Direct Payment Under SIPA Outside the Bankruptcy Court — Bankruptcy Law Basics

In certain situations, the SIPC may elect to utilize a direct payment procedure to the customers of a debtor, thereby avoiding a trustee and the courts. Certain preconditions must exist. The claims of all customers must aggregate less than $250,000, the debtor must be financially distressed as defined in the law, and the cost to the SIPC for direct payment process must be less than for liquidation through the courts. 15 U.S.C. § 78fff-4(a).

If direct payment is utilized, the entire proceeding remains outside the court. The process remains essentially a transaction between the SIPC and the debtor's customers.

Although the SIPA provides for a direct payment procedure in lieu of instituting a liquidation proceeding, the bankruptcy court may still become involved in disputes regarding the direct payment procedure. A person aggrieved by a SIPC determination with respect to a claim in a direct payment procedure may, within six months following mailing of a SIPC determination, seek a final adjudication of such claim by the court. 15 U.S.C. § 78fff-4(e). The courts having jurisdiction over cases under Title 11 have original and exclusive jurisdiction of any civil action for the adjudication of such claims. The action is to be brought in the judicial district where the head office of the debtor is located. It would be brought as an adversary proceeding in the bankruptcy court even though there is no main case.

Last reviewed October 2024