2008 WL 471574 (E.D.PA.2008)

CFTC v. Eustace, 2008 WL 471574 (E.D.PA.2008), is a good case to support the use of pooling funds and pro rata distributions in receivership cases. In this case, a court-appointed receiver requested approval of a second interim distribution to investors of $72M in settlement proceeds. In the first interim distribution, the Receiver had created two classes of investors based on the investment vehicles involved, two domestic and one off-shore. Eustace, 2008 WL 471574, at *2. However, the Receiver proposed a pro rata distribution for the second interim distribution based on additional information he had discovered in the intervening time period, including evidence of commingling of funds, the joint marketing of funds, and the investors' belief that the funds were being traded pari passu. Id. at *2-3. The Cayman Islands Joint Official Liquidators for the off-shore fund vehemently objected to the Receiver's second distribution motion arguing that the off-shore fund was the only fund with an interest in the settlement proceeds and that, after representing that there was no basis for pooling in the first interim distribution motion, the Receiver was now precluded from making a case for pooling. Id. at 4-5. The Court weighed the Receiver's arguments for pooling and noted that it is well within the Receiver's discretion to change his position regarding a distribution methodology based on subsequently learned facts. Id. at 7-8. Based on the Receiver's arguments, the Court ordered a second interim distribution to be made on a pro rata basis as recommended by the Receiver. Id. In making its decision, the Court gave considerable weight to the Receiver's determination of the method of distribution that would be most equitable to all investors. Id. at 5-6. The Court found persuasive the fact that the funds were jointly marketed (thus encouraging perceptions of one enterprise) and that, though commingling of funds was not systematic, the instances of commingling did show "blurring" of the distinctions between the receivership entities. The Court relied upon the Supreme Court case of Cunningham v. Brown 256 US1, 13 (1924), where in the Court suspended the use of tracing in favor of a pro rata pooled distribution in a Ponzi Scheme case.

- Phillip S. Stenger

Click Here To View CFTC v. Eustace

2007 WL 2155739 (E.D.Va. July 25, 2007)

In CFTC v. Forefront Investments Corp. , 2007 WL 2155739, *2 (E.D.Va. July 25, 2007) the court held that principals of an entity that had been placed in Receivership may not file pleadings on behalf of/or in the name of the Receivership entity without consent of the Receiver.

- Phil Stenger

Click Here To View CFTC v. Forefront Investments Corp.

2007 WL 4591005 (N.D. IL December 21, 2007)

In Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., 2007 WL 4591005 (N.D. IL December 21, 2007) the Court ruled that a defendant corporation and its president must show cause why they should not be referred to the United States Attorney for investigation and possible prosecution of criminal contempt under Fed.R.Crim.P. 42 after refusing to comply with a previous civil contempt order imposing various sanctions for failure to turn over documents to the Receiver as required in the preliminary injunction and the order appointing the receiver. The civil contempt sanctions included inter alia a $25,000/day fine and payment of costs to the government and the Receiver. (See Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., 2007 WL 4365365 (N.D.IL December 10, 2007 in reference to the civil contempt proceedings). Notably, the Court's action came after eleven days of non-response from the defendants. The Court noted that, while criminal contempt is an extraordinary measure, it believed the action was necessary to avoid additional delay and to force compliance with the Court's order. Lake Shore Asset Management Ltd., 2007 WL 4591005 **3.

- Phillip S. Stenger

Click Here To View Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd.

Donell is a very good case for receivers pursuing claims against investors who profit from a Ponzi Scheme. In Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008) the Ninth Circuit affirmed the District Court's granting of summary judgment in favor the court-appointed receiver on a Uniform Fraudulent Transfer Act (UFTA) claim against an investor in a Ponzi scheme to recover investor receipts in excess of investment in the Ponzi Scheme.

The Ninth Circuit relied heavily upon the Seventh Circuit's opinion in Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995) for the proposition that the UFTA allows a receiver to recover from an investor his or her profits in excess of principal invested. "Where causes of action are brought under UFTA against Ponzi scheme investors, the general rule is that to the extent innocent investors have received payments in excess of the amounts of principal that they originally invested, those payments are avoidable as fraudulent transfers." Donell, 533 F.3d at 770, citing Scholes, 56 F.3d at 757-58 and In re Slatkin, 525 F.3d 805, 814-15 (9th Cir. 2008). "The policy justification is ratable distribution of remaining assets among all the defrauded investors. The 'winners' in the Ponzi scheme, even if innocent of any fraud themselves, should not be permitted to 'enjoy an advantage over later investors sucked into the Ponzi scheme who were not so lucky.'" Id. quoting In re United Energy Corp., 944 F.2d 589, 596 (9th Cir. 1991).

The court went on to discuss the "netting rule" used by federal courts in this circumstance which provides that money an investor transfers into the Ponzi scheme will be netted against the money the investor receives back from the Ponzi Scheme. Id. at 771-72. If the result is that the investor received more than they put in, the investor will be liable under the UFTA for the net gains or profit. Id. If the receiver can show that the fraudster made the transfers to the investor with the actual intent to defraud (which can be shown as a matter of law if a Ponzi Scheme can be proved), then the receiver may be able to recover all payments to the investors, that is, return of principal plus profits unless the investor can show it acted in "good faith". Id. at 770-71.

- Phillip S. Stenger

Click Here To View Donell v. Kowell

530 F.3d 122 (2d Cir. 2008)

In Eberhard v. Marcu, 530 F.3d 122 (2d Cir. 2008), a Receiver appointed in an SEC enforcement action brought suit against a third party, the mother of the Defendant in the SEC action, to set aside the transfer of the Defendant's interest in a Canadian company as a fraudulent conveyance under section 276 of New York's Debtor & Creditor Law. The District Court determined that a bench trial would comply with due process and, upon the completion of the bench trial, ruled that the transfer of the property in question shall be set aside as a fraudulent conveyance under New York law. The Petitioner appealed, and the Second Circuit vacated and remanded the District Court's ruling finding that a receiver cannot utilize section 276 of New York's Debtor & Creditor Law to set aside a fraudulent conveyance, where he does not represent a creditor. Eberhard, 530 F.3d at 129-31. The Court noted that the New York statute states that "[e]very conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors." N.Y. Debt. & Cred. Law § 276. Furthermore, a "creditor" is defined as "a person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent." N.Y. Debt. & Cred. Law § 270. While the Court recognized the Seventh Circuit decision in Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995), it found it to be distinguishable on the basis that the receiver in Scholes was appointed for the corporations in receivership who had claims against the individual wrongdoer, whereas the receiver in this matter had been appointed only for the assets of the SEC defendant, and not for any of the corporations in which he had an interest. Eberhard, supra at 132-3. The Court held that "[w]e agree with the Seventh Circuit's analysis and hold that a receiver's standing to bring a fraudulent conveyance claim will turn on whether he represents the transferor only or also represents a creditor of the transferor." Id. at 133.* Additionally, since the Court found that the Receiver lacked standing to bring a fraudulent conveyance action, the case was essentially that of the Petitioner's intervention in the District Court proceedings to recover the property she argued had been transferred to her. Id. at 135-6. The Court then ruled that the Petitioner had a Seventh Amendment right to a trial by jury, not simply a bench trial, where a claim for the right to possession is involved. Id. at 136.

Notably, the Second Circuit also found that the District Court had subject matter jurisdiction over the Receiver's claim, as ancillary to the SEC action as long as "the receiver's suit is to aid in the accomplishment of the ends sought and directed in the SEC action." Id. at 129, quoting Esbitt v. Dutch-Am. Mercantile Corp., 335 F.2d 141, 142-43 (2d Cir. 1964).

* The Court also notes that some state statutes may impose looser standards for fraudulent conveyance, noting that Stenger v. World Harvest Church, Inc., 2006 WL 870310 (N.D.Ga. 2006) presented one factual scenario in which the receiver was permitted to pursue a fraudulent conveyance claim under the Georgia Statute which stated that fraudulent conveyances were void as to "creditors and others," thereby not limiting a receiver's claims to only that of a creditor. Eberhard, supra at 135.

- Phillip S. Stenger

Click Here To View Eberhard v. Marcu

The following cases stake out the court's ability to excercise nationwide personal jurisdiction in SEC and FTC cases. Being able to hale defendants from around the country and possibly around the world (see footnote 5 in the Cleverlink case) to the receivership court creates tremendous efficiences for the receivership, and is a prowerful weapon in the receiver's arsenal.

- Phil Stenger

Two federal district court cases handed down on the same day address the issue of jurisdiction.

Quilling v. Stark 2006 WL 1683442 (N.D. Tex., June 19, 2006) examines the scope of personal jurisdiction of a receivership court arising from the impact of 28 U.S.C. §§754 and 1692. While recognizing that, under due process, extraterritorial jurisdiction in diversity cases requires that the nonresident defendant have minimum contacts with the forum state, the Texas district court held that, where a federal statute authorizes extraterritorial service of process, the “minimum contacts” analysis is based upon the nonresident defendant’s contacts with the United States. The court concluded that, “Together, these statutes [§§754 and 1692] give a receivership court both in rem and in personam jurisdiction in all districts where property of the receivership estate may be located (emphasis the court’s),” and further noted that “This promotes judicial efficiency ‘by permitting courts to manage claims regarding receivership property in a single forum.’” *3

Quilling also confirmed the rule that the existence of a Ponzi scheme renders the transfer of investor funds fraudulent as a matter of law. *6

FTC v. Cleverlink Traking Limited 2006 WL 1735276 (N.D. Ill., June 19, 2006) confirmed that where nationwide service of process is authorized by federal law, the “minimum contacts” analysis focuses on contacts with the United States. The court further held that, under the wording of section 13(b) of the Federal Trade Commission Act, extraterritorial service such as injunctions may be had upon anyone, and not merely parties to the suit, and the court has subject matter jurisdiction through its in rem jurisdiction over receivership assets, even when in the possession of (and claimed by) a third person nonresident who is not a party to the action.

Click Here To View FTC v. Cleverlink Trading Limited & Quilling v. Stark

2007 WL 2120319 (7th Cir. March 18, 2007)

Plaintiffs sued in Illinois for securities law violations and to secure attachment of funds of defendant. Subsequently, the CFTC sued in California, where an injunction was granted and a receiver was appointed to recover funds for investors. The Court of Appeals for the 7th Circuit reversed a decision by the Illinois district court vacating its attachment, finding that in parallel actions, "the court which first obtains jurisdiction and constructive possession of property...is entitled to retain it..." Gradel v. Piranha Capital, 2007 WL 2120319 (7th Cir. March 18, 2007), *2. The Court of Appeals noted that the receiver, who had intervened in the Chicago suit, " by doing so submitted himself to the jurisdiction of the court in which that suit was pending." Id.

- Phil Stenger

Click Here To View Gradel v. Piranha Capital

2008 WL 2949443 (M.D.FL 2008)

In Gustin v. Hoffman, 2008 WL 2949443 (M.D.FL 2008), several Plaintiffs who were also creditors of the Receivership Estate sought to bring an independant cause of action against the defendants in the underlying SEC enforcement action (as well as those who received fraudulent transfers from those individuals) despite the fact that the Receiver had filed a claim against those same defendants on behalf of the Receivership Estate. Defendant Hoffman sought to dismiss the Plaintiffs' action on the basis that it was duplicative of the Receiver's action against him. Gustin, 2008 WL 2949443 *2. The Court noted that "the general rule is that a suit is duplicative of another suit if the parties, issues and available relief do not significanlty differ between the two actions." Id. quoting I.A. Durbin, Inc. v. Jefferson Nat'l Bank, 793 F.2d 1541, 1551. The Plaintiffs responded by arguing that, although they would be unable to recover in their action if the Receiver was successful in his case against Hoffman, they ought to be permitted to pursue their action on the basis that the Receiver will not likely recover more than a fraction of the losses they incurred. Id. The Plaintiffs went on to argue that Hoffman had asserted in the Receiver's action, the Receiver's lack of standing to bring a claim under Florida's Uniform Fraudulent Transfer Act. Id. While the District Court had already ruled against Hoffman on his motion to dismiss, the Plaintiff's asserted that Hoffman could appeal that decision and, therefore, there had been no definitive resolution of whether the Receiver could pursue the fraudulent transfer claims. Id. The District Court flatly rejected the Plaintiffs' arguments and dismissed their case stating that "Plaintiffs admit that they have filed this action as a placeholder, in the event that Hoffman successfully appeals this Court's Order in the Silver v. Hoffman case. This is simply not permissible." Id. at *3.

- Phillip S. Stenger

Click Here To View Gustin v. Hoffman

Hays v. Adam

2007 WL 1074092 (N.D.Ga. March 15, 2007)

The attached case arises out of an SEC action in a ponzi scheme case in the Northern District of Georgia. The Receiver brought claims for unjust enrichment against marketers seeking to recover commissions. The Court granted the Receiver's Motion for Summary Judgment based on conclusions that marketers were illegally selling unregistered securities. The Court found that injured Investors were potentially tort creditors of the Receivership and that the Receivership was entitled to sue to recover the commissions for the benefit of the Receivership so that the Receivership could reimburse its creditors and/or Investors of the tortious acts of the Receivership activities. The Court adopted Scholes v. Lehmann, 56 F.3d 750, 754-755 (7th Circuit 1995).

- Phillip S. Stenger

Click Here To View Hays v. Adam

2006 WL 2707397 (E.D.Pa. September 18, 2006)

In the past, there has been little detailed consideration of whether the creation of extra-territorial “ancillary” personal jurisdiction through the interaction of 28 U.S.C. §754 and 28 U.S.C. §1692 extends to a similar creation of ancillary venue in the Receivership Court as well. (Several cases have so held, but with little discussion. See SEC v. Bilzerian, 378 F.3d 1100, 1107 (D.C. Cir. 2004); Scholes v. Lehmann, 56 F.3d 750, 753 (7th Cir. 1995); and Haile v. Henderson Nat. Bank, 657 F.2d 816, 822 n. 6 (6th Cir. 1981), cert. denied 455 U.S. 949.)

In Hodgson v. Gilmartin, 2006 WL 2707397 (E.D.Pa. September 18, 2006), the District Court, after extensive discussion, held that there was such ancillary venue, and that actions could be brought in the Receivership Court, even though venue would normally not have been appropriate in that court under the general venue statutes. **1-7. The Hodgson case also held that increased expense and inconvenience to the Receiver (and thus to the defrauded Investors) would be given strong weight in exercising the Court’s discretion as to whether or not to transfer a case to another district pursuant to 28 U.S.C. §1404(a). **14-16.

- Phil Stenger

Click Here To View Hodgson v. Gilmartin

Re: Turn Over Orders

In this case the New York Court of Appeals held that a Bermuda bank holding stock certificates in Bermuda of a judgment debtor could be required to turn those certificates over to the judgment creditor to satisfy the judgment as long as the New York court had jurisdiction over the bank, which in this case it did because the Bermuda bank had a location in New York.

-Phillip S. Stenger


Click Here To View Koehler v. The Bank of Bermuda

2007 WL 2302167 (6th Cir. August 13, 2007)

Norwest Bank v. Malachi Corp., 2007 WL 2302167 (6th Cir. August 13, 2007), reiterates the basic rule that a district court has "broad powers and wide discretion" in fashioning relief in an equity receivership proceeding. *6. Relying upon SEC v. Basic Energy & Affiliated Resources, Inc., 273 F.3d 657, 668 (6th Cir. 2001), the Sixth Circuit held that the district court did not abuse its discretion in ordering a partial disbursement of funds to bondholders, while denying, for the time being, a motion for payment of certain outstanding expenses.

- Phil Stenger

Click Here To View Norwest Bank v. Malachi Corp.

The following case is important because it reaffirms that the receivership court has nationwide personal jurisdiction in supplemental proceedings.

- Phil Stenger

Decisions continue to multiply upholding the extra-territorial jurisdiction of a receivership court. Quilling v. Cristell reaches the same result in North Carolina as the Texas district court reached in Quilling v. Stark: due to the interaction of 28 U.S.C. §§754 and 1692, a receivership court acquires both in rem and in personam jurisdiction in all districts where the 754 filings are timely made, and no “minimum contacts” analysis is required as to non-resident defendants, emphasizing that this extraterritorial service is made “to facilitate judicial efficiency by permitting courts to manage claims regarding receivership property in a single forum.” **2-4

Other important holdings in Cristell:

1. An order of reappointment will renew the ten-day filing deadline mandated by section 754.*2


2. The receivership court has subject matter jurisdiction of all suits brought by the receiver in furtherance of the receivership under the principles of “ancillary jurisdiction,” even if there is no federal question or diversity.*4


3. The receiver has standing, since in pari delicto no longer applies when the action is brought by a receiver [citing Scholes v. Lehmann, 56 F.3d 750, 754-55 (7^th Cir. 1995)].**5-6


4. “Fraudulent intent” on the part of a transferor is inferred in fraudulent transfer cases involving Ponzi schemes.*6


5. Where a fraudulent transfer statute of limitations is tolled until “discovery,” the time does not begin to run until the receiver is appointed.**6-7

Click Here To View Quilling v. Cristell

In Quilling v. Trade Partners, Inc., 572 F.3d 293 (6th Cir. 2009), the Sixth Circuit Court of Appeals reaffirmed “the broad powers and wide discretion” of a trial court in distributing assets of a receivership, particularly emphasizing that “a pro rata basis [as contrasted with a “tracing” approach] is well supported….” 572 F.3d 298, 301

-Phillip S. Stenger


Click Here To View Quilling V. Trade Partners, Inc.

SEC v. Byers is a good case to support the use of pooling funds and pro-rata distributions in receivership cases, where separate legal entities (Real Estate Funds and Commodity Funds) were part of a unified scheme to defraud. The Court approved use of the "net investor method" of determining investor claims for distribution purposes (generally amount invested less cash received back), with a twist, in that investment rollovers (i.e., where investors chose to not take distributions and instead rolled those deferred distributions into their principal) were included as part of the investor's claim. Unsecured trade creditors were entitled to participate on a pro-rata basis in the same fashion as investors.
Click Here To View SEC v. Byers

Re: Injunction Against Bankruptcy Filing/Stay of Proceeding Against Receivership Entities

In the matter of SEC v. Byers, 2008 WL 5236644 (S.D.NY 2008), the Court addressed a motion by a group of creditors to modify certain language included in the order appointing a receiver for entities involved in a Ponzi scheme, which barred third parties from filing lawsuits and filing bankruptcy petitions against the receivership entities. Byers, 2008 WL 5236644 * 1.

The Court ruled that it had the authority to enjoin non-parties from filing an involuntary bankruptcy petition. However, the Court modified the appointment order to provide that a party could petition the Court to file an involuntary bankruptcy petition if it could show that the bankruptcy would be in the best interest of the receivership. The Court also upheld language in the receivership order that allowed the receiver to place the receivership entities in Chapter 11 bankruptcy and remain in control of the assets as a debtor-in-possession. In such case, the Court determined that the matter would be transferred to the Bankruptcy Court.

The Court also concluded it had authority to enter a stay of litigation in the receivership matter based on it's jurisdiction over the receivership property. Id. citing SEC v. Wencke, 622 F.2d 1363, 1365 (9th Cir. 1980), Liberte Capital Group, LLC v. Capwill, 462 F.3d 543,552 (6th Cir. 2006). The Court considered the three "Wencke II" factors to determine whether the Court ought to lift the stay imposed to allow litigation against the receivership entities. The Wencke factors are:

"(1) whether refusing to lift the stay genuinely preserves the status quo or whether the moving party will suffer substantial injury if not permitted to proceed; (2) the time in the course of the receivership at which the motion for relief from the stay is made; and (3) the merit of the moving party's underlying claim."

Byers, supra at * 3 citing SEC v. Wencke, 742 F.2d 1230, 1231 (9th Cir. 1984) ("Wencke II"). As to the first factor, the Court ruled that maintaining the stay preserved the status quo as it preserved the interests of the creditor body as a whole, and not just the interests of the Movants. Byers, supra at * 3. As to the second factor, the Court determined that since the case had only just begun it was not appropriate to lift the stay. Id. at *4. As to the third factor, the Court admitted it did not have sufficient information to determine the merits of the Movant's claims, but the "other two Wencke factors weigh heavily against lifting the injunction." Id.

- Phillip S. Stenger

Click Here To View SEC v. Byers

The following case effects the rights of claimants in a distribution plan to file an appeal.

- Phil Stenger

SEC v. Capital Consultants LLC 453 F.3d 1166 (9th Cir. 2006) is a case of first impression in the Ninth Circuit, addressing the appealabillity of an order finally determining the rights of some, but not all, claimants to a receivership distribution plan. The Ninth Circuit determined that such orders are not appealable as collateral orders [rejecting the holdings of the Sixth Circuit in SEC v. Basic Energy & Affiliated Resources, Inc., 273 F.3d 657, 665-67 (6th Cir. 2001), and the Fifth Circuit in SEC v. Forex Asset Mgmt. LLC, 242 F.3d 325, 33031 (5th Cir. 2001)], but can be appealed pursuant to Rule 54(b) of the Federal Rules of Civil Procedure if but only if the requirements of that Rule (an express determination by the district court that “no just reason for delay exists” coupled with the entry of judgment) are satisfied.

Click Here To View SEC v. Capital Consultants

Re: Intervention Receivership

In the recent case SEC v. Enterprise Trust Company, 559 F.3d 649 (7th Cir. 2009), the 7th Circuit reversed its prior holding in SEC v. Wozniak, 33 F.3d 13 (7th Cir. 1994) that investors must intervene in an SEC action in order to appeal in a receivership proceeding. Now, the 7th Circuit joins the 5th and the 6th Circuits in permitting investors to appeal in receivership proceedings without intervening.

-Phillip S. Stenger

Click Here To View SEC v. Enterprise Trust Company

2007 WL 2332584 (USDC D.Ariz. August 13, 2007)

SEC v. Holt, 2007 WL 2332584 (USDC D.Ariz. August 13, 2007) **2-3, reaffirms the principle that a receiver has standing to assert any rights against property that could be asserted by the receivership entity. This includes the right to sell property held by a trust placed in receivership where the trust agreement grants such authority to the trustee.

- Phil Stenger

Click Here To View SEC v. Holt

SEC v. Ross, et al.

504 F.3d 1130, 1139-1140 (9th Cir. 2007)

SEC v. Ross, et al., 504 F.3d 1130, 1139-1140 (9th Cir. 2007) is an important case for receivers because the court affirms the use of 28 U.S.C. §754 and 28 U.S.C. §1692 to permit the appointing court to exercise nationwide jurisdiction as long as the receiver complies with the filing requirements of §754. In so holding, the Court adopted the holdings in SEC v. Bilzerian, 378 F.3d 1100 (D.C. Cir. 1996) and Haile v. Henderson Nat'l Bank (6th Cir. 1981). [Here, the court declined jurisdiction because the receiver failed to make the required §754 filings but did appear to leave the door open for the receiver to seek reappointment and proper, timely compliance with §754.]

The Court also held that §22 of the Securities Act (15 U.S.C. §77v(a)) is a nationwide service of process provision that authorizes a district court to exercise jurisdiction over any person who has minimum contacts with the United States as a whole, in the same way §27 of the Act (15 U.S.C. §78aa) does. However, the Court in Ross found that the receiver failed to properly serve the non-party in question, so that Court could not exercise personal jurisdiction over that non-party.

The Court also addressed the use of summary proceedings within a receivership action, and distinguished the case from the SEC v. Wencke, 783 F.2d 829 (9th Cir. 1986), decision. The Court found that summary proceedings are appropriate if the receiver is attempting to recover a fraudulent conveyance or where the non-party is holding the property as a mere puppet for the fraud. However, summary proceedings are not appropriate where the non-party is alleged to have participated in the fraudulent activity and that participation in the fraud is the basis of the proceeding.

- Phillip S. Stenger

Click Here To View SEC v. Ross, et al.

2008 WL 4790987 (N.D.Tex., Oct 28, 2008)

In this case the receiver failed to comply with the requirement for 3 appraisals in the "private sale" of real property under 28 U.S.C. § 2001(b) because there were not sufficient assets in the estate to conduct the appraisals and thus the court denied the motion to approve the private sale of real property. The court ordered the receiver to comply with 28 U.S.C. § 2001(b) and obtain the appraisals and renotice the sale. It is hard to see how the receiver can comply with the appraisal requirement under the circumstances of this case. Perhaps the most interesting part of this case is that neither the receiver nor the court considered 28 U.S. C. § 2001(a), which governs the sale of real estate by "public sale" and which does not require any appraisals.

- Phillip S. Stenger

Click Here To View SEC v. T-Bar Resources LLC

A series of opinions have recently been issued in the 11th Circuit reaffirming the Barton Doctrine which is the "general rule that before suit is brought against a receiver leave of the court by which he was appointed must be obtained." Barton v. Barbour, 104 U.S. 126 (1881).

Standifer v. SEC, 2008 WL 513352 (N.D.GA.2008), Le v. SEC, 2008 WL 513354 (N.D.GA.2008), and Krell v. SEC, 2008 WL 513375 (N.D.GA.2008) are a line of cases brought by pro se investors against a court-appointed receiver for failing to return the funds they had previously loaned to the companies in receivership. The Receiver filed motions to dismiss each action on the basis that the Plaintiffs failed to seek the approval of the appointing court before filing the actions. Standifer 2008 WL 513352, at *2. The Court noted that the order appointing the Receiver included specific language barring any litigation by creditors or others seeking money damages from bringing an action against the receivership estate without prior court approval. Id. at *1. However, the Court's reasoning for granting the Receiver's motions to dismiss was based on the Barton doctrine. Furthermore, the Court went on to note that:

"[t]he carrying on business" exception under 28 U.S.C. § 959(a) is "narrow and intended only to permit actions, without prior approval,over torts committed in furtherance of the business. Section 959(a) does not apply to suits against receivers for administering or liquidating a receivership estate." Emphasis added.

Id at *2, citing Carter v. Rodgers, 220 F.3d 1249 (11th Cir.2000) (cert. denied 531 U.S. 1077 (2001)), Muratore v. Darr, 375 F.3d 140 (1st Cir.2004).

The issue is clear when the order appointing the receiver specifically bars third party actions, and most orders appointing receivers, particularly those entered in Federal District Court, will include such language. However, the courts have held that specific bar language is unnecessary, since the Barton doctrine prevents litigation against a receiver without prior permission of the appointing court. In Seaman Paper Co. of Massachusetts, Inc. v. Polsky, 537 F.Supp.2d 233 (D.MA.2007), the Defendant, a Receiver appointed in a Wisconsin state court action, moved to dismiss an action brought against him in Federal District Court by a trade creditor of the receivership company. The Defendant argued that the District Court lacked subject matter jurisdiction because the Plaintiff never sought the permission of the Wisconsin state court prior to filing the federal court action. Seaman, 537 F.Supp.2d at 235. The District Court agreed citing the 125 year-old Barton doctrine in which the Supreme Court stated: "It has, therefore, been found necessary, and has become a common practice for a court of equity, in its decree appointing a receiver of a railroad property, to provide that [a receiver] shall not be liable to suit unless leave is first obtained of the court by which he was appointed." Id. at 235-236 citing Barton, 104 U.S. 126. The Court noted that the Barton doctrine is based on the rationale that the appointing court has in rem subject matter jurisdiction over the assets of the receivership such that any unauthorized lawsuit would usurp the powers of the appointing court. Id. What is significant about the Seaman decision is that the state court order appointing the Receiver did not include any specific language barring claims without permission of the court and, instead, the order simply stated that the Receiver should have all of the usual powers under the state statute. Id. at 235. The Court also held that the Barton doctrine is applicable regardless of whether the Receiver has taken actual possession of the receivership property. Id. at 237. Notably, the Court's decision did not address the "carrying on business" exception to the Barton doctrine in which a receiver may be sued under 28 U.S.C. §959(a) for the receiver's own acts in conducting the business of the receivership.

- Phillip S. Stenger

Click Here To View Standifer, Le, & Krell v. SEC

The following alert and the June case contain a helpful discussion on when it might be appropriate to seek the return of fictitious profits plus principal investment.

- Phil Stenger

In Terry v. June, 432 F.Supp.2d 635 (W.D.Va. 2006) (“June”), the District Court held that the admissions, and conviction of the scheme’s perpetrator, will establish the existence of a Ponzi scheme. 432 F.Supp.2d 639. The Court also held that the existence of the Ponzi scheme establishes that the perpetrator was insolvent on the date of the transfer and made the transfer with the actual intent to defraud: both of which may be critical elements in a fraudulent conveyance action. 432 F.Supp.2d at 639-641.

Even if the fraudster acted with actual intent to defraud, and/or was insolvent at the time of the transfers, June recognize that the transferee may avoid liability by showing that he accepted the transfer “in good faith and for a reasonably equivalent value.” 432 F.Supp.2d 641-642, 644. June further contains additional conclusions that could be critical to a Receiver seeking to recover fraudulent transferred property:

1. Once the actual intent to defraud on the part of the transferor has been established (including through the mere proof of the Ponzi scheme), the burden shifts to the transferee to prove that he received the transfer in objective good faith (including not having knowledge of facts that should have put him on notice) and for reasonably equivalent value.432 F.Supp.2d at 641-42.


2. If a transferee who made a capital investment in the Ponzi scheme establishes the “good faith” defense, he is still only entitled to retain payments up to his principal investment in the scheme:the investment does not serve as “reasonably equivalent value” for the payment of “fictitious profits” (amounts in excess of his capital investment).If the transferee is unable to establish a good faith defense, and actual intent to defraud is established (apparently without reference to the presumption), the entire amount paid to the transferee must be returned, including amounts that represented a return of principal.Id. at 641-43, 644.

Click Here To View Terry v. June

U.S. Small Business Administration v. Integrated Environmental Solutions, Inc., 2006 WL 2336446 (S.D.Tex. 2006), continues the recent barrage of cases affirming the extraterritorial “in personam” jurisdiction of a Receivership Court, based upon the “interplay” of Sections 754 and 1692 of 28 U.S.C., without the need for any “minimum contacts” analysis. In addition, the Court confirmed that, under principles of ancillary jurisdiction, the Receivership Court has subject matter jurisdiction of any suit brought by the Receiver in order to execute his duties, irrespective of diversity, amount in controversy, etc.

- Phil Stenger

Click Here To View U.S. Small Business Administration v. Integrated Environmental Solutions

Welcome to my first "Receivership Alert". As new cases are decided that affect Receivers and Receiverships, I will alert you to those new developments and provide you with a copy of the case. What follows is the first Receivership Alert.

- Phil Stenger

U.S.A. v. Fairway Capital Corporation

_____ F.Supp.2d _____, 2006 WL 1554593 (D.R.I., June 8, 2006)

In Fairway, the court addressed several issues dealing directly with receiverships, including the following:

1. A receiver’s findings of fact and conclusions of law made in connection with his acceptance or rejection of creditor claims will be reviewed de novo by the court if objected to.

2. A receiver need not separately serve process on the various claimants in a receivership claims procedure, so long as the claimants are given adequate notice.

3. A federal court is not required to abstain from exercising its jurisdiction over claims in a receivership estate simply because of a pending parallel proceeding in state court.

4. Federal district courts have wide discretion in granting relief in equity receiverships and may use summary proceedings in fashioning such relief.

5. A receiver may properly deny claims that are not substantiated by the claimant.


Click Here To View USA v. Fairway Capital Corporation

Re: Intervention/Lift of Stay

In USA v. Petters, 2008 WL 5234527 (D.MN 2008), three third parties requested that the District Court grant their motion to intervene in the action so that they could petition the Court for relief from the stay provisions in the order appointing the receiver, which stay enjoined litigation against receivership entities. Applying FRCP 24, the Court allowed intervention for the limited purposes of the stay motion. However, the Court relied on the three factors set forth in SEC v. Wencke, 742 F.2d 1230, 1231 (9th Cir. 1984), in denying the motion for relief from the stay. Id. at *3-4. The Wencke factors are:

"(1) whether refusing to lift the stay genuinely preserves the status quo or whether the [movant] will suffer substantial injury if not permitted to proceed; (2) the time in the course of the receivership at which the motion for relief from the stay is made; and (3) the merit of the [movant's] underlying claim."Wencke, 742 F.2d at 1231.

In applying these factors, the Court determined that, even assuming that the third parties had meritorious claims, the other two factors weighed in favor of not lifting the stay. Petters, supra at *4. Noting that the receivership had only been in place a few months, the Court held that the status quo was best served by the actions of the Receiver that preserved the assets for the best interests of all parties involved and there would be no substantial injury to the third parties if not permitted to intervene immediately. Id. Furthermore, the Court noted that the third parties would be free make an argument at the distribution phase of the Receivership that they should be entitled to a preferential distribution. Id

- Phillip S. Stenger

Click Here To View USA v. Petters

The following case touches on several important issues concerning receiverships.

- Phil Stenger

Warfield v. Alaniz 2006 2190563 (D.Ariz. August 1, 2006) an August, 2006 decision of the federal district court for the district of Arizona held:

1. In an action for fraudulent transfer, the Receiver has standing to sue for injuries to the underlying receivership entities, which are liable to the defrauded investors as as the wrongdoer’s “tort creditors,” following Scholes v. Lehmann, 56 F.3d 750, 753 (7^th Cir. 1995). **5-6   


2. Where the Receivership Court has extraterritorial jurisdiction under a federal nationwide service of process statute (e.g., securities fraud actions under 15 U.S.C. §78aa), that personal jurisdiction also extends to pendent state-law claims.**6-7


3. In dicta, the Court indicated that summary proceedings might be utilized against third parties who are not named parties to the agency enforcement action, including “show cause” proceedings before the Receivership Court against persons in possession of receivership assets, so long as the third parties received procedural due process in the form of notice and an opportunity for a hearing.**12-13


4. Insofar as timeliness of actions is concerned, the Court drew a dividing line between “statutes of limitation,” which operate as a defense against a cause of action and bar enforcement of the right, and “statutes of repose,” which extinguish the claim.Against a statute of repose, such as that contained in the Uniform Fraudulent Transfer Act, principles of equitable tolling are not available.Similarly, while statutes of limitation are not binding on the government (including a court-appointed receiver in an SEC-initiated action), statutes of repose are binding on the government.However, equitable defenses such as laches and estoppel are not available as a defense in an action brought by the government or its subdivisions, including a court-appointed receiver. The Court thus recognized that a court-appointed receiver is “an officer of the court.” **8-11


5. Finally, the Court recognized that proof of a Ponzi scheme establishes the transferor’s actual intent to defraud [see our Receivership Alert concerning Quilling v. Cristell, 2006 WL 316981 (W.D.N.C., February 9, 2006), *6, reaching a similar result], and that the existence of the Ponzi scheme can be established by proof of the transferor’s related guilty plea.However, the court further held that proof of the Ponzi scheme did not automatically establish the transferee’s knowledge of or participation in the fraud.**15-17

Click Here To View Warfield v. Alaniz

Williamson v. PricewaterhouseCoopers LLP, Index No. 602106/2004 (N.Y. Sup. Ct. November 14, 2007) is an important case for Receivers overcoming challenges based on the in pari delicto doctrine. The New York Supreme Court refused to apply the doctrine to a nonbankruptcy trustee who had sued the company's auditors for failure to detect management fraud, where the bad actors had been removed and replaced by the innocent trustee and where the proceeds of any litigation would benefit innocent investors in the company, not the bad actors. In so holding, the Court distinguished the case where a nonbankruptcy trustee was the plaintiff from cases in which a bankruptcy trustee was the plaintiff and, therefore, subject to Bankruptcy Code section 541, which provides that the trustee steps into the shoes of the debtor prior to the trustee's appointment (thus making the bankruptcy trustee subject to the in pari delicto or unclean hands doctrine).The court cited with approval the leading case in this area, Scholes v. Lehmann, 56 F3d 750, 754 (7th Cir 1993), that "the defense of in pari delicto loses its sting when the person who is in in pari delicto is eliminated."

This case highlights a significant advantage that receiverships enjoy over bankruptcies.

- Phil Stenger

Click Here To View Williamson v. PricewaterhouseCoopers LLP