Receivership Sourcebook



Where actions are brought by the government to enjoin the continuation of conduct prohibited by law, the government frequently seeks appointment of a receiver to assist in marshalling assets on behalf of injured victims, consumers, or investors. For reasons discussed in detail in this Receivership Sourcebook, utilization of a federal-court equity receivership can prove particularly useful to the government and beneficial to victims, consumers, or investors. However, despite numerous cases addressing federal receiverships, there is virtually no current source to which one can turn to find summarization of the various issues that must be addressed in such receiverships. 1

The government initiated receivership frequently arises in connection with combined Ponzi-Pyramid marketing schemes. In such situations, there are frequently multiple perpetrators, as well as various “fellow travelers,” marketers, and possibly cooperating financial institutions, accountants, and attorneys, with varying levels of involvement in the scheme. There are usually assets that must be traced, including the assertion of claims on behalf of the victims, consumers, or investors, some of which must be raised by the receiver directly. Often there will be businesses that must be run, either temporarily until a rapid liquidation can be conducted or for some ongoing period if restoration of proper operating practices is critical to realizing the true value of the assets. The asset marshalling process in this type of case usually involves assets of many types, from cash to active businesses, realty (both commercial and residential, developed, undeveloped and in-between), stocks and bonds, artwork, jewelry, sports or celebrity memorabilia collections, automobiles, boats, and jet airplanes, not to mention causes of action. The assets may also be located throughout the United States, and, quite commonly, overseas, sometimes under the “protection” of foreign laws. In addition, hundreds to thousands of victims, consumers, or investors will frequently have been affected by the scam; and individual (and class action) lawsuits against the perpetrators and their assets, now under the control of the receiver, are quite common, complicating and potentially interfering with both the conduct of the receivership and the actual benefit of the victims, consumers, or investors. Note also that the claims of victims, consumers, investors, or trade creditors will generally exceed the value of the receivership assets and that potential conflicts are common among various classes of investors and trade creditors.

In dealing with these potential problem areas, note how everyone is benefited by the following attributes of the receivership:

  1. All defendants and their assets, including affiliated entities, may be dealt with in a single action in a single location.
  2. The receiver may bring suit in the receivership court against anyone, anywhere.
  3. Summary procedures may be utilized in resolving various claims, both against and on behalf of the receivership entities, so long as basic principles of due process are honored.
  4. Broad stay powers protect the receiver and give breathing room against crippling duties of defense in other actions.
  5. Great flexibility is given the receivership court in ordering disgorgement and setting claims verification and payment procedures, including developing an appropriate plan of distribution.

This Receivership Sourcebook is an effort to address the most common issues arising in connection with receiverships, including the practical problems that receivers must address. Furthermore, the Receivership Sourcebook has been expanded to include other types of receiverships: see Chapter 1.

  1. 1The third edition of A Treatise on the Law and Practice of Receivers by Ralph Ewing Clark (Clark on Receivers) is useful, but even as supplemented it is over twenty years old. The author has found no modern treatise which specifically addresses the problems in government initiated enforcement actions using receiverships. The only other treatise on receiverships, Clark on Receivers, was first published in 1918 and last updated in 1992.

Legal & Statutory Basis

Federal receivers are usually appointed by the court after a party to a pending lawsuit, or a lawsuit about to be filed, requests that the receiver be appointed. Typically, the receiver is appointed to take control over property that is involved in the underlying litigation, and the party seeking the appointment of the receiver must have an interest in the underlying property (e.g., lien holder, mortgage holder, secured creditor, judgment holder). A receiver’s appointment is ancillary to that underlying litigation.2

The principles discussed in this book are, in the main, equally applicable to receiverships in other types of federal enforcement actions (e.g., criminal proceedings Federal Trade Commission (“F.T.C”), Commodity Futures Trading Commission (“C.F.T.C.”), tax receiverships, Securities Investor Protection Corporation (“S.I.P.C.”), etc.) There are also analogies to the powers and limitations applicable to federal bankruptcy trustees. However, the details of the bankruptcy code may lead to different results than would otherwise flow from the federal common law of equity receiverships. Additionally, there are some major advantages in utilizing a federal receivership rather than a bankruptcy proceeding: see Chapters 5 and 11.

Today, receivers are most commonly appointed in stockholder derivative suits or creditors’ suits, or in enforcement actions brought by the United States Department of Justice (“D.O.J.”), Securities & Exchange Commission (“S.E.C.”), the F.T.C., the C.F.T.C., etc.

The federal appointment of receivers is governed by Federal Rule of Civil Procedure 663 (however, F.R.C.P. 66 does not apply to receivers in bankruptcy). 28 U.S.C. § 1292(a)(2) expressly grants jurisdiction to courts of appeals from: (i) orders appointing a receiver; (ii) orders refusing to wind up a receivership; and (iii) orders refusing to take steps “to accomplish the purposes of winding up a receivership.” This grant of appellate jurisdiction is interpreted narrowly. The Court of Appeals for the Third Circuit has held that § 1292(a)(2) is inapplicable to an order appointing a “guardian ad litem” to pursue a potential claim against a fiduciary, as well as replacing the fiduciary as the party to assert a related claim against a third party where conflicts of interest were possible. In re Pressman-Gutman Co., Inc., 459 F.3d 383, 393-395 (3d Cir. 2006); see also Gov’t of The Virgin Islands v. Lansdale, 307 F. App’x 688, 692 (3d Cir. 2009) (finding that 28 U.S.C. 1292(a)(2) did not provide appellate jurisdiction over a “Determination Order” denying a Receiver’s motion for a determination of exclusive jurisdiction).

The rights, powers, and duties of a federal equity receiver are governed by paragraph (b) of 28 U.S.C. § 959.4 The receiver acts as an officer of the court in which he is appointed.5

The receiver has complete jurisdiction over property located within the jurisdiction in which he is appointed. If the estate has real or personal property in other jurisdictions, the receiver can obtain “complete jurisdiction” over that property by filing a copy of the complaint and the order of appointment within ten days of his appointment in the district court in which the property is located. 28 U.S.C.A. § 754; see infra note 13. If the receiver does not make the necessary filings in a timely fashion, most courts allow the receiver to cure this defect by filing within ten days after entry of an order confirming the original appointment. See Chapter 2.

A series of federal district court decisions have affirmed the United States Supreme Court’s Barton Doctrine, which sets forth the general rule that before a suit can be brought against a receiver, leave of the appointing court must be obtained. See Standifer v. S.E.C., 542 F. Supp. 2d 1312 (N.D. Ga. 2008); Le v. S.E.C., 542 F. Supp. 2d 1318 (N.D. Ga. 2008); Krell v. S.E.C., 1:07-CV-2285-WSD, 2008 WL 513375 (N.D. Ga. Feb. 22, 2008); Ariel Preferred Retail Grp., LLC v. CWCapital Asset Mgmt., 883 F. Supp. 2d 797 (E.D. Mo. 2012); Republic Bank of Chicago v. Lighthouse Mgmt. Grp., Inc., 829 F. Supp. 2d 766 (D. Minn. 2010).

The receivership court sits as a court in equity and is reviewed based on the abuse of discretion standard. The district court has broad powers and wide discretion to determine the relief in an equity receivership. S.E.C. v. Basic Energy & Affiliated Res., Inc., 273 F.3d 657, 668 (6th Cir. 2001); see also Norwest Bank Wisconsin, N.A. v. Malachi Corp., 245 F. App’x 488 (6th Cir. 2007); Quilling v. Trade Partners, Inc., 572 F.3d 293, 298 (6th Cir. 2009); S.E.C. v. Kaleta, 12-20633, 2013 WL 3030300 (5th Cir. June 19, 2013). Because of this, in addition to the above referenced statutory powers of receivers, there is a substantial amount of federal common law surrounding receiverships and the equitable powers which a receiver holds.

The case law surrounding receiverships clearly and repeatedly demonstrates that the receiver’s powers in operating the estate are extraordinary and virtually only limited by the district court judge’s concept of equity. Some key receivership powers include:

  1. In appropriate circumstances a receiver may sell receivership property free of liens of third parties.6
  2. The court appointing a receiver may enjoin actions against the receivership estate to assist in the efficient administration of the receivership estate (similar to an automatic stay).7
  3. The receiver may sue defendants from all over the country (and in foreign countries) in the court where the receivership action is pending.8
  4. A receiver has the power to sue on behalf of entities which participated in the fraud once the entity is no longer under the spell of the “evil zombie” (i.e., the individual who ran the fraud).9
    As to indemnification of the receiver, see F.T.C. v. 3R Bancorp, 04 C 7177, 2006 WL 2191317 (N.D. Ill. July 28, 2006); see also New York Life Ins. Co. v. Waxenberg, 807-CV-401-T-27TGW, 2009 WL 632896 (M.D. Fla. Mar. 11, 2009).
  1. 2Zittman v. McGrath, 341 U.S. 446 (1951).
  2. 3Rule 66. Receivers Appointed by Federal Courts

    An action wherein a receiver has been appointed shall not be dismissed except by order of the court. The practice in the administration of estates by receivers or by other similar officers appointed by the court shall be in accordance with the practice heretofore followed in the courts of the United States or as provided in rules promulgated by the district courts. In all other respects the action in which the appointment of a receiver is sought or which is brought by or against a receiver is governed by these rules.

  3. 428 USCA § 959. Trustees and receivers suable; management; State laws
    (a) Trustees, receivers or managers of any property, including debtors in possession, may be sued without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property. Such actions shall be subject to the general equity power of such court so far as the same may be necessary to the ends of justice, but this shall not deprive a litigant of his right to trial by jury.
    (b) Except as provided in section 1166 of title 11, a trustee, receiver or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof.

  4. 5Ledbetter v. Farmers Bank & Trust Co., 142 F.2d 147, 150 (4th Cir. 1944); Terry v. June, 432 F. Supp. 2d 635 (W.D. Va. 2006); Warfield v. Alaniz, 453 F. Supp. 2d 1118 (D. Ariz. 2006).

  5. 6Broadway Trust Co. v. Dill, 17 F.2d 486 (3rd Cir. 1927); Seaboard Nat. Bank v. Rogers Milk Products Co., 21 F.2d 414 (2nd Cir. 1927); People’s Pittsburgh Trust Co. v. Hirsch, 65 F.2d 972 (3rd Cir. 1933).

  6. 7S.E.C. v Wencke, 622 F.2d 1363 (9th Cir. 1980); S.E.C. v. United Fin. Group, Inc., 576 F.2d 217 (9th Cir. 1978);S.E.C. v. Byers, 592 F. Supp. 2d 532 (S.D.N.Y. 2008).

  7. 828 USC § 754 and 28 USC § 792. See infra Section 2.03.

  8. 9Scholes v. Lehmann, 56 F.3d 750, 755 (7th Cir. 1995); Quilling v. Cristell, CIV.A. 304CV252, 2006 WL 316981, at **5-6 (W.D.N.C. Feb. 9, 2006). ). See also Wing v. Dockstader, 482 F. App’x 361, 362 (10th Cir. 2012); Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185, 190 (5th Cir. 2013).

Jurisdictional Issues

2.01 In General

One area of confusion that often arises in receiverships relates to the basis of jurisdiction which the receiver has over litigation related to his appointment and when the court which oversees the receivership can exercise jurisdiction over property of the receivership that is potentially located all over the country.

As to competing jurisdiction over assets arising between parallel actions, or the effect of the receiver’s intervention in the parallel action, see infraSection 3.01. See also a series of federal district court decisions affirming the United States Supreme Court’sBarton Doctrine, supra page 6.

2.02 Ancillary or Supplemental Jurisdiction

It is well established that “[t]he ancillary jurisdiction of federal courts over actions incident to a receivership established by a federal court has long been recognized. So long as an action commenced by a court appointed receiver seeks “to accomplish the ends sought and directed by the suit in which the appointment was made, such action or suit is regarded as ancillary so far as the jurisdiction of the . . . court of the United States is concerned.’” Tcherepnin v. Franz, 485 F. 2d 1251 (7th Cir. 1973) (citation omitted), quoting Pope v. Louisville, New Albany & Chicago Ry. Co., 173 U.S. 573, 577 (1899). See also Eberhard v. Marcu, 530 F.3d 122, 128-129 (2d Cir. 2008); Am. Freedom Train Found. v. Spurney, 747 F.2d 1069, 1073 (1st Cir. 1984); Merrill Scott & Associates, Ltd. v. Concilium Ins. Servs., 253 F. App’x 756, 761 (10th Cir. 2007). In such situations, the initial suit which results in the appointment of the receiver is the primary action and any suit which the receiver thereafter brings in the appointment court in order to execute his duties is ancillary to the main suit. Haile v. Henderson Nat. Bank, 657 F.2d 816, 822 (6th Cir. 1981). See also S.E.C. v. Bilzerian, 378 F.3d 1100, 1107 (D.C. Cir. 2004); U.S. Small Bus. Admin. v. Integrated Envtl. Solutions, Inc., CIV.A. H-05-3041, 2006 WL 2336446, at *2 (S.D. Tex. Aug. 10, 2006); Quilling v. Cristel, CIV.A. 304CV252, 2006 WL 316981, at *4 (W.D.N.C. Feb. 9, 2006); see also S.E.C. v. Ross, 504 F.3d 1130 (9th Cir. 2007).

A federal district court has subject matter jurisdiction in ancillary actions brought in the court where the receiver is appointed. Thus, it follows that an independent jurisdictional ground is not necessary for an ancillary action by a federal receiver. Therefore, the lack of diversity of citizenship or of a federal question does not prevent a federal court from exercising jurisdiction in an ancillary proceeding. United States v. Franklin Nat’l Bank, 512 F.2d 245, 249 (2d Cir. 1975); Integrated Envtl. Solutions, 2006 WL 2336446, at *2;Cristel, 2006 WL 316981, at *4.

Ancillary jurisdiction became supplemental jurisdiction on December 1, 1990. See § 310(a) of the Judicial Improvement Acts of 1990, 104 Stat. 5089, 28 U.S.C. §1367;10Unique Concepts, Inc. v. Manuel, 930 F.2d 573, 574 (7th Cir. 1991). As a result, for suits filed after December 1, 1990, federal jurisdiction based on the ancillary jurisdiction of the federal courts is now part of the federal courts’ statutory “supplemental” jurisdiction.Scholes v. Lehmann, 56 F.3d 750, 753 (7th Cir. 1995). Generally, 28 U.S.C.A. §1367(a) provides that, except as expressly provided by a Federal Statute, “in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.” Exceptions to the general rule found in §1367(a) are found in subsection (b) and (c) of §1367.

Section 1367(c) provides that the federal district court may decline to exercise supplemental jurisdiction over a state claim if “(1) the claim raises a novel or complex issue of State law, (2) the claim substantially predominates over the claim or claims over which the district court has original jurisdiction, (3) the district court has dismissed all claims over which it has original jurisdiction, or (4) in exceptional circumstances, there are other compelling reasons for declining jurisdiction.” 28 U.S.C. §1367(c). However, to decline such jurisdiction, the federal court must have a compelling reason.11

2.03 Personal Jurisdiction/§754

A receiver has complete jurisdiction over property located within the jurisdiction in which he is appointed. If the estate has real or personal property in other jurisdictions, the receiver can obtain “complete jurisdiction” over that property by filing a copy of the complaint and the order of appointment within ten days of his appointment in the district court in which the property is located, pursuant to 28 U.S.C. § 754.12

When §754 applies, its companion statute, 28 U.S.C. § 169213 is triggered. Section 1692 effectively expands the territorial jurisdiction of the court which appoints the receiver to any district in the United States where property believed to be that of the receivership estate is found, provided that the proper documents have been filed in each such district as required by §754.

Once a court has territorial jurisdiction, it may issue a summons on a defendant. Fed. R. Civ. P. 4 contemplates the use of statutes of the United States, such as §1692, which provide for service of process upon a party not an inhabitant of or found within the state in which the district court is held.14

In an action where service of process is effected pursuant to a federal statute which provides for nationwide service of process, the strictures (namely a minimum contacts analysis) of International Shoe v. State of Washington, 326 U.S. 310 (1945) and its progeny do not apply. Haile, 657 F.2d at 821, 826. See Janvey v. Alguire, 846 F. Supp. 2d 662, 668 (N.D. Tex. 2011); Bilzerian, 378 F.3d at 1104, 1106; Terry v. Walker, 369 F. Supp. 2d 818, 821 (W.D. Va. 2005); Integrated Envtl. Solutions, 2006 WL 2336446, at *2; Quilling v. Stark, 3:05-CV-1976-L, 2006 WL 1683442, at *3 (N.D. Tex. June 19, 2006); Quilling v. Cristell, CIV.A. 304CV252, 2006 WL 316981 (W.D.N.C. Feb. 9, 2006);S.E.C. v. Tanner, CIV.A.05-4057 SAC, 2006 WL 1128699, at *2 (D. Kan. Apr. 26, 2006).See also F.T.C. v. Cleverlink Trading Ltd., 05 C 2889, 2006 WL 1735276 (N.D. Ill. June 19, 2006). The Haile Court held that the due process aspects of service of process in that case were to be examined under Mullane v. Central Hanover Bank and Trust, 339 U.S. 306 (1950) and its progeny rather than under International Shoe. Haile, 657 F.2d at 826. The Court in Haile concluded that the issue, thus, is one of fairness and notice under the Fifth Amendment. That is, the court should ask whether the service was reasonably calculated to inform the defendants of the pendency of the proceedings against them in order that they might take advantage of the opportunity to be heard in their defense. Id. In footnote 11, the Court stated that if it is demonstrated that service is made in any manner provided in Fed. R. Civ. P. 4, then such service would meet this fairness and notice standard.15

The grant of extraterritorial jurisdiction promotes judicial efficiency by permitting courts to manage claims regarding receivership property in a single forum. Stark, 2006 WL 1683442, at *3; Cristell, 2006 WL 316981, at **2-4.

If a court finds that the filing of a notice of receivership was untimely under §754, it does not necessarily mean that the receiver will lose jurisdiction over the property in that jurisdiction. Instead, most courts allow the receiver to cure this defect by filing within ten days after entry of an order confirming the original appointment. S.E.C. v Vision Commc’ns, Inc., 74 F.3d 287, 291 (D.C. Cir. 1996); Walker, 369 F. Supp. 2d at 819-821;Select Creations, Inc. v. Paliafito America, Inc., 852 F. Supp. 740, 780 (E.D. Wis. 1994);Cristell, 2006 WL 316981, at *2. Furthermore, a court may even allow a receiver to file a notice of receivership after the expiration of the ten day period where it would not prejudice the rights of other parties. Such a situation arose in S.E.C. v. Equity Service Corp., 632 F.2d 1092 (3d Cir. 1980), where the Court ruled that a receiver who fails to file within the ten day period of §754 may reassume jurisdiction by a later filing, as long as the rights of others have not been prejudiced during the intervening period. Id. at 1095. See also S.E.C. v. Infitity Grp. Co., 27 F. Supp. 2d 559 (E.D. Pa. 1998) (holding that a receiver’s failure to comply with 28 U.S.C.A. § 754 does not divest the receiver of jurisdiction in a particular district since it is not economical to force receivers to needlessly expend estate resources to file in every district within the United States).

The court’s extraterritorial jurisdiction may extend to non-parties. See Cleverlink, 2006 WL 1735276.

An additional jurisdictional issue may arise when a receiver pursues litigation. Often, defendants contend that the district court lacks personal jurisdiction by arguing that no “property” (a term used in §754) is situated in that district, that the defendant does not hold any receivership property, and that the defendant does not have any “minimal contacts” with that district. However, in such a situation, the receiver’s property can be characterized as a “chose in action.” Black’s defines “chose” as “a thing; an article of personal property.” Black’s Law Dictionary 219 (5th ed. 1979). It also defines “chose in action” as “a thing in action and is a right of bringing an action or right to recover a debt or money. A right to personal things of which the owner has not the possession, but merely a right of action for their possession.” Id. Accordingly, a receiver’s “chose in action” constitutes personal property. Section 754 expressly includes personal property.

In Haile, 657 F.2d at 820, the United States District Court for the Middle District of Tennessee appointed a receiver for an entity that operated and grew as a result of a fraudulent bond issuance scheme. Haile, 657 F.2d at 818. As part of the litigated action, the receiver brought suit on a promissory note against two defendants who had executed and delivered the note. Id. at 820. The suit on the note in Haile, was brought in the court which appointed the receiver. Id. The defendants were citizens and residents of Huntsville, Alabama, which is located in the Northern District of Alabama, and the receiver timely filed certified copies of the complaint and order appointing him receiver with the clerk of the United States district Court for the Northern District of Alabama in accordance with §754. Id. Although the note was secured by a mortgage on real property located in Huntsville, Alabama, the receiver brought suit on the note, itself.Id. The district court in Haile found that the defendants were non-residents of the state of Tennessee and had no minimal contacts with Tennessee. Id. The district court dismissed the action on the note against the defendants, holding that the §754 did not grant the court personal jurisdiction over the defendants. Id. The Sixth Circuit Court of Appeals reversed the lower court’s decision and held that §754 and 28 U.S.C. §1692 conferred personal jurisdiction upon the appointing court over the defendants and that a “minimum contacts” analysis was not applicable. Id. at 826. In rendering its decision in Haile, the Court of Appeals conducted a thorough review of §754 and its expansion of an appointing court’s territorial jurisdiction to any district where property belonging to the receivership estate is present. Thus, in holding that §754 extended the district court’s territorial jurisdiction into the Northern District of Alabama to reach the defendants, the Court necessarily ruled that the property belonging to the estate resided in the Northern District of Alabama. Since the receiver sued only on the note itself, it is evident that the property which triggered the application of §754 was the right to receive payment from the defendants.

The conclusion in Haile is supported by a commentary by Professor Moore in the Wright & Miller treatise. In discussing the effect of the 1948 revision to §754, Professor Moore states: “as indicated in the Reviser’s Note §754 extends the operation of old §56 . . . Its application is no longer confined to property ‘of a fixed character;’ it applies to any property.” Haile, 657 F.2d at 823 quoting 7-Pt. 2 Moore’s Federal Practice, ¶66.08[1] at 1949-50 (2d ed. 1980).

The Haile result—that the Receivership court has the power to issue process in any district in which the receivership estate has property, which results in the power to make nationwide service of process and in personam jurisdiction so long as the receiver complies with §754 and there are minimal contacts with the United States as a whole, has been approved in many other cases. See e.g., Alguire, 846 F. Supp. 2d at 669;Bilzerian, 378 F.3d at 1104-06; Vision Commc’ns, 74 F.3d at 290; Spurney, 747 F.2d at 1073; Integrated Envtl. Solutions, 2006 WL 2336446, at *2; Cleverlink, 2006 WL 1735276; Walker, 369 F. Supp. 2d 818. See also S.E.C. v. Ross, 504 F.3d at 1145-46;United States v. Arizona Fuels Corp., 739 F.2d 455, 460 (9th Cir. 1984); Tanner, 2006 WL 1128699; Cleverlink, 2006 WL 1735276, at *2.

As to nationwide service of process in actions brought pursuant to the Securities Act of 1933, see S.E.C. v. Ross, 504 F.3d at 1139-1141.

Despite cases to the contrary, the Ninth Circuit has held that intervening as of right, while contesting in personam jurisdiction, is not a consent to personal jurisdiction of the court. Id. at 1148-1151; but see Defenders of Wildlife v. Bureau of Ocean Energy Mgmt., Regulation, & Enforcement, 791 F. Supp. 2d 1158, 1174-75 (S.D. Ala. 2011). Likewise, there must be proper service upon the person against whom relief is sought for personal jurisdiction to exist. Ross, at 1140.

Once nationwide service of process has been authorized under a federal statute, the court has personal jurisdiction over pendent state-law claims as well. Warfield v. Alaniz, 453 F. Supp. 2d 1118 (D. Ariz. 2006), aff’d, 569 F.3d 1015 (9th Cir. 2009).

2.04 Removal and Transfer of Venue

Once the receiver is appointed, it is very common for the receivership estate to be sued, both within its jurisdiction of appointment or in other jurisdictions, usually in state court. In such cases, the receiver should immediately file a notice of removal to have the case automatically transferred to the federal court pursuant to 28 U.S.C. § 1441 et. seq. Under 28 U.S.C. § 1446(b), the notice of removal must be filed within 30 days after receipt by the receiver of a copy of the complaint.

After a case has been removed to federal court, the receiver should move to have the case transferred to the jurisdiction where the litigation is pending, and make two arguments to support such a transfer. First, under 28 U.S.C. § 1404(a),16 the court may transfer the suit to another district that will be more convenient for both parties and witnesses, and in the interest of justice. Keep in mind that §1404(a) is the codification of the common law of forum non-conveniens but with a less harsh result (i.e., transfer instead of dismissal). Therefore, courts have applied a lower standard of inconvenience under §1404(a) than under the common law. Norwood v. Kirkpatrick, 349 U.S. 29, 31 (1955). Second, it has been held that when jurisdiction is ancillary, venue is also ancillary. Footnote 6 of the Sixth Circuit’s decision in Haile states “[w]e ascribe to the view, under the facts and circumstances of this case, that where jurisdiction is ancillary, the post-jurisdictional consideration of venue is ancillary as well.” Haile, 657 F.2d at 822. Consequently, when a district court has subject matter jurisdiction based on §1367 via its ancillary jurisdiction, under Haile, this court also has ancillary venue.

The ancillary venue issue most commonly has been addressed in passing in cases that primarily turn upon the question of personal jurisdiction under 28 U.S.C. §§754 and 1692. See supra Section 2.03. However, in Hodgson v. Gilmartin, the Court discussed in detail whether §§754 and 1692 were limited to granting ancillary jurisdiction to the receivership court, or also extended to ancillary venue. Hodgson v. Gilmartin, CIV A 06-1944, 2006 WL 2707397, at *1-7 (E.D. Pa. Sept. 18, 2006) (citing Bilzerian, 378 F.3d at 1107; Scholes, 56 F.3d at 753; and Haile, 657 F.2d at 822 n.6). The Court 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. Hodgson, at **1-7. The Hodgson case also held that increased expense and inconvenience to the receiver (and, as a result, to defrauded investors) would weigh strongly in the court’s discretionary decision of whether or not to transfer the case to another district pursuant to 28 U.S.C. § 1404(a). Id. at **14-16. See also Hodgson v. Kottke Associates, LLC, CIV.A 06-5040, 2007 WL 2234525 (E.D. Pa. Aug. 1, 2007).

  1. 101367. Supplemental jurisdiction

    (a) Except as provided in subsections (b) and (c) or as expressly provided otherwise by Federal statute, in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall include claims that involve the joinder or intervention of additional parties.(b) In any civil action of which the district courts have original jurisdiction founded solely on section 1332 of this title, the district courts shall not have supplemental jurisdiction under subsection (a) over claims by plaintiffs against persons made parties under Rule 14, 19, 20, or 24 of the Federal Rules of Civil Procedure, or over claims by persons proposed to be joined as plaintiffs under Rule 19 of such rules, or seeking to intervene as plaintiffs under Rule 24 of such rules, when exercising supplemental jurisdiction over such claims would be inconsistent with the jurisdictional requirements of section 1332.(c) The district courts may decline to exercise supplemental jurisdiction over a claim under subsection (a) if–

    (1) the claim raises a novel or complex issue of State law,

    (2) the claim substantially predominates over the claim or claims over which the district court has original jurisdiction,

    (3) the district court has dismissed all claims over which it has original jurisdiction, or

    (4) in exceptional circumstances, there are other compelling reasons for declining jurisdiction.(d) The period of limitations for any claim asserted under subsection (a), and for any other claim in the same action that is voluntarily dismissed at the same time as or after the dismissal of the claim under subsection (a), shall be tolled while the claim is pending and for a period of 30 days after it is dismissed unless State law provides for a longer tolling period.

    (e) As used in this section, the term “State” includes the District of Columbia, the Commonwealth of Puerto Rico, and any territory or possession of the United States.

  2. 11See Nerney v. Valente & Sons Repair Shop, 66 F.3d 25, 30 (2d Cir. 1995); Murphy, A Federal Practitioner’s Guide to Supplemental Jurisdiction Under 28 U.S.C. § 1367, 78 Marq. L. Rev. 973, 1023 (1995) (explaining that reference in subsection (c)(4) to “other compelling reasons” means “that all declinations of supplemental jurisdiction must be based on a compelling reason).”) (emphasis added)

  3. 1228 USC § 754. Receivers of property in different districts

    A receiver appointed in any civil action or proceeding involving property, real, personal or mixed, situated in different districts shall, upon giving bond as required by the court, be vested with complete jurisdiction and control of all such property with the right to take possession thereof.

    He shall have capacity to sue in any district without ancillary appointment, and may be sued with respect thereto as provided in section 959 of this title.

    Such receiver shall, within ten days after the entry of his order of appointment, file copies of the complaint and such order of appointment in the district court for each district in which property is located. The failure to file such copies in any district shall divest the receiver of jurisdiction and control over all such property in that district.

  4. 1328 USC §1692. Process and orders affecting property in different districts

    In proceedings in a district court where a receiver is appointed for property, real, personal, or mixed, situated in different districts, process may issue and be executed in any such district as if the property lay wholly within one district, but orders affecting the property shall be entered of record in each of such districts.

  5. 14Specifically, Fed. R. Civ. P. 4(k)(1)(D) provides:

    (k) Territorial Limits of Effective Service

    (1) Service of a summons or filing a waiver of service is effective to establish jurisdiction over the person of a defendant


    (D) when authorized by a statue of the United States.

  6. 15Id. at n.11. The Court in Haile goes on in footnote 11 to state: “If proper service was not made, the receiver should be afforded the opportunity to obtain such service. Id.

  7. 1628 U.S.C. § 1404(a) :

    For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.

Litigation by and Against the Receiver and the Receivership Estate

3.01 In General

The typical appointment order issued by a receivership court will grant authority to the receiver to marshal and protect the assets of the estate and to engage in litigation in the discharge of his duties. Often, the defendant in such an action brought by the receiver will attempt to challenge the standing of the receiver, either based upon the assertion that the cause of action, if any, belongs to the investors, not the receiver, or that the receiver may not bring the action due to the impact of in pari delicto or the “clean hands” doctrine.

Certainly, where the damage has been done directly to the investors, rather than the receivership entities, it is the investors who must bring the action. However, in many instances, the receivership entities will have been directly injured by the conduct of the defendants. And, while still subject to argument, the majority of cases have held that in pari delicto/clean hands is not a defense, nor does it establish a lack of standing, once the “zombie” receivership entities have been freed of the control of their zombie master by the appointment of an independent receiver. See Chapter 5.

Since a court-appointed receiver is “an officer of the court,” the doctrine of laches is not available as a defense against claims brought by the receiver. Warfield v. Alaniz, 453 F. Supp. 2d 1118 (D. Ariz. 2006), aff’d, 569 F.3d 1015 (9th Cir. 2009). This is in line with the analysis in Scholes v. Lehman, 56 F.3d 750 (7th Cir. 1995), which makes it clear that the claims and defenses applicable to the entity before the receiver is appointed are not necessarily applicable to the receiver. See Wing v. Gillis, 2:09-CV-314, 2012 WL 994394 (D. Utah Mar. 22, 2012), aff’d, 12-4071, 2013 WL 2169321 (10th Cir. May 21, 2013) (citing Wing v. Kendrick, 2009 WL 1362383 (D. Utah May 14, 2009)).

Principals of an entity that has been placed in receivership cannot file pleadings on behalf of/in the name of the receivership entity without the consent of the receiver.Commodity Futures Trading Comm’n v. Forefront Investments Corp., 3:07 CV 152, 2007 WL 2155739, at *2 (E.D. Va. July 25, 2007).

Generally, courts will include in the order appointing a receiver a stay provision, which would prevent suits against the receiver; the Barton Doctrine would also provide a stay on litigation without leave of the court. The authority of the court to enter an order is broad and extends to any action involving receivership assets, and may enjoin non-parties from instituting actions against assets subject to the receivership. S.E.C. v. Byers, 592 F. Supp. 2d 532, 536 (S.D.N.Y. 2008), aff’d, 609 F.3d 87 (2d Cir. 2010) (explaining the basis for the court’s authority to enjoin non-parties from filing involuntary bankruptcy petitions against any receivership entity). However, there are limitations on the power of a court to enter a stay of litigation in a receivership. The Eighth Circuit explained in Ritchie Capital Mgmt., LLC v. Jeffries, 653 F.3d 755 (8th Cir. 2011), as the equitable powers of the court exist to protect receivership assets, a stay of any litigation which would involve the interpretation of documents in a receiver’s possession, for instance, would go too far, unless it threatened the receivership assets.

A claimant may also file a motion seeking relief from the stay of litigation against the receivership entities. In S.E.C. v. Wencke, 742 F.2d 1230, 1231 (9th Cir. 1984), the Ninth Circuit listed the following as factors to be considered in granting or denying such a motion:

(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.

See also United States v. Petters, CIV 08-5348 AMDJSM, 2008 WL 5234527, at *2-4 (D. Minn. Dec. 12, 2008).

If a parallel action has been filed in another court, the receivership action does not necessarily have priority in determining claims to the receivership assets, because “the court which first obtains jurisdiction and constructive possession of the property…is entitled to retain it.…” Gradel v. Piranha Capital, L.P., 495 F.3d 729 (7th Cir. 2007). Also, by intervening in a parallel action, the receiver submits to the jurisdiction of that court. Id. However, before a suit is brought against a receiver, the leave of the court by which he was appointed must be obtained (the “Barton Doctrine”). Standifer v. S.E.C., 542 F. Supp. 2d 1312 (N.D.Ga. 2008); Le v. S.E.C., 542 F. Supp.2d 1318 (N.D.Ga. 2008); Krell v. S.E.C.,1:07-CV-2285-WSD, 2008 WL 513375 (N.D. Ga. Feb. 22, 2008).

A receiver must use judgment in litigating potential claims by or against the estate. There is no automatic immunity for the receiver. See New York Life Ins. Co. v. Waxenberg, 807-CV-401-T-27TGW, 2009 WL 632896, at *2-5 (M.D. Fla. Mar. 11, 2009) (awarding attorney fees against the receiver for, the failure of the receiver to respond to an offer of judgment).

Creditors will not be permitted to file separate actions against the defendants that are duplicative of actions filed by the receiver. Gustin v. Hoffman,608-CV-57-ORL-31DAB, 2008 WL 2949443, at **2-3 (M.D. Fla. July 29, 2008).

3.02 Fraudulent Transfer Actions

Quite commonly, a wrongdoer who has defrauded others through a Ponzi or other fraudulent scheme wishes to — and does — transfer a portion of his ill-gotten gains to third parties. If the transfer was made for full value, and with no intent to defraud or hinder others, it may be perfectly legitimate. However, in many instances a key motive for the transfer was to defraud others. Thus, the receiver can frequently substantially increase the assets of the estate by having such “fraudulent transfers” set aside.

The rules concerning what constitutes a “fraudulent transfer” vary from state to state. Forty-three states along with the District of Columbia and the United States Virgin Islands have adopted variations of the Uniform Fraudulent Transfer Act (“U.F.T.A.”),61while a handful of states have adopted variations of the older Uniform Fraudulent Conveyance Act, which are both codifications of common law applying the English Statute of 13 Elizabeth. Under Section 4 of the U.F.T.A., a transfer will be considered fraudulent if the debtor made the transfer (i) with actual intent to hinder, delay or defraud any creditor of the debtor (“actual fraud”), or (ii) without receiving a reasonably equivalent value in exchange for the transfer and the debtor was or was rendered insolvent after the transfer (“constructive fraud”). In the case of actual fraudulent intent, which is subjective and often difficult to prove, Section 4(b) of the U.F.T.A. lists 11 indicia of fraud, often referred to as “badges of fraud,” which if present will assist in proving fraudulent intent.

In fraudulent transfer actions, Defendants will often argue that a receiver lacks standing to bring the action. Several courts have, however, upheld the authority of receivers to bring fraudulent transfer actions. Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995) is the principle case discussing the issue of receiver’s standing to bring these actions, explaining that the receiver has standing to bring the actions on behalf of the companies whose shoes he stepped into, as those were separate legal entities from which funds were wrongly diverted, and thus they were injured by the transfer. See also Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008) (finding the receiver had standing based on the injuries to the company); Wing v. Dockstader, 482 F. App’x 361, 362-63 (10th Cir. 2012). The Second Circuit agreed with this analysis, however, it noted that the analysis turns on whether the receiver represents the transferor only or whether he also represents a creditor of the transferor. Eberhard v. Marcu, 530 F.3d 122, 133 (2d Cir. 2008). Therefore, where the receiver has only been appointed receiver for the assets of the malfeasor, and not for its subsidiary entities, the receiver may lack standing as a “creditor,” unless the statute permits suits by “creditors and others.” Eberhard, 530 F.3d 122; cf. Stenger v. World Harvest Church, Inc., CIV.A.1:04CV00151-RW, 2006 WL 870310 (N.D. Ga. Mar. 31, 2006). For additional discussion regarding standing, see Chapter 5.

Fortunately, in the context of a Ponzi scheme, once the existence of a Ponzi scheme is proved, the fraudulent intent of the fraudster will be presumed. In In re Independent Clearing House, 77 B.R. 843, 860 (D. Utah 1987), the bankruptcy court held that intent to defraud can always be inferred when a Ponzi scheme is involved, because such schemes must, as a matter of scientific necessity, eventually collapse and leave some creditors unpaid.

One can infer an intent to defraud future undertakers from the mere fact that a debtor was running a Ponzi scheme. Indeed, no other reasonable inference is possible. A Ponzi scheme cannot work forever. The investor pool is a limited resource and will eventually run dry. … [The perpetrator] must know all along, from the very nature of his activities, that investors at the end of the line will lose their money. Knowledge to a substantial certainty constitutes intent in the eyes of the law, … and a debtor’s knowledge that future investors will not be paid is sufficient to establish his actual intent to defraud them.

77 B.R. at 860 (citations omitted, emphasis added). This “Ponzi Scheme Presumption,” that the very existence of a Ponzi scheme is enough to establish fraudulent intent, has been overwhelmingly upheld by courts.19

Similarly, courts have widely held that once the existence of the Ponzi scheme is proved, the presumption of the transferor’s insolvency is established. As stated in theIndependent Clearing House, case at 860, “[b]y definition, an enterprise engaged in a Ponzi scheme is insolvent from day one.”20 Additionally, the authorities are clear that Ponzi scheme perpetrators are deemed insolvent from the moment of its inception, as a matter of law.21

Once the receiver has shown the actual fraudulent intent of the transferor under Section 4(a) of the U.F.T.A., under Section 8(a) of the U.F.T.A., the transfer is not voidable if the transferee can show that he took the property in good faith and for a reasonably equivalent value. The transferee bears the burden of proof on both of these elements.See e.g., June, 432 F. Supp. 2d at 641, Wing v. Layton, 2:08-CV-708, 2013 WL 3725267 (D. Utah July 12, 2013). In order to meet this burden, “the transferee must show not that he was subjectively unaware of the transferor’s fraudulent intent, but rather that he did not have knowledge of facts that should have reasonably put him on notice that the transfer was made in order to delay, hinder, or defraud creditors of the debtor.”22 Thus, it will be harder for an insider to establish this defense.

To the extent that the payments were made as part of a Ponzi scheme and represented payments in excess of principal investment, that is the payments were fictitious Ponzi profits, those payments are voidable. This is so even if the transferee can show he acted in good faith, because a Ponzi scheme by definition does not produce profits and, therefore, the transferee could not have provided reasonably equivalent value. See, e.g., Independent Clearing House, 77 B.R. 858; Donell, 533 F.3d 762; Sender v. Buchanan, 84 F. 3d 1286, 1290 (10th Cir. 1996); Scholes, 56 F.3d 759. Additionally, if the transferee cannot show he acted in good faith and/or it can be shown that the transferee was otherwise aware of the Ponzi scheme, he is not entitled to rely on the good faith defense provided in Section 8(a) of the U.F.T.A., and he may be liable for all payments received, even to the extent of the transferee’s investment in the Ponzi scheme. See, e.g., Terry v. June, 432 F. Supp. 2d 642; Scholes, 56 F.3d 759; In re Spatz, 222 B.R. 157, 169 (N.D. Ill. 1998); In re Agric. Research & Tech. Grp., Inc., 916 F.2d 528, 538 (9th Cir. 1990). See also, Donell, 533 F.3d 762. Furthermore, funds received in connection with the operation of profitable entities are likewise voidable if the entity was still a part of the greater scheme. Wing v. Layton, 2:08-CV-708, 2013 WL 3725267 (D. Utah July 12, 2013).

And a charitable organization is not immune from the requirement that a transfer by an insolvent transferor be supported by consideration. Scholes, 56 F.3d at 761; Stenger v. World Harvest Church, Inc., CIV.A.1:04CV00151-RW, 2006 WL 870310, at *10 (N.D. Ga. Mar. 31, 2006).

In determining the amount of liability of an investor, one court has held that the investor will not be permitted to offset amounts paid as federal income taxes or other expenses in connection with the amounts distributed. Donell, 533 F.3d at 778-779.

The existence of the Ponzi scheme can be established by evidence of guilty pleas of the perpetrators in related criminal proceedings. June, 432 F. Supp. 2d at 639.

For other authority on issues that arise in suits by a receiver to vitiate fraudulent transfers, see the Table of Cases, under “Fraud/Fraudulent Conveyances.”

3.03 Relief Defendants\Disgorgement Applications

Arguably, the receiver has the power to institute actions against third parties holding assets which were transferred to them by the defendants in the underlying securities litigation by making application for disgorgement. S.E.C. v. Wencke, 783 F.2d 829 (9th Cir. 1986); see also Warfield, 453 F. Supp. 2d 1118. As to “nominal defendants,” seeS.E.C. v. Ross, 504 F.3d 1130, 1141-42 (9th Cir. 2007). Generally, these would be people whom the S.E.C. might have named as relief defendants initially but chose not to proceed against for strategic reasons. This may be the only cause of action the receiver may have against these parties. The advantage to pursuing these parties for disgorgement is that the receiver should be able to pursue these cases using summary proceedings rather than plenary proceedings (thus reducing litigation costs) as long as the defendants are given due process. Wencke, 783 F.2d 829; Warfield, 453 F. Supp. 2d 1118; but see S.E.C. v. Ross, 504 F.3d 1130 (9th Cir. 2007). It would also appear that the defendants would not be entitled to a jury trial in such cases. United States v. Arizona Fuels Corp., 739 F.2d 455, 459 (9th Cir. 1984); Bien v. Robinson, 208 U.S. 423, 427 (1908).

Disgorgement can be ordered against a defendant despite the defendant’s own huge losses in the investment scheme. S.E.C. v. J. T. Wallenbrock & Associates, 440 F.3d 1109, 1117 (9th Cir. 2006).

3.04 Other Causes of Action

The Scholes case, through dealing directly with a fraudulent conveyance action, is not limited to fraudulent conveyance actions. As a result, a receiver may bring breach of contract, negligence, fraud, aiding and abetting, securities, and potentially RICO actions.

In one case, a receiver was permitted to sue marketers for recovery of commissions received by them, utilizing “unjust enrichment” as a cause of action, even when the marketers were not aware of the fraudulent scheme. Hays v. Adam, 512 F. Supp. 2d 1330 (N.D. Ga. 2007) (“the defendants’ sales…to investors violated the law, and any commissions or bonuses they received from such sales were thus received unjustly.”)But see Ross, 504 F.3d 1130.

As to “show cause” actions for contempt, see Chapter 4.

3.05 Statutes of Limitation

Where a fraudulent transfer statute of limitations is tolled until “discovery,” the time does not begin to run until at least the receiver is appointed, as the fraud could not reasonably have been discovered. World Harvest Church, at **8-10; Quilling v. Cristell, CIV.A. 304CV252, 2006 WL 316981, at **6-7 (W.D.N.C. Feb. 9, 2006). Although arguments arise that the limitation period in the U.F.T.A. is a statute of repose rather than a statute of limitation, and thus is not subject to equitable tolling, courts have found this argument invalid. See Dockstader, 482 F. App’x 361 (holding that the U.F.T.A. limitation period applies “to the claimant,” meaning the receiver, and that the fraud could not reasonably have been discovered until after the company ceased being controlled by the wrongdoer); Wing v. Kendrick, 2:08-CV-01002-DB, 2009 WL 1362383 (D. Utah May 14, 2009) (holding that equitable tolling principles apply). But see Warfield, 453 F. Supp. 2d 1118. Although many courts have indicated that the limitations period does begin on the date the receiver is appointed, the Fifth Circuit has explained that the determination of the date on which the Plaintiff should have discovered the fraud is subject to a factual analysis, which must be plead and supported conclusively by the defendant. Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185, 195-96 (5th Cir. 2013) (finding that the defendant did not prove statute of limitations defense, as the evidence reflected that upon the receiver’s appointment, the fraudulent nature of the transfer was not readily evident).

3.06 Summary Proceedings

Proceedings brought by the receiver before the receivership court can be conducted on a summary basis, so long as basic principles of due process are observed. See Chapter 7.

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. See Chapter 7.

  1. 19See, e.g., Donell, 533 F.3d at 770; Quilling v. Schonsky, 247 F. App’x 583, 586 (5th Cir. 2007); Terry v. June, 432 F. Supp. 2d 635, 639-640 (W.D. Va 2006); In re Taubman, 160 B.R. 964, 983 (Bankr. S.D. Ohio 1993); In re Slatkin, 310 B.R. 740, 748-49 (Bankr. C.D. Cal 2004); In re Randy, 189 B.R. 425, 429 (Bankr. N.D. Ill 1995); In re Nat’l Liquidators, Inc., 232 B.R. 99, 102 (Bankr. S.D. Ohio 1999); In re Agric. Research & Tech. Group, Inc., 916 F.2d 528, 535 (9th Cir. 1990); In re Baker & Getty Fin. Servs., Inc., 98 B.R. 300, 308 (Bankr. N.D. Ohio 1989), aff’d, 974 F.2d 712 (6th Cir. 1992); In re C.F. Foods, L.P., 280 B.R. 103, 110 (Bankr. E.D. Pa. 2002); In re World Vision Entm’t, Inc., 275 B.R. 641, 656-67 (Bankr. M.D. Fla. 2002); In re M & L Bus. Mach. Co., 198 B.R. 800, 807 (Bankr. D. Colo. 1996). See also Conroy v. Shott, 363 F.2d 90, 92 (6th Cir. 1966)(given that a Ponzi scheme exists, the “question of intent to defraud is not debatable”).Gordon v. Rogge, 12-11456, 2013 WL 607776 (E.D. Mich Feb. 19, 2013); Wiand v. Mason, 8:10-CV-2146-T-17MAP, 2012 WL 7071455 (M.D. Fla. Dec. 17, 2012), report and recommendation adopted, 8:10-CV-2146-T-EAK, 2013 WL 542857 (M.D. Fla. Jan. 25, 2013).

  2. 20Numerous courts have adopted this conclusion. See, e.g., In re Mark Benskin & Co., 161 B.R. 644, 650 (Bankr. W.D. Tenn. 1993); In re Int’l Loan Network, Inc., 160 B.R. 1, 12 n.15 (Bankr. D. D.C. 1993); Taubman, 160 B.R. at 978; In re Ramirez Rodriguez, 209 B.R. 424, 430-31 (Bankr. S.D. Tex. 1997). See also In re Financial Federated Title & Trust, 309 F.3d 1325, 1332 (11th Cir. 2002) (“‘By definition, a Ponzi scheme is driven further into insolvency with each transaction.’”) (citation omitted).

  3. 21See Scholes, 56 F.3d at 755; In re Randy, 189 B.R. 425, 441 (Bankr. N.D. Ill. 1995).

  4. 22Id. See, e.g., United States v. Romano, 757 F. Supp. 1331, 1338 (M.D. Fla.1989);Plotkin v. Pomona Valley Imports (In re Cohen), 199 B.R. 709, 719 (Bankr.Fed.App.1996); Fisher v. Sellis (In re Lake States Commodities, Inc.), 253 B.R. 866, 878 (Bankr.N.D.Ill.2000); In re Agricultural Research & Tech. Group, Inc., 916 F.2d at 536; Stenger v. World Harvest Church, 2006 WL 870310 (N.D.Ga. 2006) at 10;Stenger v. Rogers, 2006 WL 449151 (N.D.Ga. 2006) at 7.

Actions for Contempt

4.01 In General

Contempt of court consists of the disregard of judicial authority and a court’s ability to punish such conduct is a part of its inherent authority. Thus, disobedience to the lawful orders of a court constitutes contempt. Enforcement of and Collateral Attack on Injunctions, 11A Fed. Prac. & Proc. Civ. §2960 (2d ed.) (hereinafter “Wright & Miller: Civil”)

Since receivers are frequently appointed in actions involving fraud, it is not uncommon that the fraudsters or those with whom they are in concert will attempt to evade or ignore orders of the receivership (or other) courts. Such contempt can arise, for instance, in connection with concealment of or failure to turn over assets, refusal (or supposed inability) to repatriate assets now being held in a foreign jurisdiction, or failure to honor “freeze” orders or orders for preservation or production of records and other “discovery” orders, to name only a few. Contempt can also arise when third parties, such as banks, fail (sometimes negligently) to comply with freeze or turnover orders.

4.02 Nature and Elements of Contempt

Contempt may be criminal or civil. Civil contempt may be utilized either to coerce the defendant into compliance with a court order or to compensate the complainant for losses sustained by the failure to comply. Electrical Workers Pension Trust Fund v. Gary’s Electric Service Co., 340 F.3d 373, 379, 385 (6th Cir. 2003); Chicago Truck Drivers v. Bhd. Labor Leasing, 207 F.3d 500, 505 (8th Cir. 2000). Whereas criminalcontempt is punitive, civil contempt is remedial: to coerce the defendant into compliance with the court’s order or to compensate the complainant for losses sustained. United States v. Asay, 614 F.2d 655, 659 (9th Cir. 1980); Shakman v. Democratic Org. of Cook Cnty, 533 F.2d 344, 348-49 (7th Cir. 1976) Costs and attorney fees of both the government and the Receiver, in addition to a “fine” for compensatory damages, are also appropriate. CCommodity Futures Trading Comm’n v. Lake Shore Asset Mgmt. Ltd., 07 C 3598, 2007 WL 4591005 (N.D. Ill. Dec. 21, 2007); Shakman, 533 F.2d at 351. Criminal contempt is to be utilized only if the civil remedy is deemed inadequate. Lake Shore Asset Management, 2007 WL 4591005, at *2.

To establish the contempt, it must be shown (by clear and convincing evidence in cases of civil contempt, and beyond a reasonable doubt in criminal contempt cases) that a clear and unambiguous order was violated, and that the defendant had notice of such order. Wright & Miller: Civil 2d, §2960; as to the standard of proof, see Stotler and Co. v. Able, 870 F.2d 1158, 1163 (7th Cir. 1989). However, in instances of civil contempt, the breach need not be willful. Wright, King & Klein, Federal Practice and Procedure: Criminal 3rd §705, n, 7. Thus, in the words of the United States Supreme Court:

The absence of willfulness does not relieve from civil contempt.…Since the purpose is remedial, it matters not with what intent the defendant did the prohibited act. The decree was not fashioned so as to grant or withhold its benefits dependent on the state of minds of respondents.…An act does not cease to be a violation of a law and of a decree merely because it may have been done innocently.” McComb v. Jacksonville Paper Co., 336 U.S. 187, 191 (1949).

See also S.E.C. v. Homa, 99 C 6895, 2004 WL 1093492, at *6 (N.D. Ill. May 13, 2004) (“The state of mind of a party to the underlying action is irrelevant in a civil contempt proceeding. An inadvertent violation does not preclude a contempt citation.…in civil contempt proceedings the issue is not the [contemnor’s] state of mind but simply whether the Court’s order was in fact violated. ‘[S]ince the purpose [of civil contempt] is remedial, it matters not with what intent the defendant did the prohibited act.…An act does not cease to be a violation of the law and of a decree merely because it may have been done innocently.’”) (citations omitted).

Reliance on advice of counsel does not excuse non-compliance with an order that is, in fact, lawful. Asay, 614 F.2d at 661.

As to the procedure for contempt proceedings, including the use of incarceration in civil contempt as a method of coercing compliance with the court’s order, see §5A.06.

4.03 The “Impossibility” Defense – In General

Once clear and convincing evidence of the violation of the court order has been presented by the party seeking entry of the contempt finding, the burden is on the party in contempt to establish a defense to the contempt order, such as “present inability to comply.” United States v. Rylander, 460 U.S. 752, 756-68 (1983) (failure to produce evidence to support asserted impossibility defense not excused by fact that was also claiming Fifth Amendment); United States v. Chusid, 372 F.3d 113, 116-117 (2d Cir. 2004); Gary’s Electric, 340 F.3d at 379; In re Lawrence, 279 F.3d 1294, 1294 (11th Cir. 2002); Chicago Truck Drivers, 207 F.3d at 505; F.T.C. v. Affordable Media, LLC, 179 F.3d 1228, 1239 (9th Cir. 1999); Commodity Futures Trading Comm’n v. Wellington Precious Metals, 950 F.2d 1525 (11th Cir. 1992). See also Roman v. Korson, 307 F. Supp. 2d 908, 914 (W.D. Mich. 2004).

A defendant asserting an “impossibility” defense must show “categorically and in detail” why he or she is unable to comply with the court’s order. Gary’s Electric, 340 F.3d at 379; Lawrence, 279 F.3d at 1297; Chicago Truck Drivers, 207 F.3d at 506 (stating that “an alleged contemnor must ‘…establish that he has made in good faith all reasonable efforts to meet the terms of the court order he is seeking to avoid,” and further holding that this was an “especially high” burden); Affordable Media, 179 F.3d at 1240-41; see also Chusid, 372 F.3d at 117 (“It is his burden, however, ‘to establish his inability clearly, plainly, and unmistakably.’”); Roman, 307 F. Supp. 2d at 914.

An especially strong statement was made by the Eleventh Circuit in Wellington:

Even if the efforts he did make were “substantial,” “diligent” or “in good faith,”…the fact that he did not make ‘all reasonable efforts’ establishes that [respondent] did not sufficiently rebut the…prima facie showing of contempt.” 950 F.2d at 1529 (emphasis supplied).

Reliance on advice of counsel is not a defense. Asay, 614 F.2d at 661.And see below for a discussion on the impact of utilization of asset protection trusts as an attempted means of emasculating the contempt order.

4.04 Self-Induced Impossibility

Even though in Rylander, the Supreme Court spoke in terms of present impossibility as an absolute defense, subsequent lower court decisions have strongly supported the concept that self-induced impossibility is not a defense. Gary’s Electric, 340 F.3d at 381-384 (“…we have decided that a showing of clean hands is essential to the [impossibility] defense.”); Lawrence, 279 F.3d at 1300; Chicago Truck Drivers, 207 F.3d at 506; Asay, 614 F.2d at 659-660. See also Cent. States Se. & Sw. Areas Pension Fund v. Wintz Properties, Inc., 155 F.3d 868, 870, 875 (7th Cir. 1998); Roman, 307 F. Supp. 2d at 914; infra page 37, discussion concerning attempted utilization of asset protection trusts.

In keeping with the principle that self-induced impossibility is not a defense, the courts have held that lack of funds is not a valid “impossibility” defense when the defendant has chosen to instead pay other creditors. Gary’s Electric, 340 F.3d at 383 (“…Pipia’s decision to pay all other creditors and refusal to pay the Funds anything at all is ample evidence from which the district court could conclude that Pipia did not take ‘all reasonable steps’ to ensure Gary’s Electric’s compliance with the court order.”); Wintz, 155 F.3d at 870, 875 (“This is not a case wherein Wintz violated an injunction because it had no money whatsoever; it obviously was paying several creditors except the one entity entitled to Wintz’s money under the terms of the court order.”); Chicago Truck Drivers, 207 F.3d 500 at 504. See also Lawrence, 279 F.3d at 1297-98 (“He maintained that he had used the money for payment of various unsecured loans. We voiced a skepticism that the contemnor, a sophisticated businessman,…made no meaningful attempts to collect on debts due him. We stated that ‘Even more important, however, is the fact that the district court found [contemnor’s] explanations unworthy of belief.’”) (quoting Wellington, 950 F.2d 1525). Additionally, courts have excluded from using the impossibility defense those who created the inability to pay by living an extravagant lifestyle. See S.E.C. v. Douglas, 3:82 CV 29, 2012 WL 3587203 (N.D. Ohio Aug. 20, 2012) (citing S.E.C. v. Solow, 682 F. Supp. 2d 1312, 1323-24 (S.D. Fla. 2010); S.E.C. v. Showalter, 227 F. Supp. 2d 110, 115-21 (D.D.C. 2002)).

The perpetrators of Ponzi and other fraud schemes frequently seek both to “launder” and hide their funds by depositing such moneys overseas, where (the fraudster hopes) they will be beyond the reach of the United States’ courts. However, our courts have frequently ordered that the “overseas” funds be repatriated to the United States..

In an attempt to avoid repatriation, many defendants have established “asset protection trusts” with “duress” clauses, which provide that the foreign trustee would refuse to repatriate funds to the trust settlor if the request was a result of a court order. For a discussion of asset protection trusts, see Affordable Media, 179 F.3d at 1240-1244. In two cases, Courts of Appeal for the Ninth and Eleventh Circuits have held that the trusts did not protect the contemnors against contempt orders and incarceration, either based upon principles of self-induced impossibility or the court’s skepticism concerning the credibility of the contemnor’s testimony. Lawrence, 279 F.3d at 1296-1300 (“Further, the district court found that his testimony that he retained no control over the Trust and that he had not maintained communication with the Trustees lacked credibility. There is no support in the record before us to warrant a rejection of that credibility determination. Even if we were to find that Lawrence had set forth sufficient evidence of impossibility, we must agree with the trial court that Lawrence’s claimed defense is invalid because the asserted impossibility was self-created.”); Affordable Media, 179 F.3d at 1232, 1238-1244 (“…the provisions of the trust were intended to frustrate the operation of domestic courts….In the asset protection trust context, moreover, the burden on the party asserting an impossibility defense will be particularly high because of the likelihood that any attempted compliance with the court’s orders will be merely a charade rather than a good faith effort to comply.”)

Homestead and other exemptions do not apply to a turn over order. Steffen v. Gray, Harris & Robinson, 283 F. Supp. 2d 1272 (M.D. Fla 2003).

In some cases, the only available testimony concerning impossibility may be that of the contemnors, whose propensity for fraud has created the problems. Not surprisingly, district courts are given broad discretion to reject such testimony as lacking in credibility, if that appears to be the case. See Chusid, 372 F.3d at 117 (“…Chusid has engaged in an extended campaign of obfuscatory and even deceptive conduct in an attempt to avoid his restitution and fine obligations.”); Wellington, 950 F.2d at 1530 (“evasive and incomplete testimony will not satisfy burden of production.”)

4.05 Liability of Third Parties

In some instances, the conduct complained of may have been performed, or at least facilitated, by persons that are not parties to the underlying action, which raises the question of enforceability of the order against a third party.
To hold one who is not a party to the action in which the violated order was issued liable in contempt, two additional facts must be established: first, that the purported contemnor had knowledge of the order; and, second, that he “either abets the [party named in the court order] or is legally identified with him.” Stotler, 870 F.2d at 1164; see also Goya Foods, Inc. v. Wallack Mgmt Co., 290 F.3d 63, 75 (1st Cir. 2002).

Nonparties who reside outside the jurisdiction of a district court but who knowingly violate a court’s injunction order or aid and abet others in doing so, are subject to the jurisdiction of the district court, even when there are no other contacts with the jurisdiction. S.E.C. v. Homa, 514 F.3d 661 (7th Cir 2008).

4.06 Procedure

Contempt proceedings are normally summary in nature. See Chapter 7. Wright, Miller & Kane, Federal Practice & Procedure: Civil 2d, §2960. For a discussion of the procedure to be followed in a civil contempt proceeding (and a contrast with criminal contempt), see Wright, King & Klein, Federal Practice and Procedure: Criminal 3rd, §705.

Incarceration may be utilized as a means of coercing compliance by the contemnor.Chicago Truck Drivers, 207 F.3d at 505. See also Chusid, 372 F.3d at 116; Lawrence, 279 F.3d at 1297; Wellington, 950 F.2d at 1526 (11th Cir. 1992). However, the imprisonment for civil contempt must be conditional. Shakman, 533 F.2d at 349 n.8. And “‘although incarceration for civil contempt may continue indefinitely, it cannot last forever.’…If the bankruptcy judge determines that, although Lawrence has the ability to turn over the Trust res, he will steadfastly refuse to do so, the judge will be obligated to release Lawrence because the subject incarceration would no longer serve the civil purpose of coercion.” Lawrence, 279 F.3d at 1300-01. In such an event, however, it would appear that the receiver could petition for incarceration for criminal contempt. And see Wellington: “As long as the judge is satisfied that the coercive sanction might yet produce its intended result, the confinement may continue….many months or perhaps even several years may pass before it becomes necessary to conclude that incarceration will no longer serve the purpose of the civil contempt order.” See also Commodity Futures Trading Comm’n v. Armstrong, 284 F.3d 404, 406 (2d Cir. 2002) (incarceration continued although defendant continued to fail to comply even after two years of incarceration); Chadwick v. Janecka, 312 F.3d 597, 613 (3d Cir. 2002).

Where a contemnor has disobeyed court orders, but seeks to take advantage of the judicial system by appealing a contempt order, the appellate court may, in its discretion, refuse to hear the appeal under the “fugitive disentitlement” doctrine. United States v. Barnette, 129 F.3d 1179 (11th Cir. 1997).

Receiver Standing / In Pari Delicto

In an effort to raise funds for the receivership, receivers often bring actions against third parties who may be liable to the receivership estate. However, federal courts have recognized that, upon appointment, a receiver, like a trustee in bankruptcy, stands in the place of the entities for which he has been appointed receiver and is only permitted to bring any claim in their place. Scholes v. Lehmann, 56 F.3d 750, 753-754 (7th Cir. 1995). See also S.E.C. v. Holt, CV03-1825-PHX-PGR, 2007 WL 2332584, at *2-3 (D. Ariz. Aug. 13, 2007); Stenger v. World Harvest Church, Inc., CIV.A.1:04CV00151-RW, 2006 WL 870310, at *5-6 (N.D. Ga. Mar. 31, 2006). Cf. Eberhard v. Marcu, 530 F.3d 122 (2d Cir. 2008). Therefore, a receiver does not actually represent the interests of the investors or creditors of the receivership estate and cannot bring an action against a defendant simply alleging damages to the investors. As a result of such case law, defendants in an action brought by a receiver may raise the receiver’s standing to bring the action as an issue.

The issue of standing is closely related to subject-matter jurisdiction. Usually in S.E.C. cases, a receiver is appointed by a district court to recover, marshal, and conserve the assets of the receivership estate for the benefit of the defrauded investors or creditors. In the appointment order, the receiver should be vested with authority to bring legal actions based on law or equity in any state or federal court as the receiver deems necessary or appropriate in discharging his duties as receiver. Additionally, a receiver’s authority to initiate legal actions is authorized by federal statute. See 28 U.S.C. § 754 and 28 U.S.C. § 1692.

The appointment of a receiver to represent the interests of an individual or entity is an equitable event that, under most state and federal common law, can result in the disavowal of previous actions by the party. A receiver does have standing to recover funds wrongfully taken or withheld from the receivership estate so as to enable the receivership estate to pay the liabilities it has assumed to the investors in or creditors of the receivership estate. This standing is aided by the “adverse interest” doctrine, which is an exception to the normal rule that the acts and knowledge of an agent are attributed to the principal. See Scholes, 56 F.3d at 754; Tew v. Chase Manhattan Bank, N.A., 728 F. Supp. 1551, 1559-60 (S.D. Fla. 1990), opinion amended 741 F. Supp. 220 (S.D. Fla 1990). See also Warfield v. Alaniz, 453 F. Supp. 2d 1118 (D. Ariz. 2006);World Harvest Church, 2006 WL 870310, at **5-6. The adverse interest doctrine provides that where an agent acts in his own interest, and where his interest is adverse to the principle, that knowledge of that act will not be imputed to the principle. Little v. S. Cotton Oil Co., 156 S.C. 480 (1930); see Official Comm. of Unsecured Creditors of Allegheny Health Educ. & Research Found. v. PriceWaterhouseCoopers, LLP, 605 Pa. 269 (2010).

At first blush, it may seem counterintuitive that a receiver, who stands in the shoes of the wrong-doer for whom a receiver is appointed, should have a cause of action against another wrong-doer. However, in Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995), the Seventh Circuit recognized that a victimized corporation in a securities fraud scheme can provide the foundation for a fraud claim by the corporate victim once purged of the controlling bad characters, essentially finding that the defendant cannot ignore the corporate victim’s injury simply because the corporation is controlled by bad characters.23

In Tew v. Chase Manhattan Bank, 728 F. Supp. 1551 (S.D. Fla. 1990), Tew, acting as a trustee for a bankrupt securities corporation, sued a financial institution alleging inter alia, that it aided and abetted the officers and owners of the receivership corporation in defrauding the corporation’s investor clients. The bank defended by asserting that the prior culpable actions of the receivership corporation barred the action. Applying the adverse interest doctrine, the Court divorced the “principal” [the corporation now under the receiver’s control] from the prior acts of its officer “agents” [the owners and directors of the corporation], because the latter had been acting for their own enrichment not in the interests of the Company:

Normally, the acts and knowledge of an agent are imputed to the principal. …As with almost all rules, there is at least one exception. If the agent is acting adversely to the principal’s interests, the knowledge and misconduct of the agent are not imputed. …Under Florida law, the adverse interest exception applies and will bar Chase’s reliance on the misconduct of the former officers and directors. …For the reasons stated above, the court finds that the E.S.M. principals acted solely for their own personal enrichment, totally abandoning the interests of [E.S.M.]. …For this same reason, the adverse interest exception also bars Chase’s two counterclaims. These are based on the fraud and breach of contract by the former E.S.M. officers and directors. They cannot be applied to bar the suit of the trustee of [E.S.M.].24

Chief Judge Posner, of the Seventh Circuit, explained this same concept in his inimically more colorful fashion in Scholes, 56 F.3d 750. Scholes involved an action brought by a receiver who was appointed to take control of a set of closely held corporations involved in a Ponzi scheme. Judge Posner noted that the appointment of a receiver for these companies, freed them from their “evil zombie” state, entitling them to pursue claims against third parties:

How, the defendants ask rhetorically, could the allegedly fraudulent conveyances have hurt Douglas, who engineered them, or the corporations that he had created, that he totally controlled and probably (the record is unclear) owned all the common stock of, and that were merely the instruments through which he operated the Ponzi scheme?

The answer—so far as the corporations are concerned, and we need go no further—turns out to be straightforward. The corporations, Douglas’s robotic tools, were nevertheless in the eyes of the law separate legal entities with rights and duties. They received money from unsuspecting, if perhaps greedy and foolish, investors. That money should have been used for the stated purpose of the corporations’ sale of interests in the limited partnerships, which was to trade commodities. Instead Douglas caused the corporations to pay out the money they received to himself, his ex-wife, his favorite charities and an investor, Phillips, whom Douglas wanted to keep happy, no doubt in the hope that Phillips would invest more money in the Ponzi scheme or encourage others to do so. …

Though injured by Douglas, the corporations would not be heard to complain as long as they were controlled by him, not only because he would not permit them to complain but also because of their deep, their utter, complicity in Douglas’s fraud. The rule is that the maker of the fraudulent conveyance and all those in privity with him—which certainly includes the corporations—are bound by it. [citations omitted]. But the reason, of course, as the cases just cited make clear, is that the wrongdoer must not be allowed to profit from his wrong by recovering property that he had parted with in order to thwart his creditors. That reason falls out now that Douglas has been ousted from control of and beneficial interest in the corporations. The appointment of the receiver removed the wrongdoer from the scene. The corporations were no more Douglas’s evil zombies. Freed from his spell they became entitled to the return of the moneys—for the benefit not of Douglas but of innocent investors—that Douglas had made the corporations divert to unauthorized purposes. [citations omitted]. That the return would benefit the limited partners is just to say that anything that helps a corporation helps those who have claims against its assets.25

As a result, in bringing an action on behalf of receivership entities, a receiver can argue that he is not bound nor is his right to sue on behalf of the receivership entities tainted by the improper actions of the corporate owners and officers who engineered or participated in the scheme. See Scholes, 56 F.3d 750; Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008); Eberhard, 530 F.3d 122; World Harvest Church, 2006 WL 870310, at **5-6; Quilling v. Cristell, CIV.A. 304CV252, 2006 WL 316981(W.D.N.C. Feb. 9, 2006);Jones v. Wells Fargo Bank, N.A., 666 F.3d 955, 967 (5th Cir. 2012); but see Feinstein ex rel. WML Gryphon Fund LLC v. Long, 11-C-57, 2011 WL 3555727, at *6 (E.D. Wis. Aug. 11, 2011) (distinguishing Scholes from situation involving an investment fund, determining that transfers in the investment fund scenario, although poor decisions, did not harm the entity in the same way that did transfers in a Ponzi scheme). The Scholesanalysis has been widely endorsed. See Democratic Senatorial Campaign, 712 F.3d 185, Wing v. Dockstader, 482 F. App’x 361, 363 (10th Cir. 2012), Eberhard, 530 F.3d 122, Donell, 533 F.3d 762.

The inapplicability to a receiver of normal in pari delicto prohibitions is another reason that a receivership frequently is a more effective strategy for protecting the victims of fraud than a bankruptcy, as several courts have held that the Scholes reasoning applies only to a receiver, not to a trustee in bankruptcy. Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co. Inc., 267 F.3d 340 (3d Cir. 2001); In re Hedged-Invs. Assocs., 84 F.3d 1281, 1284-86 (10th Cir. 1996); Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1093-94 (2d Cir. 1995); Global Crossing Estate Representative v. Winnick, 04 CIV.2558(GEL), 2006 WL 2212776, at *16, n.21 (S.D.N.Y. Aug. 3, 2006); In re Derivium Capital LLC, 716 F.3d 355, 367 (4th Cir. 2013).

Some courts would limit the inapplicability of in pari delicto as a defense to fraudulent conveyance actions by a receiver. The courts reason that ignoring the in pari delictodefense in a fraudulent conveyance action would be equitable because the purpose of such an action is to recover wrongfully diverted funds in the hands of the target. However, some courts have concluded that ignoring the in pari delicto defense when the target was a tortfeasor (an accountant, lawyer, or banker whose negligence contributed to the fraud), who was not holding wrongfully diverted funds, was not equitable. Knauer v. Jonathan Roberts Fin. Group, Inc., 348 F.3d 230 (7th Cir. 2003).But see Bechtle v. Master, Sidlow & Associates, P.A., 766 F. Supp. 2d 547, 555 (E.D. Pa. 2011).

However, there appears to be an emerging trend were courts are allowing the receiver or non-bankruptcy trustee to avoid the in pari delicto defense in claims against tortfeasors. F.D.I.C. v. O’Melveney & Meyers, 61 F.3d 17 (9th Cir. 1995); Trenwick Am. Litig. Trust v Ernst & Young, L.L.P., 906 A.2d 168, at 212 (Del. Ch. 2006), aff’d sub nom. Trenwick Am. Litig. Trust v. Billett, 931 A.2d 438 (Del. 2007); Hays v. Paul, Hastings, Janofsky & Walker LLP, CIV.A. 106CV754-CAP, 2006 WL 4448809 (N.D. Ga. Sept. 14, 2006); Mosier v. Stonefield Josephson, Inc., CV 11-2666 PSG EX, 2011 WL 5075551 (C.D. Cal. Oct. 25, 2011); Williamson v. PricewaterhouseCoopers, LLP, 602106/2004 (Trial Order), 2007 WL 5527944 (N.Y.Sup. Nov. 7, 2007). Since the litigation targets in the these cases (accountants, lawyers, bankers) are often immune from claims from investors because the investors do not have direct claims against these service providers, if in pari delicto were applied against the receiver, the tort feasors would escape liability for their negligence while the investors damaged by their negligence would have no recourse. The equitable key here is that any recovery would go to the innocent investors, not those that committed the fraud (since they have been replaced by the receiver).

A receiver’s standing to recover money wrongfully taken or withheld from receivership entities to pay liabilities assumed by those entities to investors as a result of the illegal activities of the defendant is clear under Scholes, 56 F.3d 750 and Tew, 728 F. Supp. 1551. See also Hays v. Adam, 512 F. Supp. 2d 1330 (N.D. Ga. 2007). However, when opposing a receiver’s standing to make a claim, defendants often argue that the receiver is attempting to bring what essentially are investor claims when he does not, in fact, represent the investors but the receivership entities. What these arguments often overlook is the differentiation between the derivative nature of the receiver’s claims and the direct claims of the investors. In fact, the civil liability of an entity defendant is often derivative and can only be pursued by the company that was in contractual privity with that defendant. For instance, in Mid-State Fertilizer v. Exchange Nat. Bank of Chicago, 877 F.2d 1333 (7th Cir. 1989), the Seventh Circuit Court of Appeals rejected the standing of investors to pursue a depository bank in a fraud scheme similar to that involved many S.E.C. enforcement actions:

The derivative nature of such injuries leads courts in antitrust cases to hold that neither investors nor employees may recover. RICO and bank tying cases have followed the path blazed in antitrust. Antitrust, RICO and bank tying cases are not off by themselves in a corner. It is commonplace to rebuff efforts by investors and employees to collect damages for injuries done to their firms. A big chunk of the law concerning corporate derivative litigation consists in separating “direct” injury (which the investor may redress through independent suit) from “derivative” injury (which the investor may redress only through litigation in the name of the corporation). The Kimmels’ injury is derivative no matter which body of rules we consult.

Good reasons account for the enduring distinction between direct and derivative injury. When the injury is derivative, recovery by the indirectly injured person is a form of double counting. “Corporation” is but a collective noun for real people—investors, employees, suppliers with contract rights, and others. A blow that costs “the firm” $100 injures one or more of those persons. If, however, we allow the corporation to litigate in its own name and collect the whole sum (as we do), we must exclude attempts by the participants in the venture to recover for their individual injuries.[cite]29[cite]

Other courts have taken a more restrictive view of standing than the Seventh Circuit inScholes. In the case of In re Bennett Funding Grp., Inc., 336 F.3d 94, 101-102 (2d Cir. 2003), the Second Circuit held that a bankruptcy trustee did not have standing to pursue a claim on behalf of the company because the actions of the sole shareholder of the company were attributed to the company, thus preventing the company from suing third parties due to the company’s “unclean hands.” The court recognized an exception to the prevailing rule: where the fraudster’s interests are adverse to those of the company (the adverse interest exception), his actions will not taint the company. However, the adverse interest exception may only be invoked if the fraudster is not the sole actor in the company and it can be shown that there was at least one person in a position to have stopped the fraud had they known of it. Since the Bennett Fundingcase involved a bankruptcy trustee instead of a receiver, it was unclear if the Second Circuit would apply the same restrictive view of standing as it applied in Bennett Funding to a receiver or the more liberal view of standing applied in the Seventh Circuit in the Scholes case.

In Eberhard v. Marcu, 530 F.3d 122 (2d Cir. 2008), the Second Circuit seems to have adopted the Scholes interpretation of standing for a receiver pursuing a fraudulent conveyance claim. In Eberhard, the receiver was appointed over the assets of the individual defendant who caused the corporate defendants to make fraudulent conveyances. The Court closely examined the Scholes case and another Seventh Circuit case also written by Judge Posner two years after Scholes, Troelstrup v. Index Futures Grp., Inc., 130 F.3d 1274 (7th Cir. 1997). In its analysis, the Second Circuit opined that the two cases read together stand for the proposition that if the receiver is appointed over the assets of an individual who caused the fraud, the receiver will not have standing to pursue fraudulent conveyances whereas if the receiver is appointed over the assets of corporation involved in the fraud, the receiver would have standing to pursue the fraudulent conveyance (because the evil zombie is removed from the corporation and replaced by the receiver). In the Eberhard case, the receiver was appointed only over the assets of the individual fraudulent actor and not the corporation which actually conveyed the assets and therefore the receiver lacked standing. The Court noted that “had the scope of the receivership not been narrowed, the entire issue [of standing] might have been avoided.” Eberhard, 530 F.3d at 134.

In addition to the Seventh and Second Circuits, the Third, Fifth, Ninth, and Tenth Circuits have also endorsed the Scholes analysis. Marion v. TDI Inc., 591 F.3d 137 (3d Cir. 2010); Democratic Senatorial Campaign, 712 F.3d 185; Donell, 533 F.3d 762 (9th Cir. 2008); Wing v. Dockstader, 482 F. App’x 361, 362-63 (10th Cir. 2012). The Fifth Circuit analyzed the matter specifically in Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185 (5th Cir. 2013), where it corrected its previous standing analysis, explaining:

[A] federal equity receiver has standing to assert only the claims of the entities in receivership, and not the claims of the entities’ investor-creditors, but the knowledge and effects of the fraud of the principal of a Ponzi scheme in making fraudulent conveyances of the funds of the corporations under his evil coercion are not imputed to his captive corporations. Thus, once freed of his coercion by the court’s appointment of a receiver, the corporations in receivership, through the receiver, may recover assets or funds that the principal fraudulently diverted to third parties without receiving reasonably equivalent value.

See also Alguire, 2013 WL 4647293. Additionally, the Tenth Circuit found Scholesmore persuasive than analogous bankruptcy case law, which would have found a lack of standing in a fraudulent transfer proceeding. Dockstader, 482 F. App’x at 363. However, the Tenth Circuit’s limited analysis oddly characterizes Scholes as holding that “a receiver of an entity which was used to perpetrate a Ponzi scheme has standing to recover fraudulent transfers as though the receiver were a creditor of the scheme.” Id. This characterization is contrary to the general principle iterated in Scholes that receivers stand in the shoes of the entity in the receivership estate and not the creditors, and oversimplifies the Scholes holding to eliminate the explanation of how the standing is based on the injury of the entity. As the Ninth Circuit explained when engaging in itsScholes analysis in Donell v. Kowell, “[t]he Receiver has standing to bring this suit because, although the losing investors will ultimately benefit from the asset recovery, the receiver is in fact suing to redress injuries that [the company] suffered when its managers caused [the company] to commit waste and fraud.” Donell, 533 F.3d at 777.

The right of a receiver to assert rights against property that could be asserted by the receivership entity includes the right to sell property held by a trust which has been placed in receivership where the trust agreement grants such authority to the trustee.Holt, 2007 WL 2332584.

  1. 23In Troelstrup v. Index Futures Group, Inc., 130 F.3d 1274 (7th Cir 1997), decided two years after Scholes and also written by Judge Posner, the author of the Scholesopinion, the Court held that a receiver could not bring action on behalf of the individual who perpetrates the fraud scheme, only the entity the individual controlled after the fraud actor was removed.

  2. 24728 F.Supp. at 1559-1560. [bracketed information provided and excerpts omitted through ellipses].

  3. 2556 F.3d at 754. [Citations and excerpts omitted through ellipses]

Jurisdiction, Venue and Service Issues Related to a Receiver’s Action Against a Foreign Third Party

6.01 In General

Often a receiver discovers that the receivership estate has a claim against a foreign entity that does not reside nor do business in the United States. In such a situation, issues arise regarding whether the court which presides over the receivership can assert personal jurisdiction over the foreign defendant, what venue is proper, and how actual service of the summons and complaint can be achieved on the foreign defendant.

6.02 Jurisdictional Issues Relating To Foreign Defendants

A federal district court adopts the jurisdiction of the state in which they sit, and can only assert personal jurisdiction over nonresident parties when those parties could be subject to the personal jurisdiction of the state court. Michael J. Neuman & Assoc. v. Florabelle Flowers, Inc., 15 F.3d 721, 724 (7th Cir. 1994); Fisher v. Teva, PFC SRL, 212 F. App’x 72, 75 (3d Cir. 2006); Allred v. Moore & Peterson, 117 F.3d 278, 281 (5th Cir. 1997). As a result, in most circumstances, a receivership court can assert personal jurisdiction over a foreign defendant only if the state in which the receivership court sits could do likewise. States exercise jurisdiction over foreign, nonresident defendants pursuant to their respective long-arm statutes. While the various long-arm jurisdictions of the states each have specific nuances, most states’ long-arm jurisdiction statutes generally operate to give the state jurisdiction over a defendant based upon the defendant’s commission of a tortious act in that forum or due to their transaction of business in that forum.27 Additionally, many states also provide for the exercise of personal jurisdiction over foreign defendants who conspire with another to commit a tortious action upon the plaintiff as long as the conspiracy is such that it alone would be actionable.

Regardless of the requirements of the long-arm statute which is applied, a receiver must also demonstrate that the due process requirements of the United States Constitution have been met. In order for due process requirements to be met, the receiver must show that the foreign defendant had certain “minimum contacts” with the forum state so that requiring the foreign defendant to defend the suit would not violate “traditional notions of fair play and substantial justice.” International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). Such minimum contacts exist when the foreign defendant’s conduct in the forum state is such that he can reasonably foresee being haled into court there. Kulko v. California Superior Court, 436 U.S. 84, 97-98 (1978). However, if the plaintiff’s claim did not arise from the defendant’s activities in that state, due process is only satisfied if the defendant’s contacts in the forum state were of a “continuous and systematic nature.” See International Shoe, 326 U.S. 310.

Notwithstanding the foregoing, when a receiver pursues litigation under certain federal laws, state lines can simply be ignored. In enacting the Securities and Exchange Act (“S.E.A.”) and the Racketeer Influenced and Corrupt Organization (“RICO”) laws, Congress authorized nationwide service of process. Fizsimmons v. Barton, 589 F.2d 330, 332-334 (7th Cir. 1979) (securities laws); Lisak v. Mercantile Bancorp, Inc., 834 F.2d 668, 671-672 (7th Cir. 1987) (RICO). “And when a federal court is attempting to exercise personal jurisdiction over a defendant in a suit based upon a federal statute providing for nationwide service of process, the relevant inquiry is whether the defendant has had minimum contacts with the United States.” Busch v. Buchman, Buchman & O’Brien Law Firm, 11 F.3d 1255, 1257 (5th Cir. 1994). Therefore, the S.E.A. and RICO confer personal jurisdiction over a foreign defendant in any federal court as long as that defendant has sufficient minimum contacts with the United States as a whole (and not just the particular state in which the federal court is located). See Bd. of Trustees, Sheet Metal Workers’ Nat. Pension Fund v. Elite Erectors, Inc., 212 F.3d 1031 (7th Cir. 2000) (ruling that nationwide service of process is proper “as long as the defendants have adequate contacts with the United States as a whole”); United States v. De Ortiz, 910 F.2d 376, 382 (7th Cir. 1990) (“We have, in other federal question cases, determined that due process requires only that each party have sufficient contacts with the United States as a whole rather than any particular state or other geographic area.”); Herbstein v. Bruetman, 768 F. Supp. 79 (S.D.N.Y. 1991) (finding personal jurisdiction over Argentine corporation in RICO case based on contacts with the United States); In re Auto. Refinishing Paint Antitrust Litig., 358 F.3d 288, 299 (3d Cir. 2004) (finding that personal jurisdiction “is as broad as the limits of the Fifth Amendment” in an action brought under the Clayton Act).

6.03 Forum Non Conveniens

When a receiver files suit against a foreign defendant, the defendant may argue that the federal lawsuit should be dismissed under the doctrine of forum non conveniens because the matter would more appropriately be heard by the foreign defendant’s native court. “The purpose of the doctrine of forum non conveniens as stated is to avoid litigation in a seriously inconvenient forum, rather than to ensure litigation in the most convenient forum.” Casad & Richman, Jurisdiction in Civil Actions, p. 34 (1998 ed.) In the leading case of Gulf Oil Corp. v. Gilbert, 330 U.S. 501 (1947), the United States Supreme Court stated:

The principal of forum non conveniens is simply that a court may resist imposition upon its jurisdiction even when jurisdiction is authorized by the letter of a general venue statute. These statutes are drawn with a necessary generality and usually give a plaintiff a choice of courts, so that he may be quite sure of some place in which to pursue his remedy. But the open door may admit those who seek not simply justice but perhaps justice blended with some harassment. A plaintiff sometimes is under temptation to resort to a strategy of forcing the trial at a most inconvenient place for an adversary, even at some inconvenience to himself . . . . If the combination and weight of factors requisite to given results are difficult to forecast or state, those to be considered are not difficult to name. An interest to be considered, and the one likely to be most pressed, is the private interest of the litigant. Important considerations are the relative ease of access to sources of proof; availability of compulsory process for attendance of unwilling, and the cost of obtaining attendance of willing witnesses; possibility of view of premises, if view would be appropriate to the action; and all other practical problems that make trial of a case easy, expeditious and inexpensive. There may also be questions as the enforceability of a judgment if one is obtained. The court will weigh relative advantages and obstacles to fair trial. It is often said that the plaintiff may not, by choice of an inconvenient forum, “vex,” “harass,” or “oppress” the defendant by inflicting upon him expense or trouble not necessary to his own right to pursue his remedy. But unless the balance is strongly in favor of the defendant, the plaintiff’s choice of forum should rarely be disturbed. Gulf Oil, 330 U.S. at 507-508 (emphasis added).

In any analysis of a forum non conveniens motion, “the ultimate inquiry is where trial will best serve the convenience of the parties and the ends of justice. Koster v. (Am.) Lumberman’s Mut. Cas. Co., 330 U.S. 518, 527 (1947). In most receiverships, the primary witnesses against any foreign defendant and the interested parties in the litigation are in the receivership jurisdiction or, at least, within the territory of the federal government who appointed the receiver. These facts strongly favor the receiver’s choice of forum especially as there is a “strong presumption in favor of the plaintiff’s choice of forum, which may be overcome only when the private and public interest factors clearly point towards trial in the alternative forum.” Wilson v. Humphrey (Cayman) Ltd., 916 F.2d 1239, 1246 (7th Cir. 1990).

Some circuits have held that the strong presumption in favor of the plaintiff’s choice of forum “is particularly true where a domestic plaintiff has filed suit in his own home forum” against a foreign defendant. AAR Intern., Inc. v. Nimelias Enterprises S.A., 250 F.3d 510 (7th Cir. 2001). See also In Casad & Richman, Jurisdiction in Civil Actions(1998), p. 614 (“In applying the principles of forum non conveniens, federal courts sometimes give relatively heavy weight to the plaintiff’s claim to an American forum when the plaintiff is American and the defendant foreign.”) (citing Humphrey (Cayman) Ltd., 916 F.2d 1239). Additionally, for purposes of the analysis under forum non conveniens, the “home forum” or the court-appointed receiver should be considered the United States (and not any particular federal district) and the alternative forum as that of the foreign country. Reid-Walen v. Hansen, 933 F.2d 1390, 1394 (8th Cir. 1991).

6.04 Service Under The Hague Convention

Often, a receiver can serve the summons and complaint against a foreign defendant under the provisions of the Hague Convention pursuant to Fed.R.Civ.P. 4. The forms which allow a plaintiff to file according to the Hague Convention are entitled “Request for Service Abroad of Judicial or Extrajudicial Documents,” and are available, with instructions, from the United States Marshall’s Office. In most situations, this form is completed by the plaintiff and sent to the clerk’s office of the district court in which the action has been filed for execution by the court clerk. Once the form has been executed, it should be sent with two copies of the summons and complaint to the foreign court presiding over the foreign defendant’s “home jurisdiction.” The foreign court will serve the documents on the foreign defendant and return an affidavit of service to the plaintiff. More information on this process is available at

  1. 27The “doing business” doctrine is actually a variety of general jurisdiction that exists separately from long-arm jurisdiction and which will apply to bestow personal jurisdiction even when the action does not arise out of the jurisdictional contacts.

Distribution of Disgorgement Funds to Investors

7.01 Nature of Disgorgement

As a part of its equitable powers, the court in an S.E.C. enforcement action may order a wrongdoer to disgorge all gains from the illegal activity. S.E.C. v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir. 1997); S.E.C. v. First Jersey Securities, Inc., 101 F.3d 1450, 1474 (2d Cir. 1996); S.E.C. v. Certain Unknown Purchasers of Common Stock of & Call Options for Common Stock of Santa Fe Int’l Corp., 817 F.2d 1018, 1020 (2d Cir. 1987);see also S.E.C. v. Lund, 570 F. Supp. 1397, 1404 (C.D. Cal. 1983); S.E.C. v. Ridenour, 913 F.2d 515, 517 (8th Cir. 1990). Disgorgement of “ill-gotten gains” may be ordered against one who has violated federal securities laws, despite the defendant’s own huge loss in the investment scheme. S.E.C. v. J.T. Wallenbrock & Assoc., 440 F.3d 1109, 1117 (9th Cir. 2006). The Second Circuit has affirmed that disgorgement is a remedy available, even in light of the Supreme Court’s holding in Grupo Mexicano de Desarrollo, SA v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999), which provided instruction on the availability of equitable remedies to federal courts. S.E.C. v. Cavanagh, 445 F.3d 105 (2d Cir. 2006)

The purpose of disgorgement is to prevent the wrongdoer from profiting from his illegal acts, not to reimburse those who have been injured by his conduct; and there is no requirement that disgorged funds be used for investor restitution. S.E.C. v. Commonwealth Chemical Securities, Inc., 574 F.2d 90, 102 (2d Cir. 1978) (“. . . the primary purpose of disgorgement is not to compensate investors. . . . it is a method of forcing a defendant to give up the amount by which he was unjustly enriched . . . .”). This principle from Commonwealth was reaffirmed by the Second Circuit in both S.E.C. v. Wang, 944 F.2d 80, 85, 88 (2d Cir. 1991) and Fischbach, 133 F.3d at 175-76 (“The primary purpose of disgorgement orders is to deter violations of the securities laws by depriving violators of their ill-gotten gains. *** ‘The effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable.’ ***Although disgorged funds may often go to compensate securities fraud victims for their losses, such compensation is a distinctly secondary goal. ***…and a district court may order disgorgement regardless of whether the disgorged funds will be paid to such investors as restitution.”) (citations omitted). See also S.E.C. v. Huffman, 996 F.2d 800, 802 (5th Cir. 1993) (“. . . disgorgement is not precisely restitution. Disgorgement wrests ill-gotten gains from the hands of a wrongdoer. It is an equitable remedy meant to prevent the wrongdoer from enriching himself by his wrongs. Disgorgement does not aim to compensate the victims of the wrongful acts, as restitution does.”) (citations omitted).

Thus, in certain circumstances, no distribution may be made to victims. For instance, inFishbach, 133 F.3d at 175-176, where it would have been impractical to identify those investors damaged by the fraudulent conduct, the disgorged funds were instead paid to the United States Treasury. Id. See also S.E.C. v. Blavin, 769 F.2d 706, 710, 712-714 (6th Cir. 1985), where disgorged profits in excess of the losses of injured investors would revert to the United States Treasury.

As a “distinctly public-regarding remedy,” designed to deter perpetrators from wrongdoing, it is not necessary that all victims to whom payment may be due be identified, nor is it necessary that the victims that can be identified all be compensated.F.T.C. v. Bronson Partners, LLC, 654 F.3d 359, 373 (2d Cir. 2011) (“While agencies may, as a matter of grace, attempt to return as much of the disgorgement proceeds as possible, the remedy is not, strictly speaking, restitutionary at all, in that the award runs in favor of the Treasury, not of the victims.) However, it is still the policy of the Securities & Exchange Commission to recommend that disgorgements be distributed for the benefit of those injured by the illegal activities. See Fishbach, 133 F.3d at 174.

As to competing jurisdiction over assets between the receivership court and a competing parallel action, see supra 3.01.

7.02 Distribution Plans

Any plan of distribution may be adopted that is reasonable. Wang, 944 F.2d at 83-84.See also Quilling v. Trade Partners, Inc., 572 F.3d 293, 298-301 (6th Cir. 2009) (“In a receivership proceeding, the district court has ‘broad powers and wide discretion’ in crafting relief…Thus, a district court’s decision relating to the choice of a distribution plan for the receivership is reviewed for abuse of discretion.***Ultimately, the district court has wide discretion in distributing receivership assets’); S.E.C. v. Basic Energy & Affiliated Res., Inc.(“BEAR”), 273 F.3d 657, 668, 670-71 (6th Cir. 2001) (“Similarly, in the present case the district court carefully considered the escrow investors’ arguments, the position of the other BEAR investors, and the facts of the case, and accordingly fashioned a distribution plan that was fair and equitable. Thus, we cannot conclude that the district court has abused its discretion.”); S.E.C. v. Forex Asset Mgmt. LLC, 242 F.3d 325, 331 (5th Cir. 2001) (“ . . . [i]n shaping equity decrees the trial court is vested with broad discretionary power . . . .”); S.E.C. v. Elliott, 953 F.2d 1560, 1566-67 (11th Cir. 1992) (“The district court has broad powers and wide discretion to determine relief in an equity receivership.”); S.E.C. v. Hardy, 803 F.2d 1034, 1037-39 (9th Cir. 1986) (“[I]t is a recognized principle of law that the district court has broad power and wide discretion to determine the appropriate relief in an equity receivership.”); Lund, 570 F. Supp. at 1404 (“The receiver or trustee, in addition to handling other duties if necessary, is given the task of locating those members of the public who were injured by the illegal activity and to pay each injured party an amount determined by the trustee to be fair and equitable.”) See also Norwest Bank Wisconsin, N.A. v. Malachi Corp., 245 F. App’x 488 (6th Cir. 2007).

As the receiver is operating in equity, tracing principles need not apply in determining a distribution plan. Commodity Futures Trading Comm’n v. Eustace, CIV.A. 05-2973, 2008 WL 471574 (E.D. Pa. Feb. 19, 2008) (citing Cunningham v. Brown, 265 U.S. 1, 13, 44 S.Ct. 424, 68 L.Ed. 873 (1924). Generally, the receivership court, sitting in equity, will favor plans that distribute assets to the investor victims, on an equal pro rata basis, on the theory that each was a victim of the scheme. See Commodity Futures Trading Comm’n v. Wilson, 11-CV-1651-GPC-BLM, 2013 WL 3776902 (S.D. Cal. July 17, 2013) (citing United States v. Real Property Located at 13328 and 13324 State Highway 75 North, 89 F.3d 551, 553 (9th Cir.1996)).

In United States v. Durham, 86 F.3d 70 (5th Cir. 1996), the defendants defrauded thirteen (13) consumers of $806,750 through an advance fee loan business whereby consumers were told their investment would be used to originate loans. Id. at 71. When the defendants were finally arrested, only $83,495.52 of assets remained in a single bank account. Id. at 71-72. All but $8,803.99 in the account could be traced to seven claimants, four of which filed claims. Id. at 72. Over the objection of the four claimants, “the district court elected in the interest of equity, to distribute the $83,000 pro rata rather than giving the bulk of it to [the claimants] whose funds had been traced.” Id. In upholding the decision of the district court, the United States Court of Appeals for the Fifth Circuit quoted the district court:

In determining a plan for distribution, the Court must act to determine the most equitable result. In the instant action, all claimants stand equal in terms of being victimized by the defendant defrauders. The ability to trace the seized funds to Claremont and Northernaire is the result of the merely fortuitous fact that the defrauders spent the money of the other victims first. Allowing Claremont and Northernaire to recover from the funds seized to the exclusion of the other victims under the tracing principle would be to elevate the position of those two victims on the basis of the actions of the defrauders. The Court sees no justification in equity for this result.

Id. (footnote omitted); see also Forex Asset Mgmt., 242 F.3d at 331.

In upholding a plan of distribution that provided for pro rata distribution rather than a tracing approach, the Sixth Circuit held that “‘equality is equity’ as among ‘equally innocent victims,”’ further noting that “[t]he district court’s approach of pooling the receivership assets and distributing then on a pro rate basis is well supported….” Trade Partners, 572 F.3d at 298, 301 (citing Basic Energy, 273 F.3d 657, S.E.C. v. Credit Bancorp, Ltd., 290 F.3d 80, 88 (2d Cir. 2002), Forex, 242 F.3d 325, and Elliott, 953 F.2d 1560). In dicta, the Court indicated that even “ownership” of an asset would not necessarily defeat pooling rather than tracing, but would simply be one item for the district court to consider. Id., 300, n.1.

There are various methods used in pro rata distributions; the method chosen may result in differing treatment of claimants. In certain circumstances a distribution plan may provide for reimbursement to certain claimants, while excluding others. Levine, 881 F.2d at 1173, 1183, cited with approval in Wang, 944 F.2d at 84; see also Santa Fe, 817 F.2d at 1020-21; Basic Energy, 273 F.3d at 660-661. The plan may also provide different treatment for different classes of investors. Wang, 944 F.2d at 85-88; see also Basic Energy, 273 F.3d at 660-661; Norwest Bank, 245 F. App’x, at 495; Commodity Futures Trading Comm’n v. Walsh, 712 F.3d 735, 738 (2d Cir. 2013); cf. S.E.C. v. Enter. Trust Co., 559 F.3d 649, 652 (7th Cir. 2009). Providing such differing treatment is particularly applicable when the aggregate losses suffered due to the scheme cannot be fully compensated by available proceeds. Wang, 944 F.2d at 86, 87; Santa Fe, 817 F.2d at 1021. However, pro rata distribution to all investors in several related funds has been approved based upon subsequently-discovered evidence of commingling, even though an earlier distribution had utilized a “tracing” approach. Commodity Futures Trading Comm’n v. Eustace, CIV.A. 05-2973, 2008 WL 471574 (E.D. Pa. 2008). In developing a pro rata scheme, the receiver need not adjust the plan to account for inflation which would award class members with longer investments differently than those with shorter, nor other variables. Walsh, 712 F.3d at 750, c.f. Bernard L. Madoff Investment Securities LLC, U.S. Bankruptcy Court, Southern District of New York, No. 08-1789 (ruling in the context of a bankruptcy case that investors were not entitled to adjustments in distributions for fictitious profits).

In S.E.C. v. Enter. Trust Co., 559 F.3d 649 (7th Cir. 2009), the receivership defendant, Enterprise Trust Co., managed more than $100 million in almost 1,200 accounts. Some customers used Enterprise only for custodial services (to hold securities they had purchased); others relied on Enterprise to select securities (managed accounts). Enterprise’s principal manager, Lohmeier, purchased options, engaged in short sales and made other risky trades in managed accounts that were supposed to be invested conservatively. When the risky investments lost money and stockbrokers demanded additional collateral, Lohmeier supplied it by using the assets in custodial accounts, without those investors’ knowledge. By the time the S.E.C. stepped in and froze Enterprise’s assets, more than half of the money entrusted to Enterprise had been lost.

Over the objections of several owners of managed accounts, the district court approved the receiver’s distribution plan, which returned 60% of original capital to custodial investors (who neither authorized risk-taking nor had any prospect of gaining from those risks), and between 25-50% to managed account investors (who permitted Enterprise to exercise some control over their assets, knew or could have known that risky investments had been made in their accounts and would have reaped the gains if Lohmeier’s investment strategy had succeeded). Three owners of managed accounts appealed the district court’s approval of the distribution plan. Noting that “District judges possess discretion to classify claims sensibly in receivership proceedings”, and citing Wang, Elliot, Forex and Basic Energy, the Court of Appeals affirmed the district court. Id. at 652. Interestingly, the Court of Appeals stated in dicta that “Owners of custodial accounts would have had a stronger objection to the plan” if any custodial account owners had appealed, by analogy to bankruptcy’s “absolute priority rule.” Id. at 653.

For a case limiting participation in distributions to those who have suffered actual out-of-pocket losses, see Santa Fe, 817 F.2d at 1020-21.

Typically, a pro rata distribution will involve a use of some form of a “net loss” calculation to determine each claim. In many cases, claimants will have received payments back from the entity in the receivership in one form or another, and so calculation of a claim should take this into account. Generally, the net loss method would deduct the total amount returned to the victim from the initial method to determine the base for which any distribution amount may be calculated. See S.E.C. v. Capital Consultants, LLC, 397 F.3d 733, 73-38 (9th Cir. 2005). However, other methods exist and may be preferable, depending on the circumstances and equitable considerations. For instance, the “rising tide” method, where the amount the claimant receives is deducted from the pro rata share of the distribution dollar for dollar may be used. Commodity Futures Trading Comm’n v. Wilson, 11-CV-1651-GCP-BLM, 2013 WL 3776902 (S.D. Cal. July 17, 2013) (showing preference for the rising tide method over the net loss method).

In some instances, responsibility for developing the distribution plan may be given by a consent decree to the S.E.C., C.F.T.C., F.T.C., or even the receiver. In such instances, it has been held that “…unless the consent decree specifically provides otherwise once the district court satisfies itself that the distribution of proceeds in a proposed SEC disgorgement plan is fair and reasonable, its review is at an end.” Wang, 944 F.2d at 85. Insofar as the drawing of distinctions between different classes of investors, the court also observed: “This kind of line-drawing—which inevitably leaves out some potential claimants—is, unless commanded otherwise by the terms of a consent decree, appropriately left to the experience and expertise of the SEC in the first instance. . . . The district court’s task is to decide whether, in the aggregate, the plan is equitable and reasonable.” Id. at 88. Furthermore, “[b]ecause the Receiver is a fiduciary and officer of this Court, this Court may and does give some weight to the Receiver’s judgment of the most fair and equitable method of distribution.” Eustace, 2008 WL 471574, at *5.

Disqualifying defendants and their related parties, as well as those who participated in the development, implementation or marketing of the scheme, from participation in distributions has been upheld as reasonable, since it permits the disgorgement proceeds to be distributed to those who are most innocent. This was the case in Basic Energy, 273 F.3d at 660-661 (6th Cir. 2001), where defendants were excluded from participation in disgorgement proceeds and marketers of the scheme were reimbursed for a smaller fraction of their losses than were non-marketers.

Providing for a reasonable “claims bar date” has also been sustained by the courts.Hardy, 803 F.2d at 1038-1040.

Reduction in administrative costs is a consideration that may also be taken into account in developing a plan of distribution. Wang, 944 F.2d at 86-87, 87-88; see also Fischbach, 133 F.3d at 175; Elliott, 953 F.2d at 1566; S.E.C. v. Wencke, 783 F.2d 829, 837 (9th Cir. 1986).

In the context of an S.E.C. receivership distribution plan, due process requirements generally include giving investors that opportunity to have a fair hearing, present evidence, and appeal adverse rulings. As to the right of an investor affected by a plan of distribution to appeal the plan, see S.E.C. v. Enter. Trust Co., 559 F.3d 649 (7th Cir. 2009).

The broad discretion granted the Court in developing a plan of distribution is particularly important in addressing Ponzi-Pyramid marketing schemes, with their multiple investment programs, numerous investors, and non-defendants who may still have some truth of culpability. Thus in the Basic Energy receivership, the receiver recommended (and the Court adopted) a plan which created a single pool of assets for all investors, rather than tracking claims of investors in each of the multiple programs to the investors in that particular program. However, investors were classified as to whether they were “non-marketers” (claim full value), “substantial marketers” (claim reduced by 90%), “insubstantial marketers” (claim reduced by 10%), or defendants (claim reduced to zero). The Court also developed guidelines concerning the treatment of affiliates of defendants and marketers, various aspects of this plan were implicitly affirmed in the Sixth Circuit’s Basic Energy opinion.

Another interesting issue in dealing with asset distribution is the relative treatment of trade creditors vis-à-vis investor claimants. In view of the Court’s tremendous discretion in equity receiverships, the Court should also have broad latitude in resolving this issue. See, e.g., Norwest Bank, 245 F. App’x at 495. However, note that a bankruptcy trustee or judge would not have the same latitude if the matter were being handled in a bankruptcy.

7.03 Use of Summary Procedures and Administration of the Estate

The use of summary proceedings to implement the distribution plan and to administer the Estate is customary in federal receiverships and is perfectly permissible under “due process” rules so long as potential claimants are given the opportunity to be heard and to present their claims. Basic Energy, 273 F.3d at 668-671; Elliott, 953 F.2d at 1566-67, 1570-71; Hardy, 803 F.2d at 1040; Wencke, 783 F.2d at 834-839; United States v. Arizona Fuels Corp., 739 F.2d 455, 458-460 (9th Cir. 1984). See also Warfield v. Alaniz, 453 F. Supp. 2d 1118 (D. Ariz. 2006); S.E.C. v. Pension Fund of Am. L.C., 377 F. App’x 957, 961-62 (11th Cir. 2010). Thus, as the Eastern District of New York noted in F.D.I.C. v. Bernstein, 786 F. Supp. 170 (E.D.N.Y. 1992):

. . . One common thread keeps emerging out of the cases involving equity receivership—that is, a district court has extremely broad discretion in supervising an equity receivership and in determining the appropriate procedures to be used in its administration.

In keeping with this broad discretion, “the use of summary proceedings in equity receiverships as opposed to plenary proceedings under the Federal Rules [of Civil Procedure], is within the jurisdictional authority of a district court.” Such procedures “avoid formalities that would slow down the resolution of disputes. This promotes judicial efficiency and reduces litigation costs to the receivership,” thereby preserving receivership assets for the benefit of creditors. 786 F.Supp. 170, 177-78, citations omitted.

See also Hardy, 803 F.2d at 1038 (“A district judge supervising an equity receivership faces a myriad of complicated problems in dealing with the various parties and issues involved in administering the receivership. Reasonable administrative procedures, crafted to deal with the complex circumstances of each case, will be upheld. A district judge simply cannot effectively and successfully supervise a receivership and protect the interests of its beneficiaries absent broad discretionary power.”); United States v. Fairway Capital Corp., 433 F. Supp. 2d 226, 241 (D.R.I. 2006), aff’d, 483 F.3d 34 (1st Cir. 2007).

Summary proceedings are used in receivership cases because they promote judicial efficiency and reduce time and costs associated with a receivership. The Elliott court stated:

The government’s and parties’ interests in judicial efficiency underlie the use of a single receivership proceeding. Smith v. Am. Indus. Research Corp., 665 F.2d 397, 399 (1st Cir.1981). A summary proceeding reduces the time necessary to settle disputes, decreases litigation costs, and prevents further dissipation of receivership assets. SEC v. Wencke, 783 F.2d 829, 837 (9th Cir.1986), cert. denied, 479 U.S. 818, 107 S.Ct. 77, 93 L.Ed.2d 33 (1986). United States v. Arizona Fuels Corp., 739 F.2d 455, 460 (9th Cir.1984).

Elliott, 953 F.2d at 1566.

The use of summary proceedings in receivership cases has been upheld when the parties have been given a full and fair opportunity to present their claims and defenses.S.E.C. v. Universal Fin., 760 F.2d 1034, 1037 (9th Cir. 1985). Summary proceedings survive due process challenges as long as the summary procedure provides the parties adequate notice, an opportunity to file responsive pleadings and perform discovery and the right to present evidence and cross-examine witnesses at a hearing before the court. S.E.C. v. Black, 163 F.3d 188, 199 (3d Cir. 1998); Wencke, 783 F.2d at 838;Elliott, 953 F.2d at 1567.

Courts have also specifically upheld a receiver’s ability to seek turnover orders through summary proceedings. Commodity Futures Trading Comm’n v. Topworth Int’l, Ltd., 205 F.3d 1107 (9th Cir. 1999). In Topworth, a court appointed receiver sought the turnover of assets held by a non-party which he believed rightly belonged to the receivership estate and which were the subject of a default judgment entered against defendant Topworth. At a hearing initiated by the receiver to show cause why those monies should not be paid into the receivership estate, the Court entered an Order directing that the monies be turned over to the receivership estate. Id. at 1111. Topworth appealed the order, claiming that the summary procedure used by the district court was improper and violated due process. Id. The appellate court rejected Topworth’s argument, stating “for claims of nonparties to property claimed by receivers, summary proceedings satisfy due process so long as there is adequate notice and opportunity to be heard.” Id. at 1113. See also S.E.C. v. Ross, 504 F.3d 1130, 1142 (9th Cir. 2007) (Where court is attempting to determine if receivership is rightful owner of property in the hands of another, “a mere custodian [of the receivership property] is generally entitled simply to notice and an opportunity to be heard.”); Fairway Capital Corp., 433 F. Supp. 2d at 241-47 (rejecting the necessity of a plenary trial because the Court provided claimant with “an opportunity to present evidence and make arguments regarding the disputed facts.”) For a detailed discussion of due process issues, seeElliott, 953 F.2d at 1566-68, 1570.

Note, however, that the Ninth Circuit has held that summary proceedings may only be utilized in fraudulent conveyance proceedings or in other matters involving a “nominal” defendant, where the basis for the proceeding is not the defendant’s own wrongful conduct. Ross, 504 F.3d at 1141-1145. And the Ninth Circuit has held that where claims are legal, rather than equitable, there is a constitutional right to a trial by jury. Eberhard v. Marcu, 530 F.3d 122, 135-137 (2d Cir. 2008).

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. Fairway, 433 F. Supp. 2d at 237. 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. Id. at 238-240.

A receiver may properly deny claims that are not substantiated by the claimant.Fairway, 433 F.Supp.2d at 246-47.

A receiver’s findings of fact and conclusion of law made in connection with his acceptance or rejection of creditor claims will be reviewed de novo by the court if objected to. Fairway, 433 F. Supp. 2d at 231-32.

7.04 Appeals

As to the right of an investor affected by a plan of distribution to appeal the plan, seeS.E.C. v. Enter. Trust Co., 559 F.3d 649 (7th Cir. 2009).

The Circuits are in disagreement as to what constitutes an appealable order where distribution plans are involved. In S.E.C. v. Capital Consultants, 453 F.3d 1166 (9th Cir. 2006), the Court of Appeals for the Ninth Circuit held that an order finally determining the rights of some, but not all, claimants to a receivership distribution plans was not appealable as a “collateral order,” though the order might 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. See also Commodity Futures Trading Comm’n v. Forex Liquidity LLC, 384 F. App’x 645, 647 (9th Cir. 2010). This is contrary to the holdings of the Sixth Circuit in Basic Energy, 273 F.3d at 665-67 and the Fifth Circuit in S.E.C. v. Forex Asset Mgmt. LLC, 242 F.3d 325, 330-31 (5th Cir. 2001), both of which held that such orders were appealable as “collateral orders.”

The Right of Third Parties to Intervene in Receivership Proceedings

8.01 In General

It is very common for third parties, usually creditors of the defendants, to petition the Court to allow it to intervene pursuant to Federal Rule of Civil Procedure 24 for the purpose of protecting its interests in the defendants’ property.

A movant may intervene as a matter of right pursuant to Rule 24(a) of the Federal Rules of Civil Procedure or at the discretion of the court under Rule 24(b). To intervene as a matter of right, a movant must satisfy the four requirements of Rule 24(a). These requirements are: 1) the application must be timely; 2) the movant must have an interest relating to the property or transaction which is the subject of the action; 3) the movant must be so situated that the disposition of the action, as a practical matter, may impede or impair his ability to protect the interest; and 4) the movant must demonstrate that his interest is inadequately represented by the existing parties to the suit. “Failure to satisfy even one of these requirements is sufficient to warrant denial of a motion to intervene as a matter of right.” Commodity Futures Trading Comm’n v. Heritage Capital Advisory Servs. Ltd., 736 F. 2d 384, 386 (7th Cir. 1984) (emphasis added).

A district court may permit intervention under Rule 24(b) when the putative intervenor’s claims have common questions of law or fact with the underlying claims in the case. For a discussion, see United States v. Petters, CIV 08-5348 AMDJSM, 2008 WL 5234527, at *1-2 (D. Minn. Dec. 12, 2008).

8.02 Interventions in S.E.C. Actions/15 U.S.C. §78u(g)

Allowing multiple parties to intervene in an S.E.C. action would make the conduct of the S.E.C. enforcement action more complicated and cumbersome. As a result, the S.E.C. will often oppose motions to intervene on the basis of Section 21(g) of the Securities and Exchange Commission Act of 1934, 15 U.S.C. §78u(g), which states:

Notwithstanding the provisions of Section 1407(a) of title 28, United States Code, or any provision of law, no action for equitable relief instituted by the Commission pursuant to the securities laws shall be consolidated or coordinated with other actions not brought by the Commission, even though such other actions may involve common questions of fact, unless such consolidation is consented by the Commission.

In S.E.C. v. Wozniak, 92 C 4691, 1993 WL 34702 (N.D. Ill. Feb. 8, 1993), the Court denied the motion to intervene stating that the movant was prohibited from intervening in the lawsuit by the “impenetrable wall” of Section 21(g) of the Exchange Act. As stated by the Court in Wozniak, the United States Supreme Court has confirmed this provision of the Exchange Act in Parklane Hosiery Co. v. Shore, 439 U.S. 322, 332 n.17 (1979) and Aaron v. S.E.C., 446 U.S. 680, 717 n.9 (1980).

However, not all courts agree that Section 21(g) is an impenetrable wall and that therefore the S.E.C. and the receiver need to lay the ground work to defeat intervention under Fed. R. Civ. P. 24. See e.g., S.E.C. v. Kings Real Estate Inv. Trust, 222 F.R.D. 660, 666 (D. Kan. 2004). Perhaps the best defense to intervening creditors is for the receiver to set up a process whereby a creditor can present his claim, have the claim adjudicated, and have the opportunity to share with the other creditors in the distribution of assets. In this way the creditor cannot argue that the disposition of the action will impair his interest, thus defeating the third paragraph of Fed. R. Civ. P. 24(a).

8.03 Right to Appeal when Party has not Intervened

It is not uncommon for parties who have not intervened to nonetheless seek to appeal some aspect of the receivership (usually the distribution plan). All circuits which have taken up this issue have held that the nonparty could participate in the appeal.

2nd Circuit: Official Committee of Unsecured Creditors of Worldcom v S.E.C., 467 F.3d 73 (2d Cir. 2006) – Held that the Committee of Unsecured Creditors had non-party standing to bring challenge to distribution plan.

5th Circuit: S.E.C. v Forex Asset Mgmt. LLC, 242 F.3d 325 (5th Cir. 2001) – Held that investors had standing to appeal district court’s approval of receivership distribution plan for investment company, even though investors were not parties to S.E.C. action and did not seek to intervene.

6th Circuit: S.E.C. v Basic Energy & Affiliated Res., 273 F.3d 657 (6th Cir. 2002) – Held that a non-party litigant has standing to appeal from an order entered in a federal receivership action if that litigant satisfies the standard for standing to appeal an order of a bankruptcy court.

7th Circuit: S.E.C. v Enter. Trust Company, 559 F.3d 649 (7th Cir. 2009) – Held that investor who had not intervened had standing to appeal distribution plan. The Seventh Circuit reversed its prior holding in S.E.C. v. Wozniak, 33 F.3d 13 (7th Cir. 1994), which held that investors must intervene in an S.E.C. action in order to appeal in a receivership proceeding.

9th Circuit: Commodity Futures Trading Comm’n v Topworth Int’l, Ltd., 205 F.3d 1107 (9th Cir. 2000) – Held that in general one who is not a party before the district court may not appeal a judgment. However, a non-party to the litigation on the merits will have standing to appeal the decision below when the party participated in the proceedings below, and the equities favor hearing the appeal. In Topworth, the investor participated in the receivership proceedings to the fullest extent possible, filing timely objections to the plan; so the court held he had a legitimate interest in the method of distribution of the company’s remaining assets. See also S.E.C. v Wencke, 783 F.2d 829 (9th Cir. 1986).

S.E.C. Receivers in Foreign Courts

9.01 In General

English law has remained a strong authority in many areas of the world, including the Caribbean Islands many of which are considered to be tax havens for United States’ Citizens. Due to the strict confidentiality laws of the Caribbean Islands and the tax incentives offered to those who move money to the financial institutions located in these jurisdictions, there has been an increase in the number of Ponzi schemes and multi-tiered marketing schemes that have crossed international lines. This could present many obstacles for the United States’ authorities, including court appointed receivers, who are attempting to recover assets for the defrauded investors.

The English Courts and many of the various islands located in the Caribbean have enacted laws which allow their jurisdictions to recognize receivers appointed by a foreign court and to enforce the orders of the foreign court. However, these laws have very strict limitations. One limitation under English Law is that the defendant involved in the action must have sufficient connections with the jurisdiction in which the receiver was appointed. Schemmer v. Property Resources Ltd. [1975] Ch. 273; [1974] 3 All E.R. 451; (1974), 118 Sol. Jo. 716. Another limitation is that the English Courts will not recognize a foreign appointed receiver if recognition of the receiver would result in the enforcement of foreign penal laws. Stutts v. Premier Benefit Capital Trust, 1992-93 CILR 605.

9.02 There Must Be Sufficient Connection Between the Jurisdiction Appointing the Receiver and the Jurisdiction Where the Receiver Wishes to be Recognized.

In Schemmer, the Court considered whether the English Court could recognize the receiver appointed by a United States Court. S.E.C. brought an action against several individuals and VCL, a company incorporated in the Bahamas, for alleged violations of the Securities and Exchange Act 1934. The District Court Judge appointed John Schemmer as receiver and instructed him to take possession of certain assets, including all the shares and assets of PRL, a company incorporated in the Bahamas, and the assets of PRL’s subsidiaries. Schemmer, supra. Schemmer issued a writ in England seeking to have himself appointed as receiver of the assets of PRL and its subsidiaries. Id. The English Courts defined four tests for determining whether there are sufficient connections between the defendant and the jurisdiction appointing the receiver: (1) defendant subjected himself/itself to the foreign courts’ jurisdiction, (2) defendant company was incorporated within the jurisdiction of the foreign court, (3) defendant company carried on business within the jurisdiction of the foreign court, or (4) the courts of the jurisdiction where the defendant company was incorporated would recognize a receiver appointed by a foreign jurisdiction. Id. If the receiver cannot show that there are sufficient connections between the defendant and the state where the action was brought, the foreign court’s appointment of a receiver will not be recognized.Id. The English Court determined that the defendant did not submit to the federal jurisdiction where Schemmer was appointed receiver, PRL was not incorporated in the United States, PRL did not carry on business in the United States and there was no evidence that the Bahama Islands would recognize the United States order as effecting the assets located in the Bahama Islands. Id. Thus, there were not sufficient connections to support a holding that the English Courts should recognize Schemmer as receiver.

In Canadian Arab Fin. Corp. (trading as Kilderkin Inv. Grand Cayman) and Kilderkin Inv. Ltd. (both by Clarkson Company Ltd., Receiver and Manager) v. Player, 1984-85 CILR 63, the Grand Court of the Cayman Islands considered whether it had jurisdiction to recognize the receiver appointed by a foreign court. Clarkson Company Limited (“Clarkson”) was appointed the receiver and manager of Canadian Arab Financial Corporation (trading as Kilderkin Investments Grand Cayman) and Kilderkin Investments Limited, both companies were incorporated in Ontario, (collectively referred to as “Kilderkin”) by the Supreme Court of Ontario. Subsequently, Clarkson applied to the Grand Court of the Cayman Islands for an order recognizing him as the receiver and manager and authorizing him to identify and locate all assets of the Kilderkin within the jurisdiction. The Grand Court granted Clarkson’s petition. Mr. Player filed a petition with the Grand Court to rescind its decision to recognize Clarkson as the receiver and manager of Kilderkin on the theory that he, as sole shareholder, was the only person that could properly conduct litigation and defend the assets of Kilderkin. Id. The Grand Court then rescinded its previous order on several grounds, including that there were not sufficient connections between the originating suit brought against Kilderkin and Clarkson’s exercise of control over the assets of Kilderkin located in the Cayman Islands. Id. The Court applied the four tests suggested in Schemmer and determined that Kilderkin was a defendant in the Canadian proceedings and had submitted to the jurisdiction of the Supreme Court of Ontario, Kilderkin was incorporated in Canada, Kilderkin carried on business in Canada and the Ontario Courts would recognize the a foreign appointed receiver. Id. The Grand Court held that it had the jurisdiction to recognize Clarkson as the receiver and manager of Kilderkin under the four tests suggested in Schemmer and restored the initial order of the Grand Court. Id.

9.03 S.E.C. Receivers will Generally not be Recognized in Foreign Jurisdictions.

It has been firmly established that although the English Courts have the authority to recognize a receiver appointed by a foreign court, it will not enforce a foreign penal law.Stutts v. Premier Benefit Capital Trust, 1992-93 CILR 605. In the absence of similar laws within the Caribbean Islands, these jurisdictions follow the English law. Id.

In Stutts v. Premier Benefit Capital Trust, the Grand Court of the Cayman Islands considered whether the recognition of the United States appointed receiver would be enforcement of a foreign penal law. In this case, the S.E.C. filed a complaint against Premier Benefit Capital Trust (the “Trust”) and its former officers and trustees. Id. at 607. The United States District Court for the Middle District of Florida appointed Charles L. Stutts as the receiver of the trust and empowered him to marshal the assets of the trust. Mr. Stutts filed an application for an order to be recognized in the Cayman Islands as the receiver of the trust. Id. The Grand Court found that there were sufficient connections between the defendant and the jurisdiction appointing Mr. Stutts as receiver of the trust. However, the Grand Court dismissed the application on the basis that the recognition of Mr. Stutts as receiver would give effect to the foreign penal laws of the foreign jurisdiction. Id. at 606. When determining whether recognition of a foreign appointed receiver would give effect to foreign laws, the courts must determine the substance of the right sought to be enforced by the receiver and whether the enforcement would, either directly or indirectly, involve the execution of a law that was penal in effect. Id. The Grand Court stated that “[t]he general statement of principle applied . . . all suits in favor of the state for the recovery of pecuniary penalties for any violation of statutes for the protection of its revenue and other municipal laws and to all judgments for such penalties.” Id. The Grand Court examined the nature of the Securities and Exchange Act 1933 and the Securities and Exchange Act 1934 (collectively the “Acts”) to determine whether the Acts were penal in nature. The Grand Court held that the disgorgement proceedings pursuant to the provisions of the Acts were in favor of the state and formed part of the public law and therefore the receiver could not be recognized by the Cayman Islands. Id.

In Marada Global Corp. v. Marada Corp., 1994-95 CILR 546, the Grand Court of the Cayman Islands considered whether a claim to be enforced in the Cayman Islands involved the assertion of foreign penal laws. In this case, the United States District Court appointed a receiver to manage the assets of Marada Global and others and afforded the receiver the power to institute any action deemed necessary and appropriate upon obtaining the District Court’s approval. Id. at 547. After obtaining an order from the District Court, the receiver, standing in the shoes of the management of Marada Global (the “Plaintiff Company”), moved to intervene in an interpleader summons relating to funds held in a Cayman bank and filed an independent action to preserve the funds. Id. The defendant then moved to strike the plaintiff Company’s claim. The Grand Court referred to the five propositions stated in United States v. Inkley, [1989] Q. B. 255; [1988] 3 All E.R. 14428, and held that although the disgorgement provisions of the Acts are penal in nature, this is a claim brought by a company with regard to rights that are available to any private litigant and dismissed the application.Id. at 552.

The Grand Court’s decision in Marada weighed heavily upon the fact that the action brought in the Cayman Islands was brought by a corporation, not the receiver in his name. Under propositions three (3) and four (4) cited by the Court of Appeals in United States v. Inkley, the corporation is treated as a private individual and its claims were considered to be of a personal nature. However, in Stutts, the rights of the receiver that he sought to have enforced included the disgorgement of the defendant’s assets located in the Cayman Islands. The Grand Court found that disgorgement actions under the Acts were penal in nature, not personal claims of the receiver or the investors that he was charged to distribute assets to. Furthermore, the receiver in Marada wasn’t seeking to be recognized in the Cayman Islands as the receiver of the company, whereas in Stutts, the receiver was seeking to be recognized in the Cayman Islands as the receiver of the assets of the trust.

Practical Suggestions

Often in cross-border international fraud schemes funds which the S.E.C. wants to reach for the benefit of investors will lie in both the United States and the offshore jurisdiction. As a result, having the receiver be recognized in the offshore jurisdiction would be ideal; however, it is not possible because of the prohibition on the recognition of foreign penal laws.

The Cayman Islands, which takes a very hostile view to the use of its banking system for money laundering and other illegal activities, has taken a very practical view in these matters. Thus to avoid the Stutts limitation in the S.E.C. v Homa litigation,29 the Grand Court appointed me as a “liquidator” (similar to a receiver) over companies involved in the fraud scheme. This provided the “liquidators” with access to discovery materials in the United States proceeding. Moreover, as both receiver and liquidator, it allowed the coordination of claims and distribution proceedings and streamlined the liquidations. The Grand Court took the same practical approach in the Beacon Hill Hedge Fund liquidations.

  1. 28In Marada Global Corp. v. Marada Corp., 1994-95 CILR 546 citing US v. Inkley, [1989] Q. B. 255; [1988] 3 All E.R. 144, the English Court of Appeal set out the following five propositions:

    “. . . (1) the consideration of whether the claim sought to be enforced in the English courts is one which involves the assertion of foreign sovereignty, whether it be penal, revenue or other public law, is to be determined according to the criteria of English law; (2) that regard will be had to the attitude adopted by the courts in the foreign jurisdiction which will always receive serious attention and may on occasions be decisive; (3) that the category of the right of action, i.e. whether public or private, will depend on the party in whose favor it is created, on the purpose of the law or enactment in the foreign state on which it is based and on the general context of the case as a whole; (4) that the fact that the right, statutory or otherwise, is penal in nature will not deprive a person, who asserts a personal claim depending thereon, from having recourse to the courts of this country; on the other hand, by whatever description it may be known if the purpose of the action is the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity, it will not be entertained; (5) that the fact that in the foreign jurisdiction recourse may be had in a civil forum to enforce the right will not necessarily affect the true nature of the right being enforced in this country.”

  2. 29S.E.C. v Homa, Case No. 99-cv-6895 pending before the United States District Court for the Northern District of Illinois (Eastern Division) the Honorable Ronald A. Guzman.

Sale of Property

10.01 In General

The sale of property in a receivership is a judicial sale. In a judicial sale, the court is the vendor and the sale is by the court itself even though the receiver may be the instrumentality of the sale. Until a sale by the receiver is confirmed by the court, no rights are conferred on the purchaser. In re Haywood Wagon Co., 219 F.655, 659 (2d Cir. 1914).

Judicial sales of real property by a receiver are governed by 28 U.S.C. § 200130 and § 2002,31 and the judicial sales of personal property by the receiver are governed by 28 U.S.C. §2004.32

One court has held that it lacked jurisdiction to confirm the private sale of real property where the receiver failed to comply with the provisions of 28 U.S.C. § 2001. Acadia Land Co. v. Horuff, 110 F.2d 354, 355 (5th Cir. 1940). The provisions of 28 U.S.C. § 2001(b) are mandatory, and a Texas court has held that the requirement for three appraisals as a condition of a private sale will be enforced even when the costs of such appraisals exceed the value of the Estate. S.E.C. v. T-Bar Res., LLC, CIV.A.3:07CV1994-B, 2008 WL 4790987 (N.D. Tex. Oct. 28, 2008) (quaere why neither the Court nor the receiver explored the potentially less expense procedures of a public sale.)

On the other hand, 28 USC §2000 et. seq. does not apply to sale of property by a Sheriff upon execution on a judgment obtained in federal court. Generally, a judgment creditor in federal court must follow the procedures of the state in which the court is located in executing on a judgment obtained in federal court. See Federal Rule of Civil Procedure 69 (a)(1). Such a judgment creditor need not comply with 28 USC §2000 et. seq. Yazoo & M.V.R. Co. v. City of Clarksdale, 257 U.S. 10, 18 (1921).

Where a secured creditor, such as a bank with a mortgage on real property, is stayed from foreclosing its mortgage by the terms of the receivership order, the secured creditor may move the court to lift the stay in order to allow it to foreclose its mortgage. If the court grants the motion to lift the stay, the secured creditor should be able to pursue its remedies, including foreclosing the mortgage, without complying with 28 U.S.C. §2000 et. seq. because in such a case the court is not acting as a seller of the property but instead is simply removing the injunction that temporarily suspended the power of the secured creditor to sell the property. Prudential Ins. Co. of America v. Land Estates, Inc., 90 F.2d 457, 458 (2d Cir. 1937).

10.02 Implementing the Sales Procedures

Various practical steps taken by the receiver in connection with the sale of real and personal property can significantly enhance the amounts realized from such sale, as well as avoid legal and practical pitfalls.

Where real estate is concerned, the preference of the purchaser (or the attorney or real estate broker representing the purchaser) may be to use the “approved” form of contract developed by the realtors of that state. However, from the standpoint of the receiver and the court, it is better to have a standard form of contract developed by the receiver that, to the extent possible, will be used in all states in which receivership property is located, subject only to modifications compelled by local law. In practice, we have found that local attorneys and real estate brokers are willing to accept such a contract, so long as the receiver makes clear from the beginning that the special statutory issues governing such sales make it a “deal” point that the receiver’s form of contract be used. This is true whether the contract being entered into is a “private” sales agreement (conditioned upon approval of such private sale by the court), or a “judicial” sale agreement, entered into as a result of the “auction” of the property.

In drafting such a contract, we have found that the following points are critical:

  • Since the sale is a judicial sale, the contract should make clear that the purchaser is being granted “good and clear title as against the world, free and clear of all liens, encumbrances claims and interests of any kind,” except those liens, etc., which the Receiver has agreed to satisfy (e.g., existing mortgages, taxes, etc.) or subject to which the purchaser has agreed to accept title (e.g., association by-laws and existing restrictive covenants and utility encumbrances). Valid, non-excepted claims would then become a lien against the proceeds of the sale. However, the agreement should further make clear that there are no warranties of title in connection with the sale and that the Receiver is entering into the contract only in his capacity as Receiver, not in his personal capacity. The agreement should also make clear that the property is being sold “as-is.”
  • Since title will not be warranted and the property is being sold “as-is,” the purchaser must be given the opportunity to examine the state of the title (and the property) prior to the sale; in a private sale, a brief “inspection period” should be established during which this can be conducted. However, as indicated above, the contract should make clear that, except for such inspection (which should be completed prior to the confirmation hearing), there is no right to rescind an agreement to purchase, or to delay or condition closing, based upon title, etc., issues.
  • If the preliminary sales agreement is for a “private” sale,33 there should be two “earnest money” deposits: a smaller one at the time the private sale agreement is entered into, and a more substantial one at the conclusion of the inspection period. (It is suggested that these deposits in the aggregate equal at least 10% of the proposed purchase price, rather than the relatively small earnest money deposits that often exist in sales of residential real estate.)
  • The private sale purchaser should acknowledge that the sale is being made subject to the statutory provisions cited above and is thus subject to confirmation by the court and additional bidding at the confirmation hearing. The contract should also specify that the Receiver thus has the right to continue to seek higher bids for the property. It is suggested that the Receiver have the right to recommend that any higher bid received at the confirmation hearing be accepted by the court and not just those exceeding the private sale purchase price by 10% (which are required by law to be accepted).
  • The contract should provide that the Receivership Court has exclusive venue and jurisdiction to interpret and enforce the purchase agreement.

If a broker is used in connection with the sale, the listing agreement should usually provide that no commission will be paid to the broker in connection with a private sale unless his client (or another purchaser represented by him) is the ultimate purchaser of the property; however, there will be exceptions to this suggestion in instances where there is little interest in the property, or the broker is expected to perform services of overall value to the receivership estate over and above finding a specific buyer. The broker should also be obligated to continue to seek additional bidders even after a private sale agreement has been negotiated, pending the confirmation hearing, where other interested parties will be permitted to bid on the property.

10.03 In General

The sale of property in a receivership is a judicial sale. In a judicial sale, the court is the vendor and the sale is by the court itself even though the receiver may be the instrumentality of the sale. Until a sale by the receiver is confirmed by the court, no rights are conferred on the purchaser. In re Haywood Wagon Co., 219 F.655, 659 (2d Cir. 1914).

Judicial sales of real property by a receiver are governed by 28 U.S.C. § 200130 and § 2002,31 and the judicial sales of personal property by the receiver are governed by 28 U.S.C. §2004.32

One court has held that it lacked jurisdiction to confirm the private sale of real property where the receiver failed to comply with the provisions of 28 U.S.C. § 2001. Acadia Land Co. v. Horuff, 110 F.2d 354, 355 (5th Cir. 1940). The provisions of 28 U.S.C. § 2001(b) are mandatory, and a Texas court has held that the requirement for three appraisals as a condition of a private sale will be enforced even when the costs of such appraisals exceed the value of the Estate. S.E.C. v. T-Bar Res., LLC, CIV.A.3:07CV1994-B, 2008 WL 4790987 (N.D. Tex. Oct. 28, 2008) (quaere why neither the Court nor the receiver explored the potentially less expense procedures of a public sale.)

On the other hand, 28 USC §2000 et. seq. does not apply to sale of property by a Sheriff upon execution on a judgment obtained in federal court. Generally, a judgment creditor in federal court must follow the procedures of the state in which the court is located in executing on a judgment obtained in federal court. See Federal Rule of Civil Procedure 69 (a)(1). Such a judgment creditor need not comply with 28 USC §2000 et. seq. Yazoo & M.V.R. Co. v. City of Clarksdale, 257 U.S. 10, 18 (1921).

Where a secured creditor, such as a bank with a mortgage on real property, is stayed from foreclosing its mortgage by the terms of the receivership order, the secured creditor may move the court to lift the stay in order to allow it to foreclose its mortgage. If the court grants the motion to lift the stay, the secured creditor should be able to pursue its remedies, including foreclosing the mortgage, without complying with 28 U.S.C. §2000 et. seq. because in such a case the court is not acting as a seller of the property but instead is simply removing the injunction that temporarily suspended the power of the secured creditor to sell the property. Prudential Ins. Co. of America v. Land Estates, Inc., 90 F.2d 457, 458 (2d Cir. 1937).

  1. 3028 USC §2001. Sale of realty generally

    (a) Any realty or interest therein sold under any order or decree of any court of the United States shall be sold as a whole or in separate parcels at public sale at the courthouse of the county, parish, or city in which the greater part of the property is located, or upon the premises or some parcel thereof located therein, as the court directs. Such sale shall be upon such terms and conditions as the court directs.

    Property in the possession of a receiver or receivers appointed by one or more district courts shall be sold at public sale in the district wherein any such receiver was first appointed, at the courthouse of the county, parish, or city situated therein in which the greater part of the property in such district is located, or on the premises or some parcel thereof located in such county, parish, or city, as such court directs, unless the court orders the sale of the property or one or more parcels thereof in one or more ancillary districts.

    (b) After a hearing, of which notice to all interested parties shall be given by publication or otherwise as the court directs, the court may order the sale of such realty or interest or any part thereof at private sale for cash or other consideration and upon such terms and conditions as the court approves, if it finds that the best interests of the estate will be conserved thereby. Before confirmation of any private sale, the court shall appoint three disinterested persons to appraise such property or different groups of three appraisers each to appraise properties of different classes or situated in different localities. No private sale shall be confirmed at a price less than two-thirds of the appraised value. Before confirmation of any private sale, the terms thereof shall be published in such newspaper or newspapers of general circulation as the court directs at least ten days before confirmation. The private sale shall not be confirmed if a bona fide offer is made, under conditions prescribed by the court, which guarantees at least a 10 per centum increase over the price offered in the private sale.

    (c) This section shall not apply to sales and proceedings under Title 11 or by receivers or conservators of banks appointed by the Comptroller of the Currency.

  2. 3128 USC §2002. Notice of sale of realty

    A public sale of realty or interest therein under any order, judgment or decree of any court of the United States shall not be made without notice published once a week for at least four weeks prior to the sale in at least one newspaper regularly issued and of general circulation in the county, state, or judicial district of the United States wherein the realty is situated.

    If such realty is situated in more than one county, state, district or circuit, such notice shall be published in one or more of the counties, states, or districts wherein it is situated, as the court directs. The notice shall be substantially in such form and contain such description of the property by reference or otherwise as the court approves. The court may direct that the publication be made in other newspapers.

    This section shall not apply to sales and proceedings under Title 11 or by receivers or conservators of banks appointed by the Comptroller of the Currency.

  3. 3228 USC §2004. Sale of personalty generally

    Any personalty sold under any order or decree of any court of the United States shall be sold in accordance with section 2001 of this title, unless the court orders otherwise.

    This section shall not apply to sales and proceedings under Title 11 or by receivers or conservators of banks appointed by the Comptroller of the Currency.

  4. 33Of course, such a private sales agreement may be replaced by a judicial sale agreement if higher bids are presented at the confirmation hearing.

The Impact of Bankruptcy on the S.E.C. Receivership

11.01 In General

After being sued by the S.E.C., it is not uncommon for defendants to file Chapter 7 or Chapter 11 Bankruptcy petitions to thwart the S.E.C. enforcement action. If defendants are placed in bankruptcy, the S.E.C. loses control over many aspects of the case which it can otherwise influence with a receiver. Moreover, bankruptcies are not an efficient way to run the estate. As Judge Posner noted in the decision of Scholes v. Lehmann, 56 F.3d 750, 755 (7th Cir. 1995), “[c]orporate bankruptcy proceedings are not famous for expedition . . . and whatever advantages they may have over receiverships in a case such as this–if any, and none has been pointed out to us–are not ones that the defendants in these fraudulent conveyance claims should be heard to trumpet.” As a result, both investors and the S.E.C. are better served through the use of a receiver.

The receivership court may enjoin third parties from filing involuntary bankruptcy petitions against the subject of the receivership. S.E.C. v. Byers, 609 F.3d 87 (2d Cir. 2010).

11.02 The Bankruptcy Code

Under the Bankruptcy Code, a debtor may be placed into bankruptcy in one of two ways, voluntarily34 or involuntarily.35 However, in order to place a debtor into aninvoluntary bankruptcy, three creditors whose claims are not contingent as to liability or subject to a bona fide dispute, with claims totaling $15,325.00 must join in the petition. Very often, creditors’ claims against defendants in S.E.C. enforcement actions are hotly disputed. Even more restrictive is the fact that, although the S.E.C. has filed an enforcement action against a particular individual or entity, it does not mean that the S.E.C. has a claim against that person since the S.E.C.’s claim has not yet been liquidated as to amount. As a result, the S.E.C. typically cannot properly petition to have the defendant in an S.E.C. enforcement action placed into involuntary bankruptcy. Furthermore, 11 U.S.C. §303(i) provides that, if the bankruptcy court ultimately dismisses a bankruptcy case, the petitioning creditors could be subject to costs, attorneys’ fees, or damages caused by the filing and/or punitive damages. As a result, even if the S.E.C.’s claim against a particular defendant were liquidated and not contingent, like any other creditor facing possible exposure to damages for an improperly filed petition, the S.E.C. may very well be reluctant to join in an involuntary bankruptcy petition with other creditors whose claims may ultimately fail.

In addition, it is often unclear whether the defendant in an S.E.C. enforcement action is actually insolvent. Quite often the schemes engineered by the defendants are masterful in that the liabilities incurred by the perpetuation of the scheme, outside of the S.E.C. enforcement action itself, are by companies and individuals that are not controlled or otherwise directly related to the actual wrong-doer. In many circumstances, the claims of investors or defrauded individuals are actually against multiple shell companies controlled by marketers which are generally created to issue fraudulent notes and/or bonds to investors and are engineered to create a separation between the wrong-doer and the actual unlawful activity. This is particularly true in Ponzi scheme situations in which these marketer companies are simply shell companies who only have a true bankruptcy-recognized claim against the company above it in the Ponzi scheme.

Assuming, arguendo, that the threshold issue of placing a defendant in a securities enforcement action into bankruptcy could be overcome, there are still many practical problems posed by a bankruptcy in a securities enforcement action.

First, 28 U.S.C. §1408 requires that a bankruptcy petition be filed in the judicial district were the defendant has resided for 180 days prior to the filing. In many S.E.C. enforcement actions, there are numerous individual and corporate defendants residing or doing business in more than one district. As a result, to put such defendants into bankruptcy would require that a separate bankruptcy case be commenced in each judicial district in which a corporate or individual defendant resided in or primarily did business resulting in numerous bankruptcy judges and bankruptcy trustees hearing often incomplete yet, in many cases, duplicative testimony. Additionally, such a situation would create a strong possibility of inconsistent rulings between the bankruptcy judges in the various different proceedings.

Second, the multiplicity of litigations in various courts would also destroy the administrative synergies often available in receivership cases. In particular, in situations where the defendant in an S.E.C. enforcement action has property or has diverted funds off-shore, a receiver can seek to be appointed as receiver or liquidator in those foreign jurisdictions where significant assets or valuable information are located. If a bankruptcy proceeding were utilized instead of a receivership, or a multiplicity of bankruptcies in numerous jurisdictions with different trustees, the bankruptcy would result in little or no opportunity for meaningful synergies to emerge. A receiver appointed in an S.E.C. enforcement action has greater nationwide powers to recover assets or pursue individuals or causes of action than a bankruptcy trustee is statutorily equipped to pursue.

Potentially the greatest detriment in utilizing bankruptcy court administration of securities enforcement action defendants’ assets would be the successive layers of costs and fees incurred by each of the separate bankruptcy trustees and their respective counsels. For example, assuming as in the case of the typical Ponzi scheme, a number of investors provide capital to shell corporation A in Estate #1 in return for fraudulent promissory notes or bonds. Shell corporation A then forwards those funds to shell corporation B in Estate #2 in return for corresponding notes or bonds. Shell corporation B then forwards the funds on to shell corporation C in Estate #3, again for the same fraudulent notes or bonds, and then finally shell corporation C forwards the funds on to the originating defendant or operator of the scheme in Estate #4. Assuming for discussion sake that the mastermind of the scheme, and shell corporations A, B, and C were each put into bankruptcy, the cases would have to be filed in the four different districts were the four defendants resided. Since each filing would be a separate case, each case would have its own trustee and each trustee would retain its own legal counsel. who would presumably each retain their own legal counsel, accountants, experts, investors, etc. These multiple layers of administration expenses would likely cripple the collection estate and result in little or no return to investors.

We can best demonstrate the detriment to the creditors by further assuming that the only recoverable assets are held by the scheme mastermind and the only claim in each bankruptcy is the claim of the Shell corporation below them, or the claim of the original investors against Shell corporation A. If $100 in assets are recovered from the mastermind of the scheme, it is not unreasonable to expect that 25% of those assets will go simply to paying the trustee’s statutory commission, along with his or her attorneys’ fees. If shell corporation C was the only claimant against the scheme mastermind, only $75 of the original $100 recovered would then flow into the bankruptcy estate of Shell corporation C. Assuming the same 25% reduction of assets recovered for payment of that trustee along with his or her attorney, that means that only $56.25 flows to the bankruptcy estate of shell corporation B, and finally only $42.19 flows to the bankruptcy estate of shell corporation A, out of which the actual defrauded investors themselves would have their only legitimate claim in bankruptcy.

While this hypothetical has obviously been over-simplified, you can see where using the separate bankruptcies which would be required to administer the multiple layers of the typical Ponzi scheme, would result in a significant majority of the assets recovered actually being dissipated through administrative expenses, rather than being made available to be distributed as quasi-restitution to the defrauded investors. The single equity receivership obviously preserves those efficiencies by having one receiver (who, unlike a bankruptcy trustee, does not take any statutory commission based on a percentage of funds distributed), and one set of attorneys representing that receiver.

11.03 The Bankruptcy Court is not an Appropriate Venue for the S.E.C. to Conduct its Case.

It is commonplace for the S.E.C. in enforcement actions to find it necessary to resort to seeking contempt orders to force compliance with court orders. If the defendant has filed bankruptcy, the automatic stay of the bankruptcy court will chill the S.E.C.’s efforts to force the defendant to comply with its subpoenas, disgorgement orders, freeze orders, etc. Even assuming the bankruptcy court chose to cooperate in the S.E.C.’s enforcement action, bankruptcy courts, as non-Article III courts, do not have the same civil and criminal contempt powers that the district courts have to force compliance with court orders. As a result, in each matter where contempt actions are necessary, the bankruptcy court would need to forward a referral and recommendation for a finding of contempt to the United States District Court for resolution. Compare this with the ability of the court to take immediate action for citations for not only civil, but also criminal contempt: see Commodity Futures Trading Comm’n v. Lake Shore Asset Mgmt. Ltd., 07 C 3598, 2007 WL 4591005 (N.D. Ill. Dec. 21, 2007).

Where there are claims to be asserted on behalf of the estate, another major problem arises: a bankruptcy trustee may be unable to assert such claims under the doctrine ofin pari delicto. However, under the weight of authority, a receiver may bring actions without being subject to a “clean hands” or “in pari delicto” defense. See Chapter 5.

11.04 The SEC’s Tool Against Bankruptcy; Withdrawal Of Reference

Under 28 U.S.C. §157, the district courts refer cases arising under Title 11 to bankruptcy judges. However, on proper motion by a party, the district court is required to withdraw reference to the bankruptcy court to the extent resolution of the case requires consideration of both Title 11 and other laws of the United States regulating organizations or activities effecting interstate commerce. Since cases instituted by the S.E.C. involve laws of the United States effecting interstate commerce, in all likelihood the district court would be required to withdraw reference of these cases from the bankruptcy court. Where the S.E.C. has already commenced an enforcement action, it should be able to successfully petition the district court to withdraw reference to the bankruptcy court, especially where a receiver has been appointed to conduct a claims process and pursue estate assets.

  1. 3411 USC §301.

  2. 3511 USC §303.

Receiver’s Duty to Invest Funds

The primary objective of the receivership is to preserve the funds of the estate. Clark on Receivers § 381(b), Vol. 2, pg. 639. In cases where funds remain in the hands of the receiver for an extended period of time, investment of the funds may be necessary to preserve the estate. Id. Since the primary objective of the receivership is the preservation of the estate, “the law must guard those funds with great jealousy.” Id. The court controls the funds and manages the funds through the appointment of a receiver. As such, the receiver must manage the funds in accordance with the directions of the court. Id. Clark, at 640. Any action beyond those expressly or impliedly provided by the court subjects the receiver to personal liability. Id.

Therefore, in light of the fact that a receiver has no power or discretion absent an express or implied order of the court, the receivers’ only duty to invest lies in the receivers duty to petition the court for permission to invest.

If pursuant to a petition to the court to invest or otherwise the court authorizes the receiver to invest the funds, than the common law duty to invest idle funds prudently is the standard. For example, “Illinois courts have long held that a trustee must act with the same degree of skill and diligence that an ordinarily prudent man would exercise in his own similar private affairs.” In re Consupak, Inc., 87 B.R. 529, 539 (Bankr. N.D. Ill. 1988). This duty of care has been incorporated into the Illinois Trust & Trustees Act. 37

In summary, the receiver must look to the orders of the court for guidance on the administration of the estate, to include investment of funds. Absent specific guidance with respect to investment of funds, the receiver should petition the court for permission to invest. Once the receiver is clear to invest estate funds, the receiver is bound by the prudent investor standard, keeping in mind that disposition of the fund is the goal not speculation or profit.

  1. 37Section 5 of the Trusts and Trustees Act sets forth the following standard.

Receiver’s Duty to Report and Keep Accurate Account

A receiver should look to local court rules for guidance on filing of reports and an inventory in receivership cases. Absent a relevant court rule, the receiver should look to the appointing court for the frequency and manner of filing. A receiver should also file an account of receipts and disbursements with the appointing court in the frequency and manner as required by the court. The receiver should have support for the accuracy of the expenditures in the report prepared by the receiver.38 Vouchers supporting the expenditures should be preserved by the receiver.

The receiver should file a final account and report “to give account of his complete stewardship and at the same time lay the foundation for the receiver’s discharge.” Clark on Receivers §383.1(a), Vol. 2, pg. 644. All interested parties should receive notice of the receivers filing of a final account and request for discharge.39

  1. 38Standish v. Musgrove, 223 Ill 500, 506, 79 NE 161 (1906)

  2. 39Farmer’s Savings Bank of Shelby v. Pomeroy, 211 Iowa 337, 233 NW 488 (1930).

Tax Issues Affecting Receiverships

14.01 Qualified Settlement Fund

In addition to the receiver’s responsibility to take custody and control of property, the receiver is responsible for complying with any reporting obligations to the federal, state, and local taxing authorities. If the property within the custody and control of the receiver meets the statutory definition of a qualified settlement fund pursuant to Treasury Regulation §1.468B-1(c),40 then the receiver is required to file tax return(s) for the qualified settlement fund and, if necessary, pay taxes. The regulations generally provide that a fund is a qualified settlement fund if it is set up by court order, is created as a result of a violation or claimed violation of the law and is held in a segregated account.

The regulations provide that a qualified settlement fund is subject to tax on its modified gross income, which is defined as gross income computed with certain modifications.41One modification excludes amounts transferred to the qualified settlement fund by, or on behalf of, the transferor. The other modifications are deductions for administrative costs and other incidental expenses incurred in connection with the operation of the fund; losses sustained by the fund in connection with the sale, exchange, or worthlessness of property; and specially defined net operating losses.

The regulations provide that a qualified settlement fund account for income and expenses on a calendar year basis and use the accrual method of accounting.42 A qualified settlement fund is treated as a corporation and tax is imposed at the highest Trust tax rate.43 Finally, when it is time to close the estate, the regulations provide a qualified settlement fund is eligible to request the prompt assessment of tax under section 6501(d).44 Under 6501(d), a qualified settlement fund is treated as dissolving on the date the fund no longer has any assets (other than a reasonable reserve for potential tax liabilities and related professional fees) and will not receive any more transfers.45

The qualified settlement fund’s state and local filing requirements will depend upon the particular state or local government where the fund is located.

14.02 Tax Filing Obligations

Section 6012(b)(3) of the Internal Revenue Code and Treasury Regulation Section 1.6012-3(b)(4) provide that a receiver is required to file a tax return for a corporation for which he is the receiver or for which he is in control of substantially all of the assets.46The returns must be filed whether or not the receiver is operating the business and the returns must be filed for the entire taxable year. The IRS takes the same position with respect to partnerships.47

When a receiver “stands in the place” of an individual, the receiver will be required to file the tax return for that individual. Treasury Regulation §1.6012-3(b)(5). In Field Service Advice 1992-0622-3 the IRS stated that Treasury Regulation §1.6012-3(b)(5) “clearly contemplates that when a receiver is in possession of all of the individual’s property the individual will generally be legally unable to make a return and the receiver will stand in its place.” Even if the taxpayer for whose assets the receiver has been appointed files his or her own tax return, it is the IRS’s position that receiver is still responsible to sign and file the tax return.48

14.03 Receiver Liability for Taxes

Under 31 USC §3713, any claims of the United States Government, including taxes, must be paid first, before a person who is insolvent pays debts to others.49 A representative (including a receiver) who pays debts to others before paying debts to the Government is liable to the Government to the extent of those payments. Insolvency is determined using the balance sheet method as opposed to income method and consent to the appointment of a receiver is considered a “voluntary assignment of property.”50 Typically, administrative expenses such as attorney fees, court costs and expenses to operate a business have priority over debts to the Government.51 Also, generally, the representative must have known, or should have known with the exercise of diligence, of the Government debt in order to be personally liable under 31 USC §3713(b).52

14.04 I.R.S. Notice Requirements

The treasury regulations provide that a fiduciary who takes control of a debtor’s assets must provide the IRS with notice of the assignment within ten days of their appointment. Treasury Regulation 301.6036-1(a)(3). The notice should be made in writing to the district director of the district in which the debtor is located. The notice must contain those items set forth in Treasury Regulation 301.6036-1(a)(4)(ii). If this notice is not given, the statute of limitations for the debtor’s taxes will be suspended for up to two years after the appointment, however, if the notice is given, the statute of limitations will begin to run 30 days after the notice is given. I.R.C. § 6872.

Persons acting as a fiduciary (defined to include receiver) of another person are required to file a notice with the district director on Form 56, “Notice Concerning Fiduciary Relationship.” Treasury Regulation 301.6903-1. If a notice is given pursuant to Treasury Regulation 301.6036, it need not be also given on Form 56.

14.05 Tax Effect on Investors

The tax effects of a Ponzi scheme on investors are complicated and should be reviewed carefully by the investor’s tax advisor. Rev. Rul. 2009-09 and Rev. Proc. 2009-20 provide guidance in this area.


  1. 40Treasury Regulation §1.468B-1(c)

    (c) Requirements. A fund, account, or trust satisfies the requirements of this paragraph (c) if—

    • It is established pursuant to an order of, or is approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;
    • It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability—

      (i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 U.S.C. 9601 et seq.; or
      (ii) Arising out of a tort, breach of contract, or violation of law; or
      (iii) Designated by the Commissioner in a revenue ruling or revenue procedure; and

    • The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related persons). 
  2. 41Treasury Regulation §1.468B-2(b)(1)-(4).
  3. 42Treasury Regulation §1.468B-2(j).
  4. 43Treasury Regulation §1.468B-2(k).
  5. 44Treasury Regulation §1.468B-2(m).
  6. 45Treasury Regulation §1.468B-2(m).
  7. 46IRC Section 6012(b)(3) provides:

    (b) Returns made by fiduciaries and receivers–

    (3) Receivers, trustees and assignees for corporations.–In a case where a receiver, trustee in bankruptcy, or assignee, by order of a court of competent jurisdiction, by operation of law or otherwise, has possession of or holds title to all or substantially all the property or business of a corporation, whether or not such property or business is being operated, such receiver, trustee, or assignee shall make the return of income for such corporation in the same manner and form as corporations are required to make such returns.

  8. 47GCM 36811 and Technical Advice Memorandum 8210029.
  9. 48Field Service Advice 1992-0622-3.
  10. 4931 USC §3713 “Priority of Government Claims” provides:

    (a)(1) A claim of the United States Government shall be paid first when—

    (A) a person indebted to the Government is insolvent and—(i) the debtor without enough property to pay all debts makes a voluntary assignment of property; (ii) property of the debtor, if absent, is attached; or (iii) an act of bankruptcy is committed; or (B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor.

    (2) This subsection does not apply to a case under title 11.

    (b) A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.

  11. 50United States v. Butterworth-Judson Corp., 269 U.S. 504 (1926).
  12. 51United States v. State of Oklahoma, 261 U.S. 253 (1923); Southern Rwy. Co. v. United States 306 F.2d 119 (5th Cir. 1962).
  13. 52Want v. CIR, 280 F.2d 777 (2d Cir. 1960); Little v. CCIR, 113 T.C. 474 (1999); United States v. Renda, 709 F.3d 480 (5th Cir. 2013).

A Few Practical Tips

15.01 Secure the Records

The first thing a receiver must do is secure the records of the receivership estate so that he can identify assets, liabilities, potential causes of action and, perhaps most importantly, prevent the destruction or disbursement of vital records. As a result, after our appointment in the BEAR case, (S.E.C/ v Basic Energy and Affiliated Res., Inc., 273 F.3d 657 (6th CIr. 2001)) our first official act was to secure the company’s records. Since BEAR was an operating company at the time of our appointment it was necessary to allow certain employees supervised access to the records to assist in running the business until a new operating team could be put in place. In addition, we provided the defendants supervised access of the books and records to assist them in their defense in the underlying S.E.C. action.

From the beginning until the end the defendants claimed that we had control of the records and therefore they could not prove their innocence since the records were all in the receiver’s possession and, naturally, the receiver had lost or destroyed the records they needed to prove their innocence. However, because we had secured the building where the records were located and established chain of custody of the records from the beginning, these arguments did not carry the day for the defendants.

15.02 Control the Mail

If the receivership estate consists of a business it is critical that the mail be controlled by the receiver. This may entail providing the Post Office with a forwarding address to the receiver’s place of business as well as posting signs on the business location for deliveries.

This paid big dividends in the BEAR case. For example, after the S.E.C. filed its case against the defendants the district court enjoined the defendants from continuing to raise money. Notwithstanding this injunction, the defendants raised over $500,000 and deposited the funds in a bank in Boston, Massachusetts. After the money was deposited, the Boston bank, apparently contrary to defendants’ instructions, sent a correspondence to the company address, and that mail was forwarded to the receiver. The receiver then successfully argued that the money was part of the estate for distribution to investors.

15.03 Understand the Case

In the early stages of his appointment the receiver should take the time to fully understand the facts supporting the underlying case. All too often the receiver is so caught in putting out fires that he may not see the big picture in the case and, as a result, may miss important deadlines or overlook potential assets or causes of action.

15.04 Post a Website

We have found that creating a website for the case is extremely helpful to keep investors informed as to the status of the case.

15.05 Maintain an Investor Data Base

Maintaining an investor database which tracks investor contacts, correspondence, investment amount, marketer details and other relevant information is extremely helpful in administering the claims process.


Equitable receivers enjoy tremendous powers which allow them to manage the affairs of the receivership estate efficiently and effectively when compared to other alternatives such as bankruptcy. In addition, a receivership can be used as a means of tracking down, marshalling and liquidating assets (including causes of action) to maximize the overall return to investors.

The ability to address, in a single action, the claims against multiple defendants, including their related assets and entities, results in tremendous judicial and administrative efficiency, significantly reducing the demands on the time of the court and increasing assets left for distribution to investors and trade creditors, and permitting a court which is familiar with the multi-faceted facts of the case to reach consistent conclusions.53 This is particularly important in the setting of financial fraud such as Ponzi schemes, with its normal scenario of multiple defendants, plus potentially culpable marketers, financial institutions, attorneys and accountants.

The tremendous flexibility granted the receivership court in a federal equitable receivership is particularly valuable in this setting of the S.E.C.-initiated receivership. The power of the receiver to bring actions before the receivership court, no matter where the affected assets or the opposite parties may be located, is critical in the typical Ponzi-Pyramid or other securities fraud setting, where assets are frequently located (and in many instances concealed) throughout the country as well as overseas. The “stay” powers of the receivership court are of critical importance as the receiver seeks to sift through the complicated affairs of the various receivership entities, as well as to avoid bleeding off the assets of the receivership estate through addressing and defending against multiple (and often conflicting) third-party actions. The ability to address claims of investors and trade creditors, as well as claims that the receiver may assert against third parties, through summary procedures still protects the claimants (or those against whom claims are being asserted) through insistence on fundamental due process rights, but permits a more rapid and less expense conduct of the resolution process. And resolving these claims before a single court permits greater equity and consistency in addressing the frequently conflicting claims of trade creditors and investors (particularly since in such actions, available assets will prove less than verifiable claims).

Finally, this flexibility is of particular value in addressing the complexities of the typical Ponzi-Pyramid marketing scheme in determining how assets should be distributed. Each of these cases is unique and presents complex equitable considerations. The discretion granted the court in arriving at a fair distribution plan permits it to address those complexities and to develop a plan that achieves reasonable fairness for those injured in this particular scheme

  1. 53Compare this with the far less satisfactory results that would be achieved if the matter were addressed through the bankruptcy courts: see Chapter 10 of this Receivership Sourcebook.

Request a Callback