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).