Ralph Janvey v. James Alguire, et al
PUBLISHED OPINION FILED. [10-10617 Affirmed ] Judge: CES , Judge: ECP , Judge: JWE Mandate pull date is 01/05/2011 [10-10617]
Ralph Janvey v. James Alguire, et al Case: 10-10617
Document: 00511322906 Page: 1 Date Filed: 12/15/2010
IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
December 15, 2010 N o . 10-10617 Lyle W. Cayce Clerk
R A L P H S. JANVEY P la in t if f A p p e lle e v. J A M E S R. ALGUIRE, VICTORIA ANCTIL, TIFFANY ANGELLE, SYLVIA A Q U I N O , JONATHAN BARRACK, ET AL. 1; TERAL BENNETT, SUSANA C I S N E R O S , RON CLAYTON, JAMES FONTENOT, MARK GROESBECK, E T AL. 2; and JASON GREEN D e fe n d a n t s A p p e lla n t s
A p p e a l from the United States District Court for the Northern District of Texas, Dallas Division.
Before STEWART, PRADO, and ELROD, Circuit Judges. E D W A R D C. PRADO, Circuit Judge: T h e Securities Exchange Commission ("SEC") brought suit against S t a n fo r d Group Company ("SGC"), along with various other Stanford corporate e n titie s, including Stanford International Bank ("SIB"), for allegedly
p e r p e t r a t in g a massive Ponzi scheme.1 The district court appointed Robert J a n v e y (the "Receiver") to marshal the Stanford estate. In November, this Court
The alleged Ponzi scheme concerned more than one hundred corporate entities controlled by R. Allen Stanford. The Receiver obtained a preliminary injunction maintaining a freeze on accounts that belong to 117 of the defendants. Where the distinction is of no moment, we will refer to the corporate entities collectively as "Stanford."
Case: 10-10617 Document: 00511322906 Page: 2 Date Filed: 12/15/2010
No. 10-10617 h e a r d Janvey v. Adams, 588 F.3d 831 (5th Cir. 2009),2 a case concerning the fr o z e n accounts of Stanford investors. Although the Fifth Circuit ordered the d is t r ic t court to thaw the accounts of the Stanford investors, the Receiver s u b s e q u e n t ly obtained a preliminary injunction against numerous former fin a n c ia l advisors and employees of SGC, freezing the accounts of those in d iv id u a ls pending the outcome of trial.3 I n this interlocutory appeal, the Employee Defendants contend that the d is t r ic t court should have granted their motion to compel arbitration, and that t h e district court had no power to grant the preliminary injunction when the m o t io n to compel arbitration was pending. Additionally, the Employee
D e fe n d a n t s claim that the district court abused its discretion when it granted t h e preliminary injunction, and that the Receiver's calculation of the amounts s u b je c t to the injunction was overly broad. The Bennett Defendants appeal s e p a r a t e ly , claiming that the district court erroneously found that SGC operated a s a Ponzi scheme. W e hold that (1) the district court had the power to decide the motion for p r e lim in a r y injunction before deciding the motion to compel arbitration; (2) the d is t r ic t court did not abuse its discretion in granting a preliminary injunction; (3 ) the preliminary injunction was not overbroad; (4) the district court acted w it h in its power to grant a Texas Uniform Fraudulent Transfer Act ("TUFTA") in ju n c t io n rather than an attachment; and (5) the Receiver's claims are not s u b je c t to arbitration.
Judge Dennis authored the opinion, joined by Judge Garwood and Judge Prado.
There are numerous appellants, represented by various counsel. The district court describes the approximately 330 former Stanford employees collectively as "Employee Defendants." We will continue this practice for the appellants in this proceeding. When we have need to refer to the specific arguments by a particular group of defendants or a single defendant, we will refer to the seventy-six financial advisor defendants who together filed a brief as "FA Defendants," to the defendants who filed the Teral Bennett et al. brief as the "Bennett Defendants," and to Jason Green as "Green."
Case: 10-10617 Document: 00511322906 Page: 3 Date Filed: 12/15/2010
No. 10-10617 I . FACTUAL AND PROCEDURAL BACKGROUND A. S ta n f o r d , the Receiver, and Adams T h is appeal shares its background facts with this Court's prior Adams o p in io n : T h is case arises out of an alleged multi-billion-dollar Ponzi s c h e m e perpetrated by the Stanford companies . . . . According to t h e SEC, the companies' core objective was to sell certificates of d e p o s it ("CDs") issued by [SIB]. Stanford achieved and maintained a high volume of CD sales by promising above-market returns and fa ls e ly assuring investors that the CDs were backed by safe, liquid in v e s t m e n t s . For almost 15 years, [SIB] represented that it c o n s is t e n t ly earned high returns on its investment of CD sales p r o c e e d s , ranging from 12.7% in 2007 to 13.93% in 1994. In fact, h o w e v e r , [SIB] had to use new CD sales proceeds to make interest a n d redemption payments on pre-existing CDs, because it did not h a v e sufficient assets, reserves and investments to cover its lia b ilitie s . T h e SEC filed suit against R. Allen Stanford, [SIB], and r e la te d companies on February 16, 2009. At the SEC's request, the d is t r ic t court issued a temporary order restraining the payment or e x p e n d itu r e of funds belonging to the Stanford parties. The district c o u r t also appointed [the Receiver] for the Stanford interests and g r a n t e d him the power to conserve, hold, manage, and preserve the v a lu e of the receivership estate. 588 F.3d at 833. At the time the SEC filed suit, Stanford should have held a s s e t s of greater than seven billion dollars, but actually held assets of less than $ 1 billion. P o s t -a p p o in t m e n t , the Receiver froze millions of dollars in assets. These fr o z e n accounts allegedly contained funds dispersed by Stanford as purported in t e r e s t on CDs, reimbursement of CD principle, or compensation to former S t a n fo r d employees. After time for review and assessment, the district court set a date to thaw the frozen assets and ordered the Receiver to complete his review. Adams, 588 F.3d at 833. The Receiver subsequently filed a series of claims, n a m in g hundreds of CD investors and the Employee Defendants as "relief
Case: 10-10617 Document: 00511322906 Page: 4 Date Filed: 12/15/2010
No. 10-10617 d e fe n d a n t s ," and seeking to recover funds from the frozen accounts. The district c o u r t severed the investor defendants from the Employee Defendants. T h e Receiver sought a preliminary injunction to continue the freeze as to t h e investor defendants, which the district court granted in part and denied in p a r t, maintaining the freeze of the accounts of various CD investors who had r e c e iv e d payments of interest on their CDs. In Adams, the Fifth Circuit vacated t h e district court's grant of a preliminary injunction. 588 F.3d at 835. The A d a m s Court found that the CD investors could not be properly named as "relief d e fe n d a n t s " because the CD investors had actual ownership interests in the CDs a n d any proceeds of the CDs. Id. at 83435. This Court did not address the E m p lo y e e Defendants' frozen accounts. B. P o s t-A d a m s Developments, the Employee Defendants, and the I n s t a n t Appeal T h e remaining frozen accounts represent accounts held at Pershing LLC a n d JP Morgan Clearing Corp. by the Employee Defendants. After Adams, the R e c e iv e r amended his complaint against the Employee Defendants, leaving c la im s only for fraudulent transfer or unjust enrichment. The Receiver subsequently reached a series of compromises with the E m p lo y e e Defendants, allowing for partial releases of their frozen assets. The d is t r ic t court eventually entered an agreed order (the "April 6th Order"), r e le a s in g all but "(1) commissions earned from the sale of SIB CDs; (2) SIB q u a r t e r ly bonuses; and (3) branch managing-director quarterly compensation." With the account freeze due to expire, the Receiver moved for a p r e lim in a r y injunction to continue the freeze as to the funds named in the April 6 t h Order. The Receiver claimed that the three named classes of funds
r e p r e s e n t e d payments by Stanford to the Employee Defendants from the p r o c e e d s of the Ponzi scheme and therefore constituted fraudulent transfers, e n tit lin g the Receiver to disgorgement of those assets.
Case: 10-10617 Document: 00511322906 Page: 5 Date Filed: 12/15/2010
No. 10-10617 T h e Employee Defendants opposed the preliminary injunction and moved t o compel arbitration. They based their motion to compel on the existence of P r o m is s o r y Notes between the Employee Defendants and SGC. The Promissory N o te s concerned upfront loan payments that SGC paid to the Employee D e fe n d a n t s when they joined Stanford. The Promissory Notes contained a broad a r b it r a t io n clause, which provided that any dispute "arising out of or relating to t h is Note . . . would be submitted and settled by arbitration pursuant to the c o n s t itu tion , bylaws, rules, and regulations of the Financial Industry Regulation A u t h o r it y (FINRA)" or the National Association of Securities Dealers ("NASD"), F IN R A 's predecessor. The Employee Defendants argued that because the
R e c e iv e r "stood in the shoes" of SGC, the Receiver was also bound by the a r b it r a t io n clause between the Employee Defendants and SGC. T h e district court granted a temporary restraining order, and then granted t h e preliminary injunction. The district court did not decide the merits of the m o t io n to compel arbitration, finding that it had the power to issue a p r e lim in a r y injunction pending resolution of that matter. Additionally, the d is t r ic t court distinguished between a preliminary injunction under the Texas U n iform Fraudulent Transfer Act ("TUFTA") and a writ of attachment, expressly g r a n t in g the former. In granting the preliminary injunction, the district court c o n t in u e d the account freeze as to the amounts named in the April 6th Order. Various Employee Defendants appealed. II. DISCUSSION V a r io u s groups of the Employee Defendants have set forth five issues on a p p e a l : (1) whether the district court had the power to grant a preliminary in ju n c t io n before deciding the motion to compel arbitration; (2) whether the d is t r ic t court abused its discretion when it granted the preliminary injunction; (3 ) whether the district court's preliminary injunction is overbroad; (4) whether t h e district court properly granted a preliminary injunction rather than a writ 5
Case: 10-10617 Document: 00511322906 Page: 6 Date Filed: 12/15/2010
No. 10-10617 o f attachment; and (5) whether the Receiver's claims against the Employee D e fe n d a n t s are subject to arbitration. We address the five issues in turn. A. J u r i s d i c t i o n and Standard of Review for the Preliminary I n ju n c t i o n Order T h e Panel has jurisdiction over the appeal of the district court's p r e lim in a r y injunction under 28 U.S.C. § 1292(a)(1).4 W h ile "the standard to be applied by the district court in deciding whether a plaintiff is entitled to a preliminary injunction is stringent, the standard of a p p e lla te review is simply whether the issuance of the injunction, in the light of t h e applicable standard, constituted an abuse of discretion." Doran v. Salem I n n , Inc., 422 U.S. 922, 93132 (1975). Despite this deferential standard, "a d e c is io n grounded in erroneous legal principles is reviewed de novo." Byrum v. L a n d r e th , 566 F.3d 442, 445 (5th Cir. 2009) (citations omitted) (quotation marks o m itte d ). As to each element of the district court's preliminary-injunction
a n a ly s is , the district court's findings of fact "are subject to a clearly-erroneous s t a n d a r d of review," while conclusions of law "are subject to broad review and w ill be reversed if incorrect." White v. Carlucci, 862 F.2d 1209, 1211 (5th Cir. 1 9 8 9 ) (citations and quotation omitted). B. P o w e r to Grant Preliminary Injunction 1. T h e Parties' Arguments
T h e Employee Defendants argue that the district court lacked power to is s u e a preliminary injunction because the Receiver's claims against them are s u b je c t to arbitration. The Receiver argues that case law, the FINRA rules, and c o m m o n sense allows the district court to issue a preliminary injunction pending it s resolution of a motion to compel arbitration. The district court found that it
The parties dispute whether the district court retained the power to grant the preliminary injunction while the motion to compel arbitration was pending. We address this dispute below.
Case: 10-10617 Document: 00511322906 Page: 7 Date Filed: 12/15/2010
No. 10-10617 h a d power to grant preliminary relief before deciding whether to compel a r b it r a t io n . We agree with the district court. W h ile the Employee Defendants acknowledge that the grant of a p r e lim in a r y injunction lies within a district court's discretion, they posit that a m o t io n to compel arbitration strips the district court of its power to grant an in ju n c t io n . The Employee Defendants contend that (1) SGC is and was subject t o arbitration for this dispute at all relevant times because it is a member of F IN R A and it is bound under the broad arbitration clause of each Promissory N o te , which requires any controversy arising out of or related to the Note be s u b m it t e d to arbitration pursuant to FINRA rules; (2) the dispute in this action is arbitrable because the Receiver became subject to the FINRA rules and the a r b it r a t io n clauses when he stepped into the shoes of the received entity he r e p r e s e n t s ; and (3) the FINRA rules do not contemplate pre-arbitration in ju n c t iv e relief nor allow court-ordered injunctions lasting longer than 15 days. The Employee Defendants argue that because the dispute is arbitrable and s u b je c t to the FINRA rules, the district court did not have the discretion to issue in ju n c t iv e relief; it only had the power to decide the motion to compel a r b it r a t io n . Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985) ("By it s terms, the Act leaves no room for the exercise of discretion by a district court, b u t instead mandates that district courts shall direct the parties to proceed to a r b it r a t io n on issues as to which an arbitration agreement has been signed."). T h e Employee Defendants also argue that cases from both sides of a circuit s p lit support their contention that the district court does not have power to enter a n injunction. The circuit split concerns the power of a district court to issue an in ju n c t io n while arbitration is pending. The Fifth Circuit acknowledged the c ir c u it split in RGI, Inc. v. Tucker & Associates, Inc., 858 F.2d 227, 229 (5th Cir.
Case: 10-10617 Document: 00511322906 Page: 8 Date Filed: 12/15/2010
No. 10-10617 1 9 8 8 ), but did not enter the fray.5 The Employee Defendants contend that once a g a in we may avoid the fray and still decide the issue in their favor because both t h e Eighth Circuit, on one side of the split, and the Seventh Circuit, on the other s id e of the split, would not permit an injunction here. The Eighth Circuit held t h a t "where the [Federal Arbitration Act ("FAA")] is applicable to the dispute b e tw e e n the parties and no qualifying language has been alleged, the district c o u r t errs in granting injunctive relief" because the judicial inquiry required to d e t e r m in e "the propriety of injunctive relief necessarily would inject the court in t o the merits of issues more appropriately left to the arbitrator." Merrill L y n c h , Pierce, Fenner & Smith, Inc. v. Hovey, 726 F.2d 1286, 1292 (8th Cir. 1 9 8 4 ). The Seventh Circuit held that the district court may only issue injunctive r e lie f that is effective only until the arbitration panel is able to address whether t h e equitable relief should remain in effect. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Salvano, 999 F.2d 211, 21516 (7th Cir. 1993). T h e Receiver responds that the district court's broad power to preserve the s t a t u s quo is well-established and supported by case law, FINRA rules, and c o m m o n sense. The Receiver notes that "even after a district court decides that a case is subject to arbitration, most federal authority permits the district court t o issue a preliminary injunction to maintain the status quo pending a r b it r a t io n ." Further, the Receiver points out that under FINRA Rule 13804, (1 ) parties can seek court-ordered temporary injunctive relief even where the c a s e is subject to mandatory arbitration, and (2) if a court issues a temporary in ju n c t io n in a dispute subject to arbitration, an arbitration panel will hold a h e a r in g within 15 days to determine whether to continue the injunctive relief.
In RGI, we found that we need not decide whether a district court may issue a preliminary injunction while arbitration is pending because the agreement in that case clearly provided for preliminary injunctions. Id. at 231. The parties do not attempt to establish or distinguish similar facts here.
Case: 10-10617 Document: 00511322906 Page: 9 Date Filed: 12/15/2010
No. 10-10617 T h e Receiver argues that if FINRA rules allow court-ordered injunctive relief w h e n a party loses on the motion to compel arbitration, then he is entitled to s u c h relief while the motion is still pending. Finally, the Receiver notes that a r u le that would prohibit the district court from preserving the status quo when a motion to compel arbitration is filed would enable any party "to strip the trial c o u r t of its authority to enjoin the party's conduct simply by filing a motion to c o m p e l arbitration." 2. A n a ly s is
I n its order, the district court relied on its equitable powers to preserve the s t a t u s quo, and expressly reserved the question of whether the Receiver's claims w e r e subject to arbitration. In so doing, the district court noted that the cases in the circuit split did not specifically address the issue in this case: whether a c o u r t may preserve the status quo pending its resolution of a motion to compel a r b itr a tio n , not pending the actual arbitration itself. We agree with the district c o u r t: The district court can grant preliminary relief before deciding whether to c o m p e l arbitration. The language of the FAA does not touch on the ancillary power of the fe d e r a l court to act before it decides whether the dispute is arbitrable. The fe d e r a l law of arbitration is governed by the FAA. 9 U.S.C. §§ 116. As the E m p lo y e e Defendants note, the Supreme Court has consistently expressed a s t r o n g preference for arbitration. See Southland Corp. v. Keating, 465 U.S. 1, 1 0 (1984) ("In enacting § 2 of the [FAA], Congress declared a national policy fa v o r in g arbitration . . . ."). However, these sections do not provide guidance on the issue of whether a court may issue a preliminary injunction before deciding w h e t h e r the dispute is arbitrable. Section 3 provides: I f any suit or proceeding be brought in any of the courts of the U n it e d States upon any issue referable to arbitration under an a g r e e m e n t in writing for such arbitration, the court in which such s u it is pending, upon being satisfied that the issue involved in such 9
Case: 10-10617 Document: 00511322906 Page: 10 Date Filed: 12/15/2010
No. 10-10617 s u it or proceeding is referable to arbitration under such an a g r e e m e n t, shall on application of one of the parties stay the trial of t h e action until such arbitration has been had in accordance with t h e terms of the agreement, providing the applicant for the stay is n o t in default in proceeding with such arbitration. 9 U.S.C. § 3 (emphasis added). Similarly, section 4 provides: A party aggrieved by the alleged failure, neglect, or refusal of a n o t h e r to arbitrate under a written agreement for arbitration may p e t it io n any United States district court . . . for an order directing t h a t such arbitration proceed in the manner provided for in such a g r e e m e n t. . . . The court shall hear the parties, and upon being s a tis fie d that the making of the agreement for arbitration or the fa ilu r e to comply therewith is not in issue, the court shall make an o r d e r directing the parties to proceed to arbitration in accordance w it h the terms of the agreement. 9 U.S.C. § 4 (emphasis added). Section 3 only speaks to what the court should d o once it is satisfied that the issue is referable to arbitration. Similarly,
s e c t io n 4 mandates that the court must direct the parties to proceed to a r b it r a t io n only after it is satisfied that there is no issue as to whether a party fa ile d to comply with the arbitration agreement. Both of these sections speak o n ly to situations after the court has decided arbitration must ensue. Here, the court has not yet made up its mind as to arbitrability. The d is t r ic t court relied on its equitable powers to preserve the status quo, but e x p r e s s l y reserved the issue of whether the Receiver's claims were subject to a r b it r a t io n for resolution at a later date. Nothing in the FAA controls a district c o u r t 's approach to its docket. While the Supreme Court has stated that
" C o n g r e s s '[s ] clear intent, in the [FAA], [was] to move the parties to an a r b itr a b le dispute out of court and into arbitration as quickly and easily as p o s s ib le [,]" there is nothing to control the district court's expeditious d e t e r m in a t io n of arbitrability. Moses H. Cone Hosp. v. Mercury Constr. Corp., 4 6 0 U.S. 1, 22 (1983) (emphasis added).
Case: 10-10617 Document: 00511322906 Page: 11 Date Filed: 12/15/2010
No. 10-10617 T h e cases cited by the Employee Defendants also do not bar the exercise o f the district court's equitable powers here. The RGI Court found that "[t]he c r u x of the problem [in the circuit split] is whether the commands of the [FAA] r e q u ir e that a federal court immediately divest itself of any power to act to m a in t a in the status quo once it decides that the case before it is arbitrable." RGI, 8 5 8 F.2d at 22829 (emphasis added). Here, however, the district court has not y e t decided whether the case is arbitrable and thus the circuit-split cases are not a p p lic a b le . The Receiver's request for a preliminary injunction was entered b e fo r e the motion to compel arbitration. We agree with the district court that if we were to reverse and hold that the district court must stop everything and c o n s id e r the motion to compel arbitration, such a holding would create a harsh procedural rule: in order to avoid irreparable in ju r y , motions to compel arbitration where a request for injunctive r e lie f is involved must be resolved before any temporary restraining o r d e r expires. Such a rule would be both burdensome for district c o u r t s and impracticable, given the time it takes motions to compel a r b i t r a tio n to become ripe for ruling, even if no discovery is r e q u ir e d . (S u p p . R. #3 at 4273 n.5.) T h o u g h the circuit-split cases do not apply here, the reasoning of those c ir c u it s holding that a court may issue an injunction pending arbitration applies h e r e .6 As explained by the First Circuit, "the congressional desire to enforce
a r b it r a t io n agreements would frequently be frustrated if the courts were p r e c lu d e d from issuing preliminary injunctive relief to preserve the status quo p e n d in g arbitration and, ipso facto, the meaningfulness of the arbitration p r o c e s s ." Teradyne v. Mostek Corp., 797 F.2d 43, 51 (1st Cir.1986). Here, the
Given that the facts at issue here do not require us to enter the circuit split, we reserve for another day the issues of whether a district court divests itself of the discretion to maintain the status quo once it decides the case before it is arbitrable, and if not, what the limits of that discretion may be.
Case: 10-10617 Document: 00511322906 Page: 12 Date Filed: 12/15/2010
No. 10-10617 d is t r ic t court merely sought to preserve the status quo before deciding the m o t io n to compel arbitration, and by doing so they sought to preserve the m e a n in g fu ln e s s of any arbitration that might take place. Even if applicable to the facts here, the Seventh Circuit case cited by the E m p lo y e e Defendants would not bar the preliminary injunction issued by the d is t r ic t court. In Salvano, the Seventh Circuit held that the district court may is s u e injunctive relief only until the arbitration panel is able to address whether t h e equitable relief should remain in effect. 999 F.2d at 21516. In the instant c a s e , the district court expressly stated that if it decides to compel arbitration, t h e defendants may ask the district court to reconsider the preliminary in ju n c t io n in light of Fifth Circuit precedent and the terms of the contracts. T h e matter of arbitrability has not yet been decided, and the district court d id not overreach when it decided the preliminary injunction motion. C. D e c i s i o n to Grant Preliminary Injunction T h e four elements a plaintiff must establish to secure a preliminary in ju n c t io n are: (1 ) a substantial likelihood of success on the merits, (2) a substantial t h r e a t of irreparable injury if the injunction is not issued, (3) that t h e threatened injury if the injunction is denied outweighs any h a r m that will result if the injunction is granted, and (4) that the g r a n t of an injunction will not disserve the public interest. B y r u m , 566 F.3d at 445 (quotation marks omitted). The Receiver bore the b u r d e n of establishing each element. Bluefield Water Ass'n, Inc. v. City of S ta r k v ille , Miss., 577 F.3d 250, 253 (5th Cir. 2009). The district court analyzed e a c h of the elements in its grant of the preliminary injunction to the Receiver. The Employee Defendants challenge all aspects of the district court's analysis. We disagree with the Employee Defendants that the district court abused its d is c r e t io n in issuing the preliminary injunction. We address each element in t u r n , reviewing the district court's ultimate decision to grant the preliminary
Case: 10-10617 Document: 00511322906 Page: 13 Date Filed: 12/15/2010
No. 10-10617 in ju n c t io n and its findings of fact for abuse of discretion and its legal d e t e r m in a t io n s de novo. Byrum, 566 F.3d at 445. 1. L ik e li h o o d of Success on the Merits
T h e district court did not err in finding the Receiver carried his burden of p r o v in g likelihood of success on the merits. To satisfy the first element of lik e l ih o o d of success on the merits, the Receiver's evidence in the preliminary in ju n c t io n proceeding "is not required to prove [his] entitlement to summary ju d g m e n t ." Byrum, 566 F.3d at 446; see also CHARLES ALAN WRIGHT, ARTHUR R. M ILLER, MARY KAY KANE, 11A FEDERAL PRACTICE & PROCEDURE § 2948.3 (2d ed. 1 9 9 5 ) ("All courts agree that plaintiff must present a prima facie case but need n o t show that he is certain to win." (footnote omitted)). To assess the likelihood o f success on the merits, we look to "standards provided by the substantive law." Roho, Inc. v. Marquis, 902 F.2d 356, 358 (5th Cir. 1990) (citation omitted). Here, t h e Receiver contends that there is liability under TUFTA. Under TUFTA, the t r ia l court may find substantial likelihood of success on the merits when it is "presented with evidence of intent to defraud the creditor." See Tanguy v. Laux, 2 5 9 S.W.3d 851, 858 (Tex. App.--Houston [1st Dist.] 2008) (citing Tel. Equip. N etw o rk , Inc. v. TA/Westchase Place, Ltd., 80 S.W.3d 601, 609
(T e x .A p p .-- H o u s t o n [1st Dist.] 2002)). The Receiver and the Employee Defendants offer competing versions of w h a t evidence is necessary to satisfy TUFTA's requirements. The Bennett D e fe n d a n t s contend that the Receiver failed to establish that Stanford operated a s a Ponzi scheme.7 The FA Defendants argue that because they received their c o m p e n s a tion from SGC and not SIB, they did not receive compensation from the
The Bennett Defendants do not tie this argument to any element of the preliminary injunction standard, instead lodging a general objection to the district court's determination that Stanford operated as a Ponzi scheme. Because the Ponzi scheme determination has the greatest impact on the likelihood of success element, we address the Bennett Defendants' argument in this section.
Case: 10-10617 Document: 00511322906 Page: 14 Date Filed: 12/15/2010
No. 10-10617 P o n z i scheme. The Employee Defendants contend that the district court erred b y allowing the Receiver to group all the former employees of Stanford together r a t h e r than requiring the Receiver to prove that each individual Defendant r e c e iv e d fraudulent transfers of money from the Stanford scheme. Finally, the E m p lo y e e Defendants also contend that the Receiver failed to follow the h e ig h t e n e d pleading requirements of Federal Rule of Civil Procedure 9(b). The R e c e iv e r responds that (1) there is sufficient evidence to prove Stanford operated a s a Ponzi scheme from the very beginning; (2) the Receiver has presented s u ffic ie n t evidence to prove that each individual Defendant received transfers o f money from the Stanford Ponzi scheme; and (3) this Court need not decide w h e t h e r the Receiver's pleading satisfies the rules, and even if it did, Rule 9(b) d o e s not apply to fraudulent transfer cases. T h e district court agreed with the Receiver. It found that there was a P o n z i scheme and held that "`transfers made from a Ponzi scheme are p r e s u m p t iv e ly made with intent to defraud, because a Ponzi scheme is, as a m a t t e r of law, insolvent from inception.'" (Supp. R. #3 at 4277 (quoting Quilling v . Schonsky, 247 F. App'x 583, 586 (5th Cir. 2007) (unpublished) (citing Warfield v . Byron, 436 F.3d 551, 559 (5th Cir. 2006))).) Therefore, the district court found t h a t the Receiver satisfied his obligation to show an actual intent to defraud u n d e r TUFTA. The district court further found that the Receiver presented s u ffic ie n t evidence that the assets implicated by the injunction request " r e p r e s e n t e d transfers of Stanford CD proceeds." W e address first whether the Receiver presented sufficient evidence that S t a n fo r d operated as a Ponzi scheme, then discuss whether the Receiver a d e q u a t e ly established that the Employee Defendants received proceeds of a fr a u d u le n t transfer, and finally address whether this satisfies the requirements o f this element. a. W h e t h e r Stanford Operated as a Ponzi Scheme 14
Case: 10-10617 Document: 00511322906 Page: 15 Date Filed: 12/15/2010
No. 10-10617 T h e Bennett Defendants spend the bulk of their brief disputing whether S t a n fo r d operated as a Ponzi scheme ab initio. The FA Defendants separate S G C from SIB, and claim that the Receiver failed to establish that SGC, the e n tit y that provided compensation to the FA Defendants, was a Ponzi scheme. In large part, the Receiver relies upon the guilty plea of James Davis (the "Davis P le a "), the former Chief Financial Officer of SIB, to demonstrate that the S t a n fo r d enterprise operated as a Ponzi scheme. The district court relied upon t h e Davis Plea in its order, along with the declarations of the Receiver's forensic a c c o u n t a n t , Karyl Van Tassel, to find that a Ponzi scheme existed. We find that t h e district court did not err in finding that the Stanford enterprise operated as a Ponzi scheme. A Ponzi scheme is a "fraudulent investment scheme in which money c o n t r ib u t e d by later investors generates artificially high dividends or returns for t h e original investors, whose example attracts even larger investments." BLACK'S LAW DICTIONARY 1198 (8th ed. 2004); see also U.S. v. Setser, 568 F.3d 4 8 2 , 486 (5th Cir. 2009) ("in a classic Ponzi scheme, as new investments [come] in . . ., some of the new money [is] used to pay earlier investors"). The Second C ir c u it also provides a good description of a Ponzi scheme: A [P]onzi scheme is a scheme whereby a corporation operates and c o n t in u e s to operate at a loss. The corporation gives the appearance o f being profitable by obtaining new investors and using those in v e s t m e n t s to pay for the high premiums promised to earlier i n v e s t o r s . The effect of such a scheme is to put the corporation fa r t h e r and farther into debt by incurring more and more liability a n d to give the corporation the false appearance of profitability in o r d e r to obtain new investors. H ir s c h v. Arthur Andersen & Co., 72 F.3d 1085, 1088 n.3 (2d Cir. 1995). This C ir c u it has found that a Ponzi scheme "is, as a matter of law, insolvent from its in c e p tio n ." Warfield, 436 F.3d at 558 (citing Cunningham v. Brown, 265 U.S. 1, 7 8 (1924)).
Case: 10-10617 Document: 00511322906 Page: 16 Date Filed: 12/15/2010
No. 10-10617 T h e Davis Plea and the Van Tassel Declarations provide sufficient e v id e n c e to support a conclusion that there is a substantial likelihood of success o n the merits that the Stanford enterprise operated as Ponzi scheme. In his p le a , Davis, who is singularly positioned to provide insight into the workings of S t a n fo r d , admitted that the "continued routine false reporting . . . upon which C D investors routinely relied in making their investment decisions, in effect, c r e a t e d an ever-widening hole between reported assets and actual liabilities, c a u s in g the creation of a massive Ponzi scheme whereby CD redemptions u lt im a te ly could only be accomplished with new infusions of investor funds." This statement reflects a classic Ponzi scheme and directly contradicts the B e n n e t t Defendants' assertion that the district court relied upon a novel d e fin it io n of a Ponzi scheme in its order. The Van Tassel Declarations also p rov id e clear, numerical support for the creative reverse engineering undertaken b y Stanford executives to accomplish the Ponzi scheme: We found within SIB's accounting records worksheets used to derive fic t it io u s SIB revenues back to 2004. The Ponzi scheme c o n s p i r a t o r s would simply determine what level of revenues SIB n e e d e d to report in order to both look good to investors and r e g u la t o r s and to purport to cover CD obligations and other e x p e n s e s . They would then back into that total amount by a s s ig n in g equally fictitious revenue amounts to each category (e q u i t y , fixed income, precious metals, alternative) of a fictitious in v e s t m e n t allocation. V a n Tassel then goes on to specifically itemize how specific returns were based o n fictitious asset totals. T h e Bennett Defendants' argument that the Receiver failed to establish, a n d that the district court incorrectly assumed, that the Stanford entities c o n s t it u t e d a Ponzi scheme ab initio is unavailing. The Davis Plea, when read a s a whole, provides sufficient evidence for the district court to assume that the S t a n fo r d enterprise constituted a Ponzi scheme ab initio. In outlining the
Case: 10-10617 Document: 00511322906 Page: 17 Date Filed: 12/15/2010
No. 10-10617 fa c t u a l basis for the guilty plea, the Davis Plea describes how in 1988, Stanford d ir e c t e d Davis to "make false entries into the general ledger for the purpose of r e p o r t in g false revenues and false investment portfolio balances to the banking r e g u la to r s " shortly after opening Guardian International Bank, as SIB was then k n o w n , in Montserrat. The Plea further states that Stanford closed Guardian's o p e r a t io n s in Montserrat in 1989 and moved the banking operations to Antigua u n d e r the name of SIB to avoid heightened scrutiny from bank regulators in M o n tse r r a t. F in a lly , the FA Defendants' position that SGC should be separated from S I B is of no moment. As made clear by the Van Tassel Declarations, SGC r e c e iv e d the bulk of its revenue from commissions for the sale of the SIB CDs a n d fees for other services it provided to SIB related to the CD investment p o r t fo lio . The Receiver seeks to recoup those proceeds because they were the a s s e t s of the alleged Ponzi scheme. The district court did not err when it found, fo r the purposes of this preliminary injunction proceeding, that Stanford o p e r a t e d as a Ponzi scheme. b. W h e t h e r the Receiver Offered Sufficient Proof of the S o u r c e of the Frozen Accounts.
T h e Employee Defendants also argue that the district court erred in g r o u p in g all the transactions rather than examining evidence of claims against in d iv id u a ls . Contrary to the Employee Defendants' assertion, the district court f o u n d that the Receiver came forward with "competent evidence that each in d iv id u a l [Employee Defendant] received transfers of money representing CD s a le proceeds from the Stanford Ponzi scheme." We agree. The Receiver's e v id e n c e is a spreadsheet in the Van Tassel Declarations that lists each former e m p lo y e e , the form of compensation (loan, commission, or quarterly bonus), and t h e amount that Stanford paid each employee. The Van Tassel Declarations
Case: 10-10617 Document: 00511322906 Page: 18 Date Filed: 12/15/2010
No. 10-10617 s u ffic ie n t ly establish that Stanford paid the Employee Defendants from the a lle g e d Ponzi scheme for the purposes of the preliminary injunction proceeding. c. L ik e li h o o d of Success on the Merits
T h e district court did not abuse its discretion in finding the Receiver c a r r ie d his burden of proving a substantial likelihood of success on the merits for h is TUFTA claim. TUFTA requires that the debtor transferor make the transfer " w it h actual intent to . . . defraud any creditor of the debtor." TEX. BUS. & COM. C ODE ANN. § 24.005(a)(1). "In this circuit, proving that [a transferor] operated a s a Ponzi scheme establishes the fraudulent intent behind the transfers it m a d e ." SEC v. Res. Dev. Int'l, LLC, 487 F.3d 295, 301 (5th Cir. 2007) (citing W a r fie ld , 436 F.3d at 558). In other words, "`the transferees' knowing
p a r tic ip a t io n is irrelevant under the statute' for purposes of establishing the p r e m is e (as opposed to liability for) a fraudulent transfer." Id. (analyzing
T U F T A ) (quoting Warfield, 436 F.3d at 559 (analyzing Washington state law)). The Receiver carried his burden of proving that he is likely to succeed in his p r im a facie case by providing sufficient evidence that a Ponzi scheme e x is t e d -- t h e r e b y obviating the need to prove fraudulent intent of the tr a n s fe r e e s -- a n d sufficient proof that each individual received transfers of m o n e y from the Ponzi scheme. The Defendants did not refute this by showing t h a t they are likely to succeed in proving a TUFTA statutory affirmative d e fe n s e . Consequently, the district court did not err in finding a substantial lik e lih o o d of success. The parties dispute whether Rule 9(b) applies to this case and whether t h is affects the district court's finding of substantial likelihood of success. The E m p lo y e e Defendants argue that the Receiver was obligated to abide by Rule 9 (b )'s heightened pleading standards for his fraud claims, and that he failed to m e e t this standard when he "lump[ed] together" the claims against all former S t a n fo r d employees. The Receiver asserts that Rule 9(b) does not apply to 18
Case: 10-10617 Document: 00511322906 Page: 19 Date Filed: 12/15/2010
No. 10-10617 fr a u d u le n t transfer cases. We need not and do not address the issue of whether h e ig h t e n e d pleading is required. As the district court notes in its Preliminary I n ju n c t io n Order, it has not yet ruled on the defendants' pending motions to d is m is s . The only question that the district court had to decide on this element in the preliminary injunction proceeding was whether the Receiver had shown a substantial likelihood of ultimately succeeding on the merits, see Doe v. M a r s h a ll, 622 F.2d 118, 119 n.2 (5th Cir. 1980), potential procedural hurdles n o tw it h s t a n d in g . The Receiver carried this burden. 2. T h r e a t of Irreparable Harm
T h e Employee Defendants argue that the Receiver did not carry his b u r d e n of proving the second element of the preliminary injunction standard: t h r e a t of irreparable harm. The Employee Defendants argue that because the R e c e iv e r merely seeks a return of the fraudulently transferred CD proceeds, t h e r e is no threat of irreparable harm. The Employee Defendants contend that d iffic u lt y securing economic damages is insufficient to demonstrate irreparable h a r m . The Employee Defendants further argue that the Receiver was required t o establish a likelihood that each individual defendant would remove or d is s ip a t e the frozen assets but for a preliminary injunction. The Receiver replies t h a t TUFTA itself creates a presumption of dissipation. The Receiver then a r g u e s that its inability to collect a money judgment should the Employee D e fe n d a n t s dissipate the frozen accounts is sufficient to show a threat of ir r e p a r a b le harm. Finally, the Receiver agrees with the district court that he is n o t required to make an individualized showing of likely dissipation. T h e district court found that "dissipation of the assets that are the subject o f this suit . . . would impair the Court's ability to grant an effective remedy[,]" p a r tic u la r ly because much of the relief the Receiver seeks under TUFTA is " e q u it a b le in nature and involves the assets that are . . . frozen." The district c o u r t further held that the Receiver need not show that each individual 19
Case: 10-10617 Document: 00511322906 Page: 20 Date Filed: 12/15/2010
No. 10-10617 d e fe n d a n t would dissipate the frozen assets absent an injunction. The court r e a s o n e d that the Receiver was entitled to a presumption that the Employee D e fe n d a n t s would dissipate the frozen assets absent a preliminary injunction b e c a u s e the assets were fraudulently transferred as part of a Ponzi scheme. We fin d that the Receiver carried his burden of proving this element. T o satisfy the second element of the preliminary injunction standard, the R e c e iv e r must demonstrate that if the district court denied the grant of a p r e lim in a r y injunction, irreparable harm would result. Holland Am. Ins. Co. v. S u c c e s s io n of Roy, 777 F.2d 992, 997 (5th Cir. 1985).8 In general, a harm is ir r e p a r a b le where there is no adequate remedy at law, such as monetary d a m a g e s . Deerfield Med. Ctr. v. City of Deerfield Beach, 661 F.2d 328, 338 (5th C ir . Unit B 1981); Parker v. Dunlop, 517 F.2d 785, 787 (5th Cir. 1975). However, t h e mere fact that economic damages may be available does not always mean t h a t a remedy at law is "adequate." For example, some courts have found that a remedy at law is inadequate if legal redress may be obtained only by pursuing a multiplicity of actions. See, e.g., Lee v. Bickell, 292 U.S. 415, 421 (1934) ("we a r e not in doubt, the multiplicity of actions necessary for redress at law [is] s u ffic ie n t . . . to uphold the remedy by injunction"). We have previously stated t h a t where a district court has determined that a meaningful decision on the m e r it s would be impossible without an injunction, the district court may m a in t a in the status quo and issue a preliminary injunction to protect a remedy, in c lu d i n g a damages remedy, when the freezing of the assets is limited to the
The Receiver argues that TUFTA effectively creates a statutory presumption of irreparable harm. We disagree. TUFTA specifically provides that the claimant may obtain "an injunction against further disposition by the debtor or a transferee, or both, of the asset transferred." TEX. BUS. & COM. CODE § 24.008(a)(3)(A). However, the statute explicitly states that this remedy is "subject to applicable principles of equity and in accordance with applicable rules of civil procedure." TEX. BUS. & COM. CODE § 24.008(a)(3)(A). Clearly, TUFTA contemplates the application of equitable standards, encompassing the usual elements necessary to obtain a preliminary injunction.
Case: 10-10617 Document: 00511322906 Page: 21 Date Filed: 12/15/2010
No. 10-10617 p r o p e r t y in dispute or its direct, traceable proceeds. See Productos Carnic, S.A. v . Cent. Amer. Beef & Seafood Trading Co., 621 F.2d 683, 68687 (5th Cir. 1980) (" [E ]v e n were [plaintiff's] remedy limited to damages, an injunction may issue t o protect that remedy." (dicta)). Finally, a showing of "[s]peculative injury is n o t sufficient; there must be more than an unfounded fear on the part of the a p p lic a n t ." Id. (citing Carter v. Heard, 593 F.2d 10, 12 (5th Cir.1979)). We agree with the district court that the Receiver carried his burden of p r o v in g this element. First, we agree with the district court that the "Receiver s u c c e s s fu lly show[ed] that the threatened harm--dissipation of the assets that a r e the subject of this suit--would impair the [district court's] ability to grant an e ffe c t iv e remedy." The relief that the Receiver ultimately seeks is equitable in n a t u r e ; the Receiver seeks "avoidance of the transfer or obligation to the extent n e c e s s a r y to satisfy the creditor's claim." TEX. BUS. & COM. CODE § 24.008(a)(1). In his complaint, the Receiver asks the court for an order (1) establishing that t h e CD proceeds received by the Employee Defendants are property of the R e c e iv e r s h ip Estate held pursuant to a constructive trust for the benefit of the c r e d it o r s , and (2) allowing him to withdraw proceeds from the segregated escrow a c c o u n t and add them to the Receivership Estate. He does not seek damages fo r breach of contract or tort. If the defendants were to dissipate or transfer t h e s e assets out of the jurisdiction, the district court would not be able to grant t h e effective remedy, either in equity or in law, that the Receiver seeks. The a s s e t s that the Receiver requests stay frozen are assets that are directly t r a c e a b le to the Stanford Ponzi scheme and are the subject of this dispute. The R e c e iv e r merely asks that those assets continue to be held immovable while his c a s e proceeds to judgment. We do not find that the district court erred in d e t e r m in in g that a preliminary injunction was appropriate to protect against m o n e ta r y asset dissipation.
Case: 10-10617 Document: 00511322906 Page: 22 Date Filed: 12/15/2010
No. 10-10617 T h e party seeking a preliminary injunction must also show that the t h r e a te n e d harm is more than mere speculation. Succession of Roy, 777 F.2d at 9 9 7 . Here, the Receiver provided evidence of a massive Ponzi scheme and proof t h a t each individual received proceeds from the fraudulent scheme. This is s u ffic ie n t to prove the likelihood of each individual removing or dissipating the fr o z e n assets but for the preliminary injunction. Accordingly, we find that the d is t r ic t court did not err in finding that irreparable harm would result in the a b s e n c e of a preliminary injunction. 3. T h e Balance of Harms and Service of the Public Interest
O n these elements, the district court weighed the interests of the E m p lo y e e Defendants against the interests represented by the Receiver (the c r e d it o r s ) and looked to the broader ramifications of any potential recovery by t h e Receiver. The district court noted the extremely limited array of assets r e m a in in g to provide compensation to Stanford Ponzi scheme victims. The r e c o r d supports the fact that Stanford, when it entered receivership, was grossly u n d e r c a p it a liz e d . Additionally, the Receiver and the Employee Defendants r e a c h e d consent agreements to thaw all but certain discrete categories of c o m p e n s a tio n . These last elements of the district court's preliminary injunction a n a ly s is implicate the discretion of that court to craft a remedy and weigh the e v id e n c e . We do not believe that the district court abused its discretion when it fo u n d that these elements weighed in favor of the Receiver. D. S c o p e of District Court's Grant of Preliminary Injunction T h e Employee Defendants also challenge the breadth of the injunction. On appeal, the Employee Defendants renew a number of arguments that they b r o u g h t before the district court. First, the Employee Defendants contend that a n y frozen IRA account is exempt from the Receiver's claim. Second, the FA D e fe n d a n t s argue that the account freeze improperly extends to pre-tax amounts b e c a u s e they already paid taxes on those earnings. Third, the FA Defendants 22
Case: 10-10617 Document: 00511322906 Page: 23 Date Filed: 12/15/2010
No. 10-10617 a r g u e that they are entitled to an offset of amounts they lost on their personal in v e s t m e n t s in Stanford CDs. We address each of the Employee Defendants' a r g u m e n t s in turn. 1. F r o z e n IRA Accounts
A c c o r d in g to Texas law, IRA accounts are exempt from seizure. TEX. PROP. C ODE § 42.0021(a). However, the party claiming the exemption must establish t h a t she has a legal right to the funds in the IRA to be entitled to the exemption. Jones v. Am. Airlines, Inc., 131 S.W.3d 261, 270 (Tex. App.--Fort Worth, 2004, n o pet.). It is undisputed that some of the frozen accounts are IRA accounts. The Employee Defendants had the burden of proving that they have a right to t h e funds in the accounts, particularly in light of the Receiver's extensive e v id e n c e that the Employee Defendants received these funds as a fraudulent t r a n s fe r from the Stanford Ponzi scheme. The mere fact that an account is an I R A account does not automatically entitle the Employee Defendants to the e x e m p t io n ; it does not relieve the Employee Defendants of carrying the burden o f proving they have a legal right to the account. Consequently, the district c o u r t did not err when it kept the IRA accounts frozen under the preliminary in ju n ctio n . 2. T a x Matters
T h e FA Defendants argue that the Receiver improperly calculated the a m o u n t s represented by the account freeze because the Receiver did not account fo r taxes paid by the Employee Defendants on the compensation. The district c o u r t rejected this argument, relying heavily on Donell v. Kowell, in which the N in th Circuit declined to offset for taxes paid. 533 F.3d 762, 779 (9th Cir. 2008). The Ninth Circuit first reasoned that if it allowed offsets for amounts paid in g o o d faith as taxes, logic would suggest that the court also permits offsets for b a n k transfer fees, other fund management fees, and a myriad of other expenses. The court went on to state, "There is simply no principle by which to limit such 23
Case: 10-10617 Document: 00511322906 Page: 24 Date Filed: 12/15/2010
No. 10-10617 o ffs e t s . . . . If each net winner could shield his gains in their entirety in this m a n n e r , the purpose of UFTA would be defeated, and the multitude of victims w h o lost their entire investment would receive no recovery." Id. at 779. Second, t h e court found that allowing offsets in even a few areas like taxes paid would " in tr o d u c e complex problems of proof and tracing into each case," thereby " s e v e r e ly reduc[ing] the receiver's ability to gather what few assets can be lo c a t e d in the wake of a failed Ponzi scheme." Id. A lt h o u g h , as the FA Defendants note, the Donell case involved taxes paid b y an investor after receiving fraudulent funds, id. at 778, we find the Donell r e a s o n in g persuasive, particularly because there is no basis for this offset in T U F T A . We do not find the district court erred in declining to offset the prepaid t a x amounts with respect to the preliminary injunction. 3. L o s s e s on Personal Investments
T h e FA Defendants also argue that the Receiver's figures do not account fo r the Defendants' losses on their own investments in Stanford CDs. The d e fe n d a n t s have not offered any case law or statutory language on point, nor did w e find any authority, entitling the Employee Defendants to offsets for their p e r s o n a l losses on Stanford investments. We agree with the district court that t h e Defendants must seek these amounts through the Receiver's claims process lik e other creditors. E. T y p e of Equitable Relief Granted T h e Employee Defendants also renew their contention that the Receiver o b ta in e d , in essence, a writ of attachment, arguing that the "substance" of the R e c e iv e r 's suit was a request to hold assets "in order to satisfy a money ju d g m e n t ." While the Receiver also requested an attachment, the district court d id not consider this request and expressly granted an injunction. In doing so, t h e district court differentiated between a TUFTA injunction and a writ of a tta ch m en t. 24
Case: 10-10617 Document: 00511322906 Page: 25 Date Filed: 12/15/2010
No. 10-10617 A s the district court noted, TUFTA provides for both injunctions and a tta ch m e n ts. See TEX. BUS. & COM. CODE § 24.008(a)(2) (attachment); id. The district court relied upon Telephone
§ 24.008(a)(3)(A) (injunction).
E q u ip m e n t Network, Inc. v. TA/Westchase Place, Ltd., for the proposition that a claim for fraudulent transfer under Texas law contemplates the issuance of a p r e lim in a r y injunction. 80 S.W.3d at 610.9 The district court's reliance was well p la c e d . TUFTA provides that the claimant "may obtain an injunction against fu r t h e r disposition of `the asset transferred or of other property.'" Id. (quoting T EX. BUS. & COM. CODE ANN. § 24.008(a)(3)). Furthermore, the district court's o r d e r granting the preliminary injunction lacks the hallmarks of an attachment: n a m e ly , a "seizure" or "lien." The Receiver claims that Stanford fraudulently transferred proceeds from t h e alleged Ponzi scheme to the Employee Defendants and sought an injunction t o prevent the dissipation of those proceeds, now held in the frozen accounts. TUFTA expressly provides for an injunction and the district court exercised its d is c r e t io n to grant that injunction. F. M o t i o n to Compel Arbitration T h e parties also dispute whether the Receiver's claims against the E m p lo y e e Defendants are subject to arbitration. The district court did not d e c id e the motion to compel arbitration, but both parties ask this Court to decide t h is question. As the parties note, the issue has been fully briefed as the R e c e i v e r had an opportunity to file a response to the motion to compel a r b itr a tio n .
Although the Telephone Equipment court uses the acronym "UFTA," it is apparent that the court cited to and analyzed provisions of TUFTA. Id. at 607 ("UFTA lists 11, non-exhaustive `badges of fraud' to assist in determining whether the debtor made the transfer with the requisite fraudulent intent.") (citing TEX. BUS. & COM. CODE ANN. § 24.005(a)(1)).
Case: 10-10617 Document: 00511322906 Page: 26 Date Filed: 12/15/2010
No. 10-10617 W e must first decide whether this issue is before us as a part of the appeal o f the preliminary injunction. We have previously held that our "jurisdiction u n d e r 28 U.S.C. §1292(a)(1) is not limited to the specific order appealed from." In re Lease Oil Antitrust Litig., 200 F.3d 317, 31920 (5th Cir. 2000) (citation o m it t e d ). To avoid "wast[ing] judicial resources without any offsetting benefit in the form of a fully developed record," we have held that "[j]urisdiction extends t o certain related issues that have been sufficiently developed so as not to r e q u ir e further development at the trial court level." Id. at 320. We decide this is s u e to conserve judicial resources and expedite the disposition of this complex c a s e . Refraining to do so would mean money wasted in litigation costs that could b e used to compensate victims and more time spent before the Employee D e fe n d a n t s ' assets are freed. G iv e n that the district court has not yet decided this matter, we n e c e s s a r ily review the motion to compel arbitration de novo. Therefore, we
" p e r fo r m a two step inquiry to determine whether to compel a party to a r b it r a t e ." Dealer Computer Servs., Inc. v. Old Colony Motors, Inc., 588 F.3d 8 8 4 , 886 (5th Cir. 2009) (citation omitted). In the first step, we "determin[e] w h e t h e r the parties agreed to arbitrate the dispute." Fleetwood Enters., Inc. v. G a s k a m p , 280 F.3d 1069, 1073 (5th Cir. 2002). This step is further sub-divided in t o an inquiry into whether "(1) . . . there is a valid agreement to arbitrate the c la im s and (2) . . . the dispute in question fall[s] within the scope of that a r b it r a t io n agreement." Sherer v. Green Tree Servicing, 548 F.3d 279, 381 (5th C ir . 2008). If we find affirmatively as to the first step, then we must determine w h e t h e r "any federal statute or policy renders the claims nonarbitrable." Id. (q u o ta t io n s and citations omitted). We find that this issue can be decided in the fir s t step: The Receiver, acting on behalf of the creditors, is not party to the a r b it r a t io n obligations between SGC and the Employee Defendants. 1. T h e Receiver's Powers 26
Case: 10-10617 Document: 00511322906 Page: 27 Date Filed: 12/15/2010
No. 10-10617 T h e parties expend considerable energy debating what we believe may be d is t ille d to a simple question: in what capacity is the Receiver suing the E m p lo y e e Defendants? This question goes to the first sub-part of the first step o f the arbitrability assessment. From the Employee Defendants' perspective, the Receiver stands in SGC's s h o e s when it seeks to disgorge compensation that SGC paid to the Employee D e fe n d a n t s . The Employee Defendants contend that the Receiver is bound by a n y pertinent agreements or rules that govern the relationship between SGC a n d the Employee Defendants. Thus, because SGC and the Employee
D e fe n d a n t s are members of FINRA, and the Promissory Notes contained a r b it r a t io n clauses, the Receiver must arbitrate any disputes with them. The Receiver conceptualizes his rights and obligations differently. The R e c e iv e r contends that he is suing as a creditor or as a representative on behalf o f other creditors. Although the Receiver acknowledges that he is marshaling t h e assets of the Stanford estate, the Receiver claims that here, he is suing for t h e fraudulent transfer of assets, and he contends that there is substantial p r e c e d e n t standing for the proposition that receivers may assert the rights of c r e d it o r s to avoid fraudulent transfers. Because Stanford's creditors are not p a r ty to the arbitration obligations between SGC and the Employee Defendants, t h e Receiver concludes that he need not arbitrate his claims here. We believe t h a t the Receiver's characterization of this case and the pertinent case law is m o r e accurate. The district court appointed the Receiver, "grant[ing] him the power to c o n s e r v e , hold, manage, and preserve the value of the receivership estate," A d a m s , 588 F.3d at 833, and vesting him "with full power of an equity receiver u n d e r the common law as well as such powers as are enumerated herein in this o r d e r ." (Supp. R. #3 at 4270.) It is a general rule that "the receiver cannot r e c o v e r , except where recovery could have been had by the corporation." 27
Case: 10-10617 Document: 00511322906 Page: 28 Date Filed: 12/15/2010
No. 10-10617 D r e n n e n v. S. States Fire Ins. Co., 252 F. 776, 789 (5th Cir. 1918). In this sense, a receiver "stands in the shoes of the person for whom he has been appointed a n d can assert only those claims which that person could have asserted." Armstrong v. McAlpin, 699 F.2d 79, 89 (2d Cir. 1983). Were this general rule the o n ly rule, we believe the Employee Defendants would prevail and the Receiver w o u ld be bound by the arbitration agreements. As is often the case, however, t h e general rule comes with a few caveats. A receiver is also "an instrument of court; he is acting also for the s t o c k h o ld e r s of the corporation, and the creditors of the corporation." Drennen, 2 5 2 F. at 788. In this manner, receivers are legal hybrids, imbued with rights a n d obligations analogous to the various actors required to effectively manage a n estate in the absence of the "true" owner. See, e.g., Setser, 568 F.3d at 48788 (d is c u s s in g the ability of a receiver to enter and search estate property without a warrant and relinquish property to law enforcement officials). It is well settled t h a t , at different points during the pendency of the receivership, a receiver may r e p r e s e n t different interests.1 0 The Receiver argues here that he should be able t o represent the creditors' fraudulent transfer claims, and thereby avoid the m a t t e r of arbitrability. We must address whether the Receiver's claims are, in d e e d , fraudulent transfer claims and whether this posture avoids the a r b it r a t io n clauses between SGC and the Employee Defendants. 2. F r a u d u le n t Transfer
T h e Receiver asserts his claims against the Employee Defendants under a theory of fraudulent transfer, claiming that Stanford gave proceeds of the P o n z i scheme to the Employee Defendants. In Texas, fraudulent transfer claims
See, e.g., McGinness v. United States, 90 F.3d 143, 146 (6th Cir. 1996) (finding, under Ohio law, that "[w]hile it is true that the receiver can acquire no greater legal rights or powers with respect to the property than [the taxpayer] possesses . . . , the receiver's powers are not limited to the legal rights of the debtor-taxpayer, [because] [u]pon his appointment, the receiver succeeded to the rights of not only the debtor, but also the creditor").
Case: 10-10617 Document: 00511322906 Page: 29 Date Filed: 12/15/2010
No. 10-10617 a r e governed by TUFTA. TEX. BUS. & COM. CODE ANN. § 24.008. TUFTA's r e m e d ie s are expressly directed toward creditors: "In an action for relief against a transfer or obligation under this chapter, a creditor, subject to the limitations in Section 24.009 of this code, may obtain" relief. Id. § 24.008(a) (emphasis a d d e d ). The Receiver claims the right to represent "creditors" under that section a n d to assert his disgorgement claims against the Employee Defendants. To s u p p o r t his position, the Receiver contends that receivers have long held the p o w e r to assert creditor claims. We agree. I n analyzing Texas law, we have previously rejected a challenge to a r e c e iv e r 's standing to sue on behalf of creditors. Meyers v. Moody, 693 F.2d 1196, 1 2 0 6 (5th Cir. 1982). The Meyers Court quoted from Cotten v. Republic National B a n k of Dallas, which held that: C e r t a in ly a receiver for an insolvent insurance corporation . . . has a right to maintain a suit which is necessary to preserve the c o r p o r a t io n 's assets and to recover assets of which the corporation h a s been wrongfully deprived through fraud. In such a suit the r e c e iv e r may be said to sue as the representative of the corporation a n d its creditors, stockholders and policyholders . . . . 3 9 5 S.W.2d 930, 941 (Tex. Civ. App.--Dall. 1965, writ ref'd n.r.e.). This position e n jo y s wide support.1 1
See Wheeler v. Am. Nat'l Bank of Beaumont, 338 S.W.2d 486, 495 (Tex. App.--Beaumont 1960, writ granted) ("[T]here are instances where a corporation itself would not be permitted to sue for recovery of a true corporate asset because of its own fraudulent conduct in connection with the loss of the same. However, the receiver would not be so estopped. In such instances he may disaffirm or repudiate the fraudulent acts of the corporate officers and seek recovery of such assets for the benefit of the corporation and creditors. This is the rule in Texas."), aff'd in part and rev'd on other grounds by 347 S.W.2d 918 (Tex. 1961); Guardian Consumer Fin. Corp. v. Langdeau, 329 S.W.2d 926, 934 (Tex. Civ. App.--Austin 1959, no writ) ("[W]hen the receiver acts to protect innocent creditors of insolvent corporations . . . the receiver acts in a dual capacity, as a trustee for both the stockholders and the creditors, and as trustee for the creditors he can maintain and defend actions done in fraud of creditors even though the corporation would not be permitted to do so."); see also SEC v. Cook, No. CA 3:00-CV-272-R, 2001 WL 256172, at *2 (N.D. Tex. Mar. 8, 2001) (holding that receiver had standing to pursue fraudulent transfer claim); 64 TEX. JUR. 3D Receivers § 179 (2010) (noting power); 66 AM. JUR. 2d Receivers § 450 (1973) (same).
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?