Farr v. Private Advisory Group, LLC

Filing 30

ORDER granting in part and denying in part dfts' 19 Motion to Dismiss; until further order, the court stays this matter and removes it from the court's active caseload; status report due within 90 days by Judge Richard A Jones.(RS)

HONORABLE RICHARD A. JONES

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UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE

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JAMES S. FARR, on behalf of himself and all
others similarly situated,

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Case No. 16-1565-RAJ

Plaintiff,

ORDER

v.
PRIVATE ADVISORY GROUP, LLC, et
al.,
Defendants.

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I.

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This matter comes before the Court on Defendants Private Advisory Group, LLC
(“PAG”), Douglas Reed Bean, S. Christopher Bean, and Jonathan David Bishop’s
Motion to Dismiss. Dkt. # 19. For the reasons that follow, the Court GRANTS in part
and DENIES in part Defendants’ motion.
II. BACKGROUND

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INTRODUCTION

This is a securities class action. Plaintiff James S. Farr alleges that Defendants
participated in and perpetrated a Ponzi scheme involving the sale of securities issued by
Aequitas Holdings, LLC or its affiliated entities (“Aequitas”). Dkt. # 4 (“Am. Compl.”).
Aequitas, which is not named as a defendant in the instant matter, was the central
player in the alleged Ponzi scheme. Id. When the scheme collapsed, the Securities

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Exchange Commission (“SEC”) filed an enforcement action against Aequitas in the U.S.
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ORDER – 1

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District Court for the District of Oregon. SEC v. Aequitas Mgmt., LLC, No. 16-438-PK,
Dkt. # 1.
On April 14, 2016, the District of Oregon entered an order establishing a
receivership over Aequitas’ assets. Id., Dkt. # 156. The receivership order imposes a
broad “Stay of Litigation” (“Litigation Stay”). Id. at 10. Among other things, the
Litigation Stay applies to:
All civil legal proceedings of any nature, including, but not limited to,
bankruptcy proceedings, arbitration proceedings, foreclosure actions,
default proceedings, or other actions of any nature involving . . . (b) any
Receivership Property, wherever located; (c) any of the Receivership Entity
. . . (such proceedings are hereinafter referred to as “Ancillary
Proceedings”).

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Id. “Receivership Entity” is defined by reference to a list of entities that includes

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Aequitas. Id. at 2, 18. “Receivership Property” is defined to include “monies, funds,

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securities, credits, effects, goods, chattels, lands, premises, leases, claims, rights and other

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assets, together with all rents, profits, dividends, interest or other income attributable

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thereto, of whatever kind, which the Receivership Entity own, possess, have a beneficial

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interest in, or control directly or indirectly.” Id. at 5. The Litigation Stay further

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provides that “[a]ll Ancillary Proceedings are stayed in their entirety, and all Courts

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having any jurisdiction thereof are enjoined from taking or permitting any action until

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further Order of this Court.” Id. at 10.

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On October 6, 2016, several months following the entry of the Litigation Stay,

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Farr filed this lawsuit. As alleged in his complaint, Aequitas owns Defendant PAG

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through a subsidiary. Am. Compl. ¶ 16 (“Aequitas, though a subsidiary, owns an interest

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in PAG.”); ¶ 4 (“PAG is a registered investment advisor in which Aequitas owns a

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controlling interest.”); ¶ 26 (“Aequitas had a conflict of interest because it owns a

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controlling interest in PAG.”); id. (“Aequitas owned a controlling interest in PAG.”).

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Based on the Litigation Stay, Defendants filed the instant motion requesting that

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the Court dismiss Farr’s action under Federal Rule of Civil Procedure 41(b) because he

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ORDER – 2

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filed it in violation of the Litigation Stay. Dkt. # 19. In the alternative, Farr requests that
the Court stay the action until the District of Oregon lifts the Litigation Stay. Id. Farr
opposes the motion. Dkt. # 27.
III. DISCUSSION

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A.

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Scope of Litigation Stay

Defendants contend that PAG is “Receivership Property” subject to the District of

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Oregon’s Litigation Stay. Farr contends that it is not because none of the defendants
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named in this action are identified by name in the District of Oregon’s order.
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The Court finds that the plain language of the Litigation Stay encompasses Farr’s
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lawsuit. First, the Litigation Stay applies to all civil proceedings “involving . . . any
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Receivership Property, wherever located” (Aequitas Mgmt., LLC, No. 16-438-PK, Dkt. #
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156 at 10). Second, the term “Receivership Property” is broadly defined to include
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property interests such as a controlling stake in a company (see id. at 5). Third, Farr
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himself alleges that PAG is owned by Aequitas (Am. Compl. ¶¶ 4, 16, 26). Because
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PAG qualifies as “Receivership Property,” this lawsuit falls squarely within the Litigation
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Stay.
Having found that this action is among the civil proceedings sought to be enjoined
by the District of Oregon, the remaining issue is whether either of the remedies proposed
by Defendants is appropriate: (1) involuntary dismissal under Rule 41(b); or (2) a stay of
this action pending the duration of the Litigation Stay.
B.

Involuntary Dismissal Under Rule 41(b)

Defendants contend that Farr’s action should be involuntarily dismissed under
Rule 41(b) because Farr filed this action in violation of the Litigation Stay and, by doing
so, violated a court order.
Upon motion by a defendant, Federal Rule of Civil Procedure 41(b) permits the
Court to dismiss a case where a plaintiff has failed to “comply with . . . a court order.”
Fed. R. Civ. P. 41(b). “Dismissal, however, is so harsh a penalty it should be imposed as
a sanction only in extreme circumstances.” Dahl v. City of Huntington Beach, 84 F.3d
ORDER – 3

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363, 366 (9th Cir. 1996) (quoting Thompson v. Hous. Auth. of City of Los Angeles, 782
F.2d 829, 831 (9th Cir. 1986)).
Putting aside the question of whether filing this action constitutes a failure to
comply with a court order with the meaning of Rule 41, 1 Farr’s decision to file this
lawsuit is not an “extreme circumstance” sufficient to invoke the harsh penalty of
involuntary dismissal. Dahl, 84 F.3d at 366. Farr filed this lawsuit to obtain relief from
alleged securities fraud perpetrated by Defendants. Even if he did so in violation of the
Litigation Stay, dismissal would not be a proportionate sanction.
C.

Request for Stay

As an alternative to dismissal, Defendants contend that Farr’s action should be
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stayed until the expiration of the Litigation Stay.
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A district court has discretionary power to stay proceedings in its own court.
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Landis v. N.A. Co., 299 U.S. 248, 254-255 (1936); see also Lockyer v. Mirant Corp., 398
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F.3d 1098, 1109 (9th Cir. 2005). “A trial court may, with propriety, find it is efficient for
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its own docket and the fairest course for the parties to enter a stay of an action before it,
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pending resolution of independent proceedings which bear upon the case.” Leyva v.
Certified Grocers of Cal., Ltd., 593 F.2d 857, 863 (9th Cir. 1979). “A stay should not be
granted unless it appears likely the other proceedings will be concluded within a
reasonable time in relation to the urgency of the claims presented to the court.” Id. at
864. When considering a motion to stay, the district court weighs three factors: (1) the
possible damage which may result from the granting of a stay, (2) the hardship or
inequity which a party may suffer in being required to go forward, and (3) the orderly
course of justice measured in terms of the simplifying or complicating of issues, proof,
and questions of law which could be expected to result from a stay. CMAX, Inc. v. Hall,
300 F.2d 265, 268 (9th Cir. 1962).

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The Litigation Stay was issued by the District of Oregon, not the Western District of
Washington. Defendants do not cite—and the Court is unaware of—authority standing for the
proposition that failure to comply with the order of a separate court can trigger the penalty of
dismissal under Rule 41.

ORDER – 4

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Applying these factors, the Court finds that a stay is appropriate. The orderly
course of justice weighs heavily in favor of staying Farr’s lawsuit. The District of
Oregon appointed a receiver and established a receivership for the purpose of managing
and preserving property implicated in the SEC action. To further that purpose, the court
imposed a broad Litigation Stay. Given that PAG is among the property sought to be
preserved by the receivership, permitting this lawsuit to proceed would compromise the
effectiveness of the court’s order. As for projected end date for the SEC action, the Court
is well aware that the task of resolving a complex securities matter is time consuming. In
this context, however, the Court has no reason to presume that this amount of time will
become unreasonable in relation to the urgency of Farr’s claims.
A stay, of course, may impact Farr financially by preventing him from recovering
the damages to which he claims entitlement from Defendants. With PAG’s property
subject to the control of the receiver, there is a risk that its assets will diminish to the
point that Farr will not obtain the relief he seeks. This risk, however, cannot justify
permitting Farr to subvert the District of Oregon’s Litigation Stay, which was imposed
for the purpose of preserving all assets implicated in the SEC’s enforcement action.
Moreover, if after the issuance of this Order Farr continues to contend that the PAG
assets are not (or should not be) frozen in the receivership, he may request to intervene in
the District of Oregon matter and request clarification and/or modification of the
Litigation Stay. Because the orderly course of justice outweighs any risk of financial
harm to Farr and there is no reason to speculate that an unreasonable amount of time will
pass before the SEC action concludes, the Court grants Defendants’ alternative request
for a stay.
IV. CONCLUSION

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For the reasons stated above, the Court GRANTS in part and DENIES in part
Defendants’ Motion to Dismiss. Dkt. # 19. Until further order, the Court hereby STAYS
this matter and removes it from the Court’s active caseload. Within ninety (90) days
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from the date of this Order, the parties shall file a status report that updates the court on
any relevant developments in SEC v. Aequitas Mgmt., LLC, No. 16-438-PK. Should
there be any significant developments prior to the expiration of ninety (90) days, the
parties are permitted to file a motion to lift the stay on that basis.

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DATED this 24th day of February, 2017.

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A

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The Honorable Richard A. Jones
United States District Judge

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ORDER – 6