SEC v. Byers ( 2010 )

09-0234-cv (l), 09-0284-cv(con)
S EC v. B yers
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
____________________
August Term, 2009
(Argued: November 16, 2009 Decided: June 15, 2010)
Docket No. 09-0234-cv (l), 09-0284-cv (CON)
____________________
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff-Appellee,
v.
STEVEN BYERS, WEXTRUST CAPITAL, LLC, WEXTRUST EQUITY PARTNERS, LLC,
WEXTRUST DEVELOPMENT GROUP, LLC, WEXTRUST SECURITIES, LLC, AXELA
HOSPITALITY, LLC, ELKA SHERESHEVSKY,
Defendants,
JOSEPH SHERESHEVSKY,
Defendant-Third-Party Plaintiff,
INTERNATIONAL AD-HOC COMMITTEE OF WEXTRUST CREDITORS,
INTERNATIONAL CONSORTIUM OF WEXTRUST CREDITORS,
Interested Parties-Appellants,
AMNON COHEN,
Third-Party Defendant,
TIMOTHY J. COLEMAN,
Receiver.
1
____________________
Before: POOLER and WESLEY, Circuit Judges, and KEENAN, District Judge.*
Appeal from a December 17, 2008 memorandum decision and order of the United States
District Court for the Southern District of New York (Chin, J.) holding that the district court’s
jurisdiction in rem and its equitable powers provided the district court with sufficient authority to
issue an injunction barring non-parties from filing involuntary bankruptcy petitions against any
of the defendants.
Affirmed.
____________________
SHALOM JACOB (Shmuel Vasser, on the brief), Dechert LLP, New
York, N.Y. for International Ad-Hoc Committee of Wextrust Creditors;
Martin S. Siegel (Aaron B. Lauchheimer, on the brief), Brown Rudnick
LLP, New York, N.Y., for International Consortium of Wextrust
Creditors, Interested Parties-Appellants.
DAVID LISITZA, Senior Counsel (David M. Becker, General Counsel,
Mark D. Cahn, Deputy General Counsel, Jacob H. Stillman, Solicitor,
John W. Avery, Senior Litigation Counsel, Michael J. Berman,
Bankruptcy Counsel, on the brief), Securities and Exchange Commission,
Washington, D.C., for the Securities and Exchange Commission, Appellee.
MARK S. RADKE (Timothy J. Coleman, on the brief) Dewey & LeBoeuf
LLP, Washington, D.C., for Timothy J. Coleman, Receiver for the
Wextrust Entities and Affiliates, Receiver.
POOLER, Circuit Judge:
Appellants International Ad-Hoc Committee of Wextrust Creditors and International
Consortium of Wextrust Creditors (together, the “Committees”) appeal from a December 17,
*
The Honorable John F. Keenan of the United States District Court for the Southern
District of New York, sitting by designation.
2
2008 decision and order of the United States District Court for the Southern District of New
York (Denny Chin, Judge), denying their motions to modify an anti-litigation injunction
contained in the order placing defendants’ assets into receivership. The Committees challenge
the district court’s authority to enter an anti-litigation injunction barring non-parties from filing
involuntary bankruptcy proceedings against defendants. We hold that while it should be sparsely
exercised, district courts possess the authority and discretion to enter anti-litigation orders,
including those that bar the filing of involuntary bankruptcy petitions absent the district court’s
permission. We further affirm the district court’s refusal to lift the anti-litigation injunction and
its order permitting the Receiver to continue to serve as manager should a bankruptcy proceeding
be commenced.
BACKGROUND
On August 11, 2008, the Securities and Exchange Commission (“SEC”) filed a complaint
against Steven Byers, Joseph Shereshevsky, Wextrust Capital, LLC, Wextrust Equity Partners,
LLC, Wextrust Securities, LLC and Axela Hospitality, LLC (together, the “Wextrust Entities”).
The SEC complaint alleged a massive Ponzi scheme that involved some 240 Wextrust affiliates
operating in the United States, Middle East and Africa, and that reportedly defrauded investors
of approximately $255 million.
On the same day that the SEC filed its complaint, it also sought and obtained emergency
relief, including a temporary restraining order freezing the assets of the defendants and
appointing Timothy Coleman as temporary receiver (the “Receiver Order”). Coleman was
tasked with ascertaining the financial condition of the Wextrust Entities, including the extent to
which the funds were co-mingled between the various affiliates, and with determining whether
3
the Wextrust Entities should file for bankruptcy. The Receiver Order also contained an anti-
litigation provision stating in relevant part that:
[n]o person or entity, including any creditor or claimant against
any of the Defendants, or any person acting on behalf of such
creditor or claimant, shall take any action to interfere with the
taking control, possession, or management of the assets, including,
but not limited to, the filing of any lawsuits, liens, or
encumbrances, or bankruptcy cases to impact the property and
assets subject to this order.
One month later, on September 11, 2008, the district court modified the Receiver Order
to provide:
[i]f in accordance with this order the Receiver determines that any
of the Wextrust Entities and entities they own or control should
undertake a bankruptcy filing, the Receiver, be and he hereby is,
authorized to commence cases under title 11 of the United States
Code for such entities in this district, and in such cases the
Receiver shall prosecute the bankruptcy petitions in accordance
with title 11 subject to the same parameters and objectives as a
chapter 11 trustee and shall remain in possession, custody, and
control of the title 11 estates subject to the rights of any party in
interest to challenge such possession, custody, and control under
11 U.S.C. § 543 or to request a determination by this Court as to
whether the Receiver should be deemed a debtor in possession or
trustee, at a hearing, on due notice to all parties in interest, before
the undersigned.
On October 24, 2008, on the consent of all parties, the district court issued a preliminary
injunction, which incorporated by reference the provisional remedies. On October 30, 2008, the
Committees moved to modify the district court’s previous orders to (1) remove the prohibition
against filing bankruptcy petitions, or alternatively to lift the anti-litigation injunction; and (2)
delete the paragraph providing that upon a bankruptcy filing, the receiver would prosecute the
bankruptcy cases as a Chapter 11 trustee. The district court heard oral argument on November
4
14, 2008. In its decision and order issued December 17, 2008, the district court found its in rem
jurisdiction and equitable discretion provided it with authority to enjoin nonparties from filing
involuntary bankruptcy petitions against the defendants, and declined to modify that portion of
the October 24, 2008 preliminary injunction. SEC v. Byers, 592 F. Supp. 2d 532, 535-37
(S.D.N.Y. 2008). The district court also declined to lift the anti-litigation injunction. Id.However, the district court did modify the order to (1) permit any party or non-party to seek
permission to file an involuntary bankruptcy petition on three-days notice on a showing that such
a petition is appropriate and would benefit the receivership estate; and (2) allow the bankruptcy
court to decide, in the first instance, any challenge to the receiver continuing to serve serving as
debtor in possession. Id. at 537, 539-40. The Committees timely appealed.
STANDARD OF REVIEW
We review a district court’s decision to grant an injunction for abuse of discretion, but
review de novo the district court’s interpretation of law. See Weight Watchers Int’l, Inc. v.
Luigino’s, Inc., 423 F.3d 137, 141 (2d Cir. 2005).
DISCUSSION
I. Anti-Bankruptcy Injunctions
The Committees’ primary argument on appeal is that Section 303 of the Bankruptcy
Code grants them an absolute right, as creditors, to commence an involuntary bankruptcy
proceeding against a debtor. The Committees argue that the district court lacked the authority to
subvert this right by issuing the anti-litigation injunction. We disagree, and find today that while
it is a power to be exercised cautiously, district courts may issue anti-litigation injunctions
barring bankruptcy filings as part of their broad equitable powers in the context of an SEC
5
receivership.
In doing so, we join both the Ninth and Sixth Circuits, which also allow similar anti-
litigation injunctions. In SEC v. Wencke, the Ninth Circuit held that the authority of a district
court to issue an order staying a non-party from bringing litigation derived from “the inherent
power of a court of equity to fashion effective relief.” 622 F.2d 1363, 1369 (9th Cir. 1980). The
Ninth Circuit stated that:
The power of the district court to issue a stay, effective against all
persons, of all proceedings against the receivership entities rests as
much on its control over the property placed in receivership as on
its jurisdiction over the parties to the securities fraud action. The
district court took control over the properties in question when it
imposed the receivership and appointed Gould as receiver to
manage those properties.
Id. The Ninth Circuit concluded that if a district court could not control the receivership assets,
the receiver would be unable to protect those assets. Id. The Sixth Circuit in Liberte Capital
Group, LLC v. Capwill, 462 F.3d 543 (6th Cir. 2006), came to a similar conclusion:
Once assets are placed in receivership, a district court’s equitable
purpose demands that the court be able to exercise control over
claims brought against those assets. The receivership court has a
valid interest in both the value of the claims themselves and the
costs of defending any suit as a drain on receivership assets. To
this extent, the receivership court may issue a blanket injunction,
staying litigation against the named receiver and the entities under
his control unless leave of that court is first obtained. This power
extends to the institution of any suit, and not just a proceeding for
execution of a judgment against the receivership in the
receivership court. Because the court’s power of injunction in a
receivership proceeding arises from its power over the assets in
question, non-parties to the underlying litigation may be bound by
a blanket stay, so long as the non-parties have notice of the
injunction.
Id. at 551-52 (internal citations and quotations omitted). Thus, the Sixth Circuit concluded,
6
“[t]he district court may require all such claims to be brought before the receivership court for
disposition pursuant to summary process consistent with the equity purpose of the court.” Id. at
552.
Even if anti-litigation injunctions are permitted, the Committees argue, such injunctions
cannot apply to bankruptcy petitions because the ability to file a bankruptcy petition is a right
guaranteed by the Bankruptcy Act. This Court previously held debtors do not have an absolute
right to file a bankruptcy petition. In United States v. Royal Business Funds Corp., 724 F.2d 12(2d Cir. 1983), we held that a stipulation between parties may bar a debtor from commencing a
bankruptcy proceeding. There, Royal Business Funds Corporation entered into a stipulation with
the Small Business Administration (“SBA”) wherein it agreed to be placed into receivership in
exchange for an infusion of cash. Id. at 14. The stipulation between Royal Business and the
SBA contained an anti-litigation clause providing that:
All legal proceedings of any nature, wherever located, involving
Royal Business, or any of its assets, are hereby stayed, and all
Courts having any jurisdiction thereof are hereby enjoined from
taking any further action until further Order of this Court . . . .
Id. at 14 n.3. Royal Business later attempted to file for protection from its creditors pursuant to
Chapter 11 of the Bankruptcy Code. Id. at15. The SBA sought an injunction barring such a
filing. Id. This Court held that the anti-litigation clause contained in the stipulation prevented
Royal Business from filing a Chapter 11 provision without the district court’s consent, noting
that:
We by no means intend to disturb the general rules that a debtor
may not agree to waive the right to file a bankruptcy petition, that
the pendency of an equitable receivership rarely precludes a
petition in bankruptcy, or that equity receiverships should not
perform the functions of the bankruptcy court. Nevertheless, a
7
debtor subject to a federal receivership has no absolute right to file
a bankruptcy petition . . . .
Id. at 15-16 (internal citations and quotation marks omitted).
The Committees rely on In re Yaryan Naval Stores Co., 214 F. 563 (6th Cir. 1914),
which held that creditors cannot be enjoined from filing an involuntary bankruptcy. There, the
Sixth Circuit held that when Congress enacted the Bankruptcy Act, it created “[r]ights and
privileges so positively bestowed [they] cannot be destroyed, denied or abridged by any power
save that which created and brought them into being.” Id. at 565. However, as Royal Business
makes clear, this Circuit rejected Yaryan. Royal Business, 724 F.2d at 15-16.
There is no question that district courts may appoint receivers as part of their broad
power to remedy violations of federal securities laws. See, e.g., SEC v. Am. Bd. of Trade, Inc.,
830 F.2d 431, 436 (2d Cir. 1987); SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1103-04
(2d Cir. 1972). Simply put, there is no unwaivable right to file an involuntary bankruptcy
petition, and, even if there were, the receivership accomplishes what a bankruptcy would. The
receivership protects the assets of the estate, just as a stay would in bankruptcy.
An anti-litigation injunction is simply one of the tools available to courts to help further
the goals of the receivership. While such injunctions are to be used sparingly, there are
situations in which they are entirely appropriate. In this litigation the receivership must manage
hundreds of Wextrust entities that sprawl across the Middle East, Africa and the United States,
many of which may have co-mingled assets. This is precisely the situation in which an anti-
litigation injunction may assist the district court and receiver who will want to maintain
maximum control over the assets. The current injunction prevents small groups of creditors from
placing some entities into bankruptcy, thereby removing assets from the receivership estate to
8
the potential detriment of all. We are persuaded that the powers afforded the receiver and the
district court allow it to adequately protect the assets of the estate.
The Committees next argue that the district court committed reversible error by issuing
the initial preliminary injunction without performing the necessary analysis under Federal Rules
of Civil Procedure 65. The Committees rely on Jordan v. Independent Energy Corp., 446 F.
Supp. 516 (N.D. Tex. 1978), for the proposition that a court can never issue an anti-bankruptcy
injunction that satisfies the requirements of Rule 65 because the parties cannot show irreparable
harm. Id. at 529. Plainly, Jordan is not binding on this Court. Moreover, the preliminary
injunction here issued on the consent of the parties, and in the consent stipulation each defendant
waived the right to “entry of findings of fact and conclusions of law pursuant to Rule 65 of the
Federal Rules of Civil Procedure.” By virtue of the consent stipulation, all parties involved
agreed that the requirements of Fed. R. Civ. P. 65 - including irreparable harm - were met.
Given that the parties agreed that the required elements were satisfied, there is no error.
Finally, the Committees argue the Receiver Order, as amended by the district court’s
December 17, 2008 decision, includes an improper de facto designation of the receiver as
debtor-in-possession or trustee in the event of a bankruptcy filing. The Committees argue this
essentially allows the Receiver to continue to act as the manager of the Wextrust Entities post-
bankruptcy. To do so, the Committees argue, is in direct conflict with the Bankruptcy Code,
which specifically prohibits courts from appointing a receiver in bankruptcy cases. See 11
U.S.C. § 105(b) (“Notwithstanding subsection (a) of this section, a court may not appoint a
receiver in a case under this title.”).
We agree with the district court that nothing in its order conflicts with the Bankruptcy
9
Code. The order merely acknowledges that the receiver automatically becomes debtor-in-
possession by operation of law. Moreover, the receiver’s status can be challenged pursuant to
11 U.S.C. § 543, or the parties could move to appoint a trustee pursuant to 11 U.S.C. § 1104.
See, e.g., In re Bayou Group LLC, 363 B.R. 674, 686 (S.D.N.Y. 2007) (providing that after a
bankruptcy petition is filed, the receiver’s role as receiver terminated, but that his role as
manager of the bankrupt entities would continue, and the “management of a bankrupt entity that
files in Chapter 11 is automatically authorized to act as the debtor-in-possession, since under the
Bankruptcy Code, the term ‘debtor-in-possession’ quite simply ‘means debtor’”). There is no
reason a district court cannot, pre-petition, appoint a manager for the entities, and there is
nothing in the Bankruptcy Code that prevents that manager from continuing after the bankruptcy
filing, subject to challenge by others.
CONCLUSION
We have examined the remainder of the Committees’ arguments and find them without
merit. We affirm the order of the district court in its entirety.
10