SEC v. First Choice Management Servi , 767 F.3d 709 ( 2014 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
Nos. 14-1270, 14-2284
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
v.
FIRST CHOICE MANAGEMENT SERVICES, INC., et al.,
Defendants,
CRM ENERGY PARTNERS and JOHN W. HANNAH,
Appellants,
v.
JOSEPH D. BRADLEY, Receiver,
Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Indiana, South Bend Division.
No. 3:00-cv-00446-RLM-CAN — Robert L. Miller, Jr., Judge.
____________________
SUBMITTED JULY 17, 2014 — DECIDED SEPTEMBER 11, 2014
____________________
Before POSNER, RIPPLE, and WILLIAMS, Circuit Judges.
2 Nos. 14-1270, 14-2284
POSNER, Circuit Judge. This pair of appeals is a sequel to
two previous appeals arising from the same lawsuit, see 678
F.3d 538 (7th Cir. 2012); 709 F.3d 685 (7th Cir. 2013), though
there is little overlap, and only Bradley, the receiver, was a
party to the previous appeals.
The case from which the appeals arise began in 2000 as a
suit by the SEC charging First Choice Management Services
and others with fraud in violation of federal securities law.
The district court appointed a receiver to take charge of the
defendants’ assets and distribute them among the victims of
the $31 million fraud. The receiver went hunting for the as-
sets and found that some of them had been used to acquire
oil and gas leases in Texas and Oklahoma. Those leases were
therefore receivership assets. He has endeavored to sell them
and use the proceeds of their sale to compensate the victims
of the fraud. His efforts, which have continued for 14 years,
have been slowed down by efforts of third parties to estab-
lish ownership interests in the leases.
The present appellants, CRM Energy Partners and John
W. Hannah (who is CRM’s owner and alter ego, and there-
fore needn’t be discussed separately; we’ll use “CRM” to
denote both), are such third parties. Eventually CRM sought
to intervene in the receivership proceeding in order to con-
test the receiver’s proposed sale of oil leases in Osage, Okla-
homa. CRM asserts an ownership interest in those leases and
says it’s been operating them since 2002. The receiver, how-
ever, considers the oil leases to be receivership assets be-
cause, as we noted earlier, they had been bought with pro-
ceeds of fraud. The district court denied CRM’s motion to
intervene and went on to approve the sale of the Osage
leases to Wilson Operating Company, an oil company in
Nos. 14-1270, 14-2284 3
Tulsa. CRM appeals both from the denial of its motion to in-
tervene (No. 14-1270 in this court) and from the district
court’s approval of the sale (No. 14-2284).
Back in 2002 CRM had made an agreement to sell the
Osage leases to Branson Energy, Inc., for $300,000. It con-
tends that Branson didn’t pay for the leases, as the agree-
ment required it to do (or at least did not make timely pay-
ment in full), and so CRM has had to continue to operate the
leases and maintain the wells, at a total cost (it says) of more
than $2.5 million. The following year, however, the receiver
identified First Choice Management Services, the principal
defendant in the SEC’s suit, as the true owner of the Osage
oil leases, and the district court issued an order freezing
Branson’s assets. Whether, as a result of its agreement with
CRM, Branson had any interest in the Osage leases is un-
clear, but also, as will become clear, irrelevant.
Protracted negotiations between the receiver and claim-
ants to the leases ensued, and included CRM, though it was
not a litigant. With his funds running low as a result of ex-
penses incurred in administering so long-lived a receiver-
ship, the receiver decided to sell the Osage leases, and in
May 2013 he moved the district court for permission to sell
them to Wilson Operating Company. CRM presumably
knew of the motion, as it was public, and that the receiver
believed that CRM had no compensable interest in the
leases, as there was nothing in the motion to suggest that
Wilson’s purchase would be subject to a claim by CRM. In
June 2013 the district court approved the receiver’s plan and
in January 2014 approved the sale price that the receiver had
negotiated with Wilson. The court confirmed the sale itself
in May of this year.
4 Nos. 14-1270, 14-2284
CRM moved to intervene in the receivership proceeding
last December, to press its claim to a compensable interest in
the leases. The district judge denied the motion as untimely,
a recognized ground for denying a motion to intervene. E.g.,
Reich v. ABC/York-Estes Corp., 64 F.3d 316, 321 (7th Cir. 1995).
CRM had known as early as January 2004, almost ten years
before it filed its motion, that the receiver was claiming to
own (as agent of the defrauded investors) the very leases
that CRM claimed to own. In view of this clash of claims,
had CRM moved to intervene then the motion would have
been granted. Instead it waited for a decade minus two
months—waited indeed until the protracted and expensive
receivership was finally moving toward an end and the re-
ceiver’s assets were dwindling.
CRM argues that the receiver had promised to protect its
interests in the Osage leases, yet acknowledges that the re-
ceiver told the district court that he intended instead to
prosecute the investors’ claims to the leases. CRM responds
weakly that it thought that once prosecution commenced, it
would have an opportunity to defend its claims. It argues
rather absurdly that the receiver shouldn’t complain if he
doesn’t get $300,000 for the leases (the amount Wilson has
agreed to pay), because the money will be eaten up by the
receiver’s attorneys’ fees and thus not flow through to the
defrauded investors. But attorneys’ fees are a debt that the
receiver will have to pay out of other funds, to the detriment
of the fraud victims, if he doesn’t get the $300,000.
By June 2013, when the district court granted his motion,
the receiver was trying to sell the leases without regard to
CRM’s claims, which he refused to honor. CRM had no pos-
sible excuse for waiting for six months after that before mov-
Nos. 14-1270, 14-2284 5
ing to intervene—the very period during which the receiver
was negotiating the sale to Wilson and seeking approval of
the sale and sale price from the district court. While this was
happening CRM stood by silent, waiting till the last minute
to try to throw a monkey wrench into the deal.
The delay in seeking leave to intervene was inexcusable,
and allowing CRM to intervene after the sale of the leases
had been negotiated would have imposed substantial costs
on the receiver and on Wilson, not to mention further bur-
dening the district court, weary of this long-drawn-out liti-
gation. An unexcused delay of six months in moving to in-
tervene, which prejudices other parties to the litigation, justi-
fies—indeed in the absence of extraordinary circumstances
could well be thought to compel—denial of the motion. See
United States v. Ritchie Special Credit Investments, Ltd., 620
F.3d 824, 831–34 (8th Cir. 2010); United States v. Covington
County School District, 499 F.3d 464, 466 (5th Cir. 2007); Unit-
ed States v. British American Tobacco Australia Services, Ltd.,
437 F.3d 1235, 1239 (D.C. Cir. 2006). It’s true that in Georgia v.
U.S. Army Corps of Engineers, 302 F.3d 1242, 1259–60 (11th
Cir. 2002), the court had allowed intervention pursuant to a
motion filed six months after the would-be intervenor had
learned of the litigation, but the delay had not harmed any
other parties to the suit. CRM’s dawdling, in contrast, im-
posed costs on the receiver and on Wilson and made added
work for the district court.
CRM’s other appeal challenges the sale order as violating
28 U.S.C. § 2001(b), which imposes restrictions on the sale of
property by receivers appointed by federal district courts.
See, e.g., United States v. Antiques Ltd. Partnership, 2014 WL
3702580, at *4 (7th Cir. July 28, 2014). But having been turned
6 Nos. 14-1270, 14-2284
down as an intervenor, CRM did not become a party to the
litigation in the district court and therefore has no right to
appeal from rulings of the court other than, of course, the
ruling denying intervention. The appeal must therefore be
dismissed.
The order appealed from in No. 14-1270 is affirmed. Ap-
peal No. 14-2284 is dismissed.