Opinion ID: 4036586
Heading Depth: 1
Heading Rank: 4

Heading: CoreLogicʹs Liability as Relief Defendant

Text: CoreLogic appeals from the district courtʹs finding that it must disgorge money it received from LeadClick in the August 30 Transfer. As described below, the district court erred in holding CoreLogic liable for ‐ 44 ‐ LeadCliickʹs fines as a relief defendantt, because CoreLogicc had a leg gitimate claaim to repay yment of itts prior ad dvances to LeadClick k.
A Appllicable Law w ʺA reelief defend dant is a p person who o ʹholds the subject m matter of th he litigatio on in a subordinate o or possesso ory capacitty as to wh hich there is no disputee.ʹʺ Commoodity Futurees Trading Commʹn vv. Walsh, 6118 F.3d 2188, 225 (2d C Cir. 2010) (q quoting SE EC v. Colelloo, 139 F.3d d 674, 676 ((9th Cir. 19998)). The typical relief defenda ant ʺis a ba ank or trusstee, which h has only a custodiaal claimʺ to o the subjeect matter o of the litig gation. Colello, 139 F.3d at 677. A relief d defendant h has no ownership interesst in the prroperty, bu ut ʺmay bee joined to aid the reccovery of relief.ʺ SEC v. Cav vanagh (Caavanagh II),, 445 F.3d 105, 109 n..7 (2d Cir. 2006). ʺFedeeral courtss may ordeer equitablle relief against a [rellief defenda ant] not acccused of w wrongdoin has received ng . . . wherre that perrson: (1) h ill‐gotteen funds; a and (2) doees not havee a legitim mate claim tto those fu unds.ʺ S.E.C. v. Cavan nagh (Cavaanagh I), 15 55 F.3d 129 9, 136 (2d C Cir. 1998). ʺDistrict ccourts may y only req quire disgo orgement of the asseets of a reliief defendaant upon aa finding th hat she lack ks a legitim mate claim.ʺ Walsh, 6 618 F.3d att 226 (interrnal quotattion markss omitted d). ‐ 45 ‐ While we have not ʺdeveloped explicit guidelines for what qualifies as a legitimate claim sufficient to immunize . . . property from disgorgement,ʺ we have recognized that ʺrelief defendants who have provided some form of valuable consideration in good faith . . . are beyond the reach of the district courtʹs disgorgement remedy.ʺ Id. at 226 (internal quotation marks omitted). An outstanding loan from a relief defendant constitutes valuable consideration, giving rise to a ʺlegitimate claimʺ to repayment of the outstanding amount of principal and accrued interest. See Janvey v. Adams, 588 F.3d 831, 835 (5th Cir. 2009) (debtor‐creditor relationship ʺconstitutes a sufficient legitimate ownership interest to preclude treating [defendants] as relief defendantsʺ). A gratuitous transfer, however, without the payment of consideration, does not give rise to a legitimate claim. See Cavanagh I, 155 F.3d at 137 (concluding that neither relief defendant had a legitimate claim to property received as a gift, because to hold otherwise, ʺwould allow almost any defendant to circumvent the SECʹs power to recapture fraud proceeds, by the simple procedure of giving [property] to friends and relatives, without even their knowledgeʺ). ‐ 46 ‐
B Appllication The ffacts here a are undisp puted. Insttead, the p parties disp pute wheth her on thesee facts, Co oreLogic ha ad a legitim mate claim m to the Au ugust 30 Trransfer of $4.1 milllion. The FTC arguees that thiss transfer sshould be characteriized as a gratuito ous distrib bution beca ause it lack ked a form mal loan agrreement an nd, accordin ngly, was not in exch hange for valuable cconsideratiion. CoreL Logic disagrees, contend ding that tthis transaction was the repaym n outstanding ment of an intercom mpany loa an, implem mented as p vices agreement. Th part of its sshared serv he district court conccluded tha at CoreLog gic had no legitimatee claim to tthe funds becausee there wass no forma al loan agreement beetween thee parties an nd ordered d disgorg We disagreee with the district courtʹs concllusion thatt a formal loan gement. W agreem ment was reequired in this contex xt and hold d that CorreLogic waas not a pro oper relief deefendant b had a legittimate inteerest in thee transferreed funds. We because it h conclud de that und der these u undisputed d facts, CoreLogicʹs aadvances tto LeadClick constitu uted ʺvalua able consid derationʺ eentitling it to repaym ment from LeadClick k. Both parties ag gree that affter CoreLo ogic impleemented th he shared servicess system, C CoreLogic paid Lead dClickʹs acccounts pay yable. For accountin ng purposees, CoreLo ogic and LeeadClick d documenteed the advances as in ntercompaany ‐ 47 ‐ balances. The parties intended these advances to be repaid automatically from LeadClickʹs revenue once the accounts receivable function was transitioned to CoreLogic, six months after the transition of accounts payable. Once Core Logic transitioned LeadClickʹs accounts receivable system to the shared services program, LeadClick did in fact begin to repay these amounts through an automatic diversion of cash receipts deposited in the shared services account to CoreLogic.7 LeadClick repaid a total of $8.2 million of its advance balance to CoreLogic through the automated transfers. CoreLogic held a right to repayment under these circumstances. It did not merely hold the transferred funds in a custodial capacity. See Cavanagh II, 445 F.3d at 109 n.7; Colello, 139 F.3d at 677. The district court reasoned that the advances constituted gratuitous transfers that could not give rise to a legitimate claim to repayment because there was no formal debtor‐creditor relationship in place between LeadClick and CoreLogic. But, as Amici Curiae point out, the lack of a formal agreement is not surprising in the shared services context. The FTCʹs own expert acknowledged 7 The funds were first swept automatically into an account held by CLUSI, LeadClickʹs sister subsidiary, which subsequently transferred the funds into CoreLogicʹs central treasury, pursuant to the shared services agreement ‐ 48 ‐ that it is not customary to use promissory notes or charge interest on intercompany advances made pursuant to a shared services program. Requiring such documentation ʺis incompatible with the very purpose of shared services: streamlining operations and increasing efficiency by reducing excess paperwork.ʺ Amici Br. at 6. An interest charge would also be artificial, because the companies were consolidated under general accounting principles for public companies. Under these circumstances, the lack of a formal loan agreement does not create suspicion that the transactions were a sham. Even without the formalities of an armʹs‐length loan agreement, it is undisputed that CoreLogic advanced funds to LeadClick, both parties intended these advances to be repaid, and the August 30 Transfer reduced the outstanding intercompany balance. Under these facts, CoreLogicʹs claim to the August 30 Transfer was therefore legitimate.8 Accordingly, CoreLogic was not a proper relief defendant, and the district court erred in ordering it to disgorge the funds it received from LeadClick. 8 Similarly, CoreLogicʹs claim is not undermined by the fact that LeadClickʹs ability to repay depended upon its future business performance. Repayment of an uncollateralized loan based on a borrowerʹs income generally depends upon the borrowerʹs ability to generate revenue. ‐ 49 ‐