Opinion ID: 527542
Heading Depth: 2
Heading Rank: 5

Heading: The District Court's Rejection of the Initial Plans

Text: 36 In July 1988, in an opinion reported at 689 F.Supp. 317, the district court rejected most of the objections to the plans, but also rejected the plans themselves. The court rejected Levine's argument that his criminal fine should be paid out of the disgorged assets, finding that neither the Consent nor the Judgment provided for such payment. Further, deeming it almost an affront to suggest that those defrauded by Levine's insider trading activities should have their recovery reduced by the amount of his fine, the court held that the fine should not be paid out of Levine's illegal gains to the detriment of investors because the fine was personal and punitive in nature. Id. at 321. 37 Addressing the contentions of Levine and Wilkis that the SEC had promised to give their tax debts priority, the court found those arguments untenable by reason of mutual mistake and, in any event, barred by the parol evidence rule. 38 Since this Court is sitting in equity to review the distribution of the assets currently in receivership, I reject the defendants' claims that the SEC, in entering into side letter agreements with defendants, agreed to accord tax claims priority status to the obvious reduction of the fund available for defrauded investors. A mere cursory review of the parties' representations as to their respective interpretations of the side letters reveals that they did not by any means attach the same or even a similar meaning to these letters. The SEC contends that it intended merely to delineate the group of eligible claims from the receivership funds, defining tax claims as being included under this rubric. Attorneys for Levine and Wilkis, on the other hand, argue strenuously that oral representations by the SEC, when viewed together with the side letters, provided assurance that tax claims were guaranteed to be satisfied on a priority basis. The letters themselves are arguably consistent with either view. 39 Given the parties' complete disagreement on the intent of the side letter agreements, I must and do treat these letters as void and of no effect here based on mutual mistake of the parties and do not consider them in construing the terms of Wilkis's or Levine's Consent[s] ... or Final Judgments. Restatement (Second) of Contracts Sec. 152 at 385 (1981) states that where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable (emphasis added). There is no question that treatment of tax claims in the distribution of receivership assets was a hard-fought and much debated issue, and that the underlying assumptions regarding resolution of 40 this issue have had (and continue to have) a material effect on post-agreement proceedings. It is also evident that affording priority to tax claims would leave little or nothing for satisfaction of investors' claims while at the same time conferring substantial benefits on defendants. Under the equity powers of this Court, therefore, the side letters are voided. 41 689 F.Supp. at 320-21. The court also noted that  'the scope of a consent decree must be discerned within its four corners, and not by reference to what might satisfy the purposes of one of the parties to it,'  id. at 321 (quoting United States v. Armour & Co., 402 U.S. 673, 682, 91 S.Ct. 1752, 1757, 29 L.Ed.2d 256 (1971)) (district court's emphasis deleted), and concluded that Levine and Wilkis were barred by the parol evidence rule from relying on the side letters or any contemporaneous oral representations as modifications of the terms of the consents or the judgments. 42 The court rejected the arguments of the IRS and the State that their tax liens had priority over other claims, ruling that those liens had not attached in the first instance because Levine and Wilkis 43 obtained the assets they disgorged through illegal trading activities. These assets are therefore analogous to funds which have been embezzled or misappropriated, as they were obtained by wrongful means and cannot properly be considered property of the defendants. Title to the funds was acquired ... under such circumstances that [one] is under a duty to surrender it[.] United States v. Fontana, 528 F.Supp. 137, 146 (S.D.N.Y.1981), quoting 5 A. Scott, Law of Trusts Sec. 462.4 (3d ed. 1967). Consequently, Levine and Wilkis held but bare legal title to these funds from the time they were obtained, with equitable title arising in investors who were injured as a result of their illegal activities. See SEC v. Paige, 1985 U.S.Tax Cas. (CCH) p 9588 (D.D.C. July 30, 1985) (under general rule of common law the victim, and not the embezzler, retains title to funds), aff'd, 810 F.2d 307 (D.C.Cir.1987) .... Thus, neither defendant ever had such property interests in the funds to which tax liens could have attached. Instead, holding bare legal title, they serve as trustees for the benefit of defrauded investors. 44 689 F.Supp. at 321-22. 45 The court further rejected the SEC's election to pay even a portion of the tax claims against Levine and Wilkis. It concluded that equity dictated imposition of a constructive trust holding all of the disgorged assets for defrauded investors in order to achieve two goals: 46 the first is restitution to injured investors and the second is preventing Levine and Wilkis from enjoying personal gain in the form of payment of their tax liabilities .... Consequently, it is legally and equitably appropriate to declare and recognize that a constructive trust arose at the time of Levine's and Wilkis's wrongdoing ... and that the disgorged profits are therefore held for the satisfaction of investors' claims. 47 Id. at 322 (footnote omitted). 48 The district court found no fault, however, with the SEC plans' exclusion of the Arden Way claimants from the class of persons entitled to make claims against the disgorged assets. The court noted that those claimants asserted general-type damages ... much less directly linked to Levine's activities than the harm he caused contemporaneous investors, and that [t]herefore, the Arden Way claimants do not enjoy a similar priority to Levine's disgorged assets. Id. at 323 n. 7. 49 In sum, the court disapproved the SEC's proposed plans because they included provision for payment of the tax claims, and it directed the Commission to submit revised plans. The court noted that [s]hould there be funds remaining after the investors' claims have been satisfied, in that event the Court will deal with the issue of relative priorities to such remainder as between Arden Way, the IRS or any other claimants. Id.