Opinion ID: 798235
Heading Depth: 2
Heading Rank: 2

Heading: Whether the Agreement Extinguished the SEC's Rights

Text: 61 We conclude that the Agreement, entered into after the bankruptcy court denied the SEC's dismissal motion, did not extinguish the SEC's right to enforce the disgorgement judgment. First, the Receiver did not purport to settle the SEC's claim. Second, the Receiver and the SEC are independent entities, and the Receiver did not have the authority to compromise the SEC's claim. Third, the rights at issue in the Agreement are different from the rights at issue in the disgorgement judgment. 62 As to the first point, the Receiver did not purport to settle the SEC's claim with respect to the disgorgement judgment. Although the Agreement was reached while the SEC's appeal of its motion to dismiss was pending, the SEC was not a party to the Agreement. Only Sherman and the Receiver were parties. In addition, the Agreement stated that [e]ach of the Parties to this Agreement acknowledges that no other party, nor any agent or attorney of any other party, has made any promise, representation, inducement or warranty whatsoever, express or implied, which is not expressly contained in this Agreement. The SEC thus never itself relinquished its rights to enforce the disgorgement judgment or to pursue its motion to dismiss the bankruptcy petition, and the Agreement so recognized. 63 Moreover, the only pending action addressed in the Agreement was the Receiver's nondischarge action. The stipulation filed pursuant to the Agreement noted that Sherman's payments would be in full and final settlement of[the Receiver's] claims against Defendant as set forth in the [Receiver's nondischarge action]. The SEC's disgorgement judgment was not at issue in the nondischarge action. Instead, the non-discharge action involved only a separate, unadjudicated claim, albeit for the same money at issue in the disgorgement judgment: The stipulation stated that the Receiver has asserted a claim against Defendant for $581,313.43 plus interest for attorneys' fees Defendant received as purported advances against an anticipated contingent fee (the `Disgorgement Claim'), and noted that the Receiver's nondischarge action was based on the Contempt Judgment and the Disgorgement Claim.  (emphasis added). The SEC's pending appeal of the bankruptcy court's denial of its motion to dismiss is not mentioned in the stipulation or in the Agreement, nor is the disgorgement judgment in favor of the SEC. 18 Thus, the Receiver did not purport to compromise the disgorgement judgment entered in favor of the SEC. 64 As to the second point, the Receiver had no authority to compromise claims of the SEC. True, the Receiver was appointed pursuant to the SEC's motion, but the Receiver's authority is circumscribed by the order appointing him. That order makes clear that he is to marshal the assets of the receivership estates and can bring actions to do so, but it does not give him authority to compromise judgments in favor of the SEC or otherwise act on behalf of the agency. Thus, the Receiver did not have the authority to settle the SEC's claims against Sherman. 65 Finally, as to the third point, the rights at issue in the Agreement were not the same as the rights at issue in the SEC's disgorgement judgment, and the latter rights were not fully extinguished when the former rights were. The SEC and the Receiver played different roles with respect to the money at issue in the disgorgement judgment and had interests in the money predicated on separate legal theories. The Receiver's claim for this money stemmed from his role as the collector of the assets of the corporations and was premised on two independent theories for collecting the money: (1) the Receiver was entitled to the money under the terms of the contract Sherman and the Oxford companies entered into for Sherman's representation in the contingency suits; and (2) the Receiver was entitled to the money under the California Rules of Professional Conduct, which state that attorneys shall [p]romptly pay or deliver, as requested by the client, any funds . . . in the possession of the [attorney] which the client is entitled to receive. CAL. RULES OF PROF'L CONDUCT R. 4-100(B)(4), available at http://www.calbar.ca.gov/calbar/pdfs/ethics/ 2006—Rules-Prof-Conduct.pdf. 66 In contrast, the SEC's claim to this money stemmed from its role as the public enforcer of the federal securities laws and was obtained under a Colello theory. Under Colello, so long as Sherman retained some of the funds fraudulently obtained by his clients as a deposit on possible future fees, the SEC retained an interest in requiring that he disgorge those funds. Such a disgorgement would further the SEC's goals of deterring securities laws violations and compensating defrauded investors. See Colello, 139 F.3d at 677. That the Receiver recovered some of the money at issue in the disgorgement judgment to settle his contract and ethics claims does not mean that the SEC's securities law claim was extinguished. 19 67 For all of these reasons, the Agreement did not entirely extinguish the SEC's right to enforce the disgorgement judgment. The SEC is therefore a creditor under the Bankruptcy Code with respect to the disgorgement judgment. 68 As a creditor, the SEC has Article III standing to pursue the dismissal of the Shermans' bankruptcy petition because, given that status, it satisfies all three prongs of the Article III standing test. First, the SEC suffered the requisite injury in fact because the pendency of the bankruptcy action did affect the SEC's ability to enforce its judgments: If the bankruptcy petition was not dismissed, Sherman's debt resulting from the SEC's disgorgement judgment, like all of his other debts, might be discharged. Second, the SEC's injury is fairly traceable to the Shermans' bankruptcy petition, City of Sausalito, 386 F.3d at 1197 (internal quotation marks omitted), because the filing of the bankruptcy petition made it likely that the disgorgement judgment would not be fully paid. Third, it is likely, as opposed to merely speculative that the SEC's injury will be redressed by a favorable decision, as such a result would mean that the disgorgement judgment will not be discharged in bankruptcy. Id. (internal quotation marks omitted).