Opinion ID: 798235
Heading Depth: 2
Heading Rank: 1

Heading: SEC's Right To Enforce the Disgorgement Judgment

Text: 38 We first decide whether the SEC is a creditor for purposes of the Bankruptcy Code with respect to the disgorgement judgment, assuming the absence of a settlement agreement. Neither the Supreme Court nor any federal court of appeals has addressed the question whether the SEC can be a creditor under the Bankruptcy Code if the agency has obtained a monetary judgment entered in an SEC enforcement action. The Bankruptcy Appellate Panel of the Ninth Circuit and several bankruptcy courts have, however, concluded that the SEC can in such circumstances have standing as a creditor under the Bankruptcy Code. See, e.g., SEC v. Cross ( In re Cross ), 218 B.R. 76, 78-80 (B.A.P. 9th Cir.1998); SEC v. Hodge ( In re Hodge ), 216 B.R. 932, 935-36 (Bankr. S.D.Ohio 1998); SEC v. Kane ( In re Kane ), 212 B.R. 697, 700 (Bankr.D.Mass. 1997); SEC v. Maio ( In re Maio ), 176 B.R. 170, 171-72 (Bankr.S.D.Ind.1994). In concert with these tribunals, we hold that in the present case, the SEC is a creditor for purposes of the Bankruptcy Code, assuming the absence of a settlement agreement extinguishing its rights. 10 39 The Bankruptcy Code's definition of creditor includes an entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor. 11 11 U.S.C. § 101(10)(A). The Code provides that the term `entity' includes . . . governmental unit, id. § 101(15), and the Code defines claim as a 40 (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or 41 (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. 42 Id. § 101(5). The Supreme Court has stated that Congress intended by this language to adopt the broadest available definition of `claim' and has held that `right to payment' [means] nothing more nor less than an enforceable obligation. Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) (alteration in original) (one set of internal quotation marks omitted) (quoting Penn. Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, 559, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990)). 43 Applying these provisions to the present case, we see that whether the SEC is a creditor turns on whether it has a right to payment—i.e., an enforceable obligation—against the Shermans with respect to the disgorgement judgment. 11 U.S.C. § 101(10)(A), (5); Johnson, 501 U.S. at 83, 111 S.Ct. 2150. This determination depends, in turn, on the nature of the disgorgement judgment entered in favor of the SEC, the consideration to which we now turn. 44 Under the Securities Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (1934 Act), [w]henever it shall appear to the [SEC] that any person is engaged or is about to engage in acts or practices that violate the securities laws, the SEC may bring an action to enjoin such acts or practices. 15 U.S.C. § 78u(d)(1) (covering the 1934 Act); see also id. § 77t(b) (covering the 1933 Act and using materially identical language). Although injunctive relief is the only relief that the statutes expressly authorize, we have held that federal courts have inherent equitable authority to issue a variety of `ancillary relief' measures in actions brought by the SEC to enforce the federal securities laws. SEC v. Wencke, 622 F.2d 1363, 1369 (9th Cir.1980). In particular, a court may impose a receivership, see id., freeze assets, see SEC v. Hickey, 322 F.3d 1123, 1131 (9th Cir.2003), amended on other grounds on denial of reh'g, 335 F.3d 834 (9th Cir.2003), and order the disgorgement of the proceeds of fraud held by defendants, see SEC v. Wencke, 783 F.2d 829, 837 n. 9 (9th Cir.1986), and by third-party nominal defendants, SEC v. Colello, 139 F.3d 674, 676-77 (9th Cir.1998). 45 In the present case, the SEC brought the Whitworth action pursuant to its authority under 15 U.S.C. §§ 78u(d)(1) and 77t(b). The SEC obtained the disgorgement judgment against Sherman pursuant to Colello. See id. at 677. Colello authorizes courts to order the disgorgement of ill-gotten gains held by third parties who are acting as depositories and have no legitimate claim to the funds. 12 See id. Here, the $581,313.43 at issue in the disgorgement judgment was money Sherman retained in excess of his fee for the services rendered in the contingency suits. According to the contingency fee agreement, Sherman was to return this money to the Oxford companies. In the meantime, he was effectively acting as a depository for those funds, as he legitimately obtained them in the first place but no longer had a valid claim to retain them. Although the disgorgement motion was brought by both the Receiver and the SEC, the disgorgement judgment was rendered pursuant to the motion of the SEC alone, because the Receiver, but not the SEC, was subject to the automatic stay. 46 The pertinent question is whether the SEC's interest in the disgorgement judgment is sufficient to confer creditor status on it for purposes of the Bankruptcy Code even though the SEC was not to obtain any funds for its own coffers. In Nathanson v. NLRB, 344 U.S. 25, 73 S.Ct. 80, 97 L.Ed. 23 (1952), the Supreme Court considered the circumstances in which a governmental entity can, by virtue of its authority to require payments from one party to another, be a creditor under the Bankruptcy Act of 1898. 13 Nathanson held that the National Labor Relations Board (Board) was a creditor under the Bankruptcy Act with respect to the Board's order to a debtor to pay certain employees back pay, notwithstanding that it was the employees, and not the Board, who would eventually receive the money at issue. See id. at 26-27, 73 S.Ct. 80. The Court reasoned as follows: 47 The Board is the public agent chosen by Congress to enforce the National Labor Relations Act. A back pay order is a reparation order designed to vindicate the public policy of the statute by making the employees whole for losses suffered on account of an unfair labor practice. Congress has made the Board the only party entitled to enforce the Act. A back pay order is a command to pay an amount owed the Board as agent for the injured employees. The Board is therefore a claimant in the amount of the back pay. 48 Id. at 27, 73 S.Ct. 80 (citations omitted). 49 Under Nathanson, the SEC has standing as a creditor with respect to these judgments. Like the Board in Nathanson, the SEC in the present case is the public agent chosen by Congress to enforce the securities laws. Id. In addition, the disgorgement judgment is designed to vindicate the public policy of the statute. Id. As we explained in SEC v. Rind, 991 F.2d 1486 (9th Cir.1993), [b]y deterring violations of the securities laws, disgorgement actions further the[SEC's] public policy mission of protecting investors and safeguarding the integrity of the markets. Id. at 1491. In Colello, we explained that the SEC may name a non-party depository as a nominal defendant to effect full relief in the marshalling of assets that are the fruit of the underlying fraud. 139 F.3d at 677. 50 The present case may at first seem different from Nathanson in two respects. First, Nathanson noted that the Board was the  only party entitled to enforce the statute at issue, 344 U.S. at 27, 73 S.Ct. 80 (emphasis added), but the SEC is not the only enforcer of some of the sections of the statute at issue in the Whitworth action. In the Whitworth action, the SEC was enforcing two statutes and one rule promulgated thereunder: section 17(a) of the 1933 Act, section 10(b) of the 1934 Act, and Rule 10b-5 promulgated thereunder. While there is no express private cause of action under any of these provisions and no implied private cause of action under section 17(a) of the 1933 Act, see Puchall v. Houghton, Cluck, Coughlin & Riley ( In re Wash. Pub. Power Supply Sys. Sec. Litig. ), 823 F.2d 1349, 1357-58 (9th Cir.1987) (en banc), there is an implied private cause of action under section 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder, see Herman & MacLean v. Huddleston, 459 U.S. 375, 380, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983); Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 n. 9, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971). Second, Nathanson stated that [a] back pay order is a command to pay an amount owed the Board as agent for the injured employees, 344 U.S. at 27, 73 S.Ct. 80 (emphasis added), but the disgorgement order in the present case is not to be paid directly to the SEC as agent for the injured investors. As explained below, however, we conclude that these possible distinctions lack force, and that the SEC has creditor status under the Bankruptcy Code. 51 First, that the SEC is not the sole enforcer of all sections of the statute at issue in the Whitworth action does not deprive the SEC of creditor status. The two circuits that have addressed whether an entity can be a creditor if it is not the sole enforcer of a statute have come to conclusions in some tension with each other. 14 Compare Davis, 194 F.3d at 575 ([A]gencies need not be the only party entitled to enforce the Acts as their standing as creditors in the nondischargeability actions obtains regardless of whether the actual beneficiaries were authorized under federal law to prosecute the action in their own right.), with, Missouri ex rel. Ashcroft v. Cannon ( In re Cannon ), 741 F.2d 1139, 1142 (8th Cir.1984) (holding that the state of Missouri was not a creditor under the statute at issue and distinguishing Nathanson by noting, among other differences, that under the Missouri statutory scheme, the Attorney General is not the only party entitled to enforce the statute because it provides for a private right of action). 15 In accordance with the Fifth Circuit's opinion in Davis, we hold that the fact that the SEC is not the sole enforcer of the securities laws does not deprive it of creditor status. 52 To hold otherwise would be contrary to legislative intent. Maio, 176 B.R. at 172. Congress created an express cause of action for violations of section 17(a) of the 1933 Act, section 10(b) of the 1934 Act, and Rule 10b-5 promulgated thereunder, but it did so only for the SEC, not for private parties. See 15 U.S.C. § 77t(b) (expressly creating a cause of action for the SEC under the 1933 Act); id. § 78u(d)(1) (expressly creating a cause of action for the SEC under the 1934 Act and rules promulgated thereunder). And, although courts have implied a private cause of action under section 10(b) of the 1934 Act and Rule 10b-5, see Herman & MacLean, 459 U.S. at 380, 103 S.Ct. 683, they have not done so under section 17(a) of the 1933 Act, see Puchall, 823 F.2d at 1353-58. By creating an express cause of action only for the SEC under these sections and by implicitly precluding a private cause of action under section 17(a) of the 1933 Act, Congress evinced an intent not to leave enforcement of the securities laws to private parties. 53 To hold that, nonetheless, the SEC has lesser status in bankruptcy proceedings when private enforcement is permitted would both reverse Congress's assignment of basic enforcement authority to the SEC and unduly hinder enforcement of the Securities Act. Maio, 176 B.R. at 172. That private parties may have been able to bring actions seeking payment of some or all of the money at issue in the disgorgement judgment should not affect the SEC's ability to enforce the disgorgement order that it did obtain. Otherwise, the ultimate enforcement of securities laws would depend, in part, on potential action by private parties, as only private parties to securities actions could have creditor status in bankruptcy, participate in distribution of the estate, and file nondischarge actions. Yet, the decided congressional preference was for SEC enforcement of securities laws. Private parties may not always have the incentive or financial wherewithal to enforce those laws, and can only do so to the extent that they can recover for their own losses. See DCD Programs, Ltd. v. Leighton, 90 F.3d 1442, 1446 (9th Cir.1996). We therefore hold that the fact that the SEC is not the sole enforcer of the securities laws does not deprive it of creditor status. 54 Nor does it matter to the SEC's status as a creditor that the Receiver may have an enforceable interest as well in the disgorgement judgment. That judgment does not make clear to whom the money at issue is to be paid. Even if the Receiver could enforce the disgorgement judgment on the ground that he was the intended recipient of the funds at issue, the Receiver's right to enforce the judgment should not strip the SEC of its right to do so. We agree with the Bankruptcy Appellate Panel of the Ninth Circuit's reasoning in Cross : 55 As the chief enforcer of the securities laws, the [SEC] should not have to depend on the Receiver to enforce its judgments. In some cases, limited funds in the receivership estate might actually prevent the Receiver from doing so. This result, however, conflicts with the Commission's role as a statutory guardian charged with safeguarding the public interest. In addition, any costs incurred by the receivership estate in connection with enforcing the Disgorgement Judgment would reduce recovery to the defrauded investors in this case, whereas allowing the Commission to proceed preserves resources. 56 218 B.R. at 79. 57 Second, while Nathanson stated, vaguely, that a back pay order is a command to pay an amount owed the Board as agent for the injured employees, 344 U.S. at 27, 73 S.Ct. 80 (emphasis added), the fact that the disgorgement order in the present case is not paid to the SEC, even in the first instance, does not affect the SEC's creditor status. As an initial matter, we do not read the quoted statement in Nathanson as indicating that the funds were literally to be paid to the Board. Earlier in the opinion, the Court characterized the Board's order by noting that the Board ordered the bankrupt to pay certain employees back pay. Id. at 26, 73 S.Ct. 80 (emphasis added). Furthermore, the underlying Board order at issue in Nathanson stated that the respondent companies were to make [the discriminatees] whole for any loss of pay . . . by payment to each of them of a sum of money. In re Hill Transp. Co., 75 N.L.R.B. 1203, 1216 (1948) (emphasis added). 16 Thus, Nathanson could not have meant that the Board had creditor status because payment was actually to be deposited with the Board, as the order in question did not so require. It must have meant merely that the back pay order was to be considered, for purposes of the Bankruptcy Act, as an amount owed the Board. Moreover, even if the Court in Nathanson did assume that the payment was to be made to the Board in the first instance, we do not think creditor status could turn on that circumstance. Whether a governmental agency initially collects a back pay award for distribution to the directly affected individuals or, instead, simply obtains in its name an equitable order requiring payments directly to private individuals does not in any meaningful way affect the agency's interest in the money in question. In either instance, the authority to enforce the order to make payment of funds resides in the holder of the judgment—in Nathanson, the Board, here, the SEC. In either instance, the agency does not end up with the funds, but assures that affected individuals are compensated. And in either event, the agency has an enforceable obligation to require the debtor to pay money, Johnson, 501 U.S. at 83, 111 S.Ct. 2150, the sine qua non of creditor status. 58 Thus, the fact that the disgorgement judgment did not order that Sherman deposit the money at issue with the SEC does not affect the SEC's creditor status. Cf. Cross, 218 B.R. at 79 (The Receiver's role as depository [for disgorged funds] . . . did not deprive the [SEC] of creditor status [for purposes of a § 523 dischargeability action related to a disgorgement judgment].) 17 59 We conclude that the SEC is a creditor in the present case, as that term is used by the Bankruptcy Code, unless the Agreement extinguished its interest in the disgorgement judgment, a consideration to which we now turn. 60