Opinion ID: 451621
Heading Depth: 1
Heading Rank: 2

Heading: refusal to lift the stay

Text: 14 Investors claim the March 24, 1981, stay order is an injunction, and that the district court therefore should have applied the traditional equitable criteria for continuing an injunction in ruling on their motion to lift the stay. The district court, however, committed no legal error in this regard. This circuit has not applied the traditional preliminary injunction test in ruling on motions to except applicants from a blanket receivership stay. We have instead set forth three factors to consider in deciding whether to lift a receivership stay:(1) whether refusing to lift the stay genuinely preserves the status quo or whether the moving party will suffer substantial injury if not permitted to proceed; (2) the time in the course of the receivership at which the motion for relief from the stay is made; and (3) the merit of the moving party's underlying claim. 15 SEC v. Wencke, 742 F.2d 1230, 1231 (9th Cir.1984) (Wencke II), (citing SEC v. Wencke, 622 F.2d 1363, 1373-74 (9th Cir.1980) (Wencke I)). 16 This test differs in emphasis from the traditional equitable criteria employed by courts to decide whether to grant, deny, or continue a preliminary injunction. The traditional preliminary injunction test would require the Receiver to show a probability of success on the merits and the possibility of irreparable harm to the receivership if the stay is not continued. Los Angeles Memorial Coliseum Commission v. National Football League, 634 F.2d 1197, 1200-01 (9th Cir.1980). The Wencke test simply requires the district court to balance the interests of the Receiver and the moving party. Wencke I, 622 F.2d at 1373. As the Wencke I court noted, the interests of the Receiver are very broad and include not only protection of the receivership res, but also protection of defrauded investors and considerations of judicial economy. Id. at 1372-73. This is a corollary of the district court's power to enter a blanket stay. Id. at 1369. This power is broader than the court's authority to grant or deny injunctive relief under Fed.R.Civ.P. 65. Id. at 1371. 17 We use the abuse of discretion standard to decide whether the district court correctly applied the Wencke criteria to this case. See Wencke II, 742 F.2d at 1231, (citing Wencke I, 622 F.2d at 1374) (appellate court applies abuse of discretion standard in reviewing district court's application of Wencke factors and its ultimate decision). 18 Our first concern is preservation of the status quo. Investors argue that, far from preserving the status quo, continuation of the stay has impeded their ability to enforce the obligations embodied in the Borrower Notes. They point out that the Receiver has stipulated to the release of many properties from the stay order, after concluding that neither the receivership nor investors have any equity in the properties. 19 Although Investors present a sympathetic case, we agree with the Receiver that the stay, by preventing senior lienholders from foreclosing on their superior security interests in borrowers' property, has preserved the status quo and in fact benefitted Investors, most of whom hold third, fourth and fifth trust deeds. One of the main reasons cited by Judge Byrne in refusing to lift the stay was that he was convinced lifting the stay would wipe out Investors in ways they could not envision. At this interlocutory stage, we decline to second-guess Judge Byrne as to the probable effect of lifting the stay, given his long-standing involvement with the proceedings. 20 We are also persuaded that if the stay were lifted and Investors sought to enforce their interests, the Receiver, as an adverse claimant to the Borrower Notes, would intervene or have to be joined in any future court action. See Fed.R.Civ.P. 19, 24. This would result in a multiplicity of actions in different forums, and would increase litigation costs for all parties while diminishing the size of the receivership estate. 21 Our second concern is the point in the course of the receivership at which the motion for relief from stay was made. In Wencke II, the court stated: 22 Where the motion for relief from the stay is made soon after the receiver has assumed control over the estate, the receiver's need to organize and understand the entities under his control may weigh more heavily than the merits of the party's claim. As the receivership progresses, however, it may become less plausible for the receiver to contend that he needs more time to explore the affairs of the entities. The merits of the moving party's claim may then loom larger in the balance. 23 622 F.2d at 1373-74 (footnote omitted). While the Wencke I court upheld the district court's refusal to lift the stay four years later, the Wencke II court felt the stay had continued long enough and should be lifted. The court observed that the receiver had discovered no new material facts during the last six years, and that the receiver was prepared to distribute the estate's assets upon court authorization, thereby indicating he had disentangled the estate and needed no additional time. Wencke II, 742 F.2d at 1232. 24 The situation here is somewhere between the facts in Wencke I and Wencke II. The stay has been in place almost four years, yet, unlike Wencke II, material facts continue to come to light through discovery and testimony in the test cases. While the Receiver has had sufficient time to analyze Burton's business and become familiar with the estate, there are additional factual and legal issues which still must be resolved in order to determine ownership of the Borrower Notes. Because of the issues yet to be resolved, Judge Byrne ordered the parties to prepare ten additional cases for trial. Far from being tantamount to a permanent stay, Wencke II, 742 F.2d at 1232, the present stay is a flexible device which Judge Byrne has explicitly stated may be challenged at any time. 25 The merits of the underlying claim must also be considered. We agree with Investors that the outcome in the test cases, while not determinative of Investors' claims, makes it likely they will prevail in future litigation. Indeed, the Receiver and the SEC do not seriously dispute that the final Wencke factor tips in Investors' favor. However, because of the havoc which would ensue if the stay were lifted at this time, we do not believe Judge Byrne abused his substantial discretion in refusing to lift the stay. See Wencke I, 622 F.2d at 1374. Judge Byrne has ordered ten additional cases to be tried, and has encouraged the parties to enter into extensive settlement negotiations. Apparently, the district court has recently authorized the Receiver to accept all Investor objections, liquidate the assets in the estate, and pay 90% of the proceeds realized from each liquidated Borrower Note to be paid to objecting Investors. Under these circumstances, it would be premature for this court to order Judge Byrne to lift the stay.