Court Opinion

ID: 9805540
Source: CourtListenerOpinion
Date Created: 2023-08-31 18:00:44.636908+00
Date Added: 2024-06-11T10:45:49.188339
License: Public Domain

Case: 22-11132      Document: 00516879356         Page: 1    Date Filed: 08/31/2023

           United States Court of Appeals
                for the Fifth Circuit
                                                                        United States Court of Appeals
                                                                                 Fifth Circuit

                                 ____________                                  FILED
                                                                         August 31, 2023
                                   No. 22-11132                           Lyle W. Cayce
                                 ____________                                  Clerk

   Securities and Exchange Commission,

                                                             Plaintiff—Appellee,
                                       versus

   Timothy Barton,

                                            Defendant—Appellant.
                   ______________________________

                  Appeal from the United States District Court
                      for the Northern District of Texas
                           USDC No. 3:22-CV-2118
                  ______________________________

                    ON PETITION FOR REHEARING

   Before Clement, Graves, and Higginson, Circuit Judges.
   James E. Graves, Jr., Circuit Judge:
          The petition for panel rehearing is DENIED. We withdraw our
   previous opinion, reported at 72 F.4th 64, and substitute the following.
          The Securities and Exchange Commission (“SEC”) sued Defendant
   Timothy Barton as well as other individual Defendants and corporate entities
   for securities violations. Barton appeals the district court’s order appointing
   a receiver over all corporations and entities controlled by him. For the
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   following reasons, we VACATE the order appointing the receiver effective
   90 days after the issuance of this court’s mandate and REMAND for further
   proceedings. We also GRANT in part Barton’s motion for a partial stay
   pending appeal.
                                I. Background
                              a. Factual Background
          The SEC alleges the following facts in its complaint. Beginning
   around 2015, Defendant Haoqiang Fu, a Chinese national, began brokering
   homes for Defendant Stephen Wall, a Texas-based home builder. After
   deciding to expand into real estate development projects, they partnered with
   Barton, a Texas-based real estate developer. Their plan was to offer and sell
   investment loans to Chinese investors. To effectuate this plan, Barton
   formed single-purpose entities (the “Wall Entities”) to receive and control
   investor funds, purchase specific parcels of land, and later develop the land
   into residential housing. After Wall identified the land for projects, Fu
   marketed the investments to Chinese investors. For each investment
   contract, the Wall Entity would borrow a fixed amount from investors and
   use it in conjunction with other investors’ funds and money in hand to
   acquire a specific parcel of land at a specified price. In return, the investors
   were promised repayment of the principal after two years and interest
   payments after the first and second year. Between 2017 and 2019, the Wall
   Entities raised approximately $26.3 million dollars from over 100 investors.
   However, only two of the nine Wall entities purchased the property
   described in their respective investment contracts for a total of $2.6 million.
   Even these purchases were not made using the investor funds earmarked for
   those properties—instead, the purchases were made using commingled
   funds from other offerings. In addition, two other entities controlled by
   Barton (the Relief Defendants) purchased the properties that two Wall

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   entities were supposed to purchase. In all, approximately $23.7 million of the
   investors’ funds were commingled and misused to: 1) pay Barton’s personal
   expenses, 2) pay Fu commissions and fees, 3) make Ponzi payments to the
   earlier investors, 4) make political contributions, 5) acquire unrelated
   properties, 6) pay professional fees for unrelated properties, and 7) make
   payments to Wall.
                            b. Procedural Background
          On September 23, 2022, the SEC sued Barton, Wall, Fu, the Wall
   Entities, Carnegie Development (the managing member of the Wall entities),
   and the Relief Defendants for securities violations. The SEC sought a
   permanent injunction, disgorgement of ill-gotten gains, and civil penalties.
          Soon after filing its complaint, the SEC moved to appoint a receiver
   over the Wall Entities, Carnegie Development, the Relief Defendants, and
   any other entities that Barton directly or indirectly controls. It supported its
   motion with a declaration from an SEC Staff Accountant who was involved
   in the investigation. The declaration details the transfer, commingling, and
   misuse of the investors’ funds. In its motion, the SEC argued that the district
   court may appoint a receiver on a prima facie showing of fraud and
   mismanagement based on this court’s decision in SEC v. First Financial
   Group of Texas, 645 F.2d 429, 438 (5th Cir. 1981) (“First Financial”). Barton
   opposed the motion, arguing that the district court must instead find that a
   receivership is appropriate under the factors in Netsphere, Inc. v. Baron, 703
   F.3d 296, 305 (5th Cir. 2012).
          On October 18, 2022, the district court granted the SEC’s motion and
   appointed a receiver over assets belonging to the Defendant entities, the
   Relief Defendants, and any other entities directly or indirectly controlled by
   Barton. It made the following findings in its order:

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          the Court finds that, based on the record in these proceedings,
          the appointment of a receiver in this action is necessary and
          appropriate for the purposes of marshaling and preserving all
          assets of the Receivership Entities
                                         ...
          the Court finds that the SEC has brought this action to enforce
          the federal securities laws, in furtherance of the SEC’s police
          and regulatory powers, and the relief sought by the SEC and
          provided in this Order is in the public interest by preserving the
          illicit proceeds of fraudulent conduct, penalizing past unlawful
          conduct and deterring future wrongdoing, and is not in
          furtherance of a pecuniary purpose, and therefore, the Court
          concludes that the entry of this Order is excepted from the
          automatic stay pursuant to 11 U.S.C. §362(b)(4).
   The order gave the receiver numerous powers, including the power to
   determine the nature of the property interests, take possession of any
   property belonging to receivership entities, and take any actions necessary to
   preserve receivership property or prevent its dissipation, concealment, or
   inequitable distribution.
          Barton moved to strike the clause allowing the receiver to take
   possession of assets belonging to “any other entities that Defendant Timothy
   Barton directly or indirectly controls.” The district court denied his motion.
   On November 1, 2022, the receiver moved for the district court to
   supplement its receivership order to include over a hundred newly
   discovered Barton-controlled entities by name. The district court
   supplemented its order nunc pro tunc to expressly identify 126 newly
   discovered receivership entities. The receiver then moved for the court to set
   procedures for the disposition of personal property in the custody of
   receivership entities. The district court granted the motion and adopted the
   procedures proposed by the receiver. Barton timely appealed the order
   appointing the receiver and both follow-up orders. On November 28, 2022,

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   he moved in the district court for a stay pending appeal of the receivership
   order. While that motion was still pending, he also asked this court for a stay
   pending appeal. A motions panel of this court denied his request on January
   6, 2023, and the district court denied his request on January 17, 2023.
               II. Jurisdiction & Standard of Review
          We have jurisdiction over interlocutory appeals from “orders
   appointing receivers, or refusing orders to wind up receiverships or to take
   steps to accomplish the purposes thereof, such as directing sales or other
   disposals of property.” 28 U.S.C. § 1292(a)(2). We review a district court’s
   decision to appoint a receiver for abuse of discretion. Netsphere, 703 F.3d at
   305.
                                III. Discussion
                              a. The Applicable Test
          A central dispute between the parties is what test the district court
   should have applied before imposing a receivership. Barton argues the
   district court abused its discretion because it did not apply the standard or
   make the proper findings under the factors set forth in Netsphere (“Netsphere
   factors”). The SEC responds that Netsphere is inapplicable and the district
   court’s findings were sufficient under First Financial.
          In First Financial, the SEC sued a securities dealer and its officers for
   securities violations. 645 F.2d at 431. The district court granted the SEC’s
   motion for a preliminary injunction and enjoined each individual defendant
   “from offering, purchasing, or selling packages of the specified securities in
   violation of the federal securities laws, and from disposing of assets and
   records of First Financial.” Id. at 432. It also enjoined the defendants from
   disposing of more than $1,500 in personal assets per week. Id. Twelve days
   later, it granted the SEC’s motion for a temporary receiver over the

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   defendant entity, First Financial. Id. The order directed the receiver “to take
   exclusive control of the corporate assets in order to prevent injury to First
   Financial investors and to prevent further violations of the federal securities
   laws.” Id. at 437-38. Reviewing the injunction order, this court first explained
   that under the relevant securities laws, preliminary injunctive relief is
   appropriate upon a showing of “a reasonable likelihood that the defendant is
   engaged or about to engage in practices that violate the federal securities
   laws.” Id. at 434. It concluded that the district court did not abuse its
   discretion in entering a preliminary injunction. Id. at 436. Turning to the
   district court’s appointment of a receiver, it cited a Seventh Circuit case for
   the following proposition:
          The prima facie showing of fraud and mismanagement, absent
          insolvency, is enough to call into play the equitable powers of
          the court. It is hardly conceivable that the trial court should
          have permitted those who were enjoined from fraudulent
          misconduct to continue in control of (the corporate
          defendant’s) affairs for the benefit of those shown to have been
          defrauded. In such cases the appointment of a trustee-receiver
          becomes a necessary implementation of injunctive relief.
   Id. at 438 (quoting SEC v. Keller Corp., 323 F.2d 397, 403 (7th Cir. 1963)). To
   protect the public welfare and the interests of those who invested with First
   Financial, this court concluded that the “appointment of a receiver was a
   necessary relief measure within the discretion of the court, as an ancillary to
   preliminary injunctive relief during the continuing civil enforcement
   proceeding.” Id. at 439.
          The SEC relied upon First Financial in both its briefing before the
   district court and this court, but there is a crucial distinction between that
   case and the receivership order here. There, the SEC already obtained
   injunctive relief, so the receivership was “proper as an adjunct to injunctive
   relief for a securities fraud.” Netsphere, 703 F.3d at 306 (citing Keller, 323

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   F.2d at 402); see also Waffenschmidt v. MacKay, 763 F.2d 711, 716 (5th Cir.
   1985) (“Courts possess the inherent authority to enforce their own injunctive
   decrees.”) (citation omitted). Here, the SEC did not obtain a preliminary
   injunction before seeking a receivership, so First Financial is inapposite.
          That brings us back to Netsphere. In that case, a defendant was
   involved in disputes over the ownership of domain names. Netsphere, 703
   F.3d at 302. After settling those domain name disputes in related bankruptcy
   proceedings, the bankruptcy court recommended the appointment of a
   special master to mediate unpaid legal fees since the defendant kept hiring
   and firing lawyers without paying them. Id. at 303. The district court
   appointed a special master, but the defendant went on to fire another
   attorney. Id. at 304. The bankruptcy trustee then filed an emergency motion
   to appoint a receiver, which the district court granted. Id.
          Before discussing the propriety of the receivership, this court began
   by noting that a “[r]eceivership is ‘an extraordinary remedy that should be
   employed with the utmost caution’ and is justified only where there is a clear
   necessity to protect a party’s interest in property, legal and less drastic
   equitable remedies are inadequate, and the benefits of receivership outweigh
   the burdens on the affected parties.” Id. at 305 (citing 12 C. Wright & A.
   Miller, Federal Practice and Procedure § 2983 (3d ed. 2012)).
   It catalogued the various contexts where receiverships are used, including
   “cases of non-compliance with SEC regulations, [where] a receiver may be
   appointed to prevent the corporation from dissipating corporate assets and
   to pay defrauded investors.” Id. at 306. Turning to the facts of the case at
   hand, it found that none of the purported justifications supported the
   imposition of a receivership. Id. at 307-11.
          Since the SEC had not already obtained an injunction against Barton
   when the SEC moved for a receivership, First Financial does not control and

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   instead, the Netsphere factors must be met for a receivership to be justified: 1)
   a clear necessity to protect the defrauded investors’ interest in property, 2)
   legal and less drastic equitable remedies are inadequate, and 3) the benefits
   of receivership outweigh the burdens on the affected parties. See id. at 305.
                       b. The Propriety of the Receivership
           Having concluded that Netsphere applies, we consider whether the
   district court abused its discretion. In its order, the district court justified
   appointing a receiver by stating it “is necessary and appropriate for the
   purposes of marshaling and preserving all assets of the Receivership
   Entities” and would be “in the public interest by preserving illicit proceeds
   of fraudulent conduct, [and] penalizing past unlawful conduct and deterring
   future wrongdoing.” Even assuming that these findings could satisfy the first
   Netsphere factor, the order does not address whether legal and less drastic
   equitable remedies are inadequate or whether the benefits of the receivership
   outweigh the burdens on the affected parties. Netsphere, 703 F.3d at 305.
          For the latter two factors, the SEC asks us to consider the district
   court’s reasoning in its order denying Barton’s motion for a stay that was
   filed after this appeal was lodged. In its brief, it provided no authority for the
   proposition that we can look to a subsequent order denying a separate motion
   when reviewing an earlier order. However, at oral argument, SEC’s counsel
   claimed we can do so under the exception for actions in aid of an appeal in
   Silverthorne v. Laird, 460 F.2d 1175, 1178 (5th Cir. 1972). “This circuit
   follows the general rule that the filing of a valid notice of appeal from a final
   order of the district court divests that court of jurisdiction to act on the
   matters involved in the appeal, except to aid the appeal, correct clerical
   errors, or enforce its judgment so long as the judgment has not been stayed
   or superseded.” Avoyelles Sportsmen’s League, Inc. v. Marsh, 715 F.2d 897,
   928 (5th Cir. 1983). In Silverthorne, the district court denied habeas relief,

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   and the petitioner appealed. 460 F.2d at 1178. During the pendency of the
   appeal, the district court issued a written opinion “in which he thoroughly
   discussed the rationale in support of his earlier order denying habeas corpus
   relief.” Id. This court found that the written opinion’s amplified views aided
   the appeal, so it fell under that exception. Id. at 1178-79. Unlike Silverthorne,
   the order the SEC asks us to consider is not a fuller explanation of the earlier
   order granting a receivership—it is a denial of a separate motion. Further, as
   Barton points out, the district court’s order denying the stay discussed events
   and actions that took place after the receivership was already in place.
   “‘Meaningful appellate review of the exercise of discretion requires
   consideration of the basis on which the trial court acted.’” In re Volkswagen
   of Am., Inc., 545 F.3d 304, 310 n.4 (5th Cir. 2008) (en banc) (quoting
   Gurmankin v. Costanzo, 626 F.2d 1115, 1119–20 (3d Cir. 1980)). The
   reasoning in the subsequent order goes beyond the basis on which the district
   court originally acted, and Silverthorne does not give us license to consider it.
          Constraining our review to the district court’s limited reasoning in its
   original order, we cannot say whether it abused its discretion. See Gonzalez v.
   Assocs. Health & Welfare Plan, 55 F. App’x 717 (5th Cir. 2002) (“Although
   we cannot say the court abused its discretion by denying prejudgment
   interest, the district court’s failure to explain its reasoning frustrates
   meaningful appellate review.”). Accordingly, we will vacate the appointment
   of the receiver and remand so that the district court may consider whether to
   appoint a new receivership under the Netsphere factors. When faced with a
   similar situation, the Third Circuit opted to delay vacatur of the receivership
   instead of vacating it immediately. See KeyBank Nat’l Ass’n v. Fleetway
   Leasing Co., 781 F. App’x 119, 123 (3d Cir. 2019). We find the Third Circuit’s
   approach prudent here given the breadth of the receivership and the
   possibility that a new receivership would cover some of the same entities.

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   Thus, we will vacate the current receivership order effective 90 days from
   the issuance of this court’s mandate.
                           c. The Receivership’s Jurisdiction
          Barton next argues that the district court erred by placing multiple
   entities he controls in the receivership without any showing that they
   received or benefitted from ill-gotten investor funds. The SEC responds that
   the district court acted within its discretion by including all Barton-controlled
   entities in the receivership. Because it alleges that Barton has engaged in
   extensive commingling of funds, it claims that Barton’s control is an effective
   proxy for placing an entity in the receivership even if it had not yet traced the
   funds to that entity.
          In Netsphere, this court rejected the district court’s determination that
   a receivership was necessary for the defendant to pay his debts to former
   attorneys because “the jurisdictional principle that a court’s equitable
   powers do not extend to property unrelated to the underlying litigation
   applies with equal force to receiverships. A court lacks jurisdiction to impose
   a receivership over property that is not the subject of an underlying claim or
   controversy.” 703 F.3d at 310. In support, it cited Cochrane v. W.F. Potts Son
   & Co. where this court held that a receivership was proper only over the series
   of bonds subject to litigation, not the other series of bonds that were not
   subject to the complaint and over which the bondholder did not claim an
   interest. Id. (citing Cochrane v. W.F. Potts Son & Co., 47 F.2d 1026, 1027-29
   (5th Cir. 1931)). Accordingly, Netsphere held that the district court could not
   impose a receivership over the plaintiff’s personal property or assets owned
   by certain entities because those assets were not sought in or the subject of
   the underlying litigation. Id.
          The SEC relies on FDIC v. Faulkner to support the district court’s
   inclusion of all Barton-controlled entities in the receivership regardless of

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   whether they received or benefitted from ill-gotten funds. 991 F.2d 262, 267-
   68 (5th Cir. 1993). In Faulkner, the defendants allegedly engaged in
   fraudulent real estate speculation schemes. Id. at 264. The FDIC sought a
   preliminary injunction against the defendants to limit their ability to transfer
   assets, and the district court granted it. Id. On appeal, the defendants argued
   that the injunction was too broad since it froze assets that were not obtained
   through alleged fraudulent activities. Id. at 267. Since the defendants refused
   to aid the district court in determining which of the assets were traceable to
   the alleged fraud, this court held that the district court “did not err in
   freezing all of the [defendant’s] assets, pending a determination through
   limited discovery of which assets are traceable to [defendant’s] alleged
   fraudulent activities.” Id. at 268.
          Faulkner does not support the district court’s actions here. Under
   Faulkner, the SEC could have sought an injunction freezing asset transfers
   while it traced the funds and determined which entities should be placed in
   the receivership. But it did not. Since a receivership’s jurisdiction extends
   only over property subject to the underlying claims, the district court abused
   its discretion by including all Barton-controlled entities in the receivership
   without first finding that they had received or benefited from the ill-gotten
   funds. Netsphere, 703 F.3d at 310. Should the district court decide that a new
   receivership is justified on remand, it can only extend over entities that
   received or benefitted from assets traceable to Barton’s alleged fraudulent
   activities that are the subject of this litigation.
                               d. Stay Pending Appeal
          After oral argument, Barton moved for a partial stay of certain
   receivership activities pending appeal. He asked this court to: 1) order the
   receiver to retain possession of all corporations and corporate property
   pending a final decision on the merits, 2) suspend the receiver’s power to sell

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   or dispose of assets belonging to receivership entities until 60 days after a
   final opinion on the merits from this court, and 3) stay the receiver’s ability
   to undertake receivership activities that go beyond caring for the seized assets
   pending a final decision on the merits. Barton also sought emergency relief
   from the transfer of one of the receivership entity’s possessory interests in a
   particular property. We denied his emergency request as moot but carried
   the remainder of his motion with the case.
          At the outset, the SEC challenges whether Barton’s motion complies
   with Federal Rule of Appellate Procedure 8. Under Rule 8, stay motions
   ordinarily must first be presented to the district court “unless it clearly
   appears that further arguments in support of the stay would be pointless in
   the district court.” Ruiz v. Estelle, 650 F.2d 555, 567 (5th Cir. 1981). The
   district court denied Barton’s initial motion for a stay pending appeal. When
   Barton sought to preliminarily enjoin the receiver’s auction of contents of a
   particular receivership property, the district court denied his request
   explaining that “[Barton’s motion] requests the same relief, and on the same
   grounds, that the Court has already denied multiple times, and the Fifth
   Circuit has already denied once: a stay of the Receiver’s activities pending
   appeal or final judgment.” Given the clear indication that the district court
   would have denied this motion, we find that Barton’s motion satisfies Rule 8
   because moving first in the district court would have been pointless. Id.
          Barton’s first and third requests are now moot since we have reached
   a final decision on the merits. However, his second request is not moot
   because it seeks relief that extends 60 days beyond the issuance of a final
   decision. For his second request, we consider four factors in deciding
   whether to grant a stay pending appeal: “(1) whether the stay applicant has
   made a strong showing that he is likely to succeed on the merits; (2) whether
   the applicant will be irreparably injured absent a stay; (3) whether issuance of
   the stay will substantially injure the other parties interested in the

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   proceeding; and (4) where the public interest lies.” Nken v. Holder, 556 U.S.
   418, 434 (2009) (internal quotation marks and citation omitted). In light of
   our vacatur of the receivership order, we conclude that Barton has made the
   proper showing under the factors and is entitled to a partial stay.
                               IV. Conclusion
          For the foregoing reasons, we VACATE the district court’s order
   appointing a receiver effective 90 days from the issuance of this court’s
   mandate and REMAND for further proceedings consistent with this
   opinion. We also GRANT in part Barton’s motion for a partial stay pending
   appeal: the receiver’s power to sell or dispose of property belonging to
   receivership entities, including the power to complete sales or disposals of
   property already approved by the district court, is immediately suspended,
   and this suspension will remain in effect until the receivership order is
   vacated 90 days from the issuance of this court’s mandate. This suspension
   does not apply to activities in furtherance of sales or dispositions of property
   that have already occurred or been approved by the district court. “Activities
   in furtherance” do not include the completion of the sale of any property.
   Should the district court enter a new receivership order before the present
   order is vacated, this partial stay has no bearing on any actions a receiver may
   take under the new order.

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