Court Opinion

ID: 2967544
Source: CourtListenerOpinion
Date Created: 2015-09-22 02:48:19.07276+00
Date Added: 2024-06-11T13:14:05.064310
License: Public Domain

PUBLISHED

UNITED STATES COURT OF APPEALS
               FOR THE FOURTH CIRCUIT

COMMODITY FUTURES TRADING             
COMMISSION,
                Plaintiff-Appellee,
                v.
KIMBERLYNN CREEK RANCH,
INCORPORATED, a California
Corporation; KINGSFIELD RACING,
INCORPORATED, a Nevada
Corporation; SAMUEL KINGSFIELD;
PAMELA KINGSFIELD,
             Defendants-Appellants,
               and
IBS, INCORPORATED, a North
Carolina Corporation; IMC TRADING,
                                         No. 00-1989

INCORPORATED, (North Carolina), a
North Carolina Corporation; IMC
TRADING, INCORPORATED, (Arizona),
an Arizona Corporation; IMC
TRADING, INCORPORATED, (Nevada), a
Nevada Corporation; JOE MILLER
COMPANY, d/b/a IMC Trading,
Incorporated, a California
Corporation; MAZUMA TRADING
GROUP, INCORPORATED, d/b/a Pinpoint
Marketing, Limited, a Florida
Corporation; ALAN STEIN; JOSEPH
FINATERI; MICHAEL TEMPLE;
                                      
2      COMMODITY FUTURES TRADING v. KIMBERLYNN CREEK RANCH

INTERNATIONAL BULLION SERVICES,        
INCORPORATED, (Bahamas), a
Bahamas Corporation; F. X. & B.,
L.L.C., a Nevada Corporation;          
A.J.S. ENTERPRISES, INCORPORATED, a
Nevada Corporation,
                         Defendants.
                                       
             Appeal from the United States District Court
       for the Western District of North Carolina, at Charlotte.
                Richard L. Voorhees, District Judge.
                          (CA-00-103-3-V)

                      Argued: October 29, 2001

                      Decided: January 4, 2002

    Before WILKINS, WILLIAMS, and MICHAEL, Circuit Judges.

Affirmed by published opinion. Judge Wilkins wrote the opinion, in
which Judge Williams and Judge Michael joined.

                             COUNSEL

ARGUED: Robert Lawrence Bonner, HOMER, BONNER & DEL-
GADO, P.A., Miami, Florida, for Appellants. Gloria Peele Clement,
Office of General Counsel, COMMODITY FUTURES TRADING
COMMISSION, Washington, D.C., for Appellee. ON BRIEF:
Bobbi-lee Meloro, HOMER, BONNER & DELGADO, P.A., Miami,
Florida, for Appellants. Kirk T. Manhardt, Deputy General Counsel,
Glynn L. Mays, Senior Assistant General Counsel, Office of General
Counsel, COMMODITY FUTURES TRADING COMMISSION,
Washington, D.C., for Appellee.
      COMMODITY FUTURES TRADING v. KIMBERLYNN CREEK RANCH              3
                              OPINION

WILKINS, Circuit Judge:

   Kimberlynn Creek Ranch, Inc., Kingsfield Racing, Inc., Samuel
Kingsfield, and Pamela Kingsfield (collectively, "the Relief Defen-
dants") appeal a preliminary injunction entered by the district court
freezing their assets and directing them to transfer those assets and
related records to a receiver appointed by the court. The Relief Defen-
dants’ challenges relate solely to the authority of the district court to
enter the preliminary injunction against them. Because we conclude
that the district court possessed the authority to enter the preliminary
injunction, we affirm.

                                   I.

   The Commodity Futures Trading Commission ("the Commission")
brought this action against several corporate and individual defen-
dants (collectively, "the Claim Defendants") alleging that they fraudu-
lently telemarketed illegal futures contracts for precious metals and
other commodities. The Commission also sued the Relief Defendants
and several others, alleging that they held proceeds of the fraud, in
which they had no ownership interest, on behalf of the Claim Defen-
dants. The facts regarding the underlying fraud are set forth in the
memorandum and order of the district court, see Commodity Futures
Trading Comm’n v. IBS, Inc., 113 F. Supp. 2d 830, 833-41 (W.D.N.C.
2000), but are not relevant to this appeal. It suffices to say that the
district court determined that beginning in 1991, the individual claim
defendants created a series of corporations, including a sham head-
quarters in the Bahamas, for the purpose of telemarketing futures con-
tracts in gold and silver bullion and other commodities. Although
customers paid storage fees for the commodities, there was no evi-
dence that any physical commodities were ever stored on the custom-
ers’ behalf.

  The district court found that between October 1997 and March
2000, approximately $2.41 million traceable to the fraudulent activity
was deposited into accounts partially or wholly controlled by the
Relief Defendants. About half of this money—$1.22 million—was
deposited into accounts in the name of Kimberlynn Creek Ranch and
4       COMMODITY FUTURES TRADING v. KIMBERLYNN CREEK RANCH
Kingsfield Racing, businesses managed by Pamela Kingsfield. An
additional $790,912 was paid directly to Samuel Kingsfield, and
almost $400,000 was deposited into Pamela Kingsfield’s account.
Although Samuel Kingsfield testified that all of the transferred funds
constituted payment for services he rendered to one or more of the
Claim Defendants, he produced no documentary evidence to support
this claim, and the district court discredited his testimony. Evidence
further indicated that the corporate claim defendants issued credit
cards to Samuel and Pamela Kingsfield and paid for the Kingsfields’
charges on those cards. Although the cards were ostensibly for busi-
ness purposes, they were in fact used for tens of thousands of dollars
worth of personal expenses.

   The district court determined that the $2.41 million constituted the
proceeds of fraudulent activity and that the Relief Defendants had no
ownership interest in the money, i.e., that they were simply holding
the money on behalf of the Claim Defendants and had no right to
make use of the funds. Accordingly, the court entered the preliminary
injunction described above.1

                                   II.

   The Relief Defendants challenge the entry of the injunction, main-
taining first that the relevant provision of the Commodity Exchange
Act (CEA), 7 U.S.C.A. § 13a-1 (West 1999 & Supp. 2001), does not
provide subject matter jurisdiction over claims against individuals
who have not violated the CEA and that, even if such jurisdiction
exists, it does not extend to them. Second, the Relief Defendants
    1
   We note that the asset freeze ordered in the preliminary injunction
does not distinguish between assets traceable to the fraud and assets
legitimately acquired by the Relief Defendants independently of the
fraudulent activity; the injunction thus appears to freeze not only funds
held by the Relief Defendants on behalf of the Claim Defendants, but
also assets in which the Relief Defendants have an ownership interest.
However, the Relief Defendants do not challenge the terms of the prelim-
inary injunction in this appeal. At oral argument, counsel for the Relief
Defendants informed the court that contempt proceedings concerning the
proper scope of the injunction are ongoing in the district court.
      COMMODITY FUTURES TRADING v. KIMBERLYNN CREEK RANCH                 5
assert that even if the court possessed subject matter jurisdiction, it
lacked the authority to enter a preliminary injunction against them.2

   Ordinarily, the entry of a preliminary injunction is reviewed for
abuse of discretion. See Microstrategy Inc. v. Motorola, Inc., 245
F.3d 335, 339 (4th Cir. 2001). Here, however, the Relief Defendants
raise only legal questions concerning the existence of subject matter
jurisdiction and the proper interpretation of § 13a-1. Accordingly, this
court applies a de novo standard of review. See Carr v. Forbes, Inc.,
259 F.3d 273, 278 (4th Cir. 2001).

                                    A.

   The Relief Defendants first challenge the jurisdiction of the district
court over the Commission’s claim to the assets in question. The
Commission brought this action pursuant to 7 U.S.C.A. § 13a-1,
which permits the Commission to seek an injunction against "any reg-
istered entity or other person [who] has engaged, is engaging, or is
about to engage in any act or practice constituting a violation of any
provision of [the CEA] or any rule, regulation, or order thereunder."
7 U.S.C.A. § 13a-1(a). The Commission does not assert that any of
the Relief Defendants has violated the CEA; it rather maintains that
the Relief Defendants are holding funds traceable to the fraudulent
activity of others.3 The Relief Defendants argue that because the
Commission does not seek to hold them liable for violations of the
  2
     The Relief Defendants also contend that they may not be ordered to
disgorge the funds. We note that the district court has not yet ordered dis-
gorgement; the preliminary injunction simply freezes assets and orders
that they be turned over to a receiver. There is no question, however, that
the Commission ultimately seeks the disgorgement of the funds held by
the Relief Defendants.
   3
     While this appeal was pending, the district court granted the Commis-
sion’s motion to file an amended complaint that changed Samuel Kings-
field’s status from that of a relief defendant to that of a claim defendant.
The Commission filed an amended complaint and sought a preliminary
injunction against him. He, in turn, moved to dismiss the amended com-
plaint. The district court has deferred ruling on the motion for prelimi-
nary injunction and the motion to dismiss pending the outcome of this
appeal.
6     COMMODITY FUTURES TRADING v. KIMBERLYNN CREEK RANCH
CEA, they do not fall within the ambit of § 13a-1, and thus the district
court lacked subject matter jurisdiction over the Commission’s
attempt to freeze their assets.

   We agree with the Relief Defendants—and indeed, the Commis-
sion does not dispute—that because they are not accused of any fraud
in violation of the CEA, § 13a-1 did not provide the district court with
subject matter jurisdiction over a separate cause of action against
them. Cf. SEC v. Cherif, 933 F.2d 403, 413-14 (7th Cir. 1991) (hold-
ing that provision of Securities Exchange Act allowing injunction
against one who is violating, or will violate, securities laws does not
confer subject matter jurisdiction over dispute with individual not
accused of such violations). No such cause of action was pursued,
however. The Commission’s claims are against the Claim Defen-
dants; the Relief Defendants were brought into the suit as nominal
defendants only.

   Nominal defendant status is an "obscure common law concept," id.
at 414, that has come to be applied in the context of the Securities
Exchange Act (SEA) of 1934, see, e.g., SEC v. Cavanagh, 155 F.3d
129, 136 (2d Cir. 1998); SEC v. Colello, 139 F.3d 674, 675-77 (9th
Cir. 1998); Cherif, 933 F.2d at 414. "A ‘nominal defendant’ is a per-
son who can be joined to aid the recovery of relief without an [addi-
tional] assertion of subject matter jurisdiction only because he has no
ownership interest in the property which is the subject of litigation."
Cherif, 933 F.2d at 414; Colello, 139 F.3d at 677 (noting that "the
standard nominal defendant is a bank or trustee, which has only a cus-
todial claim to the property"). Because a nominal defendant has no
ownership interest in the funds at issue, once the district court has
acquired subject matter jurisdiction over the litigation regarding the
conduct that produced the funds, it is not necessary for the court to
separately obtain subject matter jurisdiction over the claim to the
funds held by the nominal defendant; rather, the nominal defendant
is joined "purely as a means of facilitating collection." Colello, 139
F.3d at 676 (internal quotation marks omitted). In short, a nominal
defendant is part of a suit only as the holder of assets that must be
recovered in order to afford complete relief; no cause of action is
asserted against a nominal defendant. See id. (noting the importance
of "distinguishing between causes of action and forms of relief"). As
the Second Circuit has succinctly explained, "Federal courts may
      COMMODITY FUTURES TRADING v. KIMBERLYNN CREEK RANCH                7
order equitable relief against a person who is not accused of wrongdo-
ing in a securities enforcement action where that person: (1) has
received ill-gotten funds; and (2) does not have a legitimate claim to
those funds." Cavanagh, 155 F.3d at 136.4

   Alternatively, the Relief Defendants contend that the district court
could not proceed against them as nominal defendants because they
have asserted an ownership interest in the funds through Samuel
Kingsfield’s testimony during the preliminary injunction hearing that
the funds were received as compensation for his services. We agree
that receipt of funds as payment for services rendered to an employer
constitutes one type of ownership interest that would preclude pro-
ceeding against the holder of the funds as a nominal defendant. How-
ever, a claimed ownership interest must not only be recognized in
law; it must also be valid in fact. Otherwise, individuals and institu-
tions holding funds on behalf of wrongdoers would be able to avoid
disgorgement (and keep the funds for themselves) simply by stating
a claim of ownership, however specious. Here, the district court, by
rejecting Samuel Kingsfield’s testimony, found that the claim of own-
ership was not factually valid. This finding was not clearly erroneous.5
  4
     As far as we are aware, this litigation represents the Commission’s
first attempt to obtain relief from a nominal defendant in an action for
commodities fraud. The novelty of this attempt does not give us pause,
however. Given the general similarity between the role of the Commis-
sion and the role of the SEC in remedying wrongs within their respective
spheres, it is entirely appropriate to allow the Commission to proceed
against nominal defendants under the same circumstances in which the
SEC could proceed against such defendants. See Colello, 139 F.3d at 676
(stating generally that "ample authority supports the proposition that the
broad equitable powers of the federal courts can be employed to recover
ill gotten gains for the benefit of the victims of wrongdoing, whether
held by the original wrongdoer or by one who has received the proceeds
after the wrong"); cf. CFTC v. Hunt, 591 F.2d 1211, 1223 (7th Cir. 1979)
(noting that although the CEA does not contain the same explicit grant
of broad equitable authority found in the SEA, "neither does [the CEA]
have any provision restricting the equitable power of the district court").
   5
     There seemed to be some confusion at oral argument as to whether
the Relief Defendants would be entitled to be heard before the entry of
a final order disgorging the assets. We have no doubt that the district
8     COMMODITY FUTURES TRADING v. KIMBERLYNN CREEK RANCH
See Lone Star Steakhouse & Saloon, Inc. v. Alpha of Va., Inc., 43
F.3d 922, 939 (4th Cir. 1995) (stating that factual findings underlying
injunction are reviewed for clear error).

                                    B.

   Our conclusion that the Relief Defendants are properly in this liti-
gation as nominal defendants is fatal to their claim that § 13a-1(a)
does not permit the imposition of an injunction against them because
they are not accused of violating the CEA. First, we reject the Relief
Defendants’ contention that a district court may not order injunctive
relief against a nominal defendant. When a plaintiff seeks equitable
relief (as the Commission does here), a district court possesses "inher-
ent equitable powers to order preliminary relief, including an asset
freeze, in order to assure the availability of permanent relief." Levi
Strauss & Co. v. Sunrise Int’l Trading Inc., 51 F.3d 982, 987 (11th
Cir. 1995). Such orders may be directed against a custodian of the
defendant’s assets, including a nominal defendant. See Colello, 139
F.3d at 679 (concluding that nominal defendant was properly ordered
to disgorge funds).

   Second, we reject the Relief Defendants’ argument that the injunc-
tive relief ordered exceeded the equitable power of the district court.
This argument raises the question of whether § 13a-1 affirmatively
prohibits the relief ultimately sought by the Commission—
disgorgement of the ill-gotten gains held by the Relief Defendants.
See Porter v. Warner Holding Co., 328 U.S. 395, 398 (1946) ("[T]he
comprehensiveness of . . . equitable jurisdiction is not to be denied or
limited in the absence of a clear and valid legislative command.
Unless a statute in so many words, or by a necessary and inescapable
inference, restricts the court’s jurisdiction in equity, the full scope of
that jurisdiction is to be recognized and applied."). If it does not, then

court will provide the Relief Defendants with an opportunity to demon-
strate the existence of a legally and factually valid ownership interest to
some or all of the assets prior to ordering disgorgement. See Cavanagh,
155 F.3d at 136-37 (noting that inclusion of nominal defendants in litiga-
tion ensures them an opportunity to contest actions affecting assets in
their possession).
      COMMODITY FUTURES TRADING v. KIMBERLYNN CREEK RANCH            9
the court possessed the power to enter a preliminary injunction in
order to preserve the existence of the remedy. See Reebok Int’l, Ltd.
v. Marnatech Enters., 970 F.2d 552, 559 (9th Cir. 1992). And, it is
well settled that equitable remedies such as disgorgement are avail-
able to remedy violations of the CEA. See CFTC v. Amer. Metals
Exch. Corp., 991 F.2d 71, 76 (3d Cir. 1993) ("A number of courts
have held that district courts have the power to order disgorgement as
a remedy for violations of the [CEA] for the purpose of depriving the
wrongdoer of his ill-gotten gains and deterring violations of the law."
(internal quotation marks omitted)); id. at 76 n.9 (explaining that the
authority to order disgorgement has been found in "the general equity
power of the federal courts"); Hunt, 591 F.2d at 1222-23. The district
court therefore possessed authority to impose a preliminary injunction
freezing assets in order to preserve the future availability of perma-
nent equitable relief.

                                 III.

  For the reasons set forth above, we affirm the entry of the prelimi-
nary injunction.

                                                          AFFIRMED