Court Opinion

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Opinions of the United
2005 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

11-8-2005

USA v. Acorn Tech Fund
Precedential or Non-Precedential: Precedential

Docket No. 04-3663

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                                             PRECEDENTIAL

          UNITED STATES COURT OF APPEALS
               FOR THE THIRD CIRCUIT

                          No. 04-3663

              UNITED STATES OF AMERICA

                               v.

            ACORN TECHNOLOGY FUND, L.P.

       LEONARD BARRACK and LYNNE BARRACK

                                        Appellants

        On Appeal from the United States District Court
           for the Eastern District of Pennsylvania
                 (D.C. Civil No. 03-cv-00070)
           District Judge: Honorable James T. Giles

                   Argued October 18, 2005

Before: VAN ANTWERPEN, ALDISERT and COWEN, Circuit
                     Judges.

                   (Filed: November 8, 2005)

Paul G. Shapiro (Argued)
Office of the United States Attorney
615 Chestnut Street
Suite 1250
Philadelphia, PA 19106
Patrick K. McCoyd
Tracey R. Seraydarian
Post & Schell, P.C.
1600 John F. Kennedy Boulevard
Four Penn Center
Philadelphia, PA 19103

Counsel for the Government, on behalf of the Small Business
Administration

Eric Kraeutler (Argued)
G. Jeffrey Boujoukos
Catharine E. Gillespie
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103

Counsel for Movants-Appellants Leonard and Lynne Barrack

                   OPINION OF THE COURT

VAN ANTWERPEN, Circuit Judge.

        Before us is an interlocutory appeal from an order denying
Appellants’ motion to lift a stay of litigation which was entered
pursuant to a receivership order. Appellants Leonard and Lynne
Barrack (“the Barracks”) are attempting to bring claims against
Acorn Technology Fund, L.P. (“Acorn”), Acorn Technology
Partners, L.L.C. (“Acorn Partners”), and the Small Business
Administration (“SBA”). The claims allege that the Barracks were
fraudulently induced to invest in Acorn, and subsequently lost
money, due to mismanagement and lack of disclosure. The United
States District Court for the Eastern District of Pennsylvania denied
the Barracks’ motion to lift the receivership stay after determining
that all their possible claims failed as a matter of law. We will
affirm the District Court’s refusal to lift the stay, and in so doing,

                                  2
we will adopt the standard of SEC v. Wencke, 742 F.2d 1230 (9th
Cir. 1984).

   I. FACTUAL BACKGROUND AND PROCEDURAL
                  HISTORY

       Acorn Technology Fund, L.P. was formed in New Jersey in
1999 as a Small Business Investment Company (“SBIC”) under
section 301(c) of the Small Business Investment Act (“SBIA”) of
1958, 15 U.S.C. § 681(c), which is administered by the SBA.
Acorn’s general partner was Acorn Technology Partners, L.L.C.,
a New Jersey company run by John Torkelsen. In early 1998,
Torkelsen convinced the Barracks to invest in Acorn beginning
with a $1,000,000 Subscription Agreement (“Subscription 1”)
executed on April 7, 1998. As part of the solicitation, on March
24, 1998, Torkelsen sent a letter to the Barracks indicating that he
was willing to do two things to “make it easier for you to
subscribe”: 1) allow them to pay only $250,000 upon signing a
Subscription Agreement, followed by $250,000 annually over the
next three years; and 2) waive any penalties which would be
imposed by the SBA if the Barracks failed to fully pay the balance
on their Subscription Agreement. The Barracks returned a signed
Subscription Agreement on April 9, 1998, along with a check for
$250,000 and a letter reciting that “You [Acorn Partners] have
agreed that if I choose to discontinue investing I will maintain my
existing position without penalty.” The Barracks also signed a
Limited Partnership Agreement, section 3.4.2 of which permitted
the general partner, with the consent of the SBA, to reduce a
defaulting limited partner’s partnership share to the amount of
capital actually contributed.

       The Barracks timely paid the first two installments of
Subscription 1, bringing their paid capital investment to $750,000.
On September 15, 2000, they signed a second Subscription
Agreement (“Subscription 2”) and promised an additional
$500,000. In 2001, though, the Barracks decided to exercise their
right–allegedly granted in the waiver letter–to discontinue investing
without penalty, and froze their total investment at $750,000.

                                 3
        In a matter initially unrelated to the Barracks, the United
States brought suit in the United States District Court for the
Eastern District of Pennsylvania on January 6, 2003, against
Torkelsen, his wife and son, and his business associate, under the
Mail Fraud Injunction Act, 18 U.S.C. § 1345, et seq. United States
v. Torkelson et al., No. 03-CV-0060 (E.D. Pa. Jan. 6, 2003). The
suit alleges that the Torkelsens used Acorn to obtain $32 million in
federal funds from the SBA, then invested the money in companies
they controlled and ultimately diverted it into their own accounts.
On January 7, 2003, the United States filed the instant suit to have
Acorn placed in receivership based on violations of the SBIA. The
District Court appointed the SBA receiver on January 17, 2003, as
authorized by 15 U.S.C. § 687c. As part of the receivership order,
the District Court imposed a stay on all civil litigation “involving
Acorn, the Receiver, or any of Acorn’s past or present officers,
directors, managers, agents or general or limited partners,” unless
specifically permitted by the court.          Order for Operating
Receivership, United States v. Acorn Technology Fund, L.P., No.
03-cv-0070 (E.D. Pa. Jan. 17, 2003) (“Receivership Order”).

        The SBA, acting as receiver, filed suit against the Barracks
to force them to pay the $750,000 still outstanding on the two
Subscription Agreements. United States Small Bus. Admin., as
Receiver for Acorn Tech. Fund, L.P. v. Barrack, No. 03-cv-5992
(E.D. Pa. Oct. 29, 2003). The Barracks responded by filing a
motion with the receivership court which sought to have the stay of
litigation lifted, for the purpose of asserting, in the SBA’s suit,
counterclaims against the SBA, Acorn, and Acorn Partners. On
August 12, 2004, the District Court denied the Barracks’ motion in
full and refused to lift the stay of litigation. This appeal followed.

    II. JURISDICTION AND STANDARD OF REVIEW

        The District Court had jurisdiction over the receivership
action pursuant to section 308 of the SBIA, 15 U.S.C. § 687(d);
section 311 of the SBIA, 15 U.S.C. § 687c(a); and section 2(5)(b)
of the Small Business Act, 15 U.S.C. § 634(b)(1). This Court has
jurisdiction over this interlocutory appeal pursuant to 28 U.S.C. §
1292(a)(1). We review de novo the District Court’s application of
law in receivership proceedings. SEC v. Black, 163 F.3d 188, 195

                                  4
(3d Cir. 1998). We exercise plenary review over applications of
the Federal Tort Claims Act’s discretionary function exception.
Mitchell v. United States, 225 F.3d 361 (3d Cir. 2000). We review
for abuse of discretion the procedures the District Court chooses to
follow in connection with the receivership proceedings, including
decisions to grant, deny, or modify an injunction. See Black, 163
F.3d at 195; see also Am. Tel. & Tel. Co. v. Winback & Conserve
Program, Inc., 42 F.3d 1421, 1427 (3d Cir. 1994).

                          III. ANALYSIS

       In this Circuit we have not yet addressed the standard for a
District Court to use when considering whether to lift a
receivership stay of litigation. Both parties have urged this Court
to adopt the standard laid out by the Ninth Circuit in SEC v.
Wencke, 622 F.2d 1363 (9th Cir. 1980) (“Wencke I”), and SEC v.
Wencke, 742 F.2d 1230 (9th Cir. 1984) (“Wencke II”)
(collectively, “Wencke”). For the reasons set forth below, we
accept this invitation.

                       A. Wencke Standard

        In a trilogy of cases in the early 1980s, the Ninth Circuit laid
out factors a District Court should consider when deciding whether
to partially or wholly lift a stay of litigation entered pursuant to a
receivership order. The court in Wencke I affirmed the inherent
power of a District Court to enter a valid stay of litigation effective
even against nonparties to the receivership action. 622 F.2d at
1369.1 The court then addressed, somewhat abstractly, the relevant

       1
        Similar to the instant case, the SEC brought suit in Wencke
to have a receiver appointed to manage and investigate the assets
of several companies and their controlling individuals after
allegations of looting and fraudulent transactions. The district
court appointed a receiver and issued an injunction staying all
persons from continuing or initiating proceedings against
receivership entities without leave of the court. Wencke I, 622
F.2d at 1367 & n.4. A nonparty to the receivership action sought
to have the receivership stay lifted to allow it to enforce a state

                                   5
issues presented when deciding whether to exempt a party from the
litigation bar. Id. at 1373-74. The Wencke II court, faced with an
appeal of the district court’s refusal to lift the same stay of
litigation, set forth a three-part test to be used by a District Court:

               “(1) [W]hether 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.”

Wencke II, 742 F.2d at 1231.

        In reviewing a district court’s refusal to lift a different
receivership stay of litigation, the Ninth Circuit reaffirmed the
three Wencke factors and clarified that they differ from the normal
criteria used by courts for preliminary injunctions. SEC v.
Universal Fin., 760 F.2d 1034, 1308 (9th Cir. 1985). The test
“simply requires the district court to balance the interests of the
Receiver and the moving party. . . . [T]he 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.

         We agree. Given how rare non-bankruptcy receiverships
are, it is not surprising that we have not yet faced this exact
issue 2 –or that few courts around the country have done so. The

court judgment which had granted it a leasehold interest in and
possession of one of the receivership entities. Id. at 1366.
       2
         In SEC v. Black, 163 F.3d 188 (3d Cir. 1998), we affirmed
a district court’s partial lifting of an asset freeze order which was
entered in receivership proceedings. There, though, the district
court realized that its initial injunction had been overbroad and the
court in fact did not have power over the funds in question. Id. at
196. This Court therefore did not have the opportunity to reach the

                                  6
purposes of a receivership are varied, but the purpose of imposing
a stay of litigation is clear. A receiver must be given a chance to
do the important job of marshaling and untangling a company’s
assets without being forced into court by every investor or
claimant. Nevertheless, an appropriate escape valve, which allows
potential litigants to petition the court for permission to sue, is
necessary so that litigants are not denied a day in court during a
lengthy stay.

         A district court should give appropriately substantial weight
to the receiver’s need to proceed unhindered by litigation, and the
very real danger of litigation expenses diminishing the receivership
estate. At the same time, we agree with the Wencke courts that the
interests of litigants also need to be considered. Far into a
receivership, if a litigant demonstrates that harm will result from
not being able to pursue a colorably meritorious claim, we do not
see why a receiver should continue to be protected from suit. Cf.
Wencke II, 742 F.2d at 1232 (reversing the district court’s refusal
to lift the stay, seven years into the receivership when the receiver
was about to distribute assets and thereby disturb the status quo of
the estate). On the other hand, very early in a receivership even the
most meritorious claims might fail to justify lifting a stay given the
possible disruption of the receiver’s duties.

       We note that when it is asked to lift a stay it would usually
be improper for a district court to attempt to actually judge the
merits of the moving party’s claims at such an early point in the
proceedings. A district court need only determine whether the
party has colorable claims to assert which justify lifting the
receivership stay. See Wencke II, 742 F.2d at 1232. If it appears
that a claim has no merit on its face, that of course may end the
matter. But, if a claim may have merit–and factual development

question of the standard to use where the district court chose (or
declined) to modify an injunction over issues within its jurisdiction.
Cf. id. at 197 (finding the third case in the Wencke trilogy, SEC v.
Universal Financial, 760 F.2d 1034 (9th Cir. 1985), inapposite
“because it relates to a stay of legal proceedings, as opposed to a
freeze of assets, applicable to a nonparty”).

                                  7
may be necessary to assess this–the district court will have to
address the other Wencke factors.

        The experiences of other courts dealing with the Wencke
standard are instructive. To the best of our knowledge, district
courts in three other Circuits besides the Ninth, when considering
whether to lift a receivership stay of litigation, have adopted or
used the Wencke standard to guide their inquiry. A Maryland
district court partially lifted a stay to allow a foreclosure action
against property on which the receivership estate also had a
judgment lien. United States v. ESIC Capital, Inc., 685 F. Supp.
483 (D. Md. 1988). The district court admitted that the
receivership was only two years old, but concluded that the merits
of the asserted claim were “substantial,” and that the movant would
suffer “substantial injury” if the claim were not allowed to proceed.
Id. at 485-86. The district court noted that a simple foreclosure
action would be “painless for all concerned.” Id. at 486. A New
York district court stated that it would have “compare[d] the
interest of the receiver and the moving party,” but found it
unnecessary where the receiver did not object to the partial lifting
of a stay. United States v. First Wall St. SBIC, L.P., 1998 U.S.
Dist. LEXIS 9487, at *4 (S.D.N.Y. June 26, 1998) (quoting ESIC
Capital, 685 F. Supp. at 485, which cited Universal Financial for
the Wencke premise).

        Most recently, a district court in Illinois refused to lift a stay
of litigation where the receivership had only been in place for three
months, the estate’s finances were complex, and the movants could
not show that they would suffer substantial injury absent
permission to sue. FTC v. 3R Bancorp, 2005 U.S. Dist. LEXIS
12503 (N.D. Ill. Feb. 23, 2005). The 3R Bancorp court relied
solely on the first and second Wencke factors, while appearing to
assume that the claim might have merit. Id. at *9; see also FTC v.
Med Resorts Int’l, Inc., 199 F.R.D. 601 (N.D. Ill. 2001) (finding
that the first and second Wencke factors, which tipped in the
direction of maintaining the receivership stay, outweighed the
admittedly strong merits of the asserted claim). Ninth Circuit
courts also have continued to use the standard. See, e.g., SEC v.
Capital Consultants, LLC, 2002 U.S. Dist. LEXIS 6775 (D. Or.
Mar. 19. 2002); SEC v. TLC Invs. & Trade Co., 147 F. Supp. 2d

                                    8
1031 (C.D. Cal. 2001); SEC v. Am. Capital Invs., 1996 U.S. App.
LEXIS 27685 (9th Cir. Oct. 22, 1996) (NPO).

        After consideration of the Wencke factors and their
application by courts which have subsequently followed the
standard, we are of the view that the Wencke test strikes an
appropriate balance between allowing a litigant to choose the
timing of his day in court, and respecting the purposes of a
receivership stay. Accordingly, we adopt the Wencke standard for
use in determining whether to lift a receivership stay. In the future
we will review a District Court’s decision on whether to lift the
receivership stay for abuse of discretion, just like any other choice
of procedures chosen by a District Court to effectuate a
receivership proceeding. See Black, 163 F.3d at 195; Am. Tel. &
Tel. Co., 42 F.3d at 1427; accord Wencke II, 742 F.2d at 1231 (“In
reviewing the district court’s application of this test and ultimate
decision, we apply an abuse of discretion standard.”).

        Since the District Court did not use Wencke despite the
urging of the parties, we must decide whether to remand this case.
We agree with the Ninth Circuit that“[w]here the claim is unlikely
to succeed (and the receiver therefore likely to prevail), there may
be less reason to require the receiver to defend the action now
rather than defer its resolution.” Wencke I, 622 F.2d at 1373. For
the reasons set forth below, we agree that the Barracks’ claims
against the SBA must fail as a matter of law, and that their
mismanagement claims can only be brought derivatively and
therefore also fail as a matter of law. As a result we have no need
to send these claims back to the District Court for consideration
under Wencke, and we will affirm the District Court’s refusal to lift
the stay as to these claims for that reason. As described below,
although the District Court erred in concluding that the Barracks’
fraud in the inducement claim was derivative, the record is
sufficiently developed to allow this Court to apply the Wencke
standard to that claim.

                   B. Claims Against the SBA

       The Barracks would like to assert two classes of claims
against the SBA: first, against the SBA as a preferred limited

                                 9
partner3 of Acorn for breach of fiduciary duties allegedly owed to
the Barracks as co-limited partners; and second, against the SBA
for breach of “its statutory and regulatory duties as regulator of
Acorn, an SBIC.” Motion of Leonard & Lynne A. Barrack for
Partial Lifting of Receivership Stay & Injunction, United States v.
Acorn Tech. Fund, L.P., No. 03-cv-0070 (E.D. Pa. Nov. 24, 2003).
The District Court concluded that the receivership stay should not
be lifted to allow the assertion of these claims because they were
without merit as a matter of law. Order Denying Motion to Modify
Stay at *15, United States v. Acorn Tech. Fund, L.P., No. 03-cv-
0070 (E.D. Pa. Aug. 12, 2004) (“District Court Order”). We agree,
and will affirm the District Court as to any claims against the SBA.

        The Federal Tort Claims Act, 28 U.S.C. §§ 1346(b), 2671
et seq., is the exclusive method for suing an administrative agency
in tort for monetary damages. 28 U.S.C. § 2679. The so-called
discretionary function exception bars:

              “Any claim based upon an act or
              omission of an employee of the
              Government, exercising due care, in
              the execution of a statute or
              regulation, whether or not such statute
              or regulation be valid, or based upon
              the exercise or performance or the
              failure to exercise or perform a
              discretionary function or duty on the
              part of a federal agency or an
              employee of the Government, whether
              or not the discretion involved be
              abused.”

28 U.S.C. § 2680(a) (emphases added).

       3
        Pursuant to 15 U.S.C. § 683, the SBA purchased
participating securities–in the form of a preferred limited
partnership interest–from Acorn.

                                10
        The Barracks’ claims against the SBA for breaching
“statutory and regulatory duties” obviously fall within the
discretionary function exception and cannot be maintained. The
Barracks argue that their other claims against the SBA were not
based on the SBA’s actions as regulator, but on the SBA’s actions
as a preferred limited partner of and investor in Acorn. The SBA
supposedly learned that the Torkelsens were looting and otherwise
mismanaging Acorn, but failed to tell the other investors, thereby
depriving them of this superior information and the opportunity to
stop investing. The SBA also, according to the Barracks, erred by
not imposing sanctions after these misdeeds were discovered.
These actions allegedly breached a fiduciary duty owed by the SBA
to co-limited partners.4 Therefore, the Barracks claim, the suit is
not barred by the discretionary function exception. Unfortunately,
the Barracks have shown no support for this distinction, nor can we
find any.

        The SBA provides leverage to a limited partnership SBIC
in part by buying participating securities and becoming a preferred
limited partner. 15 U.S.C. § 683. The SBA does gain payment
priority over other limited partners, as the Barracks stress. 15
U.S.C. § 683(g)(2). All SBICs are also required to supply
information to the SBA, and the SBA must examine each SBIC
every two years. 15 U.S.C. § 687b(b)-(c) The SBA inevitably,
therefore, has superior information to the other investors in an
SBIC. This informational advantage is solely the result of the
SBA’s position as regulator, however, as is the SBA’s mere
presence as a preferred limited partner. The Barracks acknowledge
this fact, but still assert that suit against the SBA-as-investor should
stand. Appellant Br. at *27-28. The Barracks produce no
precedent or support for this position beyond bare assertions. Any
suit based on this superior information is fundamentally based on
the SBA-as-regulator–not as investor. Even if a preferred limited

       4
        Even if the Barracks’ claims were not barred by the FTCA,
we note that they have produced no New Jersey law to support the
argument that a limited partner has a fiduciary duty to other limited
partners. However since we conclude that these claims are barred,
we will not address the fiduciary duty issue.

                                  11
partner owed a fiduciary duty to other limited partners, the
Barracks’ suit against the SBA cannot be characterized as against
another investor–the acts challenged here were taken by the SBA
pursuant to its regulatory duties.

        We next address whether the SBA’s actions here involved
discretion, or merely ministerial acts unprotected by the
discretionary function exception. The District Court concluded that
all of the SBA’s acts in question involved “decision[s] committed
to the sound discretion of the agency.” District Court Order at *18.
The Barracks fail even to raise the issue of whether the SBA’s
actions were discretionary or ministerial, but claim simply that the
SBA erred by failing to impose sanctions on Acorn, by negotiating
with Acorn Partners to lower management fees, and by failing to
inform the Barracks of Acorn’s mismanagement. Each of these
acts was undeniably taken by the SBA in the exercise of its
discretion, and involved “element[s] of judgment or choice.”
United States v. Gaubert, 499 U.S. 315, 322 (1991) (quotation
marks omitted). The SBA’s decisions regarding sanctions and
management fees were “grounded in the social, economic, or
political goals of the statute and regulations,” id. at 323, and were
not contrary to those statutes or regulations. Cf. Berkovitz v.
United States, 486 U.S. 531, 542-43 (1988). The FTCA bars suits
based on discretionary decisions. The SBA’s decisions fall
squarely within the discretionary function exception.

         We conclude that regardless of attempted characterization
as regulator or investor, the Barracks are attempting to sue the SBA
for its discretionary judgment decisions as regulator of Acorn, and
run afoul of the FTCA’s discretionary function bar. We will
therefore affirm the District Court’s refusal to lift the stay as to
these claims, since if the claims are barred as a matter of law, they
cannot be colorably meritorious under Wencke.

          C. Mismanagement Claims Against Acorn

       The Barracks next seek permission to sue Acorn and Acorn
Partners for mismanagement, alleging that if Acorn had not been
mismanaged by Torkelsen, and if Torkelsen had not told them that
Acorn was being managed in accordance with federal and state

                                 12
laws, they would not have invested or continued to invest.
Appellant Br. at *21, 23. The District Court concluded that these
claims could only be brought in a derivative suit by the SBA as
receiver for Acorn, and therefore the receivership stay should not
be lifted to allow their assertion by the Barracks individually.
District Court Order at *10. We agree.

         The Barracks’ claim, despite creative characterization,
reduces to an allegation that they would not have invested, or have
lost money on capital already invested, if the company had been
properly managed or had disclosed the mismanagement. In this,
the Barracks suffered the same wrong as all other investors in
Acorn–management misled them as to how the company was being
run, and its compliance with various laws, and as an indirect result
their investments lost value. There was no special wrong done to
the Barracks–the wrong was to the partnership, which lost almost
all of its capital as a result of the Torkelsens’ alleged looting. This
is a classic derivative claim under the Revised Uniform Limited
Partnership Act, which New Jersey has adopted. N.J. Stat. Ann. §§
42:2A-1 to 42:2A-73. The Receivership Order granted all powers
possessed by Acorn’s limited partners under state and federal
law–including the ability to bring derivative suits on behalf of the
partnership–to the SBA as receiver. Receivership Order at *2.

         We conclude that since the Barracks suffered no direct
wrong as a result of the mismanagement and lack of compliance
with securities laws, independent of the wrong to the partnership
itself, the Barracks cannot bring this claim individually. Since the
claim fails individually as a matter of law, the District Court did
not err in refusing to lift the receivership stay to allow its assertion.

     D. Fraud in the Inducement Claims Against Acorn

      The Barracks’ finally seek to assert claims against Acorn
and Acorn Partners for fraudulently inducing them to invest based

                                   13
on the penalty waiver given by Torkelsen.5 The District Court
concluded that these claims too were derivative in nature and
therefore failed as a matter of law. District Court Order at *11, 14-
15. Here, we disagree with the District Court.

        The District Court correctly acknowledged that fraud in the
inducement claims are generally individual claims. District Court
Order at *13 (citing Golden Tee, Inc. v. Venture Golf Sch., Inc.,
969 S.W. 2d 625 (Ark. 1998)). However, the District Court
characterized the Barracks’ only damages as “diminution in value
of their investment.” Id. On the contrary, the Barracks may have
suffered a wrong independent of the general wrong to the
partnership from mismanagement, and separate from any other
investor, by an invalid waiver extended to them by Torkelsen. The
Barracks may be able to make out a colorable individual claim for
fraud in the inducement; therefore it was error for the District
Court to prematurely conclude that the claim failed as a matter of
law for want of being brought derivatively.

       It is not the end of our inquiry, though, to conclude that the
fraud in the inducement claims can be properly brought
individually instead of only derivatively. The claims could of
course still lack merit.

        Fraud in New Jersey requires “(1) a material
misrepresentation of a presently existing or past fact; (2)
knowledge or belief by the defendant of its falsity; (3) an intention
that the other person rely on it; (4) reasonable reliance thereon by
the other person; and (5) resulting damages.” Banco Popular N.
Am. v. Gandi, 876 A.2d 253, 260 (N.J. 2005) (quoting Gennari v.
Weichert Co. Realtors, 691 A.2d 350, 367 (N.J. 1997)); see also
Travelodge Hotels, Inc. v. Honeysuckle Enters., 357 F. Supp. 2d

       5
        The Barracks also assert claims based on an alleged breach
of the waiver agreement, but these claims depend on whether a
valid waiver existed, and are only an argument-in-the-alternative
to the fraud in the inducement claim. Since as noted the SBA
conceded at argument that either of these claims might have merit,
we will address the claims jointly.

                                 14
788, 796 (D.N.J. 2005) (citing these factors as constituting fraud in
the inducement in New Jersey). The District Court concluded that
the waiver was inherently invalid and the Barracks’ reliance on it,
unreasonable as a matter of law. Id. at *14. These conclusions
were premature.

        Torkelsen’s letters extending the penalty waiver, as head of
Acorn’s general partner, purported to “waive penalties in advance”
for failing to fulfill a subscription agreement, and thereby allow the
Barracks in the future to make additional capital contributions if
they so wished. A59. Section 3.4.2. of the Limited Partnership
Agreement, though, states that the “General Partner may, in its sole
discretion (and with the consent of SBA given as provided in
Section 5.2. of this Agreement), elect to declare, by notice” that the
limited partner’s commitment is reduced to the capital contribution
already made, discharging further obligation to Acorn. Id.
(emphasis added). The District Court stated, without factual
inquiry, that “it is clear that SBA consent was never obtained by or
for the benefit of the Barracks.” District Court Order at *14. The
issue is not so clean-cut. The Limited Partnership Agreement
makes provision for the SBA to consent by silence:

              “If the Partnership has given the SBA thirty
              (30) days prior written notice of any proposed
              legal proceeding, arbitration or other action
              under the provisions of the Agreement with
              respect to any default by a Private Limited
              Partner in making any capital contribution to
              the Partnership required under the Agreement
              and for which SBA consent is required as
              provided in Section 5.2.3., and the
              Partnership shall not have received written
              notice from the SBA that it objects to such
              proposed action within such thirty (30) day
              period, then SBA shall be deemed to have
              consented to such proposed Partnership
              action.”

                                 15
Limited Partnership Agreement § 5.2.4. (emphases added).

       The District Court did not address the issue of consent by
silence. If such consent did issue, then the Barracks’ reliance on
the waiver may have been reasonable, and they might be able to
make out a colorable fraudulent inducement claim.

       The SBA conceded at argument that the Barracks’ fraud in
the inducement and breach of contract claims might have merit,
and therefore may satisfy the third prong of Wencke depending on
discovery. We must therefore address the other Wencke factors.

        We first ask “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.” Wencke II, 742
F.2d at 1231. The Barracks claim that the SBA has already
disturbed the status quo by filing suit to recover the money
allegedly due on the Subscription Agreements. See, e.g., Appellant
Br. at *13 (“[T]he Receiver’s actions belie any purported interest
in maintaining the status quo.”). This argument misunderstands the
purpose and practice of a receivership. One of the SBA’s key
functions as receiver is to marshal the receivership estate’s assets.
The SBA’s suit against the Barracks is simply one step in that
direction. The Wencke II court, the only court to ever find that the
receiver was the party seeking to disturb the status quo, was faced
with the far different situation where the receiver was preparing to
distribute the assets. 742 F.2d at 1231. That is simply not the case
here.

        The Barracks next argue that they would “suffer substantial
injury” if the stay is not lifted, “because of the real possibility that
they would be precluded from asserting those claims in the future.”
Appellant Br. at *13. We find this argument unpersuasive for two
reasons. First, as noted by the SBA, the Barracks can obtain
discovery in the original SBA-Barrack suit. Government Br. at
*36, 47 n.8. This discovery should help illuminate the question of
the waiver’s validity. We do not comment on the issue of whether
the availability of a defense has any bearing on the ability of a party
to bring a counterclaim. However, since successful assertion of the
waiver in either posture would result in a discharge of the

                                  16
Barracks’ obligation to make future payments, we do not see how
refusing to order the stay lifted would result in substantial injury.
Second, while it is true that if the waiver is invalid, the Barracks
would prefer to seek rescission of both Subscription Agreements
and the return of their $750,000, this argument in no way shows
that substantial injury would result if the Barracks were forced to
wait until the SBA was finished disentangling the receivership
estate. Where other courts have found the first Wencke factor to
tip in favor of lifting a receivership stay, the degree of injury has
been far more severe. For instance, in ESIC Capital, an
unemployed single mother was unable to support herself absent
regaining control of contested real estate. 685 F. Supp. at 485.
Likewise, in Wencke II, the receiver was preparing to distribute
stock to other investors, against whom the petitioning shareholders
might have had no legal recourse. 742 F.2d at 1232. What is not
sufficient is a clear attempt by the Barracks to withdraw funds from
the receivership estate before the receiver is ready to distribute
funds to all creditors. Not being allowed the first bite at the apple
is not the kind of substantial injury we will recognize under the
first prong of Wencke.

        We will next address the second Wencke factor, the “time
in the course of the receivership at which the motion for relief from
the stay is made.” Wencke II, 742 F.2d at 1231. Contrary to the
Barracks’ assertions, the SBA has not “conceded that the timing is
proper” by filing suit to recover the Barracks’ subscription funds.
Appellant Br. at *13. As we have already said, the very purpose of
a receiver is to collect and disentangle a receivership estate’s
assets, including debts owed to it. In carrying out that purpose, the
receiver simply does not consent to the bringing of a counterclaim
by every debtor.

        When the Barracks first asked the District Court to lift the
stay, the receivership had been in place for only ten months. It has
now been in effect for 30-36 months. We are reluctant to set a
clear cut-off date after which a stay should be presumptively lifted.
The second Wencke prong is inherently case-specific, and of
course, merely one of three linked considerations. The Wencke II
court lifted a stay after seven years, but focused primarily on the
fact that no new facts had been discovered in six years, and that the

                                 17
receiver was ready to distribute the assets. 742 F.2d at 1232. The
Wencke I court had refused to lift the same stay after a mere two
years. Wencke I, 622 F.2d at 1374; see also ESIC Capital, 685 F.
Supp. at 485 (“[T]his motion comes at a fairly youthful age of the
receivership – two years since its inception.”). The Ninth Circuit
in Universal Financial denied a motion to lift a four-year-old stay
where “material facts continue to come to light.” 760 F.2d at 1039.
In this case, where the alleged fraud encompassed many individuals
and companies, we cannot say that the timing factor tips in the
Barracks’ favor. See 3R Bancorp, 2005 U.S. Dist. LEXIS 12503,
at *9.

       Upon consideration of all three Wencke factors, even
though the Barracks’ proposed claims may have merit, the other
factors do not weigh in favor of allowing them to assert these
claims at the present time. While it is true that “[t]he receivership
cannot be protected from suit forever,” Wencke II, 742 F.2d at
1231, we find that the Barracks have not carried their burden of
proving that the stay should be lifted.

                       IV. CONCLUSION

        We conclude that the District Court erred in determining
that Appellants’ fraud in the inducement claims a) could only be
brought derivatively; and b) were without merit as a matter of law.
However, based on an analysis of the other Wencke factors set
forth by the Ninth Circuit for determining whether to lift a stay on
litigation entered pursuant to receivership proceedings, we affirm
the District Court’s refusal to lift the stay as to these claims. Since
non-colorable claims also present no basis for lifting a receivership
stay, we affirm the District Court’s refusal to lift the stay to allow
the assertion of mismanagement claims against Acorn or Acorn
Partners, and any claims against the SBA.

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