SEC v. Sanchez Diaz Monge ( 2023 )

United States Court of Appeals
For the First Circuit
No. 23-1290
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff, Appellee,
v.
HAYDÉE YOLANDA SANCHEZ-DIAZ MONGE,
Relief Defendant, Appellant,
LUIS JIMENEZ CARRILLO, AMAR BAHADOORSINGH, JUSTIN ROGER WALL,
and JAMIE SAMUEL WILSON,
Defendants,
MARTHA Y. JIMENEZ TRUST and CHARLES A. CARRILLO TRUST,
Relief Defendants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Kayatta, Howard, and Rikelman,
Circuit Judges.
Brooks T. Westergard, with whom Jacob S. Frenkel and Dickinson
Wright PLLC were on brief, for appellant.
Stephen Silverman, Appellate Counsel, with whom Megan
Barbero, General Counsel, Michael A. Conley, Solicitor, and Kerry
J. Dingle, Senior Appellate Counsel, were on brief, for appellee.
December 7, 2023
RIKELMAN, Circuit Judge. In 2009, Yolanda Sanchez-Diaz
divorced Luis Jimenez Carrillo and entered into a typical marital
termination agreement, which included child support for the
couple's five-year-old son and limited spousal support for her.
After Carrillo moved away, they modified this agreement in 2016.
Under the modified terms, Sanchez-Diaz took full physical and legal
custody of their son and received increased child support and help
with other expenses, including a new car.
In 2021, the Securities and Exchange Commission (SEC)
sued Carrillo for securities violations he allegedly committed
well after the couple divorced. It named Sanchez-Diaz as a relief
defendant in the suit and sought to recover from her the value of
the new car she had received four years earlier, claiming Carrillo
paid for it with illicit funds. The SEC did not accuse Sanchez-
Diaz of any wrongdoing but argued she had no legitimate claim to
the car because she had not provided any consideration for it.
The district court agreed and ordered her to pay almost $170,000,
including interest. Because we conclude that the district court
applied the wrong legal standard in evaluating the SEC's arguments
and that Sanchez-Diaz provided value for the car by assuming full-
time care for the couple's son for six years, we reverse.
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I. BACKGROUND
A. Relevant Facts
Sanchez-Diaz married Defendant Luis Jimenez Carrillo in
2001. The couple lived in California and had one child, a son,
who was born in 2003. In July 2009, Sanchez-Diaz and Carrillo
divorced and executed a marital termination agreement in
California's San Diego Superior Court. The agreement required
Carrillo to pay $1,500 per month in child support and $3,139 per
month in spousal support, with the last spousal support payment
due on August 1, 2012. It also provided for shared physical
custody of their son, who at the time was five years old; Carrillo
took care of their son every other weekend, and the parents
alternated school holidays, vacations, and the son's birthday. In
December 2009, Sanchez-Diaz and Carrillo executed an addendum to
the marital termination agreement that extended spousal support
payments for an additional six months, such that payments would
end in February 2013.
In late 2013, Carrillo moved to Mexico. Sanchez-Diaz,
who continues to reside in California, has had sole legal and
physical custody of their son since early 2014.
In March 2016, when their son was almost thirteen years
old, Sanchez-Diaz and Carrillo executed in Mexico a modified child
support agreement, which they said reduced to writing their actual
arrangement for their son's care since Carrillo had moved away.
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Under the modified agreement, Sanchez-Diaz agreed to full legal
and physical custody of their son. Carrillo agreed to pay
increased child support of $10,000 per month, to pay for the
medical and educational expenses of their son, to cover the repairs
and maintenance for the home where Sanchez-Diaz and their son
lived, and -- central to this case -- "to purchase a new vehicle
and to sign ownership of it over to [Sanchez-Diaz] every three
years." The agreement explicitly omitted any spousal support and
was set to expire when Carrillo and Sanchez-Diaz's son turned
nineteen or when he began university studies, whichever occurred
earlier.
In April 2017, Sanchez-Diaz received from Carrillo a
2017 BMW X5 M per their agreement. Around March or April 2020,
she traded in the 2017 BMW and replaced it with a 2020 BMW X5 M.
B. Legal Proceedings
In August 2021, the SEC brought a securities enforcement
action in the District of Massachusetts against Carrillo and three
other named defendants, alleging they engaged in a multi-year
securities fraud scheme. According to the complaint, from 2013
to 2019, Carrillo defrauded investors by concealing that he, in
concert with his co-defendants and others, controlled the
securities of multiple publicly-traded companies.
The complaint named Sanchez-Diaz, along with two trusts,
as relief defendants. The SEC did not allege any wrongdoing by
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Sanchez-Diaz, but it sought equitable relief from her. It claimed
that, in April 2017, Carrillo directed one of his offshore asset
managers to transfer $134,500 to a car dealership to purchase the
2017 BMW, which was titled to Sanchez-Diaz. As a result, the SEC
asserted, Sanchez-Diaz "received proceeds of the defendants'
unlawful acts, practices and schemes and should not be entitled to
retain those illegally-derived proceeds."
The district court entered a partial consent judgment
between the SEC and Sanchez-Diaz, in which she agreed not to
contest that Carrillo purchased the BMW with funds from the alleged
fraud. That left as the only open issue whether Sanchez-Diaz
should be ordered to disgorge any ill-gotten gains she received.
Shortly thereafter, the SEC moved for an order requiring
Sanchez-Diaz to pay disgorgement of $134,500, which represented
the purchase price of the 2017 BMW, plus $35,304 in prejudgment
interest, for a total of $169,804. The SEC argued that Sanchez-
Diaz had no equitable claim to the car because the 2016 agreement
"recite[d] no consideration" for Carrillo's promise to buy the
car. It maintained that the car was merely a gift from Carrillo
and that a relief defendant cannot keep a gift purchased with
illegal profits.
Sanchez-Diaz opposed the motion, arguing that she
provided valuable consideration for the BMW and, accordingly, had
a legitimate claim to it. Specifically, she contended that
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California law creates a legal presumption that she provided value
for the car because it instructs that the mutual consent of parties
who enter into a separation and support agreement is sufficient
consideration for that agreement. She also submitted a
declaration explaining that, in exchange for Carrillo's financial
obligations under the agreement, which were undertaken for the
benefit of the parties' son, she accepted full legal and physical
custody of their son.
The district court granted the SEC's disgorgement
motion. SEC v. Carrillo, 656 F. Supp. 3d 354, 356 (D. Mass. 2023).
It concluded that the SEC satisfied its burden by showing that
Sanchez-Diaz received ill-gotten funds in the form of the 2017 BMW
and that she did not have a legitimate claim to those funds. Id.
at 355. It determined that the question before it was not "whether
there existed 'consideration' in the contract law sense but whether
Sanchez[-]Diaz provided substantially equivalent value in the
bankruptcy law sense." Id. at 355-56. Applying that framework,
the district court found as a matter of fact that "conspicuously
absent in Sanchez[-]Diaz['s] defense is any persuasive argument
that [she] 'provided services or value in exchange for' the BMW."
Id. at 355 (quoting SEC v. Knox, No. 18-12058, 2022 WL 1912877, at
*4 (D. Mass. June 3, 2022)). The district court also stated that
Sanchez-Diaz's declaration did not "persuade[] [it] that she
provided goods, services, or other substantially equivalent value
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in exchange for the BMW." Id. at 356. It held that disgorgement
was therefore appropriate and ordered Sanchez-Diaz to pay
$169,804. Id.Sanchez-Diaz timely appealed the district court's
disgorgement order.
II. STANDARD OF REVIEW
"Disgorgement is an equitable remedy," and "[t]he
availability of an equitable remedy presents a question of law
engendering de novo review." In re PHC, Inc. S'holder Litig., 894
F.3d 419, 435 (1st Cir. 2018). Accordingly, we review de novo
Sanchez-Diaz's primary contention that disgorgement is not an
equitable remedy available to the SEC. Because her contention
that she has a legitimate claim to the car also must be "valid in
fact," however, we review for clear error the district court's
factual finding that she provided nothing of value in exchange for
the car.1 See CFTC v. Kimberlynn Creek Ranch, Inc., 276 F.3d 187,
192 (4th Cir. 2002) (reviewing for clear error factual findings
entered after a hearing held to determine the legitimacy of a
relief defendant's claim to ill-gotten funds).2
1The SEC conceded at oral argument, in two separate
exchanges, that the district court found that Sanchez-Diaz
provided no value for the car.
2In In re PHC, we first exercised de novo review and concluded
that disgorgement was available. 894 F.3d at 438. We then
evaluated under an abuse of discretion standard whether the
district court had properly tailored the scope of the disgorgement
order to address the wrongdoer's conduct. Id. at 438-39. Here,
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III. DISCUSSION
Sanchez-Diaz urges us to reverse the district court,
arguing primarily that she provided something of value in exchange
for the BMW and, therefore, has a legitimate claim to it. She
also contends that the district court erred in relying on
bankruptcy law principles to evaluate the legitimacy of her claim.
Her arguments raise an issue of first impression for
this court: When does a relief defendant have a legitimate claim
to property purchased with ill-gotten funds such that equitable
disgorgement would be unjustified? We begin our analysis by
setting forth the correct legal standard for evaluating whether
disgorgement against a relief defendant is an available equitable
remedy. We then apply that standard to this case.
A. When Is Equitable
Disgorgement Available Against Relief Defendants?
The SEC proceeds against Sanchez-Diaz as a relief
defendant. As the SEC acknowledges, relief defendants are "third-
party non-wrongdoers." SEC v. Ahmed, 72 F.4th 379, 407 (2d Cir.
2023). "In the context of securities enforcement actions, [they]
are individuals who are not accused of having violated the
by contrast, scope of relief is not at issue. Instead, after
setting out its understanding of the legal test for the
availability of disgorgement, the district court concluded as a
matter of fact that Sanchez-Diaz provided no value in exchange for
the car. Consistent with our precedent, we review that factual
finding for clear error. See United States v. Maglio, 21 F.4th
179, 186 (1st Cir. 2021).
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securities laws themselves, but who are believed to be in
possession of profits from such violations." SEC v. Smith, 710
F.3d 87, 90 n.2 (2d Cir. 2013). Consistent with this
understanding, the SEC has never contended that Sanchez-Diaz
engaged in any wrongful conduct or that she had any knowledge of
Carrillo's alleged fraud. Indeed, according to the complaint in
the underlying enforcement action, Carrillo's fraudulent scheme
started six years after he and Sanchez-Diaz separated.
We have not previously articulated a legal rule about
when a relief defendant in a securities enforcement action may be
subject to equitable disgorgement. The Second Circuit, however,
has set forth such a rule. Under its precedent, "[f]ederal courts
may order equitable relief against a person who is not accused of
wrongdoing 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." SEC v. Cavanagh, 155 F.3d 129,
136 (2d Cir. 1998). Several other circuits have adopted this rule
as setting forth the two critical conditions that must be satisfied
for a court to order equitable disgorgement against a relief
defendant. See, e.g., Kimberlynn Creek Ranch, 276 F.3d at 192
(quoting Cavanagh); SEC v. George, 426 F.3d 786, 798 (6th Cir.
2005) (same); SEC v. Colello, 139 F.3d 674, 677 (9th Cir. 1998)
(employing similar rule); SEC v. Cherif, 933 F.2d 403, 414 n.11
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(7th Cir. 1991) (same). Importantly, the parties agree this two-
part rule controls here.
After careful review, we conclude this two-part rule
makes good sense in light of the plain language of the applicable
statute, the equitable principles behind disgorgement, and the
nature of relief defendants. First, the Securities and Exchange
Act permits the SEC to seek, and courts to order, "any equitable
relief that may be appropriate or necessary for the benefit of
investors." 15 U.S.C. § 78u(d)(5). The statute specifically
provides for disgorgement, stating that "[i]n any action or
proceeding brought by the [SEC] under any provision of the
securities laws, the [SEC] may seek, and any [f]ederal court may
order, disgorgement." Id. § 78u(d)(7). Federal courts have
jurisdiction to "require disgorgement" under that provision "of
any unjust enrichment by the person who received such unjust
enrichment as a result of" a securities law violation. Id.
§ 78u(d)(3)(A)(ii) (emphasis added); see also George E. Palmer,
Law of Restitution § 1.1 (3d ed. 2023) (defining unjust enrichment
as "a very broad and flexible equitable doctrine, based on the
principle that it is contrary to equity and good conscience for
the defendant to retain a benefit that has come to [them] at the
expense of the plaintiff").
Second, courts considering disgorgement orders in
securities enforcement actions have focused on the equitable
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principle of unjust gain. They have imposed disgorgement as a
remedy to "forc[e] a defendant to give up the amount by which [they
were] unjustly enriched" through violations of securities laws.
SEC v. Contorinis, 743 F.3d 296, 301 (2d Cir. 2014) (first
alteration in original) (quoting FTC v. Bronson Partners, LLC, 654
F.3d 359, 372 (2d Cir. 2011)); see also SEC v. Sargent, 329 F.3d
34, 40 (1st Cir. 2003); Dan B. Dobbs & Caprice L. Roberts, Law of
Remedies: Damages, Equity, Restitution § 4.1(1) (3d ed. 2018)
(noting that the remedy of disgorgement is measured by a
defendant's unjust gains). As they have explained, a function of
disgorgement is 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." Colello,
139 F.3d at 676. As an equitable remedy, however, "disgorgement
of improper profits" is "limited to 'restoring the status quo and
ordering the return of that which rightfully belongs' to" another.
Braunstein v. McCabe, 571 F.3d 108, 122 (1st Cir. 2009) (quoting
Tull v. United States, 481 U.S. 412, 424 (1987)). Because of this
equitable limitation, disgorgement is properly applied only
against third-party non-wrongdoers "who are in possession of funds
to which they have no rightful claim." SEC v. Ross, 504 F.3d
1130, 1141 (9th Cir. 2007); see also Contorinis, 743 F.3d at 306–
07 (noting this application is "consistent with disgorgement's
remedial purpose . . . [of] ensur[ing] illegal actions do not yield
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unwarranted enrichment even to innocent parties"). If, by
contrast, a relief defendant has a rightful claim to the funds,
disgorgement is inappropriate. Ross, 504 F.3d at 1142.
Third, the two-part rule accounts for the nature of
relief defendants. "[T]he lack of a legitimate claim to the [ill-
gotten] funds is the defining element of a nominal [or,
alternatively, relief] defendant." Colello, 139 F.3d at 677. The
definition of a relief defendant is one who "holds the subject
matter of the litigation in a subordinate or possessory capacity[,]
as to which there is no dispute" -- and thereby lacks a legitimate
claim to the property at issue. Id. at 676 (quoting Cherif, 933
F.2d at 414). That is why, courts have explained, relief
defendants may "be joined to aid the recovery of relief" without
an additional assertion of subject matter jurisdiction: they have
possession but "no ownership interest" in the funds at issue and
are joined simply to facilitate collection. Kimberlynn Creek
Ranch, 276 F.3d at 191 (quoting Cherif, 933 F.2d at 414).
For all these reasons, we are persuaded by the reasoning
of our sister circuits and hold that the SEC may obtain
disgorgement from Sanchez-Diaz only if (1) she received ill-gotten
funds, in the form of the 2017 BMW, and (2) she has no legitimate
claim to those funds, i.e., to the BMW. The SEC, as the party
seeking disgorgement, must establish both elements by a
preponderance of the evidence. See Steadman v. SEC, 450 U.S. 91,
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103-04 (1981); SEC v. World Cap. Mkt., Inc., 864 F.3d 996, 1004
(9th Cir. 2017).3 When a relief defendant such as Sanchez-Diaz
contests the SEC's request for disgorgement, however, she must put
forward a claim that is both legally and factually valid and cannot
rely solely on conclusory assertions. See Kimberlynn Creek Ranch,
276 F.3d at 192 n.5.
The parties do not dispute that the first element is met
here because Sanchez-Diaz has effectively conceded that the
proceeds of the underlying fraud paid for the BMW. Accordingly,
this case hinges on the second element -- whether Sanchez-Diaz has
a "legitimate claim" to the 2017 BMW. See Cavanagh, 155 F.3d at
136. We turn our attention to that element now.
B. Identifying a "Legitimate Claim"
We have not developed guidelines for what qualifies as
a "legitimate claim" to unlawfully obtained proceeds, but our
sister circuits have. Again, we find their reasoning persuasive
and rely on it here.
Although the parties dispute who bears the burden of proving
3
the relief defendant's legitimate claim or lack thereof, neither
provides substantial briefing on this question. Additionally, we
have not found any case law that persuasively argues that the
individual should bear the burden of proof when the government
brings a claim seeking to disgorge assets or property in the
individual's possession. Even if we are incorrect and Sanchez-
Diaz had the burden of proof, she would have met it here based on
the largely undisputed facts before the district court.
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To possess a legitimate claim to ill-gotten funds, a
relief defendant must provide something of value in exchange. See
CFTC v. Walsh, 618 F.3d 218, 226 (2d Cir. 2010) ("[R]elief
defendants who have provided some form of valuable consideration
in good faith in return for proceeds of fraud are beyond the reach
of the district court's disgorgement remedy."4 (citing Janvey v.
Adams, 588 F.3d 831, 834–35 (5th Cir. 2009))); Palmer, supra,
§ 19.7 (explaining that courts generally agree that "an innocent
person who obtains a benefit through the wrongful act of a third
person" can be ordered to pay restitution "to the one at whose
expense the benefit was obtained, unless, in addition to [their]
innocence, the recipient is protected because [they] gave value").5
That value can come in different forms. It can include
providing goods or performing services in exchange for
4To be sure, the federal court in Walsh certified a
particular question of New York state law to New York's highest
court -- whether a spouse can be considered a "good faith purchaser
for value" when she relinquishes future claims to marital property
that consists almost entirely of proceeds of fraud. 618 F.3d at
231-32. But the Walsh court agreed with the legal principle
critical for our purposes here -- that when a relief defendant
provides value in return for assets, those assets are not subject
to disgorgement. See id. at 226.
The SEC has never argued that Sanchez-Diaz had any knowledge
5
of Carrillo's fraud such that she would not qualify as "an innocent
person." To the contrary, the SEC repeated at oral argument that
it was not alleging that Sanchez-Diaz was aware of the fraud.
Thus, notice of the underlying fraud is not at issue in this case,
and we do not analyze how such notice could impact the parties'
arguments.
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compensation, such as when an employee performs work for an
employer. See Kimberlynn Creek Ranch, 276 F.3d at 191–92 (finding
that salary payments received in return for services rendered to
an employer "constitute[] one type of ownership interest that would
preclude proceeding against the [employee] as a nominal
defendant"); Ross, 504 F.3d at 1142 (holding that relief defendants
who were employed as sales agents for a company that violated
securities laws had "presumptive title" to the commissions they
"received [as] compensation in return for services rendered").
Value also can come from giving up a legal claim.
Indeed, multiple courts have explained that a spouse may provide
something of value by giving up, as part of a divorce agreement,
a legal claim to marital property or child or spousal support.
See Walsh, 618 F.3d at 226 (explaining that a relief defendant may
provide value by relinquishing legal claims to marital property
through a negotiated separation agreement); cf. Scholes v.
Lehmann, 56 F.3d 750, 755-58 (7th Cir. 1995) (stating that a spouse
who received proceeds of fraud could provide more than nominal
consideration through "discharge of [her former husband's] . . .
obligations of child support and the like arising from their
divorce").
By contrast, courts agree that when a relief defendant
receives property "as a gift," there is no "'legitimate claim'
sufficient to immunize the property from disgorgement." Walsh,
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618 F.3d at 226; see also George, 426 F.3d at 798; Cavanagh, 155
F.3d at 137. Consistent with the need to distinguish between
gifts and value-backed exchanges, a relief defendant must provide
more than nominal value to demonstrate a legitimate claim. See
Restatement (Third) of Restitution and Unjust Enrichment § 68,
cmt. c, illus. 4 (Am. L. Inst. 2011). For example, in Janvey, the
Fifth Circuit held that creditors who signed a written agreement
granting them "certain rights and obligations" with respect to
funds, before the SEC enforcement action began, had a legitimate
claim and were improper relief defendants. 588 F.3d at 834–35.
By contrast, in World Capital Market, the Ninth Circuit upheld a
disgorgement order when the evidence showed that the named
defendant's alleged $5 million loan to the relief defendant was a
sham designed to minimize the amount of the named defendant's
assets. 864 F.3d at 1004–05. To support its ruling, the court
pointed to the fact that the relief defendant disclaimed any legal
obligation to repay the loan. Id.Accordingly, to exclude the possibility of a gift, the
value that a relief defendant provides in exchange for ill-gotten
gains must be more than nominal in relation to the funds received.
But no federal disgorgement precedent suggests that the value must
be substantially equal. Rather, courts have viewed their task as
"merely ensuring a non-specious claim to the funds." CFTC v.
WeCorp, Inc., 848 F. Supp. 2d 1195, 1205-06 (D. Haw. 2012)
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(rejecting agency's argument that relief-defendant attorney did
not have a legitimate claim to a retainer because he did not
provide services that were "reasonably equivalent" to the
retainer's value); see also Kimberlynn Creek Ranch, 276 F.3d at
192 (explaining that a specious claim of ownership will not allow
individuals who hold funds on behalf of wrongdoers to avoid
disgorgement). This is for good reason. Under general equitable
principles, innocent third parties can assert a defense to
restitution claims premised on unjust enrichment by demonstrating
that they gave value in return. Palmer, supra, § 16.6;
Restatement (Third) of Restitution and Unjust Enrichment § 68
cmt. c (Am. L. Inst. 2011). As long as the individual provided
more than nominal consideration, courts generally refrain from
inquiring into the adequacy of the consideration. See Restatement
(Third) of Restitution and Unjust Enrichment § 68, cmt. c, illus.
4 (Am. L. Inst. 2011); Dobbs & Roberts, supra, § 4.6(2) (explaining
that, even if one party received a payment worth more than the
value of the debt it discharged in return, the party may still
have a defense to restitution and that courts are correct not to
investigate the value of the right to recover against the debtor);
Palmer, supra, § 16.6 (referencing pragmatic reasons for declining
to inquire into the worth of a valid claim one party has
discharged, including the difficulties of ascertaining value).
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The district court here, however, took a different
approach. It determined that the relevant question was not
"whether there existed 'consideration' in the contract law sense
but whether Sanchez[-]Diaz provided substantially equivalent value
in the bankruptcy law sense."6 Carrillo, 656 F. Supp. 3d at 355-
56. The SEC's argument at the disgorgement motion hearing seems
to have inspired the district court's bankruptcy-law framing. The
SEC contended that Sanchez-Diaz did not give "equivalent value in
exchange" for Carrillo's obligation to provide her with a car, and
the question of whether she gave "equivalent value" was the central
issue before the district court.
6The concept of "reasonably equivalent value," meaning
"roughly equivalent value," is central to the law of fraudulent
transfer under the Bankruptcy Code, in which a bankruptcy trustee
can undo and recover a transfer of property from a debtor to a
third party. 2 Bankruptcy Law Manual § 9:36 (5th ed. 2023). The
Bankruptcy Code permits a trustee to recover transfers that a
debtor made before the debtor declared bankruptcy if the trustee
can show, among other things, that at the time of the transfer,
the debtor "received less than a reasonably equivalent value in
exchange for such transfer or obligation." 11 U.S.C.
§ 548(a)(1)(B)(i); see In re Palladino, 942 F.3d 55, 58-59 (1st
Cir. 2019). Although the term "reasonably equivalent value"
appears in the statute's text, it is not defined in the statute,
so courts have given it meaning. See In re R.M.L., Inc., 92 F.3d
139, 153 (3d Cir. 1996) (explaining that courts consider factors
such as the fair market value of the item received by, or the
services performed for, the debtor compared to the actual price
paid; the existence of an arm's-length relationship between the
debtor and the transferee; and the good faith of the transferee).
Critically, the term "reasonably equivalent value" does not appear
in the text of the SEC disgorgement statute.
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Neither the district court nor the SEC has cited support
for the application of this bankruptcy-law framing to SEC
disgorgement motions. After careful consideration, we also find
no basis for it in the language of the operative federal statute
or in precedent, including the cases cited by the district court.
Instead, those cases merely stand for the well-accepted principle
that a relief defendant has a legitimate claim to property or funds
only if they have provided some consideration, such as in the form
of goods or services, in exchange.
To be sure, when parties have disputed whether the relief
defendant has a legitimate claim based on services rendered, lower
courts have examined the amount of money a relief defendant
received in light of the services purportedly provided. See,
e.g., WeCorp, 848 F. Supp. 2d at 1202; SEC v. Erwin, No. 13-cv-
03363, 2022 WL 2063227, at *3–4 (D. Colo. June 8, 2022); SEC v.
Nadel, No. 11-0215, 2016 WL 639063, at *29 (E.D.N.Y. Feb. 11,
2016); SEC v. End of the Rainbow Partners, LLC, No. 17-cv-02670,
2019 WL 8348323, at *7 (D. Colo. Nov. 25, 2019). Courts have
taken a particularly close look in cases in which relief defendants
have received substantial sums of money for ministerial tasks.
See, e.g., Erwin, 2022 WL 2063227, at *3–4; Nadel, 2016 WL 639063,
at *29; End of the Rainbow Partners, 2019 WL 8348323, at *7. The
courts' inquiries, however, were aimed at distinguishing earned
compensation from gratuitous transfers. See, e.g., Erwin, 2022
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WL 2063227, at *3–4. The courts did not require that the relief
defendants furnish "equivalent value" to assert a legitimate
claim. And no case that we have found suggests that, if a relief
defendant provides more than nominal value, the court should
nevertheless scrutinize if that value were truly sufficient, by
some market-based or other external measure.
Indeed, "disgorgement is a distinctly public-regarding
remedy, available only to government entities seeking to enforce
explicit statutory provisions," and the applicable statutory
provision here focuses on the concept of unjust enrichment.
Bronson Partners, 654 F.3d at 372; see also 15 U.S.C.
§ 78u(d)(3)(A)(ii). A disgorgement order is aimed at requiring
the return of that which belongs equitably and in good conscience
to another. Braunstein, 571 F.3d at 122. It is, therefore,
available against innocent third parties. Ross, 504 F.3d at 1141.
If a relief defendant has provided some value that is more than
nominal in exchange for an asset, however, they do have a rightful
claim to that asset, even if some accounting could suggest they
obtained it at a discount. Launching small-scale adjudications
on how much of the relief defendant's discount is valid or the
precise fair market value of the relief defendant's services would
require the relief defendant to satisfy a mathematical analysis,
rather than determine the relevant question of whether they have
a just claim. Compare Janvey, 588 F.3d at 834–35 (finding that
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the existence of a creditor-debtor relationship before the
enforcement action was itself enough to give relief defendant-
creditors a legitimate ownership interest in proceeds received
through the agreement), with In re Palladino, 942 F.3d at 59
(confronting a valid creditor-debtor relationship in the
bankruptcy law context and then, nevertheless, proceeding to
examine whether the debtors' transfer provided reasonably
equivalent value to creditors); see also Dobbs & Roberts, supra,
§ 4.1(1) (contrasting restitutionary recovery through remedies
like disgorgement with recovery of damages).
To sum up, we conclude that a relief defendant in an SEC
enforcement action has a legitimate claim to funds if (i) they
have provided something of value in exchange, whether that be
services as an employee or an agreement to give up a legal claim,
as just two examples, and (ii) the value they provided is more
than nominal in relation to the money received.7 With that legal
standard in place, we turn to whether Sanchez-Diaz satisfies it.
7In so holding, we emphasize that "more than nominal" is not
an absolute number. Rather, courts should determine in the
context of a particular case whether the value that a relief
defendant provided is more than nominal in relation to the funds
received. For example, five dollars for a new Rolls Royce would
not be more than nominal. Courts evaluating the services that a
relief defendant has provided have used this type of analysis by
evaluating whether the money the relief defendant received is
related to the scope and duration of the services. See, e.g.,
Nadel, 2016 WL 639063, at *29.
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C. Application
Sanchez-Diaz received the car through the parties'
modified child custody and support agreement. Under that 2016
agreement, (i) Carrillo agreed to cover a number of expenses
involved in raising their son, including transportation, and (ii)
Sanchez-Diaz agreed to sole legal and physical custody of their
son. We conclude that, through this agreement, Sanchez-Diaz
conveyed much more than nominal value in exchange for Carrillo's
promise to purchase the 2017 BMW. Accordingly, we determine that
the district court clearly erred in holding otherwise.
1. Acceptance of Legal and Physical Custody
By accepting sole legal and physical custody of their
son under the 2016 agreement, Sanchez-Diaz agreed to be fully
responsible for every aspect of their son's life for the next five
to six years -- i.e., until he turned nineteen or started college.
The significant effort involved in raising a child, and the
obligation of full legal and physical custody, certainly
constitutes the provision of value in exchange for Carrillo's
monetary support, including the car.
Our conclusion rests not only on a practical
understanding of the realities of raising a child but also on
decades of research and legal recognition of what caring for a
child entails. For instance, California law presumes, in the
context of child support, "that a parent having primary physical
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responsibility for [a child] contributes a significant portion of
available resources for the support of [that child]." Cal. Fam.
Code § 4053(i). Similarly, research has long documented the
significant time single parents spend on childcare and household
activities. On average, single parents can spend as much as six-
and-a-half hours per day with their children, not counting the
time spent engaged in housework. Sarah M. Kendig & Suzanne M.
Bianchi, Single, Cohabitating, and Married Mothers' Time with
Children, 70 J. Marriage & Fam. 1228, 1237 (2008); D’Vera Cohn,
Gretchen Livingston & Wendy Wang, After Decades of Decline, A
Rise in Stay-at-Home Mothers, Pew Rsch. Ctr. 21 (Apr. 8, 2014),
https://www.pewresearch.org/social-trends/wp-
content/uploads/sites/3/2014/04/Moms-At-Home_04-08-2014.pdf.
And, of course, it is well understood that parents and caregivers
are central to creating the conditions that allow for a child's
healthy development, including through the time they spend
directly with that child. See Beth A. Kotchick & Rex Forehand,
Putting Parenting in Perspective: A Discussion of the Contextual
Factors That Shape Parenting Practices, 11 J. Child & Fam. Stud.
255, 255 (2002). The important contributions that parents make
to their family by caring for their children are also recognized
in the equitable distribution of property upon divorce. See Barth
H. Goldberg, Valuation of Divorce Assets § 10:4 (2023).
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Accordingly, this case is very different from cases in
which a relief defendant provided limited menial tasks in exchange
for a large sum of money, suggesting that the money was merely a
gift. See, e.g., Erwin, 2022 WL 2063227, at *3–4. It is also
different from situations in which a wrongdoer uses a relief
defendant as a mere conduit to hide proceeds from the underlying
illegal activity. See, e.g., World Cap. Mkt., 864 F.3d at 1004–
05. Here, the car was just one of the resources Carrillo committed
to provide through a valid child support and custody agreement.
And as Sanchez-Diaz explained in her declaration below, she
primarily used the car to drive their son to and from school and
extracurriculars -- i.e., in fulfillment of the custodial
obligations she had under the agreement. See Janvey, 588 F.3d at834–35.
The SEC contends, however, that Sanchez-Diaz did not
provide any value in return for the BMW because she did not
undertake new obligations through the 2016 agreement. It claims
that she had already accepted custody of the parties' son under
the earlier 2009 marital termination agreement. But the SEC
overlooks a major change in circumstances that occurred after 2009:
Carrillo left the country and moved to Mexico in late 2013. Under
the 2009 agreement, Carrillo consented to a set schedule for
sharing the care of their son: he had the son every other weekend
and on alternating school holidays, school vacations, and
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birthdays. After Carrillo moved to Mexico and since early 2014,
however, Sanchez-Diaz, who continued to reside with their son in
California, had sole physical custody. She and Carrillo then
executed the 2016 agreement to reflect their new arrangement for
the care of their son, which had been in effect in practice since
Carrillo left the country.
The district court discussed neither Sanchez-Diaz's
obligations under the 2016 agreement nor the change in
circumstances after Carrillo left the country, both of which
Sanchez-Diaz detailed in her declaration. Rather, the district
court simply rejected her declaration and concluded that Sanchez-
Diaz had provided nothing of value, even though the SEC did not
contest the basic facts of the 2009 and 2016 agreements or that
Carrillo moved out of the country in late 2013.
2. Forbearance on a Legal Claim
In addition to accepting sole legal and physical custody
of their son, Sanchez-Diaz conveyed a second form of value under
the 2016 agreement: She gave up the right to return to court to
seek modification of the 2009 child support order and instead
agreed to resolve the issues at stake through a settlement with
Carrillo. An agreement to forbear on a legal claim constitutes
an exchange of value that gives a relief defendant a legitimate
claim to assets received in return. See Walsh, 618 F.3d at 222,
226. Although the SEC hints there is something suspicious about
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the 2016 agreement given its allegation that Carrillo's fraud began
in 2013, renegotiation of child support orders in light of changed
circumstances is, in fact, a normal occurrence. See Cal. Fam.
Code § 3651(a) (providing that an order of child support "may be
modified or terminated at any time as the court determines to be
necessary"); Determining Child & Spousal Support § 6:37 (2023)
("[A]ll states permit modification of child support on a showing
of changed circumstances since the entry of the prior order.").
Importantly, between the 2009 and 2016 agreements,
Carrillo moved to Mexico, and their son neared his teenage years.
The increased cost of raising older children is one common reason
that parents seek modification of a child support order. See J.
Thomas Oldham, Abating the Feminization of Poverty: Changing the
Rules Governing Post-Decree Modification of Child Support
Obligations, 1994 BYU L. Rev. 841, 845 (explaining that parents
should be able to request modification of child support when their
children age, given that "most families spend more on teenage
children than they do on younger ones"); see also Robert D.
Broughton, Jr., Modification of Child Support Orders Under the
Uniform Interstate Family Support Act (UIFSA), Army Law. Dec. 2004,
at 57 (explaining that modification of a child support order can
be warranted because "[t]he costs of raising a child, the needs of
a child, and the financial circumstances of the parents may all
change dramatically over time," and an agreement entered when a
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child is young may not account for the costs of raising a
teenager).
Because, in return for the resources she received
through the 2016 child support agreement, Sanchez-Diaz (i)
provided services, by taking on sole legal and physical custody of
their son, and (ii) surrendered a potential legal claim, the
district court's factual finding that she provided no value is not
"plausible in light of the record viewed in its entirety." United
States v. One Star Class Sloop Sailboat, 546 F.3d 26, 35 (1st Cir.
2008) (quoting Anderson v. City of Bessemer City, 470 U.S. 564,
573-74 (1985)). Instead, "we are left with a 'strong, unyielding
conviction that the district court was mistaken.'" Benham v.
Lenox Sav. Bank, 292 F.3d 46, 48 (1st Cir. 2002) (quoting Indus.
Gen. Corp. v. Sequoia Pac. Sys. Corp., 44 F.3d 40, 46 (1st Cir.
1995)).
D. Disgorgement Is Not Available Against Sanchez-Diaz
In summary, Sanchez-Diaz provided value in exchange for
the car. The value she provided was more than nominal and
therefore satisfies our legal standard. The district court erred
as a matter of law by evaluating if that value was "substantially
equivalent" in the bankruptcy law sense. And its finding that
Sanchez-Diaz provided no value at all, despite the facts in the
record showing that she took on full legal and physical custody of
the parties' son and gave up a legal claim against her ex-husband,
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was clearly erroneous. Accordingly, no basis exists to subject
Sanchez-Diaz to disgorgement.8
IV. CONCLUSION
For all these reasons, we reverse the district court's
disgorgement order.
8 Because we conclude that disgorgement against Sanchez-Diaz
is not an available remedy and reverse on that ground, we need not
address her arguments that the remedy the SEC seeks from her is
punitive or that requiring her to pay disgorgement violates her
Fifth and Eighth Amendment rights.
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