Ussec v. Berkeley Healthcare Dynamics ( 2022 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS JAN 5 2022
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
U.S. SECURITIES & EXCHANGE No. 20-16754
COMMISSION,
D.C. No. 3:17-cv-00223-RS
Plaintiff-Appellee,
v. MEMORANDUM*
BERKELEY HEALTHCARE DYNAMICS,
LLC,
Defendant-Appellant,
______________________________
SUSAN L. UECKER,
Receiver-Appellee.
Appeal from the United States District Court
for the Northern District of California
Richard Seeborg, Chief District Judge, Presiding
Argued and Submitted October 21, 2021
San Francisco, California
Before: WATFORD and HURWITZ, Circuit Judges, and BAKER,** International
Trade Judge. Concurrence by Judge BAKER.
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The Honorable M. Miller Baker, Judge for the United States Court of
International Trade, sitting by designation.
Berkeley Healthcare Dynamics, Inc. (“BHD”) was named as a relief
defendant in this securities fraud action by the Securities and Exchange Commission
against Thomas Henderson. After a consent judgment was entered against
Henderson, the SEC sought disgorgement from BHD of funds traceable to the fraud.
The district court entered a summary judgment ordering disgorgement, and BHD did
not appeal.
A year after the judgment was entered, the Supreme Court decided Liu v. SEC,
140 S. Ct. 1936 (2020). BHD then moved for relief from judgment under Federal
Rule of Civil Procedure 60(b)(6), arguing that Liu required deduction of BHD’s
legitimate expenses from the disgorgement order. The district court denied the
motion, and this time BHD appealed.
The sole issue for decision is whether Liu changed the law governing the
disgorgement order and therefore was an extraordinary circumstance requiring
reopening of a final judgment. See Phelps v. Alameida, 569 F.3d 1120, 1135 (9th
Cir. 2009). Like the district court, we conclude that Liu did not change the governing
law and affirm the denial of the Rule 60(b)(6) motion.
1. We have long distinguished between “primary wrongdoers” and “relief
defendants” in addressing disgorgement under the securities laws. A primary
wrongdoer is one who obtained ill-gotten gains through violation of the securities
laws. See SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072, 1096 (9th Cir.
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2010). Prior to Liu, we permitted disgorgement by a wrongdoer of the entire amount
obtained through conduct forbidden by the securities statutes, reduced only by
amounts already paid back to investors. See SEC v. JT Wallenbrock & Assocs., 440
F.3d 1109, 1114 (9th Cir. 2006). Liu expressly rejected that standard, requiring that
a disgorgement award under 15 U.S.C. § 78u(d)(5) “not exceed a wrongdoer’s net
profits,” 140 S. Ct. at 1940, and that therefore “courts must deduct legitimate
expenses before ordering disgorgement,” id. at 1950. Liu plainly changed our
existing caselaw governing disgorgement by primary wrongdoers. See, e.g., SEC v.
Yang, 824 F. App’x 445, 447 (9th Cir. 2020) (remanding disgorgement order against
primary wrongdoers for further consideration in light of Liu).
2. In contrast to a primary wrongdoer, a relief or nominal defendant “holds
the subject matter of the litigation in a subordinate or possessory capacity as to which
there is no dispute.” SEC v. Colello, 139 F.3d 674, 676 (9th Cir. 1998) (cleaned up).
Under Ninth Circuit precedent, to obtain disgorgement against a relief defendant, a
“plaintiff must show that the nominal defendant has received ill gotten funds and
that he does not have a legitimate claim to those funds.” Id. at 677. A “lack of a
legitimate claim to the funds is the defining element of a nominal defendant.”
Id. Thus, disgorgement cannot be ordered if the relief defendant received the funds
as “compensation in return for services rendered.” SEC v. Ross, 504 F.3d 1130,
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1142 (9th Cir. 2007).1
3. Liu did not override our existing case law concerning disgorgement by
relief defendants. See Miller v. Gammie, 335 F.3d 889, 893 (2003) (en banc)
(requiring three-judge panel to follow Ninth Circuit precedent unless “clearly
irreconcilable” with intervening Supreme Court opinion). Liu did not involve a
relief defendant, nor did the Court state that its holding applies to relief defendants.
See 140 S. Ct. 1936. Moreover, Liu focused on disgorgement of “profit.” Id. at
1940. Under our caselaw, a relief defendant is not required to disgorge “profits,”
but instead only funds not received in exchange for consideration. See Ross, 504
F.3d at 1142. This approach provides stronger protection to relief defendants (who
need not disgorge any funds to which they have a “legitimate claim”) than Liu
provides for primary wrongdoers (who must disgorge all profits less legitimate
expenses). More importantly, our approach is consistent with the equitable principle
emphasized in Liu that a remedy should be designed to restore the status quo and
avoid being transformed into a penalty. Liu, 140 S. Ct. at 1943–44.
4. Although BHD argues that it had a legitimate claim to the funds that were
the subject of the disgorgement order, that issue was directly addressed by the district
1
Several of our sister circuits have similar standards for disgorgement against
relief defendants. See SEC v. Cherif, 933 F.2d 403, 414 (7th Cir. 1991); SEC v.
Cavanagh, 155 F.3d 129, 136 (2d Cir. 1998); Commodity Futures Trading Comm’n
v. Kimberlynn Creek Ranch, Inc., 276 F.3d 187, 192 (4th Cir. 2002).
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court in its summary judgment order, which was not appealed. BHD’s
dissatisfaction with that factual finding is not a basis for relief from judgment under
Rule 60(b)(6).
AFFIRMED.
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U.S. SEC v. Berkley Healthcare Dynamics, LLC, No. 20-16754
FILED
JAN 5 2022
BAKER, Judge, concurring:
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
In my view, it is unnecessary to decide whether Liu v. SEC, 140 S. Ct. 1936(2000), applies to relief defendants such as Berkeley Healthcare Dynamics, because
even if it does, in these circumstances it does not represent a change in the law for
purposes of Federal Rule of Civil Procedure 60(b)(6).
When the district court summarily overruled Berkeley’s objections to the
disgorgement of legitimate business expenses in 2019 without citation to any
authority, 1 Berkeley could have appealed. It did not do so.
Failure to appeal would be excusable, and Liu might then represent a change
in the law for Rule 60(b)(6) purposes, if Berkeley could point to then-existing circuit
precedent that squarely foreclosed its defense as a relief defendant to disgorgement
of the expenses at issue. But Berkeley has identified no such precedent, 2 and I am
unable to locate any. At the time of the district court’s decision, it appears to have
been at least an open question in this circuit whether a relief defendant that incurs
1
The district court’s cryptic explanation for ordering disgorgement of the expenses
was as follows: “Intervenors argue some of those monies were appropriately paid
from NA3PL, LLC (the warehouse tenant) to BHD, LLC (the landlord), to reimburse
it for various expenses it had incurred that were actually the tenant’s responsibility
under the lease. Intervenors have not shown, however, that there is any factual
dispute that those funds came from and/or were commingled with misdirected
investor funds, and therefore are subject to disgorgement.” 2-ER-82–83.
2
Berkeley asserts—without citation to any authority—that it “indisputably lacked a
well-founded legal ground upon which it could seek an appeal of the partial summary
judgment.” Reply Br. at 24.
legitimate business expenses has a “legitimate claim” to those funds. See SEC v.
Colello, 139 F.3d 674, 677 (9th Cir. 1998) (relief defendants are subject to
disgorgement of ill-gotten funds to which they do not have a “legitimate claim”).
Thus, Berkeley might have prevailed on appeal, and Liu—even if it means what
Berkeley says it means—therefore represents no change in controlling law for Rule
60(b)(6) purposes.
Because circuit precedent did not squarely foreclose its defense against
disgorgement of legitimate business expenses as a relief defendant, Berkeley cannot
now employ Rule 60(b)(6) as a substitute for an appeal on that issue, even if Liu’s
holding applies to relief defendants. Cf. GenCorp, Inc. v. Olin Corp., 477 F.3d 368,
374 (6th Cir. 2007) (Sutton, J.) (“This is not a case, in short, in which the appellant
chose not to challenge a controlling proposition of Sixth Circuit law—only to learn
after the appeal that the Supreme Court had chosen to reverse that controlling
authority.”); see also Martella v. Marine Cooks & Stewards Union, 448 F.2d 729,
730 (9th Cir. 1971) (“In order to bring himself within the limited area of Rule
60(b)(6) a petitioner is required to establish the existence of extraordinary
circumstances which prevented or rendered him unable to prosecute an appeal.”); 11
Wright & Miller, Federal Practice & Procedure § 2864 (3d ed. 2021) (“[I]t
ordinarily is not permissible to use a Rule 60(b)(6) motion to remedy a failure to
take an appeal.”). I therefore concur in affirming the district court’s denial of Rule
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60(b)(6) relief to Berkeley.
3