SEC v. Barton

Case: 22-11132 Document: 00516803802 Page: 1 Date Filed: 06/28/2023
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
____________
FILED
June 28, 2023
No. 22-11132
____________ Lyle W. Cayce
Clerk
Securities and Exchange Commission,
Plaintiff—Appellee,
versus
Timothy Barton,
Defendant—Appellant.
______________________________
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:22-CV-2118
______________________________
Before Clement, Graves, and Higginson, Circuit Judges.
James E. Graves, Jr., Circuit Judge:
The Securities and Exchange Commission (“SEC”) sued Defendant
Timothy Barton as well as other individual Defendants and corporate entities
for securities violations. Barton appeals the district court’s order appointing
a receiver over all corporations and entities controlled by him. For the
following reasons, we VACATE the order appointing the receiver effective
90 days after the issuance of this court’s mandate and REMAND for further
proceedings. We also GRANT in part Barton’s motion for a partial stay
pending appeal.
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I. Background
a. Factual Background
The SEC alleges the following facts in its complaint. Beginning
around 2015, Defendant Haoqiang Fu, a Chinese national, began brokering
homes for Defendant Stephen Wall, a Texas-based home builder. After
deciding to expand into real estate development projects, they partnered with
Barton, a Texas-based real estate developer. Their plan was to offer and sell
investment loans to Chinese investors. To effectuate this plan, Barton
formed single-purpose entities (the “Wall Entities”) to receive and control
investor funds, purchase specific parcels of land, and later develop the land
into residential housing. After Wall identified the land for projects, Fu
marketed the investments to Chinese investors. For each investment
contract, the Wall Entity would borrow a fixed amount from investors and
use it in conjunction with other investors’ funds and money in hand to
acquire a specific parcel of land at a specified price. In return, the investors
were promised repayment of the principal after two years and interest
payments after the first and second year. Between 2017 and 2019, the Wall
Entities raised approximately $26.3 million dollars from over 100 investors.
However, only two of the nine Wall entities purchased the property
described in their respective investment contracts for a total of $2.6 million.
Even these purchases were not made using the investor funds earmarked for
those properties—instead, the purchases were made using commingled
funds from other offerings. In addition, two other entities controlled by
Barton (the Relief Defendants) purchased the properties that two Wall
entities were supposed to purchase. In all, approximately $23.7 million of the
investors’ funds were commingled and misused to: 1) pay Barton’s personal
expenses, 2) pay Fu commissions and fees, 3) make Ponzi payments to the
earlier investors, 4) make political contributions, 5) acquire unrelated
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properties, 6) pay professional fees for unrelated properties, and 7) make
payments to Wall.
b. Procedural Background
On September 23, 2022, the SEC sued Barton, Wall, Fu, the Wall
Entities, Carnegie Development (the managing member of the Wall entities),
and the Relief Defendants for securities violations. The SEC sought a
permanent injunction, disgorgement of ill-gotten gains, and civil penalties.
Soon after filing its complaint, the SEC moved to appoint a receiver
over the Wall Entities, Carnegie Development, the Relief Defendants, and
any other entities that Barton directly or indirectly controls. It supported its
motion with a declaration from an SEC Staff Accountant who was involved
in the investigation. The declaration details the transfer, commingling, and
misuse of the investors’ funds. In its motion, the SEC argued that the district
court may appoint a receiver on a prima facie showing of fraud and
mismanagement based on this court’s decision in SEC v. First Financial
Group of Texas, 645 F.2d 429, 438 (5th Cir. 1981) (“First Financial”). Barton
opposed the motion, arguing that the district court must instead find that a
receivership is appropriate under the factors in Netsphere, Inc. v. Baron, 703
F.3d 296, 305 (5th Cir. 2012).
On October 18, 2022, the district court granted the SEC’s motion and
appointed a receiver over assets belonging to the Defendant entities, the
Relief Defendants, and any other entities directly or indirectly controlled by
Barton. It made the following findings in its order:
the Court finds that, based on the record in these proceedings,
the appointment of a receiver in this action is necessary and
appropriate for the purposes of marshaling and preserving all
assets of the Receivership Entities
...
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the Court finds that the SEC has brought this action to enforce
the federal securities laws, in furtherance of the SEC’s police
and regulatory powers, and the relief sought by the SEC and
provided in this Order is in the public interest by preserving the
illicit proceeds of fraudulent conduct, penalizing past unlawful
conduct and deterring future wrongdoing, and is not in
furtherance of a pecuniary purpose, and therefore, the Court
concludes that the entry of this Order is excepted from the
automatic stay pursuant to 11 U.S.C. §362(b)(4).
The order gave the receiver numerous powers, including the power to
determine the nature of the property interests, take possession of any
property belonging to receivership entities, and take any actions necessary to
preserve receivership property or prevent its dissipation, concealment, or
inequitable distribution.
Barton moved to strike the clause allowing the receiver to take
possession of assets belonging to “any other entities that Defendant Timothy
Barton directly or indirectly controls.” The district court denied his motion.
On November 1, 2022, the receiver moved for the district court to
supplement its receivership order to include over a hundred newly
discovered Barton-controlled entities by name. The district court
supplemented its order nunc pro tunc to expressly identify 126 newly
discovered receivership entities. The receiver then moved for the court to set
procedures for the disposition of personal property in the custody of
receivership entities. The district court granted the motion and adopted the
procedures proposed by the receiver. Barton timely appealed the order
appointing the receiver and both follow-up orders. On November 28, 2022,
he moved in the district court for a stay pending appeal of the receivership
order. While that motion was still pending, he also asked this court for a stay
pending appeal. A motions panel of this court denied his request on January
6, 2023, and the district court denied his request on January 17, 2023.
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II. Jurisdiction & Standard of Review
We have jurisdiction over interlocutory appeals from “orders
appointing receivers, or refusing orders to wind up receiverships or to take
steps to accomplish the purposes thereof, such as directing sales or other
disposals of property.” 28 U.S.C. § 1292(a)(2). We review a district court’s
decision to appoint a receiver for abuse of discretion. Netsphere, 703 F.3d at
305.
III. Discussion
a. The Applicable Test
A central dispute between the parties is what test the district court
should have applied before imposing a receivership. Barton argues the
district court abused its discretion because it did not apply the standard or
make the proper findings under the factors set forth in Netsphere (“Netsphere
factors”). The SEC responds that Netsphere is inapplicable and the district
court’s findings were sufficient under First Financial.
In First Financial, the SEC sued a securities dealer and its officers for
securities violations. 645 F.2d at 431. The district court granted the SEC’s
motion for a preliminary injunction and enjoined each individual defendant
“from offering, purchasing, or selling packages of the specified securities in
violation of the federal securities laws, and from disposing of assets and
records of First Financial.” Id. at 432. It also enjoined the defendants from
disposing of more than $1,500 in personal assets per week. Id. Twelve days
later, it granted the SEC’s motion for a temporary receiver over the
defendant entity, First Financial. Id. The order directed the receiver “to take
exclusive control of the corporate assets in order to prevent injury to First
Financial investors and to prevent further violations of the federal securities
laws.” Id. at 437-38. Reviewing the injunction order, this court first explained
that under the relevant securities laws, preliminary injunctive relief is
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appropriate upon a showing of “a reasonable likelihood that the defendant is
engaged or about to engage in practices that violate the federal securities
laws.” Id. at 434. It concluded that the district court did not abuse its
discretion in entering a preliminary injunction. Id. at 436. Turning to the
district court’s appointment of a receiver, it cited a Seventh Circuit case for
the following proposition:
The prima facie showing of fraud and mismanagement, absent
insolvency, is enough to call into play the equitable powers of
the court. It is hardly conceivable that the trial court should
have permitted those who were enjoined from fraudulent
misconduct to continue in control of (the corporate
defendant’s) affairs for the benefit of those shown to have been
defrauded. In such cases the appointment of a trustee-receiver
becomes a necessary implementation of injunctive relief.
Id. at 438 (quoting SEC v. Keller Corp., 323 F.2d 397, 403 (7th Cir. 1963)). To
protect the public welfare and the interests of those who invested with First
Financial, this court concluded that the “appointment of a receiver was a
necessary relief measure within the discretion of the court, as an ancillary to
preliminary injunctive relief during the continuing civil enforcement
proceeding.” Id. at 439.
The SEC relied upon First Financial in both its briefing before the
district court and this court, but there is a crucial distinction between that
case and the receivership order here. There, the SEC already obtained
injunctive relief, so the receivership was “proper as an adjunct to injunctive
relief for a securities fraud.” Netsphere, 703 F.3d at 306 (citing Keller, 323
F.2d at 402); see also Waffenschmidt v. MacKay, 763 F.2d 711, 716 (5th Cir.
1985) (“Courts possess the inherent authority to enforce their own injunctive
decrees.”) (citation omitted). Here, the SEC did not obtain a preliminary
injunction before seeking a receivership, so First Financial is inapposite.
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That brings us back to Netsphere. In that case, a defendant was
involved in disputes over the ownership of domain names. Netsphere, 703
F.3d at 302. After settling those domain name disputes in related bankruptcy
proceedings, the bankruptcy court recommended the appointment of a
special master to mediate unpaid legal fees since the defendant kept hiring
and firing lawyers without paying them. Id. at 303. The district court
appointed a special master, but the defendant went on to fire another
attorney. Id. at 304. The bankruptcy trustee then filed an emergency motion
to appoint a receiver, which the district court granted. Id.Before discussing the propriety of the receivership, this court began
by noting that a “[r]eceivership is ‘an extraordinary remedy that should be
employed with the utmost caution’ and is justified only where there is a clear
necessity to protect a party’s interest in property, legal and less drastic
equitable remedies are inadequate, and the benefits of receivership outweigh
the burdens on the affected parties.” Id. at 305 (citing 12 C. Wright & A.
Miller, Federal Practice and Procedure § 2983 (3d ed. 2012)).
It catalogued the various contexts where receiverships are used, including
“cases of non-compliance with SEC regulations, [where] a receiver may be
appointed to prevent the corporation from dissipating corporate assets and
to pay defrauded investors.” Id. at 306. Turning to the facts of the case at
hand, it found that none of the purported justifications supported the
imposition of a receivership. Id. at 307-11.
Since the SEC had not already obtained an injunction against Barton
when the SEC moved for a receivership, First Financial does not control and
instead, the Netsphere factors must be met for a receivership to be justified: 1)
a clear necessity to protect the defrauded investors’ interest in property, 2)
legal and less drastic equitable remedies are inadequate, and 3) the benefits
of receivership outweigh the burdens on the affected parties. See id. at 305.
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b. The Propriety of the Receivership
Having concluded that Netsphere applies, we consider whether the
district court abused its discretion. In its order, the district court justified
appointing a receiver by stating it “is necessary and appropriate for the
purposes of marshaling and preserving all assets of the Receivership
Entities” and would be “in the public interest by preserving illicit proceeds
of fraudulent conduct, [and] penalizing past unlawful conduct and deterring
future wrongdoing.” Even assuming that these findings could satisfy the first
Netsphere factor, the order does not address whether legal and less drastic
equitable remedies are inadequate or whether the benefits of the receivership
outweigh the burdens on the affected parties. Netsphere, 703 F.3d at 305.
For the latter two factors, the SEC asks us to consider the district
court’s reasoning in its order denying Barton’s motion for a stay that was
filed after this appeal was lodged. In its brief, it provided no authority for the
proposition that we can look to a subsequent order denying a separate motion
when reviewing an earlier order. However, at oral argument, SEC’s counsel
claimed we can do so under the exception for actions in aid of an appeal in
Silverthorne v. Laird, 460 F.2d 1175, 1178 (5th Cir. 1972). “This circuit
follows the general rule that the filing of a valid notice of appeal from a final
order of the district court divests that court of jurisdiction to act on the
matters involved in the appeal, except to aid the appeal, correct clerical
errors, or enforce its judgment so long as the judgment has not been stayed
or superseded.” Avoyelles Sportsmen’s League, Inc. v. Marsh, 715 F.2d 897,
928 (5th Cir. 1983). In Silverthorne, the district court denied habeas relief,
and the petitioner appealed. 460 F.2d at 1178. During the pendency of the
appeal, the district court issued a written opinion “in which he thoroughly
discussed the rationale in support of his earlier order denying habeas corpus
relief.” Id. This court found that the written opinion’s amplified views aided
the appeal, so it fell under that exception. Id. at 1178-79. Unlike Silverthorne,
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the order the SEC asks us to consider is not a fuller explanation of the earlier
order granting a receivership—it is a denial of a separate motion. Further, as
Barton points out, the district court’s order denying the stay discussed events
and actions that took place after the receivership was already in place.
“‘Meaningful appellate review of the exercise of discretion requires
consideration of the basis on which the trial court acted.’” In re Volkswagen
of Am., Inc., 545 F.3d 304, 310 n.4 (5th Cir. 2008) (en banc) (quoting
Gurmankin v. Costanzo, 626 F.2d 1115, 1119–20 (3d Cir. 1980)). The
reasoning in the subsequent order goes beyond the basis on which the district
court originally acted, and Silverthorne does not give us license to consider it.
Constraining our review to the district court’s limited reasoning in its
original order, we cannot say whether it abused its discretion. See Gonzalez v.
Assocs. Health & Welfare Plan, 55 F. App’x 717 (5th Cir. 2002) (“Although
we cannot say the court abused its discretion by denying prejudgment
interest, the district court’s failure to explain its reasoning frustrates
meaningful appellate review.”). Accordingly, we will vacate the appointment
of the receiver and remand so that the district court may consider whether to
appoint a new receivership under the Netsphere factors. When faced with a
similar situation, the Third Circuit opted to delay vacatur of the receivership
instead of vacating it immediately. See KeyBank Nat’l Ass’n v. Fleetway
Leasing Co., 781 F. App’x 119, 123 (3d Cir. 2019). We find the Third Circuit’s
approach prudent here given the breadth of the receivership and the
possibility that a new receivership would cover some of the same entities.
Thus, we will vacate the current receivership order effective 90 days from
the issuance of this court’s mandate.
c. The Receivership’s Jurisdiction
Barton next argues that the district court erred by placing multiple
entities he controls in the receivership without any showing that they
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received or benefitted from ill-gotten investor funds. The SEC responds that
the district court acted within its discretion by including all Barton-controlled
entities in the receivership. Because it alleges that Barton has engaged in
extensive commingling of funds, it claims that Barton’s control is an effective
proxy for placing an entity in the receivership even if it had not yet traced the
funds to that entity.
In Netsphere, this court rejected the district court’s determination that
a receivership was necessary for the defendant to pay his debts to former
attorneys because “the jurisdictional principle that a court’s equitable
powers do not extend to property unrelated to the underlying litigation
applies with equal force to receiverships. A court lacks jurisdiction to impose
a receivership over property that is not the subject of an underlying claim or
controversy.” 703 F.3d at 310. In support, it cited Cochrane v. W.F. Potts Son
& Co. where this court held that a receivership was proper only over the series
of bonds subject to litigation, not the other series of bonds that were not
subject to the complaint and over which the bondholder did not claim an
interest. Id. (citing Cochrane v. W.F. Potts Son & Co., 47 F.2d 1026, 1027-29
(5th Cir. 1931)). Accordingly, Netsphere held that the district court could not
impose a receivership over the plaintiff’s personal property or assets owned
by certain entities because those assets were not sought in or the subject of
the underlying litigation. Id.The SEC relies on FDIC v. Faulkner to support the district court’s
inclusion of all Barton-controlled entities in the receivership regardless of
whether they received or benefitted from ill-gotten funds. 991 F.2d 262, 267-
68 (5th Cir. 1993). In Faulkner, the defendants allegedly engaged in
fraudulent real estate speculation schemes. Id. at 264. The FDIC sought a
preliminary injunction against the defendants to limit their ability to transfer
assets, and the district court granted it. Id. On appeal, the defendants argued
that the injunction was too broad since it froze assets that were not obtained
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through alleged fraudulent activities. Id. at 267. Since the defendants refused
to aid the district court in determining which of the assets were traceable to
the alleged fraud, this court held that the district court “did not err in
freezing all of the [defendant’s] assets, pending a determination through
limited discovery of which assets are traceable to [defendant’s] alleged
fraudulent activities.” Id. at 268.
Faulkner does not support the district court’s actions here. Under
Faulkner, the SEC could have sought an injunction freezing asset transfers
while it traced the funds and determined which entities should be placed in
the receivership. But it did not. Since a receivership’s jurisdiction extends
only over property subject to the underlying claims, the district court abused
its discretion by including all Barton-controlled entities in the receivership
without first finding that they had received or benefited from the ill-gotten
funds. Netsphere, 703 F.3d at 310. Should the district court decide that a new
receivership is justified on remand, it can only extend over entities that
received or benefitted from assets traceable to Barton’s alleged fraudulent
activities that are the subject of this litigation.
d. Stay Pending Appeal
After oral argument, Barton moved for a partial stay of certain
receivership activities pending appeal. He asked this court to: 1) order the
receiver to retain possession of all corporations and corporate property
pending a final decision on the merits, 2) suspend the receiver’s power to sell
or dispose of assets belonging to receivership entities until 60 days after a
final opinion on the merits from this court, and 3) stay the receiver’s ability
to undertake receivership activities that go beyond caring for the seized assets
pending a final decision on the merits. Barton also sought emergency relief
from the transfer of one of the receivership entity’s possessory interests in a
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particular property. We denied his emergency request as moot but carried
the remainder of his motion with the case.
At the outset, the SEC challenges whether Barton’s motion complies
with Federal Rule of Appellate Procedure 8. Under Rule 8, stay motions
ordinarily must first be presented to the district court “unless it clearly
appears that further arguments in support of the stay would be pointless in
the district court.” Ruiz v. Estelle, 650 F.2d 555, 567 (5th Cir. 1981). The
district court denied Barton’s initial motion for a stay pending appeal. When
Barton sought to preliminarily enjoin the receiver’s auction of contents of a
particular receivership property, the district court denied his request
explaining that “[Barton’s motion] requests the same relief, and on the same
grounds, that the Court has already denied multiple times, and the Fifth
Circuit has already denied once: a stay of the Receiver’s activities pending
appeal or final judgment.” Given the clear indication that the district court
would have denied this motion, we find that Barton’s motion satisfies Rule 8
because moving first in the district court would have been pointless. Id.Barton’s first and third requests are now moot since we have reached
a final decision on the merits. However, his second request is not moot
because it seeks relief that extends 60 days beyond the issuance of a final
decision. For his second request, we consider four factors in deciding
whether to grant a stay pending appeal: “(1) whether the stay applicant has
made a strong showing that he is likely to succeed on the merits; (2) whether
the applicant will be irreparably injured absent a stay; (3) whether issuance of
the stay will substantially injure the other parties interested in the
proceeding; and (4) where the public interest lies.” Nken v. Holder, 556 U.S.
418, 434 (2009) (internal quotation marks and citation omitted). In light of
our vacatur of the receivership order, we conclude that Barton has made the
proper showing under the factors and is entitled to a partial stay.
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IV. Conclusion
For the foregoing reasons, we VACATE the district court’s order
appointing a receiver effective 90 days from the issuance of this court’s
mandate and REMAND for further proceedings consistent with this
opinion. We also GRANT in part Barton’s motion for a partial stay pending
appeal: the receiver’s power to sell or dispose of property belonging to
receivership entities is immediately suspended, and this suspension will
remain in effect until the receivership order is vacated 90 days from the
issuance of this court’s mandate. This suspension does not apply to activities
in furtherance of sales or dispositions of property that have already occurred
or been approved by the district court. Should the district court enter a new
receivership order before the present order is vacated, this partial stay has no
bearing on any actions a receiver may take under the new order.
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