Ussec v. Pritzker Levine LLP

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS MAR 7 2022
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
U.S. SECURITIES & EXCHANGE No. 20-17419
COMMISSION,
D.C. No. 3:17-cv-00223-RS
Plaintiff-Appellee,
v. MEMORANDUM*
PRITZKER LEVINE LLP,
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. Dissent 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.
In 2015, Allan Young, represented by Pritzker Levine LLP (“Pritzker”), sued
Thomas Henderson and the San Francisco Regional Center, LLC (“SFRC”) in
California state court, alleging mismanagement of EB-5 qualifying business entities
and misappropriation of investor funds.1 Pritzker obtained the appointment of a
receiver and assisted the receiver in identifying nearly $29 million in assets that were
taken into the receivership estate. The firm spent approximately 2,000 hours
litigating the state court proceedings.
Two years later, the SEC sued Henderson and SFRC in federal court. The
state court litigation was stayed, a receiver was appointed in the federal case, and
roughly $25 million from the state receivership was turned over to the federal
receiver. After the district court approved the receiver’s proposed plan of
distribution, Pritzker unsuccessfully sought an award of attorney fees for its role in
securing a “common fund” for investors. Pritzker appeals the denial of its fee
application.
1. Under the “common fund” doctrine, “a private plaintiff, or his attorney,
whose efforts create, discover, increase or preserve a fund to which others also have
a claim is entitled to recover from the fund the costs of his litigation, including
1
The Employment-Based Immigration Fifth Preference Program (“EB-5”)
offers legal permanent residency to foreign nationals who make a “direct investment
of at least $1 million in a new commercial enterprise that creates at least ten full-
time jobs for U.S. workers.” SEC v. Hui Feng, 935 F.3d 721, 725 (9th Cir. 2019)
(citing 8 U.S.C. § 1153(b)(5)).
2
attorneys’ fees.” Vincent v. Hughes Air W., Inc., 557 F.2d 759, 769 (9th Cir. 1977).
Pritzker’s efforts in the state court litigation—which included filing the case,
obtaining the appointment of a receiver, working closely with the receiver in
amassing the receivership fund, and defending the fund against various claims—
undeniably caused the creation, discovery, increase, or preservation of a common
fund that benefited investors at the conclusion of the federal action. See Indep.
Living Ctr. of S. Cal., Inc. v. Kent, 909 F.3d 272, 285 (9th Cir. 2018). The state
receiver, who later became the federal receiver, stated “Pritzker Levine undeniably
rendered services that resulted in a benefit to the Federal receivership estate
(investors and creditors),” and that “[a]bsent the actions taken by Pritzker Levine in
obtaining the appointment of the receiver in the State Court Action, the Receiver has
no doubt that Henderson and SFRC would have stripped all of the assets (or value)
out of the entity Defendants and Relief Defendants, leaving not a penny for investors
(or creditors).” The district court’s speculation that the funds transferred from the
state receiver might still have been recovered by the federal receiver in the absence
of the state receivership therefore finds no support in the record and in any event
does not demonstrate that Pritzker’s efforts were not a “cause-in-fact” of the
creation, increase, or preservation of a common fund. See Vincent, 557 F.2d at 771
n.10 (explaining that “the common fund doctrine requires that the work of the
attorney seeking an extra fee be a cause-in-fact of any claimed benefit to the fund,”
3
but not the only cause-in-fact) (emphasis added). We reverse the order denying fees
and remand for a determination of a reasonable award in light of Pritzker’s
contributions.2
2. Pritzker’s fee award should be treated as an allowed administrative
claim. The purpose of the common fund doctrine is to permit the burden of litigation
expenses “to be shared among those who are benefited by the litigant’s efforts.”
Paul, Johnson, Alston & Hunt v. Graulty, 886 F.2d 268, 271 (9th Cir. 1989). To
accomplish this, the doctrine must be applied such that “the fee can be shifted with
some exactitude to those benefiting.” Id. (quoting Petition of Hill, 775 F.2d 1037,
1041 (9th Cir. 1985)). Accordingly, the fee payment must come “from the fund
itself, as a prior charge before the beneficiaries receive it.” City of Klawock v.
2
In its brief, the SEC suggested that 15 U.S.C. §§ 77t(f) and 78u(d)(4) represent
Congress’s desire that “investor compensation should be the first priority of a
receivership estate” and that these statutes “cast significant doubt that Congress
would sanction paying Pritzker Levine from a federal receivership estate.” The SEC
did not raise, either in this Court or below, the argument pursued by our dissenting
colleague that Pritzker’s claim is barred by these provisions. We therefore decline
to consider it. See United States v. Sineneng-Smith, 140 S. Ct. 1575, 1579 (2020)
(emphasizing principle of party presentation). We note, however, that those statutes
only state that funds ordered disgorged “shall not be distributed as payment for
attorneys’ fees or expenses incurred by private parties seeking distribution of the
disgorged funds.” 15 U.S.C. §§ 77t(f), 78u(d)(4). It is not obvious that Pritzker,
who seeks a common fund award, not an award of attorneys’ fees or expenses
incurred by private parties, fits under this prohibition. Indeed, under the dissent’s
reading, the statutes would bar the claim even if it were undisputed that Pritzker
alone was the sole but-for cause of the state receivership fund and that not a penny
would have been obtained by the federal receiver absent those efforts. But we are
content to await a case in which the SEC squarely raises the issue before deciding it.
4
Gustafson, 585 F.2d 428, 431 (9th Cir. 1978).3
REVERSED AND REMANDED.
3
We grant Pritzker’s motion for judicial notice of various filings in the state
and federal court proceedings and in the bankruptcy court’s adjudication of certain
EB-5 entities’ Chapter 11 petitions. See Reyn’s Pasta Bella, LLC v. Visa USA, Inc.,
442 F.3d 741, 746 n.6 (9th Cir. 2006).
5
U.S. SEC v. Pritzker Levine LLP, No. 20-17419
FILED
MAR 7 2022
BAKER, Judge, dissenting: MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
I respectfully dissent for two separate and independent reasons. First, federal
law bars Pritzker Levine LLP’s claim to attorneys’ fees from funds disgorged by
defendants in the Securities and Exchange Commission’s successful civil enforce-
ment action. But even if this were not the case, I would still affirm the district court
because its factual finding that Pritzker was not a but-for cause of the federal re-
ceiver’s preservation of $26.7 million 1 in defendants’ ill-gotten assets is not clearly
erroneous.
1. Federal law provides that, subject to certain exceptions not relevant here,
“funds disgorged as the result of an action brought by the Commission in Federal
court . . . shall not be distributed as payment for attorneys’ fees or expenses incurred
by private parties seeking distribution of the disgorged funds.” 15 U.S.C. § 77t(f)
(emphasis added); id. § 78u(d)(4) (materially identical provision). The SEC argues
that these provisions represent “Congress’s repeated express determinations that
1
As my panel colleagues observe, the state receiver transferred about $25.2 million
to the federal receiver. Ante at 2. Along with claiming credit for the federal receiver’s
preservation of that amount, Pritzker also claims credit for the federal receiver’s se-
curing of another $1.55 million through the sale of a commercial property that had
begun during the state receivership but was completed by the federal receiver. Blue
Br. at 26, 29. Thus, Pritzker claims that the total common fund preserved by its ef-
forts is around $26.7 million, id. at 29, and it seeks an award of ten percent of that
amount, or about $2.67 million, id., which amounts to 198% of the lodestar calcula-
tion based on Pritzker’s normal hourly rates. Id.
investor compensation should be the first priority of a receivership estate in a Com-
mission enforcement action” and “an explicit policy decision by Congress to priori-
tize compensating investors over private plaintiffs’ attorneys in Commission ac-
tions.” Red Br. at 29–30. The SEC also argues that Pritzker’s “claimed entitlement
to almost double [its] fees and expenses due to a general equitable doctrine turns
these [and other] express Congressional determinations on their head.” Id. at 32.2
In its reply, Pritzker argues that these provisions do not apply because the firm
“premises its fee request exclusively on the $25.2 million fund created and preserved
in the state-court receivership and transferred to this federal receivership,” not “on
any money ‘disgorged’ to the SEC.” Gray Br. at 16.3
But every penny in the federal receivership estate available for distribution to
defrauded investors was disgorged as a result of the district court’s determination
that defendants violated the federal securities laws. See Kokesh v. SEC, 137 S. Ct.
1635, 1643 (2017) (“SEC disgorgement is imposed by the courts as a consequence
2
Although the SEC did not raise this argument in the district court, as appellee it
can defend—and we can affirm—the judgment below “on any ground fairly sup-
ported by the record.” In re Leavitt, 171 F.3d 1219, 1223 (9th Cir. 1999). My col-
leagues contend that the Commission did not raise this statutory defense on appeal
and that therefore we should not reach it under the party-presentation rule. Ante at 4
n.2. Pritzker, however, devotes more than three pages of its reply responding to the
SEC on this issue, which suggests that the firm, like me, thinks the Commission
raised it.
3
But see above note 1.
2
for violating . . . public laws.”); see also Dkt. No. 1, at 20–24, Case No. 3:17-cv-
00223 (N.D. Cal. Jan. 17, 2017) (SEC complaint alleging violations of Section 10(b)
of the Exchange Act and 17(a) of the Securities Act and seeking as relief “an order
requiring Defendants . . . to disgorge their ill-gotten gains”). Without the district
court’s various determinations that defendants were liable for these alleged federal
securities law violations and therefore required to disgorge their illicit gains, see,
e.g., Dkt. No. 543, at 1, Case No. 3:17-cv-00223 (N.D. Cal. Jan. 10, 2019) (granting
the SEC’s motion for partial summary judgment and finding, inter alia, that defend-
ant North America 3PL, LLC, “violated the securities laws” and “based on that lia-
bility,” requiring it to “disgorge the sum of $23.9 million, representing ill-gotten
gains”), the SEC would have needed to return to defendants all assets secured by the
federal receiver.
Thus, and contrary to Pritzker’s argument that its claim is not premised on
funds disgorged to the SEC, disgorgement here came exclusively through the district
court’s liability determinations, as disgorgement is a “penalty” for “violating a pub-
lic law.” Kokesh, 137 S. Ct. at 1644; see also 15 U.S.C. § 78u(d)(7) (“In any action
or proceeding brought by the Commission under any provision of the securities laws,
the Commission may seek, and any Federal court may order, disgorgement.”). As
the funds from which Pritzker seeks payment were all disgorged “as the result of an
3
action brought by the Commission in Federal court,” 15 U.S.C. §§ 77t(f), 78u(d)(4),
these provisions bar Pritzker’s claim.
Pritzker also argues that these provisions are inapplicable because it does not
seek “compensation for successfully obtaining a portion of any ‘disgorged funds’ on
behalf of any investor or creditor.” Gray Br. at 16. Pritzker asserts that it “instead
seeks compensation for the substantial work it performed in conferring a benefit on
all investors and creditors through the creation and preservation of the cash fund in
the state-court action.” Id. at 16–17. But those investors and creditors indisputably
seek “distribution of the disgorged funds” under §§ 77t(f) and 78u(d)(4), and Pritz-
ker seeks its own “distribut[ion]” of “funds disgorged” “as payment for attorneys’
fees” liability “incurred by” those investors and creditors for the firm’s services un-
der the common-fund doctrine. 15 U.S.C. §§ 77t(f), 78u(d)(4). These provisions
squarely preempt that equitable doctrine. 4
2. Moreover, even if federal law did not bar Pritzker’s claim, I would still
affirm the district court. My panel colleagues write that Pritzker’s
efforts in the state court litigation . . . undeniably caused the creation,
discovery, increase, or preservation of a common fund that benefited
4
To preserve its claim (if any) to fees derived from assets marshaled by the state
receiver, Pritzker or its client Young needed to appeal the district court’s prior orders
staying pending state-court litigation and transferring those assets to the federal re-
ceiver over Young’s objections. See Dkt. No. 96, Case No. 3:17-cv-00223 (N.D.
Cal. Mar. 23, 2017); Dkt. No. 100, Case No. 3:17-cv-00223 (N.D. Cal. Mar. 29,
2017). No such appeal was taken.
4
investors at the conclusion of the federal action. . . . The district court’s
speculation that the funds transferred from the state receiver might still
have been recovered by the federal receiver in the absence of the state
receivership therefore finds no support in the record and in any event
does not demonstrate that Pritzker’s efforts were not a ‘cause-in-fact’
of the creation, increase, or preservation of the common fund.
Ante at 3 (emphasis added and citation omitted).
My colleagues allude to the district court’s factual finding that “the bulk of
the assets taken into the [state] receivership were large commercial properties” and
that it was “at least somewhat speculative to assume that those properties could have
been sold and the proceeds placed beyond the reach of the SEC before this action
was filed.” In effect, the district court found that Pritzker was not a cause-in-fact or
but-for cause5 of the federal receiver’s securing of $26.7 million in assets that the
firm contends is a common fund.
This factual finding “must not be set aside unless clearly erroneous.” Fed. R.
Civ. P. 52(a)(6). “Review under the clearly erroneous standard requires considerable
deference; the findings of the district court should stand unless the appellate court
has the ‘definite and firm conviction that a mistake has been committed.’ ” Ambas-
sador Hotel Co. v. Wei-Chuan Inv., 189 F.3d 1017, 1024 (9th Cir. 1999) (quoting
5
A “ ‘cause in fact[ ]’ . . . is[ ] an event that, not necessarily alone, brings about a
given result. A ‘but for’ cause is cause in fact.” In re Dynamic Random Access
Memory (DRAM) Antitrust Litig., 546 F.3d 981, 991 (9th Cir. 2008) (Noonan, J.,
concurring).
5
Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension Tr., 508 U.S. 602,
623 (1993)). Thus, if the district court’s “account of the evidence is plausible in light
of the record viewed in its entirety, the court of appeals may not reverse it even
though convinced that had it been sitting as the trier of fact, it would have weighed
the evidence differently.” Id. (quoting Phoenix Eng’g & Supply Inc. v. Universal
Elec. Co., 104 F.3d 1137, 1141 (9th Cir.1997)).
In the district court, Pritzker had the burden of establishing by a preponder-
ance of the evidence that but for its state-court litigation efforts, the $26.7 million
recovered by the federal receiver would have been dissipated before the receiver
could have secured it. Cf. Burrage v. United States, 571 U.S. 204, 211 (2014) (noting
that but-for causation “requires proof that the harm would not have occurred in the
absence of—that is, but for—the defendant’s conduct”) (cleaned up and quoting
Univ. of Tex. Southwestern Medical Ctr. v. Nassar, 570 U.S. 338, 346–47 (2013)).
Evaluating whether Pritzker met its burden required the district court to make
a counterfactual finding about how much, if any, of the $26.7 million in assets
claimed by Pritzker as constituting the common fund would have been available to
the federal receiver absent Pritzker’s involvement. Cf. June v. Union Carbide Corp.,
577 F.3d 1234, 1240 (10th Cir. 2009) (observing that the “ ‘but-for test’ . . . ‘requires
a counterfactual inquiry’ in which the court considers ‘what would have occurred if
6
the actor had not engaged in the . . . conduct’ ” at issue) (quoting proposed final draft
of the Restatement (Third) of Torts § 26 cmt. e).
Here, the district court undertook that counterfactual inquiry, which my col-
leagues condemn as mere “speculation.” Ante at 3. But “[c]ounterfactuals by their
nature . . . require the fact finder to speculate what would have happened if the de-
fendant had not done what she in actual fact did.” Stanford Encyclopedia of Philos-
ophy, Causation in Law § 5.1.1 (2019) (emphasis added), available at
https://plato.stanford.edu/entries/causation-law/ (accessed Feb. 11, 2022); cf. Grp.
Health Plan, Inc. v. Philip Morris USA, Inc., 344 F.3d 753, 760 (8th Cir. 2003) (ob-
serving, in the context of the admissibility of expert testimony, that “cases involving
counterfactual estimations essentially come down to this: A certain amount of spec-
ulation is necessary, an even greater amount is permissible (and goes to the weight
of the testimony), but too much is fatal to admission.”) (emphasis added).
Pritzker’s argument—that, but for its involvement, the assets would have been
dissipated—is just as speculative as the district court’s factual finding to the con-
trary. The relevant question, therefore, is whether the district court’s necessarily
speculative counterfactual finding was still “plausible in light of the record viewed
in its entirety.” Ambassador Hotel, 189 F.3d at 1024.
On the one hand, weighing against that finding is, as my colleagues point out,
the federal receiver’s statement to the district court that “[a]bsent the actions taken
7
by Pritzker Levine” in securing the appointment of the state receiver, defendants
“would have stripped all of the assets (or value) . . . leaving not a penny for investors
(or creditors).”
On the other hand, Pritzker filed its state-court suit against certain of the fed-
eral defendants on behalf of its client Young in July 2015. Blue Br. at 16. That law-
suit was an early warning indicator to them and the other fraudsters to take the EB-
5 investor money and run. But eight months later in March 2016, when Pritzker
successfully moved the state court to appoint a receiver, id. at 18, that receiver took
possession of some $8 million in cash and three commercial properties that the state-
court defendants were marketing, id. If the state-court defendants meant to dissipate
their ill-gotten EB-5 investor assets to escape potential judgment by their creditors,
they bungled the job.
Thus, because the fraudsters did not dissipate their EB-5 investor assets in the
eight months between Pritzker’s filing of Young’s suit and Pritzker’s motion for
appointment of a state-court receiver, a factfinder could have reasonably concluded
that if Young had not filed suit, the assets would still have been available when the
district court appointed a federal receiver in January 2017. After all, in the counter-
factual world where Young never files suit and the fraudsters receive no warning,
the fraudsters would have little incentive to dissipate the assets. And in the real
8
world, even when Pritzker’s filing of Young’s suit in July 2015 gave them every
incentive to dissipate, defendants still dawdled.
In sum, weighing the evidence here involved a complicated, speculative coun-
terfactual judgment by the district court. Pritzker prevails on appeal only if the record
compels—not merely permits—the opposite counterfactual conclusion: despite the
fraudsters’ failure to dissipate the assets even after they were tipped off by Young’s
state-court suit, if Young had not filed suit those fraudsters would have dissipated
those assets by January 2017. Cf. United States v. Zielezinski, 756 F.2d 1448, 1448
(9th Cir. 1985) (per curiam) (upholding the district court’s factual finding under the
clearly erroneous standard because “[a] review of the record discloses nothing that
compels a reversal of [the] finding as clearly erroneous”); see also United States v.
Working, 224 F.3d 1093, 1102 (9th Cir. 2000) (en banc) (“Where there are two per-
missible views of the evidence, the factfinder’s choice between them cannot be
clearly erroneous.”) (quoting Anderson v. Bessemer City, 470 U.S. 564, 573–74
(1985)).
I see nothing in the record that compels—rather than permits—the counter-
factual theory urged by Pritzker and adopted by my colleagues. Thus, the district
court’s factual finding that Pritzker is not a but-for cause of the federal receiver’s
securing of the assets is not clearly erroneous. Under the deferential standard of re-
view applicable to that finding, we should affirm the district court’s denial of
9
Pritzker’s attorneys’ fees claim, even if, after weighing the evidence, we would reach
a different conclusion.
* * *
For the reasons set forth above, I respectfully dissent.
10