S.E.C. v. Wencke

• Decision Date: 09 June 1980
• Docket Number: No. 78-1395,78-1395
• Citation: 622 F.2d 1363
• Parties: Fed. Sec. L. Rep. P 97,533 SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Walter WENCKE et al. SUPERIOR MOTELS, INC., Petitioner-Appellant, v. R. N. GOULD and Securities and Exchange Commission, Receiver and Real Party in Interest and Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1363

622 F.2d 1363

Fed. Sec. L. Rep. P 97,533

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Walter WENCKE et al.

SUPERIOR MOTELS, INC., Petitioner-Appellant, v. R. N. GOULD and Securities and Exchange Commission, Receiver

and Real Party in Interest and Appellee.

No. 78-1395.

United States Court of Appeals, Ninth Circuit.

June 9, 1980.

Alex A. Harper, Craig W. Walker, Michael G. Zybala, San Diego, Cal., for Securities and Exchange Commission.

Faber L. Johnston, Johnston, Miller & Giannini, San Jose, Cal., for Wencke, et al.

Appeal from the United States District Court for the Southern District of California.

Before WRIGHT, KENNEDY and TANG, Circuit Judges.

KENNEDY, Circuit Judge:

A district court may appoint a receiver in a securities fraud action brought by the Securities and Exchange Commission (SEC). The somewhat novel question presented by this appeal is whether a district court may also issue a stay, effective against nonparties and without prior notice to them, prohibiting "all investors, creditors, and other persons" from "(c)ommencing, prosecuting, continuing or enforcing any suit" against the receivership entities, except by leave of the court. Resolution of this case requires consideration of what securities law policies are furthered when a corporation not linked with the defendant in the SEC action is prevented from enforcing a prior state court judgment (and completing another prior state court proceeding) against a receivership entity.

A. The Motel Complex

Appellant Superior Motels (Superior) built and owned a motel complex including a restaurant and cocktail lounge. In 1967, Superior entered into a sale and lease-back agreement with Lamplighter Properties whereby it leased the complex for a term of twenty years. On April 26, 1969, Superior assigned its lessee's interest to a corporation eventually known as Sun Fruit, Ltd. ¹ On or about October 1, 1972, Sun Fruit sublet the motel complex to its wholly-owned subsidiary, Rinn Motor Hotels. Shortly thereafter, Rinn Motor Hotels sublet the motel property (but not the restaurant) to Rinn-Sunnyvale Motor Hotel, a partnership of which Rinn Motor Hotels held an 80% leasehold interest and was a copartner. The motel was known by various names, but is here referred to as the Executive Inn.

B. The Nevada Receivership and Superior's State Court Action

Early in 1972, defendants Walter Wencke and Richard Mets acquired control of Sun Fruit through fraudulent means. See SEC v. Wencke, 577 F.2d 619 (9th Cir.), cert. denied, 439 U.S. 964, 99 S.Ct. 451, 58 L.Ed.2d 422, (1978) (hereinafter cited as Wencke I ). For the next two years Wencke caused Sun Fruit to transfer most of its assets to corporations owned or controlled by Wencke in exchange for nominal cash and notes. In July, 1975, on behalf of one of Sun Fruit's creditors, Wencke petitioned a Nevada state court to place Sun Fruit into receivership and appoint himself as receiver. Wencke was appointed on August 7, 1975. This action was an attempt by Wencke to conceal his looting of Sun Fruit. Wencke I, supra, 577 F.2d at 622.

On November 25, 1975, Superior filed an action in California state court to regain possession of the leasehold interest in the Executive Inn. Sun Fruit, by the sublease described above, had assumed Superior's lease. The sublease contained a provision that the appointment of a receiver for the lessee would constitute a breach of the agreement, and Superior relied upon this clause to regain the motel lease and the right to operate it. ² Named as defendants, among others, were Sun Fruit, Rinn Motor Hotels, Inc., and Rinn-Sunnyvale Motor Hotels. Allegedly because of defective service of process, Sun Fruit did not appear to contest the action, and on October 1, 1976, a Judgment in Unlawful Detainer by Default was entered against Sun Fruit by the state court. The court held that Superior was entitled to possession from Sun Fruit and "all persons holding possession of the premises under or through it or them." Rinn Motor Hotels and Rinn-Sunnyvale Motor Hotels claimed possessory rights apart from the Sun Fruit lease, and Superior proceeded against them in a separate action. On March 1, 1977, a state court in a memorandum decision ruled in Superior's favor, finding that the defendants had an interest in the property only by virtue of Sun Fruit's leasehold interest. Before the state court entered a final judgment, however, and also before Superior took possession of the premises, the federal district court entered a stay prohibiting further proceedings in the state court. We turn now to the federal proceedings.

C. SEC Proceedings, Receivership, and the Blanket Stay

On July 22, 1976, the SEC brought an action for injunctive and other equitable relief against Wencke, his wife, and several business entities controlled by Wencke and his associates, including Sun Fruit, Rinn Motor Hotels, Inc., and its subsidiary, Rinn-Sunnyvale Motor Hotel. On November 19, 1976, the district court orally granted the SEC's motion for a preliminary injunction and receivership. The temporary receiver appointed by the court was authorized to take custody of and conserve whatever assets might remain for the defrauded public investors until he could fully investigate the complex corporate relationships created by Wencke and audit the various corporate and trust entities to determine the extent of the receivership estate. On December 20, 1976, the district court granted injunctive and ancillary relief, effective as of November 19, based on its finding that the SEC had "made a prima facie case that Wencke has engaged in fraud and mismanagement with respect to defendant Sun Fruit (and other entities eventually placed in the receivership)," and that there was "a likelihood of irreparable harm to . . . shareholders of Sun Fruit unless the requested receivers are appointed." Because at least some of Sun Fruit's assets were subject to the Nevada receivership, the district court, out of concern for comity, declined to place these assets under the control of the federal receiver.

Following these preliminary orders, discovery began in the federal action. In order to attack the district court's jurisdiction, Wencke refused to be sworn at a deposition the SEC had scheduled. On the magistrate's recommendation, the district court struck the answers of all defendants and entered default judgments against them. To enable the receiver to take complete control over Wencke's entities, the district court also issued a permanent injunction which, among other things, enjoined further proceedings in the Nevada receivership and brought Sun Fruit within the federal receivership. Wencke I, supra, 577 F.2d at 621-22.

The district court entered Findings of Fact and Conclusions of Law and its Final Judgment of Permanent Injunction and Ancillary Relief on March 3, 1977, several months after the California state court determined that Sun Fruit and any sublessees of Sun Fruit had forfeited their leasehold interests in favor of Superior, and two days after the state court determined that Rinn Motor Hotels, Inc. and Rinn-Sunnyvale Motor Hotels had no other independent right to the disputed property. By virtue of the federal court order, the defendants ³ turned control over the entities placed in the receivership to the receiver, R. N. Gould. Gould was authorized to assume possession and control over all assets of the many entities in the receivership, to operate the entities on an ongoing basis, to hire lawyers and accountants to audit and investigate the financial condition and transactions of the entities, to resist all actions and claims brought against any of the entities, and to prosecute all claims which the entities might have.

The aspect of the court's decision which produced this appeal was a stay directed not only to all defendants, but also to nonparties. Except by leave of the court, all persons were stayed from continuing with any proceedings against the entities in receivership. ⁴

On May 25, 1977, the Nevada court terminated the Nevada receivership for Sun Fruit "in the interest of comity." There have been no further proceedings in the California court. On May 16, 1977, Superior filed a petition ex parte with the district court for modification or relief from the court's order, to allow it to enforce the state court judgment. The court denied the motion but permitted Superior to make a formal motion for the same relief. Superior filed such motion, and on December 14, 1977, the district court refused to modify its injunction or grant an exception for Superior. Superior appeals from this denial.

D. Wencke I

In Wencke I, we concluded that the district court "had jurisdiction to enjoin the Nevada state court." Id. at 623. Wencke argued, as does Superior in this appeal, that the Anti-Injunction Act, 28 U.S.C. § 2283, prevented the court from issuing an injunction. That section provides: "A court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments." Relying on Leiter Minerals, Inc. v. United States, 352 U.S. 220, 77 S.Ct. 287, 1 L.Ed.2d 267 (1957), and NLRB v. Nash-Finch Co., 404 U.S. 138, 92 S.Ct. 373, 30 L.Ed.2d 328 (1971), we held that section 2283 does not apply to injunctions issued at the request of the United States or administrative agencies enforcing applicable federal law. See also Puget Sound Gillnetters Ass'n v. United States District Court, 573 F.2d 1123, 1133 (9th Cir. 1978), rev'd on other grounds sub nom. Washington v. Washington State Commercial Fishing Vessel Ass'n, 443 U.S. 658, 99 S.Ct. 3055, 61 L.Ed.2d 823 (1979). Superior argues that this limitation on section 2283 applies only if the issues involved in the state and federal actions are the same. It is true that in Leiter Minerals and Nash-Finch, supra, the contested issues...