783 F.2d 829 (9th Cir. 1986), 83-6469, S.E.C. v. Wencke
|Citation:||783 F.2d 829|
|Party Name:||, 4 Fed.R.Serv.3d 95 SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Walter WENCKE, et al., Defendants. Theodore deLUSIGNAN, Movant-Appellant, v. R.N. GOULD, Receiver-Trustee, Appellee.|
|Case Date:||February 19, 1986|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
Argued and Submitted Sept. 4, 1984.
Procopio, Cory, Hargreaves & Savitch, Michael J. Radford, San Diego, Cal., for movant-appellant.
Michael S. Polan, Michael G. Zybala, Law Firm of Alex A. Harper, San Diego, Cal., for appellee.
Appeal from the United States District Court for the Southern District of California.
Before WALLACE, FLETCHER and REINHARDT, Circuit Judges.
FLETCHER, Circuit Judge:
Theodore deLusignan appeals from a post-judgment order by the district court requiring Ramapo Corporation ("Ramapo"), in which he is a 25% stockholder, to disgorge 401,351 shares of Portsmouth Square, Inc. ("PSI") and the profits it derived from those shares. The district court issued its order following judgment in a securities fraud action brought by the Securities and Exchange Commission (SEC) against Walter Wencke, who had diverted
funds from several public companies and funneled them through Ramapo to acquire the PSI shares. DeLusignan contends that in entering its disgorgement order, the district court exceeded its jurisdiction, violated the Federal Rules of Civil Procedure, and deprived both him and Ramapo of due process. We find these claims to be without merit, and affirm.
DeLusignan's Acquisition of His Ramapo Stock
PSI was incorporated in 1967 as a vehicle for investors to purchase a substantial interest in Justice Investors, a partnership that owned the Holiday Inn at 750 Kearny Street in San Francisco. In 1972, PSI was experiencing severe financial problems. All of its subsidiaries were losing money, and PSI was on the verge of bankruptcy. In May, 1972, deLusignan, president of PSI, responded to Walter Wencke's advertisement in the Wall Street Journal offering assistance to financially distressed companies.
Wencke proposed a financial aid arrangement to deLusignan and PSI's board of directors, under which Ramapo, a Delaware corporation created by Wencke and entirely owned by the Hansa Trust, a Wencke-family trust, would give PSI $10,000 in cash, assume $338,193 of PSI's liabilities, and provide assistance to PSI in negotiations to extend a $1.2 million obligation for which PSI was in default. In return, PSI would issue Ramapo its remaining authorized and unissued stock, which amounted to 401,351 shares, or a 53.5% controlling interest in the corporation. Wencke also offered to employ deLusignan as an officer of Ramapo, PSI, or one of their subsidiaries, and to transfer 25 of Ramapo's 100 shares to deLusignan. The PSI board ratified the terms of the stock transfer to Ramapo, and approved deLusignan's proposed employment contract and the transfer to him of the 25 Ramapo shares. Shortly thereafter, Wencke and the other Ramapo shareholder, Paul Potter, 1 approved an employment contract on behalf of Ramapo with deLusignan, and the Hansa Trust made a "gift" to deLusignan of 25 Ramapo shares "in order that [he] would feel part of the [Ramapo] Company." DeLusignan served as president of PSI for the next five years, until 1977.
PSI's transaction with Ramapo enabled PSI to divest itself of unprofitable subsidiaries and to improve its net worth from a negative $323,121 to a positive $25,072. PSI is currently a prosperous, dividend-paying corporation with its shares valued at $6 to $7. DeLusignan contends that PSI's recovery was due in large part to his performance as president. He maintains that by 1977, PSI's hotel property was worth over $50 million, and that prior to the district court's disgorgement order from which he appeals, his Ramapo shares were worth about $2.6 million.
The Underlying Securities Fraud Action Against Wencke
In 1976, the SEC brought the underlying securities fraud action against Wencke, his wife, three other individuals, and twenty-five trust and corporate defendants controlled by Wencke and his associates. See SEC v. Wencke, 622 F.2d 1363, 1366 (9th Cir.1980). Wencke was alleged to have violated state and federal law and breached his fiduciary duties by diverting assets and monies from companies and entities he controlled, including Time-Lenders, Inc. ("Time"), Sun Fruit, Ltd. ("Sun Fruit"), Santa Fe Financial Corporation ("Santa Fe"), and their subsidiaries, and using these funds for his personal benefit and profit. DeLusignan, Ramapo, and the Hansa Trust were not parties in the underlying action.
In March, 1977, the district court entered its final judgment. It permanently enjoined Wencke and the other defendants
from further securities activity and ordered Wencke to disgorge all assets or monies that he had taken directly or indirectly. The court appointed R.N. Gould as receiver of Time, Sun Fruit, and Santa Fe. Gould was authorized to assume possession and control over all these companies' assets, to operate them on an ongoing basis, to hire attorneys and accountants to audit and investigate their financial condition and transactions, to resist all actions and claims brought against them, to prosecute all claims they had, and to manage and conserve their assets for the benefit of their defrauded investors until the extent of the receivership estate could be determined. See id. at 1366-67.
In November, 1977, the district court specifically appointed the Receiver as voting trustee of the 60 shares of Ramapo owned by Wencke or the Hansa Trust. 2 In March, 1979, the court entered an order directing the Receiver and his counsel to identify and trace all assets and monies that Wencke and those in concert with him had looted from Time, Sun Fruit, Santa Fe, or their subsidiaries, as well as ill-gotten gains derived from those assets, and to initiate disgorgement proceedings to recover those assets and ill-gotten gains. The Receiver has brought six applications for disgorgement.
The Disgorgement Proceedings Against DeLusignan and Ramapo
In November, 1980, the Receiver filed two virtually identical pleadings in the district court. First, he filed his Application Number 4 in Disgorgement as a post-judgment pleading in the securities fraud action against Wencke. It was directed at deLusignan, Ramapo, Wencke, the Hansa Trust, and several other individuals and entities, and sought disgorgement of Ramapo's corporate charter, the 60 Ramapo shares held by the Hansa Trust, and the 25 shares held by deLusignan. Second, the Receiver filed a complaint initiating a completely separate and independent action against deLusignan, Ramapo, and the Hansa Trust seeking disgorgement of Ramapo's corporate charter and certificates and a declaration imposing a constructive trust over the three defendants' Ramapo holdings. The Receiver amended this complaint in 1982 and deleted Ramapo as a defendant, but the amended complaint still sought disgorgement of deLusignan's 25 Ramapo shares.
The Receiver's disgorgement application was served on Ramapo and the Hansa Trust in January, 1981, and on deLusignan in April, 1981. No summonses were served with the disgorgement application. In November, 1983, deLusignan was served with a summons and the complaint in the separate action filed by the Receiver in 1980.
Following service of the Receiver's disgorgement application upon deLusignan, two years and four months passed without any action being taken on the application. However, deLusignan was deposed in connection with his dealings with Wencke in April, 1981 and again in June, 1981. On August 19, 1983, deLusignan was served with another copy of the disgorgement application, a set of supporting documents, and a notice of a hearing to be held on the application before the magistrate/special master nineteen days later.
On September 2, 1983, deLusignan filed an objection to the scheduled hearing, claiming that the district court lacked personal jurisdiction over him, and that permitting the Receiver to proceed against him with the disgorgement application would violate his due process rights. The magistrate/special master conducted an evidentiary hearing on the disgorgement application, at which deLusignan's counsel made only a "special appearance" and did not present evidence or question witnesses. 3
The evidence indicated that Wencke had diverted at least $89,000 from Time, Santa Fe, and their subsidiaries, and had advanced these funds to Ramapo to acquire a majority interest in PSI and to provide operating funds for PSI. At the conclusion of the hearing, the magistrate indicated that he was prepared to find that Ramapo's assets, specifically its PSI shares and the profits it had derived from them, constituted "ill-gotten gains and as such are subject to disgorgement."
Counsel for the Receiver was directed to prepare findings of fact, conclusions of law, and recommendations. The magistrate adopted these findings and recommendations as drafted, and lodged them with the district court on October 7, 1983. The magistrate recommended that Ramapo be deemed a constructive trustee for the benefit of Time's and Santa Fe's defrauded shareholders, and that it be required to disgorge its PSI shares and the...
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