Eberhard v. Marcu

• Decision Date: 20 June 2008
• Docket Number: Docket No. 06-4536-cv.
• Citation: 530 F.3d 122
• Parties: Sandi EBERHARD, Intervenor-Appellant, v. Aaron R. MARCU, Receiver for the Assets of Todd M. Eberhard, Receiver-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

530 F.3d 122

Sandi EBERHARD, Intervenor-Appellant, v. Aaron R. MARCU, Receiver for the Assets of Todd M. Eberhard, Receiver-Appellee.

Docket No. 06-4536-cv.

United States Court of Appeals, Second Circuit.

Argued: April 10, 2008.

Decided: June 20, 2008.

Vivian Shevitz, (Jane Simkin Smith, of counsel, on the brief), South Salem, NY, for Appellant.

Andrew A. Ruffino, (Alan Vinegrad, Douglas B. Bloom, on the brief), Covington & Burling LLP, New York, NY, for Appellee.

Before CABRANES, SOTOMAYOR, and WESLEY, Circuit Judges.

WESLEY, Circuit Judge:

This appeal presents novel issues concerning the authority of a federal securities receiver over property claimed by a third party. We hold that a receiver cannot employ section 276 of New York's Debtor & Creditor Law to set aside a fraudulent conveyance where he represents only the transferor. We also hold that a third party is entitled to a jury trial under the Seventh Amendment to determine ownership of property claimed by a receiver. For these reasons, we vacate the judgment of the United States District Court for the Southern District of New York (Berman, J.) and remand for further proceedings consistent with this opinion.

BACKGROUND

Between 1998 and 2003, Todd M. Eberhard perpetrated a wide-ranging securities fraud, using his broker-dealer firm Park South Securities, LLC ("Park South") and his investment advisory firm Eberhard Investment Associates, Inc. ("EIA") to loot customer funds, issue phony account statements and "churn" customer accounts to increase his commissions. On February 4, 2003, Eberhard was charged with, inter alia, conspiracy, investment advisory fraud, mail and fraud, and obstruction of justice, ultimately pleading guilty to eleven counts and receiving a prison term of 160 months.¹

The SEC commenced a parallel civil enforcement action in the district court. On February 5, 2003, Judge Berman issued a temporary restraining order freezing the assets of Eberhard, EIA, and Park South and appointing Aaron R. Marcu receiver for EIA and Park South. Five days later, the court removed Park South from the Receivership, appointed Irving H. Picard as its Securities Investor Protection Act ("SIPA") trustee to pursue the claims of defrauded investors, and removed Park South's liquidation to the bankruptcy court. After several months, the court changed the Receivership again, adding Eberhard's personal assets. In September 2003, the Receivership was altered a third time — EIA was removed and substantially consolidated with Park South in the bankruptcy court. See In re Park S. Sec., LLC, No. 03-8024A (Bankr.S.D.N.Y. Sept. 10, 2003). As a result of that order, all that remained in the Marcu Receivership were the personal assets of Todd Eberhard.

This case is a dispute over the ownership of one of those assets — a Nova Scotia corporation named Borderline Development NS, Inc. ("Borderline NS"), formed in April 2000 with Todd Eberhard as sole shareholder. In three separate transactions in 2000 and 2001, Eberhard caused the corporation to purchase two apartment buildings in Montreal and an uninhabited island off the coast of Nova Scotia (collectively, the "Canadian Properties"). These purchases were funded by loans, extended by a bank in Georgia, that were paid back with earnings in EIA checking accounts.

In conjunction with the SEC enforcement action, Todd Eberhard provided an affidavit detailing all of his personal assets. In the affidavit, Eberhard represented that he was the "sole owner" of Borderline NS, but later notified the court that he had erred in listing the corporation as his own. He indicated that prior to his arrest, he had transferred it to Appellant, his mother Sandi. In an effort to convince the SEC and the district court, he submitted a document that purported to demonstrate the conveyance. Entitled "Re: Transfer of Ownership of Borderline Development Corporation N.S.," and signed by both Todd and Sandi Eberhard, the document indicated that, on June 21, 2000, Todd Eberhard transferred 90% of the ownership of the corporation to Sandi in exchange for her assumption of a $500,000 line of credit issued jointly to Todd and Sandi Eberhard by Citibank in 1994. Sandi thereafter intervened in the civil action under Rule 24 of the Federal Rules of Civil Procedure. She later admitted that the document Todd had submitted was a fraud, explaining that she and her son could not locate the "real documents" that allegedly reflected a conveyance of the corporation not in June 2000, but in June 2002.

On April 18, 2003, the district court entered an order authorizing the Receiver to "take all steps [he] deems appropriate for the collection, preservation, maintenance and operation" of the frozen assets, including Borderline NS, in order to "protect th[e] Court's ability to award equitable relief in the form of disgorgement of illegal profits from fraud and civil penalties." With regard to the disputed ownership of Borderline NS, the order provided that:

The Receiver shall take whatever investigative steps he deems appropriate to ascertain ownership or other interests in these assets and, if necessary, bring appropriate proceedings in this Court to determine such interests or grant other relief. Until ownership ... is determined, either by agreement between the Receiver and Eberhard or by the Court, they shall be regarded as Eberhard's assets for purposes of the asset freeze.

More than two years later, on September 9, 2005, the Receiver reported to the court that Borderline NS was an asset of Todd Eberhard because the conveyance to his mother did not occur, and even if it had, it should be set aside as fraudulent. As a result, he sought the court's authorization to sell the Canadian Properties. Sandi opposed the application, maintaining that her son conveyed the corporation to her in 2002 as noted above. She also argued that she was entitled to a jury trial to determine ownership, that the Receiver lacked standing to set aside the transfer and that the court did not have subject matter jurisdiction over his claim.

On January 31, 2006, Judge Berman issued an order rejecting Appellant's procedural objections. See SEC v. Eberhard, No. 03 Civ. 813 (S.D.N.Y. Feb. 1, 2006). The court concluded that the Receiver had standing "`to recover fraudulently obtained funds that [have] come to rest with' a third party, even a `non-wrongdoing party.'" Id. (quoting SEC v. Shiv, 379 F.Supp.2d 609, 618 (S.D.N.Y.2005) (alterations in original)). The court also held that its jurisdiction to fashion appropriate relief enabled it to decide between competing claims of ownership. Id. Finally, the court concluded that the procedures afforded to Sandi in a bench trial would comply with due process, because she had voluntarily intervened and would be given the opportunity to present witnesses and evidence. Id.

With these procedural rules in place, the court conducted a bench trial on June 1, 2006 to determine ownership of Borderline NS. The Receiver conceded that a farm owned by Sandi was used as collateral for the Citibank loan (the supposed consideration for the transfer), but noted that she began making principal and interest payments only after her son's arrest in 2003, not when she allegedly assumed responsibility for the loan in June 2002. Sandi took no part in Borderline NS's management and failed to disclose her purported ownership interest in the corporation on her 2002 tax returns. Sandi did produce the missing "real documents" demonstrating the transfer, and Jack Dacosta, the manager of the Canadian Properties, testified that he prepared those documents in June 2002 and had possessed them since that time.

The court found that the Canadian Properties were purchased solely by Todd Eberhard, using funds derived from his criminal activities. See SEC v. Eberhard, No. 03 Civ. 813 (S.D.N.Y. Aug. 11, 2006). Sidestepping the question of whether the contested conveyance actually took place, the court held that it should be set aside under N.Y. Debtor & Creditor Law § 276 as a fraudulent conveyance. Id. The court noted that the transaction bore several "badges of fraud" including lack of adequate consideration, intra-family transfer, Sandi's lack of managerial involvement with the company, and an intent to hinder or defraud Todd's creditors inferred from the earlier backdating scheme. Id. The court also rejected Sandi's requests that the transfer be upheld as security for her real estate investments with Todd and that a constructive trust be imposed in her favor. Id. The court entered judgment against Appellant on September 27, 2006, concluding that "Sandi Eberhard, intervenor in this action, has no ownership or other interest with respect to [Borderline NS] or its common stock."

Sandi Eberhard appeals, arguing that: (1) the Receiver lacked standing to set aside a fraudulent conveyance under N.Y. Debtor & Creditor Law § 276 and the district court was without jurisdiction over that claim; (2) she was entitled to a jury trial under the Seventh Amendment; (3) the transfer of Borderline NS was not a fraudulent conveyance but a legitimate preference among creditors; and (4) she was entitled to a constructive trust on the real property that her son purchased with the money in EIA accounts traceable to her.

DISCUSSION

1. Subject Matter Jurisdiction

Appellant simultaneously questions the Receiver's standing and the district court's subject matter jurisdiction over the Receiver's fraudulent conveyance claim, contending that the district court does not have jurisdiction over a claim that the Receiver lacks standing to assert.² This argument confuses two entirely separate issues. The Receiver may pursue in the district court all possible grounds for relief related to the ownership of Borderline NS. However, the district court's determination of the merits of each claim (and the Receiver's standing to assert it) is separate and distinct from the court's power to hear it. "So long as an...