Feigin v. Securities America, Inc.

• Decision Date: 05 August 1999
• Docket Number: No. 98CA0718.,98CA0718.
• Citation: 992 P.2d 675
• Parties: Philip A. FEIGIN, Securities Commissioner for the State of Colorado, Plaintiff-Appellee, v. SECURITIES AMERICA, INC., Defendant-Appellee, and Alexa Group, Ltd., James P. Dufficy, and Eva F. Balassa, Defendants, and Concerning Charles Patterson, Patricia Patterson, Edward Seevers, and Tamera Seevers, Applicants for Intervention-Appellants.
• Court: Colorado Court of Appeals

992 P.2d 675

Philip A. FEIGIN, Securities Commissioner for the State of Colorado, Plaintiff-Appellee, v. SECURITIES AMERICA, INC., Defendant-Appellee, and Alexa Group, Ltd., James P. Dufficy, and Eva F. Balassa, Defendants, and Concerning Charles Patterson, Patricia Patterson, Edward Seevers, and Tamera Seevers, Applicants for Intervention-Appellants.

No. 98CA0718.

Colorado Court of Appeals, Div. I.

August 5, 1999.

Certiorari Granted February 7, 2000.

Gale A. Norton, Attorney General, Martha Phillips Allbright, Chief Deputy Attorney General, Richard A. Westfall, Solicitor General, Richard Djokic, First Assistant Attorney General, Denver, Colorado, for Plaintiff-Appellee.

Kutak Rock, John H. Bernstein, John P. Jones, Matthew J. Rita, Denver, Colorado, for Defendant-Appellee.

John F. Head, P.C., John F. Head, Ian S. Karpel, Denver, Colorado, for Applicants for Intervention-Appellants.

Opinion by Judge CRISWELL.

Applicants for intervention, Charles and Patricia Patterson and Edward and Tamera Seevers (investors), appeal from the order denying their motion to intervene in the civil enforcement action filed by plaintiff, Philip A. Feigin, as Securities Commissioner for the State of Colorado (the Commissioner), against defendants, Alexa Group, Ltd., James P. Dufficy, Eva F. Balassa, and Securities America, Inc. (SAI). We vacate the order denying intervenors' motion and remand with directions to permit intervention. We also vacate, pending consideration of investors' objections to the settlement between the Commissioner and SAI, the order approving the settlement agreement between the Commissioner and SAI insofar as that agreement purports to establish a settlement procedure for claims possessed by any investor.

Dufficy, who was a licensed Colorado securities salesperson, and his wife, Balassa, engineered a "Ponzi" scheme whereby they offered and sold securities and investments through Alexa Group, Ltd. Dufficy was an authorized representative of SAI, a Nebraska broker-dealer, which also holds a Colorado license, until December 19, 1995, but he continued the fraudulent scheme at least through March 1996. Altogether, his investors lost in excess of $500,000.

Section 11-51-602, C.R.S.1998, authorizes the Commissioner to bring an action to enjoin violations of the state securities act. Section 11-51-604, C.R.S.1998, authorizes private parties to sue for damages for securities fraud. However, § 11-51-602 also authorizes the Commissioner, in an action for an injunction, to assert "a claim for damages under" § 11-51-604 "on behalf of some or all of the persons" injured by the securities fraud.

When the fraud here was discovered, the Commissioner commenced administrative proceedings against SAI and Dufficy to have administrative sanctions imposed upon them. At the same time, pursuant to the authority granted to him under § 11-51-602, he also brought a civil enforcement proceeding against defendants in which he sought an injunction against future violations as well as damages on behalf of the investors under § 11-51-604.

A few months later, a default judgment in favor of the Commissioner was entered against the defendants other than SAI for $597,000, including some $74,000 in attorneys fees. This judgment represented the losses of all investors, both those investing before and those investing after Dufficy ceased being SAI's authorized agent.

Then, about six months after the Commissioner initiated the civil enforcement and administrative proceedings, certain investors brought a class action against defendants to recover damages under § 11-51-604. Shortly thereafter, the Commissioner and SAI commenced settlement negotiations, which contemplated settling both the administrative proceeding and the § 11-51-602 lawsuit. Before the settlement agreement was finalized, however, certain of the named plaintiffs in the class action, together with other investors who were not named parties, but who were members of the class who had invested after Dufficy ceased being SAI's representative, sought to intervene in the enforcement action on a limited basis solely to contest and to object to the terms of the proposed settlement agreement.

In the meantime, SAI, a defendant in the class action, convinced the class action court to stay all proceedings in that case pending approval of the settlement agreement in the Commissioner's lawsuit. While this record does not evidence it, we were told in oral argument that that stay order has now been lifted.

Shortly after this motion to intervene was filed, the Commissioner and SAI filed a copy of their proposed settlement agreement and requested the court to approve its terms. The court, without holding a hearing and without stating any reasons for either of its actions, entered orders denying the request for intervention and approving the settlement agreement.

Investors assert that the trial court improperly denied them their right to be heard with respect to the fairness of the terms of the proposed settlement agreement that could have, and probably will have, a substantial adverse impact upon their rights. We agree.

The proposed settlement agreement consists of two different agreements. In the first agreement, SAI agrees to have certain conditions and limitations imposed upon its Colorado broker-dealer license, which agreement is to be made an order of the court and enforceable by it. Investors raise no objections to any of those conditions and limitations. By the second agreement, which purports to settle the Commissioner's § 11-51-604 claim for damages on behalf of the investors, the parties agree to the establishment of a "claims procedure" using a court-appointed administrator "to determine valid and supported claims of qualifying ... investors...." Under this procedure, the Commissioner is to provide to the administrator the names and addresses of all persons known to have invested with Dufficy, notice is to be given to each of those persons, and those persons must file claims with the administrator before a specified date. Any claim not submitted to the administrator by that date "will not be considered."

Under the agreement, all investors who invested before December 19, 1995 (the date Dufficy ceased being SAI's representative), whose claims are approved, are to be paid their "net losses," i.e., the amount actually invested, not including "interest, lost profits, attorney fees, compensatory damages, punitive damages, costs of collection, or any other claim...."

Any person who invested after that date will have a claim approved only if that person can prove that he or she "reasonably believed Dufficy was affiliated with SAI at the time of his/her investment, and that the investor did not know nor reasonably believe Dufficy was no longer affiliated with SAI at the time...." In addition, with respect to these investors, the administrator is given authority to award "less than 100%" of those investors' net losses, if the administrator determines that "it is appropriate in his discretion...." However, the agreement does not describe any criterion to be used by the administrator to determine when such a lesser award would be "appropriate."

Finally, if an investor's claim is approved, that investor will be paid only if there is tendered to SAI both a release of the claim against it, as well as an "assignment of claims" (presumably against Dufficy) and any other document that may be agreed upon by the Commissioner and SAI. Anyone not providing such documents will not be paid, in which event any rights or claims against SAI "shall not be impaired or otherwise affected as a matter of law."

I.

A person has the right to intervene in an action if: (1) the person claims "an interest relating to the property or transaction" that is the subject of the action; (2) the disposition of the action may "as a practical matter impair or impede his ability to protect that interest"; and (3) his interest is not "adequately represented" by existing parties. C.R.C.P. 24(a)(2); United Airlines, Inc. v. Schwesinger, 805 P.2d 1209 (Colo.App.1991). In addition, a petition to intervene must be "timely," and C.R.C.P. 24(c) requires that the motion be accompanied "by a pleading setting forth the claim or defense" for which intervention is sought.

Likewise, even if there is no right to intervene, a person may be permitted to do so if that person can demonstrate that his or her claim or defense and the main action have a common question of law or fact. C.R.C.P. 24(b).

A request for permissive intervention is addressed to the trial court's sound discretion, and its decision upon the request is reversible only for an abuse of that discretion. Grijalva v. Elkins, 132 Colo. 315, 287 P.2d 970 (1955).

Similarly, the question whether a petition for intervention, whether permissive or of right, has been filed in a timely manner is also addressed to that court's sound discretion. Law Offices of Andrew L. Quiat, P.C. v. Ellithorpe, 917 P.2d 300 (Colo.App.1995).

With respect to the other factors required to be established to authorize intervention by right, however, the courts are not of a single mind with respect to the standard of review to be applied to a trial court's decision upon the subject. Many have held that the question whether these factors have been established is to be reviewed by an appellate court on a de novo basis as an issue of law. See Sierra Club v. Espy, 18 F.3d 1202 (5th Cir. 1994); Grubbs v. Norris, 870 F.2d 343 (6th Cir.1989). Indeed, even some courts that have adopted an abuse of discretion standard of review have, nevertheless, stated that this review is "more stringent" than is the review of a decision upon a request for permissive intervention. Brody v. Spang, 957 F.2d 1108, 1114 (3d Cir.1992).

Several years ago, our supreme court seemed to say that the standard of review in such cases is for an abuse of discretion. However, there was no extended discussion of the issue, and in...