S.E.C. v. Credit Bancorp., Ltd.

• Decision Date: 18 July 2002
• Docket Number: Docket No. 01-6158.
• Citation: 297 F.3d 127
• Court: U.S. Court of Appeals — Second Circuit
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, United States of America, Intervenor-Appellant, Gene W. RAY, Dr., Centigram Comm. Corp., Stephen J. Cole-Hatchard, Nicko Feinberg, Leonard Zera, Trustee for Lathrop Investment Trust and Harrington Irrevocable Trust, Cole-Hatchard Family Limited Partnership, Michael Olberman & John Dillon, Intervenors-Plaintiffs, Stephenson Equity, Co., Thomas Stappas, Vincent J. Bagli, Andrew Calcagno, Regina Calcagno, Richard J. DuPont, Barbara DeYoung, Ronald DeYoung, Concetta G. Frato, George G. Luce & James F. Luce, TTEES FBO Luce Schwab & Case, Inc. Profit Sharing Plan, Frank Mignogna, TTE of Head & Neck Surgical Associates Retirement Trust, Robert Praegitzer, Stephen Robbins, Kurt G. Richter & Steven Allen, & Lorraine Jankowski, Intervenors-Plaintiffs-Appellees, v. CREDIT BANCORP, LTD., Credit Bancorp, Inc., & Richard Jonathan Blech, Defendants-Intervenors-Defendants, Carl H. Loewenson, Jr., Receiver-Appellee, Douglas C. Brandon & Thomas Michael Rittweger, Defendants-Intervenors-Defendants-Cross-Defendants, Credit Suisse, Swiss American Securities, Inc., Ing Baring Private Bank (Switzerland), Ltd., Brown Brothers Harriman & Co., Federal Insurance Company, Third-Party-Defendants.

297 F.3d 127

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-AppelleeUnited States of America, Intervenor-AppellantGene W. RAY, Dr., Centigram Comm. Corp., Stephen J. Cole-Hatchard, Nicko Feinberg, Leonard Zera, Trustee for Lathrop Investment Trust and Harrington Irrevocable Trust, Cole-Hatchard Family Limited Partnership, Michael Olberman & John Dillon, Intervenors-PlaintiffsStephenson Equity, Co., Thomas Stappas, Vincent J. Bagli, Andrew Calcagno, Regina Calcagno, Richard J. DuPont, Barbara DeYoung, Ronald DeYoung, Concetta G. Frato, George G. Luce & James F. Luce, TTEES FBO Luce Schwab & Case, Inc. Profit Sharing Plan, Frank Mignogna, TTE of Head & Neck Surgical Associates Retirement Trust, Robert Praegitzer, Stephen Robbins, Kurt G. Richter & Steven Allen, & Lorraine Jankowski, Intervenors-Plaintiffs-Appellees, v.CREDIT BANCORP, LTD., Credit Bancorp, Inc., & Richard Jonathan Blech, Defendants-Intervenors-DefendantsCarl H. Loewenson, Jr., Receiver-Appellee, Douglas C. Brandon & Thomas Michael Rittweger, Defendants-Intervenors-Defendants-Cross-Defendants, Credit Suisse, Swiss American Securities, Inc., Ing Baring Private Bank (Switzerland), Ltd., Brown Brothers Harriman & Co., Federal Insurance Company, Third-Party-Defendants.

Docket No. 01-6158.

United States Court of Appeals, Second Circuit.

Argued: October 11, 2001.

Submitted: November 14, 2001.

Decided: July 18, 2002.

COPYRIGHT MATERIAL OMITTED

Edward Chang, Assistant United States Attorney, New York, N.Y. (Mary Jo White, United States Attorney for the Southern District of New York, Jeffrey Oestericher, Assistant United States Attorney, New York, NY, on the brief), for Intervenor-Appellant.

Carl H. Loewenson, Jr., New York, N.Y. (Charles L. Kerr, Oliver Metzger, Andrew J. Fields, Nancy R. Thomas, Eleonore Dailly, Morrison & Foerster, New York, NY, on the brief), for Receiver-Appellee.

Before WALKER, Chief Judge, NEWMAN and KEARSE, Circuit Judges.

KEARSE, Circuit Judge.

The United States of America (the "Government"), an intervenor in this enforcement action brought by the Securities and Exchange Commission("SEC") against defendantsCredit Bancorp, Ltd., and its affiliated entities (collectively "Credit Bancorp""Bancorp" or "CBL"), appeals from so much of a May 16, 2001 order ("May 2001 Order") of the United States District Court for the Southern District of New York, Robert W. Sweet, Judge, as granted the motion of Carl H. Loewenson, Jr., CBL's receiver (the "Receiver"), for a declaration (1) that, from the assets deposited with Bancorp by its customers, along with the proceeds derived therefrom and the receipts of the receivership, debts to CBL customers have priority over tax debts to the Government; and (2) that the Receiver, in making distributions in accordance with a plan of partial distribution conditionally approved by the court, will incur no personal liability under the Federal Debt Priority statute, 31 U.S.C. § 3713(b), for tax debts of Bancorp or the receivership.The district court rejected the Government's contention that sovereign immunity had not been waived and that the court thus lacked subject matter jurisdiction to make such declarations, ruling that jurisdiction existed under 28 U.S.C. § 2410(a)(1) and as a matter of necessity.See138 F.Supp.2d 512, 526-28(2001).On appeal, the Government principally pursues its jurisdictional contentions.For the reasons that follow, we conclude that sovereign immunity has not been waived; we thus vacate the May 2001 Order for lack of jurisdiction and remand for dismissal of the Receiver's motion.

I.BACKGROUND

The present action was brought by the SEC against Credit Bancorp in November 1999, alleging, inter alia, that CBL had engaged in a Ponzi scheme that defrauded its customers in violation of § 17(a) of the Securities Act of 1933,15 U.S.C. § 77q(a),§ 10(b) of the Securities Exchange Act of 1934,15 U.S.C. § 78j(b), andSEC Rule 10b-5,17 C.F.R. § 240.10b-5.As discussed in this Court's recent decision in SEC v. Credit Bancorp, Ltd.,290 F.3d 80(2d Cir.2002), Bancorp had persuaded investors (referred to by the parties and the district court as "customers") to transfer cash and securities to it in order to enable it to engage in what it described as "riskless arbitrage" trading, and it promised to pay customers dividends based on the value of the unencumbered assets transferred by the customer.Seeid. at 83.Bancorp thereafter did pay some customers dividends, but only out of deposits it received from other customers.By the time the SEC commenced this suit and obtained a freeze of Bancorp's assets, Bancorp had victimized more than 200 customers and lost tens of millions of dollars of their assets.

Shortly after freezing Credit Bancorp's assets, the district court appointed Loewenson as Bancorp's fiscal agent; on January 21, 2000, the court appointed him Receiver.Bancorp was ordered to turn over all funds, property, documents, and records to the Receiver, who was granted broad powers to, inter alia, issue subpoenas, marshal CBL assets, liquidate those assets, and reinvest the proceeds in Treasury instruments.The freeze order directed the Receiver not to return any securities or other assets to Credit Bancorp's customers without further order of the court.In April 2000, the United States, by the United States Attorney for the Southern District of New York, sought and obtained permission to intervene in the action for the limited purpose of seeking a stay of discovery pending completion of related criminal proceedings with regard to Bancorp, its chief executive officer Richard Blech, and others.

A.The Receiver's Distribution Plan and Motion for Priority

In May and June 2000, the SEC and groups of intervening customers submitted to the district court three competing plans for interim distributions of Bancorp assets marshaled by the Receiver.In October 2000, the Receiver, after unsuccessfully attempting to negotiate a consensus plan, submitted to the court his own interim distribution plan.Under the Receiver's plan, customers who had transferred to CBL identifiable securities that were in the possession of the Receiver would be given an opportunity to retrieve them by depositing with the Receiver "Undertakings" — i.e., cash or United-States-government-backed securities in amounts equaling a specified percentage of the current market value of the securities; the cash Undertakings would be used by the Receiver to make pro rata distributions to customers whose deposits with CBL had been lost.Oral argument on the Receiver's plan was heard in mid-October, and decision was reserved.

Thereafter, the Receiver served a motion dated November 8, 2000, on the Office of the United States Attorney for the Southern District of New York in order to bring "[t]he Government ... into this action in its capacity as the Internal Revenue Service,"138 F.Supp.2d at 515.The motion asked the district court for an order

declaring that Credit Bancorp Ltd.'s customers have priority over the United States ... for payment from the customer-deposited assets, as well as the proceeds therefrom and cash receipts of the receivership [and] declaring that in notifying the Court and the potentially affected governments of the potential for tax liability, the Receiver has discharged his obligations pursuant to [the Federal Debt Priority statute,]31 U.S.C. § 3713(b)

....

(Receiver's Notice of Motion dated November 8, 2000("Priority Declaration Motion" or "Motion").)The Federal Debt Priority statute provides the federal government, in certain circumstances, with priority over other claimants as to the payment of debts, including tax debts, owed by an insolvent debtor, see31 U.S.C. § 3713(a)(1), and states that a "representative of a person or an estate ... paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government,"id.§ 3713(b).

The Receiver and the Government began negotiations with respect to Credit Bancorp's tax liability.Eventually, as discussed in Part I.B. below, the Receiver and the Government entered into a stipulation in February 2001 dealing with CBL's tax liability for the period prior to, but not after, the Receiver's appointment.

In the meantime, in an opinion dated November 29, 2000, the district court largely approved the Receiver's plan, finding it more equitable and more feasible than the other plans.Thereafter, in response to the court's expression of concern with respect to certain customers, the Receiver submitted a revised interim distribution plan, which the court approved in an opinion dated January 19, 2001.The court entered a detailed order, also dated January 19, 2001("January 2001 Order" or "Order"), setting out the terms of the plan, which provided essentially that the Receiver would, in exchange for the Undertakings, return identifiable securities under his control to the Bancorp customers who had deposited them with Bancorp, and that the Receiver would use the Undertakings principally to (a) facilitate a general pro rata distribution for those CBL customers whose securities and other assets had been transferred or lost, (b) provide collateral for claims by broker-dealers, and (c) fund the administration of the receivership.The January 2001 Order provided, however, that the Order was not to become effective prior to approval of the Receiver's request for priority treatment of customer debts:

This Order shall become effective upon further order of this Court, either by the entry of a stipulation and order between the Receiver and the United States permitting the distribution set forth herein to proceed, or by a separate order of this Court declaring that Credit Bancorp's customers have priority over the United States and the States for payment from the customer-deposited assets, as well as the proceeds therefrom, and that the distribution set forth...