S.E.C. v. Wencke, 83-6165

• Decision Date: 18 September 1984
• Docket Number: No. 83-6165,83-6165
• Parties: Fed. Sec. L. Rep. P 91,679 SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Walter WENCKE, et al., Defendants. Palmer York, Jr. and George Croke, Appellants and Real Parties In Interest.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1230

742 F.2d 1230

Fed. Sec. L. Rep. P 91,679

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

Palmer York, Jr. and George Croke, Appellants and Real

Parties In Interest.

No. 83-6165.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Sept. 4, 1984.

Decided Sept. 18, 1984.

Scott Metzger, Michael Duckor, Duckor & Spradling, San Diego, Cal., for plaintiff.

Michael G. Zybala, Michael S. Polan, Law Firm of Alex A. Harper, San Diego, Cal., for defendants.

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

Before WALLACE, FLETCHER and REINHARDT, Circuit Judges.

FLETCHER, Circuit Judge:

Palmer York, Jr. and George E. Croke appeal the district court's refusal to lift its stay preventing the commencement of their suit against the Wencke receivership. We reverse.

In 1982, Portsmouth Square, Inc. (PSI) sought to remedy its serious financial difficulties by making a deal with Walker Wencke, a self-proclaimed expert on saving financially troubled companies. Wencke, through his company RAMAPO, concluded an agreement with PSI pursuant to which PSI received $10,000 and an implied promise of Wencke's services in exchange for stock representing a controlling interest in PSI and all of the stock of two of PSI's unprofitable subsidiaries. Wencke also retained deLusignan, then president of PSI, to manage RAMAPO in exchange for twenty-five percent of the shares of RAMAPO Corporation.

The SEC began investigating Wencke's activities and in March, 1977, at the SEC's request, the district court appointed R.N. Gould as receiver for all corporate and trust entities owned by Wencke. The district court enjoined all persons from commencing or continuing with any actions against the Wencke receivership or its assets. We upheld the stay in Securities and Exchange Commission v. Wencke, et al. Superior Motels v. Gould, 622 F.2d 1363 (9th Cir.1980).

On May 31, 1983, six years after the commencement of the Wencke receivership, York and Croke, two minority shareholders of PSI, moved the district court for relief from its stay order to permit a suit against RAMAPO and Wencke alleging fraud, inadequate and unlawful consideration, and breach of fiduciary duty. The district court, applying the test laid down in Superior Motels, denied the appellants' motion. Subsequently, on November 7, 1983, the district court ordered RAMAPO to disgorge its PSI shares to the receiver for the benefit of the public shareholders of two other corporations defrauded by Wencke.

In Superior Motels v. Gould, 622 F.2d at 1373, this court set forth three factors to consider in deciding whether to except applicants from a blanket stay: (1) whether refusing to lift the stay genuinely preserves the status quo or whether the moving party will suffer substantial injury if not permitted to proceed; (2) the time in the course of the receivership at which the motion for relief from the stay is made; and (3) the merit of the moving party's underlying claim. In reviewing the district court's application of this test and ultimate decision, we apply an abuse of discretion standard. Id. at 1374.

The issue under Superior Motels is one of timing, that is, when during the course of a receivership a stay should be lifted and claims allowed to proceed, not whether the stay should be lifted at all. At some point, persons with claims against the receivership should have their day in court. The receivership cannot be protected from suit forever.

In evaluating the second or "timing" factor of the Superior Motels test, the district court concluded that "[e]xamination of the time at which...