Securities v. Forex Asset Mgmt.

• Decision Date: 26 February 2001
• Docket Number: No. 00-10224,00-10224
• Citation: 242 F.3d 325
• Parties: (5th Cir. 2001) SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. FOREX ASSET MANAGEMENT LLC, Etc; ET AL, Defendants. MICHAEL WHITBECK; DONNA WHITBECK, Movants - Appellants, v. DAN R. WALLER, Receiver, Appellee
• Court: U.S. Court of Appeals — Fifth Circuit

Page 325

242 F.3d 325 (5th Cir. 2001)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. FOREX ASSET MANAGEMENT LLC, Etc; ET AL, Defendants.

MICHAEL WHITBECK; DONNA WHITBECK, Movants - Appellants, v. DAN R. WALLER, Receiver, Appellee.

No. 00-10224

UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT

February 26, 2001

[Copyrighted Material Omitted] Appeal from the United States District Court For the Northern District of Texas.

Before WIENER, BARKSDALE, and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Michael and Donna Whitbeck ("the Whitbecks") appeal the district court's order approving of the decision by Dan R. Waller ("Receiver"), the receiver appointed to oversee the assets connected with Forex Asset Management, L.L.C. ("Forex"), to distribute the assets of Forex on a pro rata basis. We affirm.

I

The Whitbecks learned of a foreign currency investment opportunity with Forex through a radio infomercial given by Kosova, the individual who allegedly controls Forex. Thereafter, the Whitbecks attended a seminar regarding investment opportunities with Forex, and wrote a check to Forex for $100,000. Several months later, after receiving statements reflecting a profitable return on their $100,000 investment, the Whitbecks attended another seminar. After the seminar, the Whitbecks decided to invest additional money, and they took out a loan of $800,000 in order to do so. The Whitbecks then wrote a check to Forex for $800,000, which they gave to Kosova. Kosova informed the Whitbecks that their funds would be placed in a separate account in order to invest the money more aggressively.

Kosova deposited the Whitbecks' $800,000 check in an account held by FAM Preferred Trading Corporation ("FAM Preferred") at NationsBank.¹ The records documenting the FAM Preferred account's transactions show only one deposit, specifically the Whitbecks' $800,000 check.

In addition to the account at NationsBank, FAM Preferred also maintained a brokerage account with Rosenthal Collins Group, L.P. ("Rosenthal"). After depositing the $800,000 into the FAM Preferred account, Kosova transferred $750,000 into the Rosenthal account. The $750,000 deposited into the Rosenthal account was the only deposit made into that account. The Whitbecks assert that the only other withdrawals from the NationsBank account were to cover the cost of the wire transfer fees, and an $8,500 check to themselves.

After the Whitbecks invested $900,000 with Forex, the Securities and Exchange Commission ("SEC") filed a complaint against Kosova and Forex for allegedly engaging in a scheme to defraud investors. As a consequence of the SEC complaint, the assets of Forex, Kosova and the entities owned and controlled by Kosova were frozen, and a receiver was appointed.² The Whitbecks were not named as parties to the suit between the SEC, Forex and Kosova, nor did they move to intervene in accordance with Federal Rule of Civil Procedure 24.

The Receiver appointed to manage the Forex-Kosova assets determined that the Forex program had accumulated approximately $2.5 million of indebtedness, and retained approximately $1,150,000 worth of assets.³ After analyzing the debts owed and calculating the amount of the remaining assets, the Receiver determined that the assets should be distributed on a pro rata basis in order to treat the creditors equally because none of the creditors had a "secured claim . . . [or] legal preference." According to the plan, each investor "would share in the distribution based upon the percentage of their loss as measured against the losses of all of the unpaid claimants."

Prior to approving the Receiver's distribution plan, the district court sought objections to the plan, for which it received two, one of which was from the Whitbecks. Pursuant to the receivership plan, the Whitbecks' $800,000 investment was to be treated identically to the other Forex investment funds. This was because the Receiver determined that the $800,000, while placed in a separate account, was simply another investment in the Forex foreign currency program, and therefore should be analyzed similarly to the other investors' contributions. To support its position, the Receiver noted that the Whitbecks wrote both their $800,000 and $100,000 checks to Forex. Therefore, the Whitbecks' investment with Forex was calculated at $900,000, of which they were owed $878,000.⁴ Because they were owed $878,000, under a pro rata distribution they would receive 33.09 percent of the remaining assets.

The Whitbecks, however, argued that because their $800,000 check was placed in a segregated account they should receive all of the funds that remained in the FAM Preferred and Rosenthal accounts. The Whitbecks did not, however, assert that something other than a pro rata distribution should be performed with regard to their initial $100,000 investment, as these funds were commingled with other Forex investors' funds.

After considering the Whitbecks' objections, the district court affirmed the plan because it determined that the "Receiver's Plan provide[d] the most equitable means of addressing all of the victim's harms[,] . . . [and] the Whitbecks [did] not present[] any facts that would elevate their claims above those of the other investors." The court further noted that it was afforded "wide discretion in the supervision of an equity receivership . . . [and that it could] approve a plan as long as it [was] fair and equitable."

II

The Whitbecks appeal the district court's order approving the Receiver's distribution plan. Prior to reviewing the merits of the Whitbecks' appeal, there are two threshold issues that require our attention. First, we must determine whether the Whitbecks have standing to bring this appeal. Although the parties have not raised this issue, we may raise it sua sponte. See Lang v. French, 154 F.3d 217, 222 n.28 (5th Cir. 1998) (reaffirming the principle that questions regarding standing may be "raised by an appellate court sua sponte"). Our concern regarding the Whitbecks' standing stems from the fact that the Whitbecks were not named as parties in the SEC's complaint, nor did they seek to intervene in accordance with Rule 24. As the Supreme Court stated in Marino v. Ortiz, 484 U.S. 301, 304,108 S.Ct. 586, 588, 98 L.Ed.2d. 629 (1988), "[t]he rule that only parties to a lawsuit, or those that properly become parties, may appeal an adverse judgment is well settled."

While there is a general rule that non-parties to a suit do not have standing to appeal, we have previously stated that exceptions exist. For instance, in Castillo v. Cameron County, Tex., 238 F.3d 339 (5th Cir. Jan. 5, 2001), where we were asked to determine whether Texas had standing to seek review of a series of injunctions after it was dismissed from the underlying suit, we reaffirmed the principle that "'[i]f the decree affects [a third party's] interests, he is often allowed to appeal.'" Id. at 349, citing United States v. Chagra v. San Antonio Light Div. of Hearst Corp., 701 F.2d 354, 358-59 (5th Cir. 1983); see also In re Beef Indus. Antitrust Litig., 589 F.2d 786, 788 (5th Cir. 1979) (stating that "[t]he Fifth Circuit has been lenient in hearing the appeals of non-parties").

Additionally, in Castillo we emphasized that this Circuit applies a three-part test when deciding whether a non-party may appeal. We inquire "'whether "the non-part[y] actually participated in the proceedings below, the equities weigh in favor of hearing the appeal, and the non-part[y] ha[s] a personal stake in the outcome."'" Id. (citations omitted). Moreover, we favorably cited a case by our sister circuit, Commodity Futures Trading Comm'n v. Topworth Int'l, Ltd., 205 F.3d 1107, 1113 (9th Cir. 1999), in which the court found that a non-party creditor who objected to a proposed receivership distribution plan had standing because he had a legitimate interest in the proceedings, and had participated adequately in the proceedings by timely filing his claim, filing objections, and attending the hearing on the claim. Furthermore, in Castillo we reaffirmed the statement that we made in Chagra that "[n]on-party creditors who assert rights in receivership proceedings may appeal orders affecting their legitimate interests." Id., citing Chagra, 701 F.2d at 358-59.

To determine whether the Whitbecks' appeal is proper, we apply our three-part test. First, in accordance with the first prong of the test, we find that the Whitbecks participated in the proceedings in the district court to the extent their interests were involved. The Whitbecks' participation is demonstrated by three actions: (1) their filing a notice that they were an interested party; (2) their moving for a turnover of the assets in the FAM Preferred account and replying to the Receiver's response to their turnover request; and (3) their filing an objection to the Receiver's proposed distribution plan.

Second, the equities weigh in favor of hearing the appeal because the distribution order substantially affects the Whitbecks' interests and the district court solicited objections to the distribution order. Moreover, unlike other cases in which standing has been found not to exist, hearing the Whitbecks' appeal will not frustrate another legal principle. See Searcy v. Philips Elecs. N. Am. Corp., 117 F.3d 154, 156 (5th Cir. 1997) (noting that we have more strictly enforced the rule that non-parties may not appeal in the class action context because to do otherwise "could frustrate the Rule 23 mechanism"), citing Walker v. City of Mesquite, 858 F.2d 1071, 1074 (5th Cir. 1988) (stating that nonnamed class members should seek to intervene if they desire to appeal a decision regarding the class because to hear an appeal by a nonnamed party who has not intervened "would result in the frustration of the purpose behind class litigation").

Third, we find that the Whitbecks have a personal stake in the outcome of the distribution plan because the method by...