Smith v. American Industrial Research Corp., s. 80-1842

• Decision Date: 16 November 1981
• Docket Number: Nos. 80-1842,81-1034 and 81-1384,s. 80-1842
• Citation: 665 F.2d 397
• Parties: Frances SMITH, et al., Plaintiffs, Appellees, v. AMERICAN INDUSTRIAL RESEARCH CORPORATION, et al., Defendants, Appellees, Antonio Cobbuzi, et al., Plaintiffs, Appellants. Frances SMITH, et al., Plaintiffs, Appellees, v. AMERICAN INDUSTRIAL RESEARCH CORPORATION, et al., Defendants, Appellees, Daniel B. Bickford, Receiver, Defendant, Appellant. Frances SMITH, et al., Plaintiffs, Appellees, v. AMERICAN INDUSTRIAL RESEARCH CORPORATION, (AIRCO) et al., Defendants, Appellees, Daniel B. Bickford, Receiver, Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 397

665 F.2d 397

Frances SMITH, et al., Plaintiffs, Appellees, v. AMERICAN INDUSTRIAL RESEARCH CORPORATION, et al., Defendants, Appellees, Antonio Cobbuzi, et al., Plaintiffs, Appellants.

Frances SMITH, et al., Plaintiffs, Appellees, v. AMERICAN INDUSTRIAL RESEARCH CORPORATION, et al., Defendants, Appellees, Daniel B. Bickford, Receiver, Defendant, Appellant.

Frances SMITH, et al., Plaintiffs, Appellees, v. AMERICAN INDUSTRIAL RESEARCH CORPORATION, (AIRCO) et al., Defendants, Appellees, Daniel B. Bickford, Receiver, Defendant, Appellant.

Nos. 80-1842, 81-1034 and 81-1384.

United States Court of Appeals First Circuit.

Argued Oct. 5, 1981.

Decided Nov. 16, 1981.

Ronald F. Kehoe, Boston, Mass., with whom Haussermann, Davison & Shattuck, Boston, Mass., Alan L. Grenier, and Ardiff, Ardiff & Morse, Danvers, Mass., were on brief, for plaintiffs, appellants.

Jeffrey M. Smith, Boston, Mass., with whom Paul T. Smith, and Harvey R. Peters, Boston, Mass., were on brief for plaintiffs, appellees, Frances Smith, et al.

Rosalind C. Cohen, Asst. Gen. Counsel, Washington, D. C., with whom Ralph C. Ferrara, Gen. Counsel, Thomas P. Lemke, Atty., Securities and Exchange Commission, and Paul Gonson, Sol., Washington, D. C., were on brief, for the Securities and Exchange Commission, amicus curiae.

Before COFFIN, Chief Judge, BREYER, Circuit Judge, and BONSAL, ^* District Judge.

BREYER, Circuit Judge.

In September 1974, the Securities and Exchange Commission ("SEC") brought a fraud action in the Massachusetts federal district court against J & B Industries, American Industrial Research Corporation, and others (all of whom we shall refer to generically as the "AIRCO defendants"). The case was assigned to Senior Judge Murray, who, at the SEC's request appointed a receiver, Daniel Bickford, "to protect and preserve the defendants' property," presumably for the benefit of defrauded investors. In February 1975, a group of those investors, known as the "Smith plaintiffs," brought a similar private action, also in the Massachusetts federal district court. Although the private plaintiffs mentioned the SEC action as a related case, their case was assigned, not to Judge Murray, but to Judge Tauro. The SEC won its action before Judge Murray, who entered permanent injunctions against the defendants in 1975 and 1976. The private plaintiffs also won their action before Judge Tauro, primarily by default judgment.

Judge Tauro's default judgment of November 1980 ¹ led to these appeals. ² In that judgment, he not only found against the AIRCO defendants, but he also ordered Bickford, the receiver, "to pay immediately and with priority" to the plaintiffs approximately $158,000 plus interest "from the assets being held by him as receiver." Receiver Bickford, supported by the SEC, argues that Judge Tauro may well have had the power to enter a judgment against the AIRCO defendants, but he could not enter such a judgment against him as receiver-at the least, he could not order the receiver to pay the Smith plaintiffs from the receivership assets "with priority." Only Judge Murray, he claims, could do that.

Bickford and the SEC base their argument in part upon the well-established rule that a receiver cannot be sued elsewhere than in the receivership court without that court's permission. Barton v. Barbour, 104 U.S. 126, 26 L.Ed. 672 (1881). They add that Judge Murray did not give permission to sue the receiver elsewhere. They also argue that one important duty of a receivership court is the establishing of priorities as to assets likely to be smaller in total amount than the combined sum of the legitimate claims against them. If other courts are allowed to order payment out of the assets, plaintiffs in those courts may be given unfair preference over other claimants. In this case, for example, Judge Tauro's order would give the Smith plaintiffs $158,000 plus interest out of a total fund of about $400,000, leaving the remainder to satisfy others whom the AIRCO defendants also defrauded. The result is that the Smith plaintiffs would receive more than twice the amount they invested while others similarly defrauded would receive only 3% of what they had invested.

The Smith plaintiffs respond that as a technical matter, permission to sue the receiver was not necessary because they sued in the same court (the District of Massachusetts), see Jerome v. McCarter, 94 U.S. 734, 737, 24 L.Ed. 136 (1877), albeit they were assigned a different judge. In any event, they claim that they received at least implied permission to sue the receiver. ³ Barnette v. Wells Fargo Nevada Nat'l Bank, 270 U.S. 438, 442, 46 S.Ct. 326, 327, 70 L.Ed. 669 (1926). They also state that it is not unfair to allow them priority to recover their entire judgment out of the AIRCO defendants' assets. Their reasons as set out at various points in the record, include the assertions (1) that they brought their action at the receiver's suggestion as a way to establish the legitimacy of their claims; (2) that they sought to have their action heard by Judge Murray, but he would not allow consolidation or intervention; (3) that the receivership languished for several years, the receiver taking no steps to arrange for distribution of the assets until their action forced him to do so; (4) that the receiver wrongfully failed to attend a pretrial conference in Judge Tauro's court, which, in turn, led to the default judgment against him; (5) that they are entitled to a greater return than other victims because they have done all the legal work necessary to obtain any return; (6) that presumably Judge Tauro has, or might, also consider the relative merits of the claims of other victims; and (7) that the receiver's proposed asset distribution plan, submitted to Judge Murray on April 20, 1981, takes no account whatsoever of the Smith plaintiffs' work, but, rather, treats them like all other investor-victims, awarding them roughly 9% of their initial investment.

Rather than enter the metaphysical argument about whether the District of Massachusetts is one court or several, we resolve this controversy under our power to supervise the adequacy of judicial procedures in lower federal courts. See La Buy v. Howes Leather Co., 352 U.S. 249, 259-60, 77 S.Ct. 309, 315, 1 L.Ed.2d 290 (1957); In re Ellsberg, 446 F.2d 954, 956 (1st Cir. 1971); United States v. Butera, 420 F.2d 564, 567 n.2, 568 n.7 (1st Cir. 1970); Delaney v. United States, 199 F.2d 107 (1st Cir. 1952). See generally Note, The Judge Made Supervisory Power of the Federal Courts, 53 Geo.L.J. 1050 (1965); Note, The Supervisory Power of the Federal Courts, 76 Harv.L.Rev. 1656 (1963). Sound judicial management requires that the equities and priorities among claimants to receivership assets normally be determined in the receivership proceeding-in this case the proceeding before Judge Murray. Barton v. Barbour, 104 U.S. at 136. See generally, 7 Part 2 Moore's Federal Practice, P 66.07(2) (1980); C. A. Wright & A. R. Miller Federal Practice and Procedure § 2984 (1973). The record contains nothing to suggest that Judge Murray wished or intended the actual division of assets to be determined elsewhere. ⁴ Nor does it contain any evidence that Judge Tauro took into account the claims of others when he ordered that the Smith plaintiffs be paid out of the receivership assets "immediately and with priority." ⁵ Even if the receiver was seriously at fault in failing to appear for a pretrial conference-a matter which the record leaves in doubt ⁶-this fact would not justify penalizing other defrauded investors. Thus, it would seem appropriate to delete that portion of Judge Tauro's judgment that requires immediate, priority payment.

For the most part, the Smith plaintiffs' arguments to the contrary reflect a fear that the distribution will not be handled expeditiously or fairly in the receivership court. The record in this case, indeed, suggests that several years have passed without distribution, ⁷ that the major issue before the receivership has been the proper handling of the Smith plaintiffs, ⁸ and that the proceedings have occasionally become confused. ⁹ Though one cannot determine readily from the record who, if anyone, is at fault, it is difficult to believe that the entire matter could not have been handled more efficiently. We also note that the receiver's proposed distribution report makes no mention of the Smith plaintiffs' argument that they are entitled to some form of special treatment because of their expenditure of time and effort. Nonetheless, in recent months the receiver has moved expeditiously to create a plan; he assures us that the Smith plaintiffs will receive fair consideration; and Judge Murray has not yet approved any final distribution. We see no reason, therefore, why the distribution plan ought not to be developed, considered, and approved in the receivership court.

At the same time, we see no reason to set aside any other part of Judge Tauro's judgment. It is true that the judgment orders that the Smith plaintiffs recover $158,000 not only from the AIRCO defendants, but also from Bickford "as he is Receiver of the assets." But the receiver does not object to that part of the order. He stated before Judge Tauro that "our complaint, your honor, with the judgment...