Zandford v. Sec. & Exch. Comm'n

• Decision Date: 27 February 2012
• Docket Number: No. 11-172-GMS,11-172-GMS
• Parties: CHARLES ZANDFORD, Plaintiff, v. SECURITIES AND EXCHANGE COMMISSION and UNITED STATES TREASURY, Defendants.
• Court: U.S. District Court — District of Delaware

CHARLES ZANDFORD, Plaintiff,

v. SECURITIES AND EXCHANGE COMMISSIONand UNITED STATES TREASURY, Defendants.

No. 11-172-GMS

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

Dated: February 27, 2012

MEMORANDUM

I. INTRODUCTION

The plaintiff, Charles Zandford ("Zandford"), who proceed:* pro se, filed this lawsuit on February 28, 2011, alleging constitutional violations under the Due: Process clause and statutory violations under the Debt Collection Improvement Act of 1996. (D.I. 1, 10.) Zandford alleges that the defendant the Securities and Exchange Commission ("SEC") violated his right to due process and violated the Debt Collection Improvement Act of 1996 ("DCIA"), 31 U.S.C. § 3701, et seq. and the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78a, et seq. Zandford asserts jurisdiction pursuant to 28 U.S.C. § 1331 and § 1337 and seeks declaratory and injunctive relief pursuant to 28 U.S.C. §§ 2201 and 2202.¹

Before the court is a motion to dismiss the amended complaint filed by the defendant the United States Department of Treasury ("the Treasury"), a motion to dismiss the statutory claim and motion for summary judgment on the due process claim filed by the SEC, and Zandford's combined motion for discovery and opposition to the SEC's motion. (D.I. 12, 16, 18.) For thereasons that follow, the court will sua sponte dismiss the amended complaint as the injunctive relief sought is moot and the Declaratory Judgment Act cannot provide Zandford the relief he seeks.

II. BACKGROUND

Zandford filed the instant complaint to challenge the legality of the SEC's September 22, 2010 referral of a federal district court disgorgement judgment to the Treasury's Financial Management Services ("FMS") for collection by administrative offset. Zandford alleges that the referral is not legally enforceable and is void on constitutional and statutory grounds.

In July 1995, Zandford was convicted in the United States District Court for the District of Maryland of thirteen counts of wire fraud for misappropriating the proceeds from sales of securities in customers' investment accounts. On September 22, 1995 he was sentenced to fifty-two months imprisonment and ordered to pay $10,800 in restitution. United States v. Zandford, 110 F.3d 62 (4th Cir. 1997) (table decision). On the day he was sentenced, the SEC filed a civil complaint against Zandford alleging the misappropriation of the proceeds violated § 10(b) of the Securities Exchange Act and Rule 10b-5.² See Securities and Exch. Comm'n v. Zandford, Civ. No. 95-2826-AMD (D. Md.). Following several rounds of appeals, the district court reinstated final partial judgment in favor of the SEC and against Zandford in the disgorgement sum of $343,000.³ See Securities and Exch. Comm'n v. Zandford, 114 F. App'x 118 (4th Cir. 2004) (not published). The judgment denied the SEC's motion for pre-judgment interest and creditedZandford with $10,800 against the disgorgement principal of $343,000. (D.I. 10, ex. 2.) On February 1, 2005, the SEC sent Zandford a notice of the past due disgorgement amount of $343,000 plus additional interest, penalties, and fees as allowed by law. The letter stated that the amount became past due on March 27, 2004. Zandford requested a review stating that he was "not capable" of paying the disgorgement amount. On June 27, 2005, the SEC advised Zandford that it had reviewed documents and other information he provided in considering his request for waiver. The SEC determined that it could not recommend any waiver of the amount owed and advised Zandford that the debt would be referred to the Treasury as set forth in its February 1, 2005 letter. (D.I. 17, exs. A, B, D.)

The SEC referred the debt owed by Zandford to the Treasury on or about September 8, 2005. The debt was immediately returned to the SEC because the referral document stated that the debt was subject to various interest rates and the computerized debt tracking program used by the Treasury was unable to accommodate debts subject to variable interest rates. The Treasury implemented a new computerized debt tracking system and, therefore, suspended the referral of any debts from any federal agency on September 9, 2005. The Treasury recommenced acceptance of debt referrals from federal agencies on October 3, 2005. The SEC recommenced referral of debts to the Treasury on March 16, 2006. (D.I. 17, ex. 1.)

In the meantime, on October 11, 2005, Zandford filed a Chapter 7 bankruptcy in the United States Bankruptcy Court for the District of Delaware. When Zandford inherited assets from his late wife's estate, the bankruptcy action converted from a no-asset case to an asset case. The SEC filed a proof of claim in the amount of $343,000 for the disgorgement principal owed by Zandford. In turn, Zandford instituted an unsuccessful adversarial action that challenged theSEC's standing to file a "preemptive proof of claim" before referring the disgorgement to the Treasury. On February 25, 2009, the Bankruptcy Court ordered the trustee to pay $51,402,022 towards the SEC's proof of claim, and the trustee subsequently deposited $51,419.95 into the Treasury registry. (D.I. 10.)

The bankruptcy case closed on August 9, 2009. On September 22, 2010, the SEC sent Zandford a notice that the debt he owed to the SEC had been refereed to the Treasury for collection in the amount of $648,416.19. Zandford was advised that, unless payment was made within ten days from the date of the letter, collection would continue in the amount of $842,941.05 which includes all applicable fees, interests, and penalties. (D.I. 10, ex. 4.) The Treasury's "cross-servicing dispute resolution," request dated September 30, 2010, states "debtor disputes validity of debt stating post judgement interest assessed is a violation of the court order and SEC is foreclosed from charging penalties and from transferring the debt to Treasury." (D.I. 10, ex. 5.) The Treasury advises the court that it has returned the referral of the debt to the SEC and it is not presently pursuing further collection efforts. (D.I. 12.)

According to Sally Tidwell ("Tidwell"), the SEC refers delinquent debts to the Treasury for collection through a variety of means and methods.⁴ While the DCIA provides that debts 180 days delinquent shall be referred to the Treasury for debt collection service, the Treasury routinely accepts for referral and collection debts that are substantially more than 180 days delinquent. If a debtor files for bankruptcy, the Treasury returns the debt to the referring agencyso that the agency can take any appropriate action unless the debt is not, or is no longer, subject to the automatic stay provisions of the bankruptcy code.

Zandford alleges that the September 22, 2010 letter: (1) did not credit him with $10,800 against the disgorgement's principal, include pre-judgment interest, and applies variable post-judgment interest rates in derogation of the District of Maryland's February 25, 2004 order; (2) purportedly consists of fees and penalties charged by the Treasury; and (3) is untimely, unenforceable, and void because he was not provided with a timely notice, a meaningful opportunity for a hearing, and the SEC deliberately overstated the claim, all in violation of the right to due process. Finally, Zandford alleges that the SEC acted in excess of its delegated powers rendering the referral process of the disgorgement to Treasury void. Zandford seeks declaratory relief finding void the referral of the disgorgement to the Treasury and unspecified injunctive relief.

The Treasury moves for dismissal pursuant to Fed. R. Civ. P. 12(b)(6). (D.I. 12.) Zandford does not oppose the Treasury's motion. (D.I. 14.) The SEC moves for dismissal pursuant to Fed. R. Civ. P. 12(b)(1) on the grounds that it is immune from suit from those claims raised pursuant to the DCIA and for summary judgment pursuant to Fed. R. Civ. P. 56 on the grounds that there is no genuine issue of material fact that Zandford received all the process he was due under the applicable regulations. (D.I. 16.) In response, Zandford filed a combined motion for discovery and opposition to the SEC's motion. (D.I. 18.)

III. DCIA

The DCIA provides the relevant statutory and regulatory standards for the Government's debt collection efforts. Pursuant to 31 U.S.C. § 3711(d)(2), the Secretary of the Treasury ("theSecretary") and the Attorney General of the United States are authorized to prescribe standards for Federal agency use in the administrative collection, offset, compromise, and the suspension or termination of collection activity for civil claims.⁵ The DCIA contemplates that, in the event debt collection efforts remain unsuccessful, the Treasury will assume debt collection responsibilities. See 31 U.S.C. § 3711(g)(1); 31 C.F.R. § 901.1(e) (citing 31 C.F.R. § 285.12) ("[a]gencies shall transfer to the Secretary any debt that has been delinquent for a period of 180 days or more so that the Secretary may take appropriate action to collect the debt or terminate collection action."). Section 3716 provides that the government agency may collect the unpaid debt by administrative offset after giving the debtor written notice of the claim and an opportunity for a review within the agency of the decision of the agency related to the claim. 31 U.S.C. § 3716(a). The SEC's regulations for collection of debts by administrative offset provide for similar notice and review. See 17 C.F.R. §§ 204.1 et seq. With regard to notice, "[g]enerally, one demand should suffice." 31 C.F.R. § 901.2(a). "When an agency previously has given a debtor any of the required notice and review opportunities with respect to a particular debt (see, e.g., § 901.2), the agency need not duplicate such notice and review opportunities before administrative offset may be initiated." 31 C.F.R. § 901.3(b)(4)(iv). Agencies referring delinquent debts to the Treasury must certify that the debts are past due and legally enforceable and that the Agency...