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Ninth Circuit:
District Court Judge Had Power to Block State Court Litigation
Opinion Says Judicial Officer Overseeing SEC Enforcement Action Is Authorized to Order a Halt to Actions in a California Superior Court Where Contentions in Such Suits Overlap With Those of a Receiver
By a MetNews Staff Writer
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GINA CHAMPION-CAIN felon |
The Ninth U.S. Circuit Court of Appeals held yesterday that a District Court judge did not act in excess of his powers in commanding that all litigation against Chicago Title and Nossaman LLP in San Diego Superior Court, in connection with a Ponzi scheme under which about $389 million was secured from more than 400 investors, must cease.
Issuance of such an order was a condition of a settlement between Chicago Title and Krista Freitag, as receiver of the assets of ANI Development, LLC, the company owned by then-entrepreneur Gina Champion-Cain, who perpetrated the scheme. The receivership was set up by the District Court in 2019 after the Securities and Exchange Commission (“SEC”) brought a civil action against Cain and ANI for securities violations.
Under the 2022 settlement, Chicago Title paid to investors, cumulatively, $24 million in addition to the $163 million it had already provided to more than 300 persons who had been defrauded—totaling $187 million.
Investors had been told that funds they provided were held safely in escrow accounts when, in truth, they were all stuffed in a single account at Chicago Title belonging to Cain. With actions against Cain and ANI stayed, victims had sued third parties, accusing Chicago Title and Nossaman of complicity in the scheme.
Real Estate Developer
Contesting the order halting the state court litigation against Chicago Title was Kim Peterson, a San Diego real estate developer. He and entities associated with him had invested about $140 million with ANI over a period of several years.
Their opening brief on appeal asserts:
“Chicago Title, one of the largest title companies in the world, was key to the fraud….As a well-regarded escrow and title company valued in the billions, Chicago Title provided the fraud a stamp of legitimacy that Peterson and other investors relied on….As noted by the Receiver, ‘Cain’s fraudulent scheme would not have succeeded without Chicago Title’s name and active involvement.’…Throughout the course of the scheme, Chicago Title, through certain of its officers and employees, not only knew of the fraudulent nature of the lending program but actively participated in the fraud.”
Ovation Fund Management II, LLC challenged the order barring litigation against Nossaman. It alleges that Marco Costales, a partner in the firm, provided assurances to investors without conducting an independent investigation as to the accuracy of what he had been told by Peterson, who acted as a recruiter of other investors.
Ninth Circuit Opinion
Yesterday’s opinion upholds an order by District Court Judge Larry A. Burns of the Southern District of California. It was authored by Tenth Circuit Court of Appeals Judge David M. Ebel, sitting by designation.
“A district court overseeing an SEC enforcement action has the equitable power to appoint a receiver over the entity through which the Ponzi scheme was operated,” Ebel wrote, adding that a judge presiding in such an action has wide discretion in fashioning remedies.
“One way in which a district court overseeing an equitable receivership may aid a receiver in gathering and distributing the receivership’s assets equitably among defrauded investors is by issuing bar orders like the ones challenged here,” he said, declaring:
“We conclude that the district court had authority to enter the Chicago Title bar order because Peterson’s claims substantially overlapped with the ANI Receiver’s claims against Chicago Title and both sets of claims sought damages from Chicago Title for the same Ponzi scheme losses. Barring Peterson’s claims against Chicago Title was necessary to preserve the ANI receivership res.”
Three Reasons
The visiting judge elaborated:
“Barring Peterson’s claims against Chicago Title was necessary to protect ANI receivership’s assets for three reasons. First, the bar order was a necessary condition of the global settlement between the Receiver and Chicago Title, which benefitted the receivership estate as a whole by bringing in more than $24 million to pay defrauded investors’ net losses….
“Second, without the global settlement, the Receiver would have had to continue to expend receivership resources litigating against Chicago Title. In addition, the Receiver would likely have been drawn into the investors’ state-court actions against Chicago Title, also depleting receivership resources….
“Third, if the Receiver had not settled with Chicago Title, and if Peterson (or any other defrauded investors) had then succeeded in winning a judgment against Chicago Title for losses stemming from the Ponzi scheme. Chicago Title could have turned around and sought equitable indemnification….That would have required an additional expenditure of receivership assets to defend against Chicago Title’s indemnification claims and. if that defense failed, the cost of indemnification.”
Anti-Injunction Act
Peterson argued that Burns’s order violates the federal Anti-Injunction Act (“AIA”), which provides that a “court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.”
Ebel responded:
“The district court held that the Chicago Title bar order did not violate the AIA because that bar order was ‘necessary in aid’ of the federal court’s in rem ‘jurisdiction’ over the ANI receivership’s property. We agree.”
The order, as applied to Peterson, is not inequitable, the jurist said. That he recovered nothing from the funds paid out by Chicago Title, he noted, stems from the fact that, overall, he made a profit from the Ponzi scheme.
Ebel declined to consider the potential loss to Peterson in light of Freitag’s effort to “claw-back” the $12.7 million profit he purportedly realized, explaining:
“That is a separate ongoing proceeding, however, that is not before this court.”
$47 Million Settlement
Ovation, which manages an investment fund, received a $47 million settlement from Chicago Title based on losses from the Ponzi scheme, but still wants to proceed with litigation against Nossaman. Ebel said its arguments fail for the same reason Peterson’s contentions do.
The case is U.S. Securities & Exchange Commission v. Peterson, 22-56206.
Cain was sentenced by Burns on March 31, 2021, to 15 years in prison for masterminding the Ponzi scheme. The scheme entailed securing money from investors that was supposedly to be used in making loans to businesses seeking liquor licenses, when no such loans were made.
Burns told Cain that in committing a “monumental crime,” she demonstrated “tremendous callousness” and “extreme avarice.”
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