Court: Court of Appeals for the Ninth Circuit; February 1, 2005; Federal Appellate Court
Beneficiaries of a receivership are challenging aspects of the receiver’s distribution plan, which has been approved by the district court. Capital Consultants, LLC (CCL), an Oregon investment management firm, managed approximately $1 billion for various clients, including retirement plans governed by ERISA. The SEC and DOL initiated the receivership due to allegations of CCL's mismanagement and self-dealing, particularly involving poor investments in "junk debt" and a Ponzi scheme. Following the receivership's initiation on September 21, 2000, receiver Thomas Lennon returned about $500 million in publicly-held securities and $20 million in cash to clients, tracing these assets back to them. However, remaining assets included illiquid private loans and real estate, which were not individually traced to clients, except for some interim distributions of real estate. In early 2002, these private assets were sold for $60 million, and additional funds were generated through litigation and management of investments. By August 2002, the receiver reported marshaled assets totaling $259.5 million to address various claims, with investor claims being the largest. Clients had invested around $480 million in CCL's private investments. According to the approved Second Amended Distribution Plan, private assets will be pooled for pro rata distribution among clients, with the value of any real estate previously distributed deducted from individual clients' pro rata shares, differing from the treatment of publicly-held securities.
The distribution plan employs a "money-in-money-out" (MIMO) formula for dividends to clients, calculating each client's net loss as the total invested in private assets minus the total returned before receivership. Clients receive a pro rata share of their net loss, but the receivership assets are insufficient to cover all client losses. The receiver has made two distributions, alongside earlier distributions of public equities, cash, and interim real estate distributions. Some clients have initiated lawsuits against third parties, such as trustees or advisors, for their investment decisions, with some claims covered by insurance while others are not. The total potential recoveries from these claims remain unclear. Initially, the receiver proposed that any third-party recoveries would reduce clients' claims dollar-for-dollar, but after objections, a 50 percent offset was adopted, where each dollar recovered would reduce the distribution from the receiver by fifty cents. This offset provision was included in the final distribution plan approved by the district court. Four appeals challenging the offset and other aspects of the plan have been filed by various pension funds and the Department of Labor (DOL). The district court has broad discretion in overseeing equity receiverships, and its decisions regarding the administration of the receivership are reviewed for abuse of discretion. Most appellants, excluding the Plumber’s Trust, oppose the offset provision and seek its elimination, arguing that the plan reflects an equitable method for distributing the limited assets available.
The offset provision aims to strike a balance between encouraging CCL clients to pursue third-party recoveries and ensuring equitable distribution of the limited assets in the receivership. Removing this provision would lead to an unequal distribution by acknowledging losses greater than those actually incurred by appellants. The Ninth Circuit emphasizes that equity necessitates equal treatment of victims in similar circumstances, as demonstrated in United States v. Real Property Located at 13328 and 13324 State Highway 75 North, where a pro rata distribution plan was upheld to prevent inequity. The court noted that “equality is equity,” reinforcing the importance of shared recovery from pooled assets.
The Ninth Circuit has previously supported offset provisions in analogous cases. In In re Cement and Concrete Antitrust Litigation, the court approved an offset to prevent double recovery for class members against both settling and nonsettling defendants. Similarly, in In re Equity Funding Corp. of America Securities Litigation, an offset reduced class members’ net losses based on prior recoveries from a bankruptcy proceeding, ensuring equitable treatment among claimants. Both instances illustrate the court's consistent endorsement of offset provisions as a means of achieving fairness in asset distribution.
The district court approved a settlement plan, noting that class members' claims significantly exceeded the settlement fund. This case differs from prior cases (Equity Funding and Cement and Concrete) due to its 50 percent offset provision compared to their 100 percent offsets. Arguments suggesting that more sophisticated clients are less deserving of compensation were not compelling. The Department of Labor indicated that clients' investment outcomes were largely due to chance rather than informed decisions, categorizing all clients as innocent victims.
Eliminating the offset provision could risk double recovery for some clients, although the likelihood of this occurring is minimal. The offset provision aims to create more equitable compensation among clients, despite concerns it might discourage pursuing third-party claims. However, clients are still incentivized to pursue such claims, as only half of any recovery is deducted from their claims against the receivership.
Regarding ERISA objections, appellants claimed the offset provision violated ERISA fiduciary duties, but the court found no statutory prohibition against the offset provision. While the appellants cited ERISA standards for fiduciary prudence and loyalty, they did not convincingly argue that the offset provision contravenes these requirements.
Any distribution scheme in this case involves dividing inadequate receivership assets among CCL clients, meaning not all losses can be covered. Adjusting the distribution formula to favor some clients over others does not necessarily indicate a breach of fiduciary duty by the receiver. Eliminating the offset clause would violate ERISA by favoring certain plans, and the duty of loyalty does not hinge on whether the 50% offset is fair to all CCL clients. The receiver’s obligation is to act in the best interests of each ERISA Plan's participants and beneficiaries, considering the limited fund nature of the case. Favoring one claimant inherently disadvantages another, and the argument that the receiver did not consider the best interests of any plan fails to acknowledge this reality.
ERISA does not require the fiduciary to achieve an impossible outcome but mandates acting with appropriate care and diligence under prevailing circumstances. There is no legal obligation for the receiver to prioritize ERISA plans over non-ERISA plans, a point seemingly acknowledged by the Department of Labor (DOL). The appellants fail to substantiate their claims regarding the impact of eliminating the offset clause on the distribution of receivership assets. The receiver suggests that many ERISA plans may not achieve third-party recoveries, implying that these plans might be worse off without the offset provision.
The DOL contends it is inappropriate for ERISA plans to transfer recoveries to other investors before fully addressing their own losses. Arguments from the Electrical Funds and the Oregon Laborers regarding the receiver’s jurisdiction over third-party claims are unfounded; the receiver is not transferring assets but adjusting claims based on third-party recoveries. This reflects a free rider problem, which does not necessitate a change in analysis, and the district court did not abuse its discretion in its approach to equitable relief, aiming for a fairer distribution of limited funds among the victims of CCL's collapse.
The district court approved an offset provision in a class action that reduced distributions to class members who had previously received assets from a separate bankruptcy proceeding. The Ninth Circuit upheld this provision, rejecting claims that it undermined the bankruptcy's integrity and clarifying that the bankruptcy court's distributions remained unaffected by the class action settlement.
The appellants, including the Electrical Funds and the Oregon Laborers, argued that the offset violated the collateral source rule under Oregon law, with no supporting authority cited for applying state law over ERISA, which preempts state law. The collateral source rule typically prevents a tortfeasor from benefiting from a victim's third-party compensation. However, the Ninth Circuit found this rule inapplicable since the offset did not relieve the alleged tortfeasors of liability; it merely influenced the distribution of limited funds to innocent clients. The court noted that the offset aimed to allocate settlement funds among claimants rather than benefit the tortfeasors.
Additionally, the Oregon Laborers and Plumber’s Trust raised concerns about how interim real estate distributions were handled by the receiver. Publicly-traded equities were traced and returned to clients, while interim real estate distributions, including properties like the AT&T building and others, were treated differently. The value of these real estate distributions was deducted from client claims against the pooled private asset fund, which the Oregon Laborers contested. They argued that either all assets should be pooled together or that the interim real estate values should not reduce claims against the pooled assets.
Several key points emerge regarding the treatment of investments by the receiver in the context of a receivership involving CCL clients. While some clients had agreements limiting investments in public securities, adherence to these agreements was inconsistent, resulting in varied portfolios largely dictated by chance. The receiver, acknowledging the complexities of managing client portfolios, defended the prompt distribution of public equities, citing their liquidity, price volatility, and the lack of competent staff to manage them effectively. This action aimed to expedite the return of assets to clients or new managers rather than prolonging the receivership process.
The court found no abuse of discretion in treating public and private equities differently. Clients did not express objections to the early distribution of public equities, and the receiver justified deducting the value of interim distributions from clients' claims on private assets, asserting it was equitable. Specifically, the court noted that the Oregon Laborers, who chose to receive an interim distribution of a valuable property, could not claim additional value from the pooled private assets without offsetting their gains.
The court did consider whether the value of the distributed public equities should be factored into calculating each client's net loss for determining their share of the private asset pool. However, it concluded that requiring such calculations would impose an excessive administrative burden on the receiver, who had not been tasked with tracking gains and losses on public securities since they were returned directly to clients. Consequently, the district court's decision to overrule this objection was deemed appropriate.
The Oregon Laborers' position reveals inconsistencies regarding the treatment of third-party recoveries and public assets in the receivership. They argue that their recoveries should remain separate and not be pooled, yet they criticize the receiver for not pooling all public assets. All appellants, except the Department of Labor, present arguments aimed at redistributing assets favorably for themselves, often at the expense of other clients. The receiver notes that recalculating gains and losses at this stage would unjustly require some clients to return previously received public equity distributions, which is deemed unnecessary. Citing the equitable mootness doctrine, the receiver emphasizes the complications and inequities in attempting to merge public and private asset values and recalculating net losses for each client, especially since the Oregon Laborers did not seek a stay on public equity distributions.
In discussing the Plumbers’ Trust, which claims that three real estate parcels were improperly taken by the receiver, the argument is rejected. These properties were returned to the Plumbers' Trust and their value deducted from the Trust's claim against pooled private assets. The approach of equitable distribution is upheld as fair, and the Plumbers' Trust fails to provide compelling reasons for different treatment of these properties. The Trust’s claims of ownership or title are deemed irrelevant to the equitable distribution of CCL's assets under management.
The receiver did not sell the properties, thus maintaining the Plumber’s Trust's legal title. However, equitable title to assets managed by CCL belonged to its clients, consistent with fiduciary duties. Stock brokerage firms similarly hold equities in trust for clients, maintaining legal rights despite administrative practices. The Plumber’s Trust's assertion that the district court could not order pooling and pro rata distribution of public equities contradicts the Oregon Laborers' position that such pooling was necessary if the receiver maintained the treatment of interim real estate distributions. The court determined that pooling and pro rata distribution were permissible under ERISA and state property law, deeming irrelevant whether legal documents designated title holders. The court favored pooling over asset tracing for equitable distribution. While the Plumber’s Trust does not oppose pooling for other properties, it seeks selective retention of profitable assets while leaving losses in the shared pool. The Trust contends that the three parcels were not under CCL's management and thus outside the receivership estate, a claim the court rejects. The receiver was granted broad powers over all assets controlled by CCL, which included the three parcels in question. Documentation reveals CCL had significant management control over these properties under investment agreements, confirming their inclusion in the receivership portfolio.
The Crimson Corners shopping center was financed through a loan from a CCL client who later terminated their relationship with CCL, leading to Plumber’s Trust being assigned as the new lender via an assignment of trust deed. Following the borrower’s default, a deed in lieu of foreclosure named Plumber’s Trust as the title holder. The receiver noted that it was coincidental for Plumber’s Trust to become the fee title owner due to both the default and the client’s termination with CCL. Plumber’s Trust had no role in selecting the property.
Adjacent properties, One Tech and Two Tech, were transferred to general partnerships in 1984 and 1985, with initial investments proposed by CCL to diversify Plumber’s Trust’s assets. Plumber’s Trust participated as one of three general partners, with funds used for construction as per partnership agreements signed by CCL vice president David Nelson. These agreements mandated that notices be sent to CCL rather than directly to Plumber’s Trust.
In 1998, the other partners withdrew, with agreements signed by CCL vice president Linda Lucas on behalf of Plumber’s Trust. In 1995, CCL suggested taking direct management of the properties to save costs, which Plumber’s Trust approved. In 1999, Lucas transferred One Tech and Two Tech to limited liability companies with Plumber’s Trust as the sole member and CCL as the sole manager, having exclusive management rights, though Plumber’s Trust's approval was necessary for complete property sales.
Plumber’s Trust provided an affidavit from a title company officer asserting that CCL lacked authority to transfer “insurable title” to the properties. However, the investment advisory and operating agreements granted CCL significant control and management rights over the properties. The determination of CCL’s authority based on these agreements is a legal issue for the court, and while experts can interpret evidence, they cannot testify on legal matters.
The district court addressed a complex dispute concerning three properties, concluding that they should be included in the receivership estate due to CCL’s control over them. This decision was supported by the properties' consistent management under CCL for the Plumber’s Trust or other clients. The Plumber’s Trust failed to present compelling legal or equitable reasons to dispute the district court’s judgment, which allowed the receiver to deduct the value of these properties from the Trust's distribution claim, reflecting a broad discretion granted to the district court in equity receivership management. The case involved significant financial figures, with CCL reporting approximately $442 million in investments at the receivership's inception. The distribution plan established a pro rata share for CCL clients based on a "Money-in/Money-out" calculation, accounting for both initial investments and subsequent payments. The orders related to the distribution plan were deemed final for appellate purposes, and the district court certified them for appeal under Fed. R. Civ. P. 54(b).
ERISA mandates that fiduciaries managing plan funds must be bonded, as per 29 U.S.C. 1112. The offset provision was implemented to address concerns that debenture holders had a higher priority than other fraud claimants in a bankruptcy plan, despite potentially having weaker claims. The Electrical Funds assert that no ERISA plan will achieve double recovery by pursuing claims through fiduciary liability insurance or bonds, although this may not be entirely accurate if subrogation rights exist. However, the potential for double recovery remains, as the offset provision only reduces MIMO claims by 50% of third-party recoveries. The document indicates that some clients have delayed pursuing claims until after the receivership ends, raising concerns about possible double recoveries. The district court acknowledged that some clients might receive full recovery through a combination of distributions and third-party recoveries, but noted the receiver would cap distributions to ensure equitable treatment until all clients achieved 100% recovery. Despite this, the receiver is not required to extend the receivership solely to monitor these claims, and tolling agreements could delay third-party recoveries until post-receivership, allowing for double recovery opportunities. The distribution plan explicitly references net third-party recoveries, and both the district court and the Electrical Funds confirm that the 50% offset applies after deducting legal fees and costs. The DOL clarified that the receiver's obligations of prudence and loyalty do not necessitate prioritizing ERISA claims, while the Oregon Laborers highlighted that the receiver had reserved certain claims related to public equity values, which could affect future distributions.
The Oregon Laborers did not request a stay on the distribution of public equities and lack evidence of any interest in such a stay during the receiver's distribution process. They reference a statement from the receiver suggesting potential future disgorgement of public equities, but this statement is from an interim report shortly after the receiver’s appointment and is ambiguous regarding whether it pertains to public equities or private assets. The report emphasizes its preliminary nature due to time constraints and the complexity of issues involved, indicating that its content might change with further review. Despite the receiver’s comments, there is no record evidence showing that the Oregon Laborers sought a stay based on this preliminary statement.
The document explains that typical practice in the industry involves publicly traded stocks being held in "street name" by brokerage houses for clients, with beneficial owners having actual interests in the stocks. It cites a legal precedent that suggests in cases of fraudulent conduct between innocent parties, equitable distribution of pooled assets is favored over tracing individual ownership.
Additionally, the 1975 Investment Advisory Agreement granted CCL authority to manage a portfolio for the Plumber's Trust, allowing it to buy, sell, and trade assets. This agreement included a Trading Authorization and Limited Power of Attorney, confirming CCL's role as the agent with full authority over the investments. A similar authorization from 1994 and an earlier 1987 Investment Advisory Agreement reaffirmed CCL's discretionary investment rights. Minutes from an August 10, 1984, board meeting also reflect discussions about investments managed by CCL.
On August 17, 1984, a board meeting at CCL offices addressed a proposed investment of approximately $3 million, highlighting considerations related to ERISA and portfolio diversification. Mr. Zalutsky, counsel for the Plumber's Trust, reminded the Trustees that Capital Consultants, Inc. holds the responsibility for investment decisions on behalf of the Plan. The meeting's purpose was to inform the Trustees about the investment, with Mr. Grayson confirming that Capital Consultants, Inc. has sole investment authority as granted by the Operating Agreements. These agreements empower CCL to manage company assets, including acquiring and disposing of real or personal property. However, the Plumber's Trust's approval is required for the sale or transfer of all or substantially all company assets. The receiver argues that while the Plumber's Trust's consent was necessary, the Trading Authorization and Limited Power of Attorney allowed CCL to act as the Trust's agent in providing that consent. Furthermore, although the Plumber's Trust needed to approve asset sales, it did not have the authority to sell the properties itself, as the Operating Agreements specify that the Trust, being a non-manager member, cannot act as an agent for the Company or bind it in dealings with third parties.
