SEC v. Goto

• Court: District Court, D. New Hampshire
• Decided: November 18, 2004
• Docket: CV-03-490-JD
• Status: Published

Opinion

SEC v . Goto CV-03-490-JD 11/18/04 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Securities and Exchange Commission

v. Civil N o . 03-490 JD Opinion N o . 2004 DNH 164 Koji Goto and Shaleen Cassily Goto

O R D E R

The Securities and Exchange Commission moves to hold

defendant Koji Goto in contempt of this court’s December 3 , 2003,

order because he filed a petition for voluntary bankruptcy. The

SEC also asks the court to order Goto to withdraw the petition

and to pay expenses incurred as a result. Goto objects.

Background

Pursuant to its civil enforcement authority, the SEC

commenced this action against Goto and his wife on November 1 4 ,

2003. In its complaint, which alleges that Goto misappropriated

approximately $5 million entrusted to him by investors, the SEC

asked that Goto (1) be enjoined against further violations of

federal securities law, (2) disgorge the investors’ funds, and

(3) pay monetary penalties. The court granted the SEC’s

accompanying motion for a temporary restraining order, inter

alia, freezing all assets held by or for the benefit of Goto or his wife and requiring the submission of certain financial

information to the SEC.

Following a hearing, the magistrate entered a preliminary

injunction against Goto and his wife on December 3 , 2003,

incorporating the terms of the November 1 4 , 2003, temporary

restraining order.1 In relevant part, the preliminary injunction

provides that Goto shall hold and retain any and all funds and other assets held for [his] direct or indirect benefit, or under [his] direct or indirect control . . . [and] shall prevent any withdrawal, sale, payment, transfer, dissipation, assignment, pledge, alienation, encumbrance, diminution in value or other disposal of any such funds and other assets . . . .

Prelim. I n j . § III.A. The two banks holding mortgages on the

Gotos’ home, as well as several individuals who had attached the

property through judicial proceedings, subsequently moved to

modify the injunction to sell the home at foreclosure. In

relevant part, the court granted these motions on September 1 3 ,

2004, over the objections of the Gotos, who wished to sell their

home on the open market through a real estate broker.

The foreclosure auction was scheduled to take place on

October 2 1 , 2004. On October 2 0 , 2004, however, Goto filed a

voluntary petition for bankruptcy, pursuant to Chapter 11 of the

1 The parties consented to having the magistrate enter a final order on the motion for preliminary injunction.

2 bankruptcy code, in the United States Bankruptcy Court for the

District of New Hampshire. One of the mortgagees responded by

moving for relief from the automatic stay in order to proceed

with the foreclosure sale. Following a hearing, the bankruptcy

court granted the motion on October 2 1 , 2004. The foreclosure

auction proceeded without incident on November 4 , 2004. On November 3 , 2004, however, the SEC filed the instant motion,

characterizing Goto’s bankruptcy petition as “an attempt to

prevent the foreclosure auction” which “directly violated the

plain terms of [the] Injunction . . . and was attempted as an

end-run around” the order modifying the injunction to permit the

foreclosure sale.

Discussion

The SEC asks the court to hold Goto in contempt of the

injunction, to order him to withdraw the bankruptcy petition, and

to pay into court the interest that accrued on the mortgages on

his home between the dates on which the foreclosure sale was

first scheduled to occur and when it actually did. Goto

acknowledges in his objection that he filed for bankruptcy to

stop the foreclosure auction, but states that he did so “to

protect creditors from a fire sale, not harm them,” a motive for

which he cites a number of his other actions as additional

3 evidence. He also argues that, in any event, the terms of the

injunction do not prevent him from filing for bankruptcy.

On this point, the court agrees with Goto. The SEC has

failed to explain how Goto’s bankruptcy filing amounts to the

“withdrawal, sale, payment, transfer, dissipation, assignment,

pledge, alienation, encumbrance, diminution in value or other

disposal of . . . funds and other assets” as prohibited by the

injunction.2 The SEC’s argument in this regard rests entirely on

SEC v . Sterns, 1991 WL 204901 (C.D. Cal. Apr. 2 5 , 1991), where

the court found that the defendants’ bankruptcy filing “violated

the terms of [an asset freeze] Order in an apparent attempt to

frustrate the relief against them.”3 Id. at * 1 .

The SEC also takes the position, however, that Goto’s

bankruptcy petition will not enable him to exercise any control

over the assets subject to the injunction, because the

proceedings in this court are exempt from the automatic stay by

2 To the extent the SEC argues that Goto’s filing violated the September 1 3 , 2004, order, the court disagrees. As Goto points out, that order simply modified the injunction to allow the foreclosure sale under certain conditions. It did not mandate that the sale take place. 3 The court also notes that, in Sterns, the court did not expressly consider whether the bankruptcy filing constituted contempt of its order, but whether, in the face of that order, the filing contributed to the “compelling circumstances” necessary to force the defendants to withdraw the petition.

4 virtue of 11 U.S.C. § 362(b)(4). SEC v . Towers Fin. Corp., 205 B.R. 2 7 , 29-31 (S.D.N.Y. 1997); Bilzerian v . SEC, 146 B.R. 8 7 1 ,

872-73 (Bankr. M.D. Fla. 1992); 3 Collier on Bankruptcy

§362.05[5][b][i] (Alan N . Resnick et a l . , eds., 15th ed. 2004).

By the SEC’s own account, then, Goto’s petition for bankruptcy

will not “frustrate the relief” granted against him in this

action.4 C f . Sterns, 1991 WL 204901, at *1 (finding “real and

imminent danger that, should any assets be left in the control of

[the] defendants, those assets would be dissipated or concealed

before final judgment in this action”). More significantly, the

bankruptcy filing neither directly nor indirectly amounts to a

“disposal” of assets in violation of the terms of the injunction.

The SEC’s motion, insofar as it seeks to hold Goto in contempt

for declaring bankruptcy, is denied.5

The SEC also asks the court to “exercise its authority under

4 The decision on whether this proceeding is exempt from the automatic stay belongs to the bankruptcy court in the first instance. See SEC v . An-Car Oil Co., 604 F.2d 1 1 4 , 120-21 (1st Cir. 1979). Thus, the court has considered that issue here for the limited purpose of assessing the SEC’s argument that Goto’s bankruptcy filing will necessarily enable him to take control of the assets subject to the injunction. This court’s resolution of that issue is not intended to bind the bankruptcy court. 5 Because the SEC does not identify the basis of its request that Goto repay the interest incurred as a result of the delay in the foreclosure sale, the court will treat it as a suggested sanction for the alleged contempt manifested by the filing. Because Goto is not in contempt, the request is denied.

5 the All Writs Act and its broad equity powers” to order Goto to

withdraw the bankruptcy petition. “While not common, this

[c]ourt may preclude petitions in bankruptcy where there are

compelling circumstances.” CFTC v . FITC, Inc., 52 B.R. 935, 937

(N.D. Cal. 1985) (citing SEC v . Lincoln Thrift Ass’n, 577 F.2d

600, 609 (9th Cir. 1978)); accord An-Car, 604 F.2d at 119 (considering whether district court abused discretion by

terminating receivership instituted in SEC enforcement action in

favor of bankruptcy filing).

In support of this relief, the SEC argues that “allowing Goto

to maintain a Chapter 11 bankruptcy proceeding creates a

substantial risk that Goto, as debtor-in-possession, will be able

to dissipate or conceal assets which will inhibit the recovery by

investors in this case.” Again, this argument contravenes the

SEC’s own point that the injunction will remain in place despite the bankruptcy and that Goto will therefore remain unable to

dispose of any of the subject assets. C f . FITC, 52 B.R. at 938

(ordering corporate defendant to enforcement proceeding to

withdraw bankruptcy petition appointing its president as debtor-

in-possession because o f , inter alia, “danger that any assets

released to [president] will be dispersed, and the fraud against

[corporation’s] investors will be perpetuated”).

The SEC also charges that Goto’s “filing is simply a tactic

6 to frustrate the Court-imposed asset freeze and eventual

distribution of assets, supervised by this Court, to victims”

and, relatedly, that “the dual administration of the assets of

Goto in the bankruptcy court and this court would be inefficient

and result in conflicting goals.” The First Circuit has

indicated, however, that “generally, bankruptcy proceedings are

preferred to liquidation of a corporation through an equity

receivership.” An-Car, 604 F.2d at 120; see also SEC v . Am. Bd.

of Trade, Inc., 830 F.2d 4 3 1 , 436-38 (2d Cir. 1987). Although

this case, lacking a corporate defendant, will not involve a

receivership per s e , the First Circuit’s admonition applies with

equal force here, where the SEC has made plain its intention that

the court oversee the distribution of the Gotos’ assets.6 As the

Second Circuit explained in Am. Bd. of Trade, recounting the

labors of a district court judge who saddled herself with the

task of divvying up the assets of a corporate securities law violator among their many claimants: the functions undertaken by the district court in this case demonstrate the wisdom of not using a receivership

6 Indeed, in an SEC enforcement proceeding, “a receiver is indistinguishable in his functions, if not his name, from . . . a trustee . . . .” 5E Arnold S . Jacobs, Disclosure and Remedies Under the Securities Laws § 20.111 (2002). Although the SEC has not requested the appointment of a trustee, the court believes one would be necessary to assist with the administrative demands of distributing the Gotos’ assets in this action.

7 as a substitute for bankruptcy . . . . [T]he court has taken upon itself the burden of processing proof-of- claim forms filed by thousands of [investors] and other creditors, of setting priorities among classes of creditors, and of administering sales of real property, all without the aid of either the experience of a bankruptcy judge or the guidance of the bankruptcy code. 830 F.2d at 438; see also Lincoln Thrift, 577 F.2d at 605-606

(discussing “sound policy reasons for allowing liquidation to

take place only in a court of bankruptcy,” e.g., “established

system for equitable distribution of the assets to creditors”).

This court would face similar administrative burdens were

the distribution of the Gotos’ assets to proceed solely in this

court. Indeed, the court has already been invited to supervise

the sale of the Gotos’ home, not only directly, but also

indirectly by deciding whether to allow a “credit bid” and to

disallow interest on the mortgages. Assuming that a bankruptcy

proceeding is otherwise appropriate, that court is the superior

forum for overseeing the resolution of such issues and the

distribution of Goto’s assets. See An-Car, 604 F.2d at 120-21

(noting bankruptcy court’s “broad powers” to resolve issues

raised by defrauded investors’ claims to debtor’s assets).

The SEC has failed to identify the “compelling

circumstances” that might justify abjuring conventional wisdom in

this regard. The court cannot accept the SEC’s suggestion that

8 Goto acted in bad faith by filing for bankruptcy on the eve of

the foreclosure sale. In his objection to the mortgagees’

motion, Goto had indicated that he did not object to the sale of

the property per s e , but simply to its sale at a foreclosure

auction, which he believed would achieve a lower price than a

sale on the open market and therefore result in less money for everyone. The fact that this court disagreed with him does not

delegitimize his subsequent petition for bankruptcy.

Even accepting the SEC’s accusation as true, however, the

timing of the bankruptcy petition in and of itself does not

approach the kind of conduct that has led courts to take the

extraordinary step of quashing a bankruptcy filing. C f . Meyerson

v . Werner, 683 F.2d 723, 728 (2d Cir. 1982) (noting debtor’s

“long record of willful, contemptuous, and contumacious behavior”

and fact that he named only relatives and agents as creditors in petition); FTIC, 52 B.R. at 937-38 (treating filing by president

on behalf of corporation as unauthorized, because receiver

already appointed, and noting “remote . . . location chosen by

the debtor in which to file, [its] refusal to disclose the

petition to its counsel (who subsequently withdrew from the case

as a result), and the generally uncooperative position maintained

by the defendants throughout the receivership”). Nor has this

court had the opportunity to develop an “intimate knowledge of

9 the factual data” here such that newly instituted bankruptcy

proceedings would entail duplicative efforts. C f . Lincoln Trust,

577 F.2d at 609. Therefore, the SEC’s motion is denied insofar

as it asks this court to order Goto to withdraw his bankruptcy

petition.

Conclusion For the foregoing reasons, the SEC’s motion for an order

holding Goto in contempt, requiring him to withdraw his

bankruptcy petition, and sanctioning him with a monetary penalty

(document n o . 52) is DENIED.

SO ORDERED.

Joseph A . DiClerico, J r . United States District Judge November 1 8 , 2004

cc: John L . Allen, Esquire Peter D. Anderson, Esquire Edward C . Dial Jr., Esquire William S . Gannon, Esquire Edward A . Haffer, Esquire John Paul Kacavas, Esquire Mark D. Kanakis, Esquire Ian D. Roffman, Esquire Veronic Caballero Viveiros, Esquire