Securities and Exchange Commission v. Champion-Cain

• Court: District Court, S.D. California
• Decided: February 28, 2022
• Docket: 3:19-cv-01628
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA

10 SECURITIES AND EXCHANGE Case No. 3:19-cv-01628-LAB-AHG COMMISSION, 11 ORDER GRANTING MOTION FOR 12 Plaintiff, RELIEF FROM ORDER ENJOINING SUIT AGAINST RECEIVERSHIP 13 v. ENTITIES [Dkt. 741]

14 GINA CHAMPION-CAIN and ANI 15 DEVELOPMENT, LLC,

16 Defendants,

17 AMERICAN NATIONAL INVESTMENTS, INC., 18

19 Relief Defendant.

20 21 In this receivership action, the Court previously exercised its equitable 22 power to enjoin suit against Defendant ANI Development, LLC (“ANI”), Relief 23 Defendant American National Investments, Inc., and their subsidiaries and 24 affiliates (the “Receivership Entities”). (Dkt. 6). While the receivership action 25 progressed, several investors filed suit (the “Investor Actions”) against non- 26 party Chicago Title Company (“CTC”), alleging that CTC conspired with the 27 Receivership Entities’ principal, Gina Champion-Cain, to misappropriate 1 (the “Receiver”) sought and received the Court’s authorization to sue CTC in 2 state court. 3 CTC believes it has meritorious crossclaims against ANI in the Investor 4 Actions and asks the Court to permit it to join ANI as a defendant to those 5 actions and to file claims against ANI. The Court issued its injunction 6 preventing CTC from filing suit to permit the Receiver time to organize and 7 understand the Receivership Entities sufficiently to engage in litigation against 8 CTC. That purpose has been fulfilled as to the claims CTC seeks to bring, so 9 injunctive relief is no longer necessary to prevent those claims from moving 10 forward. 11 Courts may stay litigation against entities in receivership for as long as 12 “necessary to achieve the purposes of the receivership.” S.E.C. v. Wencke, 13 622 F.2d 1363, 1369 (9th Cir. 1980) (“Wencke I”). Such stays afford receivers 14 the opportunity “to organize and understand the entities under [their] control” 15 unimpeded by the exigencies of litigation. Id. at 1373–74. Three factors bear 16 on the question of whether to except an applicant from a blanket stay: “(1) 17 whether refusing to lift the stay genuinely preserves the status quo or whether 18 the moving party will suffer substantial injury if not permitted to proceed; (2) 19 the time in the course of the receivership at which the motion for relief from 20 the stay is made; and (3) the merit of the moving party’s underlying claim.” 21 S.E.C. v. Wencke, 742 F.2d 1230, 1231 (9th Cir. 1984) (“Wencke II”) 22 (interpreting Wencke I). This test “simply requires the district court to balance 23 the interests of the Receiver and the moving party.” S.E.C. v. Universal 24 Financial, 760 F.2d 1034, 1038 (9th Cir. 1985) (citing Wencke I). 25 The question of timing is paramount: “[t]he issue is . . . when during the 26 course of a receivership a stay should be lifted . . ., not whether the stay should 27 be lifted at all.” Wencke II, 742 F.2d at 1231 (emphasis in original). That time 1 months, during which time the Receiver completed her forensic accounting, 2 (Dkt. 659), “monetized or otherwise resolved” “nearly all real and personal 3 property assets of the Receivership Entities,” (Dkt. 699 at 5), and filed 4 numerous lawsuits on behalf of the Receivership Entities, including a suit 5 against CTC itself. See, e.g., Freitag v. Merit Financial, Case No. 21-cv-1633 6 (S.D. Cal.); Freitag v. Lulis, Case No. 21-cv-1715 (S.D. Cal.); Freitag v. Potter, 7 21-cv-1717 (S.D. Cal.); Freitag v. ROJ, LLC, Case No. 21-cv-1732 (S.D. Cal.); 8 Freitag v. Covington, Case No. 21-cv-1748 (S.D. Cal.); Freitag v. Levene, 9 Case No. 21-cv-1754 (S.D. Cal.); Freitag v. Luongo, Case No. 21-cv-1771 10 (S.D. Cal.); Freitag v. Libs, Case No. 22-cv-98 (S.D. Cal.); (Dkt. 737 11 (conditionally granting authority for Receiver to file suit against CTC)). It is no 12 longer “plausible . . . that [the Receiver] needs more time to explore the affairs 13 of the [Receivership Entities]” before engaging in litigation with CTC over 14 those parties’ respective roles, so the issue of timing supports granting CTC’s 15 motion. Wencke II, 742 F.2d at 1231–32. 16 The next factor has two parts—the likelihood that continuing to protect 17 the Receivership Entities from suit would injure CTC and preservation of the 18 status quo. It, too, supports permitting CTC to proceed. First, CTC will be at 19 risk of conflicting or duplicative judgments if it is prevented from filing claims 20 against ANI because the Receiver’s action and the Investor Actions seek 21 overlapping damages from CTC. (See Dkt. 737). While consolidation of those 22 actions before a single judge in state court reduces this risk, permitting CTC 23 to implead ANI in the Investor Actions permits the state court to address those 24 issues efficiently. Second, ANI now may be a necessary and indispensable 25 party to those Investor Actions—declining to lift the stay puts the investors’ 26 claims against CTC at risk of dismissal. See Cal. Code Civ. Proc. § 389; (Dkt. 27 745-7 at 6 (state court found that ANI was not “necessary party” because “at 1 CTC”). 2 The final Wencke factor—the merit of the movant’s underlying claim— 3 supports modifying the stay if the movant shows that its claim is at least 4 “colorable.” Wencke II, 742 F.2d at 1232. CTC has made that showing. It 5 contends that ANI is liable to its investors for fraud that Champion-Cain 6 admitted to engaging in while acting as ANI’s principal. The Receiver argues, 7 to the contrary, that ANI can’t be liable because “[o]nce the Receiver was 8 appointed, ANI was freed from . . . the stain of [Champion-Cain’s] fraudulent 9 conduct.” (Dkt. 745 at 13). Neither party cites any California law directly on 10 point. But the willingness of California courts to impute a fraudster’s bad acts 11 to an entity he solely owns, even after that entity has passed to the control of 12 a bankruptcy trustee, suggests that CTC’s claims are at least colorable.1 See 13 Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP, 133 Cal. 14 App. 4th 658, 679 (2005). 15 To this point, the stay has given the Receiver sufficient time to organize 16 and understand the Receivership Entities and to prepare to initiate litigation 17 against CTC. Because the Receiver is prepared to engage in that litigation, 18 the stay is no longer necessary to protect the Receivership Entities from 19 CTC’s own litigation covering similar subject matter. CTC’s motion to for relief 20 / / / 21 / / / 22 / / / 23 / / / 24 / / / 25

26 1 The SEC argues that CTC’s claims aren’t meritorious because they would not benefit the Receivership Estate and would complicate the receivership 27 process isn’t relevant to the merits of those claims. (See Dkt. 742 at 4–5). 1 | from the stay is GRANTED. CTC may join ANI as a defendant to the Investor 2 | Actions and file claims against ANI. 4 IT IS SO ORDERED. 6 | Dated: February 28, 2022 lau 4. ( Zn 7 Hon. Larry A. Burns 93 United States District Judge 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28