New Tenth Circuit Case Makes Receivership an Even More Powerful Remedy
May 24, 2017
By: John M. Tanner
Receivership law is well-settled, running back to before the United States was a country. Because appointing a receiver is an inherent power of a court in equity, there are very few applicable statutes and even less change in the law via statute. Every once in a while, however, a case comes along that has the potential to affect receivership law fundamentally. S.E.C. v. DeYoung, 850 F.3d 1172 (10th Cir. 2017) is such a case.
In DeYoung, the Securities and Exchange Commission brought suit against a 401(k) plan administrator and its owner/principal. The defendants had administered the retirement plan for money held by First Utah Bank. $24 million was missing from the plans. There were about 5,500 victims whose accounts were affected.
The receiver threatened to sue the bank on a variety of theories related to the mismanagement of the retirement plan funds in its custody. The bank and its insurance carrier offered to settle with the receiver by paying about $5 million total. A condition to settlement, however, was entry of a claims bar order, precluding all of the victims from bringing separate suits against the bank or its insurer.
The receiver sent notice of the proposed settlement terms to all of the victims. Three of the 5500 objected, not to the monetary terms of the settlement, but only to the entry of a claims bar precluding them from separately suing the bank and its insurer. They argued their claims against the bank were not property of the receivership estate and that therefore the court had no authority to enjoin their separate actions against the bank.
The United States District Court for the District of Utah entered an order approving the settlement, including the claims bar order enjoining anyone from suing the bank and its insurance carrier in the future regarding the retirement accounts. The three dissenters appealed the order, claiming that the District Court could not prohibit the victims from suing the bank.
The Tenth Circuit affirmed the District Court’s order. Thus, parties whose money was misappropriated were paid only cents on the dollar in the receivership action, and were enjoined from suing the bank (not in receivership). The practical effect of this ruling is that the receivership court discharged the debt not of the company in receivership, but of First Utah Bank. This is the extraordinary part of the ruling—it is (or had been) well-settled that a receivership court cannot discharge debt. E.g. S.M. Jones Co. v. Home Oil and Development Co., 49 So. 1009 (La. 1909) (receiver cannot discharge debt); People v. National Trust Co., 82 N.Y. 283 (N.Y. 1880) (same); 2 Ralph Ewing Clark, Clark on Receivers §500 [3rd Ed. 1959]. Debt discharge is—or had been—the exclusive province of bankruptcy courts.
It is true that DeYoung does not use the term “discharge,” but if all parties who have claims against the bank are enjoined from bringing those claims, then discharge is the practical effect.
This could be a very powerful tool for receivers going forward. If a receiver can pursue claims against third parties for the benefit of creditors of the receivership estate (who may have their own claims against the same third parties) and negotiate a settlement that includes an injunction prohibiting those creditors from pursuing their individual claims, then receivers may be able to marshal assets and maximize the potential recoveries for creditors in a highly cost-effective fashion. DeYoung represents a major development in receivership law. Both distressed companies and their creditors should consider receivership as a remedy before rushing to court to file a bankruptcy1.
1 The author’s prior article “Equitable Receiverships as an Alternative to Bankruptcy,” 40 The Colorado Lawyer 41 (Dec. 2011), can be found here: https://www.fwlaw.com/insights/equitable-receiverships-alternative-bankruptcy.