This Week At The Ninth: Arbitration

Morrison & Foerster LLP - Left Coast Appeals

Morrison & Foerster LLP - Left Coast Appeals

This week, the Ninth Circuit considers whether a receiver in an SEC enforcement action is bound by an arbitration agreement signed by the receivership entity.


The Court holds that a receiver is bound by arbitration agreements signed by the receivership entity. 

The Panel: Judges Tashima, Forrest, and Cardone (Western District of Texas), with Judge Tashima writing the opinion.

Key Highlight: “We conclude that a receiver acts on behalf of the receivership entity and thus can be bound by an agreement signed by that entity.”

Background: In 2018, the SEC initiated an enforcement action against Essex Capital Corporation (“Essex”) for securities fraud. Essex had allegedly been used in the operation of a Ponzi scheme. The district court appointed Geoff Winkler (“Receiver”) as the receiver for Essex and authorized him to seek recovery of profits from investors who had benefited from the Ponzi scheme. The Receiver filed a complaint against defendants, alleging that they had received fraudulent transfers from Essex. Defendants moved to compel arbitration. They argued that their business relationship with Essex had been conducted through an entity, Cornerstone Essex Leasing LLC, which had entered two arbitration agreements with Essex.  The district court denied defendants’ motion for arbitration, and they appealed.

Result: The Ninth Circuit reversed and remanded. 

The Court recognized that it had previously addressed a related question in Kirkland v. Rund (In re EDP Investment Co.), 821 F.3d 1146 (9th Cir. 2016), but it held that EPD Investment Co. did not control this case. In EDP Investment Co., debtors who had operated a Ponzi scheme declared bankruptcy. The bankruptcy trustee for the debtors sought to set aside fraudulent transfers made to the defendants, and the defendants moved to compel arbitration based on arbitration agreements they had signed with the debtors. The Ninth Circuit held that the bankruptcy trustee was not bound by those agreements because the trustee stood in the shoes of the debtors’ creditors, not the debtors themselves. Because the creditors were not parties to the arbitration agreements, the trustee was not bound by those agreements.

Here, the Ninth Circuit held that a receiver’s standing differs from a bankruptcy trustee’s. While 11 U.S.C. § 544 expressly empowers a bankruptcy trustee to act on behalf of creditors in avoiding fraudulent transfers, no similar statutory authority deems a receiver to be acting on behalf of the receivership entity’s creditors. Instead, a receiver acts on behalf of the receivership entity itself (here, Essex), not its creditors or investors. The Court acknowledged that the receiver’s actions will ultimately benefit the receivership entity’s defrauded investors, but it held that was not equivalent to standing in the investors’ shoes. 

The Court’s holding did not reach whether the Receiver in this case was necessarily bound by the arbitration agreements between Essex and Cornerstone Essex Leasing LLC. It remanded for the district court to determine whether the dispute had arisen out of the arbitration agreements and other threshold arbitrability issues.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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