Nonparty Whose Rights Are Conclusively Decided And Who Cannot Litigate In Another Forum Can Appeal A Decision Of The District Court
SEC v. ENTERPRISE TRUST CO. (March 18, 2009)
Although only in existence for two years, Enterprise Trust managed more than $100 million in hundreds of accounts. Some of the accounts were custodial only, and others authorized Enterprise to choose securities. Enterprise did not honor its customers instructions and traded very aggressively in both the noncustodial and custodial accounts. It lost more than half of the money in its care before the SEC stepped in. The lower court appointed a receiver to propose a distribution plan for Enterprise’s assets. The receiver proposed a plan under which holders of custodial accounts recovered approximately 60% of their investment while holders of noncustodial accounts recovered between 25 and 50% of their investment. The receiver also proposed the use of illiquid assets to repay the noncustodial accounts, further compromising their value. The district court approved the plan. Several owners of noncustodial accounts, who were not parties to the case, appeal.
In their opinion, Chief Judge Easterbrook and Judges Flaum and Manion affirmed. The Court first addressed the difficult question of appellate jurisdiction. In 1994, the Court held, in SEC v. Wozniak, that investors who were affected by a plan of distribution could not appeal without becoming formal parties through intervention. The Court believed that Supreme Court precedent supported the proposition that only a party could appeal. In 2002, however, the Supreme Court held, in Devlin v. Scardelletti, that nonparty class members could appeal. Devlin called into question the Court’s understanding of the Supreme Court’s holdings. After a review of applicable precedent, the Court concluded that a nonparty whose rights are decided and who cannot litigate the issue in some other forum does have the right to appeal. Thus, the Court overruled Wozniak. The Court found the resolution of the merits much easier. Applying an abuse of discretion standard, the Court found that the reasons the plan favored the custodial account holders over the noncustodial account holders – that the custodial account holders did not authorize Enterprise to take any action with their assets, they were unaware that Enterprise had used their assets, and they would not have benefited had Enterprise’s strategy succeeded -- made sense. In fact, the Court opined that the custodial account holders had the stronger objection -- that the noncustodial account holders received anything before the custodial account holders were fully repaid. Having found no abuse of discretion, the Court affirmed.
