Non-Intervening Account Holders May Appeal Receiver’s Plan To Distribute Assets

In response to a complaint by the Securities and Exchange Commission, the federal district court froze the assets of Enterprise Trust. The SEC claimed that Enterprise deliberately mishandled and lost millions of dollars that it held for investors. The district court appointed a receiver for Enterprise, who devised a plan to distribute the remaining assets to the account holders. The plan called for custodial account holders to receive a bigger percentage of their accounts than managed account holders.

Although they were not named parties in the lawsuit, and had not intervened, three of the managed account holders appealed to the Seventh Circuit Court of Appeals. They wanted a ruling that distributions to all Enterprise account holders should be treated equally. The appeal raised the propriety of appellate jurisdiction because, in a previous case, the court ruled that “investors affected by a receiver’s plan of distribution can’t appeal without intervening and becoming formal parties to the litigation …”

But this time the court ruled that appellate jurisdiction existed. The appellate court overruled its earlier decision, and concluded that a party whose rights were foreclosed by the receiver’s actions may appeal, even if the party has not officially intervened in the lawsuit. Here’s what the Seventh Circuit said:

People whose money was under management at Enterprise Trust Co., like creditors of a debtor in bankruptcy, must accept the distribution that the court believes appropriate. As with an in rem proceeding (where a court divvies up stakes in a fixed asset), they can’t file another suit seeking more from the pool of assets administered in the receivership (or the bankruptcy) … [Allowing those investors to appeal the receiver’s plan] eliminates a conflict among the circuits − for other courts permit investors to appeal in receivership proceedings without intervening …

The district court, and thus the receiver’s plan, ultimately was affirmed. Read the whole case, Securities and Exchange Commission v. Enterprise Trust Co., Nos. 08-3798, 08-3852 (3/18/09), by clicking here.