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Javitch v. First Union Securities, Inc.

United States District Court, N.D. Ohio, Western Division

February 28, 2017

Victor M. Javitch, Receiver, Plaintiff
v.
First Union Securities, Inc., et al., Defendants

          ORDER

          JAMES G. CARR, SR. U.S. DISTRICT JUDGE

         This is the last pending suit in a galaxy of satellite litigation stemming from a massive fraud conducted by James Capwill; Viatical Escrow Services (VES), the escrow company of which Capwill was the principal; and Capital Fund Leasing (CFL), a shell company through which Capwill diverted VES funds and made them available for his own illegitimate purposes.

         Victor Javitch, acting in his capacity as VES and CFL's court-appointed receiver, brought this action in 2001 to recover $10.5 million that Capwill diverted from VES and used to open brokerage accounts with defendant First Union Securities, Inc. The receiver's complaint made clear, and subsequent litigation has confirmed, that the vast majority of funds that Capwill deposited with First Union belonged, not to either of the entities in receivership, but rather to investors whose money VES had been holding in escrow.

         In 2014 - and after one appeal to the Sixth Circuit, two rounds of briefing on the arbitrability of the receiver's claims, and years of proceedings before an arbitration panel - my late colleague, Sr. U.S. District Judge David Katz (who, before his untimely death in 2016, had presided over this and all numerous related cases), ruled that the receiver did not have standing to pursue any claim “for money damages to recover funds deposited with [First Union] which were held by VES for the benefit of non-party customers[.]” Javitch v. First Union Secs., Inc., 2014 WL 3510603, *2 (N.D. Ohio). This was because the receiver could “only assert claims regarding Receivership property, ” and the funds that ultimately belonged to the investors “were beyond the scope of the Receiver's authority.” Id. at *3.

         Judge Katz's ruling precipitated the filing of a motion to intervene by two viatical investment companies that hired VES to act as its escrow agent, Liberte Capital Group, LLC, and Alpha Capital Group, LLC (the investors). (Doc. 112). Also pending are motions by the Liberte and Alpha investors for class certification. (Docs. 113, 114).

         Jurisdiction is proper under 28 U.S.C. § 1332(a)(1).

         Because the motion to intervene is untimely, and because the investors in any event have no substantial interest in this case, I deny the motion to intervene. I also deny the class-certification motions as moot.

         Background

         Judge Katz and the Sixth Circuit have discussed this case's lengthy background in many prior decisions. E.g., Javitch v. First Union Secs., Inc., 315 F.3d 619 (6th Cir. 2003); Liberte Cap. Grp., LLC v. Capwill, 248 F. App'x 650 (6th Cir. 2007) (the Linke case); Javitch, supra, 2014 WL 3510603 at *2. Nevertheless, because that background is critical to understanding the result I reach in this order, I set it forth in some detail below.

         A. The Liberte Capital Litigation

         The case now pending before me has its origins in a suit filed in 1999, Liberte Cap. Grp., LLC v. Capwill, Case No. 5:99CV818 (N.D. Ohio).

         Liberte was an Ohio-based viatical investment company. It purchased life insurance policies from “viators” - that is, policyholders who were terminally ill or elderly and in poor health - in exchange for a discounted, lump-sum payment to the viators. Wuliger v. Mfgs. Life Ins. Co., 567 F.3d 787, 790 (6th Cir. 2009). When the viator died, Liberte and its investors were entitled to collect the policy's death benefit.

         Liberte marketed these policies as investment vehicles to the public. “The price of the investment include[d] the funds to be paid to the owner of the policy, as well as funds to be held in escrow to pay the life insurance premiums.” Javitch, supra, 315 F.3d at 621 n.3.

         In 1997, Liberte contracted with Capwill and VES “to provide trustee services in handling monies received from investors to buy policies and to service the payment of the premiums.” Linke, supra, 248 F. App'x at 651. But the fraudulent practices of Capwill and Liberte's principal, Richard Jamieson, soon tore the investment scheme apart.

         “Many of the insurance policies underlying the viatical investments that Liberte and Alpha had marketed were procured through fraud, ” Linke, 248 F. App'x at 651, meaning that the policies were void when written and neither could nor did yield any payout to the investors. Jamieson, moreover, had made numerous misrepresentations about the riskiness of viatical investments and the supposed independence of Liberte's escrow agent, VES, from Jamieson. See U.S. v. Jamieson, 427 F.3d 394, 400-01 (6th Cir. 2005) (recounting Jamieson's conviction on two conspiracy counts and 155 counts of money laundering). Lastly, “Capwill and his escrow companies embezzled or absconded with the funds that they held in escrow[.]” Linke, supra, 248 F. App'x at 651.

         When all was said and done, the investors' total losses approached $250 million.

         In 1999, Liberte sued Capwill, VES, and CFL for wrongfully transferring money VES held in escrow to Capwill's personal bank accounts.

         Shortly after the Liberte Capital case began, the then-presiding judge, the late Honorable David D. Dowd, appointed Javitch as the receiver for VES and CFL. Javitch's task was to “take and maintain exclusive and complete custody, control and possession of all the assets belonging to VES and CFL” and “otherwise manage, maintain and protect the assets of VES and CFL” for the benefit of their creditors. (Doc. Entry of July 15, 1999, Liberte Cap. Grp., LLC v. Capwill, Case No. 5:99CV818 (N.D. Ohio)).

         Judge Dowd also granted the receiver the power to sue to recover property that belonged to the receivership entities, and he “enjoined and stayed” all others “from commencing or continuing any action at law or suit or proceedings in equity to foreclose any lien or enforce any claim against . . . VES and/or CFL or their property.” (Id. at 5-6).

         After it became apparent that Capwill had used VES funds to open bank and brokerage accounts - some in his own name, others in CFL's name, and still others in the names of his friends and associates - Judge Dowd extended the receiver's authority “to cover any and all interests in any bank accounts or brokerage accounts which are or were in the name of James A. Capwill . . . or any other name into which estate funds went[.]” (Doc. 100-1 at 3).

         B. The Receiver's Complaint

         At issue in this case, which the receiver filed in April, 2001, is roughly $10.5 million that Capwill diverted from VES and used to open brokerage accounts with First Union through one of its brokers, defendant Michael D'Angelo.

         The receiver's complaint pleaded nine counts: negligence, negligent supervision, breach of fiduciary duties, fraud, conspiracy to defraud, RICO violations, aiding and abetting fraud and violations of federal securities law, conversion, and money had and received. (Doc. 1 at ¶¶23-88).

         At its core, the theory of the complaint was that the defendants knew or should have known that Capwill, who was only an accountant and escrow agent, had neither “substantial personal financial assets or resources” nor “significant or meaningful experience in financial investing.” (Id. at ¶49(a)-(c)). This led the defendants to recommend investments that were not suitable to Capwill and to mishandle the money he had invested. Moreover, First Union also knew or should have known that most of VES's assets “were to be held in actual or constructive trust, and with fiduciary duties to others.” (Id. at ¶49(d)).

         Given all that, the receiver maintained, the defendants ought to have known that:

[t]he moneys used to open the brokerage accounts . . . were wrongfully, negligently, intentionally, fraudulently or recklessly diverted from accounts of CFL, Alpha, VES, Liberte, [and others] to these brokerage accounts by Mr. Capwill in violation of [his, CFL's, and VES's] fiduciary duties.

(Id. at ¶21; see also Id. at ¶49(e) (“the money/funds used to open the brokerage accounts . . . were not the personal funds of Mr. Capwill, or the earnings, capital, assets and/or retained earnings of . . . CFL or VES”)).[1]

         C. Arbitration

         The defendants did not answer or move to dismiss the receiver's complaint. Rather, they immediately moved to compel arbitration. (Doc. 7). Their filing raised two issues that would occupy the litigation for the next thirteen years: whether the receiver's claims were subject to arbitration, and whether the receiver had standing to recover funds deposited with First Union that VES had held in escrow and for the benefit of viatical investors.

         1. Arbitrability of the Dispute

         When Capwill opened the accounts at First Union, he signed an agreement specifying, inter alia, that “all claims or controversies” arising from the accounts were subject to arbitration. (Doc. 7-2 at 2).

         Relying on that provision, the defendants argued that the receiver “stood in the shoes” of VES and CFL and thus had to take his claims to arbitration. (Doc. 7). Judge Katz disagreed, concluding that the receiver's claims were not subject to arbitration because: 1) Javitch himself had not signed the arbitration agreements; and 2) in any event his complaint contested the validity of the agreements. (Doc. 20). The defendants appealed.

         a. The Javitch Decision

         In Javitch, supra, 315 F.3d at 627, the Sixth Circuit reversed, holding that the receiver was “bound to the arbitration agreements to the same extent that the receivership entities would have been absent the appointment of the receiver.”

         The receiver's principal argument on appeal was that the arbitration agreement did not bind him because he was not suing on behalf of VES and CFL. Rather, the receiver maintained that he was suing “on behalf of the ‘true owners of the assets': that is, the creditors who were defrauded by Capwill.” Id. at 625.

         The Circuit rejected that argument. Based on its “assessment of both the claims being asserted by Javitch and the authority granted to him by the order appointing him as receiver, ” the court explained, it was clear that “Javitch has asserted claims belonging to the receivership entities.Id. at 627. In so holding, however, the Circuit explained at length (though in dicta) why a receiver would not have standing to assert claims on behalf of a receivership entity's creditors or investors:[2]

The general rule is that a receiver acquires no greater rights in property than the debtor had and that, except as to liens in existence at the time of the appointment, the receiver holds the property for the benefit of general creditors under the direction of the court. In re K-T Sandwich Shoppe of Akron, 34 F.2d 962, 963 (6th Cir. 1929). Because they stand in the shoes of the entity in receivership, receivers have been found to lack standing to bring suit unless the receivership entity could have brought the same action. See, e.g., Goodman v. FCC, 182 F.3d 987, 991-92 (D.C. Cir. 1999) (receiver did not have standing to sue on behalf of customers and creditors of entity in receivership); Scholes v. Lehmann, 56 F.3d 750, 753-55 (7th Cir. 1995) (receiver for corporation could sue for diversion of assets as fraudulent conveyances by controlling shareholder).
Applying this general rule, the court in Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1153-54 (3d Cir. 1989), concluded that arbitration agreements, like other prepetition contractual commitments, were binding on the bankruptcy trustee to the same extent that they would bind the debtor. As a result, the court held that
in actions brought by the trustee as successor to the debtor's interest under section 541, the “trustee stands in the shoes of the debtor and can only assert those causes of action possessed by the debtor. [Conversely, ] [t]he trustee is, of course, subject to the same defenses as could have been asserted by the defendant had the action been instituted by the debtor.” Collier on Bankruptcy, ¶323.029[4].

Id. at 1154 (footnotes omitted and alteration in original). Consistent with this rationale, the court also concluded that the trustee could not be compelled to arbitrate creditor claims that it was unauthorized to assert under 11 U.S.C. § 544(b). Id. at 1155. Javitch argues that Hays supports the district court's refusal to compel arbitration because his complaints attempt to assert claims on behalf of the defrauded investors. The district court, however, did not distinguish Hays on that basis.

         The district court's opinions suggest that the receiver could not bring these actions on behalf of the investors. The court explained that it was mindful of a receiver's proper role in litigation such as in this case sub judice:

Fraud on investors that damages those investors is for those investors to pursue - not the receiver. By contrast, fraud on the receivership entity that operates to its damage is for the receiver to pursue (and to the extent that investors as the holders of equity interests in the entity may ultimately benefit from such pursuit, that does not alter the proposition that the receiver is the proper party to enforce the claim).
Scholes v. Schroeder
744 F.Supp. 1419
The Complaint clearly contends that the funds used to open accounts with the Defendants “were wrongfully, negligently, intentionally, fraudulently or recklessly diverted from accounts of CFL” in violation of Capwill's, CFL's, and VES's standard of care, their fiduciary duties, among others. Compl. at ¶21.
In accordance with the Order of Appointment in the Liberte case, the Plaintiff Receiver has been duly authorized by the Court to “oversee and to administer the business and assets of VES and CFL” by various means, including the institution of litigation to preserve the Receivership property. The issue for resolution in the case at bar is whether the Receiver for VES and CFL is bound by the agreement to arbitrate alleged to have been signed by Capwill.
Thus, the district judge, who was also presiding over the Liberte case, rejected the contention that Javitch could escape the arbitration agreements on the grounds that he was bringing suit on behalf of the defrauded investors and funding companies.

Javitch, 315 F.3d at 625-27.

         b. Remand

         The Sixth Circuit remanded the case to Judge Katz to consider whether the arbitration agreements were enforceable, and whether the doctrine of equitable estoppel precluded the receiver from trying to avoid arbitration. Id. at 628-29. Ultimately, in 2011, Judge Katz ruled in the defendants' favor on both issues, ordered the parties to proceed to arbitration, and stayed the case pending the completion of arbitration. (Doc. 85).

         2. The Receiver's Standing

         Arbitration began on November 28, 2011, and continued without any need for court intervention until February, 2014. (Doc. 92).

         Shortly after proceedings got underway, it appears, “[a] dispute [arose] . . . regarding the scope of the Receiver's standing to pursue claims for VES and CFL.” Javitch, supra, 2014 WL 3510603 at *2. The defendants argued that the receiver lacked standing to assert any claims relating to First Union brokerage accounts funded with money that VES had held in escrow for third-party investors. (Doc. 101). This was so, defendants maintained, ...


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