United States District Court, N.D. Ohio, Western Division
Victor M. Javitch, Receiver, Plaintiff
First Union Securities, Inc., et al., Defendants
G. CARR, SR. U.S. DISTRICT JUDGE
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.
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.
- 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.
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).
is proper under 28 U.S.C. § 1332(a)(1).
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.
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.
Liberte Capital Litigation
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).
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
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.
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.
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.
all was said and done, the investors' total losses
approached $250 million.
1999, Liberte sued Capwill, VES, and CFL for wrongfully
transferring money VES held in escrow to Capwill's
personal bank accounts.
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)).
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).
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).
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.
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).
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)).
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]
(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”)).
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.
Arbitrability of the Dispute
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).
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.
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.”
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.
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:
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
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
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
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
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
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
Javitch, 315 F.3d at 625-27.
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).
began on November 28, 2011, and continued without any need
for court intervention until February, 2014. (Doc. 92).
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, ...