In the
United States Court of Appeals
For the Seventh Circuit
No. 09-4090
S ECURITIES AND E XCHANGE C OMMISSION,
Plaintiff-Appellee,
v.
W EALTH M ANAGEMENT LLC, et al.,
Defendants-Appellees.
A PPEAL OF:
E DWIN W ILSON M.D. IRA and the
JAMES P. AND S ANDRA J. V ERHOEVEN
R EVOCABLE T RUST
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 1:09-cv-00506-WCG—William C. Griesbach, Judge.
A RGUED M AY 26, 2010—D ECIDED D ECEMBER 1, 2010
Before R IPPLE, K ANNE, and SYKES, Circuit Judges.
S YKES, Circuit Judge. This is an appeal from a collateral
order issued in an enforcement action brought by the
2 No. 09-4090
Securities and Exchange Commission (“SEC”) against a
Wisconsin-based investment firm and its principals. For
more than twenty years, Wealth Management LLC
handled client accounts for hundreds of investors. Many
were retirees, so Wealth Management usually stuck to
traditional safe, low-risk investments. That changed in
2003 when Wealth Management set up six unregistered
investment vehicles—similar to hedge funds—and began
investing heavily in unconventional and illiquid assets.
The six funds failed, and the SEC filed an enforcement
action against Wealth Management and two of its
principal officers alleging a host of securities-law viola-
tions. At the SEC’s request, the district court froze
Wealth Management’s assets and appointed a receiver
to perform an accounting and fashion a plan to distribute
whatever assets could be recovered.
The receiver faced a daunting task. Of the approxi-
mately $131 million Wealth Management had under
management, only about $6.3 million was recoverable.
The receiver proposed to distribute the diminished
assets to investors on a pro rata basis and also imposed
a cutoff date after which any redemption distributions
would be offset against the investor’s total distribution.
Certain investors filed objections to the proposed plan.
The district court overruled the objections and approved
the plan, and two objecting investors have appealed.
After filing their notice of appeal, the objectors asked
the district court to stay the receiver’s distribution until
the resolution of the appeal. The district court denied
this request. The objectors brought the stay motion to
No. 09-4090 3
this court, and again it was denied. Then, after briefing
was completed but prior to oral argument, the receiver
went forward with a distribution of about $4 million of
the recovered assets. On the heels of this distribution,
the receiver moved to dismiss the appeal or summarily
affirm because unwinding the distribution would be
inequitable to the nonobjecting investors and create
administrative difficulties. We said we would take the
motion with the merits.
We now affirm. The district court’s decision to
approve the plan was fair and reasonable and withstands
scrutiny under the deferential standard-of-review ap-
plicable to decisions of this kind. Where a receivership
trust lacks sufficient assets to fully repay investors and
the investors’ funds are commingled, a distribution plan
may properly be guided by the notion that “equality is
equity,” and pro rata distribution is appropriate.
Cunningham v. Brown, 265 U.S. 1, 13 (1924). In approving
the receiver’s proposed plan for distribution, the district
court properly considered and rejected the objectors’
contrary arguments—in particular, their argument that
they were really creditors and not equity holders and
therefore entitled to preferential treatment.
I. Background
A. Wealth Management and its Investors
Wealth Management LLC was a financial-planning
firm located in Appleton, Wisconsin. As of May 2009, it
managed 447 client accounts and had approximately
4 No. 09-4090
$131 million under management. Many of its clients were
retirees seeking safe, low-risk investments, so from 1985
until 2003, client assets were held in segregated
accounts, separately managed, and typically invested in
common instruments such as stocks, bonds, and highly
liquid stock and bond funds. In 2003, however, Wealth
Management altered this model by establishing six unreg-
istered investment pools that were similar to hedge
funds. These six funds, which are relief defendants in the
underlying SEC action, are: WML Gryphon Fund LLC
(“Gryphon”); WML Watch Stone Partners, L.P. (“Watch
Stone”); WML Pantera Partners, L.P. (“Pantera”); WML
Palisade Partners, L.P. (“Palisade”); WML L3 LLC (“L3”);
and WML Quetzal Partners, L.P. (“Quetzal”). Gryphon
was established as a Wisconsin limited-liability company;
L3 was a Delaware limited-liability company, and the
other four were Delaware limited partnerships. Wealth
Management served as general partner or managing
member for each of the six funds. Complete authority
to select and manage the investments in these funds
resided in two Wealth Management officers: James
Putman, the firm’s founder, Chief Executive Officer, and
Chairman; and Simone Fevola, its President and Chief
Investment Officer. Of the roughly $131 million under
management in 2009, about $102 million was invested
in these six funds—the lion’s share, approximately
$88 million, in Gryphon and Watch Stone.
The offering documents for Gryphon and Watch
Stone represented that these funds would invest primarily
in “investment grade” debt securities. This made sense
given Wealth Management’s client base—retirees who
No. 09-4090 5
depended on their Wealth Management assets as
a primary source of income and therefore required safe,
low-risk investments. But this representation was far
from the truth. Although Putman and Fevola told
clients that the funds were safe and profitable, they
were actually investing client assets in risky and illiquid
investments—primarily subfunds and other alternative
investments such as life-insurance-premium financing
funds, real-estate financing funds, and a water park.
Yet Wealth Management’s investors thought all was
well. Not only did the firm communicate to its clients
that their investments were stable and conservative, but
it also issued monthly reports suggesting that the new
Wealth Management funds were high-performing in-
struments that were exceeding industry benchmarks.
The illusion ended in February 2008 when Wealth Man-
agement sent a letter to Gryphon investors saying
that there was not enough money to pay redemptions
in full and that redemptions would be limited to two
percent per quarter of the value of each individual’s
investment.1
At this point things began to unravel. In June 2008
Putman and Fevola informed Wealth Management’s
board that they had received kickbacks for steering
assets to a life-insurance financing fund, and investors
learned that the SEC was investigating Wealth Manage-
ment’s investment practices. These revelations led to a
1
In early June 2008, Wealth Management sent a similar letter
to investors in Watch Stone.
6 No. 09-4090
rash of employee resignations, and in December 2008
Wealth Management provided written notification to
investors of its decision to completely suspend redemp-
tions and liquidate the Wealth Management funds.
Two investors in Gryphon are the objectors in this
appeal—Dr. Edwin Wilson and James and Sandra
Verhoeven.2 After receiving the February 2008 letter
limiting redemptions to two percent of an investor’s
equity, Wilson notified Gryphon of his intent to redeem
his entire investment; it appears that Wilson received a
two-percent redemption in the spring of 2008. Similarly,
on May 1, 2008, the Verhoevens asked to fully redeem
their equity. Wealth Management noted this request in
its records, and the Verhoevens received partial redemp-
tions in June and September 2008.
B. Court Proceedings
On May 20, 2009, the SEC commenced an enforcement
action against Wealth Management, Putman, and Fevola
in federal court in the Eastern District of Wisconsin. The
thrust of the multicount complaint was that Putman
and Fevola misled investors regarding the safety and
liquidity of the subject Wealth Management funds—a
breach of their fiduciary duty to investors who sought low-
risk investments—and that Wealth Management’s com-
2
On appeal Dr. Wilson appears as the Edwin Wilson M.D.
IRA, and the Verhoevens appear as the James P. and Sandra J.
Verhoeven Revocable Trust.
No. 09-4090 7
munications to investors were based on inflated values
reported by third-party managers, which Wealth Manage-
ment failed to independently investigate. The com-
plaint also alleged that Putman and Fevola had received
roughly $1.2 million in kickbacks for investing in two life-
insurance financing funds that were managed by an
individual who had previously been the subject of an
SEC enforcement action.
The SEC asked the court to freeze Wealth Manage-
ment’s assets and appoint a receiver for the firm and the
funds. The court granted both motions, and Attorney
Faye Feinstein was appointed as receiver. In addition
to managing the liquidation of Wealth Management’s
assets, Feinstein was tasked with preparing an independ-
ent accounting of the individual funds’ assets, identifying
any that could be recovered, and developing a plan for
distribution to Wealth Management’s creditors and
equity investors. The receiver’s accounting revealed that
the funds had only $6.3 million in recoverable assets to
distribute, so most investors stood to recover only
pennies on the dollar.
In September 2009 the receiver submitted her proposed
distribution plan to the district court for approval.
As relevant here, the plan sought to distribute Wealth
Management’s assets to investors on a pro rata basis.
Feinstein had concluded that no investors were creditors
of Wealth Management, and thus her plan treated all
investors equally as equity holders, regardless of whether
an investor had submitted a request to redeem his or her
interest. The proposed plan also imposed a May 31, 2008
8 No. 09-4090
redemption “cutoff date.” Redemption distribtions re-
ceived after the cutoff date would be offset against the
investor’s total distribution; redemption distributions
received prior to that date would not. The receiver said
she selected May 31, 2008, as the cutoff date because the
SEC investigation become public in June 2008 and trig-
gered a spike in redemption requests.
Six investors, including Wilson and the Verhoevens,
filed objections to the plan. They claimed that their re-
quests to redeem their shares required that they be
treated as creditors with priority over nonredeeming
investors. The district court disagreed. On November 20,
2009, the court issued an order overruling the objections
and approving the receiver’s distribution plan. The
judge agreed with the receiver that a pro rata distribution
among investors—regardless of whether a request for
redemption had been made—was a fair and equitable
method of distributing the funds’ diminished assets. In
reaching this conclusion, the judge analogized to the
bankruptcy doctrine of equitable subordination; giving
a preference to investors who submitted redemption
requests would “elevate form over substance.”
The judge also rejected the objectors’ related contention
that the receiver was required to follow Wisconsin law
in classifying investors’ claims. In the alternative the
court held that under Wisconsin law, the objectors
would not qualify as creditors with priority over
nonredeeming investors. The court concluded that the
distinction between redeeming and nonredeeming in-
vestors was relevant to the question of offset but did not
No. 09-4090 9
affect an investor’s priority status. After considering
various alternatives, the court approved the receiver’s
proposal to use May 31, 2008, as a reasonable offset
cutoff date.
The objectors appealed from the November 20 order
and moved to stay any distributions under the plan; the
district court denied this motion. The objectors then
asked this court to stay distributions pending resolution
of their appeal; a motions panel likewise denied the
stay. The receiver then distributed approximately
$4.2 million of the roughly $6.3 million trust balance,
holding back the remainder to cover accrued and ongoing
administrative costs. This took place after briefing was
complete but about three weeks before oral argument,
so the receiver moved to dismiss the appeal or to sum-
marily affirm. She invoked the doctrine of “equitable
mootness,” arguing that unwinding the distribution
would be inequitable to investors and pose administra-
tive problems. We ordered a response and said we
would consider the motion with the merits of the appeal.
II. Discussion
A. Appellate Jurisdiction
The district court’s order affirming the receiver’s distri-
bution plan is not a final order, so we cannot exercise
jurisdiction under 28 U.S.C. § 1291. See SEC v. Forex Asset
Mgmt. LLC, 242 F.3d 325, 330 (5th Cir. 2001) (concluding
that an order approving a plan of distribution is not
final because it “does not end the litigation on the merits”
10 No. 09-4090
but “is only one part of the overall litigation by the SEC”
(quotation marks omitted)). Jurisdiction over this inter-
locutory appeal is premised on the collateral-order doc-
trine; though a question of first impression in this
circuit, the Fifth and Sixth Circuits have held that the
collateral-order doctrine permits interlocutory review of
a district-court order approving a receiver’s plan of
distribution. See SEC v. Basic Energy & Affiliated Res., Inc.,
273 F.3d 657, 666-67 (6th Cir. 2001); Forex Asset Mgmt., 242
F.3d at 330-31. We agree.3
The collateral-order doctrine permits interlocutory
review of “that small class [of decisions] which finally
determine claims of right separable from, and collateral
to, rights asserted in the action, too important to be
denied review and too independent of the cause itself to
require that appellate consideration be deferred until
3
We note that the objectors have standing to pursue this
appeal even though they are not parties to the underlying
SEC enforcement action and did not seek to intervene below.
SEC v. Wozniak, 33 F.3d 13, 14 (7th Cir. 1994), held that
nonparty investors affected by a receiver’s plan of distribution
could not appeal without becoming formal parties to the
litigation by intervening in the district court. However, our
decision in Wozniak was out of step with our sister circuits
and was undermined by the Supreme Court’s decision in
Devlin v. Scardelletti, 536 U.S. 1 (2002). Recognizing this, we
overruled Wozniak in SEC v. Enterprise Trust Co., 559 F.3d 649,
652 (7th Cir. 2009), and held that nonparty, nonintervening
investors affected by a receiver’s plan of distribution have
standing to appeal an order approving the plan.
No. 09-4090 11
the whole case is adjudicated.” Cohen v. Beneficial Indus.
Loan Corp., 337 U.S. 541, 546 (1949). To fall within the
scope of this doctrine, the order must conclusively deter-
mine the disputed question, resolve an important issue
completely separate from the merits of the underlying
action, and be effectively unreviewable on appeal from
a final judgment. Mohawk Indus. v. Carpenter, 130 S. Ct.
599, 605 (2009).
The order approving the receiver’s plan of distribution
satisfies all three criteria. First, the order conclusively
determines the disputed question—how the recovered
assets in the receivership will be distributed. See Forex
Asset Mgmt., 242 F.3d at 330. Second, the manner in
which the assets will be distributed is important to the
defrauded investors and is independent of the merits of
the underlying SEC enforcement action against Wealth
Management, Putman, and Fevola. See id. Finally, the
order will be effectively unreviewable after the court
enters a final judgment because the assets will have
been distributed by that point, see id.; interlocutory
review makes sense out of fairness to the investors and
as a matter of judicial economy.
B. Federal Rule of Appellate Procedure 3(c)
Although we can properly exercise jurisdiction over
the objectors’ appeal, there is one more procedural wrinkle
we must iron out. Federal Rule of Appellate Procedure 3
requires a notice of appeal to “specify the party or parties
taking the appeal by naming each one in the caption or
body of the notice.” F ED. R. A PP. P. 3(c)(1)(A). Rule 3(c)’s
12 No. 09-4090
specificity requirement exists to give “fair notice of the
specific individual or entity seeking to appeal.” Torres v.
Oakland Scavenger Co., 487 U.S. 312, 318 (1988). This re-
quirement is not a mere formality; the Supreme Court
has instructed that “[t]he failure to name a party in a
notice of appeal . . . constitutes a failure of that party to
appeal.” Id. at 314. The rule also provides, however,
that “[a]n appeal must not be dismissed for informality
of form or title of the notice of appeal, or for failure to
name a party whose intent to appeal is otherwise clear
from the notice.” FED. R. A PP. P. 3(c)(4). Accordingly, we
have held that an appeal should not be dismissed “if
the notice as a whole is not misleading.” Bradley v. Work,
154 F.3d 704, 707 (7th Cir. 1998); see also Torres, 487 U.S.
at 318 (noting that dismissal is not appropriate if the
notice of appeal informs the court and interested parties
who is filing the appeal).
The notice of appeal in this case names the James P. and
Sandra J. Verhoeven Revocable Trust as an appellant. The
Verhoevens’ trust was not the objector below, however;
the Verhoevens objected as individuals. This technical
discrepancy does not warrant dismissal. There is no real
confusion as to the identity of the appellants. Whether
the Verhoevens appear before this court through their
trust or as individuals is not relevant to the facts or merits
of their position; they are united as parties in interest.
See United States v. Segal, 432 F.3d 767, 772 (7th Cir. 2005)
(noting that a technical failure does not warrant dis-
missal if the appellees have not been misled).
No. 09-4090 13
C. The Receiver’s Motion to Dismiss
As we have noted, the receiver moved to dismiss
the appeal or summarily affirm in light of her distribu-
tion of most of the receivership assets after the objectors’
stay requests were denied. She argues that unwinding
this distribution would be inequitable to innocent third-
party investors and create administrative difficulties
to boot. This argument is premised on an equitable doc-
trine in bankruptcy law—sometimes referred to as “equi-
table mootness”— that essentially derives from the princi-
ple that “in formulating equitable relief a court must
consider the effects of the relief on innocent third parties.” 4
In re Envirodyne Indus., Inc., 29 F.3d 301, 304 (7th Cir.
1994). The doctrine has been applied in the context of
securities-fraud receiverships, see SEC v. Wozniak, 33
F.3d 13, 15 (7th Cir. 1994) (noting in dicta that the
doctrine would govern the decision of whether to undo
a distribution by a securities-fraud receiver), overruled on
4
Although it is known as the doctrine of “equitable
mootness,” we have said that “we shy away from this term
because it fosters confusion.” United States v. Segal, 432 F.3d 767,
774 n.4 (7th Cir. 2005). “There is a big difference between
inability to alter the outcome (real mootness) and unwillingess
to alter the outcome (’equitable mootness’). Using one word
for two different concepts breeds confusion.” In re UNR
Indus., Inc., 20 F.3d 766, 769 (7th Cir. 1994). This appeal is not
constitutionally moot. The receiver still controls more than
$2 million and may recover additional assets, so fashioning
some form of relief remains possible. See In re Envirodyne
Indus., Inc., 29 F.3d 301, 303-04 (7th Cir. 1994).
14 No. 09-4090
other grounds by SEC v. Enter. Trust Co., 559 F.3d 649 (7th
Cir. 2009); SEC v. Capital Consultants, LLC, 397 F.3d 733,
745-46 (9th Cir. 2005) (applying the doctrine when con-
sidering whether to unwind a receiver’s distribution
plan in a securities-fraud case); see also Segal, 432 F.3d
at 773-74 (invoking the doctrine when evaluating whether
to undo a business transaction resulting from a RICO
forfeiture), and is properly invoked here.
Two factors are key to resolving the receiver’s motion:
(1) the legitimate expectations engendered by the plan;
and (2) the difficulty of reversing the consummated
transactions. See In re Envirodyne Indus., 29 F.3d at
304 (considering whether a “modification of a plan of
reorganization would upset legitimate expectations”);
In re UNR Indus., Inc., 20 F.3d 766, 770 (7th Cir. 1994)
(noting that the court examines “the reliance interests
engendered by the plan, coupled with the difficulty of
reversing the critical transactions”). The inquiry is fact-
intensive and weighs “the virtues of finality, the passage
of time, whether the plan has been implemented and
whether it has been substantially consummated, and
whether there has been a comprehensive change in cir-
cumstances.” Segal, 432 F.3d at 774 (citing cases) (quotation
marks omitted).5
5
The Ninth Circuit also considers whether the appellant
moved for a stay in the district court. See SEC v. Capital Con-
sultants, LLC, 397 F.3d 733, 745 (9th Cir. 2005). This factor
is neutralized by the reality that “[a] stay not sought, and
a stay sought and denied, lead equally to the implementa-
(continued...)
No. 09-4090 15
There is no question that unwinding the distribution
would raise serious equitable concerns vis-à-vis the
nonobjecting investors. It would also pose administrative
hurdles, although this transaction—involving roughly
300 investors and just over $4.2 million—is not as complex
as other transactions we have refused to unsettle. See, e.g.,
In re UNR Indus., 20 F.3d at 769-70 (refusing to unwind
multimillion-dollar bankruptcy reorganization involving
some 15 million shares of stock). But because we are
affirming on the merits, we need not take the analysis
any further. See In re Envirodyne Indus., 29 F.3d at 304
(refusing to rule on the “equitable mootness” question
when it was not outcome-determinative).
D. The Plan of Distribution
In supervising an equitable receivership, the primary
job of the district court is to ensure that the proposed
plan of distribution is fair and reasonable. See Official
Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC, 467
F.3d 73, 84 (2d Cir. 2006). The district court has broad
equitable power in this area, so appellate scrutiny is
narrow; we review the decision below for abuse of dis-
cretion. Enter. Trust Co., 559 F.3d at 652.
Because the recoverable funds fell far short of the total
assets under management, the district court concluded
5
(...continued)
tion of the plan of reorganization.” In re UNR Indus., 20 F.3d
at 770.
16 No. 09-4090
that the more reasonable course was to distribute assets
on a pro rata basis rather than try to trace assets to
specific investors. Underlying this conclusion was the
idea that all investors should be treated equally, without
regard to whether an investor had attempted to redeem
his equity investment.6 Specifically, the court held that
the claims of redeeming and nonredeeming share-
holders were identical in substance—all were defrauded
investors whose claims derived from equity interests in
Wealth Management. The court concluded that giving
redeeming shareholders priority over nonredeeming
shareholders would impermissibly “elevate form over
substance.” The court also rejected the objectors’
argument that 28 U.S.C. § 959(b) required the receiver to
follow state law, but held in the alternative that even if
state law controlled, the objectors would not qualify as
creditors entitled to preference.
6
In general and in this context, creditors hold claims against
the company in liquidation, whereas investors hold
equity interests. When an equity investor seeks to redeem
shares—thereby converting his equity interest into corporate
debt—that investor may become an unsecured creditor.
Both Wisconsin and Delaware follow the rule that creditors
must be paid before holders of equity interests. See D EL . C ODE
A NN . tit. 6, § 18-804 (priority in winding up an LLC); W IS .
S TAT . § 183.0905 (same); D EL . C ODE A NN . tit. 6, § 17-804
(winding up of a limited partnership); W IS . S TAT . § 179.74
(same). The receiver’s plan provided that distributions will be
made to Wealth Management’s creditors (all of whom are
secured) before its investors. For reasons we explain, infra, the
district court properly concluded that the objectors were not
creditors.
No. 09-4090 17
We start with the principle that where investors’ assets
are commingled and the recoverable assets in a receiver-
ship are insufficient to fully repay the investors, “equality
is equity.” Cunningham v. Brown, 265 U.S. 1, 13 (1924).
Distribution of assets on a pro rata basis ensures that
investors with substantively similar claims to repay-
ment receive proportionately equal distributions. Courts
have routinely endorsed pro rata distribution plans as
an equitable way to distribute assets held in receiver-
ship in this situation. See, e.g., Forex Asset Mgmt., 242
F.3d at 331-32 (affirming pro rata distribution even
where objecting investors’ funds were segregated in a
separate account and never commingled, noting that
whether funds are commingled or traceable is “a distinc-
tion without a difference”); SEC v. Credit Bancorp, Ltd.,
290 F.3d 80, 88-90 (2d Cir. 2002) (finding that pro rata
distribution is particularly appropriate where funds are
commingled and investors are similarly situated); United
States v. Durham, 86 F.3d 70, 72-73 (5th Cir. 1996); SEC v.
Elliott, 953 F.2d 1560, 1569-70 (11th Cir. 1992) (finding that
tracing is inequitable and approving pro rata distribu-
tion); In re Reserve Fund Secs. & Derivative Litig., 673
F. Supp. 2d 182, 195-96 (S.D.N.Y. 2009); SEC v. Byers, 637
F. Supp. 2d 166, 176-77 (S.D.N.Y. 2009).
To implement an effective pro rata distribution,
district courts supervising receiverships have the power
to “classify claims sensibly.” Enter. Trust Co., 559 F.3d at
652. This power includes the authority to subordinate
the claims of certain investors to ensure equal treat-
ment. The Bankruptcy Code codifies the doctrine of
equitable subordination and grants bankruptcy courts
18 No. 09-4090
the power to subordinate certain claims; this includes
treating shareholders who redeemed their shares as
equity holders rather than unsecured creditors. 11 U.S.C.
§ 510(c)(1); see also In re Envirodyne Indus., 79 F.3d 579,
582 (7th Cir. 1996). The goal in both securities-fraud
receiverships and liquidation bankruptcy is identical—
the fair distribution of the liquidated assets. See In re
Envirodyne Indus., 79 F.3d at 583. Equitable subordina-
tion promotes fairness by preventing a redeeming
investor from jumping to the head of the line and re-
couping 100 percent of his investment by claiming
creditor status while similarly situated nonredeeming
investors receive substantially less. See Elliott, 953 F.2d
at 1569.
The district court faithfully applied these principles in
endorsing the receiver’s proposed pro rata distribution
in this case. The court considered the claims of investors
who attempted to redeem their equity and determined
that the substance of those claims was identical to the
claims of nonredeeming equity shareholders. By sub-
ordinating the objectors’ claims and effectuating a pro
rata distribution of assets, the district court avoided
the inequity of giving some investors preference even
though all investors’ claims were substantively the
same. See United States v. Vanguard Inv. Co., 6 F.3d 222, 226-
27 (4th Cir. 1993); Elliott, 953 F.2d at 1569. This was a
reasonable exercise of the court’s discretion.
But the objectors maintain they were legally entitled
to preference. For support they cite 28 U.S.C. § 959(b),
which governs the conduct of receivers and provides, in
relevant part:
No. 09-4090 19
[A] trustee receiver or manager appointed in any
cause pending in any court of the United States,
including a debtor in possession, shall manage and
operate the property in his possession as such
trustee, receiver or manager according to the re-
quirements of the valid laws of the State in which
such property is situated, in the same manner
that the owner or possessor thereof would be
bound to do if in possession thereof.
28 U.S.C. § 959(b). The import of this provision is readily
apparent: Just as an owner or possessor of property is
required to comply with state law, so too must a receiver
comply with state law in the “management and operation”
of the receivership property in his possession. On its face,
§ 959(b) has no particular significance for distribution
decisions in a liquidation; that is, it does not affect the
receiver’s—or the court’s—classification or subordina-
tion of claims.
Long ago, the Second Circuit read § 959(b)’s predecessor
statute in this way. The court noted that liquidation
was “[m]erely to hold matters in statu quo; to mark time,
as it were; to do only what is necessary to hold the
assets intact.” Vass v. Conron Bros. Co., 59 F.2d 969, 971 (2d
Cir. 1932) (Hand, J). Accordingly, because liquidation
was not “a continuance of the business,” the statute
did not apply to liquidations. Id. Modern courts have
followed this reasoning and likewise concluded that
§ 959(b) does not apply to liquidations. See, e.g., In re N.P.
Mining Co., 963 F.2d 1449, 1460 (11th Cir. 1992) (“A
number of courts have held that section 959(b) does not
20 No. 09-4090
apply when a business’s operations have ceased and its
assets are being liquidated.”); Saravia v. 1736 18th St.,
N.W., LP, 844 F.2d 823, 827 (D.C. Cir. 1988) (viewing “the
statute as applying only to operating businesses, not
ones that were in the process of being liquidated”); In re
Valley Steel Prods. Co., 157 B.R. 442, 447-49 (Bankr. E.D. Mo.
1993) (holding § 959(b) does not apply to liquidations and
citing cases). We agree with this reading of the statute.7
In any event, the objectors do not qualify as creditors
under Wisconsin law. In Wisconsin a holder of an equity
interest in a limited-liability company becomes a cred-
itor “[a]t the time that a member becomes entitled to
receive a distribution . . . .” W IS. S TAT. § 183.0606. The
time at which a member is entitled to receive a distribu-
tion is governed by the limited-liability company’s oper-
7
We note that the Sixth Circuit has suggested in dicta that
§ 959(b) requires receivers to comply with state law regardless
of whether the receiver is liquidating an estate or actively
managing it. See In re Wall Tube & Metal Prods. Co., 831 F.2d
118, 122 (6th Cir. 1987). We think Wall Tube must be read in
light of its facts. The case involved the cleanup of an environ-
mental accident and the applicability of state laws governing
the disposal of hazardous waste; it appears that the Sixth
Circuit meant to suggest only that § 959(b) requires a
liquidating receiver to comply with state laws regulating
public health, safety, and welfare when liquidating receiver-
ship property. See id. In Midlantic National Bank v. New Jersey
Department of Environmental Protection, 474 U.S. 494, 505 (1986),
the Supreme Court explicitly declined to decide whether
§ 959(b) applies to liquidations.
No. 09-4090 21
ating agreements. Id. §§ 183.0603, 183.0604. Gryphon is
the relevant limited-liability company here, and section 5.3
of Gryphon’s operating agreement permits the fund’s
managing member to restrict distributions when “existing
economic or market conditions or conditions relating
to [Gryphon]” render “withdrawals or payments of
withdrawals . . . impracticable.” Pursuant to this provi-
sion, Gryphon’s managing member elected to limit distri-
butions to two percent per quarter of an investor’s
equity, and in February 2008 all investors received a
letter informing them of this restriction on redemptions.
The objectors received the two-percent distributions to
which they were entitled, but beyond that, pursuant to
Gryphon’s operating agreement, they were not “entitled
to receive a distribution” and therefore did not become
creditors.
The objectors also challenge the district court’s
approval of May 31, 2008, as the cutoff date for deter-
mining whether a redemption distribution would be
offset against an investor’s plan distribution. They
contend that this offset provision is arbitrary and inequi-
table, particularly with respect to the Verhoevens.8
8
The objectors also suggest that the cutoff date operates as
an illegal “clawback.” We disagree. The receiver was not
attempting to recover assets held by investors—because they
were in some way tainted by the fraud or otherwise—as in the
typical clawback action. Here, the assets in question were
always in possession of the receivership trust and no claw-
back occurred. Moreover, the case on which the objectors
(continued...)
22 No. 09-4090
Before proceeding, a brief detour into the chronology
of the Verhoevens’ redemption requests is required. In
March 2006 the Verhoevens began redeeming their
equity investment at a rate of $15,000 per quarter, and in
February 2008 they made quarterly redemption requests
for the quarters ending March 31, 2008; June 30, 2008; and
September 30, 2008. Then on May 1, 2008, they submitted
a full redemption request, but they did not receive a
disbursement prior to the May 31 cutoff date. As we
have noted, the receiver selected May 31, 2008, as the
cutoff date because the SEC investigation was disclosed
in June and redemption activity spiked across the
Wealth Management funds. The cutoff date was in-
stituted to acknowledge this change in circumstances.
8
(...continued)
rely for this argument, Janvey v. Adams, 588 F.3d 831 (5th Cir.
2009), is not on point. The issue in Janvey was whether the
district court had the authority to freeze assets the receiver
sought to “claw back” when the holders of the assets were not
relief defendants. The Fifth Circuit held that the district court
lacked this authority; it did not consider the equities of clawing
back those assets. Id. at 835. The objectors further contend,
though only in passing, that the offset provision ignores
their “choate creditor rights.” But as we have already noted,
they are not properly considered creditors. Finally, to the
extent that the objectors argue that the offset provision
violates their due-process rights, this argument was under-
developed in the district court and on appeal. See In re
Aimster Copyright Litig., 334 F.3d 643, 656 (7th Cir. 2003) (under-
developed arguments are waived).
No. 09-4090 23
The district court considered and rejected alternatives
to the offset provisions and held that the May 31, 2008
cutoff date was reasonable in light of the increase in
redemptions after the June 2008 disclosure of the allega-
tions about Wealth Management’s malfeasance. Specifi-
cally, the judge recognized that the receiver basically had
three options—offset all redemptions, offset no redemp-
tions, or select a cutoff date to determine which redemp-
tions to offset. The judge acknowledged that any cutoff
date would be both over- and under-inclusive, but
thought it was more equitable to use a cutoff date than
to offset either all or no redemptions. That is, offsetting
all redemptions would penalize investors who made
early redemption requests; offsetting none would reward
redeeming investors at the expense of nonredeeming
investors.
The district court also considered the possibility of
investigating the circumstances of each investor’s re-
demption request and setting off any resulting payment
against the final distribution only when the request was
linked to the SEC action. Although this sort of case-by-
case analysis has intuitive appeal, the ultimate goal of a
receivership is to maximize the recovery of the investor
class, and “each investor’s recovery comes at the expense
of the others.” SEC v. Byers, 637 F. Supp. 2d at 176. Investi-
gating individual claims is expensive and, as the receiver
has noted, would drain the receivership estate. Receivers
have a duty to avoid overly costly investigations, and at
a certain point, the costs of such individualized deter-
minations outweigh the benefits. See In re Equity Funding
Corp. of Am. Secs. Litig., 603 F.2d 1353, 1365 (9th Cir. 1979).
24 No. 09-4090
We conclude that the district court was within its
discretion to reject a case-by-case determination as too
costly and time consuming. And the court reasonably
settled on a fixed cutoff date as the most equitable way
to balance the claims of individual investors against the
requirements of a cost-effective and administratively
efficient distribution. Similar offset provisions have
been upheld in other cases. See Capital Consultants, LLC,
397 F.3d at 741; SEC v. Wang, 944 F.2d 80, 87-88 (2d Cir.
1991); In re Equity Funding Corp. of Am. Secs. Litig., 603
F.2d at 1363-65; In re Reserve Fund Secs. & Derivative
Litig., 673 F. Supp. 2d at 201.
For the foregoing reasons, we see no abuse of discretion
in the district court’s oversight of the receiver’s planned
distribution of receivership assets. Accordingly, the
district court’s order approving the plan is A FFIRMED.
12-1-10