A District Court may not Enjoin Third-Party Claims Against Insurers in a Securities-Fraud Receivership without Alternative Compensation Scheme

(Excerpt) Within its equitable power, a district court may place the assets of a defendant into receivership and appoint a receiver to protect a plaintiff’s interest in property where the rights over that property are disputed. In general, the purpose of this equity receivership is to marshal assets, preserve value, equitably distribute to creditors, and, either reorganize, or orderly liquidate. This power is an extraordinary remedy only justified by extreme situations, such as where there is a high probability that fraudulent conduct has occurred or will occur to frustrate the claim, or when there is a threat that the disputed property will be concealed, lost, or diminished in value. In cases involving Ponzi schemes, courts have held that the insurance policies and proceeds covering the company and its employees will be considered property of the receivership. The receiver is given broad authority to acquire, organize, and distribute the property of the estate and is vested with complete jurisdiction over the receivership property. Similar to a trustee in bankruptcy, an equity receiver has the authority to sue, but only to redress injuries to the entity in receivership. The equity receiver also has the authority to enter into settlements, subject to the district court’s finding of the agreement to be “fair and equitable and in the best interests of the estate.” Furthermore, a district court has the authority and wide discretion to issue injunctions to prevent third-parties from diminishing property of the receivership estate. This power, in conjunction with the district court’s power to approve settlements, provides a framework for analyzing a settlement which requires injunctions on third-party claims against an insurer. This memorandum addresses whether a district court, presiding over a securities-fraud receivership, has the power to enjoin third-party claims against insurers without an alternative compensation scheme. First, this memo explores the relationship between securities-fraud receivership and bankruptcy principles surrounding the court’s power to enjoin claims of third-parties. Second, it analyzes the restrictions on the authority of the receiver and receivership court to extinguish third-party contractual claims. Lastly, it examines how courts have balanced these considerations to both protect assets of the estate and protect coinsureds with contractual rights in the receivership property