7th Circuit rules defrauded investors can appeal.

• Author: Ziemer, David

Byline: David Ziemer

Defrauded investors need not intervene in an action in order to challenge the receiver's distribution of proceeds.

In so holding on Mar. 18, the Seventh Circuit overruled its prior holding to the contrary in SEC v. Wozniak, 33 F.3d 13 (7th Cir. 1994).

In the new case, the Securities and Exchange Commission filed a complaint against Enterprise Trust Company.

Almost 1,200 people had invested more than $100 million with Enterprise, in one of two types of accounts. Some used Enterprise only for custodial services (holding securities that the customers had purchased); others relied on Enterprise to select securities.

Much of the money was lost in risky investments; a receiver appointed by the court concluded that Enterprise only had $37 million in assets.

The receiver proposed the following payout to the investors: the custodial investors would receive 60 percent of their original capital; those with managed accounts would receive what was left (with returns of either 25 or 50 percent of the original investments).

Several owners of managed accounts objected, but the district judge approved the receiver's proposal. Three of those objectors appealed, and the receiver, relying on Wozniak, asked the court to dismiss the appeal.

In an opinion written by Judge Frank H. Easterbrook, the Seventh Circuit declined to dismiss the appeal, but affirmed the result.

In Wozniak, the court had held that investors affected by a receiver's plan of distribution can't appeal without intervening and becoming formal parties to the litigation.

However, in Devlin v. Scardelletti, 536 U.S. 1 (2002), the U.S. Supreme Court held that class members may appeal without becoming parties in their own right, calling the opinion in Wozniak into question.

The court in Devlin drew a distinction between persons who are bound by a suit's outcome, and those who are not. It concluded that persons who are not able to file their own suit and demand relief in a separate action may appeal without intervening first.

As an example of those who can appeal without intervening, the court cited creditors who file a claim in bankruptcy.

The Seventh Circuit concluded that the investors in this case could be analogized to creditors in a bankruptcy proceeding.

The court explained, 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...