The opinion of the court was delivered by: Honorable Larry Alan Burns United States District Judge
MOTION TO DISSOLVE TEMPORARY RESTRAINING ORDER ORDER DENYING DEFENDANTS'
The Court granted the SEC's ex parte motion for a temporary restraining order on September 6, 2012. According to the SEC, Defendants are violating the registration and antifraud provisions of the federal securities laws by, among other things, selling partnership interests in undeveloped land at a huge markup.
On September 11, Defendants filed an emergency motion to dissolve or modify the TRO pursuant to Fed. R. Civ. P. 65(b)(4). The motion makes, in essence, three arguments, which the Court summarized as follows in an order setting a briefing schedule that it entered the same day:
The first is that, by its own admission, the SEC didn't show that irreparable injury would result before Defendants could be heard. In fact, the SEC took the position, mistaken in Defendants' view, that "[u]nlike private litigants, if the government can show a probability of success on the merits, the courts presume irreparable injury in Commission enforcement actions where injunctive relief is sought." (Doc. No. 3-1 at 13.) The Defendants' second argument cuts to the heart of the SEC's jurisdiction to bring claims against them: the general partnership investments at issue simply are not securities. Here, the Defendants take issue with the SEC's claim in its moving papers that "[a]lthough some courts have found that investments in land solely for the purpose of obtaining profits from appreciation of property value on resale are not securities, and some general partnership interests are not investment contracts, the GP units at issue in this case are securities." (Doc. No. 3-1 at 14.)
And the Defendants' third argument is that the TRO threatens to do their business irreparable harm by its requirement that the appointed receiver notify each and every investor of the SEC's allegations and the TRO itself. Related to this, the Defendants argue that the TRO places the receiver in the conflicted position of serving the General Partnerships alongside Western: "Wearing his hat as receiver to the General Partnerships, he is required to send out notices to all of Western's investors. Wearing his hat as receiver to Western, it would be gross negligence or worse to send out a mass mailing to every past customer spreading inaccurate statements and allegations and would irreparably harm Western." (Doc. No. 14 at 3.)
The SEC has now responded to Defendants' arguments, and the Court will address them in sequence.
A TRO is simply a preliminary injunction issued on short notice or no notice at all, and with a quick expiration date. The standards governing their issuance are "substantially identical." Stuhlbarg Int'l Sales Co. v. John D. Brush & Co., 240 F.3d 832, 839 n.7 (9th Cir. 2001). A plaintiff must show, among other things, that it "is likely to suffer irreparable harm in the absence of preliminary relief." Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 20 (2008).
The TRO sought by the SEC, however, was issued without written notice to Defendants, and that requires a heightened showing of irreparable harm under Federal Rule of Civil Procedure 65:
(1) Issuing Without Notice. The court may issue a temporary restraining order without written or oral notice to the adverse party or its attorney only if:
(A) specific facts in an affidavit or a verified complaint clearly show that immediate and irreparable injury, loss, or damage will result to the movant before the adverse party can be heard in opposition; and
(B) the movant's attorney certifies in writing any efforts made to give notice and the reasons why it should not be required.
Fed. R. Civ. P. 65(b). In other words, while a standard-issue preliminary injunction must find a likelihood of irreparable harm, a secret-issue TRO must find a certainty of it. This higher hurdle "reflect[s] the fact that our entire jurisprudence runs counter to the notion of court action taken before reasonable notice and an opportunity to be heard has been granted ...