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Securities and Exchange Commission v. Champion-Cain

United States District Court, S.D. California

September 26, 2019




         I. BACKGROUND

         On August 28, 2019, the Securities and Exchange Commission (“SEC”) brought this action against Defendants ANI Development, LLC (“ANI Development”) and Gina Champion-Cain and Relief Defendant American National Investments, Inc. (“ANI Inc.”). ECF No. 1. According to the Complaint, Defendants violated federal securities laws by engaging in a fraudulent investment scheme that involved inducing investors to place funds into escrow accounts for the purported purpose of supplying short-term, high-interest loans to borrowers seeking to obtain liquor licenses from the State of California. Id. ¶¶ 4-6. The SEC alleges that as part of the scheme, Defendant Champion-Cain provided to investors bogus escrow agreements between ANI Development and its escrow company, which falsely indicated that the loaned funds could not be taken out of the ANI Development escrow account without prior written consent of the lenders. In reality, the SEC contends, the true escrow agreements governing the accounts permitted Defendants to withdraw and use funds at their sole discretion, which they allegedly did, transferring significant amounts of the funds to Relief Defendant ANI Inc. According to the Complaint, although Defendant ANI Development currently owes investors over $120 million, only $11 million remains in its escrow account. Id. ¶ 7.

         The Court entered a Preliminary Injunction and Appointment Order (“Appointment Order”) on September 3, 2019. ECF No. 6. Among other things, the Court in Section V of the Appointment Order placed an immediate freeze on all monies and assets in all accounts at any bank, financial institution, or brokerage firm, held in the name of, for the benefit of, or over which account authority is held by Defendants, Relief Defendant, and/or all of their subsidiaries and affiliates. Id. at 7. The Court specifically listed ANI Development’s escrow account, Account No. XXXX2122, at Chicago Title Insurance Company in that portion of the Appointment Order. Id. at 9. Additionally, in Section X of the Appointment Order, the Court appointed Krista L. Freitag (“the Receiver”) as permanent receiver of ANI Development and ANI Inc. as well as their subsidiaries and affiliates, which entailed granting her:

. . . full powers of an equity receiver, including, but not limited to, full power over all funds, assets, collateral, premises (whether owned, leased, occupied, or otherwise controlled), . . . and other property belonging to, being managed by or in the possession of or control of Defendant ANI Development and Relief Defendant [ANI Inc.] and their subsidiaries and affiliates, and [] such receiver is immediately authorized, empowered and directed . . . to have access to and to collect and take custody, control, possession, and charge of all funds, assets, collateral premises (whether owned, leased, pledged as collateral, occupied, or otherwise controlled), . . . wherever located, of or managed by Defendant ANI Development and Relief Defendant [ANI Inc.] and their subsidiaries and affiliates (collectively, the “Assets”), with full power to sue, foreclose, marshal, collect, receive, and take into possession all such Assets[.]

Id. at 14. Significantly, Section X also expressly ordered that the Receiver “have control of, and [] be added as the sole authorized signatory for, all accounts of the entities of receivership, including all accounts at any . . . escrow agent . . . which has possession, custody or control of any Assets, or which maintains accounts over which Defendant ANI Development and Relief Defendant [ANI Inc.] . . . have signatory authority[.]” Id. at 15.

         On September 13, 2019, the Receiver filed the Ex Parte Application (“the Application”) that is presently before the Court, and which was referred to the undersigned for a hearing and Report and Recommendation. ECF Nos. 15; 26. The Receiver asks the Court to issue an Order to Show Cause why non-party Chicago Title Company (“Chicago Title”) should not be held in civil contempt due to its refusal to turn over to the Receiver the $11 million remaining in ANI Development’s escrow account, in violation of the Appointment Order. The Court set an expedited briefing schedule and, once briefing was complete, held a hearing on the Application on September 25, 2019. Having considered the arguments presented at the hearing as well as those contained in the parties’ and non-parties’ briefing on the Application, the undersigned recommends that the Court GRANT the Application and find Chicago Title in civil contempt, for the reasons explained more fully below.


         Courts “have inherent power to enforce compliance with their lawful orders through civil contempt.” Spallone v. United States, 493 U.S. 265, 276 (1990). While the purpose of criminal contempt sanctions is to punish the contemnor, civil contempt sanctions are instead “penalties designed to compel future compliance with a court order, ” and “are considered to be coercive and avoidable through obedience.” Int’l Union, United Mine Workers of America v. Bagwell, 512 U.S. 821, 827 (1995).

         The party moving for a civil contempt order bears the burden of showing by clear and convincing evidence that the alleged contemnor violated the Court’s order. United States v. Ayres, 166 F.3d 991, 994 (9th Cir. 1999) (quoting In re Dual-Deck Video Cassette Recorder Antitrust Litig., 10 F.3d 693, 695 (9th Cir. 1993)). A party may be held in civil contempt for disobeying “a specific and definite court order by failure to take all reasonable steps within the party’s power to comply.” Dual-Deck, 10 F.3d at 695. Even if a party’s disobedience is in good faith, the Court may find the party in contempt because contempt “need not be willful, and there is no good faith exception to the requirement of obedience to a court order.” Id. (internal quotations and citation omitted). Nonetheless, “a person should not be held in contempt if his action appears to be based on a good faith and reasonable interpretation of the court’s order.” Id. (internal quotations, alteration, and citation omitted).


         In its Response to the Receiver’s Application (ECF No. 34), Chicago Title argues it is not in contempt of the Appointment Order because there is a good-faith dispute over the ownership of the funds in ANI Development’s escrow account. Additionally, Chicago Title makes two affirmative requests for relief: (1) that the Court direct Chicago Title to place the funds in trust with the Court until ownership disputes over the funds are resolved; and (2) that the Court extend to Chicago Title the protection of the “prosecution bar” in Section XIII of the Appointment Order, which prohibits any person seeking legal or equitable relief from ANI Development, ANI Inc., or their subsidiaries and affiliates from filing suit against them, using self-help, or otherwise interfering with the Receiver’s discharge of her duties as outlined in the order.[1]

         Before turning to Chicago Title’s affirmative requests to modify and/or vacate the Appointment Order, I will first address the question of whether the Receiver has established by clear and convincing evidence that Chicago Title’s refusal to turn over the funds in the escrow account constitutes civil contempt.

         A. Whether Chicago Title ...

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