February 3, 2021 – Rotstain v. Mendez, 2021 WL 359989 (5th Cir.)
On February 3, 2021, the United States Court of Appeals for the Fifth Circuit issued an opinion in Rotstain v. Mendez, holding in part that a receiver had standing to bring claims on behalf of investors in connection with a Ponzi scheme.
In the context of denying a motion to intervene, Rotstain clarified that receivers and their assignees have standing to bring claims on behalf of investors when the investors’ claims are against alleged conspirators for conduct in furtherance of that scheme and are derivative of and dependent on the claims of the receivership estate.
I. The Facts of Rotstain
In Rotstain, a group of investors originally filed suit against banks that provided banking services to the perpetrators of a Ponzi scheme for fraudulent transfer, fraud, conversion, civil conspiracy, violations of the Texas Security Act, and breach of fiduciary duty and asserted these claims on behalf of a putative class. A receiver had been appointed in the SEC’s action against the alleged Ponzi schemers, and due to complex issues surrounding a concurrent bankruptcy, a committee-entity (the receiver’s “assignee”) was created to act on behalf of the receivership estate and the perpetrators’ investors. The receiver and assignee intervened in the Rotstain class action; however, class certification was ultimately denied, leaving the named investors and the assignee to prosecute claims against the banks.
When unnamed investors later learned their claims may be time-barred due to the expiration of the statute of limitations after the denial of class certification, they sought to intervene in the Rotstain action approximately ten years into the litigation and after extensive discovery had been exchanged. The district court denied the motion to intervene and found the assignee adequately represented the unnamed investors’ interests, rejecting the argument that the investors would be prejudiced because the assignee lacked standing to sue on their behalf. The intervenors appealed to the Fifth Circuit.
II. The Fifth Circuit’s Decision
In the Fifth Circuit, a movant is entitled to intervene as of right when (1) the application is timely; (2) the movant has an interest in the property or transaction which is the subject of the action; (3) the movant is so situated that the disposition may, as a practical matter, impair or impede the movant’s interest; and (4) the movant’s interest is inadequately represented by the existing parties to the suit. In Rotstain, in addition to finding the investors’ motion was untimely and their intervention would compound already burdensome discovery, the Fifth Circuit held that a receiver and its assignee may adequately protect investors’ interests to the extent those investors’ claims are derivative of the receivership estate’s claims for recovery against the perpetrators of a Ponzi scheme.
In so holding, the Fifth Circuit rejected the intervenors’ argument that the assignee lacked standing to bring claims on behalf of the unnamed investors. The Rotstain Court’s decision came down to a number of characteristics present in both the assignee’s claims on behalf of the receivership estate and the intervenors’ proposed claims. First, both parties’ claims were against the banks, which were alleged participants in the Ponzi scheme, based on conduct in furtherance of that scheme. Second, the alleged injury to the intervenors necessarily required injury to the receivership’s estate because both sought to recover for the perpetrators’ injury to the intervenors. Finally, any dollar one of the parties recovered for their respective claims would necessarily preclude independent recovery for that injury by the other party. Accordingly, the intervenors’ claims were dependent on and derivative of the assignees’ claims, the assignee had standing to assert claims on behalf of unnamed investors, and the denial of intervention would not prejudice the investors in any way.
III. Rotstain’s Impact
The Fifth Circuit’s decision expands the claims a receiver or its assignee may bring against an alleged perpetrator of a Ponzi scheme to include recovery on behalf of the estate’s investors when the investors’ claims are dependent on and derivative of those of the receivership estate.