Wednesday, May 23, 2018

To the Intervenors Go the Spoils

People v. Investco Mgm’t & Dev. LLC, No. A143307 (D1d4 Apr. 18, 2018)

The Department of Business Oversight settled a blue sky case against a real estate Scheme and its Promoters. The injunction that was entered entailed the appointment of a special master to sell some assets in order to generate cash to pay off the investors in the Scheme. But it left the Promoters in place to otherwise manage the Scheme.


Some of the Scheme’s Victims brought blue sky claims of their own. Sensing a limited fund situation, the DBO joined the Scheme’s motion to modify the injunction to effectively stay the Victim cases. That way the special master could sell of property in an orderly fashion and permit all of the victims to recover pro rata, instead of rewarding those who raced to the courthouse with a greater share of the pie.

Victims then “specially appeared” in the DBO case, arguing that they couldn’t be involuntarily bound to the settlement and that even with the special master in place, the Principals still had too much control over the ongoing operations. Ultimately, they persuaded the court to amend the injunction to have the special master take full control of the Scheme, effectively putting it into receivership. And it permitted the Victims’ cases to proceed against at least some of the Scheme entities.


Victims then sought to recover their attorneys’ fees under Code of Civil Procedure § 1021.5, which codifies the private attorney general doctrine. The court awarded $150k, jointly and severally against the DBO and the Scheme. Everyone appealed.


The Court of Appeal holds that the trial court didn’t abuse its discretion in awarding fees, because the elements of recovery under § 1021.5 were supported by substantial evidence. 


(1) The Victims were successful. Their participation was essential in causing a more favorable recovery for the entire pool of investors. 


(2) In the context of the case, both the DBO and the defendants were opposing parties. Even if the DBO’s interests were technically aligned with the Victims, its procedural posture was not. 


(3) The Victims were enforcing an important right in the public interest. They were enforcing California’s blue sky laws and preventing the entry of a settlement that could have had significant negative impacts on the broader class of victimized investors. 


(4) For basically the same reason, the Victims achieved a significant on behalf of a large class of persons.


(5) Private enforcement was clearly necessary, because, as the court ultimately found, public enforcement resulted in an inadequate settlement. 


And (6) the cost of the Victims’ victory was out of proportion with their individual stake in the case. Although the victims have the potential for real recoveries in the cases they filed, they didn’t have similar incentive to get involved in this case to attack the settlement.


Affirmed.

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