429 F.

3d 438

UNITED STATES OF AMERICA

v.
ACORN TECHNOLOGY FUND, L.P. Leonard Barrack and
Lynne Barrack Appellants.
No. 04-3663.

United States Court of Appeals, Third Circuit.

Argued October 18, 2005.
Filed November 8, 2005.

COPYRIGHT MATERIAL OMITTED Paul G. Shapiro (Argued), Office

of the United States Attorney, Philadelphia, PA, Patrick K. McCoyd,
Tracey R. Seraydarian, Post & Schell, P.C., Philadelphia, PA, for the
Government, on behalf of the Small Business Administration.
Eric Kraeutler (Argued), G. Jeffrey Boujoukos, Catharine E. Gillespie,
Morgan, Lewis & Bockius LLP, Philadelphia, PA, for MovantsAppellants Leonard and Lynne Barrack.
Before VAN ANTWERPEN, ALDISERT and COWEN, Circuit Judges.
VAN ANTWERPEN, Circuit Judge.

Before us is an interlocutory appeal from an order denying Appellants' motion

to lift a stay of litigation which was entered pursuant to a receivership order.
Appellants Leonard and Lynne Barrack ("the Barracks") are attempting to bring
claims against Acorn Technology Fund, L.P. ("Acorn"), Acorn Technology
Partners, L.L.C. ("Acorn Partners"), and the Small Business Administration
("SBA"). The claims allege that the Barracks were fraudulently induced to
invest in Acorn, and subsequently lost money, due to mismanagement and lack
of disclosure. The United States District Court for the Eastern District of
Pennsylvania denied the Barracks' motion to lift the receivership stay after
determining that all their possible claims failed as a matter of law. We will
affirm the District Court's refusal to lift the stay, and in so doing, we will adopt
the standard of SEC v. Wencke, 742 F.2d 1230 (9th Cir.1984).

I.
2 FACTUAL BACKGROUND AND PROCEDURAL HISTORY
3

Acorn Technology Fund, L.P. was formed in New Jersey in 1999 as a Small
Business Investment Company ("SBIC") under section 301(c) of the Small
Business Investment Act ("SBIA") of 1958, 15 U.S.C. 681(c), which is
administered by the SBA. Acorn's general partner was Acorn Technology
Partners, L.L.C., a New Jersey company run by John Torkelsen. In early 1998,
Torkelsen convinced the Barracks to invest in Acorn beginning with a
$1,000,000 Subscription Agreement ("Subscription 1") executed on April 7,
1998. As part of the solicitation, on March 24, 1998, Torkelsen sent a letter to
the Barracks indicating that he was willing to do two things to "make it easier
for you to subscribe": 1) allow them to pay only $250,000 upon signing a
Subscription Agreement, followed by $250,000 annually over the next three
years; and 2) waive any penalties which would be imposed by the SBA if the
Barracks failed to fully pay the balance on their Subscription Agreement. The
Barracks returned a signed Subscription Agreement on April 9, 1998, along
with a check for $250,000 and a letter reciting that "You [Acorn Partners] have
agreed that if I choose to discontinue investing I will maintain my existing
position without penalty." The Barracks also signed a Limited Partnership
Agreement, section 3.4.2 of which permitted the general partner, with the
consent of the SBA, to reduce a defaulting limited partner's partnership share to
the amount of capital actually contributed.

The Barracks timely paid the first two installments of Subscription 1, bringing
their paid capital investment to $750,000. On September 15, 2000, they signed
a second Subscription Agreement ("Subscription 2") and promised an
additional $500,000. In 2001, though, the Barracks decided to exercise their
right-allegedly granted in the waiver letter-to discontinue investing without
penalty, and froze their total investment at $750,000.

In a matter initially unrelated to the Barracks, the United States brought suit in
the United States District Court for the Eastern District of Pennsylvania on
January 6, 2003, against Torkelsen, his wife and son, and his business
associate, under the Mail Fraud Injunction Act, 18 U.S.C. 1345, et seq.
United States v. Torkelson et al., No. 03-CV-0060 (E.D.Pa. Jan. 6, 2003). The
suit alleges that the Torkelsens used Acorn to obtain $32 million in federal
funds from the SBA, then invested the money in companies they controlled and
ultimately diverted it into their own accounts. On January 7, 2003, the United
States filed the instant suit to have Acorn placed in receivership based on
violations of the SBIA. The District Court appointed the SBA receiver on
January 17, 2003, as authorized by 15 U.S.C. 687c. As part of the
receivership order, the District Court imposed a stay on all civil litigation

"involving Acorn, the Receiver, or any of Acorn's past or present officers,

directors, managers, agents or general or limited partners," unless specifically
permitted by the court. Order for Operating Receivership, United States v.
Acorn Technology Fund, L.P., No. 03-cv-0070 (E.D.Pa. Jan. 17, 2003)
("Receivership Order").
6

The SBA, acting as receiver, filed suit against the Barracks to force them to pay
the $750,000 still outstanding on the two Subscription Agreements. United
States Small Bus. Admin., as Receiver for Acorn Tech. Fund, L.P. v. Barrack,
No. 03-cv-5992 (E.D.Pa. Oct. 29, 2003). The Barracks responded by filing a
motion with the receivership court which sought to have the stay of litigation
lifted, for the purpose of asserting, in the SBA's suit, counterclaims against the
SBA, Acorn, and Acorn Partners. On August 12, 2004, the District Court
denied the Barracks' motion in full and refused to lift the stay of litigation. This
appeal followed.

II. JURISDICTION AND STANDARD OF REVIEW

7

The District Court had jurisdiction over the receivership action pursuant to
section 308 of the SBIA, 15 U.S.C. 687(d); section 311 of the SBIA, 15
U.S.C. 687c(a); and section 2(5)(b) of the Small Business Act, 15 U.S.C.
634(b)(1). This Court has jurisdiction over this interlocutory appeal pursuant to
28 U.S.C. 1292(a)(1). We review de novo the District Court's application of
law in receivership proceedings. SEC v. Black, 163 F.3d 188, 195 (3d
Cir.1998). We exercise plenary review over applications of the Federal Tort
Claims Act's discretionary function exception. Mitchell v. United States, 225
F.3d 361 (3d Cir.2000). We review for abuse of discretion the procedures the
District Court chooses to follow in connection with the receivership
proceedings, including decisions to grant, deny, or modify an injunction. See
Black, 163 F.3d at 195; see also Am. Tel. & Tel. Co. v. Winback & Conserve
Program, Inc., 42 F.3d 1421, 1427 (3d Cir.1994).

III. ANALYSIS
8

In this Circuit we have not yet addressed the standard for a District Court to use
when considering whether to lift a receivership stay of litigation. Both parties
have urged this Court to adopt the standard laid out by the Ninth Circuit in SEC
v. Wencke, 622 F.2d 1363 (9th Cir.1980) ("Wencke I"), and SEC v. Wencke,
742 F.2d 1230 (9th Cir.1984) ("Wencke II") (collectively, "Wencke"). For the
reasons set forth below, we accept this invitation.

A. Wencke Standard

In a trilogy of cases in the early 1980s, the Ninth Circuit laid out factors a
District Court should consider when deciding whether to partially or wholly lift
a stay of litigation entered pursuant to a receivership order. The court in
Wencke I affirmed the inherent power of a District Court to enter a valid stay of
litigation effective even against nonparties to the receivership action. 622 F.2d
at 1369. 1 The court then addressed, somewhat abstractly, the relevant issues
presented when deciding whether to exempt a party from the litigation bar. Id.
at 1373-74. The Wencke II court, faced with an appeal of the district court's
refusal to lift the same stay of litigation, set forth a three-part test to be used by
a District Court:

10

"(1) [W]hether refusing to lift the stay genuinely preserves the status quo or
whether the moving party will suffer substantial injury if not permitted to
proceed; (2) the time in the course of the receivership at which the motion for
relief from the stay is made; and (3) the merit of the moving party's underlying
claim."

11

Wencke II, 742 F.2d at 1231.

12

In reviewing a district court's refusal to lift a different receivership stay of

litigation, the Ninth Circuit reaffirmed the three Wencke factors and clarified
that they differ from the normal criteria used by courts for preliminary
injunctions. SEC v. Universal Fin., 760 F.2d 1034, 1038 (9th Cir.1985). The
test "simply requires the district court to balance the interests of the Receiver
and the moving party.... [T]he interests of the Receiver are very broad and
include not only protection of the receivership res, but also protection of
defrauded investors and considerations of judicial economy." Id.

13

We agree. Given how rare non-bankruptcy receiverships are, it is not surprising

that we have not yet faced this exact issue2 -or that few courts around the
country have done so. The purposes of a receivership are varied, but the
purpose of imposing a stay of litigation is clear. A receiver must be given a
chance to do the important job of marshaling and untangling a company's assets
without being forced into court by every investor or claimant. Nevertheless, an
appropriate escape valve, which allows potential litigants to petition the court
for permission to sue, is necessary so that litigants are not denied a day in court
during a lengthy stay.

14

A district court should give appropriately substantial weight to the receiver's

need to proceed unhindered by litigation, and the very real danger of litigation
expenses diminishing the receivership estate. At the same time, we agree with

the Wencke courts that the interests of litigants also need to be considered. Far
into a receivership, if a litigant demonstrates that harm will result from not
being able to pursue a colorably meritorious claim, we do not see why a
receiver should continue to be protected from suit. Cf. Wencke II, 742 F.2d at
1232 (reversing the district court's refusal to lift the stay, seven years into the
receivership when the receiver was about to distribute assets and thereby
disturb the status quo of the estate). On the other hand, very early in a
receivership even the most meritorious claims might fail to justify lifting a stay
given the possible disruption of the receiver's duties.
15

We note that when it is asked to lift a stay it would usually be improper for a
district court to attempt to actually judge the merits of the moving party's
claims at such an early point in the proceedings. A district court need only
determine whether the party has colorable claims to assert which justify lifting
the receivership stay. See Wencke II, 742 F.2d at 1232. If it appears that a claim
has no merit on its face, that of course may end the matter. But, if a claim may
have merit-and factual development may be necessary to assess this-the district
court will have to address the other Wencke factors.

16

The experiences of other courts dealing with the Wencke standard are
instructive. To the best of our knowledge, district courts in three other Circuits
besides the Ninth, when considering whether to lift a receivership stay of
litigation, have adopted or used the Wencke standard to guide their inquiry. A
Maryland district court partially lifted a stay to allow a foreclosure action
against property on which the receivership estate also had a judgment lien.
United States v. ESIC Capital, Inc., 685 F.Supp. 483 (D.Md.1988). The district
court admitted that the receivership was only two years old, but concluded that
the merits of the asserted claim were "substantial," and that the movant would
suffer "substantial injury" if the claim were not allowed to proceed. Id. at 48586. The district court noted that a simple foreclosure action would be "painless
for all concerned." Id. at 486. A New York district court stated that it would
have "compare[d] the interest of the receiver and the moving party," but found
it unnecessary where the receiver did not object to the partial lifting of a stay.
United States v. First Wall St. SBIC, L.P. (S.D.N.Y. June 26, 1998), 1998 U.S.
Dist. LEXIS 9487, at *4 (quoting ESIC Capital, 685 F.Supp. at 485, which
cited Universal Financial for the Wencke premise).

17

Most recently, a district court in Illinois refused to lift a stay of litigation where
the receivership had only been in place for three months, the estate's finances
were complex, and the movants could not show that they would suffer
substantial injury absent permission to sue. FTC v. 3R Bancorp, 2005 WL
497784 (N.D.Ill. Feb. 23, 2005), 2005 U.S. Dist. LEXIS 12503. The 3R

Bancorp court relied solely on the first and second Wencke factors, while
appearing to assume that the claim might have merit. Id. at *9; see also FTC v.
Med Resorts Int'l, Inc., 199 F.R.D. 601 (N.D.Ill.2001) (finding that the first and
second Wencke factors, which tipped in the direction of maintaining the
receivership stay, outweighed the admittedly strong merits of the asserted
claim). Ninth Circuit courts also have continued to use the standard. See, e.g.,
SEC v. Capital Consultants, LLC, 2002 WL 31470399 (D.Or. Mar. 19.2002),
2002 U.S. Dist. LEXIS 6775; SEC v. TLC Invs. & Trade Co., 147 F.Supp.2d
1031 (C.D.Cal.2001); SEC v. Am. Capital Invs., 98 F.3d 1133 (9th Cir. Oct. 22,
1996), 1996 U.S.App. LEXIS 27685 (NPO).
18

After consideration of the Wencke factors and their application by courts which
have subsequently followed the standard, we are of the view that the Wencke
test strikes an appropriate balance between allowing a litigant to choose the
timing of his day in court, and respecting the purposes of a receivership stay.
Accordingly, we adopt the Wencke standard for use in determining whether to
lift a receivership stay. In the future we will review a District Court's decision
on whether to lift the receivership stay for abuse of discretion, just like any
other choice of procedures chosen by a District Court to effectuate a
receivership proceeding. See Black, 163 F.3d at 195; Am. Tel. & Tel. Co., 42
F.3d at 1427; accord Wencke II, 742 F.2d at 1231 ("In reviewing the district
court's application of this test and ultimate decision, we apply an abuse of
discretion standard.").

19

Since the District Court did not use Wencke despite the urging of the parties,
we must decide whether to remand this case. We agree with the Ninth Circuit
that "[w]here the claim is unlikely to succeed (and the receiver therefore likely
to prevail), there may be less reason to require the receiver to defend the action
now rather than defer its resolution." Wencke I, 622 F.2d at 1373. For the
reasons set forth below, we agree that the Barracks' claims against the SBA
must fail as a matter of law, and that their mismanagement claims can only be
brought derivatively and therefore also fail as a matter of law. As a result we
have no need to send these claims back to the District Court for consideration
under Wencke, and we will affirm the District Court's refusal to lift the stay as
to these claims for that reason. As described below, although the District Court
erred in concluding that the Barracks' fraud in the inducement claim was
derivative, the record is sufficiently developed to allow this Court to apply the
Wencke standard to that claim.

B. Claims Against the SBA

20

The Barracks would like to assert two classes of claims against the SBA: first,

against the SBA as a preferred limited partner3 of Acorn for breach of fiduciary
duties allegedly owed to the Barracks as co-limited partners; and second,
against the SBA for breach of "its statutory and regulatory duties as regulator of
Acorn, an SBIC." Motion of Leonard & Lynne A. Barrack for Partial Lifting of
Receivership Stay & Injunction, United States v. Acorn Tech. Fund, L.P., No.
03-cv-0070 (E.D.Pa. Nov. 24, 2003). The District Court concluded that the
receivership stay should not be lifted to allow the assertion of these claims
because they were without merit as a matter of law. Order Denying Motion to
Modify Stay at *15, United States v. Acorn Tech. Fund, L.P., No. 03-cv-0070
(E.D.Pa. Aug. 12, 2004) ("District Court Order"). We agree, and will affirm
the District Court as to any claims against the SBA.
21

The Federal Tort Claims Act, 28 U.S.C. 1346(b), 2671 et seq., is the
exclusive method for suing an administrative agency in tort for monetary
damages. 28 U.S.C. 2679. The so-called discretionary function exception
bars:

22

"Any claim based upon an act or omission of an employee of the Government,

exercising due care, in the execution of a statute or regulation, whether or not
such statute or regulation be valid, or based upon the exercise or performance
or the failure to exercise or perform a discretionary function or duty on the
part of a federal agency or an employee of the Government, whether or not the
discretion involved be abused."

23

28 U.S.C. 2680(a) (emphases added).

24

The Barracks' claims against the SBA for breaching "statutory and regulatory
duties" obviously fall within the discretionary function exception and cannot be
maintained. The Barracks argue that their other claims against the SBA were
not based on the SBA's actions as regulator, but on the SBA's actions as a
preferred limited partner of and investor in Acorn. The SBA supposedly learned
that the Torkelsens were looting and otherwise mismanaging Acorn, but failed
to tell the other investors, thereby depriving them of this superior information
and the opportunity to stop investing. The SBA also, according to the Barracks,
erred by not imposing sanctions after these misdeeds were discovered. These
actions allegedly breached a fiduciary duty owed by the SBA to co-limited
partners. 4 Therefore, the Barracks claim, the suit is not barred by the
discretionary function exception. Unfortunately, the Barracks have shown no
support for this distinction, nor can we find any.

25

The SBA provides leverage to a limited partnership SBIC in part by buying

participating securities and becoming a preferred limited partner. 15 U.S.C.

683. The SBA does gain payment priority over other limited partners, as the
Barracks stress. 15 U.S.C. 683(g)(2). All SBICs are also required to supply
information to the SBA, and the SBA must examine each SBIC every two
years. 15 U.S.C. 687b(b)-(c) The SBA inevitably, therefore, has superior
information to the other investors in an SBIC. This informational advantage is
solely the result of the SBA's position as regulator, however, as is the SBA's
mere presence as a preferred limited partner. The Barracks acknowledge this
fact, but still assert that suit against the SBA-as-investor should stand.
Appellant Br. at *27-28. The Barracks produce no precedent or support for this
position beyond bare assertions. Any suit based on this superior information is
fundamentally based on the SBA-as-regulator-not as investor. Even if a
preferred limited partner owed a fiduciary duty to other limited partners, the
Barracks' suit against the SBA cannot be characterized as against another
investor-the acts challenged here were taken by the SBA pursuant to its
regulatory duties.
26

We next address whether the SBA's actions here involved discretion, or merely
ministerial acts unprotected by the discretionary function exception. The
District Court concluded that all of the SBA's acts in question involved
"decision[s] committed to the sound discretion of the agency." District Court
Order at *18. The Barracks fail even to raise the issue of whether the SBA's
actions were discretionary or ministerial, but claim simply that the SBA erred
by failing to impose sanctions on Acorn, by negotiating with Acorn Partners to
lower management fees, and by failing to inform the Barracks of Acorn's
mismanagement. Each of these acts was undeniably taken by the SBA in the
exercise of its discretion, and involved "element[s] of judgment or choice."
United States v. Gaubert, 499 U.S. 315, 322, 111 S.Ct. 1267, 113 L.Ed.2d 335
(1991) (quotation marks omitted). The SBA's decisions regarding sanctions and
management fees were "grounded in the social, economic, or political goals of
the statute and regulations," id. at 323, 111 S.Ct. 1267, and were not contrary to
those statutes or regulations. Cf. Berkovitz v. United States, 486 U.S. 531, 54243, 108 S.Ct. 1954, 100 L.Ed.2d 531 (1988). The FTCA bars suits based on
discretionary decisions. The SBA's decisions fall squarely within the
discretionary function exception.

27

We conclude that regardless of attempted characterization as regulator or

investor, the Barracks are attempting to sue the SBA for its discretionary
judgment decisions as regulator of Acorn, and run afoul of the FTCA's
discretionary function bar. We will therefore affirm the District Court's refusal
to lift the stay as to these claims, since if the claims are barred as a matter of
law, they cannot be colorably meritorious under Wencke.

C. Mismanagement Claims Against Acorn

28

The Barracks next seek permission to sue Acorn and Acorn Partners for
mismanagement, alleging that if Acorn had not been mismanaged by
Torkelsen, and if Torkelsen had not told them that Acorn was being managed in
accordance with federal and state laws, they would not have invested or
continued to invest. Appellant Br. at *21, 23. The District Court concluded that
these claims could only be brought in a derivative suit by the SBA as receiver
for Acorn, and therefore the receivership stay should not be lifted to allow their
assertion by the Barracks individually. District Court Order at *10. We agree.

29

The Barracks' claim, despite creative characterization, reduces to an allegation

that they would not have invested, or have lost money on capital already
invested, if the company had been properly managed or had disclosed the
mismanagement. In this, the Barracks suffered the same wrong as all other
investors in Acorn-management misled them as to how the company was being
run, and its compliance with various laws, and as an indirect result their
investments lost value. There was no special wrong done to the Barracks-the
wrong was to the partnership, which lost almost all of its capital as a result of
the Torkelsens' alleged looting. This is a classic derivative claim under the
Revised Uniform Limited Partnership Act, which New Jersey has adopted. N.J.
Stat. Ann. 42:2A-1 to 42:2A-73. The Receivership Order granted all powers
possessed by Acorn's limited partners under state and federal law-including the
ability to bring derivative suits on behalf of the partnership-to the SBA as
receiver. Receivership Order at *2.

30

We conclude that since the Barracks suffered no direct wrong as a result of the
mismanagement and lack of compliance with securities laws, independent of
the wrong to the partnership itself, the Barracks cannot bring this claim
individually. Since the claim fails individually as a matter of law, the District
Court did not err in refusing to lift the receivership stay to allow its assertion.

D. Fraud in the Inducement Claims Against Acorn

31
32

The Barracks' finally seek to assert claims against Acorn and Acorn Partners for
fraudulently inducing them to invest based on the penalty waiver given by
Torkelsen.5 The District Court concluded that these claims too were derivative
in nature and therefore failed as a matter of law. District Court Order at *11,
14-15. Here, we disagree with the District Court.

33

The District Court correctly acknowledged that fraud in the inducement claims

are generally individual claims. District Court Order at *13 (citing Golden Tee,
Inc. v. Venture Golf Sch., Inc., 333 Ark. 253, 969 S.W.2d 625 (1998)).
However, the District Court characterized the Barracks' only damages as
"diminution in value of their investment." Id. On the contrary, the Barracks
may have suffered a wrong independent of the general wrong to the partnership
from mismanagement, and separate from any other investor, by an invalid
waiver extended to them by Torkelsen. The Barracks may be able to make out a
colorable individual claim for fraud in the inducement; therefore it was error
for the District Court to prematurely conclude that the claim failed as a matter
of law for want of being brought derivatively.
34

It is not the end of our inquiry, though, to conclude that the fraud in the
inducement claims can be properly brought individually instead of only
derivatively. The claims could of course still lack merit.

35

Fraud in New Jersey requires "(1) a material misrepresentation of a presently

existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3)
an intention that the other person rely on it; (4) reasonable reliance thereon by
the other person; and (5) resulting damages." Banco Popular N. Am. v. Gandi,
184 N.J. 161, 876 A.2d 253, 260 (2005) (quoting Gennari v. Weichert Co.
Realtors, 148 N.J. 582, 691 A.2d 350, 367 (1997)); see also Travelodge Hotels,
Inc. v. Honeysuckle Enters., 357 F.Supp.2d 788, 796 (D.N.J.2005) (citing these
factors as constituting fraud in the inducement in New Jersey). The District
Court concluded that the waiver was inherently invalid and the Barracks'
reliance on it, unreasonable as a matter of law. Id. at *14. These conclusions
were premature.

36

Torkelsen's letters extending the penalty waiver, as head of Acorn's general

partner, purported to "waive penalties in advance" for failing to fulfill a
subscription agreement, and thereby allow the Barracks in the future to make
additional capital contributions if they so wished. A59. Section 3.4.2. of the
Limited Partnership Agreement, though, states that the "General Partner may,
in its sole discretion (and with the consent of SBA given as provided in Section
5.2. of this Agreement), elect to declare, by notice" that the limited partner's
commitment is reduced to the capital contribution already made, discharging
further obligation to Acorn. Id. (emphasis added). The District Court stated,
without factual inquiry, that "it is clear that SBA consent was never obtained by
or for the benefit of the Barracks." District Court Order at *14. The issue is not
so clean-cut. The Limited Partnership Agreement makes provision for the SBA
to consent by silence:

37

"If the Partnership has given the SBA thirty (30) days prior written notice of

any proposed legal proceeding, arbitration or other action under the provisions
of the Agreement with respect to any default by a Private Limited Partner in
making any capital contribution to the Partnership required under the
Agreement and for which SBA consent is required as provided in Section
5.2.3., and the Partnership shall not have received written notice from the SBA
that it objects to such proposed action within such thirty (30) day period, then
SBA shall be deemed to have consented to such proposed Partnership action."
38

Limited Partnership Agreement 5.2.4. (emphases added).

39

The District Court did not address the issue of consent by silence. If such
consent did issue, then the Barracks' reliance on the waiver may have been
reasonable, and they might be able to make out a colorable fraudulent
inducement claim.

40

The SBA conceded at argument that the Barracks' fraud in the inducement and
breach of contract claims might have merit, and therefore may satisfy the third
prong of Wencke depending on discovery. We must therefore address the other
Wencke factors.

41

We first ask "whether refusing to lift the stay genuinely preserves the status quo
or whether the moving party will suffer substantial injury if not permitted to
proceed." Wencke II, 742 F.2d at 1231. The Barracks claim that the SBA has
already disturbed the status quo by filing suit to recover the money allegedly
due on the Subscription Agreements. See, e.g., Appellant Br. at *13 ("[T]he
Receiver's actions belie any purported interest in maintaining the status quo.").
This argument misunderstands the purpose and practice of a receivership. One
of the SBA's key functions as receiver is to marshal the receivership estate's
assets. The SBA's suit against the Barracks is simply one step in that direction.
The Wencke II court, the only court to ever find that the receiver was the party
seeking to disturb the status quo, was faced with the far different situation
where the receiver was preparing to distribute the assets. 742 F.2d at 1231. That
is simply not the case here.

42

The Barracks next argue that they would "suffer substantial injury" if the stay
is not lifted, "because of the real possibility that they would be precluded from
asserting those claims in the future." Appellant Br. at *13. We find this
argument unpersuasive for two reasons. First, as noted by the SBA, the
Barracks can obtain discovery in the original SBA-Barrack suit. Government
Br. at *36, 47 n. 8. This discovery should help illuminate the question of the
waiver's validity. We do not comment on the issue of whether the availability

of a defense has any bearing on the ability of a party to bring a counterclaim.

However, since successful assertion of the waiver in either posture would result
in a discharge of the Barracks' obligation to make future payments, we do not
see how refusing to order the stay lifted would result in substantial injury.
Second, while it is true that if the waiver is invalid, the Barracks would prefer
to seek rescission of both Subscription Agreements and the return of their
$750,000, this argument in no way shows that substantial injury would result if
the Barracks were forced to wait until the SBA was finished disentangling the
receivership estate. Where other courts have found the first Wencke factor to tip
in favor of lifting a receivership stay, the degree of injury has been far more
severe. For instance, in ESIC Capital, an unemployed single mother was unable
to support herself absent regaining control of contested real estate. 685 F.Supp.
at 485. Likewise, in Wencke II, the receiver was preparing to distribute stock to
other investors, against whom the petitioning shareholders might have had no
legal recourse. 742 F.2d at 1232. What is not sufficient is a clear attempt by the
Barracks to withdraw funds from the receivership estate before the receiver is
ready to distribute funds to all creditors. Not being allowed the first bite at the
apple is not the kind of substantial injury we will recognize under the first
prong of Wencke.
43

We will next address the second Wencke factor, the "time in the course of the
receivership at which the motion for relief from the stay is made." Wencke II,
742 F.2d at 1231. Contrary to the Barracks' assertions, the SBA has not
"conceded that the timing is proper" by filing suit to recover the Barracks'
subscription funds. Appellant Br. at *13. As we have already said, the very
purpose of a receiver is to collect and disentangle a receivership estate's assets,
including debts owed to it. In carrying out that purpose, the receiver simply
does not consent to the bringing of a counterclaim by every debtor.

44

When the Barracks first asked the District Court to lift the stay, the receivership
had been in place for only ten months. It has now been in effect for 30-36
months. We are reluctant to set a clear cut-off date after which a stay should be
presumptively lifted. The second Wencke prong is inherently case-specific, and
of course, merely one of three linked considerations. The Wencke II court lifted
a stay after seven years, but focused primarily on the fact that no new facts had
been discovered in six years, and that the receiver was ready to distribute the
assets. 742 F.2d at 1232. The Wencke I court had refused to lift the same stay
after a mere two years. Wencke I, 622 F.2d at 1374; see also ESIC Capital, 685
F.Supp. at 485 ("[T]his motion comes at a fairly youthful age of the
receivership two years since its inception."). The Ninth Circuit in Universal
Financial denied a motion to lift a four-year-old stay where "material facts
continue to come to light." 760 F.2d at 1039. In this case, where the alleged

fraud encompassed many individuals and companies, we cannot say that the
timing factor tips in the Barracks' favor. See 3R Bancorp, 2005 U.S. Dist.
LEXIS 12503, at *9.
45

Upon consideration of all three Wencke factors, even though the Barracks'
proposed claims may have merit, the other factors do not weigh in favor of
allowing them to assert these claims at the present time. While it is true that "
[t]he receivership cannot be protected from suit forever," Wencke II, 742 F.2d
at 1231, we find that the Barracks have not carried their burden of proving that
the stay should be lifted.

IV. CONCLUSION
46

We conclude that the District Court erred in determining that Appellants' fraud
in the inducement claims a) could only be brought derivatively; and b) were
without merit as a matter of law. However, based on an analysis of the other
Wencke factors set forth by the Ninth Circuit for determining whether to lift a
stay on litigation entered pursuant to receivership proceedings, we affirm the
District Court's refusal to lift the stay as to these claims. Since non-colorable
claims also present no basis for lifting a receivership stay, we affirm the
District Court's refusal to lift the stay to allow the assertion of mismanagement
claims against Acorn or Acorn Partners, and any claims against the SBA.

Notes:
1

Similar to the instant case, the SEC brought suit inWencke to have a receiver
appointed to manage and investigate the assets of several companies and their
controlling individuals after allegations of looting and fraudulent transactions.
The district court appointed a receiver and issued an injunction staying all
persons from continuing or initiating proceedings against receivership entities
without leave of the court. Wencke I, 622 F.2d at 1367 & n. 4. A nonparty to
the receivership action sought to have the receivership stay lifted to allow it to
enforce a state court judgment which had granted it a leasehold interest in and
possession of one of the receivership entities. Id. at 1366.

InSEC v. Black, 163 F.3d 188 (3d Cir.1998), we affirmed a district court's
partial lifting of an asset freeze order which was entered in receivership
proceedings. There, though, the district court realized that its initial injunction
had been overbroad and the court in fact did not have power over the funds in
question. Id. at 196. This Court therefore did not have the opportunity to reach
the question of the standard to use where the district court chose (or declined) to

modify an injunction over issues within its jurisdiction. Cf. id. at 197 (finding
the third case in the Wencke trilogy, SEC v. Universal Financial, 760 F.2d 1034
(9th Cir.1985), inapposite "because it relates to a stay of legal proceedings, as
opposed to a freeze of assets, applicable to a nonparty").
3

Pursuant to 15 U.S.C. 683, the SBA purchased participating securities-in the

form of a preferred limited partnership interest-from Acorn

Even if the Barracks' claims were not barred by the FTCA, we note that they
have produced no New Jersey law to support the argument that a limited partner
has a fiduciary duty to other limited partners. However since we conclude that
these claimsare barred, we will not address the fiduciary duty issue.

The Barracks also assert claims based on an alleged breach of the waiver
agreement, but these claims depend on whether a valid waiver existed, and are
only an argument-in-the-alternative to the fraud in the inducement claim. Since
as noted the SBA conceded at argument that either of these claims might have
merit, we will address the claims jointly