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United States Securities & Exchange Commission v. ISC, Inc.

United States District Court, W.D. Wisconsin

April 7, 2016




Defendants ISC, Inc. and the Estate of Loren W. Holzhueter face several Wisconsin state court actions brought by the victims of the alleged securities fraud at issue in this case.[1]Defendants ask that this court enjoin these state court actions, and any future state court actions against defendants and relief defendants, until this federal case concludes. Dkt. 87, at 1. Because defendants have not shown that such an injunction is actually necessary to this court’s exercise of its jurisdiction, the court does not have the authority to grant the relief requested. The court will deny defendants’ motion.


The SEC initiated this case on January 21, 2015. Dkt. 1. On January 28, 2015, the court issued a temporary restraining order (TRO) against defendants. Dkt. 20. The TRO remains in effect and provides, in relevant part, that “defendants and each of their officers, agents, servants, employees, and those persons in active concert or participation with them . . . are hereby prohibited from . . . making any interest or principal payments to investors, pending the resolution of this action or further order of this court.” Id. at 3-4. The TRO froze defendants’ assets. Id. at 4-5.

On November 2, 2015, the court granted the parties’ joint motion for entry of partial judgment against defendants and entered consent judgments against ISC, Inc. and the Estate of Loren W. Holzhueter. Dkts. 79-81. The consent judgments provide, in relevant part, that defendants will “pay disgorgement of ill-gotten gains and prejudgment interest thereon; that the amounts of the disgorgement and civil penalty [ISC only] shall be determined by the Court upon motion of the Commission; and that the prejudgment interest shall be calculated from the date the ill-gotten gain was obtained[.]” Dkt. 80, at 3 and Dkt. 81, at 1. Neither defendant admitted or denied the allegations at issue.

On November 18, 2015, the court granted the parties’ joint motion to deposit Loren W. Holzhueter’s life insurance proceeds with the court. Dkt. 86. The assets remain frozen and will be available to “satisfy any agreement reached by the parties to this case or any remedy ordered by the Court.” Id. at 3. Thus, this court now has control over defendants’ assets and the life insurance proceeds.


Defendants phrase their motion as one seeking a “stay” of the state court actions, but they are actually asking the court to enjoin the state court plaintiffs from prosecuting their suits for a time. Defendants’ arguments would be better addressed to the state courts, but apparently that gambit has already failed. To win the injunction they seek from this court, defendants must make a very compelling showing of actual necessity.

Defendants contend that the injunction is needed to: (1) ensure that the court is able to timely and orderly resolve this action; (2) avoid depleting defendants’ assets and to maximize investor recovery; and (3) spare defendants the burden of having to litigate this case on multiple fronts. The SEC does not support the injunction because the risk of disparate treatment among the investor victims is low, and the state court actions do not threaten the court’s ability to promptly resolve this case at it sees fit. Dkt. 92. Some of the state court plaintiffs have appeared in this case to oppose the injunction, but they acknowledge that this court has control of defendants’ assets so that they will not be able to enforce any state-court judgment against defendants until this case is complete. Dkt. 94.

The Anti-Injunction Act prohibits the court from enjoining the state court actions. Even if it did not, the court is not persuaded that the injunction is needed to protect any important interests.

A. The Anti-Injunction Act prohibits the court from enjoining the state court actions

The Anti-Injunction Act provides that “[a] court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.” 28 U.S.C. § 2283. Courts construe these three exceptions narrowly. In re Diet Drugs, 282 F.3d 220, 233 (3d Cir. 2002) (citing Atl. Coast Line R.R. Co. v. Bhd. of Locomotive Eng’rs, 398 U.S. 281, 297 (1970)); see also Zurich Am. Ins. Co. v. Superior Court for Cal., 326 F.3d 816, 824 (7th Cir. 2003) (“Because of the Act’s constitutional foundation, its three exceptions are to be applied narrowly[.]”). “Any doubts as to the propriety of a federal injunction against state court proceedings should be resolved in favor of permitting the state courts to proceed in an orderly fashion to finally determine the controversy.” Atl. Coast, 398 U.S. at 297.

Because Congress has not expressly authorized the requested stay, the stay is authorized only if it is “necessary in aid of [this court’s] jurisdiction” or “to protect and effectuate its judgments.” “Both exceptions to the general prohibition of [§] 2283 imply that some federal injunctive relief may be necessary to prevent a state court from so interfering with a federal court’s consideration or disposition of a case as to seriously impair the federal court’s flexibility and authority to decide that case.” Id. at 294-95.

“Ordinarily, the ‘aid of jurisdiction’ exception to the Anti-Injunction Act applies only to parallel state in rem rather than in personam actions.” Winkler v. Eli Lilly & Co., 101 F.3d 1196, 1202 (7th Cir. 1996). Exceptions to this general rule typically include highly unusual complex cases, such as school desegregation cases, see Garcia v. Bauza-Salas, 862 F.2d 905, 909 (1st Cir. 1988), and complex multidistrict litigation, “where a parallel state court action threatens to frustrate proceedings and disrupt the orderly resolution of the federal litigation.” Winkler, 101 F.3d at 1202. But generally the necessary in aid of jurisdiction exception empowers federal courts to stay parallel state court actions “that might render the exercise of the federal court’s jurisdiction nugatory.” Id. at 1203. In other words, the injunction must be necessary. Adkins v. Nestle Purina PetCare Co., 779 F.3d 481, 485 (7th Cir.), cert. denied subnom., Nestle Purina PetCare Co. v. Curts, 136 S.Ct. 32 (2015) (“No matter what one makes of the word ‘jurisdiction’ in § 2283, an injunction is proper only when ...

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