United States Court of Appeals
                                                                  Fifth Circuit
                                                               F I L E D
         UNITED STATES COURT OF APPEALS
                                                               October 14, 2005
                  FIFTH CIRCUIT
                                                           Charles R. Fulbruge III
                        ____________                               Clerk
                        No. 04-50080
                        ____________


SECURITIES AND EXCHANGE COMMISSION,


                    Plaintiff-Appellee,

versus


GREAT WHITE MARINE & RECREATION, INC; ET AL,


                    Defendants

GREAT WHITE MARINE & RECREATION, INC,

                    Defendant-Appellee

versus

AUGUSTINE FUND, LP,

                    Appellant

versus

CLARK B. WILL,

                    Appellee



         Appeals from the United States District Court
              For the Western District of Texas
 Before REAVLEY, JONES, and GARZA, Circuit Judges.

 EMILIO M. GARZA, Circuit Judge:

        This is an appeal from a distribution order of funds obtained in a civil action brought by the

Securities and Exchange Commission (“SEC” or “Commission”) against Great White Marine and

Recreation, Inc. (“Great White”) and its president and chief executive officer, Alvis Colin Smith, Jr.

The district court abstained from and dismissed Great White’s bankruptcy pursuant to 11 U.S.C. §

305(a), and distributed the funds in equity. Augustine Fund, L.P. (“Augustine”) ))a creditor who

would receive nothing under the distribution))appeals, claiming that the funds were part of the

bankruptcy estate and that the district court erred by placing equity holders before creditors.

                                                    I

        In July of 1999, the SEC brought an action against Great White and Smith for fraudulent

distribution of unregistered securities in the United States District Court for the Western District of

Texas. The SEC sought injunctive relief, disgorgement, prejudgment interest and civil penalties. On

August 25, 2000, the district court entered an order staying all claims against Great White. The

district court appointed an agent to collect, liquidate and disburse assets pursuant to a future order or

judgment for disgorgement. This order specifically precluded anyone from initiating bankruptcy

proceedings without the court’s permission. The court appointed Clark Will as the agent (“Agent”).

In June of 2001, the SEC, Smith and Great White settled. Smith consented to pay $3 million and turn

over various property to the Agent to establish a Disgorgement Estate.

        On August 15, 2001, Augustine filed an involuntary bankruptcy proceeding against Great

White in the Bankruptcy Court of the Northern District of Illinois. Augustine asserted a claim for over

$1 million, based on an April 20, 1999 note. The Agent moved to transfer the venue to the district


                                                   2
court in Waco. The Illinois bankruptcy court entered an order of relief under Chapter 7, appointed

a trustee, and deferred a ruling on the transfer of venue. The district court in this case issued an order

for Augustine to show cause why it should not be held in contempt for violating the stay. In

November of 2001, the district court found that Augustine had violated the stay order and ordered it

to file an agreed order in the Illinois bankruptcy court to transfer the proceeding to the district court

in Waco. In its December 2001 Order Enforcing the Stay, the district court wrote that it “is genuinely

dissatisfied that [Augustine has] not effectuated the transfer of the bankruptcy case to this court.”

After the transfer to Waco, the district court superceded its “Findings of Fact, Conclusions of Law and

the ‘so ordered’ provisions” of the November and December orders.

        The Commission and Agent filed a motion asking the Waco district court to abstain pursuant

to 11 U.S.C. § 305(a). The district court granted the motion, abstaining from and dismissing the

bankruptcy proceeding. Augustine thus filed its claim with the Agent. Subsequently, the district court

issued a Memorandum Opinion and Order adopting the Agent’s recommendation with regard to

payment of claims. The Agent recommended equitable subordination of Augustine’s claim, providing

distribution to Great White’s defrauded investors at $.08 per share. Augustine would receive nothing.

The Agent wrote, “[w]ith regard to Augustine Fund, the Court is well aware of its chicanery in this

matter. The actions and activities of Augustine in filing an involuntary bankruptcy, and seeking to

appropriate the entire Disgorgement Estate, to the exclusion of all other claimants, mitigates equitably

against them.” The district court agreed, writing, “[i]n knowing and willful contravention of the

Court’s order, Augustine filed its bankruptcy in Chicago without seeking leave of the Court.” The

district court added, “[n]ow although more than $100,000 of the Estate’s money was spent defending

the improperly filed bankruptcy, Augustine still seeks more money from the Estate to such an extent


                                                    3
that no shareholder would receive any compensation.”

        Augustine appeals the Distribution Order. There are two issues on appeal: (1) whether the

funds of the Disgorgement Estate belong to the Bankruptcy Estate; and (2) whether the district court

erred by disbursing assets to equity holders before creditors.

                                                    II

        Augustine argues that the funds of the Disgorgement Estate belong to the bankruptcy estate

because Smith misappropriated funds from Great White. This argument fails. In its abstention order,

the district court dismissed with prejudice the bankruptcy proceeding. Therefore, there is no

bankruptcy estate. See In re Herberman, 

, 278 (Bankr. W.D. Tex. 1990) (“An estate

is a separate legal identity, created on (and by) the filing of a bankruptcy petition, and continuing until

confirmation, conversion, or dismissal of the case.”). Without a bankruptcy estate, there can be no

property of a bankruptcy estate. See 11 U.S.C. § 349(b)(3) (a dismissal “revests the property of the

estate in the entity in which such property was vested immediately before the commencement of the

case under this title”).

        Augustine cites In re F.D. Roberts Securities, Inc. for the proposition that an order directing

disgorgement “would conflict with [the bankruptcy court’s] control of the property of the estate and

the result would be the surrender of money or property by the Debtor to the detriment of the general

unsecured creditors of the estate.” 

, 492-93 (Bankr. D. N.J. 1990). Here, the district

court abstained from and dismissed the bankruptcy action. Therefore, there is no concern of

interference with the bankruptcy court’s control over the property of the estate, and In re F.D. Roberts

Securities, Inc. is inapplicable. Similarly, Augustine cites Bilzerian v. SEC (In re Bilzerian), for the

proposition that the “payment of any disgorgement award will be subject to the applicable provisions


                                                    4
of the Bankruptcy Code and the control of [the bankruptcy] court.” 

, 873 (Bankr. M.D.

Fla. 1992). In Bilzerian, the court interpreted the impact of 11 U.S.C. § 362(b)(4), an automatic stay

provision that precludes payment of disgorgement awards in bankruptcy proceedings. Since the

Distribution Award is not governed by the Bankruptcy Code, the automatic stay provision does not

apply.

                                                   III

         August ine contends that even if the funds were not property of the bankruptcy estate, the

district court erred by granting priority to equity holders over creditors in its distribution. This court

reviews equitable distributions for abuse of discretion. See SEC v. Forex Asset Mgmt. LLC, 

, 332 (5th Cir. 2001) (“the district court . . . was afforded the discretion to determine the most

equitable remedy . . . . We will not disturb a district court’s permissible exercise of discretion on

appeal.”). The district court has broad powers and wide discretion in equitable distributions. See, e.g.,

SEC v. Fischbach, 

, 175 (“The crafting of a remedy for violations of the 1934 Act lies

within the district court’s broad equitable discretion.”); SEC v. Safety Fin. Serv., Inc., 

,

372-73 (5th Cir. 1982) (quoting SEC v. Lincoln Thrift Ass’n, 

, 606 (9th Cir. 1978)) (“It

is a recognized principle of law that the district court has broad powers and wide discretion to

determine the appropriate relief in an equity receivership.”).

         Augustine argues that the district court erred by not distributing the funds according to 11

U.S.C. § 510(b), which subordinates claims for violations of securities laws to claims of creditors.

This argument is meritless. The statute itself notes its limited reach: “[f]or the purpose of distribution

under this title . . .” 11 U.S.C. § 510(b) (emphasis added). The district court did not distribute assets

under the Bankruptcy Code; therefore, the priorities mandated by the bankruptcy code are


                                                    5
inapplicable.1

        The district court found that Augustine’s conduct was sufficiently egregious to equitably

subordinate its claims. In its Abstention Memorandum and Order, the district court wrote

         It has appeared from the beginning that the involuntary bankruptcy was asserted late
         in the process and long after the commencement of the Civil Action for the sole
         purpose of depriving the defrauded victims of their rightful restitution by giving an
         enormous percentage of the funds collected by the Agent to the creditors.

In adopting the Agent’s recommendations with regard to the payment of claims, the district court

wrote, “[i]n knowing and willful contravention of the Court’s order, Augustine filed its bankruptcy

in Chicago without seeking leave of the Court.” The district court added, “[n]ow although more than

$100,000 of the Estate’s money was spent defending the improperly filed bankruptcy, Augustine still

seeks more money from the Estate to such an extent that no shareholder would receive any

compensation.”

        Augustine claims that these findings are clearly erroneous and that the district court thus

abused its discretion in its equitable distribution of the Disgorgement Estate.           We disagree.

Augustine’s general counsel conceded that it was aware of the SEC’s action before it sought Great

White’s bankruptcy in August of 2001. In addition, the Agent had a conversation with Augustine’s

accountant before August of 2001, in which he explained that there were generally stay orders in these

cases. The docket states, “Ordered that all claims against Great White Marine & Recreation, Inc. be

stayed until further order of the Court, and that such other claims may only be asserted in this action.”

There were no further orders releasing the stay. Thus, the district court’s findings are not clearly


         1
            Had the district court utilized the Bankruptcy Code, it may have still been able to
 subordinate Augustine’s claims under 11 U.S.C. § 510(c)(1) which permits courts to, “under
 principles of equitable subordination, subordinate for purposes of distribution . . . all or part of an
 allowed interest to all or part of another allowed interest.” 11 U.S.C. § 510(c)(1).

                                                   6
erroneous, and it was within the district court’s discretion to equitably subordinate Augustine’s claims.



                                                   IV

        Augustine failed to show that the district court abused its discretion in its equitable

distribution of the Disgorgement Estate. Accordingly, the district court’s order is AFFIRMED.




                                                   7
EDITH H. JONES, Circuit Judge, dissenting:

               With due respect, I dissent from Part III of the majority opinion, which upholds the

district court’s decision to “equitably subordinate” Augustine’s claim as a creditor to those of

Great White’s shareholders. In my view, the district court’s findings justifying subordination are

contradictory of earlier proceedings in the case and cannot be upheld. I would vacate and remand.

               As the majority notes, two district court findings are key to its punitive ruling: that

Augustine “knowingly” and “willfully” violated the court’s stay order when it commenced an

involuntary bankruptcy against Great White, and that Augustine’s action wasted a lot of estate

funds used to defend the “improperly filed bankruptcy.”

               The majority opinion, in my view, overlooks significant details concerning the

status of the record in this case. First, on June 19, 2001, final judgments were entered against the

defendants. According to the district court’s docket sheet, the case was closed. The Agent had

been appointed, and the court expressly retained jurisdiction in the final judgments “for all

purposes.” Not even a reasonably astute reader of the court’s docket at that point would easily

have learned that the court’s stay order against creditors of Great White, which was entered a year

earlier, was to be maintained. Second, the only testimony that supports a finding that Augustine

“knew” of the stay order is that of the Agent, who informed Augustine’s accountant sometime

during the summer of 2001 that there were “usually” stay orders entered in these cases. The

district court, ruling precisely on this testimony in November 2001, concluded only that Augustine

was on inquiry notice of the pendency of the stay. That was as far as the judge would go at that

time.

               Further, in an agreed order entered in August, 2002, the court expressly superseded


                                                  8
his findings in his November 16, 2001, order. The agreed order specified that the findings of fact,

conclusions of law, and the “so-ordered” provisions of the November 16, 2001, order “are hereby

superseded and the terms of the instant agreed order shall control the relationship . . . .” Thus,

even the court’s weak “inquiry notice” finding against Augustine was abandoned.

               With regard to the bankruptcy case, Augustine points out that once it received

actual notice of the stay order, it promptly informed the bankruptcy court, and it did not object to

transferring the case to Waco. The Agent did not appear in Chicago to contest the entry of an

order for relief. The bankruptcy went on in Waco for about a year until the district court, sitting as

the bankruptcy court, concluded that he should abstain. During this time, however, all the parties

treated the bankruptcy as a viable proceeding in which various aspects of the parties’ disputes

could be resolved.2

               In the court’s written opinion on the motion to abstain from continuing the

bankruptcy case, the court does not actually accuse Augustine of impropriety. Instead, he states,

Augustine instigated the bankruptcy late in time to make a claim that creditors’ interests must

totally prevail over those of defrauded shareholders. Later in that opinion, the court expressly

recognizes that the determination of relative priority among creditors and shareholders remains to

be decided as a legal matter.

               Based on these rulings, I believe the district court flatly contradicted himself in his



        2
         On the docket sheet, the Court’s Record entries 273 (3/4/02) and 291 (4/8/02) specifically
reference the productive, helpful status conferences on the bankruptcy and “all the helpful and
persuasive comments and suggestions made by [inter alia] counsel for Augustine . . . .” Docket #291
indicates the difficult issues raised by the bankruptcy and its “unique” nature and “the importance of
this case to Great White’s creditors . . . .” The court “continues to appreciate the parties’ assistance
and cooperation . . . .”

                                                  9
later ruling that Augustine “knowingly” and “willfully” violated the stay order. He had initially

been unwilling to make that direct finding, and the order mentioning Augustine’s inquiry notice

was expressly superseded in all regards in the agreed order less than a year later. It is further

inconsistent for the court to state that Augustine cost the estate a hundred thousand dollars in

regard to the pending bankruptcy, because the parties knew they had to litigate their disputes

somewhere. One may disapprove of Augustine’s all-or-nothing litigation approach, but as even the

court acknowledged, serious issues existed, and have never been decided, concerning the proper

disbursement of the disgorgement assets among shareholders and creditors.

                Because the court’s findings that allegedly justify equitable subordination of

Augustine’s claim are not supported in the record, I would hold them clearly erroneous and would

vacate the judgment and remand for reconsideration.

                This does not mean that Augustine would succeed in its contention that, as a

creditor of Great White, its claim is entitled to full priority over the shareholders’ securities fraud

claims. The general rule, as the majority opinion notes, affords both latitude and deference to a

receiver appointed at the SEC’s behest. It is an interesting and apparently novel question whether

such a receivership can, in the exercise of “equitable” powers, wholly ignore the state law of

priorities in the winding-up of a corporation. Cf. FDIC v. Meyer, 

, 486, 

, 1006 (1994)(refusing to create direct action for damages not found in federal law).3 Perhaps

this ultimate issue would not have been reached in this case, as the disgorgement estate, made up

largely of assets obtained from Smith, the chief promoter of the scheme, might be viewed in part as



         3
         I agree with the majority that bankruptcy law priorities have no further applicability here
 following abstention.

                                                   10
restoring losses to people whom Smith had personally defrauded. Nevertheless, Augustine, like

other creditors of Great White whose claims the Agent settled, ought to have received a place at

the table.

               I respectfully dissent.




                                                11