OKLAHOMA DEPT. OF SECURITIES ex rel. FAUGHT v. SEABROOKE INVESTMENTS, LLC
2017 OK CIV APP 42
| Okla. Civ. App. | 2017Background
- DOS filed a receivership under the Oklahoma Uniform Securities Act against Tom Seabrooke and related entities after investigating Seabrooke's securities activities; a receiver was appointed and claim procedures established.
- Bricktown Capital, LLC owned the Bricktown Hotel; Doyle had a long financial relationship with Seabrooke, made numerous payments and guarantees, and received a $228,894 distribution funded in part by insurance proceeds for storm damage.
- Doyle caused Bricktown Capital to execute an April 2014 promissory note and mortgage to him for aggregated expenditures, resulting in claimed ownership of about 85% and a filed creditor claim of $3,288,489.38 (later reduced by the trial court).
- The receiver sold the hotel and collected net sale proceeds; claimants’ claims (over $15M) far exceeded receivership assets (~$1.74M). The trial court reclassified Doyle’s claim as a capital contribution (not a general creditor) — a ruling Doyle did not appeal.
- The trial court applied the equitable subordination doctrine, found Doyle an insider whose conduct was inequitable and caused harm to other investors, subordinated his claim below other creditors and capital contributors, and denied distribution to Doyle.
Issues
| Issue | Plaintiff's Argument (DOS/Receiver) | Defendant's Argument (Doyle) | Held |
|---|---|---|---|
| Whether equitable subordination is an available equitable remedy in an OUSA receivership | DOS: Equity courts have broad powers under OUSA and may apply equitable subordination to fashion remedies | Doyle: Doctrine is rooted in bankruptcy and not applicable here | Held: District courts in OUSA receiverships may apply equitable subordination as an equitable remedy |
| Whether Doyle is an "insider" subject to heightened scrutiny | DOS: Doyle had control-like dealings, guarantees, and blended expenditures with Bricktown Capital | Doyle: He was not always an insider; some expenditures predate insider status | Held: Doyle was an insider as a matter of fact; reclassification and his conduct supported that conclusion |
| Whether Doyle engaged in inequitable conduct warranting subordination | DOS: Preferential use of insurance proceeds, self‑preferencing, securing a note/mortgage, and diversion of funds harmed other investors | Doyle: Disputes some factual findings and contends portions of expenditures were unrelated/not subject to scrutiny | Held: Trial court’s findings of inequitable conduct are not against the clear weight of the evidence; conduct met the insider standard for subordination |
| Whether subordinating entire claim was disproportionate or disparate treatment | Doyle: Entire subordination is excessive; he should share pro rata with other capital contributors | DOS: Subordination follows from Doyle’s inequitable insider conduct | Held: Subordination of Doyle’s entire claim was equitable, not punitive, and not disparate treatment given his conduct |
Key Cases Cited
- Pepper v. Litton, 308 U.S. 295 (1939) (Supreme Court recognition of bankruptcy courts’ equitable power to subordinate claims for inequitable conduct)
- In re Hedged-Investments Assocs., Inc., 380 F.3d 1292 (10th Cir. 2004) (reclassification of debt as capital contribution and standards for insider scrutiny)
- In re Autostyle Plastics, Inc., 269 F.3d 726 (6th Cir. 2001) (three-part equitable subordination standard and greater scrutiny for insiders)
- State ex rel. Day v. Southwest Mineral Energy, Inc., 617 P.2d 1334 (Okla. 1980) (Oklahoma courts’ equitable power in securities-act actions includes disgorgement and flexible equitable remedies)