Securities and Exchange Commission v. Small Business Capital Corp. et al

Filing 896

ORDER partially granting #646 Fourth Interim Fee Application; partially granting #647 Fourth Interim Fee Application. Signed by Judge Edward J. Davila on 5/9/2014. (ejdlc3, COURT STAFF) (Filed on 5/9/2014) (Additional attachment(s) added on 5/9/2014: #1 Certifcate of Service) (ecg, COURT STAFF).

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UNITED STATES DISTRICT COURT

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United States District Court
For the Northern District of California

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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SECURITIES AND EXCHANGE
COMMISSION,

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Plaintiffs,
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v.
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SMALL BUSINESS CAPITAL CORP.; MARK )
FEATHERS; INVESTORS PRIME FUND,
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LLC; and SBC PORTFOLIO FUND, LLC,
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Defendants.
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)

Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING
FOURTH INTERIM FEE
APPLICATIONS
[Docket Item Nos. 646, 647]

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This lawsuit involves allegations made by the Securities and Exchange Commission

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(“SEC”) that the Defendants violated antifraud and other provisions of the federal securities laws.

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See Compl. 1, Docket Item No. 1. Receiver Thomas Seaman (“Receiver”) and the law firm of

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Allen Matkins, Leck, Gamble, Mallory & Natsis, LLP (“Allen Matkins”) seek interim payment of

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fees and expenses for services performed during the period from August 1, 2013 through October

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31, 2013 (“fourth interim fee period”) in connection with the receivership of Defendant companies

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Small Business Capital Corporation, Investors Prime Fund, LLC, SBC Portfolio Fund, LLC, and

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related companies. The Receiver and Allen Matkins filed their fourth interim fee applications on

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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FOURTH INTERIM FEE APPLICATIONS

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December 4, 2013. See Receiver’s Fourth Interim Fee Appl., Docket Item No. 646; See Allen

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Matkins’ Fourth Interim Fee Appl., Docket Item No. 647.

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I.

Fee Applications

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The Receiver and Allen Matkins request the following fees for services performed:

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Applicant and Role

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United States District Court
For the Northern District of California

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Fees
Incurred

Thomas A.
Seaman, Receiver

$167,264.50

Allen Matkins
Leck Gamble
Mallory & Natsis
LLP, General
C
l

$99,292.05

Interim
Payment
Requested
$150,538.05
(90% of fees
incurred)
$89,981.00
(90.6% of fees
incurred)

Costs

$0.00

$905.68

Total
Payment
Requested
$150,538.05

$90,886.68

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A. The Receiver

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The Receiver requests approval of his fees in full and the authority to pay 90% of the

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$167,264.50 in fees incurred from August 1, 2013, through October 31, 2013. Dkt. No. 646 at 1.

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The Receiver is requesting compensation for 861 hours of work during this period at a blended

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hourly rate of $194.00. Id. at 8. The Receiver is not requesting compensation for any expenses

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incurred during this period.

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B. Allen Matkins

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Allen Matkins requests $89,981.00 of the $99,292.05 in incurred fees for 227.8 hours of

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work, amounting to approximately 90.6% of the total fees incurred. Dkt. No. 647 at 1. This

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requested amount reflects a blended hourly rate of $395.00. Dkt. No. 647 at 1. Allen Matkins also

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requests approval of 100% of its expenses totaling $905.68. Id. at 6. The total payment requested

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amounts to $90,886.68.

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II.

Discussion

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A. Applicable Law

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The court appointing the Receiver is responsible for compensating the Receiver and his

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attorneys. See In re Alpha Telcom, Inc. [Alpha Telcom II], No. 03:01-CV-1283-PA, 2013 WL

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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FOURTH INTERIM FEE APPLICATIONS

840065, at *16 (D. Or. Mar. 6, 2013). The court may use its discretion to fashion a “fee award that

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is appropriate under the circumstances.” Id. at *17. “The court appointing the receiver has full

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power to fix the compensation of such receiver and the compensation of the receiver’s attorney or

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attorneys.” Drilling & Exploration Corp. v. Webster, 69 F.2d 416, 418 (9th Cir. 1934). The

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Receiver and the attorneys assisting the Receiver will be “reasonably, but not excessively”

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compensated for their efforts to benefit the receivership estate. Alpha Telcom II, 2013 WL

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840065, at *17. “[I]n receivership situations, lawyers should be awarded moderate fees and not

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extravagant ones.” SEC v. Byers, 590 F. Supp. 2d 637, 648 (S.D.N.Y. 2008). The Receiver and

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any professionals assisting the Receiver should charge a reduced rate to reflect the public interest

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United States District Court
For the Northern District of California

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involved in preserving funds held in the receivership estate. See id. at 646-47. The Receiver and

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his counsel should be moderately compensated for their services because investors who were

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promised large returns on investments by the defendant may stand to recover “only a fraction of

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their losses.” See id. at 645.

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A court considering awarding interim fees should consider several factors. Alpha Telcom

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II, 2013 WL 840065, at *16. An award of interim fees is appropriate “where both the magnitude

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and the protracted nature of a case impose economic hardships on professionals rendering services

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to the estate.” In re Alpha Telcom, Inc. [Alpha Telcom I], No. 01-CV-1283-PA, 2006 WL

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3085616, at *3 (D. Or. Oct. 27, 2006). The court should also consider the “economy of

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administration, the burden that the estate may be able to bear, the amount of time required,

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although not necessarily expended, and the overall value of the services provided to the estate.” In

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re Imperial “‘400’” Nat., Inc., 432 F.2d 232, 238 (3rd Cir. 1970). Frequently courts will withhold a

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portion of the requested interim fees because “until the case is concluded the court may not be able

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to accurately determine the ‘reasonable’ value of the services for which the allowance of interim

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compensation is sought.” Alpha Telcom I, 2006 WL 3085616, at *3. The factors listed above, and

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others, may persuade the court to award the entirety of the requested interim fees or some amount

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less than requested. See Byers, 590 F. Supp. 2d at 648. Lastly, “‘courts have recognized that it is

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unrealistic to expect a trial judge to evaluate and rule on every entry in an application’” and courts

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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FOURTH INTERIM FEE APPLICATIONS

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“‘endorse percentage cuts as a practical means of trimming fat from a fee application.’” Id.

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(quoting N.Y. State Ass’n for Retarded Children, Inc. v. Carey, 711 F.2d 1136, 1146 (2nd Cir.

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1983)).

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B. Applications
1. The Receiver
The receivership estate has continued to benefit from the Receiver’s progress and

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completion of substantial receivership tasks. In the first fee application period, the Receiver

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charged his maximum allowable rate of $375 per hour for 127 hours out of the 1,072 hours claimed

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during the interim period, and reduced the operating costs of the receivership estate by $24,000 per

United States District Court
For the Northern District of California

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month. See Receiver’s First Interim Fee Appl. 4-5, Docket Item No. 134. During the second

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application period, the Receiver’s agents conducted the vast majority of the work required to

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maintain the receivership estate, charging an average of $173 per hour. See Receiver’s Second

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Interim Fee Appl. 4, Docket Item No. 338. The Receiver further reduced the financial burden on

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the receivership estate by absorbing travel expenses, not billing for time spent traveling, and

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charging a reduced fee for communicating via telephone with investors. Id. 4-5.

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During the third application period, the Receiver prepared and filed income tax returns,

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reduced the operating costs of the receivership entities, and spent considerable time dealing with

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Mr. Feathers’ motions. The net cash increase in that time period was $4,159,566.56, which is

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significantly higher than the net revenue of $448,894.80 in the second application period. Dkt. No.

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607 at 1; Dkt. No. 338 at 3. The Receiver’s fees dropped from $92,929.50 in June to $43,800 in

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July. Dkt. No. 607 at 1. Furthermore, the average fees to operate the receivership entities and

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administer the estate (excluding work related to Mr. Feathers and the forensic accounting) declined

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as stabilization was attained. Id. at 6-7. The Receiver delegated work to agents billed at a lower

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rate, resulting in a blended hourly rate of $209 for the third application period. Id. at 8-9.

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During the fourth application period, the Receiver managed loan portfolios and loan

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servicing, making significant progress with several slow paying or impaired loans. Dkt. No. 646 at

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2. The Receiver completed the sale of the Whiskey Junction asset with sales proceeds of

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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FOURTH INTERIM FEE APPLICATIONS

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$243,835.50 and completed the sale of the Sweet Fingers asset with sales proceeds of $244,669.

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Id. at 2-3. The average cost of operating the receivership entities and administer the estate has

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declined to $55,800 per month for this application period (from approximately $71,000 per month

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over the life of the receivership). Id. at 7. In October, fees increased as a result asset sales, loan

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payoff, improved collections and cost cutting, claims reconciliation, determination, and analysis

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and development of a distribution plan. Id. The Receiver delegated work to agents billed at a

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lower rate, resulting in a blended hourly rate of $194 for the fourth application period. Id. at 8.

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Further, the Receiver spent $2,288.00 in work related to Defendant, including responding to

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Defendant through the Receiver’s attorney. Id. at 4, 10.

United States District Court
For the Northern District of California

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The Court partially grants the Receiver’s request for fees incurred during the fourth fee

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application period. The Court withholds 25% of the Receiver’s request for fees and the Receiver

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may apply for those fees at the conclusion of this litigation. Withholding fees until the conclusion

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of the lawsuit assists the Court in achieving its continuing goal of preserving funds held in the

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receivership estate for the compensation of the investors. This approach is common in SEC civil

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enforcement actions because it allows the Court to withhold fees until it is absolutely clear that a

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receiver’s efforts will ultimately benefit the receivership estate. See SEC v. Byers, 590 F. Supp. 2d

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at 648. The Court derives the authority to award such reduced fees from its power to “fix the

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compensation” of receivers and their attorneys. Drilling, 69 F.2d at 418.

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2. Allen Matkins
Allen Matkins provided valuable services to the Receiver during the fourth application

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period. See Dkt. No. 647 at 2-6. During the fourth application period, Allen Matkins assisted the

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Receiver in answering and reviewing numerous motions filed by Mr. Feathers and the SEC,

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reviewed the Court’s order granting the SEC’s motion for summary judgment, helped answer

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communications from loan borrowers, advised regarding legal issues and strategy pertaining to

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default and collection issues on loans, advised regarding a dispute concerning a consulting

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contract, helped answer communications and inquiries from investors, advised regarding the

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potential sale of receivership entities, analyzed claims, drafted the proposed distribution plan of

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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FOURTH INTERIM FEE APPLICATIONS

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receivership estate assets, prepared the third interim fee application, and prepared pleadings in the

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case filed by California Business Bank. Id. Allen Matkins requests to be compensated for 90.6%

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of its total fee amount of $99,292.05 (equaling $89,981) at a blended hourly rate of $395.

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The Court grants 90% of Allen Matkins’ request for fees and 100% of its request for

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expenses for the fourth interim period. The Court has determined that the award is appropriate

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under the circumstances for several reasons.

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First, as discussed above, the Court has a strong interest in preserving the funds of the
receivership estate for the benefit of the investors. Allen Matkins has chosen to assist the Receiver

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in this case where, if the SEC’s allegations are proven, investors stand to suffer great losses on

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United States District Court
For the Northern District of California

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their investments. See Order Approving Receiver’s Appl. to Employ Allen Matkins as General

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Counsel, Docket Item No. 36; Receiver’s Appl. to Employ Allen Matkins as General Counsel,

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Docket Item No. 31. As a result, Allen Matkins is obligated to charge a lower blended hourly rate

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than its customary fee. The Court is not alone in its view that SEC enforcement litigation requires

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the counsel to a receiver to charge an hourly rate substantially lower than its customary rates. For

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example, in Byers, the law firm assisting the Receiver requested a similar blended hourly rate to

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that requested by Allen Matkins in this instance, and the court deemed the rate “too high for a

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securities receivership case.” See Byers, 590 F. Supp. 2d at 646-48. The Byers court stressed that

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the discretion of the court should be utilized to reflect the public interest in maintaining the vitality

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of the receivership estate. See id. at 644-46. The Byers court noted that in such situations, the

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receiver’s counsel should be modestly compensated because investors “are likely to recover only a

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fraction of their losses.” Id. at 645. Furthermore, a law firm should voluntarily charge a

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discounted rate for all of its services, regardless of the status of the attorney providing the services.

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See id. at 647 (noting that the law firm’s application for fees should discount the hourly rate for all

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billing professionals, including summer associates, paralegals, and litigation support clerks).

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Second, the Court emphasizes that in the application for Allen Matkins to represent the
Receiver, Allen Matkins had “agreed that its blended hourly rate for the receivership will be $395

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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FOURTH INTERIM FEE APPLICATIONS

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or less.” Dkt. No. 31 at 7. Allen Matkins’ fourth fee application requests a blended hourly rate of

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$395.00, which is the maximum limit set in the application.
Third, the Court reserves its discretionary power and may consider many factors when

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awarding a reduced fee, regardless of the fees being approved by other courts in similar cases.

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This discretionary power was made apparent in In re Alpha Telcom, Inc. when the court awarded a

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reduced fee, partially because the Receiver’s performance failed to adequately recover assets for

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the receivership estate. See Alpha Telcom II, 2006 WL 3085616, at *3-6. The Alpha Telcom

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court explained that no statute or precedent required it to give deference to the opinion of the actual

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law firm or receiver requesting the fee, or the opinion of third parties who support the requested

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United States District Court
For the Northern District of California

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fees. See id. at *3 (“No statute compels such a conclusion, however, nor do I believe such great

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deference is warranted in this instance.”). The Alpha Telcom court chose to focus mainly on the

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success of the receiver’s efforts, the financial burden that the receivership estate could bear, and

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“other factors,” believing that those factors were most relevant to the appropriation of fees to the

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receiver and counsel. Id. at *6. This case highlights that the Court is not bound to any one of the

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established factors when considering fee requests. Although the Alpha Telcom court could have

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simply awarded fees based on the reasonable rates charged by other receivers in similar cases, it

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chose to focus on the efforts of the receiver to recover assets for the receivership estate instead.

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See id. at *3-6.

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Similarly, rather than fashioning an award after analyzing and compiling a record of the

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rates approved by other courts in similar cases, the Court chooses to primarily focus on the fact that

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Allen Matkins’ requested fee rate is the upper limit approved by the Court.

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The Court notes that the fee awarded to Allen Matkins here is not unusual in this type of

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case, and Allen Matkins has requested similar rates of compensation in the past. As an example,

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Allen Matkins was appointed as general counsel to the receiver in SEC v. Medical Capital

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Holdings, Inc., and requested that the court pay 80% of its incurred fees during an interim fee

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period. See No. CV-8:09-0818 DOC (C.D. Cal. Jan. 4, 2013), Docket Item No. 951 at 1. This

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request reflects a blended hourly rate of $382.72. See id. at 1, 5-6. The Medical Capital court

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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FOURTH INTERIM FEE APPLICATIONS