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

Filing 936

ORDER granting in part and denying in part #884 Fifth Interim Fee Application; granting in part and denying in part #885 Fifth Interim Fee Application; denying #889 Motion for Approval of Monthly Budget; granting in part and denying in part #923 Sixth Interim Fee Application; granting in part and denying in part #924 Sixth Interim Fee Application. Signed by Judge Edward J. Davila on 8/7/2014. (ejdlc3, COURT STAFF) (Filed on 8/7/2014)

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United States District Court
For the Northern District of California

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UNITED STATES DISTRICT COURT

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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
FIFTH AND SIXTH INTERIM FEE
APPLICATIONS; DENYING
ADMINISTRATIVE MOTION FOR
MONTHLY BUDGET
[Docket Item Nos. 884, 885, 889, 923,
924]

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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 November 1, 2013 through
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January 31, 2014 (“fifth interim fee period”) and February 1, 2014 through April 30, 2014 (“sixth
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interim fee period”) in connection with the receivership of Defendant companies Small Business
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Capital Corporation (“SBCC”), Investors Prime Fund, LLC (“IPF”), SBC Portfolio Fund, LLC
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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS;
DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET

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(“SBC”), and related companies. Furthermore, the Receiver submitted a motion requesting

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approval of a monthly budget for loan servicing work.

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The Receiver and Allen Matkins filed their fifth interim fee applications on May 6, 2014.
See Receiver’s Fifth Interim Fee Appl., Docket Item No. 884; See Allen Matkins’ Fifth Interim Fee

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Appl., Docket Item No. 885. The Receiver filed his administrative motion on May 6, 2014.

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Docket Item No. 889. The sixth interim fee applications were filed on July 9, 2014. See

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Receiver’s Sixth Interim Fee Appl., Docket Item No. 923; See Allen Matkins’ Sixth Interim Fee

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Appl., Docket Item No. 924. Mark Feathers filed oppositions to all fee applications and motions.

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United States District Court
For the Northern District of California

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Docket Item Nos. 892, 927. The SEC submitted responses supporting the fee applications. Docket

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Item No. 931.

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I.

Fee Applications

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A. Fifth Interim Fee Application

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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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Thomas A. Seaman,
Receiver
Allen Matkins Leck
Gamble Mallory & Natsis
LLP, General Counsel

Fees
Incurred

Interim
Payment
Requested

$183,399.50

$165,059.55

$0.00

$165,059.55

$148,757.00

$1,814.68

$150,571.68

$177,153.75

Costs

Total
Payment
Requested

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

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$183,399.50 in fees incurred from November 1, 2013, through January 31, 2014, amounting to

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$165,059.55. Dkt. No. 884 at 1. The Receiver is requesting compensation for 1096.9 hours of

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work during this period at a blended hourly rate of $167.00. Id. at 9. The Receiver is not

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requesting compensation for any expenses incurred during this period.

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Allen Matkins requests $148,757.00 of the $177,153.75 in incurred fees for 376.6 hours of

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work, amounting to approximately 84% of the total fees incurred. Dkt. No. 885 at 1. This

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requested amount reflects a blended hourly rate of $395.00. Id. Allen Matkins also requests

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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS;
DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET

1

approval of 100% of its expenses totaling $1,814.68. Id. at 6. The total payment requested

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amounts to $150,571.68.

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B. Sixth Interim Fee Application

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

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Fees
Incurred

Interim
Payment
Requested

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United States District Court
For the Northern District of California

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Costs

Total
Payment
Requested

Thomas A. Seaman,
Receiver

$244,204.00

$219,783.60

$0.00

$219,783.60

Allen Matkins Leck
Gamble Mallory & Natsis
LLP, General Counsel

$102,084.75

$80,619.50

$1,225.02

$81,844.52

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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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$244,204.00 in fees incurred from February 1, 2014, through April 30, 2014, amounting to

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$219,783.60. The Receiver requests compensation for 1475.2 hours of work during this period at a

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blended hourly rate of $153. Dkt. No. 923 at 10. The Receiver is not requesting compensation for

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any expenses incurred during this period.
Allen Matkins requests $80,619.50 of the $102,084.75 in incurred fees for 204.1 hours of

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work, which represents a blended hourly rate of $395.00. Allen Matkins also requests approval of

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100% of its expenses totaling $1,225.02. The total payment requested amounts to $81,844.52.

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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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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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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS;
DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET

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

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counsel should be moderately compensated for their services because investors may stand to

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recover “only a fraction of their losses.” See id. at 645.
A court considering awarding interim fees should consider several factors. Alpha Telcom

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United States District Court
For the Northern District of California

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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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“‘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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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS;
DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET

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B. Applications
1. The Receiver
In the first fee application period, the Receiver charged his maximum allowable rate of
$375 per hour for 127 hours and reduced the operating costs of the receivership estate by $24,000

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per 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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United States District Court
For the Northern District of California

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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. at 4-5.
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. See

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Receiver’s Third Interim Fee Appl. 1, Docket Item No. 607; Dkt. No. 338 at 3. Furthermore, the

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average fees to operate the receivership entities and administer the estate declined as stabilization

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was attained. Dkt. No. 607 at 6-7. The Receiver delegated work to agents billed at a lower rate,

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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. See Receiver’s Fourth Interim Fee Appl. 2, Docket Item No. 646. The Receiver

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completed the sale of the Whiskey Junction asset with sales proceeds of $243,835.50 and

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completed the sale of the Sweet Fingers asset with sales proceeds of $244,669. Id. at 2-3. The

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average cost of operating the receivership entities and administer the estate declined to $55,800 per

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month for the fourth application period (from approximately $71,000 per month over the life of the

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receivership). Id. at 7. The Receiver delegated work to agents billed at a lower rate, resulting in a

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blended hourly rate of $194 for the fourth application period. Id. at 8.

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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS;
DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET

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During the fifth application period, the Receiver worked on creating a distribution plan and

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managing and servicing the loan portfolios. Dkt. No. 884 at 1-3. The Receiver processed investor

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and non-investor claims, evaluated various methods of calculating distributions, and prepared a

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distribution plan. Id. at 4-5. In this period, the blended hourly rate was $167 per hour. Id. at 9.

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The average cost of operating the receivership rose from the last fee period to $61,000 per month.

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Id. at 8. Gross receipts for the period were $1,907,907.39 and the Receiver’s fees are 9.6% of that

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sum. Id. at 1.

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United States District Court
For the Northern District of California

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During the sixth application period, the Receiver worked on distributing $15,000,000 to
investors and managing and servicing the loan portfolios. Dkt. No. 923 at 1. Gross receipts from

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the period were $1,051,559.85 and total disbursements were $16,388,539.92 ($15 million to

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investors, payments of professional fees, loan participants, operating expenses, and loans advanced

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to borrowers). Id. The Receiver’s fees are 23.2% of the gross receipt sum. Id. The average cost

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of operating the receivership increased to $81,401.33 per month. Id. at 9. The Receiver managed

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loan servicing operations (including collection of late fees, making site visits to each borrower, and

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reviewing status of borrowers’ property taxes), began the process of sales procedure for the SBA

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license and loan portfolios, administered the receivership estate (including 2011 and 2012 tax

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returns for SBCC, annual reviews and audited GAAP financial statement, discovery requests of

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interested parties), mediation in an ongoing litigation, and made distribution of $15 million to 350

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investors in March 2014. Id. at 2-7.

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The Court partially grants the Receiver’s request for fees incurred during the fifth and sixth

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

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

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

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

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

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that a receiver’s efforts will ultimately benefit the receivership estate. See SEC v. Byers, 590 F.

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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS;
DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET

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Supp. 2d at 648. The Court derives the authority to award such reduced fees from its power to “fix

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

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2. Allen Matkins
During the fifth application period, Allen Matkins assisted the Receiver in answering and
reviewing motions filed by Mr. Feathers, preparing a summary of his work and drafting an interim

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report, issues with servicing the loan portfolios and dealing with a consultant hired to assist in

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servicing SBA loans, helped answer communications from investors, advised regarding the

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potential sale of the Receivership Entities’ SBA lending license and loan portfolio, communicated

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United States District Court
For the Northern District of California

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with counsel regarding a lawsuit filed against SPF, analyzed claims submitted by investors and

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creditors, analyzed claims against third parties, drafted the proposed distribution plan of

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receivership estate assets and analyzed objections to the Distribution Motion, prepared the fourth

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interim fee application, and prepared a mediation brief and participated in mediation in the

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California Business Bank litigation. Dkt. No. 885 at 2-6. Allen Matkins requests to be

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compensated for $148,757.00 at a blended hourly rate of $395, plus $1814.68 for expenses.

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During the sixth application period, Allen Matkins assisted the Receiver in reviewing and

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responding to Mr. Feathers’ communications and filings as well as preparing a motion for approval

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of a monthly budget for loan servicing work, legal issues related to servicing watch list loans,

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responding to a request for an audit letter, responding to investor communications, advice and sale

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procedure motions regarding the anticipated sales of SBA lending license and loan, communicated

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with counsel regarding a lawsuit filed against SPF, analyzed claims submitted by investors and

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creditors and represented the Receiver at the February 14 hearing, analyzed claims against third

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parties and Mr. Feathers’ request for reconsideration of the order allowing the motion to pursue

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claims to be filed under seal, represented the Receiver in the hearing on the distribution motion,

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prepared the fifth interim fee application, and represented the Receiver regarding the California

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Business Bank litigation. Dkt. No. 924. Allen Matkins requests to be compensated for $80,619.50

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at a blended hourly rate of $395, plus $1,225.02 for expenses.

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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS;
DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET

1

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

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expenses for the fifth and sixth interim periods, amounting to a total of $135,695.98 for the fifth

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period and a total of $73,782.57 for the sixth period. The Court has determined that the award is

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appropriate under the circumstances for several reasons.

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First, as discussed above and in every order issues on the Receiver’s and counsel’s fees, the
Court has a strong interest in preserving the funds of the receivership estate for the benefit of the

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investors. Allen Matkins has chosen to assist the Receiver in this case where investors stand to

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suffer great losses on their investments. See Order Approving Receiver’s Appl. to Employ Allen

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United States District Court
For the Northern District of California

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

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General Counsel, Docket Item No. 31. As a result, Allen Matkins is obligated to charge a lower

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blended hourly rate than its customary fee.

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Second, the Court emphasizes that in the application for Allen Matkins to represent the

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Receiver, Allen Matkins had “agreed that its blended hourly rate for the receivership will be $395

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or less.” Dkt. No. 31 at 7. Allen Matkins’ fifth and sixth fee applications request a blended hourly

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rate of $395.00, which is the maximum limit set in the application.

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Third, as discussed in previous orders, the Court reserves its discretionary power and may

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consider many factors when awarding a reduced fee, regardless of the fees being approved by other

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courts in similar cases. See Alpha Telcom II, 2006 WL 3085616, at *3-6. Here, the Court chooses

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to focus on the fact that Allen Matkins’ requested fee rate is at the upper limit approved by the

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Court. As such, the reduction in the fee award to Allen Matkins is reasonable in light of the

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circumstances of this case, the work performed by Allen Matkins, and other public interest

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considerations.

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III.

Objections

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There have been objections filed by investors. Two objection letters were filed on July 19

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and 20, 2014 by Sydney Raineri (Docket Item No. 929) and by Alan and Theresa Raineri (Docket

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Item No. 930) claiming that the sums requested by the Receiver and Allen Matkins are too high.

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Case No. 5:12-CV-03237 EJD
ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS;
DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET