SEC v. Emvest Mortgage Fund, et al

Filing 546

ORDER Re: Receiver's Twenty-third report. The Receiver's proposals, included in his request for instructions, are approved in part. The Receiver shall file, serve, and make available on the Fund's website his Twenty-Fourth Report no la ter than March 9, 2012. Comments or objections to the report shall be filed no later than March 23, 2012. The matter shall be calendared for April 6, at 1:30 p.m., but unless otherwise ordered, the Court will address all issues on the briefs and without oral argument. Signed by Judge Dana M. Sabraw on 1/24/12.(lao)

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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 UNITED STATES SECURITIES AND EXCHANGE COMMISSION, CASE NO. 04cv2295 DMS (POR) ORDER RE: RECEIVER’S TWENTY-THIRD REPORT 12 Plaintiff, 13 14 15 16 vs. EMVEST MORTGAGE FUND, LLC, EMVEST, INC., and MILON LYLE BROCK, Defendants. 17 18 On December 28, 2011, and pursuant to the July 6, 2011 Order Re: Receiver's Twenty-Second 19 Report, the Receiver filed his Twenty-Third Verified Report and Request for Instructions ("Report"). 20 The Securities and Exchange Commission ("SEC") filed a response with comments. In the July 6 21 order, the Court indicated that, unless ordered otherwise, it would address all issues presented by the 22 Report on the briefs and without oral argument. 23 Pursuant to Civil Local Rule 66.1, a receiver's report must include: (1) a summary of the 24 Receiver's operations; (2) an inventory of receivership assets and their appraised value; (3) a schedule 25 of all receipts and disbursements; (4) a list of all creditors, their addresses, and claimed amounts; and 26 (5) a petition for instructions including a recommendation as to whether the receivership should be 27 continued. For the reasons which follow, the Receiver’s proposals, included in his request for 28 instructions, are APPROVED IN PART. -1- 04cv2295 1 1. Summary of Receiver's Operations 2 The Receiver reports that the remaining assets of Emvest Mortgage Fund, LLC's ("Fund")1 3 continue to be liquidated despite a difficult financial environment, and that accurate and timely 4 financial reports continue to be prepared, distributed to the Fund’s Members, and posted on its 5 website. In the process of liquidation, the Receiver seeks to preserve the Fund's cash for any repairs 6 to the Real Estate Owned (“REO”) and for payment of utilities, insurance and taxes. Two assets 7 remain to be liquidated, one of which is in the process of being sold. (Report at 2 & 5.) 8 During the course of this action, the Court approved several Receiver’s proposals for cash 9 distributions to Members. In the March 2, 2005 order the Receiver was granted discretion to make 10 monthly distributions of up to 6% annually. Pursuant to orders entered March 2, 2005 and August 8, 11 2006, he was granted discretion to make emergency hardship distributions. On October 20, 2008, the 12 Court approved the Receiver’s proposal for a "Discounted Cash-Out" Plan, which allowed Members 13 to cash-out at 30% of their equity. Those payments were halted in March 2010 to preserve the Fund’s 14 cash in light of the slow-down in the liquidation process. It is anticipated that no further distributions 15 will be made under these programs. (Report at 2-4.) To further preserve the Fund’s cash, the 16 Receiver agrees to reduce his monthly management fee to zero as of January 1, 2012, but this does 17 not include his non-operations fees. (Id. at 3.) 18 On August 19, 2008, the Court approved a "Member's Equity to Buy REO" Plan, which allows 19 Members to use their current equity towards the purchase of any of the Fund's REO. One Member 20 purchased a property under this plan. Although theoretically the offer remains in effect, as it does not 21 affect the Fund's cash reserves, there has been no interest in it recently and it is anticipated that no 22 further transactions will be made under this plan. (Report at 4.) The Court notes that the last REO 23 is being sold. 24 Liquidation of the Fund’s portfolio is slowly nearing completion. On December 31, 2006, the 25 portfolio principal balance was $14,968,831. As of November 30, 2011, it has been reduced to one 26 REO asset valued at $644,846.00 and one Note valued at $85,000. (Report at 3.) The REO asset, a 27 28 1 The Fund was created in 2002 to buy, hold and sell real estate-backed mortgages and related instruments. It invested primarily in high-yield, high-risk mortgages. -2- 04cv2295 1 commercial property in Los Angeles, was taken back by the Fund through foreclosure. (Id. at 5.) It 2 is in escrow with sale scheduled to close this month. (Id.) The Note is for a residential loan which 3 is in foreclosure. Although the Receiver worked with the borrower to refinance it, the effort was not 4 successful. (Id. at 3, 5-6.) The Receiver therefore proposes to sell the Note on the open market. (Id. 5 at 3-4 & 6.) 6 2. The Fund's Financial Condition 7 The Receiver continues to prepare monthly financial statements, send them with periodic 8 reports to Members, and post them on the Fund's website (http://emvest.info). The Report includes 9 the November 30, 2011 financial statements. (Report at 4 & Ex. 1.) For the eleven months ending 10 November 30, 2011, the Fund recorded a net loss of $98,164. (Id. at 5 & Ex. 1.) Its income consists 11 of $18,930 in interest and $2,540 in other income. (Id. Ex. 1.) Its liabilities consist largely of REO 12 costs of $56,923 and Receiver and attorney fees of $47,200. (Id. at 5 & Ex. 1.) As of November 30, 13 2011, the Fund's loan portfolio consisted of the Note, whose value has been written down to$85,000, 14 and the last REO valued at $644,846. (Id.) In addition, the Fund holds $497,802 in cash. (Id. Ex. 1.) 15 The Fund also holds two judgments valued at close to zero. (Id. at 6.) The Fund’s liabilities consist 16 almost entirely of the accrued unpaid Receiver and attorney fees of $226,060. (Id.) 17 Because the Fund’s loan portfolio is being liquidated, and the proceeds of the liquidation have 18 largely been distributed to the Members, the Receiver contends that comparing current and past net 19 income is not a meaningful approach to assessing the Fund’s performance at this time. (Report at 4- 20 5.) For the same reasons, tracking and comparing the value of a $10,000 investment in the Fund is 21 no longer a valid measure. (Id. at 5.) 22 3. Member Distributions 23 Since the start of 2007, “more than $8 million has been paid to withdrawing Members.” 24 (Report at 4.) In 2011, Members received $404,235.00 in distributions. All current Members have 25 received at least 50% of their original investments, with the overall average at about 62%. (Id.) The 26 percentage varies among Members because some Members received emergency distributions in excess 27 of the distributions made to others. The Receiver posted on the Fund’s website a complete Member 28 list and the percentage of returns each had received. The Receiver estimates that upon the last -3- 04cv2295 1 distribution, after selling the remaining REO and Note, the Members will have received approximately 2 85% of their original investment. 3 4. Request for Instructions 4 The Receiver’s objective is to “fully liquidate the Fund’s assets and to close this case by the 5 end of January, 2012.” (Report at 6.) In furtherance of this objective, he requests Court approval for 6 a proposed sequence of actions. The SEC largely supports the Receiver’s proposal. 7 Based on the foregoing, the Court approves the following sequence of actions: 8 1. The Receiver shall retain the two outstanding judgments rather than sell them in light of 9 10 11 their lack of value. (See Report at 6.) 2. After the REO sale closes, the Receiver shall sell the Note on the open market at the best available offer as soon as reasonably possible. (Id. at 7.) 12 3. The Receiver shall cash in the $10,000 bond. (Id. at 6.) 13 4. The Receiver shall make a final distribution to the Members in a manner which equalizes 14 the percentage payout to each Member. (Id. at 7.) 15 5. The Receiver shall apply for payment of accrued unpaid Receiver and attorney fees, which 16 amounted to $226,060 as of November 30, 2011. The Receiver’s proposal to voluntarily discount the 17 Receiver and attorney fees by 20% in order to make additional funds available for distribution is 18 approved. (Id.) In addition, the Receiver’s proposal to reduce his monthly management fee to zero 19 as of January 1, 2012 is approved. (Id. at 3.) 20 6. The Receiver shall prepare the Fund’s income tax returns for 2011 and final returns for 21 2012. The Receiver’s proposal for a fixed $5,000 fee for the preparation and filing of these returns 22 is approved. (Id. at 7.) 23 The Court reserves ruling on the Receiver’s proposal regarding the two outstanding judgments. 24 (See Report at 7.) The Receiver proposes to continue to monitor the judgments and make another 25 distribution to the Members if any funds are received. While the SEC does not oppose this proposal, 26 it expressed reservations about incurring additional Receiver fees for the monitoring, unless any funds 27 are actually recovered on the judgments. The parties have not indicated how much is owed on the 28 judgments. Accordingly, the Court reserves on this issue pending the Receiver’s next report. -4- 04cv2295 1 Based on the foregoing, the Receiver’s proposals are APPROVED IN PART. Pursuant to 2 Civil Local Rule 66.1, the Receiver shall file, serve, and make available on the Fund’s website his 3 Twenty-Fourth Report no later than March 9, 2012. In addition to the information regularly provided 4 with the Report, the Receiver shall also provide a chart showing each Member’s investment and 5 distributions, together with aggregate amounts for the Fund as a whole, a summary of all Receiver and 6 attorney fees paid to date, the amounts owing on the two outstanding judgments, and the Receiver’s 7 response to the SEC’s concern regarding fees for monitoring the judgments. Comments or objections 8 to the report shall be filed no later than March 23, 2012. The matter shall be calendared for April 6, 9 at 1:30 p.m., but unless otherwise ordered, the Court will address all issues on the briefs and without 10 11 oral argument. IT IS SO ORDERED. 12 13 DATED: January 24, 2012 14 15 HON. DANA M. SABRAW United States District Judge 16 17 18 19 20 21 22 23 24 25 26 27 28 -5-

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