Securities and Exchange Commission v. Schooler et al

Filing 1487

ORDER Denying 1457 Glen Oaks Escrow to Release Deposit from Cancelled Sale of Freetrade Property to Receiver. The Court authorizes Receiver to take all reasonable steps to recover the $5,000 deposit. Signed by Judge Gonzalo P. Curiel on 6/14/17. (dlg)

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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 SECURITIES AND EXCHANGE 11 COMMISSION, 12 13 Plaintiff, v. 14 LOUIS V. SCHOOLER and FIRST FINANCIAL PLANNING 15 CORPORATION d/b/a WESTERN FINANCIAL PLANNING 16 CORPORATION, 17 Case No. 3:12-cv-02164-GPC-JMA ORDER DENYING GLEN OAKS ESCROW TO RELEASE DEPOSIT FROM CANCELLED SALE OF FREETRADE PROPERTY TO RECEIVER [ECF No. 1457-1] Defendants. 18 19 Before the Court is the Receiver’s Motion for Order Directing Glen Oaks 20 Escrow to Release Deposit From Cancelled Sale of Freetrade Property to Receiver. 21 ECF No. 1457-1. Upon review of the moving papers and the applicable law, and for 22 the following reasons, the Court DENIES the motion. 23 BACKGROUND 24 A. The SEC Enforcement Action 25 On January 21, 2016, the Court granted the SEC’s motion for final judgment 26 against Defendant Louis V. Schooler. ECF No. 1170. The SEC had initiated this 27 civil action against Defendant Schooler and Western Financial Planning Corporation 28 1 (“Western”) four years earlier, on account of their practice of defrauding investors 2 into purchasing unregistered securities. Id. (citing Second Summary Judgment 3 Order, ECF No. 1081). To carry out the scheme, Defendant Western bought 4 undeveloped real estate, with cash or through financing, and simultaneously formed 5 one or more General Partnerships (“GPs”) to own the land. First Summary 6 Judgment Order, ECF No. 1074 at 10. Western then sold General Partnership units 7 to investors and sold the undeveloped real estate to the General Partnerships. Id. at 8 10. In total, Western raised approximately $153 million from almost 3,400 9 investors through implementing this scheme. Id. B. The Decline of the General Partnership Assets 10 11 In 2013, the Court-appointed Receiver, Thomas Hebrank, engaged licensed 12 appraisers to value the 23 properties owned by the General Partnerships. ECF No. 13 203 at 2. Those professionals determined that the land was worth $16,328,000 and 14 that the net appraised value (appraised value less outstanding balances on all 15 mortgages) of the properties was $12,860,661. Id. The net appraised value 16 represented just 8.41% of the total funds that the general partners had invested in the 17 land. Id. The Receiver further estimated that, based on the then-current appraised 18 values of the land, the average GP investor would suffer an 88.40% loss if the GP 19 properties were sold in 2013. Id. 20 Three years later, soon after final judgment was entered, the Receiver moved 21 for authority to conduct an Orderly Sale of the General Partnership Properties 22 (“Orderly Sale”). Motion for Orderly Sale, ECF No. 1181-1. In the Motion, the 23 Receiver indicated that the aggregate value in the GP accounts had been steadily 24 decreasing while litigation was ongoing. See id. In September 2012, the 25 Receivership had assets of $6.6 million. Id. at 1. By the end of 2015, the assets had 26 dropped to $3.5 million, and the Receiver had reason to believe that the value of the 27 28 12cv02164 -2- 1 1 Receivership would continue to drastically decrease through the end of 2016. This 2 decline, he noted, was due to three main factors: (1) 14 of the 23 properties were not 2 3 appreciating in value ; (2) the properties were not worth enough to cover the costs of 4 the GPs carrying the properties; and (3) low levels of investor contributions to pay 5 GP administrator fees, tax preparation fees, property taxes, property insurance 6 premiums, and notes owed to Western. See id. at 1-2. In other words, the Receiver 7 concluded, because the money being spent to hold the GP properties was 8 disproportionately high in relation to the value of the GP’s real estate assets, the 9 Receivership was in a steady decline. Id. In order to prevent the value of the Receivership from falling into further 10 11 decline, the Receiver proposed that the GP properties be sold in accordance with 12 Court-approved orderly sale procedures. Id. The Receiver’s proposal explained that 13 the best way to maximize the value of all of the GP assets for the benefit of all 14 investors, irrespective of any given investors’ direct property interest, was to initiate 15 an orderly sale of the GP properties. Id. The Receiver estimated that the 16 Receivership, after conducting sales of the GP properties, Western’s properties and 17 asset recovery, would be worth $21,804,826. Id. at 16. C. The Receiver’s Motion for Orderly Sale 18 On May 20, 2016, the Court held a hearing on the Receiver’s Motion for 19 20 Orderly Sale, at which time the Court heard from the SEC, Defendant, the Receiver, 21 and the investor-interveners — that is, those investors who were granted permission 22 under Rule 23 to intervene to oppose the Receiver’s Motion. See ECF No. 1298. A 23 24 25 1 26 27 2 28 The Receiver provided the Court with projections that the Receivership would further decline to $1.8 million by the end of 2016. Indeed, the Receiver’s projection has since proved to be accurate. The Eighteenth Interim Status Report submitted by the Receiver indicates that the Receivership’s current cash balance is $1,546,447. ECF No. 1441 at 20. By way of example, the Receiver notes that the value of these 14 properties in 2016, $3,732,815, was about $400,000 less than their value in 2013, $4,137,000. Id. at 2. 12cv02164 -3- 1 short time thereafter, on May 25, 2016, the Court approved, in part, the Receiver’s 3 2 Orderly Sale process. ECF No. 1304. 3 D. Freetrade Property & Cancelled Sale 4 On March 10, 2017, the Receiver filed a Motion for Approval of Sale of 5 Freetrade/Suntec/Via 188 Property and Authority to Pay Broker’s Commission. 6 ECF No. 1446-1. In it, the Receiver indicated that he had received an offer to 7 purchase the Freetrade Property for $250,000 from Gerardo Aceves (“Buyer”). Id. 8 at 3. While the property’s list price was $260,000, the Receiver ultimately accepted 9 the offer after Buyer made it clear that $250,000 was his “best and final offer.” Id. Thereafter, the Receiver and Buyer entered into a Vacant Land Purchase 10 11 Agreement and Joint Escrow Instructions and an Addendum to Land Purchase 12 Agreement (“Purchase Agreement”). ECF No. 1457-1 at 2. Per the Purchase 13 Agreement, the Buyer deposited $5,000 into escrow. Id. On March 3, 2017, Buyer removed all contingencies. According to Receiver, 14 15 once the Buyer did so, he surrendered his right to recover his deposit unless the 16 Court did not approve the sale. Id. On March 17, 2017, Buyer cancelled the sale before the Court could review 17 18 or approve the sale. Id. The Motion for Approval of Sale of 19 Freetrade/Suntec/Via 188 Property was subsequently withdrawn from the docket. 20 See ECF No. 1446. Since the cancellation of the sale, the Receiver has requested that the escrow 21 22 company, Glen Oaks Escrow (“Glen Oaks”), release the Buyer’s $5,000 deposit to 23 Receiver. ECF No. 1457-1 at 3. Glen Oaks has communicated to Receiver that it 24 will not release the deposit unless the buyer consents or the Court issues an order 25 26 3 27 28 The Court directed the Receiver to file a Modified Orderly Sale Process that incorporated the public sale process consistent with the requirement of 28 U.S.C. § 2001. ECF No. 1304. The Receiver filed a modified proposal on June 8, 2016 (ECF No. 1309) and the Court approved the modified proposal on August 30, 2016 (ECF No. 1359). 12cv02164 -4- 1 directing it to do so. Id. According to Receiver, Buyer has not consented to the 2 release and is no longer responding to Receiver. Id. 3 4 DISCUSSION The Receiver seeks an Order from the Court directing Glen Oaks to release 5 the Buyer’s deposit from the cancelled Freetrade sale to the Receiver. The Receiver 6 states that the Receivership incurred expenses (1) preparing the motion for the 7 approval of the Freetrade sale and (2) publishing the sale in the San Diego Union 8 Tribune per the requirements of 28 U.S.C. § 2001 and the Modified Orderly Sale 9 Process. Id. at 2. As such, and because the Buyer forfeited his right to his deposit 10 unless the Court cancelled the sale, the Receiver requests an order directing the 11 release of the deposit. The Receiver has not cited any authority that would permit it to take the 12 13 requested action against Glen Oaks and the Buyer. While Receiver is correct to 14 point out that the Court has “broad equitable powers” to administer the Receivership 15 and fashion appropriate relief, see generally SEC v. Capital Consultants, LLC, 397 16 F.3d 733, 738 (9th Cir. 2005), Receiver has asked the Court to issue an order that 17 takes action against an individual who is not part of the Receivership and who is not 18 otherwise subject to the Court’s jurisdiction. A similar problem is raised by the 19 Court ordering an entity, also not part of the Receivership, to take an adverse action 20 against the Buyer. 21 Section 754 of 28 U.S.C. gives this Court territorial jurisdiction over the 22 Freetrade property, pursuant to the Court’s jurisdiction over the GPs, but the 23 Receiver has pointed to no statute or law that empowers the Court to issue an order 24 binding individuals and entities who merely do business with a federally-operated 25 receivership. 26 Absent such an authority and in light of the fact that the Court, at this 27 juncture, sees no basis for exercising personal jurisdiction over Glen Oaks or Buyer, 28 12cv02164 -5- 1 the Court DENIES Receiver’s Motion. The Court authorizes Receiver to take all 2 reasonable steps to recover the $5,000 deposit. 3 IT IS SO ORDERED. 4 5 Dated: June 14, 2017 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12cv02164 -6-

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