Securities and Exchange Commission v. Schooler et al

Filing 1538

ORDER #1517 Approving Sale of Production Partners Property and Authority to Pay Broker's Commission. Signed by Judge Gonzalo P. Curiel on 10/24/17. (dlg)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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SECURITIES AND EXCHANGE
COMMISSION,

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ORDER APPROVING:

Plaintiff,

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Case No.: 3:12-CV-02164-GPC-JMA

v.

SALE OF PRODUCTION
PARTNERS PROPERTY AND
AUTHORITY TO PAY BROKER’S
COMMISSION

LOUIS V. SCHOOLER and FIRST
FINANCIAL PLANNING
CORPORATION d/b/a WESTERN
FINANCIAL PLANNING
CORPORATION,

[ECF No. 1517]

Defendants.

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Before the Court is the Receiver’s Motion for Approval of Sale of the Production

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Partners Property and Authority to Pay Broker’s Commission. ECF No. 1517. No

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opposition was filed. Based upon a review of the moving papers and the applicable law,

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the Court GRANTS the Receiver’s motion.

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BACKGROUND

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A. The SEC Enforcement Action

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On January 21, 2016, the Court granted the SEC’s motion for final judgment

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against Defendant Louis V. Schooler. ECF No. 1170. The SEC had initiated this civil

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action against Defendant Schooler and Western Financial Planning Corporation
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(“Western”) four years earlier, on account of their practice of defrauding investors into

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purchasing unregistered securities. Id. (citing Second Summary Judgment Order, ECF

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No. 1081). To carry out the scheme, Defendant Western bought undeveloped real estate,

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with cash or through financing, and simultaneously formed one or more General

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Partnerships (“GPs”) to own the land. First Summary Judgment Order, ECF No. 1074 at

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10. Western then sold General Partnership units to investors and sold the undeveloped

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real estate to the General Partnerships. Id. at 10. In total, Western raised approximately

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$153 million from almost 3,400 investors through implementing this scheme. Id.

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B. The Decline of the General Partnership Assets

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In 2013, the Court-appointed Receiver, Thomas Hebrank, engaged licensed

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appraisers to value the 23 properties owned by the General Partnerships. ECF No. 203 at

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2. Those professionals determined that the land was worth $16,328,000 and that the net

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appraised value (appraised value less outstanding balances on all mortgages) of the

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properties was $12,860,661. Id. The net appraised value represented just 8.41% of the

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total funds that the general partners had invested in the land. Id. The Receiver further

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estimated that, based on the then-current appraised values of the land, the average GP

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investor would suffer an 88.40% loss if the GP properties were sold in 2013. Id.

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Three years later, soon after final judgment was entered, the Receiver moved for

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authority to conduct an Orderly Sale of the General Partnership Properties (“Orderly

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Sale”). Motion for Orderly Sale, ECF No. 1181-1. In the Motion, the Receiver indicated

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that the aggregate value in the GP accounts had been steadily decreasing while litigation

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was ongoing. See id. In September 2012, the Receivership had assets of $6.6 million.

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Id. at 1. By the end of 2015, the assets had dropped to $3.5 million, and the Receiver had

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reason to believe that the value of the Receivership would continue to drastically

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decrease through the end of 2016.1 This decline, he noted, was due to three main factors:

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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 Twentieth
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(1) 14 of the 23 properties were not appreciating in value2; (2) the properties were not

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worth enough to cover the costs of the GPs carrying the properties; and (3) low levels of

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investor contributions to pay GP administrator fees, tax preparation fees, property taxes,

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property insurance premiums, and notes owed to Western. See id. at 1-2. In other words,

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the Receiver concluded, because the money being spent to hold the GP properties was

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disproportionately high in relation to the value of the GP’s real estate assets, the

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Receivership was in a steady decline. Id.

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In order to prevent the value of the Receivership from falling into further decline,

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the Receiver proposed that the GP properties be sold in accordance with Court-approved

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orderly sale procedures. Id. The Receiver’s proposal explained that the best way to

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maximize the value of all of the GP assets for the benefit of all investors, irrespective of

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any given investors’ direct property interest, was to initiate an orderly sale of the GP

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properties. Id. The Receiver estimated that the Receivership, after conducting sales of

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the GP properties, Western’s properties and asset recovery, would be worth $21,804,826.

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Id. at 16.

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C. The Receiver’s Motion for Orderly Sale

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On May 20, 2016, the Court held a hearing on the Receiver’s Motion for Orderly

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Sale, at which time the Court heard from the SEC, Defendant, the Receiver, and the

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investor-interveners — that is, those investors who were granted permission under Rule

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23 to intervene to oppose the Receiver’s Motion. See ECF No. 1298. A short time

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thereafter, on May 25, 2016, the Court approved, in part, the Receiver’s Orderly Sale

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process.3 ECF No. 1304.

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Interim Status Report submitted by the Receiver indicates that the Receivership’s current cash and cash
equivalent balance is $666,113. ECF No. 1505 at 17.
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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.
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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).
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In approving the Orderly Sale, the Court addressed and evaluated the concerns

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expressed by the Receiver, the SEC, and myriad investors, all of whom held differing

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positions on whether the Orderly Sale would benefit the Receivership estate. See

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generally ECF Nos. 1181 (Motion for Orderly Sale), 1232 (SEC Response), 1234 (Dillon

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Investors’ Response), 1235 (Graham Investors’ Response); see also, e.g., ECF Nos. 1240,

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1242, 1244, 1249-1257 (Letters from Investors). The Court also took into consideration

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the recommendations of the investors’ experts, as set forth in the Xpera Report. See ECF

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No. 1304 at 16. The Xpera Report, the Court noted, substantially agreed with the

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Receiver on how to maximize the value of the Receivership estate and, for the most part,

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agreed on the appraised value of the various GP properties. Id. As such, the Court

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directed the Receiver, where feasible, to incorporate the recommendations of the Xpera

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Report into his ultimate Orderly Sale proposal. Id. at 19.

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On July 22, 2016, the Receiver moved for permission to engage CBRE, a real

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estate brokerage firm, as a consultant in order to weigh the pros and the cons of the Xpera

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Report. ECF No. 1341-1. The Court granted the Receiver’s motion on August 30, 2016.

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ECF No. 1359. CBRE presented its findings on the GP properties on October 24, 2016.

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ECF No. 1419 (filed under seal). On November 22, 2016, the Receiver submitted a

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report evaluating the Xpera Report recommendations. ECF No. 1405. The Court

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reviewed the Receiver’s report and adopted the recommendations contained therein on

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December 12, 2016. ECF No. 1423.

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D. Production Partners Property

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The Production Partners Property (the “Property”) is one of three properties

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located in North Las Vegas, Nevada, known as the “Las Vegas 1 Properties.” ECF No.

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1517-1 at 2. The Property is owned outright by the Production Partners. Id. The

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Property is approximately 35.55 acres of undeveloped land. Id.

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On May 25, 2016, the Court authorized the Receiver to engage CBRE to list the

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Las Vegas 1 Properties for sale. Id.; see also ECF No. 1305. In 2015, the broker made

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an opinion of value of $3,300,000 for the Property. Id. The CBRE list price for the
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property is $4,000,000. Id. The Xpera Group valued the Property between $4,800,000

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and $6,400,000. Id.

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In July 2017, the Receiver received an all-cash offer to purchase the Property for

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the full list price of $4,000,000 from Guy M. Wells (“Wells”). Id. In accordance with

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the Court-approved modified Orderly Sale procedures, see generally ECF No. 1309,

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1359, the Receiver sent notice of the offer to investors, and no substantive responses were

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received. ECF No. 1517-1 at 4. The Receiver and Wells executed a Purchase and Sale

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Agreement and Joint Escrow Instructions, which is subject to a qualified overbid and this

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Court’s approval. Id. at 3. Wells removed all contingencies—besides Court approval—

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on September 14, 2017. Id. at 3. On October 18, 2017, the Receiver notified the Court

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that no qualified overbids had been received for the Property. ECF No. 1535.

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E. Conclusion

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The Court finds that the purchase price of $4,000,000 is reasonable in light of the

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2015 broker’s opinion of value and that the purchase price is the same as the list price.

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While the Xpera Group’s valuation range begins above the purchase price, that range was

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based on a recommendation that the Property be held for 5 to 10 years. ECF No. 1517-2

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at 2–3 ¶ 4. The Court declined to adopt that recommendation. ECF No. 1304 at 18.

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The Court is also satisfied that the Receiver has complied with the modified

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Orderly Sale procedures. The Receiver’s notice of the sale adhered to the modified

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Orderly Sale procedures—which require that notice of the sale be published “in the

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county, state, or judicial district of the United States wherein the realty is situated,” 28

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U.S.C. § 2002 (emphasis added)—by publishing notice in the Las Vegas Review-Journal

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and by providing notice to the investors. Accordingly, and given that no opposition to

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the present Motion has been filed or raised, and no qualified overbid was received, the

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Court GRANTS Receiver’s motion for approval of sale (ECF No. 1517).

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ORDER
The Motion for Approval of Sale of the Production Partners Property and
Authority to Pay Broker's Commission filed by Thomas C. Hebrank—the Court5
3:12-CV-02164-GPC-JMA

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appointed receiver for First Financial Planning Corporation d/b/a Western Financial

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Planning Corporation ("Western"), its subsidiaries, and the General Partnerships listed in

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Schedule 1 to the Preliminary Injunction Order entered on March 13, 2013—having been

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reviewed and considered by this Court, the Receiver having notified the Court that no

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qualified overbid has been received, and for good cause appearing therefore, the Court

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finds as follows:

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1.

The Motion is granted;

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2.

The sale of the Property known as the Production Partners Property, as

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described on Exhibit A to the Declaration of Thomas C. Hebrank in support of the

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Motion, by Thomas C. Hebrank, as receiver for Production Partners, to Guy M. Wells, is

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confirmed and approved;

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3.

The purchase price of $4,000,000 for the Production Partners Property is

confirmed and approved;

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4.

The Receiver is immediately authorized to complete the sale transaction,

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including executing any and all documents as may be necessary and appropriate to do so;

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and

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5.

Because a cooperating broker is representing the buyer, the Receiver is

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authorized to immediately pay, upon closing of the sale, a commission of 6% of the final

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purchase price to broker CBRE.

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IT IS SO ORDERED.
Dated: October 24, 2017

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3:12-CV-02164-GPC-JMA