Securities and Exchange Commission v. Schooler et al

Filing 1633

ORDER Granting #1613 Sale of Washoe V Property. Signed by Judge Gonzalo P. Curiel on 6/16/18. (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 WASHOE V PROPERTY

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

[ECF No. 1613]

Defendants.

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

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Property. ECF No. 1613. On June 21, 2018, the SEC filed a statement of non-opposition

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to the motion. ECF No. 1624. Based upon a review of the moving papers and the

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applicable law, 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. This decline, he noted, was due to three main factors:

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(1) 14 of the 23 properties were not appreciating in value1; (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.2 ECF No. 1304.

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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. Washoe V Property

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Prior to being transferred to the Qualified Settlement Trust Fund, the Washoe V

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Property (the “Property”)—approximately 177.45 acres of undeveloped land in Washoe

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County, Nevada—was held by two general partners: Pyramid Highway 177 Partners and

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Frontage 177 Partners. ECF No. 1613-1 at 2.

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In 2013, after receiving authorization from the Court, Receiver obtained an

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appraisal of the Property at $180,000. Id. Again with the Court’s approval, the Receiver

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obtained another appraisal in 2015 that estimated the value at $240,000. Id. The Xpera
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Group valued the property in early 2016 to be between $594,000 and $630,000, and

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recommended that the Property be “sold now ‘as is.’” Id.

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In January and August 2015, the Lansing Companies (“Lansing”) sent letters of

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intent to purchase the Property. Id. The Receiver declined those offers. Id. Lansing

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contacted the Receiver in 2016 and proposed to enter into a joint venture to develop the

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property, and with authorization from the Court, the Receiver had CBRE analyze the

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proposal. Id. at 3. CBRE recommended that the proposal be declined, and the Receiver

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agreed; the Court accepted that recommendation. Id.

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In December 2016, Lansing sent the Receiver an unsolicited letter of intent to

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purchase the property for $600,000. Id. In accordance with the Court-approved modified

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Orderly Sale procedures, see generally ECF No. 1309, 1359, the Receiver sent notice of

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the offer to investors, and no substantive responses were received. ECF No. 1613-1 at 3.

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The Receiver countered Lansing’s offer at $640,000, and Lansing accepted, subject to

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any overbids and this Court’s approval. Id. After the Court approved the sale, however,

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Lansing declined to close the sale. Id.

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Soon after that sale fell through, North Virginia Street Partners, LLC (“Buyer”)—

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represented by CBRE—sent the Receiver a credible offer to purchase the Washoe V

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Property for $530,000. Id. The Receiver provided notice of the offer to the investors,

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negotiated terms with Buyer, and entered into a Purchase and Sale Agreement and Joint

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Escrow Instructions, subject to qualified overbid and Court approval. Id. Buyer released

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all contingencies other than Court approval. Id.

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On July 2, 2018, the Receiver notified the Court that no qualified overbids had
been received for the property. ECF No. 1630.

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E. Conclusion

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The Court finds that the purchase price of $530,000 is reasonable in light of the

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fact that this price is substantially higher than the 2013 and 2015 appraisals, and while

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below the lower end of the Xpera Group’s valuation range, only by a minimal amount.

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Further counseling in favor of the reasonableness of this amount is the fact that the broker

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commission is only 4%, whereas the standard commission is 6%-10%.

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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 Reno Journal-Gazette, and

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

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

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Court GRANTS Receiver’s motion for approval of sale (ECF No. 1613).

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ORDER

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The Motion for Approval of Sale of Washoe V Property filed by Thomas C.

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Hebrank—the Court-appointed receiver for First Financial Planning Corporation d/b/a

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Western Financial Planning Corporation ("Western"), its subsidiaries and the General

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Partnerships listed in Schedule 1 to the Preliminary Injunction Order entered on

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March 13, 2013 (collectively, "Receivership Entities")—having been reviewed and

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considered by this Court, the Receiver having notified the Court that no qualified

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overbids have been received, and for good cause appearing therefore, the Court finds as

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follows:

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1.

The Motion is granted;

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2.

The sale of the Property known as the Washoe V Property, as described on

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Exhibit A to the Declaration of Thomas C. Hebrank in support of the Motion, to North

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Virginia Street Partners, LLC, is confirmed and approved;

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3.

The purchase price of $530,000 for the Washoe V 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.

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IT IS SO ORDERED.

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A commission in the amount of 4% of the gross sales price is approved.

Dated: July 16, 2018

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3:12-CV-02164-GPC-JMA