Securities and Exchange Commission v. Schooler et al

Filing 1642

ORDER #1625 Approving Sale of Twin Plant Property and Authority to Pay Broker's Commission. Signed by Judge Gonzalo P. Curiel on 8/13/18. (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 TWIN PLANT PROPERTY
AND AUTHORITY TO PAY
BROKER’S COMMISSION

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

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[ECF No. 1625]

Defendants.

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

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Property and Authority to Pay Broker’s Commission. ECF No. 1625. No opposition was

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filed. The SEC has indicated it supports the motion. ECF No. 1636. Based upon a

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review of the moving papers and the applicable law, the Court GRANTS the Receiver’s

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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 was $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. Twin Plant Property

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The Twin Plant Property (the “Property”) is approximately 22.81 acres of

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undeveloped land in San Diego County, California. ECF No. 1625-1 at 2. The Property

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is one of the “Tecate Properties,” all of which are in the San Diego area. Id. The

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Property was held outright by Twin Plant Partners, but it has since been transferred to the

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Qualified Settlement Fund Trust. Id.

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On May 25, 2016, the Court authorized the Receiver to list the Tecate Properties

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for sale with a broker named Real Blue Properties, which has since changed its name to
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Resonate Real Estate (the “Broker”). Id. at 2 & n.1; see also ECF No. 1203. The

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recommended list price was $60,000. ECF No. 1203. The Broker listed the properties

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and responded to over 70 phone calls and emails from interested parties, and toured the

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Property with interested parties on over 47 different occasions. ECF No. 1625-1 at 2.

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In 2013, the Receiver obtained an appraisal of the Property estimating the value to

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be $125,000. Id. at 3. In 2015, another appraisal of the Property estimated its value to be

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$39,607. Id. In 2016, Xpera Group valued the Property between $346,084 and

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$519,126. Id. Xpera’s valuation range, however, was premised on the Property being

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held for an indefinite period until San Diego County “finalizes the development plan in

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the area.” Id. While the County has been working on development of the area for over

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30 years, there is “no current timeframe for when the development plan will be

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finalized.” Id. Xpera has noted that the transactions in the area has “virtually ground to a

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halt,” and that between 2012 and 2015 the only transactions in the area were for between

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$25,000 and $42,000, with the exception of a $250,000 transaction that was a “prime

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property directly on the border.” Id. The Court rejected Xpera’s indefinite timing

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proposal. ECF No. 1304 at 17–18.

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After receiving no offers for the Property for many months after its listing, the

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Receiver determined that the best course of action would be to “gradually reduc[e] the list

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price.” ECF No. 1625-1 at 3. The list price was eventually reduced to $35,000, at which

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time Tony and Claudia Contreras (“Buyer”) made an offer to purchase the Property for

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that amount. Id. In accordance with the Court-approved modified Orderly Sale

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procedures, see generally ECF No. 1309, 1359, the Receiver sent notice of the offer to

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investors. ECF No. 1625-1 at 3. The Receiver and Buyer executed a Vacant Land

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

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overbid and this Court’s approval. Id. at 3–4. Buyer removed all contingencies—besides

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Court approval—on June 17, 2018. Id. On July 30, 2018, the Receiver notified the Court

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that no qualified overbids had been received for the Property. ECF No. 1638.

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//
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E. Conclusion

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The Court finds that the purchase price of $35,000 is reasonable in light of the fact

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that the Receiver received no offers until the present one, which was obtained after

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reducing the list price to that amount. The Court is also satisfied that the Receiver has

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complied with the modified Orderly Sale procedures. The Receiver’s notice of the sale

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adhered to the modified Orderly Sale procedures—which require that notice of the sale

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be published “in the county, state, or judicial district of the United States wherein the

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realty is situated,” 28 U.S.C. § 2002 (emphasis added)—by publishing notice in the San

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Diego Union-Tribune and by providing notice to the investors. Accordingly, and given

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that no opposition to the present Motion has been filed or raised, and no qualified overbid

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was received, the Court GRANTS Receiver’s motion for approval of sale.

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ORDER

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The Motion for Approval of Sale of the Twin Plant Property and Authority to Pay

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Broker's Commission filed by Thomas C. Hebrank—the Court-appointed receiver for

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First Financial Planning Corporation d/b/a Western Financial Planning Corporation

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("Western"), its subsidiaries, and the General Partnerships listed in Schedule 1 to the

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Preliminary Injunction Order entered on March 13, 2013—having been reviewed and

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

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has been received, and for good cause appearing therefore, the Court 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 Twin Plant Property, as described on

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

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Thomas C. Hebrank to Albert Virgil Smith, IV, is confirmed and approved;

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3.

The purchase price of $35,000 for the Twin Plant 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.

Pursuant to the listing agreement with the broker, a commission in the

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amount of 9% of the gross sales price (one third of which will be paid to Buyer’s broker)

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is approved.

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IT IS SO ORDERED.
Dated: August 13, 2018

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