Securities and Exchange Commission v. Schooler et al
Filing
494
ORDER Denying # 476 Motion for Partial Reconsideration. The hearing on the Motion for Reconsideration, currently set for September 27, 2013, is VACATED. Signed by Judge Gonzalo P. Curiel on 9/19/2013. (srm) (jrl).
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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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Plaintiff,
v.
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LOUIS V. SCHOOLER and FIRST
FINANCIAL PLANNING
CORPORATION, dba Western
16 Financial Planning Corporation,
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Defendants.
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Case No. 3:12-cv-2164-GPC-JMA
ORDER DENYING MOTION FOR
PARTIAL RECONSIDERATION
(ECF NO. 476)
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This is a civil enforcement action initiated by the Securities and Exchange
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Commission (“SEC”), in which the SEC alleges defendants Louis V. Schooler
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(“Schooler”) and First Financial Planning Corporation d/b/a Western Financial
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Planning Corporation (“Western”) defrauded investors through the sale of unregistered
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securities tied to interests in real property.
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More specifically, the SEC alleges that, since 2007, Defendants have defrauded
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thousands of investors by offering and selling approximately $50 million worth of
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general partnership units (“GP units”)—i.e., interests in general partnerships organized
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by Defendants—without disclosing material facts regarding the true value of the
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underlying land, the mortgages encumbering the properties, and when ownership of the
3:12-cv-2164-GPC-JMA
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underlying land was actually transferred from Defendants to the general partnerships
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(“GPs”).
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The Court has entered a preliminary injunction and appointed Thomas C.
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Hebrank (“Receiver”) as permanent receiver to operate and manage the affairs of
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Western, its subsidiaries, and the several GPs that Western formed in connection with
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the sale of the aforementioned interests in real property.
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On August 16, 2013, the Court granted in part and denied in part Defendants’
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Motion to Modify Preliminary Injunction Order, in which Defendants requested that
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the Court remove the GPs from the receivership estate. (ECF No. 470.) In ordering
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that the GPs should be removed from the receivership estate, the Court imposed certain
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equitable conditions on their removal, including the following condition:
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[T]he Court first orders a pro rata reduction of Western’s equity interests
in the GPs according to the properties’ current fair market value as set
forth in the appraisals obtained by the Receiver. To the extent a GP
account has a zero balance or insufficient funds to meet an obligation due
within ninety days from the date of the reduction of Western’s interests,
such interests shall nonetheless be formally liquidated with no payment
to Western. Before the GPs are released from the receivership, all of
Western’s equity interests in the GPs shall be liquidated to ensure that
Western will have no future responsibility for any liability incurred by the
GPs. Additionally, given the enormous disparity between the purchase
prices of the GP properties and the funds Western raised from the GPs,
the Court finds it equitable to preclude Western from receiving a share of
any proceeds received from any future sale of the GP properties.
(ECF No. 470 at 25-26.)
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Before the Court is Defendants’ Motion for Partial Reconsideration of the Order
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Granting in Part and Denying in Part Defendants’ Motion to Modify Preliminary
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Injunction Order (“Motion for Reconsideration”). (ECF No. 474.) The Court set an
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expedited briefing schedule and hearing on the Motion for Reconsideration. (ECF No.
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483.) On September 9, 2013, both the SEC and the Receiver filed responses in
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opposition to the Motion for Reconsideration. (ECF Nos. 485, 486.) On September
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16, 2013, Defendants filed a reply. (ECF No. 490.) Despite Defendants’ request for
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oral argument, the Court deems the Motion for Reconsideration suitable for disposition
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without oral argument. See CivLR 7.1.d.1.
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Defendants assert that Federal Rules of Civil Procedure 59(e) and 60 govern
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their motion for reconsideration. Rules 59(e) and 60, however, apply only to motions
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attacking final, appealable orders. United States v. Martin, 226 F.3d 1042, 1048 n.8
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(9th Cir. 2000).
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contention that the Court’s condition—that certain assets held in the receivership estate
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be sold—constitutes a final, appealable order.
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And Defendants have provided no authority to support their
Thus, Defendants’ Motion for Reconsideration is more appropriately considered
under Rule 54(b), which provides in part that,
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any order other decision, however designated, that adjudicates fewer than
all the claims or the rights and liabilities of fewer than all the parties does
not end the action as to any of the claims or parties and may be revised at
any time before the entry of a judgment adjudicating all the claims and all
the parties’ rights and liabilities.
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Rule 54(b) reflects a district court’s “inherent jurisdiction to modify, alter, or revoke”
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its own orders before they become final. Martin, 226 F.3d at 1049.
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A motion for reconsideration should be granted if: (1) the movant presents the
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court with newly discovered evidence; (2) the court committed clear error or the initial
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decision was manifestly unjust; or (3) there is an intervening change in controlling law.
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Sch. Dist. No. 1J, Multnomah County, Or. v. ACandS, Inc., 5 F.3d 1255, 1263 (9th
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Cir.1993); see also CivLR 7.1.i.1 (requiring motions for reconsideration to be filed
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“within twenty-eight (28) days after the entry of the ruling, order or judgment sought
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to be reconsidered”). Whether to grant or deny a motion for reconsideration is within
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the sound discretion of the district court. Navajo Nation v. Norris, 331 F.3d 1041,
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1046 (9th Cir.2003) (citing Kona Enter., Inc. v. Estate of Bishop, 229 F.3d 887, 883
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(9th Cir.2000)).
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Defendants base their Motion for Reconsideration on their contention that the
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Court’s condition that Western’s interests in the GPs be liquidated constitutes clear
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error and is manifestly unjust. “[T]he clearly erroneous standard is significantly
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deferential, requiring a definite and firm conviction that a mistake has been
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committed.” Concrete Pipe & Prods. v. Constr. Laborers Pension Trust, 508 U.S. 602,
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623 (1993) (internal quotation marks omitted).
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Defendants argue the Court’s condition deprives Western of $11 million worth
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of assets without due process because Western has not yet been found liable on any of
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the SEC’s underlying claims. In addition to their due process argument, Defendants
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attack the Court’s bases for imposing these conditions.
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As to the Court’s intention to protect Western from any future liability incurred
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by the GPs, Defendants argue that “the operative documents governing the GPs already
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define the respective relationships and burdens of all relevant parties,” and that the
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Court’s concern “can be adequately addressed through clear notice to the investors of
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the fact that . . . [while, Western owns interests in the GPs purportedly worth $11
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million,] Western is not responsible for any liability incurred by the GPs.”
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Regarding the Court’s intention to preclude Western from taking even more
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money from investors in the event the GPs decide to sell their properties, Defendants
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argue they are entitled to a trial to determine whether investors paid a fair price for their
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property interests.
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Defendants then argue on behalf of the GPs–without any indication that counsel
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for Defendants also represents the GPs–that the Court’s condition alters the structure
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of the GP entities in a way that increases “the ongoing pro rata burden each investor
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will have going forward.”
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“The Power of a district court to impose a receivership or grant other forms of
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ancillary relief . . . derives from the inherent power of a court of equity to fashion
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effective relief.” SEC v. Wencke, 622 F.2d 1363, 1369 (9th Cir. 1980). The “primary
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purpose of equity receiverships is to promote orderly and efficient administration of the
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estate by the district court for the benefit of creditors.” SEC v. Hardy, 803. F.2d 1034,
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1038 (9th Cir. 1986). The court may therefore employ “reasonable procedures” to
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serve this purpose. Id.
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“Congress has authorized federal receivers to exercise broad powers in
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administering, retrieving, and disposing of assets belonging to the receivership.” SEC
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v. Ross, 504 F.3d 1130, 1145 (9th Cir. 2007) (emphasis added). Indeed, “the power
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of sale is within the scope of a receiver’s ‘complete control’ over receivership assets.”
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SEC v. Am. Capital Invs., Inc., 98 F.3d 1133, 1144 (9th Cir. 1996), abrogated on other
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grounds by Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83 (1998).
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“A district court’s power to supervise an equity receivership and to determine
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the appropriate action to be taken in the administration of the receivership is extremely
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broad.” SEC v. Capital Consultants, LLC, 397 F.3d 733, 738 (9th Cir. 2005). A
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district court’s supervisory decisions are reviewed for an abuse of discretion. Id.
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Defendants have fervently argued that the GPs are completely independent from
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Western and thus should never have been included in the receivership estate. Now
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Defendants argue that Western should remain tied to the GPs because Western
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maintains interests in the GPs purportedly worth $11 million. In the first place,
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Defendants provide no support for their contention that their interests in the GPs
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amount to $11 million. In the second place, Defendants apparently forget that they
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themselves structured the GPs in a way that requires a liquidation of Western’s
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interests in the GPs to fully separate Western from the GPs. Recognizing this, the
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Court sought the most equitable way to remove the GPs from the receivership estate
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in a way that would, on one hand, ensure the GPs’ actual independence from Western
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and, on the other hand, protect the remaining receivership estate (i.e., Western) from
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any future risk of liability incurred by the GPs. In short, Defendants cannot have it
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both ways.
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The Court is not convinced by Defendants’ conclusory assertion that Western
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would bear no responsibility for any liabilities incurred by the GPs. First, Defendants
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provide no documentation to support their position. And second, Defendants’ assertion
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runs counter to the general rule that each interest holder in a general partnership is
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jointly and severally liable for the debts and liabilities of the general partnership. See,
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e.g., Rappaport v. Gelfand, 197 Cal. App. 4th 1213, 1231 n.14 (2011) (“Under the rules
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applicable to general partnerships, ‘all partners are liable jointly and severally for all
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obligations of the partnership.’”).
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Neither is the Court convinced that the fact that Defendants have not yet been
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found liable mandates reconsideration of the Court’s concern that the GPs may be
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required to pay even more money to Western. Once removed from the receivership
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estate, some GPs may decide to sell their properties, and if Western maintains an
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interest in the GPs, it is undisputed that investors would be required to share their
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recovery with Western despite the undisputed fact that they have already paid Western
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approximately 500% of what Western initially paid for the properties.
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This is not the first time the Court has considered Defendants’ arguments against
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liquidation of Western’s interests in the GPs, as the Court also considered Defendants’
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arguments in opposition to the Receiver’s Valuation Report and Recommendation,
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which recommended that Western’s interests be liquidated in any GP that voted to
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leave the receivership estate.
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Moreover, it is not as if the Court is ordering that Western merely give away its
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interests. Rather, to protect investors and the receivership estate, the Court has ordered
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that Western’s interests be sold back to the GPs according to the current fair market
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value of Western’s interests as provided by the most reliable information currently
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before the Court—the appraisals obtained by the Receiver, an officer of the Court. See
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In re San Vincente Med. Partners Ltd., 962 F.2d 1402, 1409 (9th Cir. 1992).
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Based on the foregoing, the Court is not left with “a definite and firm conviction
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that a mistake has been committed.” See Concrete Pipe & Prods., 508 U.S. at 623.
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Nor is the Court convinced that its decision was manifestly unjust. Accordingly,
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Defendants’ Motion for Reconsideration is DENIED. The hearing on the Motion for
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Reconsideration, currently set for September 27, 2013, is VACATED.
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IT IS SO ORDERED.
DATED: September 19, 2013
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HON. GONZALO P. CURIEL
United States District Judge
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3:12-cv-2164-GPC-JMA
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