USA v. Waterside Capital Corporation

Filing 1

Consent ORDER and Judgment Dismissing Counterclaim, Appointing Receiver, Granting Permanent Injunctive Relief and Granting Money Judgment. by Mark S. Davis, United States District Judge on 05/28/2014. (Attachments: # 1 Complaint, # 2 Civil Cover Sheet) (dbera, )

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IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
NORFOLK DIVISION

UNITED STATES OF AMERICA,

Plaintiff,

CIVIL ACTION NO.: 2:13-cv-00653-MSD-LRL
WATERSIDE CAPITAL
CORPORATION,
Defendant.

CONSENT ORDER AND JUDGMENT

DISMISSING COUNTERCLAIM. APPOINTING RECEIVER. GRANTING
PERMANENT INJUNCTIVE RELIEF AND GRANTING MONEY JUDGMENT

The United States of America (the "United States"), acting on behalfof the United States

Small Business Administration ("SBA"), commenced this matter by the filing a Complaint for

Receivership Under 15 U.S.C. § 687c, Permanent Injunctive Relief and Money Judgment (the
"Complaint"). On January 27,2014, Waterside Capital Corporation ("Waterside") filed an
Answer and Counterclaim.

SBA licensed and regulatedWaterside as a Small Business Investment Company

("SBIC") under the Small Business Investment Act of 1958, as amended, 15 U.S.C. § 661, et
seg. (the "Act"). Waterside is subject to regulations governing SBICs, which are codified at
Title 13 of the Code of Federal Regulations, Part 107 (the "Regulations"). Pursuant to a

Stipulation for Entry of Consent Order and Judgment Dismissing Counterclaim, Appointing
Receiver, Granting Permanent Injunctive Relief and Granting Money Judgment dated May 27,
2014 ("Stipulation"), the parties have requested the Court to enterthis Consent Order and

Judgment ("Order"). Accordingly, it is hereby ORDERED, ADJUDGED AND DECREED
THAT:

1

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1.

Pursuant to 15 U.S.C. §687c, this Court takes exclusive jurisdiction of Waterside

and all ofits assets and property, ofwhatever kind and wherever located, and the SBA is hereby
appointed receiver ("the Receiver") of Waterside to serve without bond until further orderof this

Court. The Receiver is appointed for the purpose ofmarshaling and liquidating in an orderly
manner all ofWaterside's assets and satisfying the claims ofcreditors in the order ofpriority as
determined by this Court. This case shall remain open during the period ofreceivership.
2.

The Receiver shall have all powers, authorities, rights, and privileges previously

possessed bythe officers, directors, investment advisors, and other agents of Waterside under

applicable state and federal law and the corporate governance documents ofsaid corporation, in
addition to all powers and authority ofa receiver atequity, and all powers and authority
conferred upon the Receiver by the provisions of 15 U.S.C. § 687c and 28 U.S.C. § 754. The

officers, directors, employees, and other agents ofWaterside are hereby dismissed. Such persons
shall have no authority with respect to Waterside's operations or assets, except to the extent as
may hereafter be expressly granted by the Receiver. The Receiver shall assume and control the

operation of Waterside and shall pursue and preserve all of its claims.

3.

The past and/or present officers, directors, employees, investment advisors,

agents, trustees, attorneys, accountants, and employees of Waterside, as well as all those acting

intheir place, are hereby ordered and directed to turn over tothe Receiver forthwith all books,
records, documents, accounts, and all other instruments and papers of and relating to Waterside

and its assets and all other assets and property ofthe corporation, whether real or personal. The
former president of Waterside, Franklin P. Earley, and/or the former chieffinancial officer of

Waterside, Julie Stroh, shall furnish to the Receiver a written statement within ten (10) days after
the entry of this Order listing (i) the identity, location, and estimated value of all assets of

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Waterside; (ii) the names, addresses and amounts of claims of all known creditors of Waterside;
and (iii) the names and addresses of all known shareholders of Waterside. Within thirty (30)
days following the entry of this Order, Mr. Earley and/or Ms. Stroh shall also furnish a written
report describing all of Waterside's assets. All persons having control, custody, or possession of
any assets or property of Waterside are hereby directed to turn such assets and property over to
the Receiver.

4.

The Receiver shall promptly give notice of its appointment to all known officers,

directors, agents, employees, shareholders, creditors and debtors of Waterside, as the Receiver
deems necessary or advisable to effectuate the operation of the receivership. All persons and
entities owing any obligation or debt to Waterside, until further ordered by this Court, shall pay

all such obligations in accordance with the terms thereof to the Receiver and the receipt of such
payments by the Receiver shall have the same force and effect as if Waterside had received such
payments.

5.

The Receiver is hereby authorized to open such Receiver's accounts at banking or

other financial institutions to extend credit on behalf of Waterside, to utilize SBA personnel, and

to employ such other personnel as it may deem necessary to effectuate the operation of the
receivership, including, but not limited to, attorneys, accountants, and appraisers, and is further
authorized to expend receivership funds to compensate such personnel in such amounts and upon
such terms as the Receiver shall deem necessary and reasonable in light of the usual fees and

billing practices and procedures of such personnel. The Receiver is not required to obtain Court
approval prior to the disbursement of receivership funds for payments to personnel employed by
the Receiver or for expenses that the Receiver deems necessary and reasonable for the orderly
administration and operation of the receivership. In addition, the Receiver is authorized to

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reimburse the SBA for necessary and reasonable travel expenses incurred by SBA personnel in
the establishment and administration ofthe receivership. The Receiver may, without further
order ofthis Court, transfer, compromise, or otherwise dispose ofany asset (including without
limitation any claim), other than real estate.

6.

Waterside's past or present officers, directors, employees, agents, accountants,

shareholders, debtors and creditors of Waterside, and other appropriate persons (including
without limitation, Waterside's portfolio ofsmall business concerns and financial institutions

doing business with Waterside and/or Waterside's portfolio of small business concerns) shall,
upon reasonable notice, answer under oath to the Receiver all questions that the Receiver may
put to them in compliance with the Federal Rules ofCivil Procedure, and pursuant thereto shall

produce any non-privileged documents as required by the Receiver regarding Waterside, or any
other matter relevant to the operation or administration ofthe receivership or the collection of

funds due to Waterside. In the event the Receiver determines it necessary to require the
appearance ofany ofthe aforementioned persons, the production ofdocuments, information, or

any other discovery concerning the assets, property or business operations of Waterside, or any
other matter relevant to the operation or administration ofthe Receivership or the collection of

funds due to Waterside, the Receiver shall make its discovery request(s) in compliance with the
Federal Rules of Civil Procedure.

7.

The parties or prospective parties to any and all civil legal proceedings (excluding

the instant receivership proceeding, Waterside Capital Corporation v. Businessventures.com, LLC,
et al, Case No. CL13002061-00 (Va. Cir. Ct. Virginia Beach), and Waterside Capital Corporation

v. Paul Dietrich, case No. CL12-6115 (Va. Cir. Ct. City ofNorfolk)), wherever located, including,

but not limited to, arbitration proceedings, bankruptcy or foreclosure actions, default proceedings,

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or any other proceedings involving (i) Waterside, (ii) any assets ofWaterside, (iii) the Receiver for

Waterside, or (iv) Waterside's present or past officers, directors, employees, agents, and
representatives, to the extent said civil legal proceedings involve any action taken by any ofthem
while acting in their official capacity with Waterside, are enjoined from taking any action,
including discovery, commencing, or continuing any legal proceeding ofany nature without
further order of this Court.

8.

All civil legal proceedings (excluding the instant receivership proceeding,

Waterside Capital Corporation v. Businessventures.com, LLC, et al, Case No. CL13002061-00

(Va. Cir. Ct. Virginia Beach), and Waterside Capital Corporation v. Paul Dietrich, Case No.

CL12-6115 (Va. Cir. Ct. City ofNorfolk)), wherever located, including arbitration proceedings,
foreclosure activities, bankruptcy actions, or default proceedings involving (i) Waterside, (ii) any
ofassets ofWaterside, (iii) the Receiver for Waterside or (iv) Waterside's present or past officers,

directors, employees, agents, and representatives, to the extent said civil legal proceedings involve
any action taken in their official capacity with Waterside, are stayed in their entirety, and all Courts
having any jurisdiction thereof are enjoined from taking or permitting any action in such
proceedings until further Order of this Court.

9.

As to any claims or causes ofaction accrued or accruing in favor ofWaterside

against athird person or party, any applicable statute oflimitations is tolled during the period in
which the injunctions against the commencement of legal proceedings in paragraphs 7and 8,
remains in effect.

10.

Waterside and its past and/or present officers, directors, employees, agents, and

representatives and other persons acting in concert or participating therewith be, and they hereby
are, enjoined from, either directly or indirectly, taking any actions or causing any such action to

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be taken which would dissipate the assets and/or property of Waterside to the detriment ofthe

Receiver appointed in this case, including but not limited to destruction ofcorporate records, or
which would violate the Small Business Investment Act of 1958, as amended, 15 U.S.C. §661,
et seq., or the Regulations.

11.

The Receiver shall assert and protect the attorney/client privilege and work product

doctrine on all applicable communications that occurred prior to the date ofthis Order.

12.

The Receiver is authorized to borrow on behalfof Waterside, from the SBA, up to

$2,000,000.00, and is authorized to cause Waterside to issue Receiver's Certificates of

Indebtedness in the principal amounts ofthe sums borrowed, which certificates will bear interest at

10 percent per annum or less as circumstances may require, and which will have amaturity date
that is 18 months after the date ofissue. The Receiver's Certificates ofIndebtedness shall have

priority over all other debts and obligations ofWaterside, excluding administrative expenses ofthe

Receivership, whether presently existing or hereinafter incurred, including without limitation any
claims of stockholders of Waterside.

13.

As aresult ofnonperformance ofcertain repayments required under that Loan

Agreement dated September 1,2010, and related nonperformance in payment ofcertain

Debentures, Waterside has not complied with the requirements of 13 C.F.R. §107.507(a) and 13
C.F.R. §107.1810 (f)(3) ofthe Regulations. The Receiver, after completing its activities in
accordance with this Order, may recommend that Waterside's license as an SBIC be revoked.

14.

Judgment is hereby entered in favor ofthe United States ofAmerica, on behalfof

the SBA, and against Waterside in the amount of$11,770,722.31, consisting of $11,700,000 in
principal and $70,722.31 in interest through May 5, 2014, plus per diem interest accruing at the
rate of$2,021.93 for each day after May 5, 2014 through the date ofentry ofjudgment. Post-

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judgment interest shall accrue pursuant to 28 U.S.C. §1961 from the day after the date this Order
is entered.

15.

Waterside's Counterclaim is dismissed with prejudice.

16. The May 28,2014 settlement conference, the October 10,2014 final pretrial
conference and the November 4, 2014 trial are cancelled and the Clerk is directed to remove
such mattersfrom the Court's docket.

17.

The Court retains jurisdiction ofthis matter to entertain additional motions and to

enter such further orders as may be just and proper.
IT IS SO ORDERED.

ENTERED this 3$"^ day ofMay, 2014.
Mark S. Davis

United States District ftirfg?
HONORABLE MARK S. DAVIS
UNITED STATES DISTRICT JUDGE

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WE ASK FOR THIS:

UNITED STATES OF AMERICA
DANAJ.BOENTE

UNITED STATES ATTORNEY

By:

Gregory DMtefan, VSB # 40855
Assistant United States Attorney
Attorney for Plaintiff United States of America

United States Attorney's Office
101 W. Main Street, Suite 8000
Norfolk, Virginia 23510-1671
Telephone:
[phone]
Facsimile:
[phone]
E-mail:

gree.stefan(5),usdoi.gov

SEEN AND NO OBJECTION:

WATERSIDE CAPITAL CORPORATION

By:

William L. Stauffef, JryEsq., VSB # 14208
Counsel for DefendanfWaterside Capital Corporation
Williams Mullen

721 Lakefront Commons, Suite 200

Newport News, Virginia 23606
Telephone: [phone]
Facsimile:
[phone]
E-mail:

[e-mail]