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.: 0^?£\)(cS5

v.

WATERSIDE CAPITAL

CORPORATION,
Defendant.

COMPLAINT FOR RECEIVERSHIP UNDER 15 U.S.C. S 687c,
PERMANENT INJUNCTIVE RELIEF AND MONEY JUDGMENT

COMES NOW Plaintiff, the United Statesof America, on behalf of its agency the United
States Small Business Administration, and for its cause of action states as follows:
PARTIES, JURISDICTION AND VENUE

1.

This is a civil action brought under 15 U.S.C. § 687c by the United States of

America on behalfof its agency, the United States Small Business Administration (hereinafter
"SBA," "Agency," or "Plaintiff), whose central office is located at 409 Third Street, S.W.,
Washington, D.C. 20416.

2.

Jurisdiction is conferred on this Court by virtue of Sections 308(d), 311, and 316

of the Small Business Investment Act of 1958, as amended (hereinafter the "Act"), 15 U.S.C. §§
687(d), 687c, 687h; and 28 U.S.C. § 1345.

3.

Defendant, Waterside Capital Corporation, (hereinafter "Waterside" or

"Defendant") is a Virginia corporation and maintains its principal office and/or principal place of
business at 2505 Cheyne Walk, Virginia Beach, Virginia 23454.

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4.

Waterside was licensed by SBA as a Small Business Investment Company, SBA

license number 03/03-0205.

5.

Venue is proper under 15 U.S.C. §§ 687(d), 687h, and 28 U.S.C. § 1391(b).
STATEMENT OF FACTS

6.

Waterside was licensed by SBA as a Small Business Investment Company

("SBIC" or "licensee") pursuant to Section 301 of the Act, 15 U.S.C. § 681, SBA License No.

03/03-0205, solely to do business under the provisions ofthe Act and regulations promulgated
thereunder.

7.

SBICs are intended to advance the interests of small businesses by providing

financial assistance to small concerns. 15 U.S.C. § 661.

8.

Waterside was approved by SBA as a licensee with its sole business to operate as

an SBIC pursuant to the Act.

9.

Section 308(c) of the Act, 15 U.S.C. § 687(c), empowers SBA to prescribe

regulations to carry outthe provisions of the Actandto govern the operations of SBICs. SBA
has duly promulgated such regulations which are codified at Title 13 of the Code of Federal
Regulations, Part 107 (the "Regulations").

10.

Section 308(d) of the Act, 15 U.S.C. § 687(d), provides that upon determination

and adjudication of noncompliance or violation of the Actor the Regulations, all of the rights,
privileges and franchises of a licensee maybe forfeited and the company may be declared
dissolved.

11.

Section 311 of the Act, 15 U.S.C. § 687c, provides that, whenever in the

judgment of SBA, a licensee, or any otherperson, has engaged in or is about to engage in any
acts or practices which constitute or will constitute a violation of the Act or of any Ruleor

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Regulation promulgated pursuant to the Act, orof any order issued under the Act, then SBA may
make application for an injunction, and such Court shall have jurisdiction of such action and
shall grant permanent or temporary injunction, or other relief without bond, upon a showing that
such licensee has engaged in or is about to engage in any such acts or practices. The Court may
also appoint SBA to act as receiver for such licensee.

12.

In accordance with Sections303(a) and 303(b)of the Act, 15 U.S.C. § 683(a) and

(b), SBA provided financing to Waterside inthe principal sum of $16,100,000 (sixteen million
one hundred thousand dollars) through the purchase or guarantee of debentures (hereinafter the
"Debentures").

13.

The Debentures were expressly subjectto and incorporated by reference the

Regulations, including, but not limited to, the provisions of 13 C.F.R. §§107.1810 and 107.1830
through 107.1850. Section 107.1810(g)(1) provides thatthe entire indebtedness of an SBIC to
SBA may be declared by SBA to be immediately dueand payable upon the happening of certain
events of default identified in 13 C.F.R. §107.1810(f), including without limitation capital
impairment and failure to make payment.

14.

By letter dated May 26, 2009, Waterside was notified that it was in default of the

Regulations due to its conditionof Capital Impairment and was given 15 days to cure the
impairment, but failed to do so. Therefore, SBA determined that Waterside was in violation of
13 C.F.R. §1810(f)(5).

15.

By letter dated March 30, 2010, SBA notified Waterside that Waterside was

transferred to liquidation status, and demanded the payment of outstanding principal and interest.
16.

SBA and Waterside entered into a Loan Agreement, Secured Note and Security

Agreement, all of which were effective September 1,2010. The LoanAgreement and Secured

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Note restructured the Debentures. The Loan Agreement provided that all covenants, agreements,

representations and warranties made in itsurvived the restructuring and the execution ofthe
Secured Note and Security Agreement.

17.

Under the Loan Agreement and Secured Note, Waterside promised to repay

principal and interest to the SBA on a quarterly schedule. The Loan Agreement provided that if
an event of default occurred and remained uncured for thirty days after the date of the letter from

SBA, the entire unpaid balance of the principal and interest of the Secured Note and all other
obligations of Waterside to SBA would become immediately due and payable without the
necessity of demand, presentment, protest or notice upon Waterside, all of which were expressly
waived by Waterside.

18.

Further, the Loan Agreement provided that, in the event of a default, SBA could

choose to file a stipulation and consentjudgment and order for receivership executed by
Waterside.

19.

By letter dated May 24,2012, SBA notified Waterside that it was in default under

terms of the Loan Agreement and Secured Note for failure to make principal and interest
payments when due.
20.

As a result, SBA accelerated the amounts due and owing under the Secured Note.

21.

Waterside is in default of the Loan Agreement and Secured Note.

22.

Due to Waterside's default, SBA is authorized under 15 U.S.C. § 687c to institute

these proceedings for the appointment of SBA as Waterside's receiver. Waterside through its
counsel has already consented to the requested relief.

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COUNT ONE
DEFAULT

23.

Paragraphs 1through 22 are hereby incorporated byreference as though

set forth in their entirety herein.

24.

SBA entered into a Loan Agreement, Secured Note and Security Agreement with

Waterside effective September 1, 2010.

25.

Pursuant to the Loan Agreement and the Secured Note, Waterside promised to

repay the amounts due according to a schedule of quarterly payments which included both
principal and interest.

26.

Waterside failed to make certain payments and therefore is in default of the Loan

Agreement and the Secured Note.
27.

28.

SBA has accelerated the Secured Note and made demand for payment in full.

Waterside is indebted to SBA in the total principal amount of $11,700,000.00 plus

interest in the amount of $62,634.58 as of October 31,2013. The total indebtedness of Waterside

to SBA as of October 31,2013 is $11,762,634.58 and the per diem interest accrual is $2,021.93
for each day after October 31,2013.

29.

The United States of America is entitled to judgment against Waterside in the

amountof $11,762,634.58, plus per diem interest accruing after October31,2013 and until the

entry of judgment at the rate of $2,021.93, and is entitled to post-judgment interest pursuant to
28 U.S.C. §1961.

30.

The Loan Agreement provides that as a remedy in the event of default SBA may

file and enforce a stipulation and consentjudgment and order which provides for the

appointment of a receiver. A Stipulation for Entry of Consent Order for Receivership and a

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Consent Order and Judgment have beenexecuted bycounsel for the Defendant.
31.

The United States of America is entitled to the appointment of a receiver. The

Court shouldappoint SBA to serve as receiver withoutbond.
COUNT TWO

NON PERFORMANCE OF AN AGREEMENT WITH SBA

32.

Paragraphs 1 through 31 are hereby incorporated by reference as though set forth

in their entirety herein.

33.

Section 107.507 of the Regulations, 13 CFR §107.507(a), provides that failure to

comply with the terms of written agreement with SBA is a violation of the Regulations and an
event of default.

34.

Waterside failed to comply with the terms of the Loan Agreement and Secured

Note by failing to make the required payments and therefore violated the Regulations, butfailed
to cure the event of default.

35.

The United States of America is entitled to the appointment of a receiver. The

Court should appoint SBA to serve as receiver without bond.
36.

The United States of America is entitled to an injunction against Waterside, its

officers, agents, employees and other personsacting in concert or participation therewith from:

(a) making anydisbursements of Defendant's funds; (b) using, investing, conveying, disposing,
executing or encumbering in any fashion any or all funds or assets of Defendant, wherever
located, without the prior written consent of the receiver; or (c) violating the Act or the
Regulations promulgated thereunder.
CONCLUSION AND PRAYER FOR RELIEF

WHEREFORE, Plaintiff, United States of America, prays as follows:

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A.

That pursuant to 15 U.S.C. § 687c, this Court take exclusive jurisdiction of

Waterside and all of its assets, wherever located, appoint SBA as permanent receiver of
Waterside, to serve without bond, for the purpose of liquidating all of Defendant's assets

and satisfying the claims of creditors therefrom in the order of priority as determined by
this Court, and pursuing causes of action available to Waterside, as appropriate.
B.

That this Court determine and adjudicate Waterside's default and

noncompliance with the Loan Agreement and Secured Note and noncompliance and
violation of the Act and the Regulations promulgated thereunder.
C.

That injunctive relief, both preliminary and permanent in nature, be

granted restraining Waterside, its officers, agents, employees and other persons acting in
concert or participation therewith from: (1) making any disbursements of Defendant's
funds; (2) using, investing, conveying, disposing, executing or encumbering in any

fashion any or all funds or assets of Defendant, wherever located, without the prior
written consent of the receiver; or (3) violating the Act or the Regulations promulgated
thereunder.

D.

That this Court direct entry of an order against Waterside which also

provides that Waterside's license to operate as an SBIC may be revoked upon the wind-

up and conclusion of the receivership thereof.
E.

That this Court enter a money judgment in favor of the United States of

America on behalf of SBA and against Waterside in the amount of $11,762,634.58,
which consists of principal in the amount of $11,700,000.00 plus interest in the amount

of $62,634.58 as of October 31,2013, plus per diem interest accruing until the date of

entry ofjudgment at the rate of $2,021.93 for each day after October 31,2013, and

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award post-judgment interest pursuant to 28 U.S.C. § 1961.

F.

That this Court grant the United States ofAmerica such other and further

relief as may bedeemed just and equitable.
Respectfully submitted,
UNITED STATES OF AMERICA
DANA J. BOENTE

ACTING UNITED STATES ATTORNEY

By:

Greg D. Stefan, VSB#M0855

Assistant Uttited States Attorney
Attorney for 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:
[e-mail]

U.S. SMALL BUSINESS ADMINISTRATION

Arlene Embrey
Trial Attorney

Attorney for United States of America
U.S Small Business Administration
409 Third Street, S.W. Seventh Floor

Washington, D.C. 20416
Telephone: [phone]
Facsimile:
[phone]
Email:

arlene.embrev(a).sba.gov