United States of America v. Novus Ventures II

Filing 2

COPY OF ORDER (USDC-Northern District California 5:12cv523) appoint U.S. Small business Administration as received of Novus. (MKR)

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Case5:12-cv-00523-LHK Document44 Filed08/08/12 pag~L~~(? , h 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 SAN JOSE DIVISION 10 t.1S 's 11 == Qt.1S 12 .- ..... a.. ...- 13 UNITED STATES OF AMERICA, t:~ U U f+.< .. ColO Plaintiff, v. NOVUS VENTURES II, L.P., I:) .S b 14 =.~ rr;Cl .as Su 15 1 0 :::Z Defendant. 1:1 u j;;l-fj ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER UNDER 15 U.S.C. § 687C On February 1,2011, the United States filed a Complaint for Receivership and Injunction 17 !5 ~ Case No.: 12-CV-00523-LHK ----------------------------~) 16 fI.l,€ ) ) ) ) ) ) ) ) on behalf of its agency, the U.S. Small Business Administration ("SBA" or "Plaintiff'), against 18 Defendant Novus Ventures II, L.P. ("Novus" or "Defendant"), a Delaware limited partnership that 19 maintains its place of business and principal office in Cupertino, California. SBA seeks 20 receivership ofNovus, among other forms of injunctive relief, pursuant to Sections 308(d) and 311 21 of the Small Business Investment Act of 1958, as amended. See 15 U.S.C. §§ 687(d), 687c; ECF 22 No.1 ("Compl."). Before the Court is Plaintiff's Motion for Injunctive Relief and Appointment of 23 SBA as Receiver Under 15 U.S.C. § 687c, filed on April 19,2012. ECF No. 18 ("Mot."). The 24 Court held a hearing on the motion on July 26,2012. Having considered the parties' submissions 25 and argument and the relevant law, and for the reasons discussed herein, the Court GRANTS 26 Plaintiff's motion. 27 28 I. BACKGROUND A. Factual Background Case No.: 12-CV-OOS23-LHK ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER CaseS:12-cv-OOS23-LHK Document44 Filed08108/12 Page2 of 13 The purpose of the Small Business Investment Act of 1958 (the "Act") is to improve and 2 stimulate the national economy, and small business in particular, by stimulating and supplementing 3 the flow of private equity capital and long-tenn loan funds that small businesses need for sound 4 financing of their operations and growth. I See 15 U.S.C. § 661. Section 391 of the Act authorizes 5 SBA to license non-bank financial institutions, as well as private companies including 6 corporations, as Sma)] Business Investment Companies ("SBIC"), which in turn provide capital to 7 small businesses. See 15 U.S.C. § 681. Pursuant to Section 303 ofthe Act, SBA can provide 8 financing to a SBIC through what is known as Participating Securities, a fonn of Leverage as 9 defined in the Regulations at 13 C.F.R. § 107.1500 et seq. See 15 U.S.C. § 683; 13 C.F.R. §§ 10 107.1100, 1500. By issuing a Leverage instrument, SBA becomes a Preferred Limited Partner of 11 the SBIC. Id. In addition, when a SBIC is licensed, the license application contains an == cas 12 acknowledgment that the SBIC will be operated in accordance with the Act and the implementing .- ..... .....­ 13 Regulations, both of which place several restrictions on SBICs, including, among others, in regard 14 to their fmancing and business decisions. as 's t:c.S (,.)U .... c..,. ~o ... u .- ..... III .... ~.~ IIlQ $e 15 1Zlt: 16 industries. See Decl. of Greg Lahann ("Lahann Decl.") ~ 2. Novus's General Partner is DT 17 Associates II, LLC, of which Greg Lahann, Dan Tompkins, and Stewart Schuster are the Managing 18 Directors. Decl. of Stewart Schuster ("Schuster Decl.") ~~ 2-3. On January 5, 2001, SBA licensed 19 Novus as a SBIC pursuant to Section 301 (c) of the Act, 15 U.S.C. 681 (c), under SBA License No. 20 09179-0433. Decl. of Dianna L. Seaborn ("Seaborn Decl.") ~ 10. Pursuant to Section 303 of the 21 Act, 15 U.S.C. § 683, and 13 C.F.R. § 107.1600 et seq., SBA provided financing to Novus by 22 purchasing $68,100,000 in Participating Securities, and thereby became Novus's Preferred Limited 23 Partner. Seaborn Decl. ~ 12. SBA has paid the entire amount of$68.1 million, plus prioritized 24 payments of approximately $39,400,000, to the investor pool. Seaborn Decl. 25 SBA's financing to Novus, the Managing Directors have, collectively, personally invested over as~ .. ..c 1 0 .1:Z I: ~ ;J;S .... 0 IJ;.. Novus is a venture capital finn that invests in seed and early stage companies in technology ~ 12. In addition to 26 27 28 I Section 308(c) of the Act, 15 U.S.C. § 687(c), empowers SBA to prescribe implementing regulations to carry out the provisions of the Act. These implementing regulations are codified at Title 13 of the Code of Federal Regulations, Part 107 (the "Regulations"). 2 Case No.: 12-CV-00523-LHK ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER Case5:12-cv-00523-LHK Document44 Filed08/08/12 Page3 of 13 1 $1,200,000 in Novus. Lahann Decl. ~ 16. Novus' Limited Partners have also collectively invested 2 a total of$42,126,117 in Novus. /d. However, as Novus's Preferred Limited Partner, SBA has 3 priority over the private Limited Partners in liquidation, meaning, among other things, that SBA 4 must be repaid all of its Participating Securities before any private Limited Partners may obtain any 5 return oftheir capital. Seaborn Dec!. ~ 18. Among its responsibilities, SBA monitors the operation of all SBICs, in the course of which 6 7 it undertakes annual reviews of the SBIC's financial statements. In March 31,2006, Novus's 8 quarterly financial submission showed that Novus had a condition of "capital impairment" as 9 defined under 13 C.F.R. §§ 107.1830-1850. 2 SBA sent notification via letter dated June 5, 2006, lO that Novus had a condition of capital impairment of 80.92%, which exceeded the allowable II maximum of 60% under 13 C.F.R. §§ lO7.1830-1850. Seaborn Decl. ~ 15 & Ex. F. Pursuant to 13 == e tll 12 C.F.R. § 107 .1820(f), the letter directed Novus to cure the capital impairment within 15 days by .... "-' ....... ..... ­ 13 increasing its regulatory capital by not less than $14,647,109, plus an amount equal to any =.!a 14 additional unrealized depreciation and operating expenses incurred subsequent to March 31, 2006 . .... 8 15 Id. The letter also notified Novus that if it failed to cure its impairment, SBA would impose 16 Restricted Operations remedies under 13 C.F.R. § 107.1 820(f). /d. ·s t:cB til UU ~o ~(.) •~ !:= ~Q " II) .... .c: (/jt: "go ;:::Z 1:11) 17 i=l.;3 ... 0 ~ Novus failed to cure its capital impairment in the time and manner required by SBA. See 18 Lahann Dec!. ~ 10. Subsequently, SBA placed Novus on "Restricted Operations" status, imposing 19 several restrictions, including a prohibition on new portfolio investments unless approved by SBA, 20 prohibitions on distributions to any party other than SBA, and imposition of a 50% reduction in 21 management fees. Id.; Seaborn Decl. Ex. F at 1-2. SBA also required Novus to submit financial 22 information on a monthly basis, information on the status of each portfolio investment, a cash 23 report, and any additional liquidity requirements needed to meet follow-on investments or current 24 Capital impairment is the degree to which the regulatory capital of a SBIC has deteriorated because of accumulated losses. Generally speaking, the capital impairment percentage is calculated by adding the SBIC's undistributed net realized loss and net unrealized depreciation and dividing the result by the SBIC's private capital. See 13 C.F.R. § lO7.1840; United States v. ECC Partners, L.P., 820 F. Supp. 2d 654, 657 n.6 (D. Md. 2011). A capital impairment condition exists if the capital impairment percentage exceeds permitted levels set forth in the Regulations and varies depending on the percentage of equity capital investments made by the SBIC. See 13 C.F.R. § 107.1830(c)(2). 25 26 27 28 2 3 Case No.: 12-CV-OO523-LHK ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER CaseS:12-cv-OOS23-LHK Document44 Filed08/08/12 Page4 of 13 1 operating expenses. Seaborn Decl. Ex. F at 2. Novus complied with all of SBA' s imposed 2 reporting requirements. Lahann Dec1. ~ 10; Decl. of David Gerogosian ("Gerogosian Decl.") Ex. B 3 at 2-5. From the sales of some of its holdings and sale ofone of its portfolio companies, Novus 4 cured its capital impairment and was not impaired from September 2006 to August 2007. See 5 Lahann Decl. ~ 11. However, Novus again became capitally impaired shortly after the market 6 crashed. /d. 7 By letter dated July 22, 2008, SBA notified Novus that it was transferring Novus from 8 operating status to liquidation status. Seaborn Decl. ~ 17 & Ex. G. SBA also threatened to seek 9 receivership immediately, prompting Novus's General Partner to meet with SBA on September 10, 10 2008, to explore alternatives to receivership. Lahann Decl. ~ 12. Shortly after the September 10, 11 2008 meeting, Novus provided SBA with a plan to wind down Novus, subject to SBA's approval =:.: Q uC,) 12 and discretion ("Wind Down Plan"). Seaborn Decl. ~ 20 & Ex. I ("Wind Down Plan"); Lahann ~o 13 Decl. ~ 13. Pursuant to the Wind-Down Plan, executed on December 23, 2008, SBA agreed to 14 permit Novus's Managing Directors to manage the fund until it was completely liquidated and to 15 forbear from seeking receivership until December 1,2009, in exchange for Novus's agreement to ccs "s t:<B CCS .- .... .....­ .... c... a..Q .~.t:: =.~ 1'1)0 .!e oo"E ~~ = 16 provide SBA a signed order consenting to receivership. See Seaborn Decl. Ex. I at 3. The Wind CI) 17 Down Plan projected returns that would exceed the amount owed to SBA. Lahann Decl. ~ 13. "" 18 Novus had some initial success in executing its liquidation plan and was able to repay $28.6 19 million to SBA, which prompted SBA to allow Novus's General Partner to continue to manage the 20 fund's liquidation. Seaborn Decl. ~~ 12,22. However, Novus failed to meet its projections and 21 plans for liquidation in 2010,2011, and to date. In September 2008, Novus projected that it would 22 recover $40.9 million in 2010, whereas financial audits reveal that Novus's actual recovery for 23 2010 was only $3,466,108. See Seaborn Decl. Ex. 0 at 5P; id. Ex. J. Novus also projected in 24 September 2008 that it would recover over $86 million in 2011, whereas financial audits reveal that 25 Novus's actual recovery for 2011 was only $214,498. See Seaborn Decl. Ex. E at 5P; id. Ex. 1. In 26 fact, Novus's condition of capital impairment has been growing increasingly more severe. Since 27 2009 to date, Novus has maintained a condition of capital impairment not only in excess of its 28 permitted 60%, but in excess of 100%, which is a condition known as "extreme capital SCI) ~-S 0 ~ 4 Case No.: 12-CV-00523-LHK ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER Case5:12-cv-00523-LHK Document44 Filed08/08/12 Page5 of 13 impairment." See 13 C.F.R. § 107.1820(b); Seaborn Decl. ~ 19; McClintock Decl. Ex. 5. Based on 2 Novus's Form 468 submissions from 2008-2011, see Seaborn Decl. Exs. B-E, Novus's capital 3 impairment percentage was 101.09% at the end of 2008; 107.08% at the end of 2009; 116.31 % at 4 the end of201O; and 121.19% at the end of201 L Seaborn Decl. ~ 19; Mot. Ex. H. Furthermore, 5 even inc1uding the SBA-mandated reductions in management fees, from 2006 to date, the General 6 Partner has paid itself at least $4,635,078 in fees from the limited partnership for its management 7 ofNovus, not including other expenses such as accounting and legal services fees. 3 Seaborn Decl. 8 ~ 9 Decl. ~ 12. B. Procedural History 10 ·s t:c2 tV 21; Mot. at 13. Novus currently owes SBA $39.5 million in outstanding Leverage. Seaborn 11 On February 1, 20 11, the United States filed a Complaint for Receivership and Injunction =:.= CltV 12 on behalf of its agency, the U.S. Small Business Administration ("SBA" or "Plaintiff'), against .- ­ ..... 13 Defendant Novus Ventures 11, L.P. ("Novus"), seeking preliminary and permanent injunctive relief 14 to restrain Novus (all persons managers, partners, agents, employees etc) from: (1) making any 15 disbursement or distribution of any assets ofNovus; (2) using, conveying, encumbering in any 16 fashion any assets ofNovus, wherever located; and (3) from further violating the Act or the 17 Regulations promulgated thereunder. Compl. at 8. The Complaint asks this Court to take 18 exclusive jurisdiction ofNovus and all of its assets and to appoint SBA as receiver ofNovus for the 19 purpose of marshaling and liquidating the assets ofNovus to satisfy the claims of creditors as 20 determined by the Court. ld. U U .......... ClO ­ 1.(.) .~ !:I =.~ fI'lt:l .as =0 .... .c:: rlJt: "'Co ~Z =0 ... 0 ~.s ~ Novus filed an Answer to the Complaint on March 13, 2012. ECF No.5. Plaintiff filed the 21 22 instant motion on April 19, 2012, ECF No. 18; Defendant opposed the motion on June 21,2012, 23 ECF No. 22; and Plaintiff filed a reply on June 21, 2012, ECF No. 34. 4 The Court granted the 24 Defendant notes, however, that in addition to complying with SBA-mandated management fee reductions since 2006, in June 2011, the General Partner voluntarily reduced its fees by more than half and in March 2012 offered to reduce its fees to zero, although the SBA rejected this offer. Lahann Decl. ~ 15. 4 Plaintiff's reply brief exceeds the page limits imposed under the Civil Local Rules by more than 3 pages, and Plaintiff did not seek leave of the Court to file an oversized brief. See Civ. L.R. 7-3(c). In the future, failure to comply with the Civil Local Rule page limits will result in automatic striking of the excess pages. 25 26 27 28 3 5 Case No.: 12-CV-00523-LHK ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER Case5:12-cv-00523-LHK Document44 FiledOS/OSI12 Page6 of 13 parties' stipulated request to allow independent counsel of record for four ofNov us 's 95 limited 2 partners in their individual capacities, John Skeen, Paul K1ein, David Lundquist, and Dan 3 Tompkins ("Limited Partners"), to: (1) enter a limited and special appearance in this action on 4 behalf ofNovus, in order to file a supplemental brief in support ofNovus's opposition to the 5 motion for injunctive relief and supplemental declarations; (2) participate in oral argument; and (3) 6 participate in any appeal of the Court's decision on the motion. ECF No. 36. Pursuant to the 7 Court's order, the Limited Partners filed a supplemental brief on July 5, 2012, ECF No. 38; and 8 SBA filed its supplemental reply brief on July 16,2012, ECF No. 40. 9 .S eo 10 II. LEGAL STANDARDS Section 311 ofthe Act, 15 U.S.C. § 687c, provides that, "[w]henever, in the judgment of 11 the [SBA], a licensee or any other person has engaged or is about to engage in any acts or practices =:.:: c eo 12 which constitute or will constitute a violation of any provision of this chapter, or of any rule or u O '-Q .- ­ 13 regulation under this chapter, or of any order issued under this chapter, the [SBA] may make v.a "'" 14 application to the proper district court ofthe United States or a United States court of any place .... S 15 subject to the jurisdiction of the United States for an order enjoining such acts or practices, or for I:I'.J'E !Z =0 ~-5 16 an order enforcing compliance with such provision, rule, regulation, or order, and such courts shall 17 have jurisdiction of such actions and, upon a showing by the Administration that such licensee or "'" 0 u.. 18 other person has engaged or is about to engage in any such acts or practices, a permanent or 19 temporary injunction, restraining order, or other order, shall be granted without bond." 15 U.S.c. § 20 687c(a). The Act further provides that in any such proceeding for injunctive relief, "the court as a 21 court of equity may, to such extent as it deems necessary, take exclusive jurisdiction of the licensee 22 or licensees and the assets thereof, wherever located; and the court shall have jurisdiction in any 23 such proceeding to appoint a trustee or receiver to hold or administer under the direction of the 24 court the assets so possessed." ] 5 U.S.C. § 687c(b). Finally, the Act provides that "[t]he [SBA] 25 shall have authority to act as trustee or receiver of the licensee. Upon request by the [SBA], the 26 court may appoint the [SBA] to act in such capacity unless the court deems such appointment 27 inequitable or otherwise inappropriate by reason of the special circumstances involved." 15 U.S.C. 28 § 687c(c). 1:~ U U c.-; .... ._­..... Q.~ ~CI So "00 6 Case No.: 12-CV-00523-LHK ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER Case5:12-cv-00523-LHK Document44 Filed08/08/12 Page7 of 13 Although there is no binding Ninth Circuit authority on whether injunctive relief is 2 mandated, or merely permitted, under the Act upon SBA's showing of the predicate legal violation, 3 courts that have considered the issue have almost uniformly concluded that some form of 4 injunctive relief is required, although the precise scope of the injunctive relief remains a matter of 5 equitable discretion. See, e.g., United States v. Trusty Cap., Inc., No. 06-CV-8170, 2007 WL 6 44015, at *6 (S.D.N.Y. Jan. 5,2007) (citing cases); United States v. Marathon Inv. Partners, LP, 7 399 F. Supp. 2d 1,3 n.l (D. Mass. 2005); United States v. Vanguard Inv. Co., Inc., 667 F. Supp. 8 257, 261 (M.D.N.C. 1987) ("The Court observes that the usual requirements for preliminary 9 equitable relief are supplanted by the specific mandate of 15 U .S.C. § 687c."), aff'd 907 F.2d 439 10 ·s t:t2 c:tt (4th Cir. 1990) ("Vanguard r'). III. 11 DISCUSSION ='­ c:>";i 12 Plaintiff's Complaint asserts a single cause of action for capital impairment in violation of U U 1+-< .... U 0 .....­ . ... Q.~ 13 13 C.F.R. § 107. 1830(c), which requires that Novus, as a licensee, not have a condition of capital - 14 impairment greater than 60%. Compl. '0'026-34. Plaintiffs motion for permanent injunctive relief .!e !!~ 15 seeks permanent injunctive relief under 15 U.S.C. § 687c, asking the Court to: (1) enjoin Novus 17.1,€ ~o !Z =~ 16 from further violating the Act and its implementing regulations; (2) take exclusive jurisdiction of 17 Novus and all of its assets, wherever located; and (3) appoint SBA as Receiver ofNovus. Mot. at .... c:> 18 2. 'C t) "-I .... "-10 ~.;:; ~ 19 20 A. Permanent Injunction SBA argues that, by virtue of its condition of capital impairment in excess of the maximum 21 allowed impairment percentage of60%, Novus is in violation of the Regulations at 13 C.F.R. § 22 107.1830(b). See 13 C.F.R. § 107.1 830(b) ("If you have a condition of Capital Impairment, you 23 are not in compliance with the terms of your Leverage."). SBA further argues that Novus is in 24 violation of the Regulations at 13 C.F.R. § 107.507(a) as a result of its failure to comply with the 25 requirements of its Participating Securities. See 13 C.F .R. § 107 .507(a) ("Nonperformance of any 26 of the requirements of any Debenture, Participating Security or Preferred Security, or of any 27 written agreement with SBA," constitutes a violation of the Regulations."). 28 7 Case No.: 12-CV-00523-LHK ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER Case5:12-cv-00523-LHK Document44 Filed08/08/12 Page8 of 13 As described above, the Act provides that in the event SBA detennines that one of its 2 licensed SBICs is in violation ofthe Act or the implementing Regulations, SBA may apply to the 3 appropriate federal district court for an adjudication of such a violation and for pennanent 4 injunctive relief. 15 U.S.C. § 687(d). Upon a showing of a violation of the Act or its Regulations, 5 the license of the SBIC may be revoked. See United States v. Marathon lnv. Partners, LP, 399 F. 6 Supp.2d 1,2 (D. Mass. 2005). As demonstrated by the record, since at least July 2008, Novus's 7 percentage of capital impairment has far exceeded its maximum pennitted capital impainnent 8 percentage of 60%, as prescribed under 13 C.F.R. § 107 .1830(c). Novus does not contest its 9 capital impainnent percentage. Accordingly, SBA has made the necessary showing that Novus is 10 in violation of the Act and the implementing Regulations. As specifically mandated under 15 11 U.S.C. § 687c(a), SBA is therefore entitled to a pennanent injunction. The Court therefore grants 12 Plaintiff's request for a pennanent injunction enjoining Novus from further violating the Act and .... to-. ~o 13 its implementing Regulations. .- .... 14 ~Cl 15 The question remains, however, as to whether SBA should be appointed receiver ofNovus 1'§ 16 pursuant to 15 U.S.C. § 687c. As described above, the Act authorizes the Court to "take exclusive a::et) 17 jurisdiction of the licensee ... and the assets thereof," to the extent deemed necessary, and confers 18 jurisdiction to "appoint a trustee or receiver to hold or administer under the direction of the court 19 the assets so possessed." 15 U.S.c. § 687c(b). The Act explicitly authorizes the Court to appoint 20 SBA to act as receiver "unless the court deems such appointment inequitable or otherwise 21 inappropriate by reason of the special circumstances involved." 15 U.S.c. § 687c(c). SBA argues 22 that (1) Novus has already consented to receivership, and (2) Novus has not shown that 23 appointment of SBA as receiver would be inequitable or otherwise inappropriate, given that 24 Novus's violation of the Regulations is on its own sufficient grounds for appointing SBA as 25 receiver. See Mot. at 20; Reply at 14-18. Defendant argues in opposition that (1) Novus' consent 26 was fraudulently obtained and should thus be void, and (2) SBA has not shown that receivership is 27 necessary. See generally Opp'n at 9-22. Because SBA does not rely on Novus's consent in 's t:t.8 t':I ::s:'::: ot':l UU .- ,­ .... .... 10. (.) rIl .... =.~ .... e Set) oo..c: B. Receivership ;o,::Z i.;J-B .... 0 ~ 28 8 Case No.: 12-CV-00523-LHK ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER Case5:12-cv-00523-LHK Document44 Filed08/08/12 Page9 of 13 seeking receivership, the Court addresses the parties' equitable arguments for receivership first 2 3 4 before then turning to the issue of consent. 1. Equitable Factors While the Act authorizes the Court to appoint SBA as receiver, it does not mandate such 5 appointment. Rather, as courts have recognized, "appointing a 'receiver is an extraordinary 6 equitable remedy,' which should be applied with caution." Canada Life Assur. Co. v. LaPeter, 563 7 F.3d 837, 844 (9th Cir. 2009) (citing Aviation Supply Corp. v. R.S.B.l. Aerospace, Inc., 999 F.2d 8 314,316 (8th Cir. 1993); 12 Wright, Miller & Marcus § 2983, at 24); see also Rosen v. Siegel, 106 9 F .3d 28, 34 (2d Cir. 1997) ("[T]he appointment of a receiver is considered to be an extraordinary 10 remedy, and ... should be employed cautiously and granted only when clearly necessary to protect '8 11 plaintiffs interests in the property." (quoting CWbank, N.A. v. Nyland (CF8) Ltd., 839 F.2d 93, 97 =:= \:lCO 12 (2d Cir. 1988)); First Louisiana Inv. Corp. v. United States, 351 F.2d 495,497-98 (5th Cir. 1965) ....... ............ .2a 13 ("The appointment of a receiver, )ike the granting of a preliminary injunction is, in no small 14 measure, a discretionary matter."); Maxwell v. Enter. Wall Paper Mfg. Co., 131 F.2d 400, 403 (3d .as So 15 Cir. 1942) ("Receivership "is not to be resorted to if milder measures will give the plaintiff ... 1'g 16 adequate protection for his rights .... It is to be exercised sparingly and with great caution, and =0 17 only under extreme and exceptional circumstances.") (internal citations omitted). Under Ninth 18 Circuit law, "there is 'no precise formula for determining when a receiver may be appointed.'" 19 Canada Life Assur., 563 F.3d at 844 (quoting Aviation Supply Corp., 999 F.2d at 316). 20 Nonetheless, relevant factors for determining whether to appoint a receiver include the following: 21 "(1) whether [the party] seeking the appointment has a valid claim; (2) whether there is fraudulent 22 conduct or the probability of fraudulent conduct[] by the defendant; (3) whether the property is in 23 imminent danger of being lost, concealed, injured, diminished in value, or squandered; (4) whether 24 legal remedies are inadequate; (5) whether the harm to plaintiff by denial of the appointment would 25 outweigh injury to the party opposing appointment; (6) the plaintiff's probable success in the action 26 and the possibility ofirreparabJe injury to plaintiff's interest in the property; and (7) whether [the] 27 plaintiff'S interests sought to be protected will in fact be well-served by receivership." Id. (quoting 28 Moore's, § 66.04[2][b]; New York Life Ins. Co., 755 F. Supp. at 292 (citing 12 Wright, Miller & co 't~ t,)u .... 1+-0< y 0 "'" (J '" 1-1 ~ ",0 \1.)'= .1:Z ~.s 1-1 0 r.:... 9 Case No.: 12-CV-00523-LHK ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER Case5:12-cv-00523-LHK Document44 Filed08108/12 Page10 of 13 1 Marcus § 2983» (internal quotation marks omitted) (alterations in original). In detennining 2 whether to appoint a receiver, the Court "may consider a host of relevant factors," and "no one 3 factor is dispositive." Id. at 845. In short, the Court's equitable powers in detennining whether or 4 not to appoint a receiver are "broad" in nature." Id. 5 In support of its request for receivership, SBA argues that it reviewed Novus's proposed 6 Wind Down Plan and projections prior to filing this action, and allowed Novus three years to 7 attempt to self-liquidate. Mot. at 12-15; Reply at 15. Novus has remained in a condition of 8 extreme capital impainnent (greater than 100%) for more than three years and has repeatedly failed 9 to meet its proposed projections, and SBA argues that these facts alone justify appointment ofSBA 10 CIS 's 1:.£ =:.= U U~ .... ~o QCIS .- it) 1"-1 .1-0 CI.~ 1"-10 .!a So oo,€ "=0 !Z .: 0 ;:J.s 11 as receIver. Novus, along with four of its Limited Partners who were granted leave to file a special 12 appearance and supplemental briefin opposition to Plaintiff's motion, argues that receivership is 13 unwarranted under the circumstances. First, Novus argues that SBA has not alleged any fraudulent 14 conduct on Novus's part. Opp'n at 6. Second, Novus argues that "the evidence shows that the 15 value of Nov us' portfolio is actually increasing substantially and should be enough to ensure that 16 the SBA's investment is returned in fuJI, along with a return to private limited partner investors." 17 Opp'n at 13-14. To support this argument, Novus submits two valuation reports projecting that the 18 value of two ofNovus's most significant investments, mBlox, Inc., and Pathwork Diagnostics, Inc., 19 will increase significantly between now and the end of2014 or 2015. See Timmins Decl. Ex. B; 20 Gerogosian Decl. Ex. B. Third, Novus argues that SBA has not shown that it would be more 21 successful in maximizing the value of Novus's assets than would Novus's Managing Directors. 22 Opp'n at 14-15. Novus argues that "the SBA has a terrible track record of maximizing the value of 23 the assets ofSBICs that it places in receivership," due in large part to SBA's alleged lack of 24 expertise and knowledge in the companies and industries in which the SBICs are invested. Id. In 25 contrast to the SBA, Novus's Managing Directors are seasoned venture capitalists with specific 26 industry expertise and are thus in a better position to liquidate Novus's portfolio to maximize 27 returns. See generally Lahann Decl.; Dec!. of Dan Tompkins ("Tompkins Decl."); Schuster Decl. 28 Moreover, Novus's Managing Directors have a stronger incentive than does the SBA to maximize 1-0 0 '"'" 10 Case No.: 12-CV-OOS23-LHK ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER Case5:12-cv-00523-LHK Document44 Filed08/08/12 Page11 of 13 the return for all of Novus's investors, because not only have the Managing Directors invested a 2 substantial amount of their own money (collectively, more than $1.2 million) into Novus, but also 3 they want to protect the business relationships they have with the Limited Partners. Lahann Decl. ~ 4 16. Furthermore, Managing Directors not only invest in Novus's portfolio companies, but also sit 5 on the boards of these companies and actively participate in their management, and if a 6 receivership is imposed, Novus's portfolio companies "will lose the valuable support and guidance 7 of the Managing Directors." Opp'n at 16; see Gerogosian Decl. Ex. B at 10-17. Finally, Novus 8 argues that it has formulated and has been executing a reasonable Wind Down Plan, whereas the 9 SBA has failed to propose its own plan for operating Novus and for liquidating its assets. Opp'n at 10 \.'II 's 1:..£ 11 16-17. In reply to Novus's arguments, SBA argues that there is no basis in law for accepting == 12 Novus's own independent valuations of assets, which do not apply the SBA's special valuation U U <+-< ... .- ..... ....­ .... 13 criteria, as a basis for denying receivership. Reply at 17. Furthermore, SBA argues that even the .- ..... 14 two independent valuation reports submitted by Novus do not fully support Novus's argument that ~\.'II c; 0 "'1;) ~ Q.~ GrjO .!S =G) ~'€ IS no receivership is warranted. Id. at 18. For example, one of the valuations notes that "the timing 16 of these recoveries as stated early in this Report[] extend beyond the currently approved Wind up G) 17 plan that Novus is operating under." Gerogosian Decl. Ex. B at 14. Thus, even Novus's own 18 evidence confirms that the current liquidation plan is inadequate. Finally, SBA argues that neither 19 Novus nor the Limited Partners explain how leaving Novus's current management in place would 20 cure Novus's ongoing regulatory violations, which have persisted since 2006. Under the current 21 management, Novus first entered a condition of capital impairment over six years ago, and since 22 2009 has maintained a condition of extreme capital impairment in excess of 100%. See SUpp. 23 Reply at 3-4. Furthermore, Novus's efforts to liquidate pursuant to its Wind Down Plan have been 24 unsuccessful, as Novus has consistently recovered far less than its projections. !~ = 1=l;S .... 0 j:.I;., 25 As noted above, the Act authorizes this Court to appoint SBA as receiver of any SBIC 26 licensee in violation of the Act or its implementing Regulations, ''unless the court deems such 27 appointment inequitable or otherwise inappropriate by reason of the special circumstances 28 involved." 15 U.S.C. § 687c(c). Having considered the parties' arguments and evidence 11 Case No.: 12-CV-00523-LHK ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER Case5:12-cv-00523-LHK Document44 Filed08/08/12 Page12 of 13 presented, the Court is not persuaded that appointment of SBA as receiver for Novus would be 2 "inequitable or otherwise inappropriate by reason of the special circumstances involved." 15 3 u.S.C. § 687c(c); cf. Marathon, 399 F. Supp. 2d at 3 (granting SBA receivership upon finding, 4 among other things, that the licensee had failed to address why appointing SBA as receiver would 5 be inequitable). Here, although there are no allegations of fraudulent conduct on Novus's part, 6 there is no dispute that: (1) SBA has a valid claim to a debt of$39.5 million in outstanding 7 Leverage; (2) Novus first entered a condition of capital impainnent in excess of 60% in 2006, over 8 six years ago; (3) Novus has remained in a condition of not only capital impainnent but extreme 9 capital impainnent since 2009, and its percentage of capital impainnent has been steadily 10 increasing; (4) SBA has forborne from seeking receivership until now, allowing Novus at least S 11 three years to attempt to self-liquidate under its Wind Down Plan; (5) Novus has been unable to == C:>C\J 12 meet its projections under its Wind Down Plan; and (6) SBA is entitled to seek injunctive relief, ColO ........ 13 and specifically appointment of receivership, upon demonstrating Novus's violation of the Act or 14 Regulations. In light ofNovus's inabiJity to cure its capital impainnent condition over several !s .... u 15 years, despite extended opportunities to do so, SBA has adequately shown that its request for -ct: !» 0 .i:: Z u i:;l-6 16 receivership is reasonable and would not yield an inequitable result. C\J .... t::J3 U U~ .... ... 0 ~'E .... ~.~ file !:I.)..c = 17 Although Novus has explained why it believes receivership is not necessary, its arguments r... 0 ~ 18 do not adequately identify any special circumstances that would render receivership inequitable. 19 As SBA points out, courts have routinely granted injunctive relief and appointed a receiver to take 20 charge of the assets of an SBIC on the basis of capital impainnent and other similar violations of 21 the Act and Regulations. See Vanguard J, 667 F. Supp. at 261; Vanguard II, 694 F. Supp. at 1227­ 22 28; Norwood, 273 F. Supp. at 240 n.8; Marathon, 299 F. Supp. 2d at 3 n.l. The Court finds that 23 the facts of this record merit appointing the SBA as receiver. Accordingly, the Court takes 24 exclusive jurisdiction ofNovus and all of its assets, wherever located, and further appoints SBA as 25 receiver ofNovus, pursuant to 15 u.S.C. § 687c(b) and (c). 26 2. Consent 27 As an alternative basis for seeking receivership, SBA argues that Novus already consented 28 to receivership as part of the 2008 Wind Down Agreement. Because the Court finds that the SBA 12 Case No.: 12-CV-00523-LHK ORDER GRANTING MOTION FOR INruNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECEIVER Case5:12-cv-00523-LHK Document44 Filed08/08/12 Page13 of 13 1 has shown entitlement to injunctive relief and receivership ofNovus pursuant to 15 U.S.c. § 687c, 2 the Court need not address Novus's argument that the consent was fraudulently obtained and thus 3 void. 4 5 IV. CONCLUSION For the foregoing reasons, the Court GRANTS Plaintiffs motion for injunctive relief and 6 appointment ofSBA as receiver under 15 U.S.C. § 687c. The Court hereby incorporates by 7 reference the Proposed Order of Receivership filed by Plaintiff in conjunction with the motion. See 8 ECFNo.18-12. 9 IT IS SO ORDERED. 10 ·s t:"£ ~ 11 == 12 ... to-.. ~ 10.. U 13 Ill'"' Dated: August 8, 2012 14 C>~ UU 0 ........ ........ ........ ~.~ III 0 .ae .au 15 "C~ 16 tI)-C !Z au ;;;J;S '0"' ~ 17 18 19 20 21 22 23 24 25 26 27 28 13 Case No.: 12-CV-00523-LHK ORDER GRANTING MOTION FOR INJUNCTIVE RELIEF AND APPOINTMENT OF SBA AS RECENER Case5:l2-cv-00523-LHK Document18-l2 Filed04/l9/l2 Pagel of 6 MELINDA HAAG, CA No. 132612 2 United States Attorney JOANN M. SWANSON, CA No. 88143 3 Chief, Civil Division EDWIN L. JOE, CA No. 112328 4 Special Assistant United States Attorney 5 6 7 8 455 Market Street, 6th Floor San Francisco, California 94105-2420 Telephone: (415) 744-8494 Facsimile: (202) 481-1810 or (415) 744-6812 Email: edwin.joe@,sba.gov CHRISTOPHER 1. MCCLINTOCK, VA Bar No. 68417 ARLENE M. EMBREY, FL Bar no. 0125539 10 Trial Attorney II Office of General Counsel U.S. Small Business Administration 12 409 Third St., S.W. Washington, DC 20416 13 Telephone: (202) 205-7715 14 Facsimile: (202) 481-5497 Email: christopher.mcclintock@,sba.gov 9 15 16 Attorneys for Plaintiff UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION 17 18 19 20 UNITED STATES OF AMERICA, 21 Plaintiff, 22 v. 23 24 NOVUS VENTURES II, L.P., 25 26 Defendant(s). ) ) ) ) ) ) ) ) ) ) ) ) Civil No: CV 12-cv-00523 LHK ORDER OF RECEIVERSHIP Date: August 30, 2012 Time: 1:30 pm Ctrm: 8, 4th Floor 280 So. 1st St, San Jose Hon. Judge Lucy H. Koh 27 28 ORDER OF RECEIVERSHIP ORDER OF RECEIVERSHIP, No. 12-cv-00523 LHK Page 1 CaseS:12-cv-OOS23-LHK DocumenU8-12 Filed04/19/12 Page2 of 6 IT IS HEREBY ORDERED, ADJUDGED AND DECREED: 2 I. Pursuant to the provisions of 15 U .S.C. § 687c, this Court takes exclusive 3 jurisdiction of NOVUS VENTURES II, L.P. ("Novus") and all of its assets and property, 4 5 of whatever kind and wherever located, and the United States Small Business 6 Administration ("SBA") is hereby appointed Receiver of Nov us ("Receiver") to serve 7 without bond until further order of this Court. The Receiver is appointed for the purpose 8 of marshaling and liquidating in an orderly manner, all of Novus's assets and satisfying 9 the claims of creditors therefrom in the order of priority as determined by this Court. 10 II 2. The Receiver shall have all powers, authorities, rights and privileges 12 heretofore possessed by the officers, directors, managers, investment advisors and other \3 agents ofNovus under applicable state and federal law, by the Certificate of Limited 14 Partnership and Agreement of Limited Partnership of said limited partnership, in addition 15 16 to all powers and authority of a receiver at equity, and all powers and authority conferred 17 upon the Receiver by the provisions of 15 U.S.C. § 687c and 28 U.S.C. § 754. The 18 trustees, directors, employees, managers, investment advisors and agents of Novus are 19 hereby dismissed. Such persons shall have no authority with respect to Novus's 20 operations or assets, except to the extent as may hereafter be expressly granted by the 21 22 23 24 25 Receiver. The Receiver shall assume and control the operation ofNovus and shall pursue and preserve all of its claims. 3. The past and/or present officers, directors, managers, investment advisors, agents, trustees, attorneys, accountants, and employees ofNovus, as well as all those 26 27 28 acting in their place, are hereby ordered and directed to tum over to the Receiver forthwith all books, records, documents, accounts, and all other instruments and papers of ORDER OF RECEIVERSHIP, No. 12-cv-00523 LHK Page 2 Case5:12-cv-00523-LHK Document18-12 Filed04/19/12 Page3 of 6 and relating to Novus and its assets and all other assets and property of the corporation, 2 whether real or personal. The Receiver will provide reasonable access to all participants 3 with regard to any investment in the Novus portfolio. The former General Partner and/or 4 5 other agent ofNovus, shall furnish a written statement within five (5) days after the entry 6 of this Order, listing the identity, location and estimated value of all assets ofNovus as 7 well as the names, addresses and amounts of claims of all known creditors ofNovus. 8 Within thirty (30) days following the entry of this Order, such person shall also furnish a 9 written report describing all assets. All persons having control, custody or possession of 10 II any assets or property ofNovus are hereby directed to tum such assets and property over 12 to the Receiver. 13 4. The Receiver shall promptly give notice of its appointment to all known 14 officers, partners, directors, agents, employees, shareholders, creditors and debtors of 15 16 N ovus, as the Receiver deems necessary or advisable to effectuate the operation of the 17 receivership. All persons and entities owing any obligation or debt to Novus, until 18 further ordered by this Court, shall pay all such obligations in accordance with the terms 19 thereof to the Receiver and its receipt for such payments shall have the same force and 20 effect as ifNovus had received such payments. 21 22 5. The Receiver is hereby authorized to open such Receiver's accounts at 23 banking or other financial institutions to extend credit on behalf ofNovus, to utilize SBA 24 personnel, and to employ other such personnel as it may deem necessary to effectuate the 25 operation of the receivership including, but not limited to, attorneys, accountants, and 26 appraisers, and is further authorized to expend receivership funds to compensate such 27 28 personnel in such amounts and upon such terms as the Receiver shall deem reasonable in ORDER OF RECEIVERSHIP, No. 12-cv-00523 LHK Page 3 Case5:12-cv-00523-LHK Document18-12 Filed04/19112 Page4 of 6 light of the usual fees and billing practices and procedures of such personnel. The 2 Receiver is not required to obtain Court approval prior to the disbursement of 3 receivership funds for payments to personnel employed by the Receiver or for expenses 4 5 that the Receiver deems advantageous to the orderly administration and operation of the 6 receivership. In addition, the Receiver is authorized to reimburse the SBA for travel 7 expenses incurred by SBA personnel in the establishment and administration of the 8 receivership. The Receiver may, without further order of this Court, transfer, 9 compromise, or otherwise dispose of any asset (including without limitation any claim) 10 11 12 13 other than real estate. 6. Novus's past and/or present partners, officers, directors, agents, accountants, managers, shareholders, employees, debtors and creditors ofNovus and 14 other appropriate persons (including without limitation, the defendant's portfolio of small 15 16 business concerns and financial institutions doing business with defendant and/or 17 defendant's portfolio of small business concerns) shall answer under oath to the Receiver 18 all questions which the Receiver may put to them in compliance with the Federal Rules 19 of Civil Procedure, and pursuant thereto shall produce any documents as required by the 20 Receiver regarding the business of said corporation, or any other matter relevant to the 21 22 operation or administration of the receivership or the collection of funds due to Novus. 23 In the event that the Receiver deems it necessary to require the appearance ofthe 24 aforementioned persons, the production of documents, infonnation, or any other 25 discovery concerning the assets, property or business operations ofNovus, or any other 26 matter relevant to the operation or administration of the Receivership or the collection of 27 28 funds due to Novus, the Receiver shall make its discovery request(s) in compliance with ORDER OF RECEIVERSHIP, No. 12-cv-00523 LHK Page 4 Case5:12-cv-00523-LHK Document18-12 Filed04/19112 Page5 of 6 the Federal Rules of Civil Procedure. 2 7. The parties, or any prospective parties, to any and all civil legal 3 proceedings of any nature, excluding the instant proceeding, but including without 4 5 limitation bankruptcy proceedings, arbitration proceedings, foreclosure actions, default 6 proceedings, or other actions of any nature involving Novus or any assets ofNovus, 7 including subsidiaries, partnerships and other business combinations ofNovus, wherever 8 located, or involving Novus, the Receiver, or any of Novus's past or present officers, 9 directors, managers, agents, or general or limited partners sued for, or in connection with, 10 11 any action taken by them while acting in such capacity of any nature, whether as plaintiff, 12 defendant, third-party plaintiff, third-party defendant, or otherwise, are enjoined from 13 commencing or continuing any such legal proceeding, or from taking any action, in 14 connection with any such proceeding or any such asset. All civil legal proceedings of 15 16 any nature, excluding the instant proceeding, but including without limitation bankruptcy 17 proceedings, arbitration proceedings, foreclosure actions, default proceedings, or other 18 action of any nature involving Novus or any assets ofNovus, including subsidiaries, 19 partnerships and other business combinations ofNovus, wherever located, and excluding 20 the instant proceeding, or involving Novus, the Receiver, or any of Novus' past or 21 22 present officers, directors, managers, agents, or general or limited partners sued for, or in 23 connection with, any action taken by them while acting in such capacity of any nature, 24 whether as plaintiff, defendant, third-party plaintiff, third-party defendant, or otherwise, 25 are stayed in their entirety, and all Courts having any jurisdiction thereof are enjoined 26 from taking or permitting any action until further Order of this Court. 27 28 8. Further, as to a cause of action accrued or accruing in favor of Novus ORDER OF RECEIVERSHIP, No. 12-cv-00523 LHK PageS , Case5:12-cv-00523-LHK Document18-12 Filed04/19/12 Page6 of 6 against a third person or party, any applicable statute of limitation is tolled during the 2 period in which this injunction against the commencement of legal proceedings is in 3 effect as to that cause of action. 4 5 9. Novus and its past and/or present directors, officers, managers, general or 6 limited partners, agents, investment advisors, employees and other persons acting in 7 concert or participating therewith be, and they hereby are, enjoined from either directly or 8 indirectly taking any actions or causing any such action to be taken which would 9 dissipate the assets and/or property ofNovus to the detriment of the Receiver appointed 10 11 in this cause, including but not limited to destruction of corporate records, or which 12 would violate the Small Business Investment Act of 1958, as amended, 15 U.S.C. 661 et. 13 seg., or the regulations promUlgated thereunder ("Regulations"), 13 C.F .R. Part 107. 14 10. The Receiver is authorized to borrow on behalf ofNovus, from the SBA, 15 16 up to $500,000 and is authorized to cause Novus to issue Receiver's Certificated of 17 Indebtedness in the principal amounts of the sums borrowed, which certificates will bear 18 interest at or about 10 percent per annum and will have a maturity date no later than 18 19 months after the date of issue. Said Receiver's Certificates of Indebtedness shall be 20 deemed to be administrative expenses of the Receivership. 21 22 IT IS SO ORDERED, 23 DATED this _ _ day of _ _, 2012. 24 25 26 Hon. Judge Lucy H. Koh UNITED STATES DISTRICT COURT JUDGE 27 28 ORDER OF RECEIVERSHIP, No. 12-cv-OOS23 LHK Page 6

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