Securities and Exchange Commission v. Churchville et al

Filing 84

MEMORANDUM AND ORDER granting in part and denying in part 43 Motion for Allowance for Payment of Legal Fees, Costs and Expenses. So Ordered by Chief Judge William E. Smith on 7/12/2016. (Jackson, Ryan)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
________________________________________
)
)
)
Plaintiff,
)
)
v.
)
)
)
PATRICK CHURCHVILLE,
)
CLEARPATH WEALTH MANAGEMENT, LLC,
)
)
Defendants,
)
)
and
)
)
CLEARPATH MULTI-STRATEGY FUND I, L.P., )
CLEARPATH MULTI-STRATEGY FUND II, L.P., )
CLEARPATH MULTI-STRATEGY FUND III, L.P.,)
HCR VALUE FUND, L.P.,
)
)
Relief Defendants.
)
)
SECURITIES AND EXCHANGE COMMISSION,

C.A. No. 15-191 S

MEMORANDUM AND ORDER
WILLIAM E. SMITH, Chief Judge.
Before

the

Court

is

Acrewood

Holdings,

LLC,

Acrewood

Investment Management, L.P., Acrewood 2013, L.P., and Acrewood
2014 L.P.’s (collectively “Acrewood”) Motion for Allowance for
Payment of Legal Fees, Costs and Expenses (“Motion”).
43.)

(ECF No.

Both the Receiver and the Securities and Exchange Commission

(“SEC”) filed Responses (ECF Nos. 48 and 50), and Acrewood filed
a Reply (ECF No. 52).

For the reasons that follow, the Court

GRANTS IN PART and DENIES IN PART Acrewood’s Motion.

1

I.

Background

The parties are familiar with the facts of this dispute;
accordingly, the Court only recounts those pertinent to this Order.
On May 7, 2015, the SEC commenced a civil enforcement action
against Patrick Churchville, his firm ClearPath Wealth Management,
and a number of funds Churchville managed.

According to the

Complaint, Churchville, through his firm, “misappropriated and
misused

his

investors’

fraudulent scheme.”

cash

and

assets

through

a

years-long

(Compl. ¶ 1, ECF No. 1.)

The HCR Value Fund (“HCRVF” or the “Fund”) was one of the
funds that Churchville managed.
structure.

The Court need not detail HCRVF’s

Suffice it to say that a Churchville entity and

Acrewood were the Fund’s only partners.

Acrewood was a limited

partner and had a significant, multi-million dollar investment in
the Fund.

Churchville was the general partner, entitled to a

management fee, but invested only a small amount in the Fund.

The

HCRVF sub-fund at issue here invested in a single entity, CP
Health,

which

was

managed

by

Capio

Asset

Holdings,

LLC

and

affiliated entities (“Capio”).
When

the

SEC

filed

its

Complaint

against

Churchville,

Acrewood took steps to protect its investment in HCRVF.

First,

and central to this fee dispute, Acrewood’s and Churchville’s
counsel

negotiated

Continuing

and

Operations

of

executed
HCR

the

Value
2

“Agreement
Fund”

(“ARCO”

Regarding
or

the

“Agreement”) on May 21, 2015.

Among other things, the Agreement

provided Acrewood with management authority over the Fund.
also

included

a

“Cost

Reimbursement”

provision,

in

It

which

Churchville - knowing that the SEC had already filed an action
against him - agreed “to indemnify [Acrewood] for any reasonable
out-of-pocket costs incurred by them in connection with the SEC
Action,

[the

ARCO]

and

connection therewith.”
ECF No. 43-1.)

any

actions

reasonably

undertaken

in

(See Acrewood Mem. in Sup. of Mot. ¶ 23,

Neither the SEC nor the Court approved the

Agreement prior to its execution.
Between May 12, 2015 and July 30, 2015, Acrewood also worked
to preserve its investment in HCRVF by keeping the Fund out of
default.

In May and June 2015, it negotiated with the Fund’s bank

to prevent the bank from defaulting the Fund’s line of credit and
seizing the Fund’s assets.

Also, around the same time, Acrewood

worked with Churchville and the SEC to ensure that any court action
did not damage the value of HCRVF.

These efforts resulted in the

SEC seeking a separate freeze order relating to HCRVF that would
“ensure that money that is due to [HCRVF] by third parties may be
paid

to

[HCRVF]

and,

once

paid,

will

be

either

frozen

or

distributed to investors.” (See Comm’n’s Mot. for Order Concerning
HCR Value Fund 1-2, ECF No. 15.)
On June 2, 2015, the Court issued a preliminary injunction.
(ECF No. 13.)

As the parties requested, this injunction did not
3

include HCRVF.

(Id. at 1.)

Instead, on July 30, 2015, the Court

entered a separate order relating to HCRVF, which accomplished
three things: (1) it required Capio to continue to make payments
to HCRVF; (2) it froze any funds distributed to HCRVF; and (3) it
allowed HCRVF to “continue to operate, pursuant to the terms of
the [ARCO],” which included allowing Acrewood to assume management
of HCRVF, provided that “[n]o financial interest of [Churchville]
. . . be dissipated or diminished.”

(Order Concerning HCR Value

Fund, L.P. ¶¶ I, II, III, ECF No. 17.)
Also

on

July

30,

2015,

the

Court

created

an

equitable

receivership and appointed Stephen F. DelSesto, Esq. as Receiver
“for the purposes of marshaling and preserving” Churchville’s
assets. (Order Appointing Receiver 1, ECF No. 16.) In discharging
its duties, the Court limited the Receiver’s fees to “reasonable
compensation and expense reimbursement” (id. ¶ 59), which amount
to $350 per hour for partners, between $250 and $295 per hour for
associates, and $140 to $185 per hour for paralegals.

(See

Receiver’s Resp. to Mot. 12, ECF No. 48; Receiver’s First Interim
Fee Application 2, ECF No. 49.)
After the Receiver’s appointment, Acrewood worked with him to
wind down HCRVF.
with

Capio

that

Specifically, Acrewood negotiated a settlement
facilitated

the

final

payments

to

HCRVF.

Acrewood’s attorneys also prepared Amendment No. 1 to HCRVF’s
Limited Partnership Agreement, which allowed Acrewood to become a
4

special limited partner in the Fund for the purposes of winding it
down.

(See Receiver’s Pet. for Inst. Regarding the Proposed “HCR

Value Fund, L.P. Amed. No. 1 to the Ltd. P’ship Agreement” ¶ 17,
ECF No. 20.)
Acrewood, however, did not limit its efforts to assisting the
Receiver.

Even after the Receiver’s appointment, it incurred a

number of legal fees aimed at protecting its own interests.

The

motions surrounding the present fee dispute constitute the most
substantial of these efforts.

(See e.g., Ex. A to Decl. of Jamie

Barrett in Support of Mot. 24-26 (Nov. 9, 2015 Pepper Hamilton
Invoice), ECF No. 44-1.)

But Acrewood also advanced its own

interests in other ways, by, for example, developing its own
litigation strategy against Capio, and seeking independent legal
advice “regarding several summary analyses prepared by [Acrewood]
of the distributions that would be made by [HCRVF] in various
scenarios.”

(Mot. ¶¶ 45, 47, ECF No. 43-1.)

Acrewood now seeks to recover all of the legal fees it
incurred in relation to HCRVF and the SEC’s action.

It argues

that ARCO’s Cost Reimbursement provision entitles it to complete
indemnification for these expenses.

The SEC and Receiver oppose

Acrewood’s fee petition, at least in part.

They argue that the

Receiver is not bound by the ARCO and that Acrewood is not entitled
to complete indemnification.

Nevertheless, both acknowledge that

Acrewood may be entitled to recover some of its fees.
5

II.

Legal Standard

There is little case law relating to equitable receiverships.
Accordingly, Acrewood and the Receiver rely on cases interpreting
the U.S. Bankruptcy Code (the “Code”) and the leading treatise on
equitable receiverships, 2 Clark on Receivers (3rd ed. 1959.

Both

treat pre-petition and pre-receivership executory contracts such
as the ARCO similarly.
Generally, under Chapter 11 of the Code, debtors in possession
are liable for services performed under pre-bankruptcy contracts
in

two

circumstances.

expressly

assume

First,

liability

for

the

debtor

in

pre-bankruptcy

possession
contracts,

court approval, at any time during the bankruptcy.
365(a).

can
with

11 U.S.C. §

If the debtor in possession assumes the contract, “it

assumes the contract cum onere, and the liabilities incurred in
performing

the

expenses.”

In re FBI Distribution Corp., 330 F.3d 36, 42 (1st

Cir.

(internal

2003)

contract

will

be

quotation

treated

marks

and

as

administrative

citations

omitted).

Second, where a debtor in possession induces a party to perform
under an unassumed pre-petition contract, the party “will be
entitled to administrative priority only to the extent that the
consideration supporting the claim was supplied to the debtor in
possession during the reorganization and was beneficial to the
estate.”

Id. at 42-43.

Where the debtor in possession elects to

continue to receive benefits from a pre-petition contract prior to
6

adopting the contract, the debtor in possession “is obligated to
pay for the reasonable value of those services.”

Id. at 43-44

(emphasis in original) (quoting N.L.R.B. v. Bildisco, 465 U.S.
513, 531 (1984)).

If, on the other hand, the debtor in possession

rejects the contract and does not receive benefits from it, the
other contracting party has a pre-petition general unsecured claim
for

breach

of

contract

administrative priority.

damages

and

is

not

entitled

to

any

Id. at 42.

The authority relating to equitable receiverships echoes this
legal framework.

While there is little case law on point, the

leading treatise treats receivers in the same way bankruptcy case
law treats debtors in possession.
receiver

is

under

no

obligation

It first notes that “[t]he
to

the

parties

to

[a

pre-

receivership] contract to perform such contract on behalf of the
debtor.”

Clark, supra, § 428.

Rather, for a pre-receivership

contract to bind a receiver, “the receiver must positively indicate
his intention to take over the contract.”

Id. § 428(a).

Further,

where a receiver takes advantage of a pre-receivership contract
without adopting it, “he may do so without necessarily committing
himself to an adoption thereof.”

Id.

Instead, the receiver is

liable for “the value of the benefit [received by] the estate not
exceeding the compensation stipulated by the contract.”

7

Id.

III. Analysis
Based

on

these

authorities,

Receivership is bound by the ARCO.

neither

the

Court

nor

the

Acrewood argues that the Court

and Receivership adopted the ARCO in the Court’s July 30, 2015
Order (ECF No. 17), which the Court entered on the same day it
appointed the Receiver.

Having just been appointed, the Receiver

did not petition the Court to adopt the ARCO on July 30, nor has
it subsequently petitioned the Court to do so.
did

not

independently

provision in the Order.

adopt

the

ARCO

or

Further, the Court

its

indemnification

As the SEC noted in its motion to adopt

the Order, the Order was “intended as a supplement to the Order
Imposing Preliminary Injunction . . . .”

(Comm’n’s Mot. for Order

Concerning HCR Value Fund, L.P. 2, ECF No. 15.)

The Order, thus,

merely preserved the status quo until the Receiver could take
control of the estate and decide which, if any, pre-receivership
contracts to assume.

Since the Receiver has not asked the Court

to adopt the ARCO or its indemnification provision, neither the
Receiver nor this Court is bound by it.

See Clark, supra, § 428(a)

(“In order that the receiver may be absolutely bound by a contract
of the debtor, the receiver must positively indicate his intention
to take over the contract.”).
This, of course, is not the end of the story.

As the Receiver

readily admits, Acrewood provided services under the ARCO that
benefited the Receivership.

The Receivership, thus, must pay for
8

the reasonable value of these services. See In re FBI Distribution
Corp., 330 F.3d at 43-44.

The parties, however, dispute what

services benefited the Receivership and how the Court should define
the reasonable value of those services.

The Court resolves the

parties’ disputes as follows.
First,

the

Receivership

is

only

liable

to

Acrewood

for

services that it rendered during the pendency of the Receivership.
See id. at 42-43 (holding that debtor in possession only liable
for services rendered “during the reorganization”).

Consequently,

the Court will not consider Acrewood’s fee petition to the extent
it requests fees accrued before July 30, 2015, the date the Court
created the Receivership.

For fees relating to services Acrewood

rendered to the Fund prior to July 30, 2015, Acrewood is free to
file a claim with the Receiver pursuant to the Receivership’s
claims process.
Second,

as

noted

above,

Acrewood

is

only

entitled

compensation for services that benefited the Receivership.
(stating

that

debtor

in

possession

only

liable

for

to
Id.

services

beneficial to the estate); Clark, supra, § 428(a) (noting that if
the receiver uses services without adopting a contract, “he is
liable for such usage during the time the other party was, without
its consent or acquiescence, held subject to the contract.”).
After carefully reviewing the parties’ briefs and the post-July

9

30, 2015 invoices Acrewood submitted in support of its petition,
the Court breaks down Acrewood’s fee petition as follows:
•

Pepper Hamilton September 18, 2015 Invoice. This invoice
covers services the law firm Pepper Hamilton provided to
Acrewood during August 2015, the first invoice submitted
after the establishment of the Receivership. In it, Pepper
Hamilton bills Acrewood for (1) drafting and revising
Amendment No. 1 to HCRVP’s partnership agreement; and (2)
negotiating and drafting a settlement agreement with Capio.
These services facilitated HCRVF’s winding down, a task
the Receiver would have had to complete.
Consequently,
these services benefited the Receivership and the
Receivership must pay Acrewood a reasonable value for them.
Pepper Hamilton billed Acrewood 9.80 hours for work by a
partner for the services. (See Ex. 1 to Decl. of Jamie
Barrett 16-19, ECF No. 44.)

•

Pepper Hamilton October 5, 2015 Invoice.
This invoice
covers services provided to Acrewood in September 2015.
Like the previous invoice, this one seeks compensation for
Pepper Hamilton’s work revising Amendment No. 1 and
negotiating the settlement agreement with Capio. Again,
these services benefited the Receivership, entitling
Acrewood to recover a reasonable fee for them.
Pepper Hamilton billed Acrewood 6.00 hours for work by a
partner.
The services reflected in Pepper Hamilton’s final three
entries (9/24/15 J. Corelli; 9/30/15 J. Corelli; and
9/30/15 J.A. Dubow), however, involve Acrewood’s attempts
to enforce the ARCO and recover its fees. These services
did not benefit the Receivership; they were intended solely
to protect Acrewood’s interests. Consequently, the Court
denies Acrewood’s Motion as it relates to these fees, which
total 2.5 hours of work by two partners.
If Acrewood
believes it incurred these fees pursuant to a contract it
had with Churchville or one of his entities, it is free to
file a claim with the Receiver pursuant to the Receiver’s
claims process. (See id. at 20-23.)

•

Pepper Hamilton November 9, 2015 Invoice.
This invoice
covers services provided to Acrewood in October 2015. The
vast majority of entries on this invoice concern Acrewood’s
10

response to the Receiver’s September 30, 2015 Petition for
Instructions (ECF No. 20), which first brought the present
fee dispute to the Court’s attention. The work reflected
in these entries protected Acrewood’s interests - its
ability to recoup its fees from the Receivership. It did
not benefit the Receivership. Thus, except as specified
in the next paragraph, the Court denies Acrewood’s Motion
as it relates to the fees from this invoice. Again, if
Acrewood believes it incurred these fees pursuant to a
contract it had with Churchville or one of his entities,
it is free to file a claim with the Receiver pursuant to
the Receiver’s claims process.
Five entries, however, involve the settlement agreement
with Capio.
These entries are (1) 10/11/15 J. Corelli;
(2) 10/12/15 J. Corelli; (3) 10/14/15 J. Corelli; (4)
10/21/15 C.O. Hud; (5) 10/27/15 J. Corelli. As explained
above, this work benefited the Receivership, and Acrewood
is entitled to a reasonable fee for the services.
Pepper Hamilton billed Acrewood 5.15 hours for work by a
partner and 0.10 hours for work by an associate for these
services. (See Ex. 1 to Decl. of Jamie Barrett 24-29, ECF
No. 44.)
•

Dechert September, October and November 2015 Invoices.
These invoices cover services the law firm Dechert LLP
provided to Acrewood after the establishment of the
Receivership.
The services exclusively concern the
settlement agreement Acrewood negotiated with Capio. As
noted above, this settlement agreement facilitated the
winding down of HCRVF, which benefited the Receivership.
Consequently, Acrewood may recover a reasonable fee for
them.
For this work, Dechert billed Acrewood 4.5 hours for work
by a partner and 24.6 hours for work by an associate. (See
id. at 35-50.)

•

Adler Pollock & Sheehan (“APS”) November 10, 2015 Invoice.
APS acted as Acrewood’s local counsel for the present fee
dispute. As noted above, these efforts sought to protect
Acrewood’s interests, not the Receivership’s. The Court,
thus, denies Acrewood’s Motion as it pertains to these
fees. If Acrewood believes it incurred these fees pursuant
to a contract it had with Churchville or one of his
entities, it is free to file a claim with the Receiver
11

pursuant to the Receiver’s claims process.
51-53.)

(See id. at

In sum, Acrewood’s attorneys performed a total of 50.15 hours of
work that benefited the Receivership.

Partners at Acrewood’s law

firms performed 25.45 hours of this work; associates performed
24.7.

The Court grants, Acrewood’s Motion as to these hours.

Third, the Court must determine a reasonable value for the
services Acrewood provided to the Receivership.

See In re FBI

Distribution Corp., 330 F.3d at 44 (holding that where debtor in
possession does not adopt a contract, service provider is “entitled
to only the reasonable value of her postpetition services that
benefitted the estate”); Clark, supra, § 428(a) (“The measure of
[liability

for

services

rendered]

is

not

necessarily

that

prescribed by the contract, but is the value of the benefit such
as

interim

compensation

usage

has

stipulated

been
in

to
the

the

estate

not

contract.”).

exceeding
Here,

the

Acrewood

provided legal work to the Receivership that the Receiver otherwise
would have had to complete.

The Court identified a reasonable

value for such services when it approved the Receiver’s rates:
partners may bill no more $350 per hour, associates may bill no
more than $295 per hour, and paralegals may bill no more than $185
per hour.

(See Receiver’s Resp. to Mot. 13, ECF No. 48; Receiver’s

First Interim Fee Application 2, ECF No. 49.)

Since Acrewood

performed work on behalf of the Receiver, it is reasonable that

12

the Receivership should compensate it at the Receiver’s rates.
Accordingly, Acrewood is entitled to the following fees:
Partners:

25.45 hours x $350 = $8,907.50

Associates:

24.7 hours x $295 = $7,286.50

Total:

$16,194.00

IT IS SO ORDERED.

William E. Smith
Chief Judge
Date: July 12, 2016

13