Securities & Exchange Commission v. Kaleta et al

Filing 170

MEMORANDUM AND ORDER.the Receivers Motion for Order Approving ProposedSettlement and for Ancillary Orders [Doc. # 113] is GRANTED and theObjectors objections [Doc. # 124] are OVERRULED. It is furtherORDERED that the Receivers request relief from the September 23, 2011deadline to add third parties is DENIED as MOOT.(Signed by Judge Nancy F. Atlas) Parties notified.(sashabranner, )

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.
ALBERT FASE KALETA and
KALETA CAPITAL,
MANAGEMENT INC. et al.,
Defendants,
and
BUSINESSRADIO NETWORK, L.P.
d/b/a BizRadio and DANIEL
FRISHBERG FINANCIAL
SERVICES, INC., d/b/a DFFS
CAPITAL MANAGEMENT, INC.,
Relief Defendants.

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CIVIL ACTION NO. 4:09-3674

MEMORANDUM AND ORDER
Before the Court in this receivership proceeding are objections of certain
investors (“Objectors”)1 against a proposed settlement among Court-appointed

1

The Objectors are Carlos Barbieri, Richard Burkhart, Diane and Paul Collings
(TR Dunn Family Trust), Steve Cook, Dr. Gerald Crouch, Ivan Curiel, Kevin Deering,
Ronald and Lavonne Ellisor, Marcus Erickson, Kurt Everson, Robert Ficks, Johnny and
Betty Gauntt, Ed and Helena Gray, Martin Grosbol, Bob and Kathy Horlander, Tony
Huerta, Alisa K. Jones, Richard Kadlick, Don Keil, Timothy Koehl, Sailaja Uri
Konduri, James Maas, Jack McElligot, Pamela McElligot, Larry Mullins, Florence
Reiley, Doug and Kay Shaffer, Kohur Subramanian, George and Marene Tompkins
(Tompkins, Inc.), Jacob Tsabar, James and Patricia Stewart, Raymond Warner, Paul and
Simona Williams, and John Willis, as executor of the Estate of Geraldine J. Willis.

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receiver, Thomas L. Taylor, III, Esq. (“Receiver”), and David Wallace, Costa
Bajjali, and certain entities owned by or affiliated with Messrs. Wallace and
Bajjali.

On September 12, 2011, the Receiver filed a Motion for Order

Approving Proposed Settlement and for Ancillary Orders (“Motion”).2

The

Objectors responded by filing the “Investors’ Objection to Receiver’s Motion for
Order Approving Proposed Settlement and for Ancillary Orders” (“Response”),3
to which the Receiver timely filed a “Response to Objection to Proposed
Settlement with Wallace Bajjali Parties” (“Reply”).4 Having considered the full
record in this case, the parties’ arguments, and governing legal authorities, the
Court GRANTS the Receiver’s Motion.
Investors’ Objections to Receiver’s Motion for Order Approving Proposed Settlement
and for Ancillary Orders (“Response”) [Doc. # 124] at 1.
Several Objectors named in the Investors’ Response are not listed in the
Receiver’s Exhibit X, which identifies all known persons and entities to be bound by the
proposed Bar Order. See Bar Order List [Doc. # 113-1], Ex. X to Compromise
Settlement and Release Agreement (“Settlement”) at 140. These absent Objectors are
Carlos Barbieri, Richard Burkhart, Dr. Gerald Crouch, Ivan Curiel, Kurt Everson, Bob
and Kathy Horlander, Don Keil, James Maas, Jack McElligot, Pamela McElligot, Jacob
Tsabar, and Tony Huerta. There is, however, a Jose Huerta” listed in Exhibit X. It
appears that these individuals, including Tony Huerta (to the extent that he is not the
same person as or a representative of Jose Huerta), are not among the BR Note Holders
whose claims would be affected by the proposed Bar Order.
Finally, Exhibit X also includes investors who do not appear to be among the
individuals represented by the Schmidt Law Firm. See id. These investors are Youssef
Boutrous, John Dosier, Dan Gunderson, Glenn and Ann Latta, Barbara Ploetz, Eric
Rothenberg, Bruce Ruisard, Blake Taylor, Ethelyn Taylor and Ton Taylor.
2

Mot. [Doc. # 113].

3

Resp. [Doc. # 124].

4

Reply [Doc. # 142].

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I.

BACKGROUND
Defendants Albert Kaleta (“Kaleta”), Daniel Frishberg (“Frishberg”), and

Kaleta Capital Management (“KCM”) allegedly perpetrated several frauds related
to promissory-note securities. In one such scheme, they solicited investors, to
make loans to various entities related to a radio station (“BR Radio Entities”).
The Objectors invested in one or more of the BR Entities5 through their agent,
Wallace Bajjali Development Partners, LP (“WB Development Partners”). In
return, at least some of the Objectors received promissory notes (“BR Promissory
Notes”).
Messrs. Wallace and Bajjali own, control, and/or are otherwise affiliated6
with WB Development Partners, Wallace Bajjali Investment Fund II, L.P. (“WB
Fund II”), West Houston WB Realty Fund, L.P. (“W. Houston Fund”), LFW
Economic Opportunity Fund., L.P. (“LFW Fund”), and Spring Cypress
Investments, L.P. (“Spring Cypress”) (collectively, the “WB Parties”).
W. Houston Fund, LFW Fund and Spring Cypress (collectively, the “Note
5

For purposes of the pending Motion, it is immaterial which particular BR entity
borrowed an Investors’ funds because the Bar Order broadly defines “BR Note Holders”
as “investors, their heirs, successors, agents and assigns, who subscribed to the
BusinessRadio Note Plan and/or made loans to BusinessRadio or its affiliates by or
through any of the Wallace Bajjali Parties as their agent.” See Settlement [Doc. # 1131], Ex. 1 to Mot. § 2.12.
6

The Receiver’s Motion indicates that Messrs. Wallace and Bajjali are the
“principals” of Note Entities, W. Houston Fund, LFW Fund and Spring Cypress.
Mot. ¶ 12.

3
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Entities”) received from KCM funds that included the proceeds of the allegedly
fraudulent offerings to Objectors by Defendants. In return, each Note Entity
executed a promissory note payable to KCM (“WB/KCM Notes”).
On November 13, 2009, the Securities and Exchange Commission (“SEC”)
commenced this action against Kaleta, Frishberg, and KCM, alleging violations
of the anti-fraud provisions of the federal securities laws.7 Subsequently, the
Court appointed Taylor as the Receiver for KCM8 and Relief Defendants
BusinessRadio Network, L.P. d/b/a BizRadio (“BR Network”) and Daniel
Frishberg Financial Services, Inc. d/b/a DFFS Capital Management, Inc.
(“DFFS”)9 (collectively, the “Receivership Entities”). Under the Court’s orders,
the Receiver is authorized: (1) to take and have complete and exclusive control,
possession, and custody of the Receivership Estate10 and any assets traceable to

7

Compl. [Doc. # 1]. The SEC subsequently filed an additional enforcement action
against Messrs. Wallace and Bajjalli. See SEC v. Wallace et al., No. 4:11-cv-01932
(S.D. Tex. May 25, 2011). The court in that action ultimately entered Agreed Final
Judgments against Wallace and Bajjali individually, permanently enjoining each from
future violations of section 17(a) of the Securities Act of 1933 and imposing on each a
civil penalty of $60,000. See id. [Docs. ## 5, 6].
8

Agreed Order Appointing Receiver (“Receiver Order”) [Doc. # 7].

9

Order Modifying Order Appointing Receiver (“Modified Receiver Order”)
[Doc. # 34].
10

The “Receivership Estate” consists of the Receivership Assets and the
Receivership Records. Receiver Order, ¶ 2. “Receivership Assets” are “the assets,
monies, securities, properties, real and personal, tangible and intangible, of whatever
kind and description, wherever located, and the legally recognized privileges (with
regard to the entities), of the Defendant and all entities it owns or controls.” Id. ¶ 1;
Modified Receiver Order at 1. “Receivership Records” are “the books and records,

4
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assets owned by the Receivership Estate;11 (2) to collect all sums of money due or
owing to the Receivership Estate;12 (3) to institute actions to obtain possession
and/or recover judgment with respect to persons or entities who received assets
traceable to the Receivership Estate;13 (4) to contract and negotiate with any
claimants against the Receivership for purposes of compromising or settling any
claim;14 (5) to institute, prosecute, or compromise such actions that the Receiver
deems necessary and advisable to carry out the Receiver’s mandate;15 and (6) to
preserve the Receivership Estate and minimize expenses in furtherance of
maximum and timely disbursement to claimants.16
The Receiver explains that he spent months analyzing the Receivership
Estate’s potential claims against each of the WB Parties, the likelihood of success
on the merits, the expense of litigation (both to the Estate for prosecuting those
claims and to the WB Parties for defending against them—expenses which would

client lists, account statements, financial and accounting documents, computers,
computer hard drives, computer disks, internet exchange servers telephones, personal
digital devices and other informational resources of or in possession of the Defendant,
or issued by Defendant and in possession of any agent or employee of the Defendant.”
Receiver Order ¶ 1; Modified Receiver Order at 2.
11

Receiver Order ¶¶ 4, 5(b).

12

Id. ¶ 5(b).

13

Id. ¶ 5(c).

14

Id. ¶ 5(f).

15

Id. ¶ 5(i).

16

Id. ¶ 5(j).

5
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affect what funds would be available to satisfy any potential judgment in favor of
the Receiver), the length of any potential litigation, and the personal and entity
financials of the WB Parties.17 The Receiver also spent months negotiating the
Settlement to reach terms that would net the Estate the maximum recovery after
expenses.
On September 12, 2011, the Receiver filed the instant Motion seeking
approval of a proposed Compromise Settlement and Release Agreement
(“Settlement”) among the Receiver and the WB Parties, including Messrs.
Wallace and Bajjali.

The Receiver sent notice of the Motion and proposed

Settlement to all known BR Note Holders.18 The Objectors responded on October
3, 2011, and the Receiver replied on October 18, 2011.19
The proposed Settlement has five primary components:
Replacement Notes Personally Guaranteed by Messrs. Wallace and
Bajjali.— W. Houston Fund, LFW Fund and Spring Cypress (“Note Entities”)
will execute replacement promissory notes (“Replacement Notes”) reaffirming

17

Mot. [Doc. # 113] ¶ 13.

18

Id. ¶ 8; Reply at 8-9. See also Notice of Proposed Settlement and Proposed Final
Claim Bar Order [Doc. # 113-1], Ex. A to Settlement at 21-23.
19

Resp. [Doc. 124]. Upon the Court’s Order [Doc. # 164], the Receiver also
delivered to the Court for in camera inspection copies of the financial documentation of
the Wallace Bajjali Parties, which the Court has carefully reviewed. The Receiver also
filed a Supplement to Motion [Doc. # 165], clarifying its request for relief from the
September 23, 2011 deadline to parties should the instant Motion be denied.

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existing debts under the WB/KCM Notes and granting new and favorable
repayment terms.20 The principal amounts owed on the Replacement Notes total
$879,176.35 comprised of: $595,176.35 owed by W. Houston Fund, $275,000
owed by LFW Fund, and $9,000 due from Spring Cypress.21 Messrs. Wallace
and Bajjali will guarantee the full amount of each Replacement Note.22 The
original WB/KCM Notes are unsecured and are not personally guaranteed.23
“Cash Flow Note” Personally Guaranteed by Messrs. Wallace and
Bajjali.—WB Development Partners will execute a promissory note (“Cash Flow
Note”) to Receiver for an expected24 payment of between $300,000 and $450,000,
the specific amount to be based on “dedicated cash flow” (as defined in the Cash
Flow Note) from a development project in Amarillo, Texas (“Amarillo
Project”).25
20

Messrs. Wallace and Bajjali also will guarantee the Cash Flow

Mot. ¶ 6(1); Settlement § 4.1.

21

Mot. ¶ 4; Replacement Notes, [Doc. # 113-1], Exs. C, D, E, F, G, and H to
Settlement at 28-55. The parties have agreed on an applicable weighted interest rate of
approximately 12.15% and, as of the filing of the Motion, approximately $286,875.37 in
interest was due. See Mot. ¶ 15. The accrued interest on these Notes is part of the
Receiver’s assets. Id. ¶¶ 15, 17. The maturity dates of the WB/KCM Notes were
extended by Replacement Notes based on the liquidity of the respective Note Entity,
with an outer repayment deadline of December 31, 2012. Id. ¶¶ 16, 17. The Estate will
be compensated by accruing interest totaling $142,204.13, if all the Replacement Notes
are not paid until that deadline. Id.
22

Id. ¶ 6(2); Settlement § 4.2.

23

Mot. ¶ 17.

24

See Cash Flow Note [Doc. # 113-1], Ex. U to Settlement at 122, § 1(b)(ii).

25

Mot. ¶ 6(3); Settlement § 4.3.

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Note’s “dedicated cash flow” under most circumstances.26 The Cash Flow Note
and the accompanying Wallace and Bajjali guarantees currently are not part of the
Receivership Assets; they are additional consideration negotiated by the Receiver
for the Settlement.27
Release of the WB Parties.— The Receiver and the Receivership Entities
will fully release each of the WB Parties from any and all claims which could be
asserted by him on behalf of the Receivership Estate or the Receivership Entities
against any of them.28
Releases by the WB Parties.— The Settlement provides that the WB
Parties will fully release the Receiver, the Receivership Estate, and the
Receivership Entities from any and all claims which could be asserted by any of
them against the Receiver, the Receivership Estate, and the Receivership
Entities.29 This release would not affect the rights of other WB Parties, excluding
Messrs. Wallace and Bajjali individually, to participate in the claims process for
the Receiver’s ultimate plan of distribution of Receivership Assets.30

26

Mot. ¶ 6(4); Settlement § 4.4.

27

Mot. ¶ 18.

28

Mot. ¶ 6(5); Settlement § 5.2.

29

Mot. ¶ 6(6); Settlement § 5.3.

30

Messrs. Wallace and Bajjali would be excluded from participating in the
Receiver’s ultimate plan of distribution of Receivership Assets. See Settlement
§ 5.3.1(a).

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Bar of Certain Actions by BR Note Holders.— The Receiver seeks entry
of an order (“Bar Order”) barring for all time claims of “BR Note Holders”31
against the WB Parties in connection with or related to loans or promissory notes
obtained through any WB Party as agent and issued by any BR Entity.32 The Bar
Order thus would enjoin these note holders (including the Objectors) from
commencing or continuing any legal proceeding and/or asserting or prosecuting
any causes of action against any of the WB Parties “arising out of, in connection
with, or relating in any way to the [BR Note Plan],”33 loans made to the BR
Entities or their related entities by the BR Note Holders, and/or notes issued by
the BR Entities or their related entities to the BR Note Holders.34 The BR Note
Holders (including the Objectors), however, would be able to assert their radio
station loan-related claims through the claims process in the Receiver’s ultimate
plan of distribution of Receivership Assets.35

31

“BR Note Holders” are “the investors, their heirs, successors, agents and assigns,
who subscribed to the [BR Note Plan] and/or made loans to [BR Entities or their
affiliates] by or through any of the [WB Parties] as their agent.” Settlement § 2.12.
32

Mot. ¶ 6(7); Settlement § 4.7; see Bar Order [Doc. 113-1], Ex. B. to Settlement at

24.
33

The “BR Note Plan” is “that plan or series of transactions whereby investors
made loans to [BR Entities or their affiliates] by or through any of the [WB Parties] as
their agent.” Settlement § 2.11.

34

See Bar Order [Doc. 113-1], Ex. B. to Settlement at 24; Mot. ¶ 6(7); Settlement

§ 4.7.
35

Mot. ¶ 6(7); Settlement § 4.7.2. The Receiver explains that the Bar Order would
not affect the Objectors’ claims or rights arising out of “‘losses . . . incurred when [the

9
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The Receiver emphasizes that approval of the Bar Order is a key and
necessary condition of the Settlement.36

The Receiver argues the proposed

Settlement terms are fair and equitable “to the Receivership Estate and all persons
who have substantive claims against the Receivership Estate.”37 The Receiver
urges that settlement of the WB/KCM Note claims and any others the Receiver
may have on behalf of the Estate against Wallace and Bajjali individually and as
principals of the Note Entities or other WB Entities, or against the other WB
Parties, would be hotly contested and result in expensive litigation with uncertain
results.38 He points out litigation against the WB Parties would cost the Estate,
“conservatively, $250,000 to $300,000.”39 He urges that the Settlement, which is
a compromise consisting of interrelated compromises, is necessary to
“maximize[e] Estate assets and minimize[e] the expenses incurred to obtain
them.”40
The Objectors disagree.

They contend the Settlement is seriously

inadequate, arguing that the Settlement allows the WB Parties to pay only

WB Parties] made alleged equity investments in BizRadio” or losses arising out of real
estate investments outside the Receivership entities. Reply at 7 (quoting Resp. at 3).
36

See Mot. ¶ 26.

37

Id. ¶ 12.

38

Id. ¶ 38.

39

Id. ¶ 14.

40

Mot. ¶ 38; Reply at 2.

10
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$300,000 plus previously acknowledged promissory notes and grants the WB
Parties release from all further actions by the Receiver as well as a bar of all other
investors’ claims against the WB Parties.41 The Objectors seek to pursue their
own claims against the WB Parties for the alleged misconduct associated both
with the loans made to the BR Entities and other investments.
After close scrutiny of the record, the parties’ arguments, and the
applicable law, the Court concludes, for reasons explained in detail, that equity
warrants approval of the Settlement. The Settlement is in the best interests of all
the Estate’s claimants, including the Objectors and others in their posture.
II.

LEGAL STANDARDS
“The federal courts have inherent equitable authority to issue a variety of

‘ancillary relief’ measures in actions brought by the SEC to enforce the federal
securities laws.”

SEC v. Wencke, 622 F.2d 1363, 1368-69 (9th Cir. 1980)

(observing that a district court’s authority to issue an order staying a non-party
from bringing litigation derives from “the inherent power of a court of equity to
fashion effective relief”) (“Wencke II”); see also SEC v. Safety Fin. Serv., 674
F.2d 368, 372-73 (5th Cir. 1982). The Fifth Circuit has long endorsed other
circuits’ propositions that “(a)ny action by a trial court in supervising an equity
receivership is committed to his sound discretion and will not be disturbed unless
41

Resp. at 3.

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there is a clear showing of abuse.” Safety Fin. Serv., 674 F.2d at 373 (quoting
SEC v. Ark. Loan & Thrift Corp., 427 F.2d 1171, 1172 (8th Cir. 1970)). “It is
recognized principle of law that the district court has broad powers and wide
discretion to determine the appropriate relief in an equity.”

Id. (quoting

SEC v. Lincoln Thrift Ass’n, 577 F.2d 600, 606 (9th Cir. 1978)). “[A] district
court has wide discretion to administer proceedings in an equity receivership—
including the approval of settlements.” Gordon v. Dadante, 336 F. App’x 540,
551 (6th Cir. 2009) (unpublished). Because “[a]n anti-litigation injunction is
simply one of the tools available to courts to help further the goals of the
receivership,” SEC v. Byers, 609 F.3d 87, 92 (2d Cir. 2010) (upholding injunction
against claimants filing bankruptcies against receivership assets), a district court
has broad authority to issue blanket stays of litigation to preserve the property
placed in receivership pursuant to SEC actions. See SEC v. Stanford Int’l Bank
Ltd., 424 F. App’x, 338, 340-41 (5th Cir. 2011) (unpublished) (citations omitted);
Liberté Capital Group, LLC v. Capwill, 462 F.3d 543, 551-52 (6th Cir. 2006)
(citations omitted); see also SEC v. Byers, 609 F.3d at 91 (“While it is a power to
be exercised cautiously, district courts may issue anti-litigation injunctions
barring bankruptcy filings as part of their broad equitable powers in the context of
an SEC receivership.”).
“[N]o federal rules prescribe a particular standard for approving
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settlements in the context of an equity receivership; instead, a district court has
wide discretion to determine what relief is appropriate.” Gordon, 336 F. App’x at
548. Although a court is not obligated to follow any particular procedure, courts
have stayed proceedings by non-parties against a court-imposed receivership after
finding an appropriate showing of necessity. See Wencke II, 622 F.2d at 1371-72.
In determining whether a stay is necessary, courts may consider factors such as
the value of the proposed settlement, the value and merits of Receiver’s potential
claims, the value and merits of any foreclosed parties’ potential claims, the
complexity and costs of future litigation, the risk that litigation costs would
dissipate receivership assets, the implications of any satisfaction of an award on
other claimants, and any other equities attendant to the situation. See Liberté
Capital, 462 F.3d at 553 (citations omitted); Wencke II, 622 F.2d at 1371;
Gordon, 336 F. App’x at 544, 549. In the absence of any evidence that a
proposed settlement is of insufficient value, a district court may conclude that a
proposed settlement amount is sufficient. See Gordon, 336 F. App’x at 548.
III.

DISCUSSION
The Objectors make several arguments in opposition to the proposed

Settlement. Their primary argument is that the amounts to be collected by the
Receivership Estate are insufficient in light of the WB Parties’ assets, the WB
Parties’ admission of previously-owed WB/KCM Notes, and the Objectors’
13
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claims against the WB Parties, which they argue led to losses in excess of
$15,000,000. They argue that the Settlement is inadequate because the WB
Parties are not releasing the Receiver from their claims against the Estate. The
Objectors argue that the Receiver lacks authority to foreclose the Objectors’
claims against the WB Parties because those claims “involve the personal
property rights of the [Objecting] Investors and other third parties” outside the
Receivership Estate and the WB Parties are not among the Receivership
Entities.42 Finally, the Objectors contend that the Receiver inconsistently argued
that “the Investors’ security interests in the station [we]re invalid” in connection
with the sale of the BusinessRadio assets, and yet here wants “to absolve [the WB
Parties] of any liability to Investors for their negligence and other torts.”43
Having carefully considered all the arguments by the Objectors and the
Receiver’s responses, the terms of the proposed Settlement, and the governing
legal authorities, the Court concludes that the proposed Settlement is sufficient,
fair, and necessary. The Objectors’ objections to the Settlement are overruled.
“Replacement Notes.”— The Objectors argue that the settlement funds to
be collected in this regard are inadequate because the WB Parties, specifically the
“Note Entities,” already have admitted these existing obligations. The Objectors

42

Resp. at 2, 5.

43

Id. at 2.

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thus contend that this aspect of the Settlement provides no additional benefit for
the Receivership Estate.44
The Receiver responds, and the Objectors do not contest, that the Note
Entities have admitted to owing some debts but, significantly, do not admit the
amount or scope of the debts.45 Under the proposed Settlement, the obligations
are liquidated; the Note Entities would agree they are obligated to the
Receivership for $1,177,755.77 through October 18, 2011, with continuing
accrual of interest at a favorable rate of an average of 12% after that date.46 The
Replacement Notes aspect of the Settlement will result in payments to the
Receivership Estate of approximately $1.2 to $1.3 million.47 The Receiver also
establishes without contradiction that the agreed quantification of these
obligations is a material benefit to the Receivership Estate because the WB/KCM
Note transactions were “chaotic and poorly documented” and “not readily
susceptible to proof” and there are possible defenses that could be raised to
complicate the litigation.48 It is also apparent that the Receiver expects the WB
Parties (including the Note Entities) to strenuously contest claims against them.

44

Id.

45

Reply at 5.

46

Mot. ¶ 15; Reply at 5.

47

Id. ¶ 14.

48

Reply at 5.

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“Absent the Settlement, the requirement of litigation to establish these obligations
and to prove up their amounts would be an expensive and time-consuming
process”49 that likely would deplete actual and potential Receivership Estate
assets through legal fees that would be incurred by the Receiver prosecuting.50
The Receiver estimates that the litigation fees and expenses for the Estate could
reach $250,000 to $300,000.51 These fees would harmfully reduce available
Receivership Estate funds for distribution to claimants. In addition, the WB
Parties’ defense fees and costs would likely deplete those parties’ assets available
to the Receiver if the debt collection litigation were successful.52 The Objectors
have not attempted to refute these points or the Receiver’s concerns about
difficulty of collection of any judgment against the various WB Entities.
The Court concludes that it is far from clear that the Receiver’s claims on
the original notes would be collectible. The Court has reviewed the financial
documents of the WB Parties submitted in camera53 and credits the Receiver’s
assessment that the settlement represents the maximum that can be paid by the

49

Id.

50

Mot. ¶ 22.

51

Id. ¶ 14.

52

Id. ¶¶ 14, 22.

53

See Order [Doc. # 164].

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WB Parties.54

Obtaining through negotiations the uncontested personal

guarantees of Messrs. Wallace and Bajjali provides important additional
consideration from the WB Parties for the proposed Settlement. The original
WB/KCM Notes were not personally guaranteed,55 and guarantees could not be
obtained through litigation.
The Court concludes that Replacement Notes with the personal guarantees
of Messrs. Wallace and Bajjali are material benefits for the Receivership Estate
above and beyond the Note Entities’ existing liability under the WB/KCM Notes.
The quantification and collectability of any judgment against the WB Parties is of
paramount concern for the Estate and is questionable without the Note Holders’
reaffirmation of these obligations and Messrs. Wallace and Bajjali’s personal
guarantees. Accordingly, the Court rejects the objection that the Replacement
Notes are of insufficient value.
Cash Flow Note.— The Objectors also argue that the amount of the Cash
Flow Note is inadequate because there is no evidence to suggest that the cash
flow from the Amarillo Project is likely to result in an obligation above $300,000.
The Objectors further point out that if the WB Parties pay $300,000 within the

54

See Mot. ¶ 24.

55

Id. ¶ 17.

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first eighteen months, the rest of the debt on the Cash Flow Note is extinguished
regardless of the cash flow from the Amarillo Project.56
The Receiver counters that the Cash Flow Note and personal guarantees of
Messrs. Wallace and Bajjali are “additional consideration negotiated by the
Receiver for the release of the [WB Parties] and the entry of the Bar Order.”57
The Court agrees with the Receiver that the Cash Flow Note with the partial
personal guarantees of Messrs. Wallace and Bajjali meaningfully enhances the
actual value of the Receivership Estate.

The Objectors have not supplied

evidence or any meaningful analysis that the Cash Flow Note amount is
insufficient or that additional sums are collectable at all, let alone net of litigation
expenses. This objection is overruled.
WB Parties’ Real Estate Assets.— The Objectors argue that the proposed
Settlement fails to take into account “millions of dollars in real estate assets held
by the Wallace Bajjali companies.”58 The Receiver counters persuasively that the
real estate assets are held by “real estate partnerships”59 that are “investment
vehicles through which members of the public—including but not limited to
56

Resp. at 2-3; see also Cash Flow Note [Doc. # 113-1], Ex. U to Settlement at
122, § 3.

57

Mot. ¶ 18.

58

Resp. at 3.

59

It appears that the parties’ references to “real estate partnerships” are to WB
Fund II, WB Houston Fund, and LFW Fund. See Reply at 3. It should be noted that
WB Houston Fund and LFW Fund are also “Note Entities.”

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certain of the Objectors—made investments as limited partners.”60 The evidence
of record establishes that these real estate assets are not available to satisfy a
judgment against Messrs. Wallace and Bajjali personally because “the [real estate
assets] are owned by their limited partners, not their general partners or Messrs.
Wallace and Bajjali individually.”61 The Receiver further points out that he is
unaware of WB Fund II or the Note Entities having engaged in any wrongful or
actionable conduct regarding the Receivership Entities (other than the latter not
having paid the WB/KCM Notes).62 Last, the Objectors have not established that
these real estate assets are legally available to pay the Objectors’ particular
claims. Accordingly, this objection is overruled.
Individual Earning Potential.— The Objectors also argue that the
proposed Settlement fails to take into account the fact that Messrs. Wallace and
Bajjali personally are likely to “earn income in future years.”63 The Objectors
have not established with any specificity what claims they have against Messrs.
Wallace and Bajjali individually or the extent of Messrs. Wallace and Bajjali’s
potential future earnings.

In any event and significantly, the Receiver has

considered their earning potential by including in the proposed Settlement
60

See Reply at 3-4.

61

See id.

62

See id. at 2.

63

Resp. at 3.

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important personal guarantees from these individuals.

This objection is

overruled.
Value of Objectors’ Claims.— The Objectors also argue that the settlement
amount is insufficient in view of their putative claims against the WB Parties.
The Objectors estimate their claims and losses to be greater than $15,000,000,
consisting of approximately $5,000,000 on claims relating to the BR Promissory
Notes, $6,000,000 on claims relating to “real estate investments [having] nothing
to do with the Receivership entities,” and the balance relating to “alleged equity
investments [in a BR Entity]” made by WB Parties.64
The Receiver counters without contradiction that the Objectors’ claims
relating to “real estate” and “equity investments” would not be barred by the
proposed Bar Order because these claims do not arise from promissory note
investments made in a BR Entity by or through a WB Party as an agent (i.e., “BR
Promissory Notes”).65

The Receiver acknowledges, however, that potential

claims arising from the BR Promissory Notes would be barred, but argues here
that the proposed limited bar is “a necessary compromise in order to achieve the
totality of the Settlement proposal.”66 The Receiver explains that the WB Parties

64

Id.

65

Reply at 7; see also Settlement, §§ 2.11, 2.12; Bar Order [Doc. 113-1], Ex. B. to
Settlement at 25.
66

Id. at 2.

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wish “to settle any potential claims which could be brought against them in order
to buy peace and avoid the expense of protracted litigation, which would ensue
without a settlement with the proposed claim bar order.”67
The Court concludes that the Objectors’ claims arising from “real estate” or
“equity investment” transactions would not be barred by the Bar Order and are
not a viable basis for denying approval of the proposed Settlement. The Court
accordingly overrules this objection to this extent.
Regarding the value of the Objectors’ claims relating to their loans to or
investments in the radio station entities or assets, the Objectors have failed to
provide factual detail, evidence, or meaningful analysis of the value or likelihood
of success of their alleged claims against the WB Parties. Compare, e.g., Gordon,
336 F. App’x at 548.

The Objectors’ claims regarding the WB Parties in

connection with the radio station assets will be addressed, along with similar
claims of the other defrauded investors, during the Receivership estate
distribution process.68
The Court notes that it has carefully considered the Objectors’ assertions
that they have suffered substantial losses and want to assert claims for negligence,
fraud, breach of fiduciary duty, negligent misrepresentation and civil conspiracy

67

Mot. ¶ 5.

68

See Reply at 2, 7.

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to defraud.69 The Objectors have not, however, provided information about the
viability of their legal theories, the damages on any particular claims, or the
collectability of a judgment on the claims. Indeed, there are many others who also
claim to have suffered serious losses and damages because of “investments” in or
“loans” to radio station entities or assets. In cases where investors are similarly
defrauded, equity favors treating them alike. See, e.g., SEC v. Forex Asset Mgmt.,
242 F.3d 325, 331 (5th Cir. 2001); U.S. v. Durham, 86 F.3d 70, 73
(5th Cir. 1999); SEC v. PrivateFX Global One, Ltd., et al., 778 F. Supp. 2d 775,
783 (S.D. Tex. 2011).

The equities do not support denying the proposed

Settlement to enable the Objectors to seek favored treatment over others similarly
positioned who invested through KCM.
Bar Order.— The Objectors next argue that the Court lacks authority to
impose the Bar Order on them as part of the Settlement and that the authority
cited by the Receiver is inapplicable.

The Objectors point out that the

circumstances and the scope of the injunctions in Byers, Wencke II, and Liberté
Capital are distinct from the proposed Bar Order at issue.70

These case

distinctions do not mandate a different outcome here. This Court, as any court of
69

See Resp. at 4.

70

See Resp. at 5-6. For example, Byers involved a preliminary injunction to
protect receivership assets, and Wencke II and Liberté Capital involved litigation stays
of third parties’ claims against receivership entities. See Byers, 609 F.3d at 91;
Wencke II, 622 F.2d 1367; Liberté Capital, 462 F.3d at 551.

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equity, considers legal precedent, including the types of stays or injunctions
imposed by other courts. However, receivership cases are highly fact-specific. In
the instant case, the WB Parties were directly involved in Defendants’ radio
station business, having acted as actual agents for the BR Note Holders’ loans to
the BR Entities. The Receiver’s goal of limiting litigation involving the BR
Entities in regard to radio station liabilities and assets is appropriate to enable the
Receiver to collect as many assets as possible for distribution among all
defrauded investors.

The Bar Order advances that goal by arranging for

reasonably prompt collection of the maximum amount of funds possible from the
WB Parties under the present litigation and financial circumstances. Preclusion
of the BR Note Holder’s alleged claims relating to putative investments or loans
to a BR Entity made through a WB Party in order to collect substantial sums
without litigation costs and delay is of substantial value to the Objectors and all
others similarly positioned.

Furthermore, as noted, the Objectors have not

presented evidence to counter the Receiver’s concerns about collection of any
judgment against the various WB Entities.
WB Parties’ Claims Against the Receivership.— The Objectors also claim
that the WB Parties are “not releasing the Receiver from their claims against the
Estate.”71 The Objectors overstate the effect of the proposed Settlement. While it
71

Resp. at 2.

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is true that the publicly-owned WB Entities would not be required to relinquish
their claims as investors to participate in the Receiver’s ultimate plan of
distribution,72 the Settlement does require Messrs. Wallace and Bajjali
individually to release all claims against the Receivership Estate, including any
claims that these individuals could assert personally in the claims process
associated with an ultimate plan of distribution.73
The Court concludes that the proposed releases are sufficient and fair. The
Settlement requires Messrs. Wallace and Bajjali to release all their personal
claims against the Receivership Estate.

The Receiver also correctly states,

without contradiction by the Objectors, that the WB Entities that are publiclyowned partnerships (i.e., owned by investors other than or in addition to the
Objectors) should be permitted to participate in the claims process in an ultimate
plan of distribution. The Objectors’ objection on this basis is therefore overruled.
72

See Settlement, § 5.3.1. The Settlement provides that the WB Parties (including
their officers, agents, predecessors, etc.) release inter alia the Receiver, the
Receivership Entities (e.g., KCM and BR Entities), and the Estate from all claims
arising from the BR Note Plan and the litigation pending in this Court, but do not
release (1) claims by WB Parties (other than Wallace and Bajjali’s) to Estate assets
relating to the Receiver’s ultimate plan of distribution, and do not release (2) claims the
WB Parties may have against the “agents, officers, directors and representatives of the
Receivership Entities, other than those persons who are Wallace Bajjali Released Parties
(e.g., WB Parties and their officers), including without limitation the following
individuals or their respective past, present, and future heirs, successors, agents, and
assigns: Albert Fase Kaleta; Daniel S. Frishberg; and Elisea T. Frishberg.”
Id. § 5.3.1(a)-(b). Thus, the WB Parties retain the right to assert claims against Kaleta,
individually, and against Daniel and Elisea Frishberg, individually.
73

Reply at 9-10; see also Settlement § 5.3.1(a).

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Lack of Court Authority.— The Objectors also argue in passing, in
reliance on Stern v. Marshall, 131 S. Ct. 2594 (2011), that the WB Parties are not
parties in any proceedings before this Court and thus are not subject to the
Court’s authority or jurisdiction.74 This contention is rejected. Significantly, this
is not a bankruptcy proceeding and, unlike in Stern, the undersigned is an Article
III judge who is not impaired by Article I bankruptcy judges’ lack of plenary
authority. Furthermore, the Objectors personally have submitted to this Court’s
jurisdiction to the extent they have asserted claims for recovery against the
Receivership Estate and/or made objections to the Receiver’s actions. The Court
has broad powers and wide discretion in the supervision of an equity receivership
and the issuance of “ancillary relief.” See Byers, 609 F.3d at 91; Liberté Capital,
462 F.3d at 551-52; SEC v. Safety Fin. Serv. 674 F.2d at 372; Wencke, 622 F.2d at
1369; Gordon, 336 F. App’x. at 549.
Conclusion.— The Court holds after careful consideration that the equities
favor approval of the proposed Settlement in its entirety. As noted above, the
litigation risks of adverse outcomes on certain claims, the cost of complex, multiparty litigation, the unavailability of reliable documentation to prove the amounts
of the various existing debts owed by the Note Entities, the likelihood that
Defendants, the Note Entities, and the WB Parties would strenuously contest the
74

Resp. at 4, 5.

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Receiver’s positions, and the difficulty and lack of assurances about collectability
of all judgments are valid, paramount concerns investigated carefully by the
Receiver. These concerns persuade the Court that approval of the multi-faceted
Settlement is warranted. These circumstances, when considered in their entirety,
warrant approval of the proposed Settlement as the maximum that the Receiver
likely could obtain from the WB Parties, particularly net of expenses after
litigation by the Receiver or the Objectors in connection with BR Entities matters.
The Court accordingly exercises its discretion to approve the Settlement.
III.

CONCLUSION AND ORDER

The Settlement is an intricate, multi-part arrangement in which each party
has agreed to make reasonable compromises. The Court approves and will enter
the Receiver’s proposed Order as submitted. The Receiver has established that
the proposed Settlement is fair, equitable, necessary, and in the interest of the
Receivership Estate and all its claimants. It is therefore
ORDERED that the Receiver’s Motion for Order Approving Proposed
Settlement and for Ancillary Orders [Doc. # 113] is GRANTED and the
Objectors’ objections [Doc. # 124] are OVERRULED. It is further
ORDERED that the Receiver’s request relief from the September 23, 2011
deadline to add third parties is DENIED as MOOT.

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SIGNED at Houston, Texas, this 7th day of February, 2012.

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