Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_12-cv-02164/USCOURTS-casd-3_12-cv-02164-17/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:0077 Securities Fraud

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

CASE NO. 3:12-cv-2164-GPC-JMA

NOTICE OF TENTATIVE RULING

ON RECEIVER’S REPORT AND

RECOMMENDATION

REGARDING GENERAL

PARTNERSHIPS

v.

LOUIS V. SCHOOLER and FIRST

FINANCIAL PLANNING

CORPORATION, dba Western

Financial Planning Corporation,

Defendants.

Before the Court is the issue of whether all, some, or none of the approximately

86 general partnerships (“GPs”) currently under receivership should be released from

the receivership and under what conditions, if any. The Receiver has filed his Report

and Recommendation on this issue. (ECF No. 852.) The parties, (ECF Nos. 874, 880),

and the investors, (see, e.g., ECF No. 869), have responded to the Receiver’s Report

and Recommendation, and included both critiques and counterproposals.

On July 22, 2014, the Court issued its Order on Sua Sponte Reconsideration of

August 16, 2013 Order to Release General Partnerships from Receivership (the

“Reconsideration Order”). (ECF No. 629.) The Reconsideration Order concluded that

the GPs should remain in the receivership and, pursuant to that conclusion, the GPs’

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due process rights were implicated and thus a hearing should be held. (Id. at 7–8.) On

October 10 and 15, 2014, a due process hearing was held (the “Investor Hearing”).

(ECF Nos. 790, 794.) On October 17, 2014, the Court issued its Order Regarding

Investor Hearing (the “Investor Hearing Order”). (ECF No. 808.) The Investor Hearing

Order reiterated the Court’s concerns regarding whether it was appropriate to treat all

GPs the same in light of their varying financial conditions and thus ordered the

Receiver to file a report and recommendation addressing the Court’s concerns. (Id. at

3–6)

Upon review of the Receiver’s Report and Recommendation and the responses

thereto, the Court provides notice of its tentative ruling on this issue. While the

Reconsideration Order was concerned with the ability of the investors to manage

themselves going forward, (ECF No. 629, at 3–7), and the Investor Hearing Order was

concerned with the differing financial health of the GPs, (ECF No. 808, at 3), the Court

now concludes that a just and fair endgame is the main focus. As such, the appropriate

considerations are those of investor restitution and the commingling of Western’s

assets with investor assets.

Generally, during the pendency of an SEC enforcement action, property related

to the allegedly fraudulent investment scheme is held in receivership. See Sec. and

Exch. Comm’n v. Small Bus. Capital Corp., No. 5:12-cv-3237-EJD, 2013WL6701928,

at *4 (N.D. Cal. Dec. 19, 2013); see also In re San Vicente Med. Partners Ltd., 962

F.2d 1402, 1404–05 (9th Cir. 1992). While Defendants and some investors argue that

the general rule should be departed from in this case, the Court disagrees and findsthat

the receivership should be maintained over all the GPs.

In SEC enforcement actions, defendants may be ordered to disgorge their illgotten gains. Sec. and Exch. Comm’n v. First Jersey Sec., 101 F.3d 1450, 1474 (2d Cir.

1996). These funds can then be then be pro rata distributed back to investors, which

the SEC has indicated it intends to seek. (See ECF No. 880.) In this case, the SEC has

moved for disgorgement, (ECF No. 685), but the hearing on the SEC’s motion will not

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be held for several months. (ECF No. 849.) Moreover, outside of moving to establish

that the GPs are securities, the SEC has not yet moved on its fraud causes of action.

(See ECF No. 1.) Whether disgorgement is granted and whether investors were

defrauded bear significantly on whether distribution to investors is appropriate. See

Sec. and Exch. Comm’n v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir. 1997) (noting

that disgorged funds “may often go to compensate securities fraud victims for their

losses”). An order on either disgorgement or fraud will take months if decided on

summary judgment, and potentially upwards of a year if decided at trial. (See ECF No.

850.)

Western’s assets include an interest in every GP property except one—Washoe

I— and notes from nearly two-thirds of GPs, including two of the GPs who own

Washoe I. (See ECF No. 852-1, Ex. A.) If Western is ordered to disgorge its ill-gotten

gains, this disgorgement may include its share of each GP property and the GP notes.

Though the investors, through their GPs, own the vast majority of the GPs and thus the

GP properties, Western has essentially commingled its assets with those of investors

by taking an interest in interest in almost every GP and holding notes from nearly twothirds of GPs. If restitution to investors of Western’s disgorged funds is appropriate,

every Western investor would arguably have an interest in every GP property. Were the

Court to release the GPs, a GP property would be subject to the control of its several

hundred general partner investors who would have no obligation to consider the

interests of the thousands of investors who may be able to lay claim to Western’s

interest through investor restitution. Continuation of the receivership ensures that the

Receiver and the Court maintains oversight of these properties and that any action

taken in relation to the GPs or GP properties is the most equitable overall. See Sec. and

Exch. Comm’n v. Credit Bancorp, Ltd., No. 99-cv-11395-RWS, 2000 WL 1752979, at

*13, 43 (S.D.N.Y. Nov. 29, 2000).

Though the Court could order Western to divest its interest and the GPs to pay

the notes, and thus release the GPs without the aforementioned issue, this too is

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problematic. Western may not be liable for disgorgement or fraud and altering the

structure of the GPs at this stage may be prejudging Western’s liability. As the

appropriate course of action issignificantly influenced by Western’s liability, the Court

finds it appropriate to wait until these issues are resolved before removing the GPs

from the receivership or altering their structure.

While the Court believes that continuation of the receivership over all the GPs

is appropriate, the Court does have some concerns regarding their current financial

status as well as the information available to their investors. As the Receiver has

indicated, some investors are not paying their share of costs and these costs are shifted

onto other investors who are paying more than their share of costs. (See ECF No. 852-

1, Ex. C.) Due to comments at the investor hearing, it appears that the operational bills

sent to investors lack detail. Thus the Court findsit appropriate to order that additional

information be provided to investors so that they can make a choice as to whether to

pay the higher operational bill or not. The Receiver shall prepare an information packet

for each investor similar to what he prepared when the Court initially ordered that the

GPs be released. This packet will include an updated appraisal of their GP’s property,

the financial health of their GP and their cotenant GPs, details regarding what

percentage of investors are paying their operational bills, and facts regarding this case.

Additionally, operational bills sent to investors in the future will detail exactly what

each investor is being billed for and what may occur if some investors fail to pay their

operational bills.

At this juncture, it is unclear whether liquidation of some GP properties is

appropriate. However, the Receiver’s Report and Recommendation appearsto indicate

that liquidation of GPs that will be unable to pay their bills may be warranted. It may

also be the case that billing investors to maintain GP properties is not the wisest course

of action based on the valuation of their GP and its property. Thus the Court orders the

Receiver to provide a report and recommendation regarding whether the financial

health of certain GPs warrants liquidation of certain GP properties. Finally, based on

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issues with the partnership administrators as well asthe savings that could be provided

by a professional management company, the Court grants the Receiver’s request to

transition administration of the GPs to the Lincoln Property Company.

DATED: January 22, 2015

HON. GONZALO P. CURIEL

United States District Judge

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