Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_12-cv-02164/USCOURTS-casd-3_12-cv-02164-31/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

ORDER:

GRANTING IN PART AND

DENYING IN PART RECEIVER’S

MOTION FOR ORDER (A)

AUTHORIZING THE RECEIVER

TO CONDUCT AN ORDERLY

SALE OF GENERAL

PARTNERSHIP PROPERTIES; (B)

APPROVING THE PLAN OF

DISTRIBUTING RECEIVERSHIP

ASSETS; AND (C) APPROVING

PROCEDURES FOR THE

ADMINISTRATION OF

INVESTOR CLAIMS

DENYING AGUIRRE INVESTORS’

EX PARTE MOTION FOR AN

ORDER SETTING EVIDENTIARY

HEARING AND DISCOVERY

SCHEDULE

[ECF Nos. 1181, 1297]

v.

LOUIS V. SCHOOLER and FIRST

FINANCIAL PLANNING

CORPORATION, dba Western

Financial Planning Corporation,

Defendants.

Before the Court is Receiver Thomas C. Hebrank’s (“Receiver”)’s motion for an

order (a) authorizing the Receiver to conduct an orderly sale of general partnership

(“GP”) properties; (b) approving the plan of distributing receivership assets; and (c)

approving proceduresfor the administration ofinvestor claims (“Rec. Mot.”), ECF No.

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1181. This motion has been fully briefed. See SEC Resp., ECF No. 1232; Dillon Resp.,

ECF No. 1234; Aguirre Resp., ECF No. 1235; Rec. Dillon Reply, ECF No. 1262; Rec.

Aguirre Reply, ECF No. 1263; Receiver’s Court-Ordered Proposal Regarding GPs

(“Rec. CO Prop.”), ECF No. 1264; Receiver’s Supplement to Court-Ordered Proposal

Regarding GPs (“Rec. CO Supp.”), ECF No. 1275; Aguirre SEC Sur-reply, ECF No.

1277; Aguirre CO Resp., ECF No. 1293; Rec. CO Reply, ECF No. 1294. The Court has

also received a number of letters from individual investors concerning the Receiver’s

motion. See, e.g., ECF Nos. 1240, 1242, 1244, 1249–1257, 1282, 1283, 1288. 

A hearing was held on May 20, 2016. ECF No. 1298. Having considered the

parties’ submissions, oral argument, and the applicable law, and for the reasons that

follow, the Court GRANTS IN PART and DENIES IN PARTthe Receiver’s motion.

BACKGROUND

The facts of the case having been recited in the Court’s previous orders and the

Court will not reiterate all of them here. See, e.g., ECF No. 583 at 3–11. However, the

Court will provide salient facts relating to this order. This is an enforcement action by

Plaintiff Securities and Exchanges Commission (“SEC”) against Defendants Schooler

and Western Financial Planning Corporation (“Western”) for violations of federal

securities laws in connection with Defendants’ defrauding of investors in the sale of

general partnership (“GP”) units which were, as a matter oflaw, unregistered securities.

See ECF No. 583 at 3–11, ECF No. 1081. 

This case involves an investment scheme hatched by the Defendants that

organized GPs into co-tenancies. At least two, but typically four, GPs would end up

owning an undeveloped real estate that Defendants selected and bought. In one

instance, eleven GPs owned various parcels of one large stretch of real estate.

Generally, each GP held an undivided fractional interest in a parcel. Most co-tenancy

agreements required that all decisions about a real property be made by unanimous

consent of all co-tenant GPs. This structure and unanimity requirement made it

effectively impossible for any single investor or GP to exercise any power over the

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GP’s main asset—land. 

In addition, the GPs were financially intertwined with Western in a number of

ways. First, Western borrowed roughly $14.2 million to buy certain properties that it

later transferred to GPs. These loans were secured by mortgages on these properties.

Thus, a default by Western could result in the foreclosure of these properties.

Second, many investors borrowed money from Western to buy GP units. 

Defendants structured this debt so the GPs, rather than individual investors, owed

Western money. That is, Defendants would lend money to the GPs to cover individual

investor shortfalls in exchange for promissory notes from the GPs. Some GPs also

owed Western additional money for loans Western made to GPs to cover operational

expenses. Despite the existence of these loans, Western rarely collected on them until

a GP’s property was sold.

Third, Western bought and retained an equity, albeit non-voting, interest in every

GP. In the aggregate, these interests had a purported value of $10 million (based on the

prices Defendants charged investors for their interests), but the current fair market

value of these interests has been estimated to be about $1.22 million. Rec. Mot. 13. 

Fourth, on several occasions, Schooler would cover shortfalls in Western’s or

the GPs’ expenses.

A. Receivership

On October 5, 2012, Judge Larry A. Burns ordered that Western and the GPs be

placed under a temporary federal equity receivership because the SEC had

demonstrated a probability ofsuccess on the merits of their enforcement action and the

possibility that Defendants would dissipate assets. ECF No. 10 at 1. Judge Burns’

Order empowered the Receiver “with full powers of an equity receiver, including, but

not limited to, full power over all funds, assets, collateral, premises (whether owned,

leased, occupied, or otherwise controlled), chosesin action, books, records, papers and

other property belonging to, being managed by or in the possession of or control of

Western and its subsidiaries and affiliates, including but not limited to the [GPs] listed

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on Schedule 1 . . .” Id. at 11–14. 

On October 5, 2012, Judge Burns concluded that the SEC had made out a prima

facie case that the GPs were securities, that Defendants violated the securities laws, and

that there was a reasonable likelihood that their violations would be repeated. ECF No.

44 at 21–22. As a result, pursuant to Section 20(b) of the Securities Act of 1933, and

Section 21(d) of the Securities Exchange Act of 1934, Judge Burns issued a

preliminary injunction ordering that the receivership be made permanent. Id. 

On October 22, 2012, the case was transferred to the Honorable Gonzalo P.

Curiel. ECF No. 52. During the course of the litigation, the Court considered whether

to continue to keep the GPs under receivership. See ECF No. 1003 at 2–4. On March

4, 2015, the Court issued an Order Keeping GPs Under Receivership. Id. The Court

first carefully examined claims allegations from Defendants and individual investors

that the Receiver was behaving unethically or irresponsibly, and found no merit in

those allegations. Id. at 7–8. The Court then found that, given the posture of the

litigation, the nature of Defendants’ alleged scheme of securities fraud, the structure

of the GP units, and the differences in investor opinion, the public interest in

maintaining the receivership estate’s assets was best served by keeping all the GPs

within the receivership. See id. at 16–20. TheCourt directed the Receiver to (a) provide

more information to investors by including a detailed list of expensesin any future bills

sent to investors, obtaining updated appraisals of all GP properties, and sending a

comprehensive informational packet to investors; and (b) file a report and

recommendation regarding whether liquidation was warranted for any GPs unable to

meet their payment obligations. Id. at 21–22.

Pursuant to that Order, on April 17, 2015, the Receiver filed a report and

recommendation regarding the appropriate course of action with regards to each GP in

light of the Court keeping the GPs in receivership. ECF No. 1056. The Receiver

divided the GPs into three categories (A, B, and C) based on their ability to pay their

expenses, including underlying mortgages as well as notes and operational loans due

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to Western. Category A properties were able to pay their expenses; Category B

properties needed to raise additional capital from their investors in order to pay their

expenses, but the shortfall waslower than the estimated net proceeds from a sale of the

property; and Category C properties needed to raise additional capital from their

investors in order to pay their expenses, but the shortfall was greater than the estimated

net proceeds from a sale of the property. Id. at 3–6.

The Receiver recommended monitoring Category A properties; issuing a capital

call for Category B properties, and selling Category B properties if the capital call

failed; and selling Category C properties. Id. Finally, the Receiver identified two

underwater properties where the total amount owed on mortgages exceeded the

estimated net proceeds from a sale, and recommended exploring foreclosure or other

surrender of the properties in satisfaction of the outstanding debt. Id. at 6.The Receiver

proposed a orderly sale process for the sale of qualifying properties, which included

soliciting proposed listing agreements from multiple brokers, requesting Court

approval for engagement of a particular broker, circulating credible offers to investors

for input, seeking Court approval of sales to prospective purchasers, providing notice

of the sale motion to all investors with an interest in the property, and marketing the

property to potential overbidders. Id. at 7–8. 

On May 12, 2015, the Court adopted in part the Receiver’s report and

recommendation regarding further courses of action on the GP properties. ECF No.

1003. The Court adopted the Receiver’s approach to Category A and B properties, but

directed the Receiver to issue capital calls for the Category C properties as well. Id. at

3. In addition, the Court directed the Receiver to issue capital calls for any underwater

property where the majority of investors indicated a desire to retain the property, and

pursuing surrender only where the capital call failed. Id.

In the following year, the Court has approved the Receiver’s recommendations

in a number of instances regarding letters of intent from prospective purchasers, the

engagement of brokers, and other components of the orderly sale process. See, e.g.,

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ECF No. 1168. However, the Court has not yet finally approved the sale of any

particular GP property to a prospective purchaser. Two motions from the Receiver, to

approve the sale of the Jamul Valley property and the Reno Vista and Reno View

properties respectively, are currently pending before the Court. See ECF Nos. 1191,

1225, 1285.

B. Final Judgment

On May 19, 2015, the Court granted in part and denied in part the SEC’s motion

for summary judgment on its fourth claim for relief, finding that Defendant had

engaged in the sale of unregistered securities and that the appropriate amount of

disgorgement was $136,654,250, plus prejudgment interest calculated to May19, 2015.

ECF No. 1074 at 25. On June 3, 2015, the Court granted in part and denied in part the

SEC’s motion for summary judgments on its first and second claims for relief, granting

both causes of action as to all elements with regards to the fair market value

representation of the Stead property in Western’s sales brochure. ECF No. 1081 at 20. 

On January 21, 2016, the Court granted the SEC’s motion for final judgment

against Defendant Schooler, directing (1) a permanent injunction restraining the

Defendant from violating federal securities laws; (2) disgorgement of $136,654,250

with prejudgment interest of $10,956,030 (for a total of $147,610,280); and (3)

imposition of a civil penalty of $1,050,000. ECF No. 1170 at 8–13.

C. Receiver’s Motion

On February 4, 2016, the Receiver filed the instant motion for an order (a)

authorizing the Receiver to conduct an orderly sale of general partnership (“GP”)

properties;(b) approving the plan of distributing receivership assets; and (c) approving

procedures for the administration of investor claims. Rec. Mot. 

On April 5, 2016, the Court sua sponte directed the Receiver to craft an

additional proposal that would enable general partnerships (“GPs”) that wish to do so

to exit the receivership while maintaining control of their properties instead of having

their properties sold. ECF No. 1224 at 2. The Receiver filed that proposal on April 22,

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2016. See Rec. CO Prop.; see also Rec. CO Supp.

On May 18, 2016, the Court granted the motions of two groups of investors who

have invested in various GPs subject to the receivership, the Dillon Investors and the

Aguirre Investors (collectively “Investors”), to intervene for the limited purpose of 1

opposing the Receiver’s motion. ECF No. 1296; see Dillon Resp.; Aguirre Resp.;

Aguirre SEC Sur-reply; Aguirre CO Resp. The SEC has also responded to the

Receiver’s proposal. See SEC Resp. The Receiver has replied to Investors’ responses.

See Rec. Dillon Reply; Rec. Aguirre Reply; Rec. CO Reply. 

DISCUSSION

I. Legal Standard

Section 1 of Article III of the Constitution of the United States vests the judicial

power of the United Statesin “...one supreme Court, and in such inferior Courts as the

Congress may from time to time ordain and establish.” Clause 1 of Section 2 of Article

III goes on to provide that, “(t)he judicial Power shall extend to all Cases, in Law and

Equity, arising under this Constitution, the Laws of the United States, and Treaties

made, or which shall be made, under their Authority . . . .”

“In pursuit of their equity powers, courts often appoint receivers as neutral third

parties to address issues facing the Court where . . . it does not seem reasonable to the

Court that either party should address such issues.” Ralph S. Janvey, An Overview of

SEC Receiverships, 38 No. 2 Securities Regulation Law Journal ART 1 (2010). 

Accordingly, “the appointment of receivers in a proper case is within the scope of the

extraordinary powers of a Court sitting in equity.” Id. (quoting Gross v. Missouri & A.

RY. Co., 74 F. Supp. 242, 244 (W.D. Ark. 1947)) (internal quotation marks omitted). 

Moreover, a Court may authorize injunctive relief under Section 20(b) of the

Securities Act of 1933, and Section 21(d) of the Securities Exchange Act of 1934,

Each investor group represents over one hundred investors. See Dillon Resp. 1

1 n.1; Aguirre Resp., Attachment 1. Collectively, the Dillon and Aguirre Investors

comprise approximately 8% of the approximately 3300 investors in the case.

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where “‘a proper showing’ has been made by the SEC that there is a reasonable

likelihood that the defendant is engaged or about to engage in practices that violate the

federal securities laws.” Janvey, supra, at 7 (quoting Aviation Supply Corp. v. R.S.B.I.

Aerospace, Inc., 999 F.2d 314, 316–317 (8th Cir. 1993)). As the Fifth Circuit has

observed,

The appointment of a receiver is a well-established equitable remedy

available to the SEC in its civil enforcement proceedings for injunctive

relief. . . . The district court’s exercise of its equity power in this respect

is particularly necessary in instances in which the corporate defendant,

through its management, has defrauded members of the investing public;

in such cases, it is likely that, in the absence of the appointment of a

receiver to maintain the status quo, the corporate assets will be subject to

division and waste to the detriment of those who were induced to invest

in the corporate scheme and for whose benefit, in some measure, the SEC

injunctive action was brought.

Id. (citing SEC v. First Fin. Group of Tex, 645 F.2d 429, 434 (5th Cir. 1981), aff’d, 659

F.2d 660 (5th Cir. 1981).

The Receiver acts as an officer of the Court, and the Court is tasked with

supervising the equity receivership and determining the appropriate action to be taken

in the administration ofthe receivership. Id. Thus, “a district court’s power to supervise

an equity receivership and to determine the appropriate action to be taken in the

administration of the receivership is extremely broad.” S.E.C. v. Capital Consultants,

LLC, 397 F.3d 733, 738 (9th Cir. 2005) (quoting SEC v. Hardy, 803 F.2d 1034, 1037

(9th Cir. 1986)) (internal quotation marks omitted). “[T]he district court has broad

powers and wide discretion to determine the appropriate relief in an equity

receivership.” Id. (quoting SEC v. Lincoln Thrift Ass’n, 577 F.2d 600, 606 (9th Cir.

1978) (internal quotation marks omitted). “The basis for this broad deference to the

district court’s supervisory role in equity receiverships arises out of the fact that most

receiverships involve multiple parties and complex transactions.” Id. (quoting Hardy,

803 F.2d at 1037) (internal quotation marks omitted). 

This power to administer the receivership entails the power to order a sale of

property in receivership. As the Ninth Circuit has observed, the leading treatise on the

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law of receiverships states:

It is generally conceded that a court of equity having custody and control

of property has power to order a sale of the same in its discretion. The

power ofsale necessarily followsthe power to take possession and control

of and to preserve property, resting in the sovereignty and exercised

through courts of chancery, or courts having statutory power to make the

sale.

S.E.C. v. Am. Capital Investments, Inc., 98 F.3d 1133, 1144 (9th Cir. 1996), abrogated

on other grounds by Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83 (1998)

(quoting 2 Clark on Receivers § 482 (3d ed. 1992)).

Accordingly, the Court has the inherent power to order a sale of receivership

property and fashion any distribution plan that isfair and equitable to the investors. Id.;

see also Capital Consultants, 397 F.3d at 738–739. 

II. Parties’ Positions

a. Receiver’s Position

TheReceiver argues it isin the best interests ofthe receivership estate to conduct

an orderly sale of all the GP properties. The Receiver outlines the financial position of

the 23 GPs. Over the past three and a half years since the GPs were placed in

receivership, 14 of the 23 GP properties have not appreciated in value. Rec. Mot. 2. At

the same time, because the GPs must pay property taxes, insurance premiums,

administrator fees, tax preparation fees, and in some cases notes to Western to pay

underlying mortgages, and because the vast majority of investors have stopped making

contributions to their GPs, the balances in GP accounts have steadily declined. Rec.

Mot. 3. The aggregate balance in all GP accounts has declined from $6.6 million in

September 2012 to approximately $3.5 million as of December 31, 2015, and is

projected to be approximately $1.8 million by the end of this year. In the Receiver’s

words, “money is rapidly being spent to hold properties that are not measurably

appreciating in value.” Id. The Receiver argues that this state of affairs “runs counter

to the fundamental purpose of a federal equity receivership, which is to maximize the

value in the receivership estate for the benefit of investors and creditors.” Id.

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The Receiver proposes moving all GP properties to the orderly sale process

approved by the Court in the May 12, 2015 for the Category B and C properties. See

id. at 9, Orderly Sale Process, Ex. C. The Receiver also identifies three properties,

Dayton IV, Santa Fe, and Yuma III, which are close to being underwater, i.e., the

amount owed to mortgages is equal to or greater than their market value, that he

recommends surrendering to the lender in satisfaction of the applicable loans. Rec.

Mot. 11.

The Receiver then recommends distributing the receivership assets according to

one of two approaches, the “One Pot” approach or the “Two Tier” approach. See id. at

13. The Receiver favors the One Pot approach. Id. at 21.

b. SEC’s Position

The SEC supportsthe Receiver’s proposal for an orderly sale of the receivership

assets and the One Pot distribution plan. SEC Resp. 2. 

c. Dillon Investors’ Position

Dillon and Aguirre Investors commissioned an expert report (“Xpera Report” or

“Report”) from a consulting group, Xpera Group (“Xpera”), that independently

appraised the 23 GP properties. See Xpera Report, Dillon Resp., Ex. 1, ECF No. 1234-

2. In accordance with findings of the Report, Dillon Investors argue that the Receiver

should take a more flexible approach than selling all of the properties now as-is: selling

some of the properties in parcels and pursuing zoning and other changes, and holding

other properties for 5-10 years in order to maximize the value of the properties. See

Dillon Resp. 2–13.

Dillon Investors also argue that, as a private sale of realty, the Receiver’s orderly

sale proposal does not comport with the requirements of 28 U.S.C. § 2001(b). Id. at

15–19. 

Finally, Dillon Investors agree with the Receiver and the SEC that should an

orderly sale occur, the proceeds should be distributed to investors in accordance with

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the One Pot approach. Dillon Resp. 19. 

d. Aguirre Investors’ Position

First, Aguirre Investors argue that investors, as members of GPs, are “necessary

parties” to the case, and that due process forbids the selling of GP properties by the

Receiver. Aguirre Resp. 16; Aguirre SEC Sur-reply 3; Aguirre CO Resp. 2–4. 

Second, Aguirre Investors argue that “[n]o true plan can be submitted at this

time, because there is a void of critical financial information.” Aguirre CO Resp. 1.

However, Aguirre Investors’ “concept of a plan” isthat following an accounting of the

receivership that would achieve “full disclosure” for the investors, all GPs should take

a vote on whether to exit the receivership. Id. at 1, 4–9. Aguirre Investors proffer a poll

purporting to show that, of 1,104 investors who responded, the vast majority

(93.34–96.99%) of investors support removing GPs from the receivership, having

investors decide when to sell GPs, and having an accounting of the receivership.

Aguirre CO Resp., Ex. 1, at 2. 

Aguirre Investors support the Two Tier distribution approach. See Transcript of

May 20, 2016.

e. Individual Investors’ Positions

The Court has received a number of letters from individual investors, some of

whom support the Receiver’s plan, and some of whom oppose it and wish to exit the

Receivership. Compare, e.g., ECF Nos. 1282, 1283, with ECF Nos. 1249–1257. Some

investors disputed the accuracy of Aguirre Investors’ poll, arguing that the

communications from Aguirre Investors contained factual misrepresentations, did not

disclose the full liabilities for investors exiting the receivership, did not contact all

investors, and did not take into account the views of those who did not respond. See

ECF Nos. 1282, 1288; see also ECF No. 1282, Appendix B (attaching list of investors

opposing removing the GPs from the receivership). 

//

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III. Analysis

a. Whether GPs are “Necessary Parties” to the Action

As a threshold matter, Aguirre Investors argue that investors, as members of

GPs, are “necessary parties” to the case, and that due process forbids the selling of GP

properties. Aguirre Resp. 16; Aguirre SEC Sur-reply 3; Aguirre CO Resp. 2–4. As a

result, either the case ought to be stayed, Aguirre Resp. 16, or every order issued in this

case since the GPs were not joined as parties is void, or all of the approximately 3,300

or more investors have to be joined as parties, Transcript of May 20, 2016 Hearing, or

the Receiver must file a defendant class action and serve all investors as members of

the class by mail, Aguirre SEC Sur-reply, or, as the Aguirre Investors requested in an

ex parte motion filed on the morning of the May 20, 2016 hearing, the Court must set

a jury trial and reopen discovery on “the factual issues that remain open in this case”

because the Investors have the right to “plenary participation” in the case. Aguirre Ex

Parte Mot. 2–4, ECF No. 1297.

Aguirre Investors’ argument is without merit. As set forth supra in Part I, “the

district court has broad powers and wide discretion to determine the appropriate relief

in an equity receivership.” Capital Consultants, LLC, 397 F.3d at 738 (quoting SEC v.

Lincoln Thrift Ass’n, 577 F.2d 600, 606 (9th Cir. 1978) (internal quotation marks

omitted). As the Ninth Circuit has previously stated, 

Unless a statute in so many words, or by a necessary and inescapable

inference, restricts the court’s jurisdiction in equity, the full scope of that

jurisdiction is to be recognized and applied. “The great principles of

equity, securing complete justice, should not be yielded to light

inferences, or doubtful construction.”

See Reebok Int’l v. Marnatech Enter., Inc., 970 F.2d 552, 561–62 (9th Cir.1992)

(quoting Brown v. Swann, 35 U.S. (10 Pet.) 497, 503, 9 L.Ed. 508 (1836)); see also

Am. Capital Investments, Inc., 98 F.3d 1133, 1144. Therefore, 

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

“ancillary relief” measures in actions brought by the SEC to enforce the

federalsecurities laws. This circuit has repeatedly approved imposition of

a receivership in appropriate circumstances. The power of a district court

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to impose a receivership or grant other forms of ancillary relief does not

in the first instance depend on a statutory grant of power from the

securities laws. Rather, the authority derives from the inherent power of

a court of equity to fashion effective relief.

In re San Vicente Med. Partners Ltd., 962 F.2d 1402, 1406 (9th Cir. 1992). Moreover, 

It is generally conceded that a court of equity having custody and control

of property has power to order a sale of the same in its discretion. The

power ofsale necessarily followsthe power to take possession and control

of and to preserve property, resting in the sovereignty and exercised

through courts of chancery, or courts having statutory power to make the

sale.

Id. (quoting 2 Clark on Receivers § 482 (3d ed. 1992)).

None of the cases cited by Aguirre Investors support the proposition that the

Court lacks the authority to determine the appropriate relief in this federal equity

receivership. 

First, with regards to the arguments that the investors, as members of GPs, are

“necessary parties,” most of the cases Aguirre Investors cite do not concern federal

equity receiverships or SEC enforcement actions at all. Mathews v. Traverse (In re

Pappas), 1994 U.S. App. LEXIS 8881 (9th Cir. Apr. 13, 1994) (unpublished opinion),

Delta Fin. Corp. v. Paul D. Comanduras & Associates, 973 F.2d 301 (4th Cir. 1992),

Rudnick v. Delfino, 294 P.2d 983 (Cal. App. Ct. 1956) concern actions brought by

members of limited partnershipsseeking dissolution of the partnerships. In such cases,

courts hold that all members of the partnership are necessary parties. See 1994 U.S.

App. LEXIS 8881; 973 F.2d at 305–06; 294 P.2d 983. Pac. Queen Fisheries v. Symes,

307 F.2d 700, 721 (9th Cir. 1962), concerned a shipowner insurance dispute where

three appellant-plaintiffs, as partners in a fishery that owned the fishing vessel at issue

in the case, were held to be “necessary parties [such that their] admissions would be

binding on appellant[s]” as a whole for evidentiary purposes. And Valley Nat. Bank of

Arizona v. A.E. Rouse &Co., 121 F.3d 1332, 1336 (9th Cir. 1997), concerned the issue

of whether legal judgments against a partnership can be enforced against partners who

were not parties to an action, and concluded that “judgment may not be entered against

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one not a party to an action” as a matter of procedural due process. See id. (citing

Nisenzon v. Sadowski, 689 A.2d 1037, 1048 (R.I. 1997) ( “To the extent the judgment

purports to bind the unnamed Park City partners in their individual capacities without

their having been afforded notice and an opportunity to be heard, it is void as violative

of their due process rights.”); Duncan, Inc. v. Head, 519 So.2d 1305, 1308 (Ala. 1988)

( “In an action on a judgment, one may not obtain relief broader than the judgment sued

on. The partners must have due process of law.”); Foster Lumber Company, Inc. v.

Glad, 303 N.W.2d 815, 816 (S.D. 1981) (“[D]ue process requires personal service on

a partner to bind his individual assets”);see also Detrio v. United States, 264 F.2d 658,

660 (5th Cir. 1959) (“Undoubtedly the partnership law that requires personal service

on a partner to bind his individual assets is required by concepts of procedural due

process.”). Here, there is no question of personal judgment being entered against

individual investors or binding the assets of individual investors.

Second, Aguirre Investors argue that San Vicente, 962 F.2d 1402 and American

Capital Investments, Inc., 98 F.3d 1133, demonstrate that even if the assets of limited

partnerships can be sold by a receiver, the assets of general partnerships may not be so

sold. However, neither case supports this proposition. In San Vincente, San Vincente,

a limited partnership whose assets were under receivership due to an SEC enforcement

action against APHI, the general partnership that administered both San Vincente and

81 other partnerships and trusts, challenged a receiver’s actions in selling limited

partnership assets. 962 F.2d at 1404–05. San Vincente argued that the receiver did not

have the authority to sell the limited partnership assets because it was acting in the

place of APHI, which did not have such authority. Id. at 1408. However, the Ninth

Circuit found that the receiver was not acting in place of the general partner, but as a

court-appointed receiver, and was thus not bound by the legal relationship between

APHI and San Vincente. Id. at 1408–09. Similarly, in American Capital Investments,

the Ninth Circuit found that a receiver was acting in his capacity as a receiver, not as

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a replacement for the ousted general partner, in selling limited partnership assets. 98

F.3d at 1145.

As should be readily apparent, neither case addresses the question of whether

general partnership assets may be sold by a receiver in the same way as limited

partnership assets. Both cases do, however, repeatedly affirm the “well-established”

powers ofsale of federal equity receivers, see id., and the “wide discretion” the federal

courts enjoy in fashioning relief, see 962 F.2d at 1406. And while American Capital

Investments, 98 F.3d at 1145 n.17, does cite 2 Clark on Receivers §§ 482, 491, for the

proposition that equity receivers “can conduct a judicial sale of real property that is

properly within their ‘possession and control’ and within the court’s territorial

jurisdiction, where all parties of interest have been brought before the court,” Aguirre

Investors cite no authority to support the proposition that investors should be

understood to be parties of interest. See also Black’s Law Dictionary (9th ed. 2011)

(defining “party in interest” as “[a] person entitled under the substantive law to enforce

the right sued upon and who generally, but not necessarily, benefits from the action’s

final outcome”).

Third, with respect to the due process argument, it is well-established that “the

traditional rule is that summary proceedings are appropriate and proper to protect

equity receivership assets.” United States v. Arizona Fuels Corp., 739 F.2d 455, 456

(9th Cir. 1984) (citations omitted) see also Am. Capital Investments, 98 F.3d at 1146

(“For the claims of nonparties to property claimed by receivers, summary proceedings

satisfy due process so long as there is adequate notice and opportunity to be heard.”)

(citing SEC v. Wencke, 783 F.2d 829, 836–38 (9th Cir.), cert. denied, 479 U.S. 818,

(1986); SEC v. Universal Fin., 760 F.2d 1034, 1037 (9th Cir.1985)). In both San

Vicente and American Capital Investments, the Ninth Circuit found due process

satisfied where the partnerships had notice of the proceedings and an opportunity to be

heard. See 98 F.3d at 1147 (finding due process satisfied where “Appellants have

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presented only one alternative to the district court’s comprehensive scheme—their own

last-minute purchase proposal, which the district court found financially dubious and

inattentive to the needs of creditors, [and the district court] rejected the Investors’

proposal only after full briefing, a hearing, and post-hearing supplemental briefing.”);

962 F.2d at 1407, which investors have been amply afforded in this case, see, e.g., ECF

Nos. 790, 794, 1234, 1235, 1277, 1293, 1298. 

Accordingly, Aguirre Investors’ Ex Parte Motion for an Order Setting

Evidentiary Hearing and Discovery Schedule, ECF No. 1297, is DENIED.

b. Orderly Sale of GP Properties

i. Xpera Report

Comparing the Receiver’s proposal and the recommendations of the Investors’

experts, the Court observes that there is a substantial level of agreement between the

two regarding how to maximize the value of the receivership estate.

The Xpera Report makes the following recommendations: In 12 instances, the

Report recommends selling the GP property now, as-is. In 2 instances, the Report

recommends selling the GP property now, but exploring whether to sell in bulk or in

individual parcels in order to maximize the selling price. In 6 instances, the Report

recommends taking relatively minor actions over a time frame of less than a year, such

as obtaining a zoning change, getting a subdivision approval, or holding a property for

up to 12 months pending the completion of a nearby parkway, in order to maximize the

selling price. In 3 instances, the Report recommends holding the GP property, either

indefinitely or for a period of 5-10 years, in order to maximize the selling price.

See generally Xpera Report.

In sum, in 20 out of 23 instances, the Xpera report accords with the Receiver’s

proposal in recommending either selling the property immediately (14 instances), or

taking relatively minor actions that would take less than a year in order to improve the

value of the property before selling the property (6 instances). As the Receiver points

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out, the Receiver’s orderly sale plan contemplates a sale process that takes a significant

period of time, and could incorporate Xpera’s suggestions for how to maximize the

value of the identified properties. Rec. Dillon Reply 2.

Similarly, the vast majority of Xpera’s 2016 appraisal values are in line with the

Receiver’s 2015 appraisal values. See id., Ex. A. In 14 instances, Xpera’s 2016

appraisal values are similar to or only slightly higher than the Receiver’s 2015

appraisal values, a difference largely attributable to the year-long gap between the two

appraisals. In 6 instances, the difference in appraisal values is due to the increased

value Xpera assigns to the recommended zoning and other changes. Only in 3

instances, Las Vegas 1, Washoe IV, and Washoe County 5, is there a significant

unexplained difference in appraisal values.

Significantly, the Xpera Report endorses the Receiver’s recommended sale of

the Jamul Valley property, which has been strongly opposed by both Dillon and

Aguirre Investors, compare Xpera Report 121, with ECF Nos. 1227, 1230, as well as

the Receiver’s proposed broker and marketing time for the Sante Fe property, Xpera

Report 143. 

Only in 3 instances does Xpera differ from the Receiver in recommending

holding a GP property for a significant length of time. The Court will examine each

instance in turn. First, with regards to the Tecate property, Xpera recommends holding

the property for an indefinite amount of time until the City of San Diego Planning

Department develops an overall plan for the Tecate area including water sources. Xpera

Report 128. However, Xpera evinces no optimism that the County will develop such

a plan in the foreseeable future, stating that “that process is moving very slowly,” and

“[a]s a result, the sale of properties in Tecate has virtually ground to a halt.” Id. at 128.

Second, with regards to the Las Vegas 1 and LV Kade properties, Xpera projects

that holding the properties for 5-10 years will result in a two-to-three fold increase in

the values of the properties due to their valuable locations. See Xpera Report 29–32.

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As these two properties are by far the most valuable properties held by investors,2

Dillon Investors argue that holding these two properties for 5-10 years would

significantly increase the value of the receivership estate. Dillon Resp. 2, 6.

Xpera notes, however, that the “Las Vegas economy tends to be cyclical and

therefore, prices do not move upward (or downward) in a smooth pattern. It will be

necessary to closely track the economy to “catch” an upward wave to optimize the

value of the properties.” Xpera Report 33. The Receiver also points out that the Xpera

recommendations do not take into account that many of the GPs have unpaid expenses.

Rec. Dillon Resp. 4. While the Las Vegas 1 and LV Kade properties are appraised at

a significant value, they are also among the properties that have unpaid property taxes

and cannot pay their operating expensesfor 2016. Id. The previous capital call directed

by the Court last year for Las Vegas 1 only raised $11,776 of the needed $86,850, or

13.56% of the necessary funds, see ECF No. 1203 at 1, and the capital call for LV Kade

only raised $10,855 of the needed $99,279, or 10.93% of the necessary funds, ECF No.

1166 at 1. 

Having reviewed these three instances, the Court declines to direct the Receiver

to hold the Tecate period for an indefinite period, and the Las Vegas 1 and LV Kade

properties for 5-10 years, in the hope of increasing their selling prices. First, with

respect to the Tecate property, the Xpera Report offers no time frame and expresses no

optimism that San Diego County will decide on a development plan for the area such

that property prices in Tecate will increase in the near future. Second, with respect to

the Las Vegas 1 and LV Kade properties, while there is an evident potential for the

properties to substantially increase in value, the Xpera report also acknowledges that

there is significant risk in continuing to hold the properties due to the cyclical nature

Las Vegas 1 was valued by the Receiver as worth $5,275,00 in 2015, and by 2

Xpera as worth between $7,423,976,410 and $9,764,410 in 2016. LV Kade was valued

by the Receiver as worth $8,260,000 in 2015, and by Xpera as worth between

$8,690,220 and $11,173,140 in 2016. See Rec. Dillon Resp., Ex. A. 

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of the Las Vegas economy, the properties have run out of money to pay their operating

expenses this year, and the recent capital calls failed by a very large margin. 

That said, the Receiver has expressed willingness to evaluate the

recommendations of the Xpera Report and incorporate them where feasible. Rec.

Dillon Reply 2. The Receiver has also pointed out that if the One Pot approach is

adopted, money from the overall pool could be used to pursue such measures as

subdivisions, zoning changes, etc. for the properties that cannot currently pay their

operating expenses. Id. at 5. Thus, the Court DIRECTS the Receiver to file a report

and recommendation evaluating the pros and cons of the Xpera Report

recommendations, and identifying those recommendations that would feasibly

maximize the value of the receivership estate.

ii. 28 U.S.C. § 2001

Dillon Investors argue that the Receiver’s proposed Orderly Sale Process, Rec.

Mot., Ex. C, contemplates a private sale of realty but does not comport with the

requirements of 28 U.S.C. § 2001(b). Dillon Resp. 15–19. § 2001 provides in relevant

part,

(a) Any realty or interest therein sold under any order or decree of any

court of the United States shall be sold as a whole or in separate parcels

at public sale at the courthouse of the county, parish, or city in which the

greater part of the property islocated, or upon the premises orsome parcel

thereof located therein, as the court directs. Such sale shall be upon such

terms and conditions as the court directs. Property in the possession of a

receiver or receivers appointed by one or more district courtsshall be sold

at public sale in the district wherein any such receiver wasfirst appointed,

at the courthouse of the county, parish, or city situated therein in which

the greater part of the property in such district is located, or on the

premises or some parcel thereof located in such county, parish, or city, as

such court directs, unless the court orders the sale of the property or one

or more parcels thereof in one or more ancillary districts.

(b) After a hearing, of which notice to all interested parties shall be given

by publication or otherwise as the court directs, the court may order the

sale ofsuch realty or interest or any part thereof at private sale for cash or

other consideration and upon such terms and conditions as the court

approves, if it finds that the best interests of the estate will be conserved

thereby. Before confirmation of any private sale, the court shall appoint

three disinterested persons to appraise such property or different groups

of three appraisers each to appraise properties of different classes or

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situated in different localities. No private sale shall be confirmed at a

price less than two-thirds of the appraised value. Before confirmation of

any private sale, the terms thereof shall be published in such newspaper

or newspapers of general circulation as the court directs at least ten days

before confirmation. The private sale shall not be confirmed if a bona fide

offer is made, under conditions prescribed by the court, which guarantees

at least a 10 per centum increase over the price offered in the private sale.

The Receiver argues that the requirements for private sales under § 2001(b) are

“completely outdated and out of touch with the way real estate is sold in today’s

market,” and will result in significant costs and delay. Rec. Dillon Reply 7. Instead, the

Receiver proposes a modified Orderly Sale Process where, once terms of a sale have

been agreed on with a prospective purchaser, a public sale is conducted pursuant to the

terms of § 2001(a). Id. at 6. The Receiver has offered ECF No. 1225 at 13–14 and ECF

No. 1285 at 9–10 as examples of how this public sale procedure could operate in

conjunction with the proposed Orderly Sale Process. 

Upon review of the Receiver’s examples, the Court finds that the Receiver’s

proposed public sale process would comport with the requirements of 28 U.S.C. §

2001. The Court DIRECTS the Receiver to file a Modified Orderly Sale Process

proposal, based on that provided in Exhibit C of the Receiver’s motion, that

incorporates the public sale process discussed above.

iii. Whether to Allow GPs to Exit the Receivership

On April 5, 2016, the Court sua sponte directed the Receiver to craft an

additional proposal that would enable general partnerships (“GPs”) that wish to do so

to exit the receivership while maintaining control of their properties instead of having

their properties sold. ECF No. 1224 at 2. The Court specified that “the proposalshould

include: (1) a procedure by which each GP could elect whether or not to sell; (2)

conditions that must be met by each GP that wishes not to sell showing that the GP

could maintain fiscal viability going forward; (3) conditions that must be met by each

GP to insure fairness to those investors within GPs which wish not to sell but who

individually wish to exit their investment; (4) conditions that must be met by each GP

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to demonstrate their ability for self-governance; (5) alternatives for the disposal of

Western’s interest in such GPs; and (6) an assessment by the Receiver of the

advantages and disadvantages of the proposal.” Id.

The Receiver filed that proposal on April 22, 2016. See Rec. CO Prop.; see also

Rec. CO Supp. The Receiver points out a number of equitable and logistical problems

with allowing GPs to exit the receivership, but nonetheless proposes a mechanism

whereby the 5 GPs with sufficient cash on hand to pay their operating expenses

through 2016 and buy out Western’s interest in the GP could vote to exit the

receivership. See id. 

Upon review of the Receiver’s proposal, the Court determines that it would be

both unequitable and impracticable to allow the GPs to exit the receivership at the

present time. In his proposal, the Receiver identifies a number of equitable and

logistical hurdles complicating any attempt to allow the GPs to exit the receivership.

First, as the Court has previously recognized, all investors have a potential interest in

the value of all GP properties because Western has a financial stake in each GP, and

all investors have potential claims against Western. ECF No. 1003 at 18–20. Moreover,

it would be unfair for the fees and costs of the receivership to solely be borne by the

non-exiting investors. Rec. CO Prop. 11. This means that it would be unfair to the nonexiting investors for the exiting investors to exit the receivership without repaying

amounts owed to Western, buying out Western’s interests in the GP, and releasing all

claims against Western, including claims held by investors. Rec. CO Prop. 5. It would

also be adminstratively unworkable to have exiting investors continue to hold claims

against Western, because the amount of investor claims in equity receiverships is

determined by the amount of investor losses, which cannot be determined until the GP

properties are sold. Id. at 6. Under the Receiver’s estimate, only 5 GPs have the ability

to pay the amount necessary to exit the receivership and have cash remaining after

paying their 2016 Expenses. 

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In addition, it would be unfair for investors who did not want to leave the

receivership to not be cashed out upon a GP exiting the receivership. Otherwise, those

investors would be subject to investments they do not want and potentially subject to

personal liability for debts of their GPs, a concern several investors have previously

expressed. See ECF No. 1003 at 18. Only 5 GPs could potentially cash out non-exiting

investors with their existing cash on hand. The Receiver points out that any alternative

scheme where the exiting investors individually buy out non-exiting investors would

be “complicated, time consuming, require a lot of oversight, and, based on the low

response rates to investor votes and capital calls, unlikely to work.” Rec. CO Prop. 9. 3

The Receiver also points out that it would be difficult to develop a mechanism

for insuring that an exiting GP could govern itself. As the Court has previously

recognized, the GPs were structured by Defendants in such a way as to make them

essentially ungovernable and dependent on Defendants tomake decisions regarding the

properties. See ECF No. 583 at 6–10. Changing the management structure of the GPs

at this stage would require the Receiver to resolve difficult questions regarding “the

scope of [a] manager’s duties and responsibilities, reporting to investors, payment of

manager fees and expenses, liability for errors made, insurance, and other issues.” Id.

at 10. Moreover, it would be unfair not to obtain the consent of all exiting investors as

to the new management structure, and any failure to institute a successful management

structure could, as noted above, subject exiting investors to personal liability due to the

general partnership structure of the GPs. Id.

Moreover, to the extent that schemes to monitor investor buy-out and the

establishment of GP self-governance become administratively complex, it would be

unfair to non-exiting investors, because those administrative costs would be borne by

the entire receivership estate. 

The Receiver points out that the capital calls ordered by the Court last year 3

have raised only 18% of the funds needed. Rec. CO Reply 3. 

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Finally, the Receiver points out that the 5 GP properties that have sufficient cash

on hand to exit the receivership are projected to receive less value if they exit the

receivership than if they stay in the receivership and receive pro rata distributions

under the One Pot approach, even using the Xpera Report’s 2016 appraised property

values. See Rec. CO Supp. 2; id., Ex. A. This is because there is no correlation between

whether a GP property can pay its operational expenses and whether it has appreciated

in value. Rec. CO Prop. 8. 

Aguirre Investors’ arguments to the contrary are unpersuasive. The Aguirre

Investors argue that, following an accounting of the receivership, all GPs should be

allowed to take a vote on whether to exit the receivership. Aguirre CO Resp. 1, 4–9.

Aguirre Investors argue that until there has been “full disclosure,” investors cannot

make a well-informed decision about whether to remain in the receivership.

However,theCourt has already previously examined numerous allegations from

Defendants and individual investors that the Receiver was behaving unethically or

irresponsibly, and found no merit in those allegations. See, e.g., ECF No. 1003 at 7–8.4

The Receiver has been open with investors regarding the troubled financial status of

many of the GP properties.

Moreover, on March 4, 2015, the Court directed the Receiver to (1) begin to

include a detailed list of expensesin bills sent to investors; (2) obtain updated property

appraisals for all GP properties; and (3) provide detailed information packets to all

Indeed, at the May 20, 2016 hearing, counsel for Aguirre Investors accused the

4

Receiver of knowingly providing inaccurate financial statements to the Court and

investors. See Transcript ofMay 20, 2016 Hearing. Further questioning regarding these

accusations revealed that in the second quarter of 2014, the Receiver changed the way

Western’s receipts and disbursements were calculated so as not to include “flowthrough” funds that were technically received from the GPs and then disbursed by

Western to creditors, but did not reflect more active financial actions on Western’s part.

While the Receiver could have included a sentence in an interim report explaining this

accounting change to the Court and investors, the Receiver evidently acted in good

faith in changing the method for presenting an aspect of Western’s financial status so

as to render Western’s true level of financial activity in a clearer fashion. Aguirre

Investors provided no evidence supporting their assertion the Receiver knowingly or

intentionally misled the Court. 

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investors last year describing (a) the SEC’s allegations; (b) the Receiver’s findings to

date, including the original purchase prices of the GP properties, the funds raised by

Western from the GPs, how the difference between the purchase prices and the money

raised was spent by Western, and the results of the appraisals on the GP properties; (c)

the current and projected financial status of the GPs and their properties; and (d) the

amount and purpose of the expenses being billed to investors, the amount of billed

expenses that are actually paid, and what may occur if insufficient funds are raised

from investors to pay operational expenses. See ECF No. 1003 at 22; ECF No. 1023,

ECF No. 1069. The Court thus rejects Aguirre Investors’ argument that investors have

not been appropriately informed as to the status of the GP properties.

That said, the Court also recognizes that the Receiver’s previous fee reports to

the Court have not fully complied with the SEC’s recommended format for fee reports.

Compare, e.g., Receiver’s Fourteenth Interim Report, ECF No. 1189, with SEC

Standardized Fund AccountingReport: Civil – Receivership Fund (“SFAR”), available

at Billing Instructions for Receivers in Civil Actions Commended by the U.S.

Securities and Exchanges Commission (“SEC Billing Instructions”),

https://www.sec.gov/oiea/Article/billinginstructions.pdf. The Court thus DIRECTS

the Receiver to withdraw and resubmit Receiver’s Fourteenth Interim Report, ECF No.

1189, and submit all future fee reports, consistent with SFAR. The Court also

DIRECTS the Receiver to submit a final fee application “describing in detail the costs

and benefits associated with all litigation and other actions pursued by the receiver

during the course of the receivership,” as recommended by the SEC. Id. 

The Court also observes that Aguirre Investors have no concrete proposals to

resolve the equitable and logistical problems identified by the receiver. At the May 20,

2016 hearing, counsel for Aguirre Investors proffered the Las Vegas 1 property as an

example of the simplicity of allowing some GPs to exit the receivership, and stated that

the “only thing” keeping Las Vegas 1 in the receivership was $100,000 in unpaid

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liability. Transcript of May 20, 2016 Hearing. Aguirre Investors suggested that

requiring investors in Las Vegas 1 to pay a mere $212/mo for 6 months would pay this

liability and allow Las Vegas 1 to exit the receivership. However, this proposal

accounts for none of the concerns articulated by the Court in its April 5, 2016 Order

and also identified by the Receiver, including how the minority of investors within

exiting GPs who do not wish to exit the GPs would be bought out, the risk that exiting

investors would be exposed to personal liability to any debts incurred by the GP due

to the structure of the general partnership agreements, the lack of a functioning selfgovernance mechanismfor the exiting GPs, how Western’s share in Las Vegas 1 would

be bought out, and the fairness to non-exiting GPs of bearing all the fees and costs of

the receivership estate. 

Aguirre Investors argue largely that solutions to most of these problems cannot

be identified until there has been “full disclosure.” See Aguirre CO Resp. at 6–8;

Transcript of May 20, 2016 Hearing. This is an unrealistic response to the

5

considerable risks discussed above that any administratively complex scheme would

both unfairly burden the receivership estate and the non-exiting investors, and risk

exposing the exiting investors to personal liability on behalf of their GPs. The Court

recognizes that in any situation where the assets of the receivership estate are

insufficient to pay its claims in full, a certain number of claimants will not receive their

desired outcome. However, for the reasons stated above, the Court finds the

disadvantages of allowing GPs to exit the receivership at the present time outweigh the

Aguirre Investors also argue that the GP agreements contain a number of terms

5

allowing for self-governance, such as appointment of a signatory partner to make

various decisions and the appointment of a secretary. Id. at 9. However, as discussed

above, the existence of these terms does not mitigate the Court’s earlier observation

that implementing a workable managerialscheme would be an extremely complex task

that, if executed incorrectly, could expose exiting investors to personal liability on

behalf of their GPs. Similarly, Aguirre Investors’ argument that Western’s interest in

the GPs could be sold as “personalty” seems to contemplate additional work required

by the Receiver in order to market and sell Western’s interest in each GP. It is also

unclear how Western’s interest could be sold to non-existing investors, given the nature

of the general partnership agreements. 

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advantages from the perspective of maximizing the value of the receivership estate for

all investors.

As an alternative proposal, the Receiver suggests that investors who want to

retain GP properties can join together, form new entities, and purchase GP properties

from the receivership estate. Rec. CO Prop. 12. In order to avoid forcing investors to

essentially “repurchase” properties, the Receiver proposesthat any new investor entity

be permitted to include as a component of their bid the projected amount its investors

will receive in distributions. Id. at 13.

The Court finds that this proposal has considerable advantages when compared

with allowing GPs to exit the receivership in their current form. As the Receiver points

out, “[i]t is not at all unusual for a subset of investors in a distressed investment . . . to

form a new entity and purchase assetsfrom the distressed entity.” Id. The new investor

entities could decide their management structure from scratch, and investors who wish

to exit their investments could simply decide not to participate in the new investor

entity. To the extent that the GP property is being sold below market value, the investor

entity would be acquiring a bargain. The receivership estate would bear no

administrative expenses in connection with the formation of the new receivership

entities. Moreover, the Receiver’s proposal that any new investor entity be permitted

to include as a component of their bid the projected amount its investors will receive

in distributions reduces the cash amount the new investor entity would have to pay to

purchase a GP property.

Accordingly, the Court DIRECTS the Receiver to allow any new investor

entities who seek to purchase GP properties through the Modified Orderly Sale Process

to allow the new investor entity to include as a component of its bid for a GP property

the projected amount its investors will receive in distributions. 

c. Distribution of Receivership Assets

Once GP properties have gone through the sale process, sales have closed,

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mortgages, taxes, broker commissions, and other costs of sale have been paid, and the

net sale proceeds have been recovered, the Receiver proposestwo possible approaches

for distributing the receivership assets: the “One Pot” approach and the “Two Tier”

approach. Under the One Pot approach,

[A]ll net sale proceeds from all GP properties are pooled and distributed

pro rata to all investors based on the total funds they invested in all GPs.

Id. at 13. Under the Two Tier approach, 

[T]he net sale proceeds from the sale of each GP property go to the GPs

that own that property in accordance with their cotenant ownership

interests. The debts of each GP are then paid and the remaining net

proceeds are distributed directly to investors in accordance with their GP

units. The debts paid by the GPs include amounts owed to Western and

Western also receives its share of the net proceeds in accordance with the

GP units it owns. All investors then share pro rata in assets of Western

based on the total funds they invested in all GPs. 

Id.

The Receiver estimates that under the One Pot approach, after outstanding fees

and taxes are paid, the total cash available to distribute from the sale of GP properties,

cash on hand in GP accounts, the sale of Western’s properties, and the recovery of

Western’s remaining assets, will be approximately $21,804,826. If this amount is

distributed pro rata under the one pot approach, investors are projected to recover

13.40% of the amount they invested in their GPs. Id.

Under the Two Tier approach, approximately $20,582,303 would be distributed

directly from GPs to their investors according to their GP units, and approximately

$1,222,523 would be distributed to all investors pro rata from the remaining assets of

Western. Under this approach,the projected recoveries ofinvestors would vary greatly,

from as little as 0.75% to as much as 194.07% of their investment. See id. at Ex. D. 

The Receiver, the SEC, and Dillon Investors all favor the One Pot approach,

while Aguirre Investors favor the Two Tier approach. See Rec. Mot. 21; SEC Resp. 2;

Dillon Resp. 19–20; Aguirre Resp. 18–22; Transcript of May 20, 2016 Hearing. 

The Receiver, the SEC, and Dillon Investors make several arguments in favor

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of the One Pot approach. First, they argue that in the majority of federal equity

receivership cases, receivership assets are pooled and distributed to investors on a pro

rata basis, because in most circumstances, the similarities in the way investors were

harmed outweigh the differences in the way they invested. See Rec. Mot. 14 (citing 

Capital Consultants, 397 F.3d at 750; CFTC v. Topworth Int’l, Ltd., 205 F.3d 1107,

1116 (9th Cir. 1999); United States v. Real Property Located at 13328 and 13324 State

Highway 75 N., 89 F.3d 551, 553–54 (9th Cir. 1996); SEC v. Credit Bancorp, Ltd., 290

F.3d 80 (2d Cir. 2002); SEC v. Forex Asset Mgmt., LLC, 242 F.3d 325 (5th Cir. 2001);

SEC v. Basic Energy & Affiliated Res., 273 F.3d 657 (6th Cir. 2001); SEC v. Elliott,

953 F.2d 1560 (11th Cir. 1992), rev’d in part on other grounds, 998 F.2d 922 (11th

Cir. 1993)). The Court has already previously found that the general partnership

agreements and co-tenancy agreements did not convey any powers to investors at the

time of investment, and therefore the GP units sold to investors were securities. ECF

No. 583 at 14–17. Since all investors were victims of the same scheme, they should be

entitled to the same relief. See Dillon Resp. 20. 

Second, they argue that even in the absence of fraud, pooling of assets for

distribution has been approved where distinctions between similarly situated claimants

are based primarily on timing or luck. See, e.g., SEC Resp. 4 (citing S.E.C. v. Sunwest

Mgmt., Inc., No. CIV. 09-6056-HO, 2009 WL 3245879, at *9 (D. Or. Oct. 2, 2009)).

Here, they argue that while some investors evidently conducted research into their

investments, the materialmisrepresentations made by Defendants, and the concealment

of information such as (a) the difference between the purchase prices paid by Western

for the property, and the marked-up purchase prices paid by the GPs for the property

(which ranged from 109% to 1800%); (b) how much each cotenant GP paid for its

interest in the property, which increased as time went on; (c) the fact that, on average,

93% of the funds raised from investors went not towards the GP property directly, but

to Western where the funds were used in a variety of ways, including to pay Schooler

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and pay general Western expenses; (d) the undisclosed mortgages on some of the GP

properties; (e) the GP notes owed to Western as a result of some investors financing

their purchase of GP units and how much was owed on such notes; (f) the

operational/shortfall loans owed to Western because certain GPs were unable to pay

their operating expenses; and (g) the fact that Western stopped collecting note

payments from certain GPs in the total amount of approximately $3.3 million so GP

shortfalls would not be detected. Rec. Mot. 17–18.

The Court recognizes that where the assets of the receivership estate are

insufficient to pay its claims in full, no distribution scheme will fully satisfy all

investors. That said, the Court agrees with the Receiver, the SEC, and Dillon Investors

that the One Pot approach is the more equitable approach. While some investors did

conduct research into their investments, and investors signed general partnership

agreements tied to specific GPs, the incomplete information available to investors and

the essentially fraudulent nature of Defendants’ scheme means that even investors who

researched the same property could have wildly disparate results under the Two Tier

approach depending upon which co-tentant GP they are part of. Under the Two Tier

6

approach, estimated investor recoveries would vary dramatically, between as little as

0.75% to as much as 194.07% of their investment, while under the One Pot approach,

investors would uniformly receive an estimated 13.40% recovery. Id. at 20–21.

Investors in 69 of 86 GPs are projected to receive a greater recovery under the One Pot

approach than under the Two Tier approach. Id. at 21.

Administrative considerations also support the One Pot approach over the Two

Tier approach. The Receiver has noted that pooling receivership assets would ease

For instance, the Receiver offers the example of the Jamul Valley property:

6

Under the Two Tier approach, the three GPs that co-own the property, Jamul Meadows,

Hidden Hills, and Lyons Valley, would receive one-third of the net sale proceeds from

the property. However, because Hidden Hills and Lyons Valley owe GP notes and

operation loans to Western, while Jamul Valley does not, investors in Jamul Valley

would receive an estimated $133,023, while investors in Hidden Hills and Lyons

Valley would receive only $7,549 and $7,339 respectively. See Rec. Mot. 18–19. 

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administration of GPs in arrears with regards to their operating expenses, Rec. Mot. 22,

make available resources to consider the Xpera Report recommendations, Rec. Dillon

Reply 5, and allow the GP administrator, Lincoln Property Group, and the tax

accounting firm that prepares GP tax returns, Duffy Kruspodin & Company, LLP, to

be paid and remain as GP service providers, Rec. CO Prop. 4. All investors benefit

where the value of the receivership estate is increased by lower administrative costs

and higher selling prices for GP properties. 

Finally, Aguirre Investors’ argument that the One Pot approach is legally

impermissible is unconvincing. Essentially, Aguirre Investors argue that courts have

only pooled assets and distributed them pro rata where courts have found fraud or

commingling. See Aguirre Resp. 18–22. Even were that the case, the Court has already

previously found that Defendants employed a common scheme, material

misrepresentations were made by Defendants in connection with the marketing of the

Stead property, ECF No. 1081, and that the GPs were “financially intertwined” with

Western, e.g., 93% ofthe funds raised frominvestors went not towards the GP property

directly, but to Western where the funds were used in a variety of ways. ECF No. 583

at 10. But more importantly, Aguirre Investors have offered no authority denying the

broad authority of the Court to fashion an equitable distribution plan. 

For the reasons stated above, the Court finds that the One Pot approach would

produce a more equitable result for the investors than the Two Tier approach.

Ultimately, investors were victims of the same investment scheme, and should receive

the same relief. Accordingly, the Court APPROVES the Receiver’s recommendation

for a “One Pot” distribution plan of receivership assets, as well as the recommended

Distribution Plan attached as Exhibit E to the Receiver’s motion, and the

accompanying proposed proceduresfor the administration of investor claims, set forth

in pages 23 to 24 of the Receiver’s motion. 

CONCLUSION

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Based on the foregoing, IT IS HEREBY ORDERED that:

1. The Receiver’s motion for an order (a) authorizing the Receiver to conduct an

orderly sale of general partnership (“GP”) properties; (b) approving the plan of

distributing receivership assets; and (c) approving procedures for the

administration of investor claims, ECF No. 1181, is GRANTED IN PART and

DENIED IN PART;

2. The Court hereby DIRECTS the following orderly sale procedures: 

a. Within fourteen (14) days of the issuance of this Order, the Court

DIRECTS the Receiver to file a Modified Orderly Sale Process proposal

for the Court’s approval, incorporating a public sale process consistent

with the requirements of 28 U.S.C. § 2001;

b. Within 180 days of the issuance of this Order, the Court DIRECTS the

Receiver to file a report and recommendation evaluating the pros and cons

of the Xpera Report recommendations, and identifying those

recommendations that would feasibly maximize the value of the

receivership estate;

c. TheCourt DIRECTS the Receiver to allow any new investor entities who

seek to purchase GP properties through the Modified OrderlySale Process

to allow the new investor entity to include as a component of its bid for

a GP property the projected amount its investors will receive in

distributions;

d. The Court APPROVES the use of the One Pot approach to distribute

receivership assets;

e. The Court APPROVES the Distribution Plan attached as Rec. Mot., Ex.

E, ECF No. 1181; and

f. The Court APPROVES the proposed procedures for the administration

of investor claims, as set forth in Rec. Mot. 23–24, ECF No. 1181.

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3. The Court DIRECTS the Receiver to withdraw and resubmit Receiver’s

Fourteenth Interim Report, ECF No. 1189, and submit all future fee reports,

consistent with the SEC Standardized Fund Accounting Report (“SFAR”),

available at Billing Instructions for Receivers in Civil Actions Commended by

the U.S. Securities and Exchanges Commission (“SEC Billing Instructions”), 

https://www.sec.gov/oiea/Article/billinginstructions.pdf. The Court also

DIRECTS the Receiver to submit a finalfee application “describing in detail the

costs and benefits associated with all litigation and other actions pursued by the

receiver during the course of the receivership,” as recommended by the SEC’s

Billing Instructions. 

4. Aguirre Investors’ Ex Parte Motion for an Order Setting Evidentiary Hearing

and Discovery Schedule, ECF No. 1297, is DENIED.

IT IS SO ORDERED. 

DATED: June 13, 2016

HON. GONZALO P. CURIEL

United States District Judge

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