Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_04-cv-00163/USCOURTS-casd-3_04-cv-00163-1/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

CASE NO. 04cv163-IEG(WMc)

Order Denying Receiver’s 

Motion to Enforce Compromise

vs. Agreement [Doc. 934]

PRESTO TELECOMMUNICATIONS, INC.,

AND ALFRED LOUIS VASSALLO, JR. aka

BOBBY VASSALLO,

Defendants.

The Receiver moves the Court for an order enforcing a Compromise Agreement he entered

into with investor/claimant Michael O’Shea. The Receiver seeks an order of the Court for

judgment in favor of the Receiver and against Mr. O’Shea pursuant to the Compromise Agreement

for 25% of the settlement amount Mr. O’Shea received from Philadelphia Indemnity Company.

Mr. O’Shea has filed an opposition and the Receiver has filed a reply. 

A hearing was held before Chief Judge Irma E. Gonzalez on April 27, 2009. After that

hearing, the Court required Mr. O’Shea to file supplemental briefing, which he has now done.

Upon review, for the reasons set forth herein, the Court DENIES the Receiver’s motion. 

///

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Although neither Costas nor Autocom were named in this case, they were both affiliated

with Presto and Vassallo. The Superior Court therefore stayed the entire action pursuant to the

Court’s Preliminary Injunction.

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Background

Michael O’Shea is an investor creditor of Presto Telecommunications, Inc., and submitted

a claim in this case for $2.7 million, plus an additional $832.986.75 for attorneys’ fees, litigation

expenses, and interest for a total claim of $3,532.986.76 . Prior to the commencement of this

action, in February 2003, Mr. O’Shea commenced an action in San Diego County Superior Court

against Presto, Alfred Vassallo, Nick Costas, and Autocom, Ltd. On January 27, 2004, in

conjunction with the appointment of the Receiver, this Court issued a TRO staying all actions

against Presto and freezing all assets of Presto, Vassallo, and affiliated entities. On March 1,

2004, this Court issued a Preliminary Injunction, appointing a permanent Receiver and continuing

the stay and freeze orders. Based upon the TRO and Preliminary Injunction, on March 19, 2004,

the Superior Court stayed Mr. O’Shea’s entire action in that court.1

Presto maintained a directors and officers insurance policy (“D&O Policy”) through

Philadelphia Indemnity Company which contained a $3 million liability limit for each policy

period. Presto initially maintained the D&O Policy for the period July 2, 2002 through July 2,

2003. Presto renewed the D&O Policy for the period July 2, 2003 through July 2, 2004, but at

some point during that year Philadelphia Indemnity canceled the policy for non-payment. Both of

these policies were “claims-made” policies, requiring that an insured tender notice of a claim to

the insurer during the policy period. During the course of the state court case, Mr. O’Shea learned

that Presto had tendered his lawsuit to Philadelphia Indemnity during the initial 2002-2003 policy

period. In addition, after the initiation of this action, on May 4, 2004, the Receiver made a claim

against the 2003-2004 policy. Philadelphia Indemnity, however, denied the Receiver’s claim

because it was submitted after the policy had been canceled for non-payment. [Declaration of

Thomas Lennon in Support of Motion (“Lennon Decl.”), Doc. No. 934, ¶ 10.]

After this Court entered the Preliminary Injunction, and after the Superior Court stayed Mr.

O’Shea’s action in its entirety, Mr. O’Shea approached the Receiver seeking an agreement to

allow him to continue to litigate the state action as against Costas and Autocom, neither of whom

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were named as Defendants in this case. In an April 12, 2004 letter to the Receiver, Mr. O’Shea’s

counsel explained Mr. O’Shea was able to seek a recovery under the first policy for the 2002-2003

time period because Presto tendered Mr. O’Shea’s claim to the company during the policy period. 

Mr. O’Shea’s counsel pointed out he was unaware of any other shareholder suits filed, or any other

claims tendered, during the first policy period. [Declaration of Michael O’Shea in Support of

Opposition, Doc. No. 937, Exhibit B.]

On April 22, 2004, before the Receiver responded to his April 12, 2004 letter, Mr. O’Shea

moved the Superior Court to partially lift the stay to permit him to proceed as to Costas, Autocom

and unidentified DOE defendants. The Receiver opposed Mr. O’Shea’s motion, based upon the

Preliminary Injunction, arguing Mr. O’Shea’s action sought to recover through, and substantially

deplete, Presto’s D&O Policy. The Receiver argued Mr. O’Shea should not be permitted to

deplete those policies ahead of, and to the detriment of, the remaining 800 or so Presto

shareholders who also had claims against Presto’s officers and directors. On May 14, 2004, the

Superior Court denied Mr. O’Shea’s motion to partially lift the stay. 

More than a year later, on July 25, 2005, Mr. O’Shea again approached the Receiver about

allowing him to proceed with his state court action against Costas and Autocom. Mr. O’Shea

argued that neither the Receiver nor any of the other shareholders had any ability to recover under

the 2002-2003 D&O policy because no other claim had been tendered during that period. Mr.

O’Shea’s counsel suggested that in exchange for the Receiver allowing him to proceed with his

state court action, Mr. O’Shea would be willing to contribute 20% of any recovery from the

insurance policy to the receivership estate and also reduce his claim against the estate by twice the

amount he collects from the policy. [Lennon Decl., Exhibit B.] Thereafter, the parties negotiated

a Compromise Agreement, which they executed in August 2005.

The Compromise Agreement provided that the Receiver would “take any and all actions

necessary to partially lift the stays in the Federal Action and in the State Action, so that O’Shea

can pursue his claims against Costas, Autocom, Ltd. and unidentified DOE defendants, but not

Presto or Vassallo, in the State Action.” [Lennon Decl., Exhibit A, § 5.1.] In exchange, Mr.

O’Shea agreed to share any recovery he received with the receivership estate. Specifically, Mr.

O’Shea agreed to pay to the Receiver, for the benefit of other claimants, 25% of any funds he

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recovered from the state action. Mr. O’Shea also agreed to reduce his allowed claim based upon

the amount he recovered according to a specific formula. The Compromise Agreement required

Mr. O’Shea to “immediately inform the Receiver of and account for any such recovery.” [Id.

§ 4.3.] 

On September 8, 2005, the Court approved the Compromise Agreement and modified the

Preliminary Injunction to allow Mr. O’Shea to proceed in state court. Thereafter, Mr. O’Shea

moved to modify the stay in the Superior Court, and the Receiver filed a notice of non-opposition.

On December 2, 2005, the Superior Court granted Mr. O’Shea’s motion and modified the stay. 

Based upon the Compromise Agreement, the Receiver cooperated with Mr. O’Shea in his

prosecution of claims against Costas and Autocom, resulting in the Superior Court’s entry of

judgment against Costas in the amount of $4,397,068 on September 21, 2007. [Lennon Decl.,

¶ 15, Exhibit G.] 

On January 6, 2009, Mr. O’Shea’s counsel wrote to the Receiver, informing him that Mr.

O’Shea had entered into a settlement agreement with Philadelphia Indemnity as to the state court

action, under which Mr. O’Shea received a settlement payment. Mr. O’Shea did not, however,

disclose the amount or terms of the payment. Instead, Mr. O’Shea’s counsel stated he did not

believe payment to the Receiver was appropriate because the Compromise Agreement “lacked

consideration” and was “antithetical to the Receiver’s duties and responsibilities.” [Lennon Decl.,

¶ 16, Exhibit H.] When attempts to informally resolve the issue were unsuccessful, the Receiver

filed this motion.

In his supplemental briefing following the April 27, 2009 hearing, Mr. O’Shea disclosed

the amount of the settlement he received from Philadelphia Indemnity, the amount of attorneys

fees and costs he incurred in obtaining the judgment against Costas in the San Diego County

Superior Court, and the amount of attorneys fees and costs he incurred in connection with his

litigation against Philadelphia Indemnity. 

Discussion

Pursuant to 28 U.S.C. § 754, federal receivers have broad authority to administer, retrieve,

and dispose of assets belonging to the receivership. SEC v. Ross, 504 F.3d 1130, 1145 (9th Cir.

2007). Likewise, district courts have broad equitable authority to administer and supervise an

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In his opposition to the Receiver’s motion, Mr. O’Shea also argued the Court lacked

personal jurisdiction over him and that the Court should not summarily enforce the settlement

agreement. The Court disagrees. The Court has jurisdiction over Mr. O’Shea because he filed a

claim in this case and then entered into the Compromise Agreement which resulted in the Court’s

modification of the Preliminary Injunction. See In re PNP Holdings Corp., 99 F.3d 910, 911 (9th

Cir. 1996) (party who files proof of claim in bankruptcy proceeding consents to the bankruptcy

court’s exercise of personal jurisdiction); Ross, 504 F.3d at 1149 (acknowledging that consent to

court’s exercise of personal jurisdiction may occur in number of ways) invoking the Court’s

jurisdiction. In addition, the Court can summarily enforce a settlement such as this so long as the

party against whom enforcement is sought is afforded due process. SEC v. Wencke, 783 F.2d 829,

836-37 (9th Cir. 1986) (disgorgement summary proceedings against third-parties do not violate due

process where parties were given notice and opportunity to present contentions).

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equity receivership. SEC v. Capital Consultants, LLC, 397 F.3d 733, 738 (9th Cir. 2005). 

Mr. O’Shea argues2

 he should be relieved of the obligation to pay the Receiver 25% of his

recovery from Philadelphia Indemnity, pursuant to the terms of the Compromise Agreement,

because the agreement is unjust, unreasonable, and unfair. He argues his consent to the agreement

was vitiated by severe economic duress and the agreement lacked consideration because the

Receiver never had any legitimate claim to the proceeds of the Philadelphia Indemnity D&O

Policy for the 2002-03 time period. 

The Court finds Mr. O’Shea’s arguments persuasive and declines, as a matter of equity, to

enforce the agreement against Mr. O’Shea. Mr. O’Shea was one of the investors whose rights the

Receiver had a duty to protect. Although the Receiver believed, at the time of the Agreement, that

the Receivership Estate had a legitimate claim to the proceeds of the Philadelphia Indemnity D&O

Policy, Mr. O’Shea has demonstrated his was the only claim submitted against the policy for the

2002-03 time period. The Receiver made a claim against the D&O Policy for the 2003-04 policy

period early in this case. However, after Philadelphia Indemnity denied the Receiver’s claim, the

Receiver did not pursue that claim further in the year or so before he entered into the Compromise

Agreement with Mr. O’Shea.

The Receiver has not shown any basis upon which the D&O Policy for the 2002-03 time

period could have been considered an asset of the Receivership Estate. As a result, there was no

basis for the Receiver to oppose Mr. O’Shea’s motion to lift the stay of the Superior Court action

to allow Mr. O’Shea to pursue a judgment against Mr. Costas and, ultimately, Philadelphia

Indemnity. Mr. O’Shea, like many other investors, lost a significant amount of money as a result

of his investment in Presto Communications. Unlike any of the other investors, however, Mr.

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O’Shea was pursuing legal action to recover some of those losses and was preparing for trial when

this case was filed. Also unlike any of the other investors, Presto submitted his claim to

Philadelphia Indemnity during the 2002-03 policy period. Thus, Mr. O’Shea holds a unique

position vis-a-vis the other investor creditors who have made claims in this case.

After the state court initially stayed Mr. O’Shea’s action against Costas and Autocom, and

after the Receiver successfully opposed Mr. O’Shea’s attempt to have that stay lift, Mr. O’Shea

was placed in a position of severe economic distress. He was forced to choose between giving the

Receiver a portion of any recovery he obtained through the state court proceedings, or losing any

chance he had of recovering any of his losses. The fact that Mr. O’Shea, through counsel, 

suggested the compromise does not vitiate the very real burden of the dilemma Mr. O’Shea faced.

Because the Receiver had no basis upon which to recover under the Philadelphia Indemnity D&O

Policy for the benefit of the Receivership Estate, the Court finds Mr. O’Shea should not have been

forced to compromise his claim.

Mr. O’Shea spent years pursuing the state court action against Costas and Autocom, and

then Philadelphia Indemnity Company, at his own substantial expense. The Court finds it would

be inequitable to now require Mr. O’Shea to pay the Receiver 25% of the proceeds of the

settlement proceeds.

Conclusion

For the reasons set forth herein, the Court DENIES the Receiver’s motion to enforce the

Compromise Agreement. 

IT IS SO ORDERED.

DATED: May 14, 2009

IRMA E. GONZALEZ, Chief Judge

United States District Court

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