Securities and Exchange Commission v. Champion-Cain

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 SECURITIES AND EXCHANGE Case No.: 3:19-cv-1628-LAB-AHG COMMISSION, 12 ORDER GRANTING RECEIVER’S Plaintiff, 13 MOTION FOR APPROVAL OF v. SALE OF TENNYSON STREET 14 PROPERTY GINA CHAMPION-CAIN AND ANI 15 DEVELOPMENT, LLC,

16 Defendants, and [ECF No. 252] 17

18 AMERICAN NATIONAL 19 INVESTMENTS, INC., 20 Relief Defendant. 21 22 23 24 25 26 27 28 1 I. BACKGROUND 2 As described in prior orders, see, e.g., ECF Nos. 54, 162, 163, this is an action 3 brought by the Securities and Exchange Commission (“SEC”) against Defendants ANI 4 Development, LLC (“ANI Development”) and Gina Champion-Cain and Relief Defendant 5 American National Investments, Inc. (“ANI Inc.”), alleging violations of federal securities 6 laws based on a purportedly fraudulent liquor license loan scheme. ECF No. 1. 7 On September 3, 2019, the Court established an equitable receivership and appointed 8 Krista L. Freitag (“Receiver”) as a permanent receiver of ANI Development and ANI Inc., 9 authorizing her to take control over all funds and assets owned, managed, or in the 10 possession or control of the receivership entities. See ECF No. 6 at 14-16. In that role, the 11 Receiver acts under the control and direction of the Court to facilitate the “orderly and 12 efficient administration of the estate . . . for the benefit of creditors.” SEC v. Hardy, 803 13 F.2d 1034, 1038 (9th Cir. 1986). See also Atl. Tr. Co. v. Chapman, 208 U.S. 360, 370 14 (1908) (explaining that a motion to appoint a receiver to take charge of property is “to the 15 end that the property might be cared for and preserved for all who had or might have an 16 interest in the proceeds of its sale. . . . Immediately upon such appointment and after the 17 qualification of the receiver, the property passed into the custody of the law, and 18 thenceforward its administration was wholly under the control of the court by its officer [], 19 the receiver.”). On December 11, 2019, the presiding judge in this action, Chief Judge 20 Burns, granted the parties’ Joint Motion (ECF No. 156) to give limited consent to the 21 undersigned to hear and directly decide all motions filed in this action to approve sales of 22 receivership assets. ECF No. 160. See also 28 U.S.C. § 636(c); CivLR 72.1(g). All property 23 sale motions are set before the undersigned pursuant to that grant of consent. 24 On February 21, 2020, the Receiver filed the present Motion for Approval of Sale 25 of Tennyson Street Property (the “Tennyson Property Motion”). ECF No. 252. The motion 26 concerns one of the residential real properties within the receivership estate, a single-family 27 residence located at 3548 Tennyson Street, San Diego, California, 92106 (the “Tennyson 28 Property”). See ECF No. 252; ECF No. 76-2 at 6 (listing the Tennyson Property in the 1 Preliminary Real Estate and Liquor License Asset Schedule filed on October 3, 2019). The 2 Court entered an order the same day setting a briefing schedule and hearing on 3 March 16, 2020. ECF No. 255. The Court set a deadline of March 6, 2020 to file any 4 response in opposition to the Tennyson Property Motion, and noted that “if no opposition 5 is filed by the deadline, the Court may take the motion under submission without oral 6 argument.” Id. at 2. No opposition was filed. Therefore, being fully advised and noting the 7 lack of opposition, the Court will GRANT the Tennyson Property Motion without oral 8 argument,1 for the reasons explained more fully below. 9 II. LEGAL STANDARD 10 “[I]t is a recognized principle of law that the district court has broad powers and 11 wide discretion to determine the appropriate relief in an equity receivership.” SEC v. 12 Lincoln Thrift Ass’n, 577 F.2d 600, 606 (9th Cir. 1978). Where a district court sits in equity, 13 “[u]nless a statute in so many words, or by a necessary and inescapable inference, restricts 14 the court’s jurisdiction in equity, the full scope of that jurisdiction is to be recognized and 15 applied. ‘The great principles of equity, securing complete justice, should not be yielded 16 to light inferences, or doubtful construction.’” Porter v. Warner Holding Co., 328 U.S. 17 395, 398 (1946). 18 “[A] district court’s power to supervise an equity receivership and to determine the 19 appropriate action to be taken in the administration of the receivership is extremely broad.” 20 Hardy, 803 F.2d at 1037. As part of this broad discretion, the district court sitting in equity 21 and having custody and control of property “has power to order a sale of the same in its 22 discretion. The power of sale necessarily follows the power to take control of and to 23 preserve property[.]” SEC v. Am. Capital Investments, Inc., 98 F.3d 1133, 1144 (9th Cir. 24 1996), abrogated on other grounds by Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 25

26 27 1 Because of the lack of opposition and non-receipt of qualified overbids, the Court took both the present motion and another pending property sale motion under submission on 28 1 93-94 (1998) (quoting 2 Ralph E. Clark, Treatise on Law & Practice of Receivers § 482 2 (3d ed. 1992)). If the court approves an equitable receiver’s proposed property sale, the 3 sale “does not . . . purport to convey ‘legal’ title, but rather ‘good,’ equitable title enforced 4 by an injunction against suit.” Id. (citing 2 Clark, Treatise on Law & Practice of Receivers, 5 §§ 342, 344, 482(a), 487, 489, 491). 6 Pursuant to 28 U.S.C. § 2001(a), realty in the possession of an appointed receiver is 7 subject to a public sale process, “upon such terms and conditions as the court directs.” 8 28 U.S.C. § 2002 further requires that notice be published once a week for at least four 9 weeks prior to the sale in at least one newspaper regularly issued and of general circulation 10 in the county, state, or judicial district where the realty is located.2 These safeguards of 11 notice and opportunity to submit overbids help to ensure that the sale is able to fetch the 12 best price possible, which is consistent with the principle that “a primary purpose of equity 13 receiverships is to promote orderly and efficient administration of the estate by the district 14 court for the benefit of creditors.” Hardy, 803 F.2d at 1038. See also United States v. 15 Grable, 25 F.3d 298, 303 (6th Cir. 1994) (noting that “the intent of” the requirement in 28 16 U.S.C. § 2001 that property be sold in the county in which the land is situated is “to bring 17 a better price at the sale”). 18 III. DISCUSSION 19 A. Background of the Property and Proposed Sale 20 The Tennyson Property was purchased for $840,000 on August 20, 2019, only two 21 weeks before the receivership in this case was established. ECF No. 252-1 at 5. Title was 22 taken in the name of Relief Defendant American National Investments, Inc. Id. 23 Following her appointment, the Receiver and her staff reviewed automated valuation 24 scores for the Tennyson Property and a survey of market-comparable properties. Id. 25

26 27 2 28 U.S.C. § 2001 also provides for a private sale process under subsection (b), but the requirements of that subsection are more stringent. The Receiver does not propose a private 28 1 Though habitable, the property was unoccupied and in need of various repairs. The 2 Receiver consulted with multiple licensed brokers about the value of the property and terms 3 of a potential listing agreement, ultimately selecting Resonate Real Estate (“Broker”) and 4 listing the Tennyson Property for sale at a purchase price of $865,000. Id. 5 Broker held two open houses and received two offers near the listing price soon after. 6 Because there were multiple offers, the Receiver counter-offered the prospective buyers 7 for their highest and best price and accepted the highest offer of $885,000 from Matthew 8 Minnick and Peyton Shealy (“Buyer”) on January 22, 2020. Id.; see also ECF No. 252-3 9 at 14, Ex. A to Freitag Decl. The Receiver and Buyer executed a California Residential 10 Purchase Agreement and Joint Escrow Instructions (“Purchase Agreement”), along with 11 an Addendum making court approval of the sale a condition to closing and providing for 12 the overbid and auction process required by 28 U.S.C. § 2001(a). ECF No. 252-3. Buyer 13 has removed all contingencies other than Court approval and deposited $8,450 into escrow. 14 ECF No. 252-1 at 6, 7. 15 B. Proposed Procedures and Distribution 16 In the motion seeking approval of the sale, the Receiver proposed compliance with 17 the overbid and auction process by publishing the following notice in the San Diego Union- 18 Tribune once a week for four weeks: 19 In the action pending in U.S. District Court for the Southern District of California, Case No. 19-CV-01628-LAB-AHG, Securities and Exchange 20 Commission v. Gina Champion-Cain, et al., notice is hereby given that the 21 court-appointed receiver will conduct a public auction for the real property located at 3548 Tennyson Street, San Diego, California 92106-1847 in San 22 Diego County, California. Sale is subject to Court confirmation after the 23 auction is held. Minimum bid price is at least $910,000. The auction will take place on March 12, 2020 at 1:30 p.m. in front of the entrance to the United 24 States Courthouse, 221 W. Broadway, San Diego, California. To be allowed 25 to participate in the auction, prospective purchasers must meet certain bid qualification requirements, including submitted a signed purchase and sale 26 agreement, an earnest money deposit of $9,295, and proof of funds. All 27 bidders must be qualified by 5:00 p.m. PT on March 10, 2020, by submitting 28 1 the required materials to the receiver at 501 West Broadway, Suite 290, San Diego, California, 92101. 2

3 ECF No. 252-1 at 11-12. For those interested in qualifying as bidders, the notice also 4 provided a phone number and email address for the relevant point of contact. Id. at 12. 5 The above notice was published as proposed. On March 11, 2020 the Receiver filed 6 a Notice of Non-Receipt of Qualified Overbids Regarding the Tennyson Property Motion. 7 ECF No. 271. In the Notice, the Receiver informs the Court that, after filing the Tennyson 8 Property Motion and in addition to publishing the notice in the San Diego Union-Tribune, 9 she posted notice of the Motion on the receivership website anireceivership.com, and 10 continued to market the property through Broker and notify potential purchasers about the 11 opportunity to submit an overbid by March 10, 2020. See id. No overbids were submitted 12 by the deadline. Therefore, Matthew Minnick and Peyton Shealy are still the intended 13 Buyer. 14 The Tennyson Property is encumbered by a deed of trust in favor of Seattle Funding 15 Group (“SFG”). ECF No. 252-1 at 6. The outstanding principal balance on the interest- 16 only loan is approximately $546,000, and the Receiver continues to pay the loan current. 17 Id. The Receiver intends to use the proceeds of the sale of the Tennyson Property to pay 18 off the SFG loan and estimates the amount required to do so will be between $546,000 and 19 $550,000, assuming a late March or early April 2020 closing. Id. The Receiver also 20 estimates that the property taxes to be paid at closing will be between $6,700 and $8,600,3 21 and that costs of sale including escrow, title and recording fees will be approximately 22 $7,200. Additionally, the Receiver agreed to give Buyer a credit in the amount of $4,000 23 to be used for repairs to the sewer line and termite damage, to be paid from escrow. The 24 Broker’s fee pursuant to the listing agreement is 4% of the sale price, or $35,400, to be 25 26

27 3 This estimate incorporates a supplemental tax bill stemming from the August 2019 28 1 split with Buyer’s broker. Id. Based on these estimates, the Receiver anticipates that the 2 net sale proceeds for the receivership estate will be in the range of $280,000 to $285,000. 3 At the time the Tennyson Property Motion was filed, there was another encumbrance 4 on the property in the form of a lien recorded by the California Employment Development 5 Department (“EDD”), standing at a balance of approximately $6,000. Id. at 6-7. EDD 6 recorded the lien against the Tennyson Property for unpaid payroll taxes for the ownership 7 entity, Relief Defendant American National Investments, Inc., from the second and third 8 quarter of 2016. However, after filing the motion, the Receiver continued to negotiate with 9 EDD to release the lien, and filed a notice informing the Court that the EDD lien had been 10 released on March 17, 2020. ECF No. 279. Consequently, the Court need not address 11 whether to approve the sale free and clear of the lien and will deny as moot that portion of 12 the Tennyson Property Motion asking the Court to remove the lien and order it to attach to 13 the net sale proceeds. See ECF No. 252-1 at 7. 14 C. Court Approval of the Proposed Procedures and Sale 15 The Court has reviewed the documents submitted by the Receiver in support of the 16 Tennyson Property Motion and finds the purchase price of $885,000 to be fair and 17 reasonable. This price exceeds the August 2019 purchase price of the property by $45,000, 18 representing a return of more than 5%. ECF No. 252-1 at 5. After Broker listed the property 19 for sale at $865,000, two prospective buyers made offers near the listing price. The 20 Receiver then negotiated the price upward by seeking the highest and best counter-offers 21 from the offerors. See ECF No. 252-2, Freitag Decl. ¶ 4; ECF No. 252-3 at 13-14. 22 Additionally, Broker’s proposed commission of 4% of the gross sales price, to be split with 23 the Buyer’s broker, is consistent with the lower range of industry standards. ECF No. 252- 24 2, Freitag Decl. ¶ 8. Broker broadly marketed and advertised the property and diligently 25 responded to inquiries from interested parties. Id. 26 Moreover, the Receiver’s publication of notice seeking qualified overbids in the San 27 Diego Union Tribune, in addition to the solicitation of overbids through the receivership 28 website and continued efforts to market the property, establish that the Receiver not only 1 met but exceeded the requirements for the public sale procedures set forth in 2 28 U.S.C. §§ 2001(a) and 2002 designed to ensure the best price is obtained. Therefore, 3 upon review of the factual history and the Purchase Agreement itself, the Court finds the 4 Purchase Agreement was negotiated at arm’s-length and, further, that the Receiver 5 implemented sufficient safeguards by way of the notice and overbid process to garner the 6 highest possible price for the property. The Court is thus satisfied that the intent of the 7 statutory scheme—to ensure that the best and highest possible price is paid for property 8 within the receivership estate—has been fulfilled. 9 All uniform property sale procedures have been satisfied. Based on these 10 considerations, and noting in particular the lack of any express opposition to the Motion, 11 the Court finds the Receiver has sufficiently established that the proposed sale of the 12 Tennyson Property and proposed distribution of the sale proceeds are consistent with 13 principles of equity and the goal of a receivership to ensure the orderly and efficient 14 administration of the estate for the benefit of creditors. See Hardy, 803 F.2d at 1038. 15 IV. CONCLUSION 16 Having considered the Receiver’s Motion for Approval of Sale of Tennyson 17 Property (ECF No. 252) on its merits and noting that there is no opposition thereto, the 18 Court GRANTS the Motion, and APPROVES the proposed sale of the single-family 19 residence located at 3548 Tennyson Street, San Diego, California, 92106 to Buyer Matthew 20 Minnick and Peyton Shealy, or their designee, as described in the Purchase Agreement 21 attached as Exhibit A to the Declaration of the Receiver (ECF No. 252-3). The purchase 22 price of $885,000 for the Tennyson Street Property is confirmed and approved. 23 The Court further ORDERS the proceeds of the sale to be distributed from escrow 24 at the close of sale as follows: 25 (1) The Receiver is authorized to pay broker Resonate Real Estate a commission 26 of 4% of the sale price, or $35,400, which amount will be split with Buyer’s broker; 27 28 1 (2) The Receiver is authorized to pay Seattle Funding Group the amount 2 ||necessary to pay off the mortgage on the Property, which amount is estimated to be in the 3 || range of $546,000 to $550,000 (with the exact amount to be determined at closing); 4 (3) The Receiver is authorized to pay the property taxes due from the seller at 5 ||closing, which amount is estimated to be in the range of $6,700 to $8,600 (with the exact 6 || amount to be determined at closing); 7 (4) The Receiver is authorized to pay the costs of sale due from the seller at 8 ||closing, which amount is estimated to be approximately $7,200 (with the exact amount to 9 || be determined at closing); 10 (5) The Receiver is authorized to pay the costs to fix the sewer line and some 11 termite damage, which amounts are expected to total approximately $4,000; 12 (6) After the aforementioned estimated amounts (with the exact amounts to be 13 || determined at closing) are paid out of escrow, the net sale proceeds, which are estimated 14 be in the range of $280,000 to $285,000 (with the exact amount to be determined at 15 || closing), shall be paid to the receivership estate; and 16 (7) The Receiver is immediately authorized to complete the sale transaction, 17 including executing any and all documents as may be necessary and appropriate to do so. 18 After closing, the Receiver shall provide a full accounting of sale, maintenance, and 19 repair costs, property taxes paid, the precise amount used to pay off the SFG loan, and the 20 amount ultimately returned to the receivership estate from the sale proceeds. 21 The Court DENIES as moot the request to approve the sale free and clear of the 22 ||now-resolved EDD lien. 23 IT IS SO ORDERED. 24 || Dated: March 17, 2020 05 _ Siow. Xion Honorable Allison H. Goddard 26 United States Magistrate Judge 27 28