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United States Securities and Exchange v. Emvest Mortgage Fund

January 24, 2012


The opinion of the court was delivered by: Hon. Dana M. Sabraw United States District Judge


On December 28, 2011, and pursuant to the July 6, 2011 Order Re: Receiver's Twenty-Second Report, the Receiver filed his Twenty-Third Verified Report and Request for Instructions ("Report"). The Securities and Exchange Commission ("SEC") filed a response with comments. In the July 6 order, the Court indicated that, unless ordered otherwise, it would address all issues presented by the Report on the briefs and without oral argument.

Pursuant to Civil Local Rule 66.1, a receiver's report must include: (1) a summary of the Receiver's operations; (2) an inventory of receivership assets and their appraised value; (3) a schedule of all receipts and disbursements; (4) a list of all creditors, their addresses, and claimed amounts; and (5) a petition for instructions including a recommendation as to whether the receivership should be continued. For the reasons which follow, the Receiver's proposals, included in his request for instructions, are APPROVED IN PART.

1. Summary of Receiver's Operations

The Receiver reports that the remaining assets of Emvest Mortgage Fund, LLC's ("Fund")*fn1 continue to be liquidated despite a difficult financial environment, and that accurate and timely financial reports continue to be prepared, distributed to the Fund's Members, and posted on its website. In the process of liquidation, the Receiver seeks to preserve the Fund's cash for any repairs to the Real Estate Owned ("REO") and for payment of utilities, insurance and taxes. Two assets remain to be liquidated, one of which is in the process of being sold. (Report at 2 & 5.)

During the course of this action, the Court approved several Receiver's proposals for cash distributions to Members. In the March 2, 2005 order the Receiver was granted discretion to make monthly distributions of up to 6% annually. Pursuant to orders entered March 2, 2005 and August 8, 2006, he was granted discretion to make emergency hardship distributions. On October 20, 2008, the Court approved the Receiver's proposal for a "Discounted Cash-Out" Plan, which allowed Members to cash-out at 30% of their equity. Those payments were halted in March 2010 to preserve the Fund's cash in light of the slow-down in the liquidation process. It is anticipated that no further distributions will be made under these programs. (Report at 2-4.) To further preserve the Fund's cash, the Receiver agrees to reduce his monthly management fee to zero as of January 1, 2012, but this does not include his non-operations fees. (Id. at 3.)

On August 19, 2008, the Court approved a "Member's Equity to Buy REO" Plan, which allows Members to use their current equity towards the purchase of any of the Fund's REO. One Member purchased a property under this plan. Although theoretically the offer remains in effect, as it does not affect the Fund's cash reserves, there has been no interest in it recently and it is anticipated that no further transactions will be made under this plan. (Report at 4.) The Court notes that the last REO is being sold.

Liquidation of the Fund's portfolio is slowly nearing completion. On December 31, 2006, the portfolio principal balance was $14,968,831. As of November 30, 2011, it has been reduced to one REO asset valued at $644,846.00 and one Note valued at $85,000. (Report at 3.) The REO asset, a commercial property in Los Angeles, was taken back by the Fund through foreclosure. (Id. at 5.) It is in escrow with sale scheduled to close this month. (Id.) The Note is for a residential loan which is in foreclosure. Although the Receiver worked with the borrower to refinance it, the effort was not successful. (Id. at 3, 5-6.) The Receiver therefore proposes to sell the Note on the open market. (Id. at 3-4 & 6.)

2. The Fund's Financial Condition

The Receiver continues to prepare monthly financial statements, send them with periodic reports to Members, and post them on the Fund's website ( The Report includes the November 30, 2011 financial statements. (Report at 4 & Ex. 1.) For the eleven months ending November 30, 2011, the Fund recorded a net loss of $98,164. (Id. at 5 & Ex. 1.) Its income consists of $18,930 in interest and $2,540 in other income. (Id. Ex. 1.) Its liabilities consist largely of REO costs of $56,923 and Receiver and attorney fees of $47,200. (Id. at 5 & Ex. 1.) As of November 30, 2011, the Fund's loan portfolio consisted of the Note, whose value has been written down to$85,000, and the last REO valued at $644,846. (Id.) In addition, the Fund holds $497,802 in cash. (Id. Ex. 1.) The Fund also holds two judgments valued at close to zero. (Id. at 6.) The Fund's liabilities consist almost entirely of the accrued unpaid Receiver and attorney fees of $226,060. (Id.)

Because the Fund's loan portfolio is being liquidated, and the proceeds of the liquidation have largely been distributed to the Members, the Receiver contends that comparing current and past net income is not a meaningful approach to assessing the Fund's performance at this time. (Report at 4-5.) For the same reasons, tracking and comparing the value of a $10,000 investment in the Fund is no longer a valid measure. (Id. at 5.)

3. Member Distributions

Since the start of 2007, "more than $8 million has been paid to withdrawing Members." (Report at 4.) In 2011, Members received $404,235.00 in distributions. All current Members have received at least 50% of their original investments, with the overall average at about 62%. (Id.) The percentage varies among Members because some Members received emergency distributions in excess of the distributions made to others. The Receiver posted on the Fund's website a complete Member list and the percentage of returns each had received. The Receiver estimates that upon ...

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