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Securities and Exchange Commission v. Schooler and First Financial Planning Corporation

United States District Court, S.D. California

July 22, 2014

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
LOUIS
v.
SCHOOLER and FIRST FINANCIAL PLANNING CORPORATION, dba Western Financial Planning Corporation, Defendants.

ORDER ON SUA SPONTE RECONSIDERATION OF AUGUST 16, 2013 ORDER TO RELEASE GENERAL PARTNERSHIPS FROM RECEIVERSHIP

GONZALO P. CURIEL, District Judge.

On March 13, 2013, the Court issued its Preliminary Injunction Order and Order Appointing Thomas C. Hebrank Permanent Receiver ("Injunction Order"). (ECF No. 174.) The Injunction Order provides that Mr. Hebrank ("Receiver") be appointed over defendant Western, the entities it controls, and the several general partnerships ("GPs") that Defendants organized to hold interests in real property.

On August 16, 2013, the Court issued its Order Granting in Part and Denying in Part Defendants' Motion to Modify Preliminary Injunction Order ("Modification Order"). (ECF No. 470.) The Modification Order provided, among other things, that the GPs should be released from the receivership upon satisfaction of certain conditions. ( Id. at 25-27.) Defendants and the SEC each appealed the Modification Order. (ECF Nos. 499, 514.)

On April 25, 2014, the Court issued its Order Denying Defendants' Motion for Partial Summary Judgment and Granting in Part and Denying in Part Plaintiff's Motion for Partial Summary Judgment ("Summary Judgment Order"). (ECF No. 583.) In the Summary Judgment Order, the Court concluded the interests in real property that Defendants sold to investors are, as a matter of law, securities in the form of investment contracts. Per this conclusion, the Court found good cause to reconsider whether to release the GPs from the receivership.

After the Court indicated it would reconsider the Modification Order, the SEC moved for and was granted a stay of the parties' cross-appeals before the Ninth Circuit. (ECF No. 604.) The Ninth Circuit remanded the case for the express purpose of allowing this Court to reconsider the Modification Order.

This Court asked the parties to brief the following three issues: (1) "how the parties' cross-appeals to the Ninth Circuit affect the Court's desire to reconsider" the Modification Order; (2) "whether, given the Court's conclusion that the GP units are securities, the Court should reconsider its order removing the GPs from the receivership"; and (3) "the need to provide investors with an opportunity to file briefs and appear at the July 18, 2014 hearing." The parties filed opening and responsive briefs on these issues. (ECF Nos. 586, 588, 589, 591.) The Court also received dozens of letters from investors. (See, e.g., 611, 615, 622, 624, 628.) After considering the parties' and investors' positions, the Court held a hearing on July 18, 2014. (ECF No. 626.) The Court now addresses the three foregoing issues in turn.

1. Effect of Parties' Cross-Appeals

Because the Ninth Circuit has remanded the case "for the limited purpose of permitting th[is] [C]ourt to reconsider the August 16, 2013 order, " (ECF No. 604), this Court proceeds with reconsidering the Modification Order.

2. Reconsideration of August 16, 2013 Modification Order

Generally, "any order... that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties... may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties' rights and liabilities." Fed.R.Civ.P. 54(b).

While the Federal Rules of Civil Procedure do not set forth a standard for reconsidering interlocutory rulings, the "law of the case" doctrine and public policy dictate that the efficient operation of the judicial system requires the avoidance of re-arguing questions that have already been decided. See Pyramid Lake Paiute Tribe of Indians v. Hodel, 882 F.2d 364, 369 n.5 (9th Cir. 1989). As such, most courts adhere to a fairly narrow standard by which to reconsider their interlocutory rulings. This standard requires: (1) an intervening change in the law; (2) additional evidence that was not previously available; or (3) that the prior decision was based on clear error or would work manifest injustice. Id .; Marlyn Natraceuticals, Inc. v. Mucos Pharma GmbH & Co., 571 F.3d 873, 880 (9th Cir.2009); Sch. Dist. No. 1J v. ACandS, Inc., 5 F.3d 1255, 1263 (9th Cir.1993).

Defendants argue the Court's conclusion that the GP units are, as a matter of law, securities in the form of investment contracts is irrelevant to whether the GPs should be released from the receivership. The Court finds Defendants' arguments are, however, asserted on behalf of the GPs, which the Court has previously found to be inappropriate, given the actual conflict of interest that exists between Defendants and the GPs. (See ECF No. 511 at 8.)

Investors are concerned with three main issues: (1) the GPs being included in the receivership when investors have themselves engaged in no apparent wrongdoing; (2) the GPs having not yet been provided a hearing on whether they should be included in the receivership; and (3) the costs of the receivership.

The SEC asserts the Court's conclusion that the GP units are securities in the form of investment contracts is not only relevant to whether the GPs should remain in the receivership, but indeed requires that the GPs remain in the receivership. The SEC asserts that "investment contracts, " by definition, involve promoters who "manage, control, and operate the enterprise, " and that, "[b]ecause of this dependence, the [R]eceiver, who has merely ...


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