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Seaman v. Private Placement Capital Notes II, LLC

United States District Court, S.D. California

March 29, 2017

THOMAS A. SEAMAN, Plaintiff,


          Cynthia Bashant United States District Judge

         Before the Court is Defendants' motion to compel arbitration and stay the case, or in the alternative, to transfer venue. (ECF No. 11.) For the reasons set forth below, the motion to compel is granted in part. Arbitration proceedings will be initiated in the Southern District of California, and the Court will stay the case pending the completion of arbitration.


         A. The Total Wealth Management Receivership Proceeding

         This case stems from a related SEC enforcement action (“Enforcement Action”) brought against Total Wealth Management, Inc. (“TWM”) and investment adviser Jacob Cooper, alleging fraud in violation of Sections 206(1), (2), and (4) of the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-6(1), (2), and (4).[1] In the Enforcement Action, this Court issued a preliminary injunction against TWM and Cooper, and appointed Kristen Janulewicz permanent receiver of TWM and its subsidiaries and affiliates, including Altus Capital Management, LLC and the Altus Funds[2] (collectively, the “Receivership Entities” or “Entities”). The appointment order calls for the Receiver to recover, for the benefit of creditors and investors in the Receivership Entities, any and all assets that were owned by, or purchased with assets of, the Receivership Entities. See Preliminary Injunction and Appointment Order, SEC v. Total Wealth Management, Inc., et al., No. 15-cv-00226-BAS-DHB (S.D. Cal. Feb. 12, 2015), ECF No. 8.

         On February 23, 2016, the Court authorized the Receiver to bring the instant claim on behalf of the Receivership Entities, including the Altus Funds, against Defendant Private Placement Capital Notes II, LLC (“PPCN”) and Anthony Hartman, the beneficial owner and managing partner of PPCN. Pursuant to this authority, on March 7, 2016 Plaintiff Receiver Kristen Janulewicz brought this claim for damages and declaratory relief against PPCN and Hartman, alleging fraud, breach of contract, unjust enrichment, and fraudulent transfer. (Compl. ECF No. 1.) On June 7, 2016, Thomas Seaman was substituted as permanent receiver of the Receivership Entities, and subsequently as plaintiff in the instant case.

         The Receiver alleges that from approximately December 2007 to February 2014, the Altus Funds invested at least $24, 000, 000 in Defendant PPCN in the form of promissory notes. (Id. ¶¶ 8-11.) The Receiver alleges that the Altus Funds' investment constitutes at least 70 percent of all funds invested in PPCN, and that the Receivership Entities were insolvent at the time the Altus Funds invested in PPCN, or were rendered insolvent by the Altus Funds' investment. (Id. ¶ 12.)

         According to the Complaint, PPCN solicited investments from the Altus Funds through, among other things, the dissemination of private placement memoranda (“PPM”) and other written solicitations. (Id. ¶ 13.) PPCN represented that its business consisted of making commercial hard money loans and acquiring distressed and commercial real property. (Id. ¶ 14.) The PPMs explained that investments in PPCN were made through the purchase of promissory notes (the “Notes”). According to the Receiver, the Altus Funds purchased at least 221 Notes with PPCN. PPCN represented that the Notes would bear interest at an annual rate of 12.5 percent, to be paid semi-annually over a five-year term, after which investors could redeem the Notes for full repayment of principal. (Id. ¶¶ 17, 18.)

         The Receiver alleges that despite raising $24, 000, 000 from the Altus Funds, the income derived from PPCN's investments was insufficient to satisfy PPCN's promise to pay investors annual interest at the agreed-upon rate of 12.5 percent. (Id. ¶ 20.) The Receiver claims that PPCN has paid the Altus Funds a total of approximately $4, 570, 000 in interest, and that the value of the Altus Funds' investment via the Notes, including “credited interest” (i.e., interest credited but not paid) is at least $34, 100, 000 in the aggregate. (Id. ¶ 27.)

         In accordance with the terms of the Notes, the Receiver sent PPCN a written redemption request relating to at least $16, 000, 000 in Notes that had reached or exceeded their five-year maturity date. (Id. ¶ 31) PPCN failed to respond, and has not returned any of the requested amount to the Receiver. The Receiver alleges that Defendants made false representations to TWM and to the Altus Funds to induce them to invest in PPCN; that PPCN breached its contractual obligations under the Notes to pay principal and interest upon maturity; that Defendants were unjustly enriched by their fraudulent conduct; and that the investments were fraudulent transfers. (Id. 9-14.) The Receiver seeks actual damages of at least $20, 000, 000, punitive damages, and a declaratory judgment rescinding the Notes and ordering disgorgement of funds invested in the Notes by the Altus Funds.

         B. The Subscription Agreement and Arbitration Clause

         After the Receiver filed suit, Defendants PPCN and Hartman filed the instant motion to compel arbitration and stay the action, or in the alternative, to transfer venue. (Mot. to Compel, ECF No. 11.) Defendants argue that the Notes purchased by the Altus Funds are governed by a Purchase Questionnaire and Notice Purchase Agreement (together, the “Subscription Agreement”), which contain identical arbitration clauses. That Arbitration Clause provides:

         17. Arbitration

Note Purchaser further agrees that any dispute regarding this Agreement or Note Purchaser's investment in the Company [i.e., PPCN] . . . including any claim which is made against any placement agent or broker-dealer involved in the offer or sale of the Note, shall be resolved by arbitration which shall be the sole forum for resolution of any such disputes. Unless otherwise agreed by the parties, any such proceedings shall be brought in Greenwood Village, Colorado pursuant to the Rules and Code of Arbitration of the America [sic] Arbitration Association, except that if a bona fide claim is made against the Company, and a placement agent or broker-dealer is named in connection with such claim, then such claim shall be brought pursuant to the Rules and Code of Arbitration of the National Association of Securities Dealers, Inc.

(Mot. to Compel, Exh. 1, 1-54, ECF No. 11-3.)

         The Subscription Agreements also contain a forum selection clause that provides:

18. Governing Law; Venue
This Agreement shall be governed by, and construed in accordance with, the substantive laws of the State of Colorado without reference to Colorado conflict or choice of law provisions. Actions or proceedings litigated in connection with this Agreement, if any, shall be conducted exclusively in the ...

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