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Securities and Exchange Commission v. BIC Real Estate Development Corp.

United States District Court, E.D. California

June 15, 2017

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
BIC REAL ESTATE DEVELOPMENT CORPORATION and DANIEL R. NASE, individually and d/b/a BAKERSFIELD INVESTMENT CLUB, Defendants, BIC SOLO 401K TRUST and MARGARITA NASE, Relief Defendants.

          MEMORANDUM DECISION AND ORDER GRANTING RECEIVER'S MOTION FOR APPOINTMENT AS ELISOR (ECF NO. 220)

          Lawrence J. O'Neill UNITED STATES CHIEF DISTRICT JUDGE

         I. INTRODUCTION

         The Court-appointed receiver, David Stapleton (“Receiver”) moves the Court for an order appointing him as elisor for purposes of restoring real property interests to receivership entities, or, in the alternative, for an order to show cause regarding civil sanctions against the noncompliant investors or, in the alternative, for an order authorizing the Receiver to commence turnover litigation against noncompliant investors to recover all outstanding property interests. (ECF No. 220.) For the reasons set forth below, the Court GRANTS the Receiver's motion and appoints him as elisor.

         II. BACKGROUND

         On March 11, 2016, the Securities and Exchange Commission (“SEC” or “Commission”) brought a civil enforcement action against BIC Real Estate Development Corporation (“BIC”) and its owner Daniel R. Nase (“Nase”) (collectively, “Defendants”) for securities fraud. The Complaint alleged that Nase and BIC raised millions of dollars from investors in the fraudulent offer and sale of unregistered securities. (Complaint (“Compl.”) ¶ 4.) BIC represented itself as a real estate investment company, buying real estate primarily located in Bakersfield, California, and renting or flipping it for profit. (Compl. ¶ 20.) In response to the SEC's investigation, but prior to the initiation of the SEC's action, Nase implemented a “liquidation plan” for BIC. (Id. ¶¶ 100-01.) The plan distributed some of BIC's assets (such as real property) to investors who owned BIC stock. (Id. ¶ 93.) As a result, fractionalized interests in certain real properties held by BIC were conveyed to some BIC investors. (Id.) Nase and BIC have both consented to entry of judgment against them. (ECF Nos. 79, 214, 219, 225.)

         On April 8, 2016, the Court appointed David Stapleton as the permanent receiver and charged him with marshaling and managing the assets underlying the fraudulent scheme. (ECF No. 42, (“Appointment Order”).) Included in BIC's holdings were approximately sixty residential real estate properties primarily located in or near Bakersfield, California. (Compl. ¶¶ 20, 62.) Specifically, the Appointment Order: 1) vested the Receiver with exclusive authority and control of the assets of the receivership entities; 2) provided that all persons in possession or control of receivership assets must give control of that property to the Receiver; and 3) barred all persons from interfering with the Receiver's recovery efforts. (ECF No. 42 at 9-11.) Armed with the Appointment Order, the Receiver reached out to investors holding fractionalized interests in properties improperly conveyed in the pre-receivership liquidation in an effort to restore real property interests to the receivership. (Declaration of David Stapleton (“Stapleton Decl.”) ¶¶ 3-6.)

         On May 2, 2017, the Receiver filed a motion asking the Court for an order appointing the Receiver as elisor for purposes of restoring real property interests to the receivership entities or, in the alternative for an order to show cause regarding civil sanctions, or, in the alternative, for an order authorizing the Receiver to commence turnover litigation against noncompliant investors to recover all outstanding property interests. (ECF No. 220; ECF No. 221.) In the motion, the Receiver explains that he has been able to restore real property interests to all but twelve of the residential real properties conveyed to investors during BIC's liquidation plan. (Stapleton Decl. ¶ 5.) Thirty-nine investors who hold fractionalized interests in those twelve properties have either refused to cooperate with the Receiver in restoring title of those properties, or have not responded to the Receiver's communications. (Id.) The Receiver represents that he has provided each noncompliant investors with notice of, and access to, the Court's Appointment Order. (ECF No. 221 at 14; Stapleton Decl. ¶ 8.) The Receiver also served each of the noncompliant investors with the motion. (ECF No. 220-2.) On May 23, 3017, the SEC filed a response in support of the Receiver's motion. (ECF No. 228.) The SEC noted that, “[a]ppointing the Receiver as elisor would be the most efficient and cost-effective means of addressing the problem of fractionalized interests in properties.” (Id.) The Receiver's motion was not opposed by any party.

         On May 30, 2017, the Receiver filed a reply and update, notifying the Court that in the interim between the filing of the Receiver's motion and the reply, five previously noncompliant investors agreed to the Receiver's turnover requests and had already provided notarized documents sufficient to restore such interest. (ECF No. 229 at 3.) Nine additional formerly noncompliant investors had provided the Receiver with meaningful assurances of their intent to abide by the turnover provisions to restore fractionalized property interests to the receivership. (Id. at 4.) However, despite the Receiver's well-documented efforts to persuade investors to relinquish their interest in the improperly conveyed property over a nine month period, twenty-five investors, holding fractionalized interests in ten properties, are still refusing to comply with the Court's recovery plan. (Id.; Stapleton Decl. ¶ 6.) The Receiver reaffirmed his request for appointment as elisor to restore real property interest in the ten properties held, or partially held, by noncompliant investors to the receivership. (Id. at 5.)

         Venue is proper in this Court, and the matter is suitable for disposition without oral argument pursuant to Local Rule 230(g).

         III. STANDARD OF DECISION

         District courts have “broad powers and wide discretion” to fashion relief and administer federal receiverships. SEC v. Wencke, 622 F.2d 1363, 1371 (9th Cir. 1980). “The federal courts have inherent equitable authority to issue a variety of ‘ancillary relief' measures in actions brought by the SEC to enforce the federal securities laws.” Id. at 1369.

         IV. DISCUSSION

         A. Use of Summary Procedures

         “[T]he traditional rule is that summary proceedings are appropriate and proper to protect equity receivership assets.” United States v. Ariz. Fuels Corp., 739 F.2d 455, 458 (9th Cir.1984); see also SEC v. Sharp Capital, Inc., 315 F.3d 541, 545 (5th Cir. 2003) (finding that summary procedures were appropriate to determine if a particular asset was the property of the receiver); SEC v. Basic Energy & Affiliated Res., 273 F.3d 657, 668 (6th Cir. 2001); SEC v. Elliott, 953 F.2d 1560, 1566-67 (11th Cir. 1992). “[S]ummary proceedings are within the broad powers and wide discretion the district court enjoys to adjudicate relief in an equity receivership proceeding.” Sharp Capital, 315 F.3d at 545 (citing Elliot, 953 F.2d at 1566). A court should ensure that the third parties are afforded due process, and thus have adequate notice and an opportunity to be heard. Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 542 (1985); see also SEC v. Wencke, 783 F.2d 829, 838 (9th Cir. 1986) (appellant's due process challenge to the summary proceedings failed because he had notice of the proceedings, had an opportunity to file responsive pleadings and perform discovery, and could have presented evidence and cross-examined witnesses at hearings). Summary procedures are appropriate where a receiver can establish through direct evidence that the subjects of the ...


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