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Hebrank v. Linmar III, LLC

United States District Court, S.D. California

October 25, 2019

THOMAS C. HEBRANK, Federal Equity Receiver, zz Plaintiff,
v.
LINMAR III, LLC, a California limited liability corporation; and Does 1-25, Defendants.

         ORDER APPROVING RECEIVER'S FINAL ACCOUNT AND REPORT, EXONERATING RECEIVER'S BOND; APPROVING DISTRIBUTION OF FUNDS HELD BY POST-JUDGMENT RECEIVER; EXONERATING POST-JUDGMENT RECEIVER'S BOND; AND DISCHARGING POST-JUDGMENT RECEIVER. [ECF NO. 80]

          HON. GONZALO P. CURIEL UNITED STATES DISTRICT JUDGE.

         Before the Court is the Thomas C. Hebrank's (“Hebrank” or “Receiver”) motion to approve the post-judgment receiver's final account and report; approve distribution of funds held by post-judgment receiver; exonerate post-judgment receiver's bond; and discharge post-judgment receiver. ECF No. 80. Counsel for LinMar III, Philip Dyson (“Dyson”), filed an opposition on July 18, 2019. ECF No. 82. A reply was filed on July 26, 2019. ECF No. 83.

         BACKGROUND

         The Court-appointed James S. Lowe (“Lowe”) as post-judgment receiver on June 3, 2015. ECF No. 48. Lowe completed the sale of the LinMar III property on December 31, 2018 and filed his Final Account and Report on March 5, 2019. ECF No. 74. The instant dispute between the Receiver and Dyson centers on the distribution of the $43, 450 in funds remaining in the post-judgment receivership account.

         This case arises out of a Securities Exchange Commission (“SEC”) action, SEC v. Schooler et al., Case No. 3:12-cv-2164-GPC-JMA (S.D. Cal.), wherein the Court authorized the Receiver to pursue enforcement of promissory notes executed by LinMar III, LLC (“LinMar”). LinMar, while under the control of Louis Schooler, granted a second deed of trust on the property owned by LinMar (“LinMar Property”) to Dyson in order to secure attorney fees. ECF 80-1 at 7; Declaration of Thomas Hebrank (“Hebrank Decl.”) ¶ 3. The property had a mortgage on it in favor of Rabobank, and a third deed of trust in favor of the SEC. Hebrank Decl. ¶ 2.

         Lowe encountered significant challenges with the LinMar Property, including issues with property renovations and maintenance. Declaration of James Lowe (“Lowe Decl.”) ¶ 2. On August 12, 2018, Dyson emailed Lowe, asking him to lower the listing price of the property from $3.9 million to $3.5 million in order to be realistic given the state of the real estate market. ECF No. 82 at 1-2; Dyson Ex. 1.

         Lowe pursued various initial offers on the property, and the highest offer received was for $3, 550, 000. ECF 80-1 at 8. If the property had been purchased at $3, 550, 000, there would have been enough funds to pay Rabobank, Dyson, and the Receiver in full, with a significant amount left to make a partial payment to the SEC. ECF No. 80-1 at 8. However, these initial offers fell through after the prospective purchasers conducted further review of the property. Id.; Lowe Decl. ¶ 3.

         On December 7, 2018, an offer was made to purchase the property for $3.2 million (“December Offer”). ECF No. 82 at 3. Since the Rabobank mortgage note had matured, and the prospect of foreclosure was looming, Dyson and Hebrank decided to accept this December Offer even though $3.2 million would be insufficient to pay all parties in full. Lowe Decl. ¶ 3. Dyson and Receiver agreed to accept discounted payments, and the SEC agreed to release its lien with no payment. Lowe Decl. ¶ 4. Specifically, Dyson agreed to accept $200, 000 (original amount was $285, 000) and Receiver agreed to accept $120, 000 (originally amount was $176, 000). ECF No. 80 at 8; ECF No. 82 at 6-7.

         On December 17, 2018, Lowe emailed Dyson confirming that Dyson and Hebrank would accept discounts at thirty and thirty-two percent, respectively. Dyson Decl., Ex 5. In this same email, Lowe wrote, “My plan is that the final distribution of the Receivership funds (after bills are paid and court approval) will be equally distributed by percentage of total remaining owed to each of you.” Dyson Decl. Ex. 5. Dyson claims that he relied on Lowe's December 17 email in agreeing to discount his trust deed. Dyson Decl. ¶ 15. However, on December 19, 2018, Lowe sent another email to Dyson and the SEC which contained escrow payoff demands for Dyson and the SEC; Rabobank's demand for their first trust deed payoff; and, in relevant part, an Estimated Closing Cash Flow (“ECCF”). Dyson Decl. Ex. 7. The ECCF includes a breakdown of the property purchase offer (i.e., $3.2 million) and the distributions to be allotted, noting $200, 000 will go to to Dyson (with the adjacent note, “Discounted demand to escrow -30%) and $120, 000 to Hebrank (with the adjacent note, “Discounted demand to escrow”). Id. Below this breakdown of fund distribution is a section titled “Total Owed” listing amounts for Dyson as $285, 000 and for Hebrank, $176, 000. Id.

         In most relevant part, the ECCF includes a paragraph stating that “[a]ny funds remaining within the Receivership after the payment of obligations, will be sent to the SEC in payment of their demand of remaining funds.” Id. The ECCF does not state any limits or conditions about the amount that should go to the SEC.

         Later that same day when Lowe sent the ECCF to Dyson, Dyson released his lien, and the $200, 000 was sent to Dyson. Lowe Decl., Ex. B. The sale of the LinMar Property officially closed on December 31, 2018. Hebrank alleges that Dyson verbally communicated his assent to the terms of the ECCF to Lowe, and then confirmed his agreement by signing the release of his lien and delivering it to escrow in exchange for the $200, 000 payment from escrow at the sale closing. ECF 80-1 at 12.

         On or around January 19, 2019, Lowe contacted the Receiver's staff to inform them that approximately $43, 450 remained in the post-judgment receivership account. ECF 80-1 at 9. These funds came primarily from the broker accepting a reduced commission on the sale, the buyer agreeing to split the escrow fees and provide a credit for certain remodeling work, as well as an insurance rebate. ECF 80-1 at 9; Lowe Decl., ¶ 5. Receiver's counsel contacted the SEC to notify them about the remaining funds, and counsel for SEC obtained approval for these funds to be distributed to the victims of the fraudulent scheme in the related SEC action. Id. A stipulation to that effect was sent to Dyson via email for his approval/review on June 5, 2019. Id. On June 13, 2019, Dyson replied claiming his reliance on Lowe's December 17, 2018 email, and his ...


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