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Securities and Exchange Commission v. Champion-Cain

United States District Court, S.D. California

December 13, 2019



          Honorable Allison H. Goddard, United States Magistrate Judge.

         I. BACKGROUND

         On August 28, 2019, the Securities and Exchange Commission (“SEC”) brought this action against Defendants ANI Development, LLC (“ANI Development”) and Gina Champion-Cain and Relief Defendant American National Investments, Inc. (“ANI Inc.”), alleging violations of federal securities laws based on a purportedly fraudulent liquor license loan scheme. ECF No. 1. Along with the Complaint, the SEC filed a Joint Motion and Stipulated Request seeking a preliminary injunction, appointment of a permanent Receiver, and other related relief (ECF No. 2), which the Court granted on September 3, 2019. ECF No. 6 (“the Appointment Order”). In the Appointment Order, the Court established an equity receivership, appointing Krista Freitag as Receiver of ANI Development and ANI Inc. and authorizing her to take control over all funds and assets owned, managed, or in the possession or control of the receivership entities. See Id. at 14-16. Relevant here, the Receiver was granted full power over all premises owned, leased, occupied, or otherwise controlled by the receivership entities. Id. at 14. Additionally, Section VI of the Appointment Order placed “an immediate freeze” on the title of certain listed properties within the receivership estate, ordering that the titles “shall not be mortgaged, transferred, or otherwise hypothecated[.]” Id. at 10. The listed properties included 132 Keller Street, Petaluma, CA 94952 (“132 Keller Street”), which is a former restaurant space owned by 132 & 142 Keller Street, LLC. Id.

         On October 3, 2019, the Receiver filed a Motion for Order in Aid of Receivership (ECF No. 76), which included the Receiver's Verified Initial Report. ECF No. 76-1 at 11-24. According to the Report, the receivership encompasses approximately 70 entities, including over 60 real properties and operating businesses at the time of the Receiver's appointment. Id. at 11. Attached to the Report is a Preliminary Real Estate and Liquor License Asset Schedule (ECF No. 76-2), which lists all premises leased or owned by the receivership entities, including the commercial 132 Keller Street property. Id. at 5.

         After filing the Motion for Order in Aid of Receivership, the Receiver began filing motions seeking Court approval of various real property sales, including the present Motion for Order Approving Sale of Real Property Located at 132 Keller Street Free and Clear of Mechanic's Lien and Authorizing Payment of Broker's Commission (“the 132 Keller Street Motion”), filed on October 31, 2019. ECF No. 98.

         On November 15, 2019, the Presiding Judge in this matter, Chief Judge Larry A. Burns, issued a Minute Order stating in pertinent part:

The Court is inclined to refer certain other matters to Magistrate Judge Allison Goddard to take evidence, if necessary, and to submit to this Court a Report and Recommendation with her findings and recommendations, with regard to the proposed sale and management of properties and assets and the allocation of proceeds from such sales.

ECF No. 113.

         On November 22, 2019, interested non-party Adam Lewis Construction Company (“Adam Lewis”) filed a Response in opposition to the 132 Keller Street Motion, on the basis that the Court does not have jurisdiction to approve the sale of the property free and clear of its mechanic's lien on the property. ECF No. 128. The Receiver filed a Reply on December 2, 2019. ECF No. 140. On December 5, 2019, Chief Judge Larry A. Burns formally referred the 132 Keller Street Motion to Judge Goddard, who held a hearing on the Motion the same day, during which counsel for the Receiver and Adam Lewis were able to present oral argument to supplement their briefing.[1] See ECF Nos. 135, 154.

         On December 11, 2019, Chief Judge Burns granted the parties' Joint Motion (ECF No. 156) to give limited consent to the undersigned to decide all motions filed in this action to approve sales of receivership assets. ECF No. 160. Consequently, this Order resolves the 132 Keller Street Motion directly pursuant to the grant of limited consent rather than serving merely as a report and recommendation to Chief Judge Burns. See 28 U.S.C. § 636(c); CivLR 72.1(g).

         Having reviewed the relevant briefing and considered the testimony at the hearing, the Court GRANTS the Motion, for the reasons explained more fully below.


         “[I]t is a recognized principle of law that the district court has broad powers and wide discretion to determine the appropriate relief in an equity receivership.” SEC v. Lincoln Thrift Ass'n, 577 F.2d 600, 606 (9th Cir. 1978). See also SEC v. Hardy, 803 F.2d 1034, 1037 (9th Cir. 1986) (“[A] district court's power to supervise an equity receivership and to determine the appropriate action to be taken in the administration of the receivership is extremely broad.”).

         Where a district court sits in equity, “[u]nless a statute in so many words, or by a necessary and inescapable inference, restricts the court's jurisdiction in equity, the full scope of that jurisdiction is to be recognized and applied. ‘The great principles of equity, securing complete justice, should not be yielded to light inferences, or doubtful construction.'” Porter v. Warner Holding Co., 328 U.S. 395, 398 (1946). The Court thus has “inherent equitable authority to issue a variety of ‘ancillary relief' measures in actions brought by the SEC to enforce the federal securities laws.” SEC v. Wencke, 622 F.2d 1363, 1369 (9th Cir. 1980). In recognition of such “inherent equitable authority” of federal district courts, the Ninth Circuit “has repeatedly approved imposition of a receivership in appropriate circumstances.” Id.

         As part of its wide discretion to direct the appropriate relief in an equity receivership, the district court sitting in equity and having custody and control of property “has power to order a sale of the same in its discretion. The power of sale necessarily follows the power to take control of and to preserve property[.]” SEC v. Am. Capital Investments, Inc., 98 F.3d 1133, 1144 (9th Cir. 1996), abrogated on other grounds by Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 93-94 (1998) (quoting 2 Ralph E. Clark, Treatise on Law & Practice of Receivers § 482 (3d ed. 1992) (hereinafter “Clark on Receivers”). Consequently, a federal equity receiver “can conduct a judicial sale of real property that is property within their ‘possession and control' and within the court's territorial jurisdiction, where all parties of interest have been brought before the court.” Am. Capital Investments, Inc., 98 F.3d at 1145 n.17 (citation omitted). However, if the court approves the sale, such approval does not purport to convey legal title to the buyer; rather, the sale conveys “‘good,' equitable title enforced by an injunction against suit.” Id. (citing Clark on Receivers §§ 342, 344, 482(a), 487, 489, 491). In so doing, the court “protects the purchaser against interference and assures him a quiet title and quiet enjoyment.” Id. (quoting Clark on Receivers § 487).

         “The power of a district court to impose a receivership or grant other forms of ancillary relief does not in the first instance depend on a statutory grant of power from the securities laws. Rather, the authority derives from the inherent power of a court of equity to fashion effective relief.” Wencke, 622 F.2d at 1369. See also Am. Capital Investments, Inc., 98 F.3d at 1145 (rejecting the assertion that “there is no federal common law of receiverships” as “vastly overstated” because “the powers of sale of federal equity receivers are well-established.”). Nonetheless, federal statutes do provide some authority and guidance for courts overseeing equity receiverships. Pertinent here, 28 U.S.C. § 2001(a) provides for a public sale process of realty in the possession of an appointed receiver “upon such terms and conditions as the court directs.” 28 U.S.C. § 2002 further requires that notice be published once a week for at least four weeks prior to the sale in at least one newspaper regularly issued and of general circulation in the county, state, or judicial district where the realty is located.[2] These statutory safeguards of notice and opportunity to submit overbids help to ensure that the sale is able to fetch the best price possible, which is consistent with the principle that “a primary purpose of equity receiverships is to promote orderly and efficient administration of the estate by the district court for the benefit of creditors.” Hardy, 803 F.2d at 1038. See also United States v. Grable, 25 F.3d 298, 303 (6th Cir. 1994) (noting that “the intent of” the requirement in 28 U.S.C. § 2001 that property be sold in the county in which the land is situated is “to bring a better price at the sale”); SEC v. Billion Coupons, Inc., No. CIV. 09-00068 JMSLEK, 2009 WL 2143531, at *3 (D. Haw. July 13, 2009), report and recommendation adopted, No. CIV. 09-00068JMS-LEK, 2009 WL 2365696 (D. Haw. July 29, 2009) (approving a receiver's proposed alternative procedure for the sale of real property because the alternative procedure “ha[d] sufficient safeguards in order to solicit the highest price that a willing buyer in an arms-length negotiation will offer while conducting the sales in a timely and cost-efficient manner that will maximize the net sales proceeds.”).


         A. Background of Proposed Sale and Mechanic's Lien

         The 132 Keller Street Property is a former restaurant space owned by 132 & 140 Keller Street, LLC, one of the receivership entities, which purchased both 132 Keller Street and neighboring property 140 Keller Street for $2.9 million on November 2, 2015. ECF No. 98-2, Freitag Decl. ¶ 2. See also ECF No. 6 at 4 (listing 132 & 140 Keller Street, LLC as one of the receivership entities). Both Keller Street properties are encumbered by a mortgage held by Seattle Funding Group. The principal balance due on the interest-only mortgage is $2, 700, 000. ECF No. 98-1 at 6.

         After 132 & 140 Keller Street, LLC purchased the lot, it was split into two lots- 132 Keller Street, which operated as a restaurant, and 140 Keller Street, which continues to operate as a co-working office space under the Receiver's supervision. ECF No. 98-2, Freitag Decl. ¶ 3. In September 2018, 132 Keller Street was listed for lease on the Multiple Listing Service with licensed broker Keegan & Coppin Co., Inc. (“Broker”). In February 2019, 132 Keller Street along with all the restaurant equipment in the property were listed for sale on the Multiple Listing Service for the purchase price of $2, 000, 000. Id. ¶ 4. In March 2019, a buyer offered $1, 750, 000 and then accepted the counter-offer of $1, 800, 000. Id. See also ECF No. 98-3 at 19. The buyer, “David Ducommun or his assignee, ” and seller 132 & 140 Keller Street, LLC - Gina Champion Cain (“Seller”) then executed a Standard Commercial/Investment Purchase Agreement, and the property went into escrow on April 6, 2019. ECF No. 98-2, Freitag Decl. ¶ 4. Mr. Ducommun subsequently assigned his rights under the Purchase Agreement to Petaluma Restaurant Services Holdings, LLC (“Buyer”). Id.; ECF No. 98-3 at 48-49.

         In June 2019, Defendant Champion-Cain, on behalf of the seller 132 & 140 Keller Street LLC, executed a First Amendment to the Purchase Agreement allowing Buyer to conduct a Phase 2 environmental test at the property. ECF No. 98-2, Freitag Decl. ¶ 5. In September 2019, Buyer received the Phase 2 results and approved them. Id. The lot split between 132 Keller Street and 140 Keller Street was approved on August 12, 2019, at which time a lease went into ...

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