Securities and Exchange Commission v. Small Business Capital Corp. et al, No. 5:2012cv03237 - Document 936 (N.D. Cal. 2014)

Court Description: ORDER granting in part and denying in part 884 Fifth Interim Fee Application; granting in part and denying in part 885 Fifth Interim Fee Application; denying 889 Motion for Approval of Monthly Budget; granting in part and denying in part 923 Sixth Interim Fee Application; granting in part and denying in part 924 Sixth Interim Fee Application. Signed by Judge Edward J. Davila on 8/7/2014. (ejdlc3, COURT STAFF) (Filed on 8/7/2014)

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Securities and Exchange Commission v. Small Business Capital Corp. et al Doc. 936 1 2 3 4 5 6 7 8 United States District Court For the Northern District of California 9 UNITED STATES DISTRICT COURT 10 NORTHERN DISTRICT OF CALIFORNIA 11 SAN JOSE DIVISION 12 13 14 15 16 17 18 SECURITIES AND EXCHANGE COMMISSION, ) ) ) Plaintiffs, ) ) v. ) ) SMALL BUSINESS CAPITAL CORP.; MARK ) FEATHERS; INVESTORS PRIME FUND, ) LLC; and SBC PORTFOLIO FUND, LLC, ) ) Defendants. ) ) Case No. 5:12-CV-03237 EJD ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS; DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET [Docket Item Nos. 884, 885, 889, 923, 924] 19 This lawsuit involves allegations made by the Securities and Exchange Commission 20 (“SEC”) that the Defendants violated antifraud and other provisions of the federal securities laws. 21 See Compl. 1, Docket Item No. 1. Receiver Thomas Seaman (“Receiver”) and the law firm of 22 Allen Matkins, Leck, Gamble, Mallory & Natsis, LLP (“Allen Matkins”) seek interim payment of 23 fees and expenses for services performed during the period from November 1, 2013 through 24 January 31, 2014 (“fifth interim fee period”) and February 1, 2014 through April 30, 2014 (“sixth 25 interim fee period”) in connection with the receivership of Defendant companies Small Business 26 Capital Corporation (“SBCC”), Investors Prime Fund, LLC (“IPF”), SBC Portfolio Fund, LLC 27 28 1 Case No. 5:12-CV-03237 EJD ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS; DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET Dockets.Justia.com 1 (“SBC”), and related companies. Furthermore, the Receiver submitted a motion requesting 2 approval of a monthly budget for loan servicing work. 3 The Receiver and Allen Matkins filed their fifth interim fee applications on May 6, 2014. See Receiver’s Fifth Interim Fee Appl., Docket Item No. 884; See Allen Matkins’ Fifth Interim Fee 5 Appl., Docket Item No. 885. The Receiver filed his administrative motion on May 6, 2014. 6 Docket Item No. 889. The sixth interim fee applications were filed on July 9, 2014. See 7 Receiver’s Sixth Interim Fee Appl., Docket Item No. 923; See Allen Matkins’ Sixth Interim Fee 8 Appl., Docket Item No. 924. Mark Feathers filed oppositions to all fee applications and motions. 9 United States District Court For the Northern District of California 4 Docket Item Nos. 892, 927. The SEC submitted responses supporting the fee applications. Docket 10 Item No. 931. 11 I. Fee Applications 12 A. Fifth Interim Fee Application 13 The Receiver and Allen Matkins request the following fees for services performed: 14 Applicant and Role 15 16 17 18 19 20 Thomas A. Seaman, Receiver Allen Matkins Leck Gamble Mallory & Natsis LLP, General Counsel Costs Total Payment Requested Fees Incurred Interim Payment Requested $183,399.50 $165,059.55 $0.00 $165,059.55 $148,757.00 $1,814.68 $150,571.68 $177,153.75 The Receiver requests approval of his fees in full and the authority to pay 90% of the 21 $183,399.50 in fees incurred from November 1, 2013, through January 31, 2014, amounting to 22 $165,059.55. Dkt. No. 884 at 1. The Receiver is requesting compensation for 1096.9 hours of 23 work during this period at a blended hourly rate of $167.00. Id. at 9. The Receiver is not 24 requesting compensation for any expenses incurred during this period. 25 Allen Matkins requests $148,757.00 of the $177,153.75 in incurred fees for 376.6 hours of 26 work, amounting to approximately 84% of the total fees incurred. Dkt. No. 885 at 1. This 27 requested amount reflects a blended hourly rate of $395.00. Id. Allen Matkins also requests 28 2 Case No. 5:12-CV-03237 EJD ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS; DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET 1 approval of 100% of its expenses totaling $1,814.68. Id. at 6. The total payment requested 2 amounts to $150,571.68. 3 B. Sixth Interim Fee Application 4 The Receiver and Allen Matkins request the following fees for services performed: Applicant and Role 5 Fees Incurred Interim Payment Requested 6 7 8 United States District Court For the Northern District of California 9 Costs Total Payment Requested Thomas A. Seaman, Receiver $244,204.00 $219,783.60 $0.00 $219,783.60 Allen Matkins Leck Gamble Mallory & Natsis LLP, General Counsel $102,084.75 $80,619.50 $1,225.02 $81,844.52 10 The Receiver requests approval of his fees in full and the authority to pay 90% of the 11 12 $244,204.00 in fees incurred from February 1, 2014, through April 30, 2014, amounting to 13 $219,783.60. The Receiver requests compensation for 1475.2 hours of work during this period at a 14 blended hourly rate of $153. Dkt. No. 923 at 10. The Receiver is not requesting compensation for 15 any expenses incurred during this period. Allen Matkins requests $80,619.50 of the $102,084.75 in incurred fees for 204.1 hours of 16 17 work, which represents a blended hourly rate of $395.00. Allen Matkins also requests approval of 18 100% of its expenses totaling $1,225.02. The total payment requested amounts to $81,844.52. 19 II. Discussion 20 A. Applicable Law 21 The court appointing the Receiver is responsible for compensating the Receiver and his 22 attorneys. See In re Alpha Telcom, Inc. [Alpha Telcom II], No. 03:01-CV-1283-PA, 2013 WL 23 840065, at *16 (D. Or. Mar. 6, 2013). The court may use its discretion to fashion a “fee award that 24 is appropriate under the circumstances.” Id. at *17. “The court appointing the receiver has full 25 power to fix the compensation of such receiver and the compensation of the receiver’s attorney or 26 attorneys.” Drilling & Exploration Corp. v. Webster, 69 F.2d 416, 418 (9th Cir. 1934). The 27 Receiver and the attorneys assisting the Receiver will be “reasonably, but not excessively” 28 3 Case No. 5:12-CV-03237 EJD ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS; DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET 1 compensated for their efforts to benefit the receivership estate. Alpha Telcom II, 2013 WL 2 840065, at *17. “[I]n receivership situations, lawyers should be awarded moderate fees and not 3 extravagant ones.” SEC v. Byers, 590 F. Supp. 2d 637, 648 (S.D.N.Y. 2008). The Receiver and 4 any professionals assisting the Receiver should charge a reduced rate to reflect the public interest 5 involved in preserving funds held in the receivership estate. See id. at 646-47. The Receiver and 6 counsel should be moderately compensated for their services because investors may stand to 7 recover “only a fraction of their losses.” See id. at 645. A court considering awarding interim fees should consider several factors. Alpha Telcom 9 United States District Court For the Northern District of California 8 II, 2013 WL 840065, at *16. An award of interim fees is appropriate “where both the magnitude 10 and the protracted nature of a case impose economic hardships on professionals rendering services 11 to the estate.” In re Alpha Telcom, Inc. [Alpha Telcom I], No. 01-CV-1283-PA, 2006 WL 12 3085616, at *3 (D. Or. Oct. 27, 2006). The court should also consider the “economy of 13 administration, the burden that the estate may be able to bear, the amount of time required, 14 although not necessarily expended, and the overall value of the services provided to the estate.” In 15 re Imperial “‘400’” Nat., Inc., 432 F.2d 232, 238 (3rd Cir. 1970). Frequently courts will withhold a 16 portion of the requested interim fees because “until the case is concluded the court may not be able 17 to accurately determine the ‘reasonable’ value of the services for which the allowance of interim 18 compensation is sought.” Alpha Telcom I, 2006 WL 3085616, at *3. The factors listed above, and 19 others, may persuade the court to award the entirety of the requested interim fees or some amount 20 less than requested. See Byers, 590 F. Supp. 2d at 648. Lastly, “‘courts have recognized that it is 21 unrealistic to expect a trial judge to evaluate and rule on every entry in an application’” and courts 22 “‘endorse percentage cuts as a practical means of trimming fat from a fee application.’” Id. 23 (quoting N.Y. State Ass’n for Retarded Children, Inc. v. Carey, 711 F.2d 1136, 1146 (2nd Cir. 24 1983)). 25 26 27 28 4 Case No. 5:12-CV-03237 EJD ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS; DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET 1 2 3 B. Applications 1. The Receiver In the first fee application period, the Receiver charged his maximum allowable rate of $375 per hour for 127 hours and reduced the operating costs of the receivership estate by $24,000 5 per month. See Receiver’s First Interim Fee Appl. 4-5, Docket Item No. 134. During the second 6 application period, the Receiver’s agents conducted the vast majority of the work required to 7 maintain the receivership estate, charging an average of $173 per hour. See Receiver’s Second 8 Interim Fee Appl. 4, Docket Item No. 338. The Receiver further reduced the financial burden on 9 United States District Court For the Northern District of California 4 the receivership estate by absorbing travel expenses, not billing for time spent traveling, and 10 11 charging a reduced fee for communicating via telephone with investors. Id. at 4-5. During the third application period, the Receiver prepared and filed income tax returns, 12 reduced the operating costs of the receivership entities, and spent considerable time dealing with 13 Mr. Feathers’ motions. The net cash increase in that time period was $4,159,566.56, which is 14 significantly higher than the net revenue of $448,894.80 in the second application period. See 15 Receiver’s Third Interim Fee Appl. 1, Docket Item No. 607; Dkt. No. 338 at 3. Furthermore, the 16 average fees to operate the receivership entities and administer the estate declined as stabilization 17 was attained. Dkt. No. 607 at 6-7. The Receiver delegated work to agents billed at a lower rate, 18 resulting in a blended hourly rate of $209 for the third application period. Id. at 8-9. 19 During the fourth application period, the Receiver managed loan portfolios and loan 20 servicing. See Receiver’s Fourth Interim Fee Appl. 2, Docket Item No. 646. The Receiver 21 completed the sale of the Whiskey Junction asset with sales proceeds of $243,835.50 and 22 completed the sale of the Sweet Fingers asset with sales proceeds of $244,669. Id. at 2-3. The 23 average cost of operating the receivership entities and administer the estate declined to $55,800 per 24 month for the fourth application period (from approximately $71,000 per month over the life of the 25 receivership). Id. at 7. The Receiver delegated work to agents billed at a lower rate, resulting in a 26 blended hourly rate of $194 for the fourth application period. Id. at 8. 27 28 5 Case No. 5:12-CV-03237 EJD ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS; DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET 1 During the fifth application period, the Receiver worked on creating a distribution plan and 2 managing and servicing the loan portfolios. Dkt. No. 884 at 1-3. The Receiver processed investor 3 and non-investor claims, evaluated various methods of calculating distributions, and prepared a 4 distribution plan. Id. at 4-5. In this period, the blended hourly rate was $167 per hour. Id. at 9. 5 The average cost of operating the receivership rose from the last fee period to $61,000 per month. 6 Id. at 8. Gross receipts for the period were $1,907,907.39 and the Receiver’s fees are 9.6% of that 7 sum. Id. at 1. 8 United States District Court For the Northern District of California 9 During the sixth application period, the Receiver worked on distributing $15,000,000 to investors and managing and servicing the loan portfolios. Dkt. No. 923 at 1. Gross receipts from 10 the period were $1,051,559.85 and total disbursements were $16,388,539.92 ($15 million to 11 investors, payments of professional fees, loan participants, operating expenses, and loans advanced 12 to borrowers). Id. The Receiver’s fees are 23.2% of the gross receipt sum. Id. The average cost 13 of operating the receivership increased to $81,401.33 per month. Id. at 9. The Receiver managed 14 loan servicing operations (including collection of late fees, making site visits to each borrower, and 15 reviewing status of borrowers’ property taxes), began the process of sales procedure for the SBA 16 license and loan portfolios, administered the receivership estate (including 2011 and 2012 tax 17 returns for SBCC, annual reviews and audited GAAP financial statement, discovery requests of 18 interested parties), mediation in an ongoing litigation, and made distribution of $15 million to 350 19 investors in March 2014. Id. at 2-7. 20 The Court partially grants the Receiver’s request for fees incurred during the fifth and sixth 21 fee application period. The Court withholds 25% of the Receiver’s request for fees and the 22 Receiver may apply for those fees at the conclusion of this litigation. Withholding fees until the 23 conclusion of the lawsuit assists the Court in achieving its continuing goal of preserving funds held 24 in the receivership estate for the compensation of the investors. This approach is common in SEC 25 civil enforcement actions because it allows the Court to withhold fees until it is absolutely clear 26 that a receiver’s efforts will ultimately benefit the receivership estate. See SEC v. Byers, 590 F. 27 28 6 Case No. 5:12-CV-03237 EJD ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS; DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET 1 Supp. 2d at 648. The Court derives the authority to award such reduced fees from its power to “fix 2 the compensation” of receivers and their attorneys. Drilling, 69 F.2d at 418. 3 4 2. Allen Matkins During the fifth application period, Allen Matkins assisted the Receiver in answering and reviewing motions filed by Mr. Feathers, preparing a summary of his work and drafting an interim 6 report, issues with servicing the loan portfolios and dealing with a consultant hired to assist in 7 servicing SBA loans, helped answer communications from investors, advised regarding the 8 potential sale of the Receivership Entities’ SBA lending license and loan portfolio, communicated 9 United States District Court For the Northern District of California 5 with counsel regarding a lawsuit filed against SPF, analyzed claims submitted by investors and 10 creditors, analyzed claims against third parties, drafted the proposed distribution plan of 11 receivership estate assets and analyzed objections to the Distribution Motion, prepared the fourth 12 interim fee application, and prepared a mediation brief and participated in mediation in the 13 California Business Bank litigation. Dkt. No. 885 at 2-6. Allen Matkins requests to be 14 compensated for $148,757.00 at a blended hourly rate of $395, plus $1814.68 for expenses. 15 During the sixth application period, Allen Matkins assisted the Receiver in reviewing and 16 responding to Mr. Feathers’ communications and filings as well as preparing a motion for approval 17 of a monthly budget for loan servicing work, legal issues related to servicing watch list loans, 18 responding to a request for an audit letter, responding to investor communications, advice and sale 19 procedure motions regarding the anticipated sales of SBA lending license and loan, communicated 20 with counsel regarding a lawsuit filed against SPF, analyzed claims submitted by investors and 21 creditors and represented the Receiver at the February 14 hearing, analyzed claims against third 22 parties and Mr. Feathers’ request for reconsideration of the order allowing the motion to pursue 23 claims to be filed under seal, represented the Receiver in the hearing on the distribution motion, 24 prepared the fifth interim fee application, and represented the Receiver regarding the California 25 Business Bank litigation. Dkt. No. 924. Allen Matkins requests to be compensated for $80,619.50 26 at a blended hourly rate of $395, plus $1,225.02 for expenses. 27 28 7 Case No. 5:12-CV-03237 EJD ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS; DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET 1 The Court grants 90% of Allen Matkins’ request for fees and 100% of its request for 2 expenses for the fifth and sixth interim periods, amounting to a total of $135,695.98 for the fifth 3 period and a total of $73,782.57 for the sixth period. The Court has determined that the award is 4 appropriate under the circumstances for several reasons. 5 First, as discussed above and in every order issues on the Receiver’s and counsel’s fees, the Court has a strong interest in preserving the funds of the receivership estate for the benefit of the 7 investors. Allen Matkins has chosen to assist the Receiver in this case where investors stand to 8 suffer great losses on their investments. See Order Approving Receiver’s Appl. to Employ Allen 9 United States District Court For the Northern District of California 6 Matkins as General Counsel, Docket Item No. 36; Receiver’s Appl. to Employ Allen Matkins as 10 General Counsel, Docket Item No. 31. As a result, Allen Matkins is obligated to charge a lower 11 blended hourly rate than its customary fee. 12 Second, the Court emphasizes that in the application for Allen Matkins to represent the 13 Receiver, Allen Matkins had “agreed that its blended hourly rate for the receivership will be $395 14 or less.” Dkt. No. 31 at 7. Allen Matkins’ fifth and sixth fee applications request a blended hourly 15 rate of $395.00, which is the maximum limit set in the application. 16 Third, as discussed in previous orders, the Court reserves its discretionary power and may 17 consider many factors when awarding a reduced fee, regardless of the fees being approved by other 18 courts in similar cases. See Alpha Telcom II, 2006 WL 3085616, at *3-6. Here, the Court chooses 19 to focus on the fact that Allen Matkins’ requested fee rate is at the upper limit approved by the 20 Court. As such, the reduction in the fee award to Allen Matkins is reasonable in light of the 21 circumstances of this case, the work performed by Allen Matkins, and other public interest 22 considerations. 23 III. Objections 24 There have been objections filed by investors. Two objection letters were filed on July 19 25 and 20, 2014 by Sydney Raineri (Docket Item No. 929) and by Alan and Theresa Raineri (Docket 26 Item No. 930) claiming that the sums requested by the Receiver and Allen Matkins are too high. 27 28 8 Case No. 5:12-CV-03237 EJD ORDER PARTIALLY GRANTING FIFTH AND SIXTH INTERIM FEE APPLICATIONS; DENYING ADMINISTRATIVE MOTION FOR MONTHLY BUDGET

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