Securities And Exchange Commission v. Goldfarb et al, No. 3:2011cv00938 - Document 121 (N.D. Cal. 2013)
Court Description: ORDER GRANTING RECEIVER'S MOTION TO APPROVE SALE by Hon. William Alsup granting 93 Motion to approve sale of interest in Magna Real Estate Management LLC.(whalc2, COURT STAFF) (Filed on 8/21/2013)
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Securities And Exchange Commission v. Goldfarb et al Doc. 121 1 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE NORTHERN DISTRICT OF CALIFORNIA 8 9 11 For the Northern District of California United States District Court 10 SECURITIES AND EXCHANGE COMMISSION, Plaintiff, 12 13 No. C 11-00938 WHA ORDER GRANTING RECEIVER’S MOTION TO APPROVE THE SALE OF RECEIVERSHIP ESTATE’S INTEREST IN MAGNA REAL ESTATE MANAGEMENT LLC v. 15 LAWRENCE R. GOLDFARB and BAYSTAR CAPITAL MANAGEMENT, LLC, 16 Defendants. 14 / 17 18 19 INTRODUCTION In this SEC enforcement action, a receiver was appointed to sell defendants’ assets. The 20 receiver moves to approve the sale of the receivership estate’s largest asset, an interest in a 21 limited liability corporation. For the reasons stated below, this motion is GRANTED. 22 23 STATEMENT In March 2011, judgment was entered in an SEC enforcement action against defendants 24 Lawrence Goldfarb and Baystar Capital Management, LLC in an amount of over $14 million 25 (Dkt. No. 21). In June 2012, defendants were held in civil contempt for failing to comply with 26 the judgment (Dkt. No. 50). John Cotton was then appointed receiver of defendants’ estate in 27 order to “facilitate the marshaling of their assets and income to help comply with the Final 28 Judgment” (Dkt. No. 53). Pursuant to paragraph 35 of the order appointing receiver, the receiver must seek leave from the court to sell “all property, promissory notes, partnership interests, Dockets.Justia.com 1 limited liability company interests, and/or warrants in the Receivership Estates.” In this motion, 2 Receiver Cotton seeks approval to sell Goldfarb’s largest asset, an interest in the real estate 3 company Magna Real Estate Management LLC (MREM). 4 MREM is a California limited liability company, formed in 2008. It is owned by LRG 5 Capital Real Estate Ventures, LLC (LRG), Jeff Koblick, and Richard Hall. LRG owns 50% of 6 MREM. Koblick and Hall each own 25% (Cotton Decl. ¶ 3). Goldfarb is the sole owner of 7 LRG (Cotton Decl. ¶ 2). MREM and twenty additional investors own Magna Real Estate LLC 8 (MRE). MREM, which is managed by Koblick and Hall, is the asset manager of MRE. MRE 9 has varying percentages of ownership interests in eight real estate properties throughout California (Cotton Decl. ¶ 7). 11 For the Northern District of California United States District Court 10 In July 2012, the receiver began negotiations to sell LRG’s interest in MREM to MRE. 12 Whether the price they settled on is fair and adequate is the subject of the instant dispute. The 13 receiver retained Keyser Marsdon, a professional advisory firm in San Francisco, to make a 14 preliminary evaluation of the interest. Keyser determined that LRG’s interest was worth at 15 minimum approximately $8.8 million, and possibly more (Cotton Decl. ¶¶ 10–13). After 16 multiple rounds of negotiation with the receiver, MRE agreed to buy LRG’s interest for $5.1 17 million, a significantly lower amount than the appraised value (Cotton Decl. ¶ 25; Dkt. No. 94- 18 1). 19 Receiver Cotton seeks approval to sell the asset at this reduced price. As was discussed 20 at the August 15 hearing, Receiver Cotton has been in contact with the two largest defrauded 21 investors — two hedge funds — who together owned 83% of the funds. Both have given their 22 approval of the sale, prioritizing a lower but immediate cash payment over an uncertain future 23 payout. Based on receiver’s representations during the hearing, the other 17% of defrauded 24 investors are on notice of the proposed sale, and none have objected. 25 Defendants Goldfarb and Baystar Capital Management are the only objectors, arguing 26 that the sale price is “dramatically below the value of” the interest (Opp. at 3). To further assess 27 the fairness and reasonableness of the offer, the Court requested supplemental briefing from both 28 parties (Dkt. No. 112). At the August 15 hearing, the receiver was ordered to meet again with 2 1 the proposed buyers and submit a final proposal. On August 20, the receiver submitted a 2 revised, final proposal from MRE for $5.5 million. For the reasons stated below, the motion to 3 approve the sale of the receivership estate’s interest in MREM for the revised price of $5.5 4 million is GRANTED. 5 6 ANALYSIS According to the order appointing Receiver Cotton, “upon further order of this Court, U.S.C. §§ 2001 and 2004, the Receiver will be authorized to sell . . . limited liability company 9 interests . . . in the Receivership Estates” (Dkt. No. 58, ¶ 36). Section 2004 governs the “sale of 10 personalty generally.” It states that “any personalty sold under any order or decree of any court 11 For the Northern District of California pursuant to such procedures as may be required by this Court and additional authority such as 28 8 United States District Court 7 of the United States shall be sold in accordance with section 2001 of this title, unless the court 12 orders otherwise.” Section 2001 sets out two possible courses of action: (1) property may be 13 sold in public sale; or (2) property may be sold in a private sale, provided that three separate 14 appraisals have been conducted, the terms are published in a circulated newspaper ten days prior 15 to sale, and the sale price is no less than two-thirds of the valued price. At issue here is whether 16 this Court should use its statutorily granted discretion and approve a private sale that does not 17 comply with the dictates of Section 2001. 18 “A district court’s power to supervise an equity receivership and to determine the 19 appropriate action to be taken in the administration of the receivership is extremely broad. It is a 20 recognized principle of law that the district court has broad powers and wide discretion to 21 determine the appropriate relief in an equity receivership.” SEC v. Hardy, 803 F.2d 1034, 1037 22 (9th Cir. 1986) (citations and internal quotation marks omitted). While our court of appeals has 23 not specifically discussed this discretion with respect to Section 2001, the Third Circuit has held 24 that the statutory scheme set out in Sections 2001 and 2004 expresses a “preferential course to be 25 followed in connection with a court authorized sale of property and that the district court should 26 not order otherwise except under extraordinary circumstances.” Tanzer v. Huffines, 412 F.2d 27 221, 222 (3d Cir. 1969). The price for which the asset is sold should be the “best price under the 28 circumstances.” Id. at 223. 3 1 According to Cotton, this price, although below its appraised value, is warranted and is and MRE would require the approval of MREM managers to sell what amounts to a non- 4 controlling and restricted interest that is not easily assignable to any third party (Dkt. No. 93, 5 Exh. C, § 7.1(a); Reply Br. at 4). Such a structure limits the viability of a public sale, making 6 this sale to MRE investors the only way to quickly terminate the LRG interest in MREM. 7 Second, the two largest of the defrauded investors approve the sale at the reduced price. Third, if 8 the sale is approved, Koblick and Hall have agreed to dismiss their breach of contract and fraud 9 claims against defendants in Marin County Superior Court, which are currently stayed but could 10 result in a further judgment against the estate. Fourth, the SEC does not object to the sale. Fifth, 11 For the Northern District of California the best price possible under the circumstances for many reasons. First, the structure of MREM 3 United States District Court 2 approving this sale would close out the receivership and eliminate the economic uncertainty that 12 could come with waiting until this asset could otherwise be sold in three to five years (Dkt. No. 13 93). 14 According to defendants, this does not represent the best price under the circumstances, 15 and the receiver has not made sufficient effort to garner a higher price. Defendants argue that 16 the Court should order the receiver to obtain a full and complete appraisal of the interest, 17 publicly market the interest for sale for a reasonable period, or negotiate a more appropriate price 18 with a private buyer. According to defendant, the receiver has made no effort to sell to anyone 19 except the “insiders” of the fund, who benefit from a lower price (Opp. at 6). 20 After supplemental briefing, a full hearing, and the receipt of a subsequent revised (and 21 higher) offer, this order finds that the proposed price of $5.5 million is the best price under the 22 circumstances. As will be discussed below, it has already proven difficult to negotiate a private 23 sale for this asset. Because of the structure of the asset, it would be very difficult to sell this 24 large but non-controlling interest in MREM in a public sale as well. Defendant Goldfarb himself 25 found this to be true as well. In his declaration submitted in opposition to the civil contempt 26 order, Goldfard stated that “I have also been unable to find an outside party to purchase my 27 interest at an appropriate amount.” He directly acknowledged that the “marketability of the 28 interest is limited” (Dkt No. 44-1, ¶ 12). 4 1 This order further finds that this price is the product of good faith efforts by Koblick and 2 Hall to find a buyer for the interest, and to negotiate with receiver when a private buyer failed to 3 materialize. Koblick, in his position as manager of MREM and the asset manager of MRE, made 4 multiple attempts to secure a third party buyer for Goldfarb’s interest in MREM. The first was 5 in February 2012, when he reached out to an institutional investor. Despite these efforts, 6 Goldfarb and the investor were not able to come to an agreement (Supp. Koblick Decl. ¶¶ 4–6). 7 In March 2012, prior to Goldfarb’s civil contempt hearing, Goldfarb rejected Koblick and Hall’s 8 offer to buy his interest in MREM for $7.6 million (Goldfarb Decl. ¶ 11, Dkt. No. 44-1 ). 9 After the receiver was appointed in June 2012, Koblick made a second effort to come to an agreement with the same institutional investor, but no agreement was reached (Supp. Koblick 11 For the Northern District of California United States District Court 10 Decl. ¶ 7). Koblick made many more attempts to contact investors, to no avail. It then became 12 necessary to negotiate an agreement in which Koblick, Hall, and the MRE shareholders could 13 buy out LRG’s interest and “clear this cloud on MRE ownership” (Supp. Koblick Decl. ¶ 3). 14 The receiver and the buyers went back and forth multiple times to come to this agreement 15 (Cotton Decl. ¶¶ 15, 21–25). Pursuant to the Court’s order at the August 15 hearing, the 16 receiver obtained and filed herein MREM’s “best and final offer” of $5.5 million (Dkt. No. 120). 17 Obtaining another appraisal and attempting a public sale would be done at cost to the 18 receivership and would likely be futile, possibly even attracting a lower price than that offered 19 by the MRE investors today. 20 Additionally, the defrauded investors approve of the sale at a reduced price. According 21 to the receiver’s representations, he actively communicated with the two large hedge funds 22 which owned 83% of the defrauded funds during the course of negotiations. Both approved the 23 sale. Cotton made efforts to ascertain the identity of other defrauded investors, and has informed 24 them of this proceeding. No objections have been submitted. 25 Along with the revised offer of $5.5 million, the receiver submitted the declaration of 26 Anthony Martorana of Martorana Bohegian & Company. Mr. Martorana is a real estate 27 consultant and appraiser who prepared a summary regarding the “general effective discounts for 28 membership interests” such as the one at issue here (Dkt. No. 120 at 4). He states that, based on 5 1 the lack of control and marketability of the asset, a 24–33% “overall effective discount is 2 appropriate with an average discount of 28%” (ibid.). The proposed price of $5.5 million is an 3 approximately 31% discount from the appraised value of the MRE properties of $8,034,028 (id. 4 at 2). 5 This order recognizes that the interest is being sold below its valuation, and Goldfarb will 6 likely be left with a multi-million dollar deficiency as a result. This is a legitimate concern that 7 this order has carefully considered. But it is the duty of this Court to weigh the interests of the 8 defrauded investors with those of the defendants and to ensure that the price received under the 9 circumstances is fair and reasonable. The interest has not proven to be, and by its terms is likely not, publically marketable. Multiple past attempts at private sale have been unsuccessful. 11 For the Northern District of California United States District Court 10 Keeping the receivership open would incur additional expense, likely with little or no benefit. 12 Given these circumstances, this order finds that it is in the best interests of all parties to approve 13 this sale according to the revised proposal set forth by the receiver. 14 CONCLUSION 15 For the reasons discussed above, the receiver’s motion to approve the receivership 16 estate’s interest in Magna Real Estate Management LLC at the revised amount of $5.5. million is 17 GRANTED. 18 19 IT IS SO ORDERED. 20 21 Dated: August 21, 2013. WILLIAM ALSUP UNITED STATES DISTRICT JUDGE 22 23 24 25 26 27 28 6
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