Opinion
No. 3-98-CV-2689-M
April 19, 2002
FINDINGS AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
Michael J. Quilling, as Receiver for the Funding Resource Group Estate, has filed an interim report and proposed interim distribution plan. This mailer has been referred to United States Magistrate Judge Jeff Kaplan for recommendation pursuant to 28 U.S.C. § 636(b) and a standing order of reference dated June 16, 2000.
I.
This is a civil action brought by the SEC against 16 defendants and 13 equity relief defendants arising out of the sale of non-existent "prime bank" securities. The SEC alleges that defendants raised more than $14 million from unwitting investors by making false representations about the use and safety of investor proceeds and the expected rate of return on their investments. This conduct, if proved, constitutes a violation of the federal securities laws.
The SEC alleges violations of Sections 5(a), (c) 17(a) of the Securities Act of 1933, 15 U.S.C. § 77e (a), (c) 77q(a), Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. (Plf. Third Am. Compl. ¶ 3).
Funding Resource Group a/k/a FRG Trust ("FRG") and its managing partner, Steven C. Roberts, are named defendants in this case. On November 13, 1998, Michael J. Quilling was appointed as Receiver for FRG and Roberts. The order of appointment provides, in relevant part:
The Temporary Receiver shall take custody, possession and control of any and all assets, monies, securities and properties, real and personal, tangible and intangible, of whatever kinds and description, and wherever situated, belonging to FRG . . . [and] Roberts (hereinafter referred to as "Receivership Assets"), as well as any documents relating to the Receivership Assets.
ORDER APP. TEMP. RECEIVER, 11/13/98 at 2-3. To date, the Receiver has taken possession of and administered $2,029,984.98 in cash and other assets belonging to the Funding Resource Group Estate. The costs of administration total $581,595.21. The Receiver has requested a reserve of $3,807.12 to cover future expenses until the time for final distribution. This leaves $1,210,000.00 available for interim distribution to 470 investors on a pro rata basis. The Court previously approved claims totaling $9,842,672.74, which means that each investor would receive approximately 12.29% of their claim.
Several existing assets and potential claims remain unliquidated. These include: (1) a $675,000.00 judgment obtained against Paul Pursehouse, Quentin Sheehan, and Casavic Capital Management Group, of which $96,000.00 has been collected; and (2) a $400,000.00 judgment obtained against Airey Holdings, Inc. The Receiver also anticipates recovering $990.58 in withholding tax after Funding Resource Group files its 2001 tax return. Finally, the Receiver believes that the Estate may have a potential claim against Arrow Resources to recover an unknown amount of investor proceeds.
These costs include $224,522.38 in attorney's fees and expenses requested by the Receiver, and assumes that the Hammersmith Trust Estate repays $238,389.77 to the Funding Resource Group Estate when this case is ready for final distribution. See ORDER, 4/13/01 (authorizing repayment by Hammersmith Trust Estate).
The Receiver was ordered to post a copy of his interim report and proposed interim distribution plan on his website with instructions to all interested parties that any objections must be filed by April 9, 2002. No other objections have been received. A hearing was held on April 19, 2002. The Receiver notified all interested parties of the hearing date by posting notice on his website. No one appeared at the hearing to present any objections. The Securities and Exchange Commission, through its regional counsel, has consented to the relief sought.
II.
In his interim report and proposed interim distribution plan, the Receiver seeks authorization to: (1) pay $224,522.38 in attorney's fees and related expenses; (2) reserve $3,807.12 to cover future expenses; and (3) make an interim distribution of the remaining assets to investors on a pro rata basis. The Court will address each request in turn.
A.
The Receiver seeks $224,522.38 for legal services performed and costs incurred on behalf of the Funding Resource Group Estate from December 1, 2000 through February 28, 2002. Although no investors have objected to this fee request, the Court must nevertheless carefully examine the application to determine whether the time spent, services performed, expenses incurred, and hourly rates charged by the Receiver are justified under the factors set forth in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974).
This sum includes $3,035.92 in fees and expenses incurred in investigating and prosecuting a fraudulent transfer claim against the Hillcrest Baptist Church. This claim was eventually settled for $30,000.00.
To date, the Receiver has been paid approximately $2.1 million for services performed and expenses incurred on behalf of the Howe Financial Trust, Hammersmith Trust, Funding Resource Group, and Cord/Winterhawk Estates. Of this sum, $333,358.54 has been allocated to the Funding Resource Group Estate. Although the Receiver has always maintained separate accounts for each estate, this procedure was not formalized until March 12, 2001 when the Court required him to designate four separate receivership estates for purposes of handling claims and making distributions to defrauded investors. See ORDER, 3/12/01. In reconciling his records, the Receiver determined that $806,296.82 had been advanced by other estates to pay fees and expenses properly attributable to the Hammersmith Trust Estate. The Receiver then promptly moved to allocate fees between the various receivership estates. By order dated April 13, 2001, the Court authorized the Receiver to cause the Hammersmith Trust Estate to repay advances made by the other estates, including $238,389.77 to the Funding Resource Group Estate. See ORDER, 4/13/01. These payments will be made "at such time as such funds are needed to make interim and final distributions to investors as may hereafter be approved by the Court." Id.
This sum represents: (1) 317,857.87 advanced by the Cord/Winterhawk Estate; (2) $238,389.77 advanced by the Funding Resource Group Estate; and (3) $250,049.18 advanced by the Howe Financial Trust Estate.
As a result of the Receiver's diligent efforts, over $2 million in cash and other assets have been recovered on behalf of defrauded investors of the Funding Resource Group Estate. The fees and expenses incurred by the Estate are $557,880.92, or less than 28% of the total recovery. This is manifestly reasonable, especially in light of the difficulties encountered by the Receiver in tracing investor proceeds and liquidating concealed assets. Moreover, the Court finds that the time spent, services performed, expenses incurred, and hourly rates charged by the Receiver are justified under the factors set forth in Johnson. Accordingly, the Receiver should be authorized to pay the law firm of Quilling, Selander, Cummiskey Lownds, P.C. the sum of $224,522.38 in attorney's fees and expenses.
B.
The Receiver has asked for a reserve of $3,807.12 to cover anticipated future expenses, including bank charges, a possible bond premium, and legal fees incurred in a case against Paul Pursehouse. The Court finds that this sum should be reserved from funds available for interim distribution.
By separate order this date, the Court has approved the Receiver's application for $1,511.50 in attorney's fees and $8.26 in expenses in Quilling v. Pursehouse, No. 3-99-CV-1295-M. The Court also authorized the Receiver to pay his local counsel, Robert Lynn, $1,395.00 in fees and $61.68 in expenses for legal services performed and costs incurred in that case.
C.
The Court previously approved 470 claims totaling $9,842,672.74. There is currently $1,210,000.00 available for distribution on a pro rata basis. See SEC v. Forex Asset Management Co., 242 F.3d 325, 331 (5th Cir. 2001) (approving pro rata distribution to investors). Therefore, each claimant should be paid in accordance with the schedule attached hereto as Exhibit "A". The Receiver should issue interim distribution checks to each claimant in the amounts set forth in the schedule. The checks shall be void if not cashed within 45 days from the date of issuance. The Receiver should be authorized to send a cover letter to each claimant in the form attached as Exhibit "B" to this report.
RECOMMENDATION
The Court should approve the Receiver's interim report and proposed interim distribution plan in accordance with the above recommendation.
The Receiver is ordered to post a copy of this report and recommendation on his website, www.secreceiver.com. Any claimant or interested party may file written objections to this recommendation by May 3, 2002 . The failure to file written objections shall bar the aggrieved party from appealing the factual findings and legal conclusions of the magistrate judge that are accepted or adopted by the district court, except upon grounds of plain error or manifest injustice. See Douglass v. United Services Automobile Ass'n, 79 F.3d 1415, 1417 (5th Cir. 1996).
QUILLING, SELANDER, CUMMISKEY LOWNDS A PROFESSIONAL CORPORATION ATTORNEYS AND COUNSELORS 2001 BRYAN STREET, SUITE 1800 DALLAS, TEXAS 75201
MICHAEL J. QUILLING TELEPHONE: (214) 871-2100 BOARD CERTIFIED TELEFAX: (214) 871-2111 Business Bankruptcy Law AND CIVIL TRIAL LAW TEXAS BOARD OF LEGAL SPECIALIZATIONApril ___, 2002
Re: Civil Action No. 3-98CV2689-M; Securities and Exchange Commission vs. Funding Resource Group, et al; in the United States District Court for the Northern District of Texas, Dallas Division (Funding Resource Group Receivership Estate)
Enclosed herewith please find a check made payable to you from me in my capacity as the Receiver appointed in the above-referenced case. The check enclosed represents a PARTIAL interim distribution to you with respect to your claim against the receivership estate. As indicated on the face of the check, it will become void if not cashed within 45 days from the date of the check. Please cash it as soon as possible.
If you have any inquiries regarding this matter please contact Steve Tomasky at my office. Do not attempt to contact the Court as the Court will just refer your inquiry to me. For more information you may want to contact my website, www.secreceiver.com. I appreciate your patience and consideration.
Very truly yours,
Michael J. Quilling