Summary
holding that because there was a disputed issue of fact concerning disgorgement, summary judgment was denied and the disgorgement determination would only be made after an evidentiary hearing
Summary of this case from Sec. & Exch. Comm'n v. One or More Unknown Traders in the Common Stock of Certain IssuersOpinion
NO. CIV. S-09-0665 LKK/DAD.
December 11, 2009
ORDER
On July 31, 2009, this court appointed a permanent Receiver to marshal and recover Equity Investment Management and Trading, Inc. ("EIMT") assets. On August 20, 2009, this court established a standard for summary proceedings for the recovery of EIMT assets by the Receiver. Pursuant to this procedure, the Receiver has moved for the disgorgement of $2.0 million from interested parties Michael Callahan ("Callahan") and Matthew Tucker ("Tucker"). Callahan has filed both a motion to continue the hearing and an opposition to the motion. Tucker has not opposed the motion.
I. BACKGROUND
This court appointed a Receiver to recover assets of EIMT. These assets are to be distributed to the defrauded investors of EIMT. Throughout the Receiver's efforts to recover these assets, he discovered that EIMT consisted of several subfunds. These include Veritas Investments, LLC ("Veritas"). In December 2008, Veritas transferred $2.0 million to Michael Callahan ("Callahan") and Matthew Tucker ("Tucker") to purchase an investment called a Collateralized Mortgage Obligation ("CMO"). Veritas wired Callahan $125,000 and wired Tucker $1.875 million for the purchase. The parties contest whether a CMO was ever purchased by Callahan and Tucker. Additionally, the parties contest the extent of Callahan's involvement in this transaction. After numerous negotiations with Callahan to recover the CMO, the Receiver filed this motion to disgorge.
II. STANDARD OF REVIEW
On August 20, 2009, the court issued an order establishing a standard summary procedure for Receiver's recovery of EIMT's assets. Doc. No. 116. This order set forth the procedure for disgorgement claims for EIMT assets. First, the Receiver shall file a noticed motion for disgorgement and serve said motion upon all interested parties. Interested parties may file an opposition brief, in response to which the Receiver may file a reply brief. The order also provides that, "Upon a showing of good cause, the Court may order limited discovery concerning the particular asset."
Additionally, if "the Court determines there is a disputed issue(s) of fact concerning the disgorgement of a particular asset, the Court shall set an evidentiary hearing to resolve the issue(s)." According to this standard, the court may only grant a motion for disgorgement where material facts are in dispute if the record as a whole could not lead a rational trier of fact to find that the assets at issue are not held in constructive trust for EIMT, or more specifically, for the receivership of EIMT assets. This cannot be decided based upon whether an interested party acted in good faith in its communications with the Receiver. When the Receiver cannot meet this burden, the court shall order an evidentiary hearing to resolve any disputed facts.
The court notes that the court may consider whether an interested party acted in good faith when determining whether there is good cause for discovery.
III. ANALYSIS
A. Motion to Continue
Callahan filed a motion to continue the Receiver's Motion for Disgorgement several days after he filed an opposition to Receiver's motion. Despite the unusual chronology of Callahan's filings, the court will first decide his motion to continue. For the reasons discussed below, the court denies the motion to continue.
Callahan moves for a 60 day continuance of the Receiver's motion for disgorgement so that he can hire an attorney and conduct discovery. The court is not persuaded by Callahan's request for a continuance to hire an attorney. First, Callahan is an attorney; second, Callahan has been aware of the Receiver's demands to remit the money he obtained for the CMO since at latest July 23, 2009, Receiver's Exhibit 11; third, Callahan has been aware of the investors' demands to remit the money or the CMO since at latest January 2009, Declaration of Bruce Davis in Support of Receiver's Reply at ¶ 2; fourth, despite being a sophisticated party, with knowledge of the legal claims of EIMT to the funds or the CMO for nearly a year, Callahan did not retain counsel; and finally, Callahan submitted an opposition to the Receiver's motion. As such, it appears to the court that Callahan is merely attempting to delay proceedings, and the court denies his request for a continuance so that he can retain counsel.
Callahan also requests a continuance so that he may conduct limited discovery as to the connection between EIMT and Veritas. Callahan contends that he is entitled to such discovery so that he and Tucker can deliver the CMO to EIMT. Interested parties, however, are only entitled to discovery when they can show good cause for such discovery. This issue will be resolved in the evidentiary hearing ordered below. As such, Callahan is not entitled to a continuance on this ground.
At the same time, Callahan reports that Tucker is no longer communicating with him.
Callahan also mentions in his motion that there are disputed facts. This issue will also be resolved in the evidentiary hearing, and thereby does not merit a continuance. Accordingly, Callahan's motion for a continuance is denied. The court will rule on the motion for disgorgement at this time.,
The Court will consider Callahan's opposition as if timely filed.
Callahan also alludes to due process concerns in his motion. The Receiver interprets this as a claim challenging the summary proceeding. If it is such a challenge, Callahan's concerns will be resolved through the order for an evidentiary hearing.
B. Motion to Order Disgorgement of $2.0 Million
i. Collateralized Mortgage Obligation
The Receiver and Callahan agree that Veritas transferred $2.0 million in December 2008. Callahan was wired $125,000, and Tucker was wired $1.875 million. The money was transferred to purchase a Collateralized Mortgage Obligation ("CMO"). The Receiver has attempted to recover the CMO from Callahan and Tucker for several months. These efforts have not been fruitful. For this reason, the Receiver does not believe that the CMO was ever purchased, and now seeks disgorgement of the money transferred for the purported purchase of the CMO. Callahan, however, contends that the CMO was purchased, and may be delivered to the Receiver. This constitutes a material dispute of fact, which is dispositive as to whether the $2.0 million should be disgorged from Callahan and accordingly, the court orders an evidentiary hearing as to that issue.
ii. Joint and Several Liability
If the trier of fact concludes either that the CMO does not exist or that a CMO exists, yet is not legitimate, the transaction would appear to be fraudulent. The elements of a claim for intentional misrepresentation under California law are (1) misrepresentation (a false representation, concealment or nondisclosure), (2) knowledge of falsity, (3) intent to defraud (to induce reliance), (4) justifiable reliance, and (5) resulting damage. Agosta v. Astor, 120 Cal. App. 4th 596, 603 (2004). If the CMO was never purchased, there appears to be no question as to whether EIMT, through its subfund Veritas, experienced damage as a result of the statements that the CMO was purchased with its assets and Callahan has not argued that EIMT did not justifiably rely upon such statements. Moreover, it seems apparent that knowingly false statements were made to EIMT with the intent to defraud it of $2.0 million if the CMO does not exist or is not legitimate.
A question that remains is what Callahan's involvement was in this transaction. It is undisputed that Callahan sent an email to EIMT which demonstrated his involvement in the asserted multi-stage process of purchasing the CMO. However, it appears to the court that Callahan argues that he was not aware of the falsity of the statements he made concerning the purchase of the CMO and that he lacked the intent to defraud EIMT. The Receiver, as should be obvious, contends that Callahan was aware of the falsity of his statements and that he intended to defraud EIMT. This constitutes a disputed fact, which is determinative as to whether Callahan is a joint tortfeasor and, thereby, should be held jointly and severally liable for the entire $2.0 million.See Expressions at Rancho Niguel Assoc. V. Ahmanson Developments, Inc., 86 Cal. App. 4th 1135, 1139 (Cal. Ct. App. 2001) ("Where multiple tortfeasors are responsible for an indivisible injury suffered by the plaintiff, each tortfeasor is jointly and severally liable to the plaintiff for those damages and thus may be held individually liable to the injured plaintiff for the entirety of such damages."). Consequently, the court orders an evidentiary hearing to determine whether Callahan knew that the statements he made to EIMT concerning the purchase of the CMO were false and whether Callahan intended to defraud EIMT if it is shown that the CMO was never purchased and/or illegitimate.
Callahan also claims that he was only a facilitator in introducing Veritas and Tucker. As such, he claims to be limited to return of the $125,000. That, too, is to be heard at the evidentiary hearing.
IV. CONCLUSION
For the foregoing reasons, the court orders that Callahan's motion for a continuance is DENIED.
The court orders Tucker to disgorge $2.0 million received from Veritas. The court further orders that the evidentiary hearing is referred to Magistrate Judge Dale A. Drozd pursuant to Local Rule 302(a). Judge Drozd will confer with Callahan, Arcanum Equity Fund, LLC, Vestium Equity Fund, LLC, and Vestium Management Group, LLC, the Receiver, and set a date and time for the hearing or hearings as well as entertain any motions demonstrating good cause to conduct limited discovery.
The court is also ordering an evidentiary hearing on the motion to order disgorgement of funds from Arcanum/Vestium, Doc. No. 164. Arcanum Equity Fund, LLC, Vestium Equity Fund, LLC, and Vestium Management Group, LLC opposed this motion. As here, the court cannot resolve the motion without an evidentiary hearing. The transactions at issue in Vestium/Arcanum are somewhat related to those at issue here. For these reasons, Judge Drozd shall confer with parties for both motions and determine at his discretion whether to hold separate or combined evidentiary hearings.
IT IS SO ORDERED.