Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.


United States District Court, S.D. New York

September 2, 2004.


The opinion of the court was delivered by: RICHARD CASEY, District Judge


The Securities and Exchange Commission ("SEC") brings this action against Mark Yagalla and two of his entities, Ashbury Fund and Ashbury Management, alleging that they defrauded investors of tens of millions of dollars. Now before the Court is nonparty movant 838 Associates LLC's ("Associates'") motion to modify the preliminary injunction order to exclude $1,043,000 from the receivership assets so that it may be deemed Associates' property. The Receiver and the SEC have opposed the modification request. For the reasons set forth below, Associates' motion is DENIED.


  A. Procedural History

  On October 17, 2000, Yagalla was arrested for securities fraud; on the same day the SEC commenced this action against Yagalla and two of his entities for violation of section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a); section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b); Rule 10b-5, 17 C.F.R. § 240.10b-5; and sections 206(1) and (2) of the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-6(1) and (2). On December 12, 2001, Yagalla pled guilty to one-count of securities fraud and was subsequently sentenced to 65 months of imprisonment. Yagalla remains incarcerated at the Pensacola FPC.

  As alleged in the complaint, Yagalla, acting through one or more entities, defrauded investors of substantial sums of money, with fabricated stories of his past financial successes. Some of the "investments" were used to establish a Ponzi-scheme, while a vast portion was used to support Yagalla's lavish lifestyle.

  Finding that the SEC was likely to succeed on its claims, on October 17, 2000, the Court granted a temporary restraining order freezing Yagalla's assets. Ten days later, the Court entered a preliminary injunction, mandating that:

(a) This Court shall have sole and exclusive jurisdiction over the Defendants' assets;
(b) Any Disputes relating to the right, title, and property of any of the Defendants' assets shall be adjudicated exclusively in this Court; and
(c) No person or entity, including, but not limited to, equity holders, former employees, directors, officers, or other affiliates or associates of Defendants, shall take any action seeking to affect the Defendants' assets, the proceeds thereof, or the rights, title or interest of any person therein, in any way, nor interfere in any way with the exclusive jurisdiction of this Court over the Defendants' assets, provided however, that upon application to this Court, on notice to the Commission and the receiver, any interested party may show cause why this paragraph should be modified.
(Preliminary Injunction ¶ IX, Ex. C to Affidavit of Eugene R. Licker [Licker Aff.].)

  On November 9, 2000, the Court appointed Michael F. Armstrong as Receiver and charged him with identifying, marshaling, and preserving receivership property. (Restated Receivership Order ¶ I(A)-(H), Ex. D to Licker Aff.) Under the Receivership Order, "receivership assets" are defined as:

all assets and property . . . of the Defendants, and all of the Defendants' rights and powers with respect thereto, including, without limitation, all assets, funds, or other properties (including money, real or personal property, securities, commodities, choses in action or other property of any kind whatsoever) of Defendants, currently held by them or under their control, whether held in any of their names or for any of their direct or indirect beneficial interest wherever situated. . . .
(Id. ¶ I(A).)

  B. Purchase Agreement for the Condominium

  As part of Yagalla's lavish lifestyle, on August 14, 2000, he entered into a purchase agreement with Associates for a Manhattan residential condominium and three storage units for a total sale price of $10,430,000. The purchase agreement required Yagalla to make two separate down payments of $1,043,000 each. Yagalla only made the first of the payments, which was delivered to Rosenman & Colin LLP, as escrow agent. Although Yagalla provided a check to Rosenman to cover the second down payment, it was not backed by sufficient funds.

  Yagalla was initially scheduled to close on the condominium on October 10, 2000. The closing, however, was postponed until October 18, 2000. Yagalla, however, failed to close on the condominium on that date as well. On the day of the anticipated closing, Associates learned from a New York Times article that Yagalla had just been arrested for securities fraud. On October 18, 2000, Associates' attorneys notified Yagalla that he had defaulted under the terms of the Agreement because he failed to appear at the closings, did not pay the balance of the purchase price, and failed to pay the additional down payment. Associates therefore canceled the Agreement, notifying Yagalla that he had thirty days to cure the defaults, otherwise Associates would retain the down payment and any interest earned on it as liquidated damages. Yagalla never cured the defaults. Pursuant to a stipulation reached among Associates, the Receiver, the SEC, and Yagalla, on August 24, 2001, Associates sold the condominium and two of the storage units for $9,000,000. On October 3, 2001, Associates sold the remaining storage unit for $25,000. Associates now seeks an Order directing the Receiver to turn over to it the $1,043,000.00 down payment and accumulated interest earned upon it.


  The central issue posed by Associates' motion is whether it owned the down payment as of October 17, 2000, the date on which the Court ordered a temporary freeze on Yagalla's assets. If Associates possessed the legal title and rights to the down payment on this date, the funds would not constitute receivership property and should be dispersed to Associates.

  The Purchase Agreement delineates certain events that could amount to a default. Among them are the purchaser's failure to pay either an additional down payment or the balance of the purchase price. (Purchase Agreement § 14.1(a), Ex. B to Affidavit of Bret S. Bobo [Bobo Aff.].) The Purchase Agreement also provided that, in the event of a default by the purchaser, Associates could cancel the Agreement and keep the down payment, with interest, as liquidated damages. The Purchase Agreement reads:

Upon the occurrence of an Event of Default, the Sponsor, in its sole discretion, may elect by notice to the Purchaser to (i) cancel this Agreement or (ii) seek specific performance. If the Sponsor elects to cancel, the Purchaser shall have 30 days from the giving of the notice of cancellation to cure the specified default. If the default is not cured within such 30 days, then this Agreement is deemed cancelled, and the Sponsor shall have the right to retain, as and for liquidated damages, the entire Down Payment . . . and any interest earned on the Down Payment. . . .
(Id. § 14.2.) The curative clause in the Purchase Agreement explicitly afforded Yagalla a right to cure any default within thirty days from Associates' notice of cancellation and that "[i]f the default is not cured within such 30 days, then . . . the Sponsor shall have the right to retain . . . the entire Down Payment." (Id.) In fact, on October 18, 2000, when Associates notified Yagalla that it was cancelling the Purchase Agreement, it notified him that in the event that he failed to cure the defaults it would retain the down payment held in escrow as liquidated damages. (Letter dated Oct. 18, 2000, Ex. G to Bobo Aff.) Yagalla therefore had until November 20, 2000 to cure the defaults. The Court entered its temporary restraining order and freeze on October 17, 2000. Yagalla's time to cure the defaults — the condition precedent to breaking the escrow — had not expired as of October 17, 2000.

  As a result, as of October 17, 2000, Yagalla retained legal title to the down payment. See Press v. Marvalan Indus., Inc., 422 F.Supp. 346, 349 (S.D.N.Y. 1976); In re Ellison Assoc., 13 B.R. 661, 670 (Bankr. S.D.N.Y. 1981); 55 N.Y. Jur. 2d Escrow § 9 (1986). Moreover, Yagalla retained a contingent right to repossess the down payment. See 55 N.Y. Jur. 2d Escrow § 8 (1986). In addition, the Attorney General regulations expressly referred to in the Purchase Agreement demonstrate that the down payment must be considered Yagalla's property or asset at the time that the Court entered the temporary restraining order. See N.Y. Gen. Bus. Law § 352-h; N.Y. Comp. Codes R. & Regs. tit. 13, § 22.3, Format and Content, subparagraph (k)(2)(xiii). For these reasons, the down payment constitutes a receivership asset.

  Accordingly, because Yagalla still owned the down payment "at the hour of the signing of the freeze order" it was subject to the temporary restraining order and constitutes receivership property. See SEC v. Credit Bancorp, Ltd., 109 F.Supp. 2d 142, 144 (S.D.N.Y. 2000); see also SEC v. Princeton Economic Int'l Ltd., 84 F. Supp. 443, 446 (S.D.N.Y. 2000).*fn1 III. CONCLUSION

  For the foregoing reasons, the $1,043,000 down payment is receivership property. Associates' motion, therefore, is DENIED.

  So Ordered.

Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.