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United States v. Trusty Capital

January 5, 2007

UNITED STATES OF AMERICA, PLAINTIFF,
v.
TRUSTY CAPITAL, INC., DEFENDANT.



The opinion of the court was delivered by: Kenneth M. Karas, District Judge

OPINION and ORDER

Plaintiff United States of America brings this action on behalf of the Small Business Administration ("SBA"), alleging violations of the Small Business Investment Act, as amended, codified at 15 U.S.C. §§ 661 et seq. Plaintiff alleges that Trusty Capital, Inc. ("Defendant" or "Trusty") has, in violation of applicable SBA regulations, failed to timely repay a $1,000,000 debenture guaranteed by SBA, issued loans without sufficient documentation and without regard to SBA valuation guidelines, and that Defendant continues to be in default on a preferred stock obligation of $1,025,000, not inclusive of any additional dividend obligations or interest. Plaintiff filed the Present motion on November 11, 2006, seeking to (1) preliminarily and permanently enjoin Defendant from violating the Small Business Investment Act of 1958 and regulations promulgated thereunder; (2) take exclusive jurisdiction of Defendant and all its assets; (3) preliminarily and permanently enjoin the present officers and directors of Defendant from disposing of its assets; and (4) appoint Plaintiff as permanent receiver of Defendant. Defendant opposes any appointment of a receiver. For the reasons stated in this Opinion, Plaintiff's Motion for Injunctive Relief and Appointment of Receiver for Trusty is GRANTED.

I. Background

Trusty Capital, Inc. is a Specialized Small Business Investment Corporation ("SSBIC") that was incorporated in New York on September 15, 1987. (Pl.'s Mem. of Law in Supp. of Pl.'s Mot. for Inj. Relief and Appointment of Receiver ("Pl.'s Mem.") 3; Aff. of Yungduk Hahn ¶ 2 ("Hahn Aff.").) Defendant's articles of incorporation state that Defendant "shall further operate in the manner, have the powers and responsibilities, and be subject to the limitations provided by the [Small Business Investment Act of 1958] and the regulations issued by the Small Business Administration thereunder." (Aff. of Jerry W. Williamson ("Williamson Aff.") Attach. 2 at 2-3.) Defendant applied for a license to operate as a SSBIC in May 1989, which the Small Business Administration granted. (Williamson Aff. ¶ 9; Hahn Aff. ¶ 2.) SSBICs are companies similar to banks or other financial institutions which provide venture capital to qualified small independent businesses. (Williamson Aff. ¶ 6.) Defendant's primary business is investing in Korean-owned businesses in the New York City metropolitan area. (Hahn Aff. ¶ 7.)

On February 12, 1991, SBA financed Defendant by purchasing 1,025,000 shares of Defendant's preferred stock at a par value of $1.00 per share ("the Preferred Stock"). (Williamson Aff. ¶ 10, Attach. 3.) At that time, SBA regulations required that any preferred securities purchased by SBA be redeemed "not later than fifteen years from the date of issuance." 13 C.F.R. § 107.205 (1991).*fn1

On March 24, 1993, SBA provided further financing to Defendant by agreeing to guarantee the timely payment of all principal and interest scheduled on a $1,000,000 debenture ("the Debenture") issued by Defendant. (Pl.'s Mem. 3-4; Hahn Aff. ¶ 3.) The Debenture was originally scheduled to mature on March 1, 2003. (Williamson Aff. Attachs. 3-4.) Defendant failed to pay the Debenture on that date, and SBA paid $1,000,000 as guarantor.*fn2 (Id. ¶ 15.)

On September 2, 2005, SBA notified Defendant by letter that Defendant had failed to pay the Debenture and demanded full payment, plus interest, within fifteen days. Defendant wired $300,000 to SBA on September 15, 2005, but failed to cure the entire debt within the required time period. SBA notified Defendant, by letter dated December 2, 2005, that, according to its authority under 13 C.F.R. § 107.203(b)(1),*fn3 it was declaring Defendant's entire indebtedness to SBA, including the remaining balance of the Debenture and the Preferred Stock, immediately due and payable. (Id. ¶ 17.) Although Defendant continued to transfer funds to SBA to pay off the Debenture, by May 2006 it still had an outstanding balance of over $300,000 on the Debenture and had failed to repay any of the Preferred Stock. By letter dated May 4, 2006, SBA notified Defendant that it was being transferred to "liquidation status." (Id. ¶ 18.) On or around September 1, 2006, Defendant made the final payment on the Debenture, having ultimately repaid a total value of $1,143,245 on the Debenture, inclusive of interest. Defendant still had made no payments on the Preferred Stock. (Id. ¶ 19; Hahn Aff. ¶ 5.)

As of October 6, 2006, SBA claims it is owed (1) the principal on the Preferred Stock in the amount of $1,025,000; (2) accumulated dividends on the Preferred Stock of $563,365.41; and (3) a per diem dividend accrual of $112.33 for each day after October 5, 2006.

In addition to the facts set forth above, Plaintiff also alleges that Defendant engaged in SBA regulatory violations by issuing three loans which it could not document were for business purposes and by failing to adhere to SBA valuation guidelines when issuing its loans. (Am. Compl. ¶ 39; Pl.'s Mem. 6-7.) However, Plaintiff has submitted no admissible evidence of these regulatory violations other than the allegations in its Amended Complaint.

Plaintiff filed the Complaint in this action on October 5, 2006. On October 10, 2006, Plaintiff filed an Amended Complaint. Plaintiff moved for injunctive relief and the appointment of receiver on November 11, 2006.*fn4

II. Discussion

A. Motion for Preliminary Injunction

1. Standard of Review

Title 15, United States Code, section 687c controls the issuance of injunctions for companies licensed by SBA. The standard for injunctions issued under section 687c differs from the traditional preliminary injunction test of a probability of success on the merits and irreparable harm. See United States v. Vanguard Inv. Co. (Vanguard I), 667 F. Supp. 257, 261 (M.D.N.C. 1987) ("The Court observes that the usual requirements for preliminary ...


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