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United States v. Elk Associates Funding Corp.

United States District Court, Second Circuit

April 24, 2013

UNITED STATES OF AMERICA, on behalf of its agency, the United States Small Business Administration
v.
ELK ASSOCIATES FUNDING CORP., Defendant. Plaintiff,

PREET BHARARA, United States Attorney for the Southern District of New York LOUIS A. PELLEGRINO Assistant United States Attorney New York, New York

CONSENT ORDER APPOINTING SBA AS PERMANENT LIQUIDATING RECEIVER OF DEFENDANT ELK ASSOCIATES FUNDING CORP.

D.L. COTE, District Judge.

This cause came upon the Complaint of the United States of America on behalf of its agency, the United States Small Business Administration ("SBA"), for the appointment of SBA as permanent, liquidating receiver of ELK Associates Funding Corp. ("ELK"). After careful consideration,

IT IS HEREBY ORDERED, ADJUDGED AND DECREED:

Pursuant to the provisions 15 U.S.C. §687c, this Court hereby takes exclusive jurisdiction of ELK and all of its assets and property, of whatever kind and wherever located, and the United States Small Business Administration ("SBA") is hereby appointed Receiver ("Receiver") of ELK to serve without bond until further order of this Court. The Receiver is appointed for the purpose of marshaling and liquidating all of ELK's assets and satisfying the claims of creditors therefrom in the order of priority as determined by this Court.

2. The Receiver shall have all powers, authorities, rights and privileges heretofore possessed by the officers, directors, managers, or principals of ELK under applicable state and federal law, by the Articles of Incorporation, Certificate of incorporation., Charter and/or By-Laws of said limited corporation, in addition to all powers and authority of a receiver at equity, and all powers and authority conferred upon the Receiver by the provisions of 15 U.S.C. § 687c and 28 U.S.C. § 754. The trustees, directors, officers, managers, principals, employees, investment advisors, accountants, attorneys and other agents of ELK are hereby dismissed and their powers relating to ELK are hereby suspended. Such persons and entities shall have no authority with respect to ELK's operations or assets, except to the extent as may hereafter be expressly granted by the Receiver. The Receiver shall assume and control the operation of ELK and shall pursue and preserve all of its claims.

3. The Receiver is entitled to take immediate possession of all assets, bank accounts or other financial accounts, books and records and all other documents or instruments relating to ELK. The past and/or present officers, directors, managers, principals, management company, agents, trustees, attorneys, accountants, and employees of ELK, as well as all those acting in their place, are hereby ordered and directed to turn over to the Receiver forthwith all books, records, documents, accounts and all other instruments and papers of and relating to ELK and all of ELK's assets and all other assets and property of the corporation, whether real or personal. The former officers and/or managers of ELK shall furnish a written statement within five (5) days after the entry of this Order, listing the identity, location and estimated value of all assets of ELK, a list of all agents, employees (and job titles thereof), other personnel, attorneys, accountants and any other agents or contractors of ELK, as well as the names, addresses and amounts of claims of all known creditors of ELK. Within thirty (30) days following the entry of this Order, the former officers and/or managers of ELK shall also furnish a written report describing all assets. All persons and entities having control, custody or possession of any assets or property of ELK are hereby directed to turn such assets and property over to the Receiver.

4. The Receiver shall promptly give notice of its appointment to all known officers, managers, management companies, principals, directors, agents, employees, shareholders, creditors, debtors, and investors of ELK, as the Receiver deems necessary or advisable to effectuate the operation of the receivership. All persons and entities owing any obligation, debt, or distribution to ELK shall, until further ordered by this Court, pay all such obligations in accordance with the terms thereof to the Receiver and its receipt for such payments shall have the same force and effect as if ELK had received such payments.

5. The Receiver is hereby authorized to open such Receiver's bank accounts, at banking or other financial institutions, to extend credit on behalf of ELK, to utilize SBA personnel, and to employ such other personnel as it may deem necessary to effectuate the operation of the receivership including, but not limited to, attorneys, accountants, consultants and appraisers, and is further authorized to expend receivership funds to compensate such personnel in such amounts and upon such terms as the Receiver shall deem reasonable in light of the usual fees and billing practices and procedures of such personnel. The Receiver is not required to obtain Court approval prior to the disbursement of receivership funds for payments to personnel employed by the Receiver or for expenses that the Receiver deems advantageous to the orderly administration and operation of the receivership. In addition, the Receiver is authorized to reimburse SBA for travel expenses incurred by SBA personnel in the establishment and administration of the receivership. The Receiver may, without further order of this Court, transfer, compromise, or otherwise dispose of any claim or asset in the ordinary course of business, other than real estate.

6. ELK's past and/or present officers, managers, management companies, directors, principals, agents, attorneys, shareholders, employees, accountants, debtors, creditors, and any other appropriate persons or entities (including without limitation, the defendant's portfolio of small business concerns and financial institutions doing business with defendant and/or defendant's portfolio of small business concerns) shall answer under oath to the Receiver all questions which the Receiver may put to them and produce any documents as required by the Receiver regarding the business of said corporation, or any other matter relevant to the operation or administration of the receivership or the collection of funds due to ELK. In the event that the Receiver deems it necessary to require the appearance of the aforementioned persons or entities, the Receiver shall make its discovery request(s) in accordance with the Federal Rules of Civil Procedure.

7. The parties or prospective parties to any and all civil legal proceedings wherever located, including, but not limited to arbitration proceedings, bankruptcy or foreclosure actions, default proceedings, or any other proceedings involving (i) ELK, (ii) any assets of ELK, (iii) the Receiver for ELK or (iv) ELK's present or past officers, directors, managers, or principals to the extent said civil legal proceedings involve any action taken by them while acting in their official capacity with ELK, are enjoined from taking any action, including discovery, commencing or continuing any legal proceeding of any nature without further order of this Court.

8. All civil legal proceedings wherever located, including arbitration proceedings, foreclosure activities, bankruptcy actions, or default proceedings, but excluding the instant proceeding, involving (i) ELK, (ii) any assets of ELK, (iii) the Receiver for ELK or (iv) ELK's present or past officers, directors, managers, or principals to the extent said civil legal proceedings involve any action taken by them while acting in their official capacity with ELK, are stayed in their entirety, and all courts having any jurisdiction thereof are enjoined from taking or permitting any action in such proceedings until further Order of this Court.

9. Further, as to a cause of action accrued or accruing in favor of ELK against a third person or party, any applicable statute of limitation is tolled to the extent allowed by applicable law during the period in which this injunction against commencement of legal proceedings is in effect as to that cause of action.

10. ELK and its past and/or present officers, directors, managers, management companies, principals, agents, employees or other persons or entities acting in concert or participating therewith are hereby prohibited and enjoined from either directly or indirectly taking any actions or causing any such action to be taken which would (a) dissipate the assets and/or property of ELK to the detriment of ELK or of the Receiver appointed in this cause, including, but not limited to, destruction of corporate records, or (b) violate the Small Business Investment Act of 1958, as amended, 15 U.S.C. 661 et. seq., or the regulations promulgated thereunder, ("Regulations"), 13 C.F.R. § 107.1 et. SCQ.

11. The Receiver is authorized to borrow on behalf of ELK, from the SBA, up to $1, 000, 000 and is authorized to cause ELK to issue Receiver's Certificates of Indebtedness in the principal amounts of the sums borrowed, which certificates will bear interest at or about 10 percent per annum and will have a maturity date no later than 18 months after the date of issue. Said Receiver's Certificates of Indebtedness shall have priority over all other debts and obligations of ELK, excluding administrative expenses of the Receivership, whether currently existing or hereinafter incurred.

12. The United States Small Business Administration is further entitled to a judgment against ELK in the total sum of $21, 175, 000.00 as of October 26, 2012, plus accrued interest through the date of entry of this Order (as reduced by previous principal and interest payments received by SBA), plus post judgment interest pursuant to 28 U.S.C. § 1961 as of the date of entry of this Order.

13. This Court determines and adjudicates that ELK has violated the Act and the Regulations as alleged in the Complaint filed against ELK in the instant action, and that SBA is entitled to the relief requested in its complaint.

SO ORDERED.

COMPLAINT FOR RECEIVERSHIP AND INJUNCTION

Plaintiff, the United States of America, on behalf of its agency, the United States Small Business Administration, by its attorney Preet Bharara, United States Attorney for the Southern District of New York, alleges upon information and belief as follows:

PRELIMNARY STATEMENT

1 This is a civil action brought by the United States on behalf of the Small Business Administration (hereinafter, "SBA, " "Agency" or "Plaintiff"), to enforce the terms of a settlement agreement, including entry of a Consent Order of Receivership.

PARTIES

2. Plaintiff SBA's central office is located at 409 Third Street, S.W., Washington, DC 20416.

3. Defendant, Elk Associates Funding Corporation (hereinafter "Elk" or "Licensee"), maintains its principal place of business at 747 Third Avenue, 4th Floor, New York, NY 10017.

4. Elk's sole shareholder is AmeriTrans Capital Corporation.

JURISDICTION AND VENUE

5. Jurisdiction is conferred on this Court by virtue of the Small Business Investment Act of 1958, as amended (hereinafter, the "Act"), Sections 308(d), 311, and 316; 15 U.S.C. §§687(d), 687c, 687h; the Small Business Act, 15 U.S.C. §634(b)(1); and 28 U.S.C. §1345.

6. Venue is proper under 15 U.S.C. §§ 687(d), 687h and 28 U.S.C. §1391(b).

STATUTORY FRAMEWORK AND FACTUAL BACKGROUND

7. On or about July 24, 1980, Elk was licensed by SBA as a Small Business Investment Company ("SBIC") pursuant to Section 301(c) of the Act, 15 U.S.C. §681(c) as SBA License 02/02-5377, solely to do business under the provisions of the Act and the Regulations.

8. Section 308(c) of the Act, 15 U.S.C. §687(c), empowers SBA to prescribe regulations to carry out the provisions of the Act and to govern the operations of SBICs. SBA has duly promulgated such regulations, which are codified at Title 13 of the Code of Federal Regulations, Part 107 (the "Regulations").

9. Section 303 of the Act, 15 U.S.C. §683, authorizes SBA to provide financing to licensed SBICs. Pursuant to Section 303 of the Act, 15 U.S.C. §683, SBA provided funds to Elk through the purchase and/or guaranty of debentures, a form of leverage, as those terms are defined under the Regulations.

10. Currently, there remains $21, 075.000 in outstanding debenture leverage.

11. The debentures described in paragraphs 9-10, above, are expressly subject to and incorporated by reference in the Regulations, including but not limited to 13 C.F.R. §§107.1810, 1830-1850 and §107.507.

12. Section 308(d) of the Act, 15 U.S.C. §687(d), provides that upon determination and adjudication of noncompliance or violation of the Act or the regulations, all of the rights, privileges and franchises of a licensee, such as Elk, may be forfeited and the company may be declared dissolved.

13. Section 311 of the Act, 15 U.S.C. §687c, provides that upon a determination by SBA that a licensee, such as Elk, has engaged in or is about to engage in any acts or practices which constitute or will constitute a violation of the Act or of any rule or regulation promulgated pursuant to the Act, or of any order issued under the Act, then SBA may make application for an injunction, and such Court shall have jurisdiction of such action and grant a permanent or temporary injunction, or other relief without bond, upon a showing that such licensee has engaged in or is about to engage in any such acts or practices. The Court is authorized to appoint SBA to act as receiver for such licensee.

14. On or about March 20, 2012, Elk filed a complaint and motion for preliminary injunction and temporary restraining order in the United States District Court for the District of Columbia against the U.S. Small Business Administration styled Elk Associates Funding Corporation v. U.S. Small Business Administration et. al, Case No. 12-cv-00438 ("the Action").

15. On or about October 31, 2012, Elk and SBA entered into a Settlement Agreement ("the Agreement") and filed a Joint Stipulation of Dismissal of the Action.

16. As partial consideration for the Settlement Agreement, Elk agreed that on or before the 45th day after execution of the Agreement, Elk would tender $7, 900, 000 via wire transfer in one lump sum in full satisfaction of Elk's outstanding debenture leverage.

17. Via written agreement executed on or about December 7, 2012, SBA and Elk agreed to extend the date for payment of the $7, 900, 000 referenced in paragraph 15, above, through January 7, 2013.

18. As partial consideration for the Agreement, Elk agreed to execute a Consent Order of Receivership to be filed by SBA only in the event Elk failed to make its $7, 900, 000 payment as required under the Agreement.

19. To date, Elk has failed to make its payment as agreed.

20. To date, Elk has failed to honor the terms of the Agreement.

COUNT ONE

BREACH OF CONTRACT

21. Paragraphs 1 through 20 are incorporated herein by reference.

22. Elk's failure to make payment as agreed and failure to honor the terms of the Agreement has injured SBA in the amount of at least $7, 900, 000.

23. Elk's failure to honor the terms of the Agreement is a violation of 13 C.F.R. 107.507 (a), Nonperformance, as Elk failed to perform under a written agreement with SBA.

23. As a consequence of Elk's failure to make its payment and honor its agreement, SBA is entitled to entry of the Consent Order of Receivership executed by Elk.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff prays as follows:

A. That this Court enter the Consent Order of Receivership and grant injunctive relief, both preliminary and permanent in nature, restraining and enjoining Elk, its past or present general partner(s), managers, management company, directors, officers, agents, employees, and other persons acting in concert therewith from: (1) making any disbursements of Elk's funds; (2) using, investing, conveying, disposing, executing or encumbering in any fashion any funds or assets of Elk's, wherever located; and (3) further violating the Act or the regulations promulgated thereunder.

B. That this Court determine and adjudicate Elk's noncompliance with and violation of the Act and the Regulations promulgated thereunder.

C. That this Court, pursuant to 15 U.S.C. §687c, take exclusive jurisdiction of Elk and all of its assets, wherever located, appoint SBA as receiver of Elk for the purpose of marshaling and liquidating the assets of Elk and satisfying the claims of creditors as approved by this Court, and such other relief as contained in the Consent Order filed herewith.

D. That this Court enter judgment in the amount of $20, 806, 071.32 (as of February 4, 2013), consisting of principal in the amount of $20, 780, 332.33 in principal plus $25, 738.99 in interest through February 4, 2013, until the date of judgment, together with post judgment interest pursuant to 28 U.S.C. § 1961 as of the date judgment is entered.

E. That this Court grant such other relief as may be deemed just and proper.


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