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Securities and Exchange Commission v. Byers

United States District Court, S.D. New York

December 22, 2014

STEVEN BYERS et al., Defendants.

FRESHFIELDS BRUCKHAUS DERINGER U.S. LLP Jonathan W. Ware, Esq. Tyler S. Clarkson, Esq., Washington, D.C., Attorneys for Receiver Timothy J. Coleman

BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, P.C. John H. Rowland, Esq., Jaime DeRensis, Esq., Nashville, Tennessee, and DILWORTH PAXSON, LLP, Keith N. Costa, New York, New York, Attorneys for Regions Bank.


DENNY CHIN, Circuit Judge.

In this securities fraud case, Regions Bank ("Regions") seeks turnover of "excess cash" generated by properties owned by Tennessee Office Holdings, LLC ("TOH") pursuant to the terms of an agreement executed by the court-appointed receiver Timothy J. Coleman (the "Receiver") and Regions on March 18, 2014. Additionally, Regions requests that the Receiver pay the amounts due for the 2013 property taxes, which were assessed for a time period when the properties were under the Receivership's control. Finally, Regions requests reimbursement of their attorneys' fees in pursuing this matter.

I conducted an evidentiary hearing on October 6, 2014, at the conclusion of which I reserved decision. (Tr. 105).[1] For the reasons that follow, Regions' requests for the turnover of excess cash and payment of 2013 property taxes is GRANTED to the extent set forth below, and its request for attorneys' fees is DENIED. The following constitute my findings of fact and conclusions of law.


1. The Receivership

On August 11, 2008, the Securities and Exchange Commission ("SEC") brought this action against Steven Byers, Joseph Shereshevsky, and Wextrust affiliated entities, seeking, inter alia, the appointment of a receiver to exercise control over the assets and property interests of Wextrust, including those of TOH. (Stip. ¶ 9). This Court entered its order appointing the Receiver on September 11, 2008. (Id. ¶ 10).

As part of his duties, the Receiver and his advisors reviewed, verified, and recognized the claims of more than 1, 200 investors, 100 unsecured creditors, and numerous secured creditors, including Regions, as having claims related to the assets under his control. (Id. ¶ 12). The combined claims totaled approximately $525 million and the mortgaged debt held by secured creditors was approximately $285 million. (Id. ¶ 13).

On March 27, 2009, the Receiver submitted his Proposed Plan of Distribution, Dkt. No. 243, and the Court later approved it. (Dkt. No. 428 (the "Distribution Opinion")). The Court limited secured creditors to "recourse against specific collateral" and secured creditors were only to receive payment from the "proceeds of that collateral." (Distribution Opinion at 8). The Court also limited the possibility of a deficiency specifically to "the property-specific limited liability holding company, " which in effect meant "the Plan proposes that the deficiency claims [of secured creditors] be excluded entirely from the distribution." (Id. at 13). The Court approved this approach in the Distribution Opinion in the face of objections from various parties. (Id. at 38). For secured creditors like Regions, this meant that certain recourse loans became non-recourse. (Stip. ¶ 16).

2. The TOH and Regions Properties

Regions was and remains a secured creditor in relation to certain real property assets of the Wextrust entities. (Id. ¶ 15). At the start of the case, Regions was owed more than $70 million as a result of loans made to Wextrust affiliates to secure two hotels, two industrial buildings, two warehouses, 13 office buildings, and an office condominium development (the "Regions Properties"). (Id. ¶ 15).

On June 30, 2006, TOH financed 13 commercial properties (the "TOH Properties") located across 12 counties in Tennessee through an original promissory note (the "2006 Note") in the amount of $14, 800, 000.00 securing a loan made by Regions. (Id. ¶ 2; Tr. 9). As of October 2, 2014, TOH still owed Regions principal of approximately $12, 776, 735.26. (Id. ¶ 3; see Tr. 29: approximately $12, 777, 000 as of date of hearing)).

TOH still owns the TOH Properties. (Stip. ¶ 4; Tr. 9). Prior to the start of this case in August 2008, TOH leased 12 of the TOH Properties to various divisions of the State of Tennessee. (Stip. ¶ 5). None of the leases was terminated during the receivership and most remain in effect subject to holdover agreements. (Id.). One of the TOH Properties was damaged by fire and the State has stopped paying rent on it, and another of the TOH Properties is vacant. (Id.; Tr. 10-11). One lease (Cookeville) was renewed contingent on certain improvements to be made by the landlord; these improvements have not been made and thus the increased rent has not taken effect. (Stip. ¶ 6; Tr. 13-14, 22-23, 31).

The Cookeville Lease also provides that the "Landlord shall be responsible for payment of all real estate taxes assessed against the Building or land on which the Building is located, as well as all applicable local, state and federal income taxes which are or may be payable by Landlord." (Stip. ¶ 7). The property tax provision contained in the Cookeville Lease is consistent with the tax provisions in the balance of the leases. (Id. ¶ 8). Under the leases, TOH, as landlord, was responsible for payment of real estate and related taxes assessed against the individual properties. (Id.).

The Regions Properties, including the TOH Properties, have been subject to the preliminary injunction entered in this case on October 24, 2008. (Id. ¶ 17, citing Dkt. No. 65). The preliminary injunction is incorporated into the Court's Receiver Order, which provided "that no person or entity, including any creditor or claimant against any of the Defendants, or any person acting on behalf of such creditor or claimant, shall take any action to interfere with the taking control, possession, or management of the assets, including, but not limited to, the filing of any lawsuits, liens or encumbrances, or bankruptcy cases to impact the property and assets subject to this order." (Receiver Order at 6). The Receiver Order did not specify an end time. (Id. ¶ 17).

The Receiver no longer controls any of the Regions Properties. (Id. ¶ 18). Each of the Regions Properties has been sold at an amount satisfying the debt to Regions, relinquished to Regions and sold for an amount below the secured debt, or, in the case of the TOH Properties, the Court lifted its anti-litigation injunction to permit Regions to have a state court receiver appointed to oversee the management and sale of the properties. (Id.).

3. The Receiver's Agreements with Regions

On June 30, 2011, Regions and the Receiver entered into an Amended and Restated Promissory Note (the "2011 Note") that amended and superseded the 2006 Note. (Id. ¶ 20; RX 16). The 2011 Note matured on June 30, 2013. (Id.). The obligations under the 2011 Note remained secured by individual Deeds of Trust with respect to each of the TOH Properties (the "Deeds of Trust"). (Id. ¶ 21). Each of the Deeds of Trust included a provision requiring the Borrower - TOH - to satisfy all property taxes assessed against each individual TOH Property. (Id.). The Deeds of Trust specified that failure to pay such taxes is an event of default under the Deeds of Trust. (Id.). The 2011 Note specified that a default under the Deeds of Trust constituted a default under the 2011 Note. (Id.).

On April 15, 2013, Regions and the Receiver entered into a Forbearance Agreement (the "2013 Agreement") in advance of the expiration of the 2011 Note. (Id. ¶ 22; RX 5). Regions contended that the borrowers under the 2011 Note were in default, but they agreed to forbear from pursuing their remedies to give the Receiver an opportunity to sell the properties. (RX 5 at 2; see Coleman Dep. at 12-13). By December 31, 2013, ...

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