PAUL S. GREWAL, Magistrate Judge.
1. Pursuant to the provisions 15 U.S.C. § 687c, this Court hereby takes exclusive jurisdiction of East Gate Private Equity Fund III, L.P. ("East Gate"), 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 ("the Receiver") of East Gate to serve without bond until further order of this Court. The Receiver is appointed for the purpose of marshaling and liquidating all of East Gate'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 directors, managers and general and limited partners of East Gate under applicable state and federal law, by the Articles of Limited Partnership, and By-Laws of said limited partnership, 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, managers, employees, investment advisors, accountants, attorneys and other agents of East Gate are hereby dismissed and the powers of any general partners are hereby suspended. Such persons and entities shall have no authority with respect to East Gate'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 East Gate 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 East Gate. The past and/or present officers, directors, agents, managers, general and limited partners, trustees, attorneys, accountants, and employees of East Gate, 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 East Gate and all of East Gate's assets and all other assets and property of the limited partnership, whether real or personal. The general partner of East Gate shall furnish a written statement within ten (10) days after the entry of this Order, listing the identity, location and estimated value of all assets of East Gate, a list of all employees (and job titles thereof), other personnel, attorneys, accountants and any other agents or contractors of East Gate, as well as the names, addresses and amounts of claims of all known creditors of East Gate. Within thirty (30) days following the entry of this Order, the general partner of East Gate shall also furnish a written report describing all assets. All persons and entities having control, custody or possession of any assets or property of East Gate 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, directors, agents, employees, shareholders, creditors, debtors, managers and general and limited partners of East Gate, as the Receiver deems necessary or advisable to effectuate the operation of the receivership. All persons and entities owing any obligation, debt, or distribution with respect to a partnership interest to East Gate 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 East Gate had received such payments.
5. The Receiver is hereby authorized to open such Receiver's accounts at banking or other financial institutions to extend credit on behalf of East Gate, 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 the 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. East Gate's past and/or present officers, directors, agents, attorneys, managers, shareholders, employees, accountants, debtors, creditors, managers and general and limited partners of East Gate, and 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 limited partnership, or any other matter relevant to the operation or administration of the receivership or the collection of funds due to East Gate. 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) East Gate (ii) any assets of East Gate, (iii) the Receiver for East Gate, and (iv) East Gate's present or past directors, general partners or managers, to the extent said civil legal proceedings involve any action taken by them while acting in their official capacity for East Gate, 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) East Gate, (ii) any of assets of East Gate, (iii) the Receiver for East Gate or (iv) East Gate's present or past general partners, directors, or managers to the extent said civil legal proceedings involve any action taken in their official capacity for East Gate, 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 East Gate against a third person or party, any applicable statute of limitation is tolled during the period in which this injunction against commencement of legal proceedings is in effect as to that cause of action.
10. East Gate and its past and/or present directors, officers, managers, general or limited partners, agents, employees and other persons or entities acting in concert or participating therewith be, and they hereby are, enjoined from either directly or indirectly taking any actions or causing any such action to be taken which would dissipate the assets and/or property of East Gate to the detriment of East Gate or of the Receiver appointed in this cause, including but not limited to destruction of corporate records, or which would violate the Small Business Investment Act of 1958, as amended, 15 U.S.C. 661
11. The Receiver is authorized to borrow on behalf of East Gate, from the SBA, up to $500,000 and is authorized to cause East Gate 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 East Gate, excluding administrative expenses of the Receivership, whether currently existing or hereinafter incurred, including without limitation any claims of general or limited partners of East Gate.
12. This Court determines and adjudicates that SBA has made a sufficient showing that East Gate has violated the Act and the Regulations, as alleged in the Complaint filed against East Gate in the instant action, to obtain the relief so requested.
13. After completing its activities in accordance with this Order, the Receiver may recommend that East Gate's license as an SBIC be revoked and that control of the limited partnership be returned to East gate's general partner and/or its designee or successor in interest.
SO ORDERED.
WHEREAS, Defendant, East Gate Private Equity Fund III, L.P. ("East Gate") is a licensee of the United States Small Business Administration ("SBA") under the Small Business Investment Act of 1958, as amended, 15 U.S.C. § 661, et seq. (the "Act");
WHEREAS, Defendant is in violation of the Act and SBA's Regulations, thereby entitling SBA to obtain a receivership and other injunctive relief against Defendant under 15 U.S.C. § 687c;
WHEREAS Defendant has agreed to entry of the Consent Order for Receivership; and
WHEREAS, the said parties desire to resolve this matter amicably without further proceedings, trial or adjudication of any issue, and do hereby stipulate as follows:
1. That this Court has jurisdiction over the subject matter of this action and over Defendant in accordance with 15 U.S.C. §§ 687(d) and 687h, and that venue is proper under 15 U.S.C. §§ 687(d), 687h, and 28 U.S.C. § 1391(b);
2. That Defendant agrees to the entry of the attached Consent Order without further proceedings;
3. That the Defendant waives findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure;
4. That Defendant waives any right or basis to contest the validity of the attached Consent Order; and
5. That the Consent Order may be presented by Plaintiff to the Court for signature and entry without further notice to Defendant; provided however the United States will provide notice of entry to Defendant.
COMES NOW Plaintiff, the United States of America, on behalf of its agency, the United States Small Business Administration, and for its cause of action states as follows:
1. This is a civil action bought by the United States on behalf of its agency, the U.S. Small Business Administration (hereinafter, "SBA," "Agency," or "Plaintiff'), whose central office is located at 409 Third Street, S.W., Washington, DC 20416.
2. Jurisdiction is conferred on this Court pursuant to sections 308(d), 311, and 316 of the Small Business Investment Act, as amended; 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.
3. Defendant, East gate Private Equity Fund III, L.P. (hereinafter "East Gate" "Licensee," or "Defendant"), is a limited partnership formed under the laws of the State of Delaware that maintains its principal place of business at 5050 El Camino Real. Suite 104, Los Altos, California 94022. The sole purpose of Defendant's partnership is to operate as a small business investment company under the Small Business Investment Act of 1958. Venue is proper under 15 U.S.C. §§ 687(d), 687h and 28 U.S.C. § 1391(b).
4. Pursuant to L.R. 3-2(c) and (e), this action is properly assigned to the San Jose Division because the Defendant's principal office is located in Santa Clara County.
5. The purpose of the Small Business Investment Act of 1958, as amended, (hereinafter the "Act") is to improve and stimulate the national economy, and small businesses in particular, by stimulating and supplementing the flow of private equity capital and long-term loan funds which small businesses need for sound financing of their operations and growth
6. Congress authorized the SBA to carry out the provisions of the Act and to prescribe regulations governing the operations of Small Business Investment Companies (hereinafter "SBIC"). SBA duly promulgated such regulations, which are set forth at Title 13 of the Code of Federal Regulations, Part 107 (hereinafter the "Regulations").
7. An SBIC is a corporation, a limited liability company, or a limited partnership organized solely for the purpose of performing the functions and conducting the activities contemplated under the Act. 15 U.S.C. § 681(a). Pursuant to the Act, SBA is authorized to license SBICs, which, although they are non-depository institutions, are financial institutions that are similar to banks, savings and loans institutions and credit unions because they provide funding directly to the public. SBICs provide venture capital to qualified small independent businesses by supplementing the flow of private equity capital, long-term funds (debt securities) and loans.
8. An SBIC has the authority to borrow money, issue securities, promissory notes, or other obligations under such conditions and limitations as regulated by SBA. SBA is authorized to provide Leverage to SBICs through the purchase, or guarantee of payment, of debentures or participating securities issued by SBICs. 15 U.S.C. §§ 683(a) and (b). Such SBA financing (defined as "Leverage" under the Regulations) is subject to the Regulations, including but not limited to the provisions of 13 C.F.R. §§ 107.1820-1850 and § 107.507.
9. In consideration for being licensed to operate as an SBIC and/or receive federal tax dollar leverage, SBICs agree to comply with the requirements of the Act and the Regulations. Each Participating Securities instrument issued by an SBIC specifically incorporates the terms of the Regulations. Thus, a violation of any regulation, including exceeding the maximum capital impairment, is a violation of the terms of the Participating Securities and is a separate violation of the Act and Regulations.
10. SBA is charged with overseeing and regulating the SBIC program. If SBA determines that an SBIC licensee has engaged, or is about to engage, in any act or practices which constitute, or will constitute, a violation of the Act or Regulations, the SBA may seek, from the appropriate United States District Court, an order enjoining such act or practices, and upon a showing by the SBA that such licensee has engaged, or is about to engage, in any such act or practices, a permanent or temporary injunction, restraining order, or other order, shall be granted without bond. In addition, the Court is authorized to appoint SBA to act as receiver for such licensee. Moreover, if an SBIC violates, or fails to comply with, any of the provisions of the Act or Regulations, all of its rights, privileges, and franchises may be forfeited and the company may be declared dissolved.
11. One of the regulatory conditions that an SBIC is subject to is "Capital Impairment" as that term is defined under the Regulations. Together, 13 C.F.R. §§ 107.1830 and 107.1850 set forth the maximum amount of Capital Impairment that an SBIC licensee may have during the forbearance period and thereafter, as applicable. A licensee that has a condition of Capital Impairment is not in compliance with the terms of its Leverage.
12. Another regulatory condition affecting licensees such as Defendant is that upon the occurrence of "Restricted Operations" as that term is defined under the Regulations, the licensee consents to SBA's right to require that all of the SBIC's private capital commitments be funded in accordance with the company's Articles. The licensee's failure to act as requested by SBA results in the licensee's consent to the appointment of SBA as Receiver for the purpose of continuing the SBIC's operations.
13. SBA licensed Defendant as an SBIC pursuant to 15 U.S.C. § 681(c) on or about May 30, 2002, under SBA License No. 09/79-0443, solely to do business under the provision of the Act and the regulations promulgated thereunder.
14. Defendant's general partner is East Gate Private Equity Fund, LLC, a limited liability company.
15. Defendant's Limited Partnership Agreement acknowledges that Defendant was required at all times to be operated in accordance with the Act and Regulations.
16. Defendant applied for and received funding from the SBA through the purchase and/or guaranty of Participating Securities, a form of Leverage, as those terms are defined under the Regulations. To date, a total principal balance of $12,285,000.00 remains outstanding.
17. Section 107.1830(c) of the Regulations requires that Defendant not have a condition of Capital Impairment of greater than 60%, as that term is defined under the Regulations.
18. Based on Defendant's financial submission (SBA Form 468) for the quarter ending December 31, 2013, the SBA determined that Defendant had a condition of Capital Impairment in excess of the regulatory limit applicable to it, and by letter dated April 9, 2014, SBA directed the company to cure the impairment within 15 days of the date on the letter.
19. SBA's April 9, 2014 letter informed Defendant that failure to cure the impairment would result in the company being placed in Restricted Operations.
20. Defendant failed to cure its condition of Capital Impairment within the permitted time and, consequently, by letter dated May 12, 2014, SBA informed Defendant that it had been transferred to liquidation status.
21. Based on the last SBA Form 468 for the period ending December 31, 2014, Defendant remains in a condition of Capital Impairment.
22. To date, Defendant has failed to cure its condition of Capital Impairment.
23. Paragraphs 1 through 22 are incorporated herein by reference.
24. Defendant has failed to cure its condition of Capital Impairment, and a principal balance of over $12,285,000.00 of Participating Securities purchased by the SBA remains outstanding.
25. Defendant's failure to cure its condition of Capital Impairment is noncompliance with the terms of its Leverage and a violation of §107.1830(b) of the Regulations.
26. As a consequence of Defendant's continued condition of capital impairment, SBA is entitled to the injunctive relief provided under the Act, 15 U.S.C. §§ 687(d) and 687c, including the appointment of the SBA as Receiver of Defendant.
WHEREFORE, Plaintiff prays as follows:
A. That this Court grant injunctive relief, both preliminary and permanent in nature, restraining Defendant, its managers, general partners, directors, officers, agents, employees, and other persons acting in concert or participation therewith from: (1) making any disbursements of Defendant's funds; (2) using, investing, conveying, disposing, executing, or encumbering in any fashion, any funds or assets of Defendant, wherever located; and (3) further violating the Act or the Regulations promulgated thereunder.
B. That this Court determine and adjudicate Defendant's non-compliance 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 Defendant and all of its assets, wherever located, appoint the SBA as receiver of Defendant for the purpose of marshaling and liquidating the assets of Defendant and satisfying the claims of creditors as determined by the Court, and such other relief as contained in the Consent Decree filed simultaneously herewith.
D. That this Court grant such other relief as may be deemed just and equitable.
