Case 1:08-cv DC Document 912 Filed 07/12/13 Page 1 of 10

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1 Case 1:08-cv DC Document 912 Filed 07/12/13 Page 1 of 10 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES AND EXCHANGE COMMISSION, - against - Plaintiff, STEVEN BYERS, JOSEPH SHERESHEVSKY, WEXTRUST CAPITAL, LLC, WEXTRUST EQUITY PARTNERS, LLC, WEXTRUST DEVELOPMENT GROUP, LLC, WEXTRUST SECURITIES, LLC, and AXELA HOSPITALITY, LLC, No. 08 Civ (DC) ECF Case Defendants. MEMORANDUM OF LAW IN SUPPORT OF MOTION TO CONFIRM SALE OF THE QUILLEN MANOR PROPERTY Jonathan W. Ware, pro hac vice FRESHFIELDS BRUCKHAUS DERINGER US LLP 701 Pennsylvania Avenue, NW, Suite 600 Washington, DC (202) (t) (202) (f) July 12, 2013 Attorneys for Receiver

2 Case 1:08-cv DC Document 912 Filed 07/12/13 Page 2 of 10 Timothy J. Coleman, Receiver ( Receiver ) for the Defendant Wextrust Entities and all entities they control or in which they have an ownership interest (collectively, the Wextrust Entities and Affiliates ), respectfully submits this memorandum in support of his motion to confirm the sale of certain commercial real estate in Fountain Inn, South Carolina (the Property ), which is owned in part by Wextrust affiliate Wextrust/HPC Mortgage Fund, LP ( Wex/HPC ). If approved, the transaction will yield net cash proceeds to the receivership estate in the hundreds of thousands of dollars. BACKGROUND The Property is owned directly by Quillen Manor, LLC ( Quillen Manor ), an LLC formed in 2010 between (a) Citizens Bank & Loan (the Bank ), located in Greer, Greenville County, South Carolina, and (b) Wex/HPC. (See Limited Liability Company Operating Agreement of Quillen Manor, LLC dated January 28, 2010, a true and correct copy of which is attached as Ex. A to the Declaration of Aaron Phipps dated July 12, 2013 ( Phipps Dec. ) at p.2). Wex/HPC is a partnership between Wextrust Capital LLC, Wexford High Yield Debt Fund II, LLC, Wexford High Yield Debt Fund III, LLC, Wexford High Yield Debt Fund IV, LLC (collectively, the Wex/HPC Wex Entities ) and HPC US Fund 1, LP ( HPC ). (See Limited Partnership Agreement of Wextrust/HPC Mortgage Fund, LP dated September 22, 2006, a true and correct copy of which is attached as Ex. B to the Phipps Dec. at p. 2). The Property is located at 709 Quillen Avenue, Fountain Inn, South Carolina and operates as an assisted-living facility. (See Declaration of J. Thomas Johnson dated July 12, 2013 ( Johnson Dec. ) at 4). As of this filing, approximately 76 individuals live at the Property and receive varying levels of assisted cared. (Id.). 1

3 Case 1:08-cv DC Document 912 Filed 07/12/13 Page 3 of 10 In 2008, the Bank and Wex/HPC made loans to Fountainside Inn, LLC ( Borrower ) totaling $3,768, to develop and operate an assisted living facility located at the Property. (See Johnson Dec. 5). In 2010, Borrower defaulted and Wex/HPC took instituted a foreclosure process that resulted in the property being owned by Quillen Manor, LLC. (See Phipps Dec. 7). Wex/HPC immediately led and financed a turn around effort at the Property ensure that the needs of the dozens of eldery residents living at the facilities were met and that payroll and other ordinary course payments were made. (Id.) As noted, in 2010, the Bank and Wex/HPC formed Quillen Manor to take title to and manage the Property. (See Ex. A to the Phipps Dec. at pp. 7-8). Under the Quillen Manor Operating Agreement, the Bank has a first-in-line secured interest toaling $2,096, and Wex/HPC has a second-in-line secured interest in the same amount. (See Ex. A to the Phipps Dec. at p. 4-5, 21). Real estate property taxes for the Property are paid current and there are no other liens on the Property. (See Johnson Dec. 11). Since 2010, the Bank, which is located near the Propety, has been actively involved in its day-to-day management and oversight with input and financial assistance from Wex/HPC. (See Johnson Dec. 7). The Bank likewise advanced funds as needed to ensure the facility operated in accordance with applicable laws and regulations. (Id.). The Property has been actively marketed for sale since (See Johnson Dec. 8). The local property tax assessment for the Property is $2,231,980. (See Phipps Dec. 8). An independent appraisal of the Property conducted in September of 2012 yielded a fair market value at or below the current sale price. (See Johnson Dec. 9). In February 2013, after negotiations, GSM Properties of Fountain Inn, LLC ( Buyer ) offered to buy the Property for $3,100, (See Purchase and Sale Agreement ( Quillen Manor Sale Agreement ) between Quillen Manor, LLC and GSM Properties of Fountain Inn, 2

4 Case 1:08-cv DC Document 912 Filed 07/12/13 Page 4 of 10 LLC ( GSM ), dated February 14, 2013, a true and correct copy of which is attached as Ex. C to the Phipps Dec. at p. 6 ; Johnson Dec. 9). The Buyer is a South Carolina company that specializes in providing assisted living facilities and care. (See Johnson Dec. 9). The Receiver analyzed the agreement and based on the advice of his advisors agreed to the sale on behalf of Wex/HPC. 1 The Bank also reviewed the offer and agreed to the sale as representative of fair market value. (See Johnson Dec. 9). Pursuant to the Quillen Manor Sale Agreement, the Buyer has paid $100,000 of earnest money to the escrow agent. (Johnson Dec. 10). The Quillen Manor Sale Agreement has subsequently been amended twice to extend the relevant transaction and closing deadlines to permit Buyer to conduct due diligence and obtain financing. (See Johnson Dec. 10). Buyer has recently requested a further short extension to finalize its third-party financing of the purchase, which will be conditioned on an additional escrow payment and require closing before the end of July (Id.). The Receiver and the Bank have agreed that an extension would be in the best interest of the sale of the Property. The Receiver respectfully submits that the Court should approve the Quillen Manor Sale Agreement for several reasons. First, the proposed sale of the Property mitigates the substantial risks and costs of holding the property. Second, the purchase price of $3,100,000 was the result of arms-length negotiations with the Buyer and represents fair market value. Third, the sale will result in a net cash return to the estate in the hundreds of thousands of dollars. The Receiver is presently undertaking an audit of the books and records of Quillen Manor to determine the precise Wex/HPC share of sale proceeds and likewise conducting an audit of the records of the Wex/HPC Wex Entities and HPC to determine the exact receivership share of proceeds due Wex/HPC and the receivership estate. 1 The manager of the Wex/HPC partner, HPC, had also agreed to the sale. 3

5 Case 1:08-cv DC Document 912 Filed 07/12/13 Page 5 of 10 DISCUSSION This Court has jurisdiction over the Property, and has broad discretion and authority to approve a sale of the property. See 28 U.S.C The Receiver was appointed receiver for all entities that the Defendant Wextrust Entities control or in which they have an ownership interest. (See Receiver Order at 5). Both Wex/HPC and the Property are entities that the Defendant Wextrust Entities control or in which it they have an ownership interest, thus making them subject to the receivership. (Id.) The Court has authorized the Receiver to use, lease, sell, and convert into money all assets of the Wextrust Entities, either in public or private sales or other transactions on terms the Receiver reasonably believes based on his own experience and input from his advisors to be beneficial to the Wextrust Entities.... (See Receiver Order at 8). The proposed sale of the Property mitigates the substantial risks of holding the property. Both the Bank and Wex/HPC have made capital infusions into the Property to ensure that operations continue and the elderly residents receive proper care. Continuing to hold and maintain the Property would result in additional administrative expenses to the receivership estate. There is no reason to believe that the market value of the property will increase, or that another prospective buyer will emerge with a higher bid. The Receiver determined that accepting the Buyer s bid was the most attractive. First, although several parties have expressed interest in the Property, the Receiver felt that the Buyer s offer provided the best combination of proceeds to the Receivership and certainty of said proceeds. Second, the sale of the property will yield several hundred thousand dollars to Wex/HPC, the Receiver s share of which may be used to fund future distributions and the costs of the receivership. 4

6 Case 1:08-cv DC Document 912 Filed 07/12/13 Page 6 of 10 The extensive marketing and sales process, coupled with the information provided in the Plan of Management regarding the intended sale of the Property, has provided sufficient notice of the sale and ensured that potential purchasers had an adequate opportunity to submit bids on the Property. The Property received full market exposure and the proposed sale price reflects the fair market value of the Property. Sale of the Property is also consistent with the Wex/HPC partnership agreement, which calls for a wind up of the partnership in (See Ex. B to the Phipps Dec. at p.2). Finally, the proposed transaction is consistent with the Receiver Order and the objectives outlined in the Receiver s Plan of Management. (Dkt. No. 172 at 25.) The notice of the sale has been provided to all Defendants, all parties who have entered an appearance and/or requested notice of papers in this case, and the SEC. Additionally, copies of these papers and notice of the sale of the Property will be posted on the Receiver s website. Any person with questions or concerns about the proposed transaction will have an adequate opportunity to raise any objections with the Receiver and the Court. CONCLUSION Based on the foregoing, the Receiver respectfully requests that this Court enter an order confirming the sale of the Property, authorizing the Receiver to sell the Property pursuant to the terms and conditions of the Quillen Sale Agreement and any amendments thereto, and granting the Receiver such other relief it deems just and proper. 5

7 Case 1:08-cv DC Document 912 Filed 07/12/13 Page 7 of 10 Dated: Washington, D.C. July 12, 2013 Respectfully submitted, s/ Jonathan W. Ware Jonathan W. Ware, pro hac vice FRESHFIELDS BRUCKHAUS DERINGER US LLP 701 Pennsylvania Avenue, NW, Suite 600 Washington, DC (202) (t) (202) (f) Attorneys for Receiver 6

8 Case 1:08-cv DC Document 912 Filed 07/12/13 Page 8 of 10 CERTIFICATE OF SERVICE The undersigned, an attorney, states that I am one of the attorneys for Timothy J. Coleman, Receiver, in this matter and do hereby certify that on July 12, 2013 I directed the service of a true and correct copy of the foregoing MEMORANDUM OF LAW IN SUPPORT OF RECEIVER'S MOTION TO CONFIRM SALE OF THE QUILLEN MANOR PROPERTY AND SUPPORTING DOCUMENTS upon the following individuals in the manner indicated: Via First Class Mail Joseph Shereshevsky, Registry No c/o FCI Fort Dix Federal Correctional Institution P.O. Box 2000 Fort Dix, NJ Pro Se Defendant Alexander M. Vasilescu, Esq. Andrew M. Calamari, Esq. Steven G. Rawlings, Esq. Alistaire Bambach, Esq. Neal R. Jacobson, Esq. Philip Moustakis, Esq. Danielle Sallah, Esq. Attorneys for Plaintiff SEC Barry S. Zone, Esq. Jason Canales, Esq. Attorneys for Defendant Steven Byers Michael Fred Bachner, Esq. Attorney for Relief Defendant Elka Shereshevsky Philip A. Byler, Esq. Andrew T. Miltenberg, Esq. Ira S. Nesenoff, Esq. James B. Daniels, Esq. Attorneys for non-party Broadway Bank Paul A. Levine, Esq. Attorney for non-party Key Equipment Finance, Inc. Beth L. Kaufman, Esq. Attorneys for non-party Lawrence Costa Harris Kay, Esq. Marc X. LoPresti, Esq. Attorneys for various non-party investors Edward P. Gilbert, Esq. Attorney for non-party RAIT Partnership Francesca Morris, Esq. Attorney for non-parties Ticor Title Insurance Co. and Heritage Community Bank John M. Bradham, Esq. Peter B. Katzman, Esq. Attorneys for non-parties Space Park AIM and ISSB Partnerships Alan E. Marder, Esq. Attorney for non-parties Nashville Warehouse Partners and Southeast Warehouse Partners Edward F. Malone, Esq. George R. Mesires, Esq. Attorneys for non-parties Barrington and Hinsdale Banks 7

9 Case 1:08-cv DC Document 912 Filed 07/12/13 Page 9 of 10 Shalom Jacob, Esq. Shmuel Vasser, Esq. Attorneys for non-party Int l Ad-Hoc Committee of Wextrust Creditors Louis Orbach, Esq. Charles J. Sullivan, Esq. Attorneys for non-party TCF National Bank Elizabeth P. Gray, Esq. Attorney for non-party Gerald Jaffe John P. Doherty, Esq. Attorney for non-party Wells Fargo Bank N.A. Jeffrey L. Schwartz, Esq. John P. Amato, Esq. Stephen W. Ragland, Esq. Clarence A. Wilbon, Esq. Attorneys for non-party First Tennessee Bank National Association Martin Siegel, Esq. Attorney for non-party Int l Consortium of Wextrust Creditors Gustav P. Rech, Esq. Attorney for non-party Jerry B. Klein, C.P.A. & Associates Brett David Goodman, Esq. Attorney for non-parties Peck-Clarksville, LLC and B. David Peck Via Electronic Mail S. Brook Fowler, Esq. Attorney for non-party Citizens Bank & Loan Susan F. Balaschak, Esq. Keith N. Costa, Esq. John H. Rowland, Esq. Attorneys for non-party Regions Bank Emily S. Alexander, Esq. Attorney for non-party Martin Malek David B. Grantz, Esq. Scott T. McCleary, Esq. Attorneys for non-party Bank of America Michael I. Silverstein, Esq. Gerard P. Brady, Esq. Attorneys for non-party Erin Construction & Development Co., Inc. Alexander S. Lorenzo, Esq. Attorney for non-party LNR Partners, Inc. Carletta F. Higginson, Esq. Howard S. Suskin, Esq. Kristen E. Hudson, Esq. Paula E. Litt, Esq. Stephen L. Ascher, Esq. Attorneys for non-party Much Shelist Denenberg Ament & Rubinstein, P.C. Via Electronic Mail Jason Weiss, Esq. Attorney for non-parties HPC US Fund 1, LP and Blackport Investment Group s/ Jonathan W. Ware Jonathan W. Ware, Esq. 8

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