United States District Court, Middle District of Pennsylvania
HIGH FIVE VENTURES, INC. Plaintiff
SPORTSMANSLIQUIDATION.COM, LLC and MUSKEGON HUNTING PRODUCTS, LLC Defendants
Sylvia H. Rambo United States District Judge
In this equitable receivership action, the Receiver has moved the court to exercise its equitable power by applying a portion of the United States Bankruptcy Code (“Bankruptcy Code”) to reduce one of the claims against the insolvent Defendants from $1, 922, 140 to $329, 482 for the benefit of all claimants. For the reasons that follow, the court will not apply the Bankruptcy Code to this equitable receivership, but will exercise its equitable power to reduce the claim to $1, 131, 340 to prevent a double recovery by the claimant.
The parties do not dispute any material facts, which are based entirely on the pleadings and other submissions of the parties, and are summarized as follows.
Defendant Sportsmansliquidation.com, LLC (“Sportsmans”) operates a discount chain of retail stores that sells “hunting, fishing and other outdoor recreation products” in several states. (Doc. 1, ¶ 5.) Defendant Muskegon Hunting Products, LLC (“Muskegon”) sells outdoor sports clothing, and also operates a retail store in Michigan. (Doc. 3, ¶ 3.) Sportsmans is one of Muskegon’s primary customers. (Id.)
On January 1, 2013, Sporstmans provided a line of credit to Muskegon, which ultimately totaled $190, 712, pursuant to which Muskegon granted Sportsmans a first priority lien on all of Muskegon’s assets. (Doc. 1, ¶¶ 14-15, 18.) On March 4, 2013, Sportsmans received a loan from G&P Entertainment, LP (“G&P”), in the amount of $1, 750, 000, in exchange for a promissory note which granted G&P a first priority lien on all of Sportsmans’ assets. (Id. at ¶¶ 7-8.) On August 23, 2013, Plaintiff High Five Ventures, Inc. (“Plaintiff”) entered into an assignment agreement with G&P to acquire all of its rights under the loan to Sportsmans. (Id. at ¶9.) Then, on September 4, 2013, Plaintiff entered into a separate assignment agreement with Sportsmans to acquire its rights under the line of credit it provided to Muskegon. (Id. at ¶ 16.) Sportsmans and Muskegon subsequently defaulted on the loans and were unable to repay any of the $1, 750, 000, or $190, 712, due, respectively, despite Plaintiff’s demands for payment. (Id. at ¶¶ 10-13, 17-20.)
Plaintiff initiated this action by filing a complaint against Defendants on September 6, 2013. (Doc. 1.) In its complaint, Plaintiff asserted two counts for breach of contract, one against each Defendant, for defaulting on the two loan agreements. (Id.) On September 10, 2013, Plaintiff moved for, and Defendants consented to, an emergency motion to appoint a receiver. (Doc. 3.) On September 12, 2013, the court entered an order appointing Compass Advisory Partners, LLC as the receiver (“Receiver”) for Defendants “for the purpose of managing, protecting, preserving, operating and selling some or all of [Defendants’ assets] . . . for the benefit and protection of all creditors.” (Doc. 6, ¶ 7.) The Receiver subsequently sold all of Defendants’ assets and paid Defendants’ known secured creditors, including Plaintiff, in full. (Doc. 20, ¶¶ 3-4.) The Receiver then established a claims process for Defendants’ unsecured creditors, of which more than seventy submitted claims, including Nerangis Properties, LLC (“Nerangis”), the lessor of Sportsmans’ former retail space in Winchester, Virginia. (Doc. 33-2.) Nerangis submitted a claim for $1, 922, 140 in damages related to Sportsmans’ default on the commercial lease between Nerangis and Sportsmans, which includes amounts for rent through the remainder of the lease as well as costs associated with reletting the property. (Id.)
The total amount of unsecured claims submitted to the Receiver was $3, 384, 093.22 (Doc. 33, ¶ 5), and the Receiver estimates it will have approximately $85, 000 available to distribute among the claimants (id. at ¶ 6). Such distribution will take place on a pro rata basis after payment of any remaining administrative fees, at which point the receivership will be concluded. (Id. at ¶ 7.) As part of the distribution to the claimants, the Receiver has moved the court to reduce the Nerangis claim from $1, 922, 140 to $329, 482, which would represent the pre-receivership damages plus one year of future rent. (Id. at ¶¶ 13-16.) Nerangis opposes the instant motion and requests that it receive a pro rata distribution of its full claim, just as all the other unsecured creditors will receive their pro rata distributions. (Doc. 36, p. 14 of 14.)
Nerangis’s response was filed on March 2, 2015 (id.), and to date the Receiver has not filed a reply. Thus, this matter is ripe for consideration.
The appointment of a federal receiver is an equitable remedy governed by Rule 66 of the Federal Rules of Civil Procedure. Rule 66 states that “the practice in administering an estate by a receiver or a similar court-appointed officer must accord with the historical practice in federal courts or with a local rule.” Fed.R.Civ.P. 66. Because the Middle District of Pennsylvania has no local rule governing equitable receiverships, historical federal practice will control.
“[A] primary purpose of equity receiverships is to promote orderly and efficient administration of the estate . . . for the benefit of creditors.” Marion v. TDI Inc., 591 F.3d 137, 148 (3d Cir. 2010) (quoting SEC v. Hardy, 803 F.2d 1034, 1038 (9th Cir. 1986) (alterations in original); see also Wuliger v. Mfrs. Life Ins. Co., 567 F.3d 787, 795 (6th Cir. 2009) (“[T]he purpose of a receiver [is] to marshal the receivership entities’ assets . . . so that the assets may be distributed to the injured parties in a manner the court deems equitable.”). A district court supervising a receiver with equitable powers has wide discretion in determining the appropriate relief. See SEC v. Black, 163 F.3d 188, 199 (3d Cir. 1998) (citing SEC v. Elliott, 953 F.2d 1560, 1566 (11th Cir. 1992)); SEC v. Infinity Group Co., 226 F. App’x 217, 218 (3d Cir. 2007) (“District [c]ourts have wide equitable discretion in fashioning distribution plans in receivership proceedings.”) (citations omitted). It is within the equitable discretion of a district court to approve a receiver’s distribution plan, “provided it is ‘fair and reasonable.’” SEC v. Byers, 637 F.Supp.2d 166, 174 (S.D.N.Y. 2009) (quoting SEC v. Wang, 944 F.2d 80, 81 (2d Cir. 1991). “Because the Receiver is a fiduciary and officer of [the c]ourt, [the c]ourt may and does give some weight to the Receiver's judgment of the most fair and equitable method of distribution.” Commodity Futures Trading Comm’n v. Eustace, Civ. No. 05-2973, 2008 WL 471574, *5 (E.D. Pa. Feb. 19, 2008).
“Generally, if government action will deprive an individual of a significant property interest, that individual is entitled to an opportunity to be heard.” Elliott, 953 F.2d at 1566 (citing Boddie v. Connecticut, 401 U.S. 371, 379 (1971)). “However, a hearing is not required if there is no factual dispute.” Id. (citing Codd v. Velger, 429 U.S. 624 (1977)) (per curiam). “In granting relief, it is appropriate for the district court to use summary proceedings.” Id. (citing Hardy, 803 F.2d at1040); see Black, 163 F.3d at 199 (compiling cases finding that summary proceedings in an equitable receivership are appropriate). “A summary proceeding reduces the time necessary to settle disputes, decreases litigation costs, and prevents further dissipation of receivership assets.” Elliott, 953 F.2d at 1566 (citing SEC v. Wencke, 783 F.2d 829, 837 (9th Cir. 1986), cert. ...