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Pennant Management, Inc. v. First Farmers Financial, LLC

United States District Court, N.D. Illinois, Eastern Division

July 24, 2015

PENNANT MANAGEMENT, INC., Plaintiff,
v.
FIRST FARMERS FINANCIAL, LLC, et al., Defendants. ILLINOIS METROPOLITAN INVESTMENT FUND and HARVARD SAVINGS BANK, an Illinois Savings Bank, Plaintiff-Intervenors,
v.
FIRST FARMERS FINANCIAL, LLC, et al., Defendants.

MEMORANDUM OPINION AND ORDER

AMY J. ST. EVE, District Judge.

Patrick Cavanaugh, as receiver of the Overall Receivership Estate ("Overall Receiver") and Michael Nanosky, as receiver of the Nanosky Receivership Estate ("Nanosky Receiver") (collectively, "the Receivers") move for the entry of an order approving the sale of five hotel properties (the "Hospitality Properties"), and related relief [160]. For the following reasons, the Court grants in part and denies in part the Receivers' motion.

BACKGROUND

Pennant Management, Inc. ("Pennant") is a Registered Investment Advisor in the business of acquiring loans on behalf of its clients guaranteed by the U.S. Department of Agriculture ("USDA") or the U.S. Small Business Administration ("SBA") from third-party USDA and SBA approved lenders, such as First Farmers Financial, LLC ("First Farmers"). (R. 182, Second Am. Compl. ¶¶ 1, 27.) From June 2013 to August 2014, Pennant purchased the federally guaranteed portions of 26 separate loans originated by First Farmers. ( Id. ¶ 30.) In September 2014, Pennant allegedly discovered that none of the 26 borrowers of the First Farmers' loans actually existed, and that the loans were part of a massive fraud. ( Id. ¶¶ 37, 46.) Thus, on September 29, 2014, Pennant filed its original complaint against First Farmers and associated individuals and entities. (R. 1, Compl.)

At the request of the parties, on November 10, 2014, the Court entered an agreed order designating Michael M. Nanosky as the Receiver (the "Nanosky Receiver") to exercise control over certain assets of Defendants, including maintaining and preserving certain hospitality and real properties that they owned or controlled. (R. 29, Initial Receiver Order ¶¶ 2, 4-5, 8.) These assets included the five Hospitality Properties: (i) Crowne Plaza Orlando-Lake Buena Vista, 12490 Apopka-Vineyard Rd., Orlando, FL 32836; (ii) Crowne Plaza Saddlebrook, 50 Kenny Pl., Saddlebrook, N.J. 07663; (iii) Four Points by Sheraton, 500 Hamilton Blvd., Peoria, IL 61602; (iv) Doubletree by Hilton Hotel-Orlando East, UCF Arena, 12125 High Tech Ave., Orlando, FL 32817; and (v) Renaissance by Marriott-Orlando Downtown, 400 W. Livingston St., Orlando, FL 32801. ( Id. ¶ 5.) On April 23, 2015, the Court entered the Amended Receiver Order, which gave Mr. Nanosky continued control over those assets. (R. 122, ¶¶ 4, 5.) The Amended Receiver Order also appointed Patrick Cavanaugh as the Receiver of the Overall Receivership Estate, which includes "all assets other than those assets entrusted to the Nanosky Receivership Estate." ( Id. ¶ 24(b).) In the event the two Receivers are unable to agree, absent further direction from the Court, the Overall Receiver has the authority to determine how the Nanosky Receiver should proceed. ( Id. ¶ 10.)

The Receivers now move for the entry of an order authorizing the sale of the Hospitality Properties, and related relief (the "Motion"). Specifically, they request approval to sell the Hospitality Properties to potential purchasers that submitted bids in an online auction conducted by Auction.com. The online auction closed on July 22, 2015, and counsel for the Overall Receiver represents that the winning bids total over $86 million for the five Hospitality Properties. (R. 240.)

In the Motion, the Receivers represent that they provided notice of the Motion to all parties on the Court's electronic service list, and to all known entities that asserted an interest in the Hospitality Properties. The Court entered the Motion on June 26, 2015 and set a deadline of July 8, 2015 for responses. To date, the Court has received responses from non-party CVC Hospitality, Inc. ("CVC Hospitality") (R. 195), non-party True Line Contracting and Remodeling, Inc. ("True Line") (R. 179), and the United States (R. 203).

ANALYSIS

The Receivers have moved for the entry of an order authorizing the sale of the Hospitality Properties, and related relief. Specifically, the Receivers request that the Court: i) authorize the Receivers to sell the Hospitality Properties free and clear of liens, claims and encumbrances (collectively, the "Interests"), with such Interests, if any, attaching to the proceeds of the sale (the "Sale Proceeds") with the same force and in the same priority as currently exists; ii) stay all proceedings in other jurisdictions seeking to adjudicate any Interests in the Hospitality Properties or the Sale Proceeds; iii) set a date by which all parties asserting an Interest in the Hospitality Properties or the Sale Proceeds must file claims with the Court; and iv) approve the proposed sale procedures and grant related relief. In response, several entities have objected on different bases. For the sake of clarity, the Court first addresses the issues with respect to the Receiver's authority to sell the Hospitality Properties and the Court's authority to stay related actions in other jurisdictions, then addresses the sale process itself.

I. Authority of Receiver and Court

The Receiver argues that the Court should permit it to sell the Hospitality Properties free and clear of all Interests, and to stay all actions relating to the Hospitality Properties currently pending in other courts. In response, the Court has received several objections. First, the United States objects on the basis that 28 U.S.C. § 2410 prevents the Receivers from selling Four Points by Sheraton, 500 Hamilton Blvd., Peoria, IL 61602 (the "Peoria Property") because the SBA holds a mortgage lien on that property. Second, non-party CVC Hospitality argues that the Receiver does not have the authority to sell the Hospitality Properties, and also that the Receiver has not complied with the requirements of 28 U.S.C. § 754. (R. 195). Next, non-party True Line Contracting makes several arguments. It argues that the Receiver does not have the authority to sell the Hospitality Properties, both for similar reasons to CVC Hospitality and also for additional reasons specific to True Line. It also contends that the Receiver has not complied with the requirements of 28 U.S.C. § 754. Finally, with respect to the Receivers' proposed stay, True Line argues that the federal Anti-Injunction Act, 28 U.S.C. § 2283, bars the Court from entering a stay of another action pending in state court. The Court addresses each issue in turn.

A. The Peoria Property

As an initial matter, the United States argues that 28 U.S.C. § 2410(c) prevents the Receivers from selling the Peoria Property because the SBA holds a mortgage on the property. 28 U.S.C. § 2410(c) states in relevant part that: "[a] sale to satisfy a lien inferior to one of the United States shall be made subject to and without disturbing the lien of the United States, unless the United States consents that the property may be sold free of its lien and the proceeds divided as the parties may be entitled." 28 U.S.C. § 2410(c). The Receivers reply that they are not selling the Peoria Property to "satisfy a lien." Instead, they are selling the property free and clear of any liens to maximize the proceeds of the sale, and then seek to "quiet title" to the property under 28 U.S.C. § 2410(a). See 28 U.S.C. § 2410(a) ("... the United States may be named a party in any civil action or suit in any district court... (1) to quiet title to... real or personal property on which the United States has or claims a mortgage or other lien.")

The Court agrees with the government. 28 U.S.C. § 2410(c) sets forth a detailed framework for the judicial sale of property on which the government holds a lien. While the Receivers are correct that 28 U.S.C. § 2410(a) waives the sovereign immunity of the United States to allow parties to bring suit to quiet title to real property on which the government holds a mortgage, there is no provision in 28 U.S.C. § 2410 that indicates a party can first sell a property free and clear of a government lien, and then quiet title to the proceeds.

The cases that the Receivers cite are not to the contrary. In Boresek v. USDA, for example, the court interpreted claims to "quiet title" under § 2410(a) to include "claims to determine the priority of competing liens." Boresek v. USDA, No. 12-cv-02138, 2014 WL 4792587, at *10 (D. Ore. September 23, 2014). Thus, the court found that § 2410 waived the sovereign immunity of the United States to allow the plaintiff to bring a claim for equitable subrogation against the United States asserting that the plaintiff's lien should take priority over the lien of the government. Id . Boresek does not stand for the proposition, however, that because § 2410 waives the sovereign immunity of the United States with respect to certain lien claims, a party with a claim to real property on which the government holds a lien may sell the property free and clear of the government's lien in anticipation of an action for quiet title to determine the validity and priority of the parties' rights to the proceeds.

As the United States suggests, the Receivers can sell the Peoria Property subject to the SBA mortgage, they can pay the SBA in full at the closing of the sale, which the government represents would release the mortgage, or the Receivers can attempt to reach an alternative agreement with the government to release the lien. The Receivers also note that they may have a claim to reinstate a mortgage on the Peoria Property for the benefit of the defrauded investors, which the government concedes may have priority over the SBA's mortgage. If and when that mortgage is reinstated, that could change the analysis. As the facts stand now though, 28 U.S.C. § 2410 does not allow the Receivers to sell the Peoria Property free and clear of the government's mortgage without first obtaining its consent. For these reasons, the Court denies without prejudice the Receivers' motion for approval to sell the Peoria Property free and clear of all Interests.[1]

B. Receivers' Authority to Sell the Remaining Properties

The Receivers move to sell the remaining four Hospitality Properties free and clear of all Interests and for the Court to issue a stay on litigation involving the Hospitality Properties in other jurisdictions. In support of their Motion, the Receivers cite Eller Industries, Inc. v. Indian Motorcycle Manufacturing, Inc., 929 F.Supp. 369, 371-73 (D. Colo. 1995). In that case, the district court addressed whether its jurisdiction over a receivership precluded a bankruptcy trustee in another jurisdiction from enforcing a preliminary injunction against the receiver. In finding that it did, the court addressed its jurisdiction over the receivership and the authority of the receiver:

By ordering [the company] into receivership, all assets of the company were placed in the custody of the Court. This Court therefore has exclusive jurisdiction with respect to the administration, possession and control of [the company's] assets, ...

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