United States v. Novus Ventures II, L.P.
| Decision Date | 08 August 2012 |
| Docket Number | 12-MC-00089,Case No.: 12-CV-00523-LHK |
| Parties | UNITED STATES OF AMERICA, Plaintiff, v. NOVUS VENTURES II, L.P., Defendant. |
| Court | U.S. District Court — District of Colorado |
INJUNCTIVE RELIEF AND
APPOINTMENT OF SBA AS
On February 1, 2011, the United States filed a Complaint for Receivership and Injunction on behalf of its agency, the U.S. Small Business Administration ("SBA" or "Plaintiff"), against Defendant Novus Ventures II, L.P. ("Novus" or "Defendant"), a Delaware limited partnership that maintains its place of business and principal office in Cupertino, California. SBA seeks receivership of Novus, among other forms of injunctive relief, pursuant to Sections 308(d) and 311 of the Small Business Investment Act of 1958, as amended. See 15 U.S.C. §§ 687(d), 687c; ECF No. 1 ("Compl."). Before the Court is Plaintiff's Motion for Injunctive Relief and Appointment of SBA as Receiver Under 15 U.S.C. § 687c, filed on April 19, 2012. ECF No. 18 ("Mot."). The Court held a hearing on the motion on July 26, 2012. Having considered the parties' submissions and argument and the relevant law, and for the reasons discussed herein, the Court GRANTS Plaintiff's motion.
The purpose of the Small Business Investment Act of 1958 (the "Act") is to improve and stimulate the national economy, and small business in particular, by stimulating and supplementing the flow of private equity capital and long-term loan funds that small businesses need for sound financing of their operations and growth.1 See 15 U.S.C. § 661. Section 391 of the Act authorizes SBA to license non-bank financial institutions, as well as private companies including corporations, as Small Business Investment Companies ("SBIC"), which in turn provide capital to small businesses. See 15 U.S.C. § 681. Pursuant to Section 303 of the Act, SBA can provide financing to a SBIC through what is known as Participating Securities, a form of Leverage as defined in the Regulations at 13 C.F.R. § 107.1500 et seq. See 15 U.S.C. § 683; 13 C.F.R. §§ 107.1100, 1500. By issuing a Leverage instrument, SBA becomes a Preferred Limited Partner of the SBIC. Id. In addition, when a SBIC is licensed, the license application contains an acknowledgment that the SBIC will be operated in accordance with the Act and the implementing Regulations, both of which place several restrictions on SBICs, including, among others, in regard to their financing and business decisions.
Novus is a venture capital firm that invests in seed and early stage companies in technology industries. See Decl. of Greg Lahann ("Lahann Decl.") ¶ 2. Novus's General Partner is DT Associates II, LLC, of which Greg Lahann, Dan Tompkins, and Stewart Schuster are the Managing Directors. Decl. of Stewart Schuster ("Schuster Decl.") ¶¶ 2-3. On January 5, 2001, SBA licensed Novus as a SBIC pursuant to Section 301(c) of the Act, 15 U.S.C. 681(c), under SBA License No. 09/79-0433. Decl. of Dianna L. Seaborn ("Seaborn Decl.") ¶ 10. Pursuant to Section 303 of the Act, 15 U.S.C. § 683, and 13 C.F.R. § 107.1600 et seq., SBA provided financing to Novus by purchasing $68,100,000 in Participating Securities, and thereby became Novus's Preferred Limited Partner. Seaborn Decl. ¶ 12. SBA has paid the entire amount of $68.1 million, plus prioritized payments of approximately $39,400,000, to the investor pool. Seaborn Decl. ¶ 12. In addition to SBA's financing to Novus, the Managing Directors have, collectively, personally invested over$1,200,000 in Novus. Lahann Decl. ¶ 16. Novus' Limited Partners have also collectively invested a total of $42,126,117 in Novus. Id. However, as Novus's Preferred Limited Partner, SBA has priority over the private Limited Partners in liquidation, meaning, among other things, that SBA must be repaid all of its Participating Securities before any private Limited Partners may obtain any return of their capital. Seaborn Decl. ¶ 18.
Among its responsibilities, SBA monitors the operation of all SBICs, in the course of which it undertakes annual reviews of the SBIC's financial statements. In March 31, 2006, Novus's quarterly financial submission showed that Novus had a condition of "capital impairment" as defined under 13 C.F.R. §§ 107.1830-1850.2 SBA sent notification via letter dated June 5, 2006, that Novus had a condition of capital impairment of 80.92%, which exceeded the allowable maximum of 60% under 13 C.F.R. §§ 107.1830-1850. Seaborn Decl. ¶ 15 & Ex. F. Pursuant to 13 C.F.R. § 107.1820(f), the letter directed Novus to cure the capital impairment within 15 days by increasing its regulatory capital by not less than $14,647,109, plus an amount equal to any additional unrealized depreciation and operating expenses incurred subsequent to March 31, 2006. Id. The letter also notified Novus that if it failed to cure its impairment, SBA would impose Restricted Operations remedies under 13 C.F.R. § 107.1820(f). Id.
Novus failed to cure its capital impairment in the time and manner required by SBA. See Lahann Decl. ¶ 10. Subsequently, SBA placed Novus on "Restricted Operations" status, imposing several restrictions, including a prohibition on new portfolio investments unless approved by SBA, prohibitions on distributions to any party other than SBA, and imposition of a 50% reduction in management fees. Id.; Seaborn Decl. Ex. F at 1-2. SBA also required Novus to submit financial information on a monthly basis, information on the status of each portfolio investment, a cash report, and any additional liquidity requirements needed to meet follow-on investments or currentoperating expenses. Seaborn Decl. Ex. F at 2. Novus complied with all of SBA's imposed reporting requirements. Lahann Decl. ¶ 10; Decl. of David Gerogosian ("Gerogosian Decl.") Ex. B at 2-5. From the sales of some of its holdings and sale of one of its portfolio companies, Novus cured its capital impairment and was not impaired from September 2006 to August 2007. See Lahann Decl. ¶ 11. However, Novus again became capitally impaired shortly after the market crashed. Id.
By letter dated July 22, 2008, SBA notified Novus that it was transferring Novus from operating status to liquidation status. Seaborn Decl. ¶ 17 & Ex. G. SBA also threatened to seek receivership immediately, prompting Novus's General Partner to meet with SBA on September 10, 2008, to explore alternatives to receivership. Lahann Decl. ¶ 12. Shortly after the September 10, 2008 meeting, Novus provided SBA with a plan to wind down Novus, subject to SBA's approval and discretion ("Wind Down Plan"). Seaborn Decl. ¶ 20 & Ex. I ("Wind Down Plan"); Lahann Decl. ¶ 13. Pursuant to the Wind-Down Plan, executed on December 23, 2008, SBA agreed to permit Novus's Managing Directors to manage the fund until it was completely liquidated and to forbear from seeking receivership until December 1, 2009, in exchange for Novus's agreement to provide SBA a signed order consenting to receivership. See Seaborn Decl. Ex. I at 3. The Wind Down Plan projected returns that would exceed the amount owed to SBA. Lahann Decl. ¶ 13.
Novus had some initial success in executing its liquidation plan and was able to repay $28.6 million to SBA, which prompted SBA to allow Novus's General Partner to continue to manage the fund's liquidation. Seaborn Decl. ¶¶ 12, 22. However, Novus failed to meet its projections and plans for liquidation in 2010, 2011, and to date. In September 2008, Novus projected that it would recover $40.9 million in 2010, whereas financial audits reveal that Novus's actual recovery for 2010 was only $3,466,108. See Seaborn Decl. Ex. D at 5P; id. Ex. J. Novus also projected in September 2008 that it would recover over $86 million in 2011, whereas financial audits reveal that Novus's actual recovery for 2011 was only $214,498. See Seaborn Decl. Ex. E at 5P; id. Ex. J. In fact, Novus's condition of capital impairment has been growing increasingly more severe. Since 2009 to date, Novus has maintained a condition of capital impairment not only in excess of its permitted 60%, but in excess of 100%, which is a condition known as "extreme capitalimpairment." See 13 C.F.R. § 107.1820(b); Seaborn Decl. ¶ 19; McClintock Decl. Ex. 5. Based on Novus's Form 468 submissions from 2008-2011, see Seaborn Decl. Exs. B-E, Novus's capital impairment percentage was 101.09% at the end of 2008; 107.08% at the end of 2009; 116.31% at the end of 2010; and 121.19% at the end of 2011. Seaborn Decl. ¶ 19; Mot. Ex. H. Furthermore, even including the SBA-mandated reductions in management fees, from 2006 to date, the General Partner has paid itself at least $4,635,078 in fees from the limited partnership for its management of Novus, not including other expenses such as accounting and legal services fees.3 Seaborn Decl. ¶ 21; Mot. at 13. Novus currently owes SBA $39.5 million in outstanding Leverage. Seaborn Decl. ¶ 12.
On February 1, 2011, the United States filed a Complaint for Receivership and Injunction on behalf of its agency, the U.S. Small Business Administration ("SBA" or "Plaintiff"), against Defendant Novus Ventures II, L.P. ("Novus"), seeking preliminary and permanent injunctive relief to restrain Novus (all persons managers, partners, agents, employees etc) from: (1) making any disbursement or distribution of any assets of Novus; (2) using, conveying, encumbering in any fashion any assets of Novus, wherever located; and (3) from further violating the Act or the Regulations promulgated thereunder. Compl. at 8. The Complaint asks this Court to take exclusive jurisdiction of Novus and all of its assets and to appoint SBA as receiver of Novus for the purpose of marshaling and liquidating the assets of Novus to satisfy the claims of creditors as determined by the Court. Id.
Novus filed an Answer to the Complaint on March 13, 2012. ECF No. 5. Plaintiff filed the instant motion on April...
To continue reading
Request your trial