richards brandt miller nelson attorneys for...

MATTHEW C. BARNECK [5249]

CHAD E. FUNK [13217]

RICHARDS BRANDT MILLER NELSON

Attorneys for Black Cliffs Investments, LLC, MJ5 Investments, LLC,

Matthew A. Nielson, and Jill R. Nielson

Wells Fargo Center, 15th

Floor

299 South Main Street

P.O. Box 2465

Salt Lake City, Utah 84110-2465

Telephone: (801) 531-2000

Fax No.: (801) 532-5506

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF UTAH

SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

vs.

MANAGEMENT SOLUTIONS, INC., a

Texas Corporation; WENDELL A.

JACOBSON; ALLEN R. JACOBSON,

Defendants.

REPLY MEMORANDUM IN SUPPORT

OF MOTION FOR SUMMARY

JUDGMENT AND RENEWED MOTION

FOR ORDER RE: SALE OF

PROVIDENCE VILLAGE

Case No. 2:11cv1165

Judge Bruce S. Jenkins

Intervenors Black Cliffs Investments, LLC (“Black Cliffs”), MJ5 Investments,

LLC (“MJ5”), and Matthew A. Nielson and Jill R. Nielson (the “Nielsons”), through their

undersigned counsel of record and pursuant to D.U.Civ.R. 7-1 and 56-1, submit this Reply

Memorandum in Support of their Motion for Summary Judgment and Renewed Motion for

Order Re: Sale of Providence Village (Doc. 1571).

Case 2:11-cv-01165-BSJ Document 1838 Filed 04/21/14 of 24

http://www.utd.uscourts.gov/documents/rules.html#DUCivR7-1

http://www.utd.uscourts.gov/documents/rules.html#DUCivR56-1

https://ecf.utd.uscourts.gov/doc1/18312974556

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SUMMARY OF ARGUMENTS

It is undisputed that Black Cliffs’ offer to purchase Providence Village is

$515,000 more than the offer of Cortland Acquisitions, LLC (“Cortland”), and the offer to

purchase Buffalo Run is probably $180,000 more than the Cortland offer. The Receiver has

ignored these offers and opposed the Motion based on the assumption that Black Cliffs’ and

MJ5’s interests will be pooled and distributed pro rata.

At a hearing on December 17, 2013, on a similar previous motion, the Court gave

instructions on the record about this issue. The Court stated as follows, speaking to the

Receiver’s counsel:

If you contemplate contesting an existing entity on the theory that

it doesn’t stand alone but is part of an aggregation, then you have

to look at it. You have to understand its history. But you have to

understand whether it is indeed subject to all of the difficulties that

people end up with in an equity receivership. Maybe it has a life

of its own. Anybody thought about that? Anybody investigate

that? Is this particular entity the subject of nefarious activity on

the part of those engaged in that particular activity?

(Transcript of Hearing on December 17, 2013, at 21-22, attached as Ex. 19.)1 The Court said the

inquiry should be to determine whether an entity “was conceived in heaven rather than in hell.”

(Id. at 22.)

The Receiver has failed to show there was any fraud, “nefarious” activity, or other

“untoward” circumstances (id. at 20) in connection with Black Cliffs’ and MJ5’s acquisition of

the interests at issue. The facts show those interests were acquired via purchase agreements

signed and payments made in lawful, fair market transactions. The best the Receiver comes up

1 The Exhibits attached to this Reply Memorandum are numbered consecutively following those attached to the

Intervenors’ Motion (Doc. 1571).



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with is the argument, rebutted below, that these property interests were acquired or maintained,

in part, using “commingled” funds.

The facts and law demonstrate that the commingling concept in receivership case

law simply does not apply here. Black Cliffs and MJ5 were purchasers of interests and not

investors who placed money in the custody of Wendell Jacobson (“Jacobson”) or Management

Solutions, Inc. (“MSI”) with the expectation of earning financial gain. Black Cliffs and MJ5

entered unique transactions that were separate and different from those of any other purchase or

investor in this Receivership proceeding. Moreover, the financial data show that the payments

the Receiver says illustrate commingling were in fact made for lawful business purposes.

For these reasons the Court should conclude that Black Cliffs’ interest in

Providence Village and MJ5’s interest in Buffalo Run are lawfully obtained and validly existing

property interests that are not subject to pooling and pro rata distribution. Accordingly, the

Black Cliffs offers exceed the value of the Cortland offers the Court should order the Receiver to

accept them.

STATEMENT OF FACTS

The Receiver’s Opposition is mainly a factual presentation, consisting of some 18

pages responding to the Intervenors’ initial Statement of Facts and also setting forth additional

fact statements of his own. This Reply addresses both. Only those paragraphs that require a

further statement are addressed in this section. The paragraph numbers used below correspond

to those of Intervenors’ initial Statement of Facts.


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A. Intervenors’ Statement of Facts Relating to Providence Village.

7. The opening balance of MSI’s account on July 3, 2006 was $363,913.31.

(Declaration of Gerald Fujimoto dated 3/14/14 (Doc. 1632), ¶9.) This balance was more than

sufficient to cover the $100,000 payment to Republic Title that day. (Affidavit of Dustin J.

Barrett, ¶5.) Additionally, $96,705 of the money deposited in MSI’s account on July 3, 2006

was management fees collected for MSI’s management services. (Id.)

17. The $500,000 payment was “Fee Income” to Council Properties from

Jinco, LLC (“Jinco”), resulting from Jinco’s sale of 300 residential lots in the Falconhead Resort

in Burneyville, Oklahoma. (See Ex. 20; Doc. 1632-17.) The Opposition suggests nothing

improper about this Fee Income. (Affidavit of Mark Hashimoto dated April 18, 2014, ¶11;

Barrett Aff., ¶8.)

18. The Opposition fails to acknowledge that Janison repaid the $900,000

with two checks in the amounts of $100,000 and $800,000, respectively, dated September 18,

2007. (Barrett Aff., ¶4; see Ex. 21.) The checks are attached to the Fujimoto Declaration as

Exhibit 15. (Doc. 1632-15.)

24. During the 5½ year period from July 2006 through December 2011,

Providence Village generated over $6.7M in revenue. (See Doc. 1632-18; Hashimoto Aff., ¶22.)

The net cash flow for these years resulted in a shortfall of only $16,093. (See Doc. 1632-19.)

The expenses included capital improvements of $169,107 (Doc. 1632-18) and principal

payments of $294,026, which reduced the outstanding mortgage balance. (Hashimoto Aff.,

Exhibit 11.) Each of these expenditures increased the equity in the property. (Hashimoto Aff.,

¶¶22-23.)








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Additionally, the Fujimoto Affidavit references a credit of $139,822 against

management fees previously paid to MSI. (Doc. 1631 at 10.) The mortgage on the Providence

Village property was guaranteed by the Department of Housing and Urban Development

(“HUD”) and therefore was subject to periodic HUD audits. As a result of one such audit, MSI

was required to refund Providence Village $139,822 of management fees previously paid. The

recapture of this expense increased the profitability of Providence Village by that amount.

(Barrett Aff., ¶9; Hashimoto Aff., ¶13.)

27. See Response to paragraph 24 above.

B. Intervenors’ Facts Relating to Buffalo Run.

38. The Receiver’s response to this paragraph answers the wrong questions.

The Intervenors’ paragraph 38 asserts the Receiver has neither accepted nor rejected the

Providence Village offer or the Buffalo Run offer dated December 31, 2013. The lengthy

response instead addresses Black Cliffs’ prior offers to purchase, delivered September 24, 2013.

Regardless, the reason for rejecting the offer of September 24, 2013 and, presumably, for not

responding to the offer of December 31, 2013, was the Receiver’s assumption that Black Cliffs’

ownership interest in Janison would be pro-rated pursuant to the Receiver’s pooling Motion

(Doc. 685). The Court has not yet ruled on that Motion and has deferred hearing the Motion

until “after certain prospective sales are completed.” (Docket Entry 2/25/14.)

C. Receiver’s Additional Statements of Fact.

The Intervenors respond to only some of the Receiver’s additional fact statements,

in paragraphs numbers that correspond to those in the Opposition.


https://ecf.utd.uscourts.gov/doc1/18313001073?page=10#page=10


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5. The opening balance of MSI’s account on July 3, 2006 was $362,913.31,

which was more than sufficient to cover the $100,000 payment to Republic Title that day.

Additionally, $96,705.13 of the money deposited in MSI’s account that day was for management

fees collected for MSI’s management services. (Barrett Aff., ¶5.a.)

6. The $176,000 deposit was a loan from Thunder Bay Mortgage Company,

Inc., which MSI repaid on August 16, 2006 with check #2675. (See Ex. 22; Barrett Aff., ¶6.)

The $635,000 deposit in MSI’s account on July 21, 2006 was a loan from Squaw Springs, LLC.

MSI repaid the loan on August 11, 2006 with check #2670. (See Ex. 22; Barrett Aff., ¶7.)

10. See response to paragraph 17 above.




15. The Fujimoto Declaration describes these transactions as a confusing,

random commingling of funds. To the contrary, they are a logical series of payments following

the sale of the Creekside Apartments, consisting of distributions flowing to successive entity

owners.

a. The Creekside Apartments were owned by Creekside @ Northlake,

Ltd. The apartments were apparently sold in early January 2011. (Hashimoto Aff., ¶16.)

b. The Receiver’s QuickBooks records show the Creekside

Apartments were managed by Starwood Management Company. (Hashimoto Aff., ¶16

and Exhibit 8.)


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c. The QuickBooks records also show that North Bass, LLC owned

approximately 32% of Creekside @ Northlake, Ltd. The $150,000 payment North Bass

received on January 13, 2011 was recorded as a capital distribution, based on its

ownership interest, which was paid by Starwood Management Company. (Hashimoto

Aff., ¶17 and Exhibit 9.)

d. The QuickBooks records also show Council Properties had a 99%

ownership interest in North Bass. The January 25, 2011 payment of $165,000 was

recorded as a distribution to Council Properties based on its ownership interest.

(Hashimoto Aff., ¶18 and Exhibit 10.)

e. Council Properties owned a 49.5% interest in Janison. The

$140,000 that Council Properties loaned to Janison on January 26, 2011, which Janison

then loaned to Providence Village, resulted from the sale of the Creekside Apartments to

a third party and the subsequent distribution of those proceeds following the chain of

ownership of the entities involved. (Hashimoto Aff., ¶¶19-20.)

f. These transactions were not merely a random commingling of

funds as Mr. Fugimoto describes, but instead result from the sale of the Creekside

Apartments to a third party. (Hashimoto Aff., ¶20.)

19. The Opposition cites to the Declaration of John A. Beckstead dated

March 10, 2014, filed in the ancillary case of Beckstead v. Nielson, et al., 2:12-cv-0072

(Doc. 42) (the “Beckstead Declaration”). Attached as Exhibit F to the Beckstead Declaration is

a document titled “Closing Statement.”


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20. Nielson did not use the words “transfers” or “commissions” in the meeting

on September 12, 2013. He described the payments received as “fees.” He has always described

them as fees because the checks he received for work with Wendell Jacobson said “fees.”

(Affidavit of Matthew A. Nielson, ¶17.)

21. Nielson did not describe his work as “finding real estate”. He described

the properties as apartment complexes or multi-family income producing properties. He also did

not “assist[] the Jacobsons with the purchase of that real estate.” Nielson would look at

properties being offered for sale by contacting multi-family developers, builders, and brokerage

firms such as Hendricks Berkadia, Marcus & Millichap, and CBRE. He also reviewed internet

sources such as LoopNet and CoStar. More detail about his work is found in the accompanying

Affidavit of Matthew A. Nielson. (Nielson Aff., ¶17.)

22. As stated above, Nielson did not use the word “commission” and he was

not paid a commission. His agreement with Jacobson was that he would be paid a fee for

acquiring properties for Jacobson or an entity to ultimately purchase. It was always a flat fee and

not a percentage arrangement. They agreed on a fee based upon the size of the deal and the

upside potential. For the first five deals the fee was $100,000 each. Afterward, the fee was

sometimes more and sometimes less. (Nielson Aff., ¶18.)

26. Nielson did not sign the “Closing Statement” attached to the Beckstead

Declaration as Exhibit F. (See Ex. 23.) He did not know the document existed until this

litigation. (Nielson Aff., ¶¶9-10.) Attached as Ex. 24 is a “Settlement Statement for Stonebridge

Apartments” dated March 31, 2006, which Nielson signed on behalf of Rock Bridge, LLC


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(“Rock Bridge”). This entity was formed to purchase the Stonebridge apartments. (Nielson

Aff., ¶11.)

a. Black Cliffs signed a Purchase and Sale Agreement with

Columbus Stonebridge, LLC, the seller of the Stonebridge apartments, on February 22,

2006. (Ex. 25.)

b. The Agreement states a purchase price of $11,100,000, if the

closing occurred after March 3, 2006 but on or before March 31, 2006. (See Ex. 25 at 1.)

The closing occurred March 31, 2006. (See Ex. 24.)

c. Black Cliffs then assigned the Agreement to Rock Bridge. The

Assignment included in Ex. 26 is unsigned, but it was in fact executed at or before the

closing. (Nielson Aff., ¶14.)

d. The “Contract Sales Price” in the “Closing Statement” was altered

from “$11,100,000.00” to “$19,500,000.00,” an increase of $8,400,000. (Compare

Ex. 23 with Ex. 24.)

e. The “Funds Due” amounts at the bottom were also altered to

reflect the same dollar increase. (Compare Ex. 23 with Ex. 24.)

f. However, every other dollar figure remains the same in each

document. Specifically, the title policy and transfer tax amounts remain the same, even

though these amounts also should have increased if the contract sales price was really

$19,500,000. (Compare Ex. 23 with Ex. 24.)

g. The Stonebridge Settlement Statement contains a cost item for a

title insurance policy. The cost of a title insurance policy depends upon the contract sales


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price for the property. (Nielson Aff., ¶12.) If the purchase price had been $19,500,000,

the cost of the title policy would have been higher. (See id.)

h. The Settlement Statement also contains a cost item for a transfer

tax. The amount of this transfer tax also depends on the consideration paid for the

property. (Nielson Aff., ¶13.) For a sale at $19,500,000 the transfer tax would be

$19,500 in each column, not $11,100. (See id.)

i. Finally, the “Closing Statement” says Black Cliffs was the seller.

(See Ex. 23.) But the Purchase Agreement identifies “Columbus Stonebridge, LLC” as

the seller and Black Cliffs “or its assigns” as the buyer. (See Ex. 25.)

29. Nielson said no such thing. Nielson had no knowledge of what Jacobson

did or did not represent to investors about the Stonebridge property or any other property.

Nielson did not come to know any of the investors until after this action was filed against him

and he became involved in the main receivership proceeding. (Nielson Aff., ¶21.)

30. See Response to Paragraph 29 above.

31. Nielson had no involvement with Jacobson’s investors or lenders. At the

meeting Nielson said that on one occasion he needed to send a financial statement to the seller of

a property he had been evaluating, because the seller wanted information about the financial

strength of the potential buyer to whom Black Cliffs may assign the purchase agreement.

Jacobson’s financial statement showed some values of properties Black Cliffs had previously put

under contract and assigned to Jacobson that were much greater than the prices in Black Cliffs’

purchase agreements. Nielson assumed these numbers were only stated values and not book

values. (Nielson Aff., ¶23.)


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32. This is also untrue. At the meeting Nielson said that, after realizing the

documents he signed were not correct, he confronted Jacobson about it. Jacobson said it was all

legal, that he had been audited many times, and that everything was okay. Nielson then called

his accountant and explained it to him. The accountant told Nielson it might be legal to do this

but he was not sure. He said it did not seem morally right to him, depending on what Jacobson

was telling the investors. (Nielson Aff., ¶24.)

33. This also contains false statements. Nielson had no knowledge of whether

Jacobson misrepresented the purchase price of the Stonebridge apartments. (The Opposition

incorrectly says “Stonebrook” instead of Stonebridge.) Also, the Opposition fails to disclose that

the amounts referenced are reimbursements for funds Black Cliffs paid as earnest money for the

Stonebridge purchase. The QuickBooks records attached as Exhibit G to the Beckstead

Declaration show the following:

a. A wire of $400,000 to Black Cliffs on February 23, 2006 with the

description “E MONEY STONEBRIDGE.”

b. A wire of $100,000 on March 2, 2006 with the description “EM

STONEBRIDGE.”

c. A wire of $100,000 on March 30, 2006 with the description “E

MONEY STONEBRIDGE.”

d. Check #3198 for $250,000 on April 12, 2006 with the description

“E MONEY STONEBRIDGE.”

e. The abbreviations “E MONEY” and “EM” stand for earnest

money.


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Black Cliffs advanced these funds toward the purchase of Stonebridge. Some of the amounts

correspond to the deposits required by the Purchase and Sale Agreement with Columbus

Stonebridge, LLC dated February 22, 2006 in paragraph 2(b). (See Ex. 25; Nielson Aff.,¶25.)

ARGUMENT

POINT I

THE RECEIVER FAILS TO COME FORWARD WITH FACTS

SUPPORTING FRAUD OR A PONZI SCHEME.

The Intervenors’ Motion (Doc. 1571 at pp. 7-11) presented numerous case

authorities supporting the argument that pooling or pro rata distribution has not been approved

unless a Ponzi scheme or another pattern of fraudulent activities is demonstrated. See, e.g., SEC

v. Credit Bancorp. Ltd., et al., 290 F.3d 80, 88-89 (2d Cir. 2002) (pro rata distribution of assets

favored where “the funds of the defrauded victims were commingled and where victims were

similarly situated with respect to their relationship to the defrauders”); SEC v. Forex Asset

Management, LLC, et al., 242 F.3d 325, 332 (5th

Cir. 2001) (involving “fraudulent investment

scheme”). The Receiver does not cite a single contrary authority and does not make a contrary

argument. (See Receiver’s Opposition at 21-28.) He effectively concedes this point.2 Instead,

the Receiver continues to argue there was a commingling of funds and, therefore, the

Intervenors’ interests should be pooled and distributed pro rata. The Intervenors reply to this

argument in Point IV below.

2 Plaintiff Securities and Exchange Commission (the “SEC”) filed a separate Response to the Motion arguing some

courts have approved pro rata distributions upon only the claim of “offering fraud.” (See Doc. 1628 at 2-5.) Those

cases do not stand for that proposition. Regardless, the SEC does not even contend that there was “offering fraud”

or any other kind of fraud when Black Cliffs acquired its interest in Providence Village or MJ5 acquired its interest

in Buffalo Run. (See Doc. 1628 at 1-9.)



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Moreover, it is not enough to suggest that fraud may have occurred somewhere in

the universe of transactions completed by Wendell Jacobson, MSI, and related entities. Rather,

the Receiver must show fraud in connection with Black Cliffs’ acquisition of an interest in

Providence Village or MJ5’s acquisition of an interest in Buffalo Run, or that Providence Village

or Buffalo Run were operated as Ponzi schemes.3 Because he has failed to show any of the

above, his argument should be rejected and the Intervenors’ Motion should be granted.

POINT II

BLACK CLIFFS AND MJ5 WERE PURCHASERS, NOT INVESTORS.

The Motion argues Black Cliffs and MJ5 were not “investors” as that term is used

receivership case law, because they did not “‘commit [their] assets to the enterprise in such a

manner as to subject [themselves] to financial loss.’” Warfield v. Alaniz, et al., 569 F.3d 1015,

1021 (9th

Cir. 2009) (quoting SEC v. Rubera, 350 F.3d 1084, 1090 (9th

Cir. 2003)). The Receiver

contends that, because Black Cliffs knew its interest could be impaired if Providence Village did

not generate returns or was sold for a loss, it was an “investor” as described in Warfield. (See

Doc. 1631 at 27.)

The Receiver misreads Warfield and misunderstands the distinction between a

“purchaser” and an “investor.” The Ninth Circuit in Warfield held there was an “investment of

money” (to determine if the transaction involved a “security” under federal securities law) where

the person “turned over substantial amounts of money to [the investment manager] with the hope

3 The Opposition claims fraud in connection with the Stonebridge transaction. (Doc. 1631 at 19-21.) The facts

demonstrate these Intervenors were not involved in any such dealings, although it appears someone altered the

“Closing Statement” attached to the Beckstead Declaration as Exhibit F. (See Ex. 20.) The Opposition thus goes far

afield in trying to smear Nielson’s character with a transaction that has no relation to Providence Village or Buffalo

Run. This Reply responds to those allegations as set forth above.










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that [its] management … would yield financial gains.” Rubera, 350 F.3d at 1090. Thus, to be an

“investor” one must “commit[] their assets in return for promised financial gains ….” Warfield,

569 F.3d at 1023.

The Intervenors’ Motion establishes that Black Cliffs and MJ5 did not make

investments of money as described in Warfield and Rubera. Black Cliffs bought a one-half

interest in Janison for a specified price, and Janison acquired SA Townhomes for a price

negotiated in the Purchase Agreement. (See Exs. 6, 9-10.)4 SA Townhomes, of course, was the

single purpose entity that owned and still owns Providence Village. (Ex. 1.) Similarly, MJ5

bought a one-third tenant-in-common interest in Buffalo Run for a price negotiated in the

Purchase Agreement. (See Ex. 14.) The Receiver does not contradict those facts and makes no

attempt to argue that Black Cliffs or MJ5 simply put money in Wendell Jacobson’s hands in

exchange for a promise of financial gain. Thus, Black Cliffs and MJ5 are “purchasers” of the

interests described in Exs. 6, 9-10, and 14, and are not “investors” as that term is commonly used

in receivership case law.

The Court previously acknowledged this distinction when it granted the Barlow

Corporation’s motion for summary judgment. (Doc. 948) That important distinction applies

here as well and supports rejection of the Receiver’s argument that Black Cliffs’ and MJ5’s

interests should be pooled and distributed pro rata.

4 Exs. 6-14 referenced here are attached to the Intervenors’ Motion. (Doc. 1571)








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POINT III

BLACK CLIFFS AND MJ5 ARE NOT SIMILARLY SITUATED

WITH ANY OTHER PURCHASER OR INVESTOR.

The Receiver’s Opposition says little, if anything, about the “similarly situated”

requirement in receivership case law. As referenced above:

Courts have favored pro rata distribution of assets where, as here,

the funds of the defrauded victims were commingled and where

victims were similarly situated with respect to their relationship to

the defrauders.

Credit Bancorp, 290 F.3d at 88-89. The Opposition focuses attention on the commingling

requirement, but fails to demonstrate that Black Cliffs or MJ5 are similarly situated with any

other purchaser or investor. Even if one assumes that Wendell Jacobson and MSI are

“defrauders”5 there is no evidence in the record to suggest, much less establish, that Black Cliffs

or MJ5 is similarly situated with any other person or entity “with respect to their relationships to

the defrauders.” Credit Bancorp, 290 F.3d at 88-89. First, Black Cliffs and Council Properties

formed Janison for the purpose of buying Providence Village. Nielson was the initial manager of

Janison. Black Cliffs submitted the Letter of Intent and Janison later signed the Purchase

Agreement to buy SA Townhomes. No other purchaser or investor was involved in the

acquisition of Providence Village.

Second, no other person or entity has ever been an owner of Janison except Black

Cliffs and Council Properties. After Janison acquired SA Townhomes, no other person or entity

has been an owner of SA Townhomes except Janison and MSI. Providence Village was never

5 The SEC has not proven fraud in this case and has now abandoned its efforts to do so. When consent judgments

were entered against the Jacobsons, “the Receiver acknowledged his ongoing legal burden to demonstrate alleged

fraudulent conduct ….” (Doc. 783 at 2; Doc. 784 at 2.)






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“re-sold” to other investors, such as the SEC alleges Mr. Jacobson did on other properties. The

ownership of Janison, SA Townhomes, and Providence Village has remained constant since July

2006 when the purchase was completed.

Third, Nielson signed the Purchase Agreement as manager of Janison. (Ex. 6.)

The Intervenors are aware of no other transaction in this Receivership proceeding where the

claimant actually signed the purchase agreement to acquire the property at issue.

Regarding Buffalo Run, MJ5 entered a Purchase Agreement with Council

Properties to acquire 33.82% TIC interest. Nielson signed the Purchase Agreement as manager

of MJ5. Since that transaction was completed in March 2006, no other person or entity has been

an owner of Buffalo Run except MJ5 and Council Properties. Ownership has remained constant

from that date until the present.

The only argument the Receiver makes is that other claimants in this Receivership

proceeding also bought LLC interests or TIC interests. Certainly that is correct. However,

nothing in the case law supports such a loose definition of “similarly situated.” In Credit

Bancorp, on which the Receiver relies most, “investors transferred cash or securities to [Credit

Bancorp] and received a promise of a quarterly dividend ….” 290 F.3d at 83. In SEC v. Elliott,

et al., 953 F.2d 1560 (11th

Cir. 1992), Elliott talked investors into “loaning” him their securities,

and they unwittingly transferred legal title in their securities to Elliott. Id. at 1568-69. See also

Cunningham v. Brown, et al., 265 U.S. 1, 7-8 (1924) (investors loaned money to Charles Ponzi

purportedly to buy international postage coupons and sell them at a profit); United States v.

Durham, et al., 86 F.3d 70, 72 (5th

Cir. 1996) (investors paid cash into defendants’ fraudulent

“advance fee loan financing business”). Courts approved pro rata distribution in these cases








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because the investors were similarly situated with respect to the defrauders, i.e. each investor

entered the same type of transaction with the defrauding party.

In this action, Black Cliffs and MJ5 entered unique transactions with Council

Properties and MSI. No other purchaser or investor was involved in either acquisition. Every

other purchaser or investor in this Receivership proceeding bought ownership in a different

entity, bought a TIC interest in a different property, paid a different price, or otherwise invested

money in a different way. Thus, Black Cliffs, MJ5, and the Nielsons are not similarly situated

with any other purchaser or investor, and the Receiver’s pooling argument should be rejected.

POINT IV

THE RECEIVER’S COMMINGLING ARGMENT IS IRRELEVANT

AND IS REFUTED BY FACTS IN THE RECORD.

The Receiver’s arguments about commingled funds should be rejected because,

first, the commingling he alleges is irrelevant to the Court’s decision on this Motion and, second,

the facts refute the Receiver’s contentions.

A. Alleged Commingling Irrelevant to this Motion.

The Receiver relies upon Credit Bancorp where the Second Circuit says pro rata

distribution of assets is favored if “the funds of the defrauded victims were commingled ….”

Credit Bancorp., 290 F.3d at 88-89. The Court explained that identifiable assets are returned,

and not distributed pro rata, where the assets were segregated or never placed in the defrauder’s

control. Id. at 90.

Here, the Fujimoto Declaration concedes Black Cliffs’ $450,000 check was

deposited in a Janison account at Far West Bank, Account No. XXXXXX0046. (Fujimoto





18

Declaration, ¶13 and Exhibit 14.) A separate QuickBooks record was maintained reflecting

deposits to and disbursements from the Janison account. (Fujimoto Declaration, ¶13 and

Exhibit 13.) No evidence before the Court suggests this purchase money was commingled with

the funds of defrauded investors. Moreover, it is clear Black Cliffs’ $450,000 was payment for

the purchase of a 49.5% membership interest. Janison was not holding the money as a custodian

of invested funds. The money having been paid for a membership interest, Janison could

therefore apply it to any lawful purpose.

As for Buffalo Run, the Receiver does not dispute MJ5’s $130,000 purchase price

was paid through a 1031 exchange. MJ5 plainly bought a 33.82% TIC interest from Council

Properties as the seller. This was a straight purchase and sale of a property interest. Council

Properties was not holding the money as a custodian of invested funds. Rather, the funds were

the proceeds of the sale and Council Properties could apply it to any lawful purpose.

The concept of commingling as used in receivership case law simply does not

apply to Black Cliffs’ and MJ5’s purchases of LLC and TIC interests. Instead, it applies where

an investment manager holds the funds or other assets of investors with a requirement to invest

them for financial gain. Where a seller receives purchase money for the sale of a property

interest, the notion of commingling has no bearing on the Court’s analysis.

B. Payments and Transactions Re Providence Village.

Even if the Court considers the Receiver’s commingling argument, the facts set

forth above show these payment transaction were legitimate transfers of funds. Specifically, the

Affidavit of Mark Hashimoto (with attached exhibits), the Affidavit of Dustin J. Barrett, and the

exhibits attached to this Reply Memorandum establish the following:


19

MSI made the $900,000 payment for the purchase of Providence Village

in July 2006. Janison reimbursed MSI on September 18, 2007. (Barrett

Aff., ¶4; Hashimoto Aff., ¶10; Ex. 21.)

Thunder Bay Mortgage Company, Inc. (“Thunder Bay”) loaned MSI

$176,000 on July 21, 2006, which was repaid on August 16, 2006 with

MSI check number 2675. Squaw Springs loaned MSI $635,000 on

July 21, 2006, which was repaid on August 11, 2006 with MSI check

number 2670. (Barrett Aff., ¶¶6-7; Ex. 22.)

The opening balance of MSI’s account on July 3, 2006 was $362,913.31,

which was more than sufficient to cover the $100,000 payment to

Republic Title on that day. (Barrett Aff., ¶5.)

The $500,000 payment to Council Properties in September 2007 was “Fee

Income” from Jinco, LLC from the sale of certain lots in the Falconhead

Resort. (Barrett Aff., ¶9; Hashimoto Aff., ¶11; Ex. 20.)

The Receiver’s cash flow analysis for Providence Village fails to properly

include a refund of management fees of $139,822, which MSI was

required to refund following a HUD audit. (Barrett Aff., ¶9; Hashimoto

Aff., ¶13.)

Janison’s loan of $140,000 to Providence Village was made by check

dated December 31, 2010. It came from a Council Properties loan to

Janison of $135,000, which in turn was a capital distribution resulting

from the sale of property by Creekside @ Northlake, Ltd. (Hashimoto

Aff., ¶16 and Exhibit 9-10; Fujimoto Declaration, Exhibit 23.)

Providence Village generated over $6.7M in revenue from the time

Jansion purchased it in July 2006 through December 2011 when the

Receiver was appointed. (Hashimoto Aff., ¶22.)

During that time, the cash shortfall consisted of only $16,093 borrowed

from Arboretum. (Hashimoto Aff., ¶22 and Exhibit 11.)

Some of Providence Village’s expenses during that time were $169,107

for capital improvements and $294,026 to reduce the principal balance of

the mortgage. Both of these expenditures increased the equity of the

property. (Hashimoto Aff., ¶22.)

The value of Providence Village has increased by approximately

$2,700,000 since it was purchased in 2006. (Hashimoto Aff., ¶23.)


20

These facts show that the transactions the Receiver challenges were legitimate earnings

of fee income and loans made during the lawful operation of the Providence Village apartments.

Thus, even if those transactions were relevant to the Court’s analysis, there was nothing unlawful

or improper about them.

C. Payments and Transactions Re Buffalo Run.

The Oppositions says little about Buffalo Run except to contend it was not

profitable. The Receiver asserts Council Properties loaned money to support a cash shortfall at

Buffalo Run. The Receiver does not and cannot argue there was anything fraudulent or improper

if the property lost money.

To the contrary, MJ5 and Council Properties understood Buffalo Run likely

would not be profitable. It was a “Section 42” property, meaning there was a land use restriction

because it was low income housing, which limited the amount of rent that could be charged.

One of the reasons MJ5 bought the TIC interest in Buffalo Run was to take advantages of

resulting tax credits of approximately $900,000 that would be available to both MJ5 and Council

Properties. (Nielson Aff., ¶8.)

Thus, there was nothing unlawful or improper about MJ5 acquiring an interest in

Buffalo Run or the operations of Buffalo Run from 2006-2011.


21

POINT V

WILLIAMSON UNRECORDED TIC INTEREST IN PROVIDENCE VILLAGE.

Finally, the Receiver argues that Gary C. Williamson, as Trustee of the

Williamson Family Trust 12/28/84, claims a 28.57% tenant-in-common interest in Providence

Village, and therefore the Court cannot order a sale to Black Cliffs.

Black Cliffs has opposed the Williamson Complaint in Intervention.

Nevertheless, the Receiver follows a double standard in making this argument. The Opposition

cites the Williamson claim as a reason to deny this Motion. Yet in the sale of multifamily

properties the Receiver has declared his intention not to recognize “unrecorded TIC interests.”

(Doc. 1645 at 6 (emphasis original).) As recently as Friday, April 18, 2014, he restated that

position. (Doc. 1832 at 8.) The Receiver’s inconsistent argument should be rejected.

CONCLUSION

Based on the foregoing, the Court should rule as a matter of law (1) that there was

no fraud or other unlawful conduct relating to Black Cliffs’ and MJ5’s acquisition of interests in

Providence Village and Buffalo Run, respectively; (2) that Black Cliffs and MJ5 were

purchasers, not investors, and the Receiver’s pooling defense should be rejected; (3) that Black

Cliffs and MJ5 are not similarly situated with any other purchaser or investor, and the Receiver’s

pooling defense should be rejected; and (4) that the Receiver’s commingling argument is

irrelevant to the analysis before the Court, and the transactions the Receiver alleges were lawful

payments and loans transacted during the operation of the properties in question. Based thereon,

the Court should grant the Motion for Partial Summary Judgment and rule as a matter of law that




22

Black Cliffs’ Offers to purchase the Receiver’s interests in Providence Village and Buffalo Run

are higher than any offers given to the Receiver, such that the Receiver should be required to

accept them.

DATED this 21st day of April, 2014.

RICHARDS BRANDT MILLER NELSON

/s/ Matthew C. Barneck

MATTHEW C. BARNECK

Attorneys for Black Cliffs Investments, LLC,

MJ5 Investments, LLC, Matthew A. Nielson, and

Jill R. Nielson


23

CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on April 21, 2014, I electronically filed the foregoing

with the Clerk of Court using the CM/ECF system which sent notification of such filing to the

following:

Daniel Wadley, Esq.

Thomas M. Melton, Esq.

SECURITIES & EXCHANGE COMMISSION

15 West South Temple, Suite 1800

Salt Lake City, UT 84101

[email protected]

[email protected]

Attorneys for Plaintiff

Stephen Quesenberry, Esq.

HILL, JOHNSON & SCHMUTZ, L.C.

Riverview Plaza, Suite 300

4844 North 300 West

Provo, UT 84604-5663

[email protected]

Attorneys for Wendell A. Jacobson

and Various Intervenors

David K. Broadbent, Esq.

Matthew T. Wirthlin, Esq.

Cory A. Talbot, Esq.

J. Andrew Sjoblom, Esq.

Romaine C. Marshall, Esq.

HOLLAND & HART

222 South Main Street, Suite 2200

Salt Lake City, UT 84101

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

All other persons or entities entitled to receive

notice through PACER, pursuant to Fed. R.

Civ. P. 5(b)(3) and D.U.Civ.R. 79-1.

And

I HEREBY CERTIFY that a true and correct copy of the foregoing instrument

was mailed, first class, postage prepaid, on this 21st day of April, 2014, to the following:

Greg B. Bailey

P.O. Box 298

Fountain Green, UT 84632

Pro Se

/s/ Matthew C. Barneck


24

LIST OF EXHIBITS

Exhibit 19 – Transcript of Hearing (excerpts), December 17, 2013

Exhibit 20 − Council Properties QuickReports September 12, 2007

Exhibit 21 − Janison Investments QuickReports September 18, 2007 and MSI Corp.

QuickReport re Janison

Exhibit 22 - MSI QuickReports re Thunder Bay and Squaw Springs

Exhibit 23 - “Closing Statement” purportedly relating to Stonebridge

Exhibit 24 - Settlement Statement for Stonebridge apartments dated March 31, 2006

Exhibit 25 - Purchase and Sale Agreement dated February 22, 2006 re Stonebridge

Exhibit 26 - Assignment of Purchase and Sale Agreement re Stonebridge

G:\EDSI\DOCS\19356\0001\10M6508.DOC


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