United States District Court, W.D. Wisconsin
OPINION & ORDER
D. PETERSON District Judge
case is in its final stages, and five motions are before the
court. First, plaintiff the United States Securities and
Exchange Commission, defendant the Estate of Loren W.
Holzhueter, and relief defendants Honefi, LLC and Arlene
Holzhueter have moved for entry of consent and final
judgments against the Estate, Honefi, and Arlene Holzhueter.
Dkt. 145. Second, defendants' counsel, Kravit, Hovel
& Krawczyk, SC (KHK), has moved for accrued, unpaid
attorney fees and costs, to be paid from the funds the court
currently holds in its registry. Dkt. 151. Third, the SEC has
moved the court to appoint a receiver to oversee a two-phase
distribution of assets to the defrauded investors. Dkt. 159.
Fourth, the state court plaintiffs have moved to intervene.
Dkt. 163. And finally, the SEC, defendants, and relief
defendants have moved to temporarily stay six related
state-court actions, until the court has the opportunity to
rule on all pending motions. Dkt. 186.
parties largely agree that a receiver should oversee the
distribution of assets to the investors. But the court must
decide two issues that will affect the receivership. Over the
SEC's objection, the court will allow defendants'
attorneys to recover a portion of their unpaid attorney fees
and costs during phase I of the distribution proceedings. And
because the state court plaintiffs will have the opportunity
to be heard during the distribution proceedings, the court
will deny their motion to intervene. The court will also stay
the pending state-court cases. With these outstanding
objections resolved, the court will enter the unopposed
consent judgments and a receivership order, which the court
has modified to reflect the decisions made in this order.
initiated this enforcement action against Loren W. Holzhueter
and ISC, Inc. on January 21, 2015. Dkt. 1. On January 28,
2015, the court entered a temporary restraining order (TRO)
against defendants. Dkt. 20. The TRO remains in effect and
provides, in relevant part, that “defendants and each
of their officers, agents, servants, employees, and those
persons in active concert or participation with them . . .
are hereby prohibited from . . . making any interest or
principal payments to investors, pending the resolution of
this action or further order of this court.”
Id. at 3-4. The TRO froze defendants' assets.
Id. at 4-5.
November 2, 2015, the court granted the parties' joint
motion for entry of partial judgment against defendants and
entered consent judgments against ISC and the Estate of Loren
W. Holzhueter. Dkts. 79-81. The consent judgments provide, in
relevant part, that defendants will “pay disgorgement
of ill-gotten gains and prejudgment interest thereon; that
the amounts of the disgorgement and civil penalty [ISC only]
shall be determined by the Court upon motion of the
Commission; and that the prejudgment interest shall be
calculated from the date the ill-gotten gain was
obtained[.]” Dkt. 80, at 3 and Dkt. 81, at 1. Neither
defendant admitted or denied the allegations at issue.
November 18, 2015, the court granted the parties' joint
motion to deposit Loren W. Holzhueter's life insurance
proceeds with the court. Dkt. 86. The assets remain frozen
and will be available to “satisfy any agreement reached
by the parties to this case or any remedy ordered by the
Court.” Id. at 3.
20, 2016, the parties filed an unopposed motion for entry of
consent and final judgments against the Estate and relief
defendants Honefi, LLC and Arlene Holzhueter. Dkt. 145.
Relief defendant Aaron Holzhueter has also agreed to resolve
the SEC's claims against him by voluntarily consenting to
entry of judgment, but those terms are subject to approval by
the bankruptcy court in Holzhueter's Chapter 11 case, No.
16-13134 (Bankr. W.D. Wis. filed Sept. 12, 2016). Dkt. 145
and Dkt. 182. These parties have agreed to satisfy their
disgorgement obligations by relinquishing to the SEC: (1) the
life insurance proceeds currently held in the court's
registry; and (2) ownership and other interests in ISC and
Honefi. Upon entry of these consent judgments, the SEC will
commence the distribution phase of this case.
intends to distribute defendants' ill-gotten gains in two
phases, via receiver. First, the receiver will distribute the
life insurance proceeds and other liquid assets to injured
investors, pro rata based on net principal loss
(i.e., the total amount invested less any repayments the
investor received). Second, the receiver will distribute the
proceeds from any sale of ISC, Honefi, or their assets to all
remaining creditors. The SEC believes that a third-party
receiver will be best equipped to oversee the sale of ISC,
Honefi, and their assets and, in the interim, oversee
operations to preserve their value. The SEC envisions that
the receiver would serve several roles:
(1) maintaining custody of all Disgorgement Funds prior to
the final distribution . . .; (2) drafting and submitting
Distribution Plans for the Preliminary and Secondary
Distributions; (3) overseeing the notice and claims process,
including by assessing the validity of any disputed claims
and determining the appropriate amount a claimant should
receive . . .; (4) serving as Receiver over ISC and Honefi
for the purpose of completing arm's length sales of those
entities, and/or their assets for the benefit of investors
(and creditors); (4) [sic] entering into a consent judgment
on behalf of ISC that would be satisfied upon termination of
the receivership[;] and (5) to the extent necessary,
authorizing the retention of professionals to meet any tax
reporting requirements concerning the distribution.
Dkt. 148, at 5-6.
As this case enters its distribution phase, the parties are,
for the most part, on the same page. All agree that the court
should enter the proposed consent judgments against the
Estate, Honefi, and Arlene Holzhueter. The court will enter
those judgments shortly. And it appears that all agree that
the court should appoint a third-party receiver to oversee
the next steps. But before the court enters its order
appointing a receiver, it must address whether
defendants' counsel, Kravit, Hovel & Krawczyk, SC
(KHK), may collect unpaid attorney fees and costs during
phase I of the distribution proceedings, and whether the
state court plaintiffs may intervene in this case.
KHK's motion for attorney fees and costs
most of this litigation, KHK's bills have been paid by
ISC, subject to the approval of David Omachinski, the
independent monitor that the court appointed to oversee
ISC's operations. But, in Mr. Omachinski's judgment,
ISC does not have the resources to continue paying KHK's
bills, and it will not be able to do so in the foreseeable
future. KHK's total fees and costs have been