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United States Securities And Exchange Commission v. Isc, Inc.

United States District Court, W.D. Wisconsin

August 30, 2017

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
ISC, INC., d/b/a INSURANCE SERVICE CENTER, and THE ESTATE OF LOREN W. HOLZHUETER, Defendants, and HONEFI, LLC, ARLENE HOLZHUETER, and AARON HOLZHUETER, Relief Defendants.

          OPINION & ORDER

          JAMES D. PETERSON, DISTRICT JUDGE.

         The receiver has filed the proposed phase II distribution plan, Dkt. 299, which prompted several objections. The court will address those objections, and two additional motions, in this order.

         A. Objections to the phase II plan

         In the proposed phase II distribution plan, the receiver has identified eight creditor classes: (1) secured debt, (2) professional fees, (3) payroll and tax liabilities, (4) investor claims, (5) Kravit firm pre-receivership professional fees, (6) unsecured debt, (7) insider and indemnification claims, and (8) contingent/unliquidated/disputed claims. The first three classes-secured debt, professional fees, and payroll and tax liabilities-will recover at a rate of 100 percent. The next two classes-investor claims and the Kravit firm's pre-receivership professional fees-will recover 85 percent. The receiver will pay approved but unsecured claims at a rate of 66 percent. Insider and indemnification claims and contingent/unliquidated/disputed claims will not recover at all. Estimated claims total just over $18.2 million; by the end of phase II, the receiver will have distributed just over $15.2 million.

         Kravit, Hovel & Krawczyk does not object to its proposed payment. Dkt. 302. Contrary to the receiver's suggestion, the court had not previously ordered KHK to be compensated at the same rate as the investor class. The court limited KHK's recovery in phase I to a pro rata distribution commensurate with the investors' phase I recovery. The court had not determined KHK's status in during phase II. Nevertheless, no one objects to KHK's payment, and the court finds it reasonable under the circumstances, and it will approve the proposed distribution of $121, 194.65 to KHK.

         The court turns to the objections.

         1. Double Bubble

         Double Bubble, Ltd., objects to its classification as an unsecured creditor. Double Bubble contends that it perfected its security interest by filing a UCC financing statement with the Wisconsin Department of Financial Institutions, so the receiver should classify it as a secured creditor. Dkt. 304. But the receiver classifies Double Bubble as an unsecured creditor because its financing statement did not come up in the DFI records when he searched for financing statements using “ISC, Inc.” as the debtor organization. As it turns out, Double Bubble filed its financing statement listing “ISC, Inc .” as the debtor, with a space between the final “c” and the “.” Dkt. 306-1. The extra space was surely inadvertent, but it prevented the Double Bubble financing statement from showing up on a search of the accurate legal name of ISC, Inc.

         A creditor must file a financing statement with the Wisconsin DFI to perfect its security interest. Wis.Stat. § 409.310(1). A financing statement is effective “even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.” § 409.506(1). “[A] financing statement that fails sufficiently to provide the name of the debtor in accordance with s. 409.503(1) is seriously misleading.” § 409.506(2). There is, however, a safety valve for the debtor's name. “If a search of the records of the filing office under the debtor's correct name, using the filing office's standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with s. 409.503(1), the name provided does not make the financing statement seriously misleading.” § 409.506(3). Put simply, § “409.506(3) creates a ‘safe harbor' that will save a financing statement containing an incorrect name if a searcher can nonetheless find it in the ordinary course of a search.” In re Voboril, 568 B.R. 797, 801 (Bankr. E.D. Wis. 2017). Unfortunately, the safety valve doesn't help Double Bubble. Given the search logic that the DFI uses, which is set out in Wis. Admin. Code DFI-CCS § 504(1), the extra space prevents the Double Bubble financing statement from coming up in a search using ISC's correct legal name.

         The court has some sympathy for Double Bubble, because the additional space would be easy to overlook even if one were careful in filing the financing statement. And Double Bubble is correct that the receiver could have found its financing statement if he had used a different search, say a search simply for “ISC” with no punctuation or corporate designation. Double Bubble contends that such a search would have been “reasonably diligent.” But reasonable diligence is not the current standard. Voboril, 568 B.R. at 802. “A primary purpose of the revision to the UCC ‘was to replace the former reasonableness standard with a clearer standard based on the computerized search logic of the filing office.'” Id. (quoting In re John's Bean Farm of Homestead, Inc., 378 B.R. 385, 389 (Bankr. S.D. Fla. 2007)).

         “Seriously misleading” is a term of art with a statutorily defined meaning: a search “under the debtor's correct name” must find the financing statement, otherwise it is seriously misleading. The fact that the DFI provides search “tips” and “hints” that might produce a broader set of results does not change the statutory standard. Double Bubble's objection is overruled. Double Bubble will participate in phase II as an unsecured creditor.

         2. T&J Liquidation

         Like Double Bubble, T&J Liquidation, Inc., objects to its status as an unsecured creditor. Dkt. 313. T&J contends that it has an enforceable security interest against ISC and that, as a result, it is a secured creditor. T&J and ISC executed a security agreement “to secure ISC's payment and performance of the indebtedness and obligations due” T&J. Id. at 2. The receiver classifies T&J as an unsecured creditor because it did not perfect its security interest before the court appointed the receiver. (The receiver was appointed on October 20, 2016; T&J filed its financing statement with the DFI on January 31, 2017.)

         T&J has a security interest that would ordinarily be enforceable against ISC, but the failure to perfect that security interest affects T&J's ranking among ISC's creditors. As the receiver explains, T&J's “failure to take any action to perfect its security interest prior to the appointment of the Receiver exposed its claim to treatment as an unsecured claim in this matter.” Dkt. 334, at 2. These proceedings demand difficult choices; not everyone will be made whole. The receiver may, in its discretion and in the interests of maximizing equitable recovery, subordinate unperfected security interests. The receiver has appropriately subordinated T&J's claim, and its objection is overruled.

         3. Cowie Management Group

         Early in this case, the court entered a temporary restraining order that required, among other things, that ISC and Honefi provide an accounting of their assets to the SEC. ISC engaged the Cowie Management Group and its principal, Martin J. Cowie, to assist with that accounting. (The court will refer to Cowie and his company together as “Cowie.”) ISC incurred fees of $379, 880, of which it paid Cowie $213, 000. The receiver engaged Cowie-with the court's approval-to provide some additional services, which so far amount to $39, 855.

         Under the proposed phase II plan, Cowie's court-approved post-receiver fees are treated as professional fees and fully reimbursed. Cowie's outstanding balance for its pre-receiver work for ISC and Honefi is treated as an unsecured debt, to be compensated with ISC's other unsecured obligations at 66 percent of the principal balance. Cowie objects to the treatment of his pre-receiver work, ...


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