Attorneys for Plaintiff in Intervention GARNIK MNATSAKANYAN FAMILY INTER-VIVOS TRUST

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1 -- {.00-0.DOC-(} Case :0-cv-00-DDP-JEM Document Filed 0//0 Page of 0 RUTTER HOBBS & DAVIDOFF INCORPORATED WESLEY D. HURST (State Bar No. RISA J. MORRIS (State Bar No. 0 Avenue of the Stars, Suite 00 Los Angeles, CA 00 Telephone: (0-00 Facsimile: (0 - Attorneys for Plaintiff in Intervention GARNIK MNATSAKANYAN FAMILY INTER-VIVOS TRUST SECURITIES AND EXCHANGE COMMISSION, v. UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA Plaintiff, NEWPOINT FINANCIAL SERVICES, INC.; JOHN FARAHI; GISSOU RASTEGAR FARAHI; and ELAHEH AMOUEI, and TRIPLE "J" PLUS, Defendants. Relief Defendant. GARNIK MNATSAKANYAN FAMILY INTER-VIVOS TRUST, Proposed Intervenor. GARNIK MNATSAKANYAN FAMILY INTER-VIVOS TRUST, v. Proposed Intervenor, JOHN FARAHI; NPS0 EXCHANGE OF CALIFORNIA, INC.; JAMES H. DONELL, in his capacity as Receiver over NPS0 EXCHANGE OF CALIFORNIA, Proposed Cross- Defendants. Case No.: CV-0-0 DDP (JEMx REPLY TO OPPOSITION OF JAMES H. DONELL, RECEIVER TO EX PARTE APPLICATION OF PROPOSED INTERVENOR GARNIK MNATSAKANYAN FAMILY INTER- VIVOS TRUST ( TO INTERVENE PURSUANT TO RULE AND ( FOR LEAVE TO BRING PROPOSED COMPLAINT IN INTERVENTION PURSUANT TO THE COURT S ORDER DATED FEBRUARY, 0

2 -- {.00-0.DOC-(} Case :0-cv-00-DDP-JEM Document Filed 0//0 Page of 0 I. INTRODUCTION James H. Donell, the permanent receiver appointed by the Court herein ( Receiver improperly seeks to have this Court decide the merits of proposed plaintiff-in-intervention Garnik Mnatsakanyan Family Inter-Vivos Trust s (the Family Trust claims on the Family Trust s motion for intervention and fails to state any grounds for opposing the Family Trust s Ex Parte Application. First, the Family Trust is entitled to intervene in this action as of right. Federal Rule of Civil Procedure (a( only requires a proposed intervenor to establish that it may have an interest in the litigation. See United States v. City of Los Angeles, F.d (th Cir. 0. As set forth in the Family Trust s Ex Parte Application and explained further herein, the Family Trust has established that it does have an interest, and thus is entitled to intervene. Second, although the issue of whether the Family Trust s funds are held in trust is not presently before the Court, it is important to note that the Receiver flatly misstates California law. By statute, California law expressly provides that a qualified intermediary acts as a custodian for monies entrusted to a qualified intermediary for a like-kind deferred property exchange, and that those monies are not subject to execution or attachment. See Cal. Fin. Code 00. The Receiver offers no response to this point, but instead relies on Virginia law that is wholly inapplicable here. Third, the Family Trust will suffer substantial consequences if it is not permitted to act expeditiously to intervene and protect its interests. The Family Trust s money has been frozen by this Court in this action. It is unclear what assets exist in the receivership estate to satisfy creditors beyond the Family Trust s trust funds. The Receiver has expressly stated that it contends the Family Trust s monies are subject to disgorgement to creditors. As such, the Family Trust claims an interest in the subject of this action, and the action may impair or impede its ability to protect its interest. The Family Trust is entitled

3 -- {.00-0.DOC-(} Case :0-cv-00-DDP-JEM Document Filed 0//0 Page of 0 to intervene so that it may have the opportunity to establish for the Court the location of its money and its right to a complete return of the funds. The Receiver s argument that the Family Trust should be required to wait to intervene until a formal claims process is established is wrong. The Family Trust is entitled to participate from the outset of the proceedings so that it can protect its interests. Fourth, the Receiver claims that it acts in the interest of the Family Trust. This is manifestly false given the content of the Receiver s Opposition. The Family Trust contends that its monies are trust funds and are not subject to disgorgement to ordinary creditors. The Receiver contends that the funds at issue are not trust funds and are subject to disgorgement. It is incontrovertible that the Receiver is not acting in the interest of the Family Trust. Indeed, by virtue of filing its Opposition and refusing to stipulate to the Family Trust s intervention, the Receiver is actively working to prejudice the Family Trust. Finally, the Family Trust has acted in a timely fashion and has grounds to proceed on an ex parte basis to intervene. II. ARGUMENT A. The Receiver Improperly Seeks to Have This Court Decide The Merits of The Family Trust s Claims On A Motion for Intervention. The Receiver opposes the Family Trust s Ex Parte Application primarily on the ground that the Family Trust s monies were not held in trust by NPS 0 Exchange of California ( NPS 0 Exchange. This is not a proper ground to oppose the application. Rule requires only that a proposed intervenor may have a claim in litigation. See United States v. City of Los Angeles, F.d at 0 (holding district court erred in denying motion to intervene as of right. The relevant inquiry is whether [a proceeding] may impair rights as a practical matter rather than whether the [proceeding] will necessarily impair

4 -- {.00-0.DOC-(} Case :0-cv-00-DDP-JEM Document Filed 0//0 Page of 0 them. Id.; see also Brennan v. N.Y.C. Board of Education, 0 F.d, - 0 (d Cir. 0 (holding district court could not deny motion to intervene on ground that proposed intervenors lacked a cognizable interest where the nature of the interest was what they want to contest by intervening as parties ; Turn Key Gaming, Inc. v. Oglala Sioux Tribe, F.d 00, 0 (th Cir. ( An application for intervention cannot be resolved by reference to the ultimate merits of the claim the intervenor seeks to assert unless the allegations are frivolous on their face.. As set forth below, the Family Trust has a cognizable interest in this litigation. The Receiver s arguments are irrelevant and cannot be considered at this stage of the proceedings. B. The Receiver Misstates The Law Governing The Character of the Family Trust s Funds Entrusted to NPS 0 Exchange. Setting aside the fact that the Receiver s arguments are misplaced, it is important to note that they are also wrong. The Receiver relies exclusively on a decision of the Bankruptcy Court of the Eastern District of Virginia, which was interpreting Virginia law in deciding whether certain monies were held in trust. See In re LandAmerica Financial Group, Inc., B.R. 00, (E.D. Va. 0 (ruling state law governed the scope and existence of the interest at issue. Virginia law is irrelevant here. When this Court eventually decides whether the Family Trust s monies were held in trust, it will presumably apply California law, as provided in the governing agreement between the Family Trust and NPS 0 Exchange. See Proposed Compl. in Intervention ( Compl., Exh. A, Art..; see also In re Sale Guaranty Corp., B.R. 0 (th Cir. (applying California law to determine character of like-kind monies deposited with California qualified intermediary. California provides by statute that a qualified intermediary for a like-kind property exchange, such as NPS 0 Exchange, acts as a custodian for funds

5 -- {.00-0.DOC-(} Case :0-cv-00-DDP-JEM Document Filed 0//0 Page of 0 deposited by a taxpayer. See Cal. Fin. Code 00. The statute expressly provides that such funds are not subject to execution or attachment. Id. The Receiver offers no response to the Family Trust s position that the statute controls here. Further, the Bankruptcy Court of the Central District of California and the Ninth Circuit have both held when interpreting California law that funds placed with a qualified intermediary are held in trust. See In re Sale Guaranty, Inc., B.R. at ; In re Exchanged Titles, Inc., B.R. 0 (C.D. Cal.. The Receiver offers no response at all to In re Exchanged Titles, Inc., which held that property held by a qualified intermediary was held in trust. Further, the Receiver s distinction of Sale Guaranty is misplaced. Preliminarily, the Receiver asserts that in Sale Guaranty, the parties did not enter into fully integrated agreements, such that the case is distinguishable. See Opp. at. This assertion is unsupported. The decision does not mention whether the parties written agreement in that case was integrated. See B.R. at (mentioning written agreement without discussing integration of agreement. Further, the Receiver contends that Sale Guaranty differed from the instant case because it involved a reverse 0 deferred exchange, which is a different form of deferred exchange than occurred in the Family Trust s transaction. However, this is not a meaningful distinction. In Sale Guaranty, the qualified intermediary held sales proceeds from a real property transaction for a taxpayer pursuant to Internal Revenue Code section 0. Id. The proceeds were to be returned to the taxpayer if he was unable to complete his transaction. Id. The taxpayer believed that the funds were being held for his benefit. Id. Applying California law, the Ninth Circuit concluded that the funds were held in trust. Id. This is precisely what happened here. Thus, as in Sale Guaranty, the Family Trust s monies are being held in trust.

6 Case :0-cv-00-DDP-JEM Document Filed 0//0 Page of 0 The Receiver makes much of the fact that in the LandAmerica case, the district court ruled that the taxpayer had conveyed its entire interest in the monies at issue to the qualified intermediary. This was a unique factual situation interpreted by applying Virginia law to a scenario where a qualified intermediary agreement was drafted by parties separately represented by competent counsel and experienced financial professionals. See In re LandAmerica, B.R. at. The evidence will show that, unlike in LandAmerica, the Family Trust s funds are being held in trust pursuant to California law. See Compl. -. In any event, as a practical matter, it is simply illogical to reach any conclusion other than that the Family Trust s monies are held in trust. NPS 0 Exchange is holding the money for the Family Trust so that the Family Trust can complete a like-kind property exchange. This arrangement is governed by Internal Revenue Code section 0, which required the Family Trust to give up access to its funds pending the close of the transaction. See U.S.C. 0. Under the parties agreement, NPS 0 Exchange can perform only one of two functions with respect to the money: ( transmit the funds to close a sale if the Family Trust finds a new property to purchase; or ( return to the money to the Family Trust. See Compl., Exh. A, Art... NPS 0 Exchange holds the funds for the benefit of the Family Trust. Id. This is a trust. As such, the Family Trust s funds are not subject to disgorgement to ordinary creditors. The Receiver s argument that the Family Trust should be denied permission to intervene because the monies have purportedly been commingled puts the cart before the horse. The Family Trust is entitled to intervene so that it can trace its funds and establish its right to recovery. The Receiver is arguing that the Family Trust should not be allowed to intervene because it has not categorically proven its interest. This is not the standard for a motion to intervene. See United States v. City of Los Angeles, F.d at {.00-0.DOC-(}

7 Case :0-cv-00-DDP-JEM Document Filed 0//0 Page of 0 C. The Family Trust Has a Cognizable Interest In This Action, and As Such Is Entitled to Intervene. The Family Trust claims an interest in the subject of this action, and the action may impair or impede its ability to protect its interest. As such, it is entitled to intervene. See Fed. R. Civ. Proc.. Specifically, as set forth above, the Family Trust asserts that it entrusted nearly $. million to NPS 0 Exchange, which has now been frozen by this Court in this action. As set forth in the Family Trust s Ex Parte Application, the Family Trust will suffer substantial consequences if it is not permitted to act expeditiously to protect its interests. Specifically, the Family Trust faces a looming deadline of April, 0 to attempt to establish its rights to the funds. See Ex Parte Application at. Further, it is unclear what assets exist in the receivership estate to satisfy creditors beyond the Family Trust s trust funds. The Receiver has expressly stated that it contends the Family Trust s monies are subject to disgorgement to creditors as part of the receivership estate. See Opp. at. The Family Trust is entitled to intervene so that it may have the opportunity to establish for the Court the location of its money and its right to a complete return of the funds. The Receiver s argument that the Family Trust should be required to wait to intervene until a formal claims process is established is wrong. The Family Trust is entitled to participate from the outset of the proceedings so that it can conduct discovery and protect its interests. The fact that other third-party claims may arise is no reason to bar the Family Trust from participating in this action. D. The Receiver Is Actively Working to Oppose the Family Trust s Interests. The Receiver asserts that as a neutral professional he represents the Family Trust s interests. However, the Receiver is actively opposing the Family Trust s interests, as demonstrated by the very fact of his Opposition to the Family Trust s Ex Parte Application. By delaying the Family Trust s intervention -- {.00-0.DOC-(}

8 -- {.00-0.DOC-(} Case :0-cv-00-DDP-JEM Document Filed 0//0 Page of 0 in this matter, the Receiver is working to prejudice the Family Trust s interests. The Receiver contends that the Family Trust s monies are not held in trust, which is the Family Trust s central claim. See Opp. at -. The Receiver refuses to acknowledge controlling California law contradicting his position. In an effort to quash the Family Trust s claim, the Receiver insists on relying on an inapposite, non-authoritative Virginia case to dispute the Family Trust s position. The Receiver does not represent the Family Trust s interests. No other party represents the Family Trust s interests. The Family Trust is entitled to intervene. See Fed. R. Civ. Proc.. E. The Family Trust Has Acted in a Timely Manner and Has Grounds to Proceed on an Ex Parte Basis. As set forth in the Family Trust s Reply to the Opposition of the Securities and Exchange Commission, the Family Trust has acted in a timely manner. First, with respect to the timing of its Ex Parte Application, the Family Trust is entitled to seek emergency relief. In light of comments by counsel for the Securities and Exchange Commission to a representative of the Family Trust that the Family Trust did not require an attorney, it would be unjust to penalize the Family Trust for its delay in engaging counsel. See Decl. of Stella Mnatsakanyan in Support of Reply to Opposition of SEC,. Further, both the Receiver and the SEC have misstated the significance of the Internal Revenue Bulletin cited in their papers. The Internal Revenue Bulletin does not change the fact that the Family Trust will incur adverse tax consequences effective April, 0. The Receiver is apparently confused about the import of the Internal Revenue Bulletin when he suggests that the relief sought by the Family Trust would result in the consequences it hopes to avoid. If the Family Trust completes its exchange by April, 0, it will not incur adverse tax consequences. If it does not complete the exchange by that date, tax liability will occur. The Internal Revenue Bulletin is relevant here only in that it

9 -- {.00-0.DOC-(} Case :0-cv-00-DDP-JEM Document Filed 0//0 Page of 0 provides the Family Trust does not have to pay the taxes until its money is returned. With respect to the timing of its request to intervene, the Family Trust plainly is moving to intervene in a timely manner as contemplated by Rule. The action was only filed on January, 0 and has progressed minimally since that date. III. CONCLUSION For the foregoing reasons, The Family Trust respectfully requests that the Court permit The Family Trust to intervene in this action and order the Court clerk to file the attached Proposed Complaint in Intervention as of the date of the Court s Order, with leave for The Family Trust to pursue its claims. DATED: March, 0 RUTTER HOBBS & DAVIDOFF INCORPORATED By /s/ WESLEY D. HURST Attorneys for Plaintiff in Intervention GARNIK MNATSAKANYAN FAMILY INTER-VIVOS TRUST