SecProbe.io

CORRESP
1
filename1.htm

[Downey Brand LLP letterhead]

September 5,
2008

United States Securities

and Exchange Commission

Division of Corporation
Finance

Attn: Matt McNair  MS 4561

100 F Street, N.E.

Washington, DC 20549

Re:                               File No. 333-152151

Ladies
and Gentlemen:

Central Valley Community Bancorp (the “Registrant”)
has filed  registration statement No. 333-152151
on Form S-4 (“Registration Statement”) relating to the merger of the
Registrant and Service 1st Bancorp (“Service 1st”).

Under the merger agreement, Registrant shall pay
merger consideration to shareholders of Service 1st  consisting of 0.681818 of a share of
Registrant common stock (the “Share Consideration”) and cash for each share of
Service 1st common stock.
Additionally under the merger agreement, immediately prior to the
merger, Service 1st shall redeem each of its outstanding stock
options in exchange for a payment equal to the amount by which the value of the
per share merger consideration exceeds the exercise price under each stock
option.  A portion of the amount payable
to the shareholders and option holders of Service 1st (collectively,
“Former Shareholders”) shall be deposited into an escrow account (the “Escrow
Fund”) to indemnify litigation and credit-related costs in connection with a
loan participation agreement dispute.
Upon resolution of the dispute, the Former Shareholders would receive
the balance, if any, in the Escrow Fund, as described in the Registration
Statement.

You have asked us whether the right of Former
Shareholders to receive the escrow balance upon resolution of the dispute
constitutes a security that requires registration under the Securities Act of
1933 (“1933 Act”).

Based upon the reasoning, and subject to the
qualifications and exceptions, set forth herein we are of the opinion that the right
of Former Shareholders to receive the escrow balance upon resolution of the
dispute does not constitute a security that requires registration under the
1933 Act.

Background to the Transaction and Escrow Fund

As disclosed in the Registration Statement, during
the period in which the parties were negotiating the terms of the merger
agreement, but prior to the time the merger agreement was finalized, Service 1st
was made party to litigation arising from a loan in which Service 1st
Bank (“Service 1st Bank”), the wholly owned subsidiary of Service 1st,
held a $4,000,000 loan participation.

The parties negotiated a $3,500,000 hold back from the
cash merger consideration that was otherwise intended to be immediately payable
to the Former Shareholders, with the $3,500,000 to be placed in the Escrow Fund
pending the resolution of the litigation.

The Escrow Fund will be used, if necessary, to
indemnify Registrant and its wholly owned subsidiary, Central Valley Community
Bank, from all losses and liabilities that are caused by or arise from or in
connection with: (i) the loan participation agreement between Service 1st
Bancorp and First Bank, dated January 3, 2006 (the “Loan Participation
Agreement”); (ii) the loan covered by the Loan Participation Agreement;
and/or (iii) the complaint entitled Regent Hotel, LLC v. First Bank et al.
filed in Superior Court of California, County of Sacramento, Case Number
34-2008-00009879 (the “Regent Litigation”) (collectively, the “Identifiable
Costs”).  Plaintiff Regent Hotel LLC, a
California limited liability company and subsidiary of Regent Development, Inc.,
a California corporation, filed the Regent Litigation naming as defendants,
First Bank in its capacity as the lead bank in a loan participation and East West
Bank and Service 1st Bank in their capacities as loan participant banks.  The plaintiff claims that First Bank refused
to fund a construction loan draw request and that East West Bank and Service
1st Bank interfered in the relationship between the plaintiff and First Bank
which affected the decision by First Bank not to fund the draw request.  Service 1st Bank is a participant to the
extent of a 9.915 percentage share equal to $4,000,000 in First Bank’s
$40,342,000 construction loan to the plaintiff.
Plaintiff’s prayer for damages includes general, consequential and
incidental damages according to proof in an amount in excess of $10 million,
punitive damages, pre-judgment interest, costs of suit including reasonable
attorneys fees and such other relief as the Court deems just and proper.

As disclosed in the Registration Statement, the $3,500,000
of cash to be placed in the Escrow Fund was a figure arrived at by negotiation
of the parties. It is possible that no portion of the cash deposited into the
Escrow Fund will ever be distributed to the Service 1st Bancorp shareholders.

As a result of the creation of the Escrow Fund, the cash
portion of the merger consideration otherwise immediately payable to the former
shareholders was reduced from the originally negotiated amount of approximately
$2.50 per share, to approximately $1.17 per share (the “Immediately Payable
Cash”), with approximately $1.33 per share allocated to the Escrow Fund.

Registrant would, as a result of the merger, have the
obligation to pay the pro rata share of the Regent Litigation legal expenses of
the lead bank under certain circumstances under the loan participation
agreement.  It is highly probable that at
least some part of this legal expense payment obligation will come out of the Escrow
Fund, and, as such, an amount less than $1.33 per share will be distributed to
the Former Shareholders upon the termination of the Escrow Fund.

The Registration Statement discloses that the
parties expect that Service 1st shareholders will be taxed on the fair market
value of future distributions of the approximately $1.33 per share of merger
consideration that is deposited into the Escrow Fund, notwithstanding that the
full value, or even any portion, of the Escrow Fund may not be distributed during

calendar 2008 or at all; that Service 1st
shareholders would bear tax on cash that they did not receive during calendar
2008 and may never receive; and that whether a Service 1st
shareholder receives a distribution from the Escrow Fund, and the timing of any
such distribution, will depend upon the outcome of the litigation the Escrow
Fund was created to address.

Operation of Escrow Fund and Right to Receive Cash from Escrow Fund

Registrant and one or more representatives of the
Former Shareholders will appoint a bank or trust company to administer the
Escrow Fund in accordance with the terms of an escrow agreement signed among
the parties.

Disbursements from the Escrow Fund will be made for
the purposes of paying the Identifiable Costs incurred by Registrant.  The representative of the Former Shareholders
will have the right to monitor and dispute disbursements from the Escrow Fund.

Other than the indemnification purposes set out
above, the Escrow Fund has no other purpose, nor will it be used for any
ongoing trade or business.

The Escrow Fund will terminate upon the later of (a) the
date upon which the Regent Litigation is resolved completely by written
settlement agreement or judgment, and all appeals have been finally decided
and/or all applicable time periods for appeals have expired, and (b) either
(i) the date upon which all amounts owed under the Loan Participation
Agreement are irrevocably received by Central Valley Community Bank (as
successor to Service 1st Bank by virtue of the merger) or (ii) the date
that is six (6) months immediately following any revision to the loan by
written agreement between the parties provided that all required payments are
made by the borrower during such six (6)-month period.

Upon termination of the Escrow Fund, the remaining
funds (“Escrow Remainder”) will be proportionately distributed from the Escrow
Fund to the Former Shareholders (other than those who perfected dissenters
rights) as a part of the consideration in the merger.

The per share allocation of cash to the Escrow Fund
from what was originally contemplated to be merger consideration is made pro
rata among the Former Shareholders.
Likewise, distribution of the Escrow Remainder, if any, will be made
only to the Former Shareholders and will be made pro rata based on their former
share and option holdings.

No form or certificate will be used to represent the
right to receive the Escrow Remainder.
The right to receive the Escrow Remainder will not be transferable,
although the parties expect that the right would be transferable by operation
of law or by will.

The right of Former Shareholders to receive the
Escrow Remainder does not carry voting or dividend rights, and does not bear a
stated rate of interest.

The right of Former Shareholders to receive the
Escrow Remainder does not represent an equity interest in Registrant, Central
Valley Community Bank, or any other entity.

Neither the cash initially placed in the Escrow
Fund, nor any interim balance in the Escrow Fund, nor the amount, if any, of
the Escrow Remainder, will depend upon or be affected by the operating results
of Registrant, Central Valley Community Bank, or any other entity.

Registrant has undertaken to provide annual reports
to Former Shareholders showing assets and disbursements of the Escrow Fund,
prepared in accordance with generally accepted accounting principles, together
with a summary of the actions taken by the escrow agent during the year.

Reasoning Supporting the Opinion Presented

We have reviewed no action positions of the Staff in
connection with similar questions that have arisen in connection with
contingent payments resulting from merger transactions, focusing in particular
on the no action letters relating to a liquidating trust in Marriot Residence
Inn II Limited Partnership (May 8, 2002), and the cash escrows established
in connection with a merger in Essex Communications Corp. (June 28, 1988),
as well as no action letters cited therein.
We have reviewed additional no action letters relating to liquidating
trusts, and conducted searches for no action letters or other precedents
relating to cash escrows reserved for litigation, indemnity or other unresolved
issues at the time of a transaction.

We have also reviewed the merger agreement, the
escrow agreement, the Registration Statement, and the undertakings of the
Registrant supplied to the SEC with respect to the Escrow Fund.

We have also reviewed statutory and case law
rationales under which the right of Former Shareholders to receive the Escrow
Remainder might be deemed to be a “security” or an “investment contract.”

The right to receive the Escrow Remainder does not
fall within any of the specified instruments identified as a “security” as
defined in Section 2(a)(1) of the 1933 Act, nor, more broadly, does
it fall within the plain language or intended meaning of the 1933 Act:

“(a) Definitions

“When used in this title, unless
the context otherwise requires—

“(1)         The term “security” means a any note,
stock, treasury stock, security future, bond, debenture, evidence of
indebtedness, certificate of interest or participation in any profit-sharing
agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust
certificate, certificate of deposit for a security, fractional undivided
interest in oil, gas, or other mineral rights, any put, call, straddle, option,
or privilege on any security, certificate of deposit, or group or index of
securities (including any interest therein or based on the value thereof), or
any put, call, straddle, option, or privilege entered into on a national
securities exchange relating to foreign currency, or, in general, any interest
or instrument commonly known as a “security”, or any certificate of interest or
participation in, temporary or interim certificate for, receipt for, guarantee
of, or warrant or right to subscribe to or purchase, any of the foregoing.”  (emphasis added)

The right to receive the Escrow Remainder represents
the right of the Former Shareholders to receive whatever is left of a portion
of the merger consideration that would otherwise have been payable to the
Former Shareholders, had formation of the

Escrow Fund not been triggered by the Regent
Litigation. It is not “indebtedness,” as there will be no obligation to pay
Former Shareholders any amount from the Escrow Fund if nothing remains in the
Escrow Fund at its termination.

The right to receive the Escrow Remainder does not
fall within “the ordinary concept of a security” as articulated in  Marine Bank v. Weaver, 455 U.S. 551 (1982).  While Marine Bank noted that while the
definition of a “security” is broad,  the
test for whether a security exists requires examination of the  “character the instrument is given in commerce
by the terms of the offer, the plan of distribution, and the economic inducements
held out to the prospect,’“ Id. at 556, concluding with the observation that “The
broad statutory definition is preceded, however, by the statement that the
terms mentioned are not to be considered securities if “the context otherwise
requires . . . .”  Id. at 556, 557.

Clearly, the context here requires that the right to
receive the Escrow Remainder be treated otherwise than as a security.  The Escrow Fund exists as a risk allocation
mechanism between the parties, to prevent the Former Shareholders from
receiving nothing if the litigation is resolved for less than $3,500,000, while
preventing the Registrant and its shareholders from having to choose between
bearing all $4,000,000 of the litigation risk or foregoing the merger.

Moreover, the Former Shareholders have no
expectation of receiving any particular amount, or any amount, from the Escrow
Fund.  No stated rate of return accrues
with respect to the Escrow Fund or the Escrow Remainder. There are no voting or
dividend rights attached to the Escrow Remainder. The Escrow Remainder does not
depend upon, nor is it based upon or connect to, the success or failure of the
ongoing business of Registrant.

Accordingly, the right to receive the Escrow
Remainder is not an “investment contract”, as described in SEC v. W.J. Howey
Co. (328 U.S. 293 (1946).  The right of
the Former Shareholders to receive, at the end of the Escrow Fund, whatever the
Escrow Remainder is does not represent a “reasonable expectation of profits to
be derived from the entrepreneurial efforts of others.” United Housing
Foundation v. Forman, 421 U.S. 837, 852 (1975).

Accordingly, the right of the Former Shareholders to
receive the Escrow Remainder would not represent a security.

Finally, we note that in a review of the no action
letters relating to liquidating trusts or escrow funds, the circumstances most
often relate to formations of a trust or escrow in which assets other than cash
are being held, such as real estate or other assets that are being offered for
sale upon winding up of an entity.   In
some instances there are combinations of assets and cash being held in trust,
and we could identify only a small subset of those instances in which there was
a cash escrow being held as a reserve in a transaction to resolve litigation or
other contingencies.  See, e.g., Essex
Communications Corp. (June 28, 1988), Quanex Corporation (July 28,
1989), Celina Financial Corporation (February 19, 1993), and JMB Income
Properties, Ltd.-XIII (May 13, 1999) (“JMB”).

The Registrant has made undertakings to provide the
Former Shareholders with financial and status reports relating to the Escrow
Fund similar to those described in JMB.

In all other respects, the right of Former
Shareholders  to receive the Escrow
Remainder resulting from the merger has the attributes that are consistent with
the factors enumerated in the no action letters relating to liquidating trusts
and escrows (including the grant of rights pro rata; the lack of transferability;
the lack of voting or dividend rights or stated rate of interest; the fact th