Filed: Apr. 30, 2019
Latest Update: Mar. 03, 2020
Summary: Case: 17-13650 Date Filed: 04/30/2019 Page: 1 of 24 [PUBLISH] IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT _ No. 17-13650 _ D.C. Docket No. 1:15-cv-03904-WSD SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, AL B. HILL, Interested Party-Appellee, versus JAMES A. TORCHIA, CREDIT NATION CAPITAL, LLC, CREDIT NATION ACCEPTANCE, LLC, CREDIT NATION AUTO SALES, LLC, AMERICAN MOTOR CREDIT, LLC, et al., Defendants, RICHARD SUTHERLAND, KATHERINE SUTHERLAND, Interested Parties-Appel
Summary: Case: 17-13650 Date Filed: 04/30/2019 Page: 1 of 24 [PUBLISH] IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT _ No. 17-13650 _ D.C. Docket No. 1:15-cv-03904-WSD SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, AL B. HILL, Interested Party-Appellee, versus JAMES A. TORCHIA, CREDIT NATION CAPITAL, LLC, CREDIT NATION ACCEPTANCE, LLC, CREDIT NATION AUTO SALES, LLC, AMERICAN MOTOR CREDIT, LLC, et al., Defendants, RICHARD SUTHERLAND, KATHERINE SUTHERLAND, Interested Parties-Appell..
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Case: 17-13650 Date Filed: 04/30/2019 Page: 1 of 24
[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 17-13650
________________________
D.C. Docket No. 1:15-cv-03904-WSD
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff-Appellee,
AL B. HILL,
Interested Party-Appellee,
versus
JAMES A. TORCHIA,
CREDIT NATION CAPITAL, LLC,
CREDIT NATION ACCEPTANCE, LLC,
CREDIT NATION AUTO SALES, LLC,
AMERICAN MOTOR CREDIT, LLC, et al.,
Defendants,
RICHARD SUTHERLAND,
KATHERINE SUTHERLAND,
Interested Parties-Appellants.
Case: 17-13650 Date Filed: 04/30/2019 Page: 2 of 24
________________________
No. 17-13651
________________________
D.C. Docket No. 1:15-cv-03904-WSD
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff-Appellee,
AL B. HILL,
Interested Party-Appellee,
versus
JAMES A. TORCHIA,
CREDIT NATION CAPITAL, LLC,
CREDIT NATION ACCEPTANCE, LLC,
CREDIT NATION AUTO SALES, LLC,
AMERICAN MOTOR CREDIT, LLC, et al.,
Defendants,
RICHARD SUTHERLAND,
KATHERINE SUTHERLAND,
ANTONIO DUSCIO,
WILLIAM RUMER,
SONYA GRAVITT,
SHIRLEY GREGORY,
JAMES GREGORY,
CHARLES HEILD,
JAMES HOYER,
THOMAS JONES,
SARAH JONES,
TINA COLEMAN,
THOMAS KELLY COLEMAN,
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HOLLY HOOD,
MARGARET COLEMAN,
NANCY HOYER,
Interested Parties-Appellants.
________________________
Appeals from the United States District Court
for the Northern District of Georgia
________________________
(April 30, 2019)
Before WILSON and JORDAN, Circuit Judges, and MOORE, District Judge.∗
JORDAN, Circuit Judge:
In 1903, Charles Ponzi emigrated from northern Italy to Boston,
Massachusetts, with almost nothing. See Mitchell Zuckoff, Ponzi’s Scheme: The
True Story of a Financial Legend 6–7 (2006). More than one hundred years later,
his surname still frequents the headlines of America’s largest news outlets. See, e.g.,
Diana B. Henriques, Madoff Is Sentenced to 150 Years for Ponzi Scheme, N.Y.
Times, June 29, 2009, at A1. Mr. Ponzi is widely credited with conceiving a
fraudulent investment scheme in which potential investors are lured with promises
of high returns, the fraudsters skim a portion of the incoming investments, and the
remaining funds are redirected to pay the returns promised to previous investors who
∗The Honorable William T. Moore, Jr., United States District Judge for the Southern District of
Georgia, sitting by designation.
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are lulled into believing that the expected returns are being realized. See generally
United States v. Orton, 73 F.3d 331, 332 n.2 (11th Cir. 1996) (outlining the
parameters of the scheme). So long as the fraudsters can attract enough new
investments to cover the returns promised to previous investors, the scheme can
continue.
Mr. Ponzi’s scheme collapsed after investors were defrauded of millions of
dollars, causing half-a-dozen banks to crash. See Cunningham v. Brown, 265 U.S.
1, 7–8 (1924). See also Zuckoff, Ponzi’s Scheme, at 198, 295; Mary Darby, In Ponzi
We Trust, Smithsonian Mag., Dec. 1998, at 134–60 (also available at
https://www.smithsonianmag.com/history/in-ponzi-we-trust-64016168/). In the
end, those investors only recovered about thirty cents on the dollar. See Zuckoff,
Ponzi’s Scheme, at 106.
In the century since Mr. Ponzi conned the people of Boston, the U.S. legal
system has improved its response to financial scams. See generally Eric Lode,
Annotation, Judicial Remedies for Proceeds and Funds from Ponzi Schemes, 100
A.L.R. 6th 281 (2014). For example, courts now regularly appoint receivers to
manage the entities used in Ponzi schemes, collect and sell any assets connected to
the fraud, and distribute the proceeds to defrauded investors. See Wiand v. Lee,
753
F.3d 1194, 1200 (11th Cir. 2014) (citing S.E.C. v. Elliott,
953 F.2d 1560, 1567–68
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(11th Cir. 1992)). The goal of such receiverships is to grant fair relief to as many
investors as possible. See Elliott, 953 F.2d at 1566.
The appellants in this case are investors who fell victim to a Ponzi scheme
orchestrated by James Torchia. After the Securities and Exchange Commission
initiated federal proceedings against Mr. Torchia, the district court appointed a
receiver for one of Mr. Torchia’s entities. The receiver proposed a plan to collect
and sell assets connected to the scheme and distribute the proceeds. On appeal, the
investors argue that the district court denied them due process by employing
summary proceedings that did not allow them to present their claims and defenses
or meaningfully challenge the receiver’s decisions. We agree that the summary
proceedings here did not afford the investors due process, and reverse and remand
for further proceedings.
I
The S.E.C. filed suit against Mr. Torchia in 2015, alleging that he operated a
Ponzi scheme through one of his entities, Credit Nation Capital, LLC. CN Capital
and its investors purchased interests from third parties in life insurance policies,
commonly called life settlement policies. Mr. Torchia, claimed the S.E.C., used
another entity, Credit Nation Acceptance, LLC, to sell promissory notes with
interests in life insurance policies acquired by CN Capital. According to the S.E.C.,
Mr. Torchia commingled funds from CN Acceptance to cover CN Capital’s deficits.
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In April of 2016, the district court froze CN Capital’s assets and appointed a
receiver to facilitate the collection, sale, and distribution of assets to repay investors
defrauded by Mr. Torchia. The receiver determined that CN Capital had three
categories of investors: (1) investors who loaned money to CN Capital in return for
a promissory note; (2) investors who purchased life insurance policies in which they
were the sole beneficiaries (the “Direct Investors”); and (3) investors who purchased
fractional interests in life insurance policies where CN Capital was the beneficiary.
One month later, in May of 2016, the district court ruled that proceeds from
the receivership would be distributed pro rata—i.e., equally among all investors.
The district court also ordered the Direct Investors—who were the sole beneficiaries
of one or more insurance policies—to either (a) assign their policies to the receiver
(because the policies were serviced with funds comingled from CN Acceptance), or
(b) retain their policies provided they “remit to the receiver the value of the benefit
they have received from CN Capital,” including any so-called “fictitious profits.”
D.E. 120 at 11. “Fictitious profits” included “the amount of premiums paid by CN
Capital to keep the Direct Investors’ policies in force, and the fair market value of
other services provided to the Direct Investors by CN Capital.” Id.
A
Katherine and Richard Sutherland were Direct Investors in CN Capital and
the sole beneficiaries of an insurance policy with the face value of $26,992 on the
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life of Jimmy Martin. In June of 2016 and December of 2016, the receiver sent the
Sutherlands letters demanding that they either assign the Martin policy to him or
remit $25,820.34 in purported fictitious profits. According to the receiver, the
premiums paid by CN Capital on the Martin policy totaled $21,641.71 and the “fair
market value of other services” provided by CN Capital was $4,178.63. The receiver
did not explain how he had calculated the “fair market value of other services.” The
Sutherlands objected, arguing that their rights were superior to those of the receiver
because, as a contractual matter, the money they paid to acquire the Martin policy
included payment for the premiums and for CN Capital’s servicing of the policy.
The receiver responded that he was acting on the district court’s earlier order to
collect CN Capital’s assets.
On February 14, 2017, the receiver moved for an order requiring the
Sutherlands to file written objections to the assignment of the Martin policy. The
district court allowed the Sutherlands to file a response to the receiver’s motion, and
the receiver replied to the Sutherlands’ arguments.
As the movant, the receiver had the burden to show that the receivership was
entitled to the requested relief. See, e.g., Evans v. Robins, 897 F.2d 966, 968 (8th
Cir. 1990). Cf. Donell v. Kowell,
533 F.3d 762, 771 (9th Cir. 2009) (discussing a
receiver’s burden in recovering false profits); In re Bernard L. Madoff Inv. Sec. LLC,
454 B.R. 317, 331, 334–35 (Bankr. S.D.N.Y. 2011) (same). Throughout the process,
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however, the receiver did not submit any evidence to the district court justifying his
determination that the Sutherlands were obligated to remit fictitious profits or
supporting his calculations of the fictitious profits. Cf. Wiand, 753 F.3d at 1199,
1204 (affirming summary judgment order that allowed the receiver to recover “false
profits” where the receiver alleged that the Ponzi scheme paid out investors in excess
of their original investment and provided evidence of specific transactions).1
The Sutherlands were not permitted discovery on the receiver’s
determinations and calculations. Nor, as we explain later, were they allowed to fully
present their claims or defenses to dispute the receiver’s fictitious profits claim.
On July 12, 2017, the district court overruled the objections and ordered the
Sutherlands to either remit the fictitious profits claimed by the receiver (i.e., the
premiums paid by CN Capital plus the “fair market value of other services”) or
1
In an earlier brief to the district court, the receiver cited our opinion in Perkins v. Haines, 661
F.3d 623, 627 (11th Cir. 2011), for the proposition that “[a]ny transfers over and above the amount
of the principal [invested in a Ponzi scheme]—i.e., for fictitious profits—are not made for ‘value’
because they exceed the scope of the investors’ fraud claim and may be subject to recovery by a
plan trustee.” D.E. 78 at 3 n.2 (second alteration in original). See also In re Indep. Clearing House
Co.,
77 B.R. 843, 870 (D. Utah 1987) (outlining the “law allowing a trustee to avoid payments of
fictitious Ponzi scheme profits”). Although Perkins is generally instructive on a receiver’s ability
to recover fictitious profits, it does not state or hold that premiums paid on a life insurance policy
or “other services” provided in administering such a policy are necessarily fictitious profits. See
Perkins, 661 F.3d at 626–29. Moreover, Perkins does not provide a method for calculating such
profits. See
id. On appeal, the receiver argues that such premiums and “other services” should be
considered fictitious profits because CN Capital paid for them using comingled funds. It is not
clear on this record, however, whether the receiver provided evidence that CN Capital used
comingled funds to pay for the Martin policy’s premiums or for “other services” it provided to the
Sutherlands. It is similarly unclear whether the Sutherlands had a meaningful opportunity to
challenge the receiver’s conclusion that they profited from comingled funds. We express no view
on these matters, and leave them for determination on remand.
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assign the Martin policy to the receiver. The district court did not explain why the
receiver’s fictitious profits calculations were correct. Shortly thereafter, the
Sutherlands assigned the Martin policy to the receiver.
B
While the district court was considering the Sutherlands’ objections,
additional issues arose between the receiver and CN Capital’s investors. On April
19, 2017, following Mr. Torchia’s consent to a final judgment, the receiver asked
the district court to approve his proposed claims process and distribution plan. The
receiver’s distribution plan, among other things, treated all categories of investors
equally and consolidated each investor’s multiple claims into a single claim. One
group of investors—the O’Dell investors—jointly objected to the proposed
distribution plan and the district court’s use of summary proceedings related to the
receivership.
On July 18, 2017, the district court held a hearing on the receiver’s distribution
plan, and the O’Dell investors were allowed to present argument at that hearing. The
O’Dell investors, however, were not permitted to call witnesses or conduct
discovery, and oral argument was limited to objections to the plan’s claims and
distribution process. On August 7, 2017, the district court overruled the O’Dell
investors’ objections and approved the receiver’s distribution plan.
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The Sutherlands and the O’Dell investors separately appealed the district
court’s orders. They contend that that they were denied due process because the
district court’s summary proceedings did not provide them with a meaningful
opportunity to present their claims and defenses or to challenge the receiver’s
determinations or calculations related to the claimed fictitious profits.
II
We must first decide whether the district court’s July 12, 2017, and August 7,
2017, orders are appealable. The Sutherlands (who appeal the July 12 order) and the
O’Dell investors (who appeal the August 7 order) respectively contend that each
order is appealable under 28 U.S.C. § 1292(a)(2), as a receivership order directing
the sale or disposal of assets; under 28 U.S.C. § 1292(a)(1), as an injunction or an
order continuing an injunction; and under the collateral order doctrine (because each
order is final as to issues collateral to the S.E.C. action against Mr. Torchia and will
otherwise be unreviewable).
The S.E.C. submits that the July 12 order as to the Sutherlands is appealable
under § 1292(a)(1), and that the August 7 order as to the O’Dell investors is
appealable under the collateral order doctrine. The receiver argues that § 1292(a)(1)
does not confer appellate jurisdiction over the July 12 order as to the Sutherlands but
agrees that the August 7 order as to the O’Dell investors is appealable as a collateral
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order. We agree with the S.E.C.’s jurisdictional position, and conclude that we have
appellate jurisdiction.2
A
Under 28 U.S.C. § 1292(a)(1), we have jurisdiction to review certain
interlocutory orders, such as those “granting, continuing, modifying, refusing or
dissolving injunctions, or refusing to dissolve or modify injunctions.” See
Birmingham Fire Fighters Ass’n 117 v. Jefferson Cty., 280 F.3d 1289, 1292 (11th
Cir. 2002). “In determining what is an appealable order under [§] 1292(a)(1), courts
look not to the terminology, but to the ‘substantive effect of the order made.’”
McCoy v. La. State Bd. of Educ.,
345 F.2d 720, 721 (5th Cir. 1965) (citation omitted).
The district court’s July 12 order requiring the Sutherlands to either remit the
purported fictitious profits or assign the Martin policy to the receiver, consistent with
its prior order stating that all Direct Investors must remit fictitious profits or assign
their policies, is an order “granting [or] continuing . . . [an] injunction” under §
1292(a)(1). It “command[s] . . . an action,” Black’s Law Dictionary 904 (10th ed.
2014), concerning the merits of the relief requested by the receiver. See Yeargin
Constr. Co. v. Parsons & Whittemore Ala. Mech. & Servs. Corp., 609 F.2d 829, 831
(5th Cir. 1980) (reviewing a district court’s order requiring a party to turn over
records under § 1292(a)(1)); Laje v. R.E. Thompson Gen. Hosp.,
564 F.2d 1159,
2
Given our resolution, we do not address whether either order is appealable under § 1292(a)(2).
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1161 (5th Cir. 1977) (concluding that an order directing a hospital to grant a doctor
staff privileges “was in the nature of an injunction” and appealable under §
1292(a)(1)). See also 17 Charles Alan Wright & Arthur R. Miller, Federal Practice
and Procedure § 3922 (3rd ed. 2013) (explaining that an injunction for purposes of
§ 1292(a)(1) is an order “directed to a party, enforceable by contempt, and designed
to accord or protect ‘some or all of the substantive relief sought by a complaint’ in a
more than temporary fashion”) (footnotes omitted). The receiver presents no cases
or authorities to the contrary. Cf. Thomas v. Blue Cross & Blue Shield Ass’n, 594
F.3d 823, 829 (11th Cir. 2010) (describing certain orders that are appealable under
§ 1292(a)(1)).
The receiver does argue that, even if the July 12 order is appealable under
§ 1292(a)(1), the appeal is moot because the Sutherlands complied with the order by
assigning the Martin policy to him. We disagree. “[A] case becomes moot only
when it is impossible for a court to grant effectual relief whatever to the prevailing
party.” Chafin v. Chafin, 568 U.S. 165, 172 (2013) (citation and internal quotation
marks omitted). If the Sutherlands are ultimately successful, the district court could
award them monetary relief to compensate them for the loss of the Martin policy.
See Calderon v. Moore,
518 U.S. 149, 150 (1996) (per curiam) (“[T]he availability
of a ‘partial remedy’ is ‘sufficient to prevent [a] case from being moot.’”) (quoting
Church of Scientology of Cal. v. United States,
506 U.S. 9, 12 (1992)). See also In
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re Transwest Resort Props., Inc., 801 F.3d 1161, 1172–73 (9th Cir. 2015) (citing the
possibility of similar “partial relief” in a bankruptcy appeal); In re Tex. Grand
Prairie Hotel Realty, L.L.C.,
710 F.3d 324, 328 (5th Cir. 2013) (same).
B
The district court’s August 17 order approved the receiver’s claims process
and distribution plan. We reviewed a similar order approving a receiver’s
distribution plan in Elliott, 953 F.2d at 1566, but we did not address the jurisdictional
issue in that case, and “we are not bound by a prior decision’s sub silentio treatment
of a jurisdictional question.” Okongwu v. Reno,
229 F.3d 1327, 1330 (11th Cir.
2000). We now conclude that the August 12 order is appealable under the collateral
order doctrine.
Although we have not explicitly applied the collateral order doctrine to confer
appellate jurisdiction over an order approving a receiver’s distribution plan, at least
three other circuits have. See S.E.C. v. Wealth Mgmt. LLC, 628 F.3d 323, 330–31
(7th Cir. 2010); S.E.C. v. Forex Asset Mgmt. LLC,
242 F.3d 325, 330–31 (5th Cir
2001); S.E.C. v. Basic Energy & Affiliated Res., Inc.,
273 F.3d 657, 666–67 (6th Cir.
2001). Cf. S.E.C. v. Capital Consultants LLC,
453 F.3d 1166, 1171–72 (9th Cir.
2006) (concluding that investors’ claims to assets held by a receiver was not
collateral to the merits of the action). We agree with our sister circuits, and hold that
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the district court’s order approving the receiver’s distribution plan is appealable as a
collateral order.
Under the collateral order doctrine, we have jurisdiction to review a district
court order that (1) conclusively determines the question in dispute, (2) resolves an
important issue completely separate from and collateral to the merits of the action,
and (3) would effectively be unreviewable on appeal from the final judgment. See
Plaintiff A v. Schair, 744 F.3d 1247, 1252–53 (11th Cir. 2014) (quoting Will v.
Hallock,
546 U.S. 345, 349 (2006)). As the Fifth Circuit persuasively explained in
Forex, 242 F.3d at 330:
The decision by the district court to approve the
[r]eceiver’s distribution plan fits within the confines of the
collateral order doctrine. First, it conclusively determines
the manner in which the receivership assets should be
distributed. Second, it resolves an important issue
regarding distribution of the assets, which is separate from
the merits of the SEC’s complaint against [the defendant].
Third, it is effectively unreviewable on appeal because the
assets from the receivership will be distributed, and likely
unrecoverable, long before the action brought by the SEC
is subject to appellate review.
In sum, the district court’s order approving the receiver’s distribution plan is
appealable as a collateral order.
III
A district court has summary jurisdiction over receivership proceedings and
may deviate from the Federal Rules of Civil Procedure in favor of exercising its
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“broad powers and wide discretion to determine relief[.]” Elliott, 953 F.2d at 1566.
See also Capital Consultants,
LLC, 397 F.3d at 738 (“[A] district court’s power to
supervise an equity receivership and to determine the appropriate action to be taken
in the administration of the receivership is extremely broad.”) (quoting S.E.C. v.
Hardy,
803 F.2d 1034, 1037 (9th Cir. 1986)). This discretion derives from the
district court’s inherent equitable powers. See
Elliott, 953 F.2d at 1566.
We have affirmed the use of so-called summary proceedings to reduce the
time necessary to settle disputes, decrease litigation costs, and prevent further
dissipation of assets. See id. Although the word “summary” connotes an
abbreviated procedure, it does not permit the district court to deny the parties due
process. See
id. at 1567. See also Basic Energy &
Affiliated, 273 F.3d at 668, (“In
exercising its equitable discretion . . . the district court must still provide the
claimants with due process.”). Due process, in its most basic form, still requires
notice and an opportunity to be heard. See U.S. Const. amend. V; Mathews v.
Eldridge,
424 U.S. 319, 332–35 (1976). See also
Elliott, 953 F.2d at 1566.
To determine whether the district court’s summary proceedings provided due
process, we “look at the actual substance, not the name or form, of the procedure to
see if the [investors’] interests were adequately safeguarded.” Elliott, 953 F.2d at
1567. Summary proceedings generally afford due process, and the district court does
not abuse its discretion, so long as the investors are permitted “to present evidence
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when the facts are in dispute and to make arguments regarding those facts.” Id. On
the other hand, such proceedings are inadequate “when [the investors are] deprived
of a full and fair opportunity to present their claims and defenses.”
Id.
A
In Elliot, we considered whether a district court’s use of summary proceedings
in a receivership violated the investors’ due process rights. See
id. at 1566–67. We
concluded that the district court’s summary proceedings were sufficient as to some
investors but insufficient as to others. See
id. at 1567–76.
First, we vacated the setting aside of a transfer from Mr. Elliot—the
defendant—to two investors because the district court used inadequate summary
proceedings to conclude that the transfer was fraudulent. See id. at 1567–68.
Specifically, we ruled that the summary proceedings—which allowed the investors
to fill out written forms with their objections—were insufficient because
determining whether the transfer was fraudulent “required an evidentiary hearing”
where the investors could “present and argue their facts.”
Id. at 1568.
Second, we concluded that the summary proceedings used by the district court
to determine which investors owned particular securities—including the reviewing
of loan documents and the parties’ briefs—complied with due process. See id. at
1569–71. Unlike the circumstances surrounding the allegedly fraudulent transfer,
the facts concerning who owned the securities were not in dispute and the investors
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“failed to show how their rights would have been better protected by fuller
proceedings.” Id. at 1570.
Third, we held that the district court denied due process to one investor by
rejecting his claim that he was entitled to setoff his liability to the receivership
through a debt the receivership owed him. See id. at 1571–75. “[W]ithout permitting
[the investor] discovery or an opportunity to present evidence on his claims and
defenses,” the district court’s summary proceedings failed to afford due process
because they failed to provide the investor “a meaningful opportunity” to argue and
determine that he was entitled to a setoff.
Id. at 1572, 1575.
The district court in this case did not err by exercising its equitable power to
appoint a receiver and utilize certain summary proceedings. See id. at 1566. But, as
with the investors in Elliot challenging a fraudulent transfer claim and asserting a
setoff, the summary proceedings used by the district court did not provide the
Sutherlands or the O’Dell investors with a meaningful opportunity to challenge the
receiver’s determinations and calculations or to argue their claims and defenses. See
id. at 1568, 1575. We explain why below.
B
Between January and May of 2016, the district court appointed the receiver,
issued an injunction to freeze CN Capital’s assets, and held status conferences
regarding the receivership. The receiver then separated CN Capital’s investors into
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different categories, and the district court issued an order that called for the receiver
to collect and sell the receivership’s insurance policies, provided for a pro rata
distribution, defined fictitious profits, required investors to repay fictitious profits,
and allowed the Direct Investors to retain their policies so long as they remitted
fictitious profits. These determinations by the receiver and the orders entered by the
district court were made without giving the Sutherlands or the O’Dell investors
sufficient notice and/or a meaningful opportunity to be heard. Even after the
investors were given notice of the receiver’s determinations and the district court’s
orders, the district court continued to use summary proceedings in adjudicating their
claims and defenses. For example, as far as we can tell, the district court never
expressly addressed the argument of the Sutherlands that their interests were
superior to those of the receiver. Instead, it merely pointed to the receiver’s
conclusion that CN Capital serviced the policies using comingled funds.
In June of 2016, the Sutherlands received notice from the receiver that if they
wished to retain the Martin policy, they were required to remit fictitious profits, i.e.,
the premiums that CN Capital paid on the policy plus the “fair market value of other
services” that CN Capital rendered in administering the policy. A later notice
informed the Sutherlands that their monetary obligation totaled $25,820.34,
including $4,178.63 for “other services” provided. The receiver, however, never
provided the Sutherlands—nor filed with the district court—any evidence
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whatsoever of the premiums CN Capital paid on the policy or the nature of the
services CN Capital rendered. Nor did the receiver set out the methodology for his
calculation of “fair market value of other services.” As noted, the district court
denied the Sutherlands’ requests for discovery.
Viewing the totality of the circumstances, we conclude that the Sutherlands
were not provided sufficient process. See Elliott, 953 F.2d at 1566 (noting that “the
process that is due varies according to the nature of the right and to the type of
proceedings”). Maybe things would have been different had the receiver—the party
with the burden of proof—submitted evidence supporting how he arrived at the
amount of premiums paid by CN Capital and/or provided his methodology for
determining the “fair market value of other services” rendered by CN Capital. But
he did not, and it was therefore improper to require the Sutherlands to object to his
conclusory demands while simultaneously denying their request for discovery. See
Republic Nat. Bank of Dall. v. Crippen,
224 F.2d 565, 566 (5th Cir. 1955) (holding
that the district court erred in refusing to hear the claims of certain creditors in a
bankruptcy proceeding, and explaining that “the denial of due process . . . is never
harmless error”). See also Parker v. Williams,
862 F.2d 1471, 1481–82 (11th Cir.
1989) (“[P]rocedural due process is an absolute right . . . . Although the result in
this case may work a hardship on [a party] with no change in the ultimate result,
every party must have the opportunity to participate in the processes which may
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affect his or her rights in a significant manner.”), overruled on other grounds by
Turquitt v. Jefferson Cty., Ala., 137 F.3d 1285 (11th Cir. 1998). 3
We acknowledge that the Sutherlands were allowed to file written objections
to the assignment of the Martin policy or the repayment of fictitious profits. But the
Sutherlands were not permitted to substantively challenge the receiver’s calculation
of fictitious profits, a sum which provided a basis for the assignment of the Martin
policy.
Moreover, the district court did not allow the Sutherlands to meaningfully
argue certain claims or defenses. For example, the Sutherlands argued that, as a
contractual matter, the premiums CN Capital paid to service the Martin policy
should not be considered fictitious profits because they entered into an agreement to
purchase the Martin policy for $155,000—a sum which included CN Capital’s
servicing of the policy, the payment of premiums, the tracking and monitoring of the
policy, and the filing of an application for benefits upon the insured’s death. The
district court rejected these arguments, citing a previous order denying the motion
by another group of investors to amend the receiver’s initial separation of CN
Capital’s investors and fictitious profits determinations. As discussed in the
previous order, the other group of investors asserted different challenges related to
the receiver’s recovery of fictitious profits and focused primarily on the division of
3
Even on appeal the receiver does not provide his methodology or explain his calculations.
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CN Capital investors into different groups of investors. Because the previous order
did not address (and therefore did not foreclose) the arguments made by the
Sutherlands, the district court did not provide them with sufficient process.
We express no view as to the validity of the Sutherlands’ claims or defenses
or as to the receiver’s position or methodology. We hold only that due process
required the district court to more fully adjudicate the Sutherlands’ claims and
defenses. See Elliott, 953 F.2d at 1568, 1575. See also
Crippen, 224 F.2d at 566.
C
In April of 2017, the receiver filed his proposed distribution plan with the
district court. The plan set out how the receiver would treat fictitious profits, sell
certain assets, and distribute proceeds to investors. Several investors, including the
O’Dell investors, objected.
Like the Sutherlands, the O’Dell investors were allowed to file objections to
the proposed distribution plan. In addition, the district court heard oral argument on
their objections. The district court, however, limited the scope of the objections and
the issues at oral argument to the form of the proposed distribution plan. For
example, the O’Dell investors argued—similarly to the Sutherlands—that based on
the terms of their respective purchase agreements, the receiver should not count as
fictitious profits the premiums that CN Capital paid while administering their
policies.
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The district court declined to substantively address the O’Dell investors’
arguments related to fictitious profits. This was error. See Crippen, 224 F.2d at 566.
Due process required the district court to provide the O’Dell investors a meaningful
opportunity to object to the receiver’s determinations and calculations, present
evidence and argue their claims and defenses, and challenge the substance of the
receiver’s proposed distribution plan. See
Elliot, 953 F.2d at 1568, 1575.
D
The receiver argues that more substantial process was impractical because the
receivership was illiquid and could not afford to continue paying the premiums for
the insurance policies connected to CN Capital. To an extent, we are sympathetic.
We appreciate that, in some cases, the practical realities of a receivership may justify
some expediency at the expense of some procedural formality. That is, after all, the
nature of the district court’s broad equitable power in receivership. See Capital
Consultants, LLC, 397 F.3d at 738. In this case, for instance, the receiver needed to
quickly collect and sell the policies before they lapsed.
But we reiterate here what we said in Elliot, 953 F.2d at 1573: the need for
expediency and a district court’s authority to utilize summary proceedings in
receivership do not outweigh an investor’s right to due process. The process due
depends on a number of factors, see
Elliott, 953 F.2d at 1566, but at minimum
summary proceedings must provide affected investors with necessary information,
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a meaningful opportunity to argue the facts and their claims and defenses, and an
adjudication of their claims and defenses. Otherwise, the summary proceedings do
not afford due process. See id. at 1568, 1571–72, 1575. See also
Eldridge, 424 U.S.
at 332–33, 349 (outlining the requirements of due process); Liberte Capital Grp.,
LLC v. Capwill,
421 F.3d 377, 384–85 (6th Cir. 2005) (holding that, under the due
process clause, an investor was entitled to a hearing before the court authorized a
receiver to seize proceeds from the investor’s life settlement policy).
E
On appeal, both the Sutherlands and the O’Dell investors argue that that they
should be allowed discovery to substantiate their objections, claims, and defenses.
We decline at this time to mandate such a course on remand.
When the case returns to the district court, the receiver should submit evidence
together with a memorandum of law that supports his position that a particular
investor must remit fictitious profits. The receiver should also set out the
methodology used to calculate each investor’s fictitious profits (including the “fair
market value of other services” provided by CN Capital). Once the receiver does
so, the Sutherlands and the O’Dell investors should then be permitted to
meaningfully challenge the receiver’s legal theories, factual determinations, and
mathematical calculations. Once the district court has reviewed the receiver’s filings
and the submissions from the Sutherlands and the O’Dell investors, it will be in a
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better position to determine whether any discovery is warranted. Elliott, 953 F.2d at
1570 (stating that additional procedures are not required when the investor “fail[s]
to show how their rights would have been better protected by fuller proceedings”).
Following briefing (and possibly discovery), the district court must address the
substantive arguments made by the Sutherlands and the O’Dell investors, including
the contention that their purchase agreements foreclose the receiver’s recovery of
fictitious profits.
IV
The summary proceedings in this case provided insufficient process to the
Sutherlands and the O’Dell investors. We reverse the July 12 order requiring the
Sutherlands to either assign the Martin policy or remit fictitious profits and the
August 7 order approving the receiver’s distribution plan. We remand the case for
further proceedings consistent with this opinion.
REVERSED AND REMANDED.
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