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Securities and Exchange Commission v. Torchia

United States Court of Appeals, Eleventh Circuit

April 30, 2019

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee,
v.
JAMES A. TORCHIA, CREDIT NATION CAPITAL, LLC, CREDIT NATION ACCEPTANCE, LLC, CREDIT NATION AUTO SALES, LLC, AMERICAN MOTOR CREDIT, LLC, et al., Defendants, AL B. HILL, Interested Party-Appellee, RICHARD SUTHERLAND, KATHERINE SUTHERLAND, Interested Parties-Appellants. SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, AL B. HILL, Interested Party-Appellee,
v.
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, HOLLY HOOD, MARGARET COLEMAN, NANCY HOYER, Interested Parties-Appellants.

          Appeals from the United States District Court for the Northern District of Georgia D.C. Docket No. 1:15-cv-03904-WSD

          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 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 (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.

         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 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, 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 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.

         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 ...


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