Securities And Exchange Commission v. Torchia et al

Filing 208

ORDER AND OPINION. Intervenors' Motion to Amend Pooling Order 185 is DENIED. Signed by Judge William S. Duffey, Jr on 8/24/2016. (bgt)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.

1:15-cv-3904-WSD

JAMES A. TORCHIA, CREDIT
NATION CAPITAL, LLC, CREDIT
NATION ACCEPTANCE, LLC,
CREDIT NATION AUTO SALES,
LLC, AMERICAN MOTOR
CREDIT, LLC, and SPAGHETTI
JUNCTION, LLC,
Defendants.

OPINION AND ORDER
This matter is before the Court on Intervenors’1 Motion to Amend Pooling
Order [185] (“Motion to Amend”).

1

Honey Investment, Ltd., Faye Bagby as trustee of the Charles G.
Quarnstrom and Marjorie E. Quarnstrom Revocable Living Trust, Gaylon Childers
as trustee of the Childers’ Family Trust, Javier Salgado, Jackie Simmers, Larry
Simmers, William Jones, Professional Janitorial Services of Midland, Inc., LG
Pump, Inc., Robert Chambers, Mark Darville, Larry Slaughter, Jo-Ann Fugitt,
Zane Wallace, Gary Moore, Harry Graham, Judy Slaughter, Gary Broyles, Charles
Beck, Shirley Beck, Paul lvey, Louis Nunez, Kathryn Janicek, Donald Jones,
Joseph Kramer, Terry McIver, Gary Jones, Luann Sanders, Charles Gibson,
Charles Dahlen, Sue Dahlen, Mary Jo Evans, Nelda Couch as executor of the

I.

BACKGROUND
On May 25, 2016, the Court entered an Order [120] (“May 25th Order”)

regarding the disposition of insurance policies held by Defendants James A.
Torchia, Credit Nation Capital, LLC (“CN Capital”), Credit Nation Acceptance,
LLC, Credit Nation Auto Sales, LLC, American Motor Credit, LLC (“AMC”), and
Spaghetti Junction, LLC (collectively, “Defendants”). Al Hill, the receiver
appointed in this matter (“Receiver”) determined that CN Capital’s operations
cannot continue and it must be liquidated, including by selling its principal asset,
the life insurance policies. The parties disagreed on how to dispose of the life
insurance policies, including whether certain life insurance policy holders should
keep their investments and assume premium obligations going forward, or whether
all investors should receive a pro rata distribution. In its May 25th Order, the
Court—based on the briefs of the parties and Amicus American Financial and
Retirement Services—found there are three general categories of CN Capital life
insurance investors: (1) those who loaned money to CN Capital in return for a
promissory note equal to the amount of the loan (“Promissory Note Investors”);
(2) investors who purchased life insurance policies where the investor was named

Estate of Floyd Monroe, deceased and Charlotte Holcomb as trustee of the
Charlotte Holcomb Revocable Living Trust.

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the sole beneficiary of the death benefits (“Direct Investors”); and (3) investors
who purchased, with others, a fractional interest in life insurance policies where
CN Capital or Mr. Torchia individually was the sole beneficiary of the death
benefit (“Indirect Investors”).
After reviewing the relevant case law and the parties’ briefs, the Court
ordered:
that the Receiver shall distribute Defendants’ assets on a pro rata
basis, except as follows: (i) Direct Investors shall, consistent with this
Opinion and Order, maintain their interests in life insurance policies
only if they remit to the Receiver fictitious profits they have received
from CN Capital as a result of its premium payments and servicing of
their policies; and (ii) a Direct or Indirect Investor who owns 100% of
a life insurance policy for which the investor has paid premiums shall,
consistent with this Opinion and Order, maintain the investor’s
interest in the life insurance policy only if the investor remits to the
Receiver fictitious profits the investor has received from CN Capital
as a result of its servicing of the investor’s policy. The payments
required to be made under this Order to maintain an interest in a life
insurance policy must be paid within twenty (20) calendar days after
the Receiver sends to the investor a statement of the amount of
fictitious profits the investor must pay to the Receiver
(May 25th Order at 14-15).2
On July 21, 2016, Intervenors filed their Motion to Amend. Intervenors
allege they invested money in connection with the Berman, Weeks, Ransom,
2

On June 16, 2016, the Court entered an Order [155] clarifying its May 25th
Order. The Court clarified that its May 25th Order applies also to groups of Direct
and Indirect Investors who collectively own a policy.

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Austin, and Okress Policies. (Intervenors’ First Am. Compl. [181] ¶ 23).3
Intervenors seek amendment of the May 25th Order to allow all life insurance
policy investors—Direct and Indirect—to take ownership of certain insurance
policies without paying fictitious profits. They contend, among other things, that
(i) the distinction between Direct Investors and Indirect Investors is arbitrary, that
(ii) Direct and Indirect Investors are, in fact, similarly situated and should be
treated similarly, and (iii) that fictitious profits should not be paid to maintain
ownership of a policy, including because CN Capital made money off of its sales
of insurance policies and investors “pre-paid” premiums in the original purchase
price.
In response to Intervenors’ Motion to Amend, the Receiver argues that
Direct Investors, unlike Indirect Investors, have contractual rights vis-à-vis the
insurance companies, because they are listed as owners or beneficiaries of the
insurance policies. The Receiver also points to the documents that the Intervenors
executed, which show that Indirect Investors agreed they were not buying “any
interest in the life insurance policies,” but instead purchased “the right to receive
proceeds payable under such life insurance policies . . . .” ([192.1] ¶ 17). As to
3

For all but the Austin policy, which is owned by Leta Edge, the “owner” of
each policy is CN Capital. ([192] at 2). Intervenors thus appear to be Indirect
Investors, as that term is defined in the Court’s May 25th Order.

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fictitious profits, the Receiver maintains that the Intervenors’ policies were kept in
force—that is, the premiums were paid—using money that was “hopelessly
commingled.” ([192] at 3). The Receiver states he “has inquired of [Credit
Nation] personnel regarding the company’s pricing methodology and has
confirmed that the company did not include a pre-paid premium calculation in its
pricing.” (Id. at 12).
II.

DISCUSSION
As an initial matter, the Court notes that, while the Intervenors style their

motion as a “motion to amend,” it is, in fact, a motion for reconsideration.4
Pursuant to Local Rule 7.2(E), “[m]otions for reconsideration shall not be filed as a
matter of routine practice.” L.R. 7.2(E), NDGa. Rather, such motions are only
appropriate when “absolutely necessary” to present: (1) newly discovered
evidence; (2) an intervening development or change in controlling law; or (3) a
need to correct a clear error of law or fact. Bryan v. Murphy, 246 F. Supp. 2d
1256, 1258-59 (N.D. Ga. 2003) (internal quotations and citations omitted).
Motions for reconsideration are left to the sound discretion of the district court and
are to be decided as justice requires. Belmont Holdings Corp. v. SunTrust Banks,
4

Intervenors’ Motion to Amend is unlike the Receiver’s June 14, 2016,
“Motion for Clarification,” in that the Motion to Amend seeks a fundamental
reworking of the Court’s May 25th Order.

5

Inc., 896 F. Supp. 2d 1210, 1222-23 (N.D. Ga. 2012) (citing Region 8 Forest Serv.
Timber Purchasers Council v. Alcock, 993 F.2d 800, 806 (11th Cir. 1993)).
Intervenors do not identify newly discovered evidence, change in controlling law,
or a need to correct a clear error of law or fact. Their Motion instead appears to
“instruct the court on how the court ‘could have done it better’ the first time.”
Pres. Endangered Areas of Cobb’s History, Inc. v. U.S. Army Corps of Eng’rs, 916
F. Supp. 1557, 1560 (N.D. Ga. 1995), aff’d, 87 F.3d 1242 (11th Cir. 1996).
Moreover, Intervenors’ Motion is untimely, because a motion for reconsideration
must be filed within twenty-eight days after entry of the order about which the
party is seeking reconsideration. L.R. 7.2(E), NDGa.5 Because it is untimely,
Intervenors’ motion for reconsideration—styled as their Motion to Amend—is
denied. Even if the Court considered Intervenors’ Motion to Amend, Intervenors’
arguments are unpersuasive.
The Court has “broad powers and wide discretion to determine the
appropriate relief in an equity receivership.” SEC v. Elliott, 953 F.2d 1560, 1566
5

On July 1, 2016, the Court granted Intervenors’ motion to intervene.
Intervenors nevertheless waited three weeks until July 21, 2016, to file their
Motion to Amend. The Motion to Amend, filed almost two months after the
Court’s May 25th Order, is untimely. The Court also notes that, in determining the
distribution of assets in its May 25th Order, the Court considered the arguments of
Amicus Honey Investments, Ltd., one of the present Intervenors.

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(11th Cir. 1992); see also SEC v. Drucker, 318 F. Supp. 2d 1205, 1206 (N.D. Ga.
2004). In cases involving the liquidation of assets by a receiver, courts typically
approve either a pro rata distribution or tracing of assets to specific investors.
When victims seeking restitution occupy similar positions, a pro rata distribution is
preferred. Drucker, 318 F. Supp. 2d at 1206 (citing Elliott, 953 F.2d at 1570). In
other words, where claimants occupy essentially the same legal position as other
victims, “equity would not permit them a preference; for ‘equality is equity.’”
Elliott, 953 F.2d at 1570 (quoting Cunningham v. Brown, 265 U.S. 1, 13 (1924)).
This principle recognizes that to “allow any individual to elevate his position over
that of other investors . . . would create inequitable results, in that certain investors
would recoup 100% of their investment while others would receive substantially
less.” Id. at 1569. “Thus, where a victim seeking preferential treatment cannot
materially distinguish his situation from that of other victims, a pro rata
distribution is recognized as the most equitable solution.” Drucker, 318 F. Supp.
2d at 1207.
In determining the appropriate method of distribution in its May 25th Order,
the Court noted that the Receiver, the SEC, and Defendants agreed that the weight
of authority favors a pro rata distribution in this case. (May 25th Order at 9). The
Court found “particularly persuasive the Receiver’s finding that CN Capital

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comingled funds, and treated Promissory Note Investor funds, Direct Investor
funds, and Indirect Investor funds as fungible and available for any investment,
payment, or expense.” (Id. (internal quotations omitted)). “Moreover, both the
Direct and Indirect Investors’ life insurance policies were kept in force using
commingled funds, and the Promissory Note Investors’ interest was paid using
commingled funds.” (Id. at 10). The Court noted that “to allow [a specific class
of] investors to elevate their claims by standing on the backs of the other [ ]
investors whose funds kept [their] policies viable is not to do equity.” Liberte Cap.
Grp. v. Capwill, 229 F. Supp. 2d 799, 804 (N.D. Ohio 2002) (“[B]ut for the Liberte
investor funds used toward Crivello premiums, the Crivello policy would have
lapsed.”).
The Court determined a pro rata distribution was required. The Court noted,
however, that certain types of investors had unique situations that were materially
distinguishable from the other investors. The Court found it equitable for Direct
Investors—that is, those investors who are named as beneficiaries on the life
insurance policies in which they had an interest—to keep their respective life
insurance policies if they remit to the Receiver the value of the benefit they
received from CN Capital. The Court held that, “[b]ecause the Direct Investors
have until now received, from commingled funds, the benefit of CN Capital’s

8

premium payments on, and servicing of, their policies, the Direct Investors are
required to remit to the Receiver these fictitious profits—that is, 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. at 11 (citing Perkins v. Haines, 661 F.3d 623, 627 (11th Cir. 2011)).
The Court reasoned that “payment to the Receivership of an amount equal to the
previous payments paid and the value of services previously rendered returns to the
receivership estate the funds wrongfully used to benefit the insurance policy
investors.” (Id. at 11-12).6
Intervenors now argue that (i) the distinction between Direct Investors and
Indirect Investors is arbitrary, that (ii) Direct and Indirect Investors are, in fact,
similarly situated and should be treated similarly, and (iii) that fictitious profits
should not be paid to maintain ownership of a policy, including because CN
Capital made money off of its sales of insurance policies and investors “pre-paid”
premiums in the original purchase price.
6

The Court also noted that, to the extent certain Direct and Indirect Investors
owned policies for which they assumed the obligation to pay premiums, their
situation can be materially distinguished from that of other victims, because
commingled funds were used only, if at all, to service the policies—a relatively
minor cost in comparison to paying premium obligations. (Id. at 12-13). This
subset of investors is not the subject of Intervenors’ Motion to Amend.

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The Court disagrees with Intervenors that Direct Investors and Indirect
Investors are similarly situated and thus should be treated similarly. As the
Receiver notes, Direct Investors have contractual rights in their relationship with
the insurance companies, because they are listed as owners or beneficiaries on the
insurance policies in which they have an interest. In addition, Intervenors admit
they invested in their policies “using their IRA accounts,” which accounts, under
the Internal Revenue Code, are prohibited from investing directly in life insurance
policies. (Mot. to Amend at 5 & n.1 (citing 26 U.S.C. § 408(a)(3)). Far from a
“minor, technical distinction,” (id. at 6), “it appears that Defendants structured
these investments to circumvent the tax laws.” ([193] at 3). As part of this
structuring, Indirect Investors agreed they were not buying “any interest in the life
insurance policies,” but instead purchased “the right to receive proceeds payable
under such life insurance policies . . . .” ([192.1] ¶ 17). Put simply, Direct and
Indirect Investors agreed to, and purchased, different types of interests in life
insurance policies.
Intervenors next attempt to show they are entitled to keep their policies by
highlighting the differences between Indirect Investors and Promissory Note
Investors. Intervenors argue that the Promissory Note Investors invested in a
“high-risk affair” which “depended solely on the financial success or failure of

10

Defendants and their various businesses.” (Mot. to Amend at 8). Promissory Note
Investors, however, were told their notes were “100% asset backed” and “backed
by hard assets dollar for dollar.” ([66] at 58). These misrepresentations were a
significant basis for the Court granting a preliminary injunction in this action.
Indirect Investors, just like Promissory Note Investors, effectively have an
unsecured claim against CN Capital.
In any case, Intervenors’ arguments are unpersuasive, because the Court
already determined—and does not change its conclusion here—that because funds
from Direct, Indirect, and Promissory Note Investors were commingled, and those
commingled funds were used to keep insurance policies in force, a pro rata
distribution is equitable. The Court allowed only minor carve-outs from this pro
rata rule to account for unique situations presented by the broad range of
investments Defendants solicited. To now increase the scope of that carve-out to
include all insurance policy investors—and to allow those investors to maintain
their interests in the insurance policies without first returning fictitious profits
received from commingled funds—would allow Intervenors “to elevate their

11

claims by standing on the backs of the other [ ] investors whose funds kept [their]
policies viable . . . .” Liberte, 229 F. Supp. 2d at 805.7
The Court also disagrees with Intervenors’ contention that fictitious profits
should not be paid to maintain ownership of a policy. Intervenors argue that CN
Capital made money off of its sales of insurance policies and investors “pre-paid”
premiums in the original purchase price. First, Intervenors’ assertion that the
original purchase price included prepayment of premiums is cast into significant
doubt by the Receiver, who states he “has inquired of [Credit Nation] personnel
regarding the company’s pricing methodology and has confirmed that the company
did not include a pre-paid premium calculation in its pricing.” ([192] at 12).8
Second, even if Intervenors could show that Defendants represented the purchase
price included the prepayment of premiums, investors are not entitled to benefit to
7

Intervenors’ reliance on United States v. Ovid, No. 09-CR-216, 2012 WL
2087084 (E.D.N.Y. June 8, 2012) is misplaced. In Ovid, the Court noted that a pro
rata distribution was unwarranted where “defendants established two separate
hedge funds. They marketed them separately to different groups of investors at
different times. The two hedge funds were legally separate entities and there was
no commingling of their assets. Their respective assets were invested differently
and suffered different losses at different times.’ Id. at *8. Here, the record shows
the Defendant entities commingled funds and that commingled funds almost
certainly were used to keep insurance policies in force.
8
The Court notes that the Receiver is in the best position to determine the
facts relevant to this Opinion and Order, including because he has direct access to
the personnel who structured and sold the policies at issue.

12

the detriment of other investors simply because of what Defendants represented to
them. See CFTC v. Walsh, 712 F.3d 735, 749 (2d Cir. 2013) (a receiver “is not
required to apportion assets in conformity with misrepresentations and arbitrary
allocations that were made by the defrauder, otherwise the whim of the defrauder
would . . . control[ ] the process that is supposed to unwind the fraud.” (internal
quotation marks omitted)).
Intervenors argue that the Berman policy shows fictitious profits do not
exist, because Credit Nation purchased the policy for only $900,000 while
investors paid $2,750,000 for it. (Mot. to Amend at 10). The Receiver, however,
shows that CN Capital did not earn a profit from the sale of the Berman policy,
including because Torchia, Intervenor Faye Bagby, and a man named Barry
Neumann kept profits from the sale. ([192] at 3). CN Capital also took on the
liability to pay premiums, and, to date, has paid $649,000 in premiums to keep the
Berman policy in force. (Id. at 4). The premiums were paid “from the general
funds of CN Capital, which came from the sale of other policies, receipt of death
benefits, sale of promissory notes, receipt of payments on automobile loans, or
some other untraceable company source.” (Id.).
It also is not clear whether CN Capital made money on its life insurance
business, because profitability is contingent upon insureds living to life

13

expectancy. Moreover, as the Receiver noted, Defendants’ liabilities substantially
exceed their assets, and, in order to preserve the life settlement policies of both
Direct and Indirect Investors, the Receiver was required to liquidate other of
Defendants’ assets to pay premiums to avoid a lapse of life insurance policies.
(See May 5, 2016, Order [74] at 1-2).
It is understandable that Intervenors seek to retain the benefit of their
bargain with Defendants by maintaining their interests in insurance policies and
retaining fictitious profits. “The bottom line,” however, “is that the same pool of
commingled money paid insurance premiums, paid interest and principal to
promissory note investors, and paid the operating expenses of the receivership
companies.” ([192] at 14). “That pool was replenished by more sales of
promissory notes, by more sales of insurance policy investments, by auto loan
sales, and on occasion by death benefits.” (Id.). The Court, in the interest of
equity, created a minor exception to the pro rata distribution rule for specific
investors it determined stood in a materially different position than the other
investors. Even if Intervenors’ motion for reconsideration—styled as their Motion
to Amend—were timely, the Court would decline Intervenors’ request to expand
the scope of this exception. Intervenors’ proposed expansion of the exception
would swallow the rule, and allow all life insurance investors to retain the benefit

14

of their bargain at the expense of Promissory Note Investors whose funds helped
keep the policies in force.
III.

CONCLUSION
For the foregoing reasons,
IT IS HEREBY ORDERED that Intervenors’ Motion to Amend Pooling

Order [185] is DENIED.

SO ORDERED this 24th day of August, 2016.

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