Securities and Exchange Commission v. North Star Finance LLC et al

Filing 252

MEMORANDUM OPINION. Signed by Judge George Jarrod Hazel on 2/3/2017. (kns, Deputy Clerk)(c/m 2/3/17)

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I I , IN THE UNITED STATES DISTRICT COURT FOR THE I)ISTRICT OF MARYLAND Soulltem Divisiou .- J , II"':> " .J c * SECURITIES AND EXCHANGE COMMISSION, I Plaintiff, Case No.: G.JII-15-1339 v. NORTH STAR FINANCE, LLC, el aI., Defendants. * * MEMORANDUM OPINION This case began as a civil cnforcement action on May II. 2015. by PlaintilTSecurities and Exchange Commission ("SEC') against Michael K. Martin, Capital Sourcc Funding. LLe. and other Defendants, for violations of the Sccurities Act and Exchange Aetl arising from a fraudulent "primc bank" investment scheme allegedly perpetrated by Dcfcndants. ECF No. I. Several non-dispositive Motions arc now pcnding fi.)rrcsolution. This Memorandum Opinion and attached Order addrcss the 1()lIowing Motions: Motion lor Clcrk's Entry of Dcfault against Dcfcndanrs Capital Sourec Lcnding, LLe. and Defendants Capital Source Funding, LLe. ECF No. 196: Motion to Rclile Chapter J 3 Bankruptcy, ECF No. 232: Motion to Withdraw as Attorneys lor Relief Dcfendants, ECF No. 234: Motion to Release Living Expenses, ECF No. 236: Motion to Impose Civil Contempt Sanctions against Mr. Martin. ECF No. 242: and "Emergency Motion" to Release Living Expenses. ECF No. 248. No hearing is nceessary. See Loc. R. 105.6. For the 1i.)lIowingreasons. ECF No. 196 is grantcd. ECF No. 232 is denied. ECF No. 234 is granted. ECF No. 236 is denicd as moot. and ECF No. 248 is granted. Additionally. I See 15 U.S,c. ~ 77a and 15 U.S.C. ~ 78a ('I Sf!q. Defcndant Martin is ordcrcd to Show Causc why hc should not bc hcld in Civil Contcmpt for failurc to obcy a Court Ordcr. I. DISCUSSION A. Current and Future Release of Funds - ECF Nos. 232,236, and 248 On May 12.2015. following the filing of thc SEC Complain!. thc Court issucd a Tcmporary Restraining Order C"TRO") frcczing thc Dcfcndants' asscts. Pursuant to thc tcrms of the Tcmporary Rcstraining Order. Dcfcndants wcrc "pcrmitted to apply liJr relicI' from thc assct frcczc to pay 'nccessary and rcasonable living cxpcnscs, ... ECF No, 19 at J: see ECF NO.7 at II. Sincc thc inccption of this case. thc Court has rcsolved no less than tcn of Dcfendants' rcqucsts to unf,'cezc the assets, See, e.g ECF Nos. 19. 50. 81. 115. 122. 125. 129. 153. 184.20 1.221. 227. and 230. As PlaintifTSEC has noted. Mr. Martin has now "nearly cxhausted the funds Irozen for dcfraudcd investors, .. rendering the frecze meaningless:' 2 ECF No. 249 at 2 : ECF '0.237 at 3 ("In total. despitc having comc into thc asset frecze reporting only $10.785.35 in assets. (ECF No. 41). $144.903.44 of the $328.546.46 in funds originally frozcn .. , has becn whittlcd away:'). "Courts clearly have thc authority to enter frceze ordcrs in an SEC enforccment action:' S.E.C \', Dowdell. 175 F. Supp. 2d 850. 854 (W.D. Va. 2001) (citing See SEC \', /nlernaliona/ Loan Ne/H'ork, /nc .. 770 F,Supp. 678. 696 (D,D.C. 1991)). If the Court has ..the authority to freeze pcrsonal asscts temporarily. it logically has the 'corollary authority to rclcase frozcn pcrsonal assets. or lower the amount frozen .... /Jo\l'(/ell. 175 F. Supp. 2d at 854 (citing SEC \', DlIclal/(1Gonzalez de Caslilla, 170 F, Supp. 2d 427 (S,D.N.Y. 2001)). Courts are callcd upon to weigh "the disadvantages and possible delcterious efrcct of a frcezc .. , against thc 2 Pin cites to documents filed on the Court"s electronic filing by that system. 2 system (CM/ECF) refer to the page numbers generated considerations indicating the need I(lr such relief:' It!. (citing SEC I'. Manol' Nursing Ce17lel's. Inc" 458 F.2d 1082. 1105 (2d Cir.1(72)). Whcn the assets were first Ihlzen nearly two years ago. the Court attempted to strike an equitablc balance. The Court was concerned that some ofMr. Martin's expenses \\'erc related to an expensivc lifestyle. At the same time. the Court acknowledged that Mr. Martin had existing leases and bills to pay. and was mind fiJI that seeking and sccuring employmcnt may not occur instantaneously. Thus. the Court was generous with Mr. Martin's enduring requests to unfi'eeze the assets to pay his living expcnscs. Mr. Martin has made some attempts to lind work. including driving f(lr Ubcr and building mobilc apps. See ECF No. 248 at I. However. 21 months after the initial asset freeze. Mr. Martin still has not found a way to independently support his livelihood. nor does it appear that hc has significantly modified his lifcstyle. At this . juncturc. thc Court must make some adjustments to the futurc rclcase of funds. . See DOll'de/l. 175 F. Supp. 2d at 854 (discussing considerations to makc whcn Court is called upon to grant or deny rclcasc of funds). Thcreforc. this will be the Court's final grant of Mr. Martin's requcst for paymcnt in full. See ECF Nos. 236 and 248. lie will be awardcd a total of $11.077.00 for January. February. and March 20 f7. For thc three-month period beginning April 2017. however. thc Court will only grant up to one-third of this amount (approximately $3692.00). and this is conditional upon Mr. Martin's demonstration of securing a meaningful income and restructuring his finances. No further releases will be authorized. Because the Court tinds that Mr. Martin should be actively pursuing financial sell:surticicncy. the Court denies Mr. Martin's request to utilize new income to pay fees related to the Chapter 13 bankruptcy proceeding. ECF No. 232.3 Additionally. the Court ackno\\'lcdgcs that PlaintitTallcgcs that Mr. Martin has not submitted his petition for bankruptcy in good faith: namely. that Mr. fv1m1in declared to the bankruptcy court that he was nol a party to any .1 , ., B. Production of Documents and Civil Contempt - ECF No. 242 The Court entered a Scheduling Order in this case on February 18.2016. ECr: No. 143. beginning a protracted discovery dispute between the SEC and Mr. MaJ1in. The SEC tiled several Motions to Compel in an effort to retrieve documents li'OI11 r. Martin. lOCI'Nos. 157. M 161. and 177. On December 29. 2016. the Court issued an Order regarding the production of documents. including emails fromMr. Martin'sbusinessaccount. IOCr:No. 235. Mr. Martin tilcd a Responsc on January 5, 2017. rcfusing to consent to the Court's Order. and stating that his "5th amcndment right afforded to me pertaining to my emails betl)re July 2014 as it outside thc complaint by SEC and they arc just tishing and acting as an agent for the government in a case in NY as thcy havc very little cvidence as well." lOCI'No. 238 at 1. Thc SEC tiled a Motion to Impose Civil Contempt Sanctions on Mr. Martin. ECr: No. 242. The SEC now requests the Court to find Mr. Martin in contcmpt and impose sanctions. including imprisonment. i\ party moving tl)r civil contempt must show. by clcar and convincing evidence: (1) Thc existence of a valid dccrce of which the allcgcd contcmnor had actual or constructive knowledge: (2) that the decrec was in the movant's 'javor': (3) that the alleged contemnor by its conduct violated the terms of the decree. and had knowledge (at least constructive) of such violations: and (4) that [the J movant sum~red harm as a rcsult. .fTIf Tax. Illc. v. If & R Block E. Tax Sen's .. Il1c.. 359 F.3d 699. 705 (4th Cir. 2004) (intcrnal citations Qmitted). Upon finding a party in civil contcmpt. the Court may impose sanctions ofa "fine or imprisonment. or both. at its discretion." 18 U.S.c. * 401. Here. the Court issucd its Order on December 29. 2016. ECF No. 235. Mr. Martin indisputably knew ofthc Order. The Order was in SEC's tavor. as it directed Mr. Martin to produce the emails through providing his consent to Yahoo. Inc. 1<1. at I. Sincc the issuance of other lawsuit. ECF No. 233 at I. and that Mr. Martin is not a qualified debtor within lh~ meaning of I I U.S.C.* I09(e), as he is not an "individual \\:ith regular income:' ECF No. 233-1 at 6. 4 that Order. Mr. Martin has violated the Court's Cour! finds it appropriate to ordcr Defendant should not bc hcld in contempt. imprisonment.4 instruction by failing to comply. Thercfilrc. Martin to "show cause"' within 14 days that hc I'ailure to do so may result in monetary or hath. The Court also stresses that PluintilTSEC obtaining the documents at issuc. including explored thc by administrativc sanctions. may have alternativc subpoena. mcans of which should be in the interest of efticiency. C. Other Pending Motions - Eel' Nos. 196 and 234 Plainti ff moved on August 25. 2016. tilr an Order of Default against Source Lending. Defendants' Ll.C. and Capital Source Funding. counsel had moved to withdraw days after counsel lor an entity withdraws appearance. Capital LLC. ECF No. 196. On March 1.2016. as attorneys 101 (I )(a). "[a]1I parties other than individuals Defendants of record. Pursuant to D. Md. Loc. R. must be represented by counsel." If: within 30 Irom a case. new counsel has not entered an the Court may take appropriate actions. including directing the party to show cause as to why a delault should not be entered against it. Loe. R. 101(2)(b). After a teleconference July 21. 2016. the Court ordered Defendants on to show cause as to why default should not be entered against them within 30 days. More than 30 days have passed. thus an entry of detault against these Defendants is appropriate. Finally. on Deecmber 7. 2016. Murdoch Esq .. counsel lor Relief Defendants withdraw as attorneys Walkcr. Esq. and Local Counsel Charel Winston and Goodwill of record of the same:' that they served written notification Ms. Winston. and the Motion is granted. Holly Peterson. Funding. Inc .. movcd ECF No. 234. Mr. Walker and Ms. Peterson attest upon Relief Defendants and received written eonsentlrom Id at 1. They filrther state that Ms. Winston is making arrangements with The Court ackno\\'ledgcs that imprisolllllent is a "drastic coercive measure reserved for the 1110stextraordinary circulllstances and should be used sparingly:' NA5;CO, Inc. \'. Calcasif!1I Tele\'is;ulI ~. Radio. Inc.. 583 F. Supp~115. 121 (IlI.D. La. 1984). -t 5 subsequent counsel. Id The Motion to Withdraw is granted. with the additional cautionary note that Relief Defendants shall secure counsel in a timely fashion. or risk entry of default. II. CONCLUSION For the foregoing reasons. ECF No. 196 is granted. ECF No. 232 is denied. ECF No. 234 is granted. ECF No. 236 is denied as moot. and ECF No. 248 is granted. Mr. Martin has 14 days from the issuance of the attached Order to Show Cause as to why ECF No. 242 should not also be granted. Date: February' .2017 George J. Hazel United States District Judge 6

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