Securities and Exchange Commission v. North Star Finance LLC et al
MEMORANDUM OPINION. Signed by Judge George Jarrod Hazel on 2/3/2017. (kns, Deputy Clerk)(c/m 2/3/17)
IN THE UNITED STATES DISTRICT COURT
FOR THE I)ISTRICT OF MARYLAND
SECURITIES AND EXCHANGE
Case No.: G.JII-15-1339
NORTH STAR FINANCE,
LLC, el aI.,
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
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.
See 15 U.S,c. ~ 77a and 15 U.S.C. ~ 78a
Defcndant Martin is ordcrcd to Show Causc why hc should not bc hcld in Civil Contcmpt for
failurc to obcy a Court Ordcr.
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:'
ECF No. 249 at 2
'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
"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
Pin cites to documents
on the Court"s electronic
by that system.
refer to the page numbers generated
considerations indicating the need I(lr such relief:' It!. (citing SEC
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
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.
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.
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.
that Order. Mr. Martin has violated the Court's
Cour! finds it appropriate
to ordcr Defendant
should not bc hcld in contempt.
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
at issuc. including
may have alternativc
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
Ll.C. and Capital Source Funding.
counsel had moved to withdraw
days after counsel lor an entity withdraws
LLC. ECF No. 196. On March 1.2016.
101 (I )(a). "[a]1I parties other than individuals
of record. Pursuant to D. Md. Loc. R.
must be represented
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
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
Finally. on Deecmber
7. 2016. Murdoch
Esq .. counsel lor Relief Defendants
Walkcr. Esq. and Local Counsel
Charel Winston and Goodwill
of record of the same:'
that they served written notification
and the Motion is granted.
Funding. Inc .. movcd ..to
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
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).
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.
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
George J. Hazel
United States District Judge
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