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

Filing 348

MEMORANDUM OPINION. Signed by Judge George Jarrod Hazel on 11/8/2017. (c/m and c/e/m (CH) 11/9/2017 tds, Deputy Clerk) Modified on 11/9/2017 (tds, Deputy Clerk).

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FILED OJ':>T\\\C1 COURT, IN THE UNITED STATES I)lSTRICT~fu'MTCr FOR THE DISTRICT OF MARYLAND SOl/them SECURITIES AND EXCHANGE COMMISSION, 11,'.R'(lAh. lUll llG~- q A or I \ D;I';s;OI/ * 'J * Plaintiff, \'. NORTH STAR FINANCE, LLC, et :11., Case No.: G.JII-15-1339 * * Defendants. * * * * * * * * * * * * * * MEMORANDUM OPINION This is a civil enl(lrCement Commission "Capital violations ("SEC") against Capital Source Funding. Source Defendants"). or the Securitics bank" investment action brought by PlaintirrSecurities Act and Exchangc Actl arising rrom an allegcdly by Delendants. and attach cd Order address the !(lliowing Motions: Subpoena. Motion for Approval SEC's Application ECF No. 275: Martin's Supplemental Set! IS U.S.C. "prime Opinion as to Dclendants LLC. ECF No. 270 (construcd t(lr an Ordcr Rcquiring Compliancc as a with Motion to Recusc. ECI' No. 325: Martin's Motion I(lr an Order Modifying of Lcgal Fees and Expcnscs. lOCI' No. 328: Martin's Motion to Support Request !(If Funds l(lr Council [sicl and Expcrt Witncsscs. No. 333; Martin's 1 SEC's Motion !()r Judgmcnt or Defense I'unds. lOCI' No. 326: Martin's thc Freezing of Asscts I(lr Payments rraudulcnt IOcr NO.1. This Memorandum LLC and Capital Source Lcnding. Motion t(lr Dcrault Judgment): Administrative LLC. Capital Sourcc Lcnding. LLC (thc M ichacl K. Martin and a numbcr or other Defendants .. I(l(' scheme perpetrated Capital Source Funding. and Exchangc Emergency * 77a and 15 U.S.C. Rcconsidcration * 78a el sect. or Reinstating Chaptcr 7. lOCI' No. 345: and ECF Martin's Emergency Reconsidcr BACKGROUND Thc SEC initiated this civil cnforccmcnt dcfcndants. including that the Dcfcndants took part in an "invcstmcnt 'i~ 1.21. victims of thcir schcmc to "invcst" howcvcr. did not exist. and thc substantial ECF No. I. Thc SEC allcgcs scam known as a 'primc bank' Ii-aud" to dcli'aud Put briclly. thc SEC allcgcs that Dclendants in sccuritics Id ~ 4. Thc SEC claims that Defendants Exchangc action on May 11.20 IS. against a numbcr of Martin and thc Capital Sourcc Dcfcndants. victims of ncarly $5 million. Id 20-21. Bk 7 for Chronic Illness. ECF No. 346. No See Loc. R. 105.6 (D. Md. 2016). hcaring is ncccssary. I. [sic] ofRcsuming rclatcd to intcrnational returns promiscd banks; thcsc sccuritics. by Dclendants did not matcrializc. violated and aided and abcllcd violations Act Section I O(b) and Rulc 1Ob-5. id at 19.~ thc Sccuritics Act Scction 5. iii. at 20-21. and thc Sccuritics the Securities convinccd of thc 17(a). iii. at Act Scction Act Scction 15(a). iii. at 22- 23. II. DISCUSSION A number of motions tilcd by the SEC and Martin are currcntly which the Court addresscs A. Motion 270) bclow in turn. for Default .Judgment Against the Capital Source The SEC asks thc Court to grant an "cntry of Iinaljudgmcnts and ordering disgorgement Capital Source Funding. pending before the Courl. and civil penalties as to defendants LLC:' ECF No. no Defendants ... cstablishing (ECF No. injunctions Capital Source Lending. LLC and at I. On February 3.2017. the Court granted thc SEC's Motion for Entry of Delimit against the Capital Source Defendants. ECF No. 253. As the Court noted at the time. the Capital Source Dcfendants' as allorneys counsel withdrcw :! Pin cites to documents tiled on the Court's electronic filing system (CM/ECF) by that system. of record refer to the page numbers generated on March I. 2016. ECF No. 252 at 5. Pursuant to Loc. R. 101(2)(b). the Court ordered Defendants to show cause as to why default should not be entered against them within 30 days. whieh they did not: therelore. the Court granted the SECs Motion. !d. In its Motion for Default Judgment. the SEC argues that its Complaint pleads sunieient facts which. accepted as true. constitute a legitimate cause of action. ECF No. 270 at 7. The SEC provides the Court with additional ani davits and documentary evidence. which it argues are sufficient for the Court to enter damages against the Capital Source Defendants. Id at II. While the Capital Source Defendants did not respond to the SECs Motion. on April 12.2017. Martin tiled an Opposition in which he asks for "a 90 day stay so that we can bring on an expericnced attorney familiar with the SEC and thc experience in knowing correctly how these private deals are set up'" ECF No. 273 at I. Although the Court did not grant the stay. seven months have passed since Martin tiled his Opposition and the Capital Source Defendants are still not 1 represented: As sueh. the Court sees no reason to further delay consideration of the SECs Motion for Defimlt Judgment. "A defendant's default does not automatically entitle the plaintiff to entry ofa de/ilult judgment: rather. that decision is leli to the discretion of the court'" Edue. Credil Mgml. Corp. I'. Oplil11ul11Weldil1g. 285 F.R.D. 371. 373 (D. Md. 2(12). Generally. "Itlhe Fourth Circuit has a 'strong policy' that 'cases be decided on their merits .... Choice lIolels Il71el'll. 111('.I'. Sawl11l1ah . Slwkli Carp .. No. DKC-I 1-0438. 2011 WI. 5118328 at *2 (D. Md. Oet. 25. 2011) (eiting Ulliled Shlles \'. Sharf('/' Equip. Co .. II F.3d 450. 453 (4th Cir. 1993 )). although "delilult judgment may .; In his Opposition. liability. While Martin also made a number of substantive arguments regarding the Capital Source Defendants' the Court revie\ved Martin's arguments. it notes that. as a non-lawyer. Martin cannot represent the Capital Source Defendants pru se. See ECF No. 183 at I 11.1 (where Martin tiled a response to a motion directed at the Capital Source Lending ("'CSL"). the Court explained that "because he is not nn <tHorne)'. he call1lot represent CSL in this matter"). 3 be appropriate when the adversary proeess has been halted because of an essentially unresponsive party[-r Id. (citing S.E.C. 1'. Lml'hallgh. 359 F. Supp. 2d 4 J 8.421 (D. Md. 2(05». In a case with multiple defendants where fewer than all of the defendants have defaulted. it may not be appropriate for the Court to enter default judgment. Under the Federal Rules of Civil Procedure. tinal judgment can be entered as to one of multiple defendants only if the court "expressly determines that there is no just reason for delay:' Fed. R. Civ. P. 54(b). In the Supreme Court case of Froll' 1'. De La Vega. 82 U.S. 552 (1872). the Court was confronted with a situation where one of several defendants had defaulted and had a tinal judgment entered against him. The Court found it "unseemly and absurd" that a final judgment could be entered against one defendant. while other defendants may ultimately be I(mnd to be not liable on the same charge. Id. at 554. See also Farm Fresh Direcl Bya CIII Ahm'e, U.C \'. DOll'lIey. No, ELlI17-1760.2017 WL 4516548. *3 (0, Md. Oct. 6. 2017) (hereinalier "Farm Fresh"), The Supreme Court instructed that the proper course in such a situation would be "simply to enter a default .. against the del~llIlting party. and to "proceed with the cause upon the answers of the other defendants:' Id. See also WRIGHT AND MILLER ~ 2690 ("As a general rule, ... when one of several defendants who is alleged to be jointly liable defaults. judgment should not be entered against that defendant until the malleI' has been adjudicated with regard to all defendants. or all defendants have defaulted:'), The Fourth Circuit in u.s. .fiJr Use of 111I"SOIl\', Peerless IllS. Co. recognized that Froll' "was a case of joint liability" but f()und Frml"s reasoning "applicable not only to situations of joint liability but to those where the liability isjoint and/or several." 374 F.2d 942. 944 (4th Cir. 1967). In a recent. similar case. this Court dismissed without prejudice a plaintiffs motion for default judgment against a defaulting defendant where several defendants remained, Farm Fresh. 2017 WL 4516548 corporate (Hollander. defendants. J .). There. the plainti 1'1' sued two individual Id at *1. Neither corporate defendant entered an appearancc. entered an order of default as to the corporate motion for default judgment motion without prejudice. "plainliffhas unrelated. against the corporate reiterating or why. at this juncture. defendants. of Fr()\l'. to enter default judgement Defendants' liability is unrelated. or why. at this juncture. against just one of four parties:' and in their accompanying In fact. throughout materials liability is deeply intertwined with Defendants other than promised it is appropriate as to to enter def~lUlt the SEC's Motion for Default Martin's and Salinas's liability. describing liability. See. the conduct hi. at 9 ("Martin and Salinas made and omissions on beha II'of the Capital Source enti ties"): id. at I0 ("Martin. acting on behalf of Capital Souree Lending .... past success were lalse related it is quite clear that the Capital Source Martin. CEO of Capital Source Lending"): materia I misstatements to grant del~lldt judgment this Court with any explanation e.g. ECF No. 270 at 4 (as basis for Capital Source Defendants' of"Miehaei against just one of with claims still pending against numerous As in Farlll Fresh. the SEC has not "provided why defendants' Judgment liability is 1<1. at *4. as to the Capital Source Defendants. judgement Iiled a and pointing out that as to why defendants' Ilere. as in Fro1\' and in Farlll Fresh. it would be inappropriate defendants. and thc Clerk The court denied the plaintiffs the facts and rcasoning it is appropriate and two Id The plainti ITsubsequently defendants. not provided this Court with any cxplanation four parties:' defendants knew or was reckless in not knowing his claims of that the money eollected from investors would he used I()r purposes and that his "updates" to investors were hogus"). The nature of the hank accounts that the SEC now seeks to disgorge makes the interrelatedness ofthc liability hetween the Capital Source Defendants. Salinas and Martin all the more clear. Every aecount from which the SEC seeks to disgorge funds is under the name of either Martin or Salinas. In sum. the SEC alleges that 5 the Capital Source Dcfendants arc liable only because of the conduct of Salinas and Martin. who arc still defendants in this casco As such. the Court will deny the SEes Motion Illr Default.ludgment without prejudice to the SEC re-liling the motion at an appropriate juncture. B. Motions to Relcasc Frozcn Asscts (ECF No. 326, ECF No. 328, ECF No. 333) assets. ECI' NO.7 at X-II. Sinec then. the On May 12. 2015. the Court froze Defendants' Court has considered and granted numcrous requests from the various Defendants certain assets to provide them with reasonahle living requests. See. e.g. lOCI' No. 23: lOCI' No. 50: lOCI' No. 81. Regarding Martin. on numerous reasonable however. living expenses: ti) unlreeze prior occasions the Court released assets liJr his in its February 3. 2017. Memorandum made clear that "[nlo further releases will be authorized" Opinion. the Court lOCI' No. 252 at 3. Since then. Martin has tiled several motions asking the Court to release additional funds. See ECF No. 326: ECF No. 328: lOCI' No. 333. It has been more than two years since the Court first Iroze Martin's assets: throughout that time. the Court has consistently "should be actively pursuing maintained Id. The Court maintains financial selt~sufticiency." took in its February 3. 2017 Memorandum the position that Martin the position it Opinion and denies ECF No. 326. ECF No. 328. and ECF No. 333. Martin is warned that any luture requests for additional releases of funds will be denied as well. C. Motion for Authorization to Pursuc Chapter 7 Bankruptcy (ECF No. 345, ECF No. 346) While this enforcement multiple occasions. Martin initially tiled tor Chapter the Eastcrn District of Virginia. bankruptcy action has been proceeding. Martin tiled for bankruptcy 13 bankruptcy in the Bankruptcy on Court for ECF No. 331 at 6. In that case. he failed to disclose to the court the SEC's pending enforcement action. and declared that he was not a party to any lawsuit. Id. Once the Trustee who had been appointed 6 to the case discovered Martin's misrepresentations. the Trustee moved to dismiss Martin's Chapter 13 petition. which the bankruptcy court granted on December 12.2016. Id. In doing so. the court barred Martin Irom "filing a subsequent bankruptcy case until [Martin] obtains authorization from the District Court lor the payment of any tiling lecs associated with any future bankruptcy case ... as well as any payments to be made ... in any futurc plan liled in any future case'" III re Michael Marlill. Case No. 16-73477 (Bankr. E.D. Va .. Deecmber 12.2016) (ECF No. 40). Martin tiled a motion beltlre this Court. seeking to use funds ltlr bankruptcy tiling lees and plan payments: this Court denied that request in its February 3. 2017 Order. ECF No. 252. On June 30. 2017. Martin tiled a Chapter 7 bankruptcy pctition. which the bankruptcy court subsequently dismissed as violating the bankruptcy court's prior order. III re Michael Marlill. Case No. 17-72378 (Bankr. E.D. Va. August 14. 2017) (ECF No. 55). Since thcn. Martin has askcd the Court on multiple occasions to permit him to file lor bankruptcy with the bankruptcy court. See.e.g. ECF No. 345. In its February 3. 2017 opinion. the Court instructed that "[b]ecause the Court finds that Mr. Martin should be actively pursuing financial sell~sumciency. the Court denics Mr. Martin's request to utilizc new income to pay fees rclated to the Chapter 13 bankruptcy proceeding. lOCI' No. 232'" ECF No. 252 at 3. The Court also noted that the SEC alleged that "Mr. Martin dcclared to the bankruptcy court that he was not a party to any other lawsuit. ECF No. 233 at I. and that Mr. Martin is not a qualified debtor within the meaning of I J U.S.c. ~ I09(e). as he is not an 'individual with regular income: ECF No. 233-1 at 6'" ECF No. 252 at 3 n.1. In his pending Motions regarding his Chapter 7 bankruptcy liling. Martin implores the Court to allow his tiling to proceed. and informs the Court that his power and water services either have been or will be shut ofTdue to his failure to pay his utility bills. lOCI'No. 345 at I: ECF No. 346 at I. Martin stresses that through bankruptcy he seeks to resolve only his consumer 7 debts. and argues that his Chapter 7 bankruptcy will not interfere with the SEes en!())"cement action or the frozen assets. ECF No. 345 at I. As long as that remains true. the Court takes no position as to whether a bankruptcy case filed in a separate jurisdiction is appropriate. The Court reiterates. however. that any fees or payment plans arising li'om Martin' s Chapter 7 bankruptcy must be paid out of newly-acquired legitimate income. and that none ofMartin's originally frozen assets will be released: D. Motion for the Court to Recuse Itself (ECF No. 325) On August 17.2017. Martin moved for the Court to recuse itself under 28 U.S.c. ~ 455 and Marshall \'. Jerico. 111L' •• 446 U.S. 238. 242 (1980). The crux of Martin's argument is that the Court's prior orders have "deliberately violated [Martin's] 4th and 5th amendment right:' ECF No. 325 at I. A judge should recuse himself under 28 U.S.c. ~ 455 where "his impartiality might reasonably be questioned:' ~ 455(a). where he has a "personal bias or prejudice concerning a party:' ~ 455(b)(I). or where he or an immediate flllllily member has a personal interest in the mailer or controversy. ~ 455(b)(2)-(5). Ilere. the Court sees no reason under ~ 455 to recuse itself. While Martin may feel slighted by some of the Courts prior rulings. and may even think his Constitutional rights have been violated. he can rest assured that the Court has not "deliberately" violated any of his rights. In every instance. the Court has carefully applied the facts and law as presented by the parties. with no bias or favor for either side. If Martin feels that the Court has ruled incorrectly. his recourse is to appeal the Court's dccision to the Fourth As mentioned above. the SEC initially objected that Martin had not made the Bankruptcy Court aware of this litigation. and that Martin did 110t qualify as a "debtor" under Chapter 13. The COLIrt notes that whereas Martin did not qualify as a debtor under Chapter 13. he likely qualifies as a debtor under Chapter 7. SI!I! I I U.s.c. ~ I09(b). Additionally. the Bankruptcy COlirt is now <I\vare of this litigation and the Court's freeze on certain of Martin's bank accounts. and may act accordingly. -1 8 Circuit. which he has done. See ECF No. 339 (Notice of Appeal to Fourth Circuit). Ilowever. the Court sees no basis for recusal and will deny the Motion. E. Motion for Administrative Subpoena (ECF No. 275) The final motion pcnding before the Court is the SEC's Motion for Administrative Subpoena. ECF No. 275. At the time the SEC filed this motion. in April 2017. the SEC was actively pursuing access to Martin's emails through discovery. and was meeting resistance Irom Martin. In an attempt to obtain those emails. the SEC asked the Court to order Yahoo. Inc. to tum over Martin's emails. ECF No. 275 at I. Since then. the Court is aware that Martin signed a consent letter authorizing Yahoo. Inc. to provide the SEC with access to Martin's cmails. Therefore. the SEC no longer needs the administrative subpocna requested in ECF No. 275. and the Court will deny that motion without prcjudice as moot. III. CONCLUSION For the foregoing reasons. ECF No. 270. ECF No. 275. ECF No. 325. ECF No. 326. ECF No. 328 and ECF No. 333 are denied. Regarding ECF No. 345 and ECF No. 346. the Court docs not oppose Martin'sapplication payments arc made li'OIll for Chapter 7 Bankruptcy. so long as any tiling fees and future his legitimate. new income rathcr than the frozen assets. A separate Ordcr shall issue. Date: November (.2017 GEORGE J. HAZEL United States District Judge 9

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