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).

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/

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Plaintiff,
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NORTH STAR FINANCE, LLC, et :11.,

Case No.: G.JII-15-1339

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Defendants.

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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
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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").

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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

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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

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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

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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.
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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

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