Securities and Exchange Commission v. James A. Torchia

Case: 17-13651 Date Filed: 04/30/2019 Page: 1 of 24

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT
________________________

No. 17-13650
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D.C. Docket No. 1:15-cv-03904-WSD

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff-Appellee,

AL B. HILL,

Interested Party-Appellee,

versus

JAMES A. TORCHIA,
CREDIT NATION CAPITAL, LLC,
CREDIT NATION ACCEPTANCE, LLC,
CREDIT NATION AUTO SALES, LLC,
AMERICAN MOTOR CREDIT, LLC, et al.,

Defendants,

RICHARD SUTHERLAND,
KATHERINE SUTHERLAND,

Interested Parties-Appellants.
 Case: 17-13651 Date Filed: 04/30/2019 Page: 2 of 24

________________________

No. 17-13651
________________________

D.C. Docket No. 1:15-cv-03904-WSD

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff-Appellee,

AL B. HILL,

Interested Party-Appellee,

versus

JAMES A. TORCHIA,
CREDIT NATION CAPITAL, LLC,
CREDIT NATION ACCEPTANCE, LLC,
CREDIT NATION AUTO SALES, LLC,
AMERICAN MOTOR CREDIT, LLC, et al.,

Defendants,

RICHARD SUTHERLAND,
KATHERINE SUTHERLAND,
ANTONIO DUSCIO,
WILLIAM RUMER,
SONYA GRAVITT,
SHIRLEY GREGORY,
JAMES GREGORY,
CHARLES HEILD,
JAMES HOYER,
THOMAS JONES,
SARAH JONES,
TINA COLEMAN,
THOMAS KELLY COLEMAN,

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HOLLY HOOD,
MARGARET COLEMAN,
NANCY HOYER,

Interested Parties-Appellants.

________________________

Appeals from the United States District Court
for the Northern District of Georgia
________________________

(April 30, 2019)

Before WILSON and JORDAN, Circuit Judges, and MOORE, District Judge.∗

JORDAN, Circuit Judge:

In 1903, Charles Ponzi emigrated from northern Italy to Boston,

Massachusetts, with almost nothing. See Mitchell Zuckoff, Ponzi’s Scheme: The

True Story of a Financial Legend 6–7 (2006). More than one hundred years later,

his surname still frequents the headlines of America’s largest news outlets. See, e.g.,

Diana B. Henriques, Madoff Is Sentenced to 150 Years for Ponzi Scheme, N.Y.

Times, June 29, 2009, at A1. Mr. Ponzi is widely credited with conceiving a

fraudulent investment scheme in which potential investors are lured with promises

of high returns, the fraudsters skim a portion of the incoming investments, and the

remaining funds are redirected to pay the returns promised to previous investors who

∗The Honorable William T. Moore, Jr., United States District Judge for the Southern District of
Georgia, sitting by designation.
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are lulled into believing that the expected returns are being realized. See generally

United States v. Orton, 73 F.3d 331, 332 n.2 (11th Cir. 1996) (outlining the

parameters of the scheme). So long as the fraudsters can attract enough new

investments to cover the returns promised to previous investors, the scheme can

continue.

Mr. Ponzi’s scheme collapsed after investors were defrauded of millions of

dollars, causing half-a-dozen banks to crash. See Cunningham v. Brown, 265 U.S.

1, 7–8 (1924). See also Zuckoff, Ponzi’s Scheme, at 198, 295; Mary Darby, In Ponzi

We Trust, Smithsonian Mag., Dec. 1998, at 134–60 (also available at

https://www.smithsonianmag.com/history/in-ponzi-we-trust-64016168/). In the

end, those investors only recovered about thirty cents on the dollar. See Zuckoff,

Ponzi’s Scheme, at 106.

In the century since Mr. Ponzi conned the people of Boston, the U.S. legal

system has improved its response to financial scams. See generally Eric Lode,

Annotation, Judicial Remedies for Proceeds and Funds from Ponzi Schemes, 100

A.L.R.6th 281 (2014). For example, courts now regularly appoint receivers to

manage the entities used in Ponzi schemes, collect and sell any assets connected to

the fraud, and distribute the proceeds to defrauded investors. See Wiand v. Lee, 753

F.3d 1194, 1200 (11th Cir. 2014) (citing S.E.C. v. Elliott, 953 F.2d 1560, 1567–68

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(11th Cir. 1992)). The goal of such receiverships is to grant fair relief to as many

investors as possible. See Elliott, 953 F.2d at 1566.

The appellants in this case are investors who fell victim to a Ponzi scheme

orchestrated by James Torchia. After the Securities and Exchange Commission

initiated federal proceedings against Mr. Torchia, the district court appointed a

receiver for one of Mr. Torchia’s entities. The receiver proposed a plan to collect

and sell assets connected to the scheme and distribute the proceeds. On appeal, the

investors argue that the district court denied them due process by employing

summary proceedings that did not allow them to present their claims and defenses

or meaningfully challenge the receiver’s decisions. We agree that the summary

proceedings here did not afford the investors due process, and reverse and remand

for further proceedings.

I

The S.E.C. filed suit against Mr. Torchia in 2015, alleging that he operated a

Ponzi scheme through one of his entities, Credit Nation Capital, LLC. CN Capital

and its investors purchased interests from third parties in life insurance policies,

commonly called life settlement policies. Mr. Torchia, claimed the S.E.C., used

another entity, Credit Nation Acceptance, LLC, to sell promissory notes with

interests in life insurance policies acquired by CN Capital. According to the S.E.C.,

Mr. Torchia commingled funds from CN Acceptance to cover CN Capital’s deficits.

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In April of 2016, the district court froze CN Capital’s assets and appointed a

receiver to facilitate the collection, sale, and distribution of assets to repay investors

defrauded by Mr. Torchia. The receiver determined that CN Capital had three

categories of investors: (1) investors who loaned money to CN Capital in return for

a promissory note; (2) investors who purchased life insurance policies in which they

were the sole beneficiaries (the “Direct Investors”); and (3) investors who purchased

fractional interests in life insurance policies where CN Capital was the beneficiary.

One month later, in May of 2016, the district court ruled that proceeds from

the receivership would be distributed pro rata—i.e., equally among all investors.

The district court also ordered the Direct Investors—who were the sole beneficiaries

of one or more insurance policies—to either (a) assign their policies to the receiver

(because the policies were serviced with funds comingled from CN Acceptance), or

(b) retain their policies provided they “remit to the receiver the value of the benefit

they have received from CN Capital,” including any so-called “fictitious profits.”

D.E. 120 at 11. “Fictitious profits” included “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.

A

Katherine and Richard Sutherland were Direct Investors in CN Capital and

the sole beneficiaries of an insurance policy with the face value of $26,992 on the

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life of Jimmy Martin. In June of 2016 and December of 2016, the receiver sent the

Sutherlands letters demanding that they either assign the Martin policy to him or

remit $25,820.34 in purported fictitious profits. According to the receiver, the

premiums paid by CN Capital on the Martin policy totaled $21,641.71 and the “fair

market value of other services” provided by CN Capital was $4,178.63. The receiver

did not explain how he had calculated the “fair market value of other services.” The

Sutherlands objected, arguing that their rights were superior to those of the receiver

because, as a contractual matter, the money they paid to acquire the Martin policy

included payment for the premiums and for CN Capital’s servicing of the policy.

The receiver responded that he was acting on the district court’s earlier order to

collect CN Capital’s assets.

On February 14, 2017, the receiver moved for an order requiring the

Sutherlands to file written objections to the assignment of the Martin policy. The

district court allowed the Sutherlands to file a response to the receiver’s motion, and

the receiver replied to the Sutherlands’ arguments.

As the movant, the receiver had the burden to show that the receivership was

entitled to the requested relief. See, e.g., Evans v. Robins, 897 F.2d 966, 968 (8th

Cir. 1990). Cf. Donell v. Kowell, 533 F.3d 762, 771 (9th Cir. 2009) (discussing a

receiver’s burden in recovering false profits); In re Bernard L. Madoff Inv. Sec. LLC,

454 B.R. 317, 331, 334–35 (Bankr. S.D.N.Y. 2011) (same). Throughout the process,

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however, the receiver did not submit any evidence to the district court justifying his

determination that the Sutherlands were obligated to remit fictitious profits or

supporting his calculations of the fictitious profits. Cf. Wiand, 753 F.3d at 1199,

1204 (affirming summary judgment order that allowed the receiver to recover “false

profits” where the receiver alleged that the Ponzi scheme paid out investors in excess

of their original investment and provided evidence of specific transactions).1

The Sutherlands were not permitted discovery on the receiver’s

determinations and calculations. Nor, as we explain later, were they allowed to fully

present their claims or defenses to dispute the receiver’s fictitious profits claim.

On July 12, 2017, the district court overruled the objections and ordered the

Sutherlands to either remit the fictitious profits claimed by the receiver (i.e., the

premiums paid by CN Capital plus the “fair market value of other services”) or

1
In an earlier brief to the district court, the receiver cited our opinion in Perkins v. Haines, 661
F.3d 623, 627 (11th Cir. 2011), for the proposition that “[a]ny transfers over and above the amount
of the principal [invested in a Ponzi scheme]—i.e., for fictitious profits—are not made for ‘value’
because they exceed the scope of the investors’ fraud claim and may be subject to recovery by a
plan trustee.” D.E. 78 at 3 n.2 (second alteration in original). See also In re Indep. Clearing House
Co., 77 B.R. 843, 870 (D. Utah 1987) (outlining the “law allowing a trustee to avoid payments of
fictitious Ponzi scheme profits”). Although Perkins is generally instructive on a receiver’s ability
to recover fictitious profits, it does not state or hold that premiums paid on a life insurance policy
or “other services” provided in administering such a policy are necessarily fictitious profits. See
Perkins, 661 F.3d at 626–29. Moreover, Perkins does not provide a method for calculating such
profits. See id. On appeal, the receiver argues that such premiums and “other services” should be
considered fictitious profits because CN Capital paid for them using comingled funds. It is not
clear on this record, however, whether the receiver provided evidence that CN Capital used
comingled funds to pay for the Martin policy’s premiums or for “other services” it provided to the
Sutherlands. It is similarly unclear whether the Sutherlands had a meaningful opportunity to
challenge the receiver’s conclusion that they profited from comingled funds. We express no view
on these matters, and leave them for determination on remand.
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assign the Martin policy to the receiver. The district court did not explain why the

receiver’s fictitious profits calculations were correct. Shortly thereafter, the

Sutherlands assigned the Martin policy to the receiver.

B

While the district court was considering the Sutherlands’ objections,

additional issues arose between the receiver and CN Capital’s investors. On April

19, 2017, following Mr. Torchia’s consent to a final judgment, the receiver asked

the district court to approve his proposed claims process and distribution plan. The

receiver’s distribution plan, among other things, treated all categories of investors

equally and consolidated each investor’s multiple claims into a single claim. One

group of investors—the O’Dell investors—jointly objected to the proposed

distribution plan and the district court’s use of summary proceedings related to the

receivership.

On July 18, 2017, the district court held a hearing on the receiver’s distribution

plan, and the O’Dell investors were allowed to present argument at that hearing. The

O’Dell investors, however, were not permitted to call witnesses or conduct

discovery, and oral argument was limited to objections to the plan’s claims and

distribution process. On August 7, 2017, the district court overruled the O’Dell

investors’ objections and approved the receiver’s distribution plan.

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The Sutherlands and the O’Dell investors separately appealed the district

court’s orders. They contend that that they were denied due process because the

district court’s summary proceedings did not provide them with a meaningful

opportunity to present their claims and defenses or to challenge the receiver’s

determinations or calculations related to the claimed fictitious profits.

II

We must first decide whether the district court’s July 12, 2017, and August 7,

2017, orders are appealable. The Sutherlands (who appeal the July 12 order) and the

O’Dell investors (who appeal the August 7 order) respectively contend that each

order is appealable under 28 U.S.C. § 1292(a)(2), as a receivership order directing

the sale or disposal of assets; under 28 U.S.C. § 1292(a)(1), as an injunction or an

order continuing an injunction; and under the collateral order doctrine (because each

order is final as to issues collateral to the S.E.C. action against Mr. Torchia and will

otherwise be unreviewable).

The S.E.C. submits that the July 12 order as to the Sutherlands is appealable

under § 1292(a)(1), and that the August 7 order as to the O’Dell investors is

appealable under the collateral order doctrine. The receiver argues that § 1292(a)(1)

does not confer appellate jurisdiction over the July 12 order as to the Sutherlands but

agrees that the August 7 order as to the O’Dell investors is appealable as a collateral

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order. We agree with the S.E.C.’s jurisdictional position, and conclude that we have

appellate jurisdiction.2

A

Under 28 U.S.C. § 1292(a)(1), we have jurisdiction to review certain

interlocutory orders, such as those “granting, continuing, modifying, refusing or

dissolving injunctions, or refusing to dissolve or modify injunctions.” See

Birmingham Fire Fighters Ass’n 117 v. Jefferson Cty., 280 F.3d 1289, 1292 (11th

Cir. 2002). “In determining what is an appealable order under [§] 1292(a)(1), courts

look not to the terminology, but to the ‘substantive effect of the order made.’”

McCoy v. La. State Bd. of Educ., 345 F.2d 720, 721 (5th Cir. 1965) (citation omitted).

The district court’s July 12 order requiring the Sutherlands to either remit the

purported fictitious profits or assign the Martin policy to the receiver, consistent with

its prior order stating that all Direct Investors must remit fictitious profits or assign

their policies, is an order “granting [or] continuing . . . [an] injunction” under §

1292(a)(1). It “command[s] . . . an action,” Black’s Law Dictionary 904 (10th ed.

2014), concerning the merits of the relief requested by the receiver. See Yeargin

Constr. Co. v. Parsons & Whittemore Ala. Mech. & Servs. Corp., 609 F.2d 829, 831

(5th Cir. 1980) (reviewing a district court’s order requiring a party to turn over

records under § 1292(a)(1)); Laje v. R.E. Thompson Gen. Hosp., 564 F.2d 1159,

2
Given our resolution, we do not address whether either order is appealable under § 1292(a)(2).
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1161 (5th Cir. 1977) (concluding that an order directing a hospital to grant a doctor

staff privileges “was in the nature of an injunction” and appealable under §

1292(a)(1)). See also 17 Charles Alan Wright & Arthur R. Miller, Federal Practice

and Procedure § 3922 (3rd ed. 2013) (explaining that an injunction for purposes of

§ 1292(a)(1) is an order “directed to a party, enforceable by contempt, and designed

to accord or protect ‘some or all of the substantive relief sought by a complaint’ in a

more than temporary fashion”) (footnotes omitted). The receiver presents no cases

or authorities to the contrary. Cf. Thomas v. Blue Cross & Blue Shield Ass’n, 594

F.3d 823, 829 (11th Cir. 2010) (describing certain orders that are appealable under

§ 1292(a)(1)).

The receiver does argue that, even if the July 12 order is appealable under

§ 1292(a)(1), the appeal is moot because the Sutherlands complied with the order by

assigning the Martin policy to him. We disagree. “[A] case becomes moot only

when it is impossible for a court to grant effectual relief whatever to the prevailing

party.” Chafin v. Chafin, 568 U.S. 165, 172 (2013) (citation and internal quotation

marks omitted). If the Sutherlands are ultimately successful, the district court could

award them monetary relief to compensate them for the loss of the Martin policy.

See Calderon v. Moore, 518 U.S. 149, 150 (1996) (per curiam) (“[T]he availability

of a ‘partial remedy’ is ‘sufficient to prevent [a] case from being moot.’”) (quoting

Church of Scientology of Cal. v. United States, 506 U.S. 9, 12 (1992)). See also In

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re Transwest Resort Props., Inc., 801 F.3d 1161, 1172–73 (9th Cir. 2015) (citing the

possibility of similar “partial relief” in a bankruptcy appeal); In re Tex. Grand

Prairie Hotel Realty, L.L.C., 710 F.3d 324, 328 (5th Cir. 2013) (same).

B

The district court’s August 17 order approved the receiver’s claims process

and distribution plan. We reviewed a similar order approving a receiver’s

distribution plan in Elliott, 953 F.2d at 1566, but we did not address the jurisdictional

issue in that case, and “we are not bound by a prior decision’s sub silentio treatment

of a jurisdictional question.” Okongwu v. Reno, 229 F.3d 1327, 1330 (11th Cir.

2000). We now conclude that the August 12 order is appealable under the collateral

order doctrine.

Although we have not explicitly applied the collateral order doctrine to confer

appellate jurisdiction over an order approving a receiver’s distribution plan, at least

three other circuits have. See S.E.C. v. Wealth Mgmt. LLC, 628 F.3d 323, 330–31

(7th Cir. 2010); S.E.C. v. Forex Asset Mgmt. LLC, 242 F.3d 325, 330–31 (5th Cir

2001); S.E.C. v. Basic Energy & Affiliated Res., Inc., 273 F.3d 657, 666–67 (6th Cir.

2001). Cf. S.E.C. v. Capital Consultants LLC, 453 F.3d 1166, 1171–72 (9th Cir.

2006) (concluding that investors’ claims to assets held by a receiver was not

collateral to the merits of the action). We agree with our sister circuits, and hold that

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the district court’s order approving the receiver’s distribution plan is appealable as a

collateral order.

Under the collateral order doctrine, we have jurisdiction to review a district

court order that (1) conclusively determines the question in dispute, (2) resolves an

important issue completely separate from and collateral to the merits of the action,

and (3) would effectively be unreviewable on appeal from the final judgment. See

Plaintiff A v. Schair, 744 F.3d 1247, 1252–53 (11th Cir. 2014) (quoting Will v.

Hallock, 546 U.S. 345, 349 (2006)). As the Fifth Circuit persuasively explained in

Forex, 242 F.3d at 330:

The decision by the district court to approve the
[r]eceiver’s distribution plan fits within the confines of the
collateral order doctrine. First, it conclusively determines
the manner in which the receivership assets should be
distributed. Second, it resolves an important issue
regarding distribution of the assets, which is separate from
the merits of the SEC’s complaint against [the defendant].
Third, it is effectively unreviewable on appeal because the
assets from the receivership will be distributed, and likely
unrecoverable, long before the action brought by the SEC
is subject to appellate review.

In sum, the district court’s order approving the receiver’s distribution plan is

appealable as a collateral order.

III

A district court has summary jurisdiction over receivership proceedings and

may deviate from the Federal Rules of Civil Procedure in favor of exercising its

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“broad powers and wide discretion to determine relief[.]” Elliott, 953 F.2d at 1566.

See also Capital Consultants, LLC, 397 F.3d at 738 (“[A] district court’s power to

supervise an equity receivership and to determine the appropriate action to be taken

in the administration of the receivership is extremely broad.”) (quoting S.E.C. v.

Hardy, 803 F.2d 1034, 1037 (9th Cir. 1986)). This discretion derives from the

district court’s inherent equitable powers. See Elliott, 953 F.2d at 1566.

We have affirmed the use of so-called summary proceedings to reduce the

time necessary to settle disputes, decrease litigation costs, and prevent further

dissipation of assets. See id. Although the word “summary” connotes an

abbreviated procedure, it does not permit the district court to deny the parties due

process. See id. at 1567. See also Basic Energy & Affiliated, 273 F.3d at 668, (“In

exercising its equitable discretion . . . the district court must still provide the

claimants with due process.”). Due process, in its most basic form, still requires

notice and an opportunity to be heard. See U.S. Const. amend. V; Mathews v.

Eldridge, 424 U.S. 319, 332–35 (1976). See also Elliott, 953 F.2d at 1566.

To determine whether the district court’s summary proceedings provided due

process, we “look at the actual substance, not the name or form, of the procedure to

see if the [investors’] interests were adequately safeguarded.” Elliott, 953 F.2d at

1567. Summary proceedings generally afford due process, and the district court does

not abuse its discretion, so long as the investors are permitted “to present evidence

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when the facts are in dispute and to make arguments regarding those facts.” Id. On

the other hand, such proceedings are inadequate “when [the investors are] deprived

of a full and fair opportunity to present their claims and defenses.” Id.

A

In Elliot, we considered whether a district court’s use of summary proceedings

in a receivership violated the investors’ due process rights. See id. at 1566–67. We

concluded that the district court’s summary proceedings were sufficient as to some

investors but insufficient as to others. See id. at 1567–76.

First, we vacated the setting aside of a transfer from Mr. Elliot—the

defendant—to two investors because the district court used inadequate summary

proceedings to conclude that the transfer was fraudulent. See id. at 1567–68.

Specifically, we ruled that the summary proceedings—which allowed the investors

to fill out written forms with their objections—were insufficient because

determining whether the transfer was fraudulent “required an evidentiary hearing”

where the investors could “present and argue their facts.” Id. at 1568.

Second, we concluded that the summary proceedings used by the district court

to determine which investors owned particular securities—including the reviewing

of loan documents and the parties’ briefs—complied with due process. See id. at

1569–71. Unlike the circumstances surrounding the allegedly fraudulent transfer,

the facts concerning who owned the securities were not in dispute and the investors

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“failed to show how their rights would have been better protected by fuller

proceedings.” Id. at 1570.

Third, we held that the district court denied due process to one investor by

rejecting his claim that he was entitled to setoff his liability to the receivership

through a debt the receivership owed him. See id. at 1571–75. “[W]ithout permitting

[the investor] discovery or an opportunity to present evidence on his claims and

defenses,” the district court’s summary proceedings failed to afford due process

because they failed to provide the investor “a meaningful opportunity” to argue and

determine that he was entitled to a setoff. Id. at 1572, 1575.

The district court in this case did not err by exercising its equitable power to

appoint a receiver and utilize certain summary proceedings. See id. at 1566. But, as

with the investors in Elliot challenging a fraudulent transfer claim and asserting a

setoff, the summary proceedings used by the district court did not provide the

Sutherlands or the O’Dell investors with a meaningful opportunity to challenge the

receiver’s determinations and calculations or to argue their claims and defenses. See

id. at 1568, 1575. We explain why below.

B

Between January and May of 2016, the district court appointed the receiver,

issued an injunction to freeze CN Capital’s assets, and held status conferences

regarding the receivership. The receiver then separated CN Capital’s investors into

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different categories, and the district court issued an order that called for the receiver

to collect and sell the receivership’s insurance policies, provided for a pro rata

distribution, defined fictitious profits, required investors to repay fictitious profits,

and allowed the Direct Investors to retain their policies so long as they remitted

fictitious profits. These determinations by the receiver and the orders entered by the

district court were made without giving the Sutherlands or the O’Dell investors

sufficient notice and/or a meaningful opportunity to be heard. Even after the

investors were given notice of the receiver’s determinations and the district court’s

orders, the district court continued to use summary proceedings in adjudicating their

claims and defenses. For example, as far as we can tell, the district court never

expressly addressed the argument of the Sutherlands that their interests were

superior to those of the receiver. Instead, it merely pointed to the receiver’s

conclusion that CN Capital serviced the policies using comingled funds.

In June of 2016, the Sutherlands received notice from the receiver that if they

wished to retain the Martin policy, they were required to remit fictitious profits, i.e.,

the premiums that CN Capital paid on the policy plus the “fair market value of other

services” that CN Capital rendered in administering the policy. A later notice

informed the Sutherlands that their monetary obligation totaled $25,820.34,

including $4,178.63 for “other services” provided. The receiver, however, never

provided the Sutherlands—nor filed with the district court—any evidence

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whatsoever of the premiums CN Capital paid on the policy or the nature of the

services CN Capital rendered. Nor did the receiver set out the methodology for his

calculation of “fair market value of other services.” As noted, the district court

denied the Sutherlands’ requests for discovery.

Viewing the totality of the circumstances, we conclude that the Sutherlands

were not provided sufficient process. See Elliott, 953 F.2d at 1566 (noting that “the

process that is due varies according to the nature of the right and to the type of

proceedings”). Maybe things would have been different had the receiver—the party

with the burden of proof—submitted evidence supporting how he arrived at the

amount of premiums paid by CN Capital and/or provided his methodology for

determining the “fair market value of other services” rendered by CN Capital. But

he did not, and it was therefore improper to require the Sutherlands to object to his

conclusory demands while simultaneously denying their request for discovery. See

Republic Nat. Bank of Dall. v. Crippen, 224 F.2d 565, 566 (5th Cir. 1955) (holding

that the district court erred in refusing to hear the claims of certain creditors in a

bankruptcy proceeding, and explaining that “the denial of due process . . . is never

harmless error”). See also Parker v. Williams, 862 F.2d 1471, 1481–82 (11th Cir.

1989) (“[P]rocedural due process is an absolute right . . . . Although the result in

this case may work a hardship on [a party] with no change in the ultimate result,

every party must have the opportunity to participate in the processes which may

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affect his or her rights in a significant manner.”), overruled on other grounds by

Turquitt v. Jefferson Cty., Ala., 137 F.3d 1285 (11th Cir. 1998). 3

We acknowledge that the Sutherlands were allowed to file written objections

to the assignment of the Martin policy or the repayment of fictitious profits. But the

Sutherlands were not permitted to substantively challenge the receiver’s calculation

of fictitious profits, a sum which provided a basis for the assignment of the Martin

policy.

Moreover, the district court did not allow the Sutherlands to meaningfully

argue certain claims or defenses. For example, the Sutherlands argued that, as a

contractual matter, the premiums CN Capital paid to service the Martin policy

should not be considered fictitious profits because they entered into an agreement to

purchase the Martin policy for $155,000—a sum which included CN Capital’s

servicing of the policy, the payment of premiums, the tracking and monitoring of the

policy, and the filing of an application for benefits upon the insured’s death. The

district court rejected these arguments, citing a previous order denying the motion

by another group of investors to amend the receiver’s initial separation of CN

Capital’s investors and fictitious profits determinations. As discussed in the

previous order, the other group of investors asserted different challenges related to

the receiver’s recovery of fictitious profits and focused primarily on the division of

3
Even on appeal the receiver does not provide his methodology or explain his calculations.
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CN Capital investors into different groups of investors. Because the previous order

did not address (and therefore did not foreclose) the arguments made by the

Sutherlands, the district court did not provide them with sufficient process.

We express no view as to the validity of the Sutherlands’ claims or defenses

or as to the receiver’s position or methodology. We hold only that due process

required the district court to more fully adjudicate the Sutherlands’ claims and

defenses. See Elliott, 953 F.2d at 1568, 1575. See also Crippen, 224 F.2d at 566.

C

In April of 2017, the receiver filed his proposed distribution plan with the

district court. The plan set out how the receiver would treat fictitious profits, sell

certain assets, and distribute proceeds to investors. Several investors, including the

O’Dell investors, objected.

Like the Sutherlands, the O’Dell investors were allowed to file objections to

the proposed distribution plan. In addition, the district court heard oral argument on

their objections. The district court, however, limited the scope of the objections and

the issues at oral argument to the form of the proposed distribution plan. For

example, the O’Dell investors argued—similarly to the Sutherlands—that based on

the terms of their respective purchase agreements, the receiver should not count as

fictitious profits the premiums that CN Capital paid while administering their

policies.

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The district court declined to substantively address the O’Dell investors’

arguments related to fictitious profits. This was error. See Crippen, 224 F.2d at 566.

Due process required the district court to provide the O’Dell investors a meaningful

opportunity to object to the receiver’s determinations and calculations, present

evidence and argue their claims and defenses, and challenge the substance of the

receiver’s proposed distribution plan. See Elliot, 953 F.2d at 1568, 1575.

D

The receiver argues that more substantial process was impractical because the

receivership was illiquid and could not afford to continue paying the premiums for

the insurance policies connected to CN Capital. To an extent, we are sympathetic.

We appreciate that, in some cases, the practical realities of a receivership may justify

some expediency at the expense of some procedural formality. That is, after all, the

nature of the district court’s broad equitable power in receivership. See Capital

Consultants, LLC, 397 F.3d at 738. In this case, for instance, the receiver needed to

quickly collect and sell the policies before they lapsed.

But we reiterate here what we said in Elliot, 953 F.2d at 1573: the need for

expediency and a district court’s authority to utilize summary proceedings in

receivership do not outweigh an investor’s right to due process. The process due

depends on a number of factors, see Elliott, 953 F.2d at 1566, but at minimum

summary proceedings must provide affected investors with necessary information,

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a meaningful opportunity to argue the facts and their claims and defenses, and an

adjudication of their claims and defenses. Otherwise, the summary proceedings do

not afford due process. See id. at 1568, 1571–72, 1575. See also Eldridge, 424 U.S.

at 332–33, 349 (outlining the requirements of due process); Liberte Capital Grp.,

LLC v. Capwill, 421 F.3d 377, 384–85 (6th Cir. 2005) (holding that, under the due

process clause, an investor was entitled to a hearing before the court authorized a

receiver to seize proceeds from the investor’s life settlement policy).

E

On appeal, both the Sutherlands and the O’Dell investors argue that that they

should be allowed discovery to substantiate their objections, claims, and defenses.

We decline at this time to mandate such a course on remand.

When the case returns to the district court, the receiver should submit evidence

together with a memorandum of law that supports his position that a particular

investor must remit fictitious profits. The receiver should also set out the

methodology used to calculate each investor’s fictitious profits (including the “fair

market value of other services” provided by CN Capital). Once the receiver does

so, the Sutherlands and the O’Dell investors should then be permitted to

meaningfully challenge the receiver’s legal theories, factual determinations, and

mathematical calculations. Once the district court has reviewed the receiver’s filings

and the submissions from the Sutherlands and the O’Dell investors, it will be in a

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better position to determine whether any discovery is warranted. Elliott, 953 F.2d at

1570 (stating that additional procedures are not required when the investor “fail[s]

to show how their rights would have been better protected by fuller proceedings”).

Following briefing (and possibly discovery), the district court must address the

substantive arguments made by the Sutherlands and the O’Dell investors, including

the contention that their purchase agreements foreclose the receiver’s recovery of

fictitious profits.

IV

The summary proceedings in this case provided insufficient process to the

Sutherlands and the O’Dell investors. We reverse the July 12 order requiring the

Sutherlands to either assign the Martin policy or remit fictitious profits and the

August 7 order approving the receiver’s distribution plan. We remand the case for

further proceedings consistent with this opinion.

REVERSED AND REMANDED.

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