Sec. & Exch. Comm'n v. Mut. Benefits Corp.

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MUTUAL BENEFITS CORP., et al., Defendants.

No. 04-60573-CIV-MORE/STRAUSS

United States District Court, S.D. Florida

May 22, 2021

Hon Federico A. Moreno Counsel of record

REPORT AND RECOMMENDATION TO GRANT TRUSTEE'S MOTION FOR AN ORDER OF INSTRUCTIONS (“MOTION”) (DE 2882)

Jared M. Strauss, United States Magistrate Judge

THIS CAUSE has come before me upon the Trustee's Motion filed by Barry Mukamal, as Trustee (the “Trustee”) of the Mutual Benefits Keep Policy Trust (the “Trust”).^[1] (DE 2882). This matter has been referred to me by the District Court to take all necessary and proper action as required by law pursuant to 28 U.S.C. § 636 and the Magistrate Judge Rules of the United States District Court for the Southern District of Florida (“Referral”). (DE 2631). Acheron Capital, Ltd. in its capacity as the investment manager for Acheron Portfolio Trust, Avernus Portfolio Trust, Lorenzo Tonti 2006 Trust and STYX Portfolio Trust, (collectively “Acheron”) filed a response, nd the Trustee replied. (DE 2901; DE 2910). The parties also filed proposed orders addressing the Motion. (DE 2918; DE 2929). Additionally, I held a hearing on the Trustee's Motion on April 29, 2021 (“Motion Hearing”) at which time Acheron and the Trustee presented oral argument. (DE 2925). Following the Motion Hearing, I ordered the parties to file supplemental briefing pertaining to the Motion (DE 2923), and the parties complied (DE 2927; DE 2928). I have carefully considered the parties' filings and oral arguments, along with the record in this case. Being otherwise duly advised it is respectfully RECOMMENDED that the Motion (DE 2882) be GRANTED as set forth herein.

I. BACKGROUND

This case arises from an enforcement action by the Securities and Exchange Commission in 2004 involving the fraudulent selling of fractional viaticated investment interests in life insurance policies. (DE 1). The entities involved were put into receivership, and Roberto Martinez was appointed as Receiver (“Receiver”). (DE 26).

A. Order Regarding Future Administration and Subsequent Orders

On May 5, 2007, the Court entered an Order Regarding Future Administration of Certain Insurance Policies Subject to this Proceeding (“Order Regarding Future Administration”). (DE 1887). The Order Regarding Future Administration referenced policies that were identified to be sold (“Sell Policies”) and policies that investors would retain (“Keep Policies”). Id. at 2.

Several provisions of the Order Regarding Future Administration are pertinent to the instant Motion. Paragraph 1.C. provides that:

The interests of all investors in and beneficiaries of each such Policy, ^[2] however those interests may have been created, transferred, or characterized, including specifically but without limitation investors' interests in the proceeds of a Policy or of its disposition, are and shall continue to be subject to this Court's orders, and, subject to procedures, terms, and conditions this Court establishes from time to time, may be subject to modification, sale, liquidation, forfeiture, or termination as the Court may expressly determine, prescribe, or permit by order, including specifically but without limitation by the Disposition Orders, as they may be modified or amended from time to time, and by any future orders authorizing, approving, or directing that specified Policies shall be sold, transferred, surrendered, or permitted to lapse.

Id. at ¶1.C. Thus, this provision addresses “the interests” of all investors in Policies of the Receivership, including those investors who purchased fractional interests in Policies from the Receivership Entities.

The order also addresses the sale or transfer of Policies pursuant to: (i) specific procedures for bidding (“Bidding Procedures”); or (ii) future orders allowing the auction or sale of Policies subject to lapse due to nonpayment of premiums (“Auction for Nonpayment”). Id. at ¶3. In particular, the Order Regarding Future Administration recognizes a buyer (“Buyer”) of a Policy as the “purchaser or other transferee” of a Policy by virtue of the closing of a sale or transfer resulting from the Bidding Procedures or an Auction for Nonpayment. Id. at ¶3A. Specifically, the order states that:

By virtue of the closing of the sale or transfer of such Policy to its purchaser or other transferee (the “Buyer”) in compliance with a written agreement with the Receiver and an order of this Court (including any future order that may authorize the Receiver to sell Policies if and when he determines certain specified conditions and circumstances are met, a “Sale Order”), on and as of the effective date of the closing of the transaction: (i) the sole owner of such individual Policy, or sole assignee of the viaticated interest in any group Policy as the case may be, shall be and be deemed to be its Buyer, or if the Buyer assigns a given Policy or Buyer's right to acquire that Policy directly to one other entity as owner (the “Assignee”), and Assignee in fact acquires such Policy within fifteen (15) business days after the Receiver's sale of such Policy closes and before a Buyer's Notice (as defined in paragraph 3.B) is delivered to the Listed Insurer for that Policy, then the sole owner of such Policy shall be deemed to be Assignee (as used hereinafter, unless the context otherwise requires, as to any given Policy the Receiver sells, “Buyer” shall mean Buyer as defined above if no such assignment is effected but shall mean Assignee if such an assignment is effected); and (ii) the Policy's sole beneficiary shall be and be deemed to be its Buyer unless and until such time as the Buyer, as rightful owner, effectively designates one or more new beneficiaries in accordance with the Policy's terms, this Order, and the Sale Order approving the Receiver's sale or transfer of the Policy to the Buyer.

Id. at ¶3A. Thus, “Buyer” or an “Assignee” becomes the sole owner of an individual Policy. Setting aside the language addressing group Policies, the subject provision applies to individual Policies in terms of the sale of whole individual Policies and does not address “Buyer” and/or “Assignee” in terms of the sale of fractional interests in individual Policies.

On September 26, 2007, the Court granted the Receiver's motion for approval to sell interests in Undersubscribed Keep Policies, or authority to allow such policies to be sold in their entirety, to reduce the face amount of such policies, or to surrender or lapse such policies. (DE 1964; DE 1949). On March 25, 2008, the Receiver sought the Court's approval to engage a third-party to conduct auctions of fractional interests in Undersubscribed Keep Policies.^[3](DE 2046). The Receiver's motion included a proposed notice to prospective purchasers of such fractional interests, which warned that “fractional interests are highly speculative” and that “the purchase . . . involves a high degree of risk of loss of investment.” (DE 2046-1 at 2). Additionally, the proposed notice warned that “the fractional interests may not be transferred” pursuant to securities laws in the absence of an effective registration statement or an opinion of counsel satisfactory to the Receiver and his counsel that registration was not required. Id. at 2. Further, the proposed notice warned, inter alia, that the Receiver retained the ability to sell the entire policy or take other actions that could result in a total loss or reduction of a return on investment relative to the policy staying in force until Maturity, if the policy to which the fractional interest applied became further undersubscribed. Id. at 11. The motion also included a form of a proposed Asset Purchase Agreement (“APA”) for fractional interests.^[4] (DE 2046-2).

The Receiver filed a notice on February 20, 2009 referencing auction sales of Policies, including sales of fractional interests in Policies, approved by the Court on January 5, 2009 (“Notice”). (DE 2236 at 1). The Notice stated that “the provisions in [the order approving the sales] providing that such sales are free and clear of any ‘Encumbrance . . . ' are not intended in any way to modify or abridge the terms of the Court's [Order Regarding Future Administration or a subsequent order].”^[5] (DE 2236 at 1-2) (emphasis added).

B. The Trust Agreement

On April 2, 2009, the Receiver filed a motion seeking, inter alia, the Court's approval of a form of Trust Agreement entitled the Mutual Benefits “Keep Policy” Trust Agreement (DE 2266; DE 2266-5), which motion the District Court granted (DE 2267). On July 28, 2009, the Receiver filed a submission explaining, inter alia, that he proposed Barry Mukamal, C.P.A., to serve as Trustee and that the Trustee would “take[ ] control of . . . the nominal ownership interests in the Keep Policies” among other duties and responsibilities. (DE 2315 at 10). The Receiver and the Trustee executed the Trust Agreement (“Trust Agreement”) on September 25, 2009. (DE 2540-1). The Trust Agreement defines Policy Administration Orders and includes in that definition the Order Regarding Future Administration. Id. at § 1.1. By executing the Trust Agreement, the Receiver, inter alia, “transfer[red] . . . to the Trustee all of the Receiver's rights, powers and privileges under the Policy Administration Orders.” Id. at § 2.3.

Under Section Three of the Trust Agreement, the Trustee has broad powers and duties, which specifically include, but are not limited to:

To hold the status of owner and “nominal beneficiary” with respect to all Keep Policies, as is presently held by the Receiver pursuant to the Policy Administration Orders, and to hold and execute, in his discretion, all of the rights, powers and privileges of the Receiver under the Policy

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