Liberte Capital v. Capwill ( 2005 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 05a0358p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Plaintiffs, -
LIBERTE CAPITAL GROUP, LLC, et al.,
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No. 04-3101
ALPHA CAPITAL GROUP, LLC,
,
Plaintiff-Appellee, >
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v.
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Defendants, -
JAMES A. CAPWILL, et al.,
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JANET E. MOHNKERN, -
Intervenor-Appellant. -
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Appeal from the United States District Court
for the Northern District of Ohio at Cleveland.
No. 99-00818—David A. Katz, District Judge.
Argued: June 7, 2005
Decided and Filed: August 19, 2005
Before: BATCHELDER and COLE, Circuit Judges; OBERDORFER, District Judge.*
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COUNSEL
ARGUED: Charles A. Bowers, TAFT, STETTINIUS & HOLLISTER, Cleveland, Ohio, for
Appellant. Amy A. Wuliger-Knee, Montgomery Village, Maryland, for Appellee. ON BRIEF:
Charles A. Bowers, Bruce J.L. Lowe, TAFT, STETTINIUS & HOLLISTER, Cleveland, Ohio, C.
Richard Brubaker, Patrick J. Daughety, DRIGGS, LUCAS, BRUBAKER & HOGG, Willoughby
Hills, Ohio, for Appellant. William T. Wuliger, WULIGER, FADEL & BEYER, Cleveland, Ohio,
for Appellee.
*
The Honorable Louis F. Oberdorfer, United States District Judge for the District of Columbia, sitting by
designation.
1
No. 04-3101 Liberte Capital Group, et al. v. Capwill, et al. Page 2
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OPINION
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OBERDORFER, District Judge.
I.
This case is one of many spawned by the so-called “viatical settlement industry.” Plaintiff
Liberte Capital Group, LLC (“Liberte”) and Intervening-Plaintiffs Alpha Capital Management
Group, LLC, and Integrity Management Partners, LLC (collectively, “Alpha”) were separately
engaged in managing viatical settlements. Typically, each solicited investors whose investment
funds would purchase, at a discount, the life insurance policy of a terminally-ill insured, with the
expectation that the investor would be entitled to the policy proceeds upon the death of the insured.
In the interim between receipt of investment funds from an individual investor and the purchase of
one or more life insurance policies for the investor, the managers placed the investor’s funds in
escrow. The escrowee would draw from the escrow account the purchase price of an insurance
policy when one came available and use the remaining investment funds to pay the premiums on the
insurance policy until the death of the insured. That system broke down when an escrowee
absconded with the investment funds entrusted to it by the Plaintiffs. This case is a fall-out from
such an escrowee defalcation.
On November 3, 1998, Intervening-Plaintiff Janet E. Mohnkern invested $100,000 with
Alpha, with the understanding that it would place the funds in escrow until it located one or more
terminally ill policyholders who would, at a discounted price, surrender to Mohnkern all of his
rights, title, and interest in the policy on his life. In due course, Alpha acquired for Mohnkern a
policy on the life of Broderick J. Blacknell issued by the Professional Insurance Company.
Blacknell was terminally ill at the time. On March 9, 1999, for the discounted price of $49,995.00,
Blacknell assigned his policy to Mohnkern on the following terms:
[f]or Benefit Received the undersigned hereby assign, transfer and set over to Janet
E. Mohnkern . . . Policy No. 2063622M issued by the Professional Insurance
Corporation . . . upon the life of Broderick J. Blacknell . . . and all claims, options,
privileges, rights, title and interest therein and thereunder . . . subject to all the terms
and conditions of the policy and to all superior liens, if any, which the insurer may
have against the policy.
JA 443. The assignment further provided that Mohnkern shall have “[t]he sole right to collect from
the insurer the net proceeds of the Policy when it becomes a claim by death or maturity.” Id. By
an April 9, 1999 letter of “Approval of Absolute Assignment with Janet E. Mohnkern,” the
Professional Insurance Company recognized Mohnkern’s interest in the Policy. JA 444. Thereafter,
until Blacknell’s death, Alpha’s escrow agent paid the premiums on the Blacknell Policy,
purportedly from a portion of Mohnkern’s investment funds.1
In April 1999, after the assignment of the Blacknell Policy to Mohnkern but before
Blacknell’s death, Liberte and Alpha commenced an action in district court against their escrow
agent James A. Capwill and his companies, Viatical Escrow Services, LLC and Capital Fund
1
The balance of Mohnkern’s investment was placed in the Arthur Schaffer life insurance policy sold by Lincoln
Life Insurance Company. JA 419-20. That policy is not the subject of this litigation.
No. 04-3101 Liberte Capital Group, et al. v. Capwill, et al. Page 3
Leasing [hereinafter Capwill].2 The suit alleged that Capwill misappropriated funds it held in
escrow for Liberte and Alpha, including Mohnkern’s investment. Shortly thereafter, the district
court appointed a Receiver [hereinafter Receiver #1]. See Liberte Capital Group, LLC v. Capwill,
229 F. Supp. 2d 799, 799 (N.D. Ohio 2002). The order of appointment instructed Receiver #1 “to
satisfy the claim of creditors, including investors and other parties, in the order of legal priority . .
. .”3 See Liberte Capital Group, LLC v. Capwill, No. 02-4371, 2004 WL 1152137, at *1 (6th Cir.
May 19, 2004). Accordingly, between February 2000 and November 8, 2000, Receiver #1 disbursed
proceeds of life insurance policies of deceased insured to matched investor-beneficiaries. Id. at *2-
4.
Blacknell died on November 14, 2000. Experiencing difficulty in determining Blacknell’s
place of death and4in obtaining the required death certificate, it was not until October 1, 2001, that
the escrow agent located and sent to Mohnkern Blacknell’s death certificate together with
directions to complete the claim forms and return them, along with the death certificate, to the
Professional Insurance Company in order to receive the Blacknell Policy proceeds. Accordingly,
on October 12, 2001, Mohnkern sent the required paperwork to the insurance company.
On October 29, 2001, the district court appointed a second Receiver specifically to protect
the interests of the Alpha investors [hereinafter Receiver #2]. JA 239-40. Upon learning of the
Blacknell Policy, the proceeds of which had not yet been paid to Mohnkern, Receiver #2 filed a
motion requesting direction from the court regarding disbursement of the Blacknell Policy proceeds.
JA 241. The motion acknowledged that Mohnkern was “entitled to the benefits of the Broderick J.
Blacknell life insurance policy.” Receiver #2 requested, however, that the court terminate
Mohnkern’s rights in the policy and “replace them with an equitable claim to the residual amounts
left in the [ ] Receivership at the conclusion of the case.” Id.
Three days later, on January 10, 2002, without affording Mohnkern a hearing or any
opportunity to reply, the district court granted Receiver #2's motion and ordered that the Blacknell
Policy proceeds be paid to the escrow agent for the benefit of the Alpha receivership estate. JA 244.
The order made no mention of the March 9, 1999 document which transferred the Blacknell Policy
to Mohnkern. Nor was there any mention of the circumstances, apparently beyond her control,
which delayed her realization of the proceeds for over a year.
On September 10, 2002, Mohnkern filed a motion to intervene in the litigation and requested
a hearing to determine the rightful owner of the Blacknell Policy proceeds. JA 399. The district
court granted Mohnkern’s motion to intervene but only with regard to the “methodology of
disbursement.” JA 424. The court denied her motion for a hearing to determine ownership of the
Blacknell Policy proceeds. Id. The district court further ordered sua sponte that Mohnkern dismiss
the suit she had filed against the insurer in April 2002 seeking the proceeds of the Blacknell Policy.
Id.
2
Liberte filed the action on April 9, 1999. Alpha intervened in the suit shortly thereafter.
3
The district court expanded the Receiver’s duties on November 9, 1999, “to cover all interests in any and all
insurance policies funded by investors which Liberte Capital, LLC or Alpha Capital, LLC contacted, which are or were
in the name of James A. Capwill, Capwill & Co., CWN Group or any other name, either as nominee owner or as trustee
. . . for the purpose of managing and administering insurance policies in which one of the foregoing either is named as
owner, beneficiary or Trustee, including, but is not limited to death claims . . . .” Id. at *2.
4
After commencement of the suit, NorthEast Escrow Services, LLC replaced Capwill and his companies as
Alpha’s escrow agent.
No. 04-3101 Liberte Capital Group, et al. v. Capwill, et al. Page 4
On November 22, 2002, Mohnkern filed a motion for “release and distribution” of the
Blacknell death proceeds, arguing that she had a contractual right to the proceeds as of the date of
Blacknell’s death, subject to no other claim. JA 426. On December 6, 2002, before the district court
ruled on Mohnkern’s motion, Receiver #2 filed and served on the interested parties, including
Mohnkern, a motion for an order requiring pro rata distribution of the receivership estate. JA 461,
463. The district court held a fairness hearing on December 22, 2003, to afford all Alpha investors
the opportunity to present any objections to the distribution methods proposed by Receiver #2. JA
518-19. Mohnkern received notice of this hearing and filed an objection to the proposed pro rata
distribution, claiming once again that she owned the Blacknell Policy and, as a matter of law, was
entitled to the proceeds therefrom in full. JA 520-21. Mohnkern did not appear at the December
22, 2003 hearing.
The district court heard arguments both for and against adopting the pro rata approach. In
the end, however, the court ordered a pro rata distribution of the receivership estate which included
the Blacknell Policy proceeds. According to the court,
[t]he balancing of interests between those fortunate enough – and I use that term
advisedly – to have been matched as contrasted to those not matched to a particular
policy sold to Alpha by a viator is a delicate act, indeed. It’s a balancing act which
we, as judges, are required to undertake.
***
In this case to allow investors to elevate their claims by standing on the backs of
other Alpha investors, . . . would be tantamount to injustice, in my opinion. It would
not be doing equity.
I’ve considered all of the various methods, ladies and gentlemen. I’ve considered,
and I think I know unfortunately more than anybody else, with the possible exception
of the U.S. Attorney sitting in this room concerning these cases. It is my conclusion
. . . that this Court acting in equity, cognizant of the fact that I am under a duty to
fashion a methodology of disbursement which will do equity and comport with what
are generally notions of fairness and justice, will adopt a pro rata approach with
regards to the Alpha investors.
JA 711-14. The court dismissed Mohnkern’s claim for release of the Blacknell Policy proceeds
without further comment. JA 200. In its February 14, 2003 Order, the court certified its ruling for
appeal pursuant to Federal Rule of Civil Procedure 54(b). JA 198-204. This timely appeal followed.
On appeal, Mohnkern claims: (1) that Receiver #2, under the direction of the district court,
exceeded his authority by asserting control over the Blacknell Policy proceeds because she has sole
legal title to them; (2) that, in seizing the proceeds, Receiver #2 failed to comply with the provisions
of 28 U.S.C. §754, governing certain aspects of a receiver’s right to compel property holders in
foreign jurisdictions to surrender property to the court in which the receiver is serving; and (3) that
she was denied notice and an opportunity to be heard regarding the ownership of the Blacknell
Policy proceeds.5
5
In light of our decision to remand for a hearing as to the proper ownership of the Blacknell Policy proceeds,
we need not address Mohnkern’s substantive claims.
No. 04-3101 Liberte Capital Group, et al. v. Capwill, et al. Page 5
II.
A. Due Process Analysis
A district court has broad powers and wide discretion in fashioning relief in an equity
receivership proceeding, but the court “must still provide the claimants with due process.” SEC v.
Basic Energy & Affiliated Res., Inc., 273 F.3d 657, 668 (6th Cir. 2001). The reviewing court
reviews de novo whether procedures used by a district court violated the due process clause. See
Chao v. Hosp. Staffing Servs., Inc., 270 F.3d 374, 381 (6th Cir. 2001) (“A court abuses its discretion
when it relies on clearly erroneous findings of fact, applies an inappropriate legal standard, or
improperly applies the law, with such legal questions receiving de novo review in the Court of
Appeals.”); SEC v. McCarthy, 322 F.3d 650, 654 (9th Cir. 2003) (“[W]hether procedures used by
the district court violated the due process clause is reviewed de novo.”) Accordingly, our procedural
due process analysis addresses two questions. “[T]he first asks whether there exists a liberty or
property interest which has been interfered with by the State, the second examines whether the
procedures attendant upon that deprivation were constitutionally sufficient.” Kentucky Dep’t of
Corr. v. Thompson, 490 U.S. 454, 460 (1989) (citations omitted).
1. Existence of a Property Interest
Property interests are “created and their dimensions are defined by existing rules or
understandings that stem from an independent source such as state law--rules or understandings that
secure certain benefits and that support claims of entitlement to those benefits.” Bd. of Regents v.
Roth, 408 U.S. 564, 577 (1972). A property interest “can be created by a state statute, a formal
contract, or a contract implied from the circumstances.” Singfield v. Akron Metro. Hous. Auth., 389
F.3d 555, 565 (6th Cir. 2004); see also Leary v. Daeschner, 228 F.3d 729, 741 (6th Cir. 2000).
In this case, Mohnkern had a legal interest in the Blacknell Policy proceeds at the time the
proceeds were seized by Receiver #2. To recapitulate: Mohnkern initially invested $100,000.00
with Alpha. It later “matched” her investment with the policy of Blacknell. Blacknell formally
assigned that policy to her on March 9, 1999. As Receiver #2 concedes, see Appellee Br. at 27, that
assignment vested in Mohnkern all “privileges, rights, title and interest” in the Blacknell Policy and
“[t]he sole right to collect from the insurer the net proceeds of the Policy when it [became] a claim
by death or maturity.” JA 443; see also SEC v. Rubera, 350 F.3d 1084, 1092 (9th Cir. 2003) (noting
that viatical settlements are contracts in which “investors acquire[] the right to collect on the life
insurance policies of terminally ill individuals”) (emphasis added); In re Fin. Federated Title and
Trust, Inc., 347 F.3d 880, 882 n.1 (11th Cir. 2003) (“A viatical settlement is an investment through
which a terminally ill person (the “Viator”) sells his life insurance policy and, when the Viator dies,
the investor collects death benefits.”). Thus, Mohnkern has a clearly defined property interest in the
Blacknell Policy proceeds, sufficient to trigger the second prong of the due process analysis with
respect to the seizure by Receiver #2 of the proceeds and inclusion of them in the receivership estate.
2. What Process is Due
“When a plaintiff has a protected property interest, a predeprivation hearing of some sort is
generally required to satisfy the dictates of due process.” Leary, 228 F.3d at 742; see also Roth, 408
U.S. at 569-70 (“When protected interests are implicated, the right to some kind of prior hearing is
paramount.”); Boddie v. Connecticut, 401 U.S. 371, 379 (1971) (noting that if government action
will deprive an individual of a significant property interest, that individual is entitled to an
opportunity to be heard). The amount of process required, however, depends, in part, on the
importance of the interests at stake. See Leary, 228 F.3d at 742. Thus, we must balance the strength
of the private interest, the risk of erroneous deprivation, the probable value of additional or
substitute safeguards, and the government interest, “including the function involved and the fiscal
No. 04-3101 Liberte Capital Group, et al. v. Capwill, et al. Page 6
and administrative burdens that the additional or substitute procedural requisites would entail.”
Mathews v. Eldridge, 424 U.S. 319, 334-35 (1976).
Receiver #2 does not dispute that Mohnkern was entitled to due process in this case; rather,
he claims that she received all the process that was due. The trial court allowed Mohnkern to
intervene in the underlying suit and notified her of her right to appear and be heard at the December
2003 fairness hearing regarding the method of distribution. Thus, according to Receiver #2,
Mohnkern was not denied notice and an opportunity to be heard; she voluntarily chose not to
participate.
However, we “must look at the actual substance, not the name or form, of the procedure to
see if the claimants’ interests were adequately safeguarded.” SEC v. Elliot, 953 F.2d 1560, 1567
(11th Cir. 1992). The uncontested facts in this case demonstrate that Mohnkern had a legal interest
in the Blacknell Policy proceeds. Notwithstanding this interest, and without conducting a hearing
or affording Mohnkern an opportunity to respond, nor mention of the critical transfer documents of
March 9, 1999, the district court authorized the Alpha Receiver to seize the proceeds. Thereafter,
the district court granted Mohnkern’s motion to intervene with regard to the method of
disbursement. However, the court denied her request for a hearing regarding ownership of the
Blacknell Policy proceeds. The court subsequently held a fairness hearing, upon motion of the
Receiver #2, but made clear that the hearing was limited to the issue of determining proper
disbursement of the receivership estate which included the Blacknell Policy proceeds. At the
hearing, the court ordered a pro rata distribution of the assets and dismissed Mohnkern’s motion for
distribution of the Blacknell policy proceeds to her.
Based on these facts, it is clear that Mohnkern was never provided with a hearing relative
to the seizure by Receiver #2 of the Blacknell Policy proceeds, at which she could have presented
evidence regarding her legal entitlement. Instead, the court summarily dismissed Mohnkern’s
claims in the interest of equity and justice. Although equity and justice are appropriate
considerations for distribution, they skirt the legal basis for Mohnkern’s claim that the Blacknell
Policy’s proceeds never should have been made a part of the receivership estate.
The distinction between a hearing on the merits of a receiver’s seizing of assets to be
included in the receivership estate and the method of distribution of those assets is well recognized.
If the matter of ownership is in doubt, then the party claiming the property should
ask to be allowed to intervene in the receivership case and present his claim to the
property. The court should accord such claim a proper hearing and all parties in
interest should be heard. The third party claiming such property may present his
claim by filing with leave of court a dependent or independent suit against the
receiver. If the court finds that the property does belong to a third party it may make
an order directing the receiver to turn over such property. The question of priorities
and pro rata distribution, of course, does not enter into the problem when such an
order is properly made.
3 Clark on Receivers, § 664 (3d ed. 1959); see cf. Javitch v. First Union Sec., Inc., 315 F.3d 619,
625 (6th Cir. 2003) (noting that the “general rule is that a receiver acquires no greater rights in
property than the debtor had . . .”); Markos v. Schecter, 182 B.R. 211, 217 (N.D. Ill. 1995) (“The
situation in which trustees have been most commonly found to have acted outside of their authority
is in seizing property which is found not to be property of the estate.”).
Here, the final hearing on disbursement was not adequate to protect Mohnkern’s interests.
See Elliot, 953 F.2d at 1567-68 (holding that the district court in a receivership proceeding violated
the due process rights of two claimants when it denied them a hearing or opportunity to address the
No. 04-3101 Liberte Capital Group, et al. v. Capwill, et al. Page 7
court directly on a receiver’s entitlement to assets transferred to the claimants two weeks before the
institution of the receivership). At a minimum, once Mohnkern challenged the ownership of the
proceeds, the court should have deferred until a proper hearing had enabled the court to determine
ownership. See Basic Energy & Affiliated Resources, Inc., 273 F.3d at 668; SEC v. Wenke, 783 F.2d
829, 836-38 (9th Cir. 1986) (holding that for the claims of nonparties to property claimed by
receivers, summary proceedings satisfy due process so long as there is adequate notice and
opportunity to be heard).
Nevertheless, Receiver #2 argues that there are no additional facts or arguments Mohnkern
could present to the trial court if afforded a separate hearing as to the issue of ownership of the
Blacknell Policy proceeds. Furthermore, according to the Receiver, affording Mohnkern a hearing
would risk undermining the work of both the district court and the Receivers as it invites other
investors who were “matched” with viatical policies to request similar hearings. On the record
before us, however, it appears that Mohnkern’s claim is sufficiently distinct from that of other
investors: Blacknell died and Mohnkern’s legal rights vested before any order was entered in this
matter which purported to include the Blacknell Policy proceeds in the receivership estate. But for
the delay in obtaining Blacknell’s death certificate, Mohnkern likely would have received possession
of the Blacknell Policy proceeds over fourteen months before the court’s order authorizing their
seizure by Receiver #2. As that Receiver conceded in his December 26, 2002 opposition brief to
Mohnkern’s motion for release of the Blacknell Policy proceeds, “no order prior to the creation of
the Alpha Receivership specifically enumerated the policies that would be subject to receivership
in this case. . . . the Court did not originally contemplate having to suspend all investors’ contractual
entitlements to do equity in this case.” JA 472. In fact, under the court’s direction, the original
Receiver had disbursed death benefits to “matched” investors upon their maturity. Further, upon
the appointment of Receiver #2, the court recognized that some investors would be “made whole.”
Thus, Mohnkern should be afforded an opportunity to be heard as to her unique status in this case.
III.
For the foregoing reasons, the judgment of the district court denying Mohnkern’s motion for
release and distribution [Dkt. No. 1825] is REVERSED. The case is remanded to the district court
for a hearing as to the ownership of the Blacknell Policy proceeds, consistent with Mohnkern’s due
process rights.