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U.S. Commodity Futures Trading Commission v. Yellowstone Partners, Inc.

United States District Court, E.D. North Carolina, Western Division

February 18, 2014



LOUISE W. FLANAGAN, District Judge.

This matter comes before the court on plaintiff's response and recommendation (DE 143) as to the proposed plan of distribution set forth in the receiver's motion for disbursement of funds (DE 131). The receiver responded in agreement with plaintiff's recommendation, with one proposed clerical modification, to which plaintiff states it has no objection. The receiver filed a certificate of service in accordance with the court's December 3, 2013, order, and no objections to plaintiff's recommendation have been received in the time period provided. In this posture, this matter is ripe for ruling.


The court has in prior orders set forth the background of this case, which the court incorporates and updates herein. Plaintiff commenced this action on March 9, 2010, to restrain defendants from violating the Commodity Exchange Act, 7 U.S.C. ยง 1 et seq., as amended. Plaintiff alleged that from at least September 2009 through March 9, 2010, defendants solicited and received over $1.3 million from individuals to be pooled and traded in foreign currency markets. However, defendant Hagemann traded only a minimal portion of the funds. The remainder was misappropriated to pay personal and business expenses, and to operate a Ponzi scheme whereby he used funds received from some customers to pay other customers.

On March 10, 2010, the court awarded statutory preliminary injunctive relief to prohibit dissipation of assets where plaintiff claimed defendants engaged in fraudulent solicitation and misappropriation. On February 24, 2011, motion for entry of default judgment was made, which motion was followed on the docket by a motion for appointment of a receiver. By order entered March 1, 2011, the court awarded default judgment, including permanent injunction of further violations of the Commodity Exchange Act, substantial civil monetary penalty, and ancillary equitable relief.

On March 31, 2011, the court granted plaintiff's motion for appointment of receiver, which directed the receiver to file an initial report with the court "outlining the steps taken to identify customers, marshal assets, determine the amount invested by each customer, and the portion of assets available to pay back customers, " as well as "the estimated time it will take to distribute available assets to customers and wind up the receivership." (DE 45 at 7). Subsequently, the receiver filed multiple detailed interim reports in accordance with the court's order. (DE 47, 55, 61, 68, 74, 78, 81, 85, 94)

In report and motion to establish claim procedures and approve claim form, filed July 11, 2013, the receiver stated that he had disposed of all assets in the receivership and was then "in a position to move on to the establishment of some system for the process of claim procedures with an established claim form." (DE 121). By order dated August 6, 2013, the court approved the receiver's proposed claim procedures and claim form. (DE 125).

In his final report and motion for disbursement of funds filed October 29, 2013, the receiver stated that he had "mailed the approved claim form to all possible claimants for whom or which the Receiver had any effective address, " and a total of 23 claims, by 21 separate claimants, were submitted to the receiver. The receiver reported claims submitted of two types:

(1) "investor creditor claims pursuant to monies paid to the defendants in this case, constituting bailments and money had and received as a matter of law, " and
(2) "equity investor" claims.

(DE 131 at 2). The receiver concluded that "equity investor" claims must be subordinated to "investor creditor" claims, also referred to as "ordinary creditor" claims, resulting in a proposed distribution of $254, 173.40 in available funds to seven "investor creditor" claimants, amounting to 48.414% of the $525, 000 net claims by those claimants, and no amount of distribution to "equity investor" claimants who have an aggregate net claim of $1, 195, 000 (as revised November 4, 2013). (DE 131 at 3; DE 132 at 2). In the alternative, the proposal noted that if equity investor claimants are determined by the court to be entitled to participation as creditors, the total amount of the net receivership estate available for distribution to both classes of claimants would be 17.539%.

In the receiver's notice of objections, filed November 25, 2013, the receiver attaches four objections by claimants falling in the "equity investor" category proposed by the receiver. As summarized by the receiver, "the overall essence of these objections is that those four objectors... take the position that all investors should be treated the same, whether they have been identified as equity investors because their subscriptions agreements indicate equity investments in the defendant corporation, or otherwise general creditors whose investments did not involve written evidence of any such equity investments." (DE 138 at 1-2). As stated by one objector, "[t]he major basis for differentiating these two groups is the issuance of shares, which were proven to be sham and non-existent[, ]" and "[a]s such, to formulate any disbursement based upon a fictitious categorization created by the defendant is an injustice." (Id. Att. 1, Kaplan Objection).

In light of the objections and legal authority supporting a pro rata distribution to all claimants, rather than to a portion of the claimants, the court directed plaintiff to file a response addressing the issues raised in the objections and providing further recommendation regarding a fair and equitable distribution in this case. On January 10, 2014, plaintiff recommended distribution to all claimants, using a net pro rata method to achieve this result. On January 16, 2014, the receiver filed a joinder ...

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