953 F.2d 1560 (11th Cir. 1992), 89-5457, S.E.C. v. Elliott

Docket Nº:89-5457, 89-5528.
Citation:953 F.2d 1560
Party Name:SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Charles Phillip ELLIOTT, et al., Defendants, Charles O. Farrar, Receiver-Appellee, Kenneth J. Davis, Linda J. Davis, Leroy H. Moeller, As Personal Representative of the Estates of Adolph Hagstrom, Squire J. Kingston, Elizabeth Woods, Caroline Estelle, Lynnis H. McClain, Ted Masco, Anita K.
Case Date:February 27, 1992
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit
 
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Page 1560

953 F.2d 1560 (11th Cir. 1992)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee,

v.

Charles Phillip ELLIOTT, et al., Defendants,

Charles O. Farrar, Receiver-Appellee,

Kenneth J. Davis, Linda J. Davis, Leroy H. Moeller, As

Personal Representative of the Estates of Adolph Hagstrom,

Squire J. Kingston, Elizabeth Woods, Caroline Estelle,

Lynnis H. McClain, Ted Masco, Anita K. Hailey, Earl

Setterblade, Francis Setterblade, Lloyd Schutzman, Shirley

Schutzman, Albert C. Heil, Melvin Burkhardt, Rosa Ella

Burkhardt, Howard Dore, Ruth Dore, Gerald J. Braun, Christie

Braun, Monica Brooke Braun, C. Albert Ducharme Trust and

Catherine F. Ducharme Trust, Seaton F. McDaniel, Josephine

McDaniel, Trudy and Sidney Kleiner, Claimants-Appellants.

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee,

v.

Charles Phillip ELLIOTT, et al., Defendants,

Charles O. Farrar, Receiver-Appellee,

Melvin Burkhardt and Rosa Ella Burkhardt, Movants-Appellants.

Nos. 89-5457, 89-5528.

United States Court of Appeals, Eleventh Circuit

February 27, 1992

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Merrill N. Johnson, Naples, Fla., for K. Davis.

Kathleen Monahan, Miami, Fla., for L. Moeller.

Mark A. Ebelini, Ft. Myers, Fla., for H. Dore.

Ronald L. Stetler, Naples, Fla., for Virginia Moore.

John Charles Coleman, Robert J. Coleman, Seaton F. and Josephine A. McDaniel, Ft. Myers, Fla., Gertrude and Sid Kleiner, Naples, Fla., Kathleen A. Monahan, Joaquin Mendez, Miami, Fla., for C. Albert Ducharme Trust.

Lyons and Farrar, Miami, Fla., for Farrar.

Frank P. Murphy, Naples, Fla., for S.J. Kingston and Melvin and Rose Ella Burkhardt.

Marsha Lyons, Lyons & Farrar, William Sadowski, Miami, Fla., for Securities and Exchange Com'n.

Appeals from the United States District Court for the Southern District of Florida.

Before FAY and HATCHETT, Circuit Judges, and HILL, Senior Circuit Judge.

HILL, Senior Circuit Judge:

I. THE RECEIVERSHIP

The Securities and Exchange Commission brought a complaint against Charles Phillip Elliott, Charles Phillip Elliott d/b/a Elliott Enterprises, Elliott Securities, Inc., and Elliott Mortgage Co., Inc., for various violations of the Securities and Exchange Act. The district court granted a permanent

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injunction enjoining further securities violations and appointed Charles O. Farrar as Equity Receiver for Elliott. 1 The Receiver was ordered to take possession of the companies' assets, to file an initial report of the state of these assets, and to propose a plan of distribution of assets to victims of Elliott.

There were nearly two-thousand claims filed, each of which had to be dealt with by the Receiver and, ultimately, by the district judge. Finally, the district court entered an Order Establishing Final Plan for Distribution of Assets, from which twenty-seven claimants appeal, raising numerous objections to the Final Plan.

Elliott was engaged in a massive Ponzi-type scheme. He devised several programs as vehicles for the victims to "invest" in his companies. He offered conditional sales agreements and beneficial interest agreements (treasury bond agreements), where for his or her investment, the investor would receive periodic tax-free interest payments up to an annual rate of 15%. These investments were supposed to be secured by municipal and treasury bonds placed in the custody of third parties. There were some shortcomings in Elliott's programs: the interest was not tax-free, and Elliott did not purchase any bonds as collateral.

Elliott also offered a special Stock or Bond Income Program Agreement. If an investor's stock was not paying him large enough dividends, he could deposit his stock certificates with Elliott, giving him the right to purchase the stock at fair market value. In return, Elliott agreed to make monthly interest payments that would exceed what the investor was currently earning on his stocks and bonds. Unfortunately, the investor unwittingly transferred legal title to the stocks and bonds to Elliott when he entered these agreements. Elliott acquired the funds to make the monthly payments to investors by selling their stock.

With Notes and Collateral Loan Agreements, Elliott promised investors that, in return for their investments, he would make monthly payments and secure their investments with stocks and bonds. In reality, these stocks and bonds did not exist, Elliott never deposited them with a third party custodian, or the stocks and bonds were already hypothecated. In return for some of the investments, Elliott gave investors promissory notes "secured by the full faith and credit of Elliott Mortgage."

Elliott made many other false representations, including that his company was a registered investment advisor, that Elliott Enterprises was an underwriter for municipal bonds, that the investments were tax-free, and that his companies had received a "clean bill of health" from periodic audits by the Florida Department of Professional Regulation. As a result of these misrepresentations, Elliott managed to convince people who were anxious to believe that they could earn high returns that their investments were secured when they were not. Part of Elliott's con was creating documents that made investors believe they were secured.

It is this web of false representations that the Receiver and district court were called upon to disentangle for the benefit of defrauded claimants. Elliott had sold many of the securities and depleted the money invested so that practically none of the claimants would recover more than a small fraction of their investments. The district court ordered the liquidation of Elliott's estate and established a claims procedure by which claimants would file their proofs of claim. One thousand eight hundred and ninety (1,890) claims were filed. One year later, the Receiver requested permission to notify the claimants of his Proposed Plan for Distribution of Assets. In this plan, the Receiver delivered its factual findings and advised the district court of the legal status of each claim. The district court entered an Order authorizing the Receiver

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to notify claimants of the plan, to provide them instructions, and to create fill-in-the-blank pleading forms for filing objections within thirty days of the notice. After the objections were filed, the Receiver responded by briefing the district court on the factual and legal issues raised in the objections. In some cases, the claimants replied to the Receiver's response to their objections. Then, the district court entered its Order Establishing Final Plan for Distribution of Assets.

The district court and Receiver had a mammoth task before them, and they did a thorough job. However, because of the sheer size of the receivership estate and the huge number of claimants, it was inevitable that some of the claimants' objections would not be treated as completely as the objecting parties desired. Of the one thousand sixty-two (1,062) claimants, twenty-seven appeal. We will deal with each of their appeals in turn.

II. DUE PROCESS

Many of the appellants argue that their property was taken without due process of law. They allege that the procedure used by the district court in disposing of the Receiver's assets did not adequately protect their property.

Due process requires notice and an opportunity to be heard. Cleveland Bd. Of Education v. Loudermill, 470 U.S. 532, 542, 105 S.Ct. 1487, 1493, 84 L.Ed.2d 494, 503 (1985); Greene v. Lindsey, 456 U.S. 444, 102 S.Ct. 1874, 72 L.Ed.2d 249 (1982). Due process essentially requires that the procedures be fair. In re Murchison, 349 U.S. 133, 136, 75 S.Ct. 623, 625, 99 L.Ed. 942 (1955). The process that is due varies according to the nature of the right and to the type of proceedings. Mathews v. Eldridge, 424 U.S. 319, 334, 96 S.Ct. 893, 902, 47 L.Ed.2d 18 (1976). In Eldridge, the Supreme Court applied a balancing test to determine what type of procedure was required. The Court looked at 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 and administrative burdens that the additional or substitute procedural requisites would entail." 424 U.S. at 335, 96 S.Ct. at 903. Generally, if government action will deprive an individual of a significant property interest, that individual is entitled to an opportunity to be heard. Boddie v. Connecticut, 401 U.S. 371, 379, 91 S.Ct. 780, 786, 28 L.Ed.2d 113 (1971). However, a hearing is not required if there is no factual dispute. Codd v. Velger, 429 U.S. 624, 97 S.Ct. 882, 51 L.Ed.2d 92 (1977) (per curiam) (a discharged employee had no right to a hearing since he did not challenge the fact upon which the dismissal was based).

With these factors in mind, we must decide whether the summary procedure the district court used violated the appellants' due process rights. Rule 56 of the Federal Rules of Civil Procedure gives the district court summary jurisdiction over all the receivership proceedings and allows the district court to disregard the Federal Rules. The district court has broad powers and wide discretion to determine relief in an equity receivership. SEC v. Safety Finance Service, Inc., 674 F.2d 368, 372 (5th Cir.1982); SEC v. Lincoln Thrift Ass'n, 577 F.2d 600, 609 (9th Cir.1978); SEC v. United Financial Group, Inc., 474 F.2d 354, 358 (9th Cir.1973). This discretion derives from the inherent powers of an equity court to fashion relief. Safety Finance, 674 F.2d at 372. In granting relief, it is...

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