Sec. & Exch. Comm'n v. Mut. Benefits Corp.
| Decision Date | 22 February 2021 |
| Docket Number | CASE NO. 04-60573-CIV-MORENO/STRAUSS |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MUTUAL BENEFITS CORP., et al., Defendants. |
| Court | U.S. District Court — Southern District of Florida |
THIS CAUSE has come before me upon the District Court's Order of Referral to Magistrate Judge Strauss Regarding Litai Assets, LLC's Objections Regarding the Court's Subject Matter Jurisdiction and the Trustee's Motion for Clarification ("Order of Referral").2 (DE 2854). The District Court noted that "Litai Assets, LLC [("Litai")] did not explicitly raise the Court's subject matter jurisdiction before [me] in [my] consideration of the . . . motion to compel" ("Motion to Compel") made by Barry Mukamal, as Trustee ("Trustee") of the Mutual Benefits Keep Policy Trust (the "Trust").3 (DE 2653). Having considered Litai's objections (DE 2833), the Response (DE 2838), the Reply (DE 2842) and having heard oral argument from the Trusteeand Litai (the "Parties") as to subject matter jurisdiction at a status conference held on February 10, 2021 ("Status Conference"), it is respectfully RECOMMENDED that the Motion to Compel (DE 2653) be GRANTED IN PART AND DENIED IN PART for the reasons set forth herein.
As described more fully below and in the Original Report, the Motion to Compel seeks a declaration that the Trust owns certain data in Litai's possession and an order requiring Litai to provide that data to the Trust in a "useable, industry-standard format." (DE 2653 at 1). Litai objected on the basis that providing the Trust with its data in the manner demanded would infringe on Litai's intellectual property rights. Following an Evidentiary Hearing on November 25, 2020 to address Litai's objections, I issued the Original Report that recommended granting in part the Trustee's Motion to Compel. (DE 2830). Specifically, the Original Report recommended that Litai be ordered to provide the Trust's data in a usable, industry standard format of Litai's choosing to facilitate the transfer of servicing to a new servicer within a timeframe that allowed for adequate testing of a bulk transfer of the data prior to the termination of Litai's contractual obligations. (DE 2830 at 19). The Original Report's recommendation was limited to requiring Litai to provide the Trust with its data "for the purpose of transferring servicing to a new servicer" because the Trust's need for the data evolved over time and became necessary more recently in the context of a transfer of servicing to Q Capital Strategies, LLC ("Q Capital") and a termination of the servicing relationship with Litai.4 (DE 2830 at 9, 18). Notably, Litai stated in open Court at the EvidentiaryHearing that it was prepared to provide, and had no problem providing, the Trust with its data in a standard format that is used "predominantly for data transfers."5 (DE 2821 at 20:21-25; 170:3-7). Litai would not agree, however, to provide the entirety of the data prior to termination of the Servicing Agreement. (DE 2828 at 68:8-74:5). Nonetheless, I recommended an intermediate transfer before the end of the servicing agreement to allow the Trustee time to test the bulk transfer of data from Litai and minimize risk. (DE 2830). Following issuance of the Original Report, Litai timely filed objections challenging the Court's subject matter jurisdiction over the dispute. (DE 2833). The District Court then referred Litai's objections regarding subject matter jurisdiction to me for appropriate disposition. (DE 2854).
The Securities and Exchange Commission commenced the underlying enforcement action in 2004 against Mutual Benefits Corporation and other Defendants for fraudulently selling fractional viaticated investment interests in life insurance policies. (DE 1). See also SEC v. Mut. Benefits Corp., 408 F.3d 737, 738 (11th Cir. 2005).6 The entities involved were put intoreceivership, and Roberto Martinez was appointed as receiver (the "Receiver"). (DE 26). By September of 2005, the Court determined that "the vast majority of investors would like to have a choice regarding the ultimate disposition of their interests" and ordered that investors be allowed to vote whether to retain or sell their interests. (DE 1339 at 2-3). The Receiver then conducted a vote whereby investors in the life insurance policies voted to either: a) sell the policy; or b) retain the policy ("Keep Policies").7 (DE 2291 at 3).
By 2009, the Receiver sought to sell the servicing business and transition continued management and servicing of the remaining Keep Policies to private entities because servicing of the Keep Policies would need to be maintained "for a longer period of time than the other remaining functions of the Receivership."8 (DE 2266 at 5). Accordingly, in April 2009, the Receiver requested (DE 2266), and the Court approved (DE 2267), documents whose terms would accomplish the creation of a Trust, the transfer of certain assets to the Trust ("Trust Assets"), and the sale of the "VSI servicing business" to the predecessor of Litai, which entity would continue servicing the receivership assets transferred to the Trust (collectively, the "Transaction"). The agreements comprising the Court-approved Transaction were the Asset Purchase Agreement, the Transitional Services Agreement, the Servicing Agreement, and the Trust Agreement (the "Agreements"). (DE 2367 at ¶11); see also DE 2266 at 7 (describing the "TransactionDocuments"). To facilitate the Transaction, the Court specifically ordered "the transfer[ ] [of] the ownership and nominal beneficial interest in the Keep Policies to [the] Trustee to serve in the stead of the Receiver." (DE 2291 at 5; DE 2322; DE 2266; DE 2267). The Court also specifically ordered that "[a]t the Closing [of the Transaction], the Trustee will be vested with all claims, options, privileges, right, title and interest in, to and under the Trust Assets, free and clear of all Encumbrances." (DE 2367 at ¶9) In addition, the Court ordered that the Agreements, and any related agreements, could be modified without further notice to the Court only if the modification was "for the purpose of fulfilling the intent of the Agreements and [did] not constitute a material modification of the Agreements." (DE 2367 at ¶16).
In furtherance of the Court's authorization and directives, on September 25, 2009, the Receiver and the Trustee executed the Mutual Benefits "Keep Policy" Trust Agreement (the "Trust Agreement"). (DE 2540 at 2; DE 2540-1). The Trust Agreement is between the Receiver and the receivership Entities as settlor, and the Trustee. (DE 2540-1 at 1). "The purpose of the Trust [was] to take custody of the Trust Assets and maintain and administer the Trust Assets for the benefit of the Keep policy Investors. . .." Id. at § 2.2. Trust Assets consists of "Policies, the Policy Files and the Trust Cash." (DE 2540 at 2) (citing the Trust Agreement at § 1.1).
The Asset Purchase Agreement, which was executed by the Receiver and the predecessor of Litai pursuant to the Court's authorization and directives with respect to the Transaction, defines Policy Files, in relevant part, as follows:
[A]ll files, documents, instruments, papers, correspondence, communications, books and records (including all originals thereof) evidencing or otherwise relating to the Keep Policies, whether in physical, electronic or other form or medium, including, without limitation, (i) the Keep Policies and all correspondence relating thereto, (ii) all information and records with respect to the health status and whereabouts of each insured under a Keep Policy, (iii) all accounting records, including the accounting and bookkeeping records incident to the ownership, premium payments and receipts and distributions of proceeds with respect to eachKeep Policy made to or received from the insurance companies that issued the Keep Policies, (iv) all documents and instruments executed and/or delivered by or to Seller, a Receivership Entity, each Keep Policy Investor and any Third Party Beneficiary, an insured, a viator or any other Person in respect of a Keep Policy, or the direct or indirect acquisition, ownership or disposition thereof by Seller, any Receivership Entity, Keep Policy Investor or any Third Party Beneficiary.
(DE 2266-1 at 5, 8, § 3.2(b)) (emphasis added). The Agreements, which the Receiver entered into based upon the Court's orders, established that Litai would manage the Policy Files and that the Trust, through the Trustee, would own the Policy Files. See the Trust Agreement, DE 2540-1 at §§ 1.1, 2.3 (); see also DE 2266 ( that by the Trust Agreement, "the Trustee will . . . become the owner of the Policy Files"). The Servicing Agreement approved by the Court acknowledges Litai's role in managing the Policy Files in its preamble:
WHEREAS, the Sale of Assets, Servicing and Transfer Order authorized and directed the Trustee to enter into this Agreement, pursuant to which the Servicer would agree to manage the portfolio of Keep Policies and the Policy Files, collect funds necessary to service the Keep Policies, and pay premiums due on the Keep Policies.
(DE 2266-3 at 1). The term Policy Files is, therefore, inclusive of additional records that came into existence as a result of Litai's management of the Policy Files rather than only the records in existence at the time that the Transaction was consummated. In other words, the Transaction directed by the Court and entered into by the Receiver determined ownership of the Policy Files, i.e., the files, books, and records as more fully described in the definition of Policy Files pertaining to the Keep Policies, which would evolve over time coinciding with Litai's management of the Policy Files (the "Data").
The Parties have...
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