Sec. & Exch. Comm'n v. Mut. Benefits Corp.
| Decision Date | 03 February 2023 |
| Docket Number | 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 |
REPORT AND RECOMMENDATION [1]
THIS MATTER came before the Court upon the Trustee's Motion to Approve (1) Sale of Policies to Acheron Portfolio Trust, (2) Proposed Allocation and Distribution Procedures and (3) Settlement with Acheron Capital, Ltd. (“Sale Approval Motion”) [DE 3188], filed by Barry Mukamal (“Trustee”), the Trustee of the Mutual Benefits Keep Policy Trust (the “Trust”), on December 27 2022. I have carefully reviewed and considered the Sale Approval Motion, Beverly F. Thompson's Advisory to the Court [DE 3191], which appears (at least in part) to be a response or objection to the Sale Approval Motion,[2] the Trustee's Reply in Support of Sale, Settlement and Allocation Motion [DE 3194], and all other pertinent portions of the record. I also held a status conference regarding issues related to the Sale Approval Motion on December 16, 2022 (prior to the filing of the motion) and a hearing on the Sale Approval Motion on January 26, 2023. At the January 26, 2023 hearing the Trustee's counsel provided a proffer of the Trustee's direct testimony in support of the Sale Approval Motion. That proffer included adopting the factual statements made in the Sale Approval Motion and various other filings by the Trustee. Although I provided an opportunity for cross-examination, no party sought to cross-examine the Trustee. I did, however, pose various questions to both the Trustee and his counsel. Additionally, counsel for the Trustee and counsel for Acheron presented arguments in favor of the Sale Approval Motion. For the reasons discussed herein, I respectfully RECOMMEND that the Sale Approval Motion [DE 3188] be GRANTED.
In 2004, the Securities and Exchange Commission commenced an enforcement action against Mutual Benefits Corporation and other defendants for fraudulently selling fractional investment interests in viatical settlements. See [DE 1]; see also Acheron Cap., Ltd. v. Mukamal as Tr. of Mut. Benefits Keep Pol'y Tr. (“MBC III”), 22 F.4th 979, 984 (11th Cir. 2022); Sec. & Exch. Comm'n v. Mut. Benefits Corp (“MBC II”), 810 Fed.Appx. 770, 772 (11th Cir. 2020); Sec. & Exch. Comm'n v. Mut. Benefits Corp. (“MBC I”), 408 F.3d 737, 738 (11th Cir. 2005). “A viatical settlement is a transaction in which a terminally ill insured sells the benefits of his life insurance policy to a third party in return for a lump-sum cash payment equal to a percentage of the policy's face value.” MBC III, 22 F.4th at 984 (quoting MBC I, 408 F.3d at 738). “The purchaser of the viatical settlement realizes a profit if, when the insured dies, the policy benefits paid are greater than the purchase price, adjusted for time value.” Id. (quoting MBC I, 408 F.3d at 738).
Following the commencement of the case, the defendant entities involved were put into receivership, and Roberto Martinez was appointed as receiver (“Receiver”). [DE 26]. Investors were provided with the option to retain their investments or to direct the Receiver to sell their interests. MBC III, 22 F.4th at 984. The Receiver reported in June 2009 that, pursuant to Court approval, investors in the life insurance policies had voted to either: a) sell the policy; or b) retain the policy. [DE 2291] at 3. Policies that were retained have commonly been referred to in this case as “Keep Policies.” The Receiver also requested, and the Court approved, the creation of a trust to “provide for the continued maintenance and processing of the Keep Policies in accordance with the directives of this Court.” [DE 2291] at 5-6, 8; [DE 2322]. Consequently, on September 25, 2009, the Receiver and the Trustee executed the Mutual Benefits “Keep Policy” Trust Agreement (“Trust Agreement”) [DE 2540-1].
Initially, approximately 3,138 policies with a face value of $383,580,782 (or 27% of the total) were designated to be sold, and roughly 3,037 policies with a face value of approximately $1,054,421,049 (or 73% of the total) were designated as Keep Policies. [DE 2958] at 2 n.4. However, according to the Sale Approval Motion, at the time the Trust was created, it held 2,403 policies with a total face value of $886 million. [DE 3188] at 3. As of January 1, 2023, those numbers have decreased substantially, to 866 policies and approximately $167 million, respectively. [DE 3190-1]. As indicated in the Sale Approval Motion, the primary reason for this substantial decrease is that, by the beginning of 2022, the Trustee had distributed more than $542 million in death benefits as policies matured over the years.[3] Keep Policy Investors (“KPIs”)[4] presently hold interests equal to approximately 39.05% of the face value of the policies serviced by the Trust, and various trusts and entities managed by Acheron Capital, Ltd. (collectively, “Acheron”) hold interests accounting for the remaining 60.95%. See [DE 3190-1]. Unlike the KPIs who were victims of the fraudulent scheme giving rise to this case, Acheron obtained its interests in policies serviced by the Trust by purchasing those interests in undersubscribed policies after the commencement of this action - initially from the Receiver and later from the Trustee. See MBC II, 810 Fed.Appx. at 772. Acheron is not a KPI, and the Trustee does not owe a fiduciary duty to Acheron. See Acheron Portfolio Tr. v. Mukamal as Tr. of Mut. Benefits Keep Pol'y Tr., No. 18-CV-25099, 2021 WL 7368630, at *27-35, 37-40 (S.D. Fla. Sept. 24, 2021), report and recommendation adopted, 2022 WL 354241 (S.D. Fla. Feb. 7, 2022), aff'd, No. 22-10748, 2022 WL 17420869 (11th Cir. Dec. 6, 2022). However, the Trustee does owe contractual obligations to Acheron under various contracts. See [DE 2941, 2967]; MBC II, 810 Fed.Appx. at 773, 775. Specifically, when Acheron has purchased fractional interests from the Trustee, Acheron and the Trustee have entered into asset purchase agreements. They also entered into a separate agreement in 2015 (the “2015 Agreement”), after extensive negotiations, to resolve certain concerns that Acheron had raised. See [DE 2500, 2500-2, 2941]. Over the last few years, substantial litigation has ensued between Acheron and the Trustee.
As indicated above, the number of policies held by the Trust and the face value of the Trust's portfolio of policies have decreased substantially since the formation of the Trust in 2009. Due to concerns that continuing to administer the Trust would become unfeasible, the Trustee sought Court approval in 2020 to initiate an orderly wind-down process and eventual termination of the Trust. See [DE 2640]. In November 2020, the Court granted the Trustee's request and denied a competing wind-down motion filed by Acheron. See [DE 2723, 2825]. On March 15, 2021, the Trustee provided notice that the Trust lacked resources to continue operating the Trust without a substantial increase in costs to investors and, therefore, reported that wind down of the Trust should occur by the fourth quarter of 2021. [DE 2882] at 4-5. Due to intervening circumstances, including certain appeals filed by Acheron, that timeline was pushed back on several occasions.
On January 21, 2022, the Trustee filed a Motion to Approve Procedures for Sale of Policies in Connection with Trust Termination (“Sale Procedures Motion”) [DE 3065]. I held an evidentiary hearing on the Sale Procedures Motion on March 16, 2022. The Sale Procedures Motion sought approval to proceed with an auction in accordance with procedures outlined therein. First, the Sale Procedures Motion addressed the assets to be sold, noting that the Trustee proposed selling all of the Trust's right, title, and interest in and to the Keep Policies held by the Trust. Upon such a sale, the interests of the Trust, the Trustee, and any other person or entity (other than the purchaser), including KPIs and Acheron (if not the purchaser), would be extinguished.
Second, the Sale Procedures Motion proposed separating policies into a few separate tranches and sub-tranches at auction rather than proceeding with a policy-by-policy auction or an auction of the entire portfolio of policies as a single unit. Ultimately, by the time of the March 16, 2022 hearing, the Trustee sought to separate the policies into Tranches A, A-1, and B for purposes of bidding at auction, with Tranche B containing all policies in which Acheron did not hold an interest. Tranches A and A-1 were to include all policies in which Acheron held an interest. However, Tranche A-1 was designed to be a sub-tranche for policies where the insured is at least 100 years-old and no remaining premiums are due.
Third, the Sale Procedures Motion advised that the Trustee intended to solicit stalking horse bidders prior to the auction. Consequently, he requested “confirmation of his authority to select and approve, in his business judgment, ‘stalking horse' bids that substantially conform to the procedures described [in the Sale Procedures Motion] and that seek customary bid protections.” Sale Procedures Motion at 11. Such protections would include a break-up fee of no more than 3% of the amount of the stalking horse bid in the event the stalking horse bid is outbid at auction. Id.
The Sale Procedures Motion also addressed various other procedures and issues, and it disclosed that the Trustee retained Longevity Asset Advisors LLC (“Longevity”) to manage and conduct the sale process and to provide various related services. For its services, the Trustee agreed to pay Longevity a 7.5% commission (of the gross purchase price at auction) and to reimburse Longevity for its actual expenses.
On April 9, 2022, I entered a...
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