Securities & Exchange Comm. v. Basic Energy & Affiliated Resourses

Decision Date09 August 2001
Docket Number00-1472,Nos. 00-1088,s. 00-1088
Citation273 F.3d 657
Parties(6th Cir. 2001) Securities and Exchange Commission, Plaintiff-Appellee, Lewis G. Mosburg, Jr., Conservator-Appellee, v. Basic Energy & Affiliated Resources, Inc., et al., Defendants, James C. Brunackey (00-1088); James D. Addabo, et al. (00-1472), Movants-Appellants. Submitted:
CourtU.S. Court of Appeals — Sixth Circuit

Appeal from the United States District Court for the Eastern District of Michigan at Detroit.No. 94-74434--John Corbett O'Meara, District Judge. [Copyrighted Material Omitted] Jane E. Jarcho, Securities & Exchange Commission, Chicago, IL, for Plaintiff-appellee.

Douglas W. Van Essen, STENGER & STENGER, Grand Rapids, Michigan, for Appellees.

J.Andrew Domagalski, Richland, MI, for Defendants.

James C. Brunackey, Williamsburg, Michigan, pro se.

Walter L. Baumgardner, Jr., MUSILLI & BAUMGARDNER, St. Clair Shores, Michigan, for Appellants.

Before: MOORE and COLE, Circuit Judges; FORESTER, Chief District Judge.*

OPINION

MOORE, Circuit Judge.

Holding itself out to the investing public as an energy company, Basic Energy and Affiliated Resources, Inc. ("BEAR") was actually a Ponzi scheme, paying earlier investors out of funds raised from subsequent investors. Before the district court enjoined BEAR's officers and agents on November 9, 1994 from soliciting any additional investments, BEAR had successfully bilked thousands of investors out of millions of dollars. In December 1994, at the request of the Securities and Exchange Commission ("SEC"), the district court appointed Lewis G. Mosburg, Jr. as conservator ("Receiver") and charged him with marshaling BEAR's assets and devising a plan for the disgorgement of the proceeds to BEAR's investors. In May 1997 the district court approved the preliminary distribution plan proposed by the Receiver, and in September 2000 the district court finalized the distribution list and disgorgement plan. The present appeals involve BEAR investors' challenges to the district court's orders pursuant to this distribution plan.

In Case No. 00-1088, James Brunackey argues that the district court erred in classifying him as an "insubstantial marketer" under the classification scheme established in the distribution plan. Instead, Brunackey argues that he should be classified as a "nonmarketer," i.e., as someone who never received any commissions for selling BEAR securities. Under the distribution plan, nonmarketers are entitled to receive a greater percentage of their net contributions than are marketers. Brunackey was classified as an insubstantial marketer by the district court because BEAR records indicated that he had received a $600 commission payment from BEAR. Brunackey argues that this payment was actually a rebate and thus that he should be reclassified as a nonmarketer. He was unable, however, to present any evidence that the payment at issue was in fact a rebate; thus, the district court's finding of fact cannot be said to have been clearly erroneous. For this reason, we AFFIRM.

In Case No. 00-1472, twenty-two BEAR investors (hereinafter the "Escrow Investors") challenge the district court's order treating a Fleet Bank escrow account as a BEAR asset, to be distributed with the rest of BEAR's assets under the distribution plan. This escrow account was established with funds that the Escrow Investors advanced after the district court had enjoined BEAR and its officers and agents from further soliciting of funds. We AFFIRM the district court's order treating the escrow account as a BEAR asset. We conclude that the Escrow Investors were not denied due process and that the district court's finding that the escrow account was a BEAR asset was supported by the evidence.

I. BACKGROUND

Brunackey, No. 00-1088.

Brunackey, a BEAR investor, appeals the order classifying him as an "insubstantial marketer." Under the distribution plan devised by the Receiver and approved by the district court, each BEAR investor is assigned an investment number, a net investor claim ("NIC"), and an adjusted NIC ("ANIC"). Each investment is assigned an NIC by subtracting any commission payments, interest payments, return of principal payments, or similar payments made by BEAR to that account from the aggregate investment. Investors are then classified into one of four categories: defendants, substantial marketers, insubstantial marketers, and nonmarketers. The ANIC for all defendants in the underlying SEC action is set at zero. Thus, defendants are not entitled to receive any percentage of their NICs as part of the distribution plan. The ANIC for a substantial marketer (defined as an investor who received more than $1,000 in commissions) is equal to his NIC reduced by ninety percent. Thus, substantial marketers are entitled to receive up to ten percent of their NICs as part of the distribution plan. The ANIC for an insubstantial marketer (defined as an investor who received commissions less than $1,000) is equal to her NIC reduced by fifty percent. Thus, insubstantial marketers are entitled to receive up to half of their NICs under the distribution plan. Finally, nonmarketers' NICs are not reduced, and thus they are potentially entitled to receive their entire NICs under the plan.

According to the preliminary investor list compiled by the Receiver (dated October 21, 1996), Brunackey's investments in BEAR totaled $192,000. Joint Appendix (J.A.) at 246. This appeal, however, involves only one of those investments, designated as No. 225 by the Receiver, worth $120,000. Brunackey received a return on this investment of $13,577. Thus, under the distribution plan, his NIC for this investment is $104,698. For No. 225, Brunackey was originally classified as a "substantial marketer," because the BEAR records indicated that two separate commission payments had been made to Brunackey on this account, one for $1,500 and the other for $600. Thus, his NIC for No. 225 was reduced by ninety percent, and Brunackey was only entitled to receive up to ten percent of this investment (approximately $10,470) under the distribution plan.

Proceeding pro se, Brunackey objected to his classification as a substantial marketer, and the matter was referred to Magistrate Judge Virginia M. Morgan. At the hearing, held in October 1998, Brunackey persuaded Judge Morgan that the $1,500 payment had been a rebate on an investment he had made. The $1,500 payment from BEAR to Brunackey was contemporaneous with his investment in a BEAR project and equaled four percent of that investment. Given these facts, Judge Morgan determined that this payment had in fact been a rebate on that investment. Brunackey was unable to present similar evidence regarding the $600 payment, however. At the hearing, he unsuccessfully argued that he had not marketed any BEAR programs and that the court should place greater weight on his oral testimony than on the records of BEAR. On this point, Judge Morgan's September 14, 1999 order states:

14. No evidence was presented that the $600 payment was contemporaneous with any investment. The payment is shown on the BEAR check ledger as a commission, which is confirmed by the commission sub-ledger. The Investors [Brunackey and other members of his family] have not sustained the burden of proof that such payment should not be considered a commission. Investor No. 225 should be classified as an Insubstantial Marketer.

J.A. at 298. After the district court approved this order, Brunackey filed a notice of appeal.

The Escrow Investors, No. 00-1472.

Even after the BEAR principals had consented to the preliminary injunction on November 9, 1994, which enjoined them from raising further funds on behalf of BEAR, a number of individuals contributed approximately $500,000 in an effort to maintain BEAR as a viable entity. This effort apparently involved an attempt by BEAR attorney Bernard McClorey and BEAR president Michael Schouman to secure a seventy-five million dollar loan to make the defrauded BEAR investors whole. The current appeal involves the claims of twenty-two of these individuals, the Escrow Investors.

The funds at issue were deposited in an escrow account in the Fleet Bank in Massachusetts. This escrow account was subject to the terms of an escrow agreement, dated January 18, 1995, between Larry Smith, president of the Boston Group, the firm hired to find a lender for BEAR, and McClorey and Schouman, on behalf of BEAR. After thirty days, if an acceptable loan had not been secured for BEAR, the escrow agreement required that the $500,000 in the escrow account be returned to McClorey. In agreeing to forward these funds, the Escrow Investors had been promised that McClorey would return their money if an acceptable loan had not been secured within thirty days; in addition, McClorey and Schouman promised the Escrow Investors a ten-percent return on their deposits with McClorey.

Not surprisingly, no acceptable loan was found in the thirty-day period, and the Escrow Investors' funds were never returned. The release of the funds required the approval of both McClorey and Smith, and, for some reason, Smith failed to approve the release after the thirty-day period had expired. McClorey sued Smith in Michigan state court, seeking an order to Smith to show cause for failing to approve the release of the funds. McClorey's state complaint was filed on April 21, 1995.

Neither the Receiver nor the district court were aware of these events until May 1995, when an employee of the Receiver opened a letter from Fleet Bank to McClorey. (All BEAR mail was at that time being forwarded to the Receiver.) The Receiver quickly intervened in the state action, and in August 1985 the Michigan state court held that it lacked jurisdiction over the escrow account because it consisted of BEAR funds, which were under the federal court's jurisdiction.

In January 1996, the Receiver moved the district court for an order to...

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