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United States Securities and Exchange Commission v. Estate of Holzhueter

United States District Court, W.D. Wisconsin

October 20, 2016

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
THE ESTATE OF LOREN W. HOLZHUETER and ISC, INC. d/b/a Insurance Service Center, Defendants, and HONEFI, LLC, ARLENE HOLZHUETER, and AARON HOLZHUETER, Relief Defendants.

          ORDER APPOINTING RECEIVER

          JAMES D. PETERSON District Judge

         WHEREAS, on January 21, 2015, Plaintiff the United States Securities and Exchange Commission (the “Commission”) sued Defendants Loren W. Holzhueter and ISC, Inc. (“ISC”), alleging that they were engaged in an ongoing Ponzi scheme that raised at least $10.4 million from investors. (Docket No. 1.) The Complaint included Honefi, LLC (“Honefi”) as a Relief Defendant. Following Loren W. Holzhueter's death, the Commission filed an Amended Complaint that: (a) substituted the Estate of Loren W. Holzhueter (the “Estate”) as a defendant; and (b) added Aaron Holzhueter and Arlene Holzhueter (Loren W. Holzhueter's son and wife) as relief defendants (Docket No. 53);

         WHEREAS, in the Complaint and Amended Complaint, the Commission alleges that Loren W. Holzhueter and ISC raised millions of dollars from investors beginning in March 2000 through November 2014 through fraudulent means. (Docket Nos. 1 and 53.) The Commission contends that Loren W. Holzhueter and entities that he owned or controlled, including ISC and Honefi, obtained more than $26 million from investors beginning in at least 1995 in connection with this scheme; that ISC made repayments to investors totaling at least $12 million; and that investors still have net losses of at least $13.9 million. Individuals who provided funds to Loren W. Holzhueter or entities that he owned or controlled from 1995 to 2015 pursuant to the fraudulent means alleged in the Complaint and Amended Complaint are hereinafter referred to as “Investors”;

         WHEREAS, on November 2, 2015, the Court entered partial judgments by consent against Defendants ISC and the Estate in which it ordered that any award of civil penalties and disgorgement of ill-gotten gains would be determined by the Court upon the Commission's Motion for Remedies (Docket Nos. 80 and 81);

         WHEREAS, on June 20, 2016, the Commission filed an unopposed motion seeking entry of consent and final judgments against the Estate, Honefi, and Arlene Holzhueter in which they consented to entry of final judgment which, among other relief, requires them to disgorge Loren W. Holzhueter's ill-gotten gains by relinquishing: (a) the proceeds from the policies insuring Loren W. Holzhueter's life (the “Life Insurance Proceeds”); (b) loans made or money provided to ISC; (c) any ownership interest in ISC; (d) any ownership interest in Honefi; and (e) Loren W. Holzhueter's marital interest in certain bank accounts held jointly with Arlene Holzhueter (Docket Nos. 145-1, 145-3, 145-4, 145-6);

         WHEREAS, on October 20, 2016, the Court entered final judgments against Defendant the Estate and Relief Defendants Honefi and Arlene Holzhueter;

         WHEREAS, the Court finds that, based on the record in these proceedings, the appointment of a receiver in this action is necessary and appropriate for the purposes of (i) distributing the Life Insurance Proceeds which are deposited with the registry of the Court in a manner that treats all Investors equitably; (ii) marshaling, preserving, selling, and distributing all assets of Relief Defendant Honefi; and (iii) selling and distributing all assets of Defendant ISC in a manner designed to maximize the value to creditors (including Investors);

         WHEREAS, the Court finds that, based on the record in these proceedings, there is clear and convincing evidence that there will be irreparable injury unless a receiver is appointed by the Court;

         WHEREAS, the Court has broad, equitable discretion to order the relief set forth herein; and

         WHEREAS, this Court has subject matter jurisdiction over this action and personal jurisdiction over the Life Insurance Proceeds, ISC, and Honefi, and venue properly lies in this district.

         NOW THEREFORE, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED THAT:

         I. Appointment of Receiver

         1. Until further order of this Court, Michael S. Polsky is hereby appointed to serve without bond as receiver (the “Receiver”) for the Life Insurance Proceeds, Honefi, and ISC.

         II. Distribution of Assets

         2. As set forth in greater detail below, the Receiver is authorized, empowered, and directed to develop a plan for:

a. The distribution of the Life Insurance Proceeds and other funds deposited with the registry of the Court to Investors (“Phase 1 Distribution”); and
b. The fair, reasonable, and efficient recovery and sale of ISC and Honefi and/or their assets (collectively, the “Receivership Property”) and its distribution (“Phase 2 Distribution”).

         3. Arlene Holzhueter, Aaron Holzhueter, and the present or former officers, directors, employees, agents, managers, trustees, attorneys, accountants, affiliates, contractors, and/or partners of Honefi and ISC are hereby ordered to assist the Receiver in fulfilling his duties and obligations as set forth herein. They must respond promptly and truthfully to all requests for information and documents from the Receiver.

         4. The Receiver is authorized to engage and employ, with the prior approval of the Court, any individuals or entities the Receiver deems reasonably necessary to assist with his duties described herein (“Retained Personnel”); however, the Receiver has a continuing duty to ensure that there are no conflicts of interest between the Receiver, his Retained Personnel, the Life Insurance Proceeds, and the Receivership Property.

         III. Life Insurance Proceeds

         5. Within 21 days of the entry of this Order, and with prior approval of the Commission, the Receiver shall draft and submit to the Court a Phase 1 Distribution Plan for the Life Insurance Proceeds and other liquid assets. The Phase 1 Distribution Plan shall:

a. Provide for pro rata compensation to Investors based on their net principal loss;
b. Include an initial determination of the claim amount for each Investor, which will be determined by summing the amounts invested less any repayments that the Investor received (the “Initial Claim Determination”). The Receiver shall rely on the Initial Claim Determinations to be provided by the Commission for each Investor;
c. Include a procedure for notifying Investors of the amount of his or her Initial Claim Determination (“Claim Notice”). The Claim Notice must also include instructions and the deadline for Investors to object to their Initial Claim Determination (a “Claim Objection”). The Investor shall bear the burden of providing necessary documents to support his or her Claim Objection. Claim Objections must be submitted to the Receiver and the Commission within 30 days of the mailing of the Claim Notice.
d. Include a procedure for resolving Claim Objections, including requesting additional documents from Investors or further analysis of records. The Receiver shall confer with the Commission to resolve Claim Objections, but the Receiver shall make final determinations concerning Claim Objections. All Claim Objections must be resolved within 14 days of receipt.
e. Include a final list of claim determinations (“Final Claim Determinations”), including, for each Investor, an indication as to whether there was a Claim Objection to the Initial Claim Determination, and any adjustment made by the Receiver as a result. The Final Claim Determination will also include the amount of the pro rata distribution that each Investor will receive from the Phase 1 Distribution. The Receiver shall file the Final Claim Determinations with the Court within seven days of resolving the last timely received Claim Objection.
f. Provide for pro rata compensation to counsel for ISC for its fees and expenses, at the same rate as the Investors. The Receiver and the Commission shall review the requested fees and submit any objections or a statement of approval to the Court by the objection deadline in ¶ 6.

         6. Defendants, Relief Defendants, or other interested parties (other than Investors) may object to the Phase 1 Distribution Plan or to the Initial Claim Determinations (“Objections”). All Objections must be filed with the Court within 14 days from the service and filing of the Phase 1 Distribution Plan. The Receiver and/or the Commission shall have seven days to respond to any Objection. Prior to filing an Objection, the objecting party shall meet and confer with the Receiver and the Commission to attempt to resolve the Objection informally. This Court shall retain jurisdiction over, and shall adjudicate, any Objection that is not resolved informally.

         7. Within 14 days of the entry of an order approving the Phase 1 Distribution Plan, the Receiver shall:

a. Mail Claim Notices to Investors;
b. Obtain a letter from the Clerk of Court stating the amount of funds held in the Court's registry for this case, establish a non-interest bearing checking account or accounts as may be necessary at institutions insured by the Federal Deposit Insurance Corporation (the “Receiver's Accounts”), and request the Clerk to transfer those funds to the Receiver in trust for deposit into the Receiver's Accounts.

         8. The Receiver will make pro rata distributions to Investors and counsel for ISC from the Receiver's Accounts within 14 days of resolving the last timely received Claim Objection. The distribution check shall be accompanied by the Final Claim Determination for the Investor and the amount of any remaining claim (the “Remaining Claim”), calculated by subtracting the distribution amount from the Final Claim Determination.

         9. The Commission, Defendants, and Relief Defendants are hereby ordered to cooperate with the Receiver and to promptly answer his requests to minimize expenses incurred by the Receiver. Such cooperation includes, but is not limited to, providing Investor contact information and assisting with the contents of the notice provided to Investors.

         10. With prior approval of the Court, the Receiver may, if necessary, engage a professional to fulfill all income tax reporting requirements of the Life Insurance Proceeds and other liquid assets that are distributed pursuant to the Phase 1 Distribution (the “Tax Administrator”).

         11. With prior approval of the Court and the Commission, the Receiver, the Tax Administrator, and the Retained Personnel may recover no more than $200, 000, in aggregate, of their reasonable costs and fees associated with executing the tasks described in paragraphs 5-8 and 10, above, from the Life Insurance Proceeds. To the extent that the reasonable costs and fees incurred by the Receiver, the Tax Administrator, and the Retained Personnel associated with executing the tasks described in paragraphs 5-8 and 10, above, exceed $200, 000, they may recover those fees, with prior approval of the Court and the Commission, from assets or funds of ISC or Honefi or from the Phase 2 Distribution. Under no circumstances shall the Receiver, or any of his Retained Personnel described herein, recover any costs or fees unrelated to the tasks described in paragraphs 5-8 and 10, above, from the Life Insurance Proceeds.

         12. Aside from the funds discussed in paragraph 11, above, no claimant besides the Investors and counsel for ISC shall receive funds from the Phase 1 Distribution.

         13. With prior approval of the Court and the Commission, the Receiver may defend against claims against Life Insurance Proceeds. However, the Commission is also authorized to defend against such claims.

         IV. Honefi

         14. Pursuant to the final judgments entered against them, Defendant the Estate and Relief Defendant Arlene Holzhueter are directed to effect all corporate formalities necessary to transfer their ownership interests in Honefi to the Receiver to hold in trust to administer according to the terms of this Order or any subsequent order of the Court.

         15. The Receiver shall have all powers, authorities, rights, and privileges heretofore possessed by the officers, directors, managers, and general and limited partners of Honefi under applicable state and federal law, by the governing charters, by-laws, articles, and/or agreements, in addition to all powers and authority of a receiver at equity, and all powers conferred upon a receiver by the provisions of 28 U.S.C. §§ 754, 959, and 1692, and Fed.R.Civ.P. 66.

         16. No person holding or claiming any position of any sort with Honefi shall possess any authority to act by or on behalf of Honefi. The trustees, directors, officers, managers, employees, investment advisors, accountants, attorneys, and other agents of Honefi are hereby dismissed and the powers of any general partners, directors, and/or managers are hereby suspended. Such persons and entities shall have no authority with respect to Honefi's operations or assets, except to the extent as may hereafter be expressly granted by the Receiver. The Receiver shall assume and control the operation of Honefi and may pursue and preserve all of its claims.

         17. The Receiver has the following powers and duties with respect to Honefi:

a. To use reasonable efforts to determine the nature, location, and value of all assets and real property which Honefi owns, possesses, has a beneficial interest in, or controls, and may rely on information provided to him by the Commission and/or Honefi's former officers and directors in so doing;
b. To take custody, control, and possession of all the funds, property, premises, leases, and other assets of, or in the possession or under the direct or indirect control of, Honefi; to manage, control, operate, and maintain Honefi including real estate it owns; to use income, earnings, rents, and profits for the purpose of managing, controlling, operating, and maintaining Honefi and its assets;
c. To sell, with the prior approval of the Court, Honefi's real property, either in conjunction with a sale of ISC or separately, to maximize return to ...

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