United States District Court, D. Maryland, Southern Division
J. HAZEL, UNITED STATES DISTRICT JUDGE.
a civil enforcement action brought by Plaintiff Securities
and Exchange Commission ("SEC") against Capital
Source Funding. LLC. Capital Source Lending. LLC (the
"Capital Source Defendants"). Michael K. Martin and
a number of other Defendants, for violations of the
Securities Act and Exchange Act arising from an allegedly
fraudulent "prime bank" investment scheme
perpetrated by Defendants. ECF No. 1. This Memorandum Opinion
and attached Order address the following Motions: SEC's
Motion for Judgment as to Defendants Capital Source Funding.
LLC and Capital Source Lending. LLC, ECF No. 270 (construed
as a Motion for Default Judgment): SEC's Application for
an Order Requiring Compliance with Administrative Subpoena.
ECF No. 275; Martin's Motion to Recuse. ECF No. 325:
Martin's Motion for Approval of Defense Funds. ECF No.
326: Martin's Motion for an Order Modifying the Freezing
of Assets for Payments of Legal Fees and Expenses. ECF No.
328; Martin's Supplemental Motion to Support Request for
Funds for Council [sic] and Expert Witnesses. ECF No. 333;
Martin's Emergency Reconsideration of Reinstating Chapter
7, ECF No. 345: and Martin's Emergency Reconsider [sic]
of Resuming Bk 7 for Chronic Illness. ECF No. 346. No hearing
is necessary. See Loc. R. 105.6 (D. Md. 2016).
initiated this civil enforcement action on May 11. 2015.
against a number of defendants, including Martin and the
Capital Source Defendants. ECF No. 1. The SEC alleges that
the Defendants took part in an "investment scam known as
a 'prime bank' fraud" to defraud victims of
nearly $5 million. Id. ¶¶ 1, 21. Put
briefly, the SEC alleges that Defendants convinced victims of
their scheme to "invest" in securities related to
international banks; these securities, however, did not
exist, and the substantial returns promised by Defendants did
not materialize. Id. ¶ 4. The SEC claims that
Defendants violated and aided and abetted violations of the
Exchange Act Section 10(b) and Rule 10b-5. id at
the Securities Act Section 17(a). id at 20-21, the
Securities Act Section 5, id, at 20 21. and the
Securities Act Section 15(a), id at 22-23.
number of motions filed by the SEC and Martin are currently
pending before the Court. which the Court addresses below in
Motion for Default Judgment Against the Capital Source
Defendants (ECF No. 270)
asks the Court to grant an "entry of final judgments . .
. establishing injunctions and ordering disgorgement and
civil penalties as to defendants Capital Source Lending. LLC
and Capital Source Funding. LLC." ECF No. 270 at 1. On
February 3, 2017, the Court granted the SEC's Motion for
Entry of Default against the Capital Source Defendants. ECF
No. 253. As the Court noted at the time, the Capital Source
Defendants" counsel withdrew as attorneys of record on
March 1, 2016. ECF No. 252 at 5. Pursuant to Loc. R.
101(2)(b), the Court ordered Defendants to show cause as to
why default should not be entered against them within 30
days, which they did not; therefore, the Court granted the
SEC's Motion. Id.
Motion for Default Judgment, the SEC argues that its
Complaint pleads sufficient facts which, accepted as true,
constitute a legitimate cause of action. ECF No. 270 at 7.
The SEC provides the Court with additional affidavits and
documentary evidence, which it argues are sufficient for the
Court to enter damages against the Capital Source Defendants.
Id. at 11. While the Capital Source Defendants did
not respond to the SEC's Motion, on April 12, 2017.
Martin filed an Opposition in which he asks for "a 90
day stay so that we can bring on an experienced attorney
familiar with the SEC and the experience in knowing correctly
how these private deals are set up." ECF No. 273 at 1.
Although the Court did not grant the stay, seven months have
passed since Martin filed his Opposition and the Capital
Source Defendants are still not represented. As such, the
Court sees no reason to further delay consideration of the
SEC's Motion for Default Judgment.
defendant's default does not automatically entitle the
plaintiff to entry of a default judgment: rather, that
decision is left to the discretion of the court."
Educ. Credit Mgmt. Corp. v. Optimum Welding, 285
F.R.D. 371. 373 (D. Md. 2012). Generally. "[t]he Fourth
Circuit has a 'strong policy' that "cases be
decided on their merits."" Choice Hotels
Intern, Inc. v. Savannah Shakti Carp., no. DKC-11-0438.
2011 WL 5118328 at *2 (D. Md. Oct. 25. 2011) (citing
United States v. Shaffer Equip. Co., 11 F.3d 450.
453 (4th Cir. 1993)), although “default judgment may be
appropriate when the adversary process has been hailed
because of an essentially unresponsive party[.]"
Id. (citing S.E.C. v. Lawbaugh, 359
F.Supp.2d 418. 421 (D. Md. 2005)).
case with multiple defendants where fewer than all of the
defendants have defaulted, it may not be appropriate for the
Court to enter default judgment. Under the Federal Rules of
Civil Procedure, final judgment can be entered as to one of
multiple defendants only if the court "expressly
determines that there is no just reason for delay." fed.
R. Civ. P. 54(b). In the Supreme Court case of Frow v. De
La Vega, 82 U.S. 552 (1872). the Court was confronted
with a situation where one of several defendants had
defaulted and had a final judgment entered against him. The
Court found it "unseemly and absurd" that a final
judgment could be entered against one defendant, while other
defendants may ultimately be found to be not liable on the
same charge. Id. at 554. See also Farm Fresh
Direct By a Cut Above. LLC v. Downey, No. ELH-17-1760.
2017 WL 4516548. *3 (D. Md. Oct. 6. 2017)
(hereinafter"Farm Fresh"). The Supreme
Court instructed that the proper course in such a situation
would be “simply to enter a default" against the
defaulting party, and to "proceed with the cause upon
the answers of the other defendants." Id. See
also WRIGHT AND MILLER § 2690 ("As a general
rule . . .. when one of several defendants who is alleged to
be jointly liable defaults, judgment should not be entered
against that defendant until the matter has been adjudicated
with regard to all defendants, or all defendants have
defaulted."). The Fourth Circuit in U.S. for Use of
Hudson v. Peerless Ins. Co. recognized that
Frow "was a case of joint liability" but
found Frow's reasoning "applicable not only to
situations of joint liability but to those where the
liability is joint and/or several." 374 F.2d 942. 944
(4th Cir. 1967).
recent, similar case, this Court dismissed without prejudice
a plaintiffs motion for default judgment against a defaulting
defendant where several defendants remained. Farm
Fresh, 2017 WL 4516548 (Hollander, J.). There, the
plaintiff sued two individual defendants and two corporate
defendants. Id. at * 1. Neither corporate defendant
entered an appearance, and the Clerk entered an order of
default as to the corporate defendants. Id. The
plaintiff subsequently filed a motion for default judgment
against the corporate defendants. The court denied the
plaintiffs motion without prejudice, reiterating the facts
and reasoning of Frow, and pointing out that
"plaintiff has not provided this Court with any
explanation as to why defendants' liability is unrelated,
or why, at this juncture, it is appropriate to enter default
judgement against just one of four parties."
Id. at *4.
as in Frow and in Farm Fresh, it would be
inappropriate to grant default judgment as to the Capital
Source Defendants, with claims still pending against numerous
related defendants. As in Farm Fresh, the SEC has
not "provided this Court with any explanation as to why
defendants' liability is unrelated, or why, at this
juncture, it is appropriate to enter default judgement
against just one of four parties." In fact, throughout
the SEC's Motion for Default Judgment and in their
accompanying materials it is quite clear that the Capital
Source Defendants" liability is deeply intertwined with
Defendants Martin's and Salinas's liability. See.
e.g., ECF No. 270 at 4 (as basis for Capital Source
Defendants" liability, describing the conduct of
"Michael Martin, CEO of Capital Source Lending"):
id. at 9 ("Martin and Salinas made material
misstatements and omissions on behalf of the Capital Source
entities"); id. at 10 ("Martin. acting on
behalf of Capital Source Lending.. . . knew or was reckless
in not knowing his claims of past success were false.....that
the money collected from investors would be used for purposes
other than promised, . . . and that his
"updates"' to investors were bogus"). The
nature of the bank accounts that the SEC now seeks to
disgorge makes the interrelatedness of the liability between
the Capital Source Defendants, Salinas and Martin all the
more clear. Every account from which the SEC seeks to
disgorge funds is under the name of either Martin or Salinas.
In sum, the SEC alleges that the Capital Source Defendants
are liable only because of the conduct of Salinas and Martin,
who are still defendants in this case. As such, the Court
will deny the SEC's Motion for Default Judgment without
prejudice to the SEC re-filing the motion at an appropriate
Motions to Release Frozen Assets (ECF No. 326, ECF ...