Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-01724/USCOURTS-caed-2_07-cv-01724-28/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 12:22 Securities Fraud

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The docket indicates that Linda Neuhaus is now deceased. *

(Statement of Fact of Death, July 8, 2008, Dkt. No. 217.) Since a new

administrator for Donald Neuhaus’s estate has not yet been appointed,

the caption has not been amended to reflect Linda Neuhaus’s death.

1

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE )

COMMISSION, ) 2:07-cv-1724-GEB-CMK

)

Plaintiff, )

)

v. ) ORDER

)

SECURE INVESTMENT SERVICES, INC.; )

AMERICAN FINANCIAL SERVICES, INC.; )

LYNDON GROUP, INC.; KIMBERLY )

SNOWDEN; and LINDA NEUHAUS, as )

Administrator and Personal )

Representative of the Estate of )

Donald F. Neuhaus, )

)

Defendants. )

*

)

Evidentiary hearings were held in this action June 30, 2008

and July 28, 2008, on Michael J. Quilling’s thirteen motions to

abandon life insurance policies on which Mr. Quilling, the appointed

Receiver for Secure Investment Services, Inc., American Financial

Services, Inc. and Lyndon Group, Inc. (collectively, “the estate”),

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has paid 100% of the premiums since being appointed Receiver, even

though the estate does not have 100% interest in the policies. 

I. Background

Plaintiff Securities and Exchange Commission sought and

received appointment of Mr. Quilling as the Receiver in this civil

enforcement action, in which Plaintiff alleges Defendants engaged in a

fraudulent scheme involving the sale to investors of interests in life

insurance policies on the lives of other individuals. 

Twenty-four policies are wholly owned by the estate, and the

Receiver estimates there are potentially 660 claims which could be

filed against these policies by investors who were sold interests in

the policies, but the exact amount will not be known until claims are

filed and processed. When the Receiver was appointed there were a

total of twenty-seven wholly owned policies, but three of these

policies have matured since the Receiver’s appointment (meaning the

insured died and the estate received or is in the process of receiving

the life insurance proceeds). 

There are an additional twenty-two policies which have

multiple fractional owners; the estate is among the owners. The

Receiver testified that there are between 200 and 500 different

investors who potentially have claims against those twenty-two

policies. In the pending motions the Receiver seeks to abandon the

estate’s interest in thirteen of these twenty-two policies so that he

is authorized to discontinue paying the premiums on the abandoned

policies.

II. Policies Sought to be Abandoned at June 30 Evidentiary Hearing

One of the policies the Receiver seeks to abandon is the

BIE-F&L policy. Forty people and entities have fractional ownership

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interests in that policy. The estate owns 1.25% of that policy, and

has been paying 100% of the premiums for that policy since August

2007, paying $124,800 in premiums. The face value on that policy is

$4 million. The amount of premiums needed to keep the policy in force

is $41,000 per quarter. The current death benefit available should

both insureds die would be $4,032,444. This is what is called a

second to die policy; it insures both the husband and the wife, and

they both must die before a death benefit is paid. The amount of

anticipated death benefit for the estate was $50,506.76 when the

premiums were paid. The Receiver testified the amount he has already

spent on premiums is almost three times what the policy is worth to

the estate.

To try to resolve this premium expenditure problem, the

Receiver started sending letters in February to other investors in the

policy in which he asked them to consider transferring their ownership

interests to the estate, so that the estate would acquire sufficient

ownership interest to justify continued payment of premiums to keep

the policy from lapsing or to provide the estate with enough ownership

interest for the Receiver to be in a position to sell the policy. 

Such transferees could be given claims against the estate. Some

investors agreed to the transfer, and the total ownership interest the

estate had in the policy sometime before the hearing was 56.6%, which

equals a death benefit of approximately $2,282,000.

The Receiver also proposes to abandon the KIL-D Policy. 

There are approximately twenty-three owners of the policy. At the

time the Receiver was appointed the estate owned 4% of the policy. 

The quarterly premium was about $12,784; the estate has paid $41,700

in premiums to keep the policy from lapsing. The face value on that

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policy is $925,000. The current death benefit available to the estate

if the insured died would be $37,053.88. The Receiver made the same

offer to the investors referenced above to resolve the payment of

premium problem, and the estate’s ownership percentage increased to

64.45%, which equals a death benefit of approximately $596,000.

The Receiver also proposes to abandon the SHO-I(1) Policy. 

There are approximately twenty-three owners of the policy. At the

time the Receiver was appointed the estate owned 4.49% of the policy. 

So far the estate has paid about $64,000 in premiums. The planned

premium payment per quarter is $18,750, which is $76,800 a year. The

face value on that policy is $1.5 million. The current death benefit

available to the estate if insured died would be $67,470. The

Receiver made the same offer to the investors referenced above to

resolve this estate payment of premium problem, and the estate’s

ownership percentage increased to 42.913%, which equals a death

benefit of approximately $643,695.

The Receiver also proposes to abandon the SLE-K(1) Policy. 

There are approximately fourteen owners of the policy. At the time

the Receiver was appointed the estate owned 0.97% of the policy. So

far the estate has paid about $44,837 in premiums. The face value on

that policy is $666,666. The current death benefit available to the

estate if insured died would be $6,500. The premium payment per

quarter is just less than $8,000. The Receiver made the same offer to

the investors referenced above to resolve this estate payment of

premium, following which the estate’s ownership percentage increased

to 63.25% of the policy, which equals a death benefit of approximately

$421,000.

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The Receiver also proposes to abandon the SLE-K(2) Policy. 

There are eight owners of the policy. At the time the Receiver was

appointed the estate owned 0.1% of the policy. So far the estate has

paid about $22,500 in premiums. The face value on that policy is

$666,666. The death benefit available to the estate if insured died

would be $695.73. The premium is $33,260 a year. The Receiver made

the same offer to the investors referenced above to resolve this

estate payment of premium problem, following which the estate’s

ownership percentage increased to 10.63% of the policy, which equals a

death benefit of approximately $70,893.

The Receiver also proposes to abandon the SLE-K(3) Policy. 

There are fourteen owners of the policy. At the time the Receiver was

appointed the estate owned 2.6% of the policy. So far the estate has

paid about $54,000 in premiums. The face value on that policy is $1

million. The death benefit available to the estate if insured died

would be $26,000. The premium is $58,000 a year. The Receiver made

the same offer to the investors referenced above to resolve this

estate payment of premium problem, following which the estate’s

ownership percentage increased to 46.11% of the policy, which equals a

death benefit of approximately $461,194.

III. Policies Sought to be Abandoned at July 28 Evidentiary Hearing

The Receiver also proposes to abandon the ARM-A Policy. 

There are four owners of the policy. At the time the Receiver was

appointed the estate owned 55.8% of the policy. So far the estate has

paid about $76,000 in premiums. The face value on that policy is

$250,000. The death benefit available to the estate if insured died

would be $139,500. The premium is approximately $80,000 a year. The

Receiver made the same offer to the investors referenced above to

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resolve this estate payment of premium problem, following which the

estate’s ownership percentage increased to 70.8% of the policy, which

equals a death benefit of approximately $177,000.

The Receiver also proposes to abandon the BAU-R&L(1) Policy. 

There are twelve owners of the policy. At the time the Receiver was

appointed the estate owned 1.2% of the policy. So far the estate has

paid about $32,250 in premiums. The face value on that policy is $1

million, but the policy’s value has been reduced to $617,545 due to a

loan debt. The death benefit available to the estate if insured died

would be $7,248. The premium is $129,000 a year. The Receiver made

the same offer to the investors referenced above to resolve this

estate payment of premium problem, following which the estate’s

ownership percentage increased to 21.53% of the policy, which equals a

death benefit of approximately $132,957.

The Receiver also proposes to abandon the BER-E&B(1) Policy. 

There are twelve owners of the policy. At the time the Receiver was

appointed the estate owned 8.83% of the policy. So far the estate has

paid about $43,500 in premiums. The face value on that policy is

$458,770. The death benefit available to the estate if insured died

would be $40,545. The premium is $27,384 a year. The Receiver made

the same offer to the investors referenced above to resolve this

estate payment of premium problem, following which the estate’s

ownership percentage increased to 40.69% of the policy, which equals a

death benefit of approximately $186,673.

The Receiver also proposes to abandon the BER-E&B(2) Policy. 

There are four owners of the policy. At the time the Receiver was

appointed the estate owned 5.7% of the policy. So far the estate has

paid about $39,652 in premiums. The face value on that policy is

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$447,019. The death benefit available to the estate if insured died

would be $25,490. The premium is $23,160 a year. The Receiver made

the same offer to the investors referenced above to resolve this

estate payment of premium problem, following which the estate’s

ownership percentage increased to 49.44% of the policy, which equals a

death benefit of approximately $221,006.

The Receiver also proposes to abandon the FOW-S(1) Policy. 

There are twenty-four owners of the policy. At the time the Receiver

was appointed the estate owned 5.68% of the policy. So far the estate

has paid about $52,800 in premiums. The face value on that policy is

$1.5 million. The death benefit available to the estate if insured

died would be $85,327. The premium is $40,920 a year. The Receiver

made the same offer to the investors referenced above to resolve this

estate payment of premium problem, following which the estate’s

ownership percentage increased to 74.83% of the policy, which equals a

death benefit of approximately $1.1 million.

The Receiver also proposes to abandon the QUI-W(1) Policy. 

There are twelve owners of the policy. At the time the Receiver was

appointed the estate owned 4.3% of the policy. So far the estate has

paid about $21,835 in premiums. The face value on that policy is

$500,000. The death benefit available to the estate if insured died

would be $21,527. The premium is approximately $60,000 a year. The

Receiver made the same offer to the investors referenced above to

resolve this estate payment of premium problem, following which the

estate’s ownership percentage increased to 66.65% of the policy, which

equals a death benefit of approximately $333,250.

Lastly, the Receiver proposes to abandon the QUI-W(2)

Policy. There are twelve owners of the policy. At the time the

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Receiver was appointed the estate owned 3.89% of the policy. So far

the estate has paid about $21,835 in premiums. The face value on that

policy is $500,000. The death benefit available to the estate if

insured died would be $19,482. The premium is approximately $60,000 a

year. The Receiver made the same offer to the investors referenced

above to resolve this estate payment of premium problem, following

which the estate’s ownership percentage increased to 71.38% of the

policy, which equals a death benefit of approximately $356,900.

IV. The Receiver’s Position

The Receiver testified he cannot sell the estate’s

fractional ownership interest in a policy since “there is no market

for partial interest in a policy outside of entities such as the ones

for whom [he] was appointed as Receiver for fractional interests.” He

explained “you can’t control the policy [and] you’re at the mercy of

the other investors to pay their share of the premiums.” To date the

Receiver has paid the premiums for the policies with money borrowed

using credit secured by the estate’s wholly owned life insurance

policies, or money received when three of the wholly owned life

insurance policies matured.

The Receiver believes he faces three options:

(1) Keep the status quo. The Receiver believes this option

is not preferable because it entails the Receiver continuing to pay

the costly premiums on these policies even though the estate’s share

of the eventual payout would not come close to reimbursing the estate

for the premiums.

(2) Charge the investors for their share of the premiums. 

The Receiver believes this option would not succeed because many

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investors have informed him they cannot afford to pay their share of

the premiums.

(3) Abandon the estate’s interest in these policies and stop

paying the premiums on these policies. The Receiver believes this is

the only financially viable option. 

V. The Examiner’s Position

An Examiner, Steven A. Harr, was appointed in this case to

voice the collective interest of investors with respect to the

Receiver’s actions. The Examiner filed a statement concerning the

pending motions stating “the Examiner sees no alternative but to

support the course of action proposed by the Receiver” since “the

hold-out investors” who did not transfer their ownership interests to

the Receiver “render the . . . policies worthless” and “[f]rom the

perspective . . . of maximizing the value of the estate, it does not

make sense to take from the ability to salvage the [wholly owned]

policies in order to further attempt to create a positive result for

this minority of investors.” (Examiner’s Statement ¶ 18.) 

VI. The Investors’ Positions

Several of the investors in the policies at issue propose

alternatives to abandoning the policies, the thrust of which is keep

the policies afloat until the policies mature. 

Some investors propose that the Receiver continue to pay the

premiums until the policies mature and once the policies mature, the

estate should receive payment for the substantial amount of the

policies the Receiver now controls. The Receiver could then use this

insurance payment to cover expenses and repay the loan, with the

remainder being distributed to the investors. However, the problem

with this is that the estate would be forced to shoulder the costs of

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paying the expenses and premiums, while the investors who held out and

did not transfer their shares to the Receiver would benefit from a

windfall.

Some investors propose that the Receiver continue to pay the

premiums until the policies mature, and that once the policies mature,

the Receiver interpose himself between the insurance company and the

investors to collect the entire insurance payment. Then the Receiver

could repay the loan and expenses from the entire death benefits

payout, and distribute the rest of the benefits to all of the

investors in that policy pro rata based on their respective ownership

interest. However, the problem with this proposal is that the

Receiver appears to lack the authority to interpose himself when the

policy matures in order to collect the entire insurance payment

directly from the insurance company. Instead, the Receiver would be

forced to collect the money from each investor individually in order

to reimburse the estate, which could entail further lawsuits and more

expenses to the estate. Further, this option would require the

Receiver to remain in place for an indeterminate amount of time.

Lastly, Defendant Kimberly Snowden filed an objection after

the hearing in which she argues: 

Because the Receiver is in possession of the

information concerning the date on which the

Receiver needs to make the next payment on each

policy, . . . [any order granting the motions]

should be drafted in such a way as to authorize

the Receiver to abandon the policy on a date

certain before the Receiver is required to expend

additional funds to pay premiums. [Authoriz]ing

the Receiver simply to abandon the policy “at his

discretion” fails to provide enough notice to each

of the investors who may wish to cooperate with

the Receiver before his abandonment of the policy

. . . .

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(Snowden’s Objection to Proposed Order, Dkt. No. 220.) Issuing an

order directing the Receiver to determine the exact date he may be

forced to abandon each policy and to inform the affected investors may

benefit these investors; however, such an order would force the

Receiver to incur additional expenses to the detriment of the estate

which includes investors who have no interest in the policies at

issue. Further, the affected investors have been given sufficient

notice that the Receiver’s abandonment of the policies is imminent. 

The letter the Receiver sent to investors stated that “[i]f some of

the [investors] indicate that they are not willing to [transfer their

interests to the estate], [the Receiver] may very well abandon the

policy and quit paying premiums, in which event partial owners . . .

will have to find a way to pay the premiums [on their own].” (Mot.

for Authorization to Abandon the SLE-K(1) Policy, Exh. 2.) The

Receiver’s letter also stated that if investors “have any questions at

all, please call [him] and [he] will be happy to discuss the matter”

and provides a telephone number. (Id.) Moreover, the Receiver served

copies of his motions on each affected investor. Thus, the expense to

the estate of obtaining an order directing the Receiver to take

further action to notify the investors about the abandonment is not

justified since the investors have already received sufficient notice

and may contact the Receiver to obtain additional information about

the Receiver’s activities.

VII. Conclusion

It is evident from the record that the estate should not

continue bearing the premium expenses required to keep the thirteen

policies from lapsing, and that the Receiver should be authorized to

discontinue paying the premiums for these policies. Equity does not

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favor having the estate investors who have a minimal chance of

receiving any benefit from paying the premiums to continue paying

them. 

For the foregoing reasons,

1. the Receiver’s motion is granted and the Receiver is

authorized to abandon, at his discretion, at such time as the estate

is required to expend additional funds to pay premiums, the estate’s

interest in the life insurance policy number B10090477L in the face

amount of $4,000,000.00 issued by American General Life, referred to

in Receiver’s motion as the BIE-F&L Policy;

2. the Receiver’s motion is granted and the Receiver is

authorized to abandon, at his discretion, at such time as the estate

is required to expend additional funds to pay premiums, the estate’s

interest in the life insurance policy number 7087159 in the face

amount of $1,500,000.00 issued by Lincoln National Life Ins. Co.,

referred to in Receiver’s motion as the SHO-I(1)Policy;

3. the Receiver’s motion is granted and the Receiver is

authorized to abandon, at his discretion, at such time as the estate

is required to expend additional funds to pay premiums, the estate’s

interest in the life insurance policy number 92252406 in the face

amount of $925,000.00 issued by Transamerica Occidental, referred to

in Receiver’s motion as the KIL-D Policy;

4. the Receiver’s motion is granted and the Receiver is

authorized to abandon, at his discretion, at such time as the estate

is required to expend additional funds to pay premiums, the estate’s

interest in the life insurance policy number UL00256941 in the face

amount of $666,666.00 issued by John Hancock Mutual Life, referred to

in Receiver’s motion as the SLE-K(1) Policy;

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5. the Receiver’s motion is granted and the Receiver is

authorized to abandon, at his discretion, at such time as the estate

is required to expend additional funds to pay premiums, the estate’s

interest in the life insurance policy number UL00257151 in the face

amount of $666,666.00 issued by John Hancock Mutual Life, referred to

in Receiver’s motion as the SLE-K(2) Policy;

6. the Receiver’s motion is granted and the Receiver is

authorized, at his discretion, at such time as the estate is required

to expend additional funds to pay premiums, to abandon the estate’s

interest in the life insurance policy number 6278282845 in the face

amount of $1,000,000.00 issued by New York Life, referred to in

Receiver’s motion as the SLE-K(3) Policy;

7. the Receiver’s motion is granted and the Receiver is

authorized, at his discretion, at such time as the estate is required

to expend additional funds to pay premiums, to abandon the estate’s

interest in the life insurance policy number E00071834 in the face

amount of $250,000.00 issued by Protective Life Insurance Company,

referred to in Receiver’s motion as the ARM-A Policy;

8. the Receiver’s motion is granted and the Receiver is

authorized, at his discretion, at such time as the estate is required

to expend additional funds to pay premiums, to abandon the estate’s

interest in the life insurance policy number 1A2259108-0 in the face

amount of $1,000,000.00 (with a current death benefit of $617,545.30)

issued by Pacific Life Insurance Company, referred to in Receiver’s

motion as the BAU-R&L(1) Policy;

9. the Receiver’s motion is granted and the Receiver is

authorized, at his discretion, at such time as the estate is required

to expend additional funds to pay premiums, to abandon the estate’s

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interest in the life insurance policy number L051178300 in the face

amount of $458,770.00 issued by Allmerica Financial, referred to in

Receiver’s motion as the BER-E&B(1) Policy;

10. the Receiver’s motion is granted and the Receiver is

authorized, at his discretion, at such time as the estate is required

to expend additional funds to pay premiums, to abandon the estate’s

interest in the life insurance policy number L053968800 in the face

amount of $447,019.00 issued by Allmerica Financial, referred to in

Receiver’s motion as the BER-E&B(2) Policy;

11. the Receiver’s motion is granted and the Receiver is

authorized, at his discretion, at such time as the estate is required

to expend additional funds to pay premiums, to abandon the estate’s

interest in the life insurance policy number 600008818 in the face

amount of $1,500,000.00 issued by Southland Life Ins. Co., referred to

in Receiver’s motion as the FOW-S(1) Policy;

12. the Receiver’s motion is granted and the Receiver is

authorized, at his discretion, at such time as the estate is required

to expend additional funds to pay premiums, to abandon the estate’s

interest in the life insurance policy number BU1060089 in the face

amount of $500,000.00 issued by Mutual of Omaha, referred to in

Receiver’s motion as the QUI-W(1) Policy; and

13. the Receiver’s motion is granted and the Receiver is

authorized, at his discretion, at such time as the estate is required

to expend additional funds to pay premiums, to abandon the estate’s

interest in the life insurance policy number BU1063056 in the face

///

///

///

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amount of $500,000.00 issued by Mutual of Omaha, referred to in

Receiver’s motion as the QUI-W(2) Policy.

IT IS SO ORDERED.

Dated: July 28, 2008

 

GARLAND E. BURRELL, JR.

United States District Judge

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