Golden State TD Invs., LLC v. Andrews Kurth LLP (In re Cal. TD Invs. LLC)

489 B.R. 124

In re CALIFORNIA TD INVESTMENTS LLC, Golden State TD Investments, LLC, Debtor(s).Golden State TD Investments, LLC, QHL, Holdings, Fund Ten, LLC, Marc Sobel, Ruth Ann Wundermann–Cooper, Plaintiff(s),

v.Andrews Kurth LLP, Jon L. Dalberg, Michael D. Jewesson, Defendant(s).

Bankruptcy No. 1:07–bk–13003–GM.

Adversary No. 1:09–ap–01405–GM.

United States Bankruptcy Court, C.D. California.

March 6, 2013.

Jay H. Robinson, Marron Robinson Frederick & Foster, Dennis P. DeFranzo, Burbank, CA, Corey R. Weber, Robyn B. Sokol, Ezra Brutzkus Gubner LLP, Woodland Hills, CA, for Plaintiffs.

Craig Millet, Irvine, CA, Michael B. Smith, Gibson, Dunn & Crutcher LLP, Palo Alto, CA, Kevin S. Rosen, Gibson, Dunn & Crutcher LLP, Samuel A. Newman, Los Angeles, CA, for Defendants.

REDACTED MEMORANDUM OF OPINION REGARDING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT [DOCKET NUMBER 62]

GERALDINE MUND, Bankruptcy Judge.

Defendants Andrews Kurth LLP, Michael D. Jewesson & Jon L. Dalberg (“Defendants”) bring this motion for summary judgment (“MSJ”) on grounds of in pari delicto.

Background

Although the parties have a filed a significant amount of paper disputing what are “uncontroverted facts”, most of the essential factual background for this motion is not in dispute:

Quality Home Loans, Inc. (“QHL”) was formed in 2001 by John and Kitty Gaiser (the “Gaisers”), who each owned 50% of QHL. Its business was originating, servicing, buying and selling sub-prime mortgages.

To fund its business, QHL formed the plaintiffs in this adversary proceeding, QHL Holdings, Fund Ten, LLC (“Fund Ten”) and Golden State T.D. Investments, LLC (“Golden State” and, with Fund Ten, the “Funds”). QHL was the initial Member and initial Manager of each Fund. See Amended and Restated Operating Agreement of Fund Ten dated 5/3/05 and Amended and Restated Operating Agreement of Golden State dated 3/31/05 (the “Operating Agreements”), which are Defendants' Exhibits A & B and Plaintiffs” Exhibits 1 & 2, at ¶¶ 3.1, 5.1.¹ Additional members could be added at a price of $1000 per share. Id. at ¶ 3.2. There were approximately $37 million worth of additional memberships purchased in Fund Ten and $20 million in Golden State. The Gaisers ultimately held less than 20% of the member shares in either Fund. Declaration of Randy Miller in Support of Plaintiff's Opposition to MSJ at ¶ 7.

The Funds' stated purposes were “to acquire, hold and liquidate promissory notes secured by deeds of trust and mortgages to real property in the United States of America, and to distribute to the Members the Available Cash therefrom.” Operating Agreements ¶ 2.4 (the “liquidate” purpose was only in Golden State's Operating Agreement.)

The Funds had no employees and were managed by QHL (which remained the only manager of each Fund through the events described herein) under the terms of Operating Agreements. The Operating Agreements gave QHL, as manager, authority to “manage and direct” the Funds (¶ 5.3), but required approval of a majority of member shares before the manager could act with respect to:

(a) the sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the Company's assets;

(b) the Company's merger with or conversion into another entity;

(c) [undertaking involving a debt or obligation which would, when taken with all other obligations of the Company, exceed one half of the face value of all notes held by the Company]; and

(d) a transaction, not expressly permitted by this Agreement, involving a conflict of interest between the Manager and the Company, provided however that the sale to the company of mortgage loans originated by the Manager shall not be deemed a conflict of interest.

Operating Agreements ¶ 5.4 (provision C in brackets is only in Fund Ten's Operating Agreement).

In May and June of 2007 QHL and the Funds entered into three separate transactions: one with Silar Advisors, L.P., one with Pacificor, LLC and one with Bayview Financial, LP (the “Transactions”). Andrews Kurth was special counsel to QHL and the Funds (as well as another related entity) in the Transactions and issued opinions that were conditions to closing in each Transaction.

The particulars of these Transactions are not clear from the papers and the harm to the Funds arising from these transactions is a disputed fact that is the crux of this MSJ. Plaintiffs have presented some evidence that the Transactions sold, pledged or otherwise put the assets of the Funds at risk, in transactions that benefitted QHL, but not the Funds. In early 2007, QHL was experiencing cash flow difficulties and was trying to “shore up” with the Silar Transaction and possibly the Pacificor transaction. Miller Dec. at ¶ 9; 5/17/07 e-mail of Michael Jewesson, which is Plaintiffs' Exhibit 10. The Funds were not experiencing cash flow difficulties, at least through March 2009. Miller Dec. at ¶ 9. The Pacificor Transaction gave Pacificor the right to pursue remedies against QHL and the Funds upon default by any of them. See Draft Repurchase Agreement with accompanying e-mails, which is Plaintiff's Exhibit 7; Notice of Motion and Motion of Pacificor, LLC for Order ConfirmingApplicability of 11 U.S.C. § 555 (filed 11/21/07 in Case No. 07:13003–GM), which is Plaintiff's Exhibit 8, at 1–3. The UCC Financing Statements annexed to the Andrews Kurth opinion respecting the Pacificor Transaction lists QHL collateral of $401,949.35, Golden State collateral of $20,420,214.67 and Fund Ten collateral of $12,164,385.93. Plaintiffs' Exhibit 5. In November of 2007, Pacificor sought permission to exercise its remedies against the Funds. Pacificor § 555 Motion (Plaintiffs' Exhibit 8). The Funds and QHL received over $45 million from the Pacificor Transaction. Id. Under the Funds' Operating Agreements, QHL, not the Funds, received all earnings over the 12% annual distributions made to Fund members. Operating Agreements at ¶¶ 4.4(a) & 5.7; Miller Dec. at ¶ 8. Thus, any increased cash flows from these transactions would accrue to the benefit of QHL, while the Funds subjected their assets to risk.

On 8/21/07 QHL and the Funds filed for chapter 11 relief.

On 8/14/09, the Funds commenced an action against the Defendants in Los Angeles Superior Court (# BC419791), which was removed to this court and became this adversary proceeding. In this proceeding, Plaintiffs allege that the Transactions damaged the Funds and would not have occurred without the opinion of Andrews Kurth. (The individually named defendants are Andrews Kurth attorneys who worked on the Pacificor transaction.) Plaintiffs assert claims against the Defendants for malpractice and breach of fiduciary duty. In essence, their claims allege (i) Andrews Kurth had a conflict of interest representing both QHL and the Funds and (ii) the Andrews Kurth opinion did not accurately reflect the terms of the Operating Agreements.

[REDACTED] The Bonds indemnified the Funds for, among other things, “Loss resulting solely and directly from one or more dishonest or fraudulent acts by an employee....” Complaint dated 4/15/10 commencing the Bond Action ¶ 9 (Defendants' Exhibit F).

The Motion and its Responses

Motion

Defendants have brought this MSJ on grounds of in pari delicto: that the Funds engaged in misconduct directly related to Defendants' alleged wrongdoing. In essence, they argue that the Funds admit to QHL's wrongdoing and QHL's misconduct should be imputed to the Funds (i) under principles of corporation and agency law and (ii) as a matter of judicial estoppel.

Defendants first allege that the Funds have admitted a laundry list of wrongdoing by Gaiser and QHL including falsifying documents, having the Funds make investments in worthless assets and assets that were not authorized under the Funds' Operating Agreements, theft of money from the Funds by QHL and amendment of the Funds' operating documents without the requisite member consent. The three 2007 Transactions were merely a continuation of this same fraudulent and dishonest scheme.

Defendants argue two grounds for imputing QHL's misconduct to the Funds. One, QHL's acts should be imputed to the Funds under principles of corporation and agency law that impute wrongful conduct of a corporate officer to a corporation that is wholly-controlled by that officer. Two, the Funds admitted in their Bond Action against Lloyd's that John Gaiser and other QHL employees were employees of the Funds when they committed their wrongful and fraudulent acts, so that judicial estoppel bars the Funds from denying that such employees acted for the Funds.

Under either of these imputation theories, QHL's misconduct must be directly related to Defendants' alleged wrongdoing at issue in this proceeding, and Defendants argue that it is.

Opposition

Plaintiffs' opposition to the MSJ initially argues their underlying case for breach of fiduciary duty by Defendants, which is not relevant to this MSJ.

The Funds next argue that QHL's misconduct should not be imputed to the Funds. Applicable law will not impute corporate officer wrongdoing to a corporation if the officer was acting against the interests of the corporation, as here. The “sole actor exception,” which would impute liability notwithstanding such an adverse interest, should not be applied because QHL is not sole owner of the Funds and QHL was not the sole party with control over the Funds. The Funds also argue imputation is inappropriate against LLCs (as opposed to corporations) or as a shield to benefit wrongdoers such as the Defendants.

The Funds argue that their “admissions” in the Bond Action that QHL employees were employees of the Funds was in the limited context of their lawsuit against Lloyd's and should not be used to invoke judicial estoppel.

Reply

Defendants argue that any conflict of interest on the part of Andrews Kurth, as well as the fact that the Funds are LLCs and not corporations, are irrelevant to this MSJ.

They reassert that in pari delicto should be applied to...