Neilson v. Chang
| Decision Date | 19 June 2001 |
| Docket Number | Nos. 99-55851,99-55840,DEFENDANTS-APPELLANTS,PLAINTIFF-APPELLEE,PO-AN,CHWEN-YI,s. 99-55851 |
| Citation | 253 F.3d 520 |
| Parties | (9th Cir. 2001) IN RE: FIRST T.D. & INVESTMENT, INC.; JOINT DEVELOPMENT, INC., DEBTORS. R. TODD NEILSON, CHAPTER 7 TRUSTEE,, v. ANGELA SHIU RONG CHANG; ANGELA SHIU RONG CHANG, F/B/O THE ANGELA CHANG FAMILY TRUST; CYNTHIA L. LIEN; GALAXY INDUSTRIAL CORPORATION; ANNA P. JEN KIN; WEN F. KUO; TSU C. KUO; SZE MING MA; CHENG H. MA; IRENE WERNER; HAITANG LI; RU LIN WU; HONG YANG; XIAO PING SUN; STEVEMU; YANG YING CHANG MU; RITATSAI; PEI TI WAN, R. TODD NEILSON, CHAPTER 7 TRUSTEE,, v. ANGELA SHIU RONG CHANG; CYNTHIA L. LIEN; GALAXY INDUSTRIAL CORPORATION; ANNA P. JEN KIN; WEN F. KUO; TSU C. KUO; SZE MING MA; CHENG H. MA; IRENE WERNER; HAITANG LI; RU LIN WU; HONG YANG; XIAO PING SUN; STEVEMU; YANG YING CHANG MU; RITATSAI; PEI TI WAN; MING YENG WANG; PING YUAN LIU; CHING I LIU; CATHERINE CHANG; PETER L. CHANG; JULIE SHIH; SIMON SHIH; JULIJANTI LUCIE MOEIS; LIN CHU TSAI; HSIU CHUAN WANG CHEN; CHANG A LAN HUANG; HSIU YING KUO; HSIEN HUEI LIN; TSAI CHU LIN; CHIEN YUEH O LIEN; ACCURATE ESCROW, INC.; ANGELA SHIU RONG CHANG, F/B/O THE ANGELA CHANG FAMILY TRUST, |
| Court | U.S. Court of Appeals — Ninth Circuit |
[Copyrighted Material Omitted] Gregory M. Salvato, Parker, Milliken, Clark, O'Hara & Samuelian, Los Angeles California, for defendants-appellants Chang et al.
Michael H. Weiss, Weiss Scolney Spees, Llp, Los Angeles, California, for plaintiff-appellee R. Todd Neilson.
Appeal from the United States District Court for the Central District of California Dean D. Pregerson, District Judge, Presiding, D.C. No. CV 98-3004 DDP; Bankr. Adv. No. AD 96-03493 TD; D.C. No. CV 98-8161 DDP; Bankr. Adv. No. AD 96-03493 TD
Before: William C. Canby, Jr., M. Margaret McKeown, and Richard A. Paez, Circuit Judges.
These two consolidated appeals concern a real estate mortgage investment scheme perpetrated by Debtors, First T.D. & Investment, Inc. ("FTD") and Joint Development, Inc. ("JDI").1 The trustee of their consolidated Chapter 7 bankruptcy estates, Appellee R. Todd Neilson ("the Trustee"), filed an adversary action against Defendants, 132 investors in FTD,2 alleging that collateral notes and trust deeds ("security instruments") assigned by FTD to Defendants as security for their investments did not perfect their interests because Defendants did not have possession of the security instruments.
Twenty years ago, in a case with facts very similar to those here, we held that such security interests could not be perfected under California law without actual possession of the security instruments. See Greiner v. Wilke (In re Staff Mortgage & Inv. Corp.), 625 F.2d 281, 283 (9th Cir. 1980) ("Staff Mortgage") (citing Cal. Comm. Code § 9304(1)). More than a decade later, the California Legislature created an exception to this rule by enacting California Business and Professions Code § 10233.2, which, under limited circumstances, permits perfection without possession of the security instruments.
At issue here is whether the exception created by§ 10233.2 applies to the transactions between Defendants and FTD, such that Defendants' security interests are deemed perfected. The bankruptcy court found that § 10233.2 applies and granted summary judgment in favor of those Defendants who filed an answer in the adversary proceeding ("Answering Defendants"). The district court reversed. We have jurisdiction pursuant to 28 U.S.C. § 158(d). We hold that§ 10233.2 applies to Defendants' security interests, and therefore the Trustee's attempt to avoid Defendants' priority status must fail. We also reject the Trustee's argument that we should impose a constructive trust to circumvent § 10233.2. Accordingly, we reverse in Case No. 99-55851 ("Chang Appeal").
In a related appeal, Case No. 99-55840 ("Appeal from Default Judgments"), Defendants who defaulted in the adversary proceeding ("Defaulting Defendants") challenge the bankruptcy court's entry of final default judgments under Federal Rule of Civil Procedure 54(b). Defaulting Defendants argue that the final default judgments were inconsistent with the bankruptcy court's earlier summary judgment ruling that Answering Defendants' security interests were deemed perfected under § 10233.2. Because we hold that§ 10233.2 applies to the investor transactions at issue here, we conclude that the bankruptcy court abused its discretion and reverse the judgment of the district court with instructions to reverse the entry of final default judgments.
Prior to its involuntary bankruptcy, FTD was in the business of investing in real estate mortgages. It initiated and purchased home loans evidenced by collateral notes and secured by trust deeds on real property owned by the borrowers ("borrowers").
FTD financed its investment scheme with approximately $35 million borrowed from hundreds of individual investors, typically Chinese-American immigrants in Southern California ("investors"). FTD secured its loans from investors by assigning to them the collateral notes and trust deeds ("security instruments") from its home loan portfolio. FTD recorded the assignments with the county recorder where the property was located, but FTD maintained possession at all times of the collateral notes and trust deeds.3
Additionally, FTD entered into a "Servicing Agreement" with each investor that authorized FTD, as a "real estate broker" acting as a "servicing agent," to collect all loan payments from borrowers and to take other actions necessary or convenient to servicing of the note. While many investors at the time mistakenly believed they had actually purchased the trust deeds, Defendants accept, for purposes of this appeal, that they were merely assigned the trust deeds in a security transaction.4
FTD, in violation of California law, commingled funds received from investors and borrowers, using funds from any source for any and all purposes to continue its operations. FTD frequently used payments from one investor to pay interest and other payments to another investor -- a classic Ponzi scheme.
The investment scheme ultimately unraveled. Petitions for involuntary bankruptcy against FTD and JDI were filed under Chapter 11 of the U.S. Bankruptcy Code on October 21, 1994, and November 2, 1994, respectively. The cases were subsequently consolidated and converted to Chapter 7 proceedings in April 1995. Appellee R. Todd Neilson was appointed as trustee to manage the consolidated bankruptcy estates.
Seeking to treat all creditors on an equal basis for asset distribution, the Trustee filed an adversary action in bankruptcy court against 132 of the investors who held recorded assignments of specific trust deeds ("Defendants"). The Trustee alleged that Defendants' security interests were unperfected under California law because Defendants never obtained possession of the original collateral notes or trust deeds. Under 11 U.S.C. § 544(a), unperfected security interests are avoidable and can be relegated to the status of general unsecured claims. In this way, the Trustee sought to prevent Defendants from receiving priority in the distribution of FTD and JDI's assets.
On cross-motions for summary judgment with respect to 18 of the Answering Defendants, the bankruptcy court entered summary judgment on January 23, 1998, in their favor and against the Trustee. The bankruptcy court held that the transactions between FTD and Answering Defendants fell within the scope of § 10233.2 and thus, although they lacked actual possession of the security instruments, Answering Defendants' interests were deemed perfected. Chang , 218 B.R. at 94-95.
Because the issue of perfection under § 10233.2 was of such importance to the entire adversary proceeding, the bankruptcy court entered a final judgment pursuant to Federal Rule of Civil Procedure 54(b). The Trustee appealed to the district court. The district court reversed, holding that the transactions at issue were not within the scope of § 10233.2.
On April 30, 1997, prior to entry of summary judgment for Answering Defendants, the Trustee moved for entry of default and default judgment against the 88 Defaulting Defendants who had not answered the complaint in the above adversary proceeding.5 The bankruptcy court granted the Trustee's motion, but the interlocutory order was not appealable.
In May 1998, four months after the bankruptcy court entered summary judgment for Answering Defendants, the Trustee moved to certify the default judgments as final under Federal Rule of Civil Procedure 54(b). Defaulting Defendants objected to entry of final judgments because the judgments were inconsistent with the bankruptcy court's earlier summary judgment ruling, holding that the security interests of Answering Defendants were perfected under § 10233.2. Chang, 218 B.R. at 95. In granting the Trustee's motion to certify, the bankruptcy court stated in the final default judgments that: "The Defaulting Defendants failed to perfect their security interest in the Collateral Notes and Deeds of Trust by failing to obtain possession of same."6 Notwithstanding Defaulting Defendants' objections to the inconsistent rulings, the bankruptcy court entered the final judgments on June 1, 1998.
Defaulting Defendants appealed the entry of the final default judgments to the district court, which affirmed, citing its contemporaneous ruling reversing the bankruptcy court on the applicability of § 10233.2 to Answering Defendants.
Defendants contend that § 10233.2 applies to their loan transactions with FTD and under the provisions of that statute, their security interests are deemed perfected. They seek reversal of ...
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