3685 San Fernando Lenders, LLC v. Compass USA SPE LLC (In re U.S. Commercial Mortg. Co.), Case Nos. 2:07–CV–892–RCJ–GWF

CourtUnited States District Courts. 9th Circuit. United States District Courts. 9th Circuit. District of Nevada
Writing for the CourtROBERT C. JONES
Citation802 F.Supp.2d 1147
PartiesIn re USA COMMERCIAL MORTGAGE COMPANY, Debtor.3685 San Fernando Lenders, LLC, et al., Plaintiffs, v. Compass USA SPE LLC, et al., Defendants.
Docket Number3:07–CV–241–RCJ–GWF.,Case Nos. 2:07–CV–892–RCJ–GWF
Decision Date14 July 2011

802 F.Supp.2d 1147

In re USA COMMERCIAL MORTGAGE COMPANY, Debtor.3685 San Fernando Lenders, LLC, et al., Plaintiffs,
Compass USA SPE LLC, et al., Defendants.

Case Nos. 2:07–CV–892–RCJ–GWF


United States District Court, D. Nevada.

July 14, 2011.

[802 F.Supp.2d 1153]

Janet L. Chubb, Esq., Louis M. Bubala III, Esq., Armstrong Teasdale, Reno, NV, William A. Brewer III, Esq., Michael J. Collins, Esq., Robert M. Millimet, Esq., Bickel & Brewer, Dallas, TX, for Plaintiffs.

ROBERT C. JONES, District Judge.

The Court issues its Final Judgment And Order Awarding Declaratory Relief, Damages, Attorneys' Fees, And Prejudgment Interest, And Denying Defendants' Post–Trial Motions For Judgment As A Matter Of Law And A New Trial, as follows:


USA Commercial Mortgage Company (“USA Commercial”) was a licensed Nevada mortgage broker and loan servicer that filed for bankruptcy protection in April 2006. At an auction held in the USA

[802 F.Supp.2d 1154]

Commercial bankruptcy proceedings, Compass Partners, LLC and Compass USA SPE, LLC (collectively, “Compass”) purchased USA Commercial's interest in thousands of Loan Servicing Agreements (“LSAs”). Those LSAs were contracts between USA Commercial and fractional beneficial interest holders (the “Direct Lenders”) in various commercial mortgage investment loans secured by deeds of trust (the “Loans”) that were originated and originally serviced by USA Commercial on behalf of the Direct Lenders.

Silar Advisors, LP and Silar Special Opportunities Fund, LP (collectively, “Silar”) financed Compass's acquisition of the LSAs, as well as certain fractional beneficial interests in the Loans (the “Purchased Assets”). Silar financed Compass's acquisition of the Purchased Assets pursuant to a certain Master Repurchase Agreement (“MRA”) and other related instruments. Silar subsequently assigned its interests in, and obligations under, the Purchased Assets to Asset Resolution LLC (“Asset Resolution”), an entity created and owned by Silar for this purpose. Asset Resolution thereafter foreclosed on Compass's interests in the Purchased Assets and purported to assume all the rights and obligations attendant to owning the Purchased Assets.

Certain Direct Lenders formed limited liability companies (“LLCs”) and commenced this action against Compass, Silar, and two principals of Compass, seeking declaratory relief in connection with the interpretation of the LSAs and the Loans, as well as damages. After Silar formed and assigned its interests in the Purchased Assets to Asset Resolution, the Court acknowledged but did not approve that assignment, and allowed Asset Resolution to appear and assert counterclaims for declaratory relief and damages against approximately 65 individual Direct Lenders (20 of whom were already named as individual plaintiffs). The Court later allowed another 32 of those individual Direct Lenders to be added as named plaintiffs in this case, permitted all those 52 plaintiffs to add Asset Resolution as a defendant, determined that the LLCs lacked standing to pursue their claims, and denied the request of all the former individual members of the LLCs to be substituted for the LLCs as named plaintiffs.

On October 14, 2009, Asset Resolution filed for bankruptcy protection under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. On November 24, 2009, that court transferred the bankruptcy case to this District. This Court subsequently withdrew the reference to the bankruptcy case and converted it to chapter 7, putting Asset Resolution's estate under the exclusive control of an appointed trustee.

On December 14, 2010, a nine-person jury found Silar and/or Asset Resolution liable for breach of contract, breaches of the implied covenant of good faith and fair dealing in contract and in tort, breaches of fiduciary duties, conversion, and civil conspiracy in connection with their servicing of certain Loans pursuant to the LSAs. As a result of the foregoing and the Court's pretrial determination that Compass, Boris Piskun (“Piskun”), and David Blatt (“Blatt”) (collectively, the “Compass Defendants”) were in default and, thus, liable as a matter of law, the jury awarded plaintiffs a total of approximately $79,000 in compensatory damages, excluding attorneys' fees and prejudgment interest, and a total of $5.1 million in punitive damages.

On June 9, 2011, the Court heard oral argument on plaintiffs' motions for attorneys' fees and prejudgment interest, and defendants' post-trial motions for judgment as a matter of law and a new trial.

[802 F.Supp.2d 1155]


The Court now incorporates by reference its prior summary judgment decisions (Doc. 1489, 1819, 1820, 1855) and makes the following declarations in connection with the LSAs and the Loans:

A. The Compensation Owed To Defendants As The Loan Servicers

Section 5 of the predominant LSAs describes the compensation owed to the loan servicers in the following way:

Lender authorizes USA [Commercial] to retain monthly, as compensation for services performed hereunder, (a) one-twelfth (1/12th) of its annual servicing fee, which shall not exceed one percent (1%) per annum of the maximum principal amount of each of the Loans, (b) any late charges collected from the Borrower pursuant to the terms of the Note, and (c) any default interest collected from the Borrower pursuant to the terms of the Note.

(Doc. # 2056, Ex. A, § 5) Therefore, under the LSAs,1 the loan servicers are entitled to be paid default interest and late charges as loan servicing compensation only if the Direct Lenders are first repaid the principal amount of the Loans and all due and owing accrued regular interest in full. That is because the loan servicers have not “collected from the Borrower,” and thus cannot “retain,” sufficient sums to pay themselves any loan servicing compensation to which they would otherwise be entitled under the LSAs. Further, because the LSAs dictate the compensation to which the loan servicers would otherwise be entitled, where the Direct Lenders have not been repaid the principal amount of the Loans and all due and owing accrued regular interest in full, allocation-of-payment provisions in the promissory notes for the Loans are irrelevant, especially where 51% of the Direct Lenders in the Loans (calculated by the total beneficial interest in the Loans) have specified a different allocation.

Moreover, because the LSAs permit the loan servicers to “retain monthly” a servicing fee, as well as default interest and/or late charges “collected from the Borrower,” the loan servicers are not entitled under the LSAs to collect servicing fees, default interest, or late charges directly from the Direct Lenders, but only from funds collected from the Borrower.

Finally, for defaulted Loans, the loan servicers are entitled to be paid only one accrued annual servicing fee under the LSAs, based on the amount ultimately collected on any given Loan, not based on the principal amount of the Loan. That is because the LSAs provide that the loan servicers are entitled to “retain monthly” only an “annual servicing fee,” and almost all the Loans were for an original term of only one year.

B. Defendants Were Obligated To Comply With Nevada Law Applicable To Mortgage Brokers, Including The Power Of Attorney Requirement.

Prior to investing with USA Commercial, each Direct Lender executed one LSA with USA Commercial that governed their relationship, irrespective of the number of Loans in which the Direct Lender ultimately invested. The LSAs were expressly governed by Nevada law and binding on Defendants as successors in interest to USA Commercial, and state unambiguously that “USA [Commercial] is a mortgage

[802 F.Supp.2d 1156]

broker and loan servicer in Clark County, Nevada.” (Emphasis added.)

Under Chapter 645B of the Nevada Revised Statutes, a “mortgage broker” is required to obtain a separate valid power of attorney from an investor for each loan for which it purports to act for that investor. See Nev.Rev.Stat. § 645B.330(1). A power of attorney that fails to comply with the statute is void and unenforceable. See id. Because the LSAs are investor-specific, not loan-specific, the LSAs failed to grant either USA Commercial or defendants a valid power of attorney, as required by Nevada law applicable to “mortgage brokers.”

Moreover, even if USA Commercial and defendants were not acting as a “mortgage broker” with respect to the Direct Lenders in the colloquial sense of the phrase, but only as a “loan servicer,” their activities in that capacity were equally covered by the legal definition of “mortgage broker” under the statute. Under Chapter 645B, a “mortgage broker” includes not only those who serve as agents to assist others in obtaining loans, which is the most common colloquial usage of the phrase, but also, inter alia, those who “[h]old [ ] [themselves] out for hire to serve as an agent for any person who has money to lend, if the loan is or will be secured by a lien on real property.” Nev.Rev.Stat. § 645B.0127(1)(b). The LSAs indicate that this is precisely the capacity in which USA Commercial was hired by the Direct Lenders:

B. Lender lends, or wishes to lend, money to various borrowers ... from time to time, which loans are arranged by USA [Commercial] and are secured by interests in real and/or personal property.

C. Lender wishes to retain the services of USA [Commercial] in connection with making and servicing a loan or Loans....


1. Services in Connection with Arranging the Loans. USA [Commercial] will perform the following services in connection with arranging each loan:

(a) Obtain a promissory note or notes secured by the trust deed....

Accordingly, the loan...

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