Brady v. Brown

• Decision Date: 21 March 1995
• Docket Number: Nos. 93-55669,93-55683,s. 93-55669
• Citation: 51 F.3d 810
• Parties: RICO Bus.Disp.Guide 8775 William T. BRADY; James Cardwell; Dar-Kel Corporation, Plaintiffs-Appellees, v. Chester P. BROWN, Defendant, and Lorna Brown de Mena; Eric Brown Castelazo; Nelly Lozano de Brown, Defendants-Appellants, and Maria de Los Angeles Castelazo de Brown, Defendant-Counter-Claimant-Appellant, v. HOTEL LAS ARENAS, S.A. de C.V., Counter-Defendant-Appellee. William T. BRADY; James Cardwell; Dar-Kel Corporation, Plaintiffs-Appellees, v. Chester P. BROWN, Defendant-Cross-Claimant-Appellant, v. HOTEL LAS ARENAS, S.A. de C.V., Cross-Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 810

51 F.3d 810

RICO Bus.Disp.Guide 8775

William T. BRADY; James Cardwell; Dar-Kel Corporation, Plaintiffs-Appellees, v. Chester P. BROWN, Defendant, and Lorna Brown de Mena; Eric Brown Castelazo; Nelly Lozano de

Brown, Defendants-Appellants, and Maria de Los Angeles Castelazo de Brown, Defendant-Counter-Claimant-Appellant, v. HOTEL LAS ARENAS, S.A. de C.V., Counter-Defendant-Appellee.

William T. BRADY; James Cardwell; Dar-Kel Corporation, Plaintiffs-Appellees, v. Chester P. BROWN, Defendant-Cross-Claimant-Appellant, v. HOTEL LAS ARENAS, S.A. de C.V., Cross-Defendant-Appellee.

Nos. 93-55669, 93-55683.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 6, 1994.

Decided March 21, 1995.

Chester P. Brown, Alpine, CA and Darrell L. Johnson, Los Angeles, CA, for defendants-appellants.

Todd M. Sloan, Hennelly & Sloan, Pacific Palisades, CA and Neil D. Martin, Hill, Farrer & Burrill, Los Angeles, CA, for plaintiffs-appellees.

Appeal from the United States District Court for the Central District of California.

Before: FLETCHER, BOOCHEVER, and FERNANDEZ, Circuit Judges.

BOOCHEVER, Circuit Judge:

California businessmen Brady and Cardwell invested in Mexican coastal land and the construction of a hotel with the help of Brown, an American citizen and Mexican resident licensed to practice law in Mexico. Because Mexican law does not allow direct foreign ownership of coastal property, Brown arranged for Mexican citizens to buy the property with funds contributed by Brady and Cardwell. Through a complex series of agreements and transactions directed by Brown, Brown and his family eventually acquired controlling interests in the land, the hotel, and the hotel corporation. When Brown's family took control over the hotel, Brady and Cardwell sued Brown and his family in federal district court in California. Brown's family counterclaimed.

After a bench trial of Brady and Cardwell's claims, the district court found Brown liable for fraud and ordered him to execute a power of attorney to an agent to transfer the property into a trust approved by the Mexican government, for the benefit of Brady and Cardwell. The other defendants were also ordered to transfer their interests into the trust, to avoid unjust enrichment. The court granted summary judgment for Brady and Cardwell on the counterclaim. Brown and his family appeal. We affirm. In this opinion we address only the jurisdictional and comity issues involved in this case. We have decided the remaining issues in a memorandum

disposition filed simultaneously with this opinion.

FACTS AND PROCEDURE

In 1969, California businessmen William T. Brady ("Brady") and James Cardwell ("Cardwell") decided to acquire coastal land in Mexico. Through Guido Natali ("Natali"), a Mexican attorney, Brady and Cardwell learned that a parcel of more than 3300 hectares ¹ with seventeen kilometers of beachfront on the Gulf of California (the "Boca property") was available. Brady and Cardwell retained Fred A. Orleans ("Orleans"), a lawyer licensed to practice in Texas and in Mexico, to help them obtain an interest in the Boca property. Orleans hired Chester Brown ("Brown"), the appellant in this action, to perform services in Mexico in connection with the purchase and development of the land. Brown is a United States citizen, a resident of Mexico, and a United States-trained lawyer licensed to practice in Mexico.

In early September 1969, Brown advised Orleans that foreigners could not hold an ownership interest in the Boca property. The Boca property was in Mexico's "Forbidden Zone," an area within fifty kilometers of the shore in which the Mexican Constitution prohibited foreigners from acquiring ownership interests. Based on advice from Brown, Orleans wrote Brady and Cardwell proposing the formation of a corporation wholly owned by Mexican citizens to acquire the land:

It should be kept in mind that legally you can never own shares in the land owning corporation and while there are instances where Mexican citizens have permitted foreigners to use their names to acquire land in the forbidden zone, thus violating the Mexican Constitution, this should not be done. Instead you can obtain better results by associating with bona fide Mexican investors to develop the land and taking their just share in the profits.

Orleans wrote Brown, identifying Brady, Cardwell, and the Mexican participants in the proposed transaction. Brown drew up three agreements, each called "Contract of Association in Participation," sending a draft to Brady on October 24, 1969. In an accompanying letter, Brown advised Brady:

[I]t would be a serious mistake to attempt to purchase land in the forbidden zone in open defiance of the Mexican Constitution. To use Mexicans who are willing to lend you the use of their names as a subterfuge would merely lay you open to the eventual confiscation of the land if the authorities became aware of the subterfuge....

. . . . .

I believe you can accomplish what you want without violating any law whatsoever by resorting to the use of legitimate contractual relations. Your purpose in any case is to promote the use and sale of the land, and possibly its prior development. It is quite common for promoting and developing groups to associate with property owners to develop land and after recovering their costs, to share the profits with the owners.

Brady, Cardwell, and the four Mexican citizens selected by Orleans (three lawyers associated with Orleans, and Natali's wife) signed the agreements on November 3, 1969 (the "November 1969 agreements"). The November 1969 agreements provided that the Mexican citizens would purchase the Boca property with money ² contributed by Brady and Cardwell, and would eventually sell or lease the land to Mexican corporations that would be formed to hold and develop the property. The agreements also gave Brown irrevocable powers of attorney from the Mexican citizens over future transactions. The four Mexican citizens purchased the entire Boca property shortly thereafter. Later in November, Brown ended his relationship with Orleans and became Brady and Cardwell's lawyer.

In 1972, the Mexican government published new controls forbidding the use of "straw men," Mexican citizens who would hold title to Forbidden Zone property for foreigners. The regulations, which became law in 1973, authorized the Ministry of Foreign Affairs to grant permits to Mexican credit institutions to buy in trust coastal land intended for tourist activities, to be held for the benefit of foreign nationals such as Brady and Cardwell (an arrangement called a "fideicomiso"). The new law also required the Ministry's authorization before a foreigner could acquire or lease more than 25% of the capital, or 49% of the assets of a business enterprise.

Brown sent a copy of the regulations to Brady and Cardwell, but did not advise them to create a trust. Although the law as eventually enacted provided that those required to register their investments had 180 days in which to do so, ³ Brown told Brady and Cardwell they could not benefit from such an arrangement. Instead, he counseled Brady and Cardwell that the new regulations prevented them from owning more than 49% of any Mexican business or enterprise, and advised them to sign a new Contract of Association in Participation.

Subsequently, through a complex series of transactions, Brown used his power of attorney to orchestrate the transfer of the property to his family and to business entities controlled by his family, all of whom were Mexican citizens. First, on December 15, 1972, Brady and Cardwell signed the new participation contract, which transferred partial ownership of the Boca property to Brown's son, Eric Brown, and Brown's wife, Maria Brown.

In early 1973, Maria Brown entered into an agreement with Robert Gooden ("Gooden"), a U.S. citizen, for hotel development on 32 hectares of her Boca property. Gooden formed a California limited partnership, Bahia Ventana Company ("Bahia"), which then formed with Maria Brown a Mexican limited partnership, Cueva del Leon, in which Maria Brown was the general partner with a 51% interest, and Bahia was the limited partner with a 49% interest. Maria Brown invested no money, and made no decisions regarding the partnership.

In 1975, Brown exercised his power of attorney to transfer to his daughter, Lorna Brown, the remaining interest in the Boca property. The district court found that the Brown defendants paid a total of only $19,200 for the entire Boca property, while Brady and Cardwell eventually invested over $1 million in the purchase and development of the Boca land.

Gooden withdrew from the hotel development project in 1977, and Brady and Cardwell acquired his interest in the project and in Bahia. Later in the year, Dar-Kel Corporation ("Dar-Kel"), a California corporation formed by Brady and Cardwell, signed a contract styled as a non-recourse loan to Maria Brown, transferring funds to Mexico to build the Hotel Las Arenas ("Hotel"). Construction continued from 1977 to 1980.

In 1980, Cueva del Leon became a Mexican corporation, Hotel Las Arenas, S.A. de C.V. (the "Hotel corporation"), with Maria Brown as its majority shareholder. That same year, Maria Brown, as administrator of the Hotel corporation, signed a "Commission Agency Contract" with Dar-Kel, to provide a method for Dar-Kel to receive funds from the Hotel's operation. She also executed a contract related to the loans from Dar-Kel and leased the Hotel to the Hotel corporation. All this was done under Brown's direction, with the ostensible purpose of giving Brady and Cardwell the benefits of ownership without any conflict with Mexican law.

The Hotel opened in 1980. After several years of operation, Brady and Cardwell argued with Brown and Maria Brown regarding ownership and management issues. In 1985, Maria Brown called a shareholders meeting of the Hotel corporation, and claimed control of and title to the...