In re Lemons & Associates, Inc., Bankruptcy No. BK-S-85-273

CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Nevada
Writing for the CourtROBERT CLIVE JONES
Citation67 BR 198
Decision Date19 September 1986
Docket Number85-068,Adv. No. 85-067,Bankruptcy No. BK-S-85-273,85-076 and 85-079.
PartiesIn re LEMONS & ASSOCIATES, INC., Nevada corporation, Debtor. Brian W. HATOFF, et al., Plaintiff, Plaintiff/Intervenor, v. LEMONS AND ASSOCIATES, INC., a Nevada corporation, et al., Defendant, Defendant/Intervenor. Leroy R. BERGSTROM, Trustee et al., Plaintiff, Plaintiff/Intervenor, v. E.J. and E.C. BOONE, et al., Defendants, Defendant/Intervenor. Leroy R. BERGSTROM, Trustee et al., Plaintiff, Plaintiff/Intervenor, v. Theodore W. and Hazel M. GAUERT, et al. Leroy R. BERGSTROM, Trustee, et al., Plaintiff, Plaintiff-Intervenor, v. Theodore W. and Hazel M. GAUERT, et al., Defendants, Defendants-Intervenor. Austen L. HAYDIS, et al., Plaintiff, Plaintiff-Intervenor, v. LEMONS AND ASSOCIATES, INC., a Nevada corporation, et al., Defendants, Defendants-Intervenor.


Linda Riegle, Lionel, Sawyer & Collins, Las Vegas, Nev., Bert Goldwater, Lionel, Lawyer & Collins, Reno, Nev., for debtor.

Luther Kent Orton, Christina R. Pfirrman, Brobeck, Phleger & Harrison, San Francisco, Ca., Jeffrey L. Hartman, Reno, Nev., Mike K. Nakagawa, Mark Gorton, Cooper & Shaffer, Sacramento, Ca., for trustee/plaintiff Leroy R. Bergstrom.

J. Stephen Peek, Victoria S. Mendoza, Hale, Lane, Peek, Dennison & Howard, Reno, Nev., for plaintiffs/intervenors Haydis and Hatoff.

John J. Dawson, Craig D. Hansen, Streich, Lang, Weeks & Cardon, P.C., Phoenix, Az., for intervenor Beneficiary Committee.

Cheryl A. Skigin, Reno, Nev., for defendants-intervenors E.J. and E.C. Boone.

Bruce T. Beesley, Robinson, Lyle, Belaustegui & Robb, Reno, Nev., for defendant/intervenor Sherrick.

John C. Renshaw, Sallie B. Armstrong, Vargas & Bartlett, Reno, Nev., for intervenor Unsecured Creditors.



Lemons and Associates, Inc. and related entities ("Lemons") filed under Chapter 11 of the Bankruptcy Code in April 1985. Immediately at issue was the status of several thousand "investors" who may have ownership rights in promissory notes secured by deeds of trust on real property. The above-captioned adversary proceedings were chosen as "test cases" and consolidated for trial of their common legal issues. In each case the parties sought, among other things, declaratory and affirmative relief concerning the investors' rights to the notes under 11 U.S.C. § 541(d). The investors claimed an alternative right to secured creditor status under 11 U.S.C. § 365(i) and (j).

Accordingly, having conducted a trial of these proceedings and having considered the entire record established in conjunction therewith, the Court hereby makes its Findings of Fact and Conclusions of Law. Bankruptcy Rule 7052. Any Finding of Fact which may be more appropriately categorized as a Conclusion of Law shall be deemed as such. Any Conclusion of Law which may be more appropriately categorized as a Finding of Fact shall be deemed as such.


With respect to each adversary proceeding and the separate investors party thereto, the Court hereby adopts the detailed Findings of Fact filed by the Trustee and Committee of Unsecured Creditors on January 17, 1986 with the addition of the following:

Lemon & Associates, Inc. was incorporated under the laws of the State of Nevada on February 20, 1979. Its first office, and later its headquarters, was located in Reno, Nevada and it eventually opened branch offices in Las Vegas, Nevada and Scottsdale, Phoenix and Tucson, Arizona.1 Lemons held licenses as a mortgage company and/or mortgage broker in both Nevada and Arizona. On April 10, 1985, the same day Lemons filed its petition in this Court, the Financial Institutions Division of the Nevada Office of the Department of Commerce revoked Lemons' license to operate as a mortgage company. At that time, approximately 3,500 Lemons investors claimed over 6,000 separate trust deed investments.

1. The Presentation to Investors

Lemons represented and advertised itself as a mortgage broker engaged in brokering real estate loans and in buying and selling promissory notes secured by deeds of trust encumbering Nevada and Arizona property. Lemons placed advertisements with various newspapers and radio stations and widely distributed a general advertising brochure which was customarily given to individual as well as institutional investors. In this brochure, Lemons represented that it was a fully bonded mortgage company, licensed by the states of Nevada and Arizona, all of whose associates had strong backgrounds in mortgage banking, commercial banking, consumer lending and real estate development. It also represented: (1) that the company acted as a broker in the sale to investors of notes secured by deeds of trust; (2) that the trust deed investments earned at least 3½ percent above the prime lending rate; and (3) that these trust deeds were negotiable and readily saleable.

Lemons solicited investors of widely varying levels of financial sophistication and resources. While some of the more than 3,000 investors still involved in Lemons reside in virtually every state of the Union, the majority live in close proximity to the various Lemons branch offices in Nevada and Arizona.

Depending upon their investment goal, level of sophistication, and the inquiries they made, investors were given differing amounts of detailed information about their particular investment. However, certain representations were made almost invariably to all investors. Investors were told, and they intended and believed, that they were purchasing interests in promissory notes and that their investments would be secured by an assignment to them of a pro rata share in the deed of trust which had been executed in connection with a particular promissory note. Investors were also told that they would be paid a guaranteed rate of interest, calculated from the date they transferred funds to Lemons, and generally that their investment would be for a period of one year. At the end of one year, investors could either "withdraw" their funds or "roll over" their investment, either for another year in the same note and deed of trust or into another note and deed of trust. These representations were made to investors regardless of the terms, maturity date or performance history of their particular note, if a note had been specifically identified at that time. Many investors also received the additional representations that they could "withdraw" their monies in less than a year under certain circumstances and that, in the case of a borrower default on their note, Lemons would "transfer" their investment to another note thereby making their investment riskless. In addition, on many occasions, investors were promised an interest rate in excess of the interest rate of the note with which they were associated. Lemons represented that it could offer this higher rate because it had received loan points from the borrower which it would share with the investor in the form of a one or two percent higher interest rate.

At the time of their investment, some investors selected the particular note and deed of trust with which they wanted to be associated. Some made this selection solely on the basis of "loan inventory sheets" prepared by Lemons from its loan files, while others examined all the loan documents in the Lemons file. Some particularly careful investors undertook their own inquiries, even going so far as to examine the underlying real property and obtaining independent appraisals. However, many others relied solely on the recommendation of the Lemons "investment counselors", and some made no selection at all, leaving the decision entirely to the discretion of Lemons. Many of this latter group understood only that their investment was secured by real estate and had no further understanding of the mechanics of a trust deed investment.

In connection with its dealings with investors, Lemons utilized several form documents. Lemons kept track of each investment by means of an internal document known as an "Investor Checklist", which was completed or amended by an investment counselor each time any action was taken with respect to an investor's investment. On the date an investor transferred funds to Lemons, he generally received a receipt which usually specified the amount of the investment, the promised interest rate and the term (usually one year). On those occasions where an investor had selected a particular note and deed of trust, this also might be noted on the receipt. At the same time, or by mail soon thereafter, the investor often received a certificate, denominated a "Record of Investment", which contained basically the same information as the receipt. Investors were also required to execute a "Limited Collection Agent Authority", which purportedly gave Lemons the right to act as attorney-in-fact for the investor in all matters relating to collection and foreclosure of the investor's note, and a "Note and Trust Deed Repurchase Option Agreement", which purportedly gave Lemons the option to repurchase an investor's interest in a note and deed of trust. These two documents were typically effective for one year from the date of investment and, if the investor chose to "roll over" at the end of a year, he was requested to re-execute these agreements.

In Nevada, investors were also required to execute a document entitled "Lender's Waiver and Receipt of Documents". This document is permitted under Nevada Administrative Code (N.A.C.) Section 8.1, which provides that all persons dealing with licensed mortgage dealers in Nevada must be provided with certain documentation unless they waive receipt of such documents in writing.

At some point after their investment, most investors were associated with a note and deed of trust. For Nevada investors, this association was evidenced by a document entitled "Assignment of Deed of...

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