Bond v. Nat'l Fin. Servs. (In re U.S. Mortg. Corp.)

• Decision Date: 23 April 2013
• Docket Number: Bankruptcy No. 09–14301(RG).,Adversary No. 11–1216(RG).
• Court: U.S. Bankruptcy Court — District of New Jersey
• Parties: In re U.S. MORTGAGE CORP. & CU National Mortgage, Inc., Debtors. Edward P. Bond, Liquidating Trustee, Plaintiff, v. National Financial Services and JP Turner & Co., LLC, Defendant(s).

491 B.R. 642

In re U.S. MORTGAGE CORP. & CU National Mortgage, Inc., Debtors.Edward P. Bond, Liquidating Trustee, Plaintiff,

v.National Financial Services and JP Turner & Co., LLC, Defendant(s).

Bankruptcy No. 09–14301(RG).

Adversary No. 11–1216(RG).

United States Bankruptcy Court, D. New Jersey.

April 23, 2013.

Forman Holt Eliades Ravin & Youngman LLC, By: Erin J. Kennedy, Esq., Brigette G. McGrath, Esq., Paramus, NJ, for Edward P. Bond, Liquidating Trustee.

Riker, Danzig, Scherer, Hyland & Perretti, LLP, By: Mark E. Hall, Esq., John R. Vales, Esq., Tara J. Schellhorn, Esq., Morristown, NJ, for Defendant J.P. Turner & Co. LLC.

OPINION

ROSEMARY GAMBARDELLA, Bankruptcy Judge.

Matter Before the Court

The matters before the Court are (1) Defendant J.P. Turner & Co. LLC's (“J.P. Turner's”) Motion to Dismiss All Non–Section 548(a)(1)(A) Claims of the Second Amended Complaint to Avoid and Recover Transfers and All Time–Barred Section 548(a)(1)(A) Claims Contained Therein; (2) J.P. Turner's Motion for Summary Judgment and (3) a Cross–Motion for an Order Authorizing the Liquidating Trustee (the “Trustee”) for U.S. Mortgage Corp. (“U.S. Mortgage”) and CU National Mortgage, LLC (“CU National”) to File a Second Amended Complaint, pursuant to Rule 15 of the Federal Rules of Civil Procedure, as made applicable by Rule 7015 of the Federal Rules of Bankruptcy Procedure. A hearing was conducted on May 21, 2012. The following constitutes this Court's findings of fact and conclusions of law.

Background and Procedural History

U.S. Mortgage was a licensed mortgage banker that originated and brokered residential mortgage loans to the public. Its president, Michael J. McGrath, Jr., (“McGrath”), was also the controlling shareholder during its existence. CU National was a wholly-owned subsidiary of U.S. Mortgage that was also operated by McGrath in his role as president and controlling shareholder. See Proposed Second Amend. Compl. ¶¶ 11–15. The Trustee alleges here that at all relevant times, U.S. Mortgage and CU National were alter egos of McGrath, and that prior to the CU National Petition Date, through McGrath and/or McGrath and his wife Susan McGrath, the Debtors held brokerage accounts with Defendants.

In or about 1996, U.S. Mortgage was licensed to be a designated seller and servicer of loans for Fannie Mae, and in or about 1998, it entered the business of processing, servicing, and sometimes selling to Fannie Mae mortgage loans originated and/or funded by credit unions. Those loans were either sold to Fannie Mae by authorization of the credit unions or were serviced by CU National, which collected the monthly payments of principal, interest, and any escrows for taxes and insurance from the borrowers and transmitting those payments to the credit unions. Amend. Compl. ¶¶ 16–19.

If U.S. Mortgage received express written authorization to sell the loans to Fannie Mae, U.S. Mortgage serviced the loans (the “Fannie Mae Loans”) by collecting the monthly payments of principal, interest, and any escrows for taxes and insurance from the borrowers and transmitting those payments to Fannie Mae. Those payments were earmarked and maintained in segregated bank accounts. Amend. Compl. ¶¶ 19–20. Proceeds from the Fannie Mae Loans were deposited into U.S. Mortgage's operating account at Wachovia Bank, and U.S. Mortgage was required to pay the credit unions upon receipt of those loan proceeds. Id. ¶¶ 22, 24. The Debtors used the operating account to pay their payroll and operating expenses. Id.

The Trustee asserts here that after several years of operation, McGrath caused the Debtors to engage in fraudulent practices on a massive scale. These frauds included: (1) the use of loan proceeds from the sale of the Fannie Mae Loans in order to resolve cash flow problems, Amend. Compl. ¶¶ 25–26, and delaying the remittance of the Fannie Mae loan proceeds to the credit unions, delays that initially lasted only short periods of time and eventually by 2008 stretched to two years or more, id. ¶¶ 28–30; (2) the fraudulent sale by U.S. Mortgage of some of the loans serviced by CU National, which involved McGrath's misrepresentation that he was an officer of the credit unions and the execution of false assignments of the credit union loans to the Debtor, U.S. Mortgage, id. ¶¶ 33–34; (3) the alleged fraudulent sale of over $20,000,000 of loans to Fannie Mae that were not serviced by the Debtor and the resulting modifications of the loan servicing system to conceal that sale such that Fannie Mae would receive loan servicing information and the monthly payments, id. ¶¶ 38–39; and (4) various investments made using the Debtors' funds in an effort to raise the finds required to cover the Debtors' operational expenses and to conceal the fraudulent activities (the “Investment Scheme”). Id. ¶ 40.

Most relevant to the instant adversary proceedings, during the period of the fraudulent activities, McGrath further “engaged in various investments” using the Debtors' funds to try to raise the funds required to cover the Debtors' operational expenses and to conceal the fraudulent activities. In the Amended Complaint, the Trustee alleges that “Upon information and belief, because of the frequency of their trading activities,” the Debtors (through McGrath) were top revenue generators for the brokerage firms with which they did business and had direct access to the owners and/or high level executives of the brokerage firms. The Trustee further alleges that due to the high frequency of trades, the brokerage firms excused the Debtors and McGrath from following “certain guidelines and regulations the brokerage firms required of their investors.” Am. Compl. ¶¶ 41–44.

On June 11, 2009, the U.S. Attorney for the District of New Jersey filed a criminal information against McGrath, alleging that all of the fraudulent activities mentioned above were part of a criminal conspiracy that caused more than $100 million in losses. Id. ¶ 44–45 (incorporating the Criminal Information by reference). In the Criminal Information, the U.S. Attorney alleged that “the object of the conspiracy, which caused more than $100 million in losses, was to fraudulently sell Credit UnionLoans and to use the proceeds to finance [U.S. Mortgage's] operations and fund McGrath's personal investments and investments made on [U.S. Mortgage's] behalf.” Am. Compl. ¶ 45 (both quoting Criminal Information ¶ 8). Further, the U.S. Attorney alleged, in order to conceal the fraudulent sales of Credit Union Loans to Fannie Mae, U.S. Mortgage employees would transfer the proceeds of the sales from U.S. Mortgage's bank account into bank and brokerage accounts “controlled by defendant McGrath individually, with his wife jointly, through his corporate alter egos or for [U.S. Mortgage].” Criminal Information ¶ 15. In order to conceal over $100 million in transfers “back and forth between [U.S. Mortgage's] bank accounts and bank and brokerage accounts controlled by or benefitting defendant McGrath,” the U.S. Attorney alleged that McGrath directed U.S. Mortgage employees to create false accounting records and bank statements. Criminal Information ¶ 16. The same day the criminal information was filed, McGrath pled guilty to the charges set forth in it and allocated to the stated allegations among others. Id. ¶ 47.

In the Proposed Second Amended Complaint the Trustee alleges that as part of the Investment Scheme, McGrath invested the Debtors' funds with Defendants, that Defendants provided services to the Debtors and/or McGrath, assisting them with the purchase and sale of security instruments. That on information and belief “Elizabeth Blume” was National Financial's account representative that assisted and advised the Debtors and/or McGrath and that McGrath and Blume knew each other well enough that when Blume would change brokerage firms, McGrath would follow her. Id. ¶ 48–51.

On February 23, 2009, U.S. Mortgage filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of New Jersey. On April 1, 2009, CU National filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. By Order of this Court dated April 13, 2009, the chapter 11 cases of the Debtors were administratively consolidated. On March 13, 2009, the U.S. Trustee approved an Unsecured Creditors Committee. The Debtors' Third Amended Joint Plan of Liquidation was confirmed by this Court on October 26, 2009. Order Confirming Debtors' 3d Am. Joint Plan of Liquid., In re U.S. Mortg. Corp., No. 09–14301 (Bankr.D.N.J. Oct. 26, 2009), ECF No. 563. The cases were substantively consolidated for post-confirmation purposes by order of this Court, effective October 26, 2009. Order Authorizing Substantive Consol. of Debtors' Bankr.Estates for Post–Confirm. Purposes Nunc Pro Tunc to Oct. 26, 2009, In re U.S. Mortg. Corp., No. 09–14301 (Bankr.D.N.J. Dec. 22, 2009), ECF No. 591. Pursuant to the provisions of the Confirmation Order, id. ¶ 16, Anthony R. Calascibetta was appointed Liquidating Trustee by the Official Committee of Unsecured Creditors. Notice of Appt. of Liquidating Tr., In re U.S. Mortg. Corp., No. 09–14301 (Bankr.D.N.J. Nov. 20, 2009), ECF No. 592. On February 1, 2012, the Post–Confirmation Committee of Unsecured Creditors appointed Edward P. Bond, CPA, as the Substitute Liquidating Trustee (“Trustee”). Notice of Appt. of Substitute Liquidating Tr., In re U.S. Mortg. Corp., No. 09–14301 (Bankr.D.N.J. Feb. 1, 2012), ECF No. 967.

1. Original Adversary Complaint

On February 22, 2011, the Liquidating Trustee filed this Adversary Proceeding against National Financial Services, Inc. (“NFS”), alleging five counts against the Defendants that stem from the investment relationship between Defendants and the Debtors. Also on February 22, 2011, the Trustee filed an Amended Complaint against NFS and J.P. Turner. (ECF No. 2). By way of the present cross-motion the Trustee has presented a...