Bond v. Sparks (In re U.S. Mortg. Corp.)

• Decision Date: 23 April 2013
• Docket Number: Adversary Nos. 11–1212 (RG), 11–1218(RG).,Bankruptcy No. 09–14301 (RG).
• Citation: 492 B.R. 784
• Court: U.S. Bankruptcy Court — District of New Jersey
• Parties: In re U.S. MORTGAGE CORP. & CU National Mortgage, Inc., Debtors. Edward Bond, Liquidating Trustee, Plaintiff, v. Vining Sparks, Defendant. Edward Bond, Liquidating Trustee, Plaintiff, v. Newbridge Securities Corp., Defendant.

492 B.R. 784

In re U.S. MORTGAGE CORP. & CU National Mortgage, Inc., Debtors.

Edward Bond, Liquidating Trustee, Plaintiff,

v.Vining Sparks, Defendant.

Edward Bond, Liquidating Trustee, Plaintiff,

v.Newbridge Securities Corp., Defendant.

Bankruptcy No. 09–14301 (RG).

Adversary Nos. 11–1212 (RG), 11–1218(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 Bond, Liquidating Trustee.

Ravin Greenberg LLC, By: Brian L. Baker, Esq., Chad B. Friedman, Esq., Roseland, NJ, for Defendant Vining Sparks IBG, L.P.

Baker Donelson Bearman Caldwell & Berkowitz, PC, By: E. Franklin Childress, Jr., Esq., Bradley L. Ottinger, Esq., Memphis, TN, for Defendant Vining Sparks IBG, L.P.

Todtman Nachamie Spizz & Johns, PC, By: Alex Spizz, Esq., Jill L. Makower, Esq., New York, NY, for Defendant Newbridge Securities Corp.

Riker, Danzig, Scherer, Hyland & Perretti, LLP, By: Mark E. Hall, Esq., Morristown, NJ, for J.P. Turner & Co. LLC.

Newbridge Securities, Inc., By: Arnold Levine, Esq., Ft. Lauderdale, FL.

OPINION

ROSEMARY GAMBARDELLA, Bankruptcy Judge.

Matter Before the Court

The matters before the Court are the Motions of Defendants Vining Sparks IBG, L.P. (“Vining Sparks”) and Newbridge Securities Corp. (“Newbridge”), each of whom have filed a Motion to Dismiss separate Adversary Complaints of Edward P. Bond, Liquidating Trustee (“Trustee”) for Debtors U.S. Mortgage Corp. (“U.S.Mortgage”) and CU National Mortgage (“CU” and collectively, “Debtors”). Additionally before the Court in the Adversary Proceeding No. 11–1212, Bond v. Vining Sparks, is Trustee's Application in Support of Cross–Motion for an Order Authorizing the Liquidating Trustee to File an Amended Complaint. The Court held a hearing on December 1, 2011. The following constitutes the Court's findings of fact and conclusions of law.

Statement of Facts and Procedural History

I. Background

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. 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 the Defendants. See Am. Compl. ¶¶ 10–14, Bond v. Newbridge Secs. Corp., No. 11–1218–RG (Bankr.D.N.J. June 2, 2011), ECF No. 3 (“Newbridge Am. Compl.”); Proposed Am. Compl. ¶¶ 10–14, Cross–Mot. for Order Authorizing Am. Compl. ex. A, Bond v. Vining Sparks IBG, L.P., No. 11–1212–RG (Bankr.D.N.J. June 2, 2011), ECF No. 4–2 (“Vining Sparks Am. Compl.”).

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. Newbridge Am. Compl. ¶¶ 15–18; Vining Sparks Am. Compl. ¶¶ 15–18. If U.S. Mortgage received express written authorization to sell the loans to Fannie Mae, U.S. Mortgage serviced the 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. Newbridge Am. Compl. ¶¶ 19–20; Vining Sparks Am. Compl. ¶¶ 19–20. Proceeds from the latter type of loans (with payments remitted to Fannie Mae) were deposited into U.S. Mortgage's operating account, and U.S. Mortgage was required to pay the credit unions upon receipt of those loan proceeds. Newbridge Am. Compl. ¶¶ 22, 24; Vining Sparks Am. Compl. ¶¶ 22, 24. The Debtors used the operating account to pay their payroll and operating expenses.

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, Newbridge Am. Compl. ¶¶ 25–26; Vining Sparks Am. 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 stretched to two years or more, Newbridge Am. Compl. ¶¶ 28–30; Vining Sparks Am. Compl. ¶¶ 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, Newbridge Am. Compl. ¶¶ 33–34; Vining Sparks Am. Compl. ¶¶ 33–34; and (3) the alleged fraudulent sale of over $20,000,000 of loans to Fannie Mae that were not serviced by the Debtors and the resulting modifications of the loan servicing system to conceal that sale, such that Fannie Mae would receive loan servicing information and monthly payments; and (4) various investments made using the Debtors' funds in an effort to raise the funds required to cover the Debtors' operational expenses and to conceal the fraudulent activities (“The Investment Scheme”.) Newbridge Am. Compl. ¶¶ 38–40; Vining Sparks Am. Compl. ¶¶ 38–40.

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 Complaints, 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.” Newbridge Am. Compl. ¶¶ 40–43; Vining Sparks Am. Compl. ¶¶ 40–43.

On June 11, 2009, the U.S. Attorney for the District of New Jersey filed a criminal information (“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. Newbridge Am. Compl. ¶¶ 44–45; Vining Sparks Am. Compl. ¶ 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 Union Loans 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.” Newbridge Am. Compl. ¶¶ 45; Vining Sparks 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. Newbridge Am. Compl. ¶ 46; Vining Sparks Am. Compl. ¶ 46.

As to Vining Sparks, the Trustee alleges that Bill Thompson was the Defendant's account representative that assisted and advised the Debtors and/or McGrath, and as to Newbridge Securities, John Slipek was the Defendant's account representative that assisted and advised the Debtors and/or McGrath. Vining Sparks Am. Compl. ¶ 49; Newbridge Am. Compl. ¶ 49.

II. Administrative Proceeding

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. Pet., In re U.S. Mortg. Corp., No. 09–14301 (Bankr.D.N.J. Feb. 23, 2009), ECF No. 1. On April 1, 2009, CU National filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. Pet., In re CU Nat'l Mortg. LLC, No. 09–18104 (Bankr.D.N.J. Apr. 1, 2009), ECF No. 1. By Order of this Court, the chapter 11 cases of the Debtors were administratively consolidated. Order Directing Joint Admin. of Debtors' Chapter 11 Cases, In re U.S. Mortg. Corp., No. 09–14301 (Bankr.D.N.J. Apr. 13, 2009), ECF No. 107.

On March 13, 2009, the U.S. Trustee appointed the Unsecured Creditors' Committee pursuant to 11 U.S.C. § 1102(a)(1). Appt. of Unsecured Creditors' Comm., In re U.S. Mortg. Corp., No. 01–14301 (Bankr.D.N.J. Mar. 13, 2009), ECF No. 66.

The Debtors' Third Amended Joint Plan of Liquidation was confirmed by this Court on October 26, 2009. Order Confirming Debtors' 3d Am....