Hasso v. Hapke

• Citation: 227 Cal.App.4th 107,173 Cal.Rptr.3d 356
• Decision Date: 15 July 2014
• Docket Number: G047495,G047588
• Court: California Court of Appeals
• Parties: Ronald HASSO, as Trustee, etc., Plaintiff and Appellant, v. John HAPKE, Defendant and Appellant; Charles Fish Investments, Inc., et al., Defendants and Respondents Ronald Hasso, as Trustee, etc., Plaintiff and Appellant, v. Rockwater American Municipal Fund, LLC, et al., Defendants and Appellants.

227 Cal.App.4th 107

173 Cal.Rptr.3d 356

Ronald HASSO, as Trustee, etc., Plaintiff and Appellant,

v.John HAPKE, Defendant and Appellant;

Charles Fish Investments, Inc., et al., Defendants and Respondents

Ronald Hasso, as Trustee, etc., Plaintiff and Appellant,

v.Rockwater American Municipal Fund, LLC, et al., Defendants and Appellants.

G047495

G047588

Court of Appeal,

Fourth District, Division 3, California.

Filed 6/19/2014

As Modified on Denial of Rehearing July 15, 2014

See 8 Witkin, Cal. Procedure (5th ed. 2008) Enforcement of Judgment, § 488 et seq.

Appeals from a judgment and orders of the Superior Court of Orange County, Richard W. Luesebrink, Judge. (Retired judge of the Orange Super. Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.) Affirmed in part and reversed in part. (Super. Ct. No. 30–2009–00333066)

Winget, Spadafora & Schwartzberg, Brandon S. Reif, Marc S. Ehrlich, Los Angeles, and Kelsey L. Hotchkiss for Plaintiff and Appellant Ronald Hasso as trustee of the 2006 May S. Hasso Serrano Family Trust and as trustee of the 2006 Norman Hasso Family Trust.

Robert D. Feighner, Long Beach, for Defendants and Appellants Rockwater American Municipal Fund, LLC, Rockwater Municipal Advisors, LLC and Bryan Williams.

Brown Rudnick, Joel S. Miliband and Stephen R. Cook, Irvine, for Defendant and Appellant John Hapke.

Krause, Kalfayan, Benink & Slavens, Vincent D. Slavens and Mary K. Wyman, San Diego, for Defendants and Respondents Charles Fish Investments, Inc. and Charles Fish.

OPINION

MOORE, J.

As they say, timing is everything. In August 2007, the initial trustee of two family trusts invested millions in the Rockwater American Municipal Fund, LLC (RAM Fund)—a hedge fund engaged in municipal arbitrage.¹ The RAM Fund was managed by Rockwater Municipal Advisors, LLC (RMA), its managing member. In November 2007, Charles Fish Investments, Inc. (CFI) transferred its assets to Rockwater CFI, LLC, a wholly owned subsidiary of RMA, in exchange for a 15 percent interest in RMA. CFI had an option to unwind the transaction, if its interest in RMA did not meet certain benchmark values. The RAM Fund was devastated by the stock market crash and the trust investments were largely wiped out by 2008. CFI exercised its option to unwind the transaction with RMA and Rockwater CFI, LLC, and obtained a return of the assets originally belonging to it.

The successor trustee of the trusts sued the RAM Fund, RMA, Bryan Williams (Williams), who was the founder of the RAM Fund and the chief executive officer of RMA, John Hapke (Hapke), who was the chief financial officer of the RAM Fund, CFI, and Charles Fish (Fish), who was the chairman and chief executive officer of CFI. After it had seen clips from the movie Wall Street 2 (Twentieth Century Fox 2010) and a power point presentation with eight screens captioned “Greed,” a jury awarded the successor trustee a $4,640,380 judgment against the RAM Fund, RMA, Williams, and Hapke.² The successor trustee was unsuccessful in his attempt to obtain a judgment against CFI and Fish. The RAM Fund, RMA, and Williams (collectively, the Rockwater Defendants), on the one hand, and Hapke, on the other hand, have each filed an appeal claiming the RAM Fund was simply the victim of the market crash. The successor trustee has appealed as well, seeking to hold liable CFI and Fish, the defendants who “got away.”

The judgment against RMA and Williams for actual and constructive fraudulent transfer is reversed and the judgment in favor of CFI and Fish on those causes of action is affirmed. There is no substantial evidence to show that RMA and Williams made a fraudulent transfer, within the meaning of the Uniform Fraudulent Transfer Act (Civil Code section 3439 et seq.) (UFTA), in returning CFI's assets upon unwinding.

To the extent the judgment holds the Rockwater Defendants and Hapke liable on the causes of action for fraud by intentional misrepresentation, fraud by concealment, and/or negligent misrepresentation, it is reversed. Even if the Rockwater Defendants or Hapke had made any material misrepresentations or omissions, and even if the initial trustee of the trusts had relied thereon, any such reliance would have been unreasonable. For the same reason, the judgment in favor of CFI and Fish on those causes of action is affirmed.

The judgment against the RAM Fund and Hapke for breach of fiduciary duty and professional negligence is reversed, because there is no substantial evidence to show that they were investment advisers within the meaning of Corporations Code section 25009. However, the judgment against RMA and Williams on those causes of action is affirmed because there is substantial evidence to show that they were investment advisers and that they breached their fiduciary duties to the initial trustee. The judgment in favor of CFI and Fish on the breach of fiduciary duty cause of action is affirmed because there is substantial evidence to show that they did not breach any fiduciary duty.

The court's finding that CFI was not the alter ego of RMA is supported by substantial evidence. Consequently, we affirm the ruling that CFI was not liable for the debts of RMA. The ruling that Fish was not liable for the debts of CFI is moot, inasmuch as the judgment in favor of CFI on all causes of action is affirmed.

I

FACTS

A. BACKGROUND:

(1) Agreement between CFI and RMA—

CFI, Fish, RMA, and its wholly-owned subsidiary, Rockwater CFI, LLC, entered into a contribution agreement in November 2007. The contribution agreement provided that CFI would contribute certain assets to Rockwater CFI, LLC. In consideration therefor, Rockwater CFI, LLC agreed to assume certain obligations of CFI and RMA agreed to issue to CFI certain “Class B Units, representing approximately 15% of the issued and outstanding membership interests” of RMA. The contribution agreement gave CFI the option to unwind the deal as early as January 1, 2010, if its interest in RMA was worth less than certain threshold figures.

Also in November 2007, Fish, RMA and Rockwater CFI, LLC entered into an employment agreement, pursuant to which RMA employed Fish as a managing principal. At the same time, RMA hired CFI vice president Betsy Shelton as well.

The parties ultimately agreed to an early termination of their arrangement. An unwind agreement dated April 15, 2009 was executed by CFI, Fish, Shelton, RMA, and Rockwater CFI, LLC. The unwind agreement provided that the contribution agreement was rescinded and terminated effective May 1, 2009. As of that date, CFI and RMA returned their respective property to each other and CFI agreed to pay RMA $56,000 in settlement.

(2) The Trusts—

The two irrevocable trusts involved in this matter are the 2006 May S. Hasso Serrano Family Trust, created for the benefit of the descendants of May S. Hasso Serrano (Serrano), and the 2006 Norman Hasso Family Trust, created for the benefit of the descendants of Norman Hasso. Serrano and Norman Hasso are brother and sister.

The 2006 May S. Hasso Serrano Family Trust was funded by Serrano's parents. Serrano herself was neither the trustor nor the trustee. Rather, Bart Colson (Colson) was the initial trustee of each trust. He was a long-time family friend and business associate. At the end of 2009, Serrano's nephew Ronald Hasso (Hasso) took over as successor trustee.

(3) Serrano's Characterization of Events—

Hasso's case was built largely on Serrano's testimony, which we describe hereinafter.

Serrano has a bachelor's degree with an economics major from UCI, an MBA from UCLA, and a law degree from Pepperdine. She passed the bar exam, but never practiced law.

One day when Serrano was visiting Attorney Wayne Casey on an unrelated matter, he mentioned an interesting investment opportunity. Serrano asked for information about the investment.

Sometime thereafter, in April 2007, Hapke telephoned her. According to Serrano, Hapke explained that Attorney Casey had referred him and “that he had a background in investment advice” and he thought they “might be interested in some tax-free investments” for the trusts. Serrano told him that the trust was for the benefit of her young children and that the primary objective was to have a safe investment and preserve capital.

Serrano accepted the offer of Williams and Hapke to make a presentation to her at her home. In advance of the meeting, Hapke sent her a package of materials including an investment proposal for the 2006 May S. Hasso Serrano Family Trust, which she reviewed before the meeting, and a RAM Fund marketing brochure. The investment proposal allocated assets to three classifications—liquid investments, traditional municipal bonds, and the RAM Fund.Serrano and her husband were present at the May 29, 2007 meeting, along with Williams and Hapke. Williams and Hapke gave a power point presentation and provided a hard copy of it to Serrano. According to Serrano, Williams and Hapke told her there were a lot of risks, but that they had methods for managing and minimizing them. She also said they repeatedly told her the proposed investment was low risk and appropriate for the trusts.

Williams and Hapke provided an explanation of municipal arbitrage. Serrano testified to her understanding that the bond was split into two component parts, one being the feature that paid interest over time and the other being the remainder of the bond, and that each of the two parts was sold to a different party. She understood that the remainder of the bond was to go to the RAM Fund sub-manager. Williams and Hapke did not go into detail on the identity of the sub-manager.

Serrano understood that the RAM Fund was a hedge fund. She said Williams and Hapke told her she could get an 8 to 10 percent return, but that the return was actually more beneficial than that because it was tax exempt. According to Serrano, Williams said, “ ‘In the worst case scenario you could lose 10 percent.’ ” That was supposed to be “ ‘if the world fell...