In re Bryant

Decision Date30 March 1984
Docket NumberAdv. No. 82-404.,Bankruptcy No. BK-R-82-0594
PartiesIn re Homer BRYANT, Debtor. James H. KELLER, formerly dba Truckee Meadows Mortgage, a proprietorship, now known as Truckee Meadows Mortgage Company, a Nevada corporation, both as trustees, Plaintiff, v. Homer BRYANT; Edith M. Lyons; and Charles B. Lyons, Defendants.
CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Nevada

Gregory D. Corn, Reno, Nev., for plaintiff.

Paul A. Bible, Janet L. Chubb, Chubb & Feinstein, Reno, Nev., for defendants.

Memorandum Decision

ROBERT C. JONES, Bankruptcy Judge.


When the debtor filed his Chapter 11 petition on 21 July 1982 the estate's principal asset was a parcel of real property located at Lake Tahoe, Nevada, which he held in joint tenancy with Edith and Charles Lyons (mother and son, respectively). This property was subject to a deed of trust securing a $200,000.00 note dated 23 December 1980. This note evidenced a loan made to the debtor and the Lyonses for the purpose of constructing improvements on the property. On 29 December 1982 James H. Keller, fdba Truckee Meadows Mortgage (TMM), a sole proprietorship, now incorporated as Truckee Meadows Company, as "trustee," filed a complaint to have 11 U.S.C. § 362's stay lifted to allow pursuit of its remedies under the trust deed (the non-judicial foreclosure sale was scheduled for 22 July 1982—the day after the petition was filed). The debtor's answer included affirmative defenses challenging the amount of plaintiff's secured claim. Thereafter, the parties stipulated to continue trial several times while, apparently, the defendants attempted to sell the property.

Pursuant to stipulation, on 1 August 1983 this Court signed an order authorizing the sale of the real property. The order provided for retention of the future sale proceeds (less costs incidental to sale) in an interest-bearing trust account pending a decision on the true value of plaintiff's claim. Likewise, the 21 November 1983 order confirming the debtor's liquidation plan of reorganization required that the sale proceeds be held "pending determination of the interests in such proceeds and allowability of the claims contained in Classes B allowed secured claim of TMM and C claim of Edith Lyons as joint tenant with the debtor of the subject real property of the Amended Plan." (By the time of confirmation, Charles Lyons had died.)

In furtherance of the earlier challenge to plaintiff's claim on 13 September 1983 counsel for all three defendants filed a motion for summary judgment asserting that, as a matter of law, plaintiff was only entitled to the unpaid principal amount of its note—all other amounts being usurious. In response, plaintiff filed an opposition to defendants' motion, a cross motion for summary judgment, and points and authorities supporting its position. In effect, although the underlying complaint for relief from the stay was rendered moot by the 1 August 1983 order authorizing the debtor to sell the property, the parties have treated the present usury-related issues as a "counterclaim" to the plaintiff's complaint. On 16 September 1983 the motion and cross motion for summary judgment were, with the parties' assent, consolidated for trial.


The facts presented at trial by way of testimony, documentary evidence, and the deposition of James H. Keller were largely uncontested.

Plaintiff Keller did business as a sole proprietorship, TMM, from approximately 1978 until the incorporation of the business as Truckee Meadows Mortgage Company in November 1981. For 20 years Keller has been a licensed real estate broker. During the time of this transaction, Keller dba TMM was a licensed mortgage company as required by NEV.REV.STAT. ch. 645B (1981). As such, he was in the business of arranging loans from third parties to borrowers who requested his services. These loans were secured by trust deeds on real property. Through the use of "loan representatives" and advertising TMM would locate prospective borrowers and lenders. No evidence was presented to show how the parties to this transaction came to use Keller's services.

Once a prospective borrower decided to use TMM's services a "loan package" was prepared based upon the borrower's personal history and the real property security. This package was then presented to the prospective lender or lenders. The $200,000.00 defendants sought to borrow for construction of a dwelling on the Lake Tahoe lot was gathered from several parties in California and Nevada (listed below with the dates their money was transferred to TMM's trust account):

1) Sharon A. Laughton ($10,000.00) on 15 December 1980.
2) J.E. Binker ($15,000.00) on 15 December 1980.
3) Central Pacific Investment (CPI) ($45,000.00) on 23 December 1980. (CPI is a California mortgage broker which obtained this money from Richard and Valarie Gunst ($10,000.00), John Morton ($25,000.00), and Joseph and Marie Arguelles ($10,000.00)—all from California.)
4) Norris Supply Co. ($100,000.00) on 21 November 1980.
5) Moltzen Electric ($30,000.00) on 12 December 1980.

Because the Norris Supply money was contributed approximately one month before this loan was funded, upon receipt by Keller it was transferred from the TMM trust account to a money market account where it earned some $300 in interest for Norris. (The Norris representative testified that the money was transferred after the loan package had been examined and well in advance so as to ensure its availability whenever the loan's funding was possible—presumably when the other $100,000.00 was obtained.)

Although receipts from TMM to these above contributors bore the description "for investment," those contributors who testified at trial unanimously said the money was not lent to Keller nor to TMM, was not invested in TMM, but was a loan to the actual borrowers (the defendants), to whom they looked for repayment. CPI's investor worksheet, prepared for the benefit of the Gunsts, Morton, and the Arguelleses, showed the "borrower" as "Truckee Meadows Mortgage (Lyons & Bryant)."

With the $200,000.00 on deposit in TMM's trust account or otherwise readily available, on 23 December 1980 the defendants executed a first deed of trust with Washoe Title Guaranty Co. (WTGC) as trustee and Keller, "Trustee," as beneficiary. Simultaneously, the defendants executed a promissory note with a face amount of $200,000.00 payable to Keller, "Trustee," which bore an annual interest rate of 24% payable in interest-only monthly installments of $4,000.00 beginning 24 January 1981 and ending 24 June 1982 (when the principal amount became due in full). The note also provided that "there shall be a late penalty due Truckee Meadows Mortgage, (the third party collection agent of this transaction) which shall be computed and which shall be $5.00 per day for each and every day the said payment is not made commencing five (5) days after its due date."1 The designation of Keller as "Trustee" was not accompanied by any trust documents but was done for the sole purpose of simplifying the administration and servicing of the loan, according to the testimony of Keller and the trustee for the Norris Supply Profit Sharing Plan (for whose benefit the Norris contribution was made).

The escrow documents reveal the following relevant facts. The escrow instructions directed to WTGC (dated 19 December 1980 and signed by Keller as "Trustee" and by the defendants) included this language: "Truckee Meadows Mortgage is authorized and instructed to hold the sum of $________ which represents 1 years sic payments and to pay same each month when due. After the first year, payor hereunder is to make the monthly payments to Washoe Title Guaranty Company, until the maturity date." The first year's interest-only payments totaled $48,000.00 and this amount, along with a $28,000.00 commission to TMM (14 points based on the principal amount), and other incidental costs of loan processing, was deducted from the $200,000.00 loan. The 14-point commission received by TMM was shared with CPI for its efforts in finding the California contributors. With these deductions the net amount received by the defendants at the close of escrow was $123,145.00. The $48,000.00 deduction was also described in the installment servicing instructions (directed to WTGC) as "1 years sic prepaid interest outside escrow," and in the escrow closing statement as "1 years sic prepaid interest paid to Truckee Meadows."

According to the trial testimony, but for this $48,000.00 fund the loan would not have been made; clearly it was a condition for making the loan. However, it is not clear whose condition it was initially — Keller's or the contributors'. Keller testified that he advised the contributors to require this fund and they agreed it was necessary. The fact remains that the contributors would not have provided the $200,000.00 without this condition. Keller testified that the condition was required because the defendants admitted they were otherwise unable to make the monthly payments of $4,000.00.2 The contributors variously described the fund as "guarantee money" or "additional security" to ensure payment of the monthly amounts due under the note. This fund was nominally held in TMM's trust account and checks were drawn on this account each month until the fund was exhausted. Actually, the evidence showed the money was placed in a money market account then withdrawn and deposited into the TMM trust account as needed to cover the monthly checks drawn and paid to WTGC's installment servicing account for eventual disbursement to the contributors. This money did not sit idly merely accumulating interest for the defendants (although it did do that); in addition to its agreed use (making the monthly payments on the note), TMM's own records show that the money was used to fund other loans arranged by Keller dba TMM with all interest thereon credited to the benefit of defendants/borrowers. Presumably...

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