In re Consolidated Pioneer Mortg. Entities

Decision Date22 April 1997
Docket NumberNo. 94-361 SPK (BTM) (JFS),Bankruptcy No. 91-00214-M11.,94-361 SPK (BTM) (JFS)
Citation211 BR 704
CourtU.S. District Court — Southern District of California
PartiesIn re CONSOLIDATED PIONEER MORTGAGE ENTITIES, Debtor. PIONEER LIQUIDATING CORPORATION, Plaintiff, v. SAN DIEGO TRUST & SAVINGS BANK; First Interstate Bank of California, as successor-in-interest by merger to San Diego Trust & Savings Bank; and Wells Fargo Bank, as successor-in-interest by merger to First Interstate Bank of California, Defendants.

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Frederick McKnight, William Wilson, Scott Bertzyk, Jones, Day, Reavis & Pogue, Los Angeles, CA, for Plaintiff.

David Noonan, Steven Sanchez, Post, Kirby, Noonan & Sweat, San Diego, CA, for Defendants.

AMENDED ORDER GRANTING DEFENDANT SAN DIEGO TRUST & SAVINGS BANK'S MOTIONS FOR JUDGMENT AS A MATTER OF LAW AND DENYING PLAINTIFF PIONEER LIQUIDATING CORPORATION'S MOTIONS FOR JUDGMENT AS A MATTER OF LAW

SAMUEL P. KING, District Judge.

Plaintiff Pioneer Liquidating Corporation ("PLC") is a liquidating corporation, created in bankruptcy, and vested with substantially all the assets of the Consolidated Pioneer Mortgage Entities. The Consolidated Pioneer Mortgage Entities are a consolidation of the debtor estates of six related corporations that filed for bankruptcy in January 1991: Naiman Financial Corporation; Naimpro, Inc.; Naimco-Clairemont, Inc.; Naimco, Inc.; Alvarado Investment Corporation; and Frontier Service Corporation (collectively "debtors" or "Pioneer"). PLC was formed to take title to Pioneer's assets, liquidate the assets, and distribute them to creditors and investors according to a Joint Plan of Reorganization. PLC's assets include claims against third parties. This suit is an adversary proceeding against third-party defendant San Diego Trust & Savings Bank ("SDT" or "Bank") and its successor-by-merger, Wells Fargo Bank.

Pioneer was in the business of granting mortgages in the San Diego real estate market. Pioneer sold full and fractionalized trust deeds to investors in exchange for the funds required to make the underlying loans. Pioneer regularly made monthly payments to the investors as borrowers paid off the loans. One of Pioneer's practices was to give investors the option of receiving monthly advances even when an underlying loan was in default. Pioneer attracted new investor funds by promoting its "perfect payment record," claiming that "no investor had ever lost money" with Pioneer.

Pioneer's practice of making advances to investors required a constant large cash flow. Pioneer fell on hard times when the Southern California real estate market took a downturn in the late 1980s. Many of Pioneer's loans went into default, resulting in a shortage of incoming revenue. The shortage of revenue made it increasingly difficult to maintain the "perfect payment record." Pioneer continued to make advances to investors, but had to borrow money from several San Diego banks to stay in business.

At trial, PLC claimed that Pioneer ran out of borrowed money and had to resort to illegal Ponzi and check kiting schemes to raise revenue to pay its bills. PLC maintained that during the period leading up to bankruptcy, Pioneer misrepresented its financial condition to its investors, continued to make advances to investors on loans that were in default, and continued to assure invest that their investments were secure. PLC maintained that the entire Pioneer operation became a Ponzi scheme; Pioneer used new investor funds to make advances to earlier investors while the company slid deeper and deeper into insolvency. PLC also alleged that in order to generate revenue, Pioneer engaged in a massive check kite between San Diego banks and between accounts at SDT. PLC further alleged that SDT was not only aware of the Ponzi and check kiting schemes, but actively facilitated Pioneer's fraudulent activities to keep the company in business so that Pioneer could pay down its line of credit with SDT. SDT denied that there was a check kite, denied that there was a Ponzi scheme, and denied that it knew of any fraudulent activity at Pioneer.

Although PLC and SDT disputed the definition and existence of a check kite, the parties agreed that SDT granted Pioneer "provisional credit" on all of the deposits that Pioneer made to various commercial accounts it maintained at the Bank. "Provisional credit" meant that when Pioneer deposited checks into its accounts at SDT, the Bank posted a credit to Pioneer's account and permitted Pioneer to withdraw the funds before the deposited checks cleared through the clearinghouse system.1 SDT regularly granted provisional credit to all of its customers in good standing, as did many other smaller community banks in the San Diego area.

Undisputed evidence at trial established that Pioneer regularly wrote checks against its SDT accounts that lacked sufficient funds to cover the amount of the checks. The Bank regularly called Pioneer — almost on a daily basis — to say that it needed a deposit to "cover" the amount of the checks presented for payment the previous day. So long as a Pioneer representative brought in a "covering deposit," SDT paid the incoming checks. Pioneer always made a covering deposit, and, frequently, the checks deposited were drawn on other Pioneer accounts held at SDT or other San Diego banks. All the checks that Pioneer deposited into its accounts at SDT were eventually paid in the normal course of collection by the banks upon which they were drawn.2 SDT eventually closed all of Pioneer's accounts over a period spanning the last four months of 1990. Pioneer filed for bankruptcy in January 1991.

PLC claimed that SDT's practice of allowing Pioneer to withdraw provisionally credited funds subjected it to liability in bankruptcy in excess of $71 million. PLC claimed that before the bankruptcy, Pioneer transferred more than $71 million to SDT that PLC is entitled to recover as preferences or fraudulent transfers under 11 U.S.C. §§ 544(b), 547(b), 548(a), and 550(a) of the Bankruptcy Code.

The parties filed cross-motions for summary judgment in early 1996. The court denied both motions, but ruled with respect to the recovery of preferences: "the granting by a bank of provisional credit to a customer against uncollected funds represented by checks payable to the customer or the customer's order drawn on other banks creates an antecedent debt within the meaning of the Bankruptcy Code." Further, "the bank granting the credit is the initial transferee of property of the depositor when it offsets that debt with after-collected funds." With respect to recovery of fraudulent transfers, PLC could recover "any transfer by a Pioneer Mortgage entity to San Diego Trust that was made with actual intent to hinder, delay, or defraud any past, existing, or future creditor of the transferor Pioneer Mortgage entity." The court noted the applicable reach-back period to be ninety days for preferences and four years for fraudulent transfers.3

PLC abandoned the preference claim before trial in order to simplify the case for the jury. The amount PLC sought to recover with a ninety day reach-back period under the preferences statute was miniscule compared to the $71 million it sought to recover as fraudulent transfers. PLC alleged that Pioneer fraudulently made 473 transfers to SDT during the 18 months leading up to bankruptcy, all of which were well within the four-year statutory reach-back period for fraudulent transfers.

The trial began in January 1997. SDT filed a motion for judgment as a matter of law at the close of PLC's case, which the court took under advisement. Both parties filed motions for judgment as a matter of law at the close of the Bank's case. The court took both motions under advisement. The court asked the jury to answer two questions on a special verdict form: (1) Did PLC prove by a preponderance of the evidence that there were one or more transfers of property, and the amounts thereof, to the Bank by any Pioneer Mortgage Debtor made with actual intent to hinder, delay, or defraud present or future creditors? If so, (2) did the Bank prove by a preponderance of the evidence that it acted in good faith with respect to any transfer or transfers you identified in response to question 1?4 The jury deliberated at length, but could not reach a verdict, and the court declared a mistrial. Both parties filed renewed Rule 50 motions for judgment as a matter of law.

In view of certain uncontested evidence that was presented at trial, the court has decided to grant all of the Bank's Motions for Judgment as a Matter of Law. The court has concluded that its April 3, 1996 order denying summary judgment was an incomplete statement of the relevant law. Insofar as the court's ruling was incomplete, it was also incorrect.

I. Avoidable transfers of property

To establish an "actual fraud" fraudulent transfer, the burden is on PLC to prove: (1) that a debtor transferred an interest in property to the Bank; (2) that the debtor transferred the property during the reach-back period; and (3) that the debtor made the transfer with actual intent to hinder, delay, or defraud a present or future creditor. 11 U.S.C. § 548(a); Cal. Civ.Code § 3439.04 (West Supp.1996). In comparison, to establish a preference, the burden is on PLC to prove: (1) that the debtor transferred an interest in property to or for the benefit of the Bank; (2) the transfer was for or on account of an antecedent debt existing before the transfer was made; (3) the debtor made the transfer while insolvent; (4) that the debtor transferred the property during the reach-back period; and (5) that the transfer caused the Bank to receive more than it would have otherwise received in a bankruptcy distribution. 11 U.S.C. § 547(b). The element common to a fraudulent transfer and a preference is the requirement that PLC prove a transfer of an interest in property. If PLC proves such transfer as well as the...

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