IN RE LAU CAPITAL FUNDINE, INC.

• Decision Date: 15 February 2005
• Docket Number: Bankruptcy No. LA 99-37171 ES.,Adversary No. 02-01413 ES.
• Citation: 321 B.R. 287
• Parties: In re LAU CAPITAL FUNDING, INC., Debtor. Nancy Knupfer, Chapter 7 Trustee, Plaintiff, v. HSA Residential Mortgage Services of Texas, Inc., a Delaware Corporation, AIG International Group, Inc., and Does 1 through 20, inclusive, Defendants.
• Court: U.S. Bankruptcy Court — Central District of California

321 B.R. 287

In re LAU CAPITAL FUNDING, INC., Debtor Nancy Knupfer, Chapter 7 Trustee, Plaintiff, v. HSA Residential Mortgage Services of Texas, Inc., a Delaware Corporation, AIG International Group, Inc., and Does 1 through 20, inclusive, Defendants.

Bankruptcy No. LA 99-37171 ES. Adversary No. 02-01413 ES.

United States Bankruptcy Court, C.D. California.

February 15, 2005.

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James Stang, Pachulski, Stang and Ziehl, Los Angeles, CA, for debtor.

Nancy Knupfer, Los Angeles, CA, trustee.

MEMORANDUM DECISION ON (1) DEFENDANT HSA RESIDENTIAL MORTGAGE SERVICES OF TEAS, INC.'S MOTION FOR SUMARY JUDGMENT AND SUMARY ADJUDICATION and (2) PLAINTIFF NANCY KNUPFER, CHAPTER 7 TRUSTEE OF THE ESTATE OF LAU CAPITAL FUNDING, INC.'S MOTION FOR PARTIAL SUMMARY ADJUDICTION

MAUREEN A. TIGHE, Bankruptcy Judge.

On July 20, 1999 Lau Capital Funding ("LCF") filed a voluntary Chapter 11 petition. Thereafter, the Chapter 11 case was converted voluntarily by the Debtor to Chapter 7 on November 2, 1999. The Chapter 7 Trustee, Nancy Knupfer ("Trustee" or "plaintiff), initiated an adversary action against HSA Residential Mortgage Services of Texas, Inc. ("HSA", "RMST" or "defendant") on March 12, 2002 based on the following claims: breach of contract, avoidance, turnover, fraud, conversion, goods sold and delivered, declaratory relief, waste, and special relief. Defendant HSA has filed a motion for summary judgment on all of the Trustee's claims, in addition to moving for summary adjudication on the Trustee's request for lost profits.

The Trustee opposes HSA's motion and has filed a cross-motion for partial summary adjudication regarding the issues of breach of contract and conversion.

These motions came on for hearing on December 2, 2004 in this Court. The Court will address each of the ten issues for which the defendant requested summary judgment and summary adjudication. Additionally, where appropriate, the Court will rule on the plaintiffs cross-motions for summary adjudication.

On December 22, 2004, the Trustee filed a motion for adverse inference due to concealment of discovery and/or spoliation of evidence and for sanctions in the courtroom of Judge Erithe A. Smith.¹ The hearing is to occur on February 17, 2005. In the Trustee's motion, she alleges that HSA has withheld, concealed, or destroyed evidence regarding the extent to which HSA did business with 18 former Lau customers and regarding HSA's intentions during negotiations. Specifically, the Trustee seeks credit committee meeting minutes, source accounting data for all of the customers with which HSA actually did business, and credit recommendations composed by Trevino on each of the 18 customers. At oral argument, the Trustee argued that the ruling on the spoliation motion affects the cross-motions for summary judgment.

The Court hereby issues this memorandum in support of its decision.

BACKGROUND

Before filing its bankruptcy, LCF had been a mortgage warehouse lender, a company that loans money to mortgage companies that would, in turn, make residential mortgage loans to consumers. By providing interim financing to mortgage companies, LCF, as a lender, would receive a loan set-up fee and interest for use of its credit. HSA was also in the mortgage warehouse lending business. HSA was a wholly-owned subsidiary of AIG International Group, Inc.

After losing an important line of credit, LCF filed for Chapter 11 bankruptcy on July 20, 1999. In an effort to reorganize under its plan, LCF entered an Asset Purchase Agreement (the "Agreement") (Plaintiffs Complaint, Exhibit A) on October 1, 1999 with HSA. The parties dispute the meaning of the Agreement's contents, especially, section 3.4. Section 3.4 states the following regarding the selection of mortgage originators:

The selection of mortgage originators by Buyer of those of Seller's Customers with whom Buyer will execute Mortgage Purchase Agreements shall be in Buyer's sole discretion. The funding of individual loans from such mortgage originators and the discontinuance of any relationship with such mortgage originators shall be in Buyer's sole discretion.

The Purchase Price, as described in section 3.1, to be paid from HSA to LCF was the amount over $20.00 that HSA received from a listed customer on each loan funded through September 30, 2009.

Defendant HSA claims that the Agreement gave HSA the right to solicit any of the 18 LCF's customers on the list, attached to the Agreement as an exhibit, all of which were residential mortgage originators. HSA alleges that the Agreement did not obligate HSA to enter into mortgage purchase contracts with any of the 18 LCF customers on the customer list (Defendant's Request for Judicial Notice, Exhibit A). Consequently, LCF would receive a loan set-up fee only if HSA actually entered into a mortgage purchase contract with one of the named LCF customers.

In contrast, LCF argues that the Agreement manifests that HSA would enter into relationships with all 18 preselected LCF customers, from which LCF would receive a loan set-up fee. According to LCF's interpretation, the "sole discretion" referenced in the first sentence of section 3.4 was the initial discretion of HSA to choose which companies to do business with out of LCF's 41 existing mortgage originator customers. After selecting customers, LCF's understanding was that HSA would enter into contractual relationships with each of the selected customers and that the only discretion HSA had was to terminate relationships with the mortgage originators for underwriting reasons.

Section 6.4 of the Agreement contains a provision that required Bankruptcy Court approval of LCF's customer list: "Seller shall, immediately upon execution of this Agreement, file a motion with the United States Bankruptcy Court, Central District of California seeking an order approving the terms of this Agreement." Nevertheless, LCF never sought Bankruptcy Court approval.

HSA admits that it entered into mortgage purchase agreements with four LCF customers and that it has not yet paid any proceeds from these mortgages to LCF. However, HSA alleges that it has kept track of the amounts owed to LCF under the Agreement and has continued to do so after conversion of the case to Chapter 7. The accrued amount is approximately $135,000. HSA further claims that following the Chapter 7 conversion, HSA attempted to contact the Chapter 7 Trustee to discuss payment delivery, but that the Chapter 7 Trustee never returned its telephone calls. LCF disputes that HSA has properly accounted for money owed under the Agreement and also disputes that HSA ever tried to telephone the Trustee.

HSA did not enter agreements with the remaining 14 LCF customers on the list. The Trustee's position is that HSA's failure to pursue relationships with the other 14 LCF customers was a tactic to prevent HSA competitors in the mortgage warehouse financing business from obtaining these accounts. Moreover, by purchasing the customer list but failing to solidify relationships with the customers, the Trustee argues that HSA wasted LCF's most valuable asset and therefore is liable for damages to the estate either in tort or contract.

HSA went out of business in 2002.

LEGAL STANDARD FOR SUMMARY JUDGMENT

"At the summary judgment stage the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In deciding a motion for summary judgment, partial or otherwise, the court must view the evidence, as well as all justifiable inferences drawn from that evidence, in the light most favorable to the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. at 255,106 S.Ct. 2505.

"A party seeking summary judgment always bears the initial responsibility of informing the court of the basis for its motion, and identifying those portions of `the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party bears the initial burden of demonstrating the absence of a "genuine issue of material fact for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). On the other hand, a party opposing a motion for summary judgment may not rest upon the mere allegations or denials of his pleading, but must set forth specific facts showing that there is a genuine issue for trial. Id. at 248, 106 S.Ct. 2505. The entry of summary judgment is proper when the nonmoving party fails to make a showing sufficient to establish the existence of an element essential of that party's case, and on which that party will bear the burden of proof at trial. Celotex, 477 U.S. at 322, 106 S.Ct. 2548.

If the Court finds that summary judgment is not proper, the Court may still consider granting partial summary judgment pursuant to Federal Rule of Civil Procedure 56(d). "The procedure prescribed in subdivision 56(d) is designed to be ancillary to a motion for summary judgment." 10B Wright, Miller & Kane, Federal Practice and Procedure: Civil 3d § 2737 (West 1998). See In re Data General Corp. Antitrust Litigation, 490 F.Supp. 1089, 1103 (N.D.Cal.1980) ("The purpose of a Rule 56(d) order, which is analogous to a pretrial order under Rule 16, is to salvage all constructive results of summary judgment proceedings."); Lovejoy Electronics, Inc. v. O'Berto, 616 F.Supp. 1464 (D.C.Ill.1985) ("Partial summary judgment's purpose is to salvage some results from the judicial effort involved in the denial of a motion for summary judgment and to frame narrow triable issues if the court...