Investor Recovery Fund, LLC v. Hopkins

• Court: Idaho Supreme Court
• Writing for the Court: BRODY, Justice.
• Citation: Investor Recovery Fund, LLC v. Hopkins, 167 Idaho 42, 467 P.3d 406 (Idaho 2020)
• Decision Date: 02 July 2020
• Docket Number: Docket Nos. 46247
• Parties: INVESTOR RECOVERY FUND, LLC, Plaintiff-Appellant-Cross Respondent, v. Randall H. HOPKINS, an individual; Brian Murphy, an individual; Hopkins Financial Services, Inc., an Idaho corporation, Defendants-Respondents-Cross Appellants, and Does I-V, whose true names are unknown, Defendants.

167 Idaho 42

467 P.3d 406

INVESTOR RECOVERY FUND, LLC, Plaintiff-Appellant-Cross Respondent,

v. Randall H. HOPKINS, an individual; Brian Murphy, an individual; Hopkins Financial Services, Inc., an Idaho corporation, Defendants-Respondents-Cross Appellants,andDoes I-V, whose true names are unknown, Defendants.

Docket Nos. 46247

Supreme Court of Idaho, Boise, February 2020 Term.

Opinion Filed: July 2, 2020

Angstman Johnson, Boise, for appellant. Wyatt B. Johnson argued.

Holland & Hart, PLLC, Boise, for respondents. Robert Faucher argued.

SUBSTITUTE OPINION.

THE COURT'S PRIOR OPINION DATED APRIL 20, 2020, IS HEREBY WITHDRAWN.

BRODY, Justice.

This case addresses the applicable standard of review when considering a directed verdict in a fraud by nondisclosure case. Investor Recovery Fund, LLC is the assignee of six claims held by individual investors who lost their investments in the Hopkins Northwest Fund, LLC (the fund). Randall Hopkins and Brian Murphy were the principals of the fund, and together they owned and managed Hopkins Financial Services, Inc. (Hopkins Financial). The individual investors formed Investor Recovery for the purposes of asserting a collective claim against Hopkins Financial and the fund's principals individually (collectively, Hopkins Associates). The fund declared a moratorium on redemptions in 2008, preventing investors from taking their money out of the fund. The individual investors lost their investments when the fund declared bankruptcy six years later. Investor Recovery sued Hopkins Associates, asserting claims of fraud by nondisclosure. The district court granted the principals’ motion for a directed verdict after seven days of trial, concluding that Investor Recovery did not prove that the individual investors’ losses were causally connected to the principals’ alleged nondisclosures. We reverse the district court's directed verdict, vacate the judgment, and remand the case for further proceedings.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Factual background.

1. Investor Recovery, the individual investors, and the fund

Investor Recovery is the assignee of six claims from debenture holders who lost all or part of their investments in the fund: Carol Snyder, Carol Snyder as trustee for the Van Hees Family Trust, Kellie Pugh (Carol Snyder's daughter), Bill Pugh (Kellie Pugh's husband), Larry Erickson, and Elizabeth Erickson (collectively, the "individual investors").

Randall Hopkins and Brian Murphy (together, "Hopkins and Murphy") own and operate Hopkins Financial. Hopkins is the president and majority owner. Murphy, a CPA, is the controller and a minority owner. In 2007, Hopkins Financial acted as an affiliate and contract placement manager for a number of investment funds, including the Hopkins Northwest Fund, LLC, the fund at issue in this case. In addition to their roles at Hopkins Financial, Hopkins and Murphy served as the fund's principals.

The fund operated by raising capital from investors, most of whom were individuals. The fund pooled its capital, investing in loans secured by real estate to high-risk borrowers who were not eligible to receive loans from banks. Because of the risky nature of the loans, the fund charged borrowers high interest rates, which in turn produced high yield returns. The fund distributed the resulting earned interest in profits to its investors monthly.

Individuals investing in the fund received "debentures." Holding a debenture entitled an investor to a pro-rata share of the fund's operating profit. The debentures were not publicly traded, and there was no private market for their sale. Further, the debentures were not registered with the Securities and Exchange Commission or the Idaho Department of Finance. The only way investors could leave the fund with all or a portion of their debenture investment was through a "redemption" process.

The fund was governed by a private placement memorandum (PPM). Each investor was issued the PPM prior to investing in the fund. The PPM detailed investors’ redemption rights. The crux of the redemption policy allowed debenture holders to redeem their debentures within 121 days, or earlier, upon providing written notice to the fund. Debenture holders’ redemption rights, however, were subject to the fund's right to declare a "moratorium" on redemption requests to preserve the fund's liquidity. According to the PPM, the fund was entitled to declare a moratorium if the number of redemptions gave management concerns about the fund's liquidity or if management determined it needed to issue a new series of debentures. The relevant portion of the PPM in this case allowed management to declare a moratorium if:

Sufficient debenture holders give notice of redemption under [the PPM] to cause Management of the [fund] to have concern for the liquidity of the [fund] and parity treatment among all debenture holders[.]

2. 2008 Moratorium

From the fund's inception in 2000 through the middle of 2007, the fund produced consistent high-yield returns. The fund's returns started to decline towards the end of 2007. Hopkins attributed the drop in yield to a default in one of the fund's largest loans (the "Hunter's Point loan"). The fund also experienced a general increase in loan delinquency at the end of 2007. The fund's financial troubles in late 2007 and 2008 coincided with a larger, national economic downturn. The "Great Recession" impacted real estate in the Treasure Valley and across the country. As a result, real estate prices in Idaho plummeted in 2008.

In February 2008, lower yields and recent developments in the Hunter's Point loan spurred Hopkins and Murphy to call a special meeting for all debenture holders. On February 25, 2008, Hopkins sent a letter to all debenture holders, requesting their presence at an "urgent, important[,] and special meeting that could directly affect [their] investment in [the fund]."

On February 26, 2008, Charley Williams—an investor who is not a party to this lawsuit—sent an email to Murphy inquiring about the status of a pending redemption. In response, Murphy wrote that, "I believe that all redemptions will be suspended in [the fund] on 02-28-08." This information was not shared with any other investors, and Williams submitted a redemption request withdrawing all of his money the following day. The fund paid Williams in full.

The special meeting occurred on February 29, 2008 (the "Leap Day meeting"). Carol Snyder, Kellie Pugh, and Betsy Erickson attended the meeting. Betsy Erickson and Kellie Pugh updated their spouses on the meeting later that evening. Hopkins and Murphy presided over the meeting, walking through a PowerPoint presentation with investors in attendance. Hopkins and Murphy also distributed a thirty-five page copy of the PowerPoint presentation for investors to take home. Hopkins and Murphy's presentation disclosed that the Hunter's Point loan—which constituted 72 percent of the fund's delinquent loans—was in judicial foreclosure. Further, the PowerPoint disclosed that one-third of the fund's current loans were not performing, meaning that they were more than thirty days past due.

During the Leap Day meeting, Hopkins and Murphy also discussed the potential for a moratorium. The PowerPoint presentation included a full slide titled, "Investor Redemptions/Potential Moratorium," and stated that, "should desired redemption requests exceed [the fund]’s available cash flow to pay those requests, this may cause [the fund] to declare a moratorium." This information essentially restated the fund's moratorium policy contained in the PPM.

Immediately following the Leap Day meeting, redemption requests spiked. Throughout the spring and summer of 2008, the fund's economic condition continued to decline. The fund eventually declared a moratorium on September 8, 2008. For those redemption requests submitted after the Leap Day meeting, only two redemption requests received their full investment back. The fund never recovered from the moratorium, and failed to honor any redemption requests after calling the September 2008 moratorium.

In 2014, the fund declared bankruptcy. The fund's approved bankruptcy plan left debenture holders with nothing. The individual investors were among the fund's investors who lost the remaining balance of their debenture investments. The individual investors testified that their collective losses totaled $1.4 million.

3. The alleged nondisclosures

At trial, Carol Snyder, Larry Erickson, and Bill Pugh testified that they met with Murphy, in person or over the phone, between August and December of 2007. These individual investors testified that Murphy failed to disclose that the fund was in a position to declare a moratorium. Crucially, each of these three individual investors also testified that, had Murphy raised the possibility that the fund's dwindling liquidity allowed the fund to call a moratorium at any time, they would have redeemed their debentures immediately.

B. Procedural background.

In August 2014, Investor Recovery was organized for the purpose of pursuing a claim against Hopkins Associates. Investor Recovery subsequently filed a complaint against Hopkins Associates, alleging fraud upon each of the individual investors, fraudulent transfers by Hopkins and Murphy, vicarious liability for Hopkins Financial, and civil conspiracy. Investor Recovery later amended its complaint, adding a claim for punitive damages.

After three years of litigation, the district court granted partial summary judgment, dismissing Hopkins Financial as a defendant. The district court concluded that, outside of allegations that Hopkins and Murphy aided and assisted Hopkins Financial and other affiliated entities in soliciting investment, Investor Recovery failed to produce specific evidence making Hopkins Financial liable for the alleged torts of Hopkins and Murphy.

Before trial, Hopkins and Murphy filed a motion to exclude Investor Recovery's expert witness, R. Wayne Klein. The district court held a hearing on the...