Lorenz v. Sauer

• Decision Date: 15 January 1987
• Docket Number: Nos. 85-6322,85-6323,s. 85-6322
• Citation: 807 F.2d 1509
• Parties: M. James LORENZ, Trustee, Plaintiff-Appellant, v. Paul L. SAUER, et al., Real Party in Interest, Commissioner of Real Estate State of California, Defendant-Appellee. M. James LORENZ, Trustee, Plaintiff-Appellant, v. Mark W. RIEDEL, et al., Real Party in Interest, Commissioner of Real Estate, State of California, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1509

807 F.2d 1509

M. James LORENZ, Trustee, Plaintiff-Appellant, v. Paul L. SAUER, et al., Real Party in Interest, Commissioner

of Real Estate State of California, Defendant-Appellee.

M. James LORENZ, Trustee, Plaintiff-Appellant, v. Mark W. RIEDEL, et al., Real Party in Interest, Commissioner

of Real Estate, State of California, Defendant-Appellee.

Nos. 85-6322, 85-6323.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 10, 1986.

Decided Jan. 15, 1987.

David P. Curnow, Sullivan, McWilliams, Lewin, Markham & Disner, San Diego, Cal., for plaintiff-appellant.

Neal J. Gobar, Deputy Atty. Gen., San Diego, Cal., for defendant-appellee.

Appeal from United States District Court for the Southern District of California.

Before ANDERSON, POOLE, and THOMPSON, Circuit Judges.

POOLE, Circuit Judge:

M. James Lorenz, the Trustee of Coastal Equities, Inc., applied for payment from the California Real Estate Recovery Fund ("Recovery Fund") to satisfy judgments he obtained against real estate salesmen Paul Sauer and Michael Riedel. Pursuant to an assignment by several defrauded investors of their rights, Lorenz sued Sauer and Riedel and obtained judgments against them for negligent misrepresentation in connection with their sale of fractionalized real property notes and trust deeds on behalf of Coastal Equities, Inc. The district court granted summary judgment in favor of the California Commissioner of Real Estate ("Commissioner") on the ground that Lorenz as the trustee of the defrauding corporation was not an "aggrieved person" under Cal.Bus. & Prof.Code Sec. 10471. We affirm.

FACTS AND PROCEEDINGS

Coastal Equities, Inc. ("CEI") was incorporated in 1976 for the purpose of selling fractionalized real estate notes and trust deeds ¹ as well as interests in real estate limited partnerships. CEI, as it was later discovered, was actually a "Ponzi scheme" in which the high rates of return on the fractionalized notes and trust deeds were paid to the old investors with money generated by purchases from new investors. Increasing demands for new investors inevitably led to the collapse of the scheme, after which an involuntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code was filed against CEI. The petition was later converted into a Chapter 11 filing for reorganization. Lorenz, the appointed Trustee of the corporation, fashioned a plan of reorganization which was confirmed by the bankruptcy court. Among other things, the plan contained the following assignment clause:

An investor trust deed holder's presentation of an executed ballot to the Trustee shall also serve as a complete and absolute transfer and assignment to the Trustee of all of such electing investor's right, title and interest in the note and investor trust deed and any and all rights and claims held by such electing investor against or as to CEI, insiders of CEI or affiliates of CEI.

The defrauded investors involved in this action all voted for the plan, thereby assigning all their claims to Lorenz.

Pursuant to the assignments, Lorenz filed in the bankruptcy court a series of complaints against various former CEI salesmen. Among the salesmen sued were Sauer and Riedel, who were charged with negligent misrepresentation, constructive fraud, negligence, and securities fraud arising from their sale of the fractionalized Riedel stipulated to the entry of judgment against him on the negligent misrepresentation count, and the court entered judgment in the amount of $528,470. Soon afterwards, Sauer executed a similar stipulation, and judgment for $1,956,391 was entered against him. These sums represent the aggregate face value of fractionalized notes and trust deeds sold by Sauer and Riedel to the investors who had assigned their rights to Lorenz under the reorganization plan. Neither Sauer nor Riedel was able to satisfy the full amounts of the judgments.

notes and trust deeds. While the suits were pending, the district court withdrew its reference of the case to the bankruptcy court, and the cases were refiled in district court.

After each judgment, Lorenz filed an application in the district court for payment of the maximum statutory amount from the Recovery Fund pursuant to Cal.Bus. & Prof.Code Sec. 10471. The cases were consolidated, and thereafter the California Commissioner of Real Estate filed motions to dismiss the applications. Treating the motions to dismiss as motions for summary judgment, the district court denied recovery to Lorenz on the ground that "the Trustee [Lorenz] is not an 'aggrieved person' intended by the California legislature to be able to recover from the special limited fund created and payable only pursuant to Business and Professions Code sections 10471 et seq." Lorenz timely appealed. We have jurisdiction under 28 U.S.C. Sec. 1291, and we affirm.

DISCUSSION

We review a grant of summary judgment de novo to determine whether there remains any genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Darring v. Kincheloe, 783 F.2d 874, 876 (9th Cir.1986). When a decision turns upon applicable state law, and the state's highest court has not adjudicated the issue, the district court must make a reasonable determination, based upon recognized sources, as to the result that the highest state court would reach if it were deciding the case. Molsbergen v. United States, 757 F.2d 1016, 1020 (9th Cir.1985) cert. dismissed, --- U.S. ----, 106 S.Ct. 30, 87 L.Ed.2d 706. Here, the district court granted summary judgment on the basis of its interpretation of Cal.Bus. & Prof.Code Sec. 10471. The district court's construction of that statute, a legal question, is reviewed de novo. Matter of McLinn, 739 F.2d 1395, 1397 (9th Cir.1984) (en banc). Thus, our task is to predict whether the California Supreme Court would determine that the Trustee is not an "aggrieved person" under the statute.

The California legislature established the Recovery Fund to "protect the public against loss resulting from misrepresentation and breach of fiduciary duty by real estate brokers who are unable to respond to damage awards." Antonio v. Hempel, 71 Cal.App.3d 128, 130, 139 Cal.Rptr. 309, 311 (1977). The purpose of the statute is remedial, and it is to be given a liberal construction. Id. Recovery from this fund is available to

any aggrieved person [who] obtains a final judgment in any court of competent jurisdiction against any person or persons licensed under this part, under grounds of fraud [or] misrepresentation * * * arising directly out of any transaction when the judgment debtor was licensed and performed acts for which a license is required under this part * * *.

Cal.Bus. & Prof.Code Sec. 10471(a) (West Supp.1986) (emphasis added). The parties agree that the defrauded investors qualify as "aggrieved persons" under the statute. The Commissioner, however, contends that Lorenz, as the trustee for the company that perpetrated the fraud, is not such an aggrieved person.

After being assigned all the rights of the electing CEI investors, Lorenz obtained stipulated judgments against Sauer and Riedel for negligent misrepresentation in connection with their sale to the investors of fractionalized notes and trust deeds. Under California law, negligent misrepresentation is a species of actual fraud. Gold v. Los Angeles Democratic League, 49 Cal.App.3d 365, 373-74, 122 Cal.Rptr. 732, 738 (1975). California law permits assignment of causes of action for fraud. American Trust Co. v. California Western States Life Insurance Co., 15 Cal.2d 42, 67, 98 P.2d 497, 509 (1940); Jackson v. Deauville Holding Co., 219 Cal. 498, 500, 27 P.2d 643, 644 (1933). In particular, a cause of action to recover damages for fraud in the sale of interests in real estate is assignable. Wikstrom v. Yolo Fliers Club, 206 Cal. 461, 463-66, 274 P. 959, 960 (1929). Under this theory, the electing investors could assign to Lorenz their causes of action against Sauer and Riedel. The Commissioner...