Rosen v. Kore Holdings, Inc. (In re Rood)

Decision Date26 September 2011
Docket Number08–26866PM,Bankruptcy Nos. 08–17199PM,08–26862PM,08–26859PM,08–26854PM,08–26865PM,08–27099PM.Adversary No. 09–0188PM.
Citation459 B.R. 581
PartiesIn re Robert F. ROOD, IV, The Source, LLC, Blue Horseshoe Portfolio Services, LLC, Level One Capital Partners, LLC, Blue Horseshoe Capital, LLC, Mattehorn Financial, LLC, Level One Capital Partners, a MD LLC, Debtors.Gary A. Rosen, Chapter 7 Trustee and Southern Management Corporation Retirement Trust, Plaintiffs. v. Kore Holdings, Inc; Arcadian, Inc.; First Washington Financial Corporation; Level One Mortgage Capital; Mortgage American Bankers; Source Bio–Plastics, Inc. Sunvolt; Whiplash Motor Sports, LLC; Robert Fulton Rood, IV; Charles Timothy Jewell; Nik Hepler; Grace Ann Rood; Robert F. Rood, III; Warren A. Hughes, Jr.; and First Washington Equities, LLC, Defendants.
CourtU.S. Bankruptcy Court — District of Maryland

459 B.R. 581

In re Robert F. ROOD, IV, The Source, LLC, Blue Horseshoe Portfolio Services, LLC, Level One Capital Partners, LLC, Blue Horseshoe Capital, LLC, Mattehorn Financial, LLC, Level One Capital Partners, a MD LLC, Debtors.Gary A. Rosen, Chapter 7 Trustee and Southern Management Corporation Retirement Trust, Plaintiffs.
v.
Kore Holdings, Inc; Arcadian, Inc.; First Washington Financial Corporation; Level One Mortgage Capital; Mortgage American Bankers; Source Bio–Plastics, Inc.
Sunvolt; Whiplash Motor Sports, LLC; Robert Fulton Rood, IV; Charles Timothy Jewell; Nik Hepler; Grace Ann Rood; Robert F. Rood, III; Warren A. Hughes, Jr.; and First Washington Equities, LLC, Defendants.

Bankruptcy Nos. 08–17199PM

08–26854PM

08–26859PM

08–26862PM

08–26865PM

08–26866PM

08–27099PM.Adversary No. 09–0188PM.

United States Bankruptcy Court, D. Maryland,at Greenbelt.

Sept. 26, 2011.


[459 B.R. 588]

Nelson C. Cohen, Zuckerman Spaeder LLP, Washington, DC, Paul Sweeney, James R. Schraf, Logan, Yumkas, Vidmar & Sweeney, LLC, Annapolis, MD, for Plaintiffs.

Robert F. Rood, Potomac, MD, pro se.

Kore Holdings, Potomac, MD, pro se.Arcadian, Inc., Potomac, MD, pro se.First Washington Financial Corporation, Potomac, MD, pro se.Level One Mortgage Capital, LLC, Potomac, MD, pro se.Kaptain Koontz, Silver Spring, MD, pro se.Source Bio–Plastics, Inc., Potomac, MD, pro se.Sunvolt, Potomac, MD, pro se.Whiplash Motor Sports, LLC, Potomac, MD, pro se.Robert Fulton Rood, IV, Potomac, MD, pro se.Charles Timothy Jewell, Annapolis, MD, pro se.Nik Hepler, Laytonsville, MD, pro se.Jeffrey M. Orenstein, Goren, Wolff & Orenstein, LLC, Rockville, MD, for Defendants Grace Ann Rood and Robert F. Rood, III.Warren Hughes, Upper Marlboro, MD, pro se.First Washington Equities, LLC, Potomac, MD, pro se.Mortgage American Bankers c/o Kaptain Koontz, pro se.
MEMORANDUM OF DECISION
PAUL MANNES, Bankruptcy Judge.

This matter came before the court for the trial of a Complaint filed by Gary A. Rosen, as Chapter 7 Trustee of the above-captioned estates (the “Trustee”), and Southern Management Corporation Retirement Trust (“SMCRT”) (collectively, the “Plaintiffs”). SMCRT is a trust that was created to manage the pension funds of employees and officers of Southern Management Corporation. SMCRT holds a nondischargeable judgment, entered by default, against Debtor–Defendant Robert F. Rood, IV (“Rood”) in Adversary Proceeding No. 09–00058 brought in Rood's Chapter 7 Case No. 08–17199, in the amount of $13,876,353.47.1 This judgment arose out of a fraudulent scheme whereby funds placed in Rood's hands to invest on behalf of SMCRT were misappropriated.

The instant Complaint was filed against Rood; 2 Kore Holdings, Inc. 3 (“Kore”), a

[459 B.R. 589]

publicly held Nevada corporation with its principal place of business in Maryland; Kore's wholly owned subsidiaries Arcadian, Inc., First Washington Financial Corporation, Level One Mortgage Capital, Mortgage American Bankers, Source Bio–Plastics, Inc., Sunvolt, and Whiplash Motor Sports, LLC (collectively known as “the Kore subsidiaries”); Rood's parents, Robert F. Rood, III and Grace Ann Rood (collectively, the “Roods”); 4 Charles Timothy Jewell (“Jewell”); Nik Hepler (“Hepler”); 5 Warren A. Hughes, Jr. (“Hughes”); 6 and First Washington Equities, LLC (“FWE”).7 At the time of the filing of the Complaint, Rood was acting as the President and Chief Executive Officer of Kore and FWE, and Jewell was the Chief Operating Officer of Kore. Hepler and Hughes were associates of Rood.

I. Events Leading Up To The Complaint

SMCRT and Rood commenced a business relationship in late 2005, whereby SMCRT agreed to fund and purchase private loans originated by Rood and his affiliated entities. These entities, hereinafter referred to as the “Debtor Entities” or the “Rood Entities,” included The Source, LLC; Blue Horseshoe Portfolio Services, LLC (“Blue Horseshoe Portfolio”); Level One Capital Partners, LLC (“Level One”); Blue Horseshoe Capital, LLC (“Blue Horseshoe Capital”); Mattehorn Financial, LLC; and Level One Capital Partners, a MD LLC. The primary purpose of each loan was to fund construction and renovation projects. The loans were to be secured by at least one parcel of real property. Rood arranged matters so that SMCRT never had direct contact with borrowers. He would present the loan applications and supporting documentation to SMCRT's loan committee, and after an application was approved, SMCRT would wire the loan proceeds to a settlement agent designated by Rood (rather than directly deposit money with Rood or the Debtor Entities).

Consistent with this arrangement, SMCRT made thirty-two loans through Rood between April 2006 and September 2007. SMCRT's principals first expressed concerns regarding Rood's management of

[459 B.R. 590]

the loan portfolio in September 2007, when Rood failed to cooperate after being asked to “account for the borrowers' funds that were in his possession.” Trial Tr., David Hillman 8 Test., 4/14/10, 75. After Rood produced a letter from his attorney stating that he was under no obligation to provide the requested information to SMCRT, id. at 77, SMCRT's accountants, Hillman & Glorioso, P.L.L.C. (“H & G”), undertook an investigation into Rood's accounting records. Rood did not comply with repeated requests by H & G for information. Instead, he selected an accountant to prepare a “Special Purpose Review.” This report, prepared by Lloyd Mallory, C.P.A. (“Mallory”), stated that M–Financial Services, Inc. had “reviewed and verified all loans serviced by Level One Capital Partners, LLC and Blue Horseshoe Capital, LLC” and “verified that all Borrower's Construction Reserves have been properly managed and disbursements to the borrowing entities have been made in accordance with the procedures outlined by [Level One] and [Blue Horseshoe Capital] and agreed to by [SMCRT] and [Tysons Financial, LLC].” Pl. Ex. 463. The report concluded that “[b]ased on our review, we are not aware of any material modifications that should be made to any of the loan files nor any discrepancy between what has been reported regarding the loan files and any bank balances associated with holding the Borrower's Construction Reserves ‘in trust’.” Pl. Ex. 463, 1.

Notwithstanding the conclusions of the Special Purpose Review, Plaintiffs discovered that the Defendants were commingling and misusing SMCRT loan proceeds for personal gain. In early March 2008, SMCRT was contacted by borrowers who were unable to access SMCRT funds that Rood was allegedly holding for them (Trial Tr., David Hillman Test., 4/14/10, 79). Accordingly, on May 9, 2008, SMCRT filed suit against Rood, Blue Horseshoe and Level One in the Circuit Court for Montgomery County. Pursuant to a Temporary Restraining Order issued by the Circuit Court, a trustee was appointed to examine all books, records and files pertaining to SMCRT's loan portfolio. Rood filed the instant Chapter 7 case on the day before a hearing in the Circuit Court regarding the appointment of a permanent receiver and the granting of a preliminary injunction.9 After Rood's bankruptcy filing, the Circuit Court took no further action as to him but entered an Order appointing Thomas Murphy, Esq. (“Murphy”) as receiver, together with an Order enjoining the Debtor Entities from misappropriating funds and dissipating assets. Murphy filed an ex parte motion for right of entry, asserting that his private investigator saw evidence of large-scale destruction and disposal of documents at the office used by Rood located at 4845 Rugby Avenue, Bethesda, Maryland (the “Rugby Avenue Office”). Plaintiffs allege that Rood, Jewell, Kore, and FWE all participated in this document destruction and disposal. Upon the court's granting of Murphy's motion, Murphy proceeded to seize all items authorized under the Circuit Court Order, including bank records, loan files, computers, and electronic storage devices located at the Rugby Avenue Office.

At the meeting of creditors held in the Chapter 7 cases of Rood and the Debtor Entities pursuant to 11 U.S.C. § 341 on July 2, 2008, questions were raised as to the origin of Rood's income and the extent of support received by Rood from his parents.

[459 B.R. 591]

Rood invoked his Fifth Amendment privilege with respect to these and other issues that came to light during the § 341 meeting (such as whether any of the Debtor Entities received money in connection with the closing of SMCRT loans). Shortly thereafter, SMCRT filed an Emergency Motion for Rule 2004 Examination that was granted by Order entered July 21, 2008, whereby Rood was directed to produce all documents listed in the Rule 2004 Motion and to appear for examination.10 Rood did not provide any of the required documents until the court scheduled a hearing on SMCRT's motion to compel production. Plaintiffs assert that the five folders of documents produced were organized by Rood, Jewell and Hughes “in a self-serving manner designed to confuse and delay a complete production.” At the August 20, 2008 hearing on SMCRT's motion to compel, Rood was ordered to produce all required documents. D.E. No. 60. Rood repeatedly failed to produce the requested documents and, on multiple occasions, the Plaintiffs revisited the issue of Rood's lack of compliance, leading to the entry of a Consent Order on Suggestion of Contempt on September 18, 2008, “whereby [Rood] agreed to make his offices and home immediately available for a videotaped inspection, to disclose storage facilities in his control, to turn over his PDA device, and to make best efforts to produce all documents requested by the Plaintiffs.” The inspection yielded evidence that a number of the requested documents had not yet been produced. Plaintiffs argued that certain Defendants (namely, Hepler, Jewell, and Rood, Sr.) had the opportunity to remove documents prior to the inspection.

II. Procedural History

This Complaint was filed by the Plaintiffs on April 1, 2009. Plaintiffs also filed an...

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