Sarsenstone Corp. v. Griffith
| Decision Date | 24 June 2019 |
| Docket Number | G055106 |
| Court | California Court of Appeals Court of Appeals |
| Parties | SARSENSTONE CORPORATION, Plaintiff and Appellant, v. MICHAEL W. GRIFFITH et al., Defendants and Respondents. |
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
OPINIONAppeal from a judgment of the Superior Court of Orange County, Gail Andrea Andler, Judge. Affirmed.
Law Offices of Dennis Hartmann, Dennis Hartmann; Snell & Wilmer, Richard A. Derevan and Todd E. Lundell for Plaintiff and Appellant.
Blank Rome, Andrew R. Fletcher, Richard Weibley and Jeffrey Rosenfeld for Defendants and Respondents Michael Griffith and FCI Lender Services, Inc.
* * * Sarsenstone Corporation appeals from a judgment following a bench trial in favor of respondents Michael W. Griffith and FCI Lender Services, Inc. (FCI).1 The trial court concluded that Sarsenstone could not prove its claims against respondents for breach of fiduciary duty arising from (1) the solicitation of investors for investment trusts formed from pooling nonperforming consumer loans (promoter-based liability) or (2) the trustee relationship with the investors created by written Declarations of Trust (trustee-based liability). Sarsenstone contends the trial court erred as a matter of law in concluding that (1) Sarsenstone could not assert a promoter-based claim at trial because it failed to plead the claim and (2) promoter-based liability does not apply to the investment trusts at issue. We conclude Sarsenstone failed to plead a promoter-based claim and in any event, the doctrine of promoter liability does not apply to express trusts. Sarsenstone also contends the trial court erred in concluding that no express trust was formed, and even if an express trust had been formed, respondents were not liable for any breach of fiduciary duty. We conclude that some of the investment trusts were not express trusts under the Probate Code, and on the remaining investment trusts, we conclude that respondents were not liable for any trustee-based breach of fiduciary duty because respondents were not trustees, did not assume any duties of a trustee, and were not liable for any breach under a civil conspiracy theory. Accordingly, we affirm the judgment.
On October 28, 2014, Sarsenstone filed a Third Amended Complaint (TAC) alleging causes of action against respondents for (1) breach of fiduciary duty, (2) constructive trust, (3) money had and received, and (4) accounting. According to the TAC, in July 2002, Griffith and Gregory Fernandez formed Old Canal as a joint venture to solicit investors to purchase at a discount portfolios of defaulted secured loans. Old Canal pooled the loans into investment trusts and sold fractional interests in those trusts to investors. Old Canal then sought to collect on the defaulted loans and distribute any proceeds it recovered to the investors.
The TAC further alleged that shortly after creating Old Canal, Griffith and Fernandez conspired to defraud investors and divert investment trusts assets to themselves. One method they allegedly used was to "mark up" the acquisition price of loan pools and pocket the mark up. For example, Griffith and Fernandez would purchase a loan pool at a reduced price, but inform the investors that it had been purchased at a higher price, and split the difference. Griffith and Fernandez also issued to themselves or to companies they owned, such as FCI, interests - "phantom shares" - in some of the investment trusts without paying for those interests. Finally, Griffith and Fernandez represented to the investors that the sole compensation for administering the loan pools would be a 15 percent fee of gross collections, which would increase to 50 percent once total collections had been sufficient to return all of the investors' original investment to them.
The TAC further alleged that as part of their conspiracy, the coconspirators "concealed their activities from investors in the Trusts and all other beneficiaries of their fiduciary duties" and "used their domination of Old Canal to ensure that the corporate entity did nothing to assert its rights against the co-conspirators." The investors in theTrusts allegedly first became aware that Old Canal was breaching its duties to them in April 2007, when certain investors initiated involuntary bankruptcy proceedings against Old Canal.
Finally, Sarsenstone stated it brought the action in two capacities: (1) as successor trustee of certain trusts organized by Old Canal and for which Old Canal was originally the trustee, and (2) as trustee of the "Master Pool" of trusts formed by the bankruptcy court order as successor to certain individual trusts marketed and sold by Old Canal and respondents.
Following a 16-day bench trial, the trial court found that Sarsenstone failed to prove its claims against respondents. In its Statement of Decision, the court made several findings of fact and conclusions of law. It found that Old Canal was formed on July 2, 2002, and the original shareholders in Old Canal were Griffith, who owned 40 percent, and Nest Feather Investments, Inc., which owned 60 percent. Fernandez owned and controlled Nest Feather. The court found that between December 2003 and September 2004, Old Canal purchased delinquent loans from financial institutions with funds that Griffith and others provided to it. After purchasing the loans, Old Canal organized the loans into pools and marketed to investors fractional interests in these loan pools (the "Old Canal Loan Pools"). After the investors provided Old Canal with investment funds, Old Canal provided the investor with a Declaration of Trust and a Letter of Understanding. Each Declaration of Trust and Letter of Understanding was signed by Old Canal as the "Trustee" and by the investor as the "Beneficiary." Until April 2004, Old Canal contracted with FCI to service the loans. After April 2004, Old Canal took over responsibility for servicing the loans.
The trial court determined that Sarsenstone failed to present credible evidence to establish that Griffith or FCI assumed or were responsible for Old Canal's alleged fiduciary duties as the trustee for the Old Canal Loan Pools. According to thecourt, Sarsenstone's case relied heavily on the testimony of Fernandez to prove the relationship between Old Canal and Griffith or FCI, but the court found Fernandez lacked credibility, explaining, "[r]arely has this Court seen a witness so lacking in credibility." After acknowledging that Sarsenstone also presented other evidence aside from Fernandez's testimony, the court concluded "the balance of the evidence presented by Plaintiff was insufficient to meet Plaintiff's burden of demonstrating the level of knowing participation necessary in any wrongful acts or omissions, to the extent there were any, of Fernandez, to impose liability on [respondents]." Specifically, the court determined that Sarsenstone did not present sufficient evidence to establish (1) that Griffith or FCI agreed with Fernandez to conceal from investors the profits Old Canal earned from selling fractional interests in the loan pools, or (2) Griffith and FCI knew of any wrongdoing or knowingly participated in any wrongdoing related to soliciting investments in the Old Canal Loan Pools.
The trial court concluded that Sarsenstone had standing as successor trustee and Master Pool trustee to assert its claims. However, it concluded Sarsenstone failed to present sufficient evidence to establish either Griffith or FCI owed any trustee-based fiduciary duty to the investors. Specifically, the court concluded the Declarations of Trust and Letters of Understanding did not form an express trust, but instead formed a contractual relationship or a "nominee trust," which is excluded from the Probate Code's definition of trusts. It further concluded that FCI's agreement to service loans for Old Canal did not give rise to any fiduciary relationship between FCI and the investors.
The court concluded in the alternative that even if an express trust existed, Old Canal did not have a fiduciary duty to the trust until it accepted the trust by executing the trust instrument or exercising its powers under the trust instrument. The court found that Old Canal did not create the Declaration of Trust or accept the role of trustee until after selling the fractional interest in the loan pools to investors and after distributing profits from these sales to its shareholders. Moreover, the court found that Old Canalalone was the trustee under the Declaration of Trust, and Sarsenstone failed to present evidence sufficient to impose trustee duties on either Griffith or FCI. Specifically, the court found that Old Canal did not delegate its role as trustee to Griffith or FCI; nor did FCI or Griffith take any action that could be construed as accepting the role of trustee.
The trial court concluded Griffith and FCI could not be liable for the acts of Old Canal and Fernandez based on a theory of conspiracy for two reasons. First, nonfiduciaries cannot be liable for breach of fiduciary duty on a conspiracy theory because they are legally incapable of committing the underlying tort, and Sarsenstone failed to present sufficient evidence to establish that Griffith or FCI owed any fiduciary duty. (See Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 511 [...
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