Uecker v. (In re Mortg. Fund 08 LLC), Case No. 15-cv-00077-SI

• Decision Date: 25 September 2015
• Docket Number: C/w 15-cv-00252 SI,Case No. 15-cv-00077-SI,C/w 15-cv-00251 SI
• Court: U.S. District Court — Northern District of California
• Parties: In re MORTGAGE FUND '08 LLC, Debtor. SUSAN L. UECKER, in her capacity as Trustee of the Mortgage Fund '08 Liquidating Trust, Appellant, v. A VERY NICE POOL COMPANY, LTD., Appellee.

In re MORTGAGE FUND '08 LLC, Debtor.

SUSAN L. UECKER, in her capacity as Trustee of the Mortgage Fund '08 Liquidating Trust, Appellant, v. A VERY NICE POOL COMPANY, LTD., Appellee.

Case No. 15-cv-00077-SI

C/w 15-cv-00251 SI

C/w 15-cv-00252 SI

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

September 25, 2015

ORDER AFFIRMING BANKRUPTCY COURT AND DENYING MOTION FOR SANCTIONS

Now before the Court are three consolidated appeals by appellant Susan L. Uecker, Liquidating Trustee of the Mortgage Fund '08 Liquidating Trust, from orders of the Bankruptcy Court for the Northern District of California dismissing three adversary proceedings filed by the Trustee. For the reasons set forth below, the Court AFFIRMS the Bankruptcy Court and DENIES appellees' motion for sanctions.

BACKGROUND

These consolidated appeals arise out of the bankruptcy of Mortgage Fund '08 ("MF08").¹MF08 was formed in December 2007 as a Delaware limited liability company for the stated purpose of raising capital through the issuance of notes to investors and making loans secured by real estate with the funds raised. See Case No. 11-49803-RLE-11 (Bankruptcy Dkt. 101). In reality, MF08 was part of a fraudulent scheme perpetrated by Walter and Kelly Ng in which investors' money was funneled from MF08 to R.E. Loans LLC ("R.E. Loans"), another company that was also owned and controlled by the Ngs. R.E. Loans was an investment company that issued secured loans to real estate developers. The Ngs owned and managed The Mortgage Fund, LLC ("TMF"), which was MF08's sole owner, manager, and member. Bar-K, Inc., an affiliated entity owned by Kelly Ng and his brother Barney, served as MF08's loan servicer and broker.

Appellees A Very Nice Pool Company, Ltd. ("Pool"), Paul and Patricia Cianci ("Cianci"), and Mari DeMarsh² ("DeMarsh") invested money with R.E. Loans, and they withdrew their money in 2008. R.A. at UE 000050, UE000057, UE000064.³

On September 12, 2011, several investors of MF08 filed a Chapter 7 involuntary bankruptcy petition against MF08 in the Bankruptcy Court for the Northern District of California.⁴ See Case No. 11-49803-RLE-11 (Bankruptcy Dkt. 1). On February 3, 2012, the Bankruptcy Court appointed appellee Susan L. Uecker as the Liquidating Trustee of the Mortgage Fund '08 Liquidating Trust ("Trustee") pursuant to a Liquidating Trust Agreement. (Bankruptcy Dkt. 101).

On September 9, 2013, the Trustee filed 17 complaints, all arising out of similar transactions. Among the complaints are these three cases, in which the Trustee alleged, inter alia, that appellees were investors in R.E. Loans and that at no time did any appellee invest any money in MF08. Pool Complaint ¶ 17 (R.A. at UE000050); Cianci Complaint ¶ 17 (R.A. at p. UE000057), DeMarsh Complaint ¶ 17 (R.A. at UE000064). The complaints alleged that fundswere transferred from MF08's account at Wells Fargo Bank to each of the appellees, and that the transfers were fraudulent. Pool Complaint ¶¶ 17-19 (R.A. UE000050), Cianci Complaint ¶¶ 17-19 (R.A. at UE000057), DeMarsh Complaint ¶¶ 17-19 (R.A. at UE000064). The complaints alleged two claims: (1) a claim to avoid transfer and recover the monies paid to appellees under Cal. Civ. Code §§ 3439.04(a)(1) and 3439.07 on the grounds that they were paid with actual fraudulent intent to hinder, delay and defraud MF08's creditors; and (2) a claim to avoid transfer and recover those monies under Cal. Civ. Code §§ 3439.04(a)(2) and 3439.07 on the grounds that the monies paid to appellees was constructively fraudulent. See id.

On October 8, 2013, appellees Pool and Cianci answered the complaints, attaching as exhibits documents showing that the funds were transferred from TMF's bank account, not from MF08's. Pool Answer ¶ 17, Ex. A (R.A. UE000070, UE000078-79), Cianci Answer ¶ 17, Ex. A (R.A. at UE000082, UE000090-91). On November 8, 2013, appellee DeMarsh filed an answer which, inter alia, admitted that at certain times the Plan had invested money with R.E. Loans, LLC, and denied that the Plan received any money from MF08 or from a Wells Fargo account. (DeMarsh Answer ¶¶ 11, 17 (R.A. at UE000092-98, UE000095)).

On December 3, 2013, the Bankruptcy Court held an initial status conference in the 17 adversary proceedings filed by the Trustee. R.A. at Plan 000747-792 (transcript of Dec. 3, 2013 status conference).⁵ During the conference, after noting that the Trustee wished to amend the complaints, the Bankruptcy Court inquired why the Trustee had filed complaints alleging that fraudulent transfers were made by MF08 to appellees when the record before the Bankruptcy Court showed that the payments had been made by TMF and not MF08. R.A. at Plan 000763-64. Specifically, the Bankruptcy Court noted that the Trustee's former counsel, Iain Macdonald, had filed a declaration on August 6, 2012, in a related adversary proceeding (Uecker v. Kelly Ng et al., Case No. 11-49803-RLE-11; Adv. Proc. No. 12-04099-RLE), in which Mr. Macdonald outlined the "scheme" by which money was transferred from MF08 to R.E. Loans through TMF.⁶ Thebankruptcy court stated,

One of the things that it struck me as odd is the way the complaint was drafted, and it talks about the money coming from the Mortgage Fund '08 account to these people or to these defendants. And Mr. Brower [counsel for a number of the defendants] had no problem producing multiple documents showing that the funds appear to be coming out of the Mortgage Fund account. And I'm just curious why it is that your firm didn't have that information, because I've got a declaration from Mr. Macdonald of Macdonald Fernandez. This was filed in case number 11-49803. He signed this declaration on August 6, 2012, well after the settlement was reached, apparently in June of 2012. But he has his declaration going through as to what happened. He attaches a very detailed letter from Barney Ng's counsel to the managing members of R.E. Loans, LLC, outlining everything that went on, along with - that's Exhibit A. And then Exhibit B is a handwritten letter or what's purported to be a handwritten letter or statement from Mr. Ng, though it's not signed, basically accounting. And it attaches documents from R.E. Loans, Inc.

I was just curious why it is that the trustee, who's been involved in this case so long, failed to realize where the money was actually coming from with regards to these defendants.

R.A. at Plan 000763-64.

The Bankruptcy Court and counsel for the Trustee and the adversary proceeding defendants (appellees here) then discussed the contents of Mr. Macdonald's declaration. Mr. Brower, counsel for appellees A Very Nice Pool Company and Paul and Patricia Cianci, stated,

Mr. Brower: [I]f you look at the Iain Macdonald declaration in the exhibit following the Barney Ng note, you'll see that it is R.E. Loan's account record for the Mortgage Fund, LLC. And if you look down at, you'll see in pencil writing the names of my clients that are right on that document. . . . And what it shows is it shows that - and there's $4 million there if you look at - again, that's the missing $4 million. And if you look at that, you will see that - I look at my checks - every time there was a check from the Mortgage Fund, LLC to an R.E. Loans investor, it said, "Advance R.E. Loans" right on the check. And then the - the counter-balancing entry in the books with the purchase of my client's rights or interests by the Mortgage Fund. It says right on there: "Bought share" -

The Court: Right. There's a distinction I want to point out that this isn't an issue where Mortgage Fund '08 upstreamed the money to R.E.L. who then used the money and then in exchange for that money allegedly transferred interest in real property back to Mortgage Fund '08 in order to pay down noteholders. There is a significant - I think it's over $4 million, where Mortgage Fund actually acquires the interest. It's - it - basically they were purchasing the R.E.L. noteholders' interest. So that's a different issue from, "Oh, the money went to R.E.L. and then R.E.L.then used it to pay down the noteholders." This is where Mortgage Fund '08, and there's even correspondence, where I think one of the defendant says, "I need to get cashed out. Is someone willing [to buy] my interest"; and the next thing, Mortgage Fund ends up acquiring this gentleman's interest.

Id. at Plan 000765-67.

The Bankruptcy Court also noted that the defendants in the adversary proceedings contended that the Trustee's claims were covered and barred by the terms of a settlement that the Trustee had entered into with R.E. Loans in the separate R.E. Loans bankruptcy.⁷ Id. at Plan 000752-53, 000757-59, 000767-72. The Bankruptcy Court noted that "there seems to be a serious issue of whether the compromise excludes these . . . defendants[,]" with the Trustee, on the one hand, taking the position that her claims in the adversary proceedings were not barred because the R.E. Loans settlement only released claims against R.E. Loans noteholders who received payments directly from R.E. Loans; and the adversary proceeding defendants, on the other hand, asserting that the Trustee's claims had been released because the R.E. Loans settlement waived all claims against R.E. Loans noteholders who received payments from R.E. Loans (whether directly or through another entity), and the release waived the protections of California Civil Code Section 1542. See generally id. The Bankruptcy Court inquired, "[i]f Ms. Uecker knew about this and when she negotiated the settlement in June of 2012 in Texas with the mediator, Judge Newsome, Retired, why didn't she specifically spell out the 17 individuals are not part of the settlement[?]" Id. at Plan 000768. The bankruptcy court noted that "[t]he pleadings are really sloppy," id. at Plan 000779, and then set a schedule for briefing the Trustee's motion to amend the complaints. Id. at Plan 000784.

On December 19, 2013, the Trustee sought leave to amend the complaints to allege that thefunds were...