Uecker v. Wells Fargo Capital Fin., LLC (In re Mortg. Fund ‘08 LLC)

• Decision Date: 23 March 2015
• Docket Number: Case No. 14–cv–00993–SI
• Citation: 527 B.R. 351
• 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. Wells Fargo Capital Finance, LLC, Appellee.
• Court: U.S. District Court — Northern District of California

527 B.R. 351

In re Mortgage Fund ‘08 LLC, Debtor.

Susan L. Uecker, in her capacity as Trustee of the Mortgage Fund ‘08 Liquidating Trust, Appellant
v.
Wells Fargo Capital Finance, LLC, Appellee.

Case No. 14–cv–00993–SI

United States District Court, N.D. California.

Signed March 23, 2015

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Alexander Robert Safyan, Clifford H. Pearson, Pearson, Simon & Warshaw, LLP, Sherman Oaks, CA, Dean Alan Ziehl, Pachulski Stang Ziehl Jones LLP, Los Angeles, CA, for Appellant.

George Schieffelin Trevor, Robert George Retana, Pearson Simon Warshaw & Penny LLP, San Francisco, CA, for Appellant/Debtor.

Danny Scot Ashby, David Ingram Monteiro, David Weitman, John E. Garda, K & L Gates LLP, Dallas, TX, Matthew G. Ball, K & L Gates LLP, San Francisco, CA, for Appellee.

ORDER DISMISSING BANKRUPTCY APPEAL IN PART AND AFFIRMING BANKRUPTCY COURT'S ORDER

SUSAN ILLSTON, United States District Judge

Now before the Court is an appeal by appellant Susan L. Uecker from two orders and one memorandum decision entered by the Hon. Roger L. Efremsky of the Bankruptcy Court for the Northern District of California. Dkt. No. 1. The orders and memorandum decision appealed are: (1) the March 27, 2013 order granting appellee Wells Fargo Capital Finance, LLC's motion to dismiss the First Amended Complaint; (2) the February 11, 2014 memorandum decision granting Wells Fargo Capital Finance, LLC's motion to dismiss the Third Amended Complaint without leave to amend; and (3) the February 20, 2014 order dismissing with prejudice the Third Amended Complaint. Id. Upon careful consideration of the parties' papers, the Court DISMISSES Ms. Uecker's appeal from the March 27, 2013 order for lack of subject matter jurisdiction. The Court AFFIRMS the February 11, 2014 memorandum decision and February 20, 2014 order and enters final judgment in favor of Wells Fargo Capital Finance, LLC.

BACKGROUND

This case arises out of Wells Fargo Capital Finance, LLC's involvement in a series of financial transactions that allegedly depleted

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the assets of another corporation and led to its bankruptcy. The following facts are derived from Uecker's Third Amended Complaint (“TAC”). See Dkt. No. 17–1, Ex. 3. The Court accepts as true all factual, non-conclusory allegations made in the TAC. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555–57, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ; Clegg v. Cult Awareness Network, 18 F.3d 752, 754–55 (9th Cir.1994).

I. Factual Background

Walter and Kelly Ng owned and controlled two investment companies that issued secured loans to real estate developers: R.E. Loans, LLC (“R.E.Loans”) and the Mortgage Fund '08, LLC (“MF08”). TAC ¶¶ 2–5, 15–19. The Ngs also owned and managed the Mortgage Fund, LLC (“Manager”), which was MF08's sole owner, manager, and member. Id. ¶¶ 12, 15, 19, 39.

The Ngs and Bruce Horwitz established R.E. Loans in January 2002. Id. ¶ 5. B–4 Partners, LLC, which was owned by Walter Ng, Kelly Ng, Barney Ng, and Bruce Horwitz, managed R.E. Loans. Id . ¶ 16. R.E. Loans raised money by selling unregistered equity interests to investors. Id. ¶¶ 5–6, 16, 26–27, 39. In 2007, R.E. Loans began to face severe cash liquidity problems. Id. ¶¶ 6, 26–27. In July 2007, R.E. Loans obtained a $65 million line of credit from Wells Fargo Capital Finance, LLC (“Wells Fargo”), and gave Wells Fargo a priority security interest in its assets in return. Id. ¶¶ 7, 14, 31. R.E. Loans and Wells Fargo then executed a “Loan and Security Agreement” (“LSA”) to govern the terms of their credit arrangement. Id. ¶¶ 8, 3234; Dkt. No. 17–1, Ex. 6. LSA § 2.6 created a “lockbox” account that gave Wells Fargo control over R.E. Loans' revenues and expenditures. TAC ¶ 32; Dkt. No. 17–1, Ex. 6 at 24. In addition, LSA § 7.13 required that R.E. Loans' financial transactions meet certain conditions, including the prior approval of Wells Fargo, and that those transactions have “fair and reasonable terms.” TAC ¶¶ 32,34; Dkt. No. 17–1, Ex. 6 at 51. However, LSA § 7.13 exempted transfers designated as “Permitted Dispositions,” which LSA § 1.1 defined as “a sale of a Note Receivable ... for a cash purchase price of not less than eighty (80%) of the unpaid balance....” Dkt. No. 17–1, Ex. 6 at 15, 51. Finally, LSA § 4.9(b) provided that “[w]hen a Note Receivable is sold by [R.E. Loans] in accordance with the terms of this Agreement, [Wells Fargo] shall release [Wells Fargo's] Liens in such Note Receivable....” Id.

In October 2007, the managers of R.E. Loans created MF08 for the stated purpose of investing in secured real estate loans. TAC ¶¶ 3, 8, 12, 18, 39, 46. However, MF08's “true purpose” was to “funnel investors' money” from MF08 to R.E. Loans in order to pay R.E. Loans' investors and Wells Fargo's substantial transaction fees. Id. MF08 raised money by issuing promissory notes to investors in exchange for their investments. Id. ¶¶ 3, 39, 47–48. Between December 2007 and March 2009, MF08 raised over $80 million from investors, of which it transferred over $66 million to R.E. Loans, sometimes routing the money through B–4's accounts. Id. ¶¶ 3, 9, 40, 47, 74. These transfers constituted “substantially all of the assets of MF08 and were to MF08's severe financial detriment....” Id. ¶ 35.

When the transfers between R.E. Loans and MF08 began, MF08 maintained two bank accounts at Mt. Diablo Bank, a subsidiary of Greater Bay Bank. Id. ¶ 43. Greater Bay Bank merged with Wells Fargo's parent company in October 2007. Id. ¶¶ 43, 51. Wells Fargo allegedly became

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aware of the contents of MF08's bank accounts by virtue of this merger. Id .

By February 2008, Wells Fargo learned about the transfers between R.E. Loans to MF08 upon reviewing R.E. Loans' financial statements. Id. ¶¶ 35, 49, 51. Specifically, Wells Fargo learned that MF08 had transferred unsecured cash loans to R.E. Loans in exchange for underperforming or defaulted loans. Id. ¶¶ 41, 48, 52. These unsecured debt transfers created a default by R.E. Loans under the LSA. Id. ¶¶ 44, 49–50, 52. To cure the default, Wells Fargo approved a “scheme” with the Manager to “cover up” the unsecured debt transfers: R.E. Loans “would transfer loans it held on real estate to MF08, classify those assets as a sale to MF08, and backdate those transactions to make it appear as if the sale occurred at the time the cash was transferred by MF08.” Id. ¶¶ 49–53, 56. R.E. Loans sold these real estate loans to MF08 at face value, even though the loans were mostly non-performing or in default. Id. ¶¶ 12, 52, 62, 65, 75. R.E. Loans later transferred additional real estate loans to MF08 in exchange for cash. Id. ¶¶ 8224. Wells Fargo participated in this “scheme” by releasing its liens on the loans R.E. Loans transferred to MF08. Id. ¶¶ 52, 70.

To execute this plan, Wells Fargo allegedly reviewed MF08's governing documents, including a “Secured Promissory Note Purchase Agreement” (“NPA”) between MF08 and its investors and the “Mortgage Fund '08 Note Program Confidential Offering Memorandum” (“Offering Memorandum”). Id. ¶¶ 12, 15, 41, 51. NPA § 5.7 placed certain restrictions on MF08's ability to make loans to, and purchase existing loans from, “affiliates.”¹ TAC ¶ 41; Dkt. No. 17–1, Ex. 4 at 13–15. In particular, NPA § 5.7(e) prohibited MF08 from making a loan to an affiliate (designated as a “related party loan”) unless the loan met certain conditions: NPA § 5.7(e)(i) required that related party loans satisfy the same underwriting standards customarily applied by MF08 in other transactions and NPA § 5.7(e)(ii) prohibited related party loans made in excess of twenty percent of MF08's total loan portfolio. TAC ¶ 41; Dkt. No. 17–1, Ex. 4 at 14–15. Pursuant to the final paragraph of NPA § 5.7(e), a related party loan did not include “any loan in which the borrower or co-borrower is a Sponsored Investment Fund....” Dkt. No. 17–1, Ex. 4 at 15. In addition, NPA § 5.7(c) prohibited MF08 from purchasing existing loans from a “Sponsored Investment Fund” unless the borrower of the underlying loan was not in default and the loan satisfied underwriting criteria customarily applied to other MF08 transactions.² TAC ¶¶ 41, 44.

By engaging in these transfers, the Manager allegedly depleted substantially all of MF08's assets in breach of its fiduciary duty to MF08. Id. ¶¶ 11, 77. Wells Fargo allegedly “knew about, facilitated and approved” these transfers and therefore knew that the Manager was breaching its fiduciary duty. Id. ¶ 11. According to the TAC, Wells Fargo knowingly assisted the Manager by releasing the liens it held

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on the loans R.E. Loans transferred to MF08. Id. ¶¶ 46, 49, 51–52, 54, 68. Wells Fargo allegedly benefitted from these transfers because the transfers removed non-performing loans from R.E. Loans and replaced them with cash, thus ensuring that Wells Fargo would collect approximately $4 million in transaction fees and enhancing Wells Fargo's priority security interest in R.E. Loans' assets.Id. ¶¶ 41, 46, 48–49, 51–52, 56, 74, 76.

II. Procedural Background

On September 12, 2011, several investors of MF08 filed a Chapter 7 involuntary bankruptcy petition...