Uecker v. Wells Fargo Capital Fin., LLC (In re Mortg. Fund '08 LLC)
| Decision Date | 11 February 2014 |
| Docket Number | Bankruptcy Case No. 11-49803 RLE,Adv. Proc. No. 12-4137 RLE |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Northern District of California |
| Parties | In re: MORTGAGE FUND '08 LLC, Debtor. SUSAN L. UECKER, Trustee of the Mortgage Fund '08 Liquidating Trust, Plaintiff, v. WELLS FARGO CAPITAL FINANCE, LLC, Defendant. |
The following constitutes the
Before the Court for decision is the Motion to Dismiss by defendant Wells Fargo Capital Finance ("Wells Fargo") regarding the Third Amended Complaint (the "Complaint") filed by plaintiff Susan L. Uecker, in her capacity as the Liquidating Trustee of the Mortgage Fund '08 Liquidating Trust (the "Trustee" and "MF08"). The matter has been fully briefed and argued.
The only claim alleged in the Complaint is for aiding and abetting a pre-petition breach of fiduciary duty which is based on California law. The claim does not arise under title 11, and did not arise in the bankruptcy case of MF08 and is thus not a core proceeding under 28 U.S.C. § 157(b)(2).1 The claim is related to the chapter 11 case of MF08 and the Court may decide it on its merits. 28 U.S.C. § 1334(b); Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d 1189 (9th Cir. 2005). To the extent any party takes the position that this Court may not enter a final order in this matter, the Court deems this Memorandum Decision a report and recommendation to the district court. 28 U.S.C. § 157(c).
The standard for dismissal of a complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6),applicable here by Federal Rule of Bankruptcy Procedure 7012, is familiar to the parties and does not warrant extensive discussion.
A complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2), applicable here by Fed. R. Bankr. P. 7008. Detailed factual allegations are not required to survive a Rule 12(b)(6) motion, but a complaint must allege sufficient facts to raise a right to relief above the speculative level. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
In evaluating this Rule 12(b)(6) motion, the Court engages in a two-step analysis. First, the Court accepts as true all non-conclusory, factual allegations made in the Complaint. Based upon these allegations, the Court draws all reasonable inferences in favor of the Trustee. Second, after accepting as true all non-conclusory allegations and drawing all reasonable inferences in favor of the Trustee, the Court determines whether the Complaint alleges a plausible claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). Despite the liberal pleadings standards of Rule 8, conclusory allegations will not save a complaint from dismissal. Id., at 678. A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id., at 678. If there are two alternate explanations, one advanced by the defendant and the other advanced by the plaintiff, both of which are plausible, a complaint will survive a motion to dismiss under Rule 12(b)(6); a complaint may be dismissed only when a defendant's plausiblealternative explanation is so convincing that plaintiff's explanation is implausible. Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011).
The Complaint refers to and relies on the Note Purchase Agreement (the "Note Purchase Agreement") and the Confidential Offering Memorandum ("Offering Memorandum") between MF08 and its investors and the Loan and Security Agreement (the "Loan Agreement") between Wells Fargo and RE Loans, LLC ("RE Loans"). These documents are exhibits to Wells Fargo's Memorandum in support of its Motion to Dismiss. Docket no. 75, Ex. 1-3.
The Court may consider evidence on which the Complaint necessarily relies if (1) the complaint refers to the document; (2) the document is central to the plaintiff's claim; and (3) no party questions the authenticity of the copy attached to the Rule 12(b)(6) motion. Branch v. Tunnell, 14 F.3d 449, 453-54 (9th Cir. 1994), rev'd on other grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th Cir. 2002). The Complaint relies on these three documents, they are central to the Trustee's claim and their authenticity is not questioned. Accordingly, the Court will treat them as part of the Complaint and will assume their contents are true for present purposes. United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).
The parties are familiar with the background of this case and the allegations of the Complaint so they will not be repeated in great detail.
The Complaint alleges that MF08 was owned and managed by the Mortgage Fund, LLC, (the "Mortgage Fund" or the "Manager") andthat individuals Walter Ng and Kelly Ng owned and controlled the Mortgage Fund. Compl. ¶ 15. The Complaint also alleges that Walter and Kelly Ng controlled MF08's affiliated entities, including RE Loans and B-4 Partners, LLC. Compl. ¶¶ 16-20.2
The story alleged in the Complaint is that Walter Ng and other Ng family members formed RE Loans to make secured loans to real estate developers, raising funds by selling unregistered equity interests to investors who initially became members of RE Loans. Compl. ¶ 16. RE Loans operated successfully for several years, paying consistent returns to its investors until 2007. At that point, RE Loans was advised by its attorneys that it was violating state and federal securities laws and could not accept new money from investors. At the same time, the real estate market began to struggle and RE Loans' borrowers began to under-perform, putting RE Loans in a liquidity crisis. Compl. ¶¶ 26-28.
To solve its liquidity crisis, in July 2007, RE Loans obtained a $65 million line of credit from Wells Fargo, pursuant to which RE Loans gave Wells Fargo a first priority security interest in its secured loans as collateral. Compl. ¶¶ 31-33. In October 2007, RE Loans created MF08 with a stated purpose of making secured loans to real estate developers, and MF08 began soliciting investors, as RE Loans had, with promised returns of 8% or more per year all as described in the Offering Memorandum and as governed by the Note Purchase Agreement. Compl. ¶¶ 39-41.
The Complaint alleges that the "true purpose" of MF08 was to"funnel investors' money from MF08 to RE Loans" which it immediately began to do, and in its "creation and operation" it was a fraudulent scheme in which the managers of RE Loans and MF08 used new investors' money (from MF08) to pay old investors' purported returns (from RE Loans) and pay Wells Fargo substantial fees and interest. Compl. ¶¶ 8, 12, 46, 79, 83. Between December 2007 and April 2009, as part of this "scheme," MF08 raised $80 million from investors and transferred $66 million to RE Loans and received underperforming or defaulted loans of a lower value in return. Compl. ¶¶ 5-9, 46.
The Complaint alleges that Wells Fargo learned that MF08 had transferred cash to RE Loans - designated as an unsecured loan - when it received RE Loans' financial statement for the last quarter of 2007 in February 2008. Compl. ¶¶ 49-52. Following this discovery, Wells Fargo reviewed MF08's governing documents, and insisted that RE Loans cure what was a default under its Loan Agreement. RE Loans then sold three real estate secured notes to MF08 to eliminate the unsecured indebtedness and cure the default under the Loan Agreement (the "Initial Note Sales"). The Complaint alleges this involved "backdating" these sales to make it appear they had taken place on earlier dates. Compl. ¶¶ 52, 54, 56, 58, 66. RE Loans later transferred other real estate secured notes to MF08 in exchange for subsequent cash transfers (the "Subsequent Note Sales"). Compl. ¶¶ 71-74. The Complaint alleges the Initial Note Sales and the Subsequent Note Sales violated the terms of the Note Purchase Agreement between MF08 and its investors and resulted in the depletion of substantially all of MF08's assets, leading to its bankruptcy filing. Compl. ¶¶51-52, 75.
The Complaint alleges that Wells Fargo knew that the Manager was breaching its fiduciary duty to MF08 as of February 2008 and then knowingly assisted the Manager in accomplishing this "scheme" to deplete MF08 of its assets. Compl. ¶¶ 46, 68. Between December 2007 and April 2009, approximately $66 million was transferred by MF08 to RE Loans in exchange for real estate secured notes which the Complaint alleges were worth far less than that. The Trustee is seeking to recover an unspecified amount of compensatory and punitive damages. Compl. ¶¶ 18, 51, 77, 85, 86.
Wells Fargo contends that the Complaint should be dismissed without leave to amend because the allegations of the Complaint show that the affirmative defense of in pari delicto precludes the Trustee's case against Wells Fargo. Alternatively, Wells Fargo contends that the Complaint should be dismissed without leave to amend because it does not - and cannot - adequately plead the aiding and abetting breach of fiduciary duty claim. Wells Fargo argues that the Complaint does not allege facts plausibly showing that Wells Fargo had the requisite knowledge or provided the requisite substantial assistance to the Manager in depleting MF08 of its assets.
The Trustee contends that the in pari delicto defense can not be decided on a motion to dismiss because it involves factual issues. The Trustee also contends that the defense should not apply to her as a matter of equity or policy, and that theComplaint does plead all that is required to state...
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