Woodson Co., In re

• Decision Date: 25 March 1987
• Docket Number: Nos. 85-2698,85-2714,s. 85-2698
• Citation: 813 F.2d 266
• Parties: 17 Collier Bankr.Cas.2d 80, 15 Bankr.Ct.Dec. 1381, Bankr. L. Rep. P 71,728 In re: The WOODSON COMPANY, Debtor. FIREMAN'S FUND INSURANCE COMPANIES, et al., Plaintiffs-Appellees, v. William B. GROVER, Trustee, and Official Unsecured Creditors' Committee, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 266

813 F.2d 266

17 Collier Bankr.Cas.2d 80, 15 Bankr.Ct.Dec. 1381,

Bankr. L. Rep. P 71,728

In re: The WOODSON COMPANY, Debtor FIREMAN'S FUND INSURANCE COMPANIES, et al., Plaintiffs-Appellees, v. William B. GROVER, Trustee, and Official Unsecured Creditors' Committee, Defendants-Appellants.

Nos. 85-2698, 85-2714.

United States Court of Appeals Ninth Circuit.

Argued and Submitted July 15, 1986.

Decided March 25, 1987.

Margaret Sheneman, San Francisco, Cal., for plaintiffs-appellees.

Alan Jaroslovsky and Philip S. Warden, Santa Rosa, Cal., for defendants-appellants.

Appeal from the United States District Court for the Northern District of California.

Before BROWNING, Chief Judge, FLETCHER and NELSON, Circuit Judges.

FLETCHER, Circuit Judge:

Appellant, trustee in bankruptcy, appeals from a summary judgment excluding assets from the bankrupt estate. We reverse and remand.

FACTS

In 1984, the debtor, Woodson Company (Woodson), a licensed mortgage broker, filed under chapter 11 of the Bankruptcy Code. At the time of bankruptcy Woodson had a loan portfolio worth $65 million composed of approximately 380 loans secured by deeds of trust to real estate; approximately 2,200 investors furnished the funds for the loans.

Typically, Woodson located and evaluated proposed loans and potential borrowers. Woodson Investors, Ltd. (WIL), a California limited partnership of which Woodson was the sole general partner, provided the initial financing for approved loans. WIL was the payee of promissory notes executed by the borrowers and beneficiary of deeds of trust securing the notes.

Woodson located "permanent fund" investors (permanent investors) or "revolving fund" investors (revolving investors) to "take out" the interests of the limited partnership in the loans. ¹ WIL then assigned fractional interests in specific promissory notes and deeds of trust to the investors. The assignments were recorded in the county recorder's office. Woodson kept possession of the promissory notes until paid or discharged by foreclosure. They were not endorsed by WIL to either Woodson as attorney-in-fact for the investors, or to the investors.

Woodson purchased an insurance policy from Fireman's Fund whereby it insured Woodson's contractual obligations to its investors. The agreement between the permanent investors and Woodson provided that the permanent investors receive a guaranteed rate of interest on each investment. The rate differed from agreement to agreement, the spread between that which the borrower paid Woodson and that which Woodson paid to the investor ranging between 1% and 6%. Woodson guaranteed monthly payments to each investor regardless of whether borrowers made their monthly payments. Woodson also agreed to advance sums to cover senior encumbrances, taxes, insurance, and liens. In the event of default, Woodson negotiated with the delinquent borrower to work out the default. Woodson, however, did not consult the investors during this process nor obtain their approval of any new or modified terms. If a loan was foreclosed, the investors had an option either to receive payment in full (unpaid principal balance plus accrued interest) from Woodson or to reimburse Woodson for the costs of foreclosure and to take title to the property at the time of sale. No investor ever exercised this latter option. Upon WIL's acquisition of property through foreclosure, it immediately deeded the property to Woodson by grant deed in exchange for a promissory note in the full amount of the bid price at foreclosure.

Woodson's trustee in bankruptcy asserts that the loans are property of the bankrupt estate, and that he is entitled to hold all collections on the loans until the investors' rights are determined in the bankruptcy proceedings. Fireman's Fund and four plaintiffs brought suit and filed a motion for partial summary judgment seeking a declaratory judgment that the notes and deeds of trust are not property of the bankrupt estate but rather the property of the investors. Appellants, the trustee and creditors, responded with cross-motions for summary judgment. The bankruptcy court determined the interests of the permanent investors, reserving its ruling in respect to the revolving investors. ² It held that the permanent investors' claims were direct claims against the borrowers, not against the bankrupt estate and that the notes secured by the deeds of trust were owned by the investors, not the estate. The judgment required the trustee to pay all amounts received on the notes to those permanent investors whose notes and deeds of trust met the following requirements: (1) named WIL as payee and beneficiary; (2) were in Woodson's possession; (3) were recorded (in the case of deeds of trust); and (4) were assigned from WIL by properly executed instruments. The district court affirmed the judgment of the bankruptcy court.

I. Jurisdiction

We must determine first whether we have jurisdiction to hear this appeal. 28 U.S.C. Sec. 158(d) (Supp. III 1985) provides jurisdiction to our court for appeals from all final decisions, judgments, orders, and decrees entered by district courts in appeals to them from bankruptcy courts. The bankruptcy court held that the interests of the permanent investors were not part of the bankrupt estate and that the notes, deeds of trust and their proceeds should be delivered to Fireman's Fund; it reserved judgment, however, on the nature of the interests of revolving investors. As the interests of the revolving investors and other issues remain to be decided, we must determine whether the decision of the lower court is final within the meaning of Sec. 158(d).

The Supreme Court has adopted a practical rather than a technical construction of the requirement of "finality". Gillespie v. United States Steel Corp., 379 U.S. 148, 152, 85 S.Ct. 308, 311, 13 L.Ed.2d 199 (1964), (holding that the practical effects of marginally final orders must be taken into account in determining appealability). That a pragmatic approach to finality is necessary in bankruptcy proceedings was recognized by this court in In re Mason, 709 F.2d 1313, 1318 (9th Cir.1983) where we found jurisdiction to hear the appeal of a denial of a motion to vacate an order for relief. In finding that such an order was final for purposes of appeal in bankruptcy cases, this court stated, "one thing seems clear: certain proceedings in a bankruptcy case are so distinct and conclusive either to the rights of individual parties or the ultimate outcome of the case that final decisions as to them should be appealable as of right." Id. at 1317. This court focused on similar concerns in In re Exennium, Inc., 715 F.2d 1401, 1403 (9th Cir.1983). The bankruptcy court had determined that the sale of leases from the debtor to a third party was void because the third party was the debtor's former attorney. Although this holding did not settle finally the dispute between the trustee and the lessor, this court heard the appeal because it was "fundamental to the further outcome of this case" and "[u]ntil settled this issue will cast its shadow over further administration of the estate". See also In re Saco Local Development Corp., 711 F.2d 441 (1st Cir.1983) (an order establishing the fact of priority but not the amount is a final order for purposes of appeal).

As the partial summary judgment in this case does not determine the interests of the revolving investors, ³ we must decide whether the interests of the two types of investors are intertwined in such a way that resolution of the rights of the permanent investors affects or is affected by resolution of the claims of the revolving investors. On some loans, the funds of the revolving investors were used to supplement the permanent investors' funds. For example, if Woodson could fund only 90% of a particular loan with funds from permanent investors, the other 10% would be funded by the revolving investors. Thus the revolving investors claim a partial interest in some of the same notes and deeds of trust in which permanent investors claim a partial interest. If the revolving investors ultimately are held to be general creditors, to the extent assets are removed from the estate, they may suffer. Rather than looking to the financial consequences that the decision may have on the revolving investors, however, we must determine whether the discrete legal issue of whether the permanent investors loaned money against the security of the deeds of trust or purchased participations in the loans can be decided separately from the determination of the nature of the interests of the revolving investors.

The transactions between the revolving investors and Woodson and the permanent investors and Woodson were very different in character. Whereas each permanent investor selected the specific loan or loans in which to invest and furnished funds for a specific percentage participation in a specific loan, the revolving investors each deposited $100,000 into a passbook savings account over which Woodson had a power of attorney and from which it could withdraw funds at its discretion. Permanent investors had to wait until the loan matured before repayment to them; revolving investors, on the other hand, could withdraw their funds upon giving Woodson 30 days notice. The same rate of interest was paid to all revolving investors and was tied to the Bank of America's rate for certificates of deposit or Woodson's lending rate, whichever was greater, while the rate of interest paid permanent investors was tied to the specific loans in which they invested.

These differences suggest that the issue of whether the permanent investors purchased participation interests or made loans to Woodson is discrete and unrelated to the determination of the nature of the revolving investors' interests. The transactions of each group of investors are sufficiently distinct that deciding whether permanent investors purchased participation interests or...