The opinion of the court was delivered by: Irma E. Gonzalez, Chief Judge United States District Court
Order Granting Garrison & McInnis's Motion to Require Receiver to Pay Remaining Proceeds to Satisfy Lien [Doc. No. 894]
The law firm of Garrison & McInnis, L.L.P. ("G&M") moves the Court for an order requiring the Receiver to pay to it the sum of $285,261.51, or the remaining proceeds from the sale of the real property located at 1329 West Muirlands Drive in La Jolla. G&M argues it is entitled to the remaining proceeds from the sale pursuant to a valid and perfected lien it held against the property. The SEC and the Receiver filed oppositions. G&M filed a reply.
A hearing was held before Chief Judge Irma E. Gonzalez on August 27, 2007. Following the hearing, the Court ordered G&M to submit supplemental briefing regarding the amount of fees it claims. G&M has submitted its supplemental briefing and declarations, and the Receiver and SEC have filed supplemental responses.
Presto Communications and Vassallo initially retained G&M on or about May 2, 2000, to provide counsel regarding an employment dispute with a Presto employee. [Declaration of Gregory Garrison in Support of Reply ("Garrison Decl."), Doc. No. 902, Attachment #2, ¶ 3.] Since that time, G&M has represented Presto and Vassallo, and other officers and directors of Presto in seventeen separate lawsuits other than this one. [Id.; Declaration of Donald McInnis in Support of Reply ("McInnis Decl."), Doc. No. 902, Attachment #1, ¶ 3; Declaration of Donald McInnis in Support of Reply Regarding Motion for Court Approval of Foreclosure Sale ("McInnis Foreclosure Decl."), Doc. No. 134, ¶ 4 .]
By the middle of 2003, Presto owed G&M a substantial sum in past due attorneys fees. [Garrison Decl., ¶ 4.] Although Presto wanted G&M to continue to work on the pending litigation matters, G&M refused to do so without a guarantee of payment. [Id.] As a result, on July 8, 2003, G&M accepted a promissory note in the amount of $600,000 in favor of G&M. The note was secured by a deed of trust on the 1329 West Muirlands Drive property. [Id.; G&M's Notice of Lodgment in Support of Motion ("G&M NOL"), Exhibit A.] The promissory note and deed of trust were both signed by A.L. Vassallo and Cynthia J. Vassallo.
After the filing of this action, G&M submitted a claim for fees accrued prior to the appointment of the Receiver in the amount of $268,611.86. [G&M Reply NOL, Exhibit I.] The proof of claim reflects work done on twelve matters, including in defense of the SEC's subpoenas. [Id.; Garrison Reply Decl., ¶ 6.] According to the supplemental briefing provided by G&M after the August 27, 2007 hearing, at the time the Vassallos executed the promissory note and deed of trust on July 8, 2003, Presto Communications owed G&M $96,734.23 in legal fees, $5,405.70 of which pertained to that firm's defense of the SEC's investigation. [Supplemental Response, Notice of Lodgment, Doc. No. 909, Exhibit B.] In addition, contrary to the amount set forth in the G&M proof of claim filed August 13, 2004, G&M's supplemental briefing shows that as of January 24, 2004, when the Receiver was appointed, Presto Communications owed G&M $193,017.10 in legal fees, $6,483.70 of which were related to that firm's defense of the SEC's investigation. [Id.]
On February 7, 2007, the Court granted the Receiver's motion to sell the real property located at 1329 West Muirlands Drive. After the residence was sold, all secured liens were paid. In addition, the Court authorized the Receiver to pay $150,000 to Bank of America in satisfaction of its lien, which was superior to G&M's. After payment of the undisputed liens, there is approximately $134,870 in proceeds remaining from the sale of the property. Currently, two parties seek those remaining proceeds: G&M and the Receiver. G&M argues it is entitled to the remaining proceeds because it has a valid, perfected lien, entered into at arms length in consideration for legal services rendered.
The SEC and Receiver oppose G&M's motion for payment of the sale proceeds in satisfaction of G&M's lien. The SEC and Receiver argue (1) the deed of trust is invalid on its face, (2) investor funds were used, in part, to purchase the home such that all remaining proceeds should be deemed investor funds, (3) there are questions about the validity of the lien, including the timing of the parties' agreement, the amount of the lien, and the lack of supporting documentation, and (4) G&M is not entitled to any fees because it assisted Vassallo in attempting to avoid the SEC's investigation and continued to represent Vassallo in this litigation, contrary to the interests of Presto.
1. Facial Validity of the Lien
The SEC and Receiver argue the deed of trust is invalid on its face because it was signed by the Vassallos after they transferred the West Muirlands Drive property to the Vassallo Family Trust. The SEC and Receiver argue the Trust, not the Vassallos, owned the home and Mr. and Mrs. Vassallo had no authority to further encumber the property.
In response, G&M points out that although the Vassallos executed a grant deed transferring the West Muirlands Drive property to the Vassallo Family Trust on December 13, 2002, that deed was not recorded until September 15, 2003. G&M's deed of trust was recorded on July 8, 2003. G&M cites to Cal. Civ. Code §§ 1213 and 1214 which protect the interests of a bona fide or good faith encumbrancer, created by a recorded instrument, against prior unrecorded interests.*fn1
Under California law, it is well established that priority is determined according to time of recording, regardless of the time of transfer. Bratcher v. Buckner, 90 Cal. pp. 4th 1177, 1185 (2001). As a result, the SEC and Receiver must explain why G&M was not entitled to rely upon the record title (in the name of the Vassallos and not the Vassallo Family Trust) and should not be considered good faith encumbrancers. First Fidelity Thrift & Loan Ass'n v. Alliance Bank, 60 Cal. App. 4th 1433, 1440-41 (1998) ("a ...