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In re Mortgage Fund '08 LLC

United States District Court, N.D. California

March 23, 2015

In re MORTGAGE FUND '08 LLC, Debtor.
v.
WELLS FARGO CAPITAL FINANCE, LLC, Appellee. SUSAN L. UECKER, in her capacity as Trustee of the Mortgage Fund '08 Liquidating Trust, Appellant,

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

SUSAN ILLSTON, 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 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 (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, 32-34; 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 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. ¶¶ 82-24. 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 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 against MF08 in the Bankruptcy Court for the Northern District of California.[3] Id. ¶ 10; see Case No. 11-49803-RLE-11, Dkt. No. 1. On February 3, 2012, the bankruptcy court appointed Susan L. Uecker as the Liquidating Trustee of the Mortgage Fund '08 Liquidating Trust ("Liquidating Trust") pursuant to a Liquidating Trust Agreement. TAC ¶¶ 10, 13; Dkt. Nos. 16-2, 16-3.[4]

On June 26, 2012, Uecker initiated an action against Wells Fargo in bankruptcy court on behalf of the Liquidating Trust for the benefit of MF08's creditors. TAC ¶ 10; see Case No. 12-04137, Dkt. No. 1. Uecker alleged claims for fraudulent transfer under federal and California law and aiding and abetting breach of fiduciary duty under California law. Id.

On March 27, 2013, pursuant to Federal Rule of Civil Procedure 54(b) and Federal Rule of Bankruptcy Procedure 7054, the bankruptcy court entered partial final judgment in favor of Wells Fargo and dismissed with prejudice Uecker's fraudulent transfer claims asserted in the First Amended Complaint. Dkt. No. 17-1, Ex. 1; see Case No. 12-04137, Dkt. No. 52. On February 11, 2014, the bankruptcy court issued a memorandum decision granting Wells Fargo's motion to dismiss the TAC and its sole remaining claim for aiding and abetting breach of fiduciary duty without leave to amend. Dkt. No. 17-1, Ex. 2. In its February 11, 2014 memorandum decision, the bankruptcy court explained that "[t]o 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)." Dkt. No. 17-1, Ex. 2 at 2. On February 20, 2014, the bankruptcy court entered an order dismissing with prejudice the TAC. Case No. 12-04137, Dkt. No. 88. See Exec. Benefits Ins. Agency v. Arkison, 134 S.Ct. 2165, 2172, 2174 (2014). Accordingly, the Court will treat the bankruptcy court's memorandum decision as proposed findings of fact and conclusions of law. See id. at 2174. Uecker now appeals from the bankruptcy court's two orders and memorandum decision.

DISCUSSION

I. Jurisdiction and Standard of Review

28 U.S.C. § 158(a) governs jurisdiction over an appeal from an order of a bankruptcy court. In re Frontier Properties, Inc., 979 F.2d 1358, 1362 (9th Cir. 1992). The Court examines de novo a bankruptcy court's final orders and judgments rendered pursuant to 28 U.S.C. § 157(c)(2). See 28 U.S.C. § 158(a)(1). A district court reviewing a bankruptcy court's proposed findings of fact and conclusions of law rendered pursuant to 28 U.S.C. § 157(c)(1) shall enter a final order or judgment following de novo review. 28 U.S.C. § 157(c)(1); Fed.R.Bankr.P. 9033(d); In re S. Cal. Sunbelt Developers, Inc., 608 F.3d 456, 461 (9th Cir. 2010).

In reviewing a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the Court must dismiss a complaint if it fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). A plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570. This "facial plausibility" standard requires the plaintiff to allege facts that add up to "more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While the Court must accept the facts plead in the complaint as true and construe all facts in the light most favorable to the plaintiff, the Court is not required to accept as true "allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).

II. Fraudulent Transfer

Wells Fargo asks the Court to dismiss Uecker's appeal as to the fraudulent transfer claims asserted in the First Amended Complaint for lack of subject matter jurisdiction, and in the alternative, to enter judgment against Uecker for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Uecker contends that she properly preserved her fraudulent transfer claims for appeal and alleged sufficient facts in the First Amended Complaint to state a claim for fraudulent transfer.

A. Subject Matter Jurisdiction

Wells Fargo contends that the Court lacks subject matter jurisdiction over Uecker's appeal as to the fraudulent transfer claims asserted in the First Amended Complaint because Uecker failed to file a timely notice of appeal. Uecker responds that she properly preserved her claims for appeal pursuant to Lacey v. Maricopa County, 693 F.3d 896 (9th Cir. 2012) (en banc).[5]

In order to appeal a judgment of a bankruptcy court to a district court, an appellant must file a notice of appeal within fourteen days of "the date of entry of the judgment... appealed from." Fed.R.Bankr.P. 8002; see 28 U.S.C. § 158(a)(1). On March 27, 2013, the bankruptcy court entered - with Uecker's consent as to the form - partial final judgment dismissing with prejudice the fraudulent transfer claims. Dkt. No. 17-1, Ex. 1; see Case No. 12-04137, Dkt. No. 52. Uecker filed her notice of appeal eleven months later, on February 25, 2014. Dkt. No. 1. Her appeal is therefore untimely and the Court lacks subject matter jurisdiction over her appeal as to the fraudulent transfer claims asserted in the First Amended Complaint. See Bowles v. Russell, 551 U.S. 205, 209 (2007) ("the taking of an appeal within the prescribed time is mandatory and jurisdictional.'") (citations omitted).

Uecker contends that she properly preserved her claims for appeal under Lacey. In Lacey, the Ninth Circuit held that a plaintiff is not required to replead claims dismissed with prejudice and without leave to amend in order to preserve the claims for appeal. See 693 F.3d at 928. Uecker argues that under Lacey she was not required to replead the dismissed fraudulent transfer claims in order to preserve them for appeal. Uecker's reliance on Lacey is misplaced. Lacey did not address the requirement that an appellant file a timely notice of appeal of a judgment to confer jurisdiction a district court with subject matter jurisdiction over a bankruptcy appeal. While Lacey holds that Uecker did not waive her right to appeal by opting not to replead her fraudulent transfer claims, Uecker was still required pursuant to Federal Rule of Bankruptcy Procedure 8002 to file her appeal within fourteen ...


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