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Fox Hollow of Turlock Owner's Association v. Mauctrst, LLC

United States District Court, E.D. California

March 31, 2017

FOX HOLLOW OF TURLOCK OWNER'S ASSOCIATION, a California Nonprofit Mutual Benefit Corporation, et al., Plaintiffs
v.
MAUCTRST, LLC, et al., Defendants

          FINDINGS OF FACT AND CONCLUSIONS OF LAW

         I. Procedural History

         1. The plaintiffs in this case are Fox Hollow of Turlock Owners' Association (“Fox Hollow HOA”) and California Equity Management Group, Inc. (“CEMG”).

         2. The defendants in this case are Richard Sinclair, Brandon Sinclair, Lairtrust, LLC (“Lairtrust”), Capstone, LLC (“Capstone”), Mauctrst, LLC (“Mauctrst”), Gregory Mauchley and Stanley M. Flake (both personally and as trustee of the Julie Insurance Trust, the F. Hanse Trust, and the Capstone Trust, collectively “Flake Defendants”).

         3. This case is related to a state court case filed on April 24, 2003 in Stanislaus County Superior Court, Case No. 332233 (“State Court Action”). Parts of the present case were stayed pending final resolution of the State Court Action. The parties filed a notice of settlement on July 16, 2007. Doc. 303. However, in the State Court Action, it was determined that the settlement was unenforceable. The case was resolved in a bench trial. The ruling by the Superior Court was affirmed by the Fifth District Court of Appeal and the petition for review was denied by the California Supreme Court in 2013.

         4. The operative complaint in this case is the Consolidated Amended and Supplemental Complaint (“CAC”), Doc. 410.

         5. Defendants Richard Sinclair, Brandon Sinclair, Mauchley, Mauctrst, Capstone, and Lairtrust also filed counterclaims against Plaintiffs. Docs. 80, 425, and 471. These counterclaims were dismissed with prejudice Doc. 1014.

         6. The Flake Defendants reached a settlement with Plaintiffs. Doc. 1179. The claims against them were dismissed. Doc. 1187.

         7. Defendants Mauchley and Mauctrst also reached a settlement with Plaintiffs. Doc. 1009. The claims against Defendant Mauchley were dismissed. Doc. 1195. By stipulation of the relevant parties, Mauctrst's answer was stricken and default was entered against Mauctrst with the damages to be determined as part of the prove up hearing. Doc. 1017.

         8. Defendants have failed to obey a variety of court orders in this case. They have been sanctioned multiple times. See Docs. 613, 891, and 1014. Additionally, they have been warned about their noncompliance without sanctions being imposed. See Docs. 727 and 860. In the end, Defendants Richard Sinclair, Brandon Sinclair, Lairtrust, and Capstone were specifically warned that the court would enter default against them if they did not comply with court order. Doc. 1014, 19:27-20:3. On September 26, 2014, as a sanction for repeated violations, their answers were stricken and default was entered. Doc. 1070.

         9. The defendants in this case who had default entered against them are Richard Sinclair, Brandon Sinclair, Lairtrust, Capstone, and Mauctrst (collectively “Defaulted Defendants”).

         10. Defendants Richard Sinclair and Brandon Sinclair appealed the order. Docs. 1072 and 1073. Their appeals were dismissed for lack of jurisdiction as the entry of default was not an appealable order. Doc. 1080.

         11. On November 28, 2014, Defendant Richard Sinclair filed for bankruptcy. Doc. 1078. All proceedings against Defendant Richard Sinclair were stayed. Doc. 1079. The bankruptcy court modified the automatic stay to permit Plaintiffs to proceed in their case against Richard Sinclair. On May 11, 2015, the stay in this case was lifted. Doc. 1092.

         12. Meanwhile, Defendant Richard Sinclair made a motion for a new trial. Doc. 1083. The motion was treated as a request for reconsideration and denied. Doc 1184.

         13. On October 16, 2015, the court ordered the parties to confer regarding a status conference hearing date at which time the prospect of a prove up hearing could be discussed. Doc. 1189.

         14. Defendant Richard Sinclair asked that the hearing be set after December 31, 2015 due to medical issues. Doc. 1190.

         15. The status conference was set for January 11, 2016 and Defendants Richard Sinclair and Brandon Sinclair were ordered to personally appear. Doc. 1194.

         16. The bankruptcy court held a hearing on December 17, 2015 regarding Defendant Richard Sinclair's legal competency. Judge Ronald Sargis concluded that Defendant Richard Sinclair was legally competent to proceed as a party in his bankruptcy case. Doc. 1196-1.

         17. On January 11, 2016, Defendants Richard Sinclair and Brandon Sinclair failed to appear at the hearing. The court set a briefing schedule for default judgment and set the prove up hearing for May 10, 2016. Doc. 1199.

         18. Plaintiffs made a formal motion for default judgment. Doc. 1203. On April 14, 2016, Defendant Richard Sinclair filed a timely opposition and declaration. Doc. 1208. Defendant Richard Sinclair also submitted 108 exhibits in support of his opposition on May 3, 2016, well after the opposition deadline.

         19. On May 5, 2016, Defendant Richard Sinclair filed an ex parte motion to continue the prove up hearing; he asserted that due to his medical issues, he was not allowed to drive until the end of May. Doc. 1217. The request was denied and the court directed Defendant Richard Sinclair to find alternate means of transportation to make it to the hearing. Doc. 1219.

         20. The default judgment prove up hearing was held pursuant to Fed. Rule Civ. Proc. 55(b)(2) on May 10, 2016.

         21. None of the Defaulted Defendants took part in the hearing. The morning of the hearing, Defendant Richard Sinclair asked to appear telephonically but his request was denied. Doc. 1237, Transcript, 1:13-25.

         22. At the hearing, Defendant Richard Sinclair's declaration and exhibits were stricken as a sanction for his failure to appear and failure to comply with court orders requiring his appearance at hearings. Doc. 1237, Transcript, 10:6-14.

         23. Andrew Katakis, Sherri Lucy, and Casey Johnson testified. All of Plaintiffs' proffered exhibits, 1 through 50, were admitted. At the conclusion of the prove up hearing, the court invited Plaintiffs to submit proposed findings of fact and conclusions of law (“proposed FOFCOL”).

         24. Plaintiffs filed proposed FOFCOL and a supplemental brief. Docs. 1226 and 1227. Defendant Richard Sinclair filed an opposition. Doc. 1228.

         25. Defendant Richard Sinclair also filed a motion for reconsideration of the court's decision to strike his exhibits from the record. Doc. 1222.

         II. Facts As Alleged in the Consolidated Amended and Supplemental Complaint (“CAC”), Doc. 410

         Nature Of The Action

         26. This action arises out of the defendants' fraudulent real estate scheme of creating the false appearance of a homeowners association and individually saleable lots at a thirty-five (35) unit town home complex located in Turlock, California, and known as Fox Hollow of Turlock (“Fox Hollow”), in order to obtain loans secured by portions of Fox Hollow and to enrich themselves at the expense of the lenders, the successors to the lenders and the homeowners association by skimming off loan proceeds, dues collected in the name of the homeowners association, and rental income and tenant deposits, all while concealing their scheme and attempting to shield themselves from individual liability by creating shell companies and churning record title to the property (the “Fox Hollow Scheme”).

         27. Among other things, various defendants as more specifically alleged below: (1) represented to the City of Turlock in 1994 that Fox Hollow had a homeowners association with funds for common area lighting when no homeowners association existed; (2) conveyed title to individual lots at Fox Hollow between themselves in 1997 without either forming a homeowners association or conveying title to the common area at Fox Hollow to the homeowners association as they were required to do by the City of Turlock as a condition to the subdivision that had created such lots; (3) falsely represented to a lender in 1997 as part of obtaining five (5) loans totaling almost $1.5 million secured by lots at Fox Hollow that Fox Hollow had a homeowners association even though no homeowners association existed; (4) obtained a further subdivision of Fox Hollow in 1998 without either forming a homeowners association or conveying title to the common area at Fox Hollow to the homeowners association, and without performing work required to make the lots individually saleable such as constructing firewalls between lots and relocating underground utilities to individual lots, all as they were required to do by the City of Turlock as a condition to the subdivision that created such lots; (5) falsely represented to several lenders in 1998 as part of obtaining fifteen (15) loans totaling more than $1.8 million secured by lots at Fox Hollow that Fox Hollow had a homeowners association even though no homeowners association existed, and fraudulently concealed from those lenders that the lots were not individually saleable and that appraisals upon which the loans were based were subject to the completion of work such as firewalls and utility relocations that defendants had not done; (6) fraudulently concealed from the lenders in 1997 and in 1998 that the collateral for some of the loans did not include the one car garages that corresponded to the units included as collateral; (7) created a shell company called Mauctrst LLC and transferred record title to the lots at Fox Hollow to that shell company only seven (7) days after the fifteen (15) loans in 1998 closed, and then less than one (1) year later and after defaulting on all those loans, put the shell company in bankruptcy to delay the foreclosures; (8) created documents and instruments purporting to give Capstone Trust secured rights to Fox Hollow as a front for defendants to skim further money off Fox Hollow; (9) exploited the fact defendants had not performed the work to make the lots individually saleable to try to force the lenders to sell the loans to defendants at a substantial discount off the amount due, after Fox Hollow was abandoned by the bankruptcy trustee as severely over encumbered; (10) concealed from the lenders that the collateral for some of the loans did not include the one car garages corresponding to the units securing the loans and then exploited the error to prevent the units from being separately saleable; (11) manufactured homeowners association records and purported to act during the second one-half of 2000 on behalf of the homeowners association (even though they had not formed the homeowners association nor conveyed the common area to the homeowners association); (12) demanded in the name of the homeowners association that the lenders who were completing the foreclosures on their loans pay homeowners association assessments of $300 per month per lot or face delinquency notices, liens and foreclosures; (13) formed Plaintiff Fox Hollow HOA, on December 6, 2000, and thereby imposed upon it the unfunded obligations, liabilities and expenses to complete the requirements of the City of Turlock and to repair and maintain the common area and buildings on the property that defendants had neglected; (14) initiated at least six (6) lawsuits in state court to further delay the remaining foreclosures, all of which they lost; (15) initiated a seventh (7th) lawsuit in state court to further delay the foreclosures on four (4) of the other lots, and then settled that suit by using a fraudulent double escrow to purchase two (2) of the lots from the lender in the first escrow while skimming off loan proceeds in the second escrow on each lot; (16) rented units at Fox Hollow and collected deposits and rents on those units even though they did not own the units; (17) refused to turn over first month's rent and tenant deposits upon demand; and (18) throughout the entire time, neither assessed to themselves nor otherwise paid for the costs and expenses of keeping up, repairing and maintaining Fox Hollow.

         28. As a result of the fraudulent scheme, among other things, the lenders lost millions of dollars including on claims assigned to Plaintiff CEMG, and Plaintiff Fox Hollow HOA as the homeowners association by virtue of its obligations under the CC&Rs for the property, and Plaintiff CEMG as the successor to the lenders, were required to and did spend more than $1.3 million to perform the work required by the City of Turlock to make the lots individually saleable and to otherwise remedy the waste and neglect of Fox Hollow committed by defendants.

         Parties

         29. Plaintiff Fox Hollow of Turlock Owners' Association (“Fox Hollow HOA”) is, and at all times herein mentioned since on or about December 6, 2000 was, a non-profit mutual benefit corporation organized and existing under the laws of the State of California, with its principal office located in Stanislaus County, California.

         30. Plaintiff California Equity Management Group, Inc. (“CEMG”) is, and at all times herein mentioned was, a corporation organized and existing under the laws of the State of California, with its principal office located in Stanislaus County, California.

         31. Defendant Mauctrst, LLC (“Mauctrst”) is and at all times mentioned herein since on or about April 28, 1998, was a limited liability company, conducting business in Stanislaus County, California, and owned and controlled by Defendants Mauchley and Richard Sinclair.

         32. Defendant Gregory Mauchley (“Mauchley”) is an individual who, at all times in this action was commenced resided in Stanislaus County, California.

         33. Defendant Richard C. Sinclair (“Richard Sinclair”) is an individual who, at all times mentioned herein, resided in Stanislaus County, California. Defendant Richard Sinclair and his spouse, Deborah A. Sinclair, will be referred to from time-to-time herein as the “Sinclairs.”

         34. Defendant Stanley M. Flake (“Flake”), at all times alleged herein, resided in Tuolumne County, California, and was trustee of the Julie Insurance Trust, trustee of the F. Hanse Trust, and trustee of the Capstone Trust.

         35. Defendant Brandon Sinclair is an individual who, at all times mentioned herein, resided in Stanislaus County, California.

         36. Defendant Lairtrust, LLC (“Lairtrust”) is and at all times mentioned herein since on or about May 26, 2000, was a limited liability company, conducting business in Stanislaus County, California, and owned and controlled by the Sinclairs.

         37. Defendant Capstone, LLC (“Capstone, LLC”) is and at all times mentioned herein since on or about December 3, 2001, was a limited liability company, conducting business in Stanislaus County, California, and owned and controlled by Defendants Richard Sinclair and Brandon Sinclair.

         38. Defendant Mauctrst is, and at all times mentioned herein was, the alter ego of Defendants Mauchley and Richard Sinclair, in that there exists, and at all times herein mentioned, has existed, a unity of interest and ownership between such Defendants such that any separateness has ceased to exist, in that among other things Defendants Mauchley and Richard Sinclair used assets of Defendant Mauctrst for their personal uses, caused assets of Defendant Mauctrst to be transferred to both or one of them without adequate consideration, treated assets of Mauctrst as owned by them individually, withdrew funds from Defendant Mauctrst's bank accounts for their personal use, and inadequately capitalized Mauctrst for the activities it conducted. Adherence to the fiction of separate existence of Mauctrst as an entity distinct from Defendants Richard Sinclair and Mauchley would permit an abuse of the limited liability privilege and would sanction a fraud and promote injustice in that among other things Defendants Mauchley and Richard Sinclair, and each of them, carried on their investment and real estate business in the limited liability company's name exactly as they had conducted it previous to formation, exercising complete control and dominance of such business to such an extent that any individuality or separateness of Defendant Mauctrst and Defendants Mauchley and Richard Sinclair does not, and at all times herein mentioned did not, exist.

         39. Plaintiffs are informed and believe, and thereupon allege, that at all times mentioned herein, each and every Defendant was the agent and employee of each and every other Defendant and, in doing the acts herein alleged, was acting within the actual and apparent course and scope of such agency and employment and with the permission and consent of each other Defendant, and each Defendant ratified the conduct of each other Defendant and is estopped by reason of his, her and its conduct and statements from denying such agency and employment and that he, she or it acted within such course and scope of agency and employment.

         Jurisdiction and Venue

         40. This court's jurisdiction is based on 28 U.S.C. § 1331; 15 U.S.C. § 1964(a); and applicable principles of supplemental jurisdiction under 28 U.S.C. § 1367(a).

         41. Venue is proper in this judicial district and division pursuant to 28 U.S.C. §§ 1391(b); 18 U.S.C. § 1965; and Local Rule 3-120(d).

         Background Facts For Claims

         The Fox Hollow Property

         42. The real property about which the present action relates (the “Fox Hollow Property”) is: commonly known as 152 20th Century Boulevard, Turlock, California; located in the City of Turlock, County of Stanislaus, State of California; and more particularly described as: The East Half Of That Portion Of Land As Follows:

Beginning At The Northeast Corner Of Section 15, Township 5 South, Range 10 East, Mount Diablo Base And Meridian, According To United States Government Township Plats Running Thence West On The Section Line Between Section 10 And 15, 1, 059.3 Feet; Thence South 0 Degrees 45 Minutes East 472.5 Feet As Place Of Beginning; Thence Same Course 472.5 Feet; Thence South 89 Degrees 30 Minutes East 368.76 Feet; Thence North 0 Degrees 45 Minutes West 472.5 Feet; Thence North 89 Degrees 30 Minutes West 368.76 Feet To Place Of Beginning. Excepting Therefrom The West 15 Feet.

         43. The Fox Hollow Property consists of approximately 1.76 acres, and is rectangular in shape, with approximately 170 feet fronting on 20th Century Boulevard, and a depth of approximately 442 feet.

         44. On or about March 6, 1996, Defendant Flake as executive trustee of the Julie Insurance Trust, filed in Book 37 of Maps, Page 38, Stanislaus County Records, a final subdivision map for the Fox Hollow Property, and thereby subdivided the Fox Hollow Property into Lots 1, 11, 18 and 19, and a designated remainder (“Fox Hollow Subdivision Map # 1”). Such lots as created by the filing of the Fox Hollow Subdivision Map #1 shall be referred to herein by their lot number (e.g., “Lot 1”).

         45. Fox Hollow Subdivision Map # 1 as filed in the Official Records of Stanislaus County, California on March 6, 1996, depicted Lot 18A contiguous to Lot 19 and adjacent to Lot 18.

         46. On or about July 21, 1998, Defendant Mauchley filed in Book 38 of Maps, Page 19, Stanislaus County Records, a final subdivision map for the Fox Hollow Property, and thereby further subdivided the designated remainder of the Fox Hollow Property into Lots 2 through 10, Lots 12 through 17, and a common area (“Fox Hollow Subdivision Map # 2”). Such lots as created by the filing of the Fox Hollow Subdivision Map #2 shall be referred to herein by their lot number (e.g., “Lot 2”).

         47. Fox Hollow Subdivision Map # 2 as filed in the Official Records of Stanislaus County, California on July 21, 1998, depicted Lot 2A as contiguous to Lot 12 and across the common area from Lot 2, depicted Lot 6A as contiguous to Lot 15 and across the common area from Lot 6, depicted Lot 7A as contiguous to Lot 16 and across the common area from Lot 7, depicted Lot 8A as contiguous to Lots 16 and 7A and across the common area from Lot 8, depicted Lot 9A as contiguous to Lot 18 and across the common area from Lot 9, and depicted Lot 10A as contiguous to Lot 17 and across the common area from Lot 10.

         Initial Purchase, Encumbrance, And Development Of Fox Hollow Property As An Apartment Complex

         48. The Sinclairs purchased the Fox Hollow Property in November 1988 after obtaining approval from the City of Turlock to construct a 35-unit townhouse apartment complex, and obtained a construction loan in the face amount of $1, 492, 500 from Stockton Savings & Loan Association (“Stockton S&L”), secured by a first deed of trust against the Fox Hollow Property, that was recorded on November 7, 1988 (the “Stockton Construction Loan”).

         49. Construction of the apartment complex on the Fox Hollow Property started in 1989 and was completed in late 1990 or early 1991. The apartment complex consisted of two rows of buildings along the east and west sides of the property facing each other, with a swimming pool at the south end, and access to 20th Century Boulevard at the northern boundary.

         50. The buildings included three (3) detached single-family dwellings with one-car garage, nine (9) duplexes with attached one-car garages, and seven (7) duplexes with detached one-car garages.

         51. The Sinclairs stopped making payments on the Stockton Construction Loan in July 1992, and Stockton S&L recorded a Notice of Default on August 11, 1993, asserting a default in the amount of $172, 525.92.

         Entitlements Obtained From The City Of Turlock To Subdivide And Convert The Fox Hollow Property Into A Twenty (20) Lot Planned Unit Development With Homeowner's Association

         52. On or about the summer of 1992, Defendant Richard Sinclair made a preliminary proposal to the Community Development Department of the City of Turlock (the “Turlock Development Department”) to subdivide the Fox Hollow Property and convert the property to a planned unit development.

         53. On or about August 10, 2002, the Turlock Building Department responded to the preliminary proposal in writing, by letter sent to Richard Sinclair, in which the Turlock Building Department advised Defendant Sinclair that: The creation of a multi-lot subdivision from the existing apartment complex would require a formal submittal of applications for rezone, a planned development permit, a tentative subdivision map, and a conditional use permit; Mr. Sinclair's proposal to promote ownership of individual lots with multi-unit structures tended to promote a pattern of absentee owners sharing little beyond their investment; the City would require a complete building code analysis report of existing building construction and proposed property lines and would require construction modifications so that units were structurally and architecturally independent of each other prior to the recording of a final subdivision map; and under the circumstances, staff did not support the proposal as presented because of concerns about the proposal creating major challenges for a successful residential development.

         54. On or about September 17, 1992, Defendant Richard Sinclair confirmed in writing in a letter sent to the Director of the Turlock Development Department that he agreed to implement the conditions for approval of the project into CC&Rs for the property “to protect the general public's welfare and safety in perpetuity, ” and that he had proceeded to have the CC&Rs and homeowners documents redrafted accordingly.

         55. On or about February 2, 1993, Defendant Richard Sinclair as “Applicant” and “Owner” applied to the City of Turlock for a conditional use permit, planned unit development, rezoning and vesting tentative map, to subdivide the Fox Hollow Property into nineteen (19) lots, and a common area, and to convert the apartment complex to a planned unit development with a homeowners association owning and being responsible for the maintenance of the common area and certain aspects of the individual lots (the “Project”).

         56. As part of the application for approval of the Project, Defendant Richard Sinclair represented through his engineer on the Vesting Tentative Map of Fox Hollow submitted to the City of Turlock on or about February 5, 1993, that the garages that were detached from the dwelling units are denoted as Lots with a number followed with the capital letter “A” and that the relationship between those “A” lots and the dwelling units was that a garage lot corresponded to the dwelling unit with the same numeric lot number, as for example as stated on the Vesting Tentative Map “GARAGE LOT 6A CORRESPONDS TO DWELLING UNIT LOT 6.”

         57. On or about March 4, [1993], the Turlock Community Development Department issued a letter to Defendant Richard Sinclair confirming that a complete building code analysis of the existing building construction would be required, that any modifications to the existing structures that were required to meet current standards for subdivided lots would need to be accomplished prior to recording the final subdivision map, that the existing landscaping must be repaired prior to recording of a final map, and that appropriate CC&Rs needed to be recorded to ensure the continued maintenance of the development.

         58. The Project was approved by the Turlock City Planning Commission on or about April 1, 1993, and by the Turlock City Council on or about May 25, 1993, subject to various conditions, including among others:

         * * *

         4. Prior to recordation of a final map(s) the applicant shall:

a) Provide the City of Turlock a complete building codes analysis of the existing buildings and facilities; and
b) All modifications necessary to insure compliance with the Turlock Municipal Code and the Uniform Building Code shall be completed. [Building Department]
* * *
11. Upon any subdivision of the site, a homeowners association shall be formed and responsible for the maintenance of all common areas, roadway, parking, fencing and landscaping in accordance with Exhibit C. [Planning Department]

         59. Defendant Richard Sinclair applied to and obtained approval of the Project from the City of Turlock on the basis that the Project involved thirty-five (35) town homes with one car garages on 1.76 acres and was “creating [a] 20 lot subdivision consisting of 3 detached single family dwellings, 7 detached duplexes, 9 duplexes attached by garages, and 1 lot for common area, pool, driveways, [and] parking.”

         60. A structural building code compliance analysis for the Fox Hollow Property as required under Condition 4 a) was performed by an architect retained by Defendant Richard Sinclair and submitted to and approved by the City of Turlock in or about December 1993. The structural work specified in the analysis to meet current standards for individually owned lots included installing twenty-seven (27) firewalls for the garages, three (3) fire walls in the units, eliminating six (6) roof overhangs, removing seven (7) windows, and adding two (2) roof vents.

         61. In January 1994, Defendant Richard Sinclair submitted an application to the Turlock Community Development Department, for a modification to Condition 4 b) to the conditions of approval for the Project so that the work required to bring the existing buildings into compliance with current standards be deferred until sometime after the recording of a final map for the Project (the “Modification Application”).

         62. Defendant Richard Sinclair was advised in a letter sent on or about February 7, 1994, from the Turlock Community Development Department, that after further discussion involving the City Engineer, City Attorney's Office, and the building official and the senior planner of the Community Development Services, they were unable to develop an option that would ensure no City involvement in completion of the project in the event the property owners failed to fulfill their obligations in the matter after recording the final map, and accordingly, the options available were to: Complete the original conditions of the vesting map, file multiple final maps and completing the conditions covering the portion of the property subject to each final map, or re-subdividing the property as a condominium project.

         63. On or about February 17, 1994, the Turlock Planning Commission denied the Modification Application and thereby continued to require that all modifications to meet current standards for individually owned lots be completed prior to recording the final map.

         64. Thereafter, on or about April 29, 1994, Defendant Richard Sinclair notified the Planning Department of the City of Turlock in writing that he would be completing multiple maps for the subdivision and that: “There are sufficient funds within the Homeowner's Association to replace and maintain said [common area] lighting.” Said statement was false when made in that no homeowners association had been created nor were there funds within a homeowner association to replace and maintain lighting or otherwise maintain the common area.

         65. On or about June 8, 1994, Defendant Richard Sinclair filed a Voluntary Petition under Chapter 11 of the Bankruptcy Code on behalf of himself and his spouse, with the United States Bankruptcy Court, Eastern District of California, Case No. 94-92271-A-11 (the “Sinclair Bankruptcy Case”).

         Defendants Lose Fox Hollow Property In Late 1994 Through Foreclosure And Then Reacquire Fox Hollow Property In October 1995

         66. The Sinclairs lost the Fox Hollow Property to Stockton S&L through a non- judicial foreclosure on the Stockton Construction Loan on or about December 13, 1994.

         67. On or about the summer of 1995, Defendant Richard Sinclair contacted Defendant Flake and Defendant Mauchley; and discussed with each of them reacquiring the Fox Hollow Property from the lender, and continuing to pursue the Project.

         68. Pursuant to such discussions, Defendant Richard Sinclair formed a trust for Defendant Mauchley in August 1995 called “Mauctrst”, and Defendant Stanley Flake, as Trustee of The Julie Insurance Trust, purchased the Fox Hollow Property from the lender (which had been renamed Stockton Federal Bank) on or about October 31, 1995, for approximately $1.27 million that Defendant Flake, as trustee of the F. Hanse Trust, had advanced for the purchase.

         Fox Hollow CC&Rs Recorded In September 1996

         69. On or about September 16, 1996, Defendant Flake, as trustee of the Julie Insurance Trust, executed as the declarant, and Defendant Sinclair caused to be recorded as Document No. 96-0078121-00 in the Official Records of Stanislaus County, California, a Declaration of Covenants, Conditions and Restrictions for the Fox Hollow Property (the “Fox Hollow CC&Rs”).

         70. Article I, Section 16 of the Fox Hollow CC&Rs, defines “Association” as the “Fox Hollow of Turlock Owners' Association, a non-profit mutual benefit corporation, membership in which shall be limited to owners (as hereinafter defined) and in which all owners have a membership interest.”

         71. Article I, Section 11 of the Fox Hollow CC&Rs, defines “Owner” and “Owners” as “the record owner or owners, whether one or more persons or entities, of a fee simple title to a lot. . . .”

         72. Article I, Section 11, defines “Lots” as “Those certain parcels of land, together with the single family residential improvements attached thereto, described on the map of Fox Hollow subdivision, as Lots 1-19, County of Stanislaus, State of California.”

         73. Defendant Flake, as trustee of the Julie Insurance Trust, declared in Article II, Section 1, that the Fox Hollow Property was subject to the Fox Hollow CC&Rs.

         74. Pursuant to the Fox Hollow CC&Rs: Defendant Flake, as trustee of the Julie Insurance Trust, was required to convey to the Association fee title to the common area for the Fox Hollow Property free and clear of all liens and encumbrances “prior to the conveyance of title to the first lot” and to appoint the initial Board of the Association consisting of three (3) Directors (Art.III, §§ 3 & 6); the Association was charged with the duty to repair and maintain the common area and certain aspects of the Lots (Art. IV § 1); and the Board of the Association was mandated to “establish regular monthly assessments for operations and maintenance of the Project . . . payable in monthly installments on the first day of each month commencing on the first day of the first month following conveyance of the first Lot.” (Art. V, § 2).

         75. Article V, Section 1 of the Fox Hollow CC&Rs provides in part that: “Declarant hereby covenants and agrees for each Lot owned by it within the Project, and each Owner of any Lot by acceptance of a deed is deemed to covenant and agree, to pay to the Association the dues levied pursuant to this Article.”

         76. Defendants reaffirmed in the Fox Hollow CC&Rs that the “A” lots were not separate from their corresponding dwelling units in that among other things: (a) Article V provides that the monthly assessments for operations and reserves shall be charged to the residential units on the Lots; and (b) the easements for ingress and egress over the common area under Article VI are “for the benefit of the Lots and Lot Owners.”

         Defendants' Five (5) Loan Fraudulent Financing Scheme In February 1997

         77. On or about early 1997, Defendants Richard Sinclair, Mauchley and Flake carried out fraudulent record title churning and financing transactions involving Fox Hollow, by creating the false appearance of a planned unit development with a homeowners association and the false appearance of an arms length transaction between Defendants Flake and Mauchley in order to borrow more than $1.4 million against the Fox Hollow Property.

         78. Defendant Richard Sinclair established the price for the conveyance of Lots 1, 11, 18 and 19, and the remainder of the Fox Hollow Property, from Defendant Flake, as trustee of the Julie Insurance Trust, to Defendant Mauchley at $1.9 million.

         79. As part of the scheme, Defendant Flake, as trustee of the Julie Insurance Trust, conveyed record title to Lots 1, 11, 18, 19, and the balance of the Fox Hollow Property, to Defendant Mauchley, by five separate deeds accepted by Defendant Mauchley, and recorded in the Official Records of Stanislaus County, California on February 26, 1997.

         80. Also, as part of the scheme, Defendant Richard Sinclair assisted Defendant Mauchley in obtaining loans on Lots 1, 11, 18 and 19, each in the amount of $119, 000, and an additional loan in the amount of $1 million against the balance of the Fox Hollow Property, from GMAC Mortgage Corporation (“GMAC”), secured by first deeds of trust in favor GMAC, also recorded in the Official Records of Stanislaus County, California, on February 26, 1997.

         81. Also, as part of the scheme, the $1.9 million price for Fox Hollow was paid to Defendant Flake from the proceeds on the five (5) loans from GMAC and by a Deed of Trust in favor of Defendant Flake, as trustee of the Capstone Trust, against the Fox Hollow Property, executed on or about February 21, 1997, by Defendant Mauchley, and recorded on or about March 3, 1997, that purportedly secured an obligation in the amount of $444, 888, and provided that Defendant Flake, as trustee of the Capstone Trust will provide lot releases for the fifteen (15) lots being created (the lots other than Lots 1, 11, 18 and 19) for the payment of $37, 037 per lot, and lot releases on Lots 1, 11, 18 and 19 for the payment of $16, 447.33 per lot.

         82. Defendant Mauchley represented and promised in the “Planned Unit Development Rider” included in the deeds of trust in favor of GMAC that were recorded against Lots 1, 11, 18 and 19, on or about February 26, 1997, that:

The Property includes, but is not limited to, a parcel of land improved with a dwelling, together with other such parcels and certain common areas and facilities, as described in covenants, conditions and restrictions of record (the “Declaration”).
The Property is a part of a planned unit development known as Fox Hollow . . . [and] the Property also includes Borrower's interest in the homeowners association or equivalent entity owning or managing the common area and facilities of the PUD (the “Owners Association”), and the uses, benefits and proceeds of Borrower's interest. PUD COVENANTS. In addition to the covenants, and agreements made in the security instrument, Borrower and Lender further covenant and agree as follows: [¶] A. PUD Obligations. Borrower shall perform all of Borrower's obligations under the PUD's constituent documents. The “Constituent Documents” are the: (i) Declaration; (ii) articles of incorporation, trust instrument or equivalent document which creates the Owners Association; and (iii) any by laws or other rules or regulations of the Homeowners Association. Borrower shall promptly pay, when due, all dues and assessments imposed pursuant to the Constituent Documents.

         83. Said representations and promises in the Planned Unit Development Riders were false when made. The true facts known by Defendants Richard Sinclair, Mauchley and Flake, and concealed by them from GMAC, were that: there was no homeowners association or equivalent entity to own or manage the common area and facilities of the PUD; title to the common area had not been transferred to a homeowners association; and Defendants Richard Sinclair, Mauchley and Flake, and each of them, had no intention at that time to form a homeowners association, to transfer title to the common area to a homeowners association, or to charge and collect dues and assessment to maintain the common area and lots, all as required of them in the Fox Hollow CC&Rs and by the conditions of approval by the City of Turlock for the Project.

         84. Defendants Richard Sinclair, Mauchley and Flake, and each of them, also concealed from GMAC that the corresponding one car garage for Lot 18 was on Lot 18A, that the corresponding one car garage for Lot 18 was not included in the legal description under the deed of trust for the loan on lot 18, that the corresponding one car garage for Lot 18 was left as additional collateral for Defendant Flake to receive the balance of the sales price from the creation of the other fifteen(15) lots, and that the corresponding one car garage for Lot 18 was left out as part of the deal between Defendants Richard Sinclair, Mauchley and Flake.

         85. GMAC made said loans in reliance upon said representations and promises, and had it known the true facts and concealed facts, it would not have completed said loans without compliance with the Fox Hollow CC&Rs and City of Turlock conditions for the Project, and without including the corresponding one car garage on Lot 18A in the legal description in the deed of trust for the loan on Lot 18.

         Defendants' Fifteen (15) Loan Fraudulent financing Scheme In July 1998

         86. Defendants Richard Sinclair, Mauchley and Flake, continued the fraudulent record title churning and financing scheme for Fox Hollow in 1998.

         87. As part of the scheme, Defendant Richard Sinclair, in the name of Defendant Mauchley, filed applications for loans against each of the fifteen (15) remaining lots at Fox Hollow and continued to process Fox Hollow Subdivision Map # 2, for purpose of obtaining said loans.

         88. Each of said loans was conditioned on the filing of Fox Hollow Subdivision Map # 2 to create the lots, and each of said loans was based on each of the lots being individually saleable.

         89. As part of said scheme, by early 1998, Defendants Richard Sinclair, Mauchley and Flake planned to transfer record title to the lots at Fox Hollow to an entity to be called Mauctrst LLC immediately after such loans funded. Pursuant to such plan: Defendant Mauchley executed an “Option & Operating Agreement For Real Property And Contracts” on or about January 1, 1998, individually, as “Mauctrst” and as member manager of Mauctrst LLC, that provided among other things that Defendant Richard Sinclair would be paid a monthly fee of $10, 000 for overseeing the management and control of various properties including Fox Hollow; Defendant Richard Sinclair executed and caused to be filed with the California Secretary of State “Articles of Organization” for Mauctrst LLC on or about April 28, 1998; Defendant Richard Sinclair prepared, Defendant Mauchley executed, Defendant Mauctrst accepted and Defendant Richard Sinclair caused to be recorded in the Official Records of Stanislaus County, California, a grant deed conveying record title to Lots 1 through 19 to Mauctrst on or about July 29, 1998 (only seven (7) days after the July 1998 loans closed); and Defendant Richard Sinclair prepared and Defendants Mauctrst and Mauchley executed a deed of trust from Mauctrst LLC dated July 23, 1998 and recorded on December 3, 1998 against Lots 1 through 19, that purportedly secured an obligation in the amount of $271, 000, and provided that Defendant Flake, as trustee of the Capstone Trust would provide lot releases for lots 8, 10, 16 upon the payment of $7, 742.85 per lot, and for Lots 1-7, 9, 11-15, and 17-19 upon the payment of $15, 485.70 per lot (the “July 1998 Flake Lot Release Trust Deed”).

         90. As part of said scheme, Defendant Mauchley, on or about July 9, 1998, executed loan applications for each of such loans, describing the property by unit number or numbers, and representing that the property had been acquired in 1995.

         91. On or about July 22, 1998, Defendant Mauchley, after he had recorded Fox Hollow Subdivision Map # 2, creating fifteen (15) more lots with duplexes or single family townhouses, closed the fifteen (15) new loans secured by a first deed of trust against the each lot. The total amount of these loans was more than $1.8 million.

         92. Each town home at Fox Hollow was assigned a unit number by the U.S. Post Office with the even numbered units generally were located along the east side of the property, and the odd numbered units were generally located along the west side of the property. The following table correlates lot number, unit number, lender and loan amount for the February 1997 and July 1998 loans at Fox Hollow [the banks and finance companies that loaned money to Defendant Mauchley in 1997 and 1998 are not parties in this case and are collectively referred to as “Lenders”]:

Lot No.

Unit No.

Lender Abbreviation

Loan Amount

1

133 & 135

GMAC

$119, 000

2

129 & 131

Oceanmark / Bank One

$130, 000

3

125 & 127

Granite Bay / Allied American Funding / Conti

$130, 000

4

121 & 123

Alternative / Bank One

$135, 000

5

117 & 119

Oceanmark / Bank One

$130, 000

6

113 & 115

Alternative / HFC

$135, 000

7

109 & 111

Granite Bay / Allied American Funding / Conti

$130, 000

8

107

Oakmont / HFC

$74, 000

9

101 & 103

Granite Bay / Allied American Funding / Conti

$130, 000

10

105

Oakmont / HFC

$74, 000

11

130 & 132

GMAC

$119, 000

12

126 & 128

Alternative / Norwest Bank

$135, 000

13

122 & 124

Oceanmark / Ocwen

$130, 000

14

118 & 120

Granite Bay / Allied American Funding / Conti

$130, 000

15

114 & 116

Oceanmark / Bank One

$130, 000

16

108

Oakmont / HFC

$74, 000

17

110 & 112

Alternative / Chase

$135, 000

18

100 & 102

GMAC

$119, 000

19

104 & 106

GMAC

$119, 000

Total

$2, 278, 000

         93. A portion of the proceeds on the July 1998 loans was used to pay off the $1 million loan from GMAC, and to pay Defendant Flake the amount remaining due on the deed of trust he received at the time of the sale of the Fox Hollow Property to Defendant Mauchley in February 1997, as well as other advances he made, in the amount of approximately $575, 000.

         94. Defendant Mauchley represented and promised in the “Planned Unit Development Rider” included in the deeds of trust securing the loans on Lots 3, 4, 6, 7, 8, 9, 10, 12, 14, 16 ...


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