Monday, October 16, 2017

FYI: 9th Cir Holds TCPA Claim Not Covered Due to "Invasion of Privacy" Exclusion

The U.S. Court of Appeals for the Ninth Circuit recently held that a liability insurance policy that broadly excluded coverage for invasion of privacy claims also excluded coverage for claims for violations of the federal Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. ("TCPA").

A copy of the opinion is available at:  Link to Opinion

In 2012, a class action complaint was filed against the Los Angeles Lakers for allegedly sending text messages using an automatic telephone dialing system in violation of the TCPA.  The Lakers asked their insurer to defend them against the lawsuit.

The insurance policy required the insurer to pay for losses (with some restrictions) suffered by the Lakers "resulting from any Insured Organization Claim … for Wrongful Acts."  The policy defined "Wrongful Acts" as "any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted by" the Lakers.

The policy also contained an exclusion for claims "based upon, arising from, or in consequence of libel, slander, oral or written publication of defamatory or disparaging material, invasion of privacy, wrongful entry, eviction, false arrest, false imprisonment, malicious prosecution, malicious use or abuse of process, assault, battery or loss of consortium."

The insurer determined that the plaintiff had brought an invasion of privacy suit, which was specifically excluded from coverage, and therefore denied coverage and declined to defend the Lakers.

After the insurer's denial of coverage, the Lakers filed a complaint asserting claims for breach of contract and tortious breach of the implied covenant of good faith and fair dealing.

The trial court granted the insurer's motion to dismiss.  In so ruling, the trial court held that the TCPA claims were "implicit invasion-of-privacy claims" that fell squarely within the policy's "broad exclusionary clause." 

On appeal, the Ninth Circuit began its analysis by examining the terms of the policy under California law. 

As you may recall, California courts must "'give[] effect to the mutual intention of the parties as it existed' at the time the contract was executed."  Wolf v. Walt Disney Pictures & Television, 76 Cal. Rptr. 3d 585, 601 (Cal. Ct. App. 2008) (quoting Cal. Civ. Code § 1636).  In addition, courts must give a contract's terms their "ordinary and popular" meaning, "unless used by the parties in a technical sense or a special meaning is given to them by usage."  Palmer v. Truck Ins. Exch., 988 P.2d 568, 652 (Cal. 1999).

Additionally, California courts interpret coverage clauses in insurance contracts "broadly so as to afford the greatest possible protection to the insured."  Aroa Mktg., Inc. v. Hartford Ins. Of the Midwest, 130 Cal. Rptr. 3d 466, 470 (Cal. Ct. App. 2011).  However, courts should interpret "exclusionary clauses … narrowly against the insurer."  Id.

The Laker's insurance policy did not explicitly exclude coverage of TCPA claims.  As a result,  the Ninth Circuit had to determine whether the TCPA claims fell within the exclusion for claims "based upon, arising from, or in consequence of … invasion of privacy." 

Under the text of the TCPA, it is unlawful for any person within the United States, or any person outside the United States if the recipient is within the United States:

to make any call (other than a call made for emergency purposes or made with the prior express consent of the called party) using any automatic telephone dialing system or an artificial or prerecorded voice … to any telephone number assigned to a … cellular telephone service … or any service for which the called party is charged for the call ….

47 U.S.C. § 227(b)(1)(A)(iii).

In addition, the Ninth Circuit noted that the TCPA twice explicitly states that it is intended to protect privacy rights.  47 U.S.C. § 227(b)(2)(B)(ii)(I) ("will not adversely affect the privacy rights that this section is intended to protect…"); 227(b)(2)(C) ("the Commission may prescribe as necessary in the interest of the privacy rights this section is intended to protect").

Based on the lack of any other statements expressing an alternative intent, and focusing on the ruling making sections of the TCPA, the Ninth Circuit concluded that the purpose of the TCPA was to protect privacy rights and privacy rights alone.

Next, the Ninth Circuit analyzed the complaint based on its interpretation on the TCPA's goal of protecting privacy. 

The complaint asserted causes of action for negligent violation of the TCPA and knowing/willful violation of the TCPA.  In the Ninth Circuit's view, these two causes of action were unquestionably two invasion of privacy claims, and were excluded under the plain language of the insurance policy. 

Therefore, the Ninth Circuit held that the trial court properly concluded that the claims asserted in the complaint were excluded from coverage under the policy.

Finally, the Lakers argued that the insurer had a duty to defend, even if the policy did not require the insurer to indemnify costs incurred from the lawsuit, because the plaintiff asserted that he suffered multiple harms, not just an invasion of privacy.  The Lakers also argued that the complaint sought "recovery of economic injury" and explicitly swore off "any recovery for personal injury," and therefore the plaintiff did not seek relief for invasion of his privacy, which is generally a form of "personal injury." 

Essentially, the Lakers argued that the insurer had a duty to defend because the policy potentially entitled them to indemnity for other claims.

The Ninth Circuit rejected this argument and held that "a TCPA claim is an invasion of privacy claim, regardless of the type of relief sought."  As such, these claims were excluded under the terms of the policy.  Moreover, the Laker did not identify what other claims this set of facts could support.

Accordingly, the Ninth Circuit affirmed the dismissal of the complaint.

The dissent disagreed with the majority opinion, point out that "[w]hen Congress defines a cause of action based on specific and unambiguous statutory elements, what matters is what the statute says – not what motivated enactment of the statute."

Under the plain terms of the TCPA, statutory damages may be recovered when a plaintiff can prove: "(1) the defendant called a cellular telephone number; (2) using an [ATDS]; (3) without the recipient's prior express consent."  Mayer v Portfolio Recovery Assocs., LLC, 707 F.3d 1036, 1043 (9th Cir. 2012) (citing 47 U.S.C. § 227(b)(1)).

The dissent accused the majority of ignoring the elements of the claim, focusing instead on the misconception that Congress only enacted the TCPA to prevent invasion of privacy, yet nothing in the elements of a TCPA claim says anything about "privacy."

The dissent further disagreed the majority's interpretation of the TCPA, pointing out that that "[t]he TCPA specifically addresses public safety concerns, provides redress for economic injury, and protectives businesses from ATDS calls."  Thus, in the dissent's view, not all TCPA claims are privacy claims.

The dissent concluded that because the plaintiff only sought recovery based on an alleged violation of the TCPA, and expressly disavowed claims based on invasion of privacy, the insurer had a duty to defend the Lakers.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Wednesday, October 11, 2017

FYI: 9th Cir Limits Subsequent Good-Faith Transferee Exception in Bankruptcy Fraudulent Transfer Actions

The U.S. Court of Appeals for the Ninth Circuit recently held that a debtor corporation's sole shareholder ("Sole Shareholder") and third parties who sold real property and services to the Sole Shareholder could be liable for fraudulent transfers. 

In so ruling, the Ninth Circuit held that the third parties were initial transferees of the debtor corporation's funds because the Sole Shareholder paid the third parties with checks directly from a corporate account, even though the third parties did not have a pre-existing relationship or an ongoing relationship with the Sole Shareholder, his family, or any of his businesses.

A copy of this opinion is available at:  Link to Opinion

As you may recall, the Bankruptcy Code makes a distinction between initial and subsequent transferees when it comes to the recovery of fraudulent transfers. 

The trustee and the debtor's creditors may recover the property (or its value) from "(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any [subsequent] transferee of such initial transferee."  11 U.S.C. § 550(a). 

The trustee and creditors, however, may not recover the property or its value from a subsequent transferee if that transferee accepted the property "for value …, in good faith, and without knowledge of the voidability of the transfer."  Id. at § 550(b)(1).

In 2002, the Sole Shareholder of the debtor corporation opened a separate corporate account and deposited certain vendor rebates into that account over a ten-year span.  The Sole Shareholder concealed the separate account from the debtor corporation's general ledgers and later attempted to conceal its existence from the bankruptcy court. 

The Sole Shareholder used the separate account for personal expenses.  The Sole Shareholder purchased real property from real property sellers ("Sellers") and design services from an interior designer ("Interior Designer").  The Sole Shareholder made these purchases using corporate checks drawn on the separate account.  Neither the Sellers nor the Interior Designer had a pre-existing relationship or an ongoing relationship with the Sole Shareholder, his family, or any of his businesses.

In 2012, the corporation filed for bankruptcy.  The unsecured creditor's committee ("Committee") sought to avoid certain transfers made from the separate account, including the payments to the Sellers and the Interior Designer.  The bankruptcy court found that the Sellers and Interior Designer were subsequent transferees entitled to the safe harbor under § 550(b)(1). 

The trial court reversed the bankruptcy court's decision and found that the Sellers and Interior Designer were strictly liable to the Committee because they qualified as "initial transferees" of the fraudulent payments.  The Bankruptcy Appellate Panel affirmed the trial court's decision.

The Ninth Circuit began its analysis by noting that it had adopted the dominion test for determining who is a transferee for purposes of Section 550.  Under the dominion test, a transferee is one who has dominion over the money or other asset.  The dominion test turns on whether the recipient of funds has legal title to them and whether the recipient has the ability to use the funds as he sees fit.  The Ninth Circuit explained that the test focuses on whether the recipient of funds has legal title to them because dominion strongly correlates with legal title and dominion is akin to legal control.

The Ninth Circuit then observed that courts have taken two approaches when applying Section 550 to fraudulent transfers involving the misappropriation of corporate funds by company directors, officers, or other insiders. 

Under the majority approach (which the Ninth Circuit follows), a principal of a debtor corporation who misappropriates company funds to satisfy personal obligations is not an initial transferee because the mere power of a principal to direct the allocation of corporate resources does not amount to legal dominion and control, which is required for initial-transferee status.

In contrast, under the minority approach, corporate principals may be strictly liable as initial transferees when they misuse company funds for personal gain.  Under this "two-step transaction" approach, the debtor company is deemed to have made the initial transfer to the corporate principal, thus making him or her strictly liable as the initial transferee.

The Ninth Circuit explained the merits of the majority approach.  The Ninth Circuit pointed out that the "flow of funds" matters and that receipt of the transferred property is a necessary element for that entity to be a transferee under section 550.  The Ninth Circuit found that simply directing a transfer, i.e., such as directing a debtor to transfer funds, is not enough. 

In addition, the Court reasoned, section 550(a)(1)'s structure indicates that a principal does not become an initial transferee simply by using his or her control over corporate assets to effect a fraudulent transfer because section 550 imposes strict liability on both initial transferees and any beneficiaries of the fraudulent transfers. Thus, the Ninth Circuit held that section 550 indicates that initial transferees and beneficiaries are separate persons. 

Finally, the Ninth Circuit found that the alternative approach (under which every agent or principal of a corporation is deemed the initial transferee when he or she effected a transfer of property in his or her representative capacity) both misallocates the monitoring costs that section 550 seeks to impose and deprives the trustee of a potential source of recovery for creditors.  The Ninth Circuit observed that recovery from an embezzling principal would be difficult, thus Congress also made the first recipient of those funds liable to returning them.

The Ninth Circuit then held that the Sellers and the Interior Designer were initial transferees because legal control over the funds had never passed from the Corporation to the Sole Shareholder.  Recall that the Sole Shareholder had paid the Sellers and the Interior Designer using checks drawn on the Corporation's account, albeit a concealed, separate account.

Thus, the Ninth Circuit found that section 550 allowed the trustee to recover funds from the Sellers and the Interior Designer as initial transferees and from the Sole Shareholder as the beneficiary.

Judge Nguyen dissented from the majority's opinion.  Judge Nguyen suggested that the Ninth Circuit should abandon its dominion test, in favor of the control test used by other circuits.  Under the control test, courts "view the entire transaction as a whole to determine who truly had control of the money." In addition, Judge Nguyen argued that the debtor corporation did not have legal title to the funds prior to the transfer as a matter of state law.  Judge Nguyen argued that under state law, the Sole Shareholder converted corporate funds by transferring them into his personal account, making him the initial transferee.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Saturday, September 23, 2017

FYI: 9th Cir Holds Nevada Deficiency Limitation Preempted as to Transferees of FDIC

The U.S. Court of Appeals for the Ninth Circuit recently affirmed final judgments against corporate borrowers and guarantors in three separate cases, holding that:

(a)  the Nevada statute limiting the amount of the deficiency recoverable in a foreclosure action was preempted by federal law as applied to transferees of the Federal Deposit Insurance Corporation (FDIC);
(b)  the plaintiff bank had standing to enforce the loans it acquired from the FDIC;
(c)  the bank was not-issue precluded from showing that the subject loans had been transferred to it;
(d)  the bank did not breach the implied covenant of good faith and fair dealing by suing instead of giving the borrowers more time to restructure the loans because the alleged oral promise of more time lacked consideration and without a binding contract the implied covenant did not apply, the loan documents provided that any modification must be in writing, and defendants had entered into written agreements acknowledging that the bank reserved it right to enforce the loans.;
(e)  the bank was not estopped and did not waive its right to enforce the loans because the defendants at all times knew the loan documents could only be modified in writing and the written acknowledgments reserved the bank's right to enforce the loans;
(f)  the doctrine of laches did not bar the bank's right to foreclose on two of the loans because the bank sued within the statute of limitations and no exceptional circumstances were shown to justify application of laches;
(g)  the bank did not fail to mitigate its damages because it owed no duty to time its foreclosure proceedings so as to minimize any deficiency;
(h)  the trial court did not abuse its discretion by refusing to extend the deadline to amend the pleadings to allow the defendant to add four new defenses and a counterclaim based on the alleged work-out agreement because they showed neither good cause nor excusable neglect for seeking to amend after the pretrial deadline had already passed;
(i)  the defendant debtors were not entitled to a jury trial on the fair market value of the property in two of the cases; and
(j)  the bank did not violate the Nevada statute requiring notice to beneficiaries of the family trusts that guaranteed the debts.

A copy of the opinion is available at:  Link to Opinion

In 2004 and 2005, three limited liability companies received loans from a bank. The loans were guaranteed by the companies' principals in their capacity as trustees for family trusts. The borrowers failed to repay the loans.

The bank was succeeded by an Alabama bank of the same name, which in turn failed in 2009 and was placed in receivership by the FDIC.

The FDIC sold the failed bank's assets, including the subject loans, to a North Carolina bank. The sale was evidenced by a purchase and assumption agreement, a loss sharing agreement and an assignment.

The acquiring bank entered into negotiations with the borrowers about restructuring the loans and during this process the borrowers signed an acknowledgment providing that such negotiations were without prejudice to the lender's enforcement rights and specifically reserving the bank's right to enforce the loan documents.

In November of 2011, the acquiring bank sued to collect one of the loans, raising claims for breach of the promissory note, guaranty and breach of the covenant of good faith and fair dealing. The parties moved for summary judgment and the district court granted the acquiring bank's motion and entered judgment for 7.1 million dollars against the defendant debtors, from which they appealed.

In February of 2012, the properties securing the other two loans were sold at non-judicial sales and in March of 2012 the acquiring bank filed separate lawsuits against the borrowers and guarantors alleging breach of the promissory note, guaranty and breach of the covenant of good faith and fair dealing. The district courts granted summary judgment in the acquiring bank's favor in both actions, entering judgment for approximately $1.9 million dollars and $630,000 respectively against the defendant debtors, from which they appealed.

On appeal, the debtors argued that the acquiring bank lacked standing to enforce the loans when the complaints were filed. The Ninth Circuit rejected this argument, reasoning first that the purchase and assumption agreement, loss sharing agreement, assignment and deeds of trust securing two to loans sufficiently described and encompassed the subject loans and thus the acquiring bank had the right to enforce them.

Next, the Ninth Circuit rejected the debtors' argument that the acquiring bank was issue-precluded by a 2013 Nevada Supreme Court ruling that held that the same bank could not rely on the purchase and assumption agreement to prove that the loan involved in that case had been assigned.

The Court reasoned that the case cited by debtors did not involve the same loans and the Nevada Supreme Court's decision was not based on lack of standing, but instead on the acquiring bank's failure to "produce schedules to the [purchase and assumption agreement] listing assets excluded from the transfer. There was thus no evidence that the loan at issue there was not excluded from the [agreement] by one of those schedules." In the case at bar, by contrast, the acquiring bank "produced not only the [purchase and assumption agreement], but also the attendant schedules showing the loans at issue were not excluded from the terms of the [agreement]."

The Ninth Circuit then turned to analyze the debtors' argument that the acquiring bank "failed to prove each element of its deficiency action" because it did not prove the amount that it paid for the assignment of the subject loans and a Nevada statute limits the amount of the deficiency to the greater of the amount by which the amount paid for the loan "exceeds the fair market value of the property sold at the time of sale or the amount for which the property was actually sold…."

The Court rejected this argument, agreeing with the acquiring bank that the Nevada statute is unconstitutional and preempted by federal law. The Court relied upon a 2015 Nevada Supreme Court case which held that the statute at issue is preempted by [the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") "to the extent that it would limit recovery on loans transferred by the FDIC."  

The Ninth Circuit noted that "[i]t would be more difficult for the FDIC to dispose of the assets of failed banks if the transferee could not turn a profit on those assets." Thus, the Court adopted the Nevada Supreme Court's reasoning and held that the Nevada statute "is preempted by federal law as applied to transferees of the FDIC."

Next, the Court rejected the debtors' argument that the trial court erred in granting summary judgment because the acquiring bank breached the implied covenant of good faith and fair dealing by not honoring its oral promise to give the borrowers time to restructure the loans. It reasoned that the alleged work-out agreement was not an enforceable contract because it lacked consideration and, "[a]bsent a contract, there can be no implied covenant of good faith and fair dealing."

In addition, the Court noted that the loan documents provided that any modification must be in writing, such that the alleged oral modification was unenforceable.  Moreover, the Ninth Circuit noted, during the loan work-out negotiations, the debtors had entered into written agreements acknowledging that the acquiring bank reserved it right to enforce the loans.

The Ninth Circuit also rejected the debtors' argument that the acquiring bank was estopped or, alternatively, waived its right to enforce the loans, reasoning that even though "[e]stoppel can apply to a promise for which there was no consideration paid [and,] [i]n such a case, reliance is a substitute for consideration[,]" the third element of estoppel, "the party asserting estoppel must be ignorant of the true state of facts[,]" was missing.

The Court explained that the debtors at all times knew the loan documents could only be modified in writing and the written acknowledgments reserved the acquiring bank's right to enforce the loans. The waiver argument failed for the same reasons.

The Ninth Circuit next rejected the debtor's argument that laches barred the acquiring bank's right to foreclose on two of the loans because it waited to sue until the market value of the collateral had fallen, reasoning that "[e]specially strong circumstances must exist … to sustain a defense of laches when the statute of limitations has not run." No such circumstances were shown and the two lawsuits at issue were filed within the statute of limitations.

The debtors also argued that the acquiring bank failed to mitigate its damages because it "strung [them] along with promises of a work-out agreement, all the while intending to foreclose on the properties when the market bottomed out." The Court first noted that debtors cited no precedent showing that by doing this the acquiring bank "thereby breached a duty to them." The Court relied upon and found persuasive the Texas Supreme Court's holding in a 1990 case the "held that there is not duty for a secured creditor to time a foreclosure sale so as to minimize a deficiency."

The Ninth Circuit next rejected the debtors' argument that the trial court erred by refusing to allow them to amend their answer to "add four new defenses and a counterclaim based on the alleged work-out agreement" after the pretrial deadline had passed, reasoning that they did not show good cause or excusable neglect as required because "[t]he defenses and counterclaim they sought to add were based on the work-out agreement, which [they] knew about long before the deadline to amend had passed." The Court noted that this showed a lack of diligence, and the debtors could not show excusable neglect because they offered no explanation for the delay in seeking to amend.

In addition, the debtors argued that the trial court erred in two of the cases by deciding to "determine the fair market value of the … properties itself rather than submitting the issue to a jury … [thereby violating] their Seventh Amendment right to a jury trial…."

The Ninth Circuit rejected this argument, reasoning that "[u]nder the Seventh Amendment, the right to a jury trial exists in 'Suits at common law.'" "Nevada law appears to contemplate that fair market value in deficiency actions will be determined by the court, not by a jury. … Thus while the nature of the action may be legal, the nature of the remedy calculated based on fair market value is equitable. As the nature of remedy is the more important consideration under the Seventh Amendment, [the debtors] were not entitled to a jury trial on the fair market value of the property."

Finally, the Court rejected the debtors' argument that the bank violated Nevada's statute requiring that the foreclosing mortgagee give notice to known trust beneficiaries at least 30 days before obtaining a judgment, because the statute expressly provides that the notice may be given within such time as the court may fix, and the trial court "in these cases determined that the notice requirement was met by the service of the complaint and by a letter of August 29, 2013."  Because "[j]udgment in the cases was not entered until approximately two years after this letter, well before the 30-day limit in the statute[,]" the Ninth Circuit held that the acquiring bank did not violate the statute.

Accordingly, the judgments of the trial court in all three actions were affirmed.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Sunday, September 17, 2017

FYI: 9th Cir Holds Creditor in Fraudulent Transfer Action May Recover Amounts Above Collateralized Debt

The U.S. Court of Appeals for the Ninth Circuit recently held that, where husband and wife debtors fraudulently transferred assets, the creditor was entitled to the full sum the creditor would have recovered and was not limited to the amount of the collateralized debt. 

In so ruling, the Ninth Circuit reversed a bankruptcy court and trial court judgment in the creditor's favor that the debt was non-dischargeable due to the debtor's fraud, but improperly limiting the non-dischargeable debt to only the collateralized amount.

A copy of the opinion is available at:  Link to Opinion

A bank (Lending Bank) made a commercial loan to husband and wife borrowers. The husband borrower was the sole member and manager of a cash advance business, which purchased five insurance agencies with the $1.7 million loan from the Lending Bank,

The cash advance business executed a promissory note for the loan and gave the Lending Bank a blanket security interest in all of its assets, including intangibles, and the debtors personally guaranteed the note.  The Lending Bank in turn financed the loan under a credit and security agreement with another bank (Financing Bank) in which the Financing Bank was granted a security interest in the loan to the business.

Ten months later, the Lending Bank defaulted on the security agreement with the Financing Bank and filed for bankruptcy. The Financing Bank and the Lending Bank agreed to transfer the cash advance business's note and the personal guarantee to the Financing Bank.  The cash advance business formally acknowledged the assignment and agreed to pay the balance on the note to the Financing Bank.

Over the next several years the cash advance business repeatedly requested loan modifications and entered into several forbearance agreements with the Financing Bank. The cash advance business also executed an elaborate series of transfers and sales to place their assets beyond their creditors' reach.

The cash advance business transferred $123,200 of assets to a closely-held business of which the husband owned 100% of the shares. The husband and wife created a family trust, of which they were the beneficiaries. The closely-held business then transferred its total assets, valued at $385,000, to another company that the husband purchased from a friend for $200. The trust then purchased that company and the company agreed to pay its $385,000 in assets to the husband. The result left all of the businesses and the trust insolvent.

The cash advance business defaulted on the loan and the debtors defaulted on the guarantee.

The Financing Bank filed a lawsuit against the cash advance business and husband and wife. The husband and wife then filed for bankruptcy. The Financing Bank's lawsuit against the husband and wife was stayed but the lawsuit against the cash advance business proceeded and resulted in a judgment of $1.7million.  The Financing Bank could not collect, however, because the cash advance business was insolvent.

The Financing Bank then filed an adversary action against the husband and wife in bankruptcy court alleging that they had fraudulently transferred assets under the Washington Uniform Fraudulent Transfer Act, Wash. Rev. Code § 19.40.041 ("WUFTA"), and thus the debt was non-dischargeable under 11 U.S.C. §523(a). As you may recall, section 523(a) excepts from discharge debts obtained by actual fraud, which includes fraudulent conveyance. 11 U.S.C. § 523(a)(2)(A).

The bankruptcy court ruled in favor of the Financing Bank on the fraudulent transfer claim but limited the judgment to $123,200, which was the amount that was traceable to the Financing Bank's security interest in the cash advance business's assets.

The Financing Bank appealed and the trial court affirmed on different grounds, explaining that the Financing Bank could not maintain a fraudulent transfer claim on "non-collateral assets" because the Financing Bank could only recover assets that were the property of the debtors, meaning legally titled in the debtors' name.

Thus, the lower court held, the Financing Bank could not recover any assets from the family trust or the closely-held businesses involved in the fraudulent transfers, and, do to so under WUFTA, the Financing Bank would have had to obtain a ruling that those entities were the alter egos of the debtors, which it had failed to do.

The Financing Bank appealed.

On appeal, the Ninth Circuit reversed explaining that the purpose of WUFTA is "to provide relief for creditors whose collection on a debt is frustrated by the actions of a debtor to place the putatively satisfying assets beyond the reach of the creditor," which is also known as fraud.

The Court compared the facts of this case to others around the country under identical or similar fraud laws and concluded that, through the series of transfers, the husband "depleted the value of his assets to the detriment of his creditors" while he continued to receive payments from the trust even after he filed for bankruptcy, thereby preventing the Financing Bank from collecting the debt he owed. Thus, the Ninth Circuit agreed with the bankruptcy court's finding that the debtors had engaged in actual fraud.

The Ninth Circuit reversed on the issue of the amount the Financing Bank could recover because it was only the fraudulent transfers that prevented the Financing Bank from being able to collect.

Based on 11 U.S.C. §523(a)(2)(A), if the husband had not fraudulently transferred the assets from the closely-held company, the Financing Bank would have been able to recover against it because a non-dischargeability claim based on a fraudulent transfer scheme between closely-held companies intended to defeat collection of a debt is actual fraud. 

Thus, the Ninth Circuit held, the amount of the non-dischargeable debt was not merely the $123,200 in assets from the cash advance business, but included the $385,000 in fraudulently transferred assets.
     
Accordingly, the lower court's judgment was reversed and the matter remanded.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Wednesday, September 6, 2017

FYI: 9th Cir Holds Federal Foreclosure Bar Preempts Nevada HOA Superpriority Statute

The U.S. Court of Appeals for the Ninth Circuit recently held that the Federal Foreclosure Bar's prohibition on nonconsensual foreclosure of assets of the Federal Housing Finance Agency preempted Nevada's superpriority lien provision, Nev. Rev. Stat. § 116.3116, and invalided a homeowners association foreclosure sale that purported to extinguish Freddie Mac's interest in the property.

A copy of the opinion is available at:  Link to Opinion

In 2013, an investor ("Purchaser") purchased a home at a homeowners association foreclosure sale for $10,500 and recorded a deed in his name.  Purchaser argued that Nevada's superpriority lien provision allowed the association to sell the home to him free and clear of any other liens.  The Federal Home Loan Mortgage Corporation ("Freddie Mac") claimed it had a priority interest in the purchased home. 

As you may recall, Freddie Mac is under Federal Housing Finance Agency ("FHFA") conservatorship, meaning the FHFA temporarily owned and controlled Freddie Mac's assets.  See 12 U.S.C. § 4617(b)(2)(A)(i) (FHFA acquired Freddie Mac's "rights, titles, powers, and privileges … with respect to [its] assets" for the life of the conservatorship). 

The Federal Foreclosure Bar's prohibition on nonconsensual foreclosure protected the FHFA's conservatorship assets.  12 U.S.C. § 4617(j)(3) ("No property of the [FHFA] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the [FHFA], nor shall any involuntary lien attach to the property of the [FHFA].").

Purchaser sued to quiet title in Nevada state court.  Freddie Mac intervened and counterclaimed for the property's title, removed the case to federal district court, and moved for summary judgment.  The FHFA joined Freddie Mac's counterclaim.  Together the federal entities argued that Purchaser did not acquire "clean title" in the home because the Federal Foreclosure Bar preempted Nevada law, and invalidated any purported extinguishment of Freddie Mac's interest through the association foreclosure sale.  The trial court ruled in favor of the federal entities.

On appeal, Purchaser argued that the Federal Foreclosure Bar did not apply in this case, and even if it did, Freddie Mac lacked an enforceable property interest due to a split of the note and the security instrument. 

First, Purchaser argued that the Federal Foreclosure Bar did not apply to private homeowners association foreclosures generally, because it protected the FHFA's property only from state and local tax liens.

To determine whether the Federal Foreclosure Bar applied to private foreclosures, the Ninth Circuit began by examining the statute's structure and plain language.  The section titled "Property protection" in the Federal Foreclosure Bar did not expressly use the word "taxes."  12 U.S.C. § 4617(j)(3).  The statute did not limit "foreclosure" to a subset of foreclosure types.  Id. 

In the Ninth Circuit's view, a plain reading of the statute revealed that the Federal Foreclosure Bar was not focused on or limited to tax liens, and therefore the Federal Foreclosure Bar should apply to any property for which the FHFA served as conservator and immunized such property from any foreclosure without FHFA consent.  12 U.S.C. § 4617(j)(1), (3).

Purchaser citied F.D.I.C. v. McFarland, 243 F.3d 876 (5th Cir. 2001) as support for his argument that the Federal Foreclosure Bar applied only to tax liens.

In McFarland, the Fifth Circuit interpreted 12 U.S.C. § 1825(b)(2), a provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") that governed Federal Deposit Insurance Corporation ("FDIC") receiverships.  The FIRREA provision is worded identically to the Housing and Economic Recovery Act of 2008's ("HERA") Federal Foreclosure Bar except that the word "Corporation" appeared in the former where "Agency" appeared in the latter.  Compare 12 U.S.C. § 1825(b)(2) with 12 U.S.C. § 4617(j)(3). The court in McFarland declined to extend § 1825(b)(2) to private foreclosures. 

The Ninth Circuit, however, distinguished McFarland and reasoned that the statutory framework in that case was different from the framework surrounding the Federal Foreclosure Bar.  Specifically, the Ninth Circuit found that the unlike § 1825, § 4617(j) did not include any language limiting its general applicability provision to taxes alone. 

Therefore, the Ninth Circuit held that the language of Federal Foreclosure Bar cannot be fairly read as limited to tax liens.

Purchaser then argued that that the Federal Foreclosure Bar did not apply in this case because Freddie Mac and the FHFA implicitly consented to the foreclosure when they took no action to stop the sale. 

The Ninth Circuit rejected this argument because the plain language of Federal Foreclosure Bar did not require the Agency to actively resist foreclosure.  See 12 U.S.C. § 4617(j)(3) (flatly providing that "[n]o property of the Agency shall be subject to … foreclosure, or sale without the consent of the Agency").

Thus, the Court concluded that the Federal Foreclosure Bar applied generally to private association foreclosures and specifically to this foreclosure sale.

Next, the Ninth Circuit addressed the issue of whether the Federal Foreclosure Bar preempted Nevada state law, which had triggered multiple lawsuits in Nevada. 

As you may recall, "[t]he Supremacy Clause unambiguously provides that if there is any conflict between federal and state law, federal law shall prevail."  Gonzales v. Rich, 545 U.S. 1, 29 (2005).  Preemption arises when "compliance with both federal and state regulations is a physical impossibility, or … state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."  Bank of Am. v. City & Cty. Of S.F., 309 F.3d 551, 558 (9th Cir. 2002).

First, the Ninth Circuit determined that the Federal Foreclosure Bar did not demonstrate clear and manifest intent to preempt Nevada's superpriority lien provision through an express preemption clause.  Nevertheless, the Court found that the Federal Foreclosure Bar implicitly demonstrated a clear intent to preempt Nevada's superiority lien law. 

Nevada law allowed homeowners association foreclosures under the circumstances present in this case to automatically extinguish a mortgagee's property interest without the mortgagee's consent.  See Nev. Rev. Stat. § 116.3116.  Because the Federal Foreclosure Bar prohibited foreclosures on FHFA property without consent, in the Ninth Circuit's view, Nevada's law was an obstacle to Congress's clear and manifest goal of protecting the FHFA's assets in the face of multiple potential threats, including threats arising from state foreclosure law.

Therefore, as the two statues impliedly conflict, the Ninth Circuit held that the Federal Foreclosure Bar preempted the Nevada superpriority lien provision.

In addition, Purchaser argued that even if the Federal Foreclosure Bar applied to this case and was preemptive, Freddie Mac did not hold an enforceable property interest for "splitting" the note from the deed of trust, and failing to present sufficient evidence to establish its interest for purposes of summary judgment.

The Ninth Circuit rejected these arguments because Nevada law recognized that, in an agency relationship, a note holder remained a secured creditor with a property interest in the collateral even if the recorded deed of trust named only the owner's agent.  Although the recorded deed of trust here omitted Freddie Mac's name, Freddie Mac's property interest is valid and enforceable under Nevada law. 

Moreover, Freddie Mac introduced evidence showing that it acquired the loan secured by the subject property in 2007, and that the beneficiary of the deed of trust was Freddie Mac's authorized loan servicer. 

The Appellate Court concluded that the trial court correctly found Freddie Mac's priority property interest enforceable under Nevada law.  Accordingly, the Ninth Circuit affirmed the trial court's summary judgment in favor of Freddie Mac and the FHFA.


Eric Tsai
Maurice Wutscher LLP 
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