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 
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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