QHL Holdings, Fund Ten, LLC et al v. Andrews Kurth LLP et al

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
SAN FERNANDO VALLEY DIVISION
In re:
California TD Investments LLC
Golden State TD Investments, LLC
Debtor(s).
Golden State TD Investments, LLC, QHL
Holdings, Fund Ten, LLC, Marc Sobel,
Ruth Ann Wundermann-Cooper
Plaintiff(s),
v.
Andrews Kurth LLP, Jon L. Dalberg,
Michael D. Jewesson
Defendant(s).
Case No.: 1:07-bk-13003-GM
Adv No: 1:09-ap-01405-GM
Chapter 11
REDACTED MEMORANDUM OF OPINION
REGARDING DEFENDANT’S MOTION FOR
SUMMARY JUDGMENT
[DOCKET NUMBER 62]
Date: February 26, 2013
Time: 10:00 a.m.
Courtroom: 303
Defendants Andrews Kurth LLP, Michael D. Jewesson & Jon L. Dalberg
(“Defendants”) bring this motion for summary judgment (“MSJ”) on grounds of in pari
delicto.
Background
Although the parties have a filed a significant amount of paper disputing what are
“uncontroverted facts”, most of the essential factual background for this motion is not in
dispute:
FILED & ENTERED
MAR 06 2013
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	gonzalez
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Quality Home Loans, Inc. (“QHL”) was formed in 2001 by John and Kitty Gaiser
(the Gaisers”), who each owned 50% of QHL. Its business was originating, servicing,
buying and selling sub-prime mortgages.
To fund its business, QHL formed the plaintiffs in this adversary proceeding, QHL
Holdings, Fund Ten, LLC (“Fund Ten”) and Golden State T.D. Investments, LLC
(“Golden State” and, with Fund Ten, the “Funds”). QHL was the initial Member and
initial Manager of each Fund. See Amended and Restated Operating Agreement of
Fund Ten dated 5/3/05 and Amended and Restated Operating Agreement of Golden
State dated 3/31/05 (the “Operating Agreements”), which are Defendants’ Exhibits A &
B and Plaintiffs’’ Exhibits 1 & 2, at ¶¶ 3.1, 5.1.1 Additional members could be added at a
price of $1000 per share. Id. at ¶ 3.2. There were approximately $37 million worth of
additional memberships purchased in Fund Ten and $20 million in Golden State. The
Gaisers ultimately held less than 20% of the member shares in either Fund. Declaration
of Randy Miller in Support of Plaintiff’s Opposition to MSJ at ¶ 7.
The Funds’ stated purposes were “to acquire, hold and liquidate promissory
notes secured by deeds of trust and mortgages to real property in the United States of
America, and to distribute to the Members the Available Cash therefrom.” Operating
Agreements ¶ 2.4 (the “liquidate” purpose was only in Golden State’s Operating
Agreement.)
The Funds had no employees and were managed by QHL (which remained the
only manager of each Fund through the events described herein) under the terms of
Operating Agreements. The Operating Agreements gave QHL, as manager, authority
to “manage and direct” the Funds (¶ 5.3), but required approval of a majority of member
1 Defendants’ Exhibits are attached to the Declaration of Joshua Jessen in support of the MSJ. Plaintiffs’ Exhibits
are attached to the Declaration of Dennis DeFranzo in support of Opposition.
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shares before the manager could act with respect to:
(a) the sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the Company’s assets;
(b) the Company’s merger with or conversion into another entity;
(c) [undertaking involving a debt or obligation which would, when taken
with all other obligations of the Company, exceed one half of the face
value of all notes held by the Company]; and
(d) a transaction, not expressly permitted by this Agreement, involving a
conflict of interest between the Manager and the Company, provided
however that the sale to the company of mortgage loans originated by
the Manager shall not be deemed a conflict of interest.
Operating Agreements ¶5.4 (provision C in brackets is only in Fund Ten’s Operating
Agreement].
In May and June of 2007 QHL and the Funds entered into three separate
transactions: one with Silar Advisors, L.P., one with Pacificor, LLC and one with
Bayview Financial, LP (the “Transactions”). Andrews Kurth was special counsel to QHL
and the Funds (as well as another related entity) in the Transactions and issued
opinions that were conditions to closing in each Transaction.
The particulars of these Transactions are not clear from the papers and the harm
to the Funds arising from these transactions is a disputed fact that is the crux of this
MSJ. Plaintiffs have presented some evidence that the Transactions sold, pledged or
otherwise put the assets of the Funds at risk, in transactions that benefitted QHL, but
not the Funds. In early 2007, QHL was experiencing cash flow difficulties and was
trying to “shore up” with the Silar Transaction and possibly the Pacificor transaction.
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Miller Dec. at ¶ 9; 5/17/07 e-mail of Michael Jewesson, which is Plaintiffs’ Exhibit 10.
The Funds were not experiencing cash flow difficulties, at least through March 2009.
Miller Dec. at ¶ 9. The Pacificor Transaction gave Pacificor the right to pursue remedies
against QHL and the Funds upon default by any of them. See Draft Repurchase
Agreement with accompanying e-mails, which is Plaintiff’s Exhibit 7; Notice of Motion
and Motion of Pacificor, LLC for Order Confirming Applicability of 11 U.S.C. § 555 (filed
11/21/07 in Case No. 07:13003-GM), which is Plaintiff’s Exhibit 8, at 1-3. The UCC
Financing Statements annexed to the Andrews Kurth opinion respecting the Pacificor
Transaction lists QHL collateral of $401,949.35, Golden State collateral of
$20,420,214.67 and Fund Ten collateral of $12,164,385.93. Plaintiffs’ Exhibit 5. In
November of 2007, Pacificor sought permission to exercise its remedies against the
Funds. Pacificor § 555 Motion (Plaintiffs’ Exhibit 8). The Funds and QHL received
over $45 million from the Pacificor Transaction. Id. Under the Funds’ Operating
Agreements, QHL, not the Funds, received all earnings over the 12% annual
distributions made to Fund members. Operating Agreements at ¶¶ 4.4(a) & 5.7; Miller
Dec. at ¶ 8. Thus, any increased cash flows from these transactions would accrue to
the benefit of QHL, while the Funds subjected their assets to risk.
On 8/21/07 QHL and the Funds filed for chapter 11 relief.
On 8/14/09, the Funds commenced an action against the Defendants in Los
Angeles Superior Court (#BC419791), which was removed to this court and became
this adversary proceeding. In this proceeding, Plaintiffs allege that the Transactions
damaged the Funds and would not have occurred without the opinion of Andrews Kurth.
(The individually named defendants are Andrews Kurth attorneys who worked on the
Pacificor transaction.) Plaintiffs assert claims against the Defendants for malpractice
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and breach of fiduciary duty. In essence, their claims allege (i) Andrews Kurth had a
conflict of interest representing both QHL and the Funds and (ii) the Andrews Kurth
opinion did not accurately reflect the terms of the Operating Agreements.
[REDACTED] The Bonds indemnified the Funds for, among other things, “Loss
resulting solely and directly from one or more dishonest or fraudulent acts by an
employee . . . .” Complaint dated 4/15/10 commencing the Bond Action ¶ 9
(Defendants’ Exhibit F).
The Motion and its Responses
Motion
Defendants have brought this MSJ on grounds of in pari delicto: that the Funds
engaged in misconduct directly related to Defendants’ alleged wrongdoing. In essence,
they argue that the Funds admit to QHL’s wrongdoing and QHL’s misconduct should be
imputed to the Funds (i) under principles of corporation and agency law and (ii) as a
matter of judicial estoppel.
Defendants first allege that the Funds have admitted a laundry list of wrongdoing
by Gaiser and QHL including falsifying documents, having the Funds make investments
in worthless assets and assets that were not authorized under the Funds’ Operating
Agreements, theft of money from the Funds by QHL and amendment of the Funds’
operating documents without the requisite member consent. The three 2007
Transactions were merely a continuation of this same fraudulent and dishonest scheme.
Defendants argue two grounds for imputing QHL’s misconduct to the Funds.
One, QHL’s acts should be imputed to the Funds under principles of corporation and
agency law that impute wrongful conduct of a corporate officer to a corporation that is
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wholly-controlled by that officer. Two, the Funds admitted in their Bond Action against
Lloyd’s that John Gaiser and other QHL employees were employees of the Funds when
they committed their wrongful and fraudulent acts, so that judicial estoppel bars the
Funds from denying that such employees acted for the Funds.
Under either of these imputation theories, QHL’s misconduct must be directly
related to Defendants’ alleged wrongdoing at issue in this proceeding, and Defendants
argue that it is.
Opposition
Plaintiffs’ opposition to the MSJ initially argues their underlying case for breach of
fiduciary duty by Defendants, which is not relevant to this MSJ.
The Funds next argue that QHL’s misconduct should not be imputed to the
Funds. Applicable law will not impute corporate officer wrongdoing to a corporation if
the officer was acting against the interests of the corporation, as here. The “sole actor
exception,” which would impute liability notwithstanding such an adverse interest,
should not be applied because QHL is not sole owner of the Funds and QHL was not
the sole party with control over the Funds. The Funds also argue imputation is
inappropriate against LLCs (as opposed to corporations) or as a shield to benefit
wrongdoers such as the Defendants.
The Funds argue that their “admissions” in the Bond Action that QHL
employees were employees of the Funds was in the limited context of their lawsuit
against Lloyd’s and should not be used to invoke judicial estoppel.
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Reply
Defendants argue that any conflict of interest on the part of Andrews Kurth, as
well as the fact that the Funds are LLCs and not corporations, are irrelevant to this MSJ.
They reassert that in pari delicto should be applied to this situation where
wrongdoer Gaiser controlled the Funds through QHL and cite a “phalanx” of cases for
this proposition. Defendants argue that the adverse interest exception should not apply
because it requires the agent to “totally abandon” or be “entirely adverse” to the
principal’s interest. Furthermore, Plaintiff’s have not presented admissible evidence of
any such “adverse interest” and to the extent the money went to QHL, it benefited the
Funds by providing them with management.
Finally, Defendants argue that Plaintiffs cannot admit that QHL employees are
employees of the Funds for one purpose in the Bond Action, but not another in this
proceeding.
Legal Analysis
The central issue in this MSJ is whether misconduct of QHL and its directors,
officers and employees can be imputed to the Funds where the Funds had no
employees, but, pursuant to their Operating Agreements, were managed by QHL, as
the sole manager.
Corporation/Agency Law
California follows the well-established principle that the acts and knowledge of an
officer/agent can be attributed to a corporation/principal. Imputation may be appropriate
even though the Funds are LLCs rather than corporations and QHL is a manager rather
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than the officer. Courts do not differentiate LLCs from more traditional corporations in
this context. See, e.g., Elder v. Greer (In re Sand Hill Capital Partners III, LLC), 2010
Bankr. LEXIS 3785, 6 (Bankr. N.D. Cal. Oct. 22, 2010); 546-552 W. 146th St. LLC v.
Arfa, 863 N.Y.S.2d 412, 415 (N.Y. App. Div. 1st Dep't 2008). Furthermore, imputation
of officer acts to the corporation is simply an application of more general agency law.
This attribution or imputation rule is subject to the “adverse interest” exception,
which is in turn subject to the “sole actor” exception:
California courts have recognized a limited exception to the rule that the acts of
an officer acting adversely to a company will not be attributed to it. In Peregrine,
the court imputed the fraudulent conduct of an officer and sole-shareholder to the
corporation in spite of the fact that his actions were adverse to it. 133 Cal. App.
4th at 679. The court reasoned that because the perpetrator of the fraud "was
also the owner and sole person in control of [the corporation], his fraud is
properly imputed to [the corporation]." Id. Courts have declined to impute this
exception, however, where it has not been established that all relevant decision
makers for the corporation were engaged in the fraud. See Casey v. U.S. Bank
Nat'l Ass'n, 127 Cal. App. 4th 1138, 1143, 26 Cal. Rptr. 3d 401 (Cal. Ct. App.
2005). Thus, finding that a corporation is barred from recovery on the basis of
unclean hands is appropriate at the summary judgment stage only if the
undisputed evidence meets the standard set forth in Peregrine, namely, that
those who perpetrated the fraud solely control the corporation.
McHale v. Silicon Valley Law Group, 2011 U.S. Dist. LEXIS 151680, 17-18 (N.D. Cal.
Dec. 14, 2011); see also Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton
LLP, 133 Cal. App. 4th 658, 679-680 (Cal. Ct. App. 1st Dist. 2005); see generally
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Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 358-359
(3d Cir. 2001) (under Pennsylvania law); USACM Liquidating Trust v. Deloitte &
Touche, LLP, 764 F. Supp. 2d 1210, 1222 (D. Nev. 2011)(under Nevada law).
While New York courts have required that the agent has “totally abandoned” the
principal’s interests and other courts have required “total” or “complete” adversity for the
“adverse interest” exception to apply (see numerous authorities cited by Defendants in
Reply at 9), California courts and the Ninth Circuit do not appear to require this
heightened standard of self-dealing. See, e.g., O’Melveny, 969 F.2d at 750 (“there can
be no attribution, and therefore no estoppel, when the insiders, rather than the
corporation, benefit from the wrongdoing”); McHale, 2011 U.S. Dist. LEXIS 151680 at
17 (“officer is engaged in an activity that is adverse to the interest of the corporation”).2
Thus, Plaintiffs’ need establish only that QHL acted “adversely” to the Funds.3
Defendants’ argument that there is no evidence that QHL acted adversely to the
Funds flies in the face of facts that Defendants rely on to initially establish QHL
wrongdoing that should be imputed to the Funds. Defendants rely on this statement
from the complaint: “It is abundantly clear from the Proof of Loss that John Gaiser, via
the vehicle of his alter ego, QHL, recklessly and wantonly engaged in activities that
directly caused the Funds, and, indirectly, their respective members, a financial loss of
at least 58,000,000 [sic] via the financial collapse of the Funds.” Defendants’ Statement
of Uncontroverted Facts # 5.. They attempt to bridge this inconsistency by styling the
2 Defendants attempt to show that California does have such a heightened standard by citing to (1) a footnote in a
1975 Ninth Circuit decision stating that fraud or stealing is required, based only on the Restatement of Agency,
Funk v. Tifft, 515 F.2d 23, 26 n.4, and (2) a 1936 decision holding that an officer might in fact still be acting for a
corporation (rather than adversely to it) even if the officer does get some personal benefit from the transaction.
West American Finance Co. v. Pacific Indem. Co., 17 Cal. App. 2d 225 (Cal. App. 1936). These citations are
unpersuasive in the face of the more straightforward and recent authorities above.
3 In any event, Gaiser and QHL’s behavior in the Transactions may well meet the heightened standard of total
abandonment or adversity required in other jurisdictions.
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uncontroverted fact as the admission by Plaintiffs rather than the underlying fact itself.
(To my mind, this effort skirts more uncomfortably close to inconsistent facts impinging
on judicial integrity than the “judicial estoppel” concerns Defendants raise over the
Lloyds’ litigation.) Logic ultimately defeats this attempt to have it both ways.
Defendants must show wrongful behavior by QHL that can be imputed to the Funds for
the Funds to be in pari delicto, but this same wrongful behavior depleted Funds’ assets
for the benefit of QHL and thus triggers the “adverse interest” exception to imputation.
Without this wrongful behavior, there is no adverse interest exception, but there is also
no wrongful conduct to impute to the Funds in the first place.
While Plaintiff’s evidence that QHL benefitted from the Transactions at the
expense of the Funds is not strong, it is sufficient to raise a triable issue of fact that QHL
acted adversely to the interests of the Funds, so QHL’s misconduct should not be
imputed to the Funds (unless the sole actor exception to the adverse interest exception
applies.)4
The fact that QHL is not the sole shareholder in the Funds does not
necessarily prevent application of the “sole actor” exception. The weight of authority
applies the exception if the agent/officer was either the sole shareholder or the sole
manager of the corporation. See, e.g., Lafferty, 267 F.3d 359-60 (sole ownership or
4 This evidence of self dealing by QHL undermines Plaintiffs’ argument that the money flowing to QHL did provide
some benefit to the Funds by ensuring QHL could continue to manage the Funds. If QHL was benefitting itself at
the Funds’ expense, the Funds would have been better served by QHL’s failure and the retention of an honest
manager. The Operating Agreements provide for the payment of fees to the manager, so the Funds were already
paying for the “benefit” of QHL’s management. Operating Agreements ¶5.7. In any event, the Ninth Circuit has
held this type of incidental benefit irrelevant:
[E]ven if the corporation were to somehow benefit from the wrongdoing of insiders, the insiders’ conduct is
still not attributable to the corporation if a recovery by the Plaintiff would serve the objectives of tort
liability by properly compensating the victims of the wrongdoing and deterring future wrongdoing.
FDIC v. O'Melveny & Myers, 969 F.2d 744, 750-51 (9th Cir. 1992) (citing numerous authorities for this
proposition). Courts have framed this issue as who is the primary beneficiary. See, e.g., Baena v. KPMG LLP, 453
F.3d 1 (1st Cir. 2006); FDIC v. Ernst & Young, 967 F.2d 166, 171 (5th Cir. 1992), reh’g denied 1992 U.S. App.
LEXIS 26696 (5th Cir. Oct. 1, 1992).
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domination grounds for the exception); USACM Liquidating Trust, 764 F. Supp. 2d at
1220 (“The sole actor rule is most easily applied when the wrongdoer was also the
corporate principal's sole shareholder or when all the corporation's management
participated in the wrongdoing.”) California law on this point is not entirely clear. In
Peregrine, which the Funds rely on for the proposition that sole ownership is required
for the exception to apply, the court’s language is ambiguous: “Because Hillmann, one
of the primary architects of the Ponzi scheme, was also the owner and sole person in
control of Peregrine, his fraud is properly imputed to Peregrine.” 133 Cal. App. 4th at
679. In this context, the phrase “owner and sole person in control” could mean that
both ownership and control were necessary for the “sole actor” exception to apply, but it
could also be read to mean that either sole ownership or control were sufficient to
trigger the exception although both happened to be present in Peregrine.5
In the absence of sole ownership, the “sole actor” exception does require sole
control by QHL in the misconduct at issue. Some courts describe the sole control
requirement conversely: the “sole actor” exception should not apply if “at least one
decision-maker could have stopped the fraud” (Industrial Enters. of Am., Inc. v. Mazzuto
(In re Pitt Penn Holding Co.), 2012 Bankr. LEXIS 5563, 20-25 (Bankr. D. Del. Nov. 30,
2012)) or “where it has not been established that all relevant decisionmakers for the
corporation were engaged in the fraud” (McHale, 2011 U.S. Dist. LEXIS 151680 at 18
(quoting Casey v. U.S. Bank Nat. Assn., 127 Cal. App. 4th 1138, 1143 (Cal. Ct. App. 4th
Dist. 2005)).6 QHL did not have sole control over the Transactions. Under the
5 The Funds argue that the Peregrine decision imputed fraud from the individual (Hillman) to his wholly-owned
corporation Peregrine (which is similar to QHL), but that it did not impute the fraud to the funding entities (which
are quite similar to the Funds in this case). That distinction is not meaningful, however, because the opinion only
considered whether Peregrine’s claims against Sheppard, Mullin were barred by unclean hands.
6 Defendants argument that “every federal Court of Appeals to have considered the issue has held that the presence
of people who could have stopped the fraud is immaterial to the imputation analysis” (Reply at 20) ignores
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Operating Agreements, QHL needed the consent of a majority of the member shares to
enter into a transaction that presented a conflict of interest between QHL and the
Funds. There is a material issue of fact whether these Transactions benefited QHL at
the expense of the Funds, which would be a conflict of interest, so it is a disputed issue
of fact whether QHL was the sole decisionmaker under the Operating Agreements.
(Without knowing all of the particulars of the Transactions, it is possible that they would
have required majority member consent under other provisions of ¶ 5.4 of the Operating
Agreements.)
Defendants’ “phalanx” of authority that the adverse interest exception should not
be applied to these facts is inapposite: the cases cited by Defendants usually involve
corporations used by their principals to steal from outsiders, while QHL’s wrongdoing
was “theft” from the Funds themselves. And that distinction is crucial in the case law.
Defendants point out the many similarities between this case and the facts underlying
both Peterson v. Winston & Strawn, LLP, 2012 U.S. Dist. LEXIS 147653 (N.D. Ill. Oct.
10, 2012) and Peterson v. McGladrey & Pullen, 676 F.3d 594 (7th Cir. 2012) in which
both courts imputed to several hedge funds the fraud of their corporate manager --
thereby allowing the accounting firm and law firm involved an in pari delicto defense
against an action by the hedge funds’ bankruptcy trustee. Notwithstanding these
similarities, the differences between this situation and the Peterson ones are ultimately
inconvenient facts in each cited case that distinguish it from the present circumstances. Both Baena and Ernst &
Young did not consider the “sole actor” exception, because they determined that the managers were in fact acting to
“primarily” “benefit” the corporation. 453 F.3d at 8; 967 F.2d at 171. (Baena did however reject the 9th Circuit’s
analysis in O’Melveny, discussed below.) In Breeden v. Kirkpatrick & Lockhart LLP (In re Bennett Funding
Group, Inc.), 336 F.3d 94 (2d Cir. 2003), the innocent independent directors were “impotent to actually do
anything.” 336 F.3d at 101. The innocent directors in Official Committee of Unsecured Creditors v. Coopers &
Lybrand, 322 F.3d 147 (2d Cir. 2003) likewise appear to have been without corporate authority to stop the fraud;
their suggested means of preventing it would have been to implore creditors or an underwriter to intervene and
rescue the corporation. Lafferty did summarily dismiss the idea that “the possible existence of any innocent
independent directors” would preclude application of the “sole actor” rule, but the wrongdoing officer was the sole
shareholder of these corporations and there was no assertion that the possibly innocent directors had the authority to
stop the fraud. 267 F.3d at 360.
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more significant:
First, the Trustee contends that the pari delicto defense is inapplicable, as a
matter of Illinois law, because Bell was acting adversely to the interest of the
Funds. The district court sensibly concluded that Cenco dooms this argument.
Cenco predicted that Illinois would hold that fraud by corporate managers is
imputed to the corporation where "managers are not stealing from the
company—that is, from its current stockholders—but instead are turning the
company into an engine of theft against outsiders". Cenco, 686 F.2d at 454.
Thirty years have passed, and no court in Illinois has disagreed with this
understanding. Bell was not stealing from the Funds, whether or not he was
using them to snooker people who had money to invest.
McGladrey, 676 F.3d at 599. (The Northern District of Illinois in Winston & Strawn relied
on the 7th Circuit’s decision McGladrey to conclude that the principal was not acting
adversely to the hedge funds. 2012 U.S. Dist. LEXIS 147653 at 11-12.) QHL stole from
the Funds, whereas the hedge funds in McGladrey and Winston & Strawn were used to
steal from others. Likewise, in Cobalt Multifamily Investors I, LLC v. Arden, 857 F.
Supp. 2d 349 (S.D.N.Y. 2011), the securities violations by the principals benefited the
corporations they controlled, at the expense of outsiders. Knauer v. Jonathon Fin.
Group, Inc., 348 F.3d 230 (7th Cir. 2003) also involved a Ponzi scheme in which the
corporations were used to bilk money from investors and the defendants’ involvement in
the Ponzi scheme was quite minor. Mosier v. Callister, Nebeker & McCullough, 546
F.3d 1271 (10th Cir. 2007)(operation of debtor as Ponzi scheme was not an “adverse
interest” where wrongdoing management pursued advantages for debtor).
In addition to the adverse interest exception, California courts also refuse to
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impute the acts or knowledge of an officer in a situation where that officer has no power
to bind the corporation. Peregrine, 133 Cal. App. 4th at 679; McHale, 2011 US LEXIS
151680 at 17; Meyer v. Glenmoor Homes, Inc., 246 Cal. App. 2d 242, 264 (Cal. Ct. App.
1st Dist. 1966), reh’g denied, 246 Cal. App. 2d 242 (Cal Ct. App. 1st Dist. 1966). QHL’s
lack of authority under the Operating Agreements to bind the Funds to the Transactions
also raises this exception to imputation..
Finally, the Funds argue that the Defendants should not be able to shield
themselves from liability using this imputation theory in the face of their own
wrongdoing. In a remarkably similar set of circumstances, the Ninth Circuit stated:
Furthermore, we note that O'Melveny cannot invoke an estoppel defense
unless it is innocent itself. See, e.g., Myers v. Moody, 693 F.2d 1196, 1208 (5th
Cir. 1982) ("A party may not invoke an estoppel for the purpose of shielding
himself from the results of his own fraud, dereliction of duty, or other inequitable
conduct."), cert. denied, 464 U.S. 920, 78 L. Ed. 2d 264 , 104 S. Ct. 287 (1983).
We conclude that ADSB has a corporate identity distinct from that of its
wrongdoing officers.
FDIC v. O'Melveny & Myers, 969 F.2d 744, 751 (9th Cir. 1992). Thus, the court ruled
that O’Melveny could not attribute fraud committed by a bank’s sole shareholders to the
bank itself and thereby use an “unclean hands” defense to bar the bank’s receiver’s
professional negligence action against O’Melveny. The precedential weight of this
opinion is unclear, however. The Supreme Court reversed and remanded with
instructions to determine the issue under state rather than federal law. O'Melveny &
Myers v. FDIC, 129 L. Ed. 2d 67, 114 S. Ct. 2048, 2053 (1994). On remand, the Ninth
Circuit (rather testily) maintained that their earlier opinion had been on the basis of state
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law. FDIC v. O'Melveny & Myers, 61 F.3d 17 (9th Cir. 1995). This subsequent decision
states “we reach the same conclusion as we did the last time.” 61 F.3d at 19. If this
means that the earlier ruling stands, Defendants cannot use an equitable doctrine of in
pari delicto to shield themselves from the consequences of any of their “dereliction of
duty, or inequitable conduct.” However, this second Ninth Circuit decision could be read
as holding only that an equitable defense like unclean hands cannot be asserted
against “a trustee, receiver or similar innocent entity that steps into the party's shoes
pursuant to court order or operation of law.” Id. The Plaintiffs, as debtors-in-
possession, at least arguably fall within the protection of this more narrow interpretation
of the subsequent O’Melveny ruling.
This court does not need to determine whether O’Melveny offers the Funds an
additional defense against in pari delicto. It is a matter of disputed fact whether QHL
had the sole authority, or in fact any authority, to enter into the Transactions.
Accordingly, both the “adverse interest” and “no authority to act” exceptions prevent
imputation of QHL’s wrongful actions in the Transactions to the Funds for the purposes
of this summary judgment motion.
Judicial Estoppel
Judicial estoppel “prohibit[s] p[arties from deliberately changing positions
according to the exigencies of the moment” and so “where a party assumes a certain
legal position in a legal proceeding, and succeeds in maintaining that position, he may
not thereafter, simply because his interests have changed assume a contrary position.”
New Hampshire v. Maine, 532 U.S. 742, 749-50 (2001). It has been applied not only to
where the party has won the previous action, but also to where the party obtained a
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favorable settlement. Risetto v. Plumbers and Steamfitters Local 343, 94 F.3d 597,
604-06 (9th Cir. 1996). [REDACTED]
The Supreme Court has provided the following guidelines for the decision to
invoke judicial estoppel:
Although we have not had occasion to discuss the doctrine elaborately,
other courts have uniformly recognized that its purpose is "to protect the integrity
of the judicial process," by "prohibiting parties from deliberately changing
positions according to the exigencies of the moment." Because the rule is
intended to prevent "improper use of judicial machinery," judicial estoppel "is an
equitable doctrine invoked by a court at its discretion." Courts have observed
that "the circumstances under which judicial estoppel may appropriately be
invoked are probably not reducible to any general formulation of principle."
Nevertheless, several factors typically inform the decision whether to apply the
doctrine in a particular case: First, a party's later position must be "clearly
inconsistent" with its earlier position. Second, courts regularly inquire whether the
party has succeeded in persuading a court to accept that party's earlier position,
so that judicial acceptance of an inconsistent position in a later proceeding would
create "the perception that either the first or the second court was misled,"
Absent success in a prior proceeding, a party's later inconsistent position
introduces no "risk of inconsistent court determinations," and thus poses little
threat to judicial integrity. A third consideration is whether the party seeking to
assert an inconsistent position would derive an unfair advantage or impose an
unfair detriment on the opposing party if not estopped.
New Hampshire v. Maine, 532 U.S. at 749-751 (citations omitted).
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Defendants cite the following “admissions” by the Funds in the context of their
attempts to recover from Lloyd’s. (Italicized language was left out of quotations in
Defendants’ Memorandum of Points and Authorities. The Court notes that some of
these omissions change the meaning of the quoted language in a manner favorable to
Defendants.)
[E]ach of the acts of the officers and employees of Quality Homes Loans are
deemed to be acts of employees of the Funds for purposes of coverage under
the fidelity bond.
10/23/09 Letter by Jay Robinson, counsel to the Funds, sending a Proof of Loss to Scott
Schmoo-kler, counsel to Lloyd’s (Defendants’ Exhibit X) at 7.
“Employees” as defined by the subject insurance policies and California case
law, have engaged in certain dishonest and fraudulent acts which have resulted
in losses to THE FUNDS during the subject policy periods, well in excess of the
combined limits of the primary and excess bond policies.
Complaint dated 4/15/10 (Defendants’ Exhibit F) ¶ 9.
Plaintiff’s FAC alleges that under Coverage (A), “The primary bond insurance,
and by reference, the excess bond insurance, provided by their terms that as to
‘fidelity’ matters, the Defendants under such policies would indemnify the
insureds, including THE FUNDS, for among other damages . . . Loss resulting
solely and directly from one or more dishonest or fraudulent acts by an employee
. . .” and that such employees “have engaged in certain dishonest and fraudulent
acts which have resulted in losses to THE FUNDS during the subject policy
periods, well in excess of the combined limits of the Primary and Excess Bond
Policies.
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Plaintiffs’’ (the Funds) Opposition to Defendants’ (Lloyd’s) Motion to Strike in the Bond
Action (Defendants’ Exhibit H) at 1:20-29. This sentence is simply quoting the
Complaint, which Defendants have already quoted.
Plaintiff admits that, up to the filing of its bankruptcy, it did not have any
employees but
Plaintiff asserts that under California law, the employees of QHL were deemed to
be employees of the Plaintiff for the limited purpose of triggering coverage under
the subject Bond Policies under insuring Agreement “A.”
Plaintiffs’ (the Funds) Responses to Requests for Admissions (Defendants’ Exhibits L &
N) at 15.
[t]he Plaintiff believes that the claims submitted by Plaintiff to Defendants are
covered under insuring Agreement A of the bonds in that the losses were caused
by dishonest and fraudulent acts by persons deemed to be employees of the
funds under California case law . . . .”
Plaintiffs’ (the Funds) Responses to Form Interrogatories (Defendants’ Exhibits O & P)
at 10.
given that the Funds had no actual employees, the employees of QHL are
deemed to be employees of the Funds for purposes of bond coverage under
California law (see Research Equity Fund v. INA, 602 Fed.2d 200)).
1/23/10 Letter by Jay Robinson, counsel to the Funds, to Scott Schmookler, Esq.
(Defendants’ Exhibit Z) at 2.
Invocation of judicial estoppel is in my discretion and, after considering the
guidelines set by the Supreme Court in Maine v. New Hampshire, I will not invoke it
here. As a group, these “admissions” are generally limited by the use of “deemed” or
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“for the purposes of bond coverage,” or the like. The Funds quite clearly limited their
assertion that employees of QHL were employees of the Funds to the context of
coverage under the Lloyd’s bonds. Claiming QHL employees were employees of the
Funds for the limited purpose of insurance coverage is “not inconsistent” with arguing
that they were not employees of the Funds for other purposes; neither the Superior
Court nor this court would “appear to be misled.” The Funds’ argument in the Bond
Action makes sense: unless QHL’s employees were deemed to be employees of the
Funds, the loyalty bond issued in favor of the Funds was meaningless. If in fact Lloyd’s
had been paid to issue a bond covering malfeasance by “employees” of the Funds, and
the Defendants in this proceeding did commit wrongful actions that injured the Funds,
the Funds’ recovery from both Lloyd’s and Defendants using a different definition of
employee in different contexts does not confer an unfair advantage on the Funds. In
sum, I do not need to dismiss this suit to preserve the integrity of the courts.
Motion denied.
###
Date: March 6, 2013
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Evidentiary Objections
Plaintiffs’ Objections to Evidence Offered by Defendants
Plaintiff objections to Defendants’ statements of uncontroverted fact (whether as
irrelevant, immaterial, a misstatement of the evidence, lacking foundation or otherwise)
are not objections to evidence and will not be considered.
Although Plaintiff has not cited the Federal Rules of Evidence underlying its
objections and objections without such citations may be deemed waived under LBR
9013-1(i)(2), I will consider the remaining objections:
- Objections to Defendants’ Exhibits F-H – overruled
- Objections to Defendants’ Exhibits J-T – overruled
- Objections to Defendants’ Exhibits U, X-BB - overruled
- Objection to Defendants’ Exhibit CC – sustained to the extent that witness lacks
personal knowledge or states an opinion not within FRE 701
Defendants’ Evidentiary Objections to Declaration of Randy Miller
Sustained to the extent witness lacks personal knowledge
Plaintiffs’ Evidentiary Objection to Excerpts from Brief from Peregrine in support of
Reply
Overruled
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This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California.
June 2012 F 9021-1.1.NOTICE.ENTERED.ORDER
NOTICE OF ENTERED ORDER AND SERVICE LIST
Notice is given by the court that a judgment or order entitled (specify): __ REDACTED
MEMORANDUM OF OPINION REGARDING DEFENDANT’S MOTION FOR
SUMMARY JUDGMENT [DOCKET NUMBER 62]
_____________________
was entered on the date indicated as AEntered@ on the first page of this judgment or order and will be
served in the manner stated below:
1. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF) B Pursuant to controlling
General Orders and LBRs, the foregoing document was served on the following persons by the court via
NEF and hyperlink to the judgment or order. As of (date)________________, the following persons are
currently on the Electronic Mail Notice List for this bankruptcy case or adversary proceeding to receive
NEF transmission at the email addresses stated below.
Craig Millet: cmillet@gibsondunn.com
Samuel Newman: snewman@gibsondunn.com
Jay H. Robinson: jayrobinson@mrfflaw.net
Robyn Sokol: ecf@ebg-law.com, rsokol@ebg-law.com
Corey Weber: ecf@ebg-law.com, cweber@ebg-law.com
United States Trustee: ustpregion16.wh.ecf@usdoj.gov
Service information continued on attached page
2. SERVED BY THE COURT VIA UNITED STATES MAIL: A copy of this notice and a true copy of this
judgment or order was sent by United States mail, first class, postage prepaid, to the following persons
and/or entities at the addresses indicated below:
Dennis P. DeFranzo
Jay H. Robinson
Marrone, Robinson, Frederick & Foster
111 North First St., Suite 300
Burbank, CA 91502-1851
Kevin Rosen
Craig Millet
Joshua Jessen
Gibson, Dunn & Crutcher LLP
333 S. Grand Avenue
Los Angeles, CA 90071-3197
Service information continued on attached page
3. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment
or order which bears an AEntered@ stamp, the party lodging the judgment or order will serve a complete
copy bearing an AEntered@ stamp by United States mail, overnight mail, facsimile transmission or email
and file a proof of service of the entered order on the following persons and/or entities at the addresses,
facsimile transmission numbers, and/or email addresses stated below:
Service information continued on attached page
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