Church of God in Christ #2 v. BDM Mortgage Services, Inc. et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	) Bankruptcy Case
) No. 08-30750DM
CHURCH OF GOD IN CHRIST #2, dba 	)
Little Chapel of God In Christ, 	) Chapter 11
a California Corporation, 	)
)
Debtor. 	)
___________________________________)
CHURCH OF GOD CHRIST #2, dba 	) Adversary Proceeding
LITTLE CHURCH OF GOD IN CHRIST, 	) No. 08-3126DM
a California Corporation, 	)
)
Plaintiff, 	)
)
v. 	)
)
BDM MORTGAGE SERVICES, INC., a 	)
California Corporation, et al., 	)
)
Defendants. )
___________________________________)
MEMORANDUM DECISION ON COMPLAINT
FOR NEGLIGENCE AND BREACH OF FIDUCIARY DUTY
I. 	INTRODUCTION
On June 27 and 28, 2011, the court conducted a trial in this
adversary proceeding. 	Plaintiff Church of God In Christ #2
(“Plaintiff”) appeared and was represented by Ruth Elin Auerbach,
Esq., its attorney. 	Defendants BDM Mortgage Services, Inc.
(“BDM”) and Daniel Aranda (“Aranda”) appeared and were represented
by Stanley P. Lieber, Esq., their attorney. 	All other defendants
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Signed and Filed: October 20, 2011
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
October 21, 2011
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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have been dismissed or have settled.
During the course of the trial the court determined that
Plaintiff had not made a prima facie case as to Aranda and
indicated that it would enter judgment in his favor.
For the reasons discussed below, the court will also enter
judgment in favor of BDM. 	Although BDM acted negligently and
breached a fiduciary duty to Plaintiff, its conduct was not the
substantial cause of Plaintiff’s claimed losses and therefore it
cannot be held liable for those losses.
II. 	PROCEDURAL BACKGROUND
Plaintiff commenced this adversary proceeding on October 17,
2008. 	In paragraph 3 of the complaint Plaintiff alleged that this
is a “core” matter. 	In its answer, BDM did not respond to that
allegation and thus it is deemed admitted. 	Accordingly, the court
determines that this matter is core (see 28 U.S.C. § 157(b)); if
not core, it clearly is related to the Plaintiff’s Chapter 11 case
and thus BDM, by virtue of its response, has consented to this
court entering findings of fact and conclusions of law and a final
judgment. 	See 28 U.S.C. § 157(c)(1) & (2).
III. 	DISCUSSION 1
In February, 2004, Joseph King, Jr. (“King”) was the Senior
Pastor of Plaintiff. 	Timothy Russell (“Russell”) was the Senior
Pastor of Word 2 Heart Ministries (“Word”). 	King and Russell
executed a Letter of Intent to Merge Non-Profit Entities (Exhibit
6) to merge Plaintiff and Word into a newly merged entity to be
named in a merger agreement. 	Though the merger did not take
1 The following discussion constitutes the court's findings
of fact and conclusions of law. 	Fed. R. Bankr. P. 7052(a).
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place, never being approved by the vote of the membership of
Plaintiff, Russell was designated Co-Pastor of Plaintiff, and his
sister, Jamesetta Russell, was designated as Chief Financial
Officer.
Around the same time Russell contacted Aranda at BDM, a
mortgage broker, to negotiate a loan for Plaintiff. 	Aranda
requested certain information and documentation from Russell,
including a copy of Plaintiff’s By-Laws. 	He did not request or
obtain a Statement of Officers of Plaintiff from the Secretary of
State of California. 	Aranda did not read Plaintiff’s By-Laws but
forwarded them to the title company that was going to be involved
in the loan transactions described below.
BDM brokered and thereafter serviced a loan of $238,000 from
third party lenders to Plaintiff. 	That loan (the “First Loan”)
was evidenced by a Note Secured By a Deed of Trust (Exhibit 1)
signed by Russell on April 25, 2004, and Jamesetta Russell on
April 26, 2004 and notarized by Aranda after that outside the
presence of the Russells. 	In connection with the First Loan
Russell provided BDM with a Letter of Resolution (Exhibit 9) that
reflected that Plaintiff’s board had authorized BDM to arrange a
loan of $215,000, secured by Plaintiff’s real estate on Turk
Street in San Francisco (the “Church”). 	The Letter of Resolution
purported to authorize Russell and Jamesetta Russell to execute
all loan documents. 	Russell signed King’s name. 	There is no
evidence that King knew that Russell did so. 	There is no evidence
that Plaintiff’s Board approved or ratified this loan.
Plaintiff’s By-Laws (Exhibit 4) provide that the
Pastor/President/Chief Executive Officer are interchangeable terms
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to denote the spiritual leader of Plaintiff. 	They also indicate
that the President shall be the Executive Officer of the
corporation and that He may sign with the secretary and any other
proper officer of the corporation ... deeds, mortgages, bonds,
....” (By-Laws 7). 	Exhibit 1 was not signed by a third officer as
required by the By-Laws.
In June, 2005, BDM brokered a second loan to Plaintiff, this
time for $84,500. 	That loan (the “Second Loan”) was evidenced by
a second Note Secured By a Deed of Trust (Exhibit 2) and was
signed by Russell and Jamesetta Russell but not by a third officer
as required by the By-Laws. 	In connection with that loan Russell
again signed King’s name to a Letter of Resolution (Exhibit 10)
that was similar to the earlier one. 	There is no evidence that
King knew that Russell did so. 	There is no evidence that
Plaintiff’s Board approved or ratified this loan.
In January, 2006, BDM brokered a third loan (the “Third
Loan”) whereby Plaintiff borrowed the sum of $372,500, most of
which went to refinance the First Loan and the Second Loan and out
of which Plaintiff received a net of just over $30,000. 	As with
the earlier notes, the third Note Secured By a Deed of Trust
(Exhibit 3) was executed by Russell and Jamesetta Russell.
Russell signed King’s name to a Letter of Resolution that was
similar to the two earlier ones. 	There is no evidence that
Plaintiff’s Board approved or ratified this loan. 	At the time of
the Third Loan the First Loan and the Second Loan were both
current. 	BDM received payments on the Third Loan for several
months before the loan went into default.
Shortly after the First Loan was funded a letter dated May 3,
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2004 (Exhibit L), was executed wherein King purported to authorize
Russell to act on his behalf as Chief Executive Officer of
Plaintiff and authorized him to procure funds to be secured by the
Church for purposes of remodeling and maintaining the property and
establishing new programs. 	There is no evidence that the May 3,
2004 letter was provided to BDM until October, 2006, after all
three loans had been funded. 	In fact, Aranda could not recall
when he first saw the letter or if and when he relied on it to
make any of the three loans. 	He did not request it.
Plaintiff contends that because the three loans were never
properly authorized in accordance with its By-Laws, that BDM is
liable to it for a total amount which it is obligated to pay the
lenders who made it, plus the amount of money it borrowed from
others to service the BDM loans, plus attorneys fees incurred in
state court proceedings and in this court. 	Plaintiff contends and
BDM disputes that BDM owed it a fiduciary duty that gives rise to
this liability; in the alternative it contends and BDM also
disputes that BDM negligently permitted Plaintiff, primarily
through the actions of Russell, to borrow the funds when it was
unable to pay for them. 	Finally, BDM contends that regardless of
its conduct, it was not the proximate cause of Plaintiff’s loss -
Russell was. 	It argues that even if BDM breached a fiduciary
duty or was negligent, that conduct did not cause compensable
damages it should pay. 	The court agrees with BDM on this final
point.
To support its theory that BDM owed it a fiduciary duty,
Plaintiff surprisingly cites California Civil Code section 2923.1,
a section plainly limited to residential mortgage loan services.
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Nevertheless, subparagraph (c) makes clear that the statute does
not limit any other fiduciary duty and Wyatt v. Union Mortgage
Co., 24 Cal.3d 773 (1979) stands for the proposition that a
mortgage broker acts in a fiduciary capacity that imposes upon it
the duty of acting in the highest good faith towards its
principal. 	Accordingly, the court determines that BDM, insofar as
it acted as a mortgage broker in these transactions, did owe a
fiduciary duty to Plaintiff.
BDM relies on cases that hold mortgage brokers to a duty to
be forthcoming about loan terms and required payments. 	Here
there was absolutely no disclosure of terms or payment
requirements to Plaintiff, the borrower. 	The disclosures were to
Russell and his sister. 	BDM agreed to serve Plaintiff and then
failed to ensure that Plaintiff knew the loan terms it was
committing to three separate times.
In the alternative Plaintiff contends that BDM was negligent.
It was. 	It failed to do its appropriate and fundamental diligence
and ascertain that Plaintiff had properly authorized the three
loans that are the subject of this litigation. 	It relied
primarily on Russell and the Letters of Resolution and ignored the
clear terms of Plaintiff’s by-laws requiring three, not two,
corporate officers to execute deeds and mortgages. 	The court
rejects as unpersuasive BDM’s contention that reviewing the by-
laws was the duty of the title company. 	If in fact a title
company failed to carry out its duties that is between it and BDM;
BDM cannot exonerate itself from its failure to protect its
principal, Plaintiff, from the consequences of its own negligence
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or breach of duty. 2 	But that, too, is of no moment because
Plaintiff reaped several benefits from the three loans and what
harm it suffered at the hands of Russell was not caused by BDM.
Its conduct was not a “substantial factor” that caused that harm.
Lysick v. Walcom 258 Cal.App.2d 136 (1968); Brantley v. Boyd, 07-
6139 SC, 2011 WL 1225630 (N.D. Cal April 1, 2011).
As discussed more fully below, most of the money loaned
on the First Loan, the Second Loan and the Third Loan directly or
indirectly benefitted Plaintiff by compensating Pastor King and
providing necessary repairs and maintenance of the Church even if
its Board did not specifically authorize the loans. 	Another large
portion of the money actually serviced the debts. 	To award
Plaintiff damages for these benefits would unjustly enrich it.
To the extent Russell diverted some of the loan proceeds for
Word or for his own purposes, the damage caused to Plaintiff by
that conduct was not foreseeable by BDM. 	Its conduct in
recommending that the loans be made without proper corporate
borrowing authority admittedly caused the money to become
available; it did not lead to Russell’s conduct in setting up a
separate bank account (the “Wells Fargo account”) that he and his
sister controlled in Plaintiff’s name nor to his misuse of some of
the funds in that account.
2BDM contends that Plaintiff has failed to carry its burden
to prove negligence by a failing to call an expert witness to
testify as to the standard of care in the relevant community.
The court disagrees with BDM and accepts that when facts
giving rise to a Plaintiff’s negligence are within the experience
and understanding of individuals with common intelligence and
education, no such expert testimony is required. 	Simonton v.
Pierce, 165 Cal. App. 2d 163 (1958). 	Because the court is
granting judgment in favor of BDM its decision that no experts
were required is of no real consequence to BDM.
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One of the problems the court has been confronted with is to
quantify exactly how much Plaintiff was benefitted by the loans.
The first challenge has been to calculate how much money was
actually available. 	Neither counsel set that forth the amounts
specifically, but the court was able to examine the bank records
(Exhibit 12) and determine that in April, 2004, from the First
Loan, deposits were made to the Wells Fargo account in the sums of
$115,219.42 and $100,054.52. 	In June, 2005, from the Second Loan,
there was a deposit of $75,744.33. 	In January, 2006, from the
Third Loan, there was a deposit of $30,242.07. 	Thus the three
loans resulted in receipts, net of closing costs,, fees, etc.,
totaling $321,260.34.
At a minimum the evidence establishes that at least
$93,077.58 of the loan proceeds were used to pay King’s salary.
This amount was not set forth specifically by BDM’s counsel but is
derived from Exhibit 12, which shows that between June, 2004 and
February, 2006, payments were made from the Wells Fargo account to
Paychex for payroll, payroll taxes and Paychex invoices that
totaled $54,001.26, $15,953.81 and $2,353.51, respectively, plus
from Exhibit M-2, which shows another 20,769.15 for King’s
compensation during July, 2006.
Although perhaps the Board did not specifically authorize
payments of this amount of salary the payments have not been
disputed. 	The Board cannot turn a blind eye to the fact that the
Church’s pastor was somehow being paid. 	Management’s lack of
oversight does not transform into a liability of BDM.
Beyond payment for King, at least $22,829.26 of the loan
proceeds were used for actual improvements, insurance,
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maintenance, repairs, etc. at the Church (Exhibit N), as follows:
Sign-A-Rama 	$404.97
Home Depot 	$843.27
QuixTap 	$653.08
Best Musical 	$429.56
Golden State Painting 	$7,500.00
Central City Glass 	$1,103.49
Central Builders Ace
Hardware $41.32
S F Hardware 	$18.77
GGI 	$1,571.22
Guide One Insurance 	$9,736.75
City & County of San
Francisco $150.00
National Church Purchasing
Group $49.00
PG & E 	$87.91
Sunset Scavenger 	$112.59
SF PUC 	$77.24
AT & T 	$50.09
TOTAL 	$22,829.26
Russell testified as to numerous other conditions that needed
to be remedied at the Church, but BDM did not prove the amount
expended on these problems. 	For reasons not clear to the court,
additional receipts apparently exist but were not produced at
trial. 	Without adequate proof the court cannot quantify this
benefit beyond what is set forth above. 	Had the court decided
that BDM was liable, this failure of proof might have cost BDM
valuable credits.
The evidence also shows that substantial portions of loan
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proceeds went right back to BDM as interest on the loans. 	From
Exhibit 12 the court can locate ten check payments of $2,630.85
between June 2004 and December 2005. 	This is the exact monthly
interest due on First Loan. 	Later the same exhibit shows six
payments of $960.42, the monthly amount due on the Second Loan.
And Aranda testified without contradiction that the First Loan and
the Second Loan were current at the time Third Loan. 	From that
the court finds that at least eleven more payments were made on
the First Loan and one on the Second Loan. 3
The evidence also shows that from the Wells Fargo account at
least $116,000 went to Word (Exhibit 13), without authorization by
Plaintiff’s Board. 	As with the payments for King, these
disbursements were, at worst, improper transfers made by Russell
or Jamesetta Russell, but they were not caused by BDM’s failure to
ensure that there were three signatures on the loan documents.
To summarize the receipts and disbursements discussed above,
$321,264.31 came in from the three loans and $293,877.33 went out
for King, repairs and maintenance of the Church, debt service and
to Word. 	If the difference, $27,386.98, was misappropriated,
Plaintiff has not proven it and the court cannot speculate on the
disbursements from the Wells Fargo account not explained nor
consider it as damages to impose on BDM.
Plaintiff originally sued the lenders who made the three
loans but subsequently entered into a compromise with them. 	To
3 Members of Plaintiff loaned or advanced $148,000, of which
$22,681.68 went to cure defaults on one or more of the loans, and
another $50,400 serviced the loans for fourteen months, but the
dates of those loans have not been shown and certainly the
payments on the loans were not made from the Wells Fargo account.
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the extent it recovers monies under that compromise it concedes
there would be an offset against the amount it seeks to recover
from BDM. 4 	The fact that it expects such a recovery, presumably
from a solvent title company, undermines the theory that it has
been damaged at all, or at least for which BDM must be held
accountable.
Although Russell caused some portion of the loans proceeds to
be expended on account of Word, and provided no benefit to
Plaintiff, $20,000 has been returned to Plaintiff. 	Further,
Russell has entered into a settlement with Plaintiff such that if
and when he pays up to $83,000 over time, such a recover further
underscores the notion that BDM did not cause the damage.
IV CONCLUSION
BDM’s conduct was not admirable and it should have been more
careful in following basic principles of knowing who its borrower
was and what that borrower was or was not authorizing. 	Despite
that conduct it did not cause Plaintiff harm such that it should
be held accountable under the theories presented. 	Had Russell
asked that the loan proceeds be diverted to a separate account or
discussed his plans with Aranda the results might be otherwise.
The compensable harm was caused by Russell, Jamesetta Russell or
Word, and BDM was not their guarantor. 	Stated otherwise,
facilitating unauthorized loans that largely benefitted Plaintiff
does not impose strict liability for wrongful conduct by the
wrongdoers who diverted some of the loan proceeds.
4Plaintiff’s counsel represented that a recovery of a
settlement amount of $120,000 would be the subject of a noticed
settlement motion within a few weeks of trial. 	No such settlement
has been noticed.
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BDM is entitled to judgment in its favor. 	The court is
issuing such a judgment concurrently with this Memorandum
Decision.
* * * END OF MEMORANDUM DECISION * * *
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SERVICE LIST
Stanley P. Lieber, Esq.
Lieber Williams & Labin
22130 Clarendon Street
Woodland Hills, CA 91367
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