Memorandum of Decision Re: Disguised Security Agreement

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re LENDVEST MORTGAGE, INC.,                             No. 1-88-01058      Debtor. ___________________________/ CHARLES E. SIMS, Trustee,      Plaintiff,    v.                                                                              A.P. No. 1-90-0090 ALEJANDRO and ELLEN AMADOR,      Defendants. ______________________________/ CHARLES E. SIMS, Trustee,      Plaintiff,    v.                                                                              A.P. No. 1-90-0099 DAVID W. SANDERSON,      Defendant. ______________________________/
Memorandum of Decision
     Plaintiff Charles Sims is the trustee of the estate of Lendvest Mortgage, Inc., a defunct mortgage company. Defendants Alejandro and Ellen Amador and David Sanderson were investors in, or through, the debtor prior to bankruptcy. The issue before the court is whether defendants or the debtor estate own promissory notes secured by deeds of trust. There are no disputed issues of fact. Since the issues are the same in both of the above adversary proceedings, the court here issues one decision.      The bulk of the prebankruptcy business of Lendvest was that of a typical mortgage broker, matching commercial lenders with persons wishing to make loans secured by their real property. However, about 20 per cent of its business involved matching borrowers with private investors rather than commercial lenders. Defendants Amador and Sanderson were such private investors.      Most of the loans brokered by Lendvest with private investors were unremarkable, and have not been the subject of bankruptcy litigation. However, in a portion of private investor loans, Lendvest did more than just act as broker: it issued its written guarantee to the private investor that if the borrower failed to pay on the note then Lendvest itself would pay the investor. Thus, Lendvest and not the investor bore the ultimate risk of loss if the borrower defaulted.      In a prior adversary proceeding arising out of this case, the court ruled that notwithstanding the form of the documents, in substance the investor with a guarantee actually had a mere security interest in the borrower note. Since the original note was in the possession of Lendvest when the bankruptcy was filed, the investor's security interest was unperfected and avoidable, rendering the investor a mere unsecured creditor. The court's decision was affirmed on appeal. In re Lendvest Mortgage, Inc. (Sims v. Ratto), 119 B.R. 199 (9th Cir.BAP 1990). In that case, the note had been originally made payable to Lendvest and the investors had paid Lendvest for the note rather than deposit their funds into a loan escrow and actually fund the loan. Thus, with the exception of the fact that no fractional interests were involved, the facts were identical to those in In re The Woodson Company, 813 F.2d 266 (9th Cir.1987).      In the cases now before the court, the investors placed their funds directly into an escrow, and were themselves named as the payees on the borrower notes. Thus, unlike Ratto and Woodson, here there has never been a transfer of the notes from the debtor to the defendant investors. Moreover, in this case the investors actually made the loan to the borrower rather than merely purchasing an existing note from Lendvest. The Trustee argues that the guarantee alone makes the transaction a loan to Lendvest, regardless of other facts.      The argument of the Trustee is simple and has some merit. He asserts that in substance the investments of the Amadors and Sanderson were no different than that of Ratto, so that they should be treated the same. Moreover, he recited the specific statement in Ratto that "Where the risk of loss is shifted from the investor to the debtor through a contractual guarantee of repayment by the debtor, the transaction is a loan and not a sale." 119 B.R. at 200. The Trustee has accordingly declined the opportunity to put on more evidence about how Lendvest conducted its business and what the parties actually intended, taking the position that the existence of the guarantee is by itself dispositive.      Notwithstanding the wording of Ratto, the court is troubled by a blanket holding that a loan to the debtor results every time there is a guarantee, and does not believe that this is what the Appellate Panel meant. If read literally, the holding in Ratto would make it legally impossible for one who arranges a loan to also guarantee the borrower's performance without creating a security transaction. The court feels that the proper rule is that such a guarantee conclusively establishes a loan to the debtor only when most or all of the other circumstances also point in the same direction.      In Woodson, there were many facts inconsistent with an outright sale other than the guarantee itself. First, only fractional interests were sold to investors, making their actual exercise of ownership rights impractical or impossible. Second, the notes were not actually payable to any of the investors and their possession was retained by the debtor. Third, in many cases the investors were promised returns on their investment different from those in the note they were supposedly purchasing. In fact, the court found that the investors possessed none of the usual indicia of ownership. 813 F.2d at 272. Under these circumstances, the existence of the debtor's guarantee is rightly the dispositive factor in determining the nature of the transaction.      However, in the present cases there are virtually no incidents of a loan to the debtor other than the guarantee itself. The court disagrees with the proposition that the guarantee alone makes the transaction a loan to the debtor. When there are significant indicia of actual ownership by the investor, the existence of a contract shifting the risk of loss to the debtor does not necessarily compel a finding that the transaction was in substance a loan to the debtor.      In these cases, there is little other than the guarantee itself to point to an intended loan to the debtor. The investors placed their funds directly into the loan escrow, not the debtor's general account as in Woodson. Unlike Woodson, in these cases the notes did not exist until the investors funded the loans; the notes were made payable to the investors, not the debtor. These indicia of true ownership make Woodson inapplicable.      Moreover, the compelling equities favoring the result in Woodson are not present here. In Woodson, almost all of the hundreds of investors had the same documentation and relied on the same guarantee. The ruling in Woodson resulted in an equitable distribution of the estate, rather than allowing some investors to be paid in full while others with the same guarantee received nothing. Here, only a small fraction of Lendvest investors received a guarantee; turning their investments into loans to the debtor merely results in a windfall to non-investor creditors.      The court finds that there is insufficient evidence to establish that the Amador and Sanderson loans were in subtance loans to Lendvest. The court finds that the Lendvest guarantee was just that, and did not automatically turn the transaction into a loan to Lendvest where Lendvest never owned the note or had possession of the investor's funds. Accordingly, the Trustee having declined to present any further evidence regarding the nature of the transaction, judgment must be rendered in favor of the defendants. They shall also recover their costs of suit.      Counsel for defendants shall submit forms of judgment which counsel for the Trustee has approved as conforming to this decision.
Dated: December 10, 1990                                                                        _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy