FOR THE NORTHERN DISTRICT OF CALIFORNIA
LENDVEST MORTGAGE, INC., No. 1-88-01058
CHARLES E. SIMS, Trustee,
v. A.P. No. 1-90-0093
Memorandum of Decision
Plaintiff Charles Sims is the trustee of the estate of Lendvest Mortgage, Inc., a defunct
mortgage company. Defendant Emily DiGennaro was an investor with the debtor. The issue
in this case is whether the estate or Mrs. DiGennaro is entitled to the proceeds from the payoff
of a promissory note secured by a deed of trust.
In 1984, third parties named McCrory approached Lendvest (then named Napa Valley
Mortgage) to borrow $36,000.00. The loan was funded by Mrs. DiGennaro, who paid that
amount directly into escrow. However, the payee on the note was the debtor, not Mrs.
DiGennaro. She gave the debtor a power of attorney enabling the debtor to enforce the note,
possession of which was retained by the debtor except for a ritual delivery to Mrs. DiGennaro
and immediate redelivery to the debtor in August of 1985. Most significantly, the debtor gave
Mrs. DiGennaro its written guarantee that it would make the payments to her under the note
even if it did not receive payment from the borrowers
The loan to the McCrorys was extended in February, 1987, with the consent of Mrs.
DiGennaro. In March, 1987, the note was endorsed by the debtor to Mrs. DiGennaro "without
recourse," although it retained possession. On June 14, 1988, an involuntary petition in
bankruptcy was filed against the debtor. The note has subsequently been paid in full by the
McCrorys, and the proceeds held in trust pending the outcome of this litigation.
The issue before the court is the proper interpretation of In re The Woodson Company
F.2d 262 (9th Cir.1987). The debtor in this case, like the debtor in Woodson
, is a defunct
mortgage brokerage. The issue is whether investors own the secured notes arising out of loans
the debtor brokered, or whether the notes are property of the debtor's bankruptcy estate.
, the original payee on each note was a limited partnership formed by the debtor
with the debtor as the sole general partner. The debtor would pay the partnership for the note,
and then sell fractional interests in the note to investors, retaining possession of the note in order
to "service" it for the investors. The debtor also guaranteed each investor that if the maker of
the note failed to make a payment then the debtor itself would pay the investor. The Court of
Appeals ruled that under these circumstances the transaction was a disguised security transaction
and the debtor's estate owned the notes.
In a prior adversary proceeding arising out of this bankruptcy, this court ruled that the ruling
was applicable to a situation where the interest purchased by the investor was 100%
of the note, not a fractional interest. In that case, the debtor itself was the original payee on the
note and sold all of it to the investor, retaining possession under a service agreement and
guaranteeing payment to the investor. The court's decision in that case was affirmed on appeal.
, -- B.R.-- (9th Cir.BAP 1990).
In a separate adversary proceeding arising out of this bankruptcy, the court held that
did not apply where there no fractional interest involved, the investors were the
on the note, and their funds went directly to the borrower
, through an escrow,
and were never given to the debtor or deposited in the debtor's account. The court determined
is not applicable solely because the debtor guaranteed the note and held the note
This case involves a hybrid situation. Like Ratto
, Mrs. DiGennaro received the debtor's
guarantee and assignment of the note from the debtor, which was named the original payee. Like
the defendants in the second case, Mrs. DiGennaro placed her funds directly into an escrow and
directly funded the loan, so that her funds were never in the debtor's possession.
The court is of the opinion that this case is more like Ratto
, and less like the second case,
so that Woodson
does apply. The court did not apply Woodson
in the second case because in
that case there was no transfer whatsoever from the debtor to the investor. Since the issue to
be decided was whether a transfer was absolute or for security purposes, where there is no
transfer at all there is nothing to evaluate.
In this case, the original payee was the debtor. Therefore, the issue does arise as to whether
its assignment to the debtor was absolute or for the purposes of security. Since the debtor issued
its guarantee that it would pay Mrs. DiGennaro even if the borrower made no payment, it is clear
that the debtor bore the risk of loss.
, the court must interpret the transfer of the note from the debtor to Mrs.
DiGennaro as a transfer for security, and not an absolute transfer. Her protests that she did not
intend the transfer to be for security purposes are not controlling. In re Executive Growth Inv.,
, 40 B.R. 417, 420 (Bkrtcy.C.D.Cal.1984).
Since the transaction must be deemed to be a security transaction notwithstanding the form
of the documents, it is clear that Mrs. DiGennaro's lack of possession of the note on the date of
bankruptcy renders her an unsecured creditor. In re Staff Mortgage & Inv. Corp.
, 625 F.2d 281
(9th Cir.1980). The fact that prior to the bankruptcy she and the debtor had engaged in a ritual
transfer and retransfer is irrelevant, if there was no possession on the date of the bankruptcy;
section 544(a) gives the trustee the avoiding powers of a judicial lien creditor as of the
commencement of the case
One further curious fact in this case demands comment. Although the original investment
was made by the defendant in 1984, the note remained in the name of the debtor until March 17,
1987. On that date, the debtor endorsed the note to the defendant "without recourse." This was
just four days after the Court of Appeals issued its second amended opinion in In re Golden Plan
, 829 F.2d 705 (9th Cir.1986), holding that the notes were not property of the
bankruptcy estate because they were endorsed "without recourse." See Woodson
, footnote 6.
Whether the timing of the assignment without recourse was mere coincidence or a belated
attempt to make the ruling in Golden Plan
applicable, the assignment does not save Mrs.
DiGennaro's case. In Golden Plan
, there was no contractual guarantee. In this case, the mere
endorsement of the note in this case as being without recourse did not terminate the debtor's
obligations to Mrs. DiGennaro on its guarantee. Accordingly, the belated endorsement does not
make Golden Plan
, rather than Woodson
, controlling here.
For the foregoing reasons, the court finds that Mrs. DiGennaro's interest in the note is a
security interest and not an outright ownership interest. Since she did not have possession of the
note on the date of bankruptcy, her interest was unperfected and avoidable by the trustee.
Moreover, since the debtor was insolvent and unsecured creditors will not receive payment in
full, all payments she received from the debtor in the 90 days before bankruptcy are avoidable
Counsel for the Trustee shall submit an appropriate form of judgment. This memorandum
constitutes findings and conclusions pursuant to Bankruptcy Rule 7052.
Dated: November 17, 1990 _______________________