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. 1-90-0093 EMILY DiGENNARO,      Defendant. ______________________________/ 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, 813 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.      In Woodson, 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 in Woodson 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. Sims v. Ratto, -- B.R.-- (9th Cir.BAP 1990).      In a separate adversary proceeding arising out of this bankruptcy, the court held that Woodson did not apply where there no fractional interest involved, the investors were the original payees 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 that Woodson is not applicable solely because the debtor guaranteed the note and held the note for servicing.      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.      Under Woodson, 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., Inc., 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 of California, 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 as preferences.      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                                                                         _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy