Memorandum of Decision Re: Disguised Security Transaction

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. 1-89-100 FRANK and TOSCA RATTO,        Defendants. ______________________________/
Memorandum of Decision
     Plaintiff Charles E. Sims is the trustee of the estate of Lendvest Mortgage, Inc., a now-defunct mortgage company. The issue now before the Court is whether a promissory note made payable to the debtor, assigned to defendants Frank and Tosca Ratto, but never physically transferred to them, belongs to the Rattos or the bankruptcy estate. Because the issue has been addressed at length in several Ninth Circuit opinions, resolution of this case boils down to a single factual finding.      If the note was assigned to the Rattos as security for the debtor's obligation to them, then their interest in the note is avoidable because they did not have possession of it. In re Staff Mortgage & Inv. Corp. (9th Cir.1980) 625 F.2d 281. On the other hand, if the debtor sold the note to the Rattos and assigned it to them pursuant to the sale, then the Rattos own the note notwithstanding their lack of possession. In re Golden Plan of California, Inc. (9th Cir.1986) 829 F.2d 705, 708. The form of the documents is not controlling; it may be properly determined from all the facts and circumstances that the bargain was a security transaction and not a sale, even if all the documents recite that it is a sale. In re The Woodson Company (9th Cir.1987) 813 F.2d 266. The protests of the investor that no security transaction was intended cannot overcome the effect of the documents themselves. In re Executive Growth Investments, Inc. (Bkrtcy.C.D.Cal.1984) 40 B.R. 417, 420.      The dispositive test of whether the bargain was a sale or a security transaction is whether the investor received a contractual guarantee of repayment from the debtor, so that the risk of loss was shifted from the investor to the debtor. In re Golden Plan, at 709; In re The Woodson Company, at 271. In Golden Plan, the trustee lost because although the debtor had advanced funds to investors in bad loans, it was not contractually obligated to do so. In Woodson, the trustee won because the debtor had issued its written guarantee to the investors.      In this case, the documents signed by the Rattos are virtually identical to those before the court in Woodson, with one exception. In this case, the Rattos were concerned that they might need their investment back, so they extracted from the debtor an additional obligation, in the form of a document entitled "Contract Agreement," whereby the debtor promised to buy back the note from the Rattos at no loss of principal or interest to them. It is difficult to imagine clearer evidence that the risk of loss was in the debtor and not the Rattos.      This case is not distinguishable from Woodson because the debtor here did not have an insurance policy to protect its investors. The court in Woodson did not base its holding on the fact that there was insurance. The holding there was based on documents, indistinguishable from those now at issue, which the court found created a debtor-creditor relationship between the mortgage company and the investors.      For the foregoing reasons, the court rules that the Rattos have only an unperfected security interest in the subject note, which interest shall be avoided pursuant to section 544(a) of the Bankruptcy Code. Counsel for the trustee shall submit an appropriate form of judgment, which shall include a requirement that the Rattos return any postpetition payments they received.      This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: September 16, 1989                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy