Memorandum of Decision Re: Disguised Security Transaction

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re LENDVEST MORTGAGE, INC.,                                       No. 1-88-01058      Debtor. ___________________________/ CHARLES DUCK, Trustee,      Plaintiff,    v.                                                                                        A.P. No. 1-88-0153 LOUISE A. MOCK,      Defendant. ______________________________/
Memorandum of Decision
     Plaintiff Charles Duck 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 defendant Louise Mock, but remaining in the possession of the debtor, belongs to Mock 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 Mock as security for the debtor's obligation to her, then her interest in the note is avoidable because she 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 Mock and assigned it to her pursuant to the sale, then Mock owns the note notwithstanding her 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 reThe Woodson Company (9th Cir.1987) 813 F.2d 266.      Mock is off base in arguing that section 541(d) of the Bankruptcy Code is relevant. If the bargain was a sale, she wins without need to refer to section 541(d); if it was a security transaction, she loses notwithstanding section 541(d). In re The Woodson Company, at 270.      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.      The factual finding in this case is not as easily made as Mock makes it out to be. Her own witness, a former officer of the debtor who arranged the Mock investment, admits that the debtor did give guarantees to many investors and that he cannot remember if he gave a guarantee to Mock or not. However, Mock's own testimony that she received no guarantee is believable and unrebutted, and is the basis for the Court's finding that she did not receive a guarantee and therefore is the lawful owner of the note and not the holder of an unperfected security interest in it.      For the foregoing reasons, the Trustee shall take nothing by his complaint and the matter shall be dismissed with prejudice. Mock shall recover her costs of suit.      Counsel for Mock shall submit an appropriate form of judgment. This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: March 15, 1989                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy