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In re R&S St. Rose, LLC

United States District Court, D. Nevada

September 30, 2019

In re R&S ST. ROSE, LLC, Debtor,
v.
R & S ST. ROSE LENDERS, LLC; R & S ST. ROSE, LLC; R & S INVESTMENT GROUP, LLC; COMMONWEALTH LAND TITLE INSURANCE COMPANY; THE CREDITOR GROUP; and THE U.S. TRUSTEE, Appellees. BRANCH BANKING AND TRUST COMPANY, Appellant, AND RELATED APPEALS

          ORDER

          MIRANDA M. DU, CHIEF UNITED STATES DISTRICT JUDGE

         I. SUMMARY

         This is a consolidated appeal of Branch Banking and Tr. Co. v. R&S St. Rose Lenders, LLC, et al. case numbers 2:17-cv-01251-MMD and 2:17-cv-1298-MMD, and of Commonwealth Land Title Ins. Co. v. R&S St. Rose Lenders, LLC, et al., case number 2:17-cv-1301-MMD. These cases where consolidated because all three appeals stem from the bankruptcy case filed by R&S St. Rose, LLC (“Rose”) (bankruptcy No. 11-14974-MKN) (“Rose Bankruptcy Case”) and related adversary proceeding (adversary proceeding no. 13-01822) (“Adv. Pro.”). Appellants Branch Banking and Trust Company (“BB&T”) and Commonwealth Land Title Insurance Company (“Commonwealth”) specifically appeal the Bankruptcy Court's order overruling BB&T's Objection to R&S St. Rose Lenders' (“Lenders”) proof of claim (ECF No. 64 at 6-7 (“Order”)). (See ECF No. 62 (Appellant's joint status report); ECF No. 73 at 222; ECF No. 64 at 36.) BB&T separately appeals from the Bankruptcy Court's Memorandum Decision/Judgment (“Judgment”) in the Adv. Pro. which determined the amount of Lenders' claim filed against Rose. (ECF No. 73 186-89; ECF No. 64 at 6-34).[1] This Court affirms both the Order and Judgment.

         II. BACKGROUND

         A. Factual History

         Rose and Lenders were both formed in 2005. Each had the same members: Forouzan, Inc., and RPN LLC, which were respectively owned by Saiid Forouzan Rad and R. Phillip Nourafchan.[2] (ECF No. 65 at 36-37.) Rose was established to land-bank real property in Henderson, Nevada (“Property”) with the intent of selling the Property to Centex Homes (“Centex”). (ECF No. 87 at 89-91.) Lenders was formed for the purpose of borrowing funds from individual lenders and then loaning those same funds to Rose. (Id. at 21.)

         Rose purchased the Property for over $45 million and granted Centex a one-year option for over $54 million. (Id. at 92, 242-48.) To finance the purchase of the Property, Rose obtained funds from three separate sources: (1) about $29 million from Colonial Bank (“Colonial”) (“Acquisition Loan”) secured by a first-position deed of trust on the Property; (2) about $8 million non-refundable deposit from Centex; and (3) over $12 million comprised of money from individual lenders, with a promissory note in favor of Lenders for that amount (“Lenders' Promissory Note”) secured by a second-position deed of trust on the Property (“Lenders' DOT”). (Id. at 96; ECF No. 81 at 71-72 (St. Ct. Findings of Fact).) The individual lenders from whom Lenders borrowed money included Robert Murdock and Eckley Keach (hereinafter, “Murdock & Keach”). (ECF No. 81 at 74 (St. Ct. Findings of Fact).) The individual lenders received promissory notes from Lenders. (Id.)

         Centex declined to exercise its option to purchase the Property, thereby forfeiting its deposit. (Id. at 75.) Several months later-March 2007, in order to avoid foreclosure Rose and Colonial modified the first-position deed of trust to extend the date of maturity. (Id.) As part of that modification, Colonial requested and received a subordination agreement from Rose. (Id.)

         It is undisputed that by the summer of 2007, some of the individual investors (“first-in-time lenders”) sought repayment of their principal. (ECF No. 86 at 13.) Lenders borrowed money from other individual lenders (“later-in-time lenders”) to pay back some of the earlier loans. (E.g., ECF No. 93 at 217-18; ECF No. 90 at 86-103; ECF No. 83 at 15-166.) Later, Rose obtained a second loan from Colonial for approximately $43 million, part of which was used to pay off the Acquisition Loan and separately to develop the Property (“Construction Loan”). (ECF No. 81 at 80 (St. Ct. Findings of Fact).) The Construction Loan was secured by a new deed of trust on the Property (“Colonial's DOT”). (Id.). However, because Lenders' DOT was not reconveyed at the closing on the Construction Loan, Colonial's DOT was placed in second position on the Property behind Lenders' DOT. (Id. at 81-84.) Lenders was neither a party nor a guarantor in the Construction Loan transaction. (Id. at 80.)[3] Almost a year after the Construction Loan closed the title company asked Lenders to reconvey Lenders' DOT after confirming that Lenders' DOT's priority over Colonial's DOT, but Lenders refused. (Id. at 85.)

         Rose defaulted on both Lenders' Promissory Note and the Construction Loan and both Lender and Colonial moved to foreclose on the Property. (Id.) Lenders also defaulted on its loans with the individual lenders and stopped paying monthly interest. (ECF No. 88 at 28-29, 31-32.)

         B. Procedural History

         1. State Court Action

         Murdock & Keach filed suit against Rad, Norafchan, Rose and Lenders, but later elected to sue only Lenders for breach of their promissory notes. (E.g., id. at 27; ECF No. ECF No. 96 at 15-22.) In July 2009, Colonial filed suit in state court alleging that Colonial's DOT, securing the Construction Loan, had priority over Lenders' DOT, securing Lenders' Promissory Note. (ECF No. 70 at 67.) Colonial's suit was filed against Rad, Norafchan, Rose and Lenders, and consolidated with the Murdock & Keach suit. (Id. at 65; ECF No. 81 at 88.)

         In the meantime, in August 2009, the Federal Deposit Insurance Corporation (“FDIC”) placed Colonial into receivership. (ECF No. 81 at 85.) On August 14, 2009, BB&T entered into a Purchase and Assumption Agreement with the FDIC (“PAA”) which purported to transfer Colonial's assets to BB&T. (Id. at 86.) Thereafter, BB&T filed a second amended complaint (“SAC”) in the state court action. (Id. at 66-67.) In its SAC, BB&T asserted six claims-all relating to whether Colonial's DOT had priority over the Lenders' DOT. (Id. at 67; ECF No. 71 at 8-23.) These claims are: (1) declaratory relief- contractual subrogation; (2) declaratory relief/quiet title-replacement; (3) equitable/promissory estoppel; (4) unjust enrichment; (5) fraudulent misrepresentation; and (6) civil conspiracy. (ECF No. 71 at 8-23.) The SAC questioned whether Lenders “paid any consideration” to Rose for Lenders' DOT. (Id. at 12.) Lenders filed a counterclaim contending that Lenders' DOT had priority over Colonial's DOT. (ECF No. 71 at 238.)

         The state trial court granted summary judgment in favor of Murdock & Keach on their claims for breach of their promissory notes. (ECF No. 96 at 15-20.) It held a bench trial regarding the priority of the competing liens based on BB&T's first four claims, but the parties agreed to delay consideration of the fraudulent misrepresentation and civil conspiracy claims. (ECF No. 71 at 229.) BB&T produced the PAA in an attempt to show that it owned the note and Colonial's DOT related to the Construction Loan. (Id. at 238; ECF No. 81 at 68.) During the trial, the court explained that the PAA was insufficient to establish BB&T's ownership of the note and Colonial's DOT and directed BB&T to return the following day with additional evidence. (ECF No. 81 at 68-69.) BB&T delivered two new documents: (1) a November 2009 assignment; and (2) an executed-but unrecorded-assignment. (Id. at 69.) The trial court excluded both documents because they were not disclosed during discovery and also denied BB&T's motion to substitute in its place the FDIC or Colonial Bank (Id.).

         The state trial court ultimately found that BB&T had not met its evidentiary burden of proving it received an assignment of Colonial's DOT:

BB& . . . relied upon the language of the Purchase and Assumption Agreement, and no other admissible evidence, documentary or testimonial. The court hereby finds that [ ] the Purchase and Assumption Agreement was not sufficient evidence, on its face, to establish that BB&T was assigned the 2007 Colonial Bank Deed of Trust.

(Id. at 70-71.) The court took issue to note that its decision was not based on standing grounds. (Id. at 70 (“Although BB&T repeatedly attempted to couch the issue as one of standing, it is not a standing issue. Rather, the defect which prompts the dismissal of BB&T's claims is evidentiary.”).) The trial court found that the PAA “did not clearly transfer the loan, note and deed of trust at issue” and that it was “internally inconsistent and incomplete, and prevents the Court from making a finding as to whether an assignment of the loan at issue occurred.” (Id. at 68, 87.) This was partly because the PAA referred to attached schedules but no such schedules existed and also excluded certain assets from the sale. (Id. at 86-87.) Based on these findings, the trial court concluded that BB&T “has not shown it has the ability to assert the claims . . . filed by Colonial Bank.” (Id. at 89.) The court then held that Lenders' DOT was in first priority position. (Id. at 91.)

         BB&T then filed a motion to voluntarily dismiss its fraudulent misrepresentation and civil conspiracy claims, which the trial court granted, so BB&T could appeal its decision as a final order. (ECF No. 71 at 229.) On appeal, the Nevada Supreme Court affirmed the trial court's decision in its entirety (ECF No. 82 at 25). R&S St. Rose Lenders, LLC v. Branch Banking and Trust Co. et al., No. 56640, 2013 WL 3357064 (Nev. May 31, 2013). The state supreme court further denied rehearing en banc in February 2014. R&S St. Rose Lenders, LLC v. Branch Banking and Trust Co. et al., No. 56640, Order Denying en banc Reconsideration (Nev. Feb. 21, 2014). (ECF No. 82 at 33-46.) BB&T also filed a petition for a writ of certiorari to the United States Supreme Court which was denied. Branch Banking and Trust Co. v. R&S St. Rose Lenders, LLC, 135 S.Ct. 85 (Mem.) (2014).

         2. Relevant Bankruptcy Court Proceedings and Appeals

          In 2011, while BB&T's appeal was pending before the Nevada Supreme Court, Rose and Lenders each filed Chapter 11 bankruptcies. (ECF No. 82 at 148.)

         a. Lenders' Proof of Claim in Rose's Bankruptcy Case

         Lenders filed a proof of claim-Claim No. 12-1 (“POC 12”)-in the Rose Bankruptcy Case, claiming a total of $27, 460, 871, with $12, 000, 000 claimed as secured and $15, 460, 871 claimed as unsecured. (ECF No. 82 at 48-52; ECF No. 96 at 177.) BB&T filed an objection (“Objection”), challenging POC 12 on two bases: “(1) Lenders did not provide [Rose] . . . any money and (2) even if Lenders could show that it provided money to [Rose] . . . the amount of Lenders' claim is inflated.” (ECF No. 71 at 106; ECF No. 82 at 106.) Lenders responded, arguing that the Objection should fail “because (1) the state court had already litigated the amount of the claim . . . and (2) BB&T failed to rebut the prima facie validity of [POC 12].” (ECF No. 71 at 140 (Judge James C. Mahan's Order).) After full briefing BB&T's Objection was taken under advisement on December 11, 2013. (ECF No. 71 at 135.)

         The Bankruptcy Court subsequently overruled BB&T's Objection to POC 12. (Id. at 140.) The court held that “BB&T may not relitigate that Lenders loaned $12, 300, 000[4] to [Rose] in September 2005 as evidenced by the promissory note attached to the Lenders POC, ” because “[t]hat factual and legal issue was determined by the [s]tate [c]ourt and affirmed by the Nevada Supreme Court.” (Id. at 136.) However, the court also concluded that BB&T could challenge any additional principal advances or calculation of interest. (Id.) The Bankruptcy Court additionally found that BB&T did not produce sufficient evidence to overcome the prima facie validity of POC 12. (Id.) BB&T appealed that decision to this Court; Judge James C. Mahan presided over that appeal and issued a decision on October 1, 2014. (ECF No. 71 at 138-45.)

         In that appeal, Judge Mahan concluded that the state court “decided . . . issues of lien priority and assignment” but that the “issue of the amount of [Lenders' POC 12] was not necessarily litigated in the state court action” and thus the Bankruptcy Court should have allowed the amount to be litigated. (Id. at 144 (emphasis added).) However, Judge Mahan affirmed the Bankruptcy Court's ruling as to the prima facie validity of POC 12, despite BB&T's contention that Lenders needed to present extrinsic evidence of Lenders' Promissory Note “to prove that actual consideration was paid.” (Id. at 144-45.) Judge Mahan then remanded the case for further proceedings consistent with his opinion. (Id. at 145.) Lenders appealed and that appeal was dismissed for lack of jurisdiction because the matter was not final. (Id. at 223-25.) Specifically, the Ninth Circuit noted that Judge Mahan's “order opens the door to further factfinding and litigation surrounding the amount of Lenders' proof of claim.” (Id. at 225.)

         Before Judge Mahan's order, an order was entered in the Rose Bankruptcy Case confirming Rose's liquidation plan and approving the sale of the Property. (ECF No. 96 at 178.) BB&T and Commonwealth appealed confirmation of the Rose plan to this Court, but the order was affirmed both in this Court and on appeal before the Ninth Circuit. (Id. at 179.)

         b. The Adv. Pro.

         Concurrent with its Objection, BB&T filed the Adv. Pro. complaint, asserting seven claims to dispute the “validity, priority extent of lien, or other interest in the Property.” (Id. at 106 n.2; ECF No. 96 at 95-108.) BB&T essentially asserts many of the same legal theories it litigated in the state court. (See ECF No. 96 at 95-108.) Inter alia, BB&T asked that the Bankruptcy Court declare that the 2007 Construction Loan took the first-position priority of the 2005 Acquisition Loan and that Lenders' Promissory Note and Lenders' DOT are invalid. (Id. at 107-08.) BB&T's request regarding invalidation (seventh claim) was based on BB&T's contention that Lenders provided no consideration or money to Rose for either Lenders' Promissory Note or Lenders' DOT. (Id. at 107.) This contention was in gist the same as those underlying BB&T's Objection to POC 12. Lenders moved to dismiss the Adv. Pro. complaint. (ECF No. 71 at 135-36.) The Bankruptcy Court granted dismissal on all but the seventh claim seeking a determination of the amount of Lenders' POC 12. (ECF No. 73 at 198 at n.7.)

         c. On Remand from Judge ...


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