2 UNITED STATES DISTRICT COURT 3 DISTRICT OF NEVADA 4 * * * 5 6 In re: Case No. 2:17-cv-01251-MMD
7 R&S ST. ROSE, LLC, Member Cases: 2:17-cv-1298-MMD & 2:17-cv-1301-MMD 8 Debtor, ORDER 9 10 BRANCH BANKING AND TRUST 11 COMPANY,
12 Appellant, v. 13 R & S ST. ROSE LENDERS, LLC; R & S 14 ST. ROSE, LLC; R & S INVESTMENT GROUP, LLC; COMMONWEALTH LAND 15 TITLE INSURANCE COMPANY; THE CREDITOR GROUP; and THE U.S. 16 TRUSTEE,
17 Appellees.
18 AND RELATED APPEALS
19 20 I. SUMMARY 21 This is a consolidated appeal of Branch Banking and Tr. Co. v. R&S St. Rose 22 Lenders, LLC, et al. case numbers 2:17-cv-01251-MMD and 2:17-cv-1298-MMD, and of 23 Commonwealth Land Title Ins. Co. v. R&S St. Rose Lenders, LLC, et al., case number 24 2:17-cv-1301-MMD. These cases where consolidated because all three appeals stem 25 from the bankruptcy case filed by R&S St. Rose, LLC (“Rose”) (bankruptcy case no. 11- 26 14974-MKN) (“Rose Bankruptcy Case”) and related adversary proceeding (adversary 27 proceeding no. 13-01822) (“Adv. Pro.”). Appellants Branch Banking and Trust Company 28 (“BB&T”) and Commonwealth Land Title Insurance Company (“Commonwealth”) 2 Rose Lenders’ (“Lenders”) proof of claim (ECF No. 64 at 6–7 (“Order”)). (See ECF No. 62 3 (Appellant’s joint status report); ECF No. 73 at 222; ECF No. 64 at 36.) BB&T separately 4 appeals from the Bankruptcy Court’s Memorandum Decision/Judgment (“Judgment”) in 5 the Adv. Pro. which determined the amount of Lenders’ claim filed against Rose. (ECF 6 No. 73 186–89; ECF No. 64 at 6–34).1 This Court affirms both the Order and Judgment. 7 II. BACKGROUND 8 A. Factual History 9 Rose and Lenders were both formed in 2005. Each had the same members: 10 Forouzan, Inc., and RPN LLC, which were respectively owned by Saiid Forouzan Rad and 11 R. Phillip Nourafchan.2 (ECF No. 65 at 36–37.) Rose was established to land-bank real 12 property in Henderson, Nevada (“Property”) with the intent of selling the Property to 13 Centex Homes (“Centex”). (ECF No. 87 at 89–91.) Lenders was formed for the purpose 14 of borrowing funds from individual lenders and then loaning those same funds to Rose. 15 (Id. at 21.) 16 Rose purchased the Property for over $45 million and granted Centex a one-year 17 option for over $54 million. (Id. at 92, 242–48.) To finance the purchase of the Property, 18 Rose obtained funds from three separate sources: (1) about $29 million from Colonial 19 Bank (“Colonial”) (“Acquisition Loan”) secured by a first-position deed of trust on the 20 Property; (2) about $8 million non-refundable deposit from Centex; and (3) over $12 million 21 comprised of money from individual lenders, with a promissory note in favor of Lenders 22 for that amount (“Lenders’ Promissory Note”) secured by a second-position deed of trust 23 on the Property (“Lenders’ DOT”). (Id. at 96; ECF No. 81 at 71–72 (St. Ct. Findings of 24 Fact).) The individual lenders from whom Lenders borrowed money included Robert 25 /// 26 /// 27 1The briefings in each matter are substantively the same. Commonwealth was not a party to the underlying Adv. Pro. (ECF No. 62.) 28 2Rad passed away on June 1, 2015. (ECF No. 65 at 111.) 2 Findings of Fact).) The individual lenders received promissory notes from Lenders. (Id.) 3 Centex declined to exercise its option to purchase the Property, thereby forfeiting 4 its deposit. (Id. at 75.) Several months later—March 2007, in order to avoid foreclosure 5 Rose and Colonial modified the first-position deed of trust to extend the date of maturity. 6 (Id.) As part of that modification, Colonial requested and received a subordination 7 agreement from Rose. (Id.) 8 It is undisputed that by the summer of 2007, some of the individual investors (“first- 9 in-time lenders”) sought repayment of their principal. (ECF No. 86 at 13.) Lenders 10 borrowed money from other individual lenders (“later-in-time lenders”) to pay back some 11 of the earlier loans. (E.g., ECF No. 93 at 217–18; ECF No. 90 at 86–103; ECF No. 83 at 12 15–166.) Later, Rose obtained a second loan from Colonial for approximately $43 million, 13 part of which was used to pay off the Acquisition Loan and separately to develop the 14 Property (“Construction Loan”). (ECF No. 81 at 80 (St. Ct. Findings of Fact).) The 15 Construction Loan was secured by a new deed of trust on the Property (“Colonial’s DOT”). 16 (Id.). However, because Lenders’ DOT was not reconveyed at the closing on the 17 Construction Loan, Colonial’s DOT was placed in second position on the Property behind 18 Lenders’ DOT. (Id. at 81–84.) Lenders was neither a party nor a guarantor in the 19 Construction Loan transaction. (Id. at 80.)3 Almost a year after the Construction Loan 20 closed the title company asked Lenders to reconvey Lenders’ DOT after confirming that 21 Lenders’ DOT’s priority over Colonial’s DOT, but Lenders refused. (Id. at 85.) 22 Rose defaulted on both Lenders’ Promissory Note and the Construction Loan and 23 both Lender and Colonial moved to foreclose on the Property. (Id.) Lenders also defaulted 24 on its loans with the individual lenders and stopped paying monthly interest. (ECF No. 88 25 at 28–29, 31–32.) 26 /// 27 /// 28 3Rad and Nourafchan personally guaranteed the Construction Loan. (ECF No. 81 at 80 (St. Ct. Findings of Fact).) 2 1. State Court Action 3 Murdock & Keach filed suit against Rad, Norafchan, Rose and Lenders, but later 4 elected to sue only Lenders for breach of their promissory notes. (E.g., id. at 27; ECF No. 5 ECF No. 96 at 15–22.) In July 2009, Colonial filed suit in state court alleging that Colonial’s 6 DOT, securing the Construction Loan, had priority over Lenders’ DOT, securing Lenders’ 7 Promissory Note. (ECF No. 70 at 67.) Colonial’s suit was filed against Rad, Norafchan, 8 Rose and Lenders, and consolidated with the Murdock & Keach suit. (Id. at 65; ECF No. 9 81 at 88.) 10 In the meantime, in August 2009, the Federal Deposit Insurance Corporation 11 (“FDIC”) placed Colonial into receivership. (ECF No. 81 at 85.) On August 14, 2009, BB&T 12 entered into a Purchase and Assumption Agreement with the FDIC (“PAA”) which 13 purported to transfer Colonial’s assets to BB&T. (Id. at 86.) Thereafter, BB&T filed a 14 second amended complaint (“SAC”) in the state court action. (Id. at 66–67.) In its SAC, 15 BB&T asserted six claims—all relating to whether Colonial’s DOT had priority over the 16 Lenders’ DOT. (Id. at 67; ECF No. 71 at 8–23.) These claims are: (1) declaratory relief— 17 contractual subrogation; (2) declaratory relief/quiet title—replacement; (3) 18 equitable/promissory estoppel; (4) unjust enrichment; (5) fraudulent misrepresentation; 19 and (6) civil conspiracy. (ECF No. 71 at 8–23.) The SAC questioned whether Lenders 20 “paid any consideration” to Rose for Lenders’ DOT. (Id. at 12.) Lenders filed a counterclaim 21 contending that Lenders’ DOT had priority over Colonial’s DOT. (ECF No. 71 at 238.) 22 The state trial court granted summary judgment in favor of Murdock & Keach on 23 their claims for breach of their promissory notes. (ECF No. 96 at 15–20.) It held a bench 24 trial regarding the priority of the competing liens based on BB&T’s first four claims, but the 25 parties agreed to delay consideration of the fraudulent misrepresentation and civil 26 conspiracy claims. (ECF No. 71 at 229.) BB&T produced the PAA in an attempt to show 27 that it owned the note and Colonial’s DOT related to the Construction Loan. (Id. at 238; 28 ECF No. 81 at 68.) During the trial, the court explained that the PAA was insufficient to 2 the following day with additional evidence. (ECF No. 81 at 68–69.) BB&T delivered two 3 new documents: (1) a November 2009 assignment; and (2) an executed—but 4 unrecorded—assignment. (Id. at 69.) The trial court excluded both documents because 5 they were not disclosed during discovery and also denied BB&T’s motion to substitute in 6 its place the FDIC or Colonial Bank (Id.). 7 The state trial court ultimately found that BB&T had not met its evidentiary burden 8 of proving it received an assignment of Colonial’s DOT: 9 BB& . . . relied upon the language of the Purchase and Assumption Agreement, and no other admissible evidence, documentary or 10 testimonial. The court hereby finds that [ ] the Purchase and Assumption Agreement was not sufficient evidence, on its face, to establish that BB&T 11 was assigned the 2007 Colonial Bank Deed of Trust. 12 (Id. at 70–71.) The court took issue to note that its decision was not based on standing 13 grounds. (Id. at 70 (“Although BB&T repeatedly attempted to couch the issue as one of 14 standing, it is not a standing issue. Rather, the defect which prompts the dismissal of 15 BB&T’s claims is evidentiary.”).) The trial court found that the PAA “did not clearly transfer 16 the loan, note and deed of trust at issue” and that it was “internally inconsistent and 17 incomplete, and prevents the Court from making a finding as to whether an assignment of 18 the loan at issue occurred.” (Id. at 68, 87.) This was partly because the PAA referred to 19 attached schedules but no such schedules existed and also excluded certain assets from 20 the sale. (Id. at 86–87.) Based on these findings, the trial court concluded that BB&T “has 21 not shown it has the ability to assert the claims . . . filed by Colonial Bank.” (Id. at 89.) The 22 court then held that Lenders’ DOT was in first priority position. (Id. at 91.) 23 BB&T then filed a motion to voluntarily dismiss its fraudulent misrepresentation and 24 civil conspiracy claims, which the trial court granted, so BB&T could appeal its decision as 25 a final order. (ECF No. 71 at 229.) On appeal, the Nevada Supreme Court affirmed the 26 trial court’s decision in its entirety (ECF No. 82 at 25). R&S St. Rose Lenders, LLC v. 27 Branch Banking and Trust Co. et al., No. 56640, 2013 WL 3357064 (Nev. May 31, 2013). 28 The state supreme court further denied rehearing en banc in February 2014. R&S St. Rose 2 Reconsideration (Nev. Feb. 21, 2014). (ECF No. 82 at 33–46.) BB&T also filed a petition 3 for a writ of certiorari to the United States Supreme Court which was denied. Branch 4 Banking and Trust Co. v. R&S St. Rose Lenders, LLC, 135 S. Ct. 85 (Mem.) (2014). 5 2. Relevant Bankruptcy Court Proceedings and Appeals 6 In 2011, while BB&T’s appeal was pending before the Nevada Supreme Court, 7 Rose and Lenders each filed Chapter 11 bankruptcies. (ECF No. 82 at 148.) 8 a. Lenders’ Proof of Claim in Rose’s Bankruptcy Case 9 Lenders filed a proof of claim—Claim No. 12-1 (“POC 12”)—in the Rose Bankruptcy 10 Case, claiming a total of $27,460,871, with $12,000,000 claimed as secured and 11 $15,460,871 claimed as unsecured. (ECF No. 82 at 48–52; ECF No. 96 at 177.) BB&T 12 filed an objection (“Objection”), challenging POC 12 on two bases: “(1) Lenders did not 13 provide [Rose] . . . any money and (2) even if Lenders could show that it provided money 14 to [Rose] . . . the amount of Lenders’ claim is inflated.” (ECF No. 71 at 106; ECF No. 82 15 at 106.) Lenders responded, arguing that the Objection should fail “because (1) the state 16 court had already litigated the amount of the claim . . . and (2) BB&T failed to rebut the 17 prima facie validity of [POC 12].” (ECF No. 71 at 140 (Judge James C. Mahan’s Order).) 18 After full briefing BB&T’s Objection was taken under advisement on December 11, 2013. 19 (ECF No. 71 at 135.) 20 The Bankruptcy Court subsequently overruled BB&T’s Objection to POC 12. (Id. at 21 140.) The court held that “BB&T may not relitigate that Lenders loaned $12,300,0004 to 22 [Rose] in September 2005 as evidenced by the promissory note attached to the Lenders 23 POC,” because “[t]hat factual and legal issue was determined by the [s]tate [c]ourt and 24 affirmed by the Nevada Supreme Court.” (Id. at 136.) However, the court also concluded 25 that BB&T could challenge any additional principal advances or calculation of interest. (Id.) 26 The Bankruptcy Court additionally found that BB&T did not produce sufficient evidence to 27 /// 28 4The promissory note actually reflects an amount of $12,000,000. (E.g., ECF No. 82 at 50.) 2 Court; Judge James C. Mahan presided over that appeal and issued a decision on October 3 1, 2014. (ECF No. 71 at 138–45.) 4 In that appeal, Judge Mahan concluded that the state court “decided . . . issues of 5 lien priority and assignment” but that the “issue of the amount of [Lenders’ POC 12] was 6 not necessarily litigated in the state court action” and thus the Bankruptcy Court should 7 have allowed the amount to be litigated. (Id. at 144 (emphasis added).) However, Judge 8 Mahan affirmed the Bankruptcy Court’s ruling as to the prima facie validity of POC 12, 9 despite BB&T’s contention that Lenders needed to present extrinsic evidence of Lenders’ 10 Promissory Note “to prove that actual consideration was paid.” (Id. at 144–45.) Judge 11 Mahan then remanded the case for further proceedings consistent with his opinion. (Id. at 12 145.) Lenders appealed and that appeal was dismissed for lack of jurisdiction because the 13 matter was not final. (Id. at 223–25.) Specifically, the Ninth Circuit noted that Judge 14 Mahan’s “order opens the door to further factfinding and litigation surrounding the amount 15 of Lenders’ proof of claim.” (Id. at 225.) 16 Before Judge Mahan’s order, an order was entered in the Rose Bankruptcy Case 17 confirming Rose’s liquidation plan and approving the sale of the Property. (ECF No. 96 at 18 178.) BB&T and Commonwealth appealed confirmation of the Rose plan to this Court, but 19 the order was affirmed both in this Court and on appeal before the Ninth Circuit. (Id. at 20 179.) 21 b. The Adv. Pro. 22 Concurrent with its Objection, BB&T filed the Adv. Pro. complaint, asserting seven 23 claims to dispute the “validity, priority extent of lien, or other interest in the Property.” (Id. 24 at 106 n.2; ECF No. 96 at 95–108.) BB&T essentially asserts many of the same legal 25 theories it litigated in the state court. (See ECF No. 96 at 95–108.) Inter alia, BB&T asked 26 that the Bankruptcy Court declare that the 2007 Construction Loan took the first-position 27 priority of the 2005 Acquisition Loan and that Lenders’ Promissory Note and Lenders’ DOT 28 are invalid. (Id. at 107–08.) BB&T’s request regarding invalidation (seventh claim) was 2 either Lenders’ Promissory Note or Lenders’ DOT. (Id. at 107.) This contention was in gist 3 the same as those underlying BB&T’s Objection to POC 12. Lenders moved to dismiss 4 the Adv. Pro. complaint. (ECF No. 71 at 135–36.) The Bankruptcy Court granted dismissal 5 on all but the seventh claim seeking a determination of the amount of Lenders’ POC 12. 6 (ECF No. 73 at 198 at n.7.) 7 c. On Remand from Judge Mahan’s Order 8 In an evidentiary hearing on remand from Judge Mahan’s decision, Lenders moved 9 in limine to preclude BB&T and Commonwealth from introducing testimony/evidence to 10 dispute the “validity” of Lenders’ Promissory Note. (ECF No. 96 at 179–80.) The motion 11 specifically asked for the exclusion of testimony of BB&T and Commonwealth’s two expert 12 witnesses—Greg A. McKinnon and William T. Rogers. (Id. at 180.) Lenders argued that 13 the law of the case, judicial estoppel, claim preclusion and issue preclusion all barred 14 BB&T and Commonwealth from contesting the validity of Lenders’ Promissory Note. (Id. 15 at 180–81.)5 16 The Bankruptcy Court concluded that each asserted ground supported the relief 17 Lenders requested, but particularly focused on the law of the case doctrine. (Id. at 181.) 18 The Bankruptcy Court noted: 19 The USDC’s order remanding BB&T’s objection to the Lenders POC limited the inquiry to the amount of Lenders’ claim . . . This court’s order on Lenders’ 20 motion to dismiss the BB&T Adversary specifically determined BB&T’s seventh cause of action to be an objection as to the amount of Lenders’ 21 claim, and, more important, specifically barred BB&T from attempting to relitigate the issue of whether Lenders loaned funds to St. Rose in 22 September 2005 . . . That funds were borrowed by St. Rose from Lenders has been determined in this case; the only question that remains is how 23 much. 24 (Id.; see also ECF No. 73 at 11 (BB&T’s counsel conceding that BB&T’s Objection tracks 25 the seventh claim in its adversary complaint).) BB&T and Commonwealth did not appeal 26 the Bankruptcy Court’s ruling on Lenders’ motion in limine. 27 /// 28 5The motion was granted in part (as to Rogers) and denied in part (as to McKinnon). 2 Lenders’ plan confirmation. (ECF No. 73 at 7–172.) At the beginning of the trial, BB&T’s 3 counsel raised that the parties had an agreement that Thomas Neches (Lenders’ expert) 4 and Mckinnon (BB&T’s expert) were qualified experts and the court confirmed the parties’ 5 stipulation. (Id. at 12.) 6 On April 24, 2017, the Bankruptcy Court issued its Memorandum Decision, 7 containing extensive findings of facts and conclusions of law and considering the various 8 decisions from this Court up to that point. (Id. at 195–218.)6 The Bankruptcy Court noted 9 that “[n]otwithstanding the [s]tate [c]ourt findings and conclusions, [it] independently 10 examined the record presented to determine whether a balance is owed on the [Lenders’ 11 Promissory Note] and if so, the proper amount.” (Id. at 205–06.) Among other things, the 12 Bankruptcy Court found that evidence that Lenders loaned Rose money included the 13 uncontradicted testimony of Nourafchan—despite the opportunity for cross-examination— 14 that Lenders “advanced $10,300,000” to Rose to acquire the Property. (Id. at 208.) 15 Ultimately, the Bankruptcy Court also agreed with Neches’ calculation of the principal of 16 Lenders’ Promissory Note. (Id. at 214–18.) The court found that Lenders was owed a 17 principal balance of $9,025,000 as of April 4, 2011, accrued interest of $3,325,660 and 18 late fees in the amount of $476,250 for a total owed of $13,326,910, as of the Rose 19 Bankruptcy Case filing. (Id. at 206.) 20 Thereafter, the Bankruptcy Court entered its Judgment in favor of Lenders in the 21 Adv. Pro. based on BB&T’s seventh claim for relief and dismissing the remaining claims 22 and incorporating its finding from the Memorandum Decision that $13,326,910 is due on 23 Lenders’ Promissory Note as of April 4, 2011. (ECF No. 73 at 192–93.) The court likewise 24 entered its Order as to BB&T’s Objection to POC 12, overruling the Objection except as 25 otherwise provided—that the amount owed by Rose to Lenders (on the note as secured 26 by Lenders’ DOT) is as noted. (Id. at 226–27.) 27 /// 28 6Those decisions are noted infra. 2 Objection. (Id. at 222; ECF No. 64 at 36.) BB&T separately appealed the Bankruptcy 3 Court’s Judgment in the Adv. Pro. (ECF No. 73 at 186–89.) The appeals are timely, and 4 this Court has jurisdiction over the matter under 28 U.S.C. § 158(a)(1). 5 III. ISSUES PRESENTED 6 Two umbrella issues are presented in these consolidated appeals: (1) whether the 7 Bankruptcy Court erred in finding that Lenders funded Lenders’ Promissory Note;7 and/or 8 (2) erred in finding the balance owed on Lenders’ Promissory Note. As to the second 9 issue—of the amount owed—the following sub-issues are presented whether the 10 Bankruptcy Court erred in (a) relying on Neches’ expert testimony; or (b) its consideration 11 of the noted “substitute lenders/loans”—and by extension allowing for recovery by 12 substitute lenders. The latter sub-issue goes to BB&T’s contention that Lenders engaged 13 in a “Ponzi scheme.” 14 IV. LEGAL STANDARD 15 On appeal “the district court or bankruptcy appellate panel may affirm, modify, or 16 reverse a bankruptcy judge’s judgment, order, or decree or remand with instructions for 17 further proceedings.” Fed. R. Bankr. P. 8013. 18 A bankruptcy court’s conclusions of law are reviewed de novo, “including its 19 interpretation of the Bankruptcy Code,” and its factual findings are reviewed for clear error. 20 In re Rains, 428 F.3d 893, 900 (9th Cir. 2005); In re Salazar, 430 F.3d 992, 994 (9th Cir. 21 2005). The bankruptcy court’s factual findings are clearly erroneous only if the findings 22 “leave the definite and firm conviction” that the bankruptcy court made a mistake. In re 23 Rains, 428 F.3d at 900. “A bankruptcy court abuses its discretion if it applies the law 24 incorrectly or if it rests its decision on a clearly erroneous finding of a material fact.” In re 25 Brotby, 303 B.R. 177, 184 (B.A.P. 9th Cir. 2003); see also In re Plyam, 530 B.R. 456, 461 26 /// 27 7Although BB&T and Commonwealth phrase the issue as whether the Bankruptcy Court erred in overruling the Objection to Lenders’ POC 12, the first part of the Objection 28 essentially challenged whether Lenders funded Lenders’ Promissory Note. (ECF No. 71 at 106 (“(1) Lenders did not provide [Rose] . . . any money”).) 2 legal standard, misapplies the correct legal standard, or if its factual findings are illogical, 3 implausible, or without support in inferences that may be drawn from the facts in the 4 record.”). 5 In reviewing a bankruptcy court’s decision, this Court ignores harmless errors. In re 6 Mbunda, 484 B.R. 344, 355 (B.A.P. 9th Cir. 2012). The Court may affirm the Bankruptcy 7 Court’s decision “on any ground fairly supported by the record.” In re Warren, 568 F.3d 8 1113, 1116 (9th Cir. 2009) (citation omitted). In addition, the Court need not address 9 arguments not raised in the trial court but “may do so to (1) prevent a miscarriage of justice 10 or to preserve the integrity of the judicial process, (2) when a change of law during the 11 pendency of the appeal raises a new issue, or (3) when the issue is purely one of law.” In 12 re Lakhany, 538 B.R. 555, 560 (B.A.P. 9th Cir. 2015). 13 V. DISCUSSION 14 A. Whether Lenders Funded Lenders’ Promissory Note 15 The Court first addresses BB&T and Commonwealth’s argument that the 16 Bankruptcy Court erred in finding that Lenders funded Lenders’ Promissory Note.8 This 17 /// 18 8BB&T and Commonwealth’s arguments are disguised in the cloak that they are 19 only challenging the amount of Lenders’ Promissory Note. But many of their arguments go straight to the validity of Lenders’ Promissory Note and whether Lenders funded that 20 Note. (E.g., ECF No. 63 at 17 (contending that an illusion was created that “Lenders was a functioning entity and that the Lenders Note was actually funded); id. at 25 (contending 21 that issue preclusion is inapplicable because in the state court, “the issue of whether Lenders actually funded the Lenders Note was inessential to the state court’s dismissals 22 based on standing”); id. (“The Bankruptcy [Court] erroneously concluded that Lenders funded the Lenders Note, and compounded the error by including in the purported balance 23 those funds that were advanced by later-in-time Individual Investors whose funds were used to pay earlier-in-time investors.”); id. at 29 (“Judge Nakagawa’s attempt to use issue 24 preclusion to establish that Lenders actually funded the Lenders Note does not withstand scrutiny due to the lack of privity or a merits-based final judgment . . ..”); id. (contending 25 that the Nevada Supreme Court affirmed based on standing and “makes no mention of any factual findings related to whether Lenders funded the Lenders Note”); id. at 31 (again 26 arguing that whether Lenders actually funded the Lenders Note was not necessarily litigated in the state court); id. at 34–37 (“The Bankruptcy Court’s Finding That Lenders 27 Note Was Funded is Clearly Erroneous”); id. at 37 (“The Bankruptcy Court was clearly erroneous in its finding that the expert testimony supported the determination that Lenders 28 funded the Lenders Note.”).) The Court will otherwise address the arguments relevant to 2 Bankruptcy Court improperly gave preclusive effect to the state trial court’s findings of fact 3 and conclusions of law relevant to the issue. They rely on various decisions by this Court 4 to support an apparent position that the state trial court’s findings of facts and conclusions 5 of law should not be given any preclusive effect.9 (E.g., ECF No. 63 at 23–25.) Lenders 6 argues that issue preclusion, claim preclusion, law of the case and equitable estoppel 7 prevented the Bankruptcy Court from reconsidering the validity (or funding) of Lenders’ 8 Promissory Note. (E.g., ECF No. 86 at 32–33.) The Court applies the law of the case and 9 does not further analyze the requirements of res judicata—issue and claim preclusion, or 10 judicial estoppel. 11 The “law of the case” doctrine precludes a court from “reconsidering an issue that 12 has already been decided by the same court . . . in the identical case.” U.S. v. Alexander, 13 106 F.3d 874, 876 (9th Cir. 1997). However, the Court has “discretion to depart from the 14 law of the case where: 1) the first decision was clearly erroneous; 2) an intervening change 15 /// 16 the amount of Lenders’ Promissory Note—which materially focuses on the Bankruptcy Court’s reliance on Neches’ testimony and consideration of the “substitute loans/lenders”. 17 9In addition to Judge Mahan’s decision discussed supra and infra, those decisions 18 are: In re R & S St. Rose, LLC, Nos. 2:12–cv–01615–LDG-GWF, 2:12–cv–01617–LDG GWF, 2:12–cv–01647–LDG-GWF, 2:12–cv–01667–LDG-GWF, 2014 WL 1268807 (D. 19 Nev. Mar. 2014) (Judge Lloyd D. George) (concerning consolidation of the separate Rose and Lenders bankruptcy cases); Branch Banking and Trust Co. v. Creditor Grp., No. 2:14- 20 cv-00926-GMN, 2015 WL 1470692 (D. Nev. Mar. 2015) (Judge Gloria Navarro) (concerning BB&T’s proof of claim in Lenders’ bankruptcy case and specifically discussing 21 the two claims that BB&T voluntarily dismissed in the Rose Bankruptcy Case—finding that issue preclusion did not apply as to those two claims); and Branch Banking and Trust Co. 22 v. Rad, et al., No. 2:14-cv-01947-APG-PAL, 2015 WL 5664393 (D. Nev. Sep. 24, 2015) Judge Andrew P. Gordon) (concerning BB&T’s claim for breach of guaranty against Rad 23 and Nourafchan). 24 BB&T and Commonwealth particularly rely on Judge Navarro’s decision to argue herein that the state trial court decision was based on standing and therefore was not a 25 decision on the merits to which preclusion may apply. However, the Ninth Circuit has concluded that the state trial court decision is an “evidentiary” ruling. In re R&S St. Rose 26 Lenders, LLC, 748 F. App’x 753, 759 n.3 (9th Cir. 2018) (“This interpretation accords with Branch Banking Trust Co. v. D.M.S.I., LLC, 871 F.3d 751, 760–61 (9th Cir. 2017), in which 27 we stated that the same Nevada state court decisions were ‘evidentiary’ rulings that the materials BB&T submitted did not ‘show assignment of a loan.’”). 28 2 circumstances exist; or 5) a manifest injustice would otherwise result.” Id. (citation 3 omitted). 4 In light of Judge Mahan’s October 1, 2014 order, this Court declines to reconsider 5 whether Lenders actually funded Lenders’ Promissory Note, even though the Bankruptcy 6 Court took liberty to readdress the issue on remand.10 Per Judge Mahan’s order the only 7 issue for the Bankruptcy Court to address on remand was the amount of Lenders’ DOT. 8 (ECF No. 71 at 144 (“[T]he court finds that the issue of the amount of R&S Lenders’ proof 9 of claim was not necessarily litigated in the state court action.”).)11 To be clear, Judge 10 Mahan recognized that “the bankruptcy court overruled BB&T’s objection to [Lenders’ 11 POC 12].” (Id. at 141.) Further, Judge Mahan affirmed the Bankruptcy Court’s finding that 12 BB&T had not offered sufficient evidence to overcome the prima facie validity of Lenders’ 13 POC 12. (Id. at 144.) Judge Mahan noted that “[t]he bankruptcy court considered BB&T’s 14 evidence attempting to refute the validity of the POC and rejected it.” (Id. at 145.) 15 BB&T and Commonwealth relevantly argue that Judge Mahan’s order does not 16 prohibit a finding that the amount of Lenders’ Promissory Note is zero and otherwise argue 17 that the validity of the Note was not actually litigated in the state trial court. (ECF No. 59 18 at 13–14.) As to the latter point, Judge Mahan noted that the Bankruptcy Court took 19 evidence on the validity issue—i.e., did not decide the issue solely based on preclusion. 20 (ECF No. 71 at 144–45.) As to the amount of Lenders’ Promissory Note, BB&T and 21 Commonwealth acknowledge that “a finding that the amount of the Lenders Note is zero . 22 . . intersect with issues of validity.” (ECF No. 59 at 14.) Moreover, the Court disagrees with 23 BB&T and Commonwealth that “nothing” in Judge Mahan’s order precludes a finding that 24 /// 25 10(ECF No. 73 at 206–09 (the Bankruptcy Court readdressing the issue of whether Lenders’ Promissory Note] was funded and concluding that the “uncontradicted record 26 establishes that the [Lenders’ Promissory Note] was funded by Lenders”).) 27 11See also (ECF No. 71 at 224–25 (Ninth Circuit memorandum dismissing appeal from Judge Mahan’s decision for lack of jurisdiction and stating that Judge Mahan’s 28 remand order opens the door to “further factfinding and litigation surrounding the amount of Lenders’ proof of claim”) (emphasis added).) 2 Court to ignore commonsense. As Lenders points out, an argument that the amount of 3 Lenders’ Promissory Note is zero “is another way of saying [Lenders’ loan to Rose] is not 4 supported by consideration.” (ECF No. 86 at 28.) Commonsensically, that Lenders’ POC 5 12 is established as valid requires the implicit finding that Lenders’ Promissory Note as 6 secured by Lenders’ DOT was funded—i.e., supported by consideration or a sum of more 7 than zero. This is also consistent with the state trial court and the Nevada Supreme Court’s 8 conclusions that Murdoch and Keach had valid and enforceable contracts with Lenders 9 for monies they loaned Lenders. Again, Lenders’ purpose was to obtain funds from 10 individual lenders—including Murdoch and Keach—to fund the purchase of the Property. 11 See also (ECF No. 73 at 207 (finding, inter alia, that “there is no dispute that funds received 12 from individual lenders were used to purchase the Property” and that “[t]here is no dispute 13 that all the individual lenders . . . received promissory notes from Lenders equal to the 14 amount of their funds that were used to purchase the Property”).) 15 This Court relies on Judge Mahan’s decision as precluding further inquiry in this 16 Court on the issue of whether Lenders’ Promissory Note is valid/funded. The Court 17 additionally notes that there is no contention by BB&T and Commonwealth—nor does this 18 Court find—that Judge Mahan’s decision is clearly erroneous, that there is intervening 19 change in law, that the evidence on remand to the Bankruptcy Court was substantially 20 different than before,12 that other changed circumstances exist, or that manifest injustice 21 would result if this Court considers Judge Mahan’s decision as providing the law of this 22 case. Accordingly, this Court finds that based on the law in this case, only the amount of 23 Lenders’ Promissory Note was at issue before the Bankruptcy Court on remand. Further, 24 /// 25 12To the extent the evidence could be deemed “substantially different” on remand 26 to the Bankruptcy Court, the evidence favors the conclusion that Lenders’ Promissory Note was funded. On remand, the Bankruptcy Court noted that it relied on Nourafchan’s 27 “uncontradicted” testimony at the trial “that as of August 26, 2005, Lenders had advanced $10,300,000 to St. Rose to acquire the Property”). (ECF No. 73 at 208 (citing Second 28 Nourafchan Declaration at ¶ 5).) 2 decision affirming the validity of Lenders’ POC 12. 3 The Court now turns to the issue of the amount—beginning with the premise that 4 the amount of Lenders’ Promissory Note is not zero. 5 B. Whether the Bankruptcy Court Erred in Its Finding of The Balance Owed on Lenders’ Promissory Note 6 7 As indicated, BB&T and Commonwealth raise two issues in challenging the 8 Bankruptcy Court’s finding of the amount owed on Lenders’ Promissory Note (as distinct 9 from their attempt to reargue the funding/validity issue). First, BB&T and Commonwealth 10 argue that the Bankruptcy Court erred in admitting Neches’ expert testimony and relying 11 on his testimony in deciding the amount. (ECF No. 63 at 37–40; ECF No. 59 at 16–18.) 12 Second, BB&T and Commonwealth maintain that “substitute loans” by later-in-time 13 lenders should not have been considered in the overall amount of Lenders’ Promissory 14 Note. (ECF No. 63 at 37–45.) The Court addresses each in turn. 15 1. Admission of Neches’ Testimony 16 Lenders argues that BB&T and Commonwealth waived any objection to Neches’ 17 testimony by stipulating to Neches’ qualifications as an expert and agreeing to admit 18 Neches’ expert report. (E.g., ECF No 86 at 50; ECF No. 73 at 12 (stipulating to Neches’ 19 qualifications); id. at 14 (evidencing that the parties agree to the admission of all exhibits, 20 which includes Neches’ export report).) In their reply, BB&T and Commonwealth 21 counterargue that because they objected to Neches’ qualifications in their pre-trial motion 22 in limine—which the Bankruptcy Court denied, their objections to Neches’ testimony was 23 sufficiently preserved and not waived. (E.g., ECF No. 59 at 16–17.)13 The Court accords 24 with Lenders. See, e.g., Ohler v. United States, 529 U.S. 753, 756 (2000) (concluding that 25 /// 26 13BB&T and Commonwealth’s cited decisions to support this position are inapposite 27 to the facts of this case. See (ECF No. 59 at 16 (citing United States v. Wells, 879 F.3d 900, 917 (9th Cir. 2018), United States v. Palmer, 3 F.3d 300, 304 (9th Cir. 1993) and 28 Palmerin v. City of Riverside, 794 F.2d 1409, 1413 (9th Cir. 1986)).) None of these cases involves an earlier objection followed by a later stipulation to admit the same evidence. 2 erroneously admitted”); see also Bowoto v. Chevron Corp., 621 F.3d 116, 1130 (9th Cir. 3 2010) ( quoting Ohler’s proposition). BB&T and Commonwealth did not preserve their 4 objection when they stipulated to Neches’ qualifications and admission of his expert report 5 after the adverse ruling on their motion in limine. 6 Further, even assuming the Bankruptcy Court erred in considering Neches’ 7 testimony, this Court finds that per their stipulations BB&T and Commonwealth invited the 8 error and cannot now challenge the consideration of Neches’ testimony on appeal. “Under 9 the invited error doctrine, an error that is caused by the actions of the complaining party 10 will cause reversal “only in the most exceptional situation.” U.S. v. Schaff, 948 F.2d 501, 11 506 (9th Cir. 1991) (internal quotation and citations omitted). Such an “exceptional 12 situation” exists where, for example, the complaining party has demonstrated that 13 “reversal is necessary to preserve the integrity of the judicial process or to prevent a 14 miscarriage of justice.” Id. (citation omitted). That is not the case here. 15 The Court additionally finds that the Bankruptcy Court did not abuse its discretion 16 in otherwise relying on Neches’ testimony. Here, BB&T and Commonwealth in gist argue 17 that the Bankruptcy Court abused its discretion by failing to exclude Neches’ testimony 18 under Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, (1993) and Federal Rule of 19 Evidence 702. (ECF No. 59 at 17.) A court’s role is to act as “‘gatekeeper’ to exclude ‘junk 20 science’ that does not meet Rule 702’s reliability standards by making a preliminary 21 determination that the expert’s testimony is reliable.” Cooper v. Brown, 510 F.3d 870, 942 22 (9th Cir. 2007) (internal quotations and citations omitted). These standards are more 23 relaxed in a bench trial situation where the judge serves as factfinder. See, e.g., Att’y Gen. 24 of Ok. v. Tyson Foods, Inc., 565 F.3d 769, 779 (10th Cir. 2009) (“[W]hile Daubert's 25 standards must still be met, the usual concerns regarding unreliable expert testimony 26 reaching a jury obviously do not arise when a district court is conducting 27 /// 28 /// 2 be excluded.” Id. at 943. There is no dispute the Neches’ testimony regarding the balance 3 owed on Lenders’ Promissory Note was relevant, thus the Court solely considers reliability. 4 BB&T and Commonwealth contend that Neches’ testimony is not reliable under 5 Daubert because it is not based on established theory or technique—apparently based on 6 a contention that Neches did not apply accounting principles. (ECF No. 59 at 17.) But 7 again much of BB&T and Commonwealth’s argument appear to go back to the issue of 8 whether Lenders funded Lenders’ Promissory Note—because Neches also testified on 9 this point— (id. at 17–18). However, as this Court already concluded that issue is not up 10 for relitigation. In any event, the Bankruptcy Court noted as follows: 11 Both experts agree that, according to the accounting records, the individual lenders provided either $10,300,000 or $10,625,000 toward the purchase of 12 the Property. Both experts agree that, according to the accounting records, the funds used to purchase the Property, the additional amounts 13 subsequently received from the individual lenders, the principal payments made to the individual lenders, the loan fees paid to individual investors, and 14 the interest payments made to individual investors, all relate to the promissory notes executed by Lenders in favor of the individual lenders. This 15 accounting perspective is consistent with the court’s prior conclusion that the St. Rose Note was funded by Lenders. 16 17 (ECF No. 73 at 214.) Given these findings, this Court cannot conclude that the Bankruptcy 18 Court abused its discretion in considering Neches’ testimony or finding it reliable. See, 19 e.g., Primiano v. Cook, 598 F.3d 558 (9th Cir. 2010) (“[T]he trial court has discretion to 20 decide how to test an expert’s reliability as well as whether the testimony is reliable based 21 on ‘the particular circumstances of the particular case.’”). 22 It appears that BB&T and Commonwealth’s real issue is with where McKinnon and 23 Neches differed—regarding whether additional funds were received from individual 24 /// 25 /// 26 14See also Deal v. Hamilton Cty. Bd. of Educ., 392 F.3d 840, 852 (6th Cir. 2004) (“The ‘gatekeeper’ doctrine was designed to protect juries and is largely irrelevant 27 in the context of a bench trial.”); Allison v. McGhan Med. Corp., 184 F.3d 1300, 1310 (11th Cir.1999) (recognizing that the jury “would likely be even less equipped than the judge to 28 make reliability and relevance determinations and more likely than the judge to be awestruck by the expert’s mystique”). 2 215) which the Court discusses below. 3 2. Inclusion of “Substitute Loans” 4 BB&T and Commonwealth argue that the Bankruptcy Court erroneously adopted 5 Neches’ opinion—while rejecting McKinnon’s opinion—regarding whether “substitute 6 funds” were properly included in calculating the amount owed on Lenders’ Promissory 7 Note. (ECF No. 63 at 40; ECF No. 59 at 18–19.) This Court cannot agree. 8 “[A] witness qualified as an expert by knowledge, skill, experience, training, or 9 education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is 10 based upon sufficient facts or data, (2) the testimony is the product of reliable principles 11 and methods, and (3) the witness has applied the principles and methods reliably to the 12 facts of the case.” Fed. R. Evid. 702. Further, “[s]haky but admissible evidence is to be 13 attacked by cross examination, contrary evidence, and attention to the burden of proof, 14 not exclusion.” Primiano, 598 F.3d at 564. 15 Here, the Bankruptcy Court noted that in his report Mckinnon “testified that there is 16 no accounting basis to conclude that the additional loan proceeds substituted for the 17 repayments of principal.” (ECF No. 73 at 215.) Meanwhile, Neches concluded that “a 18 substitution of lenders is shown by the time proximity between the repayment of principal 19 to one individual lender and the receipt of additional loan proceeds from another individual 20 lender.” (Id. (citing Neches Report at 7).) The Bankruptcy Court also noted that Neches 21 relied on Rad’s previous percipient witness testimony that such substitutions occurred and 22 notes that Rad was subject to cross-examination. (Id.) Considering that the parties 23 stipulated to Neches as a qualified expert and Neches’ method and reliance on Rad’s 24 testimony establishing that loans were substituted in for others, this Court cannot conclude 25 that the Bankruptcy Court improperly relied on Neches’ opinion. 26 BB&T and Commonwealth next claim that by including the “substitute funds” in the 27 balance, the Bankruptcy Court improperly ignored Nevada law—NRS § 104.3101– 28 .3605—concerning the proper method for transferring the right to payment under a 2 BB&T and Commonwealth specifically argue that Nevada law supports a conclusion that 3 there must be documentation showing “an intent of one lender to replace another lender 4 or an assignment of the earlier in time promissory note to the new ‘substitute lender.’” 5 Lenders responds that BB&T and Commonwealth effectively ask this Court to ignore the 6 parties’ intent. (ECF No. 86 at 54–55.) 7 The Court is unpersuaded by BB&T and Commonwealth’s contention. The Court 8 finds that NRS § 104.3301 (“Person entitled to enforce instrument”) is not applicable here. 9 As the Bankruptcy Court recognized, “[n]egotiation or transfer of the prior promissory notes 10 was unnecessary . . . because there is no dispute that the subsequent individual lenders 11 received separate notes from Lenders.” (ECF No. 73 at 215 n.31.) In short, this is not a 12 situation where one party is trying to enforce a note purportedly belonging to another. 13 Moreover, the evidence presented at trial supports an intention to substitute prior loans 14 with later loans. This evidence includes Rad’s testimony about the substitutions and similar 15 uncontradicted testimony by Nourafchan on remand. (ECF No. 73 at 216.) The Bankruptcy 16 Court cites to Nourafchan’s testimony “without contradiction that after [Rose] acquired the 17 Property, Lenders received additional funds from individual lenders that ‘facilitated the 18 substitution of certain individual lenders to new lenders who wished to earn interest from 19 the Debtor.’” (Id.; (citing Second Nour Decl. at ¶ 6).) Additionally, the relevant general 20 ledger reflected that certain loans were substituted. (E.g., ECF No. 93 at 217–18; ECF No. 21 83 at 15–166.) This evidence cumulatively supports the Bankruptcy Court’s finding that 22 sufficient evidence established the substitution of funds used to acquire the Property and 23 thus it was proper for Neches to include such substitute funds in the balance owed on 24 Lenders’ Promissory Note. (ECF No. 73 at 216.) 25 Finally, BB&T and Commonwealth maintain that the substituting of funds from later- 26 in-time “investors” to pay off first-in-time “investors” amounts to a Ponzi scheme and the 27 Bankruptcy Court erred in concluding otherwise. (ECF No. 63 at 40, 43; ECF No. 59 at 28 20–21; see ECF No. 73 at 216–17 n.34.) Lenders argues that BB&T and Commonwealth 2 agrees with the Bankruptcy Court. 3 A Ponzi scheme is: 4 An arrangement whereby an enterprise makes payments to investors from the proceeds of a later investment rather than from profits of the underlying 5 business venture, as the investors expected. The fraud consists of transferring proceeds received from the new investors to previous investors, 6 thereby giving other investors the impression that a legitimate profit-making business opportunity exists, where in fact no such opportunity exists. 7 8 In re Agric. Research & Tech. Grp., Inc., 916 F.2d 528, 531 (9th Cir. 1990). The Ninth 9 Circuit has also characterized a Ponzi scheme as “a phony investment plan in which 10 monies paid by later investors are used to pay artificially high returns to the initial investors 11 with the goal of attracting more investors.” In re Slatkin, 525 F.3d 805, 809 n.1 (9th Cir. 12 2008). “The fraud consists of funnelling proceeds received from new investors to previous 13 investors in the guise of profits from the alleged business venture[.]” Donell v. Kowell, 533 14 F.3d 762, 767 n.2 (9th Cir. 2008) (emphasis added). 15 Here, there is simply no evidence that the first-in-time-lenders received the 16 repayment of their loan from Lenders in the guise of profits or that the repayment of such 17 loans resulted in “artificially high” returns. In short, there is no evidence to support a 18 conclusion that the Bankruptcy Court erred in finding the absence of a Ponzi scheme.15 19 C. Allowing Recovery for Substitute Lenders 20 As an extension of their Ponzi scheme theory, BB&T and Commonwealth insist that 21 the inclusion of later funds into the balance owed improperly rewards “substitute lenders” 22 for participating in such a scheme and thus the inclusion of such funds was in error. (ECF 23 No. 63 at 44.) Because the Court concurs that BB&T and Commonwealth fail to establish 24 /// 25 15The Bankruptcy Court also noted that BB&T and Commonwealth never raised the 26 existence of a Ponzi scheme in either the adversary complaint or in BB&T’s Objection to POC 12, nor did BB&T serve notice of its Objection to POC 12 on all of Rose’s creditors 27 or the individual lenders, and additionally found that the Ponzi scheme allegation was procedurally defective (“too late”). (ECF No. 73 at 217 n.34.) The Court does not address 28 the timeliness issue because Lenders does not argue it here and because the Court finds the Bankruptcy Court’s consideration of the merits of the claim is sound standing alone. 1 || that such a scheme exists here, the Court concludes that the Bankruptcy Court did not 2 || commit error—that its decision will result in recovery by the “substitute lenders.” 3 In sum, the Court affirms the Bankruptcy Court’s Judgment and Order from which 4 || BB&T and Commonwealth appeal. 5 || VI. CONCLUSION 6 The Court notes that the parties made several arguments and cited to several cases 7 || not discussed above. The Court has reviewed these arguments and cases and determines 8 || that they do not warrant discussion as they do not affect the outcome of the consolidated 9 || appeals. 10 It is therefore ordered that the Bankruptcy Court’s Order in bankruptcy case no. 11- 11 || 14974-MKN and Judgment in adversary proceeding no. 13-01822 are affirmed. 12 The Clerk of Court is directed to enter judgment accordingly in the consolidated 13 || appeals (2:17-cv-01251-MMD, 2:17-cv-1298-MMD, and 2:17-cv-1301-MMD) and close 14 || these cases. 15 DATED THIS 30" day of September 2019. —_
17 KMRANDA MBO 18 CHIEF UNITED STATES DISTRICT JUDGE
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