ML Manager, LLC v. Hawkins (In re Mortages Ltd.)

Citations: 559 B.R. 508; 2016 Bankr. LEXIS 3440Docket: Case No.: 2:08-bk-07465-EPB; Adversary Number: 2:10-ap-00430-EPB (consol.with adversary number 2:10-ap-00717-EPB)

Court: United States Bankruptcy Court, D. Arizona; September 19, 2016; Us Bankruptcy; United States Bankruptcy Court

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The Court must determine if the Rev Op Group (ROG) defendants are bound to an irrevocable agency agreement with plaintiff ML Manager, LLC, and the extent of ML Manager's authority under that agreement. A four-day trial took place from June 7-10, 2016, with post-trial memoranda filed on June 29, 2016. 

The factual background reveals that ML Manager's predecessor, Mortgages Ltd., was a private lender in Arizona, offering loans secured by real property and other guarantees, and raising funds by selling fractional interests in these loans to investors. These investments were termed "pass-through" investments, allowing investors to acquire direct fractional interests in loan documents and become co-owners of the property upon borrower default.

Mortgages Ltd. operated the loans and properties, selling pass-through investments through various programs outlined in a Private Offering Memorandum (POM). The ROG participated in the Revolving Opportunity Loan Program (Rev Op Program), where investors could temporarily purchase fractional interests, with Mortgages Ltd. retaining the right to repurchase these interests at specified prices during and at the end of the contract term.

In 2008, Mortgages Ltd. filed for Chapter 7 bankruptcy, later converted to Chapter 11. The confirmed bankruptcy plan established limited liability companies (Loan LLCs) to manage the loans, with ML Manager created to operate these entities. ROG members opted not to transfer their interests to the Loan LLCs, retaining their original agreements. Consequently, they are entitled to distributions per the existing agency agreement and related contracts assigned to ML Manager.

Pass-Through Investors retaining fractional interests in the ML Loans will be assessed their share of costs and expenses related to the loans before distributions are made, ensuring fair reimbursement alongside other investors. The plan allows for the transfer of contracts between Mortgages Ltd. and investors who did not transfer ownership to Loan LLCs to ML Manager. Following confirmation, ML Manager attempted to sell loans but faced objections from the ROG, which claimed ML Manager needed ROG consent for property disposal. ML Manager contended that the ROG was bound by pre-bankruptcy agreements naming Mortgages Ltd. as its agent, and that ML Manager inherited this agency post-confirmation. 

ML Manager initiated an adversary proceeding for a declaratory judgment affirming: 1) the ROG's binding agreements with Mortgages Ltd.; 2) Mortgages Ltd.'s authority to act regarding properties without ROG consent; and 3) the valid post-confirmation transfer of agency authority to ML Manager. The ROG counterclaimed for an accounting and to assert that any agency authority had been revoked. It later filed a motion for partial summary judgment, assuming agency authority existed and claiming it had revoked it. The bankruptcy court denied this motion, ruling that the agency authority was irrevocable and not affected by the transfer to ML Manager. 

On the eve of this ruling, ML Manager sought judgment on the pleadings regarding its declaratory judgment request, addressing the validity and scope of the agency agreements. The court allowed for further briefing on whether plausibility standards from key Supreme Court cases applied to the ROG's denials of ML Manager's allegations. Ultimately, the court found the ROG’s denials implausible, confirmed the execution of the agency agreements, and ruled in favor of ML Manager, dismissing the ROG’s counterclaims.

The ROG's appeal led to the Ninth Circuit Court of Appeals reversing and remanding the case, determining that the bankruptcy court did not properly assess the ROG’s denials under Rule 11 or Rule 12(f). The court noted that although the ROG's denials could be seen as implausible or potentially a sham, the bankruptcy court failed to find evidence of bad faith or to strike those denials. Consequently, the court emphasized that factual allegations in complaints or answers should be resolved through standard adjudication processes. The Ninth Circuit also overturned the bankruptcy court's ruling regarding the execution of agency agreements by ROG members, stating that the matter was to return to trial after failed summary judgment attempts.

The parties, ML Manager and the ROG, agreed that their dispute hinges on two primary questions: whether ML Manager acts as the ROG’s agent and, if so, what the scope of that agency is. To address these issues, the Court must identify the governing documents for the relationship between ROG investors and Mortgages Ltd./ML Manager. Additionally, it must decide the admissibility of parol evidence to interpret these documents, especially concerning the ROG’s assertion that some members altered or revoked the authority granted in the documents relied upon by ML Manager.

ML Manager contends that the documents, particularly the Form Agency Agreement attached to the July 10, 2006, Private Offering Memorandum (POM), provide it with exclusive rights to manage properties and loans on behalf of ROG investors, including selling properties tied to defaulted loans. Both parties acknowledge that the POM described investment programs and terms, with ML Manager claiming that all ROG members invested under the July 10, 2006 POM, which included the Form Agency Agreement. However, the ROG disputes this claim, highlighting that ML Manager has not produced any executed version of the Form Agency Agreement by ROG members. The POM states that the Company and each Participation holder will enter into an Agency Agreement that allows the Company to act as the agent for the Participation holders, administering loans on their behalf. The Form Agency Agreement specifies that the Participant appoints the Agent to act on their behalf regarding Loans and related documents, granting the Agent full discretion in performing the outlined tasks.

Participant irrevocably appoints Agent as its attorney-in-fact, granting full authority to sign and endorse documents and perform necessary tasks to fulfill the Agreement's intent. This power is irrevocable, remains effective until Agent renounces it, and is coupled with an interest. The Agent's responsibilities include account servicing, collection, compensation, and sales of interests. The Form Agency Agreement encompasses the complete understanding of the parties and must be interpreted consistently with related documents. Amendments to the agency relationship require written documentation. The Agent is also authorized to sign on behalf of the investment participant.

The Revolving Opportunity Loan Program (Rev Op Program) allows participants to purchase fractional interests in Mortgages Ltd. collateralized loans through a Revolving Loan Opportunity Agreement, though individual agreements may vary. For instance, the Rev Op Agreement signed by member McFadden lacks agency authority language, and investor Krueger's agreement differs by withholding certain authorities and omitting a paragraph present in the version from ML Manager. Most investors signed agreements that include representations and warranties, confirming their familiarity with the Rev Op Program and the Company, acknowledging reliance on legal and financial advisors, and stating that their investment decision was based solely on the Agreement, the Memorandum, and their advisors, without reliance on any external representations from the Company or its affiliates regarding the Program or its operations.

The Agreement, along with associated Loan Assignment Documents and Reassignment and Release Documents, constitutes the complete understanding between the parties regarding its subject matter, explicitly nullifying any prior or outside representations or agreements unless stated within this document. Each party confirms that their execution of the Agreement is voluntary and not influenced by any outside promises or representations. 

Any changes or agreements made after the execution of this Agreement must be documented in writing and signed by all parties to be valid. By signing, the Investor agrees to be bound by the Agency Agreement and associated documents, granting the Company a power of attorney to act on the Investor’s behalf for executing necessary documents and complying with legal requirements in various jurisdictions. This power of attorney remains effective despite any changes in the Investor's status, including death or bankruptcy.

Furthermore, the Agreement is binding on both parties and cannot be assigned. The Subscription Agreements, referred to collectively, include similar provisions regarding the acceptance of the Agency Agreement and the granting of power of attorney to Mortgages Ltd. for executing necessary documentation.

Mortgages Ltd. is authorized to act as the lender/payee/beneficiary for the undersigned in all related loan documentation unless explicitly withheld in writing. This power of attorney is enduring, surviving various changes in the undersigned's legal status and assignments of their interests. The undersigned grants Mortgages Ltd. discretion to select loan transactions regarding their participations, which can be revoked in writing. The ROG defendants question the validity of certain agreements provided by ML Manager, alleging unauthorized alterations and claims that agency authority or power of attorney was not granted. 

A preliminary legal issue involves the admissibility of parol evidence in interpreting contracts. Parol evidence cannot contradict a complete and accurate written contract but may be used to clarify parties’ intentions through prior negotiations or conduct. Courts apply either a restrictive approach, where clear contract language limits evidence consideration, or a less restrictive approach, allowing broader evidence to assess intent as long as it aligns with the contract’s language. The analysis process involves determining the extent of contract integration and the intended meaning of its terms.

The court's role at this stage is to exclude evidence lacking probative value regarding the parties' intent, followed by "finalizing" the contract's interpretation. The parol evidence rule applies, barring extrinsic evidence that contradicts the written agreement, although Arizona's approach is less restrictive, allowing consideration of extrinsic evidence if it aids in interpreting intent without altering the contract's meaning. The court allowed testimony from ROG witnesses about their understanding of the ROG/Mortgages Ltd. relationship but emphasized that this cannot overshadow documented acknowledgments of the agency powers granted to Mortgages Ltd., which are now with ML Manager. The ROG's arguments against enforcing the written agreements are dismissed as not credible, even as the court recognizes the financial hardships faced by ROG investors. The testimony from ROG members, at times evasive and contradictory, undermined their credibility. The court found that the relationships and agreements clearly state that Mortgages Ltd. was granted broad agency powers, allowing it to act on behalf of investors in managing loan portfolios. Although ROG members could prevent the use of loan proceeds for new initiatives, they agreed to allow Mortgages Ltd. to manage transactions related to borrowers and loan collateral liquidation. There is no credible evidence that Mortgages Ltd. established a program granting individual stakeholders veto rights over significant investments. Specific allegations from ROG members McFadden and Krueger are noted, particularly McFadden's claim regarding the absence of agency language in his Rev Op Agreement, despite his acknowledgment of signing the EIAA which included agency provisions.

The claim that the individual did not receive the POM does not alter the existence of agency authority outlined in the EIAA, which includes the same provisions as the New Investor Subscription Agreement. Despite his assertion of ignorance about the agency authority due to not reading the document, he signed it, thereby granting clear agency authority. In the case of Krueger, conflicting versions of the Rev Op Agreement were presented. ML Manager provided a fully executed document dated September 25, 2007, which Krueger acknowledged signing, while Krueger challenged its authenticity on three grounds: he claimed the attached pages differed from those he signed, denied sending the agreement via fax, and asserted that another version he executed was the accurate one. However, the Court, after reviewing the evidence, determined that ML Manager’s version is the governing agreement.

Regarding the assertion that the agency authority granted to Mortgages Ltd. was revocable, the Court disagreed. It noted that the agency authority in the relevant agreements was expressly stated as irrevocable and coupled with an interest, as supported by Arizona law. This law holds that an agency coupled with an interest in the subject matter is irrevocable, distinguishing it from a general power of attorney. The Court referenced a case where a plaintiff's authority over property was deemed irrevocable due to his ownership interest, reinforcing the principle that such powers survive the grantor's death and are thus irrevocable.

The phrase "coupled with an interest" refers to an interest in the property affected by the power, not merely the power itself. Mortgages Ltd. and ML Manager possess an interest in the loans associated with the power, as Mortgages Ltd. retained an interest in the interest spread and default interest, thereby linking their interest to the loans. The court noted that Mortgages Ltd. was integral in creating the transaction and its agency was fundamentally intertwined with it, as investors relied on Mortgages Ltd.’s management capabilities. The confirmed bankruptcy plan did not separate these interests; instead, ML Manager took over the management role from Mortgages Ltd. to benefit the investors. Consequently, ML Manager holds a non-revocable agency power to manage its investment portfolios in accordance with its contractual obligations and the confirmed bankruptcy provisions. Counsel for ML Manager is tasked with preparing an order that aligns with the court's decision. The Rev Op Group includes various entities and individuals who agreed to be bound by final determinations regarding Cornerstone, Inc. At trial, it was established that Mortgages Ltd. legally transferred contracts to ML Manager, who effectively stepped into Mortgages Ltd.'s role. It is acknowledged that Arizona law applies to this case, which the Ninth Circuit has endorsed.