Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-4_10-cv-00232/USCOURTS-azd-4_10-cv-00232-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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Unless otherwise stated, the facts are taken from the Motion for Leave to Appeal.

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

IN RE:

FIRST MAGNUS FINANCIAL CORP.,

Debtor. 

LARRY LATTIG, LITIGATION

TRUSTEE FOR THE FIRST MAGNUS

LITIGATION TRUST,

Plaintiff, 

vs.

GURPREET S. JAGGI, et al.,

Defendants. 

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No. CV 10-232-TUC-CKJ

 BK 4:07-1578-JMM

ORDER

Pending before the Court is the Motion for Leave to Appeal [Doc. 2] filed by Larry

Lattig, Litigation Trustee for the First Magnus Litigation Trust (the “Motion”). Also pending

before the Court is the Motion to Expedite Appeal [Doc. 5]. Oral argument has been

requested. The Court declines to schedule this matter for oral argument

Factual and Procedural Background1

In July 1996, Gurpreet Jaggi (“Jaggi”), Thomas Sullivan, Sr. (“Sullivan, Sr.”),

(“Sullivan, Jr.”), Bill Gaylord (“Gaylord”), Gary Malis (“Malis”), Dominick Marchetti

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Under chapter 11 of the Bankruptcy Code, a debtor-in-possession retains control of

the bankruptcy estate, must manage it for the benefit of the estate and the estate's creditors,

occupies the same role as a bankruptcy trustee, and is entitled to all the rights, powers, and

duties of a trustee. 11 U.S .C. § 1107(a); see also In re Smartworld Technologies, LLC, 423

F.3d 166, 175 (2nd Cir. 2005). 

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(“Marchetti”), and Karl Young (“Young”) formed the mortgage origination company First

Magnus Financial Corp. (“First Magnus” or “Debtor”). On August 21, 2007, First Magnus

filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code, in the United

States Bankruptcy Court for the District of Arizona (the “bankruptcy court”), Case No. 4-

BK-07-1578-PHX-JMM (the “bankruptcy case”). More than 5,500 employees lost their jobs

nationwide, and, like hundreds of others, because creditors of First Magnus. 

First Magnus continued the management and operation as a debtor-in-possession

pursuant to 11 U.S.C. §§ 1107 and 1108.2

 A Second Amended Plan of Liquidation (“Plan”),

dated January 4, 2008, was confirmed by the Bankruptcy Court on February 28, 2008

(“Confirmation Order”). The Litigation Trustee, Larry Lattig (the “Litigation Trustee”), was

deemed appointed in accordance with 11 U.S.C. §§ 1123 to investigate and prosecute claims

against, among others, former insiders of First Magnus.

The Litigation Trustee commenced the adversary proceeding against former insiders

of First Magnus and certain affiliated entities. The Original Complaint alleged, inter alia,

that former insiders of First Magnus stripped First Magnus of approximately $300,000,000

in capital for their own personal benefit in an atempt to hinder, delay, and defraud creditors,

and at a time when First Magnus was insolvent, had no shareholder equity, and had debbts

that greatly exceeded the value of its assets at fair valuation. The Original Complaint further

alleged that (1) former insiders of First Magnus caused certain transfers to be made to or for

the benefit of its parent company, First Magnus Capital, Inc. (“Capital”), a co-defendant

owned and operated by former insiders of First Magnus, (2) former insiders of First Magnus

caused certain transfers to be made to or for the benefit of Magnus Corporation (“Magnus”),

a co-defendant owned and operated by Sullivan, Sr., Sullivan, Jr., and Sabina Sullivan, and

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caused certain transfers to be made to or for the beneft of First Magnus Realty (“Realty”),

a co-defendant that owned First Magnus’s former headquarters, (3) Magnus managed Realty,

and that the members of Realty included Sullivan, Sr., and Indus Holdings LLC, a limited

liability company owned and managed by Jaggi, and (4) certain insiders of First Magnus and

affiliated entities misappropriated certain propriety assets of First Magnus during the course

of the bankruptcy case. 

On April 28, 2009, the bankruptcy court ordered the Litigation Trustee to amend the

194 page Original Complaint, which included 96 claims against 43 defendants, because of

its length and detailed factual specificity. The court stated:

It should not be necessary, at this initial stage of the proceedings, for the Defendants

to admit or deny each of the very specific and lengthy factual paragraphs pled by the

Trustee. These types of specific factual recitations are more akin to what the parties

might develop as the case advances, and perhaps be more appropriate to a motion for

summary judgment, once the parties have had a more deliberate period of time to

exchange information and work through discovery. For now, the Trustee needs to

more generally describe exactly what it is that each Defendant has done that creates

legal liability, and then state his legal theories and prayers for relief more succinctly.

As a legal matter, the Complaint is too cumbersome, and violates Fed.R.Civ.P. 8(a),

which call for “a short and plain statement” of the claims and relief sought. From

there, then, the parties can proceed to discovery, and collaborate on how best to

winnow down the case to its essence. Until the Complaint is reduced to its essence,

the court is also unable to determine merits of certain Defendants’ motions to dismiss

(for reasons other than Rule 8(a) on substantive grounds.)

Response, Ex. A, p. 2. The court directed counsel to comply with Rule 8 by submitting a

substantially edited revision and stated that the “entire Complaint should be refined to simply

get to the point: who is getting sued, what are the theories, and how much is demanded.”

Id. at 2-3. 

On May 13, 2009, the Litigation Trustee filed the 89 page First Amended Complaint,

which included 52 claims against 41 defendants. On September 11, 2009, the bankruptcy

court ordered the Litigation Trustee to amend the First Amended Complaint. The court

stated:

After considering the views of each party as to whether the amended complaint

satisfies the legal standards of pleadings, the court rules as follows:

1. No defendant need answer any of the first 174 paragraphs, found at pages

1-44 of the First Amended Complaint. This is because those paragraphs suffer

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the same infirmities as originally filed. They are not the short, plain statement

required by Rule 8, Fed.R.Civ.P. To the extent that paragraphs 1-174 are

“incorporated,” in any fashion, into the balance of the First Amended

Complaint, no defendant need answer them. Those paragraphs, at this stage

of the case, will simply be considered to be Plaintiff’s subjective views, in

narrative form, of matters which must later be proven.

2. As to each of the counts in the First Amended Complaint, the Plaintiff is

required to specifically identify which individual or entity against whom relief

is being sought, and specifically set forth the monetary amount or declaratory

relief sough as to each count, and as to each affected defendant . . . As the First

Amended Complaint now reads, it is difficult to understand which specific

defendants are accused of wrongdoing as to each count. This can be

accomplished by simply noting, as to each count: “Defendants affect” and

“Relief sought as to Defendant ,” and then making the names and amounts

(or declaratory relief) known clearly. In this way, guesswork is avoided, and

each defendant is on notice as to which counts apply to them. General terms,

such as “directors and officers” shall not be used in the abstract. Due to the

numerous parties in this case, it is imperative that each defendant have clear

notice of which counts apply to them.

September 11, 2009, Order, pp. 2-3. On October 2, 2009, the Litigation Trustee filed the

Second Amended Complaint (“SAC”).

The Litigation Trustee asserts that the SAC identified three significant stock

redemptions in the aggregate amount of approximately $70,000,000, approximately

$50,000,000 in officer bonuses, approximately $37,000,000 in shareholder distributions,

approximately $48,300,000 in transactions between First Magnus and Capital related to a

revolving line of credit, approximately $26,000,000 in payments made to or for the benefit

of Sullivan, Sr., on two separate promissory notes, approximately $50,000,000 in assets

transferred to Capital. The SAC also identified a scheme to misappropriate First Magnus’

assets and proprietary materials, insiders’ utilization of these materials in existing and newly

formed businesses, and unjust gains realized by taking, utilizing, marketing, and selling the

assets. Additionally, the SAC identified a series of violations of generally accepted

accounting principles, a failure to adequately reserve for and record loan losses and

repurchase and indemnification obligations, overstatements of loan values, improper

recognition of income for the purpose of artificially inflating alleged pre-tax net profits, an

ability to meet obligations as they become due with respect to the obligations First Magnus

owed to its warehouse lenders and take-out investors, and unreasonably small amounts of

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capital on hand to meet First Magnus’ outstanding obligations.

On March 3, 2010, the bankruptcy court issued a Memorandum Decision which

granted, in part, certain Motions to Dismiss and denied other Motions to Dismiss. Motion,

Ex. B. The court stated:

As the court previously explained, it is not helpful to consider, as part of the

Complaint’s necessary allegations, the general narratives contained in paragraphs 1-

154, found at pages 1-40 of the latest Second Amended Complaint[.]

The court, as it noted before, will treat each actual count as free-standing, and now

will test each challenged count to ascertain whether claims are stated under the

Federal Rules of Procedure. That analysis begins on p. 40 of the Complaint. The first

154 paragraphs will not be considered, as they are and always have been extraneous.

Motion, Ex. B, p. 3. 

No motion to reconsider was presented to the bankruptcy court. Defendants have

answered as directed by the bankruptcy court and the remaining fraudulent transfer claims

are proceeding in bankruptcy court.

The Litigation Trustee requests that the Court permit an interlocutory appeal, reverse

the Order of the bankruptcy court, direct the bankruptcy court to deny the Motions to Dismiss

and order Defendants to answer the SAC in its entirety. Defendants have filed a Response

to the Litigation Trustee’s Motion for Leave to Appeal (“Response”).

Jurisdiction over Interlocutory Appeal

District courts have appellate jurisdiction over “final judgments, orders, and decrees”

entered by a bankruptcy court. 28 U.S.C. § 158(a)(1). If an appellant is appealing an

interlocutory order of the bankruptcy court, the appellant must seek leave from the district

court prior to filing a motion to appeal an interlocutory order. 28 U.S.C. § 158(a)(3); Fed.

R. Bankr.P. 8001(b). However, while district courts must hear appeals from final decisions,

they have discretionary authority to hear interlocutory appeals. In re City of Desert Hot

Springs, 339 F.3d 782, 787 (9th Cir.2003). The applicable rules do not provide any

particular standard for evaluating a motion for leave to appeal an interlocutory appeal.

Fed.R.Bankr.P. 8003. 

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Generally, courts disfavor interlocutory appeals and only grant leave to appeal where

three extraordinary factors are met: “[1] refusal would result in wasted litigation and expense,

[2] the appeal involves a controlling question of law as to which there is a substantial ground

for difference of opinion, and [3] an immediate appeal would materially advance the ultimate

termination of the litigation.” In re NSB Film Corp., 167 B.R. 176, 180 (9th Cir.1994); In

re Burke, 95 B.R. 916, 917 (9th Cir. BAP 1989); In re 450 S. Burlington Partners LLC, No.

CV 09-4097 PSG, 2009 WL 2460880, *5 (C.D.Cal. 2009); Sims v. Sunnyside Land, LLC,

425 B.R. 284, 290 (W.D. La. 2010), citation omitted (“[b]ecause interlocutory appeals

interfere with the overriding goal of the bankruptcy system, expeditious resolution of

pressing economic difficulties, they are not favored.”). Indeed, another district court has

stated:

Because an interlocutory appeal represents a deviation from the basic judicial policy

of deferring review until the entry of a final judgment, the party seeking leave to

appeal an interlocutory order must also demonstrate that exceptional circumstances

exist.

In re Philadelphia Newspapers, LLC, 418 B.R. 548, 557 (E.D. Pa. 2009); see also In re

Wyss, 2008 WL 3850386, *1 (W.D. Wis. 2008) (“More often than not a bankruptcy court is

correct in its determination. However, even if error exists the issue for which immediate

appeal is sought may be mooted by subsequent proceedings. Accordingly, unless exceptional

circumstances are present appeals must await final order at which point all issues can be

resolved at once. In other words, it must be clear than an interlocutory appeal will materially

improve efficiency.”); In re Zech, 185 B.R. 334, 337 (D.Neb.1995), citation omitted

(“Indeed, because interlocutory appeals interfere with the cumulative goal of the bankruptcy

system . . . they are not favored.”). 

Disregard of Facts Alleged in the SAC

The Litigation Trustee asserts that the appeal deals with pure questions of law and

there is a substantial difference of opinion between the bankruptcy court’s rulings and rulings

of other courts. The Litigation Trustee asserts that the bankruptcy court was not permitted

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to disregard the well-pleaded facts in the SAC when determining whether to dismiss the

claims asserts for failure to state a claim under Fed.R.Civ.P. 12(b)(6) and/or lack of

particularity under Fed.R.Civ.P. 9(b). See Cervantes v. United States, 330 F.3d 1186, 1187

(9th Cir. 2003) (court must take as true all allegations of material fact and construe them in

the light most favorable to the non-moving party); see also Vignolo v. Miller, 120 F.3d 1075,

1077 (9th Cir. 1997). The Litigation Trustee argues that the bankruptcy court’s refusal to

consider the pleaded facts is contrary to controlling law. See Bell Atlantic Corp. v. Twombly,

550 U.S. 544, 570, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007) (a plaintiff must allege

“enough facts to state a claim to relief that is plausible on its face”); Cataulin v. Wash. Mut.

Bank, SFB, 08 CV 2419 JM (NLS), 2009 WL 648921, *2 (S.D.Cal. 2009), citing U.S. v. City

of Redwood, 640 F.2d 963, 966 (9th Cir. 1981) (moving party has a heavy burden to establish

“beyond doubt that [the] plaintiff can prove no set of facts in support of his claim which

would entitle him to relief”).

Defendants argue, however, that the bankruptcy court’s decision to not adopt the

Litigation Trustee’s proposed language demonstrates that the first 154 paragraphs were not

simply disregarded. Rather, Defendants argue that the bankruptcy court clearly determined

that the first 154 were not well pled and that the bankruptcy court was “not obliged to search

for legal theories [and facts supporting them if they are] not clearly laid out in [the SAC].”

See Mansour v. Cal-Western Reconveyance Corp., CV-09-37-PHX-DGC, 2009 WL 2132695

*3 (D.Ariz. 2009); Dennis v. BEH-1, LLC, 520 F.3d 1066, n.1 (9th Cir. 2008), citation

omitted (“Judges are not like pigs, hunting for truffles buried in briefs.”); Keenan v. Allan,

91 F.3d 1275, 1279 (9th Cir. 1996) (in discussing summary judgment, court stated that it was

not the responsibility of the court to “scour the record in search of a genuine issue of triable

fact”). 

Defendants argue that the Ninth Circuit has affirmed the dismissal of a plaintiff’s

complaint after multiple amendments where the court had instructed that the “[P]laintiffs

would be well advised to edit or eliminate their twenty six page introduction and focus on

linking their factual allegations to actual legal claims.” McHenry v. Renne, 84 F.3d 1172,

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1176 (9th Cir. 1996) (where plaintiff had been given multiple opportunities to comply, along

with specific instructions on how to correct the complaint, and plaintiff still failed to file a

compliant complaint, dismissal with prejudice was proper). Indeed, an amended complaint

or portions of an amended complaint may be dismissed if the amended complaint is as

“verbose, confusing, and conclusory” as the prior complaint. Nevijel v. North Coast Life Ins.

Co., 651 F.2d 671, 673-74 (9th Cir. 1981); see also Haynes v. Anderson & Strudwick, Inc.,

508 F.Supp. 1303 (D.C.Va. 1981) (failure to present clear presentation of matters places the

onus on the court to decipher which, if any, facts support which claims, as well as to

determine whether a plaintiff is entitled to the relief sought).

The bankruptcy court had advised the Litigation Trustee that it would consider each

claim as a “free-standing” claim and had twice advised the Litigation Trustee against a

verbose complaint. See Fed.R.Civ.P. 83(a) (“A judge may regulate practice in any manner

consistent with federal law . . . No sanction or other disadvantage may be imposed for

noncompliance with any requirement not in federal law, federal rules, or the local rules

unless the alleged violator has been furnished in the particular case with actual notice of the

requirement.”). Furthermore, the bankruptcy court advised the Litigation Trustee that “[a]t

a minimum, allegations of fraud must state ‘the time, date and specific context or nature of

the fraudulent representations or omissions’ in order to ‘enlighten each defendant as to his

or her part in the alleged fraud.’” Response, Ex. A, pp. 3-4. In light of McHenry and the

notice given by the bankruptcy court, this Court cannot say that a substantial difference of

opinion exists between the bankruptcy court’s rulings and rulings of other courts. The Court

finds this is not an appropriate basis to permit an interlocutory appeal. 

The Litigation Trustee also asserts that the bankruptcy court may not relieve a

defendant of their obligation to admit or deny allegations of facts. See Fed.R.Civ.P. 8(b) (“In

responding to a pleading a party must . . . (b) admit or deny the allegations against it by an

opposing party.”); Fed.R.Bankr.P. 7008(a) (applying Rule 8 to adversary proceedings).

Defendants assert, however, that a court may “relieve a defendant of the burden of respond

to a complaint with excessive factual detail.” Hearns v. San Bernardino Police Dept., 530

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F.3d 1124, 1131 (9th Cir. 2008). Indeed, Defendants argue that the bankruptcy court could

have dismissed the entire complaint with prejudice instead of imposing the less harsh

sanction of only dismissing the claims for actual fraud and RICO. 

Again, this Court cannot say that a substantial difference of opinion exists between

the bankruptcy court’s rulings and rulings of other courts. The Court finds this is not an

appropriate basis to permit an interlocutory appeal. 

The Litigation Trustee also asserts that there is a substantial difference of opinion and

contradictions between the bankruptcy court’s Memorandum Decision and its Order. The

Litigation Trustee points out that the Order dismissed fraudulent claims under A.R.S. § 44-

1004(A)(1) and 11 U.S.C. § 548(a)(1)(A) (e.g., Count 5) although the Motions to Dismiss

had been denied with respect to those claims. Motion, Ex. B, pp. 7-8. Further, the Litigation

Trustee argues that the Order dismisses “all fraud-related claims and allegations” with

prejudice, “specifically including the claims and allegations in Counts 2, 5, 8, 10, 13, 19, and

28 [all fraudulent transfer claims] based on A.R.S. § 44-1004(A)(1) [state law fraudulent

transfer] and 11 U.S.C. § 548(a)(1)(A) [federal avoidance of fraudulent transfer], and all

other fraud-related claims and allegations contained in Counts 1, 36, 37, 38, 41, 42, 43, 46,

47, 48, 50, 51, 56, and 57.” Motion, Ex. A, pp. 1-2. The Litigation Trustee asserts this

contradicts the bankruptcy court’s determination that the fraudulent transfer theories were

“adequately pled.” Motion, Ex. B, pp. 7-8. 

Defendants agrees that the bankruptcy court denied the motion to dismiss Count 5 in

the Memorandum Decision because the concept and theory were adequately pled. However,

Defendants point out that the bankruptcy court also clearly stated:

The Court agrees that wherever the words “fraud,” “intent to defraud,” “fraudulent

intent” or like words are found the counts fail in specifying, with particularity

required by Fed. R. Civ. P. 9(b), those facts necessary to breath legal life into the

words.

Motion, Ex. B, p. 10. The bankruptcy court, in the Memorandum Decision, then clearly

stated which counts would be dismissed. Defendants assert that the bankruptcy court clearly

discussed counts where Defendants Gaylord, Thomas, Jaggi, Sullivan, Sr., Sullivan, Jr.,

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Malis, Marchetti, and Young received transfers from First Magnus when First Magnus was

insolvent or First Magnus received less than reasonably equivalent value and had an

unreasonably small capital, or made transfer to an insider not in the ordinary course of

business and determined that those A.R.S. §44-1004(A)(2) and 11 U.S.C. §548(a)(1)(B)

claims were adequately pled. Therefore, Defendants point out that none of the fraudulent

transfer counts were dismissed in their entirety as evidenced by the Court’s Memorandum

decision denying Defendant Gaylord’s Motion to Dismiss Count 5 and Defendant Thomas’s

Motion to Dismiss Count 8. However, the bankruptcy court found that actual fraud was not

pled to particularity requirements of Fed.R.Civ.P. 9(b), Donnell v. Kowell, 533 F.3d 762, 771

(9th Cir. 2008), and, therefore, dismissed the fraud claims within Counts 2, 5, 8, 10, 13, 19,

and 28. 

The Court agrees with Defendants that the bankruptcy court’s Order did not clearly

contradict the Memorandum Decision. Moreover, in determining whether to exercise its

discretion and permit an interlocutory appeal, the Court considers that the Litigation Trustee

did not request the bankruptcy court to consider or clarify its Order. See In re Moerbe, 03-

57260-LMC, 04-5043-LMC, SA-04-CS-801-FB, 2005 WL 3337634, *3 (W.D. Tex. 2005)

(as opposed to seeking leave to file the interlocutory appeal the “more appropriate action

would have been to file a motion for reconsideration before” the bankruptcy court).

The Litigation Trustee asserts an interlocutory appeal is appropriate because

resolution of the appellate issues will advance the ultimate termination of the litigation by

crystallizing the issues for discovery and trial and also avoiding a potential retrial should the

bankruptcy court ultimately be reversed. See In re Pacific Forest Products Corp., 335 B.R.

910, 924-25 (S.D.Fla. 2005).

Defendants assert, however, that rather than materially advancing the termination of

the litigation, review would simply add another layer of litigation. Defendants point out that

the Litigation Trustee’s claims as to fraudulent transfers are proceeding and, if the

bankruptcy court is subsequently reversed, few additional facts will be needed to evaluate

the dismissed claims. See In re MCI WorldCom Communications v. Communications

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Network, Int’l, Ltd., 358 B.R. 76, 80 (S.D.N.Y. 2006). Defendants also assert that, if an

interlocutory appeal is permitted, a stay is possible, an appeal to the Ninth Circuit is possible,

and the door is open for future interlocutory appeals. The potential piece-meal litigation is

not justified because, if the Litigation Trustee succeeds at trial, the dismissed claims would

not likely provide any additional recovery because the damages would be duplicative and

would only serve to deplete the funds the should be distributed to First Magnus’s creditors

following resolution of the claims.

The Court finds that it is not clear that an interlocutory appeal will materially improve

efficiency. This case does not present exceptional circumstances that warrant the granting

of leave to file an interlocutory appeal. The Court declines to exercise interlocutory appellate

jurisdiction.

Accordingly, IT IS ORDERED:

1. To the extent this Court issues its ruling herein, the Motion to Expedite Appeal

[Doc. 5] is GRANTED.

2. The Motion for Leave to Appeal [Doc. 2] is DENIED.

3. This civil action is DISMISSED and the Clerk of the Court shall close its file

in this matter.

DATED this 6th day of August, 2010.

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