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United States District Court

For the Northern District of California 

IN THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF CALIFORNIA 

SUSSEX FINANCIAL ENTERPRISES, 

INC., 

Plaintiff, 

v. 

BAYERISCHE HYPO-UND VEREINSBANK 

AG, a/k/a HYPOVEREINSBANK; HVB 

RISK MANAGEMENT PRODUCTS, INC.; 

HVB U.S. FINANCE, INC., f/k/a 

HVB STRUCTURED FINANCE, INC.; 

and DOES 1-100, inclusive, 

Defendants. 

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Case No. 08-4791 SC 

ORDER RE: CROSS-MOTIONS 

FOR SUMMARY JUDGMENT 

I. INTRODUCTION

 Plaintiff Sussex Financial Enterprises, Inc. ("Sussex") 

brought this action against Defendants Bayerische Hypo-und 

Vereinsbank AG, et al. (collectively, "HVB"), alleging fraud and 

violation of the Racketeer Influenced and Corrupt Organizations Act 

("RICO"). Second Amended Complaint, Docket No. 93 ("SAC"). 

Sussex has now filed a Motion for Partial Summary Judgment, Docket 

Nos. 181 ("MPSJ"), 199 ("Opp'n to MPSJ"), 207 ("MPSJ Reply"), and 

HVB has filed a Motion for Summary Judgment, Docket Nos. 187 

("MSJ"), 195 ("Opp’n to MSJ"), 209 ("MSJ Reply"). Pursuant to 

Civil Local Rule 7-1(b), the Court finds the motions suitable for 

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determination without oral argument. For the following reasons, 

the Court DENIES Sussex's Motion for Partial Summary Judgment and 

GRANTS HVB's Motion for Summary Judgment. 

 

II. BACKGROUND

 A. Factual Background

Sussex, formerly known as Chenery Associates, Inc. 

("Chenery"), is a San Francisco-based financial services company 

owned by Roy E. Hahn ("Hahn") and his wife, Linda Montgomery. 

Rossi Decl. I Ex. A ("Hahn Dep. I") at 22:21-23:21.1

 From 1999 to 

2001, Sussex offered financial services to a client base of "highnet-worth individuals." Id. at 27:2-30:2; Rossi Decl. I Ex. G 

("CARDS Presentation") at SUS_HVB034436. Sussex was an early 

provider of a financial product known as Custom Adjustable Rate 

Debt Structure ("CARDS"). SAC ¶ 6. While only HVB refers to CARDS 

as a "tax shelter," see MSJ at 1, both parties agree that an 

"intended and essential" element of CARDS was its ability to 

generate sizable tax benefits for Sussex's clients. SAC ¶ 9. The 

underlying CARDS structure developed from conversations Hahn had 

with Raymond J. Ruble ("Ruble"), who was then a tax lawyer and 

partner in the New York office of Sidney Austin Brown & Wood LLP 

("Sidley Austin"). Hahn Dep. I at 15:5-17:2. 

In 1998 and 1999, Sussex marketed CARDS to high-income U.S. 

investors -- in particular, "dot-com millionaires" who had acquired 

 

1

 Ronald R. Rossi ("Rossi"), counsel for HVB, filed two 

declarations relevant to this Order. The first is a Declaration in 

support of HVB's MSJ. Docket No. 188 ("Rossi Decl. I"). The 

second is a Declaration in support of HVB's Motion to Strike the 

Expert Report and Testimony of Lynn Boak. Docket No. 191 ("Rossi 

Decl. II"). 

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valuable stock in firms but were cash-poor due to their inability 

to sell the stock. Hahn Dep. I at 16:19-17:10. Sussex cited in 

its promotional materials a "favorable tax opinion by a major New 

York law firm" stating that the Internal Revenue Service ("IRS") 

would "more likely than not" find the tax benefits possible through 

CARDS to be legal. CARDS Presentation at SUS_HVB034422, 034440. 

The favorable tax opinion was written by Ruble, the co-developer of 

CARDS, on behalf of his law firm. Hahn Dep. I at 204:18-24. This 

letter, according to Sussex, would protect clients from having to 

pay a "substantial understatement penalty" if the IRS ultimately 

found CARDS to be an illegal tax shelter. CARDS Presentation at 

SUS_HVB034422, 034440. 

 The underlying structure of CARDS is complex. Each 

transaction required Sussex to identify three participants and, 

through a series of steps, "negotiate them toward a closing." Hahn 

Dep. I at 26:15-20. Those three participants were a borrower, a 

lender, and an "assuming party." Id. at 18:21-19:23. 

 First, Sussex would cover the incorporation costs and 

attorney's fees necessary to establish a "single-purpose" limited 

liability company ("LLC"), which would serve as the borrower. Id.

at 19:2-4, 80:4-7, 82:5-13. In all but two instances, the members 

of these LLCs were two British nationals. Id. at 76:21-79:24. The 

foreign nationality of the LLC members was critical to CARDS, 

because CARDS' tax benefits were not possible without the members' 

tax-neutral status as "nonresident aliens." Rossi Decl. I Exs. L 

("DeGiorgio Dep.") at 223:5-224:18, H ("Boak Dep.") at 77:3-14. 

 Sussex would then arrange for this LLC to borrow funds from a 

lender, usually in a foreign currency. Cards Presentation at 

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SUS_HVB034425. A specific Credit Agreement set the terms of this 

loan, and a "Master Pledge and Security Agreement" incorporated 

into the Credit Agreement required the borrower to pledge back the 

loan proceeds to the lender as collateral for the loan. Boak Dep. 

at 78:17-20; Rossi Decl. Ex. F ("Credit Agreement") §§ 4.01(f), 

(g). Because the loan proceeds would be deposited with the lender 

as collateral for the loan, no money left the lender, and thus the 

lender's actual exposure to risk was minimal. Boak Dep. at 77:24-

78-19. Because of this, both parties have characterized CARDS as a 

"zero-risk" loan for the lender. Boak Dep. 77:12-14; Rossi Decl. I 

Ex. O ("DeGiorgio/Hahn E-mail"), Hahn Decl. I ¶ 7.2 The terms in 

the Credit Agreements governing each transaction were substantially 

similar. Hahn Dep. I at 43:8-44:8, 45:11-51:23. Both lender and 

borrower could transfer their rights and obligations under the 

agreement to another party. The borrower could do so with approval 

of the lender. Credit Agreement § 10.04. The lender could 

transfer its interest to a replacement lender without consulting 

the borrower. Id. § 2.06. 

 Next, one of Sussex's clients ("the client") would become the 

"assuming party" by entering into an assumption agreement with the 

LLC. In exchange for agreeing to become jointly and severally 

liable on the loan with the LLC, the client would receive a portion 

of the loan (usually, around fifteen percent). CARDS Presentation 

at SUS_HVB034421-034431. To assure the loan was fully 

collateralized, the client would be required to either deposit this 

 

2

 Roy E. Hahn ("Hahn") filed two Declarations relevant to this 

Order. The first was filed in support of Sussex's MPSJ. Docket 

No. 184 ("Hahn Decl. I"). The second was filed in support of 

Sussex's Opposition to Defendant's MSJ. Docket No. 197 ("Hahn 

Decl. II"). 

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percentage of the loan proceeds with the lender or pledge illiquid 

assets as collateral. Boak Dep. at 79:20-80:8. While the deposit 

held in collateral with the bank would generate a return, this 

return was less than the overall interest rate on the loan, leading 

to a "negative carry" necessitating the borrowers to make periodic 

interest payments. Boak Dep. 129:2-15. Under the standard 

Assumption Agreement, the LLC would be responsible for payments of 

interest and the client would be responsible for payments of 

principal on the loan. Cards Presentation at SUS_HVB034423. 

 The clients paid significant fees to participate in CARDS --

usually four to seven percent in loan origination fees, in addition 

to the ongoing interest payments on the loan. Rossi Decl. I Ex. B 

("Hahn Dep. II") at 103:8-13. The benefit the clients received in 

return was a significant tax loss. CARDS Presentation at 

SUS_HVB034430. Because the client's tax base was one hundred 

percent of the loan, the sale of the fifteen percent deposit would 

result in an ordinary loss amounting to eighty-five percent of the 

loan. Id. As a consequence, the claimed tax loss was considerably 

higher than the out-of-pocket costs for participating in CARDS. 

Id. The client had an opportunity to prepay the loan every year, 

essentially ending the CARDS transaction. Id. at 034435. 

 The LLC members received a fee for participating in the 

transaction, typically 0.5% of the total loan amount. Hahn Dep. I 

at 80:8-21. The lenders received a 1.0% loan origination fee, as 

well as interest payments. Id. at 249:25-255:7; DeGiorgio Dep. at 

174:9-16. Sussex also paid a "licensing fee" for each CARDS 

transaction initiated to a trust controlled by Ruble, the author of 

the "favorable tax opinion," for a combined total of nearly $2 

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million. Hahn Dep. I at 94:15-19, 203:2-24. Sussex did not tell 

its clients that the author of the tax opinion received a fee for 

each CARDS transaction. Id. at 98:5-13. Sussex collected more 

than $60 million from its CARDS clients. Hahn Dep. II at 103:8-13; 

Hahn Dep. I at 260:21-261:1; Rossi Decl. I Ex. C ("Plaintiff's 

CARDS Fees"). 

 HVB is a German financial institution and bank that operates 

in the United States through an office in New York, New York. SAC 

¶ 4. Around October 2000, Hahn was introduced to Dom DeGiorgio 

("DeGiorgio"), senior vice-president of HVB's subsidiary, HVB 

Structured Finance Inc. Hahn Dep. I at 31:5-33:2; Docket No. 46 

Ex. A ¶ 3. After a series of meetings, phone calls, and e-mail 

exchanges between Hahn and DeGiorgio, HVB agreed to participate as 

a CARDS lender, consummating twenty CARDS transactions by the end 

of 2000. Hahn Dep. I at 41:3-5, 41:19-23. HVB ultimately 

participated in twenty-nine CARDS transactions as a lender, and was 

the fourth of five banks to participate in CARDS. SAC ¶ 6; Hahn 

Dep. I at 20:7-21; 44:9-19. The provisions of the Credit 

Agreements used with HVB were substantially similar to the 

agreements Sussex had used with other banks in CARDS transactions. 

Hahn Dep. I at 45:11-51:23. As with earlier CARDS transactions, 

the loan had to be affirmatively renewed by the bank once each 

year. Credit Agreement § 2.04(g). 

 Around October 2001, DeGiorgio told Hahn that HVB would not be 

renewing its existing CARDS loans when the current interest period 

concluded. Hahn Dep. I at 215:22-216:6. DeGiorgio claimed that 

the reason was market uncertainty following the September 11, 2001 

attacks, as well as HVB's inability to replace a key employee who 

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had left HVB and had been in charge of the loans. SAC ¶ 20. 

 In March 2002, the IRS issued a report identifying the 

underlying structure of CARDS as a "listed transaction." Rossi 

Decl. I Ex. R ("IRS Notice 2001-21"). A "listed transaction" is a 

"transaction [that] is the same or substantially similar to one of 

the types of transactions that the [IRS] has determined to be a tax 

avoidance transaction and identified by notice, regulation, or 

other form of published guidance as a listed transaction." 26 

C.F.R. § 301.6111-2. In doing so, the IRS made public its position 

that CARDS was a fraudulent tax shelter and its intention to 

challenge CARDS in court. IRS Notice 2002-21. The rationale the 

IRS provided for this announcement was that the losses claimed in a 

CARDS transaction were inflated due to "a basis in excess of the 

fair market value of the Conveyed Assets." Id. In 2004, the IRS 

published a Coordinated Issue Paper specifically identifying CARDS 

as the transaction at issue in IRS Notice 2002-21 and providing 

several grounds for its position that CARDS-generated tax losses 

were illegal. Rossi Decl. I Ex. E ("IRS Coordinated Issue Paper"). 

 Six of Sussex's clients ultimately sued Sussex for claims 

arising from their purchase of CARDS transactions. Hahn Decl. II 

¶ 2. Sussex claims it has spent $377,100 defending these lawsuits. 

Id. Ex. 7 ("Pl.'s Attorney Invoices"). In several of these 

lawsuits, both Sussex and HVB were named as defendants. E.g., Hahn 

Decl. II Ex. 8 ("RLP Holdings Compl."), 9 ("Kerman Compl."). In at 

least one action, HVB was sued by the client of another CARDS 

marketer for its involvement in CARDS. See Rezner v. Bayerische 

Hypo-Und Vereinsbank AG, No. 06-2064 (N.D. Cal. May 1, 2009). 

Sussex was not a party to Rezner. 

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 In February 2006, HVB entered into a Deferred Prosecution 

Agreement with the U.S. Department of Justice. SAC ¶¶ 17, 23; 

Docket No. 46, Ex. A ("DPA"). In the DPA and its accompanying 

Statement of Admitted Facts, HVB admitted to the following: 

o HVB assisted "high net worth United States citizens" 

evade income taxes by "participating in and implementing 

fraudulent tax shelter transactions, including . . . 

CARDS." DPA ¶ 2. 

o While CARDS involved "loans with a purported 30-year 

term," HVB never intended to renew the loans after the 

first year, and "the transactions would be unwound in 

approximately one year in order to generate the phony tax 

benefits sought by the client participants." Id. ¶ 19. 

o HVB engaged in the unlawful and fraudulent conduct of 

"preparing and signing false and fraudulent factual 

recitations, representations, and documents as part of 

the documentation underlying the shelters." Id. ¶ 2. 

o HVB and DeGiorgio made false representations "that the 

transactions were being entered for legitimate business 

purposes and that the material terms of the loan 

agreements had been negotiated at arms length." Id. ¶ 

19. 

o HVB knew that the LLCs "were merely nominees who had no 

legitimate business purpose in entering the transaction 

and who were simply being paid to lend their neutral U.S. 

tax status to the transaction in order to enable the U.S. 

client to obtain their claimed tax benefits." Id. ¶ 20. 

o DeGiorgio "improperly manipulated HVB demand deposit 

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accounts, through which various payments related to these 

transactions were run." Id. ¶ 22. 

As part of the DPA, HVB agreed to pay the U.S. government more than 

$29 million in fees and penalties. Id. ¶ 3. 

While HVB admitted the above in the DPA, HVB also alleged that 

the CARDS "clients/'borrowers'" -- ostensibly, Sussex and/or its 

clients -- were complicit in the scheme. Specifically, HVB claimed 

"all parties" knew the CARDS transactions would be unwound within 

one year, that clients/borrowers misrepresented CARDS as an "arms 

length" transaction for legitimate business purposes, and that all 

parties knew the LLCs had "no legitimate business purpose in 

entering the transaction and . . . were simply being paid to lend 

their neutral U.S. tax status to the transaction in order to enable 

the U.S. client to obtain their claimed tax benefits." Id. ¶¶ 19, 

12, 20. 

B. Procedural Background

In its SAC, Sussex brings three causes of action. First, 

Sussex claims that HVB committed fraud in the negotiations between 

Sussex and HVB in late 2000. SAC ¶¶ 11, 36-39 ("Sussex's First 

Fraud Claim"). Sussex claims that it intended the loans to be 

long-term, thirty-year loans, and that it had no intention to 

unwind the CARDS transactions after one year. SAC ¶ 7. Sussex 

claims that HVB's commitment to renewing the loans for thirty years 

was critical to the Sussex's clients receiving a legitimate tax 

benefit. Id. ¶¶ 36-39. Sussex claims that HVB committed fraud by 

misrepresenting to Sussex in the CARDS negotiations that it 

intended to renew the loans for the full thirty years, and that 

Sussex never would have entered into an agreement with HVB had it 

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known HVB planned to call the loans after a year. Id. Sussex 

argues that, as a consequence of HVB's misrepresentations, it paid 

HVB loan origination fees and was sued by its clients. Id.

Second, Sussex alleges that HVB committed fraud by 

representing to Sussex that it would "set up and fund the loans in 

individual accounts in a timely manner," when HVB had no intent to 

do so. Id. ¶¶ 30-35 ("Sussex's Second Fraud Claim"). Sussex also 

claims that this caused Sussex to be injured in the form of loan 

origination fees paid to HVB and lawsuits brought by Sussex's 

clients. Id.

Third, Sussex brings a RICO action against HVB for its 

"promotion and participation in the CARDS program." Id. ¶¶ 40-45. 

Sussex claims that as a result of HVB's conduct, it suffered 

damages in the form of the loan origination fees it paid to HVB and 

in the cost of defending itself in lawsuits brought by its clients. 

Id. ¶¶ 28-29, 34. 

HVB filed two Motions to Dismiss. Docket Nos. 49 ("First 

MTD"), 105 ("Second MTD"). The Court granted HVB's First Motion to 

Dismiss, giving Sussex leave to file an amended complaint. Docket 

No. 66 ("First MTD Order"). The Court denied HVB's Second Motion 

to Dismiss, finding that Sussex's causes of action were pleaded 

with the requisite level of particularity. Docket No. 147 ("Second 

MTD Order"). The Court noted that many of the arguments made by 

HVB in its Second Motion to Dismiss were "better suited for summary 

judgment, or that failing, for trial before an appropriate fact 

finder." Id. at 6-7. 

HVB filed two motions to strike in response to Sussex's MPSJ. 

HVB's Motion to Strike the Expert Testimony of Lynn Boak is now 

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fully briefed. Docket Nos. 190 ("First MTS"), 193 ("First MTS 

Opp'n"), 211 ("First MTS Reply"). HVB also filed a Motion to 

Strike all or part of three documents filed in support of Sussex's 

Opposition to HVB's MSJ: (1) Paragraphs 2, 11-14 and 17 of the 

first Hahn Declaration, (2) the entire affidavit of Ronald E. 

Braley ("Braley"), Brady Decl. II Ex. A ("Braley Aff."), and (3) 

paragraph 7 of the affidavit of Philip G. Groves ("Groves"), Brady 

Decl. II Ex. B ("Groves Aff."). Docket No. 201 ("Second MTS").3

 

This motion is also fully briefed. Docket Nos. 214 ("Opp'n to 

Second MTS"), 218 ("Reply to Second MTS"). 

III. LEGAL STANDARD

 Summary judgment under Rule 56(c) of the Federal Rules of 

Civil Procedure may be granted where the pleadings and materials on 

file show "that there is no genuine issue as to any material fact 

and that the moving party is entitled to judgment as a matter of 

law." A moving party that will have the burden of proof on an 

issue at trial must "affirmatively demonstrate that no reasonable 

trier of fact could find other than for the moving party." 

Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th Cir. 

2007). Where the nonmoving party will have the burden of proof at 

trial, the moving party "can prevail merely by pointing out that 

there is an absence of evidence to support the nonmoving party's 

case." Id. If the moving party fails to persuade the court that 

there is no genuine issue of material fact, then "the nonmoving 

 

3

 Stephen Brady ("Brady"), counsel for Sussex, has filed two 

Declarations relevant to this Order. One was filed in support of 

Sussex's MPSJ. Docket No. 183 ("Brady Decl. I"). The second was 

filed in Opposition to HVB's MSJ. Docket No. 196 ("Brady Decl. 

II"). 

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party has no obligation to produce anything, even if the nonmoving 

party would have the ultimate burden of persuasion at trial." 

Nissan Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102 

(9th Cir. 2000). However, if the moving party meets its initial 

burden, then the burden shifts to the nonmoving party to produce 

evidence supporting its claims or defenses. Id. 

 When evaluating a motion for partial or full summary judgment, 

the court views the evidence through the prism of the evidentiary 

standard of proof that would pertain at trial. Anderson v. Liberty 

Lobby Inc., 477 U.S. 242, 255 (1986). The court draws all 

reasonable inferences in favor of the non-moving party. See, e.g., 

Masson v. New Yorker Magazine, Inc., 501 U.S. 496, 520 (1992). The 

court determines whether the non-moving party's "specific facts," 

coupled with disputed background or contextual facts, are such that 

a reasonable jury might return a verdict for the non-moving party. 

T.W. Elec. Service, Inc. v. Pacific Elec. Contractors Ass'n, 

809 F.2d 626, 631 (9th Cir. 1987). In such a case, summary 

judgment is inappropriate. Anderson, 477 U.S. at 248. However, 

where a rational trier of fact could not find for the nonmoving 

party based on the record as a whole, there is no "genuine issue 

for trial." Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 

574, 587 (1986). 

 

IV. Discussion

In its MPSJ, Sussex seeks partial summary judgment in its 

favor on its RICO claim. MPSJ at 1. Sussex notes that a RICO case 

was adjudicated against HVB in Rezner, No. 06-2064 (N.D. Cal. May 

1, 2009). In that case, a CARDS client brought a RICO action 

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against HVB. Id. Basing judgment largely on the admissions HVB 

made in its DPA, the court granted partial summary judgment on the 

plaintiff's RICO claim, finding no disputed issues of material fact 

as to whether HVB conducted an enterprise through a pattern of 

racketeering activity. Id. at 12. HVB and Rezner ultimately 

entered into a stipulated final judgment. No. 06-2064 (N.D. Cal. 

June 16, 2009). Sussex argues HVB should be collaterally estopped 

from re-litigating its RICO defense, and argues that even if 

collateral estoppel does not apply, there are no disputed issues of 

material fact as to HVB's RICO liability, given HVB's DPA 

admissions. MPSJ at 1. 

In its MSJ, HVB makes several arguments for judgment in its 

favor, including some that it made earlier in its motions to 

dismiss. First, HVB argues that Sussex cannot, as a matter of law, 

prove that it justifiably relied on HVB's alleged promise to renew 

the loans for thirty years, because HVB's alleged statements are 

inadmissible under the parol evidence rule and because they 

contradict the terms of the Credit Agreement. MSJ at 12. HVB 

argues that the Credit Agreement is an integrated written agreement 

that unambiguously gave HVB the right not to renew the loans after 

the first year, and that Sussex cannot justifiably rely on oral 

promises outside an integrated written agreement. Id. 

Second, HVB argues that the injuries Sussex alleges are either 

barred by law or unsupported by any evidence. Id. at 16-19. 

Specifically, HVB argues that the loan origination fees paid by 

Sussex to HVB are not a legally permissible injury, and that Sussex 

has failed to submit evidence creating a causal link between HVB's 

conduct and Sussex being sued by its clients. HVB further argues 

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that the evidence shows Sussex was not damaged by HVB's 

participation in CARDS, but rather enriched, because the $14.8 

million that Sussex collected from its clients on HVB-funded CARDS 

transactions is greater than Sussex's alleged injuries. Id. at 20-

21. Sussex makes a number of other arguments in favor of summary 

judgment, but because the Court finds the two above to be 

dispositive, it does not discuss them here. 

A. Evidentiary Objections

 1. Sussex's Evidentiary Objections 

 Sussex did not file objections to HVB's MSJ or raise 

objections in its Opposition to HVB's MSJ. However, Sussex did 

object to exhibits attached to HVB's First Motion to Strike. 

Docket No. 198 ("Def.'s Objs. to First MTS"). Because HVB cites to 

two of these exhibits in its MSJ, see Rossi Decl. I Exs. T & U, the 

Court will rule on these objections. 

 Sussex objects to a press release purportedly issued by the 

United States Attorney in the Southern District of New York as 

inadmissible under Federal Rules of Evidence 801 and 901. Id. at 

2. In this document, attached to both HVB's First Motion to Strike 

and MSJ, the U.S. Attorney states its decision not to prosecute 

Sidley Austin for its involvement in CARDS, and discusses Ruble's 

participation in CARDS, stating that he issued "fraudulent cookiecutter opinion letters". See Rossi Decl. II Ex. Q ("U.S. Attorney 

Press Release"). Because the press release is issued by a 

government authority, it is self-authenticating under Federal Rule 

of Evidence 902(1). U.S. ex rel. Parikh v. Premera Blue Cross, No. 

01-0476, 2006 WL 2841998, *8 (W.D. Wash. Sept. 29, 2006). However, 

this document cannot be used to prove the truth of the matter 

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asserted –- that Ruble acted fraudulently –- without violating Rule 

801. As such, this objection is SUSTAINED. 

 Second, Sussex objects to a statement issued by Sidley Austin 

about its involvement in CARDS, claiming it violates Rules 801 and 

901. See Rossi Decl. II Ex. R ("Sidley Austin Statement"). HVB 

argues that the Sidley Austin Statement was annexed to the U.S. 

Attorney Press Release, and is thus admissible under Rule 902(1). 

Reply to Second MTS at 14-15. The Court finds that Rule 902(1) 

does not apply because it is not issued by a government authority, 

and SUSTAINS Sussex's objection. 

 2. HVB's Evidentiary Objections 

 HVB makes numerous evidentiary objections in its two motions 

to strike. First, HVB moves to strike the Braley Affidavit, which 

Sussex attached to its Opposition to HVB's MSJ. See Second MTS. 

In his affidavit, Braley identifies himself as an attorney who was 

retained from 1999-2001 by several of the CARDS clients "to advise 

on the benefits and risks" of CARDS transactions. Braley Aff. ¶ 3. 

HVB argues that Sussex failed to disclose Braley as a potentially 

knowledgeable person as required by Federal Rule of Civil Procedure 

26, and thus Braley should be barred from testifying under Rule 

37(c)(1). Second MTS at 1, 6. Sussex did not formally disclose 

Braley until it served HVB with a supplemental Rule 26 disclosure 

on June 8, 2010 -- four days after it filed its Opposition to HVB's 

MSJ. See Katz Decl. II, Ex. 2.4

 Sussex claims Rule 26 does not 

 

4

 Richard L. Katz ("Katz"), counsel for Sussex, has filed two 

Declarations relevant to this Order. The first was filed in 

support of Sussex's Opposition to HVB's Motion to Shorten Time. 

Docket No. 206 ("Katz Decl. I"). The second was filed in support of 

Sussex's Opposition to HVB's Second MTS. Docket No. 215 ("Katz 

Decl. II"). 

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apply because Braley was not considered a potential witness to 

support its claims at the time of Sussex's Rule 26 disclosures. 

Opp'n to Second MTS at 2. Counsel for Sussex states: "It was only 

after speaking with Mr. Braley approximately one week before filing 

Plaintiff's MSJ did it become apparent Mr. Braley had valuable 

information that could be used at trial." Katz Decl. I ¶ 8. 

 Sussex filed its Motion for Partial Summary Judgment Motion on 

May 14, 2010, see MPSJ, and so, by Katz's declaration, Sussex 

learned of Braley's relevance to the case around May 7, 2010. HVB 

points out that the Braley Affidavit is dated April 1, 2010. 

Second MTS Reply at 2; see Braley Aff. Plaintiff has not argued 

that the date on the Braley Affidavit is incorrect. 

 Under Rule 37 of the Federal Rules of Civil Procedure, a party 

that fails to identify a witness as required by Rule 26(a) or 26(e) 

may not use that information or witness to supply evidence on a 

motion, at a hearing, or at a trial, unless the failure was 

substantially justified or is harmless. The Court finds Sussex's 

failure to disclose is not substantially justified or harmless. 

Even if there is an innocent explanation for the discrepancy 

between the April 1 date on the Braley affidavit and the date given 

by Katz, by failing to disclose Braley, HVB was denied the 

opportunity to depose Braley in preparing its MSJ and its response 

to Sussex's MPSJ. The Court hereby GRANTS HVB's Motion to Strike 

the Braley Affidavit. 

 Second, HVB argues that the Hahn and Groves Affidavits should 

be excluded under the parol evidence rule, because they were 

"submitted in an impermissible attempt to alter the terms of a 

written contract." Second MTS at 2-3. Because California's parol 

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evidence rule is a rule of substantive law, and because this issue 

is tightly wound with the substantive arguments made in HVB's MSJ, 

this issue is addressed infra in Part IV.B. 

 Finally, HVB objects to the Hahn Affidavit and to the expert 

report and testimony of Boak as impermissible expert testimony 

under Rule 702 of the Federal Rules of Evidence. See First MTS at 

1, Second MTS at 1-2. While the Court recognizes that this 

evidence is vulnerable to this objection, it declines to rule on 

it, because even when the evidence is considered by this Court, HVB 

is still entitled to summary judgment. See Smith v. County of 

Humboldt, 240 F. Supp. 2d 1109, 1115-16 (N.D. Cal. 2003). 

B. Sussex's MPSJ

 Sussex seeks partial summary judgment on its RICO claim. The 

four elements of a RICO violation are: (1) conduct (2) of an 

enterprise (3) through a pattern (4) of racketeering activity. 

Jarvis v. Regan, 833 F.2d 149, 151 (9th Cir. 1987). In addition, a 

private plaintiff must prove it suffered an injury caused by the 

defendant's RICO violation. Avalos v. Baca, 596 F.3d 583, 592 (9th 

Cir. 2010). Sussex argues that HVB should be collaterally estopped 

from raising a RICO defense, because a final judgment on a RICO 

cause of action was entered against HVB for its involvement in 

CARDS in Rezner v. Bayerische Hypo-Und Vereinsbank AG, No. 06-2064 

(N.D. Cal. May 9, 2009). MPSJ at 5. Sussex argues that even if 

collateral estoppel does not apply, there are no material issues of 

disputed fact, given HVB's admissions in its DPA. Id. at 7-16. 

 Collateral estoppel prevents a party from relitigating an 

issue decided in a previous action if four requirements are met: 

"(1) there was a full and fair opportunity to litigate the issue in 

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the previous action; (2) the issue was actually litigated in that 

action; (3) the issue was lost as a result of a final judgment in 

that action; and (4) the person against whom collateral estoppel is 

asserted in the present action was a party or in privity with a 

party in the previous action." Kendall v. Visa U.S.A., Inc., 518 

F.3d 1042, 1050 (9th Cir. 2008) (citation omitted). HVB argues 

that collateral estoppel should not apply because RICO "is not some 

undifferentiated 'issue'," but rather "a cause of action with 

multiple legal elements, each of which requires proof of numerous 

independent factual predicates." Opp'n to MPSJ at 12. 

 The Court agrees with HVB. There are multiple factual 

differences between the RICO claim judged against HVB in Rezner and 

the RICO claim Sussex brings in the present action, notably RICO's 

enterprise requirement. In Rezner, the court did not actually 

identify in its order the members of the RICO enterprise, and its 

discussion of the "common purpose" requirement suggests the 

enterprise consisted of HVB, Sidley Austin, and Chenery. Rezner at 

8. Additionally, in its analysis of the existence of an "ongoing 

organization," the court identified that the predicate crimes were 

committed by an "associated-in-fact organization involving [HVB], 

Chenery, Sidley Austin, and others." Id. at 9. A co-conspirator 

may not sue a member of the same conspiracy for violation of RICO. 

See Lopez v. Dean Witter Reynolds, Inc., 591 F. Supp. 581, 588 n.4 

(N.D. Cal. 1984). Because Rezner leads to a dispute of material 

fact over whether HVB and Sussex were co-conspirators, it does not 

justify partial summary judgment in Sussex's favor. For the above 

reasons, the Court holds that Sussex's collateral estoppel argument 

fails. 

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 Similarly, Sussex's argument that HVB's DPA admissions leave 

no dispute of material fact on its RICO claim also fails, for the 

reasons raised in HVB's MSJ, which the Court will now discuss. 

C. HVB's Parol Evidence and Reasonable Reliance Arguments

In its First Fraud Claim, Sussex alleges HVB never had the 

intent to renew the CARDS loans after the first year, and that HVB 

fraudulently misrepresented this intent in the CARDS credit 

agreement negotiations. SAC ¶¶ 36-39.5 In California, the 

elements of fraud are: (a) a misrepresentation by the defendant to 

the plaintiff; (b) the defendant's knowledge of its falsity; (c) 

the defendant's intent to defraud; (d) the plaintiff's justifiable 

reliance; and (e) the plaintiff's resulting damage. Lazar v. 

Super. Ct., 12 Cal. 4th 631, 638 (1996). While statements relating 

to what may happen in the future are generally not actionable, a 

promise made without any intention to perform may constitute a 

misrepresentation. Cal. Civ. Code § 1710; Lazar, 12 Cal. 4th at 

638. Such an action is often referred to as "promissory fraud." 

Id. HVB's alleged misrepresentation of its intent to renew the 

loans for the full thirty years is a misrepresentation of the 

"promissory fraud" variety. 

 HVB's first argument in favor of summary judgment on Sussex's 

First Fraud Claim and RICO claim is that Sussex's proffered 

evidence cannot, as a matter of law, establish that Sussex 

justifiably relied on HVB's alleged promise to renew the loans for 

 

5

 While the parties entered into twenty-nine CARDS transactions and 

each transaction was governed by a separate Credit Agreement, the 

parties agree that they contained substantially the same terms. 

SAC ¶ 6; Hahn Dep. I 45:11-51:23. Thus, for simplicity's sake, the 

Court will refer to the agreements collectively as "Credit 

Agreement." 

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thirty years, because it is inadmissible under the parol evidence 

rule and because it contradicts the terms of the Credit Agreement. 

MSJ at 12. HVB argues that the Credit Agreement clearly and 

unambiguously gave the lender the unqualified right to demand 

prepayment of the loan after one year, and thus Sussex's First 

Fraud Claim is barred by the parol evidence rule. Id. at 13. HVB 

argues that as a consequence, Sussex cannot show that HVB made a 

misrepresentation or that Sussex justifiably relied on such a 

misrepresentation, and thus Sussex's First Fraud claim must fail. 

Id. HVB also argues that as a consequence, this alleged 

misrepresentation cannot serve as the predicate act for Sussex's 

RICO claim, and so any RICO claim based on this action should fail. 

Id. 

 Federal courts deciding state-law causes of action must apply 

the same parol evidence rule that the forum state would use. Jinro 

America Inc. v. Secure Invest., Inc., 266 F.3d 993, 998–99 (9th 

Cir. 2001). California's parol evidence rule prohibits a party 

from using extrinsic evidence of a prior or contemporaneous oral 

agreement to contradict a plain and unambiguous term of a fully 

integrated agreement. Cal. Code Civ. Proc. § 1856(a). This rule 

applies not only to breach-of-contract claims, but also to other 

causes of action, including fraud. Charnay v. Cobert, 145 Cal. 

App. 4th 170, 186 (Ct. App. 2006).6

 Because the parol evidence rule only applies to integrated 

 

6

 While California's parol evidence rule contains a "fraud 

exception," Cal. Civ. Proc. Code § 1856(g), this exception does not 

extend to "promissory fraud claims premised on prior or 

contemporaneous statements at variance with the terms of a written 

integrated agreement." Casa Herrera, Inc. v. Beydoun, 32 Cal. 4th 

336, 346 (2004) (citations omitted). 

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written agreements, Cal. Code Civ. Proc. § 1856(a), the Court must 

determine, as a threshold matter, whether each Credit Agreement was 

intended to be a complete and final expression of the parties' 

agreement. Masterson v. Sine, 68 Cal. 2d 222, 225 (1968). The 

presence of an integration clause is conclusive on the issue of 

integration. Salyer Grain & Milling Co. v. Hensen, 13 Cal. App. 3d 

493, 501, (Ct. App. 1970). The Credit Agreement includes an 

integration clause. See Credit Agreement § 10.19. The Court also 

finds it to be an exhaustive 41-page document that addresses every 

material aspect of the agreement between the lender and the 

borrower, including the effective dates, names of the parties, and 

the obligations for both borrower and lender. Therefore, the Court 

finds that the Credit Agreement is a fully integrated agreement. 

 In California, there are two steps to determining whether to 

admit parol evidence to aid in interpreting an integrated 

agreement. Pac. State Bank v. Greene, 110 Cal. App. 4th 375, 386 

(Ct. App. 2003). First, the court provisionally receives -- 

without actually admitting -- all credible evidence concerning 

whether the language is "reasonably susceptible" to the 

interpretation urged by a party. Id. If the court decides in 

light of this evidence that the language is reasonably susceptible 

to the interpretation urged, it proceeds to the second step, 

interpreting the language in light of the parol evidence to resolve 

this latent ambiguity. Id. 

 The Court first finds that there is no facial ambiguity in the 

Credit Agreement as to HVB's right to withdraw from CARDS after one 

year. When read as a whole, the Credit Agreement unambiguously 

gives HVB sole discretion to withdraw from the funding of the CARDS 

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loans after a year. Section 2.04(d) provides: 

Not less than 10 Business Days before the 

initial Spread Reset Date, nor less than 85 

Business Days before any other Spread Reset 

Date, each Bank shall advise the Borrower 

(through the Agent) whether such Bank will be 

willing to maintain its portion of the Loan in 

full (or, if applicable, in the lesser amount 

specified by the Borrower in the relevant 

Spread Reset Request) or in part for the 

relevant period commencing on such Spread Reset 

Date. 

Section 2.04(g) provides: "If a Bank elects in its sole discretion

not to deliver a Spread Bid to the Borrower, as provided in Section 

2.04(f), such Bank shall be deemed to have delivered to the 

Borrower a Mandatory Prepayment Election Notice designating the 

relevant Spread Reset Date as a Mandatory Prepayment Date with 

respect to the Loan." (emphasis added). 

 The Agreement defines the relevant terms used in these 

sections. Per section 1.01, a "Spread Reset Date" is "each day 

that is that last day of an Interest Period." Per section 2.07, 

the first "Interest Period" is the first month of the loan, the 

second is the following 11 months, and the following interest 

periods each have a duration of twelve months. Thus, not only does 

HVB have the sole discretion to demand prepayment on the loan 

during any Spread Reset Date, but mere inaction by the Bank -- 

failure to deliver a Spread Bid -- triggers mandatory prepayment by 

the borrower. 

 Sussex argues that facial ambiguity is suggested by the 

agreement's "Expiry Date" of December 4, 2030, id. § 1.01, as well 

as the use of the term "shall" in section 2.04(a) ("The Spread on 

the Loan shall be reset on each Spread Reset Date for each Interest 

Period ending on the next succeeding Spread Reset Date"). Opp’n to 

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MSJ at 5. These terms do not create a facial ambiguity. The 

Credit Agreement contemplated a loan that could last as long as

thirty years. When read in context, the expiry date merely 

provides the outer temporal limit for the parties' obligations 

under the loan. The use of "shall" in section 2.04(a) alone does 

not rise to the level of facial ambiguity, given the clear language 

and proximity of sections 2.04(d) and (g), which give the bank sole 

discretion on whether to deliver a Bid Spread or a Mandatory 

Prepayment Notice to the borrower on each Spread Reset Date. For 

these reasons, the Credit Agreement contains no facial ambiguity as 

to HVB's right to not renew the loans after one year.7

 

 Moving to step one of California's parol evidence rule, the 

Court provisionally admits the evidence that Sussex argues supports 

an alternative reasonable interpretation of an ambiguity. Sussex 

argues that the language in the Credit Agreement "is not so clear 

and explicit with respect to HVB's right to refuse renewal for any 

arbitrary reason," and argues that the language should be 

"interpreted in the 'ordinary and popular sense' consistent with 

the customs in this trade." Opp'n to MSJ at 6. 

 Sussex provides evidence it argues supports several 

alternative interpretations of the language. First, Sussex argues 

that HVB was required to renew the loans each year, "subject to 

commercial reasons." Id. at 6-7. In support of this 

 

7

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choice-of-law provision requiring interpretation in accordance with 

New York law, Credit Agreement § 10.09, the parol evidence analysis 

would end here, with the extrinsic evidence barred. Under New 

York's parol evidence rule, extrinsic evidence is barred if the 

agreement's meaning is complete, clear, and unambiguous on the face 

of the writing within its four corners. W.W.W. Associates, Inc. v. 

Giancontieri, 77 N.Y.2d 157, 161-63 (1990). 

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interpretation, it cites to an e-mail sent by DeGiorgio to Hahn 

during the CARDS negotiations, in which it quotes DeGiorgio as 

acknowledging the term of the loans as "30 years with annual rate 

reset provisions. . ." Opp'n to MSJ at 6. It also attaches an 

affidavit by Groves, who identifies himself as a former employee of 

myCFO, Inc. ("myCFO"). Groves Aff. ¶ 1. Groves claims that myCFO 

was hired by clients to advise on the benefits and risks of CARDS, 

that myCFO employees "negotiated with Dom Degiorgio and others 

regarding the terms of the loan agreement," and that myCFO "was 

assured [HVB] would renew the loans unless there was a valid 

business reason for not doing so." Id. ¶¶ 1, 3, 7. Groves claims: 

"Examples used by Mr. Degiorgio of a valid reason would be the 

deterioration of a client's credit worthiness or insufficient 

collateral to support the loan." Id. ¶ 7. 

 The second interpretation Sussex advances is one in which HVB 

had an absolute obligation to offer a reset interest rate. Opp'n 

to MSJ at 6-7. To support this interpretation, it cites deposition 

testimony from DeGiorgio which it argues demonstrates that 

DeGiorgio believed HVB was obligated to offer a reset interest 

rate. Id. Sussex also attaches, but does not cite to, a 

declaration by Hahn, in which Hahn describes the Sussex/HVB 

negotiations and alleges that he made it clear to HVB that its 

intent to renew the loan for thirty years was critical, because it 

"would enable the borrower to satisfy the business purpose 

requirement necessary to obtain the tax benefits of the CARDS 

transaction." Hahn Decl. I ¶¶ 5, 9-14. Nothing in Hahn's 

Declaration suggests that this obligation was subject to 

"commercial reasons." 

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 Finally, Sussex cites to deposition testimony from DeGiorgio 

which it claims suggest DeGiorgio believed the borrower, not the 

lender, had sole discretion as to whether to accept a reset offer. 

Opp'n to MSJ at 6-7. 

 The Court notes two distinct problems with the evidence 

proffered by Sussex. The first is that Sussex's only piece of 

evidence that predates the Agreement -- and thus not subject to the 

taint of litigation -- is quoted woefully out of context. Sussex 

quotes the DeGiorgio/Hahn E-mail with DeGiorgio acknowledging the 

term of the loans as "30 years with annual rate reset provisions 

. . . " Opp'n to MSJ at 6. The Court finds Sussex's use of 

ellipses here to be extremely misleading. The full portion of 

DeGiorgio's term states: "term of loan - 30 years with annual rate 

reset provisions, possibly resulting in a prepayment of the entire 

facility after 12 months or at any 12 month anniversary 

thereafter." DeGiorgio/Hahn E-mail (emphasis added). This e-mail 

does not suggest an ambiguity. Rather, it supports the 

construction clear from the face of the Credit Agreement. The 

agreement could last as long as thirty years, but the loan could be 

called by HVB on the second Spread Reset Date, or on any following 

Spread Reset Date. The extrinsic evidence proffered by Sussex 

suggests that HVB bargained for -- and ultimately received -- the 

right to call the loan every twelve months. Futhermore, nothing in 

this e-mail suggests the specific interpretation Sussex advances -- 

that HVB was required to renew the loans each year "subject to 

commercial reasons." 

 The second issue is that the parol evidence proffered does not 

render the Credit Agreement reasonably susceptible to a particular 

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alternative interpretation. To be admissible under California's 

parol evidence rule, this evidence must produce more than just an 

ambiguity; it must reveal an alternative meaning to which the 

contract's language is reasonably susceptible. Dore v. Arnold 

Worldwide, Inc., 39 Cal. 4th 384, 391 (2006). Here, Sussex's 

evidence does not suggest the language is reasonably susceptible to 

a particular meaning. Rather, it suggests several conflicting 

interpretations: that HVB's power to unwind the loans was subject 

to "commercial reasons;" that HVB had an absolute obligation to 

reset the interest rate; that borrower rather than lender had sole 

discretion to unwind the loans. Sussex has not attempted to show 

the Credit Agreement is susceptible to a specific alternative 

reading -- it has merely attempted to show ambiguity. The most 

plausible of the three interpretations -- that HVB was required to 

renew the loans subject to "commercial reasons" -- is only 

supported by the Groves Affidavit, and is contradicted by the 

portion of DeGiorgio's deposition testimony that Plaintiff cites. 

 The Court finds that in light of this evidence, the Credit 

Agreement is not reasonably susceptible of any reading other than 

the one clear from the plain text of the agreement, giving HVB sole 

discretion to call the loan after a year. As such, this evidence 

is at variance with the Credit Agreement and is barred by the parol 

evidence rule. 

 Sussex argues that even if its extrinsic evidence is barred, 

the Credit Agreement should be interpreted to avoid an "absurdity." 

Opp'n to MSJ at 5. Sussex does not explicitly state what that 

absurdity is. The Court assumes it is the "2800%+ return during 

the first year of the loan" that Sussex alleges and attempts to 

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prove HVB received in its MPSJ. See MPSJ at 9, Brady Decl. I Ex. A 

("HVB Internal Documents") at HVB_Sussex041263, 041242-041244. 

 The Court's interpretation of the Credit Agreement might be 

absurd if it allowed HVB to acquire a 2800 percent return while at 

the same time frustrating all the benefits due to the clients, but 

it does not do this. While Sussex claims that HVB's mandatory 

prepayment notice frustrated its clients' ability to receive the 

intended tax benefits of the transaction, SAC ¶ 14, the Credit 

Agreement permitted clients to sell their deposit in the first 

year, and in doing so, claim an immediate tax loss. Hahn Dep. I at 

276:12-277:21, 350:22-356:4. The evidence shows that clients did 

this -- Hahn admitted that he and his wife entered into a CARDS 

agreement as a client in 2000, and that he took a CARDS-related tax 

deduction in that same year. Id. While writing off such an amount 

might raise red flags with the IRS, it is clear from the evidence 

presented that all parties realized that such an immediate writeoff was not only a possibility, but arguably the purpose of the 

transaction. Thus, HVB stood to make substantial profits on these 

"zero-risk" loans, see DeGiorgio/Hahn E-mail, but the client could 

also receive a sizable tax benefit -- albeit one that all realized 

was of questionable legality -- within that first year. The 

results of the Court's construction of the Credit Agreement are not 

absurd. 

 Finally, Sussex cites City of Hope National Medical Center v. 

Genentech, Inc., 43 Cal. 4th 375, 397-398 (2008), for the 

proposition that "[w]here uncertainty continues to exist, the 

language must be interpreted against the party responsible for that 

uncertainty." Opp'n to MSJ at 6. However, HVB did not draft the 

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Credit Agreement. Hahn admitted that the agreements were provided 

by Sussex and were substantially similar to agreements Sussex had 

used earlier with other lenders. Hahn Dep. I at 45:11-51:23. As 

such, Sussex, not HVB, is responsible for any uncertainty, and so 

the Credit Agreement should be interpreted against Sussex, not HVB. 

 HVB argues that because the Credit Agreement unambiguously 

provided HVB with the right to not renew the loans at the first 

Spread Reset Date, any reliance by Sussex on statements to the 

contrary is unjustified and unreasonable. MSJ at 12. Sussex 

argues that whether reliance was reasonable is a question of fact 

not proper for summary judgment. Opp'n to MSJ at 4. While 

reasonable reliance is generally a question of fact, a party may 

not, as a matter of law, justifiably rely on a representation that 

is patently at odds with the express provisions of a written 

contract. Hadland v. NN Investors Life Ins. Co., 24 Cal. App. 4th 

1578, 1586 (Ct. App. 1994). The Court thus finds that Sussex has 

failed to provide any evidence to support a finding of 

misrepresentation and reasonable reliance –- two required elements 

of Sussex’s First Fraud Claim -- and thus summary judgment in HVB's 

favor is appropriate as to Sussex's First Fraud Claim. 

D. HVB's Causation Argument

 HVB argues that Sussex has failed to produce evidence of an 

injury caused by Sussex's alleged misrepresentations. To recover 

for fraud, a plaintiff must prove injury or damage and prove a 

causal connection between the defendant's alleged tortious conduct 

and the plaintiff's resulting injury. Goehring v. Chapman Univ., 

121 Cal. App. 4th 353, 354 (Ct. App. 2004). Even if a plaintiff 

has justifiably relied on a misrepresentation, "no liability 

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attaches if the damages sustained were otherwise inevitable or due 

to unrelated causes." Kruse v. Bank of America, 202 Cal. App. 3d 

38, 60 (Ct. App. 1988). 

 Likewise, "RICO requires as a threshold for standing an injury 

to business or property." Avalos, 596 F.3d at 592. This injury is 

determined by reference to state law, including injuries from 

state-law claims such as fraud, intentional interference with 

contract, and interference with prospective business relations. 

Diaz v. Gates, 420 F.3d 897, 900-01 (9th Cir. 2005). Sussex 

alleges no injuries under RICO other than the two that underlie its 

fraud claims. Thus, if Sussex has failed to allege a valid injury 

for its fraud claims, it has failed to allege one for its RICO 

cause of action, and all three claims should fail. 

 Even if the plaintiff can allege a corresponding state-law 

injury, the Ninth Circuit requires the consideration of three 

factors in determining whether a plaintiff has standing to bring a 

RICO action: 

(1) whether there are more direct victims of 

the alleged wrongful conduct who can be counted 

on to vindicate the law as private attorneys 

general; (2) whether it will be difficult to 

ascertain the amount of the plaintiff's damages 

attributable to defendant's wrongful conduct; 

and (3) whether the courts will have to adopt 

complicated rules apportioning damages to 

obviate the risk of multiple recoveries. 

 Mendoza v. Zirkle Fruit Co., 301 F.3d 1163, 1169 (9th Cir. 2002). 

 Sussex alleges two distinct injuries. First, it claims that 

it paid HVB more than $4 million in loan origination fees that it 

would not have paid if it had known HVB intended to require 

mandatory prepayment of the loans after one year. SAC ¶ 28. 

Second, it claims HVB's misrepresentations caused Sussex's clients 

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to sue Sussex, requiring Sussex to spend $330,451 defending itself. 

Id. ¶ 29. These are the only damages identified by Sussex for its 

fraud causes of action and its RICO claim. 

 1. Sussex's Loan Origination Fees

 HVB argues that the loan origination fees Sussex seeks are not 

a proper injury caused by HVB's conduct. MSJ at 18-19. HVB claims 

that Sussex was made better off -- not worse off -- through HVB's 

participation in CARDS, noting that Sussex earned approximately 

$14,795,000 in client fees from the CARDS transactions in which HVB 

was the lender. Id.; Rossi Decl. I Ex. C ("Pl.'s CARDS Fees"). 

HVB argues that the loan origination fees were "wholly derived from 

Sussex's clients." MSJ at 19. 

 Sussex counters by arguing that the fees received from its 

clients are irrelevant, comparing its predicament to that of "a 

general contractor who is paid to build a house." Opp'n to MSJ at 

8 n.4. The general contractor, argues Sussex, is "free to hire 

whoever he wants and pay them accordingly with no input from the 

client." Id. If a supplier delivers an inferior product, the 

general contractor can "sue the supplier for fraud if he knowingly 

promised one product but delivered another . . . . even if the 

client didn't complain." Id. 

 Sussex's analogy is flawed. If a plaintiff contracts in 

reliance on the fraud of a defendant, the plaintiff may elect 

either the contract remedy (restitution based on rescission) or the 

tort remedy (affirmance and damages), but not both. Hjorth v. 

Bernstein, 44 Cal. App. 2d 561, 564, (Ct. App. 1941). The 

hypothetical general contractor above could seek to rescind the 

contract, but would have to return any consideration received. 

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Imperial Cas. & Indem. Co. v. Sogomonian, 198 Cal. 3d 169, 182, 

(1988). 

 Sussex does not seek rescission, however, and so it is limited 

to damages in tort. A cause of action in fraud would exist in the 

hypothetical above only if the general contractor was injured -- 

for example, if the contractor had to purchase a second batch of 

the product from another supplier to replace the inferior product, 

or if the contractor had to reimburse his client for damages 

resulting from use of the inferior product. Sussex does not claim 

that it assisted its clients in finding a bank to replace HVB, thus 

incurring an additional expense. Nor does it claim that it 

refunded these fees to its clients, or that HVB's misrepresentation 

led to a decrease in goodwill for Plaintiff among its clients. 

Sussex merely states: "Had Plaintiff known of HVB's intent to 

unwind these loans at the first anniversary, HVB would not have 

been used as the lender in these loans." Opp'n to MSJ at 8. This 

is not an injury. Because the payment of fees is not an injury in 

itself, Sussex's payment of loan origination fees does not 

constitute an injury for its fraud and RICO claims. 

 Sussex argues that HVB "should not be allowed to retain its 

ill gotten gains," Opp'n to MSJ at 8, and argues that a 

disgorgement remedy is appropriate under Ward v. Taggart, 51 Cal. 

2d 736 (1959). Sussex offers a summary of Ward: 

[P]laintiff asked his real estate broker, 

Thomsen, to search for properties for purchase. 

Defendant Taggert told Thomsen that as the 

exclusive agent for Sunset Oil Company, he had 

several acres available for sale. Thomsen 

submitted plaintiff's offer of $4,000 per acre 

to Taggart. Taggert told Thomsen that Sunset 

would not take less than $5,000 per acre. The 

offer was made, and the deal closed. Taggert 

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submitted his own offer of $4,000 per acre to 

Sunset then re-sold the land to plaintiff at 

$5,000 pocketing the $72,049.20 differential. 

Judgment was entered against Taggart for this 

compensatory damage, and $36,000 punitive 

damages. 

 Opp'n to MSJ at 9. 

 Sussex's summary of Ward is correct, but unhelpful. Ward

involved a defendant with a statutory fiduciary duty to the 

plaintiff, as provided by Section 10150 of California’s Business 

and Professions Code. "In the absence of a fiduciary relationship, 

recovery in a tort action for fraud is limited to the actual 

damages suffered by the plaintiff." Ward, 51 Cal. 2d at 741. In 

California, an ordinary arms-length transaction between a bank and 

borrower does not give rise to a fiduciary duty. Mitsui Mfrs. Bank 

v. Super. Ct., 212 Cal. App. 3d 726, 729 (Ct. App. 1989). 

Furthermore, Sussex was not even a party to the Credit Agreements, 

but rather was the agent representing the LLCs and Sussex's 

clients. As such, a disgorgement remedy is inappropriate here.8

 

For the above reasons, Sussex has failed to show it can recover 

loan origination fees paid to HVB as damages for its fraud claims 

and its RICO claims. 

2. Sussex's Legal Costs

 Sussex claims HVB's conduct caused Sussex to incur legal costs 

in defending itself in actions brought by its CARDS clients. SAC ¶ 

29. The Court notes that this is not an action in contribution, 

 

8

 Sussex also cites California Civil Code Section 2224 as support 

for its disgorgement argument. MPSJ at 21-22. Section 2224 

states: "One who gains a thing by fraud . . . is . . . an 

involuntary trustee of the thing gained," but this statute only 

applies to transactions involving some interest in property. Kraus 

v. Willow Park Pub. Golf Course, 73 Cal. App. 3d 354 (Ct. App. 

1977). Thus it is not applicable here. 

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subrogation, or indemnity -- Sussex claims that as a consequence of 

HVB's misrepresentation of its lack of intent to renew the loans 

for thirty years and its alleged failure to properly "fund" the 

loans, Sussex was sued by its clients. Id. HVB argues that its 

alleged misrepresentations are not a cause of Sussex's current 

legal trouble. MSJ at 15-18. HVB argues that a far more direct 

cause of the lawsuits was Sussex's failure to notify its clients 

that the author of the "favorable tax opinion" used to validate 

CARDS was receiving payments from Sussex for each CARDS 

transaction, and suggests that Sussex committed fraud against its 

clients by failing to disclose these payments. Id.

 Sussex did not respond to HVB's causation arguments in its 

Opposition. See Opp'n to MSJ. However, Sussex's theories of 

causation can be gleamed from statements made in other filings 

before the Court. One theory suggested, but not explicitly stated, 

is that HVB's conduct brought CARDS to the attention of the IRS. 

This theory is suggested by Sussex's expert, Boak, who writes in 

her expert report: "It has also been my experience that the IRS 

chooses its litigation vehicles carefully, preferring to wait for a 

case with 'egregious facts' than to risk a precedent-setting loss 

in court." Rossi Decl. II Ex. T ("Boak Expert Report") at 5. By 

not renewing the CARDS loans, Boak alleges HVB made "the 30-year 

term of the transaction appear to be bogus." Id. at 6 (emphasis 

added). 

 To the extent that Sussex is arguing that its harms were 

caused by HVB "ringing the alarm" on CARDS by bringing an unlawful 

tax shelter to the attention of the IRS, this argument must fail as 

a matter of law. If HVB's actions merely contributed to the 

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appearance of fraud, but CARDS was fraudulent as designed, Sussex's 

claims would be barred by the doctrine of in pari delicto. Bateman 

Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 

310-11 (1985) (holding, within the securities context, that in pari 

delicto bars recovery "only where (1) as a direct result of his own 

actions, the plaintiff bears at least substantially equal 

responsibility for the violations he seeks to redress, and (2) 

preclusion of suit would not significantly interfere with the 

effective enforcement of the securities laws and protection of the 

investing public.") Sussex does not deny that it is responsible 

for the design and marketing of CARDS; the record is clear that the 

CARDS strategy was fully formed before HVB agreed to serve as a 

CARDS lender. If CARDS was fraudulent as designed, both HVB and 

Sussex would bear substantially equal responsibility, and relief 

for Sussex would be barred by law. 

 Sussex's other theory suggested in Boak's Expert Report is 

that CARDS was not fraudulent as designed, but that HVB's failure 

to renew the loans caused CARDS to be fraudulent, which led the IRS 

to identify CARDS as a "listed transaction," which in turn led to 

tax liabilities for the CARDS clients, which in turn led to the 

lawsuits filed by the CARDS clients against Sussex. See Boak 

Expert Report at 2 ("the CARDS transaction was legitimate, except 

that . . . the failure by HVB to properly execute the transaction 

as envisioned by its promoters doomed it from the outset"). This 

theory of causation requires HVB's conduct to be one of the reasons 

for the IRS's decision to list CARDS. 

 HVB points out that in the IRS's 2002 notice in which the 

agency listed CARDS, and in a subsequent "Coordinated Issue Paper" 

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issued by the IRS on October 15, 2004, the term of the loan was not 

given as a reason for listing the transaction. See MSJ at 16, IRS 

Notice 2002-21, IRS Issue Paper. The IRS Issue Paper provided 

several reasons for its conclusion, including that the client's 

loss was not bona fide, that the loan to the LLC did not constitute 

genuine indebtness, and "the transaction as a whole lacks economic 

substance and business purpose apart from tax savings." IRS Issue 

Paper at 2. 

The Court finds that Sussex has provided no evidence to 

support the argument that CARDS's listing was due to HVB's actions 

rather than the basic design of CARDS. The Court finds each of the 

given reasons for the IRS's action to be evident from the basic 

design of CARDS. That the loss is not bona fide is clear from the 

fact that the client could claim a tax loss far exceeding his 

actual position in the loan, in part by "borrowing" the foreign 

LLC's tax-free status. DeGiorgio Dep. at 223:5-224:18, Boak Dep. 

at 77:3-14. Lack of "genuine indebtedness" is evident in the fact 

that the LLC was required to pledge back the entirety of the loan 

proceeds to the bank, effectively creating a "zero-risk" loan for 

the lenders. Boak Dep. at 77:12-14, 77:24-78:19; DeGiorgio/Hahn Email. 

 Sussex admits that, over the short term, the loan costs and 

negative carry effectively remove any legitimate business purpose 

from the loan, leaving tax avoidance as the sole purpose for a 

client to participate in CARDS. Opp'n to MSJ at 2. Sussex argues 

that this is why HVB's thirty-year commitment was so important: 

CARDS only has the semblance of a legitimate business purpose if it 

lasts for thirty years, because only deep into the life of the loan 

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will the client's costs be amortized. Id. But CARDS's structure 

gave both the bank and the borrower the right to call the loan once 

per year. See CARDS Presentation at SUS_HVB034435, Credit 

Agreement § 2.04(g). Furthermore, the lender had an unfettered 

right to transfer the loan to another bank. Credit Agreement 

§ 2.06. Because the parties' ability to wind up the loan earlier 

than thirty years was hard-wired into CARDS, HVB's lack of intent 

to renew after a year cannot be a cause of CARDS's listedtransaction status. 

 Similarly, the conduct underlying Sussex's Second Fraud Claim 

-- HVB's alleged failure to properly fund the loans in individual 

accounts -- has no causal bearing on the IRS's subsequent 

determinations. Nowhere in IRS Notice 2002-21 or its Coordinated 

Issue Paper does the IRS suggest its reasoning was based in part on 

lenders' failure to follow protocol. Sussex provides no theory 

linking this alleged "failure to fund" with either injury. 

 Boak's expert testimony alone does not create a dispute of 

material fact here, because to the extent Boak alleges HVB "doomed" 

CARDS, she fails to comply with Rule 56(e) of the Federal Rules of 

Evidence. Boak does not "set forth specific facts showing that 

there is a genuine issue for trial." See U.S. v. Various Slot 

Machines on Guam, 658 F.2d 697, 701 (9th Cir. 1981). Boak merely 

presents a conclusion -- that HVB's conduct alone doomed CARDS -- 

without a coherent statement on how she arrived at that conclusion. 

 The Court's conclusion here is consistent with a recent 

opinion by the U.S. Tax Court on the validity of tax losses 

generated through CARDS. Country Pine Fin., LLC v. Comm'r of 

Internal Revenue, T.C. Memo, 2009-251, No. 1399-07, 2009 WL 3678793 

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(Nov. 5, 2009). In Country Pine Finance, the U.S. Tax Court 

disallowed losses in a CARDS transaction funded by another bank 

because the CARDS transaction "lacked economic substance." Id. at 

*16. In the opinion of the court, the transaction lacked economic 

substance because it "consisted of prearranged steps entered into 

to generate a tax loss; the loan proceeds were never at risk and 

the transaction giving rise to the tax loss was cashflow negative." 

Id. at *12. Such is true with every CARDS transaction, and evident 

from the agreements governing the transaction. Regardless of the 

parties' intent, the agreements forming a CARDS transaction -- 

particularly, the Credit Agreement negotiated by Sussex and HVB -- 

produce a transaction where there is no genuine indebtedness and in 

which the client has the opportunity to claim an inflated tax loss. 

It follows then that CARDS's listing by the IRS -- the event 

that triggered Sussex's clients' lawsuits -- was caused not by any 

actions of HVB carrying out the loan, but rather by the design of 

CARDS itself. Thus there exists no possible line of causation 

linking HVB's alleged misrepresentations and Sussex's attorney 

fees. 

Because both of Sussex's would-be injuries are not caused by 

HVB's alleged wrongdoing, Sussex's two fraud claims must fail. 

Because these injuries also provide the basis for Sussex's RICO 

claim, the RICO claim as well must fail. The Court thus need not 

determine if the Mendoza factors favor Sussex's RICO standing. 

/// 

/// 

/// 

/// 

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V. CONCLUSION 

 The Court finds that because Plaintiff Sussex Financial 

Enterprises, Inc. has failed to produce any admissible evidence 

establishing the misrepresentation and justifiable reliance 

elements of Plaintiff's First Fraud Claim, this claim must fail. 

The Court also finds that because Plaintiff has failed to provide 

evidence that the conduct of Defendants Bayerische Hypo-Und 

Vereinsbank AB, HVB Risk Management Products, Inc., and HVB U.S. 

Finance, Inc. was a legal cause of its alleged injuries, 

Plaintiff's First and Second Fraud Claims and its RICO Claim must 

fail. Accordingly, the Court GRANTS the Motion for Summary 

Judgment filed by Defendants and DENIES the Motion for Partial 

Summary Judgment by Plaintiff. 

IT IS SO ORDERED. 

Dated: July 20, 2010 

UNITED STATES DISTRICT JUDGE

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