Opinion ID: 494670
Heading Depth: 2
Heading Rank: 2

Heading: Security or Sale

Text: 10 The district court found that the Fox investors held ownership interests in their notes and trust deeds, whereas the Bear investors merely held security interests in their note and trust deed. The district court further found that because the Bear investors did not have physical possession of the contested note and trust deed, they failed to perfect their security interests according to Division 9 of the California Commercial Code; therefore, the court viewed the Bear investors as general unsecured creditors of Golden Plan. 11 The Bear investors contend on appeal that: 1) the district court's finding of fact (that neither Golden Plan nor the Bear investors intended sales transactions of the note and trust deed) is unsupported by the record, 1 and 2) the district court erred in applying Division 9 of the California Commercial Code to the transactions at issue. 12 Both contentions hinge on the proper characterization of the transactions between Golden Plan and the Bear investors. The parties in the instant case correctly agree that Division 9 does not apply to an assignment intended to be a sale of a note or trust deed. 2 Consequently, the only issue on appeal is how to characterize the transactions between Golden Plan and the Bear investors: did the parties intend outright sales of the note and trust deed or did they intend loans for security? 13 We reverse as clearly erroneous the district court's determination that the transactions at issue were loans from the Bear investors to Golden Plan. See Semel v. Dill (In re Dill), 731 F.2d 629, 631 (9th Cir.1984).
14 Whether the parties intended outright sales or loans for security is determined from all the facts and circumstances surrounding the transactions at issue. See Develop-Amatic Engineering v. Republic Mortgage Co., 12 Cal.App.3d 143, 149, 91 Cal.Rptr. 193, 196 (1970). Both documentary and testimonial evidence in the record clearly show that Golden Plan and the Bear investors intended sales of the note and trust deed. 15 The documentation effecting the transfer of the note and trust deed indicates that the Bear investors received absolute ownership of the instruments. On March 19, 1981, Billie Ruth Only (the borrower) signed a promissory note naming as payee Roscoe Technology, Inc. (Roscoe), a Golden Plan affiliated corporation; repayment of the borrower's promissory note was secured by a deed of trust encumbering the borrower's property. On May 13, 1981, in exchange for cash payments from each of the Bear investors, Roscoe assigned its interest in the borrower's promissory note and deed of trust to the Bear investors. The assignment was evidenced by a document entitled Assignment of Deed of Trust, which provided that Roscoe grants, assigns and transfers [to the Bear investors] ... all beneficial interest under that certain Deed of Trust ... TOGETHER with the note or notes therein described or referred to, the money due and to become due thereon with interest, and all rights accrued or to accrue under said Deed of Trust. The assignment of the note was also separately evidenced by a document entitled Assignment of Note, which provided that Roscoe assigns, sets over and transfers all rights, title and interest in and to the note to the Bear investors WITHOUT RECOURSE. These documents suggest that the assignments at issue were unconditional and absolute transfer of the note and trust deed by Roscoe to the Bear investors. 16 Other than the Assignment of Deed of Trust and the Assignment of Note, the transactions between Golden Plan and the Bear investors were evidenced by documents entitled Lenders Instructions executed by each of the Bear investors. The Lenders Instructions, which are a Golden Plan form, provided that State Loan Servicing Inc. (State Loan) would act as the collection agent for the loans between the borrower and the Bear investors. State Loan's contractual duties to the Bear investors included: 1) collecting monthly payments from the borrower; 2) forwarding payments to the Bear investors; and 3) handling the paperwork relating to foreclosure, if foreclosure became necessary. Such loan collection agreements suggest that the Bear investors, rather than Golden Plan or State Loan, actually owned the note. In other words, Golden Plan and State Loan merely served as intermediaries between the borrower and the Bear investors, earning fees by arranging and servicing the loans. Consequently, the Lenders Instructions reinforce the conclusion that the parties intended to make an outright transfer of the promissory note to the Bear investors. 17 But more importantly, the Lenders Instructions indicate that despite a practice known as advancing, the Bear investors received no contractual guarantee of repayment or compensation in case of foreclosure. Such assumption of risk strongly suggests that the Bear investors were not in a creditor-debtor relationship with Golden Plan. Cf. Castle Rock Industrial Bank v. S.O.A.W. Enterprises, Inc. (In re S.O.A.W. Enterprises, Inc.), 32 B.R. 279, 282 (Bankr.W.D.Tex.1983) (transactions were disguised loans rather than sales of participation interests where investor ran no real risk). 3 The Lenders Instructions provided that in case of late payment by the borrower, State Loan was authorized either to forward the payments including the applicable late charges when received from the borrower or to advance payments in consideration of which State Loan was entitled to retain all late charges due. 4 Although the Bear investors could elect to receive payments notwithstanding the fact that the borrower had defaulted on the underlying obligation, the Bear investors bargained for such a benefit by forsaking all the late charges due. Moreover, such an option does not guarantee payment of any sort in the event of foreclosure. Consequently, the practice of advancing does not alter the nature of the transactions at issue as sales. 18 In addition to the documentary evidence, testimony presented by the Bear investors, 5 as well as testimony of the trustee himself, indicates that sales transactions were intended. The Bear investors testified that: 1) they did not believe that they were lending money to either Golden Plan or Roscoe; 2) they thought their funds would go directly to the borrower, whose occupation and income, and the estimated value of whose property had previously been disclosed to them in the prospectus they each received; 6 and 3) they expected the borrower, rather than Golden Plan or Roscoe, to repay the obligation evidenced by the note. The trustee also admitted that the Bear investors had purchased interests in the note from Roscoe rather than loaned money to Roscoe or Golden Plan secured by an assignment of Roscoe's interest in the note. 19 In sum, the testimony and documentation in the record indicate that the Bear investors bargained for, and obtained a note and trust deed from the borrower and certain services, such as advances, from Golden Plan and State Loan. Because the parties intended sales of the note and trust deed, and because there is no sound legal basis for distinguishing between the Bear investors and the Fox investors, we reverse as clearly erroneous the district court's determination that the Bear investors received only security interests from Golden Plan. 7 Assuming arguendo that the district court improperly admitted into evidence as hearsay the trustee's testimony regarding Golden Plan's business practices, we conclude that sufficient evidence apart from the trustee's testimony supports a determination that the transactions were sales of the instruments, and not loans to Golden Plan. 8 Because the parties in the instant case intended sales of interests in the Bear instruments, the district court further erred in applying Division 9 of the California Commercial Code to the transactions at issue.