Court Opinion

ID: 175008
Source: CourtListenerOpinion
Date Created: 2010-09-08 23:07:02+00
Date Added: 2024-06-11T17:25:32.815325
License: Public Domain

NOT FOR PUBLICATION

                    UNITED STATES COURT OF APPEALS                            FILED
                            FOR THE NINTH CIRCUIT                             SEP 08 2010

                                                                          MOLLY C. DWYER, CLERK
                                                                            U.S. COURT OF APPEALS

In the Matter of: USA COMMERCIAL                 No. 09-15632
MORTGAGE COMPANY.
                                                 D.C. No. 2:07-cv-00892-RCJ
                                                 District of Nevada,
DONNA CANGELOSI; et al.,                         Las Vegas

              Plaintiffs - Appellants,
                                                 MEMORANDUM*
  v.

SILAR ADVISORS, LP; et al.,

              Defendants - Appellees,

WILLIAM A. LEONARD, Jr., Trustee for
the Estate of Asset Resolution LLC,

              Trustee - Appellee.

Before: GOODWIN and W. FLETCHER, Circuit Judges, and MILLS, Senior
District Judge.**

        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
       **
             The Honorable Richard Mills, Senior United States District Judge for
the Central District of Illinois, sitting by designation.
                    Appeal from the United States District Court
                             for the District of Nevada
                    Robert Clive Jones, District Judge, Presiding

                     Argued and Submitted November 3, 2009
                     Submission Withdrawn November 6, 2009
                         Resubmitted September 7, 2010
                            San Francisco, California

      Appellants Cangelosi, Castillo, Chaudhry, Eller, Graham, Hess, Knoles,

Kriss, Lafayette, Lucas, Maraden, Mortensen, Newman, Schoonover, Simon,

Tengan, Westbrook, and Zawacki (collectively, “Appellants”) appeal district court

orders denying Appellants’ motion to vacate a preliminary injunction, granting

Appellees Silar Advisors, L.P., Silar Special Opportunities Fund, L.P., and Asset

Resolution, LLC’s (collectively, “Appellees”) motion to modify the preliminary

injunction to substitute the beneficiary, and denying Appellants’ request for an

injunction bond. We have jurisdiction under 28 U.S.C. § 1292(a)(1). We affirm in

part and reverse in part.

I. FACTUAL AND PROCEDURAL HISTORY

      USA Commercial Mortgage Company (“USACM”) was a short-term high

interest rate mortgage loan underwriter, originator, broker, funder, and servicer.

USACM solicited individuals and entities (the “direct lenders”) to invest in

fractionalized interests in those loans. There were often 200 to 300 direct lenders

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for a single loan transaction. This litigation involves servicing rights to

approximately 60 loans currently valued at approximately $485 million dollars.

Appellants are some of those direct lenders.

      USACM filed voluntary Chapter 11 bankruptcy in 2006 and its assets were

sold at auction. The loan servicing rights were a valuable asset because of the loan

servicing fees and the possibility of default interest, late charges, success fees, and

other fees. Compass Partners, LLC (“Compass”), submitted the highest bid for the

assets.

      The recognized bankruptcy committees, including the committee

representing the direct lenders, relied on Compass’s ability to obtain financing for

the $67 million purchase price. Appellee Silar Advisors, L.P. (“Silar”) financed

Compass’s purchase, and perfected a security interest in the assets.

      Shortly after confirmation of the bankruptcy plan, some dissatisfied direct

lenders wanted to terminate Compass as servicer. On May 18, 2007, those direct

lenders sent a letter to Compass that purported to terminate Compass as servicer,

and sent letters to the borrowers that stated that Compass was no longer the

servicer and that payments should be made directly to the lenders.

      The dissatisfied direct lenders sued Compass in federal court, and the case

was transferred to bankruptcy court as an adversary proceeding. The bankruptcy

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court issued a stand-still order to preserve the status quo as it existed on May 15,

2007, before the direct lenders sent the letters or filed the suit. The order stated

that Compass would remain the loan servicer and the borrowers would pay

Compass. The bankruptcy court then transferred the case back to district court.

      The dissatisfied direct lenders moved in the district court to dissolve the

bankruptcy court’s stand-still order. Instead of dissolving the order, the district

court continued it as a preliminary injunction on November 6, 2007. To protect the

direct lenders, the preliminary injunction orders, inter alia, that Compass must

employ a Nevada-licensed subservicer; Compass must place any disputed fees in a

remittance account; and Compass may not transfer or encumber its right as a loan

servicer, except the existing encumbrances to Silar.

      By this time, Compass’s assets were drained. Silar foreclosed on Compass

and created an affiliate company, Asset Resolution, LLC (“Asset Resolution”), to

hold the loan servicing rights. The direct lenders allege that Compass and Asset

Resolution performed badly as servicer by, for example, failing to pay property

taxes, failing to perform maintenance, and improperly refusing loan payoff offers.

      On January 15, 2009, a group of direct lenders filed a motion to vacate the

preliminary injunction. The court stated that because Compass was no longer

actively participating in the litigation, there would be no basis for continuing the

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injunction unless Asset Resolution substituted for Compass. On March 2, 2009,

Appellees filed a motion to substitute Asset Resolution for Compass under Federal

Rule of Civil Procedure 25(c). At the combined hearing on the motions,

Appellants asked the court to impose an injunction bond if it granted Appellees’

motion to substitute. The court denied Appellants’ motion to vacate, granted

Appellees’ motion to substitute, and denied Appellees’ request for an injunction

bond. Appellants appeal those orders.

II.   DISCUSSION

      This Court reviews for abuse of discretion a grant of a preliminary

injunction. See A&M Records, Inc. v. Napster, Inc., 284 F.3d 1091, 1098 (9th Cir

2002). If a party did not appeal the underlying preliminary injunction but does

appeal a modification to the injunction, review is generally limited to the propriety

of the modification and does not reach the underlying injunction. Gon v. First

State Ins. Co., 871 F.2d 863, 866–67 (9th Cir. 1989). However, the extent of

review depends on the extent to which the modification implicates the underlying

injunction because “a modification may be so fundamental to the original

injunction, or may otherwise present issues so inextricable from the validity of the

original injunction, that review must include the whole package.” Id. Likewise, if

a party did not appeal the underlying injunction but does appeal a denial of a

                                         -5-
motion to modify or vacate, review is generally limited to the propriety of the

denial of the motion to modify or vacate unless the new issues are inextricably

intertwined with the underlying injunction. Id.

      A.     Whether the District Court Erred by Not Requiring an Injunction
             Bond

      The preliminary injunction issued without a bond requirement on November

6, 2007. As the district court noted, Appellants’ time to appeal the denial of a bond

requirement for the underlying injunction has expired. See Fed. R. App. P.

4(a)(1)(A) (“In a civil case, except as provided in Rules 4(a)(1)(B), 4(a)(4), and

4(c), the notice of appeal required by Rule 3 must be filed with the district clerk

within 30 days after the judgment or order appealed from is entered.”).

      At the combined hearing on Appellants’ motion to vacate and Appellees’

motion to substitute the beneficiary, Appellants asked the court to modify the

injunction by imposing an injunction bond if it substituted Asset Resolution as the

beneficiary. Compass and Asset Resolution’s alleged failures as loan

servicer–including allegedly failing to properly distribute money, failing to pay

property taxes, and improperly refusing loan payoff offers–are a sufficient change

in circumstances that the district court should have considered Appellants’ request

for an injunction bond. Those harms allegedly caused more damage to the direct

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lenders than could be compensated by the amounts held in the remittance account.

Rather than consider this request, district court rejected the request as untimely.

We disagree with the district court’s conclusion on the timeliness of the request.

Accordingly, we remand to the district court for findings on whether an injunction

bond is warranted.

      B.     Whether the District Court Erred by Substituting Asset Resolution as
             Beneficiary

      Appellees argue that the order substituting Asset Resolution as beneficiary

of the preliminary injunction is not an appealable order. Their only authorities for

that proposition are Appellants’ “admission” that the order is not appealable and a

Ninth Circuit case, Educ. Credit Mgmt. Corp. v. Bernal (In re Bernal), 207 F.3d

595 (9th Cir. 2000). Appellants’ “admission” is merely their characterization of a

statement made by the district court, and it cannot be considered a party admission.

Moreover, the district court did not state that the modification is not appealable,

but rather stated only that the modification did not create a “brand-new preliminary

injunction” that reset the appeals period for all issues. Therefore, Appellees’

“admission” is no help to Appellants.

      Appellants cite Educ. Credit Mgmt. for the proposition that party

substitutions under Federal Rule of Civil Procedure 25(c) are not appealable.

                                          -7-
Educ. Credit Mgmt. supports the opposite conclusion. There, a bankruptcy court

denied a third party’s motion to intervene as a matter of right or for permissive

intervention. 207 F.3d at 597. This Court concluded that the third party should

have filed a motion to substitute under Rule 25(c). Id. at 598. In doing so, the

Court cited cases that reviewed Rule 25(c) orders under the abuse of discretion

standard, although those precedent cases denied, rather than granted, party

substitutions. Id. (citing Dodd v. Pioche Mines Consol., Inc., 308 F.2d 673, 674

(9th Cir. 1962), Sun-Maid Raisin Growers v. California Packing Corp., 273 F.2d

282, 284 (9th Cir. 1959), and Collateral Control Corp. v. Deal (In re Covington

Grain Co., Inc.), 638 F.2d 1362, 1364 (5th Cir. 1981)).

      We need not decide whether review extends to orders granting, rather than

denying, motions to substitute because we find no basis for reversal. Appellants’

only argument against the substitution, aside from the bond issue discussed above,

is that the order binds non-party direct lenders who did not receive the notice

required by Federal Rule of Civil Procedure 65(a)(1). Appellants’ briefs do not

state that any Appellant lacked notice, and counsel was unable to state at argument

that any Appellant lacked notice. Thus, Appellants are improperly attempting to

raise the rights of third parties not presently before the court. See Wedges/Ledges

of California v. City of Phoenix, 24 F.3d 56, 61 (9th Cir. 1994) (“The prudential

                                         -8-
limitations [on standing] include a requirement that the plaintiff assert his own

rights, rather than rely on the rights or interests of a third party . . . .”) (internal

quotation marks and citation omitted).

       We affirm the order substituting Asset Resolution as beneficiary.

       C.     Whether the District Court Erred by Denying Appellants’ Motion to
              Vacate

       Appellants argue that the preliminary injunction and the modification should

be vacated for lack of findings regarding irreparable injury and likelihood of

success on the merits. See Winter v. NRDC, Inc., 129 S. Ct. 365, 374 (2008);

Alliance for the Wild Rockies v. Cottrell, No. 09-35756, 2010 U.S. App. Lexis

15537, at *8–9 (9th Cir. July 28, 2010). Such arguments are untimely as to the

underlying injunction. See Fed. R. App. P. 4(a)(1)(A). Appellants may appeal

only the modification, or portions of the underlying injunction inextricably

intertwined with the modification, based on lack of irreparable harm or likelihood

of success. See Gon, 871 F.2d at 866–67.

       Appellants argue that Appellees face no irreparable harm because Appellees

have only a financial interest in the loan servicing agreements and can sue for

damages. This argument is directed at the underlying injunction and is untimely.

                                             -9-
      Appellants argue that Appellees are not likely to prevail on the merits

because Appellees were terminated as servicer, and because Appellees do not meet

Nevada’s requirements for loan servicers. Regarding termination, Appellants

argue that the direct lenders terminated Appellees as a matter of Nevada law and as

a matter of agency law. The district court stated, “The question of Compass’s

termination has not been resolved as it requires the determination of factual

issues.” Even Appellants acknowledge “that issue has yet to be determined.”

Accordingly, the alleged termination provides no basis at this time for reversal.

Appellants also argue that a preliminary injunction may not prevent the lenders

from terminating Asset Resolution as servicer. See Woolley v. Embassy Suites,

Inc., 227 Cal. App. 3d 1520, 1529–31 (1991). This is a challenge to the underlying

injunction and is untimely.

      Appellants argue that Appellees are unlawfully acting as agent to the direct

lenders without a valid power of attorney as required by Section 645B.330 of the

Nevada Revised Statutes. The district court found that Appellees are neither

mortgage brokers nor located in Nevada, rendering the statute inapplicable to

Appellees. Appellants do not dispute the court’s findings, but argue that the loan

servicing agreements’ choice of law clause requires Appellees to comply with

Section 645B.330. We do not read this clause, which relates to construction of the

                                        -10-
contract, as requiring Appellees to comply with Section 645B.330 even though

they are neither mortgage brokers nor located in Nevada.

      Thus, the modification is not improper because Appellees are unlikely to

succeed on the merits.

      Appellants argue that Appellees should be denied injunctive relief under the

unclean hands doctrine because the district court “announced its apparent view”

that Appellees’ predecessor, Compass, engaged in inequitable conduct. This

argument is directed at the underlying injunction, and Appellants did not move to

vacate the injunction until approximately nine months after the district court’s

statement. Moreover, Appellants do not allege that they raised this argument to the

district court. Even if Appellants did raise this argument to the district court, this

Court reviews for abuse of discretion a denial of an unclean hands defense, even if

the denial was sub silento. See GoTo.com, Inc. v. Walt Disney Co., 202 F.3d 1199,

1209–10 (9th Cir. 2000). Given the conduct of the parties to this case, we find no

abuse of discretion in the district court’s rejection of this argument.

      Appellants argue that the preliminary injunction freezes their assets, and that

is not allowable under Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund,

527 U.S. 308 (1999). That case is not helpful to Appellants. There, the Court held

that a district court cannot issue a preliminary injunction to freeze assets of a

                                          -11-
defendant that are unrelated to the case to ensure the defendant will have money to

pay a future judgment. Id. at 333. Here, the preliminary injunction relates to

property at issue in the case.

       Finally, Appellants argue that Appellees have a conflict of interest because

their primary duty is to their own shareholders rather than the direct lenders. We

find no merit in this argument.

       Thus, the district court did not abuse its discretion in denying Appellants’

motion to vacate the preliminary injunction.

III.   CONCLUSION

       This case is remanded for the district court to determine whether an

injunction bond is warranted. The interlocutory orders are affirmed in all other

respects.

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