Opinion
2d Crim. No. B226048 Super. Ct. No. F423908
09-01-2011
THE PEOPLE, Plaintiff and Respondent, v. HERITAGE OAKS BANK, Claimant and Appellant.
Ziyad I. Naccasha, Michael M. McMahon; Carmel & Naccasha, for Appellant. Kamala D. Harris, Attorney General, Dane R. Gillette, Chief Assistant Attorney General, Pamela C. Hamanaka, Senior Assistant Attorney General, Susan Sullivan Pithey, Supervising Deputy Attorney General, Taylor Nguyen, Deputy Attorney General, for Plaintiff and Respondent.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.111.5.
(San Luis Obispo County)
Heritage Oaks Bank (HOB) appeals a June 2, 2010 order denying its third party claim to release property seized for victim restitution purposes in a real estate securities fraud prosecution. (Pen. Code, § 186.11.) The trial court found that trust deeds recorded by HOB in 2007 and 2008 did not create a legitimately acquired security interest. (§ 186.11, subd. (i)(3); Q-Soft, Inc. v. Superior Court (2007) 157 Cal.App.4th 441, 449-450 (Q-Soft).) We affirm.
All statutory references are to the Penal Code unless otherwise stated.
Freeze and Seize Law
The "Freeze and Seize Law" provides that in aggravated white collar criminal cases, the superior court may take possession of assets under the criminal defendant's control and preserve the assets for the payment of victim restitution. (§ 186.11, subd. (a)(1); People v. Semaan (2007) 42 Cal.4th 79, 82.) "Where a defendant is convicted of a section 186.11 offense, the trial court is required to make a finding at that time as to what portion of the frozen property or assets, if any, may be levied upon to pay fines or victim restitution. [Citation.]" (Q-Softt, supra, 157 Cal.App.4th at p. 447.) An innocent third party claiming an interest in a frozen asset may file a verified claim for release of the property. (§ 186.11, subd. (e)(6); People v. Mozes (2011) 192 Cal.App.4th 1124, 1131.)
HOB claims that it acquired a legitimate security interest in three properties when it recorded blanket trust deeds to collateralize an antecedent debt on a revolving open line of credit.
EFI Securities Fraud
In 2008 Karen Guth and Joshua Yaguda were arrested on multiple counts of securities fraud involving 3,000 investors and more than $100 million in losses. Guth and Yaguda owned Estate Financial Incorporated (EFI), a business that loaned money to contractors and builders at high interest rates. The money used to make the loans came from investors, primarily elderly people, who were told their investments were secured by trust deeds on the projects. In most instances, EFI never recorded the trust deeds.
EFI had a revolving open line of credit at HOB. The trial court found that HOB money "fed the monster" and "but for HOB's willingness to continue its business with defendant Guth and EFI the defendant's crimes most certainty [would have] been detected far earlier." When Guth and Yaguda were arrested, EFI had 544 outstanding loans with a balance of $318 million. Most of the loans were in default, resulting in EFI's Chapter 11 bankruptcy.
On October 16, 2008, the San Luis Obispo County Superior Court issued a temporary restraining order freezing Guth's and Yaguda's assets. (§ 186.11, subdivision (e)(2).) Guth and Yaguda were later convicted by plea of 26 counts of securities fraud and five enhancements. They were sentenced to state prison, ordered to pay victim restitution, and, as part of the plea agreement, gave up all right and title to the seized assets.
On November 17, 2008, HOB filed a third party claim to release three properties, purportedly encumbered by 2007 and 2008 trust deeds in favor of HOB:
TPI Property - a Morro Bay gas station and a Templeton gas station. Both gas stations were held in the name of Templeton Products Incorporated of which Guth owned a 42.5 percent shareholder interest.
9th Street Property - an office building at 806 9th Street, Paso Robles.
Vineyard Drive Property - a residence, olive grove, and building for the production of olive oil at 8530 Vineyard Drive, Templeton.
HOB's moving papers stated that EFI had a long standing business relationship with HOB dating back to 1998 when EFI was issued a $500,000 unsecured line of credit. The loan was "termed out" in September 2004 with a $468,841.27 balance.
In February 2006, HOB issued EFI a one-year $5 million unsecured line of credit. In February 2007, the loan balance was $4,356,108.90. EFI stopped making payments and HOB extended the loan maturity date three times.
Collateralization of EFI Loan
In November 2007, HOB extended the loan maturity date 12 months and restructured the loan to provide that principle ($4,766.108.90) and monthly interest was due and payable on November 15, 2008. HOB had Guth execute a $4,766,108.90 trust deed on the TPI Property (the Morro Bay and Templeton gas stations) and the 9th Street Property (an office building) of which Guth and Charles Applebaum (Guth's ex-husband) owned undivided interests.
In April 2008, less than 90 days before the EFI bankruptcy, HOB advanced $1.1 million on the open line of credit, increasing the loan balance to $5,866,100. Guth gave HOB a $5,866,100 deed of trust on the Vineyard Drive Property and paid the $1.1 million to Applebaum to satisfy a marital dissolution judgment. The deed of trust was recorded February 8, 2008, more than a month before the loan documents (Change in Terms Agreement) were executed.
The trial court denied the third party claim on the ground that HOB "tried to put [itself] above everybody else in the priority line with this conversion of unsecured loan to a secured loan at the time when the [EFI] house was caving in. . . . It just doesn't smell right to me. " The court found that "HOB had access to unique and inside information about EFI's financial condition when it chose to extend and re-extend its unsecured credit line and most certainly when it rushed to collateralize that line of credit. [¶] . . . The bank's repeated extensions of credit to EFI[] and Guth and its final desperate efforts to secure its position in the midst of EFI's collapse compels the court to reject this claim."
HOB has other trust deeds that secure loans for the purchase, refinancing, or improvement of the properties. These trust deeds were recognized by the trial court as valid security interests and are not at issue.
Burden of Proof
HOB asserts that the order is not supported by substantial evidence. We reject the argument because the burden was on HOB to show that it had a legitimately acquired security interest. (People v. Semaan, supra, 42 Cal.4th at p 87; Q-Soft, supra, 157 Cal.App.4th at pp. 449-450; People v. Mozes, supra, 192 Cal.App.4th at p. 1131.) The burden of persuasion does not vanish on appeal.
"When the trier of fact has expressly or implicitly concluded that the party with the burden of proof failed to carry that burden and that party appeals, it is somewhat misleading to characterize the failure-of-proof issue as whether substantial evidence supports the judgment. . . . [W]here the issue on appeal turns on a failure of proof at trial, the question for a reviewing court becomes whether the evidence compels a finding in favor of the appellant as a matter of law. [Citations.] Specifically, the question becomes whether the appellant's evidence was (1) 'uncontradicted and unimpeached' and (2) 'of such a character and weight as to leave no room for a judicial determination that it was insufficient to support a finding.' [Citation.] The answer here is no on both counts." (Shaw v. County of Santa Cruz (2008) 170 Cal.App.4th 229, 279.)
Legitimately Acquired Security Interest
Citing Q-Soft, supra, 157 Cal.App.4th 441, HOB argues that the properties must be released if: (1) the challenged assets are not the product of defendant's (Guth's) criminal activity, (2) HOB is an innocent third party, and (3) HOB has a legitimately acquired interest in the properties.
The first prong was satisfied because Guth acquired interests in the TPI Property, 9th Street Property, and Vineyard Drive Property before the securities fraud.
The securities fraud allegedly occurred from October 18, 2002 through May 20, 2008.
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To satisfy prongs two and three, HOB must show it had clean hands and legitimately acquired a security interest in the properties. "The statutory language 'legitimately acquired interest' (§ 186.11, subd. (i)(3)) is broadly worded to give trial courts a wide modicum of discretion to account for varying individual circumstances." (Q-Soft, supra, 157 Cal.App.4th at p. 451.)
HOB asserts that the $5 million loan obligation establishes, as a matter of law, a legitimately acquired security interest. We reject the argument because the revolving line of credit was a "naked loan." Before the loan obligation was collateralized, HOB had no security interest or lien on the properties. Like hundreds of other EFI victims, HOB was an unsecured creditor.
The trial court found that the timing and manner in which the open line of credit was converted into a secured loan "was extremely suspicious." "[I[n 2006 there was a $5 million unsecured line of credit that ultimately got converted to a secured line of credit for $4,766,000 some-odd dollars, and you really have given me very little context to explain that it is an innocent transaction rather than an effort to gain priority."
HOB produced no credible evidence that the loan collateralization was an arm's length transaction or in the ordinary course of business. On the contrary, the evidence shows that EFI stopped making loan payments, was granted three loan extensions, and failed to resolve the loan obligation in 2007. When HOB asked Guth to execute the November 2007 trust deed, the majority of EFI's construction trust funds, investor funds, and assets were depleted. The trial court reasonably concluded that HOB could not put itself ahead of creditors and victims by collateralizing the loan with property owned by Guth and others.
With respect to the TPI Property (the gas stations), HOB had Guth encumber the TPI Property for more than twice the value of TPI's assets without getting the approval of TPI shareholders or a corporate resolution. (Corp. Code, § 315, subds. (a) & (g); Friedman, Cal. Practice Guide, Corporations (The Rutter Group 2010) ¶ ¶ 6: 472 & 6:473.1, pp. 6-94.15-6-94.16, 69-5.) There was no promissory note or agreement by TPI to assume the EFI loan obligation. The court found that "the $4.7 million trust deed was not based on any loan connected to [the TPI] property or the corporation that owned it. None of the funds that were part of the unsecured loan package to EFI have been traced to actual use, or financing of the gas stations. It was in every sense, of no benefit to TPI."
The trust deeds on the Vineyard Drive Property and 9th Street Property were also suspect. None of the open line of credit money was used to improve or finance anything connected with the properties.
HOB argues that the 2008 trust deed on the Vineyard Drive Property was for "consideration" because it advanced $1.1 million. Guth used the money to satisfy a marital dissolution judgment. None of the $1.1 million went to EPI. For all ostensible purposes, it was a personal loan to pay Guth's personal debt. (See e.g., People v. Mozes, supra, 192 Cal.App.4th at p. 1126 [white-collar crime victims have priority over claimant with child support order].)
With respect to the 9th Street Property, Guth and Applebaum owned undivided interests. The trial court found that the trust deeds "had nothing to with this property or with Mr. Applebaum. . . ." HOB "made over $5 million of unsecured loans and then [Guth] tried to shift this burden off to Mr. Applebaum. . . . [T]his whole idea of the trust deed on 9th Street was done without Applebaum's
consent . . . [¶] Frankly I don't know how you deal with the 9th Street trust deed. What are you going to do? Make [Applebaum] your involuntary partner in that building?"
The trial court found: "The 2008 HOB trust deed suffers from all the same shortcomings as the 2007 trust deed, indeed it was worse because by this time EFI's collapse was apparent to anyone who read the local newspapers." The timing and manner in which the 2008 trust deed was recorded (more than a month before the loan documents were executed) was extremely suspicious. "Once again, the message the [trial] court takes from this course of conduct is that HOB's sole concern was the correction of its erroneous business decision with respect with EFI, with no care whatsoever about Mr. Applebaum's ownership interest. To be eligible to receive equity one must do equity. [¶] HOB is now dependent upon the court's use of its equitable powers under section 186.11. The court finds that the equitable claims of the victims of defendant's crimes far outweigh any put forward by HOB."
HOB claims that the antecedent EFI debt trumps the right of any victim seeking restitution We disagree. Under the Freeze and Seize Law, trial courts are vested with broad discretion to "balance the strong interest in fully reimbursing white collar crime victims for their losses, while protecting legitimate property interests of innocent third persons . . . ." (Q-Soft, supra, 157 Cal.App.4th at p. 451.) The trial court found that HOB was up to its "neck in Guth's scheme" and "didn't get around to securing all of the loans . . . until very late in the game."
HOB claims that it is never too late to collateralize an unsecured loan. If that was the law, every EFI lender could do an end round around section 186.11 and thwart the restitution rights of hundreds of victims. "Section 186.11, like other provisions of the Penal Code (e.g., § 1202.4 et seq.), implements the state Constitution's declaration 'that all persons who suffer losses as a result of criminal activity shall have the right to restitution from the persons convicted of the crimes for losses they suffer.' (Cal. Const., art. I, § 28, subd. (b).)" (People v. Semaan, supra, 42 Cal.4th at p. 86.)
The trial court found that HOB's third party claim did not pass the "smell test." The same smell lingers on appeal. HOB makes no showing that it had clean hands when it attempted to collateralize the EFI loan, that the trust deeds are legitimately acquired security interests, or that the trial court abused its discretion in denying the third party claim. (People v. Semaan, supra, 42 Cal.4th at p. 87; Q-Soft, supra, 57 Cal.App.4th at p. 450; People v. Mozes, supra, 192 Cal.App.4th at p. 1132.)
The judgment (order denying HOB's third party claim) is affirmed.
NOT TO BE PUBLISHED.
YEGAN, Acting P.J. We concur:
COFFEE, J.
PERREN, J.
Jac Crawford, Judge
Superior Court County of San Luis Obispo
Ziyad I. Naccasha, Michael M. McMahon; Carmel & Naccasha, for Appellant.
Kamala D. Harris, Attorney General, Dane R. Gillette, Chief Assistant Attorney General, Pamela C. Hamanaka, Senior Assistant Attorney General, Susan Sullivan Pithey, Supervising Deputy Attorney General, Taylor Nguyen, Deputy Attorney General, for Plaintiff and Respondent.