Opinion
2:24-cv-01317-CAS (PVCx)
07-25-2024
MICHELE VIVES v. CITY NATIONAL BANK
Catherine Jeang
Catherine Jeang
PRESENT: THE HONORABLE CHRISTINA A. SNYDER, JUDGE
CIVIL MINUTES - GENERAL
Proceedings: (IN CHAMBERS) - SPECIALLY APPEARING DEFENDANT CITY NATIONAL BANK'S MOTION TO COMPEL JUDICIAL REFERENCE UNDER CAL. CODE OF CIVIL PROCEDURE SECTION 638 (Dkt. 16, filed on APRIL 19, 2024)
I. INTRODUCTION
On February 16, 2024, Michele Vives, the Court-appointed permanent receiver (the “Receiver”) for the estate of linMM Capital, LLC (“linMM Capital”), linMM Productions, LLC (“linMM Productions”), and OneN Million Productions, LLC (“One N Million Productions”) (collectively, the “linMM Entities”) filed this action against City National Bank (“CNB”). Dkt. 1 (“Compl.”). The Receiver asserts five claims for relief against CNB: (1) aiding and abetting fraud; (2) aiding and abetting the breach of fiduciary duties; (3) negligence; (4) avoidance and recovery of actual fraudulent transfers pursuant to California Civil Code §§ 3439.04(a)(1), 3439.07(a), 3439.08(b), and 3294(a), and California common law (the “CNB Transfers”); and (5) avoidance and recovery of actual fraudulent transfers pursuant to California Civil Code §§ 3439.04(a)(1), 3439.07(a), 3439.08(b), and 3294(a), and California common law (the “Investor Deposit Transfers”). Id.
On April 19, 2024, specially appearing defendant CNB filed a motion to compel judicial reference under California Code of Civil Procedure Section 638. Dkt. 16 (“Mot.”). On May 13, 2024, the Receiver filed an opposition to CNB's motion to compel judicial reference. Dkt. 22 (“Opp.”). On June 3, 2024, CNB filed a reply in support of its motion. Dkt. 25 (“Reply”).
On July 22, 2024, the Court held a hearing on specially appearing defendant CNB's motion to compel judicial reference. Having carefully considered the parties' arguments and submissions, the Court finds and concludes as follows.
II. BACKGROUND
A. Factual Allegations
From 2013 through 2021, CNB opened and maintained personal accounts for Zachary Horwitz and business accounts for his business entities. Compl. ¶ 82. Horwitz repeatedly moved substantial funds back and forth between his personal and business accounts. Id. ¶ 85.
From 2013 through 2019, the linMM Entities deposited investment funds totaling $710,489,295.50 into their CNB accounts. Id. ¶ 103. Using funds belonging to the linMM Entities, Horwitz repaid $63,286,439.07 in funds extended by CNB under his personal line of credit. Id. ¶ 109. Using funds belonging to the linMM Entities, Horwitz also paid $157,473.72 in interest accrued to CNB on his personal line of credit. Id. ¶ 111. Furthermore, on at least eleven occasions, Horwitz transferred the linMM Entities' funds into his line of credit at a time when no balance was due. Id. ¶ 113. Asa whole, this scheme allowed Horwitz to launder money in support of his Ponzi scheme. Id. ¶ 112.
On at least 133 occasions between 2013 and 2019, there is a record of transfers from the linMM Entities to Horwitz's personal account and then from Horwitz's personal account into his line of credit. IT ¶ 122. CNB was aware of these transfers but continued to engage in atypical banking procedures. Id. ¶¶ 83, 189-205. Upon request, CNB provided Horwitz with misleading proof of funds letters. IT ¶¶ 185-88. CNB additionally failed to terminate any of the personal or business accounts despite their repeated overdraft positions. IT ¶ 191. CNB also engaged in little due diligence regarding the repeated high value transfers. IT ¶¶ 207, 216-243. CNB's alleged actions allowed Horwitz to maintain his fraudulent scheme. Id. ¶ 245.
B. Account Agreement
Between August 2012 and December 2013, each of the linMM Entities opened business accounts with CNB. Mot. at 9. Upon opening these accounts, each linMM entity agreed to be bound by CNB's Account Agreement and Disclosures, in addition to any further amendments or updates thereto. Id. at 9-10.
On September 1, 2020, CNB effected an update to its Account Agreement and Disclosures (the “2020 Amendment”), which included changes to its alternative dispute resolution provision. Id. at 11. The provision currently states:
If your account is maintained at a branch in California and a dispute that involves the combined claims of all parties totaling $250,000 or more arises between us with respect to the deposit account or safe deposit box, this Agreement, its enforcement or our deposit account services, either of us may require that it be resolved by judicial reference in accordance with California Code of Civil Procedure, Sections 638, et seq. The referee shall be a retired judge, agreed upon by the parties or appointed by the court. The costs of the reference procedure, including the fee for the court reporter, shall be paid equally by all parties as the costs are incurred. The referee shall hear all pretrial and post-trial matters, including requests for equitable relief, prepare an award with written findings of fact and conclusions of law, and apportion costs as appropriate. Judgment upon the award shall be entered in the court in which such proceeding was commenced and all parties shall have full rights of appeal.
Dkt. 16-5, Declaration of Michael Mallon, Exh. F at 156. The 2020 Amendment is the controlling document between CNB and the linMM Entities. Mot. at 8.
III. DISCUSSION
CNB argues that the Court should compel judicial reference pursuant to the 2020 Amendment. Mot. at 8. It “requests that the Court: (1) grant this Motion and order the Receiver to proceed with judicial reference; (2) award CNB $25,000 for costs and expenses, including reasonable attorneys' fees, incurred to compel the relief sought by this Motion; and (3) stay this proceeding pending resolution of the parties' dispute by a referee.” Id. at 26-28.
The Receiver argues that a stay of this action would be inappropriate, regardless of the outcome on CNB's motion. Dkt. 22 at 23. She argues that the Court should also deny CNB's request for fees and expenses because the parties met and conferred to discuss their positions, and “judicial intervention is required to resolve the dispute.” Id. at 25. In reply, CNB asserts that it “merely requests that this proceeding be stayed pending the duration of the reference proceeding, at which point the referee's decision may be filed with the Court and judgment entered thereon as if the matter had been tried before the Court.” Reply at 27.
According to CNB, “[t]he Receiver previously conceded that [the 2020 Amendment] ‘require[s] a judicial reference process' if the following three conditions are present: ‘(1) a dispute, (2) regarding a claim, and (3) involving [at least] $250,000.'” Id. at 18 (citation and emphasis omitted). CNB contends that the claims arise out of the linMM Clients' accounts because “any purported ‘banking services' CNB provided, any duties CNB may have owed to the linMM Clients, and any transfers of funds that CNB allegedly facilitated in or out of the linMM Clients' accounts all necessarily arose out of the linMM Clients' accounts, the Account Agreement [], and/or CNB's account services.” Id. at 19-20. Thus, CNB argues that because there is now a dispute against CNB regarding five claims that arise out of the linMM Clients' accounts for more than $250,000, the claims must be resolved by judicial reference. Id. at 18-20. Further, CNB cites Winkler v. McCloskey. 83 F.4th 720, 723 (9th Cir. 2023), to assert that “a receiver acts on behalf of the receivership entity and thus can be bound by an agreement signed by that entity.” Id. at 21 (emphasis in motion). It argues that the Receiver who “stands in the shoes of the linMM Clients” is bound by the 2020 Amendment to the same extent as the linMM Clients themselves. IT at 22. Moreover, CNB contends that the Receiver should be estopped from arguing that the 2020 Amendment does not apply based on her repeated admissions to the contrary in response to CNB's motion to quash. Id. at 22-23; see also Securities and Exchange Commission v. Zachary J. Horwitz et al., case no. 2:21-cv-02927-CAS (PDx) (the “SEC Action”).
CNB distinguishes this action from Tarrant Bell Prop,, LLC v. Superior Ct., 51 Cal.4th 538 (2011), in which the court did not enforce a judicial reference provision because, here, there is no risk of inconsistent rulings-even in the SEC Action, no parallel action or proceeding between the receivership entities and CNB, and no other case in which these claims could be consolidated for purposes of judicial economy. Id. at 23-25. By contrast, CNB argues that judicial economy would be served by judicial reference because “the Receiver is suing a California-based bank, on behalf of California companies, alleging claims that are governed exclusively by California law” that could be adjudicated by a referee who is “familiar with these nuanced issues of state law.” Id. at 25. Thus, CNB contends that the Court should decline to exercise supplemental jurisdiction over this state law dispute, particularly when the SEC Action has effectively been resolved. Id.
In opposition, the Receiver argues that CNB fails to prove that all of the claims she asserts against CNB are subject to the 2020 Amendment since CNB only submits account agreements for three of the seven relevant accounts. Opp. at 9. For example, the Receiver contends that she is not bound by Horwitz's agreements with CNB because Horwitz is not a receivership entity, and therefore, her fraudulent transfer claims regarding funds transferred from Horwitz's personal account to his line of credit are not subject to the 2020 Amendment. Id. at 10. Asa result, she asserts that her fourth claim-the CNB Transfers claim-cannot be subject to judicial reference. Id. Further, the Receiver argues that all of her claims for avoidance and recovery of actual fraudulent transfers are outside the scope of the 2020 Amendment because the Receiver has standing to bring these claims as a creditor of the receivership entities, rather than as an account holder. Id. at 10-11. Moreover, she asserts that she has rejected the Account Agreements with CNB and that the 2020 Amendment should therefore not apply to her. IT at 12.
The Receiver also cites Tarrant Bell Prop., LLC v. Superior Ct. to argue that courts have discretion under California Code of Civil Procedure Section 638 not to enforce a valid judicial reference agreement. Id. at 13. First, the Receiver argues that “this case creates a substantial risk of inconsistent rulings” for several reasons: (1) if a judicial referee decides some but not all of the claims, and the Court decides others; (2) if a judicial referee reaches different results on either similar issues litigated in this Court or claims the Receiver intends to pursue in the future; and (3) if a judicial referee does not find a Ponzi scheme in the receivership, but the Court does, impacting the Receiver's future distribution plan and investors. IT at 14-17. Second, the Receiver cites Winkler to argue that this case satisfies the exception to the rule regarding standing in the shoes of the receivership entities, which seeks to avoid punishing the Receiver and innocent creditors for others' wrongdoing. IT at 17-18. In addition, the Receiver asserts that the Court has “extremely broad power and broad deference” over a receivership and may deny CNB's motion to compel. IT at 18-19, 22. She argues that judicial reference conflicts with the goals of a receivership because it would “deprive[] the Court of its exclusive authority over the Receivership and to maximize recoveries for the defrauded victims,” would increase the cost of the receivership, and would create delay and barriers to the discovery of certain information. IT at 19-22. According to the Receiver, “[n]one of the cases cited in the [m]otion involve the referral of a federal equity receiver's lawsuit to a judicial referee, and certainly not in connection with a Receiver's fraudulent transfer claims.” IT at 22. Finally, the Receiver argues that judicial economy would not be served even if all, rather than only some, claims were “tried in a different forum from the balance of the Receivership case.” Id. at 23.
In reply, CNB asserts that because the Receiver does not have standing to assert claims on behalf of Horwitz, it is irrelevant whether he is subject to judicial reference. Reply at 11. It argues that judicial reference is appropriate because the linMM Clients are suing CNB for wrongdoing with respect to their accounts, and the Receiver cannot “bypass a valid ADR agreement simply by including allegations relating to nonparties.” Id. While the Receiver argues that the 2020 Amendment does not apply to the CNB Transfers claim, CNB contends “that the funds involved in all of the CNB Transfers are alleged to have first been deposited in the linMM Clients' accounts at CNB and then later transferred out of those same deposit accounts.” Id. at 12-13. Further, CNB argues that the court in Winkler rejected the argument that the Receiver stands in “the shoes of the creditors” rather than in “the shoes of the receivership entities” and “precludes the Receiver's argument that a receivership entity may disregard its contracts by relying on its fictional standing as a ‘creditor' to bring a fraudulent transfer claim.” Id. at 14 (citation and emphasis omitted). Moreover, CNB contends that, whether as “creditors” or “accountholders,” the linMM Clients signed the Account Agreement and are thus subject to the 2020 Amendment. Id. at 15. CNB also argues that the Receiver may not reject the Account Agreements because (1) there is no statutory authorization permitting a receiver to reject an executory contract; (2) the 2020 Amendment is not an executory contract; (3) rejecting a contract merely breaches but does not rescind the contract; and (4) this action concerns breaches of duties of care that arise out of the 2020 Amendment, so the 1 inMM Clients cannot also disclaim their obligations under the same agreement. Id. at 15-17.
Further, CNB argues that a court does not have “broad discretion” to abrogate contracts and instead may decline to enforce a judicial reference agreement “only in limited circumstances-namely, a ‘risk of inconsistent rulings and considerations of judicial economy.'” Id. at 17, 27 (citation omitted). CNB contends that judicial reference would promote judicial economy because this Court would not have to adjudicate the claims alleged in the Receiver's 196-page complaint in an action that is here on a theory of supplemental jurisdiction, “which the Court could independently choose not to exercise irrespective of the judicial reference provision.” hi at 18. It argues that there is also no risk of inconsistent rulings because there is no basis for compelling fewer than all five claims to judicial reference, there is no increased risk of divergent findings in a future, hypothetical case, and “[t]here is [] no legitimate risk of a disagreement on whether Horwitz operated a Ponzi scheme.” Id. at 19-22. According to CNB, the narrow exception in Winkler does not apply here because CNB's motion “does not implicate any equitable defense or inequitable conduct; it seeks only to enforce a clear legal right,” and it would further be inequitable to abrogate a valid contract. Id. at 23-24. CNB contends that if the 2020 Amendment is honored, the Receiver will have the opportunity to assert her claims before a mutually selected retired judge and will still have full discovery and appeal rights. Id. at 24. Finally, CNB argues that while the Receiver “attempt[s] to manufacture some nonexistent public policy in favor of adjudicating the linMM Clients' claims in the forum of her choice,” the Court expressly permitted the Receiver to recover assets through ADR, and “the Receiver has demonstrated that she is perfectly capable of pursuing the receivership entities' rights through ADR.” Id. at 24-25.
The Receiver argues that she is asserting claims for avoidance and recovery of actual fraudulent transfers in her capacity as a creditor of the receivership entities. Opp. at 11. In the Court's January 14, 2022 order on appointment of a permanent receiver, the Court acknowledged the Receiver's creditor capacity. See dkt. 70. Pursuant to the Court's order, the Receiver has:
. . . full powers of an equity receiver, including, but not limited to, full power over all funds, assets, collateral, premises (whether owned, leased, occupied, or otherwise controlled), choses in action, books, records, papers and other property belonging to, being managed by or in the possession of or control of Defendant 1 inMM and its subsidiaries and affiliates, and over the Subject Assets, and that such receiver is immediately authorized, empowered and directed: ...
J. to institute, compromise, adjust, appear in, intervene in, or become party to such actions or proceedings in state, federal, or foreign courts, which (i) the receiver deems necessary and advisable to preserve or recover any Assets, or (ii) the receiver deems necessary and advisable to carry out the receiver's mandate under this Order[.]Id. at 1, 3. However, the only reason the Receiver can file this lawsuit and assert claims against CNB is because she has been appointed by the Court to represent the linMM Entities. Under Winkler, a receiver can be bound by an agreement signed by the receivership entities. See Winkler. 83 F.4th at 723 (“We conclude that a receiver acts on behalf of the receivership entity and thus can be bound by an agreement signed by that entity.”). Here, the Receiver “stands in the shoes” of the linMM Entities, which all entered into and agreed to be bound by the 2020 Amendment. Thus, the Receiver may also be bound by the 2020 Amendment if the Court finds that her claims arise out of this agreement between the linMM Entities and CNB.
The Receiver does not appear to dispute that her first three claims for aiding and abetting fraud, aiding and abetting the breach of fiduciary duties, and negligence, arise out of and are thus subject to the 2020 Amendment. Instead, she argues that her claims for avoidance and recovery of actual fraudulent transfers, and particularly her fourth claim regarding the CNB Transfers, do not implicate the 2020 Amendment. It is true that the Receiver's fourth claim relates to funds that Horwitz caused the linMM Entities to transfer and that she seeks to recover funds that go to the benefit of creditors. However, the Court does not find that these circumstances change the fact that the Receiver asserts these claims on behalf of the linMM Entities and that all of the Receiver's claims arise out of the linMM Entities' accounts and agreement with CNB. Even though the linMM Entities may be creditors themselves, they are also accountholders who are bound by their agreements with CNB. Therefore, the Court finds that the Receiver is also bound by the 2020 Amendment.
Further, the Court does not have the same concerns-“the risk of inconsistent rulings and considerations of judicial economy”-set forth in Tarrant Bell to justify exercising its discretion not to enforce the judicial reference agreement. See Tarrant Bell Prop.. 51 Cal.4th at 545 (“Given these circumstances, the trial court acted well within its discretion in basing its refusal to appoint a referee on the risk of inconsistent rulings and considerations of judicial economy.”). Here, there is no real risk of inconsistent rulings. At oral argument, the Receiver raised the concern of potentially inconsistent results regarding CNB's good faith defense. However, a judicial referee is just as likely as this Court to find that this defense is unavailable to CNB. Thus, the Court finds that there is no real showing at this stage of a risk of inconsistent rulings. Further, this is not an action that warrants taking the case away from a judicial referee for purposes of judicial economy. In fact, a judicial referee is more likely to handle this action in a more streamlined fashion, whereas there is a greater potential for delay in proceedings in this Court. Moreover, the Court is not persuaded that adjudication before a judicial referee is more expensive than litigation in this Court. As pointed out in oral argument, the parties are to agree on a judicial referee and will be able to consider hourly rates when making their decision. In any event, the parties' selection is subject to approval by the Court. Further, the linMM Entities agreed to resolve their disputes with CNB by judicial reference pursuant to the 2020 Amendment. Accordingly, the Court finds that the parties should proceed to judicial reference and grants specially appearing defendant CNB's motion. The Court hereby stays this proceeding pending resolution of the parties' dispute by a referee.
IV. CONCLUSION
In accordance with the foregoing, the Court GRANTS specially appearing defendant CNB's motion to compel judicial reference and stays this proceeding pending resolution of the parties' dispute by a referee. The Court declines to award CNB $25,000 for costs and expenses, including reasonable attorneys' fees, incurred to compel the relief sought by its motion.
IT IS SO ORDERED.