Trial

Bankruptcy Judge: Hon. Eddward P. Ballinger, Jr.

Introduction

The issues before the Court are whether the Rev Op Group ("ROG") defendants1 in this adversary case are bound to an irrevocable agency agreement with Plaintiff ML Manager, LLC ("ML Manager") and, if bound, the extent of ML Manager's agency authority. A trial was held over the course of four days, from June 7-10, 2016, and the parties submitted post-trial memoranda on June 29, 2016.

Factual Background

The facts regarding this bankruptcy and adversary have been set forth on numerous occasions not only by the parties, but also in several opinions by the Ninth Circuit Court of Appeals. For the sake of judicial efficiency, this Court appropriates, in part, the history of this case from those appellate decisions and the parties' Joint Pretrial Statement.

ML Manager's predecessor in interest, Mortgages Ltd., was a private lender funding real estate investments in Arizona. Its borrowers executed promissory notes in favor of Mortgages Ltd. and provided various forms of security, including real property evidenced by deeds of trust, assignments of rent and, in some cases, personal guarantees. Mortgages Ltd. raised monies to fund the loans by selling interests in the loans to investors who received fractional interests in the notes and trust deeds. The parties describe these partial ownership interests generally as "pass-through" investments, meaning the investors acquired a direct fractional interest in the loan documents. Each direct fractional interest was also referred to as a "participation." Unlike other investment vehicles in which investors received equity in the lender, when a Mortgages Ltd. borrower defaulted and its real property collateral was foreclosed upon, those holding participations became part owners of the realty as tenants in common with the others who had invested in the same loan. Mortgages Ltd. acted as the servicing agent not only for its loans, but also for the properties acquired due to loan defaults.

Mortgages Ltd. sold its pass-through investments through numerous investment programs described in general terms in a Private Offering Memorandum ("POM"). The ROG participated in a loan program called the Revolving Opportunity Loan Program ("Rev Op Program"), in which each investor agreed to purchase a fractional interest in a Mortgages Ltd. loan, at least temporarily. Rev Op Program investors granted Mortgages Ltd. the right to repurchase the investor's fractional interest at a contractually specified price at any time during the contract period. Additionally, Mortgages Ltd. was obligated to repurchase each interest for a specified price at the end of the contract term if the borrower had not fully repaid the loan. Rev Op Program investments typically matured in 90 to 120 days. These repurchase rights distinguished this investment program from other programs offered by Mortgages Ltd.

In 2008, Mortgages Ltd. commenced a Chapter 7 bankruptcy proceeding (subsequently converted to a Chapter 11). Its confirmed bankruptcy plan provided for the creation of various limited liability companies referred to as the "Loan LLCs." The Loan LLCs were created to hold the Mortgages Ltd. loans and loan documents associated with each particular loan. ML Manager was created to manage and operate the Loan LLCs. Investors were given the option of exchanging their existing participations for membership interests in the new Loan LLCs.

Members of the ROG elected not to transfer their participation interests to the Loan LLCs, which meant under the terms of the bankruptcy plan that they continued to hold their fractional interests according to the terms of their pre-bankruptcy investment agreements:

Amended Plan, section 4.13, docket 1532 and Order Confirming Amended Plan, section U.2., docket 1755. Further, the plan provided that, at the option of the plan proponent, the contracts between Mortgages Ltd. and the pass-through investors who elected not to transfer their ownership interests to the Loan LLCs could be transferred and assigned to ML Manager.

Since confirmation, ML Manager has sought to sell some of the loans in its portfolio. The ROG objected to many of these sales on the ground that ML Manager could not dispose of the properties without the ROG's consent. ML Manager disagreed, asserting that the ROG was bound by the terms of various pre-bankruptcy agreements designating Mortgages Ltd. as the ROG's agent and, in accordance with the provisions of the reorganization plan, ML Manager succeeded to Mortgages Ltd.'s agency role. This dispute eventually led ML Manager to file this adversary proceeding seeking declaratory judgment as follows:

The ROG counterclaimed, seeking an accounting from ML Manager and declaratory judgment that the ROG validly revoked any agency authority if such authority ever existed.

Subsequently, the ROG filed a motion for partial summary judgment on its declaratory judgment counterclaim. Solely for purposes of the motion for summary judgment, the ROG assumed agency authority existed and argued it had validly revoked such authority. On May 26, 2010, the bankruptcy court denied the ROG's motion for summary judgment, concluding that the agency authority was coupled with an interest and irrevocable. Additionally, the court held that the agency authority was not decoupled by the assignment to ML Manager. The court indicated that whether the assignment to ML Manager was valid was an issue still to be determined.

The day before the bankruptcy court issued this ruling, ML Manager filed its own motion for judgment on the pleadings on its countervailing request for declaratory judgment. The legal arguments presented overlapped, in part, with those raised in the ROG's partial motion for summary judgment. Additionally, the motion for judgment on the pleadings raised questions as to whether the agency agreements were executed, whether the agency agreements were incorporated by reference into other executed investor agreements, the scope of the agency agreements, and whether discretion was withheld by some investors. At the hearing on the motion, the court granted the parties time for additional briefing on whether the plausibility standard, outlined in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), governed the denials made by the ROG in their answers to the allegations in ML Manager's complaint. After the additional briefing, the court issued its decision concluding that the ROG's denials were implausible and that the ROG had executed the respective agency agreements. The court entered declaratory judgment in favor of ML Manager on the enforceability of the agency agreements and dismissed the ROG's counterclaims.

The ROG appealed, and the matter made its way to the Ninth Circuit Court of Appeals, which reversed and remanded the case, concluding that the bankruptcy court had failed to analyze the ROG's denials in the answers under either the required Rule 11 or Rule 12(f) standards:

In re Mortgages Ltd., 771 F.3d 623, 632 (9th Cir. 2014)(citations omitted). With the matter back before this Court, this matter proceeded to trial, after a few unsuccessful summary judgment detours.

The Documents

After years of litigation, both ML Manager and the ROG agree that their dispute can be resolved by answering two questions: 1. Is ML Manager the ROG's agent? and 2. If an agency relationship exists, what is its scope?2 To resolve these questions, the Court must determine which documents govern the relationship between each ROG investor and Mortgages Ltd./ML Manager. In addition, the Court must determine whether parol evidence is admissible to interpret these materials, particularly with respect to the ROG's claim that some of its members withheld, revoked or modified the grant of authority set forth in documents upon which ML Manager relies for its broad agency authority.

ML Manager believes the following documents establish that Mortgages Ltd. was granted sole discretion to act on behalf of the ROG investors in managing properties and/or loans, including the authority to sell the properties securing defaulted loans upon terms the agent deems appropriate:

1. The Form Agency Agreement attached to the July 10, 2006, Private Offering Memorandum

The parties agree Mortgages Ltd. issued offering memoranda to potential investors describing its various investment programs, their respective terms, potential risks and obligations. They also agree each ROG member invested in accordance with the terms of one such memorandum. ML Manager claims the ROG invested pursuant to the private offering memoranda dated July 10, 2006 ("POM"), which subjected each investor to the terms contained in an attached Form Agency Agreement. The ROG disputes that all its members invested pursuant to the July 10, 2006, POM and points out that ML Manager has not produced any version of the attached Form Agency Agreement executed by or on behalf of any ROG defendant.

ML Manager relies on the following paragraph contained within the POM entitled Agency Agreement:

Trial Exhibit 8, p. 8. Exhibit A to the POM — the Form Agency Agreement — provides in pertinent part as follows:

Trial Exhibit 8, p. 52 or Trial Exhibit 10, p. 1. Among the powers granted to the agent under this provision are responsibility for account servicing, collection, compensation, and sale of interests. In addition, the Form Agency Agreement provides that this agreement sets forth the entire agreement and understanding of the parties and is to be read consistently with the other relevant documents. Trial Exhibit 10, p. 8, ¶ 7(d). Modification and amendment of the agency relationship requires a written memorialization. Id. at ¶ 7(f). Paragraph 7(k) also permits the agent to sign the agreement on behalf of the investment participant as the investor's attorney-in-fact. Id. at p. 9, ¶ 7(k).

2. The Revolving Opportunity Loan Program Purchase Agreement ("Rev Op Agreement")

Each ROG defendant participated in the Revolving Opportunity Loan Program ("Rev Op Program"), which permitted purchase of fractional interests in Mortgages Ltd. collateralized loans and which was memorialized by a Revolving Loan Opportunity Agreement ("Rev Op Agreement"). Unfortunately, each Rev Op Agreement was not identical. For example, ML Manager acknowledges that the Rev Op Agreement signed by ROG member McFadden does not contain any agency authority language. Additionally, investor Krueger presented a Rev Op Agreement that differs from the one produced by ML Manager in that certain authority is withheld by Krueger from Mortgages Ltd. and one paragraph stricken in Krueger's version, but not in ML Manager's version. Most ROG investors, however, signed a version of the Rev Op Agreement containing provisions like this one:

Section 11. Adoption of the Agreements.

Trial Exhibit 16, pp. 4-9.

3. New Investor Subscription Agreement ("NISA")/Existing Investor Account Agreement ("EIAA")

The parties refer to the NISA and EIAA collectively as the Subscription Agreements. Each Subscription Agreement contains language either identical to, or very similar to, the following in reference to the agency agreements:

Trial Exhibit 17, pp. 5-6.

The ROG defendants challenge the validity of several versions of the agreements ML Manager provides, arguing that some appear to have been altered without the investor's knowledge or consent. Additionally, the ROG contends that several investors withheld agency authority and/or discretion such that no agency authority or power of attorney was ever granted to Mortgages Ltd.

Parol Evidence

One preliminary legal issue raised in this case is the extent parol evidence is admissible to interpret the contracts at issue. Parol evidence is inadmissible to vary or contradict a written contract between parties where the contract is a complete and accurate integration of the parties' agreement. Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 152, 854 P.2d 1134, 1138 (1993)(citing 3 Arthur L. Corbin, Corbin on Contracts § 573, at 357 (1960) ("Corbin"); Rental Dev. Corp. v. Rubenstein Const. Co., 96 Ariz. 133, 136, 393 P.2d 144, 146 (1964)). Prior understandings, negotiations, and subsequent conduct may be admissible, however, to assist in interpreting the parties' intentions. Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 393, 682 P.2d 388, 398 (1984).

Courts generally take one of two analytical approaches to determining when parol evidence is admissible. The restrictive, plain meaning approach prohibits consideration of parol evidence where the contract is plain and unambiguous on its face. See Taylor, 175 Ariz. at 152-53, 854 P.2d at 1138-39. Where the contract's language is plain and unambiguous on its face, its meaning must be determined from the four corners of the instrument without resort to extrinsic evidence of any nature. Id. The less restrictive approach permits courts to consider "all of the proffered evidence to determine its relevance to the parties' intent." Id. As long as the contract language is "reasonably susceptible" to the interpretation asserted by its proponent and not contradictory to the language in the contract, parol evidence will be admissible. Id. at 154, 854 P.2d at 1140.

Id. at 153, 854 P.2d at 1139 (citations admitted and emphasis in original).

Arizona follows this less restrictive view.3 As such, this Court need not make a preliminary finding of ambiguity before considering extrinsic evidence offered by the parties. Rather, the question for the Court is whether the extrinsic evidence being offered simply aids in interpreting the intent of the parties, as opposed to contradicting the meaning of the contract's terms, and whether the contract language at issue is reasonably susceptible to the interpretation offered by the party seeking to admit the extrinsic evidence.

The Court permitted ROG witnesses to testify regarding their understanding (or at times lack of any understanding) regarding the relevant ROG/Mortgages Ltd. relationship. However, this testimony does not permit the Court to ignore the numerous memorializations and acknowledgements of the broad agency powers granted to Mortgages Ltd. — the powers now held by ML Manager — because to do so would violate the legal limits on use of parol evidence. ML Manager's agency powers are easily determined by reference to the materials described above.

The evidence presented by the ROG to argue against enforcement of the parties' written agreements is rejected for a second reason: It is not credible. The Court is sympathetic to the significant financial losses suffered by the honest investors comprising the ROG. They have the right to expect redress from Mortgages Ltd. and its successor. There is no need to embarrass them with record citation to the defects in their evidence. It is enough to point out that at trial their testimony was, at times, evasive, contradictory, implausible and not believable. During ML Manager's case in chief, some financially sophisticated ROG members purported to be strikingly naïve about key terms governing their investment relationships with Mortgages Ltd. But, when it came time to present the ROG's evidence, these same members appeared much more certain regarding the powers granted to ML Manager's predecessor.

Even if this Court accepted some of the ROG representations regarding Mortgage Ltd.'s operations, the documentary evidence clearly establishes that the only plausible interpretation of the ROG/Mortgages Ltd. relationship is that while it may be true that Mortgages Ltd. promised each investor would receive its promised return — by way of borrower performance or Mortgages Ltd. investment repurchase — the governing written agreements show that investors granted the company broad agency powers with respect to loan portfolio administration. Each ROG member was entitled to prevent prospective use of loan repayment proceeds for new endeavors. But, once the ROG acquired a participation, its members acknowledged that Mortgages Ltd. could act on behalf of all investors in connection with dealing with borrowers and liquidating loan collateral. There is no credible evidence establishing that Mortgages Ltd. created (or that the experienced ROG members invested in) a loan program that granted any individual stakeholder asset management veto power over transactions involving multi-million dollar investments by other participants.

Special attention is required regarding the allegations of ROG members McFadden and Krueger, both of whom admitted receiving and signing some, although not all, of the documents relied on by ML Manager. In particular, McFadden argued his Rev Op Agreement did not contain any agency language. However, McFadden admitted signing the EIAA offered as Exhibit 12 by ML Manager. His EIAA, like the others, expressly provides that the investor agrees to be bound by a form agency agreement attached to the July 10, 2016, POM. His claim he never received the POM, if true, does not change the fact that his EIAA contained the same paragraphs 4 and 6 as cited in section 3 of this decision, New Investor Subscription Agreement ("NISA")/Existing Investor Account Agreement ("EIAA"), regarding the grant of agency authority and discretion to Mortgages Ltd. Trial Exhibit 12. His testimony that he did not know he was agreeing to such agency authority because he did not read the document before signing it does not alter the fact that he, in fact, signed the document containing a clear, express grant of agency authority.

With respect to Krueger, the parties offered conflicting Rev Op Agreements. ML Manager offered Exhibit 24, which is a fully executed copy of a Rev Op Agreement dated September 25, 2007, with signatures of both Krueger (on behalf of the Lonnie Joel Krueger Family Trust), and Mortgages Ltd.'s owner, Scott Coles. Krueger acknowledged signing the last page of this document and admitted that the fax number at the top of the document is a fax number belonging to his businesses. He makes three arguments to challenge the authenticity of this document. First, he argues that pages 1-9 attached to the signature page are not the pages he included with his signature page to Mortgages Ltd. Second, he denies having faxed the Rev Op Agreement to Mortgages Ltd. Third, he contends that the version of the Rev Op Agreement he executed is the one the ROG provides at Exhibit 217.

Exhibit 217 mirrors ML Manager's Exhibit 24, but for three differences. First, this agreement is only executed by Krueger: There is no signature on behalf of Mortgages Ltd. Second, Krueger has stricken two provisions in this version relating to the grant of a power of attorney to Mortgages Ltd. Third, there is no indication of any facsimile transmission. Upon the Court's review of the documents, and considering the testimony at trial, the Court concludes that Exhibit 24 is the governing agreement.

Agency with an Interest

Another argument proffered by the ROG is that even if agency authority was granted to Mortgages Ltd., the grant of agency was revocable and, in fact, was effectively revoked by the ROG defendants. The Court disagrees for two reasons. First, the provisions referring to agency authority in the Form Agency Agreement, Subscription Agreements and Rev Op Agreements expressly state that the agency authority is coupled with an interest and irrevocable. Second, even in the absence of such language, Arizona law provides that if the power or agency is coupled with an interest in the subject matter of the agency, the agency is irrevocable. See Phoenix Title & Trust Co. v. Grimes, 101 Ariz. 182, 184, 416 P.2d 979, 981 (1966).4 Unlike a general power of attorney, this "type of power is not merely an interest in the exercise of the power, but an interest in the property over which the power operates. A power coupled with an interest survives the person giving it and is irrevocable." In re Indenture of Trust Dated January 13, 1964, 235 Ariz. 40, 50, 326 P.3d 307, 317 (App. 2014)(citations omitted).

In Phoenix Title, plaintiff located a parcel of raw land and organized a joint venture to "purchase, develop, subdivide and resell the land" for the mutual benefit of a group of investors. Phoenix Title, 101 Ariz. at 183, 416 P.2d at 980. The parties entered into several agreements, one of which provided plaintiff the sole right to "advertise, promote, develop and sell the lots" in which he also had a percentage ownership interest. Id. Plaintiff would receive a commission from the sales proceeds. The court concluded that plaintiff's power was coupled with an interest. Plaintiff did not simply have an interest in the commission for marketing and selling the properties. Plaintiff's interest was coupled with an ownership interest in the thing — the property itself over which he exercised authority. As such, plaintiff's death did not terminate the agency relationship: It was irrevocable.

Id. at 184, 416 P.2d at 981 (quoting Taylor v. Burns, 203 U.S. 120, 27 S.Ct. 40, 51 L.Ed. 116 (1906)).

The interest of Mortgages Ltd. (and now ML Manager) similarly is not simply an interest in the power itself, but is an interest in the loans upon which the power was to operate. As Judge Haines noted, Mortgages Ltd. retained an interest in the interest spread and default interest, providing it with an interest in the loans themselves. Transcript of May 26, 2010, hearing, docket 129, pp. 59-60. As was stated in Phoenix Title, the plaintiff in that case was so "instrumental in creating the transaction, and his agency was such an inseparable part of the transaction, that the threads of the agreements cannot be torn from the warp and woof of the transaction itself." Phoenix Title, 101 Ariz. at 184, 416 P.2d at 981.

Likewise, Mortgages Ltd. was instrumental in creating this transaction and the agency authority was an inseparable part of the transaction, as the investors were investing, in essence, in Mortgages Ltd.'s ability to manage these loans for the investors. Additionally, the Court agrees with Judge Haines' conclusion that the confirmed plan did not decouple those interests. Transcript of May 26, 2010, hearing, docket 129, p. 60. The plan provided that ML Manager stepped into Mortgages Ltd.'s shoes and continued to manage the loans for the benefit of the investors.

Based upon the foregoing, the Court finds and concludes that ML Manager possesses a non-revocable agency power granting it authority to manage its investment portfolios to further the best interests of all investors in a manner consistent with duties imposed on it both by its assumed contractual duties and the provisions of confirmed bankruptcy plan. Counsel for ML Manager shall prepare and upload a form of Order that is consistent with the memorandum decision.