# Johnson v. Edwards Family P'ship, LP (In re Cmty. Home Fin. Servs., Inc.)

> United States Bankruptcy Court, S.D. Mississippi · February 27, 2018 · 583 B.R. 1

URL: https://www.frixlaw.com/law-library/cases/8501204

## Case

- **Full name:** IN RE: COMMUNITY HOME FINANCIAL SERVICES, INC., Debtor. Kristina M. Johnson, as Trustee for the Estate of Community Home Financial Services, Inc. v. Edwards Family Partnership, LP and Beher Holdings Trust, Kristina M. Johnson, as Trustee for the Estate of Community Home Financial Services, Inc. v. Charles Edwards, Edwards Family Partnership, LP, Edwards Family Partnership, LLP, and Beher Holdings Trust, Kristina M. Johnson, Chapter 11 Trustee of the Estate of Community Home Financial Services, Inc. v. Edwards Family Partnership, LP, Beher Holdings Trust, and Charles C. Edwards, individually and as Managing Partner of Edwards Family Partnership, LP and Beher Holdings Trust
- **Court:** United States Bankruptcy Court, S.D. Mississippi
- **Decided:** February 27, 2018
- **Citations:** 583 B.R. 1
- **Precedential status:** Published
- **Opinion:** Opinion of the court
- **Cited by:** 5 later opinions in the Frix Law Library

## Citator (automated)

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- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/8501204

## Opinion text

B. Contested Matters
Also before the Court at Trial were the following contested matters (collectively, the "Contested Matters") filed in the Bankruptcy Case, related to Proofs of Claim 4-1 through 9-1 and CHFS's use of alleged cash collateral:
Proofs of Claim 4-1 & 5-1
Objection to Claim of Beher Holdings Trust (Claim No. 4) and to Claim of Edwards Family Partnership (Claim No. 5) (the "Objection to POC 4 & 5") (Bankr. Dkt. 162) filed by CHFS
Edwards Family Partnership, LP and Beher Holdings Trust's Responses to Objection to Proof of Claim of Beher Holdings Trust No. 4 and to Proof of Claim of Edwards Family Partnership, LP No. 5 (DK # 162) (the "Responses to Objection to POC 4 & 5") (Bankr. Dkt. 208) filed by EFP/BHT
Proofs of Claim 6-1 & 9-1
Objection to Claims of Edwards Family Partnership (Claim No. 6 and Claim No. 9) (the "Objection to POC 6 & 9") (Bankr. Dkt. 163) filed by CHFS
Edwards Family Partnership, LP's Responses to Objection to Proof of Claim of Edwards Family Partnership, LP No. 6 and to Proof of Claim of Edwards Family Partnership, LP No. 9 (DK # 163) (the "Responses to Objection to POC 6 & 9") (Bankr. Dkt. 209) filed by EFP
Proofs of Claim 7-1 & 8-1
Objection to Claims of Beher Holdings Trust (Claim No. 7 and Claim No. 8) (the "Objection to POC 7 & 8") (Bankr. Dkt. 164) filed by CHFS
Beher Holding Trust's Response to Objection to Proof of Claim of Beher Holdings Trust No. 7 and to Proof of Claim of Beher Holdings Trust No. 8 (Dkt # 164) (the "Response to Objection to POC 7 & 8") (Bankr. Dkt. 210) filed by BHT
Cash Collateral
Edwards Family Partnership, LP and Beher Holdings Trust's Third Motion to Prohibit Use of Cash Collateral Until the Court Rules in Adversary Proceeding 12-00091 (the "Cash Collateral Objection") (Bankr. Dkt. 901) filed by EFP/BHT
Trustee's Objection to Edwards Family Partnership, LP and Beher Holdings Trust's Third Motion to Prohibit Use of Cash Collateral Until the Court Rules in Adversary Proceeding 12-00091 (Dkt. No. 901) (the "Response to Cash Collateral Objection") (Bankr. Dkt. 927) filed by the Trustee
Trustee's Supplemental Objection to Edwards Family Partnership, LP and Beher Holdings Trust's Third Motion to Prohibit Use of Cash Collateral Until the Court Rules in Adversary Proceeding 12-00091 (Dkt. No. 901) (the "Supplemental Response to Cash Collateral Objection") (Bankr. Dkt. 1024) filed by the Trustee
Trustee's Motion for Use of Cash (to Extent Required) Nunc Pro Tunc (the "Trustee's Cash Motion") (Bankr. Dkt. 906) filed by the Trustee
Edwards Family Partnership, LP and Beher Holdings Trust's Response to Trustee's Motion for Use of Cash Collateral (to the Extent Required) Nunc Pro Tunc (DOC. No. 906) (the "Response to Trustee's Cash Motion") (Bankr. Dkt. 919) filed by EFP/BHT
Trustee's Reply to Edwards Family Partnership, LP and Beher Holdings Trust's Response to Trustee's Motion *11 for Use of Cash Collateral (to the Extent Required) Nunc Pro Tunc (the "Reply to Response to Trustee's Cash Motion") (Bankr. Dkt. 926) filed by the Trustee
Trustee's Supplemental Reply to Edwards Family Partnership, LP and Beher Holdings Trust's Response to Trustee's Motion for Use of Cash Collateral (to the Extent Required) Nunc Pro Tunc (the "Supplemental Reply to Response to Trustee's Cash Motion") (Bankr. Dkt. 1023) filed by the Trustee
C. Pretrial Orders & Trial
The Court consolidated the Contested Matters in the Bankruptcy Case, the Home Improvement Loans Adversary, the Mortgage Portfolios Adversary, and the Post-Petition Conduct Adversary for purposes of the Trial, due to common questions of fact, law, witnesses, and exhibits. (HIL Adv. Dkt. 285; MPF Adv. Dkt. 57). On September 5, 2017, the Joint Pretrial Order was entered in the Home Improvement Loans Adversary (HIL Adv. Dkt. 322) and in the Mortgage Portfolios Adversary (MPF Adv. Dkt. 118). As agreed upon by the parties, the Addendum to Joint Pretrial Order was entered in the Home Improvement Loans Adversary (HIL Adv. Dkt. 324) and in the Mortgage Portfolios Adversary (MPF Adv. Dkt. 120) on September 18, 2017. On October 17, 2017, the Joint Pretrial Order (PPC Adv. Dkt. 108) was entered in the Post-Petition Conduct Adversary.
On October 24, 2017, the Court entered an order granting the parties permission to correct certain errors that appeared in the document lists and to incorporate the Addendum to Joint Pretrial Order into a single amended joint pretrial order in the Home Improvement Loans Adversary and the Mortgage Portfolios Adversary. (HIL Adv. Dkt. 330; MPF Adv. Dkt. 125). That same day, the Amended Joint Pretrial Order was entered in the Home Improvement Loans Adversary (the "HIL Amended Pretrial Order") (HIL Adv. Dkt. 331) and in the Mortgage Portfolios Adversary (the "MPF Amended Pretrial Order") (MPF Adv. Dkt. 126). On October 30, 2017, the Court entered an order in the Post-Petition Conduct Adversary likewise granting the parties permission to correct certain errors that appeared in the documents lists into a single amended joint pretrial order in the Post-Petition Conduct Adversary (PPC Adv. Dkt. 114), and on that say day, the Amended Joint Pretrial Order was entered in the Post-Petition Conduct Adversary (the "PPC Amended Pretrial Order") (PPC Adv. Dkt. 118).
At Trial, 3 Jeffrey R. Barber ("Barber"), Kristina M. Johnson, Mark A. Mintz, and Stephanie B. McLarty represented the Trustee, and Jim R. Spencer, Jr. and Stephanie M. Rippee represented EFP/BHT and Dr. Edwards. During the Trial, the following witnesses testified on behalf of the Trustee: Jeffrey N. Aucoin, the Trustee, Alan Sercy, Jeffrey Albert Kirk, and Harold B. McCarley, Jr. The following witnesses testified on behalf of EFP/BHT and Dr. Edwards: Dr. Edwards, William Richard Hare, and Martha Edwards Borg.
At the beginning of Trial, the Court took judicial notice of the pleadings filed in the following cases before the U.S. District Court for the Southern District of Mississippi: United States v. Dickson , Case No. 3:14-cr-00078-TSL-FKB;
*12 Edwards Family Partnership, LP v. William D. Dickson Enterprises, Inc. , Case No. 3:14-cv-00436-CWR-LRA; Edwards Family Partnership, LP v. Dickson , Case No. 3:13-cv-00587-CWR-LRA; and Johnson v. Edwards Family Partnership, LP , Case No. 3:15-cv-00260-CWR-LRA. At Trial, the parties stipulated to the admissibility of 114 exhibits. The Trustee introduced into evidence seven (7) additional exhibits; Dr. Edwards and EFP/BHT introduced into evidence thirteen (13) additional exhibits. Sixteen (16) exhibits were admitted only for demonstrative or identification purposes. 4 Having considered the pleadings as well as the testimony, exhibits, and the arguments of counsel, the Court makes the following findings of fact and conclusions of law. 5
TABLE OF CONTENTS
JURISDICTION ...15
INTRODUCTION ...15
FACTS ...18
A. CHFS ...18
B. Credit Facility-Home Improvement Loans ...18
1. Rainbow Loan Term Sheet-Initial $10 Million Loan ...19
2. Execution of Rainbow Loan Agreement ...19
3. Rainbow Group ...20
4. Terms & Conditions of the Rainbow Loan Agreement ...20
5. 2006 Note ...21
6. Custodial Agreement ...22
7. 2007 Assignment ...22
8. 2007 Note ...23
9. BVI Company Register ...23
10. 2010 Assignment ...24
11. Amended Loan Agreements ...24
12. BHT Note & EFP Note ...25
13. Guaranties ...25
C. Mortgage Portfolios ...26
1. Portfolio # 1 ...27
2. Portfolio # 2 ...29
3. Portfolio # 3 ...29
4. Portfolio # 4 ...30
5. Portfolio # 5 ...30
6. Portfolio # 6 ...30
7. Portfolio # 7 ...30
D. Original State Lawsuit & Receivership Action ...31
E. Pre-petition Transfers ...32
F. Bankruptcy Case ...33
1. Proofs of Claim Filed by EFP/BHT...33
2. Proof of Claim Filed by Dickson ...35
3. Claims Register ...36
4. Cash Collateral Orders ...36 *13 G. Initiation of Home Improvement Loans Adversary ...37
H. Initiation of Adversary Proceeding 12-00109-NPO ...37
I. Dickson Guaranty Suit ...37
J. Initiation of Mortgage Portfolios Adversary ...38
K. Post-petition Transfers & Rogue Operation ...38
L. Appointment of Trustee....39
M. Trustee's Investigation of Funds Stolen & Diverted ...41
N. Stay of Adversary Proceedings ...41
O. Criminal Proceedings Against Dickson ...42
P. Trustee's Efforts to Locate Loan Documents ...42
Q. ClearSpring ...42
R. Turnover Order ...43
S. Edwards TRO Case ...43
T. Dickson Adversary Proceeding ...44
U. Recovery of Funds ...44
V. Partial Summary Judgment in Dickson Guaranty Suit ...45
W. Rejection of Servicing Contract ...46
X. Dr. Edwards & Meehan ...46
Y. Extension of 11 U.S.C. § 546 Deadline ...47
Z. Dr. Edwards' Plans to Travel to Costa Rica ...47
AA. Cash Collateral Objection & Trustee's Cash Motion ...47
BB. Dr. Edwards' Trip to Costa Rica ...49
CC. Trustee & Meehan ...50
DD. Trustee's Initiation of RICO Case ...50
EE. Trustee's Withdrawal Motions ...51
FF. RICO Case ...51
GG. Terminating the Stays ...52
HH. Restitution Order ...52
II. HIL Third Amended Complaint ...54
JJ. Post-Petition Conduct Adversary....54
KK. Bankruptcy Court's Consolidation Orders ...55
LL. MPF Complaint ...56
MM. HIL Answer & Counterclaim ...57
NN. Panamanian Counsel ...57
OO. Adversary Proceeding 12-00109-NPO ...57
PP. Settlement & Dismissals in Mortgage Portfolios Adversary ...58
QQ. Restoration Order ...58
RR. Motion to Continue ...58
SS. Motion to Prohibit Amendment ...59
TT. Trial ...59
DISCUSSION ...60
A. Home Improvement Loans Adversary ...60
1. Choice of Law-Generally ...60
2. Doctrines of Waiver and/or Estoppel ...62
3. Statute of Limitations ...63
4. Count I (Legal Capacity of the Rainbow Group) ...66
a. Choice of Law ...66
b. Are the Rainbow Loan Agreement, the 2006 Note, and the Custodial Agreement void ab initio ? ...66
(1.) British Virgin Islands Law ...67 *14 (2.) BCA ...68
(3.) Kirk ...68
(4.) Hare ...69
c. Analysis ...69
5. Count II (Legal Capacity of Beher Limited) ...71
a. Choice of Law ...72
b. Does the Trustee have standing to complain about the legal authority of Beher Limited to execute the 2010 Assignment or to object to the validity of the 2010 Assignment?...72
c. Under British Virgin Islands law, does the striking of Beher Limited from the BVI Company Register in 2008 void the 2010 Assignment (of the 2006 Note to BHT?) ...73
(1.) Kirk ...74
(2.) Hare ...75
d. Analysis ...76
6. Count IV (Perfection of Security Interest) ...77
a. Choice of Law ...78
b. Do EFP/BHT have a perfected security interest in the Home Improvement Loans? ...78
(1.) Are EFP/BHT assignees of the Custodial Agreement? ...80
(2.) Are EFP/BHT required by the UCC to "re-perfect" their security interest? ...82
c. Analysis ...83
7. Count V (Tracing of Funds) ...83
8. Count VI (POC 4-1 & POC 5-1) ...84
a. Calculation of Claims...84
b. Analysis ...86
B. Mortgage Portfolios Adversary ...87
1. MPF Complaint ...87
2. MPF Counterclaim Counts ...87
3. Misjoinder of Parties ...87
4. Choice of Law ...88
5. Counts I & IV/MPF Counterclaim Counts I-III (Mortgage Portfolios)...89
a. Are Portfolios # 1-# 7 assets of true joint ventures, collateral for loans, or the subject of servicing contracts ...90
(1.) Portfolios # 1 & # 2 (EFP & CHFS) ...90
(a.) Intent ...92
(b.) Control ...93
(c.) Profit Sharing ...93
(d.) Who owns Portfolios # 1 & # 2...94
(e.) Does EFP have a perfected a perfected security interest? ...94
(2.) Portfolios # 3-# 6 (EFP & CHFS) ...95
(a.) Who owns Portfolios # 3-# 6? ...95
(b.) Are the loans enforceable? ...95
(3.) Portfolio # 7 (BHT & CHFS) ...96
6. Counts II & III/MPF Counterclaim Count VIII (POC 6-1 to POC 9-1) ...97
a. Calculation of Claims ...97
b. Analysis ...99
7. MPF Counterclaim Count IV (Breach of MPF Agreements) ...100
8. MPF Counterclaim Count V (Breach of Fiduciary Duty) ...100
9. MPF Counterclaim Count VI (Servicing Fees)...101
10. MPF Counterclaim Count VII (Tracing of Funds) ...102
C. Tracing of Funds ...102
1. Choice of Law ...102
2. Does EFP have a security interest in the $5,490,132.19 wired to the Trustee from accounts at Banco Panameño or the *15 $540,000 in loan payments intercepted by the Trustee? ...102
a. Tracing of Funds-General ...103
b. Tracing of Pre-petition Funds ...103
c. Tracing of Post-petition Funds ...104
d. Tracing of Funds Recovered or Intercepted ...105
3. Analysis ...106
D. Cash Collateral Contested Matters ...107
E. Post-Petition Conduct Adversary ...108
1. Count I (Violation of Automatic Stay) ...109
a. Did Dr. Edwards know about the existence of the automatic stay? ...110
b. Did Dr. Edwards intend his actions? ...110
c. Did Dr. Edwards violate the automatic stay? ...110
d. May the Trustee recover damages under 11 U.S.C. § 362 (k) ? ...112
2. Count II (Turnover of Property) ...114
3. Count III (Post-petition Transfer) ...114
4. Count IV (Civil Conspiracy) ...114
a. Choice of Law ...114
b. Did EFP/BHT and Dr. Edwards act in concert to hinder, delay, and otherwise defraud the estate and its creditors by withholding information pertinent to the operation of its ongoing business and assets stolen from the estate? ...115
5. Count V (Conversion) ...117
a. Choice of Law ...117
b. Did EFP/BHT and Dr. Edwards convert estate property for their own use without permission or lawful justification and willfully interfere with the Trustee's duty to protect and acquire the estate's property thereby depriving the Trustee of rightful possession of that property? ...117
6. Count VI (Equitable Subordination) ...118
F. Plan Confirmation Proceedings in the Bankruptcy Case ...119
CONCLUSION ...120
JURISDICTION
This Court has jurisdiction over the subject matter of and the parties to these adversary proceedings and contested matters pursuant to 28 U.S.C. § 1334 . This matter is a core proceeding as defined in 28 U.S.C. § 157 (b)(2)(A), (B), (E), (K), (M), and (O). Notice of the Trial was proper under the circumstances.
INTRODUCTION
By way of explanation and apology for the considerable length of this Opinion, this effort resolves three (3) adversary proceedings and five (5) Contested Matters. The consolidation of these proceedings and matters into a single Opinion was deemed by the Court to be the most efficient means of resolving years of disputes previously unresolved in state court, federal district court, and numerous mediations. The objective of the Court is to create a clear path for an exit strategy in the Bankruptcy Case. The journey began on February 15, 2012, with litigation filed in state court that was removed to federal district court and then stayed by CHFS's chapter 11 bankruptcy filing on May 23, 2012. 6
*16 During the two (2) years it operated as a debtor-in-possession, CHFS initiated two of the three adversary proceedings addressed in this Opinion. All of these matters were derailed by the criminal conduct of CHFS's president, resulting in the appointment of the Trustee in 2014. During several failed attempts at mediation, litigation stalled. Because of the length of this Opinion, the Court provides a short summary of the facts to assist the reader in understanding the myriad of legal issues raised by the parties.
This Opinion describes only a portion of the long, tedious relationship between Dr. Edwards, an orthopedic surgeon from Baltimore, Maryland, and William D. "Butch" Dickson ("Dickson"), a business owner from Jackson, Mississippi. Both Dr. Edwards and Dickson owned and operated multiple family businesses. This unlikely pair were introduced by a broker from New York hired by Dickson to locate a lender to replace the current lender for CHFS, a mortgage servicing company managed by Dickson. Edwards and Dickson entered into their first business deal, a credit facility of $10 million to fund the purchase of home improvement loans. To save time and money, John Allen ("Allen"), a disbarred attorney and employee of CHFS, drafted the loan documents using as forms the documents prepared by CHFS's prior lender, cutting and pasting different names and addresses where appropriate. In this early transaction and in all subsequent transactions regarding the home improvement loans, Dr. Edwards, entities owned by Dr. Edwards, or an offshore trust funded the loans. Dr. Edwards relied on his daughter, Martha Edwards Borg, who is not a certified public accountant and does not hold a degree in accounting, to review CHFS's financial reports, calculate the principal balance and interest due on the promissory notes each month, and determine "eligible receivables" based on a "Borrowing Base Certificate." To provide some understanding as to the magnitude of their initial business deal, the flow of funds from CHFS to entities of Dr. Edwards averaged between $600,000 and $700,000 per month.
During their business relationship, Dr. Edwards and Dickson ignored or changed the terms of their agreement. For example, they increased the line of credit from $10 million to $16 million, assigned promissory notes to different entities owned or advised by Dr. Edwards, and changed the number and frequency of wire transfers. These changes were not always documented in writing; some of the written changes were implemented solely as the result of an exchange of emails. When changes were formally documented, mistakes were made. Dr. Edwards, who is not an attorney, prepared and drafted many of these documents himself. He did not always use the correct name of the alleged lender.
In 2008, Dr. Edwards and Dickson entered into an entirely new business relationship, a series of seven (7) so-called "joint ventures," in which Dr. Edwards, through entities he controlled or advised, including an offshore trust, expended approximately $20 million either as investments, loans, or purchases of portfolios of mortgages. Dr. Edwards drafted three of the purported "joint venture" agreements himself; he did not bother to memorialize in writing the remaining purported "joint venture" agreements. 7
In the beginning, Dr. Edwards and Dickson were content with their informal *17 business relationship. Then, in 2010, Dr. Edwards became suspicious that CHFS had exceeded the limit of the credit facility regarding the home improvement loans, and Dickson believed that Dr. Edwards was overcharging CHFS by, for example, posting payments late. Dickson also believed that Dr. Edwards was not remitting CHFS's share of the net profits from the purported joint ventures. Litigation ensued. In 2012, Dickson diverted or transferred approximately $3.7 million from CHFS's operating accounts to an account in a Panamanian bank. He then commenced the Bankruptcy Case on behalf of CHFS.
In the Bankruptcy Case, Dr. Edwards filed proofs of claim on behalf of EFP/BHT totaling approximately $30 million. As the largest creditor of CHFS, EFP/BHT challenged almost every action taken by CHFS in the Bankruptcy Case. In the fall of 2013, Dickson surreptitiously began moving CHFS's business operations to Costa Rica. Then, in early 2014, Dickson fled to Costa Rica but not before withdrawing over $9 million from CHFS's operating and escrow accounts. For his bankruptcy crimes, Dickson was sentenced to fifty-seven (57) months in a federal correctional facility.
The discovery of the unauthorized transfers led to the swift appointment of the Trustee. With limited cooperation from Dickson, the Trustee eventually recovered and/or intercepted some of the stolen funds. Needless to say, her efforts to administer the bankruptcy estate were hampered by the lack of bank records.
Without informing the Trustee, Dr. Edwards paid Dickson's business associate in Costa Rica, Mike James Meehan ("Meehan"), for information about CHFS's rogue operation and, in December of 2014, met with him in Costa Rica. Dr. Edwards and Meehan corresponded for five (5) months, and during that time, Dr. Edwards did not inform the Trustee. When Meehan himself later contacted the Trustee, she learned for the first time that Meehan had sent Dr. Edwards two (2) compact discs ("CDs") and a dropbox. 8 The Trustee sued Dr. Edwards and two offshore lenders.
In these consolidated Adversary Proceedings, the Trustee asks the Court to determine the respective rights and obligations of CHFS, EFP, Edwards Family Partnership, LLP ("EFP LLP"), 9 and BHT based, among other testimony and evidence, on: (1) documents prepared in haste using documents from another transaction as forms or documents drafted by Dr. Edwards (regardless of which the parties acted inconsistently with respect to their alleged contractual rights); (2) an interpretation and application of the law of the British Virgin Islands as explained by lawyers practicing in that jurisdiction; (3) the testimony of Dr. Edwards who admits he did not pay much attention to Dickson and CHFS until the monthly payments stopped; (4) the testimony of Borg, who held the title of bookkeeper but who had *18 limited knowledge of general accounting principles; and (5) the testimony of an accountant, Aucoin, whose analysis was limited because of the unavailability of bank records from Panama and Costa Rica. The Trustee also asks the Court to determine the source of the funds returned to her after Dickson's arrest as well as the funds she intercepted. Finally, the Trustee challenges Dr. Edwards' post-petition conduct as a stay violation and conversion. 10
EFP/BHT assert counterclaims in these adversary proceedings, in which they ask the Court to declare, inter alia , that they have a secured interest in the home improvement loans, they own the notes underlying other mortgage portfolios, and they are entitled to the money recovered by the Trustee. They also seek damages against the estate for losses they incurred as a result of Dickson's criminal conduct.
FACTS
The majority of facts elicited at Trial are undisputed. Indeed, the parties stipulated to the admissibility of 114 documents at Trial. The parties' primary disputes rest on an application of law to the facts.
A. CHFS
CHFS, a Delaware company, is a mortgage servicing entity that for the most part purchased mortgage loan portfolios at a discount from various third parties and serviced those loans, as well as loans owned by two (2) affiliated companies, Discount Home Mortgage, Inc. and Discount Mortgage, Inc. (Bankr. Dkt. 167; HIL Adv. Dkt. 341 at 10-11). Additionally, CHFS serviced consumer loans owned by SNGC, LLC, not involved in this litigation. (HIL Adv. Dkt. 341 at 11; MPF Ex. P-15).
The majority of CHFS's shares of stock are owned by Victory Consulting Group, Inc. ("Victory Consulting") (HIL Adv. Dkt. 340 at 86). Until early 2014, Dickson was CHFS's chief executive officer and its owner through his ownership of Victory Consulting. Before the fall of 2013, CHFS's principal place of business was located at 234 East Capitol Street, in Jackson, Mississippi, where employees, including Dickson's family members, serviced mortgage loan portfolios, each one consisting of hundreds of individual notes secured by mostly subordinate residential mortgages on property located in over thirty (30) states in the United States. (HIL Adv. Dkt. 341 at 11). For each mortgage loan there was an underlying retail installment contract signed by the consumer. All of the loans were for a period longer than five (5) years. (HIL Adv. Dkt. 341 at 11).
B. Credit Facility-Home Improvement Loans
In 2006, near the end of CHFS's relationship with its current lender, Roy Al Finance and Loan Company, Dickson began searching for replacement financing. (HIL Adv. Dkt. 341 at 113-14). That same year, Joe Logan ("Logan"), a business broker hired by CHFS, brought a loan proposal to Dr. Edwards, whom Logan knew from previous business deals, whereby Dr. Edwards would replace Roy Al Finance and Loan Company. 11 (HIL Adv. Dkt. 341 *19 at 112-14). In July of 2006, Dr. Edwards met with Dickson in his home in Baltimore. (HIL Adv. Dkt. 341 at 114). At Dr. Edwards' request, his daughter Borg traveled to Jackson, Mississippi, to meet with Dickson and CHFS employees for the purpose of learning CHFS's business operations. (HIL Adv. Dkt. 342 at 117-18). Borg was unfamiliar with second mortgages but apparently her report to her father about CHFS was favorable. (HIL Adv. Dkt. 342 at 182).
From September 25, 2006, to August 10, 2010, Dr. Edwards, acting through four (4) entities owned and/or purportedly controlled by him-The Rainbow Group, Ltd., a British Virgin Islands company; Beher Holdings, Ltd. ("Beher Limited"), a British Virgin Islands company; EFP, a Delaware limited partnership; and BHT, a trust organized under the laws of Bermuda-loaned approximately $16 million to CHFS. (Bankr. Dkt. 167 at 9). Borg, who has a bachelor's degree in political science but does not hold a degree in accounting and is not a certified public accountant, acted as the bookkeeper for The Rainbow Group, Ltd., Beher Limited, and EFP/BHT in all of these transactions. (HIL Adv. Dkt. 342 at 115-18, 121-22).
The parties have stipulated that the consumer mortgage loans that are at issue in the Home Improvement Loans Adversary, which CHFS purchased from various unrelated entities, are the 1,809 loans listed in schedules 2 and 3 attached to the expert report of Jeffrey N. Aucoin ("Aucoin"). (HIL Ex. P-7, Schedules 2 & 3; HIL Adv. Dkt. 331 at 40). These loans are referred to as the "Home Improvement Loans" because the consumers obtained the loans to replace windows, coat basements, and the like. (HIL Adv. Dkt. 341 at 11). As to these transactions, it is undisputed that the relationship between CHFS and EFP/BHT can be characterized as borrower-lender.
1. Rainbow Loan Term Sheet-Initial $10 Million Loan
On July 17, 2006, Dr. Edwards sent a letter (the "Rainbow Loan Term Sheet") (HIL Ex. P-3) to Dickson outlining the terms and conditions under which The Rainbow Group, Ltd. would offer CHFS a revolving line of credit up to $10 million to replace CHFS's existing credit facility and provide capital for the purchase of additional Home Improvement Loans. (HIL Adv. Dkt. 331 at 40). The Rainbow Loan Term Sheet appears on the letterhead of:
The Rainbow Group, Ltd.
Intercontinental Investment
P.O. Box 627, Zone 1
Panama, Republic of Panama
(HIL Ex. P-3). The letterhead identifies Patsy Cambra de Brackett as "President" of "The Rainbow Group, Ltd." and Dr. Edwards as "U.S. Investment Advisor." Pursuant to the Rainbow Loan Term Sheet, Dr. Edwards proposed that the form of the loan documents follow those already in existence between CHFS and its then lender, Roy Al Finance and Loan Company.
2. Execution of Rainbow Loan Agreement
Allen prepared the Loan and Security Agreement (the "Rainbow Loan Agreement") (HIL Exs. P-1, P-2, D-17 & D-18), using as forms the documents in place between CHFS and Roy Al Finance and Loan Company and conforming the terms to the Rainbow Loan Term Sheet. (HIL Adv. Dkt. 341 at 115). On September 25, *20 2006, CHFS and "The Rainbow Group, Ltd." signed the Rainbow Loan Agreement, in which "The Rainbow Group, Ltd., a British Virgin Island [ sic ] corporation ... or assigns" agreed to advance to CHFS a line of credit up to $10 million to pay-off in full Roy Al Finance and Loan Company and to acquire new consumer mortgage loans. (HIL Adv. Dkt. 331 at 41). Patsy Cambra de Brackett 12 purportedly signed the Rainbow Loan Agreement on behalf of "The Rainbow Group, Ltd." as "President," and Dr. Edwards signed the Rainbow Loan Agreement on behalf of "The Rainbow Group, Ltd." as "U.S. Investment Manager." Dickson signed the Rainbow Loan Agreement on behalf of CHFS and as a personal guarantor.
3. Rainbow Group
The Rainbow Loan Agreement identifies "The Rainbow Group, Ltd." as a British Virgin Islands corporation. The British Virgin Islands is a British overseas territory located in the northeastern Caribbean. (HIL Adv. Dkt. 342 at 12-13). There is no entry in the British Virgin Island Register of Companies (the "BVI Company Register") for an entity named " The Rainbow Group, Ltd." (HIL Adv. Dkt. 342 at 15). According to Dr. Edwards, the use of "The" in the name is a drafting error, and there is no entity known as " The Rainbow Group, Ltd." (HIL Adv. Dkt. 341 at 119-20). There is an entry in the BVI Company Register for an entity called "Rainbow Group, Ltd." (HIL Adv. Dkt. 342 at 36). For ease of reference, the Court refers to the Rainbow entity as the "Rainbow Group," without regard to whether its proper name is "The Rainbow Group, Ltd." or "Rainbow Group, Ltd."
4. Terms & Conditions of the Rainbow Loan Agreement
The parties did not always conform their conduct to the terms and conditions of the Rainbow Loan Agreement. See, e.g. , (HIL Ex. D-24). The Rainbow Loan Agreement required CHFS to deposit all payments received on the underlying retail installment contracts into a blocked account at BancorpSouth Bank ("BancorpSouth") in Tupelo, Mississippi. CHFS and Rainbow Group would own the blocked account jointly, but only the Rainbow Group would have the right to withdraw funds from the blocked account. 13 As security, CHFS was required to assign the retail installment contracts to the Rainbow Group.
After the initial disbursement in an amount sufficient to pay off Roy Al Finance and Loan Company and pay all loan fees owed the Rainbow Group, plus an *21 initial advance of $500,000, 14 CHFS could request additional advances up to 80% of "eligible receivables," consisting of the aggregate outstanding principal balance owed to CHFS by consumers, less the balance on any accounts more than sixty-one (61) days delinquent. For that calculation, CHFS was required to send the Rainbow Group a monthly "Borrowing Base Certificate," showing the total principal balance of eligible consumer loans, the current balance for the line of credit (as calculated by Borg), and the remaining availability. (HIL Ex. D-14); see, e.g. , (HIL Ex. D-24). As the bookkeeper for the Rainbow Group, Borg was responsible for maintaining a list of the Home Improvement Loans, determining whether new consumer loans met the eligibility requirements, and calculating the balance due for the line of credit. (HIL Adv. Dkt. 342 at 118-19). In that role, she was responsible for providing CHFS the figures for the current balance due that appeared each month in the Borrowing Base Certificate. According to Dr. Edwards, CHFS routinely requested and received advances under the line of credit up to the maximum availability, as shown in the Borrowing Base Certificate. (HIL Adv. Dkt. 341 at 124). If the Rainbow Group did not have sufficient funds, Dr. Edwards would arrange for payment by a different entity owned or purportedly controlled by him. (HIL Adv. Dkt. 341 at 125).
Paragraph 9.6 of the Rainbow Loan Agreement grants the Rainbow Group the right to divide and reissue the promissory note and to assign its rights, as follows:
9.6 ASSIGNMENT BY LENDER. LENDER MAY AT ANY TIME (A) DIVIDE AND REISSUE (WITHOUT SUBSTANTIVE CHANGES OTHER THAN RESULTING FROM SUCH DIVISION) THE NOTE, AND/OR (B) SELL, ASSIGN, GRANT PARTICIPATION IN, DELEGATE OR OTHERWISE TRANSFER TO ANY OTHER PERSON (AN " ASSIGNEE ") ALL OR PART OF RIGHTS AND DUTIES OF LENDER UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. TO THE EXTENT INDICATED IN ANY DOCUMENT, INSTRUMENT OR AGREEMENT SO SELLING, ASSIGNING, GRANTING PARTICIPATION IN, OR OTHERWISE TRANSFERRING TO AN ASSIGNEE SUCH RIGHTS AND/OR DUTIES, (I) THE ASSIGNEE SHALL ACQUIRE ALL THE LENDER'S RIGHTS UNDER THE AGREEMENT AND THE OTHER LOAN DOCUMENTS AND (II) THE ASSIGNEE SHALL BE DEEMED TO BE THE "LENDER" UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS WITH THE AUTHORITY TO EXERCISE SUCH RIGHTS IN THE CAPACITY OF LENDER.
(HIL Exs. P-1, P-2, D-17 & D-18). Paragraph 9.19 contains a similar provision. Under ¶ 2.3(iii), the maturity date of the loan was March 7, 2009, but CHFS was granted an additional six (6) months to obtain alternate financing or liquidate the credit line.
5. 2006 Note
Consistent with the Rainbow Loan Agreement, Dickson, as president of CHFS, signed a Note (the "2006 Note") (HIL Exs. P-1, P-2, D-2, D-17 & D-18), dated September 25, 2006, obligating CHFS to pay the Rainbow Group the unpaid balance of all advances made under *22 the $10 million line of credit. (HIL Adv. Dkt. 331 at 41). The maturity date of the 2006 Note was March 25, 2009. The 2006 Note required CHFS to pay interest only, at the initial annual rate of 13% or 5% plus prime rate, whichever is greater, and after one year, at an annual rate of 12%, on the outstanding principal amount advanced to CHFS until February 25, 2009, and, thereafter, CHFS agreed to pay principal and interest until the maturity date of March 25, 2009.
6. Custodial Agreement
CHFS entered into the Custodial Agreement (the "Custodial Agreement") (HIL Ex. D-22) to provide for the custody of the original loan documents and assignments for the benefit of the Rainbow Group. (HIL Adv. Dkt. 331 at 41). The Custodial Agreement designated Harold B. McCarley, Jr. PLLC (the "McCarley Firm"), a law firm located in Ridgeland, Mississippi, as the custodian. (HIL Adv. Dkt. 343 at 10). Dickson, as president of CHFS, and Harold B. McCarley, Jr. ("McCarley"), on behalf of the McCarley Firm, signed the Custodial Agreement. No designated individual for the Rainbow Group signed the Custodial Agreement. In the signature block, there are blanks for the signatures of Patsy Cambra de Brackett, as president of the Rainbow Group, and Dr. Edwards, as its United States investment manager.
Before any newly acquired retail installment contract could become an "eligible receivable" under the Rainbow Loan Agreement, the Custodial Agreement required CHFS to deliver to the McCarley Firm the retail installment contract, the consumer mortgage, and the assignment transferring the mortgage to the Rainbow Group. Pursuant to the Custodial Agreement, the McCarley Firm agreed to certify and confirm each new retail installment contract and related documents delivered by CHFS, in return for payment of a $20 fee. At Trial, McCarley testified that he currently holds these documents and releases them only when he receives a written request signed by both CHFS and the Rainbow Group or other entity identified by Dr. Edwards. (HIL Adv. Dkt. 343 at 9-10). The release of documents was not uncommon and took place whenever a borrower paid off a mortgage. (HIL Adv. Dkt. 341 at 125). There is no provision in the Custodial Agreement for the McCarley Firm to release the documents to the Rainbow Group or other lender in the event of a default of the Rainbow Loan Agreement by CHFS. Sections 5.1 and 5.7 of the Custodial Agreement prohibited any amendment or assignment without the prior written consent of the McCarley Firm, the Rainbow Group, and CHFS, as follows:
Section 5.1. Amendment . This Agreement may be amended from time to time by Custodian, Lender and Borrower by written agreement signed by such parties.
Section 5.7 Assignment . No party hereto shall sell, pledge, assign or otherwise transfer this Agreement without the prior written consent of the other parties hereto.
(HIL Ex. D-22).
The advances from the Rainbow Loan Agreement resulted in a flow of money to and from the Rainbow Group. In theory, CHFS profited from this arrangement in two ways, on the spread (the difference between the principal balance of the consumer mortgage loans and the price CHFS paid for them) and on the unearned discount. The Rainbow Group profited from CHFS's payment of interest at annual rates varying from 12.5% to 14%. (HIL Ex. P-7 at 9).
7. 2007 Assignment
At some point, Dr. Edwards transferred the assets of the Rainbow Group to Beher *23 Limited, a British Virgin Islands company that he purchased from a subsidiary of VP Bank (BVI) Limited ("VP Bank") on or about April 25, 2007, for that purpose. (HIL Exs. D-20 & P-26). (HIL Adv. Dkt. 341 at 126-27). On April 28, 2007, Dr. Edwards sent an email to Dickson, informing him that Beher Limited had purchased the "Rainbow Group Loans" and that all future wires from CHFS should be sent to Beher Limited's account at JP Morgan Chase Bank. (HIL Ex. P-20). Shortly thereafter, on May 1, 2007, "The Rainbow Group, Ltd." purportedly assigned the 2006 Note (the "2007 Assignment") (HIL Exs. P-1, P-2, D-2, D-17 & D-18) to Beher Limited. Dr. Edwards' handwritten endorsement appears on the last page of the 2006 Note and provides: "Pay to the Order of: Beher Holdings, Ltd. without recourse" and is signed by Dr. Edwards in his capacity as the investment manager for the Rainbow Group. (HIL Adv. Dkt. 331 at 41). There were no changes or amendments to the Rainbow Loan Agreement or the Custodial Agreement. To be clear, there is no document that amends the Custodial Agreement to change the name of the lender from the Rainbow Group to Beher Limited or that assigns the Custodial Agreement from the Rainbow Group to Beher Limited. (HIL Adv. Dkt. 341 at 14-15).
8. 2007 Note
In an email dated August 6, 2007, Dr. Edwards informed Dickson that his recent request for an advance exceeded the borrowing limit. (HIL Ex. D-21). Thereafter, CHFS executed a $3 million Supplemental Promissory Note and Credit Facility (the "2007 Note") (HIL Ex. D-17) payable to Beher Limited. The 2007 Note purportedly increased the amount of available credit under the Rainbow Loan Agreement to $12 million. 15 (HIL Adv. Dkt. 331 at 41). The 2007 Note required CHFS to pay interest only, at the annual rate of fourteen percent (14%) on the outstanding principal amount of the credit facility until the maturity date of March 25, 2009.
9. BVI Company Register
On October 31, 2008, the Registrar struck both Beher Limited and "Rainbow Group, Ltd." from the BVI Company Register because of their failure to pay annual registration fees pursuant to the BVI Business Companies Act ("BCA"). (HIL Ex. P-12; HIL Adv. Dkt. 341 at 128). Unlike Beher Limited, it does not appear that Rainbow Group, Ltd. engaged in any business after the strike off.
An email to Dr. Edwards from Robert Hirst ("Hirst"), head of banking at VP Bank, shows that Dr. Edwards was aware by November 2, 2009, that Beher Limited was "not in goodstanding [ sic ] with the companies [ sic ] registry" and, as a result, was legally restricted from executing any transactions until it was returned to good standing. (HIL Ex. P-26; HIL Adv. Dkt. 341 at 221). In an email to Hirst dated November 5, 2009, Dr. Edwards complained that he received "no warning about striking the company." (HIL Ex. P-26). Dr. Edwards then became involved in a dispute with VP Bank and Beher Limited's registered agent, ATU General Trust (BVI) Limited, purportedly a subsidiary of VP Bank, regarding the payment of Beher Limited's registration fees. (HIL Adv. Dkt. 341 at 128). Apparently, they disagreed about whether the price Dr. Edwards paid VP Bank to purchase Beher Limited should have included payment of the initial registration fee. (HIL Adv. Dkt. 341 at 128). It is unknown whether the fee dispute *24 was ever resolved. Regardless, Dr. Edwards did not take any action to restore Beher Limited to the BVI Company Register until July 17, 2017, when he commenced a proceeding in the Eastern Caribbean Supreme Court in the High Court of Justice (Commercial Division) Virgin Islands, to have Beher Limited restored to the BVI Company Register. (HIL Ex. P-27; HIL Adv. Dkt. 341 at 129, 172).
On May 1, 2010, before the restoration of Beher Limited to the BVI Company Register, Dr. Edwards transferred the assets of Beher Limited to BHT, a trust that he created under Bermuda law for the benefit of his children. (HIL Ex. P-26; HIL Adv. Dkt. 341 at 127). The trustee of BHT is Church Bay Trust Co. ("Church Bay Trust"), a licensed Bermuda trust company. No attorney has appeared in these proceedings on behalf of Church Bay Trust. Dr. Edwards testified that he is the "settlor" or "grantor" of BHT as well as its investment advisor and "controls" BHT in the context of this litigation. (HIL Adv. Dkt. 341 at 127, 164 & 172). There is no document indicating that Church Bay Trust delegated to Dr. Edwards its responsibilities for managing BHT's assets. Dr. Edwards testified that he controls BHT.
10. 2010 Assignment
On May 10, 2010, before Beher Limited was restored to the BVI Company Register, Beher Limited assigned the 2006 Note to BHT (the "2010 Assignment") (HIL Adv. Dkt. 237-1 at 39) (HIL Ex. D-2) by Dr. Edwards' handwritten endorsement on the last page of the 2006 Note. (HIL Adv. Dkt. 331 at 41). The endorsement provides: "Pay to the order of Beher Holdings Trust without recourse" and is signed by Dr. Edwards as the "Investment Manager" for Beher Limited. Again, there were no changes or amendments to the Rainbow Loan Agreement or the Custodial Agreement. Unlike the 2006 Note, the 2007 Note was never assigned to BHT.
11. Amended Loan Agreements
On August 6, 2010, Dr. Edwards sent an email to Dickson, "I just realized the Beher-CHFS loan has matured." (HIL Ex. P-4). Dr. Edwards attached a letter to the email proposing a new loan wherein BHT would renew a portion of the indebtedness owed by CHFS, and EFP would become CHFS's new lender for the remaining portion of the loan. (HIL Exs. P-4 & D-5). EFP was formed by Dr. Edwards as a family limited partnership under Delaware law, and Dr. Edwards is its general partner (HIL Adv. Dkt. 341 at 129) and Borg is a limited partner (HIL Adv. Dkt. 342 at 115). In the same email to Dickson, Dr. Edwards informed him that the renewal "gives us the opportunity to clean up several items." (HIL Ex. P-4 & D-5).
On August 10, 2010, CHFS executed two nearly identical amendments (the "Amended Loan Agreements") (HIL Exs. D-9 & D-10), prepared by Dr. Edwards, which amended the Rainbow Loan Agreement to increase the line of credit from $12 million to $16 million and divide the loan between two lenders, EFP ($4 million) and BHT ($12 million). (HIL Adv. Dkt. 331 at 42). This division represents a 75/25 percentage split of the loan between BHT and EFP, respectively. The Amended Loan Agreements, each consisting of a single page, were signed by Dickson on behalf of CHFS.
Dr. Edwards signed the Amended Loan Agreement on behalf of BHT (the "BHT Amended Loan Agreement") (HIL Ex. D-10) as its "US Investment Manager." Church Bay Trust did not sign the BHT Amended Loan Agreement, and there is no document authorizing Dr. Edwards to sign it on BHT's behalf. The amount of the *25 credit line provided by BHT is listed inconsistently as "Sixteen [ sic ] Million Dollars ($12,000,000)." The following statement appears at the bottom of the page: "The outstanding principal balance due Lender, subject to alteration upon documentation of any mistake in calculations, was $11,201,233 as of July 31, 2010."
Dr. Edwards signed the Amended Loan Agreement on behalf of EFP (the "EFP Amended Loan Agreement") (HIL Ex. D-9) as its "General Partner." (HIL Adv. Dk. 341 at 129). Notably, the EFP Amended Loan Agreement purportedly amends the Rainbow Loan Agreement although EFP was not a party to, or assignee of, the Rainbow Loan Agreement. The amount of the credit line provided by EFP is listed as "Four Million Dollars ($4,000,000)." A statement similar to the one in the BHT Amended Loan Agreement appears at the bottom of the page of the EFP Amended Loan Agreement: "The outstanding principal balance due Lender, subject to alteration upon documentation of any mistake in calculations, was $3,733,744 as of July 31, 2010."
Many changes were made to the Rainbow Loan Agreement other than the increase in the credit facility and EFP/BHT's replacement of Beher Limited as lenders. Among these changes, payments were no longer required to be made to a blocked account but were required to be wired "to the address provided from time to time in writing." The availability of eligible receivables was increased to 92% of total loans from January 1, 2011, until June 1, 2011, when it was reduced to 90%. Unlike the EFP Amended Loan Agreement, the BHT Amended Loan Agreement increased this percentage to 94% from October 1, 2010, until January 1, 2011. Additionally, the interest rate per annum was set at 12.5% effective August 1, 2010.
12. BHT Note & EFP Note
Pursuant to the Amended Loan Agreements, CHFS executed a $12 million Commercial Loan Note and Line of Credit in favor of BHT (the "BHT Note") (HIL Ex. D-7) and a $4 million Commercial Loan Note and Line of Credit in favor of EFP (the "EFP Note") (HIL Ex. D-6), both of which were drafted by Dr. Edwards (HIL Adv. Dkt. 341 at 184). Of the total amount of the credit facility of $16 million, BHT undertook seventy-five percent (75%) of the obligation, and EFP undertook twenty-five percent (25%) of the obligation. (HIL Adv. Dkt. 342 at 122). The maturity date of the BHT Note and EFP Note was August 1, 2013. (HIL Adv. Dkt. 331 at 42). Both the BHT Note and EFP Note were signed by Dickson on behalf of CHFS and individually as a guarantor.
Both the BHT Note and EFP Note provided for the payment of interest only at 12.5% until maturity. Security for repayment of the loans (as evidenced by the BHT Note and EFP Note) was the assignment of the consumer mortgage loans and Dickson's written guaranties. There is no document that amends the Custodial Agreement to change the name of the lender from the Rainbow Group to EFP/BHT or that assigns the Custodial Agreement to EFP/BHT. After execution of the EFP and the BHT Notes, CHFS made three payments totaling $667,500 from September 1, 2010 to November 30, 2010. (HIL Ex. P-7, Schedule 7; HIL Adv. Dkt. 340 at 123-24; HIL Adv. Dkt. 342 at 124).
13. Guaranties
In addition to signing the EFP Note and BHT Note as a personal guarantor, Dickson signed two nearly identical guaranties in favor of EFP and BHT. (Case No. 3:13-cv-00587-CWR-LRA, Dkt. 14 Exs. H & I). By each guaranty, signed on August 10, 2010, Dickson "unconditionally and absolutely *26 guarantee[d] ... the due and punctual payment and performance when due of the principal of the Note and the interest thereon...." He accepted liability that was not conditioned on EFP/BHT first demanding payment from CHFS or pursuing any remedies against their collateral. Moreover, Dickson agreed that his obligation under the guaranty agreements was independent of CHFS's obligation. In addition, Dickson agreed to pay all costs and expenses incurred by EFP/BHT in enforcing the guarantees.
C. Mortgage Portfolios
In 2008, before the parties entered into the Amended Loan Agreements in 2010, Dickson approached Dr. Edwards about expanding the nature and scope of their business relationship to include a series of transactions where entities owned and/or purportedly controlled by Dr. Edwards would provide approximately $9 million for CHFS to purchase seven (7) mortgage portfolios of subprime loans (the "Mortgage Portfolios"). (HIL Adv. Dkt. 341 at 19 & 135). Because of the financial crisis in the mortgage industry at that time, Dickson believed that CHFS could purchase loan portfolios at favorable prices. (HIL Adv. Dkt. 341 at 19 & 135). Dr. Edwards testified that he did not consider these transactions to be loans." 16 (HIL Adv. Dkt. 341 at 137).
For ease of reference, the Mortgage Portfolios are referred to individually as Portfolios one through seven ("Portfolios # 1-# 7"), in the order in which they were purchased by CHFS. 17 The parties to Portfolios # 1-# 6 are CHFS and EFP LLP; the parties to Portfolio # 7 are CHFS and BHT. Of the seven (7) transactions, only three are memorialized in writing. Dr. Edwards prepared all three (3) written agreements without the assistance of an attorney and admitted at Trial that they were poorly drafted. (HIL Adv. Dkt. 341 at 187-88). "I should have had attorneys write these. I'm very sorry I didn't." (HIL Adv. Dkt. 341 at 211). Of the three (3) written agreements, EFP LLP (not EFP) is the counterparty to two, and BHT is the counterparty to one. The Portfolios are shown below:
Mortgage Counter-party Documentation Portfolio Portfolio Seller #1 EFP LLP Written DLJ Mortgage Capital, Inc. #2 EFP LLP Written DLJ Mortgage Capital, Inc. #3 Unknown Undocumented DLJ Mortgage Capital, Inc. #4 Unknown Undocumented Promor Investments, LLC #5 Unknown Undocumented Blue World Pools, Inc. #6 Unknown Undocumented Blue World Pools, Inc. #7 BHT Written Blue World Pools, Inc.
(MPF Exs. P-5 to P-14 & D-3 to D-5; MPF Ex. P-2, Schedule 8; PPC Exs. D-22 *27 & D-23). The loans in the Portfolios were serviced by CHFS. The consumer borrower would make payment to CHFS either by check, automatic draft, or money order, and CHFS would remit collections to EFP/BHT, which then would return to CHFS its servicing fees. (HIL Adv. Dkt. 341 at 21). The parties have stipulated that the loans at issue in the Mortgage Portfolios Adversary are the 2,080 loans listed in schedules 2.1 to 2.7 attached to Aucoin's expert report (the "Mortgage Portfolios"). (MPF Adv. Dkt. 126 at 37). As with the Home Improvement Loans, Borg was responsible for reviewing and maintaining the records related to the Mortgage Portfolios as EFP/BHT's bookkeeper. (HIL Adv. Dkt. 342 at 125 & 136). Borg testified that CHFS did not categorize the Mortgage Portfolios by portfolio until 2011 at her request. (HIL Adv. Dkt. 341 at 132-33).
Although the purchases of the seven portfolios was funded directly by entities owned or purportedly controlled by Dr. Edwards (not necessarily EFP/BHT), all of the portfolio purchase agreements were between CHFS and the portfolio seller. (HIL Adv. Dkt. 341 at 16-17, 19; MPF Exs. P-5 to P-14; HIL Adv. Dkt. 342 at 131). Moreover, for Portfolios # 1-# 6, the portfolio sellers assigned the loans to CHFS. (HIL Adv. Dkt. 341 at 17). The original notes and assignments comprising the consumer loans in Portfolios # 1-# 6 are currently in EFP's possession as "collateral." (HIL Adv. Dkt. 342 at 198-99).
As to Portfolio # 7, the original notes and assignments were supposed to be held by Patrick Frascogna ("Frascogna"), a Mississippi attorney whose law office was in the same building as CHFS. (MPF Ex. P-4 & D-28). Frascogna, however, either released the original loan documents to Dickson at some point or never took possession of them. According to Dickson, the original loan documents are in a warehouse somewhere in Panama, the location of which he has not divulged. (HIL Adv. Dkt. 341 at 6). The original notes and loan documents, however, remain missing. 18 According to the Custodial File Delivery Form MPF Reply to Counterclaim D-28 at 1) signed by Dickson and the Custodial Certifications (MPF Ex. D-28 at 2-5) signed by Frascogna, CHFS assigned the notes that comprise Portfolio # 7 to BHT. Each Mortgage Portfolio is discussed separately below.
1. Portfolio # 1
In late 2007, CHFS entered into negotiations with DLJ Mortgage Capital, Inc. ("DLJ") for the purchase of Portfolio # 1. (MPF Ex. P-5). Portfolio # 1 consists of 225 second mortgages with a collective unpaid principal balance of $9,573,866.86. (MPF Ex. P-7). On January 7, 2008, Dr. Edwards emailed Dickson agreeing to provide CHFS with the funds to purchase Portfolio # 1. "If I put up all $ and you manage the portfolio, the upside split will be something like 3:1 after repayment of principal, reimbursement of your costs (based upon CHFS financial statements) and interest on my funds." (MPF Ex. D-1). On January 9, 2008, CHFS executed a letter agreement committing to purchase Portfolio # 1 from DLJ (MPF Ex. P-28) for 27% of the aggregate unpaid balance of the loans. CHFS and DLJ then entered into a Mortgage Loan Purchase Agreement (the "DLJ Purchase Agreement")
*28 (MPF Ex. P-6). An entity purportedly controlled by Dr. Edwards funded $2,584,944 and $143,608, on January 31, 2008, and February 8, 2008, respectively, to purchase Portfolio # 1. (MPF Exs. P-2 at 2 & D-8). 19
The formal terms of the arrangement between CHFS and EFP regarding the purchase of Portfolio # 1 were reduced to writing in the Mortgage Portfolio Joint Venture Between Edwards Family Partnership & Community Home Financial Services, Inc. (the "MPF Agreement I ") (MPF Exs. P-6 & D-20; MPF Adv. Dkt. 126 at 36) dated January 28, 2008, and drafted by Dr. Edwards, which he later admitted in a letter to Dickson had been "poorly written." (HIL Ex. D-30; MPF Ex. D-35). EFP LLP agreed to commit approximately $3 million to purchase Portfolio # 1, and "[i]n exchange for its capital investment, EFP [LLP] will receive interest on the outstanding balance to be paid monthly at the rate of 12% and receive 75% of net proceeds from the portfolio. CHFS will receive a servicing fee of $20 per month for each loan payment collected and 25% of net proceeds from the portfolio." Later, on page two, MPF Agreement I sets forth in detail these distribution rights:
Distributions
1. CHFS will send a monthly statement along with the financial summary. The statement will note the number of collections X $20 each and any out of pocket major collection expenses.
2. EFP [LLP] will pay the CHFS invoice within 15 days of receipt.
3. Anytime total loan interest and principal pay-offs exceed cumulative CHFS servicing invoices + interest on the EFP [LLP] investment by $10,000, EFP [LLP] will distribute 25% of the cumulative net proceeds to CHFS and retain 75%.
4. EFP [LLP] will either provide or confirm a CHFS monthly statement of all income and expenses of joint venture.
(MPF Exs. P-6 & D-20). Accordingly, under MPF Agreement I , CHFS was entitled to receive: (1) a $20 fee for each loan payment collected each month; (2) 100% reimbursement for "any out of pocket major collection expenses"; and (3) 25% of the net proceeds "anytime total loan interest and principal pay-offs exceed cumulative CHFS servicing invoices + interest on the EFP investment by $10,000." MPF Agreement I further provides, "CHFS will vigorously pursue collections for accounts 3 months or more behind. This may include personal visits to renegotiate loans, court judgments, wage garnishments and/or mortgage foreclosures. CHFS will front collection expenses which will be reimbursed." (MPF Exs. P-6 & D-20).
MPF Agreement I did not require CHFS to assign EFP LLP any rights, interests, or claims in the mortgage instruments that CHFS received as the purchaser of Portfolio # 1 from DLJ under the DLJ Purchase Agreement. However, MPF Agreement I did require EFP LLP to hold title to the individual notes and mortgages as "collateral." Specifically, MPF Agreement I provides:
Security for $3 million investment
1. EFP [LLP] will hold title to all notes and mortgages as collateral and will be entitled to physically retain *29 the original notes until they are paid.
2. EFP [LLP] will be able to assign this collateral to a national lending institution.
3. All portfolio mortgage payments will be made to a lockbox. A bank agreement will provide that funds from the lockbox may be released to only EFP [LLP].
4. CHFS represents that all statements in this Agreement are correct and that it will perform in accordance with its terms. Misrepresentation or failure to perform in accordance [with] this Agreement shall constitute a default under the Amended Note and Credit Agreement between CHFS and [Beher Limited], an affiliate of EFP [LLP].
(MPF Ex. D-3; PPC Ex. D-22). Dr. Edwards testified that the original notes and mortgages that comprise Portfolio # 1 are currently at his home in Baltimore. (HIL Adv. Dkt. 341 at 140).
2. Portfolio # 2
On March 25, 2008, CHFS signed a letter committing to purchase Portfolio # 2 from DLJ for approximately $1.37 million. (MPF Ex. P-8; MPF Adv. Dkt. 126 at 36). Portfolio # 2 consists of 151 first and second mortgages with an original principal balance of $6,880,143.58. (MPF Ex. P-9). The formal terms governing the rights and obligations of EFP LLP and CHFS concerning Portfolio # 2 were reduced to writing on April 20, 2008, in the Mortgage Portfolio Joint Venture II Between Edwards Family Partnership & Community Home Financial Services, Inc. ("MPF Agreement II ") (MPF Ex. D-4; MPF Adv. Dkt. 126 at 36; PPC Ex. D-23). An entity purportedly controlled by Dr. Edwards funded $1,379,557, on April 22, 2008, to purchase Portfolio # 2. (MPF Exs. P-2 at 2 & D-9). MPF Agreement I and MPF Agreement II contain the same or similar provisions concerning the respective ownership rights of CHFS and EFP LLP but differ as to due diligence and the treatment of costs. (MPF Ex. D-6).
Unlike MPF Agreement I , MPF Agreement II provides that "[t]he cost of loan due diligence will be equally divided between EFP [LLP] and CHFS. CHFS will pay all costs relating to loan servicing and collections prior to engaging outside counsel to collect on defaulted loans. Costs of collection by outside attorneys or other third parties will be paid two thirds by EFP [LLP] and one third by CHFS." (MPF Ex. D-4; PPC Ex. D-23). Thus, under MPF Agreement II , CHFS was entitled to receive from EFP LLP: (1) a $20 fee for each loan payment collected each month; (2) 50% reimbursement for all due diligence expenditures incurred by CHFS; (3) 100% reimbursement for out of pocket major collection expenses every month; (4) 67% reimbursement for all costs of collection by outside attorneys or other third parties; and (5) 25% distribution of proceeds "anytime total loan interest and principal pay-offs exceed cumulative CHFS servicing invoices + interest on the EFP [LLP] investment by $10,000" for servicing Portfolio # 2.
3. Portfolio # 3
On July 14, 2008, CHFS agreed to purchase Portfolio # 3 from DLJ for $1,592,285.48. (MPF Ex. P-10). Portfolio # 3 consists of 173 mortgages with an original principal balance of $7,591,887.60. (MPF Ex. P-10). An entity purportedly controlled by Dr. Edwards funded $1,584,008, on July 26, 2008, to purchase Portfolio # 3. (MPF Exs. P-2 at 2 & D-10). There is no writing that memorializes the respective distribution rights for Portfolio # 3.
*30 4. Portfolio # 4
On October 28, 2009, CHFS entered into an agreement with Promor Investments, LLC to purchase Portfolio # 4 for approximately $1.05 million. (MPF Ex. P-11). An entity purportedly controlled by Dr. Edwards funded $1,054,550, on October 28, 2009, to purchase Portfolio # 4. (MPF Exs. P-2 at 2 & D-11). There is no writing that memorializes the respective distribution rights for Portfolio # 4.
5. Portfolio # 5
On March 22, 2010, CHFS entered into an agreement with Blue World Pools, Inc. ("BWP") to purchase Portfolio # 5 for approximately $4 million. (MPF Ex. P-12; MPF Adv. Dkt. 126 at 36). An entity purportedly controlled by Dr. Edwards funded $4,027,272, on April 22, 2010, to purchase Portfolio # 5. (MPF Exs. P-2 at 3 & D-13). BWP is engaged in the business of originating residential swimming pool loans secured by home mortgages. (HIL Adv. Dkt. 342 at 205). There is no writing that memorializes the respective distribution rights for Portfolio # 5.
6. Portfolio # 6
On November 15, 2010, CHFS entered into an agreement with BWP to purchase Portfolio # 6 for $3,397,875.33. (MPF Ex. P-13). Portfolio # 6 consists of 431 loans. (MPF Ex. P-13). An entity purportedly controlled by Dr. Edwards funded $3,397,875, on November 19, 2010, to purchase Portfolio # 6. (MPF Exs. P-2 at 3 & D-12). There is no writing that memorializes the respective distribution rights for Portfolio # 6.
7. Portfolio # 7
On February 16, 2011, CHFS entered into an agreement with BWP to purchase Portfolio # 7 for approximately $6.5 million (MPF Ex. P-14; MPF Adv. Dkt. 126 at 36). Portfolio # 7 consists of second mortgages with an original principal balance of approximately $10.6 million. (MPF Ex. P-14). Portfolio # 7 is the largest mortgage portfolio purchased by CHFS.
On March 1, 2011, CHFS signed the Mortgage Portfolio Joint Venture Between Beher Holdings Trust & Community Home Financial Services, Inc. ("MPF Agreement III ") (MPF Ex. D-5 & PPC Ex. D-20). MPF Agreement III was signed on behalf of BHT by Church Bay Trust. MPF Agreement III contains terms that are materially different from those in MPF Agreement I and MPF Agreement II . For example, MPF Agreement III provides that "[t]he benefits and obligations of the Purchase Agreement have been assigned from CHFS to [BHT]. [BHT] will be the beneficial owner of the loans, subject to the terms of this Joint Venture." (MPF Exs. D-5 & D-26; PPC Exs. D-20 & D-21). Moreover, MPF Agreement III provides that "[t]he custodian selected by [BHT] will hold the original Notes and Assignments to [BHT] for all loans in the portfolio and will be entitled to physically retain the original notes until they are paid." (MPF Ex. D-5; PPC Ex. D-20). The parties agreed that the original notes and assignments in Portfolio # 7 would not be held by BHT, Dr. Edwards, or CHFS but by a third-party custodian. BHT selected Frascogna as the custodian. The custodial certifications signed by Frascogna indicate that he received corporate assignments of the original notes and mortgages from CHFS to BHT. (MPF Ex. D-28). As noted previously, Frascogna either allowed Dickson to take possession of the original loan documents or later released them to Dickson. Either way, the documents remain missing.
MPF Agreement III contains materially different distribution terms. "CHFS will pay all costs of loan due diligence, loan *31 servicing and collections prior to engaging outside counsel to collect on defaulted loans. Costs of collection by outside attorneys or other third parties will be paid two thirds by [BHT] and one third by [CHFS]." (MPF Ex. D-5; PPC Ex. D-20). With respect to payment, "CHFS will receive a servicing fee of $15 per month for each loan payment collected and 25% of net proceeds from the portfolio after repayment of [BHT]." MPF Agreement III also includes the following provision: "[W]hen [BHT] principal, interest and CHFS servicing fees are paid, [BHT] will distribute 25% of additional proceeds to CHFS and retain 75%." Thus, unlike MPF Agreement I and MPF Agreement II , CHFS was required to pay all of its due diligence expenses, CHFS received a reduced monthly servicing fee of only $15 per month, and CHFS was not entitled to receive any distribution of its 25% share of the net proceeds until BHT recovered its entire cash contribution. Moreover, a purported default under MPF Agreement III would also be considered a default under the Home Improvement Loans: "CHFS represents that all statements in this Agreement are correct and that it will perform in accordance with its terms. Misrepresentation or failure to perform in accordance [with] this Agreement shall constitute a default under the Commercial Loan Note and Line of Credit dated August 10, 2010." On March 6, 2011, CHFS assigned the purchase agreement with BWP to Church Bay Trust. (PPC Ex. D-21). Between March of 2011 and June of 2011, an entity purportedly controlled by Dr. Edwards funded $5,777,754 to purchase Portfolio # 7. (MPF Exs. P-2 at 3 & D-14).
D. Original State Lawsuit & Receivership Action
In 2010, the business relationship between Dickson and Dr. Edwards soured. CHFS made payments under the terms of the Amended Loan Agreements, the BHT Note, and the EFP Note until December of 2010, when he became convinced that Dr. Edwards was overcharging the credit line by charging interest before draws occurred. (HIL Adv. Dkt. 342 at 139). In a letter dated January 4, 2012, Dr. Edwards responded to Dickson's challenge regarding the calculation of net proceeds in MPF Agreement I . (MPF Ex. D-35; HIL Ex. D-30). Then, on January 20, 2012, Dr. Edwards sent identical letters to CHFS demanding that CHFS cure certain defaults on the EFP Note and BHT Note by January 31, 2012, or face acceleration of the maturity date. (HIL Exs. D-11 & D-12). Dr. Edwards signed the letter regarding the BHT Note as BHT's "agent." CHFS made its last payment on the Mortgage Portfolios in February of 2012. (HIL Adv. Dkt. 341 at 149-50). For the last collections period paid by CHFS pre-petition, Borg received the monthly report from CHFS for Portfolio # 7 dated February 14, 2012 (MPF Ex. D-16) and for Portfolios # 1-# 6 dated February 23, 2012 (MPF Ex. D-15).
On February 15, 2012, CHFS and Dickson sued Dr. Edwards and EFP/BHT in state court, seeking a declaration of the parties' rights (the "Original State Lawsuit") (Case No. 3:12-cv-00252-CWR-LRA, Dkt. 1-2 at 7-29). CHFS and Dickson challenged the alleged secured status of the loans that financed the Home Improvement Loans and also asserted an interest in the net profits of the alleged Joint Ventures. On April 11, 2012, Dr. Edwards and EFP/BHT removed the Original State Lawsuit to the District Court (the "Receivership Action") (Case No. 3:12-cv-00252-CWR-LRA, Dkt. 1) and asserted counterclaims seeking a judgment against CHFS for amounts due on the EFP Note and BHT Note, a judgment *32 against Dickson for his guarantees of the EFP Note and BHT Note, judicial foreclosure on their collateral, and a judgment against CHFS for its breach of the purported joint venture agreements. (HIL Adv. Dkt. 341 at 151). On May 1, 2012, EFP/BHT filed an emergency motion for the immediate appointment of a receiver for CHFS. (Case No. 3:12-cv-00252-CWR-LRA, Dkt. 6). In May of 2012, the District Court conducted a trial of the Receivership Action, which was interrupted by the filing of the Bankruptcy Case, as discussed later in this Opinion.
E. Pre-petition Transfers
Although CHFS was not primarily involved in the business of loaning funds, CHFS disclosed in its bankruptcy schedules that from February 14, 2012 to May 14, 2012, it loaned S3.2 million, in amounts varying from $250,000 to $500,000, to Dickson and four affiliated companies, including W.D. Dickson Enterprises, Inc., Crisco Investments, Inc., Double S Construction, Inc., and Discount Mortgage, Inc., as shown below:
02/14/2012 Discount Mortgage, Inc. $500,000 02/14/2012 Double S Construction, Inc. $500,000 02/14/2012 William D. Dickson $250,000 02/15/2012 W. D. Dickson Enterprises, Inc. $350,000 03/14/2012 Double S Construction, Inc. $400,000 04/12/2012 Crisco Investments, Inc. $500,000 05/14/2012 Discount Mortgage, Inc. $250,000 05/14/2012 Crisco Investments, Inc. $450,000 TOTAL $3,200,000
(Bankr. Dkt. 115 at 6, Attach. B: MPF Ex. D-41; HIL Ex. D-36). The promissory notes provided for payment of interest at the initial rate of four percent (4%) per annum. (MPF Ex. D-41: HIL Ex. D-36). These four affiliated companies shared the same office space with CHFS and some of the same employees.
On March 1, 2012, Dickson formed the W W Warren Foundation in Panama. 20 An analysis of available bank records shows that CHFS transferred approximately $3.7 million (including the above sums), directly or indirectly, from CHFS's operating account at BancorpSouth ending in 6711 to the account of the W W Warren Foundation at Banco Panameho de la Vivenda S.A. ("Banco Panameño") (later known as Banvivienda) in Panama as well as other accounts, as shown below:
*33 Discount Mortgage, Inc. $55,000* Double S Construction, Inc. $15,000* Crisco Investments, Inc. $50,000* W.D. Dickson Enterprises, Inc. $225,849* William D. Dickson $50,000* Victory Consulting $640,000* W W Warren Foundation $2,300,000 E.S. Berry Jr. $240,000 Unknown $124,151 Total $3,700,000
(HIL Ex. P-7, Schedule 8). 21
F. Bankruptcy Case
On May 23, 2012, during the trial of the Receivership Action, CHFS filed a voluntary chapter 11 petition for relief (the "Petition") (Bankr. Dkt. 1). The commencement of the Bankruptcy Case stayed all proceedings against CHFS, including the trial of the Receivership Action. 11 U.S.C. § 362 (a). CHFS proceeded as the debtor-in-possession (the "DIP") in the Bankruptcy Case pursuant to 11 U.S.C. § 1101 , with Dickson acting as its designated representative until December 23, 2013, when the Court entered an order approving the appointment of a chapter 11 trustee. (Bankr. Dkt. 429). The parties have stipulated that as of the date of the Petition, the total amount due on the loans made to CHFS to fund the purchases of the Home Improvement Loans was $17,832,496. (HIL Adv. Dkt. 331 at 43). The parties have also stipulated that as of the date of the Petition, the amount at issue for each Portfolio was, as follows:
Portfolio #1 $1,115,304 Portfolio #2 $564,778 Portfolio #3 $61,685 Portfolio #4 $160,103 Portfolio #5 $2,616,209 Portfolio #6 $2,395,383 Portfolio #7 $4,866,989
(MPF Adv. Dkt. 126 at 36-37).
1. Proofs of Claim Filed by EFP/BHT
The bar date to file non-governmental proofs of claim in the Bankruptcy Case was September 20, 2012. (Bankr. Dkt. 15). On that date, EFP/BHT filed six (6) proofs of claim arising from the two distinct business relationships with CHFS regarding the Home Improvement Loans and the purported "joint ventures." (Claims 4-1 to 9-1; HIL Exs. P-1, P-2, D-17 & D-18; MPF Exs. D-20 to D-23; PPC Exs. P-1 to P-6). Proofs of claim 4-1 and 5-1 relate to the Home Improvement Loans; proofs of claim 6-1 through 9-1 relate to the Mortgage Portfolios.
*34 EFP/BHT filed proofs of claim four ("POC 4-1") and five ("POC 5-1"), each in the amount of $18,390,660.32 for "Money Loaned" to CHFS. (HIL Exs. P-1, P-2, D-17 & D-18; PPC Exs. P-1 & P-2). POC 4-1 is noted in the claims register as belonging to BHT whereas POC 5-1 is noted in the claims register as belonging to EFP. Nevertheless, both POC 4-1 and POC 5-1 name EFP/BHT jointly as the creditor, and the amounts listed are the same. EFP/BHT jointly assert a perfected security interest, based on "Possession." (HIL Adv. Dkt. 331 at 40). Dr. Edwards signed both POC 4-1 and POC 5-1 as BHT's "Agent" and as EFP's "Managing Partner." Attached to both POC 4-1 and POC 5-1 are the Rainbow Loan Agreement, the Custodial Agreement, the 2006 Note, the 2007 Note, the EFP Note, the BHT Note, and the Amended Loan Agreements. The Custodial Agreement is the only document attached to either POC 4-1 or POC 5-1 that is signed by McCarley. (HIL Adv. Dkt. 331 at 40).
POC 4-1 and POC 5-1 are duplicate filings in which the total amount that EFP/BHT claim is $18,390,660.32 and not twice that amount, as suggested by the duplicate filings. The portion of the total amount of $18,390,660.32 that is allegedly owed to BHT and EFP, separately, is not disclosed in POC 4-1 and POC 5-1.
CHFS filed the Objection to POC 4 & 5, challenging EFP/BHT's secured status. CHFS maintained that the 2007 Assignment and 2010 Assignment are invalid because the Rainbow Group was never lawfully incorporated to transact business. They also point out that all collateral was assigned to Beher Limited, not to EFP or BHT. Thus, according to CHFS, even if a security interest exists in favor of EFP/BHT, it remains unperfected because of EFP/BHT's failure to establish perfection by possession through a custodian. MISS. CODE ANN. § 75-9-313(c). EFP/BHT filed the Responses to Objection to POC 4 & 5 in which they incorporated the pleadings they filed in the Home Improvement Loans Adversary.
EFP filed nearly identical proofs of claim six ("POC 6-1") and nine ("POC 9-1") in the estimated amount of $7,101,094. 3 5 and $7,101,094. 5 5, respectively. (MPF Exs. D-20 & D-23; PPC Exs. P-3 & P-6). In POC 6-1, the basis for EFP's unsecured claim was a "series of six (6) Joint Venture Agreements." EFP claims damages arising out of CHFS's alleged breach of its fiduciary duty. EFP attached MPF Agreement I and MPF Agreement II as exhibits to both POC 6-1 and POC 9-1, but the counterparty in both MPF Agreement I and MPF Agreement II is EFP LLP.
EFP filed POC 9-1 "solely to protect its right to assert a secured claim against [CHFS]" in the event it was determined that EFP did not own the Mortgage Portfolios. According to Exhibit A to POC 9-1, EFP's total investment, plus interest, in the joint ventures was $7,101,094.55, as follows:
*35 Mortgage Portfolio Outstanding Investment Interest Portfolio #1 $1,249,694.32 $34,922.62 Portfolio #2 $554,754.44 $15,502.73 Portfolio #4 $89,202.22 $2,492.77 Mt View $47,606.97 $1,330.39 BWP #1 $2,598,513.87 $71,777.63 BWP #2 $2,369,091.99 $66,204.76
(POC 9-1 Ex. A). 22
CHFS filed the Objection to POC 6 & 9. CHFS maintains that neither MPF Agreement I nor MPF Agreement II required CHFS to repay EFP in frill before CHFS was entitled to 25% share of net proceeds and that EFP had improperly withheld its share of the net proceeds. Moreover, CHFS points out that it never signed a promissory note. CHFS denies that EFP/BHT owned the notes in the Mortgage Portfolios. In the absence of written agreements as to Portfolios # 3-# 6, CHFS alleges that there is no debt. EFP filed the Responses to Objection to POC 6 & 9 in which it incorporated by reference its pleadings filed in the Mortgage Portfolios Adversary.
BHT filed nearly identical proofs of claim seven ("POC 7-1") and eight ("POC 8-1") in the estimated amount of $4,917,547.3 5 and $4,917,547.3 4 , respectively. (MPF Exs. D-21 & D-22; PPC Exs. P-4 & P-5). In POC 7-1, the basis for its unsecured claim is also a "series of six (6) Joint Venture Agreements." BHT claims damages arising out of CHFS's alleged breach of its fiduciary duty. BHT estimates its loss of the investment, plus interest, at $4,917,547.35. (POC 7-1 Ex. A). BHT attached MPF Agreement III as an exhibit to POC 7-1.
BHT filed POC 8-1 "solely to protect its right to assert a seemed claim against [CHFS]" in the event it was determined that BHT did not own the Mortgage Portfolios. (POC 8-1). In POC 8-1, BHT's investment in the joint venture was allegedly $4,917,547.3 4 , as follows:
Portfolio Outstanding Investment Interest Portfolio $4,783,861.55 $133,685.99
(POC 8-1 Ex. A). 23 CHFS filed the Objection to POC 7 & 8, setting forth the same allegations contained in its Objection to POC 6 & 9. Likewise, BHT filed the Responses to Objection to POC 7 & 8, which minors EFP's allegations in the Responses to Objection to POC 6 & 9.
2. Proof of Claim Filed by Dickson
Dickson filed a proof of claim ("POC 10-1") (Claim 10-1) on September 20, 2012, for an unknown amount. In the attachment to POC 10-1, Dickson explains that his "unliquidated claim ... is the result of an indemnity which may arise regarding his personal guaranty on the Home Improvement Line from BHT and EFP." 24 (POC
*36 10-1 Pt. 2).
3. Claims Register
In the claims register of the Bankruptcy Case, thirty-two (32) proofs of claim were filed; six (6) of which were filed by EFP/BHT (Claims 4-9), four (4) of which have been withdrawn (Claims 1, 11, 16 & 32), two (2) of which have been satisfied (Claims 19 & 25), and one of which was filed by Dickson (Claim 10). The total amount of the remaining nineteen (19) proofs of claim is $207,405.62.
4. Cash Collateral Orders
In order to facilitate the operation of CHFS's business, interim orders were entered in the Bankruptcy Case on July 10, 2012, and May 3, 2013, regarding its cash flow (the "Cash Collateral Orders") (Bankr. Dkt. 60 & 231; HIL Exs. D-46 & D-47; MPF Exs. D-51 & D-52). EFP/BHT alleged that payments on the Home Improvement Loans constituted their cash collateral, which CHFS may not use without permission of the Court. (Bankr. Dkt. 23 at 2). Under the Cash Collateral Orders, CHFS was required to deposit all funds collected in the Home Improvement Loans into the DIP operating account (the "DIP Operating Account") at Wells Fargo Bank ("Wells Fargo"). CHFS also was required to make adequate protection payments to EFP/BHT each month beginning July 10, 2012, and continuing until October 10, 2012, in an amount equal to all payments collected on the Home Improvement Loans during the previous month plus interest calculated at the rate of seven percent (7%) per annum. For purposes of the Cash Collateral Orders, the principal balance as of June 1, 2012, was deemed to be $18,300,000. According to Borg, CHFS made four adequate protection payments. (HIL Adv. Dkt. 342 at 124-25).
As to the Mortgage Portfolios, EFP/BHT claimed that the notes do not constitute property of the estate but belonged to them. (Bankr Dkt. 23 at 2). Under the Cash Collateral Orders, CHFS was required to segregate collections on the Mortgage Portfolios into separate escrow accounts at Wells Fargo: (1) the EFP Mortgage Portfolios Escrow Account ending in -9335 and (2) the BHT Mortgage Portfolios Escrow Account ending in -9343. CHFS was required to deposit all of the collections from any EFP Mortgage Portfolio (Portfolios # 1-# 6) into its DIP Operating Account and transfer funds, less a $20 servicing fee, to the EFP Mortgage Portfolios Escrow Account. Similarly, CHFS was required to deposit all of the collections from any BHT Mortgage Portfolio Loan (Portfolio # 7) into its DIP Operating Account and transfer funds, less a $15 servicing fee, to the BHT Mortgage Portfolios Escrow Account.
Other than carve outs for operating and other expenses, the Cash Collateral Orders prohibited CHFS from disbursing the funds in the DIP Operating Account without further order of the Court. CHFS segregated the collections on the Home Improvement Loans and Mortgage Portfolios from that point forward until October of 2013. As of October 31, 2013, the EFP Mortgage Portfolios Escrow Account held a balance of $3,871,020.06 (MPF Ex.
*37 D-50 at 30), and the BHT Mortgage Portfolios Escrow Account held a balance of $2,072,893.31 (MPF Ex. D-50 at 21).
G. Initiation of Home Improvement Loans Adversary
Before the Trustee's appointment on January 21, 2014, CHFS and Dickson initiated the Home Improvement Loans Adversary on August 24, 2012, by filing the Complaint to Determine the Validity and Extent of Claims (the "HIL Original Complaint") (HIL Adv. Dkt. 1) against EFP/BHT. (HIL Adv. Dkt. 331 at 40). In the HIL Original Complaint, CHFS and Dickson sought to determine "the validity and extent of the respective claim(s) of EFP and BHT against CHFS and Dickson, respectively, some or all of which derive solely from the knowingly unlawful actions by The Rainbow Group, Ltd. and/or some or all of its representatives." (HIL Adv. Dkt. 1 at 2-3). As relief, CHFS and Dickson sought to obtain a judgment against EFP and BHT declaring that the underlying loan documents are void ab initio . (HIL Adv. Dkt. 1, Counts I-IX).
CHFS and Dickson amended the HIL Original Complaint twice. They filed the Amended Complaint to Determine the Validity and Extent of Claims (HIL Adv. Dkt. 6), as of right, on September 13, 2012. CHFS and Dickson then filed the Objection to POC 4 & 5, which mirrored the allegations in the Amended Complaint. (HIL Adv. Dkt. 6). On March 5, 2013, the Court entered the Order to Consolidate for Administration and Discovery (HIL Adv. Dkt. 24), consolidating the Home Improvement Loans Adversary and the Objection to POC 4 & 5 for all purposes. CHFS and Dickson filed the Second Amended Complaint (the "HIL Second Amended Complaint") (HIL Adv. Dkt. 48) with leave of Court (HIL Adv. Dkt. 47) on June 6, 2013.
H. Initiation of Adversary Proceeding 12-00109-NPO
CHFS and Dickson initiated adversary proceeding 12-00109-NPO on October 24, 2012, against EFP/BHT and EFP LLP. (Adv. Proc. 12-00091 -NPO, Dkt. 1). CHFS and Dickson sought a declaration that EFP/BHT and EFP LLP failed to pay CHFS its share of the net profits under the seven (7) agreements governing the Mortgage Portfolios entered into between January 2008 and March 2011. CHFS's objections to POCs 6-1, 7-1, 8-1, and 9-1 mirrored these allegations. CHFS also sought declaratory relief regarding an eighth unwritten joint venture involving the purchase through The Debt Exchange, Inc. ("DebtX") of a pool of residential real estate lots in Atlanta, Georgia (the "Atlanta Property"). CHFS and Dickson filed the Amended Complaint (Adv. Proc. 12-00109 -NPO, Dkt. 7) on January 15, 2013. The Court entered an order on March 5, 2013, consolidating for administrative purposes and discovery adversary proceeding 12-00109-NPO, the Objection to POC 6 & 9, and the Objection to POC 7 & 8. (Adv. Proc. 12-00109 -NPO, Dkt. 13). EFP/BHT and EFP LLP filed an answer and counterclaim on March 8, 2013. (Adv. Proc. 12-00109 -NPO, Dkt. 14). In their answer, EFP/BHT and EFP LLP denied that EFP LLP (as opposed to EFP) had ever engaged in business with CHFS. In the counterclaim, EFP/BHT sought, inter alia , a declaratory judgment that CHFS's only interest in the Mortgage Portfolios was a right to servicing fees of $20 or $15 and a 25% split of the net proceeds after repayment of EFP/BHT's investment. CHFS filed an answer to the counterclaim on March 29, 2013. (Adv. Proc. 12-00109 -NPO, Dkt. 16).
I. Dickson Guaranty Suit
In the Receivership Action, the District Court found that the automatic stay imposed *38 by operation of law by CHFS's commencement of the Bankruptcy Case did not apply to the counterclaims asserted by EFP/BHT against Dickson seeking to hold Dickson personally liable on the EFP Note and BHT Note based on two guaranty agreements. (Case No. 3:12-cv-00252-CWR-LRA, Dkt. 109 & 110). The District Court reasoned that Dickson was not in bankruptcy and thus was not protected by the stay. 25 Accordingly, on March 29, 2013, the District Court severed those counterclaims from the claim asserted against CHFS, realigned the parties (with EFP/BHT as the plaintiffs and Dickson as the defendant), and assigned it a new case number, 3:13-cv-00587-CWR-LRA (the "Dickson Guaranty Suit").
J. Initiation of Mortgage Portfolios Adversary
CHFS and Dickson initiated the Mortgage Portfolios Adversary against EFP/BHT, Dr. Edwards, James Edwards, Edwards Family Partnership, LLP, the Atkinson Trust, and DebtX by filing the Complaint (the "MPF Original Complaint") (MPF Adv. Dkt. 1) on November 26, 2013. Many of the allegations in the MPF Original Complaint are similar to those alleged in adversary proceeding 12-00109-NPO, with the notable exception that the MPF Original Complaint names two additional defendants, the Atkinson Trust and DebtX.
CHFS and Dickson alleged in the MPF Original Complaint that CHFS was approved as a registered user of DebtX's online loan sale platform in 2008 and that the defendants, Dr. Edwards, James Edwards, EFP, and Atkinson Trust, used CHFS's username and password in 2010 to purchase (through DebtX) the Atlanta Property, and in doing so misappropriated for themselves a business opportunity that belonged to CHFS and Dr. Edwards. After acquiring the Atlanta Property in CHFS's name, Dr. Edwards then transferred the property to the Atkinson Trust. CHFS and Dickson alleged that DebtX negligently failed to follow its procedures by allowing Dr. Edwards, James Edwards, EFP, and Atkinson Trust to bid on and acquire the Atlanta Property using CHFS's and Dickson's status as a registered user of its online loan sale platform.
K. Post-petition Transfers & Rogue Operation
During the course of the Bankruptcy Case, CHFS generated substantial sums of money. For example, the October 2013 monthly operating report, the last one filed by CHFS as a DIP, showed an ending cash balance of $9,059,191.49. (Bankr. Dkt. 416; HIL Ex. D-45; MPF Ex. D-50). Beginning in the fall of 2013, Dickson began transferring most of CHFS's cash to accounts in his name or in the name of affiliated companies in violation of the Cash Collateral Orders. From November 5, 2013, to January 7, 2014, Dickson transferred approximately $9,095,000 from CHFS's account. (HIL Ex. P-7, Schedules 8 & 8.1). There were four wire transfers totaling $8,395,000 to the account of W W Warren Foundation at Banco Panameño in Panama, and one wire transfer totaling $700,000 to the account of Victory Consulting (HIL Ex. D-41; MPF Ex. D-46; PPC Ex. D-16), another entity owned or controlled by Dickson. The parties have stipulated that W W Warren Foundation and Victory Consulting are insiders and affiliates *39 of Dickson and/or CHFS. (HIL Adv. Dkt. 331 at 42).
Approximate Outbound Inbound Date Amount Transfers Transfers 11/05/2013 $900,000 DIP Operating Account W W Warren Foundation at Banco Panameño 11/12/2013 $795,000 DIP Operating Account W W Warren Foundation at Banco Panameño 11/25/2013 $700,000 DIP Operating Account Victory Consulting at Wells Fargo 12/11/2013 $3,500,000 EFP Mortgage Portfolios W W Warren Foundation Escrow Account at Banco Panameño 12/11/2013 $2,000,000 BHT Mortgage Portfolios W W Warren Foundation at Escrow Account Banco Panameño 12/19/2013 $1,200,000 DIP Operating Account W W Warren Foundation at Banco Panameño Total $9,095,000
(HIL Adv. Dkt. 331 at 42; HIL Ex. P-7, Schedules 8 & 8.1). There were additional wire transfers from Victory Consulting's account at Wells Fargo to RE & B Investment Trust's account at Scotia Bank in Costa Rica totaling $1,325,000 and to W W Warren Foundation's account totaling $450,000. Dickson and others continued to divert funds totaling at least $1.3 million from the estate until approximately April of 2014. (HIL Adv. Dkt. 341 at 37).
In the fall of 2013, Dickson moved from Jackson, Mississippi to Costa Rica and set up a "rogue" operation of CHFS's business there and in Panama. (Bankr. Dkt. 918). This rogue operation had several facets, including:
• written and oral communications with borrowers to send payments to alternate addresses;
• electronic deposits into non-CHFS accounts;
• transmission of checks between the United States and Costa Rica;
• diversion of payoff checks through foreign accounts; and
• purchase of foreign assets.
(HIL Adv. Dkt. 341 at 37-40; HIL Ex. P-7). The rogue operation ceased sometime between mid- to late-April 2014. (HIL Adv. Dkt. 341 at 37).
In March of 2014, Dickson arranged for the shipment of several computer servers, other office equipment, and almost all of CHFS's current loan records to Costa Rica. (HIL Adv. Dkt. 341 at 6 & 9-10). Dickson entered into an agreement with Meehan, the owner of Advanced Communications S.A., a call center in Costa Rica, to provide debt collection services for CHFS beginning in December 2013. (HIL Adv. Dkt. 341 at 37). A former CHFS employee, Reshonda Rhodes, traveled to Cosa Rica on two separate occasions to assist Dickson in setting up the rogue operation. (HIL Adv. Dkt. 341 at 40). As part of the scheme, Dickson changed CHFS's physical mailing address from Jackson, Mississippi, to that of its corporate agent in Las Vegas, Nevada, where payments from borrowers were received and forwarded to Dickson in Costa Rica. (HIL Adv. Dkt. 341 at 54).
L. Appointment of Trustee
On August 15, 2012, EFP/BHT filed the Edwards Family Partnership, LP and Beher Holdings Trust's Motion to Appoint *40 Chapter 11 Trustee for Community Home Financial Services, Inc. (the "EFP/BHT Motion to Appoint Trustee") (Bankr. Dkt. 96) based on allegations of pre-petition and post-petition misconduct of CHFS. CHFS opposed the appointment of a chapter 11 trustee (Bankr. Dkt. 120) and, on the same day, filed the Motion for Examiner (the "CHFS Motion to Appoint Examiner") (Bankr. Dkt. 121). In response, the U.S. Trustee asked the Court to grant the CHFS Motion to Appoint Examiner and hold the EFP/BHT Motion to Appoint Trustee in abeyance pending the examiner's report. (Bankr. Dkt. 122). In an order entered on September 25, 2012, the Court held both the EFP/BHT Motion to Appoint Trustee and the CHFS Motion to Appoint Examiner in abeyance. 26 (Bankr. Dkt. 133).
On December 20, 2013, counsel for CHFS, who was unaware of Dickson's activities at the time they occurred, filed the Disclosure of Transfer of Funds and Other Matters (the "Disclosure") (Bankr. Dkt. 426), notifying the Court of the following:
1) CHFS has changed its principal place of business from Jackson, Mississippi to Panama.
2) CHFS has transferred funds from the DIP [Operating Account] at Wells Fargo Bank to other CHFS bank accounts located in Panama.
3) CHFS has set up two (2) branch offices-one in Panama and one in Costa Rica. The business operations of CHFS are continuing to be conducted at these two branch locations.
(Bankr. Dkt. 426 at 1). Contrary to the Disclosure, the funds were not transferred "to other CHFS bank accounts" but to accounts owned by Dickson or affiliated companies. (HIL Ex. P-7 at 11).
In response to the Disclosure, the U.S. Trustee filed the United States Trustee's Emergency Motion for Order for the Appointment of a Chapter 11 Trustee (Bankr. Dkt. 427) on December 20, 2013. On December 23, 2013, the Court entered the Order Granting United States Trustee's Emergency Motion for Order for the Appointment of a Chapter 11 Trustee (Bankr. Dkt. 429).
On January 8, 2014, the U.S. Trustee filed the United States Trustee's Application for Approval of Chapter 11 Trustee (Bankr. Dkt. 455), seeking approval of the appointment of Johnson as the chapter 11 trustee. EFP/BHT filed the Objection to Application for Approval of Chapter 11 Trustee (Bankr. Dkt. 458), alleging the existence of a conflict or "adverse interest" arising out of the representation by Johnson's law firm of the accountant firm retained by CHFS as an expert witness in the Bankruptcy Case. After finding that Johnson had no conflict and was a "disinterested person" as defined under 11 U.S.C. § 101 (14), the Court entered the Order (Bankr. Dkt. 473), approving Johnson's appointment as the chapter 11 trustee on January 21, 2014.
Upon entry of the order granting the emergency motion for appointment of a chapter 11 trustee and approving the appointment of Johnson as the Trustee, Dickson no longer had any decision-making authority for CHFS. 11 U.S.C. § 704 , § 1106. Nevertheless, Dickson's efforts to transfer CHFS's business and assets within the United States, between the United States and Latin America, and within Latin America continued after the Trustee's appointment. (HIL Adv. Dkt. 341 at 37).
*41 M. Trustee's Investigation of Funds Stolen & Diverted
The Trustee's investigation of Dickson's conduct revealed that the $9,095,000 million transferred by him and the $1.3 million later diverted from the estate were laundered, commingled, and otherwise dissipated by the purchase of Costa Rican loans and a condominium in Los Sueños, Costa Rica, in the names of other entities including Philanfin, S.A. and Phalanx, S.A. The Trustee eventually discovered a document that appeared to transfer shares of stock in CHFS to Dickson and Phalanx, S.A., a Costa Rican company. (HIL Ex. P-13; MPF Ex. P-17; HIL Adv. Dkt. 341 at 22). The Trustee also found mortgages held in the name of Philanfin, S.A. with a value of over $2 million. (HIL Adv. Dkt. 341 at 25). The parties have stipulated that Phalanx, S.A. and Philanfin, S.A. are insiders and affiliates of CHFS and/or Dickson. (HIL Adv. Dkt. 331 at 42).
At the time of the Trustee's appointment, CHFS was essentially no longer an ongoing business in the United States. CHFS had only approximately $7,500 cash on-hand, collectively, in numerous bank accounts. (HIL Adv. Dkt. 341 at 5). The Trustee sent letters to all individuals and entities having any connection with the Bankruptcy Case, demanding that they turn over any assets, information, or documents belonging to the estate. (HIL Adv. Dkt. 341 at 5). The Trustee conducted an examination of Dickson under Rule 2004 of the Federal Rules of Bankruptcy Procedure during which she asked him about the whereabouts of loan records, but Dickson refused to answer almost every question, invoking his Fifth Amendment right against self-incrimination. (HIL Adv. Dkt. 341 at 6).
On February 7, 2014, Dr. Edwards sent the Trustee by email a copy of a report he prepared at the request of the Federal Bureau of Investigation ("FBI"), as well as other documents. (MPF Ex. D-42; HIL Ex. D-37; PPC Ex. D-12; HIL Adv. Dkt. 341 at 50). The report included information obtained by Dr. Edwards as a result of subpoenas that Dr. Edwards' attorneys issued to all known banks where Dickson and/or his affiliated companies held accounts and also as a result of the investigation undertaken by Dr. Edwards' attorneys in Costa Rica. (HIL Adv. Dkt. 341 at 153-54). On February 9, 2014, Dr. Edwards sent the Trustee another email to which he attached a chart prepared by his lawyers in Costa Rica regarding bank accounts held by Dickson. (PPC Ex. D-1). In the email, he offered "to initiate legal proceedings in Costa Rica to freeze these assets for the bankruptcy estate." (PPC Ex. D-1).
Based on mostly outdated records obtained from Dr. Edwards and information gleaned from CHFS's mail, the Trustee sent letters to consumers instructing them to remit their loan payments to her, to provide her with copies of the loan documents (since the borrowers initially were the Trustee's primary source of information), and to ignore payment instructions from anyone else. (HIL Adv. Dkt. 341 at 54 & 99). When the Trustee discovered that Dickson had informed borrowers that CHFS had changed its Mississippi address to the Nevada address, someone notified borrowers to send their payments to a new address in Miami, Florida, where payments again were being forwarded to Dickson in Costa Rica.
N. Stay of Adversary Proceedings
In each of the Adversary Proceedings initiated by CHFS and Dickson, an order was entered on March 6, 2014, substituting the Trustee for CHFS as the proper party-in-interest. (HIL Adv. Dkt. 121; MPF Adv. Dkt. 21; Adv. Proc. 12-00109 -NPO, *42 Dkt. 71); 11 U.S.C. § 323 ; FED. R. BANKR. P. 6009. In the same orders, the Court stayed the Adversary Proceedings. (HIL Adv. Dkt. 121, MPF Adv. Dkt. 21; Adv. Proc. 12-00109 -NPO, Dkt. 71).
O. Criminal Proceedings Against Dickson
On March 10, 2014, a criminal complaint was filed against Dickson, alleging that Dickson "conspired to wire approximately $9,095,000.00 from accounts subject to bankruptcy protection to accounts [he] owned and/or controlled." (Case No. 3:14-cr-00078-TSL-FKB, Dkt. 1 at 4). Dickson was detained in Panama in federal custody and deported to the United States while en route to Costa Rica. Upon his return to the United States, Dickson was arrested for bank fraud and held without bond. An indictment was issued on April 9, 2014.
P. Trustee's Efforts to Locate Loan Documents
Although the Trustee initially gained access to CHFS's computer servers in Panama with Allen's login information, Dickson reached out from his jail cell to Reshonda Rhodes to contact the computer server company in Panama to deactivate Allen's password. (HIL Adv. Dkt. 341 at 7). The Trustee appeared at Dickson's arraignment in April of 2014, and demanded that he execute consents to allow her access to CHFS's four (4) computer servers in Panama. (HIL Adv. Dkt. 341 at 7). The Trustee eventually obtained access to three of the four computer servers in Panama. Of these, one of the servers had been wiped clean. (HIL Adv. Dkt. 341 at 7-8). Some information on the other two servers was encrypted. The Trustee retained a forensic computer technician to break the codes, but he was unsuccessful. The Trustee found inconsistencies in the data between the two servers. (HIL Adv. Dkt. 341 at 30). A borrower's name may be on one or both servers, and when a borrower's name was found on both servers, the borrower's information was sometimes different with no server being more accurate than the other.
After leaving a meeting with counsel for Dickson and his affiliates where she obtained permission to enter CHFS's place of business in Jackson, Mississippi, and remove whatever records were there, the Trustee went to 234 East Capitol Street but was denied access past the reception area by Dickson's family members and employees. (HIL Adv. Dkt. 341 at 9). When the Trustee returned the next Monday, all furniture and furnishings, including all certificates and pictures hanging on the walls, had been removed. The Trustee found only a handful of documents, but they related to old loans. (HIL Adv. Dkt. 341 at 9).
Despite demands from the Trustee, not all books and records of CHFS, electronic or otherwise, were surrendered to her. (HIL Adv. Dkt. 341 at 5). The original documents assigning mortgages to CHFS and purportedly from CHFS to BHT have never been recovered by the Trustee. Although Dickson testified that certain documents and access codes are in a warehouse in Panama, he has not disclosed the location of the warehouse. (HIL Adv. Dkt. 341 at 6).
Q. ClearSpring
An order was entered on April 11, 2014, allowing the Trustee to service loans with the assistance of counsel, nunc pro tunc to January 8, 2014, until a professional mortgage servicing company could be approved by the Court. (Bankr. Dkt. 616). That same day, the Trustee filed an application seeking permission to hire Vantium Capital, Inc., later known as ClearSpring Loan *43 Services, Inc. ("ClearSpring"), 27 to service the vast majority of the consumer loans. (Bankr. Dkt. 618; HIL Adv. Dkt. 341 at 18, 92). EFP/BHT objected to the proposed servicing contract, alleging that the fees the Trustee proposed to pay ClearSpring were unreasonably high. (Bankr. Dkt. 630). The parties resolved their dispute, and the application was approved on June 3, 2014. (Bankr. Dkt. 702; PPC Ex. P-16). In the Agreed Order Granting Trustee's Application to Employ Loan Servicing Company and to Establish Settlement Authority (Bankr. Dkt. 702; PPC Ex. P-16), the Trustee proposed to pay ClearSpring, in general, an electronic boarding fee of $25 per loan (including dormant loans); a one-time administrative accounting work fee of $35 per loan, a deboarding/transfer fee of $25 per loan; a performing loan fee of 10% of payments collected, up to $50 per loan with a minimum $20 fee; fifty percent (50%) of late fees; and base fees of $7.50 per month per dormant loan. EFP/BHT agreed to cooperate with ClearSpring in order to smooth the transition and reduce costs by releasing original loan documents, when requested, and providing information to ClearSpring. In return, ClearSpring agreed to allow EFP/BHT to track its servicing activities by granting them "view only" access to its proprietary web-based software. In addition, the Trustee agreed to provide EFP/BHT with monthly reports of collections received from ClearSpring. Finally, the parties agreed that ClearSpring's fees and expenses would be a surcharge under 11 U.S.C. § 506 (c) that would not be subject to "claw back" for any cause other than a violation of the terms of the servicing agreement with ClearSpring.
The electronic information on CHFS's computer servers along with physical records and files created by the Trustee when borrowers contacted her, were transferred to ClearSpring, and ClearSpring went "live" in June of 2014. (HIL Ex. P-24). Alan Sercy ("Sercy"), president and chief executive officer of ClearSpring, testified at Trial that the information from CHFS's servers designated loans as either EFP, BHT, CHFS, or Discount Home Mortgage, Inc., and ClearSpring continued those same designations. (HIL Adv. Dkt. 341 at 96-97; HIL Ex. P-24 at 3). The Trustee did not ask ClearSpring to verify that a loan belonged to any particular portfolio. (HIL Adv. Dkt. 341 at 29). Initially, 3,828 loans were "boarded" with ClearSpring. (HIL Ex. P-24 at 3).
R. Turnover Order
On April 25, 2014, the Court entered the Order Granting Edwards Family Partnership, LP and Beher Holding Trust's Emergency Motion for Order Directing William D. Dickson to Show Cause and Directing Him to Return the Funds Transferred from the Bankruptcy Estate (the "Turnover Order") (Bankr. Dkt. 631; PPC Ex. P-27) in the Bankruptcy Case. The Turnover Order required Dickson to provide information and documents to the Trustee pursuant to 11 U.S.C. § 521 (a)(3)-(4) within ten (10) business days. Dickson failed to comply with the Turnover Order. (HIL Adv. Dkt. 341 at 5).
S. Edwards TRO Case
In District Court, EFP/BHT sued W.D. Dickson Enterprises, Inc., Crisco Investments, Inc., Phalanx, S.A., Victory Consulting, and Dickson (the "Edwards TRO Case") ( *44 Case No. 3:14-cv-00436-CWR-LRA) on June 3, 2014. Dr. Edwards became concerned that Dickson, from his jail cell, was attempting to auction real property held for him by shell corporations. EFP/BHT asked the District Court to issue an injunction restraining the named defendants from selling the real property. On June 11, 2014, EFP/BHT filed the First Amended Complaint (the "Amended Edwards TRO Complaint") (Case No. 3:14-cv-00436-CWR-LRA, Dkt. 10), adding as defendants W W Warren Foundation, Discount Mortgage, Inc., Discount Home Mortgage, Inc., and Double S Construction, Inc., all of whom are affiliates and/or insiders of CHFS. The Amended Edwards TRO Complaint asserted claims to avoid the fraudulent conveyance of the stock of Victory Consulting (present owner of CHFS stock) to W W Warren Foundation, avoidance of fraudulent liens related to certain items of real property owned by affiliates of CHFS, injunctive relief and the appointment of a receiver, imposition of a constructive trust, and piercing of the corporate veil of certain affiliates/insiders of CHFS. According to EFP/BHT, the Amended Edwards TRO Complaint was filed "against these non-debtor persons and companies to try to un-do and/or stop certain pre- and post-bankruptcy fraudulent transfers by the debtor." (Case No. 3:14-cv-00436-CWR-LRA, Dkt. 35). After no substantive activity in the Edwards TRO Case for nearly two (2) years, the District Court entered an order on January 12, 2017, closing the Edwards TRO Case without prejudice. (Case No. 3:14-cv-00436-CWR-LRA, Dkt. 42).
T. Dickson Adversary Proceeding
On June 4, 2014, the Trustee initiated an action similar to the Edwards TRO Case, adversary proceeding 14-00030-NPO (the "Dickson Adversary Proceeding"), against Dickson, certain related companies, and insiders, seeking to recover pre-petition and post-petition transfers under the avoidance powers granted her by 11 U.S.C. § 544 . In the Dickson Adversary Proceeding, the Trustee alleged certain defendants related to Dickson continued to withhold funds and proprietary information belonging to the estate. The Trustee also alleged "[u]pon information and belief, some of [CHFS's] money transferred pre-petition and/or post-petition to bank accounts in Latin America has been transferred to one or more of the Defendants or has funded purchases by one or more of the Defendants, including real property in Latin America and mortgage loans in Latin America, the proceeds of which are generating income received from additional borrowers." (Adv. Proc. 14-00030 -NPO, Dkt. 33 n.23). The Trustee also sought to equitably subordinate Dickson's claims, including his claim for indemnity, and to enjoin the sale at auction of the properties owned by insiders and/or affiliates of CHFS. 28
U. Recovery of Funds
Beginning in July of 2014, the Trustee recovered and/or intercepted funds totaling $6,693,838.38. (HIL Ex. P-7 at 12-13). On July 10, 2014, $3,099,154.09 was wired to the Trustee from a CHFS account at Banco Panameño. (HIL Adv. Dkt. 331 at 43). (Banco Panameño later became Banvivienda Bank. (HIL Adv. Dkt. 341 at 28) ). On July 10, 2014, $1,824,871.49 was wired to the Trustee from a "Dickson William D" account at Banco Panameño. On March 19, 2015, $408,146.70 was wired to the Trustee from a CHFS account at Banco Panameño. Finally, on April 3, 2015, $566,106.61 was *45 wired to the Trustee from a CHFS account at Banco Panameño.
07/10/2014 $3,099,154.09 CHFS Account at Banco Panameño 07/10/2014 $1,824,871.49 "Dickson William D" Account at Banco Panameño 03/19/2015 $408,146.70 CHFS Account at Banco Panameño 04/03/2015 $566,106.61 CHFS Account at Banco Panameño Total $5,898,278.89
(HIL Ex. P-7 at 12-13). The Trustee also intercepted two cashier's checks totaling $540,000 made payable to CHFS. The Trustee intercepted the first cashier's check in the amount of $300,000 from BancorpSouth dated January 29, 2014, and the second $240,000 cashier's check from a W.D. Dickson account at OmniBank, dated February 25, 2014. (HIL Adv. Dkt. 341 at 26).
Date Amount Account 01/29/2014 $300,000 BancorpSouth 02/25/2014 $240,000 W.D. Dickson Account at OmniBank Total $540,000
The Trustee also received $144,191.90 from a settlement related to Coastal Condos and $111,367.59 from the sale of Willow Court. (HIL Ex. P-7 at 13; HIL Adv. Dkt. 340 at 94). The Trustee testified that she was unable to credit these funds against any particular CHFS borrower loans. (HIL Adv. Dkt. 341 at 28).
V. Partial Summary Judgment in Dickson Guaranty Suit
In the Dickson Guaranty Suit, EFP/BHT moved for partial summary judgment as to Dickson's liability as guarantor since the EFP Note and BHT Note matured on August 1, 2013, and remain unpaid. (Case No. 3:13-cv-00587-CWR-LRA, Dkt. 14). The District Count entered an order granting partial summary judgment in favor of EFP/BHT on September 10, 2014 (the "September 10 Order") (PPC Ex. P-25); Edwards Family P'ship, LP v. Dickson , Case No. 3:13-cv-00587-CWR-LRA, 2014 WL 4494283 (S.D. Miss. Sept. 10, 2014). The District Court found that CHFS had defaulted on the EFP Note and BHT Note and that Dickson was personally liable by virtue of the guaranties he signed. ( Id. , at *3 ). "Dickson signed these agreements [with EFP/BHT] and testified to its validity .... According to Dickson, CHFS made payments under the terms of the original loan agreements, the amended agreements, and the BHT and EFP notes until October 2011." ( Id. , at *1-2 ). Applying Mississippi contract law, the District Court ruled that the clear and unambiguous language of the guaranty agreements rendered Dickson personally liable for the debt owed by CHFS. The District Court ordered the parties to file affidavits establishing the extent of Dickson's liability. On August 26, 2015, the District Court concluded that Dickson owed, as of September 20, 2014, on the EFP Note $3,775,995 (principal), $2,651,983 (interest), and $2,946 (per diem) and on the BHT Note $11,327,984 (principal), $8,021,207 (interest), and $8,868 (per diem) (Case No. 3:13-cv-00587-CWR-LRA, Dkt. 67). The District Court entered a final judgment in favor of EFP/BHT on September 1, 2015. (PPC Ex. P-30).
Dickson appealed the decision to the Fifth Circuit Court of Appeals, arguing *46 that the summary judgment was premature because of the pending Home Improvement Loans Adversary in which he and CHFS were challenging the extent and validity of the EFP Note and BHT Note. Dickson posited that if CHFS's obligation fell away, then his should too. On May 23, 2016, the Fifth Circuit affirmed the District Court. Edwards Family P'ship L.P. v. Dickson , 821 F.3d 614 (5th Cir. 2016). Based on the unambiguous language of the guaranty agreements, the Fifth Circuit ruled that Dickson waived any defenses to the enforcement of the EFP Note and BHT Note, and, therefore, was required to satisfy the obligations "no matter what." Id. at 614 .
W. Rejection of Servicing Contract
On June 4, 2014, the Trustee obtained authority from the Court pursuant to 11 U.S.C. § 365 (a) to reject the servicing agreement entered into between CHFS and SNGC, LLC on August 26, 2005. (MPF P-15; Bankr. Dkt. 705; HIL Adv. Dkt. 341 at 12). Under the contract, CHFS had agreed to service certain loans that SNGC, LLC had purchased prior to the Petition date for a servicing fee. The Trustee determined it was not economically feasible to continue to service these loans and that it was in the best interest of the estate to allow SNGC, LLC to service its own loans.
X. Dr. Edwards & Meehan
Dr. Edwards testified that Meehan 29 first contacted him by telephone on September 11, 2014. (HIL Adv. Dkt. 341 at 200). The next day, Dr. Edwards emailed Meehan a copy of the September 10 Order "granting Edwards Family Partnership its Judgment against Dickson under his Guaranty. (PPC Ex. P-32). 30 Only two days before, on September 10, 2014, the District Court had entered the September 10 Order, but at this juncture the District Court had not yet determined the amount of damages that Dickson owed EFP/BHT and had not yet entered a final judgment in the Guaranty Suit. (PPC Ex. P-25).
In other emails on September 12, 2014, Dr. Edwards informed Meehan that he was "trying to arrange a trip to San Jose" and would like to meet with him "to review the CHFS computers and Dickson's property," and talk to Dickson's former attorney. (PPC Ex. P-32). There were other email exchanges between Dr. Edwards and Meehan from September 25, 2014, through February of 2015. (PPC Ex. P-32).
On October 11, 2014, at 9:32 a.m., 31 Dr. Edwards wrote in an email to Barber, counsel for the Trustee, "Martha [Borg] forwarded your question on the Sanford mortgage release ... Jeff [Barber], please exit the loan servicing business as we cannot abide by your firm's charges. Let Vantium deal with CHFS loose ends; Martha [Borg] and I will deal with EFP and BHT loose ends." (PPC Ex. P-12). Dr. Edwards did not reveal to Barber his ongoing communications with Meehan. Later that same day at 11:00 a.m., Dr. Edwards emailed *47 Meehan, "Did you receive the first wire? Was your IT guy able to open the loan files?" (PPC Ex. P-32 at 59).
On October 14, 2014, Meehan emailed Dr. Edwards the link to a dropbox account containing CHFS data pulled from a CHFS computer. (PPC Ex. P-32 at 61). Dr. Edwards was unable to access the dropbox and asked Meehan to mail him the information on CDs. (HIL Adv. Dkt. 341 at 206). Sometime later, Meehan mailed Dr. Edwards two CDs containing the hard drive of the computer used by Reshonda Rhodes. (HIL Adv. Dkt. 341 at 157 & 203; PPC Ex. P-34). On October 15, 2014, Dr. Edwards informed Meehan in an email that he had opened the two CDs but that they did not contain all of the loan servicing data he needed. He instructed Meehan to use Dickson's former employees to obtain access to CHFS information from another off-site server. Dr. Edwards also inquired whether Meehan had received the first wire transfer payment, noting that he had "agreed to send the second thousand if I was able to find any useful information. Certainly some of the information on the CDs will find a use." (PPC Ex. P-32 at 66).
At Trial, Edwards testified that he believed the CDs to be duplicates of each other and that they contained no new or relevant information. (HIL Adv. Dkt. 341 at 157). Nevertheless, he admitted that he wired Meehan money but only "out of just appreciation." (HIL Adv. Dkt. 341 at 207). Dr. Edwards gave one of the CDs to the FBI and kept the other. (HIL Adv. Dkt. 341 at 208-09; PPC Ex. P-34).
Y. Extension of 11 U.S.C. § 546 Deadline
On October 27, 2014, the Trustee filed in the Bankruptcy Case the Trustee's Motion to Extend 11 U.S.C. § 546 Deadline (the "Motion to Extend") (Bankr. Dkt. 848). On November 13, 2014, the Court entered the Order Granting Trustee's Motion to Extend 11 U.S.C. § 546 Deadline [Dkt. # 848] (Bankr. Dkt. 877), enlarging the one-year limitations period in 11 U.S.C. § 546 to January 21, 2016.
Z. Dr. Edwards' Plans to Travel to Costa Rica
Between November 12 and 19, 2014, Dr. Edwards and Meehan began discussing, through emails, Dr. Edwards' plans to visit Costa Rica from December 3 to December 9, 2014. (PPC Ex. P-32). He also planned a telephone interview with Daniel Romero ("Romero"), Meehan's attorney. On November 28, 2014, Dr. Edwards asked Meehan to arrange a meeting with Martinez, Dickson's former attorney, to "enlist his help in reclaiming stolen assets." (PPC Ex. P-32 at 51-52). Dr. Edwards also asked Meehan, "Can you get a list of the mortgages and other investments that attorney Jose Martinez prepared for Dickson? Is he still willing to help us reclaim stolen funds or is he backing off?" Dr. Edwards then stated, "If he is still on our side I would like to set up a meeting with him between December 6 evening to Dec 8 AM." (PPC Ex. P-32 at 42).
AA. Cash Collateral Objection & Trustee's Cash Motion
On December 3, 2014, EFP/BHT filed the Cash Collateral Objection, objecting to the Trustee's use of their alleged cash collateral and asserting that the collections by the Trustee and ClearSpring on the Home Improvement Loans and the Mortgage Portfolios belonged to them. They expressed concerns over the demands for payment of administrative expenses and sought an order prohibiting the Trustee from using any of the cash generated by collections on either the Home Improvement Loans or the Mortgage Portfolios.
*48 On December 22, 2014, the Trustee filed the Response to Cash Collateral Objection, stating that the relief requested by EFP/BHT exceeded the relief afforded under 11 U.S.C. § 363 and that EFP/BHT's interest in the cash was adequately protected. The Trustee incorporated by reference the authorities and arguments presented in the Trustee's Cash Motion filed on December 5, 2014, shortly after the filing of the Cash Collateral Objection.
In the Trustee's Cash Motion, the Trustee sought permission from the Court, to the extent required, to use cash to maintain the operations of CHFS in the ordinary course of business until the confirmation of a plan of liquidation. The Trustee explained that until the filing of the Cash Collateral Objection, EFP/BHT had agreed to the use of cash to operate the business, first by CHFS and then by the Trustee.
The Trustee asserted that the interests of EFP/BHT were adequately protected by: (a) repatriation of approximately $4.9 million wrongfully removed from the estate and the Trustee's ongoing efforts to repatriate additional funds; (b) the monthly accumulation of cash through the servicing of loans by ClearSpring; (c) numerous orders preserving the rights, claims, and defenses of EFP/BHT regarding estate assets; (d) estate funds being safeguarded in the Trustee's accounts subject to her sole access; and (e) the monthly operating reports, which are current and accessible, pursuant to an agreed order, to ClearSpring's reports. The Trustee expressed her willingness to remit monthly payments to EFP/BHT, provided that sufficient funds remained in the estate to meet its obligations.
The Trustee disputed EFP/BHT's assertion that the cash generated from the Home Improvement Loans belonged to them. Also, she pointed out that 11 U.S.C. § 363 permits the Court to order the use of cash irrespective of a putative secured creditor's lack of consent. The Trustee also disputed EFP/BHT's assertion that they own the Mortgage Portfolios because no adjudication had been made to that point. Certain of the transactions were not governed by a written agreement, and complicated issues existed as to which law applied to fill in the gaps, according to the Trustee. Moreover, some of the alleged Mortgage Portfolios are titled in the name of CHFS.
The Trustee characterized EFP/BHT's request for relief as an attempt to "strangle" the estate and prevent her from exercising her statutory duties. (Bankr. Dkt. 906 at 8). For example, without the use of cash, the Trustee could not: (1) maintain corporate good standing in states that require payment of franchise fees and annual fees as a condition precedent to foreclosing loans or suing to collect indebtedness; (2) pay the monthly charge for remote access to CHFS's computer servers in Panama necessary to service loans that have not been boarded with ClearSpring; (3) refund amounts to borrowers improperly assessed by CHFS in violation of federal statutes; (4) pay recording fees to cancel mortgages that have been paid in full; (5) pay U.S. Trustee fees; and (6) pay appropriate state and federal taxes. (Bankr. Dkt. 906 at 9). To the extent required, the Trustee requested permission to use cash for ordinary expenses of the estate nunc pro tunc to January 16, 2014, the date the Court approved her appointment.
In the Response to Trustee's Cash Motion, EFP/BHT alleged that the overwhelming majority of the cash collected was either their cash collateral or cash in which the estate held no interest. In support of their position, they pointed to the criminal conduct of Dickson in taking the post-petition collections and diverting them *49 to accounts in Latin America. If the cash collected belonged to CHFS, they reasoned, "Dickson would not have needed to resort to self-help." (Bankr. Dkt. 919 at 1). They claimed that the Home Improvement Loans Adversary placed a "choke hold" on their ability to obtain relief from the automatic stay and realize on their collateral. They asked the Court to prohibit any use of their cash collateral until resolution of the Home Improvement Loans Adversary. In the Reply to Response to Trustee's Cash Motion, the Trustee claimed that EFP/BHT did not oppose the order holding in abeyance the Home Improvement Loans Adversary and did not request that the Court lift the hold. The Trustee interposed a procedural objection in that "EFP/BHT should not be permitted to obtain factual findings on the Joint Venture Loans in a contested matter that could arguably have preclusive effect in the Adversary Proceeding relating to the Joint Venture Loans." (Bankr. Dkt. 926 at 4 n.7).
BB. Dr. Edwards' Trip to Costa Rica
Dr. Edwards traveled to Costa Rica on December 3, 2014. (HIL Adv. Dkt. 341 at 157). While there, he met with Meehan as they had planned. On December 10, 2014, Dr. Edwards notified Meehan by email that he had wired $1,000 to his account so that Meehan "will be able to accomplish 3 things ASAP." (PPC Ex. P-32 at 64). Among them, Dr. Edwards asked Meehan to "[d]ownload to CD information in hard drive of one container computer and one call center computers." (PPC Ex. P-32 at 64). In an email from Dr. Edwards dated December 27, 2014, he asked Meehan, "I have not received the downloads from the two computers we found in your office. Do you have them?" (PPC Ex. P-32 at 62).
In a letter dated February 4, 2015, the Trustee informed Borg and McCarley that ClearSpring "ha[d] been trying to locate documents on certain loan files in order to pursue collections, respond to borrower Qualified Written Requests under RESPA, 32 analyze modification requests, and respond to inquiries by borrowers or governmental agencies." (PPC Ex. P-15). The Trustee reminded Borg and McCarley that their compliance with this request was required pursuant to the order that approved ClearSpring as the loan servicer (Bankr. Dkt. 702; PPC Ex. 16). Neither Dr. Edwards nor Borg notified the Trustee of the CHFS information they had obtained from Meehan. (HIL Adv. Dkt. 341 at 41).
In emails between February 6 and 9, 2015, Dr. Edwards asked about the assets seized by the Costa Rican government from Dickson. In an email to Meehan's attorney on February 13, 2015, Dr. Edwards asked whether any seized assets would be "paid over to the victims (my companies), the FBI or to whom?" (PPC Ex. P-32 at 68).
According to Dr. Edwards, the only information he ultimately received from Meehan were some computer records of the Home Improvement Loans and the other EFP/BHT portfolios that Meehan copied onto CDs. Dr. Edwards testified that he believed the information on the CDs were duplicative of records already in the Trustee's possession. Thus, Dr. Edwards supposedly believed he had no useful information to turn over to the Trustee. (HIL Adv. Dkt. 341 at 157-58). Dr. Edwards testified that despite his efforts, he was unable to collect any money from any source in Costa Rica or Panama. (HIL Adv. Dkt. 341 at 158).
*50 According to the Trustee, as a result of Dr. Edwards' contact with Meehan from September of 2014 to February of 2015, Dr. Edwards had knowledge of approximately 2,000 loans, at least two bank accounts in CHFS's name (one with Banco de Costa Rica and the other with Banco Panameño), over $1.5 million in loans purchased in Costa Rica with funds stolen from the estate, and the names of two CHFS affiliates (Pirrana SA and Mary Madison Foundation), all of which she was previously unaware.
CC. Trustee & Meehan
Meehan attempted to contact the Trustee for the first time on February 17, 2015. (HIL Adv. Dkt. 341 at 30-31). But for Meehan contacting the Trustee directly, she would not have known the location of CHFS's computers in Costa Rica or other information regarding the financial affairs as well as books and records of CHFS's operations there, all of which Dr. Edwards knew five months earlier. In February or March of 2015, Meehan gave the Trustee a CD, which was another copy of the hard drive of Reshonda Rhodes' computer. (HIL Adv. Dkt. 341 at 40; PPC Ex. P-34). 33 The CD contained borrower information, information about Costa Rican loans, and forms that changed automatic draft deposits into Victory Consul

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/8501204. Public record. Not legal advice.