Diversified Funding Group LLC, et al v. Hendon, et al, No. 2:2017cv01572 - Document 23 (D. Ariz. 2018)

Court Description: ORDER: The Bankruptcy Court's Order Granting Motions to Dismiss is AFFIRMED. IT IS FURTHER ORDERED directing the Clerk of the Court to terminate this action and enter judgment accordingly. Signed by Judge G Murray Snow on 6/12/2018. (REK)

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Diversified Funding Group LLC, et al v. Hendon, et al 1 Doc. 23 WO 2 3 4 5 6 7 8 IN THE UNITED STATES DISTRICT COURT 9 FOR THE DISTRICT OF ARIZONA 10 11 Diversified Funding Group LLC, et al., No. CV-17-01571-PHX-GMS 12 Appellants, 13 v. No. BK-11-21164-PHX-SHG Adv. No. 16-127-SHG Adv. No. 16-518-SHG 14 Hendon, et al., CONSOLIDATED with: 15 16 17 Appellees. No. CV-17-01572-PHX-GMS No. BK-11-21164-PHX-SHG Adv. No. 16-127-SHG Adv. No. 16-518-SHG 18 19 20 21 22 23 24 25 26 27 28 ORDER Pending before the Court is Appellants’ appeal of the Bankruptcy Court’s decision to dismiss Appellees. (Docs. 1, 25). The Court affirms the decision. BACKGROUND In 2010, Danny’s Happy Valley, LLC (“DHV”) filed for relief under Chapter 11 of the Bankruptcy Code, and nearly a year later, the principal of DHV, Daniel Lewis Hendon, also filed for personal relief under Chapter 11. These two petitions were joined in 2011. In response to a request of the DHV and Hendon debtors, the Bankruptcy Court initiated a plan that established a liquidating trust and empowered a trustee to administer the assets of the trust. On October 27, 2011, Appellant Diversified Funding Group, LLC, Dockets.Justia.com 1 (“DFG”), a creditor in the Hendon Bankruptcy, sought a determination that its claim was 2 nondischargeable. On August 13, 2014, the Bankruptcy Court entered a $23,916,359.14 3 nondischargeable judgment in favor of DFG. 4 Beginning in March 2016, DFG filed separate complaints against Hendon and 5 other appellees in Arizona federal court (“Arizona complaint”) and California state court 6 (“California complaint”). In the complaints, DFG named Hendon and twenty-five other 7 non-debtors and non-creditors as parties and sought relief in eighteen separate counts. In 8 short summary of these complaints, Daniel Hendon and Heather Hendon held a 9 controlling interest in fourteen separate carwashes. In August 2013, in a plea agreement 10 that resolved pending criminal charges against him, Daniel Hendon divested himself from 11 ownership of the carwash entities. The Verde Group, led by chairman Ernie Garcia, 12 purchased three mortgage notes secured by the carwashes, which it sold to Pacwest three 13 months later for a profit of over $2,000,000. The Verde Group then made two loans to 14 Heather Hendon: for $1,000,000 in April 2015 and $600,000 in December 2015. Heather 15 Hendon, the Verde Group, Ernie Garcia, and Pacwest have settled with DFG and are no 16 longer parties to this suit. 17 DFG’s complaints allege additional fraudulent activity among the remaining 18 parties. Using proceeds from Verde’s loans to her, Heather Hendon transferred $45,000 19 to Alan Meda and the Burch & Cracchiolo law firm to pay for Daniel Hendon’s legal 20 fees. DFG alleges that Meda, together with Heather Hendon’s attorney Carolyn Johnson 21 at Dickenson Wright, instructed Heather Hendon to create a sham bank account to 22 conceal the funds from DFG and the Bankruptcy Court. DFG claims that Daniel Hendon 23 retains ownership and control of the carwash entities through Pacwest. DFG claims that 24 Daniel Hendon transferred $530,033 to Nell Hendon, his deceased mother, as a 25 reimbursement for advances that she made on a loan, but no supporting documents for 26 the transfer were produced. DFG claims that Kelly Carroll, Daniel Hendon’s ex-wife, 27 made three fraudulent transfers to Daniel Hendon from 2007 to 2010. DFG claims that 28 Daniel Hendon fraudulently transferred at least $100,000 to Maria Barker, his girlfriend -2- 1 in 2014. DFG claims that Daniel Hendon fraudulently transferred $1,200,000 to Gil 2 Olguin and OSC capital in 2010. DFG claims that Daniel Hendon sold a Ferrari to his 3 longtime friend Jay Swart for $80,000 to thwart collection in 2010. Lastly, DFG alleges 4 that Daniel Hendon fraudulently transferred unspecified amounts of money at unspecified 5 times to former employee Ernie Vasquez. 6 Eventually, both complaints were removed and/or transferred to the District of 7 Arizona Bankruptcy Court. Because the defendants argued that the claims belonged 8 exclusively to the Trustee and not DFG, DFG purchased the Trustee’s rights to prosecute 9 any potential claims. Concurrent with this purchase, DFG settled with twelve of the 10 defendants, including Heather Hendon, Pacwest and the Verde Group. Many of the 11 remaining parties filed motions to dismiss the complaints. With few exceptions, the 12 Court granted the motions to dismiss without leave to amend.1 DFG appeals. 13 14 DISCUSSION I. Legal Standard 15 Under 29 U.S.C. § 158(a)(1), the Court has jurisdiction over appeals from “final 16 judgments, orders, and decrees” of bankruptcy judges. The Court reviews a bankruptcy 17 court’s conclusions of law de novo, and its findings of fact under the clearly erroneous 18 standard. Greene v. Savage, 583 F.3d 614, 618 (9th Cir.2009); Fed. R. Bankr.P. 8013. 19 “Issues not ‘specifically and distinctly raised and argued’ in the opening brief need not be 20 considered by the court.” See U.S. v. Montoya, 45 F.3d 1286, 1300 (9th Cir.1995) (citing 21 Officers for Justice v. Civil Serv. Comm'n, 979 F.2d 721, 726 (9th Cir. 1992)). 22 II. Analysis 23 In the opening brief, Appellants argue that the Bankruptcy Court erred by (1) 24 failing to consider the nondischargeability judgement, (2) dismissing the civil RICO 25 claims with prejudice, and (3) dismissing the claims without leave to amend. 26 27 1 28 See Bankruptcy Court decision, Diversified Funding Group v. Hendon, et al, No. 2:16-ap-00518, Doc. 39; (Doc. 25, App. Tab 1) (“Bankruptcy Order”), for detailed description of the procedural history. -3- 1 A. 2 DFG provided a loan to Daniel Hendon and his entities in 2007. When Daniel 3 Hendon failed to repay the loan, DFG sued Daniel Hendon and won a state suit for 4 breach of contract and fraud for $17.7 million. Daniel Hendon subsequently filed for 5 Chapter 11 relief. 6 judgment against Hendon should be exempt from discharge pursuant to 11 U.S.C. § 7 523(a)(2), which “does not discharge an individual debtor from any debt . . . obtained . . . 8 by false pretenses, a false representation, or actual fraud.” DFG alleged that Daniel 9 Hendon fraudulently made false representations to obtain the loan and extensions from 10 DFG, and Daniel Hendon made a fraudulent omission concerning his intended use of 11 loan proceeds, and that these false representations made his loan obligation to DFG 12 nondischargeable. (Doc. 25, App. Tab 81 at 1–10). The court granted DFG’s request 13 because it showed that Hendon made a fraudulent omission regarding his use of loan 14 proceeds, but it also ruled that DFG did not prove that Hendon fraudulently obtained the 15 loan or extensions to the loan. (Doc. 25, App. Tab 81 at 23–24). Consideration of nondischargeable debt DFG then requested the Bankruptcy Court to hold that DFG’s 16 In roughly one page of its opening brief, Appellants summarily argue that the 17 Bankruptcy Court’s subsequent decision to dismiss parties from the present complaint is 18 flawed because it failed to acknowledge the previous nondischargeable debt 19 determination. Appellants briefly claim that the judgment “strongly supports” the “fraud 20 and civil RICO claims.” Id. 21 In the present decision, the Bankruptcy Court dismissed claims in DFG’s 22 complaints for various reasons. First, the Bankruptcy Court held that Arizona Complaint 23 Count I, brought under 11 U.S.C. §§ 547–550, may not be commenced after two years 24 from the entry of the order for relief. 11 U.S.C. § 546(a). The Bankruptcy Court 25 determined that the 2011 petition date served as the entry of the order for relief, and it 26 dismissed the claims because the complaints were filed in 2016, years after the 2013 27 statutory deadline. Diversified Funding Group v. Hendon, et al, No. 2:16-ap-00518, Doc. 28 39 at 11–14. A consideration of the 2014 nondischargeability decision would not save -4- 1 these untimely claims. 2 Second, reference to the nondischargeability decision would not influence the 3 Bankruptcy Court’s decision to dismiss the claims in Arizona Complaint Count II and 4 California Complaint Count I concerning state law fraudulent transfers. Defendants must 5 receive fraudulent transfers to be liable under the appropriate state laws. A.R.S. § 44- 6 1004; Cal. Civ. Code § 3439.04. 7 Appellees Johnson, Despain, and Nell Hendon because they never received any 8 fraudulent transfers. Diversified Funding Group v. Hendon, et al, No. 2:16-ap-00518, 9 Doc. 39 at 15, 16. The nondishargeability decision does not state that Johnson, Despain, 10 or Nell Hendon ever received any fraudulent transfers. The Bankruptcy Court dismissed 11 the claims against Carroll, Swart, and Olguin as time barred. Diversified Funding Group 12 v. Hendon, et al, No. 2:16-ap-00518, Doc. 39at 15. It dismissed other claims because 13 relief from the fraudulent transfers would require action against Pacwest, but Pacwest is 14 no longer a party in the suit due to its settlement agreement with Appellants. Diversified 15 Funding Group v. Hendon, et al, No. 2:16-ap-00518, Doc. 39 at 17. Appellants fail to 16 describe how consideration of the nondischargeability decision would impact the analysis 17 of any of these dismissals. The Bankruptcy Court dismissed claims against 18 Third, the nondischargeability decision would not influence the Bankruptcy 19 Court’s decision to dismiss the claims in California Complaint Counts II, V, VII, and 20 VIII concerning fraudulent concealment. California law hold parties accountable for 21 fraudulent concealment only if they have a duty to disclose. Hambrick v. Healthcare 22 Partners Med. Grp., Inc., 238 Cal. App. 4th 124, 162 (2015). The Bankruptcy Court 23 dismissed these claims because none of the remaining defendants had financial 24 relationships with DFG or were parties to the Pacwest sale or the Verde loans. 25 Diversified Funding Group v. Hendon, et al, No. 2:16-ap-00518, Doc. 39 at 19. 26 Appellants fail to describe how consideration of the nondischargeability decision would 27 impact the Bankruptcy Court’s analysis that the remaining defendants did not have a duty 28 to disclose to DFG. -5- 1 Lastly, the nondischargeability decision would not influence the Bankruptcy 2 Court’s decision to dismiss the civil RICO claims. A prima facie RICO claim requires 3 the plaintiff to show that the conduct of an enterprise, through a pattern of racketeering 4 activity (known as predicate acts), caused injury to the plaintiff’s business or property. 5 United Brotherhood of Carpenters & Joiners of Am. v. Bldg. & Const. Trades Dep’t, 6 AFL-CIO, 770 F.3d 834, 837 (9th Cir. 2014) (citation omitted). The Bankruptcy Court 7 dismissed the complaints against the non-settling defendants because of a failure to show 8 the plausibility of repeated predicated acts by an enterprise. Diversified Funding Group 9 v. Hendon, et al, No. 2:16-ap-00518, Doc. 39 at 37–38. The only alleged connection 10 among the remaining defendants was that some of them received loan proceeds, 11 sometimes in unspecified amounts and at unspecified times. Appellants fail to show how 12 reference to the nondischargeability decision would impact that analysis. 13 In short, the Appellants have failed to demonstrate how the nondischargeability 14 decision would change the Bankruptcy Court’s dismissal of the fraud and civil RICO 15 claims. 16 nondischargeability determination. If the Bankruptcy Court otherwise erred, DFG did 17 not specifically and distinctly raise and argue these issues in the opening brief. See U.S. 18 v. Montoya, 45 F.3d 1286, 1300 (9th Cir.1995) (citing Officers for Justice v. Civil Serv. 19 Comm'n, 979 F.2d 721, 726 (9th Cir. 1992)). The Bankruptcy Court did not commit legal error by not addressing the 20 B. 21 Appellants argue that the Bankruptcy Court committed legal error by individually 22 considering appellees’ alleged actions rather than collectively, and that the civil RICO 23 portions of the complaint would have survived under the proper review. (Doc. 25 at 9– 24 15). Civil RICO Argument 25 The RICO statute generally makes it unlawful for any person to use or invest 26 income from a pattern of racketeering activity. 18 U.S.C. § 1962(a). The statute includes 27 civil remedies. 18 U.S.C. § 1964. To establish a civil RICO claim, a plaintiff must 28 establish “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering -6- 1 activity (known as predicate acts) (5) causing injury to plaintiff's business or property.” 2 Living Designs, Inc. v. E.I. DuPont de Nemours & Co., 431 F.3d 353, 361 (9th Cir. 3 2005). Concerning the first prong, RICO conduct is defined as “participat[ion] in the 4 operation or management of the enterprise itself.” Reves v. Ernst & Young, 507 U.S. 170, 5 185 (1993). Concerning the second prong, a RICO enterprise, if not a legal entity, is “a 6 group of persons associated together for a common purpose of engaging in a course of 7 conduct.” United States v. Turkette, 452 U.S. 576, 583 (1981). It further requires three 8 features: a purpose; relationships among those associated with the enterprise; and 9 sufficient longevity to pursue the purpose. Boyle v. United States, 556 U.S. 938, 946 10 (2009). Concerning the third prong, a pattern requires at least two predicate acts that 11 have a relationship to each other and constitute a threat of continued racketeering activity. 12 H.J. Inc. V. Nw. Bell Tel. Co., 492 U.S. 229, 239–40 (1989). Concerning the fourth 13 prong, the predicate acts must be defined in 18 U.S.C. § 1961(1), which include 14 numerous indictable acts, including “fraud connected with a case under title 11.” 18 15 U.S.C. § 1961(1)(D). 16 Rule 9(b) requires a party alleging fraud to “state with particularity the 17 circumstances constituting fraud,” including an account of the “time, place, and specific 18 content of the false representations as well as the identities of the parties to the 19 misrepresentation.” Edwards v. Marin Park, Inc., 356 F.3d 1058, 1066 (9th Cir. 2004). 20 “Rule 9(b)'s requirement that . . . the circumstances constituting fraud or mistake shall be 21 stated with particularity applies to civil RICO fraud claims.” Id. at 1065–66 (internal 22 quotations omitted). “Rule 9(b) does not allow a complaint to merely lump multiple 23 defendants together but require[s] plaintiffs to differentiate their allegations when suing 24 more than one defendant and inform each defendant separately of the allegations 25 surrounding his alleged participation in the fraud.” Swartz v. KPMG LLP, 476 F.3d 756, 26 764–65 (9th Cir. 2007) (citation and ellipsis omitted). “To comply with Rule 9(b), 27 allegations of fraud must be specific enough to give defendants notice of the particular 28 misconduct which is alleged to constitute the fraud charged so that they can defend -7- 1 against the charge and not just deny that they have done anything wrong.” Bly–Magee v. 2 California, 236 F.3d 1014, 1019 (9th Cir. 2001) (internal quotations omitted). 3 In short review, the amended complaint alleged the following separate conduct of 4 non-settling parties to establish liability under RICO. Daniel Hendon’s ledger includes a 5 transfer of roughly $500,000 to his personal bank account to be used to repay his mother 6 Nell Hendon as reimbursement for advances that she paid on a loan, but the Complaint 7 does not include any supporting documentation for this payment to Nell, and the 8 nondischargeability decision determined that she never received the money. Daniel 9 Hendon transferred between $150,000 to $200,000 on three occasions between 2007 and 10 2010. Daniel Hendon transferred $100,000 to his girlfriend Maria Barker in 2014. 11 Daniel Hendon transferred $1,200,000 to Gil Olguin in 2010. Daniel Hendon sold a 12 Ferrari to Jay Swart in 2010 for $80,000. Heather Hendon transferred $45,000 to Alan 13 Meda in 2015 for Daniel Hendon’s legal fees. Daniel Hendon fraudulently transferred 14 various payments to former employee Ernie Vasquez in unspecified amounts and at 15 unspecified times. 16 The Bankruptcy Court dismissed the RICO complaints against the non-settling 17 parties for various reasons. It generally dismissed the claims against Carroll and Vasquez 18 because DFG acknowledged at oral argument that neither committed a RICO predicate 19 act. Diversified Funding Group v. Hendon, et al, No. 2:16-ap-00518, Doc. 39 at 30. 20 Concerning RICO conduct, the Bankruptcy Court determined that the claims against Nell 21 Hendon, Barker, Swart, and Vasquez failed to allege that their conduct met the operation 22 or management threshold. Diversified Funding Group v. Hendon, et al, No. 2:16-ap- 23 00518, Doc. 39 at 31. Concerning RICO enterprises, the Bankruptcy Court determined 24 that the complaint failed to show that appellees Daniel Hendon, Meda, Johnson, and 25 Despain had any relationship to one another that could plausibly be construed as a RICO 26 common interest, or that Nell Hendon, Barker, Swart, and Olguin had a connection to 27 each other. Diversified Funding Group v. Hendon, et al, No. 2:16-ap-00518, Doc. 39 at 28 32. -8- 1 Considering that Rule 9(b)’s particularity requirement applies to civil RICO fraud 2 claims, Edwards, 356 F.3d at 1065–66, and that Rule 9(b) does not allow a complaint to 3 lump multiple defendants together, but requires individual allegations supporting 4 participation in the fraud, Swartz, 476 F.3d 756 at 764–65, the Bankruptcy Court did not 5 commit legal error in dismissing appellants’ civil RICO claims. 6 C. 7 A party may amend its pleading once as a matter of course. Fed. R. Civ. P. 8 15(a)(1). Thereafter, a party may amend its pleading only with written consent or the 9 court’s leave, and courts “should freely give leave when justice so requires.” Fed. R. Civ. 10 P. 15(a)(2). However, leave to amend “may be denied if the proposed amendment either 11 lacks merit or would not serve any purpose because to grant it would be futile in saving 12 the plaintiff's suit.” Universal Mortg. Co., Inc. v. Prudential Ins. Co., 799 F.2d 458, 459 13 (9th Cir. 1986) (citations omitted). The standard of review for denial of leave to amend is 14 abuse of discretion. Dan Caputo Co. v. Russian River County Sanitation District, 749 15 F.2d 571, 574 (9th Cir. 1984). Dismissal without leave to amend 16 DFG’s argument is limited to a claim that this particular case has a complicated 17 set of facts and that DFG should have been permitted to present new evidence obtained 18 subsequent to their previously amended complaint. However, DFG did not present any 19 of the alleged new evidence in its opening brief, nor did DFG make an affirmative 20 argument as to how the Bankruptcy Court abused its discretion to deny leave to amend. 21 Additionally, the Court is unaware that DFG ever requested leave to amend prior to the 22 dismissal. Again, “[i]ssues not ‘specifically and distinctly raised and argued’ in the 23 opening brief need not be considered by the court.” See U.S. v. Montoya, 45 F.3d 1286, 24 1300 (9th Cir.1995) (citing Officers for Justice v. Civil Serv. Comm'n, 979 F.2d 721, 726 25 (9th Cir. 1992)). In sum, the Court is unaware of how DFG could have successfully 26 amended its complaint when the Bankruptcy Court denied leave to amend for futility. 27 Therefore, the Court affirms the Bankruptcy Court’s decision to dismiss without leave to 28 amend. -9- 1 2 3 4 5 IT IS THEREFORE ORDERED that the Bankruptcy Court's Order Granting Motions to Dismiss is AFFIRMED. IT IS FURTHER ORDERED directing the Clerk of the Court to terminate this action and enter judgment accordingly. Dated this 12th day of June, 2018. 6 7 8 9 Honorable G. Murray Snow United States District Judge 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 10 -

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