In Re USA Commercial Mortg. Co.
802 F. Supp. 2d 1147
D. Nev.2011Background
- USA Commercial Mortgage Company filed for bankruptcy; Compass purchased USA's loan servicing rights under LSAs at auction.
- Silar Advisors financed Compass's acquisition and later assigned interests to Asset Resolution, which foreclosed and asserted rights as to the Purchased Assets.
- Several Direct Lenders sued Compass, Silar, and Compass principals asserting contract interpretation, damages, and related claims; the Court initially found standing issues and allowed Asset Resolution to participate despite not being approved as assignee.
- A nine-person jury eventually held Silar and/or Asset Resolution liable for breach of contract, implied covenant breaches, fiduciary duties, conversion, and civil conspiracy, with compensatory damages around $79,000 and punitive damages totaling about $5.1 million against Compass, Piskun, and Blatt.
- Post-trial proceedings addressed attorneys’ fees, prejudgment interest, and declaratory relief; the court awarded substantial fees to plaintiffs and determined 51% control rights, fiduciary duties, and MRA treatment of the assets, while denying some defendant requests.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether LSAs entitle servicers to priority servicing compensation | Plaintiffs rely on LSA terms to cap servicing compensation and require repayment of principal and accrued interest first. | Defendants claim broader authority to collect servicing-related sums from Direct Lenders. | LSAs limit servicing compensation to funds collected from Borrower after principal and interest, not directly from Direct Lenders; priority to Direct Lender repayment applies. |
| Whether Nevada law on mortgage brokers required separate powers of attorney per loan | LSAs governed by Nevada law; Direct Lenders' rights require valid powers of attorney for each loan. | Agency and execution of powers of attorney were sufficient under the plan transfer. | Defendants lacked valid powers of attorney per Nevada Rev. Stat. § 645B.330; they acted as mortgage brokers without proper authority. |
| Whether the MRA constitutes a purchase-and-sale transaction or a collateralized loan | MRA language indicates a purchase-and-sale, with title to assets transferring to Silar, not a loan. | MRA could be viewed as a secured loan depending on contingent security interests. | Under New York law, the MRA is a purchase-and-sale transaction, not a collateralized loan. |
| Whether 51% control rights empowered Direct Lenders to manage loans and terminate servicers | 51% rule grants Direct Lenders authority to designate servicing and foreclose decisions regardless of minority interests. | Direct Lenders' action interfered with servicing and could not override servicing actions. | 51% rule gives Direct Lenders management control; they may instruct on servicing and foreclosures. |
| Whether punitive damages and attorney-fee awards were proper given the conduct and damages | Evidence shows egregious, deliberate misconduct warranting punitive damages and declaratory-fee relief under LSAs and Nevada law. | Challenged the amount and allocation of punitive damages and argued against fees. | Punitive damages upheld as constitutional; substantial attorney-fee and cost awards granted; declaratory relief affirmed. |
Key Cases Cited
- Granite Partners, L.P. v. Bear, Stearns & Co., 17 F. Supp. 2d 275 (S.D.N.Y. 1998) (repo agreements and asset purchase intent treated as purchases, not loans)
- In re Am. Home Mortgage Holdings, Inc., 388 B.R. 69 (Bankr. D. Del. 2008) (repurchase agreements characterized as purchase-and-sale; contingent security interests do not convert to loans)
- First Citizens Fed. Sav. & Loan Ass'n v. Worthen Bank & Trust Co., 919 F.2d 510 (9th Cir. 1990) (fiduciary duty concepts in agency context)
- State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (S. Ct. 2003) (guideposts for punitive damages constitutional review)
- BMW of N. Am. v. Gore, 517 U.S. 559 (S. Ct. 1996) (due process considerations for punitive damages; ratio considerations)
- Planned Parenthood of the Columbia/Willamette Inc. v. Am. Coalition of Life Activists, 422 F.3d 949 (9th Cir. 2005) (ratios and egregiousness considerations for punitive damages)
- Exxon Shipping Co. v. Baker, 554 U.S. 471 (S. Ct. 2008) (ratios and constitutional standards for punitive damages in maritime context)