Old Canal Financial Corp. v. Sarsenstone Corp.
550 B.R. 519
C.D. Cal.2016Background
- Old Canal Financial Corporation (OCF) acquired consumer loan pools for investors; OCF held bare legal title while investors expected trust ownership. A Chapter 7 trustee was appointed after an involuntary petition in 2007.
- Investors elected Sarsenstone as successor trustee for most Loan Pools in 2008; by 2009 Sarsenstone served as trustee for 51 pools, the Chapter 7 trustee for 7, and 11 pools (the “FCI Loan Pools”) were held by FCI.
- The Chapter 7 Trustee and Sarsenstone executed a Settlement Agreement (May 21, 2009) that: (1) consolidated assets into a Master Loan Pool with Sarsenstone as Master Pool Trustee; (2) made Sarsenstone the Chapter 7 Trustee’s Liquidation Agent with an assignment of the Chapter 7 Trustee’s rights to pursue claims; and (3) required Sarsenstone to obtain a $1,000,000 fidelity bond by Sept. 30, 2009.
- The Bankruptcy Court approved the Settlement Agreement in a 2009 Order, retaining jurisdiction to interpret and enforce the Agreement. Sarsenstone later sued Griffith and FCI in state court alleging fiduciary breaches and seeking disgorgement and rescission of transfers of the 11 FCI pools.
- Before trial, Griffith and FCI challenged Sarsenstone’s standing; the Bankruptcy Court issued a 2015 Order clarifying that (a) the Settlement Agreement was incorporated into the 2009 Order, (b) Sarsenstone had standing as Master Pool Trustee and as Liquidating Agent to pursue claims (including regarding the FCI pools), and (c) Sarsenstone’s failure to obtain the $1 million bond did not invalidate its trustee status.
- Appellants appealed the 2015 Order raising three issues: standing to sue on behalf of investors/all pools, effect of failure to obtain the bond, and whether the 2009 Order incorporated the Settlement Agreement. The district court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Settlement Agreement/2009 Order authorized Sarsenstone to pursue claims for all Loan Pools (including FCI pools) | Appellants: Settlement and 2009 Order do not permit Sarsenstone to sue on behalf of third‑party investors or assert claims for pools held by FCI | Sarsenstone: Assigned Chapter 7 Trustee’s rights as Liquidating Agent and succeeded as trustee for many pools; thus has standing to pursue claims tied to the Master Loan Pool and estate property | Affirmed: Sarsenstone has standing as successor Master Pool Trustee for non‑FCI pools and as Liquidating Agent to pursue claims affecting estate property including FCI pools when alleged to belong to the estate |
| Whether Sarsenstone’s failure to obtain the $1,000,000 fidelity bond voided or conditioned its status as Master Pool Trustee | Appellants: Bond was a condition precedent and failure invalidates trustee status | Sarsenstone: Bond requirement is not an express condition precedent; failure did not terminate the Agreement or trustee status | Affirmed: Bond was not an express condition precedent; absence of bond did not affect Master Pool Trustee status and no material‑breach termination was established |
| Whether the 2009 Order incorporated the Settlement Agreement so the Bankruptcy Court could interpret it | Appellants: 2009 Order did not incorporate all terms and bankruptcy court lacked authority to expand rights | Sarsenstone: 2009 Order expressly approved and incorporated the Settlement Agreement and retained jurisdiction to interpret/enforce it | Affirmed: 2009 Order incorporated and approved the Settlement Agreement; bankruptcy court had authority and jurisdiction to clarify and enforce it |
Key Cases Cited
- Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (Sup. Ct.) (trustee may not sue on behalf of creditors when claims belong to creditors, not the estate)
- Williams v. Cal. 1st Bank, 859 F.2d 664 (9th Cir.) (trustee lacked standing where suit sought to benefit investors rather than the estate)
- Smith v. Arthur Andersen LLP, 421 F.3d 989 (9th Cir.) (standing inquiry focuses on whether trustee seeks to redress injury to the debtor/estate)
- CarrAmerica Realty Corp. v. Nvidia Corp., [citation="302 F. App'x 514"] (9th Cir.) (trustee has standing to avoid fraudulent transfers that injured the bankrupt corporation/estate)
- Preblich v. Battley, 181 F.3d 1048 (9th Cir.) (appeals from bankruptcy final orders)
- Retz v. Samson (In re Retz), 606 F.3d 1189 (9th Cir.) (standard of review for bankruptcy findings and clear‑error review)