Hebrank v. Linmar III, LLC et al

Filing 85

ORDER Approving 80 Receiver's Final Account and Report, Exonerating Receiver's Bond; Approving Distribution of Funds Held by Post-Judgment Receiver; Exonerating Post-Judgment Receiver's Bond; and Discharging Post-Judgment Receiver. Signed by Judge Gonzalo P. Curiel on 10/25/19. (dlg)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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THOMAS C. HEBRANK, Federal
Equity Receiver,
Plaintiff,

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v.
LINMAR III, LLC, a California
limited liability corporation; and Does
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Defendants.

Case No.: 13-cv-02180-GPC-JMA
ORDER APPROVING RECEIVER’S
FINAL ACCOUNT AND REPORT,
EXONERATING RECEIVER’S BOND;
APPROVING DISTRIBUTION OF FUNDS
HELD BY POST-JUDGMENT RECEIVER;
EXONERATING POST-JUDGMENT
RECEIVER’S BOND; AND
DISCHARGING POST-JUDGMENT
RECEIVER.
[ECF No. 80]

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Before the Court is the Thomas C. Hebrank’s (“Hebrank” or “Receiver”) motion to
approve the post-judgment receiver’s final account and report; approve distribution of
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funds held by post-judgment receiver; exonerate post-judgment receiver’s bond; and

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discharge post-judgment receiver. ECF No. 80. Counsel for LinMar III, Philip Dyson

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(“Dyson”), filed an opposition on July 18, 2019. ECF No. 82. A reply was filed on July

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26, 2019. ECF No. 83.

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BACKGROUND
The Court-appointed James S. Lowe (“Lowe”) as post-judgment receiver on June

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3, 2015. ECF No. 48. Lowe completed the sale of the LinMar III property on December

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31, 2018 and filed his Final Account and Report on March 5, 2019. ECF No. 74. The

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instant dispute between the Receiver and Dyson centers on the distribution of the $43,450

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in funds remaining in the post-judgment receivership account.
This case arises out of a Securities Exchange Commission (“SEC”) action, SEC v.

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Schooler et al., Case No. 3:12-cv-2164-GPC-JMA (S.D. Cal.), wherein the Court

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authorized the Receiver to pursue enforcement of promissory notes executed by LinMar

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III, LLC (“LinMar”). LinMar, while under the control of Louis Schooler, granted a

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second deed of trust on the property owned by LinMar (“LinMar Property”) to Dyson in

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order to secure attorney fees. ECF 80-1 at 7; Declaration of Thomas Hebrank (“Hebrank

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Decl.”) ¶ 3. The property had a mortgage on it in favor of Rabobank, and a third deed of

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trust in favor of the SEC. Hebrank Decl. ¶ 2.

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Lowe encountered significant challenges with the LinMar Property, including

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issues with property renovations and maintenance. Declaration of James Lowe (“Lowe

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Decl.”) ¶ 2. On August 12, 2018, Dyson emailed Lowe, asking him to lower the listing

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price of the property from $3.9 million to $3.5 million in order to be realistic given the

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state of the real estate market. ECF No. 82 at 1-2; Dyson Ex. 1.

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Lowe pursued various initial offers on the property, and the highest offer received

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was for $3,550,000. ECF 80-1 at 8. If the property had been purchased at $3,550,000,

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there would have been enough funds to pay Rabobank, Dyson, and the Receiver in full,

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with a significant amount left to make a partial payment to the SEC. ECF No. 80-1 at 8.

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However, these initial offers fell through after the prospective purchasers conducted

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further review of the property. Id.; Lowe Decl. ¶ 3.

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On December 7, 2018, an offer was made to purchase the property for $3.2 million

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(“December Offer”). ECF No. 82 at 3. Since the Rabobank mortgage note had matured,

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and the prospect of foreclosure was looming, Dyson and Hebrank decided to accept this

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December Offer even though $3.2 million would be insufficient to pay all parties in full.

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Lowe Decl. ¶ 3. Dyson and Receiver agreed to accept discounted payments, and the SEC

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agreed to release its lien with no payment. Lowe Decl. ¶ 4. Specifically, Dyson agreed

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to accept $200,000 (original amount was $285,000) and Receiver agreed to accept

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$120,000 (originally amount was $176,000). ECF No. 80 at 8; ECF No. 82 at 6-7.

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On December 17, 2018, Lowe emailed Dyson confirming that Dyson and Hebrank

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would accept discounts at thirty and thirty-two percent, respectively. Dyson Decl., Ex 5.

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In this same email, Lowe wrote, “My plan is that the final distribution of the

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Receivership funds (after bills are paid and court approval) will be equally distributed by

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percentage of total remaining owed to each of you.” Dyson Decl. Ex. 5. Dyson claims

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that he relied on Lowe’s December 17 email in agreeing to discount his trust deed.

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Dyson Decl. ¶ 15. However, on December 19, 2018, Lowe sent another email to Dyson

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and the SEC which contained escrow payoff demands for Dyson and the SEC;

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Rabobank’s demand for their first trust deed payoff; and, in relevant part, an Estimated

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Closing Cash Flow (“ECCF”). Dyson Decl. Ex. 7. The ECCF includes a breakdown of

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the property purchase offer (i.e., $3.2 million) and the distributions to be allotted, noting

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$200,000 will go to to Dyson (with the adjacent note, “Discounted demand to escrow -

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30%) and $120,000 to Hebrank (with the adjacent note, “Discounted demand to

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escrow”). Id. Below this breakdown of fund distribution is a section titled “Total Owed”

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listing amounts for Dyson as $285,000 and for Hebrank, $176,000. Id.

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In most relevant part, the ECCF includes a paragraph stating that “[a]ny funds

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remaining within the Receivership after the payment of obligations, will be sent to the

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SEC in payment of their demand of remaining funds.” Id. The ECCF does not state any

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limits or conditions about the amount that should go to the SEC.

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Later that same day when Lowe sent the ECCF to Dyson, Dyson released his lien,

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and the $200,000 was sent to Dyson. Lowe Decl., Ex. B. The sale of the LinMar

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Property officially closed on December 31, 2018. Hebrank alleges that Dyson verbally

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communicated his assent to the terms of the ECCF to Lowe, and then confirmed his

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agreement by signing the release of his lien and delivering it to escrow in exchange for

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the $200,000 payment from escrow at the sale closing. ECF 80-1 at 12.

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On or around January 19, 2019, Lowe contacted the Receiver’s staff to inform

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them that approximately $43,450 remained in the post-judgment receivership account.

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ECF 80-1 at 9. These funds came primarily from the broker accepting a reduced

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commission on the sale, the buyer agreeing to split the escrow fees and provide a credit

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for certain remodeling work, as well as an insurance rebate. ECF 80-1 at 9; Lowe Decl.,

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¶ 5. Receiver’s counsel contacted the SEC to notify them about the remaining funds, and

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counsel for SEC obtained approval for these funds to be distributed to the victims of the

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fraudulent scheme in the related SEC action. Id. A stipulation to that effect was sent to

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Dyson via email for his approval/review on June 5, 2019. Id. On June 13, 2019, Dyson

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replied claiming his reliance on Lowe’s December 17, 2018 email, and his belief that the

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$43,450 of remaining funds should be split between the SEC and himself on a pro-rata

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basis based on the original amounts owed to each party (i.e., $285,000 to Dyson and

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$176,000 to the SEC). Hebrank Decl. Ex. B.

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DISCUSSION

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Dyson opposes the Receiver’s motion on the basis that he is owed a percentage of

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the remaining $43,450 in the post-judgment receivership account. Specifically, Dyson

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seeks sixty percent of the remaining funds (i.e., $26,191.66) with the remaining amount

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(i.e., $17,258.34) to go to the SEC as third deed holder. Although Dyson cites no legal

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authority, he asserts that he did not agree to discount his second trust lien “as a gift to the

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SEC.” ECF 82 at 7.

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I.

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Consent
Under California law, mutual assent is a required element of contract formation.

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“Mutual assent may be manifested by written or spoken words, or by conduct, and

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acceptance of contract terms may be implied through action or inaction.” Knutson v.

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Sirius XM Radio Inc., 771 F.3d 559, 565 (9th Cir. 2014) (citing Binder v. Aetna Life Ins.

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Co.,75 Cal.App.4th 832, 850 (1999); Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585,

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593–95, 111 S.Ct. 1522, 113 L.Ed.2d 622 (1991)). Courts must determine whether the

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outward manifestations of consent would lead a reasonable person to believe the offeree

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has assented to the agreement. Meyer v. Benko, 55 Cal.App.3d 937, 942–43 (1976).

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Dyson relies heavily on Lowe’s representations in the December 17, 2018 email.

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However, any representations by Lowe’s December 17, 2018 email, were supplanted by

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the ECCF that circulated on December 19, 2018. Further, in his December 17, 2018

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email, Lowe did not indicate that this was the final plan for the distribution of funds, and

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there was no reason for Dyson to believe that Lowe’s representation of “his plan” in the

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December 17 email would override the provisions listed in the ECCF circulated two days

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later.

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Dyson does not dispute his receipt of the ECCF or his awareness of the existence

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of the ECCF provision indicating that all remaining funds would go to the SEC since he

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admits that he did receive an email on December 19, 2018, from Lowe with the ECCF

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document. ECF 82 at 5; Dyson Decl. Ex, 7. Cf. Windsor Mills, Inc., 25 Cal.App.3d at

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993 (“[A]n offeree, regardless of apparent manifestation of his consent, is not bound by

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inconspicuous contractual provisions of which he was unaware, contained in a document

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whose contractual nature is not obvious.”).

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Dyson’s acceptance of the terms of the ECCF is further reinforced by his decision

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to release his lien that same day in order to receive the $200,000 payout. Accordingly,

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the Court finds that Dyson assented to the terms of the ECCF that was circulated to the

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parties on December 19, 2018.

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II.

Unconscionability
Dyson does not make a legal argument with respect to the substantive nature of the

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ECCF, but claims that he agreed to accept the discounted amount based on his concerns

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that he might receive nothing from his trust deed since Rabobank was threatening

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foreclosure proceedings, and also based on his concern that Lowe was favoring the SEC

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over all other parties. Dyson Decl. ¶ 13. Dyson also alleges that he believed that the

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remaining funds in the post-judgment account would total around $2,000. Dyson Decl.

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¶13. The Court interprets these allegations as a claim seeking to invalidate the terms of

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the ECCF as an unconscionable contract.

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In California, courts may refuse to enforce a contract if it is unconscionable. Cal.

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Civ.Code § 1670.5 (1999). “Courts have held that the agreement must be ‘overly harsh,’

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‘unduly oppressive,’ ‘unreasonably favorable,’ or must ‘shock the conscience.’” Poublon

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v. C.H. Robinson Co., 846 F.3d 1251, 1261 (9th Cir. 2017) (quoting Sanchez, 61 Cal.4th

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at 911 (emphasis omitted)). The “central idea” is that “the unconscionability doctrine is

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concerned not with a simple old-fashioned bad bargain but with terms that are

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unreasonably favorable to the more powerful party.” Baltazar, 62 Cal.4th at 1244

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(internal quotation marks and citations omitted). “Not all one-sided contract provisions

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are unconscionable,” Sanchez, 61 Cal.4th at 911, 190 Cal.Rptr.3d 812, and “[t]he

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ultimate issue is whether, in view of all relevant circumstances, the contract is so unfair

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that enforcement must be withheld.” Bass v. Facebook, Inc., 394 F. Supp. 3d 1024,

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1037–38 (N.D. Cal. 2019). The “mere fact that a contract term is not read or understood

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by the non-drafting party or that the drafting party occupies a superior bargaining

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position will not authorize a court to refuse to enforce the contract.” A & M Produce Co.

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v. FMC Corp., 135 Cal. App. 3d 473, 486 (Ct. App. 1982).

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Here, Dyson is a sophisticated actor who has represented LinMar III for over six

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years. As such, Dyson is well acquainted with the nature of LinMar Property and the

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issues in this case. His position does not support a finding of unequal bargaining power

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to render the terms of the ECCF unconscionable. Dyson asserts that he felt pressure to

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accept the thirty percent discount based on Rabobank’s imminent initiation of foreclosure

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proceedings, and Lowe’s potential bias for the SEC. Dyson Decl. ¶ 13. However, any

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pressure that Dyson felt for a timely sale of the LinMar Property was not based on any

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falsehood or manipulation, since it was true that any profit he might have made off the

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property sale would have been jeopardized by Rabobank’s potential foreclosure.

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Accordingly, the Court orders the following:

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1. The Receiver’s Final Account and Report is hereby approved;

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2. Receiver is ordered to pay all remaining funds to Thomas Hebrank, as receiver in

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the related SEC Action, from the Receivership Estate, thereby closing any existing

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banking account within 30 days from the signing of this Order;

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3. The Receiver’s fees and expenses and those of his agents and professionals, as set
forth in the Final Account and Report are hereby approved;
4. The Receiver’s and his professional’s actions and transactions during his
administration of the Receivership Estate are approved;
5. The Receivership is terminated;
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6. The Receiver’s bond is exonerated;

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7. Notice of the Receiver’s Final Account and Report was adequate;

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8. This Court will retain jurisdiction regarding the Receiver’s actions, transactions

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and his Final Account and Report; and
9. James S. Lowe II shall be and hereby is discharged from any and all further duties,
liabilities, or obligations related to this action.

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Dated: October 25, 2019

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