The Richard And Sheila J. McKnight 2000 Family Tust, Richard McKnight Trustee

Filing 352

ORDER Granting 331 Motion for Summary Judgment. Signed by Judge Robert C. Jones on 1/5/2015. (Copies have been distributed pursuant to the NEF - SLR)

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UNITED STATES DISTRICT COURT

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DISTRICT OF NEVADA

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THE RICHARD AND SHEILA J. MCKNIGHT
2000 FAMILY TRUST et al.,

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Plaintiffs,

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vs.
WILLIAM J. BARKETT et al.,

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Defendants.

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2:10-cv-01617-RCJ-GWF
ORDER

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This is a complex breach of guaranty case related to the USA Commercial bankruptcy.

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Pending before the Court is a Motion for Summary Judgment (ECF No. 331). For the reasons

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given herein, the Court grants the motion.

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I.

FACTS AND PROCEDURAL HISTORY

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Plaintiff Richard McKnight,1 as trustee for The Richard & Sheila J. McKnight 2000

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Family Trust (“the McKnight Trust”) provided $100,000 out of the total of $4.5 million that

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various direct lenders loaned to Defendant Castaic III Partners, LLC (“Castaic III”) through USA

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Commercial Mortgage Co. (“USA Commercial”). (Compl. ¶ 5, Sept. 21, 2010, ECF No. 1). The

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McKnight Trust has received no interest payments on the loan since August 2006. (Id. ¶ 9).

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Plaintiff sued Defendants Castaic III and William J. Barkett in this Court on two claims:
(1) Breach of Guaranty (Barkett only); and (2) Declaratory Judgment. The Court denied a

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Richard McKnight is a apparently both a beneficiary and the trustee of the McKnight
Trust and one of the McKnight Trust’s attorneys in this action.

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motion to reconsider transfer of the case from the Hon. Gloria M. Navarro to this Court,

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dismissed the second cause of action for declaratory judgment, granted offensive summary

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judgment on the first cause of action for breach of guaranty, and permitted 260 other direct

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lenders to intervene as Plaintiffs and to add claims against Castaic Partners, LLC (“Castaic” or

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“Tapia Ranch”) and Castaic II Partners, LLC (“Castaic II”). Defendants appealed the judgment

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against them as to breach of guaranty, but the Court of Appeals dismissed the appeal for lack of

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jurisdiction.

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Each group of intervenors has filed its own complaint in intervention. Intervenor

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Plaintiffs Thomas J. Kapp and Cynthia S. Roher, as trustees of the T&C Kapp Family Trust (the

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“Kapp Intervenors” or “Kapp”) filed a Complaint in Intervention (the “Kapp CI”) against Barkett

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and Castaic II for breach of contract, breach of guaranty, and declaratory judgment. (See Kapp

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CI, May 12, 2011, ECF No. 34). A second group of intervenors (the “Rasmussen Intervenors”)

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have filed a complaint in intervention (the “Rasmussen CI”) against Barkett, Castaic, Castaic II,

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and Castaic III for breach of contract, breach of guaranty, and declaratory judgment. (See

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Rasmussen CI, Aug. 8, 2011, ECF No. 61). The Rasmussen CI alleges the amount each

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Rasmussen Intervenor loaned the Castaic entities. (See id. ¶¶ 5, 67–69). A third group of

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intervenors, DACA-Castaic, LLC and Debt Acquisition Co. of America V, LLC (“DACA V,”

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collectively, the “DACA Intervenors” or “DACA”), withdrew its motion to intervene.

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The Court granted a motion to dismiss the Kapp CI in part, dismissing the declaratory

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judgment claim but refusing to dismiss the breach of contract and breach of guaranty claims for

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lack of standing. Defendants argued that Kapp Intervenors had transferred their interests in the

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relevant loans to DACA-Castaic, LLC and thus no longer had standing to sue for breach of

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contract or breach of guaranty. The Kapp Intervenors responded that they had only transferred

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the deeds of trust, not the beneficial interest. The Court invited summary judgment motions on

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the issue but refused to dismiss because the Kapp CI was sufficiently pled. The Court
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completely denied a motion to dismiss the Rasmussen CI, noting that the claim for declaratory

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relief thereunder was different from the declaratory relief claims in the Complaint and the Kapp

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CI that the Court had dismissed. The Court struck Defendants’ “crossclaim,” which was in

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reality a third-party complaint and/or a counterclaim, directing Defendants to refile the pleading

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properly, which they did. (See Countercl. and Third-Party Compl., ECF Nos. 156, 157). In that

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pleading, Defendants countersued several Compass entities, the two DACA entities, and direct

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lenders for: (1) breach of contract; (2) declaratory judgment; (3) interference with prospective

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economic advantage; (4) usury; (5) breach of fiduciary duty (two Compass entities only); (6)

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unjust enrichment; and (7) slander of title.

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The Court refused to stay the judgment against Defendants in favor of Plaintiff but noted

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that it would await summary judgment motions as to whether certain Intervenor Plaintiffs still

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owned the beneficial interest in the loans or had transferred them to DACA-Castaic, LLC or

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other parties. DACA asked the Court to grant it summary judgment on thirteen issues under its

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Counterclaim (as to Defendants’ Third-Party Complaint) for declaratory relief. The Court

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granted the motion in part, ruling that any direct lender who had transferred his or her beneficial

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interest in a Castaic loan to DACA had also transferred his or her interest in the respective deed

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of trust or guaranty and could no longer sue on the note or Barkett’s guaranty thereof, because the

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interest in the guaranty followed the interest in the note automatically under California law. The

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Court noted that it remained a question of fact which direct lenders had effected such transfers.

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The evidence adduced at the time showed only a transfer of Castaic Partners, LLC’s beneficial

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interest in the Castaic loans to DACA-Castaic, LLC, but did not indicate any previous transfer

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from any direct lenders to Castaic Partners, LLC. The Court also noted that no party disputed

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that the Castaic loans were in default but that it would not attempt to calculate the total amount

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due on each loan at the pre-trial stage. The Court also ruled that the notes were neither usurious

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nor subject to offset. The Court ruled that the Castaic deeds of trust were enforceable under their
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terms and that the pending foreclosures in California under the 2007 notices of default were

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proper. The Court also noted that an action against Barkett for breach of guaranty would not

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violate the one-action rule even after foreclosure, because Barkett was not the target of any

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foreclosure, though Plaintiffs could only collect on a guaranty to the extent of any deficiency

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remaining after a foreclosure sale. The Court also ruled that the Purchase Agreement, under

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which DACA-Castaic, LLC purported to obtain the beneficial interests in the loans from Castaic

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Partners, LLC, was in compliance with the 51% rule under Chapter 645B, and that DACA-

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Castaic, LLC’s decision to foreclose was valid. The Court declined to rule on the priority of a

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lien against the properties held by DACA V, because DACA V and DACA-Castaic were not

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adversaries in the present case.

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Kapp Intervenors also moved for summary judgment on four points. The Court refused

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to rule that Barkett was liable to Kapp Intervenors on the guaranty because it was not clear that

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the Kapp Intervenors retained the beneficial interest in the loans. The Court again noted that no

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party denied the Castaic loans were in default. The Court then ruled that Barkett was liable to the

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Kapp Intervenors on the Castaic II Guaranty, but the Court added that Barkett could obtain relief

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under Rule 60(b) if he could later show that the Kapp Intervenors had transferred their interest in

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the Castaic II note. The Court ruled that it would not attempt to calculate the total amount due on

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the Castaic II loan at the pre-trial stage. Next, the Court ruled that the Castaic notes were to be

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interpreted by their terms under Nevada law, that Nevada had no usury law, and that the

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borrower under the notes had waived any right of offset. Finally, the Court declined to rule

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whether any direct lenders were liable for the wrongdoing of loan servicers.

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Defendants then filed three similar motions, asking the Court to dismiss the Kapp CI, the

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Rasmussen CI, and DACA’s Counterclaim for lack of subject matter jurisdiction. The Court

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ruled that it had diversity jurisdiction to adjudicate the Kapp CI and bankruptcy jurisdiction (but

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not diversity jurisdiction) to adjudicate the Rasmussen CI and DACA’s Third-Party
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Counterclaim, and that neither mandatory nor equitable abstention under the Bankruptcy Code

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were appropriate.

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In March 2013, the Court granted in part DACA’s motion for leave to file a Supplemental

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Third-Party Counterclaim against Defendants and a Supplemental Fourth Party-Complaint

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(against Pond Avenue Partners, LLC (“Pond”), Merjan Financial Corp. (“Merjan”), and Palisades

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Capital (NV), LLC), based upon events occurring after DACA filed its Third-Party Counterclaim

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in February 2012. DACA soon thereafter filed that consolidated pleading, i.e., the Answer,

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Counterclaim, Supplemental Counterclaim, and Fourth-Party Complaint (the “DACA Pleading”).

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(See DACA Pldg., Mar. 25, 2012, ECF No. 231). The Court adopted the magistrate judge’s

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recommendation to strike the answers of Barkett and the Castaic Defendants and to instruct the

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Clerk to enter default as a sanction for failing to comply with a court order to retain new counsel.

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The Clerk entered default as to the February 2012 Counterclaim, accordingly.

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DACA asked the Court to strike Barkett’s and the Castaic Defendants’ Answer and

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Counterclaims (ECF No. 247) to the DACA Pleading and also requested a default judgment or

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offensive summary judgment as to its third-party counterclaims in the DACA Pleading, offensive

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summary judgment on its fourth-party claims, and defensive summary judgment against

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Defendants’ third-party claims. The Court struck the answer as against the first counterclaim in

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the DACA Pleading, but not as against the answers to the second counterclaim and the

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supplemental counterclaim therein. The Court granted default judgment in favor of DACA and

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against Defendants as to DACA’s first third-party counterclaim, but not as to its supplemental

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counterclaim, and the Court solicited a proposed form of judgment from DACA. The Court

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dismissed DACA’s second third-party counterclaim for appointment of a receiver. The Court

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granted offensive summary judgment to DACA’s on its Fourth-Party Complaint as against

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Palisades Capital (NV) LLC, but denied it as against Pond or Merjan. The Court denied

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offensive summary judgment to DACA on its supplemental third-party counterclaim against
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Defendants. The Court granted in part and denied in part defensive summary judgment to DACA

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as against Defendants’ second third-party claim for declaratory judgment. The Court granted

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defensive summary judgment to DACA as against Defendants’ seventh third-party claim for

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slander of title.

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Plaintiffs asked the Court to dismiss Defendants’ counterclaims as against Plaintiffs. The

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Court granted the motion. DACA has now asked the Court for summary judgment in several

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respects.

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II.

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SUMMARY JUDGMENT STANDARDS
A court must grant summary judgment when “the movant shows that there is no genuine

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dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R.

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Civ. P. 56(a). Material facts are those which may affect the outcome of the case. See Anderson v.

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Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). A dispute as to

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a material fact is genuine if there is sufficient evidence for a reasonable jury to return a verdict

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for the nonmoving party. See id. A principal purpose of summary judgment is “to isolate and

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dispose of factually unsupported claims.” Celotex Corp. v. Catrett, 477 U.S. 317, 323–24, 106 S.

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Ct. 2548, 91 L. Ed. 2d 265 (1986). In determining summary judgment, a court uses a burden-

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shifting scheme:

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When the party moving for summary judgment would bear the burden of proof at
trial, it must come forward with evidence which would entitle it to a directed verdict
if the evidence went uncontroverted at trial. In such a case, the moving party has the
initial burden of establishing the absence of a genuine issue of fact on each issue
material to its case.

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C.A.R. Transp. Brokerage Co. v. Darden Rests., Inc., 213 F.3d 474, 480 (9th Cir. 2000) (citations

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and internal quotation marks omitted). In contrast, when the nonmoving party bears the burden of

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proving the claim or defense, the moving party can meet its burden in two ways: (1) by

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presenting evidence to negate an essential element of the nonmoving party’s case; or (2) by

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demonstrating that the nonmoving party failed to make a showing sufficient to establish an

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element essential to that party’s case on which that party will bear the burden of proof at trial. See

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Celotex Corp., 477 U.S. at 323–24. If the moving party fails to meet its initial burden, summary

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judgment must be denied and the court need not consider the nonmoving party’s evidence. See

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Adickes v. S.H. Kress & Co., 398 U.S. 144, 159–60, 90 S. Ct. 1598, 26 L. Ed. 2d 142 (1970).

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If the moving party meets its initial burden, the burden then shifts to the opposing party to

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establish a genuine issue of material fact. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

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475 U.S. 574, 586, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986). To establish the existence of a

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factual dispute, the opposing party need not establish a material issue of fact conclusively in its

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favor. It is sufficient that “the claimed factual dispute be shown to require a jury or judge to

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resolve the parties’ differing versions of the truth at trial.” T.W. Elec. Serv., Inc. v. Pac. Elec.

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Contractors Ass’n, 809 F.2d 626, 631 (9th Cir. 1987). In other words, the nonmoving party

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cannot avoid summary judgment by relying solely on conclusory allegations unsupported by

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facts. See Taylor v. List, 880 F.2d 1040, 1045 (9th Cir. 1989). Instead, the opposition must go

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beyond the assertions and allegations of the pleadings and set forth specific facts by producing

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competent evidence that shows a genuine issue for trial. See Fed. R. Civ. P. 56(e); Celotex Corp.,

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477 U.S. at 324.

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At the summary judgment stage, a court’s function is not to weigh the evidence and

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determine the truth, but to determine whether there is a genuine issue for trial. See Anderson, 477

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U.S. at 249. The evidence of the nonmovant is “to be believed, and all justifiable inferences are

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to be drawn in his favor.” Id. at 255. But if the evidence of the nonmoving party is merely

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colorable or is not significantly probative, summary judgment may be granted. See id. at 249–50.

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III.

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ANALYSIS
DACA first asks the Court to grant it offensive summary judgment on its counterclaim

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for declaratory relief against Defendants that: (1) the nonjudicial foreclosure under the deeds of

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trust on the Castaic and Castaic II properties, including the respective trustee’s sales on
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November 13 and 16, 2012, were valid; (2) Defendants have no right to rescind or set aside the

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foreclosures; and (3) Defendants have no interests in the Castaic or Castaic II properties by virtue

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of their succession to any interest of any direct lenders.

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DACA notes that the Court has already ruled in this case that the deeds of trust are

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enforceable, (see Order 9:19–20, ECF No. 170), and that the then-impending foreclosures were

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proper, (see id. 9:20–21). The Court agrees that these issues are settled, i.e., that the deeds of

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trust are valid and that foreclosures were therefore generally appropriate. The potential

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remaining issue is whether the foreclosures were in fact carried out pursuant to California law.

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DACA has adduced the two trustee’s deeds as evidence of the completed trustees sales and notes

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that the trustee’s sales give rise to a rebuttable presumption of the validity of the foreclosure sale

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under California law. See Cal. Civil Code § 2924(c); Stevens v. Plumas Eureka Annex Mining

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Co., 41 P.2d 927, 928 (Cal. 1935) (“[T]he recital in the deed from trustee to purchaser at the sale,

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coupled with the other facts in the record, is sufficient to show prima facie that the trustee duly

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gave notice of sale as required by law and the provisions of the trust deed under the terms of

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which the sale was had.”). Recitations of compliance with applicable foreclosure laws appear in

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the trustee’s deeds in this case. (See Castaic Trustee’s Deed, ECF No. 337-4, at 62; Castaic II

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Trustee’s Deed, ECF No. 337-4, at 72). DACA notes that under California law, an equitable

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action by a mortgagor to set aside a foreclosure, even where illegality of the foreclosure can be

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shown, requires that the mortgagor tender the amount in default, which Defendants have never

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claimed here. See Lona v. Citibank, 134 Cal. Rptr. 3d 922, 633 (Ct. App. 2011). DACA also

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notes that Defendants have admitted having no direct lender interests in the Castaic loans. (See

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Supplemental Responses to Interrogatories Nos. 5 and 9, 3:21–22, 5:2–4, ECF No. 337-6, at 8,

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10). The Court finds that DACA has satisfied its initial burden to show that there is no genuine

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issue of material fact as to its requested declarations.

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In response, Defendants first argue that the motion for summary judgment should be
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denied because DACA filed no separate statement of undisputed facts under “Local Rule 7056.”

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Defendants presumably mean to refer to Local Rule of Bankruptcy Practice 7056(a). That rule

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applies only to adversary proceedings. Although jurisdiction in this case is based in part on

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relation to a bankruptcy case under 28 U.S.C. § 1334(b), the present case is not in fact an

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adversary proceeding under the Bankruptcy Code but a “regular” civil case. Local Rule of Civil

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Practice 56-1 requires no separate statement of undisputed facts. Next, Defendants argue the

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foreclosure sales are void, but they adduce no evidence in support. The only evidence adduced in

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opposition are Barkett’s and Carrie Rowell’s brief declarations consisting of irrelevant claims

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and legal conclusions. There is no evidence of any irregularity in the foreclosure sales. The

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Court rejects Defendants’ arguments that DACA was not permitted to foreclose because it did

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not have a 100% beneficial interest in the loan. The Court has already ruled that DACA had the

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right to foreclosure under Nevada’s 51% rule. Any minority lenders retain their right to a pro

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rata share of the proceeds of the foreclosure, but it only takes 51% to make the decision to

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foreclose. Finally, Defendants point to, but do not produce, an alleged declaration in a

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bankruptcy case in another district wherein Barkett has attested that either he or entities of which

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he is the managing member have acquired some beneficial interest in the Castaic and Castaic II

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deeds of trust. Because the claim of ownership is in the alternative (the alternative being that

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some entity separate from Barkett has the alleged interest), it would not create a genuine issue of

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material fact even if it were adduced. Nor is the declaration alleged to indicate that Barkett or

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others apart from DACA in fact own more than 49% of the interest in any of the loans, which

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would be the only way for that single piece of evidence to create an issue of material fact that

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DACA did not have the right to foreclose without one or more other parties’ consent.

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Defendants have not satisfied their shifted burden on summary judgment.

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Second, DACA asks the Court to grant it offensive summary judgment on its fourthparty claims for declaratory relief against Pond, Merjan, and Palisades that: (1) the nonjudicial
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foreclosure under the deeds of trust on the Castaic and Castaic II properties, including the

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respective trustee’s sales on November 13 and 16, 2012, were valid; (2) Forth-Party Defendants

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have no right to rescind or set aside the foreclosures; and (3) Fourth-Party Defendants have no

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interests in the Castaic or Castaic II properties by virtue of their succession to any interest of any

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direct lenders. The Court grants the motion in this respect. DACA has carried its initial burden

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on summary judgment on these issues as against any potential objector to the foreclosure, as

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noted, supra, and no Fourth-Party Defendant has responded to attempt to satisfy its shifted

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burden.

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Third, DACA asks the Court to grant it defensive summary judgment against all of

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Defendants’ third-party claims. DACA notes that the Court has already granted it defensive

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summary judgment as against the second and seventh third-party claims, (see Order, ECF No.

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317), and although it believes the other third-party claims do not apply against DACA, it brings

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the present motion for defensive summary judgment against those claims “in an abundance of

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caution.” The Court agrees with DACA’s analysis that: (1) the first third-party claim for beach

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of contract is against Compass as the successor service to USA Commercial; (2) the third third-

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party claim for interference with prospective economic advantage relates to conduct by those two

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entities; (3) that the fourth third-party claim for usury is necessarily without merit because, as the

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Court has stated, Nevada has no usury law; (4) the fifth third-party claim for breach of fiduciary

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duty expressly applies only against Compass; and (5) the sixth third-party claim for unjust

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enrichment relates only to fees and charges by Compass. Defendants present no substantive

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arguments in response. The Court therefore grants summary judgment.

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Finally, DACA asks the Court to enter final judgment on all claims by and against

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DACA. The Court grants the request and shall separately enter the Proposed Judgment (ECF No.

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331) attached to DACA’s motion. Defendants object that the Proposed Judgment would strip

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minority direct lenders of their interests in the Castaic loans because it would state that the 51%
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rule permits the assignment of 100% of the interest in fractionalized notes and security

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instruments upon the consent of 51%. Not so. The 51% rule is not a rule whereby 51% of the

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owners of the beneficial interest in a loan may assign to themselves the beneficial interests of the

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minority. This Court has never so ruled, and no party before the Court, including DACA, has

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ever so argued. The language of the Proposed Judgment is consistent with the law and makes

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clear that DACA will be the “sole beneficiary of record” under the deeds of trust, but not that it

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will be the sole beneficiary of the loans. In fact, it makes clear that DACA will be a fiduciary for

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the minority interest-holders in the Castaic loans, who remain entitled to their pro rata shares of

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the proceeds of any recovery on those loans. That is consistent with the 51% rule, which

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prevents minority interest-holders from frustrating action on a loan while protecting their

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equitable interest in the loan upon a decision by the majority interest-holders to pursue an action.2

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CONCLUSION

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IT IS HEREBY ORDERED that the Motion for Summary Judgment (ECF No. 331) is
GRANTED.
IT IS SO ORDERED.
Dated:this 9th5th day of January, 2015.
Dated This day of December, 2014.

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_____________________________________
ROBERT C. JONES
United States District Judge

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The 51% rule technically requires a supermajority to act. A majority is anything greater
than 50%, e.g., 50.1%. The distinction does not present itself in this case.
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