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Judd Law Group Prevails for Defrauded Guarantors — LNV Corp. v STK Financial LLC, et al. (W.D. Wa. Case # 11-5744 RJB)

In what is becoming something of an annual holiday tradition, shortly before Thanksgiving this year Judd Law Group LLP achieved a very favorable resolution of a high-stakes lawsuit for two long-time clients.

The facts giving rise to the suit are complicated and tragic: Steve – a seasoned financial advisor for a series of major broker-dealers – successfully managed millions of dollars of other people’s money. After some 15 years of watching his clients accumulate wealth and live the good life, Steve grew impatient, and started making unauthorized “loans” to himself from the investment accounts under his management. Steve used the loans to fund a lavish lifestyle: A typical night out involved flying to Las Vegas, losing hundreds of thousands of dollars at a high-stakes 21 table, and retiring to his suite with a high-priced hooker. After spending more than $7 million of his client’s money, Steve grew desperate for cash to keep his theft from being discovered. Consequently, he hatched and executed a fraud scheme to misappropriate the proceeds of a $750,000 bank loan.

Steve’s father and his father’s business partner had an opportunity to purchase a suburban office building, and Steve offered to help them obtain a commercial real estate loan, secured by a deed of trust recorded against the property, structured to pay off the loan from the rental of the office space. They authorized Steve to act as their agent to obtain financing, and Steve told them that they would need to sign loan application documents. Instead of a commercial real estate loan, however, Steve arranged for a term loan where the only collateral would be his father’s and his father’s business partner’s personal guarantees. Under the impression that they were signing loan application documents, Steve obtained his father’s and his father’s business partner’s signatures on a variety of bank documents, including personal guarantee agreements. Unbeknownst to putative guarantors, the bank wired the proceeds of the $750,000 loan to an account under Steve’s sole control, and he used the proceeds for his own purposes, including more trips to Vegas.

Eventually, however, Steve’s schemes fell apart: Steve became the target of a criminal investigation, eventually pleaded guilty to unrelated crimes, and was sentenced to – and is currently serving – a 65 month term in federal prison. As the noose tightened, the $750,000 loan went into default, and the lending bank failed and went into receivership. The loan was ultimately purchased at auction from the FDIC by LNV Corporation, a subsidiary of Beal Bank. In August 2010, LNV served notice of default on the the putative guarantors: This was the first time that Steve’s father and the father’s business partner learned about the $750,000 loan. When the loan remained unpaid, in September 2010 LNV sued to enforce the guarantees, and the unwitting guarantors retained Judd Law Group.

As the facts emerged through discovery, LNV’s counsel acknowledged that the guarantors’ plight was extremely sympathetic. Nevertheless, LNV asserted that applicable law – in this case Washington State law applied – holds that a lender can rely on a guarantor’s signature as a valid manifestation of assent, and that therefore the guarantors were legally bound to repay the loan: Their only recourse was to sue Steve for fraud. As a primary defense, Judd Law Group asserted the doctrine of fraud-in-the-execution, which under Washington law provides that if a person who is unable to or prevented from determining the contents of a legal document signs that document in reasonable reliance on a misrepresentation of the nature of the document, the document is void and of no legal effect. The few reported cases that have affirmed fraud-in-the-execution have all involved situations where a signatory to a document is blind, unable to read, or does not understand the language in which the document is written. In this case, the guarantors acknowledged that their signatures on the guarantee agreements were genuine, and neither Steve, his father, nor his father’s business partner had any recollection of what Steve had said at the time he obtained their signatures.

Several weeks before the court-ordered mandatory mediation, LNV filed a motion for summary judgment, arguing that because discovery had failed to adduce any evidence as to the misrepresentations Steve had allegedly made, the guarantors could not prove elements essential to thd defense, such as a misrepresentation of material fact, reliance on any misrepresentations, or that any such reliance was reasonable. In opposition, Judd Law Group proffered the deposition testimony of Steve, his father, and his father’s business partner to the effect that Steve had not told them that they were signing anything other than loan application documents. We further argued that that as the guarantors’ agent and financial adviser, Washington law imposed on Steve the fiduciary obligation to disclose all material facts relating to the documents, and that Steve’s failure to do so amounted to fraud.

With trial less than a month away, our mediation failed to yield a settlement: LNV expressed confidence that it would prevail on summary judgment, in the belief that no U.S. District Court judge would find it credible that two experienced, well-educated people could possibly have signed personal guarantees without being aware of what the documents were; my clients simply did not have the assets to meet LNV’s demand, without regard to the strength of the case we had developed. As we prepared for trial, we continued negotiations, with little real progress. Three days before our pretrial conference, the Court issued an order denying summary judgment, holding that Steve’s failure to disclose the true nature of the bank documents that his father and his father’s business partner had signed amounted to fraud, and that it was not unreasonable for them to rely on Steve’s fiduciary obligations under the circumstances.[1] Within two hours after the order denying summary judgment was filed, the parties settled for a fraction of the amount LNV demanded at mediation.

This hard-fought litigation lasted two years, at substantial cost. But any less of an effort would almost certainly have resulted in my clients’ financial ruin. Pitted against an adversary with virtually unlimited resources, my clients showed tremendous fortitude and confidence in Judd Law Group. Whether we would have won at trial is anybody’s guess, but there is no doubt that Judd Law Group identified a dispositive legal defense theory and developed an evidentiary record sufficient to establish it at trial. It is beyond dispute that had we not demonstrated the commitment and ability to prevail at trial, the case would not have settled. This case again clearly illustrates our value proposition: Judd Law Group achieves excellent, cost-effective results through fierce advocacy focused solely on strategic, significant objectives.

From time to time one of your clients, friends or colleagues will face a legal dispute that requires the expertise, judgment, and quality of big firm lawyering, but for which the service, affordability, and personal attention of a boutique is better suited. Please keep me in mind, and mention me the next time someone you know is looking for a really good lawyer.

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