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Diversified Funding Group LLC, v. Hendon

United States District Court, D. Arizona

June 12, 2018

Diversified Funding Group LLC, et al., Appellants,
Hendon, et al., Appellees. Adv. Nos. 16-127-SHG, 16-518-SHG



         Pending before the Court is Appellants’ appeal of the Bankruptcy Court’s decision to dismiss Appellees. (Docs. 1, 25). The Court affirms the decision.


         In 2010, Danny’s Happy Valley, LLC (“DHV”) filed for relief under Chapter 11 of the Bankruptcy Code, and nearly a year later, the principal of DHV, Daniel Lewis Hendon, also filed for personal relief under Chapter 11. These two petitions were joined in 2011. In response to a request of the DHV and Hendon debtors, the Bankruptcy Court initiated a plan that established a liquidating trust and empowered a trustee to administer the assets of the trust. On October 27, 2011, Appellant Diversified Funding Group, LLC, (“DFG”), a creditor in the Hendon Bankruptcy, sought a determination that its claim was nondischargeable. On August 13, 2014, the Bankruptcy Court entered a $23,916,359.14 nondischargeable judgment in favor of DFG.

         Beginning in March 2016, DFG filed separate complaints against Hendon and other appellees in Arizona federal court (“Arizona complaint”) and California state court (“California complaint”). In the complaints, DFG named Hendon and twenty-five other non-debtors and non-creditors as parties and sought relief in eighteen separate counts. In short summary of these complaints, Daniel Hendon and Heather Hendon held a controlling interest in fourteen separate carwashes. In August 2013, in a plea agreement that resolved pending criminal charges against him, Daniel Hendon divested himself from ownership of the carwash entities. The Verde Group, led by chairman Ernie Garcia, purchased three mortgage notes secured by the carwashes, which it sold to Pacwest three months later for a profit of over $2,000,000. The Verde Group then made two loans to Heather Hendon: for $1,000,000 in April 2015 and $600,000 in December 2015. Heather Hendon, the Verde Group, Ernie Garcia, and Pacwest have settled with DFG and are no longer parties to this suit.

         DFG’s complaints allege additional fraudulent activity among the remaining parties. Using proceeds from Verde’s loans to her, Heather Hendon transferred $45,000 to Alan Meda and the Burch & Cracchiolo law firm to pay for Daniel Hendon’s legal fees. DFG alleges that Meda, together with Heather Hendon’s attorney Carolyn Johnson at Dickenson Wright, instructed Heather Hendon to create a sham bank account to conceal the funds from DFG and the Bankruptcy Court. DFG claims that Daniel Hendon retains ownership and control of the carwash entities through Pacwest. DFG claims that Daniel Hendon transferred $530,033 to Nell Hendon, his deceased mother, as a reimbursement for advances that she made on a loan, but no supporting documents for the transfer were produced. DFG claims that Kelly Carroll, Daniel Hendon’s ex-wife, made three fraudulent transfers to Daniel Hendon from 2007 to 2010. DFG claims that Daniel Hendon fraudulently transferred at least $100,000 to Maria Barker, his girlfriend in 2014. DFG claims that Daniel Hendon fraudulently transferred $1,200,000 to Gil Olguin and OSC capital in 2010. DFG claims that Daniel Hendon sold a Ferrari to his longtime friend Jay Swart for $80,000 to thwart collection in 2010. Lastly, DFG alleges that Daniel Hendon fraudulently transferred unspecified amounts of money at unspecified times to former employee Ernie Vasquez.

         Eventually, both complaints were removed and/or transferred to the District of Arizona Bankruptcy Court. Because the defendants argued that the claims belonged exclusively to the Trustee and not DFG, DFG purchased the Trustee’s rights to prosecute any potential claims. Concurrent with this purchase, DFG settled with twelve of the defendants, including Heather Hendon, Pacwest and the Verde Group. Many of the remaining parties filed motions to dismiss the complaints. With few exceptions, the Court granted the motions to dismiss without leave to amend.[1] DFG appeals.


         I. Legal Standard

         Under 29 U.S.C. § 158(a)(1), the Court has jurisdiction over appeals from “final judgments, orders, and decrees” of bankruptcy judges. The Court reviews a bankruptcy court’s conclusions of law de novo, and its findings of fact under the clearly erroneous standard. Greene v. Savage, 583 F.3d 614, 618 (9th Cir.2009); Fed. R. Bankr.P. 8013. “Issues not ‘specifically and distinctly raised and argued’ in the opening brief need not be considered by the court.” See U.S. v. Montoya, 45 F.3d 1286, 1300 (9th Cir.1995) (citing Officers for Justice v. Civil Serv. Comm'n, 979 F.2d 721, 726 (9th Cir. 1992)).

         II. Analysis

         In the opening brief, Appellants argue that the Bankruptcy Court erred by (1) failing to consider the nondischargeability judgement, (2) dismissing the civil RICO claims with prejudice, and (3) dismissing the claims without leave to amend.

         A. Consideration of nondischargeable debt

         DFG provided a loan to Daniel Hendon and his entities in 2007. When Daniel Hendon failed to repay the loan, DFG sued Daniel Hendon and won a state suit for breach of contract and fraud for $17.7 million. Daniel Hendon subsequently filed for Chapter 11 relief. DFG then requested the Bankruptcy Court to hold that DFG’s judgment against Hendon should be exempt from discharge pursuant to 11 U.S.C. § 523(a)(2), which “does not discharge an individual debtor from any debt . . . obtained . . . by false pretenses, a false representation, or actual fraud.” DFG alleged that Daniel Hendon fraudulently made false representations to obtain the loan and extensions from DFG, and Daniel Hendon made a fraudulent omission concerning his intended use of loan proceeds, and that these false representations made his loan obligation to DFG nondischargeable. (Doc. 25, App. Tab 81 at 1–10). The court granted DFG’s request ...

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