Spillane Law Group Wins Affirmance of Securities Fraud Judgment by 9th Cir. BAP (California Farms v. Roberts)

On September 10, 2015 I informed you that the firm won a securities fraud judgment from Bankruptcy Judge Maureen Tighe.  We showed that the defendants induced our client to invest in an organic produce venture through false and reckless statements that the defendants were growing their own produce while suppressing information that they were merely buying produce from third party growers.  These growers all had powers under the Perishable Agricultural Commodities Act (“PACA”) to hold insiders personally liable for unpaid debts for sale of perishable produce.

Our clients’ investment took the form of loans secured by the venture’s assets.  The defendants named our client a manager of the venture.  Then, after defaulting on debts to growers they thrust our client forward as personally liable for their defalcation under PACA.  Our client was forced to surrender its collateral to avoid personal liability to growers.  Judge Tighe found this to be part of the pattern of fraud and rendered judgment in our clients’ favor for their entire investment, without reduction for the value of the collateral.

The defendants appealed to the Ninth Circuit Bankruptcy Appellate Panel, arguing that Judge Tighe had failed to take into account the value of the surrendered collateral in assessing damages.  We showed that the defendants had failed to raise this issue at trial and that notions of marshaling and valuing collateral in a secured debt transaction don’t apply to fraud cases.  We further showed that Judge Tighe reasonably concluded that our clients were forced to surrender their collateral to avoid personal liability, and that this did not mitigate or reduce their damages.

The Ninth Circuit Bankruptcy Appellate Panel affirmed our judgment on all grounds.  [See decision.]  Said the court: “Roberts’ disposition of collateral argument ignores the bankruptcy court’s determination that [plaintiff] was forced to assign his interest in the collateral to third party produce suppliers in order to obtain a release of potentially massive liability under the Perishable Agricultural Commodities Act – liability that flowed from Roberts’ fraud. Roberts’ disposition of collateral argument, furthermore, relies on California Commercial Code statutes enacted to restrict the collection of contract based debts and attempts to apply them without any supporting authority to a nondischargeable fraud claim.”

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