Case Name:   Antonio Ocegueda, et al. vs. Ken Nathanson, et al.

Case No.:       1-11-CV-202525

 

On May 22, 2014, the Court issued a tentative ruling on several matters including four (4) motions to seal by plaintiffs Antonio Ocegueda, Ines Ocegueda, Jorge Orejel, Gricelda Garcia, and Judy Jones (“Plaintiffs”), Plaintiffs’ motions for default judgment against defendants The Gallant Group (“Gallant”), American Brother Corporation, Inc. (“ABC”), Troy Holland (“Holland”), TMG Financial, Inc. (“TMG”), and (in a separate motion) Eric De Blasi (“De Blasi”) and accompanying requests for punitive damages, and defendant Adeel Amin’s (“Amin”) motion to tax costs on appeal.

 

The Court took the requests for punitive damages under submission pending evidence of the defaulting defendants’ financial conditions.[1]

 

The Court continued Amin’s motion to tax costs on appeal pending an in camera review of Plaintiffs’ billing records.

 

The Court continued the motion for default judgment against De Blasi to June 27, 2014.

 

The Court also continued Plaintiffs’ motion to seal exhibits 10, 12, 27, 29, 30, 32-35, 37-48, 67-69 to the Declaration of Jacob Heath ISO Plaintiffs’ Motion for Default Judgments Against Holland, et al., with instructions to narrowly tailor the redactions in exhibits 12, 30, 32, 35, 37, 38, 40, 42 and 45.  With regard to exhibits 10, 27, 29, 33, 34, 38, 39, 41, 44, 46-48 (which were designated confidential by Amin), the Court gave Amin 10 days from the date of the Court’s final order on the motion to file a motion to seal these exhibits.

 

The Court also continued Plaintiffs’ motion to seal exhibits 9, 11-20, 41 and 42 to the Declaration of Jacob Heath ISO the Motion for Class Certification, with instructions to narrowly tailor the redactions in exhibits 14, 15, 17 and 18.  With regard to exhibits 9, 11, 12, 13, 16, 19, 20, 41 and 42 (which were designated confidential by Amin), the Court gave Amin 10 days from the date of the Court’s final order on the motion to file a motion to seal these exhibits.

 

The Court also continued Plaintiff’s motion to seal exhibits 10, 12, 15-30, 34-40, 42-43, 46-50, 54-58, and 60 to the Declaration of Jacob Heath ISO the Motion for Default Judgment Against De Blasi, with instructions to narrowly tailor the redactions in exhibits 12 and 49.  With regard to exhibits 10, 15-30, 34-40, 42-43, 46-48, 50, 54-58 and 60, the Court gave Amin 10 days from the date of the Court’s final order on the motion to file a motion to seal these exhibits.

 

Regarding Plaintiffs’ motion to seal paragraph 29, Attachments 3-13 to Exhibit I, and Exhibit P to the Declaration of Jacob Heath ISO Plaintiffs’ Motion to Compel Against Amin, the motion was denied as to paragraph 29 and Exhibit P to the Heath Declaration.  The motion was continued as to Attachment 10 to Exhibit I with instructions to narrowly tailor the redactions therein.  With regard to Attachments 3-9 and 11-13 of Exhibit I, the Court gave Amin 10 days from the date of the Court’s final order on the motion to file a motion to seal these exhibits.

 

On May 30, 2014, the Court issued its final Order on the above-referenced motions.

 

On June 9, 2014, Plaintiffs filed supplemental papers in support of the request for punitive damages against the defaulting defendants.

 

On June 10, 2014, Plaintiffs filed a motion to seal exhibits 5-46, 50-51, and 53-65 of the Declaration of Jacob Heath ISO Plaintiffs’ Supplemental Application for Punitive Damages.  Plaintiffs also filed supplemental papers and exhibits in support of the continued motions to seal.

 

On June 25, 2014, the continued motions to seal, motion for default judgment against De Blasi, motion to tax, and request for punitive damages were continued again to July 25, 2014.

 

Continued Motions to Seal

 

Amin was given 10 days to file a motion to seal the portions of Plaintiffs’ original motion in which Plaintiffs did not take a position on whether the exhibits satisfied the requirements of the Sealed Records Rules.  Amin did not file any motion to seal.  Accordingly, the following exhibits and/or portions thereof will now be placed into the public file: exhibits 10, 27, 29, 33, 34, 38, 39, 41, 44, 46-48 to the Declaration of Jacob Heath ISO Plaintiffs’ Motion for Default Judgments Against Holland, et al., exhibits 9, 11, 12, 13, 16, 19, 20, 41 and 42 to the Declaration of Jacob Heath ISO the Motion for Class Certification, exhibits 10, 15-30, 34-40, 42-43, 46-48, 50, 54-58 and 60 to the Declaration of Jacob Heath ISO the Motion for Default Judgment Against De Blasi, and Attachments 3-9 and 11-13 of Exhibit I to the Declaration of Jacob Heath ISO Plaintiffs’ Motion to Compel Against Amin.

 

With regard to exhibits 12, 30, 32, 35, 37, 38, 40, 42 and 45 to the Declaration of Jacob Heath ISO Plaintiffs’ Motion for Default Judgments Against Holland, et al., exhibits 14, 15, 17 and 18 to the Declaration of Jacob Heath ISO the Motion for Class Certification, exhibits 12 and 49 to the Declaration of Jacob Heath ISO the Motion for Default Judgment Against De Blasi, and Attachment 10 to Exhibit I to the Declaration of Jacob Heath ISO Plaintiffs’ Motion to Compel Against Amin, Plaintiffs sufficiently identify an overriding interest that overcomes the right of public access and supports sealing the unredacted records because they contain sensitive and personal identifying and financial information of alleged victims and third parties.  (See Valley Bank of Nev. v. Superior Court (1975) 15 Cal.3d 652, 656-657 [recognizing constitutional right of financial privacy].)  A substantial probability exists that the overriding interest will be prejudiced if the records are not sealed.  The proposed sealing is now narrowly tailored, as only the personal and financial information is redacted from the exhibits, and no less restrictive means exist to achieve the overriding interest.  (See Cal. Rules of Court, rule 2.550(d).)  Accordingly, Plaintiffs’ motions to seal these exhibits are GRANTED.

 

Motion for Default Judgment Against De Blasi

 

Plaintiffs now move for default judgment against De Blasi.  Plaintiffs submit a Judicial Council Form CIV-100 for De Blasi requesting a court judgment and total damages of $1,358,869.[2]  Plaintiffs contend that between February 2012 and October 2013, they attempted to serve De Blasi 14 times at seven different addresses in California, Nevada and Virginia before the Court ordered service by publication on October 29, 2013, and he was deemed served as of December 4, 2013.  On January 7, 2014, the Court entered default.

 

The operative First Amended Class Action Complaint (“FACAC”) asserts five causes of action against De Blasi for: (1) breach of contract (corporate guaranty); (2) unfair competition – corporate guaranty (Bus. & Prof. Code, § 17200); (3) unfair competition – failure to translate attorney fee agreement; (4) unfair competition – false advertising; and (5) fraud.

 

The action arises out of a statewide network of individuals and entities that took advantage of homeowners fearful of losing their homes to foreclosure by promising to assist them with loan modification services through a sham front called RewireMyLoan.com.[3]  Plaintiffs allege that RewireMyLoan directed victims to defendant Ken Nathanson (“Nathanson”), a licensed but currently suspended attorney, taking a cut off the top of the homeowners’ upfront fees.[4]  RewireMyLoan.com guaranteed to refund the homeowners’ payments should Nathanson fail to acquire loan modification, but failed to deliver on its promises, and no refunds were made.[5]  Plaintiffs allege that Gallant is a California corporation doing business under the fictitious business name of RewireMyLoan.com;[6] Amin is the owner and CEO of ABC and Gallant;[7] and De Blasi invested in RewireMyLoan.com and acted in concert with Amin as a decision-maker with respect to the RewireMyLoan entities’ activities.[8]

 

Amin, ABC, Gallant, De Blasi, Holland and TMG (the “Rewire Defendants”) allegedly used a number of real estate brokers who had close relationships with their local communities to recruit and identify homeowners and solicit their interest in the loan modification services.[9]  One of the referring agents was Robert Aldana, a Spanish-language radio personality and licensed real estate agent based in San Jose who solicited homeowners on his radio show and began the negotiations that led victims to RewireMyLoan.com.[10]  Meetings were conducted in Spanish, and Mr. Aldana’s staff collected the homeowners’ personal and financial information and informed them that they would get a loan modification through Nathanson or their money back.[11]  They were presented with English-language contracts with the Rewire Defendants and were instructed to sign them.[12]  These victims did not receive Spanish-language translations of their contract documents.[13]  Plaintiffs allege on information and belief that the Rewire Defendants authorized Mr. Aldana to present these contracts to consumers and paid referral fees to Mr. Aldana.[14]  The brokers and agents in the referral network promoted Nathanson’s loan modification services by stating that they included litigation against the bank, making them superior to standard loan modification services and making representations about the results that Nathanson could achieve, including interest rate and principal balance reductions.[15]  These promises were backed by a contractual money-back guarantee by the Rewire Defendants.[16]

 

The Rewire Defendants or individuals authorized to act on their behalf presented form contracts for the victims to sign, including the Attorney-Client Fee Agreement entered into between the victims and the Nathanson Defendants.[17]  The Attorney-Client Fee Agreement included provisions for the victims to make an upfront payment in exchange for a “loan modification package.”[18]  These upfront fees ranged from $2,975.00 to $4,995.00 per property.[19]  All of the victims received a “Corporate Guaranty” from the Rewire Defendants that provided that Rewire would serve as Guarantor on behalf of the Nathanson Defendants.[20]  There were two versions of the Corporate Guaranty.  One version was provided as a “material inducement” to enter into the Attorney-Client Agreement, and “absolutely, presently, continually, unconditionally, and irrevocably guarantees the refund to Guaranteed Party of the entire amount charged by Guaranteed Party by Sherman & Nathanson, a Professional corporation (S&N) in the event S&N fails to provide the services that S&N promises to perform pursuant to said Attorney-Client Agreement.”[21]  The other version of the Corporate Guaranty stated that the refund would be provided if Nathanson’s services “do not result in an offer of more favorable loan terms (as defined in the Fee Agreement) from Guaranteed Party’s home lender.”[22]

 

Plaintiffs allege that victims made their payments directly to Nathanson, who then paid the Rewire Defendants and provided referral fees to brokers and/or other agents in the referral network.[23]  Plaintiffs allege on information and belief that after the Rewire Defendants received the payments, they did not substantially perform the promised services and did little, if anything, for each victim, and did not communicate with them regarding the status of their mortgage modifications.[24]  The victims received little or none of the results that were guaranteed, and few, if any, received the promised litigation services.[25]  Few victims, if any, received any promised loan modification at all, let alone significant reductions in interest rates and/or principal amounts guaranteed by the defendants.[26]  Moreover, the Rewire Defendants did not provide the guaranteed refunds to the victims, despite receiving requests to do so by victims.[27]  When the Rewire Defendants became aware of multiple refund demands, they expressed a desire to avoid paying any refunds by, among other tactics, seeking to renegotiate their Corporate Guaranty with the victims.[28]  Plaintiffs allege on information and belief that the Rewire Defendants conspired and acted in concert and/or as agents with the others to develop the plan to offer money-back guarantees as a material inducement for victims to enter into the agreements, with no intention of actually honoring the Guaranty.[29]  Plaintiffs allege that Rewire was not adequately capitalized to operate its business and was dominated by Amin, De Blasi and Holland, who did not intend for RewireMyLoan.com to honor its guarantees in good faith.[30]  Plaintiffs allege that Rewire was an alter ego of Amin, De Blasi and Holland.[31]

 

In the first cause of action for breach of contract, Plaintiffs allege the Rewire Defendants breached the Corporate Guaranty by failing to provide the promised money-back guaranty.[32]  In the second cause of action for unfair competition under California Business & Professions Code section 17200 (the “Unfair Competition Law” or “UCL”), Plaintiffs allege that the Rewire Defendants engaged in unlawful, unfair and fraudulent business practices by using the Corporate Guaranty as a material inducement for class members to enter into contracts with the defendants and failing to provide the promised money-back guarantee after the Nathanson Defendants failed to perform the promised loan modification services.[33]  In the third cause of action for violation of the UCL, Plaintiffs allege that the Rewire Defendants, acting as the Nathanson Defendants’ agents in negotiating with the 1632 Subclass Members, engaged in unlawful, unfair and fraudulent business practices in violation of California Civil Code section 1632 subdivision (b)(6) by failing to deliver to the 1632 Subclass Members a translation of the Attorney-Client Agreements in the language in which the agreements were negotiated.[34]  In the fourth cause of action for violation of the UCL, Plaintiffs allege that the Rewire Defendants made false and/or deceptive representations regarding the “guaranteed” loan modification and/or litigation services through channels including oral representations, the Internet, radio, and form contracts.[35]  In the fifth cause of action for fraud, Plaintiffs allege that Amin, on behalf of Rewire, falsely represented to each Class Member through the Corporate Guaranty that each Class Member would receive the return of their upfront payments in the event the Defendants were unable to secure a loan modification for the Class Member or the Nathanson Defendants failed to provide the services they promised to perform pursuant to the Attorney-Client Agreement.[36]  Plaintiffs allege on information and belief that Amin knew the representation was false when made because Amin did not intend to provide the promised refunds, and/or he made the representation recklessly and without regard for its truth.[37]  Plaintiffs allege the Class Members reasonably relied on Amin’s representations by entering into the Attorney-Client Agreement and were harmed by the loss of their upfront payments.[38]  Plaintiffs allege that Holland, De Blasi and TMG were agents of Rewire and knew of and participated in the making of the fraudulent representations set forth in the Corporate Guaranty, and therefore are liable for Rewire’s fraudulent acts as well.[39]  Plaintiffs allege that Holland, De Blasi and TMG were co-conspirators of Amin and Rewire because they knew of and participated in the making of the fraudulent representations set forth in the Corporate Guaranty and agreed with and allowed Amin and Rewire to make these fraudulent representations to Class Members through the Corporate Guaranty so as to individually benefit from the conspiracy.[40]

 

Plaintiffs sufficiently demonstrate a prima facie case against De Blasi based on alter ego liability.  “In California, two conditions must be met before the alter ego doctrine will be invoked.  First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist.  Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone.  [Citations.]  Among the factors to be considered in applying the doctrine are commingling of funds and other assets of the two entities, the holding out by one entity that it is liable for the debts of the other, identical equitable ownership in the two entities, use of the same offices and employees, and use of one as a mere shell or conduit for the affairs of the other.  [Citations.]  Other factors which have been described in the case law include inadequate capitalization, disregard of corporate formalities, lack of segregation of corporate records, and identical directors and officers.  [Citations.]  No one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied.  [Citation.]” (Sonora Diamond Corp. v. Sup. Ct. (2000) 83 Cal.App.4th 523, 538-539.)

 

In Plaintiffs’ Main Default Judgment motion against Gallant, ABC, Holland and TMG, Plaintiffs established that Rewire breached its promises under the Corporate Guaranty for at least 250 homeowners; that Rewire provided the Corporate Guaranty as an inducement to enter into contracts for loan modification services but did not honor the money-back guarantees and did not intend to honor the guarantees; that Rewire violated Civil Code section 1632 for the 1632 Subclass Members during Rewire’s intake process; and that Rewire made false representations regarding its “guaranteed” loan modification services through various channels including oral representations, the Internet, radio, and form contracts.

 

Here, Plaintiffs’ evidence, if credited, establishes that De Blasi was Amin’s partner in launching Rewire, which was the public face of Gallant;[41] that De Blasi was chief executive officer of Gallant’s hospitality division and played an integral role in the Rewire loan modification business;[42] and that De Blasi received and used revenue generated from Rewire to fund personal expenses.[43]  Plaintiffs further demonstrate that Gallant was a shell corporation that did not issue stock or observe corporate formalities, had no corporate assets aside from the loan modification services proceeds (which De Blasi used for non-corporate purposes), did not pay its rent, employees or taxes, and was undercapitalized, with no reserve accounts for refunds.[44]  Plaintiffs further establish that De Blasi failed to pay for Gallant’s corporate obligations and diverted proceeds for his personal use as “expenses.”[45]  The evidence supports a prima facie case that a unity of interest and ownership exists between De Blasi and Gallant.  There would be an inequitable result if the acts of Gallant/Rewire were treated as those of Gallant/Rewire alone because De Blasi would profit from Rewire’s breach of contract, fraud, unfair business practices and false advertising.

 

Thus, Plaintiffs sufficiently establish a prima case that De Blasi is liable for Rewire’s actions that constitute breaches of the Corporate Guaranty, unfair competition, and fraud.  The motion for default judgment is GRANTED.  The Court hereby orders De Blasi to pay Plaintiffs compensatory damages in the amount of $951,710.00, attorney’s fees in the amount of $15,117.00, and prejudgment interest at a legal rate of ten percent per annum, which as of March 21, 2014 is in the amount of $92,042.  De Blasi and the other defaulting defendants ABC, Gallant, Holland and TMG shall be jointly and severally liable for this sum.

 

Motion to Seal Portions of Supplemental Heath Exhibits

 

Plaintiffs move to seal exhibits 5-46, 50-51, and 53-65 to the Declaration of Jacob M. Heath ISO Plaintiffs’ Supplemental Application for Punitive Damages Against Defaulting Defendants.  According to Plaintiffs, Suppl. Heath Exhs. 35 and 35A contain a Gallant vendor list that includes homeowners’ names.[46]  Plaintiffs take no position as to whether the financial material is confidential but seek to protect the homeowners from disclosure of their names.

 

Although the Court agrees that the homeowners whose names appear in Suppl. Heath Exhs. 35 and 35A have an overriding interest in preventing disclosure of their personal identifying and financial information that overcomes the right of public access and supports sealing the unredacted records, the proposed sealing is not narrowly tailored to redact only the personal and sensitive information.[47]  (See Cal. Rules of Court, rule 2.550(d).)  The matter will be taken under submission pending Plaintiffs’ submission of redacted versions within 10 days from the date of the Court’s final Order.

 

As for Suppl. Heath Exhibits 5-34, 36-46, 50-51, and 53-65, Plaintiffs state that these exhibits contain financial information of Gallant and ABC, but Plaintiffs take no position on sealing these exhibits.  Plaintiffs claim that Amin designated certain of these exhibits (53-56) as confidential.  Thus, Amin shall have 10 days from the date of the Court’s final Order to file a motion to seal any of the remaining exhibits.

 

Request for Punitive Damages

 

Plaintiffs seek $300,000 in punitive damages from Gallant, ABC, TMG, Holland and De Blasi.

 

“The essential question in determining a punitive damages award is whether the amount of the award substantially serves the societal interest in punishing the wrongdoer and deterring similar misconduct.  In answering the question, courts consider (1) the reprehensibility of the defendant’s conduct, (2) the relationship between the punitive damage award and the harm done, and (3) the amount of the punitive damage award in proportion to the defendant’s wealth.  [Citations.]”  (County of San Bernardino v. Walsh (2007) 158 Cal.App.4th 533, 545.)  “[T]he purpose underlying consideration of the financial component [is] to assure that the award punishes but does not cripple or bankrupt the defendant.”  (Kenly v. Ukegawa (1993) 16 Cal.App.4th 49, 57.)

 

The Court has already found that Plaintiffs presented prima facie evidence that Gallant, ABC, TMG, Holland and De Blasi engaged in fraud to support punitive damages.  (See Cal. Civ. Code, § 3294.)  Here, Plaintiffs’ request for $300,000 in punitive damages is based on Plaintiffs’ examination of Gallant and ABC’s QuickBooks files, 2009 tax returns, and checking account statements from late 2008 through early 2010, as well as documents from third parties establishing that these defendants made between $343,000 and $724,000 in gross profits in 2009 alone from the Rewire scheme, and that Gallant and ABC transferred at least $249,000 in revenue to Amin, De Blasi, TMG and Holland.  Thus, the requested $300,000 in punitive damages is directly related to the harm done to the victims of the loan modification scheme.

 

Regarding the defaulting defendants’ wealth, Plaintiffs submit that in 2009, Gallant made $1,209,114.60 in total income and $459,596 in gross profits;[48] that ABC made $265,544 in total income and $265,544 in gross profits;[49] and that Rewire activity contributed over $983,000 in total income and over $343,000 in gross profits and over $172,000 in net ordinary income to Gallant.[50]  Plaintiffs submit that although Gallant’s 2009 annual Profit & Loss Statement shows no distribution of money to Amin and De Blasi,[51] a month-by-month analysis shows that between January and November 2009, Gallant transferred at least $150,000 to Amin and over $100,000 to De Blasi,[52] and that Gallant transferred at least $89,000 to TMG in 2009.[53]  Plaintiffs contend that Gallant’s books were altered to cancel out Gallant’s payments to Amin and De Blasi in 2009.

 

Plaintiffs further submit that in 2008, Gallant had over $531,000 in assets and an equal amount in liabilities,[54] and nearly all of these assets and liabilities carried over through 2009, dipped to nearly $523,000 in 2010 and appear unchanged in 2013;[55] that Gallant’s statements of cash flow show that its cash on hand varied between $23,452 in December 2008 and negative $723 in December 2013;[56] that in December 2009, ABC had nearly $4,000 in net assets and an equal amount in liabilities, and these amounts appear mostly unchanged from 2010 through 2013.[57]  Plaintiffs contend that there is a lack of new financial data after early 2010, and that Gallant’s 2009 tax returns may not be reliable indicators of Gallant’s ability to pay punitive damages.

 

Plaintiffs further submit that bank statements show that Gallant and ABC received at least $852,000 in revenue from Nathanson between January and December 2009,[58] and that Gallant and ABC transferred over $150,000 to Amin and over $100,000 to De Blasi in 2009.[59]  As of 2010, Gallant and ABC’s bank accounts had little or no money.[60]

 

Plaintiffs submit that publicly available information shows that Gallant, ABC and TMG do not appear to hold any public-facing assets,[61] while Holland may own a home in Danville, California worth $157,000 in 1993 and two vehicles worth a combined $39,990,[62] and De Blasi may own a home in Alamo, California worth over $2.8 million,[63] as well as several restaurants and nightclubs.[64]

 

The Court finds that based on the evidence presented, which suggests that Gallant and ABC’s true net worth has been manipulated, the $300,000 in requested punitive damages, based on profits from the Rewire scheme, would sufficiently punish but not cripple the defendants.  Accordingly, the Court enters the requested $300,000 in punitive damages jointly against ABC, Gallant, TMG, Holland, and De Blasi.

 

Motion to Tax

 

The Court has conducted an in camera review of the time records of Plaintiffs’ counsel for work performed in response to Amin and Brown’s appeal.  The Court notes that Plaintiffs did not include in their fee requests more than 48 percent of the hours incurred in working on the appeal.  The Court finds the amount of fees requested in Plaintiffs’ September 23, 2013 memorandum of costs on appeal were reasonably incurred.  The motion to tax is DENIED.