Tuesday, March 8, 2011
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Court Rejects Claim That Lawyer’s Purchase of Debt Was in Anticipation of Lawsuit
By SHERRI M. OKAMOTO, Staff Writer
This district’s Court of Appeal yesterday upheld a $2.8 million award in favor of a Pasadena attorney who had filed a civil suit to collect on a debt he had purchased.
Div. Three, in an unpublished decision, explained that Business and Professions Code Sec. 6129 could not be asserted as an affirmative defense to Surjit Soni’s efforts to enforce the promissory note Tony Neman had executed to secure a residential construction loan for a property in Beverly Hills.
The appellate panel concluded that Neman had presented insufficient evidence to support a finding that Soni’s purchase of the debt in 2007 from East West Bank was made “with intent to bring suit thereon,” in violation of the statute.
Soni—who described himself as an attorney, a developer, and a real estate investor—was the only witness who testified at trial before Los Angeles Superior Court Judge Rolf M. Treu.
Bankruptcy Procedures
When he purchased the debt, Soni said he knew it was approximately two years and five months delinquent and the borrower, a limited liability company owned by Neman, was in bankruptcy. Soni claimed he was “sufficiently familiar” with bankruptcy procedures and issues to realize the property, located at 1124 Marilyn Drive, was “in a very good secured position” and if the property itself or the assets of the bankruptcy estate were more valuable than the note with its first trust deed and guarantees then there was a good chance that a buyer of those instruments would “get paid through the sale of that property in the bankruptcy” or by resolution of the bankruptcy.
Since the property had appraised for $7.8 million but the note only had an outstanding obligation of $6.5 million, and the bank was willing to sell the debt for $4.5 million, Soni said he did not think he would ever have to sue Neman because the property’s worth was sufficiently ample to pay off the debt.
Soni and his wife later purchased the property at a public auction non‑judicial foreclosure for $5 million, leaving a deficiency on the note of over $2.9 million. Soni then sued Neman to recover this balance. Neman asserted Soni’s actions violated Sec. 6129, which provides that “[e]very attorney who, either directly or indirectly, buys or is interested in buying any evidence of debt or thing in action, with intent to bring suit thereon, is guilty of a misdemeanor.”
Treu found there was no evidence to support the defense because there was no evidence that Soni’s purchase of the debt “was anything other than a normal business transaction by a lender,” specifically noting the lack of any expert testimony that the sale was “a particularly unusual transaction,” and “not one that a prudent normally-intended investor would engage in.”
The defense was not presented to the jury, which later returned a $3,479,434.53 verdict in favor of Soni.
Writing for the appellate court, Justice Walter Croskey disagreed with Treu’s suggestion that testimony from an expert was necessary to successfully assert a defense based on Sec. 6129, but agreed that Neman had not set forth sufficient evidence to establish Soni’s intent to sue on the debt he had acquired.
“[T]he fact that an attorney purchases a debt and then is unable to collect on it without bringing a civil suit does not, by itself, support use of section 6129 as an affirmative defense to the suit,” the justice explained, noting “the case law history on section 6129’s predecessor statute, former Penal Code section 161, shows that our Supreme Court has impliedly recognized that the statute can be used as an affirmative defense if it is ‘sustained by the evidence.’”
No Inference
In this case, Croskey said, “what the evidence indicates is that a jury could find that even though the real property appraised for $7.8 million, it was not certain that, from their investment of $4.5 million, plaintiffs would realize the entire $6.5 million dollars represented by the promissory note and its guarantees when they decided to sell the real property.”
He reasoned “the possibility of their realizing less than the $6.5 million does not support an inference that the attorney plaintiff had the required intent to sue on defendant’s guarantees to recover the deficiency” since Soni purchased the note at a $2 million discount and might have been satisfied with “a more modest profit from a sale of the real property than what a sale price of $6.5 million would bring.”
Croskey emphasized that yesterday’s ruling was intended as “a narrow holding to acknowledge both the purpose of [Sec. 6129] and the need to apply the statute literally so as to avoid precluding investors, who happen to be attorneys, from making investments on which they may someday have to sue.”
Joined by Presiding Justice Joan D. Klein and Justice Richard D. Aldrich, Croskey upheld the judgment in favor of Soni, but directed the amount be modified to delete an award of $655,306.99 in attorney fees since there was no evidence such fees were incurred because of litigation under the promissory note.
Thomas J. Weiss and Hyrum K. Hunt of Weiss & Hunt represented Neman. Leo E. Lundberg and M. Danton Richardson of the Soni Law Firm represented Soni.
The case is Soni v. Newman, B222133.
Copyright 2011, Metropolitan News Company