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WILLIAMS v. NATIONAL HOUSING EXCHANGE

August 16, 2000

DONNA LEE H. WILLIAMS, INSURANCE COMMISSIONER OF THE STATE OF DELAWARE, AS RECEIVER OF NATIONAL HERITAGE LIFE INSURANCE COMPANY IN REHABILITATION. CONTINENTAL STOCK TRANSFER & TRUST COMPANY, MIDWEST INDEPENDENT BANK, AND MIDWEST MORTGAGE SERVICING, PLAINTIFF,
V.
NATIONAL HOUSING EXCHANGE, INC., APX MORTGAGE SERVICES, INC., AND RESOURCES ASSET MANAGEMENT, INC., DEFENDANTS.



The opinion of the court was delivered by: Elaine E. Bucklo, United States District Judge

MEMORANDUM OPINION AND ORDER

I.

In 1993, National Housing Exchange ("NHE") issued a bond with a face value of $126,000,000, secured by a pool of mortgage debentures. This bond was purchased by National Heritage Life Insurance Company ("National Heritage") in December 1993, which entered into an Indenture and Servicing Agreement (the "Indenture"), with Continental Stock Transfer and Trust Company ("Continental"), the bond's trustee, and APX Mortgage Services ("APX"), the servicer of the mortgages securing the bond, one of Mr. Pound's enterprises. In May 1994, the Delaware Court of Chancery placed National Heritage in rehabilitation and then in November 1995, in liquidation. The Delaware Commissioner of Insurance, Donna Lee H. Williams (the "Commissioner"), was appointed as receiver for National Heritage.

However, things had already begun to go bad on the other side of the deal. In the summer of 1994, Continental and the Commissioner informed NHE and APX that they had failed to comply with their obligations under the Indenture and were in default. In November 1994, Continental notified NHE and APX that their rights under the Indenture were terminated, and Midwest Independent Bank and Midwest Mortgage Servicing ("Midwest"), a Missouri corporation and its subsidiary, took control of APX's assets under a security agreement that Midwest and APX had entered into earlier that year.

Now, enter RAM, the relevant defendant here. It was incorporated by Mr. Pound, with himself as president, in October 1994, and took over APX's business, including the servicing of the mortgages, in December 1994, when APX shut down. NHE authorized the appointment of Midwest as servicer of the mortgages if RAM was appointed subservicer, which it was in an agreement of December 23, 1994, the "Agreement"). When it was informed of the appointments in January 1995, Continental was not pleased. It rejected the designation of Midwest as servicer, and demanded that RAM turn over all files relating to the mortgages, but RAM refused. Continental and the Commissioner then approved Midwest as a servicer. RAM retained possession of the files and acted as subservicer.

From December 1994 through August 1995, RAM paid itself a 1% servicing fee of at least $982,820.53, out of bank accounts RAM maintained for purposes of collecting and disbursing monies related to the bond (the "bond accounts"), moreover carrying the loans at a higher principal balance than their fair market value, increasing the amount derived from the servicing fee.

RAM also purchased from South Star, a Florida corporation, a first, second, and third mortgage secured by property in Laguna Beach, California, that had been acquired, ultimately, from the Resolution Trust Corporation. RAM used the third mortgage as collateral for the bond and, in March 1995, purchased the first and second mortgages in the name of NHE with $476,957.67 taken from the bond accounts. On March 24, 1995, RAM paid South Star $130.007.95 in "unidentified funds," from an account for monies received from borrowers that it could not otherwise attribute, and it also paid South Star $92,274.06 in funds from another account that had been established to maintain monies generated by mortgage loans prior to December 29, 1993.

From December 1995 through September 1995, RAM paid itself $110,544.15 in borrower late charges from the bond accounts. Between February and May 1992, RAN paid National Workout, an Illinois firm incorporated by Mr. Pound, purportedly devoted to renegotiating delinquent loans, a total of $74,900 from bond accounts which was repaid from further monies Mr. Pound transferred from loan accounts RAM was maintaining for Continental. On March 20 1995, under a workout agreement, RAM allowed a borrower, Valentine Short, to pay off his mortgage loan with $650,000, less than he owed, and then paid $36,693 to South Star, purportedly as accrued interest. From January to November 1995, RAM paid $46,542.32 of its own corporate expenses out of the bond accounts; and in February and May 1995, it paid $3,987.60 in travel expenses for its employees out of those accounts.

Between May and August of 1995, RAM modified at least seven non-performing mortgage loans to characterize them as "performing," paying itself at least $22,854.37 as "modification fees." From May to December 1995, RAM paid itself $14,112.72 in interest accumulated in a Tax and Insurance Account to which borrowers' insurance and tax payments were credited. In November 1995, RAM paid itself $10,561.55 from the Real Estate Tax Account, to which borrower's tax payments were credited. After this case was filed on March 7, 1995, and until August of that year, RAM paid $171.493.41 in attorneys' fees out of the bond accounts.

In an order of January 8, 1996, I appointed a receiver to take possession of the mortgage loans, accounts, and files, and all of RAM's bank accounts. RAM purportedly complied, but in December 1995, Mr. Pound had withdrawn $85,000 from RAM's corporate account that he did not disclose to the receiver; Mr. Pound subsequently redeposited the funds and used them to pay $50,000 to a lawyer.

Mr. Pound, APX, RAM, and National Workout were indicted in April 1998 in a 93-count, 165-page indictment by the United States Attorney for the Middle District of Florida, which included counts of fraud facilitation and concealment, fraud and theft with relation to the bond, as well as charges of fraud connected with APX and RAM mortgage services and money laundering with regard to the debenture mortgages collections. Mr. Pound was convicted of all 67 counts with which he was charged and sentenced to serve 740 years in federal prison, three years of supervised release, and perform 75 hours of community service, and ordered to pay $133,854,104.24 in restitution to the Commissioner.

II.

The Commissioner moves for summary judgment on counts XIII (breach of contract), count XIV (unjust enrichment), count XV (breach of fiduciary duty), and count XVI (civil conspiracy) against RAM, and asks ...


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