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Grassmueck v. Potala Village, LLC

United States District Court, W.D. Washington, Seattle

June 14, 2018



          JAMES L. ROBART, United States District Judge.


         Before the court is Plaintiff Michael A. Grassmueck's motion for summary judgment. (Mot. (Dkt. # 18).) Mr. Grassmueck is the court-appointed federal equity receiver (“Receiver”) in Securities & Exchange Commission v. Path America, LLC, et al., No. C15-1350JLR (W.D. Wash.) (“SEC Action”). In his role as Receiver, Mr. Grassmueck seeks to recover $914, 954.84 from Defendant Potala Village, LLC (“Potala Village”) along with an award of prejudgment interest on that amount. (See generally Mot.) Potala Village opposes Mr. Grassmueck's motion. (See Resp. (Dkt. # 25).) The court has considered the motion, all submissions filed in support of and in opposition to the motion, and the applicable law. Being fully advised, [1] the court GRANTS Mr. Grassmueck's motion.


         A. Mr. Dargey's Fraudulent Scheme and Guilty Plea

         Mr. Losbang Dargey owned and operated Path America SnoCo, LLC, and Path America KingCo, LLC, [2] both of which were EB-5 regional centers approved by the United States Immigration and Citizenship Services (“USCIS”). (1st Scollan Decl. (Dkt. # 21) ¶ 5, Ex. D (attaching Mr. Dargey's plea agreement from United States v. Losbang Dargey, No. Cr17-0001RSL (W.D. Wash.) (“the Criminal Action”), Dkt. # 6) (“Plea Agreement”) ¶ 7(b).) The EB-5 Program provides that foreign nationals may qualify for United States residency if they make a qualified investment of $500, 000.00 or more in a specified project or regional center that is determined to have created or preserved at least 10 jobs in the United States. See 8 U.S.C. § 1153(b)(5); 8 C.F.R. §204.6. Using these two USCIS-approved EB-5 regional centers, Mr. Dargey promoted two EB-5 projects to immigrant investors: Path America Farmer's Market (“the PAFM Project”) and Potala Tower (“the Tower Project”). (Plea Agreement ¶ 7(c).)

         Mr. Dargey made material misrepresentations and omissions in the investment offerings for these two EB-5 projects. (Id. ¶¶ 7(d)-(i).) For example, contrary to Mr. Dargey's representations, he fraudulently diverted immigrant investor capital contributions intended for the two EB-5 projects to other non-EB-5 real estate projects that he owned and controlled. (Id. ¶ 7(h).) Ultimately, Mr. Dargey pleaded guilty to criminal conduct related to certain matters alleged in the SEC Action, including wire fraud. (See generally id.; see also 1st Scollan Decl. ¶ 6, Ex. E (attaching Dkt. # 506 from the Criminal Action, which is the Consent to Final Judgment as to Mr. Dargey and Relief Defendant Path Othello).)

         B. The Related SEC Action

         In a related civil action, the SEC alleged three claims of securities fraud against Mr. Dargey, Path America SnoCo, LLC, Path America KingCo, LLC, and other related entities in violation of (1) Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5, (2) Sections 17(a)(1) and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77q(a)(1), 77q(a)(3), and (3) Section 17(a)(2) of the Securities Act, 15 U.S.C. § 77q(a)(2). See SEC Action, Compl. (Dkt. # 1) ¶¶ 46-57. Mr. Grassmueck is the court-appointed receiver in the SEC Action for the following entities: (1) Path America, LLC, (2) Path America SnoCo, LLC, (3) Path America Farmer's Market, LP, (4) Path America King Co, LLC, (5) Path America Tower, LP, (5) Path Tower Seattle, LP, (6) Potala Tower Seattle, LLC, (7) Potala Shoreline, LLC, (8) Potala Village Kirkland, LLC, [3] (9) Dargey Development, LLC, (10) Dargey Enterprises, LLC, (11) Path Farmer's Market, LLC, and (12) Dargey Holdings, LLC (collectively, “the Receivership Entities”). (Grassmueck Decl. ¶¶ 2-3, Exs. A, B); see also SEC Action, Dkt. ## 88, 375. Potala Village is not a receivership entity. (See Grassmueck Decl. ¶ 3, Exs. A, B.)

         C. Potala Village

         Mr. Dargey created Potala Village for the purpose of acquiring, developing, and operating a mixed-use project located at 1315 Pacific Ave., Everett, Washington (“the Property”). (Ans. (Dkt. # 17) ¶ 8.) Mr. Dargey is a member of and presently holds an approximate 58% majority interest in Potala Village. (Ans. ¶¶ 8-9; 1st Scollan Decl. ¶ 3, Ex. B (“Cohanim Dep.”) at 34:1-9.) In 2008, Mr. Dargey sent an offering prospectus to potential investors regarding the Potala Village project. (Cohanim Decl. (Dkt. # 26) ¶ 4, Ex. A.) The Potala Village prospectus stated that one of Mr. Dargey's other businesses, Dargey Enterprises, LLC (“Dargey Enterprises”), would serve as the developer of the Potala Village project.[4] (Id. at PVE0494; Cohanim Dep. at 64:16-20; 1st Scollan Decl. ¶ 7, Ex. F.) The prospectus also stated that the developer fees paid to Dargey Enterprises would be $450, 000.00. (Cohanim Decl. ¶ 4, Ex. A at PVE0504.) Mr. Dargey remained the manager of Potala Village until approximately February 2016. (See Cohanim Dep. at 43:13-44:6.)

         D. The Transfer of $914, 954.84 to Potala Village

         During September and October 2012, Mr. Dargey caused Dargey Enterprises to transfer a total of $976, 954.84 to Potala Village in three transactions. (1st Scollan Decl. ¶ 8, Ex. G; Gadawski Decl. (Dkt. # 20) ¶ 4, Exs. A, B.) Potala Village returned just $62, 000.00 to Dargey Enterprises, which reduced the balance of the transfers to $914, 954.84. (See 1st Scollan Decl. ¶ 8, Ex. G; Gadawski Decl. ¶ 4, Exs. A, B.)

         Mr. Grassmueck hired a forensic accountant to trace the origins of the $914, 954.84 that Dargey Enterprises transferred to Potala Village. (See Gadawski Decl. ¶¶ 3-6, Exs. A-D.) Path America Farmer's Market, LP (“PAFM”), another Receivership entity in the SEC Action, transferred funds to Dargey Enterprises before each of the transfers from Dargey Enterprises to Potala Village. (Gadawski Decl. ¶ 5, Ex. C; see also Grassmueck Decl. ¶ 2 (listing PAFM as one of the Receivership entities in the SEC Action).) First, on September 25, 2012, PAFM transferred $300, 000.00 to Dargey Enterprises. (Gadawski Decl. ¶ 5, Ex. C.) This $300, 000.00 transfer enabled Dargey Enterprises to transfer $200, 000.00 to Potala Village on the same day. (Id.) Next, on October 9, 2012, PAFM transferred $170, 000.00 to Dargey Enterprises. (Id.) This $170, 000.00 transfer enabled Dargey Enterprises to transfer $167, 000.00 to Potala Village on the same day. (Id.) Finally, on October 30, 2012, PAFM transferred $609, 000.00 to Potala Village directly but on behalf of Dargey Enterprises. (Id.) Both Potala Village and Dargey Enterprises reported these funds as owing from Potala Village to Dargey Enterprises. (Id.)

         In addition, PAFM's transfers to Dargey Enterprises and Potala Village occurred after receiving deposits of immigrant investor funds. (Id.) Before receiving the immigrant investor funds, the PAFM bank account balance was only $11, 174.85, and prior to the transfers by PAFM to Dargey Enterprises, the Dargey Enterprises bank account contained only $2, 218.77. (Id.) Thus, the deposit of immigrant investor funds into PAFM enabled PAFM to transfer funds to Dargey Enterprises, which in turn enabled Dargey Enterprises to transfer $914, 954.84 to Potala Village. (Id.) Therefore, the $914, 954.84 at issue here is directly traceable to immigrant investor funds. (See id.)

         E. The 2012 Note

         Mr. Dargey, acting in his capacity as the sole manager of both Potala Village and Dargey Enterprises, executed a promissory note pursuant to which Potala Village promised to repay $914, 954.84 to Dargey Enterprises, interest-free, upon the sale of the Potala Village project. (See Vecchio Decl. (Dkt. # 27) ¶ 4, Ex. I.) The promissory note purports to have an execution date of October 9, 2012 (“the 2012 Note”). (Id. at PVE0003.) However, Mark Reichlin, Potala Village's Federal Rule of Civil Procedure 30(b)(6) deponent, [5] testified during his deposition that (1) he had never seen the 2012 Note until the onset of the present litigation, (2) except for Mr. Dargey, none of the members of Potala Village knew that such a promissory note existed at the time, (3) the // // 2012 Note may not have existed at that time, and (4) the 2012 Note appeared to have been created after-the-fact for Mr. Dargey's benefit.[6] (2d Scollan Decl. (Dkt. # 29) ¶ 2, // // Ex. J (“Reichlin Dep.”)[7] at 36:2-37:3, 39:12-40:7.) Indeed, the 2012 Note contains a facially apparent backdating error. The 2012 Note purports on its face to have an execution date of October 9, 2012. (Vecchio Decl. ¶ 4, Ex. I at PVE0003.) The 2012 Note also recites that Potala Village “received $609, 954.84 (minus $62, 000[.00] for a HUD approved funds swap with the management company) . . . .” (Id. at PVE0001.) Yet, Potala Village did not receive the $609, 954.84 until October 30, 2012, and did not transfer the $62, 000.00 back to Dargey Enterprises until November 15, 2012. (2d Scollan Decl. ¶ 8, Ex. G.) Both of these events occurred weeks after the 2012 Note's purported October 9, 2012, execution date.

         Mr. Grassmueck issued an interrogatory to Potala Village asking it to “[s]tate any value that [Potala Village] provided in exchange for the $914, 954.84 (as identified in the 2012 Note) . . . .” (1st Scollan Decl. ¶ 10, Ex. I (attaching Mr. Grassmueck's interrogatories to Potala Village and Potala's responses thereto) at 3-4.) In response, Potala Village did not identify any contemporaneous item of value, including the 2012 Note, and “dispute[d]” the “assumption” that Potala Village “received $914, 954.84 pursuant to the 2012 Note.”[8] (Id. (capitalization in original omitted).)

         During discovery, Potala Village also repeatedly disclaimed any obligation under the 2012 Note. In Interrogatory No. 7, Mr. Grassmueck asked: “Who negotiated the alleged reduction of the balance due on the 2012 Note?” (1st Scollan Decl. ¶ 10, Ex. I at 5.) Potala Village responded by objecting to the interrogatory “to the extent that it assumes that [Potala Village] had any obligation under the 2012 Note, . . . an assumption [Potala Village] disputes.” (Id.) Similarly, in response to Interrogatory No. 1 regarding payments made under the 2012 Note, Potala Village stated that it “does not agree that it has or had any payment obligations under the 2012 Note . . . .”[9] (Id. at 2.)

         Finally, in its answer to Mr. Grassmueck's complaint, Potala Village expressly denied that the transfers of funds at issue in this suit “were documented as promissory notes.” (See Compl. (Dkt. # 1) ¶ 11 (“The Receivership Entities provided funds to Defendant. The transfers of funds were documented as promissory notes.”); Ans. (Dkt. # 17) ¶ 11 (“Answering paragraph 11 of the Complaint, [Potala Village] denies any and all allegations therein.”).)

         F. The 2015 Note

         In 2013, members of Potala Village discovered that-contrary to statements in the prospectus, which limited the amount of developer fees to $450, 000.00-Mr. Dargey had in fact caused Potala Village to pay approximately $920, 000.00 in such fees either to Dargey Enterprises or to Mr. Dargey himself. (Resp. at 5 (citing Cohanim Decl. ¶ 5, Ex. B at PVE0423; Reichlin Dep. at 19:19-20:14; 21:20-24:13).) The members of Potala Village confronted Mr. Dargey, and Mr. Dargey and Dargey Enterprises agreed to correct the issue by treating Potala Village's overpayment as a partial repayment of the 2012 Note. (Cohanim Decl. ¶ 6, Ex. C (attaching an email string that discusses both the developer fee and the reduction of amount due under the 2012 Note).)

         On February 27, 2015, Mr. Dargey, as the manager of Potala Village, executed a new promissory note from Potala Village in favor of Dargey Enterprises. (1st Scollan Decl. ¶ 9, Ex. H (“the 2015 Note”).) Mr. Dargey did not circulate the 2015 Note to the other Potala Village members at the time of execution or inform them that he had executed the 2015 Note until months later. (Resp. at 6 (citing Reichlin Dep. at 41:12-43:19, 46:18-47:15); Cohanim Decl. ¶ 8, Ex. E.) The 2015 Note stated the principal amount of the loan as $444, 954.84. (See Cohanim Decl. ¶ 8, Ex. E.) The 2015 Note has a stated execution date of February 27, 2015, and a maturity date of February 29, 2016. (Id. at PVE0231, PVE0238.) Unlike the 2012 Note, which was interest-free (see Vecchio Decl. ¶ 4, Ex. I), the 2015 Note provides for interest at 3% annum, compounded annually on each anniversary date of the note (Cohamin Decl. ¶ 8, Ex. I). After the maturity date, the 2015 Note provides for interest at the rate of the lesser of 10% annum or the highest rate permitted by applicable law. (Id.) The maturity date has passed, and Potala Village has made no payments on the 2015 Note. (Cohanim Dep. at 69:16-70:2, 68:23-25; Ans. ¶¶ 14, 16.)

         The 2015 Note itself does not reference the 2012 Note, indicate that the 2015 Note supersedes the 2012 Note, or state that it reduces the principal amount owed on the 2012 Note. (See generally 1st Scollan Decl. ¶ 9, Ex. H.) Nevertheless, Potala Village asserts in its response to Mr. Grassmueck's motion that “it was clearly intended to replace the 2012 Note . . . for it reflected the precise balance owed on the 2012 Note . . . and identified no other consideration for that amount.”[10] (Resp. at 6.)

         Potala Village asserts that, in June 2016, Dargey Enterprises agreed to cap payment of the 2015 Note, including principal and interest, at $500, 000.00. (Cohanim Dep. at 76:14-77:9.) The agreement to cap the 2015 Note was an oral agreement between Mr. Dargey and Mr. Cohanim, who was serving as the managing member of Potala Village at the time. (Id. at 81:7-13; see also Vecchio Decl. ¶ 13.) The only written document memorializing the oral agreement is an August 19, 2016, email from Mr. Cohanim to Mr. Dargey and others, in which Mr. Cohanim states that “[Mr. Dargey] will accept a cap on interest for Dargey Enterprises's promissory note whereby the note will be considered paid in full at $500K.” (Cohanim Decl. ¶ 9, Ex. F.)

         G. The Receivership and this Lawsuit

         On July 15, 2016, the court in the SEC Action placed Dargey Enterprises into the Receivership. (Grassmueck Decl. ¶ 3, Ex. B.) Mr. Grassmueck filed this action on behalf of the Receivership on February 15, 2017. (See Compl. (Dkt. # 1).) Mr. // Grassmueck seeks summary judgment of the entire amount of Dargey Enterprises's transfers to Potala Village, plus prejudgment interest. (See generally Mot.) He argues that the Receivership is entitled to the return of all the transfers at issue under Washington's Uniform Fraudulent Transfer Act (“UFTA”), based on (1) actual fraud, RCW 19.41.041(a)(1), and (2) constructive fraud, RCW 19.41.041(b).[11] (Id. at 5-7.) Mr. Potala also argues that the Receivership is entitled to recoup the transfers based on a theory of unjust enrichment. (Id. at 7-9.) Potala Village opposes Mr. Grassmueck's motion and argues that at most the Receiver is entitled to recoup $500, 000.00 in full satisfaction of the 2015 Note, but no more. (See generally Resp.; id. at 8 (“Potala believes that the Receiver-on behalf of [Dargey] Enterprises-is entitled to $500, 000[.00] in full satisfaction of the 2015 Note . . . .”).) The court now considers Mr. Grassmueck's motion.

         III. ANALYSIS

         A. Standard

         Summary judgment is appropriate if the evidence shows “that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Galen v. Cty. of L.A., 477 F.3d 652, 658 (9th Cir. 2007). A fact is “material” if it might affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A factual dispute is “‘genuine' only if there is sufficient evidence for a reasonable fact finder to find for the non-moving party.” Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 992 (9th Cir. 2001) (citing Anderson, 477 U.S. at 248-49).

         The moving party bears the initial burden of showing there is no genuine dispute of material fact and that it is entitled to prevail as a matter of law. Celotex, 477 U.S. at 323. If the moving party meets its burden of production, the burden then shifts to the nonmoving party to identify specific facts from which a fact finder could reasonably find in the nonmoving party's favor. Id. at 324; Anderson, 477 U.S. at 252.

         The court is “required to view the facts and draw reasonable inferences in the light most favorable to the [nonmoving] party.” Scott v. Harris, 550 U.S. 372, 378 (2007). The court may not weigh evidence or make credibility determinations in analyzing a motion for summary judgment because those are “jury functions, not those of a judge.” Anderson, 477 U.S. at 249-50. Nevertheless, the nonmoving party “must do more than simply show that there is some metaphysical doubt as to the material facts . . . . Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial.” Scott, 550 U.S. at 380 (internal quotation marks omitted) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986)).

         B. UFTA Claim

         Mr. Grassmueck asserts that he is entitled to summary judgment under two separate provisions of UFTA. (Mot. at 5-7.) Mr. Grassmueck argues that there is no genuine issue of material fact that Mr. Dargey made transfers at issue here to Potala Village with “actual intent to . . . defraud” under RCW 19.40.041(a)(1). (Mot. at 5-6 (citing RCW 19.40.041(a)(1)).) Second, Mr. Grassmueck argues that there is no genuine issue of material fact that the transfers at issue were constructively fraudulent under RCW 19.40.041(a)(2). (Id. at 6-7.) Because the court grants summary judgment under RCW ...

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