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Rigby v. Corliss

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

July 27, 2018

JAMES F. RIGBY, Trustee of Michael R. Mastro, Plaintiff,
v.
MICHAEL J. CORLISS, Defendant.

          MEMORANDUM OF DECISION

          Robert S. Lasnik United States District Judge.

         This matter was heard by the Court in a bench trial commencing on July 9, 2018. Plaintiff James T. Rigby, the Chapter 7 trustee of the bankruptcy estate of Michael R. Mastro, filed this lawsuit to recover damages arising from the conversion of certain estate assets, to force defendant Michael J. Corliss to surrender $111, 600, and to recover damages arising from misstatements Corliss made to the trustee.

         FINDINGS OF FACT

         By a preponderance of the evidence, the Court finds as follows:

         On August 21, 2009, the United States Bankruptcy Court for the Western District of Washington granted an involuntary bankruptcy petition filed by some of Mastro's creditors. Mastro had been a prominent real estate developer and financier in the Pacific Northwest, but was unable to weather the financial crisis in the late 2000s.

         During the winter of 2010 and spring of 2011, Mastro and his wife, Linda, lived in Palm Desert, California. Their Medina mansion had been sold as part of the bankruptcy proceeding, but the Mastros retained a Range Rover, a Bentley, Chihuly art, jewelry, and other assets. Corliss and his wife, Lauri, were also staying in Palm Desert and met the Mastros at a New Years party. Corliss and Mastro knew each other prior to this meeting. Corliss had purchased a roof truss manufacturing business from Mastro in 1985. Corliss and Mastro occasionally saw each other socially in the intervening years, and Corliss thought favorably of Mastro. Lauri Corliss had met the Mastros a couple times before the New Years meeting, but it was not until this encounter that she and Linda Mastro hit it off.

         Lauri Corliss felt bad for the Mastros: they had suffered great financial loss through the real estate downturn and had had their name and reputation dragged through the mud. She appreciated that Corliss, who was also heavily invested in real estate, could have suffered the same fate: the banks were pushing hard to collect payments on outstanding loans during the height of the downturn, and Lauri Corliss understood how you could fall behind and get pushed into bankruptcy. Linda Mastro, for her part, felt ostracized and destitute, turning to Lauri Corliss for a sympathetic ear and, in some instances, for financial help.[1] Over the course of approximately four months, the Mastros and the Corlisses had lunch and/or dinner together approximately ten times, and Lauri Corliss and Linda Mastro became friends.

         At some point, Corliss got the impression that Mastro was going to ask him for money. At the time, Corliss had been lending to various business partners to help keep them afloat during the downturn, and he was inclined to be of help. The business Corliss had purchased from Mastro twenty-five years earlier had done very well, and he knew that if Mastro were asking for money, he must be in a really tough spot. When Corliss mentioned the possibility of helping Mastro to his wife, Lauri Corliss encouraged him to do so. Mastro did ask for financial assistance and, although Corliss was willing to make an unsecured loan of $50, 000 (and would probably have gifted him the $50, 000 if asked), Mastro insisted on providing 68 ounces of gold as collateral. The gold had a market value that exceeded the $50, 000 loan amount, but Corliss viewed the arrangement as something akin to a line of credit where he would make additional disbursements as the Mastros needed it. Corliss believed that Mastro wanted to get back into the real estate business after his bankruptcy was resolved and would use this loan to reestablish his credit.

         Corliss made no effort to confirm that Mastro owned the gold he offered as collateral before accepting it. At the time, the Mastros had been in bankruptcy for almost a year and a half and were living openly in California with a number of valuable assets in their possession. Neither Corliss nor his wife understood the details of the bankruptcy proceeding, but they knew that the Mastros were in Palm Desert because the trustee had seized their Seattle-area residence and had sold it and other assets for the benefit of Mastro's creditors. The Corlisses reasonably assumed that Mastro owned the assets in his possession, such as the gold Mastro offered as collateral, and that they were either not part of the bankruptcy estate or the trustee had chosen not to seize them.

         Kara King, Corliss' assistant, was tasked with drafting the paperwork for the loan and disbursing checks. The form King utilized included Corliss' standard terms (6% interest, one year maturity date, 18% default interest rate) and indicated that the promissory note was unsecured. It is undisputed, however, that Mastro provided the gold as collateral for the loan. King told Corliss that Mastro had requested that the loan be disbursed in multiple checks in specific denominations and asked if that were okay. Corliss approved, and King made the first disbursement on January 17, 2011.

         Corliss and Lauri Corliss believed, and there is no evidence to the contrary, that the Mastros were asset rich and cash poor and that they were using the money Corliss gave them to pay living expenses such as rent, gas, and food. King disbursed additional checks to Mastro on January 28, 2011. As of the end of February, she reported to Corliss that only the first round of checks had been cashed: the others remained outstanding. Corliss asked King to find out whether and where the checks had been deposited. Although Corliss does not remember why he cared, he knew that Mastro had been ill and may have wanted to make sure they had been deposited or he may have been curious about where Mastro was doing his banking.

         In April 2011, Mastro told Corliss that he had closed a deal, and he made a $111, 600 payment on the loan balance.[2] Additional promissory notes were drawn up and additional checks disbursed in May and June. Each disbursement totaled $25, 000, but was made up of three checks for $9, 000, $9, 000, and $7, 000. Mastro occasionally provided handwritten loan updates that included disbursements, payments, balances, and new requests.

         The Mastros's lease in Palm Desert ended in June 2011, and their Seattle-area home had been sold by the trustee. Corliss understood that the Mastros went to Vancouver, British Columbia, and were thinking of traveling across Canada. In July 2011, King received a note from Mastro asking that she use his sister's Seattle address to contact him until further notice: the note was written on stationary from a hotel in Winnipeg, Manitoba. Shortly thereafter, Mastro wrote from Toronto, Ontario, to provide a loan update and request that Corliss wire the balance of the loan account, $94, 500, which included the value Mastro assigned to the 68 ounces of gold, to a branch of the Royal Bank of Canada. Mastro indicated that he would prefer that the transaction be considered another loan for which he would send additional collateral. Corliss authorized the transfer, and King gave instructions for its transmission on July 20, 2011.

         On July 20 and 21, the Mastros took their three dogs to an animal hospital in Toronto to get international health certificates. The hospital staff reported that the Mastros planned to fly by private jet to Lisbon, Portugal. On July 22, 2011, King forwarded a business journal article to Corliss indicating that the bankruptcy trustee had lost contact with Mastro, that Mastro was under a court order to turn over two diamond rings, and that there was a hearing scheduled that Friday. The Mastros failed to appear at the hearing, and bench warrants were issued for their arrests. The United States Department of Justice filed a sealed criminal complaint against Mastro for bankruptcy fraud on August 5, 2011. The evidence shows that Mastro had left Canada for Portugal shortly after receiving the wire transfer from Corliss.

         Throughout this period, Linda Mastro and Lauri Corliss remained in contact via phone and/or email. At some point, Lauri Corliss became aware that the Mastros had left Canada for Europe and that the Mastros had missed a court date and could not come home until their attorneys had resolved the issues arising therefrom. Whenever the topic of homecoming came up, Linda Mastro bounced between optimism and resignation regarding their chances of favorably resolving the bankruptcy problems. By September 2011, both Corliss and his wife knew that the U.S. Marshal's Service was looking for the Mastros and that the bankruptcy court was looking for their assets.

         In December 2011, the trustee retained “recovery counsel” to coordinate an international investigation of Mastro's whereabouts, activities, and assets. The trustee was looking for any and all assets and searched in many of the places Mastro had visited and/or had held assets, including the Isle of Man, Belize, Canada, Portugal, and ultimately France. At ...


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