In Re: Douglas Thorpe v. Tj 12, LLC ( 2023 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS SEP 15 2023
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: DOUGLAS THORPE, No. 22-60042
Debtor, BAP No. 21-1216
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MEMORANDUM*
DOUGLAS THORPE,
Appellant,
v.
TJ 12, LLC,
Appellee.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Brand, Taylor, and Lafferty III, Bankruptcy Judges, Presiding
Submitted September 13, 2023**
Phoenix, Arizona
Before: GOULD, HURWITZ, and BUMATAY, Circuit Judges.
This is an appeal from a Bankruptcy Appellate Panel (“BAP”) decision
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
affirming a judgment entered in an adversary proceeding holding that Douglas
Thorpe (“Thorpe”) did not have an equitable mortgage on his residence. “We review
the BAP’s decision de novo, and we review the underlying bankruptcy court
decision using the same standard of review the BAP did.” In re Hutchinson, 15 F.4th
1229, 1232 (9th Cir. 2021) (citations omitted). We have jurisdiction under 28 U.S.C.
§ 158(d) and affirm.
1. Citing Arizona law, Thorpe first argues that the appropriate standard of
review of the bankruptcy court’s finding about the intentions of the parties in
entering into the relevant transaction is de novo because the substantive facts are
undisputed. But the intent of the parties is an issue of fact under Arizona law. See
Shelton v. Cunningham, 508 P.2d 55, 58 (Ariz. 1973); Merryweather v. Pendleton,
372 P.2d 335, 338 (Ariz. 1962). In any event, “the proper standard of review is a
question of federal procedure and is governed by federal law,” Rosenbloom v. Pyott,
765 F.3d 1137, 1147 n.8 (9th Cir. 2014) (citation omitted), and Thorpe concedes that
federal courts review for clear error a trial court’s finding about “the intention of the
parties” to create a mortgage, Stephens v. Arrow Lumber Co., 354 F.2d 732, 734 (9th
Cir. 1966); see also In re Corey, 892 F.2d 829, 837–38 (9th Cir. 1989) (similar);
Nat. Res., Inc. v. Wineberg, 349 F.2d 685, 688 (9th Cir. 1965) (reviewing equitable-
mortgage determination for clear error).
2. “In determining whether a transaction was for security purposes or was a
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bona fide sale,” Arizona courts consider multiple factors, none of which is
determinative. Merryweather, 372 P.2d at 340–41. Applying those factors, the
bankruptcy court did not clearly err in finding the transaction was a sale.
a. The BAP correctly recognized that no more than three factors support
recharacterizing the sale of the house as a loan. These factors were: Thorpe’s
financial distress at the time of the transaction, see Shelton, 508 P.2d at 58; the
amount of the purchase price, which was approximately the amount of existing
indebtedness on the residence, see Merryweather, 372 P.2d at 340; and the
contemporaneous option agreement, id. at 341.
b. But, as the BAP recognized, the bankruptcy court did not clearly err in
finding that the remaining factors indicate that the challenged transaction was—as
the relevant documents indicate—a sale, not a secured loan.
i. The record supports the bankruptcy court’s findings that during the
negotiations, TJ 12, LLC “did not agree to provide a loan,” and that Thorpe hoped
to rebuy the property at a later date. See Merryweather, 372 P.2d at 340. As the
bankruptcy court reasonably put it, it “seems inconceivable” that Thorpe would
“borrow $96,000.00 when he only needed $14,000.00” to cure the default on the
loan.
ii. The bankruptcy court did not clearly err in finding that the “amount of the
consideration paid” was not substantially less than “the actual value of the property
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in question.” Id. at 340–41. The bankruptcy court credited McNaughton’s
testimony that he believed he would spend $40,000 to $50,000 in “upgrades” before
reselling for about $175,000.
iii. Subsequent to the transaction, TJ 12 paid taxes and insurance and owed
$1,365 a month to Arizona Instant Funding, LLC on the loan but charged Thorpe
only $800 per month in rent for the first year. See id. at 341. As the BAP put it, the
increase in rent for the second year could indicate McNaughton’s “desire to charge
a sufficient amount of rent to cover” expenses. The court found credible
McNaughton’s testimony that text messages he sent to Thorpe did not refer to a loan,
but rather to Thorpe’s ability to find a buyer or exercise the option to purchase.
iv. Even if the bankruptcy court, when weighing “the relative sophistication
of the parties,” Shelton, 508 P.2d at 58, should not have considered the sophistication
of Thorpe’s brother and mother, it reasonably found that Thorpe graduated from
college and “comes across as an intelligent person who understands the nuances in
this case.”
v. The record supports the bankruptcy court’s finding that neither
McNaughton nor TJ 12 was “in the business of loaning money.” Id. McNaughton
testified that neither he nor his entities made any loans secured by real estate in the
four years prior to the transaction.
AFFIRMED.
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