In the Matter of Los Angeles Trust Deed & Mortgage Exchange, Bankrupt. Associate Fundings, Inc. v. Stanley A. Phipps, Trustees-Appellees

This action stems from certain freewheeling activities of David Farrell, president and principal shareholder of Los Angeles Trust Deed & Mortgage Exchange (Exchange). In late 1958 and early 1959, Exchange financed several ventures of Edmund Cantillon and Alvin Rabalais, who were in the business of developing real property, mostly in Orange County, California.

Cantillon and Rabalais operated via different legal entities — sometimes as a co-partnership under the name, West-port Development Co. (Westport), sometimes through either of two corporations, Associate. Fundings, Inc. (Associate) or Brentwood Downs, Inc. (Brent-wood). They negotiated an arrangement with Farrell whereby Exchange would loan funds at 10% interest to one or more of the Cantillon-Rabalais legal entities, with trust deeds as security. In addition, Farrell personally was to receive 50% of the net profits on each tract financed by Exchange. During 1958 and 1959, Exchange financed development of seven tracts under this arrangement. In every situation, the secured loan with 10% interest was set forth in one document and the agreement to share profits with Farrell was set forth in another.

On December 18, 1960,…