Class Plaintiff's Response to Automatic Stay - equitatus

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BONNETT, FAIRBOURN, FRIEDMAN &
BALINT, P.C.
William G. Fairbourn (Admitted Pro Hac Vice)
Az. Bar No. 003399
Andrew S. Friedman (Admitted Pro Hac Vice)
Az. Bar No. 005425
Robert J. Spurlock (Admitted Pro Hac Vice)
Az. Bar No. 009857
Wendy J. Harrison
Kathryn A. Honecker
William F. King
2901 N. Central Avenue, Suite 1000
Phoenix, AZ 85012
Telephone: (602) 274-1100
Facsimile: (602) 274-1199
Email: afriedman@bffb.com
MEYERS LAW GROUP, P.C.
Merle C. Meyers, Esq.
(Admitted pro hac vice)
CA Bar # 66849
44 Montgomery Street, Suite 1010
San Francisco, CA 94104
Telephone (415) 362-7500
Facsimile: (415) 362-7515
Email: mmeyers@mlg-pc.com
Attorneys for Defendants Gordon Noble, Arlene Dea Deeley
Fredric C. Mendes, Nancy Rapp, Phillip Cantor, and John Emanuele
[Additional Counsel Appear on Signature Page]
In re
R.E. LOANS, LLC,
R.E. FUTURE, LLC, and
CAPITAL SALVAGE, a California
corporation,
Debtors.
GREENBERG TRAURIG LLP, et
al.,
Plaintiff,
vs.
DWIGHT DIXON COLLINS, et al.,
R.E. LOANS, LLC,
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
Defendants.
Nominal Defendant.
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Chapter 11
Case No. 11-35865-bjh11
Jointly Administered
Adversary Proceeding No. 11-03620-BJH
Date: [To Be Scheduled]
Judge: Honorable Barbara J. Houser
DEFENDANTS GORDON NOBLE,
ARLENE DEA DEELEY, FREDRIC C.
MENDES, NANCY RAPP AND PHILLIP
CANTOR‘S RESPONSE TO AMENDED
MOTION PURSUANT TO SECTIONS 362
AND 105(a) OF THE BANKRUPTCY
CODE AND RULE 7065 OF THE
FEDERAL RULES OF BANKRUPTCY
PROCEDURE FOR AN ORDER
EXTENDING THE AUTOMATIC STAY,
OR, IN THE ALTERNATIVE, FOR THE
ISSUANCE OF AN INJUNCTION
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TABLE OF CONTENTS
INTRODUCTION .....................................................................................................................1
PROCEDURAL BACKGROUND ..............................................................................................2
FACTUAL BACKGROUND .......................................................................................................3
LEGAL ARGUMENT ..................................................................................................................8
I. SECTION 362 DOES NOT APPLY BECAUSE THE CLAIMS
ALLEGED AGAINST GREENBERG IN THE CALIFORNIA CLASS COMPLAINT
BELONG TO CALIFORNIA CLASS PLAINTIFFS, NOT THE ESTATE................. 8
A. Legal Standard ........................................................................................................ 8
B. California Class Plaintiffs Own the Claims in the Consolidated
Complaint Under California Law.......................................................................... 9
PAGE
1. Class Plaintiffs Do Not Allege Legal Malpractice .................................... 11
2. Each of the Claims are Direct and Therefore Belong to
Class Plaintiffs ............................................................................................. 13
a) Class Plaintiffs’ Aiding and Abetting Claims
(Breach of Fiduciary (First Cause) and Fraud Claim
(Fifth Cause)) Are Direct Claims................................................... 13
b) The Securities Fraud Claim (Second Cause) is
an Individual Claim ....................................................................... 15
c) The Common Law Fraud Claims (Third and Fourth
Causes) and the Negligent Misrepresentation Claim
(Seventh Cause) are Direct Claims ................................................ 15
d) The Violation of California’s Unfair Competition Law
(Cause Six) is a Direct Claim....................................................... 16
e) The Claims Relating to MF08 Could Not Possibly Belong
to the RE Loans Bankruptcy Estate..........................................1 6
II.
THERE IS NO LEGITIMATE BASIS FOR ENJOINING THE
CALIFORNIA CLASS LITIGATION UNDER § 362 OR 105 ...................................... 16
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A. Unusual Circumstances Do Not Exist Because the California Class
Litigation Does Not Harm the Debtor’s Ability To Reorganize .....................18
B. An Injunction is Unwarranted Under Section 105 as it Would
Cause Significant Harm to The California Class Litigation and Provide No
Benefit to the Debtor’s Reorganization Efforts................................................21
1. The California Class Litigation Will Not Cause Any Harm
to The Debtor’s Reorganization Efforts[MM1]....................................21
2. California Class Plaintiffs Face Significant Injury from an
Injunction.................................................................................................22
3. No Public Interest Will Be Served By An Injunction. .........................23
III.
NEITHER SECTIONS 362 NOR 105 AUTHORIZE THIS BANKRUPTCY
COURT TO HEAR THE CALIFORNIA CLASS LITIGATION .............................24
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TABLE OF AUTHORITIES
PAGE
CASES
Arnold v. Garlock, Inc.
278 F.3d 426 (5th Cir. 2001)............................................................................................. 17
Avikian v. WTC Financial Corp.
98 Cal. App. 4th. 1108 (2002)........................................................................................... 12
Beran v. World Telemetry, Inc.
747 F. Supp. 2d 719 (S.D. Tex, 2010) .............................................................................. 19
Chord Associates LLC v. Protech 2003-D LLC
No. 07-5138,2010 WL 1257874 (E.D.N.Y. March 25, 2010) .................................... 19, 23
Crain v. Electronic Memories & Magnetics Corp.
50 Cal.App.3d 509 (1975)........................................................................................... 10, 15
Don Hanvey Oil Trust, Inc. v. Unit Texas Drilling, LLC
No. C-10-202, 2011 WL 606264 (S.D. Tex. Feb. 16, 2011) .............................................. 9
Everitt v. Pneumo Abex, LLC
703 F. Supp. 2d 630 (S.D. Miss. 2009)......................................................................... 8, 17
Forcine Concrete & Construction Co. v. Manning Equipment Sales & Service
426 B.R. 520 (E.D. Pa 2010)............................................................................................. 20
In re American Film Tech., Inc.
175 B.R. 847 (Bankr. D. Del. 1994) ................................................................................. 20
In re Bangerter,
106 B.R. 649 (Bankr. C.D. Cal. 1989) ........................................................................ 10, 15
In re Bora Bora Inc.,
42 B.R. 17 (D. Puerto Rico 2010) ..................................................................................... 17
In re Educators Group Health Trust
25 F.3d 1281 (5th Cir. 1994)................................................................................... 9, 10, 16
In re E.F. Hutton Southwest Properties II, Ltd.
103 B.R. 808 (Bankr. N.D. Tex. 1989) ............................................................................... 9
iii

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In re Enron Corp. Sec. Derivative & “ERISA” Litig.
No. MDL–1446, Nos. H-01-3624, G-02-0299, 2007 WL 789141 (Mar. 12, 2007) ........... 9
In re Excel Innovations, Inc.
502 F.3d 1086 (9th Circuit 2007)...................................................................... 8, 17, 19, 21
In re Ionosphere Clubs, Inc.
111 B.R. 423 (Bankr. S.D.N.Y. 1991) .............................................................................. 20
In re Johns-Manville Corp
33 B.R. 254 (Bankr. S.D.N.Y. 1983) ................................................................................ 20
In re Rickel Home Centers, Inc.
199 B.R. 498 (Bankr. D. Del. 1996) ........................................................................... 22, 23
In re Saxby’s Coffee Worldwide, LLC
No. 09-0340, 2009 WL 4730238 (Bankr. E.D. Pa., Dec. 4, 2009) ................................... 17
In re Seatco, Inc.,
257 B.R. 469 (N.D. Tex. 2001)................................................................................... 17, 23
In re Skyport Global Comm., Inc.
Bankruptcy No. 08-36737, Adv. No. 0-03150, 2011 WL 111427
(Bankr. S.D. Tex. Jan. 13, 2011). ....................................................................................... 9
In re Soporex, Inc.
Bankruptcy No. 08-34174-BJH-7, Adversary No. 11-3305-BJH, 2011
WL 5911674 (Bankr. N.D. Tex. Nov. 28, 2011) ................................................................ 9
In re Vitro, S.A.B. de C.V.
455 B.R. 571 (Bankr. N.D. Tex. 2011) ............................................................................. 23
In re Zale Corp
62 F.3d 746 (5th Cir. 1995)......................................................................................... 18, 23
In re Zarnel
619 F.3d 156 (2d Cir. 2010).............................................................................................. 23
Jara v. Suprema Meats, Inc.
121 Cal. App.4th 1238 (1st Dist. 2004) ............................................................................ 10
Jones v. H.F. Ahmanson & Co.
81 Cal. Rptr. 592 (1969).................................................................................................... 15
Lautzenhiser Technologies, LLC v. Sunrise Medical HHG, Inc.
752 F. Supp. 2d 988 (S.D. Ind. 2010) ............................................................................... 22
iv

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MBNA Am. Bank, N.A. v. Hill
436 F.3d 104 (2d Cir. 2006).............................................................................................. 23
Pavicich v. Santucci
85 Cal. App. 4th 382, (2000)............................................................................................. 15
Queenie, Ltd. V. Nygard Int’l
321 F.3d 282 (2d Cir. 2003).............................................................................................. 20
Reliant Energy Servs. v. Enron Canada Corp.
349 F.3d 816 (5th Cir. 2003)............................................................................................. 16
Rice v. Crow
81 Cal. App. 4th 725 (2000).............................................................................................. 19
Seven Seas Petroleum, Inc
522 F.3d 575 (5th Cir. 2008)....................................................................................... 10, 14
Smith v. Tele-Communications, Inc.
134 Cal. App. 3d 338 (1982)............................................................................................. 10
Stanford v. Foamex, L.P.
No. 07-4225, 2009 WL 1033607 (E.D. Pa. 2009) ...................................................... 19, 20
Stern v. Marshall
131 S. Ct. 2594 (2011) ...................................................................................................... 24
Sutter v. Gen. Petroleum Corp.
28 Cal.2d 525 (1946)......................................................................................................... 15
Vega v. Jones, Day, Reavis & Pogue
121 Cal.App.4th 282 (2004).............................................................................................. 15
Wedgeworth v. Fibreboard Corp.
706 F.2d 541 (5th Cir. 1983)............................................................................................. 19
RULES
Federal Rules of Bankruptcy Procedure Rule 7065 ........................................................................ 2
CODES
Tex. Bus. Org. Code........................................................................................................................ 9
28 U.S.C. § 157(c)(1) .................................................................................................................... 24
28 USC § 1334 .............................................................................................................................. 24
28 USC § 1441 .............................................................................................................................. 24
28 U.S.C. § 1452(a)....................................................................................................................... 24
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INTRODUCTION
1. Greenberg Traurig, LLP (“Greenberg”) is not entitled to any of the relief it seeks in this
Adversary Proceeding. Greenberg has no concern for the Debtor or the administration of this
Chapter 11 bankruptcy. Its request for stay protection is nothing but a thinly-veiled and flimsy effort
to avoid, minimize or postpone liability it faces in the California state proceedings for its own
wrongdoing. Greenberg’s motion is completely at odds with the purposes of the Bankruptcy Code,
which exists to protect the Debtor, not Greenberg. The Debtor does not see the need for the so-called
“protection” Greenberg claims is so important, and neither should this Court.
2. Greenberg’s argument that class plaintiffs are asserting claims of the estate is meritless. The
California class plaintiffs unquestionably own the claims they assert in the California class action.
Each claim alleges breaches of duties owed directly to the RE Loans investors, not to RE Loans itself.
Each claim alleges direct and individual harm to the investors, not RE Loans. Because these claims
do not belong to the estate, they are not stayed under § 362(a)(3).
3. Greenberg’s request that the stay be extended to prevent harm to the estate confuses and
ultimately fails to apply the proper standards required to enjoin third party litigation pursuant to §§
362 and 105. A stay is not automatic and may be granted only in unusual circumstances, after a
traditional analysis of the merits of injunctive relief. Greenberg cannot show that any of the
necessary factors are met here. It utterly fails to demonstrate that allowing the California class
litigation to proceed will irreparably harm the reorganization. Its argument to this effect is largely
based on factually-unsupported speculation. Moreover, neither §§ 362 nor 105 could possibly be
utilized to move the state court claims here for resolution.
4. The California class litigation is critical to the RE Loans investors injured by Greenberg’s
illegal conduct. The state law claims allege that Greenberg committed a number of acts, including
common law and securities fraud, that directly and individually harmed investors in RE Loans and
Mortgage Fund ’08 (“MF08”). Greenberg, acting in concert with Wells Fargo Foothill, LLC, (“Wells
Fargo”) stripped the investors of valuable membership rights and compromised the security of their
investments. Many of the investors lost their entire retirement funds, and others lost their life
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savings. The investors will never be made whole. The California class litigation presents the best
chance they have of any meaningful mitigation of their losses caused by Greenberg.
PROCEDURAL BACKGROUND
5. On August 31, 2011, the first class action was filed against RE Loans, its managers/majorityin
interest members, its attorneys (Greenberg), and Wells Fargo, now captioned Noble, et al. v. R.E.
Loans, LLC, et al., case no. RG11593201, and is pending in California Superior Court in Alameda
County (“Noble Class Action”). On November 4, 2011, a second class action entitled Mendes v. B-4
Partners, LLC, et al., case no. RG 11603095, was also filed in the Alameda Superior Court (“Mendes
Class Action”). The California State Court recently granted the plaintiffs in the Noble Class Action
and the Mendes Class Action leave to file a consolidated and amended complaint (“Consolidated
Complaint”), and ordered that the two class actions be consolidated.
6. On January 30, 2012, a third class action was filed, entitled Nolan v. Wells Fargo Capital
Finance and Greenberg Traurig, case no. RG12614850. Plaintiff Nolan has agreed to join in the
Consolidated Complaint. The three consolidated cases are referred to as the “California Class
Litigation,” and the operative complaint for all purposes here is the Consolidated Complaint attached
to the Declaration of Ilana S. Rubel in Support of the Greenberg Parties’ Amended Motion Pursuant
to Sections 362 and 1059(a) of the Bankruptcy Code and Rule 7065 of the Federal Rules of
Bankruptcy Procedure for an Order Extending the Automatic Stay, or, In the Alternative, for the
Issuance of a Preliminary Injunction, filed January 30, 2012 (Doc. No. 29-2, Exhibit B).
7. Each of the plaintiffs in the California Class Litigation (the “California Class Plaintiffs”) was
named as a defendant in adversary proceedings filed by Wells Fargo and Greenberg on November 28,
2011 and November 29, 2011, respectively (A.P. Nos. 11-03618-bjh and 11-03620-bjh, the
“Adversary Proceedings”). 1
On December 21, 2011, the Noble, Mendes and Batroa plaintiffs
stipulated with Wells Fargo and Greenberg that their state court actions would be temporarily stayed
until the issues raised by Wells Fargo and Greenberg in the Adversary Proceedings have been
1 The Adversary Proceedings were filed after the California state court judge stated that the claims in the Noble Amended
Complaint are not pleaded as derivative claims belonging to the bankrupt entities. Order dated November 8, 2011.
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resolved. Plaintiff Nolan has also agreed to abide by the stipulation.
8. On February 1, 2012, the Debtor filed a proposed joint plan of reorganization (the “Plan”),
together with a proposed disclosure statement (the “Disclosure”), in their chapter 11 cases.
FACTUAL BACKGROUND
9. The California Class Plaintiffs represent over 1400 investors in RE Loans and over 600
investors in Mortgage Fund ‘08 (“MF08”). As alleged in the Consolidated Complaint, Greenberg
and Wells Fargo together compromised the rights and interests of investors in RE Loans and MF08
and caused them devastating financial injury. The California Class Litigation claims are the
investors’ only chance to mitigated the losses inflicted on them by Greenberg and Wells Fargo. The
factual allegations supporting the California Class Plaintiffs’ claims in the Consolidated Complaint
are summarized below.
10. RE Loans was a “hard money” lender that used funds from investors to make secured real
estate development loans, returning profits from these loans to the investors. RE Loans investormembers
were given equity membership interests in return for their contributions. As limited
liability company members, they had important contractual control rights. For instance, members
holding a majority of interests could remove the RE Loans managers ("Managers" or "RE Loans
Managers"), vote to dissolve RE Loans, or (with limited exceptions) amend the RE Loans operating
agreement. CC 48. 2
11. RE Loans grew rapidly from its formation in 2002 through 2006. CC 52. By early 2007,
the Managers had raised more than $700 million from approximately 1400 members, and RE Loans
had more than $55 million operating cash on hand. Id. 52, 55. The portfolio loans were
performing well, providing members with an average annualized yield exceeding 8%. Id. RE Loans
members had no reason to doubt that their investments were safe and profitable.
12. In 2007, the RE Loans Managers encountered two major problems. First was the realization
that, from 2002 through 2006, they had violated state and federal securities laws in the sales of RE
2
Citations to the Consolidated Complaint are in the form "CC at __."
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Loans memberships interests, giving the members the right to rescind their investment transactions.
CC 5, 53, 57. In March 2007, the Managers were told to stop selling RE Loans shares because
doing so violated federal and state securities laws. Id. 5, 57. The Managers stopped, but they
never told the members about the securities violations. Id. 7, 8, 57, 59-62.
13. The second problem was an operating cash shortage within RE Loans. From 2002 through
2006, the amount of RE Loans’ operating cash had fluctuated, but was always enough to fund
portfolio loan commitments, pay stated returns to the members and capital withdrawals, and pay the
Managers lucrative fees and commissions. CC 6, 52. But by 2007, the burden of funding loan
commitments to developers and paying distributions to the members had surpassed RE Loans’
fundraising capacity. Id. 6, 58. By mid 2007, RE Loans was almost out of operating cash and had
no way to raise money because it was closed to new investors. Id. 6, 56.
14. The RE Loans Managers knew they owed a fiduciary duty to the members to disclose the past
securities violations, the shortage of operating cash, and the inability to raise capital through new
investment. CC 7, 51, 60. But disclosure ran the risk that the members might lose confidence in
the safety of their investments and demand to be cashed out. Id. 60. Disclosure could also prompt
the members to exercise their rights of control against the Managers, thus ending lucrative financial
benefits from operating RE Loans. Id.
15. The Managers retained Greenberg, who devised a plan to secretly handle RE Loans’ securities
violations so it could resume soliciting investment capital and hopefully remedy the operating cash
shortage. CC 9, 61. Greenberg also helped the Managers hide the cash shortage by bringing in
Wells Fargo to provide a line of credit loan. CC Id. 9-10, 61-63.
16. Wells Fargo was willing to make the loan, but demanded a security interest in virtually all of
RE Loans’ assets, including an assignment of RE Loans' security interests in its portfolio loans. CC
10, 64. The loan agreement also required that RE Loans agree to indemnify and hold Wells Fargo
harmless for claims and liabilities incurred in connection with the loan agreement, except for liability
resulting from gross negligence or willful misconduct. RE Loans badly needed the money, so the
Managers acceded to Wells Fargo’s demands. See Loan and Security Agreement by and between
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R.E. Loans, Inc. and B-4 Partners LLC, as Borrowers and Wells Fargo Foothill, LLC, as Lender
("Loan Agreement") § 11.3 [In re RE Loans, case no. 11-35865, Docket No. 35].
17. There was a problem in that RE Loans’ operating agreement neither authorized borrowing
from institutional lenders like Wells Fargo nor permitted the Managers to assign or pledge RE Loans’
assets as security for third-party borrowings. CC 10, 66. The Managers had repeatedly promised
the members that RE Loans would not raise cash from institutional lenders. Id. 67-68. To
circumvent this problem, Greenberg and Wells Fargo consummated the loan in secret, with approval
from the members to be obtained afterward. Id. 11, 73.
18. A scheme was designed to secretly fix RE Loans’ securities problems, obtain cash to make
RE Loans appear liquid, and ensure that Wells Fargo’s security interest was primary. CC 11-12,
62-91, 96. The plan involved: (1) secretly obtaining the line of credit loan from Wells Fargo; (2)
orchestrating a process to get RE Loans’ members to approve the loan after-the-fact and surrender
their equity interests for promissory notes with security interests subordinate to Wells Fargo’s; and
(3) establishing a mechanism for repaying the loan. Id. The RE Loans members did not know about
this plan. Id. 95, 99-100.
19. A process called an “exchange agreement” was conceived to try to legitimize the Wells Fargo
loan by obtaining the members’ approval, while denying the members adequate information with
which to make a knowledgeable assessment of the risks and detriments of that approval. CC 11,
73-90. The exchange agreement also eliminated the RE Loans members’ equity shares in RE Loans
and replaced them with promissory notes with security interests junior to that held by Wells Fargo.
Id. 11, 74-76, 92, 94. Wells Fargo required the exchange agreement to ensure that its security
interest was primary, and to ensure that the legality of the loan could not be challenged by the
members. Id. 74-76.
20. Greenberg and Wells Fargo knew that the Managers were breaching fiduciary duties owed to
the members by engaging in actions that jeopardized the members’ investments and stripped them of
valuable membership rights. CC 10, 14, 66, 69-72, 77-78. They proceeded anyway. The
Managers and Greenberg embarked on a campaign to convince the members to consent to the
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exchange agreement. Greenberg drafted a number of documents that misrepresented the financial
condition of RE Loans, falsely described the exchange agreement, hid the past securities violations,
and failed to disclose the high risks associated with the exchange notes offered to the members. Id.
11, 77, 79-90. By making these false and inadequate statements to the members, Greenberg not
only aided and abetted the Managers’ breach of fiduciary duties, it knowingly committed securities
and common law fraud. Id. 11, 14, 77, 79-90, 193-249. By requiring the fraudulent exchange
agreement, Wells Fargo aided and abetted the Managers’ breach of fiduciary duties and committed
securities fraud. Id. 14, 72, 74-75, 78, 193-213.
21. The unauthorized line of credit loan and exchange agreement provided RE Loans with some
operating cash. CC 91. The Managers used some of the line of credit money to pay capital
distributions to members, thus perpetuating the illusion that RE Loans was liquid. Id. The money
also enabled the Managers to continue the existence of RE Loans and their financial sinecure. Id.
22. But the Managers breached fiduciary duties owed to the members by carrying out
Greenberg’s and Wells Fargo’s plan. CC 92-95. By entering the loan in secret, the Managers
breached their duty of disclosure to the members. Id. 93. They breached their duty of fair
treatment by unilaterally – and without notice – encumbering the asset base that existed to back the
members’ investments. Id. 10, 11, 66, 73. And they breached both the duty of truthful disclosure
and fair treatment by tricking the members into the exchange agreement through misleading
representations. Id. 11, 73-90.
23. Greenberg’s and Wells Fargo’s plan had a devastating effect on the rights and interests of the
RE Loans members. CC 92-95. The pledging of previously unencumbered assets to Wells Fargo
materially impaired the interests and rights of the members by stripping them of any recourse against
RE Loans’ assets. Id. 93. The exchange agreement turned the members into holders of promissory
notes with security interests inferior to that held by Wells Fargo. Id. 94. By surrendering their
equity ownership interests, the members lost all rights of control in the operation of RE Loans. Id.
94-95. In return, they were given high-risk notes signed by a now-highly leveraged borrower. Id.
The members were not informed of any of the significant perils of those notes, including the notes’
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likely elimination by default and foreclosure under Wells Fargo’s senior lien. Id. 81.
24. In short, through deceit and non-disclosure, Greenberg and Wells Fargo disenfranchised the
members and encumbered the assets upon which their investments were based, while keeping them in
the dark about RE Loans’ continuing liquidity problems and the significant jeopardy of the
replacement notes handed to them.
25. Greenberg’s and Wells Fargo’s scheme wronged those who invested in MF08 as well. From
the beginning, Greenberg’s and Wells Fargo’s plan called for the formation of a new investment
company – MF08 – to solicit investor capital and funnel it to RE Loans to repay the Wells Fargo
Loan and perpetuate the illusion of the company's liquidity. CC 12, 96-97. The Managers
established MF08 immediately after the exchange agreement transaction and represented it to
investors as a profitable investment opportunity similar to RE Loans. Id. 98-100. But from its
formation, the MF08 Managers operated MF08 in a Ponzi scheme arrangement. Id. 12, 101, 104,
106. Funds raised from the MF08 investors were “loaned” to RE Loans to pay its distributions and
other expenses. Id. 104, 107-109. Wells Fargo and Greenberg knew about and assisted the MF08
Ponzi scheme operation. Id. 97, 102, 108-09. The Wells Fargo loan documents contemplated the
creation of MF08. Id. 102, 108-109. Greenberg drafted misleading offering documents to induce
people to invest in MF08. Id. 102.
26. The MF08 Ponzi scheme did not raise enough money to enable RE Loans to repay the Wells
Fargo loan or meet its other obligations. CC 111-12. Within months of the exchange agreement
transaction, RE Loans defaulted on the loan and on its obligations under the promissory notes. Id.
13, 111-12.
27. Greenberg’s and Wells Fargo’s wrongful conduct has inflicted devastating financial harm on
the RE Loans and MF08 investors. CC 15, 114. Many have lost their retirement funds. Id.
Others lost their entire life savings. Id. These people, many of whom are destitute, now find
themselves waiting at or near or at the end of the line of creditors. Being forced to wait through
bankruptcy proceedings while their California Class Litigation claims languish is undoubtedly
prejudicial to the California Class Action Plaintiffs.
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LEGAL ARGUMENT
28. Greenberg argues that the California Class Litigation should be stayed under § 362(a)(3)
because the claims belong to the estate. In addition, Greenberg argues that the California Class
Litigation should be stayed under § 362 because the litigation will harm the debtor’s estate and for
judicial economy purposes. Alternatively, Greenberg argues that an injunction under § 105 is
appropriate because the estate will be adversely affected by the California Class Litigation.
29. Throughout all of its arguments, Greenberg attempts to blur the distinction between the
automatic stay of § 362 and the discretionary extension of the stay through § 105, in the apparent
hope that the confusion will accomplish an outcome that is not envisioned by statute. But as
discussed below, the two remedies are as different as night and day, and neither applies here.
30. The automatic stay of § 362 applies only to causes of action that are owned by the Debtor's
estate, or that are directed at the Debtor’s assets, and while its application requires no weighing of
factors, it is narrow in its scope. Because none of the claims asserted in the California Class
Litigation are owned by the Debtor’s estate, and no claim is made against the Debtors themselves or
their assets, § 362(a)(3) is inapplicable here.
31. The injunctive relief available under § 105, on the other hand, is not automatic and may be
granted only in unusual circumstances, after a traditional analysis of the merits of injunctive relief. A
stay of third party litigation under § 362 requires application of § 105 and the traditional factors
governing the issuance of an injunction. In re Excel Innovations, Inc., 502 F.3d 1086 (9th Cir. 2007)
(§§ 362 and 105 do not provide separate and distinct bases for extending the stay to nondebtor);
Everitt v. Pneumo Abex, LLC, 703 F. Supp. 2d 630 (S.D. Miss. 2009) (the extension of § 362 to
nondebtor does not occur automatically but must proceed through § 105.). Applying those factors
here precludes any injunctive relief affecting the California Class Litigation.
I. SECTION 362 DOES NOT APPLY BECAUSE THE CLAIMS ALLEGED AGAINST
GREENBERG IN THE CALIFORNIA CLASS COMPLAINT BELONG TO
CALIFORNIA CLASS PLAINTIFFS, NOT TO THE ESTATE
A. Legal Standard
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32. A claim belongs to the bankruptcy estate only if the pre-petition debtor owned it under
applicable state law and could have brought it as of the bankruptcy’s commencement. In re
Educators Group Health Trust, 25 F.3d 1281, 1284 (5th Cir. 1994). Thus, if the claims against
Greenberg in the Consolidated Complaint belonged to RE Loans under applicable state law, they
belong to the estate now. 3 The inquiry looks at the nature of the injury for which relief is sought. 4
33. The bankruptcy court applies state law to determine whether claims would have belonged to
the pre-petition debtor. Educators, 25 F.3d at 1284. In determining which state's law to use, the
court applies the choice of law rules of the forum in which it sits. 5
The Texas Business Organizations
Code supplies Texas' choice of law rule. Under this code, "actions involving the internal affairs of a
foreign corporation are governed by the law of the state of incorporation." Skyport Global, 2011 WL
111427, at *15 ("[t]he evaluation of whether a claim is direct or derivative falls into this category of
actions involving the internal affairs of a corporation.") (quoting Tex. Bus. Org. Code 1.102).
Therefore, because the Debtors are California limited liability companies, California law governs the
resolution of that issue.
B. California Class Plaintiffs Own the Claims in the Consolidated Complaint Under
California Law
34. Jones v. H.F. Ahmanson & Co., 81 Cal. Rptr. 592, 598 (1969), provides California's test for
determining whether a cause of action is direct or derivative. Under Jones, a claim belongs to the
corporation “if the gravamen of the complaint is injury to the corporation, or to the whole body of its
stock or property …, or if it seeks to recover assets for the corporation or to prevent the dissipation
of its assets.” Id. By contrast, a personal claim seeks “to enforce a right against the corporation
which the stockholder possesses as an individual.” Id. The Jones standard has remained the
3 See In re Enron Corp. Sec. Derivative & “ERISA” Litig., No. MDL–1446, Nos. H-01-3624, G-02-0299, 2007 WL
789141, at *4 (Mar. 12, 2007) (“Where the corporation is in bankruptcy, a derivative claim is the property of the debtor’s
estate, rather than of the individual plaintiff, and the individual lacks standing to assert the claim.”).
4 In re E.F. Hutton Southwest Prop. II, Ltd., 103 B.R. 808, 812 (Bankr. N.D. Tex. 1989) (noting that the trustee has no
standing to bring personal claims of creditors). In making the determination, the court considers the factual allegations in
the plaintiff’s complaint. Don Hanvey Oil Trust, Inc. v. Unit Texas Drilling, LLC, No. C-10-202, 2011 WL 606264, at *5
(S.D. Tex. Feb. 16, 2011).
5 In re Soporex, Inc., No. 08-34174, Adversary No. 11-3305, 2011 WL 5911674 (Bankr. N.D. Tex. Nov. 28, 2011); In re
Skyport Global Comm., Inc., Bankruptcy No. 08-36737, Adv. No. 0-03150, 2011 WL 111427, at *14-15 (Bankr. S.D.
Tex. Jan. 13, 2011).
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definitive rule in California to this day. 6
35. Jones was a class action in which the minority stockholders sued the corporation’s majority
shareholders for actions that diminished the value of their stock. The California Supreme Court held
that the minority shareholders’ claims were direct. Key to this determination was the fact that the
plaintiff did not “seek to recover for the corporation for injury to the corporation by defendants’
actions.” 81 Cal. Rptr. at 598. 7
36. Jones makes it clear that a class of individuals who were all harmed in the same manner by
the defendants’ wrongful conduct may assert individual claims: “The individual wrong necessary to
support a suit by a shareholder need not be unique to that plaintiff. The same injury may affect a
substantial number of shareholders. If the injury is not incidental to an injury to the corporation, an
individual cause of action exists." 81 Cal. Rptr. at 599. 8
37. Class Plaintiffs’ claims against Greenberg are direct under Jones. Class Plaintiffs allege
seven causes of action against Greenberg based on wrongful conduct that breached duties owed to the
RE Loans members, not to RE Loans itself. The claims are:
First Cause: Aiding and abetting the RE Loans Managers’ breach of fiduciary
duties owed to those Class Plaintiffs who were members of RE Loans (CC 193
- 204);
Second Cause: Secondary liability for securities fraud perpetrated against those
Class Plaintiffs who invested in RE Loans and exchanged their equity ownership
interests for promissory notes in the Exchange Transaction (CC 205 - 213);
Third Cause: Fraud by misrepresentation in connection with the Exchange
Transaction (CC 215-224);
6 See Jara v. Suprema Meats, Inc., 121 Cal. App. 4th 1238, 1253 (2004) (“Jones … offers an authoritative analysis for
distinguishing claims that must be asserted in a derivative action and those that may be asserted in an individual action”);
Smith v. Tele-Communications, Inc., 134 Cal. App.3d 338 (1982) (following Jones, concluding that minority shareholder
had individual claims for fraud and breach of fiduciary duty against majority shareholders); In re Bangerter, 106 B.R.
649, 651-53 (Bankr. C.D. Cal. 1989) (concluding under Jones that minority shareholder had standing to bring individual
fraud-based claim against majority shareholder); Crain v. Elec. Memories & Magnetics Corp., 50 Cal. App. 3d 509, 520-
23 (1975) (following Jones, concluding that class action plaintiffs had direct claims against majority shareholders for
breach of fiduciary duty and constructive fraud).
7 Cf. Educators, 25 F.3d at 1284 (“Conversely, if the cause of action does not explicitly or implicitly allege harm to the
debtor, then the cause of action could not have been asserted by the debtor as of the commencement of the case, and thus
is not property of the estate.”).
8 See also Seven Seas Petro. Inc., 522 F.3d 575, 588 (5th. Cir. 2008) (“We also wish to dispel any notion that a claim
belongs to the estate or is otherwise only assertable by the trustee merely because it could be brought by a number of
creditors, instead of just one.”).
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Fourth Cause: Fraud by concealment and suppression of facts in connection with
the exchange transaction (CC 226 - 241);
Fifth Cause: Aiding and abetting fraud by the RE Loans Managers in connection
with the exchange transaction (CC 243 - 249);
Sixth Cause: Violation of California’s Unfair Competition Law as to Class
Plaintiffs who invested in RE Loans and exchanged their equity ownership
interests for promissory notes in the exchange transaction (CC 250 - 255);
Seventh Cause: Negligent misrepresentation of past and existing facts in
connection with the exchange transaction (CC 257 - 262); and
Eighth – Fourteenth Causes: Claims alleging wrongdoing by Greenberg in
connection with MF08.
1. Class Plaintiffs Do Not Allege Legal Malpractice
38. Greenberg mischaracterizes California Class Plaintiffs’ claims as alleging legal malpractice
perpetrated on an unwitting RE Loans. 9
The Consolidated Complaint provides no support for
Greenberg’s assertion. There are no allegations that Greenberg helped the Managers breach any
duties they owed to RE Loans. Nor are there any allegations stating or suggesting that Greenberg
breached any duties that it owed to RE Loans. All of Greenberg's alleged actions either helped the
Managers breach duties that the Managers owed to the RE Loans members, or breached duties that
Greenberg itself owed the members. The claims based on these actions are personal and belong to
California Class Plaintiffs under California law. Jones, 81 Cal. Rptr. at 598.
39. For instance, the aiding and abetting claims allege that, by helping the Managers hide the past
securities violations, Greenberg assisted them in breaching the duty of truthful disclosure that they
owed to the members. By helping the Managers consummate the Wells Fargo line of credit loan and
carry out the exchange agreement transaction, Greenberg helped them breach the duties of truthful
disclosure, the duty of loyalty and the duty to deal fairly – duties the Managers owed to the members.
Greenberg's conduct with the exchange agreement helped the Managers commit securities and
common law fraud against the members. The common theme with the aiding and abetting claims is
that Greenberg acted in concert with the Managers to engage in conduct that was directed against –
and directly harmed – the members. CC 8, 11, 13, 61, 62, 73, 77, 79-90. The Consolidated
9 Brief in Support of Amended Motion Pursuant to §§ 362 and 105(a) of the Bankruptcy Code and Rule 7065 of the
Federal Rules of Bankruptcy Procedure For an Order Extending the Automatic Stay, or, in the Alternative, For the
Issuance of a Preliminary Injunction (“GT Memo.”) at 12, 13.
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Complaint contains no allegations – express or implied – that Greenberg helped the Managers breach
any duties owed to the company, such as mismanagement or misappropriation of RE Loans’ assets.
See Avikian v. WTC Fin. Corp., 98 Cal. App. 4th. 1108, 1115-16 (2002) (noting that claims of
mismanagement and self-dealing were derivative claims).
40. Similarly, the direct claims, such as common law fraud, negligent misrepresentation and
violation of California's unfair competition law allege that Greenberg itself committed wrongful acts
that breached duties owed to the members, not RE Loans. For instance, the fraud and negligent
misrepresentation claims allege that Greenberg breached duties it owed directly to the members by
making misrepresentations and failing to disclose material facts to induce them to consent to the
exchange agreement transaction. Like the aiding and abetting claims, these causes are based on
actions that directly wronged the members, not RE Loans.
41. All actions, whether by the Managers with Greenberg's assistance or by Greenberg directly,
harmed the members, not RE Loans. The pledging of previously unencumbered RE Loans assets and
the substitution of high-risk subordinated notes for membership interests in a previously unleveraged
RE Loans had a devastating impact on the rights and interests of the California Class Plaintiffs,
essentially stripping them of any recourse to RE Loans’ assets.
42. That California Class Plaintiffs also claim a loss in the value of their investments does not
make their claims derivative under California law. In Jones, the plaintiff and class alleged that the
value of their stock had been diminished. The court, however, drew a critical distinction, noting that
the diminution in the stock value was not because of harm to the company: “Although [the plaintiff]
does allege that the value of her stock has been diminished by defendants’ actions, she does not
contend that the diminished value reflects an injury to the corporation and resultant depreciation in
the value of the stock.” 81 Cal. Rptr. at 598.
43. The same is true here. California Class Plaintiffs allege that the wrongful conduct –
nondisclosure of securities violations, omission of material disclosures, secret financing through
Wells Fargo and the exchange agreement transaction – harmed them directly and individually. The
decision to pledge previously unencumbered assets to Wells Fargo materially impaired the interests
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and rights of the members by stripping them of any recourse to RE Loans’ assets. CC 92. The
exchange agreement “turned the Members into holders of promissory notes with security interests
second to that held by Wells Fargo.” CC 94. Through the exchange agreement, “the Members lost
all rights they had as equity shareholders in RE Loans and were relegated to second-tier creditors
with junior security interests.” Id. Through nondisclosure of important information and unfair
transactions, the managers and Greenberg deprived the members of the right to protect their
investments.
2. Each of the Claims are Direct and Therefore Belong to Class Plaintiffs
a) Class Plaintiffs’ Aiding and Abetting Claims (Breach of Fiduciary
Duty (First Cause) and Fraud Claim (Fifth Cause)) Are Direct
Claims
44. As explained above, the aiding and abetting breach of fiduciary duties and fraud claims
cannot belong to the estate because none of the duties allegedly breached were owed to RE Loans.
The hiding of past securities violations and the secret line of credit loan breached the duty of truthful
disclosure owed by the Managers to the members. The exchange transaction, through which RE
Loans members were induced to surrender their equity interests and approve the unauthorized Wells
Fargo loan, breached the RE Loans Managers' duty of loyalty and duty to refrain from engaging in
unfair transactions, as to those members. Class Plaintiffs allege that, had the RE Loans Managers
disclosed the securities violations and cash shortage in June 2007, the RE Loans members "would
have at least had the option to take steps to save at least some of their initial investments. CC 114.
These types of duties – truthful disclosure and to refrain from engaging in unfair transactions – are
owed by the Managers to the members, but not the company.
45. California Class Plaintiffs own the aiding and abetting fraud claim for the same reasons they
own the aiding and abetting breach of fiduciary duties claim. The fraud-based allegations are that, by
drafting the misleading exchange agreement documents, Greenberg substantially assisted the RE
Loans Managers in directly injuring the members by fraudulently inducing them to consent to the
exchange agreement.
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46. Moreover, RE Loans could not possibly have brought an aiding and abetting fraud claim
against Greenberg as of the commencement of this case because it participated in the alleged
fraudulent conduct. In Seven Seas, bondholders brought a state court action against another creditor,
alleging that the creditor conspired with the debtor (Seven Seas Petroleum) to defraud and that the
creditor aided and abetted the debtor’s fraud. The creditor contended that the fraud-based claims
belonged to the bankruptcy estate. The court disagreed, noting that there were no allegations that the
alleged misconduct injured the debtor. 522 F.3d at 586. The court also noted that, because the debtor
was a participant in the wrongful conduct, it could not have brought the claims as of the
commencement of the bankruptcy. The court explained: “[the debtor] would not have been in a
position to assert the [plaintiff] bondholders’ reliance on any alleged misrepresentations, or to claim
to have suffered damages on account of such reliance....” Id. Beyond its inability to assert the
reliance or damages of RE Loans’ members, RE Loans could not have pled its own reliance based on
the allegations in the Consolidated Complaint because RE Loans itself made misstatements and
omissions on which the aiding and abetting fraud claim is based. RE Loans would thus have been
barred from raising the aiding and abetting fraud claim by the straightforward proposition that a
“participant in a fraud cannot also be a victim…[of that fraud], for he cannot have relied on the truth
of the fraudulent representations….” Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 454 (7th Cir.
1982).
47. As noted above, Greenberg cites to no allegations suggesting that recovery is sought for
mismanagement of RE Loans, misappropriation of RE Loans’ assets or any other breach of duty
owed to RE Loans. California Class Plaintiffs acknowledge that the estate might have claims for
alleged wrongful conduct by Greenberg which directly harmed RE Loans. Courts acknowledge that
the general series of events can give rise to both estate and individual claims. As explained in Seven
Seas, "it is entirely possible for a bankruptcy estate and a creditor to own separate claims against a
third party arising out of the same general series of events and broad course of conduct." 522 F.3d at
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585. 10 But there is no doubt that the aiding and abetting claims allege harm to the RE Loans
members, not RE Loans itself. These claims belong to the California Class Plaintiffs.
b) The Securities Fraud Claim (Second Cause) is an Individual Claim
48. The securities fraud claim cannot be owned by the estate because, like the aiding and abetting
fraud claim, it alleges that Greenberg committed acts that "knowingly and substantially" assisted RE
Loans in committing fraud against the RE Loans members as individuals and resulted in individual
harm. CC 73, 75, 77, 80-89. Greenberg knew that the disclosures it drafted about the exchange
agreement transaction were misleading, and were made with intent to induce the RE Loans Members
to rely on the false representations. CC 212. And, as with common law fraud, RE Loans could not
have sued Greenberg for securities fraud because RE Loans was committing securities fraud itself.
49. California courts have long held that a shareholder who is induced by fraud to act to his
detriment has a direct claim against the wrongdoer because the harm is direct and individual. 11
c) The Common Law Fraud Claims (Third and Fourth Causes) and
the Negligent Misrepresentation Claim (Seventh Cause) are Direct
Claims
50. California Class Plaintiffs undoubtedly own the fraud and negligent misrepresentation claims.
Those claims allege wrongful conduct by Greenberg that breached duties Greenberg itself owed to
the RE Loans members. See Pavicich v. Santucci, 85 Cal. App. 4th 382, 395 (2000) (“For example,
if an attorney commits actual fraud in his dealings with third parties, the fact that he did so in the
capacity of attorney does not relieve him of liability.”) 12
Where, as here, the fraudulent conduct
induces action and results in direct and individual damages, the fraud claim is direct and not
derivative. See Vega, 121 Cal. App. 4th at 297 (claim that defendant deceived plaintiff into
10 See Bangerter, 106 B.R. at 653 (noting that a majority shareholder's wrongful conduct may harm the corporation and at
the same time cause direct injury to the plaintiff); Crain, 50 Cal. App. 3d at 521, (noting that the same set of operative
facts may give rise to both direct and derivative claims).
11 See Sutter v. Gen. Petro. Corp., 28 Cal.2d 525, 530 (1946) (“But ‘if the injury is one to the plaintiff as a stockholder
and to him individually, and not to the corporation, as where the action is based on a contract to which he is a party, or a
right belonging severally to him, or on a fraud affecting him directly, it is an individual action.’”) ( citation omitted); Vega
v. Jones, Day, Reavis & Pogue, 121 Cal. App. 4th 282, 297 (2004) (plaintiff’s claim that defendant deceived him into
exchanging his stock for worthless stock stated a direct claim).
12 See also, Vega, 121 Cal. App. 4th at 291, (“Accordingly, a lawyer communicating on behalf of a client with a nonclient
may not knowingly make a false statement of material fact to the nonclient ...”).
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exchanging his stock for worthless stock stated a direct claim); Educators, 25 F.3d at 1286 (holding
that “the claim that the defendants negligently misrepresented the financial status of… [the bankrupt
party] to the plaintiff[s]…” involved direct injury to the plaintiffs and therefore belonged solely to
them).
51. Moreover, these claims allege that the conduct harmed the members, not RE Loans.
Greenberg's misrepresentations and failures to disclose the truth about the exchange agreement
transaction induced the members to consent to a process that directly harmed their rights and interests
as RE Loans equity owners.
d) The Violation of California’s Unfair Competition Law (Cause Six)
is a Direct Claim
52. Greenberg’s alleged violation of California’s unfair competition law is based on the same
factual allegations of misconduct that support the aiding and abetting claims and the independent
fraud-based claims (securities and common law fraud). CC 252, 253. As explained above, this
alleged conduct establishes that the aiding and abetting claims and independent fraud claims are
individual and belong to California Class Plaintiffs. As such, this claim – which is based on the
same alleged conduct and resulting harm – is also direct and belongs to RE Loans investors, not to
RE Loans itself.
e) The Claims Relating to MF08 Could Not Possibly Belong to the RE
Loans Bankruptcy Estate
53. Causes eight through fourteen in the Consolidated Complaint allege wrongdoing by
Greenberg against those who invested in MF08. Greenberg fails to point out that these causes of
action could not possibly belong to the RE Loans bankruptcy estate because they allege wrongdoing
by Greenberg in connection with MF08.
II.
THERE IS NO LEGITIMATE BASIS FOR ENJOINING THE CALIFORNIA CLASS
LITIGATION UNDER SECTIONS 362 OR 105
54. Greenberg argues that extension of the stay is appropriate because the prosecution of the
California Class Litigation will impact the estate. As a general rule, however, “[s]ection 362 is
rarely… a valid basis on which to stay actions against non-debtors.” Reliant Energy Servs. v. Enron
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Canada Corp., 349 F.3d 816, 825 (5th Cir. 2003) (citing Arnold v. Garlock, Inc., 278 F.3d 426, 436
(5th Cir. 2001)). To enjoin creditors from enforcing their claims against nondebtors in nonbankruptcy
courts is an exception to the general principle that to enjoy the benefits of bankruptcy a
recipient needs to suffer the burdens. In re Bora Bora Inc., 424 B.R. 17, 25 (D. Puerto Rico 2010)
(citing In re Saxby’s Coffee Worldwide, LLC, No. 09-0340, 2009 WL 4730238, at *5 (Bankr. E.D.
Pa,. Dec. 4, 2009)). Accordingly, extending the stay to a nondebtor is appropriate only in “unusual
circumstances” that exist only when the nondebtor and the debtor enjoy such an identity of interests
that suit against the nondebtor is essentially a suit against the debtor or when the third party action
will have an adverse impact on the debtors’ reorganization. In re Zale, 62 F.3d 746, 761 (5th. Cir.
1995); In re Seatco, Inc., 257 B.R. 469, 476-77 (N.D. Tex. 2001) (Houser, J.).
55. Even if unusual circumstances exist, a stay is not automatically extended to nondebtors, but
must proceed through an injunction under § 105. Everitt, 703 F. Supp. 2d at 638. The court in Excel
Innovations explained that the lower court erred in treating the unusual circumstances doctrine and
the usual preliminary injunction standard as separate and distinct bases for affirming the stay. 502
F.3d at 1096. The unusual circumstances doctrine does not negate the need to satisfy the traditional
preliminary injunction standard – it invokes that standard. Id. Pursuant to § 105, the court must
apply the traditional factors governing the issuance of a temporary injunction to the bankruptcy
context. Seatco, 257 B.R. at 477. In doing so, courts must examine whether the debtor has a
reasonable likelihood of a successful reorganization, whether the third party litigation would
endanger that reorganization, the relative hardship of the parties, and any public interest concerns, if
relevant. Excel Innovations, 502 F.3d at 1096 (it is error to treat the unusual circumstances doctrine
and the usual preliminary injunction standard as separate and distinct bases for affirming the stay);
Zale, 62 F.3d at 761.
56. Greenberg’s application of these legal requirements to the California Class Litigation fails on
every possible level. Greenberg completely ignores applicable case law regarding §§ 362 and 105. 13
13 Greenberg periodically references cases discussing “related to” jurisdiction, which is not relevant at all in determining
whether the court should grant a preliminary injunction of the California Class Litigation. A court must initially evaluate
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Most importantly, Greenberg cannot show that unusual circumstances exist. Greenberg fails to focus
on the key inquiry—whether this third party litigation will impact the Debtor’s ability to reorganize.
And, Greenberg never explains how the California Class Litigation will prevent the Debtor from a
successful reorganization.
57. Notably, if the California Class Litigation impaired the Debtor’s reorganization efforts,
presumably the Debtor itself would have participated in these Adversary Proceedings or initiated its
own stay litigation, as is most typical with these kinds of proceedings. Instead, the Debtor is
conspicuously absent from this dispute and has filed the Plan and Disclosure. Clearly, the Debtor is
moving forward toward confirmation, unimpeded by the pendency of the California Class Litigation,
belying Greenberg’s core (and essential) argument as to prejudice to the Debtor's reorganization
efforts.
58. Greenberg’s feigned interest in protecting the estate's claims (against Greenberg) is obviously
disingenuous and superficial. Greenberg is attempting to manipulate RE Loans’ bankruptcy status
solely for its own benefit to delay or to avoid the California Class Litigation altogether. Such
maneuvering by a non-debtor is not supported by the Bankruptcy Code.
A. Unusual Circumstances Do Not Exist Because the California Class
Litigation Does Not Harm the Debtor’s Ability To Reorganize
59. Greenberg fails to demonstrate that unusual circumstances exist here. Greenberg does not
assert that there is an identity of interest between itself and the Debtor and never tries to explain how
the California Class Litigation will have an adverse impact on the Debtor's ability to reorganize.
Rather, Greenberg simply claims that the Debtor's estate will be impacted generally by the California
Class Litigation because of the inconvenience of participating in discovery and the potential for
duplication or prejudice in different proceedings. GT Memo. at 14-16. Greenberg fails to articulate
whether it has subject matter jurisdiction (a much easier standard than obtaining an injunction under § 105) before it even
considers whether it should extend the stay under §105. Zale, 62 F.3d at 761 (a bankruptcy court must first determine if it
has jurisdiction to issue an injunction, and if so, then it must decide if it is appropriate to exercise its power under § 105).
Class Plaintiffs do not dispute this Court’s limited jurisdiction to decide whether to enjoin the California Class Litigation
under §§ 362 or 105 in this adversary proceeding. Class Plaintiffs do dispute whether unusual circumstances exist, and
whether the factors supporting an injunction under § 105 are present. As discussed below, they also dispute this Court’s
jurisdiction to hear the California Class Litigation directly, or as a basis for removal.
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how even a temporary delay in the California Class Litigation will resolve those issues or otherwise
benefit the reorganization process. 14
60. Sooner or later, the California Class Litigation must go forward, whether it is “inconvenient”
or not. There is no showing that going forward now, rather than later, is any more or less problematic
for the Debtor, particularly as it is evident that it has not slowed the Debtor’s plan confirmation
process. Even if injunctive relief were appropriate here, it would only be temporary, not permanent,
so the California Class Litigation would proceed eventually anyway. Better that it does so now.
61. Greenberg’s primary argument is that the California Class Litigation might somehow impair
the estate’s potential claims against Greenberg itself. GT Memo. at 12-13. This disingenuous
position demonstrates the weakness of Greenberg’s entire justification for an injunction. Collateral
estoppel of the estate’s claims against Greenberg is not a valid concern here. Because RE Loans is
not a party to the California Class Litigation, doctrines of collateral estoppel and issue preclusion do
not apply. See Rice v. Crow, 81 Cal. App. 4th 725, 734-35 (2000) (because collateral estoppel/issue
preclusion is an aspect of res judicata, it only applies to bar relitigation of the same issues between
the same parties or their privies).
62. Moreover, most courts have refused to find unusual circumstances because of the ordinary
burden of discovery or collateral estoppel concerns, even when the potential impact on the debtor has
been more significant than exists here. See Excel Innovations, 502 F.3d at 1086 (refusing to extend a
stay to nondebtor defendants because of collateral estoppel concerns or because debtor might be
compelled to spend money participating in litigation); Stanford v. Foamex, No. 07-4225, 2009 WL
1033607, at *2 n.9 (E.D. Pa. 2009) (refusing to extend stay merely because the non-bankrupt parties
are in a similar legal or factual nexus with the debtor). 15
14 See Wedgeworth v. Fibreboard Corp., 706 F.2d 541, 546 (5th Cir. 1983) (“Defendants have not shown that any
hardship complained of is the result of proceeding to trial now. Nor is there a showing that the difficulties inherent in the
general situation, including potential judicial inefficiency, constitute a sufficient offset to the plaintiffs’ right to proceed
without inordinate delay to resolution of their claims.”).
15 See also Beran v. World Telemetry, 747 F. Supp. 2d 719, 723-725 (potential application of collateral estoppel does not
warrant injunction absent identity of interests of the debtor and nondebtor); Chord Assoc. LLC v. Protech 2003-D LLC,
No. 07-5138, 2010 WL 1257874, at *13 (E.D.N.Y. March 25, 2010) (rejecting extension of stay based on conclusory
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63. The court in Stanford explained that collateral estoppel issues arise only in cases where a
debtor’s indemnification obligations are absolute. 2009 WL 1033607, at *3 n.10. The court cited
Queenie, Ltd. v. Nygard Int’l, 321 F.3d 282, 287 (2d Cir. 2003), where the Second Circuit explained
that if the possibility of a “later use against the debtor…of an adverse decision” “could support
application of the stay, there would be vast and unwarranted interference with creditors’ enforcement
of their rights against non-debtor co-defendants,” and noted that it had found no decisions applying a
stay to a non-debtor solely on collateral estoppel grounds.
64. In the limited number of cases where courts have enjoined non-debtor litigation, the
circumstances have been radically different. 16
Typically, the stayed third party litigation has named
the debtor’s management as defendants, where liability against an employee could be automatically
imputed to the debtor, and/or the burden of discovery would be overwhelming to management,
distracting it from its focus on reorganization. 17
65. In this case, liability of Greenberg cannot be imputed to the Debtor. Nor can a finding in
Greenberg’s favor in the California Class Litigation be used against the Debtor. The burden imposed
on the Debtor's indirectly participating in a few cases in California state court is a far cry from mass
tort context or suits against management of the debtor. Greenberg is not involved in the
reorganization and the current management of RE Loans are not defendants in the litigation. Nor will
they likely be significantly involved in the litigation. While the former management will certainly be
witnesses in the California Class Litigation, those individuals are no longer involved in the Debtor’s
management, and are not at all involved in the Debtor’s confirmation process.
statements regarding evidentiary prejudice); Forcine Concrete & Constr. Co. v. Manning Equip. Sales & Serv., 426 B.R.
520, 525 (E.D. Pa 2010) (unusual circumstances do not exist even assuming arguendo that debtor could be collaterally
estopped from relitigating any issue decided in prior proceedings).
16 See, e.g., In re Johns-Manville Corp., 33 B.R. 254 (Bankr. S.D.N.Y. 1983) and 40 B.R. 219 (Bankr. S.D.N.Y. 1984)
(mass tort, involving a “litigation explosion” of thousands of asbestos personal injury claims, could overwhelm the
debtor’s management's ability to focus on the reorganization efforts).
17 Greenberg relies on these types of cases. See, e.g., In re American Film Tech., Inc., 175 B.R. 847, 855 (Bankr. D. Del.
1994) (liability of employees could be imputed to the employer debtor as a result of litigation); In re Ionosphere Clubs,
Inc., 111 B.R. 423, 435 (Bankr. S.D.N.Y. 1991) (enjoining action against the chairman of the board of debtor whose
liability would be imputed to the corporation).
20

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B. An Injunction is Unwarranted Under Section 105 as it Would Cause
Significant Harm to The California Class Litigation and Provide No
Benefit to the Debtor’s Reorganization Efforts
66. In applying the traditional factors governing the issuance of temporary injunctions to the
bankruptcy context, courts must look at whether the debtor has a reasonable likelihood of a
successful reorganization, whether the litigation would endanger the debtor’s possibility of
reorganization, the relative hardship of the parties, and any public interest concerns, if relevant. Zale,
62 F.3d at 761. Moreover, the injury cannot be speculative. Excel Innovations, 502 F.3d at 1097.
Greenberg does not meet these requirements.
1. The California Class Litigation Will Not Cause Any Harm to The
Debtor’s Reorganization Efforts.
67. Greenberg must demonstrate that the California Class Litigation has a substantial likelihood
of irreparably harming the Debtor’s ability to successfully reorganize by a clear and convincing
standard. Even assuming that a successful reorganization by the Debtor is likely, 18 Greenberg cannot
explain how the California Class Litigation will prevent the Debtor from proceeding with its
reorganization or how a delay in the California Class Litigation will benefit the reorganization
process. Greenberg, nevertheless, summarily concludes that the estate’s claims and the California
Class Plaintiffs' claims are so intertwined that the reorganization cannot proceed. GT Memo. at 17-
18 & 22 n.5. This makes no sense on a legal or factual basis.
68. The estate can easily prosecute its claims separately from the California Class Litigation, if it
decides to do so. 19
Greenberg fails to offer anything other than mere speculation that the California
Class Litigation may cause the debtor to incur some additional time and costs. Excel Innovations,
502 F.3d at 1097 (refusing to extend a stay to nondebtor defendants due to collateral estoppel
concerns or because debtor may be compelled to spend money participating in litigation).
69. Greenberg asserts that it may have a potential contribution claim against the estate, but never
18 Greenberg provides no evidence in support of this factor. Excel Innovations, 502 F.3d at 1097 (“Although it is not a
high burden to show a reasonable likelihood of success in reorganization, the BAP’s conclusion that [the debtor] had so
amounted to an abuse of discretion because ‘the record contains no evidence on which the BAP rationally could have
based that decision.”).
19 Greenberg has no evidence that the estate is even going to pursue claims or that any claims will be filed in this court.
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explains how such a claim would impair the reorganization plan. Courts generally have not enjoined
third party litigation because of potential contribution claims. See, e.g,. In re Rickel Home Centers,
Inc., 199 BR. 498, 501 (Bankr. D. Del. 1996) (injunction not warranted merely because of potential
indemnification and contribution claims would impact the reorganization). Moreover, as discussed
above, no legitimate collateral estoppel concerns exist here. Greenberg simply has not offered any
facts sufficient for a finding of irreparable harm to the Debtor’s ability to reorganize because of the
California Class Litigation.
2. California Class Plaintiffs Face Significant Injury from an
Injunction.
70. Not only has Greenberg failed to show an injunction will assist the Debtor in a successful
reorganization, it also ignores the significant injury to the California Class Plaintiffs and the putative
class. By the time these stay motions are heard by this Court, the California Class Litigation will
have been delayed by more than four months.
71. Further delay will cause significant harm to the putative class, which is made up of many
elderly individuals who have lost their entire retirement savings. These people primarily reside in
California and should have their day in court in California as soon as possible. Many of the events in
question in the California Class Litigation took place over five years ago. Even if youth were on their
side, fading memories are always a concern. Here, many of the parties and witnesses involved in this
case are elderly individuals. 20
72. The passage of time will only increase the possibility of lost documents and unreliable
memories. 21
It would be unjust to force the California Class Plaintiffs and their proposed class of
elderly victims to continue to struggle financially waiting for their day in court against Wells Fargo
and Greenberg for however many years it takes to sort out RE Loans’ reorganization.
20 For example, Walter Ng, the head of RE Loans and a primary witness in California Class Plaintiffs' case against
Greenberg, is now in his 80s.
21 Lautzenhiser Tech., LLC v. Sunrise Med. HHG, Inc., 752 F. Supp. 2d 988, 999 (S.D. Ind. 2010) (“Evidentiary prejudice
exists if a party is unable to present a case on the merits due to a loss of witnesses, records, or faded or unreliable
memories of long past events, thus ‘undermining the court’s ability to judge the facts.’”); Rickel Home Centers, 199 B.R.
at 501 (“A stay ... will undoubtedly harm the plaintiff. There has already been a six month delay…. [and] the passage of
time will increase the possibility of faded memories or lost documents.”).
22

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73. Greenberg claims that the California Class Plaintiffs' interests are well represented in the
Debtor's chapter 11 cases because they also are creditors in those cases. But like the balance of
Greenberg’s arguments, this makes no sense. As explained above, the claims asserted in the
California Class Litigation belong to the RE Loans investors, not to RE Loans itself. As such, those
claims are neither represented nor available for prosecution in the Debtors’ chapter 11 cases – just as
the California Class Plaintiffs cannot pursue derivative claims, the Debtor cannot pursue direct
claims. Therefore, the California Class Litigation claims are not “well represented” in the chapter 11
cases, they are not represented at all.
3. No Public Interest Will Be Served By An Injunction.
74. Finally, there is no public interest served here as the injunction unnecessary to protect the
debtor’s ability to reorganize. In fact, it would be a great disservice to the purposes of the
Bankruptcy Code, to allow a nondebtor defendant to avoid litigation in this manner. 22
This
Adversary Proceeding is an attempt by Greenberg to avoid litigation altogether and has absolutely
nothing to do with the Debtor's reorganization. Indeed, at times, Greenberg seems to be requesting
that the California Class Litigation be permanently, rather than temporarily, enjoined – clearly an
unavailable outcome. 23
22 See, e.g., In re Vitro, S.A.B. de C.V., 455 B.R. 571, 581 (Bankr. N.D. Tex. 2011) (denying non-debtor's request for
injunction, reasoning that "[t]he granting of injunction [under § 105] will disserve the public interest. Extending the
automatic stay or issuing an injunction for non-debtors contravenes a basic and compelling principle of federal
bankruptcy law. Like the rest of the Code, Chapter 15 focuses on protecting the debtors, non the non-debtor ..."); see also
In re Zarnel, 619 F.3d 156, 171 (2d Cir. 2010) ("The automatic stay serves a number of purposes: 'providing debtors with
a fresh start, protecting the assets of the estate, and allowing the bankruptcy court to centralize disputes concerning the
estate.'") (quoting MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 109 (2d Cir. 2006)) (emphasis added).
23 Even in situations where courts have extended stays to nondebtors, the injunctions have been quite limited in time and
scope. For example, In Rickel Home Centers, a case referenced by Greenberg, the debtor sought injunctive relief of a
securities class action against its employees. The court rejected the debtor’s arguments that potential indemnification and
contribution claims would impact the reorganization. 199 B.R. at 501 The court, however, found that discovery would
interfere with the management’s need to work on the reorganization in the coming months. Id. As a result, the court
allowed the class action litigation to proceed in resolving the motion to dismiss and only the debtor was limited in its
participation in discovery and only for a short amount of time. Id. at 501-02. See also Seatco, 257 B.R. at 476 (temporary
injunction of third party litigation against a guarantor of the debtor expired upon an uncured default of debtor to plaintiff);
Zale, 62 F.3d at 761 (temporary stay may not be extended post-confirmation to form permanent injunction extinguishing
nondebtor’s liability); Chord, 2010 WL 1257874, at *13 (finding stay that was indefinite or conditioned upon conclusion
of reorganization proceeds inappropriate; instead, extending stay six weeks to give the debtors “breathing room” for
management to focus on reorganization process).
23

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III.
NEITHER SECTIONS 362 NOR 105 AUTHORIZE THIS BANKRUPTCY COURT TO
HEAR THE CALIFORNIA CLASS LITIGATION
75. Citing to irrelevant “related to” jurisdiction case law, Greenberg asserts the Court should
actually take over and hear the California Class Litigation. Greenberg argues that it would be more
efficient if the direct claims involved in the California Litigation and the estate claims be heard
together in the Bankruptcy Court. GT Memo. at 18. As discussed above, third-party litigation
should be enjoined only when unusual circumstances exist and traditional factors support an
injunction, none of which is the case here.
76. Greenberg fails to identify any legal authority that would allow this Court to take jurisdiction
of the California Class Litigation and thereby take control of the claims of non-debtors (California
Class Plaintiffs) against other non-debtors (Wells Fargo and Greenberg). Such a request is
completely inconsistent with bankruptcy jurisdiction, the use of adversary proceedings and the
purpose of §§ 362 and 105 of the Bankruptcy Code. Adversary proceedings cannot be used to move
third-party litigation from a state court to bankruptcy court.
77. Moreover, Greenberg’s stay motion is not the proper procedure for requesting a transfer of
litigation from state court to bankruptcy court. The correct procedure is through the removal process
set forth in 28 USC §§ 1441 and 1452, and then, only if the district court otherwise has bankruptcy
“related to” jurisdiction under 28 USC § 1334, which plaintiffs dispute. Merely filing a motion in an
adversary proceeding in this Bankruptcy Court is not an appropriate substitute for that process, and
must therefore be rejected regardless of its merits.
78. Even if the case were properly removed to the Northern District of California and not
remanded, and then referred and transferred from California to this Bankruptcy Court, the Court
could not render a final decision in the matter in any event, pursuant to 28 U.S.C. § 157(c)(1). See
also Stern v. Marshall, 131 S. Ct. 2594, 2611 (2011) (finding bankruptcy court's adjudication of
debtor's state law counterclaims against creditor unconstitutional as outside the authority given the
bankruptcy court under Article III). As such, it would make no practical or economic sense at all for
this Court to take over the state court case, even if formidable impediments to transfer in the removal
24

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and remand process did not already prevent transfer.
79. Lastly, it is ridiculous for Greenberg to claim that it would be most economical for the
California Class Litigation to be heard in Texas. As described in the California Class Plaintiffs'
motions to transfer venue, 24 in the California Class Litigation, all of the parties, all of the witnesses,
all of the evidence and the substantive law hail from California. In addition, the bankruptcy
proceedings of MF08 and all the Managers are pending in the Oakland Bankruptcy Court.
CONCLUSION
For these reasons, Greenberg’s Motion should be denied.
Dated this 21st day of February 2012.
BONNETT, FAIRBOURN, FRIEDMAN &
BALINT, P.C.
By s/Andrew S. Friedman
William G. Fairbourn (Admitted Pro Hac Vice)
Andrew S. Friedman (Admitted Pro Hac Vice)
Robert J. Spurlock (Admitted Pro Hac Vice)
Wendy J. Harrison
Kathryn A. Honecker
William F. King
2901 N. Central Avenue, Suite 1000
Phoenix, AZ 85012
Telephone: (602) 274-1100
Facsimile: (602) 274-1199
Email: afriedman@bffb.com
MEYERS LAW GROUP, P.C.
Merle C. Meyers, Esq.
CA Bar # 66849 (Admitted pro hac vice)
44 Montgomery Street, Suite 1010
San Francisco, CA 94104
Telephone (415) 362-7500
Facsimile: (415) 362-7515
Email: mmeyers@mlg-pc.com
24
See California Class Plaintffs’ Motion to Transfer, filed on February 3, 2012 in Case No 11-35865-BJH and
Defendants’ Motion To Transfer Venue of Adversary Proceeding filed on February, 2012 in Adversary Proceeding No.
11-03618-BJH.
25

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GLAST, PHILLIPS & MURRAY, P.C.
Mike Dodge, Esq. TX Bar # 05937000
14801 Quorum Drive, Suite 500
Dallas, TX 75254-1449
Telephone: (972) 419-7172
Facsimile: (972) 419-8329
Email: mdodge@gmp-law.com
CHAVEZ & GERTLER LLP
Mark A. Chavez (CA Bar No. 90858)
Nance F. Becker (CA Bar No. 99292)
42 Miller Ave.
Mill Valley, CA 94941
Telephone: (415) 381-5599
Facsimile: (415) 381-5572
Email: mark@chavezgertler.com
AIMAN-SMITH & MARCY
Randall B. Aiman-Smith (Ca Bar No. 124599(
Carey A. James (CA Bar No. 269270
7677 Oakport Street, Suite 1020
Oakland, CA 94621
Telephone: (510) 562-6800
Facsimile: (510) 562-6830
Email: caj1.asm@gmail.com
LAW OFFICE RICHARD E. BROWN
Richard E. Brown (CA Bar No. 104253)
PO Box 1420
Alamo, CA 94596
Telephone: (925) 295-0700
Facsimile: (925) 952-4339
rebrownlaw@aol.com
Attorneys for Defendants
Gordon Noble, Arlene Dea Deeley Fredric C.
Mendes, Nancy Rapp, Phillip Cantor, and John
Emanuele
26

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CERTIFICATE OF SERVICE
I hereby certify that on February 21, 2012, I electronically filed the foregoing with the Clerk
of the Court using the CM/ECF system which will send notification of such filing to the e-mail
addresses denoted on the Electronic mail notice list, and I hereby certify that I have mailed the
foregoing document via the United States Postal Service to the non-CM/ECF participants indicated
on the Manual Notice List.
I certify under penalty of perjury under the laws of the United States of America that the
foregoing is true and correct. Executed on February 21, 2012.
By: s/Andrew S. Friedman
Andrew S. Friedman
BONNETT, FAIRBOURN, FRIEDMAN
& BALINT, P.C.
2901 N. Central Avenue, Suite 1000
Phoenix, AZ 85012
Tel: (602) 274-1100
Fax: (602) 274-1199
27

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[MM1]Isn’t this section a repeat or rephrasing of Section A? perhaps the two sections should be collapsed
into one?