Class Plaintiff's Response to Automatic Stay - equitatus

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Case 11-03620-bjh Doc 40 Filed 02/21/12 Entered 02/21/12 23:34:41 Desc Main Document Page 10 of 34 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 4
Case 11-03620-bjh Doc 40 Filed 02/21/12 Entered 02/21/12 23:34:41 Desc Main Document Page 11 of 34 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 5
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Class Plaintiff's Response to Automatic Stay - equitatus

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