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 18 of 34 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 12
Case 11-03620-bjh Doc 40 Filed 02/21/12 Entered 02/21/12 23:34:41 Desc Main Document Page 19 of 34 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. 13
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Class Plaintiff's Response to Automatic Stay - equitatus

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