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 20 of 34 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 14
Case 11-03620-bjh Doc 40 Filed 02/21/12 Entered 02/21/12 23:34:41 Desc Main Document Page 21 of 34 585. 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 ...”). 15
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Class Plaintiff's Response to Automatic Stay - equitatus

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