Wells Fargo Capital Fin., LLC v. Noble (In re R.E. Loans LLC)

519 B.R. 499

In re R.E. LOANS LLC, R.E. Future, LLC, and Capital Salvage, a California Corporation, Debtors.

Wells Fargo Capital Finance, LLC, Plaintiff

v.Gordon Noble, Arlene Dea Deeley, Fredric C. Mendes, Nancy Rapp, Phillip Cantor, John Emanuele, and David Nolan, Defendants.

Bankruptcy No. 11–35865–bjh–11.

Adversary No. 13–3157–bjh.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Signed Feb. 5, 2014.

David I. Monteiro, David Weitman, K & L Gates LLP, Dallas, TX, for Plaintiff.

Stephen R. Basser, Barrack Rodos & Bacine, San Diego, CA, Richard Edmiston Brown, Law Office of Richard E. Brown, Alamo, CA, Mark A. Chavez, Chavez & Gertler LLP, Mill Valley, CA, Michael Clayton Dodge, Glast, Phillips & Murray, P.C., Dallas, TX, Andrew S. Friedman, Bonnett Fairbourn Friedman & Balint, PC, Francis J. Balint, Jr., Phoenix, AZ, Carey A. James, Aiman–Smith & Marcy, Oakland, CA, Merle C. Meyers, Meyers Law Group, P.C., San Francisco, CA, for Defendants.

MEMORANDUM OPINION

BARBARA J. HOUSER, Bankruptcy Judge.

Before the Court is Wells Fargo Capital Finance, LLC's (“Wells Fargo ”) Motion for Judgment on the Pleadings (the “Motion ”) [Dkt. No. 13]. By the Motion, Wells Fargo seeks to enjoin Defendants Gordon Noble, Arlene Dea Deeley, Fredric C. Mendes, Nancy Rapp, Phillip Cantor, John Emanuele, and David Nolan (collectively, the “REL Class Plaintiffs ”) from

(1) pursuing, obtaining, enforcing, or collecting any judgment against Wells Fargo based on any measure of relief sought in the Third Amended Complaint other than the difference in value, as of November 2007, between the junior secured notes that the REL Class Plaintiffs received as a result of the Exchange Offering and the consideration that REL Class Plaintiffs gave for those junior secured notes in connection with the Exchange Offering; (2) continuing to prosecute any claims or causes of action asserted in the Third Amended Complaint that depend on assertions of implicit or explicit harm suffered by REL after the Exchange Offering and for which REL could have brought a claim as of the date REL filed its petition for bankruptcy protection; and (3) recovering against Wells Fargo for, or enforcing or collecting under any judgment purporting to award recovery for, harm implicitly or explicitly suffered by REL after the Exchange Offering and for which REL could have brought a claim.¹

Motion at 2–3. Wells Fargo contends that the recovery of these damages by the REL Class Plaintiffs would conflict with the terms of the confirmed plan of reorganization for R.E. Loans, LLC (“REL ”), which released Wells Fargo from any claims that REL owned against it.

Not surprisingly, the REL Class Plaintiffs oppose the Motion, contending that the claims pled in the Third Consolidated and Amended Complaint (the “TAC ”) filed in the Superior Court of California, County of Alameda (the “California Class Action ”) against, as relevant here, Wells Fargo, are direct claims which they own and are entitled to assert against Wells Fargo notwithstanding the REL plan's release of REL's claims against Wells Fargo. In short, this Court has been asked to decide if “the allegations and causes of action in the [TAC] constitute property of the estate of [REL].” Stipulation Regarding Filing of Third Consolidated and Amended Complaint ¶ 4.c. [First AP Dkt.² No. 83–1].

The Motion was heard on January 22, 2014. This Memorandum Opinion contains the Court's conclusions of law with respect to the Motion.

I. FACTUAL AND PROCEDURAL BACKGROUND

This adversary proceeding has a somewhat complicated factual and procedural history. To put the fundamental legal dispute raised by the Motion into context, the Court will start with certain background facts.³

REL was formed in 2002 to make real estate loans to developers in California. REL funded these loans through monies obtained from investors, including the REL Class Plaintiffs. Investors in REL became members of that limited liability company in return for their investments.

REL apparently prospered for a few years. In fact, by the end of 2006, REL had raised nearly $700 million from more than 1,400 investors/members.

According to the REL Class Plaintiffs, REL's ability to raise investor capital “screeched to a halt in the spring of 2007 when, unbeknownst to the Members, [REL] was told it had been raising the funds from investors in violation of the California and federal securities statutes for many years.” TAC ¶ 7. “With no ability to continue raising new money from investors, [REL] faced a cash liquidity crisis....” Id. ¶ 9. “Rather than disclose the problems to the Members,” REL is alleged to have turned to another law firm, Greenberg Traurig, LLP, (“Greenberg ”) for “a solution to their securities violations and cash liquidity problems.” Id. ¶ 11. Greenberg “masterminded an ‘exchange offering’ designed to transform the Members from equity members in [REL] into noteholders.” Id. ¶ 11. Then, according to the REL Class Plaintiffs, “Greenberg and the [REL] Managers prepared and disseminated false and misleading offering documents for the exchange transaction that misrepresented [REL's] financial condition, misrepresented and omitted material facts concerning [REL's] securities violations and misrepresented the nature of the exchange offering and its ramifications for the Members.” Id.

According to the REL Class Plaintiffs, “[i]n furtherance of the scheme, Greenberg also masterminded the formation of [Mortgage Fund '08, LLC (‘MF08 ’) ] as a feeder fund to raise and funnel new investor funds to [REL], since [REL] was itself prohibited from raising new investor funds without disclosing its past securities violations.” Id. ¶ 12. But, the “scheme required an immediate infusion of cash ... to maintain the false appearance of [REL's] financial stability while the exchange offering was conducted....” Id. ¶ 13. “In furtherance of the scheme,” Greenberg is alleged to have brought in Wells Fargo “to provide the third-party financing necessary to give [REL] the appearance of financial stability long enough for the [REL] Managers to consummate the exchange offering and establish MF08 as a secret funding source for [REL].” Id. Wells Fargo is alleged to have known about REL's securities violations and precarious financial condition, and that Greenberg had devised the exchange offering as a means to “sanitize the securities violations.” Id. Wells Fargo is alleged to have knowingly participated in the fraudulent scheme, “materially assisting [REL's] continuing securities violations....” Id.

According to the REL Class Plaintiffs, “[t]he exchange transaction and the related MF08 offering allowed the [REL] Managers to sustain the fraud for a prolonged period of time, but—as in all Ponzi schemes—collapse was inevitable.” Id. ¶ 15. It is undisputed that REL defaulted on the Wells Fargo line of credit loan in September of 2008, and then defaulted on the promissory notes issued to its former members in the exchange offering. MF08 also defaulted on its obligations to its noteholders. Thereafter, REL, MF08, and certain of their managers and affiliates filed for bankruptcy protection in Texas (REL) and California (everyone else). REL's Chapter 11 petition was filed in this Court on September 13, 2011.

The financial collapse of REL and MF08 prompted regulatory and criminal investigations of those companies and their respective managers. Specifically, on February 28, 2013, the Securities Exchange Commission brought a civil enforcement action against various managers of REL and MF08 in the United States District Court for the Northern District of California, which the SEC characterizes as a “multi-million dollar securities fraud perpetrated on investors.” Complaint at 1, SEC v. Ng, No. 13–0895 (N.D.Ca. Feb. 28, 2013), ECF No. 1.

After numerous twists and turns in its Chapter 11 case here, REL ultimately succeeded in confirming a consensual Chapter 11 plan of reorganization. Specifically, on June 26, 2012, this Court entered its Findings of Fact, Conclusions of Law, and Order Confirming Debtors' Modified Fourth Amended Joint⁴ Chapter 11 Plan of Reorganization, Dated June 1, 2012 (the “Confirmation Order ”) [Bankr.Dkt.⁵ No. 967]. Under the terms of the Modified Fourth Amended Chapter 11 Plan of Reorganization of R.E. Loans, LLC, R.E. Future, LLC, and Capital Salvage, a California corporation (the “Plan ”) [Bankr.Dkt. No. 905], Wells Fargo received the “Wells Fargo Release, ” as that term was defined in Article II, § 2.1 of the Plan. The Wells Fargo Release is a broad release of, in summary, any and all claims that “the Debtors, their Estates, the Reorganized Debtors, and any Person seeking to exercise the rights of the Debtors,” held against Wells Fargo “based in whole or in part on any act, omission, transaction, event or other occurrence taking place on or prior to the Effective Date, relating in any way to the Debtors, the Reorganized Debtors, the Debtors' Estates, the Cases, or the Plan....” Plan at 18.

With these general background facts in mind, the Court will turn to facts (procedural and otherwise) relevant to the litigation between the REL Class Plaintiffs and Wells Fargo. Specifically, in September 2011, the REL Class Plaintiffs filed the California Class Action against various parties, including Well Fargo, arising out of their investment with REL. On November 28, 2011, Wells Fargo initiated an adversary proceeding (the “First AP ”) in this Court seeking a declaratory judgment and temporary injunction against the REL Class Plaintiffs. In summary, Wells Fargo alleged in the First AP that the claims asserted by the REL Class Plaintiffs against it in the Amended and Consolidated Complaint on file in the California Class Action (the “Amended and Consolidated Complaint ”) were property of the REL bankruptcy estate and that the REL Class Plaintiffs lacked standing to assert those claims.

On January 30, 2012, Wells Fargo filed its Amended Motion to Stay Class Action Claims Against Wells Fargo Capital...