Wells Fargo Capital Finance, LLC et al v. Noble et al

Filing 24

OPINION: The bankruptcy court's May 11, 2012 order denying plaintiff-appellant Wells Fargo Capital Finance, LLC's amended motion to stay class action claims and for issuance of a temporary injunction, and the bankruptcy court's May 17, 2012 final judgment dismissing adversary proceeding are AFFIRMED in part and REVERSED in part, and this adversary proceeding is REMANDED for further proceedings consistent with the court's opinion. (Ordered by Chief Judge Sidney A Fitzwater on 3/28/2013) (Chief Judge Sidney A Fitzwater)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
IN RE R.E. LOANS, LLC, et al.,

§
§
Debtors.
§
§
WELLS FARGO CAPITAL FINANCE, §
LLC,
§
§
Plaintiff§
Appellant,
§
§
VS.
§
§
GORDON NOBLE, et al.,
§
§
Defendants§
Appellees.
§

Civil Action No. 3:12-CV-3513-D
(Bank. Ct. No. 11-35865-BJH-11;
Adv. No. 11-03618-BJH)

APPEAL FROM THE
UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
FITZWATER, Chief Judge:
In this appeal from a bankruptcy court order denying a motion to stay and temporarily
enjoin a class action and a judgment dismissing an adversary proceeding, the question
presented is whether the claims of the plaintiffs in a state-court putative class action are
property of the debtor’s estate. Concluding that the claims in part are property of the estate
and in part are not, the court affirms in part, and reverses and remands in part, the bankruptcy
court’s order and judgment.

I
A
Plaintiff-appellant Wells Fargo Capital Finance, LLC (“Wells Fargo”) initiated this
adversary proceeding against defendants-appellees (the “Class Plaintiffs”), who are class
plaintiffs in a consolidated putative class action pending against Wells Fargo,1 Greenberg
Traurig, LLP (“Greenberg”), and others in California superior court (the “Class Action”).2
Wells Fargo sought a determination that the claims of the Class Plaintiffs in the Class Action
are property of the estate of R.E. Loans, LLC (“REL”), a chapter 11 debtor, and therefore
could only have been brought by REL as debtor-in-possession. Wells Fargo also sought by
motion to stay the Class Action and enjoin the Class Plaintiffs from prosecuting their claims
against Wells Fargo. Wells Fargo argued that, based on the face of the consolidated class
action complaint (“consolidated complaint”),3 the claims asserted against Wells Fargo in the
Class Action are property of the REL bankruptcy estate.
B
In the Class Action, the Class Plaintiffs sue on behalf of former investors of REL and

its affiliate, Mortgage Fund ‘08 LLC (“MF08”), who they contend lost millions of dollars
1

Wells Fargo is sued as “Wells Fargo Capital Finance, Inc. f/k/a Wells Fargo Foothill,
LLC.” Supp. R. 2:385. The court for clarity will refer to this entity as “Wells Fargo.”
2

Defendants-appellees are Gordon Noble, Arlene Dea Deeley, Fredric C. Mendes,
Nancy Rapp, Phillip Cantor, John Emanuele, Irene Lee, and David Nolan.
3

The consolidated complaint was filed on January 9, 2012 and amended on February
15, 2012. As have the parties, the court will cite the version of the consolidated complaint
that is found at volume two of the supplemental record on appeal. See Supp. R. 2:383-443.
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as a result of a scheme carried out by the managers of REL and MF08, acting in concert with
Greenberg and Wells Fargo. According to the consolidated complaint,4 REL and MF08

made real estate development loans using funds raised from investors. REL was organized
as a limited liability company, and those who invested became members of REL.5 REL and
MF08 were managed by the same individuals (the “Managers”).6 As limited liability
company members, REL members had control rights. For instance, members holding a
majority of interests could remove and replace the Managers, vote to dissolve REL, or (with
limited exceptions) amend the operating agreement. Members were entitled to withdraw all
or part of their investments on written notice.
Beginning in mid-2007, the Managers, Greenberg, and Wells Fargo developed and
carried out a scheme through which the Managers, with the knowing assistance of Greenberg
and Wells Fargo, acted against REL’s members and MF08’s noteholders. They inflicted
significant harm by stripping REL’s members of their ownership interests in, and rights of
control over, REL, and by changing the nature of their investments. They injured MF08’s

4

The factual recitation set out in § I(B) of this opinion is taken from the consolidated
complaint. The court recognizes that many of these allegations will be contested in the Class
Action.
5

The consolidated complaint alleges that investors in MF08 received promissory notes
in exchange for their investments.
6

According to the consolidated complaint, Walter Ng, Kelly Ng, Bruce Horwitz, and
Barney Ng managed REL and MF08 through two affiliated companies, B-4 Partners, LLC
and Bar-K, Inc. (“Bar-K”), and managed MF08 through The Mortgage Fund, LLC and BarK.
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noteholders by using their funds to make loans that were funneled through REL. REL’s
auditors had warned the Managers that REL was violating the securities laws by selling
unregistered securities that did not qualify for exemption from registration under federal and
California law. In March 2007, REL’s lawyers advised the Managers that REL had been
violating securities laws since 2002 and that REL faced substantial civil penalties for
continuing to do so. The lawyers warned them to stop soliciting or accepting any future
investor contributions.7 By mid-2007, REL faced a severe cash liquidity shortage, and this
problem was exacerbated because the Managers had been told not to take investments in
REL because their selling shares was violating federal and state securities laws. Although
the Managers knew they were obligated by their fiduciary duties to disclose to the members
their past securities violations and cash liquidity problems, disclosure could cause the
members to lose confidence in the Managers and in the safety of their investments, and could
prompt members to withdrew their investments and exercise their control rights against the
Managers, ending the Managers’ ability to continue to reap financial benefits from operating
REL.
Together with Greenberg and Wells Fargo, the Managers developed and carried out
a plan to hide their past securities violations and REL’s cash shortage. Greenberg, who was
counsel to the Managers, brought in Wells Fargo for the purpose of lending money to REL

7

According to the consolidated complaint, from 2002 through 2006, REL violated
state and federal securities laws by selling REL memberships, which constituted securities,
but failing to register the offerings with the Securities and Exchange Commission.
-4-

to enable the Managers to maintain the illusion that REL was liquid. The Managers,
Greenberg, and Wells Fargo knew that, without the prior approval of REL’s members, REL
was not authorized to borrow operating cash from a third-party lender and encumber REL’s
assets or any portion of its loan portfolio as security for third-party borrowings. The
Managers had repeatedly promised the members that REL would not raise capital through
borrowing from third-party lenders. So the Managers entered into a secret transaction in
which Wells Fargo extended to REL a $65 million line of credit secured by a perfected firstpriority lien against REL’s assets (an amount in excess of $700 million). Wells Fargo also
required REL to endorse and deliver $250 million in notes receivables.
To obtain the members’ approval of the Wells Fargo loan after the fact, Greenberg
masterminded an exchange transaction (“Exchange Offering”) that transformed the members
from equity shareholders of REL into creditors whose security interests were junior to Wells
Fargo’s. Under the Exchange Offering, members were solicited to exchange their equity
membership shares for promissory notes secured by REL’s portfolio loan assets. Although
the Managers portrayed the Exchange Offering as a restructuring of REL, it was a subterfuge
to persuade the members to give after-the-fact approval to the unauthorized Wells Fargo
loan, legitimize the Managers’ past, undisclosed securities laws violations, and divest the
members of their interests and control rights in REL. The Exchange Offering was designed
to eliminate the members’ equity shares and replace them with security interests that were
junior to the interests held by Wells Fargo. When the scheme was revealed, REL defaulted
on the line of credit loan and on the promissory notes that it had issued to the members.
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MF08 also defaulted on its obligations to its noteholders. The Managers and Greenberg
made numerous false and misleading statements of material fact to the members to obtain
their agreement to the Exchange Offering, thereby breaching their fiduciary duties to the
members and committing securities fraud, negligent misrepresentation, and common law
fraud.
The Wells Fargo loan transaction and the Exchange Offering had a devastating effect
on the members. The decision to pledge previously unencumbered assets to Wells Fargo
materially impaired the interests and rights of the members by stripping them of any recourse
to REL’s assets, putting them in a subordinate position to Wells Fargo. The effect of the
Exchange Offering was to turn the members from equity shareholders in REL into holders
of promissory notes with security interests that were junior to Wells Fargo. The Managers,
Greenberg, and Wells Fargo disenfranchised the members, encumbered the assets on which
the members’ investments were based, and hid from them REL’s continuing liquidity
problems.
The Class Plaintiffs assert three claims against Wells Fargo: first, Wells Fargo is liable
for aiding and abetting the Managers’ breach of fiduciary duties; second, Wells Fargo is
secondarily liable for securities fraud under Cal. Corp. Code § 25504.1; and, third, Wells
Fargo is liable for violating the California Unfair Competition Law (“UCL”), Cal. Bus. &
Prof. Code § 17200 et seq.8

8

The Class Plaintiffs assert similar claims against MF08. The bankruptcy court held
that these claims, relating solely to MF08, could not possibly belong to REL’s estate. Wells
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C
Wells Fargo filed the adversary proceeding below, seeking by amended motion to stay
and enjoin the Class Plaintiffs from prosecuting against it the claims in the Class Action. The
Class Plaintiffs opposed the motion. The bankruptcy court conducted a hearing on the
motion, after which it entered an oral ruling and written order denying Wells Fargo’s
amended motion. The bankruptcy court held that the claims in the Class Action did not
belong to REL and were not property of its estate. In its oral ruling, it began by agreeing
with REL that any claim arising from mismanagement of REL or misappropriation of REL’s
assets would constitute property of REL’s estate, which would preclude the Class Plaintiffs
from pursuing these claims to the detriment of REL’s other creditors. But from its reading
of the consolidated complaint, and on the assumption that the Class Plaintiffs would not
attempt to broaden their allegations if Wells Fargo’s motion were denied, the bankruptcy
court concluded that the causes of action as currently pleaded did not constitute property of
REL’s estate and thus were not stayed under § 362 of the Bankruptcy Code. Applying the
Fifth Circuit test for determining whether a claim is property of a debtor’s estate, the
bankruptcy court concluded that none of the claims was. According to the bankruptcy court,
the claim that Wells Fargo aided and abetted breach of fiduciary duties owed by the

Fargo does not challenge this ruling in this appeal.
Additionally, Greenberg initiated an adversary proceeding seeking to prevent the
Class Plaintiffs from pursuing claims against it. In the bankruptcy court’s oral ruling, it held
that the Class Plaintiffs’ claims against Greenberg were not claims of REL’s estate, and it
dismissed the adversary proceeding. Greenberg is not a party to this appeal.
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Managers to the Class Plaintiffs and the other class members as a whole was not property of
the REL estate because REL could not have sued Wells Fargo on such a claim on the petition
date. The claim that Wells Fargo was secondarily liable for REL’s securities law violations
could not belong to REL because it is the party who allegedly committed the violations. And
the other claims should be analyzed similarly, with the same result. The bankruptcy court
distinguished the cases on which Wells Fargo relied to argue that the claims are property of
the REL estate. It reasoned, inter alia, that “the Class Plaintiffs allege separate duties owed
to them and misrepresentations made to them, among other things.” R. 8:1383. And it held
that “the harm alleged in each cause of action, if valid, is to [the Class Plaintiffs], not to
[REL].” Id. at 1384. The bankruptcy court “conclude[d] that the causes of action pled in the
Consolidated Complaint do not belong to [REL] and thus are not property of [REL’s]
bankruptcy estate[] and are not protected by the automatic stay.” Id.
Wells Fargo appeals the bankruptcy court’s order denying Wells Fargo’s amended
motion to stay class action claims and for issuance of a temporary injunction, and the
bankruptcy court’s final judgment dismissing the adversary proceeding.
II
The question “[w]hether a specific cause of action belongs to a bankruptcy estate is
. . . a matter of law that [the reviewing court] decide[s] by reference to the facial allegations
in the complaint.” In re Seven Seas Petroleum, Inc., 522 F.3d 575, 583 (5th Cir. 2008)
(citing In re Educators Grp. Health Trust, 25 F.3d 1281, 1285 (5th Cir. 1994)). “‘Th[is]
court reviews the bankruptcy court’s conclusions of law de novo[.]’” In re Nary, 253 B.R.
-8-

752, 756 (N.D. Tex. 2000) (Fitzwater, J.) (quoting In re ICH Corp., 230 B.R. 88, 91 n.10
(N.D. Tex. 1999) (Fitzwater, J.)). Accordingly, this court considers the facial allegations of
the consolidated complaint to determine whether a particular state cause of action belongs
to the REL estate, without deferring in any respect to the decision of the bankruptcy court.
III
“[P]roperty of the [bankruptcy] estate includes ‘all legal or equitable interests of the
debtor in property as of the commencement of the case.’” Educators Grp., 25 F.3d at 1283
(quoting 11 U.S.C. § 541(a)(1)). “The term ‘all legal or equitable interests’ has been defined
broadly to include causes of action.” Id. (citing La. World Exposition v. Fed. Ins. Co., 858
F.2d 233, 245 (5th Cir. 1988)). “If a cause of action belongs to the estate, then the trustee
has exclusive standing to assert the claim.” Id. at 1284 (citing cases). “If, on the other hand,
a cause of action belongs solely to the estate’s creditors, then the trustee has no standing to
bring the cause of action.” Id. (citing cases). “Whether a particular state cause of action
belongs to the estate depends on whether under applicable state law the debtor could have
raised the claim as of the commencement of the case.” Id. (citing cases). This question does
not turn on an evaluation of the merits of the claim. “[W]hether the claim[] will ultimately
prove to be legally or factually valid is not [the court’s] concern.” Seven Seas, 522 F.3d at
585. “[T]he fact that [a party] ultimately may be unable to prevail on the claims does not
render the claims property of the estate.” Id. at 587-88. Nor does it turn on the label given
to the claim. The court should look past the nominal title given a claim when assessing
whether it is in substance duplicative or derivative of a claim that is property of the estate.
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See In re Madoff, 848 F.Supp.2d 469, 482 (S.D.N.Y. 2012) (“Indeed, courts in this district
have looked past the nominal title of the cause of action pleaded in assessing whether or not
a claim is in substance duplicative or derivative of a claim that is the property of the
Trustee.”) (citing See In re Ionosphere Clubs, Inc., 156 B.R. 414, 439 (S.D.N.Y. 1993)),
appeal dismissed, No. 12-1645 (2d Cir. May 25, 2012).
To determine whether the debtor could have raised the claim as of the commencement
of the case, the court, “[a]s part of this inquiry, [looks] at the nature of the injury for which
relief is sought.” Educators Grp., 25 F.3d at 1284; see Seven Seas, 522 F.3d at 585 (“[W]e
consider whether under state law [the debtor] could have raised the claims as of the
commencement of the bankruptcy, and examine the nature of the injury for which relief is
sought.”). “If a cause of action alleges only indirect harm to a creditor (i.e., an injury which
derives from harm to the debtor), and the debtor could have raised a claim for its direct injury
under the applicable law, then the cause of action belongs to the estate.” Educators Grp., 25
F.3d at 1284 (citing cases). “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.” Id.
“[I]t 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.”
Seven Seas, 522 F.3d at 585 (citing In re Zale Corp., 62 F.3d 746, 753 (5th Cir. 1995)). That
the bankruptcy estate may have claims for its own direct injuries that it could have brought
as of the commencement of the case does not mean that the creditor’s claims are merely
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derivative of the debtor’s. See id. at 587. “[T]here is nothing illogical or contradictory about
saying that [a defendant] might have inflicted direct injuries on both the [creditor] and [the
debtor] during the course of dealings that form the backdrop of both sets of claims.” Id.
IV
The court considers first whether the Class Plaintiffs’ claim for aiding and abetting
breach of fiduciary duties is property of the REL estate. Wells Fargo maintains that the Class
Plaintiffs allege two distinct harms.9 The Class Plaintiffs do not challenge this assertion, and
they implicitly adopt it.10 The court will therefore analyze the breach of fiduciary duties

9

Wells Fargo asserts in its opening brief:
The Consolidated Complaint identifies two distinct harms that
the Class Plaintiffs purportedly suffered as a result of the
breaches of fiduciary duty that the Managers allegedly
committed and that Wells Fargo allegedly aided and abetted: (1)
that the Managers incurred debt on behalf of REL that they
allegedly had no authority to incur, and (2) that, by entering into
the Exchange Offering, the Class Plaintiffs lost the ability they
had as members of REL to control or remove the Managers,
who, they allege, ultimately drove REL into bankruptcy.

Appellant Br. 12.
10

In their brief, the Class Plaintiffs state:
The Consolidated Complaint alleges wrongful conduct by
the RE Loans Managers and Wells Fargo in connection with two
events: (1) the secret closing of an unauthorized line of credit
loan through which the Managers unilaterally encumbered all of
RE Loans assets, and (2) the Exchange Transaction through
which the Managers hid past securities violations, induced the
RE Loans Members to approve the unauthorized loan and forfeit
valuable ownership rights by exchanging them for promissory
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claims according to these two alleged harms.
A
Considering the facial allegations of the consolidated complaint, the court holds that
the Class Plaintiffs’ claim for aiding and abetting breach of fiduciary duties based on the line
of credit loan transaction is property of the REL estate.
1
The gravamen of this ground of the claim is that Wells Fargo aided and abetted the
Managers in breaching their fiduciary duties to the Class Plaintiffs by carrying out an
unauthorized scheme to borrow money from Wells Fargo, a third-party lender, under terms
that made Wells Fargo a highly oversecured creditor and that heavily encumbered REL’s
assets. The Class Plaintiffs allege, in pertinent part, that they were injured because “[t]he
Managers’ decision to pledge previously unencumbered assets to Wells Fargo materially
impaired the interests and rights of the Members by stripping them of any recourse to
[REL’s] assets. As a result of the assignment, the Members were placed in a subordinate
position to Wells Fargo.” Supp. R. 2:407-08; see also id. at 408 (“[T]hrough borrowing from
a third party lender” the Managers “encumber[ed] the asset base that existed to back the

notes having a junior security interest.
Appellees Br. 15. And in briefing whether the claim for aiding and abetting breach of
fiduciary duties belongs to the REL estate, the Class Plaintiffs divide their argument between
alleged harm arising from the line of credit loan, id. at 16-17, and alleged harm arising from
the Exchange Offering, id. at 18-21. Even if they did so in response to how Wells Fargo
organized its opening brief, the Class Plaintiffs do not expressly contest the premise that they
are asserting injuries arising from two separate events or harms.
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Members’ investments.”); id. (“Defendants . . . encumbered the assets upon which the
Members’ investments were based[.]”). Although the Class Plaintiffs attempt to cast the
injury as harming them directly, this component of their claim at least implicitly alleges harm
to REL itself. The harm associated with this component of the claim is derivative of an
injury to REL because the line of credit loan was made to REL, and its assets were
encumbered before the Exchange Offering, at a time when the Class Plaintiffs11 owned the
encumbered assets as equity members of REL.12 The encumbering of REL’s assets in turn
injured the REL members’ equity interests. Had REL’s assets not been encumbered, the
members would not have been injured as equity owners. Therefore, the alleged injuries the
Class Plaintiffs suffered when REL’s assets were encumbered by Wells Fargo’s security
interest were incurred derivatively.13

11

Wells Fargo acknowledges that “[t]he Consolidated Complaint alleges that most of
the Class Plaintiffs were equity investors in REL[.]” Appellant Br. 12. The Class Plaintiffs
point out that they represent not only investors in REL but investors in MF08. For purposes
of this decision, it is immaterial that fewer than all Class Plaintiffs were equity investors prior
to the Exchange Offering.
12

See, e.g., Appellees Br. 9 (“The Exchange Transaction also eliminated the [REL]
Members’ equity shares in [REL] and replaced them with promissory notes with security
interests junior to [those] held by Wells Fargo.”).
13

The Class Plaintiffs posit that, under California law, their claim is direct rather than
derivative. They quote the standard set by Jones v. H.F. Ahmanson & Co., 460 P.2d 464,
470 (Cal. 1969), that a claim is derivative “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.” Appellees Br. 14 (ellipsis in
original). This assertion supports the court’s conclusion that the Class Plaintiffs are alleging
injury to REL’s assets as a whole that, in turn (and derivatively), injured the REL equity
owners.
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In their brief, appellees essentially make three arguments, each of which lacks force.
First, they argue that the consolidated complaint alleges direct harm when it asserts that
Wells Fargo, by helping the Managers consummate the line of credit loan in secret, helped
the Managers breach the duties of truthful disclosure and of fair treatment owed directly to
the members under California law. This argument addresses to whom the duty was owed,
not the direct or derivative nature of the injuries the Class Plaintiffs allegedly incurred.
Second, the Class Plaintiffs maintain that the Managers’ breach of fiduciary duties
directly injured them by substantially impairing the value of the members’ investments in
REL by unilaterally encumbering REL’s assets. In support, they quote this allegation in the
consolidated complaint: “Moreover, the Managers breached their duty of fair treatment by
unilaterally — and without notice — encumbering the asset base that existed to back the
Members’ investments.” Appellees Br. 17 (quoting consolidated complaint ¶ 93). Given that
the Class Plaintiffs were equity investors in REL before the Exchange Offering and at the
time of the loan, this argument implicitly concedes that the injury to the members is
derivative.
Third, the Class Plaintiffs contend that it is significant that the consolidated complaint
does not allege that the line of credit loan injured REL by placing the company in debt; there
are no allegations that the Managers engaged in self-dealing or breached any fiduciary duties
owed to REL by secretly borrowing from Wells Fargo; and the consolidated complaint
alleges that the loan provided REL with operating cash, enabled the Managers to pay
distributions to members, and continued the existence of the company. This argument is
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defeated by the allegations of the consolidated complaint that clearly assert that the Managers
injured REL by encumbering its assets in connection with the line of credit loan from Wells
Fargo. Indeed, the consolidated complaint alleges, inter alia, that “[t]he terms of the line of
credit loan — dictated by Wells Fargo — were draconian,” Supp. R. 2:401, it labels the
security requirement “exorbitant,” id.; it characterizes the collateral-to-debt ratio as
“astounding,” id., and “irregular and excessive,” id.; and it asserts that “[t]he line of credit
loan was a suspicious transaction,” id.
2
The court next considers whether, on the petition date, REL could have brought a
claim under California law against Wells Fargo for aiding and abetting breach of fiduciary
duties based on the line of credit loan. The Class Plaintiffs essentially rely on their harmrelated arguments to contend that REL could not have raised this claim. They maintain that
REL could not have brought such a claim because the consolidated complaint plainly alleges
breaches of fiduciary duties owed to the members that harmed them, and there are no
allegations that the Managers owed the same fiduciary duties to REL, or assertions of
mismanagement of, or injury to, REL directly. They posit that, under Seven Seas, it is
immaterial that REL could have brought a completely separate claim against the Managers
for mismanagement or self-dealing.
Having rejected above the Class Plaintiffs’ arguments concerning the derivative nature
of the harm, the court likewise rejects the same arguments presented in relation to this
element. Moreover, the consolidated complaint on its face demonstrates that REL could have
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raised a claim for aiding and abetting breach of fiduciary duties under state law. For
example, it alleges that Wells Fargo aided and abetted REL’s Managers in entering into a line
of credit loan with “draconian” terms, Supp. R. 2:401, and “irregular and excessive”
collateral requirements, id.; that REL lacked authority to enter into the loan, id., and that
Wells Fargo knew the loan was unauthorized, id. at 403; and that the loan encumbered REL’s
asset base, id. at 408.
3
The court therefore holds that, to the extent the Class Plaintiffs’ claim for aiding and
abetting breach of fiduciary duties is based on the line of credit loan transaction, the claim
is property of the REL estate.
B
The Class Plaintiffs’ claim for aiding and abetting breach of fiduciary duties based on
the Exchange Offering is not, however, property of the REL estate.
Wells Fargo maintains that the Class Plaintiffs must be alleging harm that is derivative
to REL because their theory of liability is, and must be, that they suffered injury from the
Exchange Offering by losing the right to control REL and thus to prevent the alleged
mismanagement and mishandling of money that ultimately led to REL’s bankruptcy. Wells
Fargo argues that the theme of injury through loss of the right of control animates the Class
Plaintiffs’ allegations, and that they suffered no other potentially cognizable injury from the
Exchange Offering. The court disagrees.
The consolidated complaint contains extensive allegations that the Class Plaintiffs
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were misled into exchanging their equity interests in REL for promissory notes. The
allegations of injury are of direct harm to the Class Plaintiffs, not explicitly or implicitly of
harm to REL that injured the Class Plaintiffs derivatively or indirectly. See, e.g., Supp. R.
2:388 (alleging that the Exchange Offering “transform[ed] the Members from equity
shareholders in [REL] into creditors with security interests junior to Wells Fargo’s.”); id. at
408 (alleging that “[i]n one transaction orchestrated by the Managers, Greenberg and Wells
Fargo, the Members lost all rights they had as equity shareholders in [REL] and were
relegated with junior security interests.”).
Accordingly, the court holds that, to the extent the Class Plaintiffs’ claim for aiding
and abetting breach of fiduciary duties is based on the Exchange Offering, the claims are not
property of the REL estate.
V
The Class Plaintiffs’ claim for secondary liability for securities fraud is not property
of the REL estate.
The bankruptcy court held that this claim could not possibly belong to the estate
because REL itself is alleged to have committed the securities fraud. Wells Fargo does not
quarrel with this premise, but instead contends that the securities fraud claim is simply a
relabeled cause of action for aiding and abetting breach of fiduciary duties. It argues that
“[t]he Court should treat the cause of action for secondary liability for securities fraud as
derivative of direct harm to REL for the same reasons as the aiding and abetting breach of
fiduciary duty claim.” Appellant Br. 23.
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The court will assume, without deciding, that REL could sue Wells Fargo under
California law for secondary liability for REL’s own acts of securities fraud. Even so, the
consolidated complaint alleges direct injury to the Class Plaintiffs, not injury to REL that
harmed the Class Plaintiffs indirectly or derivatively. The Class Plaintiffs allege that, in
connection with the Exchange Offering, REL and its Managers made untrue statements of
material fact and omitted to state material facts necessary to make the statements made, in
light of the circumstances under which they were made, not misleading, in violation of
§ 25401. They assert that Wells Fargo knowingly and substantially assisted the securities
violations with the intent to induce the Members’ reliance, thus materially assisting in the
securities fraud. In other words, the securities fraud claim is based on the Exchange
Offering, and the court has already held that the Class Plaintiffs were injured directly by the
Exchange Offering conduct. The claim does not explicitly or implicitly allege harm to REL
itself, and the bankruptcy court correctly concluded that it was not property of the REL
estate.
VI
The court holds that the Class Plaintiffs’ UCL claim in part is property of the REL
estate and in part is not.
The Class Plaintiffs state in their brief that “the alleged misconduct on which the UCL
claim is based is the same as that supporting the aiding and abetting breach of fiduciary
duties and securities fraud claims.” Appellees Br. 13. They do not directly challenge Wells
Fargo’s contention that the UCL claims are dependent on the others. Instead, they contend
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that, like the other claims, this claim is “direct and belongs to [REL] investors, not to [REL]
itself.” Appellees Br. 26. The court therefore applies its conclusions above and holds that
the UCL claim is property of the REL estate to the extent based on the line of credit loan, and
otherwise is not property of the estate.
*

*

*

The court holds that the Class Plaintiffs’ aiding and abetting breach of fiduciary duties
claim and UCL claim based on the line of credit loan are property of the REL estate. The
Class Plaintiffs’ aiding and abetting breach of fiduciary duties claim and UCL claim based
on the Exchange Offering, and their claim for secondary liability for securities fraud, are not
property of the REL estate. The bankruptcy court’s order and judgment are therefore
AFFIRMED in part and REVERSED in part, and this adversary proceeding is REMANDED
for further proceedings consistent with this opinion. The parties shall bear their own taxable
costs.
AFFIRMED IN PART; REVERSED AND REMANDED IN PART.
March 28, 2013.

_________________________________
SIDNEY A. FITZWATER
CHIEF JUDGE

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