BARBARA J. HOUSER, Bankruptcy Judge.
Before the Court is Wells Fargo Capital Finance, LLC's ("
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 ("
Not surprisingly, the REL Class Plaintiffs oppose the Motion, contending that the claims pled in the Third Consolidated and Amended Complaint (the "
The Motion was heard on January 22, 2014. This Memorandum Opinion contains the Court's conclusions of law with respect to the Motion.
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.
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.
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, ("
According to the REL Class Plaintiffs, "[i]n furtherance of the scheme, Greenberg also masterminded the formation of [Mortgage Fund '08, LLC (`
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
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 Joint
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 "
On January 30, 2012, Wells Fargo filed its Amended Motion to Stay Class Action Claims Against Wells Fargo Capital Finance, LLC and for Issuance of a Temporary Injunction [First AP Dkt. No. 12], which was heard by the Court on April 23, 2012. In an oral ruling announced on the record on May 2, 2012, this Court denied Wells Fargo's stay motion and requested injunction, concluding that the claims asserted by the REL Class Plaintiffs in the Amended and Consolidated Complaint were not property of REL's bankruptcy estate and were not stayed by § 362 of the Bankruptcy Code. An order consistent with this oral ruling was entered on May 11, 2012 [First AP Dkt. No. 54], and a judgment dismissing the First AP was entered on May 17, 2012 [First AP Dkt. No. 56].
Wells Fargo appealed. After briefing and oral argument, on March 28, 2013, the
As just noted, the issue on appeal to the District Court was whether the REL Class Plaintiffs' claims against Wells Fargo as pled in the Amended and Consolidated Complaint were property of the REL bankruptcy estate. The District Court first considered whether the REL Class Plaintiffs' claim for aiding and abetting breach of fiduciary duties was property of the REL bankruptcy estate. Wells Fargo argued that the REL Class Plaintiffs alleged two separate harms: (i) harms based on the credit facility that Wells Fargo provided to REL, which encumbered all of REL's assets; and (ii) harms based on an exchange offering (hereinafter, the "
The District Court next considered whether the REL Class Plaintiffs' claim for secondary liability for securities fraud as pled in the Amended and Consolidated Complaint was property of the REL bankruptcy estate. The District Court concluded that the REL Class Plaintiffs alleged a direct injury as their claim was based on the Exchange Offering made to them, and they were injured directly by that offering.
The District Court finally considered the REL Class Plaintiffs' unfair competition law claim as pled in the Amended and Consolidated Complaint, concluding that any unfair competition law claim based on the line of credit Wells Fargo provided to REL was property of the REL bankruptcy estate. However, according to the District Court's analysis, any unfair competition law claim based on the Exchange Offering belonged to the REL Class Plaintiffs and was not property of the REL bankruptcy estate.
Wells Fargo appealed the District Court's decision to the Fifth Circuit Court of Appeals. That appeal remains pending, although the REL Class Plaintiffs filed a motion to dismiss the appeal due to the agreed filing of a new complaint in the California Class Action — i.e., the TAC — which, according the REL Class Plaintiffs, moots the appeal, since the Amended and Consolidated Complaint is no longer the live pleading in the California Class Action. Although oral argument on the appeal was scheduled for February 6, 2014, by letter dated January 17, 2014, the Circuit Court cancelled the argument and the case will be disposed of based upon the parties' written submissions.
Rule 12(c) of the Federal Rules of Civil Procedure provides that "[a]fter the pleadings are closed — but early enough not to delay trial — a party may move for judgment on the pleadings." FED.R.CIV.P. 12(c). Judgment on the pleadings is only appropriate when there are only questions of law and no disputed issues of fact. Hughes v. Tobacco Inst., Inc., 278 F.3d 417, 420 (5th Cir.2001). A court decides a motion under Rule 12(c) using the same standard it would use to decide a motion to dismiss under Rule 12(b)(6). Guidry v. Am. Pub. Life Ins. Co., 512 F.3d 177, 181 (5th Cir.2007).
The issue for this Court to decide, then, is whether Wells Fargo's complaint in the Second AP states a valid claim. St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 440 n. 8 (5th Cir.2000). The Court will construe the complaint in the light most favorable to Wells Fargo, id., accepting all of its factual allegations as true. Doe v. MySpace, Inc., 528 F.3d 413, 418 (5th Cir.2008). In deciding the Motion, the Court must also determine whether the complaint pled enough facts to state a plausible claim. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (U.S.2007). The Court is confined to the pleadings in determining whether the Motion should be granted. Spivey v. Robertson, 197 F.3d 772, 774 (5th Cir.1999).
This question is easily answered in the affirmative. As noted previously, the District Court concluded that the three claims pled in the Consolidated and Amended Complaint — i.e., (i) aiding and abetting breach of fiduciary duties; (ii) secondary liability for securities fraud; and (iii) unfair competition law — at least to the extent those claims were based on the Wells Fargo line of credit loan transaction, constituted property of the REL bankruptcy estate and the REL Class Plaintiffs lacked standing to bring those claims. However, the District Court also concluded that to the extent those three claims were based on the Exchange Offering, the REL Class Plaintiffs owned the claims and the claims were not property of the REL bankruptcy estate.
There is no claim asserted in the TAC based on the Wells Fargo line of credit loan transaction. When the REL Class Plaintiffs amended their complaint, they
However, Wells Fargo remains unsatisfied — largely it seems with the District Court's refusal in the First AP to fully adopt its position on the Exchange Offer-based claims — and has returned to this Court now that the TAC is on file to seek the determination that at least certain damages being sought on the Exchange Offer-based claims are derivative of damages that belong to the REL bankruptcy estate and the REL Class Plaintiffs cannot recover those damages given the Wells Fargo Release in the Plan.
In addressing Wells Fargo's arguably new, but certainly more nuanced, argument here, we will first decide whether it is possible that damages on individually owned claims can actually be damages that derive from damage to the bankruptcy debtor (here, REL) such that the individuals (here, the REL Class Plaintiffs) are precluded from recovering those damages. Assuming that contention is legally sound, we will analyze the damages available to the REL Class Plaintiffs on the claims pled in the TAC to see if they are improperly attempting to recover damages that belong to the REL bankruptcy estate and were released under the Plan.
As noted previously, Well Fargo requests in the Motion that this Court declare that (1) "the REL Class Plaintiffs have, at most, a personal claim against Wells Fargo for any difference in value, in November 2007, between the equity interests the REL Class Plaintiffs gave REL, and the debt instruments REL gave the REL Class Plaintiffs" in the Exchange Offering, and (2) "all other claims the REL Class Plaintiffs assert against Wells Fargo... were property of the REL estate as of the effective date of the REL Plan, and were therefore released as against Wells Fargo under the REL Plan and the REL Confirmation Order." Motion at 2. As the argument progresses in its initial brief, and becomes even more crisply articulated in its reply brief (the "
In their opposition to the Motion (the "
At the outset, this Court notes that Wells Fargo essentially concedes that the claims pled against it in the TAC are direct claims owned by the REL Class Plaintiffs. But, to be clear, if Wells Fargo is not making this concession, this Court concludes that the three claims pled against Wells Fargo in the TAC that arise
However, this conclusion does not end our analysis, as Wells Fargo now makes the more nuanced argument that the REL Class Plaintiffs are attempting to recover damages that are derivative of damages REL suffered on claims that REL could have brought on its bankruptcy petition date.
The principal case upon which Wells Fargo relies is In re NC12, Inc., 478 B.R. 820 (Bankr.S.D.Tex.2012). In that case, shareholders of NC12, Inc. filed a state court lawsuit against NC12's former directors and officers. Id. at 825. The plaintiff-shareholders sued for breach of fiduciary duty. Id. Another group of shareholders intervened, and the intervenors brought causes of action for breach of fiduciary duty, shareholder oppression, securities fraud, and conspiracy. Id. The court concluded that all of the claims were property of the NC12 bankruptcy estate,
The NC12 court began its analysis with the question of whether NC12 could have raised the claims that the shareholders were raising when NC12 filed for bankruptcy. Id. at 832. As for the intervenors' claim for shareholder oppression, the intervenors' claimed that they were oppressed when the defendants: (i) took control of the corporation and stripped its assets; (ii) removed directors who were trusted by the shareholders; and (iii) thwarted attempts to investigate NC12's accounting practices. Id. at 834. While the court recognized that the intervenors could have sought damages for the violation of their shareholder rights, they could not seek damages based on harm to NC12:
Id. at 835. After reviewing the allegations contained in the petition, the court concluded that any harm the intervenors allegedly suffered was derivative of harm suffered by NC12. Id.
Similarly, the NC12 court concluded that the shareholders did not have a direct claim for breach of fiduciary duty (or conspiracy to commit breach of fiduciary duty). The court found the shareholders' allegations to be "generalized allegations of mismanagement" and any harm as a result of the defendants' alleged stripping of corporate assets was felt by NC12 in the first instance. Id.
However, the NC12 court concluded that the intervenors' securities fraud claim (and related aiding and abetting claim) was a direct claim that was not property of the NC12 bankruptcy estate. Id. According to the court's analysis, the intervenors had a direct claim for the difference in price they paid for shares in reliance on the defendants' alleged misrepresentations and the actual value of NC12's shares at the time of their investment. Id. at 837. The court also stated that "[t]he Intervenors may not recover damages for the difference in the price they paid for the shares and what the shares would have been worth if not for the alleged post-purchase misconduct in the operation of the corporation." Id. In a footnote, the NC12 court clarified that it was "not rul[ing] on the appropriate measure of damages for the Intervenors' fraud claims." Id. at 837 n. 1. Instead, according to the court, its ruling regarding recoverable damages related "solely to the issue of which injuries give rise to claims belonging to the Intervenors." Id.
Wells Fargo also relies on an opinion by the NC12 court in another case, West v. Peterson (In re Noram Resources, Inc.), No. 11-3598, 2012 WL 2571154 (Bankr. S.D.Tex. July 2, 2012). In that case, the trustee for the bankruptcy estates of Ausam Energy Corp. and Noram Resources, Inc. (collectively, the "Debtors") brought an action against shareholders (who also held additional warrants) of the Debtors for turnover of property and damages resulting from violation of the automatic stay. Id. at *1. The shareholders had filed state court lawsuits against former directors of the Debtors for negligence and negligent misrepresentation. Id. Two of the shareholders had settled their state court claims and the remaining shareholders were continuing to pursue their claims in state court. Id. In his action before the bankruptcy court, the trustee argued that because the shareholders' claims were
The issue before the Noram court was whether the shareholders' claims for negligence and negligent misrepresentation were property of the Debtors' estates. The court concluded that they were property of the estates in part. Id. at *4 Specifically, the shareholders' claim for negligence was a derivative claim belonging to the bankruptcy estate because the former shareholders' damages derived from the Debtors' damages. Id. at *5. In coming to its conclusion, the court stated:
Id. at *6.
The Noram court also concluded that the shareholders' negligent misrepresentation claim based on harm they suffered as a result of the Debtors' former directors' failure to disclose Ausam's financial condition was owned by the shareholders, as the Debtors "could not have brought claims for negligent misrepresentation to the Defendants as of the petition date." Id. However, according to the court, "[t]he Defendants' damage calculation must ... exclude consideration of the reduction in value [of the shares] caused by the breach of the Debenture." Id. Or, stated another way,
Id. at *7.
Of note, while the shareholders argued that they were seeking damages based solely on the misrepresentations made by the directors and officers to them, the court concluded that their pleadings alleged post-misrepresentation mismanagement:
Id. According to the court, this claim for damages to Ausam was property of the estate and could only be asserted by the bankruptcy trustee. Id.
In another case relied upon by Wells Fargo, Grove Farm Fish & Poi, LLC v. Cates (In re Grove Farm Fish & Poi, LLC), No. 90031, 2011 WL 3878358 (Bankr.D.Haw. Aug. 31, 2011), the issue before the court was whether certain causes of action asserted by a minority member against the majority member and/or certain of the debtor's managers were direct or derivative claims. Id. at *1. One of the claims was a claim that the
In the final case relied upon by Wells Fargo, Weidberg v. Barnett, 752 F.Supp.2d 301, 303 (E.D.N.Y.2010) the plaintiff was the co-owner of a bicycle company. He sued the other co-owner and the company's chief financial officer asserting four causes of action: (i) breach of fiduciary duty; (ii) aiding and abetting breach of fiduciary duty; (iii) fraudulent inducement; and (iv) breach of contact. Id. at 304-05. Once again, the issue before the court with respect to three of those claims — i.e., breach of fiduciary duty, aiding and abetting a breach of fiduciary duty and breach of contract — was whether the plaintiff alleged direct claims, or whether his claims were derivative of claims that the bicycle company could have brought when it filed its bankruptcy petition. Id. at 306-07.
The court concluded that the plaintiff's claim for breach of fiduciary duty based on allegations that the defendants looted the company properly belonged to the company. Id. at 308. The alleged acts harmed the company by decreasing its value, and the plaintiff's harm was derivative of the company's harm. Id. Thus, according to the court, the claim belonged to the bankruptcy estate. See id. at 306-07. While the court concluded that the plaintiff could have had a direct claim for breach of fiduciary duty based on the defendants' alleged failure to truthfully represent the company's financial condition to him, the court ultimately concluded that the plaintiff "expresses a theory of damages that is derivative. He alleges that the defendants' misstatement of the value of the [company] caused the plaintiff `to suffer damages from the diminution of the value of his company in the amount of $5 million.'" Id. at 308. Because harm that a plaintiff suffers due to a diminution of value in his ownership interest of an entity is indirect harm, it is a derivative claim belonging to the bankruptcy estate.
While the court concluded that the plaintiff could have held a breach of contract
So, while these cases clearly stand for the unremarkable proposition that the nature of the injury and the harm or damage suffered must be considered when deciding whether the cause of action is direct or derivative, the flaw in Wells Fargo's analysis is revealed in its Reply when it identifies the harm or injury it believes the REL Class Plaintiffs' sue to remedy. First, Wells Fargo posits that the TAC contains allegations that "after the Exchange Offering, the Managers engaged in misconduct and mismanagement that ultimately drove REL into bankruptcy and ultimately rendered the Class Plaintiffs' investments worthless." Reply at 8. Then, according to Wells Fargo, none of these "numerous `general allegations of mismanagement' or `alleged breaches of fiduciary duty involve any alleged injury directly to the' investors-turned-noteholders." Id. at 8-9; cf. In re NC12, 478 B.R. at 836. Finally, Wells Fargo argues that the REL Class Plaintiffs' "`allegations pertain to injuries to' REL because they concern `stripp[ing][REL] of assets to the detriment of [its] creditors' and could be remedied in a breach of fiduciary action against the Managers." Reply at 9 (alteration in original) (citing In re NC12, 478 B.R. at 836).
The flaw in Wells Fargo's argument is that it is predicated upon a false premise.
To demonstrate this point, we turn to a brief analysis of each of the claims pled in the TAC and whether the alleged harm is personal to the REL Class Plaintiffs — i.e., do they allege an injury to them-selves or is their injury derived from harm to the debtor? In doing so, we keep in mind the Fifth Circuit's admonition in In re Seven Seas Petroleum, Inc., 522 F.3d 575, 587 (5th Cir.2008), that the fact 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 derivative of the debtor's.
In the TAC, the REL Class Plaintiffs allege that Wells Fargo aided and abetted the REL managers' breach of the fiduciary duty to make full, accurate and truthful disclosures to the members at the time the managers solicited the members' participation in the Exchange Offering. TAC ¶¶ 301-10 (and paragraphs referenced therein). According to the REL Class Plaintiffs, "[t]his is a duty of truthfulness that runs directly to the investors as members of ... REL." Opposition at 16. And, according to the REL Class Plaintiffs, the "harm from the alleged breach is that the REL investors were wrongfully induced to enter into the Exchange Offering — a harm in no way
The REL Class Plaintiffs appear to correctly state California law. The statutes and cases they rely upon in their Opposition are correctly cited. Moreover, under California law, a defendant who aids and abets an intentional tort can be held jointly liable for that tort. Newman v. San Joaquin Delta Cmty. College Dist., No. 09-3441, 2010 WL 3633737 (E.D.Cal. Sept. 14, 2010). A breach of fiduciary duty is an intentional tort under California law. See Casey v. U.S. Bank Nat'l Ass'n, 127 Cal.App.4th 1138, 26 Cal.Rptr.3d 401, 405 (2005). In Heckmann v. Ahmanson, 168 Cal.App.3d 119, 214 Cal.Rptr. 177, 183 (1985), the court found that a company could be jointly liable as an aider and abettor for another company's breach of fiduciary duty where it was an active participant in the breach.
Assuming, without deciding, that Wells Fargo's actions satisfied the elements of aiding and abetting an intentional tort, Wells Fargo would be jointly liable for the damages resulting from the managers' breaches of fiduciary duty to REL's members. And, contrary to Wells Fargo's requested limitation in the Motion,
This cause of action — aiding and abetting the managers' breach of fiduciary duties owed to the REL Class Plaintiffs as members of REL (as contrasted with duties the managers owed to REL itself) — seeks to recover damages for the omissions of material facts or the affirmative misrepresentations of material facts made to the REL Class Plaintiffs in connection with the Exchange Offering. The allegations of injury are of direct harm to the REL Class Plaintiffs, not explicitly or implicitly of harm to REL that injured the Class Plaintiffs derivatively or indirectly. Moreover, this measure of damage does not appear to compensate the REL Class Plaintiffs for injury to REL, as REL was not injured by the Exchange Offer or by its managers' breaches of fiduciary duty to the members in connection with the Exchange Offer.
However, with this said, to the extent a component of the REL Class Plaintiffs' damages at trial includes compensation to the REL Class Plaintiffs for post-Exchange Offer mismanagement of REL, that component of damages must be excluded by the court presiding over the California Class Action because a claim — and the damages flowing from that claim — for post-Exchange Offer mismanagement by REL's managers belonged to REL on
While this is a bit theoretical at the moment, and will remain theoretical until the evidence at trial is known, perhaps an example will illuminate the Court's thinking. Let's assume that the REL Class Plaintiffs' measure of damages for aiding and abetting breach of fiduciary duty is, as they argue, expectancy or benefit of the bargain damages, and assume further that the reason the REL Class Plaintiffs did not receive the benefit of their bargain — i.e., payment of the notes in full — is because of a combination of two things: (i) the REL managers' post-Exchange Offer mismanagement or negligence, and (ii) the collapse of the real estate market in California. If this is the evidence at trial, the court presiding over the California Class Action will be required to apportion the recoverable damages between those attributable to the REL managers' post-Exchange Offer "bad acts" for which REL could have sued on its bankruptcy petition date and those attributable to the collapse of the real estate market for which REL would have no claim. Conversely, if the evidence at trial establishes that REL's financial demise and ultimate inability to pay the notes had nothing to do with post-Exchange Offer REL manager "bad acts," but was inevitable from either the cumulative effect of the pre-Exchange Offer "bad acts" and the substantial continuing decline of the California real estate market following the Exchange Offer, or was precipitated by simply the collapse of the California real estate market following the Exchange Offer, then, from this Court's perspective, no portion of the REL Class Plaintiffs' damages should be excluded as derivative of an injury to REL.
Until the evidence at trial is closed, it is impossible to know what facts will be proven. So, from this Court's perspective, it is impossible to enjoin the REL Class Plaintiffs from pursuing their direct claim against Wells Fargo for aiding and abetting the REL managers' breach of fiduciary duty owed to them as members of REL. But, it is appropriate to enjoin the REL Class Plaintiffs from attempting to recover damages attributable to the REL managers' post-Exchange Offer mismanagement of REL.
The REL Class Plaintiffs allege that REL made untrue statements and omitted material facts in violation of § 25401 of the California Corporations Code in connection with the Exchange Offering. TAC ¶ 315. They also allege that Wells Fargo "knowingly and substantially assisted [REL's] securities law violations," id. ¶ 317, making Wells Fargo secondarily liable under California law for securities fraud. Id. ¶¶ 311-318. The REL Class Plaintiffs further allege that the members were harmed by, among other things: (i) the loss of their right to share in profits; (ii) the loss of their voting rights to control management of the LLC; (iii) the loss of their undisclosed right to rescind their original membership investments (having been locked in through long term notes); and (iv) receipt of subordinated promissory notes that were less valuable than the
In general, the Court agrees with the REL Class Plaintiffs. They allege that they were fraudulently induced to exchange their membership interests in REL for junior secured promissory notes and that they suffered an injury the instant they agreed to the exchange. California courts have found that when a plaintiff was defrauded, his "injury is in no sense derivative of his status as an owner-member of the resulting entity." Denevi v. LGCC, 121 Cal.App.4th 1211, 18 Cal.Rptr.3d 276, 284 (2004). As the REL Class Plaintiffs correctly argue, § 25401 of the California Corporations Code prohibits persons from "[m]ak[ing] an untrue statement of material fact or omit[ting] to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading." CAL. CORP. CODE § 25401. Under California law, an entity who "materially assists in any violation of Section ... 25401 ... with the intent to deceive or defraud, is jointly and severally liable with any other person liable ... for such violation." CAL. CORP. CODE § 25504.1. Section 25501 of the California Corporations Code provides the damages available to a plaintiff who purchased securities — but no longer holds those securities — from a seller who violated § 25401:
Id. § 25401.
Moreover, §§ 25401 and 25501 do not require the plaintiff to show any proof of causation or that the plaintiff relied on the untrue statement. Bowden v. Robinson, 67 Cal.App.3d 705, 136 Cal.Rptr. 871, 878 (1977). Therefore, a plaintiff can recover damages, even when "the subject matter of the misrepresentation was not a factor in causing the subsequent decline in the price or value of the security purchased by the plaintiff." 1 MARSH & VOLK, PRACTICE UNDER THE CALIFORNIA SECURITIES LAWS (rev. ed. 2006) § 14.03[7]. This is consistent with the measure of damages under § 12(2) of the Securities Act of 1933. See In re WorldCom, Inc., 377 B.R. 77, 91-92 (Bankr.S.D.N.Y.). California modeled Section 25501 after Section 12(2). Id. at 91. In Randall v. Loftsgaarden, 478 U.S. 647, 659, 106 S.Ct. 3143, 92 L.Ed.2d 525 (1986), the Supreme Court noted that through § 12(2), "Congress shifted the risk of an intervening decline in value of the security to defendants, whether or not that decline was actually caused by the fraud."
Assuming, without deciding, that REL did make untrue statements of material fact or omitted material facts in connection with the Exchange Offering, it violated
Moreover, even if the value of the REL Class Plaintiffs' notes may have been reduced due to post-Exchange Offer mismanagement of REL (as Wells Fargo contends), Marsh's California Corporate Law, § 15.11 supports that the claim is still a direct one:
MARSH'S CALIFORNIA CORPORATE LAW, § 15.11 (emphasis added)
This cause of action — secondary liability for securities fraud — seeks to recover damages for the omissions of material facts or the affirmative misrepresentations of material facts made to the REL Class Plaintiffs in connection with the Exchange Offer. This cause of action does not depend upon any explicit or implicit harm to REL and this measure of damages does not appear to compensate the REL Class Plaintiffs for injury to REL, as REL was not injured by the Exchange Offer or by its misrepresentations or omissions to its members.
But, like the Court's analysis with respect to the aiding and abetting breach of fiduciary duty claim asserted against Wells Fargo, it is theoretically possible that some component of the damages proven at trial may be derivative of damage to REL based upon its managers' post-Exchange Offer mismanagement. To the extent that it is, that component of damage cannot be recovered by the REL Class Plaintiffs.
The REL Class Plaintiffs' third cause of action alleges violation of the California Unfair Competition Law ("
The Court agrees with the REL Class Plaintiffs in part. The UCL certainly prohibits a broad range of unfair business practices. CAL. BUS. & PROF. CODE § 17200 et seq. However, as the California Supreme Court thoroughly discussed in Korea Supply Co. v. Lockheed Martin Corp., 29 Cal.4th 1134, 131 Cal.Rptr.2d 29, 63 P.3d 937, 943 (2003), while the UCL is expansive in scope, remedies under the UCL are limited. Because an action under the UCL is equitable in nature, a plaintiff cannot recover damages. Id. Instead, as the court in Hill v. Opus Corp., 464 B.R. 361, 364 (C.D.Cal.2011) held, a plaintiff is limited to injunctive relief or restitution as its remedies. See also Cel-Tech Commc'ns, 20 Cal.4th 163, 83 Cal.Rptr.2d 548, 973 P.2d 527, 539 (1999) ("Prevailing plaintiffs are generally limited to injunctive relief and restitution. Plaintiffs may not receive damages, much less treble damages, or attorney fees." (citations omitted)). In Kraus v. Trinity Mgmt. Svcs., Inc., 23 Cal.4th 116, 96 Cal.Rptr.2d 485, 999 P.2d 718, 726-27 (2000), the California Supreme Court defined restitution in the context of the UCL as "compelling a UCL defendant to return money obtained through an unfair business practice to those persons in interest from whom the property was taken, that is, to persons who had an ownership interest in the property." Moreover, as the California Supreme Court stated:
Korea Supply Co., 131 Cal.Rptr.2d 29, 63 P.3d at 947.
The REL Class Plaintiffs allege that Wells Fargo engaged in business practices that violated the UCL. Assuming, without deciding, that the REL Class Plaintiff have a cognizable cause of action under the UCL, the REL Class Plaintiffs' remedy under California law is limited to restitution, as injunctive relief is neither sought nor beneficial here. From this Court's reading of California law, restitution would permit the recovery of the money or property allegedly taken through the unfair practice — i.e., the REL Class Plaintiffs' membership interests in REL, as no money was provided at the time of the Exchange Offering. As noted previously, that is not the remedy the REL Class Plaintiffs hope to receive; rather, they hope to compel Wells Fargo to "pay restitution." But, like the California Supreme Court said of the plaintiffs in Korea Supply, this Court has grave concerns that "the remedy sought by the [REL Class Plaintiffs] in this case is not restitutionary because the [REL Class Plaintiffs do] not have an ownership interest in the money [they] seek[] to recover from [Wells Fargo]." Id.
Thus, while this Court has some concern over whether the REL Class Plaintiffs can prevail on this claim and recover the monies they seek to recover, that decision is better left to the court presiding over the California Class Action. See Seven Seas, 522 F.3d at 585, 587-88 ("[W]hether the claim[] will ultimately prove to be legally or factually valid is not [the court's] concern.... [T]he fact that [a party] ultimately may be unable to prevail on the claims does not render the claims property of the estate."). All this Court
The REL Class Plaintiffs complied with the Opinion when they amended the California Class Action complaint. The TAC does not state a claim against Wells Fargo that is property of the REL bankruptcy estate. The three claims pled in the TAC state claims that belong to the REL Class Plaintiffs. However, because it is theoretically possible that some component of the damages proven at trial may be derivative of damage to REL based upon its managers' post-Exchange Offer mismanagement, the Court will issue an injunction preventing the REL Class Plaintiffs from collecting that portion of the damages proven at trial. We leave it to the court presiding over the California Class Action to correctly apportion those damages to the extent that becomes necessary at trial.
An Order granting the Motion to this limited extent and a conforming Judgment will be entered separately. Counsel for the REL Class Plaintiffs is directed to prepare such documents, get Wells Fargo's approval as to the form of the documents, and then upload them for the Court's consideration within ten (10) days of the entry of this Memorandum Opinion on the Court's docket. If no agreement can be reached, the parties are directed to submit their respective proposed forms of documents to the Court for consideration by the Court within that same ten (10) day time period.
Wells Fargo Capital Fin., LLC v. Noble (In re R.E. Loans, LLC), No. 12-3513, 2013 WL 1265205 (N.D.Tex. March 20, 2013).
So from the Court's perspective, Wells Fargo mischaracterizes the thrust of the relevant allegations in the TAC. As the Court reads the TAC, none of these allegations relate to post-Exchange Offer mismanagement of REL, the stripping of REL's assets by its managers, or similar claims that would give rise to a claim that belongs to the REL bankruptcy estate.