hollister & brace for the northern district of …€¦ · 1 the bankruptcy action referred to...

NOTICE OF MOTION AND MOTION FOR PRELIMINARY APPROVAL OF THE $11 MILLION SETTLEMENT WITH ALL DEFENDANTS; MEMORANDUM IN SUPPORT

Case No. C-10-5336-JSW

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Robert L. Brace, Esq., SBN 122240 Email: [email protected] HOLLISTER & BRACE P.O. Box 630 Santa Barbara, CA 93102 Telephone: 805.963.6711 Facsimile: 805.965.0329

Attorneys for the Hays Plaintiffs and the Putative Settlement Class

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN FRANCISCO DIVISION

VIVIAN R. HAYS, an individual; SHARON R. BILLEDEAU, an individual; BROOKVEST, LLC, a Virginia limited liability company; CDC-Rural, LP and CDC-Glendale, LP, Arizona limited partnerships; COMMERCIAL ONE CORPORATION, a Pennsylvania corporation; DCRE INVESTMENTS, LLC, a limited liability company; ROBERT P. DREYER, an individual; ESPERANCE, LLC, a Louisiana limited liability company; FEMRITE COMMERCIAL RENTALS, LLC, a Wisconsin limited liability company; DANIEL FRIEDLANDER, an individual; IRON CROWN, LLLP, a Colorado limited liability partnership; KYOUNGAE KIM, as Trustee of the Kyoungae Kim Trust Dated December 16, 2002; CAROLYN KNEESE, as Trustee of the Carolyn Calvin Kneese Trust; LEAPIN EAGLE, LLC, a New York limited liability company; DANNY J. MCDANIEL AND CHARIS L.MCDANIEL, individuals; KEVIN D. MILLER and JIN SUK PARK, individuals; GIUSEPPE PASSANTINO and ROSANNA PASSANTINO, individuals; FRED PIRO, as Trustee of The Mary and Freddie Piro 1987 Trust; LARRY E. PRESNELL, an individual; PRUDENTIAL PROPERTIES, LLC, a Florida limited liability company; TRACY A. RALPHS and SANDRA M. RALPHS, individuals; TED WILLIAM RAMOS and EMILIA RAMOS, as Trustees of the Ramos Family Trust, dated 4-14-04; GREGORY D. SCHULTZ, an individual; PETER SCHONBERGER, an individual; DENISE WILSON, an individual; KENNETH WOOD, an individual; JOSEPH A. ZELINKA and PAMELA ZELINKA, individuals; and all others similarly situated;

Case No.: C 10-05336 JSW

NOTICE OF MOTION AND MOTION FOR PRELIMINARY APPROVAL OF $11 MILLION SETTLEMENT WITH DEFENDANTS; MEMORANDUM IN SUPPORT Assigned to the Hon. Jeffrey S. White Date: July 20, 2012 Time: 9:00am Courtroom: 11, 19th Floor Final Fairness Hrg.: November 16, 2012

Case3:10-cv-05336-JSW Document38 Filed05/15/12 Page1 of 27

NOTICE OF MOTION AND MOTION FOR PRELIMINARY APPROVAL OF THE $11 MILLION SETTLEMENT WITH ALL DEFENDANTS; MEMORANDUM IN SUPPORT


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Plaintiffs, vs.

COMMONWEALTH LAND TITLE INSURANCE COMPANY, a Nebraska corporation; COMMONWEALTH LAND TITLE COMPANY, a California corporation; LAWYERS TITLE INSURANCE CORPORATION, a Nebraska corporation; LANDAMERICA CHARTER TITLE COMPANY, a Virginia corporation; and DOES 1 through 100,

Defendants.


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Table of Contents

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TABLE OF CONTENTS

NOTICE OF MOTION AND MOTION ...................................................................................... 1

MEMORANDUM OF POINTS & AUTHORITIES .................................................................... 2

I. INTRODUCTION ............................................................................................................. 2

A. Summary of Plaintiffs’ Claims ....................................................................................... 2

B. Summary of Defenses .................................................................................................... 4

C. The LES Trust ................................................................................................................ 5

D. This Settlement Is Intertwined With the Bankruptcy Settlement. .................................. 5

E. Preliminary Approval Is Appropriate. ............................................................................ 6

II. A SUMMARY OF THE LITIGATION ARISING OUT OF THE COLLAPSE ............. 7

OF LES ............................................................................................................................ 7

A. The 1031 Exchange Process ........................................................................................... 7

B. LES was a QI That Invested Exchange Funds in Auction Rate Securities .................... 7

(“ARS”), Which Froze in February 2008, Rendering LES Insolvent............................ 7

C. After Filing Proofs of Claim in the Bankruptcy of LES, the Hays Plaintiffs ................ 8

Filed Litigation Against SunTrust Banks and Then Against the Title ........................... 8

Insurance Defendants. .................................................................................................... 8

1. The case against SunTrust Banks ............................................................................... 9

2. The Case Filed Against the Title Insurance Defendants was Negatively ................... 9

Impacted by the Anti-Fiduciary Duty Orders. ............................................................ 9

D. The Liquidation Trusts Made a Claim on a $50 Million E&O Policy Issued by ......... 10

Lloyds to LFG and Its Subsidiaries and Settlement for $37.8 Million. ........................ 10


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Table of Contents

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III. THE PRELIMINARY APPROVAL PROCESS ......................................................... 12

IV. THE COURT SHOULD GRANT CLASS CERTIFICATION FOR PURPOSES

OF THE SETTLEMENT ............................................................................................. 15

V. THE COURT SHOULD PRELIMINARILY APPROVE THE $11 MILLION

SETTLEMENT, SET THE DATE FOR A FINAL FAIRNESS HEARING AND

ALLOW THE CLASS REPRESETATIVES TO SEND OUT TH E NOTICE. ........... 17

A. The Settlement is Adequate and Good for the Class. ................................................... 17

B. The Proposed Notice is Adequate. ............................................................................... 18

C. Proposed Schedule of Events ....................................................................................... 19

VI. CONCLUSION.............................................................................................................. 20


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Table of Authorities

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TABLE OF AUTHORITIES

Cases

Hanlon v. Chrysler Corp. 150 F.3d 1011 (9th Cir. 1998). .............................................................................................. 16 Harris v. Palm Springs Alpine Estates, Inc. 329 F.2d 909 (9th Cir. Cal. 1964) .......................................................................................... 16 Lerwill v. Inflight Motion Pictures, Inc. 582 F.2d 507 (9th Cir. Cal. 1978). ......................................................................................... 17 Manty v. Miller & Holmes, Inc. (In re Nation-Wide Exch. Servs.) 291 B.R. 131 (Bankr. D. Minn. 2003) ...................................................................................... 3 McHale v. Boulder Capital, LLC, 439 B.R. 47; 2010 Bankr. LEXIS 2612; 53 Bankr.Ct. Dec.

180 (S.D.N.Y. 2010). ................................................................................................................ 3 Philadelphia Housing Authority v. American Radiator & Standard Sanitary Corp. 323 F. Supp. 364 (E.D. Pa. 1970) ........................................................................................... 13 Taxel v. Surnow (In re San Diego Realty Exch.) 132 B.R. 424 (Bankr. S.D. Cal. 1991) ...................................................................................... 3 Tech-Bilt, Inc. v. Woodward-Clyde Assocs. 38 Cal. 3d 488 (1985)………………………………………………………………………..15 Torrisi v. Tucson Elec. Power Co. 8 F.3d 1370 (9th Cir. 1993) .................................................................................................... 19

Statutes

California Code of Civil Procedure. § 877.6…………………………………………….…15, 23

Federal Code of Civil Procedure 23 ........................................................................... 15, 16, 18,19

Other Authorities

2 Herbert Newberg & Alba Conte, Newberg on Class Actions (3d ed. 1992) ........................... 13

Manual for Complex Litigation Third (3d ed. 1995) .................................................................. 13

Manual for Complex Litigation Fourth (4th ed. 2010) .......................................................... 13, 17


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NOTICE OF MOTION AND MOTION FOR PRELIMINARY APPROVAL OF $11 MILLION CLASS SETTLEMENT WITH ALL DEFENDANTS


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NOTICE OF MOTION AND MOTION

TO ALL PARTIES, INTERESTED PERSONS AND THEIR ATTORNEYS:

PLEASE TAKE NOTICE that Plaintiffs, on behalf of themselves and the Settlement

Class (as defined in the accompanying Memorandum), hereby move, pursuant to Fed. R. Civ.

P. 23(e), with the consent of all the Defendants, for an Order: (1) preliminarily approving the

terms of the $11 million class-wide settlement (the “Class Settlement”); (2) certifying the

proposed settlement class for purposes of settlement only; (3) approving the form and method

for providing notice of the Settlement to the settlement class and other interested persons;

(4) scheduling a final fairness hearing at which time the request for final approval of the

Settlement will be heard; and (5) appointing the named Plaintiffs as Class representatives and

Hollister & Brace as Class counsel.

This Motion is based on this Notice, the accompanying Memorandum of Points and

Authorities, the Declaration of Robert L. Brace (“RLB Decl.”), all documents and arguments

submitted in support thereof, and the complete court file. A hearing date has been set for July

20, 2012, or as early as may be heard, at 9:00 a.m., in Courtroom 11, 19th Floor, before United

States District Judge Jeffrey S. White, at the United States District Court for the Northern

District of California, United States Courthouse, 450 Golden Gate Avenue, San Francisco,

California.

DATED: May 15, 2012 Respectfully submitted, By: /s/ Robert L. Brace, Esq., Ca. Bar No. 122240 HOLLISTER & BRACE

P.O Box 630 Santa Barbara, Ca. 93102 Tel: (805) 963-6711

Attorneys for the Hays Plaintiffs and the Putative Settlement Class


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MEMORANDUM IN SUPPORT OF MOTION FOR PRELIMINARY APPROVAL OF $11 MILLION CLASS SETTLEMENT WITH ALL DEFENDANTS


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MEMORANDUM OF POINTS & AUTHORITIES

I. INTRODUCTION

In this matter, the Plaintiffs seek preliminary court approval of an $11 million class-

wide Settlement (the “Class Settlement”) with the defendants identified in the above caption.

The Court’s final approval of the Class Settlement (Exhibit 7 to the RLB Decl.) will allow the

383 class members to also recover an additional $36.8 million obtained in a settlement

involving an E&O insurer, the trustees of two liquidation trusts, and defendants in a related

bankruptcy Settlement1 (the “Bankruptcy Settlement”). The Bankruptcy Settlement (Exhibit 8

to the RLB Decl.) is conditioned upon approval of the Class Settlement. The Class Settlement is

conditioned upon approval of the Bankruptcy Settlement. Combining these settlements with

other recoveries made and distributed in the bankruptcy action will result in the payment of

over 90% of Plaintiffs’ unpaid 1031 Exchange Funds– which is a very good result.

A. Summary of Plaintiffs’ Claims

This class action litigation was brought by 27 named Plaintiffs on behalf of a class of

383 similarly situated persons (collectively, the “LES Exchangers”) located in numerous states

who each lost substantial money (“Exchange Funds”) entrusted to LandAmerica 1031

Exchange Services, Inc. (“LES”), acting as a “qualified intermediary” in the business of

facilitating like-kind exchanges of real property pursuant to Internal Revenue Code Section

1031 (“1031 Exchanges”).

LES was owned by LandAmerica Financial Group, Inc. (“LFG”), a Fortune 500

company, before the real estate markets took a dramatic downturn. LES invested the Exchange

Funds it held in Auction Rate Securities (“ARS”). As a result of the economic crisis, the ARS

markets froze on or about February 11, 2008. Plaintiffs allege that this rendered LES insolvent

and, eventually, LES was unable to return Exchange Funds to Plaintiffs. LES and LFG filed

1 The bankruptcy action referred to herein is styled as In re LandAmerica Financial Group, Inc., et al., United States Bankruptcy Court for the Eastern District of Virginia, Case No. 08-35994-KRH.


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Chapter 11 bankruptcy on November 26, 2008, in the United States Bankruptcy Court for the

Eastern District of Virginia. At the time of the filing, the defendants (which are title

companies) were wholly owned subsidiaries of LFG2. These particular subsidiaries of LFG did

not file for bankruptcy. The non-debtor title companies, which are the defendants herein may

be referred to as the “Title Insurance Defendants.”

The Plaintiffs contend that the Title Insurance Defendants knowingly, actively, and

substantially assisted a 1031 Ponzi scheme3 at LES after LES became insolvent due to the

freezing of the ARS Market. The Plaintiffs allege that the Ponzi scheme ran from February

11, 2008 to November 26, 2008, entrapping the named Plaintiffs and members of the Class,

who collectively lost approximately $191 million.

The Plaintiffs contend that at the direction of senior management, the Title Insurance

Defendants helped LES in committing intentional torts against the LES Exchangers by: (i)

referring new clients to LES, knowing LES was insolvent; (ii) printing and distributing

Exchange Agreements for LES, knowing they contained promises which could not be

performed by LES; (iii) printing and distributing promotional materials for LES containing

representations of financial security, which the Title Insurance Defendants knew were false;

2 The defendants are: Commonwealth Land Title Insurance Company (“CLTIC”), Commonwealth Land Title Company (“Commonwealth”), Lawyer’s Title Insurance Corporation (“LTIC”), and LandAmerica Charter Title Company (“LCTC”). Certain subsidiaries of Fidelity National Financial, Inc. (“FNF”) purchased the non-debtor Title Insurance Defendants from LFG while the LFG bankruptcy case was pending. The sale to FNF’s subsidiaries was approved by the bankruptcy court on December 17, 2008.

3 Qualified Intermediaries who pay older exchanges with after-acquired funds when the trust is in a deficit operate a Ponzi scheme. See Taxel v. Surnow (In re San Diego Realty Exch.), 132 B.R. 424 (Bankr. S.D. Cal. 1991), rev’d to determine the existence of an express trust, 1994 U.S. App. LEXIS 10317 (9th Cir. Cal. May 2, 1994). Even when an exchange business does not start out as a Ponzi scheme “once [the company] mismanaged and converted the funds of some clients, and kept taking in the business and assets of others, it quickly became that.” Manty v. Miller & Holmes, Inc. (In re Nation-Wide Exch. Servs.), 291 B.R. 131, 149 n. 20 (Bankr. D. Minn. 2003) (stating that the case could be termed a resulting Ponzi scheme or Ponzi scheme by performance). In the context of 1031 Exchanges, when newly deposited Exchange Funds are used to pay old Exchanges because there is a deficit in the trust account, a Ponzi scheme presumption applies so that any transfers made in the course of the Ponzi scheme are presumed to have been made for no purpose other than to hinder, delay or defraud creditors. McHale v. Boulder Capital, LLC, 439 B.R. 47; 2010 Bankr. LEXIS 2612; 53 Bankr.Ct. Dec. 180 (S.D.N.Y. 2010).


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(iv) physically transmitting escrowed Exchange Funds to LES, knowing the funds would be

used by LES to pay off older LES Exchange customers; (v) physically transmitting escrowed

Exchange Funds received back from LES to pay off older pending Exchanges, knowing the

funds had been taken from LES’s new customers; and (vi) transferring millions in emergency

money over to LES to make lulling payments to close pending Exchanges to perpetuate the

Ponzi scheme, not to fix it.

The Plaintiffs contend that the agreed-upon goal of the Title Insurance Defendants was

to “buy time” to raise capital to recharge the LES trust or to get by until the ARS market

recovered. Plaintiffs allege that instead of apologizing to the LES Exchangers in existence in

February of 2008 and admitting that LES had made an imprudent investment of Exchange

Funds in ARS and, as a result, those Exchangers had suffered a loss, the Title Insurance

Defendants decided to participate in the 1031 Ponzi scheme. Plaintiffs allege that the Title

Insurance Defendants decided to shift the risk of loss to the new customers of LES, the

Plaintiffs herein. The Plaintiffs contend the Title Insurance Defendants decided to “buy the

time” needed to solve LES’s problem with new customers’ money without disclosing to the

Plaintiffs that they were the involuntary solution used for someone else’s unfortunate business

situation. Plaintiffs allege that the Title Insurance Defendants were motivated to help

perpetrate the scheme at LES, because the failure of LES would destroy the business goodwill

of all the LandAmerica entities, including the value of the Title Insurance Defendants.

B. Summary of Defenses

The Title Insurance Defendants vigorously deny the Plaintiffs’ claims and assert

various defenses to these claims. The Title Insurance Defendants filed a Rule 12(b)(6) Motion

to Dismiss the complaint in its entirety; that motion is fully briefed and is pending. In that

motion, the Title Insurance Defendants argued that all of Plaintiffs’ claims are completely

barred under principles of res judicata due to the effect of the confirmed LFG bankruptcy plan.

Further, Defendants argue that the aiding and abetting breach of fiduciary duty claims (claims

3 and 4 in this complaint) were effectively neutered when the District Court ruled, in the


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related breach of fiduciary duty case, that there was no fiduciary duty between LES and the

LES Exchangers. Defendants also argue that many of the Plaintiffs in this lawsuit and the

Class were never referred to LES by the Title Company Defendants. All of these defenses are

before the Court in the pending Motion to Dismiss. Defendants believe additional defenses

would have been developed and successfully presented at trial.

C. The LES Trust

LFG and LES filed for bankruptcy on November 26, 2008, and thereafter, a Joint

Chapter 11 Plan (the “Plan”) was approved, establishing the LandAmerica 1031 Exchange

Services Inc., Liquidation Trust (the “LES Trust”) and the LFG Liquidation Trust (the “LFG

Trust”). Together, the LES Trust and the LFG Trust will be referred to as the “Trusts.” The

LES Exchangers are beneficiaries of the Trusts whose purpose has been to liquidate assets and

pay claims asserted in the bankruptcy court. The LES Trust has effectively gone about its

work, and to date it has already distributed significant sums to the LES Exchangers. In fact,

the LES Exchangers have already been repaid more than 70% of their Exchange Funds. If this

Settlement is approved, they will be over 90% and given other potential recoveries by the

Trusts it is very likely they will get to 100%. This Class Settlement, together with the

Bankruptcy Settlement discussed below, are significant and important parts of the distribution

math. An accounting of prior distributions by the Trusts to the LES Exchangers (the class

members) are set out in Exhibit 6 attached to the RLB Declaration.

D. This Settlement Is Intertwined With the Bankruptcy Settlement.

The approval of this $11 million Class Settlement with the Title Insurance Defendants

is an express condition to the Bankruptcy Settlement. When perfected, that settlement will

send $36.8 million to the LES Trust, to be distributed to the Trust beneficiaries (who are

members of the proposed Class) after paying fees and costs. The Bankruptcy Settlement has

already been approved, contingent only upon the final approval of this Class Settlement to be

fully effective.


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If this Class Settlement is approved, the combined distribution to the Exchanger

Plaintiffs will bring their recovery to above 90% of their allegedly lost Exchange Funds. With

other anticipated recoveries, the distribution to the LES commingled exchangers should reach

100% of the lost exchange fund amount of $191 million. If this Class Settlement is not

approved, then the $36.8 million settlement is not final, and that money is at risk of loss in

further litigation between the E&O insurers, the Trusts, and the Title Insurance Defendants.

E. Preliminary Approval Is Appropriate.

Preliminary approval of the $11 million Class Settlement is appropriate because it is

fair and the proposed Settlement Class meets the requirements of Federal Rule of Civil

Procedure 23. The Class Settlement was reached after adversarial negotiations between

counsel who are intimately familiar with the facts. The negotiation of this Class Settlement

and the Bankruptcy Settlement stretched over the course of weeks, and involved multiple

parties with skilled counsel advocating their clients’ respective positions. The payment of

$11 million, coupled with the $36.8 million, is a significant and efficient global resolution of

what would be lengthy, expensive and very complex litigation. The payment of $11 million,

by itself, in light of the claims and defenses, represents a fair resolution of this litigation.

The Settlement Class is sufficiently numerous (383 members) and the claims of the

named plaintiffs’ (27 total) are typical of those of the Settlement Class and common to all

class members. The named Plaintiffs are adequate Class Representatives. Class Counsel, who

for the past five years has worked solely on 1031 Ponzi scheme cases, helping to collect over

$240 million in settlements from well-represented institutional defendants, is adequate and

qualified. Preliminary approval is warranted so that notice can be sent to solicit objections.

After notice and the chance for objections to be heard, the Court can determine if final

approval is appropriate.

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II. A SUMMARY OF THE LITIGATION ARISING OUT OF THE COLLAPSE

OF LES

A. The 1031 Exchange Process

Section 1031 of the Internal Revenue Code (“Section 1031”) permits an owner of

property to defer the capital gains tax that would be due upon sale, provided the proceeds (that

is, the Exchange Funds) are timely applied to purchase “Replacement Property.” Property

owners seeking tax-deferred treatment (“Exchangers”) have 45 days from the date of the sale

of their “Relinquished Property” to identify a “Replacement Property” and 180 days to close

on the purchase. In order to defer the tax, Exchangers are not permitted to take possession of

sale proceeds, but instead must use a qualified intermediary (hereinafter, “QI”), take

possession of the Exchange Funds. The QI takes possession of the Exchange Funds and holds

them during the period between sale of “Relinquished Property” and purchase of

“Replacement Property.” The use of a QI allows the Exchanger to avoid taking actual

possession of the sale proceeds, which allows the Exchanger to defer the tax, provided that the

QI purchases a Replacement Property within the allotted time.

B. LES was a QI That Invested Exchange Funds in Auction Rate Securities (“ARS”), Which Froze in February 2008, Rendering LES Insolvent.

LES operated as a QI. Since the inception of LES in the early 1990s, LES’s general

practice was to commingle the proceeds of one customer’s sale of Relinquished Property with

funds received in connection with the 1031 transactions of other customers. This practice

worked as long as LES had sufficient funds available when needed to complete all 1031

transactions. The failure to complete a 1031 Exchange because of the lack of available funds

would cause severe reputational damage to LES and stop the flow of incoming Exchange

Funds.

Since in or about 2002, LES had invested a substantial portion of the 1031 Exchange

Funds it received in auction rate securities (“ARS”) comprised of student loans. An ARS is a

debt instrument with a long-term maturity for which the interest rate is regularly set through an


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auction process whereby an auctioneer begins with a high asking rate, which is lowered until

some participant is willing to accept the auctioneer’s rate, or a predetermined reserve rate is

reached (a “Dutch Auction”). Investment in ARS is considered a low-risk investment.

However, during the week of February 11, 2008, the Dutch Auctions for even lower risk ARS

failed, which rendered the ARS that LES owned illiquid. Plaintiffs allege that LES could not

access the securities to meet its 1031 Exchange obligations, allegedly rendering LES

insolvent.

Plaintiffs allege that when the ARS market “froze” in mid-February, approximately

41% percent of the LES commingled assets set aside to fulfill Exchange transactions became

illiquid, and therefore inaccessible. By September 2008, plaintiffs allege that the percentage

was 80%. Despite this, Plaintiffs allege that LES continued to take in new customer funds

with no change in operations or in any of its disclosures to its customers. After February

2008, plaintiffs allege that LES ran a Ponzi scheme, taking in new Exchange Funds from new

customers to close Exchanges for older customers which could not close because their

Exchange Funds had been invested in ARS which had frozen. When the alleged scheme

collapsed on November 28, 2008, 383 LES Exchangers were owed over $191 million.

C. After Filing Proofs of Claim in the Bankruptcy of LES, the Hays Plaintiffs Filed Litigation Against SunTrust Banks and Then Against the Title Insurance Defendants.

It has been and still is the Hays Plaintiffs’ contention that: (i) LES held the Exchange

Funds in trust for a specific purpose; (ii) the LES Exchangers were beneficiaries of the trust

and the fiduciary relationship with LES; (iii) certain persons and entities affiliated with LES

knowingly assisted LES in breaching fiduciary duties LES owed to the LES Exchangers who

deposited Exchange Funds with LES between February and November 2008; and (iv) these

aiders and abettors also helped LES convert trust assets and commit fraud to induce new

Exchangers to part with their money. Aiding and abetting liability requires the primary

tortfeasor to commit an intentional tort, such as fraud, conversion, or breach of trust.


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1. The case against SunTrust Banks

On January 14, 2009, certain of the Hays Plaintiffs sued SunTrust Banks (“SunTrust”)

in the United States District Court, Southern District of California, for aiding and abetting LES

in the breach of fiduciary duties LES owed the LES Exchangers (the “SunTrust Banks Case”).

The complaint against SunTrust is attached as Exhibit 2 to the RLB Decl. The case is styled as

Arthur, et al., v. SunTrust Banks, Inc., et al., Case No.3:09-2054-BEN-AJB. On June 12,

2009, the SunTrust Banks case was transferred by the Panel on Multidistrict Litigation

(“MDL”) to the Federal District Court for South Carolina and consolidated with another

action, Gerald R. Terry, et al. v. SunTrust Banks, Inc., et al., Case. No. 8:09-415. The

SunTrust consolidated litigation is entitled In re LandAmerica Financial Group, Inc., et al.,

MDL No. 2054.

On June 2, 2010, the District Court in South Carolina granted SunTrust’s motion to

dismiss. The decision to grant SunTrusts’s motion to dismiss came after a ruling issued by the

Bankruptcy Court in Virginia (the “Bankruptcy Court”), which held that LES was not acting in

a fiduciary capacity as to the receipt of Exchange Funds. Plaintiffs strongly disagree with the

Bankruptcy Court’s ruling. Plaintiffs also strongly disagree with the South Carolina District

Court’s decision on SunTrusts’s motion to dismiss, which adopted the rationale of the

Bankruptcy Court, and concluded that LES was not acting in a fiduciary capacity while

holding the Exchange Funds for the 180-day Exchange period. The Hays Plaintiffs appealed

the Judgment of Dismissal to the Fourth Circuit, with Oral argument set for May 17, 2012. A

copy of the Bankruptcy Court’s order and the District Court’s Order (hereinafter, the “Anti-

Fiduciary Duty Orders”) are combined and attached to the Declaration of Robert L. Brace

(“RLB Decl.”) as Exhibit 3.

2. The Case Filed Against the Title Insurance Defendants was Negatively Impacted by the Anti-Fiduciary Duty Orders.

The District Court’s ruling in the SunTrust Banks case negatively impacted the Hays

Plaintiffs’ ability to argue that others (such as the Title Insurance Defendants) intentionally


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assisted LES in breaching fiduciary duties owed to the LES Exchangers. The South Carolina

District Court’s ruling weighs heavily in favor of granting preliminary Class approval of this

$11 million settlement of the case against the Title Insurance Defendants for aiding and

abetting LES’s breach of fiduciary duty -- a duty the District Court concluded that LES did not

owe.

On November 24, 2010, the Hays Plaintiffs sued the Title Insurance Defendants in the

federal district court for the Northern District of California. The case is entitled Hays, et al. v.

Commonwealth, et al., Case No. C 10-5336-JSW. This matter was then transferred to South

Carolina as a tag-along to In re LandAmerica Financial Group, Inc., et al., MDL No. 2054. A

First Amended Complaint was filed on August 11, 2011 and it is attached to the RLB Decl. as

Exhibit 1. A Motion to Dismiss was filed, opposed, and oral argument presented. The Motion

to Dismiss and the Hays Plaintiffs’ Opposition is attached to the RLB Decl. as Exhibits 4 and

5 respectively. The District Court in South Carolina never ruled on the motion, and instead

requested that the MDL Panel remand the matter back to the transferor court – the Northern

District of California. The MDL Panel agreed, so the case is now before this Court with a

motion to dismiss that has been fully briefed and argued and is awaiting decision. With the

12(b)(6) motion still pending, the parties evaluated their respective positions, examined the

costs and benefits of further action, and decided that it was better to settle than to engage is

costly and risky litigation. Plaintiffs now seek the Court’s approval of the Class Settlement

that the parties negotiated (Exhibit 7 to the RLB Decl.). The case is a purported class action

which requires judicial oversight to protect the constitutional rights of the parties who are not

technically before the Court.

D. The Liquidation Trusts Made a Claim on a $50 Million E&O Policy Issued by Lloyds to LFG and Its Subsidiaries and Settlement for $37.8 Million.

LES and LFG filed voluntary petitions for relief under Chapter 11 of Title 11 of the

United States Code with the United States Bankruptcy Court for the Eastern District of


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Virginia (the “Bankruptcy Court”). The Trusts were created by the Plan, which was approved

by order entered on November 23, 2009 by the Bankruptcy Court.

Pursuant to the Plan, certain assets of LES and LFG were transferred to the Trusts,

including the right to pursue E&O coverage under policies issued by Certain Underwriters at

Lloyd’s of London (“Underwriters”) with an aggregate liability limit of $50 million. The

Trusts asserted that Underwriters were obligated to provide coverage up to the $50 million

limit for the negligence claims the LES Exchangers had made against LES for failing to close

their Exchanges. Underwriters disputed coverage, the amount available, and the merits of the

claims asserted. However, on January 11, 2012, Underwriters agreed to pay $37.8 million

($36.8 million to the LES Trust and $1 million to the LFG Trust), provided the insurance was

deemed exhausted by the Bankruptcy Court. However, exhaustion would eliminate coverage

for the Hays Plaintiffs’ claims against the Title Insurance Defendants who, as subsidiaries of

LFG, were insureds under the policies. The Title Insurance Defendants objected to the

“Trustees/Underwriters Agreement,” arguing, among other things, that it did not actually

exhaust all available coverage and it inappropriately gave one insured (LES) priority over the

claims of the other insureds (the Title Insurance Defendants) to the same insurance proceeds.

The Hays Plaintiffs and the Trusts all agreed they should try to avoid the potential loss

of the $37.8 million, to be paid over by Underwriters, so they entered into serious settlement

negotiations between themselves, Underwriters, and the Title Insurance Defendants. As a

result of the negotiations, it was agreed that the Title Insurance Defendants would withdraw

their objection to the Trusts/Underwrites Agreement, that the Trust/Underwriters Agreement

would be approved, with the payment of $37.8 million to the Trusts. In addition, the

Underwriters agreed that it would exhaust the coverage by contributing $3.2 million to settle

the Hays Class Action claims, and the Title Insurance Defendants agreed to contribute $7.8

million out of their own pockets, for a total payment to the Class of $11 million. As part of

the negotiation process, Class Counsel also agreed to cap fees at 25% of $9 million out of the

$11 million. So, in summary, the global settlement is as follows:


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III. THE PRELIMINARY APPROVAL PROCESS

Approval of any class settlement involves a two-step process. First, the Court decides if

the case can be a class action under Rule 23 and then it makes a preliminary fairness

determination based on the terms of the proposed settlement. The Court determines whether the

settlement seems fair on its face and worth submitting to the unnamed class members. If

preliminary approval is warranted, the Court then schedules a final fairness hearing and directs

that notice of the settlement be provided to class members.

The second step is the final fairness hearing, where a final determination is made

regarding the fairness, reasonableness and adequacy of the proposed settlement. A final

determination regarding fairness is made only after notice has been given to class members, so

that they have an opportunity to voice their views or exclude themselves from the process. The

final determination at the final fairness hearing is the time for the Court to be active with

exacting and thorough judicial review to expose flaws or abuses of the class settlement process.

In determining whether preliminary approval is warranted, the Court need not reach any

ultimate conclusions on contested issues of fact or law which underlie the merits of the dispute,

and need not engage in a trial on the merits. The purpose of the preliminary hearing is simply

for the Court to determine whether there is a likelihood it could grant final approval before class

members are notified. Preliminary approval is merely the prerequisite to giving notice so that

“the proposed settlement . . . may be submitted to members of the prospective class for their

Payor/Payee Settlement Amount Approval Required by:

Underwriters / LES Trust $36.8 million Virginia Bankruptcy Court

Underwriters / LFG Trust $1 million Virginia Bankruptcy Court

Underwriters to LES Class $3.2 million California N. District Court

Title Insurance Defendants / Class $7.8 million California N. District Court

Total: $48.8 million


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acceptance or rejection.” Philadelphia Housing Authority v. American Radiator & Standard

Sanitary Corp., 323 F. Supp. 364, 372 (E.D. Pa. 1970). Settlements that appear to fall within

the range of what might be found fair, reasonable and adequate, are entitled to preliminary

approval, provided there are no obvious grounds to doubt their fairness or other obvious

deficiencies. Manual for Complex Litigation Third, §30.41, at 236-37 (3d ed. 1995) (hereinafter

“Manual 3d ”).

There is a presumption that a proposed settlement is fair and reasonable when it is the

result of arm’s-length negotiations by experienced counsel. 2 Herbert Newberg & Alba Conte,

Newberg on Class Actions §11.41 at 11-88 (3d ed. 1992); Manual 3d §30.42 (3d ed. 1995);

Manual for Complex Litigation Fourth, §21.64 (4th ed. 2010) (hereinafter “Manual 4th”).

Robert Brace (“Brace’) of Hollister & Brace is counsel to the Class representatives and he

declares that the settlement is fair, and in the best interests of the Class. Brace seeks to be

appointed by the Court as counsel to the Class, pursuant to Rule 23(g)(1). Since February 2007,

Brace has personally expended over 8,000 hours working exclusively on IRC §1031 Ponzi

scheme cases, assisting in the collection of over $240 million in settlements from banks,

brokers, insurers, and law firms. The six (6) cases are as follows:

IRC §1031 Ponzi Scheme Cases on Which Robert Brace Served as Lead /Co-Lead Counsel:

1 MDL No. 1878, In re: Southwest Exchange Inc. Internal Revenue Service

§ 1031 Tax-Deferred Exchange Litigation, United States District Court for the District of Nevada Case Number 2:07-CV-01394-RCJ-LRL before the Hon. Robert C. Jones. (409 Docket Entries.)

2 MDL No. 2028, In re: Edward H. Okun Internal Revenue Service § 1031 Tax Deferred Exchange Litigation, United States District Court for the Northern District of California, Case Number 07-CV-2795-JW before the Hon. James Ware. (287 Docket Entries.)

3 Hunter, et al. v. Citibank, N.A., et al., United States District Court for the Northern District of California, Case Number 09-CV-2079-JW before the Hon. James Ware. (597 Docket Entries.)


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4 MDL No. 2054, In re: LandAmerica 1031 Exchange Services, Inc. §1031 Tax Deferred Exchange Litigation, United States District Court of South Carolina, Case Number 09-mn-2054-JFA before the Hon. Joseph Anderson. (224 Docket Entries.)

5 United States Fire Insurance Company v. Vesta Strategies, LLC, United

States Northern District Court of California, Case Number 09-cv-2388-JW, before the Hon. James Ware (278 Docket Entries.)

6 Dillon v. Continental Casualty Company, United States Northern District

Court of California, Case Number 10-cv-5238-JW, before the Hon. James Ware (69 Docket Entries.)

A cursory review of the docket entries in the above §1031 Ponzi scheme cases reflects

years of intense legal research by counsel for Plaintiffs and defendants, developed as they

fought over all conceivable issues which could be the subject of a colorable dispute. Based on

the narrow focus of the cases worked on, Brace has special insight into what is a fair and

reasonable settlement for an alleged aider and abettor of a §1031 Ponzi scheme. According to

Brace, the Class Settlement with the Title Insurance Defendants for $11 million, which secures

an additional $36.8 million from the Bankruptcy Settlement, is a sound result for the Class.

The Class will be in a position to recover 100% of their lost Exchange Funds. As the

Defendants point out, if each Exchanger had invested Exchange Funds in Replacement Property

in 2008, as originally planned, that property’s value may be significantly less today than what it

was in 2008.

This Class Settlement was the result of adversarial negotiations, and the amount to be

paid represents a compromise of disputed claims. The defendants contest liability and assert

significant defenses to recovery. The Court should certify the case as a class action, grant

preliminary approval of the Class Settlement, allow the class representatives to send out notice,

and grant final approval at the final fairness hearing, with a bar order precluding future claims

against the Title Insurance Defendants. The Title Insurance Defendants also seek a finding that

this is a good faith settlement under C.C.P. § 877.6 and an order precluding any future claims


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by any joint tortfeasor based on equitable comparative contribution, or partial or comparative

indemnity, based on comparative negligence or comparative fault.. The determination of good

faith under C.C.P.§ 877.6 is governed by essentially the same factors as the fairness and

adequacy of the Settlement for the Class. See, e.g., Tech-Bilt, Inc. v. Woodward-Clyde Assocs.,

38 Cal. 3d 488, 499-500 (1985).

IV. THE COURT SHOULD GRANT CLASS CERTIFICATION FOR PURPOSES

OF THE SETTLEMENT.

A court can certify a settlement class where plaintiffs demonstrate that the proposed

class and proposed class representatives meet the four prerequisites in Fed. R. Civ. P. 23(a) –

numerosity, commonality, typicality and adequacy of representation – and one of the three

requirements of Fed. R. Civ. P. 23(b). Here, pursuant to Rules 23(a) and (b)(3), Plaintiffs seek

certification of a defined settlement class consisting of :

Each and every commingled exchanger who entrusted 1031 exchange funds to LandAmerica 1031 Exchange Services, Inc. after February 11, 2008 and who has been denied access to any of those Exchange Funds, and who suffered loss or damages or allegedly suffered loss or damages in any way, directly or indirectly, related to or arising out of (a) the bankruptcy of LES, or (b) any of the events, acts or conduct alleged in the Complaint or the First Amended Complaint filed in the Hays Class Action. The Class shall also include any person or entity that holds a valid assignment of a claim from a commingled exchanger that would have qualified for the Class but-for the assignment of such claim. Notwithstanding the foregoing, the Class shall not include (a) any persons or entities that have already settled with and released the Title Company Parties, or any of them, for any claim that would otherwise qualify such persons or entities for membership in the Class, or (b) any persons or entities that have assigned their claims to any other person or entities prior to the date that an order approving this Settlement Agreement becomes a Final Order.

As detailed in the RLB Decl., the members of the Class and the amount of their claims

are known by counsel. The members are a well-defined group of persons with known addresses

and an active interest in the case because their claims are large. This is not a coupon case or de

minimus claim case dependent on certification to give value. Individual cases will be


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prosecuted if the settlement is not approved and the Class is not certified. Further, it is the

presence of the Class and the ability to settle with it that helped enable the parties to enter into

the Bankruptcy Settlement and achieve a global resolution of all claims.

1. Numerosity – The proposed class of 383 people is “so numerous that

joinder of all members is impracticable.” Fed. R. Civ. P. 23(a)(1). Impracticable does not

mean impossible. The Court on its own can conclude it would be difficult, inconvenient, and

wasteful to attempt to corral and join 383 plaintiffs into one case, using permissive joinder.

Harris v. Palm Springs Alpine Estates, Inc., 329 F.2d 909, 913-14 (9th Cir. Cal. 1964). The

efficiency of a Rule 23 class action in this matter is obvious. Litigation by individuals or small

groups of plaintiffs in multiple courts across the United States would be wasteful. The denial

of class certification will not deter prosecution of litigation against the Defendants because the

size of most members’ claims are substantial. Exhibit 6 reflects multiple class members with

claims exceeding $4 million and claims in excess of $100,000 as being more common than not.

Unless the matter is voluntarily concluded here, there will be costly and protracted litigation.

2. Commonality – Commonality relates to whether there are “questions of

law or fact common to the class.” Fed. R. Civ. P. 23(a)(2). Commonality is satisfied if there is

one issue common to class members. Hanlon v. Chrysler Corp., 150 F.3d 1011, 1019 (9th Cir.

1998). The factual and legal issues concerning the Defendants’ potential liability to class

members are common. Did the Title Insurance Defendants knowingly assist LES in running a

1031 Ponzi scheme after LES became insolvent in February 2008? If the answer is determined

to be “yes” for one LES Exchanger, then it potentially links the Defendants to liability for each

and every LES Exchanger depositing funds after February 2008.

3. Typicality – Typicality under Rule 23(a)(3) is satisfied if the

representative plaintiffs’ claims share a common element with the Class claims because they

arise from the same course of conduct triggering liability to all Plaintiffs. In other words, are

the class representatives’ claims against the Defendants typical of the class members’ claims

against the same Defendants? Here, the named Plaintiffs’ claims are typical of the class


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members’ claims against the same Defendants. All of the LES Exchangers lost Exchange Funds

deposited with LES. The class representatives allege that each Defendant knowingly assisted

LES, and each Defendant’s assistance was a substantial factor in perpetrating LES’s existence,

which injured all of the LES Exchangers. Typicality of the claims is established.

4. Adequacy of Representation – Adequacy under Rule 23(a)(4) is satisfied

if plaintiffs have no disabling conflicts of interest with other members of the Class and

plaintiffs’ counsel is competent and well qualified to undertake the litigation. Lerwill v. Inflight

Motion Pictures, Inc., 582 F.2d 507, 512 (9th Cir. Cal. 1978). Here, Plaintiffs are represented

by counsel who has the most known experience in handling § 1031 Ponzi scheme cases for

class plaintiffs. No conflict exists between the named Plaintiffs and the Class members. The

money recovered will be disbursed on a pro-rated basis. The more money recovered, the more

that is paid to all class members. The common goal is to recover as much money as possible

for the plaintiffs, to make them all whole.

5. Common Questions of Law and Fact Predominate – Common questions

of law or fact predominate over individual questions. All of the class members deposited their

money, and then it was gone. There are no unique issues. This is not a case about the

Plaintiffs’ individual behavior, but rather a case about what the Defendants knew and what the

Defendants did to assist LES, after knowing LES was insolvent.

6. Superiority of Class Action – Because the Court is certifying this action

for settlement purposes only, it need not determine whether the Class would be manageable for

litigation purposes in order to approve the Class. Manual 4th § 21.132.

V. THE COURT SHOULD PRELIMINARILY APPROVE THE $11 MILLION

SETTLEMENT, SET THE DATE FOR A FINAL FAIRNESS HEARING AND

ALLOW THE CLASS REPRESETATIVES TO SEND OUT TH E NOTICE.

A. The Settlement is Adequate and Good for the Class.

The Manual for Complex Litigation Fourth (4th ed. 2010) (“Manual 4th”), lists factors


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for a court to consider when approving a class-wide settlement intended to bind all class

members who do not opt out. Manual 4th §21.62. The central issue is, of course, the evaluation

of the advantages of the proposed settlement versus the probable outcome of a trial on the

merits. The Court must juxtapose the amount voluntarily surrendered by the Defendants with

the amount Plaintiffs could forcefully obtain from them with a verdict at trial, less the costs and

risks of going to trial.

If this $11 million settlement is approved, the Plaintiffs will be in a position to recover

close to all of their $191 million in lost Exchange Funds, which is the amount they would

recover at trial against the Defendants if they prevailed. Moreover, when payments already

made to members of the Class are considered, and certain defenses are applied, the scope of

potential recovery in this lawsuit by the Plaintiffs will drop. Even if Plaintiffs prevail on some

claims, the potential recovery could be less than the $11 million being offered. It could also be

more – but the risk of no recovery or a recovery less than the offered settlement is real.

Plaintiffs will argue they are also entitled to consequential damages proximately

caused by the failure of their 1031 Exchanges and interest owed on the delay in the return of

their money. However, the Defendants have defenses to these consequential damages claims,

including the fact that real estate prices have declined dramatically across the United States

since November 2008. The Defendants will argue that the Exchangers have benefitted from the

collapse of LES because they received their Exchange Funds back in time to buy real property

at 50% of its cost in late 2008. The Plaintiffs dispute this argument. Based on these factors, the

Settlement is adequate and good for the class. The same analysis supports a finding of good

faith settlement to preclude joint tortfeasor indemnity and contribution claims under C.C.P. §

877.6.

B. The Proposed Notice is Adequate.

For any class certified under Rule 23(b)(3), the court must order that class members

receive the best notice practicable under the circumstances, including individual notice to all

members who can be identified through reasonable effort. Fed. R. Civ. P. 23(c)(2)(B). For a


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binding settlement, the Court must direct the Plaintiffs to give notice in a reasonable manner to

all class members who would be bound by the proposed settlement. Fed. R. Civ. P. 23(e). Class

members are entitled to know the terms of the agreement. Class members are entitled to a

notice which clearly and concisely states in plain, easily understood language: (i) the nature of

the action; (ii) the definition of the class certified; (iii) the class claims, issues or defenses; (iv)

that a class member may enter an appearance through an attorney if they so desire; (v) that the

court will exclude from the class any member who requests exclusion; (vi) the time and manner

for requesting exclusion; and (vii) the binding effect of a class judgment on members under

Rule 23(c)(3). Class members are also entitled to notice of the fees and costs being requested

by class counsel and given an opportunity to object. Rule 23(h).4

The parties have agreed on the form of notice (the “Notice of Settlement” attached as

Exhibit 1 to the proposed Preliminary Approval Order) to be disseminated to all people who fall

within the definition of the Class and whose names and addresses can be reasonably identified.

The parties agree that class members shall also receive copies of: (i) the First Amended

Complaint; (ii) the Motion to Dismiss the First Amended Complaint; and (iii) the Settlement

Agreement (attached to the RLB Decl. as Exhibits 1, 4 and 7 respectively). Thus, the proposed

method of notice comports with Rule 23 and the requirements of due process. See, e.g., Torrisi

v. Tucson Elec. Power Co., 8 F.3d 1370, 1374 (9th Cir. 1993).

C. Proposed Schedule of Events

The Court’s entry of the Preliminary Approval Order would, among other things:

(i) certify the action as a class action (only for the purposes of the proposed Settlement);

(ii) direct the Notice of the Class Settlement to all members of the Class; (iii) permit time to

obtain any necessary approvals from other courts; and (iv) schedule a final fairness hearing to

4 Pursuant to the Settlement Agreement, the defendants shall not be responsible for any administration expenses, including but not limited to costs and expenses of providing notice to members of the putative Class, costs and expenses associated with the administration of the Settlement Fund, escrow fees, taxes, and custodial fees, and all such costs shall be borne by the Class and/or their counsel.


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consider whether the Settlement should be approved as being fair, reasonable, and adequate. As

such, the proposed Preliminary Approval Order sets certain deadlines. The parties recommend

that the following dates be inserted into the proposed Preliminary Approval Order:

a deadline for mailing notices to the Class and for mailing any notices pursuant to

the Class Action Fairness Act of 2005 (“CAFA”): 10 days after entry of Preliminary

Approval Order;

● a deadline for requesting exclusion from the Class and deadline for filing Objections

to the Class Settlement, including any Objections to the Bar Order to be entered in

favor of the Settling Defendants who are to be released pursuant to the terms of the

Settlement: 60 days before the Final Fairness hearing;

● Final Fairness Hearing: 105 days after mailing of notices, in compliance with

CAFA;

● a deadline for Class Counsel to file its motion for payment of reasonable attorneys

fees and reimbursement of litigation costs (at least 45 days prior to the Final

Fairness hearing); and

● a deadline for Class Representatives to file their motion for payment of incentive

fees (at least 45 days prior to the Final Fairness hearing).

This schedule is similar to those used and approved by numerous courts in class action

settlements and provides due process to Class members with respect to their rights concerning

the Settlements. See Torrisi, 8 F.3d at 1374-75.

At this preliminary stage, the Court need not finally determine whether the Class

Settlement is fair, reasonable and adequate. Rather, the Court need only determine whether the

Class Settlement is “within the range of reasonableness” and, if so, direct the dissemination of

the Settlement Notice to potential members of the Class and schedule a final fairness hearing.

///

///


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VI. CONCLUSION

For the foregoing reasons, Plaintiffs, with the consent of the settling defendants,

respectfully request that the Court grant preliminary approval of the Class Settlement by

entering the proposed Preliminary Approval Order submitted herewith. DATED this 15th day of May, 2012 Respectfully submitted,

HOLLISTER & BRACE

By: /s/

ROBERT L. BRACE Attorneys for the Hays Plaintiffs and the

Putative Settlement Class


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INDEX OF EXHIBITS

Attached to the Declaration of Robert L. Brace

Exhibit # Description Page(s)

1 First Amended Complaint filed in Hays, et al. v. Commonwealth, et al., USDC N.D. CA. Case No. C 10-5336-JSW

15, 19

2 Second Amended Complaint Against SunTrust Banks, Inc. filed. in consolidated matter In re LandAmerica Financial Group, Inc., et al., MDL No. 8:09-2054-JFA (the “SunTrust Complaint”)

14

3 The Anti-Fiduciary Duty Orders:

- Order Dismissing the SunTrust Complaint - Order Entered by the Bankruptcy Court -

9

4 Motion to Dismiss Pursuant to Rule 12(b)(6), Filed by the Defendants in Hays, et al. v. Commonwealth, et al., USDC N.D. CA. Case No. C 10-5336-JSW

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5 Plaintiffs’ Opposition to Motion to Dismiss filed by the Defendants in Hays, et al. v. Commonwealth, et al., USDC N.D. CA. Case No. C 10-5336-JSW

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6 List of LES Commingled Exchangers Showing 1) Damages and 2) an Accounting of prior distributions by the Trusts

5, 16

7 Class Settlement Agreement for $11 Million 2,5,6,7,10,

12,14,19

8 Bankruptcy Settlement Agreement for $36.8 million and $ 1 million 2,5,6,

14,16


hollister & brace for the northern district of …€¦ · 1 the bankruptcy action referred to...

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