IN THE UNITED STATES DISTRICT COURT FOR THE...

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF SOUTH CAROLINA

ANDERSON DIVISION

IN RE: LANDAMERICA 1031 EXCHANGE SERVICES, INC. INTERNAL REVENUE SERVICE § 1031 TAX DEFERRED EXCHANGE LITIGATION VIVIAN R. HAYS, et al. Plaintiffs, vs.

COMMONWEALTH LAND TITLE INSURANCE COMPANY, et al.,

Defendants.

MDL No.: 8:09-mn-2054-JFA Dist. of South Carolina No.: 3:11-cv-00619-JFA

PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO THE

DEFENDANTS’ MOTION TO DISMISS

THE FIRST AMENDED COMPLAINT

8:09-mn-02054-JFA Date Filed 11/04/11 Entry Number 209 of 45

i

TABLE OF CONTENTS

Page(s) I. INTRODUCTION ......................................................................................................... 1-10 II. BACKGROUND ......................................................................................................... 10-13

A. Identity of the Relevant Parties and Nature of the Claims............................... 10-12

B. The Plaintiffs Did Pursue Claims for Damages in the Bankruptcy Court and Have Recovered Damages Equal to 67% of Their Lost Exchange Funds....... 12-13

C. Procedural Background of this Litigation..............................................................13 III. LEGAL STANDARD........................................................................................................13 IV. CHOICE OF LAW ...................................................................................................... 13-23

A. California Common Law applies ..................................................................... 13-16 B. Various States’ Statutory Laws Apply............................................................. 16-23

1. California ............................................................................................. 17-19 2. Virginia ................................................................................................ 19-20 3. Texas .................................................................................................... 20-21 4. Florida .................................................................................................. 21-22 5. New York............................................................................................. 22-23

V. ARGUMENT............................................................................................................... 23-35

A. The Plaintiffs’ Direct Claims Against the Defendants Cannot Be Barred By the Bankruptcy Court...................................................................................................23

B. The Plaintiffs’ Direct Claims Against the Defendants Are Not “ARS Litigation Claims” Or “Other Litigation Claims”............................................ 24-25

C. The Plaintiffs’ FAC Satisfies the Elements of Aiding and Abetting the Fraud

Committed by LES Against All the Exchangers ............................................ 25-27 D. The Plaintiffs’ FAC Satisfies the Elements of a Conspiracy to Defraud Them ... .27-28

E. The Plaintiffs’ FAC Satisfies the Elements of Aiding and Abetting LES’s

Breach of Fiduciary Duty and the Conversion of Trust Funds........................ 28-29


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F. The Plaintiffs’ FAC Satisfies the Elements of Enterprise Liability in California Where the Original Complaint Was Filed and Where 80 Victims Reside ...... 29-31

G. The Plaintiffs’ FAC Satisfies the Elements of Negligence Committed by Defendants ...................................................................................................... 31-32

. H. The Plaintiffs’ FAC Satisfies the Elements of Breach of Fiduciary Duty Committed by the Defendants as Escrow Agents............................................ 32-33

I. The Plaintiffs’ FAC Pleads a Cause of Action for Conversion of Escrow Funds by the Escrow Agents ............................................................................................33 J. The Plaintiffs’ FAC Pleads RICO Liability..................................................... 33-35 1. The Money Transmitter Statutes Apply to LES .......................................33

2. The Defendants Committed Multiple Predicate Acts for the Enterprise and LES Committed Thousands of Predicate Acts Showing a Pattern of

Racketeering Activity .......................................................................... 33-34

3. The Plaintiffs’ RICO Claims Do Not Fail Because the Persons Involved in the Enterprise Were Distinct From the Enterprise........................... 34-35

VI. CONCLUSION..................................................................................................................35


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TABLE OF AUTHORITIES Page(s)

Cases 1924 Leonard Rd., LLC v. Van Roekal, 72 Va. 543, 552 (2006) ..............................................................................................................7 Aldens, Inc. v. La Follette, 552 F.2d 795 (7th Cir. 1975) ....................................................................................................17 America OnLine, Inc. v. The Superior Court of Alameda County, 90 Cal.App.4th 1 (2001) ..........................................................................................................17 Arthur, et al. v. SunTrust Banks, et al., Case No.09-CV-0054 BEN MB (USDC SD CA) .............................................................13, 28 Arno v. Club Med. Inc., 22 F. 3d 1464 (9th Cir. 1994) ...................................................................................................13 Baisch v. Gallina, 346 F.3d 366 (2nd Cir. 2003)..............................................................................................12, 25 Bank of America National Trust & Savings Ass. v. Hutchinson, 212 Cal.App.2d 142 (1963) .....................................................................................................31 Bank of New York v. New Jersey Title Guar. & Trust Co., 256 A.D., 609, 611, 11 N.Y.S.2d 181 (N.Y. App. Div. 1939) ................................................33 Bastable v. Muslu, 78 Va. Cir. 401 (2009) .............................................................................................................16 Buck v. Oliff, 1990 WL 751239(Va. Cir. Ct. July 27, 1990) ....................................................................... 16 Cahaly v. Benistar Property Exchange Trust Co., Inc., 68 Mass. App.Ct. 668, 864 N.E. 2d 548, 559 (Mass. App.Ct. 2007) ......................................33 Cedric Kushner Promotions, Ltd. v. Don King, 533 U.S. 158; 121 S. Ct. 2087; 150 L. Ed 2d 198 (2001)..................................................10, 34 City of Atascadero v. Merrill Lynch, 68 Cal. App. 4th 445 (Cal. Ct. App. 1998) .........................................................................14, 25 Daingerfield v. Thompson, 74 Va. 136 (1880) ....................................................................................................................15 Dameron v. Old Republic National Title Insurance Company, 155 F.3d 718 (4th Cir. 1998) ......................................................................................................7


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Page(s) Cases Deutsche Bank AG (In Re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2nd Cir. 2005)....................................................................................................23 E.F. Hutton & Co. v. Hadley, 901 F.2d 979 (11th Cir.1990) ..................................................................................................23 Escrow Institute of California v. Pierno, 24 Cal.App.3d 361 (2nd Dist. 1972) .........................................................................................17 Gerald R. Terry, et al. v. SunTrust Banks, et al., Case No. 2009-CP-04-00373 (USDC SC)...............................................................................13 Halifax Corporation v. Wachovia Bank, 268 Va. 641 (Va. 2004)............................................................................................................15 Hamby v. St. Paul Mercury Indemnity Company, 217 F. 2d 78 (1954)....................................................................................................................7 Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995).....................................................................................................23 Hunter v. Citibank, N.A., 2010 U.S. Dist. LEXIS 61912 (N.D. Cal. 2010) .......................................................2, 4, 29, 33 In re Granite Partners, L.P., 194 B.R. 318 (Bankr. S.D.N.Y.1996)........................................................................... 23, fn 15 In re Mission Ins. Co., 41 Cal.App.4th 828 (1995) ......................................................................................................29 In Re: Southwest Exchange, Inc., IRS § 1031 Tax Deferred Exchange Litigation, USDC Dist. Nev. Case No. 07-01394 RCJ……………………………………………6, fn 10 In re The 1031 Tax Group, LLC, 2011 U.S. Dist. LEXIS 33755 (S.D.N.Y. 2011)........................................................................2 Institute of Veterinary Pathology, Inc. v. California Health Laboratories Inc.,

116 Cal.App.3d 111 (1981) .....................................................................................................30 Landmark Land Co. v. Cone (In Re Landmark Land Co.)

76 F.3d 553 (4th Cir. 1996) ......................................................................................................25 Lawyers Title Insurance Corporation v. United American Bank of Memphis, 21 F.Supp.2d 785 (1998) .........................................................................................................27


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Page(s) Cases Lipcon v. Underwriters at Lloyd’s, London,

148 F. 3d 1285 (11th Cir. 1998) ...............................................................................................16 Manty v. Miller & Holmes, Inc. (In re Nation-Wide Exch. Servs.), 291 B.R. 131 n. 20 (Bankr. D. Minn. 2003) ..................................................................... 3, fn 6 McDaniel v. Bear Sterns & Co., 96 F.Supp. 343, 359 (S.D.N.Y. 2002)......................................................................................27 McHale v. Boulder Capital, LLC,

439 B.R. 47; 2010 Bankr. LEXIS 2612; 53 Bankr.Ct. Dec. 180 (S.D.N.Y. 2010) ...................3 McHale v. Citibank (In Re The 1031 Tax Group, LLC), 420 B.R. 178, 194 (Bankr. S.D.N.Y. 2009)...............................................................................2 Mediators, Inc. v. Manney (In re The Mediators. Inc.),

105 F.3d 822 (2d Cir. 1997)......................................................................................... 23, fn 15 Mesler v. Bragg Management Co.,

39 Cal.3d 290 (1985) ...............................................................................................................30 Millard Refrigerated Services, Inc. v. LandAmerica 1031 Exchange Services, Inc., 2009 Bankr. LEXIS 940 (Bankr. E.D. VA. April 15, 2009) .....................................................6 Neilson v. Union Bank of California, N.A., 290 F. Supp. 2d 1101 (U.S.D.C. Cal. 2003) ................................................................14, 27, 28 New Hampshire v. Maine, 532 U.S. 742, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001)............................................................7 Prudential Residential Services v. Cash, 70 Va. Cir. 27 (2005) ...............................................................................................................19 Ratcliff v. Walker, 117 Va. 569, 85 S.E. 575 (1915)..............................................................................................15 Rechtzigel Trust v. Fidelity National Title, 748 N.W. 2d 312; 2008 Minn. App. LEXIS 220.................................................... 30, 31, fn 17 Rock Creek View LLC v. Cole Construction LLC, 2010 VA. Cir. LEXIS 122 ...................................................................................................8, 28 St. Louis & S.F. Ry. v. Johnston, 133 U.S. 566, 567-77, 33 L. Ed. 683, 10 S.Ct. 390 (1890)................................................11, 25


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Page(s) Cases Schultz v. Neovi Data Corp. (2007) 152 Cal.App.4th 86, 95, 60 Cal.Rptr.3d 801.................................................................27 State of Washington v. Grimes,

111 Wa. App. 544, 46 P.3d 801 (Wash. Ct. App. 2002) ...........................................................9 Taxel v. Surnow (In re San Diego Realty Exch.), 132 B.R. 424 (Bankr. S.D. Cal. 1991) .............................................................................. 3, fn 6 Terry, v. SunTrust Banks, Inc. (In re IRS §1031 Exchange Litigation), 2011 U.S. Dist. LEXIS 63996 (S. Carolina 2011)...................................................... 6, fn 9 Tysons Toyota, Inc. v. Commonwealth Life Insurance,

20 Va. Cir. 399 (1990) .............................................................................................................15 United States v. 1,370,851.62 in U.S. Currency, 2009 U.S. Dist. LEXIS 97441 (2009).....................................................................................22 United States v. Carpenter, 2011 U.S. Dist. LEXIS 98626 (D. Mass. Sept. 1, 2011) ...........................................................9 United States v. Mazza-Alafut, 621 F.3d 205 (2010, CA 2 N.Y.) .............................................................................................22 U.S. v. Donald McGhan, United States District Court, Dist. of Nev. C.N.2:09-CR-0199-PMP-PAL ................... 9, fn 13 U.S. v. Edward H. Okun, 2009 U.S. Dist. LEXUS 12421, (E.D. Va., Feb. 18, 2009) ............................................ 9, fn 12 Volvo Construction Equipment N. Am., Inc. v. CLM Equipment Company, Inc., 386 F.3d 581 (4th Cir. 2004) ...................................................................................................17 Wells Fargo Bank v. Arizona Laborers, Teamsters & Cement Masons Local No. 395 Pension Trust Fund, 201 Arizona 474, 489, 38 P.3d 12, 27 (2002) ........................................26 Williamson v. Abellera, 245 Ga. App. 312, 537 S.E. 2d 130 (2000)..............................................................................32 Winters v. Dowdall, 882 N.Y.S. 100, 63 A.D. 3d 650 (2009) ..................................................................................32 Wright v Bank of America Corp., 219 F. 3d 79 (2d Cir. 2000)..................................................................................................... 23


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Statutes 18 U.S.C. §1960...................................................................................................................9, 22, 33 §§1962(c) and (d)...........................................................................................................................34 19 N.Y. CRR §175.1......................................................................................................................22 Cal. Fin. Code § 17000 ..................................................................................................................17 Cal. Fin. Code §17003 ...................................................................................................................18 Cal. Fin. Code §17004 ...................................................................................................................18 Cal. Fin. Code §17006 ...................................................................................................................18 Cal. Fin. Code §17006.5 ................................................................................................................18 Cal. Fin. Code §17200 ...................................................................................................................18 Cal. Fin. Code §17202 ...................................................................................................................18 Cal. Fin. Code §17301 ...................................................................................................................18 Cal. Fin. Code §17302 ...................................................................................................................18 Cal. Fin. Code §17409 .............................................................................................................18, 32 Fla. Stat. §475.01 ...........................................................................................................................21 Fla. Stat. §475.01(f) .......................................................................................................................21 Fla. Stat. §475.278 .........................................................................................................................22 Fla. Stat. §518.10 ...........................................................................................................................21 Fla. Stat. §560 ................................................................................................................................21 Fla. Stat. § 626.8473 ..................................................................................................................9, 32 Internal Revenue Code §1031....................................................................................................6, 10 N.Y. Banking Law § 440 ...............................................................................................................22 N.Y. Banking Law § 641 ...............................................................................................................22 N.Y. Banking Law §650 ................................................................................................................22 N.Y. Real Property Law §443........................................................................................................22


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Tex. Fin. Code § 151.003(8)..........................................................................................................20 Tex. Fin. Code § 151.301(b)(4) .....................................................................................................20 Tex. Fin. Code § 151.302...............................................................................................................21 Tex. Fin. Code § 51.309(a) ............................................................................................................21 Tex. Fin. Code § 151.404(a) ..........................................................................................................20 Virginia Code §54.1-2100 .............................................................................................................19 Virginia Code §54.1-2107 .............................................................................................................19 Virginia Code §54.1-2108 .............................................................................................................19 Virginia Code §54.1-2131 ....................................................................................................... 19-20 Federal Codes of Civil Procedure FRCP 12(b)(1) .................................................................................................................................5 FRCP 12(b)(6) .................................................................................................................................5 Other Authorities RESTATEMENT, SECOND, CONFLICT OF LAWS § 187 ......................................................................17 RESTATEMENT (SECOND) OF TORTS § 876 (1979)........................................................14-16, 25- 27


1

I. INTRODUCTION

The Hays Plaintiffs (“Plaintiffs”), the Commingled LES Exchangers in the First Amended

Complaint (“FAC”), bring nine causes of action1 against four former subsidiaries of LandAmerica

Financial Group, Inc. (“LFG”) that were sold to Fidelity National Financial, Inc. (“FNF”) by the

LFG bankruptcy estate. LFG sold these four distinct corporations (the “Defendants”)2 to FNF for,

among other things, $147 million in cash. FNF had originally agreed to pay $298 million in cash,

but reduced the price after FNF discovered, among other things, the existing liability the

Defendants owed to the Plaintiffs.3 The “discounted” sale of the Defendant corporations by LFG to

FNF did not modify, reduce, or eliminate the title insurance obligations owed by Defendants to

their insureds or convert client funds held in escrow into Defendants’ money. Similarly, the sale

did not cause any release of the existing tort claims the Plaintiffs had or have against the

Defendants. FNF did not buy the assets of the Defendants and leave the contract and tort liabilities.

FNF bought the stand alone corporate entities which included all assets as well as all existing

liabilities. The Defendants did not file for bankruptcy and thus received no stay or discharge from

the bankruptcies filed by LFG, and its subsidiary, LandAmerica 1031 Exchange Services, Inc.

(“LES”).

Plaintiffs are not taking two bites out of the same rotten apple purchased by FNF. Plaintiffs

are enforcing their legal rights against distinct corporate Defendants who, prior to their sale to FNF,

conspired with LES and assisted LES in defrauding Plaintiffs out of $201 million dollars. FNF

would receive a windfall if the Defendants’ liabilities to Plaintiffs were extinguished by the sale to

FNF and the bankruptcy of LES. FNF bought the Defendants expecting they would be sued.

1 The nine causes of action are: 1) aiding and abetting the fraud committed by LES; 2) conspiracy to commit fraud with LES; 3) aiding and abetting the breach of fiduciary duty by LES; 4) aiding and abetting the conversion of trust funds by LES; 5) enterprise liability; 6) negligence; 7) breach of fiduciary duty; 8) conversion of escrow funds; and 9) RICO liability. 2 The Defendants in this action are: 1) Commonwealth Land Title Insurance Company (“CLTIC”); Commonwealth Land Title Company; 3) Lawyers Title Insurance Corporation (“LTIC”); and 4) LandAmerica Charter Title Company. 3 See Exhibit A attached hereto which is a copy of an Adversary Complaint filed by the LFG Trustee against certain officers and directors of LFG (Ex. A, ¶¶ 145, 156-162). See also Exhibit Q attached hereto.


2

Plaintiffs’ case is not affected by the application of federal law to the Joint Chapter 11 Plan

of LFG and LES (the “Confirmed Plan”). Plaintiffs’ direct claims (which have always been owned

by Plaintiffs and the property of Plaintiffs) were not and could not be involuntarily transferred to

the two bankruptcy litigation trusts (the “LES Trust” and the “LFG Trust”) that were created when

the Confirmed Plan was approved by the United States Bankruptcy Court for the Eastern District of

Virginia (the “Bankruptcy Court”). The LES Trust stands in the dirty shoes LES was wearing when

it filed for bankruptcy; the same is true for the LFG Trust. The Defendants conspired with LES to

defraud the Plaintiffs. The Defendants aided and abetted LES in committing intentional torts

against the Plaintiffs. LES, for itself, has no cognizable claim against Defendants arising out of

their combined conspiracy to operate a 1031 Ponzi scheme, so Plaintiffs’ claims are not derivative

of any claim which could be brought against the Defendants by LES. In re The 1031 Tax Group,

LLC, 2011 U.S. Dist. LEXIS 33755 (S.D.N.Y. 2011). In addition, the Defendants and the two

Trusts have settled all claims they had against each other so this litigation will not interfere with

work being done to collect assets.4 (Bankr. Dkt. 2021). Furthermore, the two litigation trusts have

no right to bring the Plaintiffs’ direct claims for damages measured by lost Exchange Funds as

those claims belong exclusively to the Plaintiffs. McHale v. Citibank (In Re The 1031 Tax Group,

LLC), 420 B.R. 178, 194 (Bankr. S.D.N.Y. 2009); Hunter v. Citibank, N.A., 2010 U.S. Dist. LEXIS

61912 (N.D. Cal. 2010). Plaintiffs’ standing to bring their claims which are not “ARS Litigation”

claims is confirmed in the litigation trusts’ “ARS Litigation” settlement with SunTrust which

states:

The Settlement Agreement will not change the rights, if any, that the Exchangers may be pursuing individually or collectively against SunTrust, or SunTrust’s defenses thereto. (See Exhibit C).5

4 See Exhibit B attached hereto which is a copy of a Complaint and Settlement Agreement between the LFG and LES Trust and FNF, CTLIC and LTIC dated September 9, 2009 releasing all potential claims they had against each other. The Release does not release plaintiffs’ claims against Defendants. The release does cover Defendants claims against the officers and directors of LFG who were also officers and directors of CTLIC and LTIC. 5 Exhibit C attached hereto is a Motion for Entry of an Order Approving Agreement between McHale, the LES Trustee and SunTrust Banks. The Motion recites the terms of the Settlement and on page 8 it includes the fact that the settlement with SunTrust over the sale of the ARS to LES is not intended and does not settle the Exchangers’ claims against Sun Trust for aiding and abetting LES in the operation of a 1031 Ponzi scheme after the ARS froze in February 2008.


3

Plaintiffs’ claims are not barred by any res judicata effect of the Confirmed Plan, because

(a) the Confirmed Plan does not and cannot constitutionally bar direct claims against non-debtor

third-party tortfeasors and the Confirmed Plan (which was modified to make this clear) states this

as fact; (b) the injunction and stay imposed by the Bankruptcy Court only applies in this case to

Plaintiffs’ potential claims against the officers and directors of LFG and LES who were also

officers and directors of the Defendants (See Dkt. #100 in SunTrust case); and (c) the prosecution

of this action will have no effect, whatsoever, on the effectiveness of the Confirmed Plan.

Defendants are not entitled to dismissal for lack of standing or lack of subject matter jurisdiction.

There are 27 named Plaintiffs in the FAC with $15,768,431.46 in lost Exchange Funds and

ten Exchangers with $5,428.610.50 in lost Exchange Funds who had direct contact with Defendants

establishing a ratio of 3 to 1 in numbers and damages. (See Exhibit D attached hereto). As set out

in Exhibit 1 to the FAC, there are 384 LES Exchangers in the class who lost $201 million in

Exchange Funds. Even if these LES Exchangers have recovered 67% of their lost Exchange Funds,

they are still owed $67 million, and this number does not include consequential damages. The

identities of LES Exchangers listed on Exhibit 1 to the FAC (as well as all other LES Exchangers

depositing after February 11, 2008) who had escrow or title insurance contracts with the

Defendants, or were referred to LES by the employees or agents of Defendants, are known by the

Defendants because they have possession of the documents, and their employees received a

documented $150 referral fee for each Exchanger directed over to LES.

All of the Plaintiffs’ claims are “fairly traceable” to the intentional bad-behavior of the

Defendants. The Defendants are being charged with knowing, active and substantial participation

in a 1031 Ponzi scheme.6 The Defendants directed LES to run a Ponzi scheme. The Defendants

6 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,


4

were not passive observers of the fate of their affiliate. Instead, as the Plaintiffs allege, at the

direction of senior management, the Defendants helped LES in committing intentional torts

including common law fraud by: (i) continuing to refer significant numbers of new clients to LES,

knowing LES was insolvent, while paying their employees $150 for each referral without telling

them, “by the way, LES is insolvent;” (ii) printing and distributing by mail or wire to Defendants’

clients Exchange Agreements for LES, knowing they were fraudulent; (iii) printing and

distributing by mail or wire LES promotional materials containing false representations, which the

Defendants knew were categorically false; (iv) using the interstate wire system to physically

transmit escrowed Exchange Funds to LES, knowing the funds would be stolen by LES to pay off

older LES Exchange customers; (v) physically transmitting escrowed Exchange Funds received

back from LES to pay off older LES Exchange customers, knowing the funds had been stolen 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.

Transferring money to LES for LES to make “lulling payments” to perpetuate a Ponzi scheme is

aiding and abetting as a matter of law. (See Exhibits E7 and F attached hereto, which are Orders

issued by Hon. James Ware in Anita Hunter et al. v. Citibank, N.A., et al., U.S.D.C. N.D. CA. Case

Number C 09 2079 JW, concerning the Cordell Defendants who made loans to Edward Okun so he

could make lulling payments to close old Exchanges).

The documents and testimony recovered to date by the Plaintiffs unequivocally demonstrate

that the agreed-upon goal of the Defendants was to “buy time” to raise capital to recharge the LES

trust or unfreeze the frozen ARS. 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 Defendants decided to participate in

LLC, 439 B.R. 47; 2010 Bankr. LEXIS 2612; 53 Bankr.Ct. Dec. 180 (S.D.N.Y. 2010). 7 In California, Judge Ware (the Chief Judge of Northern California) has ruled that: “Since each QI held the exchangers’ funds in trust, the QIs were in a fiduciary relationship with the exchangers and owed them a concomitant duty of care as beneficiaries of that trust. Thus, the Court finds that under California law, the QIs owed a fiduciary duty directly to Plaintiff exchangers.” (Page 7 of Exhibit E). The law cited by Judge Ware on QI fiduciary duty is California common law which applies to this case which was filed in California because California has the most victims and there is no conflict in the laws of other applicable states.


5

the Federal crimes of mail fraud and wire fraud by shifting the risk of loss to the new customers of

LES, the Plaintiffs herein. The Defendants (and each one of them) 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. The

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

Defendants being sold to FNF. (See Exhibit G attached hereto.8)

Contrary to the Defendants’ contentions, the Plaintiffs are not seeking to hold Defendants

liable for “failing” to put LES into bankruptcy immediately after the Auction Rate Securities

(“ARS”) market froze in February 2008. LES, itself, was obligated to timely file for bankruptcy,

liquidate the ARS, pay the Commingled Exchangers existing in February of 2008 on a pro-rated

basis, and avoid defrauding new customers. Once the ARS market froze, the Defendants were

obligated to disassociate themselves from ongoing business dealings with LES, especially business

dealings that were intended to perpetuate LES’s existence for nine and one-half months while it ran

a 1031 Ponzi scheme. Defendants were obligated to refrain from assisting LES in committing

intentional torts. They did not, so the Plaintiffs have standing under FRCP 12(b)(1).

In addition to having exclusive standing, the FAC recites nine viable causes of action which

are not subject to dismissal under FRCP 12(b)(6). The Plaintiffs allege three causes of action for

aiding and abetting three intentional torts committed by LES. The three intentional torts committed

by LES are: (i) breach of fiduciary duty; (ii) conversion of trust funds; and (iii) fraud in the

inception of each Exchange Agreement executed by all 384 class members, including the 27 named

Plaintiffs.

8 In paragraph 110 of the FAC, the Plaintiffs refer to and quote the October 6, 2008 letter from Peter Kolbe to James Nixon, Chief Examiner of the Nebraska Department of Insurance where CLTIC and LTIC were licensed as insurers. The entire letter is now submitted for the file as Exhibit G attached hereto. In the last paragraph of the letter Kolbe states: “The failure of the Exchange Company to fund its liabilities would have a catastrophic impact on the business of Land American’s title insurance subsidiaries [CTLIC and LTIC].” (Emphasis added).


6

In the SunTrust case,9 this Court reluctantly followed the ruling by the Bankruptcy Court

which (for the stated purpose of assuring pro rata payments to all Commingled and Segregated

LES Exchangers)10 concluded that regardless of what both contracting parties actually believed

and said about their own contractual relationship the court would conclude the opposite and

rule that: (i) LES, as an IRC §1031 Qualified Intermediary (“QI”), did not “hold” the Exchange

Funds in “trust” or “in escrow” because these words were not included in the Exchange

Agreements; (ii) both legal and equitable title to the Exchange Funds were transferred to LES

pursuant to the “unambiguous” Exchange Agreements, granting LES unfettered ownership over

these funds for the QI to pay personal business debts or take the money to gamble in Las Vegas if

they so wish; (iii) LES was a mere contract debtor to the Exchangers as the Exchange Funds had

been “loaned” to LES even though the words “loan” or “promissory note” were not included in the

Exchange Agreements; and (iv) LES owed no common law or statutory fiduciary duties to the

Exchangers arising out of its receipt of the Exchangers’ Exchange Funds because the Exchange

Agreement said LES had no obligations implied by law, therefore no laws applied to LES.

9 See Terry. v. SunTrust, U.S.D.C. District of South Carolina Case No. 8:09-cv-415-JFA, Dkt.No. 160 or In re IRS §1031 Exchange Litigation, 2011 U.S. Dist. LEXIS 63996 (S. Carolina 2011), hereinafter the “SunTrust Order.” 10 Pro rata payments have not been issued to the LES Commingled Exchangers. The alleged dispute between the Commingled Exchangers (the Plaintiffs herein) and the Segregated Exchangers whose money was on deposit and sitting safe at Citibank and Centennial Bank was a pretext. The fight over the existence or non-existence of a trust benefitted no one but the lawyers. Defeating the Segregated Exchangers’ argument that their Exchange Funds were held in trust and should be used to timely close their Exchanges (Millard Refrigerated Services, Inc. v. LandAmerica 1031 Exchange Services, Inc., 2009 Bankr. LEXIS 940 (Bankr. E.D. VA. April 15, 2009)) pushed their safely segregated cash into the bankruptcy estate to be billed against by the lawyers because the lawyers could not get paid in frozen ARS. The Segregated Exchangers’ money was not used to pay for the pro-rata losses suffered by the Commingled Exchangers because the “Waterfall Provisions” in the Confirmed Plan provided that the Segregated Exchangers get paid back first, and they have received 100% of their lost Exchange Funds as contrasted to the 67% received by the Commingled Exchangers. The lawyers argued there was no trust and LES owed no fiduciary duty even though prior to bankruptcy LES said it was a fiduciary of the trust funds and LFG claimed the Exchange Funds belonged to the Exchangers, were not assets included on its consolidated balance sheet, and were held by LES in escrow. The post bankruptcy contradiction of the most basic facts got the lawyers paid at the expense of jeopardizing full recovery for the Commingled Exchangers by potentially eliminating aiding and betting liability for breach of fiduciary duty and conversion of trust funds. The prosecution of these two theories in the McGhan 1031 Ponzi scheme case in Las Vegas resulted in the recovery of over $100 million from, among others, aiders and abettors in the theft of $97.4 million in Exchange Funds. See Exhibit H, the Receiver’s report submitted to Hon. Robert Jones in In Re: Southwest Exchange, Inc., Internal Revenue Service Section 1031 Tax Deferred Exchange Litigation, MDL No. 1878, USDC Dist. Nev. C.N. 07-cv-01394-RCJ.


7

The Court’s ruling is opposite to Judge Ware’s rulings in California (Exhibits E and F).

The Court’s ruling conflicts directly with Hamby v. St. Paul Mercury Indemnity Company, 217 F.

2d 78 (1954) which holds that an agent occupies a fiduciary relationship to their clients when the

agent is entrusted with money to be used for a specific purpose. The Court’s ruling conflicts with

1924 Leonard Rd., LLC v. Van Roekal, 272 Va. 543, 552 (2006), which says a resulting trust is

presumed when it is the Exchanger’s money transferred to a stranger to “hold,” even when the

existence of a trust would contravene the express language of the written transaction documents

because why else would you need a resulting trust. The Court’s ruling also conflicts with

Dameron v. Old Republic National Title Insurance Company, 155 F.3d 718 (4th Cir. 1998), as well

as the repeated description of the Exchangers’ relationship with LES by senior management at the

Defendants as set out in Exhibits 3 and 4 to the FAC and paragraphs 109, 114, 115, 121, 122 and

124 therein.

The Court’s ruling in SunTrust need not be followed here, however, because these

Defendants (unlike SunTrust who was not advertising that the Exchange Funds were held in trust

and LES was a fiduciary) are judicially estopped from making factual contentions which are 180

degrees opposite to prior representations to Plaintiffs and governmental administrators, including

the Nebraska Department of Insurance. (See FAC, ¶110 and Exhibit G attached hereto.) New

Hampshire v. Maine, 532 U.S. 742, 747-50, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001).

For the sake of argument only, even if we assume the validity of the post-bankruptcy

fabricated proposition that LES did not hold the Exchange Funds in trust or escrow and did not owe

a fiduciary duty to the Exchangers, LES still committed a successful common law fraud (obtained

money by false pretenses) against all 384 of the Exchangers with the knowing and substantial

existence of the Defendants. The Plaintiffs’ allegations are as follows:

Between February 11, 2008 and the Petition Date of November 26, 2008, it was also CLTIC and LTIC’s customary business practice to conceal from field employees making the referrals to LES the insolvency of LES and/or the dire financial condition of LFG. Intentionally concealing the truth about the ARS Freeze from employees referring clients to LES substantially assisted the LES Ponzi scheme because honest employees at CLTIC and LTIC would not have made the referrals for $150 if they knew the truth.


8

During this same nine and 1/2 month time frame, CLTIC and LTIC would print and provide clients copies of Exchange Agreements for review and execution by each customer. In some instances, employees of CLTIC and LTIC would assist in preparing the LES Exchange Agreements. CLTIC and LTIC acted, and agreed to act, as a “conduit” whereby false and fraudulent Exchange Agreements were to be disseminated to the public, including the Plaintiffs, using interstate wires, to obtain Exchange Funds by false pretenses to be sent to LES to pay off older Exchanges pending at LES. All of the Plaintiffs, and each member of the Class, reasonably relied upon the representations in the Exchange Agreements, many of which were transmitted over interstate wires. After February 11, 2008, CLTIC and LTIC knew that LES could not perform its agreed-upon obligations without a miracle infusion of cash to recharge the trust. CLTIC and LTIC knew there was ongoing wire fraud and mail fraud in the inception of these Exchange Agreements. For the Exchange Agreements to be truthful, they would have had to say to the new Exchanger: “LES made a bad investment in ARS and is now insolvent. LES needs your Exchange Funds to close other people’s exchanges. LES will fund your purchase of Replacement Property if a miracle occurs between now and the date you need your money back.” No Exchanger would agree to part with their money had the Exchange Agreements been truthful, and CLTIC and LTIC knew it.11

Plaintiffs have plead viable claims against the Defendants for aiding and abetting LES in the

commission of a fraud and conspiracy to commit fraud. Defendants contend they acted as a unitary

business enterprise brought together for the common purpose to defraud the Plaintiffs (with no

distinction between themselves and the criminal enterprise) to defeat Plaintiffs’ claims that they

conspired with each other and are liable under RICO. Plaintiffs did not plead agency as the source

for Defendants’ vicarious liability. The Defendants’ admission of agency makes them liable

pursuant to Plaintiffs’ Fifth Cause of Action for alter ego liability and Plaintiffs request leave to

amend to add agency based on the Defendants’ admissions. Notwithstanding the issue of “agency,”

there is no “agents immunity for conspiracy” when the Defendants were separate corporations

acting for their own individual advantage and gain. State law doctrines defining the duties of

escrow agents do not allow them, or anyone else, to knowingly participate in Ponzi schemes. The

“economic loss” rule does not bar causes of action for active negligence and breach of fiduciary

(commissions, as contrasted to omissions) because there is a collateral contract between the parties.

Rock Creek View LLC v. Cole Construction LLC, 2010 VA. Cir. LEXIS 122.

The Defendants issued title insurance and acted as the escrow agents for certain Plaintiffs.

The title insurance is valid and the Defendants complied with the express terms of each escrow.

11 See FAC, ¶¶ 52 and 53.


9

However, the Defendants also (outside of any contractual obligations) stepped forward and referred

Plaintiffs to LES. They also physically sent the escrowed Exchange Funds to LES knowing LES

would not use the money as promised, but would instead steal the money. The title insurance and

escrow instructions do not cover the intended theft of Exchange Funds so there is no breach of

contract claim for the “economic loss” rule to bar tort claims.

Plaintiffs’ claim for conversion of escrow funds by the Defendants applies to those

Defendants who served as escrow agents to those Plaintiffs and class members who deposited their

Exchange Funds with the Defendants prior to transmission to LES. Escrowed funds are held in

trust. (For example see Fla. Stat. § 626.8473). The tort of conversion applies to the misuse of trust

funds. The Defendants intentionally sent the trust funds to LES so LES could make lulling

payments to satisfy old Exchanges. This was a misuse of the funds and constitutes a conversion.

Plaintiffs’ RICO claims pled hundreds, if not thousands, of predicate acts committed by the

Defendants and LES, and a systematic and continuing “pattern” of racketeering activities over a

nine and a half month period. Stealing $201 million from hundreds of Exchangers in a nationwide

fraud is not “garden variety fraud.” In a similar Virginia 1031 case, Edward Okun was convicted

and sentenced to 100 years in prison for operating a 1031 Ponzi scheme by committing the same

mail and wire fraud committed by LES.12 Donald McGhan of the Southwest Exchange matter has

been sentenced to ten years for the same crimes.13 Also, see State of Washington v. Grimes, 111

Wa. App. 544, 46 P.3d 801 (Wash. Ct. App. 2002) and United States v. Carpenter, 2011 U.S. Dist.

LEXIS 98626 (D. Mass. Sept. 1, 2011).

The systematic pattern of crimes committed in this case by LES and the Defendants are the

type covered by the RICO statute. The fact that LES was paid for acting as a QI, in addition to

moving funds from point A to point B, does not negate the applicability of the federal money

transmitter statute—18 U.S.C. § 1960—and analogous state laws to Plaintiffs’ RICO claims. QIs

are engaged in the business of “money transmission” as that term is defined in the relevant money

transmission statutes.

12 See U.S. v. Edward H. Okun, 2009 U.S. Dist. LEXUS 12421, (E.D. Va., Feb. 18, 2009).

13 See U.S. v. Donald McGhan, United States District Court, Dist. of Nev. C.N.2:09-CR-0199-PMP-PAL.


10

Plaintiffs alleged there was a “distinction” between the “persons” (the Defendants)

associated with the “enterprise” and the “enterprise” itself. The “enterprise” was not a “single

entity” with the Defendants as agents of the entity. Plaintiffs did not plead agency. Plaintiffs will

waive RICO if Defendants will admit LES was their agent and CLTIC, LTIC, LES and LFG were

all just one single entity. The Defendants cite outdated RICO law. The U.S. Supreme Court in

Cedric Kushner Promotions, Ltd. v. Don King, 533 U.S. 158; 121 S. Ct. 2087; 150 L. Ed 2d 198

(2001) says Plaintiffs’ allegations that the persons conducting the enterprise were distinct from the

enterprise itself are sufficient to impose §1962(c) liability.

II. BACKGROUND

A. Identity of the Relevant Parties and Nature of the Claims.

Plaintiffs were individual real estate investors seeking to effect tax-deferred, like-kind

exchanges under § 1031 of the Internal Revenue Code during the 180-day period prior to

November 26, 2008. (FAC, ¶¶ 12-42.) In connection with their Exchanges, Plaintiffs caused the

transfer of funds generated by the sale of real property (“Exchange Funds”) to LES, a “qualified

intermediary” (“QI”) for the “specific purpose” of completing such transactions. Id. An “Exchange

Agreement” set forth the relationship between LES and its customers. Id. at ¶ 3 and Exhibit 6 to the

FAC. LES was a wholly-owned subsidiary of LFG, a publicly-traded (Fortune 500) company that

operated in the title insurance and escrow business through hundreds of subsidiaries, including

Defendants Lawyer Title Insurance Corporation (“LTIC”) and Commonwealth Land Title

Insurance Company (“CLTIC”). Id. at ¶¶ 2, 48 and 49.

At the time of Plaintiffs’ transactions, CLTIC and LTIC were wholly-owned subsidiaries of

LFG, Defendant Commonwealth Land Title Company (“CLTC”) was a wholly-owned subsidiary

of CLTIC, and LandAmerica Charter Title Company (“LCTC”) was a wholly-owned subsidiary of

LTIC. Id. at ¶¶ 2, 44 and 46. After LFG filed for bankruptcy, CLTIC and LTIC as well as their

wholly-owned subsidiaries were sold to wholly-owned subsidiaries of FNF. Id. at ¶ 9. The sale to

FNF did nothing to eliminate, reduce, or impair the contract obligations or tort liabilities of CLTIC,

LTIC or their subsidiaries.

Contrary to Defendants’ assertion, the Plaintiffs do not claim that LES invested “their”


11

Exchange Funds in ARS and that those investments became illiquid when the ARS market froze in

February 2008. Plaintiffs’ claims are not “ARS Litigation” claims as defined in the Confirmation

Plan. The propriety or impropriety of the ARS investments by LES is not the issue here, as it has

been in the ARS Litigation being prosecuted in the Bankruptcy Court.

Instead, the Plaintiffs allege that the ARS froze on February 11, 2008 and thereafter the

Defendants directed LES to operate a 1031 Ponzi scheme to save the Defendants’ goodwill. The

Plaintiffs allege further that the Defendants were aware of the ARS freeze and the LES Ponzi

scheme because senior management at CLTIC and LTIC were also senior management of LES and

LFG. These same senior managers admit that LES was a fiduciary using newly deposited

Exchange Funds to fund older Exchanges because the prior Exchangers’ Exchange Funds were

frozen in ARS and there was no other money left at LES, or at LFG. Plaintiffs claim further that

Defendants knowingly assisted LES in running a Ponzi scheme by: (i) referring new clients to LES;

(ii) drafting fraudulent Exchange Agreements; (iii) disseminating fraudulent marketing material;

(iv) transferring Exchange Funds to and from LES; (v) transferring money to LES to be reinvested

in the enterprise so LES could make lulling payments; and (vi) purchasing some of the illiquid ARS

from LES for LES to continue to make lulling payments. Id. ¶¶ 2, 7, 8, 56, 102-112, and 123.

Plaintiffs do fall into two different categories of victims - - those who had direct

relationships with Defendants which caused the creation of additional duties which were breached,

and those who did not. All of the Plaintiffs, however, allege aiding and abetting and conspiracy

claims. Their claims do not advance a “deepening insolvency” theory because that claim, if it

existed, would belong to the LES Trust for the benefit of all the creditors of LES. Plaintiffs are not

contending that the Defendants were required to devine the future through a crystal ball. After

February 11, 2008, LES was hopelessly insolvent and the Defendants knew it. Soliciting and

receiving deposits of Exchange Funds after February 11, 2008 is deemed, as a matter of law, to be a

fraud on the new Exchangers. St. Louis & S.F. Ry. v. Johnston, 133 U.S. 566, 567-77, 33 L. Ed.

683, 10 S.Ct. 390 (1890).

The Defendants should have simply ceased doing business with LES. The alternative

course, which is the course taken by the Defendants, results in aiding and abetting liability. It took


12

common sense and common decency, not a crystal ball, to foresee that without a miracle infusion

of cash to recharge the trust, someday the Ponzi scheme would end and there would be failed

Exchanges with injured Exchangers. The end came on November 26, 2008, and the injured

Exchangers are identified on Exhibit 1 to the FAC. Recognizing the unique nature of a Ponzi

scheme, courts analyzing RICO causation issues have rejected the crystal ball argument proffered

by Defendants in this case.

[I]n several paradigmatic racketeering enterprises, the racketeer does not necessarily intend to harm the specific victim. He or she may, instead, intend no more than to create a substantial risk of injury to the victim. In a Ponzi scheme, for example, the racketeer targets investors through fraud, but he does not consciously intend for those investors to lose their money; he simply wants to perpetuate the Ponzi scheme for as long as possible . . . . Where a racketeering enterprise intends no specific harm to any particular individual, but causes harm by the creation of substantial risk of harm, the victim injured by that enterprise’s harm may have RICO standing . . . . (See Baisch v. Gallina, 346 F.3d 366, 376 (2nd Cir. 2003) (emphasis added).

B. Plaintiffs Did Pursue Claims for Damages in the Bankruptcy Court and Have Recovered Damages Equal to 67% of Their Lost Exchange Funds.

The ARS market did not thaw, and on November 26, 2008, LES and LFG filed for

bankruptcy protection which was jointly administered. Plaintiffs did file proofs of claim seeking to

recover their lost Exchange Funds. Some Plaintiffs commenced adversary proceedings, and many

filed notices of appearance in the bankruptcy proceeding. Plaintiffs do not dispute the facts

asserted in the table attached as Exhibit A to Defendants’ motion. However, seeking to recover

damages from the bankrupt estate of LES, the primary tortfeasor, does not release other joint

tortfeasors who have not also filed for bankruptcy. There is “no bankruptcy by association” for

joint tortfeasors because other joint tortfeasors have filed for bankruptcy.

The Debtors (LFG and LES) did file a modified Disclosure Statement and Plan on October

13, 2009. Bankr. Dkt. No. 2207. On November 23, 2009, the bankruptcy court confirmed the plan.

Bankr. Dkt. No. 2666. The Confirmed Plan classifies Plaintiffs’ claims against LES as “Class 6

Commingled Exchange Principal Claims.” To date those claims have received distributions

representing about 67% of the Exchange Funds they transferred to LES, while the Segregated LES

Exchangers have recovered 100%. Bankr. Dkt. No. 4539. The two classes of Exchangers have not

been treated the same, which was the ostensible purpose of pushing all of the Exchange Funds into


13

the bankruptcy estate by claiming the Exchange Funds were not held in trust.

C. Procedural Background of this Litigation.

Defendants’ description is correct. Plaintiffs’ case was filed in California Federal Court and

moved to South Carolina by the Judicial Panel on Multidistrict Litigation. Plaintiffs’ case is related

to two putative class actions entitled Gerald R. Terry, et al. v. SunTrust Banks, et al., Case No.

2009-CP-04-00373 (USDC SC) (“Terry”) and Arthur, et al. v. SunTrust Banks, et al., Case No.09-

CV-0054 BEN MB (USDC SD CA) (“Arthur”). On June 15, 2011, this Court filed its Order

granting the motion of SunTrust Banks to dismiss the Second Amended Complaint of the Terry and

Arthur plaintiffs (hereafter, the “SunTrust Order”) Dkt No. 160. On August 11, 2011, the plaintiffs

in this case filed the FAC which includes causes of action for aiding and abetting the fraud

committed by LES, conspiracy to commit fraud, and RICO liability which were not addressed in

the SunTrust Order.

III. LEGAL STANDARD

Plaintiffs’ FAC is a detailed, factual statement, satisfying adequate notice, which outlines

the immoral business behavior of the Defendants in a plan orchestrated by LFG (a Fortune 500

company) to steal over $200 million of the LES Exchangers’ money to buy time to fix a bad

investment in ARS made by LES. The FAC describes facts which satisfy the elements necessary to

establish liability on the nine causes of action contained in the FAC.

IV. CHOICE OF LAW

A. California Common Law Applies.

This action was initially filed in California and transferee courts in MDL proceedings apply

the law of the transferor forum. California common law applies in this case pursuant to California

choice of law. Virginia’s lex loci delicti doctrine does not apply, and California has a far greater

connection to this litigation than Virginia, which is where fraudulent QIs seem to congregate.

In Arno v. Club Med. Inc., 22 F. 3d 1464, 1467 (9th Cir. 1994) the Ninth Circuit explained

that regardless of where the relevant conduct occurred,

[the court] must apply California’s choice of law rules in deciding which jurisdiction’s law governs [a plaintiff’s] state-law claims. California has jettisoned the relatively predictable choice of law rules based on the place where the transaction occurred (lex locus) in favor of a three-part governmental interest test.


14

Under this amorphous and somewhat result-oriented approach, we must first consider whether the two states’ laws actually differ; if so, we must examine each state’s interest in applying its law to determine whether there is a “true conflict;” and if each state has a legitimate interest we must compare the impairment to each jurisdiction under the other’s rule of law.

Here, under the first prong of the governmental interest test, this Court must examine

whether the law of the original forum, California, differs in any material respect from the law of

Virginia, where LES was located, or the laws in the States where LES operated. Because there is

no material difference, California law should be used as the law applicable on all of the common

law causes of action. As set out in Exhibit I attached hereto, California also has a legitimate and

overriding interest in the outcome of this litigation because 80 (not just a “handful”) out of the 384

Commingled LES Exchangers resided in and were victimized in California, to the tune of $34.6

million. The states with the largest number of victims are set forth below:

State

No. of Victims

Amount of Lost Exchange Funds

Exhibit No.

California 80 $34.6 million I

Texas 33 $33.2 million J

Virginia 29 $12.7 million K

New York 26 $26.7 million L

Florida 24 $16.3 million M

California recognizes liability for those persons who knowingly aid and abet a primary

tortfeasor in the commission of intentional torts like fraud, conversion and breach of fiduciary duty.

City of Atascadero v. Merrill Lynch, 68 Cal. App. 4th 445 (Cal. Ct. App. 1998). California adopts

the elements of liability for aiding and abetting the intentional torts of others as set out in

RESTATEMENT (SECOND) OF TORTS § 876 (1979). Neilson v. Union Bank of California, N.A., 290

F. Supp. 2d 1101 (U.S.D.C. Cal. 2003).14 According to the RESTATEMENT OF TORTS, the elements

are as follows:

14 Shepardizing Neilson demonstrates that since its issuance, the opinion has been cited 92 times, including citations from the District Courts of the First, Second, Fifth, Sixth and Eighth Circuits. This is in addition to dozens of citations from the District Courts in the Ninth Circuit, including Washington and Hawaii and all of the California courts.


15

§ 876 Persons Acting in Concert

For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he: (a) does a tortious act in concert with the other or pursuant to a common design with him; (b) knows that the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so conduct himself; or

(c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person.

Contrary to Defendants’ assertions, Virginia (like California) recognizes aiding and abetting

liability. In fact, the Virginia case of Daingerfield v. Thompson, 74 Va. 136 (1880) was cited in the

RESTATEMENT OF TORTS for the proposition that “encouragement” to act can be used to establish

aiding and abetting liability. In Daingerfield, a Virginia trespasser incited another fellow trespasser

to “fire a salute” at the resident standing at the door, which regrettably hit its mark and the man’s

leg had to be amputated. The non-shooter was held liable for damages as a joint tortfeasor with the

shooter for the intentional tort of battery.

In Tysons Toyota, Inc. v. Commonwealth Life Insurance, 20 Va. Cir. 399 (1990), the Fairfax

County Circuit Court cited Daingerfield, as well as Ratcliff v. Walker, 117 Va. 569, 85 S.E. 575

(1915). The Virginia court in Ratcliff held that when actors operating under a common

understanding and with a common design are present at the commission of a wrong and encourage

or encite the commission of that wrong, they may be held liable as joint tortfeasors. Id.

In Tyson, the Virginia Court did rule that aiding and abetting, like conspiracy, is not an

independent stand-alone tort. For aiding and abetting liability to apply, the Plaintiff must first

establish the commission by the primary wrongdoer of the underlying tort. If there is no underlying

intentional tort, there can be no aiding and abetting liability. Id. See also, Halifax Corporation v.

Wachovia Bank, 268 Va. 641 (Va. 2004) where the Supreme Court of Virginia assumed that

Virginia recognized such a cause of action but determined the Plaintiffs’ claim in that case did not

satisfy the elements of RESTATEMENT (SECOND) OF TORTS § 876.


16

The cases cited by Defendants in support of the notion that Virginia (as contrasted to all

other states) does not recognize joint tortfeasor liability do not say what the Defendants contend

they say. Bastable v. Muslu, 78 Va. Cir. 401 (2009) is a negligent entrustment case where the

minor primary tortfeasor got into an unintentional auto “accident.” Additionally, Buck v. Oliff,

1990 WL 751239 (Va. Cir. Ct. July 27, 1990) is a case where the in pro per Plaintiff alleged that

defendant Riggs recklessly aided and abetted the terrorist activity of Osama Bin Laden. Aiding

and abetting requires actual knowledge, and “recklessness” does not trigger any duty to

withdraw. Because there is no perceived material difference between the laws of California,

Virginia, or the other critical states, California common law should apply.

The Virginia choice of law clause does not apply to Plaintiffs’ common law tort claims

against the Defendants. Defendants helped draft fraudulent LES Exchange Agreements knowing

LES was incapable of performing, yet they now insist that the choice of law clause is enforceable

for their benefit. The clause states that, as between LES and the Exchangers, “this Exchange

Agreement shall be governed by and construed in accordance with the applicable laws of the

Commonwealth of Virginia.” The Defendants are not parties to the Exchange Agreement and this

lawsuit is not between LES and the Exchangers for breach of the terms of the Exchange

Agreement. As non-parties to the Exchange Agreements, the Defendants have no right to seek any

benefits from them.

To the extent that the choice of law clause was included by Defendants in the LES

Exchange Agreements they drafted to trigger aiding and abetting laws that are less favorable to the

Exchangers than California law, the choice of law clause is unenforceable. Lipcon v. Underwriters

at Lloyd’s, London, 148 F. 3d 1285, 1296 (11th Cir. 1998).

B. Various States’ Statutory Laws Apply.

The Defendants concede that various state consumer protection laws govern their

relationship with the Exchangers with whom they had direct contact. According to the Defendants,

the law of the state in which the Defendants’ services were provided controls. The same reasoning

would apply to LES. LES’s main office was in Virginia, but LES had offices and conducted its QI

business in all 50 states. As seen from Exhibits I to M submitted with this Opposition, the 5 states


17

with the most victims are: (i) California; (ii) Texas; (iii) Florida; (iv) Virginia; and (v) New York.

LES was bound by the rules and regulations of each state it where it conducted business. This is

true regardless of the Virginia choice of law clause, as public policy prevents contracting parties

from avoiding important consumer protection regulations which govern their physical behavior in a

specific state by just saying so in a contract. America OnLine, Inc. v. The Superior Court of

Alameda County, 90 Cal.App.4th 1 (2001); Aldens, Inc. v. La Follette, 552 F.2d 795 (7th Cir. 1975);

and Volvo Construction Equipment N. Am., Inc. v. CLM Equipment Company, Inc., 386 F.3d 581

(4th Cir. 2004). Pursuant to §187 of the RESTATEMENT, SECOND, CONFLICT OF LAWS, a choice-of-

law provision will not be enforced if application of the law of the chosen state would be contrary to

a fundamental policy of a state which has a materially greater interest than the chosen state in the

determination of the particular issue. Id.

In each state where each Plaintiff resided and contracted with LES, statutory consumer

protection laws applied to LES’s business activities in that state. LES was not an “unregulated”

business holding billions of dollars of other peoples’ money with the right to gamble the money

away in Las Vegas, as hoped by the Defendants.

1. California

For instance, as set out in paragraph 13 of the FAC, California Fin. Code §17000, et seq.

regulated LES as an “escrow agent” while LES conducted QI business in California to protect the

public against poor business practices. Escrow Institute of California v. Pierno, 24 Cal.App.3d 361

(2nd Dist. 1972.) As seen in Exhibit G, Peter A. Kolbe for CLTIC and LTIC confirmed to the

Nebraska Department of Insurance that LES was an escrow agent in the following admissions:

“ . . . the Exchange Company [LES] engages in a specialized form of escrow.”

* * *

“. . . An essential function of a Qualified Intermediary is to hold in escrow the proceeds from the sale of one property and to disburse the same upon the purchase or exchange of a new property of “like kind.” “At any given point, the Exchange Company is holding in escrow proceeds from the sale of properties for the purchase of new properties of like kind.” (Exhibit G.)


18

California Financial Code §17003 defines an “escrow” to include money and title

documents held by a QI. An escrow is:

“Any transaction in which one person (the Exchanger), for the purpose of effecting the . . . transfer . . . of real property to another person (the buyer of the Relinquished Property), delivers any money, evidence of title . . . to a third person (LES acting as QI) to be held by that third person until the happening of a specified event (the purchase of Replacement Property) . . . when it is then to be delivered by that third person (LES acting as QI) to a . . . grantor (the seller of the Replacement Property).

The Exchange Agreement attached as Exhibit 6 to the FAC describes an “escrow” as

defined in Cal. Fin. Code §17003. Paragraph 1(a) of Exhibit 6 says that LES agrees to acquire

from Exchanger the Relinquished Property and LES agrees to convey the Replacement Property to

the Exchanger in exchange for the Relinquished Property for the purpose of an integrated,

interdependent, mutual and reciprocal plan intended to effectuate an Exchange by taxpayer of like-

kind real properties.

Cal. Fin. Code §17004 defines an escrow agent as any person engaged in the business of

receiving escrows for deposit or delivery. Banks, trust companies, savings and loan associations,

and insurance companies are excluded from the definition of an escrow agent because they are

already regulated. (Cal. Fin. Code §17006.) LES as a QI is not excluded from the definition and in

California it has the burden of proving it is not an escrow agent. (Cal Fin. Code §17006.5.) To

protect Californians, escrow agents must be licensed and bonded (Cal. Fin. Code §§17200 and

17202) and members of the Escrow Agents’ Fidelity Corporation (Cal. Fin. Code §17301). All

money and property deposited with an escrow agent is held in trust. (Cal. Fin. Code §17302.)

All moneys deposited in escrow must be maintained separate, distinct, and apart from funds

belonging to the escrow agent. Those funds, when deposited, are to be designated as “trust funds,”

“escrow accounts,” or under some other appropriate name indicating that the funds are not the

funds of the escrow agent. (Cal. Fin. Code §17409.) When conducting business in California with

Californians, LES was subject to these escrow laws. The Exchange Funds deposited by the 80

California Exchangers (Exhibit I) were held in a statutorily imposed trust by LES as a matter of

California law regardless of the Bankruptcy Court’s desire to exercise jurisdiction over these funds.

The fact that the 80 Exchange Agreements entered into by the 80 California Exchangers


19

said LES had no implied obligations arising from any applicable laws meant nothing and means

nothing today. Parties cannot contract around important consumer protection statutes. Because

LES was a statutory trustee, the Defendants are liable for aiding and abetting LES’s breach of

fiduciary duty and conversion of trust funds.

2. Virginia

There is also unwaivable statutory relief for the 29 victims from Virginia (Exhibit K),

including the named Plaintiffs in the case – Tracy and Sandra Ralphs from Suffolk (FAC, ¶22) and

Brookvest, LLC from Richmond (FAC, ¶24). Prudential Residential Services v. Cash, 70 Va. Cir.

27 (2005). A description of LES’s physical activities as a QI contracting with Virginians is set out

in the deposition transcript of Stephen Connor, which is quoted below:

Q. What is your understanding of what a QI is?

A. A QI is any party that is not disqualified, who takes control and possession of a taxpayer’s relinquished property, sells it, transfers it, receives the funds, and acquires replacement property or property of like kind within the parameters of Section 1031. (Connor Dep., 105:10-16, Feb. 19, 2009.)

Connor’s description of LES’s physical activities is consistent with LES’s physical

obligations articulated in each Exchange Agreement; objective manifestations of physical behavior

which bring LES within the statutory definition of a “real estate broker” under Virginia law.

Virginia Code §54.1-2100 defines a “real estate broker” to mean:

Any person . . . who, for compensation or valuable consideration sells . . .buys . . . or negotiates the purchase or sale or exchange of real estate.

Virginia Code §54.1-2107 goes on to make it crystal clear that LES was a real estate broker by

stating that:

One act for compensation . . . of buying or selling real estate of or for another, or offering for another to buy or sell or exchange real estate. . . shall constitute the person. . . performing . . . the acts enumerated above, a real estate broker or real estate salesperson.

Virginia statutory law goes on to regulate what LES could do and could not do with the

Exchange Funds deposited by Virginians with LES. LES could not use the Exchange Funds to

gamble in Vegas or pay its personal business expenses as the Bankruptcy Court tried to authorize.

Virginia Code §54.1-2108 says that LES shall not “divert or misuse any funds held in escrow or


20

otherwise held by him [LES] for another. . .” Section 54.1-2131 of the same Virginia statute also

required LES to disclose to each Virginia Exchanger “material facts. . . concerning the transaction

of which the licensee [LES] has the knowledge,” which would have included the operation of a

Ponzi scheme.

The integration clause in the Exchange Agreement negating the imposition of additional

duties on LES implied by operation of law cannot, under any conceivable circumstance, apply to

statutes governing the relationship between LES and the Virginia Exchangers. LES’s post-

bankruptcy trick was tried and rejected in Prudential Residential Services v. Cash, 70 Va. Cir. 27

(2005) where the court held that the real estate broker was a “statutory fiduciary” as contrasted to a

“common law fiduciary” and the regulations (Va. Code Ann.§ 54.1-2131, et seq.) were imputed

into every contract entered into in Virginia by Virginians. The court said:

“Va. Code Ann. § 54.1-2131 imputes into every existing contract certain duties by a real estate broker. It is not necessary to set forth those duties and conduct in a written contract when they are already required by law.” Id.

In Virginia, LES was a “statutory fiduciary” with statutory duties which could not be

waived. The Defendants were assisting LES in breaching these statutory fiduciary duties, which

makes them liable for aiding and abetting the breach of fiduciary duty.

The other states with the largest number of victims are Texas, Florida and New York.

Plaintiff Kneese is from Texas (FAC, ¶ 21 and Exhibit J); Plaintiffs Friedlander and Prudential

Properties are from Florida (FAC, ¶¶ 29 and 39 and Exhibit M); and Plaintiffs Leapin Eagle and

Schonberger are from New York (FAC, ¶¶ 32 and 40 and Exhibit L). Texas, Florida and New

York have money transmitter statutes which, by definition, apply to LES. They also have statutes

regarding escrow agents and real estate agents which apply to LES. The reach of these important

consumer protection statutes cannot be waived and the language in the statutes is implied into every

Exchange Agreement notwithstanding any integration clause, disclaimer of implied duties clause,

Virginia choice of law clause, or desire to be an unregulated business holding billions of dollars of

other peoples’ money.

3. Texas

For instance, Tex. Fin. Code § 151.301(b)(4) defines “money transmission” as “the receipt


21

of money . . . by any means in exchange for a promise to make the money . . . available at a later

time or different location.” Tex. Fin. Code § 151.003(8) specifically exempts lawyers and title

companies in connection with real property transactions so the reach of the statute must encompass

QIs, such as LES, because the exemption speaks to the exact business being conducted by LES in

Texas.

Tex. Fin. Code § 151.302 requires a license “to engage in the business of money

transmission.” LES did not have such a license in Texas which is a predicate act under RICO.

Tex. Fin. Code § 151.404(a) imposes a statutory trust upon the escrowed funds: “A license

holder shall hold in trust all money received for transmission directly . . . from the time of receipt

until the time the transmission obligation is discharged. A trust resulting from the license holder’s

actions is in favor of the person to whom the related money transmission obligations are owed.”

Additionally, Tex. Fin. Code § 51.309(a) imposes investment restrictions upon money transmitters

including the mandate that assets equal liabilities. Therefore, in Texas, Exchange Funds are held in

trust, LES was the trustee, the Texas Exchangers were beneficiaries of the trust, LES (as a statutory

trustee) owed fiduciary duties to the Exchangers which LES breached, and the Defendants are

liable for aiding and abetting LES’s breaches of fiduciary duties while operating in Texas.

4. Florida

Florida has a similar money transmitter statute as Texas. Fla. Stat. §560 et seq. [Money

Services Business]. Florida defines a “statutory fiduciary” to include any person who by reason of

a written agreement has the responsibility for the acquisition or exchange of money or property of

another. (Fla. Stat. §518.10.) Florida’s statutes regulating professions and occupations includes

Chapter 475 regarding real estate brokers. Fla. Stat. §475.01 defines a broker very broadly to

include: “ . . . a person who, for another, and for a compensation or valuable consideration . . . sells, exchanges, buys . . . any real property or any interest in or concerning the same . . . or who advertises or holds out to the public by any oral or printed solicitation or representation that she or he is engaged in the business of . . . buying, selling, exchanging . . . real property of others or interests therein . . . or who directs or assist in the . . . closing of any transaction which does , or is calculated to, result in a sale, exchange or lease thereof . . .”

A broker, like LES, is a fiduciary [Fla. Stat. §475.01(f)] and as a single agent only


22

representing the Exchanger in the 1031 Exchange LES had the following enumerated statutory

duties which cannot be disclaimed: (i) dealing honestly and fairly; (ii) loyalty; (iii) confidentiality;

(iv) obedience; (v) full disclosure; (vi) accounting for all funds; and (vii) skill, care, and diligence

in the transaction. (Fla. Stat. §475.278.)

So, in Florida, LES acted as a broker, a money transmitter and a statutory fiduciary making

the Defendants liable for aiding and abetting LES’s breaches of statutory fiduciary duties. In

addition, by operating a money transmitter business in Florida without a license, LES violated 18

U.S.C. §1960, which is a predicate act under RICO. See United States v. 1,370,851.62 in U.S.

Currency, 2009 U.S. Dist. LEXIS 97441 (2009).

5. New York

N.Y. Banking Law § 641 provides that no person shall engage in the business of receiving

money for transmission or transmitting the same without a license obtained from the New York

Superintendent of Banks. The statute excludes banks, trust companies, and similarly regulated

financial institutions from the licensing requirements but does not exclude QIs. N.Y. Banking Law

§650 provides that any person who engages in the business of receiving money for transmission

without a license is guilty of a class “A” misdemeanor. United States v. Mazza-Alafut, 621 F.3d 205

(2010, CA 2 N.Y.) holds that operating such a business without the required license supports a

conviction under 18 U.S.C. §1960 – a predicate act under RICO.

N.Y. Real Property Law §440 defines a real estate broker broadly enough to include LES.

Real estate brokers in New York are imposed with statutory fiduciary duties of: (i) reasonable care;

(ii) undivided loyalty; (iii) confidentiality; (iv) full disclosure (v) obedience; and (vi) duty to

account. N.Y. Real Property Law §443. In addition, funds received by a real estate broker from a

client must be deposited into an FDIC-insured account and these funds cannot be under any

circumstances comingled with the broker’s own funds. 19 N.Y. CRR §175.1. The Exchange

Funds are held in a statutory trust.

As to the 26 New York Exchangers doing business with LES in New York who lost $26.7

million in Exchange Funds (Exhibit L), LES was a money transmitter and a real estate broker

holding Exchange Funds in trust violating statutorily enumerated fiduciary duties, and the


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Defendants knowingly assisted LES in the breach of these fiduciary duties.

V. ARGUMENT

A. Plaintiffs’ Direct Claims Against Defendants Cannot Be Barred By the Bankruptcy Court.

The Bankruptcy Court cannot bar, enjoin or release direct claims against non-Debtors,

which belong solely to a unique class of creditors of the debtor. Deutsche Bank AG (In Re

Metromedia Fiber Network, Inc.), 416 F.3d 136 (2nd Cir. 2005). Non-debtors whose conduct

injured a specific sub-set of creditors of the debtor must file their own bankruptcy to obtain a

discharge under the Bankruptcy Code. Ponzi scheme cases (fraudulent inducements to part with

money) are always considered direct actions belonging to the defrauded depositors and are to be

prosecuted by them and not the debtor-in-possession (LES). See, e.g., Hirsch v. Arthur Andersen &

Co., 72 F.3d 1085 (2d Cir. 1995); E.F. Hutton & Co. v. Hadley, 901 F.2d 979 (11th Cir.1990);

Wright v Bank of America Corp., 219 F. 3d 79, 86-87 (2d Cir. 2000). B. Plaintiffs’ Direct Claims Against the Defendants Are Not “ARS Litigation Claims” Or “Other Litigation Claims.”

The Confirmed Plan vested the trusts with responsibility for “monetizing and distributing”

certain assets that were allocated to each trust. The assets of each trust include the right to bring

litigation which belonged to the debtors.15 In particular, the LES Trust was allocated all causes of

action defined as “ARS Litigation” and the LFG trust was allocated all causes of action falling

under the definition of “Other Litigation.” To make it clear that Plaintiffs could bring claims

against SunTrust and other joint tortfeasors (excluding officers and directors until the stay was

lifted), the Order approving the Plan included the following language:

For the avoidance of doubt, nothing contained in this Order or the Plan shall preclude Persons who . . . hold Claims against . . . the Debtors . . . from . . .

15 In a bankruptcy proceeding, state law determines whether a right to sue belongs to the debtor or to the individual creditor. Mediators, Inc. v. Manney (In re The Mediators. Inc.), 105 F.3d 822, 825 (2d Cir. 1997). If the cause of action belongs to the estate, the trustee has exclusive standing to assert it; conversely, if the cause of action belongs solely to the creditors, the trustee has no standing to assert it. In re Granite Partners, L.P., 194 B.R. 318, 324-25 (Bankr. S.D.N.Y.1996). To determine standing, the Court must look to the nature of the wrongs alleged in the complaint without regard to the plaintiffs designation, and the nature of the injury for which relief is sought. Id. at 325.


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enforcing, collecting or otherwise recovering on any suit, action or other proceeding that is not an Enjoined Action against Persons other than Debtors. . .

The Confirmed Plan defines “ARS Litigation” as: all Claims and/or Causes of Action that

belong to the LES Trust:

. . . (a) against broker, banks, or other institutions or parties . . . involved in the underwriting, offering, marketing, and/or sale of the Auction Rate Securities and/or (b) otherwise relating to the Auction Rate Securities’ purchase, sale, transfer, value and/or liquidity. The ARS Litigation shall also include all Claims and/or Causes of Action against unaffiliated third parties, including, but not limited to, SunTrust Bank, that held or hold Exchange Funds, and proceeds from the sale or settlement of such Claims and/or Causes of Action against unaffiliated third parties.

Plaintiffs’ case against Defendants is not “ARS Litigation”. The Defendants did not

underwrite, offer, market, or sell the ARS to LES. SunTrust sold the ARS to LES, and Plaintiffs’

case (like this case) against SunTrust is not enjoined because that case does not fit the definition of

“ARS Litigation.” When the LES Trusts settled with SunTrust, the Settlement Agreement made it

crystal clear that the Plaintiffs’ case was not barred or released by the language in the Settlement

Agreement. If the LES Trust believed the Plaintiffs were interfering with the Confirmed Plan by

their litigation against SunTrust or these Defendants, they have the standing and motive to raise the

issue with the bankruptcy court. They have not.

The Confirmed Plan defines “other litigation” as all claims and causes of action of LFG

and/or LES against prepetition officers and directors of LFG, LES or former underwriter

subsidiaries, in their capacity as such. CLTIC and LTIC are the former underwriting subsidiaries

of LFG. The Trustee of the LFG Trust has filed an action on behalf of the LFG Trust against

former directors and officers of LFG, LES, CTLIC and LTIC for the mismanagement of LFG and

LES. See, Matson v. Alpert, et. al., Case No. 08-35994 (Bankr. D.Va. 2011) attached as Exhibit A.

Plaintiffs have no intention of interfering in this litigation and have honored the stay and will honor

the stay until it is lifted.

Plaintiffs’ claims do not trigger the ARS Litigation definition simply because CLTIC and

LTIC swapped cash for illiquid ARS. The Plaintiffs have no dispute with the Defendants

concerning the amount paid for the ARS. The dispute with Defendants arises, solely, from the fact

that senior management at CLTIC and LTIC knew the cash transferred to LES would be


25

used to make lulling payments to perpetuate the Ponzi scheme. LES had to pay off older Exchanges

pending at LES in order to induce new customers to deposit their money with LES. It is the

intended use of the money to substantially assist the fraud which gives rise to the Defendants’

liability.

A judgment in this litigation will not deplete the insurance proceeds that the Confirmed Plan

designated for the estate. The Confirmed Plan stays actions that would deplete the proceeds of

insurance policies but the LFG Trust has made no demand on Plaintiffs to stay their litigation

against the Defendants. Similarly, the Defendants have made no factual showing that they are

covered by LFG’s insurance policies for intentional bad acts or that they are entitled to

indemnification paid by insurance from their former officers and directors who directed the

employees at the corporations to do the bad acts.

The corporate Defendants were personally involved in LES’s operation of a Ponzi scheme.

The acts committed were the result of active and deliberate dishonesty promulgated by the highest

ranking officers of the corporations. Such dishonesty by the corporations would preclude

indemnification from their dishonest officers and directors. See Landmark Land Co. v. Cone (In Re

Landmark Land Co.), 76 F.3d 553 (4th Cir. 1996). Hopefully, courts do not spend taxpayer dollars

resolving disputes between crooks over the proper sharing of the stolen loot.

C. Plaintiffs’ FAC Satisfies the Elements of Aiding and Abetting the Fraud Committed by LES Against All the Exchangers.

LES committed fraud in the inception on all new Exchangers depositing funds after

February 11, 2008. The Exchange Agreements contained false representations as to the use of the

Exchange Funds. The Exchange Funds were not deposited with LES to “hold” and keep in

SunTrust’s FDIC-insured account until (1) used to close the Exchanger’s exchange; or (2) returned

to the Exchanger. Instead, the Exchange Funds were used to run a Ponzi scheme by paying off old

Exchanges. The Defendants knew this, they directed LES to do it, and the Defendants provided

substantial assistance to LES based on the various activities alleged in the FAC. The law supports

Plaintiffs’ claims. See Exhibits E and F; St. Louis & S.F. Ry. v. Johnston, 133 U.S. 566 (1890);

Baisch v. Gallina, 346 F. 3d 366 (2nd Cir. 2003); City of Atascadero v. Merrill Lynch, 68 Cal. App

4th 445 (Cal. Ct. App. 1998); and RESTATEMENT (SECOND) TORTS § 876 (1979).


26

The Defendants contend they only aided and abetted the fraud committed by LES as to those

LES Exchangers they actually referred to LES who now have failed Exchanges. This is a

RESTATEMENT (SECOND) TORTS § 876(c) case. As to the other non-referred Exchangers with failed

Exchanges there is no case because the Defendants’ own tortious conduct in referring others to LES

did not cause the non-referred Exchangers to lose their money. Although the scheme was to injure

all foreseeable Exchangers (unless a miracle infusion of cash occurred), according to the

Defendants, they are only liable to those Exchangers with failed Exchanges they succeeded in

actually and tortiously referring to LES.

But if the scheme was to defraud all commingled Exchangers, and there was direction,

assistance, and encouragement by the Defendants to LES in the form of referring some clients to

LES, then the Defendants are liable for aiding and abetting the entire scheme. LES was starved for

money and needed new customers’ money to keep the scheme alive. The Defendants assisted LES

by paying their employees $150 to refer Exchangers to LES, which caused millions of dollars to

flow into LES, the exact amount to be determined. The exact amount, however, was substantial

because it included Exchangers depositing after February 11, 2008, who successfully closed their

Exchanges.

“But for” causation is not the test.16 The test is whether the assistance makes it “easier” for

the violation to occur, not whether the assistances provided was “necessary” for the primary

tortfeasor to accomplish the tort. Wells Fargo Bank v. Arizona Laborers, Teamsters & Cement

Masons Local No. 395 Pension Trust Fund, 201 Arizona 474, 489, 38 P.3d 12, 27 (2002). If the

encouragement or assistance is a substantial factor in causing the resulting tort, the one giving it is

himself a tortfeasor and is responsible for the consequences of the other’s act. (RESTATEMENT OF

TORTS (SECOND) § 876, comment “d”.) Proximate cause exists where the Defendants’ actions were

a substantial factor in the responsible causation and Plaintiffs’ injury was reasonably foreseeable or

16 In other words, the scheme to defraud at LES may have succeeded without the referrals so the Defendants’ help was not a “but for” cause of Plaintiffs’ loss. This is like the driver of a getaway car in a robbery arguing that the bank robber could have successfully robbed the bank by walking home instead of riding in the getaway car. The test is knowledge and substantial assistance or encouragement. There is no known defense that the assistance was not needed because the primary tortfeasor could have committed the tort anyway.


27

anticipated as a natural consequence. McDaniel v. Bear Sterns & Co., 196 F.Supp. 343, 359

(S.D.N.Y. 2002). Advice or encouragement to act operates as moral support to a tortfeasor and if

the act encouraged is known to be tortious, it has the same effect upon liability of the advisor as

active participation or physical assistance. Schultz v. Neovi Data Corp. (2007) 152 Cal.App.4th 86,

95, 60 Cal.Rptr.3d 801; RESTATEMENT (SECOND) TORTS §876, comment “d.”

LTIC knows about substantial assistance and causation for aiding and abetting liability. See

Lawyers Title Insurance Corporation v. United American Bank of Memphis, 21 F.Supp.2d 785

(1998). In this case, LTIC, as a Plaintiff, argued and the court agreed that in determining whether a

Defendant’s conduct provided substantial assistance to the wrongdoer, the nature of the act

encouraged, the amount of assistance given, the Defendant’s presence or absence at the time of the

tort, the Defendant’s relation to the primary tortfeasor, and the Defendant’s state of mind are all to

be considered. Id. at 799. A Defendant who participates in an unlawful activity in concert with the

primary tortfeasor is liable for any damages resulting from acts committed by his compatriots in

the course of that activity. Id. at 795.

Ted Chandler was the CEO of LFG, CTLIC and LTIC; Bill Evans was the CFO of LFG, and

the V.P. for LES, CTLIC and LTIC; and Pam Saylors was the President of LES and a V.P. for

LFG, CTLIC and LTIC. They all knew LES was running a Ponzi scheme and they all instructed

CTLIC and LTIC to encourage LES to keep running a Ponzi scheme by referring new Exchangers

to LES. If they, on behalf of CTLIC and LTIC, had issued a directive instructing the title insurers

to stop sending business to LES because LES was defrauding its customers, the Ponzi scheme

would have stopped at LES on the day of the issuance of the directive. CTLIC and LTIC’s

encouragement to LES to continue was substantial assistance and a substantial factor in causing all

of the Plaintiffs’ losses.

D. Plaintiffs’ FAC Satisfies the Elements of a Conspiracy to Defraud Them.

Plaintiffs’ conspiracy case is a RESTATEMENT OF TORTS (SECOND) § 876(a) case. The

difference between aiding and abetting a fraud and conspiracy to commit fraud are set out in

Neilson v. Union Bank of California, N.A., 290 F. Supp. 2d 1101 (U.S.D.C. Cal. 2003). An agent

of a principal may be liable for conspiracy with the principal if he was acting for his own individual


28

advantage and gain in committing the crimes or breached his own duty owed to the plaintiffs.

Individual advantage and gain is not an element of aiding and abetting liability because this tort

requires assistance not just agreement. An agent aider and abettor can work for free, by the hour,

or for a percent of the loot.

Even if we assume the Defendants’ contentions are correct that LES was the Defendants’

agent (with elements of control, benefit, and loyalty stipulated to) in committing the crimes and

torts alleged, a conspiracy claim is still viable if LES was acting, partially, for its own individual

advantage and gain in defrauding the Exchangers at the behest of the Defendants or if LES

breached its own duties owned to the Exchangers. Neilson, at 1122-1129. As succinctly put in the

Virginia Rock Creek case, there is a common law duty not to commit fraud “which is a duty owed

by everyone to everyone.” Rock Creek Park View, supra, at 15. Agents cannot knowingly commit

fraud with their principal based on an agreement with their principal and raise agency as a defense.

The same standard would apply to murder.

Plaintiffs did not include agency or partnership allegations in the FAC. Defendants are

contending, however, that LES was their agent in a unitary business enterprise operating with the

common purpose to defraud the Exchangers, thus they cannot conspire with LES (their agent).

Plaintiffs request leave to amend to allege agency and partnership so that judgment can be entered

immediately against Defendants’ based on their own vicarious liability theory of the case.

The civil conspiracy started on February 11, 2008. Evidence of the conspiracy includes: (i) the

constant referral of new clients to LES by CTLIC and LTIC while LES was insolvent; (ii) drafting

false Exchange Agreements; (iii) sending out false marketing materials; (iv) laundering stolen

money; and (v) providing money to LES to make lulling payments.

E. Plaintiffs’ FAC Satisfies the Elements of Aiding and Abetting LES’s Breach of Fiduciary Duty and the Conversion of Trust Funds.

Plaintiffs incorporate all of the arguments set forth in the Terry and Arthur Plaintiffs’

Memorandum in Opposition to the Motion to Dismiss filed by Defendant SunTrust Banks, Inc.

(attached as Exhibit N, Dkt. No. 67) and Plaintiffs’ Memorandum in Opposition to Defendant

SunTrust Banks, Inc.’s Motion to Dismiss Plaintiffs’ Second Amended Consolidated Complaint


29

(Exhibit O, Dkt. No. 136) as though fully set forth herein. The matter is briefed and the law is

clear.

Plaintiffs add to the arguments in Exhibits N and O by noting that the Defendants are

judicially estopped from raising arguments based on facts which are 180 degrees from the factual

recitations made to government administrators when seeking their permission and assistance. (See

Exhibit G attached hereto.) In addition, the various state statutes cited in the FAC and herein

establish the existence of a trust at LES and statutory fiduciary duties owed by LES to the

Exchangers which cannot be waived and are imputed into each Exchange Agreement regardless of

any silly clause which says implied duties do not arise by operation of law. Additionally, Judge

Ware in California has ruled that QIs act as fiduciaries and the tort of conversion applied to QIs

misappropriating Exchange Funds and California law controls. Hunter v. Citibank, N.A., 2010 U.S.

Dist. 61912, at page 58.

Finally, the Treasury Inspector General for Tax Administration for the Department of the

Treasury says that qualified intermediaries are fiduciaries. The conclusion by the Department

of the Treasury that QIs, like LES, act as fiduciaries in a 1031 Exchange should bind this Court’s

interpretation of the relationship between the Exchangers and LES. A copy of the report issued by

the Treasury Inspector General is attached hereto as Exhibit P.

F. Plaintiffs’ FAC Satisfies the Elements of Enterprise Liability in California Where the Original Complaint Was Filed and Where 80 Victims Reside.

Enterprise liability is just another name for alter ego liability. In re Mission Ins. Co., 41

Cal. App. 4th 828 (1995). The Defendants admit they acted as a unified business enterprise as a

defense to Plaintiffs’ conspiracy claim and RICO claim. Plaintiffs pled the Fifth Cause of Action

in the alternative (FAC, ¶ 160). The Defendants were the profit-generating subsidiaries for LFG,

generating close to 90% of its consolidated income while LES generated less than 1%. (FAC, ¶ 2,

49). The FAC points out that the Defendants used consolidated accounting, centralized cash

management, interlocking officers and directors, and shared employees, work and office space with

LES (FAC, ¶ 49). LES filed for bankruptcy leaving $200 million owed to the LES Exchangers

while the Defendants walked away. In California, the separate corporate existence of an entity will


30

not be honored where to do so would defeat the rights and equities of third persons. It is an

equitable remedy reached by the court and it does not eliminate the separate corporate existence of

the Defendants for other purposes. Mesler v. Bragg Management Co., 39 Cal. 3d 290 (1985). To

justify piercing the corporate veil, a Plaintiff must show the court a unity of interest and ownership

between the corporations such that their separate personalities no longer exist, and that an

inequitable result would follow if the one corporation was not held liable for the torts of the other.

The Plaintiffs must show specific manipulative conduct which relegates one corporation (LES) to

the status of an instrumentality, agency, conduit or adjunct of the other corporations (CTLIC and

LTIC). Institute of Veterinary Pathology, Inc. v. California Health Laboratories Inc., 116 Cal.

App. 3d 111, 119-120 (1981).

In this case, after February 11, 2008, LES was nothing but a subordinate instrumentality

used by the money making Defendants to delay and hopefully avoid their own financial collapse

caused by their close affiliation with LES. LES itself had no legitimate purpose to stay in business

by defrauding new customers. The ARS froze and LES was insolvent. LES’s liability was fixed on

or within a few weeks after February 11, 2008, along with its inability to pay. The QI business

should have stopped operating right then. Delaying LES’s bankruptcy by changing the identity of

the LES creditors did nothing to eliminate the debt established in February 2008 or rationally

benefit LES. The only corporations that “could” reap financial gain by LES’s continued existence

from February 11, 2008 to November 26, 2008 were the money-making Defendants seeking a

suitor to pay the highest price. LES was used as an instrumentality of the Defendants in their

scheme to convince the public LES was alive when it was dead, cold, and insolvent.

The Defendants are also estopped to deny their alter ego liability. Exhibit 3 to the FAC are

the LES marketing materials given to Plaintiff Hays by CLTIC escrow officer Patricia Grech,

approximately 15 days before LES filed for bankruptcy. The fraudulent solicitation materials sent

by CTLIC to Hays to induce her to part with her money cited Rechtzigel Trust v. Fidelity National

Title, 748 N.W. 2d 312; 2008 Minn. App. LEXIS 220 (an insurance dispute) to warn Hays that a

bankruptcy trustee of a QI “may” seek to avoid payments made by the QI to an Exchanger if made


31

within 90 days prior to the petition date.17 In order to avoid doing business with a QI that may file

for bankruptcy, CTLIC referred Hays to LES 15 days before it filed for bankruptcy while LES had

already engaged bankruptcy counsel at the behest of senior management at CTLIC and LTIC.

In the section “Know Your Source of Security,” the Defendants represented to Hays that

LES’s financial health was directly linked to the financial strength of the Defendants. The section is

represented below:

Know your Source of Security 1031 regulations allow the qualified intermediary to provide a third-party guaranty. However, a guaranty is only as good as the company behind it. LandAmerica 1031 [LES] meets this safe harbor by providing this guaranty through its parent company, LandAmerica Financial Group, Inc. (NYSE, symbol LFG). Each of LFG’s major title insurance underwriters has received an “A+” financial rating from Fitch and an “A” from Standard & Poor’s, two of the leading insurance rating companies. Individually, these are some of the largest and most recognized names in the title insurance industry: Commonwealth Land Title Insurance Company Lawyers Title Insurance Corporation

Hays, as well as other Plaintiffs, relied on CLTIC’s statement that LES’s alleged financial

strength was derived from the QI’s affiliation with the Defendants. The Defendants should be

estopped from denying they were a unified enterprise (which they apparently are not doing) and

should be held liable for the debts of LES based on Plaintiffs’ Fifth Cause of Action. Being part of

an enterprise and conducting the affairs of an enterprise does not make them all a single corporate

entity.

G. The Plaintiffs’ FAC Satisfies the Elements of Negligence Committed by Defendants.

Once the Defendants referred clients to LES they had a duty to tell the truth, which included

the obligation not to suppress or conceal any facts within their knowledge which would materially

qualify the statements made. “If he speaks at all he must make a full and fair disclosure.” Bank of

America National Trust & Savings Ass. v. Hutchinson, 212 Cal. App. 2d 142 (1963). The

Defendants referred clients who deposited millions with LES after February 11, 2008. These LES

17 Ironically, the Court in Rechtzigel held there was no title insurance coverage for the buyer [Exchanger] of the Replacement Property because the bankrupt QI had no interest in the property to create an adverse interest to trigger title insurance coverage.


32

Exchangers included Plaintiffs, class members, and others who were fortunate enough to have their

Exchanges close prior to November 26, 2008. The referrals to LES had nothing to do with the title

insurance sold or the escrows opened for LES Exchangers. By making the referrals, however, the

Defendants created for themselves the duty to act prudently in making the referral. The duty of

prudence required full and honest disclosure.

In the context of referring clients to a QI, courts have held the person referring the Exchanger

to the QI must do so prudently and may be liable for making a negligent referral. Winters v.

Dowdall, 882 N.Y.S. 100, 63 A.D. 3d 650 (2009); Williamson v. Abellera, 245 Ga. App. 312, 537

S.E. 2d 130 (2000). See also Exhibit F, page 11, Judge Ware’s ruling on negligence against

Cordell in the Okun case.

The negligence claim does not fail because Plaintiffs have also alleged intentional acts unless

the Defendants are admitting that their acts were all intentionally performed. The claim arises from

a duty derived as a consequence of the parties’ prior relationship which was breached.

H. Plaintiffs’ FAC Satisfies the Elements of Breach of Fiduciary Duty Committed by the Defendants as Escrow Agents.

Escrow agents are fiduciaries and hold the escrow funds in a statutorily imposed trust. Fla.

Stat. § 626.8473; Cal. Fin. Code § 17409. Defendants argue they could only be liable for breach of

contract, and they are not liable for breach of contract because they sent the money to LES based on

escrow instructions, so end of story and end of case. But the Defendants referred the Exchangers to

LES. And the Defendants knew that LES would steal their money. The Defendants knew LES

would steal their money to avoid immediate financial collapse which would be “catastrophic” to the

Defendants, who were trying to sell themselves to FNF for the highest price. The Defendants

breached their duty of undivided loyalty and duty to disclose.

The Defendants had a fiduciary duty to disclose facts within their knowledge that the

Exchangers would have liked to know – like the fact that LES was running a Ponzi scheme which

posed the substantial risk that their Exchanges would fail and their life savings would be lost. The

Defendants had a duty to NOT send the Exchange Funds to LES if to do so would jeopardize the

entire purpose of the creation of the escrow with Defendants. The Defendants did not have a duty


33

to “police” its depositors. However, police work was not needed as the Defendants had previous

knowledge of the facts because they were participants in the scheme.

I. Plaintiffs’ FAC Pleads a Cause of Action for Conversion of Escrow Funds by the Escrow Agents.

A “trustee who misappropriates trust funds can undoubtedly be sued either at law for

conversion or in equity for an accounting.” Bank of New York v. New Jersey Title Guar. & Trust

Co., 256 A.D., 609, 611, 11 N.Y.S. 2d 181 (NY App. Div. 1939). Judge Ware ruled that the law in

California establishes that Exchangers have a claim for conversion of Exchange Funds. His ruling

below controls this case because California law controls:

“The fact that Plaintiffs were not entitled to the funds until the property exchange was completed or 180 days after deposit, whichever came first, does not preclude a cause of action for conversion.” Hunter v. Citibank, N.A., 2010 U.S. Dist. 61912, at page 58 (citing Cahaly v. Benistar Property Exchange Trust Co., Inc., 68 Mass. App.Ct. 668, 864 N.E. 2d 548, 559 (Mass. App.Ct. 2007).

J. Plaintiffs’ FAC Pleads RICO Liability.

1. The Money Transmitter Statutes Apply to LES.

In the United States of America there is no business where you can hold billions of dollars

of others people’s money and there are no regulations governing your behavior. The money

transmitter statutes apply to LES and a plain reading of them should satisfy the Court as such. LES

acted as an unlicensed money transmitter, which violated laws in Texas, Florida, New York, and

elsewhere. Being unlicensed violates 18 U.S.C. §1960, which is a predicate act under RICO.

Defendants contend that LES’s failure to be licensed did not cause Plaintiffs’ loss. But these

regulatory statutes imposed investment restrictions, bonding requirements, periodic financial

reporting and regulatory oversight. The statutes also state that assets must equal liabilities, which

LES could not claim after February 11, 2008. Unless the Defendants are saying LES would not

have complied with these statutes and the regulators were inept, compliance by LES would have

terminated LES’s receipt of new customers’ money soon after February 11, 2008, which would

have saved the Plaintiffs in this case from the losses they suffered.

2. The Defendants Committed Multiple Predicate Acts for the Enterprise and LES Committed Thousands of Predicate Acts Showing a Pattern of Racketeering Activity.

On or about November 11, 2008, Pat Grech of CLTIC told Plaintiff Hays over the


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phone that Hays should use LES because LES “was financially sound” (wire fraud). Pat Grech

referred Hays to the LES website which contained the positive, but fraudulent, information

contained in Exhibit 3 to the FAC (wire fraud). On November 14, 2008, Hays’ equity was wired by

Commonwealth Land Title Company, at the direction of CLTIC, to LES (wire fraud) (FAC, ¶13).

On October 1, 2008, James Berry of LTIC transmitted to Plaintiff Wood by internet a fraudulent

LES Exchange Agreement (wire fraud) (FAC, ¶15). On June 25, 2008, Plaintiff Billedeau’s money

was wired to LES at the direction of LTIC (wire fraud) (FAC, ¶17). On or about November 21,

2008, Jill Snee of LTIC, CLTIC and LES orally represented to Plaintiffs CDC-Rural and CDC

Glendale that their money would be held in escrow by LES and would be safe. In response, their

money was wired to LES five days before LES filed for bankruptcy (wire fraud) (FAC, ¶18).

There are 10 Plaintiffs named in the FAC referred by Defendants to LES which would include mail

fraud and wire fraud. (FAC, ¶¶13-23.) Attached as Exhibit Q are letters from counsel for CLTIC

to the Missouri Department of Insurance outlining that these fraudulent activities occurred nonstop

from February 11, 2008 to November 26, 2008.

LES, with the participation of the Defendants, had been committing mail fraud and wire

fraud on each Exchanger since 2002 by investing in ARS instead of keeping the money safe on

deposit at SunTrust Bank in an FDIC-insured account, as was represented in each Exchange

Agreement (FAC, ¶6). LES committed, at a minimum, 384 predicate acts of mail fraud and wire

fraud by defrauding the class.

This case is not “garden variety fraud”, but fraud at the pinnacle of immorality by a Fortune

500 company. LES’s bankruptcy is not a defense. If the Defendants could have kept the scheme

alive longer they would have as there is no evidence of repudiation, second thoughts or a desire to

stop. The scheme collapsed because the money ran out.

3. Plaintiffs’ RICO Claims Do Not Fail Because the Persons Involved in the Enterprise Were Distinct From the Enterprise.

The Plaintiffs’ FAC satisfies the elements of §§1962(c) and (d). Cedric Kushner

Promotions, Supra, 533 U.S. 158 (2001). First, the Plaintiffs did not allege that LES was the

Defendants’ agent or that the Defendants were LES’s agents. The Plaintiffs allege that the

Defendants were persons distinct from the enterprise. The Defendants were legally


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separate entities from LES and LFG, with different rights, responsibilities and goals. The

Defendants’ primary obligations, as licensed insurers, were to their policyholders. (FAC, ¶113.)

LES’s obligations, as a QI trustee, were to its Exchangers. LFG was simply the shareholder of the

Defendants and LES. Combined, they acted as one RICO enterprise but not as one single corporate

entity. As distinct corporate entities they could conspire with one another.

If the Defendants were acting as LES’s agents in the fraud being committed at LES, they

did so for their own individual advantage and gain in attempting to sell themselves at the highest

price prior to LES’s collapse. If LES was acting as the Defendants’ agent in the fraud being

committed at LES, then the Defendants are liable as principals pursuant to respondeat superior.

LES, who is not a defendant, cannot raise the agent’s immunity from conspiracy liability because it

was breaching its own duties it owed directly to the Exchangers – the duty to tell the truth.

VI. CONCLUSION

For the foregoing reasons, the Defendants’ Motion to Dismiss should be denied. If the

Defendants’ Motion is not denied, Plaintiffs respectfully request leave to amend.

Dated: November 4, 2011 Respectfully submitted,

By: /s/ Robert L. Brace HOLLISTER & BRACE P.O Box 630 Santa Barbara, CA 93102 Tel: (805) 963-6711 Fax: (805) 965-0329 Email: [email protected]

Attorneys for Plaintiffs, and all others similarly situated


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