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In re LandSource Communities Development LLC

United States District Court, D. Delaware

January 3, 2020


         Chapter 11 (Jointly Administered)

          Robert E. Barnes, Tony Nasser, BARNES LAW, LLP, Los Angeles, California; Stamatios Stamoulis, STAMOULIS & WEINBLATT, LLC, Wilmington, Delaware, Counsel for Appellant

          Daniel M. Petrocelli, David Marroso, Megan K. Smith, O'MELVENY & MEYERS LLP, Los Angeles, California; David B. Stratton, Marcy J. McLaughlin, PEPPER HAMILTON LLP, Wilmington, Delaware, Counsel for Appellee




         Pending before the Court is an appeal by Citizens Against Corporate Crime, LLC and its sole member and officer Nicholas Marsch III (together, "CACC"), from the Bankruptcy Court's November 1, 2018 Order Granting Lennar Corporation's Motion to Enforce the Injunction and Release in the Debtors' Joint Chapter 11 Plan and Confirmation Order (B.D.I. 3613, APP659-62)[1]("Enforcement Order"). The Enforcement Order was entered in the Chapter 11 cases of Landsource Development Communities, LLC and certain of its affiliates ("Debtors") following the Bankruptcy Court's July 17, 2018 Order reopening those cases (B.D.I. 3562, APP343-44) ("Reopen Order"), which CACC also challenges on appeal. The Enforcement Order granted appellee Lennar Corporation's ("Lennar") October 5, 2018 motion (B.D.I. 3581, APP416-60) ("Enforcement Motion"), which sought an order enforcing the injunction and release provisions contained in the Debtors' confirmed plan of reorganization (B.D.I. 2214-1) ("Plan") and the Bankruptcy Court's Confirmation Order (B.D.I. 2151, SA1644). The Enforcement Order granted Lennar's request for relief and required CACC to dismiss with prejudice litigation pending against Lennar in the United States District Court for the Eastern District of California ("California Action"). The Enforcement Order also denied CACC's separate motion for abstention (B.D.I. 3607, APP567-80) ("Abstention Motion") as moot. For the reasons set forth herein, the Court affirms the Reopen Order and Enforcement Order.


         A. The Debtors and the Chapter 11 Cases

         The Debtors' primary business was developing master communities for residential and commercial land development. In February 2007, approximately 15 months before its bankruptcy filing, LandSource recapitalized its debt and membership. (B.D.I. 2137 ("White Decl."), SA1452-1454 at ¶ 10(d)). Before this transaction, Lennar and LNR Property Corporation each owned 50% of LandSource's member interests. Id. On February 27, 2007, in exchange for a 68% member interest in LandSource, MW Housing Partners III, L.P., which was 90%-owned by the California Public Employees' Retirement System ("CalPERS"), contributed $370 million in cash and $600 million in real property to LandSource. (See B.D.I. 2047-3 ("Supplement to Disclosure Statement"), SA1283; B.D.I. 1772 ("Disclosure Statement"), SA882). As a result of CalPERS's investment in LandSource, Lennar's 50% ownership interest was reduced to 16%. (White Decl. at ¶ 10(d), SA1452-54). LandSource subsequently borrowed from new lenders to pay a $700 million distribution to Lennar in exchange for its reduced equity interest. (Supplement to Disclosure Statement at 11, SA1283). In its Complaint in the California Action, CACC alleged that these "2007 transactions" constitute a fraud on CalPERS. Like many businesses in the homebuilding sector, LandSource was devastated by the subprime mortgage crisis and, despite efforts to realign its business, became insolvent in 2008 and filed petitions under Chapter 11 on June 8, 2008 ("Petition Date"). (Disclosure Statement at 23, SA883).

         B. The Settlement with Lennar

         Lennar was the Debtors' largest unsecured creditor and filed proofs of claim in excess of $130 million against the jointly administered estates. (B.D.I. 2139 ("Lennar* s Confirmation Br.") at 3, SA1490). Lennar's claims dwarfed those of other unsecured creditors, which totaled only $27.6 million. Id. Efforts to confirm a reorganization plan that left in place claims by and against Lennar did not succeed. The Creditors' Committee-which included Marsch's company Briarwood Capital-fought for a release of Lennar's claims against the Debtors to avoid Lennar receiving the majority of distributions and diminishing the recovery available for other creditors under the Plan. (White Decl. at ¶ 10(d), SA1452-54).

         Following months of negotiation, the Creditors' Committee, secured creditors, and other parties in interest reached an agreement for a consensual Plan ("Lennar Settlement"). The Lennar Settlement included a complete release of Lennar's unsecured claims in exchange for valuable consideration - the resolution of potential causes of action the Debtors or others might assert against Lennar, including causes of action based on the 2007 transactions. (Lennar's Confirmation Br. at 2-6, SA1489-93; Supplement to Disclosure Statement at 11, SA1283; White Decl., SA 1452-54). Lennar agreed to contribute $140 million in cash to the Debtor and to waive any distributions on its $130 million unsecured claim. (See B.D.I. 2214-1 ("Plan") at 39, 50; SA1748, 1759). In exchange, Lennar received a 15% equity interest in the Reorganized Debtors, various assets, and a broad release from "any and all Claims ... or liabilities whatsoever" held by "any Person, in any way relating to the Debtors, the Chapter 11 Cases, or the Plan." (Plan at 39, 60, SA1748, 1769 (emphasis added)). The term "person" was defined to include "any governmental unit or any political subdivision thereof." (Id. at 18). The record supports Lennar's assertion that this settlement funded the Plan. (See e.g., SA1452-54, 1490, 1512-18, 1610-11; White Decl.; Lennar's Confirmation Br.; B.D.I. 2140 ("Barclays' Confirmation Br."); B.D.I. 2142).

         When the settlement was reached, a Supplement to Disclosure Statement was filed on July 6, 2009 that described the Lennar Settlement in detail, including the potential claims that would be released and enjoined under the Plan. The Debtors also effected nationwide publication notice of LandSource's disclosure statement. (B.D.I. 1850 (Affidavit of Publication in the Wall Street Journal, SA1245)). The Creditors' Committee encouraged its constituents to vote in favor of the Plan. (Barclays' Confirmation Brief at 11, 23, SA1514, 1526). The vast majority of voting classes voted to accept the Plan. (B.D.I. 2143 (Declaration Regarding Tabulation of Votes), SA1617). Absent the Lennar Settlement, the Debtors' reorganization would not have been possible. (White Decl. at ¶ 5, SA1442-43).

         The confirmed Plan incorporated the broad consensual third-party release of Lennar and the other terms of the Lennar Settlement. (Plan at 19, 60; SA 1728, 1769). The Plan also expressly reserved the Bankruptcy Court's post-confirmation jurisdiction to "resolve any disputes concerning any release of a non-Debtor hereunder or the injunction against acts, employment of process or actions against such non-Debtor arising hereunder." (Plan at 67-68, SA1776-77). The Confirmation Order includes injunction and release provisions that essentially mirror the Plan. (B.D.I. 2151 ("Confirmation Order") at 22-23, 42-43; SA1665-66, 1685-86). The Order directs that, "[u]pon the entry of the Confirmation Order with respect to the Plan, all Holders of Claims and Interest and other parties in interest. .. shall be enjoined from taking any actions to interfere with the implementation or consummation of the Plan." (Id. ¶ 34, SA1689). Neither Marsch nor his company opted out of the Release or objected to the Lennar Settlement prior to confirmation.

         CalPERS and the California Attorney General's Office ("CAGO") participated in the LandSource bankruptcy. CalPERS, which was represented by private counsel, objected to an early iteration of the Debtors' Disclosure Statement on several grounds, but later withdrew its objection. (B.D.I. 1430 (CalPERS' Objection), SA8O9; B.D.I. 1677 (Withdrawal of Objection), SA850). CalPERS did not object to the Supplement to Disclosure Statement, which described in detail the Lennar Settlement and added the broad release of Lennar to the Plan. Like Marsch, CalPERS also did not object to the Plan or otherwise opt out of the Release prior to confirmation. CAGO appeared in the Chapter 11 cases on behalf of four state environmental agencies that were creditors or parties in interest in the bankruptcy. (See B.D.I. 676, 771, 775, 1012, 1031, 1185, 1207, 1571, 1633 (Notices of Appearance and Pro Hac Applications and Orders). Deputy Attorneys General participated in the proceedings, including by filing objections to an early Disclosure Statement and attending the confirmation hearing. (See B.D.I. 1445 (Water Resource Board Objection), SA0818). Like CalPERS, the CAGO did not object to the Lennar Settlement or the Injunction and Release in the Confirmation Order.

         The Bankruptcy Court entered its Confirmation Order on July 20, 2009, and the Plan became effective on July 31, 2009. (B.D.I. 2151 (Confirmation Order), SA1644; B.D.I. 2223 (Notice of Effective Date), SA1985). No party appealed or sought reconsideration of Plan confirmation.

         C. The California Action and Reopen Order

         More than seven years later, on February 23, 2017, Marsch formed CACC in Wyoming. (B.D.I. 3582-1 ("CACC Articles of Organization"), SA2100-03). It is undisputed that Marsch is and has always been the sole and controlling member of CACC. (B.D.I. 3582-16 (CACC's Reponses to Interrogatories), SA2299-2302; B.D.I. 3582-17 ("CACC operating agreement") SA2304-08). One day after its formation, CACC filed its Complaint against Lennar in the California state court alleging claims under the California False Claims Act against Lennar and various Doe defendants on behalf of CalPERS. The California government investigated CACC's claims but ultimately filed in January 2018 a notice declining to intervene in the case. (B.D.I. 3539-4 ("Marroso Decl.") at ¶ 4, APP-93).

         Lennar was served with the Summons and Complaint on April 17, 2018. (Id.) Relevant to the appeal, the claims alleged by CACC's Complaint relate to Lennar's conduct with respect to the February 2007 transaction and the LandSource Chapter 11 cases. The gravamen of the Complaint is that Lennar (1) "fraudulently induced [CalPERS] to enter into a Contribution and Formation Agreement which required CalPERS to contribute nearly a billion dollars in assets to LandSource," (2) then "induced CalPERS to allow [it] to strip all of the cash and loan proceeds from the LandSource balance sheet in a 'Special Distribution, '" which "placed LandSource on an inevitable and foreseeable path to bankruptcy," and (3) subsequently "filed, managed, and manipulated the LandSource bankruptcy, causing a total loss to CalPERS." (B.D.I. 3582-2 ("Complaint") at ¶¶ 18-20, 31, 37;APP108-112).

         On May 17, 2018, Lennar removed the Complaint to the United States District Court for the Eastern District of California, thus initiating the California Action. (Case No. 2:18-cv-01269 TLN-DB, D.I. 1 (Notice of Removal), SA24O6). The next day, Lennar filed its Motion to Reopen in the Bankruptcy Court. (B.D.I. 3539, APP43-57). Lennar argued in support of its motion that the Bankruptcy Court was best suited to interpret and enforce its own Confirmation Order based upon, among other reasons, its familiarity with the LandSource Chapter 11 cases. (Id. at 12, APP54). Lennar also argued that each and every claim asserted against Lennar in the Complaint fell within the scope of the Injunction and Release in the Confirmation Order. (Id. at 9-11, APP51, APP53). CACC filed the sole objection to the Motion to Reopen on July 2, 2018. (B.D.I. 3552, APP292-312).[2]

         The Bankruptcy Court granted Lennar's Motion to Reopen from the bench at the July 17, 2018 hearing and issued its written order the same day. (Marroso DecL, Ex. 25 (Hr'g Tr. at 33:7-11), APP378; Reopen Order, APP343-44). With permission of the Bankruptcy Court, in July 2018, Lennar served discovery on CACC to ascertain its owners, managers, and members. (Marroso Decl., Ex. 28, APP466). Lennar eventually moved to compel, and the Bankruptcy Court ordered CACC to respond. (B.D.I. 3574 (Order on Lennar's Request to Compel Discovery), APP403-05). On the eve of Marsch's deposition, CACC produced interrogatory responses and documents that establish without a doubt that Marsch formed and wholly owns and controls CACC. (B.D.I. 3582, SA2299-2302).

         D. The Enforcement Order

         Lennar filed the Enforcement Motion on October 5, 2018. (B.D.I. 3581, APP416-60). CACC filed the sole objection to the Enforcement Motion on October 18, 2018. (B.D.I. 3593, APP52O). The same day, CAGO filed a Statement of Non-Opposition to Lennar's Enforcement Motion. (Id.) In its Statement, CAGO stated that, "[a]s the real party in interest in the California Action," the People of California "do not oppose Lennar's request" that CACC be required to dismiss the Complaint as a violation of the Injunction and Release in the Confirmation Order and enjoined from taking further actions against Lennar in violation of the Confirmation Order. (Id. at 4, APP52l (emphasis added)).

         Eight days before the hearing on Lennar's Enforcement Motion, CACC filed an Abstention Motion and purported to set the motion for hearing the same day as the hearing on Lennar's Enforcement Motion. (B.D.I. 3589, APP478-90). A few days later, apparently realizing its procedural error, CACC filed a Motion to Shorten Notice on the Abstention Motion. (B.D.I. 3594, APP527-31). Lennar opposed CACC's Abstention Motion and its request for shortened notice on October 22, 2018. (B.D.I. 3596, APP555-60). The next day, the Bankruptcy Court denied CACC's motion to shorten time on the Abstention Motion "for the reasons stated in ...

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