United States District Court, D. Delaware
IN RE LANDSOURCE COMMUNITIES DEVELOPMENT, LLC, et al., Debtors.
LENNAR CORPORATION, Appellee. CITIZENS AGAINST CORPORATE CRIME, LLC, Appellant,
11 (Jointly Administered)
E. Barnes, Tony Nasser, BARNES LAW, LLP, Los Angeles,
California; Stamatios Stamoulis, STAMOULIS & WEINBLATT,
LLC, Wilmington, Delaware, Counsel for Appellant
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
CONNOLLY, UNITED STATES DISTRICT JUDGE.
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)("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.
The Debtors and the Chapter 11 Cases
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).
The Settlement with 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).
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).
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,
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.
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
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.
The California Action and Reopen Order
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).
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,
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).
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,
The Enforcement Order
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
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