Showdown coming soon to a courtroom far, far away…


31 thoughts on “Showdown coming soon to a courtroom far, far away…

  1. These cartoons are very clever and lighten up a bit this truly fraudulent, distressing state of affairs.
    Thank you, John Robie, keeping us posted at the same time…very appreciated.
    Hannah + Ron Nunn

    • Hannah, I have “The Hamptons” 64/100 from the old EPR offices, dated 1977. Think it’s worth anything? Funny running into you like this after all thes years.

      Mike McG aka REreno (no relation to RE Reno!)

  2. You must know These bastards have cash accounts in the Bahamas, Cayman Islands And Switzerland.
    Can any of these be located. I for one actuallyt heard Walter tell a golfing friend at the Sequahya Country
    country club that if he wanted to stash some money for tax purposes that he should go to the Bahamas
    or the Cayman Islands as thats where he has his.

    • You have a terrific collection of clown graphics, although I am not convinced that McGrane is the only one deserving of them. That last email in the series reveals a lot– his allegations that the reason we have no claim are because the whole original transfer was illegal, the promissory notes are worthless, and that Krause, Weissenborn, etc. have known this all along, and the whole payment plan is a farce because we don’t stand a chance at getting anything back, which he claims Krause and company knew all along, and suggests they are complicit in fraud. Also, (news flash) Krause used to work with the Tx lawyer Gibbs, who (according to McGrane) had an obligation to be familiar with California law and bungled notifications to us.

      Let’s not overlook that McGrane’s legal bill has probably far exceeded $180,000 by now, and this whole thing never would have come up if Kelly had just paid on the $180,000 promissory note he signed to DSI in Nov 2010. Kelly Ng is obviously incompetent in business and a liar. (Yes, I know, that’s not really news to anyone here.) Eventually this will probably serve as one of the many examples when someone sues Kelly for breach of fiduciary duty, etc. Weissenborn and Krause are probably not too pleased with this, as $180,000 is practically lunch money out of the millions of (our) dollars they have burned through, and McGrane has given us way more information about costs and inner-relationships of this whole bad deal than we’d ever get from Weissenborn himself, including that Weissenborn charges us $550 an hour to make our money disappear.

      I have no clue if McGrane will ever persevere in his legal efforts, but I think we’ve gotten a lot more information for the dollar than any of the other players have offered. He’s probably a huge thorn in the Mackinac Partners greedy paw.

  3. I believe DSI’s claim has merit and he has been burned so he is spilling his guts out. Right or wrong, I think what he is telling us is pretty valuable. It’s just what can we do about all of this?

  4. Just received yet another claim filed initiated by DSI and as stated above he may have a claim. I am very concerned in what this all means to the investors, noteholders or whatever we have been named. Everyone is out for a piece of the pie and there will not be a cent left for us.

    • Since Kelly Ng did neglect to pay on a promissory note he signed to them, for $180,000, which seemed to come from a legal agreement over an earlier bill not paid, DSI probably does have a valid claim for the $180,000 agreement, and perhaps a big chunk of McGrane’s legal bills. (A judge might decide that the hundreds of thousands he billed for all of those emails and wasting everyone’s time with the venue change filed in the wrong court justifies some discount.)

      But that’s still a fraction of what James Weissenborn at Mackinac Partners is taking for themselves, and all of the contractors they have hired.

      • Didn’t REL already pay the $180,000 to DSI? I think that DSI’s status as a creditor in the RE Loans bankruptcy is because RE Loans refused to indemnify DSI against securities fraud lawsuits filed by RE Loans investors, and the claim represents DSI’s costs of defending those lawsuits. At least that’s what document 390 on the docket says. Presumably the amount of DSI’s claim will increase as DSI incurs additional attorney fees defending the RE loans investors’ lawsuits against DSI (…and litigating the indemnity dispute/claim in the bankruptcy case?). Does anyone know which RE Loans investors have filed securities fraud lawsuits against DSI and in which court(s) have they been filed? Another question, is it Mackinac/Weissenborn as manager of RE Loans who decided not indemnify DSI? If RE Loans did indemnify DSI, how would the payments be made (e.g. as an operating expense of RE Loans)?

        • I *thought* that I read in some of those very long documents that REL had not paid the $180,000, but admit that I sometimes skimmed a bit where it seemed repetitious, so my apologies if I missed payment info. You may be right about the indemnification issue being an additional aspect to this.

          Appreciate your analysis on the other points about McGrane. His paragraph 3 in the corrected response on the change of venue filing caught my eye:

          “3. As is abundantly clear from the above pleadings on file in the B-4 Partners
          Bankruptcy Case, R.E. Loans is completely kidding itself (not to mention this bankruptcy court)
          by thinking/saying that B-4 Partners will avoid imposition of a Chapter 7 bankruptcy trustee for
          very long.”

          That’s what I’ve been thinking about all of the related companies and parties. (Barney, Kelly, Bruce, B-4, and RE Loans.) No doubt those who are sucking out millions would like to keep driving this wagon into the ground as long as they can get paid, (James Weissenborn of Mackinac Partners, and all of his “consultants” come to mind.)

          They argue that they are trying to leverage better deals out of the land than a quick liquidation would yield, but now that we’ve seen their burn rate, and hourly fees, and the ridiculous amount of money they have wasted on their few interactions with us, (how many thousands for the RE Reno meeting in the Walnut Creek Marriott which accomplished nothing? How many thousands to prepare and mail a plan that is not approved? and so on…) I’m starting to believe that Chapter 7 and a quick liquidation would be more beneficial for noteholders than supporting these parasites. Is Well’s still handing them more money to keep things afloat, putting us deeper in the hole on our own money?? Are they bringing in a bigger return than they are billing us for, or are they just treading water and selling off bits and pieces at a rate sufficient to keep themselves employed, while further reducing the value of our portfolio and increasing the debt?

          • As far as I know Wells is financing RE Loans and ultimately that includes compensating counsel for the noteholders committee, whose last bill was $916K.

  5. DSI’s objection has merit in my opinion. Under the plain language of the corporations code cited by McGrane, any current payment of principal or interest on our notes would be a prohibited distribution given RE Loans LLC’s bankrupt status.

    Krause won’t address DSI’s objection head-on in the email correspondence but instead says (paraphrasing here), “we’ll just amend the disclosure statement to reference the argument as an alternative basis to subordinate the notes” or “only the debtor in possession has standing to avoid the notes under Bankruptcy Code section 544,” neither of which deals with what McGrane is doing here, i.e., objecting to noteholders’ claims under section 502 as a “party in interest” on the basis that the noteholders’ claims are unenforceable under California law.

    McGrane’s analysis is text-based, simple, and there is no dispute that RE Loans LLC is currently insolvent. I’m not seeing how the analysis can be refuted.

    What I’m wondering is, was there action that could have and should have been taken in the RE Loans LLC bankruptcy case prior to the February 6, 2012, bar date to protect the noteholders’ interests with respect to DSI’s corporations code objection to the noteholders’ claims? McGrane alludes to this: “[T]here were never any securities fraud-based rescission/damages claims filed against Debtor by the noteholders before the 2/6/12 bar date….”

    And, is there anything that can be done now in the RE Loans LLC bankruptcy case, other than make the subordination and 544 standing arguments paraphrased above?

    Is the noteholders’ committee taking this seriously? It seems to me that this is a smart move by McGrane on his client’s behalf and to write him off as a clown or quibble with him about his grammar is not helpful.

    • Received 3 letters today from the counsel representing the committee and noteholders regarding DSI’s claim. More confusion added. With all of these Attorney’s involved, you would think they could grasp hold of this case.

  6. This was a comment posted on my blog that demands your attention.

    Do you have any right of recovery in the RE Loans BK or will you just get screwed and get nothing?

    Hello, I’m a noteholder who received DSI’s omnibus objection in the mail yesterday. While I have low expectations of ever seeing any of my RE Loans investment, the DSI objection does not appear frivolous to me. The 2007 exchange note transaction appears to be a “distribution” as defined in Cal. Corp. Code § 17001. It also appears that § 17254(d)(2) applies here (“If the indebtedness is issued as a distribution, each payment of principal or interest on the indebtedness is treated as a distribution, the effect of which is measured on the date the payment is actually made.”) Following the text of the statute, a current distribution of principal or interest on the notes would be prohibited under § 17254(a)(1) (i.e., because of RE Loans’ bankrupt status). Why would this not be a credible objection to the noteholders’ claims?

    On the procedural issues, why would DSI not be a “party in interest” with standing to object to the noteholders’ claims under Bankruptcy Code § 502? I think McGrane has a point that DSI is not seeking to avoid any transfers under § 544 but rather is making a straight objection that the noteholder’s claims are unenforceable under California law; § 544 authorizes the trustee/debtor in possession to avoid certain transfers, but how would that preclude a creditor from objecting to claims on the basis that they are unenforceable under state law? I spent the better part of the afternoon searching caselaw on Lexis and could find no authority that a creditor does not have standing to make that objection because the trustee/debtor in possession has authority to avoid transfers under § 544.

    Anyway, I’m wondering if anyone can shed some light on DSI’s strategy here. DSI’s claim is relatively small (less than $200K), does it have anything to gain by throwing the noteholders under the bus other than “to maximize the extent of its secured indemnity rights against REL to the fullest extent possible”?

    • Just posted new McGrane documents on this issue:

      Also McGrane answered the question posted above in an email, stating;
      ” To answer the last question, in fact all DSI is actually seeking to do here is, as stated above, “to maximize the extent of its secured indemnity rights against REL to the fullest extent possible.”

      However, and if DSI is also able to help the situation for the Exchange Noteholders by being truthful about things others would prefer to see buried, so much the better. DSI’s suggestion of a B-4 Partners strategy, for example, is intended to do the latter. See attached briefs for any that have missed the import of DSI’s suggested B-4 strategy, which I previously referred to as a “silver lining” in earlier email traffic.”

      • See my 2/28 1:32 p.m. post below. McGrane is doing some very smart lawyering in my opinion; the omnibus objection looks for the noteholders, and I’m not convinced McGrane is the noteholders’ friend, but what he is saying deserves consideration in light of his track record.

  7. If one of the letters you received was a copy of Document 556 on the docket (the committee’s motion to strike DSI’s corporations code objection), I found that online this morning and reviewed it.

    The motion makes procedural and substantive arguments against DSI’s “omnibus objections.” The procedural arguments may or may not have merit, I don’t know, but even if they do those can likely be fixed pretty easily.

    The substantive arguments are what matter, they address whether DSI’s objection is valid (and if so, whether the noteholders’ claims are enforceable under applicable nonbankruptcy law).

    The main substantive arguments are found at paragraphs 43, 44, and 45 of Document 556.

    Paragraph 43 says “DSI fails even to allege that the Debtors were unable to pay their debts as they came due following the Exchange offer in November 2007, and certainly offers no factual allegations to support that contention.”

    This argument is neither here nor there, as the question whether the notes are currently enforceable has nothing to do with whether RE Loans was insolvent, or became insolvent as a result of the issuance of the notes, back in November 2007. There is no dispute that RE Loans is insolvent now and any current distribution in the form of payment of principal or interest on the notes is therefore prohibited by operation of section 17254(a) and (d)(2), at least that is what DSI is arguing and paragraph 43 dodges it.

    Next, paragraph 44 says “The problem with [DSI’s] argument…is that the rules governing ‘distributions’ apply to membership interests, not promissory notes, and so have no application to the Noteholders’ claims unless the underlying notes are first avoided or otherwise rescinded so as to restore the Noteholders to their former status as members of a limited liability company.”

    In my opinion this is flat-out wrong as section 17254(d)(2) of the Corporations Code applies on its face where “indebtedness is issued as a distribution” to members of an LLC. The committee proffers no explanation why the exchange note transaction was not a “distribution” as defined at §17001 or why the promissory notes are not “indebtedness.”

    Moreover, the noteholders’ lack of status as members of RE Loans LLC has nothing to do with whether RE Loans could lawfully make a current distribution to the noteholders. If the notes are an “indebtedness issued as a distribution,” a current payment of principal or interest on the notes is prohibited, period, whether or not the noteholders who would receive the payments are members of the LLC. Contrary to the committee’s assertion, there is nothing whatsoever in the text of the statute suggesting that the notes would need to be avoided, and the noteholders restored to their prior status as members of the LLC, for the payments to be prohibited.

    Finally, paragraph 45 claims that DSI ignores §17254(d), which says that a member of a limited liability company is “obligated to return a distribution…to the extent that…the member…had actual knowledge of facts indicating the impropriety of the distribution….” The committee asserts that since the noteholders are fraud victims, they did not have actual knowledge of the impropriety of the distribution, and so this code section provides a “safe harbor” for them.

    Again, similar to paragraph 43, the problem with paragraph 45 is that §17254(d) is simply inapplicable to current distributions, i.e., payments of principal or interest on the notes. Presumably, the noteholders have actual knowledge that RE Loans is insolvent and therefore would not benefit in any way from the “safe harbor” of §17254(d) with respect to current payments of principal or interest on their notes.

    I won’t get into the committee’s mudslinging against McGrane that takes up the rest of the motion to strike, other than to observe that McGrane’s approach was validated in a big way in another Chapter 11 bankruptcy case (see for starters), and that the committee’s handling of DSI’s objection does not inspire confidence, as explained above. McGrane is in Texas not San Francisco and it remains to be seen whether his act will be well-received by the bankruptcy judge there. In the meantime I’m taking seriously DSI’s objection and also McGrane’s various accusations against counsel for the noteholders’ committee.

      • It’s interesting, if you look at McGrane’s strategy in the SonicBlue bankruptcy, it had a “win-win” aspect to it that appealed to the judge in that case, by benefiting his client as well as the the other creditors in addition to exposing unethical behavior on the part of various attorneys involved in the matter. His recommended approach as set forth in document 555 has echoes of that and you have to wonder why counsel for the noteholders is digging its heels in making lame arguments against DSI’s objection instead of taking a different approach. I suppose it could be because of how McGrane is delivering the message, but I think the noteholder committee’s counsel has to know better.

    • I could have been a little more precise in the above post; a current payment of principal or interest would not be a “distribution” as defined by Corporations Code section 17001, but rather it would be a payment that is “treated as a distribution.” for purposes of section 17254.

  8. The investors may have to reach a decision on the various issues very soon.

    I have read the 98-page amended disclosure that describes the plan for the liquidation of R.E. Loans.
    I think that all investors will receive a copy of this statement in the mail.

    On pages 50 and 51, the disclosure statement discusses the vote that each investor will have concerning the promissory note that the investor received from the November 1, 2007, exchange.

    The big questions are whether or not the exchange was legal and, if the exchange was not legal, what happens to the promissory note. There is a second big issue concerning the distributions of principal and interest any investor received after the exchange agreement. Will the investor be ordered to give that money back, that is, will there be a claw back? The claw back may be $120,000,000.

    An important factor in this analysis is whether or not R.E. Loans was insolvent at the time of the exchange and at the time the mangers made distributions of principal and interest to each investor.

    There are no simple answers to these questions. But here are some undisputed background facts that might help you understand the problem.

    This post will discuss 2007.

    R.E. Loans had quarterly unaudited financials. The December 31st unaudited financial was audited each year by Armanino McKenna, revised, and then published for the investors as an annual report.

    The 12/31/2006 audited financials reported cash as $55,540,620.

    The 3/31/2007 unaudited financials stated cash as $32,909,949.

    The 6/30/2007 unaudited financials stated cash as $1,077,894.

    What happened to the cash? Those of you who attended the McGuire trial may recall the testimony that the managers continued to honor requests for distribution of principal after they had stopped “new” investments on April 1, 2007, when they learned from Armanino McKenna that R.E. Loans was operating in violation of the rules and regulations of the SEC and were advised by the lawyers at Morgan Miller & Blair that accepting “new” money would be illegal.

    In order to conceal a serious cash flow problem from the investors, the managers “advanced” new money to R.E. Loans to keep R.E. Loans afloat while they obtained the line of credit from Wells Fargo Foothill. These “advances” totaled $6,122,490.90 and all of the advances were refunded by the managers to themselves from the first draw on the line of credit on July 19, 2007.

    The next set of unaudited financials, dated August 31, 2007, was attached as an Exhibit to the October 2007 Confidential Memorandum that was sent to each investor as part of the documentation concerning the ballot for the exchange agreement.

    The 8/31/2007 unaudited financials stated cash as $2,002,937.

    These financials concealed one important fact. Starting on August 1, 2007, the managers resumed “advancing” new money to R.E. Loans. In August 2007, these “advances” came from out-of-state investors. These investors apparently had no reason to know that R.E. Loans was a closed fund. The out-of-state investments were deposited first in a Mechanics Bank “Walter Ng Investors” checking account, transferred into a B-4 Partners checking account and then re-deposited in an R.E. Loans checking account for distribution of principal and interest payments to R.E. Loans’ investors.

    The “advances” by the managers continued to December 31, 2007, and into 2008. By December 31, 2007, the August through December advances totaled more than $19,600,000.

    Mortgage Fund ’08 was the largest source of money for these “advances.” In 2007, the managers took $11,273,534.32 from investments made in Mortgage Fund ’08, transferred them into a B-4 Partners checking account and then re-deposited them in an R.E. Loans checking account for distribution of principal and interest payments to R.E. Loans’ investors.

    The 12/31/2007 unaudited financials stated cash as $1,256,230.

    These unaudited financials recorded the August through December transfers as “Due to Manager,” $19,602,793. This money was “Due to Manager,” that is B-4 Partners, because all of the “new” money was passed through the B-4 Partners checking account. However, during the “audit” of these December 31, 2007, unaudited financials by Armanino McKenna, this entry was removed from the annual report, which was issued on April 11, 2008.

    Although the issue stated on page 50 and 51 of the disclosure statement for your vote will ultimately be a matter of expert testimony, the existence of the “advances” implies to me that R.E. Loans was insolvent from time to time in 2007.

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