IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

12261 FONDREN, LLC, individually and derivatively on behalf of Riverbank Realty, LP, Plaintiff,

§§§ §

v. §§§

CIVIL ACTION NO. 4:09-CV-04074

RIVERBANK REALTY GP, LLC, ALLEN GROSS, and GFI MANAGEMENT SERVICES, INC., Defendants - and - RIVERBANK REALTY, LP, Nominal Defendant.

§§§§§§§§§

PLAINTIFF’S RESPONSE TO DEFENDANTS’ PARTIAL MOTION TO DISMISS

Dated: April 2, 2010

Darryl W. Anderson State Bar No. 24008694 J. Benjamin Mitchell State Bar No. 24060290 FULBRIGHT & JAWORSKI L.L.P. Fulbright Tower 1301 McKinney, Suite 5100 Houston, TX 77010-3095 Telephone: (713) 651-5151 Facsimile: (713) 651-5246 Counsel for Plaintiff 12261 Fondren, LLC, individually and on behalf of Riverbank Realty, LP

85562795.3

TABLE OF CONTENTS

Page

-i-

TABLE OF AUTHORITIES ......................................................................................................... ii

NATURE AND STAGE OF PROCEEDING ............................................................................... 1

ISSUES TO BE RULED UPON AND STANDARD OF REVIEW ............................................ 1

SUMMARY OF ARGUMENT ..................................................................................................... 2

BACKGROUND FACTS.............................................................................................................. 3

ARGUMENT AND AUTHORITIES............................................................................................ 7

I. Plaintiff Has Properly Alleged a Claim for Breach of Fiduciary Duty.................. 7

A. Plaintiff has Properly Alleged a Derivative Claim on Behalf of Borrower .................................................................................................... 8

1. The Law is Clear that Creditors May Assert Fiduciary Duty Claims Derivatively on Behalf of the Debtor Entity, as Plaintiff Has Done.......................................................................... 8

2. There Is No Basis for Defendants to Ignore Plaintiff’s Derivative Allegations and Recharacterize Them as Direct Claims ............................................................................................ 9

B. Plaintiff Has Properly Alleged Breaches of Fiduciary Duty by Gross and Riverbank GP.......................................................................... 13

1. Plaintiff Has Properly Pled a Breach of the Duty of Loyalty as a Component of Borrower’s Fiduciary Duty Claim ................ 13

2. Plaintiff has Properly Pled a Breach of the Duty of Care as a Component of Borrower’s Fiduciary Duty Claim .................... 17

a. Plaintiff’s Allegations Comport with Delaware Law Requirements for Pleading a Due Care Violation............ 18

b. Borrower’s Fiduciary Duty Claim is Not Precluded by Plaintiff’s Claim for Breach of the Guaranty.............. 20

II. Plaintiff has Alleged Claims for Aiding and Abetting and Conspiracy............... 22

III. Plaintiff Has Properly Pled that GFI Management is the Alter Ego of Gross .................................................................................................................... 23

CONCLUSION............................................................................................................................ 25

TABLE OF AUTHORITIES

Page(s) CASES

Aronson v. Lewis, 473 A.2d 805 (Del. 1984) ..................................................................................................17

Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009).........................................................................................................1

Asher v. A G Edwards & Sons, 272 F. App’x 357 (5th Cir. 2008) ......................................................................................12

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007).............................................................................................................1

Brehm v. Eisner, 746 A.2d 244 (Del. 2000) ......................................................................................17, 19, 20

Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) ............................................................................................14, 22

Continuing Creditors’ Comm. of Star Telecomms. Inc. v. Edgecomb, 385 F. Supp. 2d 449 (D. Del. 2004)...................................................................................12

Data Management Internationale, Inc. v. Saraga, No. 05C-05-108 2007 Del. Super. LEXIS 412 (Del. Super. Ct. July 25, 2007)................21

Desimone v. Barrows, 924 A.2d 908 (Del. Ch. 2007)............................................................................................19

Erickson v. Pardus, 551 U.S. 89 (2007)...............................................................................................................1

Garber v. Whittaker, 174 A. 34 (Del. Super. Ct. 1934) .......................................................................................21

Guth v. Loft, Inc., 5 A.2d 503 (Del. 1939) ......................................................................................................14

Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003)........................................................................................2, 15

In re Katrina Canal Breaches Litig., 495 F.3d 191 (5th Cir. 2007) ...............................................................................................1

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Lewis v. Vogelstein, 699 A.2d 327 (Del. Ch. 1997)............................................................................................17

Lovelace v. Software Spectrum Inc., 78 F.3d 1015 (5th Cir. 1996) .........................................................................................2, 15

Martin K. Eby Constr. Co. v. Dallas Area Rapid Transit, 369 F.3d 464 (5th Cir. 2004) ...............................................................................................1

Metro Commc’n Corp. BVI v. Advanced MobileComm Techs. Inc., 854 A.2d 121 (Del. Ch. 2004)............................................................................................19

North American Catholic Education Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007) ......................................................................................8, 9, 10, 13

Production Res. Group v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004)........................................................................................8, 21

Robbins v. Oklahoma, 519 F.3d 1242 (10th Cir. 2008) ...........................................................................................2

Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), overruled on other grounds by Gantler v. Stephens, 965 A.2d 695 (Del. 2009) ............................................................................................17, 22

Solomon v. Pathe Communications, 1995 Del. Ch. LEXIS 46 (Del. Ch. Apr. 21, 1995), aff’d, 672 A.2d 35 (Del. 1996).........16

Steinman v. Levine, 2002 Del. Ch. LEXIS 132 (Del.Ch. 2002)...................................................................12, 16

Sysco Food Serv. of Metro N.Y., LLC v. Jekyll & Hyde, Inc., 2009 U.S. Dist. LEXIS 108317 (S.D.N.Y. Nov. 17, 2009) .........................................23, 25

Terrebonne Homecare, Inc. v. SMA Health Plan, Inc., 271 F.3d 186 (5th Cir. 2001) .............................................................................................12

Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) ..................................................................................................8

Torch Liquidating Trust v. Stockstill, 561 F.3d 377 (5th Cir. 2009) .................................................................................11, 12, 18

RULES AND STATUTES

Fed. R. Civ. P. 12(b)(6)..............................................................................................................1, 12

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Plaintiff 12261 Fondren, LLC, individually and derivatively on behalf of Riverbank

Realty, LP, files this Response to Defendants’ Rule 12(b)(6) Partial Motion to Dismiss.

NATURE AND STAGE OF PROCEEDING

Plaintiff filed its Original Complaint on December 21, 2009. On February 26, 2010,

Defendants filed their Partial Motion to Dismiss. A status conference is scheduled with the court

on April 14, 2010. No discovery has been conducted.

ISSUES TO BE RULED UPON AND STANDARD OF REVIEW

Defendants have filed a partial motion to dismiss encompassing the following issues:

1. Whether Plaintiff has sufficiently pled derivative claims, on behalf of Riverbank Realty, LP, alleging breach of fiduciary duty;

2. Whether Plaintiff has sufficiently pled claims for aiding and abetting breach of fiduciary duty and for conspiracy; and

3. Whether Plaintiff has sufficiently pled that defendant Allen Gross is the alter ego of defendant GFI Management Services Inc.

The standard of review for defendants’ arguments is well-known. “To survive a motion

to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to

relief that is plausible on its face Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citation and

quotation marks omitted). “Factual allegations must be enough to raise a right to relief above the

speculative level, on the assumption that all the allegations in the complaint are true (even if

doubtful in fact).” In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir. 2007) (citing

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quotation marks, citations, and footnote

omitted)). “When ruling on a defendant’s motion to dismiss, a judge must accept as true all of

the factual allegations contained in the complaint.” Erickson v. Pardus, 551 U.S. 89, 94 (2007).

Moreover, the court must view the well-pled facts “in the light most favorable to the plaintiff.’”

Martin K. Eby Constr. Co. v. Dallas Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004)

(citation omitted). The court “may not dismiss on the ground that it appears unlikely the

allegations can be proven.” Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008).

Additionally, a defendant may not introduce new evidence for purposes of a motion to

dismiss. “Normally, in deciding a motion to dismiss for failure to state a claim, courts must limit

their inquiry to the facts stated in the complaint and the documents either attached to or

incorporated in the complaint.” Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1017-18 (5th

Cir. 1996); see also Guttman v. Huang, 823 A.2d 492, 499 (Del. Ch. 2003).

SUMMARY OF ARGUMENT

Plaintiff 12261 Fondren, LLC (“Plaintiff”) has filed a detailed complaint explaining the

multiple ways in which defendants Allen Gross (“Gross”) and Riverbank Realty GP, LLC

(“Riverbank GP”) have breached their fiduciary duties to nominal defendant Riverbank Realty,

LP (“Borrower”). In particular, Gross and Riverbank GP have used their control over Borrower

to cause it to distribute significant Borrower funds to defendant GFI Management Services, Inc.

(“GFI”), an entity dominated and controlled by Gross himself. In so doing, defendants have

disregarded Borrower’s legal obligations, and indeed operated it in a manner in violation of those

obligations while allowing substantial waster to occur to Borrower’s assets. Delaware law

expressly authorizes an entity in plaintiff’s position to assert derivative claims on behalf of

Borrower to recoup these substantial losses.

By defendants’ motion, however, they seek to escape liability for these actions altogether.

Improperly relying on factual allegations nowhere found in the Complaint—and even

contradicted by the Complaint in some instances—defendants ask the Court to hold as a matter

of law that plaintiffs cannot assert a derivative claim on behalf of Borrower, that the detailed

allegations of wrongdoing by defendants are insufficient to state a claim for breach of either the

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fiduciary duty of loyalty or the fiduciary duty of care, and that, as a result, plaintiff’s claims for

aiding and abetting liability and conspiracy must also be dismissed. Capping off their motion,

defendants ask the Court to hold as a matter of law that Gross does not so dominate GFI as to be

its alter ego, notwithstanding the actions of Gross on behalf of GFI alleged in the Complaint and

the statements about their intertwined relationship also cited in the Complaint. As explained

below, defendants’ efforts to avoid accountability for their misconduct must be rejected, and

their partial motion to dismiss should be denied in all respects.

BACKGROUND FACTS

As explained in exhaustive detail in the Complaint, the origins of this case date back to

2006, when Borrower borrowed $8.6 million from plaintiff’s predecessor-in-interest,1 to be used

in connection with a 320-unit apartment complex located in Harris County. See Compl. ¶¶ 8, 10.

As part of the security for this debt, defendant Gross, (1) on behalf of Borrower, executed an

Assignment of Leases and Rents, and (2) in his individual capacity, executed a Guaranty

Agreement. See id. ¶ 9 & Exs. 3-4.

The management and control of Borrower is completely in the hands of defendants

Riverbank GP and Gross. Riverbank GP is Borrower’s general partner and has sole

responsibility for management of Borrower. See id. ¶ 47 (citing Borrower’s partnership

agreement). Furthermore, defendant Gross has exclusive management authority over Riverbank

GP. See id. ¶ 48 (quoting Riverbank GP’s LLC agreement). Thus, by the express terms of the

agreements, defendant Gross has the exclusive authority to control Riverbank GP, including the

authority to dictate how Riverbank GP runs the Borrower. At the same time, these agreements 1 The holder of the promissory note and the various other loan documents that are at issue in this case has changed several times. See Compl. ¶ 10. For ease of reference, plaintiff will refer to itself or its predecessors-in-interest as “plaintiff,” except where context requires otherwise. Likewise, plaintiff will refer to all the various “loan documents” collectively unless a particular document is at issue.

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both explicitly state that Riverbank GP and Gross owe fiduciary duties to Borrower. See id. ¶¶

47-48 (quoting agreements).

Among the first things that Gross, acting through Riverbank GP, caused the Borrower to

do was to hire defendant GFI as the property manager for the apartment complex. See, e.g., id.

¶¶ 32, 49, 66-69, 73. This decision was personally enriching to Gross because he has complete

control and authority over GFI. See id. ¶¶ 49, 66, 73. In short, defendant Gross, using his

control over the Borrower, secured an $8.6 million note in connection with a multi-unit

apartment complex, and then directed payments from the Borrower to an entity he controlled.

On or about January 1, 2009, Borrower became insolvent. See id. ¶ 60. Furthermore,

beginning no later than January 2009, Borrower has been in breach of its obligations under the

loan documents; indeed, Borrower has not made a single payment to plaintiff on its debt since

December 2008, despite a contractual obligation to make monthly principal and interest

payments. See id. ¶¶ 12-14. This failure to make any payments whatsoever to plaintiff was not

due to lack of revenue. Instead, with revenue no longer sufficient to cover all of Borrower’s

debts as they came due, Riverbank GP and Gross knowingly, intentionally, and with gross

negligence exercised their authority to cause Borrower to make payments out of the rents and

other revenues received to Gross’ management company, GFI. See id. ¶¶ 64, 67-69.

Defendants’ decision to use Borrower’s income to pay themselves violated Borrower’s

contractual obligation to make its payments to plaintiff prior to making payments to GFI, Gross’

management company; making payments to others prior to plaintiff constituted a

misappropriation of the income from the property. See, e.g., id. ¶¶ 32-33, 64, 67, 68, 73, 74.

Indeed, the Assignment of Rents, specifically states “any Rents so collected by Borrower shall be

held in trust by Borrower for the sole and exclusive benefit of Lender and Borrower shall, within

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one (1) business day after receipt of any Rents, pay the same to Lender to be applied by Lender

as hereinafter set forth.” See id. at Ex. 3.2

The consequences of this self-interested decision by defendants were severe for

Borrower. Money paid to GFI, after all, was money that was unavailable to be used to make

repairs to the property. And, as plaintiff describes in the Complaint, the property had suffered

significant damage as a result of Hurricane Ike, compounded by the mismanagement of

defendants. See id. ¶¶ 35-37, 39, 64, 67, 69. Had defendants caused Borrower to make the

required payments to plaintiff, then plaintiff would have been able to use those funds to make the

necessary repairs to the property, which repairs defendants were not themselves making. See id.

¶ 64. The property, after all, was plaintiff’s collateral for the loan, and plaintiff, unlike

defendants, has a vested interest in maintaining the value of the property. See id. ¶¶ 8-9, 64.

Even insurance proceeds obtained by Borrower were distributed to GFI, rather than used to

repair the property, in violation of the loan documents. See id. ¶ 67.

As a result, the property, which (prior to foreclosure) was Borrower’s sole asset, suffered

from significant waste and has been substantially diminished in value. See id. ¶¶ 35-36. The

property suffers from foundation issues, mold growth, rotted wood on exterior windows, missing

siding, damaged roofs, and water damage to ceilings, walls, carpet, and sheetrock. See id. ¶ 35.

At the time of filing the Complaint, eight percent of the units were completely unleasable, and

over 30% of the units were vacant. See id. ¶ 36. The City of Houston has ordered plaintiff to

relocate tenants in five of the 21 buildings on the property, and prohibited plaintiff from entering

2 Furthermore, while plaintiff is not required to marshal its evidence to defeat a motion to dismiss, it should be noted that, at trial, plaintiff will present evidence that defendant Gross, on behalf of Borrower, and defendant GFI Management Services executed a Manager’s Subordination Agreement that specifically provided that payments would not be made to GFI unless and until plaintiff had been paid in full.

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into new leases for nearly one-half of the units. See id. Given the significant damage to the

property caused by defendants’ actions, it is not surprising that when plaintiff foreclosed on the

property, it sold for approximately 35% of its appraised value as of the origination of the loan,

and only 47% of the original principal balance on the note. See id. ¶ 37.

Several months into 2009, during which Borrower made no payments to plaintiff,

plaintiff began to exercise its remedies under the loan documents against Borrower. Thus, on

April 9, 2009, plaintiff sent a demand letter to Borrower and to Gross. See id. ¶ 15. No

payments were made in response to this demand, however. See id. On May 29, 2009, therefore,

plaintiff accelerated the note, and filed suit in state court, in Harris County, Texas. See id. ¶ 16.

In response to plaintiff’s request for a temporary restraining order, Borrower agreed to entry of a

temporary injunction. See id. Subsequently, on July 10, 2009, plaintiff and Borrower reached

agreement on an agreed order appointing a receiver for the property.3 See id. After significant

efforts by the Receiver to rehabilitate the property and mitigate the damage done by defendants,

the property was sold at foreclosure on December 1, 2009. See id. ¶ 17. Plaintiff obtained the

property at the foreclosure sale through entry of a credit bid, and the resulting deficiency under

the loan was in excess of $6.9 million. See id.

Having forestalled further damage to the property through the appointment of the

Receiver and subsequent foreclosure, plaintiff now seeks to recover damages on behalf of itself,

individually, and on behalf of Borrower, derivatively, for the damage inflicted by defendants. In

particular, plaintiff has asserted a direct claim for breach of the guaranty agreement against Allen 3 Defendants seek to avoid the obligation to limit their grounds for dismissal to the facts alleged in the Complaint, asserting that the tenants were unreliable for payment, that their insurer was AIG, that they loaned some of their own money to Borrower, and that they tried to work with plaintiff to renegotiate the loan. See Mem. in Support ¶¶ 7-9. The court will not be surprised to hear that the plaintiff vigorously disputes the accuracy and characterization of these “facts,” which plaintiff will rebut at the appropriate time. In any event, they cannot be considered on a motion to dismiss.

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Gross, the guarantor, and against GFI, Gross’ alter ego. The viability of that claim is not

disputed in defendants’ motion to dismiss. 4 In addition, plaintiff has asserted a derivative claim

on behalf of Borrower against Gross and Riverbank GP (and against GFI, as alter ego of Gross)

for breach of the fiduciary duties that they owe to Borrower. Plaintiff has also asserted an aiding

and abetting claim against GFI for its conduct in facilitating the breach of fiduciary duties by

Gross and Riverbank GP, as well as a conspiracy claim against all defendants. These claims are

the subject of defendants’ motion to dismiss.

As explained below, the detailed facts alleged by plaintiff amply support its fiduciary

duty, aiding and abetting, and conspiracy claims, as well as its alter ego allegation. Therefore,

the motion to dismiss should be denied.

ARGUMENT AND AUTHORITIES

I. Plaintiff Has Properly Alleged a Claim for Breach of Fiduciary Duty

Defendants’ motion is primarily focused on plaintiff’s fiduciary duty claim. To

understand the nature of their challenge, it is important to note what defendants do not dispute.

At least for purposes of their motion to dismiss, defendants do not dispute that Riverbank GP and

Gross both owe fiduciary duties to Borrower. Nor do they dispute that plaintiff is a creditor of

Borrower and that Borrower is insolvent. Defendants’ motion is premised on two alternative

theories: (1) that plaintiff has not properly alleged a derivative claim; and (2) that plaintiff has

not alleged sufficient facts to support breach of the fiduciary duties defendants admit they owe to

Borrower. Both of these arguments are without merit.

4 Because defendants do not challenge the sufficiency of the plaintiff’s claim for breach of the guaranty, plaintiff will omit a general discussion of the various requirements of that agreement.

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A. Plaintiff has Properly Alleged a Derivative Claim on Behalf of Borrower

1. The Law is Clear that Creditors May Assert Fiduciary Duty Claims Derivatively on Behalf of the Debtor Entity, as Plaintiff Has Done.

The threshold issue raised by defendants’ motion is whether plaintiff, as a creditor of

Borrower, may assert claims derivatively on Borrower’s behalf for breach of fiduciary duties

owed to Borrower by defendants. In the ordinary case of a solvent corporation, of course, a

derivative suit “enables a stockholder”—not a creditor—“to bring suit on behalf of the

corporation for harm done to the corporation.” Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845

A.2d 1031, 1036 (Del. 2004). But the situation is different when the entity is insolvent. “By

definition, the fact of insolvency places the creditors in the shoes normally occupied by the

shareholders–that of residual risk-bearers.” Production Res. Group v. NCT Group, Inc., 863

A.2d 772, 791 (Del. Ch. 2004).

As defendants acknowledge, the question of the standing of creditors of an insolvent

entity to assert claims for breach of fiduciary duty was conclusively resolved by the Delaware

Supreme Court in North American Catholic Education Programming Foundation, Inc. v.

Gheewalla, 930 A.2d 92 (Del. 2007). In Gheewalla, the court dismissed the claims because the

plaintiffs attempted to bring direct claims—not derivative claims. In fact, in Gheewalla,

“[Plaintiff] did not attempt to allege a derivative claim.” Id. at 102 (emphasis added). “In the

Court of Chancery and in this appeal, NACEPF waived any basis it may have had for pursuit of

its claim derivatively. Instead, NACEPF seeks to assert only a direct claim for breach of

fiduciary duties.” Id. at 97 (emphasis added).

The fact that creditors do not have a direct claim, however, does not mean that they

cannot allege a claim for breach of fiduciary duty. Instead, Gheewalla holds that such claims

must be brought derivatively, on behalf of the insolvent entity. As that court made clear, “[t]he

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corporation’s insolvency makes the creditors the principal constituency injured by any fiduciary

breaches that diminish the firm’s value. Therefore, equitable considerations give creditors

standing to pursue derivative claims against the directors of an insolvent corporation.” Id. at 101-

02 (citations and internal quotations omitted). Accordingly, “in most, if not all instances—

creditors of insolvent corporations could bring derivative claims against directors of an insolvent

corporation for breach of fiduciary duty.” Id. at 101-02 (attributing this to a chancery court

opinion and endorsing the view) (citation omitted). The holding of Gheewalla, then, is that a

creditor of an insolvent entity may not bring fiduciary duty claims directly, but, as plaintiff has

done here, may bring them derivatively on behalf of the insolvent entity.

There is no dispute that plaintiff has asserted its fiduciary duty claim in a derivative

capacity in this suit, just as Gheewalla authorizes. In its Complaint, from the outset, plaintiff

clearly pled valid derivative claims on behalf of Borrower.5 Even defendants admit this is the

case. See Mem. in Support ¶ 26 (grudgingly conceding that “Plaintiff has attempted to cast its

claims as derivative in nature”).

2. There Is No Basis for Defendants to Ignore Plaintiff’s Derivative Allegations and Recharacterize Them as Direct Claims

Undeterred by the holding of Gheewalla and the express pleading of plaintiff, defendants

ask the Court to ignore the actual allegations in the Complaint and instead treat the Complaint as

if plaintiff had alleged direct claims in its individual capacity, rather than derivative claims.

According to defendants, plaintiff has disguised direct claims with a “‘derivative’ band-aid.” Id. 5 See e.g., Compl. ¶ 1 (“Furthermore Allen Gross and Riverbank Realty GP, LLC owe fiduciary duties to Riverbank Realty, LP, the breaches of which Plaintiff, as a creditor and due to Riverbank Realty, LP’s insolvency, hereby asserts derivatively”); ¶ 57 (“Plaintiff brings this cause of action derivatively on behalf of Borrower, a Delaware limited partnership, against Borrower GP and Allen Gross.”); ¶ 61 (“Furthermore, when Borrower became insolvent, Borrower’s creditors, including Plaintiff, as payee under the Note, took the place of Borrower’s partners as residual beneficiaries of the partnership. As a result, Plaintiff is authorized to bring this derivative action against Borrower GP and Allen Gross.”).

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This argument fails for multiple reasons. First, it is premised on facts contradicted by the actual

allegations in the Complaint. Second, it is based on a misreading of the lone case defendants cite

as support for recharacterizing the allegations made in the Complaint.

There is a wide gulf between the facts defendants imagine plaintiff pled and the actual

allegations found in the Complaint. Defendants ask the Court to hold that plaintiff has failed to

allege any harm to the Borrower, and to disregard the allegation that Borrower suffered nearly $7

million in damages because that damage figure is also the amount of damages alleged to have

been suffered by plaintiff. See id. ¶¶ 34-35. The unstated (and mistaken) premise is that a

derivative claim is improper if the injury to the entity on whose behalf the lawsuit is brought also

resulted in an injury to the derivative plaintiff.

This argument turns Gheewalla on its head. By definition, every creditor of an insolvent

entity is owed money by that entity. As such, the creditor is, by definition, injured when the

insolvent entity is injured, such as by having its funds misappropriated or its assets wasted. In

fact, this is the precise reason that the Gheewalla court held that creditors do have standing to

bring a derivative claim. See Gheewalla, 903 A.2d at 101-02 (“The corporation’s insolvency

makes the creditors the principal constituency injured by any fiduciary breaches that diminish the

firm’s value. Therefore, equitable considerations give creditors standing to pursue derivative

claims against the directors of an insolvent corporation.”) (citations and internal quotations

omitted); see also id. at 103 (“Creditors may nonetheless protect their interest by bringing

derivative claims on behalf of the insolvent corporation.”) (emphasis added). Thus, the fact that

plaintiff was injured by virtue of the breaches of fiduciary duty to Borrower is not a reason to

dismiss plaintiff’s derivative claim as improper. It is instead the very reason that Delaware

courts authorize creditors such as plaintiff to bring these claims derivatively in the first place.

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The case that defendants cite as authority for disregarding plaintiff’s derivative damages

allegations does not stand for that proposition. See Torch Liquidating Trust v. Stockstill, 561

F.3d 377 (5th Cir. 2009). To properly appreciate defendant’s misplaced reliance on Torch, it is

critical to note the Fifth Circuit’s pronouncement that, unlike this case, “this is not a derivative

suit. The Trust…is the plaintiff—neither a shareholder nor a creditor is the plaintiff.” Id. at 388

n.11. The Fifth Circuit dismissed the claims in Torch, not because the plaintiff pled both direct

damages (on behalf of itself) and derivative damages (on behalf of the corporation), but rather

because the Torch plaintiff failed to allege any “actual, quantifiable damages suffered” by the

corporation. Id. at 390. This deficiency was especially glaring because “[w]hen asked during

oral argument to identify any specific pleading permitting an inference of injury to Torch,

plaintiff could identify none.” Id. (emphasis added). Moreover, it was clear that the Fifth

Circuit was suspicious of the complaint and its allegations plausibility because the plaintiff

acknowledged that, when amending its complaint, rather than engaging in substantive analysis

and investigation of the claims it alleged, it simply “replaced nearly all of its prior references to

‘creditors’ with new references to ‘creditors and shareholders.’” Id. Even more absurdly, the

plaintiff also assured the court that, if necessary, it could “easily amend” its complaint further by

engaging in “another ‘find and replace’ exercise” to allege whatever damages to the corporation

the court specified. Id. at 382, 391.

Unlike Torch, this Complaint contains derivative allegations which specify actual,

quantifiable damages suffered by Borrower which arise from validly pled derivative causes of

action. See, e.g., Compl. ¶¶ 64, 69, 74. Despite what defendants’ motion to dismiss argues, the

pleading of both direct and derivative damage amounts in the same pleading does not in any way

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invalidate the derivative damages allegations contained in the Complaint.6 The derivative

damages suffered by Borrower are plausible, actual, and quantifiable damages—no mere “band-

aid”—and are sufficient to satisfy the pleading standards of Rule 12(b)(6).7

In short, defendants cannot refashion the Complaint in a manner that better suits their

dismissal briefing by pretending that, like the plaintiff in Torch, absolutely no actual,

quantifiable damages to the corporation were alleged within it. The Fifth Circuit has “noted on

many occasions that plaintiff is the master of his complaint.” Asher v. A G Edwards & Sons, 272

F. App’x 357, 359 (5th Cir. 2008) (citing Terrebonne Homecare, Inc. v. SMA Health Plan, Inc.,

271 F.3d 186, 189 (5th Cir. 2001)). A defendant is not entitled to a dismissal based on the

deficiencies that they wish had been pled. Here, plaintiff properly pled derivative claims, not

disguised direct claims as Defendants wish.8

6 Defendants attempt to make something out of the fact that plaintiff alleged the same damage amount for Borrower on the derivative claim as for plaintiff on its direct claim. It is true, of course, that the evidence may ultimately establish that defendants’ breaches caused damages to Borrower greater than the amounts that Borrower owed to plaintiff, so that there may ultimately be a recovery sufficient for Borrower to comply with its obligations to plaintiff and to fulfill additional obligations that may arise thereafter as well. And perhaps defendants believe they will be able to provide evidence showing that their breaches damaged Borrower in an amount less than the full amount Borrower owed to plaintiff. But plaintiff pleaded damages based on the best information available to it at this time as to the impact of the misappropriation of funds and the waste suffered by the property due to defendants’ actions. Whatever the evidence ultimately reveals on this point, merely because defendants disagree with the amount plaintiff pleaded is not a reason for dismissal for failure to state a claim. 7 The alleged breaches of the duty of care found in the Complaint, for example, are premised on corporate waste and corporate mismanagement—prototypical derivative claims under Delaware law. Continuing Creditors’ Comm. of Star Telecomms. Inc. v. Edgecomb, 385 F. Supp. 2d 449, 457 (D. Del. 2004) (citing Steinman v. Levine, 2002 Del. Ch. LEXIS 132, at 41 n.50 (Del.Ch. 2002) (noting that events affecting all stockholders in the same way, such as corporate waste and mismanagement, “falls squarely within the definition of a derivative action.”)). 8 Even if defendants were correct, it appears from defendants’ Memorandum that their argument extends only to the allegations that defendants breached the duty of care component of their fiduciary duties. See Mem. in Support ¶ 34 (“[A] closer look at the breach of fiduciary duty of care claim shows that Plaintiff is complaining about alleged actions by the Defendants that harmed the Plaintiff, not the Borrower.”) (first emphasis added). Defendants’ challenge to the duty of loyalty claim, see id. ¶¶ 42-46, contains no such argument. This concession that plaintiff has properly asserted a derivative claim based on a breach of the duty of loyalty means that plaintiff’s claim for breach of fiduciary duty cannot be dismissed.

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B. Plaintiff Has Properly Alleged Breaches of Fiduciary Duty by Gross and Riverbank GP

Under Delaware law, the two main fiduciary duties owed are: (1) a duty of care; and (2) a

duty of loyalty. Even when a company is navigating through the so-called “zone of insolvency,”

the focus for Delaware directors of corporations does not change—under Delaware law, directors

must continue to discharge their fiduciary duties. See Gheewalla, 930 A.2d at 101.

Plaintiff has alleged, on behalf of Borrower, that Riverbank GP and Gross have breached

both their fiduciary duty of loyalty and their fiduciary duty of care to Borrower. A properly pled

breach of either of these duties is independently sufficient to support plaintiff’s breach of

fiduciary duty claim. Thus, defendants are not entitled to dismissal unless they can establish as a

matter of law, accepting the well-pled allegations of the Complaint as true, that plaintiff will not

be able to establish a claim for breach of either of these components of Riverbank GP’s and

Gross’ fiduciary duties. As explained below, they fail to do so.

1. Plaintiff Has Properly Pled a Breach of the Duty of Loyalty as a Component of Borrower’s Fiduciary Duty Claim

The duty of loyalty prohibits self-dealing and the usurpation of corporate opportunities by

directors. Delaware courts have defined the duty of loyalty as follows:

Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. . . .A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers. The rule that requires an undivided and unselfish loyalty to the corporation demands that there be no conflict between duty and self-interest.

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Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939). In sum, “the duty of loyalty mandates that the

best interests of the corporation and its shareholders takes precedence over any interest possessed

by a director, officer or controlling shareholder and not shared by the stockholders generally.”

Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).

In seeking dismissal of the duty of loyalty aspect of plaintiff’s claim for breach of

fiduciary duty, defendants do not dispute that Gross received a personal benefit from payments

to GFI or that the management contract is a self-interested transaction. See, e.g., Compl. ¶¶ 58-

59. Their sole contention is that the payments made to GFI were lawfully owed, and they imply

that plaintiff is merely complaining that Borrower paid one valid claim over another. Defendants

assert that “there are no allegations that these payments were not fair or that the Borrower was

not contractually obligated to make the payments, nor are there any allegations that Plaintiff took

any steps under the loan documents to stop such payments.” Mem. in Support ¶ 46.

The Complaint does, however, make those allegations:

Borrower GP and Allen Gross allowed and or caused Borrower to make payments to GFI Management and to Borrower’s attorneys, which payments were funded out of the rents and revenues from the Property. This conduct by Borrower GP and Allen Gross was willful, intentional, and/or grossly negligent. Borrower GP and Allen Gross made these payments on behalf of Borrower despite having actual knowledge that the receivership was imminent and that Borrower was contractually obligated to pay all rents and revenues received from the Property to Noteholder.

Compl. ¶ 68.9 Indeed, the Assignment of Rents, attached as Exhibit 3 to the Complaint, makes

clear that defendants cannot use proceeds from rents to pay GFI if Borrower’s obligations under

9 See also id. ¶ 25 (alleging Borrower misapplied security deposits in violation of Receivership Order); id. ¶ 32 (alleging Borrower used rents to pay GFI, contrary to obligations of Deed of Trust and Assignment of Rents); id. ¶ 67 (alleging payments were made to GFI instead of repairing property, despite a contractual obligation to make payments to plaintiff, which could have used the money to make the needed repairs); id. ¶ 74 (alleging that GFI’s acceptance of payments constituted a violation of the loan documents).

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the loan documents have not first been satisfied, because those rents “shall be held in trust by

Borrower for the sole and exclusive benefit of Lender.” Id. at Ex. 3.

Unable to support their motion based on the actual allegations in the Complaint,

defendants attempt to allege facts of their own as a basis for dismissal. Thus, they assert that

GFI was approved by the Lender and not removed prior to the appointment of the Receiver. See

Mem. in Support ¶ 45. Reliance on such facts outside of the Complaint is not proper on a motion

to dismiss. See, e.g., Lovelace, 78 F.3d at 1017-18.10 The merits of that well-known rule are

particularly apparent in this case. For the evidence will show that plaintiff secured an agreement

from GFI in which GFI agreed that it was not entitled to any payments until plaintiff was fully

paid.11

This Manager’s Subordination Agreement provides that:

The Manager agrees that the liens of the Loan Documents, and Lender’s right to payment under the Loan Documents, shall be superior to and have priority over the Management Agreement as well as any claim, security interest or right to payment of the Manager arising out of or in any way connected with its services performed under the Management Agreement. In furtherance of the foregoing, the Manager hereby fully and completely subordinates to the lien of the Loan Documents, and to Lender’s right to payment under the Loan Documents, the following: (a) the Management Agreement; (b) any such claim or security interest the Manager may now or hereafter have against the Property and/or the rents, issues, profits and income therefrom; and (c) any right to payment of the Manager arising out of or in any way connected with its services performed under the Management Agreement.

Ex. A, Manager’s Subordination Agreement ¶ 4 (emphasis added).

10 Delaware courts likewise refuse to consider allegations outside the complaint when ruling on motions to dismiss challenging fiduciary duty claims. “I am obliged to turn down the defendants’ invitation to use these allegations as a factor in my analysis of their motion to dismiss. Instead, I will consider their motion against a record confined to the well-pled allegations of the complaint. Likewise, I will draw all reasonable inferences from the non-conclusory factual allegations of the complaint in the plaintiffs’ favor.” Guttman v. Huang, 823 A.2d 492, 499 (Del. Ch. 2003) (footnotes omitted). 11 A copy of this agreement is attached hereto as Exhibit A. Plaintiff attaches this document solely to demonstrate that its factual allegations will be supported by evidence at trial.

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In light of plaintiffs’ actual allegations, the cases relied on by defendants are simply

inapposite. For instance, defendants cite Steinman v. Levine, 2002 Del. Ch. LEXIS 132 (Del.

Ch. 2002), for the proposition that a payment to an insider or self-interested director—without

more—is not a breach of the duty of loyalty. Mem. in Support ¶ 43. Here, unlike in Steinman,

there is “more.” In Steinman, the court noted that the plaintiff “makes no claim for waste” and

“does not even claim that [the self-interested payment] was not entirely fair.” Id. at *45.

Plaintiff’s Complaint is replete with such allegations. Defendants had a clear obligation not to

make payments to themselves, which they ignored. Their actions causing the Borrower to make

payments to GFI ultimately resulted in further waste to the partnership while profiting Gross,

individually. Indeed, they continued to do so even while agreeing to the appointment of a

Receiver, ensuring that as much as possible of the Borrower’s assets were transferred to GFI

before the Receiver took over. See Compl. ¶ 68.

Similarly, Solomon v. Pathe Communications, 1995 Del. Ch. LEXIS 46 (Del. Ch. Apr.

21, 1995), aff’d, 672 A.2d 35 (Del. 1996), is of no assistance to defendants’ argument. Indeed,

that case spelled out the type of allegations that would survive a motion to dismiss, which

allegation are present in this case:

[P]laintiff would state a claim if he alleged that [defendant] had valid legal grounds to oppose or forestall the foreclosure, which it did not exercise. In that event a breach of loyalty would arguably be provable. But here there is no allegation that [defendant] did possess rights or claims that could have been used by [defendant] legitimately to thwart the [challenged transaction].

Solomon, 1995 Del. Ch. LEXIS 46, at *17.

The Complaint adequately alleges a claim for breach of fiduciary duty based on

violations of defendants’ duty of loyalty, and therefore the motion to dismiss plaintiff’s fiduciary

duty claim must be denied.

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2. Plaintiff has Properly Pled a Breach of the Duty of Care as a Component of Borrower’s Fiduciary Duty Claim

To fulfill their duty of care, it has long been the law in Delaware that fiduciaries must:

inform themselves, prior to making a business decision, of all material information reasonably available to them. Having become so informed, they must then act with requisite care in the discharge of their duties. While the Delaware cases use a variety of terms to describe the applicable standard of care, our analysis satisfies us that under the business judgment rule director liability is predicated upon concepts of gross negligence.

Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984); see also Brehm v. Eisner, 746 A.2d 244, 259

(Del. 2000) (explaining “Delaware jurisprudence that, in making business decisions, directors

must consider all material information reasonably available, and that the directors’ process is

actionable only if grossly negligent”); Smith v. Van Gorkom, 488 A.2d 858, 872-73 (Del. 1985)

(holding that “a director’s duty to exercise an informed business judgment is in the nature of a

duty of care”), overruled on other grounds by Gantler v. Stephens, 965 A.2d 695, 713 n.54 (Del.

2009). In addition, a fiduciary violates his or her duty of due care under Delaware law when a

plaintiff can establish corporate waste. See Brehm, 746 A.2d at 263. As the Delaware Supreme

Court has explained, “Most often the claim is associated with a transfer of corporate assets that

serves no corporate purpose; or for which no consideration at all is received. Such a transfer is

in effect a gift.” Id. (quoting Lewis v. Vogelstein, 699 A.2d 327, 336 (Del. Ch. 1997)).

Plaintiff has alleged that defendants violated their duty of due care in two principal

respects: (1) by allowing the property to waste; and (2) by causing Borrower to violate its

contractual obligations, which required Borrower to pay to plaintiff all rents and revenues from

the property, to remit to plaintiff insurance proceeds, and to otherwise comply with the terms of

the loan documents. See Compl. ¶ 63. Defendants knew that a failure to repair the property after

the hurricane would result in waste of the property, and they likewise knew that the terms of the

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loan documents prohibited payments to GFI unless and until plaintiff had been paid. See ¶¶ 64,

67. Notwithstanding this knowledge, they made the decision—grossly negligent at best, if not

willful and intentional—to redirect the assets of Borrower to GFI. See id. ¶ 65.

Defendants argue these allegations fail to state a claim for breach of the duty of care on

several grounds. First, defendants claim that plaintiff has not pled a proper duty of care claim

because plaintiff has not alleged facts regarding the process by which defendants reached their

decision to cause Borrower to disregard its contractual obligations under the loan documents.

See Mem. in Support ¶ 33. Second, defendants argue that a duty of care claim based on the

waste they caused the property to suffer is precluded because plaintiff, in its individual capacity,

has a claim against defendant Gross under the guaranty agreement. See id. ¶ 37. Lastly, they

allege that plaintiff has failed to plead sufficient facts to overcome the application of the business

judgment rule.12 See id. ¶¶ 38-40. All of these arguments are without merit.

a. Plaintiff’s Allegations Comport with Delaware Law Requirements for Pleading a Due Care Violation

Defendants’ argument that plaintiff failed to allege facts challenging the process by

which they decided to cause Borrower to disregard its contractual obligations is refuted by

abundant Delaware authority. A number of cases have recognized that a decision-making

process by which a fiduciary determines to flout legal obligations is a violation of the duty of

care. As one court has explained:

Although directors have wide authority to take lawful action on behalf of the corporation, they have no authority knowingly to cause the corporation to become a rogue, exposing the corporation to penalties from criminal and civil regulators. Delaware corporate law has long been clear on this rather obvious notion; namely,

12 Defendants also challenge plaintiff’s duty of care allegations on the ground that they are not a proper derivative claim, relying on the Torch decision. See id. ¶¶ 34-36. Because this contention is rebutted in the preceding section, plaintiff will not repeat that argument here.

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that it is utterly inconsistent with one’s duty of fidelity to the corporation to consciously cause the corporation to act unlawfully.

Desimone v. Barrows, 924 A.2d 908, 934 (Del. Ch. 2007) (footnote omitted); Metro Commc’n

Corp. BVI v. Advanced MobileComm Techs. Inc., 854 A.2d 121, 131 (Del. Ch. 2004) (“Under

Delaware law, a fiduciary may not choose to manage an entity in an illegal fashion, even if the

fiduciary believes that the illegal activity will result in profits for the entity.”).

The Metro Communication decision is particularly instructive. The facts of that case are

complicated, but the core allegation was that the fiduciaries of a limited liability company known

as Fidelity Brazil caused Fidelity Brazil to violate a contractual obligation to disclose to plaintiff

Metro a material adverse event. The court found this conduct to constitute a breach of the duty

of care:

. . . [T]he proposition that the managers of an LLC have no fiduciary duty at all to ensure that the LLC lives up to its contractual duties is one that is difficult to accept and that is certainly not supported by prior precedent. How can an LLC perform a contract except through its managers and officers?

* * *

In addition to any contractual duties owed by Fidelity Brazil and its managers, the managers owed a fiduciary duty of loyalty and care to Fidelity Brazil. Those duties obviously include the requirement to make good faith efforts to ensure that the LLC fulfilled its contractual duty to its members.

Metro Commc’n, 854 A.2d at 141 n.32, 153 (footnotes omitted). Even the case cited by

defendants as the basis for their dismissal argument demonstrates that dismissal is not

appropriate in this situation. In Brehm, one of the allegations made was that Disney’s board

violated its duty of care by causing Disney to make a severance payment to its terminated

president, Michael Ovitz, rather than terminating him for cause and refusing to make the

payment. The court found that “[c]onstrued most favorably to plaintiffs,” the best plaintiffs had

alleged was “that the Board had arguable grounds to fire Ovitz for cause.” Brehm, 746 A.2d at

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265. As a result, “the Complaint fails on its face to meet the waste test because it does not allege

with particularity facts tending to show that no reasonable business person would have made the

decision that the New Board made under these circumstances.” Id. at 266. In this case, by

contrast, plaintiff has alleged that Borrower had an express contractual obligation to make

payments first to plaintiff, prohibiting payments to GFI until the obligation to plaintiff had been

satisfied. That is more than sufficient to satisfy the requirements for pleading a violation of the

duty of care.

b. Borrower’s Fiduciary Duty Claim is Not Precluded by Plaintiff’s Claim for Breach of the Guaranty

Defendants also argue that the fact that plaintiff has a direct claim for breach of the

guaranty against Gross somehow bars Borrower’s claim, asserted derivatively by plaintiff, for

breach of fiduciary duty, calling it “bootstrapping.” See Mem. in Support ¶ 37. Defendants rely

on Kuroda v. SPJS Holdings, LLC, for this proposition. 971 A.2d 872 (Del. Ch. 2009).

However, in Kuroda, unlike here, one plaintiff used a single direct injury to allege both a breach

of contract claim and a tort claim. See id. at 889. There, the court recognized that although the

plaintiff attempted to plead a tort claim for conversion, it was really “duplicative of [plaintiff’s]

breach of contract claim.” Id.

The court in Kuroda further explained that plaintiff’s tort claim was barred because it

arose “solely from a breach of contract.” Id. (emphasis added). On the other hand, the court

instructed, when a plaintiff alleges that a defendant “violated an independent legal duty, apart

from the duty imposed by contract,” the claim may stand. Id. (emphasis added). Here, plaintiff’s

contract claim and Borrower’s fiduciary duty claim are claims that belong to two different

parties, under two different causes of action, for two entirely different injuries. The fiduciary

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duties of care and loyalty that defendants owe to Borrower are completely independent of the

contractual duty that Defendants owe to plaintiff.

Defendants also quote Data Management Internationale, Inc. v. Saraga, No. 05C-05-108

2007 Del. Super. LEXIS 412 (Del. Super. Ct. July 25, 2007), to support this argument. Mem. in

Support ¶ 37. However, Data Management stands for exactly the opposite proposition, and in

fact, the court denied the defendant’s motion to dismiss and held that both the tort and contract

claim could stand. The court explained that a tort claim “may be asserted alongside a contract

claim where the plaintiff alleges the defendant breached a tort duty independent of any

obligations imposed by the contract.” Id. at *11. That is exactly the case here. Defendants’

fiduciary obligation to Borrower “did not arise by the mere agreement” between Gross and

plaintiff which is memorialized in the guaranty. See id. at *13, n.32 (citing Garber v. Whittaker,

174 A. 34, 36 (Del. Super. Ct. 1934)). Borrower was not even a party to the Guaranty.13

Finally, defendants cannot defeat plaintiff’s breach of the duty of care allegation based on

the business judgment rule. Defendants appear to suggest that a plaintiff must plead additional

facts to overcome the business judgment rule, separate and apart from what it must plead to

establish a violation of the duty of care (and the duty of loyalty, as well). If that is defendants’

argument, it is mistaken. As the Delaware Supreme Court has explained:

The [business judgment] rule posits a powerful presumption in favor of actions taken by the directors in that a decision made by a loyal and informed board will not be overturned by the courts unless it cannot be “attributed to any rational business purpose.” Thus, a shareholder plaintiff challenging a board decision has the burden at the outset to rebut the rule’s presumption. To rebut the rule, a

13 Nor does Production Resources, 863 A.2d 772, aid defendants’ argument. See Mem. in Support ¶ 37. In that case, the court simply made the unsurprising observation that plaintiff’s allegation that defendants “reneged on a promise to sell stock” was more properly a “contract or misrepresentation claim” and “not a claim for breach of fiduciary duty.” Id. at 79 n.88. Nothing in that decision supports the contention that a valid fiduciary duty claim becomes invalid if there is a separately valid, independent contract claim.

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shareholder assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty—good faith, loyalty or due care. If a shareholder plaintiff fails to meet this evidentiary burden, the business judgment rule attaches to protect corporate officers and directors and the decisions they make, and our courts will not second-guess these business judgments. If the rule is rebutted, the burden shifts to the defendant directors, the proponents of the challenged transaction, to prove to the trier of fact the “entire fairness” of the transaction to the shareholder plaintiff.

Cede & Co., 634 A.2d at 361.

Just last year, the Delaware Supreme Court considered the application of the business

judgment rule in the context of a motion to dismiss. See Gantler, 965 A.2d at 706. The court

reversed an order of dismissal, explaining that “[p]rocedurally, the plaintiffs have the burden to

plead facts sufficient to rebut the presumption. On a motion to dismiss, the pled facts must

support a reasonable inference that in making the challenged decision, the board of directors

breached either its duty of loyalty or its duty of care.” Id.

Thus, if plaintiff has pled either a claim that defendants breached their duty of loyalty, or

a claim that defendants breached their duty of due care, then it has removed its fiduciary duty

claim from the realm of the business judgment rule. As explained in this section and the

previous one, plaintiff has met this pleading burden. Defendants cannot, therefore, rely on the

business judgment rule as an independent basis for dismissal of plaintiff’s duty of care

allegation.

II. Plaintiff has Alleged Claims for Aiding and Abetting and Conspiracy

Defendants’ sole reason for dismissing plaintiff’s aiding and abetting and conspiracy

causes of action is that “[w]ithout an underlying claim for breach of fiduciary duty, there can be

no claim for aiding and abetting breach of fiduciary duty or conspiracy.” Mem. in Support ¶ 49.

However, as established above, plaintiff has indeed raised proper derivative claims for breach of

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fiduciary duty, and therefore there is a valid underlying claim. Accordingly, Defendant’s motion

to dismiss the conspiracy and aiding and abetting claims must be denied.

III. Plaintiff Has Properly Pled that GFI Management is the Alter Ego of Gross

Defendants correctly identify the two-pronged test for proving an alter ego claim, namely

(1) whether the owner exercises “complete domination” of the entity with respect to the

particular transaction challenged; and (2) whether that domination was used to commit a wrong

against the plaintiff. See Mem. in Support ¶ 52; Sysco Food Serv. of Metro N.Y., LLC v. Jekyll &

Hyde, Inc., 2009 U.S. Dist. LEXIS 108317, at *6 (S.D.N.Y. Nov. 17, 2009) (citations omitted).

Defendants ignore, however, that “because of the variety of circumstances in which an alter ego

theory may be advanced, courts will pierce the veil only after a ‘fact specific inquiry.’” Id.

(citations omitted). This makes alter ego claims ill-suited for dismissal under 12(b)(6).

In any event, plaintiff has made sufficient allegations of alter ego, as defendants all but

concede when they argue that plaintiff’s allegations are “false.” See Mem. in Support ¶ 54. For

example, the complaint alleges that “Allen Gross is also the chief executive officer, chairman,

secretary, chief financial officer, president, and director of GFI Management.” Complaint ¶ 49.

Defendants dispute this allegation, claiming he is merely the Chairman and President, but that

disputed issue of fact is not appropriately resolved on a motion to dismiss.14 See also Sysco

Food Serv., 2009 U.S. Dist. LEXIS 108317, at *7 (noting that one of the factors suggestive of

domination is “overlap in ownership, officers, directors and personnel”).

Furthermore, plaintiff’s allegations of Gross’ domination are bolstered by statements

about Gross available at the website of GFI Capital Resources, Inc. (which was referenced in the

14 Plaintiff’s allegation was based on a report obtained from a well-recognized search service that gathers and analyzes public records and the like. Discovery will reveal the full extent of Gross’ role, as well as during what time frame he held which positions.

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Complaint). According to that website, Allen Gross “governs every facet of his Manhattan-

based firm.”15 Defendants make much of the fact that this statement is from GFI Capital’s

website, whereas the defendant in this case is GFI Management. But, again according to the GFI

Capital website, one of the “facets” of GFI Capital that Gross exercise complete control over is

GFI Management: “GFI [Capital]’s various divisions, including Commercial Real Estate Sales,

Commercial Real Estate Finance, Property Management, Retail, Mortgage Banking, Insurance

Services, and Real Estate Development deliver incomparable results to our clients while

consistently maintaining the highest level of professionalism.” (emphasis added). Moreover, the

final two paragraphs of Allen Gross’s executive profile further establish that he controls GFI

Management and has from the very beginning:

In 1983, Allen founded GFI Mortgage Bankers, Inc. in Brooklyn, New York while continuing to practice law. Presently, GFI consists of five prosperous divisions including, Realty Services, Mortgage Banking, Property Management, Retail, Insurance and Development, together closing more than $2 billion of business annually.

Mr. Gross governs every facet of his Manhattan-based firm. Under his leadership, GFI’s Realty Services division has generated over $10 billion in transactions nationwide, while the Mortgage Banking division has closed more than $8 billion in loans. The GFI Management team oversees a residential portfolio in excess of 20,000 units in five states. In addition, GFI insures $2 billion in real estate alone.

(emphasis added). Finally, even if Gross did not have complete domination over GFI

Management in all respects, he certainly did so with respect to the self-dealing transactions that

are at issue here, which is all that is required. In this regard, it is telling that the address for

Borrower listed in the Note, see Compl. at Ex. 1, and the address for Gross listed in the

15 Defendant’s Motion is correct in one respect. In the Complaint, plaintiff inadvertently substituted the word “aspect” for the word “facet,” when the correct quote from the website used “facet.” Plaintiff regrets the error, but respectfully submits this typographical mistake does not advance defendants’ argument for dismissal in the slightest.

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Guaranty, see id. at Ex. 4, are both identified as care of the GFI Management address. See also

Sysco Food Serv., 2009 U.S. Dist. LEXIS 108317, at *7 (identifying the sharing of common

office space, phone numbers and addresses with other commonly owned corporate entities” as

well as “the payment or guarantee of debts of the dominated corporation by other corporations in

the group” as an indicia of domination supporting an alter ego claim). Accordingly, the

Complaint clearly alleges sufficient facts to satisfy the domination prong of the test.

Second, the complaint sufficiently alleges that Gross used this domination to injure the

partnership (with respect to the derivative claims) and plaintiff (with respect to the guaranty

claim). Defendants do not dispute that the breaches of fiduciary duty and contract alleged in the

Complaint satisfy the requirement for a wrong directed at the plaintiff sufficient to support an

alter ego claim.

CONCLUSION

Plaintiff 12261 Fondren, LLC respectfully requests that the Court deny Defendants’

Partial Motion to Dismiss in its entirety. Plaintiff requests all other relief to which it is justly

entitled.

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Dated: April 2, 2010

Respectfully submitted,

/s/ Darryl W. Anderson Darryl W. Anderson State Bar No. 24008694 J. Benjamin Mitchell State Bar No. 24060290

FULBRIGHT & JAWORSKI L.L.P. Fulbright Tower 1301 McKinney, Suite 5100 Houston, TX 77010-3095 Telephone: (713) 651-5151 Facsimile: (713) 651-5246 danderson@fulbright.com bmitchell@fulbright.com Counsel for Plaintiff 12261 Fondren, LLC, individually and on behalf of Riverbank Realty, LP

CERTIFICATE OF SERVICE

I hereby certify that a copy of the foregoing document was filed with the Court’s

electronic case filing (ECF) system on April 2, 2010, which caused an electronic copy of this

document to be served on all counsel of record who have appeared in this matter.

/s/ Darryl W. Anderson

Darryl W. Anderson