Adversary Complaint

B 104 [08/07]

B 104

ADVERSARY PROCEEDING COVER SHEET(Instructions on Reverse)

ADVERSARY PROCEEDING NUMBER(Court Use Only)

PLAINTIFFS DEFENDANTS

ATTORNEYS (Firm Name, Address, and Telephone No.) ATTORNEYS (If Known)

PARTY (Check One Box Only) Debtor U.S. Trustee/Bankruptcy Admin Creditor Other Trustee

PARTY (Check One Box Only) Debtor U.S. Trustee/Bankruptcy Admin Creditor Other Trustee

CAUSE OF ACTION (WRITE A BRIEF STATEMENT OF CAUSE OF ACTION, INCLUDING ALL U.S. STATUTES INVOLVED)

NATURE OF SUIT(Number up to five (5) boxes starting with lead cause of action as 1, first alternative cause as 2, second alternative cause as 3, etc.)

FRBP 7001(1) – Recovery of Money/Property 11 - Recovery of money/property - § 542 turnover of property 12 - Recovery of money/property - § 547 preference 13 - Recovery of money/property - § 548 fraudulent transfer 14 - Recovery of money/property - other

FRBP 7001(2) – Validity, Priority or Extent of Lien 21 - Validity, priority or extent of lien or other interest in property

FRBP 7001(3) – Approval of Sale of Property 31 - Approval of sale of property of estate and of co-owner - § 363(h)

FRBP 7001(4) – Objection/Revocation of Discharge 41 - Objection / revocation of discharge - § 727(c),(d),(e)

FRBP 7001(5) – Revocation of Confirmation 51 - Revocation of confirmation

FRBP 7001(6) – Dischargeability 66 - Dischargeability - § 523(a)(1),(14),(14A) priority tax claims 62 - Dischargeability - § 523(a)(2), false pretenses, false

representation, actual fraud 67 - Dischargeability - § 523(a)(4), fraud as fiduciary, embezzlement,

larceny(continued next column)

FRBP 7001(6) – Dischargeability (continued) 61 - Dischargeability - § 523(a)(5), domestic support 68 - Dischargeability - § 523(a)(6), willful and malicious injury 63 - Dischargeability - § 523(a)(8), student loan 64 - Dischargeability - § 523(a)(15), divorce or separation obligation

(other than domestic support) 65 - Dischargeability - other

FRBP 7001(7) – Injunctive Relief 71 - Injunctive relief - reinstatement of stay 72 - Injunctive relief - other

FRBP 7001(8) Subordination of Claim or Interest 81 - Subordination of claim or interest

FRBP 7001(9) Declaratory Judgment 91 - Declaratory judgment

FRBP 7001(10) Determination of Removed Action 01 - Determination of removed claim or cause

Other SS-SIPA Case – 15 U.S.C. §§ 78aaa et.seq. 02 - Other (e.g. other actions that would have been brought in state

court if unrelated to bankruptcy case)

Check if this case involves a substantive issue of state law Check if this is asserted to be a class action under FRCP 23

Check if a jury trial is demanded in complaint Demand $

Other Relief Sought

Case 10-13160-LA11 Filed 10/05/10 Doc 48 Pg. 1 of 33

B 104 () [08/07]

B 104

BANKRUPTCY CASE IN WHICH THIS ADVERSARY PROCEEDING ARISESNAME OF DEBTOR BANKRUPTCY CASE NO.

DISTRICT IN WHICH CASE IS PENDING DIVISIONAL OFFICE NAME OF JUDGE

RELATED ADVERSARY PROCEEDING (IF ANY)PLAINTIFF DEFENDANT ADVERSARY PROCEEDING NO.

DISTRICT IN WHICH ADVERSARY IS PENDING DIVISIONAL OFFICE NAME OF JUDGE

SIGNATURE OF ATTORNEY (OR PLAINTIFF)

DATE PRINT NAME OF ATTORNEY (OR PLAINTIFF)

INSTRUCTIONS

The filing of a bankruptcy case creates an “estate” under the jurisdiction of the bankruptcy court which consists of all of theproperty of the debtor, wherever that property is located. Because the bankruptcy estate is so extensive and the jurisdiction of thecourt so broad, there may be lawsuits over the property or property rights of the estate. There also may be lawsuits concerningthe debtor’s discharge. If such a lawsuit is filed in a bankruptcy court, it is called an adversary proceeding.

A party filing an adversary proceeding must also complete and file Form 104, the Adversary Proceeding Cover Sheet, unlessthe party files the adversary proceeding electronically through the court’s Case Management/Electronic Case Filing system(CM/ECF). In some courts, the cover sheet is not required when the adversary proceeding is filed electronically through thecourt’s Case Management/Electronic Case Files (CM/ECF) system. (CM/ECF captures the information on Form 104 as part ofthe filing process.) When completed, the cover sheet summarizes basic information on the adversary proceeding. The clerk ofcourt needs the information to process the adversary proceeding and prepare required statistical reports on court activity.

The cover sheet and the information contained on it do not replace or supplement the filing and service of pleadings or otherpapers as required by law, the Bankruptcy Rules, or the local rules of court. The cover sheet, which is largely self-explanatory,must be completed by the plaintiff’s attorney (or by the plaintiff if the plaintiff is not represented by an attorney). A separate coversheet must be submitted to the clerk for each complaint filed.

Plaintiffs and Defendants. Give the names of the plaintiffs and the defendants exactly as they appear on the complaint.

Attorneys. Give the names and addresses of the attorneys, if known.

Party. Check the most appropriate box in the first column for the plaintiffs and in the second column for the defendants.

Demand. Enter the dollar amount being demanded in the complaint.

Signature. This cover sheet must be signed by the attorney of record in the box on the second page of the form. If the plaintiff isrepresented by a law firm, a member of the firm must sign. If the plaintiff is pro se, that is, not represented by an attorney, theplaintiff must sign.


DEFENDANTS

ENCINITAS 338, LLC, a Nevada limited liability company; DIAMOND BAY INVESTMENTS, INC., a Nevada corporation; OASIS LOAN ADVISORS, LLC, a Nevada limited liability company; JORDAN WIRSZ; DOUGLAS ESTEVES; DENNIS R. BLITZ; RICHARD RIVERA; MARIA TRINIDAD RIVERA; DONALD ROLAND ENRICO; BONNY KAY ENRICO; MALDEN VENTURES, LTD.; DEFINED BENEFIT TRUST; PROVIDENT GROUP; ROBERT B. CALDWELL; ESTHER GOMEZ; FIRST SAVINGS BANK FBO JOAN M. ALIPRAND, IRA; EDWARD B. ALLEN; CAROL ALLEN; DBI-SECURED INCOME PARTNERS, LLC; ROBERT ALLEN DEMBINSKI; DIANE M. DEMBINSKI; GREGORY D. ERECKSON REVOCABLE TRUST DATED AUGUST 1, 2003; FIFTY-FIVE LLC; DAVID ROY FOSSATI; JOHN P. HILT; DAVID J. HOUSTON; CAROL B. HOUSTON; NEIL E. HOUSTON; DONNA K. HOUSTON; THE LITTRELL FAMILY TRUST DATED NOVEMBER 30, 2005; SCOTT R. LLOYD; CAROLLYN S. LLOYD; THE MAGIC TRUST DATED DECEMBER 20, 2005; THE MIELA FAMILY TRUST DATED JUNE 24, 1994; ESTHER G. MILES; DARRON L. MILES; LAWRENCE EARL NOBLIN; STEPHANIE GRACE NOBLIN; ARTHUR POLACHECK; GLORIANNE M. POLACHECK; PRESWICK CORP.; QUANTUM RESOURCES, LP; THE SURVIVORS TRUST OF THE ROBBINS FAMILY TRUST DATED JULY 31, 1989; MARK ROBINSON; MARSHA ROBINSON; THE BERNARD F. RUBIN AND HELEN RUBIN LIVING TRUST A, DATED MAY 23, 1986; RICHARD B. SAMUELS; THE SIROTA-END LIVING TRUST DATED OCTOBER 15, 1998; GAIL JEAN TAGART; THE WIGHTMAN FAMILY TRUST DATED FEBRUARY 8, 2008; and THE WILLIAMS FAMILY TRUST DATED NOVEMBER 2, 1992


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VANDERHOFF LAW GROUP Alan Vanderhoff, Cal. Bar No. 138032 Jeanne C. Vanderhoff, Cal. Bar No. 138011 750 B Street, Suite 1620 San Diego, California 92101 Telephone: (619) 299-2050 Sara Pfrommer, Cal. Bar No. 84452 2663 Little Kate Road PO Box 3912 Park City, UT 84060 Telephone: (435) 658-2453 Attorneys for Encinitas Office, L.P., Debtor-in-Possession

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF CALIFORNIA In re: ENCINITAS OFFICE, L.P., a California limited partnership, Debtor.

Case No. 10-13160-LA11 Adv. No. COMPLAINT FOR BREACH OF CONTRACT; FRAUD; BREACH OF FIDUCIARY DUTY; NEGLIGENCE; DECLARATORY RELIEF; EQUITABLE SUBORDINATION and USURY

ENCINITAS OFFICE, L.P., a California limited partnership, Plaintiffs, v. ENCINITAS 338, LLC, a Nevada limited liability company; DIAMOND BAY INVESTMENTS, INC., a Nevada corporation; OASIS LOAN ADVISORS, LLC, a Nevada limited liability company; JORDAN WIRSZ; DOUGLAS ESTEVES; DENNIS R. BLITZ; RICHARD RIVERA; MARIA TRINIDAD RIVERA; DONALD ROLAND ENRICO; BONNY KAY ENRICO; MALDEN VENTURES, LTD.; DEFINED BENEFIT TRUST; PROVIDENT GROUP; ROBERT B. CALDWELL; ESTHER GOMEZ; FIRST SAVINGS BANK FBO JOAN M. ALIPRAND, IRA; EDWARD B. ALLEN; CAROL ALLEN; DBI-SECURED INCOME PARTNERS, LLC;


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ROBERT ALLEN DEMBINSKI; DIANE M. DEMBINSKI; GREGORY D. ERECKSON REVOCABLE TRUST DATED AUGUST 1, 2003; FIFTY-FIVE LLC; DAVID ROY FOSSATI; JOHN P. HILT; DAVID J. HOUSTON; CAROL B. HOUSTON; NEIL E. HOUSTON; DONNA K. HOUSTON; THE LITTRELL FAMILY TRUST DATED NOVEMBER 30, 2005; SCOTT R. LLOYD; CAROLLYN S. LLOYD; THE MAGIC TRUST DATED DECEMBER 20, 2005; THE MIELA FAMILY TRUST DATED JUNE 24, 1994; ESTHER G. MILES; DARRON L. MILES; LAWRENCE EARL NOBLIN; STEPHANIE GRACE NOBLIN; ARTHUR POLACHECK; GLORIANNE M. POLACHECK; PRESWICK CORP.; QUANTUM RESOURCES, LP; THE SURVIVORS TRUST OF THE ROBBINS FAMILY TRUST DATED JULY 31, 1989; MARK ROBINSON; MARSHA ROBINSON; THE BERNARD F. RUBIN AND HELEN RUBIN LIVING TRUST A, DATED MAY 23, 1986; RICHARD B. SAMUELS; THE SIROTA-END LIVING TRUST DATED OCTOBER 15, 1998; GAIL JEAN TAGART; THE WIGHTMAN FAMILY TRUST DATED FEBRUARY 8, 2008; and THE WILLIAMS FAMILY TRUST DATED NOVEMBER 2, 1992. Defendants.

ENCINITAS OFFICE, L.P., debtor-in-possession (“Plaintiff”) alleges as follows:

JURISDICTION AND VENUE

1. This Court has exclusive jurisdiction over this proceeding pursuant to 28

U.S.C. §§ 157 and 1334.

2. This matter constitutes a core proceeding pursuant to and 28 U.S.C. §§

157(b)(2)(A), (O), and 1334.

3. Venue is proper in this district pursuant to 28 U.S.C. § 1409(a).


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THE PARTIES

4. Plaintiff Encinitas Office, L.P. is a California limited partnership with its

principal place of business in California. Plaintiff filed a petition under Chapter 11 of the

United States Bankruptcy Code on July 29, 2010.

5. Plaintiff is informed and believe and thereon alleges that defendant

ENCINITAS 338, LLC (“Encinitas 338”) is a Nevada limited liability company with its

principal place of business in Las Vegas, Nevada.

6. Plaintiff is informed and believes and thereon alleges that defendant

DIAMOND BAY INVESTMENTS, INC., (“Diamond Bay”) is a Nevada corporation with its

principal place of business in Las Vegas, Nevada.

7. Plaintiff is informed and believes and thereon alleges that the Construction

Loan Agreement at issue in this Complaint (the “Construction Loan”) was made by the

following defendants (collectively, the “Construction Lenders”), each of whom agreed, by

acquiring an interest in and under the Construction Loan, to be bound by the terms thereof:

DIAMOND BAY, DENNIS R. BLITZ, RICHARD RIVERA, MARIA TRINIDAD

RIVERA, DONALD ROLAND ENRICO, BONNY KAY ENRICO, MALDEN

VENTURES, LTD., DEFINED BENEFIT TRUST, PROVIDENT GROUP, ROBERT B.

CALDWELL, ESTHER GOMEZ, FIRST SAVINGS BANK FBO JOAN M. ALIPRAND,

IRA, EDWARD B. ALLEN, CAROL ALLEN, DBI-SECURED INCOME PARTNERS,

LLC, ROBERT ALLEN DEMBINSKI, DIANE M. DEMBINSKI, GREGORY D.

ERECKSON REVOCABLE TRUST DATED AUGUST 1, 2003, FIFTY-FIVE LLC,

DAVID ROY FOSSATI, JOHN P. HILT, DAVID J. HOUSTON, CAROL B. HOUSTON,

NEIL E. HOUSTON, DONNA K. HOUSTON, THE LITTRELL FAMILY TRUST DATED

NOVEMBER 30, 2005, SCOTT R. LLOYD, CAROLLYN S. LLOYD, THE MAGIC

TRUST DATED DECEMBER 20, 2005, THE MIELA FAMILY TRUST DATED JUNE 24,

1994, ESTHER G. MILES, DARRON L. MILES, LAWRENCE EARL NOBLIN,

STEPHANIE GRACE NOBLIN, ARTHUR POLACHECK, GLORIANNE M.

POLACHECK, PRESWICK CORP., QUANTUM RESOURCES, LP, THE SURVIVORS


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TRUST OF THE ROBBINS FAMILY TRUST DATED JULY 31, 1989, MARK

ROBINSON, MARSHA ROBINSON, THE BERNARD F. RUBIN AND HELEN RUBIN

LIVING TRUST A, DATED MAY 23, 1986, RICHARD B. SAMUELS, THE SIROTA-

END LIVING TRUST DATED OCTOBER 15, 1998, GAIL JEAN TAGART, THE

WIGHTMAN FAMILY TRUST DATED FEBRUARY 8, 2008, and THE WILLIAMS

FAMILY TRUST DATED NOVEMBER 2, 1992.

8. Plaintiff is informed and believes and thereon alleges that defendant JORDAN

WIRSZ is an individual who at all times relevant to the matters alleged herein was a resident

of Las Vegas, Nevada.

9. Plaintiff is informed and believes and thereon alleges that defendant

DOUGLAS ANTONIO ESTEVES is an individual residing in Arizona. He is a real estate

broker and holds California Real Estate Broker’s License No. 00922927. He was also, at all

times relevant to this Complaint, an officer and employee of Diamond Bay.

10. Plaintiff is informed and believes and thereon alleges that Defendant OASIS

LOAN ADVISORS, LLC is a Nevada limited liability corporation with its principal place of

business in Las Vegas, Nevada.

11. At all times relevant to this Complaint, defendants WIRSZ and ESTEVES

were agents and alter egos of DIAMOND BAY.

12. Plaintiff is informed and believes and thereon alleges that until late 2009,

Diamond Bay was agent for various individuals and entities who purchased interests in the

construction loan that is at issue in this action.

13. Plaintiff is informed and believes and thereon alleges that at some point in

2009 after Diamond Bay defaulted on the Construction Loan, Diamond Bay’s position was

acquired by defendant Oasis, at which time Oasis became the loan servicer. Plaintiff is

informed and believes, and thereon alleges, that in its capacity as loan servicer, Oasis is the

agent for all purposes of the Construction Lenders.


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GENERAL ALLEGATIONS

A. General Allegations Relating To The Project; The Construction Loan

Agreement And The Breach Of That Contract

14. Plaintiff’s sole asset is a partially constructed office condominium known as

the Quail Garden Corporate Center (“the Project”). The Project, designed by architects

Hanna Gabriel Wells, is located on the north side of Encinitas Boulevard near the

intersection of Quail Gardens Drive at 662 Encinitas Boulevard and is the first private

Leadership in Energy and Environmental Design (LEED) – certified building in the city of

Encinitas, California. The Project is designed to consist of one single-story commercial

office and/or medical condominium complex totaling approximately 33,000 square feet,

divided into twenty-one units with an average size of approximately 1,575 square feet.

15. Plaintiff acquired the raw land on which the Project is constructed in 2007, for

an amount in excess of $3,085,000. Of this amount, the limited partners of Plaintiff provided

half, with the rest in the form of loan from First Bank of Beverly Hills. The limited partners

of Plaintiff invested an additional $650,000 of equity to fund the development costs,

including architectural plans, site development, obtaining the necessary permits and the like.

Plaintiff’s total equity investment in the Project is $2,150,000.

16. In May of 2008, Plaintiff wished to refinance the existing loan and obtain

additional financing to complete and construct the Project. During the spring of 2008,

representatives of Plaintiff met with defendant Douglas Antonio Esteves, who represented

himself as a principal of Diamond Bay. Plaintiff paid a fee of $7,500 to Diamond Bay to

cover the cost of “due diligence” with respect to the making of the proposed construction

loan.

17. The due diligence for Diamond Bay was conducted by Esteves. Although

Esteves purports to hold a valid California real estate broker’s license, he never informed the

California Department of Real Estate that he was affiliated with Diamond Bay, or that he

intended to use his broker’s license to enable Diamond Bay to place commercial real estate

loans in California.


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18. Diamond Bay has never obtained any kind of license or certification from the

State of California to act as a finance lender, real estate mortgage loan broker, or real estate

securities seller.

19. Esteves told Plaintiff that Diamond Bay was ready, willing and able to make a

construction loan in the amount of $10,560,000 (the “Construction Loan”). This amount was

sufficient to complete the construction of the building as designed. Plaintiff is informed and

believes and thereon alleges that at the time this representation was made, Diamond Bay did

not have $10,560,000 to advance to Plaintiff, but rather was intending to raise a significant

portion of the funding through both present and future sales of interests in the Construction

Loan to various investors.

20. In April of 2008, however, Diamond Bay had been advised by the State of

Arizona that the marketing of investments for the purpose of pooling them into a real estate

loan was a violation of Arizona’s state securities laws, and had been ordered to cease and

desist from that activity in the State of Arizona. Diamond Bay consented to that result.

21. Plaintiff is informed and believes that Esteves knew of the Arizona cease and

desist order when it was entered in April of 2008. Neither Esteves nor any other

representative of Diamond Bay ever informed plaintiff of this information.

22. Plaintiff is informed and believes that Diamond Bay’s methodology for

soliciting investments in Arizona was essentially identical to the methodology for soliciting

investments in other jurisdictions. Accordingly, as of April 2008 at the latest, Diamond Bay

knew that its fund-raising activities could be considered illegal securities offerings by other

jurisdictions, as well as Arizona.

23. On May 15, 2008, Plaintiff entered into a Construction Loan Agreement dated

as of May 15, 2008 between Encinitas Office, L.P., as borrower, and the Construction

Lenders, as lender. The Construction Loan Agreement and related documents are hereinafter

referred to collectively as the “Construction Loan Agreement.” The Construction Loan

Agreement is, by its terms, governed by California law.


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24. In conjunction with the Construction Loan Agreement, Plaintiff also executed

a promissory note in the amount of $10,560,000 (the “Promissory Note”). The Promissory

Note provided for an interest rate of 12.5% and had a maturity date of September 1, 2009.

25. Pursuant to the Construction Loan Agreement, the Construction Lenders also

required that Plaintiff pay a loan fee of 5.5% of the total loan commitment. At the time of

the execution of the Construction Loan Agreement, Plaintiff paid $580,000, the number of

points required by the Construction Lenders multiplied by $10,560,000, the maximum

outstanding balance of the loan, even though the Construction Lenders initially funded only

$3,500,000.

26. Collection of loan fees for funds that have not yet been advanced under a loan

agreement is illegal in the State of California.

27. On May 15, 2008, the Construction Lenders recorded a deed of trust against

the property (the “Diamond Bay Deed of Trust”) on behalf of themselves and a number of of

additional “beneficiaries.” The Diamond Bay Deed of Trust purported to secure a

repayment of $10,560,000, even though only $3,500,000 of the committed amount was

funded at that time.

28. Diamond Bay agreed to service the Construction Loan Agreement on behalf

of the Construction Lenders. Plaintiff is informed and believes, and thereon alleges, that

Diamond Bay and the various beneficiaries entered into one or more Loan Servicing

Agreements that set forth Diamond Bay’s obligations with respect to the servicing of the

loan.

29. Diamond Bay was required to be licensed by the State of California in order to

act as loan servicer for the Construction Loan, but never sought or obtained any licensure

from the State of California.

30. Pursuant to paragraph 3.1 of the Construction Loan Agreement, the

Construction Lenders were obligated, so long as the borrower was not in default, to disburse

loan proceeds in the Construction Loan Agreement.


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31. Plaintiff relied on Diamond Bay’s representations that it was ready, willing

and able to fund a construction loan in the amount of $10,560,000 and on the Construction

Lenders’ contractual obligation to disburse the loan proceeds in that amount, as required to

complete construction of the Project.

32. Diamond Bay, however, did not have $10,560,000 with which to fund the

obligations under the Construction Loan Agreement, but was rather anticipating that it would

sell interests in the Construction Loan and fund its obligations through the proceeds of those

sales. Diamond Bay did not disclose this fact to Plaintiff.

33. Between May 15, 2008 and February of 2009, Diamond Bay sold interests in

the Construction Loan to fifty-four different beneficiaries (the “Beneficiaries”). Each of the

Beneficiaries took an assignment of an interest in the Construction Loan, and Diamond Bay

caused a partial assignment of the Diamond Bay Deed of Trust to be recorded with the

County Recorder for San Diego County for each of the Beneficiaries. Each Beneficiary was

a “Lender” under the Construction Loan documents, entitled to the benefits thereof and

subject to the burdens and obligations thereunder. The Beneficiaries and Diamond Bay are

collectively referred to herein as the “Construction Lenders.”

34. The sale of interests in the Construction Loan constitutes a “real property

security” under the provisions of Sections 10237-10239 of the California Business &

Professions Code. Under California law, the sale of a real property security must either fit

within the exemption described in the Business & Professions Code, or the offerer of the

security must comply with the securities laws and regulations of the California Corporations

Code.

35. The sale of interests in the Construction Loan did not fit within the

exemptions, and in particular (but without limitation), violated Business & Professions Code

Section 10238(f) and 10238(h)(i) by virtue of, among other things: a) being sold to more

than ten individuals and b) constituting the sale of fractionalized interests in a construction

loan that was not fully funded. Accordingly, neither Diamond Bay, Wirsz nor Esteves was


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entitled to rely on the real property securities exemption contained in the California Business

& Professions Code.

36. Plaintiff is informed and believes, and thereon alleges, that Diamond Bay also

never registered the sale of interests as a security with the State of California or otherwise

complied with the securities laws and regulations of the State.

37. The Construction Loan Agreement was entered into by Plaintiff and the

Construction Lenders on or about May 15, 2008. The Construction Lenders agreed to loan

Plaintiff $10,560,000. Construction on the project commenced on or about June 18, 2008.

38. The construction of Plaintiff’s Project required an initial disbursement of $3.5

million followed by monthly disbursements of $500,000 per month in the early months and

$750,000 per month in the later months. The initial disbursement of $3,500,000 was made

on May 31, 2008. A second disbursement of $600,000 was made a month later on June 30,

2008. However, thereafter the Construction Lenders ceased making the required

disbursements and further disbursements became irregular.

39. Serious defaults by the Construction Lenders began in October of 2008. The

Construction Lenders failed to make the October 1st disbursement of $500,000. Plaintiff was

told that “fund raising is a little slow right now, and may take us a little longer than usual . . .

.” The October 1st disbursement was nearly a month late. Matters quickly got worse.

40. The Construction Lenders failed to make the November 1st disbursement.

With the disbursements being late, Plaintiff needed $750,000 in November. However, the

Construction Lenders only funded $200,000 that month. No loan funds at all were disbursed

in December. The Construction Lenders said that the reason for not making the loan

disbursements was that they did not have the money.

41. By January, Plaintiff was in serious trouble as a result of the Construction

Lenders’ defaults. The unpaid invoices were mounting and the subcontractors had begun

filing mechanics’ liens.

42. On February 26, 2009, Plaintiff’s attorney sent a formal Notice of Lender

Default to the Construction Lenders, pursuant to Section 16.12 of the Construction Loan


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Agreement, on account of the Construction Lender’s failure to fund over $870,333 of loan

disbursement requests. Plaintiff demanded that the Construction Lenders forthwith advance

the funds they had agreed to provide under the Construction Loan Agreement. The

Construction Lenders did not comply with this demand. The Construction Lenders were, and

remain, in default of the Construction Loan Agreement.

43. Plaintiff was forced to shut down the Project on February 26, 2009 due to lack

of construction loan funds.

44. At the time the Construction Lenders ceased performing under the

Construction Loan Agreement, Plaintiff was in full compliance with all of its obligations

under the Construction Loan Agreement and was entitled to demand and require full and

complete performance of the Construction Loan Agreement by the Construction Lenders.

45. At the time the construction was stopped, the Project was approximately 50%

completed, including major infrastructure improvements to Encinitas Boulevard, street

widening and paving, plus the installation of storm drains, curb, gutter, sidewalk, all

underground utilities and a fully landscaped median.

46. Various contractors had provided goods and services to Plaintiff with respect

to the construction of the Property in reliance upon the Construction Lenders’ agreement to

fund the Construction Loan.

47. The unpaid contractors who were unpaid as a result of the Construction

Lenders’ breach of the Construction Loan Agreement have asserted claims exceeding

$800,000 in amount against Plaintiff, its general partner, Wiegand Neglia, Inc. and against

the principals of the general partner, Bruce Wiegand and Bart Neglia, personally. These

claims are a direct result of the breach of the Construction Loan Agreement by the

Construction Lenders.

48. Prior to cessation of construction, Plaintiff had entered into two purchase

contracts, both for the sale of medical office condominiums. One was for a unit of 1556

square feet, with a sales price of $925,820.00 and the other was for a unit of 1259 square feet,

with a sales price of $749,105 (a sales price of approximately $595/square foot). As a


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consequence of the breach of the Construction Loan Agreement and Plaintiff’s subsequent

inability to complete construction of the Project, both contracts have been cancelled. One of

the parties to these sales contracts have asserted claims against Plaintiff in an amount that

may exceed $50,000.

49. From February 2009 to the present, Plaintiff has been required to expend

money to protect and preserve the half-completed construction site, including reinforcement

to the semi-completed structure, security guards, weed abatement and the like. These costs

and expenses exceed $200,000.

50. Plaintiff has suffered actual, out-of-pocket damages caused by the breach of

the Construction Loan Agreement in excess of $2,000,000. Additionally, Plaintiff faces the

risk of loss of its entire $2,150,000 equity investment in the Project. Finally, Plaintiff alleges

that, had it been able to complete the Project on time and as scheduled, it would have made a

profit in an amount in excess of $3,500,000 upon the sell-out of the Project and that the loss

of this profit is attributable to the Construction Lenders’ breach of the Construction Loan

Agreement.

B. General Allegations Relating To Oasis Loan Advisors LLC And Its

Breach Of Contract And Covenant Of Good Faith And Fair Dealing

51. Following the default under the Construction Loan Agreement, defendant

Oasis Loan Advisors, LLC, a Nevada limited liability company (“Oasis”) took over Diamond

Bay’s position as “loan servicer.” Plaintiff is informed and believes that there is an

agreement between Oasis and the Construction Lenders with respect to the servicing of the

Construction Loan, but Oasis has refused to disclose the terms of that agreement to Plaintiff.

Oasis has also refused to disclose to Plaintiff the terms and conditions under which it

acquired Diamond Bay’s interest in and to the Construction Loan Agreement and the

servicing rights.

52. From February 2009 to the present, Plaintiff has sought a new source of

financing to complete the Project. The half-completed state of the Project, the fact that 54

different beneficial interests had been recorded against the Project and the fact that Diamond


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Bay and its principal, Jordan Wirsz, had ceased to fulfill their obligations as servicers of the

Construction Loan, made it difficult to find any new source of financing.

53. Notwithstanding these difficulties, Plaintiff identified a source of new

financing, Pacific Horizon Mortgage Investors II, LLC. Pacific Horizon was, however,

unwilling to make the loan unless it could be assured that it would be in a first priority

position with respect to the repayment of the loan.

54. The contemplated loan from Pacific Horizon is for $5,000,000. The

approximately $1,000,000 difference between this amount and the $4,000,000 remaining to

be disbursed under the Construction Loan Agreement represents additional fees for the new

loan, a higher interest rate (14% as compared to 12.5% under the Construction Loan

Agreement), and administrative and legal costs occasioned by the breach of the Construction

Loan Agreement.

55. On August 19, 2009, Plaintiff sent an e-mail to Amnon Cohen who, at that

time, was doing business under the name of Chelsea Loan Servicing and Workouts, LLC.

Plaintiff provided Mr. Amnon extensive information about the Project including (1) a project

brochure, (2) an executive summary, (3) sources and uses of existing construction funds as of

that date, (4) a pro forma financial analysis, (5) a sales comparison summary, (6) the status of

buyer escrows, and (8) buyer prospects. Mr. Cohen acknowledged receipt of the information

and suggested further discussions.

56. On September 1, 2009, Plaintiff received an e-mail from Mr. Cohen under the

name of Oasis Loan Advisors, LLC. In the e-mail, Mr. Cohen stated that his group had

“officially taken over” as of September 1st.

57. On November 12, 2009, Plaintiff received an e-mail from Rodney Tucker of

Oasis Loan Advisors. Attached to the e-mail was a formal offer from the Construction

Lenders regarding a global resolution of the disputes between the Construction Lenders and

Plaintiff (the “Oasis Proposal”). Mr. Tucker represented that the Oasis Proposal was

acceptable to the beneficiaries of the deed of trust and was contingent only on finding

acceptable financing to complete the Project.


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58. The Oasis Proposal provided, among other things, that (1) the Construction

Lenders would subordinate their deed of trust to new construction loan in an amount not to

exceed $5 million, and (2) the sale proceeds from the Project would be disbursed (i) first to

pay off the priming lender, (ii) after the priming lender was paid and through $15 million of

proceeds, Plaintiff would receive 75% of the sale proceeds and the Construction Lenders

would receive 25%, and (iii) after $15 million, Plaintiff would receive 25% of the sale

proceeds and the Construction Lenders would receive 75%. In addition, of the first $15

million, Plaintiff would receive 100% of the sale proceeds over the equivalent of $450 per

square foot of rentable space.

59. On December 1, 2009, Plaintiff accepted the Oasis Proposal and returned a

signed copy to the Construction Lenders on that date thereby entering into a settlement

contract with the Construction Lenders (the “Oasis Agreement”).

60. Notwithstanding its agreement, however, Oasis has failed and refused to

effectuate the subordination, which has required Plaintiff to file for bankruptcy and seek a

priming lien for the construction financing, to assure that the new construction lender will be

guaranteed first priority of repayment for sums advanced to complete the construction of the

Project.

61. Oasis has also refused to honor its agreement with respect to the sharing of the

sales proceeds as evidenced by the Oasis Agreement.

62. Plaintiff is informed and believes, and thereon alleges, that although Oasis has

repeatedly assured Plaintiff of its good faith and intent to honor the Oasis Agreement, Oasis

never intended to perform under the Oasis Agreement, but rather to stall and delay in the

hope that Plaintiff would ultimately be in sufficiently dire economic straits that it would have

to capitulate to Oasis’s demands with respect to the Project.

63. As a result of Oasis’s breach of contract, and breach of the covenant of good

faith and fair dealing embodied in that contract, Plaintiff has incurred the cost and expense of

filing for bankruptcy in order to protect its interests, and will continue to incur costs and


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expenses in conjunction with the administration of the bankruptcy, all of which are the direct

and proximate result of Oasis’s failure to abide by the terms of the Oasis Agreement.

C. General Allegations Relating To Non-Compliance With California

Statutes And Regulations

64. The Construction Loan Agreement is, according to its terms, governed by

California law. Plaintiff is a California limited partnership, the property is located in

California, and a number of the individual investors who acquired interests in the

Construction Loan are located in California. Accordingly, the California statutory and

regulatory scheme applicable to loan servicing agents required Diamond Bay to be licensed

as a real estate broker in California in order to act as the arranger of and servicing agent for

the Beneficiaries with respect to the subject loan negotiated and entered into in California

and secured by California real estate and required Diamond Bay to comply with the

California statutes and regulations governing mortgage loan brokers and the sale of real

property securities.

65. California law also requires Encinitas 338 and Oasis to be licensed a real

estate brokers in California to represent the interests of the Beneficiaries as members of

Encinitas 338.

66. Plaintiff is informed and believes, and on that basis alleges: a) Diamond Bay

never obtained any license to make loans in California and thus acted as the arranger and the

loan servicing agent on the subject loan without proper authority, b) Jordan Wirsz, the

principal of Diamond Bay, was not licensed as a broker, c) Douglas Esteves, who also

negotiated the loan terms with Plaintiff acting as a principal of Diamond Bay, was licensed as

a real estate broker but had not, as is required by the regulations of the State of California,

registered his license as affiliated with Diamond Bay, so that Diamond Bay could rely upon

it and, d) Oasis is not licensed as a real estate broker with the State of California.

67. Moreover, the loan contract was, at its inception, marketed to more than ten

fractional interest holders, in violation of applicable California statutes and regulations

providing for exemption from the securities laws for certain real property securities


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transactions. The sale of real property securities by Diamond Bay is therefore illegal, even if

those sales are or were conducted or arranged by a licensed broker.

68. Plaintiff further alleges that the Construction Loan Agreement was, from

inception, illegal and unenforceable.

69. Encinitas 338, as successor-in-interest to Diamond Bay’s loan servicing rights

and the rights of the Construction Lenders under the Construction Loan Agreement, are

subject to the same defenses that Plaintiff has against the Construction Lenders, including the

defense that the Construction Loan Agreement was, from its inception, illegal and

unenforceable.

D. General Allegations Relating To Usury

70. The Construction Lenders, under the Construction Loan Agreement, charged

Plaintiff interest on the construction loan in excess of the amount permitted by Article 15,

Section 1 of the California Constitution, which provides for an interest ceiling not to exceed

the higher of (a) 10% per annum or (b) 5% per annum over the discount rate set by the

Federal Reserve Bank of San Francisco operative on the 25th day immediately preceding the

date of origination of the loan.

71. Plaintiffs are informed and believe and thereon allege that Encinitas 338

contends that it is entitled to collect interest in excess of the permissible legal rate.

72. Although the Construction Loan was purported to be made and arranged by

Esteves, a broker licensed in California, because Diamond Bay was a corporation, it was

itself required to be licensed as a broker under California law in order to avail itself of the

real estate broker exemption to the usury law. Diamond Bay was not a licensed real estate

broker, nor had it registered any licensed real estate broker with the State of California to act

on its corporate behalf. Accordingly, the Construction Loan was not made or arranged by a

licensed California real estate broker within the meaning of the exemption, or otherwise

exempt from the anti-usury provisions of the California Constitution.

73. In addition, neither Diamond Bay nor Encinitas 338 is licensed otherwise in

California to make loans.


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74. As a result, the loans are illegal and unenforceable. Plaintiff paid interest to

the Construction Lenders in the amount of $604,826.22, from May 15, 2008 through

February, 2009. At a minimum, as required by California law, Defendants are prohibited

from collecting any interest whatsoever and must return all interest and other charges already

paid. Plaintiff is entitled to treble damages.

E. General Allegations Relating To Defendant’s Failure To Register To Do

Business In California

75. Diamond Bay, Oasis, and Encinitas 338 all conducted, or are conducting,

substantial business in California.

76. As a result of their activities in California, Diamond Bay, Oasis, and Encinitas

338 and each of them were and are obligated to register to do business in California and to

remain in good standing as a foreign corporation in the State of California in order to do

business and enforce rights within the State.

77. Plaintiff is informed and believes and thereon alleges that Diamond Bay at

one time registered with the State of California, but that it was not in good standing at the

time the Construction Loan Agreement was executed or at any point in time thereafter, when

it was soliciting and selling interests in the Construction Loan in California and to California

residents.

78. Plaintiff is informed and believes and thereon alleges that neither Oasis nor

Encinitas 338 have ever registered to do business in California.

79. As a result, Diamond Bay was not entitled to enter into contracts in California

and the Construction Loan Agreement and related documents are void ab initio. Moreover,

neither Oasis nor Encinitas 338 is authorized to do business in the State of California,

including without limitation, enforcing or exercising any rights under the Construction Loan

Agreement.


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F. General Allegations Relating To Illegality Of Contract Under Securities

Laws

80. Pursuant to the pertinent California statutory and regulatory scheme regarding

securities offerings, Diamond Bay as sponsor/issuer was required to have a current securities

permit from the California Department of Corporations in order to be able to offer

fractionalized interests in the promissory note for the subject loan to more than ten

Beneficiaries.

81. Diamond Bay never obtained a securities permit in the state of California, nor

did Oasis or Encinitas 338.

82. Diamond Bay knew that the loan it was originating and selling fractionalized

interest in were secured by real property located in California and that it consistently sought

to access the California market by placing advertisements, conducting direct mailings and

maintaining websites that were accessible to investors from the State of California. Diamond

Bay in fact sold fractionalized interests in the Construction Loan to a number of investors in

the State of California, notwithstanding the fact that it was not licensed or otherwise

authorized to make such sales.

83. Accordingly, all of the loan servicing agreements Diamond Bay entered into

with the Beneficiaries/Construction Lenders, as well as the documents pursuant to which

Diamond Bay sold fractionalized interests to the Beneficiaries/Construction Lenders, are

illegal and unenforceable.

84. A contract which has for its purpose the violation of law or the public policy

implementing the law is void or voidable. The Construction Loan Agreement required the

unauthorized and illegal sale of fractionalized interests to the Beneficiaries/Construction

Lenders in order for Diamond Bay to fulfill the funding obligations thereunder and is

therefore itself illegal and unenforceable.

85. Neither Encinitas 338, Oasis nor any of the Beneficiaries have any greater

rights under, or interest in, the Construction Loan Agreement than Diamond Bay had, and are


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therefore precluded from enforcing the Construction Loan Agreement, including without

limitation, exercising any purported right to foreclose on the Project.

FIRST CAUSE OF ACTION

(Breach of Contract Against Diamond Bay, Encinitas 338 and the Construction Lenders)

86. Plaintiff incorporates by reference the allegations in paragraphs 1 through 85.

87. Among other things, Diamond Bay has breached the Construction Loan

Agreement as more particularly described in the General Allegations, and continuing

thereafter to the present, in the following manner:

(a) Assessing and collecting servicing fees, late fees, default interest and

prepayment penalties that are neither earned nor assessable without a real estate broker’s

license;

(b) Demanding the payment of a maturity date fee in excess of maximum

set by applicable law;

(c) Failing to register as a broker-dealer;

(d) Entering into an obligation to fund the Construction Loan without

having adequate funds to fulfill the funding obligation under the Construction Loan

Agreement;

(e) Entering into a loan obligation, the only source of funding for which

was the sale of real property securities in violation of California law;

(f) Without disclosure to the borrower, use of partial funding, putting

Plaintiff at risk; and

(g) Failure to obtain a permit for partial funding, causing litigation

exposure to Plaintiff from the Defendants.

88. Among other things, the Construction Lenders have breached the Construction

Loan Agreement as more particularly described in the General Allegations, and continuing

thereafter to the present, the Construction Lenders breached the Construction Loan

Agreement in the following manner:


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(a) Failing to fully fund the Construction Loan pursuant to its obligation

to do so as set forth in the Construction Loan Agreement;

(b) Assessing and collecting servicing fees, late fees, default interest and

prepayment penalties that are neither earned nor assessable without a real estate broker’s

license;

(c) Demanding the payment of a maturity date fee in excess of maximum

set by applicable law; and

(d) Entering into an obligation to fund the Construction Loan without

having adequate funds to fulfill the funding obligation under the Construction Loan

Agreement.

89. No lawful excuse applies to protect the Construction Lenders from their full

and timely performance of its obligations under the Construction Loan Agreement.

90. Plaintiff is informed and believes and thereon alleges that during the fall of

2009 and the spring of 2010, Oasis induced the Construction Lenders to assign their interests

in the Construction Loan to a newly formed Nevada limited liability company, Encinitas 338,

LLC. Plaintiff is informed and believes that Oasis is the managing member of Encinitas 338

and that Encinitas 338 acts by and through Oasis.

91. Encinitas 338 is the successor-in-interest to the Construction Lenders under

the Construction Loan Agreement and acquired its interest will full knowledge of all of the

facts and circumstances of the Project, including the Construction Lenders’ default under the

Loan and the partially completed status of the Project. As such, Encinitas 338 is subject to

Plaintiff’s claims and defenses with respect to the Construction Loan Agreement and is

entitled to no greater rights under the Construction Loan Agreement than the Construction

Lenders could have claimed.

92. The Construction Lenders are parties to the Construction Loan Agreement.

Their interests subject to all of the claims and defenses that Plaintiff has under the

Construction Loan Agreement. Likewise, Encinitas 338’s interest in the Project consists

solely of the assignment of beneficial interests by the Construction Lenders, and accordingly


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Encinitas 338 is also subject to all of the claims and defenses to the enforcement of the

Construction Loan Agreement that Plaintiff has under the Construction Loan Agreement.

93. Plaintiff has fully performed all of its obligations under the Construction Loan

Agreement, and/or such obligations have been waived by Defendants or excused by reason of

Defendants’ actions, inactions, material breaches of the agreement, or the illegality of the

transaction.

94. Plaintiff has sustained and will sustain damages in an amount which is

unknown and difficult to calculate. At a minimum, Plaintiff is entitled to damages that

include, but are not limited to: a) a refund of the illegal advance fees, b) actual out-of-pocket

costs to protect and preserve the partially constructed Project following the Construction

Lenders’ default, c) the actual additional costs incurred from having to obtain replacement

financing, including without limitation, the additional loan fees, higher interest payments and

costs of administering this bankruptcy case, d) damages suffered by Plaintiff from claims

asserted against Plaintiff by unpaid contractors, e) damages suffered by Plaintiff from claims

asserted by parties who had contracted to buy units in the Project, which contracts Plaintiff

was unable to perform due to Defendants’ breaches, and f) lost economic opportunities

resulting from the delay in the completion of the Project and the resulting inability of

Plaintiff to sell units in the Project and realize the profits therefrom. Plaintiff asserts that the

damages it has suffered from breach of the Construction Loan Agreement exceed

$5,000,000.

95. Plaintiff is entitled to set off and recoupment of the damages it has incurred as

a result of the breaches of the Construction Loan Agreement against any amounts that it owes

under thereunder to any Construction Lender, including without limitation Encinitas 338, or

any other entity or individual claiming its rights through, or seeking to enforce rights under,

the Construction Loan Agreement.


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SECOND CAUSE OF ACTION

(Breach of Contract and Covenant of Good Faith and Fair Dealing,

Against Oasis Loan Advisors, LLC)

96. Plaintiff incorporates by reference the allegations in paragraphs 1 through 95.

97. Oasis, as representative of the Construction Lenders entered into the Oasis

Agreement pursuant to which the Construction Lenders and Plaintiff agreed that (1) the

Construction Lenders would subordinate their deed of trust to new construction loan in an

amount not to exceed $5 million, and (2) the sale proceeds from the Project would be

disbursed (i) first to pay off the priming lender, (ii) after the priming lender was paid and

through $15 million of proceeds, Plaintiff would receive 75% of the sale proceeds and the

Construction Lenders would receive 25%, and (iii) after $15 million, Plaintiff would receive

25% of the sale proceeds and the Construction Lenders would receive 75%. In addition, of

the first $15 million, Plaintiff would receive 100% of the sale proceeds over the equivalent of

$450 per square foot of rentable space.

98. Notwithstanding its agreement, however, Oasis has failed and refused to

effectuate the subordination, which has required Plaintiff to file for bankruptcy and seek a

priming lien for the construction financing, to assure that the new construction lender will be

guaranteed first priority of repayment for sums advanced to complete the construction of the

Project.

99. Oasis has also refused to honor its agreement with respect to the sharing of the

sales proceeds as evidenced by the Oasis Agreement.

100. Plaintiff is informed and believes, and thereon alleges, that although Oasis has

repeatedly assured Plaintiff of its good faith and intent to honor the Oasis Agreement, Oasis

never intended to perform under the Oasis Agreement, but rather to stall and delay in the

hope that Plaintiff would ultimately be in sufficiently dire economic straits that it would have

to capitulate to Oasis’s demands with respect to the Project.

101. As a result of Oasis’s breach of contract, and breach of the covenant of good

faith and fair dealing embodied in that contract, Plaintiff has incurred the cost and expense of


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filing for bankruptcy in order to protect its interests, and will continue to incur costs and

expenses in conjunction with the administration of the bankruptcy, all of which are the direct

and proximate result of Oasis’s failure to abide by the terms of the Oasis Agreement.

THIRD CAUSE OF ACTION

(Breach of Fiduciary Duty Against Diamond Bay and Esteves)

102. Plaintiff incorporates by reference the allegations in paragraphs 1 through

101.

103. In the State of California, a mortgage loan broker owes a fiduciary duty of the

“highest good faith toward his principal” and “is charged with the duty of fullest disclosure

of all material facts concerning the transaction that might affect the principal’s decision.”

Barry v. Raskov, 232 Cal.App.3d 447, 455 (1991). The broker owes this duty to the lender-

investor as well as to the borrower. Id.

104. The fiduciary duty of the broker is non-delegable and exists in order to assure

that all real estate loan transactions in California that are performed through the efforts of a

licensed real estate broker are conducted in good faith and in strict compliance with the laws

and regulations of the State of California.

105. Defendant Esteves was acting as agent of both Plaintiff and Diamond Bay in

connection with the Construction Loan.

106. As agent/broker for Plaintiff, Esteves owed the highest fiduciary duty of care

to Plaintiffs with respect to the Construction Loan, including, without limitation, the duty to

inform Plaintiff that a) Diamond Bay had been held in violation of the Arizona securities

laws for their solicitation of investors, b) that Diamond Bay was not able to fund the

Construction Loan in full at the time it was entered into, and c) that Diamond Bay intending

to further solicit new investors, in a manner similar to the solicitations that had been

precluded by the State of Arizona, in order to obtain the necessary funds. Esteves did not

inform Plaintiff of any of this information.

107. Diamond Bay also owed fiduciary obligations to Plaintiff with respect to the

Construction Loan.


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108. Both Esteves and Diamond Bay breached their fiduciary obligations to

Plaintiff, causing Plaintiff damages in excess of $3,000,000, to be further established at the

time of trial.

FOURTH CAUSE OF ACTION

(Negligence against Esteves)


108.

110. Esteves owed a duty of care to Plaintiff.

111. Esteves breached his duty of care to Plaintiff by negligently failing to inform

Plaintiff that a) Diamond Bay had been held in violation of the Arizona securities laws for

their solicitation of investors, b) that Diamond Bay was not able to fund the Construction

Loan in full at the time it was entered into, and c) that Diamond Bay intending to further

solicit new investors, in a manner similar to the solicitations that had been precluded by the

State of Arizona, in order to obtain the necessary funds.

112. Plaintiff was damaged by Esteves’ breach of his duty of care in an amount in

excess of $3,000,000, to be further established at the time of trial.

113. Esteves was the proximate cause of the damages suffered by Plaintiff.

FIFTH CAUSE OF ACTION

(Against Diamond Bay, Esteves and Wirsz for Deceit)


113.

115. Defendants Diamond Bay, Esteves and Wirsz had a duty to disclose to

Plaintiff that: a) Diamond Bay had been held in violation of the Arizona securities laws for

their solicitation of investors, b) Diamond Bay did not have sufficient money to fund the

Construction Loan in full at the time it was entered into, c) Diamond Bay intended to further

solicit new investors, in a manner similar to the solicitations that had been precluded by the

State of Arizona, in order to obtain the money necessary to fund the Construction Loan in

full, and d) Diamond Bay was not licensed as a finance lender in the State of California.


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116. Neither Diamond Bay, Esteves nor Wirsz disclosed any of these facts to

Plaintiff before entering into the Construction Loan.

117. Plaintiff would not have entered into the Construction Loan with Diamond

Bay had it known any of the facts set forth in paragraph 115 of this Complaint.

118. Plaintiff was damaged by Defendants’ deceit in an amount in excess of

$3,000,000, to be further established at the time of trial.

SIXTH CAUSE OF ACTION

(Declaratory Relief Against all Defendants)

119. Plaintiffs incorporate by reference the allegations in paragraphs 1 through

118.

120. The declaration of the rights and duties of Plaintiff and Defendants with

respect to the Project is a proper matter for declaratory relief.

121. An actual controversy has arisen and now exists between Plaintiff and

Defendants with respect to the various parties’ interests in the Project and the rights of

Defendants to foreclose on the Project. A further controversy exists between Plaintiff and

Defendants with respect to the enforceability of any of the loan documents.

122. Plaintiffs desire a judicial determination of (1) the parties’ rights and duties

with respect to the Project, (2) the validity, priority and extent of the respective claims

asserted against the Project, and (3) the rights of specific performance, if any. Plaintiff

further seeks an order from the Court that the loan documents are illegal and unenforceable

and/or that Plaintiffs may rescind the loan based on the facts set forth herein, together with a

determination of the following specific issues:

(a) Whether the contracts between the parties are unlawful and violate any

securities, licensing laws and regulations or other laws or regulations, and thus cannot be

enforced;

(b) Whether California law was circumvented and/or violated by the

manner in which Diamond Bay negotiated and procured Plaintiff’s acquiescence to the

Construction Loan Agreement;


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(c) Whether California law was circumvented and/or violated by the

manner in which Diamond Bay assigned fractionalized beneficial interests in the

Construction Loan;

(d) Whether Diamond Bay was required to register as a broker-dealer

and/or licensed real estate broker, or to obtain any other license required by the State of

California to engage in the loan transaction with Plaintiff;

(e) Whether Diamond Bay may avoid its obligation to obtain the requisite

licenses by using the services of a California licensed real estate broker who did not register

his affiliation with Diamond Bay with the State of California;

(f) Whether the failure to register as a broker-dealer and lack of any

broker’s or other required licenses precludes the enforceability of the contracts or the

collection of any amounts thereunder;

(g) Whether Diamond Bay, Esteves and/or Wirsz breached a fiduciary

duty to Plaintiff;

(h) Whether Diamond Bay, Esteves and/or Wirsz deceived Plaintiff by

failing to disclose material relevant information regarding Diamond Bay’s ability to fully

fund the Construction Loan, prior to entering into it;

(i) Whether the collection of advance fees in respect of unperformed

obligations of the lender under the Loan Construction Agreement renders the Loan

Construction Agreement illegal and unenforceable;

(j) Whether Diamond Bay is required to disgorge any illegally collected

loan or other fees;

(k) Whether the use of partial funding is a violation of the securities laws;

(l) Whether Encinitas 338, as successor-in-interest to the lender under the

Construction Loan Agreement, is subject to the claims and defenses of Plaintiff to payment

of the Construction Loan;

(m) Whether Plaintiff is entitled to offset its damages against any amounts

owed under the Construction Loan Agreement;


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(n) Whether Defendants, or any of them, can foreclose on the loans;

(o) Whether Defendants Diamond Bay, Oasis and Encinitas 338 were

required to register to do business in California as a condition to defending the claims herein

or in entering into the loan agreement or act as representatives of the Beneficiaries under the

Loan Documents;

(p) Whether Douglas Esteves exceeded the scope of authority permitted

under the California laws and regulations governing licensed real estate brokers with respect

to his role in negotiating and arranging the Construction Loan;

(q) Whether Esteves was acting as Diamond Bay’s agent with respect to

negotiating and arranging the Construction Loan;

(r) Whether usurious interest and fees have been collected and what

interest if any can be charged; and

(s) Whether, under the facts and circumstances of this case, the unpaid

contractors should be entitled to payment in full before Encinitas 338 receives any payment

with respect to the Construction Loan.

123. Plaintiff is informed and believes that Defendants dispute each of Plaintiff’s

contentions with respect to the Construction Loan Agreements as set forth herein, and the

rights of Plaintiff to rescind, reform or refinance or otherwise replace the indebtedness

against the Project, and whether Encinitas 338 is entitled to foreclose on the Project pursuant

to the facts and circumstances of this case.

124. A judicial declaration is necessary and appropriate at this time under the

circumstances in order that Plaintiff and Defendants may ascertain their respective rights and

duties with respect to the loan documents and the Project, and also to determine if foreclosure

by Defendants can be permitted and if so by which Defendants and under what terms or

conditions.


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SEVENTH CAUSE OF ACTION

(Equitable Subordination of the Construction Loan to

Unpaid Contractor Claims)


124.

126. When the Construction Lenders defaulted on their obligation to fund the

Construction Loan, Plaintiff was unable to fully pay the contractors who provided their goods

and services to construct the Project. Had the Construction Lenders performed as they had

agreed and wer obligated to do under the Construction Loan Agreements, all of the

contractors would have been paid in full.

127. Under Section 510(c)(2) of the Bankruptcy Code, the Court may, under

principles of equitable subordination, subordinate for the purposes of distribution all or part

of an allowed claim to all or part of another allowed claim. Plaintiff alleges that it would be

unfair and inequitable, under the facts and circumstances of this case, for the Construction

Lenders or any person or entity claiming rights or interests under the Construction Loan

Agreement to be repaid prior to the contractors’ claims being paid in full. Accordingly,

Plaintiff requests that the Bankruptcy Court exercise its equitable powers under Section 510

of the Bankruptcy Code and determine that the claims of all contractors providing goods and

services for the benefit of the Project should be allowed a priority in distribution of any

proceeds resulting from the sale of the Project, over the Construction Lenders or any other

successor-in-interest seeking to enforce the Construction Lenders’ rights under the

Construction Loan Agreement.

EIGHTH CAUSE OF ACTION

(Usury)


127.

129. California law limits the amount of interest that may be charged on the loan.


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130. Without any lawful defense thereto, the Construction Lenders charged interest

on the loan in excess of the statutory maximum interest rate, which is the greater of (i) 10%

per annum, or (ii) 5 percentage points over the San Francisco Federal Reserve Bank's

discount rate operative on the 25th day of the month immediately preceding the origination of

the loans.

131. As a proximate result of the usurious interest rates and charges by the

Construction Lenders, Plaintiff has been damaged as herein alleged and have suffered and

will continue to suffer general damages and special damages including the potential loss of

the Project or the inability to develop it, which losses are estimated to be not less than the

amount of $1,000,000 which shall be determined according to proof at trial. Moreover, the

Construction Lenders are obligated to return all interest paid herein and may not collect any

additional interest as a result of the usurious charges made in violation of applicable law, and

Plaintiff may offset its claim for such disgorgement against amounts otherwise owed by

Plaintiff to the Construction Lenders or their assigns.

132. The collection of usurious interest by the Construction Lenders was knowing

and intentional and undertaken in complete disregard of the rights of Plaintiff and applicable

law. As a result, Plaintiff is entitled to damages equal to three times the interest already

collected by the Construction Lenders, and is entitled to offset its claim for such amount

against any amount otherwise owed by Plaintiff to the Construction Lenders or their assigns

under the Construction Loan Agreement.

WHEREFORE, Plaintiff Encinitas Office L.P. prays as follows:

1. On the First Cause of Action, for a judgment against Diamond Bay, Encinitas

338, and the Construction Lenders, directly and by way of setoff and recoupment, for

damages caused the Construction Lenders’ breach of the Construction Loan Agreement, in

an amount to be proven at trial.

2. On the Second Cause of Action, for a judgment against Oasis Loan Advisors,

LLC, for breach of the Oasis Agreement and breach of the covenant of good faith and fair

dealing embodied therein, for damages in an amount to be proven at trial.


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3. On the Third Cause of Action, for a judgment against Diamond Bay, Douglas

Antonio Esteves, and Jordan Wirsz for damages for breach of their fiduciary duties to

Plaintiffs, in an amount to be proven at trial.

4. On the Fourth Cause of Action, for a judgment against Douglas Antonio

Esteves for damages in an amount to be proven at trial.

5. On the Fifth Cause of Action, for a judgment against Diamond Bay, Douglas

Antonion Esteves, and Jordan Wirsz and, by way of setoff and recoupment, against all

defendants claiming rights as assignee of, or successor-in-interest to, Diamond Bay under the

Construction Loan Agreement, for damages in an amount to be proven at trial.

6. On the Sixth Cause of Action, for a judgment against all Defendants, for a

judicial declaration of the respective rights and duties, if any, of all parties with respect to the

Construction Loan Agreement including, without limitation, that (1) Plaintiff is not in default

under the Construction Loan Agreement and related documents, (2) the Construction Lenders

are in default under the Construction Loan Agreement and related documents, (3) the breach

of the Construction Loan Agreement and related documents excused Plaintiff’s performance

under the Construction Loan Agreement and related documents, (4) Plaintiff is entitled to

setoff and recoupment of its breach of contract and tort claims against any amounts owing

under the Construction Loan Agreement and related documents, if any, notwithstanding the

assignment of the Construction Lenders’ interests under the under the Construction Loan

Agreement and related documents, (5) the security interest(s) are unenforceable, and (6) no

foreclosure can proceed.

7. On the Seventh Cause of Action, for a judgment against all Defendants

equitably subordinating the lien of the Diamond Bay Deed of Trust to the claims of unpaid

contractors who provided goods or services for the benefit of the Project.

8. On the Eighth Cause of Action, for a judgment against the Construction

Lenders and any other person or entity claiming rights as assignee of, or successor-in-interest

to, Diamond Bay, for (1) a declaration that the loans do not bear interest, (2) an offset equal


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to all interest and other fees paid since the inception of the loan, and (3) three times the

interest and fees that Plaintiffs have paid.

9. On all Causes of Action:

(a) For compensatory damages, general and special damages in excess of

the unlimited jurisdictional amount of this court and estimated to be not less than the amount

of $5,000,000 at this time, as the same shall be determined according to proof at trial;

(b) For punitive and/or exemplary damages according to law;

(c) For prejudgment interest on compensatory damages at the maximum

legal rate of interest according to proof and law;

(d) For attorneys’ fees according to proof and law;

(e) For costs incurred; and

(f) For such other relief as the Court may deem just and proper.

October 5, 2010 /s/ Sara Pfrommer ________________________

Sara Pfrommer Attorneys for ENCINITAS OFFICE, LP


Adversary Complaint

Documents

Transcript of Adversary Complaint