Investors Sue Debtor’s Alleged Insiders for Fraudulent Conduct
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December 12, 2022, US Bankruptcy Court for Nevada – Pioneer Funding Group III, LLC, Pioneer Funding Group IV, LLC, and Further South, LLC (“Plaintiffs”) file an adversary proceeding against Royal Essex LLC, Royal Union Properties LLC, George F. Holman, Martha Jane Holman, Essex Real Estate Group, LLC, et al. (“Defendants”) in the bankruptcy case of Essex Real Estate Partners, LLC (“Debtor”). The Plaintiffs allege that the Defendants devised a “scheme” to “defraud” investors of Debtor by allegedly using Defendants’ “insider” positions to gain alleged unfair advantage over investors.
George F. Holman, Sr. formed Debtor Essex in 2007, raising approximately $3.6 million from equity investors and securing a $66 million loan, which he personally guaranteed. After 2008 market crash, Essex defaulted on its loan and Mr. Holman filed for chapter 7 bankruptcy leaving no hope for substantial recovery to equity investors in the following years. In 2019, Mr. Holman and his chapter 7 trustee, Ms. Jeri Knudson, learned that the Ancient Mortgage Staute of Nevada would allow them to strip Essex’s sole asset (real property worth approx. $45 million) of all its liens, leading to a substantial recovery to Essex’s equity investors.
The complaint alleges that the Defendants purposefully concealed this information from the equity investors and allegedly planned to secure all the money for themselves. Pursuant to the alleged scheme, Mr. Holman allegedly amended Essex’s operating agreement to eliminate Class A members’ right to notice and right of first refusal to acquire the membership interests that Mr. Holman wished to sell to Defendant Royal Union, allegedly run by a longtime friend. Subsequently, Royal Union Properties, LLC purchased Holman family’s membership interest in Essex. The Plaintiffs further allege that Royal Union again amended Essex’s operative agreement which allegedly capped Preferred Members’s recovery to only $3.6 million, leaving the remaining proceeds available for common members such as Royal Union. The complaint contends that Royal Union made another operative agreement amendment by allegedly creating and gifting series B preferred units to Royal Union and thereby absorbing all the money left from $27 million recovery after paying $3.6 million to now series A Preferred Members.
The Plaintiffs claim that the alleged scheme would result into Essex’s long time preferred investors receiving only 3% of what Royal Union would receive after two days as a member, while common members including the Plaintiffs would receive nothing at all. The complaint claims that Mr. Holman and Ms. Knudson breached their fiduciary duties by allowing the alleged amendments and by allegedly participating in the “scheme”. It further alleges that Defendants’ allegedly fraudulent conduct caused substantial damage to the Plaintiffs.
The Plaintiffs request the Court for an order equitably subordinating the claims or interests of the Defendants in Debtor Essex.
Pioneer Funding Group III, LLC, et al. v. Royal Essex, LLC, et al. (In re Essex Real Estate Partners, LLC), AP No. 21-05041-nmc, US Bankruptcy Court for Nevada.