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One Longhorn Land I, L.P. v. Presley

United States District Court, C.D. California

April 13, 2015


Page 756

Bankruptcy No. 1:14-bk-13029-MT; Adversary No. 1:15-ap-01016-MT.

Attorneys for Plaintiffs: Paul Laurin.

Attorneys for Defendants: Gary Wallace.

Page 757


Present: The Honorable CHRISTINA A. SNYDER.



On June 18, 2014, defendant Brian Presley (" Presley" ) filed a voluntary petition for Chapter 7 bankruptcy relief in the United States Bankruptcy Court for the

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Central District of California. On February 23, 2015, plaintiff One Longhorn Land I, L.P. (" Longhorn" ) filed an adversary complaint in the bankruptcy court. See Dkt. No. 1 Ex. 1 (" Adv. Compl." ). On March 2, 2015, Longhorn filed a motion to withdraw the bankruptcy reference with regard to its adversary complaint. Dkt. No. 1. Presley opposed that motion on March 16, 2015, Dkt. No. 10, and Longhorn replied on March 23, 2015, Dkt. No. 14. On April 13, 2015, the Court held a hearing on the motion. Having considered the parties' arguments, the Court denies the motion for the reasons that follow.


The adversary complaint alleges that Presley is a fifty percent owner and managing member of Freedom Films, LLC (" Freedom Films" ), a company that is itself a debtor in a separate pending bankruptcy case. Adv. Compl. ¶ ¶ 4, 6. Freedom Films and related entities were in the business of making movies. Id. ¶ 10. At some point, Presley solicited and obtained financing from a private equity firm called Palo Verde Fund, L.P. (" Palo Verde" ). Id. ¶ ¶ 12-13. In or around July 2010, Presley helped establish an entity called FF Arabian, LLC (" FF Arabian" ) to produce a movie project called Arabian Nights, in which Palo Verde invested. Id. ¶ 14.

Longhorn contends that Presley's movie projects have been commercial failures, and that in order to continue attracting investors, Presley diverted money intended for Arabian Nights to pay returns to Palo Verde investors on a different film, creating the false impression that the other film was a commercial success. Id. ¶ 15. Longhorn alleges that Anthony Stacy (" Stacy" ) and Paul Ross (" Ross" ) of Palo Verde knew of and facilitated this Ponzi scheme. Id. Longhorn also submits that millions of dollars intended to finance Arabian Nights were instead channeled through Freedom Films entities for various other non-FF Arabian expenses, leaving FF Arabian severely undercapitalized. Id. ¶ 16-17. Longhorn contends that Presley continued to spend lavishly on various film projects despite this undercapitalization. Id. ¶ ¶ 34-35, 38-39.

Longhorn alleges that Palo Verde eventually demanded the return of some of its previously invested capital, and that Presley agreed to return a portion disguised as a " loan." Id. ¶ ¶ 18-19. Longhorn contends that only part of this return was actually effectuated, in a further effort to disguise FF Arabian's poor financial condition. Id. ¶ 24. Subsequently, Presley and Palo Verde sought more investors in FF Arabian, including Longhorn, which invested $500,000 in FF Arabian in mid-2011. Id. ¶ ¶ 27-28, 31. Longhorn alleges that Presley, Stacy, and Ross purposefully withheld relevant information from Longhorn as it was deciding whether to make its investment, and made affirmatively misleading representations. Id. ¶ ¶ 29-30, 36-37.

Longhorn further alleges that Presley caused Freedom Films to agree to repurchase Longhorn's membership interest in FF Arabian for $625,000, then breached that agreement by failing to pay for any portion of Longhorn's interest. Id. ¶ ¶ 41-42. On September 12, 2013, Longhorn and other investors in FF Arabian, including Palo Verde, filed in Texas state court an action asserting breach of contract claims related to Freedom Films' failure to repurchase membership interests in FF Arabian as agreed. That lawsuit was stayed when Freedom Films filed for bankruptcy, and Longhorn alleges that it subsequently discovered Palo Verde's role in the misconduct described above. Palo Verde has failed and is currently being liquidated. Id. ¶ 43.

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The adversary complaint alleges three claims for relief. First, Longhorn alleges that the debt owed by Presley to Longhorn is nondischargeable under 11 U.S.C. § 523(a)(2)(A) because it was induced by means of false pretenses, false representations, or actual fraud. Id. ¶ ¶ 46-51. Second, Longhorn claims that the debt is nondischargeable under 11 U.S.C. § 523(a)(4) because it was incurred through fraud or defalcation while Presley was acting in a fiduciary capacity. Id. ¶ ¶ 52-57. Third, Longhorn alleges that the debt is nondischargeable under 11 U.S.C. § 523(a)(19) because Presley's conduct violated federal and state securities laws, specifically: (1) section 3(a)(47) of the Securities Exchange Act of 1934; (2) Rule 10b-5, promulgated by the SEC under the Securities Exchange Act of 1934; (3) section 12(a)(2) of the Securities Act of 1933, (4) sections 25504 and 25504.1 of the California Corporations Code, and (5) section 33.A of the Texas Securities Act of September 1, 2011. Id. ¶ ¶ 58-62.

The bankruptcy court docket reflects that the adversary complaint was filed on February 23, 2015, and that Presley filed a motion to dismiss on March 26, 2015. On March 23, 2015, Longhorn filed a separate action in the United States District Court for the Eastern District of Texas against Ross, Stacy, and David Presley (defendant Presley's father). See Dkt. No. 15 Ex. 1. This lawsuit, which the Court subsequently refers to as the " Texas Federal Action," involves the same underlying facts as does the adversary complaint. See generally id. In the Texas Federal ...

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