CASE 0:14-cv-04531-SRN-SER Document 150 Filed 02/14/18 Page 1 of 10

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

Court File No. 14-CV-4531 (SRN-SER) HomeStar Property Solutions, LLC, Plaintiff, PLAINTIFF’S REPLY MEMORANDUM OF LAW IN SUPPORT OF MOTION TO VACATE DISMISSAL, INVALIDATE SETTLEMENT AND LIFT STAY OR, IN THE ALTERNATIVE, FOR RELIEF UNDER RULE 60

vs.

Safeguard Properties, LLC and Bank of America, N.A., Defendants.

I.

INTRODUCTION

The responsive papers filed by Defendant Safeguard Properties, LLC (“Safeguard”) acknowledge that Minnesota receivership law applies to the authority that the Ohio state court receiver has with respect to Plaintiff HomeStar Property Solutions, LLC’s (“HomeStar’s”) Minnesota assets, including this federal court litigation. See Safeguard’s Memorandum of Law in Opposition to Plaintiff’s Motion (“Safeguard Memo.”), pp. 8-10. Minnesota law requires that an out-of-state receiver seeking to conduct activities in Minnesota must request appointment as an ancillary receiver before taking any action, including taking over litigation pending in a Minnesota federal court. It is undisputed that Receiver Chandra has taken no action to be appointed as an ancillary receiver.

Therefore, his purported $70,000 settlement of this $1.7 million

lawsuit, whether approved by an Ohio state court or not, can have no legal effect in 1

CASE 0:14-cv-04531-SRN-SER Document 150 Filed 02/14/18 Page 2 of 10

Minnesota or with this federal court. Because Receiver Chandra has no legal authority to prosecute or settle this Minnesota federal court action on behalf of HomeStar, this Court must not accept Receiver Chandra’s purported settlement or requested dismissal with prejudice of this action. Moreover, the requests by Receiver Chandra were improperly filed without his ever having been admitted to practice before this Court. II. A.

ARGUMENT

The Ohio State District Court Appointed Receiver Has No Legal Authority to Settle or Dismiss This $1.7 Million Minnesota Federal District Court Lawsuit. HomeStar and Safeguard agree that “[t]he capacity of receivers appointed by the

states is governed by the law of the state in which the court sits.” See Safeguard Memo., p. 10, citing Cohen v. LaVin, 210 F.2d 550 (2d Cir. 1954). HomeStar and the Defendants also agree that “[i]n Minnesota, the powers of foreign receivers are governed by Minn. Stat. § 576.41(2).” See Safeguard Memo., p. 10. Minnesota Statute § 576.41 provides that: A foreign receiver may obtain appointment by a court of this state as a receiver in an ancillary receivership with respect to any property located in or subject to the jurisdiction of the court if (1) the foreign receiver would be eligible to serve as receiver under section 576.26, and (2) the appointment is in furtherance of the foreign receiver's possession, control, or disposition of property subject to the foreign receivership and in accordance with orders of the foreign jurisdiction. Minn. Stat. § 576.41, subd. 2 (quoted in Safeguard’s Memo., at p. 10). HomeStar and Safeguard also agree that Receiver Chandra has never sought or obtained appointment as an ancillary receiver under Section 576.41 at any time, yet he has taken action to settle this

2

CASE 0:14-cv-04531-SRN-SER Document 150 Filed 02/14/18 Page 3 of 10

$1.7 million Minnesota case out from under HomeStar for $70,000, in order to satisfy a $33,293.74 judgment. The central question at issue in this motion is whether a receiver appointed by a foreign state court who has not been appointed as an ancillary receiver under Minnesota law has the legal authority to settle and dismiss with prejudice a Minnesota federal district court case. The answer is no. 1.

The Receiver Never Requested nor Obtained Appointment as an Ancillary Receiver, As Required Under Minnesota Law.

Minnesota Statute § 576.41was enacted in 2012 to govern foreign receivers seeking to take over property in Minnesota. Safeguard cites a series of cases decided decades earlier, standing for the proposition that “[Minnesota] permits a foreign receiver to sue in its courts as a matter of comity.” See Safeguard Memo., p. 10, citing Woodward v. Sonnesyn, 203 N.W. 221, 222 (Minn. 1925) (internal citation omitted). Minnesota Statute § 576.41 was enacted to codify this principle, and to provide the process which a foreign receiver must follow in order to have legal authority to take action in Minnesota courts – application for appointment as an ancillary receiver. It is undisputed that Receiver Chandra has never sought appointment as an ancillary receiver under Minnesota Statute § 576.41. Despite this, Safeguard argues that Receiver Chandra complied with Section 576.41, which, according to Safeguard, makes appointment optional. See Safeguard Memo., pp. 11-12. Safeguard’s argument is nonsensical. Contrary to Safeguard’s arguments, the legislature enacted Section 576.41 specifically in order that Minnesota courts could act as

3

CASE 0:14-cv-04531-SRN-SER Document 150 Filed 02/14/18 Page 4 of 10

gatekeepers, and ensure that foreign receivers acting in the state were qualified to do so. If appointment as an ancillary receiver were not necessary, even after the enactment of Minnesota Statute § 576.41 in 2012, the statute would be rendered meaningless, because a foreign receiver would have no reason to ever apply for appointment as an ancillary receiver. This interpretation of the statute would violate the well-established principle that statutory language must be read in a manner which gives effect to the law as written by the legislature. See Minn. Stat. § 645.16; see also Friedlander v. Edwards Lifesciences, LLC, 900 N.W.2d 162, 165 (Minn. 2017) ("We must adhere to the plain language of [language implemented by the legislature] and give effect to all parts of the [law].”) This is particularly true because the statute was enacted decades after the cases cited by Safeguard, and thus reflects the more recent and specific expression of the intent of the legislature. See AFSCME Council No. 14, Local Union No. 517 v. Washington Cty. Bd. of Comm’rs, 527 N.W.2d 127, 132–33 (Minn. Ct. App. 1995) (applying canons of construction reflecting that more recent and specific statutory language must prevail where it in any way conflicts with older or less specific language). Safeguard further argues that Minnesota Statute § 576.41 should be treated like what it calls the “analogous federal statute,” 28 U.S.C. § 754. These statutes are in no way analogous. The federal statute provides that a federal receiver appointed in another federal district “shall have the capacity to sue in any district without ancillary appointment.” See 28 U.S.C. § 754. The Minnesota law contains completely contrary language, stating the requirements necessary for appointment as an ancillary receiver. See Minn. Stat. § 576.41. The fact that a federal receiver is not required to seek appointment as an ancillary receiver 4

CASE 0:14-cv-04531-SRN-SER Document 150 Filed 02/14/18 Page 5 of 10

to prosecute an action in federal court has no bearing on whether a state court receiver is obligated to do so under Minnesota state law. Lastly, Safeguard argues that Receiver Chandra “followed the protocol set forth by this Court in its March 27, 2017 Order by filing a stipulation for dismissal upon approval of the settlement.” See Safeguard Memo., p. 12. Safeguard misconstrues the March 27, 2017 Order (Doc. 129), which was in fact merely an order issued by the Magistrate Judge staying this case. The argument that the Magistrate Judge’s Stay Order somehow gave license to Receiver Chandra to proceed without being appointed as an ancillary receiver gives the Order weight and legal authority that it does not and could not have had. 2.

HomeStar Did Not Waive its Rights by Not Contesting the Ohio Proceeding.

Most of Safeguard’s responsive papers deal with HomeStar’s alleged failure to contest or appear in the Ohio action. This argument is completely misplaced. Again, it is undisputed that Minnesota receivership law applies to the Ohio state court receiver’s attempted settlement and other actions in this Minnesota federal district court. The key legal point that is now before this Court is that the Ohio action, including the appointment of the receiver in Ohio, and the Ohio state court’s improvident approval of the Receiver’s conduct in purportedly settling this Minnesota federal district court lawsuit, has no legal effect in Minnesota or on this Federal Court, unless and until the Receiver obtains appointment by a court of this state. Again, it is undisputed that no such appointment has been sought. If and when Receiver Chandra seeks such an appointment, HomeStar will have the opportunity to fully contest the receiver being appointed as an ancillary receiver

5

CASE 0:14-cv-04531-SRN-SER Document 150 Filed 02/14/18 Page 6 of 10

here in Minnesota. Minn. Stat. § 576.41. HomeStar has never had the opportunity to contest a Minnesota appointment. All of Safeguard’s lengthy discussion of what occurred in Ohio is irrelevant. 3.

Safeguard’s Collateral Estoppel Argument is Specious at Best.

The doctrine of collateral estoppel does not, as Safeguard has argued, bar HomeStar from challenging the receiver’s settlement of this case. In order for collateral estoppel to apply, all of the following elements must be met: (1)

The party against whom estoppel is sought was a party or in privity with a party to the prior action;

(2)

There was a final judgment on the merits in the previous case after a full and fair opportunity to litigate the issue;

(3)

The issue must have been admitted or actually tried and decided and must be necessary to the final judgment; and

(4)

The issue must have been identical to the issue involved in the prior suit.

Monahan v. Eagle Picher Indus., Inc., 486 N.E.2d 1165, 1168 (Ohio Ct. App. 1984); see also Safeguard Memo., pp. 15-16 (noting that Ohio law governs this matter for purposes of collateral estoppel). Under Ohio law, collateral estoppel does not attach unless an issue was actually litigated in the prior proceeding. It is not sufficient that it could have been adjudicated. Goodson v. McDonough Power Equip., Inc., 443 N.E.2d 978, 985 (Ohio 1983) (“An absolute due process prerequisite to the application of collateral estoppel is that the party asserting the preclusion must prove that the identical issue was actually litigated, directly determined, and essential to the judgment in the prior action”). 6

CASE 0:14-cv-04531-SRN-SER Document 150 Filed 02/14/18 Page 7 of 10

Here, collateral estoppel fails, because the issue at the heart of this motion is not the same one litigated in the Ohio action. The essential basis for voiding the actions of Receiver Chandra is that he was never legally authorized under Minnesota law to take over HomeStar’s Minnesota assets, and the prosecution of this action, because he never sought appointment as an ancillary receiver. This issue was never raised in the Ohio state court action, much less fully adjudicated. Monahan, 486 N.E.2d at 1168. The Ohio state court would not have had jurisdiction over the issue of whether Receiver Chandra could act as an ancillary receiver over HomeStar’s Minnesota assets, and in any case the court was never asked to reach that question. Because the issue of Receiver Chandra’s authority under Minnesota law (or lack thereof) was not fully adjudicated by the Ohio state court, collateral estoppel creates no bar to presenting that issue to this Federal Court. Collateral estoppel also fails because the issue of Receiver Chandra’s authority under Minnesota law is not “identical to the issue involved in the prior suit.” Monahan, 486 N.E.2d at 1168. B.

Receiver Chandra Is Not Licensed to Practice in This Court. As noted in HomeStar’s initial papers, Receiver Chandra is not licensed to practice

law in the State of Minnesota, nor is he admitted to this Court. See Edwards Aff., ¶ 4. Receiver Chandra has never, whether before or after the filing of the present Motion, moved to be permitted to appear before this Court pro hac vice or in any other manner, despite having represented, in a pleading filed with the Court on December 15, 2017, that he would move for admission pro hac vice before seeking dismissal of this action. See

7

CASE 0:14-cv-04531-SRN-SER Document 150 Filed 02/14/18 Page 8 of 10

Edwards Aff., ¶ 4; Doc. 132-2, p. 2, ¶ 1. For this reason alone, the Receiver’s stipulation for dismissal was improperly filed, and the “stipulated” dismissal should be vacated. C.

Receiver Chandra Acted in a Blatantly Negligent Manner, Notwithstanding Safeguard’s Self-Serving Efforts to Defend His Conduct. Safeguard has taken up the argument that Receiver Chandra was not negligent in

his agreement to settle this case for a tiny fraction of its true value. Safeguard Memo., pp. 20-21. To the contrary, the Receiver settled this case after doing virtually nothing. It would work a grave injustice if HomeStar and its creditors are ultimately bound by the grossly unfair settlement brokered by the Receiver. “An Ohio receiver has a personal duty to faithfully discharge his or her duties. . . . The receiver acts in a fiduciary capacity and must use ordinary care in administering the assets of the corporation.” INF Ent., Inc. v. Donnellon, 729 N.E.2d 1221, 1222 (Ohio Ct. App. 1999). Here, Receiver Chandra spent a total of 3.5 hours of work, only some of which involved this action, before resolving to settle this $1.7 million dispute for $70,000. See Affidavit of Anthony G. Edwards (“Edwards Aff.”), ¶ 2; Ex. J. Of these 3.5 hours, one hour was spent reviewing the Receiver’s appointment order, and two hours were spent talking with counsel for Safeguard and Herbruck. Id. The Receiver never talked at all to HomeStar management, nor to its counsel, about this case before settling it. See Edwards Aff., ¶ 2; Exs. H and J. By the time Receiver Chandra was appointed, this case had been in litigation for more than two years. Hundreds of thousands of pages of discovery had been exchanged.

8

CASE 0:14-cv-04531-SRN-SER Document 150 Filed 02/14/18 Page 9 of 10

The case was trial-ready, and counsel for HomeStar was working on a straight contingency basis, meaning that no further attorneys’ fees would be required. See Edwards Aff., ¶ 2; Ex. H. Despite this, after only a few hours of work, Receiver Chandra decided to throw away a $1.7 million lawsuit for four cents on the dollar. Receiver Chandra did not act as a fiduciary – he acted against HomeStar’s interests. HomeStar deserves a fair chance to present its claims to this Court and believes that it will prevail at trial once it is given a chance to do so. D.

HomeStar Is Entitled to Relief Under Rule 60. Safeguard argues that HomeStar is entitled to relief, if at all, under Rule 60 of the

Federal Rules of Civil Procedure. See Safeguard Memo., p. 6. HomeStar does not agree that this Motion must be brought under Rule 60. The judgment which was entered in this action (very shortly before HomeStar brought the present Motion, and after it had notified the Court that it intended to do so – see Doc. 137) was entered as a result of the unauthorized acts of a receiver who had not sought appointment as an ancillary receiver under Minnesota law, and who signed a stipulation for dismissal with prejudice on behalf of HomeStar despite not being privileged to practice before this Court. For these reasons, at the time this Motion was filed, no actual judgment had been or could have been entered. To the extent the Court concludes that judgment had in fact been entered, HomeStar is entitled to relief under Rule 60 on the basis that the judgment was void. See Fed. R. Civ. P. 60(b)(4). As discussed supra, Receiver Chandra was without legal authority to settle this case and move for its dismissal, and accordingly the Court lacked jurisdiction to grant 9

CASE 0:14-cv-04531-SRN-SER Document 150 Filed 02/14/18 Page 10 of 10

to dismissal, rendering it void. See Stoll v. Gottlieb, 305 U.S. 165, 171 (1938) (judgment is void when a court extends its jurisdiction beyond the scope of its authority). Alternatively, the Court can and should grant relief under Rule 60(b)(3) (fraud, misrepresentation or misconduct by an opposing party) or Rule 60(b)(6) (any other reason that justifies relief). The settlement entered into by the Receiver is grossly unfair, and was entered into by a receiver without the requisite authority. This case was dismissed through a stipulation for dismissal signed by a Receiver who failed to act in HomeStar’s best interests, and who signed the stipulation without being licensed to appear before this Court. III.

CONCLUSION

For the foregoing reasons, Plaintiff HomeStar Property Solutions, LLC respectfully requests that the Court grant all relief requested through this Motion. Dated: Feb. 14, 2018

PARKER DANIELS KIBORT, LLC

By:

/s Andrew D. Parker Andrew D. Parker Reg. No. 195042 [email protected] Christopher M. Daniels Reg. No. 271809 [email protected] Anthony G. Edwards Reg. No. 342555 [email protected] 888 Colwell Building 123 North Third Street Minneapolis, Minnesota 55401 Telephone: (612) 355-4100

ATTORNEYS FOR PLAINTIFF

10