1 brian barry #135631 jill levine betts...

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PLAINTIFFS’ REPLY TO U.S. TRUST’S OPPOSITION TO CLASS CERTIFICATION FINALreplyUST.CLASS.CERT.wpd

BRIAN BARRY #135631JILL LEVINE BETTS #208065RICK XIAO #221823LAW OFFICES OF BRIAN BARRY1801 Avenue of the Stars, Suite 307Los Angeles, California 90067Telephone: (310) 788-0831Facsimile: (310) 788-0841

Attorneys for Class Action Plaintiffs[Additional Counsel on Signature Page]

UNITED STATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA - WESTERN DIVISION

In re HERITAGE BOND LITIGATION____________________________________

David Sinow, Howard Preston, Langdon Parrill,Ray Stits, Barrett Anderson, Laurence Pilgeram,Scott McKenry, Ralph Allman, and GilbertKivenson, On behalf of themselves and allothers similarly situated,

Plaintiffs,v.

U.S. Trust Company of Texas, N.A., U.S. TrustCorporation, Tarrant County Health FacilitiesDevelopment Corporation, Jerold Goldstein,Onofrio V. Bertolini, Stephen P. Goodman,Evan Greenspan, Estate of Andrew Kornreich,Deceased, Cary Medill, Estate of Emery Rubin,Larry A. Rubin, Herbert Saltzman, Virgil Lim,Clarke Underwood, Donald B. Chalker,Marshall Wexler, Robert Kasirer, Debra Kasirer,Bistra & Munkacs Holdings, Inc., JDDJHoldings, L.P., Health Care Holdings, LLC,CareContinuum, LLC, Louis Pontarelli, WilliamFilippone, Leo Dierckman, Alan Pollak, GeriOstlund, Richard Kuhl, James E. Iverson, VictorP. Dhooge, John M. Clarey, James F. Dlugosch,Edward J. Hentges, Kenneth R. Larsen, JeromeE. Tabolich, Steven W. Erickson, Paul R.Ekholm, Kenneth E. Dawkins, Joel T. Boehm,Sabo & Green, Atkinson, Andelson, Loya, Ruud& Romo, Valuation Counselors Group, Inc.,Capital Consulting Group, Inc., HealthcareFinancial Solutions Group, Inc., Zelenofske,Axelrod & Co., Ltd., Berman and Bertolini, Inc.aka Berman & Associates, Michael Sobelman,Sobelman Cohen & Sullivan LLP, Foley &Lardner as Doe No. 2, and Wildman, HarroldAllen & Dixon as Doe No. 3 and Does 4-10,

Defendants.

02-ML-1475-DT(RCx)

Consolidated With Case Nos:CV 01-5752 DT (RCx)CV 02-382 DT (RCx)CV 02-993 DT (RCx)CV 02-2745 DT (RCx)CV 02-6484 DT (RCx)CV 02-6841DT (RCx)CV 02-9221 DT (RCx)

Companion CaseCV 02-6512 DT

This Document Relates To:

CV 02-382 DT (RCx)

PLAINTIFFS’ REPLY TO OPPOSITION OF U.S.TRUST TO MOTION FORCLASS CERTIFICATION

Date/Time: July 12, 2004Courtroom: 880Hon. Dickran Tevrizian

Discovery Cutoff: 8/27/04Pre-Trial Conf: 11/1/04

________________________________________

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1 See Cross Claims of U.S. Trust Company, N.A. and U.S. Trust Corporation, filedDecember 31, 2003, at ¶64.

2 To rebut the standing arguments raised with respect to proposed representativesParrill, Allman, McKenry, Anderson and Pilgeram, Plaintiffs incorporate herein their Reply toCBIZ’s opposition at Section II.

PLAINTIFFS’ REPLY TO U.S. TRUST’S OPPOSITION TO CLASS CERTIFICATION FINALreplyUST.CLASS.CERT.wpd 1

I. PRELIMINARY STATEMENT

To defeat class certification, the memorandum in opposition filed by U.S.

Trust (“UST Opp.”) reargues a matter decided long ago: This is a multi-district

federal securities fraud action with a variety of related state law claims over which

the Court exercised supplemental jurisdiction. Consequently, U.S. Trust’s

assertion that most of the defendants and claims should be pursued in various state

courts (UST Opp. at 2, 18-19), is not only untimely, but ignores the fact that U.S.

Trust’s own cross claims allege that a “substantial part of the events occurred in

this district.”1 The remaining arguments are standard “fox guarding the hen-

house” fare, e.g., inadequate class representatives, intra-class conflicts,

predominance of individual issues -- all of which are easily defeated. Plaintiffs’

motion for class certification should be granted.

II. ALL CLASS REPRESENTATIVES HAVE STANDING 2

Citing Southern Cal. Title Clearing Co. v. Laws, 2 Cal.App.3d 586, 590

(1969), U.S. Trust challenges Howard Preston’s standing because his bonds are

held in joint tenancy. However, Laws was an individual action concerning real

property. Not surprisingly, the court held that co-owners of real property are

“indispensable” parties under Cal. Code Civ. Proc. §389 and the absence of an

indispensable party would deprive the court of subject matter jurisdiction. Id. at

589. Here, both Cal. Code Civ. Proc. §389(d) and Fed.R.Civ.P. 19(d) expressly

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3 Whereas Mrs. Preston was previously a named Plaintiff, U.S. Trust’s concern thatMrs. Preston’s rights may be affected in her ‘absence’ is unfounded. See Declaration of Brian Barryfiled concurrently herewith (hereinafter “Dec”) at Ex. 1.


provide for a statutory “carve out” exception to compulsory joinder of

“indispensable” parties to a class action. Denying Preston standing in this case

defeats the fundamental purpose of a class action - avoiding multiplicity of actions

where joinder of all claimants is “impracticable.” Fed. R. Civ. P., Rule 23(a)(1);

Harris v. Palm Springs Alpine Estates, Inc., 329 F.2d 909, 913-914 (9th Cir.

1964). Accordingly, either or both Mr. and Mrs. Preston have individual standing

in this class action.3

Regarding David Sinow, U.S. Trust concedes standing in a back-handed

fashion. U.S. T. Opp. at 5. (“If the claims alleged in the FAC are among the

“‘rights and entitlements’ ... conveyed to Sinow ... he has standing to pursue those

claims.”) U.S. Trust’s further argument – “if the Court does not agree with U.S.

Trust’s [view that a bondholder’s right to sue U.S. Trust is always divested when

the bonds are sold], then Sinow undoubtedly lacks standing . . .” (id.) – flatly

ignores both Plaintiffs’ class definition and the Court’s agreement that people

who purchase via an assignment have acquired the right to sue. See fn 20 herein.

III. ONLY CALIFORNIA LAW APPLIES TO STATE LAW CLAIMS

A. U.S. Trust’s Choice-of-Law Argument is Untimely

Presumptively, in an action brought in California, like the instant case,

California law applies unless a party "timely invokes the law of a foreign state."

Hurtado v. Superior Court, 11 Cal.3d 574, 581 (1974), accord, Washington

Mutual Bank v. Superior Court, 24 Cal.4th 906, 919 (2001) (“Washington

Mutual”). (Emphasis added). Where a party untimely invokes the laws of foreign

states, the belated choice-of-law arguments are summarily denied as a matter of

law. Skinner v. De Laurentiis, 2004 WL 316962 (Cal.App. 2 Dist. 2004). In

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4 This Court has issued many rulings in this action that made findings under Californialaw. In addition, parties and claims have been dismissed under application of California law. SeeDeclaration of Jill Betts filed in connection with Plaintiffs’ Reply to Opposition filed by the CBIZDefendants at ¶¶ 9-10.

5 To give obvious examples, in its Answer to Class Plaintiffs’ Fourth AmendedComplaint (the “FAC”) at ¶ 572:10-11, U.S. Trust expressly invoked “protection from...Article I,Section 17 of the California Constitution...and substantive due process provided in the CaliforniaConstitution.” Now, even in the very opposition in which it contends that no “single state’s law”would apply in this class action (UST Opp. 28:13-16), U.S. Trust inexplicably cites not one but atleast five California state courts’ decisions. Furthermore, in the Betker action, U.S. Trust freely citedand argued California cases as if it would never second-guess this Court’s application of Californialaw. (U.S. Trust’s P&A in its Motion to Dismiss Third Amended Complaint (Betker Action).Arguably, U.S. Trust’s invocation of California case law might have led to this Court’s application


Skinner, the California Court of Appeal affirmed the trial court’s denial of the

plaintiff’s belated choice-of-law request which caused “prejudice” to the

defendants’ “discovery” and “trial strategy,” and which “impede[d] the orderly

administration of justice and frustrate[d] the court's duty to move the case along.”

Skinner, 2004 WL 316962, **4-6; see also, Julian-Ocampo v. Air Ambulance

Network, Inc., 2001 WL 34039480, at **2-3 (D.Or. 2001) (applying the doctrine

of judicial estoppel to bar the defendant’s untimely choice-of-law arguments).

Here, since inception of this complex class action in November 2001, all

parties and this Court have proceeded under the reasonable assumption that

California law applies to Plaintiffs’ pendant state law claims.4 Nearly three years

into the case, with the twice-extended discovery cutoff less than two months away,

U.S. Trust now abruptly asserts that class certification is precluded by “numerous

material differences between the laws of the various states.” (UST Opp., p. 19:17-

18). In stark contrast to this sudden and untimely invocation of its choice-of-law

arguments, U.S. Trust, from the very outset of this litigation, has repeatedly

invoked, argued, and relied on California law in the related actions pending before

this Court.5 Such an untimely invocation of the laws of foreign states is highly

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of California law in its subsequent order. (The Betker Order, 14:7). Notably, on August 20, 2002,per U.S. Trust’s motion, the Multi-District Litigation Panel transferred the Heartland ReceiverAction from Chicago to California.

6 Arguably, invocation of the laws of others states at such a late date in the case is alsobarred by the doctrines of: (1) equitable estoppel, United States v. Hall, 974 F.2d 1201, 1205 (9thCir. 1992); Watkins v. U.S. Army, 875 F.2d 699, 709 (9th Cir. 1989); Muslin v. FrelinghuysenLivestock Managers, Inc., 777 F.2d 1230, 1231 n.1 (7th Cir. 1985)(court rejected application ofIllinois law because parties initially relied on New York law); and (2) waiver; Barker v. Wingo, 407U.S. 514, 525 (1972); United States v. Sandoval, 990 F.2d 481, 483 (9th Cir. 1993).


prejudicial to Plaintiffs’ case and to this Court’s orderly administration of justice,

and should be denied as a matter of law.6

As this Court understands, the present case involves overwhelming legal

complexities and multiplicities of parties and witnesses. The discovery cut-off is

less than two months away, over 33 depositions have been conducted (29 of which

were taken in California), substantial written discovery has been propounded,

expert witnesses have been consulted and settlements have been reached with a

number of parties. Consequently, “it defies logic to think that [Plaintiffs’ case-

in-chief] and trial strategy would not be prejudicially impacted by [U.S.

Trust’s] attempt to change [the presumptively applicable law.]” Skinner,

supra, 2004 WL 316962, *6. (emphasis added).

It is most ironic that U.S. Trust – who now seems grievously concerned that it

would be not just “unmanageable,” but “a practical impossibility” for this Court to

apply “the laws of the various states” – has waited almost three years to bring this

Court’s attention to this very issue. Doubtless, at the current stage of this complex

class action, to permit U.S. Trust to assert the choice-of-law controversy would

enable it to impermissibly “impede the orderly administration of justice and

frustrate the court's duty to move the case along.” Skinner, supra, 2004 WL

316962, *6. U.S. Trust’s untimely choice-of-law argument must be rejected.

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287 See Dec at ¶¶ 6-19 for evidence linking Heritage bond scheme to California.


B. Application of California Law is Required

In any event, U.S. Trust’s choice-of-law argument fails to defeat class

certification because, under the two-prong analysis employed by federal courts in

California, only California law applies to the state law claims. Specifically,

applying California law to the state law claims satisfies constitutional due process

requirements and defendants fail to meet their burden of proving that California

law does not apply. See In re Pizza Time, 112 F.R.D. 15, 17-21 (N.D. Cal. 1986);

In re Seagate Techs. Sec. Litig., 115 F.R.D. 264, 269 (N.D. Cal. 1987); Zinser v.

Accufix Research Inst., Inc., 253 F.3d 1180, 1187 (9th Cir. 2001).

1. Plaintiffs Have Met the Due Process Requirements

Due process requirements are met if there is “a significant contact or

significant aggregation of contacts” between the forum state and a plaintiff’s

supplemental claims, “creating state interests, such that choice of its law is neither

arbitrary nor fundamentally unfair.” Allstate Ins. Co. v. Hague, 449 U.S. 302,

312-313 (1981); Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 818 (1985).

Stated simply, “the forum's significant contacts to the litigation [support] the

State's interest in applying its law.” Hague, 449 U.S. at 313-329; Shutts, 472 U.S.

at 819.

a. Contacts Between California and Plaintiffs’ Common-Law Claims

In examining the sufficiency of contacts between the forum state and a

plaintiff’s state law claims, the Supreme Court has instructed courts to focus on

“the contacts of the State...with the parties and with the occurrence or transaction

giving rise to the litigation.” Hague, 449 U.S. at 308. (emphasis added). Here,

California is the focal point for each of the bond offerings and a majority of the

wrongdoings alleged by the Plaintiffs.7 Thus each class member’s claims,

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8 For purposes of this inquiry, U.S. Trust’s contacts with California are not analyzedindependently. Rather, courts analyze the contacts of the “parties” to the forum state giving rise tolitigation. Hague, 449 U.S. at 308 (emphasis added); In re Pizza Time Theatre Sec. Litig., 112 F.R.D.15, 18 (N.D. Cal. 1986)(analyzing all parties’ contacts with California.); Seagate, 115 F.R.D. 264,270 (N.D.Cal. 1987) (“[F]ocusing on only the foreign state plaintiffs' contacts with the forum statewould raise the constitutional minimum of Shutts to an insurmountable barrier for any nation wideclass action.”) (emphasis original).

9 See Dec at ¶¶ 6-19.

10 In fact, U.S. Trust sued the Heritage Officers and Directors in Texas state court andthe Defendants’ motion to transfer the case to California was granted.


regardless of which bond was purchased or where the plaintiff resides, is linked to

California.

While the Hague and Shutts inquiries focus on the contacts a state has with

the litigation, generally, and the plaintiffs’ claims, in particular, as opposed to the

contacts the state has with a particular defendant, California also has significant

contacts with the “occurrence or transaction” giving rise to Plaintiffs’ claims

against U.S. Trust.8 U.S. Trust admits that many of Plaintiffs’ claims against it

turn on whether bond funds were wrongfully disbursed upon submission of non-

conforming Requisition Certificates. (UST Opp. at 21:19-22:12). Here, the

undisputed evidence conclusively demonstrates that “the occurrence or

transaction” with respect to the Requisition Certificates at issue took place

primarily in California, and involved numerous “parties” to this action who were

California residents.9

First, nearly all the Requisition Certificates (including the non-conforming

ones) were produced in California, and submitted to U.S. Trust from California

by Heritage directors and officers. Second, said Heritage directors and officers,

who are named defendants in this class action, were California residents when

they prepared, signed, and/or submitted Requisition Certificates to U.S. Trust.10

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See Pizza Time, 112 F.R.D. at 18 (numerous misrepresentations made by

California resident defendants). Third, when preparing the Requisitions

Certificates in California, defendant Virgil Lim created and submitted to U.S.

Trust numerous “dummy” invoices on behalf of various Heritage entities.

Seagate, 115 F.R.D. at 272 (holding that “California has an ‘interest’ within the

rule of Shutts in the allegedly fraudulent conduct of California residents

perpetrated primarily in California.”).

This evidence proves that most, if not all, Requisition Certificates were

created in and sent to U.S. Trust from California. The parties who created and/or

directed the creation of these documents were California residents. When U.S.

Trust processed the Requisition Certificates, the monies were sent to California

bank accounts. Upon receipt of the funds in California, various California

defendants engaged in the co-mingling of monies via wire transfers the amongst

various California bank accounts. These activities resulted in a federal Grand Jury

investigation in California, which may result in charges of money laundering, tax

fraud and wire fraud. Consequently, there is a “significant aggregation of

contacts” between California and plaintiffs’ common-law claims against U.S.

Trust, supporting California’s “interest in applying its law.” Hague, 449 U.S. at

313-329 (1981); Shutts, 472 U.S. at 819 (1985).

b. Fundamental Fairness of Applying California Law

The application of California law to Plaintiffs’ state law claims comports with

notions of fairness encompassed in the Due Process clause. The expectation of the

parties is a major factor in determining the fundamental fairness of applying the

law of the forum state. Hague, 449 U.S. at 333; Shutts, 472 U.S. at 822. When

securities are offered, marketed, or sold in California, the parties involved should

anticipate “the possible application of California law.” Pizza Time, 112 F.R.D. at

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2811 See Dec. ¶¶ 6-19.


18 (“the application of California law to [state law] claims... would be neither

arbitrary nor unfair” because defendant underwriters sold stocks in California.); In

re Activision Sec. Litig., 1985 WL 5827, **3-4 (N.D. Cal. December 2 1985)

(contacts constitutionally sufficient where "[T]he [stock] offering materials

allegedly were prepared, issued and disseminated in California").

Here, the Official Statements were drafted almost exclusively by attorneys in

California; the lead underwriter was based in California; the sales of Heritage

bonds were marketed primarily in Solana Beach towards primarily California

residents; the Official Statements were disseminated primarily from California;

and a majority of the feasability studies attached to the Official Statements were

created by California-based parties.11 For these obvious reasons, “California's

aggregate contacts with, and interest in, the events alleged in [Plaintiffs’ FAC]

were self-evident... and sufficient to give notice to the parties that California law

might apply in any subsequent litigation.” Pizza Time, 112 F.R.D. at 18.

Moreover, nearly all of the lawsuits and arbitrations that have been filed as

a result of this debacle, have been filed in California or by Californians. Of the

twenty-four arbitrations filed against the underwriter, its executives and brokers,

nineteen were initiated by California residents. Four putative class actions and

one individual action were filed in California by California residents. Numerous

parties involved in the bond deals have been sued in California by former Miller &

Schroeder brokers (most recently, Mark Augusta filed suit). Indeed, two cases not

originally filed in California were transferred to California and related to the

instant case - the trustee action which was transferred from Texas and the SEC

Receiver action which U.S. Trust successfully petitioned the MDL panel to

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2812 Only one action is pending that was not filed in or transferred to California.


transfer to California.12

In sum, there is a “significant aggregation of contacts” between California

and Plaintiffs’ common-law claims such that this Court’s application of California

law in the present case is “neither arbitrary nor fundamentally unfair.” Hence,

Plaintiffs have met the constitutional due process requirements for having

California law applied to their pendent common-law claims against U.S. Trust.

2. U.S. Trust Has Failed to Meet California’s Choice-of-Law Test

Since Plaintiffs’ claims clearly meet the constitutional due process

requirements, U.S. Trust bears the burden of satisfying California’s choice-of-law

test in order to show that California law does not apply in this action. The Ninth

Circuit has adopted a three-prong conflicts test for California's choice-of-law

inquiry: (1) whether the laws of the foreign states materially conflict with

California law; (2) if a conflict exists, whether California and the foreign state

both have a legitimate interest in having their laws applied, such that a "true

conflict" exists; (3) if a "true conflict" exists, the court employs the “comparative

impairment” approach to determine whether the foreign states’ interest would be

more impaired than California's interest if the foreign states’ laws were not

applied. Liew v. Official Receiver and Liquidator, 685 F.2d 1192, 1196 (9th Cir.

1982); Washington Mutual, 24 Cal.4th at 921, 922-27.

If a defendant fails to meet the burden of establishing any prong of this test,

California law governs. Seagate, 115 F.R.D. at 269 (so holding); Washington

Mutual, 24 Cal.4th at 921 (2001) (“California may constitutionally require

[foreign law proponent] to shoulder the burden of demonstrating that foreign law,

rather than California law, should apply to class claims.”); In re MDC Holdings

Sec. Litig., 754 F.Supp. 785, 803-04 (S.D.Cal. 1990) (“[defendant] has not made

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13 U.S. Trust cannot show a “true conflict” exists. As fully detailed in BarryDeclaration, the laws of other states governing the types of common-law claims Plaintiffs assertagainst U.S. Trust do not materially conflict with California law. An any event, Plaintiffs do notconcede that any other state’s law should apply.

Indeed, U.S. Trust does not seek to enforce the choice-of-law clauses in the Indentures, andPlaintiffs, as third-party beneficiaries to the Indentures, have the option to waive the choice-of-lawclauses. As a result, the state laws of ALL the jurisdictions that might possibly apply in this caseare contractually limited to California, Texas, Florida and Illinois by the choice-of-law clauses in theIndentures. Thus, even if either U.S. Trust or Plaintiffs subsequently sought to enforce the choice-of-law clauses, there would be no manageability problem because the laws of California, Texas, Floridaand Illinois applicable to Plaintiffs’ common-law claims are substantively and substantially similar.See Dec at ¶¶ 27-31, Ex 35-40.


any attempt to satisfy the three-part governmental interest test...[T]hus, the court

presumes that California law controls ...”); Martin v. Dahlberg, Inc.,156 F.R.D.

207, 218 (N.D.Cal. 1994) (“[t]o avoid the automatic application of California

law to a nationwide class, defendants have the ‘substantial burden’ of” meeting

California’s conflicts test).

Stressing the importance of the "comparative impairment" prong of the

conflicts test, the Ninth Circuit expressly held that "California will decline to

apply its own law to a case brought in California only if it is shown that another

state has a greater interest in having its law applied." Nelson v. Tiffany Industries,

Inc., 778 F.2d 533, 534 (9th Cir. 1985) (emphasis added). The Ninth Circuit’s

holding in Nelson was recently reaffirmed by the California Supreme Court which

likewise concluded that “California law may be used on a classwide basis...so long

as the interests of other states are not found to outweigh California's interest in

having its law applied.” Washington Mutual, 24 Cal.4th at 921 (emphasis added).

Hence, assuming, arguendo, that U.S. Trust can demonstrate that a “true

conflict” exists (which it cannot),13 this Court is still bound to apply California law

in this class action brought in California, unless U.S. Trust also meets its burden

of demonstrating that “another state has a greater interest in having its law

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applied.” Nelson, 778 F.2d at 534 (emphasis added); Washington Mutual, 24

Cal.4th at 921.

A number of federal courts in California have certified nationwide or multi-

state class actions alleging state law claims where the defendants failed to carry

their burden of establishing the "comparative impairment" prong of the conflicts

test. Harmsen v. Smith, 693 F.2d 932, 946-947 (9th Cir. 1982); Pizza Time, 112

F.R.D. at 20; Seagate, 115 F.R.D. at 271-72; Roberts v. Heim, 670 F.Supp. 1466,

1494 (N.D.Cal. 1987); In re Computer Memories Sec. Litig., 111 F.R.D. 675, 685

(N.D.Cal.1986). Indeed, the Seagate court framed the choice of law question

more starkly: “[T]he actual choice for the foreign states is whether to allow their

residents’ common law...claims to proceed under California law – or not at all.”

115 F.R.D. at 271 (emphasis added). Accordingly, the court found that “the

prospect of [multiple] different state laws controlling [plaintiffs’ state law] claims

is illusory.” Id. at 271 (following Pizza Time, 112 F.R.D. at 20)(emphasis added).

Here, U.S. Trust has not carried its burden of proving that “another state has a

greater interest in having its law applied” in this action. Nelson, 778 F.2d at 534

(emphasis added.); Washington Mutual, 24 Cal.4th at 921. Indeed, asserting that

Shutts “precludes application of California law, or any other single state’s law” to

Plaintiffs’ common-law claims (UST Opp. 28:13-16), U.S. Trust fails to offer the

“choice” of another state’s law which should apply. Instead, it seeks to defeat

class certification by asking the Court to adopt the “illusory” position that multiple

states’ laws apply to Plaintiffs’ common-law claims. Seagate rejects such a result.

U.S. Trust’s admission that no single state’s law should be elevated over

California’s fails to meet the “comparative impairment” prong of the choice of

law inquiry: “California will decline to apply its own law to a case brought in

California only if it is shown that another state has a greater interest in having its

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14 To support its illusory choice-of-law argument, U.S. Trust cobbles together a list ofbare-bone citations, only one of which was decided in the controlling jurisdiction. Zinser v. AccufixResearch Institute, Inc., 253 F.3d 1180, 1196 (9th Cir. 2001) is distinguishable in several materialrespects. First, Zinser was a “diversity” case. In contrast, the instant action is a “federal question”case alleging, inter alia, violations of the Securities Exchange Act of 1934, which, unlike in Zinser,affords legal uniformity in this case. Second, unlike the plaintiffs in Zinser, Plaintiffs here are notseeking quasi-injunctive medical monitoring relief.


law applied.” Nelson, 778 F.2d at 534 (emphasis supplied); Washington Mutual,

24 Cal.4th at 921. Consequently, in this class action brought in California, this

Court must apply only California law to Plaintiffs’ pendent common-law claims

against U.S. Trust. Nelson, 778 F.2d at 534; Washington Mutual, 24 Cal.4th at

921; Pizza Time, 112 F.R.D. at 20; Seagate, 115 F.R.D. at 271-72.14

Because California law applies to Plaintiffs’ state law claims against U.S.

Trust, Plaintiffs have demonstrated the predominance of common issues of law as

required by Federal Rules of Civil Procedures, Rule 23(a)(2).

IV. U.S. TRUST’S “NET LENDER” AND “NET BORROWER”ARGUMENT IS FUNDAMENTALLY FLAWED; THERE ARE NOIRRECONCILABLE INTRA-CLASS CONFLICTS

The methodology U.S. Trust employs in its “net lender” and “net borrower”

argument is premised upon a “reconciliation” of improper inter-company

transfers (UST Opp., p. 11:3-21). The “reconciliation” is based solely on a

“summary” created by Defendant Lim (Bacon Dec., ¶¶ 25-27; Exhibit V),

Heritage’s bookkeeper who has admitted in depositions to falsifying corporate

invoices attached to numerous Requisition Certificates. Aside from its doubtful

veracity, Lim’s “summary” is woefully insufficient to buttress U.S. Trust’s theory

that so-called “net lenders” and “net borrowers” exist and, thus, have conflicting

interests.

First, because Lim’s “summary” is only a PARTIAL reconciliation,

covering January 1, 1998 to October 31, 1999, it is not a true representation of

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15 In fact, even a cursory look at Lim’s “summary” reveals obvious errors, such asmultiple “debits” matching a single “credit,” and a sum shown as debited from two Heritage projectsbut credited nowhere.


ultimate NET “borrowers” and “lenders.” Second, U.S. Trust fails to introduce

any evidence to prove that Lim’s “summary” includes ALL of the inter-company

transfers that occurred during the time period the summary purports to illustrate. 15

Third, the very task of attempting to reconcile of improper inter-company transfers

among the so-called “net lenders” and “net borrowers” is analogous to

unscrambling the egg. For example, in making the purported distinction between

the “net lenders” and “net borrowers,” even U.S. Trust is unable to determine

whether the Heritage Rancho should be classified as a “net lender” or a “net

borrower.” (UST Opp. at 11 n. 21).

Moreover, U.S. Trust’s position ignores its prior actions as Trustee: U.S.

Trust itself treated all of the Heritage entities as one enterprise in which funds

available to one were available to all. Specifically, when faced with the unfeasible

task of sorting out the inter-company transfers after receivers were appointed to

take over management of the projects, U.S. Trust instead engaged in the practice

of paying operating expenses for all the Heritage projects out of reserves

belonging to what it now calls “net lenders.” In fact, when Miller & Schroeder

claimed that the inter-company transfers created a potential conflict of interest

among the Heritage entities, U.S. Trust responded to this charge by letter dated

November 15, 2000 as follows:

[G]iven the present difficulties, without additional operating successand additional relief, it is unlikely that these Projects will realizesufficient proceeds to give the respective Bondholders a recoveryfrom the Projects of one hundred cents on the dollar. Accordingly,unsecured claims against the Projects more likely than not willreceive no recovery. Accordingly, the issue of whether “questionedtransfers” may raise a claim of one Project against another may, as apractical matter, be irrelevant since no recovery from the Projectsappears to be obtainable based upon those “questioned transactions”.

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Thus, it is clear U.S. Trust previously viewed and understood the entire

Heritage system to be a single Ponzi scheme in which a barrage of illegal inter-

company transfers occurred among the intertwined Heritage entities so that

mismanagement and misappropriation could be concealed. For all these reasons,

U.S. Trust’s current position cannot hold water.

Even assuming borrower and lender subclasses could be identified via

Defendant Lim’s tainted summary of the inter-company transfers, any

mathematical conclusions to be drawn pale in comparison to the massive fraud

perpetrated on all Plaintiffs which created the market for the Heritage bonds.

Plaintiffs have repeatedly alleged that ALL of the Heritage facilities were doomed

to failure – not solely because of the inter-company transfers, but also because of,

inter alia, unrealistic cost estimates, inflated property appraisals, excessive and

multi-layered management fees, outright theft of bond funds, and because these

facilities were the dregs of the hospital community. U.S. Trust’s failure to account

for all these other allegations of fraud on the market makes their position

untenable.

At best, U.S. Trust’s “conflict” argument is limited to the proposition that

the “net lender” bondholders have “greater” claims to damages than the “net

borrower” bondholders because “[t]he Net Borrowers were not damaged by at all

by [the inter-company transfers] from the Net Lenders.” (UST Opp. at 11:11-

16;12:13-15). Even if true, this argument is legally insufficient to subvert class

certification in this case. See Marshall v. Holiday Magic, Inc., 550 F.2d 1173,

1177 (9th Cir 1977) (the fact that “some of the plaintiffs may have claims against

each other does not detract from their identical legal and factual claims against the

defendants”); see also Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975). If this

Court ultimately determines that the “net lenders” have a claim of greater damages

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than the “net borrowers,” any conflict would necessarily arise at the settlement or

damages stage of the litigation. The solution is the ultimate creation of sub-

classes, if needed, not the denial of class certification. See Cromer Finance Ltd. v.

Berger, 205 F.R.D. 113, 126-127 (S.D.N.Y. 2001); La Sala v. American Sav. &

Loan Assn. 5 Cal.3d 864, 884 (1971) (so holding).

For these same reasons, the supposed conflicts U.S. Trust claims are posed

by the existing and approved settlements with the Accountants and the Attorneys

are red herrings. In any event, the Accountants were sued for conspiracy to

commit fraud in connection with all the offerings. Therefore, their potential

liability spanned the full gamut of offerings until settlement was reached. In

addition, U.S. Trust, among other defendants who were involved in all of the

offerings, previously filed cross complaints for contribution and indemnity against

Atkinson Andelson. Since this Court’s bar order in relation to that settlement

dismissed the indemnification and contribution claims against Atkinson Andelson,

the amounts paid can be viewed as relating to liability for indemnification and

contribution on all offerings.

V. COMMON ISSUES OF FACT PREDOMINATE

While Rule 23(a)(2) refers to “questions of law or fact” common to the class,

federal courts have held that the “commonality” test is “qualitative rather than

quantitative, that is, there need be only a single issue common to all members of

the class.” In re American Medical Systems, Inc., 75 F.3d 1069, 1080 (6th Cir.

1996) (emphasis added); Mullen v. Treasure Chest Casino, LLC, 186 F.3d 620,

625 (5th Cir. 1999) (“at least one issue, the resolution of which will affect all or a

significant number of the putative class members”). Furthermore, the Ninth

Circuit has opined that “[T]he existence of shared legal issues with divergent

factual predicates is sufficient, as is a common core of salient facts coupled with

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16 Plaintiffs’ claims against U.S. Trust are pleaded in the Eleventh though SixteenthCauses of Action in the FAC for Breach of Contract, Negligence, Breach of Fiduciary Duties,Fraudulent Concealment, Intentional Misrepresentation, and Negligent Misrepresentation,respectively. (The FAC, ¶¶510-551).


disparate legal remedies within the class.” Staton v. Boeing Co., 327 F.3d 938, 957

(9th Cir. 2003)(emphasis supplied). As shown below, there exists far more than “a

single issue common to all members of the class” in each of Plaintiffs’ claims

against U.S. Trust.16

U.S. Trust admits that the material terms “in the eleven Trust Indentures

applicable to the eleven Heritage Bond Offerings” – which set forth U.S. Trust’s

duties as the sole bond trustee – are identical. (UST Opp. at 21:20-26). Hence, the

duties U.S. Trust owes to every Heritage bondholder are the same, thus providing

the benchmark which all class members claims against U.S. Trust will be

measured. Therefore, the issues of the existence of U.S. Trust’s duties and its

breaches thereof are “shared legal issues” upon which “divergent factual

predicates are sufficient.” Staton v. Boeing Co., 327 F.3d at 957.

A. The Intentional and Negligent Misrepresentation Claims

U.S. Trust contends that its alleged “fraudulent” and “negligent”

communications with Heritage bondholders require “individualized proof”

because: (1) [S]ome of the plaintiffs received it, some did not, and some don’t

know if they received it or not;” (2) “those plaintiffs who received and read it,

describ[ed] differing reactions to it.” (UST Opp., p. 20:1-17) U.S. Trust asserts

that the cases Plaintiffs cite in their motion on the indirect reliance doctrine

predate Mirkin v. Wasserman, 5 Cal.4th 1083, 1095 (1993), implying that those

cases are no longer good law. (UST Opp., p. 21:4-7). However, Mirkin does not

abrogate the indirect reliance doctrine. More importantly, it does not stand for the

proposition that each class member must have read the misleading materials in

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order to assert a claim for fraud.

U.S. Trust’s exaggerates the holding in Mirkin. In Massachusetts Mutual

Life Ins. Co. v. Superior Court, 97 Cal.App.4th 1282, 1292-93 (2002), the court

reaffirmed the indirect reliance doctrine established in Vasquez v. Superior Court,

4 Cal.3d 800, 814 (1971) and Occidental Land, Inc. v. Superior Court, 18 Cal.3d

355, 363 (1976) – cases predating Mirkin which U.S. Trust claims are

“significantly limited” by Mirkin. Specifically, the court stated that “‘if the trial

court finds material misrepresentations were made to the class members, at least

an inference of reliance would arise as to the entire class.’” Massachusetts Mutual,

97 Cal.App.4th at 292-93 (quoting and citing approvingly Vasquez and Occidental

Land). The indirect reliance doctrine was not abrogated by Mirkin and should be

applied in this case.

In Mirkin the Cal. Supreme Court refused to apply the fraud on the market

theory to common law claims. The case stemmed form misrepresentations

disseminated by Maxicare Health Plans Inc., a publicly traded company, during a

2 year and 4 month period. Plaintiffs alleged the false statements were included in

prospectuses, SEC filings and “other public communications”. The issue in the

case was simply put as follows: “whether plaintiffs, who cannot allege that they

read or heard the alleged misrepresentations, have pled a cause of action for

deceit.” Id. at 103. The court distinguished Mirkin from the earlier cases where it

created the indirect reliance doctrine. The court noted that Vasquez and Occidental

Land were consumer class actions and the holdings therein, and the doctrine it

created, applied when the same material misrepresentations have actually been

communicated to each member of a class. It did not say each class member had to

have read the misrepresentation, it was enough if the class member heard the

misrepresentation. Id. at 108.

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2817 See Dec ¶¶23-26, Ex.31-34 attaching UST’s letters to Miller & Schroder.


The indirect communication cases, as the court called them, were based on

the Restatement Second of Torts, section 533, which holds that a maker of a

fraudulent misrepresentation is subject to liability if the misrepresentation, though

not made directly to the other, is made to a third person and the maker intends or

has reason to expect that its terms will be repeated or its substance communicated

to the other and it will influence his conduct. Cases such as Varwig v. Anderson-

Behel Porsche/Audi Inc., 74 Cal.App.3d 578 (1977) and Barnhouse v. City of

Pinole, 133 Cal.App.3d 171 (1982) and others have applied this principle.

Furthermore, courts in this state have found liability under the common law for

misrepresentations not actually communicated to the plaintiff. These cases were

decided on agency principles. Mirkin at 109-110. In Committee on Children’s

Television, Inc. v. General Foods Corp., 35 Cal.3d 197, 219(1983), the California

Supreme Court held that the repetition of the representations should not be a

prerequisite for liability, it should be sufficient that defendant makes a

misrepresentation to one group intending to influence the behavior of the ultimate

purchaser, and that he succeeds in his plan.

Plaintiffs have specifically stated that the fraud on the market theory is not

implicated in this case. Thus, Mirkin has nothing to do with the price of tea in

China. US Trust cites to it in an attempt to confuse this Court, and because they

really have no defense to the utilization of the other theories for the presumption

of reliance that Plaintiffs have put forth.

Here, even though only some of the class representatives received

communications from U.S. Trust, all of them actually heard U.S. Trust’s

misrepresentations contained in its letters to Miller & Schroder. 17 Consequently,

all of the class representatives had actually relied on U.S. Trust’s

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misrepresentations. Hence, in the context of determining the predominance of the

issue of reliance, class representatives’ actual reliance on U.S. Trust’s

misrepresentations was a fact common to all the class members in this action.

As demonstrated above, common issues of fact are myriad and predominant

in each and every claim Plaintiffs pleaded against U.S. Trust. And many of those

common issues of fact are self-evident in U.S. Trust’s own contentions and

theories. Plainly, Plaintiffs have fully demonstrated the predominance of common

issues of fact as required by Federal Rules of Civil Procedures, Rule 23(a)(2).

VI. The Class Definition is Reasonable and Equitable

Plaintiffs’ proposed definition – which U.S. Trust calls a “collusive” “Sinow

carve-in” – is reasonable and equitable in light of the applicable law and facts in

this case. Contrary to U.S. Trust’s cynical view of the class definition, special

treatment for Plaintiff Sinow alone was not contemplated. Rather, in crafting the

definition, the intent was to ensure vulture investors were excluded, and people

who acquired post-default Heritage bonds by means other than a purchase for

money, such as by inheritance or written agreement which contained assignment

of claims language were included. The terms and reasons for the class definition

have already been discussed with the Court at each of the preliminary approval

hearings and the Court indicated its belief that the definition is fair. Sinow’s

agreement with Strategic Capital Trust Company (SCTC) and Capel is such an

agreement. Furthermore, SCTC is also brought into the class by this definition as

it retained some of the bonds acquired in that transaction. Furthermore, as stated

by U.S. Trust in their Opp at 23, the agreement entered into by Heartland Funds

and SWIB, whereby Heartland sold the bonds to SWIB, and later repurchased

them, is another example of a written agreement which assigned all rights

concurrently with a transfer of the bonds. Presumably, this is the basis for

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Heartland’s case against U.S. Trust in Texas. Under the existing class definition,

Heartland may become a class member rather than continue its own suit.

Plaintiffs’ counsel was guided by the Ninth Circuit’s teaching that a sale of

securities does not automatically transfer an investor’s legal claims on his or her

securities. In re Nucorp Energy Sec. Litig, 772 F.2d 1486, 1490, 1492-93 (9th Cir.

1985). In rejecting the “automatic assignment” argument, the Ninth Circuit

expressed the concern that an opposite conclusion would “remove a remedy from

those who were defrauded, by gratuitously giving [their securities] to those who

were not defrauded and suffered no injury. . . .” Nucorp Energy Sec. Litig., 772

F.2d at 1490. (Emphasis added). Here, Plaintiffs; counsel was confronted with an

unusual situation. The Heritage bonds were marketed to the elderly and those with

Alzheimer’s disease. The Class definition development as a byproduct of the

information gleaned from hundreds of bondholders who contacted Plaintiffs’

counsel over the past three years. During this time, Plaintiffs’ counsel has learned

that most bondholders are elderly, some have been afflicted with Alzheimer’s and

still others are the children or heirs of bondholders who have recently died. Many

have expressed concerns for what would happen to their claims if they died or

become incapacitated prior to a resolution of this action. Given these developing

circumstances, as well as the Ninth Circuit’s holding in Nucorp, the proposed

definition – contrary to U.S. Trust’s insidious insinuations – is designed to bring

into the fold those who acquire the post-fault Heritage bonds by means of bequest,

devise, endowment, inheritance, or written assignment.

When Mr. Sinow acquired his Heritage bonds through a written

assignment, he obtained all the legal claims on the bonds – a crucial and distinct

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18 At the Attorney-Defendants Settlement hearing, this Court noted that the proposedsubclasses allowed “[T]hose people who are purchasing by want of an assignment step into the shoesof the assignor and you know, the rights of the assignor had inured to the benefit of the assignee.They get nothing greater. They get nothing less. So I think that’s the distinction that Mr. Barry ismaking and that’s a distinction that I am making as well.”

19 Furthermore, at the Sobelman hearing, U.S. Trust’s counsel stated that “there are anumber of large transactions that went down that contained assignment language”. Transcript,19:21-23. He went on to say that “we’re very concerned that all distributions that have been madeon the Heritage bonds get included in the reduction of Heritage bondholder losses...” Under thecurrent class definition, U.S. Trust’s alleged concerns are illusory. Logically, a post-defaultbondholder who became a bondholder per an assignment of rights will submit a claim and thedistributions he received will be recognized when the claims administrator calculates the recognizedloss. A former bondholder who sold his bonds per an assignment, who did not receive a distribution,will not be allowed to submit a claim. Alternatively, a bondholder who sold his bonds on the openmarket after default to a vulture investor will have a recognized loss and he will be allowed torecover. If the vulture investor paid less than he got in distributions, then he make a good bet andhe has a profit. Even if he was entitled to submit a claim, there would be no recognized loss.


fact recognized by this Court. 18 For all the foregoing reasons, Plaintiffs’ proposed

class definition is reasonable and equitable.19

VII. SINOW IS AN ADEQUATE REPRESENTATIVE

The unbridled and false accusation of fraud that U.S. Trust hurls at Mr.

Sinow cannot eviscerate his right to serve as class representative in this case. In In

re Computer Memories Sec. Litig., 111 F.R.D. at 682-83, the plaintiff was

previously indicted by a federal grand jury on charges of mail fraud and

racketeering, and the subject of numerous civil suits. Despite these dramatic facts,

the court found the plaintiff to be an adequate class representative, noting:

The federal indictment was subsequently dismissed, and defendants have not offered any direct evidence indicating that Fine was actually guilty of any wrongdoing. Similarly, all of the civil suits described by defendants were either settled or dismissed with prejudice.

Id. (Emphasis added); See also, Kleiner v. First Nat'l Bank of Atlanta, 97 F.R.D.

683, 696-97 (N.D.Ga.1983) (rejecting the argument that plaintiffs was inadequate

because of a federal investigation for failure to report a prior bankruptcy on a loan

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20 While unlikely, should Mr. Sinow ultimately be barred from recovery by a defenseparticular to him, it would not effect his ability to satisfy the typicality requirement. In re FrontierIns. Group Inc. Securities Litigation, 172 F.R.D. 31, 41 (E.D. N.Y. 1997).

21 U.S. Trust’s inability to cite any language in any Indenture or any bond certificateto that effect confirms that neither the Indentures nor the bond certificates prohibit the formerHeritage bondholders from asserting legal claims against U.S. Trust.


application).

Here, the “collusive” conduct of which U.S. Trust alleges Mr. Sinow’s is

guilty consists of “buying” the Heritage bonds in the course of a settlement

agreement where he and his former employer made whole their clients who lost

money on the Heritage bonds. The settlement – which resulted in dismissal of the

suit against Mr. Sinow with prejudice – is far from proof that Mr. Sinow is “guilty

of any wrongdoing.” In re Computer Memories Sec. Litig., 111 F.R.D. at 682-83.

Accordingly, Mr. Sinow is an adequate class representative.20

VIII. CLAIMS AGAINST U.S. TRUST DO NOT AUTOMATICALLY PASS

For a host of reasons discussed below, U.S. Trust’s argument that its

fiduciary duties “run only to current Heritage bondholders” is legally unsound,

inherently inequitable, and capable of producing perverse consequences.

First, U.S. Trust’s strained interpretation of the rights of “Owner” flies in the

face of the language in the Indentures. However, the term “Owner” is defined in

the Indentures, the Indentures do not prohibit the former Heritage bondholders

from asserting legal claims against U.S. Trust.21 Unsurprisingly, the portion of the

Indentures – which U.S. Trust cites to show the Owner’s rights (UST Opp., p.

24:15-17) – is wholly silent on any bondholder’s right to sue U.S. Trust, as it

deals solely with the Owner’s right to receive principal and interest on the bonds.

Remarkably, based on the Owner’s right to receive principal and interest, U.S.

Trust jumps to the conclusion that “all rights under the Indentures and bonds

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22 U.S. Trust’s assumption that the Owner’s right to receive principal and interest onthe bonds includes “all” rights of the Owner is demonstrably false, as the very Indenture (like all theother Indentures) U.S. Trust cites also provide the Owner with the right to bring individual suitsagainst a third party under certain circumstances.


belong to the current bondholders.” (UST Opp., 24:19-20) (emphasis added). In

reaching such a conclusion, erroneously assumes that the Owner’s right to receive

principal and interest payments encompasses “all” rights belonging to current

bondholders.22 Without showing what rights are “all” rights of the “Owner” under

the Indentures, U.S. Trust’s false assumption belies the conclusion that its

fiduciary duties run only to the current bondholders.

Second, and most important, U.S. Trust’s argument that “all rights and claims

under the Indentures pass to the purchaser” (UST Opp., 24:21-24) has been

roundly rejected by the Ninth Circuit and many other federal courts. Reaffirming

its holding in In re Nucorp Energy Sec. Litig., 772 F.2d 1486, 1490, 1492-93 (9th

Cir. 1985) (“Nucorp”), the Ninth Circuit reiterated:

In In re Nucorp Energy Sec. Litig., 772 F.2d 1486 (9th Cir.1985), we held that purchasers of securities did NOT receive an automatic assignment of the fraud and tort claims of their predecessors under either federal or state law.

Class Plaintiffs v. City of Seattle, 955 F.2d 1268, 1285 (9th Cir. 1992). (Emphasis

added). Furthermore, in LNC Invs., Inc. v. First Fid. Bank, N.A., 1997 U.S. Dist.

LEXIS 12858 (S.D.N.Y. 1997), the district court ruled that Nucorp was applicable

not only to plaintiffs’ tort action (violation of the Trust Indenture Act and breach

of fiduciary duties), but also to their breach of contract claim (breach of the

indenture) against the bond trustee. Similarly, the Second Circuit also has found

Nucorp to be specifically applicable to bondholders’ legal claims against the bond

trustee. Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 85 F.3d 970, 973-74

(S.D.N.Y. 1995) (holding that “the claims of the previous bondholders...were not

automatically assigned to [subsequent purchaser] upon its purchase of the

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23 In its Motion for Summary Judgement filed in the Heartland Receiver action, U.S.Trust cites to Bluebird Partners, L.P. v. First Fid. Bank, N.A., 97 N.Y.2d 456 (2002) in support ofits argument that the rights follow the bonds. In Bluebird Partners, the court held that the New York“General Obligations Law § 13-107 automatically transfers rights to the buyers of bonds.” Id. at 462,


Bonds.”) (emphasis added.); see also, In re Washington Public Power Supply

System Sec. Litigation, 720 F.Supp. 1379, 1420 (D. Ariz. 1989).

The rationale underlying the Ninth Circuit’s holding in Nucorp stems from

common sense and fairness. As the district court observed in Bluebird Partners,

L.P. v. First Fidelity Bank , 896 F.Supp. 152, 156 (S.D.N.Y. 1995) , "[I]n rejecting

automatic assignment, these Courts were concerned with restricting the right to

sue to those who actually suffered the injury." Id. at 156. “Thus, the proper

inquiry for determining the transferability of claims upon sale of a security is

whether the subsequent purchaser was injured by the misconduct.” Id.

Given the overwhelming authorities directly on point, it is simply inarguable

that the right to sue U.S. Trust belongs to the bondholders who have been harmed

by U.S. Trust’s misconduct, and that such a right does not follow the bonds as they

move from holder to holder, but remains with the ones who claim injury.

Here, U.S. Trust stretches its erroneous argument that its fiduciary duties “run

only to current bondholders” to the nonsensical conclusion that “[t]he former

owners of the bonds have become strangers to the Indentures.” (UST, Opp., p.

24:20-21). In advancing such a novel argument that bondholders’ legal claims

follow their bonds, U.S. Trust is unable to cite a single case! And in the face of the

binding authorities, U.S. Trust chooses to ignore the crucial fact that the former

bondholders (such as Mr. McKenry) were persons to whom U.S. Trust owed

fiduciary duties at the time of U.S. Trust’s misconduct and were harmed as a

result. U.S. Trust’s argument is squarely contrary to the prevailing case law,

fundamentally unfair and prone to perverse consequences.23

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fn*. In so holding, the court expressly acknowledged that its conclusion “ironically achieved theopposite result [of the current federal case law].” Id. Nevertheless, the court justified its rulingbased solely on the “intent” and “history” of the New York legislature. Id. at 462. Here, the NewYork General Obligations Law § 13-107 simply does not apply in this case. Nor is the intent orhistory of the New York legislature at issue. Furthermore, because the court’s ruling in Bluebird isclearly at odds with the Ninth Circuit’s holding in Nucorp, this Court may not even consider, muchless follow, Bluebird. See, Lum v. Jensen, 876 F.2d 1385, 1387 (9th Cir. 1989) (holding that theNinth Circuit may consider the case law of other states only when there is no binding precedent.).

24 The Betker Action alleges $24 million loss. The Heartland Receiver Action seeks$5 million. The Texas State Action alleges $20 million for ten plaintiffs.


IX. CLASS ACTION IS A SUPERIOR METHOD

Unlike plaintiffs in other litigation related to the Heritage bond offerings24,

the proposed Class consists of numerous individual bondholders whose loss is less

than $15,000. Of the three-hundred and thirty one (331) class members who have

contacted Plaintiffs’ Counsel to date, two-hundred and twenty (220) have losses

ranging from $5,000 - $50,000. Class members suffered average losses of

approximately Thus, contrary to U.S. Trust’s contention, the class devise is

superior to any other method of adjudicating the claims involved in this case. See

Susser v. Castle Energy Corp., 1994 WL 247206 at * 11 (April 25, 1994 C.D.

Cal.); In re United Energy Corp., Etc. Sec. Litig., 122 F.R.D. 251 (C.D.Cal.1988)

(finding the class devise was superior because “[T]he amounts invested by

purchasers of [stock] were relatively small. Individual litigation would not be

feasible.”) (emphasis added); Crown, Cork, & Seal Co. v. Parker, 462 US 345,

349 (1983) (noting that class action enables persons to assert small claims that

could not be litigated individually because the costs would far out-weigh any

recovery.).

Dated: June 28, 2004 LAW OFFICE OF BRIAN BARRY

____________________Brian Barry #135631

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Jill Levine Betts #208065Rick Xiao #2218231801 Avenue of the Stars, Suite 307Los Angeles, CA 90067Telephone: (310) 788-0831Facsimile: (310) 788-0841

GLANCY BINKOW & GOLDBERG LLPLionel Z. GlancyPeter BinkowKevin Ruf1801 Avenue of the Stars, Suite 311Los Angeles, CA 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160

Co Lead Counsel for Class Action Plaintiffs

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PLAINTIFFS’ REPLY TO U.S. TRUST’S OPPOSITION TO CLASS CERTIFICATION FINALreplyUST.CLASS.CERT.wpd i

TABLE OF CONTENTS

I. PRELIMINARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. ALL CLASS REPRESENTATIVES HAVE STANDING . . . . . . . . . . . . . . . 1

III. ONLY CALIFORNIA LAW APPLIES TO STATE LAW CLAIMS . . . . . . 2A. U.S. Trust’s Choice-of-Law Argument is Untimely . . . . . . . . . . . . . . . . 2B. Application of California Law is Required . . . . . . . . . . . . . . . . . . . . . . 5

1. Plaintiffs Have Met the Due Process Requirements . . . . . . . . . 5a. Contacts Between California and Plaintiffs’ Common-Law Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5b. Fundamental Fairness of Applying California Law . . . . . 7

2. U.S. Trust Has Failed to Meet California’s Choice-of-Law Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

IV. U.S. TRUST’S “NET LENDER” AND “NET BORROWER” ARGUMENT ISFUNDAMENTALLY FLAWED; THERE ARE NO IRRECONCILABLEINTRA-CLASS CONFLICTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

V. COMMON ISSUES OF FACT PREDOMINATE . . . . . . . . . . . . . . . . . . . . . 15A. The Intentional and Negligent Misrepresentation Claims . . . . . . . . . . 16

VI. The Class Definition is Reasonable and Equitable . . . . . . . . . . . . . . . . . . . 19

VII. SINOW IS AN ADEQUATE REPRESENTATIVE . . . . . . . . . . . . . . . . . . 21

VIII. CLAIMS AGAINST U.S. TRUST DO NOT AUTOMATICALLY PASS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

IX. CLASS ACTION IS A SUPERIOR METHOD . . . . . . . . . . . . . . . . . . . . . 25

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PLAINTIFFS’ REPLY TO U.S. TRUST’S OPPOSITION TO CLASS CERTIFICATION FINALreplyUST.CLASS.CERT.wpd ii

TABLE OF AUTHORITIES

CASES

Allstate Ins. Co. v. Hague, 449 U.S. 302 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-7

Barker v. Wingo, 407 U.S. 514 (1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Barnhouse v. City of Pinole, 133 Cal.App.3d 171 (1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Bluebird Partners, L.P. v. First Fid. Bank, N.A., 97 N.Y.2d 456 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 85 F.3d 970 (S.D.N.Y. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 24

Class Plaintiffs v. City of Seattle, 955 F.2d 1268 (9th Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Committee on Children’s Television, Inc. v. General Foods Corp., 35 Cal.3d 197 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Cromer Finance Ltd. v. Berger, 205 F.R.D. 113 (S.D.N.Y. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Crown, Cork, & Seal Co. v. Parker, 462 US 345 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Harmsen v. Smith, 693 F.2d 932 (9th Cir. 1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Harris v. Palm Springs Alpine Estates, Inc.,329 F.2d 909 (9th Cir. 1964) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

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Hurtado v. Superior Court, 11 Cal.3d 574 (1974) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

In re Activision Sec. Litig., 1985 WL 5827 (N.D. Cal. December 2 1985) . . . . . . . . . . . . . . . . . . . . . . . 8

In re American Medical Systems, Inc., 75 F.3d 1069 (6th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

In re Computer Memories Sec. Litig., 111 F.R.D. 675 (N.D.Cal.1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 21, 22

In re Frontier Ins. Group Inc. Securities Litigation, 172 F.R.D. 31 (E.D. N.Y. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

In re MDC Holdings Sec. Litig., 754 F.Supp. 785 (S.D.Cal. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

In re Nucorp Energy Sec. Litig, 772 F.2d 1486 (9th Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 23, 24

In re Pizza Time Theatre Sec. Litig., 112 F.R.D. 15 (N.D. Cal. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . 5-8, 11, 12

In re Seagate Techs. Sec. Litig., 115 F.R.D. 264 (N.D. Cal. 1987) . . . . . . . . . . . . . . . . . . . . . . . 5-7, 9, 11, 12

In re United Energy Corp., Etc. Sec. Litig., 122 F.R.D. 251 (C.D.Cal.1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

In re Washington Public Power Supply System Sec. Litigation, 720 F.Supp. 1379 (D. Ariz. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Julian-Ocampo v. Air Ambulance Network, Inc., 2001 WL 34039480 (D.Or. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Kleiner v. First Nat'l Bank of Atlanta, 97 F.R.D. 683, (N.D.Ga.1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

La Sala v. American Sav. & Loan Assn. 5 Cal.3d 864 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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PLAINTIFFS’ REPLY TO U.S. TRUST’S OPPOSITION TO CLASS CERTIFICATION FINALreplyUST.CLASS.CERT.wpd iv

Liew v. Official Receiver and Liquidator, 685 F.2d 1192, 1196 (9th Cir. 1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

LNC Invs., Inc. v. First Fid. Bank, N.A., 1997 U.S. Dist. LEXIS 12858 (S.D.N.Y. 1997) . . . . . . . . . . . . . . . . . . . . . 23

Marshall v. Holiday Magic, Inc., 550 F.2d 1173 (9th Cir 1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Martin v. Dahlberg, Inc.,156 F.R.D. 207 (N.D.Cal. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Massachusetts Mutual Life Ins. Co. v. Superior Court, 97 Cal.App.4th 1282 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Mirkin v. Wasserman, 5 Cal.4th 1083 (1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-18

Mullen v. Treasure Chest Casino, LLC, 186 F.3d 620, 625 (5th Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Muslin v. Frelinghuysen Livestock Managers, Inc., 777 F.2d 1230 (7th Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Nelson v. Tiffany Industries, Inc., 778 F.2d 533 (9th Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-12

Occidental Land, Inc. v. Superior Court, 18 Cal.3d 355 (1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-7, 11

Roberts v. Heim, 670 F.Supp. 1466 (N.D.Cal. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Skinner v. De Laurentiis, 2004 WL 316962 (Cal.App. 2 Dist. 2004) . . . . . . . . . . . . . . . . . . . . . . . . 2-4

Southern Cal. Title Clearing Co. v. Laws,2 Cal.App.3d 586 (1969) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

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Staton v. Boeing Co., 327 F.3d 938 (9th Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Susser v. Castle Energy Corp., 1994 WL 247206 at * 11 (April 25, 1994 C.D. Cal.) . . . . . . . . . . . . . . . . . 25

United States v. Hall, 974 F.2d 1201 (9th Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

United States v. Sandoval, 990 F.2d 481 (9th Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Varwig v. Anderson-Behel Porsche/Audi Inc., 74 Cal.App.3d 578 (1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Vasquez v. Superior Court, 4 Cal.3d 800 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Washington Mutual Bank v. Superior Court, 24 Cal.4th 906 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 9-12

Watkins v. U.S. Army,875 F.2d 699 (9th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180 (9th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 12

CODES

Cal. Code Civ. Proc. §389 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Fed. R. Civ. P., Rule 23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 12, 15, 19

Fed.R.Civ.P. 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

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PLAINTIFFS’ REPLY TO U.S. TRUST’S OPPOSITION TO CLASS CERTIFICATION FINALreplyUST.CLASS.CERT.wpd vi

OTHER AUTHORITIES

Restatement Second of Torts, section 533 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

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PLAINTIFFS’ REPLY TO U.S. TRUST’S OPPOSITION TO CLASS CERTIFICATION FINALreplyUST.CLASS.CERT.wpd i

PROOF OF SERVICE VIA ELECTRONIC TRANSFERSTATE OF CALIFORNIA, COUNTY OF LOS ANGELES

I, the undersigned, declare: that I am employed in the aforesaid County,State of California in the office of a member of the Bar of this Court at whosedirection the following service was made. I am over the age of 18 and not a partyto the within entitled action; my business address is: 1801 Avenue of the Stars,Suite 307, Los Angeles, California 90067.

On June 28, 2004, I served upon the interested parties in this action,pursuant to Fed. R. Civ. P. Rule 5(b) and Local Rule 5-3, the document describedas follows:PLAINTIFFS’ REPLY TO OPPOSITION OF U.S. TRUST TO MOTIONFOR CLASS CERTIFICATION [X] by sending electronically a true and correct copy thereof to Verilaw for

service on all counsel of record (see attached service list) by electronicservice pursuant to the Order Re: Electronic Service.By electronic transfer I sent said document to Verilaw Technologies, Inc.,

located at 400 East Lancaster Avenue, Suite 300, Wayne, Pennsylvania 19087,www.verilaw.com, initiated on the Heritage Bond Litigation Website, before thehour of 6:30 PM.

I declare under penalty of perjury, under the laws of the State of Californiaand the United States of America, that the foregoing is true and correct. Executedon June 28, 2004, at Los Angeles, Los Angeles County, California.

Jill Betts

1 brian barry #135631 jill levine betts...

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