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ADVERSARY PROCEEDING COVER SHEET (Instructions on Reverse)

PLAINTIFFS Encinitas Office, LP

ADVERSARY PROCEEDING NUMBER

(Court Use Only)

DEFENDANTS See attached list

ATTORNEYS (Firm Name, Address, and Telephone No.) Alan Vanderhoff, Cal. Bar No. 138032 Sara Pfrommer, Cal Bar No. 84452 750 B Street, Suite 1620 San Diego, CA 92101 (619) 299-2050 PARTY (Check One Box Only)
Debtor Creditor Trustee U.S. Trustee/Bankruptcy Admin Other

ATTORNEYS (If Known)

PARTY (Check One Box Only)

Debtor Creditor Trustee U.S. Trustee/Bankruptcy Admin Other

CAUSE OF ACTION (WRITE A BRIEF STATEMENT OF CAUSE OF ACTION, INCLUDING ALL U.S. STATUTES INVOLVED) Breach of contract, fraud, breach of fiduciary duty, negligence, declaratory relief, equitable subordination and usury arising out of a construction loan agreement.

NATURE OF SUIT
(Number up to five (5) boxes starting with lead cause of action as 1, first alternative cause as 2, second alternative cause as 3, etc.) FRBP 7001(1) Recovery of Money/Property 11 - Recovery of money/property - 542 turnover of property 12 - Recovery of money/property - 547 preference 13 - Recovery of money/property - 548 fraudulent transfer 14 - Recovery of money/property - other FRBP 7001(2) Validity, Priority or Extent of Lien 21 - Validity, priority or extent of lien or other interest in property FRBP 7001(3) Approval of Sale of Property 31 - Approval of sale of property of estate and of co-owner - 363(h) FRBP 7001(4) Objection/Revocation of Discharge 41 - Objection / revocation of discharge - 727(c),(d),(e) FRBP 7001(5) Revocation of Confirmation 51 - Revocation of confirmation FRBP 7001(6) Dischargeability 66 - Dischargeability - 523(a)(1),(14),(14A) priority tax claims 62 - Dischargeability - 523(a)(2), false pretenses, false representation, actual fraud 67 - Dischargeability - 523(a)(4), fraud as fiduciary, embezzlement, larceny (continued next column) Check if this case involves a substantive issue of state law Check if a jury trial is demanded in complaint Other Relief Sought FRBP 7001(6) Dischargeability (continued) 61 - Dischargeability - 523(a)(5), domestic support 68 - Dischargeability - 523(a)(6), willful and malicious injury 63 - Dischargeability - 523(a)(8), student loan 64 - Dischargeability - 523(a)(15), divorce or separation obligation (other than domestic support) 65 - Dischargeability - other FRBP 7001(7) Injunctive Relief 71 - Injunctive relief - reinstatement of stay 72 - Injunctive relief - other FRBP 7001(8) Subordination of Claim or Interest 81 - Subordination of claim or interest FRBP 7001(9) Declaratory Judgment 91 - Declaratory judgment FRBP 7001(10) Determination of Removed Action 01 - Determination of removed claim or cause Other SS-SIPA Case 15 U.S.C. 78aaa et.seq. 02 - Other (e.g. other actions that would have been brought in state court if unrelated to bankruptcy case) Check if this is asserted to be a class action under FRCP 23 Demand $

5,000,000

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BANKRUPTCY CASE IN WHICH THIS ADVERSARY PROCEEDING ARISES NAME OF DEBTOR BANKRUPTCY CASE NO.

Encinitas Office, LP
DISTRICT IN WHICH CASE IS PENDING DIVISIONAL OFFICE

10-13160-LA11
NAME OF JUDGE

California Southern

Louise DeCarl Adler

RELATED ADVERSARY PROCEEDING (IF ANY)

PLAINTIFF

DEFENDANT

ADVERSARY PROCEEDING NO.

DISTRICT IN WHICH ADVERSARY IS PENDING

DIVISIONAL OFFICE

NAME OF JUDGE

SIGNATURE OF ATTORNEY (OR PLAINTIFF)

/s/ Alan Vanerhoff

DATE PRINT NAME OF ATTORNEY (OR PLAINTIFF)

10/05/10

Alan Vanderhoff

INSTRUCTIONS
The filing of a bankruptcy case creates an estate under the jurisdiction of the bankruptcy court which consists of all of the property of the debtor, wherever that property is located. Because the bankruptcy estate is so extensive and the jurisdiction of the court so broad, there may be lawsuits over the property or property rights of the estate. There also may be lawsuits concerning the debtors discharge. If such a lawsuit is filed in a bankruptcy court, it is called an adversary proceeding. A party filing an adversary proceeding must also complete and file Form 104, the Adversary Proceeding Cover Sheet, unless the party files the adversary proceeding electronically through the courts Case Management/Electronic Case Filing system (CM/ECF). In some courts, the cover sheet is not required when the adversary proceeding is filed electronically through the courts Case Management/Electronic Case Files (CM/ECF) system. (CM/ECF captures the information on Form 104 as part of the filing process.) When completed, the cover sheet summarizes basic information on the adversary proceeding. The clerk of court needs the information to process the adversary proceeding and prepare required statistical reports on court activity. The cover sheet and the information contained on it do not replace or supplement the filing and service of pleadings or other papers as required by law, the Bankruptcy Rules, or the local rules of court. The cover sheet, which is largely self-explanatory, must be completed by the plaintiffs attorney (or by the plaintiff if the plaintiff is not represented by an attorney). A separate cover sheet must be submitted to the clerk for each complaint filed. Plaintiffs and Defendants. Give the names of the plaintiffs and the defendants exactly as they appear on the complaint. Attorneys. Give the names and addresses of the attorneys, if known. Party. Check the most appropriate box in the first column for the plaintiffs and in the second column for the defendants. Demand. Enter the dollar amount being demanded in the complaint. Signature. This cover sheet must be signed by the attorney of record in the box on the second page of the form. If the plaintiff is represented by a law firm, a member of the firm must sign. If the plaintiff is pro se, that is, not represented by an attorney, the plaintiff must sign.

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DEFENDANTS

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

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

10 SOUTHERN DISTRICT OF CALIFORNIA 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ENCINITAS OFFICE, L.P., a California limited partnership, Plaintiffs, v. ENCINITAS 338, LLC, a Nevada limited liability company; DIAMOND BAY INVESTMENTS, INC., a Nevada corporation; OASIS LOAN ADVISORS, LLC, a Nevada limited liability company; JORDAN WIRSZ; DOUGLAS ESTEVES; DENNIS R. BLITZ; RICHARD RIVERA; MARIA TRINIDAD RIVERA; DONALD ROLAND ENRICO; BONNY KAY ENRICO; MALDEN VENTURES, LTD.; DEFINED BENEFIT TRUST; PROVIDENT GROUP; ROBERT B. CALDWELL; ESTHER GOMEZ; FIRST SAVINGS BANK FBO JOAN M. ALIPRAND, IRA; EDWARD B. ALLEN; CAROL ALLEN; DBISECURED INCOME PARTNERS, LLC; In re: ENCINITAS OFFICE, L.P., a California limited partnership, Debtor. Case No. 10-13160-LA11 Adv. No. COMPLAINT FOR BREACH OF CONTRACT; FRAUD; BREACH OF FIDUCIARY DUTY; NEGLIGENCE; DECLARATORY RELIEF; EQUITABLE SUBORDINATION and USURY

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

17 18 19 20 21 22 23 24 25 26 27 28 2 1. U.S.C. 157 and 1334. 2. This matter constitutes a core proceeding pursuant to and 28 U.S.C. ENCINITAS OFFICE, L.P., debtor-in-possession (Plaintiff) alleges as follows: JURISDICTION AND VENUE This Court has exclusive jurisdiction over this proceeding pursuant to 28

157(b)(2)(A), (O), and 1334. 3. Venue is proper in this district pursuant to 28 U.S.C. 1409(a).

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

principal place of business in California. Plaintiff filed a petition under Chapter 11 of the United States Bankruptcy Code on July 29, 2010. 5. Plaintiff is informed and believe and thereon alleges that defendant

ENCINITAS 338, LLC (Encinitas 338) is a Nevada limited liability company with its principal place of business in Las Vegas, Nevada. 6. Plaintiff is informed and believes and thereon alleges that defendant

DIAMOND BAY INVESTMENTS, INC., (Diamond Bay) is a Nevada corporation with its principal place of business in Las Vegas, Nevada. 7. Plaintiff is informed and believes and thereon alleges that the Construction

Loan Agreement at issue in this Complaint (the Construction Loan) was made by the following defendants (collectively, the Construction Lenders), each of whom agreed, by acquiring an interest in and under the Construction Loan, to be bound by the terms thereof: DIAMOND BAY, DENNIS R. BLITZ, RICHARD RIVERA, MARIA TRINIDAD RIVERA, DONALD ROLAND ENRICO, BONNY KAY ENRICO, MALDEN VENTURES, LTD., DEFINED BENEFIT TRUST, PROVIDENT GROUP, ROBERT B. CALDWELL, ESTHER GOMEZ, FIRST SAVINGS BANK FBO JOAN M. ALIPRAND, IRA, EDWARD B. ALLEN, CAROL ALLEN, DBI-SECURED INCOME PARTNERS, LLC, ROBERT ALLEN DEMBINSKI, DIANE M. DEMBINSKI, GREGORY D. ERECKSON REVOCABLE TRUST DATED AUGUST 1, 2003, FIFTY-FIVE LLC, DAVID ROY FOSSATI, JOHN P. HILT, DAVID J. HOUSTON, CAROL B. HOUSTON, NEIL E. HOUSTON, DONNA K. HOUSTON, THE LITTRELL FAMILY TRUST DATED NOVEMBER 30, 2005, SCOTT R. LLOYD, CAROLLYN S. LLOYD, THE MAGIC TRUST DATED DECEMBER 20, 2005, THE MIELA FAMILY TRUST DATED JUNE 24, 1994, ESTHER G. MILES, DARRON L. MILES, LAWRENCE EARL NOBLIN, STEPHANIE GRACE NOBLIN, ARTHUR POLACHECK, GLORIANNE M. POLACHECK, PRESWICK CORP., QUANTUM RESOURCES, LP, THE SURVIVORS 3

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TRUST OF THE ROBBINS FAMILY TRUST DATED JULY 31, 1989, MARK ROBINSON, MARSHA ROBINSON, THE BERNARD F. RUBIN AND HELEN RUBIN LIVING TRUST A, DATED MAY 23, 1986, RICHARD B. SAMUELS, THE SIROTAEND LIVING TRUST DATED OCTOBER 15, 1998, GAIL JEAN TAGART, THE WIGHTMAN FAMILY TRUST DATED FEBRUARY 8, 2008, and THE WILLIAMS FAMILY TRUST DATED NOVEMBER 2, 1992. 8. Plaintiff is informed and believes and thereon alleges that defendant JORDAN

WIRSZ is an individual who at all times relevant to the matters alleged herein was a resident of Las Vegas, Nevada. 9. Plaintiff is informed and believes and thereon alleges that defendant

DOUGLAS ANTONIO ESTEVES is an individual residing in Arizona. He is a real estate broker and holds California Real Estate Brokers License No. 00922927. He was also, at all times relevant to this Complaint, an officer and employee of Diamond Bay. 10. Plaintiff is informed and believes and thereon alleges that Defendant OASIS

LOAN ADVISORS, LLC is a Nevada limited liability corporation with its principal place of business in Las Vegas, Nevada. 11. At all times relevant to this Complaint, defendants WIRSZ and ESTEVES

were agents and alter egos of DIAMOND BAY. 12. Plaintiff is informed and believes and thereon alleges that until late 2009,

Diamond Bay was agent for various individuals and entities who purchased interests in the construction loan that is at issue in this action. 13. Plaintiff is informed and believes and thereon alleges that at some point in

2009 after Diamond Bay defaulted on the Construction Loan, Diamond Bays position was acquired by defendant Oasis, at which time Oasis became the loan servicer. Plaintiff is informed and believes, and thereon alleges, that in its capacity as loan servicer, Oasis is the agent for all purposes of the Construction Lenders.

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GENERAL ALLEGATIONS General Allegations Relating To The Project; The Construction Loan Agreement And The Breach Of That Contract Plaintiffs sole asset is a partially constructed office condominium known as

the Quail Garden Corporate Center (the Project). The Project, designed by architects Hanna Gabriel Wells, is located on the north side of Encinitas Boulevard near the intersection of Quail Gardens Drive at 662 Encinitas Boulevard and is the first private Leadership in Energy and Environmental Design (LEED) certified building in the city of Encinitas, California. The Project is designed to consist of one single-story commercial office and/or medical condominium complex totaling approximately 33,000 square feet, divided into twenty-one units with an average size of approximately 1,575 square feet. 15. Plaintiff acquired the raw land on which the Project is constructed in 2007, for

an amount in excess of $3,085,000. Of this amount, the limited partners of Plaintiff provided half, with the rest in the form of loan from First Bank of Beverly Hills. The limited partners of Plaintiff invested an additional $650,000 of equity to fund the development costs, including architectural plans, site development, obtaining the necessary permits and the like. Plaintiffs total equity investment in the Project is $2,150,000. 16. In May of 2008, Plaintiff wished to refinance the existing loan and obtain

additional financing to complete and construct the Project. During the spring of 2008, representatives of Plaintiff met with defendant Douglas Antonio Esteves, who represented himself as a principal of Diamond Bay. Plaintiff paid a fee of $7,500 to Diamond Bay to cover the cost of due diligence with respect to the making of the proposed construction loan. 17. The due diligence for Diamond Bay was conducted by Esteves. Although

Esteves purports to hold a valid California real estate brokers license, he never informed the California Department of Real Estate that he was affiliated with Diamond Bay, or that he intended to use his brokers license to enable Diamond Bay to place commercial real estate loans in California. 5

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18.

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

State of California to act as a finance lender, real estate mortgage loan broker, or real estate securities seller. 19. Esteves told Plaintiff that Diamond Bay was ready, willing and able to make a

construction loan in the amount of $10,560,000 (the Construction Loan). This amount was sufficient to complete the construction of the building as designed. Plaintiff is informed and believes and thereon alleges that at the time this representation was made, Diamond Bay did not have $10,560,000 to advance to Plaintiff, but rather was intending to raise a significant portion of the funding through both present and future sales of interests in the Construction Loan to various investors. 20. In April of 2008, however, Diamond Bay had been advised by the State of

Arizona that the marketing of investments for the purpose of pooling them into a real estate loan was a violation of Arizonas state securities laws, and had been ordered to cease and desist from that activity in the State of Arizona. Diamond Bay consented to that result. 21. Plaintiff is informed and believes that Esteves knew of the Arizona cease and

desist order when it was entered in April of 2008. Neither Esteves nor any other representative of Diamond Bay ever informed plaintiff of this information. 22. Plaintiff is informed and believes that Diamond Bays methodology for

soliciting investments in Arizona was essentially identical to the methodology for soliciting investments in other jurisdictions. Accordingly, as of April 2008 at the latest, Diamond Bay knew that its fund-raising activities could be considered illegal securities offerings by other jurisdictions, as well as Arizona. 23. On May 15, 2008, Plaintiff entered into a Construction Loan Agreement dated

as of May 15, 2008 between Encinitas Office, L.P., as borrower, and the Construction Lenders, as lender. The Construction Loan Agreement and related documents are hereinafter referred to collectively as the Construction Loan Agreement. The Construction Loan Agreement is, by its terms, governed by California law.

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24.

In conjunction with the Construction Loan Agreement, Plaintiff also executed

a promissory note in the amount of $10,560,000 (the Promissory Note). The Promissory Note provided for an interest rate of 12.5% and had a maturity date of September 1, 2009. 25. Pursuant to the Construction Loan Agreement, the Construction Lenders also

required that Plaintiff pay a loan fee of 5.5% of the total loan commitment. At the time of the execution of the Construction Loan Agreement, Plaintiff paid $580,000, the number of points required by the Construction Lenders multiplied by $10,560,000, the maximum outstanding balance of the loan, even though the Construction Lenders initially funded only $3,500,000. 26. Collection of loan fees for funds that have not yet been advanced under a loan

agreement is illegal in the State of California. 27. On May 15, 2008, the Construction Lenders recorded a deed of trust against

the property (the Diamond Bay Deed of Trust) on behalf of themselves and a number of of additional beneficiaries. The Diamond Bay Deed of Trust purported to secure a repayment of $10,560,000, even though only $3,500,000 of the committed amount was funded at that time. 28. Diamond Bay agreed to service the Construction Loan Agreement on behalf

of the Construction Lenders. Plaintiff is informed and believes, and thereon alleges, that Diamond Bay and the various beneficiaries entered into one or more Loan Servicing Agreements that set forth Diamond Bays obligations with respect to the servicing of the loan. 29. Diamond Bay was required to be licensed by the State of California in order to

act as loan servicer for the Construction Loan, but never sought or obtained any licensure from the State of California. 30. Pursuant to paragraph 3.1 of the Construction Loan Agreement, the

Construction Lenders were obligated, so long as the borrower was not in default, to disburse loan proceeds in the Construction Loan Agreement.

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31.

Plaintiff relied on Diamond Bays representations that it was ready, willing

and able to fund a construction loan in the amount of $10,560,000 and on the Construction Lenders contractual obligation to disburse the loan proceeds in that amount, as required to complete construction of the Project. 32. Diamond Bay, however, did not have $10,560,000 with which to fund the

obligations under the Construction Loan Agreement, but was rather anticipating that it would sell interests in the Construction Loan and fund its obligations through the proceeds of those sales. Diamond Bay did not disclose this fact to Plaintiff. 33. Between May 15, 2008 and February of 2009, Diamond Bay sold interests in

the Construction Loan to fifty-four different beneficiaries (the Beneficiaries). Each of the Beneficiaries took an assignment of an interest in the Construction Loan, and Diamond Bay caused a partial assignment of the Diamond Bay Deed of Trust to be recorded with the County Recorder for San Diego County for each of the Beneficiaries. Each Beneficiary was a Lender under the Construction Loan documents, entitled to the benefits thereof and subject to the burdens and obligations thereunder. The Beneficiaries and Diamond Bay are collectively referred to herein as the Construction Lenders. 34. The sale of interests in the Construction Loan constitutes a real property

security under the provisions of Sections 10237-10239 of the California Business & Professions Code. Under California law, the sale of a real property security must either fit within the exemption described in the Business & Professions Code, or the offerer of the security must comply with the securities laws and regulations of the California Corporations Code. 35. The sale of interests in the Construction Loan did not fit within the

exemptions, and in particular (but without limitation), violated Business & Professions Code Section 10238(f) and 10238(h)(i) by virtue of, among other things: a) being sold to more than ten individuals and b) constituting the sale of fractionalized interests in a construction loan that was not fully funded. Accordingly, neither Diamond Bay, Wirsz nor Esteves was

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entitled to rely on the real property securities exemption contained in the California Business & Professions Code. 36. Plaintiff is informed and believes, and thereon alleges, that Diamond Bay also

never registered the sale of interests as a security with the State of California or otherwise complied with the securities laws and regulations of the State. 37. The Construction Loan Agreement was entered into by Plaintiff and the

Construction Lenders on or about May 15, 2008. The Construction Lenders agreed to loan Plaintiff $10,560,000. Construction on the project commenced on or about June 18, 2008. 38. The construction of Plaintiffs Project required an initial disbursement of $3.5

million followed by monthly disbursements of $500,000 per month in the early months and $750,000 per month in the later months. The initial disbursement of $3,500,000 was made on May 31, 2008. A second disbursement of $600,000 was made a month later on June 30, 2008. However, thereafter the Construction Lenders ceased making the required disbursements and further disbursements became irregular. 39. Serious defaults by the Construction Lenders began in October of 2008. The

Construction Lenders failed to make the October 1st disbursement of $500,000. Plaintiff was told that fund raising is a little slow right now, and may take us a little longer than usual . . . . The October 1st disbursement was nearly a month late. Matters quickly got worse. 40. The Construction Lenders failed to make the November 1st disbursement.

With the disbursements being late, Plaintiff needed $750,000 in November. However, the Construction Lenders only funded $200,000 that month. No loan funds at all were disbursed in December. The Construction Lenders said that the reason for not making the loan disbursements was that they did not have the money. 41. By January, Plaintiff was in serious trouble as a result of the Construction

Lenders defaults. The unpaid invoices were mounting and the subcontractors had begun filing mechanics liens. 42. On February 26, 2009, Plaintiffs attorney sent a formal Notice of Lender

Default to the Construction Lenders, pursuant to Section 16.12 of the Construction Loan 9

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Agreement, on account of the Construction Lenders failure to fund over $870,333 of loan disbursement requests. Plaintiff demanded that the Construction Lenders forthwith advance the funds they had agreed to provide under the Construction Loan Agreement. The Construction Lenders did not comply with this demand. The Construction Lenders were, and remain, in default of the Construction Loan Agreement. 43. Plaintiff was forced to shut down the Project on February 26, 2009 due to lack

of construction loan funds. 44. At the time the Construction Lenders ceased performing under the

Construction Loan Agreement, Plaintiff was in full compliance with all of its obligations under the Construction Loan Agreement and was entitled to demand and require full and complete performance of the Construction Loan Agreement by the Construction Lenders. 45. At the time the construction was stopped, the Project was approximately 50%

completed, including major infrastructure improvements to Encinitas Boulevard, street widening and paving, plus the installation of storm drains, curb, gutter, sidewalk, all underground utilities and a fully landscaped median. 46. Various contractors had provided goods and services to Plaintiff with respect

to the construction of the Property in reliance upon the Construction Lenders agreement to fund the Construction Loan. 47. The unpaid contractors who were unpaid as a result of the Construction

Lenders breach of the Construction Loan Agreement have asserted claims exceeding $800,000 in amount against Plaintiff, its general partner, Wiegand Neglia, Inc. and against the principals of the general partner, Bruce Wiegand and Bart Neglia, personally. These claims are a direct result of the breach of the Construction Loan Agreement by the Construction Lenders. 48. Prior to cessation of construction, Plaintiff had entered into two purchase

contracts, both for the sale of medical office condominiums. One was for a unit of 1556 square feet, with a sales price of $925,820.00 and the other was for a unit of 1259 square feet, with a sales price of $749,105 (a sales price of approximately $595/square foot). As a 10

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consequence of the breach of the Construction Loan Agreement and Plaintiffs subsequent inability to complete construction of the Project, both contracts have been cancelled. One of the parties to these sales contracts have asserted claims against Plaintiff in an amount that may exceed $50,000. 49. From February 2009 to the present, Plaintiff has been required to expend

money to protect and preserve the half-completed construction site, including reinforcement to the semi-completed structure, security guards, weed abatement and the like. These costs and expenses exceed $200,000. 50. Plaintiff has suffered actual, out-of-pocket damages caused by the breach of

the Construction Loan Agreement in excess of $2,000,000. Additionally, Plaintiff faces the risk of loss of its entire $2,150,000 equity investment in the Project. Finally, Plaintiff alleges that, had it been able to complete the Project on time and as scheduled, it would have made a profit in an amount in excess of $3,500,000 upon the sell-out of the Project and that the loss of this profit is attributable to the Construction Lenders breach of the Construction Loan Agreement. B. General Allegations Relating To Oasis Loan Advisors LLC And Its Breach Of Contract And Covenant Of Good Faith And Fair Dealing 51. Following the default under the Construction Loan Agreement, defendant

Oasis Loan Advisors, LLC, a Nevada limited liability company (Oasis) took over Diamond Bays position as loan servicer. Plaintiff is informed and believes that there is an agreement between Oasis and the Construction Lenders with respect to the servicing of the Construction Loan, but Oasis has refused to disclose the terms of that agreement to Plaintiff. Oasis has also refused to disclose to Plaintiff the terms and conditions under which it acquired Diamond Bays interest in and to the Construction Loan Agreement and the servicing rights. 52. From February 2009 to the present, Plaintiff has sought a new source of

financing to complete the Project. The half-completed state of the Project, the fact that 54 different beneficial interests had been recorded against the Project and the fact that Diamond 11

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Bay and its principal, Jordan Wirsz, had ceased to fulfill their obligations as servicers of the Construction Loan, made it difficult to find any new source of financing. 53. Notwithstanding these difficulties, Plaintiff identified a source of new

financing, Pacific Horizon Mortgage Investors II, LLC. Pacific Horizon was, however, unwilling to make the loan unless it could be assured that it would be in a first priority position with respect to the repayment of the loan. 54. The contemplated loan from Pacific Horizon is for $5,000,000. The

approximately $1,000,000 difference between this amount and the $4,000,000 remaining to be disbursed under the Construction Loan Agreement represents additional fees for the new loan, a higher interest rate (14% as compared to 12.5% under the Construction Loan Agreement), and administrative and legal costs occasioned by the breach of the Construction Loan Agreement. 55. On August 19, 2009, Plaintiff sent an e-mail to Amnon Cohen who, at that

time, was doing business under the name of Chelsea Loan Servicing and Workouts, LLC. Plaintiff provided Mr. Amnon extensive information about the Project including (1) a project brochure, (2) an executive summary, (3) sources and uses of existing construction funds as of that date, (4) a pro forma financial analysis, (5) a sales comparison summary, (6) the status of buyer escrows, and (8) buyer prospects. Mr. Cohen acknowledged receipt of the information and suggested further discussions. 56. On September 1, 2009, Plaintiff received an e-mail from Mr. Cohen under the

name of Oasis Loan Advisors, LLC. In the e-mail, Mr. Cohen stated that his group had officially taken over as of September 1st. 57. On November 12, 2009, Plaintiff received an e-mail from Rodney Tucker of

Oasis Loan Advisors. Attached to the e-mail was a formal offer from the Construction Lenders regarding a global resolution of the disputes between the Construction Lenders and Plaintiff (the Oasis Proposal). Mr. Tucker represented that the Oasis Proposal was acceptable to the beneficiaries of the deed of trust and was contingent only on finding acceptable financing to complete the Project. 12

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58.

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

Lenders would subordinate their deed of trust to new construction loan in an amount not to exceed $5 million, and (2) the sale proceeds from the Project would be disbursed (i) first to pay off the priming lender, (ii) after the priming lender was paid and through $15 million of proceeds, Plaintiff would receive 75% of the sale proceeds and the Construction Lenders would receive 25%, and (iii) after $15 million, Plaintiff would receive 25% of the sale proceeds and the Construction Lenders would receive 75%. In addition, of the first $15 million, Plaintiff would receive 100% of the sale proceeds over the equivalent of $450 per square foot of rentable space. 59. On December 1, 2009, Plaintiff accepted the Oasis Proposal and returned a

signed copy to the Construction Lenders on that date thereby entering into a settlement contract with the Construction Lenders (the Oasis Agreement). 60. Notwithstanding its agreement, however, Oasis has failed and refused to

effectuate the subordination, which has required Plaintiff to file for bankruptcy and seek a priming lien for the construction financing, to assure that the new construction lender will be guaranteed first priority of repayment for sums advanced to complete the construction of the Project. 61. Oasis has also refused to honor its agreement with respect to the sharing of the

sales proceeds as evidenced by the Oasis Agreement. 62. Plaintiff is informed and believes, and thereon alleges, that although Oasis has

repeatedly assured Plaintiff of its good faith and intent to honor the Oasis Agreement, Oasis never intended to perform under the Oasis Agreement, but rather to stall and delay in the hope that Plaintiff would ultimately be in sufficiently dire economic straits that it would have to capitulate to Oasiss demands with respect to the Project. 63. As a result of Oasiss breach of contract, and breach of the covenant of good

faith and fair dealing embodied in that contract, Plaintiff has incurred the cost and expense of filing for bankruptcy in order to protect its interests, and will continue to incur costs and

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expenses in conjunction with the administration of the bankruptcy, all of which are the direct and proximate result of Oasiss failure to abide by the terms of the Oasis Agreement. C. General Allegations Relating To Non-Compliance With California Statutes And Regulations 64. The Construction Loan Agreement is, according to its terms, governed by

California law. Plaintiff is a California limited partnership, the property is located in California, and a number of the individual investors who acquired interests in the Construction Loan are located in California. Accordingly, the California statutory and regulatory scheme applicable to loan servicing agents required Diamond Bay to be licensed as a real estate broker in California in order to act as the arranger of and servicing agent for the Beneficiaries with respect to the subject loan negotiated and entered into in California and secured by California real estate and required Diamond Bay to comply with the California statutes and regulations governing mortgage loan brokers and the sale of real property securities. 65. California law also requires Encinitas 338 and Oasis to be licensed a real

estate brokers in California to represent the interests of the Beneficiaries as members of Encinitas 338. 66. Plaintiff is informed and believes, and on that basis alleges: a) Diamond Bay

never obtained any license to make loans in California and thus acted as the arranger and the loan servicing agent on the subject loan without proper authority, b) Jordan Wirsz, the principal of Diamond Bay, was not licensed as a broker, c) Douglas Esteves, who also negotiated the loan terms with Plaintiff acting as a principal of Diamond Bay, was licensed as a real estate broker but had not, as is required by the regulations of the State of California, registered his license as affiliated with Diamond Bay, so that Diamond Bay could rely upon it and, d) Oasis is not licensed as a real estate broker with the State of California. 67. Moreover, the loan contract was, at its inception, marketed to more than ten

fractional interest holders, in violation of applicable California statutes and regulations providing for exemption from the securities laws for certain real property securities 14

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transactions. The sale of real property securities by Diamond Bay is therefore illegal, even if those sales are or were conducted or arranged by a licensed broker. 68. Plaintiff further alleges that the Construction Loan Agreement was, from

inception, illegal and unenforceable. 69. Encinitas 338, as successor-in-interest to Diamond Bays loan servicing rights

and the rights of the Construction Lenders under the Construction Loan Agreement, are subject to the same defenses that Plaintiff has against the Construction Lenders, including the defense that the Construction Loan Agreement was, from its inception, illegal and unenforceable. D. 70. General Allegations Relating To Usury The Construction Lenders, under the Construction Loan Agreement, charged

Plaintiff interest on the construction loan in excess of the amount permitted by Article 15, Section 1 of the California Constitution, which provides for an interest ceiling not to exceed the higher of (a) 10% per annum or (b) 5% per annum over the discount rate set by the Federal Reserve Bank of San Francisco operative on the 25th day immediately preceding the date of origination of the loan. 71. Plaintiffs are informed and believe and thereon allege that Encinitas 338

contends that it is entitled to collect interest in excess of the permissible legal rate. 72. Although the Construction Loan was purported to be made and arranged by

Esteves, a broker licensed in California, because Diamond Bay was a corporation, it was itself required to be licensed as a broker under California law in order to avail itself of the real estate broker exemption to the usury law. Diamond Bay was not a licensed real estate broker, nor had it registered any licensed real estate broker with the State of California to act on its corporate behalf. Accordingly, the Construction Loan was not made or arranged by a licensed California real estate broker within the meaning of the exemption, or otherwise exempt from the anti-usury provisions of the California Constitution. 73. In addition, neither Diamond Bay nor Encinitas 338 is licensed otherwise in

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74.

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

the Construction Lenders in the amount of $604,826.22, from May 15, 2008 through February, 2009. At a minimum, as required by California law, Defendants are prohibited from collecting any interest whatsoever and must return all interest and other charges already paid. Plaintiff is entitled to treble damages. E. General Allegations Relating To Defendants Failure To Register To Do Business In California 75. Diamond Bay, Oasis, and Encinitas 338 all conducted, or are conducting,

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

338 and each of them were and are obligated to register to do business in California and to remain in good standing as a foreign corporation in the State of California in order to do business and enforce rights within the State. 77. Plaintiff is informed and believes and thereon alleges that Diamond Bay at

one time registered with the State of California, but that it was not in good standing at the time the Construction Loan Agreement was executed or at any point in time thereafter, when it was soliciting and selling interests in the Construction Loan in California and to California residents. 78. Plaintiff is informed and believes and thereon alleges that neither Oasis nor

Encinitas 338 have ever registered to do business in California. 79. As a result, Diamond Bay was not entitled to enter into contracts in California

and the Construction Loan Agreement and related documents are void ab initio. Moreover, neither Oasis nor Encinitas 338 is authorized to do business in the State of California, including without limitation, enforcing or exercising any rights under the Construction Loan Agreement.

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F.

General Allegations Relating To Illegality Of Contract Under Securities Laws

80.

Pursuant to the pertinent California statutory and regulatory scheme regarding

securities offerings, Diamond Bay as sponsor/issuer was required to have a current securities permit from the California Department of Corporations in order to be able to offer fractionalized interests in the promissory note for the subject loan to more than ten Beneficiaries. 81. Diamond Bay never obtained a securities permit in the state of California, nor

did Oasis or Encinitas 338. 82. Diamond Bay knew that the loan it was originating and selling fractionalized

interest in were secured by real property located in California and that it consistently sought to access the California market by placing advertisements, conducting direct mailings and maintaining websites that were accessible to investors from the State of California. Diamond Bay in fact sold fractionalized interests in the Construction Loan to a number of investors in the State of California, notwithstanding the fact that it was not licensed or otherwise authorized to make such sales. 83. Accordingly, all of the loan servicing agreements Diamond Bay entered into

with the Beneficiaries/Construction Lenders, as well as the documents pursuant to which Diamond Bay sold fractionalized interests to the Beneficiaries/Construction Lenders, are illegal and unenforceable. 84. A contract which has for its purpose the violation of law or the public policy

implementing the law is void or voidable. The Construction Loan Agreement required the unauthorized and illegal sale of fractionalized interests to the Beneficiaries/Construction Lenders in order for Diamond Bay to fulfill the funding obligations thereunder and is therefore itself illegal and unenforceable. 85. Neither Encinitas 338, Oasis nor any of the Beneficiaries have any greater

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

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therefore precluded from enforcing the Construction Loan Agreement, including without limitation, exercising any purported right to foreclose on the Project. FIRST CAUSE OF ACTION (Breach of Contract Against Diamond Bay, Encinitas 338 and the Construction Lenders) 86. 87. Plaintiff incorporates by reference the allegations in paragraphs 1 through 85. Among other things, Diamond Bay has breached the Construction Loan

Agreement as more particularly described in the General Allegations, and continuing thereafter to the present, in the following manner: (a) Assessing and collecting servicing fees, late fees, default interest and

prepayment penalties that are neither earned nor assessable without a real estate brokers license; (b) set by applicable law; (c) (d) Failing to register as a broker-dealer; Entering into an obligation to fund the Construction Loan without Demanding the payment of a maturity date fee in excess of maximum

having adequate funds to fulfill the funding obligation under the Construction Loan Agreement; (e) Entering into a loan obligation, the only source of funding for which

was the sale of real property securities in violation of California law; (f) Plaintiff at risk; and (g) Failure to obtain a permit for partial funding, causing litigation Without disclosure to the borrower, use of partial funding, putting

exposure to Plaintiff from the Defendants. 88. Among other things, the Construction Lenders have breached the Construction

Loan Agreement as more particularly described in the General Allegations, and continuing thereafter to the present, the Construction Lenders breached the Construction Loan Agreement in the following manner:

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(a)

Failing to fully fund the Construction Loan pursuant to its obligation

to do so as set forth in the Construction Loan Agreement; (b) Assessing and collecting servicing fees, late fees, default interest and

prepayment penalties that are neither earned nor assessable without a real estate brokers license; (c) Demanding the payment of a maturity date fee in excess of maximum

set by applicable law; and (d) Entering into an obligation to fund the Construction Loan without

having adequate funds to fulfill the funding obligation under the Construction Loan Agreement. 89. No lawful excuse applies to protect the Construction Lenders from their full

and timely performance of its obligations under the Construction Loan Agreement. 90. Plaintiff is informed and believes and thereon alleges that during the fall of

2009 and the spring of 2010, Oasis induced the Construction Lenders to assign their interests in the Construction Loan to a newly formed Nevada limited liability company, Encinitas 338, LLC. Plaintiff is informed and believes that Oasis is the managing member of Encinitas 338 and that Encinitas 338 acts by and through Oasis. 91. Encinitas 338 is the successor-in-interest to the Construction Lenders under

the Construction Loan Agreement and acquired its interest will full knowledge of all of the facts and circumstances of the Project, including the Construction Lenders default under the Loan and the partially completed status of the Project. As such, Encinitas 338 is subject to Plaintiffs claims and defenses with respect to the Construction Loan Agreement and is entitled to no greater rights under the Construction Loan Agreement than the Construction Lenders could have claimed. 92. The Construction Lenders are parties to the Construction Loan Agreement.

Their interests subject to all of the claims and defenses that Plaintiff has under the Construction Loan Agreement. Likewise, Encinitas 338s interest in the Project consists solely of the assignment of beneficial interests by the Construction Lenders, and accordingly 19

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Encinitas 338 is also subject to all of the claims and defenses to the enforcement of the Construction Loan Agreement that Plaintiff has under the Construction Loan Agreement. 93. Plaintiff has fully performed all of its obligations under the Construction Loan

Agreement, and/or such obligations have been waived by Defendants or excused by reason of Defendants actions, inactions, material breaches of the agreement, or the illegality of the transaction. 94. Plaintiff has sustained and will sustain damages in an amount which is

unknown and difficult to calculate. At a minimum, Plaintiff is entitled to damages that include, but are not limited to: a) a refund of the illegal advance fees, b) actual out-of-pocket costs to protect and preserve the partially constructed Project following the Construction Lenders default, c) the actual additional costs incurred from having to obtain replacement financing, including without limitation, the additional loan fees, higher interest payments and costs of administering this bankruptcy case, d) damages suffered by Plaintiff from claims asserted against Plaintiff by unpaid contractors, e) damages suffered by Plaintiff from claims asserted by parties who had contracted to buy units in the Project, which contracts Plaintiff was unable to perform due to Defendants breaches, and f) lost economic opportunities resulting from the delay in the completion of the Project and the resulting inability of Plaintiff to sell units in the Project and realize the profits therefrom. Plaintiff asserts that the damages it has suffered from breach of the Construction Loan Agreement exceed $5,000,000. 95. Plaintiff is entitled to set off and recoupment of the damages it has incurred as

a result of the breaches of the Construction Loan Agreement against any amounts that it owes under thereunder to any Construction Lender, including without limitation Encinitas 338, or any other entity or individual claiming its rights through, or seeking to enforce rights under, the Construction Loan Agreement.

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 96. 97.

SECOND CAUSE OF ACTION (Breach of Contract and Covenant of Good Faith and Fair Dealing, Against Oasis Loan Advisors, LLC) Plaintiff incorporates by reference the allegations in paragraphs 1 through 95. Oasis, as representative of the Construction Lenders entered into the Oasis

Agreement pursuant to which the Construction Lenders and Plaintiff agreed that (1) the Construction Lenders would subordinate their deed of trust to new construction loan in an amount not to exceed $5 million, and (2) the sale proceeds from the Project would be disbursed (i) first to pay off the priming lender, (ii) after the priming lender was paid and through $15 million of proceeds, Plaintiff would receive 75% of the sale proceeds and the Construction Lenders would receive 25%, and (iii) after $15 million, Plaintiff would receive 25% of the sale proceeds and the Construction Lenders would receive 75%. In addition, of the first $15 million, Plaintiff would receive 100% of the sale proceeds over the equivalent of $450 per square foot of rentable space. 98. Notwithstanding its agreement, however, Oasis has failed and refused to

effectuate the subordination, which has required Plaintiff to file for bankruptcy and seek a priming lien for the construction financing, to assure that the new construction lender will be guaranteed first priority of repayment for sums advanced to complete the construction of the Project. 99. Oasis has also refused to honor its agreement with respect to the sharing of the

sales proceeds as evidenced by the Oasis Agreement. 100. Plaintiff is informed and believes, and thereon alleges, that although Oasis has

repeatedly assured Plaintiff of its good faith and intent to honor the Oasis Agreement, Oasis never intended to perform under the Oasis Agreement, but rather to stall and delay in the hope that Plaintiff would ultimately be in sufficiently dire economic straits that it would have to capitulate to Oasiss demands with respect to the Project. 101. As a result of Oasiss breach of contract, and breach of the covenant of good

faith and fair dealing embodied in that contract, Plaintiff has incurred the cost and expense of 21

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filing for bankruptcy in order to protect its interests, and will continue to incur costs and expenses in conjunction with the administration of the bankruptcy, all of which are the direct and proximate result of Oasiss failure to abide by the terms of the Oasis Agreement. THIRD CAUSE OF ACTION (Breach of Fiduciary Duty Against Diamond Bay and Esteves) 102. 101. 103. In the State of California, a mortgage loan broker owes a fiduciary duty of the Plaintiff incorporates by reference the allegations in paragraphs 1 through

highest good faith toward his principal and is charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principals decision. Barry v. Raskov, 232 Cal.App.3d 447, 455 (1991). The broker owes this duty to the lenderinvestor as well as to the borrower. Id. 104. The fiduciary duty of the broker is non-delegable and exists in order to assure

that all real estate loan transactions in California that are performed through the efforts of a licensed real estate broker are conducted in good faith and in strict compliance with the laws and regulations of the State of California. 105. Defendant Esteves was acting as agent of both Plaintiff and Diamond Bay in

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

to Plaintiffs with respect to the Construction Loan, including, without limitation, the duty to inform Plaintiff that a) Diamond Bay had been held in violation of the Arizona securities laws for their solicitation of investors, b) that Diamond Bay was not able to fund the Construction Loan in full at the time it was entered into, and c) that Diamond Bay intending to further solicit new investors, in a manner similar to the solicitations that had been precluded by the State of Arizona, in order to obtain the necessary funds. Esteves did not inform Plaintiff of any of this information. 107. Diamond Bay also owed fiduciary obligations to Plaintiff with respect to the

Construction Loan. 22

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 113. 108.

108.

Both Esteves and Diamond Bay breached their fiduciary obligations to

Plaintiff, causing Plaintiff damages in excess of $3,000,000, to be further established at the time of trial. FOURTH CAUSE OF ACTION (Negligence against Esteves) 109. Plaintiff incorporates by reference the allegations in paragraphs 1 through

110. 111.

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

Plaintiff that a) Diamond Bay had been held in violation of the Arizona securities laws for their solicitation of investors, b) that Diamond Bay was not able to fund the Construction Loan in full at the time it was entered into, and c) that Diamond Bay intending to further solicit new investors, in a manner similar to the solicitations that had been precluded by the State of Arizona, in order to obtain the necessary funds. 112. Plaintiff was damaged by Esteves breach of his duty of care in an amount in

excess of $3,000,000, to be further established at the time of trial. 113. Esteves was the proximate cause of the damages suffered by Plaintiff. FIFTH CAUSE OF ACTION (Against Diamond Bay, Esteves and Wirsz for Deceit) 114. Plaintiff incorporates by reference the allegations in paragraphs 1 through

115.

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

Plaintiff that: a) Diamond Bay had been held in violation of the Arizona securities laws for their solicitation of investors, b) Diamond Bay did not have sufficient money to fund the Construction Loan in full at the time it was entered into, c) Diamond Bay intended to further solicit new investors, in a manner similar to the solicitations that had been precluded by the State of Arizona, in order to obtain the money necessary to fund the Construction Loan in full, and d) Diamond Bay was not licensed as a finance lender in the State of California. 23

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 118.

116.

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

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

Bay had it known any of the facts set forth in paragraph 115 of this Complaint. 118. Plaintiff was damaged by Defendants deceit in an amount in excess of

$3,000,000, to be further established at the time of trial. SIXTH CAUSE OF ACTION (Declaratory Relief Against all Defendants) 119. Plaintiffs incorporate by reference the allegations in paragraphs 1 through

120.

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

respect to the Project is a proper matter for declaratory relief. 121. An actual controversy has arisen and now exists between Plaintiff and

Defendants with respect to the various parties interests in the Project and the rights of Defendants to foreclose on the Project. A further controversy exists between Plaintiff and Defendants with respect to the enforceability of any of the loan documents. 122. Plaintiffs desire a judicial determination of (1) the parties rights and duties

with respect to the Project, (2) the validity, priority and extent of the respective claims asserted against the Project, and (3) the rights of specific performance, if any. Plaintiff further seeks an order from the Court that the loan documents are illegal and unenforceable and/or that Plaintiffs may rescind the loan based on the facts set forth herein, together with a determination of the following specific issues: (a) Whether the contracts between the parties are unlawful and violate any

securities, licensing laws and regulations or other laws or regulations, and thus cannot be enforced; (b) Whether California law was circumvented and/or violated by the

manner in which Diamond Bay negotiated and procured Plaintiffs acquiescence to the Construction Loan Agreement; 24

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(c)

Whether California law was circumvented and/or violated by the

manner in which Diamond Bay assigned fractionalized beneficial interests in the Construction Loan; (d) Whether Diamond Bay was required to register as a broker-dealer

and/or licensed real estate broker, or to obtain any other license required by the State of California to engage in the loan transaction with Plaintiff; (e) Whether Diamond Bay may avoid its obligation to obtain the requisite

licenses by using the services of a California licensed real estate broker who did not register his affiliation with Diamond Bay with the State of California; (f) Whether the failure to register as a broker-dealer and lack of any

brokers or other required licenses precludes the enforceability of the contracts or the collection of any amounts thereunder; (g) duty to Plaintiff; (h) Whether Diamond Bay, Esteves and/or Wirsz deceived Plaintiff by Whether Diamond Bay, Esteves and/or Wirsz breached a fiduciary

failing to disclose material relevant information regarding Diamond Bays ability to fully fund the Construction Loan, prior to entering into it; (i) Whether the collection of advance fees in respect of unperformed

obligations of the lender under the Loan Construction Agreement renders the Loan Construction Agreement illegal and unenforceable; (j) loan or other fees; (k) (l) Whether the use of partial funding is a violation of the securities laws; Whether Encinitas 338, as successor-in-interest to the lender under the Whether Diamond Bay is required to disgorge any illegally collected

Construction Loan Agreement, is subject to the claims and defenses of Plaintiff to payment of the Construction Loan; (m) Whether Plaintiff is entitled to offset its damages against any amounts

owed under the Construction Loan Agreement; 25

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(n) (o)

Whether Defendants, or any of them, can foreclose on the loans; Whether Defendants Diamond Bay, Oasis and Encinitas 338 were

required to register to do business in California as a condition to defending the claims herein or in entering into the loan agreement or act as representatives of the Beneficiaries under the Loan Documents; (p) Whether Douglas Esteves exceeded the scope of authority permitted

under the California laws and regulations governing licensed real estate brokers with respect to his role in negotiating and arranging the Construction Loan; (q) Whether Esteves was acting as Diamond Bays agent with respect to

negotiating and arranging the Construction Loan; (r) Whether usurious interest and fees have been collected and what

interest if any can be charged; and (s) Whether, under the facts and circumstances of this case, the unpaid

contractors should be entitled to payment in full before Encinitas 338 receives any payment with respect to the Construction Loan. 123. Plaintiff is informed and believes that Defendants dispute each of Plaintiffs

contentions with respect to the Construction Loan Agreements as set forth herein, and the rights of Plaintiff to rescind, reform or refinance or otherwise replace the indebtedness against the Project, and whether Encinitas 338 is entitled to foreclose on the Project pursuant to the facts and circumstances of this case. 124. A judicial declaration is necessary and appropriate at this time under the

circumstances in order that Plaintiff and Defendants may ascertain their respective rights and duties with respect to the loan documents and the Project, and also to determine if foreclosure by Defendants can be permitted and if so by which Defendants and under what terms or conditions.

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 127. 129. 128. 124. 126. 125.

SEVENTH CAUSE OF ACTION (Equitable Subordination of the Construction Loan to Unpaid Contractor Claims) Plaintiffs incorporate by reference the allegations in paragraphs 1 through

When the Construction Lenders defaulted on their obligation to fund the

Construction Loan, Plaintiff was unable to fully pay the contractors who provided their goods and services to construct the Project. Had the Construction Lenders performed as they had agreed and wer obligated to do under the Construction Loan Agreements, all of the contractors would have been paid in full. 127. Under Section 510(c)(2) of the Bankruptcy Code, the Court may, under

principles of equitable subordination, subordinate for the purposes of distribution all or part of an allowed claim to all or part of another allowed claim. Plaintiff alleges that it would be unfair and inequitable, under the facts and circumstances of this case, for the Construction Lenders or any person or entity claiming rights or interests under the Construction Loan Agreement to be repaid prior to the contractors claims being paid in full. Accordingly, Plaintiff requests that the Bankruptcy Court exercise its equitable powers under Section 510 of the Bankruptcy Code and determine that the claims of all contractors providing goods and services for the benefit of the Project should be allowed a priority in distribution of any proceeds resulting from the sale of the Project, over the Construction Lenders or any other successor-in-interest seeking to enforce the Construction Lenders rights under the Construction Loan Agreement. EIGHTH CAUSE OF ACTION (Usury) Plaintiffs incorporate by reference the allegations in paragraphs 1 through

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

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130.

Without any lawful defense thereto, the Construction Lenders charged interest

on the loan in excess of the statutory maximum interest rate, which is the greater of (i) 10% per annum, or (ii) 5 percentage points over the San Francisco Federal Reserve Bank's discount rate operative on the 25th day of the month immediately preceding the origination of the loans. 131. As a proximate result of the usurious interest rates and charges by the

Construction Lenders, Plaintiff has been damaged as herein alleged and have suffered and will continue to suffer general damages and special damages including the potential loss of the Project or the inability to develop it, which losses are estimated to be not less than the amount of $1,000,000 which shall be determined according to proof at trial. Moreover, the Construction Lenders are obligated to return all interest paid herein and may not collect any additional interest as a result of the usurious charges made in violation of applicable law, and Plaintiff may offset its claim for such disgorgement against amounts otherwise owed by Plaintiff to the Construction Lenders or their assigns. 132. The collection of usurious interest by the Construction Lenders was knowing

and intentional and undertaken in complete disregard of the rights of Plaintiff and applicable law. As a result, Plaintiff is entitled to damages equal to three times the interest already collected by the Construction Lenders, and is entitled to offset its claim for such amount against any amount otherwise owed by Plaintiff to the Construction Lenders or their assigns under the Construction Loan Agreement. WHEREFORE, Plaintiff Encinitas Office L.P. prays as follows: 1. On the First Cause of Action, for a judgment against Diamond Bay, Encinitas

338, and the Construction Lenders, directly and by way of setoff and recoupment, for damages caused the Construction Lenders breach of the Construction Loan Agreement, in an amount to be proven at trial. 2. On the Second Cause of Action, for a judgment against Oasis Loan Advisors,

LLC, for breach of the Oasis Agreement and breach of the covenant of good faith and fair dealing embodied therein, for damages in an amount to be proven at trial. 28

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3.

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

Antonio Esteves, and Jordan Wirsz for damages for breach of their fiduciary duties to Plaintiffs, in an amount to be proven at trial. 4. On the Fourth Cause of Action, for a judgment against Douglas Antonio

Esteves for damages in an amount to be proven at trial. 5. On the Fifth Cause of Action, for a judgment against Diamond Bay, Douglas

Antonion Esteves, and Jordan Wirsz and, by way of setoff and recoupment, against all defendants claiming rights as assignee of, or successor-in-interest to, Diamond Bay under the Construction Loan Agreement, for damages in an amount to be proven at trial. 6. On the Sixth Cause of Action, for a judgment against all Defendants, for a

judicial declaration of the respective rights and duties, if any, of all parties with respect to the Construction Loan Agreement including, without limitation, that (1) Plaintiff is not in default under the Construction Loan Agreement and related documents, (2) the Construction Lenders are in default under the Construction Loan Agreement and related documents, (3) the breach of the Construction Loan Agreement and related documents excused Plaintiffs performance under the Construction Loan Agreement and related documents, (4) Plaintiff is entitled to setoff and recoupment of its breach of contract and tort claims against any amounts owing under the Construction Loan Agreement and related documents, if any, notwithstanding the assignment of the Construction Lenders interests under the under the Construction Loan Agreement and related documents, (5) the security interest(s) are unenforceable, and (6) no foreclosure can proceed. 7. On the Seventh Cause of Action, for a judgment against all Defendants

equitably subordinating the lien of the Diamond Bay Deed of Trust to the claims of unpaid contractors who provided goods or services for the benefit of the Project. 8. On the Eighth Cause of Action, for a judgment against the Construction

Lenders and any other person or entity claiming rights as assignee of, or successor-in-interest to, Diamond Bay, for (1) a declaration that the loans do not bear interest, (2) an offset equal

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to all interest and other fees paid since the inception of the loan, and (3) three times the interest and fees that Plaintiffs have paid. 9. On all Causes of Action: (a) For compensatory damages, general and special damages in excess of

the unlimited jurisdictional amount of this court and estimated to be not less than the amount of $5,000,000 at this time, as the same shall be determined according to proof at trial; (b) (c) For punitive and/or exemplary damages according to law; For prejudgment interest on compensatory damages at the maximum

legal rate of interest according to proof and law; (d) (e) (f) For attorneys fees according to proof and law; For costs incurred; and For such other relief as the Court may deem just and proper.

October 5, 2010

/s/ Sara Pfrommer ________________________ Sara Pfrommer Attorneys for ENCINITAS OFFICE, LP

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