Opposition Brief — Barnett v. Glenborough Realty Corp.

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FILER

SEP 18 1998

No. 98-303 } DERE OF THE CLERK |

IN THE

Supreme Court of the United States

OCTOBER TERM, 1997

DONALD A. BARNETT, SHEILA GOLD,

RONDA CHANEY, LON CHANEY, JR., WILLIAM

MITCHELL AND ROBERT Q. BUICKEROOD,

vs. Petitioners,

GLENBOROUGH REALTY CORPORATION,

GLENBOROUGH CORPORATION, ROBERT

BATINOVICH AND ANTHONY BLUMBERG,

Respondents.

On Petition for a Writ of Certiorari to the

California Court of Appeal for the First Appellate District

BRIEF IN OPPOSITION OF RESPONDENTS

GLENBOROUGH REALTY CORPORATION,

GLENBOROUGH CORPORATION AND ROBERT

BATINOVICH

Melvin R. Goldman* Counsel for Respondents

Darryl P. Rains Glenborough Realty Corporation,

Craig D. Martin Glenborough Corporation,

MORRISON & FOERSTER LLP and Robert Bationovich

425 Market Street

San Francisco, California 94105

(415) 268-7000

*Counsel of Record

LIST OF PARTIES

The petition accurately lists the parties to the proceeding.

Neither Glenborough Corporation nor Glenborough Realty

Corporation have parents or nonwholly owned subsidiaries.

TABLE OF CONTENTS

Page

TAPS COP ALS TREE ES Ai os oe seg Cacewens iv

SIAL EEL Ge LEGS GaMES 6 koh Acne sec wes twos a 1

Formation OF The REIT . 2.0.6. cc ecee 2

Allocation Of REIT Shares ............ 3

The Allegations Of Plaintiff's Complaint .. 3

Settlement Of The Action ............. 4

Certification Of The Settlement Class .... 6

The Trial Court’s Approval Of The Settle-

NEE 3 55 Re eee a ea 6

G. Solicitation Of Approval By The Limited

Mino Ow >

PEP ree eT Pe er eee 7

Appellate Review Of The Settlement ..... 8

REASONS FOR DENYING THE WRIT........... 11

A. The Mandatory Class Was Certified Under

The Same, Uncontroversial Standards

Approved By The Federal Courts........ 12

1. This Court’s holding in Phillips Petro-

ae 0 SD sa aes eine nna ans 12

2. Federal Rule of Civil Procedure 23 ... 13

3. The Ninth Circuit has not exceeded

the limited holding of Shutts ........ 15

4. California courts follow Rule 23 and

BONE SaaS sce ed 5 0a OE Rae 0 19 \

B. The Class Was Properly Certified Pursuant

To Rules 23(b)(1) And 23(b)(2) ......... 20

1. Defendants faced a high risk of incon-

SIRGDE BORMNCRIONS o.oo cc oe ee es 21

2. Plaintiffs’ claims were predominantly

ONG sik eS A ih ks hes ces 22

C. All Class Members Had Minimum Con-

tacts With California By Virtue Of Their

Ownership Of Interests In California Lim-

SOG PUTUNCRUINS 65s Ss in Few eek ee Ve 26

ili

TABLE OF CONTENTS

(continued)

D. Petitioners Do Not Have Standing To Com-

plain About The Mandatory Class Since

They Are Not Aggrieved Parties.........

MME ST CC ees aos ke cae sWhdes be 0 oat

TABLE OF AUTHORITIES

CASES PAGE(S)

Adams v. Robertson,

SOE EEF esc ee e he niece eiaves 5 20 n.9

Allison v. Citgo Petroleum Corp.,

No. 96-30489, 1998 U.S. App. LEXIS 20171 (Sth

<i AO. Ee EE 5 hse cds Waa es ba Peni es 14

Arkansas Educ. Assn v. Board of Educ., Portland, Ark.

Sch. Dist.,

GAB: FAG Fas See CAFTA) so iniie's CKids bank 24

Arnold v. United Artists Theatre Circuit, Inc.,

158 ER.D. 439 (N.D. Cal. 1994). .............. 17, 18

Avagliano v. Sumitomo Shoji Am., Inc.,

107 ER.D. 748 (S.D.N.Y. 1985) ............... 13

Bailey v. Patterson,

SOO ND ic Se ee RS kN eine sie Pein ten 28

Bell v. American Title Ins. Co.,

ye be ee) } RR ee ae passim

Brown v. Ticor Title Insurance Co., _

982 F.2d 386 (9th Cir. 1992),

cert. dismissed, 511 U.S. 117 (1994)............. passim

City of San Jose v. Superior Court,

12: Cook SE EE re a hc GAS RSS os cee 8 n.3

Clarke v. Advanced Private Networks, Inc.,

373 FEA See es Pe En gk ce cans eecnce’ 19 n.8

DeBoer v. Mellon Mortgage Co.,

64 F.3d 1171 (8th Cir. 1995),

cert. denied, Crehan v. DeBoer, 517 U.S. 1156 (1996) 28

Epstein v. MCA, Inc.,

126 FSG Aor Core Geer AEs ein 8 ha CEN le 27

TABLE OF AUTHORITIES

(continued)

CASES PAGE(S)

Frazier v. City of Richmond,

TOA Cal: App, 30: 14695 (1986) ©. 6 oe ee. 20, 22,

Green v. Occidental Petroleum Corp.,

SAT Fee Be Ae CAE. ASTOR. os wns 80 vcietele a's de's 15

Grimes v. Vitalink Communications Corp.,

17 F.3d 1553 (3d Cir.),

CR is TAS Wie FIO LAGOS) ook cc enssesaess 26, 27

Hanna v. Plumer,

Noo 6 Sob pk scr aedeves seed 13

Howard v. McLucas,

aE POP A AROD GANy LOMO) 40 0-505 0.0 wp es 0.2 13

Hynson v. Drummond Coal Co.,

Pe gee 2 ae. § ger ae eer 27

In re Jackson Lockdown/MCO Cases,

BE Fels Pe, BIGRD ois so ce ccasacs 13

In re Real Estate Title and Settlement Servs. Antitrust

Litig.,

1986-1 Trade Cas. (CCH) (E.D. Pa. 1986),

aff'd without op., 815 F.2d 695 (3d Cir. 1987),

cert. denied, 485 U.S. 909 (1988) ............... 15

In re Real Estate Title and Settlement Servs. Antitrust

Litig.,

OOP Fa Fee (ae Uy Sree es SV 15, 16,

TABLE OF AUTHORITIES

(continued)

CASES PAGE(S)

Linney v. Cellular Alaska Partnership,

Nos. 97-16637-40, 1998 U.S. App. LEXIS 20484

(Sth, Civ: Aan: BE Re vin ne ca aa eke pedses s passim

O’Shea v. Littleton,

414 U.S, GBB CFS) x 95 sch cee ee UGK es 28

Phillips Petroleum Co. v. Shutts,

472 U.S. THF Cee oo he EEN REPORTS U4 ON Ee passim

Probe v. State Teachers Retirement Sys.,

780 F2d 776 (9th Cir.), cert. denied, 476 U.S. 1170

(19GG6) 5 SESS are ree ec eee ean es 14, 15,

Rodgers v. U.S. Steel Corp.,

GO ERD, SQ2 Cae es POE ni > bndnewed® +> 24

Scott v. City of Anniston, Ala.,

G82 F.2d 13535:C2106 Soe Oo sab ene haie & oceieies 24

Thomas v. Albright,

139 F3d 227 (D.C. Cir. 1998),

cert. petition filed (Aug. 24, 1998)............... 14

Ticor Title Ins. v. Brown,

511 U.S. 127 GIs 6 as I ld A. Baan 17 n.7

White v. National Football League,

822 F. Supp. 1389 (D. Minn. 1993),

affd on other grounds, 41 F.3d 402 (8th Cir. 1994),

Cert. dated. SUG: Jp: BES? TAPMOD fn ok heave sues 17, 28

n.14

Vii

TABLE OF AUTHORITIES

(continued)

STATUTES AND RULES

EC Ie case oka st haaee PERS Yee 6

EIN Lie beh ys WAS 4 ph aN ops pues ee ve

Fed. R. Civ. P.

EEE Scr dis oC iss gos as eke ss 6 Cae ex passim

i icinid ckeoika ass «alas oldia-ninveis% oa passim

ee is WA ca boeken wh wae eed ek 8s 13

MIE TI Sete O wields SPUN chek Doe Gewe Sen's b 13

OTHER AUTHORITIES

Proposed Rules of Civil Procedure, Advisory Committees

Notes,

ee MOEN CS as 6 ONE Sh gal CON ews oe 13, 14

1 Herbert B. Newberg & Alba Conte, Newberg on

Cimee Actions $1.22 (S50 60. 1992)... ce 13, 14

7A Charles Alan Wright et al., Federal Practice &

Procedure: Civil §1775 (2d ed. 1986) ............ 21, 24

STATEMENT OF THE CASE

Substantial evidence supports the conclusions of the courts

below that, in an action to prevent the consolidation of eight

faltering limited partnerships, claims for equitable relief

predominated and defendants faced a risk of adjudications

imposing upon them incompatible standards of conduct.

Based on these determinations, the California Court of

Appeal held that a settlement class was properly certified under

Federal Rules of Civil Procedure 23(b)(1) and 23(b)(2), and

that the mandatory settlement did not run afoul of the due

process protections set forth in Phillips Petroleum Co. v. Shutts,

472 U.S. 797 (1985).

The California Court of Appeal’s analysis is in harmony

with that of every Circuit Court of Appeals—including the

Ninth Circuit—to have addressed mandatory certification since

this Court decided Shutts. See, e.g., Linney v. Cellular Alasta

Partnership, Nos. 97-16637-40, 1998 U.S. App. LEXIS 20484

(9th Cir. Aug. 21, 1998) (mandatory class certification

appropriate where claims not “wholly or predominantly” for

monetary damages). The petition, therefore, does not present a

“conflict” in need of resolution by this Court. Rather, at issue is

whether a trial judge abused his discretion in concluding that

the plaintiff class was “of the type historically allowed under the

terms of Rules 23(b)(1) and 23(b)(2).” Pet. 21.

The record below demonstrates that this action was

properly certified as a no opt out class under both

Rules 23(b)(1) and 23(b)(2), and that plaintiffs’ claims for

damages were, at most, incidental to their primary objective of

altering the terms of the consolidation.

Moreover, the opt out right addressed by Shutts is

implicated only where a state court otherwise lacks personal

jurisdiction over plaintiff class members. Under Shutts, class

members’ minimum contacts obviate any need for an opt out

right. Because the limited partnerships in which class members

held interests were organized under California law, plaintiffs

had contacts with the State of California sufficient to establish

the trial court’s jurisdiction for purposes of the settlement.

Finally, by litigating the merits of the settlement in a

California court, petitioners have waived any argument that the

trial court’s exercise of personal jurisdiction over them deprived

them of due process. The petition should, therefore, be denied.

A. Formation Of The REIT.

The plaintiff class in this case consists of the former limited

partners of eight partnerships, formed between 1979 and 1988.

The purpose of the partnerships was to invest in real estate,

hold it for periods of between three and fifteen years, and

distribute anticipated returns. App. 2.

At the time of the proposed consolidation, only two of the

eight partnerships had returned their limited partners’ original

investment. Units of the limited partnership were traded

sporadically in the secondary market, and at a deep discount to

their original cost and net asset value. Jd.

Glenborough Corporation and Robert Batinovich,! who

had assumed management of the partnerships during the

period 1989-1991, sought to remedy investors’ poor return and

lack of liquidity. In September 1994, Glenborough proposed

that the limited partnerships be merged with Glenborough

Corporation into a publicly-traded real estate investment trust

(the “REIT”), listed on the New York Stock Exchange.

The proposed consolidation offered limited partners a

number of advantages over the partnerships’ original structure.

First, because REIT shares would be traded on a major

exchange, the consolidation would provide investors with

greater liquidity, which most investors consider beneficial.

Second, the consolidation would allow limited partners to share

1 Mr. Batinovich, Glenborough Corporation, and their affiliated entities are

collectively referred to as “Glenborough.”

in fees generated by Glenborough’s management of various

properties. Third, limited partners would enjoy a diversification

of their assets, both with respect to the type of properties held

and their geographic location. Fourth, the REIT would permit

enhanced access to capital markets and greater opportunities

for future growth and investment.

B. Allocation Of REIT Shares.

Glenborough filed a Form S-4 registration statement with

the Securities and Exchange Commission (“SEC”) describing

how Glenborough Corporation and the limited partnerships

would merge, and how shares in the newly-formed REIT would

be distributed. Shares in the REIT were to be allocated

between Glenborough and the limited partnerships as a group,

according to their respective contributions to the REIT’s cash

flow. The registration statement referred to this as the Level I

allocation. At Level II, the shares allocated in Level I to entities

other than Glenborough Corporation were to be divided among

the limited partnerships and the other contributors according to

each asset’s net asset value. At Level III, shares in the REIT

were allocated between the general partners and the limited

partners of each limited partnership, in accordance with the

provisions of each partnership agreement. App. 3.

C. The Allegations Of Plaintiffs Complaint.

On February 21, 1995, plaintiff Anthony Blumberg filed a

complaint challenging the fairness of the consolidation to the

limited partners. Plaintiff alleged that the contribution of

Glenborough Corporation, which plaintiff asserted was a

worthless management company, did not warrant giving

Glenborough a 20 percent interest in the REIT. Plaintiff also

alleged that the consolidation would prevent the ultimate

liquidation of the properties and that the consolidation had

been contrived so that Glenborough could continue to earn

property management fees. The consolidation, plaintiff

asserted, constituted a breach of fiduciary duty. App. 3.

The complaint also alleged that “plaintiff and the

members of the Class have sustained and wili continue to

sustain irreparable injury in the absence” of court action and

that plaintiff lacked “an adequate remedy at law.” Accordingly,

the complaint prayed for a declaration “that the defendants

have breached their legal duties to limited partners,” and

sought an order “enjoining Defendants from effectuating the

Roll-Up.” App. 21a. Ancillary to this relief, the complaint also

prayed for rescission (if the consolidation were consummated

before trial), an accounting, and for compensatory damages

according to proof. Id.

D. Settlement Of The Action.

On April 6, 1995, the parties commenced discussions to

explore the possibility of resoiving the case. Glenborough

agreed to provide plaintiff's counsel with non-public documents

relating to, among other things, the proposed allocation of

shares, including SEC comments on the registration statement.

App. 3-4. Glenborough also promised not to attempt to “go

effective” with the consolidation without providing plaintiff

sufficient time to pursue formal discovery or seek an injunction,

if necessary. App. 3-4.

One critical element of the settlement negotiations

concerned Glenborough’s transaction with Rancon Corporation

(““Rancon”). Following the filing of the original registration

statement with the SEC proposing the consolidation,

Glenborough had entered with Rancon into a series of

agreements granting an affiliate of Glenborough the right to

provide partnership administration and property management

services for nine real estate limited partnerships.

Given that the Level I allocation of REIT shares between

Glenborough and the limited partnerships was based upon

contributed cash flow, Glenborough argued to plaintiff’s

counsel that this significantly higher cash flow justified

increasing Glenborough’s Level I allocation of shares in the

REIT from 20.2 percent to 29 percent. Glenborough said that it

would nevertheless leave its Level I allocation at the pre-

Rancon level. App. 4. Plaintiff's counsel agreed to study the

proposed revised terms of the transaction.

After consulting with an expert from Coopers & Lybrand,

plaintiff's counsel concluded that the allocation of REIT shares

between the limited partners and Glenborough approached the

realm of reasonableness when compared to similar transactions.

Counsel also reviewed the trading price and earnings multiples

of similar REITs, as well as information concerning contributed

debt, Glenborough’s expenses and the fairness opinion of an

outside consultant. Plaintiff’s counsel satisfied themselves that,

with the additional projected Rancon cash flow, the

transaction’s terms were reasonable. App. 4-5.

Plaintiff’s counsel’s investigation led them to conclude,

however, that additional risk disclosures should be included in

the Prospectus, and that further restrictions on the ability of

management to issue and exercise stock options should be

adopted. After negotiations concerning these terms, the parties

reached an agreement in principle to settle the litigation on

June 21, 1995. App. 5, 14-15.

The settlement called for, among other things, additional

disclosures in the initial “Risk Factors” section concerning the

lack of formal appraisal of Glenborough Corporation. It also

required disclosures concerning anticipated management fees

and the impact of the Rancon transaction. App. 15.

The settlement also imposed additional restrictions on

management’s stock sales. The “lock-up” on REIT shares

owned by Glenborough management, preventing Glenborough

from disposing of its stock, was extended from one year to two.

The duration on the prohibition on the granting of stock

options was also extended, and stock options with an exercise

price of less than $15 per share were prohibited for one year. Id.

E. Certification Of The Settlement Class.

After an extensive process of documenting the agreement,

the parties executed a final settlement agreement in October

1995. App. 5. Pursuant to that agreement, on October 11, 1995,

the San Mateo Superior Court certified a settlement class of all

limited partners in the limited partnerships under California

Code of Civil Procedure Section 382 and Federal Rules of Civil

Procedure 23(b)(1) and 23(b)(2). App. 27-28. The court also

gave preliminary approval to the settlement, and scheduled a

settlement hearing for December 21, 1995. Notice was mailed

to the limited partners on November 15, 1995. App. 29, 31.

Due to the nature of the relief for which the settlement

provided—additional risk disclosures and __ structural

modifications to the consolidation—and the necessarily fixed

allocation of REIT shares, the settlement did not permit opt

outs. Had class members been permitted to opt out, plaintiffs

who excluded themselves from the terms of the settlement

would nevertheless have enjoyed the benefits of the settlement.

F. The Trial Court’s Approval Of The Settlement.

Fourteen class members, including the six objectors who

filed this petition, submitted objections in response to the

notice. In order to permit all objectors to file briefs and other

materials, the court continued the hearing on the settlement

from December 21, 1995 to January 17, 1996. After the January

hearing, the court accepted additional briefing from petitioners

and responses from plaintiff Blumberg and the Glenborough

defendants. In total, these submissions exceeded 2800 pages. In

addition, another group of objectors filed a separate action in

federal court, seeking (without success) to have the

consolidation enjoined.

On June 6, 1996, the trial court issued a written decision

granting plaintiff's motion for final approval of the settlement.

The trial court made the following findings, among others:

* that plaintiff’s counsel “demonstrated in their support of

their request for approval, that their approach of cash-

flow valuation, rather than relative asset valuation, is

economically more realistic and is the one that is

generally adopted in similar situations;”

* that plaintiff and Glenborough “engaged in negotiations,

and certain modifications were made . . . requiring

additional disclosures and imposing certain restrictions

on the sale of the general partner’s stock . . . and also

imposing certain restrictions on management incentive

options, and the exercise of such options;”

* that the court had “consider[ed] the benefits conferred

on the settling class members by the settlement, and the

risks faced by the settlement class members of

establishing liability, causation and damages, and the

likely probable duration and further expense of the likely

burdensome and protracted litigation in the absence of

settlement;”

* that the settlement “was entered in good faith;” and that

“the settlement is fundamentally fair, adequate and

reasonable to the respective parties to the settlement.”

App. 49-52.

G. Solicitation Of Approval By The Limited Partners.

While the settlement approval process continued, a final

Prospectus detailing the proposed consolidation was issued to

the partnerships’ limited partners on October 26, 1995. The

Prospectus set a deadline of December 28, 1995 for voting on

the transaction, one week after the scheduled settlement

hearing. Eighty percent of limited partners who cast proxies

voted to approve the consolidation. App. 6. Because the trial

court continued the settlement hearing to permit additional

briefing, the vote occurred and the transaction closed before

the settlement received final approval.

Seen te ee ee ee

H. Appellate Review Of The Settlement.

Petitioners appealed the trial court’s decision to the

California Court of Appeal, arguing that, for many fact-specific

reasons, the settlement was unfair. Petitioners said that

plaintiff's case had been strong on the merits, and that the

Level I and Level II allocations of REIT stock unfairly

benefited Glenborough. Petitioners also asserted that the

settlement had not conferred a meaningful benefit on the class

and that the trial court order certifying the settlement class and

preliminarily approving the settlement had violated the trial

court’s local rules and California Code of Civil Procedure

section 527.2 Petitioners also argued that the mandatory

settlement class had been improperly certified pursuant to

Federal Rules of Civil Procedure 23(b)(1) and 23(b)(2) and that

the settlement violated due process.*

The Court of Appeal rejected petitioners’ arguments and

affirmed the settlement. With respect to the mandatory

settlement class, the court found that certification pursuant to

Federal Rule of Civil Procedure 23(b)(1)* had been appropriate

because “there was a likelihood of separate actions” and a “risk

of inconsistent adjudications which could create potential

conflicts for Glenborough, e.g., concerning required disclosures

2 The order preliminarily approving the settlement enjoined class members

from filing other suits. Petitioners argued that to obtain such relief, the

California Code requires parties to post a bond.

3 Although California courts are not bound by Rule 23, the California

Supreme Court “has directed state courts to follow rule 23 whenever

California authority is lacking.” App. at 21 (citing City of San Jose v. Superior

Court, 12 Cal. 3d 447, 453 (1974)).

* Rule 23(b)(1) applies where “the prosecution of separate actions by or

against individual members of the class would create a risk of (A) inconsistent

or varying, adjudications with respect to individual members of the class which

would establish incompatible standards of conduct for the party opposing the

class, or (B) adjudications with respect to individual members of the class

which would as a practical matter be dispositive of the interests of the other

members not parties to the adjudications or substantially impair or impede

their ability to protect their interests .. . .”

in the prospectus which would have to be disseminated class-

wide, allocation of REIT shares, etc.” App. 21.

The Court of Appeal concluded that certification was

equally appropriate under Rule 23(b)(2),5 affirming the trial

court’s implicit finding that the action was primarily for

equitable relief:

The complaint itself sought to enjoin consummation

- of the rollup, or, if the rollup closed, to rescind it

absent a fair market evaluation of [Glenborough’s]

assets. It further asked for an accounting and for

compensatory damages. The settlement itself provided

for non-monetary relief. Of course damage claims

were extinguished, but so, too was the right to hold up

the rollup! The court did not abuse its broad

discretion in implicitly deciding that equitable relief

predominated.

App. 22.

The Court of Appeals also rejected each of the theories

petitioners asserted would have entitled the class to substantial

monetary relief. For example, petitioners had claimed that the

Level I allocation was unfair to the limited partners because it

was based upon contributed cash flow rather than a fair market

valuation of the entities’ assets. The Court of Appeal observed

that petitioners had “disregarded” the parties’ expert and other

evidence showing that the valuation methods were commonly

used in such consolidations. Moreover, the court noted,

Glenborough Corporation’s contributed cash flow had been

heavily discounted because Glenborough “received 20.2

percent of the shares issued by the REIT while contributing

29.5 percent of the cash flow contributed to the REIT.” App. 8.

5 Class certification pursuant to Rule 23(b)(2) is proper where “the party

opposing the class has acted or refused to act on grounds generally applicable

to the class, thereby making appropriate final injunctive relief or

corresponding declaratory relief with respect to the class as a whole .. . .”

Petitioners had also complained that Glenborough

Corporation’s value had been overstated, and that the Rancon

transaction would not benefit limited partners. The Court of

Appeal disposed of this argument as well, noting that

petitioners’ objection “ignores [Glenborough Corporation’s]

cash flow contribution” and the fact that Glenborough

“contributed substantial intangible assets to the REIT in the

form of revenue streams from long-term management

contracts.” App. 9.

Petitioners had also argued that the Level II allocation was

unfair, claiming that one of the partnerships owned

substantially by Glenborough received a disproportionate

interest in the REIT. The Court of Appeal again rejected

petitioners’ argument, showing that shares allocated to the

partnership accurately reflected its net asset value. App. 10-12.

Finally, petitioners had asserted that the consolidation

would prevent the liquidation of the partnerships’ property

holdings according to their original timetable. The Court of

Appeal, however, noted that because the consolidated entity

would be traded on the New York Stock Exchange, the

consolidation afforded investors liquidity, and that the

consolidation allowed investors to share in property

management fees. The court also stated that a bulk liquidation

of the properties would have resulted in discounts exceeding

the entire cost of the consolidation, and that the cost of

administering the REITs during a gradual liquidation would

have eroded the return to the limited partners. App. 12-13.

The Court of Appeal concluded that members of the

plaintiff class had been afforded due process:

[W]here the claim for monetary relief does not

predominate over claims for injunctive and declara-

tory relief, due process is satisfied without the opt out

right where objectors are adequately represented by

named plaintiffs; represented by a qualified attorney;

provided with notice of the proposed settlement; given

an Opportunity to object; and assured that settlement

will not go forward unless the trial court determines it

to be fair, adequate and reasonable. All these elements

ensuring due process were present in this case.

App. 23-24 (emphasis added) (citation omitted).

Petitioners sought review of the this decision by the Cali-

fornia Supreme Court on March 30, 1998. The petition for

review was denied on May 20, 1998.

REASONS FOR DENYING THE WRIT

The petition should be denied for at least four reasons.

First, California and federal courts apply the same rule — that

no opt out classes may properly be certified where monetary

claims do not predominate or there is a risk of inconsistent

judgments. There is no conflict between California and federal

law. Second, substantial evidence supports certification of a no

opt out class under these well-settled standards. Third, the

settlement did not deprive class members of due process

because they had minimum contacts with California sufficient

for the California court to exercise in personam jurisdiction.

This obviates the need for the additional procedural protection

of a right to opt out. Finally, by litigating the merits of the

settlement in the California trial court, petitioners waived any

argument that California’s exercise of jurisdiction deprived

them of due process.

A. The Mandatory Class Was Certified Under The Same,

Uncontroversial Standards Approved By The Federal

Courts.

Where an action seeks a “wholly or predominantly money

judgment,” federal courts follow the teaching of Shutts and

afford absent class members a right to opt out. Petitioners’

suggestion, that the Ninth Circuit articulated a different

standard in its decision Brown v. Ticor Title Insurance Co., 982

F.2d 386 (9th Cir. 1992), cert. dismissed, 511 U.S. 117 (1994), has

been rejected by the lower courts and, most recently, by the

Ninth Circuit itself. California courts, including the courts

below, also follow Shutts, requiring a right of exclusion where

claims are predominantly monetary. Bell v. American Title Ins.

Co., 226 Cal. App. 3d 1589, 1610 (1991). Where plaintiffs seek

predominantly equitable relief, and certification is proper under

Rules 23(b)(1) and 23(b)(2), California’s courts hold that the

right of exclusion lies within the sound discretion of the trial

court. Id.

1. This Court’s holding in Phillips Petroleum Co. v. Shutts.

In Shutts, the defendant argued that a class certified by the

Kansas state court improperly purported to bind non-resident

plaintiff class members. Because many of the absent plaintiff

class members lacked “minimum contacts” with Kansas, the

defendant argued, the court lacked personal jurisdiction over

class members. The defendant asserted that the Kansas court

had thus exceeded its jurisdictional reach, depriving absent class

members of due process. Shutts, 472 U.S. at 806.

This Court rejected the defendant’s jurisdictional

challenge. It held that because the burdens of litigation upon

absent plaintiff class members are fewer than those imposed

upon absent defendants, the “Due Process Clause need not and

does not afford the former as much protection from state-court

jurisdiction as it does the latter.” Shutts, 472 U.S. at 811. Thus,

the Court held, states may exercise personal jurisdiction over

absent class members in actions “concerning claims wholly or

predominately for money judgments,” so long as class members

receive notice and an opportunity to opt out. Jd. at n.3.

Shutts does not reach the question of whether courts may

constitutionally bind absent class members in actions not

“wholly or predominately” seeking money damages without

affording an opt out right.

2. Federal Rule of Civil Procedure 23.

The Federal Rules of Civil Procedure, however, which are

presumptively constitutional, Hanna v. Plumer, 380 U.S. 460,

471 (1965), do speak to the circumstances under which

mandatory classes may be certified. Since 1966, the Federal

Rules have permitted no opt out classes where either (1) the

defendant is subject to the risk of multiple, inconsistent

adjudications or (2) the plaintiff seeks primarily equitable

relief. Rule 23(c)(2) requires that members of classes certified

pursuant to Rule 23(b)(3) be allowed to exclude themselves; no

such opt out right is afforded under Rules 23(b)(1) or 23(b)(2).

See Proposed Rules of Civil Procedure, Advisory Committee’s

Notes, 39 ER.D. 69, 100 (1966) (certification pursuant to

(b)(1) provides “a ready and fair means of achieving unitary

adjudication”’); 105 (judgment in a class action under (b)(1) or

(b)(2) binding on “class members”; in (b)(3), binding only upon

those to whom notice was sent and who did not request

exclusion); Howard v. McLucas, 782 F.2d 956, 961 (11th Cir.

1986); In re Jackson Lockdown/MCO Cases, 107 ER.D. 703,

710-13 (E.D. Mich. 1985); Avagliano v. Sumitomo Shoji Am.,

Inc., 107 ER.D. 748, 749 (S.D.N.Y. 1985).

The reasons for permitting mandatory classes under Rules

23(b)(1) and 23(b)(2) are compelling, as Mr. Newberg points

out:

Because class actions under Rule 23(b)(1) or (2) are

designed to avoid inconsistent adjudications or

prejudice arising from separate suits by individuals

similarly situated ..., they are analogous. to

interpleader or quasi-in-rem suits in which equitable

circumstances dictate the need for a _ unitary

adjudication .... The societal cost of permitting opt-

outs for the purpose of __ individual

adjudications ... could be enormous, compared to

the modest gains at best in constitutional terms for

additional individual procedural rights. Thus, the opt-

out due process right for class members in common

question fie, Rule 23(b)(3)] class actions, which

Shutts held is tantamount to implied consent to

jurisdiction in the absence of exercising such exclusion

right after notice, would also seem to be an

unnecessary element of procedural due process in

class suits that are traditionally maintained on a no-

opt-out basis, regardless of individual consent of class

members.

1 Herbert B. Newberg & Alba Conte, Newberg on Class Actions

§ 1.22, at 1-51 (3d ed. 1992). See also Advisory Committee’s

Notes, supra, 39 F.R.D. at 100 (“The difficulties which would be

likely to arise if resort were had to separate actions by or

against the individual members of the class _ [in

Rule 23(b)(1) actions] furnish the reasons for, and the principal

key to, the propriety and value of utilizing the class-action

device.’’).

Every Circuit Court of Appeals to have considered the

question after Shutts has concluded that, so long as claims for

monetary damages do not predominate, a class may be properly

certified under Rules 23(b)(1) and 23(b)(2). See, e.g., Allison v.

Citgo Petroleum Corp., No. 96-30489, 1998 U.S. App. LEXIS

20171, at *17 (Sth Cir. Aug. 18, 1998); Thomas v. Albright, 139

F.3d 227, 235 (D.C. Cir. 1998), petition for cert. filed (August 24,

1998) (No. 98-326); Probe v. State Teachers’ Retirement Sys. , 780

F.2d 776, 780 (9th Cir.), cert. denied, 476 U.S. 1170 (1986).

3. The Ninth Circuit hes not exceeded the limited holding

of Shutts.

The petition contends that in Brown v. Ticor Title Insurance

Co., 982 F2d 386 (9th Cir. 1992), cert. dismissed, 511 U.S. 117

(1994), the Ninth Circuit “held unequivocally” that where a

class action purports to bind absent class members concerning

claims for “substantial damages,” due process is violated. Pet. 4.

The petition states that the Ninth Circuit thus announced a new

due process standard, beyond the explicit scope of Shutts. Pet.

18.

The petition misstates Ninth Circuit law. For years,

unchallenged Ninth Circuit authority has provided that where

an action is properly certified pursuant to Rules 23(b)(1) and

23(b)(2), a court may, in its sound discretion, preclude class

members from exercising an opt out right. See, e.g, Probe v.

State Teachers’ Retirement Sys., 780 F.2d 776, 780 (9th Cir.), cert.

denied, 476 U.S. 1170 (1986); Green v. Occidental Petroleum

Corp., 541 F.2d 1335, 1339 (9th Cir. 1976).

Brown did not purport to overturn that precedent. In 1985,

class action claims against several title insurance companies

were filed in Pennsylvania. In 1986, a Pennsylvania district court

certified a mandatory settlement class pursuant to Rules

23(b)(1) and 23(b)(2) after determining that the defendants

faced the risk of inconsistent adjudications and that the relief

sought was primarily equitable. In re Real Estate Title and

Settlement Servs. Antitrust Litig., 1986-1 Trade Cas. (CCH)

{1 67,149 at 62,928 (E.D. Pa. 1986), affd without op., 815 F.2d

695 (3d Cir. 1987), cert. denied, 485 U.S. 909 (1988).

Thereafter, certain members of the settlement class filed

an action in Arizona state court reasserting the released claims.

That case was enjoined by the Arizona federal district court on

the grounds that the action interfered with the prior federal

judgment in Pennsylvania. The Third Circuit reversed. In re

Real Estate Title and Settlement Servs. Antitrust Litig., 869 F.2d

760 (3d Cir. 1989). Without reaching the question of whether

the plaintiffs had been denied adequate due process by the

settlement, the Third Circuit held that, because the plaintiffs

lacked minimum contacts with Pennsylvania, the Pennsylvania

court could not enjoin the plaintiffs from collaterally attacking

the judgment elsewhere. Jn re Real Estate Title, 869 F.2d at 765.

Specifically, the Third Circuit noted that while Congress

has, in some instances, required plaintiffs to litigate their claims

in particular fora, Congress never indicated that a plaintiff,

lacking minimum contacts with the class action forum, which

had “substantial damage claims should nonetheless be forced to

bring its collateral challenge in that forum.” 869 F.2d at 767.

Because the Third Circuit concluded that the judgment in the

Pennsylvania court had released “substantial damage claims” in

which the plaintiffs had a property interest, and because the

Pennsylvania court lacked personal jurisdiction over the

Arizona plaintiffs, the plaintiffs were permitted to bring a

collateral challenge to the settlement in Arizona. Jn re Real

Estate Title, 869 F.2d at 767-68.

The plaintiffs in Brown, other settlement class members,

filed suit in the Arizona federal district court. The court held

that the plaintiffs’ claims were barred by res judicata. The

plaintiffs appealed to the Ninth Circuit. Brown, 982 F.2d at

389-90.

In its decision reversing the district court, the Ninth

Circuit did not address whether it believed itself bound by the

Pennsylvania district court’s 1986 determination that the claims

in the prior litigation were primarily equitable. Instead, the

Ninth Circuit stated only that it would follow the Third Circuit’s

“holding” that the Pennsylvania judgment foreclosed

“substantial. damage claims.” Relying on Shutts, the court

observed that where monetary claims predominate, a right of

exclusion must be granted. Because the Pennsylvania settlement

class had been mandatory, the Ninth Circuit concluded that due

process had been violated. Brown, 982 F.2d at 392.

Petitioners argue that by referring to “substantial” rather

than “predominant” damage claims, the Ninth Circuit lowered

the threshold at which due process requires a right of exclusion.

But the Ninth Circuit did not distinguish between “substantial”

claims and “predominant” claims, or indicate that it was

exceeding this Court’s holding in Shutts. To the contrary, the

Ninth Circuit explicitly recognized that “Shutts is limited to

claims ‘wholly or predominantly for money judgments.’ ”

Brown, 982 F.2d at 392 (quoting Shutts, 472 U.S. at 811 n.3).

Subsequent decisions confirm that, although Brown’s

language is “a little broad and imprecise,” Arnold v. United

Artists Theatre Circuit, Inc., 158 FR.D. 439, 463-64 (N.D. Cal.

1994), the Ninth Circuit did not intend to contradict its own

precedent or exceed the limited holding of Shutts.’

In one of the first lower court decisions to consider Brown,

White v. National Football League, 822 F. Supp. 1389 (D. Minn.

1993), affd on other grounds, 41 F.3d 402 (8th Cir. 1994), for

example, the district court certified a mandatory settlement

class. Reviewing the implications of the Brown decision, it

concluded:

The Brown case does not alter the constitutional

standards articulated in Shutts and, in fact, expressly

recognizes that “Shutts is limited to claims ‘wholly or

predominantly for money judgments.’” At most,

Brown stands for the proposition that where a class

action involves claims “wholly or predominantly” for

7 It was the Ninth Circuit’s imprecision that led this Court to grant certiorari

in Brown, later dismissed as improvidently granted. See Ticor Title Ins. v.

Brown, 511 U.S. 117, 125 (1994) (O’Connor, J. dissenting) (“[A]Ithough we

held in [Shutts] that there is a constitutional right to opt out of class actions

brought in state court, that holding was expressly ‘limited to those class

actions which seek to bind known plaintiffs concerning claims wholly or

predominately for money judgment . . .. The Ninth Circuit's rule, by contrast,

applies whenever ‘substantial damage claims’ are asserted.”) (citations

omitted). As discussed below, that perceived conflict was recently clarified by

the Ninth Circuit.

money damages, and where the settlement of such

class action accords only injunctive relief and no

damage recovery, an absent nonresident class

member’s later claim for damages will not be barred.

822 F. Supp. at 1412 (emphasis in original).

Similarly, in Arnold, the district court acknowledged that

while the language of Brown was muddled, the Ninth Circuit’s

exclusive reliance on Shutts made it clear that “under Ticor and

Shutts, the constitutional due process requirement of notice to

absent class members applies only to cases where claims for

monetary damages ‘predominate.’” Arnold, 158 ER.D. at 464

(emphasis in original).

Most importantly, the Ninth Circuit itself has clarified its

holding in Brown. Three days after this petition was filed, the

Ninth Circuit held that “due process requires the option to opt-

out only in the limited set of claims that aie ‘wholly or

predominately for money judgments.’” Linney v. Cellular

Alaska Partnership, Nos. 97-16637-40, 1998 U.S. App. LEXIS

20484, at *13 (9th Cir. Aug. 21, 1998) (quoting Shutts, 472 U.S.

at 811 n.3).

In Linney, limited partners sued their general partner for

breach of contract and breach of fiduciary duty. After one

proposed settlement was rejected by the district court as

inadequate, the parties reached a proposed settlement

providing for equitable relief and a settlement fund.

Objectors challenged the settlement, arguing that the class

had been inadequately represented. They asserted that the

mandatory nature of the settlement deprived the class of due

process because class members could not avoid releasing their

damage claims. Linney, 1998 U.S. App. LEXIS 20484, at *12.

Explicitly relying on its decision in Brown, the Ninth

Circuit rejected this argument:

[A]ppellants argue that new class counsel erred by not

insisting that the class be allowed to opt-out of the

monetary portion of the settlement, citing cases to

suggest that the option to opt-out is required where

monetaiy relief is sought in addition to injunctive

relief. However, this court has held that due process

requires the option to opt-out only in the limited set of

claims that are “wholly or predominately for money

judgments.”

Id. at *12-13 (emphasis added) (citations omitted). The court

then reaffirmed the viability of longstanding Ninth Circuit

precedent holding that denial of a right of exclusion in cases

certified pursuant to Rule 23(b)(2) lies within the sound

discretion of the trial court. Jd. at *13 n.3, 20 n.6.

There is, therefore, no decision adopting the due process

test petitioners propose here, that the presence of “substantial”

damages precludes certification of a mandatory class.$

4. California courts follow Rule 23 and Shutts.

Rule 23(b) and this Court’s holding in Shutts are precisely

the standards applied by California courts in determining

whether to certify a class action and whether due process

requires the right of absent class members to opt out. Where

claims are predominantly for money damages, California courts

permit class members a right of exclusion. A right to exclusion

is discretionary where the class is certified pursuant to

Rules 23(b)(1) and 23(b)(2). Bell v. American Title Ins. Co., 226

Cal. App. 3d 1589, 1603 (1991).

In Bell, objectors to a settlement argued that the trial

court’s preclusion of opt outs had deprived them of due

8 Clarke v. Advanced Private Networks, Inc., 173 FR.D. 521 (D. Nev. 1997)

does not adopt the “substantial damages” test posited by petitioners. In

Clarke, the district court denied a motion for mandatory class certification.

Citing Brown, the court found an opt out right was required because “Tw]hile

the complaint incidentally seeks to enjoin interference with partnership

management, diversion of partnership assets, and a turn-over order, damages

quite plainly is the primary relief sought.” Id. at 523 (emphasis added). This

holding is entirely consistent with Shutts and Linney.

process. The Court of Appeal concluded that, under Shutts,

absent class members must receive the right to “opt out” of

class actions seeking to bind plaintiffs “concerning claims

wholly or predominantly for money judgments.” Bell, 226 Cal.

App. 3d at 1609 (quoting Shutts, 472 U.S. at 811 n.3). The Bell

court held, however, that the trial court had not abused its

discretion in precluding opt outs because the settlement class

had been certified under Rules 23(b)(1) and 23(b)(2), the

action was not predominately for monetary relief, and the

plaintiff class consisted of owners of California real property,

thereby satisfying the minimum contacts test for personal

jurisdiction. Jd., 226 Cal. App. 3d at 1609-11.

California’s interpretation of Rule 23 and Shutts is thus

consistent with every post-Shutts Court of Appeals decision

addressing mandatory classes. Because the conflict between

California and federal law suggested by petitioners does not

exist, the petition should be denied.

B. The Class Was Properly Certified Pursuant To

Rules 23(b)(1) And 23(b)(2).

The petition seeks review, then, not of a legal conflict, but

of the fact-intensive question of whether the trial court abused

its discretion in finding the settlement class to be “of the type

historically allowed under the terms of Rules 23(b)(1) and

23(b)(2).” Pet. 21.

California’s trial courts are afforded wide discretion in

determining whether and how a class is certified. See Bell, 226

Cal. App. 3d at 1603 (“The trial court has great discretion in

decisions on certifying class actions.”); Frazier v. City of

Richmond, 184 Cal. App. 3d 1491, 1503 (1986) (trial court’s

decision concerning whether to provide opt out “should not be

upset on appeal in the absence of an abuse of the trial court’s

discretion”). Here, the record confirms the conclusions of the

courts below that this mandatory class was properly certified

pursuant to Rules 23(b)(1) and 23(b)(2), and that class

members were afforded due process.

1. Defendants faced a high risk of inconsistent

adjudications.

Rule 23(b)(1) provides that certification is appropriate

where “the prosecution of separate actions by or against indi-

vidual members of the class would create a risk of . . . inconsis-

tent or varying adjudications with respect to individual mem-

bers of the class which would establish incompatible standards

of conduct for the party opposing the class.” In order to certify

a class pursuant to subsection (b)(1), there “must be a risk that

separate actions will in fact be brought if a class action is not

permitted.” 7A Charles Alan Wright & Arthur R. Miller, Fed-

eral Practice and Procedure: Civil § 1773, p. 427 (2d ed. 1986).

In this case, the risk of multiple inconsistent adjudications

was significant. Shortly after the trial court granted preliminary

approval of the settlement, a separate federal action was filed

seeking to enjoin the consolidation. App. 21. Petitioners, more-

over, made it very clear that they would pursue separate litiga-

tion if allowed to do so.

Had multiple actions been permitted to proceed, they

could have resulted in irreconcilable rulings governing

Glenborough’s conduct with respect to the consolidation. For

example, had one court found the merger beneficial, and

instructed Glenborough to complete the consolidation as

required by the limited partners’ proxy vote, while another

found the merger to violate the general partners’ fiduciary

duties and ordered it abandoned, Glenborough would have

been confronted with mutually exclusive orders.

Similarly, different courts could have mandated varying

allocations of REIT shares among the various entities contrib-

uting assets. If in ome case, a court determined that the

increased cash flow contributed by the Rancon transaction

justified an allocation of 29 percent of the REIT shares to

Glenborough, while another court determined that the 20 per-

cent allotted Glenborough was fair, and still another concluded

Glenborough should receive only 10 percent, the consolidation

would have been unworkable. Or, had courts come to differing

conclusions concerning the adequacy of disclosures in the Pro-

spectus, Glenborough would have faced the impossible task of

producing distinct versions of a document that must, as a matter

of law, be distributed class-wide. App. 21.

As a result, the trial court concluded there was a risk of

multiple inconsistent adjudications and certified the class pur-

suant to Rule 23(b)(1). The Court of Appeal agreed, finding

that the record reflected “a likelihood of separate actions” and

thus “a risk of inconsistent adjudications.” App 21.

In arguing that certification under Rule 23(b)(1) was

“insupportable,” petitioners ignore each of these points.

Rather, petitioners assert that “the mere fact that some plain-

tiffs might be successful in individual lawsuits against a defen-

dant while others may not is not a ground for invoking

Rule 23(b)(1)(A).” Pet. 22. Neither the parties, the trial court

nor the Court of Appeal, however, ever relied upon such a

theory in support of class certification.

2. Plaintiffs’ claims were predominantly equitable.

Certification of a mandatory class is also appropriate

where the relief sought is predominantly equitable in nature.

Rule 23(b)(2) provides for class certification where “the party

opposing the class has acted or refused to act on grounds

generally applicable to the class, thereby making appropriate

final injunctive relief or corresponding declaratory relief with

respect to the class as a whole.” Federal courts, including the

Ninth Circuit, hold that “{c]lass actions certified under

Rule 23(b)(2) are not limited to actions requesting only injunc-

tive or declaratory relief, but may include cases that also seek

monetary damages.” Linney, 1998 U.S. App. LEXIS 20484, at

*13 (quoting Probe, 780 F.2d at 780).

Like the federal courts, “California courts have ...

afforded rule 23(b)(2) status where the final relief sought

includes both injunctive relief and monetary damages.” Bell,

226 Cal. App. 3d at 1606 (citing Frazier, 184 Cal. App. 3d at

1501 (certifying pursuant to (b)(2) where case not predomi-

nantly for monetary damages)). Thus, in determining whether

to certify a class pursuant to subsection (b)(2) in a case seeking

monetary and non-monetary relief, California’s courts look to

whether the requested monetary relief predominates. Bell, 226

Cal. App. 3d at 1606.

In this case, plaintiffs sought predominantly equitable

relief. The complaint sought to enjoin the consolidation (or

asked for rescission if the consolidation closed) unless there was

a fair and independent valuation of the assets contributed by

Glenborough. As plaintiff Blumberg’s counsel declared under

penalty of perjury:

When we filed suit, our primary orientation was to

challenge the . . . allocations (i.e., maximizing the

shares allocable to the partnerships), [to] supplement

the risk disclosures of the transaction to the limited

partners, and to achieve as much protection as possi-

ble for the post-rollup market value of the shares

received.

App. 24a-25a.

Indeed, it was the predominance of claims for equitable

relief that initially formed the basis of petitioners’ opposition to

the settlement’s release of damage claims. In their brief, peti-

tioners told the trial court that the “focus of the original

Complaint was for injunctive relief — i.e., to prevent the Con-

solidation. . . .” App. 35a. Petitioners also represented that

“injunctive relief would end this litigation in days.” App. 66a.

9 This case is, therefore, distinguishable from Adams v. Robertson, 520 U.S.

83, 117 S. Ct. 1028 (1997), in which the Court granted, and later dismissed,

certiorari. That case concerned allegations that an insurance company had

encouraged insureds to exchange existing policies for more expensive ones

providing less coverage, claims best addressed through monetary damages. As

the petitioners told the Court, unlike this case, Adams “primarily invol{ed]

claims for monetary relief.” Adams, 520 U.S. at —_, 117 S. Ct. at 1029.

Petitioners can hardly blame the trial court for agreeing that the

action sought primarily injunctive relief.

Petitioners also assert that because, by the time the settle-

ment had finally been approved, the consolidation had occurred

and the disclosures and limitation on trading of the shares were

in place, defendants’ actions had rendered “moot” the equita-

ble relief originally sought.!° Without citation to authority, peti-

tioners assert that, as a result, the equitable claims were no

longer “predominant,” rendering Rule 23(b)(2) certification

inappropriate. Pet. 24.

Courts and commentators agree, however, that actions

taken by a defendant after a lawsuit is filed cannot change the

nature of the plaintiff’s claims, nor will such action defeat class

certification. See Scott v. City of Anniston, Ala., 682 F.2d 1353,

1358 (11th Cir. 1982) (“[A] class action properly brought under

Rule 23(b)(2) need not be reclassified under (b)(3) merely

because a change in the defendant’s conduct made injunctive

relief inappropriate.”); Arkansas Educ. Ass’n v. Board of Educ.,

Portland, Ark., Sch. Dist., 446 F.2d 763 (8th Cir. 1971); Rodgers v.

U.S. Steel Corp., 69 FR.D. 382 (W.D. Pa. 1975); 7A Wright,

Federal Practice & Procedure § 1775 at 467-68.

Nor do petitioners’ characterization of the money damages

at stake, unsupported by the record, alter the nature of the

litigation. Petitioners assert that claims “with an estimated

value of between $10 and $20 million” were released. Pet. 3. In

fact, the record shows plaintiffs’ damage claims were completely

meritless. Indeed, in analyzing the fairness of the settlement,

the Court of Appeal considered and refuted each argument

mustered by petitioners in support of their alleged damages.

App. 7-14. Petitioners do not even attempt to rebut the Court

of Appeal’s conclusions.

10 The consolidation was consummated before the settlement was finally

approved only because of the delay caused by petitioners’ challenge to the

settlement. Moreover, as the Court of Appeal noted, the consolidation had

not occurred at the time the class was certified. App. 21 n.6.

After a thorough review of the record, the Court of

Appeal held that the trial court had acted within its sound

discretion in determining plaintiffs’ claims for equitable relief

predominated and in certifying the class pursuant to

Rule 23(b)(2):

The complaint itself sought to enjoin consummation

of the rollup, or, if the rollup closed, to rescind it

absent a fair market evaluation of [Glenborough’s]

assets. It further asked for an accounting and for

compensatory damages. The settlement itself provided

for non-monetary relief. Of course damage claims

were extinguished, but so, too was the right to hold up

the rollup! The court did not abuse its broad discre-

tion in implicitly deciding that equitable relief

predominated.

App. 22. The petition offers no basis to disturb this

conclusion.

11 Without citation to the record, petitioners claim that the Court of Appeal

“focuse[d] unduly on the consideration received in the settlement . . . rather

than on the claims released in the settlement.” Pet. 18 (emphasis in original).

To the contrary, as the opinion makes clear, the court considered both the

nature of the relief sought and the relief obtained. App. 22. Moreover, as the

Ninth Circuit’s decision in Linney shows, courts may properly weigh the relief

afforded by a settlement in determining the nature of the claims. Linney, 1998

U.S. App. LEXIS 20484, at *13 (comparing monetary value of settlement’s

equitable consideration with value of settlement fund).

C. All Class Members Had Minimum Contacts With Cali-

fornia By Virtue Of Their Ownership Of Interests In

California Limited Partnerships.

As discussed above, Shutts held that in a class action

primarily for money damages, an out-of-state class member is

not bound unless the forum state provides procedural due

process protections. Those protections include providing absent

class members with the opportunity to opt out or remove

themselves from the class. Shutts, 472 U.S. at 812.

The burdens imposed by litigation upon an absent class-

action plaintiff are far less significant than those placed upon an

absent defendant. Shutts, 472 U.S. at 808. The class action

device “protects the interests of absent plaintiffs through court

inquiry into the common nature of all claims, the adequacy of

representation, proper jurisdiction over the class, as well as a

judicial determination of the fairness and adequacy of any

proposed settlement agreed upon by the parties.” Grimes v.

Vitalink Communications Corp., 17 F.3d 1553, 1560 n.8 (3d Cir.)

(finding that mandatory state court class settlement released all

claims related to a merger) (citing Shutts, 472 U.S. at 809-10),

cert. denied, 513 U.S. 986 (1994).

In this case, each absent class member had sufficient

minimum contacts with the State of California to support the

trial court’s exercise of specific jurisdiction over their claims.

The class members each held an interest in a California limited

partnership that participated in the consolidation.

Grimes v. Vitalink is directly on point. In Grimes, a non-

resident class member owned stock in a Delaware corporation.

He surrendered those shares in response to a tender offer. The

Third Circuit held that he had sufficient contact to establish

specific jurisdiction and bind himself to a class settlement and

release entered by a Delaware state court. Grimes, 17 F.3d at

1569. The Third Circuit held that specific jurisdiction “requires

only that a party be shown to have committed at least one act in

the relevant forum which is substantially related to the claim

being adjudicated.” Jd. at 1559. “[T]he law has long put the

buyer of corporate stock on notice that corporate rights attach-

ing to stock ownership may be adjudicated in a single proceed-

ing in another jurisdiction, including at a minimum the corpora-

tion’s state of incorporation.” /d. (quoting Hynson v. Drummond

Coal Co., 601 A.2d 570, 579 (Del. Ch. 1991)).!

The absent class members’ ownership of interests in part-

nerships organized under California law is equivalent to the

stock ownership in Grimes and establishes the necessary mini-

mum contacts to support the exercise of personal jurisdiction

over claims challenging the consolidation of their limited part-

nership interest into the REIT. Accordingly, the opt out right

required by Shutts to support personal jurisdiction over absent

class members is not implicated here.

Petitioners assert that in Epstein v. MCA, Inc., 126 F.3d

1235 (9th Cir. 1997), the Ninth Circuit “stat[ed] that the consti-

tutional right to opt out is not limited to those absent class

members over whom” the court lacks jurisdiction. Pet. 4-5

(emphasis in original). Epstein, say petitioners, therefore con-

flicts with Grimes.

Epstein, however, held that adequate representation is a

prerequisite to binding absent class members to a judgment,

regardless of whether class members had “minimum contacts”

with the forum. 126 F.3d at 1241-42. Epstein did not involve the

right to opt out. While in dicta, the Ninth Circuit disapproved of

Grimes’ broader interpretation of the opt out right in Shutts, the

holdings of Grimes and Epstein simply do not conflict.%

12 According to Hynson, “merely holding . . . the shares of a corporation of

that state itself creates a sufficient relationship with that jurisdiction to permit

that jurisdiction to be one in which rights attaching to stock of the corporation

may be conclusively adjudicated.” 601 A.2d at 572.

13 Petitioners also misread Brown as holding that the right to opt out “is not

limited to persons over whom the trial court lacks in personam jurisdic-

tion . . . .” Pet. 27. Brown, which involved Arizona plaintiffs’ challenge to a

Pennsylvania judgment, did not even discuss this issue.

D. Petitioners Do Not Have Standing To Complain About

The Mandatory Class Since They Are Not Aggrieved

Parties.

Finally, petitioners consented to the trial court’s jurisdic-

tion and therefore are not aggrieved parties as to the no opt out

class. Personal jurisdiction is an individual on interest

derived from the Due Process Clause of the Fourteenth

Amendment. Shutts, 472 U.S. at 807. A plaintiff can therefore

waive the personal jurisdiction requirement. Jd. at 812 (“[a]ny

plaintiff may consent to jurisdiction”). Petitioners have waived

any jurisdictional challenge here.

First, petitioners did not cite to any evidence of their

domiciles, and therefore have not shown that they lacked mini-

mum contacts with California. This is not surprising since they

did not raise the Shutts argument in the trial court. Rather,

another moet ta | group of objectors raised this argument

at the supplemental briefing stage. Petitioners cannot assert

errors that allegedly affected only other class members. O’Shea

v. Littleton, 414 U.S. 488, 494 (1974); Bailey v. Patterson, 369

U.S. 30, 32-33 (1962).

Second, even assuming that all the petitioners are not

Californians, they consented to the trial court’s jurisdiction by

appearing and pursuing their objections on the merits. DeBoer

v. Mellon Mortgage Co., 64 F3d 1171, 1175 (8th Cir. 1995)

(“When an objector submits to the court’s jurisdiction, how-

ever, the Shutts dilemma is avoided.”’), cert. denied, 517 U.S.

1156 (1996).* Thus, petitioners lack standing to assert on

appeal that the no opt out class violated their due process

rights.

14 Of course, a “party to a mandatory class action who appears in court to

contest inclusion in the class is analogous to a party who appears merely to

contest jurisdiction, and should be deemed to consent to jurisdiction only if it

actually litigates the . . . underlying merits of the case.” White v. National Football

League, 41 F.3d 402, 407-08 (8th Cir. 1994), cert. denied, 515 U.S. 1137 (1995)

(emphasis added). In challenging the underlying merits of the case, petition-

ers have “shown a willingness to engage in extensive litigation in the forum.”

In re Real Estate Title, 869 F.2d at 771. In this case, therefore, petitioners

“have had their day in court to point out the shortcomings of . . . the

settlement on the merits.” DeBoer, 64 F.3d at 1176.

CONCLUSION

For the foregoing reasons, the petition should be denied.

Dated: September 18, 1998 -

Respectfully submitted,

Melvin R. Goldman*

Darryl P. Rains

Craig D. Martin

MORRISON & FOERSTER LLP

425 Market Street

San Francisco, California 94105

(415) 268-7000

Counsel for Pespondents

Glenborough Realty Corporation,

Glenborough Corporation,

and Robert Bationovich

*Counsel of Record

App. la

Patrick J. Grannan SBN 115693

CHIMICLES, JACOBSEN & TIKELLIS

633 West Fifth Street, Suite 3300

Los Angeles, CA 90071

(213) 623-8100

Clinton A. Krislov

KRISLOV & ASSOCIATES, LTD.

Suite 810

222 North La Salle Street

Chicago, IL 60601-1086

(312) 606-0500

ATTORNEYS FOR PLAINTIFF

(Additional! Plaintiff's Counsel Appear on Signature Page)

SUPERIOR COURT OF THE STATE OF CALIFORNIA

IN AND FOR SAN MATEO COUNTY

ANTHONY E. BLUMBERG, on behalf ) CASE NO.

of himself and all others similarly ) CLASS ACTION.

situated,

Plaintiff,

GLENBBOROUGH REALTY

CORPORATION (A CALIFORNIA

CORPORATION); GLENBOROUGH

CORPORATION (A CALIFORNIA

CORPORATION); and ROBERT

BATINOVICH,

Ne ee ee ee ee ee ee ee” ee” See” ee

App. 2a

Defendants, ) CLASS ACTION

) COMPLAINT FOR

EQUITEC INCOME REAL ESTATE) 1. Breach of

INVESTORS B, (A CALIFORNIA) _- Fiduciary Duty

LIMITED PARTNERSHIP); ) 2. Breach of Duty

EQUITEC INCOME REAL ESTATE ) of Good Faith

INVESTORS C (A CALIFORNIA __) _ and Fair Dealing

LIMITED PARTNERSHIP; EQUITEC ) AND PRAYER

INCOME REAL ESTATE ) FOR

INVESTORS-EQUITY FUND 4 (A __ ) INJUNCTIVE

CALIFORNIA LIMITED ) RELIEF

PARTNERSHIP); EQUITEC )

MORTGAGE INVESTORS FUND IV )

(A CALIFORNIA LIMITED )

PARTNERSHIP); EQUITEC 79 REAL )

ESTATE INVESTORS (A

CALIFORNIA LIMITED

PARTNERSHIP); OUTLOOK

PROPERTIES FUND IV (A

CALIFORNIA LIMITED

PARTNERSHIP); GLENBOROUGH

ALL SUITE HOTELS LP. (A

CALIFORNIA LIMITED

PARTNERSHIP; GLENBOROUGH

PENSION INVESTORS (A

CALIFORNIA LIMITED

PARTNERSHIP); and

GLENBOROUGH REALTY TRUST

INCORPORATED (A MARYLAND

CORPORATION),

Nominal Defendants.

ee ee ee ee ee ee ee ee

App. 3a

Plaintiff, by and through his undersigned attorneys, alleges

upon information and belief, except as to himself, which facts

are alleged on knowledge, as follows:

NATURE OF THE ACTION

1. This is a Class Action, brought by plaintiff, for himself

and on behalf of all limited partner unitholders in eight real

estate limited partnerships (the “Limited Partnerships” or

“Partnerships”) organized and existing under California law.

Each of the Partnerships and the holders of their partnership

units is similarly situated. Through this action, Plaintiff seeks

injunctive relief and compensatory damages for himself and all

other similarly situated unitholders arising from a proposed

roll-up transaction (the “Roll-Up”) being effected by the

defendants whereby plaintiff and class members would

exchange their current Limited Partnership interests for shares

in a newly-formed corporation, Glenborough Realty Trust

Incorporated (“GRTT’), which would then control, through an

affiliate, the Partnerships’ assets. The Roll-Up has the purpose

and effect of unfairly entrenching management and of shifting

upwards of 20% of the ownership of Partnership assets to the

general partner defendants at the expense of plaintiff and

members of the class.

2. Defendants, by means of the Roll-Up, are violating and

will violate the rights of each and every class member.

Defendants have geared the transaction to thwart the

maximization of investment returns by class members through

sale of the properties, substituting the Roll-Up for that sale.

The Roll-Up is motivated solely by defendants’ self-interested

plan to maintain, entrench, and guarantee their positions of

control over the Limited Partnerships’ operations and

defendants’ receipt of on-going management fees. The Roll-Up

is also designed and intended transfer over 20% of the assets of

the Partnerships to the general partner defendants in return for

an insolvent company. The actions of defendants in structuring

the Roll-Up and their other actions taken in conjunction with

App. 4a

the Roll-Up constitute concerted action against the interests of

Plaintiff and the class in violation of defendants’ fiduciary

duties under California law and their duty of good faith and fair

dealing.

3. The general partner defendants have thus breached

their fiduciary duties and their duty of good faith and fair

dealing owed to plaintiff and the class members. Specifically,

these defendants have devised ratios to allocate the securities to

be issued in the Roll-Up which grossly favor said defendants

and which do not accurately reflect the current fair have

proposed for issuance and dissemination a misleading

prospectus and consent solicitation statement to solicit and

coerce the approval of the Roll-Up scheme. Plaintiff and class

members have been and will be deceived, manipulated,

frustrated, and damaged by defendants’ actions. Plaintiff,

individually and for the Class, seeks relief for injury suffered

and to be suffered as a result of the defendants’ breach of

fiduciary duties and self-dealing in connection with their

RollUp scheme, as set forth in this Complaint.

THE PARTIES

4. Plaintiff Anthony E. Blumberg is an individual who

owns 20 units of Equitec Realty Income Partnership B,

originally purchased for $5,000 during its initial pu ic offering

period. Plaintiff is being injured and threatened wi.h injury by

defendants’ unlawful acts in the same manner as all other

members of the proposed class, pursuant to a common scheme

directed at all class members by defendants.

5. Defendant Glenborough Realty Corporation (“GRC”)

is a California corporation with its principal place of business in

San Mateo, California. Defendant GRC is a wholly-owned

subsidiary of defendant Glenborough Corporation. GRC has

been one general partner of the eight Limited Partnerships that

are the subject of the Roll-Up: Equitec Income Real Estate

Investors B (“Equitec B”), Equitec Income Real Estate

——--

App. 5a

Investors C (“Equitec C”) Equitec Income Real Estate

Investors—Equity Fund 4 (“Equitec 4”), Equitec Mortgage

investors Fund iV (“Equitec Mortgage IV”), Equitec 79 Real

Estate Investors (“Equitec 79”), Outlook Properties Fund IV

(“Outlook IV”), Glenborough All Suite Hotels, L.P. (“All

Suites”) and Glenborough Pension Investors (“GPI”). GRC has

been general partner of the Limited Partnerships since the date

of final approval of general partner substitution indicated

below:

Partnership: Date:

Equitec B February 18, 1992

Equitec C February 18, 1992

Equitec 4 February 25, 1992

Equitec Mortgage IV February 13, 1992

Equitec 79 April 9, 1992

Outlook IV May 6, 1992

All Suites February 22, 1994

GPI April 4, 1994

6. Defendant Glenborough Corporation is a California

corporation with its principal place of business in San Mateo,

California, which is controlled by defendant Robert Batinovich

and his affiliates. GC owns all of the issued and outstanding

shares of GRC.

7. Defendant Robert Batinovich (“Batinovich’”’) is the

President of GRC. Defendant Batinovich maintains a business

office in San Mateo, California. Robert Batinovich has been the

other general partner of the eight Limited Partnerships since

the same dates of final approval of general partner substitution

indicated above. Defendant Batinovich controls GRC through

his ownership and control over GC.

§. Defendants GC, GRC and Batinovich are collectively

referred to herein as the “General Partner Defendants.” By

virtue of their position and their ability to control and direct the

affairs of the Limited Partnerships, the General Partner

Defendants are in a fiduciary relationship with plaintiff and

App. 6a

class members, and owe to plaintiff and class members the

highest obligations of good faith, fair dealing, and full

disclosure.

9. Defendant Equitec Income Real Estate Investors B is a

limited partnership organized and existing under California law

with its principal place business in San Mateo County. Equitec

B is named as a nominal defendant only.

10. Equitec Income Real Estate Investors C is a limited

partnership organized and existing under California law with its

principal place of business in San Mateo, California. Equitec C

is named as a nominal defendant only.

11. Equitec Income Real Estate Investors—Equity Fund 4

is a limited partnership organized and existing under California

law with its principal place of business in San Mateo, California.

Equitec 4 is named as a nominal defendant only.

12. Equitec Mortgage Investors Fund IV is a limited part-

nership organized and existing under California law with its

principal place of business in San Mateo, California. Equitec

Mortgage IV is named as a nominal defendant only.

13. Equitec 79 Real Estate Investors is a limited partner-

ship organized and existing under California law with its princi-

pal place of business in San Mateo, California. Equitec 79 is

named as a nominal defendant only.

14. Outlook Properties Fund IV is a limited partnership

organized and existing under California law with its principal

place of business in San Mateo, California. Outlook IV is

named as a nominal defendant only.

15. Glenborough All Suite Hotels, L.P. is a limited part-

nership organized and existing under California law with its

principal place of business in San Mateo, California. All Suites

is named as a nominal defendant only.

App. 7a

16. Glenborough Pension Investors is a limited partner-

ship organized and existing under California law with its princi-

pal place of business in San Mateo, California. GPI is named as

a nominal defendant only.

17. Each of the Partnerships is managed, directed and

controlled, either directly or indirectly, by Defendants GRC,

GC and Batinovich. No allegations of wrongdoing are made as

against the Partnerships, other than those actions perpetrated

by the General Partner Defendants. The Partnerships are

named as nominal defendants as their absence from the action

might interfere with the ability of the Court to grant complete

relief to Plaintiff and the Class.

18. Glenborough Realty Trust Incorporated is a corpora-

tion organized and existing under Maryland law with its princi-

pal place of business in San Mateo, California. GRTI is the

entity into which the partnerships will be rolled up pursuant to

the General Partner Defendants’ unlawful plan and scheme,

and it is intended to qualify, post Roll-Up, as a real estate

investment trust under Section 856 et seq. of the Internal

Revenue Code. GRTI is named as a nominal defendant to

assure that the Court may grant complete relief to Plaintiff and

the Class.

CLASS ACTION ALLEGATIONS

19. Plaintiff brings this action as a class action on his own

behalf and on behalf of a class composed of all holders of units

of the Limited Partnerships (the “Class”), who have suffered

and will suffer harm as a direct result of the defendants’

proposed Roll-Up scheme. Expressly excluded from the

Class are defendants and each of their family members,

affiliates, subsidiaries, officers, and directors.

20. The Class is so numerous that joinder of all members

is impracticable. There are approximately 13,263 unitholders in

the Limited Partnerships.

App. 8a

21. Common questions of law and fact exist as to all

members of the Class and predominate over any questions

affecting solely individual members of the Class including:

a. Whether the General Partner Defendants have

breached their fiduciary duties by engaging in a scheme to

transfer substantial ownership benefits in the assets of the

Limited Partnerships by means of the Roll-Up scheme,

which is being implemented on unfair terms and in a

coercive manner;

b. Whether the General Partner Defendants are

furthering their RollUp scheme by engaging in fraudulent,

deceptive, or manipulative acts and practices;

c. Whether the prospectus and consent solicitation

statement to be issued in connection with the Roll-Up of

the eight Limited Partnerships contains false or misleading

statements, misrepresents material facts, or omits to state

material facts required to be included therein;

d. Whether plaintiff and other members of the

Class will be irreparably harmed if the defendants are not

preliminary and permanently enjoined from the conduct

described herein; and

e. Whether plaintiff and members of the Class have

suffered and will continue to suffer damages as a result of

the acts and omissions complained of herein.

22. Plaintiff’s claims are typical of all members of the

Class. The rights of all unitholders are similarly threatened by

the defendants’ attempt to unfairly shift ownership rights in

over 20% of the Partnerships’ assets to themselves. Plaintiff’s

claims, as an investor in one of the Limited Partnerships, and

the claims of all Class members all arise from the same breach

of fiduciary duties and are based on identical legal theories.

Plaintiff and the members of the Class are being damaged in

identical proportions based on the disproportionate ownership

App. 9a

rights which defendants have awarded themselves in the entity

which will survive the Roll-Up.

23. Plaintiff is prepared to represent the interests of the

Class members vigorously and has retained counsel experienced

in similar litigation. No conflict exists between the interests of

plaintiff and the interests of the Class. Plaintiff and the other

Class members are all unitholders in the Limited Partnerships.

Plaintiff and all of the Class members are being harmed by the

acts of the defendants as herein alleged.

24. A class action is the most fair and efficient manner in

which to adjudicate unitholders’ claims arising out of

defendants’ conduct in connection with the proposed Roll-Up.

Defendants have acted and refused to act on grounds generally

applicable to the Class, which makes final injunctive relief

appropriate on behaif of all Class members. In addition, the

prosecution of separate actions by individual members of the

Class would create a risk of inconsistent or varying

adjudications with respect to individual members of the

Class which would establish incompatible standards of conduct

for the party opposing the Class, would create a risk of

inconsistent rulings which might be dispositive of the interests

of other Class members not parties to the adjudications, or

which might substantially impede their ability to protect their

interests. Further, the amount of individual damages suffered

by each member of the Class, while significant in terms of the

amounts of their investments, would not be sufficient to justify

the expense of separate, individual actions. Should individual

actions be brought, or be required to be brought, by each

individual member of the Class, the resultant multiplicity of law

suits would cause undue hardship and expense for the Court

and the litigants.

25. Each of the defendants is based in San Mateo,

California, and Plaintiff believes that much of the conduct

which is at issue in this litigation was conceived, planned and

carried out in this County. Consequently, it is desirable that the

litigation of the claims of plaintiff and members of the Class be

App. 10a

concentrated in this Court. Plaintiff anticipates no difficulties in

managing this case as a class action.

FACTUAL ALLEGATIONS

THE LIMITED PARTNERSHIPS’ INITIAL

ORGANIZATION

26. The Limited Partnerships were organized under

California law during the period from 1979 through 1988 as real

estate limited partnerships. Each of them offered and sold units

of limited partnership interest to the public pursuant to

prospectuses and registration statements that stated to

prospective Limited Partnership investors, among other things,

that the Limited Partnerships were formed to invest in income

producing real property and/or mortgages. In general, the

Limited Partnerships’ original investment objectives were to

acquire and operate real estate income properties, to preserve

Partnership capital and provide cash distributions from

operations to investors, while providing the potential for capital

appreciation and increasing cash distributions through the

ownership and eventual disposition of réal estate. The Limited

Partnerships were not publicly traded entities, and it was

expected that the interests which the investors purchased would

be held until liquidation and dissolution after three to twelve

years, as provided in the limited partnership agreements of the

Limited Partnerships.

27. Each of the Limited Partnerships is governed by a

separate Agreement of Limited Partnership. These amended

agreements (collectively, the “Partnership Agreements”) have

substantially uniform terms and requirersents concerning the

business, structure, and management of the Limited

Partnerships.

App. lla

GENERAL PARTNER COMPENSATION UNDER

THE PARTNERSHIP AGREEMENTS

28. The Partnership Agreements-spell out and limit the

compensation to be paid to the General Partner Defendants.

Each one provides for the General Partners to receive:

(i) certain ongoing compensation for operating the Partnership,

(ii) fixed shares of operating distributions from cash flow, and

(iii) a “back-end” share of liquidating distributions -generally

1% until the limited partners have received back their

uninvested capital plus a specified 10-16% return, with a

General Partner bonus thereafter. (Registration Statement on

Form S-4 Pre-Effective Amendment No. 2 at 20; id. at Exhibits

3.07, 3.11, 3.15, 3.18, 3.24, 3.26 and 3.28).

29. Based upon current values of the Limited

Partnerships’ real estate assets, a liquidation sale of the

Partnerships’ properties would produce only $2.9 million for the

General Partners—$1.4 million in sales fees and $1.5 million in

general partner proceeds. (Registration Statement on Form S-4

Pre-Effective Amendment No. 2 at 49). Additionally, a

liquidation of the Limited Partnerships would end the

substantial management fees presently being charged to the

Partnerships.

30. As a consequence, the General Partner Defendants

entered into a plan and scheme to effectuate the Roll-Up in

violation of their fiduciary duties to Plaintiff and the Class, as

well as their duty of good faith and fair dealing. In order to

perpetuate their lucrative management position and to obtain a

substantial equity interest of over 20 million dollars, defendants

embarked upon their Roll-Up scheme.

THE ROLL-UP

31. The present terms of the Roll-Up are memorialized in

a Registration Statement on Form S-4, filed with the Securities

and Exchange Commission on or about September 1, 1994

App. 12a

bearing Registration No. 33-83506, which has been amended

thereafter on September 12, 1994 and January 4, 1995. The

January 4, 1995 Pre-Effective Amendment No. 2 is sometimes

referred to in this complaint as the “S-4.” The S-4 contains the

current draft of the prospectus and consent solicitation

statement which is to be issued by the General Partner

Defendants to members of the Class to obtain their consent to

the Roll-Up. According to the S-4, the Partnerships raised over

$153 million in capital contributions from investors. Through

September 30, 1994, total distributions to the Partnerships

totaled only $77,843,615, approximately 1/2 of the initial

investments. Indeed, Partners in only one of the Partnerships

(Equitec 79) had received distributions which exceeded their

original invested capital. These losses will be exacerbated if the

Roll-Up is effectuated on the terms defendants presently

propose.

32. If the Roll-Up is completed, the Limited Partnerships

will be combined with GC and merged into GRTI. The separate

existence of the Partnerships will cease, and GRTI will control

the assets of the Partnerships through an affiliated partnership

known as the Operating Partnership. Plaintiff and

Class members will receive shares of common stock or notes

issued by GRTI. At the heart of defendants’ deceptive and

improper scheme lies their decision to contribute GC to the

Roll-Up in exchange for an excessively large ownership interest

in the resulting entity, GRTI.

33. Through the Roll-Up, defendants will convert their

ownership of a worthless management company, with a book

value of negative $5.4 million ($3.9 million in assets subject to

$9.3 million in debt), into a 22-28% interest in GRTI (valued at

$21- $28 million) and a profit for defendants. Further, the Roll-

Up will prevent the Limited Partnerships from selling their

assets for their own profit, and incur (at the Partnerships’ sole

expense) tremendous and excessive fees, further reducing the

assets accruing to the interest of Plaintiff and the other

Class members.

App. 13a

34. A total of 6,871,615 shares in GRTI are to issued if all

Partnerships participate in the Roll-Up. Of this a total of

1,610,912 shares will be allocated to the owners of GC assuming

the Roll-Up is effectuated. S-4 at 93-94.

35. Specifically, the S-4 identifies three levels of allocation

of interests in GRTI. S-4 at 76. The Level One allocation is

between the Partnerships as a group and GC. The Level Two

allocation is among the Partnerships. The Level Three alloca-

tion is between the General Partners and the limited partners of

each Partnership.

36. In making the Level Two allocation, the defendants

obtained separate appraisals of the real estate values held by

each of the eight Limited Partnerships. However, the Level One

allocation arbitrarily allocated 20-24% of GRTI to GC (which is

affiliated with the other General Partner Defendants) without

any appraisal of GC’s business or assets. Instead, allocation at

Level One was accomplished pursuant to a different methodol-

ogy which focused upon the relative cash flow of GC on the one

hand, and the Partnerships on the other. This was done because

GC, unlike the Partnerships, was technically insolvent, with a

negative networth of $5.4 million..

37. According to the S-4, the Limited Partnerships have a

value of $82.2 million. Allocating GC a 20.24% share of this

appraised value would correspond to a $103.06 million total

value of GRTI and a valuation of GC interests at over $20.86

million.

38. This $20 million valuation for the GC interests consti-

tutes an outrageously unfair and excessive valuation for the

following reasons:

a The Book Value of GC is substantially negative;

GC has assets of only $3.9 million, less $9.3 million in debt

obligations which will be taken over by GRTI.

b. The $20 million valuation constitutes the applica-

tion of a multiplier of more than 7 times GC’s most recent

App. 14a

net earnings without reduction for its substantial debt obli-

gations that will be relieved in the Roll-Up.

c. With no appraisal at all, the GRC/GC management

group has been arbitrarily assigned a 20.24% share of

GRTI plus its General Partners’ share of each Limited

Partnership as if each Partnership had been liquidated.

d. The General Partners’ share of the eight Partner-

ships amounts to 22,421 additional shares and would bring

GRC/GC’s tota’ ownership to 1,413,236 shares or 20.56%

of GRTT’s 6,871,615 total shares. When added to the allo-

cation of 197,676 shares attributable to GRC/GC’s owner-

ship of Limited Partnership interests, GRC/GC’s resulting

total will be 1,610,912 shares or 23.44% of GRTI. Depend-

ing upon the number of Partnerships which elect to partici-

pate, as well as other factors, the allocation to the General

Partner Defendants may exceed 27% of GRTI’s shares.

39. In order to finalize the Roll-Up scheme pursuant to

the terms of the current Partnership Agreements, the defend-

ants need to receive the approval of a majority of the limited

partners in each Limited Partnership. Any Limited Partnership

that fails to approve the Roll-Up by not providing a majority

vote in favor will not be included in the Roll-Up and will remain

an independent partnership entity. Any Limited Partnership

that does approve the Roll-Up will exchange all of its outstand-

ing limited partnership units for newly issued shares and notes.

The proposed solicitation materials for that vote are deceptive

and misleading as more fully described below.

THE NOTES AS AN ALTERNATIVE TO APPRAISAL

RIGHTS UNDER THOMPSON-KILLEA ACT

40. Purporting to satisfy the provisions of California’s

Thompson-Killea Limited Partner Protection Act of 1992, the

defendants have structured the Roll-Up to permit investors to

elect to receive up to 20% of the total Exchange Value in the

form of subordinated, unsecured Notes due in the year 2002

—_—

App. 15a

(the “Notes”’) instead of GRTI shares. But the interest rate on

the Notes (120% of the federal 3 year note rate) is so low for

the risk involved that the Notes are certain to sell, if at all, at a

substantial discount from their face/exchange value.

41. Under the Thompson-Killea Limited Partner

Protection Act of 1992, certain presumptions relating to the

fairness of roll-up transactions are created under California law.

While the S-4 states that the Roll-Up is intended to comply with

Thompson-Killea, that statement is false and misleading, and is

designed to foster the incorrect impression among

Class members that their rights are being duly protected in the

context of the-Roll-Up.

42. Under Thompson-Killea, a presumption is created

that the rights of limited partners are protected in a roll-up

transaction if the transaction provides that a dissenting limited

partner will receive compensation for his, her, or its limited

partnership units based on an appraisal of the limited

partnership assets performed by an independent appraiser

unaffiliated with the sponsor or general partner of the limited

partnership and which values the assets as if sold in a orderly

manner in a reasonable period of time, plus or minus other

balance sheet items, less the costs of sale or refinancing.

Compensation on account of such appraised value to be given

to dissenting limited partners in a roll-up transaction may be in

the form of cash, secured debt instruments, unsecured debt

instruments, or freely traded securities. However, to fall within

the statutory presumption of fairness, debt instruments or freely

tradable securities must meet certain specified requirements.

43. The Roll-Up fails to fall within the statutory

presumption of fairness established under Thompson-Killea

because the allocation mechanism employed in the context of

the Roll-Up does not assure that dissenting limited partners will

receive the appraised value of their pro rata share of the limited

partnership assets plus or minus other balance sheet items and

less the cost of sale or refinancing. Instead, pursuant to the

terms of the Roll-Up as described in the S-4, dissenting limited

App. 16a

partners will receive far less. This is a function of both the

allocation of shares to GC pursuant to the terms of the Roll-

Up, as well as the fact that the total amount of Notes available

to be issued under the Roll-Up is limited. If there are a

sufficient number of dissenting limited partners, it is possible

that there will not be sufficient Notes for all dissenting limited

partners.

44. Moreover, dissenting limited partners who fail to

make an effective election to receive Notes will, instead, receive

shares in GRTI. However, in view of the fact that the GRTI

shares have not traded on a certified national securities

Exchange or on the interdealer quotation system of the

National Association of Securities Dealers, Inc. for one year,

the shares of GRTI do not qualify as freely tradeable securities

under Thompson-Killea.

BREACH OF DUTY TO MAXIMIZE VALUE

45. Under well-established fiduciary law, management

that has decided to acquire an entity's businesses or assets for

itself must first seek to obtain maximum value by seeking to

auction or otherwise sell those businesses or assets to the

highest bidder, without imposing obstacles to preserve

management’s position or purchase opportunity. The General

Partner Defendants breached this duty by entering into the

Roll-Up scheme without making any effort to market the

properties of the Partnerships.

FUNDAMENTAL UNFAIRNESS OF THE ROLL-UP

46. The defendants’ Roll-Up plan is unfair and coercive

for at least the following reasons:

a. Plaintiff and Class members are being compelled to

vote in favor of forfeiting ownership of their existing

securities in defined, finite-life real estate limited

partnership entities in exchange for units of a newly-

{

App. 17a

created, publicly traded corporation with no definite

composition and, thus, no definable asset value, net worth,

earnings, cash flow, or liquidation value on which to base

their investment decision.

b. Plaintiff and Class members are precluded from

receiving objective investment advice from the General

Partners regarding their voting decisions on the Roll-Up,

because General Partners and the individual defendants

are receiving substantial compensation as a result of the

Roll-Up, while their continued receipt of compensation

may be of limited duration otherwise.

c. The voting process forces those limited partners

who vote against the Roll-Up, but whose Limited

Partnerships approve the Roll-Up, to become shareholders

and/or noteholders of GRTI against their will.

d. The proposed prospectus and consent solicitation

statement fails to disclose any valuation data which would

permit Class members to make an informed assessment of

the allocation of GRTI shares to the General Partners

Defendants and their affiliates, and falsely states that the

Roll-Up complies with the requirements of the Thompson-

Killea Limited Partner Protection Act of 1992.

e. The Roll-Up provides for an excessive and unfair

allocation of GRTI shares to the General Partner

Defendants.

f. The Roll-Up is the product of self-dealing by the

General Partner Defendants.

47. In the event that the Roll-Up is consummated,

plaintiff and Class members will be irreparably damaged in that

they will have lost their interests in the Limited partnerships in

exchange for units in GRTI.

App. 18a

FIRST CAUSE OF ACTION

(Claim for Breach of Fiduciary Duty

Against GC, GRC and Batinovich)

48. Plaintiff incorporates by reference and repeats and

realleges Paragraphs 1 through 47 above, as if fully set forth

herein.

49. The General Partner Defendants, by reason of their

position as general partners of the Limited Partnerships, are in

a fiduciary relationship with plaintiff and Class members and

owe plaintiff and Class members the highest obligations of good

faith, fair dealing, and full disclosure.

50. Defendants breached their fiduciary duties to plaintiff

and Class members by jointly orchestrating the Roll-Up scheme

in order to convey economic benefits to the defendants, in the

form of a $20 million interest in GRTI, in return for a

technically insolvent entity using unfair terms and coercion, and

with the intent to disseminate a false and misleading

prospectus/consent solicitation statement.

51. The proposed Roll-Up is not in the best interests of

plaintiff and Class members. The Roll-Up is a violation of the

defendants’ obligation to direct the affairs of the Limited

Partnerships in good faith for the investors and not for purposes

of self-dealing and taking unfair advantage of said investors.

52. The conduct of each of the defendants as herein

alleged was undertaken deliberately, willfully, and in conscious

disregard of the rights of plaintiff and Class members and was

intended and directed to harm the Limited Partnerships and

their limited partners and to advance the personal interests of

the General Partner Defendants in violation of the fiduciary

duties that each of said defendants owes to plaintiff and the

Class members.

53. Plaintiff and Class members have no adequate remedy

at law. if defendants are not enjoined from consummating the

App. 19a

Roll-Up, plaintiff and the Class members will suffer irreparable

injury.

SECOND CAUSE OF ACTION

(Claim for Breach of Duty of Good Faith and Fair

Dealing Against GC, GRC and Batinovich)

54. Plaintiff incorporates by reference and repeats and

realleges Paragraphs 1 through 53 above, as if fully set forth

herein.

55. Plaintiff and the other Class members held a

reasonable expectation that defendants would act to maximize

their interests and subordinate any incentive-based return to

the General Partners until the unitholders realized a full return

on their capital contribution plus growth, as represented in the

original Partnership Agreeme.:ts to which the General Partner

Defendants voluntarily became bound on the dates alleged

above. By voluntarily assuming the duties and status of a

general partner in the Partnerships under the Partnership

Agreements, the General Partner Defendants became subject

to an implied covenant of good faith and fair dealing which

barred them from taking actions that would prevent Plaintiff

and the Class members from receiving the benefits of the

Partnership Agreements. —

56. Defendants’ attempt to effect the Roll-Up, to subvert

bona fide dissenters’ appraisal rights by the use of coercive low-

interest notes, and to dilute the value of unitholders’ interests in

the Partnerships through both the excessive valuation of GC

and the payment of excessive fees associated with the Roll-Up

constitute an obvious departure from the standards of good

faith and fair dealing imposed upon defendants under

California law and the Partnership Agreements.

57. Defendants’ conduct substantially defeats the

reasonable expectations of the Class in committing their capital

to the Limited Partnerships at their inception and utilizes

defendants’ exclusive control and superior position to oppress

App. 20a

the unitholders, to commit fraud upon their fights, and to

deprive the unitholders of the benefits of their investment.

58. Defendants’ oppressive behavior threatens to

prejudice the rights and interests of the members of the

Class and would deprive Class members of a substantial

financial benefit that would otherwise accrue to them.

59. Plaintiff and the Class members have no adequate

remedy at law. If defendants are not enjoined from

consummating the Roll-Up, plaintiff and the Class members

will suffer irreparable injury.

IRREPARABLE INJURY

60. As a result of the foregoing conduct on the part of the

defendants, plaintiff and the members of the Class have

sustained and will continue to sustain irreparable injury in the

absence of action by this Court. As described in greater detail

above, unless this Court assumes equitable jurisdiction and

otherwise orders the Defendants to act in accordance with their

fiduciary obligations and other duties under California law, they

will continue to act in accordance with their coercive and

improper scheme in breach of their fiduciary duties and their

duty of good faith and fair dealing. Plaintiff and the Class lack

an adequate remedy at law.

PRAYER FOR RELIEF

WHEREFORE, plaintiff, individually and on behalf of the

members of the Class, demands the following relief:

A. An Order certifying this action as a class action on

behalf of the proposed plaintiff Class (i.e. all unitholders in

the affected Limited Partnerships excluding defendants

and their affiliates);

App. 2la

B. A declaration that the defendants have breached

their legal duties to limited partners of the Limited

Partnerships;

C. An Order preliminarily and permanently enjoining

Defendants from effectuating the Roll-Up of the Limited

Partnerships, and, if consummated, rescinding the RollUp

and setting it aside except based on a fair and independent

valuation of the GC assets;

D. An Order requiring defendants to account for all

profits realized from their improper conduct challenged

herein;

E. An Order awarding compensatory damages in an

amount to be determined upon proof submitted to the

Court;

F. An award of costs and disbursements of this action,

reasonable attorneys, fees and expenses, and such other

and further relief as the Court may deem just and

appropriate.

Dated: February 20, 1995 Respectfully submitted,

CHIMICLES, JACOBSEN &

TIKELLIS

By: /s/ PATRICK J. GRANNAN

Patrick J. Grannan

633 Fifth Street

Suite 3300

Los Angeles, CA 90071

(213) 523-8100

App. 22a

CLINTON A. KRISLOV

KRISLOV & ASSOCIATES,

LTD.

222 North LaSalle Street

Suite 810

Chicago, IL 60601

(312) 606-0500

CHIMICLES, JACOBSEN &

TIKELLIS

James R. Malone, Jr.

361 West Lancaster Avenue

Haverford, PA 19041

(610) 642-8500

ATTORNEYS FOR PLAINTIFF

AND THE CLASS

App. 23a

Patrick J. Grannan SBN 115693

CHIMICLES, JACOBSEN & TIKELLIS

633 West Fifth Street, Suite 3300

Los Angeles, CA 90071

(213) 623-8100

Clinton A. Krislov

KRISLOV & ASSOCIATES, LTD.

Suite 810

222 North La Salle Street

Chicago, IL 60601-1086

(312) 606-0500

ATTORNEYS FOR PLAINTIFF

SUPERIOR COURT OF THE STATE OF CALIFORNIA

IN AND FOR SAN MATEO COUNTY

ANTHONY E. BLUMBERG, on behalf

) CASE NO. 391223

of himself and all others similarly situated, ) CLASS ACTION

Plaintiff,

GLENBOROUGH REALTY _

CORPORATION (A CALIFORNIA

CORPORATION); GLENBOROUGH

CORPORATION (A ) CALIFORNIA

CORPORATION); and ROBERT

BATINOVICH,

Defendants,

EQUITEC INCOME REAL ESTATE

INVESTORS B, et al.,

Nominal Defendants.

Nee Nee ee es

) DECLARATION OF

) CLINTON A. KRISLOV

) IN SUPPORT OF

) REQUEST FOR FINAL

) APPROVAL OF CLASS

) ACTION SETTLEMENT

) AND PETITION FOR

) AN AWARD OF

) ATTORNEY’S FEES

) AND EXPENSES

) Date: December 21, 1995

) Time: 9:00 a.m.

) Dept.: 4

) Trial: None

) Disc. cut-off: None

)

App. 24a

I, Clinton A. Krislov, declare:

1. I am an attorney-at-law, duly admitted to practice in the

State of Illinois. I am the founder and principal of the law firm

of Krislov & Associates, Ltd. I am submitting this Affidavit in

support of my firm’s application for an award of attorneys, fees

in connection with services rendered to the plaintiff class and

the reimbursement of expenses incurred by my firm in the

course of this litigation.

2. I personally handled all negotiations with the defend-

ants concerning class counsel’s application for an award of

attorney’s fees and expenses. All discussions concerning attor-

ney’s fees were entirely independent of the settlement negotia-

tions and occurred only after we had reached a final agreement

on all of the substantive terms of the settlement.

3. I began monitoring this proposed rollup with the first

S.E.C. filing on September 1, 1994. I have particular experience

in successfully identifying and challenging unfair rollup transac-

tions. See, e.g., In re Prudential-EBache Energy Income Partner-

ships Securities Litigation, No. MDL 888 (E.D. La. 1994); In Re

Franchise Finance Corp., of America Litigation, C.A. No. 13073

(Del. Ch. 1994). I identified three areas in which the original

proposal and filings were deficient: first, the allocation of inter-

ests between the general partner/ management group and the

limited partners was disproportionate; second, there was not

full disclosure of the risks that were peculiar to this transaction;

and third, there were not significant protections against an

immediate decline in the market value of the resulting entity

after the rollup.

4. After having identified these problem areas in the origi-

nal registration statement, I engaged an outside expert consult-

ant to study the financial aspects of the transaction in greater

depth and to review the transaction as it progressed. Our expert

continued to study the proposed transaction after we filed suit

in February 1995. When we filed suit, our primary orientation

was (0 challenge the Level one allocations (i.e., maximizing the

App. 25a

shares allocable to the partnerships), to the supplement the risk

disclosures of the transaction to the limited partners, and to

achieve as much protection an possible for the post-rollup

market value of the shares received. Thus, when Glenborough

Corp.’s Level one allocation percentage did not change after

the addition of the Rancon management contracts, which

increased Glenborough Corp.’s contribution to cash flow by

over 50%, we determined that the rollup was within the range

of reasonableness with respect to that aspect of the deal. We

then proceeded to negotiate the additional disclosures and the

protective aspects of the terms of the rollup which help ensure

the market strength of the shares following the rollup.

5. By the end of June 1995, we were able to negotiate a

settlement on all of the substantive text, and a settlement

agreement was drafted and circulated. Only then did we begin to

negotiate the attorney’s fees issues at all. When we reached an

impasse on this issue, we sought ways to surmount the impasse.

After examining various alternatives, Mel Goldman and |

agreed to meet on September 6, 1995, at the new Denver

International Airport, to discuss and resolve any Open issues.

Only after assuring ourselves that we had agreed on all substan-

tive terms, did we then begin negotiations over fees and were,

after some hours, able to reach agreement on the figure ulti-

mately agreed upon.

I declare under the penalty of perjury under the laws of

the State of California that the foregoing is true and correct.

Executed at Chicago, Illinois on December 18, 1995.

/s/ CLINTON A. KRISLOV

Clinton A. Krislov

App. 26a

PROOF OF SERVICE

STATE OF CALIFORNIA, COUNTY OF LOS ANGELES

I am employed in the County of Los-Angeles, State of

California. I am over the age of 18 and not a party to the within

action. My business address is 633 West Fifth Street, Suite 3300,

Los Angeles, California 90071.

On December 18, 1995, 1 served the foregoing document

described as DECLARATION OF CLINTON A. SLOV IN

SUPPORT OF REQUEST FOR A FINAL APPROVAL OF

CLASS ACTION SETTLEMENT AND PETITION FOR AN

AWARD OF ATTORNEY’S FEES AND EXPENSES on the

parties in this action, as follows:

X By placing the true copies thereof enclosed in sealed

envelopes addressed as stated on the attached service list;

SEE SERVICE LIST

XX Ly Mail: I caused such envelope to be deposited in the

mail at Los Augeles, California. The envelope was mailed

with postage thereon fully prepaid.

By Facsimile: I caused such document(s) to be sent to the

address above via the facsimile number indicated.

By Personal Service as indicated: I caused such envelope

to be delivered by hand to the offices of the addressee.

XX ___ By Federal Express: I caused such document(s) to be sent

Federal Express next day delivery an stated on the

attached service list.

XX (State) I declare under penalty of perjury under the laws

of the State of California that the above is true and

correct.

I am “readily familiar” with the firm’s practice of

collecting and processing correspondence for mailing. It

is deposited with the U.S. Postal Service on that same day

in the ordinary course of business. I as aware that on

motion of party served, service is presumed invalid if

postal cancellation date or postage meter date is more

than I day after the date of deposit for mailing in

affidavit.

Executed on December 19, 1995 at Los Angeles,

California.

/s/ Laura Sesti

LAURA SESTI

App. 27a

SERVICE LIST

Anthony Blumberg, et al. v. Glenborough Realty, et al,

San Mateo Superior Court Case No. 391223

CLASS ACTION

CLINTON A. KRISLOV

KRISLOV & ASSOCIATES, LTD.

222 North La Salle Street

Suite 810

Chicago, IL 60601-1086

(312) 606-0500

MELVIN R. GOLDMAN

DARRYL P. RAINS

MORRISON & FOERSTER

345 Califurnis. Street

San Francisco, CA 94104-2675

(415) 667-7000

LIONEL Z. GLANCY

PETER A. BINKOW

LAW OFFICES OF LIONEL Z. GLANCY

1299 Ocean Avenue

Suite 323 Santa Monica, CA 90401

(310) 319-3277

ANDREW FRIEDMAN

WECHSLER HARWOOD HALEBIAN A FEFFER

805 Third Avenue

7th Floor

New York, NY 10022

(212) 935-7400

VINCENT T. GRESHAM

Attorney At Law

6065 Roswell Road

Suite 144%

Atlanta, Georgia 30328

JANICE SCHCEN

OMNI TRUST

3111 Bel Air Drive

Las Vegas, NV 89109

(702) 792-2693

App. 28a

SERVICE LIST

Anthony Blumberg, et al. v. Glenborough Realty, et al,

San Mateo Superior Court Case No. 391223

CLASS ACTION

LINDA S. McNEER

177 Lake Drive

Mountain Lakes, NJ 07046

LAW OFFICES OF JOHN W. ALLURED

One Montgomery Street

Suite 1400

San Francisco, CA 94104

FARROW, BRAMSON, BASKIN & PLUTZIK

Alan. R. Plutzik

Edward Romero

2125 Oak Grove, Suite 120

Walnut Creek, CA 94598

App. 29a

LAW OFFICES OF JOHN W. ALLURED

John W. Allured (State Bar No. 84770)

One Montgomery Street, Suite 1400

San Francisco, California 94104

Telephone: (415) 837-2990

FARROW, BRAMSON, BASKIN & PLUTZIK

Alan R. Plutzik (State Bar No. 77785)

2125 Oak Grove Road, Suite 120

Walnut Creek, California 94598

Telephone: (510) 945-0200

Attorneys for Class Members Donald A.

Barnett, Sheila Gold, Ronda Chaney, Lon

Chaney, Jr., William P. Mitchell and Robert

Q. Buickerood, Trustee of the Buickerood

1989 Revocable Living Trust

IN THE SUPERIOR COURT OF THE STATE OF CALIFORNIA

IN AND FOR THE COUNTY OF SAN MATEO

ANTHONY BLUMBERG et al., ) Case No. 391223

)

Plaintiffs, ) OBJECTION OF

) CLASS MEMBERS

v. ) DONALD A.

) BARNET, SHEILA

GLENBOROUGH REALTY | ) GOLD, RONDA

CORPORATION, GLENBOROUGH ) CHANEY, LON

CORPORATION, ROBERT }) CHANEY, JR.,

BATINOVICH et al., ) WILLIAM P.

) MITHCELL AND

Defendant. ) ROBERT Q.

) BUICKEROOD,

) TRUSTEE, TO

) FINAL APPROVAL

) OF SETTLEMENT

)

) Date: December 21,

) 1995

) Time: 9:00 a.m.

) Dept.: 99

)

App. 30a

TABLE OF CONTENTS

E,. EE RR EN inne capa se INE ea

Il. THE NATURE OF THE CLAIMS WHICH

WOULD BE RELEASED IF THE SETTLE-

MENT WERE TO BE APPROVED BY THIS

CRPAIIGE. ac es

ee ha ee a oe eee a ee So ee ee ee AS ee

A. The Rollup Transaction Is Grossly Unfair to the

eg Bere gy ali gd Farry aN

1. Too Much Stock In The REIT Has Been

Allocated To The General Partners And

Their Affiliates, So As To Unfairly Dilute

The Limited Partners’ Ownership Interests . .

(i)

(ii)

(iii)

(iv)

Failure to Allocate in Accordance

with the Relative Value of the

Assets Contributed to the REIT ..

Inappropriate and Inconsistent Cal-

culation of Cash Flow ..........

The General Partners Improperly

Relied on “Adjusted” Cash Flow

From A year Whose Results Were

Inflated By Extraordinary Income .

Failure to Consider Determinants

Of Value Other Than Cash Flow ..

y X The Rollup is Also Unfair Because It

Deprives The Limited Partners of Valuable

Rights and Extends Substantial Benefits To

The General Partners At The Limited Part-

UE NO ik 5 8s US SRN es

a. The Rollup Entrenches Management

And Prevents The Partnerships From

Liquidating Or Adopting Other Strate-

gies To Maximize Returns to The Lim-

WO NE vac p cceeseeedcaw es his

eae

App. 31a

TABLE OF CONTENTS

(continued)

b. Elimination of $63 Million of

Accumulated Rights to Preferred Annual

NN Sara Pree tks eek oe Bee

c. Unfair Imposition of Massive Transaction

Costs On The Limited Partners........

d. Elimination of Debts, Personal Guaran-

tees And Tax Liability and Other Bene-

fits For The General Partners and Their

I rin Se ws a we ks shke wi o%

OR OS EE a ey

IV. THE SETTLEMENT IS NO” FAIR, REASON-

PARR PAE? PPT IUAL ES ogc sc cc ce setienes

A. The Settlement Confers i'> Meaningful Benefit

MU SOE ole VeNe eaten caves cede as

B. The Settlement was “Negotiated” at an Early

I OE Se I cs i new Kaceineie cece.

C. The Settlement is “Tainted” by Virtue of the

Provisions Concerning the Plaintiff Incentive

Bonus and Plaintiff’s Attorneys Fees.........

D. The Ability of Defendants to Withstand a

i EEO Cee ty wee

E. The Reaction of the Class Members .........

F. The Complexity, Expense and Likely Duration

ie vast atk vak soe ek ree

We GS 0 i Saa Via e 5 SARS SRG 06 ORS

App. 32a

TABLE OF AUTHORITIES

CASES PAGE(S)

Armstrong v. Board of School Directors of the City of

Milwaukee, 616 F.2d 305, 314 (7th Cir. 1980)........ 20

Buchet v. ITT Consumer Financial Corp., 845 F.Supp.

Ge FE RIE ys 6.06 ncn ks Fae SNad med oe cs 5 20

City of Detroit v. Grinnell Corp., 495 F.2d 448, 462-463

Cee Sl A es RR CRS Ss 6s Oda eer S or erwin passim

Ficalora v. Lockheed California Co., 751 F.2d 995, (9th

Coes TRS: a5 vos oe d pelt Po nd 4 Woe bo a ca 20,26

Grunin v. International House of Pancakes, 513 F.2d

114, 123 (8th Cir.), cert. denied, 423 U.S. 864 (1975) . 19

I.U.E. v. Unisys Corp., 858 F.Supp. 1243, 1264

(E.DB Yu toes as Sata reeds Cede ee 19

In re General Motors Corp., Engine Interchange

Litigation, 594 F.2d 1106 (7th Cir. cert. denied 444

if Ms Li: oo ee GeeerpEn tly gennigap mm TnD GR ye 20

In re Oracle Securities Litigation, 829 FSupp. 1176

(N.D.Cal, E9RB) «acs Siwceedek soe SUES RIN. EONS 20,27

In re Traffic Executive Ass’n—Eastern Railroads, 627

FOR GEE Cae Nils BOUL, § 065-56 u 2 0c canes 3 main eo 20

Mars Steel v. Continental Illinois National Bank & Trust

Co. of Chicago, 834 F.2d 677 (7th Cir. 1987) ........ 19

Reynolds v. King, 790 FSupp. 1101 (M.D.Ala. 1990) .. 20

Schneider v. Vennard, 183 Cal.App.3d 1340 (1986) .... 19

Sherman v. Lloyd, 181 Cal. App. 693 (1986) ........ 14

Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982)

cert. denied, 464 US. 818 (1963) ...............:; 19

App. 33a

TABLE OF AUTHORITIES

(continued)

CASES PAGE(S)

State of West Virginia v. Chas, Pfizer & Co., 440 F.2d

1079 (2d Cir.), cert. denied sub nom. Cotler Drugs, Inc.

v. Charles Pfizer & Co., 404 U.S. 871 (1971) ........ 20

STATUTES

GAA Nr ie PEAS ais hah ek cas NSE 21

es I as BN cc oe eas naka tao eh een 4 21

Limited Partnership Rollup Reform Act of 1993, 15

Sen SEE wk \ a ieim ac scte he't eas endiees kee 1

Killea-Thompson Act, Cal. Corp. Code §25014.5..... 1

MISCELLANEOUS

John Geschke, Regulating Rollups: General Partners’

Fiduciary Obligations in Light of the Limited

Partnership Rollup Reform Act of 1993, 47 Stan.L.Rev.

geo 2 BUSPAR ate te ele ies steeping Pole ape es 1,12

I. INTRODUCTION

Class members Members Donald A. Barnett, Sheila Gold,

Ronda Chaney, Lon Chaney, Jr., William P. Mitchell and

Robert Q. Buickerood hereby file this obection to the final

approval of the proposed settlement of this class action. This

action arises out of a proposed consolidation of eight real estate

limited partnerships! into Glenborough Realty Trust

Incorporated, a publicly-traded real estate investment trust, or

“REIT” (the “REIT”). Under the terms of the Consolidation,

the limited partners of the Partnerships are to surrender their

interests in the Partnerships in exhange for shares of common

stock in the REIT. Defendants Robert Batinovich

(“Batinovich”) and Glenborough Realty Corporation, who are

the general partners of the Partnerships (collectively, “the

General Partners”), will also receive shares of common stock in

the REIT in exchange for contributing to it (1) Glenborough

Corporation (“GC”), a management company controlled by

Batinovich, (2) assorted other businesses and interests, and

(3) their general partnership interests in the Partnership. The

Consolidation is of a type commonly referred to as a “rollup”,

and is hereinafter referred to as the “Rollup” or the “Rollup

Transaction” .?

(1) These are Equitec Income Real Estate Investors B, Equitec Income Real

Estate Investors C, Equitec Income Real Estate Investors—Equity Fund IV,

Equitec Mortgage Investors Fund IV, Equitec 79 Real Estate Investors,

Outlook Properties Fund IV, Glenborough All Suite Hotels, L.P, and

Glenborough Pension Investors (collectively, “the Partnerships”).

(2) ‘Roiiups” have been extensively criticized on the ground that they almost

always benefit and enrich the general partners at the expense of the limited

partners. See, e.g., John Geschke, Regulating Rollups: General Partners’

Fiduciary Obligations in Light of the Limited Partnership Rollup Reform Act of

1993, 47 Stan.L.Rev. 85 (1994). Indeed, perceived abuses by general partners

in effectuating such transactions led to both federal and state legislation to

prevent further abuse. See Limited Partnership Rollup Reform Act of 1993

(15 U.S.C. §78n(h) et seq.; Killea-Thompson Act (Cal. Corp. Code §25014.5 et

seq.)

App. 35a

The Class Action Complaint (the “Complaint”), which

purported to have been brought by plaintiff Anthony Blumberg

as a class action on behalf of all limited partners in the

Partnerships, alleged that the Rollup is unfair to the limited

partners in that, inter alia, (1) the Consolidation was designed

to perpetuate the General Partners’ ability to earn management

fees and other consideration (Complaint at 1128—30; 46),

(2) the Consolidation would prevent the limited partners from

realizing value on the sale of the Partnerships’ assets (id. at

133); and (3) the shares of common stock of the Company to be

issued to the General Partners are excessive and

disproportionate (id. at 1132-33; 38; 46). The Complaint alleged

two causes of action, ie., for breach of fiduciary duty and

breach of the duty of good faith and fair dealing, and sought to

enjoin the Consolidation.

However, barely four months after the Complaint was

filed—and without having conducted any formal discovery,

without having sought preliminary or final injunctive relief

against defendants, and, indeed, without even having required

defendants to respond to the Complaint—plaintiff Blumberg

agreed to settle the litigation in its entirety. Significantly, this

settlement encompasses not only plaintiff Blumberg’s individual

claims, but also those of a plaintiff class consisting of all of the

13,000 persons who hold limited partnership interests in any of

the Partnerships. Moreover, despite the fact that focus of the

original Complaint was for injunctive relief—i.e., to prevent the

Consolidation—, the settlement purports to conclusively settle,

release and bar any and all claims (including claims for

damages) which the class members may have relating to this

$96 million transaction, without affording the class members

any right to “opt-out” or exclude themselves from the class.

Finally, even though no person or entity other than the named

defendants are parties to the settlement (or in any way involved

in the litigation), the scope of the claims settled, released, and

barred extends not only to the named defendants and their

affiliates, but rather to any and all persons. Thus, the settlement

extinguishes ail claims-—of any kind or nature—which any

App. 36a

limited partner might have against any person concerning the

Rollup.

More important, this “settlement” confers no meaningful

benefit on the members of the plaintiff class. Despite

purporting to settle, release and permanently bar any and all

claims for money damages or equitable relief (such as

rescission), the settlement does not require defendants to pay

one dime to the plaintiff class. Similarly, the settlement does not

increase by one share the allocation of common stock to be

received by the limited partners in connection with the Rollup.

Rather, the settlement merely requires defendants to add four

“curative disclosures” —totalling some eight sentences—to the

five hundred (500) page Prospectus, modifies one purported

“restriction” on defendants’ ability to sell stock after the

Rollup, and limits the Company’s ability to grant stock options

to employees. These “benefits” are totally insignificant.

With respect to the plaintiff Blumberg and his counsel,

however, the settlement does provide very substantial—and

tangible—benefits. According to the terms of the settlement,

plaintiff Blumberg is entitled to seek an “incentive bonus” of

$10,000, and his counsel is entitled to seek attorneys’ fees in the

amount of eight hundred and fifty thousand dollars! Even worse,

the bonus and the fees will not be paid by the defendants, but

rather by the REIT—an entity which will not have economic

substance unless and until the Rollup is approved. Thus,

plaintiff and his counsel are not only no longer opposed to the

Rollup, they have become, in effect, advocates for that

transaction! Consequently, apart from its other problems, the

settlement creates a direct, substantial, and irreconciliable

conflict of interest between plaintiff and his counsel, on one

hand, and the class members, on the other.

While this settlement would be objectionable under

virtually any circumstances, it is especially so here, where the

claims of the class members against the General Partners are

extremely strong. As explained below, the Rollup is (as the

Complaint in this matter originally alleged) grossly unfair to the

App. 37a

limited partners in that, inter alia, (1) as a result of the change

in the structure of the limited partners’ investment, i.e., from a

limited partnership to a corporation, the limited partners will

lose numerous important rights and investment benefits,

including the right to a preferred return on investment (the

current accumulated value of which is some $63 million),

(2) the limited partners’ ownership interests will be substantially

diluted as a result of an excessive and improper allocation of

shares of common stock to the General Partners, and (3) the

limited partners will incur millions of dollars in transaction

costs alone—as well as suffer adverse tax consequences—

without any corresponding benefit. At the same time, the

Rollup will result in substantial benefits to the General

Partners, including (1) tax benefits (not shared by the limited

partners) of approximately $19 million, (2) relief from

approximately $14.3 million of debt of GC, (3) elimination of at

least approximately $4.3 million of liability to the limited

partners, and (4) an allocation of common stock in the

Company which is excessive and disproportionate to the

interests being contributed by the General Partners (and

others). Thus, it is clear that the Rollup amounts to a clear

breach of the fiduciary (and other) duties owed by the General

Partners to the ‘limited partners of the Partnerships.

In short, this settlement constitutes a complete

abandonment of the rights of the class members in exchange for

substantial attorneys’ fees. Under the legal—and equitable—

principles which govern this Court’s review of the settlement,

the settlement cannot—and must not—be allowed to stanc.

Therefore, the motion for final approval of the settlement must

be denied.

Il. THE NATURE OF THE CLAIMS WHICH WOULD BE

RELEASED IF THE SETTLEMENT WERE TO BE

APPROVED BY THIS COURT

To evaluate the merits of the settlement, the Court must

consider the nature of the claims which would be released and

extinguished if the settlement were to be approved. Those

App. 38a

claims which include, without limitation, claims that the Rollup

Transaction is unfair to the limited partners of the Partnerships,

and that the defendants have misled the limited partners in

attempting to induce them to vote in favor of the Rollup, are

serious, substantial and supported by clear and compelling

evidence.

A. The Rollup Transaction Is Grossly Unfair to the

Limited Partners

The Rollup Transaction, as described in the Prospectus,? is

grossly unfair to the limited partners in several respects.

1. Too Much Stock In The REIT Has Been Allocated

To The General Partners And Their Affiliates, So

As To Unfairly Dilute The Limited Partners’

Ownership Interests

The Rollup is unfair, first, because it allocates an excessive

amount of stock in the REIT to the General Partners and

entities controlled by them, thus unfairly diluting the limited

partners’ share and giving a windfall to the General Partners.

That allocation has been carried out pursuant to a faulty and

biased methodology which violates every principle of fairness

and equity.

The REIT, as described in the Prospectus, will consist

basically of two kinds of assets—commercial and industrial real

estate, which is being contributed by the Partnerships and

related entities (hereinafter, the “Allocation Partnerships”), and

a management company, GC, which is substantially owned or

controlled by the General Partners. The real estate which the

Allocation Partnerships are contributing to the REIT generates

income from rents, and also has a substantial underlying value

in that it can be sold on the open market. GC, on the other

hand, is a service business. It generates income by performing

prope“ management services, and does not own significant or

(3) A copy of ihe Prospectus, in its entirety, is attached to the Declaration of

Alan R. Plutzik, filed herewith, as Exhibit A.

sittin. ® en eee eee Sais

App. 39a

valuable fixed assets. GC’s future prospects are dependent on

the extent to which it can count on a continuing flow of

management fees from the Partnerships and other entities. Any

reduction in such fee income—such as might result if one or

more of the Partnerships liquidated its assets and distributed

the proceeds to its limited partners—would cause a direct and

material diminution of GC’s bottom line.

The General Partners have allocated the REIT’s stock

between the Allocation Partnerships and the shareholders of

GC (i.e., themselves and their affiliated persons and entities) so

as to give the GC shareholders a disproportionate share of the

stock. They have allocated approximately 5.15 million shares, or

79.76% of the REIT’s stock, to the Allocation Partnerships, and

approximately 1.3 million shares, or 20.24% of the stock, to the

shareholders of GC.‘ If we exclude from the calculation certain

of the Allocation Partnerships which are themselves owned or

controlled by the General Partners, the division of stock

between the remaining Partnerships and the shareholders of

GC is in the ratio of 78% to 22%. In other words, for every 3.5

shares allocated to the limited partners, the GC shareholders

will receive one share. Id. See the Declaration of valuation

expert Robert EF Reilly, filed herewith (the “Reilly

Declaration’’), at 12. This division presupposes that the value of

GC is-29% (.22/.78) of the value of the real estate assets

contributed to the deal by the Partnerships. Jd.

The General Partners have themselves suggested that the

real estate assets contributed to the REIT by the Partnerships

are worth between $65 and $76 million.s Thus, to justify giving

the shareholders of GC as much as 29% of the REIT stock

which the investors in the Partnerships will receive, the value of

GC would have to be between $18 million and $22 million.

(*) See Prospectus, Exhibit A to the Plutzik Declaration, at page 11.

(5) See Prospectus at 86,113 and 268; Prospectus Supplement (hereinafter

cited as “Supplement”), at 25, 60, 84, 105, 127, 151, 175, 201. Relevant

excerpts from the Supplement are attached collectively as Exhibit B to the

Plutzik Declaration.

App. 40a

However, the General Partners made no effort whatsoever to

determine the value of GC. (Had they done so, they would have

had to conclude that the value of GC is far less than $18

million.) Rather, the General Partners allocated the REIT

stock between the limited partners and the GC shareholders

solely by comparing the cash flow of GC with the aggregate

cash flow of the Partnerships.

As the Reilly Declaration convincingly demonstrates, the

General Partners’ methodology of allocating the stock by

comparing cash flows is improper and results in the allocation

of an excessive amount of stock to the owners of GC—ie.,

defendant Batinov.ch and others. Mr. Reilly, a highly

experienced and qualified expert who is a co-author of the

definitive treatise on the subject of business valuation,® has

analyzed the Rollup Transaction and, in particular, the

allocation of stock between the Partnerships and the

shareholders of GC. He has concluded that the percentage of

stock which has been allocated to the shareholders of GC has

been unfairly inflated by a factor of at least 40% (relative to the

Partnerships), and possibly substantially more. Reilly

Declaration, 913.

The General Partners’ allocation methodology violates

fundamental valuation principles and produces an unfair result

in several distinct respects.

(i) Failure to Allocate in Accordance with the

Relative Value of the Assets Contributed to

the REIT

Instead of measuring the cash flow of the Allocation

Partnerships against the cash flow of GC to determine how to

divide the REIT stock, the General Partners should have

allocated the stock in accordance with the ratio between the fair

value of the Allccation Partnership assets and the fair value of

GC. Reilly Declaration, 198,11. A comparison of cash flows,

(3d Edition, 1996).

Soe ee eee! ee ee Te *

App. 41a

even if properly conducted, is no substitute for a comparison of

values.

Indeed, the cash flow of one group of business entities,

such as the Partnerships, to the cash flow of another business

entity engaged in an entirely different business, such as GC,

cannot yield a fair allocation because the two figures are simply

not comparable—they are apples and oranges. This is so

because, for purposes of estimating value, one must consider

not only cash flow but also the risk that the cash flow will be

achieved. The cash flow must then be discounted by that risk to

arrive at a fair estimation or comparison of value. Reilly

Declaration, 198-12.

It is a fundamental precept of valuation that risk varies

depending on the particular business involved and, especially,

on the line of commerce in which the business operates. Reilly

Declaration, 18. Far greater risk is associated with the income

stream of a service company engaged in property management

than with the rental income generated by commercial real

property. Indeed, the discount rate which must be applied to

the cash flow generated by a service company like GC is at least

double the discount rate applicable to the cash flow earned by

the Partnerships’ real estate properties. Reilly Declaration, 112.

Therefore, even if the cash flow figures on which the

General Partners based the stock allocation were otherwise

valid (which, as we shall see, they were not), GC’s cash flow

would nevertheless have to be discounted substantially relative

to the cash flow generated by the Partnerships to produce a fair

comparison. Jd. However, in allocating the stock between the

limited partners and themselves, the General Partners simply

compared cash flow figures and made no allowances at all for

risk. As a result, the the General Partners allocated to

themselves and their affiliates a far greater percentage of the

REIT’s stock than they deserved.

App. 42a

(ii) ae propaate and inconsistent Calculation

of Cash Flow

Moreover, for purposes of comparison with the

Partnerships’ cash flow, the General Partners calculated GC’s

cash flow in an inappropriate, inconsistent and unfair fashion.

Reilly Declaration, 119- 10

The allocation to the GC shareholders of 29% of the stock

which the limited partners will receive was first proposed by the

General Partners in Pre-Effective Amendment No. 2 to the

Rollup’s Registration Statement, which was filed with the

Securities and Exchange Commission on January 4, 1995. The

cash flow figure used for GC in that allocation was $1.897

million, which was based on budgeted (i.e., predicted) results for

GC for a single fiscal year—fiscal year ended June 30, 1995.’

The General Partners continue to base their allocation of the

REIT stock on GC’s predicted fiscal 1995 cash flow. This is

improper for two reasons.

First, regardless of whether one uses budgeted numbers or

historical financial data in conducting a valuation analysis, that

data must be normalized, either by adjusting to exclude

extraordinary items or by averaging several years of results, or

both. Historical or projected financial data used in a valuation

analysis should present a fair picture of the company’s actual or

projected results, and should not reflect aberrational results of

operations for particular years which may not be representative

of past or future performance in other years. Reilly

Declaration, 19. Where the financial results of a company differ

significantly from year to year, to use a single year’s figure

without normalizing it and without considering results from

other years produces anomalous and unfair results.

Here, GC’s financial results varied widely from year to

year during the five years immediately prior to the issuance of

() Pre-Effective Amendment No. 2, at page 94. See Exhibit C to the

Declaration of Alan R. Plutzik, filed herewith.

App. 43a

the Prospectus.’ Yet, the GC cash flow figures which formed the

basis for the allocation in Pre-Effective Amendment No. 2 were

nevertheless based on a single year’s projected results, and there

is no indication that those results were appropriately

normalized.

Second, the General Partners have continued to rely on

budgeted or projected fiscal 1995 cash flow figures in allocating

the REIT stock long after those figures have been superseded

and undermined by actual fiscal 1995 results. As noted above,

the allocation of the stock based on budgeted fiscal 1995 cash

flow was first proposed by the General Partners in a document

filed in January, 1995. By the time the Prospectus became

effective in late October, 1995, GC’s 1995 fiscal year had

concluded and the actual results for that fiscal year were

available. Indeed, actual financial results for fiscal 1995 are

included in materials mailed to the limited partners to solicit

their consent to the Rollup. Yet, the General Partners continue

to base their stock allocation on the previously projected fiscal

1995 results rather than making use of the actual reported fiscal

1995 numbers that superseded them.

The General Partners’ motive in ignoring the actual 1995

numbers becomes clearer when those numbers are scrutinized.

While definitive cash flow figures for 1995 cannot be

determined from the data which the General Partners have

disclosed, it appears that, when normalized to remove

extraordinary items, GC’s actual fiscal 1995 results were

significantly less favorable than 1994.° The Prospeci-is’s failure

(8) GC’s reported financial results for the years 1991-1995 are found at

page 275 of the Prospectus.

() GC reported net income of $718,000 in fiscal 1995, down substantially

from the $3.1 million in net income reported the previous year. Supplement,

at page 7. See Exhibit B to the Plutzik Declaration. Moreover, at least $1.7

million of GC’s revenues for the 1995 fiscal year were attributable to

extraordinary income from the so-called “Rancon Partnerships”. If that

revenue and associated costs were excluded, it appears that GC’s profits for

the year would have been reduced by at least $400,000. Jd.

App. 44a

to make use of, or even discuss, actual fiscal 1995 results raises

serious questions about the integrity of the allocation process.

(iii) The General Partners Improperly Relied

on “Adjusted” Cash Flow From A Year

Whose Were Inflated By Extraordinary

Income

Notwithstanding the fact that the allocation of stock

between the limited partners and the GC shareholders is based

on projected fiscal 1995 cash flows, the Prospectus repeatedly

invokes “adjusted” historical financial results from GC’s 1994

fiscal year, which ended June 30, 1994. The Prospectus argues

that because the 1994 cash flow figures would justify an even

higher allocation of stock to GC’s owners than the 29% figure

actually awarded, the allocation actually made is reasonable.

However, the General Partners’ reliance on GC’s “adjusted”

1994 cash flow figures does not mitigate the unfairness of the

transaction." The evidence shows, and Mr. Reilly has

concluded, that reliance on GC’s fiscal 1994 “adjusted” cash

flow to allocate the stock in the REIT would be inappropriate.

Reilly Declaration, 119-10.

Fiscal 1994 was an aberrational year for GC which is not in

any way representative of that company’s past performance. In

that fiscal year, GC reported the highest revenues, net income

and book value of any of the past five years. Prospectus at 275.

Indeed, GC’s 1994 results exceeded those for other recent years

by a very wide margin. Id.

Even more importantly, fiscal 1994 results are not

indicative of GC’s future performance. GC’s results for fiscal

1995 were substantially worse than the 1994 results—the

Company’s revenues, profits and book value all plummeted. Jd.

Indeed, the notes to GC’s financial statements indicate that GC

(10) Indeed, as we demonstrate below, the Prospectus’s focus on GC’s fiscal

1994 adjusted cash flow figures as a justification for the huge quantity of stock

being allocated to the GC shareholders is highly misleading. See discussion at

pages 17-18, below.

App. 45a

experienced a “decrease in management activities” in fiscal

1995. Supplement at 1 (see Exhibit B to the Plutzik

Declaration). Furthermore, there is good reason to believe that

unless the Rollup goes forward, GC’s performance will decline

even more in the future because many of the Partnerships on

which GC has been depending for fee income will be reaching

their expiration date and will be dissolving and liquidating their

assets.

Thus, two of the largest and most important Partnerships

on which GC has been relying for fee income—All Suites and

Outlook [V—are at the end of their term and, absent the

Rollup, would liquidate themselves. Prospectus at 92. These two

Partnerships alone appear to have generated some $2.5 million

in management fees for GC in fiscal 1994—some 15% of GC’s

reported revenues. Supplement at pages 152-158, 202-206. If

the Rollup does not go forward, All Suites and Outlook IV will

dissolve and these fees will vanish. Indeed, most of the

Partnerships are at or near their projected expiration date and

will pass out of existence unless the Rollup is approved.

Prospectus at 41. As these Partnerships are phased out, GC’s

revenues, cash flow and net income will be significantly

reduced.

Moreover, the General Partners have chosen to employ a

far different methodology in computing GC’s fiscal 1994 cash

flow than they used in computing the cash flow for the

Partnerships.'!Accordingly, the figures for GC’s cash flow and

for those of the Partnerships are not comparable to each other.

In sum, reliance on the “adjusted” historical cash flow of

GC for the aberrational and unrepresentative fiscal year 1994,

without considering future earning capacity or actual results

from other years, is improper and does not mitigate the fairness

of the transaction to the limited partners.

(11) See Prospectus at 102-103

App. 46a

(iv) Failure to Consider Determinants Of Value

Other Than Cash Flow

Furthermore, in allocating stock in the REIT between the

Allocation Partnerships and themselves, the General Partners

relied solely on a cash flow comparison, and paid no attention

to any other relevant factors, such as market comparables or

asset values. This dereliction is particularly significant because

the analysis failed to reflect the fact that the Partnerships

owned real estate which had a substantial market value, while

GC owned few, if any, significant assets. Had such considera-

tions been taken into account, the percentage of stock accorded

to the shareholders of GC would have had to be substantially

reduced.

A balance sheet comparison illustrates this point dramati-

cally. The aggregate book value of the Partnerships, as reported

in the Prospectus, is $76.6 million.’ The book value of the GC

assets being contributed to the REIT, on the other hand, is a

negative $6.1 million. Prospectus at 5. In light of this disparity,

it was fundamentally unfair for the General Partners to give the

shareholders of GC 29% of the stock they allocated to the

limited partners. See Reilly Declaration, 13.

2. The Rollup is Also Unfair Because It Deprives the

Limited Partners of Valuable Rights and Extends

Substantial Benefits To The General Partners At

The Limited Partners’ Expense

The Rollup is also unfair in that it deprives the limited

partners of valuable rights for inadequate consideration and

(12) See the financial statements of the Partnerships, at pages 277, 279, 281,

283, 285, 287, 291 of the Prospectus. Other measurements of the value of the

assets owned by the Partnerships yield remarkably similar valuations. For

example, the Prospectus represents that the Partnerships have a “Portfolio

value” of $70.7 million (/d. at 113), and a “net asset value”, exclusive of the

costs of the Rollup, of $68.7 million. Jd. at 268. In addition, the Prospectus

represents that if the assets of the Partnerships were immediately liquidated,

they would fetch $65.5 million in the marketplace. Jd. at 15, 86.

App. 47a

unfairly provides benefits to the General Partners. The follow-

ing points are relevant in this connection:

a. The Rollup Entrenches Management And Pre-

vents The Partnerships From Liquidating Or

Adopting Other Strategies to Maximize Returns

to The Limited Partners

The Rollup entrenches management by incorporating the

property management company, GC, in the REIT, and by giving

the General Partners and their affiliates substantial up-front

stock in the entity. In so doing, it forecloses the possibility that

the Partnerships could either (a) continue to operate as they

have historically done; (b) replace management and continue to

operate; or (c) liquidate and distribute their assets to the lim-

ited partners. This loss of options is highly significant.

The performance of rollups generally has been “dismal”.

The higher liquidity attributable to rollups “comes at an

extremely high cost to the limited partners.‘ Indeed, a recent

study has revealed that the estimated loss of value stemming

from a typical rollup of a real estate limited partnership is 30%

of the investors’ original investment.'* Moreover, in this case,

there are no significant benefits to the limited partners to

counterbalance the many negatives. Indeed, the Prospectus

itself acknowledges that the limited partners would do at least

as well financially if the Partnerships were entirely liquidated as

they would do by participating in the Rollup, even under the

most optimistic scenario for the performance of the REIT.

Prospectus at 15. Under these circumstances, it is a breach of

fiduciary duty for the General Partners to recommend that the

limited partners approve and participate in the Rollup

Transaction.

(13) Geschke, “Regulating Rollups: General Partners’ Fiduciary Obligations in

Light of the Limited Partnership Rollup Reform Act of 1993”, 47 Stanford L.

Rev. 85, 90 (Nov., 1994).

(14) Jd., 47 Stanford L. Rev. at 94.

App. 48a

The General Partners’ motives in creating and recom-

mending the Rollup are highly suspect. If the Rollup goes

forward, they will receive publicly traded stock worth an esti-

mated $18-$23 million. Prospectus at 47-48. However, if the

Partnerships were to liquidate, the General Partners would

receive less than $3 million in cash, and would be saddled with

continued ownership of GC as its revenues and profits declined.

Id.

b. Elimination of $63 Million of Accumulated

Rights to Preferred Annual Returns

Under the existing partnership agreements, the limited

partners are entitled to approximately $63 million in aggregate

accumulated preferred annual returns from the Partnerships.

This means that the limited partners wouid be entitled to

receive certain minimum returns before subordinated returns

flow to the General Partners. Prospectus at 5, 47. The Rollup

would extinguish these preferred returns, thereby benefiting the

General Partners. The limited partners will receive no consider-

ation for the surrender of these valuable rights.

c. Unfair Imposition of Massive Transaction Costs

On The Limited Partners

The transaction costs of the Rollup will aggregate over $4

million—an expense which would not be incurred but for the

transaction. Prospectus at In the event that the Rollup is con-

summated, these enormous and unproductive transactional

costs will be paid by the REIT. Prospectus at 6. Thus, the

limited partners, as the owners of 78% of the REIT’s stock, will

end up shouldering the lion’s share of this cost—an immediate

dilution of over 5% in the value of their investment. Jd. The

imposition of these expenses on the limited partners without

any corresponding benefit is unfair and improper.

App. 49a

d. Elimination of Debts, Personal Guarantees And

Liability and Other Benefits For The General

Partners and Their Affiliates

In addition to giving the General Partners a controlling

interest in the REIT and entrenching them in their positions,

the Rollup would also extend to the General Partners and their

affiliates a cornucopia of ancillary, but extremely valuable bene-

fits at the expense of the limited partners. First, the Rollup

would eliminate at least $4.3 million of liability owed by the

General Partners as a result of Partnership debts which they

personally guaranteed. Prospectus at 17. Second, it would extin-

guish personal liability of Robert and Andrew Batinovich on

$14.3 million of GC’s debt for which they have given personal

guarantees. Jd. Third, the transaction has been structured so as

to permit the General Partners to obtain tax benefits of approx-

imately $19 million. Jd. at 17. These benefits will not be shared

by the limited partners, many of whom will incur a tax detriment

as a result of the transaction. Prospectus at 6-7.

Finally, GPA, Ltd., a partnership controlled by the Gen-

eral Partners and their affiliates, has been given a special deal

more favorable than that of any of the other Partnerships.

Under that arrangement, GPA receives a share of an Operating

Partnership controlled by the REIT instead of REIT stock,

together with a redemption right, thus enabling GPA to avoid

exposure to a potential decline in the REIT’s stock after the

Rollup. Moreover, that share exceeds the relative value of the

assets which GPA will contribute to the REIT. Prospectus at

149-50. This arrangement is unfair to the partners in the other

Partnerships.

B. The Prospectus is Materially False and Misleading

Apart from the fact that the Rollup is substantively unfair

to the limited partners, the Prospectus is materially false and

misleading in numerous respects. And while this would be

improper in any commercial setting, it is especially so where—

App. 50a

as here—the Prospectus has been prepared by the limited

partners’ own fiduciaries!**

The mispresentations and/or omissions of material fact in

the Prospectus include, but are not limited to, the following:

(a) The Prospectus contains numerous representa-

tions to the effect that the Rollup represents the best

opportunity for the limited partners to obtain distributions

and maximize investment value. For example, in a section

of the Prospectus entitled “SUMMARY,” under the head-

ing, “Benefits of, and Background and Reasons for, the

Consolidation,” the Prospectus represents:

Given the prevailing market conditions, the General

Partners believe the Consolidation is the most attrac-

tive alternative for providing Investors with liquidity

and the possibility of increased distributions and

investment value as compared to a liquidation of the

Partnerships’ assets. Accordingly, the General Part-

ners believe the Consolidation is the best means-of

most closely meeting the Partnerships’ original invest-

ment objectivvs.

Prospectus at 8. Similarly, in the “SUMMARY” section of

the Prospectus, under the heading, “Recommendation of

the General Partners,” the Prospectus represents:

The General Partners believe the Consolidation is the

most attractive alternative for providing Investors with

liquidity and the possibility of increased distributions

and investment value as compared to a liquidation of

the Partnerships’ assets. Accordingly, the General

Partners believe the Consolidation is the best means

of meeting the Partnerships’ original investment

objectives.

_—_

(15) It is hornbook law that general partners stand in a fiduciary relationship

with their limited partners. Sherman v. Lloyd, 181 Cal. App. 693, 698-99

(1986).

App. 5la

Prospectus at 8. These representations are materially false

and misleading, in that, inter alia, the Rollup is most likely

to decrease—not increase—distributions to the limited

partners by virtue of, among other things, (i) the fact that

the Rollup would eliminate the limited partners’ rights to

preferred returns (relative to the General Partners),

(ii) the limited partners’ ownership interests will be sub-

stantially diluted by virtue of the excessive and dispropor-

tionate allocation of shares to the GC, (iii) the REIT will

be saddled with GC’s enormous debt load and massive

negative book value; and (iv) the limited partners will in

effect bear some $4 million of transaction costs in connec-

tion with the Rollup, which monies which otherwise would

be available to fund distributions (as for operating pur-

poses). In addition, the Rollup is most likely to decrease—

not increase—the value of the limited partners’ holdings

by virtue of, among other things, (i) the perpetuation of

management by the General Partners (under whom only

one of the Partnerships has returned the amount of the

original invested capital—let alone any return thereon),

(ii) the dilution of the limited partners’ ownership interests

by virtue of the excessive and disproportionate allocation

of shares of common stock to the General Partners,

(iii) the elimination of the limited partners’ rights to pre-

ferred returns, (iv) the effective elimination of the limited

partners’ right to obtain a return of capital through liqui-

dation of the Partnerships’ assets during the time originally

contemplated by the partnership agreements, and (v) the

substantial transaction costs of the Rollup.

(b) The Prospectus contains numerous representa-

tions to the effect that the General Partners believe the

Rollup is fair to the limited partners. For example, in the

“SUMMARY?” section of the Prospectus, under the head-

ing “Fairness,” the Prospectus represents, “The General

Partners reasonably believe the terms of the Consolidation

are fair as a whole, and to the Investors in each of the

App. 52a

Partnerships, regardless of which combination of Partner-

ships is included in the Consolidation.” Prospectus at 8.

Similarly, in a section of the Prospectus entitled, “FAIR-

NESS,” under the heading, “General Partners’ Belief as to

Fairness,” the Prospectus represents, “The General Part-

ners reasonably believe that the terms of the Consolidation

are fair when considered as a whole, and to the Investors in

each of the Partnerships, regardless of which of the Part-

nerships are included in the Consolidation, or whether an

Investor receives Shares or Notes, assuming the Minimum

Participation requirement is met.” Prospectus at 74. These

representations are materially false and misleading in that,

inter alia, (i) the Rollup is grossly unfair to the limited

partners for the reasons set forth above, (ii) the General

Partners have no reasonable basis to believe, and do not in

good faith believe, that the Rollup is fair to the limited

partners, and (ili) the Rollup benefits the General Partners

at the expense of the limited partners.

the General Partners that the limited partners approve the

Rollup. For example, in the “SUMMARY” section of the

Prospectus, under the heading, “Recommendation of the

General Partners,” the Prospectus represents, “The Gen-

eral Partners have approved the Consolidation and believe

the Consolidation is fair as to each Partnership, any combi-

nation of Partnerships, and as a whole. The General Part-

ners strongly recommend that the Investors in each Part-

nership vote “YES” in favor of the Consolidation.”

Prospectus at 8. These representations are materially false

and misleading in that, inter alia, (i) the Rollup is grossly

unfair to the limited partners for the reasons set forth

above, (ii) the General Partners have no reasonable basis

to believe, and do not in good faith believe, that the Rollup

is fair to the limited partners, and (iii) the Rollup benefits

the General Partners at the expense of the limited

partners.

Oe PS eH a ey eee

App. 53a

(d) The Prospectus contains numerous representa-

tions to the effect that the General Partners believe that

the Rollup is superior to other alternative available to the

limited partners, including continued management in pre-

sent form. For example, in the “SUMMARY’ section of the

Prospectus, under the heading, “Comparison of Alterna-

tive Consideration,” the Prospectus represents:

The General Partners believe that the comparison of

the values that might be realized from various alterna-

tives when considered together with the anticipated

effect of the Consolidation on distributions and with

all the other differences between continued ownership

of Units as compared with the receipt of Shares or

Notes, supports the General Partners’ conclusion that

the consolidation is fair to Investors.

Prospectus at 15. Also, in a section of the Prospectus

entitled, “THE CONSOLIDATION AND RELATED

TRANSACTIONS,” under the heading, “Approval and

Recommendations of the General Partners,” the Prospec-

tus represents, “The General Partners have approved the

Consolidation. The General Partners believe that an

investment in the Company through ownership of common

stock will provide greater overall benefits to Investors than

the benefits derived from an investment in an individual

Partnership or from any of the alternatives to the Consoli-

dation considered by the General Partners.” Prospectus at

55. These representations are materially false and mislead-

ing, in that, inter alia, (i) the Rollup is more likely to

decrease—not increase—distributions to the limited part-

ners, as discussed above, (ii) the Rollup is more likely to

decrease—not increase—the value of the limited partners’

holding, as discussed above, and (iii) the General Partners

have no reasonable basis to believe, and do not in good

faith believe, that the Rollup is preferable to other alterna-

tives available to the limited partners.

App. 54a

(e) The Prospectus contains numerous representa-

tions to the effect that the General Partners believe that

the allocation of shares as between the Limited Partners,

on the one hand, and the Management Companies, on the

other, is proper. For example in a section of the Prospectus

entitled, “ALLOCATION OF SHARES AND NOTES,”

under the heading, “Level I Allocation—Allocation

Between GC and the Allocation Partnerships as a Group,”

the Prospectus represents:

The Company and the General Partners believe the

public equity markets will value the Company’s Shares

based primarily on an evaluation of the Company as

an ongoing business, with estimated pro forma

adjusted funds from operations and resulting cash

distributions being the critical factors in this valuation.

Therefore, the Company and the General Partners

have determined that it is appropriate and fair to

allocate shares the Shares of the Company between

the Allocation Partnerships and GC based on their

relative contributions to the anticipated operating

cash flow of the Company.

Prospectus at 10 1. These representations were materially

false and misleading in that, inter alia, (i) the methodology

of allocating shares in this manner as improper and incom-

plete insofar as it focused on “cash flow” rather than

“value,” (ii) the manner in which defendants’ purported to

apply a comparison based on cash flow was improper and

biased in favor of the shareholders of GC, and (iii) under

proper valuation techniques, the value of GC relative to

the Partnerships was substantially less than that reflected

in the Level I allocation.

(f) The Prospectus represents that the allocation of

shares as between the shareholders of GC and the Partner-

ships affords the limited partners a substantial discount

because, while the “cash flow” of GC purportedly has

increased since the original valuation, the allocation of

App. 55a

shares to GC was not being changed. For example, in a

section of the Prospectus entitled, “ALLOCATION OF

SHARES AND NOTES,” under the heading, “Level I

Allocation—Between GC and the Allocation Partnerships

as a Group,” the Prospectus represents:

Allocation of Shares. The General Partners originally

made the allocation of Shares as ot September 1,

1994. At that time, operating cash flow was deter-

mined to be $7,477,756 for the Partnerships as a

group, and $1,897,604 for GC, for a total of

$9,375,360. GC’s cash flow accounted for 20.24% of

total cash flow, and the cash flow of the Partnerships

as a group accounted for 79.76% of total cash flow.

Accordingly, of the Company’s total Common Stock,

the Partnerships as a group were allocated 79.76%

(5,480,800 Shares), and GC was allocated 20.24%

(1,390,815 Shares).

**x * *

As a result of the Rancon Transaction, GC’s cash flow

has increased by approximately 55%. However, the

General Partners have elected to maintain the previ-

ous percentage allocation of Shares in the Level I

Allocation. For allocation purposes, this treatment is

equivalent to a substantial discount of the cash flow

contributed by GC to the Company in connection with

the Consolidation.

Prospectus at 105. These representations are materially

false and misleading in that, inter alia, (i) the value of GC

has not materially improved since the original allocation

and (ii) to the extent that the value of GC has changed

since the original allocation, it has worsened.

(g) The Prospectus contains numerous representa-

tions that rollups involving real estate limited partnerships

traded at or above their “asset value per share.” For

example, in a section entitled “FAIRNESS,” under the

App. 56a

heading “Valuation of Shares,” the Prospectus made repre-

sentations concerning the trading history of certain

“recent” Rollups. Prospectus at 88. These representations

are materially false and misleading in that, inter alia, in

many (if not most) rollup situations, the average value of

the investment has declined substantially.

(h) The Prospectus contains numerous representa-

tions concerning the purported advantages of the Rollup.

For example, in the section of the Prospectus entitled

“BENEFITS OF AND BACKGROUND AND REA-

SONS FOR, THE CONSOLIDATION,” under the head-

ing “Benefits of, and Reasons for, the Consolidation,” the

Prospectus discusses supposed advantages of the Rollup,

including, but not limited to, increased distributions,

liquidity and diversification of assets. Prospectus at 51-53.

However, these representations are materially false and

misleading in that, inter alia, (i) the Rollup is more likely to

decrease—not increase—distributions to the limited part-

ners, as discussed above, (ii) the common stock of the

REIT is likely to trade well below the comparative value of

the limited partners’ current ownership interests such that

any “liquidity” will be realized only through a substantial

loss in value, and (iii) given that the assets held by the

Partnerships are similar, the Rollup will not result in any

meaningful diversification of assets.

en eee

App. 57a

I. APPLICABLE LEGAL STANDARDS

The basic prerequisite to approval of a class action

settlement is a judicial determination that the settlement is

“fair, reasonable, and adequate.” See Grunin v. International

House of Pancakes, 513 F.2d 114, 123 (8th Cir.), cert. denied, 423

U.S. 864 (1975).!6 In making this determination, the Court “acts

as a fiduciary who must serve as a guardian of the rights of

absent class members . . .. The Court cannot accept a settlement

that the proponents have not shown to be fair, reasonable, and

adequate.” Id. See also I.U.E. v. Unisys Corp., 858 F.Supp. 1243,

1264 (E.D.N.Y. 1994)

The Court’s duty to scrutinize a settlement is heightened

where, as here, a determination on class certification was

coincident with the negotiation of a settlement. Mars Steel v.

Illinois National Bank & Trust Co. of Chicago, 834 E2d 677,

680-681 (7th Cir. 1987); Weinberger v. Kendric, 698 F.2d 61, 73

2d Cir. 1982) cert denied, 464 U.S. 818 (1983). As stated by the

Second Circuit in Weinberger,

Although we thus refuse to adopt a per se

rule prohibiting approval when a class action settlement

has been reached by means of se

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