2013-00151827-CU-MC

Forte Capital Partners LLC vs. William J. Delgado

Nature of Proceeding:    Motion for Preliminary Injunction

Filed By:  Wilson, Andrew H.

Appearance required.

The parties filed a joint stipulation at the Court’s request concerning the proposed
scope of any preliminary injunction.  The Joint Stipulation asserts many facts that are
not supported by admissible evidence, however it appears that the parties have
agreed to these facts, such as the current value of the shares, and the fact that the
certificated shares cannot be immediately sold and must be sold pursuant to “Rule
144.”

The joint stipulation states that the GDSI shares have lost 50% of their value since the
TRO was issued and are currently quoted at $.37.  Plaintiff believes the only way the
value of the shares can be protected is to appoint a receiver to take possession of all
shares in the Scottsdale Capital Advisors brokerage account as well as the shares
held in certificate form and that all shares would be held pending the parties’
agreement or further order of the Court.  Alternatively, plaintiff requests that the Court
enjoin any transfer of shares held in the Scottsdale Capital Advisors brokerage
account and to impose restrictions upon the number of certificated shares which could
be sold to 5,000 shares per day, with a maximum of 100,000 shares per month, and to
require defendants to report all sales of shares on a weekly basis.

Defendants contend that the certificated shares, although restricted pursuant to Rule
144 [17 C.F.R. § 230.144 (2007)], are sufficient to secure the debt. Parenthetically, the
Court notes the SEC adopted Rule 144 to establish specific criteria for determining
whether a person is not engaged in a distribution. Rule 144 creates a safe harbor from
the Section 2(a)(11) definition of “underwriter.” A person satisfying the applicable
conditions of the Rule 144 safe harbor is deemed not to be engaged in a distribution of
the securities and therefore not an underwriter of the securities for purposes of Section
2(a)(11). Therefore, such a person is deemed not to be an underwriter when
determining whether a sale is eligible for the Section 4(1) exemption for “transactions
by any person other than an issuer, underwriter, or dealer.

Further Defendants contend that appointment of a receiver is not warranted and will
dilute the value of the shares.  The Court agrees.  Moreover, securing the entire
amount of shares held by Scottsdale is excessive for the amount plaintiff claims is
owed to it.  Such relief would constitute a prejudgment attachment that does not
comply with the attachment statute.  Defendants are willing to pledge all of Defendant
Western Financial’s 2.2 million certificated shares as security and subject to the court
ordered injunction.  Defendants propose that the shares be held [in trust] by defense
counsel, who agrees to be bound by the injunction, to avoid the cost of a receiver.

The Court believes that the requested relief as framed by plaintiff is still over-broad
and not narrowly tailored enough to protect plaintiff’s interest.  The Court will consider
an injunction in the form agreed to by defendant.  Appearance is required to further
explore a potential pre-trial remedy.

The earlier tentative ruling from November 22, 2013  is repeated below for the court’s
and parties’ convenience:

Plaintiff’s Application for Preliminary Injunction and appointment of receiver is denied
on the terms specified in the TRO.  However, the Court is persuaded that plaintiff is
likely to prevail on the merits of the fraudulent conveyance claim, and is entitled to
some form of injunctive relief under Civil Code section §3439.07.  However the
requested relief is not narrowly tailored and potentially seeks to tie up far more funds
than is necessarily required to protect the plaintiff from the fraudulent conveyance. A temporary restraining order and order to show cause were issued ex parte without
notice to defendants on November 5, 2013.

The TRO enjoins defendants from selling, hypothecating or transferring certain shares
of Global Digital Systems, Inc., (“GDSI”), including those held in brokerage accounts
by defendant Scottsdale Capital Advisers. Defendants were ordered to show cause
why a preliminary injunction should not be granted on the terms of the TRO, and why
an appointment of a receiver should not be made, to take custody of all of the GDSI
shares.

Plaintiff was ordered to post a TRO bond in the amount of $2,500. There is no entry in
CCMS reflecting that this bond has been posted.

Plaintiff contends defendant William J. Delgado is indebted to it in the amount of
$917,655 arising out of a loan from Forte Capital Partners LLC to Falcon Technologies
in the amount of $420,000 and a personal guaranty signed by defendant.  Delgado
was the President and Chairman of the Board of Falcon Technologies, Inc. and its
largest shareholder.   Defendant does not dispute the amount of the loan or that the
loan is in default.

Plaintiff learned in 2012 that defendant was reviving GDSI and was to transfer
9,000,000 “GDSI” shares in his daughters’ names and to entities formed by defendant,
Three Rivers LLC, and Western Financial, for the purposes of hiding his assets from
creditors like plaintiff.  Plaintiff contends that the stock is currently trading at $.73 a
share, and that the entire 9,000,000 Shares must be protected to prevent destruction
of the value of the stock by defendant attempting to transfer a large number of shares.
Thus, plaintiff is essentially seeking to attach $6,570,000 of defendant’s property to
secure a debt of $917,655.   Plaintiff filed an earlier lawsuit seeking recovery of the
promissory note, but allowed that lawsuit to remain dormant and eventually dismissed
it recently, without prejudice, because it had learned of defendant’s fraudulent
conveyance of the GDSI shares and did not want defendant to be aware that plaintiff
was gathering evidence to file this lawsuit and obtain the requested injunctive relief.

Plaintiff seeks a preliminary injunction enjoining defendants from selling, hypothecating
or transferring Shares of Global Digital Systems, Inc., (“GDSI”), and a “limited
appointment” of a receiver to take over the Shares that were fraudulently conveyed.

Under the common law, injunctions are rarely granted where a suit for damages
provides a clear remedy. See Thayer Plymouth Ctr. Inc v Chrysler Motors Corp (1967)
255 Cal.App.2d 300, 307.  Statutes governing prejudgment attachment limit the
conditions on which payment of money may be restrained. Doyka v Superior Court
(1991) 233 Cal.All.3d 134, 1136.  In Doyka, the court voided injunctive relief enjoining
a party from using funds on deposit in any bank because this was in effect a
prejudgment attachment that did not comply with the attachment statute.  However, in
considering the adequacy of damages as a remedy, the Court may consider whether
the party against whom the judgment is sought is able to respond in damages, i.e. if
the defendant is shown to be insolvent, a monetary judgment may be inadequate.
West Coast Const. Co. v Oceano Sanitary Dist. (1971) 17 Cal.App.3d 693, 700.
Counsel for plaintiff contends that Delgado has a considerable number of unsatisfied
creditors and that Delgado has no assets to satisfy the judgment that plaintiff is likely
to procure in this action.   (The court notes that defendant obtained a fee waiver in the
earlier filed action, Case No. 2011-00098232.)
Specific statutory provisions provide greater protection to a creditor who establishes a
fraudulent conveyance.  Under the Uniform Fraudulent Transfer Act, an injunction may
issue to prevent the further disposition of assets by one being sued for improperly
transferring the assets.  Civil Code 3439.07 See Oiye v Fox (2012) 211 Cal.App.4th
1036, 1057.  Plaintiff has submitted evidence in the form of the Declaration of Jeffrey
Lampson in which he states Delgado told him he as forming Three Rivers to avoid
holding the GDSI shares in his name.  (Declaration of Lampson)   Plaintiff has
provided admissible evidence that a significant number of shares (6,043,801) were
issued to Three Rivers in 2012.  Lamson was assisting Delgado in April-June of 2013
with his activities as the controlling shareholder and Chief Executive Officer of GDSI.
Lamson witnessed Delgado issuing instructions to Scottsdale Advisors concerning the
sales of GDSI shares.
Plaintiff has thus met its burden to establish that is likely to prevail on its claim for
fraudulent conveyance.  (Declaration of Lampson)

In opposition, defendant does not dispute any of the facts establishing either the
amount of the debt or the fraudulent conveyance.  Rather defendant argues only that
this dispute over the promissory note in the 2011 action was resolved by a stipulation
for entry of judgment, transmitted to plaintiff’s counsel on February 28, 2012.
Defendant signed the settlement agreement and forwarded it to plaintiff; however, the
settlement agreement was not signed by the plaintiff.  Defendant contends that the
prior action was dismissed without prejudice on November 8, 2013 so that plaintiff
could recover the entire amount due on the note rather than the amount set forth in the
settlement agreement.

Defendant contends that plaintiff should be collaterally estopped from recovering on
the underlying promissory note because the parties had reached a settlement before
the underlying case was dismissed without prejudice.  However, collateral estoppel
does not apply in this case because there has been no final judgment entered on the
settlement agreement.  Moreover, the settlement agreement contains several
representations by Defendant that he lacked assets and that his current  net worth was
stated to be no greater than $25,000.   This representation of no assets was an
express incentive for the settlement.  Understandably, plaintiff’s concurrent discovery
of $6,570,000 worth of assets beneficially held by defendant would have caused them
not to sign the settlement agreement but rather to pursue this action.

Defendant Tara Delgado contends she will be harmed if the injunction is granted. Tara
Delgado is the daughter of William Delgado, who invested $10,000 into Three Rivers,
and is the manager of Three Rivers.  Plaintiff has presented evidence that the current
value of the Three Rivers account may be $4,411,974.73 (6,043,801 shares x .73)
Tara Delgado also states that she works as a “sales recruiter.”  Tara Delgado has not
established that she will be harmed by the requested injunctive relief (if more narrowly
tailored), and even if some harm was shown, the harm to plaintiff if the injunction were
not granted would be far greater.

“In exercising its discretion whether to issue a preliminary injunction ‘the trial court
must consider “two interrelated factors, ” specifically, the likelihood that
plaintiffs will prevail on the merits at trial, and the comparative harm to be suffered by
plaintiffs if the injunction does not issue against the harm to be suffered by
defendants … if it does.'” Right Site Coalition v. Los Angeles Unified School Dist.
(2008) 160 Cal.App.4th 336, 341-42, quoting King v. Meese (1987) 43 Cal.3d             1217,1226.)

Plaintiff has established the likelihood of prevailing on the merits.  However, an
appearance is required to discuss the scope of the proposed injunction.