1/23/2020 9:23 PM

Velva L. Price
District Clerk
Travis County
D-1-GN-19-007411
Carrisa Stiles
CAUSE NO. D-1-GN-19-007411

WC 56 EAST AVENUE, LLC § IN THE DISTRICT COURT OF

§
Plaintiff, §
§
v. § TRAVIS COUNTY, TEXAS
§
PENNYBACKER CAPITAL §
MANAGEMENT, LLC, §
PENNYBACKER V, LP, § 250TH JUDICIAL DISTRICT
PENNYBACKER V GP, LLC, MARK §
HAWKINS, U.S. REAL ESTATE §
CREDIT HOLDINGS III-A, LP, 56 §
EAST AVENUE, LP, 56 EAST §
AVENUE, GP, LLC and 56 EAST §
AVENUE GP OWNERSHIP TRUST. §
§
Defendants. §

PLAINTIFF’S THIRD AMENDED PETITION

Plaintiff WC 56 East Avenue, LLC (“Plaintiff” or “Borrower”) files this Second

Amended Petition against U.S. Real Estate Credit Holdings III-A, LP (“Original Lender”) and

Pennybacker Capital Management, LLC, Pennybacker V, LP, Pennybacker V GP, LLC, 56 East

Avenue, LP Pennybacker and 56 East Avenue GP, LLC, 56 East Avenue GP Ownership Trust,

and Mark Hawkins (collectively, “Pennybacker,” and together with Original Lender collectively,

“Defendant” or “Lender”) and in support thereof shows the Court the following:

I. PETITION

1. Pennybacker and Original Lender have engaged in conspiracy and fraud to

wrongfully manufacture a fake loan default that did not actually occur, to cause irreparable harm

to WC 56 East Avenue, LLC, and to create more profitable financial positions for each of Original

Lender and Pennybacker than are available to them under the Loan Agreement, as more fully set

forth below. Original Lender erroneously and wrongfully attempted to default Borrower, charge
Borrower interest at the highly lucrative default interest rate, and to foreclose on the Property on

the unsupported and false notion that Borrower has “violated Section 9.10(a), (b), and (c) of the

Loan Agreement by acquiring additional property other than the Property as described in the Loan

Documents.” Original Lender then sold the loan to Pennybacker, presumably at a price reflective

of the lucrative defaulted status of the loan. Despite a factual finding in a hearing held on

November 12, 2019 in which the Court found that the Borrower had not acquired the property, and

therefore the Default and Acceleration Notice was incorrect, Pennybacker has failed to retract the

default and continued to knowingly enforce a fraudulent allegation of default so that it may either

(i) wrongfully foreclose in order to fraudulently convey to themselves on an irreplaceable prime

downtown Austin real estate property that would not otherwise be available for ownership by

Pennybacker, or, in the alternative (ii) improperly collect on the Loan at the default rate and for an

extended default time period. Further, Pennybacker continues to pursue the default and foreclosure

to harm the business reputation of Borrower.

II. DISCOVERY CONTROL PLAN

2. Plaintiff intends to conduct discovery under Level 2 of Rule 190.3 of the Texas

Rules of Civil Procedure.

III. RULE 47(C) CLAIM FOR RELIEF

3. Plaintiff seeks monetary relief over $1,000,000 and non-monetary relief.

IV. PARTIES

4. Plaintiff WC 56 East Avenue, LLC is a Delaware limited liability company,

authorized to conduct business in the State of Texas.

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 5. Defendant U.S. Real Estate Credit Holdings III-A, LP (“Original Lender”) is an

Irish limited partnership and may be served with process through its registered agent, Corporation

Service Company, 2710 Gateway Oaks Drive, Suite 150N, Sacramento, California 95833.

6. Defendant 56 East Avenue, LP is a Texas limited partnership and may be served

with process through its registered agent, Capitol Corporate Services, Inc., 206 E. 9th St., Ste.

1300, Austin, TX 78701-4411.

7. Defendant 56 East Avenue GP, LLC is a Texas limited liability company and may

be served with process through its registered agent, Capitol Corporate Services, Inc., 206 E. 9th

St., Ste. 1300, Austin, TX 78701-4411.

8. Defendant 56 East Avenue GP Ownership Trust is a trust that may be served with

process through its Trustee, Mark L. Hawkins, with a place of business at Armbrust & Brown,

PLLC, 100 Congress Avenue, Suite 1300, Austin, Texas 78701-2744.

9. Defendant Pennybacker Capital Management, LLC is a Texas limited liability

company and may be served with process at its principal place of business at 3800 North Lamar

Blvd., Suite 350, Austin, Texas 78756.

10. Defendant Pennybacker V GP, LLC is a Delaware limited liability company and

may be served with process at its principal place of business at 3800 North Lamar Blvd., Suite

350, Austin, Texas 78756.

11. Defendant Pennybacker V, LP is a Delaware limited partnership and may be served

with process at its principal place of business at 3800 North Lamar Blvd., Suite 350, Austin, Texas

78756.

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 12. Defendant Mark Hawkins is an individual and may be served with process at his

principal place of business at Armbrust & Brown, PLLC, 100 Congress Avenue, Suite 1300,

Austin, Texas 78701.

V. VENUE AND JURISDICTION

13. The matter in controversy is within the jurisdictional limits of the Court.

14. Venue is proper in Travis County, Texas, pursuant to Section 15.002(a)(1), and

Section 15.002(a)(3) of the Texas Civil Practice & Remedies Code.

VI. FACTS

A. Loan Agreement

15. Plaintiff incorporates by reference the factual allegations contained in the preceding

paragraphs.

16. On or about December 12, 2017, Plaintiff executed a Promissory Note in the

original amount of $15,000,000.00 (the “Loan”) in favor of U.S. Real Estate Credit Holdings III-

A (“Original Lender”). The Loan is secured by, among other collateral, certain parcels of real

property located at 50-56 East Avenue, Austin, Texas, as more fully described in the loan

documents (collectively, the “Property”).

17. The original maturity date under the Loan was January 1, 2019.

18. The Loan Agreement provided for an option for Borrower to extend the maturity

date of the Loan for two (2) six-month extension terms by providing written notice to Lender.

Borrower timely provided such notices and the maturity date was extended first to July 1, 2019

and subsequently to January 1, 2020.

19. Prior to the issuance of the alleged default, Borrower was current on all financial

obligations under the Loan Agreement.

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 20. The current outstanding Loan balance is $15 million. The Property has a current

value significantly in excess of the outstanding Loan balance.

21. Further, the Property consists of a 1.12-acre parcel located in the Rainey Street

District in downtown Austin, one of the hottest real estate markets in the country. The Property is

particularly unique and valuable given that it possesses entitlements, and is zoned as of right, for

a 15:1 FAR development with no height restriction, enabling an over 700,000 SF high-rise tower

to be built on the site. It is well known that Borrower and its affiliates employ a long-term hold

strategy, so Pennybacker knew that the only way it could attempt to gain ownership of the Property

is by perpetuating the fraud and conspiracy detailed below.

22. On September 13th, Alexander Zabik, Managing Director and Portfolio Manager

of Pennybacker contacted Jeremy Stoler of World Class, a corporate affiliate of Plaintiff, to discuss

opportunities to lend to World Class and to see if there were ways for the firms to do business

together. Zabik and Stoler spoke on September 15th, and Zabik said Pennybacker would like to

find a way to lend to World Class on real estate projects and that the Principals of Pennybacker

“would not want to in an adversarial position with Nate Paul.”

23. Based on the assurance made by Pennybacker on this call with Zabik, Jeremy Stoler

agreed to a subsequent call on September 18th with Alexander Zabik and Vince Reyna, Principal,

Founder, and Chief Investment Officer of Pennybacker Capital Management, LLC. This call

occurred on September 18th and Reyna reassured Stoler that Pennybacker had an interest in

lending to World Class but only in “situations that would be helpful and not in an adversarial

position to Nate.”

24. Unbeknownst to Stoler and World Class, Pennybacker was simultaneously

conspiring to purchase the loan on 56 East Avenue and manufacture an improper default to attempt

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to fraudulently convey the property to themselves by pursuing an illegal collateral sale of the

property.

B. The Alleged Default

25. On October 15, 2019, Borrower received a letter correspondence from Lender,

dated October 9, 2019, alleging Borrower “violated Section 9.10(a), (b) and (c) of the Loan

Agreement by acquiring additional property other than the Property as described in the Loan

Documents” (the “Default and Acceleration Notice”).

26. The Default and Acceleration Notice does not identify the “additional property”

Lender alleges Borrower acquired in contravention of the loan documents.

27. The Default and Acceleration Notice indicates that Lender was allegedly

immediately exercising its right to accelerate the maturity of the Loan and declare the full amount

of the Loan immediately due and payable.

28. No representative of the Lender, nor any agent of the Lender, made any contact

with Borrower regarding this allegation prior to issuing the Default and Acceleration Notice of

default and acceleration. In response to Borrower’s inquiry, Lender has not produced any

document that establishes that Borrower has acquired any additional property other than the

Property as described in the Loan Documents, and relies instead on Borrower’s participation in

discussions with the City of Austin over a right, that the City of Austin believes, Borrower may

have to a certain 0.252 acres of land which is a portion of 0.9702 acres of land owned by the City

of Austin (the “Alleged Real Property”).

29. Lender has presented an alleged “Deed Without Warranty” dated March 20, 2019,

which Lender purports represents an acquisition by Borrower of the Alleged Real Property.

However, this document is not a valid conveyance of real property for at least two reasons. First,

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the Grantor under the Deed Without Warranty is not the owner of the fee and therefore could not

have transferred anything to Borrower in March 2019. The Grantor under the “Deed Without

Warranty” is listed as Austin-Travis County Mental Health Mental Retardation d/b/a Integral Care

and f/d/b/a Austin Travis County Integral Care but the title records show that the actual fee owner

of the property is the City of Austin, and has been since 1953. Secondly, the “Deed Without

Warranty” is invalid because does not even clearly purport to convey real property or indicate that

the Grantor has a right to any real property – the “Deed Without Warranty” uses the following

conditional granting language “all of Grantor’s right, title and interest, if any, in and to the

[Alleged Real Property]”. This conditional language does not create a proper conveyance of real

property.

30. Moreover, the Deed Without Warranty was not delivered to Borrower by the

Grantor, Borrower did not accept the Deed Without Warranty from the Grantor, and no

consideration was exchanged for this purported conveyance. Borrower did not consent to, and had

no knowledge of the recording of the Deed Without Warranty. No sale was conducted, and no bill

of sale or other closing document related to this Alleged Real Property is known by Borrower to

exist. Quite simply, this is because the Borrower did not purchase the Alleged Real Property.

31. As such, Borrower did not acquire, and has not acquired, any additional property

other than the Property as described in the Loan Documents.

32. On October 30, 2019 the Loan was purportedly sold to a newly formed entity with

the name 56 East Avenue, LP. Given the prior allegations of default, the very short term remaining

to maturity, and the significant value of the Property, it is likely that the Loan was sold at a

premium.

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 33. The new lender, 56 East Avenue, LP, refused to disclose its identity. Plaintiff was

unaware of the identity of the purchaser and had no reason to believe Pennybacker was an

adversarial party. Pennybacker’s involvement only became known to Plaintiff on January 13,

2020, after a court order compelled the disclosure.

34. On November 6, 2019, after the loan purchase had occurred, without disclosing that

it was the owner of Plaintiff’s Loan, Zabik of Pennybacker and Stoler had another call in which

Zabik shared that Pennybacker had a desire to work with World Class on property loans and

inquired as to the status of certain properties. Despite Pennybacker’s purported acquisition of the

Loan on October 30, neither Original Lender nor Pennybacker chose to inform Borrower of the

purported Loan sale until Borrower discovered the same via inquiry to the Loan servicer. Only

then did Pennybacker, make an appearance in this matter on November 7, 2019, still hiding its

identity through its newly formed entity, 56 East Avenue, LP.

35. Pennybacker was present at the November 12, 2019, hearing in which the Court

made factual findings of improper default and is therefore aware of the factual defect in its

foreclosure process. Notably, chose to remain incognito as to the identity of its beneficial owner

at the hearing, hiding behind a series of entities.

36. The evidence regarding the Alleged Real Property was presented in a hearing on an

application for Temporary Injunction. In that hearing Hon. Judge Scott H. Jenkins made two

factual findings: (a) that Lender’s Default and Acceleration Notice was invalid (“their notice is

not accurate”) Nov 12 Hr’g Tr. 134:1-2, and (b) that Borrower did not acquire the Alleged Real

Property (“You didn’t acquire it later”) Id. at 134:2-3.

37. Despite being possession of information and documents that clearly and

unequivocally contradict its unfounded allegations, Original Lender recklessly, in bad faith and

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with fraudulent intent declared acceleration and default on the basis of Borrower allegedly

acquiring property, and on an otherwise performing loan, so that it could sell the loan at a premium

and exit its position.

38. Further, despite a Court ruling that Original Lender’s notice was defective and that

the Borrower did not acquire the property, Pennybacker nonetheless insists on proceeding to

foreclose on the Property so it can either (i) obtain ownership of the prime and irreplaceable

Property via foreclosure (even if it must to then defend a wrongful foreclosure suit), or alternatively

(ii) collect on the Loan at the default rate and for an extended default time period, given that it

purchased the Loan at a premium and without such default interest would realize a loss on its

acquisition of the Loan from Original Lender.

39. In order to protect its substantial equity in the property (the property has a current

market value of $33 million in comparison with a loan balance less than $17 million) Plaintiff was

forced to file Chapter 11 bankruptcy protection, despite being current on all loan payments prior

to the Lender improperly calling the Loan in default.

40. As of the date the date of this filing, at no time has Zabik, Reyna, or any business

person from Pennybacker reached out to the Borrower to let Borrower know that Pennybacker did

in fact purchase this loan and that Pennybacker was the ultimate party behind these nefarious

actions.

41. Pennybacker’s concealing of its identity while continuing to be in contact with the

Borrower under false pretenses was done to perpetuate the fraud and deceive the Borrower

42. Lender’s wrongful activities have resulted in significant reputational damage to

Plaintiff in the marketplace. Such damage has occurred and is ongoing, and, among other things,

has made it more difficult for Plaintiff to refinance its position.

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 III. CAUSES OF ACTION

CAUSE 1: Declaratory Judgment

43. Plaintiff incorporates by reference the factual allegations contained in the preceding

paragraphs.

44. A controversy has developed between the parties regarding the Loan Agreement.

Specifically, the Lender claims that Borrower “violated Section 9.10(a), (b) and (c) of the Loan

Agreement by acquiring additional property other than the Property as described in the Loan

Documents.” Borrower denies that this event has occurred as Lender describes and asserts that if

Borrower owns any additional property that is not described in the Loan Agreement then it is not

a default of the Loan Agreement. This Court agrees that Borrower did not acquire additional

property after the start of the Loan Agreement. As a result, Borrower contends that it is not in

default of the Loan Agreement and Lender did not have the right to accelerate the loan and seek

to foreclose, and seeks a finding that given the Court’s determination at the November 12, 2019

hearing, a property acquisition did not occur and therefore the Lender cannot declare a Loan default

on that basis. Further, Pennybacker has not demonstrated that it is a proper holder of the Note and

that the purported transfer of the Loan was a valid conveyance and therefore Borrower demands

that such a showing be made before Pennybacker be permitted to enforce any of lender’s rights

under the Loan. Accordingly, Plaintiff seeks the Court’s intervention to determine the rights,

duties and obligations of the parties pursuant to Tex. Civ. Prac. Rem. Code §37.001, et seq.

CAUSE 2: Breach of Contract

45. Plaintiff incorporates by reference the factual allegations contained in the preceding

paragraphs.

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 46. The Loan Agreement is a valid and enforceable written contract executed by

Plaintiff, and Original Lender and purportedly assigned to Pennybacker. Plaintiff performed,

tendered performance of, or was excused from performing its contractual obligations under the

Agreement, and is the proper party to sue for breach of the Agreement.

47. Plaintiff was not in default of the Loan, and is not in default of the Loan, on the

basis of the Plaintiff “acquiring additional property”. Nonetheless, Original Lender and

Pennybacker continue to seek to charge default interest on the Loan as of the date of the alleged

default.

48. As the new purported owner of the Loan, and for refusing to withdraw the wrongful

default and acceleration, and pursing foreclosure, Pennybacker is also liable for the foregoing

breach of contract.

49. Defendants’ wrongful default and acceleration of the Loan are breaches of Lender’s

obligations under the Loan Agreement for which Plaintiff has suffered and continues to suffer

damages, which are within the jurisdictional limits of this Court.

CAUSE 3: Fraud

50. Plaintiff incorporates by reference the factual allegations contained in the preceding

paragraphs.

51. By sending an erroneous Default and Acceleration Notice, Original Lender made a

material representation that was false. Having no documentation or clear title record showing that

Plaintiff had “acquired property” as alleged, Lender knew the representation was false at the time

it sent the Default and Acceleration Notice, or Lender recklessly asserted the representation of

default without knowledge of its truth.

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 52. Knowing that it would not be able to sell the Loan at a premium if it were in good

standing, Original Lender pursued the wrongful default of the Loan in order to manufacture a

profitable and premature exit from its position as the owner of the Loan. These efforts allowed

Original Lender to achieve an exit of the Loan on October 30, 2019, two months prior to the

maturity date of the Loan. Further, discovery will show that Original Lender sold its position at a

more favorable price than par given the defaulted status. In its efforts to maximize its profits,

Original Lender intended to induce Plaintiff to act upon the fraudulent representation. Plaintiff

actually and justifiably acted upon the representation and thereby suffered injury.

53. Knowing that it would not be able to seek to foreclose on the Property were the

Loan in good standing, and, despite knowledge that Original Lender’s default notice was incorrect,

Pennybacker Capital Management, LLC, through Pennybacker V, LP, Pennybacker V GP, LLC,

56 East Avenue, LP, its general partner, 56 East Avenue GP, LLC, Mark Hawkins the trustee of

the 56 East Avenue GP Ownership Trust, each knowingly refuse to rescind the wrongful default

in an effort to either (i) obtain ownership of the prime and irreplaceable Property via foreclosure

(even if it had to then defend a wrongful foreclosure suit), or (ii) collect on the Loan at the default

rate and for an extended default time period, given that it purchased the Loan at a premium and

without such default interest would realize a loss on its acquisition of the Loan from Original

Lender.

CAUSE 4: Civil Conspiracy

54. Plaintiff incorporates by reference the factual allegations contained in the preceding

paragraphs.

55. Defendant Pennybacker Capital Management, LLC, Defendant Pennybacker V,

LP, Defendant Pennybacker V GP, LLC, Defendant Mark Hawkings, Defendant U.S. Real Estate

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Credit Holdings, III-A, LLC, Defendant 56 East Avenue, LP, Defendant 56 East Avenue GP, LLC,

and Defendant 56 East Avenue GP Ownership Trust, acted in concert with each other to

accomplish the acceleration and default of the Loan Agreement in order to permit one, or more of

the Defendant’s to execute and benefit from a non-judicial foreclosure with less than thirty days

remaining until maturity of the Note and in furtherance of the fraud set forth in Cause 3 above.

The Defendants together pursued their course of action and sought to effect the improper

foreclosure of Plaintiff’s real property and collection of default rate interest against Borrower. By

issuing an erroneous notice of default and acceleration, and by continuing to prosecute such false

notice of default and acceleration each Defendant participated in an unlawful scheme to deprive

Plaintiff of its property and charge default interest on the Loan. As a result, Plaintiff has suffered

and continues to suffer injury.

Count 5: Breach of Fiduciary Duty

1. Plaintiff incorporates by reference the factual allegations contained in the preceding

paragraphs.

2. Although the relationship between lenders and borrowers does not always create a

fiduciary relationship, a fiduciary relationship was created here when Plaintiff entrusted Original

Lender with its business confidential information to be used only in furtherance of a lending

relationship. Original Lender, and by assignment Pennybacker, had a special relationship of trust

and confidence with Plaintiff and a fiduciary duty to not use Borrower’s information for its own

competitive purposes.

3. By taking Plaintiffs’ confidential information with the acknowledgement that the

information would only be used in furtherance of a lending relationship and using the same

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information for its own hidden agenda and pecuniary advantage, Pennybacker and Original

Lender, breached the fiduciary duty owed to Plaintiff causing Plaintiff damages.

4. By refusing to identify itself as the new owner of the Loan, while simultaneously

communicating with Plaintiff on other matters, Pennybacker breached its fiduciary duty to deal

with Plaintiffs in good faith.

5. Plaintiff has suffered damages as a result of the breach in an amount to be proved

at trial.

VIII. PRAYER FOR RELIEF

WHEREFORE, PREMISES CONSIDERED, Plaintiff respectfully prays that:

1. Defendants be cited to appear and answer;

2. Upon an emergency hearing on Plaintiff’s application, grant Plaintiff the

temporary injunctive relief against Defendant as requested herein;

3. Upon trial of this action, the Court award Plaintiff:

a. actual damages;

b. punitive and exemplary damages pursuant to Tex. Civ. Prac. & Rem. Code

Ann. § 41.003(a) and Tex. Bus. & Comm. Code § 27.01;

c. prejudgment and post judgment interest;

d. attorneys’ fees; and

e. such other and further relief, at law or in equity, to which Plaintiff may

be justly entitled.

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DATED: January 23, 2020

/s/ Brian Elliott

Brian Elliott
State Bar No. 24101036
814 Lavaca Street
Austin, Texas 78701
Phone: (512) 605-6622
Facsimile: (512) 322-9238
belliott@world-class.com

ATTORNEY FOR PLAINTIFF

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