In Re: Phoenix Associates Land Syndicate, Inc.
ORDER AND REASONS denying 198 Motion to Dismiss for Failure to State a Claim. Signed by Judge Susie Morgan. (bwn)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
WILBUR J. “BILL” BABIN, JR., IN
HIS CAPACITY AS TRUSTEE
OF THE BANKRUPTCY ESTATE
OF PHOENIX ASSOCIATES LAND
CADDO EAST ESTATES I, LTD, ET
ORDER AND REASONS
Before the Court is a motion to dismiss Plaintiff’s Texas state law claim for aiding
and abetting Debtor’s officers’ and directors’ breach of fiduciary duty in Fifth Amended
Compliant1 and to dismiss Schuler as a Defendant pursuant to Fed. R. Civ. P. 12(b)(6)
filed by Defendants Caddo East Estates I, Ltd. (“Caddo”) and George Schuler
(“Schuler”).2 The Court has reviewed the briefs, the record, and the applicable law and
now issues this Order and Reasons.
Wilbur Babin, Jr. is the Trustee for the bankruptcy estate of Phoenix Land
Associates, Inc. (“Debtor”), which has as its principals C. Paul Alonzo, Ronald L.
Blackburn, and Carolyn Alonzo ("the Principals"). Debtor filed a voluntary petition for
R. Doc. 197.
R. Doc. 198.
bankruptcy under Chapter 11 on June 10, 2009, which was converted into a Chapter 7
liquidation proceeding on July 31, 2009. The Trustee was appointed on July 31, 2009
and confirmed on August 31, 2009.
On January 19, 2010, the Trustee filed the instant suit, suing Defendants other
than Schuler for avoidance of fraudulent transfers on a theory of constructive fraud. On
August 13, 2012, after being granted leave, he filed a Second Amended Complaint,
which: (1) added Schuler as an additional Defendant, accusing him of aiding and
abetting the Principals of the Debtor in breaching their fiduciary duties; (2) added a
cause of action against Defendants for recovery of fraudulent transfers based on a theory
of actual fraud under 11 U.S.C. § 548(a)(1)(A); and (3) added a cause of action against
Defendants for a declaratory judgment that the transfer of Debtor’s real property is a
nullity under Louisiana law.3
Schuler moved to dismiss the Second Amended Complaint on various grounds.4
The Court issued the First Schuler Order denying the motion to dismiss concluding that
(1) the Bankruptcy Code does not preempt a claim for aiding and abetting breach of a
fiduciary duty, and (2) Louisiana law applies to the Trustee’s claim for aiding and
abetting breach of fiduciary duty,5 and Louisiana might permit a civil conspiracy claim.
The Court granted Plaintiff leave to amend “to plead a cause of action for conspiracy
under Louisiana law.”6
R. Docs. 117, 129 (substitution adding an allegation of diversity jurisdiction).
R. Doc. 136.
5 On page three of the memorandum in support of the second motion to dismiss, filed by Caddo East
Estates I, Ltd. and Schuler (R. Doc. 179-1), Schuler says the Court held in the First Schuler Order that
Louisiana law “governs plaintiff’s claims against Schuler in the lawsuit.” However, the Court’s holding was
only with respect to the trustee’s aiding and abetting breach of fiduciary claim against Schuler.
6 R. Doc. 168.
Plaintiff then filed Third and Fourth Amended Complaints.7 In the Fourth
Amended Complaint, Plaintiff alleged that Defendants Schuler and Caddo knowingly
participated and assisted in the Principals’ breaches of the fiduciary duties they owed to
the Debtor and that the Debtor was proximately damaged by Schuler and Caddo aiding
and abetting the breaches.8 Plaintiff also alleged that Caddo and Schuler conspired with
each other and with the officers and directors of Phoenix to commit fraud.9 Caddo and
Schuler filed a second motion to dismiss the new conspiracy claim in the Fourth
Amended Complaint and to dismiss Schuler as a defendant altogether.10
Plaintiff then filed a motion to reconsider asking that the Court review its rulings
in the First Schuler Order “relative only to the following issues: (1) Whether Texas law,
and not Louisiana law, governs the Trustee’s aiding and abetting claim pursuant to the
standards set forth in La. C.C. Art. 3543, or alternatively Art. 3542; and, if not (2)
Whether the Trustee’s civil conspiracy claims are prescribed or are otherwise not
viable.”11 In the First Schuler Order, the Court held that Louisiana’s choice-of-law rules
applied and that Louisiana Civil Code article 3542 supplied the analysis to be used when
deciding which state’s law applied to the Plaintiff’s claim for aiding and abetting a
R. Docs. 171, 177.
The heading after Count 3 of Fourth Amended Complaint states: “Aiding and Abetting Breach of
Fiduciary Duty of the Debtor’s Officers and Directors Under Texas law.” Subheadings included in a
complaint are not part of the factual allegations. The choice of law is a question of law to be decided by the
Court based on the factual allegations and not on subheadings found in the Complaint.
9 R. Doc. 177 at pp. 15–19.
10 R. Doc. 179.
11 R. Doc. 173 at p. 1. The motion to reconsider was unusual in that it was filed by the prevailing party in
the denial of the first motion to dismiss. Plaintiff did not ask the Court to reconsider its denial of the
motion to dismiss but only its basis for denial insofar as it was based on choice-of-law principles. The
Court also notes that the First Schuler Order did not contain a ruling on prescription. That issue was not
properly raised by the motion to reconsider and, thus, was not addressed.
breach of fiduciary duty.12 The Court found that, under the factors set out in article
3542, Louisiana law applied. In the motion to reconsider, the Plaintiff argued that
instead article 3543 should be used, and under that article, Texas law applies to this
claim. The Court reconsidered its ruling in the First Schuler Order and held that Texas
law governs the Trustee’s claim for aiding and abetting breach of fiduciary duty.13
Because the Court reconsidered its prior ruling and held that Texas law applies to
Plaintiff’s claims for aiding and abetting breach of fiduciary duty, the Court granted
Plaintiff leave to file a Fifth Amended Complaint asserting a cause of action for breach of
fiduciary duty only under Texas law. Schuler and Caddo’s motion to dismiss was denied
without prejudice, and they were given leave to file a motion to dismiss in response to
Plaintiff’s Fifth Amended Complaint. Plaintiff’s Fifth Amended Complaint was filed on
August 15, 2014 and asserts a Texas state law claim for aiding and abetting debtor’s
officers’ and directors’ breach of fiduciary duty.14 Defendants Caddo and Schuler then
filed this motion to dismiss Plaintiff’s Texas state law claim for aiding and abetting in
Fifth Amended Complaint and to dismiss Schuler as a Defendant pursuant to Fed. R.
Civ. P. 12(b)(6).15
STANDARD OF LAW
Pursuant to Federal Rule of Civil Procedure 12(b)(6), a district court may dismiss
a complaint, or any part of it, for failure to state a claim upon which relief may be
See R. Doc. 168.
R. Doc. 196.
14 R. Doc. 197.
15 R. Doc. 198.
granted if the plaintiff has not set forth factual allegations in support of his claim that
would entitle him to relief.16 As the Fifth Circuit explained in Gonzalez v. Kay:
“Factual allegations must be enough to raise a right to relief above the
speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct.
1955, 167 L.Ed.2d 929 (2007). The Supreme Court recently expounded
upon the Twombly standard, explaining that “[t]o survive a motion to
dismiss, a complaint must contain sufficient factual matter, accepted as
true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v.
Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting
Twombly, 550 U.S. at 570, 127 S.Ct. 1955, 167 L.Ed.2d 929). “A claim has
facial plausibility when the plaintiff pleads factual content that allows the
court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Id. It follows that “where the well-pleaded facts do
not permit the court to infer more than the mere possibility of misconduct,
the complaint has alleged – but it has not ‘show[n]’ – that the pleader is
entitled to relief. ” Id. at 1950 (quoting Fed. R. Civ. P. 8(a)(2)).17
This Court cannot look beyond the factual allegations in the pleadings to
determine whether relief should be granted.18 In assessing the complaint, a court must
accept all well-pleaded facts as true and liberally construe all factual allegations in the
light most favorable to the plaintiff.19 “Dismissal is appropriate when the complaint ‘on
its face show[s] a bar to relief.’”20 “A statute-of-limitations defense may be raised in a
motion to dismiss under Fed.R.Civ.P. 12(b)(6), but the defense is subject to the
traditional rule that the motion cannot be granted unless ‘it appears beyond doubt that
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir.
17 577 F.3d 600, 603 (5th Cir. 2009).
18 See Spivey v. Robertson, 197 F.3d 772, 774 (5th Cir. 1999); Baker v. Putnal, 75 F.3d 190, 196 (5th Cir.
19 Spivey, 197 F.3d at 774; Lowrey v. Tex. A & M Univ. Sys., 117 F.3d 242, 247 (5th Cir. 1997).
20 Cutrer v. McMillan, 308 F. App’x 819, 820 (5th Cir. 2009) (per curiam) (unpublished) (alteration in
original) (quoting Clark v. Amoco Prod. Co., 794 F.2d 967, 970 (5th Cir. 1986)).
the plaintiff can prove no set of facts in support of his claim which would entitle him to
Defendants assert that Plaintiff has failed to allege sufficient facts to support a
valid Texas state law claim for “knowing participation” in a breach of fiduciary duty,
and, thus, the claim must be dismissed.22 The Fifth Circuit has stated:
Under Texas law, “where a third party knowingly participates in the
breach of duty of a fiduciary, such third party becomes a joint tortfeasor
with the fiduciary and is liable as such.” Kinzbach Tool Co. v. Corbett–
Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 514 (1942). To establish a
claim for knowing participation in a breach of fiduciary duty, a plaintiff
must assert: (1) the existence of a fiduciary relationship; (2) that the third
party knew of the fiduciary relationship; and (3) that the third party was
aware that it was participating in the breach of that fiduciary relationship.
See Cox Tex. Newspapers, L.P. v. Wootten, 59 S.W.3d 717, 721–22
(Tex.App.2001) (citing Kinzbach Tool, 160 S.W.2d at 514).23
Texas courts also refer to this claim as aiding and abetting a breach of fiduciary duty of
Defendants argue Plaintiff fails to allege Caddo and Schuler knew of the existence
of a fiduciary relationship or that they knew they were participating in a breach of that
fiduciary relationship.25 Plaintiff responds that he has set forth sufficient facts in his
Fifth Amended Complaint to satisfy the plausibility standard under Twombly and
Cross v. Lucius, 713 F.2d 153, 156 (5th Cir. 1983) (quoting Abdul-Alim Amin v. Universal Life
Insurance Co., 706 F.2d 638, 640 (5th Cir. 1983)).
22 R. Doc. 199 at p. 4.
23 Meadows v. Hartford Life Ins. Co., 492 F.3d 634, 639 (5th Cir. 2007).
24 See, e.g., Floyd v. Hefner, 556 F. Supp. 2d 617, 654 (S.D. Tex. 2008) (“Texas recognizes a cause of
action for aiding and abetting a breach of fiduciary duty.”); Hendricks v. Thornton, 973 S.W.2d 348, 372
(Tex. App. 1998, pet. denied) (recognizing a cause of action for “aiding and abetting a breach of fiduciary
duty of another”).
25 R. Doc. 199 at pp. 5–6; R. Doc. 212 at p. 6.
Iqbal.26 The Court finds that Plaintiff’s Fifth Amended Complaint contains sufficient
factual allegations that, when accepted as true, “‘state a claim to relief that is plausible
on its face.’”27 Specifically, the Fifth Amended Complaint alleges the existence of a
fiduciary relationship in paragraphs 40 and 41.28 It also sets forth sufficient facts from
which one may infer that the remaining two elements are met: that Schuler and Caddo
knew of the fiduciary relationship and that they were aware that they were participating
in the breach of that fiduciary relationship.29 For this reason, Plaintiff’s claim
sufficiently states a claim for relief.
Defendants also assert that the Trustee’s claim for aiding and abetting breach of
the Debtor’s directors’ and officers’ duties must be dismissed because it is barred by
Louisiana’s one-year prescriptive period for delictual actions.30 Even though Texas
substantive law applies to Plaintiff’s claim, Defendants claim that Louisiana procedural
law applies and that Louisiana’s laws regarding prescription are considered procedural
R. Doc. 207 at pp. 5–6.
Ashcroft v. Iqbal, 556 U.S.662, 663 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
28 R. Doc. 197. (“40. The Alonzos and Blackburn were officers and directors of the Debtor and as such
enjoyed a position of confidence with the Debtor. . . . 41. Paul Alonzo, Carolyn Alonzo, and Ron
Blackburn, as the Debtor’s officers and directors owed various fiduciary duties to the Debtor . . . .”).
29 The Fifth Amended Complaint states that the Defendants were co-conspirators with the officers and
directors and that
Caddo and Schuler knowingly participated and assisted and acted in concert with and in
said breaches of the fiduciary duties, by inter alia:
(a) knowingly devising and implementing the DMA and the accompanying agreements
that perpetrated a fraud on the Debtor, on its creditors and on the creditors of the
companies wholly owned by the Debtor;
(b) knowingly facilitating and “papering” the improper transfer of assets from the Debtor
without adequate consideration being given and thus improperly denuding the Debtor of
its assets; and
(c) knowingly participating in taking steps to hide or conceal the fraudulent nature of the
transactions with the affiliated defendants through a myriad of transfers and nominees.
R. Doc. 197 at p. 15.
30 R. Doc. 199 at p. 7.
laws.31 Plaintiff argues that the Court should instead apply Texas procedural law because
the substantive–procedural choice-of-law rules that apply to diversity cases do not apply
in bankruptcy cases.32 Plaintiff further claims that, regardless of whether Texas or
Louisiana law applies, Plaintiff’s claim has not prescribed because of tolling.33
Defendants filed their first motion to dismiss on September 28, 2012.34 At that
time, Plaintiff and Defendants argued that Louisiana’s choice-of-law rules should
apply.35 Notably, Plaintiff at that time argued that, although the Court is not bound by
Klaxon36 because this matter is not founded on diversity jurisdiction, the Court should
nonetheless follow Klaxon and apply the choice-of-law rules of the forum: Louisiana.37
Defendants agreed that Louisiana’s choice-of-law provisions should apply.38
Both parties agreed that the Court should apply Louisiana’s choice-of-law rules.
Many bankruptcy courts follow the forum state’s choice-of-law rules when dealing with
state law claims.39 Finding this approach to be correct, the Court ordered that
Louisiana’s choice-of-law rules govern the instant matter.40 Rather than addressing
R. Doc. 207 at p. 6.
33 Id. at p. 9.
34 R. Doc. 136.
35 R. Doc. 148 at pp. 12–13; R. Doc. 154 at p. 3.
36 Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487 (1941). The Supreme Court in Klaxon held that
federal courts sitting in diversity should apply the choice-of-law rules of the state in which it sits. Id. at
37 R. Doc. 148 at pp. 12–13. Courts are split on whether Klaxon applies to bankruptcy courts when the
claims at issue are rooted in state law. Some courts understand Klaxon to require that the forum state’s
choice-of-law rules apply in bankruptcy cases involving state law claims, although some say there is an
exception when federal interests are implicated. Others apply an independent judgment test or the federal
choice-of-law rules. See 1 Bankruptcy Litigation § 5:372 Conflict of law rules applied on state law-based
claims (updated July 2014) (compiling cases and addressing the different tests).
38 R. Doc. 154 at p. 3.
39 See, e.g., In re Merritt Dredging Co., Inc., 839 F.2d 203 (4th Cir. 1988); In re Gaston & Snow, 243 F.3d
599 (2d Cir. 2001); see also supra note 37.
40 R. Doc. 168 at p. 5, 5 n.10 (“Federal courts sitting in diversity apply the choice of law rules of the state in
which the court is located. . . . Courts sitting in bankruptcy are not technically bound by Klaxon, as they
Louisiana’s choice-of-law rules in their briefs for this pending motion, both parties
argue about whether laws of prescription are procedural or substantive and whether the
rules are applied differently in bankruptcy cases. These arguments ignore the fact that
the Court already has ruled that Louisiana’s conflicts rules apply, and the Court now
rules that Louisiana Civil Code article 3549 provides the analysis for deciding which
limitations or prescriptive period applies.41 The Court’s use of the forum state’s choiceof-law rules in this case is consistent with the approach taken by many courts in dealing
with state law claims related to bankruptcy cases not implicating important federal
Louisiana has codified its choice-of-law rules, including its rule for determining
which limitations or prescriptive period applies.43 Article 3549 sets forth the rules for
selecting the applicable statute of limitations. In this case, the Court has determined
that Texas substantive law applies. Thus, the applicable subsection under the article is
subsection (B), which provides:
B. When the substantive law of another state would be applicable to the
merits of an action brought in this state, the prescription and peremption
law of this state applies, except as specified below:
(1) If the action is barred under the law of this state, the action shall be
dismissed unless it would not be barred in the state whose law would be
are not exercising diversity jurisdiction. Nevertheless, bankruptcy courts apply the choice of law rules of
the state in which they sit as a matter of course when dealing with state law claims in bankruptcy. In re E.
Cameron Partners, L.P., 2011 WL 4625368, at *3 (Bankr. W.D. La. June 23, 1999).”).
41 R. Doc. 168 at p. 5, 5 n.10; La. C.C. art. 3549.
42 See supra, notes 37, 39. The Fifth Circuit still has not spoken on this issue. See In re Mirant Corp., 675
F.3d 530, 536 (5th Cir. 2012) (“This circuit has not determined whether the independent judgment test or
the forum state’s choice-of-law rules should be applied in bankruptcy.”); Woods-Tucker Leasing Corp. of
Ga. v. Hutcheson-Ingram Dev. Co., 642 F.2d 744, 748 (1981). The Court maintains its view that the
choice-of-law rules of Louisiana, the forum state, apply.
43 Trizec Properties, Inc. v. U.S. Mineral Products Co., 974 F.2d 602, 604–05 (5th Cir. 1992). See La. C.C.
applicable to the merits and maintenance of the action in this state is
warranted by compelling considerations of remedial justice.44
At the motion to dismiss stage, “[a] statute of limitations may support dismissal
under Rule 12(b)(6) where it is evident from the plaintiff’s pleadings that the action is
barred and the pleadings fail to raise some basis for tolling or the like.”45 In Louisiana,
delictual actions are subject to a one-year prescriptive period, which may be tolled under
the doctrine of contra non valentem.46 Under Texas law, the statute of limitations for
aiding and abetting a breach of fiduciary duty is three years from when the action
accrues and is subject to Texas’s respective tolling principles.47 In this case, questions
exist as to when Plaintiff’s cause of action accrued, when the limitations period began
and whether it has expired, and whether the period was tolled. Because it is not
apparent from the face of the Fifth Amended Complaint that the action is time barred,
dismissal under Rule 12(b)(6) is not appropriate. Instead, a motion for summary
judgment is the proper mechanism to raise the issue of whether Plaintiff’s claim is
barred by Defendant’s statute of limitations defense, but only after the facts have been
La. Civ. Code art. 3549(B).
Jones v. Alcoa, Inc., 339 F.3d 359, 366 (5th Cir. 2003).
46 La. Civ. Code art. 3492; Wells v. Zadeck, 89 So. 3d 1145, 1150 (La. 2012) (“Louisiana jurisprudence has
long recognized the doctrine of contra non valentem as a means of suspending the running of
prescription . . . . [There are] four instances where contra non valentem can be applied to prevent the
running of prescription: (1) where there was some legal cause which prevented the courts or their officers
from taking cognizance of or acting on the plaintiff’s action; (2) where there was some condition coupled
with the contract or connected with the proceedings which prevented the creditor from suing or acting;
(3) where the debtor himself has done some act effectually to prevent the creditor from availing himself of
his cause of action; and (4) where the cause of action is not known or reasonably knowable by the
plaintiff, even though this ignorance is not induced by the defendant.”).
47 See Quilling v. Compass Bank, 2004 WL 2093117, at *3 n.6 (N.D. Tex. Sept. 17, 2004) (citing Tex. Bus.
& Com. Code § 3.118(g)(3)) (“[I]t should be noted that under Texas law, the statute of limitations for
Aiding and Abetting Breach of a Fiduciary Duty is 3 years.”).
Accordingly, Defendants’ motion to dismiss is DENIED.
Hello This is a Test
New Orleans, Louisiana, this ____ day of __________, 2014.
UNITED STATES DISTRICT JUDGE
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