Clapper et al v. American Realty Investors Inc et al
Filing
209
MEMORANDUM OPINION AND ORDER granting in part, denying in part MOTIONS to #153 Dismiss for Failure to State a Claim filed by Income Opportunity Realty Investors Inc, Transcontinental Realty Investors Inc, #157 Dismiss for Failure to State a Claim filed by Ryan T Phillips, Mickey N Phillips, #152 Dismiss for Failure to State a Claim filed by Prime Income Asset Management LLC, Pillar Income Asset Management Inc, Prime Income Asset Management Inc, #154 Dismiss for Failure to State a Claim filed by The May Trust, The Martin Trust, #156 Dismiss for Failure to State a Claim filed by Donald Phillips, #155 Dismiss for Failure to State a Claim filed by Gene E Phillips, #151 Dismiss for Failure to State a Claim filed by American Realty Trust, Inc, #158 Dismiss for Failure to State a Claim filed by EQK Holdings Inc, American Realty Investors Inc, Basic Capital Management, Inc, #150 Motion to Dismiss filed by Louis Corna, Gene S Bertcher, Daniel J Moos re: #153 Motion to Dismiss for Failure to State a Claim, #157 Motion to Dismiss for Failure to State a Claim, #152 Motion to Dismiss for Failure to State a Claim, #154 Motion to Dismiss for Failure to State a Claim, #156 Motion to Dismiss for Failure to State a Claim, #155 Motion to Dismiss for Failure to State a Claim, #151 Motion to Dismiss for Failure to State a Claim, #158 Motion to Dismiss for Failure to State a Claim, #150 MOTION to Dismiss Plaintiffs' Claims. (Ordered by Judge Sidney A Fitzwater on 1/25/2016) (Judge Sidney A Fitzwater)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
DAVID M. CLAPPER, Individually,
et al.,
Plaintiffs,
VS.
AMERICAN REALTY INVESTORS,
INC., et al.,
Defendants.
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§ Civil Action No. 3:14-CV-2970-D
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§
§
§
§
§
MEMORANDUM OPINION
AND ORDER
In a prior opinion in this case— Clapper v. American Realty Investors, Inc., 2015 WL
3504856 (N.D. Tex. June 3, 2015) (Fitzwater, J.) (“Clapper II”)—the court granted in part
and denied in part defendants’ motions to dismiss under Fed. R. Civ. P. 9(b) and 12(b)(6),
but it also granted plaintiffs leave to replead. Plaintiffs have filed a second amended
complaint, and several defendants move anew to dismiss. For the reasons that follow, the
court grants the motions in part and denies them in part.
I
Because this case is the subject of two prior memorandum opinions and orders, see
Clapper v. American Realty Investors, Inc., 2015 WL 264711 (N.D. Tex. Jan. 21, 2015)
(Fitzwater, J.) (“Clapper I”), and Clapper II, the court will recount only the background facts
and procedural history that are pertinent to this decision.
Plaintiffs David M. Clapper (“Clapper”), Atlantic Midwest, LLC (“Atlantic
Midwest”), and Atlantic XIII, LLC (“Atlantic XIII”) sue several defendants seeking to
recover against some or all them on claims for fraudulent conveyance, in violation of the
Texas Uniform Fraudulent Transfer Act, (“TUFTA”), Tex. Bus. & Com. Code Ann. § 24.001
et seq. (West 2015); unjust enrichment/constructive trust; single enterprise; alter ego; and
violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C.
§ 1962.1
In their second amended complaint, plaintiffs allege a claim for fraudulent
conveyance, in violation of TUFTA, against defendants American Realty Trust, Inc.
(“ART”), American Realty Investors, Inc. (“ARI”), EQK Holdings, Inc. (“EQK”), Basic
Capital Management (“BCM”), the Martin Trust, the May Trust, Ryan Phillips (“Ryan”),
Mickey Phillips (“Mickey”) and Gene Phillips (“Gene”); a claim for unjust
enrichment/constructive trust against defendants ARI, EQK, BCM, Ryan, Gene, Mickey, the
Martin Trust, and the May Trust; a claim for single enterprise against defendants ART, ARI,
BCM, EQK, Pillar Income Asset Management, Inc. (“Pillar”), Prime Income Asset
Management, Inc. (“Prime”), and Prime Income Asset Management, LLC (“Prime LLC”);
a claim for alter ego against Gene; and a civil RICO claim against all defendants.
In nine separate motions, the following defendants, individually or in these
combinations, move to dismiss under Rules 9(b) and 12(b)(6): (1) defendants Danny Moos
1
The counts of the second amended complaint are misnumbered. There are two counts
designated as count IV, and no counts designated as V and VI. If it is necessary to refer to
a count by number, the court will use the number reflected in the second amended complaint.
-2-
(“Moos”), Louis Corna (“Corna”), and Gene Bertcher (“Bertcher”); (2) ART; (3) Pillar,
Prime, and Prime LLC; (4) defendants Transcontinental Realty Investors, Inc. (“TCI”) and
Income Opportunity Realty Investors, Inc. (“IOT”); (5) the May Trust and the Martin Trust;
(6) Gene; (7) defendant Donald Phillips (“Donald”); (8) Ryan and Mickey; and (9) ARI,
BCM, and EQK. With the exception of ART—who does not move to dismiss plaintiffs’
TUFTA claim2—each defendant moves to dismiss all claims against it.3 Plaintiffs oppose
the motions.
II
“In deciding a Rule 12(b)(6) motion to dismiss, the court evaluates the sufficiency of
plaintiffs’ amended complaint by accepting all well-pleaded facts as true, viewing them in
the light most favorable to the plaintiff[s].” Bramlett v. Med. Protective Co. of Fort Wayne,
Ind., 855 F.Supp.2d 615, 618 (N.D. Tex. 2012) (Fitzwater, C.J.) (quoting In re Katrina Canal
Breaches Litig., 495 F.3d 191, 205 (5th Cir. 2007)) (internal quotation marks and brackets
omitted). To survive the motions to dismiss under Rule 12(b)(6), plaintiffs must plead
“enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff[s]
plead[] factual content that allows the court to draw the reasonable inference that the
2
Accordingly, the court will not address whether plaintiffs have pleaded a plausible
TUFTA claim against ART.
3
Defendants Syntek West, Inc., Realty Advisors, LLC, Realty Advisors, Inc., Realty
Advisors Management, Inc., Henry Butler, Robert Jakuszewski, Sharon Hunt, and Ted R.
Munselle have neither filed nor joined motions to dismiss the second amended complaint.
-3-
defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
“The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than
a sheer possibility that a defendant has acted unlawfully.” Id. (quoting Twombly, 550 U.S.
at 556); see also Twombly, 550 U.S. at 555 (“Factual allegations must be enough to raise a
right to relief above the speculative level[.]”). “[W]here 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 ‘shown’—‘that the pleader is entitled to relief.’” Iqbal, 556 U.S. at
679 (brackets omitted) (quoting Rule 8(a)(2)). “Threadbare recitals of the elements of a
cause of action, supported by mere conclusory statements, do not suffice.” Id. at 678
(citation omitted).
“Rule 9(b) imposes a heightened pleading standard for fraud claims and requires that
a party state with particularity facts supporting each element of fraud.”
Turner v.
AmericaHomeKey Inc., 2011 WL 3606688, at *2 (N.D. Tex. Aug. 16, 2011) (Fitzwater, C.J.)
(citing Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719, 724 (5th Cir. 2003)), aff’d,
514 Fed. Appx. 513 (5th Cir. 2013). “[Rule] 9(b) applies to . . . RICO claims resting on
allegations of fraud.” Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir. 1997)
(citing Tel-Phonic Servs., Inc. v. TBS Int’l, Inc., 975 F.2d 1134, 1139 (5th Cir. 1992)); see
also Tel-Phonic Servs., 975 F.2d at 1138 (“[Rule 9(b)] applies to the pleading of fraud as a
predicate act in a RICO claim[.]”). “At a minimum, Rule 9(b) requires allegations of the
particulars of time, place, and contents of the false representations, as well as the identity of
the person making the misrepresentation and what he obtained thereby.” Turner, 2011 WL
-4-
3606688, at *2 (quoting Benchmark Elecs., 343 F.3d at 724) (internal quotation marks
omitted). More colloquially, plaintiffs must plead the “who, what, when, where, and how”
of the fraud. United States ex rel. Williams v. Bell Helicopter Textron Inc., 417 F.3d 450,
453 (5th Cir. 2005) (quoting United States ex rel. Thompson v. Columbia/HCA Healthcare
Corp., 125 F.3d 899, 903 (5th Cir. 1997)). Because Rule 9(b) must be “read in conjunction
with [Rule] 8 which requires only a short and plain statement of the claim showing that the
pleader is entitled to relief,” “punctilious pleading detail” is not required. Steiner v.
Southmark Corp., 734 F. Supp. 269, 273 (N.D. Tex. 1990) (Fitzwater, J.) (quoting Landry
v. Air Line Pilots Ass’n Int’l AFL-CIO, 892 F.2d 1238, 1264 (5th Cir. 1990)) (internal
quotation marks omitted). “The court’s key concern in assessing a complaint under Rule 9(b)
is to determine whether the plaintiff seeks to redress specific wrongs or whether the plaintiff
instead seeks the opportunity to search out actionable wrongs.” Garcia v. Boyar & Miller,
P.C., 2007 WL 2428572, at *4 (N.D. Tex. Aug. 28, 2007) (Fitzwater, J.) (citation omitted).
III
The court turns first to plaintiffs’ alter ego claim, which they assert only against Gene.
The court assumes that either Georgia or Texas law governs this claim.4
4
In Clapper II the court explained:
[b]ecause the laws of Texas, Nevada, and Georgia do not appear
to conflict concerning the piercing the corporate veil doctrine,
because neither side has thoroughly briefed the choice-of-law
issue, and because both sides cite Texas and Nevada law, the
court will assume arguendo that the law of Texas or Nevada
applies to plaintiffs’ alter ego claim. The court notes, however,
-5-
A
“Under the alter ego doctrine in Georgia, the corporate entity may be disregarded for
liability purposes when it is shown that the corporate form has been abused.” Baillie Lumber
Co. v. Thompson, 612 S.E.2d 296, 299 (Ga. 2005). Under Texas law, “‘[a]lter ego applies
when there is such unity between corporation and individual that the separateness of the
corporation has ceased and holding only the corporation liable would result in injustice.’”
SEC v. Res. Dev. Int’l, LLC, 487 F.3d 295, 302 (5th Cir. 2007) (quoting Castleberry v.
Branscum, 721 S.W.2d 270, 272 (Tex. 1986)).
Under Georgia law,
it is necessary to show that the shareholders disregarded the
corporate entity and made it a mere instrumentality for the
transaction of their own affairs; that there is such unity of
interest and ownership that the separate personalities of the
corporation and the owners no longer exist. The concept of
piercing the corporate veil is applied in Georgia to remedy
injustices which arise where a party has over extended his
privilege in the use of a corporate entity in order to defeat
justice, perpetuate fraud or to evade contractual or tort
responsibility. . . . Plaintiff must show that the defendant
that ART was incorporated in Georgia and that courts have held
that the law of the state of incorporation for the entity whose
corporate form is at issue applies to determine whether to pierce
the corporate veil.
Clapper II, 2015 WL 3504856, at *9 n.15 (quoting Ace Am. Ins. Co. v. Huntsman Corp., 255
F.R.D. 179, 195 (S.D. Tex. 2008)) (internal quotation marks omitted). In his motion to
dismiss, Gene relies on Georgia law. Plaintiffs rely on Texas law. Because neither side has
adequately briefed the choice-of-law issue, and because Georgia and Texas law do not appear
to conflict, the court will assume arguendo that either Georgia or Texas law applies to
plaintiffs’ alter ego claim against Gene.
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disregarded the separateness of legal entities by commingling on
an interchangeable or joint basis or confusing the otherwise
separate properties, records or control.
Baillie Lumber Co., 612 S.E.2d at 299 (citations and internal quotation marks omitted).
To recover under an alter ego theory under Texas law, a plaintiff must prove two
elements: (1) “such unity between corporation and individual that the separateness of the
corporation has ceased,” and (2) a finding that “holding only the corporation liable would
result in injustice.” Castleberry, 721 S.W.2d at 271-72; see also Mancorp, Inc. v. Culpepper,
802 S.W.2d 226, 228 (Tex. 1990) (stating that “[u]nder the alter ego theory, courts disregard
the corporate entity when there exists such unity between corporation and individual that the
corporation ceases to be separate and when holding only the corporation liable would
promote injustice.”). Factors to be considered include “the degree to which corporate
formalities have been followed and corporate and individual property have been kept
separately, the amount of financial interest, ownership and control the individual maintains
over the corporation, and whether the corporation has been used for personal purposes.”
Castleberry, 721 S.W.2d at 272.
B
Gene maintains that the court should dismiss the alter ego claim against him because
plaintiffs’ second amended complaint contains only general, conclusory allegations that are
unsupported by fact and are merely a recitation of the elements or factors for establishing
alter ego liability. He posits that plaintiffs rely on the alleged lack of separateness between,
and the commingling of assets among, ART, BCM, ARI, and EQK; that plaintiffs fail to
-7-
make factual allegations regarding the commingling of Gene’s assets with any of the assets
of other defendants, or any of the other pertinent factors to pierce the corporate veil, and
instead focus on Gene’s alleged control over the entities and the transactions by other
defendants; that, under Georgia law, a person’s use and control of an entity to promote his
own ends is not a factor in piercing the corporate veil; that Georgia law requires that a person
be the owner or shareholder of the entity to impose alter ego liability, but plaintiffs do not
allege that Gene is the owner or shareholder of the entities for which they seek to hold him
liable; and that plaintiffs do not plead actual fraud, a requisite for imposing alter ego liability,
with the specificity that Rule 9(b) requires.
Plaintiffs respond that, in contending that they have failed to make factual allegations
that would support an alter ego claim, Gene’s motion refers to but a few paragraphs of the
second amended complaint; Gene’s contention that the claim fails because there is no
allegation that he commingled his personal accounts with those of the defendants disregards
that commingling is but one factor to be considered, and ignores the fact that a court of
competent jurisdiction has found that Gene in fact controls the entities involved; concerning
the allegation that no transaction was completed without Gene’s approval, this assertion is
supported by extensive evidence; and the pleading standard is whether a cognizable claim
has been alleged, assuming the allegations of the complaint are true, and plaintiffs have met
this standard. Relying on Texas law, plaintiffs argue that alter ego applies when there is such
unity between corporation and individual that the separateness of the corporation has ceased,
and holding only the corporation liable would result in injustice; this is shown from the total
-8-
dealings of the corporation and the individual, including the degree to which corporate
formalities have been followed and corporate and individual property have been kept
separately, the amount of financial interest, ownership and control the individual maintains
over the corporation, and whether the corporation has been used for personal purposes; the
corporate veil may be pierced on an alter ego theory where a corporation is organized and
operated as a mere tool or business conduit of another; and that to pierce the corporate veil
and impose liability under an alter ego theory of liability, a plaintiff must show that the
persons or entities on whom he seeks to impose liability are alter egos of the corporation, and
that the corporate fiction was used for an illegitimate purpose, in satisfaction of the
requirements of § 21.223(a) and (b) of the Texas Business Organizations Code. Citing
various allegations in the second amended complaint, plaintiffs contend that they have
pleaded a plausible alter ego claim against Gene, regardless whether Texas or Georgia law
applies. And they maintain that Gene’s contention that no “actual fraud” has been pleaded
is without basis, considering the allegations of the second amended complaint concerning
fraudulent transfers and the fraud committed in conjunction with plaintiffs’ RICO claims.
Plaintiffs posit that they have adequately pleaded the elements required under Rule 9(b).
-9-
C
In support of their alter ego claim, plaintiffs allege the following:
At all relevant times, the unity of business interests that is EQK,
BCM, ART, ARI, Prime, Prime, LLC and Pillar, were/are
controlled entirely by and therefore have a unity of interest with
Defendant Gene Phillips.
The assets of ARI, EQK, BCM, ART, Pillar, Prime, Prime, LLC
are controlled by Gene Phillips.
Gene Phillips directs all business activities of ARI, EQK, BCM,
ART, Pillar, Prime, Prime, LLC.
Defendant Gene Phillips controls all decisions and exercise[s]
dominion and control over all assets as it pertains to the unity of
interest among ARI, EQK, BCM, ART, Pillar, Prime[,] and
Prime[] LLC.
Based on information and belief, at all relevant times, Defendant
Gene Phillips uses the assets of ARI, EQK, BCM, ART, Pillar,
Prime and Prime, LLC to secure financing for himself
personally, for his family, and for his personal projects,
including but not limited to Port Olepentz, as well as various oil
and gas interests held by [Gene] or other entities he controls.
Based on information and belief, at all relevant times Defendant
Gene Philips directed and caused the assets of Debtor ART,
Defendant BCM and EQK to be transferred from ART to avoid
collection of those assets specifically to avoid significant
personal tax liabilities for Gene Phillips and the entities with
which he has a unity of interest, including BCM, EQK, Pillar,
Prime, Prime, LLC and ARI.
Those who work at Pillar, Prime, Prime, LLC and the Officers
and Directors of BCM, ARI, EQK and ART are lead to believe
and confirmed their belief that the assets of ART, ARI, BCM,
EQK, Prime, Prime, LLC and Pillar, as well as those of the May
Trust and the Martin Trust, belong and are controlled by Gene
Phillips and consider the assets Gene Phillips’ “family’s
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money[.”]
Based on information and belief, Gene Phillips decides and
controls what attorneys will be used for any work associated
with unity of business interests among Pillar, Prime, Prime,
LLC, ARI, BCM, EQK and ART and all outside counsel are
directed that Gene Phillips must personally approve any
business transactions or major decisions in any litigation.
Based on information and belief, Gene Phillips decides and
controls what bills will actually be paid and the amounts to be
paid with regard to the unity of business interests among Pillar,
Prime, Prime, LLC, BCM, ARI, EQK, Art, the May Trust and
the Martin Trust.
Gene Phillips approves and controls all payments to be made
[by] all entities which he shares a unity of interest, including
EQK, BCM, ARI, ART, Prime, Prime, LLC and Pillar.
Based on information and belief, Gene Phillips decides and
controls what assets of ARI, EQK, ART, BCM, Prime, Prime,
LLC or Pillar will or will not be pledged, encumbered or
otherwise used to secure financing for his personal projects or
to fund projects for the entities in which he has a unity of
interest.
2d Am. Compl. ¶¶ 87-97 (paragraph numbers omitted).
The court concludes that the pertinent allegations of plaintiffs’ second amended
complaint, taken as true, are sufficient to plead a plausible alter ego claim against Gene and
to satisfy the requirements of Rule 9(b).5 Plaintiffs allege that Gene has undisclosed interests
5
Because the court holds that plaintiffs have satisfied the pleading requirements of
Rule 9(b), it need not decide whether plaintiffs must comply with Rule 9(b) when alleging
an alter ego theory of liability.
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in the Entity Defendants (2d Am. Compl. ¶ 17)6; that Gene is the controlling decisionmaker
for the Entity Defendants (id.); that EQK, BCM, ART, ARI, Prime, Prime LLC, and Pillar
have a unity of interest with Gene (id. ¶ 87); that Gene controls the assets, business activities,
and transactions for ARI, BCM, EQK, ART, ARI, Prime, Prime LLC, and Pillar (id. ¶¶ 8889, 94); that Gene uses the assets of ARI, EQK, BCM, ART, Pillar, Prime, and Prime LLC
for himself and his family, and that the entities’ assets are considered Gene’s “family’s
money” (id. ¶¶ 91, 93); that Gene directed the allegedly fraudulent transfers of assets from
ART to other Entity Defendants (id. ¶ 92); and that the assets and accounting records of the
Entity Defendants are commingled and not kept separately (id. ¶¶ 98-101). Taken together,
these allegations sufficiently state a plausible claim that Gene is the alter ego of one or more
of the Entity Defendants. See, e.g., Ralls Corp. v. Huerfano River Wind, LLC, 27 F.Supp.
3d 1303, 1328-29 (N.D. Ga. 2014). Accordingly, the court denies Gene’s motion to dismiss
the alter ego claim asserted against him.
IV
The court turns next to plaintiffs’ single business enterprise7 claim, asserted against
ART, ARI, BCM, EQK, Pillar, Prime, and Prime LLC. Plaintiffs allege that ART, ARI,
EQK, BCM, Pillar, Prime, and Prime LLC are a single enterprise, responsible for the debts
6
As noted in Clapper II, the term “Entity Defendants” refers to ARI, ART, EQK, and
BCM.
7
In their second amended complaint, plaintiffs refer to this claim as their “single
enterprise claim.” 2d Am. Compl. ¶ 164.
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and obligations of ART, and that the court should enter a judgment against each of these
defendants in the amount due and owing by ART under the $73 million judgment entered by
Judge Godbey in ART Midwest, Inc. v. Clapper, No. 3:99-cv-2355-N.
A
Defendants move to dismiss plaintiffs’ single business enterprise theory of liability,
contending that the Supreme Court of Texas abolished the theory in SSP Partners v.
Gladstrong Invs. (USA) Corp., 275 S.W.3d 444 (Tex. 2008).8
Plaintiffs respond that the court in SSP Partners did not entirely eliminate the single
business enterprise theory of liability, but instead held that there must be a showing of actual
fraud to succeed on such a claim. They contend that under Tex. Bus. Orgs. Code Ann. §
21.223 (West 2016), the single business enterprise theory may still be raised and liability
found where actual fraud is shown; that they have alleged that the defendants named in Count
II of their second amended complaint used their “single enterprise” to perpetrate fraud; and
that, because they have alleged actual fraud, defendants’ motions to dismiss should be
denied.
Defendants contend in reply9 that courts, including the Fifth Circuit, have consistently
adhered to SSP Partners’ holding that the single business enterprise theory is not a valid
basis in Texas for disregarding a corporation’s separate existence; that the existence of fraud
8
Because both sides assume that Texas law applies to plaintiffs’ single business
enterprise claim, the court will as well.
9
ARI, BCM, and EQK incorporate the arguments in ART’s reply.
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is “of no consequence,” ART Reply Br. at 3; and that the statute (Tex. Bus. Orgs. Code Ann.
§ 21.223) and caselaw that plaintiffs cite govern the liability of parties under an alter ego
theory and have nothing to do with the abrogated single business enterprise theory.
B
Before the Supreme Court of Texas decided SSP Partners, various Texas courts of
appeals recognized the “single business enterprise” theory of liability. This theory operated
as an “equitable veil piercing theor[y],” N. Am. Van Lines, Inc. v. Emmons, 50 S.W.3d 103,
116 (Tex. App. 2001, pet. denied), if a plaintiff was able to demonstrate that two or more
“corporations [were] not operated as separate entities but rather integrate[d] their resources
to achieve a common business purpose,” Paramount Petroleum Corp. v. Taylor Rental
Center, 712 S.W.2d 534, 536 (Tex. App. 1986, writ ref’d n.r.e.), abrogated by SSP Partners,
275 S.W.3d 444. “Unlike other equitable corporate doctrines, however, such as ‘alter ego,’
proof of fraud [was] not required” to recover under the single business enterprise theory.
Acceptance Indem. Ins. Co. v. Maltez, 2009 WL 2748201, at *5 (5th Cir. June 30, 2009) (per
curiam) (citation omitted); see also N. Am. Van Lines, Inc., 50 S.W.3d at 120 (“To recover
under a finding of a single business enterprise, no proof of fraud is required; instead, the
single business enterprise theory relies on equity analogies to partnership principles of
liability.” (citing Aluminum Chems. (Bolivia), Inc. v. Bechtel Corp., 28 S.W.3d 64, 68 (Tex.
App. 2000, no pet))).
In SSP Partners the Supreme Court of Texas held that, for liability purposes, the
corporate fiction should be disregarded only “when the corporate form has been used as part
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of a basically unfair device to achieve an inequitable result.” SSP Partners, 275 S.W.3d at
454. The court explained:
[t]he “single business enterprise” liability theory on which SSP
relies does not entail the level of agreement required for joint
enterprise liability or the abuse required before the law
disregards the corporate structure to impose liability. The
theory SSP advocates applies whenever two corporations
coordinate operations and combine resources in pursuit of the
same business purpose. We have never approved of imposing
joint liability on separate entities merely because they were part
of a single business enterprise, and we have pointed out that an
issue exists whether a theory of single business enterprise is a
necessary addition to Texas law regarding the theory of alter ego
for disregarding corporate structure.
Id. at 452 (citations omitted) (some internal quotation marks omitted). The court further
explained that “[a]buse and injustice are not components of the single business enterprise
theory[,] . . . [which] applies to corporations that engage in any sharing of names, offices,
accounting, employees, services, and finances,” id. at 454, and noted it had “never held
corporations liable for each other’s obligations merely because of centralized control, mutual
purposes, and shared finances,” id. at 455. Accordingly, the court held that “the single
business enterprise liability theory . . . will not support the imposition of one corporation’s
obligations on another.” Id. at 456.10
10
Cases decided after SSP Partners have consistently recognized that “[t]he Texas
Supreme Court has rejected the single business enterprise theory.” Harding Co. v. Sendero
Res., Inc., 365 S.W.3d 732, 745 n.27 (Tex. App. 2012, pet. denied); see also In re Carmelita,
Inc., 2009 WL 2356488, at *5 (S.D. Tex. July 29, 2009) (“[A]t present, Texas does not
recognize the common law doctrine of single business enterprise. Therefore to the extent that
claimants rely on that doctrine to pierce the corporate veil, those claims must fail as a matter
of law[.]” (citations omitted)); Lincoln Gen. Ins. Co. v. U.S. Auto Ins. Servs., Inc., 2009 WL
- 15 -
In response to defendants’ motions to dismiss this claim, plaintiffs rely on Tryco
Enterprises, Inc. v. Robinson, 390 S.W.3d 497, 508 (Tex. App. 2013, no pet.), and Tex. Bus.
Orgs. Code Ann. § 21.22311 to argue that a single enterprise theory of liability still exists
where a party alleges actual fraud. In Tryco Enterprises, however, the plaintiffs sought to
1174641, at *4 (N.D. Tex. Apr. 29, 2009) (Boyle, J.) (“The Court agrees that any claims
based upon the single business enterprise doctrine fail as a matter of law.”); Burchinal v. PJ
Trailers-Seminole Mgmt. Co., 372 S.W.3d 200, 218 (Tex. App. 2012, no pet.) (“The Texas
Supreme Court completely rejected the single-business entity doctrine as a valid mechanism
for piercing the corporate veil and imposing liability in Texas in SSP Partners[.]”); Big Easy
Cajun Corp. v. Dall. Galleria Ltd., 293 S.W.3d 345, 347 (Tex. App. 2009, pet. denied) (“[In
SSP Partners t]he supreme court held the single business enterprise liability theory will not
support the imposition of one corporation’s obligations on another [, and b]ecause the theory
on which Galleria secured its judgment[—i.e., the single business enterprise theory—]has
been rejected by the Texas Supreme court, the judgment must be reversed.”).
11
Tex. Bus. Orgs. Code Ann. § 21.223 provides, in pertinent part:
(a) A holder of shares, an owner of any beneficial interest in
shares, or a subscriber for shares whose subscription has been
accepted, or any affiliate of such a holder, owner, or subscriber
or of the corporation, may not be held liable to the corporation
or its obligees with respect to . . .
(2) any contractual obligation of the corporation or any matter
relating to or arising from the obligation on the basis that the
holder, beneficial owner, subscriber, or affiliate is or was the
alter ego of the corporation or on the basis of actual or
constructive fraud, a sham to perpetrate a fraud, or other similar
theory[.] . . .
(b) Subsection (a)(2) does not prevent or limit the liability of a
holder, beneficial owner, subscriber, or affiliate if the obligee
demonstrates that the holder, beneficial owner, subscriber, or
affiliate caused the corporation to be used for the purpose of
perpetrating and did perpetrate an actual fraud on the obligee
primarily for the direct personal benefit of the holder, beneficial
owner, subscriber, or affiliate.
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“pierce the corporate veil and impose liability under an alter ego theory of liability.” Tryco
Enters., 390 S.W.3d at 508. In their second amended complaint, plaintiffs do not seek to
impose liability on ART, ARI, BCM, EQK, Pillar, Prime, or Prime LLC based on theories
of alter ego, piercing the corporate veil, or under Tex. Bus. Orgs. Code Ann. § 21.223. In
fact, although they pleaded an alter ego claim in their first amended complaint, after the court
dismissed the claim in Clapper II, 2015 WL 3504856, at *11, plaintiffs did not replead this
theory against any defendant other than Gene, electing instead to assert only their “single
enterprise” claim against ART, ARI, BCM, EQK, Pillar, Prime, and Prime LLC.
Accordingly, the court dismisses plaintiffs’ single business enterprise claim against
ART, ARI, BCM, EQK, Pillar, Prime, and Prime LLC.
V
The court now turns to plaintiffs’ civil RICO claim.
A
As the court explained in Clapper II:
RICO makes it unlawful “for any person employed by or
associated with any enterprise engaged in, or the activities of
which affect, interstate or foreign commerce, to conduct or
participate, directly or indirectly, in the conduct of such
enterprise’s affairs through a pattern of racketeering activity[.]”
18 U.S.C. § 1962(c). “‘Reduced to their simplest terms, the
essential elements of a RICO claim are: (1) a person who
engages in (2) a pattern of racketeering activity (3) connected to
the acquisition, establishment, conduct, or control of an
enterprise.’” Orthoflex, Inc. v. ThermoTek, Inc., 2012 WL
2864510, at *2 (N.D. Tex. July 12, 2012) (Fitzwater, C.J.)
(quoting Larrew v. Barnes, 2002 WL 32130462, at *1 n.1 (N.D.
Tex. Aug. 27, 2002) (Kaplan, J.), rec. adopted, 2002 WL
- 17 -
32130462 (N.D. Tex. Sept. 17, 2002) (Fitzwater, J.)).
Clapper II, 2015 WL 3504856, at *11.
“Section 1961(1)(B) defines ‘racketeering activity’ according to whether it constitutes
‘any act which is indictable’ under several specified sections of title 18 of the United States
Code, [two] of which [are] mail fraud [and wire fraud].” TruGreen Landcare, LLC v. Scott,
512 F.Supp.2d 613, 623 (N.D. Tex. 2007) (Fitzwater, J.) (citations omitted). “To establish
a pattern of racketeering activity, [plaintiffs] must allege (1) the predicate acts of racketeering
activity, and (2) a pattern of such acts.” Orthoflex, 2012 WL 2864510, at * 2 (citing In re
Burzynski, 989 F.2d 733, 742 (5th Cir. 1993)). A pattern of racketeering activity includes
two or more acts of racketeering activity. See 18 U.S.C. § 1961(5). “[A] ‘pattern’ requires
both that the acts are ‘related’ to each other and that they have ‘continuity.’” Burzynski, 989
F.2d at 742. “It is this factor of continuity plus relationship which combines to produce a
pattern.” H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239 (1989) (citation omitted).
Predicate acts are related if they “have the same or similar purposes, results, participants,
victims, or methods of commission, or otherwise are interrelated by distinguishing
characteristics and are not isolated events.” Id. at 240. Continuity requires that the related
acts “constitute or threaten long-term criminal activity.” Burzynski, 989 F.2d at 742 (citing
H.J. Inc., 492 U.S. at 239). Continuity can be proved by “a closed period of repeated
conduct, or . . . past conduct that by its nature projects into the future with a threat of
repetition.” H.J. Inc., 492 U.S. at 241. “A closed period of conduct may be demonstrated
‘by proving a series of related predicates extending over a substantial period of time,’” while
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“[a]n open period of conduct involves the establishment of ‘a threat of continued racketeering
activity.’” Word of Faith World Outreach Ctr. Church, Inc. v. Sawyer, 90 F.3d 118, 122 (5th
Cir. 1996) (citing H.J. Inc., 492 U.S. at 242).
B
Defendants contend that plaintiffs have failed to plead a plausible civil RICO claim
because they have not alleged a pattern of racketeering activity.12 They maintain that
plaintiffs have alleged a single scheme, a single victim, and a single injury, which is wholly
outside the scope of RICO; have failed to plead “closed-ended” continuity, because the first
alleged transfer of assets occurred in January 2011, and the predicate acts would have to have
occurred prior to October 2011, and, as a matter of law, eleven months is insufficient to
establish closed-ended continuity; and have also failed to plead “open-ended” continuity
because their allegation that defendants’ defrauding of bankruptcy courts, creditors, and the
Securities and Exchange Commission (“SEC”) are the regular way defendants do business
is entirely conclusory, and plaintiffs do not plausibly allege that defendants’ conduct poses
a threat of future fraud. In sum, defendants argue that
Plaintiffs’ allegations are limited to the contention that, over the
span of less than a year, Defendants conspired to fraudulently
transfer assets to prevent Plaintiffs from collecting under the
judgment and then conspired to conceal the transfers. Plaintiffs
do not plead any plausible racketeering activity that occurred
12
Defendants assert that plaintiffs’ civil RICO claim is so deficient as to warrant the
imposition of sanctions, but they do not actually request that the court award sanctions or
specify any basis for the court to do so. Absent a motion seeking sanctions, the court
declines to address whether sanctions should be imposed.
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after 2011, do not allege that there were victims of defendants’
alleged criminal acts other than Plaintiffs themselves, and do not
assert any facts that would suggest any threat of continued
criminal activity. . . . At most, Plaintiffs plead[] a single scheme
and a single injury, with no alleged victims other than Plaintiffs
themselves. As such, Plaintiffs fail to plead a “pattern of
racketeering activity.”
Pillar, et al., Mot. to Dis. at 18.
Plaintiffs respond that they have pleaded at least 15 separate transactions that occurred
in which false notaries were used, and that the false documents were transmitted via mail or
wire; that over a course of years, false and fraudulent financial records and reports were
transmitted by wire or mail to the SEC, and false documents were submitted to bankruptcy
courts, and that this practice continues today; that the predicate acts the court has already
found to have been sufficiently pleaded have been repeated in separate transactions over the
course of not fewer than six years, and that they are the regular manner in which defendants’
association-in-fact and/or enterprises regularly operate; and that plaintiffs have alleged that
hundreds of predicate acts have occurred. In response to defendants’ arguments regarding
continuity, plaintiffs contend that they have alleged that the entities that form the associationin-fact and the individuals and entities directing them have regularly and systematically
performed the predicate acts of racketeering activities alleged over at least six years, and that
it is believed to have been occurring for a longer period of time and will continue to occur;
that plaintiffs have alleged that the predicate acts are used as defendants’ regular means of
operation, and that the victims are not just plaintiffs but numerous others to whom the entities
in the association-in-fact/enterprises owe debts; and that at the pleading stage, plaintiffs are
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only required to allege that the predicate acts were conducted over a period of time and make
up the regular means of operation for these defendants.
C
The court concludes that the second amended complaint does not adequately plead a
pattern of racketeering activity because the pleaded predicate acts lack continuity.
“Continuity cannot be established by multiple acts of fraud that are part of a single
transaction.” Orthoflex, 2012 WL 2864510, at *3 (citing Word of Faith, 90 F.3d at 123); see
also Burzynski, 989 F.2d at 734 (“All of the alleged predicate acts took place as part of the
Burzynski I litigation, which has ended. . . . The conduct did not constitute or threaten
long-term criminal activity.”); Calcasieu Marine Nat’l Bank v. Grant, 943 F.2d 1453, 1464
(5th Cir. 1991) (“there is no threat here of continued criminal acts. [Defendant’s] acts which
were alleged to have deprived [plaintiff] of a property interest were, when completed,
without threat of repetition.”); Delta Truck & Tractor, Inc. v. J.I. Case Co., 855 F.2d 241,
244 (5th Cir. 1988) (“Delta has alleged as a pattern of racketeering activity nothing more
than numerous predicate acts which were necessary segments of an otherwise legitimate
[merger].”). When this is the case, “[t]he conduct d[oes] not constitute or threaten long-term
criminal activity.” Burzynski, 989 F.2d at 743; see also Calcasieu, 943 F.2d at 1464
(“Short-term criminal conduct is not the concern of RICO.”).
Although the second amended complaint alleges generally that “[t]he predicate acts
committed by these Defendants occurred regularly over a period of time beginning at least
from 2008, and believed to be before that time, and continuing today,” 2d Am. Compl. ¶ 188,
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plaintiffs have failed to plead specific dates on which many of the alleged predicate acts
occurred.13 Of the predicate acts for which plaintiffs have provided dates,14 all occurred
13
See, e.g., 2d Am. Compl. ¶ 128 (“In filings with the SEC, Defendant TCI submitted
false and untrue documentation regarding transfers of its shares that were in furtherance of
the conspiracy to defraud ART’s creditors and which were intended to aid and abet the
fraudulent conveyances of the TCI stock. TCI further participated in the conspiracy by
modifying its books and records to reflect the fraudulent transfers of its stock that are
described herein.”).
14
Plaintiffs allege in general terms, without specifying dates or linking any of
defendants’ conduct with a specific provision of title 18 or other defined “racketeering
activity,” see Clapper II, 2015 WL 3504856, at *13, the following predicate acts in support
of their RICO claim:
a.
b.
c.
d.
Creating a scheme to defraud the Plaintiffs by creating
false and fraudulent pretenses, transactions, loans and
documents, all of which were executed in violation of
law and transmitted by U.S. mail and/or wire to the
Securities and Exchange Commission, attorneys and
others in violation of one or more of the following
statutes: 18 [U.S.C. §] 1028[,] 18 [U.S.C. §] 1341, 18
[U.S.C. §] 1343, 18 [U.S.C. §] 1348, 18 [U.S.C. §] 1350.
...
Through the fraudulent concealment of assets, the
intentional filing of false or incomplete forms with U.S.
Bankruptcy Courts and/or the filing of false information
in several states with respective bankruptcy courts. . . .
By fraudulently preparing and executing transactional
documents to defraud the Plaintiffs and others for their
own benefit and the benefit of other related affiliates
through violations of 18 [U.S.C. §] 1028[,] 18 [U.S.C. §]
1341, 18 [U.S.C. §] 1343, 18 [U.S.C. §] 1348, 18 [U.S.C.
§] 1350. . . .
By violating the Wire Fraud Act via emails, telephone
calls through transmission and dissemination of false and
fraudulent information, including via U.S. Mail.
2d Am. Compl. ¶ 186. The court is unable to discern from these allegations, however, which
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between January 2011 and August 2012. The alleged predicate acts consist of the following:
defendants fraudulently transferred TCI stock in order to hinder and delay creditors, and, in
connection with this transfer, defendants EQK, TCI, ARI, Moos, Bertcher, and Corna filed
false reports with the SEC regarding the transaction; sometime between January 2011 and
the October 11, 2011 entry of a final judgment, ART fraudulently conveyed its property and
backdated and included false notaries on the documentation associated with the transactions;
defendants ARI, TCI, IOT, Bertcher, and Moos submitted false documents under oath to the
SEC in March 2011; and ART twice filed for bankruptcy on the eve of hearings on plaintiffs’
post-judgment enforcement motions—first in January 2012 and again in August 2012—in
order to hinder and delay creditors. Plaintiffs do not plausibly allege any specific act of
racketeering activity that occurred after August 2012. In other words, plaintiffs’ allegations
are effectively limited to the assertion that, over the span of approximately 19 months, ending
in August 2012, defendants committed various acts of fraud and other criminal activity in
order to render ART judgment proof and to cover up their actions.
In Calcasieu Marine National Bank the Fifth Circuit held that the plaintiff’s RICO
claim should not have been submitted to the jury where there was no threat “of continued
criminal acts. [Defendant]’s acts which were alleged to have deprived [plaintiff] of a
property interest were, when completed, without threat of repetition.” Calcasieu Marine
Nat’l Bank, 943 F.2d at 1464. Similarly, in Orthoflex this court explained that “[c]ontinuity
defendants committed predicate acts of racketeering activity or when such acts occurred.
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cannot be established by multiple acts of fraud that are part of a single transaction.”
Orthoflex, 2012 WL 2864510, at *3. In the present case, plaintiffs have pleaded multiple acts
of fraud and other criminal acts that together enabled defendants to defraud plaintiffs by
rendering ART judgment proof. In fact, plaintiffs specifically allege that, as a result of
defendants’ fraudulent and criminal activity, ART has been rendered insolvent and unable
to pay the judgment entered against it in the underlying litigation. See 2d Am. Compl. ¶ 121.
Accordingly, as in Calcasieu Marine National Bank and Orthoflex, defendants’ acts are all
part of their alleged fraudulent scheme to avoid payment of the judgment entered against
ART, and, once completed, do not threaten repetition. In other words, accepting the
allegations of plaintiffs’ second amended complaint as true, the predicate acts were part of
a transaction—the transfer of assets between related entities, the related filing of documents
with the SEC, and the resulting filing for bankruptcy of an insolvent company—that has
since ended. Because the assets in which plaintiffs claim an interest have already been
transferred to ART’s parent and related entities, there is no threat of continued criminal
activity regarding ART’s assets, and plaintiffs have failed otherwise to plead conduct that
constitutes or threatens long-term criminal activity. See Auto-Opt Networks, Inc. v. GTL
USA, Inc., 2014WL 2719219, at *7 (N.D. Tex. June 16, 2014) (Fitzwater, C.J.) (dismissing
civil RICO claim where agreement under which money was owed had been terminated, and
funds allegedly due had already been transferred to defendant’s parent companies, allegedly
to avoid payment under the agreement).
Plaintiffs’ conclusory and unsupported allegation that the predicate acts described “are
- 24 -
the regular way that Defendants do business and provides evidence of a distinct threat of long
term racketeering activity anticipated to continue well into the future to further defraud other
victims,” does not plausibly plead continuity. 2d Am. Compl. ¶ 195. Plaintiffs do not
plausibly allege any predicate act of racketeering activity that occurred after August 2012,
when ART filed for bankruptcy. And there is no pleaded factual basis from which the court
can reasonably infer that there is a threat that defendants will commit acts of racketeering
activity in the future. See Burzynski, 989 F.2d at 744 (dismissing RICO claim because, inter
alia, “[t]o permit [the plaintiff to rely on general, speculative, and unsupported pleading]
would allow conclusory pleading to erode the substance of the ‘continuity,’ ‘enterprise,’ and
‘pattern’ requirements” of RICO).
Nor are plaintiffs’ allegations that defendants “conspired to hide assets and defraud
Plaintiffs and other third parties,” 2d Am. Compl. ¶ 196 (emphasis added), or that
defendants’ fraudulent transfers were made with the intent to “hinder and delay creditors,”
id. ¶¶ 50; see also, e.g., id. at ¶¶ 55, 56, 57, 108, 120, 123, 127, and 144, sufficient to
plausibly plead continuity. Plaintiffs have failed to specify any other creditor that defendants
have defrauded or attempted to defraud, and their allegations are therefore speculative,
conclusory, and insufficient to state a claim on which relief can be granted.
Accordingly, the court dismisses plaintiffs’ civil RICO claim because the allegations
in the second amended complaint do not allow the court to draw the reasonable inference that
- 25 -
defendants engaged in a pattern of racketeering activity.15
D
Plaintiffs also appear to allege a RICO conspiracy claim under 18 U.S.C. § 1962(d),
which makes it “unlawful for any person to conspire to violate any of the provisions of
[RICO].” “To prove a RICO conspiracy, [plaintiffs] must establish (1) that two or more
people agreed to commit a substantive RICO offense and (2) that the defendant knew of and
agreed to the overall objective of the RICO offense.” TruGreen Landcare, 512 F.Supp.2d
at 625 n.11 (quoting United States v. Delgado, 401 F.3d 290, 296 (5th Cir. 2005)). “A RICO
conspiracy thus has RICO-specific requirements—such as an agreement by at least two
conspirators to engage in a pattern of racketeering activity [.]” Id. If the second amended
complaint is insufficient to enable the court to draw the reasonable inference that there has
been a pattern of racketeering activity, the same allegations cannot be the basis for a RICO
conspiracy claim because there can be no agreement to engage in a substantive RICO offense
that does not exist.
Because the court concludes that plaintiffs have failed to plead a plausible civil RICO
claim, the court dismisses their RICO conspiracy claim for failure to state a claim on which
15
Because the second amended complaint fails to adequately plead continuity, the
court need not reach defendants’ contentions that plaintiffs have failed to plead a valid
enterprise or association-in-fact under RICO, that plaintiffs have failed to plead any
cognizable “racketeering activity,” that plaintiffs lack standing to pursue a RICO cause of
action against defendants because the only harm that can be inferred from the complaint is
harm to the debtor itself, that plaintiffs have failed to plead sufficient facts to demonstrate
proximate causation, or that plaintiffs have failed to properly allege a cognizable RICO
injury.
- 26 -
relief can be granted. See Orthoflex, 2012 WL 2864510, at *4 (citing Paul v. Aviva Life &
Annuity Co., 2010 WL 5105925, at *6 (N.D. Tex. Dec. 14, 2010) (Boyle, J.) (“Because all
other RICO claims have been dismissed, the RICO conspiracy claim must also be
dismissed.”)).
VI
The court now considers plaintiffs’ TUFTA claim, which they assert against
defendants ART, ARI, EQK, BCM, the Martin Trust, the May Trust, Ryan, Mickey, and
Gene.
A
In Clapper II the court granted in part and denied in part defendants’ motions to
dismiss plaintiffs’ TUFTA claim. It held that because plaintiffs had alleged that Ryan “is a
director of Defendant BCM, a beneficiary of Defendant May Trust and Defendant Martin
Trust and as a result, now controls, received, or otherwise has possession of assets that were
fraudulently transferred from ART,” and that the May Trust and the Martin Trust “are, in the
chain of title, the ultimate owners and controllers of the shares fraudulently conveyed,”
plaintiffs may be able to recover under TUFTA against these defendants. Clapper II, 2015
WL 3504856, at *6 (citations omitted). The court also held that the first amended complaint
sufficiently pleaded, under Rule 9(b)’s heightened pleading standard, a TUFTA claim against
defendants ARI, ART, BCM, and EQK.
In the second amended complaint, plaintiffs have omitted the allegation that the May
Trust and the Martin Trust are “the ultimate owners and controllers of the shares fraudulently
- 27 -
conveyed.” Id. They contend instead that the May Trust and the Martin Trust “receive a
benefit from the TCI stock and other ART assets that were fraudulently transferred and are,
in the chain of title, of the assets fraudulently conveyed.” 2d Am. Compl. ¶ 132. Plaintiffs
also allege that EQK, BCM, ARI, Ryan, Gene, Donald, Mickey, the May Trust and the
Martin Trust “are all recipients in the chain of title of assets that were fraudulently
transferred by Judgment Debtor ART.” Id. at ¶ 137.
B
Ryan, Gene, Mickey, the May Trust, the Martin Trust, and BCM move to dismiss
plaintiffs’ TUFTA claim under Rules 12(b)(6),16 arguing that plaintiffs have failed to
plausibly allege any facts demonstrating that defendants are transferees of an asset of ART
or persons for whose benefits transfers were made. Ryan and Mickey also maintain that,
because plaintiffs have omitted from the second amended complaint their allegation that the
May Trust or the Martin Trust are the ultimate owners of the stock, there is no factual basis
for plaintiffs’ assertion that Ryan and Mickey “now control[], received, or otherwise [have]
possession” of the stock as beneficiaries of the trusts. ARI and EQK also generally move to
dismiss plaintiffs’ TUFTA claim asserted against them, but their joint motion with BCM is
limited to why they maintain that plaintiffs’ TUFTA claim against BCM fails.
Plaintiffs respond that they have satisfied the pleading standards of Rules 12(b)(6) and
16
These defendants also move to dismiss plaintiffs’ TUFTA claim against them under
Rule 9(b). Because the court concludes that plaintiffs have failed to state a TUFTA claim
against these defendants on which relief can be granted, it need not address whether the
claims should be dismissed for failing to comply with the pleading requirements of Rule 9(b).
- 28 -
9(b) by alleging that defendants are “recipients in the chain of title of the fraudulently
transferred assets,” and that the transfers were made for the benefit of each defendant. They
allege in support of their TUFTA claim:
Defendants EQK, BCM and ARI, and based on information and
belief, The Martin Trust, and the May Trust, R. Phillips, G.
Phillips and M. Phillips, are all recipients in the chain of title of
assets that were fraudulently transferred by Judgment Debtor
ART.
The fraudulent transfers by ART were made for the benefit of
Defendants R. Phillips, G. Phillips and M. Phillips, the Martin
Trust, the May Trust, ARI, EQK and BCM, so that loans owed
by or guaranteed by these Defendants would not be deemed due
as a result of collection efforts taken against ART’s assets.
The fraudulent transfers by ART were made for the benefit of
Defendants R. Phillips, G. Phillips and M. Phillips, the Martin
Trust, the May Trust, ARI, EQK and BCM, to avoid significant
tax liabilities that would occur as a result of collection efforts
taken against ART’s assets.
The fraudulent transfers by ART were made for the benefit of
Defendants R. Phillips, G. Phillips and M. Phillips, the Martin
Trust, the May Trust, ARI, EQK and BCM, so that these
Defendants could cause ART to file bankruptcy to further hinder
and delay creditors and ART’s assets would be available to
these Defendants and not tied up in bankruptcy so that these
Defendants could continue to use ART’s assets as collateral to
obtain financing from lenders to fund their own business and
personal endeavors.
2d Am. Compl. ¶¶ 137-140 (paragraph numbers omitted). Plaintiffs also allege several
transfers of assets to EQK and ARI, including stock in TCI, IOT, BCM, and EQK, and real
- 29 -
property.17
C
To establish a claim under TUFTA, a plaintiff must prove that (1) it is a “creditor”
with a claim against a “debtor”; (2) the debtor transferred assets after, or a short time before,
the plaintiff’s claim arose; and (3) the debtor made the transfer with the intent to hinder,
delay, or defraud the plaintiff. Dontos v. Vendomation NZ Ltd., 582 Fed. Appx. 338, 344
(5th Cir. 2014) (per curiam) (citing Nwokedi v. Unlimited Restoration Specialists, Inc., 428
S.W.3d 191, 203-05 (Tex. App. 2013, pet. denied)). TUFTA allows recovery against the
debtor, the transferee, or the person for whose benefit the transfer was made. See Tex. Bus.
& Com. Code Ann. 24.008, 24.009; Mack, 737 F.3d at 1361 (discussing TUFTA’s
predecessor, the Uniform Fraudulent Conveyance Act, and noting that the statute “does not
provide for recovery other than recovery of the property transferred or its value from one
who is, directly or indirectly, a transferee or recipient thereof.”).
Plaintiffs appear to allege fraudulent transfers of stock in TCI, stock in IOT, stock in
EQK, stock in BCM, and real property. See 2d Am. Compl. ¶¶ 110-117. With respect to
BCM, the May Trust, the Martin Trust, and Gene, plaintiffs allege only that these defendants
are “recipients in the chain of title of assets that were fraudulently transferred[.]” Id. at ¶
137. This allegation is conclusory, and plaintiffs fail to allege any facts demonstrating that
17
The alleged chain of title and current ownership of each asset is unclear, but
plaintiffs allege that ARI and EQK currently own TCI and IOT stock. See 2d Am. Compl.
¶¶ 108-113.
- 30 -
the assets were directly transferred to, and are currently in the possession of, BCM, the May
Trust, the Martin Trust, or Gene.
Plaintiffs allege that Ryan and Mickey, as beneficiaries of the May Trust and Martin
Trust and as directors of BCM, each “controls, received, or otherwise has possession of
assets that were fraudulently transferred from ART, including but likely not limited to the
TCI and IOT stock[.]” Id. at ¶¶ 130-131. But plaintiffs do not plead any facts that enable
the court to draw the reasonable inference that BCM, the May Trust, or the Martin Trust are
the transferees of any particular asset or that they are currently in possession of any asset.
Likewise, plaintiffs have not alleged any facts demonstrating that Ryan and Mickey, as
beneficiaries of the May Trust and Martin Trust and as directors of BCM, are transferees or
owners of any of the assets.
Alternatively, plaintiffs argue that they can recover under TUFTA against Ryan,
Gene, Mickey, the May Trust, the Martin Trust, and BCM because the allegedly fraudulent
transfers were made for the benefit of these defendants “so that loans owed by or guaranteed
by these Defendants would not be deemed due as a result of collection efforts taken against
ART’s assets,” id. at ¶ 138; “to avoid significant tax liabilities that would occur as a result
of collection efforts taken against ART’s assets,” id. at ¶ 139; and “so that these Defendants
could cause ART to file bankruptcy to further hinder and delay creditors and ART’s assets
would be available to these Defendants and not tied up in bankruptcy,” id. at 140, thereby
enabling these defendants to “continue to use ART’s assets as collateral to obtain financing
from lenders to fund their own business and personal endeavors,” id.
- 31 -
These allegations are conclusory and unsupported by the alleged facts. For example,
the second amended complaint does not allege any facts that enable the court to draw the
reasonable inference that defendants owned or guaranteed any loans; that any loans were
forgiven or not “deemed due”; that any defendant avoided tax liability by the asset transfers;
or that any defendant used ART’s financing as collateral to obtain financing. Moreover, the
second amended complaint does not plead facts that explain how the alleged fraudulent
transfers resulted in these benefits to any defendant. In sum, plaintiffs have failed to identify
any benefit that BCM, the May Trust, the Martin Trust, Ryan, Gene, or Mickey received as
a result of the alleged fraudulent transfers.
Plaintiffs have, however, sufficiently alleged a TUFTA claim against ARI and EQK.
Plaintiffs allege that ART fraudulently transferred BCM stock to ARI; that ART fraudulently
transferred EQK stock to ARI; that ART fraudulently transferred TCI stock to EQK; that
EQK fraudulently transferred TCI and IOT stock to ARI; and that EQK and ARI currently
possess at least some TCI and IOT stock. 2d Am. Compl. ¶¶ 107-113.18 Plaintiffs also allege
December 2010 transfers of real property and interests in other entities to EQK. Id. ¶ 117.
In their joint motion with BCM, neither EQK nor ARI explains how plaintiffs’ allegations
18
EQK and ARI urge the court to disregard ¶¶ 111 and 113 of the second amended
complaint, contending that they contradict ¶ 112. Paragraph 111 alleges that EQK currently
holds TCI and IOT stock; ¶ 112 asserts that EQK transferred TCI and IOT stock to ARI in
2014; and ¶ 113 pleads that EQK still holds the fraudulently transferred assets. 2d Am.
Compl. ¶¶ 111-113. Plaintiffs respond that “EQK” in ¶ 113 is a typographical error and
should be “ARI,” and that, read together, these allegations allege that EQK and ARI each
hold TCI and IOT stock today. The court agrees.
- 32 -
fail to plausibly state a TUFTA claim against them. Plaintiffs have plausibly alleged that
EQK and ARI have ownership interests in at least some of ART’s fraudulently transferred
assets.
Accordingly, the court grants the motions to dismiss plaintiffs’ TUFTA claims against
the May Trust, the Martin Trust, BCM, Ryan, Mickey, and Gene and denies the motion to
dismiss plaintiffs’ TUFTA claims against EQK and ARI.
VII
Finally, the court considers plaintiffs’ claim for unjust enrichment/constructive trust.
A
“A party may recover under the unjust enrichment theory when one person has
obtained a benefit from another by fraud, duress, or the taking of an undue advantage.”
Heldenfels Bros., Inc. v. City of Corpus Christi, 832 S.W.2d 39, 41 (Tex.1992). “A key
element of unjust enrichment is that the person sought to be charged wrongly secured or
passively received a benefit.” Ahmed v. Shah, 2015 WL 222171, at *5 (Tex. App. Jan.15,
2015, no pet.) (mem. op.) (citing Villarreal v. Grant Geophysical, Inc., 136 S.W.3d 265, 270
(Tex. App. 2004, pet. denied)). “Unjust enrichment is not a proper remedy ‘merely because
it might appear expedient or generally fair that some recompense be afforded for an
unfortunate loss to the claimant[.]’” Baxter v. PNC Bank Nat’l Ass’n, 541 Fed. Appx. 395,
398 (5th Cir. 2013) (per curiam) (quoting Heldenfels Bros., 832 S.W.2d at 40). “It is not
enough that the person sought to be charged received some incidental benefit.” Ahmed, 2015
WL 222171, at *5.
- 33 -
“A constructive trust is not a cause of action under Texas law.” In re Moore, 608 F.3d
253, 263 (5th Cir. 2010). Rather, “[a] constructive trust is an equitable remedy used to
prevent unjust enrichment.” Baxter, 541 Fed. Appx. at 398 (citing Everett v. TK–Taito, LLC,
178 S.W.3d 844, 859 (Tex. App. 2005, no pet.)); see also Messier v. Messier, 458 S.W.3d
155, 164 (Tex. App. 2015, no pet.) (“A constructive trust [may be] imposed when one party
holds property that legally belongs to the other.” (citing In re Marriage of Harrison, 310
S.W.3d 209, 214 (Tex. App.2010, pet. denied))). “In order to establish a constructive trust,
the proponent must prove: (1) breach of a special trust, fiduciary relationship, or actual fraud;
(2) unjust enrichment of the wrongdoer; and, (3) tracing to an identifiable res.” Baxter, 541
Fed. Appx. at 398.
B
Defendants ARI, EQK, BCM, the Martin Trust, the May Trust, Ryan, Gene, and
Mickey move to dismiss plaintiffs’ claim for unjust enrichment/constructive trust. They
contend that plaintiffs have failed to plead that they currently possess any fraudulently
transferred asset, or plead any facts demonstrating that they obtained a benefit from plaintiffs.
Plaintiffs respond that they have alleged that defendants currently possess fraudulently
transferred assets and that they have otherwise benefitted from the fraudulent transfers: “so
that loans owned by or guaranteed by these Defendants would not be deemed due as a result
of collection efforts taken against ART’s assets”; “to avoid significant tax liabilities that
would occur as a result of collection efforts taken against ART’s assets”; and “so that these
Defendants could cause ART to file bankruptcy to further hinder and delay creditors and
- 34 -
ART’s assets would be available to these Defendants and not tied up in bankruptcy so that
these Defendants could continue to use ART’s assets as collateral to obtain financing from
lenders to fund their own business and personal endeavors.” 2d Am. Compl. ¶¶ 152-54.
The court holds that plaintiffs have failed to plausibly allege an unjust
enrichment/constructive trust claim against BCM, Gene, Ryan, Mickey, the May Trust, and
the Martin Trust. Plaintiffs do not allege facts that enable the court to draw the reasonable
inference that BCM or Gene possesses any of the fraudulently transferred assets. Plaintiffs
assert that the May Trust and the Martin Trust “receive a benefit from the TCI stock and the
other ART assets that were fraudulently transferred,” 2d Am. Compl. ¶ 132, but plaintiffs no
longer allege that the May Trust and the Martin Trust currently possess the transferred stock.
Plaintiffs argue that Ryan and Mickey, as beneficiaries of the May Trust and the Martin
Trust, receive any benefit enjoyed by the Trusts. Because plaintiffs have not plausibly
alleged any benefit to the Trusts, they have not alleged any benefit to Ryan and Mickey as
beneficiaries of the Trusts.
Plaintiffs maintain that, even if defendants do not currently possess a fraudulently
transferred asset, plaintiffs can recover any benefit that defendants unjustly received. But
as the court explained supra at § VI(C), plaintiffs have not alleged any facts supporting their
allegation that defendants have avoided tax liability because of the fraudulent transfers; that
defendants have used ART’s assets as collateral because of the fraudulent transfers; or that
defendants have been forgiven a debt because of the fraudulent transfers. Accordingly, the
court grants defendants’ motions to dismiss plaintiffs’ unjust enrichment/constructive trust
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claim against BCM, the May Trust, the Martin Trust, Ryan, Mickey, and Gene.
Plaintiffs allege that EQK and ARI currently possess at least some TCI and IOT stock,
and that EQK currently owns fraudulently-transferred real property. 2d Am. Compl. ¶¶ 107113. Accordingly, the court denies defendants’ motion to dismiss plaintiffs’ unjust
enrichment/constructive trust claim asserted against EQK and ARI.
*
*
*
For the foregoing reasons, the court grants in part and denies in part defendants’
motions to dismiss.
SO ORDERED.
January 25, 2016.
_________________________________
SIDNEY A. FITZWATER
UNITED STATES DISTRICT JUDGE
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