Clapper et al v. American Realty Investors Inc et al
Filing
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MEMORANDUM OPINION AND ORDER concluding in its discretion that the court should exercise supplemental jurisdiction under 28 U.S.C. 1367(a), and denying without prejudice #687 MOTION for Leave to File Fifth Amended Complaint Pursuant to the Court's Order Dated February 28, 2018 (DE 684), or in the Alternative, Motion to Remove Plaintiffs Atlantic XIII, LLC and Atlantic Midwest, LLC as Parties in Plaintiff's Fifth Amended Complaint Pursuant to Fed. R. Civ. P. 21 filed by Atlantic Midwest LLC, Atlantic XIII LLC, David M Clapper. (Ordered by Judge Sidney A Fitzwater on 6/6/2018) (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 Clapper v. American Realty Investors, Inc., 2018 WL 1083609, at *1 (N.D. Tex.
Feb. 28, 2018) (Fitzwater, J.) (“Clapper IV”), the court granted defendants’ motions to
dismiss pursuant to Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction, but
granted plaintiffs leave to move for any available relief that would enable the court to
exercise subject matter jurisdiction. In response, plaintiffs filed a motion for leave to file a
fifth amended complaint, or, alternatively, to remove plaintiffs Atlantic XIII, LLC (“Atlantic
XIII”) and Atlantic Midwest, LLC (“Atlantic Midwest”) (collectively, the “Atlantic entities”)
as parties in their fifth amended complaint under Rule 21. Concluding in its discretion that
it should exercise supplemental jurisdiction under 28 U.S.C. § 1367(a), the court denies
plaintiffs’ motion for leave to file a fifth amended complaint and their motion to remove the
Atlantic entities from the lawsuit.
I
Because this case is the subject of four prior memorandum opinions and orders, see,
e.g., Clapper v. American Realty Investors, Inc., 2016 WL 302313 (N.D. Tex. Jan. 25, 2016)
(Fitzwater, J.) (“Clapper III”), the court will recount only the background facts pertinent to
this decision.
On August 19, 2014 plaintiffs David M. Clapper (“Clapper”), Atlantic Midwest, and
Atlantic XIII filed this lawsuit against numerous defendants. They invoked this court’s
diversity jurisdiction and also its federal question jurisdiction based on the assertion of a
claim under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C.
§ 1962. See Compl. ¶ 1 (“This Court has jurisdiction over this action pursuant to 28 USC §
1332, (diversity jurisdiction) and based on a federal question being raised pursuant to
RICO.”). In Clapper III, however, the court dismissed the civil RICO claim. Plaintiffs
unsuccessfully sought leave of court to replead that claim.1 They then filed on March 24,
2017 a third amended complaint that omitted any federal-law claims, including a civil RICO
claim.
In December 2017 the court had under consideration various pending motions. As
part of the decisional process, it reviewed the third amended complaint. In doing so, it noted
that plaintiffs predicated subject matter jurisdiction on diversity of citizenship, 28 U.S.C. §
1332, but it concluded that the third amended complaint failed to allege properly the
1
The court denied plaintiffs’ motion for leave to file a third complaint to the extent
they sought to replead their civil RICO claim.
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citizenship of plaintiffs Clapper, Atlantic XIII, and Atlantic Midwest, and defendants Prime
Income Asset Management, LLC, and Gene Phillips (“Phillips”). Because diversity
jurisdiction was then the sole basis for the court’s subject matter jurisdiction, the court
ordered plaintiffs to amend their complaint to properly plead the citizenship of the parties
specified in the order. In response, plaintiffs filed a fourth amended complaint (“fourth
complaint”).2
In the fourth complaint, plaintiffs allege claims against defendants American Realty
Investors Inc., American Realty Trust, Inc. (“ART”), and EQK Holdings Inc. (collectively,
the “Entity Defendants”) and Phillips for fraudulent conveyance, in violation of the Texas
Uniform Fraudulent Transfer Act, Tex. Bus. & Com. Code Ann. § 24.001 et seq. (West
2015) (“TUFTA”); unjust enrichment/constructive trust; and alter ego. Plaintiffs’ claims all
center on the theory that defendants are attempting to evade a final judgment entered by
Judge Godbey at the culmination of extensive litigation, including an appeal to the Fifth
Circuit.
After plaintiffs filed the fourth complaint, the Entity Defendants moved to dismiss
pursuant to Rule 12(b)(1) and Rule 19 for lack of subject matter jurisdiction and to strike the
fourth complaint pursuant to Rule 41. Phillips also moved to dismiss the case under Rule
12(b)(1) for lack of subject matter jurisdiction and for want of standing, or, alternatively, to
2
The fourth complaint omitted Atlantic XIII as a plaintiff. Under the court’s
reasoning, however, it did not matter that Atlantic XIII was not a plaintiff because its
citizenship still determined ART Midwest’s citizenship, and it was ART Midwest’s
citizenship that controlled when determining the citizenship of plaintiffs’ side of the suit.
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strike the fourth complaint. Phillips and the Entity Defendants maintained that, because ART
Midwest, not Atlantic Midwest, was the real party to the controversy, the court was required
to look to the citizenship of ART Midwest when determining whether the parties were
diverse citizens. They contended that the Georgia citizenship of two members of ART
Midwest—Atlantic XIII and ART—destroyed diversity because ART was also a defendant
in the lawsuit. The court agreed and granted defendants’ motion to dismiss in Clapper IV.
But the court also concluded that, although plaintiffs could pursue litigation against
defendants in state court, because this case had been pending in this court since August 19,
2014, it would grant plaintiffs leave to move for any available relief that would enable the
court to exercise subject matter jurisdiction. Plaintiffs then moved for leave to file an
amended complaint pleading supplemental jurisdiction, or, in the alternative, to remove the
Atlantic entities from the lawsuit. Plaintiffs’ motion, which defendants oppose, is now
before the court for decision.
II
Although this court can exercise supplemental jurisdiction over the state-law claims
under 28 U.S.C. § 1367(a), “when all federal claims are dismissed or otherwise eliminated
from a case prior to trial, [the Fifth Circuit has] stated that [its] ‘general rule’ is to decline to
exercise jurisdiction over the pendent state law claims.” McClelland v. Gronwaldt, 155 F.3d
507, 519 (5th Cir. 1998) (citing Wong v. Stripling, 881 F.2d 200, 204 (5th Cir. 1989)),
overruled on other grounds by Arana v. Ochsner Health Plan, 338 F.3d 433, 440 (5th Cir.
2003) (en banc). To determine whether to exercise jurisdiction, the court balances “the
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statutory factors set forth by 28 U.S.C. § 1367(c),” “the common law factors of judicial
economy, convenience, fairness, and comity,” and the threat of “improper forum
manipulation.” Burnett v. Petroleum Geo-Servs., Inc., 2013 WL 1723011, at *5 (N.D. Tex.
Apr. 22, 2013) (Fitzwater, C.J.) (citing Enochs v. Lampasas Cnty., 641 F.3d 155, 159 (5th
Cir. 2011)). The statutory factors are “(1) whether the state claims raise novel or complex
issues of state law; (2) whether the state claims substantially predominate over the federal
claims; (3) whether the federal claims have been dismissed; and (4) whether there are
exceptional circumstances or other compelling reasons for declining jurisdiction.” Enochs,
641 F.3d at 159 (citing 28 U.S.C. § 1367(c)). “These interests are to be considered on a
case-by-case basis, and no single factor is dispositive.” Mendoza v. Murphy, 532 F.3d 342,
346 (5th Cir. 2008) (internal citation omitted). While forum manipulation should be
considered, the courts have repeatedly held that amending a complaint to delete all federal
claims is not a pernicious forum manipulation. See, e.g., Giles v. NYLCare Health Plans,
Inc., 172 F.3d 332, 335 (5th Cir. 1999) (stating it is not improper forum manipulation to
delete federal claims). This is because “plaintiffs get to pick their forum and pick the claims
they want to make unless they are blatantly forum shopping.” Guzzino v. Felterman, 191
F.3d 588, 595 (5th Cir. 1999).
III
A
The second and third statutory factors favor declining to exercise supplemental
jurisdiction and dismissing the case. The court has dismissed the claim over which it had
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federal-question jurisdiction (civil RICO claim), and state-law claims not only substantially
predominate, they completely predominate because there are no federal-law claims
remaining. These factors, however, are counterbalanced by the common law factors,
particularly judicial economy. See Mendoza, 532 F.3d at 346 (citing Smith v. Amedisys Inc.,
298 F.3d 434, 447 (5th Cir. 2002) (affirming decision to exercise supplemental jurisdiction
after dismissal of all federal claims)).
“[W]hen the federal-law claims have dropped out of the lawsuit in its early stages and
only state-law claims remain, the federal court should decline the exercise of jurisdiction by
dismissing the case without prejudice.” Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350
(1988) (citing United Mine Workers of Am. v. Gibbs, 383 U.S. 715, 726-27 (1966)). It is not
clear, however, what counts as an “early stage” in the litigation. See Parker & Parsley
Petroleum Co. v. Dresser Indus., 972 F.2d 580, 586 (5th Cir. 1992) (noting that earlier case
law had left the phrase undefined). In determining whether the district court abused its
discretion when deciding whether to exercise supplemental jurisdiction, the Fifth Circuit has
considered the amount of time elapsed in the litigation, the length of time remaining until
trial, and the amount of discovery completed. Compare Newport Ltd. v. Sears, Roebuck &
Co., 941 F.2d 302, 307 (5th Cir. 1991) (finding abuse of discretion where court dismissed
case on eve of trial after four years of litigation, thousands of pages of record and discovery,
and preparation of pretrial order exceeding 200 pages), and Doddy v. Oxy USA, Inc., 101
F.3d 448, 456 (5th Cir. 1996) (finding abuse of discretion where case was dismissed less than
one month before trial after two years of litigation, over 300 pleadings, and extensive
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discovery taken under federal rules) with Parker & Parsley, 972 F.2d at 587 (finding abuse
of discretion where case was retained after nine months of litigation and a few weeks
remained before trial but parties were “not ready for trial”), Knatt v. Hosp. Serv. Dist. No.
1 of E. Baton Rouge Parish, 373 Fed. Appx. 438, 443 (5th Cir. Apr.12, 2010) (per curiam)
(finding no abuse of discretion where district court dismissed case based on complexity of
state-law issues, even after over 7,000 pages of discovery and 29 depositions), and Brim v.
ExxonMobil Pipeline Co., 213 Fed. Appx. 303, 306 (5th Cir. 2007) (per curiam) (affirming
dismissal where, at the time of summary judgment, parties were approximately one year into
litigation, two months remained until trial, and, although parties had completed some
discovery, two discovery disputes had not been settled by court, and parties could use any
trial preparation, legal research, and discovery in state court proceedings).
This case has been pending in this court for almost 46 months. When the court ruled
on defendants’ motions to dismiss for lack of subject matter jurisdiction in late February
2018,3 the trial setting order, which set the trial date for late February 2018, had only recently
been vacated so that the court could rule on several pending motions. See Batiste v. Island
Records Inc., 179 F.3d 217, 227 (5th Cir. 1999) (finding abuse of discretion when district
court declined to exercise supplemental jurisdiction in case pending for almost three years
3
Defendants maintain that the court should consider only the judicial resources that
were expended until the time the federal claim was dismissed. The court disagrees. The
Fifth Circuit considers the state of the litigation at a later time. See D’Onofrio v. Vacation
Publications, Inc., 888 F.3d 197, 207 (5th Cir. 2018) (considering federal judicial resources
expended up to time motion to dismiss for lack of subject matter jurisdiction was filed).
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and scheduled to begin trial one month later). An extensive amount of, if not all, discovery
had already been completed, and multiple depositions had been taken. See Smith, 298 F.3d
at 447 (common law factors favor exercising supplemental jurisdiction where “instant case
has been pending for almost three years, the parties have taken numerous depositions, and
the matter had progressed to the advanced stages of litigation with little left to do before
trial”). Although defendants point out that a majority of the opinions in this case were issued
by the magistrate judge, the undersigned district judge is familiar with the merits of the case.
The court has issued multiple opinions on motions to dismiss and is well-versed in the
lengthy history of the case in this court. See Batiste, 179 F.3d at 227 (holding that judicial
economy supported exercising supplemental jurisdiction where there were numerous
depositions and discovery disputes in federal court and district court had given significant
consideration to multiple motions to dismiss claims or grant summary judgment). Were this
case to begin anew in state court, the state court judge would face the burdensome task of
becoming acquainted with the multi-year federal-court history of the parties’ dispute in
multiple lawsuits.
B
Moreover, even if the court assumes arguendo that it should decline to exercise
supplemental jurisdiction under 28 U.S.C. § 1367(a), it would grant plaintiffs’ alternative
motion to sever the Atlantic entities under Rule 214 in order to preserve diversity jurisdiction
4
The court would do so on the basis that the Atlantic entities are not parties required
to be joined under Rule 19.
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over the balance of the suit. Clapper’s claims would remain pending in this court, and the
Atlantic entities would likely seek relief for the same claims in state court.5 Judicial
resources would be better conserved by avoiding such simultaneous, duplicative litigation
and instead disposing of the claims of all plaintiffs in one forum. The court thus concludes
that judicial economy weighs in favor of exercising supplemental jurisdiction.
C
The remaining Gibbs factors do not support dismissal. Defendants point to no
unfairness that would result should the court exercise supplemental jurisdiction, and
considering that the remaining issues are not particularly complex,6 comity concerns are
minimal. While improper forum manipulation factors into the court’s decision whether to
exercise supplemental jurisdiction, see Enochs, 641 F.3d at 159 (citing Carnegie-Mellon, 484
U.S. at 357) (“[w]e are also instructed to guard against improper forum manipulation”),
5
The court notes that plaintiffs filed a lawsuit in state court on April 27, 2018. This
action appears to be in response to the court’s April 4, 2018 order. In that order the court
stated that plaintiffs could ameliorate their concern that the statute of repose would
extinguish their fraudulent transfers claims on April 28, 2018 by filing a suit in state court
prior to that date and then dismissing that suit if the court decided to exercise supplemental
jurisdiction in this case. Because it seems apparent that plaintiffs filed the state-court suit to
protect their interests in accordance with the court’s suggestion, the pendency of the state
court case does not bear upon the factor of judicial economy.
6
Defendants maintain that plaintiffs’ lawsuit implicates a number of novel and
complex legal issues, including whether ART’s transfer of its shares to EQK and ARI was
made for reasonably equivalent value, whether special purpose entities qualify as debtors
under TUFTA, and whether the statute of repose under TUFTA can be tolled. Defendants
fail to explain why such issues would not involve a straightforward application of law or why
they are particularly complex.
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defendants fail to present compelling evidence or argument that such manipulation occurred
here. In any case, forum manipulation “is not so serious of a concern that it can become a
trump card which overrides all of the other factors we are instructed to consider and
balance.” Enochs, 641 F.3d at 161.
D
The court thus concludes that the statutory and common law factors collectively weigh
in favor of exercising supplemental jurisdiction over plaintiffs’ remaining state-law claims.7
IV
The court will consider whether to statistically reopen any motions that were pending
at the time the court dismissed this case. Within 14 days of the date this memorandum
opinion and order is filed, a party requesting that a motion be statistically reopened must file
a request that identifies the motion by the ECF document number and the motion’s title. No
motions may be filed in this case without leave of court until the court lifts the ban on
motions that it previously imposed.
7
The court denies plaintiffs’ motion for leave to amend their complaint under Rule
16(b)(4) to plead supplemental jurisdiction. A formal amendment of the complaint is
unnecessary because the court has determined in its discretion that it will exercise
supplemental jurisdiction. And because the court’s subject matter jurisdiction is now based
on supplemental jurisdiction under 28 U.S.C. § 1367(a), not diversity jurisdiction, the court
also denies plaintiffs’ alternative motion to remove Atlantic XIII and Atlantic Midwest as
plaintiffs from the fifth amended complaint.
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*
*
*
For the reasons explained, the court in its discretion chooses to exercise supplemental
jurisdiction over the remaining state-law claims in this lawsuit. Plaintiffs’ motion for leave
to file fifth amended complaint pursuant to the court’s order dated February 28, 2018, or in
the alternative, motion to remove plaintiff Atlantic XIII and Atlantic Midwest as parties in
plaintiff’s fifth amended complaint pursuant to Fed. R. Civ. P. 21 is denied without prejudice.
SO ORDERED.
June 6, 2018.
_________________________________
SIDNEY A. FITZWATER
UNITED STATES DISTRICT JUDGE
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