Tow v. Amegy Bank N.A. et al
Filing
215
MEMORANDUM AND OPINION entered GRANTING 115 MOTION to Dismiss Certain Claims and/or for Partial Summary Judgment. (Signed by Judge Lee H Rosenthal) Parties notified.(leddins, 4)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
RODNEY TOW,
Plaintiff,
VS.
AMEGY BANK N.A., et al.,
Defendants.
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CIVIL ACTION NO. 4:11-cv-03700
MEMORANDUM AND OPINION
This Memorandum and Opinion addresses the motion for summary judgment on claims
against Michael Manners and companies he owned or controlled. Manners founded Royce Homes,
LP, and was a 50 % owner between1998 and 2006. The Trustee of the Royce Homes bankruptcy
estate, Rodney Tow, alleges that Manners conspired to breach the fiduciary duties owed to Royce
Homes by both Manners and by defendant John H. Speer, who was the president of Royce Homes’s
general partner and owned the other 50 % of Royce Homes until 2006, when Speer bought
Manners’s interest. Tow has sued Manners and his affiliated companies, Allard Investment
Company, LLC, DWM Holdings, LP, DWM Holdings GP, LLC, MGM Motor Sports, LLC, Saracen
Holdings, LP, Saracen Holdings, LLC, and Saracen Holdings GP, LLC (collectively, “Manners”
and the “Manners Defendants”).
Based on the pleadings; the motion, responses, and replies; the parties’ submissions; the oral
argument; the record; and the applicable law, this court grants the motion for summary judgment.
The reasons are explained below.
I.
Background
Much of the relevant background is set out in the Memorandum and Opinion issued on
October 1, 2013 and is set out here only as necessary.
In 1984, Manners founded Royce Homes, Inc., the predecessor to Royce Homes, L.P.
(Docket Entry No. 117, Ex. 1 (Manners Affidavit) at 1). Manners was Royce Homes’s chief
executive officer until July 1998, when he sold 50 % of Royce Homes’s equity to Speer and became
a limited partner. (Id.). The parties entered into an Amended and Restated Agreement of Limited
Partnership (the “1998 Agreement”), which replaced the previous limited partnership agreement.
(Docket Entry No. 132, Ex. 4 at 18). The 1998 Agreement made Hammersmith Group, now
Hammersmith Group, LLC, Royce Homes’s general partner. Hammersmith had a 1 % interest in
the partnership. Speer was Hammersmith’s president. (TAC ¶ 61). Speer, as chief executive officer
of First Duval Group, Inc., was Royce Homes’s limited partner with a 49 % interest. Manners,
through Royce Homes, Inc., retained a 50 % limited partnership interest. Speer, the president, sole
director, and sole owner of Hammersmith, exercised Hammersmith’s authority as general partner.
(TAC ¶ 31).
The 1998 Agreement gave the general partner exclusive management rights and duties.
“‘General Partner’ mean[t] Hammersmith Group, Inc.” (Docket Entry No. 132, Ex. 4 at 21).
Manners relinquished his executive control. The “General Partner [had] the full and exclusive
power and authority on behalf of [Royce Homes] to manage, control, administer and operate the
business and affairs of [Royce Homes], and to do or cause to be done any and all acts which it
deem[ed] necessary or appropriate thereto, and the scope of such power and authority . . .
encompass[ed] all matters in any way connected with or incident to such business.” (Id. at 34). This
included the power and authority to:
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(a)
expend [Royce Homes’s] capital and revenues in furtherance
of the business of [Royce Homes];
(b)
to enter into any partnership agreement, sharing arrangement,
or joint venture which is engaged in any business or transaction in
which [Royce Homes was] authorized to engage;
(c)
to . . . draw, make, execute and issue promissory notes and
other negotiable or non-negotiable instruments and evidences of
indebtedness, and to secure the payment of the sums so borrowed and
to mortgage, pledge, or assign in trust all or any part of [Royce
Homes’s] property;
...
(h)
to guarantee the payment of money or the performance of any
contract or obligation by any
person, firm or corporation on
behalf of [Royce Homes];
(i)
to sue and be sued, complain and defend, in the name and on
behalf of [Royce Homes] and enter into such agreements, receipts,
releases and discharges with respect to any such matters as the
General Partner deems advisable;
...
(m)
to enter into, perform and carry out contracts, agreements and
to do any other acts and things necessary, appropriate or incidental to
the accomplishment of the purposes of [Royce Homes];
[and]
(n)
to cause [Royce Homes] to borrow funds or accept other
capital contributions without the consent of the limited partners.
(Id. at 34-36).
The 1998 Agreement also stripped the limited partner of any managerial role and shielded
him from related liabilities. “No Limited Partner [was] liable to [Royce Homes] for the debts,
liabilities, contracts, or any other obligations of [Royce Homes], except to the extent of his Interest
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in [Royce Homes].” (Id. at 37). “No Limited Partner [was to] take part in the operation,
management, or control of [Royce Homes] business, transact any business in [Royce Homes’s]
name, or have the power to sign documents or otherwise bind [Royce Homes]” except as might be
required by the Delaware Revised Limited Partnership Act. (Id. at 38). The limited partner could
“not withdraw from [Royce Homes] or sell, assign, transfer or subject to a security interest all or any
portion of his Interest in [Royce Homes] unless [with] the written consent of the General Partner,”
who had sole and absolute discretion in deciding whether to grant or deny the withdrawal. (Id.).
The 1998 Agreement also included a buyout provision outlining the procedures governing a
voluntary buy out of a partner. (Id. at 48).
In the spring of 2006, Manners and Speer entered into negotiations for Speer to buy
Manners’s remaining interest in Royce Homes. Buying out Manners’s 50 % interest cost Speer
“$33,342,405 plus a loan fee of $236,386.” (TAC ¶ 40). Speer entered into two personal
obligations to finance this purchase: a $20 million personal loan from Amegy (the “Amegy Loan”),
and a $13,342,405 promissory note to Manners (the “Manners Note”). (TAC ¶ 40). Before the
buyout, Speer obtained lender consents. (Docket Entry No. 115, App. 11, Ex. I). “Speer represented
to Royce Homes’s lenders that distributions to make the payments on the Amegy [L]oan[] would
be made from same year profits; would not reduce equity below $40 million; and would not cause
Royce Homes to violate the lenders’ debt-to-equity covenants contained within their loan
documents.” (TAC ¶ 44). Manners and Speer entered into a purchase agreement, the Manners Note,
and an intercreditor agreement. Manners then submitted a formal resignation. Speer signed the
Manners Note personally.
The purchase agreement between Speer and Manners became effective on September 20,
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2006 (the “2006 Purchase Agreement”). (Docket Entry No. 116, App. 4, Ex. B, at 1). The purchase
price was $33,342,405, consisting of $20,000,000 paid in cash at closing and the $13,342,405
Manners Note. The Manners Note was attached to the 2006 Purchase Agreement. (Id., App. 5, Ex.
C). Speer was to pay a $236,873 closing fee. On October 2, 2006, Speer was to pay “$1,500 per
lot acquired for which home construction [had] started by the Royce Entities . . . after June 30, 2006
and on or before September 30, 2006 and[] $1,500 per home for which construction was started after
June 30, 2006 and for which closing and transfer of title to such home by the Royce Entities to a
customer occurs on or before September 30, 2006.” (Id.). After October 1, 2006 and until all
amounts were fully paid, Speer was to pay Manners “$1,500 per lot acquired for which home
construction [was] started by the Royce Entities . . . on or after October 1, 2006[] and $1,500 per
home for which construction was started after June 30, 2006 and for which closing and transfer of
title [was] to occur on or after October 1, 2006.” Speer was to “cause the Royce Entities to instruct
all title companies to pay such $1,500 amounts directly to the [Manners] at the closing of each lot
or home.” (Id.) “All direct payments to [Manners] transmitted from the various title companies
[were to] be treated as a distribution of capital by Royce Holdings, L.P. to [Manners] as a payment
by [Speer]. (Id.).
The Manners Note also had a subordination provision, which stated that Speer’s “obligations
with respect to the principal of and interest on this Note shall be subordinate and junior in right of
payment . . . to any indebtedness of [Speer] with respect to ‘Senior Debt,’ whether now existing or
hereinafter incurred.” (Id. at 3). Senior debt was defined to mean “any and all obligations of [Speer]
or any entity of which [Speer] owns, directly or indirectly, a majority equity interest at such time
with respect to any principal, interest . . . , premium, penalties, fees, indemnification,
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reimbursements and other amounts owed with respect to any Indebtedness of the [Speer] or ay such
subsidiary unless such indebtedness expressly provides that such Indebtedness is pari pasu or
subordinate in right of payment to this Note.” (Id.) Indebtedness meant, among other things,
borrowed money. The Note stated:
(b)
No payment of principal or interest on this Note shall be made
at any time (i) when a default or event of default (however defined)
has occurred and is continuing under the terms of any Senior Debt (or
if such a payment or principal or interest would result in such a
default or event of default), and (ii) when a payment or distribution
to [Speer] by one of [his] Controlled Entities is not permitted under
the terms of any Senior Debt. If, notwithstanding the foregoing
provisions of [this section] any payment is made, then [Manners] will
hold the same in trust and pay it over to the holders of the Senior
Debt.
(Id. at 6 (emphasis added)).
On September 20, 2006, Manners resigned as a Royce Homes officer, signing the following
statement:
I, Michael G. Manners, hereby resign any and all positions I hold as
a director, officer, manager, consultant or in any other capacity of
management of the below listed entities or any other direct or indirect
subsidiaries of Hammersmith Group, Inc., a Delaware corporation,
or Royce Holdings, LP, a Delaware limited partnership, effective as
of September 20, 2006. Provided that, this Notice of Resignation
shall not apply to, and in no way affect, my honorary position,
compensation or benefits with Royce Homes, L.P. as Chairman
Emeritus.
(Id., App. 6, Ex. D). At closing, Manners received the $20,000,000 payment. Speer and Manners
signed the Manners Note.
A.
Speer’s First Obligation: Amegy Loan Principal and Interest Payments
In January 2007, Speer owed a $10,000,000 principal payment on his Amegy Loan. The
“Royce Homes LP-Loan Account” shows that Royce Homes wired $10,000,000 to Speer’s personal
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Amegy bank account on January 3, 2007. (TAC ¶¶ 129, 131). This money came from “draws on
the Royce Homes lines of credit.” (TAC ¶¶ 121, 127 (detailing which lines of credit were used)).
Tow alleged that this distribution breached the Royce Homes partnership agreement, Speer’s
fiduciary duty, and Speer’s representation to Royce Homes’s lenders because it was made from
funds Royce Homes had borrowed; violated loan covenants, including debt-to-equity ratio
requirements; was not for a partnership purpose; was inconsistent with the fiduciary responsibility
for safekeeping partnership property; and was not made in furtherance of partnership business.
(TAC ¶¶ 48, 134-38).
Speer owed another principal payment, of $2.5 million, in July 2007. Tow alleged that
Royce Homes was “required to borrow money in order to make this payment.” (TAC ¶ 139).
“Speer recognized making the payment caused a problem for Royce Homes and sought permission
from Amegy to not make the July 2007 principal payment but[] Amegy insisted the payment be
made. Despite the fact that Royce Homes was continuously breaching its debt-to-equity ratios with
its lenders, Speer made the $2.5 million principal payment on July 2, 2007.” (TAC ¶ 146). This
“Amegy payment distribution was made from funds borrowed from Royce Homes lenders.” (TAC
¶ 156).
Tow alleged that William D. Gathmann, Royce Homes’s former chief financial officer,
anticipated that upcoming financial disclosures would reveal the breach of Royce Homes’s
covenants with its lenders. (TAC ¶ 141). “On May 11, 2007, Gathmann sent Speer and James
Hunter, the Royce Homes Chief Operating Officer, an email attaching a PowerPoint presentation”
requesting “waivers/amendments to the loan agreements.” (TAC ¶ 139). The PowerPoint
presentation stated that for “some banks, leverage ratio covenant and spec ratio covenant are not in
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compliance.” (TAC ¶ 140). This presentation was not shown to Royce Homes lenders. (TAC ¶
142). “Gathmann recreated the PowerPoint presentation in June 2007. As with the May 2007
presentation, this one was never seen by a Royce Homes lender. Instead it was sent to Amegy,
Speer’s lender, on September 11, 2007.” (TAC ¶ 143).
In September 2007, Speer owed another $2.5 million on his Amegy Loan. (TAC ¶ 157).
Speer requested, and received, a modification to his loan agreement with Amegy, postponing the
September 2007 payment to December 31, 2007, with a final payment due on June 30, 2008.
According to Tow, in “early September 2007, the Royce Homes auditors were trying to release the
audited financial statements but needed Royce Homes to go to its lenders to seek a waiver of breach
of the debt-to-equity ratios. Some Royce Homes lenders provided the waivers or modified the loan
covenants, temporarily, to accommodate the auditors’ request.” (TAC ¶ 159). Royce Homes failed
to comply with the modified debt-to-equity ratio requirements. (Id.)
Royce Homes’s finances continued to deteriorate. Speer knew that Royce Homes did not
have the money for him to make the Amegy Loan payment due on December 31, 2007. Speer
created a new company, RH Model Homes 2007, Inc., which purchased model homes from Royce
Homes. RBC Bank, a Royce Homes lender, financed the purchases. First Duval, the Royce Homes
parent company, and the Speer Children’s Trust, which coowned First Duval with Speer, subsidized
the transfer of the model homes from Royce Homes to RH Model Homes. (TAC ¶ 159). Through
this arrangement, Royce Homes realized about $2.8 million.
At the end of December 2007, the debt-to-equity modifications that Royce Homes obtained
from some of its lenders expired, again placing Royce Homes in breach of those loan covenants.
(TAC ¶ 160). Nonetheless, Speer wired $2,554,854.17 from the Royce Homes LP-Loan Account
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to his personal Amegy account and made the principal payment of $2.5 million on his Amegy Loan.
(TAC ¶¶ 161-64). This distribution to Speer and payment to Amegy allegedly breached the
partnership agreement for the same reasons as the other distributions and payments. (TAC ¶ 165).
Between October 2, 2006 and June 30, 2008, Speer’s monthly interest payments totaled
about $1.5. (TAC ¶ 169). As with the principal payments, Royce Homes wired money from the
Royce Homes LP-Loan Account into Speer’s personal Amegy account. (TAC ¶¶ 171-72). These
wire transfers allegedly breached the partnership agreement because Royce Homes was not
preserving adequate working capital reserves and made the transfers when Royce Homes was in
breach of its loan covenants. (TAC ¶ 173).
B.
Speer’s Second Obligation: The Manners Note
Speer and Manners allegedly devised a plan to make the payments on the $13,342,406
Manners Note through Royce Homes. The Manners Note, like the Amegy Loan, was allegedly paid
with money Royce Homes had borrowed, in violation of the partnership agreement. (TAC ¶¶ 17576). The funds used for the Manners Note payments were billed to Royce Homes as a “management
fee” for Manners. Gathmann testified that Manners did not provide services for those fees. (TAC
¶ 177). “Calling the disbursement a management fee [allegedly] allowed it to be inconspicuously
capitalized into the lot value so each payment could increase the value of a lot by making it appear
it was a cost associated with enhancing the value of the lot.” (TAC ¶ 389). By June 2007, when the
payments stopped, Speer had reduced the balance owed on the Manners Note to $11,165,661;
Manners had received $3,085,100 in payments on the Manners Note. (TAC ¶ 178). These payments
allegedly breached the partnership agreement.
C.
The Claims Against Manners and the Manners Defendants
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Six causes of action against Manners and the Manners Defendants appear to be at issue in
the pending motion for summary judgment. The claims are that these defendants: (1) breached
fiduciary duties owed to Royce Homes; (2) aided and abetted Speer in breaching the fiduciary duties
he owed Royce Homes; (3) unjustly enriched Manners at the expense of Royce Homes or otherwise
converted Royce Homes’s assets; (4) aided and abetted Speer’s conversion of Royce Homes assets
and the unjust enrichment of Speer at Royce Homes’s expense; (5) breached the subordination
provision in the Manners Note; and (6) bought 50 Royce Homes properties in a sham transaction
through one of the Manners Defendants, Allard Investment. The court addresses the motion and
response for each cause of action.
II.
The Applicable Legal Standards
A.
The Motion for Summary Judgment
In deciding a summary judgment motion, the court draws all reasonable inferences in the
light most favorable to the nonmoving party. Connors v. Graves, 538 F.3d 373, 376 (5th Cir. 2008).
When the moving party has met its Rule 56 burden, the nonmoving party must identify specific
evidence in the record and articulate how that evidence supports that party’s claim. Baranowski v.
Hart, 486 F.3d 112, 119 (5th Cir. 2007). “This burden is not satisfied with some metaphysical
doubt as to the material facts, by unsubstantiated assertions, or by only a scintilla of evidence.”
Little, 37 F.3d at 1075 (internal quotation marks and citations omitted). Factual controversies
resolve in the nonmoving party’s favor, “but only when there is an actual controversy, that is, when
both parties have submitted evidence of contradictory facts.” Id.
“A party asserting that a fact cannot be or is genuinely disputed must support the assertion
by[] citing to particular parts of materials in the record including depositions, documents,
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electronically stored information, affidavits or declarations, stipulations (including those made for
purposes of motion only), admissions, interrogatory answers, or other materials.” FED. R. CIV. PRO.
56(c)(1)(A). A party can also show that cited materials “do not establish the absence or presence
of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the
fact.” FED. R. CIV. PRO. 56(c)(1)(B). The court is not required to go beyond the parts of the record
that the parties specifically cite. FED. R. CIV. PRO. 56(c)(3).
Summary-judgment evidence must be competent. The evidence cannot be hearsay, Okoye
v. Univ. of Tex. Houston Health Sci. Ctr., 245 F.3d 507, 510 n.5 (5th Cir.), or unsubstantiated
assertions, VRV Development v. Mid-Content Cas. Co., 630 F.3d 451, 455 (5th Cir. 2011). FED. R.
CIV. PRO. 56(c)(2) (“A party may object that the material cited to support or dispute a fact cannot
be presented in a form that would be admissible in evidence.”). In the absence of proof, the court
does not “assume that the nonmoving party could or would prove the necessary facts.” Little, 37
F.3d at 1075. Resolving actual disputes of material facts in favor of a nonmoving party “is a world
apart from assuming that general averments embrace the specific facts needed to sustain the
complaint. . . . It will not do to presume the missing facts because without them the affidavits would
not establish the injury that they generally allege.” Lujan v. Nat’l Wildlife Federation, 497 U.S. 871,
888 (1990).
B.
The Summary-Judgment Evidence
The court has considered the TAC, the documents incorporated in the TAC by reference or
attached to the TAC, and the documents quoted at length in the TAC. In addition, the court has
considered the affidavit of Michael Manners, (Docket Entry No. 116, App. 1); the affidavit of Marc
Schwartz, certified public accountant, (id. at App. 2); the deposition excerpts of Pamela Mitchell,
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Royce Homes’s director of corporate finance, provided by the parties; the interest-payment
agreement, (id., App. 2, Ex. B); the Manners Note, (id., App. 5, Ex. C); the Manners resignation
letter, (id., App 6., Ex. D), Royce Homes financial statements for years 2004-2007, id. (App. 7-9);
the intercreditor agreement, (id., App. 10, Ex. H.); and the lender consents to Speer’s purchase of
Manners’s interest, (id., App. 11, Ex. I). Tow relied on much of the same evidence that Manners
and the Manners Defendants submitted. The court has also examined the additional summaryjudgment evidence Tow filed.
III.
Analysis
A.
The Claim that Manners Breached Fiduciary Duties
Tow alleged that Speer, Amegy, and Manners devised a scheme to take money out of Royce
Homes to finance Speer’s 2006 buyout of Manners’s interest in the partnership without reflecting
a loss in equity on Royce Homes’s balance sheets. (TAC ¶ 37). Tow claims that Manners knew
about the scheme and cooperated to implement it. (TAC ¶ 39). Tow also argues that Manners
breached the duties of loyalty and care he owed as a limited partner by selling his ownership in
Royce Homes to Speer. Tow claims that Manners knowingly breached the 1998 Agreement, (TAC
¶ 190), and the duties of care and loyalty he and Speer owed to Royce Homes, (TAC ¶ 204(a)-(b)).
Tow identifies Manners’s status as “Chairman Emeritus of Royce Homes” as the position giving rise
to Manners’s fiduciary duties after he sold his interest in Royce Homes in 2006. (TAC ¶ 201).
Delaware Law controls the fiduciary-duty claims. Royce Homes is a Delaware limited
partnership. The operative partnership agreement identifies Delaware law as controlling. Under
Delaware law:
A fiduciary relationship is a situation where one person reposes
special trust in and reliance on the judgment of another or where a
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special duty exists on the part of one person to protect the interest of
another. The relationship connotes a dependence. A fiduciary
relation implies a condition of superiority of one of the parties over
the other.
Cheese Shop Int’l, Inc. v. Steele, 303 A.2d 689, 690 (Del. Ch. 1973), rev’d on other grounds, 311
A.2d 870 (Del. 1973). “Unquestionably, the general partner of a limited partnership owes direct
fiduciary duties to the partnership and to its limited partners.” Wallace ex rel. Cencom Cable
Income Parnters II, Inc., L.P. v. Wood, 752 A.2d 1175, 1180 (Del. Ch. 1999). “[D]irectors of a
corporate general partner likewise may owe fiduciary duties to the partnership and to the limited
partners.” Id. Under the 1998 Agreement, Hammersmith was the general partner of Royce Homes.
Speer was Hammersmith’s president and a 49 % owner of Royce Homes; Hammersmith owned 1
%. Manners was the only other partner and owner of Royce Homes. Speer owed Manners, the only
other partner in the partnership, a fiduciary duty.
Manners was a passive limited partner under his 1998 Agreement with Speer. “Passive
limited partners do not owe default fiduciary duties, but under certain circumstances, they can
assume fiduciary duties if they take on an active role in the management of the entity.” Feeley v.
NHAOCG, LLC, 62 A.3d 649, 662 (Del. Ch. 2012) (citing Cantor Fitzgerald, L.P. v. Cantor, 2000
WL 307370, at *22 (Del. Ch. Mar. 13, 2000) (imposing fiduciary duties on limited partners based
on circumstances of limited partnership’s business); KE Prop. Mgmt., Inc. v. 275 Madison Mgmt.,
19 Del. J. Corp. L. 805, 821–22, 1993 WL 285900, at *9 (Del. Ch. July 27, 1993) (imposing
fiduciary duties on limited partner who exercised discretionary authority)). “[T]o the extent that
a partnership agreement empowers a limited partner with discretion to take actions affecting the
governance of the limited partnership, the limited partner may be subject to the obligations of a
fiduciary, including the operation to act in good faith as to the other partners.” KE Prop. Mgmt.,
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1993 WL 285900, at *9. Or, if the general partner and limited partner are nested financial
institutions and the “general partner and a limited partner are controlled by the same entity, ‘this
might be sufficient to impose on [the limited partner] the same fiduciary duty’ owed by the general
partner.” In re Estate of Conaway, No. 6056 (VCG), 2012 WL 524190, at * 8 (Del. Ch. Feb. 15,
2012) (quoting KE Prop. Mgmt., 1993 WL 285900, at *8).
“By contrast, a limited partner owes no fiduciary duties to the partnership absent
circumstances enabling the limited partner to exercise management or control over the partnership,
thus creating a fiduciary relationship.” Id. at *4. This is because “the principle of fiduciary duty,
stated most generally, [is] that one who controls property of another may not, without implied or
express agreement, intentionally use that property in a way that benefits the holder of the control to
the detriment of the property or its beneficial owner.” In re USACafes, L.P. Litig., 600 A.2d 43, 48
(Del Ch. 1991). “There are, of course, other aspects — a fiduciary may not waste property even if
no self interest is involved and must exercise care even when his heart is pure — but the central
aspect of the relationship is, undoubtedly, fidelity in the control of property for the benefit of
another.” Id. (citing Robert Flannigan, The Fiduciary Obligation, 9 Oxford J. Legal St. 285 1989)).
“When the provisions of the Uniform Partnership Act and the Uniform Limited Partnership
Act are read together, it is clear that the general partner in a limited partnership owes a fiduciary
duty to the limited partners.” Boxer v. Husky Oil Co., 429 A.2d 995, 997 (Del Ch. 1981). “It is also
clear that a partner owes a fiduciary duty to the other partners at common law.” Id. (citing Meinhard
v. Salmon, 249 N.Y. 458 (1928)). “The duty of the general partner in a limited partnership to
exercise the utmost good faith, fairness, and loyalty is, therefore, required both by statute and
common law.” Id. As Chief Judge Cardozo famously stated:
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Joint adventurers, like copartners, owe to one another, while the
enterprise continues, the duty of the finest loyalty. Many forms of
conduct permissible in a workaday world for those acting at arm’s
length, are forbidden to those bound by fiduciary ties. A trustee is
held to something stricter than the morals of the market place. Not
honesty alone, but the punctilio of an honor the most sensitive, is then
the standard behavior.
Meinhard, 249 N.Y. at 463–64.
Manners argues that he was not a fiduciary of Royce Homes at any time relevant to this law
suit. Instead, he was a limited partner from 1998 to 2006, and the “Chairman Emeritus,” an
honorary position, after 2006. Both roles are examined in light of the evidence, arguments, and legal
standards.
1.
Manners as Limited Partner: 1998 to 2006
Manners challenges Tow to identify summary-judgment evidence showing that Manners
exercised discretionary control over Royce Homes’s property or discretionary authority in Royce
Homes governance after 1998. “[T]o the extent that a partnership agreement empowers a limited
partner [with] discretion to take actions affecting the governance of the limited partnership, the
limited partner may be subject to the obligations of a fiduciary, including the obligation to act in
good faith as to the other partners,” because “all partners owe each other fiduciary obligations” to
the extent they have the power to take actions affecting the partnership. Bond Purchase, L.L.C. v.
Patriot Tax Credit Props., L.P., 746 A.2d 842, 863 (Del. Ch. 1999) (quotation omitted). Tow must
point to summary-judgment evidence that raises a genuine factual dispute material to deciding
whether Manners had or exercised discretionary control over Royce Homes management or property
that gave rise to a fiduciary duty on his part.
During the relevant period, the Royce Homes partnership agreements expressly granted only
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Hammersmith and its president, Speer, the control that gives rise to fiduciary obligations. The 1998
Agreement identified Hammersmith as the General Partner. (Agreement, Article 1.1(p) (“General
Partner” means Hammersmith Group, Inc.)). The TAC acknowledged that Speer was “[a]t all times
relevant to the [TAC] the president, sole director, and sole owner of Royce Homes’s general partner,
Hammersmith.” (TAC ¶ 31). The 1998 Agreement also outlined the general partner’s “fiduciary
responsibility” for safekeeping partnership property and gave to the general partner “full and
exclusive power and authority on behalf of [Royce Homes] to manage, control, administer and
operate the business and affairs of the [Royce Homes], and to do or cause to be done any and all acts
which it deems to be necessary and appropriate.” (1998 Agreement, Article 5.1). This included the
exclusive power to expend capital and revenue, to enter into any other partnership agreement, to
borrow money or “draw, make, execute and issue promissory notes and other negotiable or nonnegotiable instruments and evidences of indebtedness,” to lend money, to guarantee the payment of
money, and to sue and be sued. (See id.).
The 1998 Agreement identified Manners as a Royce Homes limited partner. The 1998
Agreement stated that “[n]o Limited Partner as such shall take part in the operation, management,
or control of the [Royce Homes’s] business, transact any business in [Royce Homes’s] name, or
have the power to sign documents for or otherwise bind” Royce Homes. (Id. at 6.2). Under the
plain terms of the 1998 Agreement, Manners did not have the discretionary control necessary to give
rise to a fiduciary obligation. The 1998 Agreement did not put Manners in a position of trust.
Rather, the 1998 Agreement expressly precluded Manners from exercising control over Royce
Homes or its property. Manners had no “default fiduciary duties” to Royce Homes.
Tow correctly notes that Manners could nonetheless have fiduciary obligations if he
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undertook an active role at Royce Homes. Manners challenges Tow to point to summary-judgment
evidence showing that he undertook a role in which he exercised discretion over Royce Homes’s
management or over Royce Homes’s property. In response, Tow asserts that there is “a wealth of
facts support[ing] the conclusion that Manners was a fiduciary of Royce Homes.” (Docket Entry
No. 146 at 46). But Tow points to little in the summary-judgment evidence. Tow asserts that
“Manners was the founder and original president of Royce Homes and his name was valuable to
Royce[; e]ven after selling 50 % of his interest to Speer in 1998, he remained a limited partner close
to the company[; he] remained involved in the decision-making process of Royce Homes, as
evidenced by his participation in annual planning meetings of Royce Homes.” (Id. (emphasis
added)). “Even stronger evidence is Manners’s coordination with Speer and Amegy of the [b]uyout
transactions, which w[ere] arranged to cause Royce [Homes] to make payments to fund the purchase
of Manners’s remaining 50 % interest.” (Id. (emphasis added)). Tow alleges that “Manners actively
participated with Speer by agreeing to place the Buyout obligations in Speer’s personal name so the
obligations would not be disclosed on Royce Homes’s balance sheets.” (Id. at 44 (emphasis added)).
None of these allegations or the related summary-judgment evidence cited supports an inference that
Manners exercised discretionary control over Royce Homes.
Tow filed a supplemental brief in which he claims that Manners had a fiduciary relationship
between 1998 and 2006 based on: (1) Manners coming to the office 2-3 times per week; (2) having
“closed door” meetings with upper management; (3) that Speer was interested in acquiring several
out-of-town companies and asked Manners to “go down and look at them”; (4) Manners’s receipt
and review of financial reports “both orally and in hard copy form” which he could consult; (5) a
purported discount Manners received for purchasing 50 homes from Royce Homes; and (6) having
17
been referred to as “President of Royce Homes” on Extreme Makeover, Home Edition.
The evidence that Manners went to meetings and discussed transactions with Speer, and that
he agreed to Speer’s purchase of Manners’s interest in Royce Homes in Speer’s name, do not raise
a fact dispute that Manners exercised control over, or was acting on behalf of, Royce Homes.
Employees usually go to their office, get paid, and have benefits. Those facts do not establish an
inference of discretionary control over Royce Homes. Meetings with upper management and having
access to corporate records do not evidence Manners’s control over Royce Homes or its property.
Tow does not point to competent summary-judgment evidence that Manners had or exercised
discretionary control or authority over Royce Homes’s governance or property from 1998 to 2006.
Nor does Tow identify summary-judgment evidence that Manners was acting as a general agent on
behalf of Royce Homes from 1998 to 2006.
2.
Manners as Chairman Emeritus: After 2006
Tow alleges that Manners’s role as Chairman Emeritus gave rise to fiduciary obligations.1
After the 2006 buyout, however, Manners was no longer a Royce Homes owner or limited partner.
Instead, he was a salaried employee with the title of “Chairman Emeritus.” Again, Tow correctly
notes that an employee may have fiduciary obligations to the partnership works for fiduciary
obligations requiring him to act loyally, with good faith, and with due care. A managerial employee
might have fiduciary duties to his employer to the extent he has discretionary control or authority
over the partnership. See Triton Const. Co., Inc. v. Eastern Shore Elec. Servs., Inc., 2009 WL
1
Manners argues that once he transferred his Royce Homes ownership, Texas law should apply to
the duty and obligations he owed Royce Homes as a mere employee. Tow does not respond and cites both
Texas and Delaware cases in response to the substantive argument regarding the duties of a chairman
emeritus. The parties, however, have not parsed any meaningful difference between the application of Texas
law here as opposed to the application of Delaware law. For present purposes, the distinction is without a
difference.
18
1387115, at *10 (Del. Ch. May 18, 2009) (noting key employees akin to officer or director may have
corporate fiduciary duties). The hallmark of fiduciary duty is discretionary control. See id. (noting
that, in a small company, attending meetings and frequent contact with corporation’s principals did
not create fiduciary obligations). Citing cases from Texas, Tow also correctly notes that an
individual might have a fiduciary duty to a corporation under traditional agency principles. “Under
fundamental principles of agency law, an agent owes his principal a duty of good faith, loyalty, and
fair dealing. These duties encompass the corollary duties of an agent to disclose information that
is relevant to the affairs to the agency entrusted to him and to refrain from placing himself in a
position antagonistic to his principal concerning the subject matter of his agency.” Id.
As evidence that Manners had control as Chairman Emeritus, Tow points to the fact that
management called Manners an “executive,” that employees referred to Manners as “a partner” of
the company, and that Manners had a salary, medical benefits, car, an expense account, and had
received a W-2 Form. (Docket Entry No. 173 at 4). None of this evidence shows that Manners
exercised control over Royce Homes property or actively managed Royce Homes.2 A title does not
give rise to a fiduciary duty unless Tow can show that Manners had or used the power and control
typically associated with such a title. Tow has pointed not pointed to summary-judgment evidence
showing that Manners acted on behalf of Royce Homes, held property for the benefit of Royce
Homes, or exercised control over Royce Homes governance as Chairman Emeritus.
3.
Other Fiduciary Duty Issues
Tow alleges only that “[a]s Chairman Emeritus of Royce Homes, Manners owed a fiduciary
2
In addition, in asserting that the distributions Speer made to Manners were unlawful, the TAC states
that Manners was not “require[d] to perform any services” and that “Manners did not perform any services.”
(TAC ¶ 591).
19
duty to Royce Homes.” (TAC ¶ 201). Tow also alleges that Speer owed fiduciary duties to Royce
Homes. (See TAC ¶ 119 (Breach of Partnership Defendants “had a fiduciary duty to Royce Homes
and Hammersmith”); see also TAC ¶ 199 (“Speer owed a fiduciary duty to Royce Homes as well
as to Hammersmith”); TAC ¶ 212 (“The purchase of Manners’s interest in Royce Homes by Speer,
the financing of that transaction, making distributions to repay Speer’s personal obligations to
Amegy and Manners, the sale of Allard, the tax distributions, the payments to Donnie Lou Speer
[and other] transaction[s] all breached the Fiduciaries’ fiduciary duty to Royce Home and
Hammersmith, breached the Fiduciaries’ duty of loyalty and duty of care, were self-dealing, and in
bad faith.”); TAC ¶ 294 (“Speer . . . owed a fiduciary duty to Royce Homes.”); TAC ¶ 310 (“Speer
. . . owed a fiduciary duty to Royce Homes. Manners as an employee, control person, Chairman
Emeritus owed a fiduciary duty to Royce Homes.”); TAC ¶ 321 (“The Allard Fiduciaries breached
their fiduciary duty to Royce Homes . . . .”); TAC ¶ 323 (“The Fiduciaries’ conduct was not
authorized[, and they] totally abandoned Royce Homes’s interest. Their interests were adverse to
Royce Homes and not for its benefit.”) ; TAC ¶ 324 (“All of the Fiduciaries . . . owed fiduciary
duties to Royce Homes. They violated this duty in failing to care for Royce Homes and safeguard
its assets[;] failed to care and safeguard Royce Homes’s assets they removed assets when they were
not authorized . . . .)). Tow does not allege that Manners or Speer were fiduciaries to Royce Homes
creditors.
If Manners had discretionary control over Royce Homes, any resulting fiduciary duties
would run to Speer, the only partner other than Manners from 1998 to 2006 and the only partner
after 2006. The Delaware Revised Limited Partnership Act, which expressly controls the 1998
Agreement, gives only the general partner the right to sue on behalf of the partnership. Delaware
20
law provides that a “limited partner . . . may bring an action . . . in the right of a limited partnership
to recover a judgment in its favor if general partners with authority to do so have refused to bring
the action.” 6 DEL. C. § 17-1001. This provision has been likened to the demand-futility
requirement under Delaware’s General Corporations Law. A shareholder cannot bring an action on
behalf of the corporation unless the managers refused or a demand that the managers do so would
have been futile. To bring a derivative action, however, “the plaintiff must be a partner.” 6 DEL.
C. § 17-1002. The partnership act “facially bar[s] any party other than a limited partner . . . from
suing derivatively. Read literally, the provisions prevent creditors from suing on behalf of the
partnership, and Delaware courts historically have interpreted” the provisions as giving the partners
exclusive rights to sue for breach of another party’s fiduciary duties to them. CML V, LLC v. Bax,
6 A.3d 238, 245 (Del. Ch. 2010), aff’d 28 A.3d 1037 (Del. 2011). To the extent Tow sues Manners
on the partnership’s behalf, he lacks derivative standing. Tow neither pleads nor argues that
Manners or Speer owed fiduciary duties to the creditors of Royce Homes to preserve assets for the
creditors when Royce Homes was in the “zone of insolvency” or insolvent.
To the extent that Tow sues Manners directly for breach of fiduciary duty owing to Royce
Homes, Tow appears to be suing Manners for breaching a fiduciary duty he owed to Speer by
negotiating and entering into a transaction with Speer. Tow has not provided legal authority
showing that, absent fraud, a partnership can sue a limited partner for breachig a fiduciary duty owed
to a general partner by entering into an agreement with that general partner. See, e.g., In re Safety
Intern., Inc., 775 F.2d 660, 662 (5th Cir. 1985) (“Yet, even when the transaction is detrimental to
21
the corporation, no cause of action will lie if all of the shareholders have ratified the transaction.”).3
That is particularly true here as between Speer and Manners, the agreement was fully disclosed and
at arms-length. Tow has provided no legal support for the proposition that a contract executed
knowingly and voluntarily between a partnership’s equity owners could be the basis for the
partnership to sue for breach of a fiduciary duty the equity owners owed to the partnership.
In sum, the allegations, cited record evidence, and cited authorities do not support an
inference that Manners owed Royce Homes a fiduciary duty that he breached. Tow has not pleaded
or cited a legal basis or record evidence showing that Manners owed a fiduciary duty to Royce
Homes’s creditors. The claim that Manners, as a limited partner or “Chairman Emeritus,” was liable
to the partnership for the harms caused by how the general partner financed the buyout of Manners’s
interest lacks support on this record. Whatever might be said about Manners’s role in the demise
of Royce Homes, Tow has not identified record evidence or cited a case supporting an inference that
Manners had or breached fiduciary duties by entering into the 1998 Agreement or 2006 Purchase
Agreement with Speer, Royce Homes’s only other owner and partner.
B.
Conspiracy to Breach Fiduciary Duty And Aiding Breach of Fiduciary Duty
Tow also alleges that Manners is liable for aiding and abetting Speer’s breach of fiduciary
3
Manners vigorously asserts a ratification defense: because Speer and Manners were both the only
equity owners and transacting parties they necessarily ratified the transaction. Ratification, however, is more
properly construed as an ex post decision of disinterested equity owners to accept a fiduciaries otherwise
unlawful act. “Ratification is a concept deriving from the law of agency which contemplates the ex post
conferring upon or confirming of the legal authority of an agent in circumstances in which the agent had no
authority or arguably no authority to act.” Lewis v. Vogelstein, 699 A.2d 327, 334 (Del. Ch. 1997); see also
In re Mesa Ltd. P’ship Preferred Unitholders Litig., Civ. A. No. 12243 (VCH), 1991 WL 262669, at *1256
(Del. Ch. 1991) (“Delaware case law holds that shareholders of a corporation, if fully informed, may ratify
actions of the directors which would otherwise constitute breaches of fiduciary duty.”). The Manners-Speer
transaction was not in breach of a fiduciary duty from the beginning, and Tow has not shown that the only
two equity owners of a partnership can knowingly and freely contract with each other in breach of the duties
that they owe to each other.
22
duties he owed to Royce Homes. (TAC ¶ 369). Whether Speer breached a fiduciary duty to Royce
Homes is a question of Delaware law; whether Manners conspired with Speer to breach that duty
is a question of Texas law. “Texas recognizes a cause of action for aiding and abetting a breach of
fiduciary duty.” Floyd v. Hefner, 556 F. Supp. 2d 617, 654–55 (S.D. Tex. 2008). “‘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.’” Id. (quoting Meadows v. Hartford Life Ins. Co., 492 F.3d 634, 639 (5th Cir. 2007)).
Speer was the president and CEO of Royce Homes, and the sole director, sole shareholder,
and president of Hammersmith, the general partner of Royce Homes. Speer controlled Royce
Homes and Hammersmith. Speer and Hammersmith owed fiduciary duties to the Royce Homes
partners. “[T]he general partner in a limited partnership owes a fiduciary duty to the limited partners
. . . and to the other partners at common law.” Boxer, 429 A.2d at 997. To support an inference that
Manners is liable to Tow for aiding Speer in breaching his fiduciary duties, Tow would have to show
that there was an actionable breach by Speer and that Manners was aware that he was participating
in the breach.
Tow argues that there is evidence that Manners “set into motion a series of transactions that
crippled Royce [Homes].” (Docket Entry No. 126 at 44). Tow argues that “Manners and Speer
conspired to put the debt in Speer’s name, with Royce bearing the ultimate obligation for payments.”
(Id.). A limited partner can sue a general partner and, in certain situations, a general partner can sue
a limited partner. But, as pleaded, Tow’s conspiracy claims appear to consist of either: (1) suing
Manners on Manners’s behalf for the role Manners played in helping Speer breach fiduciary duties
23
that Speer owed Manners or (2) suing Manners on Speer’s behalf for the transaction that Speer
negotiated for his own benefit. Tow has not cited legal support for the proposition that a
partnership’s bankruptcy trustee may sue the only two partners for breaching the fiduciary duties
they owed to each other by agreeing to an arm’s-length transaction with disclosed terms.
Tow also argues that Manners conspired to breach the fiduciary duties Speer owed to Royce
Homes after the 2006 buyout. Tow alleges that Manners facilitated Speer’s distributions of Royce
Homes’s borrowed funds to Amegy to pay for the Amegy Loan that financed the buyout. Tow also
alleges that Manners facilitated the unlawful distributions of Royce Homes funds to pay for the
Manners Note. But after the 2006 buyout, Speer was, in effect, Royce Homes’s only owner.
Delaware law is clear that a company’s sole owner cannot breach fiduciary duties “owed to the
companies he wholly owned.” See Midland Food Services, LLC v. Castle Hill Holdings V, LLC, 792
A.2d 920, n. 14 (Del. Ch. 1999) (citing Goodman v. Futrovsky, 213 A.2d 899, 902 (1965) (the
defendants could not defraud company since they “were the sole owners . . . and could do with it as
they wished”), cert denied, 383 U.S. 946 (1966). Tow has not cited legal support for the proposition
that a nonowner can be liable for conspiring with the sole owner of a partnership for breaching
duties that the owner owes himself.4
Tow has not pointed to relevant summary-judgment evidence showing that Speer breached
fiduciary duties to Royce Homes itself – not its partners or creditors – through the 2006 buyout
4
For example, in his response to Manners’s motion for summary judgment, Tow insists that “Speer
had a duty not to use control over the partnership’s property to his advantage, he had a fiduciary duty of
loyalty to Royce Homes, and a fiduciary duty to manage the Royce Homes assets in Royce Homes’ interest.”
(Docket Entry No. 126 at 43). But, as the controlling person of Hammersmith, Royce Homes’s general
partner, Speer would owe fiduciary duties only to the limited partners. Before the buyout he was a limited
partner alongside Manners. After the buyout, he was the sole limited partner. Tow is essentially suing
Manners arguing that Speer either breached a duty of loyalty to himself or Manners through their arm’slength transaction.
24
transaction and its financing. Whatever might be said about Speer’s questionable distributions and
loan payments, Tow has not pointed to summary-judgment evidence of, or a legal basis for, finding
that the buyout and related distributions gave rise to a breach of fiduciary duty. Speer owed a
fiduciary duty to Manners when he was a limited partner, before 2006. After 2006, Speer was
effectively the sole owner and partner of Royce Homes.
Tow has not raised a fact dispute or identified evidence supporting an inference that Manners
conspired to breach fiduciary duties owed by Speer.
C.
Unjust Enrichment and Conversion
Tow alleges that Manners unjustly enriched himself at the expense of Royce Homes’s
creditors. “A party may recover under an unjust enrichment theory where a person has obtained a
benefit from another due to fraud, duress or taking of undue advantage.” Mowray v. Avery, 76
S.W.3d 663, 679 (Tex. App. —Corpus Christi 2002) (citing HECI Exploration Co. v. Neel, 982
S.W.2d 881, 891 (Tex. 1998)).
Tow also alleges that Manners is liable for civil theft or conversion for facilitating the
misappropriation of Royce Homes’s assets in implementing the 2006 Purchase Agreement. Tow
alleges that “Manners appropriated Royce [Homes’s] property with the intent to deprive [and]
unlawfully appropriated property of Royce Homes with intent to deprive Royce Homes of its
property without its effective consent.” (TAC ¶ 343).
“‘The unauthorized and wrongful assumption and exercise of dominion and control over the
personal property of another, to the exclusion of or inconsistent with the owner’s rights, is in law
a conversion.’” Ojeda v. Wal-Mart Stores, Inc., 956 S.W.2d 704, 707 (Tex. App. —San Antonio
1997, pet. denied) (quoting (Waisath v. Lack’s Stores, Inc., 474 S.W.2d 444, 447 (Tex. 1971)).
25
“[P]laintiff must prove: (1) plaintiff owned, had legal possession of, or was entitled to possession
of the property; (2) defendant assumed and exercised dominion and control over the property in an
unlawful and unauthorized manner, to the exclusion of an inconsistent with plaintiff’s rights; (3)
plaintiff made a demand for the property; and (4) defendant refused to return the property” Id.
As discussed above, the record evidence and applicable law do not support an inference that
Manners had or exercised control as a limited partner from 1998 to 2006 or as Chairman Emeritus
after 2006 to cause Royce Homes to distribute funds, to enter into any agreements, or to take certain
management actions. The TAC alleges in great detail that Speer orchestrated the distributions. Tow
has not pleaded or provided summary-judgment evidence suggesting that Manners tricked or
coerced Speer or Royce Homes into making the distributions that paid the Amegy Loan or Manners
Note. Neither Royce Homes’s creditors nor Speer has asserted that Manners owed them fiduciary
duties that he breached in connection with the 2006 Purchase Agreement. According to Tow, Speer
arranged for Manners to be paid under the agreements that Speer negotiated on behalf of himself and
Royce Homes. Tow has not identified summary-judgment evidence showing Manners’s direct
liability to Royce Homes for unjust enrichment, theft, or conversion.
Tow also argues that Manners is indirectly liable to Royce Homes for Speer’s allegedly
unlawful distributions after Manners relinquished his ownership in Royce Homes. Tow has not
identified summary-judgment evidence showing that Manners participated in obtaining the Amegy
Loan or the principal or interest payments made on the Amegy Loan or the Manners Note. To the
contrary, the Manners Note included a subordination provision under which Manners agreed to
protect Royce Homes’s creditors by agreeing that his right to receive Note payments was
subordinate to the payment obligations owed to other lenders.
26
Tow alleges that Manners was complicit in Speer’s unlawful distributions which paid the
Manners Note because the payments were billed as a “management fee.” (TAC ¶ 389). Tow asserts
in the TAC that calling “the disbursement a management fee allowed [the payments] to be
inconspicuously capitalized into the lot value so each payment could increase the value of a lot by
making it appear it was a cost associated with enhancing the value of the lot” thereby hiding the loss
in equity each payment on the Manners Note caused. (TAC ¶¶ 389-90). Tow, however, has not
identified summary-judgment evidence tending to show that Manners actually assisted or knowingly
accomplished or aided an unlawful act in the 2006 buyout, including by accepting Speer’s personal
payment of $20,000,000 or accepting payments on the Manners Note. Manners did not control the
distributions, how they were billed, or how they were reflected on Royce Homes’s balance sheet.
The summary-judgment record does not support an inference that Manners misappropriated Royce
Homes funds or helped misappropriate Royce Homes funds.
D.
The Claim that Manners Breached the Subordination Provision
Tow alleges that all payments on the Manners Note were to be held in trust because of
Speer’s default on the Amegy Loan and Royce Homes’s default on its loans. Tow seeks declaratory
relief and an order requiring Manners to turn over the money Royce Homes paid him on the
Manners Note. (TAC ¶ 419).
The subordination provision states that “[n]o payment . . . shall be made at any time (i) when
a default or event of default . . . has occurred and is continuing under the” the terms of the Senior
Debt.” (Docket Entry No. 116, App 5, Ex. C. at 4). In an event of default, any payment made was
to be held “in trust and pa[id] over to the holders of the Senior Debt.” Tow alleges that after
September 30, 2006, Royce Homes and Speer defaulted on senior-debt obligations and that Manners
27
must turn over the payments he received on the Manners Note after September 30, 2006. The issue
is whether Tow, as the trustee of Royce Homes’s bankrupt estate, can recover on this claim.
The Fifth Circuit has made clear that if “a claim belongs to the estate, then the bankruptcy
trustee has exclusive standing to assert it.” In re Seven Seas Pet., Inc., 522 F.3d 575, 584 (5th Cir.
2008) (citations omitted). “Whether a particular state-law claim belongs to the bankruptcy estate
depends on whether under the applicable state law the debtor could have raised the claim as of the
commencement of the case.” Id. (citations omitted). “As part of this inquiry, [the court] look[s] to
the nature of the injury for which relief is sought and consider[s] the relationship between the debtor
and the injury.” Id. “If a cause of action alleges only indirect harm to a creditor (i.e., an injury
which derives from harm to the debtor), and the debtor could have raised a claim for its direct harm
under the applicable law, then the cause of action belongs to the estate.” (quotation omitted).
“Conversely, if the cause of action does not explicitly or implicitly allege harm to the debtor, then
the cause of action could not have been asserted by the debtor as of the commencement of the case,
and thus is not property of the estate.” Id. “[T]he trustee has no right to bring claims that belong
solely to the estate’s creditors.” Id.
Based on the present record, Royce Homes cannot pursue a breach of contract claim based
on the subordination provision. Speer entered into the Manners Note personally. Speer – not Royce
Homes – was Manners’s debtor. By claiming that Manners breached the subordination provision
of the Manners Note, Tow is asserting breach of a contract to which neither Royce Homes nor
Royce Homes’s creditors were parties. “Parties are presumed to contract for themselves and it
follows that a contract will not be construed as having been made for the benefit of a third person
unless it clearly appears that such was the intention of the contracting parties.” Rep. Nat’l Bank of
28
Dallas v. Nat’l Bankers Life Ins. Co., 427 S.W.2d 76, 80 (Tex. App. —Dallas 1968). “Beneficiaries
of contracts to which they are not parties are divided into three classes: (a) donee beneficiaries, (b)
creditor beneficiaries, and (c) and incidental beneficiaries; and only those falling within the first two
categories may enforce contracts made for their benefit.” Id. “[A]n incidental beneficiary [is] one
who will be benefitted only incidentally by the performance of the contract [and] cannot maintain
an action thereon; an incidental beneficiary acquires, by virtue of the promise, no right either against
the promisor or the promissee.” Id.
“To qualify as an intended third-party beneficiary, a party must show that she is either a
‘donee’ or ‘creditor’ beneficiary of the contract.” Stine v. Stewart, 80 S.W.3d 586, 589 (Tex. 2002).
“An agreement benefits a ‘donee beneficiary’ if, under the contract, the performance promised will,
when rendered come to him as a pure donation.” Id. (quotation omitted). “[A]n agreement benefits
a ‘creditor’ beneficiary if, under the agreement, that performance will come to him in satisfaction
of a legal duty owed to him by the promisee.” Id. “This duty may be an indebtedness, contractual
obligation or other legally enforceable commitment owed to the third party.” Id.
“The fact that a person might receive an incidental benefit from a contract to which he is not
a party does not give that person a right of action to enforce [it] . . . . A third party may recover on
a contract made between other parties only if the parties intended to secure some benefit to that third
party, and only if the contracting parties entered into the contract directly for the third party’s
benefit.” MCI Telecommunications Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 651 (Tex. 1999).
“A court will not create a third-party beneficiary contract by implication . . . . The intention to
contract or confer a direct benefit to a third party must be clearly and fully spelled out or
enforcement by the third party must be denied.” Id. “Consequently, a presumption exists that
29
parties contracted for themselves unless it clearly appears that they intended a third party to benefit
from the contract.” Id.
Manners promised to abate payments Speer owed him on the Manners Note while Speer or
a Speer entity was in default of a senior-debt obligation. Manners promised that if a Note payment
was made while Speer or a Speer entity was in default on a senior-debt obligation, Manners would
hold those payments in trust to be paid to the senior-debt holders. The subordination provision
directly benefitted Speer and only incidentally benefitted his creditors or the entities that he owned.
Royce Homes and its creditors were not the beneficiaries of the subordination provision in the
Manners Note. Manners promised to abate the Note payments if Speer was in default on other
obligations and to turn over to senior-debt holders payments made during the abatement. Even if
Royce Homes creditors were beneficiaries as the holders of senior debt, Royce Homes was not due
anything under the express or implied terms of the Note and would not have had standing to sue on
the subordination provision of the Manners Note. Neither does Tow.
Tow cites In re Schimmelpenninck, 183 F.3d 347, 351 (5th. Cir. 1999), in support of his
standing argument. In that case, the Fifth Circuit stated that a “trustee can assert the general claims
of creditors, but is precluded from asserting those creditor claims that are personal. In other words,
even if a claim ‘belongs to’ the creditor, the trustee is the proper party to assert the claim for the
benefit of all creditors, provided the claim advances a generalized grievance.” Id. at 359. Tow
asserts that, as the Royce Homes trustee, he can assert claims on behalf of the Royce Homes
bankruptcy estate if those claims generally affect all creditors. Schimmelpennick, however, does not
stand for such a broad proposition. In Seven Seas, the Fifth Circuit explained the limit on the claims
Schimmelpennick allows. The Fifth Circuit stated that there “‘is a difference between a creditor’s
30
interests in the claims of the [debtor] against a third party, which are enforced by the trustee, and the
creditor’s own direct–not derivative–claim against the third party, which only the creditor . . . can
enforce.’” Seven Seas, 522 F.3d at 588–89 (quoting Steinberg v. Buczynski, 40 F.3d 890, 893 (7thc
Cir. 1994) (Posner, J.)). The Fifth Circuit clarified that “Schimmelpennick was not meant to work
a change to this well-established rule, even when the claims at issue may be brought by a number
of creditors instead of just one.” Id. “Rather, [Schimmelpennick’s] point was that some claims that
are usually brought by creditors outside of bankruptcy . . . are nonetheless vested exclusively in the
trustee in bankruptcy . . . not merely because the claims are common to a number of creditors, but
because they ultimately seek to recover assets of the estate that are not under the debtor’s control–by
reason of fraudulent transfer, for instance, or because of the existence of separate corporate entities
that are a sham.” Id. (emphasis added). “It is actions by individual creditors asserting a generalized
injury to the debtor’s estate, which ultimately affects all creditors, that can be said to raise a
generalized grievance, not actions by creditors that are merely common to a number of them. Id.
(emphasis in original, alterations and quotation marks omitted).
Here, even assuming a breach of the subordination provision in the Manners Note, Tow has
not identified a legal or factual basis to find that breach of that provision created a legal cause of
action for the Royce Homes bankruptcy estate. Speer owed Manners money. Whether Manners
breached the subordination provision in his agreement with Speer, Tow has not identified a basis
to find that the alleged breach of the subordination agreement created a cause of action on which
Royce Homes creditors – much less the Royce Homes bankruptcy estate – could recover against
Manners.
Manners’s motion for summary judgment on the breach of the subordination
provision is granted.
31
D.
The Claim of Fraudulent Transfers to Allard Investment
Tow alleges that Manners, through his company Allard Investment, caused Royce Homes
to transfer 50 homes to Allard Investments for less than their reasonably equivalent value, in
violation of the constructive-fraud provisions of the Texas Uniform Fraudulent Conveyances Act
and the Delaware Uniform Fraudulent Conveyances Act. In his summary-judgment motion,
Manners argued that Tow could not show that the 50 homes were sold for less than their reasonably
equivalent value. In response, Tow argued that the issue was not ripe because he had no opportunity
to appoint an appraiser. In April 2013, Manners submitted a supplemental reply to Tow’s
supplemental response to the motion for summary judgment. Manners pointed out that an appraiser
had been designated but Tow still had not shown that the sales were unfair to Royce Homes. Tow
did not respond to this argument. Manners has identified the lack of any summary-judgment
evidence that the sales of the 50 homes to Allard Investment were for less than reasonably
equivalent value within the meaning of TUFTA and DUFTA. Tow has not responded, despite the
opportunity to do so. Summary judgment is appropriately granted on this claim.
IV.
Conclusion
For the foregoing reasons, Manners’s motion for summary judgment (Docket Entry No. 115)
is granted.
SIGNED on September 30, 2013, at Houston, Texas.
______________________________________
Lee H. Rosenthal
United States District Judge
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