Johnson et al

Filing 15

MEMORANDUM OPINION AND ORDER affirming rulings of Bankruptcy Court (Signed by Judge Sim Lake) Parties notified. (aboyd, 4)

United States District Court
Southern District of Texas

ENTERED
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
IN RE:
SBMC HEALTHCARE, LLC,

§
§
§

Debtor.

May 11, 2017
David J. Bradley, Clerk

BANKRUPTCY NO. 12-33299-H4-11

§

MARTY McVEY, Individually, and
McVEY & CO. INVESTMENTS, LLC,
Plaintiffs,

§
§
§
§
§

v.

§
§

MILLARD A. JOHNSON,
Individually, and JOHNSON,
DeLUCA KURISKY & GOULD, P.C.,

§
§
§
§
§

Defendants.
MILLARD A. JOHNSON,
Individually, and JOHNSON,
DeLUCA KURISKY & GOULD, P.C.,
Appellants,

MARTY McVEY, Individually, and
McVEY & CO. INVESTMENTS, LLC,
Appellees.

§
§
§
§
§
§
§
§

v.

ADVERSARY NO. 14-03126

CIVIL ACTION NO. 16-2947

§
§
§
§

MEMORANDUM OPINION AND ORDER

Appellants, Millard A. Johnson ("Johnson"), individually, and
Johnson

DeLuca Kurisky

&

Gould,

P. C.

( "JDKG")

("Appellants" or

"Defendants" in the Bankruptcy Court proceedings),

appeal three

orders and one set of findings of facts and conclusions of law
entered by the Bankruptcy Court in Adversary No. 14-03126:

the September 18, 2014, Order: (1) Granting in Part and
Denying in Part the Defendants' Motion to Dismiss;
( 2) Denying the Trust's Motion to Intervene in Its
Entirety; ( 3) Granting in Part and Denying in Part the
Plaintiffs'
Motion for
Remand
("Order of
Partial
Dismissal and Remand," Adversary Docket Entry No. 46) ; 1
the October 30, 2014, Order: (1) Granting in Part and
Carrying in Part Defendants' Motion to Amend or for
Clarification of Judgment of Partial Dismissal and Remand
Pursuant to Bankr. R. Pro. 9023; (2) Reopening the Record
to Allow the Parties to Introduce Exhibits and Adduce
Testimony; and (3) Setting a Hearing for 9:30 A.M. on
December 12, 2014
("Order of Partial Reopening of
Adversary," Docket Entry No. 55); 2
the September 21, 2016, Order Denying in Its Entirety the
Defendants' Motion to Amend or for Clarification of
Judgment of Partial Dismissal and Remand Order Pursuant
to Bankr. R. Pro. 9023 ("Order Denying Motion to Amend or
Clarify," Adversary Docket Entry No. 121) ; 3 and
the September 26, 2016, Amended Findings of Fact and
Conclusions of Law Regarding the Defendants' Motion to
Amend or for Clarification of Judgment of Partial
Dismissal and Remand Order Pursuant to Bankruptcy Rule
9023 ("Amended Findings of Fact and Conclusions of Law"),
Adversary Docket Entry No. 124) . 4

1

Exhibi t 1 to Notice of Filing of an Appeal, Docket Entry
No. 1-2.
See also Appellants' Opening Brief, Docket Entry No. 8,
p. 1 (citing Appellants' Bankruptcy Record on Appeal ("Appellants'
BROA"), Docket Entry No. 2-2, pp. 290-292).
Although Appellants
have appealed the September 18, 2014, Order of Partial Dismissal
and Remand, Appellants have not appealed the Memorandum Opinion
Regarding Defendants' Motion to Dismiss, the Trust's Motion to
Intervene,
and
Plaintiffs'
Motion
for
Remand
("Memorandum
Opinion"), issued on the same date stating reasons for the rulings
set forth in the Order of Partial Dismissal and Remand.
See
Appellants' BROA, pp. 256-89; and In re SBMC Healthcare, LLC, 519
B.R. 172 (Bankr. S.D. Tex. 2014).
2

Exhibi t 2 to Notice of Filing of an Appeal, Docket Entry
No. 1-3.
See also
Appellants' BROA, Docket Entry No. 2-2,
pp. 330-45.
3

Exhibi t 3 to Notice of Filing of an Appeal, Docket Entry
No. 1-4.
See also
Appellants' BROA, Docket Entry No. 2-2,
pp. 1' 6 6 9-7 0.
4

Exhibi t

4 to Notice of Filing of an Appeal,
-2-

Docket Entry
(continued ... )

Two designations of record have been filed: Appellants' Bankruptcy
Record on Appeal
Appellees'
"Appellees'

(Docket Entry No.

Bankruptcy
BROA") . 5

Record

on

2;

"Appellants'

Appeal

Pending before

(Docket

the

court

BROA") ;

Entry

No.

and
3;

are Appellants'

Opening Brief (Docket Entry No. 8), Appellees' Brief (Docket Entry
No. 13), and Appellants' Reply Brief (Docket Entry No. 14) . 6

For

the reasons explained below, all of the Bankruptcy Court's orders
and findings of fact and conclusions of law will be affirmed.

I.

Factual and Procedural Background

This case arises out of the Chapter 11 bankruptcy of SBMC
Healthcare LLC

("SBMC" or "Debtor")

d/b/a Spring Branch Medical

Center styled In re SBMC Healthcare, LLC, Cause Number 12-33299-H411.

SBMC's bankrutpcy case was initiated on April 30, 2012, when

Appellants filed a Chapter 11 petition as attorneys for SBMC. 7
May 1, 2012,

On

SBMC filed a request with the Bankruptcy Court that

4

( • • • continued)
No. 1-5. See also
pp. 1' 671-1' 7 0 9.

Appellants'

BROA,

Docket

Entry

No.

2-2,

5

Page citations to the Bankruptcy Court documents included in
these filings are to the pagination imprinted by the federal
court's electronic filing system at the top right corner of the
document.
6

Page citations to the parties' briefs are to the native page
numbers at the bottom of the page.
7

Appellees' Brief, Docket Entry No. 13, p. 5.
See also
Voluntary Petition, Docket Entry No. 1 in Bankruptcy Case No. 1233299-H4-11.
-3-

Appellants be employed as general bankruptcy counsel. 8

On May 25,

2012, SBMC filed an amended request with the Bankruptcy Court that
Appellants be employed as special bankruptcy counsel along with
Marilee A. Madan, P.C., as bankrutpcy co-counsel.
and amended request

to employ Appellants

as

9

SBMC's request

bankruptcy counsel

rested in part, on assertions that Appellants had previously agreed
to represent SBMC in a number of matters including:
•

Cause No. 2011-26442; Greater Houston Emergency
Physicians, PLLC v. SBMC Healthcare, LLC d/b/a
Spring Branch Medical Center, pending in the 127th
Judicial District Court,
Harris County,
Texas
[ "GHEP Action"] ;

•

Cause No. 2012-20333; Harborcove Financial, LLC v.
SBMC Healthcare, LLC, et al., pending in the 80th
Judicial District Court of Harris County, Texas
[ "Harborcove Action"] . 10

Both SBMC's original and amended requests to employ Appellants as
bankruptcy counsel also stated:
Except as set forth above and in the attached affidavit,
the Firm has no other connection with the Debtor, its

8

Application to Employ Johnson DeLuca Kurisky & Gould, P.C.,
as Bankruptcy Counsel Pursuant to 11 U.S.C. §§ 327 and 328 (a),
Appellants' BROA, Docket Entry No. 2-2, pp. 3,927-3,932.
9

Amended Application to Employ Johnson DeLuca Kurisky & Gould,
P.C., as Special Bankruptcy Counsel Pursuant to 11 U.S.C. §§ 327
and 32 8 (a) , Appellants' BROA, Docket Entry No. 2-2, pp. 3, 6213,627.
10

Id. at p. 3,624 ~ 9. See also Application to Employ Johnson
DeLuca Kurisky & Gould, P.C., as Bankruptcy Counsel Pursuant to 11
U.S.C. §§ 327 and 328(a), Appellants' BROA, Docket Entry No. 2-2,
p. 3,930 (same).
-4-

creditors,
any
other
parties
in
interest,
their
respective attorneys and accountants, the United States
trustee, or any person employed in the office of the
United States trustee and are "disinterested persons"
within the definition of Section 101(14)
of the
Bankruptcy Code on the matters for which it is to be
engaged as special counsel. A copy of the Affidavit is
attached and incorporated herein as Exhibit 1. 11
The affidavits of proposed counsel attached to both SBMC's original
and amended requests to employ Appellants similarly stated:
. the Firm has represented the Debtor prior to
this bankruptcy case.
The Firm has represented the
Debtor in the following matters:
•

Cause
No.
2011-26442;
Greater
Houston
Emergency Physicians, PLLC v. SBMC Healthcare,
LLC d/b/a
Spring Branch Medical
Center,
pending in the 127th Judicial District Court,
Harris County, Texas ["GHEP Action"];

•

Cause No. 2 012-2 0333; Harborcove Financial,
LLC v. SBMC Healthcare, LLC, et al., pending
in the 80th District Court of Harris County,
Texas ["Harborcove Action"];

The Firm does not believe that the above disclosure
presents any conflict that would preclude its unbiased
representation of the Movant and the estate in this case
in its proposed role as bankruptcy counsel. 12

11

Arnended Application to Employ Johnson DeLuca Kurisky & Gould,
P.C., as Special Bankruptcy Counsel Pursuant to 11 U.S.C. §§ 327
and 328(a), Appellants' BROA, Docket Entry No. 2-2, pp. 3,625 ~ 10.
See also Application to Employ Johnson DeLuca Kurisky & Gould,
P. C., as Bankruptcy Counsel Pursuant to 11 U.S. C. §§ 32 7 and
328(a), Appellants' BROA, Docket Entry No. 2-2, p. 3,930 ~ 10
(same).
12

Affidavit of Proposed Counsel Pursuant to 11 U.S.C. § 329(a)
and Bankruptcy Rules 2014, 2016(b), Appellants' BROA, Docket Entry
No. 2-2, pp. 3,628 (affidavit attached to amended application); and
3,934 (affidavit attached to original application).
-5-

On June 18,

2 012,

the Bankruptcy Court approved SBMC' s

amended

request that Appellants serve as special bankruptcy counsel. 13
On March 25,

2013, the First Amended Plan of Liquidation by

the Official Committee of Unsecured Creditors and Joint Plan of
Liquidation of the Committee and SBMC Healthcare, LLC ("the Plan")
was filed in SBMC's bankrutpcy. 14
trust

The Plan created a liquidating

("SBMC Liquidating Trust" or the "Trust")

Debtor's assets,
Limitation

of

15

to liquidate the

and contained a section titled,

Liability

Exculpated Persons") . 16

of

Exculpated

On April 4,

"Releases and

Persons"

2013,

("Release

of

the Bankruptcy Court

confirmed the Amended Plan of Liquidation. 17
Appellee Marty McVey ("McVey") was SBMC's president and 100%
equity owner.

McVey personally guaranteed some of SBMC's financial

obligations.

Appellee McVey & Company Investments

("M&C")

is a

company controlled by McVey that performed management services for
SBMC. 18

McVey and M&C are referred to herein as "Appellees" and

13

0rder Granting Amended Application to Employ Johnson DeLuca
Kurisky & Gould P.C. as Special Bankruptcy Counsel to the Debtor
Pursuant to 11 U.S.C. §§ 327 and 328(a)
[Relates to Docket
No. 101], Appellants' BROA, Docket Entry No. 2-2, pp. 3,659-3,663.
14

Appellants' BROA, Docket Entry No. 2-2, pp. 3,828-3,876.

15

Id. at pp. 3,835-36, and pp. 3,856-66.

16

Id. at pp. 3,819-20.

17

0rder Confirming First Amended Plan of Liquidation by the
Official Committee of Unsecured Creditors and Joint Plan of
Liquidation of the Committee and SBMC Healthcare, LLC, Appellants'
BROA, Docket Entry No. 2-2, pp. 4,527-4,549.
18

Appellants'

Opening

Brief,
-6-

Docket

Entry

No. 8, p. 5;
(continued ... )

"Plaintiffs"

in

reference

to

the

Bankruptcy Court proceedings.

McVey was named as a defendant along with SBMC in both the GHEP and
Harborcove actions, and M&C was named as an additional defendant in
the GHEP Action.

Appellants filed prepetition answers in the GHEP

Action for SBMC, McVey,

and M&C on February 13,

2012,

and filed

prepetition answers in the Harborcove Action for SBMC and McVey on
April 27,

2012. 19

On April 27,

2012,

Appellants also drafted a

written agreement to forestall foreclosure in the Harborcove Action
("the Rule 11 Agreement")

pursuant to which Harborcove agreed to

forego the foreclosure sale posted for May 1, 2012, and not to post
any SBMC property for foreclosure for a period of 120 days if a
payment of $1,525,000.00 was made on SBMC's outstanding debt by
April 30, 2012
Rule

11

("Rule 11 Payment") . 20

Payment

was

not

made,

When on April 30, 2012, the
McVey

and

SBMC

forestalled

foreclosure by having Appellants file SBMC's Chapter 11 petition. 21

18

( • • • continued)
Appellees' Brief, Docket Entry No. 13, p. 3.

19

Appellants' Opening Brief, Docket Entry No. 8, p. 6 (citing
Appellants'
BROA,
Docket
Entry
No.
2-2,
pp.
3, 691-3, 695
(Defendant's Verified Original Answer filed on behalf of Marty
McVey in the GHEP Action), and pp. 3,753-3,756 (Original Answer for
Defendant Marty McVey filed in the Harborcove Action) .
20

April 27, 2012, Letter Agreement, Appellants' BROA, Docket
Entry No. 2-2, pp. 94-96.
See Appellants' Opening Brief, Docket
Entry No. 8, p. 7; Appellees' Brief, Docket Entry No. 13, p. 4.
21

Appellees' Brief, Docket Entry No. 13, p. 5.
See also
Voluntary Petition, Docket Entry No. 1 in Bankruptcy Case No. 1233299-H4-11.
-7-

Appellants

continued

to

represent

both

SBMC

and

McVey

in

the

Harborcove Action until August of 2013 when Appellants moved to
withdraw,

22

and the state court granted their motion to withdraw on

August 9, 2013. 23
On March 10, 2014, Appellees filed suit against Appellants in
the 270th Judicial District Court of Harris County, Texas

("State

Court Action"), asserting claims for negligence/legal malpractice,
breach of fiduciary duty,

and violations of the Texas Deceptive

Trade Practices Act ( DTPA) . 24

Appellees describe their petition as

having alleged that
Appellants were negligent in drafting the Rule 11
Agreement,
which
was
designed
to
forestall
the
foreclosure proceedings, in that it permitted Harborcove
to sell its note to a third party who could then
foreclose on the collateral.
Appellees allege that
Appellants failed to file an action to prevent the
foreclosure and, instead, coerced McVey into forcing SBMC
into bankrutpcy.
Appellees
allege that
once
in
bankruptcy, SBMC's assets were liquidated for pennies on
the dollar and various creditors, including the IRS, were
not paid. As a result, these creditors and the IRS sued

22

Counsel for SBMC Healthcare, LLC and Marty McVey's Motion to
Withdraw filed on August 5, 2013, in Cause No. 2012-20333,
Appellants' BROA, Docket Entry No. 2-2, pp. 3,757-3,760 (see
especially p. 3,757 ~ 1 stating:
"The law firm of Johnson DeLuca
Kurisky & Gould, P.C. ('JDKG'), counsel for SBMC Healthcare, LLC
and Marty McVey, appeared on SBMC Healthcare, LLC and Marty McVey's
behalf on or about April 27, 2012.").
23

0rder on Counsel for SBMC Healthcare, LLC and Marty McVey's
Motion to Withdraw in Cause No. 2012-20333, Appellants' BROA,
Docket Entry No. 2-2, pp. 3,761-3,762 (granting JDKG's motion to
withdraw as counsel for SBMC and McVey on August 9, 2013).
24

Plaintiffs' Original Petition & Request for
Appellants' BROA, Docket Entry No. 2-2, pp. 80-92.
-8-

Disclosure,

(or filed liens against) McVey and M&C in their personal
capacity for their personal obligations.
Appellees
allege that but for Appellants' erroneous advice and
breach of fiduciary duties, McVey would have been able to
consummate a deal to pay SBMC's creditors without
bankruptcy,
would not
have
incurred the personal
obligations, judgments and attorney's fees but, as owner
of SBMC, would have obtained equity from the sale of
SBMC. 25
On April 21, 2014, Appellants initiated Adversary No. 14-03126
by

removing Appellees'

State

Court

Action

to

Bankruptcy

Court

pursuant to 28 U.S.C. § 1452, Federal Rule of Bankruptcy Procedure
9027, and Bankruptcy Local Rule 9027-1. 26
On

April

25,

2014,

Appellants

Adversary No. 14-03126 arguing that

filed

a

Motion

to

Dismiss

(1) Appellees lacked standing

because their claims belonged to the Debtor, SBMC, and any damages
Appellees suffered were derivative of damages suffered by SBMC; and
( 2)

Appellees'

claims were barred by the Release of Exculpated

Persons contained in SBMC' s

confirmed Plan. 27

On May 16 ,

2 0 14 ,

Appellees responded that the claims at issue were not derivative of
the Debtor's claims because Appellants had individual attorneyclient relationships with Appellees,

Appellants breached duties

25

Appellees' Brief, Docket Entry No. 13, pp. 10-11 (citing
Plaintiffs' Original Petition & Request for Disclosure, Appellants'
BROA, Docket Entry No. 2-2, pp. 84-87).
26

Notice of Removal, Appellants'
pp. 1-7.
27

BROA,

Docket Entry No.

2-2,

Defendants' Motion to Dismiss Pursuant to Bankruptcy Rule of
Procedure 7012(b) (1)
and
(6),
and Memorandum in Support of
Defendants' Motion to Dismiss Pursuant to Bankr. R. P. 7012(b) (1)
and (6), Appellants' BROA, Docket Entry No. 2-2, pp. 8-20.
-9-

owed to Appellees because of those attorney/client relationships,
and Appellants'
injuries

and

breaches proximately caused Appellees to suffer

damages

separate

and

distinct

from

injuries

and

damages suffered by SBMC. 28
On April 29, 2014, the SBMC Liquidating Trust filed a Motion
to Intervene arguing that it, as owner, successor-in-interest, and
holder of all causes of action of the Debtor, and former debtor-inpossession, owned the causes of action that Appellees asserted in
the State Court Action. 29
On May 8, 2014, Appellees filed a Motion to Remand,

arguing

that the Bankruptcy Court lacked subject matter jurisdiction over
the claims asserted in the State Court Action or, alternatively,
that

the

Bankruptcy

Court

should

abstain from hearing the dispute.

mandatorily

or

permissively

30

28

Plaintiffs' Response to Defendants' Motion to Dismiss
Pursuant to Bankruptcy Rule of Procedure 7 012 (b) ( 1) and ( 6) and
Plaintiffs' Memorandum in Support of Plaintiffs' Response to
Defendants' Motion to Dismiss Pursuant to Bankruptcy Rule of
Procedure 7 012 (b) ( 1) and ( 6) , to Appellants' BROA, Docket Entry
No. 2-2, pp. 115-35.
29

SBMC Liquidating Trust's Motion to Intervene,
No. 10 in Adversary No. H-14-03126.
30

Docket Entry

Plaintiffs' Motion to Remand or, Alternatively, Motion to
Abstain, and Plaintiffs' Memorandum in Support of Their Motion to
Remand or, Alternatively, Motion to Abstain, Appellants' BROA,
Docket Entry No. 2-2, pp. 21-51.
-10-

On June 4, 2014, and June 12, 2014, the Bankruptcy Court held
hearings on Appellants'

motion to dismiss,

the SBMC Liquidating

Trust's motion to intervene, and Appellees' motion to remand. 31
On September 18, 2014, the Bankrutpcy Court granted in part
and denied in part Appellants'

motion to dismiss and Appellees'

motion to remand, and denied the SBMC Liquidating Trust's motion to
intervene. 32

The Bankruptcy Court granted Appellants'

motion to

dismiss "all causes of action brought by the [Appellees] alleging
injury due to the devaluation of SBMC stock, " 33 dismissed those
claims with prejudice, and denied Appellees' motion to remand those
claims. 34

The Bankruptcy Court denied Appellants' motion to dismiss

"all causes of action brought by the
injury to them due to negligence,

[Appellees]

alleging direct

breach of fiduciary duty and

violation of the Texas [DTPA], " 35 and remanded those claims to state
court. 36

The

Bankruptcy Court

explained the

reasons

for

these

rulings in a Memorandum Opinion issued on the same day, In re SBMC

31 Transcript of Hearing held on June 4, 2014, in Adversary
No. 14-03126-H4-ADV, Appellants' BROA, Docket Entry No. 2-2,
pp. 1,434-1,491; Transcript of Hearing held on June 12, 2014, in
Adversary No. 14-03126-H4-ADV, Appellants' BROA, Docket Entry
No. 2-2, pp. 1, 492-1,576.
32 0rder of Partial Dismissal and Remand, Exhibit 1 to Notice
of Filing of an Appeal, Docket Entry No. 1-2. See also Appellants'
BROA, Docket Entry No. 2-2, pp. 290-92.
33Id. at p. 2 .

See also Appellants' BROA, p. 291.

34Id.

See also Appellants' BROA, p. 291.

3sid.

See also Appellants' BROA, p. 291.

36Id.

See also Appellants' BROA, p. 291.
-11-

Healthcare,

LLC,

519

B.R.

172

(Bankr.

S.D.

Tex.

2014)

37

In

pertinent part the Bankruptcy Court stated as follows:
Defendants plead that, even if all facts are taken
as true, Plaintiffs lack standing to assert the causes of
action in the Complaint and therefore dismissal is
appropriate.
Defendants argue that McVey suffered
only indirect harm on account of his status as
shareholder of the Debtor, and thus these causes of
action are derivative of SBMC.
Defendants further
assert that all Plaintiffs' causes of action could have
been brought by SBMC as of the Petition Date, making them
property of the Debtor's estate, or more precisely the
Trust, pursuant to § 541 (a) (1) of the Code.
This
argument fails to take into account that the complaint
alleges that Plaintiffs suffered personal injury when
creditors of SBMC sued McVey and M&C in their individual
capacities as guarantors of SBMC's debts.
Moreover, even if the Debtor (or, as of now, the
Trust) has derivative claims, it does not preclude a
third-party's direct causes of action based on the same
underlying transaction or occurrence.
As Plaintiffs
point out, "it is entirely possible for a bankruptcy
estate and a creditor to own separate claims against a
third party arising out of the same general series of
events and broad coarse of conduct."
In re Seven Seas
Petroleum, Inc., 522 F.3d 575, 585 (5th Cir. 2008).
Accordingly, as set forth below, this Court will dismiss
the derivative claims asserted in the Complaint, but will
not dismiss those claims in the Complaint that are the
direct claims of the Plaintiffs.

b.

Direct Causes o£ Action

Plaintiffs assert personal injuries in the Complaint
and therefore have direct causes of action.
The
Complaint alleges that
Plaintiffs had a
personal
attorney-client relationship with Defendants during which
Defendants breached their fiduciary duty to Plaintiffs by
negligently advising McVey to file a Chapter 11

37

September 18, 2014, Memorandum Opinion,
Docket Entry No. 2-2, pp. 256-289.
-12-

Appellants'

BROA,

bankrutpcy on behalf of SBMC.
As a result of
Defendants' alleged negligence, Plaintiffs contend that
they suffered losses when unpaid SBMC creditors sued
Plaintiffs, in their individual capacities as guarantors,
to recover obligations owed by SBMC.
. In connection
with these lawsuits, Plaintiffs incurred defense costs
and had judgments entered against them personally after
SBMC failed to pay the debts through its bankruptcy . . .
The
harm that
Plaintiffs
allegedly
sustained
in
connection with lawsuits filed against them in their
individual capacities is personal and entirely distinct
from any harm suffered by SBMC. Therefore, Plaintiffs'
causes of action against Defendants for negligence,
breach of fiduciary duty, and violation of the DTPA that
are based on suits filed against them by SBMC creditors
are Plaintiffs' direct causes of action that should not
be dismissed. In re Skyport Communications Inc., 2011 WL
111427 (Bankr. S.D. Tex. Jan. 13, 2011) (holding that
dismissal is proper for a derivative cause of action, but
not for a direct cause of action) .
c.

Derivative Causes o£ Action

The Complaint also asserts injury based on loss of
value to SBMC stock, a derivative cause of action
belonging to SBMC- the corporation- or, more precisely,
SBMC's estate. Specifically, Plaintiffs allege that the
total debt owed by SBMC was approximately $8 million and
that McVey was negotiating a letter of intent to sell
SBMC's real property for $15 million . . . The Complaint
asserts that, as a result of SBMC's bankruptcy filing:
(1) McVey lost the opportunity to sell SBMC' s real
property and assets to recover their fair market value;
(2) SBMC's assets were liquidated at bottom dollar; and
(3) no other creditors but Harborcove- and certainly not
McVey, the 100% shareholder of SBMC
received any
proceeds from the liquidation.
Inasmuch as the Complaint quantifies the harm
suffered by McVey as the loss of value to his SBMC
shares, it is not distinct from harm suffered by SBMC,
the corporation.
A claim of loss for devaluation of
stock is a derivative cause of action that belongs
exclusively to SBMC, the corporation, or, in this case,
SBMC's estate (i.e. the Trust).
Thus, McVey, as
"individual
stockholder [,]
ha [ s]
no
separate
and
independent right of action for injuries suffered by the
corporation which merely result in the depreciation of
[his] stock."
Wingate[ v. Hajdik], 795 S.W.2d [717],
-13-

719 [(Tex. 1990), superseded by statute on other grounds
as stated in Sneed v. Webre, 465 S.W.3d 169 (Tex. 2015)]
. Because the causes of action based on devaluation
of SBMC stock are derivative, they belong exclusively to
SBMC's estate and should be dismissed for lack of
standing.
d.

Conc~usion

Assuming, as this Court must, that all allegations
in the Complaint are true, the Motion to Dismiss will be
denied as to the direct causes of action and granted as
to the derivative causes of action.
Plaintiffs have
direct causes of action for malpractice, breach of
fiduciary duty, and violation of the DTPA based on
allegations of personal injury suffered in connection
with lawsuits filed against them individually.
These
claims will not be dismissed.
In contrast, Plaintiffs'
causes of action for malpractice, breach of fiduciary
duty, and violation of the DTPA based on devaluation of
SBMC stock are derivative of the Debtor's estate. These
claims will be dismissed with prejudice as to the
Plaintiffs for lack of standing. 38
Id. at 182-85.

The Bankruptcy Court denied the Trust's motion to

intervene for failure to plead a cause of action. 39
The Bankruptcy Court denied the Appellees'
derivative
Appellees'

claims

that

the

court

Id. at 185.

motion to remand the

dismissed,

and

granted

the

motion to remand their direct claims upon concluding

that it lacked subject matter jurisdiction over the direct claims,
and alternatively, that even if it had subject matter jurisdiction,
remand was

appropriate

because

the

state

court

had

concurrent

jurisdiction and permissive abstention was appropriate with respect
to the direct claims.

40

Id. at 185-93.

38

Id. at pp. 13-18, Appellants' BROA, pp. 268-273.

39

Id. at pp. 19-20, Appellants' BROA, pp. 274-75.

40

Id. at pp. 20-33, Appellants' BROA, pp. 275-88.
-14-

On September 24, 2014, Appellants moved the Bankruptcy Court
to reconsider its September 18, 2014, Order of Partial Dismissal
and Remand and to clarify
(1) that any claim by [Appellees] that they have become
or will become liable to creditors by virtue of SBMC
Healthcare LLC's inability to pay or have incurred cost
in defending such claims is a derivative claim which is
dismissed; and (2) that the [Appellants'] decision to
advise [Appellees] to commence a bankruptcy filing for
SBMC Healthcare LLC is released by the
Plan of
Reorganization. 41
Appellants acknowledged that "[o]ther narrower claims implied by
the pleading are presumed to be true for now and appear to still
require remand." 42
was

Appellees responded that if the Plan's Release

broad enough to

cover pre-petition advice,

the

Release

is

invalid because Appellants negotiated it while they had attorneyclient

relationships

with Appellees

without

making

disclosures

required by the Texas Disciplinary Rules of Professional Conduct. 43
On October 30, 2014, the Bankruptcy Court entered the Order of
Partial Reopening of Adversary granting in part and carrying in
part Appellants' motion for reconsideration, stating:

41

Defendants' Motion to Amend or for Clarification of Judgment
of Partial Dismissal and Remand Pursuant to Bankr. R. Pro. 9023
("Appellants' Motion to Amend or Clarify"), p. 10, Appellants'
BROA, Docket Entry No. 2-2, p. 302.
42Id.
43

Plaintiffs' Response to Defendants' Motion to Amend or for
Clarification of Judgment of Partial Dismissal and Remand Pursuant
to Bankr. R. Proc. 9023, p. 8, Appellants' BROA, Docket Entry
No. 2-2, p. 314.
-15-

Defendants ask this Court to reconsider:
( 1)
its
classification of certain of Plaintiffs' claims as
direct,
as
opposed
to
derivative;
and
(2)
its
interpretation of a provision that limits the liability
of the Defendants (the Exculpatory Provision) in the
Plan. 44
Regarding the nature of the Appellees'

state court claims,

the

Bankruptcy Court stated:
Defendants ask this Court to reconsider its demarcation
between Plaintiffs' direct claims (those based on suits
filed against them by SBMC creditors) and Plaintiffs'
derivative claims (those based on loss of value to SBMC
stock) .
After considering the Motion to Amend, the
Response, and the Reply, this Court concludes that the
Memorandum Opinion properly analyzes this issue and
reaches the correct result. 45
As to the Exculpatory Provision, the Bankruptcy Court reopened
the

record to develop "extrinsic evidence

on the

[exculpatory]

provision's meaning, " 46 and held hearings on December 12 and 15,
2014, and January 27 and 28, 2015. 47

At the initial hearing held

44 Exhibi t 2 to Notice of Filing of An Appeal, Docket Entry
No. 1-3, p. 3.
See also Appellants' BROA, Docket Entry No. 2-2,
p. 332.
45Id. at p. 4.
2, p. 333.

See also Appellants' BROA, Docket Entry No. 2-

46Id. at p. 6.
2, p. 335.

See also Appellants' BROA, Docket Entry No. 2-

47

See Hearing Transcripts, Appellants' BROA, Docket Entry
No. 2-2, pp. 954-1,002 (Hearing held on December 12, 2014, #50 Motion to Amend or For Clarification of Judgment); pp. 366-548
(December 15, 2014, #50 - Continued Hearing on Motion to Amend or
for Clarification of Judgment); pp. 549-785 (January 27, 2015, #50
- Continued Hearing on Motion to Amend or for Clarification of
Judgment); pp. 786-953 (January 28, 2015, #50- Continued Hearing
on Motion to Amend or for Clarification of Judgment); and pp. 954( continued ... )
-16-

on December 12, 2014, Appellees' counsel argued that the Bankruptcy
Court had no jurisdiction to amend its Order of Partial Dismissal
and

Remand

remanded.

48

because

Appellees'

On April 22,

direct

2015,

claims

had

already

been

the Bankruptcy Court issued its

Order Denying Defendants' Motion to Amend or Clarify, and vacated
its

October

jurisdiction

30,
to

2014,

Order

reconsider

upon

its

concluding

earlier

decision was appealed to this court;

it

order. 49

had

no

That

and the court reversed and

remanded the case to the Bankruptcy Court.
On September 26,

remand

that

50

2016, without holding additional hearings,

the Bankrutpcy Court entered the Order Denying in Its Entirety the
Defendants'

Motion to Amend or for Clarification of Judgment of

Partial Dismissal and Remand Order Pursuant to Bankruptcy Rule of

47

( • • • continued)
1,002 (December 12, 2014, Complete Hearing Transcript on #50 Motion to Amend or for Clarification of Judgment).
48

See December 12, 2014, Complete Hearing Transcript on #50 Motion to Amend or for Clarification of Judgment, Appellants' BROA,
Docket Entry No. 2-2, pp. 966-967.
49

0rder
Denying
Defendants'
Motion
to
Amend
or
for
Clarification of Judgment of Partial Dismissal and Remand Order
Pursuant to Bankr. R. Pro. 9023, Appellants' BROA, Docket Entry
No. 2-2, pp. 1,428-1,433. See also April 22, 2015, #50- Ruling,
Appellants' BROA, Docket Entry No. 2-2, pp. 1,577-1,584.
50

March 21, 2016, Memorandum Opinion and Order, Docket Entry
No. 20 in Civil Action No. H-15-1173, Appellants' BROA, Docket
Entry No. 2-2, pp. 1,585-1,628.
-17-

Civil Procedure 923. 51

On September 26, 2016, the Bankruptcy Court

entered Amended Findings of Fact and Conclusions of Law Regarding
the Defendants' Motion to Amend or for Clarification of Judgment of
Partial
9023. 52

Dismissal
In

and Remand Order

pertinent

part

the

Pursuant

Amended

to

Bankruptcy Rule

Findings

of

Fact

and

Conclusions of Law state:
The October 30[, 2014], Order addressed the Defendants'
request for this Court to reconsider its initial ruling
regarding which of the Plaintiffs' claims are derivative
claims, and this Court expressly set forth that "after
considering the issue in light of the instant pleadings,
this
Court
concludes
that
the
Memorandum Opinion
correctly analyzes and sufficiently explains its original
holding on this issue."
. The Court stands by this
decision today. 53
The Bankruptcy Court then analyzed two issues with respect to the
meaning of the Exculpatory Provision in SBMC's Plan:
(1) whether the Exculpatory Provision is broad enough to
encompass Johnson advising McVey to file a Chapter 11
petition on behalf of SBMC (i.e., the Malpractice Claim
for Filing); and (2) even if the Exculpatory Provision is
broad enough to encompass the advice to file, whether the
Exculpatory Provision is fair and reasonable to the
Plaintiffs
such that
they
should be barred from

51

4.

Notice of Filing of an Appeal, Exhibit 3, Docket Entry No. 1See also Appellants' BROA, Docket Entry No. 2-2, pp. 1,669-70.
52

Notice of Filing of an Appeal, Exhibit 4, Docket Entry No. 15.
See also Appellants' BROA, Docket Entry No. 2-2, pp. 1, 6711,709.
53

Id. at pp. 4-5 (quoting October 30, 2014, Order of Partial
Reopening of Adversary, Exhibit 3 to Notice of Filing of an Appeal,
Docket Entry No. 1-3, p. 5, Appellants BROA, Docket Entry No. 2-2,
p.
334).
See also Appellants'
BROA,
Docket Entry No.
2-2,
pp. 1' 6 7 4-7 5.
-18-

prosecuting the Malpractice Claim for Filing that they
allege in the State Court Lawsuit. 54
In pertinent part the Bankruptcy Court concluded that
the Exculpatory Provision does not encompass the prepetition communications between McVey and Johnson,
including Johnson's advice to McVey to file a Chapter 11
petition on behalf of SBMC; and therefore the Malpractice
Claim for Filing should not be dismissed. Alternatively,
even if the Exculpatory Provision does encompass the prepetition communications between McVey and Johnson about
the latter's advice to McVey to file SBMC's petition,
this Court finds that the Exculpatory Provision is not
fair and reasonable to the Plaintiffs and therefore is
unenforceable against them; stated differently, the
Exculpatory Provision does not release the Defendants
from malpractice claims, including the Malpractice Claim
for Filing.
These findings, as well as this Court's
conclusion that the Plaintiffs' so-called "creditors sued
me" claims are personal (and not derivative) claims,
means that the Motion to Amend should be denied in its
entirety.
Stated otherwise, the Court finds that the
Malpractice Claim for Filing should not be dismissed but
rather was correctly remanded, together with the other
malpractice claims asserted by the Plaintiffs, to the
Harris County District Court, as set forth in the Partial
Dismissal and Remand Order. 55

II.

Issues on Appeal and Standard of Review

Appellants raise three issues on appeal:
( 1)

Did the Bankruptcy Court err when it failed to
dismiss all of Appellees' claims as derivative,
including those that were based on the personal
effect of SBMC's lost equity in bankruptcy?

54

Id. at pp. 5-6.
No. 2-2, pp. 1,675-76.
55

Id. at pp. 38-39.
No. 2-2, pp. 1,708-09.

See also Appellants'
See also Appellants'
-19-

BROA,

Docket Entry

BROA,

Docket Entry

(2)

Did the Bankruptcy Court err in applying, or in its
application of, state law considerations to create
artificial barriers to the application of the
release language of the Confirmed Plan as written?

( 3)

Did the Bankruptcy Court err when it failed to
dismiss Appellees' claims as barred under the
release language of the Confirmed Plan? 56

The

Appellants'

motion

to

dismiss

was

filed

Federal Rule of Civil Procedure 12 (b) ( 1) and ( 6)

pursuant

(incorporated by

Federal Rules of Bankruptcy Procedure 7012 (b) (1) and (6)) . 57
a

Rule

12 (b) ( 1)

motion

is

filed

together

with

to

other

When

Rule

12

motions, the court should address the jurisdictional attack before
addressing any attack on the merits.
F.3d 158,

161

United States,

(5th Cir.
122 S.

2001),

Ct.

Pasadena, 5 61 F. 2d 60 6, 608

2665

Ramming v. United States, 281

cert.
(2002)

denied sub nom.

Cloud v.

(citing Hitt v.

(5th Cir. 197 7)

City of

(per curiam) ) .

"This

requirement prevents a court without jurisdiction from prematurely
dismissing a case with prejudice."
a

case

for

lack

of

subject

Id.

matter

The court's dismissal of
jurisdiction

is

not

a

determination of the merits and does not prevent the plaintiff from
pursuing a claim in a court that has proper jurisdiction.

Id.

In

examining a Rule 12(b) (1) motion, courts are empowered to consider

56

Appellants' Opening Brief, Docket Entry No. 8, pp. 3-4.

57

Defendants' Motion to Dismiss Pursuant to Bankruptcy Rule of
Procedure 7012(b) (1) and (6), p. 1, and Memorandum in Support of
Defendants' Motion to Dismiss Pursuant to Bankr. R. P. 7012(b) (1)
and (6), pp. 1-2, Appellants' BROA, Docket Entry No. 2-2, pp. 8,
and 11-12.
-20-

matters of fact which may be in dispute.

"Lack of subject matter

jurisdiction may be found in any one of three instances:

(1)

the

complaint alone; (2) the complaint supplemented by undisputed facts
evidenced in the

record;

or

( 3)

the

complaint

supplemented by

undisputed facts plus the court's resolution of disputed facts."
Id.

(citing Barrera-Montenegro v. United States, 74 F.3d 657, 659

(5th Cir. 199 6) ) .

"The burden of proof for a Rule 12 (b) ( 1) motion

to dismiss is on the party asserting jurisdiction."

Id.

Final judgments, orders, and decrees of a bankruptcy court may
be appealed to a

federal

28

district court.

U.S.C.

§

158(a).

Because this court functions as an appellate court, it applies the
same standard of review that
reviewing

district

court

federal

appellate courts use when
Accordingly,

decisions.

this

court

reviews the Bankruptcy Court's findings of fact for clear error and
conclusions on questions of law or mixed questions of law and fact
de novo.
Inc.),

See Garner v.

811 F. 3d 786,

791

Knoll,

Inc.

(5th Cir.

(In re TUSA-ESPO Holdings,

2016).

A bankrutpcy court's

dismissal under Federal Rule of Civil Procedure 12(b) (1)

for lack

of subject matter jurisdiction is generally reviewed de novo.

RLB

Contracting,

Inc.

RLB

Contracting,

Inc.),

v.

Butler

(In

773 F. 3d 596,

601

re

The

Complaint

(5th Cir. 2014).

of

However,

"purely factual findings" by the bankruptcy court in ruling on a
Rule 12(b) (1) motion are reviewed for clear error.

-21-

Id.

III.
A.

Analysis

The Bankrutpcy Court Did Not Err When It Failed to Dismiss All
of Appellees' Claims as Derivative

Appellants

argue

that

the

Bankruptcy Court

erred when

it

failed to dismiss all of the claims that the Appellees asserted in
their state court petition as derivative of claims that SBMC - not
Appellees -

had standing to prosecute. 58

Appellants characterize

Appellees'

causes

malpractice,

of

action

for

legal

breach

of

fiduciary duty, and violation of the DTPA as claims for
( 1) advising SBMC to file for Chapter 11 bankruptcy,
rather than enforce SBMC's Rule 11 Agreement with
Harborcove through an injunction, which allegedly was due
to drafting errors in SBMC' s Rule 11 Agreement; (2) for
persuading McVey, as the president of SBMC, to permit
Appellants
to
act
as
litigation
counsel
in
the
bankruptcy, which stripped Appellees of their ability to
use Appellants as bankrutpcy .counsel; and (3) failing to
advise McVey and [M&C] about an arbitration provision in
the retention agreement with JDKG. 59
Appellants argue that the claim for failing to advise McVey and M&C
about an arbitration provision in the retention agreement with JDKG
is the only claim that is even arguably personal to McVey
and M&C.
For this reason, this claim is the only one
that still requires remand to the state court so that
Appellants can address it there.
Other than this
single claim, however, all others should have been
dismissed.
For this briefing, when Appellants request
that 'all claims be dismissed, ' [Appellants] mean [] all
claims other than this one narrow cause of action. 60

58

Appellants' Opening Brief, Docket Entry No. 8, p. 3.

59

Id. at 11-12.

60

Id. at 12 n. 5 (acknowledging that "Appellants referenced
this claim as one that still needed to be remanded in its first
appeal to this Court." (citing March 21, 2016, Memorandum Opinion
(continued ... )
_:22-

Accordingly, Appellants ask this court to
reverse the Bankruptcy Court's determination that
Appellees had standing to bring clams based on the
alleged diminution of value to SBMC or that required a
showing of harm to SBMC. Furthermore, Appellants request
that
this
court
reverse
the
Bankruptcy
Court's
determination that the Release does not bar Appellees[']
claims related to the advice for SBMC to file for
bankruptcy as well as the claims related to Appellants[']
request to become special counsel to SBMC after the
filing of bankruptcy.
Appellants request that the
Bankruptcy Court's remand order be modified to only
remand those claims related to Appellees' allegation that
the Appellants did not fully disclose the existence of
the arbitration provision in the GHEP and Harborcove
retention agreements and dismiss all others. 61
Appellants' argument shows that there is no dispute that the
Bankruptcy Court correctly remanded Appellees'
action

for

lack of

subject matter

direct causes of

jurisdiction.

At

issue

is

whether the Bankruptcy Court correctly concluded that Appellees
have

standing

to

direct

assert

causes

of

action

for

negligence/malpractice, breach of fiduciary duty, and violation of
the

DTPA based

Appellees

on

allegations

individually,

that

Appellants

Appellants
breached

owed
duties

duties

to

owed

to

Appellees individually, and as a result of those breaches Appellees
suffered personal injury and damages in the form of tax liens,
judgments,

and attorneys fees

incurred defending lawsuits filed

against them individually by the IRS and other SBMC creditors.

60

( • • • continued)
and Order, Docket Entry No. 20 in Civil Action No. H-15-1173,
p. 10, Appellants' BROA, p. 1594 ("Appellants acknowledge that
'[o]ther narrower claims implied by the pleading are presumed to be
true for now and appear to still require remand.'")).

61

Appellants' Opening Brief, Docket Entry No. 8, pp. 57-58.
-23-

1.

Applicable Law

A party's

standing

to

sue

is

implicit

in

the

concept

of

subject-matter jurisdiction and is not presumed; it must be proved.
See Texas Association of Business v. Texas Air Control Board, 852
S.W.2d 440,
Wildlife,

445-46

112 S.

(Tex.

Ct.

1993).

2130,

2136

See also Lujan v.
(1992)

Defenders of

(to establish standing a

party must show an injury in fact traceable to the conduct of the
defendant likely to be redressed by the relief sought).
In Texas, the standing doctrine requires a concrete
injury to the plaintiff and a real controversy between
the parties that will be resolved by the court.
This
parallels the federal test for Article III standing . . .
Under Texas law, as under federal law, the standing
inquiry begins with the plaintiff's alleged injury. The
plaintiff must be personally injured - he must plead
facts demonstrating that he, himself (rather than a third
party or the public at large), suffered the injury . . .
[The injury) must be concrete and particularized, actual
or imminent, not hypothetical.
The second element of the standing test requires that the
plaintiff's alleged injury be fairly traceable to the
defendant's conduct.
The third element of standing requires that the
plaintiff's alleged injury be likely to be redressed by
the requested relief, and the plaintiff must demonstrate
standing separately for each form of relief sought . . .
The
standing
inquiry
requires
careful
judicial
examination of a complaint's allegations to ascertain
whether the particular plaintiff is entitled to an
adjudication of the particular claims asserted.
Heckman v. Williamson County,
(citations omitted).

369 S.W.3d 137, 154-56 (Tex. 2012)

Standing is a question of law for the court

to decide, although facts necessary to the decision may need to be
-24-

decided by the factfinder.
each claim asserted.
v.

Cuno,

126

S.

Id. at 150.

Id. at 153.
Ct.

1854,

Standing must exist for

See also DaimlerChrysler Corp.

1867

(2006)

("a

plaintiff

must

demonstrate standing for each claim he seeks to press").
Under Texas

law "[a]

corporate

stockholder cannot

recover

damages personally for a wrong done solely to the corporation, even
though he may be injured by that wrong."

Wingate v. Hajdik,

795

S.W.2d 717, 719 (Tex. 1990), superseded by statute on other grounds
as stated in Sneed v. Webre, 465 S.W.3d 169, 185 n. 10 (Tex. 2015).
In Wingate the Texas Supreme Court explained that
[o] rdinarily, the cause of action for injury to the
property of a corporation,
or the impairment or
destruction
of
its
business,
is
vested
in
the
corporation, as distinguished from its stockholders, even
though it may result indirectly in loss of earnings to
the stockholders. Generally, the individual stockholders
have no separate and independent right of action for
injuries suffered by the corporation which merely result
in the depreciation of the value of their stock.
This
rule is based on the principle that where such an injury
occurs each shareholder suffers relatively in proportion
to the number of shares he owns, and each will be made
whole
if
the
corporation
obtains
restitution
or
compensation from the wrongdoer.
Such action must be
brought by the corporation, not alone to avoid a
multiplicity of suits by the various stockholders and to
bar a subsequent suit by the corporation, but in order
that the damages so recovered may be available for the
payment
of
the
corporation's
creditors,
and
for
proportional distributions to the
stockholders as
dividends, or for such other purposes as the directors
may lawfully determine.
Id.
216,

(quoting Commonwealth of Massachusetts v.
221

(Tex.

(recognizing that

1942),

cert.

individual

denied,

63

shareholders
-25-

S.

Davis,
Ct.

have no

168 S.W.2d
1447

(1943)

separate

and

independent right of action for wrongs to the corporation that
merely result in depreciation in the value of stock even though the
harm

may

result

shareholders)).

indirectly
A

in

the

loss

of

earnings

to

the

shareholder who seeks individual redress based

on allegations of wrong done to a corporation has thus been held to
lack standing.
(Tex. 2016).

See Linegar v. DLA Piper,

495 S.W.3d 276, 279-80

recover for wrongs done to the corporation, the

~To

shareholder must bring the suit derivatively in the name of the
corporation so that each shareholder will be made whole if the
Webre v.

corporation obtains compensation from the wrongdoer."

Sneed, 358 S.W.3d 322, 329-30 (Tex.App.-Houston [1st Dist.] 2011),
aff'd Sneed, 465 S.W.3d at 169.
The Wingate Court clarified, however,
does not
done

that the general rule

a stockholder from recovering damages for wrongs

~prohibit

to him individually

'where the wrongdoer violates

a

duty

arising from contract or otherwise, and owing directly by him to
the stockholder.'"
222).

795 S.W.2d at 719 (citing Davis, 168 S.W.2d at

The Texas Supreme Court recently reiterated this principle

in Linegar,

495

S.W.3d at

279-80,

explaining that

~to

recover

individually, a shareholder must prove a personal cause of action
and personal injury."
In Linegar

the

Id.
Texas

(quoting Davis, 168 S.W.2d at 222).
Supreme Court held that

a

corporate

stockholder who provided a loan to the corporation from his selfdirected retirement account had standing to sue the corporation's

-26-

law firm for malpractice for incorrectly assuring the stockholder
that the loan would be secured.

495 S.W.3d at 382.

major stockholder in IdentiPHI,

Inc.

Linegar was a

("IdentiPHI"), and was also

chairman, director, and majority stockholder in Zaychan PTY, Ltd.
("Zaychan"),

the corporate trustee of the Linegar Superannuation

Fund, an Australian self-managed retirement trust with Linegar and
his wife as sole beneficiaries.

Linegar arranged for Zaychan to

make a bridge loan to IdentiPHI.

In March 2008 IdentiPHI executed

a promissory note to Zaychan granting a security interest in all of
IdentiPHI's assets.
keep

the

The note had to be paid by June 29, 2008, to

self-directed

Australian

law.

transaction.

retirement

DLA

Piper

account

represented

in

compliance

IdentiPHI

with

in

the

Linegar alleged that DLA Piper assured him in his

individual capacity that the loan would be secured.

When IdentiPHI

filed

that

for

financing

bankruptcy,
statement

however,

had

not

Linegar

been

learned

filed

security interest in IdentiPHI's assets.

to

perfect

a

UCC-1

Zaychan's

If the security interest

in the March 2008 note that IdentiPHI gave to Zaychan had been
properly perfected, the full amount due on the note - approximately
$1.67 million- would have bee recovered.
was recovered.

Instead, only $150,000

Id. at 277-78.

Linegar sued DLA Piper for negligence/malpractice based on the
firm's

assurances

perfected.

to

him

that

the

security

interest

would

be

A jury found in favor and Linegar and awarded damages.

-27-

Id.

at

278.

An appellate court

reversed,

ruling that

Linegar

lacked standing because Zaychan was the holder of the note.

Id.

The Texas Supreme Court reversed and remanded holding that Linegar
had standing to sue DLA Piper for providing negligent advice to him
in his individual capacity.

Id. at 282.

Reasoning that Linegar

alleged he relied on DLA Piper's advice that the loan would be
secure in deciding to direct Zaychan to make the loan, and that the
failure

to perfect the

security interest caused a

loss

to him

individually instead of to Zaychan because Zaychan was merely a
trustee holding legal title to the account from which the loan was
made and not the beneficiary of the account,

the Texas Supreme

Court held that the jury was entitled to find that DLA Piper had an
attorney-client

relationship

with

Linegar,

DLA

Piper

duties owed to Linegar by virtue of that relationship,

breached
and DLA

Piper's breach of duties owed to Linegar caused Linegar to suffer
damages.

In support of its holding the Linegar Court cited Murphy

v. Campbell, 964 S.W.2d 265 (Tex. 1997).
In

Murphy

Stores, Inc.

the

three

major

Id. at 280-82.

stockholders

of

Colonial

Food

("Colonial") wanted to sell the business, but only if

they could each net $2 million after taxes and other obligations.
964 S.W.2d at 267.

The stockholders sought advice from Colonial's

accountant and auditor,

Touche Ross

the tax consequences of a sale.
the

stockholders

accepted

Convenience Stores, Inc.
its

assets

and

&

Co.

("Touche Ross") , about

Based on advice from Touche Ross,

a

purchase

offer

from

National

Colonial then dissolved and distributed

liabilities

to
-28-

the

stockholders.

When

the

stockholders

received

formal

deficiency

notices

from

the

IRS

claiming that Colonial owed taxes from the sale of its assets, the
stockholders settled with the IRS and then sued Touche Ross for
malpractice.
theories.

Touche Ross moved for summary judgment on several
The district court granted Touch Ross's motion without

specifying the reasons.

Plaintiffs appealed.

Id.

Finding that

fact issues existed as to whether plaintiffs had individual claims
against Touche Ross distinct from Colonial's claims, the appellate
court remanded the plaintiffs' fraud claims and otherwise affirmed
the district court's grant of summary judgment to Touche Ross.
at 268.

Id.

Touche Ross argued to the Texas Supreme Court that the

stockholders lacked standing because any wrong that may have done
was to Colonial, not to the individual stockholders.
Wingate,

Id.

Citing

the Texas Supreme Court held that because Touche Ross

counseled the stockholders directly and the tax consequences of the
IRS ruling fell directly on them, they suffered a direct loss and
therefore had standing to assert a claim separate from any claim
that Colonial might have had against Touche Ross.

Id.

The Texas Supreme Court's opinions in Wingate,

Linegar,

and

Murphy demonstrate that Appellees have standing to prosecute direct
claims

in

state

court

for

which

they

allege

facts

capable

of

establishing

that:

individually;

(2) Appellants violated those duties; and (3) those

(1)

Appellants

violations damaged Appellees.

-29-

owed

duties

to

Appellees

2.

Application of the Law to the Appellees' Allegations
(a)

Negligence/Malpractice

Asserting that they had attorney/client relationships with the
Appellants, Appellees allege that
the following errors and/or omissions by Defendants in
the underlying representation constitutes negligence:
1.

Failure to diligently represent Plaintiffs.

2.

Failure to preserve Plaintiffs' claims, rights and
defenses.

3.

Failure to protect Plaintiffs' interests.

4.

Failure
to
Plaintiffs.

render

proper

legal

advice to

Defendants fell below the standard of care for attorneys
practicing law in Texas, and thus, Defendants' conduct was a
proximate and/or producing cause of Plaintiffs'
losses and
damages. 62
Legal
negligence.

malpractice

is

must prove four elements:
(2)

proximately
occurred.
(2013)

tort

cause

of

action

based

on

Belt v. Oppenheimer, Blend, Harrison & Tate, Inc., 192

S.W.3d 780, 783 (Tex. 2006).

duty;

a

the

(1) the attorneys owed the plaintiffs a

attorneys

caused

the

Plaintiffs alleging legal malpractice

breached

plaintiffs'

See also Gunn v.

that

duty;

injuries;

Minton,

(3)
and

133 S.

Ct.

the
(4)

breach
damages

1059,

1065

(recognizing that these are the elements needed to prove a

legal malpractice claim under Texas law) .

62

At common law the rule

Plaintiffs' Original Petition & Request for Disclosure, p. 9,
Appellants' BROA, Docket Entry No. 2-2, p. 88.
-30-

of privity limited an attorney's liability to those in privity with
the attorney.

McCamish, Martin, Brown & Loeffler v. F.E. Appling

Interests, 991 S.W.2d 787, 792 (Tex. 1999).

An attorney in Texas

is therefore not liable for malpractice to anyone other than his
client.

Id.

"held to

An attorney owes a duty of care to his client and is

the

standard of

care

reasonably prudent attorney."
664 (Tex. 1989).
to a

client

which

would be

exercised

by

a

Cosgrove v. Grimes, 774 S.W.2d 662,

A litigation attorney's negligence causes damage

if the result the client would have obtained with

competent counsel is more favorable to the client than the result
actually obtained.
S.W.3d 841,

847

See Kelley & Witherspoon, LLP v. Hooper,

(Tex.

App.-Dallas 2013,

no pet.).

401

Malpractice

damages "are the difference between the result obtained for the
client and the result that would have been obtained by competent
counsel."

Elizondo v. Krist, 415 S.W.3d 259, 263 (Tex. 2013).

(1)

Appellees Have Alleged Facts Capable of
Proving that Appellants Owed Duties to Them in
Their Individual Capacities

Appellants argue that Appellees lack standing to assert claims
against them for negligence/malpractice because those claims arise
from advice provided to McVey in his representative capacity as
president of SBMC and,

therefore,

are derivative of claims that

originally belonged to SBMC and now belong to SBMC's Liquidating
Trust.

Appellees respond that Appellants mischaracterize their

-31-

claims as derivative because they are not suing for advice provided
to McVey in his representative capacity as SBMC's president and are
not seeking to recover the loss of their stock value.
argue

instead

that

they

are

suing

Appellants

for

Appellees
Appellants'

failure to diligently represent them individually and are seeking
to recover damages in the form of personal liability for tax liens,
judgments,

and attorneys fees

incurred defending lawsuits filed

against them in their individual capacities as guarantors of SBMC's
debt.
Appellees allege that
Harborcove .
filed suit on April 5, 2012 in Harris
County, Texas against SBMC and McVey, personally, for
repayment of the loan and further seeking injunctive
relief.
Millard Johnson ("Johnson") and the law firm of
Johnson DeLuca Kurisky & Gould, P.C.
(the "Firm")
(collectively "Defendants") agreed to represent SBMC and
McVey, individually in the suit brought by Harborcove.
Johnson and the Firm had a previous attorney-client
relationship with SBMC, McVey as well as McVey's other
company McVey & Co. Investments, LLC ( "M&C") , and had
represented them in at least one prior lawsuit in June
2011[, i.e., the GHEP Action].
After Defendants were retained by McVey and his
entities SBMC and M&C, they agreed to accept service on
their behalf in the Harborcove suit on April 17, 2012. 63
Evidence presented to the Bankrutpcy Court undisputedly established
that Appellants not only accepted service for McVey individually in
the

Harborcove

63

Action,

Id. at pp.
pp. 82-83.

3-4,

but

also

Appellants'
-32-

filed

BROA,

an

answer

Docket

for

him

Entry No.

and

2-2,

continued to represent him individually in that action until August
9,

2013,

SBMC' s

over

Plan

four months

on

April

4,

after
2013.

the

Bankruptcy Court

Appellees

also

approved

allege

and

Appellants do not dispute - that in addition to representing McVey
individually in the Harborcove Action, Appellants represented both
McVey individually and M&C in the earlier-filed GHEP Action.

Under

Texas law the attorney-client relationship can be created by an
express contract or it can be implied from the actions of the
parties.
105

Tanox, Inc. v. Akin, Gump, Strauss, Hauer & Feld, L.L.P.,

S.W.3d

denied).

244,

254

(Tex.App.-Houston

[14th

See also Honeycutt v. Billingsley,

Dist.]

992 S.W.2d 570,

(Tex.App.-Houston [1st Dist.] 1999, pet. denied).
in the Appellees'

2003,

pet.
581

The allegations

state court petition are more than capable of

establishing that Appellants had attorney/client relationships not
just with SBMC but also with McVey individually and with M&C, and
therefore owed duties directly to Appellees individually and not
merely as SBMC's officers, shareholders, or contractors.

(2)

Appellees Have Alleged Facts Capable of
Proving that Appellants Breached Duties Owed
Directly to Them Individually

Appellants argue that they cannot be held liable to McVey or
to M&C for advising McVey to put SBMC into bankruptcy because that
advice was provided to McVey in his representative capacity as
president of SBMC, and was not provided either to McVey or to M&C

-33-

individually.

While Appellants cannot be held liable to McVey or

to M&C for breaching duties owed only to SBMC, Appellants can be
held liable to McVey and to M&C for breaching duties owed directly
to them individually.

Wingate,

795 S.W.2d at 719; Linegar,

S.W.3d at 279-80; Murphy, 964 S.W.2d 268-69.
In pertinent part Appellees allege that
Johnson erroneously advised McVey that SBMC needed to
file Chapter 11 bankruptcy.
Specifically, Johnson
erroneously advised McVey that bankruptcy was the only
option to forestall the foreclosure because Harborcove
could simply sell the note to a third party who could
then foreclose on the collateral.
Johnson ultimately
convinced McVey that a third party purchaser could hold
the Trustees['] sale by virtue of Harborcove's filing,
without the reposting by the third party.
Such advice
was erroneous.
It was known to Johnson, when he rendered such
advice, that McVey had been under extreme duress due to
his elderly mother suffering a fatal stroke and that
McVey was tending to these needs in North Carolina.
Nonetheless, on Sunday, April 29, 2012, McVey was advised
by Johnson that there was no option other than bankruptcy
and it had to be done the next day to prevent the
foreclosure. As a result, McVey traveled back from North
Carolina early to make the frantic deadline imposed by
Johnson and was not given any opportunity to obtain a
second legal opinion. Moreover, Johnson never explained
to McVey the pros and cons of filing bankruptcy or the
potential risks involved.
Had such proper advice been
rendered, and had McVey been fully advised of the
potential risks, McVey would not have agreed to the
filing of bankruptcy and would have required Johnson to
file an injunction, temporary restraining order or some
other action to enforce the Rule 11 Agreement and prevent
the May 1, 2012 foreclosure.

After Johnson erroneously suggested that SBMC file
for bankruptcy, he then persuaded McVey to allow him and
the Firm to serve as SBMC's bankruptcy special counsel,
-34-

495

noting that the Firm was attempting to expand its
practice in the field of bankruptcy. The real intent of
Johnson was obvious: Johnson knew of SBMC's precarious
financial situation and knew that the only way for him
and his Firm to recover their significant past-due legal
fees was to represent SBMC in the bankruptcy proceedings
where their fees would be approved and paid out monthly
in addition to the ability to generate substantial
additional legal fees.
Thus,
Johnson saw the
representation as a way to catapult his Firm's bankruptcy
practice all the while disregarding the interests of
SBMC, McVey, and M&C, the Firm's clients.
On April 30, 2012, Johnson filed the Chapter 11
bankruptcy for SBMC
Johnson's interests were
furthered over those of McVey and SBMC when he convinced
McVey to lobby the bankruptcy court to allow Johnson and
his Firm to be hired as special counsel in the
bankruptcy.
At the time, Johnson did not explain to
McVey
that
he
would be
giving
up
the
previous
relationship with Johnson and his firm because of the
clear conflict.
McVey did not understand that, by
agreeing to have Johnson and the Firm serve in the
bankruptcy, he would be left without his own individual
counsel in all proceedings. 64
If

true,

establishing

Appellees'
that

factual

Appellants

allegations

breached

are

duties

capable

that

they

of
owed

directly to Appellees as a result of their existing attorney/client
relationship by failing to explain to McVey the pros,

cons,

and

potential risks that filing a Chapter 11 petition for SBMC posed to
him and to M&C in their individual capacities, and by failing to
disclose to McVey that if the Bankruptcy Court allowed Appellants
to serve as special bankrutpcy counsel to SBMC, McVey and M&C would
be

giving

up

their

previous

attorney/client

relationship

with

Appellants because of a conflict, and McVey and M&C would be left
without individual representation in the bankruptcy case and any
related adversary proceedings.
64

Id. at pp.
pp. 84-86.

5-7,

Appellants'
-35-

BROA,

Docket

Entry No.

2-2,

(3)

Appellees
Have Alleged
Facts
Capable
of
Proving that Appellants' Breaches Proximately
Caused Direct Injury and Damages to Appellees

Appellees allege that
McVey and M&C have been personally damaged as a result of
the erroneous advice given by Johnson which drove SBMC
into bankruptcy.
After bankruptcy, the assets were liquidated .
[V]arious creditors, including the Internal Revenue
Service, were not paid from the bankruptcy funds.
This
caused the IRS to file a $1.4 Million lean against McVey
personally. Aside from the IRS, various SBMC creditors
filed lawsuits against McVey and M&C for over $1. 2
Million.
These liens and lawsuits would not have
occurred had Johnson not forced SBMC into bankruptcy
through faulty advice.
In sum, Johnson wrongfully advised McVey, his
client, that he had no other option but to have the
company in which he was
100% equity owner in file for
bankruptcy.
Johnson knew, or should have known, that
this was not the only option as he had the Rule 11
Agreement in place which would have prevented the pending
foreclosure.
To the extent that Johnson knew that the
foreclosure would have to be re-posted if the note was
transferred,
such
misrepresentations
cannot
be
characterized as advice, judgment or opinion and were
made knowingly and intentionally in order to get McVey to
retain Johnson and his Firm as special bankruptcy
counsel.
As
a
result
of
Johnson's
intentional
misrepresentation (or negligent advice), McVey and M&C
were personally damaged in excess of $10,000,000. 65
If true, these factual allegations are capable of establishing
that Appellants' allegedly erroneous advice to McVey individually
and as representative of M&C that filing a Chapter 11 petition for
SBMC was the only means to prevent Harborcove from foreclosing on

65

Id. at
pp. 86-87.

pp.

7-8,

Appellants'
-36-

BROA,

Docket

Entry No.

2-2,

SBMC' s

assets

bankruptcy.

in

May

of

2012

caused

McVey

to

Appellees allege that Appellants'

put

SBMC

into

erroneous advice

caused them to suffer direct injuries and damages in the form of
liability for tax liens,
incurred

defending

the

judgments, and personal attorneys'
various

lawsuits

brought

against

individually after SBMC's debts went unpaid in bankruptcy.
damages in the form of tax liens,

judgments,

fees
them

Because

and attorneys fees

arising from lawsuits filed against McVey and M&C individually by
the IRS and other SBMC creditors are damages that are personal to
McVey and M&C, Appellees have alleged facts capable of proving that
Appellants' breach of duties owed to them individually caused them
to suffer injury and damages

that are personal

and not merely

derivative of injuries and damages suffered by SBMC.

(4)

Conclusion

Because Appellees' state court petition alleges facts capable
of establishing that Appellants had attorney/client relationships
with Appellees and therefore owed duties directly to Appellees
individually,

that Appellants breached duties owed to Appellees

individually,

and that Appellees

thereby suffered injuries

and

damages that are personal to them and not merely derivative of
injuries and damages suffered by SBMC,

the court concludes that

Appellees have alleged direct claims for negligence/malpractice
against Appellants and that the Bankruptcy Court did not err by
failing to dismiss these claims as derivative.

-37-

(b)

Breach of Fiduciary Duties

Appellees allege in their state court petition that
Defendants are liable for breach of fiduciary duty. At
all
times
material,
Defendants
had
a
fiduciary
relationship with Plaintiffs.
Thus, Defendants owed
Plaintiffs various fiduciary duties, including the duty
to act with loyalty and utmost good faith, duty of fair
and honest dealing and to refrain from any self-dealing.
Defendants breached their fiduciary duties owed to
Plaintiffs by the acts and omissions stated herein.
Specifically, Defendants placed their own interests ahead
of Plaintiffs['] by advising SBMC to file for bankruptcy
rather than enforce the Rule 11 Agreement in order to
( 1) ensure that their attorney's fees were paid; and
(2) catapult the Firm's bankruptcy practice and ensure
the payment of thousands of dollars in attorney's fees
during the course of the bankruptcy proceedings. 66
Appellees

also

allege

that

"[d] ue

to

intentional breach of fiduciary duty,

Defendants'

blatant

and

Plaintiffs are entitled to

the disgorgement of fees and/or expenses paid to Defendants.

Thus,

Plaintiffs seek total fee forfeiture from Defendants." 67
An attorney has a fiduciary duty to his client as a matter of
law.

Willis v. Maverick,

760 S.W.2d 642,

fiduciary duty that

an attorney owes

attorney "to render a

f~ll

the client's
client a

645

to a

(Tex.

client

1988).

The

requires

the

and fair disclosure of facts material to

representation."

An attorney thus

fiduciary duty of good faith,

owes

his

which includes absolute

candor, openness, and honesty, without concealment or deception.
Tanox, 105 S.W.3d at 253.

66

Id. at pp.
pp. 88-89.
67

9-10,

Appellants'

BROA,

Docket Entry No.

2-2,

Id. at p. 12, Appellants' BROA, Docket Entry No. 2-2, p. 91.
-38-

The elements of a breach of fiduciary duty claim are (1) the
existence of a fiduciary relationship (either as a matter of law or
a matter of fact) and (2) a breach of the fiduciary duties by the
attorney defendant
Abetter

Trucking

( 3)

that causes

Co.,

Inc.

v.

( 4)

damage to the plaintiff.

Arizpe,

113

(Tex.App.-Houston [1st Dist.] 2003, no pet.)
of America N.A.,
denied)).

72 S.W.3d 779,

792

S.W.3d

503,

508

(citing Avary v. Bank

(Tex.App.-Dallas 2002,

pet.

A long recognized equitable remedy for breach of a

fiduciary duty is fee forfeiture.

Arce v. Burrow, 958 S.W.2d 239,

246 (Tex.App.-Houston [14th Dist.] 1997, aff'd, in part, rev'd, in
part on other grounds, 997 S.W.2d 299 (Tex. 1999)

("[W]e hold that

fee forfeiture is a recognized remedy when an attorney breaches a
fiduciary duty to his or her client.n).

Where a plaintiff seeks

the remedy of fee forfeiture and proves his claim of breach of
fiduciary

duty,

there

causation or damages.

is

no

requirement

that

he

must

Id. at 251 ("To be entitled to forfeiture,

the client need only prove the existence of a breach;
causation

and/or

prove

damages

is

not

necessary.

The

proof of
amount

of

forfeiture, if any, is to be determined by the trial court, using
the factors set out in this opinion.n).

Not every complaint that

can be said to implicate a lawyer's fiduciary duties is actionable
separately from a negligence claim.
of

care

in

characteristics

negligence
of

that

claims
inherent

-39-

Because a lawyer's "standard
is

often

fiduciary

defined
relationship

by

the

courts refer to the fiduciary relationship that the lawyer has to
the client and use fiduciary standards to define the standard of
care required of lawyers."
(Tex.App.-Dallas 2007,

pet.

Murphy v. Gruber, 241 S.W.3d 689, 696
denied).

"[C]ourts have most often

applied those standards to conclude that the claims are really
negligence,

not breach-of-fiduciary-duty claims." Id.

Breach of

fiduciary duty by an attorney most often involves the attorney's
"subordinating his client's interests to his own,

retaining the

client's funds, engaging in self dealing, improperly using client
confidences, failing to disclose conflicts of interest, or making
representations to achieve these ends."

Id. at 693.

Because Appellees' state court petition alleges facts capable
of establishing that Appellants had attorney/client relationships
with McVey and M&C and therefore owed fiduciary duties directly to
Appellees individually, that Appellants breached fiduciary duties
owed to Appellees

individually by failing

to

disclose

that

if

Appellants were allowed to serve as special bankrutpcy counsel to
SBMC, Appellees would be giving up their previous attorney/client
relationship

with

Appellants

because

of

a

conflict,

and

that

Appellees thereby suffered direct injuries and damages that are
personal to them and not merely derivative of injuries and damages
suffered by SBMC, the court concludes that Appellees have alleged
direct claims for breach of fiduciary duty against Appellants, and
that the Bankruptcy Court did not err by failing to dismiss these
claims as derivative.

-40-

(c)

Texas DTPA Violations

Appellees allege that
[p]ursuant to Latham v. Castillo, 972 S.W.2d 66, 68 (Tex.
1998), an express misrepresentation constitutes an
unconscionable action or course of action that cannot be
characterized as advice, judgment, or opinion, and thus
violates the Texas
Deceptive Trade
Practices Act
("DTPAu).
In this same regard, an attorney may be held
liable to his client if he violates Section 17.49 (c) (3)
of the DTPA by engaging in an unconscionable action or
course of action.
Plaintiffs are consumers under the
DTPA because they acquired goods or services from
Defendants. Defendants violated the DTPA by engaging in
false, misleading, unconscionable or deceptive acts or
practices that the Clients relied upon to their
detriment.
Specifically,
Defendants made express
misrepresentations by advising McVey that bankruptcy was
his only option when Defendants knew that this was not
true in light of the Rule 11 Agreement. Plaintiffs will
show that Defendants' conduct, as described herein, was
committed knowingly and intentionally as those terms are
defined by the DTPA.
Moreover, the conduct described
herein constitutes an unconscionable action or course of
action that cannot be characterized as advice, judgment
or opinion.
Accordingly, Defendants are liable to
Plaintiffs for additional damages as provided by the
DTPA, including treble damages and reasonable attorneys'
fees necessary to , bring this cause of action, all of
which are being sought herein. 68
The Texas DTPA is a consumer protection law that prohibits
"[f]alse, misleading, or deceptive acts or practices in the conduct
of any trade
§

17.46(a).

or commerce

u

Tex.

Bus.

&

Com.

Code Ann.

A consumer may maintain an action under the Texas DTPA

if the defendant engaged in false, misleading, or deceptive acts
and these acts constituted a producing cause of the consumer's
damages.

68

Tex. Bus.

&

Com. Code Ann.

§

17 . 50 (a) ( 1)

See also Doe

Id. at p. 10, Appellants' BROA, Docket Entry No. 2-2, p. 8 9.
-41-

..:!.v~·~B~o~v.:r.....:::..S--..::,C:...:l~u~b~s~.::::O..:f~G~r"-=e:::.:a=t..:::::e..:r~D::..::a~l=-=-l:::::a.::::s...L,___,I:..:n~c~. ,

1995)

(enumerating

plaintiff

is

misleading,

a

the

elements

consumer,

(2)

of

9 0 7 S . W. 2 d 4 7 2 ,
DTPA

actions

the
and

or deceptive acts,

defendant
(3)

4 7 8 ( Tex .

as:

engaged

(1)
in

the

false,

these acts constituted a

producing cause of the consumer's damages).
Appellees allege that Appellants violated the DTPA when, prior
to McVey's agreeing to put SBMC into bankruptcy, they told him that
bankruptcy was

the

only option to

avoid

foreclosure

on SBMC' s

assets when Appellants knew that this was not true in light of the
Rule 11 Agreement.
facts that,

Because Appellees' state court petition alleges

if true,

are capable of establishing Appellants had

attorney/client relationships with McVey and M&C who acquired legal
services from Appellants and can therefore be considered consumers
under Texas law, that Appellants engaged in false, misleading, or
deceptive acts by telling McVey that bankruptcy was the only option
to avoid foreclosure on SBMC's assets, and that this deception was
a producing cause of damages that were personal to Appellees and
not merely derivative of injuries and damages suffered by SBMC, the
court

concludes

that

Appellees

have

alleged

facts

capable

of

establishing direct claims for violation of the Texas DTPA against
Appellants, and that the Bankruptcy Court did not err by failing to
dismiss these claims as derivative.

-42-

B.

The Bankruptcy Court Did Not Err by Failing to Conclude that
the Appellees' Direct Claims Are Barred Under the Release
Language of the Confir.med Plan
On April 4, 2013, the Bankruptcy Court confirmed the Amended

Plan of Liquidation in SBMC's bankrutpcy case.
a

Trust

to

liquidate

the

Debtor's

assets,

69

The Plan created

and

contained

the

following Release of Exculpated Persons:
13.4. Releases and Limitation of Liability of Exculpated
Persons. The Exculpated Persons shall not have or incur
any liability to any Person for any act taken or omission
made in good faith in connection with or in any way
related
to
negotiating,
formulating,
implementing,
confirming, or consummating this Plan, the Disclosure
Statement or any contract,
instrument,
filing with
governmental agencies, release, or other agreement or
document created in connection with or related to this
Plan, any prior. plan or disclosure statement of the
Debtor, or the administration. of the Bankruptcy Case, nor
with respect to any liability, claim or cause of action,
whether known or unknown,
asserted or unasserted,
belonging to or assertable by the Debtor, the Estate, or
the Liquidating Trustee against the Exculpated Persons,
from the beginning of time until the Effective Date
unless the act is found to be in violation of the
Bankruptcy Code,
State Law or Federal Law.
The
Exculpated Persons shall have no liability to any Person
for actions taken in good faith under or relating to this
Plan or in connection with the administration of the
Bankruptcy Case including, without limitation, failure to
obtain confirmation of this Plan or to satisfy any
condition or conditions precedent, or waiver of or
refusal to waive any condition or conditions precedent to
Confirmation or to the occurrence of the Effective Date.
Further, the Exculpated Persons shall not have or incur
any liability to any Person for any act or omission in
connection with or arising out of their administration of
this Plan.
The releases contained in this paragraph do

69

0rder Confirming First Amended Plan of Liquidation by the
Official Committee of Unsecured Creditors and Joint Plan of
Liquidation of the Committee and SBMC Healthcare, LLC, Appellants'
BROA, Docket Entry No. 2~2, pp. 4,527-49.
-43-

not apply to violations of the Bankruptcy Code, egregious
conduct, gross negligence or willful misconduct as
determined by the Bankruptcy Court.
The Committee
Members and its Counsel are fully exculpated from any and
all claims. 70
Appellants have argued throughout this case that the Plan's
Release barred all the claims alleged in the Appellees' state court
petition.

Acknowledging

that

Appellants

employed in the Bankruptcy Case" due

are

to their

"professionals
role

as

special

bankruptcy counsel for SBMC, and thus are "Exculpated Persons" to
whom the protections of the release apply,

the Bankruptcy Court

nevertheless concluded that the release does no bar the direct
claims

asserted

in

the

Appellees'

state

court

petition.

The

Bankruptcy Court initially reasoned that
[b]ecause the Provision exculpates acts or omissions in
connection with the Debtor's "Plan" and "Bankruptcy
Case," exculpatory protection necessarily relies on the
existence of the Debtor's bankruptcy case.
Thus, as
drafted, the Exculpatory Provision only limits the
liability of Defendants beginning from the Petition Date
going forward.
Because the Provision is effective
exclusively as to post-petition events, it does not bar
Plaintiffs' causes of action that form the substance of
this Adversary Proceeding. Plaintiffs' lawsuit is based
on events that occurred prior to the Debtor's bankruptcy
namely, Defendants' failure to properly draft and
enforce a Rule 11 agreement and Defendants negligently
advising McVey to file a Chapter 11 petition for SBMC.
Because Plaintiffs' lawsuit is based on pre-petition
events and the Exculpatory Provision only immunizes
Defendants from post-petition acts or omissions, the
Provision
is
ineffective
to
bar
this
Adversary
Proceeding. 71

7

°First Amended Plan of Liquidation by the Official Committee
of Unsecured Creditors and Joint Plan of Liquidation of the
Committee and SBMC Healthcare, LLC, pp. 34-35, Appellants' BROA,
Docket Entry No. 2-2, pp~ 3,868-69.
71

September 18, 2014, Memorandum Opinion, pp. 11-2, Appellants'
BROA, Docket Entry No. 2~2, pp. 266-67.
See also In re SBMC, 519
-44-

The Bankruptcy Court acknowledged that "[t]he Exculpatory Provision
includes language that attempts to discharge pre-petition claims, " 72
but concluded that
law.

,73

language "fails

for

overbreadth under Texas

Although the Bankruptcy Court subsequently reopened the

Adversary Proceeding to reconsider this issue, the Bankruptcy Court
ultimately reached the same conclusion, i.e., that
the Exculpatory Provision does not encompass the prepetition communications between McVey and
Johnson
concerning the latter's advice to the former to file the
bankruptcy petition on behalf of SBMC.
Thus, the
Exculpatory Provision does not bar the Plaintiffs from
prosecuting the Malpractice Claim for Filing against the
Defendants. 74
Appellants argument that the Plan's Release bars the claims
asserted in Appellees'

state

court

petition

is

based on their

contention that those claims arise from advice given to SBMC to
file bankruptcy.

Their argument is grounded on undisputed Texas

law that shareholders lack standing to prosecute claims derived
from wrongs done to a corporation, i.e., shareholders lack standing
to assert derivative claims individually.

The Bankruptcy Court has

not only acknowledged this undisputed tenant of Texas law but also

B.R. at 181.
72

Id.

at n. 3.

74

Amended Findings of Fact and Conclusions of Law, Exhibit 4
to Notice of Filing of an Appeal, Docket Entry No. 1-5, p. 13;
Appellants' BROA, Docket Entry No. 2-2, p. 1,683.
-45-

dismissed the derivative claims asserted in Appellees' state court
petition for this reason.

75

The Bankruptcy Court explained:

The Court will grant, in part, the Motion to Dismiss, and
dismiss with prejudice the causes of action alleging
injury due to devaluation of SBMC Stock. Plaintiffs lack
standing to bring these derivative actions as they belong
exclusively to SBMC's estate (i.e. the Trust) . 76
Appellants' do not dispute that the Plan's Release Language is
not

applicable

to

pre-petition

advice

given

to

Appellees

Instead, Appellants argue that

individually.

Appellees fail to cite any evidence of advice given to
them individually.
The legal advice at issue was
rendered to SBMC and concerned whether SBMC should file
bankruptcy.
McVey as an individual did not have the
power to put SBMC into bankruptcy, only its President and
CEO could do that.
Thus, to the extent McVey was
involved, it was only in his capacity as the President
and CEO of the debtor. 77
Appellants' argument fails to recognize that Appellees allege - and
Appellants
SBMC's

do

not

Chapter

11

dispute -

that

petition,

both before

Appellants

had

and

after

filing

attorney/client

relationships not only with SBMC and McVey in his representative

September 18, 201~, Order of Partial Dismissal and Remand,
Exhibit 1 to Notice of Filing of an Appeal, Docket Entry No. 1-2,
p. 2 ("ORDERED that the Defendants' Motion to Dismiss is granted in
part, and all causes of action brought by the Plaintiffs alleging
injury due to devaluation of SBMC stock are dismissed with
prejudice to refiling by the Plaintiffs [.] "). See also Appellants'
BROA, Docket Entry No. 2-2, p. 291.
75

76

September 18, 2014, Memorandum Opinion, p. 33, Appellants'
BROA, Docket Entry No. 2-2, pp. 288. See also In re SBMC, 519 B.R.
at 193.
77

Appellants' Reply Brief, Docket Entry No. 14, pp. 20-21.
-46-

capacity as SBMC's president and CEO, but also with McVey and M&C
in their individual capacities.
preceding

section,

the

court

Appellees'

state

court

For the reasons stated in the
has

petition

already

concluded

that

the

asserts

direct

claims

for

negligence/malpractice, breach of fiduciary duty, and violation of
the Texas DTPA because the petition alleges facts that,
are capable of proving that
relationships
( 2)

with

( 1)

Appellees

if true,

Appellants had attorney I client

in

their

individual

capacities;

Appellants breached duties owed directly to Appellees as a

result

of

those

attorney/

client

relationships

by

failing

to

explain to McVey the pros, cons, and potential risks that filing a
Chapter 11 petition for SBMC posed to him and to M&C in their
individual capacities, and by failing to disclose to McVey that if
the

Bankruptcy

Court

allowed

Appellants

to

serve

as

special

bankrutpcy counsel to SBMC, McVey and M&C would be giving up their
previous attorney/client relationships with Appellants because of
conflicts, and would be left without individual representation in
the bankruptcy case and any related adversary proceedings;
(3)

Appellants'

alleged

breaches

of

duties

owed

directly

and
to

Appellees caused Appellees to suffer both injuries and damages that
are personal to them and not merely derivative of injuries and
damages suffered by SBMC.
Because Appellants do not argue and the court does not find
that the breaches of duties owed to Appellees individually alleged

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in Appellees' state court petition are "actions taken in good faith
under or relating to [SBMC's Confirmed] Plan or in connection with
the administration of the Bankruptcy Case," the court concludes
that the Bankruptcy Court did not err by failing to conclude that
the direct claims alleged in Appellees'

state court petition are

barred under the Release Language of the Confirmed Plan.

Because

the court reaches this conclusion based on the plain language of
the release in the Confirmed Plan as written, the court need not
reach and expresses no opinion on the Appellants' second issue on
appeal, i.e., "[d]id the Bankruptcy Court err in applying in its
application
barriers

of

to

state

the

law

considerations

application

of

the

to

create

release

artificial

language

of

the

Confirmed Plan as written?"

IV.

Conclusions and Order

For the reasons stated above,
Bankrutpcy

Court

Appellees'

claims

Appellee's
Confirmed

claims
Plan.

did
as

not

err

by

the court concludes that the
failing

derivative,

or

as barred under

the

Accordingly,

the

by

to

dismiss

failing

release

September

to

all

dismiss

language of
18,

2014,

of

the

Order:

(1) Granting in Part and Denying in Part the Defendants' Motion to
Dismiss;

(2)

Entirety;

(3) Granting in Part and Denying in Part the Plaintiffs'

Denying

the

Trust's

Motion

to

Intervene

in

Its

Motion for Remand (Adversary Docket Entry No. 46), is AFFIRMED; the

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October 30, 2014, Order:
Defendants'

(1) Granting in Part and Carrying in Part

Motion to Amend or for Clarification of Judgment of

Partial Dismissal and Remand Order Pursuant to Bankr. R. Pro. 9023;
(2) Reopening the Record to Allow the Parties to Introduce Exhibits
and Adduce Testimony; and (3)

Setting a Hearing for 9:30 A.M. on

December 12, 2014 (Docket Entry No. 55), is AFFIRMED; the September
21, 2016, Order Denying in Its Entirety the Defendants' Motion to
Amend or for Clarification of Judgment of Partial Dismissal and
Remand Order Pursuant to Bankr.

R.

Pro.

902 3

(Adversary Docket

Entry No. 121), is AFFIRMED; and the September 26,

2016, Amended

Findings of Fact and Conclusions of Law Regarding the Defendants'
Motion

to

Dismissal

Amend
and

or

Remand

for

Clarification

Order

Pursuant

of
to

Judgment
Bankruptcy

of

Partial

Rule

9023

(Adversary Docket Entry No. 124), is AFFIRMED. 78
SIGNED at Houston, Texas, on this

/~day

o

SIM LAKE
UNITED STATES DISTRICT JUDGE

78

The court has allowed the parties extraordinary leeway in
submitting lengthy briefs and other written materials in connection
with the pending motions. As the length of this Memorandum Opinion
and Order indicates, the court has expended considerable time
reading these papers and performing a significant amount of
independent research to be as fully informed as possible when
addressing the parties' arguments.
While, because of the sheer
volume of information presented, it is not impossible that some
arguments were overlooked, the parties should assume that failure
to expressly address a particular argument in this Memorandum
Opinion and Order reflects the court's judgment that the argument
lacked sufficient merit to warrant discussion.
Accordingly, the
court strongly discourages the parties from seeking reconsideration
based on arguments they have previously raised or that they could
have raised.
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