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Basic Capital Management, Inc. v. Dynex Capital, Inc.

United States District Court, N.D. Texas, Dallas Division

November 7, 2017

DYNEX CAPITAL, INC., et al., Defendants.



         Plaintiffs' motion to remand this removed action presents the question whether removal of this action-in which it is undisputed that the parties are diverse citizens and that the minimum jurisdictional threshold is exceeded-is nonetheless impermissible under the rule of Barrow v. Hunton, 99 U.S. 80 (1878), which precludes removal jurisdiction over a state court action that seeks to nullify or enforce a prior state-court judgment. For the reasons that follow, the court denies the motion to remand and denies as moot plaintiffs' motion to stay the case pending a decision on the remand motion.


         Plaintiffs Basic Capital Management, Inc. (“BCM”), American Realty Trust, Inc. (“ART”), and Transcontinental Realty Investors, Inc. (“TRI”) bring this action against defendants Dynex Capital, Inc. (“Dynex”) and Dynex Commercial, Inc. (“DCI”) to recover on claims for fraudulent transfers, alter ego, and related claims.

         Plaintiffs' suit relates to a case filed nearly two decades ago. Dynex and DCI are real estate lending companies. They entered into a transaction with BCM on behalf of ART and TCI, which included two loan commitments-one to borrow $33.4 million to acquire and develop three buildings in New Orleans, and one to borrow $160 million to develop commercial and multifamily properties (the “$160 Million Commitment”). In 1999 BCM, ART, and TRI sued DCI in Texas state court, alleging five claims related to the breach of the $160 Million Commitment.[1] In 2000 Dynex was added as a defendant in the state court action. The jury found DCI liable for breaching the $160 Million Commitment, but found that Dynex was not liable for any claims related to the $160 Million Commitment.[2] In 2004 the trial court granted plaintiffs' post-verdict motion for judgment notwithstanding the verdict and entered a take-nothing judgment against both DCI and Dynex Capital. Plaintiffs appealed the take-nothing judgment against DCI but did not appeal the take-nothing judgment in favor of Dynex. After appeals to the court of appeals and the Supreme Court of Texas, the trial court in 2015 entered a final judgment against DCI, awarding plaintiffs damages for breach of the $160 Million Commitment. In April 2017 plaintiffs filed the present action in state court in an attempt to collect against Dynex based on the state court judgment against DCI. These claims are all based on Dynex's allegations that, beginning in 1999 and leading up to and through the appellate process, Dynex and DCI attempted to evade judgment creditors through a series of transfers of DCI's assets that eventually led to its insolvency. Plaintiffs allege that these transfers were motivated by an effort to evade judgment creditors. Their state-court original petition (“petition”) alleges claims for fraudulent transfer[3] and civil conspiracy[4] under the Texas Uniform Fraudulent Transfer Act (“TUFTA”), Tex. Bus. & Com. Code Ann. § 24.001 (West 2017), and alter ego liability.[5]Plaintiffs also seek other remedies relating to DCI and Dynex's allegedly fraudulent conduct.[6] In May 2017 Dynex and DCI removed the case to this court under 28 U.S.C. § 1332 based on diversity of citizenship.[7]

         BCM, ART, and TRI move to remand and to stay this litigation pending the court's decision on the remand motion. Dynex and DCI oppose the motions, and they separately move to dismiss this suit.[8]


         As the removing parties, Dynex and DCI “ha[ve] the burden of overcoming an initial presumption against jurisdiction and establishing that removal is proper.” Carnes v. Data Return, L.L.C., 2005 WL 265167, at *1 (N.D. Tex. Feb.1, 2005) (Fitzwater, J.) (citing Howery v. Allstate Ins. Co., 243 F.3d 912, 916 (5th Cir. 2001)). “In general, defendants may remove a civil action if a federal court would have had original jurisdiction.” De Aguilar v. Boeing Co., 47 F.3d 1404, 1408 (5th Cir. 1995) (citing 28 U.S.C. § 1441(a)). “Due regard for the rightful independence of state governments, which should actuate federal courts, requires that they scrupulously confine their own jurisdiction to the precise limits which (a federal) statute has defined.” Victory Carriers, Inc. v. Law, 404 U.S. 202, 212 (1971) (quoting Healy v. Ratta, 292 U.S. 263, 270 (1934)). “The federal removal statute, 28 U.S.C. § 1441, is subject to strict construction because a defendant's use of that statute deprives a state court of a case properly before it and thereby implicates important federalism concerns.” Frank v. Bear Stearns & Co., 128 F.3d 919, 922 (5th Cir. 1997) (citing Carpenter v. Wichita Falls Indep. Sch. Dist., 44 F.3d 362, 365 (5th Cir. 1995)). “[D]oubts regarding whether removal jurisdiction is proper should be resolved against federal jurisdiction.” Acuna v. Brown & Root Inc., 200 F.3d 335, 339 (5th Cir. 2000).


         Plaintiffs do not contest diversity of citizenship or the amount in controversy. They maintain, however, that the court lacks jurisdiction because this suit represents a mere continuation of the original state-court suit.


         A federal court does not have removal jurisdiction over a state court action that seeks to nullify or enforce a prior state court judgment. See Barrow, 99 U.S. at 82-83 (holding that federal court lacked jurisdiction to rule in “proceeding to procure nullity” of state court judgment); Beighley v. FDIC, 868 F.2d 776, 781 (5th Cir. 1989) (“As modern case law makes clear, the Barrow rule applies only when an action in federal court seeks to nullify or to enforce the judgment of a prior state court suit.”), superseded by statute on other grounds as stated by Tedford v. Warner-Lambert Co., 327 F.3d 428 n.14 (5th Cir.1989); Wuxi Taihu Tractor Co. v. York Grp., Inc., 460 Fed.Appx. 357, 359 (5th Cir. 2012) (per curiam) (applying Barrow where plaintiff sought bill of review in removed Texas court action). Courts consider whether the second suit “is a supplementary proceeding so connected with the original suit as to form an incident to it, and substantially a continuation of it.” Barrow, 99 U.S. at 82. If the court is asked to overturn the prior state court judgment on the basis of procedural irregularities, and the litigant presents no new, substantive arguments, federal jurisdiction may be improper. But if a litigant asserts new, substantive arguments, the federal court can exercise jurisdiction. See Barrow, 99 U.S. at 85 (contrasting “causes relat[ed] to form and those relat[ed] to the merits”); Wuxi Taihu, 460 Fed.Appx. at 359 (holding that case should be remanded because it dealt with procedural irregularities in state proceeding). Courts must distinguish between cases seeking a “revision of errors and irregularities, or of the legality and correctness of the judgments and decrees of the State courts” and those that constitute “a new case arising upon new facts, [which] although having relation to the validity of an actual judgment or decree, or of the party's right to claim any benefit by reason thereof, ” are nevertheless independent of the previous judgment. Barrow, 99 U.S. at 83. “The distinction between the two classes of cases may be somewhat nice, but it may be affirmed to exist.” Id.


         The court now examines whether the claims in this suit qualify under Barrow as actions separate from the original state suit.


         As a preliminary matter, the court notes that the Fifth Circuit is hesitant to construe the Barrow rule broadly. Given evolving views regarding how removal implicates ...

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