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Basic Capital Management Inc v. Dynex Capital Inc

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

May 7, 2018

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



         In this removed action, 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 transfer, alter ego, and conspiracy. Dynex and DCI move to dismiss plaintiffs' state-court original petition (“petition”). For the reasons that follow, the court grants Dynex's and DCI's motions to dismiss and grants plaintiffs leave to file an amended complaint.


         Because this case is the subject of a prior memorandum opinion and order, Basic Capital Mgmt., Inc. v. Dynex Capital, Inc., 2017 WL 5197145, at *1 (N.D. Tex. Nov. 7, 2017) (Fitzwater, J.), the court will recount only the background facts and procedural history that are pertinent to this decision.

         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, acting on behalf of ART and TRI, 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 Dynex's and DCI's post-verdict motions for judgment notwithstanding the verdict and entered a take-nothing judgment against both DCI and Dynex. 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 plaintiffs' 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. Their petition alleges claims for fraudulent transfer and civil conspiracy under the Texas Uniform Fraudulent Transfer Act (“TUFTA”), Tex. Bus. & Com. Code Ann. § 24.001 (West 2018), and alter ego liability. Plaintiffs also seek other remedies relating to DCI and Dynex's allegedly fraudulent conduct.[3] In May 2017 Dynex and DCI removed the case to this court.

         Dynex now moves under Fed.R.Civ.P. 12(b)(6) and 9(b) to dismiss plaintiffs' petition. DCI moves separately under Rule 8(a)(2), 9(b) and 12(b)(6) to dismiss the petition. Plaintiffs oppose the motion.


         Under Rule 12(b)(6), the court evaluates the pleadings by “accept[ing] ‘all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff.'” In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir. 2007) (quoting Martin K. Eby Constr. Co. v. Dall. Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004)). To survive defendants' motions to dismiss, plaintiffs must allege enough facts “to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant[s] [are] liable for the misconduct alleged” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “The plausibility standard is not akin to a ‘probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id.; see also Twombly, 550 U.S. at 555 (“Factual allegations must be enough to raise a right to relief above the speculative level [.]”). “[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not ‘show[n]'-‘that the pleader is entitled to relief.'” Iqbal, 556 U.S. at 679 (quoting Rule 8(a)(2)). Furthermore, under Rule 8(a)(2), a pleading must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Although “the pleading standard Rule 8 announces does not require ‘detailed factual allegations, '” it demands more than “‘labels and conclusions.'” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555). And “‘a formulaic recitation of the elements of a cause of action will not do.'” Id. (quoting Twombly, 550 U.S. at 555).

         “Rule 9(b) imposes a heightened pleading standard for fraud claims and requires that a party state with particularity facts supporting each element of fraud.” Turner v. AmericaHomeKey Inc., 2011 WL 3606688, at *2 (N.D. Tex. Aug. 16, 2011) (Fitzwater, C.J.) (citing Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719, 724 (5th Cir. 2003)), aff'd, 514 Fed.Appx. 513 (5th Cir. 2013). “At a minimum, Rule 9(b) requires allegations of the particulars of time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby.” Id. (quoting Benchmark Elecs., 343 F.3d at 724) (internal quotation marks omitted). More colloquially, plaintiffs must plead the “who, what, when, where, and how” of the fraud. Williams v. Bell Helicopter Textron, Inc., 417 F.3d 450, 453 (5th Cir. 2005) (quoting United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903 (5th Cir. 1997)).


         Dynex and DCI maintain that plaintiffs' pleading of an alter ego claim does not satisfy the pleading requirements of Rules 12(b)(6) and 9(b).


         When a suit is removed to federal court based on diversity jurisdiction, district courts “apply the conflict of laws rule of the state in which it sits to determine which state's substantive law should be applied.” Alberto v. Diversified Group, Inc., 55 F.3d 201, 203 (5th Cir. 1995) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941)). Under Texas law, “only the laws of the jurisdiction of incorporation of a foreign corporation shall govern . . . the liability, if any, of shareholders of the foreign corporation for the debts, liabilities, and obligations of the foreign corporation for which they are not otherwise liable by statute or agreement.” Tex. Bus. Corp. Act Ann. art. 8.02 (West 2003); see also Ace Am. Ins. Co. v. Huntsman Corp., 255 F.R.D. 179, 195 (S.D. Tex. 2008) (citing cases) (“[C]ourts have held that the law of the state of incorporation for the entity whose corporate form is at issue applies to determine whether to pierce the corporate veil.”).

         DCI and Dynex were both incorporated in Virginia. See Pet. ¶¶ 6-7 (“Defendant [Dynex] is a Virginia corporation with its principal place of business in Glen Allen, Virginia, ” and “[DCI] is a Virginia corporation with its principal place of business in Glen Allen, Virginia.”). Accordingly, the court applies Virginia law when determining whether plaintiffs have sufficiently pleaded an alter ego claim.

         Under Virginia law, “[a] court can pierce the corporate veil only upon a showing that (1) the corporation was the ‘alter ego, alias, stooge, or dummy' of the other entity; and (2) ‘the corporation was a device or sham used to disguise wrongs, obscure fraud, or conceal crime.'” Oliver v. Omega Protein, Inc., 2011 WL 1044403, at *5 ...

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