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Bass v. United Development Funding, L.P.

Court of Appeals of Texas, Fifth District, Dallas

August 21, 2019

J. KYLE BASS, ET AL., Appellants

          On Appeal from the County Court at Law No. 3 Dallas County, Texas Trial Court Cause No. CC-17-06253-C

          Before Justices Whitehill, Molberg, and Reichek



         This interlocutory appeal arises out of a lawsuit filed by appellees United Development Funding, L.P., et al. (collectively, UDF) against J. Kyle Bass and Hayman Capital Management, L.P., et al. (collectively, Hayman), asserting claims for business disparagement, tortious interference with contract, tortious interference with business relationships, and civil conspiracy to commit these torts, based on statements Hayman wrote and published on the internet about UDF's business. Hayman filed a motion to dismiss UDF's claims pursuant to the Texas Citizens Participation Act, Tex. Civ. Prac. & Rem. Code Ann. §§ 27.001-.011 (TCPA). The trial court denied Hayman's motion to dismiss.

         Hayman raises six issues on appeal. In its first five issues, Hayman argues UDF failed to establish by clear and specific evidence a prima facie case for certain of the essential elements of its claims. In its sixth issue, Hayman contends the trial court erred by striking evidence attached to Hayman's post-hearing brief. For the reasons that follow, we conclude UDF carried its burden under the TCPA to establish a prima facie case for the challenged essential elements of its claims preserved for our review.[1] We further conclude the trial court did not err by striking evidence attached to Hayman's post-hearing brief. Accordingly, we affirm the trial court's order.


         Procedural Background

         UDF filed suit against Hayman on November 28, 2017, asserting claims for business disparagement, tortious interference with contract, tortious interference with business relationships, civil conspiracy to disparage UDF's business, civil conspiracy to tortiously interfere with UDF's contracts, and civil conspiracy to tortiously interfere with UDF's prospective contracts and business relationships. UDF requested actual and exemplary damages, as well as an award of its attorney's fees.

         On January 26, 2018, Hayman filed a motion to dismiss UDF's lawsuit under the TCPA. As relevant to the issues before us, Hayman argued that UDF did not meet its burden under section 27.005(c) of the TCPA to establish by clear and specific evidence a prima facie case for the actual malice element of its claims. See Tex. Civ. Prac. & Rem. Code Ann. § 27.005(c). In its reply brief on its motion to dismiss, Hayman additionally argued that UDF did not establish a prima facie case that Hayman's statements were false or that Hayman's statements caused UDF's damages.

         In its brief in opposition to Hayman's motion to dismiss, UDF asserted that its petition as well as numerous affidavits-from its business counterparts, employees, investors, and a forensic accounting expert specializing in "areas that are the subject of [Hayman's] false statements"- provided detailed allegations and evidence far exceeding the minimum quantum of evidence necessary to state a prima facie case under the TCPA.

         Following a May 21, 2018 hearing on Hayman's motion, Hayman filed an amended post-hearing brief on May 30, 2018, attaching additional evidence, including a supplemental affidavit of Bass. UDF moved to strike Hayman's amended post-hearing brief and Bass' supplemental affidavit on the grounds (1) they were filed outside of the deadlines and briefing schedule provided in the parties' Rule 11 agreement; (2) they were not served and filed at least three days prior to the scheduled hearing as required by Dallas Local Rule 2.09; (3) Bass' supplemental affidavit constituted new evidence filed after the hearing on Hayman's motion to dismiss; and (4) Hayman's submission of new evidence and arguments after the hearing was prejudicial to UDF.

         On June 11, 2018, the trial court signed an order denying Hayman's motion to dismiss. In its order, the trial court concluded Hayman's amended post-hearing brief and the "evidence in the [brief]" were improperly submitted by Hayman "without authorization after the hearing." Accordingly, the trial court granted UDF's motion to strike the evidence in Hayman's amended post-hearing brief, but the trial court did not strike the amended post-hearing brief itself from the record.

         UDF's Prima Facie Evidence

         This is not a case in which the plaintiff merely provided the "minimum quantum of evidence" necessary to satisfy its burden to state a prima facie case for its claims. See In re Lipsky, 460 S.W.3d 579, 590 (Tex. 2015). Rather, the prodigious quantity of details and specific fact allegations in UDF's pleadings and affidavits that support a rational inference establishing the challenged elements is much like a restaurant menu with too many offerings-the difficulty lies in choosing which examples, and what level of detail, to include in our opinion. In concluding UDF satisfied its burden under the TCPA, we reviewed over 2, 000 pages of pleadings, affidavits, and evidence, such as copies of Hayman's internet posts and statements, news and social media articles, correspondence, contracts and agreements, contract modification agreements, and SEC filings. As we must, we considered these pleadings, affidavits, and evidence in a light most favorable to UDF, the nonmovant. Dyer v. Medoc Health Servs., LLC, 573 S.W.3d 418, 424 (Tex. App.-Dallas 2019, pet. denied).

         UDF's sixty-one page petition, and affidavits attached to its response to Hayman's motion to dismiss, quote extensively from Hayman's internet posts and they provide numerous detailed descriptions of Hayman's alleged false statements, including dates, titles, and headlines of the posts, and the manner in which Hayman circulated its statements on the internet and among various specifically identified news and social media outlets, further publicly proliferating Hayman's indictments of UDF's business. UDF's pleadings and affidavits explain how and why Hayman's statements were false; illustrate and describe how and why Hayman made the false statements knowingly or recklessly; and chronicle the economic and business damages and losses UDF sustained as a direct result of Hayman's false statements. Evidentiary documentation supporting UDF's fact allegations and affidavit testimony was attached to UDF's response to Hayman's motion to dismiss, and included, among other things, copies of: Hayman's posts and statements subject of this lawsuit; social media posts by other organizations, as well as news articles reporting on Hayman's statements; UDF's SEC filings; invoices; billing statements; contracts and agreements between UDF and various of its business partners and associates, customers, and lenders; modifications to and terminations of such contracts and agreements resulting from Hayman's allegedly false and misleading statements; and correspondence reflecting the same. In this opinion, we describe only some of those supernumerary fact allegations and evidence.

         The Allegations Underlying UDF's Claims

         We draw the following facts from the pleadings and from evidence adduced in connection with Hayman's motion to dismiss and UDF's response thereto. See Deuell v. Tex. Right to Life Comm., Inc., 508 S.W.3d 679, 685 (Tex. App.-Houston [1st Dist.] 2016, pet. denied). For purposes of this appeal, we accept UDF's pleading allegations and evidence as true.

         This lawsuit derives from a series of internet posts written and published by Hayman, a hedge fund registered with the United States Securities and Exchange Commission (SEC), about the viability and legitimacy of the business of UDF, a residential real estate lender. Hayman purchases and sells securities and other financial instruments for institutional investors and high net worth individuals. Bass is Hayman's founder and chief investment officer. Bass and Hayman utilize short selling as an investment strategy.[2] The gravamen of UDF's claims is that Hayman published and disseminated defamatory, false, and misleading statements about UDF's business in order to drive down UDF's stock price and profit from several large short positions it had taken in UDF stock.

         UDF is a family of funds that lends money to residential real estate developers and homebuilders in Texas and other states. Several UDF entities are or were registered with the SEC or were listed on the NASDAQ stock exchange. According to UDF's petition:

The UDF family was founded in 2003 to provide investors an opportunity to diversify their portfolios with unique and sound investments in affordable residential real estate. The UDF Family enjoyed steady growth and provided consistent returns to investors for over a decade while financing hundreds of millions of dollars in successful housing, construction and development projects for leading developers in the State of Texas and elsewhere.

         UDF alleges, "Bass made a name for himself as an investor in 2008 when the large short positions he had taken against the housing market proved to be hugely profitable for his investors." In subsequent years, however, Bass' investments incurred losses. According to UDF, "[b]y 2015, a steady stream of investors were withdrawing money from Bass' funds due to poor returns." To stem the exodus of Hayman investors, UDF claims Hayman took "voluminous" short positions in UDF stock, and then engaged in a campaign to spread false and damaging information about UDF to the public marketplace, to UDF's business associates, and to governmental authorities with the objective of driving down the price of UDF stock:

[Hayman and Bass] chose to engage in what is known as a "short-and-distort" scheme. In this illegal scheme, the short seller spreads false and damaging information about the target company it is betting against in order to harm the business and its stock price. [Hayman and Bass] chose UDF as their target for their scheme.
[In] 2015, [Hayman and Bass] opened an enormous short position in UDF. [Hayman and Bass] then attacked UDF in a series of false internet posts that were made anonymously . . . . The heart of [their] attack was that UDF was not a legitimate real estate lending and development business, but rather a billion-dollar house of cards that had been built up through a massive Ponzi scheme. [They] purported to have done extensive research to back their false claims that UDF had no genuine financial ability to carry on its business and that it was just a matter of time before creditors and investors were stuck with the fallout of UDF's insolvency.

         UDF alleges that Hayman and Bass posted this false information on the internet, disseminated the false information to the media, and provided the false information "directly to UDF's business partners-lenders, borrowers, accountants, title companies, etc-that [they] knew were necessary to UDF's continued success." UDF contends that as a result of Hayman's false statements:

• UDF sustained hundreds of millions of dollars in damages;
• UDF suffered a sudden and severe loss of access to credit and capital markets necessary for operation of its business;
• UDF was forced to pay off loans and liquidate assets;
• UDF lost builder and developer customers and future investors; and
• agreements and plans for real estate development projects between UDF and its customers and business associates fell through.

         When UDF's stock price dropped as a result of Hayman's false statements, [3] Hayman and Bass sold their short positions in UDF stock at a profit of $60 million or more.

         Hayman's Short Positions in UDF

         Hayman contends that Parker Lewis, a Hayman analyst, began conducting research into real estate investment trusts (REITs)[4] in 2014, to identify potential investment opportunities. Lewis' research led him to probe the business and financial circumstances of various UDF entities. According to Hayman, Lewis uncovered "a number of what appeared to be financial irregularities" and "certain facts or patterns that raised reasonable questions regarding general solvency concerns (and specifically concerning the ability to timely pay debts) regarding certain significant groups of related borrowers of certain UDF Entities [or] certain UDF Entities themselves."

         In 2015, Hayman opened an "enormous" short position against UDF. Outstanding short positions against UDF IV-an entity in the UDF family of funds-generally averaged around 80, 000 shares. Prior to launching its public campaign attacking UDF's business on December 10, 2015, however, Hayman took an astonishing short position in excess of 4, 000, 000 shares against UDF IV.

         Hayman's Anonymous Internet Posts

         On December 9, 2015, Hayman-using the pseudonym "Ernest Poole"-created an anonymous blogger profile, "Investors for Truth" (IFT), on the investment website www. On IFT's web page the following day (after assuming a large short position against UDF IV), Hayman anonymously published the first of a number of posts falsely declaring or creating a false impression that UDF was an illegitimate, "Ponzi-like real estate scheme" on the verge of collapse, and that "investors [would be] left holding the bag." Titled, "A Texas-Sized Scheme Exposing the Darkest Corner of the REIT Business, United Development Funding (UDF)," Hayman's post began, "Only when the tide goes out do you discover who's been swimming naked." According to UDF, the article falsely asserted, among other things, that:

• UDF had characteristics emblematic of a "Ponzi scheme."
• New investor capital was being used to provide returns to old UDF investors.
• UDF's so-called "developments loans" were collateralized by real estate with no actual development "as much as" ten years after the loans were issued.
• There were "sinister" explanations for UDF's business practices: "Where did all the money go if not to developments?"
• UDF was generating non-legitimate, fictitious, purported returns to "maintain the scheme."
• The "cracks in UDF's façade [were] starting to appear."
• UDF was "underwater" because there was no development for numerous UDF loans.
• UDF's investors, including "retail investors and retirees," were "gullible" "victims" of "one of the most egregious cases" of a business model in which "poor investments are masked by additional capital raises."

         Hayman's December 10 post included an anonymous letter it sent to Whitley Penn, UDFs former auditor, on December 4, 2015 (the Penn letter). The Penn letter "essentially falsely accuse[d] Whitley Penn of being a conspirator with UDF and disseminating false information to investors and the public." The letter included a laundry list of "Red Flags" that implied Whitley Penn either was intentionally deceived by UDF and failed to catch the accounting irregularities, or Whitley Penn was actively conspiring with UDF to deceive investors.[5]

         Additional anonymous internet posts published by Hayman on December 11 and December 15, 2015 were titled:

• "United Development Funding (UDF) One Example of Many: How The Scheme Works, from One UDF Fund to the Next," and
• "Reaching Across the Aisle of Your Private Jet Does Not Equal an Arms' Length Transaction United Development Funding (UDF) ."

         Claiming that "UDF's management began deceiving its fund investors essentially from the beginning," Hayman's December 11 and 15 posts echoed the narrative that UDF was running a Ponzi scheme, UDF loan proceeds were being misappropriated, and UDF was issuing loans for real estate development projects that never occurred.

         A considerable portion of Hayman's posts targeted Centurion-Hayman's largest group of borrower entities-charging that Centurion was not creditworthy, Centurion and UDF had an illicit relationship, and Centurion was not engaged in bona fide real estate development. According to UDF, Hayman prevaricated that Centurion was part of UDF's scheme to misappropriate money from shareholders by issuing loans for sham real estate development projects that never materialized. Declaring that these loans were "collateralized by land that has never been developed (for years, not quarters)," Hayman predicated that Centurion did not have the ability to pay its UDF loans, stating, "100% of UDF IV loans are classified as fully collectable, which is likely a material misrepresentation if the largest borrower is insolvent."

         For example, Hayman claimed, "Centurion has owned [Shahan Prairie] for over 10 years and there is no sign of development activity." Posting two photographs of undeveloped land designated as "Shahan Prairie Estates," Hayman dissembled, "This is the land that has served as collateral for multiple UDF loans issued by various UDF entities; these pictures of the land acquired by Centurion in 2004 were taken in November 2015." Underneath the photographs, Hayman posed the rhetorical question, "If you were a developer borrowing at interest rates of 13%, wouldn't you be developing real estate as fast as possible?"

         In its fourteen-page post, "Reaching Across the Aisle of Your Private Jet Does Not Equal an Arm's Length Transaction United Development Funding (UDF)," Hayman claimed:

Loans to Centurion regularly (i) do not generate any cash (principal or interest), (ii) are extended without any extension fees (try that one with a bank), and (iii) accrue larger and larger balances (year after year). . . . Are investors (and the authorities) really going to believe that loans that behave in this manner are arm's length?

         Raising "further questions about management credibility," Hayman described UDF's Form 8-K, filed with the SEC on December 14, 2015, as:

[M]anagement's rambling response attempting to further lull investors with the old saw, "they just don't understand our business." Management has been misleading investors for years, and its response continues further down the path of deception. Not only were management's responses deceptive; in some cases, the responses were comical.

         In a January 2016 article titled, "ANATOMY OF A BILLION DOLLAR HOUSE OF CARDS THE CASE AGAINST UDF IV," Hayman continued its drumbeat of accusations that UDF was running a Ponzi scheme; UDF was issuing loans that did not generate any cash income; UDF was funneling new capital to repay existing investors; UDF's loans were "dangerously concentrated" with two borrowers which were "in financial distress"; UDF had an "undisclosed business relationship" with the principal executive of Centurion in which "the economics [do] not add up"; and UDF was funding so-called real estate developments when no developing activities actually were occurring. Large bolded headlines within the article included:

"Shareholders in UDF IV and UDF's other real estate investment trusts (REITs) are being victimized by UDF management's Ponzi-like real estate scheme"

         Hayman Launches www.

         On February 4, 2016, Hayman launched a newly created website, Unlike its previous anonymous posts, Hayman's posts were openly published by Hayman Capital Management, L.P. The website included a "Letter from Kyle Bass," addressed to "Dear Reader." Bass' letter stated:

• "Our research showed that UDF exhibited characteristics consistent with a Ponzi scheme, the size and scope of which exceeded a billion dollars."
• "UDF is using new investor money to pay existing investors" and "perpetuating a Ponzi-like real estate scheme across multiple funds."
• "UDF management is misleading investors."
• "UDF management is preying on 'Mom and Pop' retail investors" and "is using new investors' money to make payments to existing investors, and thereby perpetuating the scheme."
• "After years of mismanagement, the UDF structure has begun to implode."
• "Today, as a consequence of mismanagement and concealed losses, UDF faces significant bankruptcy risk, which would leave its shares virtually worthless."
• "The research on this website exposes how a Texas real estate developer built a billion dollar house of cards and why it is now on the verge of collapse."

         Sandbagging UDF with additional accusations concerning its business and business partners, Hayman's posts recycled the same themes:

• UDF's shareholders were "victim[s]" of its "Ponzi-like real estate scheme."
• UDF had been "misleading investors for years."
• UDF business model, including "[u]sing cash from new investors to repay existing investors," was "not sound."
• Transactions with Centurion, UDF's largest borrower, were not at arms' length and were an integral component of UDF's fraudulent business scheme.
• Loans to Centurion were "almost always not repaid."
• Loans to Centurion "typically d[id] not generate any actual cash income."
• Hayman's conclusions were "[b]ased on a thorough examination of SEC filings, county records and various court documents."

         UDF's Petition and Affidavits Point to Clear and Specific Facts Showing Hayman's Statements and Implications Were False

         Pointing to specific fact allegations in its petition and in affidavits and evidence attached to its response to Hayman's motion to dismiss, UDF asserts the statements and the implications in Hayman's internet posts were false.[6] Contrary to Hayman's prevarications, UDF maintains that "[n]one of UDF's returns were fictitious, UDF was not involved in any unlawful fraudulent scheme to generate fictitious returns, and investor money was not misappropriated but rather used in furtherance of legitimate business opportunities typically secured by bona fide real estate."

         In a ninety-two page affidavit accompanying UDF's response to Hayman's motion to dismiss, Hollis M. Greenlaw, Chief Executive Officer (CEO) of UDF IV and a director of various UDF entities, averred that UDF's SEC filings and other public records unequivocally demonstrated UDF loans generated actual cash over the life of the loan. Greenlaw attested:

. . . UDF's public filings show cash receipts which were applied to principal and interest repayments. For example, UDF IV's SEC filings showed that it was generating significant amounts of cash, and, in fact, its generation of cash had been steadily increasing. [UDF's] 2014 10-K contain[s] a table listing each outstanding loan and the cash receipts that were applied to principal (which includes compounded interest). UDF IV disclosed that its 2012 cash receipts for its outstanding loan portfolio were approximately $26 million, which increased to approximately $100 million in 2013 and then to approximately $152 million in 2014. However, this table only shows a subset of UDF IV's total cash receipts since it does not include cash receipts on loans that were repaid in full during 2012, 2013 and 2014. Total cash receipts applied to principal of approximately $45 million in 2012, $135 million in 2013 and $173 million in 2014 are shown in the Consolidated Statement of Cash Flows on page F-7 of UDF IV's 2014 10-K. . . . Public records (which Bass swears he researched) also show recorded UDF lien releases from pod, lot and home sales that generally resulted in cash payments to UDF. [Hayman] also ignored the parts of UDF's business, finished lot loans and homebuilding loans, that generate current cash. [Hayman] only focused on the part of UDF's business that naturally consumes cash - acquisition and development loans.[7]

         In a twenty-four page affidavit attached to UDF's response to Hayman's motion to dismiss, Dale Kitchens, a ...

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