United States District Court, N.D. Texas, Dallas Division
BASIC CAPITAL MANAGEMENT, INC., et. al., Plaintiffs,
v.
DYNEX CAPITAL, INC., et. al., Defendants.
MEMORANDUM OPINION AND ORDER
BRANTLEY STARR, UNITED STATES DISTRICT JUDGE
In this
action alleging fraudulent transfer and alter ego liability,
defendants Dynex Commercial Inc. (Dynex Commercial) and Dynex
Capital, Inc. (Dynex Capital) move to dismiss the claims of
plaintiffs Basic Capital Management, Inc. (BCM),
Transcontinental Realty Investors, Inc. (TCI), and Michael J.
Quilling as court-appointed receiver for American Realty
Trust, Inc. (ART) (collectively the plaintiffs) for failure
to state a claim on which relief can be granted (collectively
the motions to dismiss) [Docs. No. 78, 80]. The Court
concludes that the plaintiffs have failed to state a claim as
to both defendants and therefore DISMISSES
with PREJUDICE the plaintiffs' claims
against Dynex Commercial and Dynex Capital and
DENIES the plaintiffs' requests for
exemplary damages and attorney's fees. Because dismissal
of the plaintiffs' claims is dispositive, the Court
DISMISSES as MOOT the
defendants' pending motion to extend time to file summary
judgment [Doc. No. 94] and any other pending motions.
I.
The
plaintiffs' second amended complaint [Doc. No. 75] states
that Dynex Capital and Dynex Commercial, among other things,
originated and serviced mortgage loans.[1] After Dynex
Commercial provided ART and TCI a number of multi-million
dollar real estate loans, it entered into two real estate
loan commitments with BCM, who was operating on behalf of TCI
and ART.[2] One commitment was for $33.4 million, and
the other was for $160 million.[3] Several months later, BCM
attempted to borrow additional funds under the $160 million
commitment.[4] Dynex Commercial allegedly refused to
provide any funds under this commitment and further refused
to provide any funds under the $33.4 million commitment for
any tenant improvements unless BCM cancelled the remainder of
the $160 million commitment, which amounted to $154 million
dollars.[5]
The
plaintiffs sued Dynex Commercial on April 15, 1999 for breach
of both the $160 million and $33.4 million commitments and
Dynex Capital for other related claims.[6] The case was the
68th Judicial District Court in Dallas County,
Texas, tried the case in January and February 2004, resulting
in a jury verdict of over $30 million (including
attorney's fees).[7] However, the trial court judge granted
Dynex Commercial's post-verdict motion for judgment
notwithstanding the verdict and rendered a “take
nothing” judgment against the plaintiffs.[8] After a lengthy
appeals process, a final, non-appealable judgment in favor of
the plaintiffs was entered on July 20, 2015 against Dynex
Commercial; Dynex Capital was no longer a party to the case
at that point.[9] The final judgment totaled over $55
million dollars.[10] On March 16, 2016, TCI served a request
for production and a first set of interrogatories to aid in
the enforcement of the judgment.[11] Dynex Commercial
responded with answers and objections on May 2, 2016, which
indicated that Dynex Commercial had ceased operations and had
no assets that could be used to pay any of the final
judgment.[12]Soon after, TCI served a notice of intent
to service subpoena on non-party Dynex Capital, requesting
the production of documents.[13] After some alleged
stonewalling by Dynex Commercial and Dynex Capital on
discovery motions, the plaintiffs began to obtain information
that formed the basis of this lawsuit.[14]
The
plaintiffs discovered that after the state court action
commenced in 1999, Dynex Commercial divested all of its
assets by transferring them to Dynex Capital.[15]In its
complaint in this case, the plaintiffs specifically allege 25
transfers of commercial loans and security interests that
occurred between 1999 and 2001.[16] As a result of these
transfers, along with others, Dynex Commercial ceased
operations at the end of 2000 and had no remaining assets as
of January 1, 2001.[17]
Based
in part off of these discoveries, the plaintiffs sued Dynex
Commercial and Dynex Capital in the 191st District Court in
Dallas County on April 26, 2017.[18]The plaintiffs alleged,
among other things, that Dynex Commercial was an alter ego of
Dynex Capital and that the 25 transfers made between 1999 and
2001 constituted fraudulent transfers under the Texas Uniform
Fraudulent Transfers Act (“Fraudulent Transfers
Act”).[19] Shortly thereafter, the defendants
removed the case to this Court on May 1, 2017 on the basis of
diversity jurisdiction [Doc. No. 1]. In their second amended
complaint filed on March 8, 2019, the plaintiffs have
narrowed their claims to the fraudulent transfer and alter
ego claims, along with seeking exemplary damages and
attorney's fees pursuant to these claims.
II.
With
these facts and this procedural posture, the Court considers
Dynex Capital and Dynex Commercial's motions to dismiss.
A.
Under
Federal Rule of Civil Procedure 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.'”[20] To survive a motion to
dismiss, the plaintiffs must allege enough facts “to
state a claim to relief that is plausible on its
face.”[21] “A claim has facial plausibility
when the plaintiff pleads factual content that allows the
court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.”[22] “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.”[23]“[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.'”[24]
B.
Dynex
Capital and Dynex Commercial argue, among other things,
[25]
in their motions to dismiss that the plaintiffs'
fraudulent transfer and alter ego claims are barred by the
Fraudulent Transfer Act's statute of repose and res
judicata respectively. Subsequently, the plaintiffs'
claims for exemplary damages and attorney's fees are also
barred, as they are contingent on the fraudulent transfer and
alter ego claims. The Court agrees with this analysis.
Because the Fraudulent Transfer Act's statute of repose
and res judicata bar the plaintiffs' claims, the
plaintiffs have failed to state a claim under Rule 12(b)(6)
against Dynex Capital and Dynex Commercial.
C.
A
threshold issue raised by all parties is what facts, if any,
this Court can and should judicially notice for Rule 12(b)(6)
motions. Federal Rule of Evidence 201(b) states a court may
judicially notice a fact that is not subject to reasonable
dispute in that it is either (1) generally known within the
territorial jurisdiction of the trial court or (2) capable of
accurate and ready determination by resort to sources whose
accuracy cannot reasonably be questioned. If the contents of
documents are subject to dispute, courts may judicially
notice documents for their existence and the statements they
contain and not to prove the truth of the contents in the
documents.[26]
In
Meyers v. Textron, Inc., [27] the Fifth Circuit stated
that district courts, when ruling on a Rule 12(b)(6) motion,
must primarily look at the allegations in the complaint but
may also take into account “documents incorporated into
the complaint by reference or integral to the claim, items
subject to judicial notice, [including] matters of public
record, orders, items appearing in the record of the case,
and exhibits attached to the complaint whose authenticity is
unquestioned.”[28] Fifth Circuit precedent makes clear that
“public records” includes publicly available
documents and transcripts and pleadings filed in state
court.[29]
Because
they are directly relevant to resolving the issues of this
case, the Court takes judicial notice of Dynex Capital's
2002 Form 10-K report and the proceedings and record of the
1999 litigation before the 68th Judicial District Court. As
the contents of these records are subject to dispute, the
Court judicially notices these documents for their existence
and of what statements they contain and not for the truth of
their contents. These documents are all publicly available
governmental filings and the existence of the documents, and
the contents therein, cannot reasonably be questioned.
D.
The
plaintiffs allege Dynex Commercial's 25 loan transfers to
Dynex Capital that ended 18 years ago (from 1999 to 2001)
were fraudulent and violated section 24.005(a)(1) of the
Texas Business and Commerce Code. Section 24.005(a)(1) states
that a transfer made by a debtor is fraudulent as to a
creditor if the debtor made the transfer with “actual
intent to hinder, delay, or defraud any creditor of the
debtor.”[30]But there is a catch. Section
24.010(a)(1), a statute of repose, [31] states that a cause of
action with respect to fraudulent transfer under section
24.005(a)(1) is extinguished if it is not brought
“within four years after the transfer was made . . .
or, if later, within one year after the transfer . . . was or
reasonably could have been discovered by the
claimant.”[32] The one-year statute of repose deadline
triggers after the fraudulent nature of the transfer is or
reasonably could have been discovered.[33]
Granted,
the question of whether a plaintiff reasonably could have
discovered the fraudulent nature of a transfer is generally a
question of fact for the fact-finder.[34]But at times,
the issue can be so clear cut that it is appropriate to
resolve at the motion to dismiss phase based on judicially
noticed public records that were constructive notice of
potentially fraudulent transfers. Indeed, the Fifth Circuit
recently affirmed the granting of a motion to dismiss under
the one-year repose statute deadline, based on the complaint,
attachments to the complaint, documents referred to in the
complaint, judicially noticed public records, and judicially
noticed court records.[35]
The
Fifth Circuit cases Janvey I and Bilouris
are instructive in assessing whether a plaintiff has met
section 24.010(a)(1)'s repose deadline. In Janvey
I, the plaintiff was a court-appointed receiver over
several corporations involved in what would later be found to
be a massive Ponzi scheme.[36] The receiver was tasked with
preserving the resources of these corporations and pursuing
the corporations' assets held by third parties as the
result of fraudulent conveyances.[37] To this end, the
plaintiff brought a fraudulent transfer claim under section
24.005(a)(1) against the defendant.[38] The defendant argued, in
part, that the plaintiff failed to meet the repose deadline
under section 24.010(a)(1).[39]
In
evaluating whether the plaintiff had filed suit after repose
barred the claim, the Fifth Circuit noted that the plaintiff
had to hire an expert to examine the books and records of the
corporations to determine whether any transfers were made
fraudulently.[40] Given the complexity of the transactions
and the need to hire an expert to determine whether
fraudulent transfers had even occurred, the Fifth Circuit
found that the plaintiff could not reasonably have discovered
the fraudulent nature of the transfers until the initiator of
the Ponzi scheme himself pled guilty in another case less
than a year earlier.[41] As that guilty plea was entered less
than a year prior to the suit, the plaintiff had filed suit
before the repose deadline passed.[42] The Fifth Circuit was
careful to note that the discovery of the fraudulent nature
of the transfers, and not just the existence of the
transfers, was key to their finding.[43]
In
Bilouris, the plaintiffs brought a fraudulent
transfer claim against the defendant for transferring a
parcel of land to his son to avoid paying a state district
court judgment.[44] The defendant argued in a motion to
dismiss that the repose statute in section 24.010(a)(1)
barred the claim.[45] In contrast to Janvey I, the
Fifth Circuit found that the plaintiffs could have reasonably
known the fraudulent nature of the transfer years before the
suit was brought.[46] The Fifth Circuit noted that the
transfer occurred during the state court litigation and so
the plaintiffs were on notice of its existence, as the
warranty deed was filed in the county property
records.[47]Moreover, a few months after the transfer
was made, the plaintiffs took a deposition of the
defendant's wife and so had an opportunity to discover
the fraudulent nature of the land transfer at that
point.[48] The Fifth Circuit went out of its way to
contrast Bilouris with Janvey I, stating
that the Janvey I plaintiff “was faced with a
sophisticated, extensive, worldwide Ponzi scheme, and thus
the point where the discovery rule activated was harder to
suss out.”[49] In contrast, the plaintiffs in
Bilouris “had the resources and opportunity to
discern the fraudulent nature of this single transaction when
it was recorded.”[50]
The
Court finds this case to be like the public activity in
Bilouris and not like the hidden activity in
Janvey I. The last of the 25 transfers the
plaintiffs list in their second amended complaint was
complete on October 29, 2001 and that, as of January 1, 2001,
Dynex Commercial had no remaining assets. On March 28, 2002,
Dynex Capital filed with the SEC a 10-K annual report, which
states that transfers from Dynex Commercial to Dynex Capital
were made from 1999 to 2001 and that Dynex Commercial
“has no assets.”[51] Corporate 10-K reports are
hardly hidden from the public eye; they are available on the
SEC's website. The statements within this report,
regardless of their truth, were sufficient to put the
plaintiffs on notice of the 25 transfers. Thus, as of March
28, 2002, the plaintiffs were on constructive notice of these
transfers-in the same way the plaintiffs in Bilouris
were on notice of the warranty deed filed in the county
records.
The
Fifth Circuit in Janvey II made it clear that the
statute of repose deadline only triggers when a claimant
knows or reasonably could have known both the existence of
the transfer and the fraudulent nature of the
transfer.[52] The 10-K annual report, as discussed
above, put the plaintiffs on constructive notice of the
existence of the transfers. Regarding knowledge of the
fraudulent nature of the transfer, the plaintiffs were in
ongoing litigation with the defendants when the annual 10-K
report was filed. Once filed, the plaintiffs could have
reasonably discovered the alleged fraudulent nature of the 25
transfers, especially given that Dynex Commercial having no
assets meant it could not pay any potential judgment.
Therefore, this case is also akin to Bilious in that
the plaintiffs were in ongoing litigation with the defendant
when the publicly documented transfer occurred.[53] So, the
one-year repose deadline began to run on March 28, 2002, the
date of the filing of the 10-K annual report.
The
section 24.010(a)(1) repose statute requires the plaintiffs
to bring forth a cause of action within one year of when the
fraudulent nature of the transfers reasonably could have been
discovered. The plaintiffs had constructive notice of the
existence of the transfers and could have known their
allegedly fraudulent nature on March 28, 2002. The plaintiffs
did not file suit until April 26, 2017, 14 years after the
one-year repose statute barred the claim. Therefore, the
Court DISMISSES with
PREJUDICE the plaintiffs' fraudulent
transfer claims.
E.
In
their remaining claim, the plaintiffs allege alter ego
against Dynex Capital, claiming that Dynex Commercial was its
mere tool or business conduit to perpetrate fraud and other
malfeasances. In Dynex Capital's motion to dismiss, Dynex
Capital argues that this claim is barred by res judicata, as
it could have been raised during the initial state court
litigation.
Under
res judicata, “a final judgment on the merits of an
action precludes the parties or their privies from
relitigating issues that were or could have been raised in
that action.”[54] A finding of res judicata requires the
presence of four elements: “(1) the parties are
identical or in privity; (2) the prior action was rendered by
a court of competent jurisdiction; (3) the prior action was
concluded by a final judgment on the merits; and, (4) the
same claim or cause of action was involved in both
actions.[55]” Although res judicata is
generally raised as an affirmative defense to be pleaded in
an answer, it may be raised in a motion to dismiss, as was
done here, when the facts are not controverted or are
conclusively established.[56] Judicially noticed facts may
also be included in making this determination.[57]
The
Court uses the transactional test to determine whether two
suits involve the same claim or cause of action under the
fourth element. This test requires the Court to determine
whether the two cases are based on “the same nucleus of
operative facts.”[58] The nucleus of operative facts is not
identical with the type of relief requested, substantive
theories advanced, or types of rights asserted.[59] If both cases
are based on the same nucleus of operative facts, the prior
judgment precludes any rights the plaintiff had with respect
to any transactions in which the original action
arose.[60] What constitutes a transaction is to be
“determined pragmatically, giving weight to such
considerations as whether the facts are related in time,
space, origin, or motivation, whether they form a convenient
trial unit, and whether their treatment as a unit conforms to
the parties' expectations or business understanding or
usage.[61]”
Hall
v. Hodgkins is instructive as to how the fourth element
applies. 305 Fed.Appx. 224');">305 Fed.Appx. 224, 228 (5th Cir. 2008). In
Hall, the plaintiff filed suit against the
defendants for barring him from membership in the Civil Air
Patrol because he reported criminal acts and policy
violations occurring within the Patrol.[62] The plaintiff
had brought two prior lawsuits, which were both dismissed,
alleging the Civil Air Patrol had wrongfully terminated his
membership for reporting criminal acts and policy
violations.[63] The Fifth Circuit found that, regardless
of the fact that the plaintiff's claims were different
between his lawsuits, the same transaction underlied all of
the suits: that the defendants were punishing him for
whistleblowing while he was working for the
Patrol.[64] Thus, the Fifth Circuit found the fourth
element satisfied and res judicata met.[65]
Here,
the plaintiffs' alter ego claim meets all four elements
of res judicata. The plaintiffs do not dispute the first
three elements.[66] Regarding the fourth element, both suits
revolve around a single transaction: Dynex Commercial's
refusal to comply with the $160 million and $33.4 million
loan commitments. This transaction is what led to the state
...