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Malouf v. Sterquell PSF Settlement, L.C.

Court of Appeals of Texas, Fifth District, Dallas

November 7, 2019

MATT MALOUF, 635 PHILLIPS LIMITED PARTNERSHIP, 635 PHILLIPS ASSOCIATES, LLC, AND MINERVA PARTNERS, Appellants
v.
STERQUELL PSF SETTLEMENT, L.C., Appellee

          On Appeal from the 134th Judicial District Court Dallas County, Texas Trial Court Cause No. DC-15-02371

          Before Justices Pedersen, III, Reichek, and Carlyle

          MEMORANDUM OPINION

          CORY L. CARLYLE, JUSTICE

         This is a dispute over a business venture's profits. Appellee Sterquell PSF Settlement, L.C. ("Sterquell PSF")[1] asserted claims against appellants[2] for, among other things, breach of fiduciary duty and breach of contract. Following a bench trial, the trial court rendered judgment in Sterquell PSF's favor and awarded it actual and exemplary damages totaling more than $1 million, plus attorney's fees and interest. In seven issues, appellants contend the trial court "applied the wrong agreements, ignored corporate forms, and gave Sterquell PSF legal rights that it does not have." We affirm the trial court's judgment in this memorandum opinion. See Tex. R. App. P. 47.4.

         I. Background

         In 1996, Hapsmith Texas Corporation agreed to fund a commercial development project in Irving, Texas, in exchange for the City of Irving's promise to repay qualifying project costs plus a percentage of ad valorem taxes in annual payments over approximately twenty years (the "Reimbursement Agreement"). In 2002, 635 LP, a Texas limited partnership, acquired Hapsmith's interest in the Reimbursement Agreement. 635 LP's general partner was 635 LLC.

         In 2008, Malouf and Steve W. Sterquell formed Irving Reimbursement, LLC ("IRLLC") for the sole purpose of acquiring 635 LP's right to receive future payments under the Reimbursement Agreement. At its inception, IRLLC had three members: "Matt Malouf, IRA" owned 45%; Sterquell Profit Sharing Trust (the "Trust") owned 45%; and American Housing Foundation ("AHF"), of which Sterquell was president, owned 10%. Malouf and Sterquell were IRLLC's "managers," with authority to "exercise all [IRLLC's] powers" and "control the business and affairs of [IRLLC]." IRLLC acquired sole ownership of both 635 LP and 635 LLC.[3]

         IRLLC financed the acquisition of 635 LP and 635 LLC through a loan from Capital One Bank. All revenues from the Reimbursement Agreement were to be used to repay the Capital One loan until it was fully paid in 2013. Then, the remaining two years' payments under the Reimbursement Agreement were to go to 635 LP.

         In 2009, Sterquell died. His creditors and others filed lawsuits against his estate and a bankruptcy proceeding ensued. A group of Sterquell's creditors formed Sterquell PSF to receive and manage assets obtained through settlement proceedings. Pursuant to those proceedings, the Trust assigned Sterquell PSF (1) its 45% interest in IRLLC and (2) "whatever interest" it held in 635 LP.

         Upon Sterquell's death, Malouf became the sole manager of both IRLLC and 635 LLC. He signed and filed IRLLC's 2011 federal income tax return, which stated it was a "final" return and described "distribution" and "transfer" of all of IRLLC's assets during 2011, resulting in total IRLLC assets of "0." Also, Malouf signed 635 LP's tax returns in 2012, 2013, and 2014, all of which listed Sterquell PSF as a 635 LP partner and owner.

         The Capital One loan was fully repaid by early 2013. At that point, 635 LP was debt-free, with a cash balance of $115, 666.99. In 2014 and 2015, respectively, Irving made payments of $2, 285, 102.00 and $1, 577, 092.00 under the Reimbursement Agreement.

         Sterquell PSF filed this lawsuit against appellants in March 2015. According to the petition, (1) in 2009, "the charter of [IRLLC] was forfeited for failure to pay franchise tax"; (2) "[s]ince the termination of [IRLLC], 635 LP has identified the members of the terminated entity as the owners and limited partners of the limited partnership"; (3) "[Sterquell PSF] is now a partner of 635 LP with rights that accrue to a limited partner"; (4) 635 LLC, as general partner of 635 LP, has made improper payments totaling $305, 000.00 to Minerva, "an entity owned and managed by Matt Malouf"; and (5) in 2015, Malouf made an unauthorized transfer of $2, 290, 449.65 from 635 LP to his IRA. Sterquell PSF (1) sought a declaration that it was entitled to a share of the 2014 and 2015 Reimbursement Agreement payments; (2) asserted causes of action for breach of fiduciary duty, breach of contract, conversion, theft, and "money had and received"; (3) requested that a "constructive trust"[4] be imposed on the misappropriated assets, and (4) claimed actual and exemplary damages and attorney's fees.[5]

         The defendants filed (1) a general denial answer and (2) a plea to the jurisdiction in which they contended "Sterquell PSF has no limited partner interest in 635 LP" and therefore "lacks standing to bring claims." The trial court denied defendants' plea to the jurisdiction. In February 2016, Malouf paid IRLLC's back taxes and reinstated its charter.

         The trial court held a May 2016 bench trial and a later hearing on attorney's fees. The trial court's final judgment awarded Sterquell PSF recovery against Malouf, individually, in the amount of $561, 855.05 in actual damages and $500, 000.00 in exemplary damages, plus prejudgment interest and attorney's fees. Also, the trial court issued findings of fact and conclusions of law supporting Sterquell PSF's recovery on the grounds of breach of fiduciary duty, breach of the 635 LP partnership agreement, theft, conversion, misappropriation of fiduciary property, and fraud.[6]

         II. Appellants' issues

         When reviewing the sufficiency of the evidence to support the trial court's findings, we apply the same standards of review that apply to a jury's verdict. See MBM Fin. Corp. v. Woodlands Operating Co., L.P., 292 S.W.3d 660, 663 n.3 (Tex. 2009) (citing Catalina v. Blasdel, 881 S.W.2d 295, 297 (Tex. 1994)). When an appellant challenges the legal sufficiency of an adverse finding on which he did not have the burden of proof at trial, he must demonstrate there is no evidence to support the adverse finding. Wyde v. Francesconi, 566 S.W.3d 890, 894 (Tex. App.-Dallas 2018, no pet.). In evaluating the legal sufficiency of the evidence to support a finding, we view the evidence in the light favorable to the challenged finding, indulging every reasonable inference supporting it. City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005). The ultimate test is whether the evidence allows reasonable and fair-minded people to reach the finding under review. See id. at 827. The evidence is legally insufficient to support the finding if (a) there is a complete absence of evidence of a vital fact, (b) the court is barred by rules of law or evidence from giving weight to the only evidence offered to prove a vital fact, (c) the evidence offered to prove a vital fact is no more than a mere scintilla, or (d) the evidence conclusively establishes the opposite of the vital fact. Id. at 810 (quoting Robert W. Calvert, "No Evidence" & "Insufficient Evidence" Points of Error, 38 Tex. L. Rev. 361 (1960)). We defer to unchallenged findings of fact that are supported by some evidence. Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC, 437 S.W.3d 518, 523 (Tex. 2014).

         We review a trial court's conclusions of law de novo to determine if the trial court drew the correct legal conclusions from the facts. See, e.g., Wright Grp. Architects-Planners, P.L.L.C. v. Pierce, 343 S.W.3d 196, 199 (Tex. App.-Dallas 2011, no pet.). We must uphold conclusions of law if any legal theory supported by the evidence sustains the judgment. Wyde, 566 S.W.3d at 895. We will not reverse a trial court's judgment based on an incorrect legal conclusion if the controlling findings of fact support the judgment on a correct legal theory. Id.; Anderton v. Green, 555 S.W.3d 361, 371 (Tex. App.-Dallas 2018, no pet.). A. Sterquell PSF's "standing"

         Issues of standing and capacity are questions of law, which are reviewed de novo. Douglas-Peters v. Cho, Choe & Holen, P.C., No. 05-15-01538-CV, 2017 WL 836848, at *9 (Tex. App.- Dallas Mar. 3, 2017, no pet.) (mem. op.). Although the question of whether a party is entitled to sue on a contract is often informally referred to as a question of "standing," it is not truly a standing issue because it does not affect the jurisdiction of the court. Fitness Evolution, L.P. v. Headhunter Fitness, L.L.C., No. 05-13-00506-CV, 2015 WL 6750047, at *14 (Tex. App.-Dallas Nov. 4, 2015, no pet.) (mem. op. on reh'g). "Texas law is clear that a challenge to a party's privity of contract is a challenge to capacity, not standing," and is merits-based. Highland Credit Opportunities CDO, L.P. v. UBS AG, 451 S.W.3d 508, 515 (Tex. App.-Dallas 2014, no pet.); accord Fitness Evolution, 2015 WL 6750047, at *14. Unlike standing, a challenge to a party's capacity to participate in a suit can be waived. Douglas-Peters, 2017 WL 836848, at *9 (citing Highland Credit, 451 S.W.3d at 516); see also Tex. R. Civ. P. 93(5) (requiring that "[a] denial of partnership as alleged in any pleading" must be verified by affidavit). Also, capacity may be tried by consent. Douglas-Peters, 2017 WL 836848, at *9.

         In their first and third issues, appellants assert the trial court erred by concluding Sterquell PSF is a partner in 635 LP and thus has "standing" to assert claims for breach of contract and breach of fiduciary duty regarding Malouf's management of 635 LLC and 635 LP.[7] Sterquell PSF argues (1) "Malouf's failure to deny [Sterquell PSF's] partnership status under oath [pursuant to rule 93(5)] resulted in his admission of the existence of a partnership which could not be controverted at trial," and (2) "[a]lternatively, the record does include sufficient probative evidence from which the fact-finder could reasonably infer that Malouf had unanimous consent of all partners to effectuate the transfer."

         To the extent Sterquell PSF contends appellants waived their right to challenge to Sterquell PSF's status as a 635 LP partner, we disagree. Although appellants did not file a rule 93 verified "denial of partnership," the record shows Sterquell PSF did not assert their "admission" argument below. See Highland Credit, 451 S.W.3d at 516. Rather, Sterquell PSF's claimed status as a 635 LP partner was a primary focus of both sides' arguments at trial. On this record, we conclude capacity was tried by consent. See id. at 517 ("[W]here capacity was clearly litigated, albeit mischaracterized as standing, we are reluctant to conclude that the issue has not been preserved for our review.").

         The trial court found in part (1) "[635 LP] is a limited partnership whose general partner is [635 LLC]"; (2) "Malouf is the manager of [635 LLC]" and "personally performed all management functions of the limited partnership and made all decisions on behalf of the limited partnership"; (3) "Malouf, as manager of [IRLLC] decided to terminate the entity and distributed all of its assets to its members at the end of 2011"; (4) "[t]he tax return of [635 LP] for the year 2012 identifies [IRLLC] as a limited partner with a 99% share of profit, loss and capital at the beginning of the year and a 0% share at the end of the year"; and (5) "[t]he 2012 tax return also identifies Sterquell PSF as a limited partner." In its conclusions of law, the trial court stated in part (1) "[IRLLC] transferred all of its assets to its members in 2011" and (2) "[u]pon the transfer of the assets of [IRLLC], Sterquell PSF became a limited partner of [635 LP]."

         In a legal sufficiency evaluation, we view the evidence in the light favorable to the challenged finding and indulge every reasonable inference supporting it. City of Keller, 168 S.W.3d at 822. The record shows Malouf (1) fully controlled IRLLC and 635 LLC, the general partner of 635 LP; (2) signed IRLLC's 2011 federal income tax return, which stated it was a "final" return and described "distribution" and "transfer" of all of IRLLC's assets during 2011, resulting in total IRLLC assets of "0"; and (3) signed 635 LP's tax returns in 2012, 2013, and 2014, all of which listed Sterquell PSF as a 635 LP partner and owner. Additionally, at trial, (1) Malouf testified 635 LP's 2011 tax accountant was Mike Carter; (2) Sterquell PSF introduced into evidence a handwritten note on Carter's file copy of 635 LP's 2011 tax return that stated "Per T/C w/Matt, Irving Reimbursement transferred its 99% interest to Matt Malouf IRA (49%) and Sterquell PSF Settlement, LC (50%)"; and (3) Malouf testified he does not "deny telling [Carter] that."

         In light of that evidence, appellants' arguments that the record contains no "asset transfer agreement or assignment" and that "the contents of a tax return cannot change or affect the parties' legal relationships" are immaterial. The evidence described above allows for reasonable inferences that Malouf, acting within his authority as manager of both IRLLC and 635 LLC, (1) directed the transfer of a portion of IRLLC's interest in 635 LP to Sterquell PSF and (2) obtained unanimous consent of 635 LP's partners-which were fully controlled by him-to make Sterquell PSF a "substitute limited partner" in 635 LP. See id.[8]

         On this record, we conclude the evidence is legally sufficient to support the trial court's findings that Sterquell PSF is a partner in 635 LP and therefore could properly assert claims for breach of contract and breach of fiduciary duty regarding Malouf s management of 635 LLC and 635 LP. See City of Keller, 168 S.W.3d at 822. B. Exemplary damages and attorney's fees

         In their sixth and seventh issues, appellants contend the trial court erred by awarding Sterquell PSF exemplary damages and attorney's fees. According to appellants, this court should "vacate" those awards because (1) the trial court erred by concluding Malouf is liable for breach of fiduciary duty, civil theft, and conversion, and therefore "there is no legal basis for Sterquell PSF's recovery of exemplary damages," and (2) Sterquell PSF's attorney's fees were awarded "pursuant [to] Texas Civil Practice and Remedies Code §§ 37.009 (declaratory judgment), 38.001 (breach of contract), and 134.005 (civil theft)," and "the trial court's rulings on declaratory judgment, breach of contract, and civil theft are all subject to reversal." "Recovery against a breaching fiduciary is not limited to an accounting of ...


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