In April we reported on the Texas Supreme Court’s decision in Mosaic Baybrook One, L.P., Mosaic Baybrook Two, L.P., and Mosaic Residential, Inc. v. Tammy Cessor (No. 21-0161; delivered April 21, 2023), in which the Court reversed a Houston [14th] Court of Appeals ruling that affirmed class action certification in a landlord-tenant dispute. Last week the Court denied a petition for review in a case arising from the same litigation, this time affirming the 14thCourt.
Mosaic Baybrook One LP, et al v. Tammy Cessor and Paul Simien (No. 14-19-00514-CV and 14-19-00695-CV, decided June 29, 2021), as you may recall, involved a landlord-tenant dispute over the proprietary of certain late fees charged by the landlord for failure to timely pay rent under § 92.019, Property Code. Plaintiffs further alleged that the landlord violated § 13.505, Water Code, which regulates the amount of water and sewage charges that a landlord may charge. The trial court certified tenants’ claims as a class action, which, as noted above, SCOTX eventually reversed. At the same as the class certification proceeded through the courts, the landlord appealed the trial court’s order awarding tenants a temporary injunction, denying landlord’s TCPA motion to dismiss, and awarding tenants attorney’s fees for a frivolous TCPA appeal.
Once again (and this time for keeps), the court of appeals affirmed. This case is worth reading for two reasons: (1) its discussion of the appropriate standards for required specificity of a temporary injunction order; and (2) its analysis of the proof necessary to surmount summary judgment on a claim arising under the Texas Uniform Fraudulent Transfer Act (TUFTA). Here is basically what happened. On October 24, 2018, the trial court certified tenants’ class action. One week later, Mosaic Baybrook One, LP and Mosaic Baybrook Two, LP (the LP appellants) sold the apartment complex, which they had owned since 2015, to Baybrook LL, LLC, which proceeded to disperse the assets of the sale to various affiliated entities defined as “insiders” under TUFTA. At a trial court hearing on November 12 regarding class certification, the LP appellants represented to the court that they still owned the property. Class certification followed, but it was not until February that the tenants caught on to the sale and filed a fraudulent transfer action, seeking a temporary injunction against further dispersal of the assets. In response, Baybrook filed a TCPA motion to dismiss, followed by tenants filing a motion for temporary injunction. The trial court granted the TI, denied the TCPA motion, and awarded attorney’s fees to tenants on the basis that the TCPA motion was frivolous.
In an opinion by Justice Poissant, the court of appeals affirmed. Baybrook challenged the TI order on the basis that the order did not provide “reasonable detail as to which accounts must be frozen” and “fail[ed] to identify what irreparable harm the Tenant Appellees would suffer.” To obtain a TI, “the applicant must provide: (1) the existence of a cause of action against the defendant; (2) a probable right to the relief sought, and (3) that a probable, imminent, and irreparable injury would occur in the interim if the injunction were not granted” (citations omitted). An applicant, however, “is not required to establish that it will prevail on final trial” (citation omitted). Under Rule 683, TRCP, the trial court TI order must “(1) contain a specific date setting the cause of action for trial and (2) set forth the reasons justifying the issuance of the temporary injunction,” including “why the injury will be suffered” and the specific act or acts to be restrained” (citations omitted). The standard of review is abuse of discretion.
The court then turned to TUFTA to assess whether tenants had alleged a cause of action. The operative section of the statute, § 24.005, Business & Commerce Code, requires the debtor to make the transfer, either before the creditor’s claim arose or within a reasonable time thereafter, “with actual intent to hinder, delay, or defraud any creditor of the debtor.” Absent “actual intent,” TUFTA liability may still be found if “without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (B) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.” § 24.006. Because “direct proof of fraudulent intent is often unavailable,” circumstantial evidence “may be used to provide fraudulent intent” (citations omitted). The statute identifies so-called “badges of fraud” that, when taken together, indicate fraudulent intent.
First, the court held that tenants did not have to show a “probable right to relief” under TUFTA for the underlying claims. In other words, a TI motion under TUFTA is not a “case within a case.” Instead, “the relevant inquiry is whether [tenants] provided sufficient evidence to show a probable right to relief on their TUFTA claim, not the underlying class-action lawsuits” (citations omitted; emphasis added). Here the trial court concluded that the LP Appellants transferred their only asset an distributed most of the net proceeds to “insider” entities, leaving none of them with sufficient assets to pay for a judgment, all the while staring at a possible multi-million dollar judgment in the underlying case. The transfer further rendered the LP Appellants insolvent, “though the day before the transfer…they had assets worth at least $60 million.” Incredibly, on appeal Baybrook failed to contest the trial court’s order as to the “independent grounds” under § 24.006, that is, they the LP Appellants failed to receive reasonably equivalent value in exchange for the transfer to insiders and their consequent insolvency. That omission cost them, as the court of appeals concluded that the trial court did not abuse its discretion when it determined that the tenants had a probable right to recover on their TUFTA claim.
The question then became whether the tenants showed “irreparable harm.” Baybrook argued that the trial court’s order “fail[ed] to provide a specific amount for the potential value of the contingent damages that rely on the underlying claims.” In the trial court, Baybrook represented that the LP Defendants were winding down their business and would not receive any further assets over the $470,000 it had left after dispersing $60 million to their pals. That’s all the court really needed to find a strong probability that, “if the assets were not frozen, there is a likelihood that there would not be enough money available to cover any potential damage awards arising from the underlying actions” (citations omitted). In addition to freezing the LP Defendants’ meager assets, the trial court likewise froze about $3.3 million held by one of the insiders, given the likelihood that the insider would follow suit and invest the money elsewhere. The trial court thus did not abuse its discretion and its order was reasonably specific as to the frozen accounts (as the court pointed out in response to Baybrook’s argument that the order did not give account numbers, Baybrook refused to disclose them).
Finally, Baybrook’s appeal of the denial of its TCPA motion fell flat because Baybrook’ attack on tenants’ prima facie showing for each essential element of their TUFTA action didn’t hold any water. This is where Baybrook’s failure to appeal the “independent grounds” under § 24.006 came back to bite it. Instead, Baybrook argued that tenants failed to show damages. Based on authority holding that at the TCPA stage plaintiffs are not required to provide the exact amount of damages, the court dismissed the argument. Even so, the court observed, TUFTA allows for both monetary and injunctive relief, so Baybrook’s damages argument missed the mark. Baybrook then tried various jurisdictional challenges for the first time, and these likewise failed. And to cap things off, the court of appeals concluded that the trial court did not abuse its discretion in awarding attorney’s fees for a frivolous TCPA motion. Here the court noted that the LP Defendants filed the motion after the trial court had informed the parties that tenants had made their case for temporary injunction. Baybrook thus knew that its motion to dismiss “had no basis in fact or law based on the preponderance of evidence” but made the motion anyway.
One wonders what will happen to this case at this point. SCOTX has already stricken the class certification order, largely because the order failed the predominance test. It sent the case back to the trial court, which can either try to fashion a compliant Rule 42 order or, presumably, dismiss the case. Where does that leave the TUFTA and TCPA issues? Baybrook will have to pay attorney’s fees for its frivolous TCPA motion, that much seems clear. In the absence of a class action, it is unclear how much value the TUFTA action has at this point. TUFTA does allow the court to award attorney’s fees and costs, so Baybrook may have to come out of pocket for those as well. That may be, however, the sum total in a case that has been up and down the court system as many times as this one has.
