Justice Gisela Triana
In an interesting and informative opinion authored by Justice Triana, the Austin Court of Appeals has substantially upheld a trial court order dismissing claims for lack of jurisdiction under the Texas Uniform Fraudulent Transfer Act (TUFTA) and under the Texas Citizen Participation Act (Ch. 27, CPRC). The court reversed and remanded the trial court’s rendition of summary judgment in favor of the defendants because they did not request that relief.
LMP Austin English Aire, LLC, derivatively through Lafayette English Partner, LLC (individually and derivatively) through Lafayette English Apartments, LP v. Lafayette English Apartments, LP (Nominal Defendant); Lafayette English GP, LLC; HVC English, LLC; HVC Lafayette, LLC; Scott Schaeffer; Austin Lafayette Landing Realty LLC; and Austin CMA English Aire Realty, LLC (No. 03-21-00219-CV) arose from a real estate deal that went bad in the wake of the 2008 financial crisis. This case looks more complex than it actually is. While there are a lot of entities involved that share varying degrees of business relationships, the facts are pretty simple. In 2006, Plaintiffs, a limited partnership, financed its purchase of apartment properties with a $17.3 million loan from an investment limited partnership (RAIT). The loan was secured by the properties. The financing agreement provided that the lender could take control of the properties if they did not perform adequately to service the loan. That happened in 2009. The lender then reorganized the original entities into new partnerships to manage the properties. After the properties limped along another few years, the lender sold them in 2015 to the first buyers (the HVC entities). The sales price (about $18 million) paid off the loan, with nothing left over to distribute to the borrowers. In 2018, the first buyers sold the property again, this time for about $38 million. Plaintiffs, the original borrowers who lost the properties, sued to unwind the sale.
Plaintiffs alleged that the properties were undervalued and made derivative claims against the entities formed by the lender to manage the properties, the 2015 first buyers, and the 2018 ultimate buyers. They asserted breach of contract, breach of fiduciary duty, and violations of TUFTA. They also sought a declaratory judgment, an accounting, and quieting of title. Defendants moved for dismissal under the TCPA and filed a plea to the jurisdiction on the TUFTA claim. The parties also filed cross motions for summary judgment. After hearing the motions, the trial court granted the defendants’ plea to the jurisdiction, granted a partial dismissal under the TCPA, assessed attorney’s fees and sanctions under the TCPA against Plaintiffs, granted summary judgment for the defendants on all claims, and denied Plaintiffs’ cross motion for summary judgment. Plaintiffs’ appealed.
The court of appeals affirmed in part and reversed in part. First, the court affirmed the trial court’s order granting the defendants’ plea to the jurisdiction. This required the court to analyze whether Plaintiffs qualified as a “creditor” under TUFTA (only creditors may bring TUFTA claims, not equity holders). Reviewing federal appellate precedent construing TUFTA, appropriate authority for state courts construing uniform laws, the court determined that interests in a limited partnership constitute equity security, not debt. Because they were not statutory creditors, Plaintiffs did not have standing to bring a TUFTA claim.
Second, the court upheld the trial court’s partial dismissal of Plaintiffs’ “knowing participation/aiding and abetting a breach of fiduciary duty” claim against the first buyers. The TCPA analysis proceeded under the pre-2019 amendments to the law, meaning that the broader version of the act applied here. The first buyers asserted that the Plaintiffs’ claim (a “legal action” under the TCPA) was based on, related to, or in response to the buyers’ exercise of their right of association. They argued that Plaintiffs’ pleadings alleged a “communication scheme between First Buyers, their principals, and Schaeffer (the lender’s principal) to collectively pursue their common interest in sharing profits from the full value of the Properties through creation of a sham sale. In other words, the lender and the first buyers collaborated to bilk Plaintiffs out of the net proceeds of the sale by selling the properties under-market. Plaintiffs’ evidence for this scheme involved the communications made by these parties when they negotiated the first sale. The court of appeals ruled that those alleged communications “implicate First Buyers’ exercise of their right of association” (citations omitted).
Having determined that the TCPA applied to the knowing participation claim, the court turned to whether Plaintiffs had made out a prima facie case by clear and specific evidence, as the TCPA requires. Noting that Texas has not recognized a cause of action for “aiding and abetting,” the question became whether Plaintiffs could show that “a third party knowingly participate[d] in the breach of duty of a fiduciary” and thus became “a joint tort-feasor with the fiduciary” (citations omitted). The court determined that the first buyers did not have the requisite actual knowledge of the lender’s fiduciary duty or the awareness that they were participating in the lender’s breach of fiduciary duty. Plaintiffs attempted to infer or impute such knowledge by circumstantial evidence of prior business deals between the lender and the first buyers, but the court rejected this approach. There was no evidence in the record that the first buyers knew about the contractual relations between Plaintiffs and the lender, so no rational inference that they “knowingly participated” in cheating Plaintiffs could be made. And the weight of Texas case law holds that “imputed knowledge is insufficient to find knowing participation in a breach of fiduciary duty” (citations omitted). Consequently, with no evidence of actual knowledge of the breach on the part of the first buyers, the knowing participation claim failed. TCPA dismissal was proper.
Moving to the award of attorney’s fees and sanctions to the first buyers, the court upheld the trial court once more. With regard to the attorney’s fees issue, Plaintiffs failed to brief the issue on appeal, so the court found waiver of that issue. It found next that the trial did not abuse its discretion when it awarded sanctions in an amount slightly less than the attorney’s fee award. There was nothing in the record to indicate that the trial court contradicted any of its findings in making the sanctions award (i.e. that it was unlikely that Plaintiffs would bring similar claims in the future), and that other appellate courts had ruled that sanctions awards using attorney’s fees as a benchmark were within the trial court’s discretion. The trial court could thus reasonably have concluded that the $50,000 sanctions assessment would sufficiently deter Plaintiffs from bringing future claims subject to TCPA dismissal.
Finally, the court of appeals cut Plaintiffs a break by reversing the trial court order granting the defendants summary judgment on claims other than the breach of contract claim. Plaintiffs’ breach of contract claim alleged that the lender had violated the 2006 financing agreement by failing to get the consent of an independent manager, as required by the agreement. This language did not appear in the 2009 agreement reorganizing management once the lender took control, and, the court found, for good reason. Financing agreement require the consent of an independent manager for material alterations in the conditions of the agreement because the requirement protects creditors, such as the lender in this case. Once a loan is no longer outstanding, there is no need for an independent manager, and that’s why the 2009 agreement, in which the lender took responsibility for the loan, did not require it. The trial court thus properly granted summary judgment to the lender on Plaintiffs’ claim that the first sale required such consent. And since Plaintiffs’ could not void the first sale under the breach of contract claim, Plaintiffs’ declaratory judgment and quiet title claims fell to the wayside.
But beyond the breach of contract claim, the defendants did not ask the trial court for summary judgment on Plaintiffs’ claims for breach of fiduciary duty, fraud by nondisclosure, accounting, and breach-of-contract alleging that the sale of the Properties was below market value and was not in the best interest of the original borrowers. The court remanded to the trial court for further proceedings on those issues.
This is another interesting case to think about from the perspective of a proposed business court. It’s a business-to-business case involving multiple entities, most of which are Delaware limited partnerships. It has a lot of issues, including a TUFTA claim, involving fairly high-dollar business transactions. Indeed, under prior proposals for a specialized business court, this case would certainly qualify. That being said, the issues in the case are not that “complex.” The TUFTA claim, though it required analysis of federal and state interpretations of a uniform law, was pretty well settled and did not present the court of appeals with a specialized question of law. Much of Justice Triana’s 55-page opinion was devoted to the TCPA analysis, not something a business court should be spending its time on. There are some unresolved issues relating to breach of fiduciary duty, fraud, accounting, and the alleged undervaluing of the first sale, but these seem heavily fact-intensive and within the purview of a factfinder, not a specialized court dealing in complicated legal issues. Again, there may well be cases that the trial and appellate courts can’t handle, but the devil is in the details of what kinds of cases those might be.
