Defendant’s Brief in Support of Their Motion for Summary Judgment

In re Brentwood-Lexford Partners, LLC

Description: This case was a breach of contract and conversion case brought by a bankruptcy trustee against the former owners of a real estate property management company.  The dispute arose after Brentwood-Lexford defaulted on a note owed to the company from whom it had purchased the stock of another property management company.  Plaintiff sued defendants for breach of contract, fraudulent transfer, tortious interference, conspiracy and breach of fiduciary duty after they terminated certain property management contracts, opened up a new property management company and began servicing the former clients of Brentwood-Lexford. This brief was filed by Heygood, Orr & Pearson on behalf of their client.

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
IN RE:BRENTWOOD-LEXFORD
PARTNERS, LLC,DEBTOR
___________________________________

DANIEL J. SHERMAN,
CHAPTER 7 TRUSTEE

Plaintiff,

vs.

FSC REALTY, LLC; RALPH WILLIAMS,
THE WILLIAMS FAMILY TRUST; BRUCE
WOODWARD; STANLEY R. FIMBERG;
RON BARNETT; CINDY WOLFE; and
MYAN MANAGEMENT GROUP, L.L.C.

Defendants and Counter-Plaintiffs

vs.

EQUITY APARTMENT MANAGEMENT LLC

Counter-Defendant.

CASE NO. 01-37645-RCMAdversary Proceeding No. 01-03645

DEFENDANTS’ BRIEF IN SUPPORT OF

THEIR MOTION FOR SUMMARY JUDGMENT

TO THE HONORABE ROBERT C. McGUIRE,

UNITED STATES BANKRUPTCY JUDGE:

 

COME NOW Defendants Ralph Williams (“Williams”), The Williams Family Trust, Bruce Woodward (“Woodward”), Ron Barnett (“Barnett”), Cindy Wolfe (“Wolfe”), Myan Management, L.L.C. (“Myan”), FSC Realty LLC (“FSC Realty”) and Stanley R. Fimberg (“Fimberg”) and respectfully file this Brief in Support of their Motion for Summary Judgment and Brief in Support, and state as follows:

Introduction

This case began as a simple suit on a note brought in state court by Lexford Properties Management, LLC now known as Equity Apartment Management LLC (“Equity”) against Debtor Brentwood-Lexford Partners, LLC (“Brentwood”) based on its failure to pay an April 1, 1998 note entered into when Brentwood purchased the stock of a property management company from Equity.  That note was a non-recourse note with no collateral and no personal guarantees; in other words, its value was limited to the value of Brentwood.  As the case wore on and Equity realized that the value of Brentwood was far less than the value of the note at issue, Equity looked for other, more solvent targets.  Over a period of months, Equity added as defendants the five former owners of Brentwood, the former managing member of Brentwood (“FSC Realty”) and an unrelated property management company formed by Defendants Woodward and Williams after they had resigned from Brentwood (“Myan”).

After Brentwood filed bankruptcy and this case was removed to federal court and then transferred to this Court, Daniel “Corky” Sherman, the Chapter 7 trustee for Brentwood (the “Trustee”) filed a motion seeking to retain Equity’s attorneys, the Munsch, Hardt firm, as attorneys for the Trustee.  Despite Equity’s status as the estate’s largest creditor and Defendants’ opposition, the Court granted the motion and Equity’s lawyers became the Trustee’s lawyers.  Subsequently Equity and Defendants agreed to dismiss the claims between them, leaving only the Trustee and Defendants as parties to this case.  As Defendants anticipated, the Trustee, through his attorneys and Equity’s former attorneys, has now asserted in his recent Cross-Complaint the same meritless claims against Defendants that Equity had previously asserted.  And some of the claims are clearly brought solely for the benefit of Equity rather than for the benefit of the Estate the Trustee ostensibly represents.  For the reasons set forth below, the Trustee’s claims should be dismissed and judgment should be entered in favor of Defendants.

Facts

Defendants Woodward, Williams and Fimberg have been in the property management business for more than twenty (20) years.  Prior to 1996, they were the principals of Lexford Properties, Inc. (“LPI”), a property management company based in Dallas, Texas, which managed large apartment communities.  In August 1996, Equity purchased LPI.   Following the purchase, Defendants Woodward and Williams continued to work for LPI in the property management business.  In 1997, Equity became interested in forming a real estate investment trust (“REIT”).  Income from third party property management services is known in the industry as “non-qualifying REIT income,” and Equity believed that the existence of the third party property management business would jeopardize its opportunity to become a REIT and to successfully execute a public offering of its stock.  Deposition of Paul Selid (“Selid Depo”) attached hereto as Exhibit A at pp. 23-29.  [NOTE: CHANGE ALL REFEENCES TO SEPARATE APPENDIX BY PAGE NUMBER].  As such, it was critical to Equity to sell or otherwise dispose of its third party property management business.  Id. at pp. 35-36.

Following their discussions with Equity, Brentwood purchased Equity’s third party property management business in April 1998 through a Stock Purchase Agreement (“SPA”) and promissory note (the “Note”). See SPA attached hereto as Exhibit B; see Note attached hereto as Exhibit C.  As part of the transaction, Defendants Woodward, Williams and Fimberg were required to give up their consulting and employment agreements which paid Williams and Fimberg $50,000 per year and Woodward $150,000 per year.  See SPA at pars. 8.4, 8.5.

This lawsuit began as a simple suit on a note brought by Equity against Brentwood after Brentwood did not pay an installment of principal and interest allegedly due on the Note on April 1, 2000.  Equity, by letter dated April 11, 2000, accelerated the Note.  See Exhibit D attached hereto.  The acceleration notice stated that more than $1.9 million was then due and owing to Equity by Brentwood.  Brentwood’s former officers have testified that the acceleration of the note essentially destroyed Brentwood’s prospects for financial success and virtually ensured its eventual demise.  See Deposition of Ralph Williams attached hereto as Exhibit E (“Williams Depo”) at pp. 105-106; Deposition of Bruce Woodward (“Woodward Depo”) attached hereto as Exhibit F at p. 174.

Brentwood is a limited liability company.  The managing member of Brentwood was FSC Realty of which Defendant Stanley Fimberg is the managing member.  FSC Realty also owned 45% of the shares of Brentwood, while Defendants Woodward and Williams were minority owners, holding 22.5% each of the shares of Brentwood.  Defendants Barnett and Wolfe each owned 5% of the shares.  See Williams Depo at p. 10.  As the Manager of Brentwood, FSC Realty was charged with carrying out the business of Brentwood.  Pursuant to Brentwood’s Operating Agreement, FSC Realty had the sole discretion to make distributions to members of Distributable Cash.  See Brentwood’s Operating Agreement attached hereto as Exhibit G at par. 5.4.  Such a distribution of excess cash flow was made in March 2000 pursuant to the terms of the Note with Equity.

The Note, drafted by Equity, specifically permitted Brentwood to distribute excess cash flow as determined by a formula set forth in the Note itself.  See Note attached hereto as Exhibit C at ¶¶ 5(f); 4(d).  Even Equity admitted in its pleadings in state court that  “[t]he distributions by Brentwood were permitted ….”  Plaintiffs Supplemental Brief and Evidence in Support of its Application for Temporary Injunction attached hereto as Exhibit H at ¶ 6 (emphasis added).  As Ralph Williams explained in his deposition, “the excess cash flow as defined by the terms of the promissory note was calculated and distributed in March of 2000.”  Williams Depo at p. 47; see also Williams Depo at p. 48 (“Q.  It’s a permissible conduct, is it not?  A.  Yes.”).  Despite the fact that the Note, which its attorneys drafted, specifically permitted the distribution of excess cash flow which took place in March 2000, this distribution was the primary basis for Equity’s fraudulent transfer claim and has now become the basis for the Trustee’s identical claim as set forth in his recent Cross-Complaint.

Although the distribution of excess cash flow occurred in March 2000, it was calculated based on Brentwood’s financial position as of the end of 1999.  See Williams Depo at p. 46.  In other words, the excess cash flow distributed in March 2000 was the excess cash flow generated in calendar year (and fiscal year) 1999.  Id. at 47.  Contrary to the Trustee’s suggestion, there was nothing sinister about the timing of the distribution in March 2000.  In fact, the excess cash flow from 1998 had similarly been distributed in March of 1999.  Id. at pp. 44-45.

Not only was the distribution of excess cash flow permitted by the terms of the Note, but it is unquestioned that Defendants fully intended to make the April Note payment at the time the excess cash flow was distributed.  In fact, in his deposition, Ralph Williams, who was the CFO of Brentwood, clearly explained Brentwood’s intention to pay the Note:

Q.        Well you told me earlier that in March of 2000 it was your every intention to pay the principal and interest payment due on April 1.

A.        Yes.

Williams Depo at p. 53.  Not only did Mr. Williams believe that Brentwood could make the Note payment in April following the permissible distribution of excess cash flow, but this belief was entirely reasonable.  Although Plaintiff would have this Court believe that Brentwood essentially drained its bank account in order to distribute excess cash flow, this is far from the truth.  In fact, as Mr. Williams testified, after the distribution of excess cash flow in March 2000, Brentwood had approximately $275,000.00 in cash on hand.  Williams Depo at p. 56.  The principal amount due on the Note as of April 1, 2000 was only $203,703.66.  See Exh. C at ¶ 2.  The interest allegedly due on April 1, 2000 was an additional $110,000.00, for a total amount allegedly due as of April 1, 2000 of $313,000.00.  See Exh. D.  In addition to the $275,000.00 cash on hand after the distribution of excess cash flow, Brentwood had accounts receivable of approximately $400,000 which it anticipated would be paid shortly after April 1, 2000.  As Mr. Williams testified, “on April 1 I had $275,000.00 in the bank plus receivables of $400,000.00.”  Williams Depo at p. 56; See also expert report of David Roberts attached hereto as Exhibit I.

In addition to the accounts receivable from third parties, Mr. Williams also testified that he believed that Cardinal Realty, Equity’s parent company, owed Brentwood approximately $150,000.00 due to a contractual dispute stemming from its closure of its human resources department which he believed would be paid shortly.  See Williams Depo at p. 52.  Equity recently ratified this belief when it agreed to reduce its claim in this case by $135,000 in compromise of Brentwood’s claim for breach of contract stemming from the closure of Equity’s human resources department.  See Joint Motion to Compromise and Settle Controversies attached hereto as Exhibit J at ¶ 11; Order Allowing Claim attached hereto as Exhibit K.  When this offset of $135,000 — to which Equity has agreed before this Court — is subtracted from the $313,000 due under the Note as of April 1, 2000, the true amount due under the Note was only $178,000.  As set forth above, Brentwood had more than enough cash in the bank — without regard to its receivables due in April — to pay this amount following its permissible distribution of excess cash flow in March 2000.

Prior to the decision not to make the April Note payment, Defendants had attempted to renegotiate the Note, but had been rebuffed by Equity.  See, e.g., Exhibits L and M attached hereto [Exhibits 2 and 6 to Fimberg Depo Vol. II].  The business decision to withhold the April payment was made as a means of bringing Equity to the bargaining table.  Unfortunately, although it held a non-recourse note with no personal guaranties, Equity instead chose to accelerate the Note, making the entire principal amount of $1,943,333.00 immediately due and payable.  See Williams Depo at p. 53; Exhibit D.  Following Equity’s acceleration of the Note, Brentwood was under water and had no chance of succeeding financially.  Williams Depo at pp. 69-70; Woodward Depo at p. 135.  The acceleration effectively destroyed Brentwood.

Defendant Woodward had previously been the President of Brentwood and Defendant Williams the CFO of Brentwood.  Williams Depo at pp. 10-11; Woodward Depo at pp. 9-10.  Defendant Barnett was the Treasurer and Assistant Secretary.  On September 27, 2000, Mr. Williams resigned his position at Brentwood, and on September 28, 2000, Woodward resigned from his position with Brentwood.  Id.; see also resignation letters attached hereto as Exhibits N and O.  Defendant Barnett resigned on October 31, 2000.  See resignation letter attached hereto as Exhibit P.  As for Defendant Wolfe, she was an employee of Brentwood but never an officer or director.  See Affidavit of Bruce Woodward attached hereto as Exhibit Q at ¶ 3.

Woodward, Williams and Barnett resigned because, due to the acceleration of the Note, Brentwood was under water and had virtually no chance of succeeding financially.  Williams Depo at pp. 69-70; Woodward Depo at p. 135.  At the time he resigned, Williams was receiving no salary other than a $500 per month director’s fee and believed that there was no possibility of any further distributions from Brentwood to Williams or his partners due to the acceleration of the Note; in essence, he was working for free.  Williams Depo at pp. 69-70.

Under the SPA between Brentwood and Equity, Williams and Woodward were entitled to resign at any time.  Williams Depo at p. 99; Woodward Depo at pp. 167-168; see also SPA attached hereto as Exhibit B.  While Lexford sought a non-compete agreement from Williams and Woodward at the time they were negotiating the SPA, none was ever agreed to.  Woodward Depo at pp. 167-168.  Similarly, neither Williams nor Woodward had an employment agreement, consulting agreement or other agreement which would restrict their ability to resign from Brentwood.  Williams Depo at p. 99; Woodward Depo at pp. 167-168.  Even Equity’s corporate representatives admitted in their depositions that nothing in the SPA or the other agreements prevented Woodward and Williams from resigning, going into the property management business and even competing with Brentwood if they chose.  Deposition of Leslie Fox attached hereto as Exhibit R (“Fox Depo”) at p. 40; Deposition of Bradley Van Auken attached hereto as Exhibit S (“Van Auken Depo”) at p. 128.

After Williams and Woodward resigned, the employees of Brentwood ceased working for Brentwood and Brentwood essentially ceased operating.  Since there was no one at Brentwood to manage their properties and, in particular, no one with a Texas real estate broker’s license (Woodward had been the only person at Brentwood with such a license), the companies owning properties managed by Brentwood canceled their contracts with Brentwood.  Williams Depo at pp. 35-37, 101; Deposition of Stanley Fimberg (“Fimberg Depo”) attached hereto as Exhibit T at pp. 123-124.  While some of these companies have now entered into contracts with Woodward and Williams’ new management company, Myan Management, many of them instead chose other management companies with no connection or affiliation whatsoever with Woodward or Williams.  Woodward Depo at pp. 98-99; Fimberg Depo at pp. 122-124.

As stated above, Equity originally brought suit against Brentwood in state court for its failure to pay the accelerated balance of the Note.  Later, Equity added a host of tort and contract theories against the other Defendants herein.  After Brentwood filed for bankruptcy, this case was removed to federal court and transferred to this Court.  Subsequently, Equity and Defendants agreed to dismiss the claims between them, leaving only the Trustee and Defendants as parties.  See Agreed Motion for Partial Dismissal and Agreed Order Granting Partial Dismissal attached hereto as Exhibits U and V respectively.  Following the dismissal of Equity’s claims, the Trustee filed his Cross-Complaint which asserts the same causes of action against Defendants that Equity had previously asserted.  While the Trustee’s attorneys ostensibly represent the interests of the Trustee rather than the interests of Equity, their former client, some of the claims the Trustee has asserted are designed solely to benefit Equity rather than the Estate.  There are no genuine issues of material fact.  For the reasons set forth below, Defendants are entitled to judgment in their favor as a matter of law on the claims asserted by the Trustee in his Cross-Complaint.

Argument and Authorities

I.          Defendants are entitled to summary judgment on the Trustee’s breach of contract claim.

A.        Section 5.6 of the SPA only required that the subject entities “enter into” management contracts with Brentwood, not that they stay under contract in perpetuity.

In his Cross-Complaint attached hereto as Exhibit W, the Trustee has alleged in his Fifth Cause of Action that Williams, Woodward, FSC Realty and Fimberg violated section 5.6 of the SPA, which reads as follows:

5.6       Property Owners Agreement.  FSC Realty, Fimberg, Williams and Woodward (collectively, the AProperty Owners@) hereby agree that for so long as amounts remain unpaid on the Promissory Note, the Property Owners will use their best efforts to cause all entities owning residential rental property that the Property Owners, individually or jointly with others with whom they are acting in concert, own or control (the AProperties@) to enter into management contracts with Buyer to the exclusion of other property management companies, subject to the Property Owners= exercise of their fiduciary duties, if any, owed to other interest holders in such entities by virtue of the Property Owners= direct or indirect position or relationship with such entity.

 

See Exhibit B at ¶ 5.6 (emphasis added).  The Trustee alleges that these four Defendants have breached Section 5.6 of the SPA by failing to use their best efforts to cause all entities they owned or controlled jointly or with others to enter into contracts with Brentwood to the exclusion of other property management companies.

The SPA, however, does not require properties owned or controlled by Williams, Woodward or Fimberg to remain under contract with Brentwood for any particular length of time.  Williams Depo at pp. 100-101; Woodward Depo at p. 170; Fimberg Depo at pp. 126-128.  The SPA merely states that Williams, Woodward and Fimberg were required to use their “best efforts” to cause properties they own or control to “enter into” management contracts with Brentwood.  See Exhibit B at Section 5.6.  This part of the SPA was intended to require them to “bring to the table” at the time the SPA was signed the management contracts under their control, a requirement they clearly fulfilled.  Williams Depo at pp. 100-101; Woodward Depo at pp. 168-170.  In fact, the properties they owned or controlled at the time the SPA was signed were been under contract with Brentwood for nearly two and a half years.  Id. Nothing in the SPA required those properties to remain under contract with Brentwood in perpetuity; in fact, each property management contract has a 30 day cancellation provision allowing cancellation with or without cause.  Id.

B.        Section 5.6 of the SPA is expressly subject to Defendants’ exercise of their fiduciary duties.

Section 5.6 of the SPA also contemplated that situations might arise in which the parties’ fiduciary duties to third parties would obligate them to move the property management contracts for properties under their control from Brentwood to some other property management company.  Fimberg Depo at pp. 126-127.  Section 5.6 specifically states that it is subject to the fiduciary duties Williams, Woodward and Fimberg owe to any interest holders in properties they own or control.  See Exhibit B at Section 5.6.  Those fiduciary duties required Williams, Woodward and Fimberg to ensure that any properties they own or control are managed effectively.  Woodward Depo at pp. 171-172.  Because there were no employees left at Brentwood to perform property management functions following the permissible resignation of Woodward and Williams, it would have been a breach of Defendants’ fiduciary duties to keep their properties under contract with Brentwood.  Williams Depo at pp. 35-36; Woodward Depo at pp. 171-172.

The very language of the SPA recognizes that Woodward, Williams and Fimberg have no duty to keep entities they own or control under contract with Brentwood when there is no possible way Brentwood can adequately manage those properties.  In fact, their fiduciary duties to their partners with which they own or control the properties compels them to move the contracts to another entity that can adequately manage the properties.  Because the SPA permits Woodward, Williams and Fimberg to move properties they control from Brentwood if their fiduciary duties require it, and because their fiduciary duties required them to transfer their properties to another property management company following Woodward and William’s justifiable and permissible resignation from Brentwood, the Trustee cannot possibly prevail on the merits of its claim for breach of the SPA.  Defendants are therefore entitled to judgment in their favor on this claim as a matter of law.

II.        Defendants are entitled to summary judgment on the Trustee’s fraudulent transfer claim.

A.        Defendants can assert as defenses to the Trustee’s fraudulent transfer claim the same defenses they asserted when the same claim was brought by Equity.

Equity previously brought claims against Defendants for fraudulent transfer.  These claims were recently dismissed without prejudice to the Trustee’s ability to assert such claims.  Following the dismissal of Equity’s claims, the Trustee asserted identical claims for fraudulent transfer against Defendants.  Compare Exhibit W at ¶¶ 26-28 with Exhibit Y at ¶¶ 33-35.  As set forth below, Defendants have numerous defenses to these claims, based primarily on the fact that the alleged fraudulent transfer in March 2000 was specifically permitted by the terms of the Note drafted by Equity.  Defendants previously asserted these defenses when Equity brought suit for fraudulent transfer, see Defendant’s Fifth Amended Answer and Counterclaims attached hereto as Exhibit Z, and have recently asserted these same defenses in their Answer to the Trustee’s Cross-Complaint.  See Defendant’s Answer attached hereto as Exhibit AA.

Under well-established principles of bankruptcy law, Defendants are entitled to assert the same defenses to the Trustee’s fraudulent transfer claim as they did when the same claim was brought by Equity.  Here, the Trustee seeks to avoid certain allegedly fraudulent transfers through its Cross-Complaint.  Under bankruptcy law, it may avoid fraudulent transfers by “stepping into the shoes of an unsecured creditor who could have avoided those transfers by means of a revocatory action.”  Traina v. Whitney Nat’l Bank, 109 F.3d 244, 246 (5th Cir. 1997).  Where, as here, the Trustee seeks recovery under the Texas Fraudulent Transfer Act, it does so on behalf of creditors such as Equity.  See, e.g., In re MortgageAmerica Corp, 714 F.2d 1266, 1272 (5th Cir. 1983) (“A suit under the Texas act, in other words, pursues the debtor’s property and, as such, is usually brought by the trustee in bankruptcy for the benefit of all creditors equally.”); In re Terry L. Douglas, 190 B.R. 831, 836 (Bankr. S.D. Ohio 1995) (in bringing fraudulent transfer claim, trustee “stands in the shoes of the debtor’s unsecured creditors”).

Because the trustee stands in the shoes of creditors like Equity when bringing a fraudulent transfer claim, Defendants have the right to assert the same defenses to such a claim as they would if it were brought directly by Equity:

Section 550 of the Bankruptcy Code further provides that the trustee may recover from the transferees all property transferred in violation of the applicable law.  As a result, the trustee stands in the shoes of debtor’s unsecured creditors, but he acquires no greater rights of avoidance by operation of § 544 (b) of the Bankruptcy Code than such creditors would themselves have under state law.

In re Terry L. Douglas, 190 B.R. at 836.  In other words, a trustee pursuing a fraudulent transfer claim “stands in the shoes of the creditor, subject to any defenses that could be asserted against the creditor.”  In re Wilma L. Bushey, 210 B.R. 95, 100 (B.A.P. 6th Cir. 1997).  This principle is particularly applicable here where the Trustee has expressly requested that the Court enter and Order, which it did, “substituting the Trustee for Equity as the party-in-interest with respect to the Litigation and this Adversary Proceeding . . . .”  See Chapter 7 Trustee’s Motion to Substitute Trustee as Party in Interest attached hereto as Exhibit X at p. 2.  As set forth below, the same defenses Defendants asserted when Equity brought suit for fraudulent transfer are applicable here and bar the Trustee’s claims as a matter of law.

B.        The distribution of excess cash flow was expressly permitted by the terms of                the Note between Equity and Defendants.

Defendants are entitled to summary judgment on the Trustee’s fraudulent transfer claim to the extent it is based on the distribution of approximately $600,000 made in March 2000 for the simple reason that the distribution was specifically permitted and anticipated by the very terms of the Note drafted by Equity.[1] The Note, drafted by Plaintiff, specifically permitted Brentwood to distribute excess cash flow as determined by a formula set forth in the Note itself.  See Exh. C at ¶¶5(f); 4(d).  Even Equity has admitted that “[t]he distributions were permitted ….”  Exh. H at ¶ 6.  As Ralph Williams explained in his deposition, “the excess cash flow as defined by the terms of the promissory note was calculated and distributed in March of 2000.”  Williams Depo at p. 47.  Despite the fact that the Note, which Equity’s attorneys drafted, specifically permitted the distribution of excess cash flow which took place in March 2000, this distribution is the primary basis for the Trustee’s fraudulent transfer claim.

As stated, the Note anticipated and permitted Defendants’ distribution of excess cash flow.  In fact, the only restriction in the Note on the distribution of excess cash flow was “if there is a Delinquency” under the Note.  See Exh. C at ¶ 4(d).  A Delinquency is defined by the Note as “[a] failure in the payment of any installment of interest on or the principal of this Note or any part thereof on the date same is due which the failure continues uncured for a period of at least five (5) days.”  Exh. C at ¶ 3.  Because the payment of principal at issue was not due until April 1, 2000, there could have been no delinquency in March 2000 when the distribution of excess cash flow was made.  As such, the distribution of excess cash flow – the distribution itself, the amount of the distribution and the timing of the distribution – was clearly permitted by the Note drafted by Equity.

According to the Texas Limited Liability Company Act, “at the time that a member becomes entitled to receive a distribution, that member has the status of and is entitled to all remedies available to a creditor of the limited liability company.”  Texas Limited Liability Company Act Art. 5.08.  As such, when the excess cash flow was calculated pursuant to the terms of the Note in March 2000 and the Managing Member, FSC Realty, decided to make a distribution, Defendants Woodward, Williams, Barnett, Wolfe and Fimberg became creditors of Brentwood with the same right of payment as any other general creditor.

In their Answer herein, Defendants asserted the affirmative defenses of ratification, waiver and estoppel as defenses to the Trustee’s fraudulent transfer claim.  Under Texas law, “ratification of a contract occurs when a party recognizes the validity of the contract by acting under the contract, performing under the contract, or affirmatively acknowledging the contract.”  Stable Energy, LP v. Newberry, 999 S.W.2d 538, 547 (Tex. App. – Austin 1999, pet. denied).  In the instant case, by suing under the Note, Equity ratified the Note and its various provisions.  And by basing its various claims on the debt represented by the Note, the Trustee has ratified the Note as well.[2] As discussed above, one of the provisions of the Note specifically permitted the distribution of excess cash flow which the Trustee now claims is a fraudulent transfer.  Because Equity and the Trustee effectively ratified this distribution, the distribution cannot form the basis for the Trustee’s fraudulent transfer claim.

Similarly, by expressly permitting in writing the distribution of excess cash flow, Equity, and now the Trustee in its stead, have waived their right to claim that such a distribution constituted a fraudulent transfer.  Texas courts have held that a party waives its rights “by intelligently, voluntarily, and knowingly relinquishing a known right or acting inconsistent with claiming that right.”  Fort Worth ISD v. City of Fort Worth, 22 S.W.3d 831, 844 (Tex. 2000).  By expressly permitting in writing the distribution of excess cash flow, Equity and the Trustee intelligently, voluntarily, and knowingly relinquished any right to use such distribution as the basis for a fraudulent transfer claim and have acted inconsistently with asserting such a claim.

In addition to the affirmative defenses of ratification and waiver, Defendants have also asserted the affirmative defense of estoppel.  Texas courts have explained that there are two types of estoppel, equitable estoppel and quasi estoppel.  The elements of equitable estoppel are as follows:

  1. A false representation or concealment of material fact;
  2. made with knowledge, actual or constructive, of those facts;
  3. with the intention that it should be acted on;
  4. to a party without knowledge or means of obtaining knowledge of the real facts;
  5. who detrimentally relies on the representations.

Stable Energy, 999 S.W.2d at 548; see also Johnson & Higgins v. Kenneco Energy, 962 S.W.2d 507, 515-16 (Tex. 1998).  Here, by agreeing in the Note to allow Brentwood to make a distribution of excess cash flow, Equity falsely represented that it agreed such a distribution was permissible and concealed its intent to use such distribution as a pretext for a fraudulent transfer claim against the individual defendants who are not parties to the Note.  Equity’s false representation and concealment of material facts was made with knowledge of the actual facts to Defendants, who had no knowledge or means of obtaining knowledge of Equity’s true plan, and with the intention that Defendants act upon its false representations and concealment by entering into the Note transaction.  As set forth in the deposition of Ralph Williams, Brentwood relied upon the fact that the Note permitted the distribution of excess cash flow when it distributed funds in March 200.  See Williams Depo at p. 47 (“the excess cash flow as defined by the terms of the promissory note was calculated and distributed in March of 2000”).  Under these facts, Equity and now the Trustee are estopped from asserting that the permissible distribution of excess cash flow amounts to a fraudulent transfer.

Finally, the Trustee is estopped from asserting his fraudulent transfer claim under the doctrine of quasi estoppel.  Texas courts have held that the doctrine of quasi estoppel “precludes a party from accepting the benefits of a transaction and then subsequently taking an inconsistent position to avoid corresponding obligations or effects.”  Stable Energy, 999 S.W.2d at 548; Bristol-Myers Squib Co. v. Barner, 964 S.W.2d 299, 302 (Tex. App. – Corpus Christi 1998, no writ) (“The principle of quasi-estoppel precludes a party from asserting, to another’s disadvantage, a right inconsistent with a position it has previously taken”).  The doctrine of quasi estoppel applies “when it would be unconscionable to allow a person to maintain a position inconsistent with one in which he acquiesced, or of which he accepted a benefit.”  Id. As stated above, the Note drafted by Equity under which it sued Brentwood unquestionably permitted Defendants to distribute excess cash flow as that term was defined in the Note.   There has been no suggestion that the distribution in March 2000 was not calculated pursuant to the terms of the Note or that it was in any way prohibited by the Note.  By ridding itself of an entity it no longer wanted, and one which threatened the viability of the REIT it was forming, Equity enjoyed the benefits of the Note transaction.  See Williams Depo at pp. 96-97.  Equity also enjoyed the benefits of the Note transaction since it resulted in the termination of employment and consulting agreements with Defendants and eliminated valuable stock options held by Defendants.  Woodward Depo at pp. 165-167.  Finally, Equity enjoyed the benefits of the Note transaction since it is unquestioned that Brentwood made, at a minimum, its April 1, 1999 payment of interest under the Note.

Having enjoyed the benefits of the Note transaction, Equity, and now the Trustee, have taken the inconsistent position that the distribution of excess cash flow was not permissible, but rather, amounted to a fraudulent transfer.  Under the doctrine of quasi estoppel, it would be unconscionable to allow the Trustee to maintain these inconsistent positions.  For the foregoing reasons, Defendants Woodward and Williams are entitled to summary judgment on Plaintiff’s fraudulent transfer claim insofar as it is based on the March 2000 distributions.

C.        The Trustee cannot show an intent to defraud.

The Trustee’s fraudulent transfer claim should also be dismissed because there is no evidence that Defendants had an intent to defraud, one of the elements of his fraudulent transfer claim.  See Tex. Bus. & Comm. Code § 28.005 (Vernon 2000).  Because no evidence exists on this element of the Trustee’s fraudulent transfer claim, that claim must be dismissed.

As set forth above, the distribution of excess cash flow the Trustee now attacks as fraudulent was permitted by the terms of the Note Equity drafted.  Even more importantly, it is unquestioned that Defendants fully intended to make the April Note payment at the time the excess cash flow was distributed.  In fact, in his deposition, Ralph Williams clearly explained Brentwood’s intention to pay the Note:

Q.        Well you told me earlier that in March of 2000 it was your every intention to pay the principal and interest payment due on April 1.

A.        Yes.

Williams Depo at p. 53.  Not only did Mr. Williams believe that Brentwood could make the Note payment on April 1 notwithstanding the permissible distribution of excess cash flow, but this belief was entirely reasonable.  After the distribution of excess cash flow in March 2000, Brentwood had approximately $275,000.00 in cash on hand as well as receivables of approximately $400,000 and a debt from Plaintiff’s parent company of approximately $150,000.  Williams Depo at pp. 52, 56.  These funds were well in excess of the $313,000 principal and interest payments allegedly due under the Note as of April 1, 2000.  And when one subtracts the agreed offset Equity has made to its claim herein of $135,000, it becomes clear that Brentwood had enough cash in the bank to meet its obligations under the Note in April 2000.  Because the Trustee cannot demonstrate that Defendants intended to defraud Equity or any other creditors at the time it distributed its excess cash flow, or at any other time, it cannot show that it is likely to prevail on the merits of its fraudulent transfer claim and Defendants are therefore entitled to judgment as a matter of law.

D.        The other alleged transfers do not support the Trustee’s claim.

The Trustee also alleges that “since March 2000, Williams, Woodward, FSC Realty, Barnett, Wolfe and possibly others have continued to make the same types of transfers to themselves.”  Trustee’s Cross-Complaint at ¶ 27.  Plaintiff has failed, however, to identify the alleged fraudulent transfers.  And despite the fact that the Defendants have been deposed several times and discovery is essentially closed, the Trustee makes his allegation “on information and belief.”  Id. In truth, the Trustee has no evidence of any such transfers and his fraudulent transfer claim should therefore be dismissed.

To the extent the alleged transfers involved Defendant Myan, there is likewise no evidence of any such transfers.  Simply put, Brentwood did not transfer or sell any of its assets to Defendant Myan.  With respect to the property management agreements managed by Brentwood, each of those property management contracts was subject to cancellation upon thirty days notice.  Woodward Depo at p. 170.  After their resignation, Defendants Woodward and Williams contacted the property owners for whom Brentwood was managing properties to determine whether they would like to enter into new property management contracts with Defendant Myan.  Several of the property owners entered into such contracts with Myan, but many of them did not, and instead entered into property management contracts with third parties.  See Woodward Depo at pp. 88-89.  Brentwood did not “transfer” the property management agreements to Myan.  Instead, the contracts were terminated by the property owners and, in some cases, the property owners subsequently entered into new property contracts with Myan.

The Trustee also appears to assert that Brentwood transferred or sold its employees to Myan.  In truth, all of the employees of Brentwood were employed by SRF Personnel, Inc.  Woodward Depo at pp. 30-31.  After the resignation of Woodward and Williams, these employees ceased working for Brentwood and later many of them took jobs with Defendant Myan.  Woodward Depo at pp. 160-162.  The employees were not, however, “transferred” from Brentwood to Myan.  Neither Brentwood nor SRF would have any legal authority to “transfer” the employees from one company to another.  Each of the employees was an at-will employee who had the right to either take a position with Myan upon being asked or to decline to do so.  No one could “transfer” their employment from one entity to another.

E.        Defendants are entitled to judgment in their favor as a matter of law on the Trustee’s claim for fraudulent transfer under the Bankruptcy Code to the extent it seeks to avoid any transfers occurring before September 13, 2000, one year before Brentwood filed bankruptcy.

 

The Trustee has brought a claim for fraudulent transfer under the Bankruptcy Code seeking to avoid various allegedly fraudulent transfers.  Among them is a distribution of excess cash flow occurring in March 2000 which was permitted by the express terms of the Note between Defendants and Equity.  To the extent the Trustee seeks to avoid this transfer — or any other transfers occurring earlier than September 13, 2000, one year before Brentwood filed for bankruptcy — its claims are barred as a matter of law.

Under Section 547 of the Bankruptcy Code, the Trustee may only avoid transfers made “between ninety days and one year before the date of the filing of the petition . . . .”  11 U.S.C. § 547(b)(5).  Similarly, under Section 548 of the Bankruptcy Code, the Trustee may avoid a transfer “that was made or incurred on or within one year before the date of the filing of the petition . . . .”  11 U.S.C. § 548(a)(1).  Finally, under Section 550 of the Bankruptcy Code, an action or proceeding must be commenced within “one year after the avoidance of the transfer on account of which recovery under this section is sought . . . .”  11 U.S.C. § 550 (f).  The Court may take judicial notice of the fact that Brentwood filed its bankruptcy petition on September 13, 2001.  See also Trustee’s Cross-Complaint at ¶ 2.  As such, Defendants are entitled to judgment as a matter of law on any claims brought by the Trustee under the Bankruptcy Code for allegedly fraudulent transfers occurring before September 13, 2000, including the alleged fraudulent transfer in March 2000.

F.         Conclusion.

As set forth above, the March 2000 distribution of excess cash flow which forms the core of the Trustee’s fraudulent transfer claim was expressly permitted by the terms of the Note drafted by Equity.  Moreover, because that distribution took place more than a year before Brentwood’s bankruptcy, it cannot form the basis of a claim for fraudulent transfer.  In addition, the Trustee has no evidence of an intent to defraud by Defendants.  Finally, the Trustee has no evidence of any transfers from Brentwood to Defendants other than the excess cash flow distribution mentioned above.  For these reasons, Defendants are entitled to judgment in their favor as a matter of law on the Trustee’s claim for fraudulent transfer.

III.       Defendants are entitled to summary judgment on the Trustee’s breach of fiduciary    duty claim.

The Trustee alleges that Defendants Woodward, Williams, Barnett and Wolfe were officers of Brentwood and that, as officers of an insolvent corporation, these Defendants owe the creditors, apparently including Equity, a fiduciary duty and/or duty of care and loyalty (referred to collectively as a “fiduciary duty”) to ensure that the assets of Brentwood were devoted to the payment of corporate debts without preferring one creditor over another or preferring themselves as creditors to the injury of general creditors.  At a previous hearing in state court, Equity cited the case of Plas-Tex v. Jones, No. 03-9-00286-CV, 2000 WL 632677 (Tex. App. – Austin May 18, 2000) as authority for the existence of such a fiduciary duty.  In that case, and the cases it cites, however, the duty asserted by Equity, and now by the Trustee, is clearly limited to officers of insolvent corporations.  Because the alleged transfers at issue took place either before Brentwood was allegedly insolvent or after Defendants were no longer officrs of Brentwood, they cannot form the basis of a claim for breach of fiduciary duty.

A.        It is unquestionable that Defendants owed no fiduciary duties to Brentwood’s creditors prior to April 2000 or after October 2000.

There is no evidence that Brentwood was insolvent until after Equity accelerated the Note in this case on April 11, 2000.  As such, Defendants are entitled to summary judgment as a matter of law on any claims for breach of fiduciary duty arising prior to April 11, 2000.  Moreover, it is unquestioned that Defendants Woodward and Williams resigned as officers of Brentwood by September 28, 2000 and Defendant Barnett by October 31, 2000.  FSC Realty resigned as managing member by letter dated October 4, 2000.  As such, Defendants Woodward and Williams are entitled to judgment in their favor as a matter of law on any claims based on conduct occurring after September 30, 2000, Defendant FSC Realty is entitled to judgment in its favor on any claims based on conduct occurring after October 4, 2000 and Defendant Barnett is entitled to judgment in his favor as a matter of law on any claims based on conduct occurring after October 31, 2000.  Finally, Defendant Wolfe is entitled to judgment in her favor as a matter of law on all of Plaintiff’s breach of fiduciary duty claims since she was never an officer or director of Brentwood.  See Exhibit Q at ¶ 3.  Among the claims which are therefore barred are any claims based upon the distribution of excess cash flow in March 2000.  Moreover, any claims based upon the alleged transfer of assets from Brentwood to Myan in October and November 2000 are likewise barred.[3]

B.        There is no evidence of any transfers to Defendants between April and October 2000 or any other breaches of fiduciary duty.

Texas law is clear that the assets subject to a potential claim by the Trustee are limited to assets transferred from Brentwood to the former officers and directors of Brentwood.  See, e.g., Hixson v. Pride of Texas Distribution, 683 S.W.2d 173, 176 (Tex. App. – Fort Worth 1985, no writ) (“The liability is limited to the extent of the value of the corporate assets received by all the directors”); Siegel v. Holliday, 663 S.W.2d 824, 828 (Tex. 1984) (“The directors may be held personally liable, but in no case may their joint liability to all creditors exceed the value of the corporate assets that came into their hands”).  In the instant case, the only assets allegedly transferred to Woodward, Williams, Barnett, Wolfe, the Trust and Fimberg are the assets transferred as part of the March 2000 distribution of excess cash flow.  As stated above, however, such transfers cannot form the basis for a breach of fiduciary duty claim since there is no evidence that Brentwood was insolvent at the time of the transfer.  And there is no evidence of any transfer of assets from Brentwood to the individual Defendants between April and October 2000.  Likewise, there is no evidence of any other actions constituting a supposed breach of fiduciary duty between April and October 2000.  Defendants are therefore entitled to judgment in their favor as a matter of law on the Trustee’s claims for breach of fiduciary duty.

C.        The Williams Family Trust and FSC Realty are entitled to summary judgment on Plaintiff=s breach of fiduciary duty claim.

The Williams Family Trust (“Trust”) and FSC Realty are entitled to summary judgment in their favor as a matter of law for the additional reason that they were merely members of Brentwood as opposed to an officer or director.  The Trustee alleges that as members of an insolvent corporation, the Trust and FSC Realty owed Brentwood=s creditors, apparently including Equity, a fiduciary duty to ensure that the assets of Brentwood were devoted to the payment of corporate debts without preferring one creditor over another or preferring themselves as creditors to the injury of general creditors.  Under Plas-Tex v. Jones, No. 03-9-00286-CV, 2000 W.L. 632677 (Tex. App. B Austin May 18, 2000) and other cases, however, that duty is clearly limited to officers of insolvent corporations.  It is unquestionable that neither the Trust nor FSC Realty was ever an officer or director of Brentwood; obviously as entities rather than individuals they could not act as officers or directors.  The Trust and FSC Realty merely held a membership interest in Brentwood.

No Texas cases have recognized any fiduciary duty owed to creditors of a limited liability company by one of its members.  In fact, the Dallas Court of Appeals has refused even to recognize a fiduciary duty between members of an L.L.C.  See Suntech Processing Systems v. Sun Communications, 2000 W.L. 1780236, No. 05-99-00213-CV (Tex. App.BDallas Dec. 5, 2000, pet. denied).  Members of an L.L.C. are no different than shareholders of any other type of corporation; they merely hold an ownership interest in the entity and have no role in the entity=s management.  Texas Courts have recognized that Asince shareholders are not trustees, they have no fiduciary duties.@  Henry I. Siegel Co. v. Holliday, 663 S.W.2d 824, 829 (Tex. 1984).  Because Texas law does not recognize a fiduciary duty owed by a mere member of an L.L.C., the Williams Family Trust and FSC Realty are entitled to judgment in their favor as a matter of law on Plaintiff=s breach of fiduciary duty claim.

IV.       Defendants are entitled to summary judgment on the Trustee’s tortious interference claim.

A.        The Trustee lacks standing to pursue this claim.

Among the claims asserted by the Trustee in his recently filed Cross-Complaint is a claim for tortious interference with contract.  In making this claim, the Trustee has alleged that Defendants interfered with the Note between Defendants and Equity.  See, e.g., Cross-Complaint at ¶ 21.  The Trustee, however, lacks standing to pursue this claim, and Defendants are therefore entitled to judgment on this claim as a matter of law.

The Note at issue obligated Brentwood to pay certain amounts to Equity as part of the SPA whereby Brentwood purchased the stock in an Ohio corporation engaged in the property management business.  In the state court lawsuit which preceded this bankruptcy proceeding, Equity sued Defendants for tortiously interfering with the Note.  See Plaintiff’s Fifth Amended Petition attached hereto as Exhibit Y at ¶ 30.  Until recently, these claims were part of this adversary proceeding.  In its Petition, Equity alleged that it was “the older and holder of the Note, has actual physical possession of same and has been damaged as a result of Brentwood’s failure to pay the Note.”  Exhibit Y at ¶ 20.  Any cause of action alleging interference with the Note necessarily belonged to Equity, the payee under the Note.

The “burden to establish standing remains with the party claiming that standing exists,” in this case, the Trustee.  Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1092 (2d Cir. 1995).  Under bankruptcy law, a trustee “has standing to represent only the interests of the debtor corporation.”  Id. at 1093.  The trustee “stands in the shoes of the debtors and can only maintain those actions that the debtors could have brought prior to the bankruptcy proceeding.”  Id; see also Shearson Lehman Hutton Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991) (“Under the Bankruptcy Code, the trustee stands in the shoes of the bankrupt corporation and has standing to bring any suit that the bankrupt corporation could have instituted had it not petitioned for bankruptcy.”).

Here, any cause of action for tortiously interfering with the Note belonged to Equity and not Brentwood.  Brentwood could not have sued its own officers for interfering with its contract to pay money to Equity since, under Texas law, actual damage is an element of a claim for tortious interference with contract. See, e.g., Prudential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74, 77 (Tex. 2000) (the elements of a claim for tortious interference with contract include and act of interference “that proximately caused the plaintiff’s injury”).  There is no evidence that the decision of Brentwood’s officers to not pay the Note to Equity caused actual damages to Brentwood.  The only party injured by the failure of Brentwood to pay the Note was Equity, not Brentwood or its bankruptcy estate.  The clearest indication that a cause of action for interfering with the Note does not belong to Brentwood is the fact that Equity, the holder of the Note, previously brought such a claim against Defendants in this case.

Under Bankruptcy law, the Trustee cannot bring claims for the benefit of creditors of the estate such as Equity.  “It is well settled that a bankruptcy trustee has no standing generally to sue third parties on behalf of the estate’s creditors, but may only assert claims held by the bankrupt corporation itself.”  Shearson Lehman, 944 F.2d at 118.  Stated another way, “when creditors . . . have a claim for injury that is particularized as to them, they are exclusively entitled to pursue that claim, and the bankruptcy trustee is precluded from doing so.”  Hirsch, 72 F.3d at 1093.  Any cause of action for tortious interference belonged to Equity, not the Estate.  As such, the Trustee lacks standing to pursue this cause of action, which should therefore be dismissed with prejudice.             

B.        Equity’s claim for tortious interference was recently dismissed with prejudice.

 

Equity previously brought an identical claim against Defendants for tortious interference with contract.  See Exhibit Y at ¶ 30.  As set forth above, under bankruptcy law, the Trustee has no standing to pursue its tortious interference cause of action, which belonged to Equity.  And there is no case law which would allow a creditor such as Equity to assign its cause of action to a bankruptcy trustee.  Even if Equity could somehow convey its cause of action to the Trustee, that cause of action was dismissed before the Trustee filed his Cross-Complaint. See Agreed Order Granting Partial Dismissal attached hereto as Exhibit V.  And the claim was dismissed with prejudice to its refiling by anyone, including the Trustee.  Id.; see also Agreed Motion of Partial Dismissal attached hereto as Exhibit U (dismissing tortious interference claim with prejudice while dismissing other claims “without prejudice to the Trustee’s ability to assert or pursue such claims.”).

In the recent Agreed Motion of Partial Dismissal, Equity represented to this Court that:

  1. It was the owner and holder of the claim against Defendants for tortious interference with contract;
  2. It had not assigned or transferred that claim to anyone;
  3. It was dismissing with prejudice the claim for tortious interference;
  4. It was dismissing “without prejudice to the Trustee’s ability to assert or pursue such claims,” other specified claims not including the tortious interference claim.

See Exhibit U; see also Agreed Order of Partial Dismissal attached hereto as Exhibit V.  Had Equity, the asserted owner and holder of the tortious interference claim, wished to preserve the Trustee’s right to subsequently bring such a claim, it could simply have listed the claim as one which was being dismissed without prejudice to the ability of the Trustee to assert it later as it did with other claims.  It did not do so, however, as the parties specifically agreed that the tortious interference claim was being dismissed for good and could not be filed again later by the Trustee or anyone else.  Now Equity, acting through its counsel — who have been appointed as counsel for the Trustee — seeks to avoid the effect of its representations to this Court through the artifice of ostensibly bringing claims on behalf of the Trustee.  Clearly the Trustee cannot pursue Equity’s claim in order for Equity to avoid the effect of its voluntary dismissal with prejudice. [4] The Court should merely confirm what the parties already have agreed, that the claim for tortious interference has been dismissed with prejudice.

C.        The Estate has not been damaged by the alleged tortious interference.

As stated above, in order to state a claim for tortious interference with contract, a plaintiff must show that the alleged act of interference proximately caused it damages.  See, e.g., Prundential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74, 77 (Tex. 2000) (the elements of a claim for tortious interference with contract include an act of interference “that proximately caused the plaintiff’s injury”).  The only party injured by the failure of Bentwood to pay the Note was Equity, not Brentwood or its bankruptcy estate.  Tellingly, in his Cross-Complaint, the Trustee does not even allege that the alleged tortious interference “proximately caused” any injury to the Estate.  See Cross-Complaint at ¶ 32 (the acts of interference “proximately caused damages and as a result, the Debtor and the creditors of the Debtor were actually damaged.”).  Moreover, by asserting that the acts of interference caused damage to the “creditors of the Debtor,” the Trustee underscores Defendants’ point outlined above that the cause of action belongs to the creditors (specifically Equity) and not the Estate.  Because there is no evidence, or even an allegation, that the alleged acts of interference proximately caused damages to the Estate, Defendants are entitled to judgment in their favor as a matter of law on the Trustee’s claim for tortious interference.[5]

D. Defendants’ alleged acts of interference are privileged, justified and excused.

The claims against Defendants amount to nothing more than an improper attempt to hold them liable on a non-recourse note which they did not sign or guarantee.  Numerous Texas courts, however, have held that a mere breach of contract, standing alone, does not amount to a tort.  See, e.g, Rodriguez v. Dipp, 546 S.W.2d 655, 657 (Tex. App. – El Paso 1977, writ ref’d n.r.e.) (“Clearly, failure to pay a note when due does not constitute the breach of such a legal duty as will give rise to a tort …”).  As the Texas Supreme Court has stated, “a party is usually able to abandon a disadvantageous but valid contract and be responsible for breach of contract only.”  Holloway v. Skinner, 898 S.W.2d 793, 795 (Tex. 1995).  Plaintiff’s tortious interference claim essentially asks this Court to ignore these fundamental principles and convert what Equity originally claimed was a mere breach of contract by Brentwood into something much more.

Not only is the Trustee’s tortious interference claim an improper attempt to convert an alleged breach of contract into a tort, but it seeks to hold Defendants liable for doing no more than exercising their legal rights.  Under Texas law, a defendant is justified in interfering with a contract if he acts in the exercise of his own legal rights or a good faith claim to a colorable legal right, even though that claim ultimately proved to be mistaken.  See, e.g., Texas Beef Cattle Co. v. Green , 921 S.W.2d 203, 211 (Tex. 1996); Hill v. Heritage Resources, Inc., 964 S.W.2d 89, 115 (Tex. App. – El Paso 1998, pet. denied) (“An interfering party is justified in his … interference if he has an equal or superior right in the subject matter”); Central Savings & Loan Assoc. v. Stemmons Northwest Bank, 848 S.W.2d 232, 241 (Tex. App. – Dallas 1992, no writ) (“[a] plaintiff cannot recover for tortious interference with the contract … if the allegedly interfering third party acted to protect his own legitimate interests”).

If a party’s alleged acts of interference constitute nothing more than his exercise of his own contractual rights, the motive with which he acts is irrelevant.  As the Texas Supreme Court has stated, “improper motives cannot transform lawful actions into actionable torts.  Whatever a man has a legal right to do, he may do with impunity, regardless of motive, and if in exercising his legal right in a legal way damage results to another, no cause of action arises against him because of a bad motive in exercising the right.”  Texas Beef Cattle Co., 921 S.W.2d at 211 (citations omitted).  Under this principle, justification is established as a matter of law when the defendant’s acts which the plaintiff claims constitute tortious interference are merely done in the defendant’s exercise of its own contractual rights, regardless of motive.  Baty v. Protech Ins. Agency, 63 S.W.3d 841, 857 (Tex. App. – Houston [14th Dist.] 2001, pet. filed).

Each of the actions which could possibly serve as a basis for the Trustee’s tortious interference claim was privileged, justified and excused as a matter of law.  If the action about which the Trustee complains is Defendants= distribution of excess cash flow in March 2000, as set forth above, such distribution was expressly permitted by the terms of the Note.  If the actions about which the Trustee complains are Defendants Woodward and Williams= resignation from Brentwood in order to set up their own property management company, these actions were completely lawful, permissible and, indeed, anticipated by Equity.  If the actions about which the Trustee complains are moving their properties from Brentwood to a capable property management company following Woodward and Williams’ justifiable and permissible resignation from Brentwood, those actions were likewise privileged, justified and excused.  Regardless of the motive the Trustee may attribute to the Defendants’ actions, they were justified and excused as a matter of law, and therefore cannot form the basis for the Trustee’s tortious interference claim on which Defendants are therefore entitled to judgment as a matter of law.

V.        Defendants are entitled to summary judgment on the Trustee’s conspiracy claim.

The Trustee’s final claim against Defendants is one for conspiracy.  Under Texas law, “a defendant’s liability for conspiracy depends on participation in some underlying tort for which the plaintiff seeks to hold at least one of the name defendants liable.”  Tilton v. Marshall, 925 S.W.2d 672, 681 (Tex. 1996).  Here, the conduct in which the Trustee alleges Defendants conspired are: 1) breaches of fiduciary duty; 2) fraudulent transfers; and 3) tortious interference with contract; and 4) breaches of contract.  Exhibit W at ¶ 34.  As set forth above, Defendants are entitled to judgment as a mater of law on each of these claims, rendering the conspiracy claim moot.  And as for the breach of contract claim, “[b]ecause breach of contract is not a tort, it will not support a civil conspiracy.”  Grizzle v. Texas Commerce Bank, 38 S.W.3d 265, 285 (Tex. App.–Dallas 2001, pet. granted); see also Walsh v. America’s Tele-Network Corp., 195 F. Supp.2d 840, 851 (E.D. Tex. 2002) (same).

Defendants are also entitled to judgment in their favor as a matter of law because there is no evidence of the essential elements of a conspiracy claim.  Under Texas law, a plaintiff asserting a conspiracy claim must plead and prove:

  1. A combination of two or more persons;
  2. An object to be accomplished (an unlawful purpose or a lawful purpose by unlawful means);
  3. A meeting of the minds on the object or course of action;
  4. One or more unlawful, overt acts; and
  5. Damages as the proximate result.

Ins. Co.of North America v. Morris, 981 S.W.2d 667, 675 (Tex. 1998).  As for the meeting of the minds element, the plaintiff must plead and prove the following:

There must be an agreement or understanding between the conspirators to inflict a wrong against, or injury on, another, a meeting of minds on the object or course of action, and some mutual mental action coupled with an intent to commit the act which results in injury; in short, there must be a preconceived plan and unity of design and purpose, for the common design is of the essence of the conspiracy.           

Schlumberger Well Surveying Corp. v. Nortex Oil and Gas, 435 S.W.2d 854, 857 (Tex. 1968).  Because there is no evidence of any of the elements of the Trustee’s conspiracy claim, and in particular, no evidence of any meeting of the minds, Defendants are entitled to judgment in their favor as a matter of law.

VI.       Defendants are entitled to judgment as a matter of law on the Trustee’s claim for attorneys’ fees.

 

As set forth above, Defendants are entitled to judgment in their favor as a matter of law on each of the Trustee’s claims herein.  Because the Trustee cannot prevail on any of its claims, it is not entitled to an award of attorneys’ fees.

Conclusion and Prayer

WHEREFORE, PREMISES CONSIDERED, Defendants Ralph Williams, The Williams Family Trust, Bruce Woodward, Ron Barnett, Cindy Wolfe, Myan Management, L.L.C., FSC Realty LLC and Stanley R. Fimberg pray that this Motion be granted, that the Court enter judgment in their favor as a matter of law on the claims against them and that they be granted such other and further relief, at law and in equity, to which they may be justly entitled.

Respectfully submitted,
HEYGOOD, ORR & PEARSON
2331 W. Northwest Highway
Second Floor
Dallas, Texas 75220
(214) 237-9001 (Telephone)
(214) 237-9002 (Telecopier)


[1] The Trustee has not alleged that Defendants intended to defraud any creditor other than Equity through the March 2000 distribution nor that Defendants were attempting to avoid any debt other than the debt to Equity under the Note.  In fact, the Estate currently has more than sufficient funds to pay all creditors other than Equity.  And, as set forth below, the Estate has more than enough cash to pay the amounts due under the Note to Equity in April 2000, before it was accelerated.

[2] The Trustee also ratified the Note by filing a Joint Motion to Compromise in which it sought to compromise Equity’s claim against the Estate, a claim based solely on the Note.  See Exhibit J.  This Motion was approved by the Court.  See Exhibit K.

[3] As set forth above, no assets of Brentwood were transferred or sold to Myan.  Rather, Brentwood ceased to operate as a going concern.  Subsequently, Myan entered into property management contracts with some of the companies which had previously had contracts with Brentwood that had been canceled.  Moreover, some of the SRF Personnel employees who had previously worked for Brentwood began working for Myan.  There was, however, no transfer of any assets from Brentwood to Myan.

[4] Its attempt to do so, however, clearly implicates the concerns raised by counsel for Defendants in their opposition to the Trustee’s motion to retain the Munsch, Hardt firm, counsel for Equity, as counsel for the Trustee.  Here, the new counsel for the Trustee — the same firm that has been paid thousands of dollars by Equity pursuing Equity’s claims against Defendants — is attempting to assert a cause of action belonging to Equity, not to the Trustee.  In doing so, it is forcing Defendants — creditors of the Estate — to expend needless attorneys’ fees seeking dismissal of this claim as well as causing the Estate itself to spend needless attorneys’ fees resisting this Motion as it applies to the tortious interference claim.  In light of these events, Defendants request that the Court reconsider its ruling on the Trustee’s motion to employ the Munsch, Hardt firm.

[5] For this same reason, the Trustee lacks standing to purse a claim for tortious interference.  See, e.g., Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1091 (2d Cir. 1995).