Martin R. Barash, United States Bankruptcy Judge.
This adversary proceeding arises out of the prepetition acquisition of a secured loan by defendant Radians Wareham Holding, Inc. ("RWHI") and the prepetition exercise of remedies under that loan agreement against the chapter 11 debtors herein, Ironclad Performance Wear Corporation, a California corporation ("ICPW CA"), and Ironclad Performance Wear Corporation, a Nevada corporation ("ICPW NV") (collectively, the "Debtors").
The Complaint alleges that RWHI acquired the loan and exercised remedies thereunder in an effort to acquire the Debtors' business and in a manner that caused injury to the Debtors and the value of their business. Based on this premise, the Complaint asserts: (i) a cause of action for economic duress, (ii) a cause of action for breach of the covenant of good faith and fair dealing, (iii) a cause of action for unjust enrichment, (iv) a cause of action for recovery, as an unauthorized transfer, of all funds paid to RWHI on its claims in the Debtors' cases, and (v) disallowance of the proof of claim filed by RWHI on account of the acquired loan. The Complaint also names as defendants RWHI's affiliates, Safety Supply Corporation ("Safety Supply"), and Radians, Inc. ("Radians") (together with Safety Supply and RWHI, "Defendants").
Defendants have filed their motion to dismiss the Complaint (the "Motion to Dismiss" or "MTD"). Adv. Dkt. 5. Defendants argue that Safety Supply and Radians should be dismissed from this lawsuit because the Complaint does not allege enough facts to support a claim against these affiliates of RWHI. Defendants further argue that all claims against them should be dismissed because: (i) the claims were released pursuant to the terms of a prepetition release executed by the Debtors, (ii) the claims were released pursuant to the terms of the agreed order approving the Debtor's postpetition financing, and (iii) the Complaint fails to adequately plead causes of action on which relief can be granted.
On September 8, 2017 ("Petition Date"), the Debtors each filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. ICPW CA developed and manufactured high-performance task-specific gloves and apparel in a variety of end markets. See Omnibus Declaration of L. Geoff Greulich in Support of Debtors' Emergency "First Day" Motions ("Greulich Decl."), ¶ 3.
In connection with commencement of these cases, the United States Trustee ("UST") appointed (1) the Equity Committee, see Case Dkt. 59; and (2) an official committee of unsecured creditors ("Creditors' Committee"). See Case Dkt. 62.
In late 2014, the Debtors obtained a revolving credit facility from Capital One, N.A. ("Capital One"), secured by substantially all of the Debtors' assets. Greulich Decl., Case Dkt. 6, ¶ 12. On July 25, 2017, Capital One assigned the loan to RWHI. Id., ¶ 14. As of the Petition Date, RWHI was the Debtors' only secured creditor. Id., ¶ 23. RWHI filed identical proofs of claim in each of the Debtors' cases. See Claim No. 20-1 in Case No. 1:17-bk-12408-MB; Claim No. 7-1 in Case No. 1:17-bk-12409-MB). Both proofs of claim asserted a claim amount of $ 3,464,093.28, owing as of the Petition Date (collectively, the "Claim").
Shortly before the Petition Date, the Debtors and RWHI entered into an asset purchase agreement ("APA") pursuant to which RWHI agreed to serve as a stalking horse, i.e., purchase the Debtors' assets subject to overbid and court approval. Greulich Decl., Case Dkt. 6, ¶ 27. The APA provided for certain bidding procedures applicable to the process, and a breakup fee of $ 500,000 ("Breakup Fee") if RWHI was not the winning bidder in an auction for the Debtors' assets, or if the Debtors proceeded with a plan of reorganization. See Greulich Decl. at 271-72.
On September 28, 2017, the Court entered an order approving the form of the APA and the bidding procedures to which the Debtors and RWHI agreed, including the Breakup Fee. See Case Dkt. 71 ("Bidding Procedures Order"). On October 30, 2017, the Court conducted an auction and thereafter approved the sale of substantially all the Debtors' assets to a purchaser other than RWHI. See Sale Order, Case Dkt. 177. The winning bidder agreed to purchase substantially all of the Debtors' assets for $ 25,500,000. Id. That sale closed on November 14, 2017. See Case Dkt. 237.
Also before the Petition Date, the Debtors and RWHI entered into the DIP Agreement, pursuant which RWHI agreed to provide postpetition financing while the Debtors marketed the opportunity to overbid for the assets. Greulich Decl., Case Dkt. 6, ¶ 23. On October 6, 2017, the Court entered its final order approving the DIP Agreement, the form of which was agreed
Case Dkt. 87 at 19 (Final DIP Order).
On December 5, 2017, the Equity Committee filed the Complaint and initiated the instant adversary proceeding. The Court subsequently confirmed the Plan, which dissolved the Equity Committee, created a trust solely for the benefit of the shareholders of ICPW NV, and transferred to the trust the rights of the Equity Committee to prosecute this action. See Case Dkt. 438, 442. Thereafter, the parties entered into a stipulation substituting Matthew Pliskin, as trustee under the trust created by the Plan, as Plaintiff. See Adv. Dkt. 42.
What follows are the relevant allegations from the Complaint. Safety Supply is the
Defendants manufacture safety equipment and apparel. Id., ¶ 12. In 2007 or 2008, the representatives of the Debtors and RWHI met to discuss if the two businesses might benefit from a strategic transaction. Id., ¶ 14. The Debtors decided not to pursue such a transaction, but over the next several years RWHI communicated its interest in acquiring the Debtors' brands or assets. Id.
Between November 2016 and April 2017, Capital One agreed to waive defaults when the Debtors breached the debt service coverage ratio ("DSCR") covenant of the Loan Agreement. Id., ¶ 19. On April 11, 2017, Capital One agreed to replace the DSCR covenant with a 12-month trailing adjusted EBITDA covenant. Id. In May 2017, Capital One demonstrated it was willing to work with the Debtors through financial difficulties when it extended the loan's maturity date to July 2018. Id.
In May 2017, RWHI prepared to go public with an offer to purchase ICPW NV's shares for 27.5 cents per share. Id., ¶ 15. Around the time RWHI was preparing its stock purchase offer, the Debtors' board of directors received anonymous reports of accounting irregularities that resulted in inflated revenue figures on the Debtors' financial statements. Id., ¶ 16. Upon investigating the reports, the Debtors filed a Form 8-K Report with the Securities and Exchange Commission on or about July 6, 2017, dated June 29, 2017, disclosing the financial irregularities, the termination of the employment of the Debtors' chief executive officer and chief financial officer, and the appointment of new individuals to those positions. Id.
Days later, on July 10, 2017, RWHI's CEO wrote the Debtors' chairman to say RWHI did not want to wait for the financial reports to be restated, and RWHI was willing to consider increasing its 27.5 cents per share purchase offer. Id., ¶ 17. Meanwhile, RWHI contacted Capital One to express its interest in purchasing the Debtors' loan. Id., ¶ 18. RWHI and Capital One quickly reached an agreement whereby RWHI would purchase the loan and waive any recourse against Capital One related to the uncertainties presented by the misstatements in the Debtors' financial statements. Id., ¶ 20. RWHI purchased the loan from Capital One on July 25, 2017, and Radians wired to Capital One an amount of money equivalent to the outstanding balance on the loan. Id., ¶ 21. Neither Defendants nor their managers had ever before acted as a commercial lender. Id.
The next day, on July 26, 2017, counsel for RWHI sent the Debtors a letter declaring the Debtors in default under the loan due to the previously disclosed misstated financial reports, accelerating the loan, and demanding immediate payment of the $ 3,688,195.22 outstanding balance in full. Id., ¶ 22. RWHI knew the Debtors had no means by which to pay the loan since the Debtors' last financial statements showed a cash balance of less than $ 300,000. Id. Over the next four weeks, the Debtors negotiated with several prospective lenders to either replace or supplement the existing debt, but RWHI did not allow that to happen. Id., ¶ 23. Instead, RWHI agreed only to two one-week forbearances—one signed August 1, the other signed August 14—even though the Debtors told RWHI they needed two to three weeks to arrange financing. Id. Meanwhile, RWHI continued to make offers to purchase the Debtors. Id.
RWHI improperly used the acceleration and cash sweeping provisions of the Loan Agreement to further RWHI's own economic interests because RWHI was only interested in acquiring the Debtors' assets. See id., ¶¶ 30-34. RWHI's actions forced the Debtors into bankruptcy. Id. In bankruptcy, the Debtors' assets were sold for a price that was less than the value of the assets before RWHI exercised these remedies. Id.
Under Federal Rule of Civil Procedure 8, made applicable here by Federal Rule of Bankruptcy Procedure 7008, a complaint must include "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). A complaint must "give the defendant fair notice of what the claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); see also Eclectic Properties E., LLC v. Marcus & Millichap Co., 751 F.3d 990, 996 (9th Cir. 2014).
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), applicable here under Federal Rule of Bankruptcy Procedure 7012(b), challenges the sufficiency of the allegations set forth in the complaint. "A Rule 12(b)(6) dismissal may be based on either a `lack of a cognizable legal theory' or `the absence of sufficient facts alleged under a cognizable legal theory.'" Johnson v. Riverside Healthcare Sys., 534 F.3d 1116, 1121 (9th Cir. 2008) (quoting Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990)).
In resolving a Rule 12(b)(6) motion to dismiss, the court must construe the complaint in the light most favorable to the plaintiff and accept all well-pleaded factual allegations as true. Johnson, 534 F.3d at 1122; Knox v. Davis, 260 F.3d 1009, 1012 (9th Cir. 2001). On the other hand, the court is not bound by conclusory statements, statements of law, and unwarranted inferences cast as factual allegations. Twombly, 550 U.S. at 555-57, 127 S.Ct. 1955; Clegg v. Cult Awareness Network, 18 F.3d 752, 754-55 (9th Cir. 1994).
"While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the `grounds' of his `entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555, 127 S.Ct. 1955
In Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), the Supreme Court elaborated on the Twombly standard as follows:
Id. at 678, 129 S.Ct. 1937 (citations and internal quotation marks omitted).
If dismissal is granted under Rule 12(b)(6), leave to amend should be allowed unless the pleading may not possibly be cured by the allegation of other facts. Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000). If amendment would be futile, dismissal may be ordered with prejudice. Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir. 1996).
A complaint may be dismissed under Rule 12(b)(6) based on an affirmative defense "only if the defendant shows some obvious bar to securing relief on the face of the complaint." ASARCO, LLC v. Union Pacific R. Co., 765 F.3d 999, 1004 (9th Cir. 2014). "If, from the allegations of the complaint as well as any judicially noticeable materials, an asserted defense raises disputed issues of fact, dismissal under Rule 12(b)(6) is improper." Id. (citing Scott v. Kuhlmann, 746 F.2d 1377, 1378 (9th Cir. 1984)).
In considering a Rule 12(b)(6) motion, "courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) (citations omitted). "Certain written instruments attached to pleadings may be considered part of the pleading." United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). "Even if a document is not attached to a complaint, it may be incorporated by reference into a complaint if the plaintiff refers extensively to the document or the document forms the basis of the plaintiff's claim." Id. The Court may consider such a document on which the complaint "necessarily relies" if: "(1) the complaint refers to the document; (2) the document is central to the plaintiff's claim; and (3) no party questions the authenticity of the document." United States v. Corinthian Colleges, 655 F.3d 984, 999 (9th Cir. 2011). "The defendant may offer such a document, and the district court may treat such a document as part of the complaint, and thus may assume that its contents are true for purposes of a motion to dismiss under 12(b)(6)." United States v. Ritchie, 342 F.3d at 908.
Here, the Complaint refers extensively to the loan documents and revisions between the Debtors and Capital One, and the forbearance agreements between the Debtors and RWHI. Those documents are central to Plaintiff's claims. The Complaint
Thus, the Court has considered the following documents in ruling on the Motion to Dismiss:
The parties agree that the substantive law of Texas applies to the three state-law causes of action by virtue of a choice of law provision in the Loan Agreement. See Adv. Dkt. 6 at 57, Section 13.5. The Complaint alleges that the "Loan Agreement provided it was to be governed by the laws of the State of Texas (Section 13.[5])." Complaint, ¶ 1. Similarly, Defendants admit that "[t]he tort claims are governed by Texas law." MTD at 3 (citing Section 13.5 of the Loan Agreement). As for Plaintiff's objection to claim, bankruptcy law applies in the first instance, although determination of the objection may require the examination of state law. As for Plaintiff's claim for the recovery of an unauthorized postpetition transfer, bankruptcy law provides the rule of decision.
As a preliminary matter, Defendants argue that the Complaint should be dismissed as to Safety Supply and Radians because "RWHI undertook all of the allegedly improper actions," MTD at 14, and these two affiliates "did not participate in the purchase of the Subject Loan and are not parties to any agreement as to the Subject Loan," id. at 3.
As a threshold matter, the Court observes that Plaintiff's civil conspiracy theory of liability with respect to Safety Supply and Radians was raised for the first time in Plaintiff's opposition to the Motion to Dismiss (the "Opposition"). The Complaint itself does not use the term civil conspiracy, identify the elements of a civil conspiracy, or assert facts adequate to satisfy the elements of a civil conspiracy. Thus, the civil conspiracy theory asserted in Plaintiff's opposition derives from outside the Complaint and is not a proper defense to the inadequacy of the Complaint. See Broam v. Bogan, 320 F.3d 1023, 1026 n. 2 (9th Cir. 2003) ("In determining the propriety of a Rule 12(b)(6) dismissal, a court may not look beyond the complaint to a plaintiff's moving papers, such as a memorandum in opposition to a defendant's motion to dismiss.") (quoting Schneider v. Cal. Dep't. of Corr., 151 F.3d 1194, 1197 n. 1 (9th Cir.1998)). Moreover, even if the Court assumes that Plaintiff attempted in some measure to plead a civil conspiracy, its allegations are woefully inadequate to the task.
Under Texas law, the elements of a civil conspiracy are: "(1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as a proximate result." Tri v. J.T.T., 162 S.W.3d 552, 556 (Tex. 2005). Civil conspiracy is a derivative tort. Tilton v. Marshall, 925 S.W.2d 672, 681 (Tex. 1996). "That is, 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 named defendants liable." Hotze v. Miller, 361 S.W.3d 707, 718 (Tex. App. 2012, pet. denied).
The Complaint alleges that Safety Supply is the parent company of RWHI and Radians, Complaint, ¶¶ 4-6, and "[a]s corporate members of the same privately-owned organization, [RWHI], Radians and Safety Supply Corporation acted under the same management and share responsibility for each related entity's actions regarding the [Debtors]," id., ¶ 13. The Complaint alleges that "[RWHI], through [Safety Supply], prepared to go public with the offer [to purchase the shares of ICPW NV]," id., ¶ 15, and that Radians wired money to Capital One when RWHI purchased the Debtors' loan from Capital One, id., ¶ 21.
These factual allegations do not satisfy the elements for a civil conspiracy under Texas law. First, the allegation that Safety Supply and Radians acted under the same management does not satisfy any element of a civil conspiracy. At best it suggests that RWHI may have directed its wholly owned subsidiaries to undertake certain actions for the benefit of RWHI, which actions were not themselves tortious. Second, the allegation that the three Defendants "share responsibility" for each other's actions is not a factual allegation. It is a legal conclusion, which the Court is not bound to accept as true on a Rule 12(b)(6) motion. Ashcroft v. Iqbal, 556 U.S. 662, 678-79, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Third, the Complaint does not allege any meeting of the minds between the three Defendants regarding a common objective or course of action, the substance of their agreement, or that it was made by each participant with a specific intent "to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means."
The alleged fact that Safety Supply sought to purchase shares of ICPW NV arguably demonstrates that RWHI sought to use its wholly owned subsidiary to acquire the Debtors' business. It does not establish an agreement between the two entities to achieve any unlawful purpose or any lawful purpose by unlawful means. Likewise, the alleged fact that Radians wired the money used by RWHI to acquire the Debtors' loan from Capital One, demonstrates little more than that Radians facilitated the purchase of that loan on behalf of its wholly owned parent. It does not establish a meeting of the minds regarding either an unlawful purpose or a lawful purpose by unlawful means. As such, the Complaint fails to provide Defendants with "fair notice" of the civil conspiracy theory that was subsequently asserted in the Opposition or the "grounds upon which [that theory] rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
Notably, it is not clear under Texas law whether a parent can even conspire with its wholly owned subsidiary. See Grizzle v. Texas Commerce Bank, 38 S.W.3d 265, 284 (Tex. App. 2001), rev'd in part on other grounds, 96 S.W.3d 240 (Tex. 2002) (noting disagreement among Texas courts). Some Texas courts have adopted a per se prohibition on civil conspiracy between a corporate parent and its subsidiaries, relying on Copperweld Corporation v. Independence Tube Corp., 467 U.S. 752, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984), a United States Supreme Court case interpreting a federal antitrust statute (the Sherman Act). See, e.g., Atl. Richfield Co. v. Misty Prod., Inc.,
But the Court does not need to adjudicate this issue at this juncture. Because the Complaint does not identify civil conspiracy as a basis for liability against Safety Supply and Radians, and the Complaint does not plead facts that would put Defendants on notice that a civil conspiracy has been alleged, the Court need only rule that the civil conspiracy argument asserted in the Opposition is inadequate to remedy the Complaint.
Chapter 33 of the Texas Civil Practices and Remedies Code provides a proportionate responsibility scheme that generally applies to all common law torts and certain statutory torts. Tex. Civ. Prac. & Rem. Code § 33.002; see PEMEX Exploracion y Produccion v. Murphy Energy Corp., 923 F.Supp.2d 961, 980 (S.D. Tex. 2013), aff'd, 595 Fed. App'x 445 (5th Cir. 2015). "[T]he statute requires the trier of fact to determine the percentage of responsibility of each claimant, defendant, settling person, and responsible third party who has been designated in accordance with the statute." Arceneaux v. Pinnacle Entm't, Inc., 523 S.W.3d 746, 748 (Ct. App. 2017). The purpose of the statute is to "hold each party responsible only for the party's own conduct causing injury." Id. (internal quotations omitted). Although the Complaint alleges that Radians wired money to Capital One to acquire the loan, and Safety Supply prepared a share purchase offer, neither of these actions is itself tortious and therefore does not support apportioning liability to Safety Supply or Radians.
Based on the foregoing, the Court will grant the Motion to Dismiss with respect to Safety Supply and Radians, but will grant Plaintiff leave to amend his complaint to allege facts that, if established, would show either (i) the existence of a civil conspiracy justifying the imposition of liability on Safety Supply and/or Radians for wrongful acts committed by RWHI, or (ii) tortious acts by Safety Supply and/or Radians that would substantiate an apportionment of liability to either or both of those entities.
Defendants argue that Plaintiff is barred from bringing the Complaint in its entirety for two separate reasons. First, Defendants
As noted, Plaintiff is the successor in interest to the Equity Committee. The beneficiaries of the trust for which Plaintiff serves as trustee are the former holders of the equity in ICPW-NV. Defendants rely on these facts to argue that Plaintiff does not have standing to pursue the claims asserted in the Complaint. Defendants argue that Plaintiff cannot have standing because the equity holders have not been directly injured by Defendants and do not otherwise have standing as equity holders, under Texas law, to sue for damages to the corporation. But these arguments assume incorrectly that Plaintiff is asserting causes of action that originated with the equity holders themselves. To the contrary, the claims that Plaintiff is pursuing on behalf of the plan trust are claims of the Estates. In re Spaulding Composites Co., 207 B.R. 899, 903 (9th Cir. BAP 1997). The Equity Committee was granted the right to pursue claims of the Estates under the Final DIP Order, and that right was transferred to Plaintiff pursuant to the Plan. That the ultimate beneficiary of any recoveries realized by Plaintiff are former equity holders of ICPW-NV is of no moment.
A release is an affirmative defense that must be raised in the answer or a responsive pleading. Fed. R. Civ. P. 8(b), (c); see Tex. R. Civ. P. 94. A complaint may be dismissed under Rule 12(b)(6) based on an affirmative defense "only if the defendant shows some obvious bar to securing relief on the face of the complaint." ASARCO, LLC v. Union Pacific R. Co., 765 F.3d 999, 1004 (9th Cir. 2014). "If, from the allegations of the complaint as well as any judicially noticeable materials, an asserted defense raises disputed issues of fact, dismissal under Rule 12(b)(6) is improper." Id. (citing Scott v. Kuhlmann, 746 F.2d 1377, 1378 (9th Cir.1984)).
Property of the bankruptcy estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The scope of section 541 is "broadly defined and includes causes of action." CBS, Inc. v. Folks (In re Folks), 211 B.R. 378 (9th Cir. BAP 1997) (citing United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n. 9, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983)). The nature of the property rights that become assets of an estate are defined by state law. Id. (citing Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979)). Thus, if a cause of action is released by the debtor prepetition, it will not be a "legal or equitable interest of the debtor in property as of the commencement of the case." See 11 U.S.C. § 541(a)(1).
In Texas, a "release, valid on its face, until set aside, is a complete bar to any later action based on matters covered by the release." Deer Creek Ltd. v. North Am. Mortgage Co., 792 S.W.2d 198, 203 (Tex. App. 1990, no writ) (citing Schmaltz v. Walder, 566 S.W.2d 81, 83 (Tex. App.
Defendants contend that the claims asserted in the Complaint were released by the Debtors prior to the commencement of these cases and therefore never became assets of the Debtors' estates. Specifically, Defendants point to language in the prepetition Forbearance Agreements executed by the Debtors and RWHI, in which the Debtors (i) acknowledge that they have no defenses to the payment obligations under their prepetition loan, and (ii) release any claims they had against RWHI at the time they executed such agreements. The relevant language in the forbearance agreements reads as follows:
August 1 Forbearance Agreement at ¶¶ 6, 14; August 14 Forbearance Agreement at ¶¶ 6, 12 (the "Prepetition Releases").
Although the releases are broad and would appear to cover the claims presented in the Complaint, Plaintiff argues that the Prepetition Releases do not bar this action because (i) the Prepetition Releases are not binding on Plaintiff as a matter of bankruptcy policy and/or because Plaintiff was not a party to the releases; (ii) Plaintiff's claims post-date the Prepetition Releases; and (iii) the Prepetition Releases are voidable based on coercion and duress.
First, Plaintiff argues that the Prepetition Releases do not apply to the claims asserted in the Complaint as a matter of bankruptcy policy. Opp. at 17. The Court disagrees. Plaintiff mistakenly relies on several cases applying the general principle that because the Bankruptcy Code seeks to provide a "fresh start" to "the honest but unfortunate debtor," Grogan v. Garner, 498 U.S. 279, 286-287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), "[i]t is against public policy for a debtor to waive the prepetition protection of the Bankruptcy Code." Bank of China v. Huang (In re Huang), 275 F.3d 1173, 1177 (9th Cir. 2002); see Continental Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011, 1026 (9th Cir. 2012) (reaffirming Huang); In re Cole, 226 B.R. 647, 651-654 & nn. 6-7 (9th Cir. BAP 1998) (citing sixteen cases for the proposition that "prepetition waivers of the bankruptcy discharge . . . [and] other bankruptcy benefits . . . are . . . unenforceable").
The Ninth Circuit reiterated this policy statement in Thorpe, in which the court of appeals held that the debtor's transfer of claims to a plan trust pursuant to Bankruptcy Code section 524(g) did not give rise to a claim for damages based on a prepetition agreement promising not to assign those claims. 671 F.3d at 1026 (citing In re Huang, 275 F.3d at 1177). This is because enforcement of the prepetition agreement in this manner—although the agreement did not mention specific rights in bankruptcy—would effectively waive the rights of a debtor to use the trust and injunction mechanism under Bankruptcy Code section 524(g). It also would violate the provisions of Bankruptcy Code section 541(c) which abrogate prepetition anti-assignment restrictions that would limit a debtor's right to transfer its interests in bankruptcy. See 671 F.3d at 1026-27.
But these cases are distinguishable—as are the other cases cited by Plaintiff. These courts declined to enforce either (i) a prepetition waiver by the debtor of specifically-identified rights or protections under the Bankruptcy Code, or (ii) a prepetition waiver by the debtor of nonbankruptcy rights which, if enforced, would effectively deny the debtor rights or protections created by the Bankruptcy Code. None of these cases involve a debtor, its successor, or a third party being permitted to pursue nonbankruptcy claims that were released prepetition by the debtor in accordance with state law.
The case on which Plaintiff most heavily relies actually supports the Court's analysis. See Minnesota Corn Processors, Inc. v. American Sweeteners, Inc. (In re American Sweeteners, Inc.), 248 B.R. 271 (Bankr. E.D. Pa. 2000). The debtor and a creditor executed a prepetition release pursuant to which the debtor released all claims against the creditor for any conduct occurring before the date of the settlement agreement. Id. at 275. In the context of a dispute over discovery, the court held that the prepetition release was a "complete defense to any action on the claims released," but that the release was not effective to preclude a claim of equitable subordination under Bankruptcy Code section 510(c). Id. at 275-78.
Finally, irrespective of whether the Prepetition Releases are enforceable, Plaintiff contends that he should not be bound by those releases because he was not a party to them. The Court finds this argument unpersuasive. Having made clear that Plaintiff is only pursuing claims that were property of the Estates, see Opp. at 20, Plaintiff cannot now argue that these claims are free of any defenses to which they were subject when they were still in the hands of the Debtors or the Estates. Plaintiff effectively has stepped into the shoes of the Debtors and the Estates and takes these claims how he finds them. See 11 U.S.C. § 541(a)(1) (estate includes only those "legal and equitable interests of the debtor in property as of the commencement of the case."). In this instance, it appears the claims were waived and released before they ever became property of the Estates. Plaintiff cannot avoid this reality.
Second, Plaintiff argues that the Prepetition Releases do not bar his claims because the Debtors' injuries "occurred upon the closing of the sale of [the Debtors']
In Texas, "a cause of action generally accrues at the time when facts come into existence authorizing a claimant to seek a judicial remedy." Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 828 (Tex. 1990). A plaintiff's cause of action accrues "when a wrongful act causes some legal injury, even if the fact of injury is not discovered until later, and even if all resulting damages have not yet occurred." S.V. v. R.V., 933 S.W.2d 1, 4 (Tex. 1996). "The fact that damage may continue to occur for an extended period after denial does not prevent limitations from starting to run." Murray v. San Jacinto Agency, Inc., 800 S.W.2d at 828.
Here, the Complaint alleges that RWHI's wrongful actions included "accelerating the loan, agreeing only to unworkable one-week forbearances and sweeping [the Debtors'] bank accounts," Complaint, ¶ 25. According to the Complaint, these actions first occurred before the Prepetition Releases were executed. The Complaint alleges that these actions injured the Debtors by "depriv[ing the Debtors] of the benefits of the Loan Agreement," id., ¶ 38; by "coerc[ing] unreasonable terms and other consideration from [the Debtors], including a pre-payment fee and the Break-Up Fee," ¶ 43; and by providing RWHI with a commercial advantage over the Debtors. Id., ¶¶ 31, 38. Under Texas law, regardless of whether additional injuries manifested themselves later, the claims based on RWHI's pre-release conduct accrued before the Prepetition Releases were executed.
Even if this were not the case, Texas law permits a release to be valid against unknown claims and damages that develop in the future. Keck, Mahin & Cate v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 20 S.W.3d 692, 698 (Tex. 2000) ("Although releases often consider claims existing at the time of execution, a valid release may encompass unknown claims and damages that develop in the future."). Here, the Debtors released Defendants
See August 1 Forbearance Agreement at ¶ 14; August 14 Forbearance Agreement at ¶ 12. This language is broad enough to cover any unknown claims and injuries caused by RWHI that were not yet known.
Plaintiff attempts to support its argument with an unreported Texas appellate
The case, however, is not persuasive on the point for which it is cited. The holding applies narrowly to "a claim to recover illegal or invalid fees or taxes." This limitation is all the more apparent when the case is read in conjunction with the case on which it relies, Lowenberg v. City of Dallas, 168 S.W.3d 800. In Lowenberg, the Texas Supreme Court began its decision as follows: "The question presented is when a claim accrues for refund of an illegal fee. The court of appeals held it accrues when the fee is enacted rather than when it is paid, distinguishing a recent opinion by this Court to the contrary. We disagree, and thus reverse." Id. (emphasis added). Neither Texas Valla Real Estate I or Lowenberg deals with the time at which a tort claim arises. Texas law is clear that it arises when the wrongful conduct occurs and the injury first results, regardless of whether additional injuries arise from that conduct.
Finally, Plaintiff argues that the Prepetition Releases are voidable because they were obtained as a result of Defendants' duress upon the Debtors. Defendants contend that there was no duress and the Prepetition Releases are valid.
A release obtained by duress is voidable. Jeanes v. Hamby, 685 S.W.2d 695, 702 (Tex. App. 1985, writ ref'd n.r.e.) (citing Mitchell v. C.C. Sanitation Co., 430 S.W.2d 933, 936 (Tex. App. 1968, writ ref'd n.r.e.); Deer Creek Ltd. v. North Am. Mortgage Co., 792 S.W.2d 198, 203 (Tex. App. 1990, no writ); see also Wright v. Sydow, 173 S.W.3d 534, 543-44 (Tex. App. 2004, pet. denied) ("Generally, when one coerces another to execute a contract by taking undue or unjust advantage of the person's economic necessity or distress, the contract may be invalid or unenforceable. This legal theory is called economic duress."). "The elements of duress are the same for both contract and tort." 49 Tex. Prac., Contract Law § 2.35, Duress, coercion, and undue influence—Elements of duress.
As described in Section E below, Plaintiff has not adequately pled the tort of economic duress under Texas law. But even if the Court assumes for the sake of argument that Plaintiff had done so, and that the Prepetition Releases were a result of such duress, the Court would not be able rule on the enforceability of the Prepetition Releases at this stage of the litigation. To succeed in demonstrating that a release (or any other defense) entitles Defendants to immediate dismissal, Defendants would have to show from the face of the Complaint that there is an "obvious bar to securing relief." ASARCO, LLC v. Union Pacific R. Co., 765 F.3d 999, 1004 (9th Cir. 2014) (emphasis added).
The allegations in the Complaint show that there is a potential bar to relief but not an obvious one. The Complaint raises substantial factual questions. The Prepetition Releases suggest that Plaintiff's
Defendants assert that this entire action is barred by the release (the "DIP Release") contained in section 11.13 of the Debtor in Possession Credit Agreement between the Debtors and RWHI (the "DIP Agreement"), Case Dkt. 6 at 229, as approved by the Final DIP Order, Case Dkt. 87. Plaintiff asserts that the DIP Release could not serve as a bar to the Estates' claims until expiration of the 60-day "Lookback Period" provided for in the Final DIP Order (the "Lookback Provision"), Case Dkt. 87, ¶ kk. The DIP Release provides in relevant part as follows:
Case Dkt. 6 at 229. This broad release, if approved by the Court, would seem to preclude the Debtors, their successors, and their assigns from pursuing virtually any action against Defendants.
Accordingly, both the Equity Committee and the Creditors' Committee objected on multiple grounds to the motion to approve the DIP Agreement, Case Dkt. 7. The Equity Committee requested that "any final [DIP] order incorporate additional language to clarify that the Equity Committee and creditors may pursue claims and causes of action in their individual capacity and on behalf of the estate to challenge the validity, perfection or enforceability of Radians' prepetition liens." Case Dkt. 86 at 6. The Equity Committee also requested that "any waiver by the estates should not be effective until the Equity Committee and the Creditors' Committee have [had] sufficient time to investigate and challenge Radians' liens, if necessary." Id. at 10. The
The Lookback Provision at the end of the Final DIP Order provides for a 60-day lookback period in which the Committees would be permitted to pursue an action against RWHI regarding the amount, validity, or enforceability of the prepetition loan, or to bring any other claim that they have, individually or on behalf of the Estates. The language is tailored to address the Equity Committee's objection:
Id. at 19 (emphasis added). The DIP Release also bars the Debtors' right to pursue an action against RWHI regarding the amount, validity, or enforceability of the prepetition loan:
Id. Defendants now argue that the DIP Release bars this entire action, notwithstanding the Lookback Provision in the Final DIP Order.
Defendants are wrong. First, the provisions of the Final DIP Order take precedence over the DIP Agreement, which contains the DIP Release. See Final DIP Order at 8 ("In the event of a conflict between the Loan Documents and this Final Financing Order, this Final Financing Order shall control."). Second, the Final DIP Order makes clear that, although the Debtors were waiving their rights against RWHI, the ability to bring a claim against RWHI on behalf of the Estates was preserved for a period of 60 days from the date of entry of the Final DIP Order. Id. In other words, the DIP Release is subject
Moreover, Courts routinely approve provisions like the Lookback Provision where the claims released by a debtor are preserved for another entity to pursue on behalf of the debtor's estate. See In re Adelphia Commc'ns Corp., 330 B.R. 364, 383-84 (Bankr. S.D.N.Y. 2005) ("It was necessary (and typical) for the Debtors to accede to such a provision, and for the Court to approve it. Provisions of that character are common in DIP financing orders in chapter 11 cases (at least where prepetition lenders are asked to make concessions to permit the postpetition financing), but bankruptcy courts normally approve them only where some entity—typically a creditors' committee—has the ability to assert those claims.").
Accordingly, the Court rejects the argument that the DIP Release bars this action. The Motion to Dismiss based on the Postpetition Release will be denied.
Duress can arise as a defense to a contract claim, see e.g., Wright v. Sydow, 173 S.W.3d at 543-44, or a tort. See Likover v. Sunflower Terrace II, Ltd., 696 S.W.2d 468, 472 (Tex. App. 1985) (citing Housing Authority of City of Dallas v. Hubbell, 325 S.W.2d 880, 902 (Tex. App. 1959, writ ref'd n.r.e.)). Duress of property is also referred to as "economic duress." See id. Under Texas law, economic duress consists of the following elements: (1) the defendant threatened to do some act that it had no legal right to do; (2) the threat was of such a nature as to destroy the free agency of the threatened party; (3) the threat overcame the threatened party's free will and caused it to do what it otherwise would not have done and was not legally bound to do; (4) the restraint
Duress "may be evidenced by forcing a victim to choose between distasteful and costly situations, i.e., bow to duress or face bankruptcy, loss of credit rating, or loss of profits from a venture." Trinh v. Lang Van Bui, No. 14-11-00442-CV, 2012 WL 5378112, at *7 n.7 (Tex. App. Nov. 1, 2012) (quoting State Nat. Bank of El Paso v. Farah Mfg. Co., 678 S.W.2d 661, 686 (Tex. App. 1984, writ granted (Mar. 6, 1985), judgment set aside and cause dismissed (Mar. 6, 1985)). "Duress must be shown from the acts or conduct of the party accused of duress, not the emotions of the purported victim." McCord v. Goode, 308 S.W.3d 409, 413 (Tex. App. 2010, no pet.). Generally, what constitutes duress is a question of law, but whether duress exists under a particular set of circumstances is a fact question. Wright v. Sydow, 173 S.W.3d at 544. A plaintiff that prevails on a duress claim is entitled to actual pecuniary damages proximately caused by the defendant. See, e.g., Housing Authority of City of Dallas v. Hubbell, 325 S.W.2d at 905-909.
The gravamen of the Complaint is that Defendants improperly used the acceleration and cash sweeping provisions of the Loan Agreement to further Defendants' own economic interests because Defendants were interested only in acquiring the Debtors' assets. See Complaint, ¶¶ 30-34. The Complaint alleges that Defendants' actions "forced" the Debtors into bankruptcy, which led to a sale of the Debtors' assets for a price that was less than the value of the assets before the sequence of events was set into motion by the acceleration.
Defendants argue that Plaintiff has not stated a claim for duress because: (1) the Complaint does not allege that RWHI threatened to perform an act it had no legal right to perform and instead simply exercised its rights under the Loan Agreement; (2) RWHI was not responsible for the Debtors' underlying financial distress because that distress was caused by the Debtors and their former officers; and (3) the commencement of a bankruptcy case and the administration of that case—which the Debtors took advantage of—is a statutory protection from the sort of duress alleged by Plaintiff, not a form of damage.
Defendants argue that the Complaint is inadequate because it fails to allege that (a) RWHI made a threat against the Debtors, (b) to do something that RWHI did not have a legal right to do. Reply at 13. The Court agrees that these and other elements of the cause of action have not been adequately pled. For the reasons set forth below, however, the Court will permit Plaintiff to replead this cause of action.
The Complaint alleges that (i) RWHI's counsel sent a letter to the Debtors declaring a default, accelerating the loan and demanding immediate payment of the entire balance loan balance the day after acquiring the loan, even though RWHI knew the Debtors would be unable to pay the loan, Complaint, ¶ 22, (ii) RWHI thereafter entered into two one-week forbearance agreements while simultaneously making offers to purchase the Debtors' assets, id., ¶ 23, and (iii) RWHI thereafter began sweeping the Debtors' bank accounts with the intention of "forcing ICPW to shut down [sic], and turn over its assets
Although the Complaint describes a series of actions undertaken by RWHI purportedly in the exercise of its rights under the Loan Agreement, and ascribes a bad faith intent to those actions, the Complaint does not specifically identify a threat by RWHI to do anything. Black's Law Dictionary defines "threat" in relevant part as "a declaration, express or implied, of an intent to inflict loss or pain on another." Black's Law Dictionary (10th ed. 2014). The Complaint describes the transmittal of a letter by RWHI one day after its acquisition of the loan, declaring a default and accelerating the loan balance. The Complaint also describes the subsequent exercise of RWHI's cash sweep remedy under the Loan Agreement. None of these actions is alleged to have contained or constituted a threat by RWHI to exercise a remedy or take some other action. Each of these actions was itself the exercise of a remedy of the Loan Agreement. See, e.g., Nance v. Resolution Trust Corp., 803 S.W.2d 323, 333 (Tex. App. 1990), writ denied per curiam, 813 S.W.2d 154 (Tex. 1991) ("There is no evidence that Nance's will was overcome by any threat made by Alamo. Indeed, there is no evidence of any threat at all, and the only action of which Nance complains . . . was specifically authorized by the terms of the contract.").
Even if a threat were alleged, the Complaint fails to identify the action that was threatened or demonstrate that RWHI did not have a legal right to undertake the threatened action. There are no allegations that the Debtors were not in default or that the Loan Agreement did not provide the remedies exercised by RWHI. Instead, Plaintiff argues that the acceleration and cash sweep were not proper because they were not undertaken in good faith. To support this argument, Plaintiff relies on the Ninth Circuit's decision in Brown v. AVEMCO Investment Corp., 603 F.2d 1367 (9th Cir. 1979) (construing Texas law), which applied the predecessor to Texas Business and Commercial Code section 1.309. Section 1.309 provides in relevant part:
Tex. Bus. & Com. Code § 1.309 (2017); see also Tex. Bus. & Comm. Code § 1.208 (West 1984) (repealed 2003).
Defendants also rely on State Nat. Bank of El Paso v. Farah Mfg. Co., 678 S.W.2d 661, 683-88 (Tex. App. 1984, writ granted (Mar. 6, 1985), judgment set aside and cause dismissed (Mar. 6, 1985)) ("Farah").
These cases, however, do not remedy Plaintiff's duress claim. Even if the Court assumes for the sake of argument that RWHI's default declaration and debt acceleration were undertaken in bad faith, the Complaint does not allege that RWHI ever threatened to exercise these remedies. RWHI just exercised them. The present circumstances are materially different than those presented in Farah, where the lender threatened to declare a default and accelerate the note if the borrower did not accede to the lender's demands. And they are even farther afield of Brown, in which the Ninth Circuit held that the acceleration clause at issue was subject to the good faith requirement under the Texas Uniform Commercial Code but was not asked to address the requirements of a claim for duress under Texas law.
Notwithstanding the foregoing analysis, the Court is not persuaded that repleading the duress claim is futile and will grant Plaintiff leave to do so. Based on the facts alleged in the Complaint, it is at least plausible that RWHI's letter declaring a default and accelerating the debt under the Loan Agreement was an implicit threat by RWHI to exercise other remedies or take other actions against the Debtors. Plaintiff may be able to state a claim for duress under Texas law, if Plaintiff can allege that (1) the letter constituted a threat by RWHI to take action that it did not have a legal right to take; (2) the threat was of such a nature as to destroy the free agency of the Debtors; (3) the threat overcame the threatened party's
To be clear, the Court is not prejudging these issues. The Court does not know if facts and law exist to substantiate such allegations. For instance, if RWHI made an implicit threat to exercise remedies other than acceleration under the Loan Agreement, it is not clear whether the exercise of such a remedy is subject to the same good faith requirement as acceleration. If Plaintiff determines to file an amended Complaint alleging the "threat" for purposes of the duress analysis was a threat to exercise the cash sweep or any other remedy, Plaintiff should be prepared to demonstrate why RWHI did not have a legal right to exercise that remedy under section 1.309 and/or otherwise applicable Texas law.
Further, Plaintiff will need to allege facts that specifically address and satisfy all of the elements of a claim for duress under Texas law. The Complaint largely elides over those elements. For instance, the Complaint describes facts suggesting that RWHI acted in bad faith and for motives unrelated to enforcing the Loan Agreement as a creditor. The Complaint further alleges that the Debtors were harmed by RWHI's conduct. But the Complaint does not adequately allege that RWHI "destroy[ed] the free agency "of the Debtors, or "overcame the [Debtors'] free will and caused [them] to do what [they] otherwise would not have done and was not legally bound to do."
The closest Plaintiff comes is to allege that RWHI's conduct "forced" the Debtors to file bankruptcy. But the term "forced" does not necessarily mean to destroy the free agency or overcome the free will of another party—a very specific standard articulated in the Texas case law. The term "forced" may mean merely "done or produced with effort, exertion, or pressure." Merriam Webster's Collegiate Dictionary (10th ed. 1996) at 455. It is not clear from the allegations in the Complaint that RWHI destroyed the Debtors' free agency and overcame their free will—rather than simply adding to the existing pressures facing the Debtors and/or hastening the filing of their bankruptcy cases. If Plaintiff intends to replead the duress cause of action, Plaintiff should consider and address the applicable standard under Texas law and plead facts sufficient to satisfy that standard, if they exist.
Defendants argue that Plaintiff cannot state a claim for duress because Defendants were not responsible for the Debtors' underlying financial distress.
Some Texas courts have held that a party cannot be liable for a duress claim unless the party "was responsible for [the] claimant's financial distress." See First Texas Sav. Ass'n of Dallas v. Dicker Ctr., Inc., 631 S.W.2d 179, 185-86 (Tex. App. 1982, no writ); Simpson v. MBank Dallas, N.A., 724 S.W.2d 102, 109 (Tex. App. 1987, writ ref'd n.r.e.) (relying on First Texas Sav. Ass'n of Dallas v. Dicker Ctr., Inc., 631 S.W.2d at 185-86); Deer Creek Ltd. v. North Am. Mortgage Co., 792 S.W.2d 198, 203 (Tex. App. 1990, no writ) (relying on Simpson v. MBank Dallas, N.A., 724 S.W.2d at 109). Other courts have narrowed the principle to apply only when a party alleges that its preexisting financial condition was the reason it submitted to duress. See State Nat. Bank of El Paso v. Farah Mfg. Co., 678 S.W.2d at 687 ("The First Texas case [631 S.W.2d at 185] and those like it are clearly distinguishable. FMC's claim of duress does not rest upon its pre-existing financial condition as the basis for Farah and other board members having submitted to the lenders' threats. It rests primarily upon the acts and conduct of the lenders and the ramifications carried by their threats. Since FMC's pre-existing financial condition is not relevant to its cause of action for duress, [the lenders' contention] is without merit."). Still other courts have simply declined to treat this as a required element of duress. See Sudan v. Sudan, 145 S.W.3d 280, 286 n. 9 (Tex. App. 2004), rev'd on other grounds, 199 S.W.3d 291 (Tex. 2006). The Sudan court could "find no Texas Supreme Court opinion recognizing [responsibility for a duress claimant's financial distress] as a separate element [of duress]." Id. After quoting the portion of First Texas from which this rule was derived, the Sudan court concluded that "because the Texas Supreme Court has never adopted any such requirement, and because we do not agree that it even follows from the quoted sentence of [17] C.J.S. [Contracts, § 177 (1963)], we decline to treat it as a required element of the defense of duress." Id.
The Motion to Dismiss cannot be granted on this basis under any of the standards by which Texas courts assess financial distress in the context of duress. Under the Farah application of the rule, Defendants need only be responsible for the Debtors' preexisting financial distress if Plaintiff has alleged that the Debtors' preexisting financial condition was the reason they submitted to duress. This is not the case. The Complaint alleges that the Debtors were forced to file for bankruptcy and surrender their assets as a result of RWHI's acceleration of the loan and sweeping of the Debtors' bank accounts. Complaint, ¶¶ 22-28. The Complaint does not rely on the Debtors' preexisting financial condition as a basis for the duress claim; it relies strictly on RWHI's actions that allegedly forced the Debtors into bankruptcy.
But even if financial distress is a required element of duress, as First Texas treated it, the Complaint sufficiently alleges RWHI's responsibility for the Debtors' financial distress. The Complaint alleges that (i) RWHI accelerated the loan and demanded payment of approximately $ 3.7 million even though RWHI knew the Debtors had a cash balance of less than $ 300,000, Complaint, ¶ 22; (ii) the Debtors were negotiating with a number of other prospective lenders, but RWHI refused to allow the Debtors the time to arrange refinancing, id., ¶ 23; (iii) RWHI began sweeping the Debtors' bank accounts even though RWHI knew the Debtors could not operate without such cash, id., ¶ 24; and (iv) this forced the Debtors to file for bankruptcy and surrender their assets, id.,
Defendants argue that Plaintiff cannot state a claim for duress because the Debtors always had the option to seek the protections of bankruptcy:
MTD at 19. There are two flaws with Defendants' argument. First, the Debtors' bankruptcy forms the basis of Plaintiff's claim for duress. The Complaint alleges that RWHI improperly used the acceleration and cash sweeping provisions to force the Debtors into bankruptcy, ¶¶ 31-32, and in so doing, prevented the Debtors from obtaining out-of-court financing or otherwise engaging in strategic transactions on terms more favorable than those achieved in bankruptcy, id., ¶ 33. See id., ¶ 28. Thus, even if Debtors' bankruptcy filing provided the Debtors some form of protection, the Complaint alleges that the Debtors nevertheless were harmed by the bankruptcy process. In other words, Plaintiff is alleging that the Debtors were worse off because the Defendants' alleged duress caused the Debtors to go through a bankruptcy process that they otherwise would not have had to go through. Texas law clearly contemplates that compelling an entity to resort to bankruptcy may itself be compensable injury. See State Nat. Bank of El Paso v. Farah Mfg. Co., 678 S.W.2d at 686 ("Economic duress . . . may be evidenced by forcing a victim to choose between distasteful and costly situations, i.e., bow to duress or face bankruptcy, loss of credit rating, or loss of profits from a venture.").
Second, to the extent Defendants are arguing that the Debtors could have and should have sought bankruptcy protection sooner, that issue simply cannot be determined on the pleadings. The Complaint alleges that the parties negotiated from the time RWHI declared a default to the time it began sweeping the Debtors' bank accounts—during which time RWHI continued to make purchase offers to the Debtors. Complaint, ¶¶ 23-24. Without considering the facts and circumstances surrounding the parties' behavior prepetition, it would be impossible to determine whether the Debtors could have sought bankruptcy protection sooner than they did. This argument is simply not supported by the facts pled in the Complaint.
For the reasons set forth in Section E.1 above, the Court will grant the Motion to Dismiss with respect to the First Cause of Action: Duress, with leave to amend.
The Complaint alleges that the Loan Agreement "included an implied covenant of good faith and fair dealing" that prohibited each party from acting in a way that
Texas common law does not recognize an implied duty of good faith and fair dealing—breach of which constitutes a tort—in every contract or business transaction. Formosa Plastics Corp. v. Presidio Eng'rs & Contrs., 960 S.W.2d 41, 52 (Tex. 1998); English v. Fischer, 660 S.W.2d 521, 522 (Tex. 1983). "Texas courts have carved out exceptions for certain `special relationships' such as between insurers and insured, principal and agent, joint venturers and partners. Cockrell v. Republic Mortg. Ins. Co., 817 S.W.2d 106, 116 (Tex. App. 1991) (citing Arnold v. Nat'l County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987) and other authority). These "special relationships" do not include the relationship between a lender and a borrower. Cockrell v. Republic Mortg. Inc. Co., 817 S.W.2d at 116; Nance v. Resolution Trust Corp., 803 S.W.2d at 333; Georgetown Assoc. Ltd. v. Home Fed. Sav. And Loan Ass'n, 795 S.W.2d 252, 255 (Tex. App. 1990), writ dismissed w.o.j.; Victoria Bank & Trust Co. 779 S.W.2d 893, 902 (Tex. App. 1989), rev'd on other grounds 811 S.W.2d 931 (1991).
"Absent an Arnold `special relationship,' the duty to act in good faith is contractual in nature and its breach does not amount to an independent tort." Adolph Coors Co. v. Rodriguez, 780 S.W.2d 477, 481 (Tex. App. 1989), no writ, (no duty of good faith and fair dealing in supplier-distributor relationship) [hereinafter "Coors"]; Lumpkin v. H & C Comms., Inc., 755 S.W.2d 538, 540 (Tex. App. 1988), writ denied, (no duty of good faith and fair dealing in an employer-employee relationship).
The contractual duty of good faith in a commercial setting has been codified at Texas Business and Commerce Code section 1.304. Tex. Bus. & Comm. Code § 1.304 (2017). This statute provides: "Every contract or duty within this title imposes an obligation of good faith in its performance and enforcement." Id. Applying the nearly identical predecessor to section 1.304,
Coors, 780 S.W.2d at 481 (citations omitted). Further, "The agreement made by the parties and embodied in the contract itself cannot be varied by an implied covenant of good faith and fair dealing." Id. at 482 (citing Exxon Corp. v. Atlantic Richfield Co., 678 S.W.2d 944, 947 (Tex. 1984)). At most, it gives rise to claim for breach of
Here, the Plaintiff alleges that RWHI enforced the acceleration and cash sweep provisions of the Loan Agreement in bad faith, i.e., for the purpose of leveraging the Debtors to sell RWHI its business. Plaintiff argues that this violates the specific duty in section 1.309 of the Texas Business and Commerce Code not to exercise an acceleration clause or certain other enforcement provisions unless the RWHI believed in good faith that the prospect of payment or performance was impaired. Plaintiff also argues that this violates RWHI's more general duty under section 1.304 to act in good faith when performing and enforcing the Loan Agreement. Although not express, the Complaint appears to treat this cause of action as one sounding in tort. But there is no allegation that RWHI and the Debtors had any of the relationships that Texas law recognizes as a "special relationship" giving rise to potential tort liability for breach of the duty of good faith. To the contrary, the Complaint alleges that the contractual relationship between the Debtors and RWHI was that of lender and borrower under the Loan Agreement.
Accordingly, to the extent Plaintiff is alleging a tort for breach of the covenant of good faith and fair dealing under the Loan Agreement, the Motion to Dismiss will be granted with prejudice. Under the circumstances alleged, such a tort does not exist under Texas law and repleading would be futile. However, to the extent Plaintiff is asserting a breach of contract claim based on RWHI's alleged breaches of the implied duty of good faith and fair dealing, the Motion will be granted with leave to amend. If the Plaintiff elects to replead this claim, he should be sure to allege all of the elements of such a claim and allege facts to support those elements. In particular, Plaintiff should pay special attention to the issue of damages and identify those damages it alleges are compensable as a result of the breach of contract.
The Complaint alleges that (a) "wrongful actions include using the acceleration and sweeping provisions of the Loan Agreement to coerce unreasonable terms and
The asset purchase agreement among RWHI and the Debtors (the "APA") provided that RWHI would receive a breakup fee of $ 500,000 (the "Breakup Fee") if RWHI was not the winning bidder in an auction for the Debtors' assets or if the Debtors proceeded with a plan of reorganization. See Greulich Decl. at 271-72. On September 28, 2017, the Court entered an order approving the form of the APA and the bidding procedures (the "Bidding Procedures Order"). Case Dkt. 71. On November 3, 2017, the Court entered an order approving the sale of substantially all the Debtors' assets (the "Sale Order"). Case Dkt. 177. The Court made the following findings in the Bidding Procedures Order:
Case Dkt. 71, ¶¶ D, H. In the Sale Order, the Court explicitly ordered the escrow agent for the sale of the Debtors' assets to pay RWHI the Breakup Fee. See Case Dkt. 177, ¶ 11.
The prepayment fee referred to in the Complaint was a result of the August 1 Forbearance Agreement negotiated by the parties prepetition. The August 1 Forbearance Agreement modified the Loan Agreement to provide RWHI with a prepayment fee of $ 120,000 if the loan was repaid in conjunction with financing or an asset sale to a party other than RWHI (the "Prepayment Fee"). See August 1 Forbearance Agreement at 3-4, § 7. Unlike the Breakup Fee, the Prepayment Fee was never expressly approved by the Court.
Plaintiff's argument that the Estates should recover the Breakup Fee is an impermissible collateral attack on a final order of a federal court. The Bidding Procedures Order and the Sale Order became final orders no later than November 3, 2017, when the Sale Order was entered. See Bullard v. Blue Hills Bank, ___ U.S. ___, 135 S.Ct. 1686, 1692, 191 L.Ed.2d 621 (2015) ("Congress has long provided that orders in bankruptcy cases may be immediately appealed if they finally dispose of discrete disputes within the larger case."); Bonham v. Compton (In re Bonham), 229 F.3d 750, 761 (9th Cir. 2000) (bankruptcy court order is final and appealable where it resolves and seriously affects substantive rights and finally determines the discrete
As to both the Prepayment Fee and the Breakup Fee, the unjust enrichment claim also fails because the parties' dispute was covered by a valid, express contract. Unjust enrichment is "an equitable principle holding that one who receives benefits unjustly should make restitution for those benefits." Villarreal v. Grant Geophysical, Inc., 136 S.W.3d 265, 270 (Tex. App. 2004, pet. denied). "A party may recover under a theory of unjust enrichment when one party has obtained a benefit from another by fraud, duress, or the taking of an undue advantage." First Union Nat'l Bank v. Richmont Capital Partners I, L.P., 168 S.W.3d 917, 931 (Tex. App. 2005), aff'd, 168 S.W.3d 917 (Tex. 2005). But the doctrine of unjust enrichment "applies the principles of restitution to disputes which are not governed by a contract between the contending parties." Id. The policy is rooted in contract theory:
Id. (internal citations omitted).
Plaintiff argues that he has a claim for unjust enrichment because RWHI obtained certain benefits from the Debtors by duress, namely the Prepayment Fee and the Breakup Fee. Opp. at 14. At oral argument, Plaintiff contended that there was no valid, express contract controlling the circumstances here because the Complaint alleges that the Forbearance Agreements were obtained by duress. But this argument suffers a fatal flaw. Even if Plaintiff can prove that the Forbearance Agreements are voidable because they were procured by duress, this does nothing to void the original Loan Agreement—the valid, express agreement that governed the debtor-creditor relationship between RWHI and the Debtors. Nor would it do anything to void the Court-approved APA, which governed their relationship as potential buyer and seller of the Debtors' assets in the bankruptcy case. "[T]here can be no recovery under a quasi-contract theory because the parties should be bound by their express agreements." First Union Nat'l Bank v. Richmont Capital Partners I, L.P., 168 S.W.3d at 931.
For these reasons, the Third Cause of Action: Unjust Enrichment fails to state a claim upon which relief can be granted. The Court will grant the Motion to Dismiss with respect to this claim with prejudice because the Court finds that additional
The Fourth Cause of Action for Avoidance and Recovery of Property Transfer seeks to avoid and recover, under Bankruptcy Code sections 549 and 550, "the transfer of property in the form of the payment based on Radians' Claim." Complaint, ¶¶ 29, 46-49. Although the "Claim" is defined in the Complaint to mean RWHI's prepetition debt claim under the Loan Agreement, see Complaint, ¶ 7, the Court understands the Plaintiff to mean all amounts paid to RWHI in the case, including the Break-Up Fee, which first arose when the Court approved the APA between RWHI and the Debtors. Bankruptcy Code section 549 provides for the avoidance of unauthorized postpetition transfers by a debtor in possession.
Aalfs v. Wirum (In re Straightline Invs.), 525 F.3d 870, 877 (9th Cir. 2008). Section 550 permits the recovery of transfers avoided under section 549. See 11 U.S.C. § 550. The problem is that the Complaint does not identify any unauthorized transfers that are avoidable. Payment of the original prepetition debt obligation, the Prepayment Fee and the Break-Up Fee were all authorized by the Court pursuant to the Sale Order.
Accordingly, the Fourth Cause of Action: Recovery of an Unauthorized Postpetition Transfer will be dismissed with prejudice. Repleading would be futile because the payment of these amounts was expressly authorized by an order of the Court.
The Complaint objects to the Claim filed in the Debtors' cases by RWHI for amounts owed under the Loan Agreement (the "Claim Objection"). See Complaint, ¶¶ 7, 29. The Complaint states that the claim is objectionable under Bankruptcy Code section 502 "[b]ased on the above-described misconduct and inequitable actions on the part of the Radians entities. . . ." Id., ¶ 29. But the Complaint fails to address any basis for objection under Bankruptcy Code section 502(b). This section provides that if an objection to a claim is made, after notice and a hearing, the court shall allow such claim, except to the
Accordingly, the Court will grant the Motion to Dismiss the Claim Objection. However, the Court will grant leave to the Plaintiff to replead. Although the Court is skeptical that there is a legal basis to invalidate the entirety of the prepetition debt, the Court acknowledges that this issue was not the focus of the briefing or the argument on the Motion to Dismiss. If the Plaintiff repleads its claim objection, it should be sure to identify and explain both the factual and legal basis for disallowing the Claim.
Based on the foregoing, Defendants' Motion to Dismiss will be GRANTED IN PART and DENIED IN PART as follows:
Tex. Bus. & Comm. Code section 1.208 (West 1984) (repealed 2003).
Id. (emphasis added)
