Thomas v. Barton Lodge II, Ltd.

Revised May 13, 1999
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 97-50412
_____________________
GEORGE R. THOMAS,
Plaintiff - Appellant-Cross-Appellee,
versus
BARTON LODGE II, LTD.,
Defendant - Third Party Plaintiff-
Counter Defendant-Appellee,
versus
PHAM BARTON LODGE II, LIMITED PARTNERSHIP, Et Al,
Third Party Defendants,
RON BENEKE, Et Al,
Third Party Defendants-Cross
Defendants,
versus
RON BENEKE; PHAM-BARTON LODGE II LIMITED
PARTNERSHIP; THE PAUL D. HINCH FAMILY
PARTNERSHIP, LIMITED; THE DISCOP COMPANY,
INCORPORATED; ALLIANCE/PCA APARTMENT PORTFOLIO
I LIMITED PARTNERSHIP; ALLIANCE/PCA COMPANY;
HBC PARTNERS LIMITED PARTNERSHIP; HINCH PARTNERS,
Third Party Defendants - Cross Defendants-
Appellees,
GENERAL ELECTRIC CAPITAL CORPORATION; GENERAL
ELECTRIC REAL ESTATE EQUITIES, INCORPORATED,
Third Party Defendants - Cross Defendants-
Appellees - Cross-Appellants,
versus
DAVID JOHNSTON; DAVID JOHNSTON CORPORATION,
Third Party Defendants - Cross Claimants-
Cross Defendants,
versus
LEE R. LARKIN; ARCH McNEIL,
Cross Claimants-Counter Plaintiffs-Appellants.
_________________________________________________________________
Appeals from the United States District Court for the
Western District of Texas
________________________________________________________________
May 12, 1999
Before JOLLY, WIENER, and PARKER, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
This case involves the alleged malfeasance of numerous parties
to a transaction in which the principal asset of Barton Lodge II,
Ltd. (“BL II”), a limited partnership, was sold by the general
partner to stave off a foreclosure sale. The district court
dismissed the case in a series of summary judgment rulings, and
three of the parties to the litigation, George Thomas, Lee R.
Larkin and Arch McNeil, now appeal. We hold that the district
court erred in part when it held that the plaintiffs failed to
allege actual damages. In most respects, however, we affirm the
2
district court’s summary judgment rulings, including its ruling
that the statute of limitations barred various claims and that the
case of Newton v. Mallory, 601 S.W.2d 181 (Tex.Civ.App. – Dallas
1980, no writ), applies to bar the largest part of the alleged
damages. We therefore affirm in part, reverse in part and remand.
I
The facts regarding the events leading up to the current
dispute are contested by the parties. To the extent possible, we
will present those facts to which all parties agree, and then turn
to the respective versions of events alleged by the defendants and
the plaintiffs in this case.
A
BL II is a Texas limited partnership, which was formed on
September 1, 1982, to construct and own an apartment project (“the
Project”) in Austin, Texas. The partnership consisted of a general
partner, who contributed $99 in capital to the partnership and 56
limited partners who each contributed approximately $50,000 in
capital to the partnership. The general partner of BL II was PHAM-
Barton Lodge II Limited Partnership (“PHAM”). PHAM itself was a
partnership made up of a number of general partners, one of which,
Ron Beneke, is a named defendant in this case. The named plaintiff
in this case, George Thomas, was one of the limited partners in BL
II.
3
In order to finance the Project, BL II obtained a loan from
University Savings Association (“USA”) for $8.75 million in
exchange for a security interest in the Project. In 1986, BL II
defaulted on the mortgage. In 1990, the Resolution Trust
Corporation (the “RTC”), which had inherited the mortgage from USA,
posted the Project for a May 1, 1990 foreclosure sale.
On April 2, 1990, PHAM sent a letter (“the April 2 letter”) to
the limited partners proposing a sale of the project. The letter
stated:
Although you have thirty days within which to make your
decision under the terms of the partnership agreement, an
immediate response is requested because the general
partner has been informed by the current holder of the
project indebtedness that unless these consents are
received in time to permit the project to be sold on
April 30, 1990, in the transaction described herein, it
is likely that the project will be foreclosed by the
holder of the mortgage indebtedness as soon as legally
possible after May 1, 1990.
The letter went on to describe the proposed transaction:
The General Partner proposes to sell the Project in
a simultaneous two step transaction. In the first phase,
the Partnership would sell the Project to David Johnston
Corporation (“DJC”), which is a corporation owned by
David Johnston who is affiliated with members of the
General Partner, in exchange for $10,000 cash and subject
to the outstanding indebtedness on the Project at the
date of the sale. . . . The purchaser also will agree to
pay the Partnership 70.175% of any sums it receives, if,
as and when received, pursuant to contract rights granted
to the purchaser in the second phase of the transaction.
These contract rights will include 35.625% of any (i) Net
Dispositions and Refinancing Proceeds and (b) Net Cash
Flow (each as hereinafter defined) from the Project.
Since the Partnership will be receiving 70.175% of the
purchaser’s 35.625% contract rights, the Partnership will
4
actually receive 25% of such amounts generated from the
Project.
DJC intends to ask the Resolution Trust Corporation
(“RTC”), which currently holds the mortgage indebtedness
on the Project, to reduce the total payoff for the
outstanding indebtedness on the Project to $6,800,000.
Because DJC intends to use the proceeds from the second
phase of the transaction to pay off the outstanding
indebtedness on the Project and because such payoff will
remove a non-performing asset from the RTC’s portfolio
without the need for foreclosure or the advance by the
RTC of further funds, the General Partner believes that
the RTC will agree to accept the reduced payoff from DJC.
However, there can be no assurance in this regard.
After paying off the reduced debt on the Project,
DJC will sell the Project to Alliance/PCA (“Alliance”).
The sales price will be (a) $6,844,000 in cash, (b)
35.625% of any Net Disposition and Financing Proceeds (as
described below) that Alliance receives when and if it
refinances or disposes of the Project, and (c) 35.625% of
all Net Cash Flow from the Project, meaning operating
income less debt service and preferential return on
capital (including any accruals thereof) and expenses of
operating, managing, repairing, maintaining and improving
the Project. It is highly unlikely that there will be any
Net Cash Flow from the Project. Alliance is a joint
venture whose members include affiliates of General
Electric Capital and a company to be owned by
partnerships and/or trusts for the benefit of the members
and/or families of members of the General Partner.
The acquisition cost of the Project will be financed
through loans and/or equity contributions from affiliates
of General Electric Capital and/or Alliance/PCA (the
“Acquisition Advance”). The Acquisition Advance is
estimated at $6,995,000 including closing costs of
$25,000 plus a one point brokerage fee to the Melody
Company, one point to General Electric Capital Affiliates
and one-half point to PCA affiliates.
On April 26, 1990, Thomas sent a letter to PHAM refusing to
consent to the proposed sale. In that letter he stated:
I believe the General Partner on this proposed sale
is looking after his own interest at the expense of the
limited partner and the limited partner is left “holding
the bag.”
5
There may also be mismanagement and incompetence, as
well as conflict of interest in negotiating with the
lender and the proposed buyer, and I am planning to
consult my attorney about legal remedies.
On April 30, 1990, the Project was sold in a two-step
transaction, first to David Johnston Corporation (“DJC”), then to
Alliance/PCA Apartment Portfolio I Limited Partnership (“A/PCA
Portfolio”). A/PCA Portfolio is a limited partnership made up of
a general partner, Alliance/PCA Company, and two limited partners,
HBC Partners (“HBC”) and General Electric Real Estate Equities,
Inc. (“GE Equities”). The transaction effectively took place
pursuant to the description in the April 2 letter. DJC paid the
proposed $10,000 to BL II and received the Project subject to the
mortgage indebtedness. DJC also agreed to pay BL II 70.175% of its
35.625% contract rights under the sale of the project to A/PCA
Portfolio. DJC then sold the Project to A/PCA Portfolio in
exchange for $6,795,000 and its 35.625% contract rights. The RTC
released DJC of the mortgage indebtedness in exchange for
$6,750,000. In order to purchase the Project from DJC, A/PCA
Portfolio borrowed approximately $6,900,000 from General Electric
Capital Corporation (“GE Capital”).
On September 7, 1990, PHAM sent a letter to the limited
partners stating that the Project had been sold on April 30, 1990.
In December 1990, A/PCA Portfolio sold the Project to Clayton,
Williams & Sherwood for $8,839,500. Under its contract rights, DJC
6
received $407,046. DJC then paid $285,645 to the limited partners
and retained $121,402. The overall consequences to the limited
partners of the transaction were that they received a final payout
of approximately $5,000 on an initial investment of $50,000 and
they received approximately $45,000 in reportable capital earnings
for tax purposes.
B
We now proceed to the version of events presented by the
defendants in this matter. We note that what we iterate now
essentially amounts to allegations made by the defendants. For
purposes of this appeal, we pass no judgment as to the relative
truth of these allegations.
According to the defendants, BL II, like many real estate
ventures from that period was simply a business failure. In the
mid-80s it became increasingly apparent that BL II’s revenues from
leasing apartments simply could not produce enough money to pay the
interest payments owed on the mortgage. From 1987 on, BL II was
incapable of making interest payments on its loans. By 1990, BL II
owed approximately $10,750,000, and the value of the Project at the
time was approximately $7,500,000. After doing everything in its
power, PHAM finally conceded defeat and sought to negotiate a
bailout.
The defendants argue that, at the time, Alliance/PCA was in
the process of purchasing several other failed projects and was in
7
a position to negotiate a favorable deal with RTC by resolving
several outstanding loans at once. Recognizing that PHAM would not
be able to obtain as much debt forgiveness for BL II by directly
negotiating with the RTC as Alliance/PCA could, PHAM elected to
sell the project to an Alliance/PCA affiliate in exchange for a
percentage of the final sale of the Project after Alliance/PCA had
successfully renegotiated the debt.
The defendants further argue that, given the pressure on PHAM
from the looming foreclosure sale, PHAM took every reasonable
precaution it could to finalize the transaction in a principled and
conscientious manner. PHAM sent out the April 2 letter notifying
the limited partners of the transaction and notifying them that the
parties purchasing the Project had affiliations to members of PHAM.
PHAM then received approval from a majority of the limited partners
in BL II and proceeded with the sale. The defendants argue that,
if PHAM had not negotiated the sale, BL II would simply have lost
the Project without getting anything back on it and BL II’s limited
partners would have received less money and less favorable tax
consequences.
C
Thomas, McNeil, and Larkin (“the plaintiffs”) allege a
significantly different version of events. Again, in iterating the
allegations made by the plaintiffs, we note that we pass no
judgment as to the verity of these assertions.
8
To fully understand the plaintiffs’ version of events, it is
necessary to first understand the make-up of PHAM, the general
partner of BL II. PHAM originally consisted of four managing
general partners, Paul Hinch, Charles Miller, Paul Austin, and Mack
Pogue, and two general partners, Ron Beneke and Hugh Caraway. Of
these six partners, three of them, Hinch, Beneke, and Caraway were
also affiliated with numerous other limited partnerships. These
three, for example, were all partners in HBC, the limited partner
of A/PCA Portfolio. In addition, all three were affiliated with
the Property Company of America, Inc. (“PCA”) and the Property
Company of America Management, Inc. (“PCA Management”), the manager
of A/PCA Portfolio.
The BL II partnership agreement only permitted the managing
general partners of PHAM to act on behalf of BL II. At some point
after 1984, all of the managing partners of PHAM resigned.
Although he did not have the power to do so under the BL II
agreement, Beneke assumed the role of managing partner of PHAM with
respect to BL II. In 1989, PHAM dissolved. The limited partners
of BL II were not notified of this development. At that point,
Beneke arguably had no authority whatsoever to act on behalf of BL
9
II.1 He nevertheless negotiated the sale of the Project in April
of 1990.
The plaintiffs do not dispute that BL II consistently lost
money in the 1980s. They do, however, dispute that PHAM was
blameless in its actions leading up to the April 30, 1990 sale.
First, they argue that PHAM took actions that violated the terms of
the BL II partnership agreement. Specifically, under the
agreement, PHAM was obligated to make operating deficit loans
(“ODL’s) to BL II in the event that BL II was unable to meet its
obligations under the mortgage. In addition, they argue that PHAM
amended the BL II agreement without notifying or obtaining the
approval of the BL II limited partners. This amendment permitted
PHAM to avoid liability for incurred cost overruns and operating
expenses that further hindered BL II’s ability to meet its loan
obligations. The plaintiffs also argue that, at a time when BL II
was supposedly unable to make interest payments on its mortgage,
PHAM was funneling funds from BL II to PCA. Had PHAM not engaged
in these activities, the plaintiffs argue, BL II would not have
faced as significant a level of indebtedness as it did.
1
If this point is correct, it would technically be more
appropriate to refer to Beneke’s actions on behalf of BL II as his
actions, rather than PHAM’s actions. For some semblance of
clarity, however, we refer to actions by an entity acting as the
general partner of BL II as actions of PHAM, without passing
judgment on this issue.
10
The plaintiffs go on to assert that Beneke and the other
parties to the transaction realized that the value of real estate
was increasing and recognized an opportunity for personal gain. By
forcing a foreclosure of the Project, the defendants would be able
to reap the benefits of a forced sale. The plaintiffs allege that
Beneke intentionally misled the limited partners into believing
that it was necessary to sell the Project through the April 2
letter.
The plaintiffs furthermore argue that there were numerous
procedural errors in the attempt to obtain approval of the
transaction. First, the plaintiffs argue that because DJC and
A/PCA Portfolio were affiliates of PHAM partners, the proposed sale
required unanimous consent from the limited partners under the BL
II partnership agreement. The plaintiffs also argue that PHAM did
not obtain a majority approval from the limited partners until
after PHAM had completed the sale.
Finally, the plaintiffs argue that remaining funds owned by BL
II, after the sale of the project, were misappropriated by the
defendants. After the Project was sold, BL II still had a note
from PCA for a $500,000 loan. In addition, BL II had a bond
reserve fund valued at $162,611. Finally, the plaintiffs assert
that BL II had furniture and equipment that was not subject to the
mortgage. The plaintiffs argue that there was never an accounting
for the value of any of these items.
11
II
Thomas sued multiple parties for their role in the sale of BL
II’s property. For purposes of this appeal, among the defendants,
there are two remaining factions who have not settled. First,
there is Beneke, who acted as the general partner of PHAM. Thomas
sued Beneke for breach of fiduciary duties, breach of contract,
actual, constructive and statutory fraud, negligence and gross
negligence, conversion, breach of duty of good faith and fair
dealing, civil conspiracy, Racketeer Influenced and Corrupt
Organizations Act (“RICO”) violations, and fraudulent transfer.
The other group consists of GE Capital and GE Equities (“the GE
defendants”). They were sued for breach of fiduciary duties,
breach of contract, actual and constructive fraud, negligence and
gross negligence, conversion, civil conspiracy, RICO violations,
and fraudulent transfers.
Thomas’s lawsuit was fashioned as a derivative suit on behalf
of BL II. In response to the suit, Beneke counterclaimed against
BL II and joined each of the limited partners in their individual
capacity. Besides Thomas, the only other limited partners still
involved in the suit are Lee R. Larkin and Arch McNeil. McNeil and
Larkin filed a counterclaim against Beneke and cross-claims against
the other defendants, essentially alleging the same causes of
action alleged by Thomas on behalf of BL II.
12
The district court disposed of the case with a procession of
orders. On February 7, 1997, the court issued two orders. In the
first, an Order Granting in Part and Denying in Part Motion for
Summary Judgment as to the Statutes of Limitations (“SOL Order”),
the district court held that the claims based on breach of
contract, RICO violations, fraudulent transfers and fraud are
subject to four-year statute of limitations while the claims based
on breach of duty of good faith, negligence and gross negligence,
conversion, DTPA violations, breach of fiduciary duties, and
conspiracy are subject to a two-year statute of limitations. The
court then held that all claims subject to a two-year statute of
limitations were barred. In the second order, Order Denying Third
Party Defendant Arch McNeil’s Motion for Summary Judgment (“McNeil
Order”), the court rejected McNeil’s argument that, under § 16.069
of Tex.Civ.Prac.&Rem.Code, a counterclaim or cross-claim is revived
from a statute of limitations bar.
On March 2, 1997, the district court judge, Judge Royal
Furgeson, held that because of a potential conflict of interest,
the case should be transferred to Judge Lucius D. Bunton.
Then, on May 8, 1997, the court issued an order (“No Damages
Order”) that effectively resolved the case. In that order, the
court first noted that, for the remaining claims (breach of
contract, RICO violations, fraudulent transfers and fraud), the
plaintiff must prove damages. The court found that at the time the
13
project was sold, BL II owed $10,705,830, and that the value of the
project was $7,500,000. The court held that because the total
damages claimed by plaintiffs on behalf of BL II were $8,216,152,
even if the plaintiffs claims were upheld, BL II would not recover
any damages, as those damages would have been owed to the RTC.
Finally, on May 22, the court entered an order that operated
to strike confessions of judgment related to the case (“Strike
Order”). On June 3, 1997, the court entered an order to clarify
that the court’s No Damages Order and Strike Order had disposed of
all remaining claims, cross-claims, and counterclaims in the case
(“Final Order”).
III
The parties associated with this case raise multiple issues on
appeal. Because of the complexity of the case, we address each
issue raised in relation to its corresponding court order. The
first ruling with which the parties take issue is the SOL Order.
Thomas argues that the district court erred in granting in part the
defendants’ motion for summary judgment pursuant to the statute of
limitations. The GE defendants, on the other hand, argue that with
respect to them, claims based on fraud should be barred by the
limitations period. We find no error with the district court’s
limitations ruling and therefore affirm it.
The next contested ruling is the McNeil Order. McNeil argues
that the district court incorrectly applied Texas law to his
14
procedural claim that, because he is a cross-claimant, his claims
are not barred by the statute of limitations. Because we agree
with the district court that McNeil and Larkin are asserting the
same claims asserted by Thomas, we also affirm the district court
on this issue.
The next issue raised on appeal by Thomas is whether the
district court erred when it issued its No Damages Order. Thomas
contends that the district court misapplied Texas law when it
concluded that the indebtedness of lost property must be factored
into the value of what is lost when a party alleges actual damages.
Thomas further argues that, even if the court correctly applied the
law, the court still erred in calculating the damages alleged by
Thomas. The defendants argue that the district court appropriately
concluded that Thomas had failed to demonstrate any damages and
that Thomas’s claims should therefore be dismissed. We find
Thomas’s second argument persuasive and therefore reverse and
remand on this issue.
Next, McNeil and Larkin protest the dismissal of their claims
pursuant to the Final Order. The Final Order, however, is based on
the district court’s No Damages Order, which we reverse in part.
We therefore hold that, to the extent that our opinion reinstates
Thomas’s claims, McNeil and Larkin’s claims also are reinstated.
The GE defendants cross-appeal arguing that McNeil and Larkin’s
cross-claims are not permitted under the Federal Rules of Civil
15
Procedure. We hold that McNeil and Larkin have properly filed
cross-claims pursuant to the Federal Rules of Civil Procedure.
Finally, Beneke argues that, even if he is not entitled to
summary judgment on the damages issue, he is nevertheless entitled
to summary judgment on other grounds. Because the district court
has not addressed this argument, we remand for an initial
determination by that court.
IV
This case was determined on the basis of a series of summary
judgment motions. We therefore review under our standard for
summary judgment. Summary judgment is proper if “the pleadings,
depositions, answers to interrogatories and admissions on file,
together with affidavits, if any, show that there is no genuine
dispute as to any material fact and that the moving party is
entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c).
A summary judgment ruling is reviewed de novo, applying the
same criteria employed by the district court. Conkling v. Turner,
18 F.3d 1285, 1295 (5th Cir. 1994). We therefore must determine
“whether the summary judgment evidence on file shows that there is
no genuine issue of material fact and that the moving party is
entitled to judgment as a matter of law.” Ruiz v. Whirlpool, Inc.,
12 F.3d 510, 513 (5th Cir. 1994) (citing Hibernia National Bank v.
Carner, 997 F.2d 94, 97 (5th Cir. 1993).
16
When a moving party alleges that there is an absence of
evidence necessary to prove a specific element of a case, the
nonmoving party bears the burden of presenting evidence that
provides a genuine issue for trial. See Celotex Corp. v. Catrett,
477 U.S. 317, 322-23 (1986). "[T]here is no issue for trial unless
there is sufficient evidence favoring the nonmoving party for a
jury to return a verdict for that party.... If the evidence is
merely colorable, or is not significantly probative, summary
judgment may be granted." Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 249-50 (1986) (citations omitted).
V
In its SOL Order, the district court held that all of the
claims, with the exception of the claims for fraud, fraudulent
transfer, breach of contract, and RICO violations, were subject to
two-year limitations periods. The district court then held that
the cause of action accrued on the date of the sale, April 30,
1990. Because Thomas did not file his case until October 1, 1993,
and because the district court found that no doctrine of equitable
tolling applied, the district court held that all claims subject to
a two-year limitations period are barred. Thomas argues that the
district court erred when it held that some of Thomas’s claims were
barred by the statute of limitations. The GE defendants argue
that the district court erred in not barring the fraud claims
alleged against them. We will address each argument in turn.
17
A
Thomas makes two arguments regarding the SOL Order. Thomas
first argues that the trial court improperly applied a two-year
limitations period to BL II’s Breach of Fiduciary Duty and
Conspiracy to Commit Fraud Claims. Thomas also argues that the
trial court failed to properly apply various tolling doctrines to
the case.
1
Thomas argues that there is a four-year limitations period for
breach of fiduciary duty. The district court followed the clear
and unambiguous language of Kansas Reinsurance Co., Ltd. v.
Congressional Mortg. Corp. of Texas, 20 F.3d 1362 (5th Cir. 1994)
and held that a Texas breach of fiduciary duty claim is subject to
a two-year statute of limitations. Thomas now asks us to ignore
this case and instead look to our decision in Castillo v. First
City Bancorporation of Texas, 43 F.3d 953, 960 (5th Cir. 1994).
Castillo, however, deals with a claim for duress. In short, the
district court relied on binding Fifth Circuit precedent to reach
its conclusion that the limitations period for breach of fiduciary
duty is two years. There are no cases on point that provide
support for a different approach. We therefore affirm the district
court.
18
Thomas also contends that the district court erred when it
held that civil conspiracy claims are subject to a two-year statute
of limitations. Thomas relies on Lone Star Partners v. NationsBank
Corp., 893 S.W.2d 593, 601 (Tex.App.--Texarkana 1994, writ denied),
and Atlantic Life Ins. Co. v. Hurlbut, 696 S.W.2d 83, 102
(Tex.App.--Dallas 1985), rev’d on other grounds, 749 S.W.2d 762
(Tex. 1988), for support. Neither of these cases actually stand
for Thomas’s proposition that a civil conspiracy claim is subject
to a four-year statute of limitations. The district court cites to
Stevenson v. Koutzarov, 795 S.W.2d 313 (Tex.App.--Houston [1st
Dist.] 1990, writ denied), and Chevalier v. Animal Rehabilitation
Center, Inc., 839 F. Supp. 1224 (N.D. Tex. 1993), for the
proposition that the limitations period is two years. We find the
reasoning in Stevenson and Chevalier persuasive, and affirm the
district court.
19
2
The district court held that the action accrued at the time
the project was sold. In response to Thomas’s argument that the
discovery rule should toll the limitations period, see, e.g.,
Computer Associates Intern., Inc. v. Altai, Inc., 918 S.W.2d 453,
456 (Tex. 1996), the district court held that the plaintiffs
discovered enough to investigate the injury shortly after the sale.
The district court noted that:
The nature of a derivative action fundamentally
alters the application of the discovery rule.
Ordinarily, it is the knowledge of the party bringing the
action which is determinative of the extent to which the
discovery rule will toll limitations. In a limited
partnership derivative action, however, the party
bringing the action is the limited partnership itself.
The knowledge of a general partner would ordinarily be
imputed to the limited partnership. . . . However, if BL
II were to be charged with the knowledge of PHAM, it
would be commensurate with the court holding that the
limited partners are barred from proceeding because PHAM
was aware that the actions taken by PHAM were wrong. The
law does not countenance such inequities. Given that a
derivative action by the limited partners in a limited
partnership is effectively a suit on behalf of the
limited partners, it is really the knowledge of the
limited partners that should be charged to the limited
partnership. Therefore, it is the knowledge of the
limited partners as a class that will be imputed to the
limited partnership.
The district court held that, upon receipt of the April 2, 1990
letter from PHAM that explained the sale of the Project and the
potential conflicts involved and given the subsequent sale, a
reasonable person would have conducted further inquiries.
20
Thomas first argues that the court improperly imputes the
knowledge of one limited partner (i.e., Thomas’s knowledge) to the
rest of the partnership. However, as the cited passage
illustrates, the district court did not consider the knowledge of
any one particular partner but instead considered the knowledge of
the limited partners as a class. As opposed to the alternative,
applying partnership law to impute the knowledge of the general
partner to the partnership as a whole, this approach strikes us as
eminently practical and sound.
Thomas also argued that the limitations period should be
tolled by the doctrine of fraudulent concealment, the doctrine that
a defendant who fraudulently conceals a cause of action is estopped
from asserting a limitations defense. Nichols v. Smith, 507 S.W.2d
518, 519 (Tex. 1974). The district court noted that “there cannot
be fraudulent concealment of facts which admittedly were or should
have been known by [the plaintiff]” Timberlake v. A.H. Robins Co.,
Inc., 727 F.2d 1363, 1366-67 (5th Cir. 1984) (quoting Fusco v.
Johns-Manville Products Corp., 643 F.2d 1181, 1184 (5th Cir.
1981)). The district court held that the limited partners should
have had knowledge when informed of the sale of the project.
Thomas argues first that the defendants had an increased obligation
to inform the plaintiffs given their fiduciary duties, and, second,
that the district court ignored a number of affirmative fraudulent
misrepresentations made by the defendants. Neither of these
21
arguments addresses the basis for the district court’s ruling. The
district court held that, at the point when the limited partners
suffered significant damages from the sale of the project, they had
enough knowledge to investigate and a reasonable investigation
would have led the partners to file a claim in court. We find no
error in the district court’s holding.
Thomas next seizes upon language in the district court’s
opinion stating that a reasonable investor, upon receiving the
April 2 letter, would have looked to the partnership agreement in
investigating the transaction. Thomas argues that the courts have
held that shareholders should not have an affirmative duty to
consult the books of a corporation. There are two problems with
Thomas’s argument. First, it ignores the difference between
shareholders, who often are not sophisticated investors, and the
limited partners here, who clearly were.2 Second, the court does
not rest its holding that the action was discoverable solely on
2
We note that a rule relieving shareholders of an obligation
to be familiar with the books of a corporation is significantly
different from a rule relieving partners of a similar obligation
with respect to their partnership agreement. For one thing, each
partner clearly has easy access to the partnership agreement,
whereas a shareholder may not be able to easily review the books of
a corporation. For another thing, each partner participates in
forming the partnership agreement: there must be an affirmative act
on the part of the partner to consciously comprehend and acquiesce
to the terms of the agreement. Even if a limited partner has not
taken a role in negotiating the terms of the partnership agreement,
he still must be familiar with them at the time he joins the
partnership.
22
information in the partnership agreement. Instead, the court notes
that the April 2, 1990 letter should have lead the limited partners
to investigate further, and that a consultation of BL II’s
partnership agreement would have demonstrated that the sale
required unanimous consent.
Thomas also takes issue with the court’s principal rationale
for concluding that the cause of action was discoverable at the
time the property was sold because the limited partners received
notice through the April 2, 1990 letter. The letter informed the
limited partners that the project would be sold in the face of a
foreclosure sale, that the sale likely would result in considerable
losses to the limited partners, and that the purchasers of the
project were affiliated with the general partner.3 From this
letter, the district court concluded that the limited partners
should have had enough information to investigate the transaction.
Thomas argues that this letter only informs the limited partners of
a potential loss, not of the basis for a claim of fraud. However,
this claim ignores the district court’s reasoning that a letter
3
The plaintiffs argue that the letter does not state that the
purchasers were affiliated with the PHAM. The text of the letter
indicates otherwise: “the Partnership would sell the Project to
David Johnston Corporation (“DJC”), which is a corporation owned by
David Johnston who is affiliated with members of the General
Partner. . . . DJC will sell the Project to Alliance/PCA
(“Alliance”). . . . Alliance is a joint venture whose members
include affiliates of General Electric Capital and a company to be
owned by partnerships and/or trusts for the benefit of the members
and/or families of members of the General Partner.”
23
disclosing an interested transaction that results in significant
losses to sophisticated investors should provide the basis for
those investors to investigate whether there may be potential
fraud.
Finally, Thomas argues that the district court’s ruling leads
to a result that rewards dishonest fiduciaries. The district
court’s ruling, however, is properly limited to the statute of
limitations issue. Whenever a plaintiff is barred from filing a
claim because of the statute of limitations, there is always a risk
that the plaintiff’s claim is meritorious and that the defendant’s
improper conduct has been rewarded. That result alone, however,
cannot form the basis for opening the courts to the plaintiff.
B
On cross-appeal, the GE defendants argue that the district
court incorrectly applied a four-year statute of limitations to the
claims against them for fraud and fraudulent transfers. With
respect to the GE defendants, the claims are based on a theory of
vicarious liability. The district court held that, under
established Texas law, “[e]ach party to a fraudulent transaction is
responsible for the acts of the others done in furtherance of the
scheme.” Crisp v. Southwest Bancshares Leasing Co., 586 S.W.2d
610, 615 (Tex.Ct.App.--Amarillo 1979, writ ref’d n.r.e.)(citations
omitted). The defendants argue that vicarious liability, like
conspiracy, should be subject to a two-year statute of limitations.
24
As we have stated above, conspiracy claims are clearly subject to
a two-year statute of limitations period. There does not, however,
appear to be a precedent of a Texas court applying a two-year
statute of limitations to an aiding and abetting claim. Because
there is no binding Texas law on the subject, we must make an Erie
guess as to the appropriate limitations period. We hold that,
where a claim of fraud is based on a defendant aiding and abetting
a co-defendant, the appropriate limitations period is the same as
the underlying fraud, four years.
V
McNeil and Larkin filed a motion for summary judgment in which
they argued that under Tex. Civ. Prac. & Rem. Code § 16.069, even
if Thomas’s claims are barred by the statute of limitations, their
claims should be revived as they are cross-claims or
counterclaims.4 Under § 16.069, a cross-claim or counterclaim
filed within thirty days of a required answer to the original claim
may be filed even though it would be barred by the statute of
limitations if filed separately. In this case, the district court
held that McNeil’s claims were nevertheless barred as McNeil had
effectively filed a derivative claim on behalf of BL II. The
district court relied on Hobbs Trailers v. J.T. Arnett Grain, 560
4
McNeil and Larkin presented conflicting arguments in their
briefs regarding the appropriate label for their claims. See
infra, note 6. This uncertainty does not affect our analysis for
purposes of § 16.069.
25
S.S.2d 85 (Tex. 1971), that states: “the statute [§ 16.069] may not
be applied to the situation in which the original plaintiff becomes
the nominal defendant.” The district court concluded that, because
the original plaintiff was BL II and because McNeil could only file
claims on behalf of BL II, § 16.069 could not be applied to revive
claims otherwise barred by the statute of limitations. McNeil does
not explain why Hobbs should not control in this instance. There
is no dispute that the original plaintiff was acting on behalf of
BL II and that McNeil, in filing cross-claims and counterclaims,
acted on behalf of BL II. We therefore affirm the district court’s
ruling.5
VI
We turn now to the order by the district court that had the
greatest impact on this case. The district court effectively
resolved the remaining claims of the case with its No Damages
5
McNeil also argues that the McNeil Order is inconsistent with
the SOL Order. This supposed inconsistency is that the McNeil
Order treats McNeil’s claim as a claim on behalf of the partnership
while the SOL Order looks to the knowledge of the limited partners
when determining the application of the discovery rule. As we have
already explained, however, the SOL Order looks to the limited
partners as a class. Again, the only reason why the SOL Order
takes this approach is that, if it looked solely to the knowledge
of the partnership under traditional partnership rules, it would
have to impute to the partnership the knowledge of the general
partner. Because BL II is made up of the general partner and the
limited partners, the district court therefore concluded that only
the knowledge reasonably available to the limited partners as a
class should be imputed to BL II. The district court did not look
solely to the knowledge of Thomas in making its decision. See
supra, Part IV.A.
26
Order. In determining the damages in this case, the district court
followed the rule in Newton v. Mallory, 601 S.W.2d 181, 182
(Tex.Civ.App. – Dallas 1980, no writ), that “the value of the land
lost is the fair market value of the land at the time of
foreclosure, less the indebtedness due thereon.” After adding up
the various damages claimed by the plaintiff, the district court
concluded that the damages were less than the amount of
indebtedness at the time the project was sold.
In order to properly address this issue, we must first review
Texas law as it pertains to damages. We then revisit the district
court’s treatment of the damages claimed by the plaintiffs under
the remaining causes of action. Finally, we turn to the issue of
whether, in the light of Thomas’s claimed damages, the district
court correctly dismissed this case.
A
Under Texas law, “[t]he general principle of damages is
compensation to plaintiff for his actual loss resulting from
defendant's wrong.” McClung Cotton Co., Inc. v. Cotton
Concentration Co., 479 S.W.2d 733, 737 (Tex.Civ.App.--Dallas 1972,
writ ref'd n.r.e.) (Citing Chicago, M. & St. P. Ry. v.
McCaull-Dinsmore Co., 253 U.S. 97 (1920); Stewart v. Basey, 150
Tex. 666, 245 S.W.2d 484 (1952)). Damages must be alleged with
specificity: “Although damages need not be established with
mathematical precision, the evidence must provide a basis for
27
reasonable inferences.” Dyl v. Adams, 167 F.3d 945, 947 (5th Cir.
1999).
We have found no Texas Supreme Court case that defines the
appropriate measure of damages in a case such as this. However, in
the case of Newton v. Mallory, the Court of Civil Appeals for
Dallas, Texas, encountered an analogous question. 601 S.W.2d 181
(Tex.Civ.App. – Dallas 1980, no writ). In Newton, a partnership
was formed to invest in a property. One of the partners loaned
money to the partnership in exchange for a vendor’s lien on the
property. A partner was appointed as a managing partner and
another was appointed as a trustee. These two partners were given
the responsibility of collecting payments from the partners to pay
installments on the loan. When some of the partners ceased making
their contributions, the managing partner and trustee ceased making
payments without notifying the partnership. The result was a
foreclosure sale on the property. Some of the partners then sued.
As damages, they sought to recover their initial contribution to
the partnership. The court, however, rejected this measure of
damages. Instead, the court held that, where a partnership lost
its principal asset as a result of foreclosure, the measure of
damages should be the value of the property lost less the mortgage
indebtedness of the property. Newton, 601 S.W.2d at 182.
Because there is no Texas Supreme Court ruling on this issue,
we must make an Erie guess regarding Texas law on this subject. As
28
we stated in U.S. v. Johnson, 160 F.3d 1061, 1063-64 (5th Cir.
1998), “[i]n the absence of Texas Supreme Court pronouncements, we
generally defer to the holdings of lesser state courts unless we
are convinced by other evidence that the state law is otherwise.”
We have no reason to doubt that the decision in Newton represents
Texas law. We therefore adhere to its reasoning that, in a
situation such as this--where a general partner’s action results in
lost property owned by the partnership--the partnership must
account for the indebtedness of the lost property when seeking to
recover the actual damages for its loss.
B
In its No Damages Order, the district court carefully reviewed
the damages alleged by Thomas. These damages consisted of the
following:
29
Note to PCA not Repaid $522,856.00
BL II’s Cash on Hand $4,073.00
Freeze Damage Insurance Proceeds $26,612.00
BL II’s Bond Reserve Fund $162,611.00
Value of the lost project $7,500,000.00
Furniture and Equipment not specified
Cost Overruns not Funded $339,047.00
Operational Expenses not Funded $1,098,670.00
Operational Deficit Loans not Made $931,030.00
Total: $10,584,899.00
The district court then concluded that the damages from cost
overruns and operational expenses not funded and from operational
deficit loans not made each occurred before 1989 and were therefore
barred by the statute of limitations. The district court also held
that the plaintiffs failed to demonstrate that the furniture and
office equipment was not secured by the original $8.75 million
dollar loan. The court further held that the plaintiffs had failed
to quantify the value of the furniture and equipment. Based on
these findings, the court disregarded the plaintiffs’ damages
claims with respect to these items. The court therefore held that
plaintiffs’ alleged damages amounted to $8,216,512.00.
The court then found that the outstanding debt on the Project
at the time the Project was sold was $10,705,830.00. Based on this
finding and the holding in Newton, the court concluded that the
30
plaintiffs had failed to demonstrate a loss that was greater than
the outstanding indebtedness on the property.
C
On appeal, Thomas argues that Newton should not apply to the
calculation of actual damages in this case. Thomas next argues
that, even if Newton should apply, the district court erred in
calculating the value of the damages and the outstanding
indebtedness. Finally, Thomas argues that the district court erred
when it treated property owned by BL II after the sale of the
project as subject to the mortgage indebtedness.
1
Thomas’s first argument is that Newton should not apply to the
calculation of actual damages here. We generally agree with Thomas
that the result reached by applying Newton to this case is
troublesome. There is a straightforward explanation for why this
is so. In Newton, the managing partner and trustee lost the
property through foreclosure and suffered the same losses as the
other partners in the partnership. In this case, the General
Partner actually turned a profit on the sale of the Project. While
it is not entirely clear how much money Hinch, Beneke, and Carraway
(all general partners in PHAM) made, it is apparent that the sale
of the Project, after the RTC’s debt forgiveness, made a profit of
as much as $2 million. Of that sum, only $285,000 made its way
back to the partnership. Because Beneke’s power under BL II’s
31
Partnership Agreement to bring about the transaction is called into
question by the participation of interested parties in the
transaction, there appears to be a case for arguing that the
parties to the transaction have been unjustly enriched through this
transaction.
The fact that Newton’s requirements make it difficult for the
plaintiffs here to allege actual damages does not, however, leave
the plaintiffs without a remedy. What is troublesome in this case
is not just that the defendants sold the project for less than what
it may have been worth, but also that the defendants seem to have
profited from that sale. Under Texas law, the plaintiffs could,
and did in their seventh amended complaint, seek a constructive
trust. As we recently noted in Dyl v. Adams, supra, under Texas
law, a constructive trust is appropriate to prevent unjust
enrichment when a defendant has committed a fraud. 167 F.3d at
948. For whatever reason, this issue was not raised on appeal, and
we are therefore unable to address it.
We hold however that, for actual damages, we are bound to
apply the method used in Newton. In Newton, the court held that
the plaintiffs could not rely on their initial contribution to the
partnership as a measure of actual damages. The court looked
instead to the value of what was lost, the property, and in valuing
the property, the court considered the indebtedness of the
property. In this case, Thomas does not argue that the original
32
contribution of the limited partners should be a measure of the
actual damages of the partnership. Instead, he argues that the
measure of damages should be the losses incurred by the partnership
as a result of the conduct of the defendants, including their
mismanagement of the project, their failure to reduce the
indebtedness of the project, and their failure to obtain the best
price for the project because of their self-interested dealing.
However, because those damages are reflected in the value of the
project when it was sold, the actual damages claimed by Thomas are
identical in form to those addressed by the court in Newton.
As we have noted, in pleading actual damages under Texas law,
the plaintiff must plead them with specificity. In this case, the
plaintiffs’ principal claim for actual damages is the loss of the
value of the project because of the conduct of the general partner
and the purchasers of the project. In Newton, the only claim was
for the loss of the value of the land at the time of foreclosure
because of the conduct of the general partner. The reasoning in
Newton, that the court must account for the indebtedness of the
lost property in calculating actual damages is equally applicable
here. The plaintiffs are certainly entitled to show that the value
of the property is higher than its indebtedness, but, under the
reasoning in Newton, the court may not simply disregard the
indebtedness of the property when determining the value of what was
actually lost. Thus, for purposes of this appeal, we hold that in
33
calculating the actual damages suffered by BL II, the district
court did not err in accounting for the indebtedness of the project
when valuing the loss of the project through its sale.
2
Thomas next argues that the district court erred in its
valuation of the damages claimed by Thomas and in its valuation of
the outstanding mortgage indebtedness. After a careful review of
the record, we cannot agree with any of these arguments. For
instance, Thomas argues that the value of the land at the time the
Project was sold was more than $7,500,000. However, Thomas did not
certify an expert to provide testimony to support a different
figure. Instead, Thomas produced two non-experts, neither of whom
had an ownership interest in the Project, who provided their best
estimates of the value of the land at the time of sale. We agree
with the district court that this evidence is simply inadequate to
support a different value for the project.
Thomas also argued that the amount of mortgage indebtedness
was not the $10,705,830.00. Thomas points to the fact that the
defendants were able to renegotiate the debt by almost $4 million
as evidence that BL II would not have had to pay the full amount of
its indebtedness. However, the defendants have argued and
attempted to demonstrate that the debt renegotiation was part of a
larger negotiation and that BL II could not have renegotiated the
debt in the same way. Although we do not necessarily accept the
34
defendants’ account as true, we note that there is no evidence that
we could find in the record that would lead us to reject their
argument as untrue--and the partnership carries the burden of proof
on these damages. As we have said, under Texas law when alleging
damages, the plaintiff must allege them with specificity. It is
not enough to present conjecture about what might have happened,
the defendant must present real evidence of his loss. We can find
no such evidence here.
The plaintiffs also take issue with the district court’s
exclusion of the damages from the missing furniture and equipment,
the cost overruns and operational expenses not funded, and the
operational deficit loans not made. Because the amount of debt
would still outweigh the damages claimed by the plaintiffs if we
included these items as damages, we do not consider whether the
district court erred in excluding these items.
3
Thomas finally argues that not all of the assets of BL II were
sold with the Project. After the sale, BL II still retained a note
from PCA for $500,000, a bond reserve fund valued at $163,611, its
cash on hand, and the freeze damage insurance proceeds. Thomas
argues that the value of those assets were never distributed among
the limited partners, even though BL II maintained them after
selling the project and escaping its debt.
35
Beneke argues that the summary judgment evidence demonstrated
as a matter of law that the PCA note was held by BL II exclusively
for the benefit of USA. Beneke further argues that the summary
judgment evidence did not establish that BL II owned the bond
reserve fund. After reviewing the record, we conclude that there
is a genuine issue of material fact regarding the ownership of the
PCA note, the bond reserve fund, BL II’s cash on hand, and the
freeze damage insurance proceeds. If these items were owned by BL
II, there should have been an accounting for them upon the
dissolution of the partnership. Furthermore, because these items
were not tied to the Project, the district court should not have
weighed them against the indebtedness of the Project when making
its damages calculations. We hold that the district court erred in
holding that the plaintiffs had alleged no damages as the
plaintiffs properly alleged that they had lost the value of the PCA
note, the bond reserve fund, BL II’s cash on hand, and the freeze
damage insurance proceeds, to which they may well be entitled. We
therefore reverse the district court’s No Damages Order to this
limited extent.
36
VII
The district court dismissed all of McNeil and Larkin’s claims
in the Final Order. McNeil and Larkin argue that both orders
contain errors of law and fact. Because the Final Order dismissed
McNeil and Larkin’s claims pursuant to the No Damages Order and
because we reverse that order, the claims dismissed by that order
will now be reinstated.
The GE defendants have raised a purely legal question on
cross-appeal related to McNeil and Larkin’s claims. As described
above, McNeil and Larkin were third party defendants brought into
the suit by a claim made by the PCA defendants (of whom only Beneke
remains in this appeal). With the exception of Beneke, the
defendants have a procedural objection to the claims filed by
McNeil and Larkin. Under Fed.R.Civ.P. 14(a), a third party
defendant may assert claims arising out of the transaction against
the original plaintiff, counterclaims against the third party
plaintiff, and cross claims against a co-party under rule 13(g).
The GE defendants argue that “[m]ost courts have accepted the
definition set forth in Murray v. Haverford Hospital Corp., 278
F. Supp. 5, 6 (E.D. Pa. 1968), where co-parties were defined as
‘parties having like status, such as, co-defendants.’” Georgia
Ports Authority v. Construzioni Meccaniche Industriali Genovesi,
S.P.A., 119 F.R.D. 693, 694 (S.D. Ga. 1988). The GE defendants
argue that, as McNeil and Larkin do not share co-defendant status
37
with them, McNeil and Larkin cannot be co-parties under rule
13(g).6
Although some courts have held that third party defendants may
not file cross-claims against original defendants under rule 14(a),
the issue has not been addressed by the Fifth Circuit. We agree
that a reading of rules 14(a) and 13(g) can lead to the conclusion
that third party defendants are barred from filing cross-claims
against original defendants. We, however, find this reading to be
a strained one and the result nonsensical. Under rule 14(a), third
party defendants can join additional parties to the lawsuit to
resolve claims related to the claim made against them. It
therefore seems strange to conclude that they cannot bring those
claims against parties already involved in the suit. The practical
effect of adhering to the defendant’s reasoning would be to hold
that when a third party defendant wishes to allege a claim against
an original defendant, he must file a separate complaint against
the original defendant and then move for joinder of the two
actions. We will not require third party defendants to jump
6
In their opening brief, McNeil and Larkin seem prepared to
concede this point, arguing that they should have labeled their
claims “counterclaims,” but claiming that this was a harmless error
nonetheless. The problem with this argument is that their claims
against the non-Beneke defendants cannot be counterclaims as those
defendants did not file any claims against them. McNeil and Larkin
apparently concede this point in their reply brief when they state
that there is “diverse authority on the issue of what to call their
claims,” but that there is nonetheless a “general principle . . .
that [their] claims should go forward.”
38
through these additional hoops. We hold that, under Rule 14(a), a
third party defendant may file a cross-claim against an original
defendant even if it would be inappropriate to characterize the
third party defendant as a co-defendant of the original defendant.
VIII
Beneke argues that, even if the district court erred in its No
Damages Order, there is another ground on which the district court
could have granted summary judgment. Beneke argues that Thomas
ratified the acts of the defendants by accepting the proceeds from
the sale and the favorable tax treatment. Because the district
court did not address this claim in its No Damages Order, we remand
to the district court for an initial determination, if in the
district court’s judgment a resolution of this issue is necessary
to properly conclude this case.
IX
In working its way through this convoluted case, the district
court, admirably, committed only one error, an error in calculating
damages. We hold that the district court correctly determined that
the loss of the project did not result in actual damages to BL II
as the value of the project at the time of the sale was less than
the indebtedness of the project. The district court nevertheless
erred when it dismissed the plaintiffs’ claims on summary judgment,
holding that the plaintiffs had not alleged any actual damages.
The plaintiffs did allege claims for actual damages based on items
39
they assert were in the control of BL II after the sale of the
project but not accounted for in the dissolution of the
partnership. We hold that the district court erred when it failed
to consider as part of the damages the plaintiffs’ claims for the
loss of the PCA note, the bond reserve fund, BL II’s cash on hand
after the sale of the project, and the freeze damage insurance
proceeds. We therefore reverse the grant of summary judgment on
these limited claims. We note, however, that Beneke argues that
summary judgment is appropriate on other grounds. We leave this
argument to the district court to resolve.
In sum, we therefore REVERSE the district court with respect
to its summary judgment rulings on the issue of whether Thomas
failed to demonstrate damages with respect to the limited claims
noted above. In all other respects we AFFIRM the summary judgment
rulings of the district court. We REMAND for further proceedings
not inconsistent with this opinion.
AFFIRMED IN PART, REVERSED IN PART, and REMANDED.
40