Basic Capital Management, Inc. v. Dynex Cap

Case: 19-11272 Document: 00515606091 Page: 1 Date Filed: 10/19/2020
REVISED
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
October 2, 2020
No. 19-11272
Lyle W. Cayce
Clerk
Basic Capital Management, Incorporated;
Transcontinental Realty Investors, Incorporated;
Michael J. Quilling, as Court Appointed Receiver for
American Realty Trust Incorporated,
Plaintiffs—Appellants,
versus
Dynex Capital, Incorporated; Dynex Commercial,
Incorporated, also known as DCI Commercial Incorporated,
Defendants—Appellees.
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:17-CV-1147
Before King, Stewart, and Southwick, Circuit Judges.
King, Circuit Judge:
After years of litigation in the Texas state courts, Plaintiffs-appellants
won a $55 million judgment against Dynex Commercial, Inc. Unable to
collect that judgment, Plaintiffs filed a lawsuit against Dynex Commercial,
Inc. and Dynex Capital, Inc., alleging fraudulent-transfer and alter-ego
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claims. The district court dismissed Plaintiffs’ second amended complaint
with prejudice on the grounds that the fraudulent-transfer claim is time-
barred, and the alter-ego claim is barred by res judicata. We AFFIRM.
I.
In the late 1990s, Dynex Commercial, Inc. (“DCI”) agreed to lend
Plaintiffs $160 million to finance commercial and multifamily properties.
When DCI failed to fulfill its loan commitment, Plaintiffs brought a lawsuit
in 1999 in Texas state court against DCI and its indirect parent company,
Dynex Capital, Inc. (“Dynex Capital”). In 2004, a jury returned a verdict in
Plaintiffs’ favor. The trial court, however, granted DCI and Dynex Capital’s
motions for judgment notwithstanding the verdict and ordered that Plaintiffs
“take nothing” from DCI and Dynex Capital. Plaintiffs appealed the trial
court’s judgment as to DCI, though not as to Dynex Capital. After several
appeals, the Texas Supreme Court reversed the trial court. On remand, in
2015, judgment was entered in favor of Plaintiffs for over $55 million dollars
against DCI, which was the “sole remaining defendant” at the time.
In April 2017, as part of their efforts to enforce the judgment following
post-judgment discovery, Plaintiffs brought a new lawsuit in Texas state
court once again against both DCI and Dynex Capital. DCI and Dynex
Capital removed the case to federal court on the basis of diversity
jurisdiction. Because DCI has no assets, Plaintiffs seek to recover from Dynex
Capital by alleging that, in 2000, DCI fraudulently transferred twenty-five
commercial loans and security interests to Dynex Capital and that DCI was
Dynex Capital’s alter ego. The district court dismissed Plaintiffs’ claims twice
without prejudice and with leave to amend. After Plaintiffs filed their second
amended complaint, DCI and Dynex Capital again moved to dismiss, arguing
that the fraudulent-transfer claim is time-barred and the alter-ego claim is
barred by res judicata. After providing Plaintiffs with three bites at the
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proverbial apple, the district court agreed with DCI and Dynex Capital and
dismissed Plaintiffs’ second amended complaint with prejudice. Plaintiffs
then filed a timely notice of appeal.
II.
We review the district court’s ruling on a motion to dismiss under
Federal Rule of Civil Procedure 12(b)(6) de novo. Wampler v. Sw. Bell Tel.
Co., 597 F.3d 741, 744 (5th Cir. 2010). “To survive a motion to dismiss, a
complaint must contain sufficient factual matter, accepted as true, to ‘state a
claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
“[D]ismissal under Rule 12(b)(6) may be appropriate based on a
successful affirmative defense,” provided that the affirmative defense
“appear[s] on the face of the complaint.” EPCO Carbon Dioxide Prods., Inc.
v. JP Morgan Chase Bank, NA, 467 F.3d 466, 470 (5th Cir. 2006). Judicially
noticed facts may also be considered in ruling on a motion to dismiss. Funk v.
Stryker Corp., 631 F.3d 777, 783 (5th Cir. 2011). “A district court’s use of
judicial notice under Federal Rule of Evidence 201 is reviewed for abuse of
discretion.” Id.
As an initial matter, we must first determine whether the district
court’s use of certain judicially noticed facts in ruling on the 12(b)(6) motion
was appropriate. Specifically, the district court took judicial notice of Dynex
Capital’s 2002 Form 10-K annual report (the “Form 10-K”) and the
proceedings and record of the 1999 state-court litigation (the “state-court
record”).
Federal Rule of Evidence 201 allows a district court to take judicial
notice of a “fact that is not subject to reasonable dispute because it (1) is
generally known within the trial court’s territorial jurisdiction; or (2) can be
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accurately and readily determined from sources whose accuracy cannot
reasonably be questioned.” Fed. R. Evid. 201(b). The district court “may
take judicial notice at any stage of the proceeding.” Fed. R. Evid. 201(d)
(emphasis added). And if there remained any doubt about whether “any
stage of the proceeding” included the motion-to-dismiss stage, our
precedents have resolved that doubt, explaining that “[w]hen reviewing a
motion to dismiss, a district court ‘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.’” Funk, 631 F.3d at 783 (quoting Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308, 322 (2007)); see also Lovelace v. Software Spectrum Inc., 78
F.3d 1015, 1017–18 (5th Cir. 1996).
In this case, as the district court correctly observed, the Form 10-K
and the state-court record “are all publicly available governmental filings and
the existence of the documents, and the contents therein, cannot reasonably
be questioned.” Therefore, the Form 10-K and the state-court record fall
squarely within the ambit of Rule 201(b).
Plaintiffs, however, take issue with the district court’s consideration
of the Form 10-K and state-court record at the motion-to-dismiss stage.
According to Plaintiffs, although Rule 201 may incant the words “any stage
of the proceedings,” at the motion-to-dismiss stage, a district court “must
not go outside the pleadings” with one exception. Plaintiffs argue that this
sole exception exists when a defendant attaches documents to a motion to
dismiss that are “referred to in the plaintiff’s complaint and are central to its
claim.” In support of their argument, Plaintiffs rely on Scanlan v. Texas A&M
Univ., 343 F.3d 533 (5th Cir. 2003). But their reliance on Scanlan is misplaced
because Scanlan did not involve properly judicially noticed facts. 343 F.3d at
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537. Thus, Plaintiffs’ argument fails. As discussed above, Rule 201(d)
expressly provides that a court “may take judicial notice at any stage of the
proceeding,” and our precedents confirm judicially noticed facts may be
considered in ruling on a 12(b)(6) motion. See Funk, 631 F.3d at 783; Lovelace,
78 F.3d at 1017–18.
Therefore, in ruling on the 12(b)(6) motion, “the district court
appropriately used judicial notice.” Funk, 631 F.3d at 783. As a result, against
the backdrop of Plaintiffs’ complaint and the properly judicially noticed
Form 10-K and state-court record, we turn to whether Plaintiffs’ claims are
time-barred or precluded by res judicata.
III.
Plaintiffs bring a fraudulent-transfer claim under the Texas Uniform
Fraudulent Transfer Act (“TUFTA”), TEX. BUS. & COM. CODE ANN.
§ 24.001 et. seq. Specifically, Plaintiffs allege that Dynex Capital intended to
defraud them by stripping DCI of all of its assets while the state-court
litigation was ongoing. In support of this claim, Plaintiffs point to twenty-five
loan transfers from DCI to Dynex Capital in 2000.
Under TUFTA, a plaintiff must bring a fraudulent-transfer claim
“within four years after the transfer was made or the obligation was incurred
or, if later, within one year after the transfer or obligation was or could
reasonably have been discovered by the claimant.” TEX. BUS. & COM. CODE
ANN. § 24.010(a)(1). We have made an Erie guess that the one-year period
begins to run when the plaintiff knew of or could reasonably have discovered
the transfer and its fraudulent nature. Janvey v. Democratic Senatorial
Campaign Comm., Inc., 712 F.3d 185, 195 (5th Cir. 2013).
In this case, Plaintiffs filed their lawsuit in April 2017. Accordingly, if
Plaintiffs knew of or could reasonably have discovered the transfers of the
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twenty-five loans and their fraudulent nature before April 2016, then the
fraudulent-transfer claim is time-barred. Below, we first address whether
Plaintiffs knew of or could reasonably have discovered the transfers before
turning to whether they knew or could reasonably have discovered the
allegedly fraudulent nature of the transfers.
A.
Whether Plaintiffs knew of or could reasonably have discovered the
transfers before April 2016 is fairly straightforward. First, in March 2002, in
the Form 10-K, Plaintiffs were at least made aware of the fact that DCI was
transferring loans to Dynex Capital. Specifically, the Form 10-K disclosed
that DCI and Dynex Capital had a “funding agreement” under which DCI
transferred certain commercial mortgage loans to Dynex Capital, and that
Dynex Capital “paid DCI none, $288 1, and $2,147, respectively, under this
agreement for the years ended December 31, 2001, 2000 and 1999.” Second,
during opening statements in the state-court litigation in January 2004,
Plaintiffs’ counsel argued to the jury that “every loan made by [DCI] ended
up in Dynex Capital’s hands.” This statement implies that Plaintiffs were
aware of transfers of assets from DCI to Dynex Capital. Third, Plaintiffs have
admitted that as early as February 2004 they “researched and printed out
every UCC filing found online that reflected assets owned by [DCI]” and
that “[t]hese searches covered transactions as far back as the late 1990’s
through February 9, 2004.” All of the transfers that Plaintiffs complain about
occurred in 2000, so Plaintiffs’ thorough research of DCI’s secured interests
from 1999 to 2004 would have provided Plaintiffs with notice of the transfers
1
All amounts are in thousands of dollars.
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at issue. Therefore, Plaintiffs knew of or reasonably could have discovered
the transfers at least by February 2004, if not earlier.
B.
As discussed above, knowledge of the transfers does not end our
inquiry. The fraudulent-transfer claim will only be time-barred if Plaintiffs
also knew of or reasonably could have discovered the fraudulent nature of the
transfers before April 2016. For the reasons that follow, we agree with the
district court that Plaintiffs reasonably could have discovered the allegedly
fraudulent nature long before April 2016.
First, in the Form 10-K, Dynex Capital disclosed that as of December
31, 2001, DCI “has no assets but has asserted counterclaims” in the state-
court litigation. This type of disclosure should have, at the very least,
prompted additional diligence and review of where DCI’s assets went. The
argument that this sentence is buried in the Form 10-K is unavailing. The
disclosure is clearly made in the Notes to the Consolidated Financial
Statements, and a plaintiff, exercising reasonable diligence, would have
reviewed the annual report of a company it was suing for millions of dollars.
Second, beyond the Form 10-K, Plaintiffs have admitted that their thorough
review in 2004 of all of DCI’s UCCs revealed “evidence of potentially Tens
of Millions of Dollars in secured positions on real estate that were titled in
the name of Dynex Commercial and/or Dynex Capital, as well as
assignments from Dynex Commercial to Dynex Capital.” This discovery
would have prompted a reasonable plaintiff to inquire why these assignments
occurred within the company’s corporate structure.
Third, even disregarding the public disclosures in the Form 10-K and
the UCCs, Plaintiffs were told in a January 2003 deposition that DCI was no
longer operating and had not held any loans since 2001. Upon hearing that a
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defendant no longer has any assets, especially one being sued for millions of
dollars, a reasonable plaintiff would make some sort of inquiry into the
situation. And since discovery in the state-court litigation was ongoing when
the deposition occurred, asking a few follow-up questions at the deposition,
for example, would likely have borne fruit. See Biliouris ex rel Biliouris v.
Patman, 751 F. App’x 603, 605 (5th Cir. 2019) (concluding that a plaintiff
could have reasonably discovered the fraudulent nature of a transfer because
the plaintiff received constructive notice of the transfer’s existence while
discovery was ongoing). Indeed, as in Biliouris ex rel Biliouris v. Patman, the
alleged fraud in this case involves transferring all of a defendant’s assets while
litigation is pending without receiving anything in return. In this respect, the
alleged fraud here is readily distinguishable from the complicated Ponzi
scheme at issue in Janvey v. Democratic Senatorial Campaign Committee. See
712 F.3d at 196 (discussing that the Ponzi scheme would not have been
“readily evident . . . to anyone not privy to the inner workings of the [relevant
entities]” and that discovering the fraud required, among other things, an
analysis of the books and records by a certified public accountant).
Finally, Plaintiffs’ assertion that pre-judgment discovery regarding
DCI’s ability to satisfy a judgment would not have been permissible is
unavailing. There are at least two other ways that the transfers from DCI to
Dynex Capital would have been “relevant to the subject matter of the
pending action”: (1) the relationship between DCI and Dynex Capital and
(2) the possibility of adding a fraudulent-transfer claim. Tex. R. Civ. P. 192.3.
Thus, following the January 2003 deposition—or even as part of that
deposition—Plaintiffs could have taken discovery about where DCI’s assets
went. In any event, Plaintiffs could have reasonably discovered the allegedly
fraudulent nature long before April 2016.
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Therefore, we agree with the district court that the fraudulent-
transfer claim is time-barred.
IV.
Plaintiffs’ alter-ego claim is barred by res judicata. “[D]ismissal under
Rule 12(b)(6) is appropriate if the res judicata bar is apparent from the
pleadings and judicially noticed facts.” Kahn v. Ripley, 772 F. App’x 141, 142
(5th Cir. 2019) (citations omitted).
Under Texas law, which applies when federal courts determine the
preclusive effect of Texas judgments, res judicata “bars assertion of a claim
in a subsequent case when: (1) there is a prior final judgment on the merits by
a court of competent jurisdiction; (2) the parties in the second action are the
same or in privity with those in the first action; and (3) the second action is
based on the same claims as were raised or could have been raised in the first
action.” Weaver v. Tex. Capital Bank, N.A., 660 F.3d 900, 906 (5th Cir.
2011).
The parties agree that the first two elements of res judicata have been
met in this case, so the only dispute concerns whether Plaintiffs’ alter-ego
claim could have been brought in the state-court litigation. To determine
what claims could have been raised in the first action, Texas follows a
“transactional approach,” under which “a final judgment on an action
extinguishes the right to bring suit on the transaction, or series of connected
transactions, out of which the action arose.” Barr v. Resolution Trust Corp. ex
rel. Sunbelt Fed. Sav., 837 S.W.2d 627, 631 (Tex. 1992). This determination
“requires an analysis of the factual matters that make up the gist of the
complaint.” Id. at 630. “Any cause of action which arises out of those same
facts should, if practicable, be litigated in the same lawsuit.” Id.
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Plaintiffs’ alter-ego claim could have and should have been brought in
the state-court litigation. The gist of the state-court litigation and the instant
litigation revolves around liability for breach of the $160 million loan
agreement. In the state-court action, Plaintiffs successfully held DCI liable
for that breach. They tried and failed, however, to hold Dynex Capital jointly
and severally liable for that breach. Nevertheless, in their second amended
complaint, Plaintiffs allege that “Dynex Capital should be held jointly and
severally liable for the judgment debt of [DCI] owed to Plaintiffs because
Dynex Capital and [DCI] constituted a single business enterprise and carry
out a common business objective.” And Plaintiffs go on to allege that “Dynex
Capital used the corporate form of [DCI] to perpetrate a fraud on Plaintiffs
by inducing Plaintiffs to enter into the $160 Million Commitment . . . on the
pretext that [DCI] was and would be capable of fulfilling its obligations . . . .”
Regardless of how Plaintiffs repackage their claim, they are attempting to
relitigate Dynex Capital’s liability for breach of the $160 million loan
agreement after a Texas court has already entered judgment in favor of Dynex
Capital—a judgment that has been left unchallenged as to Dynex Capital. Res
judicata bars this type of claim.
And Plaintiffs are aware that the state-court litigation and the action
before us share the same nucleus of operative facts. Indeed, in opposing
removal of this case to federal court, Plaintiffs argued that the alter-ego claim
asserted against Dynex Capital is “simply an extension and continuation of
the claims asserted against [DCI].”
Although Plaintiffs include allegations about events that occurred
after the state-court litigation began, i.e. the transfer of DCI’s assets to Dynex
Capital, those allegations do not mean that Plaintiffs were unable to bring
their alter-ego claim in the state-court litigation. See Barr, 837 S.W.2d at 631
(“Discovery should put a claimant on notice of any need for alternative
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pleading. Moreover, if success on one theory becomes doubtful because of
developments during trial, a party is free to seek a trial amendment.”). In this
case, while the state-court litigation was pending, Plaintiffs were aware of the
fact that DCI had no assets and had engaged in a series of transfers of its
assets to Dynex Capital. These facts would have put a reasonable plaintiff on
notice of the need for alternative pleading, including the possibility of an
alter-ego claim. Indeed, in the state-court litigation, Plaintiffs alleged that
Dynex Capital was liable because it “made representations to [Plaintiffs] that
[DCI] was willing, ready, and able, and had the financial stability and
resources, to provide $160,000,000 in loans to [Plaintiffs].” Further, at trial,
Plaintiffs (unsuccessfully) attempted to “amend [the complaint] to formally
seek damages directly from Dynex Capital” for breach of contract on the
theory that Dynex Capital ratified the loan commitment. See Nilsen v. City of
Moss Point, 701 F.2d 556, 563 (5th Cir. 1983) (“[B]oth courts and
commentators agree that theories which were the subject of an untimely
motion to amend, filed in the earlier action, ‘could have been brought’
there.”). Plaintiffs’ failure to raise an alter-ego claim against Dynex Capital
during the state-court litigation does not mean that they can raise such a claim
now.
Therefore, we agree with the district court that the alter-ego claim is
barred by res judicata.
V.
Plainly put, Plaintiffs first attempted to recover from DCI and Dynex
Capital in state court more than twenty years ago. When the trial court
entered take-nothing judgments in favor of DCI and Dynex Capital, Plaintiffs
could have challenged that judgment as to both DCI and Dynex Capital. By
the time the case returned to the trial court on remand from the Texas
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Supreme Court, DCI was the only remaining defendant, and the opportunity
to hold Dynex Capital liable had long since come and gone.
We AFFIRM the district court’s judgment.
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