Afshani v. Spirit SPE Portfolio 2006-1

Case: 21-10137 Document: 00516260184 Page: 1 Date Filed: 03/30/2022
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
No. 21-10137 March 30, 2022
Lyle W. Cayce
Clerk
Shahram Afshani,
Plaintiff—Appellant,
versus
Spirit SPE Portfolio 2006-1, L.L.C.; SMTA Shopko
Portfolio I, L.L.C.; Spirit Realty Capital,
Incorporated,
Defendants—Appellees.
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:19-CV-1421
Before Dennis, Elrod, and Duncan, Circuit Judges.
Per Curiam:*
After buying two large commercial properties, Shahram Afshani sued
the sellers for breach of contract and fraud. He claimed that, during contract
negotiations, the sellers had promoted the financial health of the properties’
*
Pursuant to 5th Circuit Rule 47.5, the court has determined that this
opinion should not be published and is not precedent except under the limited
circumstances set forth in 5th Circuit Rule 47.5.4.
Case: 21-10137 Document: 00516260184 Page: 2 Date Filed: 03/30/2022
No. 21-10137
big-box-store tenant, all the while knowing the tenant was in poor shape. The
district court dismissed both claims, concluding Afshani pled no plausible
breach and failed to allege fraud with the particularity demanded by Federal
Rule of Civil Procedure 9(b). As to the contract claim, we agree with the
district court and affirm. But as to the fraud claims, we disagree. On his third
try, Afshani pled enough to clear the Rule 9(b) hurdle. So we reverse the
dismissal of those claims and remand for further proceedings.
I.
Spirit Realty Capital, Inc. (“SRC”) owns two companies that held
title to two commercial properties. One property is in La Crosse, Wisconsin
(the “La Crosse Property”), and was owned by Spirit SPE Portfolio 2006-1,
LLC (“SPE”). The other is in Onalaska, Wisconsin (the “Onalaska
Property”), and was owned by SMTA Shopko Portfolio I, LLC (“SMTA”).
Both properties are leased to big-box retailer Shopko under a master lease
with SRC.
Afshani, an investor, won at auction the right to purchase the La
Crosse Property from SPE. SRC senior vice president Travis Carter
spearheaded the follow-on negotiations with Afshani to close the deal. Carter
was also the managing agent of SPE and SMTA. Afshani alleges 1 that during
the escrow period between June and July of 2018, Carter represented that
Shopko was a financially viable tenant that could be relied on to pay its rent.
Moreover, between June and December of 2018, Carter told Afshani on
multiple occasions that “Shopko was a very valuable tenant that was
vertically integrated and whose lease income could be counted on for years
into the future . . . for the full term of the leases.” Carter also represented
1
The allegations are from Afshani’s third amended complaint, which we accept as
true. Turner v. Lieutenant Driver, 848 F.3d 678, 684 (5th Cir. 2017).
2
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that “Shopko’s pharmacy division was doing extremely well and its optical
division was doing a ‘phenomenal’ volume of business.” Motivated by
Shopko’s tenancy, Afshani closed on the La Crosse Property and, weeks
later, agreed to purchase the Onalaska Property from SMTA.
At both closings, SPE and SMTA transferred the existing Shopko
leases and delivered renewed Shopko leases expiring in 2031 and 2035,
respectively, as the agreements required. Both agreements included “as is”
provisions disclaiming any express or implied representation or warranty
beyond the agreements. The agreements also precluded Afshani from
contacting Shopko, its employees, or its representatives before closing
without the seller’s written consent.
Afshani (on behalf of an LLC) also agreed to buy a third property from
SRC. During that escrow period, Carter sent Afshani a release, which
Afshani declined to sign. The release purported to (1) disclaim that SRC had
represented anything about Shopko’s status, (2) disclaim any reliance on
SRC’s representations about Shopko, and (3) warrant that both parties acted
solely on their own judgment and due diligence. When Afshani rejected the
Release, SRC canceled the purchase contract and returned Afshani’s deposit
in full.
In May 2019, Afshani sued SRC, SPE, and SMTA (collectively,
“Defendants”) in Texas state court for fraud and breach of contract.
According to Afshani, he would not have bought the LaCrosse and Onalaska
Properties had he known about Shopko’s “impending financial collapse.”
And because SRC had loaned $35 million to Shopko and was privy to
Shopko’s “severe financial distress,” Afshani claimed SRC fraudulently
concealed Shopko’s deteriorating financial position and “dumped” the
properties by selling them to him.
3
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Defendants removed the case to federal court and moved to dismiss
for failure to state a claim. Afshani amended his complaint in response. De-
fendants again moved to dismiss. Granting the motion, the district court dis-
missed all claims without prejudice to allow Afshani to replead with sufficient
particularity, stating that “the Court’s allowance of one more repleading will
be [Afshani’s] last.”
Afshani again amended his complaint and, for the first time, identified
Carter as the perpetrator of the alleged fraud. Defendants again moved to
dismiss. This time, the court dismissed Afshani’s claims with prejudice. As
to the contract claim, it held that (1) Afshani failed to identify any part of
either contract breached by Defendants, and (2) Afshani’s unilateral mistake
theory failed as a matter of law. As to the fraud claims, the court concluded
Afshani’s complaint failed to sufficiently plead (1) the time and place of the
alleged fraud, and (2) that Defendants knew of Shopko’s financial condition.
Afshani timely appealed.
II.
We review de novo a Rule 12(b)(6) dismissal for failure to state a claim.
Innova Hosp. San Antonio, L.P. v. Blue Cross & Blue Shield of Ga., Inc., 892
F.3d 719, 726 (5th Cir. 2018). “To survive a motion to dismiss, a complaint
must contain sufficient factual matter which, when taken as true, states ‘a
claim to relief that is plausible on its face.’” Ibid. (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). Dismissal is proper when, accepting all
well-pled facts as true, the plaintiff has not stated a plausible claim for relief.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “In alleging fraud or mistake, a
party must state with particularity the circumstances constituting fraud or
mistake,” whereas “[m]alice, intent, knowledge, and other conditions of a
person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b).
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III.
A.
We first address Afshani’s breach of contract claim, which the district
court correctly dismissed. Afshani argues that he “pled a valid contractual
theory” of unilateral mistake of fact. He argues that because Shopko’s finan-
cial condition was material to the contract and Afshani mistakenly relied on
an incomplete picture of that condition when buying the properties, a mistake
exists that voids the contract. But the contracts themselves did not explicitly
require Defendants to disclose this information, and, in any event, such alle-
gations are better understood as part of his fraud claims, which we address
infra. Moreover, Afshani himself admits that “unilateral mistake” is really a
theory for equitably avoiding a contract, not a theory of breach. See James T.
Taylor & Son, Inc. v. Arlington Indep. Sch. Dist., 335 S.W.2d 371, 373 (Tex.
1960).
Afshani has thus failed to identify any specific provision of the agree-
ments that the Defendants allegedly breached. He does point to Section
2.02(c), which required SPE and SMTA to deliver “a form of new
lease . . . to be executed by [Shopko] in the form previously approved.” But,
as Afshani admits, the Defendants did what that section required. His breach
of contract theory therefore fails. See Smith Int’l, Inc. v. Egle Grp., LLC, 490
F.3d 380, 387 (5th Cir. 2007) (internal quotation omitted) (“A breach occurs
when a party fails to perform a duty required by the contract.”).
B.
We turn to Afshani’s fraud claims. Under the heightened pleading
standard of Rule 9(b), a plaintiff “must state with particularity the circum-
stances” of the allegedly fraudulent conduct—at minimum “the who, what,
when, and where.” Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir.
1997); see also City of Clinton v. Pilgrim’s Pride Corp., 632 F.3d 148, 153 (5th
5
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Cir. 2010). “What constitutes particularity will necessarily differ with the
facts of each case.” Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719,
724 (5th Cir. 2003) (cleaned up). The district court gave Afshani two addi-
tional chances to allege fraud with sufficient particularity before dismissing
the claims with prejudice. Contrary to the court’s ruling, however, we think
Afshani managed to clear the Rule 9(b) hurdle on his third try.
First, Afshani alleged the “who” of his fraud claims. In his third
amended complaint, he identified Carter as the person who allegedly made
multiple misleading statements about Shopko’s financial viability. Second, as
for the “what,” Afshani alleged Defendants knew about Shopko’s unfavora-
ble financials because they themselves had made sizeable loans to Shopko.
Moreover, according to Afshani, Defendants concealed this information
from him and instead promoted Shopko as a solid lessee. Despite Shopko’s
proximity to bankruptcy, Afshani alleges that Carter stated Shopko was “a
very valuable tenant that was vertically integrated and whose lease income
could be counted on for years into the future . . . for the full term of the
leases.” That’s enough to meet the Rule 9(b) requirements for the “what”
prong. See Benchmark Elecs., 343 F.3d at 724 (finding Rule 9(b) satisfied by
allegations that defendant’s representative made false and misleading repre-
sentations about a purchased stock’s financial health). 2
2
For similar reasons, we also disagree with the district court’s conclusion that
Afshani failed to allege plausibly that Carter knew the falsity of his statements or recklessly
disregarded the truth. Afshani claimed Carter had “inside information” about Shopko’s
financial health due to SRC’s $35-million loan to the big-box retailer. And Afshani
repeatedly alleged Carter’s knowledge of Shopko’s financial distress, claiming he “traded
with [Afshani] based on non-public information about which only Defendants knew and
about which Defendants knew [Afshani] was ignorant.” Afshani thus adequately pled
Carter knew his representations were false to clear the hurdles of Rule 9(b) and 12(b)(6).
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The district court also concluded Afshani failed to adequately allege
the “when” of his fraud claims. Specifically, the court found that Afshani’s
allegation that Carter made the statements “between June and December of
2018” was not specific enough. But Afshani’s complaint explains that some
statements were made during the escrow period for the properties in ques-
tion. And because Afshani proceeded on a fraud-by-nondisclosure theory, he
identified a shorter time window—between June and July 2018—during
which Carter likely should have disclosed Shopko’s precarious condition. 3
Afshani also alleged that during this period, Carter “represented that Shopko
was a valued and financially viable tenant that could be counted upon to faith-
fully pay the new lease.” These allegations are particular enough to satisfy
Rule 9(b). See Benchmark Elecs., 343 F.3d at 724 (finding Rule 9(b) satisfied
where plaintiff alleged oral misrepresentations occurring over a series of dis-
tinct months); see also Southland Sec. Corp v. INSpire Ins. Sols., Inc., 365 F.3d
353, 372 (explaining that “Rule 9(b) does not require that a specific date and
time always be alleged as to each misrepresentation”).
Finally, the district court concluded that Afshani failed to allege
“where” the fraud took place. It reasoned that any allegedly fraudulent state-
ments “certainly were not made in the contracts, which do not contain
clauses resembling any of the statements Carter made.” We disagree. In his
third amended complaint, Afshani claimed Defendants should have disclosed
their knowledge of Shopko’s financial condition in the real estate contracts
and the new leases. He alleged: “As a result of Mr. Carter’s representa-
tions . . . [Afshani] relied on the resulting income stream reflected in the New
Lease . . . .” In particular, “the delivery of the New Lease by Defendants and
3
What’s more, Afshani specifically alleged that Carter “should have” disclosed
Shopko’s poor financial health “within the contracts . . . or clearly and plainly disclaimed
any ability for [Afshani] to rely upon the New Leases.”
7
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Defendants’ non-disclosure of Shopko’s known (to Defendants only, but not
to Plaintiff) impending financial collapse represented a material fraudulent
misrepresentation.” Afshani made substantially similar allegations about the
Onalaska contract and leases. These allegations are enough to satisfy Rule
9(b).
In sum, contrary to the district court’s ruling, we conclude that Af-
shani satisfied the heightened pleading standard of Rule 9(b). 4
AFFIRMED IN PART; REVERSED AND REMANDED IN
PART.
4
On appeal, Defendants raised several arguments in the alternative as to why the
district court’s ruling should be upheld, apart from the Rule 9(b) issue. For instance,
Defendants argued the economic-loss doctrine bars Afshani’s suit. SRC also argued that
none of the alleged misrepresentations is attributable to it. The district court did not
address any of these issues in its ruling, and we think it appropriate to allow that court to
do so in the first instance. We express no opinion as to how those issues should be resolved
on remand.
8