28 F.4th 591
5th Cir.2022Background
- Dongtai Investment Group, LLC formed to acquire a Houston Crowne Plaza; original members Jiao, Yu, and Zhou each contributed $1,000,000 for 16.66% interests; Xu contracted to contribute $3,000,000 for 50.02% but in fact paid $867,889.11.
- The three original investors assigned their membership interests to their children; assignor/assignee status later became disputed.
- Plaintiffs (assignors and assignees) sued Xu and his wholly owned LCL Company for breach, fraud, fiduciary duty, and § 10(b) securities claims; district court entered an agreed temporary order suspending Xu’s managerial powers.
- District court found Xu violated the agreed order, held him in contempt, and later granted Plaintiffs a preliminary injunction and declaratory relief: invalidating Xu’s unit certificates, ordering new certificates reflecting only the capital Xu actually contributed, and declaring Xu indebted to Dongtai for $1,304,400.80.
- The court issued a turnover order directing Xu to turn over his remaining 14.45% membership interest to Dongtai in partial satisfaction of that judgment; Xu appealed.
- The Fifth Circuit affirmed the denial of Xu’s motions to dismiss, the preliminary injunction, the declaratory judgment, and the turnover order.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument (Xu) | Held |
|---|---|---|---|
| Standing to bring derivative claims | Assignors and/or assignees are members with derivative standing under Texas law | Assignees not proper members; lack of derivative standing bars claims | Plaintiffs have standing: under Tex. Bus. Orgs. Code assignors remain members until assignees become members; at least one party has Article III standing (affirmed) |
| Securities-fraud pleading & domestic transaction | Complaint meets PSLRA/Rule 9(b) and alleges domestic purchase in U.S.; LCL implicated | Pleading fails PSLRA/9(b); transaction not in U.S.; LCL not implicated | Pleading sufficient; allegations support domestic transaction and LCL’s involvement; dismissal properly denied |
| Preliminary injunction (irreparable harm) | Irreparable harm: imminent loss of IHG franchise/hotel and business risk | No adequate showing of irreparable injury | District court did not abuse discretion; factual findings supported likely irreparable injury; injunction proper |
| Declaratory relief altering membership interest | Court may declare membership percentage based on amount actually paid and order new certificates | Declaration effectively expels Xu and violates Tex. Bus. Orgs. Code §§101.107/101.112 | Declaratory judgment valid; it reallocated units to reflect actual contribution and did not expel Xu or invoke §101.112(d)’s exclusive-remedy bar |
| Turnover order vs. charging-order exclusivity | Turnover permitted where judgment creditor is the entity from which the interest derives and award transfers interest to that entity | Turnover violates §101.112(d), which makes charging order the exclusive remedy | Turnover allowed under Texas precedent (exception); district court’s turnover not barred by §101.112(d) in these facts |
Key Cases Cited
- Lakedreams v. Taylor, 932 F.2d 1103 (5th Cir. 1991) (jurisdictional rule on reviewability of denials of motions to dismiss in injunction appeals)
- Magnolia Marine Transp. Co. v. Laplace Towing Corp., 964 F.2d 1571 (5th Cir. 1992) (appellate review may reach matters intertwined with injunction basis)
- In re Lease Oil Antitrust Litig. (No. II), 200 F.3d 317 (5th Cir. 2000) (entangled-issues doctrine in interlocutory appeals)
- Masel v. Villarreal, 924 F.3d 734 (5th Cir. 2019) (PSLRA and Rule 9(b) heightened pleading standards for securities fraud)
- Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010) (extraterritorial reach of §10(b) is a merits question)
- Byrum v. Landreth, 566 F.3d 442 (5th Cir. 2009) (four-element preliminary injunction test)
- Atwood Turnkey Drilling, Inc. v. Petroleo Brasileiro, S.A., 875 F.2d 1174 (5th Cir. 1989) (exception where potential economic loss threatens business existence can support irreparable injury)
- Hewlett-Packard Co. v. Quanta Storage, Inc., 961 F.3d 731 (5th Cir. 2020) (turnover orders are final for appellate review)
- Hux v. Southern Methodist University, 819 F.3d 776 (5th Cir. 2016) (Erie-guided approach to predicting state law)
- Gillet v. ZUPT, LLC, 523 S.W.3d 749 (Tex. App.—Houston [14th Dist.] 2017) (Texas intermediate court holding charging-order exclusivity inapposite where entity-creditor is awarded the membership interest)