In this case, the Court must determine whether certain debts must be deemed non-dischargeable due to the debtor’s failure to disclose side profits he made on land deals in which he served as fiduciary for passive investors.
This matter comes before the Court on the parties’ extensively briefed cross-motions for summary judgment:
• Plaintiffs’ Combined Motion and Brief for Partial Summary Judgment on Defendant’s Affirmative Defenses (“Pi. M.S.J. on Affirm. Defs.”) [Dkt. No. 45], Defendant’s Response to Plaintiffs’ Combined Motion and Brief for Partial Summary Judgment on Defendant’s Affirmative Defenses (“Def. Resp. to Pl. M.S.J.'on Affirm. Defs.”) [Dkt. No. 84], and Reply to Defendant’s Response to Plaintiffs’ Motion for Partial Summary Judgment (“Pl. Reply to Def. Resp. to Pl. M.S.J. on Affirm. Defs.”) [Dkt. No. 87];
• Defendant’s Motion for Final Summary Judgment and the memorandum in support thereof (“Def. M.S.J.”) [Dkt. No. 88], Plaintiffs’ Response to Defendant’s Motion for Final' Summary Judgment (“Pl. Resp. to Def. M.S.J.”) [Dkt. No. 99], and Defendant’s Reply to Plaintiffs’ Response to Defendant’s Motion for Final Summary Judgment (“Def. Reply to Pl. Resp. to Def. M.S.J.”) [Dkt. Ño. 102];
• Plaintiffs’ Combined Motion and Brief for Summary Judgment on Defendant’s Liability and Damages (“Pl., M.S.J. on Liab.”) [Dkt. No. 92], Defendant’s Response to Plaintiffs’ Combined Motion and Brief for Summary Judgment on Defendant’s Liability and Damages (“Def. Resp. to Pl. M.S.J. on Liab.”) [Dkt. No. 104], and Plaintiffs’ Reply-Summary Judgment Motion on Defendant’s Liability and Damages (“Pl. Reply to Def. Resp. to Pl. M.S.J. on Liab.”) [Dkt. No. 105],
The Court has considered these submissions; the other pleadings in the record; the exhibits attached to the various briefs, including the affidavits and deposition transcripts;
I. JURISDICTION AND CONSTITUTIONAL AUTHORITY
The Court has jurisdiction under 28 U.S.C. §§ 157 and 1334, and this is a core proceeding. See 28 U.S.C. § 157(b)(2)(I); Morrison v. W. Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473 (5th Cir.2009).
As far as constitutional authority, non-dischargeability actions were not “the stuff of the traditional actions at common law tried by the courts at Westminster in 1789.” Stern v. Marshall, — U.S. -,
II. FACTUAL BACKGROUND
Due to the tangle of entities, individuals, and transactions, this case has a patina of complexity, but its core is quite simple, and the parties are in essential agreement as to all relevant facts.
The case revolves around the purchases of four properties in the Buda/Kyle area south of Austin, Texas. The deals at issue (the “Challenged Transactions ”) were made by three partnerships (the “Investor Partnerships ”): The Meadows at Buda, Ltd. (“Meadows at Buda ”), The Meadows at Kyle, Ltd. (“Meadows at Kyle I ”), and The Meadows at Kyle II, Ltd. (‘Meadows at Kyle II”).
Robert Light, Stanley Light, George Gary Duncan (who goes by Gary), Adrian-na Duncan, Robert Duncan, Diana Duncan (the “Individual Plaintiffs,” and together with Meadows at Kyle II, “Plaintiffs ”)invested (on their own and through affiliated entities) as limited partners in the Investor Partnerships. See PI. Resp. to Def. M.S.J., Exs. 10, 28, 46. The general partner of each Investor Partnership was an entity controlled by Defendant, Whitting-ton.
What Whittington did not disclose to the limited partners — and what he affirmatively denied to Plaintiff Gary Duncan with respect to the Meadows at Kyle II deal— was that a portion of the purchase amounts paid by the Investor Partnerships never made it to the sellers of the properties. Rather, Whittington and some of his associates (acting through affiliated entities and various intermediaries) took a large cut of each purchase price. An entity called Gunn & Whittington Development I, Ltd. (“G & W”), of which Whit-tington was 50% owner, received a total of $378,126.80 out of the Meadows at Buda deal (the purchase of the Finley & Hale Properties) and $244,603 out of the Meadows at Kyle I deal (the purchase of the Whitten Property). See Pl. M.S.J. on Liab., Ex. 14 (Finley), Ex. 65 (Hale), Ex. 30 (Whitten); Def. Resp. to Pl. M.S.J. on Liab., ¶ 5 (Whittington 50% owner of G & W). An entity called Madras, Inc., of which Whittington was owner, took a $106,548.66 cut of the Meadows at Kyle II deal (the purchase of the Perron Property). See Pl. M.S.J. on Liab., Exs. 42, 48, 52, 53; Gunn Aff., ¶ 6. When secret cuts to individuals and entities that were not owned by Whittington but that benefited his associates are added in, the non-disclosed payments total more than $1,750,000, out of purchases totaling approximately $7 million. In other words, more than 20% of the purchase prices paid by the Investor Partnerships went not to the sellers but to Whittington and other third parties. See Pl. M.S.J. on Liab., 5-7 (collecting and summarizing the data).
Whittington and his associates had originally entered into purchase agreements with the sellers of the properties. Ultimately, however, these original agreements were assigned over to the Investor Partnerships. The Investor Partnerships then purchased the properties at a higher price, consisting of (1) the originally agreed-upon amounts, which were paid to the sellers, plus (2) the undisclosed “cuts,” paid to Whittington and his associates. For example, Whittington’s associates originally contracted to purchase the Hale and Finley Properties at the price of $16,500 per acre, about $3.4 million for the 207 acres of combined land. But the investors, through Meadows at Buda, ultimately paid $21,000 per acre, more than $4.3 million, for the properties. The difference of about $938,000 was kept by Whittington and his associates. The uncontested evidence shows that similar practices were followed with respect to the other properties. See generally Pl. M.S.J. on Liab., 3-8 (citing and summarizing exhibits).
Whittington has sought to justify the “cuts” as a sort of finder’s fee or development fee (or both), merited because Whit-tington and his associates put work into identifying desirable properties and initiating development of the open land into residential subdivisions. See, e.g., Def. Resp. to Pl. M.S.J. on Affirm. Defs., ¶ 7; Def. Resp. to Pl. M.S.J. on Liab., ¶¶ 5, 14, 28, 35.
As further evidence that Whittington’s nondisclosures were neither innocent nor inadvertent, Plaintiffs note that, in essence, two sets of closing accounts were kept of each transaction, only one of which sets revealed that funds were being diverted to Whittington and his associates instead of being paid to the sellers of each property. See generally PI. M.S.J. on Liab., 3-8 (citing the exhibits that show two sets of figures and breakdowns of payments). Whittington has not provided any innocent explanation of this highly incriminating evidence. In his deposition, he stated only that he did not disclose the secret “fees” to the investors because he and his partner William Gunn “didn’t think it was ... any of their business.” See Whittington Dep., 48, 54, 98-99.
Plaintiffs point to yet more evidence of ill intent. As to the Meadows at Kyle II transaction, Whittington admitted that he affirmatively lied to Plaintiff Gary Duncan about whether he was reaping a side profit. This transpired because Whittington sent Duncan an incompletely redacted version of one of the contracts. The contract revealed that the sellers of the land were actually being paid a price significantly lower than what the investors were putting into the deal. Duncan questioned Whit-tington about the discrepancy and asked Whittington if any of the excess was profiting him. Whittington denied he was making side profits on the project. As he admitted to Duncan in a later deposition: “You called me and asked if I was making any money on the [Meadows at Kyle II/Perron Property] project because you saw the price per acre, and I was not truthful and told you no.” Whittington Dep., 99; see also Duncan Dep., 49-51.
Not until December 2010 did the Individual Plaintiffs find out about the side profits. That is when Gunn, having become disgruntled with his partner Whit-tington, disclosed the scheme to Plaintiff Gary Duncan.
Bradley and Londa Whittington filed for relief under Chapter 7 of Title 11 of the United States Code (the “Code” or the “Bankruptcy Code ”)on May 81, 2013. Their meeting with creditors under section 341 of the Bankruptcy Code was originally set for June 28, 2013 [No. 13-11036, Dkt. No. 4]. Under Federal Rule of Bankruptcy Procedure 4007(c), the last date to commence a proceeding to object to the debtors’ discharge was sixty days later, on August 27, 2013. Plaintiffs filed this adversary proceeding on August 26, 2013, seeking to bar the Whittingtons’ discharge under § 523(a)(2)(A) and § 523(a)(4) of the Bankruptcy Code. Plaintiffs dismissed Londa WTiittington as a defendant as of November 14, 2013 [Dkt. No. 23]. After the parties submitted their various motions for summary judgment, responsive briefs, and evidence, the Court held the Hearing, and the matter was taken under advisement.
III. SUMMARY JUDGMENT STANDARD
Plaintiffs seek summary judgment on liability and damages as well as on all of Whittington’s asserted defenses. Whit-tington seeks summary judgment on certain defenses, including standing and statute of limitations.
Under Federal Rule of Civil Procedure 56, made applicable in this adversary proceeding by Federal Rule of Bankruptcy Procedure 7056, a court “shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R.Civ.P. 56(a); see Celotex Corp. v. Catrett,
Plaintiffs bear the burden of proof on non-dischargeability under § 523(a)(2)(A) and § 523(a)(4) of the Bankruptcy Code, as well as on the amount they are owed. Gen. Elec. Capital Corp. v. Acosta (In re Acosta),
“If the moyant bears the burden of proof on an issue at trial, a successful motion for summary judgment must present evidence that would entitlé the movant to judgment at trial.” Vulcan Constr. Materials v. Kibel (In re Kibel), Adv. No. 10-5086,
Whittington bears the burden of proving his affirmative defenses, including his argument that this action is barred by the statute of limitations. See, e.g., Elmo v. Oak Farms Dairy, No. A-3:07-CV2004-D,
Plaintiffs have asserted the “discovery rule” as a means of avoiding Whit-tington’s statute of limitations defense, and on this matter, assuming Whittington otherwise makes out his statute of limitations defense, they have the burden of proof Woods v. William M. Mercer, Inc.,
IV. ANALYSIS AND HOLDINGS
Plaintiffs allege that Whittington breached his fiduciary duties and committed fraud, and that they should be awarded a range of damages along with attorneys’ fees as their claim against him. They also argue that under § 523(a)(2)(A) and § 523(a)(4) of the Bankruptcy Code, their claim against Whittington should be deemed non-dischargeable. Whittington denies that he owes any debt to Plaintiffs, denies that the debt (if any) should be held nondischargeable, and asserts numerous affirmative defenses.
As explained below, the Court holds as a matter of law that Plaintiffs have established that Whittington owes a nondis-chargeable debt under § 523(a)(2)(A) and § 523(a)(4) of the Bankruptcy Code as a result of his breach of fiduciary duty, false representation, fraud, and defalcation.
1. § 528(a)(2)(A)
“Despite the more general purpose of the bankruptcy code, which is to give debtors a fresh start, § 523(a)(2)(A) captures a competing principle. Section 523(a)(2)(A) is not designed to protect debtors; rather it is designed to protect the victims of fraud.” Tummel & Carroll v. Quinlivan (In re Quinlivan),
Section 523(a)(2)(A) states that a debt will not be discharged “to the extent [it was] obtained by — false pretenses, a false representation, or actual fraud.” Plaintiffs claim that Whittington owes them a debt as a result of “false representation[s]” and “actual fraud.”
The Fifth Circuit has explained the dements of § 523(a)(2)(A) thus:
For a debt to be nondischargeable under section 523(a)(2)(A), the creditor must show (1) that the debtor made a representation; (2) that the debtor knew the representation was false; (3) that the representation was made with the intent to deceive the creditor; (4) that the creditor actually and justifiably relied on the representation; and (5) that the creditor sustained a loss as a proximate result of its reliance.
Acosta,
a. Misrepresentation
As to the Meadows at Kyle II transaction, which involved the purchase of the Perron Property, Whittington concedes that he made a misrepresentation concerning whether he was making side profits.
As to the other transactions and properties, Whittington notes that he made no misrepresentation, and he argues this element is unmet. Plaintiffs retort that omitting to inform them about the
Plaintiffs are correct that Whit-tington was a fiduciary with respect to the Investor Partnerships and their limited partners, and as such, he had a duty to disclose material facts about the Challenged Transactions to them. “Managing partners owe their copartners the highest fiduciary duty recognized in the law.” Hughes v. St. David’s Support Corp.,
Under Texas law, Whittington’s duty to disclose encompassed all material facts concerning the Challenged Transactions. “[P]artners owe each other a duty to make full disclosure of all material facts within their knowledge relating to partnership affairs.” Schlumberger Tech. Corp. v. Swanson,
The self-dealing side profits bring into question the fairness of the transactions and Whittington’s ability to act as a trustworthy agent for the Investor Partnerships and the limited partners. They are plainly “material facts” that must be disclosed. See, e.g., Manheim Auto. Fin. Servs., Inc. v. Hurst (In re Hurst),
Whittington’s only argument of any substance on this element is that the fiduciary relationship arose so late — at or after each closing — that his fiduciary duty could not have been breached by any failure to disclose.
It is true that Texas law teaches that a fiduciary duty must exist before it can be breached. “[T]he trust giving rise to the fiduciary relationship must exist prior to the act creating the debt, i.e. the debtor must have been a trustee' prior to his or her wrongdoing.” Cardwell,
Whittington is not clear on when he believes his fiduciary duties did arise. He appears to contend that because “[t]he partnership documents in each transaction were signed at closing,” as a result his duty “only arose after closing [sic] of each transaction.” Def. Resp. to PI. M.S.J. on Liab., ¶ 31. Plaintiffs retort that each partnership was formed and each partnership agreement executed before each closing. PL Reply to Def. Resp. to PI. M.S.J. on Liab., 3.
The situation is more complicated than either party states. Meadows at Buda was formed on May 25, 2004, and the partner
Thus, based on uncontested evidence, Whittington is wrong about at least the Hale and Whitten Properties, both of which closed at least one day after the partnership agreements were signed. As to the other two properties, Finley and Perron, Plaintiffs admit the agreements were not signed until the day of closing. Plaintiffs state that these partnership agreements were signed before the closings, but the summary judgment evidence is not clear on this point. For summary judgment purposes, the Court construes the evidence in Whittington’s favor, and accepts his contention that the Meadows at Buda and Meadows at Kyle II partnership agreements were signed “at closing” of the Finley and Perron Properties, and not before.
But even if all the partnership agreements were signed “at closing,” Whitting-ton cannot free himself of his duties so easily. He signed all of the closing documents on behalf of the Investor Partnerships. It is clear that at each closing, Whittington, his contractual counterparties, and his limited partners believed he had accepted and was acting in his capacity as manager of the general partner of each entity. In signing these documents, he indicated that he accepted this role— including the fiduciary duties incumbent on it. Regardless of when the documents were signed, the partnerships had to be effective before the purchase documents, because without a partnership there could be no purchaser. Once each partnership formed, the duty to disclose arose, and all necessary disclosures had to be made.
In other words, Whittington’s own signature attests to his fiduciary relationship with each Investor Partnership. His signature only had power by virtue of his role as officer and fiduciary of each Investor Partnership. Whittington has provided no support for his idea that he could ignore corporate formalities by signing the transaction documents on behalf of each partnership as if that partnership were indeed formed, but then — having tidily and secretly profited on the transactions at the expense of his partners — turn around and challenge the very authority he claimed to have when he signed. This is wholly unlike the cases cited by Whittington in which duties truly arose after arm’s-length transactions between parties who later entered into a fiduciary relationship. The Court is not springing any retroactive or unexpected duties upon Whittington.
In sum, Whittington’s duties arose either before or at the time of signing— not later. It may be the case that, as Whittington argues, the underlying terms of each deal were agreed upon much earlier, and thus prior to the arising of a fiduciary relationship. But that is of no moment; it is not when the secret deal
There is an alternative argument on this element that bears mentioning. Plaintiffs have pointed to an unusual provision in each partnership agreement, explicitly imposing fiduciary duties on the limited partners for' “exercis[ing] good faith or integrity” in their own affairs and in partnership affairs,
[A]s those affairs may relate to the acquisition, ownership, development, consulting, and/or sale (collectively, “Development”) of other real property. It is expressly acknowledged, agreed and understood that these duties and responsibilities shall apply to any Development of real property that any limited partners has [sic] entered into since August 1,2003....
PL Resp. to Def. M.S.J., Exs. 10, 28, 46, § 7.9(b) (identical in each agreement).
G & W was a limited partner in each Investor Partnership. Whittington acted as manager of G & W — or rather, of its general partner, an entity titled Gunn & Whittington Development II, L.L.C. See PI. M.S.J. on Liab., Exs. 6, 7.
b. Debtor Knew Was False
As to the Meadows at Kyle II transaction, which involved the purchase of the Perron Property, Whittington concedes that he knew his misrepresentation was false. As to the other Challenged Transactions, Whittington does not contest-this element, nor does the Court see how it can
c. Made With Intent to Deceive
Whittington asserts that Plaintiffs’ “key failure” is their “lack of proof’ regarding the intent to deceive. He states that since he did not have a duty to disclose the side deals — or at a minimum did not “know” he had such duty — he “could not have formulated the requisite intent to deceive.” Def. Resp. to PL M.S.J. on Liab., ¶ 31.
“[Ijssues involving a person’s intent usually require a trial.” Nijjar v. Schott (In re Schott), Adv. No. 11-5030,
“Intent of a kind sufficient to preclude discharge for debt for money obtained by debtor’s false pretenses, false representation or actual fraud may be inferred where a debtor makes a false representation and knows or should know that the statement will induce another to act.” Jones,
Because Plaintiffs bear the burden of proof on the issue of intent, in order to prevail at summary judgment they are obligated to “present evidence that would entitle [them] ... to judgment at trial.” Kibel,
The totality of the circumstances shows a plain intent to deceive Plaintiffs. Most damning, of course, is the outright lie as to the Meadows at Kyle II transaction, which helps paint “a picture of deceptive conduct on the part of the debtor.” Id. Whittington’s failure to disclose the side profits on the other transactions has to be viewed in light of his outright lie as to the Meadows at Kyle II transaction. These were intentional, deceptive omissions, and
Plaintiffs have presented evidence that would entitle them to judgment at trial, so the burden has shifted to Whittington to establish a genuine issue of material fact. Whittington asserts that he “had no way of knowing he would have had a duty to disclose •... and therefore, could not have formulated the requisite intent to deceive.” Def. Resp. to PI. M.S.J. on Liab., ¶ 31; see Whittington Dep., 44-45 (explaining the deceptive deal documents by stating that “we didn’t feel it was necessary .to disclose”), 48 (claiming that he and Gunn “didn’t think it was ... any of their [i.e., the limited partners’] business” whether they were making side profits). Even construing the facts in Whittington’s favor and accepting Whittington’s (rather implausible) claim that he did not understand his duty to treat Plaintiffs honestly, this element is still met as a matter of law, because the uncontroverted facts surrounding the acquisition of the properties and the side profits taken by Whittington establish that Whittington intended to deceive Plaintiffs. Whittington’s allegedly mistaken view as to the nature of his fiduciary duties does not mean he lacked the intent to deceive under this element. It might mean that he did not appreciate the precise legal consequences of his deception, but it does not change the fact that he knew he was deceiving and intended to do so. .
No reasonable fact-finder could look at the gains that Whittington stood to make on the transactions, the fact that he admits to having lied as to the Meadows at Kyle II transaction, and the production of dual sets of documents as to each transaction, and yet believe that Whittington did not intend to deceive Plaintiffs as to all of the Challenged Transactions. Whittington intended to (and did) pocket significant, secret gains for himself and his associates as a result of the Challenged Transactions. And he intended Plaintiffs to be deceived as to this fact.
Summary judgment is due to Plaintiffs on this element.
d. Actually and Justifiably Relied Upon
Actual reliance is straightforward. The Investor Partnerships and limited partners actually entered into the Challenged Transactions, and the uncontroverted evidence shows that they did so in actual ignorance of material information known to their fiduciary and hidden from them by
The record also compels a holding that the reliance was justifiable. “Justifiable reliance is a lesser standard than reasonable reliance .... but it does not leave reason out of the calculus.” Baker v. Sharpe (In re Sharpe),
Justifiable reliance in the other transactions is equally established. There were no red flags to alert Plaintiffs to their fiduciary’s breach of his duty to disclose material information.
Plaintiffs are entitled to a finding in their favor on this element.
e. Proximately. Caused Loss
Whittington claims that the Investor Partnerships and limited partners cannot demonstrate a “proximately caused loss” from his fraud and breach of fiduciary duty, because the partnerships paid a fair price for the land, even if part of what
The Kinzbach court continued that “if the fiduciary ‘takes any gift, gratuity, or benefit in violation of his duty, or acquires any interest adverse to his principal, without a full disclosure, it is a betrayal of his trust and a breach of confidence, and he must account to his principal for all he has received.’ ” Kinzbach,
For this reason, Plaintiffs need not demonstrate that they suffered any further loss in order to sustain their cause of action under § 523(a)(2)(A). This element of § 523(a)(2)(A) is designed to insure that the debt-that forms the basis of a creditor’s claim arises from the relevant acts — that there is a causal link between them. The Supreme Court in Cohen v. de la Cruz upheld an award of treble dam
Thus, while the Fifth Circuit’s test states that a creditor must show that it “sustained a loss as a proximate result of its reliance,” Acosta,
There is clearly a causal link here between the debt Whittington owes the Investor Partnerships and limited partners and the conduct from which it “arises,” although as discussed in the damages section below, the exact amount of the appropriate damages remains to be determined. This element is met, as are the other elements of § 523(a)(2)(A).
2. § 523(a) (h)
Under 11 U.S.C. § 523(a)(4), a debtor cannot receive a discharge “from any debt ... for fraud or defalcation while acting in a fiduciary capacity.” According to the Fifth Circuit, “[t]his bar to discharge reaches ‘debts incurred through abuses of fiduciary positions ... [and] involving] debts arising from the debtor’s acquisition or use of property that is not the debtor’s.’ ” FNFS, Ltd. v. Harwood (In re Harwood),
The Court now turns to the issue of whether Whittington incurred a debt to Plaintiffs by fraud or defalcation while acting in his fiduciary capacity.
Fraud in a fiduciary capacity, for purposes of § 523(a)(4), requires “positive fraud, or fraud in fact, involving moral turpitude or intentional wrong ... and not implied fraud.” Bullock,
Whittington has committed fraud in a fiduciary capacity. As discussed in the preceding sections of this opinion, there is no genuine issue as to whether Whittington had a fiduciary duty that arose at or before he signed the closing documents in the Challenged Transactions on behalf of each Investor Partnership. His fiduciary duties required him to disclose the side profits to the limited partners in each Investor Partnership before signing the documents on their behalf and taking his secret profits. He intended to deceive Plaintiffs, not only in the misrepresentation that he made but in his omissions as to the other transactions. “This discharge exception ‘was intended to reach those debts incurred through abuses of fiduciary positions....’” In re Miller,
A finding of defalcation in a fiduciary capacity can also be sustained. “Even without the necessity of a fraud finding ... self-dealing and wrongful diversion of ... funds [in the context of a fiduciary relationship] constitutes a defalcation for the purposes of § 523(a)(4).” Smiedt v. Williams (In re Williams), No. 13-40856,
The Court construes all relevant facts in Whittington’s favor (as the Court must at summary judgment), but nonetheless, any reasonable fact-finder would have to find that he met the “culpable state of mind requirement” in light of his “gross recklessness in respect to the improper nature of the relevant fiduciary behavior.” Bullock,
Thus, in addition to his debts to Plaintiffs being established and held nondis-chargeable under § 523(a)(2)(A), Whitting-ton’s discharge of these debts must be denied under § 532(a)(4) as well.
B. Defenses
Whittington has urged several affirmative defenses in response to Plaintiffs’ claims. He argues that the Individual Plaintiffs lack standing to bring their claims, that the statute of limitations bars all Plaintiffs’ claims, and that the equitable doctrines of fraud, unclean hands, and laches should bar recovery.
1. Standing
Under Federal Rule of Bankruptcy Procedure 4007(c), the deadline for objecting to discharge in this case was August 27, 2013. Plaintiffs filed their complaint on August 26, the day be-, fore the deadline ran. But as Whitting-ton points out and Plaintiffs do not dispute, Texas law does not permit claims such as this to be brought by individual limited partners. See, e.g., Nauslar v. Coors Brewing Co.,
Pursuant to assignment agreements executed several months later, however, the Individual Plaintiffs acquired the relevant claims from Meadows at Buda and Meadows at Kyle I. See PL M.S.J. on Affirm. Defs., Ex. 56 (assignment agreement stating in relevant part that Meadows at Buda assigns “right, title, and interest” in its legal claims against Whittington to the Individual Plaintiffs), Ex. 57 (assignment
Whittington disagrees. He does not challenge the effectiveness of these assignments in themselves, but he argues that the claims, even if validly assigned, were already dead by the time of the assignments — and they remain dead. In other words, as counsel for Whittington colorfully put it, a valid assignment can “cure the sick but not raise the dead”: if a claim is merely infirm (due to the identity of the party bringing it), then an assignment can successfully cure the defect; but where a claim is dead (because it has been forfeited prior to the assignment by the party who could have brought it but failed to), then an assignment cannot resurrect it. Whit-tington’s theory sounds plausible, but he points to no law really supporting it — and as is discussed below, there are numerous cases running in the other direction, including in practically the exact same context as here.
a. Constitutional Standing
Whittington does not clearly delineate whether his “standing” argument is Article Ill/constitutional or prudential/statutory in nature. Insofar as Whit-tington challenges Plaintiffs’ constitutional standing, that challenge is plainly wrong, under clear Fifth Circuit law. See, e.g., Ensley v. Cody Res.,
Plaintiffs have plainly demonstrated their status as investors who were concretely and actually injured by Whitting-ton’s conduct (though of course the extent of that injury remains to be determined), and that a favorable decision by the Court would redress this harm. This was decided by the Fifth Circuit in Ensley.
b. Prudential Standing
i. Rule 17
It is prudential standing that was lacking on the day this adversary proceeding was filed. The difference between constitutional and prudential standing defects is crucial. For instance, Fifth Circuit precedent teaches that a prudential standing defect, such as this one, can be waived if not raised promptly. In the Ensley case, the court found that a defendant who waited until the plaintiff had put on its case-in-chief to object to the plaintiffs standing had waived its opportunity to raise the objection.
Prudential standing involves “judicially created limits concerning] (1) whether a plaintiff’s grievance arguably falls within the zone of interests protected by the statutory provision invoked in the suit, (2) whether the complaint raises abstract questions or a generalized grievance more properly addressed by the legislative branch, and (3) whether the plaintiff is asserting his or her own legal rights and interests rather than the legal rights and interests of third parties.” St. Paul Fire & Marine Ins. Co. v. Labuzan,
It is the third element that was lacking here: As of the filing of their complaint, the Individual Plaintiffs were in effect .“asserting ... the legal rights and interests of third parties,” i.e., the Investor Partnerships. Id. “A plaintiff that does not possess a right under the substantive law is not the real party in interest with respect to that right and may not assert it.” In re Enron Corp. Secs., Derivative & ERISA Litig.,
What to do when parties are “asserting ... the legal rights and interests of third parties,” St. Paul Fire & Marine,
The court may not dismiss an action for failure to prosecute in the name of the real party in interest until, after an objection, a reasonable time has been allowed for the real party in interest to ratify, join, or be substituted into the action. After ratification, joinder, or substitution, the action proceeds as if it had been originally commenced by the real party in interest.
Fed.R.Civ.P. 17(a)(3). As explained below, what happened in this case tracks the rule quite well: There was an objection based on a real-party-in-interest defect within a reasonable time (within a few months), there was a ratification of the action by the real party in interest, and now, the action is going to proceed as if it had been originally commenced by the real party in interest.
To get to its holding, the Court will analyze: (1) whether the post-complaint assignments of the causes of action from Meadows at Buda and Meadows at Kyle I to the Individual Plaintiffs successfully ratified them as the real parties in interest in this suit, and, if so, (2) whether this case should be treated “as if it had been originally commenced by the real party in interest” under Rule 17(a)(3). These questions are decisive for the Individual Plaintiffs: If this “relation back” were not permitted, then the Individual Plaintiffs would have to be dismissed from this suit with prejudice, because a new suit for nondischargeability would be time-barred under Federal Rule of Bankruptcy' Procedure 4007.
ii. Assignment and Ratification
There is no doubt that assignments can transform a party into the “real party in interest.” See, e,g., Decorative Ctr. of Houston v. Direct Response Publ’ns,
Plaintiffs assert that the assignments here amount to á “ratification” of the suit, in compliance with Rule 17(a)(3). They argue that “[Meadows at] Buda and [Meadows at] Kyle I acknowledge the existence of this suit and have ratified its maintenance by the Plaintiffs, who are now the real parties in interest.” PL Reply to Def. Resp. to PI. M.S.J. on Affirm. Defs., 6.
Ratification requires the ratifying party to agree to the lawsuit’s continuation and be “bound by any settlement or judgment.” Wieburg v. GTE Southwest
As noted above, the assignments here transfer to the Individual Plaintiffs all of Meadows at Buda’s and Meadows at Kyle I’s “right, title, and interest” in their legal claims against Whittington and numerous of his associates. PI. M.S.J. on Affirm. Defs., Exs. 56, 57. This broad assignment meets the test for ratification. It authorizes the Individual Plaintiffs’ continuance of the action, binds the assignor partnerships to the results of this ease, and prevents Whittington from having to defend himself “against the claims again in a later action.” Wieburg,
iii. “Understandable Mistake”
Once the Court has decided that the real party in interest has ratified the action, the language of the rule might seem mandatory: “[T]he action proceeds” as if the real party in interest had commenced it originally; in other words, the post-ratification suit should relate back to the time the suit was originally filed. Fed. R. Civ. P. 17(a)(3). But, relying in part on the guidance of the advisory committee on the federal rules, Fifth Circuit law “has put a gloss on Rule 17’s unqualified language. It holds that a plaintiff must have a reasonable basis for naming the wrong party to be entitled to ratification, joinder, or substitution.” Magallon v. Livingston,
When the Wieburg case returned to the Fifth Circuit after remand, the court, summarizing its prior opinion, stated: “To avoid dismissal ... a plaintiff who is not the real party in interest must show, first, that he sued in his own name based on an understandable mistake and, second, that he did not have a reasonable time to correct the pleading deficiency.” Wieburg v. GTE Sw., Inc.,
Determining whether the failure to properly plead was an “understandable mistake” requires analysis of the particu-ldr circumstances that led to the failure, as well as the steps taken to correct the mistake. See, e.g., Magallon,
Plaintiffs have provided no real argument concerning how “understandable” their mistake was. Nonetheless, the record is clear in several respects. First, there was little delay between the Individual Plaintiffs’ being alerted to their error and their remedying it. Plaintiffs’ amended complaint [Dkt. No. 6] was filed on September 16, 2013. Whittington’s answer, which raises the issue of standing, was filed on October 16, 2013. Answer [Dkt. No. 19], ¶¶ 5-6, 42-43, 61. Uncon-troverted deposition testimony shows that while the assignments bear earlier dates, they were actually executed in November of 2013. See Duncan Dep., 67; Gist Dep., 29-31. Plaintiffs’ first motion for partial summary judgment was filed December 6, 2013, and it discusses and attaches the assignment documents. See PI. M.S.J. on Affirm. Defs., 2-5, Exs. 56-57. In other words, the mistake was corrected quickly, thus preventing any prejudice to Whitting-ton or any delay to this proceeding. Whit-tington has not argued that he was in any way prejudiced or strategically disadvantaged because of the timing of the assignments.
In addition to being promptly remedied, the mistake is of a relatively technical
Whittington points to a statement of experience that Plaintiff Gary Duncan put in the record, and he argues that Plaintiffs’ mistake should not be considered understandable because the statement shows that “Duncan is an extremely experienced and talented commercial trial lawyer.” Id. In fact, however, as far as the statement of experience reveals, Duncan has neither a license to practice in Texas nor experience with Texas law, nor does his experience appear directly pertinent to assessing the questions of partnership law relevant here. See generally Dkt. No. 49, Ex. A, 10-16 (reflecting a career focused on plaintiffs law since 1979). The mistake made by Plaintiffs in this case resembles that made in Asset Funding Group, in which the plaintiff failed to include some affiliate, en-. tities to whom particular claims belonged, and in which the plaintiff moved promptly to correct the mistake and was permitted to do so by the court.
As limited partners aggrieved by the general partner of the partnership, Plaintiffs’ mistake in seeking to sue in their own names was understandable. There is no hint of strategic manipulation in the record, nor is there a reason to think the assignments could not have been executed earlier if the need for them had been recognized. Nor does the alteration appear to have caused any prejudice or vexation to the defendants. Whittington has failed to provide any reason to doubt any of this. Thus, the Court holds that the Individual Plaintiffs are now thé real parties in interest with respect to the Meadows at Buda transaction and Meadows at Kyle I transaction.
iv. Relation Back, “Dead” Causes of Action, and Bankruptcy Rule 4007
The remaining issue is whether the lawsuit (as ratified) “relates back” to the time the complaint was originally filed. There is no merit in Whittington’s argument that because the Individual Plaintiffs were not the real parties in interest at the inception of this lawsuit, they cannot be made so after the fact, or that that their alteration in status cannot “relate back” to the date of the original complaint. Courts commonly allow “relation back” of Rule 17(a) corrections of the real party in interest, including in situations where plaintiffs’ claims would otherwise be time-barred. See, e.g., Advanced Magnetics, Inc. v. Bayfront Partners, Inc.,
Given this clear law, Whittington’s only hope is to argue that there is something particular to non-dischargeability actions that would alter this usual practice. But contrary to his arguments, Bankruptcy Rule 4007 requires no special treatment in this respect. Missing the deadline for an objection to discharge is not a “jurisdictional” defect and may be waived if not timely made. Kontrick v. Ryan,
The nondischargeability context does not differ from the other situations in which Rule 17 has been applied to permit a claim to proceed when it would otherwise be barred by the statute ofhimitations. It is true that the filing deadline of Bankruptcy Rule 4007 is interpreted strictly. “The strict time limitation placed upon creditors who wish to object to a debt’s dischargeability reflects the Bankruptcy Code’s goal of providing debtors with a fresh start.” State Bank & Trust, N.A. v. Dunlap (In re Dunlap),
The Court does not believe that Federal Rule 17 conflicts with Bankruptcy Rule 4007, be it however so strict. The rules are compatible, and both should be given force. What was in doubt here was the real-party-in-interest requirement of Federal Rule 17, not the timeliness requirement of Bankruptcy Rule 4007. As the Fifth Circuit has explained, a purpose of the strict time limits of Bankruptcy Rules 4004 and 4007 is “to promote the expeditious and efficient administration of bankruptcy cases by assuring participants in bankruptcy proceedings ‘that, within the set period of 60 days, they can know which debts, are subject to an exception to discharge.’ ” Grossie v. Sam (In re Sam),
Numerous cases, addressing the issue in various circumstances, support the Court’s holding as to the intersection of Federal Rule 17 and Bankruptcy Rule 4007. These cases have allowed relation back after the correction of a “real party in interest” defect, including where the Bankruptcy Rule 4004 or 4007 deadlines would have been missed but for the relation back, where there is no prejudice to the defendant, and where Rule 17’s requirements are met. One leading case is Meyer, out of the Seventh Circuit.
There are numerous other, similar cases. See, e.g., Capobianco v. Trew (In re Capobianco),
For these reasons, the Court concludes that Plaintiffs meet the requirements of both constitutional and prudential standing, and that they may continue as Plaintiffs in this cause of action as if they were the real parties in interest as of the date the complaint was originally filed.
2. Statute of Limitations
Under Texas law, claims for breach of fiduciary duty must be brought within four years of the alleged breach. Tex. Civ. PRAC. & Rem.Code § 16.004(a)(5); Suter v. Univ. of Tex. at San Antonio,
Plaintiffs respond that the “discovery rule” defers accrual of their claim against Whittington. The Fifth Circuit has noted that “[u]nder Texas law, the discovery rule is an exception to the general rule that a cause of action accrues when a wrongful act causes some legal injury.” TIG Ins. Co. v. Aon Re, Inc.,
A close companion to the discovery rule — and sometimes conflated with it — is the principle that estops a defendant from relying on a statute of limitations defense in cases “in which the wrongdoing is fraudulently concealed.” S.V.,
The doctrine of fraudulent concealment provides that where a defendant is under a duty to make disclosure but fraudulently conceals the existence of a cause of action from the party to whom itbelongs, the defendant is estopped from relying on the defense of limitations until the party learns of the right of action or should have learned thereof through the exercise of reasonable diligence.
Moreno v. Sterling Drug, Inc., 787 S.W.2d 348, 352 n. 1 (Tex.1990).
In its thorough discussion of these linked principles in the case of S.V. v. R.V., the Texas Supreme Court, after surveying numerous cases, noted that Texas courts “have sometimes used the phrase [‘discovery rule’] to refer generally to all instances in which accrual is deferred, including fraud and fraudulent concealment,” and that “[a]t other times we have distinguished between fraudulent concealment and the discovery rule.”
a. Fraudulent Concealment
Plaintiffs cited the “discovery rule” as their response to the statute of limitations defense, but they may also be entitled to deferral of the limitations on grounds of fraudulent concealment, which courts have characterized as “[t]he equitable estoppel effect of fraudulent concealment.” A.W. v. Humble Indep. Sch. Dist.,
While the preceding sections demonstrate that elements (1), (2), (3), and (5) are easily met, element (4) requires further analysis. Even if a plaintiff is “without knowledge,” this element has been held to require “reasonable diligence” in investigation. “In an arm’s-length transaction the defrauded party must exercise ordinary care for the protection of his own interests and is charged with knowledge of all facts which would have been discovered by a reasonably prudent person similarly situated.” Courseview, Inc. v. Phillips Petroleum Co.,
[A fiduciary relationship] may excuse the defrauded party from taking action that would be required in an arm’s-length transaction or from making as prompt or searching investigation as might otherwise be expected. In some situations there is no legal duty to use means available for discovering the fraud.... We are not prepared to say, however, that one in a relationship of trust and confidence is always justified as a matter of law in neglecting every precaution until something occurs to arouse his suspicions.
Courseview,
This case presents precisely the sort of intentional concealment of ill-gotten profits (in the face of a duty to disclose such profits) that allows a plaintiff to benefit from equitable estoppel. See Borderlon v. Peck,
Against this view, Whittington argues that Plaintiffs could and should have investigated more than they did. Whittington points to the fact that Gunn revealed the side-profits scheme to Plaintiffs in 2010, and he reasons that “[i]f [Plaintiff Gary Duncan] ... had just asked William Gunn, [Whittington’s] ... partner, in 2006 he would have gotten the information he needed.” Def. Resp. to PI. M.S.J. on Affirm. Defs., ¶ 32. Similarly, he suggests that Plaintiffs “could have followed up with the title companies” to discover the true destination of their investment funds, back at the time of the transactions. Id. But the uncontroverted evidence is that Gunn and Whittington had consciously chosen not to reveal their profiteering scheme, and that- Gunn revealed it only after he himself felt betrayed or ill-treated by Whittington, years after the transactions. PI. M.S.J. on Affirm. Def., Duncan Aff., ¶ 11, Gunn Aff., ¶¶ 7-8. It is true that now, long after the fact, Gunn’s retroactive deposition testimony is that, if he had been called in 2006, he “probably would have had to tell” Duncan about the scheme. Gunn Dep., 43. But this half-hearted statement is preceded by several pages that cast considerable doubt on it: There
• But even crediting Whittington’s assertion that Plaintiffs could have discovered the truth simply by asking Gunn, the Court cannot find that that Plaintiffs were obliged to engage in such an investigation. AlS the evidence shows, great, care was taken to make sure that a parallel set of documents was produced to hide the side profits. The only conceivable “red flag” was the partially redacted Meadows at Kyle II/Perron Property contract that was sent to Plaintiff Gary Duncan. Far from “neglecting every precaution,” Duncan followed up on this surprising document by specifically asking Whittington if he was receiving a side profit on the deal. Whit-tington answered that he was not. Whit-tington’s suggestion that Duncan should have distrusted his fiduciary and sought more details from Gunn or from the relevant title companies is difficult to sustain — even construing the,facts fully in Whittington’s favor. “[Whittington] cannot lie to his potential investors ... and then, when the lies are discovered, cry foul because they should have known better than to trust him.” Ward Family Found. v. Arnette (In re Arnette),
In the cases where courts have denied equitable estoppel despite fraud by a fiduciary, the parties have been informed of at least some particulars indicating suspicious or fraudulent behavior. See Etan Indus., Inc. v. Lehmann,
The case of Thomas v. Barton Lodge II, Ltd. provides a useful contrast to this case.
Typically, application of the fraudulent concealment doctrine requires fact-specific inquiries into reasonableness. But on this record, even with all facts construed in Whittington’s favor, no reasonable fact-finder could hold that Plaintiffs “knew or should have known of [their] ... wrongful injury.” USPPS, Ltd. v. Avery Dennison Corp.,
b. Discovery Rule
Even if the application of the statute of limitations were not equitably estopped by
“The determination of whether the discovery rule applies to a particular cause of action is a question of law.” TIG,
Even if the discovery rule applies to a cause of action “categorically,” the delayed accrual of the claim can present fact issues&emdash;including what would have been a reasonably diligent investigation under the circumstances of a particular case. See, e.g., Willis,
In order to determine the discovery rule’s applicability, Texas law requires “that the nature of the injury must be inherently undiscoverable and that the injury itself must be objectively verifiable.” Id. (quoting HECI,
There is no dispute over the second requirement, that the injury be objectively verifiable. The cases where courts have found this element lacking are, for instance, cases where subjective impressions and extensive expert testimony are required to establish an injury. See generally S.V.,
The other element of the discovery rule test requires that the injury be
Looking to the facts of this case, Plaintiffs assert that they were unaware of any injuries until December 20, 2010, and Whittington does not contest that. Whit-tington claims that they should have become aware of the wrongdoing earlier. But .Whittington’s suggestion that Plaintiffs could have asked Gunn concerning side profits or pressed an investigation with the title company does little to refute the presumption of inherent undiscovera-bility in this fiduciary context.
The Court disagrees with Whittington’s idea that Plaintiffs had to look behind the answer of their fiduciary to ask the same questions of Gunn or of the title company, who did not owe them the same duties that Whittington did. Again, the relevant principle seems to be that “[Whittington] cannot lie to his potential investors ... and then, when the lies are discovered, cry foul because they should have known better
The cases cited by Whittington are not ’ analogous. For instance, in the Fifth Circuit case of Suter v. University of Texas at San Antonio, a professor alleged that her university employer mishandled funds that were meant to support her in establishing a laboratory when she began employment with the university.
Even construing the contested facts in Whittington’s favor, the discovery rule applies to this situation. It delayed the accrual of Plaintiffs’ cause of action until they actually learned of their injury in 2010. Accordingly, Whittington’s statute of limitations defense is denied.
S. Fraud/Unclean Hands/Laches
Whittington has alleged that certain equitable doctrines, namely fraud, unclean hands, and laches, should bar Plaintiffs’ recovery. On these affirmative defenses, Whittington bears the burden of proof. Elmo,
The only factual basis on which Whit-tington suggests these doctrines should apply is Duncan’s denying Whittington a promised commission for the September 2012 closing of a resale of the Meadows at Kyle I property. See Def. Resp. to PI. M.S.J. on Affirm. Defs., ¶¶ 35-38; Duncan Dep., 57-58 (Duncan acknowledging that “[a]t some point I made a decision” not to pay Whittington’s commission on the September 2012 deal). The parties settled this dispute, and the settlement provided in part that the commission that was owed to Whittington “was forfeited by you” (i.e.,
“The clean hands doctrine requires that one who seeks equity, does equity. Equitable relief is not warranted when the plaintiff has engaged in unconscionable, unjust, or inequitable conduct with regard to the issue in dispute.” Dunnagan v. Watson,
“The defense of laches requires proof .of (1) a party’s unreasonable delay in asserting a legal or equitable right, and (2) a good-faith detrimental change of position by another because of the delay.” Fox v. O’Leary, No. 03-11-00270-CV,
As far as fraud, Texas law requires the following elements to make out a fraud claim:
(1) a material representation was made; (2) it was false when made; (3) the speaker either knew it was false, or made it without knowledge of its truth; (4) the speaker made it with the intent that it should be acted upon; (5) the party acted in reliance; and (6) the party was injured as a result.
Fluorine On Call, Ltd. v. Fluorogas Ltd.,
Furthermore, even if Whittington could make out an independent fraud claim based on the September 2012 transaction, he does not explain how it could serve as an affirmative defense to the claims at hand, which are based on distinct activities from years before. There is simply no nexus between the alleged fraud and the dispute at hand. Whittington’s fraud defense must fail.
Plaintiffs have pointed to a lack of a “fact issue in the record” concerning any of these issues. Thus the burden shifted to Whittington. He has failed to show “significant probative evidence” of a “triable issue of fact.” Century Savings & Loan,
C. Damages
In relevant part, § 523(a)(2)(A) covers “any debt ... for money ... to the extent obtained by ... a false representation, or actual fraud.... ” This section has been held to cover “all liability arising from fraud,” including for instance restitution, exemplary damages, and attorneys’ fees. Cohen v. de la Cruz,
Here, because there is no pre-existing judgment on Plaintiffs’ claims, the Court must determine the amount of Whitting-ton’s liability arising from fraud and breach of fiduciary duty by looking to the damages that Whittington owes Plaintiffs under the relevant Texas state law. See Morrison v. W. Builders of Amarillo, Inc. (In re Morrison),
Whittington argues that even if the Court finds him liable for fraud or a breach of fiduciary duty, damages are not due to Plaintiffs because the Investor Partnerships and limited partners did not suffer any losses. Indeed, he argues, they got a good deal, paying a fair price under the circumstances then existing, no matter whether some of the money ended up in his pocket instead of with the actual sellers of the land.
But Texas precedent teaches that having breached his fiduciary duties, committed fraud, and received secret profits as a result, Whittington may not escape Plaintiffs’ claims by appealing to some hypothetical, alternate world in which his fees might have been deemed acceptable or reasonable, if they had been disclosed. Plaintiffs are. entitled to recover at least what Whittington himself gained through his fraud.
A fiduciary cannot say to the one to whom he bears such relationship: You have sustained no loss by my misconduct in receiving a commission from a party opposite to you, and therefore you are without remedy.... It is the law that in such instances if the fiduciary “takes any gift, gratuity, or benefit in violation of his duty, or acquires any interest adverse to his principal, without a full disclosure, it is a betrayal of his trust and a breach of confidence, and he must account to his principal for all he has received.”
Kinzbach Tool Co. v. Corbett-Wallace Corp.,
[D]isgorgement is not precisely restitution. Disgorgement wrests ill-gotten gains from the hands of a wrongdoer. It is an equitable remedy meant to prevent the wrongdoer from enriching himself by his wrongs. Disgorgement does not aim to compensate the victims of the wrongful acts, as restitution does. Thus, a disgorgement order might be for an amount more or less than that required to make the victims whole.
S.E.C. v. Huffman,
But Plaintiffs request more than this easily supported damages award, claiming they are entitled to the entire difference between what they paid for the land and what the sellers of the land received — approximately $1.7 million. In other words, they seek to put Whittington on the hook not only for the profits he made from the transactions (including through G & W and Madras, Inc.), but also the profits taken — with his knowledge — by his associates (including through Hays Land Partners, Ltd.; C.L.A.F. Co., LLC; and John Trube).
Some cases support an extension of liability beyond the breacher of fiduciary duties, to his associates who knowingly participate in the breach. The Kinzbach court noted that “[i]t is settled as the law of this State that where a third party knowingly participates in the breach of duty of a fiduciary, such third party becomes a joint tortfeasor with the fiduciary and is liable as such.”
There is some evidence in the record suggestive of knowledge of the scheme on the part of Trabe, Gannaway, and the rest. But at this point, the evidence does not establish their knowing participation in a breach of fiduciary duty. See Cox Tex. Newspapers, L.P. v. Wootten,
Case law provides some support for extending a fiduciary’s liability beyond what the fiduciary himself directly took. For instance, the bankruptcy court in Jones awarded restitution in the form of a non-dischargeable § 523 debt, based on partnership funds misappropriated by the debtor and his associates (who used the partnership funds as the debtor’s “own personal piggy bank”), after a close review of business records and with the aid of expert testimony. Mullen v. Jones (In re Jones),
While the Court may eventually award further damages, the record is inadequate to support a further award at this time. The Court will consider additional testimony and evidence concerning whether Whit-tington should be held accountable for the amounts that went to the third parties, as misappropriated partnership funds. Even the funds that did not go to Whittington personally may have benefitted his commercial associates at the expense of the partners and partnerships to whom he owed duties, including the duties to advise them of all material information concerning the transactions.
At a hearing on this issue, the Court’s considerations will include each transaction as a whole, each player’s role in it, and the value (if any) provided by the recipients of payments. If it becomes apparent that the funds that went to Whittington’s associates
Plaintiffs have also requested an award of attorneys’ fees, interest, and exemplary damages. Under Texas case law, “exemplary damages would be proper where ‘a fiduciary has engaged in self-dealing,’” and where the plaintiff can prove by clear and convincing evidence that the debt arose by actual fraud, malice, or gross negligence. Jones,
Plaintiffs may well be entitled to these additional grounds for relief, but making all the findings necessary to support awards of exemplary damages, attorneys’, fees, and interest will require more evidence than is in the record at this point. The Court will set a hearing to consider all these remaining matters so that this adversary proceeding may be brought to an end.
V. CONCLUSION
For the reasons stated above, the Court will grant summary judgment to Plaintiffs on all matters but their request for damages, which is granted only in part, as to the amounts taken by Whittington and the entities in which had a direct stake. Whit-tington’s motion will be denied in its entirety.
The amount of Whittington’s non-dis-chargeable debt, which may include awards of restitution/disgorgement, interest, attorneys’ fees, and punitive damages, will be determined a future hearing.
An order will issue to this effect.
Notes
. While all materials in the record have been carefully reviewed, the Court has relied in particular upon the. following affidavits and depositions (some of which are attached, unfortunately, in piecemeal fashion to numerous different briefs): Oral Deposition of Bradley D. Whittington, Dec. 9, 2013 (“Whittington Dep.”), attached in various parts to Pl. M.S.J. on Liab., Pl. Resp. to Def. M.S.J., and Def. Resp. to Pl. M.S.J. on Liab. (as Ex. E); Oral Deposition of William T. Gunn, Jan. 10, 2014 (“Gunn Dep.”), attached in various parts to Pl. M.S.J. on Liab., Pl. Resp. to Def. M.S.J., Def. M.S.J. (as Ex. A), Def. Resp. to Pl. M.S.J. on Liab. (as Ex. A), and Def. Resp. to PL M.S.J. on Affirm. Defs. (as Ex. A); Oral Deposition of Harry John Trube, Feb. 20, 2014 (“Trube Dep.”), attached in various parts to Pl. M.S.J. on Liab., Def. Resp. to Pl. M.S.J. on Liab. (as Ex. G), and Def. M.S.J. (as Ex. G); Deposition of George Gary Duncan, Jan. 27, 2014 (“Duncan Dep.’’), attached in various parts to Pl. M.S.J. on Liab., Pl. Resp. to Def. M.S.J., Def. M.S.J. (as Ex. C), Pl. Reply to Def. Resp. to Pl. M.S.J. on Affirm. Defs.; and Def. Resp. to Pl. M.S.J. on Affirm. Defs. (as Ex. C); Oral Deposition of Grant Gist, Jan. 10, 2014 (“Gist Dep.”), attached in various parts to Pl. Resp. to Def. M.S.J., Def. M.S.J. (as Ex. B), Def. Resp. to Pl. M.S.J. on Liab. (as Ex. D), Def. Reply to Pl. Resp. to Def. M.S.J. (as Ex. C), and Def. Resp. to PL M.S.J. on Affirm. Defs. (as Ex. B); Affidavit of George Gary Duncan in Support of Pl. M.S.J. on Affirm. Defs. ("Duncan Aff.”), attached to PL M.S.J. on Affirm Defs. and to Pl. Resp. to Def. M.S.J.; Affidavit of William T. Gunn (“Gunn Aff.”), attached to Pl. M.S.J. on Affirm Defs. and to PL Resp. to Def. M.S.J.
. The executed, constitutive documents of the Investor Partnership are attached, among other places, to the Pl. Resp. to Def. Ex. 10 (Meadows at Buda, effective June 11, 2004), Ex. 28 (Meadows at Kyle I, effective Dec. 15, 2006), Ex. 46 (Meadows at Kyle II, effective Aug. 8, 2006).
. Whittington was manager of La Luz II, LLC, which served as general partner of Meadows at Buda; he was manager of Meadows at Kyle Development Co., LLC, which served as general partner of Meadows at Kyle I; and he was manager of Meadows at Kyle II Development Co., LLC, the general partner of Meadows at Kyle II. See PI. Resp. to Def. M.S J., Ex. 10 (Whittington signing as manager of La Luz II, LLC, as general partner of Meadows at Buda), Ex. 28 (Whittington signing as manager of Meadows at Kyle Development Co., LLC, as general partner of Meadows at Kyle I), Ex. 46 (Whittington signing as manager of Meadows at Kyle Development Co. II, LLC, as general partner of Meadows at Kyle II).
. Meadows at Buda closed on the Finley Property on June 11, 2004. See Pl. M.S.J. on Liab., Exs. 14, 14A, 15. Meadows at Buda closed on the Hale Property on June 15, 2004. See Pl. M.S.J. on Liab., Exs. 20, 21, 65. Meadows at Kyle I closed on the Whitten Property on December 16, 2005. See Pl. M.S.J. on Liab., Exs. 30, 31, 33. Meadows at Kyle II closed on the Perron Property on August 8, 2006. See Pl. M.S.J. on Liab., Exs. 47, 48.
. At that time, Gunn disclosed the scheme as to Meadows at Kyle I and II. See Gunn Aff., ¶¶ 8, 12; Duncan Aff., ¶¶ 11-12. Duncan apparently learned of the Meadows at Buda later. Duncan Aff., ¶ 14. In November of 2013, Plaintiffs entered a settlement and indemnification agreement with Gunn, with Gunn agreeing to make a payment of $160,000 to them. See Def. Resp. to PI. M.S.J. on Liab., Ex. H.
. Although the analysis that follows demonstrates that the elements of § 523(a)(2)(A) and § 523(a)(4) are satisfied as to éach Investor Partnership and each set of limited partners, in fact, as discussed below, the underlying causes of action here properly belong to the Investor Partnerships. See Section TV.B.l.
. The elements required to make out fraud under Texas law essentially track the § 523(a)(2)(A) elements:
Texas law requires the following elements to make out a fraud claim: (1) a material representation was made; (2) it was false when made; (3) the speaker either knew it was false, or made it without knowledge of its truth; (4) the speaker made it with the intent that it should be acted upon; (5) the party acted in reliance; and (6) the party was injured as a result.
Fluorine On Call, Ltd. v. Fluorogas Ltd.,
[FJraud by nondisclosure occurs when: (1) a party conceals or fails to disclose a material fact within that party's knowledge, (2) the party had a duty to disclose the fact, (3) the party knows that the other party is ignorant of the fact and does not have an equal opportunity to discover the truth, (4) the party intends to induce the other party to take some action by concealing or failing to disclose the fact, (5) the other party justifiably relied on the nondisclosure, and (6) the other party suffers injury as a- result of acting without knowledge of the undisclosed fact.
Drexel Highlander Ltd. P’ship v. Edelman (In re Edelman), No. 13-3078,
Although formally speaking, Whittington's debt arises under Texas law concerning fraud and breach of fiduciary duty, and then is held nondischargeable under federal bankruptcy law, as a practical matter, insofar as the bankruptcy elements are met, these Texas law tests have been met as well. The Court will focus (as the parties did) on the federal non-dischargeability requirements, providing additional comments on the state liability standards as needed.
. Indeed, the mere fact that a fiduciary stood on both sides of a transaction with disclosing her conflicted'position is often held by itself to raise a presumption that the transaction was unfair. See Jackson Law Office, P.C. v. Chappell,
. Under Texas law, "[t]he elements of a breach of fiduciary duty claim are: (1) a fiduciary relationship between the plaintiff and defendant; (2) the defendant must have breached his fiduciary duty to the plaintiff; and (3) the defendant’s breach must result in injury to the plaintiff or benefit to the defendant.” Navigant Consulting, Inc. v. Wilkinson,
. While the case law discussed above does not directly speak to this particular variant of "nested” partnerships, it seems likely that given Whittington’s apparent control of the general partner of G & W, this clause in the partnership contracts bound him as well.
.Even the Hale Property might be included in the scope of the fiduciary duties imposed by the partnership agreements if the subsequent assignments and agreements concerning that property meet the definition of "entering] into” "Development” — which they might well do. But the Court has not heard substantial argument on that point and declines to hold one way or the other on it now.
. The Texas law test for fraud by misrepresentation requires an "intent that [the false representation] should be acted upon,” and the test for fraud by nondisclosure requires that that the defendant “intends to induce the other party to take some action by concealing or failing to disclose the [hidden] fact.” See supra note 7. Although these intent elements differ slightly from that analyzed above, they are plainly met by Whittington's conduct. His clear intention in concealing and lying about the secret profits were to make sure the deals went through as planned — which they did. This intention meets the required Texas elements as well as the federal nondischarge-ability requirements. In addition, there is a presumption of intent under Texas law when •there is self-dealing by a fiduciary. "In [International Bankers Life Insurance Co. v.] Holloway, [
. Some courts, noting that it could be difficult to "prove a negative” — that is, to prove reliance on facts that were not disclosed— have focused their inquiry on whether the concealed information was material, that is, whether it would have affected decision-making had it been disclosed, a standard plainly met here. See Titan Grp. v. Faggen,
. The Individual Plaintiffs have not claimed to be suing derivatively or to have suffered the sort of direct injuries that can occasionally permit suits by partners instead of the partnership. See id. at 249-52 (discussing cases and doctrine).
. While this assignment agreement is dated Dec. 31, 2012, the actual execution did not take place until the same time as the Meadows at Buda assignment, many months later. See Duncan Dep., 67 (stating that Meadows at Kyle I assignment was "[pjrobably'' not executed until "about the same time as [Meadows at] Buda,” that is, "about November,” 2013). The analysis in this Memorandum Opinion is premised on this later date.
. Indeed, Whittington himself may have made a similar "jump” past the partnerships and to the limited partners: Whittington's bankruptcy schedules list several of the Individual Plaintiffs as unsecured creditors with disputed claims apparently emerging from the Investor Partnerships. See Case No. 13-11036, Dkt. No. 1, Sch. F.
. For clarity, the statute of limitations for breach of fiduciary under Texas law (as interpreted by the Fifth Circuit) was, at the time of Thomas, two years. See id. at 645.- Texas law was subsequently amended, and four years is now the limitations period for breach of fiduciary duty claims. Tex. Civ. Prác. & Rem.Code § 16.004(a)(5); Suter,
. Even the public availability of documents indicating misconduct does not refute "inherent undiscoverability,” when a fiduciary relationship is involved and is relied upon. See Douglass,
. Whittington also argues that restitution or disgorgement is inappropriate because it was not properly pled. Whittington cites no law supporting his position, and the Court does not find it meritorious. While Whittington is correct that neither "restitution” nor "disgorgement” appears in the complaint, Plaintiffs state they seek "actual and compensatory damages” as well as "exemplary damages,” and the sums they seek for actual and compensatory damages equate to the total of the "secret cuts.” See, e.g., First Am. Compl., ¶¶ 39, 58, 79. Thus, from the start Plaintiffs have sought disgorgement of the same sum that they still seek.. They did so by means of the requisite "short and plain statement of the claim” for damages upon which they are proceeding. Bell Atl. Corp. v. Twombly,