Fraudulent Transfers Made With Actual Intent to Hinder, Delay or Defraud Creditors Permit Piercing the Corporate Veil for Contract Debts

Texas law greatly restricts the use of alter ego or fraud to pierce the corporate veil and hold shareholders liable for a corporation’s contract debts.  A shareholder may only be held personally liable

if the obligee demonstrates that the holder, beneficial owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate.

Tex. Bus. Orgs. Code § 21.223(b).

In the long running saga of Husky Int’l Elecs., Inc. v. Ritz (In re Ritz), No. 14-20526 (5th Cir. Aug. 10, 2016), Chrysalis Manufacturing sold products to Husky International without any misrepresentations.  Daniel Ritz, who had financial control of Chrysalis, then drained Chrysalis of assets by transferring Chrysalis funds to other entities Ritz controlled.  Husky sued Ritz seeking to hold him personally liable under Section 21.223(b).  Ritz then filed for Chapter 7 bankruptcy.  Husky objected to the discharge of Ritz’s debt under 11 U.S.C. § 523(a)(2)(A) (excepting from discharge “any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud.”).

On appeal the Fifth Circuit faced two issues, first whether fraudulent transfers in violation of the Texas Uniform Fraudulent Transfer Act (TUFTA) would support an alter ego claim for personal liability under Texas Business Organizations Code Section 21.223(b).  The second was whether a debt incurred without a misrepresentation would support an objection to discharge of the debt under U.S Code Section 523(a)(2)(A).

In its first opinion the circuit court did not reach the alter ego issue but held that the absence of a misrepresentation precluded an objection to discharge.  The U.S. Supreme Court reversed, holding that fraudulent transfers could support an objection to discharge.  Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016).  On remand, despite the absence of state court holdings on the issue, the Fifth Circuit held that fraudulent transfers committed with actual fraud can support an alter ego claim for personal liability:

We hold today, however, that establishing that a transfer is fraudulent under the actual fraud prong of TUFTA is sufficient to satisfy the actual fraud requirement of veil-piercing because a transfer that is made “with the actual intent to hinder, delay, or defraud any creditor,” Tex. Bus. & Com. Code Ann. § 24.005(a)(1), necessarily “involves ‘dishonesty of purpose or intent to deceive.”

“Although no Texas court has previously reached the same holding, looking to the sources this court considers when making an Erie guess, we are convinced that the Supreme Court of Texas would arrive at the same conclusion as we do here.”

Husky Int’l Elecs., Inc. v. Ritz (In re Ritz), No. 14-20526 (5th Cir. Aug. 10, 2016).

The Impact of Medical Lien Funding on Past Medical Expenses “Actually Paid or Incurred”

Texas Civil Practice and Remedies Code Section 41.0105 limits recoveries of medical care expenses by an injured claimant to those expenses actually paid or incurred by or on behalf of the claimant.  A number of appellate decisions have addressed what this paid-or-incurred language means in different contexts.  The opinion in Katy Springs Manufacturing, Inc. v. Favalora, 476 S.W.3d 579 (Tex. App.—Houston [14th Dist.] 2015, pet. denied, motion for rehearing pending), is another such case.

The plaintiff, Favalora, was injured on the job, and, uninsured, he incurred over $200,000 in medical expenses.  Favalora then entered into contracts with several of his health care providers, assigning his interest in and granting a security interest in any proceeds that might be recovered in his pending personal injury suit against his employer, Katy Springs.  Favalora’s health care providers in turn sold those accounts receivable at a discount and the accompanying assignment and security interest in the lawsuit proceeds to Medstar Funding, a “direct funder of health care receivables.”

Katy Springs argued that only the discounted sale price, paid by MedStar to the health care providers, was admissible as evidence of Favalora’s past medical expenses “actually paid or incurred,” pursuant to section 41.0105 of the Texas Civil Practice and Remedies Code and the Texas Supreme Court’s decision in Haygood v. De Escabado, 356 S.W.3d 390 (Tex. 2011).  Favalora argued that he was still on the hook for the full amount of the medical bills, which could and would be collected by MedStar.

The Houston Fourteenth Court of Appeals agreed with Favalora, affirming the trial court’s ruling.

Katy Springs filed a petition for review with the Texas Supreme Court raising a number of issues including issues challenging the lower courts’ rulings concerning evidence of plaintiff’s medical expenses and the impact of medical lien financing.  The petition for review was denied.  Katy Springs has now filed a motion for rehearing.  The Supreme Court requested a response from Favalora, which has been filed, and Katy Springs has filed a reply brief.  An amicus curiae brief has been submitted by the Texas Association of Defense Counsel as well.

Katy Springs Manufacturing, Inc. v. Favalora, 476 S.W.3d 579 (Tex. App.—Houston [14th Dist.] 2015, pet. dism’d, motion for rehearing pending [15-0923]).



The Texas Supreme Court Adopts a “Factual Plausibility” Pleading Standard

Did the Texas Supreme Court substitute fair notice pleading for well-pleaded complaints?  Texas Rule of Civil Procedure 91a was adopted in 2013, and provides a “no reasonable person could believe” standard.  Until recently, whether “no reasonable person could believe” meant “plausibility” remained an unanswered question.  In City of Dallas v. Sanchez, No. 15-0094 (July 1, 2016), the Court implicitly construed Rule 91a to impose a “factual-plausibility standard.”

Sanchez marks the first time the Court posited a standard by which to assess Rule 91a’s “no reasonable person could believe” or “no basis in fact” standard. Interestingly, the Court’s per curiam opinion does not engage in an in-depth analysis as to how the Court arrived at a “factual-plausibility standard,” but simply cites to a Houston Fourteenth Court of Appeals case, which analogized Rule 91a to Federal Rule 12(b)(6) and applied the federal well-pleaded complaint standard.  See Wooley v. Schaffer, 447 S.W.3d 71, 75-76 (Tex. App.—Houston [14th Dist.] 2014, pet. denied).

In Sanchez, 9-1-1 dispatchers in Dallas, Texas received two calls within ten-minutes of one another, from two separate callers, with separate phone numbers and separate residences, but both at the same apartment complex and both requesting assistance for a drug-overdose victim.  The second call concerned Matthew Sanchez.  After the dispatcher received the victim’s location and emergency, the call was disconnected and never reestablished.  Emergency responders arrived at the first caller’s residence and provided treatment to the first drug-overdose victim.  The responders subsequently left the apartment complex, concluding that the second call was redundant.  Sanchez died.

On Petition for Review, following partial dismissal by the trial court under Rule 91a, the Texas Supreme Court centered its attention on a single issue: “whether the phone’s condition was a proximate cause of Sanchez’s death.”  Asked another way, is it factually plausible that a 9-1-1 phone system malfunction actually caused Sanchez’s death?  If “yes,” the Texas Tort Claims Act waives the City’s governmental immunity.  If “no,” then the plaintiffs’ pleading has no basis in fact and dismissal is mandatory under Rule 91a.  The Court answered “no”:

“The malfunction was merely one of a series of factors that contributed to Sanchez not receiving timely medical assistance. . . . Sanchez’s death was caused  by drugs, the passage of time, and misinterpretation of information. . . . Accordingly, the pleadings do not establish a defect in the 9-1-1 telephone system was a proximate cause of Sanchez’s death as required to establish a waiver of governmental immunity under the Tort Claims Act.”

Thus, the Court appears to treat the “factual-plausibility standard” as co-extensive with the federal plausibility standard.  In light of Sanchez, practitioners need seriously to consider whether notice-pleading will keep their case in court.  The bare facts in the Sanchez petition left too many unanswered factual questions, not the least of which is whether the City had a long-standing problem with its emergency responder line that was left unremedied, with knowledge that some callers/victims would be disconnected from emergency dispatchers and, thereby, harmed. Notice-pleading ordinarily allows for bare facts and conclusory statements. But the Court in Sanchez required something more.

  City of Dallas v. Sanchez, No. 15-0094 (Tex. July 1, 2016)

Personal jurisdiction found over corporate parent without veil-piercing

Ordinarily, when evaluating the contacts of distinct legal entities, the contacts of parent corporations and subsidiaries are evaluated separately for jurisdictional purposes, unless the corporate veil is pierced.  On first glance, that doesn’t appear to be what happened in Cornerstone Healthcare Group Holding, Inc. v. Nautic Management VI, L.P.  The key to understanding this opinion lies in the nature of the causes of action, and the fact that those causes of action arose before–or concurrent with–the creation of the subsidiary entities that were part of the overall transaction in question.

According to the allegations, several executives of Cornerstone identified Reliant Hospital Partners, LLC as a possible takeover target, and instead of presenting the opportunity to Cornerstone, took the opportunity to Nautic Management VI, a Delaware limited partner, and Nautic Partners, a management advisor that conducts due diligence on potential investments.  Nautic Management ultimately purchased Reliant (Old Reliant) and to facilitate the deal, it set up a chain of wholly-owned subsidiaries beginning with Reliant Holding Company, a Delaware company, which owned Reliant Pledgor, also a Delaware Company, which owned Reliant Opco Holding Corporation, also a Delaware Company. Reliant Pledgor and Reliant Opco owned Reliant Acquisitions, a Delaware company with its principle place of business in Texas.  Reliant Acquisitions purchased Old Reliant.   Following this acquisition, the Cornerstone executives who were involved in the Nautic transaction resigned from Cornerstone and joined Reliant Acquisitions.  Cornerstone brought suit accusing the executives of usurping corporate opportunities, misappropriating confidential information, and breaching fiduciary duties.  Cornerstone alleged that the Nautic entities and employees conspired and tortiously interfered.  Nautic Management and three funds it managed entered special appearances to contest personal jurisdiction.

The trial court granted the funds’ special appearances, but denied Nautic Management’s special appearance.  The court of appeals affirmed as to the funds’ special appearances but reversed as to Nautic Management, holding that Texas lacks jurisdiction.  The Texas Supreme Court granted Cornerstone’s petitions for review and reversed, holding that Texas has jurisdiction over the funds and over Nautic Management.

The supreme court’s opinion acknowledges that Cornerstone was not relying upon any veil-piercing theory to assert jurisdiction.  The opinion also acknowledges that the contacts of a parent and subsidiary  that are distinct entities cannot be attributed to one another.  Even so, the court found jurisdiction because the acquisition of Reliant and the creation of the various entities were all part of a single transaction to which the funds and Nautic Management were parties.  The court held that Cornerstone’s claims arose from the transaction itself which included purposeful contacts with Texas.  The court’s opinion may be found here.




Mandamus standard over dominant jurisdiction is relaxed

Once upon a time a trial court’s decision on a question of dominant jurisdiction was not subject to mandamus relief unless one court was actively interfering with another court’s exercise of jurisdiction.  The Texas Supreme Court has abrogated that standard in favor of the more flexible standard the court adopted in In re Prudential Insurance Company of America.

The opinion in In re J.B. Hunt Transport, Inc. involves a vehicle accident in Waller County, Texas between a tractor-trailer owned by J.B. Hunt and the occupants of an Isuzu Rodeo.  Following the accident, J.B. Hunt filed suit for property damages against the owners and occupants of the Isuzu seeking damages for the property damage to the tractor-trailer.  Before service was effected, the occupants of the Isuzu sued J.B. Hunt and its driver in Dallas County, Texas.   Defendants in both suits filed pleas in abatement.  The Dallas County district court agreed that the Waller County suit was the first filed, but the court denied the plea in abatement after concluding that an unspecified exception to the rule of dominant jurisdiction applied.

The Waller County district court abated the suit because by that time, J.B. Hunt had filed a petition for writ of mandamus to compel the Dallas County district court to abate the suit.  The Dallas Court of Appeals denied mandamus relief.  J.B. Hunt then sought mandamus relief from the Texas Supreme Court.

The Texas Supreme Court holds that the Dallas district court abused its discretion by denying the plea in abatement.  The court first clarified  language from its 1988 opinion in Wyatt v. Shaw Plumbing Co.  to specify what it meant by the requirement of an inherent interrelation of subject-matter between the two pending suits.  The court then turned its attention to two exceptions to the rule of dominant jurisdiction.

The court held that the inequitable conduct exception was not applicable.  The court held that evidence showing (1) that J.B. Hunt sent claims managers to the hospital to express condolences; (2) that J.B. Hunt offered to pay hotel room expenses; (3) that J.B. Hunt never mentioned its property damage claim; (4) that J.B. Hunt frequently inquired about the injured parties’ health; and (5) that J.B. Hunt sent an e-mail entitled “Williams v. JB Hunt” implying that J.B. Hunt was the defendant–was not evidence that would support the inequitable conduct exception.  This exception requires proof that the second-filer delayed filing as a result of the conduct and was prejudiced.  There was no evidence of delay or prejudice.

The court also rejected the second exception.  If the first filer files suit merely to obtain priority and without a bona fide intent to prosecute the suit, then there is an exception.  The court held that J.B. Hunt’s acts in asking if the opposing counsel would accept service and in contacting counsel about matters involving the investigation of the cause of the accident are evidence of prosecuting the suit.  The court further pointed out that it is not impermissible to intend to secure a favorable venue.  What is impermissible is when that filing of suit is not followed by a bona fide intent to prosecute the suit.

Thus, the court found that the Dallas County district court abused its discretion by denying J.B. Hunt’s plea in abatement.  The court then proceeded to hold that In re Prudential’s more flexible mandamus standard applied and supported the granting of mandamus relief in this case.  The court’s opinion may be found here.



Court clerks have a duty to file tendered documents

“A clerk has a ‘mandatory, ministerial duty’ to file all documents submitted for filing,” according to a recent opinion issued by the Dallas Court of Appeals.  The court further held that the court, not the clerk, then has the power to decide the propriety of the filing.

In Sanders v. Sanders, No. 05-16-00248-CV, Appellant Pilar Sanders filed an affidavit of indigency with the Collin County District Clerk.  The affidavit contained three separate cause numbers on it.  The District Clerk filed the affidavit only in the first case number.  As a result, the court reporters for the other two cases were unaware of the filing of the affidavit.  The court of appeals later notified those court reporters of the filings, at which point the reporters filed contests to the affidavit.  At the hearing on the contests, the District Clerk testified that there was no timely filing of an affidavit and for that reason, the trial court clerk sustained the contests to the affidavit.

The appellant challenged the trial court’s order on appeal and the court of appeals reversed the order.  Noting that the affidavit was filed when it was put into the hands of the District Clerk, the court held that the District Clerk was required to file the affidavit and that it should have been deemed filed in each of the cases when it was delivered to the clerk.  The court’s opinion may be found here.

Notably, this opinion may be helpful in other circumstances, including supersedeas practice where Appellate Rule 24.1(2) establishes the initial authority to approve a bond with the trial court clerk, with the authority to review the bond resting with the trial court upon motion of any party.  This rule was intended to establish a uniform system for the initial approval of bonds.


Context Matters: personal e-mail addresses of government officials are not protected from disclosure requirements

The Texas Public Information Act is intended to provide the public with a window into the business of government and the official acts of public officials.   There are some limited restrictions on the information that may be obtained by a person requesting information.  The Austin Court of Appeals’ opinion in The Austin Bulldog vs. Leffingwell deals with whether an exception to disclosure requirements for e-mail addresses of a member of the public was applicable to elected city officials to the Austin City Council when those city officials used their personal e-mail addresses for communications.

The Austin Bulldog publication had made a request for certain information from the City of Austin.  The City withheld e-mail communications that were responsive due to the fact that the communications involved personal email addresses, albeit the personal email addresses of government officials.  The City requested an opinion from the Attorney General’s office, which advised the City that the email communications could be withheld because they involved the personal emails of a “member of the public.”  The Austin Bulldog filed suit to challenge the ruling.

The court of appeals noted that the Public Information Act does not define “member of the public,” and the court sought to construe the phrase.  The Court noted that the context matters.  In some contexts, the phrase might include government officials, but here, the court observed that the context puts government officials in a category outside of “members of the public” since the whole point of the Act is to provide a window into the workings of those officials by the “members of the public” who are not a part of the government.  Thus, the court held that the city officials’ personal email addresses are not shielded from disclosure and must be disclosed as public information.  The court’s opinion may be found here.

Injunction Law: Back to the Basics

Temporary restraining orders and temporary injunctions are governed by some fairly specific requirements. Failure to follow those black-and-white requirements can result in the court’s order being declared void.  That’s what happened in Medi-Lynx Monitoring, Inc. v. AMI Monitoring, Inc.  Texas Rule of Civil Procedure 683 requires that an order granting a temporary injunction set the cause for trial on the merits.  The injunctive order at issue in the appeal failed to do so.  The Dallas Court of Appeals noted that Rule 683 is mandatory and “a temporary injunction that is noncompliant is subject to being declared void and dissolved.”  Because there was no dispute that the order failed to set the matter for trial, the court of appeals held that the trial court abused its discretion in granting the injunction, and the injunction was ordered dissolved.

The appellants also complained that the trial court had failed to hold a hearing before granting the injunction and that the injunction failed to set a proper amount of bond.  The court of appeals did not address these alleged infirmities because of its conclusion as to the first error.  The court’s opinion may be found here.


Whistleblowers: Who Ya Gonna Call?

The Texas Whistleblower Act protects a public employee who makes a good faith report of a legal violation by his or her employer “to an appropriate law enforcement authority.” Tex. Gov’t Code  § 554.002(a).   Texas law has generally held that the “appropriate law enforcement authority” must be an authority that has outward-looking powers to investigate, enforce, and prosecute.  But what happens if the agency the employee works for is the agency charged with investigating, enforcing, and prosecuting both within that agency and other agencies?  That’s what happened in McMillen v. Texas Health & Human Services Commission.

McMillen worked for the Texas Health and Human Services Commission’s Office of the Inspector General.  After he made a report of improper collection of payments from certain recipients’ Medicaid benefits to the head of the OIG’s Internal Affairs Division and to the Commission’s Executive Commissioner, he was terminated.  He sued the Commission and its Executive Commissioner under the Whistleblower Act, which waives state immunity for good faith reports made to appropriate law-enforcement authority.

The trial court denied the Commission’s plea to the jurisdiction.  The Austin Court of Appeals reversed after concluding that McMillen did not report to an appropriate law-enforcement authority.  The Supreme Court of Texas reversed the court of appeals judgment.  After noting that the Commission’s OIG was charged with enforcement authority, the Court acknowledged that its authority included internal compliance, but the OIG also has outward-looking powers that go beyond this agency.  Accordingly, the Court held that McMillen had reported to an appropriate law-enforcement authority.  The case was remanded back to the court of appeals for further proceedings.  The Supreme Court’s opinion may be found here: McMillen opinion.

Plaintiffs avoid getting (anti) SLAPPed

Appellate courts in Texas have seen an influx of defamation, business disparagement, and other similar actions since 2011 when the Texas Citizens Participation Act (“TCPA”), Tex. Civ. Prac. & Rem. Code §§ 27.001-27.011 (2015), was signed into law.  The TCPA is an anti-SLAPP statute; SLAPP is an acronym for Strategic Lawsuits Against Public Participation, which is a lawsuit brought with the intent to silence those who exercise their First Amendment rights to speak out on public issues or communicate with the government by intimidating or harassing the critic with the burden and expense of defending a lawsuit.  Thus, the TCPA provides for an expedited dismissal (and interlocutory appeal from a trial court’s denial of a motion to dismiss) of a legal action that is based on, relates to, or is in response to a party’s exercise of the right of free speech, right to petition, or right of association.  The TCPA’s provisions are powerful and broadly interpreted, and plaintiffs have struggled to hold on to their claims when faced with a section 27.003 motion to dismiss.

Shortly before the new year, the Dallas Court of Appeals issued two opinions concerning defamation and the TCPA involving the same set of tragic underlying facts.  Shortly after sustaining a traumatic brain injury from a car accident, Paul Tatum took his own life.  After the death of their son, the Tatums, appellants in both cases, paid the Dallas Morning News (“DMN”) to print an obituary for Paul.  About a month later, DMN reporter, Steve Blow, wrote a column that did not name the Tatums, but quoted from Paul’s obituary, described the events surrounding his death, and criticized people who are dishonest about loved ones’ suicides.

In Tatum v. Dallas Morning News, the Fifth Court of Appeals reversed summary judgment in favor of DMN and Blow on the Tatums’ libel claim.  The Court concluded that the Tatums raised a genuine issue of material fact regarding: (1) whether Blow’s column was about their family; (2) whether the column was capable of defaming the Tatums; and (3) whether the column was neither true nor substantially true.  Read the opinion here for a detailed explanation of defamation law on these issues.

In the second case, Tatum v. Hersh, the Tatums sued Julie Hersh for intentional infliction of emotional distress.  Hersh, author of a book about her personal history with depression and attempted suicide, allegedly met with Blow of the DMN, “promoted Paul’s death and the Obituary . . . as a news story,” “incited Blow to write about suicides in obituaries,” and “encouraged [Blow] to make the Tatum tragedy public.”  Blow’s article quotes Hersh and references both her book and a blog article that she allegedly wrote after reading Paul’s obituary and learning of his suicide.  Hersh filed a motion to dismiss, pursuant to the TCPA, and the trial court granted it.  The Dallas Court of Appeals reversed the trial court’s order granting dismissal, concluding that Hersh failed to establish that the TCPA applied to the Tatums claims because Hersh denied having made the specific statements at issue.  In so holding, the Court relied on one of its earlier TCPA opinions, Pickens v. Cordia.

Appellees in both of the above cases have been granted an extension of time to file a petition for review with the Supreme Court.