Opinion
Civil Action No. 3:99-CV-2687-L,
October 9, 2001
MEMORANDUM OPINION AND ORDER
Before the court is Plaintiffs' Motion for Summary Judgment ("Plaintiffs' Motion"), filed December 5, 2000. Defendants Charley Birkes ("Birkes"), Linda Swenson ("Swenson"), Equity Housing Group ("Equity Housing"), and Equity Housing Group 99, L.L.C. ("Equity 99") did not file a response to Plaintiffs' Motion. Plaintiffs filed their motion on December 5, 2000. Pursuant to Local Rule 7. l(e), Defendants' response was due December 26, 2000. After careful consideration of Plaintiffs' Motion, Plaintiffs' brief, applicable authorities, and summary judgment evidence submitted by Plaintiffs, the court, for the reasons stated herein, grants in part and denies in part Plaintiffs' Motion.
I. Procedural and Factual Background
Plaintiffs William E. Baldridge ("Baldridge") and 1997 Sunset, Inc. ("Sunset") brought suit against Birkes, Swenson, Equity Housing, and Equity 99 (collectively "Defendants") as a result of a dispute that arose from the parties' participation in a real estate investment partnership. Defendants Birkes and Swenson were the principals in Equity Housing, and they were primarily in the business of creating real estate investment partnerships. One such real estate partnership was Equity Housing Fund X. Equity Housing Fund X was created as a vehicle to develop a Senior Housing community in Mesa, Arizona (the "Arizona Project").
The Arizona Project encountered financial troubles. Birkes and Swenson therefore approached Baldridge and asked him to provide his knowledge and resources to assist in salvaging the Arizona Project. Baldridge agreed, so Birkes and Swenson formed a partnership with him. They created the partnership by transferring Equity Housing Fund X to Sunset. Sunset is a company owned by Baldridge. Baldridge then agreed to contribute personal funds to the Arizona Project. He also agreed to obtain and personally guarantee an $8,800,000 loan on behalf of the Arizona Project. He was able to obtain the loan, but only after he assured the lender that he, Sunset, or some other company owned by him would always be Equity Housing Fund X's managing partner. If this changed, the loan would be in default and the lender had the right to accelerate payment terms and declare that all principal and interest be immediately paid. Baldridge attempted to protect against this default by having Birkes and Swenson consent to allowing him, Sunset, or some other company owned by him to always be Equity Housing Fund X's managing partner. Birkes and Swenson agreed.
Resolution of these issues allowed the Arizona Project to continue. With time, however, Baldridge became concerned that the Arizona Project's facilities needed to be redesigned. This required additional funds. The parties agreed to raise the funds by collectively contributing enough money to cover any cash shortfalls that arose due to the redesign of the facilities. Baldridge, Birkes, and Swenson entered into a letter agreement contract ("letter agreement" or "agreement") to memorialize this arrangement. The agreement also reflected that if Baldwin advanced any funds to the project, the parties would reimburse the advances to the extent that they exceeded Baldridge's proportional obligation under the agreement.
Despite the agreement, Defendants refused to pay their respective obligations. Baldridge was therefore made to advance approximately half a million dollars to cover capital shortfalls. It is also noteworthy that approximately 150 limited partners contributed funds to the Arizona Project to ensure that it was properly funded. If Baldridge allowed the loan to fall into default, the limited partners' funds would be lost. Baldridge therefore recognized that he or his company must remain as managing partner of Equity Housing Fund X.
Throughout Baldridge's interaction with Birkes and Swenson, he became concerned that Birkes and Swenson were violating fiduciary obligations to the partnership. Baldridge therefore scheduled a limited partner meeting for August 31, 1999 to address these concerns. The partnership agreement required that notice of the meeting be sent to the limited partners, and that the notice specifically include the resolution to be addressed at the meeting. Baldridge complied with this requirement and sent notice that identified his concerns regarding Birkes and Swenson's conduct.
Baldridge ultimately decided that the meeting would be canceled until he resolved several outstanding matters. He informed Birkes and Swenson that the meeting was canceled and attempted to inform the limited partners by mailing notices of the cancellation. Birkes and Swenson arranged to go through with the meeting despite that Baldridge believed the meeting was canceled. Birkes and Swenson perpetrated this scheme by faxing proxies to limited partners before they received Baldridge's cancellation notice. The limited partners were therefore led to believe that they had authorized proxies for Baldridge's meeting. In fact, Birkes and Swenson were used the proxies to conduct their own meeting. The meeting was held after Birkes and Swenson successfully procured enough proxies to constitute a quorum.
The court notes that although Birkes and Swenson contended that they had procured sufficient proxies to constitute a quorum, they would not allow an employee of Plaintiffs — who learned of and attended the meeting — to see the proxies.
Although Birkes and Swenson went through with the meeting, the resolution proposed by Baldridge was not to have been considered because the cancellation notice withdrew the resolution. Birkes and Swenson nevertheless presented and "voted down" the resolution. Additionally, Birkes and Swenson presented novel resolutions. None of the resolutions had been announced in Baldridge's meeting notice. The partnership agreement therefore made presentation of the resolutions improper. Regardless, Birkes and Swenson used the proxies to pass the novel resolutions.
One of the resolutions removed Baldridge and Sunset (Baldridge's company) as the managing partner of Equity Housing Fund X. If this resolution were given effect, the $8,800,000 loan would be in default. This would have been financially "disastrous" to Baldridge and the 150 limited partners that contributed funds to the Arizona Project.
Plaintiffs filed suit in state court to prevent Defendants from carrying out the resolution. The state court granted a temporary restraining order ("TRO"). Defendants thereafter removed the case to this court, and it likewise granted a TRO. The TRO was later converted into a preliminary injunction.
Beyond the request for TRO, Plaintiffs have asserted claims for breach of contract, promissory estoppel, unjust enrichment, breach of fiduciary duty, intentional and/or negligent misrepresentation, libel and slander, fraud, fraud in the inducement, civil conspiracy, fraud in real estate, and securities fraud. Plaintiffs further request the court to implement a constructive trust, permanent injunction, and to assess attorney fees and exemplary damages. These claims and underlying facts were made by verified complaint.
Plaintiffs propounded requests for admissions in preparation for this litigation, but Defendants did not respond to the requests. Plaintiffs contend the requests are admitted by default pursuant to Federal Rule of Civil Procedure 36(a). Plaintiffs use these admissions, affidavits, and documentary evidence to substantiate their motion. The court considers the admissions to be competent summary judgment evidence, as nothing in the record constitutes good cause which would permit the court to allow Defendants to withdraw the admissions.
II. Summary Judgment Standard
Summary judgment shall be rendered when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 323-25 (1986); Ragas v. Tennessee Gas Pipeline Co., 136 F.3d 455, 458 (5th Cir. 1998). A dispute regarding a material fact is "genuine" if the evidence is such that a reasonable jury could return a verdict in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). When ruling on a motion for summary judgment, the court is required to view all inferences drawn from the factual record in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 587 (1986); Ragas, 136 F.3d at 458.
Once the moving party has made an initial showing that there is no evidence to support the nonmoving party's case, the party opposing the motion must come forward with competent summary judgment evidence of the existence of a genuine fact issue. Matsushita, 475 U.S. at 586. Mere conclusory allegations are not competent summary judgment evidence, and thus are insufficient to defeat a motion for summary judgment. Eason v. Thaler, 73 F.3d 1322, 1325 (5th Cir. 1996). Unsubstantiated assertions, improbable inferences, and unsupported speculation are not competent summary judgment evidence. See Forsyth v. Barr, 19 F.3d 1527, 1533 (5th Cir.), cert. denied, 513 U.S. 871 (1994). The party opposing summary judgment is required to identify specific evidence in the record and to articulate the precise manner in which that evidence supports his claim. Ragas, 136 F.3d at 458. Rule 56 does not impose a duty on the court to "sift through the record in search of evidence" to support the nonmovant's opposition to the motion for summary judgment. Id.; see also Skotak v. Tenneco Resins, Inc., 953 F.2d 909, 915-16 n. 7 (5th Cir.), cert. denied, 506 U.S. 832 (1992). "Only disputes over facts that might affect the outcome of the suit under the governing laws will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248. Disputed fact issues which are "irrelevant and unnecessary" will not be considered by a court in ruling on a summary judgment motion. Id. If the nonmoving party fails to make a showing sufficient to establish the existence of an element essential to its case and on which it will bear the burden of proof at trial, summary judgment must be granted. Celotex, 477 U.S. at 322-23.
III. Analysis
Defendants have not responded to Plaintiffs' Motion. Defendants' failure to respond does not, of course, permit the court to enter a "default" summary judgment. Eversley v. MBank Dallas, 843 F.2d 172, 174 (5th Cir. 1988); see also Resolution Trust Corp. v. Starkley, 41 F.3d 1018, 1022-23 (5th Cir. 1995). The court is permitted, however, to accept Plaintiffs' evidence as undisputed. See Eversley 843 F.2d at 174; Tutton v. Garland Indep. Sch. Dist., 733 F. Supp. 1113, 1117 (N.D. Tex. 1990). Moreover, Defendants' failure to respond means that they have not designated specific facts showing that there is a genuine issue for trial: "A summary judgment nonmovant who does not respond to the motion is relegated to [his] unsworn pleadings, which do not constitute summary judgment evidence." Bookman v. Schubzda, 945 F. Supp. 999, 1002 (N.D. Tex 1996) (citing Solo Serve Corp. v. Westowne Assocs., 929 F.2d 160, 165 (5th Cir. 1991)). Additionally, the court may use Defendants' default admissions as a basis for summary judgment. See Fed.R.Civ.P. 36(a); see also United States v. Kasuboski, 834 F.2d 1345, 1350 (7th Cir. 1987) (referencing Dukes v. South Carolina Ins. Co., 770 F.2d 545 (5th Cir. 1985)).
A. Breach of Letter Agreement Contract
Plaintiffs contend that Birkes, Swenson, Equity Housing, and Equity 99 are liable for breach of a letter agreement contract. As summary judgment evidence, Plaintiffs submit an unsigned copy of the letter agreement, affidavits, and select default admissions from all Defendants. The default admissions state that all Defendants: 1) signed the letter agreement, 2) breached the letter agreement, 3) proximately caused the injuries that resulted from the breach, and 4) are jointly and severally liable for damages arising from the breach. Defendants further admit by default that they are not entitled to offset or reduce the damages.
The court notes that the agreement includes signature lines for "Charley Birkes," "Linda Swenson," and "Equity Housing [b]y . . . Authorized Representative." The signature lines for "Charley Birkes" and "Linda Swenson" refer to Defendants Birkes and Swenson. This, combined with their default admissions that they breached the agreement and are jointly and severally liable, eliminates any genuine issue of material fact regarding their liability. Summary judgment against Birkes and Swenson is therefore appropriate.
This is not the case for Equity Housing and Equity 99. Although the agreement contains a signature line for "Equity Group By . . . Authorized representative," the agreement does not define whether "Equity Group" is meant to reference Equity Housing, Equity 99, or both. Plaintiffs likely want the court to assume that "Equity Group" genetically refers to both Equity Housing and Equity 99. It may also be the case that Equity Housing and Equity 99 are sufficiently related that the liability of one is essentially the liability of the other. Whatever the case, Plaintiffs' summary judgment evidence does not clarify this issue. Thus, although the court accepts Plaintiffs' summary judgment evidence as uncontroverted, the court must still construe facts in a light favorable to the nonmovants (in this case Equity Housing and Equity 99). In doing so, the court cannot assume that "Equity Group" references both Equity Housing and Equity 99 without summary judgment evidence that clarifies the issue. As such, the court will not grant summary judgment against Equity Housing and Equity 99. Damages for the breach of contract will therefore be born by Birkes and Swenson.
The court expresses no opinion on whether Equity Housing or Equity 99 can later be held liable for breaching the agreement.
Plaintiffs have claimed $825,060.45 in damages. They submit Baldridge's affidavit as summary judgment evidence to establish these damages. They also submit default admissions wherein Birkes and Swenson admit that they caused Plaintiffs $825,060.45 in damages. Absent any contradictory evidence from Birkes and Swenson, no genuine issue of material fact has been raised regarding the accuracy or amount of the damages. Birkes and Swenson are therefore jointly and severally liable to Plaintiffs for $825,060.45.
Plaintiffs also request $28,650 in prejudgment interest and $60,899.25 in reasonable and necessary attorney fees. As summary judgment evidence, Plaintiffs submit select default admissions from Defendants and the affidavit of Plaintiffs' attorney, Gregory Ackles ("Mr. Ackles").
All Defendants admitted by default that they collectively owed $28,650 in prejudgment interest and $60,899.25 in reasonable and necessary attorney fees. Further, Mr. Ackles's affidavit indicates that $60,889.25 represents a hourly rate of $250 and that this rate is reasonable and customary in the Dallas legal community for an attorney with his experience.
Since Birkes and Swenson are summarily liable for breaching the letter agreement, the court holds Birkes and Swenson jointly and severally liable for $28,650 in prejudgment interest and $60,899.25 in attorney fees. The court does not, however, hold Equity Housing and Equity 99 liable for prejudgment interest and fees because, despite their default admissions, a genuine issue of material fact remains whether they are liable for the underlying breach of the letter agreement. B. Fraud and Fraudulent Inducement
The court expresses no opinion on whether Equity Housing or Equity 99 can later be held liable for prejudgment interest and attorney fees.
In Texas, "[a] fraud cause of action requires `a material misrepresentation, which was false, and which was either known to be false when made or was asserted without knowledge of its truth, which was intended to be acted upon, which was relied upon, and which caused injury.'" Formosa Plastics Corp. USA v. Presidio Engineers and Contractors, 960 S.W.2d 41, 47 (Tex. 1998). "A promise of future performance constitutes an actionable misrepresentation if the promise was made with no intention of performing at the time it was made." Formosa Plastics., 960 S.W.2d at 48.
As summary judgment evidence for the fraud and fraudulent inducement claims, Plaintiffs have offered select default admissions from Defendants and the affidavit of Baldridge. All Defendants admit that they "induced both Plaintiffs to enter into the [letter] [a]greement knowing that the Defendants would not honor the terms of the [a]greement." Plaintiffs' Motion at 12. Baldridge's affidavit further notes that he was assured by Defendants that all would contribute their respective shares of funds, that he relied on these assurances, and that Defendants have failed to honor their obligations to Plaintiffs. Baldridge's Affidavit at 2-3.
Unlike Plaintiffs' summary judgment evidence on the breach of contract claim, Plaintiffs' fraud and fraudulent inducement evidence specifically attributes fraudulent conduct to all Defendants — including Equity Housing and Equity 99. Combined with Defendants' default admissions, this evidence is sufficient to show that all Defendants induced Plaintiffs to enter the agreement although Defendants knew the agreement would not be performed. Plaintiffs are therefore entitled to summary judgment against Birkes, Swenson, Equity Housing, and Equity 99 for fraud and fraudulent inducement. C. Exemplary Damages
This holding is not inconsistent with the court's prior holding that a genuine issue of material fact remains whether Equity Housing and Equity 99 were parties to the letter agreement. Regardless whether they were parties, the summary judgment evidence reveals that they used deceptive representations to persuade Plaintiffs to enter the agreement. Fraud and fraudulent inducement are distinct causes of action from breach of contract. See Formosa Plastics Corp. USA, 960 S.W.2d at 46 ("[I]t is well established that the legal duty not to fraudulently procure a contract is separate and independent from the duties established by the contract itself"). Hence, even if Equity Housing and Equity 99 are not liable for breaching the agreement, they can be liable for fraud and fraudulent inducement. Where Plaintiffs' summary judgment evidence does not eliminate all genuine issues of material fact on the breach of contract claim, it does eliminate genuine issues of material fact regarding the fraud and fraudulent inducement claims.
Plaintiffs assert that they are entitled to $1,000,000 in exemplary damages. Texas allows "exemplary damages [to] be awarded only if the claimant proves by clear and convincing evidence that the harm with respect to which the claimant seeks recovery of exemplary damages results from (1) Fraud [or] (2) Malice. . . ." Tex. Civ. Prac. Rem. Code Ann. § 41.003(a) (Vernon 1997) (emphasis added). In making the award, "the trier of fact shall consider evidence, if any, relating to: (1) the nature of the wrong; (2) the character of the conduct involved; (3) the degree of culpability of the wrongdoer; (4) the situation and sensibilities of the parties concerned; (5) the extent to which such conduct offends a public sense of justice and propriety; and (6) the net worth of the defendant." Tex. Civ. Prac. Rem. Code § 41.011(a).
The court concludes that Plaintiffs' uncontroverted summary judgment evidence clearly and convincingly shows that Defendants' fraudulent actions justify exemplary damages. The evidence establishes that Defendants acted in a reprehensible manner. Plaintiffs did not seek out Defendants and request that Defendants make Plaintiffs partners in the Arizona Project. Defendants sought out Plaintiffs. They did so expressly because they needed Plaintiffs to assist salvage the Arizona Project, which was severely underfunded.
Plaintiffs agreed to provide this assistance only after Defendants assured that Plaintiffs would collectively remain as managing partner of Equity Housing Fund X, that Plaintiffs would be reimbursed as appropriate, and that Defendants would contribute their fair shares to the Arizona Project. The evidence shows that Defendants did not comply with any of these conditions. Instead, Defendants took advantage of Plaintiffs' contributions and required Plaintiffs to contribute more than agreed, while Defendants failed to contribute their proportionate shares.
The court is able to gather further insight into Defendants' behavior when it reviews summary judgment evidence that Defendants used suspect means to conduct the August 31, 1999 limited partner meeting where Plaintiffs were removed as general partner. It is especially telling that the meeting was initially intended to address Birkes and Swenson's questionable fiduciary conduct; however, Birkes and Swenson used the meeting to remove Plaintiffs.
The summary judgment evidence further demonstrates that Defendants were aware that removing Plaintiffs could expose them to more than $8,000,000 in immediately payable debt. This also could have adversely affected the limited partners who contributed funds to the Arizona Project. Defendants have apparently been undeterred by the adverse and considerable financial repercussions of their actions. The court, considering the factors relevant to Defendants' conduct, therefore concludes that this evidence justifies an award of exemplary damages on Plaintiffs' fraud claim.
The court also notes that even if fraud had not been shown, Texas Civil Practice and Remedies Code section 41.003(a)(2) allows the court to award exemplary damages upon a showing of malice. The uncontroverted evidence, as previously set forth, shows that Defendants displayed a severe disregard for the Plaintiffs' rights and the harm it would cause them. Such actions by Defendants were malicious. The court can therefore base exemplary damages on Defendants' malicious conduct.
Plaintiffs contend that $1,000,000 is sufficient to adequately punish Defendants. Plaintiffs support this contention with default admissions from Defendants where they admit that Plaintiffs are entitled to $1,000,000 in exemplary damages. Since Defendants have not raised a genuine issue of material fact to challenge the basis for or amount of exemplary damages, the court concludes that Birkes, Swenson, Equity Housing, and Equity 99 are jointly and severally liable for $1,000,000 in exemplary damages. D. Declaratory Judgment
This amount falls well within the exemplary damage cap imposed by Chapter 41 of Texas's Civil Practice and Remedies Code. Relative to this discussion, the cap limits exemplary damages to the greater of two times economic damages or $200,000. Here, two times economic damages is $1,650,120.90. This exceeds $200,000; thus $1,650,120.90 is the proper cap. Plaintiffs have requested only $1,000.000, and the court concludes that Defendants' fraudulent and malicious conduct justifies an award of this amount to serve the purpose of exemplary damages.
Plaintiffs have requested a declaration that the August 31, 1999 limited partner meeting be declared void and that all actions taken at that meeting be declared void. The court is allowed to issue declaratory relief to resolve actual controversies between parties. See 28 U.S.C. § 2201; see also Fed.R.Civ.P. 57.
The court believes that declaratory relief is appropriate because a genuine controversy surrounds the meeting. If the meeting is given effect, Plaintiffs may be removed as managing partner and Plaintiffs (along with the limited partners) stand to lose millions of dollars. If the meeting is not given effect, Plaintiffs retain the status as managing partner, and their financial interest will not be compromised.
The uncontroverted summary judgment evidence establishes that Birkes and Swenson conducted the meeting despite having notice that it was canceled and without complying with the terms of the partnership agreement. The agreement required Birkes and Swenson to give prior notice of the specific resolutions that were addressed at the meeting. Instead of complying with the agreement, Birkes and Swenson deceptively procured sufficient proxies to constitute a quorum, and used those proxies to pass resolutions that were not included in the meeting notice. The court therefore declares that the meeting and any actions taken at the meeting are void and shall have no effect. E. Permanent Injunction
Plaintiffs have requested the court to convert their TRO into a permanent injunction. The TRO has already been converted into a preliminary injunction on the grounds that Plaintiffs demonstrated a substantial likelihood of success on the merits, a substantial threat of irreparable harm, that greater injury would have occurred if the TRO was not granted than resulted when the TRO was granted, and that the public interest was not disserved. See The court's Temporary Restraining Order, dated December 3, 1999. "[T]he standard for a permanent injunction is the same as the standard for a preliminary injunction except that, in the case of the former, the plaintiff must actually succeed on the merits rather than to merely show . . . a likelihood of success." Burlington Northern and Santa Fe Ry. Co. v. Brotherhood of Maint. of Way Employees, 143 F. Supp.2d 672, 688-89 (N.D. Tex 2001) (citing Amoco Prod. Co. v. Village of Gamball, 480 U.S. 531, 546 n. 12 (1987)); see also Calmes v. United States, 926 F. Supp. 582, 591-92 (N.D. Tex. 1996).
By virtue of this summary judgment, Plaintiffs have succeeded on the merits. The court further finds that granting the permanent injunction will subject Defendants to minimal harm, if any, while protecting Plaintiffs from irreparable financial harm which could not otherwise be adequately remedied at law. The court will convert the TRO into a permanent inunction once final judgment is entered and enjoin Defendants from:
a) enforcing or attempting to enforce any vote or action taken at the August 31, 1999 meeting;
b) undertaking any action to remove, or enforcing any prior action to remove, William E. Baldridge, or any entity controlled by him, as the exclusive and Sole Managing Member of Sunset Colony, L.L.C., the exclusive and Sole General Partner of Equity Housing Fund X;
c) notifying any credit or lending institution that William E. Baldridge, or any entity controlled by him, has been removed as the Sole and exclusive Managing Member of Sunset Colony, L.L.C., the exclusive and Sole General Partner of Equity Housing Fund X; and
d) undertaking any action to enforce any prior or further action to elect Equity Group 99, L.L.C. as a "Co-General Partner" of Equity Housing Fund X.F. Remaining Claims
Plaintiffs also originally asserted claims for promissory estoppel, unjust enrichment, breach of fiduciary duty, intentional and/or negligent misrepresentation, libel and slander, civil conspiracy, fraud in real estate, securities fraud, and requested the court to implement a constructive trust. Their motion for summary judgment does not address these claims. Plaintiffs account for this by stating, "Although summary judgment on every claim is proper, this [motion] shall only address the claims upon which Plaintiffs seek judgment upon which Plaintiffs have established the exact amount of damages." Plaintiffs' Motion at 9. Absent specifically designated summary judgment evidence and briefing, the court denies summary judgment on Plaintiffs' claims for promissory estoppel, unjust enrichment, breach of fiduciary duty, intentional and/or negligent misrepresentation, libel and slander, civil conspiracy, fraud in real estate, securities fraud, and for implementation of a constructive trust. IV. Conclusion
For the reasons stated herein, there is no genuine issue of material fact with respect to Plaintiffs' breach of contract claim against Birkes and Swenson, with respect to Plaintiffs' fraud and fraudulent inducement claims against all Defendants, or with respect to Plaintiffs' request for declaratory relief and permanent injunction against all Defendants. The court grants Plaintiffs' Motion for Summary Judgment as it relates to these claims. The court denies Plaintiffs' Motion for Summary Judgment on all other claims. With respect to the claims denied, Plaintiffs shall inform the court in writing by October 16, 2001 whether they intend to pursue these claims. If Plaintiffs do not desire to pursue these claims, the court will enter judgment for Plaintiffs in accordance with this opinion. Accordingly, the court grants in part and denies in part Plaintiffs' Motion for Summary Judgment.
It is so ordered