Opinion
1-22-CV-652-DAE
01-31-2024
NOBLE CAPITAL TEXAS REAL ESTATE INCOME FUND LP, Plaintiff, v. JADON NEWMAN, CHRIS RAGLAND, ROMNEY NAVARRO, GRADY COLLINS, JADON NEWMAN (as trustee for JFN GRANTOR TRUST), HANNAH HEERLEIN (as trustee for N.A. NEWMAN HERITAGE TRUST), HANNAH HEERLEIN (as trustee for K.A. NEWMAN HERITAGE TRUST), RAGLAND HOLDINGS, LLC, NOBLE CAPITAL FUND MANAGEMENT, LLC, NOBLE CAPITAL PROPERTIES, LLC, NOBLE CAPITAL SERVCING, LLC, NOBLE CAPITAL REAL ESTATE, LLC (f/k/a EMERGE REAL ESTATE GROUP, LLC), STREAMLINE FUNDING GROUP, LLC, NOBLE CAPITAL REO, LLC, NOBLE CAPITAL INCOME FUND II, LLC, NOBLE CAPITAL INCOME FUND III, LLC, and DOES 1-50, Defendants.
REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
MARK LANE, UNITED STATES/MAGISTRATE JUDGE
TO THE HONORABLE DAVID EZRA UNITED STATES DISTRICT JUDGE:
Before the court is Defendants' Motion to Dismiss Plaintiff's Second Amended Complaint (Dkt. 16) and all related briefing. After reviewing the pleadings and the relevant case law, and determining that a hearing is not necessary, the undersigned submits the following Report and Recommendation to the District Court.
United States District Judge David Ezra referred the Motion to the undersigned. Text Order, May 8, 2023. The referral did not specify if it was for disposition or for a Report and Recommendation on the merits. Because the Motion is dispositive, the undersigned proceeds with a Report and Recommendation as to the merits pursuant to 28 U.S.C. § 636(b), Rule 72 of the Federal Rules of Civil Procedure, and Rule 1(d) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas.
For the reasons stated, the undersigned recommends the Motion be granted in part and denied in part.
I. Request to Strike for Noncompliance
Defendants argue the court should strike the Fund's Second Amended Complaint because the undersigned previously “recommend[ed] that future pleadings that fail to comply with the Local Rules be stricken.” Dkt. 18 at 3 (quoting Dkt. 13 (Report and Recommendation recommending dismissal of the Fund's First Amended Complaint) at 7). Defendants note that the Fund filed a second version of its Second Amended Complaint without leave of court or Defendants' consent which is contrary to Federal Rule of Civil Procedure 15(a)(2). Id. (citing Dkt. 16). Defendants urge that if the court would not have granted the Fund leave to amend, it should not now reward the Fund “with a more favorable result [for] sidestepping the requirement of seeking leave of court to amend.” Id.
As best the court can tell, the first Second Amended Complaint (Dkt. 15) included the comments pane of Microsoft Word's Track Changes feature; the second Second Amended Complaint does not include the comments pane. The Fund's filing the first Second Amended Complaint with the comment pane reminds the court of the “sloppiness” the court pointed out in its previous Report and Recommendation (Dkt. 13). But the District Judge referred Defendants' Motion to the undersigned, the undersigned believes the District Judge prefers that the Motion be resolved on the merits. Accordingly, the undersigned declines to recommend that the District Judge strike the Fund's second Second Amended Complaint (“Live Complaint”) (Dkt. 16).
II. Background
Plaintiff (“the Fund”) is a limited partnership created in 2017 to maintain the assets of various individual investors. Dkt. 16 at ¶13. The investors are clients of Defendant Noble Capital Fund Management (“NCFM”). Id. at ¶35. NCFM referred the investors to the Fund so they could earn income through real estate investments. Id. at ¶31. The Fund's relationship to Defendants is based on a series of contracts, including a Management Advisory Services Agreement (“MASA”) in which NCFM agreed to act as the Fund's manager. Id. at ¶¶ 35, 55. NCFM's primary duties under the agreements were performing diligence on borrowers, recommending loans, originating loans, servicing loans, and working out troubled loans. Id. at ¶35.
The Fund contends “the Individual Defendants own and operate a web of alter-ego entities that they refer to interchangeably as ‘Noble Capital'” and alleges “the Individual Defendants used their Noble Capital enterprise to defraud the Fund out of substantial assets.” Id. at ¶¶43, 35. “Specifically, Defendants serially furnished false and misleading credit memoranda to the Fund to induce it to fund loans that Defendants knew posed an unacceptable risk of default.” Id. at ¶36. The Fund alleges Defendants' fraud has resulted in losses for the Fund and gains for certain Defendants. Id. at ¶39.
The Fund now asserts thirteen claims (although, the caption lists fourteen causes of action) for civil violations of the Racketeer Influenced Corrupt Organizations Act (“RICO”), fraud, false advertising, unfair competition, breach of contract, conversion, and unjust enrichment. Id. at ¶42.
The Live Complaint does not include claims contained in the First Amended Complaint under California's Business and Professions Code. Compare Dkt. 4 at 1 with Dkt. 16 at 1.
This lawsuit is but one of several legal actions between the Fund and Defendants since 2019. Dkt. 9 at 2. Various parties here were engaged in arbitration in early 2019. Dkt. 6 at 2. During the pendency of that arbitration, the Fund first sued Defendants in the Northern District of California in May 2019 and amended its complaint to assert eleven additional causes of action in July 2019. Dkt. 6 at 2; Dkt. 9 at 2. The parties then agreed to another arbitration to resolve the Fund's lawsuit. Dkt. 9 at 3. Before this second arbitration, NCFM liquidated the Fund's assets. Dkt. 6 at 2 (contending the liquidation was to prevent mismanagement); Dkt. 9 at 3 (alleging the liquidation was illicit conversion).
All page number references refer to the CM/ECF page number found in the CM/ECF document header.
NCFM won a partial award in the first arbitration. Dkt. 6 at 2.
Its financial resources depleted, the Fund requested release from the second arbitration. Dkt. 9 at 3. The Fund was released and filed its second amended complaint in the Northern District of California litigation. Id. at 3. Defendants moved to dismiss that action, and the Fund voluntarily dismissed it without prejudice in April 2021. Id. at 3.
In December 2019, certain Defendants filed a separate action in the Western District of Texas against the Fund. Id. at 3. In that case, the court granted the Fund's motion to compel arbitration, and the suit was dismissed in August 2021. Id. at 3-4.
One Defendant filed a lawsuit in Texas state court in December 2020, which was removed to federal court. Docket Sheet in 1:20-cv-1247-DAE. That suit faced interlocutory appeal and is being litigated. See id.
The Fund's general partner and another plaintiff brought a lawsuit in the Western District of Texas against certain Defendants in June 2022. Docket Sheet in 1:22-cv-626-DAE. That suit is being litigated as well. See id.
The Fund filed this action on July 5, 2022. Dkt. 1 at 1. The undersigned previously issued a Report and Recommendation recommending that the District Court grant Defendants' Motion to Dismiss Plaintiff's First Amended Complaint (Dkt. 6). Dkt. 12. Neither party objected to the Report and Recommendation, and then-presiding District Judge Lee Yeakel adopted it in its entirety, granting Defendants' Motion and dismissing the First Amended Complaint without prejudice. Dkt. 14.
III. Standard of Review
When evaluating a motion to dismiss for failure to state a claim under Rule 12(b)(6) the complaint must be liberally construed in favor of the plaintiff and all facts pleaded must be taken as true. Leatherman v. Tarrant Cnty. Narcotics Intel. & Coordination Unit, 507 U.S. 163, 164 (1993); Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996). Although Federal Rule of Civil Procedure 8 mandates only that a pleading contain a “short and plain statement of the claim showing that the pleader is entitled to relief,” this standard demands more than unadorned accusations, “labels and conclusions,” “a formulaic recitation of the elements of a cause of action,” or “naked assertion[s]” devoid of “further factual enhancement.” Bell Atl. v. Twombly, 550 U.S. 544, 555-57 (2007). Rather, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” Id. at 570. The Supreme Court has made clear this plausibility standard is not simply a “probability requirement,” but imposes a standard higher than “a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The standard is properly guided by “[t]wo working principles.” Id. at 678. First, although “a court must ‘accept as true all of the allegations contained in a complaint,' that tenet is inapplicable to legal conclusions” and “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. at 678. Second, “[d]etermining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679. Thus, in considering a motion to dismiss, the court must first identify pleadings that are no more than legal conclusions not entitled to the assumption of truth, then assume the veracity of well-pleaded factual allegations and determine whether those allegations plausibly give rise to an entitlement to relief. If not, “the complaint has alleged-but it has not ‘show[n]'-‘that the pleader is entitled to relief.'” Id. at 679 (quoting FED. R. CIV. P. 8(a)(2)).
IV. Analysis
The court again notes that this dispute is a mess. See Dkt. 13 (“To say the dispute between the parties is a mess would do a disservice to messes everywhere.”). Plaintiff has filed several lawsuits against (various iterations of) Defendants; some actions were voluntarily dismissed; and some proceeded to arbitration. This action is a microcosm of the dispute as the Fund's First Amended Complaint, which cited unattached exhibits and law from a different jurisdiction, was dismissed for illicit group pleading.
The Fund asserts thirteen causes of action in its Live Complaint. Dkt. 16 at 1. Some claims fail as a matter of law and others fail because the Fund did not plead the elements still others fail because the Fund did not allege wrongdoing by a Defendant. Where the Fund adequately pleaded a claim, the undersigned will recommend denying Defendants' Motion.
Defendants argue in their Motion that the Fund's Live Complaint again includes illicit group pleading. The Fund contends that “[s]uch pleading is unavoidable and, indeed, necessary in a case like this,” Dkt. 22 at 5, and the Fund's Response includes citations to cases it contends hold that the Fifth Circuit's disfavor of group pleading is not an absolute bar. Id. at 5-6 (citing federal district court cases from the Northern, Eastern, Southern, and Western Districts of Texas).
The court prefers to resolve cases on their merits, and the Fund has been provided opportunity to amend its complaint. Accordingly, the undersigned reviewed the Fund's Live Complaint with the assumption that it presents the Fund's claims in their strongest form. Accordingly, where the Fund engages in group pleading such that the court cannot discern fair notice to Defendants, where it asserts inapplicable causes of action, or where it fails to plead the elements of a cause of action, the undersigned will recommend dismissal with prejudice. The court again notes that the dispute is a mess. See Dkt. 13. And at some point, the litigation between the parties must be put on a path to resolution.
Below the court first addresses the Fund's claims that the undersigned recommends the District Court dismiss. It then addresses the claims it concludes survive Defendants' Motion- counts four, five, six, and twelve.
A. Fraud-based Claims (Counts 1, 2 & 3)
Plaintiff asserts fraud-based claims: civil RICO, Dkt. 16 at 40, civil RICO conspiracy, id. at 43, and fraud. Id. at 43. Each is addressed in turn.
1. Civil RICO (Count 1)
The Fund alleges a civil RICO claim against all seventy-something Defendants. Dkt. 16 at 40. Defendants take several issues with the Fund's RICO claim, including arguing that the Fund failed to plead a pattern of racketeering activity. Dkt. 18 at 16.
RICO claims under 18 U.S.C. § 1962 have three common elements: “(1) a person who engages in (2) a pattern of racketeering activity, (3) connected to the acquisition, establishment, conduct, or control of an enterprise.” Abraham v. Singh, 480 F.3d 351, 355 (5th Cir.2007). “A pattern of racketeering activity consists of two or more predicate criminal acts that are (1) related and (2) amount to or pose a threat of continued criminal activity.” St. Germain v. Howard, 556 F.3d 261, 263 (5th Cir. 2009) (citing Singh 480 F.3d at 355). “Racketeering activity” is defined in RICO as “any act or threat involving” certain enumerated state law crimes or any “act” indictable under specified federal statutes and certain federal “offenses.” Dennis v. Gen. Imaging, 918 F.2d 496, 511 (5th Cir. 1990) (quoting 18 U.S.C. § 1961(1)). The acts comprising the racketeering activity are commonly known as predicate acts. Id. “The term ‘pattern' is defined as ‘requiring at least two acts of racketeering activity' within a ten[-]year period.” Id. (quoting 18 U.S.C. § 1961(5)).
In the Live Complaint, the Fund alleged that the predicate acts committed by Defendants were mail fraud, Dkt. 16 ¶173, wire fraud, id. ¶172, and transportation of stolen property. Id. ¶174.
Because the Fund relies on fraud as a predicate act for its RICO claim, the Live Complaint is subject to the heightened pleading standard of Federal Rule of Civil Procedure 9(b), requiring a plaintiff to “state with particularity the circumstances constituting fraud.” Arruda v. Curves Intl, 861 Fed.Appx. 831, 834 (5th Cir. 2021) (citing Williams v. WMX Techs., 112 F.3d 175, 177 (5th Cir. 1997); FED. R. CIV. P. 9(b)). This requires “at a minimum” that a plaintiff provide the “‘who, what, when, where, and how' of the alleged fraud.” Id. (quoting U.S. ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903 (5th Cir. 1997)) (internal quotations omitted).
The Fund's allegation of mail fraud is clearly inadequate. The crime of mail fraud, 18 U.S.C. § 1341, requires that the mailing be in furtherance of the scheme to defraud. United States v. Maze, 414 U.S. 395, 403 (1974). But the Fund does not allege mention a mailing in its Live Complaint. Because a mailing or use of an interstate carrier is an element of mail fraud, the absence of such an allegation dooms the Fund's mail fraud claim.
The Fund's wire fraud claim is also inadequate. The Fund contends that the Individual Defendants “initiated and received multiple transfers of Fund and loan borrower funds across state lines via the use of wires ....” Dkt. 16 ¶172. The Fund then points to several preceding paragraphs in the Live Complaint as instances of the Individual Defendants' illicit use of wires.
None of the paragraphs outlining the Fund's RICO claim provide the who, what, when, where, and how. Dkt. 16 ¶165-78. Furthermore, the paragraphs to which the Fund cites in the “Substantive Allegations” section of the Live Complaint likewise does not contain allegation pled with particularity. Paragraph 32 describes marketing practices generally. Id. ¶32. Paragraph 47 describes in the broadest of terms the Noble entities, including that they used @noblecapital.com email addresses. Id. ¶47. Paragraph 58 alleges that Defendants did not intend to uphold contractual obligations. Id. ¶58. Paragraph 71 alleges that a Noble Capital Group-owned or -controlled entity purchased defaulted loans in Q3 and Q4 2018, comprising 5% of the loans the Noble entities originated for the Fund. Id. ¶71. Paragraph 72 alleges there were early payment defaults. Id ¶72. Paragraph 162 alleges that NCFM or Noble Capital Group without authorization directed the transfer of Fund assets. Id. ¶162. And paragraphs 60 through 64 allege the 4 Individual Defendants conducted insufficient diligence and recommend loans that defaulted. Id. ¶¶60-64. The allegations in paragraphs 60 through 64 also allege that the 4 Individual Defendants caused credit memoranda signed by Defendants Ragland and Collins to be delivered to the Fund, but there is no allegation of how the memoranda were sent. Id. These allegations come nowhere close to providing the who, what, when, where, and how of the alleged fraud. Nor do they sufficiently allege the use of wires.
Finally, the Fund alleges violations of 18 U.S.C. §§ 2314 and 2315 as RICO predicates based on “the Individual Defendants initiat[ing] and receiv[ing] multiple transfers that caused Fund funds to travel or be transported in interstate commerce ....” Id. ¶174. The Fund again points to the allegations contained in paragraphs 32, 47, 58, 71, 72, and 162. Id. Only the allegations in paragraph 162 describe with particularity a RICO predicate offense. Because the Live Complaint alleges only a single RICO predicate, the Fund failed to establish the pattern required for a RICO claim. Accordingly, the undersigned will recommend the District Court dismiss the Fund's first cause of action.
2. Civil RICO conspiracy (Count 2)
The Fund alleges a RICO conspiracy against all Defendants. Dkt. 16 at 43. Defendants argue that because the Fund failed to allege a RICO claim, its conspiracy claim fails. Dkt. 18 at 17.
A plaintiff that fails to state a claim under § 1962(c) correspondingly fails to state a claim under § 1962(d). N. Cypress Med. Ctr. Operating Co. v. Cigna Healthcare, 781 F.3d 182, 203 (5th Cir. 2015).
Because the Fund failed to state a claim under § 1962(c), its § 1962(d) conspiracy claim correspondingly fails. Accordingly, the undersigned will recommend dismissal of the Fund's RICO conspiracy claim.
The Fund's claim fails for a second, independent reason. A civil RICO conspiracy claim must plead agreement to commit predicate acts and knowledge that the acts were part of a pattern of racketeering activity. Tel-Phonic Servs. v. TBS Int'l, 975 F.2d 1134, 1140 (5th Cir. 1992) (citing Glessner v. Kenny, 952 F.2d 702, 714 (3d Cir.1991)). The Fund has pleaded the conclusory allegation that Defendants “conspired.” Dkt. 16 ¶180. But it has not pleaded the elements of a RICO conspiracy because it does not allege facts implying any agreement involving each of the (seventy-something) Defendants to commit at least two predicate acts and knowledge that the acts were part of a pattern. Accordingly, if the District Court declines to adopt the recommendation to dismiss the civil RICO claim because the RICO claim fails, the undersigned recommends that, in the alternative, the District Court dismiss the Fund's RICO conspiracy claim for failure to allege an agreement. Accordingly, the undersigned will recommend the District Court dismiss the Fund's second cause of action.
3. Fraud (Count 3)
The Fund alleges “the Individual Defendants and [NCFM] made repeated false and fraudulent misrepresentations and omissions to [the Fund],” including borrowers' credentials, background check results, and recommendations to fund loans. Dkt. 16 ¶185. The relevant Defendants contend that the Fund is attempting to “shoehorn its [breach of contract] allegations into a fraud claim,” which the law prohibits. Dkt. 18 at 11.
“As a general rule, the failure to perform the terms of a contract is a breach of contract, not a tort.” Heller Fin., Inc. v. Grammco Comput. Sales, 71 F.3d 518, 527 (5th Cir. 1996). This is not to say that an act cannot constitute both a tort and a breach of contract. But where a party's action may constitute either a tort or a breach of contract, “[t]he nature of the injury most often determines which duty or duties are breached. When the injury is only economic loss to the subject of a contract itself the action sounds in contract alone.” Sw. Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 495 (Tex. 1991) (quoting Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986)).
If the defendant's conduct-such as negligently burning down a house-would give rise to liability independent of the fact that a contract exists between the parties, the plaintiff's claim may also sound in tort. Conversely, if the defendant's conduct-such as failing to publish an advertisement-would give rise to liability only because it breaches the parties' agreement, the plaintiff's claim ordinarily sounds only in contract.Id. at 494.
Further, “a party states a tort claim when the duty allegedly breached is independent of the contractual undertaking and the harm suffered is not merely the economic loss of a contractual benefit.” Chapman Custom Homes, Inc. v. Dallas Plumbing Co., 445 S.W.3d 716, 718 (Tex. 2014). That said, in Texas recovery in tort for the economic losses caused by the failure of a party to perform under a contract are generally precluded under the Economic Loss Doctrine. Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 12 (Tex. 2007) (citing DeLanney, 809 S.W.2d at 494-95).
“In determining whether a tort claim is merely a repackaged breach of contract claim, a court must consider: 1) whether the claim is for breach of duty created by contract, as opposed to a duty imposed by law; and 2) whether the injury is only the economic loss to the subject of the contract itself.” Stanley Indus. Of S. Fla. V J.C. Penney, Corp., 2006 U.S. Dist. LEXIS 63109, 2006 WL 2432309, at *5 (N.D. Tex. Aug. 18, 2006) (citing Formosa Plastics Corp. USA v. Presidio Eng'rs and Contractors, 960 S.W.2d 41, 45-47 (Tex. 1998)).
Here, the alleged misrepresentations all relate to the relevant Defendants' duties under contracts. Dkt. 16 ¶185, 186 (relevant “Defendants had not properly looked into or reported on borrower credentials,” a duty under the MASA). Although the Fund alleges the alleged fraud claim arose because the relevant Defendants “never intended to uphold their contractual obligations to the Fund ....,” Id. ¶58, nowhere does the Fund allege that any Defendant fraudulently induced it.
To the extent the Fund's fraud claim could be repackaged as a fraudulent inducement claim, it fails because the sole allegation regarding entering a contract is that Defendants “never intended to uphold their contractual obligations to the Fund ....” Dkt. 16 ¶58. This lone allegation is insufficient to meet the heightened pleading fraud pleading standard. FED. R. CIV. P. 9(b) (“In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.”); Schnurr v. Preston, No. 5:17-CV-512-DAE, 2018 U.S. Dist. LEXIS 232767, at *3 (W.D. Tex., May 29, 2018) (“Claims alleging fraud and fraudulent inducement are subject to the requirements of Rule 9(b) of the Federal Rules of Civil Procedure.”).
Again, the acts of which the Fund complains are references to the relevant Defendants' duties created under contracts. Id. ¶186 (repeating three times X “was not an appropriate borrower to recommend” where X is a prospective borrower). And the only damages alleged in connection with this claim would appear to be the economic damages flowing from the Fund's reliance on this alleged misrepresentation. Id. ¶¶190-91 (the Fund's “reliance on Defendants' misrepresentations and omissions . . .”; the Fund “has been damaged in an amount to be proven at trial”).
Accordingly, the undersigned concludes that Plaintiffs have failed to state a claim for negligent misrepresentation above and beyond their claim for breach of contract based on these same facts and contractual obligations and will recommend that the District Court dismiss the Fund's third cause of action.
B. Conversion (Counts 7 & 8)
The Fund asserts two claims for conversion. Dkt. 16 at 49, 50. The first, Count Seven, alleges Defendants Noble Capital Properties, NCFM, and Noble Capital Servicing converted several real properties. Id. at 49-50. The second, Count Eight, alleges all Defendants converted $26 million from Fund accounts to investment vehicles controlled by Defendants. Id. at 50.
“Conversion occurs when, wrongfully and without authorization, one assumes and exercises control and dominion over the personal property of another, either inconsistently with or to the exclusion of the owner's rights.” United States v. Boardwalk Motor Sports, 692 F.3d 378, 381 (5th Cir. 2012). A conversion claims has four elements: “(1) the plaintiff owned, possessed, or had the right to immediately possess the property; (2) the defendant unlawfully and without authorization assumed and exercised control over the property to the exclusion of, or inconsistent with, the plaintiff's rights as an owner; (3) the plaintiff demanded the return of the property; and (4) the defendant refused to return the property.” BBX Operating v. Bank of Am., N.A. (In re Connect Transp.), 825 Fed.Appx. 150, 153 (5th Cir. 2020) (citing Arthur W. Tifford, PA v. Tandem Energy Corp., 562 F.3d 699, 705 (5th Cir. 2009)). Conversion involves the unauthorized and unlawful assumption and exercise of dominion and control over the personal property of another. Hilburn v. Storage Tr. Props., 586 S.W.3d 501, 508 (Tex. App.-Houston [14th Dist.] 2019, no pet.). Conversion claims for money require a plaintiff to plead additional elements. In re TXNB Internal Case, 483 F.3d 292, 308 (5th Cir. 2007).
The Fund's first conversion claim, Count 7, relates to real property, but the tort of conversion pertains only to personal property. Hilburn, 586 S.W.3d at 508. Therefore, that claim fails as a matter of law. Accordingly, the undersigned will recommend dismissal of the Fund's seventh cause of action, the first conversion claim.
The Fund's Response does not respond to Defendants' contention that the Fund's conversion-of-real-property claim fails as a matter of law. See Dkt. 22 at 13-14. Thus, the undersigned concludes that claim is abandoned.
The Fund's second conversion claim, Count 8, relates to money. “Conversion claims for money must meet additional requirements.” United States v. Boardwalk Motor Sports, 692 F.3d 378, 381 (5th Cir. 2012). “An action will lie for conversion of money when its identification is possible and there is an obligation to deliver the specific money . . . or otherwise particularly treat specific money.” Id. (quoting Hous. Nat'l Bank v. Biber, 613 S.W.2d 771, 774 (Tex. App.- Houston [14th Dist.] 1981, writ ref'd n.r.e.)) (internal quotations omitted). “Actions for conversion of money are available in Texas only where ‘money is (1) delivered for safekeeping; (2) intended to be kept segregated; (3) substantially in the form in which it is received or an intact fund; and (4) not the subject of a title claim by the keeper.'” Edge Petroleum Operating Co. v. GPR Holdings (In re TXNB Internal Case), 483 F.3d 292, 308 (5th Cir. 2007) (quoting Edlund v. Bounds, 842 S.W.2d 719, 727 (Tex. App.-Dallas 1992, writ denied).
The Fund argues it “has a right to the principle and interest payments that Defendants collected from borrowers in the Fund's loan portfolio.” Dkt. 22 at 13. The Fund alleges Defendants have withheld those payments and that Defendants “wrongfully directed third-party administrators to liquidate and transfer $26 million of the funds assets ....” Id. The Fund also contends that it was not required to plead the extra requirements for a conversion of money because “the Rules do not require a complaint to support every element of a cause of action, much less to anticipate and negate possible defenses.” Id. at 14. Thus, the Fund contends its “allegations are sufficient to state a plausible claim for conversion.” Id. at 13.
A plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545 (2007). Money can be the subject of conversion only “when it is in the form of specific chattel, such as old coins, or when ‘the money delivered is to another party for safekeeping, the keeper claims no title, and the money is required and intended to be segregated, either substantially in the form in which it was received or as an intact fund.'” Mitchell Energy Corp. v. Samson Res., 80 F.3d 976, 984 (5th Cir. 1996) (quoting Dixon v. State, 808 S.W.2d 721, 723 (Tex. App.-Austin 1991, writ dism'd w.o.oj.)).
The Fund's second conversion claim is not plausible because the Live Complaint does not allege that the $26 million was specific chattel or that Defendants were entrusted to hold the money for safekeeping in the form in which it was received or as an intact fund. Pointing to the notice pleading standard does not preserve this claim; the claim fails as a matter of law because the Live Complaint does not allege that the $26 million was the sort of property that may give rise to a cognizable conversion claim. Nor does the Fund allege that it demanded the money back nor does it allege Defendants refused to return the money. Accordingly, the undersigned will recommend dismissal of the Fund's eighth cause of action, the second conversion claim.
In the alternative, the undersigned would recommend dismissal of this claim for illicit group pleading. The claim is asserted against all Defendants, including Does 1-50.
C. Unjust Enrichment (Count 9)
The Fund's ninth cause of action is against all Defendants for unjust enrichment. Dkt. 16 at 51. Defendants move to dismiss this claim because the Fund does not allege that Defendants “retained a benefit ‘by fraud, duress, or the taking of an undue advantage,' or that it is inequitable for Defendants to retain the benefit.” Dkt. 18 at 17 (quoting Sullivan v. Leor Energy, 600 F.3d 926, 930 (5th Cir. 2010)).
“The unjust enrichment doctrine applies principles of restitution to disputes where there is no actual contract and is based on the equitable principle that one who receives benefits which would be unjust for him to retain ought to make restitution.” In re Guardianship of Fortenberry, 261 S.W.3d 904, 915 (Tex. App.-Dallas 2008, no pet.). “Because a claim for unjust enrichment is ‘based on quasi-contract,' it is ‘unavailable when a valid, express contract governing the subject matter of the dispute exists.'” Burlington N. R.R. Co. v. Sw. Elec. Power Co., 925 S.W.2d 92, 97 (Tex. App. - Texarkana 1996). “[W]hen a valid, express contract covers the subject matter of the parties' dispute, there can be no recovery under a quasi-contract theory ....” Fortune Prod. Co. v. Conoco, Inc., 52 S.W.3d 671, 684 (Tex. 2000). “When a valid agreement already addresses the matter, recovery under an equitable theory is generally inconsistent with the express agreement.” Excess Underwriters at Lloyd's v. Frank's Casing Crew & Rental Tools, 246 S.W.3d 42, 50 (Tex. 2008) (quoting Fortune Prod., 52 S.W.3d at 684). Furthermore, a “party may recover under an unjust enrichment theory when one person has obtained a benefit from another by fraud, duress, or the taking of undue advantage.” Padua v. Jason A. Gibson, No. 14-21-00489-CV, 2023 Tex.App. LEXIS 4833, at *14 (Tex. App.-Houston [14th Dist.] July 6, 2023, pet. filed) (citing cases and citing other authority).
In this case, the subject matter of the dispute-Defendants' relationship and responsibilities to the Fund-is expressly governed by contract. See, e.g., Dkt. 16 ¶56 (“[T]he ‘MASA' between the Fund and NCFM . . . governs the Fund's business relationship with multiple Noble entitles ....). The Live Complaint also does not allege fraud, duress, or undue advantage as part of this cause of action. Dkt. 16 ¶¶232-35.
The Fund contends that its equitable claim is in addition to its breach of contract claim. Dkt. 22 at 20. Providing no analysis, the Fund cites without analysis Sw. Elec. Power Co. v. Burlington N. R.R. C. for the proposition that “overpayments under a valid contract may give rise to a claim for . . . unjust enrichment. Id. (citing 966 S.W.2d 467, 469 (Tex. 1998)). Without analysis, the court will rely on more recent authority, which is crystal clear: “In Texas, unjust enrichment is based on quasi-contract and is unavailable when a valid, express contract governing the subject matter of the dispute exists.” Coghlan v. Wellcraft Marine Corp., 240 F.3d 449, 454 (5th Cir. 2001) (citing Texas cases).
The Fund does not contest validity of the various contracts at issue in this lawsuit. Indeed, the Fund asserts it complied with various contracts and is suing here to enforce those contracts. See, e.g., Dkt. 16 ¶204. The Response is clear about the basis of the Fund's unjust enrichment claim: “Defendants received and retained principal and interest payments from borrower which they are contractually obligated to tender to the Fund ....” Dkt. 22 at 20.
Because contracts govern the subject matter of this dispute and because the Live Complaint does not allege fraud, duress, or undue advantage as part of its unjust enrichment claim, the undersigned will recommend the District Court dismiss the Fund's unjust enrichment claim, its ninth cause of action.
D. Tortious Interference (Count 10)
The Fund asserts a claim for Intentional Interference with Contractual Relations against NCFM and Noble Capital Servicing. Dkt. 16 at 52. Defendants allege this claim fails because Defendants are not strangers to the contracts. Dkt. 18 at 9.
“In El Paso Healthcare System, Ltd. v. Murphy, the Supreme Court of Texas stated the following: To prevail on a claim for tortious interference with an existing contract, the plaintiff must present evidence that the defendant induced the plaintiff's co-contracting party to breach the contract, and thus interfered with the plaintiff's legal rights under the . . . contract.” WickFire v. Woodruff, 989 F.3d 343, 354 (5th Cir. 2021) (quoting 518 S.W.3d at 421-22) (cleaned up). “The claim may be brought ‘against any third person . . . who wrongly induces another contracting party to breach the contract.'” Haynes v. Bryan, No. 01-20-00685-CV, 2022 Tex.App. LEXIS 3785, at *9 (Tex. App.-Houston [1st Dist.] June 7, 2022, no pet. h.) (quoting Holloway v. Skinner, 898 S.W.2d 793, 795 (Tex. 1995). “To satisfy the second element, a defendant must be more than a willing participant; she must knowingly induce one of the contracting parties to breach its obligations. Id. (citing Browning-Ferris v. Reyna, 865 S.W.2d 925, 927 (Tex. 1993)).
The Fund alleges the relevant Defendants' actions induced the Fund to breach its relationship with one of its partners. Id. ¶240. The Fund also alleges the relevant Defendants' actions “render[ed] the Fund inoperable” and “harmed the Fund's reputation.” Id.
Because the Fund does not allege that the relevant Defendants (or any Defendants for that matter) induced a third party to breach the third party's contract with the Fund, the Fund's tortious interference claim fails. Accordingly, the undersigned will recommend the District Court dismiss the Fund's tenth cause of action.
E. Accounting (Count 11)
The Fund asserts a claim for accounting against NCFM. Dkt. 16 ¶244. Defendants argue the claim should be dismissed “as it is an equitable remedy available only ‘when the facts and accounts presented are so complex that adequate relief may not be obtained at law.'” Dkt. 18 at 5 (citing Sam v. Wells Fargo Bank, N.A., 2016 WL 4470111, at *9-10 (S.D. Tex. July 15, 2016)). Defendants point out that “the Fund has not alleged it lacks adequate relief at law.” Id.
“An accounting is generally an equitable remedy rather than an independent cause of action.” Brock v. Fannie Mae, No. 4:11-CV-211-A, 2012 U.S. Dist. LEXIS 23754, at *13 (N.D. Tex. 2012) (citing T.F.W. Mgmt., Inc. v. Westwood Shores Prop. Owners Ass'n, 79 S.W.3d 712, 717 (Tex. App.-Houston [14th Dist.] 2002, pet. denied)). “An accounting is appropriate ‘when the facts and accounts presented are so complex adequate relief may not be obtained at law.'” Martinez v. Wells Fargo Bank, N.A., No. SA-12-CA-465-FB, 2012 U.S. Dist. LEXIS 207982, at *10 (W.D. Tex. 2012) (citing Brock, 2012 U.S. Dist. LEXIS 23754, 2012 WL 620550, at *5. “Nonetheless, when a party can obtain adequate relief ‘through the use of standard discovery procedures, such as requests for production and interrogatories, a trial court does not err in not ordering an accounting.'” Scheele v. Wells Fargo Bank, N.A., 2013 U.S. Dist. LEXIS 135846, *16 (W.D. Tex. Sept. 23, 2013) (Ezra, J.) (quoting T.F.W. Mgmt., 79 S.W.3d at 717-18). Granting an accounting is within the discretion of the trial court. Id. (citing Sw. Livestock & Trucking Co. v. Dooley, 884 S.W.2d 805, 809 (Tex. App.-San Antonio 1994)).
Whether or not the Fund's accounting claim is properly pled is of no matter. The Fund did not address NCFM's argument that the purported claim should be dismissed. See generally Dkt. 22. Failure to pursue a claim beyond the complaint constitutes abandonment. Black v. N. Panola Sch. Dist., 461 F.3d 584, 588 n.1 (5th Cir. 2006) (dismissing claim plaintiff failed to defend in response to motion to dismiss).
Because the Fund did not defend it purported accounting claim in its Response, it abandoned that claim. Accordingly, the undersigned will recommend the District Court dismiss that claim. As accounting is generally an equitable remedy rather than a cause of action, and because the Fund does not allege it lacks an adequate remedy at law, the undersigned will recommend that dismissal of the purported accounting claim be with prejudice.
F. Breach of the Duty of Good Faith and Fair Dealing (Count 13)
The Fund asserts a claim for breach of the duty of good faith and fair dealing. Dkt. 16 at 55. Defendants argue this claim should be dismissed because under Texas law there is no general duty of good faith and fair dealing, and the Live Complaint does not allege a special relationship between the parties that would give rise to such a duty. Dkt. 18 at 18.
“Texas law does not impose a generalized contractual duty of good faith and fair dealing and, in fact, rejects it in almost all circumstances.” Hux v. S. Methodist Univ., 819 F.3d 776, 781 (5th Cir. 2016) (citing English v. Fischer, 660 S.W.2d 521, 522 (Tex. 1983)). “But in an extremely narrow class of cases, the Texas courts have determined that a special relationship may give rise to a tort duty of good faith and fair dealing.” Id. (citing Arnold v. Nat'l Cty. Mut. Fire Ins., 725 S.W.2d 165, 167 (Tex. 1987)). “A duty of good faith and fair dealing may arise in two contexts.” Id. “The first, not pertinent here, is when the parties are in a formal fiduciary relationship (e.g., principal-agent, attorney-client, or trustee-beneficiary); in such situations, the ordinary bundle of duties incumbent on a fiduciary includes a duty of good faith and fair dealing.” Id. (citing Crim Truck & Tractor Co. v. Navistar Int'l Transp. Corp., 823 S.W.2d 591, 593-94 (Tex. 1992)). The second context is when the parties are not formal fiduciaries but are still in a special or confidential relationship. Id. For the second context to apply, the “relationship must exist before and apart from the contract or agreement that forms the basis of the controversy.” Id. (citing Transp. Ins. Co. v. Faircloth, 898 S.W.2d 269, 280 (Tex. 1995)). “A party's unilateral, subjective sense of trust and confidence in the opposing party is not sufficient to give rise to a special relationship and the attendant duty.” Id. (citing Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 177 (Tex. 1997)).
Neither context applies here. The Live Complaint does not allege NCFM owed the Fund a fiduciary duty. See Dkt. 16 ¶¶259-265. The second context does not apply because (1) there is no allegation that the parties have a longstanding relationship that involves an imbalance of power and (2) the parties' relationship does not exist before an apart from the contracts that sparked this controversy. All the Fund's allegations in support of its claim relate to the MASA-a contract. The Live Complaint explicitly alleged that “NCFM prevented the Fund from receiving the benefits it is entitled under the MASA.” Dkt. 16 ¶263.
The undersigned is conscious that the duty of good faith and fair dealing arises “in an extremely narrow class of cases.” Hux, 819 F.3d at 781. Because the Live Complaint contains no allegations that put this lawsuit into that narrow class of cases, the undersigned will recommend dismissal of the Fund's breach of the duty of good faith and fair dealing claim-its thirteenth cause of action.
G. False Advertising (Count 4)
The Live Complaint contains a claim for false advertising under the Lanham Act against the Individual Defendants, Noble Capital Group, Noble Capital Fund Income Fund II and Income Fund III. Dkt. 16 at 45. The relevant Defendants argue the claim should be dismissed for several reasons: first, the Fund is not a competitor of NCFM; second, the Live Complaint does not allege various elements of a false advertising claim. Dkt. 18 at 14.
To establish a prima facie case of false advertising under Section 43(a) of the Lanham Act, “the plaintiff must show that the defendant made (1) a false or misleading statement of fact about a product; (2) the statement was deceptive; (3) the deception is material; (4) the product is in interstate commerce; and (5) the plaintiff has been injured or is likely to be injured as a result.” Boltex Mfg. Co., L.P. v. Galperti, Inc., 827 Fed.Appx. 401, 406 (5th Cir. 2020) (citing Logan v. Burgers Ozark Country Cured Hams, 263 F.3d 447, 462 (5th Cir. 2001)). “The failure to prove the existence of any element of the prima facie case is fatal to the plaintiff's claim.” Id. (quoting Pizza Hut v. Papa John's Int'l, 227 F.3d 489, 495 (5th Cir. 2000)).
Out of the gate, the relevant Defendants contend the false advertising claim fails because the Fund does not allege NCFM is a competitor to the Fund. Id. The Fund responds that nothing in the Lanham Act requires that parties be competitors for a false advertising claim to be cognizable. Dkt. 22 at 16. The Fund is correct.
Section 1125 authorizes suit by “any person who believes that he or she is likely to be damaged” by a defendant's false advertising. 15 U.S.C. §1125(a)(1). “Read literally, that broad language might suggest that an action is available to anyone who can satisfy the minimum requirements of Article III.” Lexmark Int'l v. Static Control Components, 572 U.S. 118, 129, (2014). But §1125's broad sweep is not as broad as it appears. Id. The Lanham Act includes an “‘unusual, and extraordinarily helpful,' detailed statement of the statute's purposes.” Id. at 131 (quoting H. B. Halicki Productions v. United Artists Communications, 812 F.2d 1213, 1214 (9th Cir. 1987)). Because “[m]ost of the enumerated purposes are relevant to false-association cases . . . [the Act is] concerned with injuries to business reputation and present and future sales.” Id. (citing authority). Thus, “a plaintiff must allege an injury to a commercial interest in reputation or sales.” Id. at 131-32. Competitor status is not required.
The Fund alleges “Defendants' false and misleading statements have caused or are likely to cause competitive or commercial injury to the Fund, . . . and the Fund's reputation has been harmed ....” Dkt. 16 ¶201 (emphasis added).
The relevant Defendants also briefly contend that the information was not shared widely enough to be considered an advertisement. Dkt. 18 at 14 (citing non-binding authority from the U.S. District Court for the Eastern District of Texas case). The Fifth Circuit does not impose a strict definition of advertisement standard. To qualify as a statement made in the context of commercial advertising, the representation should be made for “the purpose of influencing consumers to buy defendant's goods or services” and “disseminated sufficiently to the relevant purchasing public.” Seven-Up Co. v. Coca-Cola Co., 86 F.3d 1379, 1384 (5th Cir. 1996). The Fund alleges the relevant Defendants made statements on NCFM's website, at state-of-the-company events, online, including on YouTube and Facebook, and in press releases. The court concludes the allegedly false or misleading statements were disseminated to the relevant purchasing public to influence customers to invest in the relevant Defendants' investment products and services.
The relevant Defendants also challenge the Fund's false advertising claim contending (1) that the relevant Defendants' alleged actions benefitted the Fund and (2) that the Fund's reputational harm contention is based on developments that occurred after investors invested in the Fund. Defendants' arguments are persuasive but not dispositive of this claim.
The Fund's arguments begin in an odd posture because the relevant Defendants are not competitors, and as the Live Complaint provides, the relevant Defendants employed statements “both on behalf of and also in order to divert investment money away from the Fund and into Defendants' other funds ” Dkt. 16 ¶194. The Live Complaint alleges that the relevant Defendants used the Fund's CUSIP number “to attract investors to the Fund ....” Id. ¶196. The Fund also objects to Defendants employing the name “Signature Fund” when advertising the Fund. Id. ¶197. The Fund alleges that using the name “Signature Fund” was not approved by the Fund and contends Defendants did so to confuse investors. Id. ¶197. But these allegations do not suggest that the relevant Defendants made statements that were literally false or likely to mislead potential investors. Furthermore, the Fund arguably benefitted from the relevant Defendants' actions to attract investors to the Fund.
A CUSIP number is a unique, nine-digit alphanumeric code that identifies a security under the standards of the Committee on Uniform Security Identification Procedures. Dkt. 16 ¶85.
In any event, the Fund alleges a cognizable claim for false advertising. The Live Complaint also alleges that NCFM published on its website an advertisement for the Fund that promises investors an 8.25% annual return. Dkt. 16 ¶99. The Fund alleges that Defendant Ragland prepared or directed the ad, which was approved by Defendants Collins, Navarro, and Newman. Id. The Fund asserts that “none of the funds . . . are able generate a guaranteed 8.25% return or any guaranteed return, and the Fund has fallen short of that mark on multiple occasions.” Id. ¶100. The Live Complaint also alleges that at a company event in Austin, Texas and published on YouTube and Facebook, Defendant Ragland told investors “inside funds [including the Fund]” that “regardless of how good of a job we do, you're still getting your payments on your properties ....” Id. ¶104 (emphasis in original).
The Fund's allegations are enough to state a false advertising claim. The statement that returns of at least 8.25% was false and deceptive (no cautionary language accompanied the statement). The deception is material as it was meant to attract investors into Defendants' funds, including the Fund. The statement and others appeared in multiple places online, including on YouTube and Facebook, which are in interstate commerce. Id. ¶200. Finally, the Fund alleges that it has been or is likely to be harmed. Defendant Collins acknowledged the reputational harm facing the Fund:
Dkt. 16 ¶99.
We can't keep publishing the financial stating we hit the hurdle rate of 8.25% and the investors get less than that. We can explain it to them all we want[,] but they don't really care and feel like they have been misled and will look to start withdrawing when their lockup expires. Not good.Dkt. 16 ¶112 (emphasis in original).
The Fund's Lanham Act false advertising is not subject to Rule 9(b)'s heightened pleading standard. Tempur-Pedic Int'l v. Angel Beds, 902 F.Supp.2d 958, 971 (S.D. Tex. 2012). Because the Fund alleges each element of a Lanham Act false advertising claim, and because Defendants' procedural arguments are unavailing, the undersigned will recommend that the District Court deny Defendants' motion to dismiss this claim as to Defendants Collins, Navarro, Newman, and Ragland, and Noble Capital Group. Because the Live Complaint alleges only that Noble Capital Fund Management Income Fund II and Income Fund III were repositories for diverted funds, made no statements, and authorized no statements, the Fund has not alleged that either fund engaged in false advertising. Accordingly, the undersigned will recommend that the District Court grant Defendants' motion to dismiss the false advertising claim alleged against Income Fund II and Income Fund III.
H. Breach of Contract (Counts 5, 6 & 12)
The Fund asserts three breach of contract claims-two against NCFM, one against Noble Capital Properties. Dkt. 16 at 46, 48, 53. Defendants move to dismiss each one. Dkt. 18 at 7. The breach of contract claims arise out of the MASA and a memorandum of understanding (MOU). Defendants assert the agreements are governed by California. The Fund did not contest Defendants' assertion.
Under California law, the elements of a cause of action for breach of contract are (1) the existence of the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to the plaintiff. United States Capital Glob. Inv. Mgmt., Ltd. Liab. Co. v. Noble Cap. Grp., Ltd. Liab. Co., No. 1:22-CV-626-DAE, 2023 U.S. Dist. LEXIS 133109, at *22 (W.D. Tex. 2023) (citing Oasis W. Realty, LLC v. Goldman, 51 Cal.4th 811, 821, 124 Cal.Rptr.3d 256, 250 P.3d 1115 (2011)). “The elements of a breach of contract claim are identical under California law” and Texas law. Chartis Specialty Ins. Co. v. Tesoro Corp., 930 F.Supp.2d 653, 665 (W.D. Tex. 2013) (citing First Com.l Mortg. Co. v. Reece, 89 Cal.App.4th 731, 745, 108 Cal.Rptr.2d 23 (Cal.Ct.App. 2001)). Thus, whether the breach of contract claims are governed by California or Texas law does not affect the court's analysis of whether the Fund stated claims for breach of contract.
Defendants also point out that the Fund did not attach the agreements it alleged Defendants breached. Defendants argue that the Fund did not sufficiently identify the contractual provisions at issue or Defendants' actions that constituted breaches. Dkt 18 at 7, 8. But “[u]nder Federal Rule of Civil Procedure 8(a), a ‘short and plain statement of the claim' suffices.” Securimetrics, Inc. v. Hartford Cas. Ins., No. C 05-00917 CW, 2005 U.S. Dist. LEXIS 44893, at *6 (N.D. Cal. 2005). Thus, to plead the existence of a contract, a plaintiff must quote the terms of the purported contract, attach it to the complaint, or clearly allege the substance of the relevant terms. Ramirez v. GMAC Mortg., No. CV 09-8189 PSG (FFMx), 2010 U.S. Dist. LEXIS 5377, 2010 WL 148167, *1 (C.D. Cal. Jan. 12, 2010); Securimetrics, 2005 U.S. Dist. LEXIS 44893, at *2 (“The forms appended to the Federal Rules of Civil Procedure note that ‘plaintiff may set forth the contract verbatim in the complaint or plead it, as indicated, by exhibit, or plead it according to its legal effect'” (citations omitted)). Thus, failure to attach the alleged agreement is not fatal. Virun, Inc. v. Cymbiotika Ltd. Liab. Co., No. 8:22-cv-00325-WLH-DFM, 2023 U.S. Dist. LEXIS 215369, at *9 (C.D. Cal. 2023). Attaching the contract is unnecessary if the claimant alleges the substance of the relevant terms. Id.
1. Violations of the MASA (Counts 5 & 12)
The Fund alleges that NCFM breached multiple of its obligations under the MASA. Dkt. 16 at 46. Defendants contend that the Fund's allegation that Defendants failed to transmit payments is not tied to the MASA require that NCFM “‘[m]anage portfolio investments and thus does not constitute a breach a as matter of law.” Dkt. 18 at 7 (citing Park v. Morgan Stanley., No. 2:11-cv-9466, 2021 WL 589653, at *3 (C.D. Cal. Feb. 22, 2012). Defendants further argue that the Fund's complaint that the Fund's auditors did not receive requested documents does not allege conduct that breaches the MASA's provision requiring NCFM to “cooperate with the Fund” and “keep the General Partner fully informed with regard to services provided by” NCFM. Id. at 8 (citing Dkt. 16 ¶¶149, 209).
As the Fund points out, it alleges several breaches of the MASA. Dkt. 16 ¶¶205 (requiring due diligence), 206 (requiring structuring, securitization, and execution), 207 (requiring repossession, restructuring, or remediation), 208 (requiring portfolio management), 209 (requiring cooperation and information). As Defendants challenge only two these in their Motion, the undersigned will recommend that the District Court deny Defendants' motion to dismiss count five.
The Fund also alleges that NCFM breached the MASA “when it unilaterally stole” $26 million in Fund assets, including $2 million in fees. Id. ¶255. Defendant NCFM asserts the same objection to this claim as it does the other breach of contract claims: the Fund does not sufficiently identify the MASA provision NCFM is alleged to have breached or the actions or omissions that constitute breach.
The Fund quotes the MASA provisions that provide NCFM's duties to “[m]anage the portfolio of investments in respect to collateral monitoring, cash management, and any other activities as requested by the General Partner,” Dkt. 16 ¶250, and to “at all times cooperate with the Fund and keep the GP fully informed with regard to the services provided by [NCFM].” Id. ¶251. The Fund alleges these actions were done with the knowledge or approval of the Fund and “effectively destroyed the Fund's value ....” Id. ¶¶254, 256. Again, the court concludes that the allegations provide enough information to give Defendant NCFM fair notice of the claim against it. Accordingly, the undersigned will recommend the District Court deny Defendants' motion to dismiss the Fund's twelfth cause of action.
2. Breach of the MOU (Count 6)
The Fund alleges that Noble Capital Properties breached a memorandum of understanding. Dkt. 16 at 48. Defendants move to dismiss this claim, contending it “suffers from the same defects” as the Fund's other breach of contract claims. Dkt. 18 at 8.
The court concludes that the Fund states a claim for breach of contract. The Live Complaint alleges that “Pursuant to the June 30, 2018 MOU, Noble Capital Properties promised that it would finalize and issue new notes for the MOU properties by September 1, 2018. Dkt. 16 ¶214. The Live Complaint alleges Noble Capital Properties breached this provision by “failing to issue new notes for any of the MOU properties at any time, despite the Fund's repeated requests.” Id. These allegations as to the substance of the contractual provisions and actions constituting the alleged breach provide Defendants with fair notice. Accordingly, the undersigned will recommend the District Court deny Defendants motion to dismiss the Fund's sixth cause of action.
V. Conclusion
The undersigned shares Defendants' frustration with the Fund's Live Complaint. It is clear that the Fund threw mud at the wall to see what would stick and expected the court to sift through its allegations to discern cognizable claims. The Fund would have been better served by focusing its-and the court's-attention on its best claims. This is the second time in this litigation that the Fund has tried this.
The Live Complaint is nearly identical to the First Amended Complaint, but it is perhaps less instructive. In recommending dismissal of the First Amended Complaint, the undersigned noted the document made several references to exhibits but the Fund attached none to the document. Dkt. 13 at 6 n.5. The Live Complaint made no materials changes to strengthen its claims; it did however add the numeral “4” in several places where the document references the Individual Defendants. Compare generally, Dkt. 4 with Dkt. 16.
On a final procedural note, Defendants point out that the Fund flouted the Local Rules and Federal Rule 15(a)(2). Although, clerical errors happen to the best of us, even magistrate judges, the Fund's repeated inability to adhere to the rules warrants mentioning to the District Judge. As the undersigned recommended before, “[g]iven the parties' appetites for and experience with litigation, the undersigned will recommend that future pleadings that fail to comply with the Local Rules be stricken.” Dkt. 13 at 7.
The Fund's Live Complaint is a repackaged amalgamation of claims asserted elsewhere, including earlier in this action and in other litigation. While no doubt presented sloppily, some of the Fund's claims should move forward. Indeed, these parties-and various iterations of them- have been slugging it out in courthouses from California to Travis County, Texas. It is time that the parties move toward final resolution (of at least some) of their claims.
To that end and to summarize, the undersigned will recommend that the Fund be permitted to proceed with its fourth cause of action-false advertising-against the Individual Defendants, Noble Capital Group, and Noble Capital Financial Management as well as its fifth, sixth, and twelfth causes of action-breaches of contract-as alleged.
VI. Recommendations
For the reasons stated above, the undersigned RECOMMENDS that the District Court GRANT in part and DENY in part Defendants' Motion to Dismiss Plaintiff's First Amended Complaint (Dkt. 18).
Specifically, the undersigned RECOMMENDS that Defendants' Motion to Dismiss (Dkt. 18) be GRANTED and the Fund's following claims be DISMISSED WITH PREJUDICE:
- First cause of action against all Defendants;
- Second cause of action against all Defendants;
- Third cause of action against the Individual Defendants and Noble Capital Fund Management;
- Fourth cause of action against Income Fund II and Income Fund III only;
- Seventh cause of action against Noble Capital Properties, Noble Capital Fund Management, and Noble Capital Servicing;
- Ninth cause of action against all Defendants;
- Tenth cause of action against Noble Capital Fund Management and Noble Capital Servicing;
- Eleventh cause of action against Noble Capital Fund Management; and
- Thirteenth cause of action against Noble Capital Fund Management.
The undersigned RECOMMENDS that Defendants' Motion to Dismiss (Dkt. 18) be DENIED as to the Fund's following claims:
- Fourth cause of action against the Individual Defendants, Noble Capital Group, and Noble Capital Fund Management only;
- Fifth cause of action against Noble Capital Fund Management;
- Sixth cause of action against Noble Capital Properties;
- Twelfth cause of action against Noble Capital Fund Management;
The undersigned also RECOMMENDS based on the foregoing that any motion for leave to amend the factual allegations contained in its Amended Complaint be DENIED.
The undersigned REITERATES its PREVIOUS RECOMMENDATION to then-presiding District Judge Lee Yeakel that future pleadings that do not comply with the Local Rules be SUMMARILY STRICKEN.
In light of this Report and Recommendation, the referral to the magistrate should be ended.
VII. Objections
The parties may object to this Report and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. See Battles v. United States Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987).
A party's failure to file written objections to the proposed findings and recommendations contained in this Report within 14 days after the party is served with a copy of the Report shall bar that party from de novo review by the District Court of the proposed findings and recommendations in the Report and, except upon grounds of plain error, shall bar the party from appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the District Court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150-53 (1985); Douglass v. United Serv. Auto. Ass'n, 79 F.3d 1415 (5th Cir. 1996) (en banc).