Opinion
3:03-CV-158-M
January 5, 2004
MEMORANDUM OPINION AND ORDER
Before the Court are Defendant's Motion to Strike First Amended Complaint and Motion for Entry of Judgment on Certain Claims, filed on September 8, 2003, Plaintiff's Motion for Leave to Amend Complaint, contained in Plaintiff's Response to Defendant's Motion to Strike, filed on September 24, 2003, and Plaintiff's Amended Motion for Leave to Amend Complaint, filed on October 2, 2003. Having considered the parties' Motions, the Court GRANTS Defendant's Motion to Strike and Motion for Entry of Judgment on Certain Claims and DENIES in part and GRANTS in part Plaintiff's Amended Motion for Leave to Amend Complaint.
Because Plaintiff filed an Amended Motion the Court, his original Motion for Leave to Amend is DENIED as moot.
I. BACKGROUND
This suit is related to another case before the Court, SEC v. Sharp Capital, Inc., 03:98-CV-2792-M, in which Plaintiff Ralph Janvey is the Special Master appointed for Sharp Capital, Inc. ("Sharp"). Here, Plaintiff brought several claims against the law firm of Thompson Knight LLP regarding its representation of Sharp, and its conduct after ending its representation of Sharp. Plaintiff's Original Complaint asserted five causes of action against the Defendant: breach of fiduciary duty, participation in breach of fiduciary duty, legal malpractice, conspiracy to commit fraudulent conveyance, and fraud.On March 10, 2003, Defendant filed a Motion to Dismiss under Fed.R.Civ.P. 12(b)(6). On May 30, 2003, the Court heard oral argument on Defendant's Motion. On July 8, 2003, the Court issued an Order granting Defendant's Motion in part and denying it in part. The Court denied Defendant's Motion as to Plaintiff's claims that Defendant improperly advised Sharp in its creation of an offshore banking structure to conceal Sharp's alleged securities laws violations. As for Plaintiff's other claims involving Defendant's conduct during the period when it represented Sharp and thereafter, the Court granted Defendant's Motion to Dismiss, but allowed Plaintiff to amend the Complaint to detail allegations (1) that Defendant and Sharp's founder, Mauricio Gutierrez ("Gutierrez"), acted in collusion against Sharp's interest and (2) that after Defendant ceased representing Sharp, Gutierrez acted so adversely to Sharp as to preclude imputation to Sharp of Gutierrez's knowledge of Defendant's alleged wrongdoing. The Court granted Defendant's Motion as to Plaintiff's claims involving Defendant's conduct after the Special Master was appointed, but allowed Plaintiff to amend if it could allege an affirmative request to Defendant to produce information or documents related to Sharp.
On August 22, 2003, Plaintiff filed his First Amended Complaint. On September 8, 2003, Defendant filed its Motion to Strike First Amended Complaint and Motion for Entry of Judgment on Certain Claims. On October 2, 2003, Plaintiff filed an Amended Motion to Amend Complaint, attaching a proposed Second Amended Complaint.
II. ANALYSIS
A. Defendant's Motion to Strike First Amended ComplaintDefendant argues that Plaintiff's First Amended Complaint should be stricken because it fails to comply with the Court's July 8, 2003 Order. The Court's Order directed Plaintiff to amend his Complaint to allege facts, if any, that Defendant colluded with Gutierrez in an effort to defraud Sharp and that Gutierrez acted adversely to Sharp after Defendant's representation of Sharp ended, In addition, the Order permitted Plaintiff to allege facts, if any, that Plaintiff affirmatively requested Sharp-related documents from Defendant.
Plaintiff's First Amended Complaint includes new allegations regarding collusion between Gutierrez and Defendant and adverse action on the part of Gutierrez towards Sharp. Defendant does not object to these amendments. Rather, Defendant argues that certain additional amendments violate the Court's Order authorizing only the matters described in the Order. According to Defendant, the First Amended Complaint does not allege that Plaintiff affirmatively requested documents from Defendant, but instead asserts a new theory as to why liability should be imposed for actions taken after the Special Master was appointed, despite Plaintiff's failure to request such documents. Second, Defendant argues that Plaintiff's First Amended Complaint includes a new substantive allegation of wrongdoing that does not address the issues of collusion, adverse action, or whether Plaintiff requested documents from Defendant, and which thus contravenes the July 8, 2003 Order.
Specifically, Defendant objects to paragraphs 61, 65, 80, 81, 82, and 83 of the First Amended Complaint.
This allegation is contained in paragraph 54 of the First Amended Complaint.
Plaintiff acknowledges that Plaintiff never requested documents from Defendant. However, Plaintiff argues that he included additional allegations in the Complaint to demonstrate that Plaintiff had not been derelict in his duties as Special Master and that Defendant owed the Special Master an ethical duty to disclose the law firm's involvement with Sharp and Protexa.
In his Amended Motion for Leave to Amend Complaint, Plaintiff argues that such a duty also arose by operation of law. However, Plaintiff does not mention this theory in his response to Defendant's Motion to Strike.
In response to Defendant's contention that the Amended Complaint contains an additional substantive allegation, Plaintiff maintains that his modification of paragraph 54 is simply a "stylistic" edit.
The proffered Second Amended Complaint is similar to the First Amended Complaint, but it also contains a new allegation that Defendant aided and abetted Sharp in breaching Sharp's fiduciary duty towards Sharp's investors.
The Court is of the opinion that Plaintiff's First Amended Complaint exceeded what was permitted by the Court's July 8, 2003 Order. While Plaintiff pled additional claims of collusion and adverse action, Plaintiff exceeded the scope of the Court's Order by also alleging an additional theory of liability for the time after the Receiver's appointment, which does not state a claim for relief. Therefore, the Court grants Defendant's Motion to Strike First Amended Complaint. B. Plaintiff's Amended Motion for Leave to Amend
Because the Court must first consider whether to grant Plaintiff's Amended Motion for Leave to Amend before deciding whether judgment on any of Plaintiff's claims is appropriate, the Court addresses Defendant's Motion for Entry of Judgment on Certain Claims separately in Section C, infra.
1. The Addition of Allegations that Defendant Had a Duty to Disclose
Next, the Court must consider whether it should grant Plaintiff's Amended Motion for Leave to Amend Complaint. Plaintiff argues that leave is appropriate because Defendant had a duty to disclose its involvement with Sharp, and its failure to do so constitutes a breach of that duty. Plaintiff asserts that this duty is derived from Plaintiff's status as Special Master, from the Texas Disciplinary Rules of Professional Conduct, and otherwise by operation of law. Defendant argues that Plaintiff's Amended Motion should be denied because the new allegations asserted by Plaintiff are futile.
Under FED. R. CIV. P. 15(a), a party may amend a pleading after a responsive pleading has been served if the party seeking amendment obtains leave of Court. The Court has discretion in deciding whether leave is appropriate, and leave should be freely given "when justice so requires." FED. R. CIV. P. 15(a); see Jamieson v. Shaw, 772 F.2d 1205, 1208 (5th Cir. 1985). However, leave is not automatically granted. Rather, in deciding whether to grant leave, the Court
. . . may consider a variety of factors in exercising its discretion, including undue delay, bad faith or dilatory motive on the part of the movant, repeated failures to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, and futility of the amendment. Schiller v. Physicians Resource Group, Inc., 342 F.3d 563, 566 (5th Cir. 2003)
In the present case, Defendant does not contend, nor does the Court find, that Plaintiff has delayed in seeking leave to amend or that Plaintiff seeks to amend in bad faith or with dilatory motive. Plaintiff promptly requested leave following the Court's July 8, 2003 Order. Furthermore, Plaintiff has not previously sought leave to amend, so Plaintiff's request does not present an instance of a repeated failure to correct previous deficiencies. In addition, the Court finds that Defendant would not be prejudiced if Plaintiff were granted leave to amend. Plaintiff's proposed amendments are predicated on the same factual allegations as his prior Complaint. Plaintiff merely seeks to add additional legal theories to his Complaint. Consequently, Defendant would not be burdened with the task of undertaking additional discovery if leave were granted.
The remaining factor to be considered, and the one that Defendant contends is decisive, is whether Plaintiff's proposed amendments are futile. Amendment would be futile if the allegations proffered by the party seeking leave lack legal foundation. Jamieson, 772 F.2d at 1208. This inquiry requires the Court to analyze the legal sufficiency of the Complaint using the Rule 12(b)(6) standard. Id. at 1208-09. In determining whether Plaintiff's amendments are futile, the Court must accept Plaintiff's allegations as true, and the Complaint must stand "unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."Conley v. Gibson, 355 U.S. 41, 45-46 (1957). The Court must analyze Plaintiff's new allegations and determine whether they satisfy this standard.
First, Plaintiff alleges that Defendant had a duty to disclose its prior involvement with Sharp and Protexa based on Plaintiff's status as the Court-appointed Special Master. According to Plaintiff, because Plaintiff was the Special Master, and because a Special Master operates as an arm of the Court, Defendant had an affirmative duty to disclose pertinent information to Plaintiff. Plaintiff asserts that this duty is grounded in Rule 3.03 of the Texas Disciplinary Rules of Professional Conduct. Rule 3.03, which addresses a party's duty of candor towards the court, provides that "[a] lawyer shall not knowingly: (1) make a false statement of material fact or law to a tribunal; [or] (2) fail to disclose a fact to a tribunal when disclosure is necessary to avoid assisting a criminal or fraudulent act." TEX. DISCIPLINARY RULES OF PROF'L CONDUCT R. 3.03. Plaintiff's theory appears to be that since the Special Master is an appointee of the Court, the ethical rules that apply to a party's conduct toward the tribunal also apply to Defendant's conduct toward Plaintiff. However, the Texas Disciplinary Rules do not provide for a private cause of action. The Preamble to the Rules explicitly states, "These rules do not undertake to define standards of civil liability for lawyers for professional conduct. Violation of a rule does not give rise to a private cause of action. . . ." TEX. DISCIPLINARY RULES OF PROF'L CONDUCT Preamble ¶ 15. Even if the Rules created a private remedy, the Court concludes as a matter of law that the failure to voluntarily disclose a prior relationship not inquired about does not assist a criminal or fraudulent act. Accordingly, to the extent Plaintiff's Second Amended Complaint alleges a cause of action based on a duty to disclose pursuant to Rule 3.03, the Court finds that such an allegation does not state a claim for which relief may be granted, and is therefore futile. Thus, to the extent Plaintiff seeks to assert such a claim in his Second Amended Complaint, Plaintiff's Motion for Leave to Amend is denied.
Plaintiff alleges the existence of such a duty in paragraphs 60, 82, 83, and 84 of the Second Amended Complaint.
In further support of his position that Defendant owed Plaintiff a duty to disclose, Plaintiff contends that such a duty arose by operation of law. Under Texas law, a duty to speak may arise by operation of law, such that a failure to do so constitutes a fraud, when:
(1) a confidential or fiduciary relationship exists between the parties; or (2) one party learns later that his previous affirmative statement was false or misleading; or (3) one party learns later that the other party is relying on a concealed fact, provided that the concealing party also knows that the relying party is ignorant of the concealed fact and does not have an equal opportunity to discover the truth; or (4) one party voluntarily discloses some but less than all material facts, so that he must disclose the whole truth, i.e., all material facts, lest his partial disclosure convey a false impression.
Plaintiff does not argue that a fiduciary or confidential relationship existed between himself and Defendant, nor does Plaintiff argue that Defendant knowingly failed to correct its previous false statement. Rather, Plaintiff contends that Defendant had a duty to speak because Defendant allegedly concealed a fact knowing that Plaintiff would rely on the concealed fact and that Defendant voluntarily disclosed some, but less than all, material facts.
As to Defendant's alleged concealment, Plaintiff claims that he did not know of Defendant's involvement with Sharp and Protexa and that he "had no way of knowing these facts." PL's Reply Br. at 3. In addition, Plaintiff asserts that he relied on Defendant's nondisclosure in reaching several agreements with Defendant and in litigating against International Transactions regarding the Agral Arbitration Award.
While Plaintiff may have relied on what he believed, but did not know, Plaintiff fails to explain why the information about Defendant's representation of Sharp and involvement with Protexa was unavailable to him, or to assert that Defendant believed Plaintiff to be ill-informed or uniformed about that. Presumably, had Plaintiff inquired about Defendant's involvement with Sharp and Protexa, Defendant would have told Plaintiff about its prior representation. Plaintiff could have asked, but did not do so. While the failure to disclose this information may preclude further action by Plaintiff and the Sharp Estate, the circumstances of this case do not support Plaintiff's claim that Defendant had a legal duty to speak.
Plaintiff seems to contend that Defendant voluntarily disclosed only part of the material facts, rendering the disclosure misleading. Plaintiff does not articulate what material facts were only partially disclosed, nor is a partial disclosure apparent from the Complaint. Plaintiff asserts that Defendant announced to Judge Jorge Solis in late 1998 that Sharp and Protexa had reached a settlement agreement, which would have extinguished the necessity for confirmation of an arbitration award that Sharp had obtained from Protexa. However, Plaintiff alleges that Defendant did not inform Judge Solis or Plaintiff that the award had been transferred to an attorney and then sold back to Protexa at a discount. This incomplete disclosure is alleged to constitute a fraud on the Sharp Estate. However, this specific allegation relates to conduct that occurred in September 1998, before the Plaintiff was appointed Special Master and when Sharp had its own counsel at the law firm of Gardere Wynne Sewell LLP. The Court has already dismissed claims against Thompson Knight arising during this period as barred by limitations. If Plaintiff is suggesting that Defendant's statement to Judge Solis created a future duty on Defendant's part to disclose to Plaintiff the transfer of the arbitration award, the Court finds the claim to be without legal merit.
Because, as a matter of law, Defendant did not have a duty to disclose its prior relationship with Protexa or the transfer of the arbitration award, Plaintiff has failed to state a claim in that regard. Therefore, to the extent Plaintiff asserts such a claim in his Second Amended Complaint, the claim is futile. Accordingly, Plaintiff's Motion for Leave to Amend is denied as to any such claim.
2. The Addition of a Claim of Participation in Sharp's Breach of Fiduciary Duty on Behalf of the Sharp Investors
In addition to the amendments previously mentioned, the Second Amended Complaint contains additional allegations based on Defendant's alleged participation in Sharp's breach of a fiduciary duty to Sharp's investors. On August 28, 2003, the Court issued an Order Approving Revised Settlement in SEC v. Sharp Capital, in which the Court held that a claim that a third party participated in Sharp's breach of its fiduciary duty belonged to the Special Master and not to the Sharp investors. Because the Court issued that Order after the filing of Plaintiff's Original Complaint, Plaintiff now seeks leave to add a claim on behalf of Sharp's investors that Defendant participated in Sharp's breach of its fiduciary duty. Defendant does not object outright to the addition of such allegations. Rather, Defendant maintains that amendment would be proper if the plaintiffs in the state court suit styledBaxter v. Gardere Wynne Sewell LLP stipulate that this Court's August 28, 2003 Order applies to the claims asserted by theBaxter plaintiffs against Defendant. Defendant contends that in the absence of such a stipulation, Defendant would be burdened by having to litigate an identical claim in two forums.
These allegations are contained in paragraphs 69 and 70 of the Second Amended Complaint.
Plaintiff does not discuss Defendant's request for stipulation in his papers. However, the Court is of the opinion that the addition of the new claims is appropriate even in the absence of a stipulation by the Baxter Plaintiffs, which this Court cannot require. While a stipulation might decrease Defendant's burden, the mere fact that Defendant might be required to litigate in two forums does not persuade the Court that an amendment of the Complaint here should be conditional on action in the state case. Therefore, to the extent Plaintiff seeks leave to amend his Complaint to allege Defendant's participation in Sharp's breach of a fiduciary duty to its investors, Plaintiff's Amended Motion is granted.
3. Plaintiff's Alteration of Paragraph 54
The Second Amended Complaint contains the same alterations in paragraph 54 as those contained in the First Amended Complaint. While Plaintiff maintains that the changes to paragraph 54 are simply stylistic edits, Defendant argues that modification is inappropriate because the paragraph contains allegations that the Court already held are barred by limitations. Defendant argues that to permit Plaintiff to alter the allegations, the appellate record will be rendered uncertain. The Court agrees with Defendant. Because the Court has already dismissed Plaintiff's claims arising from the alleged conduct of Defendant after Defendant's representation of Sharp ceased, but before the appointment of the Special Master, modification of these claims is improper. Therefore, to the extent Plaintiff seeks to modify-even stylistically-portions of the Complaint relating to previously dismissed claims, such as those in paragraph 54, Plaintiff's Amended Motion is denied.
C. Defendant's Motion for Entry of Judgment on Certain Claims
Because the Court finds that Plaintiff's claims that Defendant had an affirmative duty to disclose information regarding its relationship with Sharp and Protexa are futile, the Court dismisses Plaintiff's claims based on Defendant's conduct after the Special Master was appointed. Accordingly, the Court grants Defendant's Motion for Entry of Judgment and instructs Defendant to submit a proposed form of partial judgment dismissing such claims.
II. CONCLUSION
Defendant's Motion to Strike First Amended Complaint and Motion for Entry of Judgment on Certain Claims is GRANTED. Plaintiff's Amended Motion for Leave to Amend Complaint is DENIED in part and GRANTED in part. Specifically, the Court denies Plaintiff's Amended Motion as to Plaintiff's claims that, after the appointment of the Special Master, Defendant owed Plaintiff a duty to disclose, and as to Plaintiff's modification of paragraph 54. The Court grants Plaintiff's Amended Motion to permit allegations that Defendant participated in Sharp's breach of fiduciary duty. The Court therefore directs Plaintiff to file, within fourteen days of the date of this Order, a Third Amended Complaint containing the already asserted allegations of Defendant's participation in Sharp's breach of fiduciary duty to Sharp's investors, of collusion between Gutierrez and Defendant, and of adverse action on the part of Gutierrez towards Sharp, but not with other modifications.