Opinion
No. 05-14-00967-CV
01-13-2016
SHORE CHAN DEPUMPO LLP AND EDWARD MANDEL, Appellants v. STEVEN W. THRASHER D/B/A THRASHER ASSOCIATES, L.L.C., Appellee
On Appeal from the 193rd Judicial District Court Dallas County, Texas
Trial Court Cause No. DC-13-10549
MEMORANDUM OPINION
Before Justices Fillmore, Stoddart, and O'Neill
Opinion by Justice Stoddart
The Hon. Michael J. O'Neill, Justice, Assigned
Shore Chan Depumpo LLP (SCD) and Edward Mandel appeal an order dismissing their declaratory judgment suit against Steven W. Thrasher d/b/a Thrasher Associates, LLC for want of jurisdiction. We conclude that Mandel lacks standing to file this lawsuit and the declaratory judgment suit is an improper collateral attack. Accordingly, we affirm the trial court's order dismissing this case for want of jurisdiction.
This case involves several lawsuits against different parties over a span of years. We briefly describe the present lawsuit, then discuss the prior lawsuits and proceedings in more detail. In 2013, SCD and Mandel filed this suit seeking a declaration that a final judgment and settlement agreement in two prior lawsuits prevent Thrasher from pursuing any action against Mandel on any claim or cause of action that accrued before December 18, 2012. The prior lawsuits were filed in 2009 and 2011 by Thrasher, an attorney, against attorneys who are now members of SCD over alleged non-payment of referral fees and alleged fraudulent transfers (the Referral-Fee Lawsuits). Mandel was not named as a party in these lawsuits.
The other lawsuits relevant to this appeal involve dealings between Thrasher and Mandel. In 2005, Thrasher entered into a business venture with Mandel to develop an internet search engine. They soon parted ways, and in late 2005 Mandel formed a new company to develop a similar search engine. Mandel sued Thrasher in 2006 over the failed venture, and Thrasher filed counterclaims against Mandel for fraud, breach of fiduciary duty, theft of trade secrets, and other claims (the Trade Secret Lawsuit).
In January 2010, Mandel filed for Chapter 11 bankruptcy protection. Thrasher filed a proof of claim in Mandel's bankruptcy based on his counterclaims in the Trade Secret Lawsuit. On September 30, 2011, the bankruptcy court overruled Mandel's objections and allowed Thrasher's claims in the amount of $1 million against Mandel for theft of trade secrets, fraud, and other claims. The federal district court affirmed the bankruptcy court decision on July 3, 2013.
Meanwhile, the Referral-Fee Lawsuits were mediated and the settlement agreement was reached effective December 18, 2012. The settlement agreement includes a mutual release of all claims "arising from or related to the events and transactions which are the subject matter of this case." The agreement also states that the mutual release "runs to the benefit of all clients, members, attorneys, agents, employees, officers, directors, shareholders and partners of the parties." Mandel was a client of the attorneys who settled with Thrasher. However, he was not a named party to the Referral-Fee Lawsuits and did not personally sign the settlement agreement. After a dispute arose about the final terms of the settlement agreement, the 298th District Court rendered a final judgment on May 16, 2013 (the Final Judgment) disposing of both lawsuits. The Final Judgment found the settlement agreement, attached to the judgment, was binding and fully enforceable "as to all persons or entities described/identified therein, regardless of whether their signatures actually appear on the document."
Italics indicate handwritten terms on the document.
Back in the bankruptcy court, on July 10, 2013, Mandel filed an omnibus motion to enforce the Final Judgment and settlement agreement from the Referral-Fee Lawsuits. Mandel sought to dismiss Thrasher's proof of claim matter, recently affirmed by the federal district court, and three adversary proceedings relating to Thrasher's claims. Mandel argued the Final Judgment and settlement agreement released Thrasher's claims because Mandel was a client of SCD and Thrasher's claims accrued before December 18, 2012. Sometime after filing the omnibus motion, Mandel appealed Thrasher's proof of claim matter to the Fifth Circuit. See In re Mandel, 578 Fed. Appx. 376, 376 (5th Cir. 2014).
These adversary proceedings sought to except Thrasher's claims from discharge in bankruptcy and to impose a constructive trust on Mandel's shares in NeXplore Corporation.
The Fifth Circuit affirmed the liability findings of the federal district court and the bankruptcy court, but remanded for the bankruptcy court to either conduct an evidentiary hearing on the issue of damages or to explain the basis for its award. In re Mandel, 578 Fed. Appx. 376, 391 (5th Cir. 2014). The bankruptcy court issued a memorandum opinion on remand explaining its award of $1 million to Thrasher against Mandel. In re Mandel, No. 10-40219, 2015 WL 5737173, at *9 (Bankr. E.D. Tex. Sept. 30, 2015). The bankruptcy court approved a settlement between the trustee and Thrasher allowing Thrasher's claim against the estate in the amount of $1 million. In re Mandel, 2015 WL 5737173, at *1. The bankruptcy court addressed the issue of damages on remand because "[t]he amount of compensatory damages may be relevant in the event the Court denies Mandel a discharge (11 U.S.C. § 727) or finds his debts to the claimants non-dischargeable in bankruptcy (11 U.S.C. § 523)." Id.
On September 12, 2013, the bankruptcy court granted in part and denied in part Mandel's omnibus motion. The bankruptcy court declined to make a ruling regarding the proof of claim matter. As to the adversary proceedings, the bankruptcy court granted the omnibus motion to the extent any relief sought in those proceedings was based on the subject matter of the Referral-Fee Lawsuits, and denied it in all other respects. The bankruptcy court retained exclusive jurisdiction over the discharge issues and refused to dismiss the adversary proceedings. The bankruptcy court order states that it is "without prejudice to the ability of the parties to return to the state court, if they so choose, about enforcement of the settlement agreement."
Mandel and SCD filed this declaratory judgment suit on September 9, 2013. They alleged that Thrasher continued to pursue claims against Mandel that accrued before the effective date of the settlement agreement. Mandel and SCD requested a declaration that the "Final Judgment prevents any and all Defendants from pursuing, lodging and/or maintaining any action in any Court against Edward Mandel, Positive Software or Nexplore based upon any claim or cause of action that accrued before December 18, 2012."
Positive Software Solutions, Inc. and NeXplore Corporation are corporations in which Mandel owns shares or is an officer. Neither entity is a party to this lawsuit and they are not entitled to affirmative relief. See Fuqua v. Taylor, 683 S.W.2d 735, 738 (Tex. App.-Dallas 1984, writ ref'd n.r.e.) ("Judgment may not be granted in favor of a party not named in the suit as a plaintiff or a defendant."); see also Mapco, Inc. v. Carter, 817 S.W.2d 686, 687 (Tex. 1991) (per curiam) (trial court erred by rendering judgment against entity never made a party).
Mandel and SCD filed a motion for summary judgment and Thrasher filed a cross-motion for summary judgment. At the hearing on the motions, the trial court concluded it lacked jurisdiction because the parties sought clarification and interpretation of a another court's judgment. The trial court dismissed the case for want of jurisdiction. Mandel and SCD appeal.
A. Standing of Bankruptcy Debtor
Because Mandel is a debtor in a pending bankruptcy proceeding, we requested the parties file letter briefs regarding our jurisdiction and Mandel's standing. See Douglas v. Delp, 987 S.W.2d 879, 882 (Tex. 1999) (trustee has exclusive standing to assert claims belonging to bankruptcy estate). Both parties filed letter briefs and we begin with the question of jurisdiction and standing.
Standing is a component of subject matter jurisdiction, cannot be waived, and may be raised for the first time on appeal by the parties or by the court sua sponte. Tex. Ass'n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 443 (Tex. 1993). Courts cannot address the merits of a case without subject matter jurisdiction. Douglas, 987 S.W.2d at 882 (citing State Bar of Tex. v. Gomez, 891 S.W.2d 243, 245 (Tex. 1994)). When we consider a party's standing sua sponte, we construe the petition in favor of the party, and if necessary, review the entire record to determine if any evidence supports standing. Tex. Ass'n of Bus., 852 S.W.2d at 446. Subject matter jurisdiction is a question of law, which we review de novo. Norris v. Brookshire Grocery Co., 362 S.W.3d 226, 231 (Tex. App.—Dallas 2012, pet. denied).
Bankruptcy can affect a debtor's standing to sue. "Section 541 of the Bankruptcy Code provides that virtually all of a debtor's assets, including causes of action belonging to the debtor at the commencement of the bankruptcy case, vest in the bankruptcy estate upon the filing of a bankruptcy petition." Kane v. Nat'l Union Fire Ins. Co., 535 F.3d 380, 385 (5th Cir. 2008) (per curiam); see also 11 U.S.C. § 541(a)(1) (2012) (property of estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case"); Martin, 343 S.W.3d at 888. Legal or equitable interests in property include causes of action of the debtor against third parties. See Highland Capital Mgmt. LP v. Chesapeake Energy Corp. (In re Seven Seas Petroleum, Inc.), 522 F.3d 575, 584 (5th Cir. 2008); In re Educators Group Health Trust, 25 F.3d 1281, 1283 (5th Cir. 1994) (term "all legal or equitable interests" defined broadly to include causes of action).
Once a cause of action belongs to the bankruptcy estate and a trustee has been appointed, "then the trustee has exclusive standing to assert the claim." Educators Group Health Trust, 25 F.3d at 1284; Douglas, 987 S.W.2d at 882 (trustee has exclusive standing to assert claims belonging to bankruptcy estate). The trustee, as the representative of the bankruptcy estate, is the real party in interest, and is the only party with standing to prosecute causes of action belonging to the estate. 11 U.S.C. §§ 323, 541(a)(1); Kane, 535 F.3d at 385.
1. Pleadings and Evidence
The original petition in this case alleges the background of the Referral-Fee Lawsuits, the settlement agreement, and the Final Judgment. It also alleges that Mandel was a client of SCD as of the effective date of the settlement and that, by the terms of the settlement agreement, Thrasher released all claims he had against Mandel as of the effective date. The petition alleged that after the Final Judgment, Thrasher continued to assert claims against Mandel which accrued before the effective date of the settlement. In his answer, Thrasher alleged that this action was subject to Mandel's pending bankruptcy proceeding. In an agreed motion for continuance, the parties informed the trial court that Mandel filed bankruptcy in January 2010 and the bankruptcy case was still pending. Thrasher asserted the bankruptcy court had exclusive jurisdiction over the relief requested by Mandel. Mandel contended the bankruptcy case did not bar the declaratory judgment action.
Mandel's and SCD's summary judgment evidence indicates that Mandel filed for bankruptcy in 2010, Thrasher sued Mandel in the bankruptcy case, and the bankruptcy court appointed a Chapter 11 trustee on June 8, 2012. Mandel testified in his affidavit that Thrasher continued to pursue claims against Mandel in the bankruptcy court after the Final Judgment was rendered.
2. Analysis
Mandel argues in his letter brief that he has standing to assert a cause of action based on the Final Judgment and settlement agreement because that cause of action arose after the commencement of his bankruptcy case and is not an asset of the bankruptcy estate. We disagree.
While the property of the estate includes all of a debtor's assets at the commencement of the case, the property of the estate of an individual Chapter 11 debtor, such as Mandel, also includes "all property of the kind specified in section 541 that the debtor acquires after the commencement of the case but before the case is . . . converted to a case under Chapter 7." 11 U.S.C. § 1115(a)(1) (emphasis added); In re Lively, 717 F.3d 406, 409 (5th Cir. 2013) (Congress amended the Bankruptcy Code to include an individual Chapter 11 debtor's post-petition earnings and property acquisitions in the bankruptcy estate). "Causes of action that belong to the debtor 'at the time the case is commenced' or that are acquired after commencement but before conversion [to Chapter 7] are therefore property belonging to the estate." In re Cantu, 784 F.3d 253, 257 (5th Cir. 2015) (concluding claim for bankruptcy malpractice accrued during Chapter 11 case before conversion to Chapter 7 and therefore claim belonged to bankruptcy estate, not individual debtor).
The pleadings and evidence indicate that at the time this suit was filed, Mandel was a Chapter 11 bankruptcy debtor and a Chapter 11 trustee had been appointed by the bankruptcy court. The record also indicates that any claim Mandel may assert based on the Final Judgment and settlement agreement was acquired after commencement of the bankruptcy case and before conversion to Chapter 7. Therefore, that claim became property of the bankruptcy estate, and trustee has exclusive standing to assert the claim. See 11 U.S.C. § 1115(a); Cantu, 784 F.3d at 257; Kane, 535 F.3d at 385; Douglas, 987 S.W.2d at 882.
The Final Judgment was signed May 16, 2013. The bankruptcy case was not converted to a Chapter 7 case until December 19, 2014. See In re Mandel, 2015 WL 5737173, at *1.
We conclude the cause of action asserted by Mandel in this case was property of his bankruptcy estate. Therefore, the trustee has exclusive standing to assert the claim. Kane, 535 F.3d at 385; Douglas, 987 S.W.2d at 882. Because the trustee did not assert this cause of action and Mandel lacks standing to assert it, the trial court correctly determined—even though on a different basis—that it lacked subject matter jurisdiction over Mandel's claim. We reject Mandel's arguments that he has standing to bring this lawsuit.
Mandel also contends the bankruptcy court order allowed the parties to return to state court about enforcement of the Final Judgment. The order on the omnibus motion stated it was without prejudice to the parties returning to state court about enforcement of the settlement agreement. However, the bankruptcy court expressly denied Mandel's request to dismiss the adversary proceedings and retained its exclusive jurisdiction to determine issues relating to discharge. The order did not purport to confer jurisdiction on the state court to render a declaratory judgment in this case. However, we need not decide the full extent of the bankruptcy court order, because, as discussed in the next section, neither Mandel nor SCD have shown the trial court had jurisdiction to render the declaratory judgment.
B. Collateral Attack
A declaratory judgment is proper only if a justiciable controversy exists as to the rights and status of the parties and the controversy will be resolved by the declaration sought. Bonham State Bank v. Beadle, 907 S.W.2d 465, 467 (Tex. 1995); Texas Dep't of Pub. Safety v. Moore, 985 S.W.2d 149, 153 (Tex. App.—Austin 1998, no pet.). "To constitute a justiciable controversy, there must exist a real and substantial controversy involving genuine conflict of tangible interests and not merely a theoretical dispute." Beadle, 907 S.W.2d at 467 (quoting Bexar-Medina-Atascosa Counties Water Control & Improvement Dist. No. 1 v. Medina Lake Protection Ass'n, 640 S.W.2d 778, 779-80 (Tex. App.—San Antonio 1982, writ ref'd n.r.e.)).
A declaratory judgment action may not be used to collaterally attack, modify, or interpret a prior judgment. Dallas Cty. Tax Collector v. Andolina, 303 S.W.3d 926, 930 (Tex. App.—Dallas 2010, no pet.) (citing Martin v. Dosohs I, Ltd., 2 S.W.3d 350, 353-54 (Tex. App.—San Antonio 1999, pet. denied); Cohen v. Cohen, 632 S.W.2d 172, 173 (Tex. App.—Waco 1982, no writ)). "Collateral attacks on final judgments are generally disallowed because it is the policy of the law to give finality to the judgments of the courts." Browning v. Prostok, 165 S.W.3d 336, 345 (Tex. 2005). "A collateral attack is an attempt to avoid the binding force of a judgment in a proceeding not instituted for the purpose of correcting, modifying, or vacating the judgment, but in order to obtain some specific relief which the judgment currently stands as a bar against." Id. at 346. Only a void judgment may be collaterally attacked. Id. A judgment is void only if the court had no jurisdiction over the parties or property, no jurisdiction of the subject matter, no jurisdiction to enter the judgment, or no capacity to act as a court. Id. A collateral proceeding that does not assert a judgment is void for lack of jurisdiction is an impermissible collateral attack. Id.
Mandel and SCD argue they only seek to interpret the Final Judgment, not declare it void. However, similar considerations are at play when a declaratory judgment is sought not to declare an earlier judgment void, but to have a court merely "interpret" a prior judgment. See Rapid Settlements, Ltd. v. SSC Settlements, LLC, 251 S.W.3d 129, 140 (Tex. App.—Tyler 2008, orig. proceeding) ("Declaratory relief is not available for the interpretation of a prior judgment entered by that or any other court."); Martin, 2 S.W.3d at 354 ("[T]he use of a declaratory judgment suit to interpret a judgment of the same or another court is an impermissible collateral attack on the previous judgment."); Cohen, 632 S.W.2d at 173 ("The utilization of a declaratory judgment action is a collateral attack on the prior judgment and cannot be used for the purpose of asking a trial court to interpret a prior judgment entered by that or any other court."); Speaker v. Lawler, 463 S.W.2d 741, 742-43 (Tex. Civ. App.—Beaumont 1971, writ ref'd n.r.e.) ("[A] litigant cannot use [the declaratory judgments act] for the purpose of asking a trial court to interpret a prior judgment entered by that or another court.").
Suits seeking to interpret judgments of another court are barred even when the claimants expressly state that they are not seeking to declare the prior order void or unenforceable, but merely to clarify their rights under it. See Rapid Settlements, 251 S.W.3d at 140; Martin, 2 S.W.3d at 353. As the supreme court explained in Browning, while the subsequent action often "contemplates relief other than revoking the [prior] order, it necessarily challenges the integrity of the order and results in a review, perhaps a recalculation" of the matters at issue in the prior suit. 165 S.W.3d at 346-47.
Here, Mandel and SCD do not argue that the Final Judgment is void for any of the recognized grounds that render a judgment void. Browning, 165 S.W.3d at 346. Therefore, "any collateral attack is improper." Id.; accord Andolina, 303 S.W.3d at 930. The declaratory judgment sought by Mandel and SCD would reinterpret the Final Judgment to enjoin Thrasher from pursuing any suit against Mandel on any claim that accrued before the effective date of the settlement. They do not contend the 298th District Court lacked jurisdiction of the parties, the property, the subject matter, or to render the Final Judgment, nor do they contend that court lacked the capacity to act as a court. Thus, they are making an improper collateral attack on that judgment. Browning, 165 S.W.3d at 346; Andolina, 303 S.W.3d at 931 (declaratory judgment action seeking to declare that debtor could direct payment to unpaid real property taxes but not personal property taxes was impermissible collateral attack on bankruptcy order that taxing authorities retained their liens until paid in full).
Mandel and SCD argue the supreme court rejected the rule prohibiting use of the declaratory judgment act to interpret prior judgments in Beadle. However, the supreme court merely held the rule was inapplicable in that case:
Cases that deal with the question of whether a declaratory judgment may be used to interpret another judgment are inapposite. There are entirely different considerations at play. A suit to "interpret" a judgment is usually a guise to obtain review or modification of a judgment outside of the appellate process or an attempt to collaterally attack a judgment. See, e.g., Segrest v. Segrest, 649 S.W.2d 610, 611-12 (Tex. 1983) (disapproving use of a declaratory judgment as a tool to collaterally attack a final divorce decree), cert. denied, 464 U.S. 894, 104 S. Ct. 242, 78 L. Ed. 2d 232 (1983). Neither of those situations is present here.Beadle, 907 S.W.2d at 468. In Beadle, Bonham Bank did not seek a "declaration of the meaning of either judgment." Id. But here, Mandel and SCD are seeking a declaration of the meaning of the Final Judgment and the rule against interpreting prior judgments applies.
Mandel and SCD contend in their reply brief that the trial court had jurisdiction because the settlement agreement settled claims against "Mandel personally that were separate from the bankruptcy estate, which means they were outside the bankruptcy court's jurisdiction." We express no opinion about whether Thrasher could assert claims against Mandel personally while the bankruptcy case remains pending. Regardless, there is no evidence in this record that Thrasher is pursuing any claims against Mandel outside of the bankruptcy proceeding. The evidence indicates all of Thrasher's claims against Mandel are pending in the bankruptcy case—the proof of claim litigation and the three adversary proceedings. Furthermore, even if there was evidence of such claims, the present declaratory judgment suit is a collateral attack on the Final Judgment of the 298th District Court.
See Lively, 717 F.3d at 409 (noting effect of 11 U.S.C. § 1115 was to bring individual debtor's post-petition earnings and property acquisitions "within the protection of the automatic stay, which benefits the individual debtor, while enabling court supervision of the debtor's use of those interests") (citations omitted); see also 11 U.S.C. § 362(a)(1) (bankruptcy petition stays commencement or continuation of judicial action or proceeding against debtor that was or could have been commenced before commencement of bankruptcy case).
Mandel described the claims against him in his affidavit:
In my bankruptcy case, Steven Thrasher personally, and on behalf of White Nile Software, has pursued various claims against me and NeXplore. Specifically, he sought a constructive trust over NeXplore stock, sued NeXplore in Texas court, and sought damages from me personally based upon the legal services he alleges he rendered.Mandel identified no other claims pursued by Thrasher after the Final Judgment:
After entry of the Final Judgment attached to the Affidavit of Michael Shore as its Exhibit 1, Mr. Thrasher has continued to pursue his personal claims against me and NeXplore in the bankruptcy court and Texas state court.
To the extent Mandel is relying on hypothetical claims Thrasher may assert against him personally, there is no justiciable controversy. See Beadle, 907 S.W.2d at 467. Nor is there any evidence indicating Thrasher pursued any claims against SCD after the date of the Final Judgment. Absent any evidence of such claims, Mandel and SCD seek merely an advisory opinion on an hypothetical dispute. See OHBA Corp. v. City of Carrollton, 203 S.W.3d 1, 6 (Tex. App.—Dallas 2006, pet. denied) (declaratory judgment act does not give courts power to rule on hypothetical or contingent situations); Martin, 2 S.W.3d at 354 (declaratory judgment act does not permit advisory opinions interpreting prior judgments).
C. Conclusion
We conclude Mandel lacks standing to present this declaratory judgment claim. Furthermore, this declaratory judgment action is an improper collateral attack on the Final Judgment. We overrule Mandel's and SCD's sole issue on appeal and affirm the trial court's order dismissing the case for want of jurisdiction.
/Craig Stoddart/
CRAIG STODDART
JUSTICE 140967F.P05
JUDGMENT
On Appeal from the 193rd Judicial District Court, Dallas County, Texas
Trial Court Cause No. DC-13-10549.
Opinion delivered by Justice Stoddart. Justices Fillmore and O'Neill participating.
In accordance with this Court's opinion of this date, the trial court's order dismissing for want of jurisdiction is AFFIRMED.
It is ORDERED that appellee Steven W. Thrasher d/b/a Thrasher Associates, L.L.C. recover his costs of this appeal from appellants Shore Chan Depumpo LLP and Edward Mandel. Judgment entered this 13th day of January, 2016.