Opinion
1:22-CV-626-DAE
06-29-2023
US CAPITAL GLOBAL INVESTMENT MANAGEMENT, LLC f/k/a U.S. CAPITAL INVESTMENT MANGEMENT, LLC, a limited liability company, and U.S. CAPITAL PARTNERS INC., a corporation, Plaintiffs, v. NOBLE CAPITAL GROUP, LLC, and NOBLE CAPITAL FUND MANAGEMENT, LLC, Defendants.
REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
MARK LANE, UNITED STATES MAGISTRATE JUDGE
TO THE HONORABLE DAVID A. EZRA, UNITED STATES DISTRICT JUDGE:
Before the court is Defendants' Motion to Dismiss Plaintiffs' Amended Complaint (Dkt. #10) 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.
The motion was referred by then-presiding United States District Judge Lee Yeakel to the undersigned for a Report and Recommendation as to the merits pursuant to 28 U.S.C. § 636(b)(1)(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. Dkt. #15.
I. Background
Plaintiff U.S. Capital Partners, Inc. (“US Capital”) is a San Francisco-based corporation that provides financial advisory services related to capital formation. Plaintiff U.S. Capital Global Investment Management, LLC f/k/a U.S. Capital Investment Management, LLC is a California limited liability company that was the general partner of the U.S. Capital/Noble Capital Texas Real Estate Income Fund, LP (the “Fund”).
Defendant Noble Capital Group (“Noble Capital”) is an Austin-based private lending organization that specializes in making loans to real estate entrepreneurs in Texas. Defendant Noble Capital Fund Management (“Noble Management”) is a subsidiary of Noble Capital and serves as its operations arm. Collectively these entities are Defendants.
Noble Management and U.S. Capital entered into a series of agreements establishing the Fund, whereby U.S. Capital would administer the Fund and identify investors while Noble would make loans.
In August 2016, U.S. Capital Partners entered into a letter agreement (“2016 Letter Agreement”) with Noble Management, which provided U.S. Capital Partners was to act as a financial advisor to Noble Management. Dkt. #8-1 (2016 Letter Agreement) at 1.
Later in January 2017, Noble Management, U.S. Capital Investment Management, and the Fund entered into a Management Advisory Services Agreement (“MASA”), which provided that U.S. Capital Investment Management agreed to be the general partner while Noble Management managed the Fund's investments. Dkt. #8-2 (MASA) at 1.
In February 2017, Noble Management and three non-party Noble-affiliated companies, the Fund, and U.S. Capital Global Securities, LLC (US Capital's broker-dealer affiliate), entered into another letter agreement (“2017 Letter Agreement”), which provided U.S. Capital Global Securities would be the “exclusive” placement agent for the Fund. Dkt. #8-3 at 1.
The parties' relationship soured, and they have been engaged in myriad litigation over their gone-bad relationship. See e.g., Nobel Cap. Fund Mgmt., LLC et al. v. U.S. Cap. Glob. Mgmt. LLC, Case No. 1:20-CV-1247-RP (“the 1247 Action); Noble Cap. Grp., LLC et al. v. U.S. Cap. Partners, Inc., et al., Case No. 1:19-CV-1255-LY (“the 1255 Action”); Noble Cap. Tex. Real Est. Income Fund LP v. Newman et al., Case No. 1:22-CV-652-DAE.
In June 2022, Plaintiffs filed the instant lawsuit. Dkt. #1 at 1. Plaintiffs allege Defendants were “grossly mismanaging the Fund for their benefit and the detriment of the Fund and its investors.” Dkt. #8 at 6. Plaintiffs further allege “Defendants intentionally and knowingly devised and implemented a scheme of publishing defamatory accusations against the Plaintiffs” in other litigation. Id. The Amended Complaint asserts seven claims: (1) malicious prosecution, Dkt. #8 at 20; (2 & 3) abuse of process, id. at 21, 22; and (4, 5, 6, & 7) breach of contract, id. at 23, 24, 25, 26.
Plaintiffs assert this court has supplemental jurisdiction over this action under 28 U.S.C. § 1367. Dkt. #8 at 2. Supplemental jurisdiction dictates that the court have original jurisdiction over at least one claim. 28 U.S.C. § 1367(a). Plaintiffs do not assert a basis for the court's original jurisdiction in this action. Dkt. #8 at 2. Nonetheless, the undersigned concludes the court has subject matter jurisdiction over this lawsuit pursuant to 18 U.S.C. § 1332. First, Plaintiffs are seeking one-hundred million dollars, which is greater than $75,000. Id. Second, the Plaintiffs are citizens of California, and the Defendants are citizens of Texas, meeting the so-called diversity of citizenship requirement. Id.; see infra at 6.
Defendants now move to dismiss this lawsuit under Federal Rule of Civil Procedure 12(b)(6) on the grounds that the Amended Complaint does not plead sufficient facts to meet the elements of the claims asserted. Dkt. #10 at 1.
II. Legal Standard: Rule 12(b)(6) Motion to Dismiss
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.” BellAtl. 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 shown-that the pleader is entitled to relief.” Id. at 679. In sum, a “plaintiff must plead enough facts to nudge the claims across the line from conceivable to plausible.” Hinojosa v. Livingston, 807 F.3d 657, 684 (5th Cir. 2015) (quoting Iqbal, 556 U.S. at 680) (cleaned up).
III. Analysis
Defendants move to dismiss all claims contained in Plaintiffs' Amended Complaint. Defendants contend each of Plaintiffs' seven claims lacks sufficient factual allegations and falls short of Rule 8(a)'s pleading standard. Plaintiffs argue the opposite. The parties also dispute whether California law applies to all claims or whether Texas law applies to some and California law to others.
A. Choice of Law
Defendants claim in their Motion that Plaintiffs have failed to state various claims under Texas law. See generally Dkt. #10 at 3-13. Plaintiffs contend California law governs based on agreements between the parties. Dkt. #11 at 3. Defendants argue Texas law governs the tort claims and California law governs the contract claims. Dkt. #14 at 3. The court must determine which state law governs Plaintiffs' claims.
A federal court sitting in diversity applies the choice-of-law rules of the forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Texas has adopted the Restatement (Second) of Conflicts approach to contractual choice-of-law provisions. See DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 677-78 (Tex. 1990). Under Texas law, the parties' choice-of-law will be enforced unless the chosen law has no substantial relationship to the parties or the transaction or unless application of the law chosen would be contrary to a fundamental policy of a state that has a materially greater interest than the chosen state in the determination of a particular issue. See Lemmon v. United Waste Sys., 958 S.W.2d 493, 498-99 (Tex. App-Fort Worth 1997, pet. denied).
All of the agreements between the parties at issue contain the following provision: “This Agreement shall be governed by the law of the State of California.” Dkt. #8-1 ¶ 15; Dkt. #8-2 ¶ 6(d); Dkt. #8-3 ¶ 16.
The choice-of-law clause specifically refers to “This Agreement,” which indicates the parties intended to restrict the clause to the interpretation or construction of the agreement itself. Tex. Taco Cabana, Ltd. v. Taco Cabana of N.M., Inc., 304 F.Supp.2d 903, 908 (W.D. Tex. 2003) (citing America's Favorite Chicken Co. v. Cajun Enterprises, Inc., 130 F.3d 180, 182 (5th Cir. 1997)). Thus, the agreements' choice-of-law clauses are narrow and do not address the whole of the parties' relationship. The choice-of-law clause does not address the general rights and liabilities of the parties, so this court must apply Texas choice-of-law rules to determine which law applies to the tort claims set forth in the Amended Complaint. See Caton v. Leach Corp., 896 F.2d 939, 943 (5th Cir. 1990).
Where the parties have not agreed to the application of law to a particular issue, Texas applies the “most significant relationship” test as enunciated in the Restatement (Second) of Conflicts. See Gutierrez v. Collins, 583 S.W.2d 312, 318 (Tex. 1979). Section 145 states:
(1) The rights and liabilities of the parties with respect to an issue in tort are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the occurrence and the parties under the principles stated in § 6.
(2) Contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:
(a) the place where the injury occurred,
(b) the place where the conduct causing the injury occurred,
(c) the domicil, residence, nationality, place of incorporation and place of business of the parties, and
(d) the place where the relationship, if any, between the parties is centered.
Restatement (Second) of Conflicts § 145 (Am. Law Inst. 1971). This court must evaluate these contacts according to their relative importance with respect to the particular issue. Id.
Plaintiffs' claims for malicious prosecution (cause #1) and abuse of process (causes #2 and #3) arise out of lawsuits filed by Defendants in Texas-the 1247 Action and the 1255 Action. Dkt. #8 at 20, 22.
The Plaintiffs are a California corporation and a California limited liability company; none of the LLC's members are Texas citizens. Id. at 2-3. Defendants are two limited liability companies with their principal places of business in Austin, Texas. Id. at 3. Noble Capital Fund Management is a wholly owned subsidiary of Noble Capital Group. Id. Neither Defendant is a citizen of California. Noble Cap. Grp. LLC v. U.S. Cap. Partners, Inc., Cause No. 1:19-cv-1255-LY (W.D. Tex. Dec. 27, 2019).
Taken together, these contacts indicate Texas law applies to the tort claims because the conduct that caused the alleged injuries occurred in Texas and the relationship between the parties is centered in Texas.
B. First cause of action: Malicious Prosecution
Defendants move to dismiss Plaintiffs' malicious prosecution claim on the ground that the Amended Complaint fails to adequately plead three of six elements. Dkt. #10 at 3. Plaintiffs argue that they pled the three elements of a malicious prosecution claim under California law. Dkt. #11 at 5. As discussed above, Texas law applies to this claim.
Under Texas law, “[t]o establish a claim for malicious prosecution, a plaintiff must show: (1) the institution or continuation of civil proceedings against the plaintiff; (2) initiated by the defendant; (3) with malice in the commencement of the proceedings; (4) which proceedings lacked probable cause; (5) were terminated in the plaintiff's favor; and (6) resulted in special damages.” Duzich v. Advantage Fin. Corp., 395 F.3d 527, 529 (5th Cir. 2004) (citing Tex. Beef Cattle Co. v. Green, 921 S.W.2d 203, 207 (Tex. 1996)).
Specifically, Defendants contend that Plaintiffs did not adequately plead the fourth, fifth, and sixth elements. Dkt. #10 at 3.
1. Fourth element: Probable cause
Defendants assert that the Amended Complaint “merely recites the conclusory statement that Defendants ‘lacked probable cause to file, initiate, bring and pursue the lawsuit' in question but makes no factual allegations whatsoever.” Dkt. #10 at 4. Plaintiffs respond that the Amended Complaint specifically alleges probable cause. Dkt. #11 at 5.
“In order to make out a prima facie case of malicious prosecution, the plaintiff must show, among other things, that there was a lack of probable cause for the proceedings brought against him by the defendant.” Akin v. Dahl, 661 S.W.2d 917, 919 (Tex. 1983), cert. denied, 466 U.S. 938 (1984)) (citing James v. Brown, 637 S.W.2d 914, 918 (Tex. 1982)). “It is the events prior to the institution of the proceedings which must be examined, and only those events, to determine if the defendants had probable cause to act.” Id. “Courts must presume that the defendant acted reasonably and had probable cause to initiate . . . proceedings.” Kroger Tex. Ltd. v. Suberu, 216 S.W.3d 788, 793 (Tex. 2006) (citing Akin, 661 S.W.2d at 920) (applying Akin to a tort action).
Plaintiffs respond that the Amended Complaint details the lack of probable cause, which “is specifically alleged paragraphs 13-20 and 43-61.” Dkt. #11 at 6. Plaintiffs also contend that “paragraphs 16-17, 21-42 & 57 of the Amended Complaint” further support their contention that Defendants lacked probable cause in the previous lawsuit. Id. at 7. Effectively, Plaintiffs urge the court to embark a meandering journey through nearly the entire factual background section of the Amended Complaint.
Against the court's better judgment, it indulged Plaintiffs. It should have been obvious that the Amended Complaint does not contain specific factual allegations regarding probable cause when the Plaintiffs directed the court to fifty-seven of the sixty-one paragraphs in the Amended Complaint's factual background section. If there is a connection to be drawn between the facts pled and the probable cause element, it was not obvious to the court. Accordingly, the Amended Complaint does not plead the fourth element of malicious prosecution.
2. Fifth element: Termination in plaintiff's favor
Defendants also argue that the fifth element of a malicious prosecution claim cannot be met because the 1255 Action was not terminated in Plaintiffs' favor because the parties were ordered to arbitrate the claims in the lawsuit. Dkt. #10 at 4. Plaintiffs contend that enforcement of the arbitration provision-at their urging-was a termination in their favor. Dkt. #11 at 8.
Plaintiffs cite to and analyze the prior judgment under California case law. Dkt. #11 at 9 (citing Fuentes v. Berry, 38 Cal.App.4th 1800, 1808 (1995)). But as noted above, Texas law governs this claim.
“Supreme Court and Fifth Circuit precedent provide general guidance on the qualifications for prevailing party status.” Dearmore v. City of Garland, 519 F.3d 517, 521 (5th Cir. 2008). “The Supreme Court has noted that the touchstone of the prevailing party inquiry . . . is the material alteration of the legal relationship of the parties in a manner which Congress sought to promote in the fee statute.” Id. (citing and quoting cases) (cleaned up) (discussing prevailing parties in the 42 U.S.C. § 1983 context).
Citing Heritage Capital Corp. v. Christie's, 2018 WL 398202, at *3 (N.D. Tex. Jan. 12, 2018), Defendants argue that the 1255 Action was not terminated in Plaintiffs' favor because “that lawsuit was dismissed in lieu of arbitration, and no determination on the merits was reached because [Defendant] U.S. Capital terminated the arbitration.” Dkt. #10 at 4.
Plaintiffs argue that Heritage Capital is distinguishable. Dkt. #11 at 8. Heritage is a copyright case, which implicates a statutory regime, and Plaintiffs note that “there is not statutory scheme or Congressional [sic] intent, or fee shifting issue for consideration” in this action. Id. at 9. Plaintiffs specifically argue that the fee-shifting provision, permitting attorney's fees for the prevailing party, in the Copyright Act is not analogous to the circumstances of this case.
However, “it has been the Court's approach to interpret the [prevailing party] in a consistent manner” across statutes. CRST Van Expedited, Inc. v. EEOC, 578 U.S. 419, 422 (2016). But “courts have had difficulties in ascertaining what other forms of judicial action have the ‘necessary judicial imprimatur' to create prevailing party status ....” Dearmore, 519 F.3d at 521. Indeed, “it remains an open question whether other types of non-merits involuntary dismissals should confer prevailing party status.” Beach Blitz Co. v. City of Miami Beach, 13 F.4th 1289, 1301 (11th Cir. 2021) (citing cases).
Absent citation to contrary case law, the undersigned will adhere to the general guidance Supreme Court and Fifth Circuit precedent provides. “To become a prevailing party, a plaintiff must obtain, at an absolute minimum, actual relief on the merits of the claim.” Howard v. Weston, 354 Fed.Appx. 75, 77-78 (5th Cir. 2009) (quoting Farrar v. Hobby, 506 U.S. 103, 116 (1992) (O'Connor, J., concurring) (brackets omitted)); see also, e.g., Hewitt v. Helms, 482 U.S. 755, 760 (1987) (“Respect for ordinary language requires that a plaintiff receive at least some relief on the merits of his claim before he can be said to prevail.”).
Plaintiffs argue that by being sent to arbitration, “Defendants can no longer pretend to advocate as plaintiffs” and that the judgment in the prior action “terminated [Defendants'] scheme,” materially changing the parties' relationship in favor Plaintiffs.
However, “[o]f itself, ‘the moral satisfaction that results from any favorable statement of law' cannot bestow prevailing party status.” Farrar, 506 U.S. at 112-13 (quoting Hewitt, 482 U.S. at 762). “No material alteration of the legal relationship between the parties occurs until the plaintiff becomes entitled to enforce a judgment, consent decree, or settlement against the defendant.” Id. (“a judicial pronouncement that the defendant has violated the Constitution, unaccompanied by an enforceable judgment on the merits, does not render the plaintiff a prevailing party”).
Here, arbitration was compelled. Neither the district court nor the Fifth Circuit addressed the merits of the claims in the 1255 Action. There was no alteration of the parties' legal rights, and there was no enforceable merits judgment. This court will follow the footsteps of courts that have analyzed what judicial imprimatur creates prevailing party status in various contexts and conclude that compelling parties to arbitration does not render a prevailing party. Thus, there was no prevailing party in the prior lawsuit, and the fifth element required for malicious prosecution is absent.
“[A]n underlying civil suit has not terminated in favor of a malicious prosecution plaintiff until the appeals process for that underlying suit has been exhausted.” Tex. Beef Cattle Co. v. Green, 921 S.W.2d 203, 208 (Tex. 1996)
The First Circuit has held that a dismissal “with prejudice” compelling arbitration did not confer prevailing party status under the Copyright Act because the same substantive claims would be heard in an alternative forum. Cortes-Ramos v. Sony Corp. of Am., 889 F.3d 24, 25-26 (1st Cir. 2018).
3. Sixth element: Special damages
Defendants argue that the Amended Complaint does not allege special damages, the sixth element of a malicious prosecution claim. Dkt. #10 at 5. Plaintiffs contend that the Amended Complaint sufficiently pleads the damages element in paragraphs 62, 66, and 95. Dkt. #11 at 10.
“A plaintiff must suffer a special injury before recovering for malicious prosecution of a civil case.” Tex. Beef Cattle, 921 S.W.2d at 208. “It is insufficient that a party has suffered the ordinary losses incident to defending a civil suit, such as inconvenience, embarrassment, discovery costs, and attorney's fees.” Id. at 208. “The mere filing of a lawsuit cannot satisfy the special injury requirement.” Id. at 208-09 (citingMartin v. Trevino, 578 S.W.2d 763, 766-69 (Tex. Civ. App.- Corpus Christi 1978, writ ref'd n.r.e.)). “There must be some physical interference with a party's person or property in the form of an arrest, attachment, injunction, or sequestration.” Id. at 209 (citing Sharif-Munir-Davidson Dev. Corp. v. Bell, 788 S.W.2d 427, 430 (Tex. App.-Dallas 1990, writ denied) (emphases added)). “While this rule may leave a party without a remedy for indirect losses, the countervailing policies supporting this heightened threshold in malicious prosecution cases are compelling and well-established in Texas law.” Id. (citing Pye v. Cardwell, 222 S.W. 153, 153 (Tex. 1920); Salado College v. Davis, 47 Tex. 131, 135-36 (Tex. 1877)).
The Amended Complaint alleges: damage to business reputation; loss of business opportunities; monetary damages, including potential lost profits; attorney's fees and litigation costs; and “distraction from the usual and routine functions of operating their business.” Dkt. #8 ¶62. Plaintiffs also point to the damages alleged in support of their seventh cause of action, which include: “reimbursement and payment of all costs and expenses, damages, and liabilities, including attorney's fees ....” Dkt. #11 at 10 (citing Dkt. #8 ¶95).
Unhelpfully, Plaintiffs also refer to paragraph 62 of the Amended Complaint, which “adopts and incorporates the allegations in paragraphs 1-61 & 95 of the Amended Complaint.” Dkt. #11 at 10; Dkt. #8 ¶62.
None of the damages alleged involve physical interference with the Plaintiffs' property. Thus, they are not special damages under Texas law. Again, “Texas has long been one of those jurisdictions unwilling to dispense with the special injury requirement, and its courts have consistently rebuked litigants' attempts to have that requirement altered or abrogated.” AirgasSouthwest, Inc. v. IWS Gas & Supply of Tex., Ltd., 390 S.W.3d 472, 482 (Tex. App.-Houston [1st Dist.] 2012, pet. denied). Accordingly, the Amended Complaint does not sufficiently allege the sixth element of a malicious prosecution claim under Texas law.
4. Conclusion
Because Plaintiffs do not allege facts sufficient to defeat the presumption that Defendants acted reasonably and had probable cause to bring the 1255 Action, the Amended Complaint does not allege the fourth element of a malicious prosecution claim. Because Plaintiffs were not the prevailing party in the previous action, the Amended Complaint does not allege the fifth element of a malicious prosecution claim. And because Plaintiffs do not allege special damages, the Amended Complaint does not allege the sixth element of a malicious prosecution claim. Because the Amended Complaint does not allege one or more elements of a malicious prosecution claim under Texas law, the undersigned will recommend dismissal of the first cause of action.
C. Second and third causes of action: Abuse of Process
Defendants argue that Plaintiffs' abuse of process claims fail because the Amended Complaint does not allege the requisite elements. As to the 1255 Action, Defendants argue Plaintiffs fail to allege “that the process issued was itself used in some improper manner, which is a required element of the claim.” Dkt. #10 at 6 (citing Pittsburg SNV LLC v. PharMerica East, Inc., 2012 WL 4509753, at *2 (E.D. Tex. Jul. 19, 2012)). Plaintiffs disagree and contend that Defendants' “manipulation of the judicial process is abusive per se.” Dkt. #13 at 11, 13. As to the 1247 Action, Defendants contend that Plaintiffs fail to allege that process was used improperly after it was issued. Dkt. #10 at 7. In their Response, Plaintiffs argue that the Amended Complaint contains sufficient allegations under California law to support an abuse of process claim. Again, Texas law governs the tort claims in this action. Supra at 4-7.
Under Texas law, an abuse of process claim requires a party to allege (1) “an illegal, improper or perverted use of the process, a use neither warranted nor authorized by the process;” (2) “an ulterior motive or purpose in exercising such illegal, perverted or improper use of the process;” and (3) damages resulting from “such illegal act.” Cooper v. Trent, 551 S.W.3d 325, 333-34 (Tex. App.-Houston [14th Dist.] 2018, pet. denied). “Critically, ‘abuse of process consists not in the filing and maintenance of a civil action, but rather in the perversion of some process issued in the suit after its issuance.'” Cantu v. Guerra, No. SA-20-CV-0746-JKP-HJB, 2021 U.S. Dist. LEXIS 119681, at *51 (W.D. Tex. 2021) (quoting Detenbeck v. Koester, 886 S.W.2d 477, 481 (Tex. App.-Houston [1st Dist.] 1994, writ dismissed) (emphasis added)). “Even if an action is commenced ‘without probable cause' and with a malicious intent, the commencement of such action does not of itself state a claim for abuse of process.” Id. (citing Detenbeck, 886 S.W.2d at 481). “The mere maintenance of a civil action, even if done with malicious intent, will not support a cause of action for abuse of process.” Detenbeck, 886 S.W.2d at 481.
“In other words, abuse of process applies to a situation where a properly issued service of process is later used for a purpose for which it was not intended.” Martinez v. English, 267 S.W.3d 521, 528-29 (Tex. App.-Austin 2008, pet. denied) (citing Bossin v. Towber, 894 S.W.2d 25, 33 (Tex. App.-Houston [14th Dist.] 1994, writ denied)). “If the claim is that wrongful intent or malice caused the process to be issued initially, the claim is one for malicious prosecution, not for abuse of process.” Id. (citing Bossin, 894 S.W.3d at 33) (emphasis in original).
The abuse of process inquiry is as follows:
The purpose for which the process is used, once it is issued, is the only thing of importance .... Some definite act or threat not authorized by the process, or aimed at an objective not legitimate in the use of the process, is required; and there is no liability where the defendant has done nothing more than carry out the process to its authorized conclusion, even though with bad intentions. The improper purpose usually takes the form of coercion to obtain a collateral advantage, not properly involved in the proceeding itself, such as the surrender of property or the payment of money, by the use of the process as a threat or a club. There is, in other words, a form of extortion, and it is what is done in the course of negotiation, rather than the issuance or any formal use of the process itself, which constitutes the tort.Liverman v. Payne-Hall, 486 S.W.3d 1, 5 (Tex. App.-El Paso 2015, no pet.) (quoting Blackstock v. Tatum, 396 S.W.2d 463, 468 (Tex. Civ. App.-Houston 1965, no writ) (emphases added)).
Furthermore, “the improper purpose of the process manifests itself by the surrender of property or the payment of money ‘by the use of process as a threat or a club.'” RRR Farms v. Am. Horse Prot. Ass'n, 957 S.W.2d 121, 134 (Tex. App.-Houston [14th Dist.] 1997, pet. denied) (quoting Blackstock, 396 S.W.2d at 468). “The mere issuance of process, by itself, is not sufficient to establish the abuse of process tort.” Id.
1. Second cause of action: abuse of process-1255 Action
Plaintiffs' first abuse of process claim centers on Defendants' alleged use of process for “ulterior motives” in the 1255 Action. Dkt. #11 at 12. The Amended Complaint alleges that in 2018, “Defendants intentionally and knowingly devised and implemented a scheme of publishing defamatory accusations against the Plaintiffs ....” Dkt. #8 ¶16. And that “[t]hese lies were initially used as threats to coerce USCGIM to capitulate to the Defendants' demand ....” Id. ¶17. Plaintiffs allege that in the 1255 Action, it was Defendants' “intent and effort to publicize [] false representations.” Id. ¶56.
Specifically, Plaintiffs allege:
The Defendants intentionally used this legal procedure for improper purposes. The Defendants filed and pursued the lawsuit with malice and with the malicious intention of retaliating against USCGIM for its failure to capitulate to the Defendants' demands to remove itself as the Fund's General Partner and provide the Defendants unfettered control of the investment Fund and to fabricate a pretext in a misguided attempt to justify to the Fund's investors the Defendants' wrongdoing, mismanagement, poor performance, and poor results, that the legal procedure was not designed to achieve[.]Dkt. #8 ¶69.
Problematically for Plaintiffs, nowhere do they allege that Defendants used any process illicitly after its filing. See generally, Dkt. #8. While they did not like and disagreed with the allegations in the 1255 Action, Plaintiffs do not allege any nefarious use of process after the issuance of that process. See generally, id. Accordingly, Plaintiffs fail to allege an element of abuse of process. And the undersigned will recommend dismissal of the second cause of action.
2. Third cause of action: abuse of process-declaration
Defendants move to dismiss Plaintiffs' third cause of action (their second abuse of process claim), Dkt. #10 at 7, which arises out of a declaration that allegedly contained untrue statements. Dkt. #8 ¶¶74-75. Again, Plaintiffs' Response provides: “Plaintiffs' Counts 2 and 3 for Abuse of Process are Well Plead and Allege Sufficient Facts.” Dkt. #11 at 11 (Section D heading).
“The ‘process' referred to is civil or criminal process issued by a court, such as a writ, a warrant, or other order of the court mandating or prohibiting certain action within a legal proceeding.” Gonzalez v. United States, No. EP-14-CV-263-PRM-RFC, 2015 U.S. Dist. LEXIS 189043, at *19 (W.D. Tex. 2015) (citing Bossin v. Towber, 894 S.W.2d 25, 33 (Tex. App.- Houston [14th Dist.] 1994, writ den'd) and Snyder v. Byrne, 770 S.W.2d 65, 69 (Tex. App.- Corpus Christi, 1989, reh'g denied)); see also Wise v. Wilmoth, No. 3:16-CV-1039-M-BH, 2017 U.S. Dist. LEXIS 119725, at *33 (N.D. Tex. 2017).
This claim fails as a matter of law because a declaration is not “process” under Texas law for the purpose of an abuse of process claim. Accordingly, the undersigned will recommend dismissal of the third cause of action.
This claim also fails for substantially the same reasons as the second cause of action (the other abuse of process claim) because Plaintiffs do not allege the declaration was used against them to compel them to action collateral to the proceeding in which it was submitted.
D. Fourth through seventh causes of action: Breach of Contract
Plaintiffs also assert four breach of contract claims. Dkt. #8 at 23-26. Defendants move to dismiss each one. Dkt. #10 at 8, 10-12. The breach of contract claims arise out of the various agreements executed by the parties, which all contain a choice of law provision governing “This Agreement.” Accordingly, California law applies. See supra at 4-7 (analyzing choice of law provisions).
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. Oasis W. Realty, LLC v. Goldman, 51 Cal.4th 811, 821 (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 (Cal.Ct.App. 2001)).
1. Fourth and fifth causes of action: breach of contract
Defendants argue that Plaintiffs' fourth and fifth causes of action should be dismissed because Plaintiffs failed to plead breach or damages. Dkt. #10 at 8, 10. Defendants further argue that Plaintiffs waived both claims. Id. Plaintiffs assert each of the counts for breach of contract are well pled and allege sufficient facts. Dkt. #11 at 13 (section E heading).
The fourth cause of action in the Amended Complaint alleges: Defendant Noble Management “intentionally breached the MASA when it published a non-final arbitration award . . .” in the 1247 Action. Dkt. #8 at 24. The fifth cause of action alleges: Defendant Noble Management “intentionally breached the Letter Agreement when it published a non-final arbitration award . . .” in the 1255 Action. Id. Because the alleged conduct is substantially similar-indeed, it is identical except for in which lawsuit the non-final arbitration award was published-the court will analyze both claims together.
The dispute resolution confidentiality provisions of the MASA and the 2017 Letter Agreement are identical save for the former referencing JAMS and the latter referencing FINRA. Dkt. #8-2 at 6; Dkt. #8-3 at 6. Both provide:
The parties agree that the arbitration shall be confidential and that no party shall disclose to any person . . . any document filed at [JAMS or FINRA] or exchanged between the parties or testimony presented (or any summaries or quotations thereof) in connection with the arbitration that is designated either on the document or on the testimonial record as “Confidential” (the “Confidential Information”).Id. (emphases added).
Defendants' argument is simple: “the Amended Complaint fails to allege that [Defendants] filed any document bearing [the “Confidential”] designation. Dkt. #14 at 7.
In their Response, Plaintiffs argue that the published non-final arbitration award was later determined to be confidential by a JAMS panel and that Defendants subsequently moved to seal it. Dkt. #11 at 14-15. Whether such actions give rise to a breach of contract claim is not relevant here, however, because the allegations contained in the Amended Complaint are at issue. And the Amended Complaint simply does not allege that Defendants published a document with a “Confidential” or “Confidential Information” or similar designation in either the 1255 Action or 1247 Action.
Defendants disagreed with Plaintiffs' contention, but elected to seal the document rather than litigate the issue. Dkt. #11-1 at 1.
For the foregoing reasons, neither the fourth nor fifth causes of action state a claim for breach of contract under California (or Texas) law. Accordingly, the undersigned will recommend dismissal of both the fourth and fifth claims.
Because Plaintiffs' breach of contract by disclosure claims are subject to dismissal for lack of sufficient factual allegations as to the element of breach, there is no need to consider Defendants' alternative argument for dismissal based on failure to plead damages or waiver.
2. Sixth and seventh causes of action: Indemnification
Defendants move to dismiss Plaintiffs' sixth and seventh causes of action. Dkt. #10 at 11, 12. In their sixth and seventh causes of action, Plaintiffs allege Defendants breached the 2016 Letter Agreement and the MASA by not indemnifying Plaintiffs in the 1255 Action and the 1247 Action. Dkt. #8 at 25, 26. Plaintiffs also point out that Defendants incorrectly cited Texas case law in their Motion, Dkt. #11 at 17; however, both Plaintiffs and Defendants provide citations to California law in the Response and Reply. Id.; see, e.g., Dkt. #14 at 8. Because Plaintiffs' sixth and seventh causes of action are highly similar, the court will analyze them together.
Two agreements between the parties (or their privies) contain indemnification provisions. Plaintiffs allege that under the 2016 Letter Agreement, Defendant Noble Managment “owe[d] a duty to hold harmless [Plaintiff U.S. Capital] from and against any losses, claims, damages or liabilities, and to reimburse all documented out-of-pocket expenses, including fees, charges, and disbursements to counsel, that are related to, or arising out of or in connection with [the] engagement.” Dkt. #8 at 25; see also, Dkt. #8-1 at ¶7 (Annex A to 2016 Letter Agreement). Plaintiffs allege that under the MASA, Defendant Noble Managment “owe[d] a duty to indemnify and hold harmless [Plaintiff U.S. Capital Global Investment Management] from and against, and pay or reimburse [Plaintiff U.S. Capital Global Investment Management] from any losses, claims, damages or liabilities, (whether or not resulting from third party claims), including fees, charges, and disbursements to counsel, that is related to, or in any manner arising out of the performance of [Plaintiff U.S. Capital Global Investment Management] of its services under the [MASA].” Dkt. #8 at 26.
Plaintiffs contend that Defendants owe Plaintiffs reimbursement and payment of all costs, expenses, damages, and liabilities in the 1255 Action and the 1247 Action. Dkt. #8 at 25, 26. Defendants contend that they are not obligated to indemnify Plaintiffs in lawsuits between the parties arising out of the agreements. Defendants argue, inter alia, that the Amended Complaint does not allege the parties intended to allow first-party attorney's fees for breach of contract claims and that “under California law, the general rule is that an indemnity provision does not allow recovery of attorney's fees for a first-party breach of contract claim, although such fees may be awarded if the parties intended to allow them.” Dkt. #14 at 9 (quoting Goodman Food Prods. v. Sunrise Foods Int'lInc., 2022 U.S. Dist. LEXIS 128808, at *21-22 (C.D. Cal. Jun. 1, 2022)).
“Although indemnity generally relates to third party claims, this general rule does not apply if the parties to a contract use the term ‘indemnity' to include direct liability as well as third party liability.” Zalkind v. Ceradyne, Inc., 194 Cal.App.4th 1010, 1024 (2011) (cleaned up). “Determining the scope of an indemnity provision is a matter of contract interpretation, giving effect to the parties' mutual intent based on the contract's clear and explicit language.” Goodman, 2022 U.S. Dist. LEXIS 128808, at *22-23 (citing Alki Partners, LP v. DB Fund Servs., LLC, 4 Cal.App. 5th 574, 600 (2016)).
“An indemnity agreement is to be interpreted according to the language and contents of the contract as well as the intention of the parties as indicated by the contract.” Myers Bldg. Indus., Ltd. v. Interface Tech., Inc., 17 Cal.Rptr.2d 242, 253-54 (1993) (citing Widson v. Int'l Harvester Co., 153 Cal.App.3d 45, (1984)). “The extent of the duty to indemnify is determined from the contract. Id. (citing Herman Christensen & Sons, Inc. v. Paris Plastering Co., 61 Cal.App.3d 237, 245 (1976)). “The indemnity provisions of a contract are to be construed under the same rules governing other contracts with a view to determining the actual intent of the parties.” Id.
“A clause which contains the words ‘indemnify' and ‘hold harmless' is an indemnity clause which generally obligates the indemnitor to reimburse the indemnitee for any damages the indemnitee becomes obligated to pay third persons.” Carr Bus. Enters., Inc. v. City of Chowchilla, 82 Cal.Rptr.3d 128, 132 (2008) (quoting Myers, 13 Cal.App.4th at 969). “Indemnification agreements ordinarily relate to third party claims.” Id. (quoting Myers, 13 Cal.App.4th at 969). “Generally, the inclusion of attorney fees as an item of loss in a third[-]party claim-indemnity provision does not constitute a provision for the award of attorney fees in an action on the contract which is required to trigger” entitlement to attorney's fees incurred to enforce the contract. Id.; see also CAL. CIV. CODE § 1717. Thus, “[w]ithout other indications of an intent to shift fees in first-party actions, ‘the inclusion of attorney fees as an item of loss in a third-party claim-indemnity provision does not constitute a provision for the award of attorney fees in an action on the contract.'” Goodman, 2022 U.S. Dist. LEXIS 128808, at *22 (quoting Carr, 166 Cal.App.4th at 20). Courts will not infer the parties intended an indemnification provision to cover attorney's fees between the parties if the provision “does not specifically provide for attorney's fees in an action on the contract ....” Alki Partners, 209 Cal.Rptr.3d at 174 (citing Myers, 13 Cal.App.4th at 970 (emphasis in original).) (internal quotations removed). “[A]n indemnification clause in which one party promised to indemnify the other from any, all, and every claim which arises out of the performance of the contract deals only with third party claims and cannot support an award of attorney fees in an action for breach of contract between the parties to the agreement.” Id. at 171 (citing Myers, 13 Cal.App.4th at 974) (cleaned up).
The 2016 Letter Agreement provides that Defendant Noble Management:
[A]grees to indemnify and hold harmless USCP and its affiliates . . . from and against any losses, claims, damages or liabilities related to, or arising out of or in connection with USCP's Engagement, and will reimburse each Indemnified Person for all reasonable, document, out-of-pocket expenses (including fees, charges and disbursements of counsel) as they are incurred in connection with investigating, preparing, pursuing or defending any action, claim, suit, investigation or proceeding related to, arising out of or in connection with the Engagement . . .Dkt. #8-1 at 7 (Annex A to the 2016 Letter Agreement).
The MASA provides that Defendant Noble Management:
[A]grees to indemnify and hold harmless [Plaintiff U.S. Capital Global Investment Management] . . . from and against, and pay or reimburse [Plaintiff U.S. Capital Global Investment Management] and such other indemnified persons for, and all actions, claims demands, proceedings, investigation, inquiries, liabilities, obligations fines, deficiencies, costs, expenses, royalties, losses and damages (whether or not resulting from third party claims) related to or arising out of the performance by [Defendant Noble Management] of services under this Agreement, and to reimburse [Plaintiff U.S. Capital Global Investment Management] and any other indemnified person for out-of-pocket expenses and reasonable legal and accounting expenses incurred by it in connection with or relating to investigating, preparing to defend, defending, asserting or prosecuting any actions, claims or other proceedings (including any investigation or inquiry) arising in any manner out of or in connection [sic] [Defendant Noble Management's] performance of services hereunder ....Dkt. #8-2 at 3 (MASA). The MASA provision goes on to specify that Defendant Noble Management would not be responsible for any costs arising for actions by Plaintiff U.S. Capital Global Investment Management that stem from, inter alia, fraud.
As in Carr and the cases it analyzes, the agreements' indemnity provisions on which Plaintiffs rely contain “no express language authorizing recovery of fees in an action to enforce the contract” and therefore do not provide for recovery of Plaintiffs fees in a first-party action against Defendants for breach of contract. Carr, 166 Cal.App.4th at 23. “The court will not infer that the parties intended an indemnification provision to cover attorney fees between the parties if the provision ‘does not specifically provide for attorney's fees in an action on the contract.'” Alki Partners, 209 Cal.Rptr.3d at 171 (quoting Myers, 13 Cal.App.4th at 970).
Plaintiffs cite no contrary, on-point authority, nor have they identified language elsewhere in the agreements suggesting that the parties intended to shift attorney's fees in a first-party breach of contract action.
The provisions Plaintiffs rely on are titled “Indemnification: Limitation on Liability” and “Indemnification.... (b) Limitation on Liability.” As in Carr, “the headings in both the contracts suggest that the parties intended the clauses to relate to indemnity not attorneys fees.” Carr, 82 Cal.Rptr.3d at 133.
Moreover, the parties explicitly contemplated the award of attorney's fees in a dispute on the agreements in the arbitration context. The dispute resolution provisions, which are separate from the indemnification provisions, in both agreements provide that in an arbitration an “Arbitrator shall award attorneys' fees and costs to the prevailing party” and where “the Arbitrator determines a party to be the prevailing party on some but not all of the claims and counterclaims, the Arbitrator may award the prevailing party an appropriate percentage of the costs and expenses incurred by the prevailing party.” Clearly, the parties knew how to include provisions for attorney's fees in the third-party and first-party contexts. Therefore, it is contrary to logic to read into the agreements an attorney's fees provision in the litigation context-a context not included in the agreements.
Precedent provides clear guidance. “It would have been simple for the parties to provide: If any action is commenced to enforce or interpret the terms of this agreement, the prevailing party shall be entitled to recover reasonable attorney fees.” Alki Partners, 209 Cal.Rptr.3d at 174. Accordingly, the sixth and seventh causes of action, Plaintiffs indemnification claims, fail as a matter of law.
IV. Conclusion
Plaintiffs' Amended Complaint should be dismissed in its entirety. Contrary to their assertion, Plaintiffs' tort claims are governed by Texas law, and the Amended Complaint does not allege the requisite elements for malicious prosecution or abuse of process under Texas law. Plaintiffs' disclosure-based breach of contract claims, which pursuant to agreements between the parties (or their privies) are governed by California law, likewise fail because the Amended Complaint contains insufficient factual information to sustain the elements of breach of contract. Plaintiffs' indemnification-based breach of contract claims fail because the agreements do not provide for attorney's fees in first-party lawsuits on the contracts. Accordingly, the undersigned will recommend dismissal of all claims for failure to comply with the pleading requirement of Rule 8(a).
V. Recommendations
For the reasons given above, the undersigned RECOMMENDS that Defendants' Motion to Dismiss Plaintiffs' Amended Complaint (Dkt. #10) be GRANTED.
VI. Objections
The parties may file objections 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. U.S. 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 fourteen (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 Services Auto. Ass'n, 79 F.3d 1415 (5th Cir. 1996) (en banc).