Opinion
CASE NO: 94-21308, ADVERSARY NO. 94-2160.
February 21, 2007
MEMORANDUM OPINION
The United States District Court for the Southern District of Texas, Laredo Division, remanded to this Court two issues concerning the dismissal of The Cadle Company's claim for tortious interference. The District Court instructs this Court to provide further development regarding the existence of a claim for tortious interference in the collection of a judgment under Texas law, and also, to develop the analysis regarding Cadle's standing to bring such a claim. Based on the findings of fact and conclusions of law stated below, the Court finds that Cadle does not have standing to bring a claim for tortious inference with the collection of a judgment. A separate order will issue.
Factual Background
Plaintiff, The Cadle Company ("Cadle"), holds a judgment against the Debtor in the amount of $1,075,167.47 (the "Judgment"). Cadle claims that the Defendants interfered with its right to collect on the judgment by conspiring with the Debtor to shield assets of the Debtor from the claims of Cadle.
Specifically, Cadle claims that the actions taken by the Defendants in the alleged conspiracy include misrepresenting the financial condition of the Debtor; structuring the settlement of certain franchise litigation involving the Debtor and Whataburger, Inc. so that no settlement proceeds would be allocated to the Debtor; diverting bonus payments due to the Debtor as a shareholder of Whataburger of Alice, Inc. ("WOA") to other parties; and the fraudulent redemption by Defendants of WOA stock which belonged to the Debtor. The Debtor is included in this adversary as a co-conspirator.
Defendants maintain that if there is a claim for tortious interference, it does not belong to Cadle. It is argued that any damage resulting from the alleged conspiracy was damage to all creditors, and as such, the claim belongs to the estate.
Procedural Background
On April 15, 1996, the Hon. Richard Schmidt issued an order dismissing Cadle as a party-plaintiff based on, among other things, a finding that Cadle lacked standing to bring a tortious interference claim against Defendant. Based in part on the ruling of the Bankruptcy Court, the Trustee entered into a settlement with the Defendants. An order and judgment approving the settlement was entered in the main case (signed by J. Leal). However, Cadle appealed the bankruptcy court's order dismissing it as a party-plaintiff.
By an order signed on October 25, 2002, the United States District Court for the Southern District of Texas, Laredo Division, affirmed three of the four grounds of appeal. However, the district court remanded the dismissal of Plaintiff's cause of action for tortious interference to this Court. In a memorandum opinion denying a rehearing, the district court stated that
. . . the bankruptcy court's discussion of the tortious interference claim was not well-developed. The bankruptcy judge made no reference to the Educators case, nor did he discuss the elements of tortious interference claim other than to observe that it could be brought by any creditor and thus was `a general claim.' This Court is functioning here as an appellate court. It cannot adequately review the merits of a claim that has not been fully developed below. For that reason, that particular issue was remanded for further development as to what are the elements of a tortious interference claim, how those elements differ from the elements for fraudulent transfer claims, and, under the Educators framework, who owns such a claim.
The undersigned judge, was added to this case on February 25, 2004. A status hearing was held on April 8, 2004, and the tortious interference remand was presented as a live issue. The Court ordered Cadle to submit a substantive brief in response to Defendant's substantive motion re-urging its prior filed motion to dismiss the tortious interference claim. Cadle submitted its brief in the main case on May 5, 2004. This Court issued its judgment and memorandum opinion in a companion case (adversary case 02-0001) on December 10, 2004. Due to a clerical error resulting from the issuance of the companion opinion, the Court did not promptly consider the issues set forth in this memorandum opinion.
Ownership of the Claim
Defendants' motion re-urging dismissal is based on two claims. First, Defendants argue that Cadle has failed to state a claim upon which relief may be granted. Second, Defendants argue that Cadle lacks standing to bring a tortious interference claim in bankruptcy.
The Court will begin its analysis with the issue of standing. If Cadle lacks standing to bring the tortious interference claim, the question of Cadle's success or failure in pleading such a claim is obviated. Furthermore, the question of standing is the crux of the matter, given the already approved settlement. That settlement now has the effect of res judicata; it settles all claims against the Defendants that the Trustee owns. Thus, if Cadle is found to have standing to bring the tortious interference claim in its own name (i.e. Cadle owns the claim), then the issue remains alive — the Trustee could not have settled a claim that he does not own. However, if Cadle lacks standing to assert the tortious interfence claim, then it becomes property of the estate, and is resolved by the approved settlement.
Tortious interference is a tort defined by state law. The elements of tortious interference are (1) a relationship subject to interference; (2) willful and intentional interference; (3) proximate cause between the willful interference and damage, and; (3) actual damage or loss. Cebryk v. Veco Corp., 124 Fed. Appx. 282 (5th Cir. 2005) (citing Prudential Insurance Company of America v. Financial Review Services, Inc., 29 S.W.3d 74, 77 (Tex. 2000)). For the purpose of assessing standing, the Court will assume that a tortious interference action based on hindering a judgment creditor's right to satisfaction is valid under Texas law. The issue is who owns such an action.
The Fifth Circuit annunciated the standard for determining whether a particular state claim belongs to the estate in In re Educators Group Health Trust, 25 F.3d 1281, 1284 (5th Cir. 1994):
Whether a particular state cause of action belongs to the estate depends on whether under applicable state law the debtor could have raised the claim as of the commencement of the case. See S.I. Acquisition, 817 F.2d at 1142 (examining the cause of action premised on alter ego under Texas law); MortgageAmerica, 714 F.2d at 1275-1277 (examining the causes of action based on the Fraudulent Transfers Act and "denuding the corporation" theory under Texas law). As part of this inquiry, we look at the nature of the injury for which relief is sought. See E.F. Hutton, 103 B.R. at 812 ("The injury characterization analysis should be considered as an inseparable component of whether an action belongs to the [estate] or individual [creditor]."). If a cause of action alleges only indirect harm to a creditor (i.e., an injury which derives from harm to the debtor), and the debtor could have raised a claim for its direct injury under the applicable law, then the cause of action belongs to the estate. See, e.g., S.I. Acquisition, 817 F.2d at 1152-53 (concluding that an action based upon alter ego properly belongs to the estate, where (1) the debtor could have pierced its own corporate veil under Texas law; and (2) the debtor was unable to meet its corporate obligations due to the misuse of the corporate form, causing a derivative injury to the individual creditor); MortgageAmerica, 714 F.2d at 1275 (concluding that an action under the Fraudulent Transfers Act properly belongs to the estate, where (1) the debtor could have brought the action to recover its assets; and (2) the debtor is stripped of assets, causing a derivative injury to the individual creditor). Conversely, if the cause of action does not explicitly or implicitly allege harm to the debtor, then the cause of action could not have been asserted by the debtor as of the commencement of the case, and thus is not property of the estate.
In re Educators Group Health Trust, 25 F.3d at 1284.
In this case, the cause of action at issue is the claim for tortious interference with the ability of Cadle to collect on its judgment. Cadle argues that it "has alleged sufficient acts of wrongful conduct by the non-debtor Defendants directed specifically at Cadle which entitle Cadle to pursue the [tortious interference claim]." (Cadle Brief on Claim, p. 2). Cadle's focus on whether the wrongful conduct is directed specifically at a creditor or generally at all creditors is misplaced. According to the Fifth Circuit, the bankruptcy court in Educators made the same mistake:
In determining whether a cause of action may belong to the estate, the bankruptcy court focused on whether the act or omission complained of was directed specifically or generally at the school districts participating in EGHT. Consequently, if the factfinder were to find that the act or omission was directed generally at the school districts participating in EGHT, then the cause of action would belong to the estate; if not, then the cause of action would belong to the plaintiff school districts. The problem with the bankruptcy court's framework is that it assumes, rather than decides, whether a cause of action belongs to the bankruptcy estate. Stated differently, the fact that creditors in general are harmed does not determine whether a cause of action belongs to the bankruptcy estate; rather, general harm to creditors necessarily follows from the fact that the debtor has been injured. The bankruptcy court's standard for determining whether a cause of action belongs to the estate ignores the relationship between the debtor and the nature of the injury suffered. Because that relationship must be considered when determining whether a cause of action belongs to the estate, we conclude that the bankruptcy court applied the wrong legal standard to the causes of action listed in the complaint.
In re Educators Group Health Trust, 25 F.3d at 1285.
Pursuant to Educators, this Court looks to the nature of the injury for which relief is sought in order to determine to whom the claim belongs. Essentially, Cadle's tortious interference claim rests on injuries resulting from alleged transfers of the Debtor's property to third parties. While Cadle has styled its action to personalize the harm caused by these transfers in the form of interfering with collection of its judgment, Cadle's injuries nonetheless stem from transfers of the Debtor's property. According to Cadle, it was the Debtor who should have received settlement proceeds, a bonus payment, and WOA stock. However, these assets went to third parties. In other words, the initial injury in this case was a direct injury to the Debtor — funds due to the Debtor went to other parties. Cadle was only injured in this case as an indirect result of the Debtor being denied particular funds. Thus, Cadle's injuries are secondary to the injuries sustained by the Debtor.
"If a cause of action alleges only indirect harm to a creditor (i.e. an injury which derives from harm to the debtor), and the debtor could have raised a claim for its direct injury under the applicable law, then the cause of action belongs to the estate." Educators, 25 F.3d at 1284. In this case, if the Debtor was denied funds as described by Cadle, then the Debtor would have been able to raise a claim for the injury.
It is true that under the present set of facts, the Debtor may have been a co-conspirator in the fraudulent transactions that underlie Cadle's tortious interference claim. Such complicity may amount to a defense in any action the Debtor could have brought against the other Defendants. However, this does not negate the determination that the claim belongs to the estate. Educators states that the Debtor need only have the ability to raise the claim as of the commencement of the bankruptcy proceeding. There is no "support for the proposition that a defense on the merits of a claim brought by the debtor precludes the debtor from bringing the claim. That the defendant may have a valid defense on the merits of a claim brought by the debtor goes to the resolution of the claim, and not to the ability of the debtor to assert the claim. The latter, of course, determines what is, or is not, property of the bankruptcy estate." Educators, 25 F.3d at 1286.
Conclusion
The injuries underlying the tortious interference cause of action are direct injuries to the Debtor — transfers of the Debtor's property to third parties. The Debtor could have brought the action to recover this property as of the beginning of the case. According to Educators, the fact that Cadle's injury was an indirect result of injury to the Debtor, means that the claim belongs to the estate. Cadle's cause of action for tortious interference with collection of a judgment is dismissed for lack of standing.