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Dynex Capital, Inc. v. Quilling

United States District Court, E.D. Virginia, Richmond Division

April 1, 2019

DYNEX CAPITAL, INC., Plaintiff,
v.
MICHAEL J. QUILLING, in his capacity as Receiver for American Realty Trust, Inc., Defendant.

          MEMORANDUM OPINION

          M. Hannah Lauck United States District Judge.

         This matter comes before the Court on Defendant, Michael J. Quilling, in his capacity as Receiver for American Realty Trust, Inc.'s, ("Quilling"), Motion to Dismiss and Unopposed Motion For Leave to Supplement the Record (the "Motion to Supplement the Record").[1] (ECF Nos. 14, 20.) In his Motion to Dismiss, Quilling asserts three grounds for relief: (1) that the Court lacks personal jurisdiction over Quilling under Federal Rule of Civil Procedure 12(b)(2); (2) that the Court must abstain from ruling on the suit and transfer it to the United States District Court for the Northern District of Texas, or dismiss the suit pursuant to the Anticipatory Suit Exception to the First-to-File Rule; and, (3) that Plaintiff Dynex Capital, Inc. ("Dynex Capital") failed to state a claim upon which relief can be granted under Rule 12(b)(6). (Mot. Dismiss 1, ECF No. 14.) Dynex Capital responded and opposed the Motion to Dismiss on all grounds, (ECF No. 18), and Quilling replied, (ECF No. 19).

         The Court dispenses with oral argument because the materials before it adequately present the facts and legal contentions, and argument would not aid the decisional process. The Court exercises jurisdiction over Plaintiffs' federal claims pursuant to 28 U.S.C. § 1332.[2] For the reasons that follow, the Court will grant the Motion to Supplement the Record. Utilizing Brillhart abstention, the Court will also grant the Motion to Dismiss and abstain from ruling on Dynex Capital's request for declaratory relief.

         I. Factual and Procedural History[3]

         Two decades of litigation in both Texas state and Texas federal courts, which resulted in multiple multi-million-dollar judgments, led to Dynex Capital filing the declaratory judgment action currently pending before this Court. To accurately portray this case, the Court must describe the litigation history of three related cases, each filed in a state or federal court in Texas. These actions-the Original Action, the Clapper Action, and the Fraudulent Transfer Action- serve as a puzzle piece created by the series of events leading to Dynex Capital's request for a declaratory judgment in this Court. In describing the facts of this case, the Court will also discuss the Litigation Cost Sharing Agreement, which stands at the heart of the Eastern District of Virginia litigation. The Court concludes its discussion of the facts by describing the two current competing actions: (1) the suit presently pending before this Court; and, (2) the inverse of this matter that Dynex Capital removed to the United States District Court for the Northern District of Texas and that the Northern District of Texas later remanded to a Texas state court.

         A. The Original Action

         The Court must begin its discussion of the facts with a brief synopsis of the related litigation. The related litigation began twenty years ago, on April 15, 1999, when American Realty Trust, Inc. ("ART"), Basic Capital Management, Inc., and Transcontinental Realty Investors, Inc. (collectively, with ART and Basic Capital Management, Inc., the "Judgment Creditors"), filed a breach of contract action against Dynex Commercial, Inc. (the "Original Action"), in the 68th Judicial District Court of Dallas County, Texas (the "Texas State Court"), Basic Capital Management, Inc., et al v. Dynex Commercial, Inc., etal9 Cause No. DC-03-00675. The Judgment Creditors later added Dynex Capital as a defendant to the Original Action. The Judgment Creditors "sought to hold both [Dynex Commercial, Inc.] and Dynex Capital liable for the alleged breach of a $160 million loan commitment," along with other claims. (Compl.¶9, ECF No. 1.)

         Nearly five years after the Original Action commenced, a jury ruled in favor of the Judgment Creditors. That verdict resulted in extensive post-judgment litigation that percolated up and down the Texas state court system for nearly a decade as the parties disputed responsibility for paying damages.[4] See Basic Capital Mgmt, Inc., et al. v. Dynex Commercial, Inc., et al., 402 S.W.3d 257 (Tex. App. 2013).

         On July 20, 2015, over sixteen years after the Judgment Creditors filed the Original Action, the Texas State Court entered final judgment in the matter. As part of the final judgment, the Texas State Court ordered approximately $47 million in damages against Dynex Commercial, Inc. (the "Original Action Final Judgment"). The Texas State Court did not award damages to the Judgment Creditors against Dynex Capital, the plaintiff in the matter currently pending before this Court.

         B. The Clapper Action

         Also in 1999, Art Midwest, Inc. and ART brought a separate but related lawsuit against David Clapper, Atlantic Midwest, LLC, and Atlantic XIII, L.L.C. in a Texas federal district court.[5] Art Midwest, Inc., et al v. Clapper, et al., No. 3:99-CV-2355-N (N.D. Tex.) (the "Clapper Action"). Defendants counterclaimed, and the case concluded in a final judgment "in excess of $73 million" in favor of the "Clapper Parties" as counter-plaintiffs. (Compl. ¶ 15.)

         On December 11, 2015, five months after the Texas State Court issued the Original Action Final Judgment, the Northern District of Texas appointed Quilling as receiver "to recover ART's portion of the" Original Action Final Judgment. (Id. ¶ 16; see Mot. Dismiss Ex. 1-2 "Agreed Order Appointing Receiver Pursuant to Tex. Civ. Prac. & Rem. Code § 31.002," ECF No. 14-1.) With Quilling's position as Receiver for ART now established, the Court returns to the litigation in the Original Action.

         C. Post-Judgment Discovery in the Original Action

         After the Texas State Court issued the Original Action Final Judgment and after the Northern District of Texas appointed Quilling receiver, the parties to the Original Action engaged in post-judgment discovery. On December 1, 2016, Quilling, in his capacity as Receiver for ART, filed in the Texas State Court the Receiver's Application for Issuance of Turnover Order, and Brief in Support, "seeking a court order for [Dynex Commercial, Inc.] to turn over to [Quilling] all of its non-exempt property, and to appoint Michael J. Quilling as Receiver over all of [Dynex Commercial Inc.'s] non-exempt assets." (Mem. Supp. Mot. Dismiss ¶ 9, ECF No. 15.)

         The Texas State Court granted Quilling's request and entered an order giving Quilling broad powers as "the appointed Receiver in this case." (Mot. Dismiss Ex. 1-1 "Order Granting Motion for Turnover" 2, ECF No. 14-1.) Additionally, it gave Quilling "the power and authority to take possession of, maintain, operate, and/or sell all non-exempt leviable property of [Dynex Commercial, Inc.], including, but not limited to ... all contract rights, whether present or future." (Id.) It also granted Quilling the ability to "exercise the right, without any obligation, to investigate and/or prosecute claims or causes of action [he] determine[d] to be appropriate." (Id. 5.)

         In his Motion to Dismiss filed in this Court, Quilling asserts that post-judgment discovery in the Texas State Court included several hearings and revealed that Dynex Commercial, Inc. and Dynex Capital may have been engaged in fraudulent transfers to avoid the Original Action Final Judgment. "As a result of recognizing that... assets ... had all been secreted from [Dynex Commercial, Inc.] to Dynex Capital," the Judgment Creditors filed an additional action, the Fraudulent Transfer Action. (Mem. Supp. Mot. Dismiss ¶ 10.) Because the litigation in the Fraudulent Transfer Action resulted in the discovery of the Litigation Cost Sharing Agreement, which forms the core of the action presently pending before the Court, the Court now turns to a brief discussion of the Fraudulent Transfer Action.

         D. The Fraudulent Transfer Action

         On April 26, 2017, the Judgment Creditors filed an action in Texas State Court against Dynex Capital and Dynex Commercial, Inc., asserting claims of alter ego, fraudulent transfer, and related claims (the "Fraudulent Transfer Action"), Case Number 3:17-cv-01147-D. In the Fraudulent Transfer Action, the Judgment Creditors sought to collect the Original Action Final Judgment. On May 1, 2017, Dynex Capital and Dynex Commercial, Inc. removed the Fraudulent Transfer Action to the Northern District of Texas.

         While litigating the Fraudulent Transfer Action, the Judgment Creditors learned through discovery that Dynex Capital and Dynex Commercial, Inc., had previously entered into a Litigation Cost Sharing Agreement (the "Litigation Cost Sharing Agreement"). The Litigation Cost Sharing Agreement recognized that Dynex Commercial, Inc. "has limited financial resources and may be unable to fund certain costs associated with the [l]itigation."[6] (Compl. Ex. 1 "Litigation Cost Sharing Agreement" 1, ECF No. 1-1.) As part of the Litigation Cost Sharing Agreement, the parties

agree[d] to use good faith efforts to agree on the allocation of any settlements, claims, damage award or judgements [sic] to any plaintiff as a result of the [l]itigation, such allocation to be based on the proportionate contribution by each party to the amount of the settlement, claim, damage award or judgement [sic] entered. In the absence of any agreement between [Dynex Capital] and [Dynex Commercial, Inc.], such settlement claim or judgement [sic] will be allocated 20% to [Dynex Capital] and 80% to [Dynex Commercial, Inc.].

(Litig. Cost Sharing Agreement 1). In this case, Quilling focuses on the last sentence of this excerpt to claim that, because the Judgment Creditors obtained a judgment against Dynex Commercial, Inc., Dynex Capital must now pay 20% of that judgment.

         With this background, the Court turns now to the instant declaratory judgment action and the competing action, which pends before the Texas State Court.

         E. The Declaratory Judgment Action and the Competing Action

         On May 10, 2018, Quilling, through counsel, mailed to Counsel for Dynex Capital, a letter demanding "immediate payment to the Receiver of 20% of the present amount of the" Original Action Final Judgment. (Compl. Ex. 2 "Demand Letter" 2, ECF No. 1-2.) In the Demand Letter, Quilling based his claim for monetary payment on Dynex Capital's promises set forth in the Litigation Cost Sharing Agreement. Quilling estimated that Dynex Capital owed him approximately $11, 341, 360.65. The Demand Letter stated: "If payment is not received within ten (10) days of this letter, then the Receiver shall proceed to obtain the same via appropriate legal process." (Id. 2.)

         Dynex Capital did not respond to the Demand Letter. Instead Dynex Capital filed the present declaratory judgment action in this Court on May 17, 2018. In its Complaint, Dynex Capital seeks a declaratory judgment "that Dynex Capital has no obligation to [Dynex Commercial, Inc.] or the Receiver under the Litigation [Cost Sharing] Agreement to pay ...


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