Flores v. ASI Computer Technologies Inc. et. al., No. 5:2006cv00135 - Document 114 (S.D. Tex. 2010)
Court Description: MEMORANDUM AND ORDER denying ASI's 98 MOTION for Summary Judgment. The parties are to proceed with the case according to the Scheduling Order of November 3, 2009. (Signed by Judge George P. Kazen) Parties notified. (dmorales)
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Flores v. ASI Computer Technologies Inc. et. al. Doc. 114 o IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS LAREDO DIVISION ALFREDO FLORES, et al., Plaintiffs, vs. ASI COMPUTER TECHNOLOGIES INC, et al., Defendants. § § § § § § § § § Civil Action No. L-06-135 MEMORANDUM AND ORDER Plaintiffs Alfredo Flores and Patrick Wong sue Defendant ASI Computer Technologies, Inc., and ASI Asset Holding’s, LLC (collectively “Binding Term “ASI”) for Sheet breach Agreement of for the October Resolution 12, of 2005, Concurso Proceeding and Transfer of Equity Interests” (Binding Term Sheet Agreement) (Dkt. 14-1). Flores and Wong have also brought a claim for fraud arising from negotiations preceding the Binding Term Sheet Agreement, a claim for promissory estoppel, and a claim for breach of their June 29, 2005, employment agreements with ASI (Dkt. Nos. 14-2, 14-3). ¶¶ 31–33.) ASI moves for (Dkt. 60, 2nd Am. Compl. summary judgment that Texas’s “unlawful acts rule” bars Flores and Wong’s claims for breach of the Binding estoppel. Term Sheet Agreement, fraud, and promissory (Dkt. 98, ASI Mot. Summ. J. ¶¶ 2, 4.) Dockets.Justia.com SUMMARY JUDGMENT STANDARD The Court should render summary judgment “if the pleadings, the discovery affidavits and show disclosure that there is materials no on genuine file, issue and as any to any material fact and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322–23 (1986); Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc). The Court must review the evidence and draw inferences from it in the light most favorable to the nonmoving party. Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d 410, 412 (5th Cir. 2003). ASI filed its motion over eleven months before the close of discovery in this case. However, ASI asserts that it is entitled to summary judgment on the basis of undisputed facts drawn from Flores and Wong’s filings. (ASI Mot. Summ. J. ¶ 1.) In particular, ASI relies on assertions Flores and Wong make in their second amended complaint (Dkt. 60), on documentary exhibits attached to Flores and Wong’s first amended complaint (Dkt. Nos. 14-1, 14-2, 14-3), on Flores and Wong’s response (Dkt. 31) to ASI’s motion to dismiss, and on a report on Mexican law prepared by Flores and Wong’s experts (Dkt. 66-1). The Court shall decide the motion on the basis of facts drawn from these 2 / 16 materials, analyzed in the light most favorable to Flores and Wong.1 BACKGROUND Flores and Wong were the majority owners and officers of Mexmal Group, Ltd, a holding company organized under Texas law. Mexmal Group’s holdings included several other entities organized under U.S. law: Dinastia, LP, Dinastia International Corporation, Dinamex Inc., and Patel Investments, LP (“the Dinastia entities”), as well as a number of companies organized under the laws of Mexico, including Mexmal Mayorista S.A. de C.V. (“Mayorista”). (2nd Am. Compl. ¶¶ 8–9; Dkt. 66-1, Pl. Suppl. Expert Rpt. § 2.1.) the Dinastia entities. Finance Corporation (Binding Term Flores and Wong were the officers of (2nd Am. Compl. ¶ 9.) (“IFC”) Sheet loaned Agreement International $10,000,000 p. 1, to Recital Mayorista. ¶ B.) As collateral, IFC received secured interests in stock of Mexmal Group, the Dinastia entities, other Mexican entities. 1 Mayorista, and Mexmal Group’s Id. The Court has also recited some findings of fact made in the related U.S. Bankruptcy case, In re Dinastia L.P., et al., No. 05-33650 (Bankr. S.D. Tex., Mar. 10, 2005). However, those facts are presented for background purposes only. 3 / 16 A. The Dinastia Entities’ U.S. Bankruptcy On March 10, 2005, the Dinastia entities filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Southern District of Texas. (2nd Am. Compl. ¶ 9.) See In re Dinastia L.P., et al., No. 05-33650 (Bankr. S.D. Tex. Mar. 10, 2005). On Declaracion Mexico. ¶ 8.) March de 15, Concurso Mayorista Mercantil in filed a Solicitud Monterrey, Nuevo de Leon, (Pl. Suppl. Expert Rpt. §§ 2.2–2.3; 2nd Am. Compl. A concurso mercantil bankruptcy proceeding. concurso 2005, mercantil proceeding. (Id.) is a Mexican law commercial (Pl. Suppl. Expert Rpt. §§ 2.2–2.3.) is a Mexican law commercial A bankruptcy IFC was the largest creditor in Mayorista’s concurso, but Mayorista also owed a substantial amount in unpaid taxes and fines to the Secratoría de Hacienda y Crédito Público (“the Mexican Finance Ministry”). (2nd Am. Compl. ¶¶ 11, 12; Pl. Suppl. Expert Rpt. §§ 2.10, 2.23, 2.24.) Flores and Wong are personally liable for Mayorista’s tax debt. ¶ 22.) (2nd Am. Compl. Their failure to have Mayorista pay the taxes was a crime under the Mexican tax code, as is their continued failure to fulfill their personal obligations to pay the debt. (Pl. Suppl. Expert Rpt. § 3.5.) The Dinastia entities’ U.S. bankruptcy culminated in an arrangement under which an outside purchaser, MaxUSA, Inc., was to acquire 4 / 16 the Dinastia entities and provide funding for a Chapter 11 plan. (Bankr. No. 05-33650, Dkt. 148 at ¶¶ 7–8.) In order to secure agreement on the proposed plan, MaxUSA agreed that it would also provide funds necessary for the resolution of Mayorista’s concurso. concurso were MaxUSA’s obligations with respect to the memorialized in the “IFC Settlement Agreement” (Dkt. 21-5, Bankr. No. 05-33650, Dkt. Nos. 148-1, 148-2), among Mexmal Group, MaxUSA, and IFC. (Binding Term Sheet Agreement p. 1, 05-33650, Recital MaxUSA assets. ¶ D; ultimately Bankr. failed No. to purchase the Dkt. 148 Dinastia at ¶ 9.) entities’ (Binding Term Sheet Agreement p. 2, Recital ¶ E; Bankr. No. 05-33650, Dkt. 173, Order of June 13, 2005 ¶ 3.) Flores and Wong sought out ASI to take MaxUSA’s place as purchaser and supplier of post-petition financing. 9.) (See 2nd Am. Compl. ¶¶ 8– The Bankruptcy Court ordered that ASI would have until June 28, 2005, to purchase the Dinastia entities and assume MaxUSA’s obligations under the IFC Settlement Agreement. (Binding Term Sheet Agreement p. 1, Recitals ¶¶ D–F; Bankr. No. 05-33650, Dkt. 173, Order of June 13, 2005, pp. 5–6.) ASI did so. (Binding Term Sheet Agreement p. 2, Recitals ¶¶ G–H.) B. The Binding Term Sheet Agreement In order to resolve its obligations under the IFC Settlement Agreement, ASI negotiated a subsequent agreement with IFC and a subsequent agreement with Flores and Wong. 5 / 16 Under the subsequent agreement with IFC, IFC sold Mayorista’s debt to ASI, along with IFC’s secured interests in stock of Mexmal Group, Mayorista, and Mexmal Group’s other Mexican holdings. Term Sheet negotiated Agreement the p. 2, Binding Term Recitals Sheet ¶¶ G, agreement (Binding H.) ASI then with Flores and (Id. at p. 1, p. 2, Recital ¶ I.) Wong. ASI and Flores and Wong executed the Binding Term Sheet Agreement on October 12, 2005.2 Flores and Wong agreed to transfer their entire interests in Mexmal Group and all of its holdings, including Agmt., ¶¶ 5–6.) Mayorista, to ASI. (Binding Term Sheet ASI agreed to complete Mayorista’s concurso, and to pay off Mayorista’s Mexican tax debt: ASI will proceed with the completion of the Concurso in accordance with the terms and conditions of the IFC Settlement Agreement (as modified herein) and subject to the provisions of applicable Mexico law, including resolution of all tax liabilities of Mexmal Mayorista asserted by the Mexico taxing authority . . . in the Concurso and payment of such liabilities in a manner agreed on by the [taxing authority]. (Id. at ¶ 1.) Flores and Wong “represent[ed] that the principal amount of the tax liabilities alleged to be owed to the [Mexican Finance Ministry] is $2,141,000 as of September 26, 2005 and that 2 there has been no material increase in such amount On October 23, 2005, ASI and Flores and Wong executed the 2year employment agreements that are the subject of Flores and Wong’s second breach of contract claim. (2nd Am. Compl. ¶¶ 2730.) The instant motion for summary judgment does not concern that claim. 6 / 16 thereafter through Agreement].” (Id.) best to the efforts date of [the Binding Term Sheet Flores and Wong also agreed to “use their negotiate a reduction of all of the tax liabilities to an amount within the range of $575,000 to $1 million.” After (Id.) the agreement, Flores and Wong transferred their interests in Mexmal Group and its holdings to ASI. (Pl. Suppl. Expert Rpt. § 2.6; 2nd Am. Compl. ¶ 10.) Flores remains Mayorista’s representative in the concurso. (2nd Am. Compl. ¶ 22.) C. Mayorista’s Concurso Mercantil Concurso Mexican mercantil Insolvency proceedings Court. A are supervised concurso by begins with the a “conciliation” stage, during which an appointed “conciliator” produces a definitive list of debts and “recognized creditors” for approval of the insolvency court. (Pl. Suppl. Expert Rpt. § 3.1.) The conciliator then attempts to induce the insolvent entity and its recognized creditors to negotiate a creditors’ agreement, the equivalent of a Chapter 11 reorganization plan. (Id.) A creditors’ agreement requires consent by creditors holding at least fifty percent of the non-tax debt listed on the definitive creditors’ list. to an 7 / 16 end if an agreement (Id. at § 3.3.) is reached and The concurso comes approved by the (Id. at § 3.1.) insolvency court. If no agreement is reached, the concurso becomes a liquidation. Mexican insolvency law from other liabilities. to reduce a tax debt (Id.) treats tax debt very differently The insolvency court has no authority during a concurso, nor definitively determine a tax debt’s amount. Rpt. §§ 3.4.1, 3.4.3.) may the court (Pl. Suppl. Expert Although tax debt will appear on the definitive creditors’ list, the listed figures are never more than estimates, because to the Finance retains authority independently taxes. (Id. at §§ 3.4.1, 3.4.2.) Ministry assess at and all collect times unpaid The Finance Ministry has no standing to participate in any stage of the concurso proceeding, and it is prohibited by statute from negotiating a reduction of tax debt with an entity in concurso mercantil. Expert Rpt. §§ 3.4.1, 3.4.4.) (Pl. Suppl. Negotiations to reduce tax debt can begin only if the entity emerges from the concurso with a creditors’ agreement. (Id. at § 3.4.1.) After purchasing the IFC debt, ASI controlled 52.8% of the total debt in the Mayorista concurso, but ASI refused to participate in the concurso and did not notify the presiding officials that it had purchased the IFC debt. 3.4.4.) (Id. at §§ 3.3, IFC appeared as the debt’s owner on the conciliator’s definitive list of Mayorista’s creditors, which the insolvency court 8 / 16 approved on January 24, 2006. (Id. at § 2.10.) A creditors’ agreement was impossible without participation of IFC or ASI, and Mayorista’s concurso became a liquidation on August 30, 2006. (Id. at § 2.15.) This foreclosed any possibility of Flores and Wong negotiating a reduction of the tax debt with the Finance Ministry.3 (Pl. Suppl. Expert Rpt. §§ 3.4.4–3.4.5.) In December, 2006, the Finance Ministry determined that Mayorista’s debt for unpaid taxes in 2005 is $214,148. June, debt 2007, for the Finance unpaid taxes Ministry in 2004 (Id. at § 2.23.) determined is that $4,966,470.70. In Mayorista’s (Id. at § 2.24.) ASI has not paid any of Mayorista’s tax debt. Compl. ¶¶ 11–14, 17, 24–25.) (2nd Am. Flores and Wong remain exposed to possible criminal prosecution for the unpaid taxes, which could culminate in a punishment of up to ten years’ imprisonment. (Pl. Suppl. Expert Rpt. § 3.5.) Flores and Wong filed this suit against ASI on September 12, 2006. breached the Binding Term Sheet They contend that ASI has Agreement’s provisions concerning the Mexican bankruptcy: Defendant, however, have [sic] failed to perform all of their [sic] contractual obligations, including but not limited to completing the Concurso process, cooperating with the Concurso official, failing [sic] to pay off Mexican debtors or even make an offer of the same, failing to disclose in the Concurso proceedings IFC’s assignment to ASI, failing to assume the personal 3 Even if there had been a creditors’ agreement, it is not clear that Mexican law would have permitted giving Mayorista a tax reduction. (Pl. Suppl. Expert Rpt. § 3.4.5.) 9 / 16 guarantees and liability still held by Plaintiffs in Mexico, [and] failing to pay [the Mexican Finance Ministry] for Mexican taxes owed by [Mayorista] . . . . (2nd Am. Compl. ¶ 26.) ASI has moved for summary judgment against Flores and Wong’s claims based ASI’s on alleged failure to pay Mayorista’s tax debt. ASI asserts that Texas’s unlawful acts rule bars Flores and Wong from relief for any injury caused by their unlawful failure to pay Mayorista’s taxes. DISCUSSION A. The Unlawful Acts Rule The seminal case for Texas’s unlawful acts rule is Gulf, Colorado & Santa Fe Railway Co. v. Johnson, 9 S.W. 602 (Tex. 1888). In Johnson, the defendant was sued for damaging the plaintiff’s building. Id. at 602. the because suit was barred the The defendant asserted that building housed gaming business at the time it was damaged. Id. an illegal The Texas Supreme Court rejected the defendant’s argument, but the court supplied two formulations of the unlawful acts rule still frequently cited by Texas’s appellate courts: It may be assumed, as undisputed doctrine, that no action will lie to recover a claim for damages, if to establish it the plaintiff requires aid from an illegal transaction, or is under the necessity of showing or in any manner depending upon an illegal act to which he is a party. (. . .) In those cases where it is shown that, at the time of the injury, the plaintiff was engaged in the denounced or illegal act, the rule is, if the illegal act contributed to the injury, he cannot recover; but, 10 / 16 if plaintiff’s act did not contribute to the injury, the fact alone that at the time he was engaged in an act in violation of law will not of itself preclude a recovery. Id. at 603. This Court has found no more recent case in which the Texas Supreme Court has stated the rule in such sweeping terms. However, Texas courts of appeals continue to quote the Johnson court’s categorical formulation. E.g., Rodriquez v. Love, 860 S.W.2d 541, 544 (Tex. App.—El Paso 1993, no writ) (citing Johnson for the proposition that the rule bars any action “predicated upon an admittedly unlawful act of the party asserting it”); see also, e.g., Dover v. Baker, Brown, Sharman & Parker, 859 S.W.2d 441, 450 (Tex. App.—Houston [1st Dist.] 1993, no writ). narrower agreement The Texas Supreme Court stated the rule in somewhat terms in Kokernot underlying an v. illegal Gilstrap, mortgage explaining “f[ell] that within an that class of contracts which are held to be illegal and void and upon which a plaintiff cannot recover when it is necessary for him to prove his own illegal acts as part of his cause of action.” 187 S.W.2d 368, 370 (Tex. 1945). However, in Graham v. Dean, 188 S.W.2d 372 (Tex. 1945), the court indicated that the rule should not be applied to circumstances in which it would not serve the policy considerations that justify it. The Graham court held that the rule did not bar recovery against a carrier for damage to a load of machinery that the carrier had not been legally licensed to haul, because the plaintiffs did not know 11 / 16 Id. at 372. the carrier was unlicensed. The court concluded that “[i]t would be in derogation and not in furtherance of the public policy of this State to permit the defendant to set up his own illegal conduct to defeat his obligation to [plaintiffs] . . . .” Id. Other cases indicate that the rule is more flexible than Johnson’s categorical language suggests. 481 F.3d 234, 243–44 (5th Cir. See Rico v. Flores, 2007). Indeed, “there are multiple versions of the . . . rule, versions which emphasize different injuries links between suffered.” a Id. plaintiff’s at 243. illegal The rule acts does and the not, for example, preclude recovery where the plaintiff’s unlawful act was not injury the proximate would not cause have of occurred committed the unlawful act. the if injury, the even though plaintiff had the not St. Louis, B. & M. Ry. Co. v. Price, 269 S.W. 422, 423, 428 (Tex. Comm’n App. 1925, judgm’t adopted) (motorist who was driving without a license may recover for injuries suffered in collision with train); Petta v. Rivera, 985 S.W.2d 199, 204 (Tex. App.—Corpus Christi 1998, review granted) (rule did not bar suit arising from police officer firing shots at an illegally fleeing motorist), rev’d on other grounds sub nom. Texas Dept. of Public Safety v. Petta, 44. S.W.3d 575 (Tex. 2001); see also Pyeatt v. Stroud, 264 S.W. 307, 309 (Tex. Civ. App.—Galveston 1924, writ granted), aff’d, 269 12 / 16 S.W. 430 (Tex. Comm’n. App. 1925, judgm’t adopted) (whether plaintiff motorcyclist had stolen his motorcycle was irrelevant to whether he could recover for a collision resulting from defendant motorist’s willful wrong). B. Analysis The rationale of the unlawful acts rule does not favor refusing to enforce the Binding Term Sheet Agreement in this case. That agreement did not require, reward, or facilitate Flores and Wong’s failure to pay Mayorista’s occurred before the agreement was made. taxes, which Rather, the agreement obliged ASI to make the Mexican Government whole for a crime that had already been committed. Texas courts generally refuse to enforce contractual or tort obligations that would require defendants to share losses that a plaintiff has suffered as a proximate result of the plaintiff’s own criminal acts. E.g., Ward v. Emmett, 37 S.W.3d 500, 503 (Tex. App.—San Antonio 2001, n.w.h.); Saks v. Sawtelle, Good, Davison & Toilo, 880 S.W.2d 466, 470–71 (Tex. App.—San Antonio 1994, writ denied). The Court has found no case, however, in which Texas courts have refused to enforce an obligation, incurred after the plaintiff’s crime, to make the sole victim of that crime whole. Obviously, the public policy behind the Mexican tax code is to ensure that taxes due to the Mexican Government are collected. 13 / 16 Assuming the Finance Ministry might be lenient with a delinquent taxpayer or choose to negotiate a sum in order to facilitate collection, it would not serve public policy to refuse enforcing a third party’s obligation to pay a tax debt simply because doing so might allow the tax debtor to escape prosecution. The Court is skeptical that Texas courts would bar Flores and Wong’s suit without some indication that enforcing the Binding Term Sheet Agreement would hinder Mexican authorities’ efforts to ensure that Mayorista’s taxes are paid. In Duncan Land & Exploration, Inc. v. Littlepage, 984 S.W.2d 318 (Tex.App.—Fort Worth 1998, review denied), the plaintiff could prove his right to recover under an oil and gas lease only by demonstrating that he had operated an oil well in violation of an order by the Texas Railroad Commission. Id. at 322–23. The Court refused to apply the unlawful acts rule, reasoning that punishment for violating the order should be left to the Railroad Commission, id. at 330, and noting that in oil and gas cases “courts . . . have only invoked the illegal acts rule against a private entity when doing so favored the Railroad Commission.” Id. at 330, 330 n.4. To the extent Flores and Wong seek to compel ASI to make the Mexican Government whole for Flores and Wong’s failure to pay Mayorista’s tax debt, the Court concludes that the unlawful 14 / 16 acts rule does not bar their suit.4 However, the fact that much of Flores and Wong’s alleged injury is the result of their own criminal conduct may preclude some forms of relief that would do nothing to make the Mexican Government whole. For example, the Court does not now decide whether Flores and Wong may seek to rescind the Binding Term Sheet Agreement (see Pl. Am. Compl. ¶ 35), a remedy that could relieve ASI of any obligation to pay Mayorista’s tax debt. Also, Flores and Wong seek compensatory damages for several alleged injuries including “emotional pain,” “inconvenience,” anguish” “[l]oss of enjoyment of life,” and “mental (Pl. Am. Compl. ¶¶ 34e, 34g, 34i, 34j–34k), and they seek exemplary damages “[i]n order to punish [ASI]” for acting “with malice or reckless indifference to the protected rights of [Flores and Wong].” (Pl. Am. Compl. ¶ 36.) The unlawful acts rule may bar Flores and Wong from seeking damages that would force ASI to share in the losses caused by their failure to pay Mayorista’s tax debt. Again, the Court cannot fully assess the applicability of the unlawful acts rule without the benefit of a fully developed record. Further, the rule permits recovery against a defendant bearing greater culpability for the unlawful 4 Flores and Wong do not include specific performance in their prayer for relief. (Pl. Second Am. Compl. p. 17.) However, the Federal Rules of Civil Procedure state that a district court’s final judgment “should grant the relief to which each party is entitled, even if the party has not demanded that relief in its pleadings.” Rule 54(c), Fed. R. Civ. P. 15 / 16 act than does the plaintiff. De Vall v. Strunk, 96 S.W.2d 245, 247 ASI (Tex.Civ.App. 1936). appears to have controlled Mayorista’s assets since October, 2005, and the current record contains some indication that ASI has sought to evade the tax debt by affirmative malfeasance that offends Mexican law more severely than Flores and Wong’s failure to pay the taxes in the first instance. (Pl. Suppl. Expert Rpt. ¶¶ 2.10, 2.22, 3.2.) However, this issue must also await development of the record. CONCLUSION The unlawful acts rule does not bar Flores and Wong’s suit for breach of ASI’s alleged obligation to pay Mayorista’s tax debt. However, the Court does not at this time decide to what extent the rule permits Flores and Wong to seek relief beyond specific performance. (Dkt. 98) is DENIED. ASI’s motion for summary judgment The parties are to proceed with the case according to the Scheduling Order of November 3, 2009. (Dkt. 112.) DONE at Laredo, TX, this 6th day of July, 2010. ___________________________________ George P. Kazen Senior United States District Judge 16 / 16
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