[00:00:22] Speaker 03: Looks like we're all ready to go. [00:00:24] Speaker 02: Good morning, Your Honors. [00:00:25] Speaker 02: May I please the court? [00:00:28] Speaker 02: My name is Dennis McLaughlin. [00:00:29] Speaker 02: I'm with the Western Washington Law Group, and I represent the appellant, the Billing Associates Northwest, who is an assignee of the claims of various Washington landlords against a company that was their agent for billing and collection purposes that defalcated their money that was held in a segregated trust account. [00:00:53] Speaker 02: We're here today on a motion to dismiss that was granted without need to amend any further based upon basically three affirmative defenses that the court felt were clear on the face of the complaint. [00:01:11] Speaker 02: And we suggest that they're not. [00:01:13] Speaker 02: The first of those affirmative defenses is called the one satisfaction rule. [00:01:18] Speaker 02: The one satisfaction rule prevents you from any plaintiff from getting a recovery more than what they're entitled to for one injury. [00:01:26] Speaker 02: Well, that's not the case here. [00:01:29] Speaker 02: Didn't get a full recovery. [00:01:30] Speaker 00: Let me have you help me on a different question, which is the case as against the manager defendants. [00:01:38] Speaker 00: I don't see enough allegations here to establish the exercise of personal jurisdiction. [00:01:45] Speaker 00: So I want to make sure that I give you an opportunity to address that, see if I'm missing anything. [00:01:49] Speaker 00: I've got Harper, the CFO, COO, COO. [00:01:54] Speaker 00: It doesn't seem like he started until after 2013. [00:01:56] Speaker 00: I don't see any allegations of any involvement by him. [00:02:00] Speaker 00: with regard to the contracts at issue in this case. [00:02:04] Speaker 00: I've got Christ, the president, the one who signed the bankruptcy petition. [00:02:09] Speaker 00: Seems like he got involved in the later stages. [00:02:11] Speaker 00: And then I've got everybody else who owned and managed ADS, all being residents of Texas. [00:02:19] Speaker 00: That is correct. [00:02:19] Speaker 00: They are residents of Texas. [00:02:21] Speaker 00: That's not enough to meet the minimum context. [00:02:24] Speaker 00: What am I missing? [00:02:27] Speaker 02: Well, we've alleged the alter ego theory, first of all, that they formed this company for the purpose of availing themselves to take over this Washington business. [00:02:37] Speaker 02: At first, ADS was a Delaware corporation that had a sales agent building associates in Washington to sell the services of sub-metering and being a landlord's agent for collection and utility purposes. [00:02:53] Speaker 02: This group of people bought that ADS Delaware and formed a company called ADS LLC, which is a Texas corporation, specifically to take over the Washington business that targeted the Washington customers. [00:03:09] Speaker 02: and purposely availed themselves of being able to do business in Washington under an LLC. [00:03:14] Speaker 02: However, they did it with an under-capitalized LLC. [00:03:18] Speaker 02: They didn't observe corporate formalities. [00:03:20] Speaker 02: And they did it solely for, as the allegations would say, solely for a shield of personal liability. [00:03:27] Speaker 02: But they directed and they, every aspect of that corporation's business and what they did. [00:03:33] Speaker 00: The problem I have with that argument is I don't think it goes as far as [00:03:39] Speaker 00: as you claim, just the general allegations that they're all involved. [00:03:43] Speaker 00: I mean, that's why I named Harper and Christ in particular, because they didn't seem to get involved until even after the fact. [00:03:51] Speaker 00: So I think on the manager defendants, you've got to show that they individually have sufficient contacts with Washington. [00:03:59] Speaker 02: Well, again, I'd like to point out that the original contractual relationship was a different entity, this Delaware LLC. [00:04:08] Speaker 02: It was the Texas LLC that bought the Delaware LLC. [00:04:14] Speaker 02: And all those people were involved in that decision to buy that LLC for the purposes of targeting the Washington customers and the Washington landlords. [00:04:27] Speaker 02: And they did it with an undercapitalized Texas LLC, which is separate and apart from the Washington LLC. [00:04:35] Speaker 02: But they did it with the intent to target those Washington customers. [00:04:38] Speaker 02: They were all involved at that time. [00:04:41] Speaker 02: And in fact, even after the bankruptcy, as it relates to Mr. Harper, he was the one who said, we want that book of business. [00:04:49] Speaker 02: And if you give us that book of business up there in Washington, we'll pay up. [00:04:54] Speaker 02: We'll pay off all these landlords, but you're not going to have your customers anymore. [00:04:59] Speaker 02: So the goal was to go and get these Washington customers, and they caused damage to those Washington customers. [00:05:06] Speaker 02: They knew they caused damage to those Washington customers. [00:05:09] Speaker 02: They knew that that was the Washington customers' money that they were holding in a segregated account that they diverted for their own personal purposes. [00:05:18] Speaker 00: To determine your alter ego theory, do we apply Washington law or Texas law? [00:05:24] Speaker 00: And does it make a difference? [00:05:26] Speaker 02: It wouldn't make a difference in this case. [00:05:28] Speaker 02: Because under either theory, with the allegations that are pled in the complaint, they would have the disregard of corporate entity, whether you want to call it alter ego. [00:05:39] Speaker 02: I think disregarding the corporate entity is probably a better term. [00:05:42] Speaker 02: But there are subtle differences. [00:05:45] Speaker 02: I would think if there's an intentional targeting case, though, [00:05:48] Speaker 02: of Washington residents, you would apply the Washington personal jurisdiction standards and the alter ego standards in Washington because that's what they did. [00:05:59] Speaker 02: They purposely availed themselves and they targeted Washington customers. [00:06:03] Speaker 02: They did it intentionally. [00:06:05] Speaker 02: They took their money and they knew it was going to cause them damages in Washington. [00:06:09] Speaker 02: So in that case, they reached into Washington with an intent. [00:06:13] Speaker 02: And therefore, they should be held liable under Washington law for that alter ego theory, because they availed themselves of that purpose. [00:06:24] Speaker 02: I can move on to the other affirmative defenses. [00:06:27] Speaker 02: The next one was the release. [00:06:30] Speaker 02: The judge, I suppose, found and appellees argue that it's clear and unambiguous. [00:06:36] Speaker 02: I don't find it to be clear and unambiguous. [00:06:38] Speaker 02: And if I do, I find it to be clear and unambiguous in the different direction. [00:06:42] Speaker 02: The release says it settles all issues regarding property of the estate. [00:06:49] Speaker 02: And it's signed by Areya Holder. [00:06:52] Speaker 02: person, Chapter 7 trustee. [00:06:55] Speaker 02: Chapter 7 trustee is not a debtor in bankruptcy. [00:06:59] Speaker 02: There are two distinct entities. [00:07:01] Speaker 02: In fact, a Chapter 7 trustee is often adverse to the debtor in bankruptcy. [00:07:06] Speaker 02: Their fiduciary duty is owed to the creditors, which [00:07:10] Speaker 02: And therefore, the creditors have a right to bring a breach of fiduciary duty claim against a trustee. [00:07:17] Speaker 02: So that's why there was a release as to the trustee. [00:07:20] Speaker 02: ADS is not even mentioned in that release. [00:07:24] Speaker 02: And it's all about property of the estate, both in footnote five and the last page of the release agreement. [00:07:31] Speaker 02: And then we have the last thing is this statute of limitations defense. [00:07:37] Speaker 02: The Floyd versus Hefner duo, the 2006 unpublished case and the 2008 published case that modified the 2006 unpublished case, both of which were summary judgment cases but well reasoned either way, also shows that the trustee is not the same as the company because the plaintiffs were the company and the trustee. [00:08:02] Speaker 02: And the trustee was asserting claims that were owed to the company. [00:08:08] Speaker 02: So the statute of limitations in Texas, there's a day for date equitable tolling for purposes of when there's an automatic stay in place, which I'm just going to liken it for in the crudest to a preliminary injunction. [00:08:23] Speaker 02: And then if you get a discharge, you get a permanent injunction. [00:08:26] Speaker 02: Well, they didn't get a discharge because they're a corporation. [00:08:30] Speaker 02: So there was a preliminary injunction that prohibited anyone from suing ADS at that time. [00:08:37] Speaker 02: The allegations are they discovered the defalcation and the breach of fiduciary duty during the bankruptcy, and they brought the claim within four years after the bankruptcy stay was expired. [00:08:51] Speaker 03: Well, the judge thought they made two different allegations about that, inconsistent allegations about when the discovery was made. [00:08:58] Speaker 02: Well, we always said that as the ADS, and I would disagree. [00:09:04] Speaker 02: But it's a matter of semantics, OK? [00:09:06] Speaker 03: OK, so you disagree with me about what the judge said? [00:09:09] Speaker 02: No, I'm not disagreeing with you. [00:09:10] Speaker 02: I'm disagreeing with what the judge said. [00:09:12] Speaker 03: OK. [00:09:13] Speaker 02: I'm disagreeing with the finding conclusion, whatever you want to go about it. [00:09:18] Speaker 02: It's de novo review anyways. [00:09:20] Speaker 03: I'm just asking you whether there are inconsistent allegations in the two different complaints. [00:09:24] Speaker 02: I think not. [00:09:25] Speaker 03: OK. [00:09:25] Speaker 03: Explain why, please. [00:09:26] Speaker 02: Yes, because it was always that they discovered that ADS had committed the breach of fiduciary duty during the bankruptcy. [00:09:38] Speaker 02: After the bankruptcy ended, they found out that the defalcation occurred and benefited the corporate insiders, the non-ADS appellees. [00:09:49] Speaker 02: Afterwards, they didn't know where the money was diverted to, where it went. [00:09:55] Speaker 02: They knew it went from the trust account to the operating account, and that it was the landlord's money. [00:10:00] Speaker 02: They didn't know that it was used to pay off the bills and other obligations of the non-ADS appellees. [00:10:09] Speaker 02: And therefore, they weren't inconsistent. [00:10:11] Speaker 02: The breach of the duty of loyalty that the non-ADS appellees engaged in was found out after the bankruptcy, after Mr. Collier. [00:10:25] Speaker 03: Did they need access to the database? [00:10:27] Speaker 02: They had access to the database. [00:10:29] Speaker 03: And that's when they discovered? [00:10:31] Speaker 02: That's when they discovered that the money went from the trust account to the operating account. [00:10:38] Speaker 02: the inside operations until after the settlement that the trustee had entered into with the former president of the company, Mr. Collier. [00:10:50] Speaker 00: Is it that the district court said that you had options, building associates had options during the bankruptcy, but didn't pursue them. [00:11:01] Speaker 00: Is your account of that that you knew about the potential claims, but not the full scope of it? [00:11:08] Speaker 02: We knew that there had been, when we got access to the Starnick system, which was in connection with the settlement agreement at the close of the bankruptcy. [00:11:18] Speaker 02: In fact, that was like one of the last issues to close the bankruptcy, was that we had access to the Starnick system. [00:11:26] Speaker 02: We knew the money went from the segregated trust account. [00:11:29] Speaker 02: into the operating account. [00:11:32] Speaker 02: So therefore, we knew that there was theft of these specifically identifiable monies that were used to benefit ADS. [00:11:39] Speaker 02: And that was not ADS's money. [00:11:42] Speaker 02: The money comes in that they collect on behalf of the landlords, the utility money. [00:11:47] Speaker 00: So you're saying that you didn't know, for example, until after you accessed the Starnick system that there were claims against the manager defendants? [00:11:56] Speaker 02: No, we didn't know that they were against the manager defendants until after the bankruptcy closed. [00:12:01] Speaker 03: That's the problem. [00:12:02] Speaker 03: Hang on. [00:12:02] Speaker 03: Forgive me for interrupting. [00:12:03] Speaker 03: That's the problem. [00:12:04] Speaker 03: So the district court said, reasoned, that building associates originally pled that it learned of facts necessary to bring claims against ADS, against ADS as you said, right, during the bankruptcy, quote, while the trustee was pursuing claims against some of ADS managers. [00:12:20] Speaker 03: Right, like Mr. Collier in Circle K. Then in the second amended complaint, plaintiff states, quote, after the ADS, I think that's supposed to be bankruptcy, was initially closed, in December 2016, billion associates received further information for the first time that supports a claim against ADS. [00:12:37] Speaker 03: My understanding is what you're saying is that after the bankruptcy closed, [00:12:40] Speaker 03: You got access to the Starnick system, or if that's how you pronounce that, Starnick, whatever, to that system, that database, and that's when you learned that you think there were wrongs committed by the individual managers. [00:12:51] Speaker 03: Is that right? [00:12:53] Speaker 03: No. [00:12:53] Speaker 02: We got access to the Starnick system during the bankruptcy, and that showed money just going from the trust account to the operating account of ADS. [00:13:05] Speaker 02: OK. [00:13:06] Speaker 02: And then after that, we learned that the money that went into the operating account went for the benefit of the non-ADS appellees. [00:13:14] Speaker 02: So that's when we became aware that they had breached. [00:13:17] Speaker 00: And that knowledge came to you after the bankruptcies. [00:13:21] Speaker 00: Afterwards. [00:13:21] Speaker 02: That's why they're not. [00:13:22] Speaker 02: It's confusing because. [00:13:23] Speaker 03: The initial closure, right? [00:13:25] Speaker 03: As at the time the bankruptcy was initially closed, what did you know? [00:13:29] Speaker 02: We knew that there was money that went to ADS. [00:13:32] Speaker 03: OK. [00:13:34] Speaker 03: All right. [00:13:34] Speaker 02: And then afterwards, we learned that ADS used that money to pay off obligations of the individual appellees, the non-ADS appellees. [00:13:44] Speaker 02: So therefore, we learned that afterwards, because after the trustee had settled all the claims that, pre-petition claims that ADS had against Mr. Collier, Mr. Collier produced a declaration. [00:13:57] Speaker 02: And that's where we obtained that information. [00:14:00] Speaker 02: sufficient to allege a claim against the non-ADS appellees. [00:14:06] Speaker 02: So, confusing yes, perhaps not as artful as I would have liked it to be in hindsight, but that's why the allegations are not inconsistent, which is, I believe, what you were asking me, Judge Kissinger. [00:14:19] Speaker 03: Well, and then you have the ADS, because I think the district court was bothered by that, and he's pretty clear about that. [00:14:24] Speaker 03: And then he's got this problem of you being, because your explanation is pretty clear, right? [00:14:30] Speaker 03: But he had a motion to dismiss and no opposition. [00:14:34] Speaker 02: That's correct. [00:14:35] Speaker 02: It was filed 19 hours late. [00:14:36] Speaker 03: OK. [00:14:37] Speaker 03: And so what do we do about that? [00:14:38] Speaker 02: Well, the court undertook an independent duty, which it's right to do, to look at this, and relied pretty much on the first amended complaint and said, well, you didn't cure the deficiencies that I saw in the first amended complaint. [00:14:53] Speaker 02: And so when we're going to the merits of those issues, and if the court undertakes an independent duty to look at the allegations of the complaint, then it has to look to take them as being true and see if it's a plausible claim. [00:15:07] Speaker 02: And we believe there is a plausible claim there and that the court erred by relying on three affirmative defenses that had yet to be pled as being dispositive in this case, because plaintiffs aren't typically supposed to plead around affirmative defenses, at least [00:15:24] Speaker 02: I agree that the law is a little bit unclear on that, but I think we're getting back to that if you look at the unpublished ploughed majority decision. [00:15:34] Speaker 02: So under those circumstances, I believe that relying on the one satisfaction rule, relying on the statute of limitations rule, and relying on the release rule, all of which are not dispositive on the face of the complaint, [00:15:49] Speaker 02: then I believe, at this case, then the motion to dismiss should have been denied, as it should have been with the first amended complaint. [00:15:58] Speaker 02: But the court relied on the rulings in the order on the first amended complaint when they issued the order on the second amended complaint. [00:16:08] Speaker 02: That's why we allege that that was an error as well, because of the incorporation by reference. [00:16:17] Speaker 02: If the court doesn't have any more questions of me on the procedural niceties and a lot of pages, when I looked at the synopsis, I realized that we were probably going to get more into the merits of these claims than we are as to these procedural waiver issues and all that. [00:16:34] Speaker 02: But if there's no other questions, I'll just save the rest of my time for rebuttal. [00:16:39] Speaker 03: That's fine. [00:16:39] Speaker 02: Thank you so much. [00:16:40] Speaker 03: You bet. [00:17:02] Speaker 01: One second, your honors. [00:17:12] Speaker 01: Okay. [00:17:12] Speaker 01: May it please the court, Rory Cosgrove, along with my partner, Mark Rosencrantz, on the briefing from the Carney-Badley Spellman firm in Seattle. [00:17:19] Speaker 01: We're here on behalf of Appalee's Addison Data Services, LLC, and its members. [00:17:25] Speaker 01: billing associates had three opportunities to plead a plausible claim against Apple ease three times it failed the district court properly dismissed billing associates second amended complaint under rule twelve b six and this court should affirm that dismissal order I want to jump right into [00:17:46] Speaker 01: Judge Nguyen's question about the claims against the ADS members. [00:17:52] Speaker 01: And I want to focus on that first. [00:17:53] Speaker 01: And I think it's important to distinguish between what type of claims Billing Associates is alleging against the ADS members. [00:18:02] Speaker 01: We see from its opening brief and the 20 plus issues that it identified for this court to review that it purports to raise a direct breach of fiduciary duty claim against the ADS members and a derivative breach of fiduciary duty claim against the members. [00:18:18] Speaker 01: I want to jump right into that issue. [00:18:20] Speaker 01: Number one. [00:18:22] Speaker 01: A direct breach of fiduciary duty claim against the ADS members is not recognized in Texas. [00:18:29] Speaker 01: And that's the first issue I want to address. [00:18:32] Speaker 01: And to address that issue, we turn to Matthews v. Milkshake LLC, as 2014 decision from the Bankruptcy Court in the Western District of Texas. [00:18:49] Speaker 01: Following Delaware law, the leading jurisdiction for corporate law issues, that court recognizes that Texas does not recognize a direct breach of fiduciary duty claim asserted by creditors against a corporation's members. [00:19:02] Speaker 01: And that principle emanating from that case is followed by numerous other jurisdictions. [00:19:08] Speaker 01: Another case, Torch Liquidating Trust, Ex-Rail Bridge Associates, LLC versus Stocksell. [00:19:13] Speaker 01: This is a Fifth Circuit decision in 2019, 561 F3, [00:19:17] Speaker 01: a third, 377 at 386. [00:19:19] Speaker 01: Quote, individual creditors of an insolvent corporation have no right to assert direct claims for breach of fiduciary duty against corporate directors. [00:19:28] Speaker 01: And there are more. [00:19:28] Speaker 01: K versus Lone Star Fund, that's a bankruptcy decision from the Northern District of Texas, 2011, 453. [00:19:35] Speaker 01: Bankruptcy Reporter 645, whether the corporation is insolvent or not, creditors never may assert direct claims against directors or officers for breach of fiduciary duty. [00:19:44] Speaker 01: And that's citing a leading case from the Supreme Court of Delaware, Guy Walla. [00:19:48] Speaker 01: The point being that it comes as no surprise in Billing Associates' opening brief that it doesn't cite any law, no authority whatsoever for its purported direct breach of fiduciary duty. [00:19:58] Speaker 00: I hate to interrupt your flow, counsel, [00:20:00] Speaker 00: The clock runs very fast and I want to move you to the claim against ADS at specifically footnote five of the settlement agreement because that it's a specific carve out and it carves out any claims against the bankruptcy estate related to access to the estate's database with Starnick Systems, Inc. [00:20:26] Speaker 00: And it says these claims are specifically exempted from the release. [00:20:31] Speaker 00: So why doesn't billing associates get the benefit of that? [00:20:36] Speaker 01: Well, to answer your question, Your Honor, I think we first have to start with the basics of how this settlement agreement arose. [00:20:42] Speaker 01: And then I will directly answer that question. [00:20:44] Speaker 01: So in a Chapter 7 bankruptcy, when a debtor files a petition, two things happen. [00:20:50] Speaker 01: An estate is created, transferring all the debtor's property to the estate, and an automatic stay is entered. [00:20:55] Speaker 01: All of the debtor's property interests go into the bankruptcy estate. [00:20:58] Speaker 01: Creditors [00:21:00] Speaker 01: whether unsecured or secured, must file proof of claims in the bankruptcy proceeding. [00:21:04] Speaker 01: And then the trustee who's charged with administering the estate analyzes the claims and either allows them or disallows them. [00:21:11] Speaker 01: And in this case, the trustee for the ADS bankruptcy estate and two creditors, one of which is Billing Associates, signed this release and settlement agreement. [00:21:21] Speaker 01: It did two things. [00:21:22] Speaker 01: And then I'm going to address your question, Judge Williams. [00:21:24] Speaker 04: Please do. [00:21:24] Speaker 01: Yeah, so it allowed a claim, it liquidated an unsecured claim for $653,000, and it released all claims that billing associates may have against the bankruptcy estate, and then it had a carve-out. [00:21:37] Speaker 01: And this is to answer your question. [00:21:39] Speaker 01: The one exception to this very broad mutual release is that this settlement will have no impact on any existing agreement. [00:21:48] Speaker 01: Any existing agreement between billing associates and the trustee concerning post-petition access to the database and any claims against the estate related to such. [00:22:00] Speaker 01: Such is modifying any existing agreement between the trustee and billing associates concerning access to the Starnick system. [00:22:08] Speaker 01: And thus, this release exempts that claim. [00:22:11] Speaker 01: There's no allegation here that Billing Associates was denied access to the Starnick system. [00:22:16] Speaker 01: And so this carve-out does not save the claim that Billing Associates is alleging against- Well, that's one possible reading. [00:22:22] Speaker 00: You're reading it in the narrowest way possible. [00:22:26] Speaker 00: And even if we accept that that is an acceptable reading, there's another reading, right? [00:22:32] Speaker 00: So to the extent there's any ambiguity, [00:22:36] Speaker 00: Why doesn't building associates get the benefit of that? [00:22:41] Speaker 01: Well, I think first, to answer that question, first, I think this is plain and unambiguous. [00:22:45] Speaker 03: It's not. [00:22:46] Speaker 03: It's not. [00:22:47] Speaker 03: It can be read a couple of ways. [00:22:48] Speaker 03: Just accept that as a hypothetical, if you will. [00:22:52] Speaker 01: So if I understand the court's questions. [00:22:55] Speaker 00: Let me rephrase my question, because maybe I didn't make it specific enough. [00:23:00] Speaker 00: I'm reading this provision, and it releases, and I'm reading the second phrase, any claims against a bankruptcy estate related to such, right? [00:23:10] Speaker 00: And you're saying, well, such talks about the agreement. [00:23:12] Speaker 00: It modifies the agreement. [00:23:14] Speaker 00: I think that another fair reading would be related to such, meaning related to post-petition [00:23:22] Speaker 00: access to the state's database with starting systems. [00:23:25] Speaker 00: So to the extent that this release or this carve out is susceptible to two different readings, I think the law dictates that building associates get the benefit of that ambiguity. [00:23:37] Speaker 01: Well, I think how I would answer that question is we have to interpret this provision in the context of the entire settlement agreement. [00:23:46] Speaker 01: And if we're analyzing the plain meaning of this agreement, when it says that this agreement will have no impact, let's read this together, on any existing agreement between the parties concerning, so any agreement concerning post-petition access. [00:24:02] Speaker 01: So in other words, if [00:24:04] Speaker 01: If an agreement existed between the trustee and billing associates concerning access to the Starnick database, that this agreement would not prohibit billing associates from pursuing relief in the bankruptcy estate concerning that access. [00:24:25] Speaker 01: But here, there's no allegation whatsoever in any of the three iterations of billing associate's complaints that it was either denied access to the agreement, or that there was denied access to the Starnick system, or that there was an agreement that the trustee purportedly breached that thus prevented billing associates from uncovering any information it wanted to receive from the Starnick system. [00:24:48] Speaker 03: And that's relevant if you read the footnote the way you're reading it. [00:24:51] Speaker 03: But Judge Wins invited you to look at it the other way and suggested that it could be read a different way. [00:24:58] Speaker 03: And why wouldn't they get the benefit of the drafting ambiguity is what we're waiting for you to answer. [00:25:04] Speaker 01: Right. [00:25:05] Speaker 01: Well, I think the best way for me to answer that is the release and settlement agreement is merely one independent ground to support the district court's dismissal of billing associate's claim against ADS. [00:25:20] Speaker 00: And so if I can transition that, I think it's- The answer that you're trying to give to my question is that my reading is not supported by the text. [00:25:29] Speaker 01: Absolutely. [00:25:30] Speaker 03: So let's talk about that. [00:25:31] Speaker 03: What evidence was there of a separate agreement about accessing the Starnix system? [00:25:36] Speaker 01: As far as I know, in reading all three iterations of the complaints, there's no allegation whatsoever about some sort of agreement between billing associates and the trustee. [00:25:45] Speaker 01: I mean, certainly billing associates. [00:25:47] Speaker 03: Is that problematic for you? [00:25:48] Speaker 03: If there had been such an agreement, then it seems to me easy to read the footnote the way you're suggesting it should be read, where the footnote when it says, it's referring to such agreement. [00:25:58] Speaker 03: But what you're telling us is there isn't an alleged agreement about accessing the system. [00:26:02] Speaker 01: Or billing associates merely didn't allege. [00:26:05] Speaker 01: The agreement could possibly exist. [00:26:06] Speaker 03: I'm just saying the point is that the absence of reference to such agreement, it doesn't help you for purposes of construing that footnote the way you want us to construe it. [00:26:16] Speaker 01: I think that if the court concludes that there is ambiguity in this agreement, I think under the case law, the court would be [00:26:23] Speaker 01: it would be able to draw the conclusion that the agreement could be read the other way. [00:26:28] Speaker 01: But again, what I'm positing is that this agreement is plain and unambiguous and should be enforced according to its plain terms, just as much of the district court acknowledged. [00:26:36] Speaker 00: Now, I'd like to turn- It doesn't seem plain to me, so let's move on. [00:26:39] Speaker 01: Okay, that's fair. [00:26:41] Speaker 01: I did want to address, to go back to, and eventually I got 10 minutes left, I want to address the claims against the ADS members, because there was a colloquy earlier about [00:26:53] Speaker 01: The relevance or irrelevance of billing associates' knowledge about its claims against the ADS members and whether, when was that knowledge learned? [00:27:04] Speaker 01: Did it come during the bankruptcy? [00:27:05] Speaker 01: Did it come after? [00:27:06] Speaker 01: It's irrelevant because billing associates has no direct claim against the ADS members. [00:27:13] Speaker 03: Again, it- Well, the judge didn't think it was irrelevant. [00:27:16] Speaker 03: He went to the fallback argument about whether there was a claim, but he sort of very clearly finds relevance in the [00:27:23] Speaker 03: two different ways the complaint makes this allegation about when the discovery was made. [00:27:28] Speaker 01: Right. [00:27:29] Speaker 01: And again, this court can affirm on any basis supported by the record. [00:27:32] Speaker 01: And so what I will say on this issue about the claims asserted against the members, number one, in their issues presented, they've purported to assert two claims, derivative and direct, of breach of fiduciary duty. [00:27:44] Speaker 01: We know that direct breach is not recognized under Texas law. [00:27:48] Speaker 01: And on the derivative side, they didn't make the argument in their opening brief. [00:27:52] Speaker 01: That argument's waived. [00:27:53] Speaker 01: And so when we come to the district court's rationale, the district court got it right because even if the court were able to revive an argument that they waived by not addressing it in their opening brief, it failed as a matter of law because of the inconsistent allegations that billing associates alleged in its two different complaints. [00:28:11] Speaker 01: And I want to address the court's question earlier between counsel on the inconsistency. [00:28:15] Speaker 01: We look at the First Amendment complaint, ER 4908, paragraph 34. [00:28:19] Speaker 01: When the trustee began pursuing claims against some of the ADS managers, billing associates and the landlords by accessing the ADS's computer software, known as the Starnick system, learned for the first time that ADS transferred the tenant utility payments before ADS filed for bankruptcy. [00:28:33] Speaker 01: That's what it alleged. [00:28:34] Speaker 03: And then later, there's a direct- Counsel, we can hear you just fine. [00:28:37] Speaker 03: If you slow down just a little bit, it'll be easier to understand your argument. [00:28:40] Speaker 01: Absolutely. [00:28:41] Speaker 01: Later, if you look at the second amended complaint, here's the inconsistency that the district court judge pointed out. [00:28:47] Speaker 01: ER-299, paragraph 86. [00:28:51] Speaker 01: This allegation directly conflicts with paragraph 34, ER-498, in the first amended complaint. [00:28:59] Speaker 01: In the second amended complaint, Billing Associates alleges, after the ADS bankruptcy closed, [00:29:04] Speaker 01: in december twenty sixteen billing associates received further information for the first time that revealed eighty s transferred the tenant payments directly to the eighty s members for their benefit and it also alleged that learned for the first time that the eighty s members knew that the tenant payments for the landlord's property this is the inconsistency but the district court judge pointed out and therefore applied judicial estoppel to prevent them from raising inconsistency directly contradicted by the prior pleadings [00:29:33] Speaker 01: Again, the derivative claims against the ADS members, the derivative claim for breach of fiduciary duty that they are raising on behalf of the debtor corporation against the creditors, they didn't make any argument in their opening brief. [00:29:47] Speaker 01: That claim is waived. [00:29:48] Speaker 01: And it's the same for the derivative trust fund doctrine claim that they raised. [00:29:52] Speaker 01: They admit in their opening brief [00:29:53] Speaker 01: that that claim is derivative. [00:29:55] Speaker 01: And the reason that billing associates knowledge is not important because it's a derivative claim. [00:30:00] Speaker 01: They're bringing it on behalf of essentially the trustee. [00:30:03] Speaker 01: And so the trustee's knowledge and the debtor's knowledge is imputed to billing associates. [00:30:08] Speaker 01: And so we know that the trustee was charged with the duty of administering the estate. [00:30:14] Speaker 01: analyzing the claims filed, and also analyzing the debtor's financial condition and whether the corporate managers were mismanaging the corporation, committing corporates, et cetera. [00:30:24] Speaker 01: There's no allegation that the trustee didn't do his job. [00:30:27] Speaker 01: And frankly, it's presumed that the trustee is fully and capably administering the estate. [00:30:32] Speaker 01: And so the trustee, we know from the first amended complaint, knew about these possible claims. [00:30:37] Speaker 01: It investigated them. [00:30:38] Speaker 01: One thing that is consistent in all three iterations of this complaint is, as Billing Associates admits, [00:30:44] Speaker 01: that the trustee has the sole and exclusive authority to pursue these derivative claims against corporate managers. [00:30:53] Speaker 01: It investigated those claims. [00:30:54] Speaker 01: It pursued some of them, but it declined to pursue others during the bankruptcy proceeding. [00:31:01] Speaker 01: It satisfied its duty of administering the estate and once... Nobody's arguing otherwise, right? [00:31:07] Speaker 03: The estate was reopened, the bankruptcy proceeding was reopened, they wanted to bid on, there was competing bids on the remaining claims. [00:31:15] Speaker 03: There's no problem with that, is there? [00:31:17] Speaker 01: Well, there's not necessarily a problem, but the problem for billing associates is that by the time they bought the abandoned claims in 2021... They're competing bids for those abandoned claims. [00:31:29] Speaker 01: They purchased claims and paid money to the bankruptcy estate that could then be used to pay for administrative costs and any remaining creditors that had claims. [00:31:37] Speaker 01: But by the time they bought that claim, that claim had already expired a long time ago. [00:31:42] Speaker 01: The trustee declined to pursue it. [00:31:44] Speaker 01: And one thing I want to say here is it's not unjust for this result. [00:31:49] Speaker 01: And we know from, I believe it's at, let's see here. [00:31:54] Speaker 01: It's at ER. [00:31:59] Speaker 01: Er 382. [00:32:00] Speaker 01: This is the order granting the compromise, the motion to approve the compromise. [00:32:07] Speaker 03: Can you help me out? [00:32:07] Speaker 03: Which volume, please? [00:32:10] Speaker 01: The first volume, 382. [00:32:11] Speaker 03: Okay. [00:32:13] Speaker 01: And there's only one footnote. [00:32:16] Speaker 01: The footnote on 382. [00:32:18] Speaker 01: It says, the trustee does not make any representations or warranties of any kind or nature as to the extent or validity of the bankruptcy estate's interest in any claims, whether they exist or not, and whether they are viable. [00:32:30] Speaker 01: And so the point being here is that [00:32:33] Speaker 01: Billing Associates was on notice that it was purchasing these claims that remained dormant and in the bankruptcy estate, but the trustee was not guaranteeing that these claims still were viable. [00:32:46] Speaker 01: And the point being is that by the time Billing Associates got these derivative claims in 2021, the statute of limitations had already expired. [00:32:55] Speaker 01: They were worthless claims. [00:32:56] Speaker 03: So you're on ER 382 in Volume 3. [00:32:58] Speaker 03: There's a footnote. [00:32:59] Speaker 03: The trustee does not make any representations. [00:33:01] Speaker 03: That's where you want us to be? [00:33:02] Speaker 01: Yeah. [00:33:03] Speaker 01: Yes, Your Honor. [00:33:04] Speaker 03: All right. [00:33:05] Speaker 01: and uh... i'm sorry yeah i i printed these out just individually just no problem i don't want to make sure when we ever right after listen to this are quite right find the records like that and what one thing i want to say about this is this isn't an unjust result i mean again going back to basics the trustee is charged with administering the estate billing association the trustee hired billing associates attorney to represent both the trustee and billing associates and so again for these derivative claims all knowledge isn't from the trustee is imputed to [00:33:33] Speaker 01: billing associates because it's acting on behalf of the estate, right? [00:33:39] Speaker 01: But as the district court acknowledged, billing associates had options. [00:33:44] Speaker 01: There's a case in the Fifth Circuit, it's called Gibraltar Savings LD Brinkman Courts, it's at 860 F second, 1275. [00:33:56] Speaker 01: And there were prior decisions from that circuit that essentially hold that for claims against corporate managers or members, those belong to the trustee. [00:34:07] Speaker 01: Sorry, those belong to the bankruptcy estate. [00:34:10] Speaker 01: So therefore, only the trustee has the authority to pursue those claims for the benefit of all the creditors. [00:34:15] Speaker 01: This case that came a year after SI Acquisition, which is cited in this case, says that, well, what about in those circumstances where the trustee may not be pursuing claims that a creditor may otherwise want to pursue? [00:34:28] Speaker 01: Well, in that case, the creditor in billing associate's shoes obtained a leave from the trustee to derivative assert the claim against the managers. [00:34:37] Speaker 01: And that's what they could have done here. [00:34:38] Speaker 01: And let's keep in mind. [00:34:40] Speaker 01: were they required to do that no of course not but the point being that this is an unjust result that the statute of limitations expires and therefore their claims are stale and can't be pursued they had options and by the way the automatic stay didn't prevent billing associates well they were derivative claims that but they could the point is that they could have obtained a leave from the trustee to ask the trustee to [00:35:02] Speaker 01: trustee, we've presented the information to you. [00:35:04] Speaker 01: You've investigated this. [00:35:05] Speaker 01: We want you to pursue it. [00:35:06] Speaker 01: They didn't ask the bankruptcy court to pursue these. [00:35:09] Speaker 03: And they didn't have to do that. [00:35:10] Speaker 03: But the district court thought that they were free to pursue them themselves. [00:35:16] Speaker 01: Right. [00:35:16] Speaker 01: Well, of course, they were free to pursue themselves once they were abandoned by the trustee, which happened way too late after the statute of limitations had expired. [00:35:26] Speaker 03: That sort of begs the question about whether it was state or not. [00:35:29] Speaker 03: But I appreciate your point. [00:35:30] Speaker 03: I understand your point. [00:35:31] Speaker 01: OK. [00:35:31] Speaker 01: And I do want to get back to, if the court has no further questions on the issues about the claims asserted against the EDS members, I do want to briefly turn to the issues for the [00:35:46] Speaker 01: I mean, I've got a minute left, so I'll just focus on the main argument that the district court adopted and that we would advance this court to adopt as well on the statute of limitations. [00:35:55] Speaker 01: One thing is consistent in all three iterations of the complaint that billing associates knew as of June 20, 2014, that ADS breached the agreement. [00:36:05] Speaker 01: That's their allegation. [00:36:06] Speaker 01: We breached the agreement. [00:36:07] Speaker 01: What was the primary obligation under this agreement? [00:36:10] Speaker 01: Well, the primary obligation was that ADS would have the tenant utility payments sent to it. [00:36:18] Speaker 01: It would hold those payments in its trust account, in its operating account, and then eventually remit those payments back to the landlords. [00:36:26] Speaker 01: So that was the primary obligation. [00:36:29] Speaker 01: Billing Associates didn't allege how the agreement was breached or why, but the point being is that the statute of limitations began running before ADS filed for Chapter 7 bankruptcy. [00:36:44] Speaker 01: We know that a cause of action accrues when a defendant... Are you going to tell us that part of the statute of limitations has already expired before it was told? [00:36:52] Speaker 01: No, I guess I've got 20 seconds, but the point is... That's why I'm trying to help. [00:36:56] Speaker 01: I agree with the premise that under Texas common law, which is incorporated into section 108 of the bankruptcy code, the extension of time, [00:37:04] Speaker 01: that they get the benefit of a one-for-one tolling. [00:37:07] Speaker 01: And so the statute of limitations was told from July 18, 2014 until December 27. [00:37:15] Speaker 03: What's the July 14 date? [00:37:17] Speaker 01: July 18 is when the bankruptcy petition was filed. [00:37:24] Speaker 01: Under Texas common law, under their tolling doctrines, the day that the bankruptcy petition is filed, it goes all the way up to the time the automatic stay is terminated. [00:37:35] Speaker 01: And so then the statute begins running the following day. [00:37:38] Speaker 03: Doesn't it resume running? [00:37:39] Speaker 01: Right. [00:37:40] Speaker 01: It resumes running. [00:37:41] Speaker 01: So my point being, though, is they filed their complaint in federal court in Seattle exactly four years to the day. [00:37:48] Speaker 01: The problem for billing associates is that the claim had already began running. [00:37:52] Speaker 03: Right, which is why the answer to my first question should have been yes. [00:37:54] Speaker 01: It had already started well, but that's my conclusion and I'll leave with that mansions your question Judge Morgan is yes description is yes And if I could just summarize my request for relief because I'm out of time We're asking this court to affirm the district court's dismissal of building associates claims against all at-the-least under rule 12 Thank you for the court's time. [00:38:14] Speaker 03: Thank you Counsel I do have this question about the [00:38:20] Speaker 03: statute having already run in the tolling period only being co-extensive with the bankruptcy stay. [00:38:26] Speaker 02: The discovery rule, fiduciary duty claims especially. [00:38:31] Speaker 03: Well, but OK, but as to, I think, opposing counsel's argument, and I think I found this in the record, is that there's an allegation from your team that as to ADS, as to the corporate defendant, there was knowledge of the breach earlier. [00:38:44] Speaker 03: before the bankruptcy was filed. [00:38:45] Speaker 03: Is that wrong? [00:38:46] Speaker 02: A breach of fiduciary duty? [00:38:48] Speaker 02: That would be incorrect. [00:38:49] Speaker 03: Any breach? [00:38:50] Speaker 03: He said breach of the contract. [00:38:51] Speaker 02: Yeah. [00:38:52] Speaker 02: Well, no. [00:38:53] Speaker 02: We terminated the contract because it wasn't going right. [00:38:56] Speaker 03: I just want to know the answer to the question. [00:38:58] Speaker 02: The answer is no. [00:38:59] Speaker 03: Why? [00:39:00] Speaker 02: Why? [00:39:00] Speaker 02: Because what we're talking about, first of all, is breach of fiduciary duty. [00:39:06] Speaker 03: Well, OK. [00:39:07] Speaker 02: OK, so that's the claim. [00:39:08] Speaker 02: And the breach fiduciary duty begins to run upon discovery of the breach by the fiduciary. [00:39:14] Speaker 03: And we're talking about, as to the corporate defendant, you're right. [00:39:17] Speaker 03: Your position is that the statute of limitations had not already started to run. [00:39:21] Speaker 02: That's correct. [00:39:22] Speaker 03: So it's only coextensive with the bankruptcy stay. [00:39:26] Speaker 03: Which would be consistent with the allegation in your First Amendment amended complaint. [00:39:29] Speaker 02: That's correct. [00:39:30] Speaker 02: All right. [00:39:31] Speaker 02: OK. [00:39:31] Speaker 02: That's absolutely correct. [00:39:32] Speaker 02: And that's one of the first point I was going to bring up. [00:39:35] Speaker 02: The second point I was going to bring up is we've got to make sure that we understand the difference between abandoning an asset and purchasing an asset, because they were used interchangeably by opposing counsel. [00:39:48] Speaker 02: If billing associates would have bought [00:39:53] Speaker 02: the claim. [00:39:54] Speaker 02: That may be a different story, but they didn't. [00:39:57] Speaker 02: They paid to have the trustee abandon it back to the debtor, ADS. [00:40:03] Speaker 03: Why does that matter for purposes of your argument? [00:40:06] Speaker 02: Well, because we could not assert the derivative claim on behalf of ADS against the corporate defendants until the claim got back to ADS. [00:40:19] Speaker 02: And that's the big distinction. [00:40:21] Speaker 02: And then we had to prove that they were insolvent and that they weren't doing business. [00:40:27] Speaker 02: And then we could derivatively assert that claim. [00:40:30] Speaker 02: And we didn't buy the claim. [00:40:32] Speaker 02: We paid for it to get abandoned. [00:40:35] Speaker 02: back to ADS. [00:40:36] Speaker 02: So that's a very important distinction, because until ADS got the claim, we couldn't derivatively assert it. [00:40:43] Speaker 03: So we're speaking in shorthand. [00:40:44] Speaker 03: I don't think it's because we misunderstand the record, but thank you for the clarification. [00:40:47] Speaker 02: Thank you. [00:40:48] Speaker 02: And I'd like to go back to the release carve out, because such. [00:40:52] Speaker 02: And you'll notice even in their briefing that they added the term agreement in brackets in their answering brief. [00:41:00] Speaker 02: But that isn't the only plausible reading. [00:41:03] Speaker 02: You're going to get, let's assume there was this agreement, okay? [00:41:06] Speaker 03: Wait, wait, which agreement? [00:41:07] Speaker 02: The disagreement to access the Starnick system. [00:41:09] Speaker 03: Was there, is there any indication of that? [00:41:11] Speaker 02: There's no, there's no allegation of that, but let's, but it says that there, but there was going to be given access to the Starnick system. [00:41:21] Speaker 03: You said there wasn't any allegation that there was an agreement to give them access to the Starnick system. [00:41:25] Speaker 02: I'm saying, on footnote five, they were given access to the Starnick system. [00:41:31] Speaker 02: And they said, anything related to access to the Starnick system is exempt. [00:41:37] Speaker 02: Why? [00:41:37] Speaker 02: Because you don't know what's in the Starnick system until you look at it. [00:41:42] Speaker 02: So you're not going to release those claims that arise from the access that you are given. [00:41:49] Speaker 02: That's a plausible reading. [00:41:50] Speaker 02: Because why would you release claims that are within this database that you haven't seen? [00:41:56] Speaker 02: You are going to exempt it from that database. [00:41:58] Speaker 02: So that's a plausible and reasonable reading. [00:42:01] Speaker 02: And I think that Judge Nguyen had it correct. [00:42:06] Speaker 02: Other than that, I want to point out once again, on paragraph 34 of the first amended complaint, that was only as to the corporate defendant ADS. [00:42:19] Speaker 02: It's clear it says, we discovered the money went to ADS. [00:42:24] Speaker 02: Paragraph 86 of the second amended complaint says, after the bankruptcy closed, we learned that it was paid to the non-ADS managers. [00:42:35] Speaker 02: And that's clearly the difference that I was trying to say before. [00:42:39] Speaker 02: Any other questions? [00:42:40] Speaker 02: I'll yield my 26 seconds. [00:42:42] Speaker 04: Anything further? [00:42:44] Speaker 04: Nothing further, thank you. [00:42:45] Speaker 02: I want to thank you for your attention and thorough reading of the record and your clerks. [00:42:50] Speaker 02: You guys did an amazing job. [00:42:51] Speaker 02: Thank you. [00:42:51] Speaker 02: And have a good day. [00:42:52] Speaker 03: You made our clerks day. [00:42:53] Speaker 03: Thank you all so very much for your advocacy. [00:42:55] Speaker 03: We'll take this case under advisement, and we'll stand in recess for today.