John Ray Melcher & Melcher Holdings, Inc. v. Small Bus. Loan Source, LLC

• Decision Date: 09 March 2016
• Docket Number: CIVIL ACTION NO. G-14-288
• Parties: JOHN RAY MELCHER and MELCHER HOLDINGS, INC. v. SMALL BUSINESS LOAN SOURCE, LLC, ET AL.
• Court: U.S. District Court — Southern District of Texas

JOHN RAY MELCHERand MELCHER HOLDINGS, INC. v. SMALL BUSINESS LOAN SOURCE, LLC, ET AL.

CIVIL ACTION NO. G-14-288

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS GALVESTON DIVISION

March 9, 2016

REPORT AND RECOMMENDATION

Before the Court, by referral from the Honorable George C. Hanks, Jr., United States District Judge, is the Motion to Dismiss of Defendants Jason Speights, Todd Worrich and the Speights Law Firm, LLP; the Motion seeks the dismissal of all but one of the claims asserted against these Defendants by Plaintiffs, John Ray Melcher and Melcher Holdings, Inc.. Having considered the Parties submissions, the Court now issues this Report and Recommendation.

About six months after the alleged Wiggins conspiracy perfected the foreclosure on the Kemah property owned by Melcher Holdings, Inc. (MHI), MHI hired the Speights Law Firm to sue TWIA for wind damage to the property during Hurricane Ike. That suit was ultimately settled in December 2011 for about $220,000.00. In the meantime, John Ray Melcher (Melcher) had filed for personal bankruptcy and his Chapter 7 Petition was still pending when the TWIA suit settled. At the time of the TWIA settlement, MHI was potentially liable for a deficiency on its SBA loan in excess of $120,000.00. As a result, after the law firm deducted its fee of about $100,000.00 from the settlement checks, the remaining amount was paid to First Bank, the then-assignee of the SBA loan.

In their First Amended Complaint it appears the Plaintiffs have sued Speights, Worrich and the Law Firm for all the claims asserted against every other named Defendant and, in addition, for legal malpractice. In a nutshell, the Plaintiffs accuse these Defendants of mishandling the TWIA settlement funds in furtherance of the Wiggins conspiracy.

As for the alleged involvement in the Wiggins conspiracy to acquire MHI's property, Plaintiffs' claims fail. As far as the Plaintiffs are concerned, the central objection of the conspiracy, the foreclosure on MHI's property, had clearly been completed by the time these Defendants became involved with the Plaintiffs, and the relevant conspiratorial period is determinative. If the central object of a conspiracy has been accomplished, evidence of subsequent events designed to conceal that accomplishment cannot be relied upon to establish liability for an implied conspiracy to conceal the completed injury. Cf. United States v. Etheridge, 424 F.2d 951, 964 (6^th Cir. 1970) (citing, Grunewald v. United States, 353 U.S. 391 (1957). In short, there was no conspiracy these Defendants could have joined. For this same reason, Plaintiffs' RICO claim fails. The RICO claim is based upon the alleged Wiggins conspiracy to illegally acquire, inter alia, MHI's property in support of its underlying economic goal to control the Kemah waterfront. These Defendants simply prosecuted MHI's windstorm claim.

Plaintiffs argue that the settlement funds should have been tendered to Melcher's bankruptcy trustee. Melcher alleges that because he was the sole stockholder of MHI the corporation was just a "legal fiction" and, therefore, the settlement funds were the absolute property of Melcher's bankruptcy estate. Melcher is wrong. Under applicable Texas law, a corporation is a separate legal entity from its shareholders and officers and even a sole shareholder cannot recover damages for injuries to the corporation. Singh v. Morris, 338 S.W. 3d 176, 181-82 (Tex. App. -- Houston [14 Dist.] 2011, writ denied.). As a result, Melcher's bankruptcy estate had no claim to the settlement funds. In fact, the Defendants have submitted a copy of a letter from the bankruptcy trustee to counsel for First Bank disclaiming any interest in the funds. They have also submitted a copy of the security agreement in favor of First Bank's interest, as assignee, in the funds and the Settlement, signed by Melcher on behalf of MHI, authorizing payment of the relevant funds the firm and First Bank's predecessor in interest.¹

Plaintiffs' § 1983 claim fails for the simple reason that these Defendants are not state actors. See In re Griffiths, 413 U.S. 717, 729 (1973) (Although lawyers are generally licensed by the states, "they are not officials of government by virtue of being lawyers.").

Finally, all other state law claims, except MHI's legal malpractice claim, must also be dismissed.² These Defendants are protected by the Texas "Anti-Fracturing Rule" which bars a Plaintiff from opportunistically "fracturing" a legal malpractice claim into other theories of recovery. Riverwalk C Y Hotel...