Obsidian Sols. v. KBIDC Invs.

Decision Date30 July 2021
Docket Number05-19-00440-CV
PartiesOBSIDIAN SOLUTIONS, LLC F/N/A ARCO IDEAS, LLC, Appellant v. KBIDC INVESTMENTS, LLC, Appellee
CourtTexas Court of Appeals

OBSIDIAN SOLUTIONS, LLC F/N/A ARCO IDEAS, LLC, Appellant
v.

KBIDC INVESTMENTS, LLC, Appellee

No. 05-19-00440-CV

Court of Appeals of Texas, Fifth District, Dallas

July 30, 2021


On Appeal from the 14th Judicial District Court Dallas County, Texas Trial Court Cause No. DC-17-10092

Before Justices Pedersen, III, and Reichek [1]

MEMORANDUM OPINION

AMANDA L. REICHEK, JUSTICE

In this business dispute, KBIDC Investments, LLC sued Obsidian Solutions, LLC f/n/a ARCO Ideas, LLC for breach of contract, fraud, unjust enrichment, and money had and received in connection with agreements to develop and bring conceptual consumer products to market and to design an office facility. KBIDC purportedly purchased these causes of action out of bankruptcy from a company called Blue Matrix, LLC. Following a jury trial, the trial court rendered a judgment favorable to KBIDC. Both sides appealed.

Among its issues on appeal, Obsidian challenges the trial court's subject matter jurisdiction over the lawsuit. For the reasons set out below, we conclude that, although the trial court had jurisdiction over the lawsuit, KBIDC lacked capacity to sue or recover on the claims it asserted against Obsidian. Accordingly, we reverse the trial court's judgment and render judgment that KBIDC take nothing.

FACTUAL BACKGROUND

Kendall Harter, an entrepreneur and inventor, founded Blue Matrix, LLC and Hydro Toys, LLC (collectively, "Blue Matrix") in 2012 and engaged ARCO Ideas to assist in developing his ideas for an automatic sandwich-making machine, self-sealing water balloons, and water balloon-launching toys. Harter required ARCO to sign a mutual non-disclosure agreement to protect any proprietary information related to the products. The agreement prohibited ARCO from disclosing confidential information to third parties and required Obsidian to limit internal disclosure of information to only those employees to whom it was necessary to disclose information. Once those projects began, Harter also engaged ARCO to design its new offices.

Two years later, in May 2014, Blue Matrix was running out of money and terminated the relationship. By that time, ARCO had produced a self-sealing water balloon, which won Best in Show at Toy Fair 2015, but was not able to develop either a water balloon "bazooka" or a working sandwich machine prototype. As for the office design/buildout, Harter said the finished product was riddled with problems. Harter testified that ARCO had failed to develop working products on time or within budget despite continually representing it was "on target." But Scott Goodwin of ARCO testified ARCO was hired to "assist" Harter in developing his ideas, and he detailed the work ARCO put into the projects. He said he never made any guarantees to Harter nor could he in a business in which "[s]omething has never been done before." As for the office space, Goodwin believed Harter put too much money into it by selecting high-rent space. He acknowledged there were issues with some of the vendors and products relating to the build out, but he said these were corrected.

In December 2015, Blue Matrix filed for chapter 11 bankruptcy. During the bankruptcy, Blue Matrix executed an Asset Purchase Agreement (APA) conveying certain assets to appellee KBIDC, a company created by Blue Matrix's largest investor, Jeff Kent, to buy the assets. After making the purchase, Kent said he wanted to determine why Blue Matrix went bankrupt and had a forensic accounting performed. Kent believed that despite the fact that Blue Matrix paid ARCO a substantial amount of money, ARCO had not fulfilled its contractual obligations, but had instead produced "worthless trash." KBIDC ultimately sued ARCO, now known as Obsidian, alleging claims for breach of the development agreements, breach of the agreement to build out an office interior, breach of the nondisclosure agreement, fraud, unjust enrichment, and money had and received.

In its answer, Obsidian generally denied the claims and also raised several affirmative defenses, including that KBIDC was not a proper party because there had been no assignment of the claims and that the bankruptcy court had exclusive jurisdiction over the claims.

The case was tried to a jury. At the conclusion of the evidence, Obsidian sought a directed verdict on all claims on the basis that (1) KBIDC had no standing because it failed to list the causes of action on the bankruptcy schedules and (2) there was no evidence that the causes of actions were assigned to KBIDC. KBIDC alternatively argued there was no evidence that Obsidian breached any agreement. The trial court directed a verdict on KBIDC's fraud and money had and received claims in Obsidian's favor, but submitted questions on the contract claims and unjust enrichment claims.

The jury failed to find in KBIDC's favor on breach of contract, found Obsidian breached the nondisclosure agreement but awarded no damages, and awarded damages for unjust enrichment. The trial court rendered judgment in accordance with the jury's verdict and also awarded injunctive relief and attorneys' fees to KBIDC. The parties' post-judgment motions were denied by operation of law, and both sides appealed.

In five issues, Obsidian contends the trial court lacked subject matter jurisdiction over KBIDC's claims, misapplied the law regarding unjust enrichment, and erred in awarding attorney's fees and injunctive relief. In two issues by cross-appeal, KBIDC conditionally challenges the trial court's directed verdict on its claims for fraud, money had and received, and exemplary damages. It also challenges the jury's failure to find breach of contract and the jury finding of zero damages for breach of the NDA.

We begin our review with Obsidian's assertion that the trial court lacked jurisdiction over the claims.

ANALYSIS

In its third issue, Obsidian argues the trial did not have subject matter jurisdiction over any of the causes of action asserted by KBIDC because (1) KBIDC did not acquire the contract claims or related causes of action under the APA and therefore had no standing to assert them and (2) the claims remain within the exclusive jurisdiction of the bankruptcy estate because they were not disclosed on Blue Matrix's bankruptcy schedules.

Subject matter jurisdiction is essential to a court's authority to decide a case. Tex. Ass'n of Business v. Tex. Air Control Bd., 852 S.W.2d 440, 443 (Tex. 1993). Standing is implicit in the concept of subject matter jurisdiction. Id. If a plaintiff lacks standing to assert a claim, the court has no jurisdiction over that claim and must dismiss it. Heckman v. Williamson Cnty., 369 S.W.3d 137, 150 (Tex. 2012). Whether a party has standing to pursue a cause of action is a question of law subject to de novo review. Id. at 149-50. Because standing is jurisdictional, it cannot be waived and may be raised for the first time on appeal by the parties or the court. Tex. Ass'n of Bus., 440 S.W.2d at 445-46. Moreover, if necessary, we may consider any submitted documents that are outside the record for the limited purpose of determining our own jurisdiction. Greystar, LLC v. Adams, 426 S.W. 861, 865 (Tex. App.-Dallas 2014, no pet.).

The record here shows that one month before trial, Obsidian filed a plea to the jurisdiction with evidence raising the same complaints as brought here. The plea, however, was never set for hearing and was not ruled on by the trial judge. During trial, however, both sides presented the issue as to whether the claims were assigned to KBIDC under the APA, and the trial judge ruled the claims were assigned. With that background in mind, we turn to Obsidian's jurisdictional arguments.

A. Bankruptcy Court Jurisdiction

We begin with Obsidian's argument that the trial court lacked subject matter jurisdiction because the claims at issue were not disclosed on Blue Matrix's bankruptcy schedule and, therefore, remain within the exclusive jurisdiction of the bankruptcy court. Obsidian argues that until the claims are abandoned by the bankruptcy trustee or administered in the bankruptcy case, they remain the property of the bankruptcy estate even if the bankruptcy case has been closed or a plan was confirmed. See Dixon v. First Family Fin. Servs., 276 B.R. 173, 181 (S.D.Miss. 2002), abrogated on other grounds, Reed v. Miss. Farm Bureau Mut. Co., 299 B.R. 804 (S.D.Miss. 2003). Where, as here, the property was not disclosed, Obsidian contends the claims cannot have been either abandoned or administered. Id.

Bankruptcy can affect a debtor's standing to sue. Norris v. Brookshire Grocery Co., 362 S.W.3d 226, 231 (Tex. App.-Dallas 2012, pet. denied). And while we agree that claims can, in some cases, remain the property of the bankruptcy estate if not disclosed before the estate is fully administered, this is not the result where, as here, the bankruptcy court dismisses the case. See id. Under the Bankruptcy Code, a dismissal, unless otherwise ordered, "revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title." 11 U.S.C. § 349(b)(3). All of the property that was transferred from the debtor to the estate revests in the debtor regardless of whether the debtor disclosed it to the bankruptcy court. See e.g., Crawford v. Franklin Credit Mgmt. Corp., 758 F.3d 473, 485 (2d Cir. 2014) (explaining that section 349(b)(3) "makes no distinction between those [assets] that were listed in the debtor's schedule of assets and those [assets] that were not; what is revested in the immediately-pre-petition owner or owners is 'the property of the estate.'").

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