Sed Holdings, L.L.C. v. TM Prop. Solutions, L.L.C. (In re 3 Star Props., L.L.C.)

• Court: U.S. Court of Appeals — Fifth Circuit
• Writing for the Court: Stuart Kyle Duncan, Circuit Judge
• Citation: Sed Holdings, L.L.C. v. TM Prop. Solutions, L.L.C. (In re 3 Star Props., L.L.C.), 2 F.4th 387 (5th Cir. 2021)
• Decision Date: 17 June 2021
• Docket Number: No. 19-20841,19-20841
• Parties: In the MATTER OF: 3 STAR PROPERTIES, L.L.C., Debtor, Sed Holdings, L.L.C., Appellee Cross-Appellant, v. TM Property Solutions, L.L.C.; Biltmore Funding, L.L.C.; TMPS, L.L.C.; Mark Hyland; Home Servicing, L.L.C., Appellants Cross-Appellees, Don St. John ; Howard L. Nations, a Professional Corporation, Cross-Appellees.

2 F.4th 387

In the MATTER OF: 3 STAR PROPERTIES, L.L.C., Debtor,

Sed Holdings, L.L.C., Appellee Cross-Appellant,

v.TM Property Solutions, L.L.C.; Biltmore Funding, L.L.C.; TMPS, L.L.C.; Mark Hyland; Home Servicing, L.L.C., Appellants Cross-Appellees,Don St. John ; Howard L. Nations, a Professional Corporation, Cross-Appellees.

No. 19-20841

United States Court of Appeals, Fifth Circuit.

FILED June 17, 2021

David J. Drez, III, Esq., Jacob Fain, Wick Phillips Gould & Martin, L.L.P., Fort Worth, TX, James Blake Hamm, Snow & Green, L.L.P., Hockley, TX, Jared Isaac Levinthal, Levinthal Wilkins, P.L.L.C., Houston, TX, for Appellee/Cross-Appellant.

Sean Michael Reagan, Reagan Law Firm, Houston, TX, for Appellants/Cross-Appellees TM Property Solutions, L.L.C., Don St. John, Biltmore Funding, L.L.C., TMPS, L.L.C., Mark Hyland, Home Servicing, L.L.C.

Andrew L. Johnson, Thompson, Coe, Cousins & Irons, L.L.P., Houston, TX, for Cross-Appellee Howard L. Nations, A Professional Corporation.

Before Haynes, Duncan, and Engelhardt, Circuit Judges.

Stuart Kyle Duncan, Circuit Judge:

A federal jury found that 3 Star Properties fraudulently sold SED Holdings millions in loans and awarded SED over $14 million in damages. From that verdict, we must untangle a snarled skein of appeals and cross-appeals. We affirm the liability judgment against 3 Star but, concluding the damages award was excessive, we remand for remittitur of the award. We vacate a separate judgment against Home Servicing for breaching a contract to service the loans, and we remand for a new trial on that claim.

I. BACKGROUND

A. Facts

In 2014, SED contracted with 3 Star to buy 1,235 non-performing residential mortgage loans.¹ 3 Star made certain representations about the loans—that it was their sole owner, that it had the right to sell them, and that they would be sold "free and clear"—that were not true. In fact, at the time the parties signed the loan sale agreement ("LSA"), 3 Star was a shell company that did not own the loans, had no assets, and did not generate revenue.

Three other companies owned the loans: Biltmore Funding ("Biltmore"); TM Property Solutions² ("TM Property"); and Biltmore Funding II ("Biltmore II"), all of which were partly owned and/or managed by Mark Hyland. Hyland authorized those entities to sell the loans to 3 Star, but only after 3 Star purportedly sold them to SED. Hyland had authorized 3 Star to market the loans to SED and represent it owned them, despite knowing that was untrue. Hyland and James Johnson, 3 Star's managing member, crafted the 3 Star-SED LSA and agreed to split the profits. SED was in the dark about all of this.

Under the LSA's terms, SED bought the loans for nearly $14 million. SED would pay $2 million in cash at closing, $2 million about a month later, and the balance by year's end. The loan proceeds were to be transferred to Mark Dykes, an attorney with Nations Law Firm, who would act as escrow agent until SED paid 3 Star in full. The LSA provided that "the parties will use Home Servicing ... to service the loans, as more fully outlined in the Collateral Agreement." The collateral agreement between 3 Star and SED provided that SED would "not modify the servicing agreement presently in place for the [loans] without written approval of [3 Star]." The referenced servicing agreement was a residential special servicing agreement ("RSSA") between Home Servicing and TM Property.

After SED had fronted $4 million, things unraveled. SED discovered most of the loans were defective. It tried, unsuccessfully, to "put back" nearly all the loans under a provision in the LSA.³ Then it started suing.

B. Procedural History

SED first filed suit in a North Carolina state court against 3 Star, Johnson, Hyland, TM Property, and Home Servicing, seeking to recover damages from the LSA transaction (the "North Carolina suit"). About two months later, 3 Star sued SED in a Harris County, Texas state court for allegedly breaching the LSA (the "Harris County suit"). Biltmore, TM Property, and others intervened in the Harris County suit, moving to substitute for 3 Star, asserting superior title to the loans at issue, and bringing their own claims against SED. SED counterclaimed against 3 Star, Biltmore, and TM Property. Biltmore and TM Property then filed an involuntary bankruptcy petition against 3 Star. The North Carolina and Harris County suits were removed to bankruptcy court and consolidated, but after the bankruptcy court approved the sale of the Biltmore and TM Property pools of loans, the suits proceeded in the Southern District of Texas.

Meanwhile, Biltmore II was in the midst of separate litigation against 3 Star. Shortly after the North Carolina and Harris County suits were filed, Biltmore II sued 3 Star in a Tarrant County, Texas state court (the "Tarrant County suit"), seeking a declaratory judgment that it (Biltmore II) held title to the 473 loans it sold 3 Star because 3 Star never paid for them. SED intervened as a defendant, arguing that it, not Biltmore II, held title to the 473 loans and seeking a declaration of "clear and negotiable title to [all] the 1,235 mortgage notes" in the 3 Star-SED LSA. SED and Biltmore II settled before trial.⁴ Biltmore II's claims against 3 Star, however, proceeded to a bench trial. The Tarrant County court held that Biltmore II had clear and negotiable title to the 473 loans. In reaching its judgment, the court examined the 3 Star-SED LSA, finding that 3 Star made various misrepresentations about the 473 Biltmore II loans; that 3 Star committed fraud on SED by attempting to sell 473 loans in which it had no ownership interest; and that the 3 Star-SED LSA was therefore void and unenforceable as to the 473 loans.

Back in the Southern District of Texas, the court made a number of pre-trial rulings to narrow the scope of SED's wide-ranging suit. The remaining claims were: (1) SED's fraudulent transfer claims against Biltmore, TM Property, Hyland, and 3 Star; (2) SED's breach of contract claim against Home Servicing; (3) SED's breach of contract and negligence claims against Brown & Associates; (4) SED's conspiracy claims against Hyland, TM Property, Biltmore, Brown & Associates, Dykes, 3 Star, and Johnson; and (5) Home Servicing's breach of contract counterclaim against SED. Those claims went to a jury, except SED's claims against 3 Star and Johnson, on which the court entered a default judgment for SED.

The jury found for SED on every claim. The final judgment held 3 Star and Johnson liable for fraud and Hyland, Dykes, Johnson, 3 Star, TM Property, and Biltmore jointly and severally liable for conspiracy to commit fraud. It awarded SED a $9,430,000 judgment against Dykes,⁵ Johnson, 3 Star, TM Property, and Biltmore. The court also held Biltmore, TM Property, Hyland, and 3 Star liable for fraudulent transfer of SED's payments to 3 Star totaling $4,372,739; SED was entitled to avoidance of those funds and equitable subordination of TM Property's and Biltmore's claims. Finally, Home Servicing was held liable for breach of the Servicing Agreement, for which SED was awarded $300,000. The court subsequently denied Home Servicing's motion for new trial, Dykes and Hyland's motion to alter the judgment, and TM Property's motion to alter the judgment, as well as their joint renewed motion for judgment as a matter of law ("JMOL"). That brings us to this appeal.

Hyland, TM Property, and Biltmore ("Hyland Defendants") appeal the district court's partial denial of their motion to dismiss, various evidentiary rulings, the verdict, the final judgment, the equitable subordination order, and the district court's denial of their motions for new trial, JMOL, and to alter or amend the judgment. Home Servicing appeals the verdict and final judgment against it, as well as the order denying its motion for a new trial. SED cross-appeals. It contends primarily that the district court should not have dismissed certain claims against the Hyland Defendants, Home Servicing, Dykes, and Home Servicing's chief operating officer Don St. John.

II. DISCUSSION

A. Hyland Defendants’ Claims

1. Res Judicata

As a threshold issue, the Hyland Defendants argue res judicata should have barred SED's claims against them because SED was involved in the Tarrant County suit, which already resolved the merits of this case. The district court rejected their motion to dismiss based on res judicata , a ruling we review de novo . Basic Cap. Mgmt., Inc. v. Dynex Cap., Inc. , 976 F.3d 585, 588 (5th Cir. 2020). "Dismissal under Rule 12(b)(6) may be appropriate based on a successful affirmative defense, provided that the affirmative defense appears on the face of the complaint." Ibid. (cleaned up). A court may dismiss claims as barred by res judicata if the "bar is apparent from the pleadings and judicially noticed facts." Kahn v. Ripley , 772 F. App'x 141, 142 (5th Cir. 2019) (per curiam).

The Tarrant County suit involved an entity not party to this appeal, Biltmore II. Biltmore II sued 3 Star, seeking a judgment that Biltmore II held title to the loans it sold to 3 Star. Understandably, SED intervened to assert that it had "clear and negotiable title" to all the loans in the LSA, including those to which Biltmore II laid claim. The court ultimately ruled in favor of Biltmore II, along the way holding that 3 Star never owned Biltmore II's pool of loans and thus committed fraud by "selling" them to SED. It also held the 3 Star-SED LSA void and unenforceable as to the Biltmore II loans. The wrinkle is that SED settled with Biltmore II before the court issued its decision; the parties agreed that Biltmore II held title to the contested loans but that they would divvy up the proceeds of the loans, once liquidated.

The Hyland Defendants urge that the Tarrant County suit precludes SED from bringing its claims against them here because SED previously "sought affirmative relief for each and every loan that is at issue in this case [and] SED's claims in Tarrant County were resolved...