In the Matter of: DALLAS ROADSTER, LIMITED; IEDA ENTERPRISES, INC. Debtors
DALLAS ROADSTER, LIMITED, Appellant-Cross-Appellee TEXAS CAPITAL BANK N.A., Appellee-Cross-Appellant-Cross-Appellee IEDA ENTERPRISE, INCORPORATED; BAHMAN KHOBAHY Cross-Appellees BAHMAN HAFEZAMINI Cross-Appellee-Cross-Appellant
from the United States District Court for the Eastern
District of Texas.
KING, OWEN, and HAYNES, Circuit Judges.
case comes to us after more than five years of litigation
over loan agreements between a bank and a used car
dealership. The borrower, Dallas Roadster, Limited, sought
damages, and the lender, Texas Capital Bank N.A., sought
certain attorneys' fees after receiving full payment on
the loans through the borrower's bankruptcy proceedings.
Each contends that the other breached the loan agreements.
Following a four day bench trial on the breach of contract
issues, the district court issued take-nothing judgments on
the borrower's and lender's claims. Both the borrower
and the lender appealed, as did one of the borrower's
guarantors, who challenges the grant of summary judgment
dismissing his counterclaims against the lender. For the
following reasons, we AFFIRM in part, VACATE in part, and
FACTUAL AND PROCEDURAL BACKGROUND
Roadster, Limited ("Roadster"), which operates a
used car dealership, executed several loan agreements with
Texas Capital Bank N.A. ("TCB"). While the business
relationship proved profitable for both parties over the
course of several years, it ended when TCB declared that
events of default had occurred, accelerated the outstanding
balances on the loans, and sought an ex parte receivership in
state court. TCB's actions coincided with a raid by the
Drug Enforcement Administration ("DEA") of Roadster
and the arrest of Roadster's CEO, Bahman Hafezamini, on
money laundering charges.
2008, TCB and Roadster executed promissory notes evidencing:
(1) a $4 million loan that Roadster could use on a revolving
basis for purchasing inventory ("Floor Plan Note");
and (2) an approximately $2 million loan that Roadster used
to refinance its real estate ("Real Estate Note").
The maturity date of the revolving loan was extended by
agreement of the parties several times. As relevant here, the
loan was scheduled to mature on December 15, 2011.
connection with the Floor Plan Note, TCB and Roadster also
executed a Loan and Security Agreement ("Floor Plan Loan
Agreement"). Hafezamini (Roadster's CEO), Bahman
Khobahy (Roadster's President), and IEDA Enterprise, Inc.
(a Texas corporation that is the general partner of Roadster
and is owned 50% by Hafezamini and 50% by Khobahy) each
executed an unlimited guaranty agreement. The Floor Plan Loan
Agreement set out various requirements and rights. For
example, in § 7.2(o), Roadster agreed to a "Change
of Ownership or Control" clause, which provided that
Roadster would not "[p]ermit any change in the ownership
or control of Borrower, or permit the sale, transfer or
conveyance of any shares or other interest in Borrower"
without the prior written consent of TCB. Additionally,
§ 7.1(a) required Roadster to "[a]t all times
maintain full and accurate books of account and records"
and furnish to TCB certain financial statements and
certificates of compliance. Specifically, Roadster was
obligated to certify after each calendar quarter that it was
in full compliance with each of the covenants in the Floor
Plan Loan Agreement and that there were no events of default.
to this appeal, the Floor Plan Loan Agreement also contained
an "Events of Default and Remedies" section, which
listed fifteen events of default. The occurrence and
continuance of an event of default would allow TCB to
exercise various remedies. Although during the period at
issue, there may have been other events of default, the
primary focus here is on two of the fifteen events: §
9.1(n) - if TCB, "in good faith, shall deem itself
insecure, " and § 9.1(o) - if Roadster or any of
its guarantors "suffers a material adverse change in its
business or financial condition." The Floor Plan Loan
Agreement provided various default remedies that TCB could
exercise if an event of default occurred. For example, TCB
could accelerate the outstanding balance immediately and seek
the appointment of a receiver.
Floor Plan Loan Agreement also included a non-waiver clause,
which stated, in part, that no waiver "shall ever be
effective unless it is in writing and signed by" TCB.
Additionally, the Floor Plan Loan Agreement contained
covenants requiring Roadster to pay TCB's expenses and
attorneys' fees under certain circumstances.
connection with the Real Estate Note, TCB and Roadster also
executed a Loan and Security Agreement ("Real Estate
Loan Agreement") and a Deed of Trust. Similar to the
Floor Plan Loan Agreement, the Real Estate Loan Agreement
contained various obligations on the part of Roadster, a list
of events of default, and remedies that TCB could exercise.
Moreover, the Real Estate Loan Agreement included a
"cross-default" provision, which stated that a
default under any other loan agreement between TCB and
Roadster, such as the Floor Plan Loan Agreement, would also
constitute an event of default under the Real Estate Loan
September 2010, the DEA notified TCB that it was
investigating Roadster and Hafezamini, among others. As part
of the investigation, the DEA conducted four undercover
operations in which government agents purchased vehicles from
Roadster, each time using more than $10, 000 in cash.
Although Roadster was required to file a form with the
Internal Revenue Service anytime more than $10, 000 in cash
was used for a purchase, Roadster failed to do so after each
of these undercover purchases.
the investigation, TCB cooperated with and was regularly kept
up to date by the DEA. For example, after the first
undercover purchase, the DEA met with TCB to review a large
cash deposit by Roadster. The DEA also communicated with TCB
about potential arrests. For example, on November 9, 2011,
the DEA emailed TCB that a federal grand jury had indicted
Hafezamini on money laundering charges and that the DEA
intended to implement searches and arrests on November 16,
2011. The next day, the DEA met with and told TCB that a
search of Roadster would occur on November 16, 2011.
November 16, 2011, the DEA executed its search warrants and
seized books, records, computer equipment, and currency from
Roadster. Hafezamini was also arrested on November 16. His
indictment was later dismissed after he agreed to a pretrial
diversion agreement in July 2012.
TCB's Actions After Becoming Aware of the DEA
2010, after being alerted to the DEA investigation, TCB
started to take steps to protect itself. Specifically, TCB
hired a monitor who conducted daily audits on Roadster's
premises. TCB also asked Roadster to start looking for
alternative financing, a prompt that may also have been
occasioned in part by the approaching maturity date of the
Floor Plan Note. At least by late June 2011, TCB had retained
counsel to prepare for the filing of a receivership. During
this time, however, Roadster continued to operate
efficiently. Indeed, an email from a TCB employee in May 2011
recognized that "Dallas Roadster appears to be operating
more efficiently than ever."
October 26, 2011, TCB sent a Notice of Default to Roadster,
IEDA, Hafezamini, and Khobahy claiming that Roadster was in
default under the loan agreement because Roadster had sought
financing from Automotive Finance Corporation
("AFC"). TCB requested that Roadster notify it in
writing if Roadster had not entered into a financing
agreement with AFC. Although Roadster did not respond to TCB
in writing, Roadster did inform representatives of TCB in
person that it had not entered into a credit facility with
November 15, 2011, the day before the DEA raided Roadster and
arrested Hafezamini, TCB sent a Notice of Acceleration and
Notice of Cross-Default and Acceleration to Roadster, IEDA,
Hafezamini, and Khobahy. The letter was not actually
delivered until the next day, November 16. In the letter, TCB
once again based its default claim on Roadster's pursuit
of alternative financing from AFC. Additionally, TCB cited
two other events of default under the Floor Plan Loan
Agreement as independent grounds for exercising its default
remedies: § 9.1(n) (when TCB, in good faith, deems
itself insecure), and § 9.1(o) (when Roadster or any
guarantor suffers a material adverse change in its business
or financial condition). The letter concluded that this was
not intended to be an exhaustive list of potential events of
November 16, 2011, soon after the DEA raid had begun, TCB
filed its Original Petition and Emergency Application for
Appointment of a Receiver in Texas state court against
Roadster and its guarantors (IEDA, Hafezamini, and Khobahy).
The suit alleged (1) default under the Floor Plan Note, (2)
breach of contract, (3) liability on the guaranties, and (4)
entitlement to attorneys' fees. Additionally, as part of
the emergency application for receivership, TCB
"request[ed] that the Court appoint a receiver to take
control of and manage the property . . . and to provide for
an orderly liquidation of the Personal Property to satisfy
the outstanding indebtedness under the Loan Documents and in
accordance with [TCB's] rights under the same."
Under Dallas County local rules, TCB was required to provide
Roadster with notice of the ex parte application at least two
hours before it was filed. However, apparently invoking an
exception to the local rules, TCB did not provide Roadster
with notice because TCB's attorney declared that notice
"would impair or annul the court's power to grant
relief because the subject matter of the Application could be
accomplished or property removed, secreted or destroyed, if
notice were required."
the Original Petition and Emergency Application for
Appointment of a Receiver was an affidavit from Paul Noonan,
a senior vice president at TCB. The Texas state court granted
the ex parte application soon after it was filed. Notably,
after the bench trial, the district court found that
Noonan's affidavit contained a number of false
Bankruptcy and Adversary Proceedings
did not appeal the receivership. Instead, on December 12,
2011, Roadster filed for Chapter 11 bankruptcy. On December 20, 2011, the bankruptcy court
entered an agreed order requiring the receiver to return to
Roadster the assets in the receiver's custody.
Bankruptcy Court Proceedings
December 2012, TCB's state court action was removed to
the bankruptcy court, commencing an adversary proceeding. In
July 2013, Roadster, IEDA, Khobahy, and Hafezamini each filed
an answer and counterclaims against TCB.
October 2013, the bankruptcy court confirmed Roadster's
third amended plan of reorganization ("Confirmed
Plan"), and the adversary proceeding was withdrawn to
federal district court. The Confirmed Plan resolved all
remaining disputes over Roadster's outstanding loan
balance,  as well as (1) all of
TCB's pre-petition attorneys' fees and expenses, and
(2) the fees and expenses incurred in connection with the
bankruptcy case after the bankruptcy petition was filed.
However, the Confirmed Plan specifically carved out the
"post-petition litigation fees and expenses"
related to this litigation and stated that it was not
affecting TCB's right to pursue these fees.
district court, TCB filed a First Amended Complaint. The
complaint clarified that TCB sought only its post-petition
attorneys' fees, which were carved out of the Confirmed
Plan. At this stage of the litigation, the following claims
remained: (1) TCB's claims for breach of contract against
Roadster and its guarantors (IEDA, Khobahy, and Hafezamini)
seeking to recover its post-petition attorneys'
fees; (2) Roadster's various
counterclaims against TCB, including breach of
contract; (3) Khobahy's various
counterclaims against TCB; and (4) Hafezamini's various
counterclaims against TCB.
March 2015, the magistrate judge issued a report and
recommendation on TCB's motion for summary judgment and
Roadster's partial motion for summary
judgment. The magistrate judge
recommended that TCB's summary judgment motion be granted
as to all of Hafezamini's, Khobahy's, and
Roadster's claims except for Roadster's breach of
contract claim. The magistrate judge recommended that
Roadster's partial summary judgment motion be denied.
Thus, the only claims that would survive after summary
judgment were TCB's breach of contract claims for
attorneys' fees and Roadster's breach of contract
Roadster, Khobahy, and Hafezamini each filed objections to
the magistrate judge's report and recommendation.
Reviewing the objections de novo, the district court adopted
in full the magistrate judge's report and
August 2015, the district court conducted a four day bench
trial, ultimately entering take-nothing judgments on
TCB's and Roadster's remaining claims.
Unsurprisingly, Roadster's and TCB's narratives at
trial of the events leading up to the bankruptcy differed
sharply. In short, TCB contended that it simply took remedial
steps that were allowed under the Floor Plan Loan Agreement
and the Real Estate Loan Agreement. According to TCB, there
were multiple events of default, and the Floor Plan Loan
Agreement specifically granted TCB the option of accelerating
the balances of the loans and obtaining a receivership if an
event of default occurred. Roadster countered, however, that
it was over-collateralized, TCB's interests were never in
jeopardy, and no event of default had occurred that would
justify TCB accelerating the loan and seeking an ex parte
receivership. Rather, according to Roadster, TCB saw an
opportunity to exit the loan agreements and used bad faith
tactics to do so. In an oral ruling,  the district court largely agreed with
Roadster regarding TCB's bad faith actions. For example,
the district court found that TCB "acted in bad faith
and outside of reasonable legitimate activity in asking for
and obtaining an order for the receiver to liquidate."
The district court added that it was "actually somewhat
stunned" that TCB's witnesses were claiming that the
receivership was not for the purpose of liquidation and that
the witnesses "would be repeating this [claim] over and
over again to a federal judge." The district court also
noted "evidence of connivance with the receiver"
and specifically found that TCB "and the receiver acted
outside of all reasonable legitimate activity in the
operation of the receivership, given the law dealing with
making its findings relating to the bad faith actions of TCB,
the district court held that, although § 7.1(h) and
§ 9.6 of the Floor Plan Loan Agreement "allow
recovery" of TCB's attorneys' fees, those
clauses were unenforceable under these circumstances.
Specifically, the district court conducted an
"Erie analysis" of how the Texas Supreme
Court's decision in Zachry Construction Corp. v. Port
of Houston Authority, 449 S.W.3d 98 (Tex. 2016), would
apply to the contract provisions and facts of this
litigation. The district court determined "that a Texas
court would hold that [a] broad-sweeping indemnification
clause or broad attorneys' fees clause [is] unenforceable
when it leads to the injured party having to indemnify the
wrongdoer for the injuring party's own deliberate and
intentional wrongdoing." Alternatively, the district
court denied recovery of attorneys' fees using its
inherent power, reasoning that "when ...