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In re Dallas Roadster, Ltd.

United States Court of Appeals, Fifth Circuit

January 17, 2017

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

         Appeals from the United States District Court for the Eastern District of Texas.

          Before KING, OWEN, and HAYNES, Circuit Judges.

          KING, Circuit Judge:

         This 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 REMAND.


         Dallas 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.

         A. The Contracts

         In 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.

         In 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.

         Relevant 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.

         The 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.[1]

         In 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 Agreement.

         B. DEA Investigation

         In 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.

         Throughout 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.

         On 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.

         C. TCB's Actions After Becoming Aware of the DEA Investigation

         In late 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."[2]

         On 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 AFC.[3]

         On 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 default.

         On 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."

         Accompanying 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 statements.[4]

         D. Bankruptcy and Adversary Proceedings

         Roadster did not appeal the receivership. Instead, on December 12, 2011, Roadster filed for Chapter 11 bankruptcy.[5] 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.

         i. Bankruptcy Court Proceedings

         In 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.

         In 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, [6] 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.

         ii. Summary Judgment

         In the 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;[7] (2) Roadster's various counterclaims against TCB, including breach of contract;[8] (3) Khobahy's various counterclaims against TCB;[9] and (4) Hafezamini's various counterclaims against TCB.[10]

         In 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.[11] 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 counterclaim.

         TCB, 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 recommendation.[12]

         iii. Bench Trial

         In 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, [13] 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 receiverships."[14]

         After 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 ...

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