American Realty Investors Still Face $63M Judgment
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Law360 (August 15, 2018, 5:40 PM EDT) -- Jilted creditors seeking to collect on a $63 million judgment against an American Realty Investors Inc. affiliate received a mixed-bag ruling on Tuesday, as a Texas federal judge tossed some of their fraudulent transfer and alter ego claims but kept others intact ahead of a likely trial.
David M. Clapper and Michigan-based Atlantic Midwest LLC have accused ARI and EQK Holdings Inc. of fraudulently moving assets around in bankruptcy so that ARI affiliate American Realty Trust Inc. would be unable to pay the $63 million judgment against it.
Former ARI CEO Gene Phillips, who is associated with all three entities, is also being sued by Clapper and Atlantic over the same allegations.
In Tuesday's decision, U.S. District Judge Sidney A. Fitzwater sorted through a jumble of pending motions to dismiss and motions for summary judgment, paring back many of Clapper and Atlantic's fraudulent transfer and alter ego claims but still leaving the suit standing once the dust cleared.
Judge Fitzwater started off by denying Phillips' and the other defendants' motion to dismiss Clapper's fourth amended complaint in its entirety, saying the several bases Phillips used as justification weren't sufficient to compel such sweepingly broad relief.
Regarding Clapper and Atlantic's fraudulent transfer claims under the Texas Uniform Fraudulent Transfer Act, Judge Fitzwater dismissed the elements that relied on interests in real property across Texas, Florida and Tennessee held by ART and then transferred to ARI, and he also axed references to $105 million in cash and other assets held by EQK, saying both sets of allegations "do not identify facts such as when the assets were transferred."
He declined to toss elements of the claims that rely on alleged stock transfers between EQK and ART, however.
"Plaintiffs have plausibly alleged that EQK has ownership interests in at least some of ART's allegedly fraudulently transferred assets," the judge said.
Judge Fitzwater also declined to dismiss allegations that some of the defendants transferred assets to third parties just because the third parties had not been joined as defendants, saying ART had provided "no argument that these parties are necessary parties that must be joined."
Judge Fitzwater also declined to rule on whether Clapper and Atlantic may be entitled to punitive damages, saying that was an issue for trial. He did, however, dismiss a fraudulent transfer claim against Phillips directly.
As for the alter ego claims, Judge Fitzwater denied the defendants' motions for summary judgment on Clapper's claims that ARI is an alter ego of both ART and EQK. He did find that Phillips was not an alter ego of EQK, however.
Tuesday's ruling is the latest development in a legal battle between Clapper and Atlantic, and Phillips and his American Realty entities. The dispute began when ARI refused to return escrowed funds after a deal to sell Clapper eight apartment complexes went south. A jury initially ruled in ARI's favor in 2004, but the Fifth Circuit reversed and remanded the case for a new trial in 2007.
The district court entered partial judgments against ARI totaling more than $27 million between 2008 and 2009, and a jury found in favor of Atlantic Midwest in October 2011 in another trial over the remaining claims. U.S. District Judge David C. Godbey entered a cumulative $73 million judgment against ARI that was later reduced to $63 million.
ARI appealed to the Fifth Circuit and in the meantime filed for bankruptcy in Nevada and Georgia to stave off collection efforts, Clapper claims. Both cases were dismissed as having been filed in the wrong venue, the complaint says. ARI then pursued a bankruptcy in Texas, which was ultimately dismissed last March as having been filed in bad faith, Clapper says.
Clapper says he discovered that ARI, its subsidiaries and Phillips transferred "hundreds of millions" in assets to affiliate family trusts to avoid paying Atlantic Midwest, leading him to file the current lawsuit in Texas federal court in 2014.
The defendants were sanctioned in 2016 after an ARI executive dragged down a deposition by repeatedly saying he didn't know the answers to various questions and his attorney repeatedly objected throughout the session.
Clapper and Atlantic are represented by Andrew W. Mychalowych, Lindsay K. James, Scott A. Decius and Tracy S. Thomas of Siciliano Mychalowych & Van Dusen PLC.
ARI, EQK and Phillips are represented by Stephen A. Khoury of Kelsoe Khoury Rogers Caughfield & Clark PC.
The case is Clapper et al. v. American Realty Investors Inc. et al., case number 3:14-cv-02970, in the U.S. District Court for the Northern District of Texas.
--Additional reporting by Matthew Guarnaccia and Alex Wolf. Editing by Haylee Pearl.
