Opinion & Order — Eric Greathouse et al. v. Capital Plus Financial LLC et al. (Document 82)
Summary
Opinion & Order filed September 6, 2023 as Document 82 in Eric Greathouse, et al. v. Capital Plus Financial LLC, et al., No. 4:22-CV-0686-P, U.S. District Court for the Northern District of Texas, Fort Worth Division. The Court grants in part and denies in part Defendants' Motions to Dismiss (ECF Nos. 31, 34, 36), dismisses Plaintiffs' unjust enrichment claims against all Defendants and denies the motions as to Plaintiffs' other claims. The opinion states that Plaintiffs allege they were assigned SBA numbers by Capital Plus but never received PPP funds, and that they bring claims for breach of contract, unjust enrichment, California's Unfair Competition Law and the North Carolina Unfair and Deceptive Trade Practices Act. It addresses Article III standing and arguments by the individual and corporate defendants, and states that Capital Plus approved 472,036 PPP loans.
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“Opinion & Order — Eric Greathouse et al. v. Capital Plus Financial LLC et al. (Document 82).”
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Case 4:22-cv-00686-P Document 82 Filed 09/06/23 Page 1 of 39 PageID <pageID>
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
FORT WORTH DIVISION
ERIC GREATHOUSE, ET AL.,
Plaintiffs,
v. No. 4:22-CV-0686-P
CAPITAL PLUS FINANCIAL LLC, ET AL.,
Defendants.
OPINION & ORDER
Before the Court are Defendants’ Motions to Dismiss (ECF Nos. 31,
34, 36). For the reasons stated below, the motions are GRANTED IN
PART and DENIED IN PART. Plaintiffs’ unjust enrichment claims
against all Defendants are DISMISSED. To the extent Defendants seek
to dismiss Plaintiffs’ other claims, the motions are DENIED.
INTRODUCTION
In 2020, Congress put their trust—to the tune of $800 billion—into
private lenders to help alleviate the effects of the burdensome federal,
state, and local regulations that crippled businesses and the livelihoods
of millions of families across the country. As with any $800 billion
government program, the trust placed in the actors carrying it out was
often undeserved. Like magic, bad actors arrive wherever hundred-
billion-dollar government programs occur.
In this case, Plaintiffs allege that Defendants were bad actors who
capitalized on the exorbitant government fees given for approving PPP
loans while never disbursing the funds to countless businesses in need.
And because of the striking allegations in their complaint, this Court
must allow many of Plaintiffs’ claims to proceed. When such an
egregious abuse of public trust is apparent, the Court cannot dismiss
this case on the pleadings alone.
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FACTUAL & PROCEDURAL BACKGROUND
In 2020, Congress passed the CARES Act, which provided for the
Payroll Protection Program (“PPP”)—a loan assistance program for
businesses financially burdened by restrictions imposed on the country
by local, state, and federal officials. This extraordinary act required a
comprehensive plan to disburse billions of dollars to countless
businesses in a very short window of time. Because of the logistical
challenges that approving loans for millions of American businesses
presented, the government worked with private lenders to streamline
the approval process.
The approval and loan disbursal process promulgated by the SBAs
rulemaking followed a 7-step process:
1. The business sent in the required information on an application
to show eligibility for the PPP program.
2. The lender approved the application and sent notice to the SBA.
3. The SBA issues an “SBA number” to the loan, signifying its
approval.
4. The lender makes a one-time, full disbursement of the PPP funds
within 10 days of loan approval.
5. After disbursing the funds, the lender received the fees they are
statutorily entitled to.
6. The lender monitors the loan and reviews the businesses’ use of
the funds to establish whether loan forgiveness applies.
7. The loan is either forgiven, forgiven in part, or paid back in whole
by the business.
To assist lenders with the approval process, the Federal Reserve
Bank of the United States also instituted the Paycheck Protection
Program Liquidity Facility (“PPPFL”), which advanced funds through
non-recourse loans to lenders who could provide proof of approvals and
disbursements of PPP loans as collateral.
Defendant Capital Plus Financial LLC (“Capital Plus”)—a wholly
owned subsidiary of Defendant Crossroads Inc.—stepped up to the plate
and began approving loans through the process authorized by the
CARES Act and subsequent rulemaking procedures. And they did so at
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an astonishing pace. In less than five months, Capital Plus approved an
astonishing 472,036 PPP loans. The volume of loans approved was so
numerous that they were the second largest lender of PPP loans in 2021
by volume—assigning more loans than the combined efforts of many
major financial behemoths. Indeed, Capital Plus enlisted help from
outside providers to process loans due to capacity constraints. To make
monetary matters even more astonishing, Capital Plus—due to their
massive quantity of “approved” loans—drew down nearly $7.5 billion in
funding from the PPPFL program.
The plan instituted by Capital Plus and its parent company,
Crossroads, paid off as they amassed an astonishing $970.5 million in
revenue—a 2,446% increase from the year before. In many shareholder
letters and releases, Crossroads—through their directors including
Defendants Alpert and Donnelly—talked about the success of the PPP
lending craze and the income it was generating for the parent company.
In some SEC filings directors touted the $930 million “windfall” from
PPP lending. And they also often discussed strategies and other
directives that Crossroads aimed toward regarding the lending
program—often referring to Capital Plus and Crossroads as a single
entity. One of the immediate strategies implemented with the new
windfall of cash was a $238.9 million dividend that was quickly paid out
after the PPP window closed. Most of the money went to insiders in the
company like Defendants Alpert and Donnelly who together owned
62.8% of outstanding shares. This resulted in a $149,918,480 payday
between the two individuals.
But while income soared for Capital Plus and Crossroads, complaints
from individuals approved for loans did as well. Plaintiffs allege that—
although they received SBA numbers—funds were never disbursed to
them and others. In effect, Capital Plus and Crossroads collected the
fees associated with approval and interest on the $7.5 billion in PPPFL
funds but never completed their obligation to countless individuals who
were in dire straits financially. Even worse, Plaintiffs could not go to
another lender as they were restricted from processing any other
applications once a valid SBA number was assigned to them. And
further, Plaintiffs allege that because the SBA number was assigned to
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them, they are still under legal obligations to pay back money that they
never received.
Because of the alleged faults of Crossroads, Capital Plus, and its
directors, a group of Plaintiffs bring this suit under the Class Action
Fairness Act seeking redress of their injuries under four theories: (1)
Breach of Contract; (2) Unjust Enrichment; (3) California’s Unfair
Competition Law (“UCL); and (4) North Carolina Unfair and Deceptive
Trade Practices Act (“NCUDTPA”).
B. The Parties
1. Plaintiffs
Plaintiff Eric Greathouse is a citizen of Arkansas who owns an
insurance inspection business. Plaintiff Tiffany Sumrall is a citizen of
Texas who owns a landscaping business. Plaintiff Cori Pericho is a
citizen of Hawaii who owns a messenger and delivery service. Plaintiff
John Pinkney is a citizen of Texas who owns a cable communications
business. Plaintiff Alicia Mena is a citizen of Arizona who owns a
housecleaning business. These Plaintiffs collectively seek to represent a
nationwide class and bring two claims for breach-of-contract and unjust
enrichment.
Plaintiff Barbara Myles is a citizen of North Carolina who owns a
business that assists independent artists. Myles seeks to represent a
North Carolina subclass and brings a claim under the NCUDTPA in
addition to claims for breach-of-contract and unjust enrichment.
Lastly, Plaintiff Ernesto Covarrubias is a citizen of California who
owns an auto repair business. Plaintiff Joshua Smith is also a citizen of
California who is an operates a delivery and human resource and
consulting business. Covarrubias and Smith seek to represent a
California subclass and bring a claim under the UCL in addition to
claims for breach-of-contract and unjust enrichment.
All Plaintiffs were assigned an SBA number by Capital Plus, but
never received PPP funds.
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2. Corporate Defendants
Defendant Crossroads is a publicly traded Delaware corporation with
its principal place of business in Dallas, Texas.
Defendant Capital Plus is a Texas limited liability company with its
principal place of business in Bedford, Texas. Capital Plus is a wholly
owned subsidiary of Crossroads.
3. Individual Defendants
Defendant Donnelly has continually served as a Director and CEO of
Defendant Crossroads since December 2017. Donnelly also
simultaneously served as CEO of Defendant Capital Plus from 2014
until August 30, 2021.
Defendant Alpert is the Chairman of the Board of Directors of
Defendant Crossroads. Alpert has served in this role since 2017. Alpert
also holds leadership positions with other Texas-based companies that
engage in business with the Corporate Defendants through investment
advisory services.
LEGAL STANDARD
A. Rule 12(b)(1)
Article III of the Constitution limits federal-court jurisdiction to
“cases” or “controversies.” U.S. CONST. art. III, § 2. To satisfy this
requirement, a plaintiff must establish that he has a “personal stake” in
the lawsuit. See Davis v. Fed. Election Comm’n, 554 U.S. 724, 732–33
(2008). Because standing is a central concern of subject-
matter jurisdiction, it is properly addressed under Rule 12(b)(1). Lee v.
Verizon Commc’ns, Inc., 837 F.3d 523, 533 (5th Cir. 2016). The party
seeking federal jurisdiction has the burden of establishing
standing. Lujan v. Def. of Wildlife, 504 U.S. 555, 561 (1992).
B. Rule 12(b)(2)
After personal jurisdiction has been raised in a 12(b)(2) motion, “the
party seeking jurisdiction bears the burden of proof but must only
present a prima facie case.” Luv N’ care, Ltd. v. Insta–Mix, Inc., 438 F.3d
465, 469 (5th Cir. 2006). In determining whether a plaintiff meets its
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burden, a district court must “accept the plaintiff’s uncontroverted
allegations as true and resolve all conflicts of jurisdictional facts
contained in the parties’ affidavits and other documentation in the
plaintiff’s favor.” Jones v. Artists Rts. Enf’t Corp., 789 F. App’x 423, 425
(5th Cir. 2019).
C. Rule 12(b)(6)
To survive a motion to dismiss under Rule 12(b)(6), a plaintiff must
plead “enough facts to state a claim to relief that is plausible on its face.”
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). The Court, in turn,
must accept all well-pleaded facts in the complaint as true and view
them in the light most favorable to the plaintiff. Sonnier v. State Farm
Mut. Auto. Ins., 509 F.3d 673, 675 (5th Cir. 2007). If there are well-plead
factual allegations, the Court assumes their veracity and then
determines whether they plausibly give rise to an entitlement to relief.
Id.
ANALYSIS
Due to the many arguments contained in Defendants’ three motions,
the Court proceeds to address them in the following order: (1) Article III
standing; (2) arguments particular to the Individual Defendants; (3)
arguments particular to the Corporate Defendants; and (4) arguments
applicable to claims brought against all Defendants. The Court
addresses each issue in turn.
A. Article III Standing
Article III’s case-or-controversy requirement demands that a
plaintiff show he has standing to sue. This prevents courts from “being
used to usurp the powers of the [other] political branches.” Clapper v.
Amnesty Int’l USA, 568 U.S. 398, 408 (2013). This doctrine thus
preserves the “proper—and properly limited—role of the courts in a
democratic society.” Warth v. Seldin, 422 U.S. 490, 498 (1975).
Historically, this concept meant that a plaintiff only needed a “legally
cognizable cause of action.” Sierra v. City of Hallandale Beach, Fla., 996
F.3d 1110, 1115 (11th Cir. 2021) (Newsom, J., concurring). But over
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many decades, the Supreme Court jumbled together an opaque standing
doctrine that came to its full fruition in 1992. Like most cobbled together
doctrines not found in the text of the Constitution, this standard has
provided no modicum of predictability or clarity to the lower courts other
than the ability to shrink the size of their dockets. 1
Regardless of the nature of this doctrine, “it is now all but gospel” 2
that a plaintiff must show “(1) an injury in fact, (2) that is fairly
traceable to the challenged conduct of the defendant, and (3) that is
likely to be redressed by a favorable judicial decision.” Spokeo, Inc. v.
Robins, 578 U.S. 330, 341 (2016). Failure to establish these elements
“deprives the federal courts of jurisdiction to hear the suit.” Rivera v.
Wyeth–Ayerst Labs., 283 F.3d 315, 319 (5th Cir. 2002). But courts must
“assume, for purposes of the standing analysis, that [Plaintiffs are]
correct on the merits of [their] claim.” Texas v. Equal Emp. Opportunity
Comm’n, 933 F.3d 433, 447 (5th Cir. 2019).
Defendants argue that Plaintiffs lack Article III standing to pursue
their claims. Their specific arguments are addressed below under each
corresponding element.
1. Injury in Fact
Defendants assert that Plaintiffs suffered no injury. “Injury in fact”
requires that a plaintiff allege an invasion of a legally protected interest.
See Lujan, 504 U.S. at 560. This inquiry further divides into several
nebulous subtests—an injury in fact must be (1) concrete, not abstract,
(2) particularized, not generalized, and (3) actual or imminent, not
conjectural or hypothetical. Id. at 1548; see also Clapper v. Amnesty Int’l
USA, 568 U.S. 398, 408–09 (2013); Schlesinger v. Reservists Comm. to
Stop the War, 418 U.S. 208 (1974). Though neatly organized, these
1 See Cass R. Sunstein, Standing and the Privatization of Public Law, 88 COLUM.
L. REV. 1432, 1436-38 (1988); see also Robert J. Pushaw Jr., Bridging the Enforcement
Gap in Constitutional Law: A Critique of the Supreme Court’s Theory That Self-
Restraint Promotes Federalism, 46 Wm. & Mary L. Rev. 1289, 1327 (2005) (“[T]he
Court’s refusal to admit explicitly that it was acting on policy rather than
constitutional grounds resulted in further analytical confusion.”).
2 See Sierra, 996 F.3d at 1115 (Newsom, J., concurring).
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categories are often better suited to acquit Clodius rather than forming
a solid basis for dismissal. 3
Plaintiffs allege that their concrete injuries are (1) the deprivation of
the use of their PPP loan funds, (2) the inability to seek alternative
funding for their PPP loan after Defendants failed to fund the loans, (3)
the lost opportunities incident upon Capital Plus’s failure to fund
Plaintiffs’ loans during the pandemic, and (4) the continuing obligation
to repay loan funds that they never received. 4
These injuries are concrete because they already happened when
payments were not remitted; particularized because they deal with each
Plaintiffs’ individual loan; actual because the payment has not occurred;
or—in the case of the obligation to repay with interest—imminent as the
loan repayments continue to loom over Plaintiffs. And though
Defendants may have qualms about why the payments were not
remitted, the Court must assume that Plaintiffs are correct on the
merits at this stage.
Injury in fact is present.
2. Causation
A plaintiff has standing if he can demonstrate a “personal injury
fairly traceable to the defendant’s allegedly unlawful conduct.”
California v. Texas, 141 S. Ct. 2104, 2113 (2021). Causation does not
“require a showing of proximate cause or that ‘the defendant’s actions
are the very last step in the chain of causation.’” Inclusive Communities
Project, Inc. v. Dep’t of Treasury, 946 F.3d 649, 655 (5th Cir. 2019) (citing
Bennett v. Spear, 520 U.S. 154, 169 (1997)). But a plaintiff’s injuries
3 “Clodius, at any rate, escaped; most of the judges giving their opinions so written
as to be illegible that they might not be in danger from the people by condemning him,
nor in disgrace with the nobility by acquitting him.” Plutarch, John Langhorne &
William Langhorne, PLUTARCH’S LIVES 272 (1804).
4 Plaintiffs also potentially lost the opportunity to apply for loan forgiveness.
Borrowers can apply for loan forgiveness any time up to the maturity date of the loan.
It is unclear whether the maturity date of the loan was set when SBA approved
Plaintiffs’ PPP loan request and released the funds to Capital Plus for disbursal to
Plaintiffs or whether the maturity date is not finalized until Plaintiffs receive the loan
funds. Still, Plaintiffs injuries are enough to stand on their own.
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can’t be “the result of the independent action of some third party not
before the court.” Bennett, 520 U.S. at 167.
Plaintiffs argue that Capital Plus’s actions caused their injuries
because they received the PPP loan funding from the government but
failed to release it to Plaintiffs even though the SBA had approved their
PPP loan applications. Defendants counter that they tried to release the
funds to Plaintiffs’ accounts but could not do so because of account blocks
or faulty paperwork submitted by Plaintiffs. And while Defendants’
arguments may have merit, the Court must accept the merits of
Plaintiffs’ arguments as true. At bottom, Plaintiffs plausibly claim that
Defendants’ refusal or failure to remit the loan payments they were
entitled to caused their injuries.
Causation is met.
3. Redressability
Redressability “limits the relief that a plaintiff may seek to that
which is likely to remedy the plaintiff’s alleged injuries.” Stringer v.
Whitley, 942 F.3d 715, 720 (5th Cir. 2019). And this requires a plaintiff
to show that a favorable decision will likely redress the injury. Inclusive
Communities Project, Inc. v. Dep’t. of Treasury, 946 F.3d 649, 655 (5th
Cir. 2019). A plaintiff need only allege the recovery to which they are
entitled and “[w]hether recovery for such a claim is permitted under
governing law is a separate question.” Cole v. Gen. Motors Corp., 484
F.3d 717, 723 (5th Cir. 2007). It is thus “sufficient for standing purposes
that the plaintiffs seek recovery for an economic harm that they allege
they have suffered.” Id.
Defendants assert that redressability is not met for two reasons.
First, the relief requested in the complaint exceeds Plaintiffs’ alleged
injuries. And second, Plaintiffs have not shown or alleged that their PPP
loans would be forgiven—making any payment insignificant. The Court
disagrees.
As to the first assertion, the Court finds that the requested relief does
not exceed Plaintiffs’ alleged injuries. Plaintiffs plead multiple causes of
action in the alternative—which they could do at this stage.
Defendants—as a result—seek to improperly dive into the merits of
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Plaintiffs’ claims at a time when they only need to allege redressability
in line with the claims they assert. Cole, 484 F.3d at 723.
As to the second assertion, it does not matter whether the loans are
forgivable or not. In Sprint Communications, Justice Breyer—writing
for the majority—held that an assignee had standing to sue even when
the assignee was contractually obligated to remit the litigation proceeds
to an assignor. Sprint Communs. Co., L.P. v. APCC Servs., 554 U.S. 269,
286-87, 128 S. Ct. 2531, 2542 (2008). The majority opinion reasoned that
redressability focuses on “whether the injury that a plaintiff alleges is
likely to be redressed through the ligation—not on what the plaintiff
ultimately intends to do with the money he recovers.” Id. Redressability
was met even though the plaintiff would be required to hot-potato the
money away to a non-party immediately. Id.
Here, a legal victory would redress the injuries for which the
Plaintiffs bring suit. Plaintiffs’ injuries relate to the failure to receive
the PPP loans they were entitled to after they received an SBA loan
number. Indeed, one of the injuries alleged includes the debt now owed
to the SBA by Plaintiffs. And if the Plaintiffs prevail, the fact that they
might hot-potato any recovery to the SBA is irrelevant under current
precedent.
Redressability is met. And having met all the elements of Article III
standing, the Court next turns to Defendants’ objections.
B. Individual Defendants: Donnelly & Alpert
Donnelly and Alpert (“Individual Defendants”) assert arguments and
defenses related to their positions within the corporate framework of
Crossroads and Capital Plus. The Court addresses each argument in
turn.
Donnelly first asserts that this Court does not have personal
jurisdiction over him. But before analyzing personal jurisdiction, the
Court must address whether the fiduciary-shield doctrine applies to
Donnelly.
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1. Fiduciary-Shield Doctrine
The fiduciary-shield doctrine prohibits a court from exercising
personal jurisdiction over an individual whose only actions in the forum
state were taken in the individual’s capacity as a corporate
representative—even if the court has personal jurisdiction over the
corporation itself. See Stuart v. Spademan, 772 F.2d 1185, 1197 (5th Cir.
1985). But the fiduciary-shield doctrine is “removed if the individual’s
personal interests motivate his actions.” Lewis v. Fresne, 252 F.3d 352,
359 n.6 (5th Cir. 2001). To prove this, a plaintiff must allege “individual
participation in the unlawful conduct challenged in the Complaint.” Fed.
Trade Comm’n v. Educare Ctr. Servs., Inc., 414 F. Supp. 3d 960, 980
(W.D. Tex. 2019). As a result, Plaintiffs must plead Donnelly’s (1)
individual participation in the unlawful conduct and (2) personal
interest in the unlawful conduct.
The operative facts of the complaint allege Donnelly’s individual
participation:
• “[Donnelly] controlled and directed Crossroads’s and CPF’s PPP
lending activities and directly participated in CPF’s and Crossroads’s
violations and failure to fund the SBA-approved PPP loans at issue
and personally profited therefore.” 5
• “Donnelly and Alpert controlled both Crossroads and CPF.
Defendants Donnelly and Alpert also controlled and directed
Crossroads’s and CPF’s PPP lending activities.” 6
• “As a direct and proximate result of defendants Donnelly’s and
Alpert’s conduct, Plaintiffs and the Class have suffered and continue
to suffer injury.” 7
The complaint also paints a picture rife with personal interest.
Donnelly owned 37.8% of outstanding shares of a company where a
$238.9 million dividend was up streamed from Capital Plus after profits
went from $26 million to $997 million in one year. Donnelly personally
earned $90,227,080 in dividends as a result. This qualifies as a personal
5
ECF No. 1 at 62, 65
6
ECF No. 1 at 58.
7
ECF No. 1 at 59.
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benefit. And combined with the context that Crossroads, through a small
regional Community Development Financial Institution, processed
more PPP loans than Bank of America, PNC Bank, TD Bank and Wells
Fargo combined—despite similar financial incentives—also suggests
that this was something beyond “business as usual.”
The fiduciary-shield doctrine does not apply to Donnelly. So the
Court turns to personal jurisdiction.
1. Personal Jurisdiction – Donnelly
Donnelly argues that this Court does not have personal jurisdiction
over him because he is a nonresident of Texas and his only contacts with
the state come in his official capacity with Capital Plus and Crossroads.
The Court disagrees.
Federal courts sitting in diversity may exercise personal jurisdiction
if: “(1) the long-arm statute of the forum state creates personal
jurisdiction over the defendant; and (2) the exercise of personal
jurisdiction is consistent with the due process guarantees of the United
States Constitution.” Clemens v. McNamee, 615 F.3d 374, 378 (5th Cir.
2010). And because Texas’s long-arm statute “extends as far as
constitutional due process allows,” courts only need to consider the due
process inquiry. McFadin v. Gerber, 587 F.3d 753, 759 (5th Cir. 2009).
This requires a plaintiff to show: (1) minimum contacts between the
defendant and the forum state and; (2) that the assertion of jurisdiction
is fair and reasonable. Int’l Shoe Co. v. Washington, 326 U.S. 310, 316,
(1945); Sangha v. Navig8 ShipManagement Private Ltd., 882 F.3d 96,
102 (5th Cir. 2018). The Court thus addresses both elements.
a. Minimum Contacts
While physical presence or residency are not required for personal
jurisdiction, a defendant must have “certain minimum contacts . . . such
that the maintenance of the suit does not offend traditional notions of
fair play and substantial justice.” Int’l Shoe, 326 U.S. at 316.
A court may assert specific jurisdiction over a nonresident defendant
“whose contacts with the forum state are singular or sporadic only if the
cause of action asserted arises out of or is related to those contacts.” Int’l
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Energy Ventures Mgmt. v. United Energy Grp., Ltd., 818 F.3d 193, 212
(5th Cir. 2016) (citing Daimler AG v. Bauman, 571 U.S. 117, 126 (2014)).
The Court considers three prongs in making this determination:
(1) whether the defendant has minimum contacts with the
forum state, i.e., whether it purposely directed its activities
toward the forum state or purposefully availed itself of the
privileges of conducting activities there; (2) whether the
plaintiff’s cause of action arises out of or results from the
defendant’s forum-related contacts; and (3) whether the
exercise of personal jurisdiction is fair and reasonable.
Seiferth v. Helicopteros Atuneros, Inc., 472 F.3d 266, 271 (5th Cir. 2006).
The first prong requires that the contacts asserted are not “random,
fortuitous, or attenuated.” Moncrief Oil, Int’l. Inc. v. OAO Gazprom, 481
F.3d 309, 312 (5th Cir. 2007). But a single act by the defendant directed
at the forum state can be enough to confer personal jurisdiction if that
act gives rise to the claim being asserted. Ruston Gas Turbines, Inc. v.
Donaldson Co., 9 F.3d 415, 418 (5th Cir. 1993). This analysis must “look
to the defendant’s contacts with the forum State itself, not the
defendant’s contacts with persons who reside there.” Walden v. Fiore,
571 U.S. 277, 285 (2014). Put simply, “the plaintiff cannot be the only
link between the defendant and the forum. Rather, it is a defendant’s
conduct that must form the necessary connection with the forum State
that is the basis for its jurisdiction over him.” Id.
Donnelly argues that his contacts with Texas are limited and
sporadic. The Court disagrees.
Donnelly’s conduct surrounding this suit directs and avails itself of
the privileges of conducting business in Texas. Donnelly attended
meetings in Texas, directed communications into Texas, and performed
work for Texas entities 8 that served many citizens of Texas. Indeed, his
8 Donnelly continues to serve as a manager and director of Capital Plus. See Texas
Comptroller of Public Accounts, Capital Plus Financial, LLC Report,
https://mycpa.cpa.state.tx.us/coa/coaSearchBtn.
Donnelly also serves as CEO, director, and board member of Crossroads which is
headquartered in Dallas, Texas (¶ 26), and has served as CEO and director since
December 2017. See see also Texas Comptroller of Public Accounts, Crossroads
Systems, Inc. Report, https://mycpa.cpa.state.tx.us/coa/coaSearchBtn.
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status as a “registered” agent for Capital Plus requires that he must
“continuously maintain” a presence in the state and “maintain a
business office at the same address as the entity’s registered office.” TEX.
BUS. ORGS. CODE ANN. § 5.201. Notwithstanding his choice to live in a
different state, these contacts are systematically intertwined with and
avail himself to Texas. The first element is met.
The second prong requires “a connection between the forum and the
specific claims at issue.” Bristol-Myers Squibb Co. v. Sup. Ct. of Cal., 137
S. Ct. 1773, 1781 (2017). At bottom, “there must be . . . [a related] activity
or an occurrence that takes place in the forum State and is therefore
subject to the State’s regulation.” Ford Motor Co., 141 S. Ct. at 1025.
According to Plaintiffs’ complaint, Donnelly—as the dual CEO of
Crossroads and Capital Plus—orchestrated a plan to fund over 472,000
PPP loans. As a result, Donnelly’s companies received over $930 million
in loan processing fees. The complaint further alleges that Donnelly
exercised significant control over Capital Plus and Crossroads and
directed decisions on PPP lending. This included establishing corporate
policies and supervising Capital Plus’s PPP lending activities. Under
Donnelly’s direction, Capital Plus ratcheted up its participation in PPP
lending to exploit higher lender fees and to use unfunded and other PPP
loans as collateral to secure billions of dollars in PPPLF loan advances.
Donnelly’s contacts that avail him of Texas’s privileges are intertwined
with the facts that give rise to this suit. His position in a Texas company
and direction and control over it are both the basis for his availment and
central to the facts alleged in Plaintiffs’ complaint.
Plaintiff thus meets its burden of satisfying the first two elements.
Because of this, the burden now shifts to Donnelly to prove that it would
be unfair to exercise personal jurisdiction over him. To meet this burden,
the defendant must make a “compelling case” that exercising
jurisdiction would be unfair. See Wien Air Alaska, Inc. v. Brandt, 195
F.3d 208, 215 (5th Cir. 1999) (“[O]nce minimum contacts are
established, the interests of the forum and the plaintiff justify even large
burdens on the defendant.”). Courts make the fairness determination by
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assessing five factors: (1) the burden on the defendant having to litigate
in the forum; (2) the forum state’s interests in the lawsuit; (3) the
plaintiff’s interests in convenient and effective relief; (4) the judicial
system’s interest in efficient resolution of controversies; and (5) the
state’s shared interest in furthering fundamental social policies. See
Ruston Gas Turbines, Inc. v. Donaldson Co., 9 F.3d 415, 421 (5th Cir.
1993).
First, Donnelly notes that he travels to Texas for business and other
matters. Additional trips for the occasional hearing or trial are not
unduly burdensome. Indeed, Donnelly is litigating in this district
already—in a case in which he did not challenge personal jurisdiction.
See Oto Analytics Inc. v. Capital Plus Fin. LLC, Case No. 3:21-cv-2636
(N.D. Tex.) (Boyle, J.). And even if it were “inconvenient” for Donnelly
to make the occasional trip to Fort Worth, “once minimum contacts are
established, the interests of the forum and the plaintiff justify even large
burdens on the defendant.” Wien Air Alaska, Inc., 195 F.3d at 215.
Second, Texas is interested in protecting its consumers and ensuring
that companies within its borders comply with its law. And this case
involves allegations of harm done to Texas citizens by Texas companies.
Third, Plaintiffs are interested in relief from harm allegedly done to
them, and this forum is appropriate for redressing the harm. Fourth, the
judicial system’s interest is met as this Court affords a proper forum for
this suit where alleged harms can be remedied. Fifth, the states share
an interest in the efficient resolution of cases, especially ones that
allegedly caused harm on a national scale.
All fairness factors thus favor personal jurisdiction. And the Court
thus has personal jurisdiction over Donnelly.
2. Liability Shield – Alpert and Donnelly
The Individual Defendants next contend they should be dismissed
from the case as their companies’ liability shields cover them. The Court
disagrees.
Under Texas law, the shareholder or affiliate of a corporation:
may not be held liable to the corporation or its obligees with
respect to . . . any contractual obligation of the corporation
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or any matter relating to or arising from the obligation on
the basis that the holder, beneficial owner, subscriber, or
affiliate is or was the alter ego of the corporation or on the
basis of actual or constructive fraud, a sham to perpetrate
a fraud, or other similar theory.
TEX. BUS. ORGS. CODE § 21.223(a)(2) (emphasis added). 9 An exception
exists if the defendant “caused the corporation to be used for the purpose
of perpetrating and did perpetrate an actual fraud on the obligee
primarily for the direct personal benefit of the holder, beneficial owner,
subscriber, or affiliate.” Id. § 21.223(b).
Here, Donnelly and Alpert both fall into affiliate shareholder status.
And because they fall into the text of the statute, the Court must address
two things: (1) whether the claims against them “arise out of” or “relate
to” a contractual obligation of the corporation; and (2) whether the
complaint sufficiently alleges that the Individual Defendants
perpetrated an actual fraud.
i. “Relating to” or “arising out of”
The first issue is whether the claims against Donnelly and Alpert
“arise out of” or “relate to” a contractual obligation. The terms “relating
to” and “arising out of” are broad and flexible and should be construed
as such.
Plaintiffs assert that because they do not make any contractual
claims against the Individual Defendants, the liability shield afforded
by § 21.223(a)(2) does not apply. The Court disagrees.
Plaintiff’s claims are noncontractual in nature and relate to three
causes of action: unjust enrichment, the UCL, and the NCUDTPA.
Plaintiffs allege that the Individual Defendants led, directed, and
controlled their companies to engage in business practices leading to
their unjust enrichment at the expense of the SBA and the loss of
Plaintiffs. And while Plaintiffs attempt to creatively plead around the
liability shield by claiming that they are only concerned with the
dividend and SBA fees, it does not change the proximity of the
9 Although § 21.223 refers only to corporations, TEX. BUS. ORGS. CODE ANN. §
101.002(a) extends its reach to limited liability companies as well.
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Individual Defendants’ actions to the contractual issue. Plaintiffs’ only
tie to the SBA fees at issue is their contractual relationship with Capital
Plus. At bottom, the gravamen of Plaintiffs’ claims arise from the
unfulfilled loans, which they assert is a breach of contract in the same
complaint. Without this contractual relationship, Plaintiffs have no
ground to stand on as to why the Individual Defendants were unjustly
enriched or engaged in unfair business practices related to them. Thus,
all of Plaintiffs’ noncontractual claims relate to or arise from the conduct
surrounding the unfulfilled loan agreements—which are contractual in
nature.
Plaintiffs’ claims fall under § 21.223(a)(2). And thus, for their claims
against the Individual Defendants to survive, they must show that
actual fraud is present.
ii. Actual Fraud & Direct Personal Benefit
Evading limited liability requires a plaintiff to show that: “(1) the
affiliate caused the corporation to be used to perpetrate and did
perpetrate an actual fraud on the obligee; and (2) the fraud was
primarily for the direct personal benefit of the holder, beneficial owner,
subscriber, or affiliate.” Thomas v. Hughes, 27 F.4th 995, 1016 (5th Cir.
2022) (citing TEX. BUS. ORGS. CODE § 21.223(a)(2)).
“Actual fraud”—as required by § 21.223(a)(2)—is distinct from the
tort of fraud and only requires a plaintiff to show “dishonesty of purpose
or intent to deceive.” Archer v. Griffith, 390 S.W.2d 735, 740 (Tex. 1964);
Latham v. Burgher, 320 S.W.3d 602, 607 (Tex. App.—Dallas 2010, no
pet.). Because Rule 9(b) states that “conditions of a person’s mind may
be alleged generally,” actual fraud is evaluated under Rule 12(b)(6) and
not the more restrictive Rule 9 standard. Weston Grp., Inc. v. Sw. Home
Health Care, LP, No. 3:12-CV-1964-G, 2014 WL 940329, at *2 (N.D. Tex.
Mar. 11, 2014) (Fitzwater, J.). As a result, courts “may deduce
fraudulent intent from all of the facts and circumstances.” Spring St.
Partners, 730 F.3d 427, 443 (5th Cir. 2013) (emphasis in original). And
“courts generally look at the totality of a shareholder’s actions to
determine whether he committed actual fraud.” Weston Grp., 2014 WL
940329, at *2. Thus, “all that is required at the pleading stage is a
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general allegation of [a defendant’s] dishonest purpose or deceitful
intent with respect to [the company] and its transactions.” AHBP LLC
v. Lynd Co., No. SA-22-CV-00096-XR, 2023 WL 139149, at *7 (W.D. Tex.
Jan. 9, 2023) (citing Archer, 390 S.W.2d at 740 (Tex. 1964)).
Defendants assert that Plaintiff does not plead actual fraud with
enough specificity and only relies on a conclusory statement that Alpert
and Donnelly “directed” and “controlled” the companies. The Court
disagrees.
Considering the full context of the complaint and all allegations in it,
actual fraud is met. Plaintiffs allege that Alpert and Donnelly
“controlled and directed Crossroads’s and CPF’s PPP lending activities,”
including a lending scheme where the company acted “acted
intentionally, knowingly, and maliciously” to maximize SBA fees and
disregard loan obligations to Plaintiffs. ECF No. 65 at ¶¶ 303, 306.
Indeed, despite having fewer resources than more prominent financial
institutions, a modest regional LLC under Donnelly and Alpert’s control
managed to process a larger volume of PPP loans than Bank of America,
PNC Bank, TD Bank, and Wells Fargo combined. This resulted in the
approval of “472,036 PPP loans totaling over $7.5 billion in funds” in a
very short time window. ¶¶ 9, 75, 79, 87, 90. And while Plaintiffs do not
allege fraud in the complaint, the “overarching theme of the [Plaintiffs’]
complaint, regardless of the accompanying legal labels,” is that Alpert
and Donnelly led and directed CFP and Crossroads to maximize fees in
order to enrich themselves and other insiders in the company. Gold
Coast Commodities, Inc. v. Crum, 68 F.4th 963, 969 (5th Cir. 2023). But
doing so was at the detriment of those who applied for loans. Indeed, the
only people enriched by the alleged scheme were insiders after issuing
the dividend. And while Plaintiffs use no magic words in their
complaint, “all the facts and circumstances” surrounding the conduct
alleged support a finding of actual fraud. 10 Latham, 320 S.W.3d at 607
10
See also Spring St. Partners, 730 F.3d at 445 (finding actual fraud where the
context of the complaint showed that defendant created an LLC to shift assets and
allowed the company’s charter to lapse after litigation began); In re Arnette, 454 B.R.
663, 694–95 (Bankr. N.D. Tex. 2011) (holding that a party committed actual fraud by
making material misrepresentations, failing to disclose important information, and
never intending to comply with the terms of the parties’ agreement); Latham, 320
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(“[A]ctual fraud means conduct involving either dishonesty of purpose
or intent to deceive.” (emphasis added)).
Personal benefit requires a plaintiff to plead that “funds derived from
the corporations’ allegedly fraudulent conduct were pocketed by or
diverted to the individual defendant.” Bates Energy Oil & Gas v.
Complete Oilfield Svcs., 361 F. Supp. 3d 633, 665 (W.D. Tex. 2019). If
funds are only used for a corporation’s benefit or are diverted to other
ventures, a plaintiff’s claim fails. Id.
Here, personal benefit is met for a hundred-million reasons. The
Individual Defendants both received paydays in a quickly announced
dividend—equal to nearly 80% of the outstanding share price at the
time. Alpert (25%) and Donnelly (37.8%) together owned 62.8% of a
company’s outstanding shares where the $238.9 million dividend was
quickly upstreamed and paid out to shareholders after the PPP window
closed. In the end, Alpert and Donnelly collectively pocketed
$149,918,480 in cash from the special dividend. This easily meets the
standard of a personal benefit.
* * *
Because actual fraud is present in the context of Plaintiffs’ complaint
and the Individual Defendants personally benefited from their alleged
conduct, the liability shield does not apply to the Individual Defendants,
and they must face the claims brought against them.
The Court now addresses the jurisdictional and preliminary issues
brought by the Corporate Defendants’ motions.
C. Capital Plus Financial & Crossroads
1. Alter Ego - Crossroads
Crossroads asserts that it must be dismissed from the case because
they are a member of Capital Plus and shielded under limited liability.
S.W.3d at 610 (“A rational juror could also have decided Latham’s contextual conduct
represented dishonesty of purpose or an intent to deceive, i.e., actual fraud.”).
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Federal district courts sitting in diversity must “apply the conflict of
laws rule of the state in which it sits to determine which state’s
substantive law should be applied.” Because the forum state is Texas,
the Court applies Texas’ conflict of laws to its alter ego analysis. Texas
law dictates that the state of incorporation controls. See TEX. BUS. ORG.
CODE ANN. § 1.104; Alberto v. Diversified Grp. Inc., 55 F.3d 201, 203 (5th
Cir. 1995). Where the claim seeks to hold a parent company liable for
the obligations of a subsidiary, the subsidiary’s state of incorporation
provides the applicable law. See ASARCO LLC v. Americas Min. Corp.,
382 B.R. 49, 64–65 (S.D. Tex. 2007). And as Capital Plus—the subsidiary
in this situation—is organized under the laws of Texas, the Court looks
to Texas law.
As stated before, Texas law dictates that the shareholder or affiliate
of a corporation “may not be held liable to the corporation or its obligees
with respect to . . . any contractual obligation of the corporation or any
matter relating to or arising from the obligation on the basis that the
holder, beneficial owner, subscriber, or affiliate is or was the alter ego of
the corporation.” TEX. BUS. ORGS. CODE § 21.223(a)(2) (emphasis
added). 11 To defeat this, Plaintiffs must show that a defendant “caused
the corporation to be used for the purpose of perpetrating and did
perpetrate an actual fraud on the obligee primarily for the direct
personal benefit of the holder, beneficial owner, subscriber, or
affiliate.” Id. § 21.223(b).
Here, Crossroads is a shareholder/member, so the statute applies.
So—once again—the Court must address two things: (1) whether the
claims against them “arise out of” or “relate to” a contractual obligation
of the corporation; and (2) whether the complaint sufficiently alleges
that the Individual Defendants perpetrated an actual fraud.
i. “Relating to” or “arising out of”
The first issue is whether the claims against Crossroads “arise out
of” or “relate to” a contractual obligation. As established in the section
11 Although § 21.223 refers only to corporations, TEX. BUS. ORGS. CODE
§101.002(a) extends its reach to limited liability companies as well.
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dealing with the Individual Defendants, the claims asserted by
Plaintiffs are contractual in nature.
As stated in depth before, the breach-of-contract claim is clearly
contractual, and the other claims arise out of and relate to the alleged
contractual relationship with Capital Plus. 12 At issue is the conduct
surrounding the unfulfilled loan agreements—which are contractual in
nature.
Plaintiffs’ claims thus fall under § 21.223(a)(2). And for their claims
against Crossroads to survive, they must show that actual fraud is
present.
ii. Actual Fraud & Direct Personal Benefit
Once again, to evade limited liability a plaintiff to show that “(1) the
affiliate caused the corporation to be used to perpetrate and did
perpetrate an actual fraud on the obligee; and (2) the fraud was
primarily for the direct personal benefit of the holder, beneficial owner,
subscriber, or affiliate.” Thomas, 27 F.4th at 1016 (citing TEX. BUS.
ORGS. CODE § 21.223(a)(2)).
Crossroads asserts that Plaintiffs do not plead actual fraud with
enough specificity and that they only rely on conclusory statements of
regular business activity—insufficient to pierce the corporate veil of
Capital Plus. The Court disagrees.
As stated before “actual fraud” requires a plaintiff to show
“dishonesty of purpose or intent to deceive.” Archer, 390 S.W.2d at 740;
Latham, 320 S.W.3d at 607 (Tex. App.—Dallas 2010, no pet.). Courts
“may deduce fraudulent intent from all of the facts and circumstances.”
Spring St. Partners, 730 F.3d at 443 (emphasis in original). And “all that
is required at the pleading stage is a general allegation of [a defendant’s]
dishonest purpose or deceitful intent with respect to [the company] and
its transactions.” AHBP LLC, 2023 WL 139149, at *7 (citing Archer, 390
S.W.2d at 740). In a business-transaction context that might be routine
in a vacuum, actual fraud can be inferred from the proximity or volume
of transactions in context with other circumstances. See Spring St.
12 See supra at p. 16.
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Partners, 730 F.3d at 445 (finding actual fraud where the context of the
complaint showed that defendant created an LLC to shift assets and
allowed the company’s charter to lapse after litigation began); In re
Arnette, 454 B.R. at 694–95 (holding that a party committed actual fraud
by making material misrepresentations, failing to disclose important
information, and never intending to comply with the terms of the
parties’ agreement).
In Weston Group, the court found that a plaintiff’s allegations were
sufficient to plead actual fraud. Weston Grp, 2014 WL 940329, at *5.
There the plaintiffs alleged that (1) a business promised to pay but never
followed through, (2) an LLC was used to funnel money between
different companies, and (3) the corporate defendant received
government benefits that were supposed to go to plaintiffs but were
funneled upstream to insiders instead. Id. The court reasoned that even
though the regular movement of money between companies is not
enough to plead actual fraud, the movements of money alongside the
other allegations and circumstances “[rose] above the level of a
conclusory description.” Id. (citing Shandong Yinguang Chem. Indus.
Joint Stock Company, Ltd. v. Potter, 607 F.3d 1029, 1032–33 (5th Cir.
2010)).
Like the pleadings in Weston Group, which alleged (1) unfulfilled
payments, (2) upstreamed money, and (3) improperly used government
benefits, here, Plaintiffs allege the same but on a grander scale.
Plaintiffs allege that Crossroads exercised its control over Capital Plus
and its PPP lending scheme. The primary purpose of the alleged plan
was to maximize SBA fees to the detriment of loan obligations it owed
to Plaintiffs. ECF No. 65 at ¶¶ 303, 306. Captial Plus approved “472,036
PPP loans totaling over $7.5 billion in funds” in a short time window. ¶¶
9, 75, 79, 87, 90. Again, the “overarching theme of the [Plaintiffs’]
complaint, regardless of the accompanying legal labels,” is that
Crossroads saw a window to maximize fees earned at the detriment of
those who applied for loans to enrich itself and other insiders in the
company. Gold Coast Commodities, 68 F.4th at 969. An awareness of the
nearly half-a-million loan agreements was often noted in Crossroads
financial statements and shareholder letters. And Crossroads also often
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noted strategies and timelines on the company’s policy toward these
loans. So this was anything but a regular business transaction or
transfer between parent and subsidiary—it was a transformational plan
executed with the full knowledge and control of Crossroads.
Indeed, Crossroads’s involvement in the PPP became the main event
as it reported that “the Company’ received $970.5 million in total
revenue of which $930 million was PPP loan fees in 2021 compared to
just $27.5 million in total revenue the prior year.” ECF No. 1 at 4. The
subsidiary LLCs’ profits on the back of the PPP program dwarfed those
of the parent corporation. It was a modern-day gold rush as
Crossroads—knowing that many of Plaintiffs’ loans remained
unfunded—upstreamed hundreds of millions of dollars in PPP-related
loan processing fees and PPPLF loan advances. And once the PPP
window closed, Crossroads paid out a $238.9 million dividend to its
insiders and kept the rest of the profit for the corporation’s benefit.
Lastly, the funds at issue were not corporate funds owned by
Crossroads. These funds were earned because of Capital Plus and
Crossroads engaging in an emergency government benefit program.
Plaintiffs allege that Crossroads kept fees for processing the loans and
sat on PPPFL advances from the federal reserve and milked interest on
the nearly $7.5 billion in cash it gained from that was intended to cover
loan disbursements that Plaintiffs were entitled to. Plaintiffs even
allege that the PPPFL funds were obtained by lying about loans that
were never completed. Considering the full context of the complaint that
alleges (1) unfulfilled payments, (2) upstreamed money, (3) a wild
lending spree that overhauled the nature of Crossroads’s business
model, and (4) improperly used government programming funds, actual
fraud is met.
Again, Personal benefit requires a plaintiff to plead that “funds
derived from the corporations’ allegedly fraudulent conduct were
pocketed by or diverted to the individual defendant.” Bates Energy Oil
& Gas v. Complete Oilfield Svcs., 361 F. Supp. 3d 633, 665 (W.D. Tex.
2019). If funds are only used for a corporation’s benefit or are diverted
to other ventures, a plaintiff’s claim fails. Id.
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As discussed above, personal benefit is met for a hundred-million
reasons present in Crossroads’ income statements and its insiders’ bank
accounts.
* * *
Because actual fraud is present in the context of Plaintiffs’ complaint
and Crossroads personally benefited from its alleged conduct, the
liability shield does not apply, and it must face the claims brought by
Plaintiffs.
2. Statutory Standing - Negotiable Instruments & Breach of
Contract
Defendants next argue that Plaintiffs lack statutory standing to sue
for breach of contract because the contract is a negotiable instrument
held by Defendants.
A negotiable instrument is created where there is
“an unconditional promise or order to pay a fixed amount of money, with
or without interest or other charges described in the promise or
order.” TEX. BUS. & COM. CODE § 3.104(a). Only holders of negotiable
instruments may enforce their terms. Id. § 3.301; see also Maldonado
v. CitiMortgage, Inc., 676 F. App’x 282, 284 (5th Cir. 2017). Because
Capital Plus is the holder of the agreement, if it is negotiable, Plaintiffs
will be unable to enforce it.
Plaintiffs assert that the note is not a negotiable instrument because
it is forgivable, thus calling the fixed nature of the note into question.
They are correct.
Notes are not negotiable where there is uncertainty as to the amount
or where they incorporate methods that establish the value of the note
and its forgivability from outside the agreement. See Cobb Bank & Tr.
Co. v. Am. Mfrs. Mut. Ins., 624 F.2d 722, 725 (5th Cir. 1980) (holding
that the instrument was not negotiable where the amount to be paid was
uncertain); Fed. Deposit Ins. Corp. v. Eagle Props., Ltd., 664 F. Supp.
1027, 1035 (W.D. Tex. 1985) (note is not negotiable if a “provision leaves
a possibility of reduction in the amount collectible on the note”); FFP
Mktg. Co. v. Long Lane Master Tr. IV, 169 S.W.3d 402, 408 (Tex. App.
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2005—Fort Worth 2005, no pet.) (note is not negotiable where “one
cannot determine from the face of [the] note the extent of the maker’s
liability”); Hinckley v. Eggers, 587 S.W.2d 448, 451 (Tex. Civ. App.
1979—Dallas 1979, no writ) (note is not for a fixed amount where the
amount to be paid could only “be determined only from sources outside
the instrument”).
The centrality of forgiveness to the nature of the PPP loan process
meets this uncertainty. And while Defendants assert that all notes are
forgivable at the holder’s discretion, they again fail to distinguish the
unique posture of PPP loans. As other courts have noted, “forgiveness is
the essential characteristic of the debtor’s obligation under the PPP
Note and the PPP requirements. But for forgiveness, there is no PPP.”
In re Parking Mgmt., 620 B.R. 544, 558 (Bankr. D. Md. 2020). Indeed,
“[t]he debtor’s liability to repay the PPP relies on some future extrinsic
event which may never occur.” Id. (cleaned up). And the agreement is
“subject to a triggering event or occurrence reasonably contemplated by
the debtor and creditor at the time the debtor applied for and obtained
the PPP funds.” Id.
On top of the amount being uncertain, the note is not unconditional.
A promise is not unconditional if a promissory note incorporates other
provisions. See Resol. Tr. Corp. v. 1601 Partners, Ltd., 796 F. Supp. 238,
239-40 (N.D. Tex. 1992) (Sanders, J.) (“[W]hen an instrument
incorporates by reference the terms of another document the … promise
contained within the instrument, therefore, is rendered conditional.”).
Here, the entire forgiveness or partial forgiveness mechanism
associated with the PPP loans came from agency rulemaking that fell
outside the promissory note and had the potential to change any minute
the SBA issued a new guidance. So the terms that make the note
uncertain as to the amount also make the note conditional.
Defendants’ objections on statutory standing are meritless.
3. Breach of Contract
Crossroads and CFP assert that the documents signed by Plaintiffs
do not give rise to a contractual obligation because they were unilateral
and binding only on Plaintiffs. The Court disagrees.
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Documents “executed at the same time, with the same purpose, and
in the course of the same transaction, [are] construe[d] . . . together.” NC
Lear Servs., Inc. v. Kingdom of Saudi Arabia, 581 F.3d 210, 216 (5th Cir.
2009). And “[i]t is well settled that courts must enforce the unambiguous
language in a contract as written, and the applicable standard is the
objective intent evidenced by the language used, rather than by the
subjective intent of the parties.” Dresser-Rand Co. v. Virtual
Automation, Inc., 361 F.3d 831, 845 (5th Cir. 2004) (citations omitted).
Capital Plus executed a “Notice – No Oral Agreements” clause, which
refers to the notes as a “Loan Agreement.” It then defines “Loan
Agreement” as “one or more promises, promissory notes, agreements . .
. pursuant to which a financial institution loans . . . or agrees to loan
money.” ECF No. 4 at 10. Further, the SBA PPP lending rule was
incorporated into the documents governing the contract. The lending
rule states: “[t]he lender must make a one-time, full disbursement of the
PPP loan within 10 calendar days of loan approval; for the purposes of
this rule, a loan is considered approved when the loan is assigned a loan
number by SBA.” 86 FED. REG. 3692, 3710. Taken together, the
documents contain unambiguous language that provides CFP a duty to
disburse funding upon issuing an SBA number—regardless of CFPs
subjective intent surrounding the agreement.
Plaintiffs have a proper breach-of-contract claim.
4. Release
Defendants next contend that Plaintiffs’ contractual claims are
barred by a validly signed release covering all claims brought under the
“loan agreement.” The parties collectively whiffed on briefing this issue.
Plaintiffs claim that the release didn’t include future acts, and
Defendants claim that the release was a complete forfeiture of all claims
stemming from the agreement. And yet, neither party recognizes the
unique relationship embedded in this specific contract.
Texas law holds that “parties have the right to contract as they see
fit as long as their agreement does not violate the law or public
policy.” In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 129 (Tex. 2004).
And “it is by now axiomatic that legislative enactments generally
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establish public policy.” Royston, Rayzor, Vickery, & Williams, LLP v.
Lopez, 467 S.W.3d 494, 504 (Tex. 2015). So when lawmakers impose a
statutory restriction, “the issue for the courts is whether the contract
violates the statute, not whether it violates public policy.” Marsh USA
Inc. v. Cook, 354 S.W.3d 764, 771 (Tex. 2011) (discussing whether the
contract meets statutory “requirement for enforceability under the
Act”); see also Woolsey v. Panhandle Ref. Co., 131 Tex. 449, 116 S.W.2d
675, 678 (Tex. 1938) (“[A]n agreement which violates a valid statute is
illegal and void.”).
The Court thus identifies the issue here as “whether public policy
embedded in [the PPP program and SBA Lending Rules] precludes
enforcement of [the exculpatory clause].” Phila. Indem. Ins. Co. v. White,
490 S.W.3d 468, 471 (Tex. 2016).
While private parties can contract around many laws, Texas looks to
their relationship to determine whether the provisions violate public
policy. Crowell v. Hous. Auth. of Dall., 495 S.W.2d 887, 889 (Tex. 1973).
Courts regularly enforce exculpatory agreements between private
persons of equal bargaining strength. Id. But when one party has
substantially less bargaining power in the relationship, the exculpatory
agreement will be declared void. Id.
In Crowell, the Texas Supreme Court held that an exculpatory clause
exempting the Dallas Housing Authority (“DHA”) from premises
liability was against public policy. Crowell, 495 S.W.2d at 889. The court
reasoned that because the DHA’s legislative purpose rested on providing
safe dwelling accommodations to low-income families, the provision
directly violated the nature of the statutory relationship between the
contracting parties. Id.; see also Lone Star Gas Co. v. Veal, 378 S.W.2d
89, 93 (Tex. Civ. App.—Eastland 1964, writ ref’d n.r.e.) (holding that
exculpatory clause invalid where a public utility contracted out of
liability for negligence in the performance of public service).
Like the DHA—a creature of specific legislative enactment—Capital
Plus was a component of a government assistance program and not a
freewheeling lender. For PPP loan agreements, there is no
customization or negotiation of the core terms of the agreement because
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it is prescribed by statute. Plaintiffs could not take to the marketplace
to hunt down a better rate or deal. Indeed, Capital Plus’s only job was
mechanical—to approve or deny the loan and then release the funds.
And while the exculpatory clause may cover conduct outside the
regulation, its primary function reserves the right to directly violate
statutorily enacted public policy—the only basis for the relationship
between Capital Plus and Plaintiffs.
Thus, the exculpatory clause is void.
5. Damages
Defendants next argue that Plaintiffs’ claims should be dismissed
because they inconsistently or improperly pleaded the damages they are
allegedly entitled to. The Court disagrees.
A 12(b)(6) motion concerns causes of action, not remedies. So
“[w]hether a claim for relief should be dismissed under Rule 12(b)(6)
turns not on whether all of the relief asked for can be granted, but
whether the plaintiff is entitled to any relief.” Mott’s, LLP v.
Comercializadora Eloro, S.A., 507 F. Supp. 3d 780, 791 (W.D. Tex. 2020).
And courts “have consistently interpreted [Rule 8] to allow a plaintiff
any relief that the pleaded claim supports; requesting an improper
remedy is not fatal.” Laird v. Integrated Res., Inc., 897 F.2d 826, 841
(5th Cir. 1990). Indeed, “[I]t need not appear that the plaintiff can obtain
the particular relief prayed for in the complaint, as long as the district
judge can ascertain from what has been alleged that some relief may be
granted by the court.” Mott’s, 507 F. Supp. 3d at 791 (citing 5B Charles
A. Wright & Arthur R. Miller, FEDERAL PRACTICE AND PROCEDURE §
1357 (3d ed. 2004)).
At this stage, Plaintiffs can plead alternative causes of action with
different damage theories. And while some are debatably wrong, (1) this
is not the time to address them, and (2) they are not fatal to Plaintiffs
claims.
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D. All Defendants
1. Unjust Enrichment
Plaintiffs state a claim for unjust enrichment against all Defendants
due to the millions of SBA fees the Corporate Defendants received and
the dividend payments the Individual Defendants received. They argue
that because Defendants received the fees associated with processing
their loans from the SBA and never disbursed the money, this entitles
them to restitution. This argument misses the whole point of unjust
enrichment.
Unjust enrichment requires a party to make restitution to another if
they have been enriched at the other party’s expense. See Penick v.
Penick, 783 S.W.2d 194, 197 (Tex. 1988) (“one receiving benefits which
are unjust for him to retain ought to make restitution or pay the value
of the benefit to the party contributing the benefit.”) This means that
the benefit received by a defendant must come directly from a plaintiff.
Id. Unjust enrichment does not operate on a but-for-causation benefit
scheme, the benefit must be directly conferred. Id.
Here, Defendants were enriched from the fees they obtained from
processing loan applications. These fees came directly from the
government, not from Plaintiffs. And this rule is the same in every state
from which Plaintiffs bring a claim. 13 Therefore, Plaintiffs conferred no
benefit or enrichment. Therefore, Plaintiffs’ unjust enrichment claims
fail.
Plaintiffs’ unjust enrichment claims are thus DISMISSED.
13 See First Union Nat. Bank, 168 S.W.3d 917, 931 (Tex. App.––Dallas 2005, no
pet.); Hartness v. Nuckles, 2015 Ark. 444, 475 (2015); D.W.H Painting Co., Inc. v. D.W.
Ward Constr. Co., Inc., 174 N.C.App. 327, 334 (2005); State v. Ariz. Pension Planning,
154 Ariz. 56, 58 (1987) (en banc); Small v. Badenhop, 67 Haw. 626, 636 (1985).
In addition to other states not recognizing claims where a benefit is not conferred
by the plaintiff, California does not recognize unjust enrichment claims at all.
Therefore, the California subclass claim fails under this theory were California law to
apply. See Hooked Media Grp., Inc. v. Apple, Inc., 55 Cal.App.5th 323, 336 (2020)
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2. North Carolina Unfair and Deceptive Trade Practices Act
Defendants next argue that Plaintiff failed to bring a proper claim
under the NCUDTPA. The Court disagrees.
The NCUDTPA states that “[u]nfair methods of competition in or
affecting commerce, and unfair or deceptive acts or practices in or
affecting commerce, are declared unlawful.” N.C. GEN. STAT. ANN. § 75–
1.1(a). In applying North Carolina law, federal district courts in the
Fifth Circuit are bound by the North Carolina Supreme Court’s
decisions. Camacho v. Ford Motor Co., 993 F.3d 308, 311 (5th Cir. 2021).
And when interpreting a North Carolina statute, we use the same
methods of statutory interpretation used by the North Carolina
Supreme Court. Id.
To establish a claim for unfair trade practices under the NCUDTPA,
a plaintiff must meet three elements: (1) that the defendant
committed an unfair or deceptive act or practice; (2) that the action was
in or affecting commerce; and (3) that the act proximately caused injury
to the plaintiff. Dalton v. Camp, 353 N.C. 647, 656–57 (2001) (citation
omitted).
As to the first element, “[a] practice is unfair if it is unethical or
unscrupulous, and it is deceptive if it has a tendency to deceive.” Id.
(citing Polo Fashions, Inc. v. Craftex, Inc., 816 F.2d 145, 148 (4th Cir.
1987)). Determining whether an act is unfair or deceptive is a question
of law for the court. Gray v. N.C. Ins. Underwriting Ass’n, 352 N.C. 61,
68 (2000).
Whether the Court uses the words unfair, deceptive, unethical, or
unscrupulous, the facts before it meet this standard. Plaintiffs allege
that in a national crisis—where Congress entrusted private actors with
approving PPP loans—Alpert and Donnelly controlled and directed
Capital Plus and Crossroads to process an unattainable number of
applications designed to skim fees off the top. They allegedly did this
while owning a majority of the company’s outstanding shares. And the
second the PPP window closed, Alpert and Donnelly paid themselves
millions in dividends while thousands of loans remained unprocessed—
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leaving businesses hung out to dry in their time of need. These facts on
the face of the complaint mean that the first element is met.
As to the second element, “in or affecting commerce,” the statute
defines “commerce” inclusively as “business activity, however
denominated.” § 75-1.1(b). But from this expansive definition, the North
Carolina Supreme Court has somehow gathered that “[the Act] is not
intended to apply to all wrongs in a business setting.” Dalton,
353 N.C. at 658. Business activities that fall beyond the statute’s scope
include professional services, most employer-employee disputes, and
securities transactions. Id. This is because the Act concerns only two
types of business transactions: “(1) interactions between businesses, and
(2) interactions between businesses and consumers.” Nobel v. Foxmoor
Grp., 380 N.C. 116, 121 (2022).
This case fits neatly into the second category as it involves an
interaction between a private company and a large class of individual
consumers. And because the conduct here falls within the statute’s
scope, the second element is met.
Turning to the third element, the Act requires more than just proving
simple causation. It also requires that “some type
of egregious or aggravating circumstances must be alleged” for the Act’s
provisions to take effect. Dalton, 353 N.C. 647, 656–57 (2001).
Plaintiffs properly allege that the act was partly caused by Alpert
and Donnelly because they controlled and directed the Crossroads and
Capital Plus. And the facts and allegations contained in the complaint
are egregious and aggravating. At risk of sounding repetitive, hundreds
of thousands of loans remained unprocessed while the Corporate
Defendants and insiders were enriched by a large dividend earned by
approving an absurd amount of loans. Holding the facts alleged by
Plaintiffs as true, this was an egregious abuse of private and public
trust.
Plaintiffs have a valid NCUDTPA claim.
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3. California Unfair Competition Law
Defendants next argue that Plaintiffs failed to bring a proper claim
under California’s Unfair Competition Law (“UCL”). The Court
disagrees.
Once again, in diversity cases, courts must apply state substantive
law and federal procedural rules. Camacho, 993 F.3d at 311. State
statutes promulgated by the California legislature—like the UCL—are
substantive. Id. In applying California law, federal district courts in the
Fifth Circuit are bound by the Supreme Court of California’s decisions.
Id. And when interpreting a California statute, we use the same
methods of statutory interpretation used by the Supreme Court of
California. Id.
The UCL prohibits “unlawful, unfair or fraudulent” business
practices. CAL. BUS. & PROF. CODE § 17200. Each of these three
categories come with their own requirements. Here, Plaintiffs only
allege (1) “unlawful” and (2) “unfair” conduct. The Court thus addresses
both.
i. “Unlawful” Business Practices
Defendants argue that Plaintiff fails to state a claim for unlawful
business practices under the UCL. The Court disagrees.
To be “unlawful,” the UCL requires a plaintiff to allege a business
practice that resulted in the independent violation of “any law.” See
Hamilton v. Bank of Blue Valley, 746 F. Supp. 2d 1160, 1180 (E.D. Cal.
2010) (“The UCL ‘borrows’ violations of other laws and treats them as
unlawful practices independently actionable.”). Under this broadly
drawn statute, “[a] business act or practice is unlawful under the [UCL]
if it violates a rule contained in some other state or federal statute.”
Sandoz Inc. v. Amgen Inc., 137 S. Ct. 1664, 1673 (2017) (citing Rose v.
Bank of Am., N. A., 57 Cal. 4th 390, 396 (2013)). And the predicate laws
in question can be “civil, criminal, federal, state, or municipal, statutory,
regulatory, or court-made.” See Sybersound Recs., Inc. v. UAV Corp., 517
F.3d 1137, 1151 (9th Cir. 2008) (cleaned up). In short, an alleged
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violation of almost any law—save the law of the jungle—is enough to
state a claim.
Defendants assert that Plaintiffs failed to allege a predicate violation
of another law because a breach-of-contract claim does not provide an
independent violation of a law unless there is an independent basis to
make the breach unlawful. See Sybersound Recs., 517 F.3d at 1152. But
Plaintiffs correctly argue that they properly pleaded a regulatory
violation—existing independent of their contractual relationship.
Plaintiffs’ complaint points to a violation of the SBA “lending rule.”
The rule states: “[t]he lender must make a one-time, full disbursement
of the PPP loan within 10 calendar days of loan approval; for the
purposes of this rule, a loan is considered approved when the loan is
assigned a loan number by SBA.” 86 FED. REG. 3692, 3710 (emphasis
added).
Because a predicate law can be regulatory 14 in nature, Plaintiffs
maintain a valid UCL claim for unlawful business practices. 15 See
Sybersound Recs., 517 F.3d at 1151.
ii. “Unfair” Business Practices
Defendants next argue that Plaintiffs fail to state a claim for an
unfair business practice under the UCL. They are wrong.
There is a current three-way split in California appellate courts as to
what constitutes an “unfair” business practice in the consumer context.
See Nationwide Biweekly Admin., Inc. v. Superior Court, 9 Cal. 5th 279,
284 (2020) (acknowledging the split among the appellate courts but
declining to resolve it). So this Court must make an Erie guess as to
which test the Supreme Court of California would adopt.
14 Defendants’ contention that this interim final rule issued by the SBA does not
qualify as a law under the UCL is incorrect. Administrative rule making is a valid
predicate law under the UCL. See Sybersound Recs., 517 F.3d at 1151.
15 The Complaint also alleges a violation of the NCUDTPA—which is a state
enacted law. See Sandoz Inc., 137 S. Ct. 1664, 1673 (2017). Though not raised by either
party, this is arguably enough to state a valid and independently actionable UCL
claim. So, in a strange way, one poorly drawn statute—plagued with vagueness—could
give rise to another.
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Erie guesses “treat state intermediate courts’ decisions as the
strongest indicator of what a state supreme court would do, absent a
compelling reason to believe that the state supreme court would reject
the lower courts’ reasoning.” Kelly v. Nichamoff, 868 F.3d 371, 375 (5th
Cir. 2017). But an Erie guess may also consider the following factors:
(1) decisions of the state supreme court in analogous cases,
(2) the rationales and analyses underlying state supreme
court decisions on related issues, (3) dicta by the state
supreme court, (4) lower state court decisions, (5) the
general rule on the question, (6) the rulings of courts of
other states to which state courts look when formulating
substantive law[,] and (7) other available sources, such as
treatises and legal commentaries.
Weatherly v. Pershing, L.L.C., 945 F.3d 915, 920 (5th Cir. 2019), cert.
denied, 141 S. Ct. 236 (2020).
Many of these factors offer little help—California appellate and
lower courts are split more than three ways on the issue, the Supreme
Court of California has so far ducked resolving the issue, and treatises
acknowledge the split with no resolution. But the “rationales and
analyses underlying state supreme court decisions on related issues”
highlight how broadly the California Supreme Court is willing to
interpret this statute. As a result, this Court will turn to the statute’s
text and utilize “the same methods of statutory interpretation used by
the California Supreme Court” to interpret the text of the UCL. Id. After
this, the Court will determine which test has the most fidelity to the text
of the UCL.
It does not appear that the Supreme Court of California has any
consistent principles of statutory interpretation beyond pondering the
orb of legislative history. See Almond All. of Cal. v. Fish & Game Com.,
No. S275412, 2022 Cal. LEXIS 5573, at *2 (Sep. 21, 2022) (denying
review of appellate court opinion finding that bumble bees were fish);
Ferra v. Loews Hollywood Hotel, LLC, 11 Cal. 5th 858, 879 (2021)
(“[C]anons of construction . . . will not be applied so as to defeat the
underlying legislative intent otherwise determined.”). Indeed, the court
has embraced the chaotic results of “divining” legislative intent from
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whatever sources are available—even where it leads to an absurd result
contrary to the text:
Careful analysis of a statute to divine legislative intent can
sometimes yield results that might seem surprising at first
blush. Courts engaged in this task have interpreted “less”
as “more” and “unlawful” as “lawful” Long ago, the United
States Supreme Court concluded that the “seas” referenced
in one statute required no water at all; quite recently, it
determined that a fish is not a “‘tangible object.’”
These kinds of seemingly illogical outcomes can in fact best
capture the enacting Legislature’s intent in a variety of
circumstances. A statute may be construed in a manner
that goes beyond the literal meaning of its text to avoid an
absurd result the Legislature could not possibly have
contemplated.
Almond All. of Cal., 2022 Cal. LEXIS 5573, at *2 (cleaned up). And while
this Court strongly disagrees with this judicial philosophy, it will do its
best to implement and impersonate it here. 16
The UCL is all about equity. In the Supreme Court of California’s
decisions applying the UCL, it consistently emphasizes that “the section
was intentionally framed in its broad, sweeping language, precisely to
enable judicial tribunals to deal with the innumerable . . . new schemes
which the fertility of man’s invention would contrive.” Barquis v.
Merchants Collection Ass’n, 7 Cal. 3d 94, 112 (1972) (cleaned up). This
means that “[w]hen a scheme is evolved which on its face violates the
16 Rather than looking to the one thing that the legislature adopted—the text—
Courts who adopt this philosophy find themselves reviewing everything besides that
which was agreed and voted on. While this method requires judges to pretend that the
legislature contains some Borg-like consciousness, it usually results in picking and
choosing whatever fits a judge’s sensibilities. Justice Scalia noted that:
[L]egislative history has facilitated rather than deterred decisions that
are based upon the courts’ policy preferences, rather than neutral
principles of law . . . . In any major piece of legislation, the legislative
history is extensive, and there is something for everybody. As
Judge Harold Leventhal used to say, the trick is to look over the heads
of the crowd and pick out your friends. The variety and specificity of
result that legislative history can achieve is unparalleled.
Antonin Scalia, A MATTER OF INTERPRETATION 21 (1997).
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fundamental rules of honesty and fair dealing, a court of equity is not
impotent to frustrate its consummation because the scheme is an
original one.” Id. at 112. And “there is a maxim as old as law that there
can be no right without a remedy, and in searching for a precise
precedent, an equity court must not lose sight, not only of its power, but
of its duty to arrive at a just solution of the problem.” Id. The California
Supreme Court states a court’s role in equity as follows:
[Equity is] much more elastic and capable of expansion and
extension to new cases than the common law. Its very
central principles, its foundation upon the eternal verities
of right and justice, its resting upon the truths of morality
rather than upon arbitrary customs and rigid dogmas,
necessarily gave it this character of flexibility, and
permitted its doctrines to be enlarged so as to embrace new
cases as they constantly arose. It has, therefore, as an
essential part of its nature, a capacity of orderly and
regular growth—a growth not arbitrary, according to the
will of individual judges—but in the direction of its already
settled principles. It is ever reaching out and expanding
its doctrines so as to cover new facts and relations, but still
without any break or change in the principles or doctrines
themselves. 17
Nationwide Biweekly, 9 Cal. 5th at 300. Indeed, “the flexible equitable
powers of the modern trial judge derive from the role of the trained and
experienced chancellor and depend upon skills and wisdom acquired
through years of study, training and experience which are not
susceptible of adequate transmission through instructions to a lay jury.”
Id.
17 “Men should use common words to say uncommon things, but they do the
reverse. We find them trying to envelop trivial ideas in grand words and to dress their
very ordinary thoughts in the most extraordinary expressions and the most outlandish,
artificial, and rarest phrases. Their sentences perpetually stalk about on stilts. [They]
delight in bombast, and to their writing generally in a grand, puffed-up, unreal,
hyperbolical, and acrobatic style.” Arthur Schopenhauer, Essays of Schopenhauer –
“On Authorship and Style” 150 (1890).
To put this passage on equity commonly, judges can do whatever they want when
sitting in equity so long as the subjective taste of the judges who review their work
agree with them as well.
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After engaging with this flexible understanding of the law, the Court
now turns to the three tests before it—analyzing which one best fits this
judicial philosophy.
The first test—adopted by the Supreme Court of California in cases
between direct competitors—boxes the definition of “unfair” into a small
corner. This is because it requires the business conduct to violate
antitrust or “the spirit” of antitrust law. See Scripps Clinic v. Superior
Court, 108 Cal. App. 4th 917, 939 (2003). But the UCL was
“intentionally framed in its broad, sweeping language, precisely to
enable judicial tribunals to deal with the innumerable new schemes
which the fertility of man’s invention would contrive.” Barquis, 7 Cal.
3d at 112. Applying this narrow definition in all consumer cases would
extinguish numerous actions based on unfair business practices. This
would allow companies to fly above the great penumbras of the UCL—
enacted to give little clarity and to allow judges maximum leeway to
channel the spirit of the great muses of justice outside of “arbitrary
customs and rigid dogmas.” Nationwide Biweekly, 9 Cal. 5th at 300. The
first test does not apply as it intrudes on the divinely appointed territory
of the “great chancellor” to determine right and wrong. 18 Id.
Under the second test, courts apply the definition of “unfair” from
Section 5 of the Federal Trade Commission Act (“FTCA”). See Camacho
v. Auto. Club of S. Cal., 142 Cal. App. 4th 1394, 1403 (2006). This
requires the plaintiff to prove three elements: (1) that the consumer
injury is substantial; (2) that the injury is not outweighed by any
countervailing benefits or consumers or competition; and (3) that it must
be an injury that consumers themselves could not reasonably have
avoided. Id. Such a constricting definition would chain down the “eternal
verities of right and justice” and allow the “fertility of man’s invention”
to scheme of ways to escape the divine fate of justice. Barquis, 7 Cal.3d
at 112. Thus, a rigid application of elements made with mere words
18 The Court notes that some circuits that apply this test also allow a violation of
statutory or administrative laws. However, the Court still finds this standard too
restrictive given the California Supreme Court’s comments on the purpose and
meaning of the statute.
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would despoil the lofty cause of the legislature—bringing it earthbound.
The second test does not apply. 19
Under the third test, an act or practice is “unfair” when it “offends
an established public policy or when the practice is immoral, unethical,
oppressive, unscrupulous, or substantially injurious to consumers.”
Smith v. State Farm Mutual Auto. Ins. Co., 93 Cal. App. 4th 700, 719
(2001); see also Ticconi v. Blue Shield of California Life & Health Ins.
Co., 160 Cal. App. 4th 528, 539 (2008); Candelore v. Tinder, Inc., 19 Cal.
App. 5th 1138, 1156 (2018). This test simply restates the words of the
UCL. And it remains flexible enough for judges to continue “reaching
out and expanding its doctrines so as to cover new facts and relations.”
Nationwide Biweekly, 9 Cal. 5th at 300. After all, what is unfair? What
is injurious? What is unethical? What is public policy? These decisions
are not for ordinary men to make. Nay, they are for “the trained and
experienced chancellor . . . [with] skills and wisdom acquired through
years of study, training and experience which are not susceptible of
adequate transmission through instructions to a lay jury.” Id. And this
test keeps skyward the ethereal wings of the legislature’s intent, laying
waste to any “arbitrary customs and rigid dogmas” such as elements,
factors, or a predictable application of the law over time. Id.
Having adopted the third test in line with the Supreme Court of
California’s reasoning, the Court now analyzes Defendants’ alleged
conduct to see if it was substantially injurious, unethical, or against
public policy.
Defendants alleged conduct was against public policy as it violates
the federally enacted PPP program’s intended benefit. Defendants’
alleged conduct was also injurious. By ignoring loan obligations and
refusing to disburse the funds the individuals were entitled to, Plaintiffs
19 The Court further notes that even if the California Supreme Court adopted the
FTCA test, its elements are still met. Plaintiffs’ injuries are substantial because they
are deprived of funds they are entitled to and must pay them back. There are no
countervailing benefits to consumers or competition as this was a government program
and other lenders were not able to process loans as a result of Capital Plus’s aggressive
lending practices. And lastly, consumers could not have reasonably avoided the
mistake as Capital Plus was a credible lender under the PPP program.
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businesses were harmed, and they remain on the hook for the needed
payments they never received. See Gibson v. World Sav. & Loan Assn.,
103 Cal. App. 4th 1291, 1306–1307 (2002) (holding that a lender’s failure
to comply with trust-deed provisions was an unfair business practice).
Lastly, Defendants’ alleged conduct was also unethical. Scheming to
keep government fees and shirking statutorily enacted responsibilities
to disburse loans to individuals is unethical and violative of the public
and private trust even under a narrow textualist reading of the UCL.
Plaintiffs thus state a valid UCL claim for unfair business practices
against all Defendants.
CONCLUSION
Defendants make many arguments in their defense that may be true
but cannot be considered at this stage in the case. These issues are
appropriately resolved at the summary judgment stage.
Bound by precedent, Defendants’ Motions to Dismiss (ECF Nos. 31,
34, 36) are GRANTED IN PART and DENIED IN PART. Plaintiffs’
unjust enrichment claims against all Defendants are DISMISSED. And
to the extent Defendants seek to dismiss any other claims, their motions
are DENIED.
SO ORDERED on this 6th day of September 2023.
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