# In the

Third Court of Appeals

Austin, Texas

_____________________ No.: 03-17-749-CV

_____________________ SBI Investments LLC, 2-14-1 and L2 Capital, LLC, Appellants,

v.

Quantum Materials Corp., Appellee.

--------------------- On Appeal from the 428th District Court

Hays County, Texas

Trial Court Cause No. 17-2033

The Hon. Gary Steel, Presiding

---------------------

Michael Louis Minns

TBN: 14184300

Ashley Blair Arnett

TBN: 24064833

M INNS &A RNETT

9119 Gessner

Houston, Texas 77074

mike@minnslaw.com

ashley@minnslaw.com

(713) 777-0772 (direct)

Seth Kretzer

TBN: 24043764

K RETZER L AW F IRM

440 Louisiana Street, Suite 1440

Houston, Texas 77002

seth@kretzerfirm.com

(713) 775-3050 (direct)

Attorneys for Appellee, Quantum

Materials Corp ACCEPTED

03-17-00749-CV

21539504

THIRD COURT OF APPEALS

AUSTIN, TEXAS

12/31/2017 6:53 PM

JEFFREY D. KYLE

CLERKi STATEMENT REGARDING ORAL ARGUMENT

Oral argument is not necessary. The district court did not abuse its discretion,

but rather came to the only logical conclusion based on the extensive evidence.

Appellants’ primary issue, a procedural one, complaining of an alleged notice failure

by a defaulting party, simply makes no sense in light of the record showing an

exhaustive adversary proceeding at which the Appellants attended, presented

witnesses, and vigorously cross-examined the Appellee’s witnesses.ii TABLE OF CONTENTS

STATEMENT REGARDING ORAL ARGUMENT

................................................ i

INDEX OF AUTHORITIES

.................................................................................... iii

INTRODUCTION

..................................................................................................... 1

A. Procedural Issue

.................................................................................... 1

B. Substantive Issues

................................................................................. 1

I. Empire Received Notice

.................................................................................. 2

II. Appellants Do Not Have Standing to Assert A Contention of Defective

Service on Empire

............................................................................................ 7

A. The Appellants Do Not Meet Any Conception Of Third-Party

Standing Relative to The Injunction Because That Injunction Does

Not Affect Them With Any Injury

....................................................... 7

B. There Are No Procedural Defects Vis-à-vis Empire, But Regardless,

The Appellants Have No Standing to Litigate Any Procedural

Defects in Service on Empire Because Appellants Fully Participated

in the October 26 Hearing

..................................................................... 8

C. The Participation By Appellants’ Counsel At The Injunction

Hearing Waives The Instant Notice Argument

................................... 10

III. Quantum Has A Probable Right Of Prevailing

............................................. 10

IV. Quantum Will Suffer A Definitively Irreparable Injury

............................... 11

CONCLUSION

....................................................................................................... 14

CERTIFICATE OF SERVICE

................................................................................ 15

CERTIFICATE OF COMPLIANCE

....................................................................... 15iii INDEX OF AUTHORITIES

Cases

Amalgamated Acme Affiliates v. Minton

, 33 S.W.3d 387 (Tex. App.

— Austin 2000)

................................................................................................................................. 10

Austin Nursing Ctr. v. Lovato

, 171 S.W.3d 845, 48 Tex. Sup. Ct. J. 624 (Tex. 2005) 9

Bell v. Craig

, 555 S.W.2d 210 (Tex.App.

— Dallas 1977, no writ)

.............................. 7

Butnaru v. Ford Motor Co

., 84 S.W.3d 198 (Tex. 2002)

.......................................... 12

Everett v. TK-Taito, L.L.C

., 178 S.W.3d 844 (Tex. App.-Fort Worth 2005, no pet.)

.. 9

ForScan Corp. v. Dresser Indus

., 789 S.W.2d 389 (Tex. App.--Houston [14th Dist.]

1990, writ denied)

................................................................................................... 13

Great Lakes Eng'g, Inc. v. Andersen

, 627 S.W.2d 436 (Tex.App.-Houston [14th

Dist.] 1981, no writ)

.................................................................................................. 9

Guerrero v. Satterwhite

, No. 13-11-00181-CV, 2011 Tex. App. LEXIS 7191

(App.

— Corpus Christi Aug. 31, 2011)

..................................................................... 6

Landry v. Burge

, No. 05

– 99

– 01217

– CV, 2000 WL 1456471, at *4 (Tex.App.

—

Dallas 2000, no pet.)

................................................................................................. 7

M.D. Anderson Cancer Ctr. v. Novak

, 52 S.W.3d 704, 44 Tex. Sup. Ct. J. 905 (Tex.

2001)

......................................................................................................................... 9

Miller v. K & M P’ship

, 770 S.W.2d 84 (Tex. App.

— Houston [1st Dist.] 1989)

..... 13

Nootsie, Ltd. v. Williamson County Appraisal Dist

., 925 S.W.2d 659, 39 Tex. Sup.

Ct. J. 1049 (Tex. 1996)

.......................................................................................... 8-9

Pilf Invs. v. Arlitt, 940 S.W.2d 255 (Tex. App.

— San Antonio 1997)

....................... 10

Q'Max Am., Inc. v. Screen Logix, LLC

, No. 01-15-00319-CV, 2016 Tex. App.

LEXIS 2136 (App.

— Houston [1st Dist.] Mar. 1, 2016)

........................................... 8iv

Shaw's D. B. & L., Inc. v. Fletcher

, 580 S.W.2d 91 (Tex.Civ.App. Houston (1st

Dist.) 1979, no writ)

................................................................................................ 11

Statutes and Rules

T EX

. C IV

. P RAC

. & R EM

. C ODE A NN

. § 51.014(a)(4)

.................................................... 7

6A Charles Alan Wright, Arthur R. Miller, and Mary Kay Kane, W RIGHT

, M ILLER &

K ANE

, F EDERAL P RACTICE AND P ROCEDURE : Civil 2d § 1559, 441 (2d ed.1990)

.... 91 I NTRODUCTION

A. Procedural Issue

Appellants’ primary argument trains on a procedural issue theoretically

germane to a different entity, Empire Stock Transfer, that (at most) has no impact

whatsoever on the appellants. There is simply no mechanism for the appellants to

act as proxies for alleged procedural improprieties they perceive to have been

suffered by a non-complaining party. Even if some vaporous procedural defect were

established, the very appearance of the Appellants at the injunction hearing vitiates

any contention of harm.

B. Substantive Issues

Appellants’ secondary arguments are quasi-substantive in nature; the core

problem is that the injunction 1) does not name either appellant; 2) does not

proscribe or prescribe any conduct by either appellant, and 3) does not affect either

appellant in any way, shape, or form that was identified by them in their opening

brief. Nor does the opening brief address how these intervenors have standing vis-àvis an injunction under these conditions. As best as your Appellee can tell, the

Appellants want this Court to manufacture a theory of standing that their brief omits.

Regardless, it cannot be said that there is no irreparable injury because the

Appellee presented testimony from an expert witness/professional economist that the

actions of Empire Stock Transfer would place Quantum into an economic situation

known in academic literature as a “death spiral” and Quantum’s CEO explained that2

Empire’s actions could cause his other debentures to reset at rates that would destroy

his capital structure. And it cannot be said that there is no evidence that the notes

were paid timely and that the collateral should have been released. Mr. Squires

testified that the notes were paid and there were no defaults. Even the witness for

L2, Mr. Adam Long, conceded that he had received a large amount of money when

the money was due. No one argued that the collateral should be forfeited because of

delinquency. L2’s essential argument was that there were ill-defined defaults in their

ambiguous note terms, and therefore an undetermined additional amount of money

might be due them. Based on the testimony, it was not only likely that the ultimate

fact finder would rule in favor of Quantum, but highly unlikely that there would not

be a directed verdict in favor of Quantum. Far more than the required evidence to

maintain the status quo

.

I. E MPIRE R ECEIVED N OTICE

The Appellants’ first point of error was stated as an abuse of discretion by the

district judge “when the party enjoined, Empire Stock Transfer, was not provided

notice of the temporary injunction hearing.” (Appellant’s Brief, at vi). This

argument is based on a counter-factual premise that the Appellants know is counterfactual.

Empire received proper actual notice, as well as constructive notice.

Specifically, on October 10, 2017, Empire was served as shown on the following

page.3

The district court also took judicial notice of effective service on Empire in the

following ways: 1) Empire has been wholly compliant with the injunction

(Transcript, p. 23); 2) an officer of the court made an unrefuted representation that

after actual service of the October 10 hearing, corporate counsel, Mr. Steven Morse,

served appropriate facsimile notice of the hearing; 3) Empire has not contested the

injunction even though the Appellants have done so vigorously.

It is difficult to understand what the Appellants are complaining about. Are

they contending that Empire did not have effective notice (which they have no

standing to do) or that Empire has chosen not to contest the injunction, which is a

litigation decision exclusively in the discretion of Empire?45

In open court on October 12, 2017, the hearing was reset to October 26, 2017,

giving actual knowledge to all who appeared and constructive notice to everyone

previously noticed to be at the courthouse. The Order itself was served on Empire

and obeyed by Empire, as reflected in the record, to which the court also took

judicial notice. See Transcript, p. 23.

On October 16, Counsel for the Appellee sent to personnel at Empire a copy of

this Order; their confirmation is reproduced below; please note the word “Received”

from Mr. Patrick Mokros at the domain name empirestock.com:6

At the minimum, Empire had proper notice. See, e.g., Guerrero v.

Satterwhite

, No. 13-11-00181-CV, 2011 Tex. App. LEXIS 7191 (App.

— Corpus

Christi Aug. 31, 2011)

, *12-13 (“The trial court, after confirming that Robert was

present in the courtroom and that he had a copy of the amended writ of injunction,

had Robert served. Service by the court was complete and proper. Therefore, because

the injunction was then properly served, we conclude that the trial court did not7

abuse its discretion when it enforced the injunction.”).

With all due respect, the Appellants’ notice argument is disingenuous because

Appellee obviously did not serve the Intervenors (because they had not yet

intervened) so the Appellants had to have received notice from Empire. In other

words, Appellants raise as their first point of error the putatively defective service on

Empire when service on Empire was how the Appellants know to attend the

injunction hearing in the first place.

II. A PPELLANTS D O N OT H AVE S TANDING TO A SSERT A C ONTENTION OF

D EFECTIVE S ERVICE ON E MPIRE

A. The Appellants Do Not Meet Any Conception Of Third-Party

Standing Relative to The Injunction Because That Injunction Does

Not Affect Them With Any Injury

It is a legal maxim that persons not named in an injunction may nevertheless

take an appeal if they can establish a direct injury; in other words, an appellant need

not be a party to a temporary injunction in order to have standing to appeal it, so long

as the appellant is personally aggrieved by the entry of the temporary injunction and

therefore, has a justiciable interest in the controversy. See T EX

. C IV

. P RAC

. & R EM

.

C ODE A NN

. § 51.014(a)(4) (authorizing a “person” to appeal from the grant or denial

of a temporary injunction); Landry v. Burge

, No. 05

– 99

– 01217

– CV, 2000 WL

1456471, at *4 (Tex.App.

— Dallas 2000, no pet.) (not designated for publication)

(non-parties that are personally aggrieved by temporary injunction have standing to

appeal); Bell v. Craig

, 555 S.W.2d 210, 211

– 12 (Tex.App.

— Dallas 1977, no writ)8

(party adversely affected by temporary injunction had standing to appeal despite fact

that order did not expressly enjoin him from doing anything); Q'Max Am., Inc. v.

Screen Logix, LLC

, No. 01-15-00319-CV, 2016 Tex. App. LEXIS 2136 (App.

—

Houston [1st Dist.] Mar. 1, 2016) (same).

Query: what injury do the Appellants complain of? Their merits brief elides

any mention of the fact that 1) the injunction does not name them and 2) has no

derivative effect on them. The closest that the merits brief comes is this:

In other words, what Quantum has complained about is not that they will be

losing their shares, but that Appellants could purchase shares for a lower pricea monetary concern directed at Appellants, not Empire.

Brief, p. 15.

Perhaps, this might suggest a potential dispute between Appellants and

Quantum, for the ultimate factfinder, but such a condition has nothing to do with the

injunction entered against Empire.

B. There Are No Procedural Defects Vis-à-vis Empire, But Regardless,

The Appellants Have No Standing to Litigate Any Procedural

Defects in Service on Empire Because Appellants Fully Participated

in the October 26 Hearing

The Appellants could not have been injured by any defective service on

Empire. The most fundamental weakness in the Appellants’ argument is that, in

Texas, the standing doctrine requires that there be (1) “a real controversy between

the parties,” that (2) “will be actually determined by the judicial declaration sought.”

Nootsie, Ltd. v. Williamson County Appraisal Dist

., 925 S.W.2d 659, 662, 39 Tex.9

Sup. Ct. J. 1049 (Tex. 1996) (quoting Tex. Air Control Bd

., 852 S.W.2d at 446).

“The issue of standing focuses on whether a party has a sufficient relationship with

the lawsuit so as to have a ‘justiciable interest’ in its outcome.” Austin Nursing Ctr.

v. Lovato

, 171 S.W.3d 845, 848, 48 Tex. Sup. Ct. J. 624 (Tex. 2005) (quoting 6A

Charles Alan Wright, Arthur R. Miller, and Mary Kay Kane, W RIGHT

, M ILLER &

K ANE

, F EDERAL P RACTICE AND P ROCEDURE : Civil 2d § 1559, 441 (2d ed.1990) ).

“The determination of whether a plaintiff possesses standing to assert a particular

claim depends on the facts pleaded and the cause of action asserted.” Everett v. TKTaito, L.L.C

., 178 S.W.3d 844, 853 (Tex. App.-Fort Worth 2005, no pet.)

. See also

M.D. Anderson Cancer Ctr. v. Novak

, 52 S.W.3d 704, 707-08, 44 Tex. Sup. Ct. J.

905 (Tex. 2001) (analyzing standing in the context of asserted claim).

To the contrary, Appellants participated in the October 26, 2017 injunction

hearing, the transcript of which runs to 137 pages. Nowhere in the merits brief do

the Appellants claim that their ability to present evidence, or to cross-examine, was

impeded. Cf., Great Lakes Eng'g, Inc. v. Andersen

, 627 S.W.2d 436, 436

(Tex.App.-Houston [14th Dist.] 1981, no writ) (order denying temporary injunction

reversed because “trial court abused its discretion in not allowing the appellant to

fully develop its evidence”). Nor could such an argument have been made with any

seriousness, since the Appellants cross-examined both the CEO of Quantum, Mr.

Steve Squires, and the expert witness, economist Dr. Kenneth Lehrer. Moreover,

Appellants also presented their own witness, Adam Long of L2 Capital.10

C. The Participation By Appellants’ Counsel At The Injunction

Hearing Waives The Instant Notice Argument

Appellants had the same able counsel at the Injunction hearing as they do in

this appeal; the presence of such counsel at the hearing waives any notice argument:

University Sports also asserts that it did not have counsel present at the

temporary injunction hearing because Rash was only making a partial or

special appearance on its behalf. Rash was authorized to adopt Amalgamated

Acme’s motion to dissolve the TRO, and to argue the motion to continue the

temporary injunction hearing. University Sports did not authorize Rash to

argue the merits of the injunction. University Sports does not offer any support

for its argument that an attorney can make a partial or special appearance as to

some matters but not others while still preserving the party’s rights on appeal

as to those matters it refused to permit the attorney to argue.

Amalgamated Acme Affiliates v. Minton

, 33 S.W.3d 387, 396-97 (Tex. App.

— Austin

2000)

.

Contrast the active advocacy of the Appellants at the Injunction hearing with

the situation which compelled reversal in Pilf Invs. v. Arlitt :

Although counsel for the unnamed defendants had actual notice of the motion

and hearing, that does not put them on notice that they will be expected to also

defend the unnamed parties at the injunction hearing.

940 S.W.2d 255, 260 (Tex. App.

— San Antonio 1997).

Appellants stand at the completely opposite point; they intervened precisely so

that they could oppose the injunction at the hearing, and their counsels did so

throughout the hearing which spanned several hours.

III. Q UANTUM H AS A P ROBABLE R IGHT O F P REVAILING

This is an injunctive proceeding because Empire (on the instruction of the

Appellants) converted treasury stock on its ledgers to collateral. The purpose was to11

then convert it again to an asset trading on the open market. The district court had

three options: 1) it could deny any relief at which point the collateral would have

been forfeited and Quantum would have entered into the “death spiral”; 2) release

the collateral back to Quantum; or 3) maintain the status quo of the stock as

collateral for the final fact-finder to make a decision. In other words, the district

court restrained a second unalterable conversion.

The Appellants’ miscomprehension of the legal theory undergirding

Quantum’s lawsuit shows their miscomprehension of the role of a transfer agent;

their confusion is seen in the following sentence: “Even in the lawsuit, Quantum

does not seek to have empire return the stock to Quantum.” Agreed. The problem is

not that Empire has taken stock from Quantum that Quantum wants sent back. See

Shaw's D. B. & L., Inc. v. Fletcher

, 580 S.W.2d 91 (Tex.Civ.App. Houston (1st

Dist.) 1979, no writ) (Once a presentment of the stock and request for change of

ownership has been made, coupled with some proof of ownership, then the

unreasonable refusal to transfer is a conversion of the stock.). To the contrary, the

problem with Empire is that it would have wrongfully re-characterized shares of

Quantum as collateral for the loans to the Appellants notwithstanding that the loans

had been paid off.

IV. Q UANTUM W ILL S UFFER A D EFINITIVELY I RREPARABLE I NJURY

The Appellants’ argument in their opening brief that any damages to Quantum

would be strictly monetary is tantamount to that which was extensively litigated at12

the hearing. The Texas Supreme Court has made clear that a district court errs in

issuing an injunction only when the evidence supports a single and decidedly

opposite conclusion:

[T]he trial court's conclusion that the Butnarus do not have an adequate legal

remedy was not arbitrary and unreasonable and was not made without

reference to guiding rules and principles. And, because the trial court's

determination was not an abuse of discretion, the court of appeals should not

have substituted its judgment for that of the trial court.

Butnaru v. Ford Motor Co

., 84 S.W.3d 198, 211 (Tex. 2002) (emphasis added).

For the reasons explicated below, it cannot be said that the district court

abused its discretion in reaching a decision unsupported by the substantial evidence

adduced.

Dr. Lehrer explained that a transfer of stock by Empire would likely force

Quantum into a “death spiral” which could cause Quantum’s intellectual property to

be sold at vulture prices:

[T]he generally accepted literature has come to be known as a

death spiral. The more shares you get, the more you can sell; the more you can

control at a lower price; create more defaults; get more shares. And eventually

shares have been known to trade at one thousandths of a cent in other cases

--

not this one. And the literature has nicknamed that the death spiral.

And if all these shares are issued and the price falls and the death spiral comes

into being, then Quantum will suffer irreparable damages for something that

might not be.

Transcript, p. 28.

In other words, unlike quantifiable damages, Empire’s conduct jeopardized the13

going-concern value of Quantum’s entire business. See ForScan Corp. v. Dresser

Indus

., 789 S.W.2d 389, 395 (Tex. App.--Houston [14th Dist.] 1990, writ denied)

(holding injunctive relief supported by defendant's testimony that he was in process

of testing and attempting to market product).

Mr. Squires explained how Empire’s transfer would force a dilution of

existing shareholders by operation of a nesting reset pricing effect on Quantum’s

other debentures:

SQUIRES: The other debentures that he referred to do have the

-- they have

the option to ratchet it down. So, if we raise funds at a lower price, then their

conversion rate lowers as well.

Q. And does that mean you're not going to be able to sustain any lending at all

and no one would lend you money?

SQUIRES: It would probably be a massive dilution, yes.

Transcript, p. 54.

Affirming an injunction in a similar context, the First Court of Appeals

explained:

[T]he evidence established that the 997,500 shares at issue had a present value

of about $ 10,000,000. The expected infusion of $150 million by investors,

and the planned placement of the stock in a charitable trust, could significantly

alter the value of the stock.

The evidence at the hearing did not conclusively establish that any injuries

suffered by appellees were capable of accurate measurement, nor does it

clearly demonstrate Miller’s ability to respond in damages. We find that the

trial court did not abuse its discretion in granting the temporary injunction.

Miller v. K & M P’ship

, 770 S.W.2d 84, 88 (Tex. App.

— Houston [1st Dist.] 1989)

.14

To be sure, the Appellants offered a countervailing theory at the injunction

hearing through the testimony of Mr. Adam Long of L2 Capital. (See Transcript, p.

93). The district court simply exercised its discretion in crediting a set of facts

contrary to Mr. Long’s testimony, and the Appellants have not shown this to

constitute an abuse of discretion.

CONCLUSION

The trial court’s injunction should be affirmed. The Appellants’ primary

argument reduces to the contention that they can hide behind some vaporous

procedural defect in the service on a different party even though they 1) appeared at

the injunction hearing with numerous attorneys; 2) announced “ready”; 3) spent

hours cross-examining witnesses; and 4) presented their own witness.

On the issue of irreparable harm, all the testimony favored the Appellee’s

position and the injunction order issued. By contrast, all the Appellants have brought

forth in their brief are their own polemical arguments rather than an attack trained on

the evidence on which the district court’s injunction is based.

Dated: December 31, 2017 Respectfully submitted,

_________________________ Michael Louis Minns

TBN: 14184300

Ashley Blair Arnett

TBN: 24064833

M INNS &A RNETT15 9119 Gessner

Houston, Texas 77074

mike@minnslaw.com

ashley@minnslaw.com

(713) 777-0772 (direct)

Seth Kretzer

TBN: 24043764

K RETZER L AW F IRM

440 Louisiana Street, Suite 1440

Houston, Texas 77002

seth@kretzerfirm.com

(713) 775-3050 (direct)

Attorneys for Appellee, Quantum

Materials Corp.

CERTIFICATE OF SERVICE

I certify that a true and correct copy of this brief were served on all parties by

electronic filing as indicated below on the 31st day of December 2017.

___________________________

Seth Kretzer

CERTIFICATE OF COMPLIANCE

I certify that this brief contains 2,791 words.

___________________________

Seth Kretzer