Court Opinion

ID: 6328307
Source: CourtListenerOpinion
Date Created: 2022-03-30 18:00:44.390749+00
Date Added: 2024-06-11T09:21:16.144908
License: Public Domain

Case: 21-10137     Document: 00516260184          Page: 1    Date Filed: 03/30/2022

              United States Court of Appeals
                   for the Fifth Circuit                            United States Court of Appeals
                                                                             Fifth Circuit

                                                                           FILED
                                   No. 21-10137                       March 30, 2022
                                                                      Lyle W. Cayce
                                                                           Clerk
   Shahram Afshani,

                                                            Plaintiff—Appellant,

                                       versus

   Spirit SPE Portfolio 2006-1, L.L.C.; SMTA Shopko
   Portfolio I, L.L.C.; Spirit Realty Capital,
   Incorporated,

                                                         Defendants—Appellees.

                  Appeal from the United States District Court
                      for the Northern District of Texas
                            USDC No. 3:19-CV-1421

   Before Dennis, Elrod, and Duncan, Circuit Judges.
   Per Curiam:*
          After buying two large commercial properties, Shahram Afshani sued
   the sellers for breach of contract and fraud. He claimed that, during contract
   negotiations, the sellers had promoted the financial health of the properties’

          *
            Pursuant to 5th Circuit Rule 47.5, the court has determined that this
   opinion should not be published and is not precedent except under the limited
   circumstances set forth in 5th Circuit Rule 47.5.4.
Case: 21-10137       Document: 00516260184             Page: 2     Date Filed: 03/30/2022

                                        No. 21-10137

   big-box-store tenant, all the while knowing the tenant was in poor shape. The
   district court dismissed both claims, concluding Afshani pled no plausible
   breach and failed to allege fraud with the particularity demanded by Federal
   Rule of Civil Procedure 9(b). As to the contract claim, we agree with the
   district court and affirm. But as to the fraud claims, we disagree. On his third
   try, Afshani pled enough to clear the Rule 9(b) hurdle. So we reverse the
   dismissal of those claims and remand for further proceedings.
                                             I.
          Spirit Realty Capital, Inc. (“SRC”) owns two companies that held
   title to two commercial properties. One property is in La Crosse, Wisconsin
   (the “La Crosse Property”), and was owned by Spirit SPE Portfolio 2006-1,
   LLC (“SPE”). The other is in Onalaska, Wisconsin (the “Onalaska
   Property”), and was owned by SMTA Shopko Portfolio I, LLC (“SMTA”).
   Both properties are leased to big-box retailer Shopko under a master lease
   with SRC.
          Afshani, an investor, won at auction the right to purchase the La
   Crosse Property from SPE. SRC senior vice president Travis Carter
   spearheaded the follow-on negotiations with Afshani to close the deal. Carter
   was also the managing agent of SPE and SMTA. Afshani alleges 1 that during
   the escrow period between June and July of 2018, Carter represented that
   Shopko was a financially viable tenant that could be relied on to pay its rent.
   Moreover, between June and December of 2018, Carter told Afshani on
   multiple occasions that “Shopko was a very valuable tenant that was
   vertically integrated and whose lease income could be counted on for years
   into the future . . . for the full term of the leases.” Carter also represented

          1
            The allegations are from Afshani’s third amended complaint, which we accept as
   true. Turner v. Lieutenant Driver, 848 F.3d 678, 684 (5th Cir. 2017).

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                                       No. 21-10137

   that “Shopko’s pharmacy division was doing extremely well and its optical
   division was doing a ‘phenomenal’ volume of business.” Motivated by
   Shopko’s tenancy, Afshani closed on the La Crosse Property and, weeks
   later, agreed to purchase the Onalaska Property from SMTA.
              At both closings, SPE and SMTA transferred the existing Shopko
   leases and delivered renewed Shopko leases expiring in 2031 and 2035,
   respectively, as the agreements required. Both agreements included “as is”
   provisions disclaiming any express or implied representation or warranty
   beyond the agreements. The agreements also precluded Afshani from
   contacting Shopko, its employees, or its representatives before closing
   without the seller’s written consent.
              Afshani (on behalf of an LLC) also agreed to buy a third property from
   SRC. During that escrow period, Carter sent Afshani a release, which
   Afshani declined to sign. The release purported to (1) disclaim that SRC had
   represented anything about Shopko’s status, (2) disclaim any reliance on
   SRC’s representations about Shopko, and (3) warrant that both parties acted
   solely on their own judgment and due diligence. When Afshani rejected the
   Release, SRC canceled the purchase contract and returned Afshani’s deposit
   in full.
              In May 2019, Afshani sued SRC, SPE, and SMTA (collectively,
   “Defendants”) in Texas state court for fraud and breach of contract.
   According to Afshani, he would not have bought the LaCrosse and Onalaska
   Properties had he known about Shopko’s “impending financial collapse.”
   And because SRC had loaned $35 million to Shopko and was privy to
   Shopko’s “severe financial distress,” Afshani claimed SRC fraudulently
   concealed Shopko’s deteriorating financial position and “dumped” the
   properties by selling them to him.

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                                      No. 21-10137

          Defendants removed the case to federal court and moved to dismiss
   for failure to state a claim. Afshani amended his complaint in response. De-
   fendants again moved to dismiss. Granting the motion, the district court dis-
   missed all claims without prejudice to allow Afshani to replead with sufficient
   particularity, stating that “the Court’s allowance of one more repleading will
   be [Afshani’s] last.”
          Afshani again amended his complaint and, for the first time, identified
   Carter as the perpetrator of the alleged fraud. Defendants again moved to
   dismiss. This time, the court dismissed Afshani’s claims with prejudice. As
   to the contract claim, it held that (1) Afshani failed to identify any part of
   either contract breached by Defendants, and (2) Afshani’s unilateral mistake
   theory failed as a matter of law. As to the fraud claims, the court concluded
   Afshani’s complaint failed to sufficiently plead (1) the time and place of the
   alleged fraud, and (2) that Defendants knew of Shopko’s financial condition.
   Afshani timely appealed.
                                          II.
          We review de novo a Rule 12(b)(6) dismissal for failure to state a claim.
   Innova Hosp. San Antonio, L.P. v. Blue Cross & Blue Shield of Ga., Inc., 892
   F.3d 719, 726 (5th Cir. 2018). “To survive a motion to dismiss, a complaint
   must contain sufficient factual matter which, when taken as true, states ‘a
   claim to relief that is plausible on its face.’” Ibid. (quoting Bell Atl. Corp. v.
   Twombly, 550 U.S. 544, 570 (2007)). Dismissal is proper when, accepting all
   well-pled facts as true, the plaintiff has not stated a plausible claim for relief.
   Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “In alleging fraud or mistake, a
   party must state with particularity the circumstances constituting fraud or
   mistake,” whereas “[m]alice, intent, knowledge, and other conditions of a
   person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b).

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                                          III.
                                           A.
            We first address Afshani’s breach of contract claim, which the district
   court correctly dismissed. Afshani argues that he “pled a valid contractual
   theory” of unilateral mistake of fact. He argues that because Shopko’s finan-
   cial condition was material to the contract and Afshani mistakenly relied on
   an incomplete picture of that condition when buying the properties, a mistake
   exists that voids the contract. But the contracts themselves did not explicitly
   require Defendants to disclose this information, and, in any event, such alle-
   gations are better understood as part of his fraud claims, which we address
   infra. Moreover, Afshani himself admits that “unilateral mistake” is really a
   theory for equitably avoiding a contract, not a theory of breach. See James T.
   Taylor & Son, Inc. v. Arlington Indep. Sch. Dist., 335 S.W.2d 371, 373 (Tex.
   1960).
            Afshani has thus failed to identify any specific provision of the agree-
   ments that the Defendants allegedly breached. He does point to Section
   2.02(c), which required SPE and SMTA to deliver “a form of new
   lease . . . to be executed by [Shopko] in the form previously approved.” But,
   as Afshani admits, the Defendants did what that section required. His breach
   of contract theory therefore fails. See Smith Int’l, Inc. v. Egle Grp., LLC, 490
   F.3d 380, 387 (5th Cir. 2007) (internal quotation omitted) (“A breach occurs
   when a party fails to perform a duty required by the contract.”).
                                           B.
            We turn to Afshani’s fraud claims. Under the heightened pleading
   standard of Rule 9(b), a plaintiff “must state with particularity the circum-
   stances” of the allegedly fraudulent conduct—at minimum “the who, what,
   when, and where.” Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir.
   1997); see also City of Clinton v. Pilgrim’s Pride Corp., 632 F.3d 148, 153 (5th

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                                           No. 21-10137

   Cir. 2010). “What constitutes particularity will necessarily differ with the
   facts of each case.” Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719,
   724 (5th Cir. 2003) (cleaned up). The district court gave Afshani two addi-
   tional chances to allege fraud with sufficient particularity before dismissing
   the claims with prejudice. Contrary to the court’s ruling, however, we think
   Afshani managed to clear the Rule 9(b) hurdle on his third try.
           First, Afshani alleged the “who” of his fraud claims. In his third
   amended complaint, he identified Carter as the person who allegedly made
   multiple misleading statements about Shopko’s financial viability. Second, as
   for the “what,” Afshani alleged Defendants knew about Shopko’s unfavora-
   ble financials because they themselves had made sizeable loans to Shopko.
   Moreover, according to Afshani, Defendants concealed this information
   from him and instead promoted Shopko as a solid lessee. Despite Shopko’s
   proximity to bankruptcy, Afshani alleges that Carter stated Shopko was “a
   very valuable tenant that was vertically integrated and whose lease income
   could be counted on for years into the future . . . for the full term of the
   leases.” That’s enough to meet the Rule 9(b) requirements for the “what”
   prong. See Benchmark Elecs., 343 F.3d at 724 (finding Rule 9(b) satisfied by
   allegations that defendant’s representative made false and misleading repre-
   sentations about a purchased stock’s financial health). 2

           2
             For similar reasons, we also disagree with the district court’s conclusion that
   Afshani failed to allege plausibly that Carter knew the falsity of his statements or recklessly
   disregarded the truth. Afshani claimed Carter had “inside information” about Shopko’s
   financial health due to SRC’s $35-million loan to the big-box retailer. And Afshani
   repeatedly alleged Carter’s knowledge of Shopko’s financial distress, claiming he “traded
   with [Afshani] based on non-public information about which only Defendants knew and
   about which Defendants knew [Afshani] was ignorant.” Afshani thus adequately pled
   Carter knew his representations were false to clear the hurdles of Rule 9(b) and 12(b)(6).

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           The district court also concluded Afshani failed to adequately allege
   the “when” of his fraud claims. Specifically, the court found that Afshani’s
   allegation that Carter made the statements “between June and December of
   2018” was not specific enough. But Afshani’s complaint explains that some
   statements were made during the escrow period for the properties in ques-
   tion. And because Afshani proceeded on a fraud-by-nondisclosure theory, he
   identified a shorter time window—between June and July 2018—during
   which Carter likely should have disclosed Shopko’s precarious condition. 3
   Afshani also alleged that during this period, Carter “represented that Shopko
   was a valued and financially viable tenant that could be counted upon to faith-
   fully pay the new lease.” These allegations are particular enough to satisfy
   Rule 9(b). See Benchmark Elecs., 343 F.3d at 724 (finding Rule 9(b) satisfied
   where plaintiff alleged oral misrepresentations occurring over a series of dis-
   tinct months); see also Southland Sec. Corp v. INSpire Ins. Sols., Inc., 365 F.3d
   353, 372 (explaining that “Rule 9(b) does not require that a specific date and
   time always be alleged as to each misrepresentation”).
           Finally, the district court concluded that Afshani failed to allege
   “where” the fraud took place. It reasoned that any allegedly fraudulent state-
   ments “certainly were not made in the contracts, which do not contain
   clauses resembling any of the statements Carter made.” We disagree. In his
   third amended complaint, Afshani claimed Defendants should have disclosed
   their knowledge of Shopko’s financial condition in the real estate contracts
   and the new leases. He alleged: “As a result of Mr. Carter’s representa-
   tions . . . [Afshani] relied on the resulting income stream reflected in the New
   Lease . . . .” In particular, “the delivery of the New Lease by Defendants and

           3
             What’s more, Afshani specifically alleged that Carter “should have” disclosed
   Shopko’s poor financial health “within the contracts . . . or clearly and plainly disclaimed
   any ability for [Afshani] to rely upon the New Leases.”

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   Defendants’ non-disclosure of Shopko’s known (to Defendants only, but not
   to Plaintiff) impending financial collapse represented a material fraudulent
   misrepresentation.” Afshani made substantially similar allegations about the
   Onalaska contract and leases. These allegations are enough to satisfy Rule
   9(b).
           In sum, contrary to the district court’s ruling, we conclude that Af-
   shani satisfied the heightened pleading standard of Rule 9(b). 4
   AFFIRMED IN PART; REVERSED AND REMANDED IN
   PART.

           4
             On appeal, Defendants raised several arguments in the alternative as to why the
   district court’s ruling should be upheld, apart from the Rule 9(b) issue. For instance,
   Defendants argued the economic-loss doctrine bars Afshani’s suit. SRC also argued that
   none of the alleged misrepresentations is attributable to it. The district court did not
   address any of these issues in its ruling, and we think it appropriate to allow that court to
   do so in the first instance. We express no opinion as to how those issues should be resolved
   on remand.

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