Court Opinion

ID: 6322633
Source: CourtListenerOpinion
Date Created: 2022-03-12 01:00:29.197845+00
Date Added: 2024-06-11T09:20:59.838658
License: Public Domain

Case: 20-20106      Document: 00516235282         Page: 1    Date Filed: 03/11/2022

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

                                                                        FILED
                                                                  March 11, 2022
                                   No. 20-20106                    Lyle W. Cayce
                                                                        Clerk

   Xiongen Jiao; Qianju Jiao; Zhonghua Yu; Jiatong Yu;
   Pengfei Zhou; Xuanmei Zhou,

                                                            Plaintiffs—Appellees,

                                       versus

   Ningbo Xu; LCL Company, L.L.C.; Dongtai Investment
   Group, L.L.C.,

                                                        Defendants—Appellants.

                  Appeal from the United States District Court
                      for the Southern District of Texas
                           USDC No. 4:19-CV-1848

   Before Smith, Costa, and Wilson, Circuit Judges.
   Cory T. Wilson, Circuit Judge:
          Assignors and assignees of membership interests in Dongtai
   Investment Group, LLC sued Dongtai’s managing member, Ningbo
   “Kevin” Xu, alleging that Xu committed various fraudulent acts. The
   district court granted injunctive and declaratory relief and ordered Xu to turn
   over his remaining Dongtai membership units partially to satisfy the
   judgment. We affirm.
Case: 20-20106       Document: 00516235282             Page: 2      Date Filed: 03/11/2022

                                        No. 20-20106

                                             I.
           In late 2016, Ningbo Xu, Xiongen Jiao, Zhonghua Yu, and Pengfei
   Zhou formed Dongtai Investment Group, LLC for the purpose of acquiring
   the Crowne Plaza Hotel in Houston. Jiao, Yu, and Zhou each made a capital
   contribution of $1,000,000 for a 16.66% membership interest in Dongtai. Xu
   was contractually obligated to pay $3,000,000 for a 50.02% membership
   interest. Jiao, Yu, and Zhou later assigned their Dongtai membership
   interests to their children, Qianju Jiao, Jiatong Yu, and Xuanmei Zhou.1
           Upon discovering financial wrongdoing by Xu, the assignors and
   assignees brought various claims against Xu and LCL Company, LLC
   (collectively, Xu), alleging, inter alia, breach of contract, fraud, derivative
   and non-derivative breach of fiduciary duty, and violations of § 10(b) of the
   Securities Exchange Act.2 The parties entered an agreed order for temporary
   relief, which suspended Xu’s powers as managing member of Dongtai and
   prohibited him from accessing or withdrawing funds from Dongtai’s bank
   accounts. Xu subsequently violated the agreed order on multiple occasions,
   which led the district court to hold Xu in contempt and impose sanctions
   against him.
           Meanwhile, Plaintiffs filed a motion for injunctive and declaratory
   relief. In response, Xu filed two motions to dismiss pursuant to Federal Rule
   of Civil Procedure 12(b)(6), which the district court denied.3 The district

           1
          As discussed infra, Xu contends that the children were not proper assignees of
   membership interests in Dongtai.
           2
             According to Plaintiffs’ complaint, Xu acted through LCL Company—an LLC
   solely owned by Xu. Dongtai is named as a nominal defendant only; Plaintiffs “also bring
   their claims derivatively on behalf of and for the benefit of Dongtai.”
           3
            For simplicity, we refer to Xu’s motions to dismiss as a singular motion in the
   remainder of this opinion.

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                                           No. 20-20106

   court granted Plaintiffs’ motion for preliminary injunction and declaratory
   judgment against Xu. In its order, the court found that Xu did not make the
   agreed-upon $3,000,000 capital contribution for his membership interest in
   Dongtai but instead only paid $867,889.11. Based on that finding, the court
   declared Xu’s unit certificates invalid and ordered Dongtai to provide Xu
   with new certificates reflecting the ownership interest derived from the
   amount Xu had actually paid. Finally, the court declared that Xu owed
   Dongtai $1,304,400.80 because of Xu’s numerous unauthorized withdrawals
   from Dongtai’s accounts.4
           The district court then entered a turnover order that required Xu to
   return his membership interest in Dongtai to the company as a partial
   satisfaction of the declaratory judgment award.
           Xu now appeals the district court’s denials of his motions to dismiss,
   its grant of injunctive and declaratory relief, and its turnover order.
                                                II.
           As an initial matter, we must examine the basis of our jurisdiction.
   Lakedreams v. Taylor, 932 F.2d 1103, 1106 (5th Cir. 1991). We conclude that
   we have jurisdiction to address the rulings challenged by Xu in this case: The
   preliminary injunction is an interlocutory order made appealable by 28
   U.S.C. § 1292(a)(1).5 The declaratory relief constitutes a final order, and we

           4
           According to the court’s order, this amount did “not include the amount in
   consequential and other damages” or “attorneys’ fees and costs Plaintiffs.”
           5
             See 28 U.S.C. § 1292(a)(1) (providing appellate jurisdiction over appeals from
   “[i]nterlocutory orders of the district courts of the United States . . . granting, continuing,
   modifying, refusing or dissolving injunctions.”); Janvey v. Alguire, 647 F.3d 585, 591 (5th
   Cir. 2011) (“We have jurisdiction over the appeal of the district court’s preliminary
   injunction under 28 U.S.C. § 1292(a)(1).”).

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   have appellate jurisdiction under 28 U.S.C. § 2201.6 The turnover order is
   likewise final, and we have appellate jurisdiction to review it under 28 U.S.C.
   § 1291. See Hewlett-Packard Co. v. Quanta Storage, Inc., 961 F.3d 731, 741–42
   (5th Cir. 2020) (“Turnover Orders are final and . . . review is proper under
   28 U.S.C. § 1291.”).
           Typically, we would not have jurisdiction over the district court’s
   denial of Xu’s motion to dismiss. See Lakedreams, 932 F.2d at 1107 (no
   jurisdiction to review denial of motion to dismiss where record showed “no
   indication that the district court consolidated the preliminary injunction with
   a trial on the merits,” and “the order granting the preliminary injunction
   ma[de] no mention of the motion to dismiss”). But to the extent the
   underpinnings of Xu’s motion are inextricably intertwined with the district
   court’s subsequent rulings challenged on appeal, we determine that we have
   jurisdiction to address those issues. See Magnolia Marine Transp. Co. v.
   Laplace Towing Corp., 964 F.2d 1571, 1580 (5th Cir. 1992) (“[O]ur
   jurisdiction is not limited to the specific [injunctive] order appealed from,
   and we may review all matters which establish the immediate basis for
   granting injunctive relief.”); see also In re Lease Oil Antitrust Litig. (No. II),
   200 F.3d 317, 320 (5th Cir. 2000) (reaching denial of motion to dismiss as
   part of § 1292(a)(1) appeal where issues were “so entangled as to arrive here
   together” and “[d]elaying review . . . would make no practical sense”).
                                              III.
                                               A.
           We briefly address Xu’s assertions regarding his motion to dismiss
   that are intertwined with the rest of this appeal. Xu first contends the district

           6
              See 28 U.S.C. § 2201 (“Any [declaratory judgment] shall have the force and effect
   of a final judgment or decree and shall be reviewable as such.”).

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                                    No. 20-20106

   court erred in denying his motion because Plaintiffs lack standing to assert
   shareholder derivative claims. But under Texas law, a member of a closely
   held limited liability company can bring a derivative proceeding. Tex. Bus.
   Orgs. Code § 101.463(c). It is undisputed that Dongtai is a closely held
   limited liability company. The original investors were members of Dongtai
   and assigned their membership interests to their children. “An assignor of a
   membership interest in a limited liability company continues to be a member
   of the company and is entitled to exercise any unassigned rights or powers of
   a member of the company until the assignee becomes a member of the
   company.” Tex. Bus. Orgs. Code § 101.111(a). Thus, even if the
   assignees failed to comply with the requirements set out in Dongtai’s
   operating agreement for becoming members, as Xu alleges, the assignors
   would still be members of Dongtai. Either way, at least one group, if not both,
   has sufficient membership interest in Dongtai to confer standing to bring a
   derivative proceeding. See, e.g., Rumsfeld v. F. for Acad. & Institutional Rts.,
   Inc. (FAIR), 547 U.S. 47, 52 n.2 (2006) (“[T]he presence of one party with
   standing is sufficient to satisfy Article III’s case-or-controversy
   requirement.”)
          Xu also contends that the district court erred in declining to dismiss
   Plaintiffs’ securities fraud claims because (1) Plaintiffs fail to satisfy the
   heightened pleading requirement for securities fraud claims; (2) Plaintiffs’
   complaint fails to establish that the alleged securities fraud transaction
   occurred in the United States, and (3) Plaintiffs’ security fraud allegations do
   not implicate LCL Company or Dongtai. Again, we find no error in the
   district court’s assessment of these issues.
          To meet the heightened pleading requirements set forth in Federal
   Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act
   (PSLRA), “a plaintiff must plead (1) a material misrepresentation or
   omission by the defendant; (2) scienter; (3) a connection between the

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   misrepresentation or omission and the purchase or sale of a security;
   (4) reliance upon the misrepresentation or omission; (5) economic loss; and
   (6) loss causation.” Masel v. Villarreal, 924 F.3d 734, 743 (5th Cir. 2019)
   (internal quotation marks and citation omitted). The district court properly
   assessed Plaintiffs’ complaint under these requirements and denied Xu’s
   argument that Plaintiffs did not satisfy the requisite heightened pleading
   standard.
          Similarly, the court properly overruled Xu’s contention that
   Plaintiffs’ securities fraud claims should be dismissed because Plaintiffs’
   complaint lacks evidence that the membership units were purchased in the
   United States. As noted by the district court, “the complaint makes clear
   that the purchase involved a Texas limited liability company’s member units,
   and the exhibits attached to the complaint demonstrate . . . Plaintiffs paid
   U.S. currency for domestic LLC member units.” But even if this were not
   the case, whether § 10(b) reaches certain conduct is a merits question that
   does not implicate subject matter jurisdiction. Morrison v. Nat’l Austl. Bank
   Ltd., 561 U.S. 247, 253–54 (2010).
          Finally, as stated above, Plaintiffs’ complaint alleges that Xu acted
   through LCL Company—an LLC solely owned by Xu. So Xu’s contention
   that “[n]one of the securities fraud allegations asserted by Plaintiffs
   specifically implicate . . . LCL Company” is simply untrue. And, again,
   Dongtai is named only as a nominal defendant.
                                        B.
          We next address the district court’s order granting a preliminary
   injunction, which is “an extraordinary remedy.” Miss. Power & Light Co. v.
   United Gas Pipe Line Co., 760 F.2d 618, 621 (5th Cir. 1985). To obtain a
   preliminary injunction, the movant must establish four elements:

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           (1) a substantial likelihood of success on the merits, (2) a
           substantial threat of irreparable injury if the injunction is not
           issued, (3) that the threatened injury if the injunction is denied
           outweighs any harm that will result if the injunction is granted,
           and (4) that the grant of an injunction will not disserve the
           public interest.
   Byrum v. Landreth, 566 F.3d 442, 445 (5th Cir. 2009) (quoting Speaks v.
   Kruse, 445 F.3d 396, 399–400 (5th Cir. 2006)). We review the grant of a
   preliminary injunction for abuse of discretion. Women’s Med. Ctr. of Nw.
   Hous. v. Bell, 248 F.3d 411, 418–19 (5th Cir. 2001). “Factual findings are
   reviewed for clear error, while legal conclusions are reviewed de novo.”
   Moore v. Brown, 868 F.3d 398, 403 (5th Cir. 2017).
           Xu’s sole contention is that the district court abused its discretion in
   granting the preliminary injunction because Plaintiffs failed to establish a
   substantial threat of irreparable injury. “[A] harm is irreparable where there
   is no adequate remedy at law, such as monetary damages. However, the mere
   fact that economic damages may be available does not always mean that a
   remedy at law is ‘adequate.’” Janvey v. Alguire, 647 F.3d 585, 600 (5th Cir.
   2011) (citation omitted).            “[A]n exception exists where the potential
   economic loss is so great as to threaten the existence of the movant’s
   business.” Atwood Turnkey Drilling, Inc. v. Petroleo Brasileiro, S.A., 875 F.2d
   1174, 1179 (5th Cir. 1989).7
           In holding that Plaintiffs faced irreparable injury, the district court
   found that Plaintiffs were in imminent danger of losing the hotel’s IHG
   franchise and even the hotel itself.                The district court’s findings are

           7
             See also Fla. Businessmen for Free Enter. v. City of Hollywood, 648 F.2d 956, 958 n.2
   (5th Cir. 1981) (“A substantial loss of business may amount to irreparable injury if the
   amount of lost profits is difficult or impossible to calculate, especially where . . . the loss of
   business may result in bankruptcy.”).

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   supported by the record, including testimony of both fact and expert
   witnesses, and are not clearly erroneous. Accordingly, the district court did
   not abuse its discretion by concluding that Plaintiffs established a substantial
   threat they would suffer irreparable injury if an injunction was not granted.
                                         C.
          Next, we consider the district court’s authority to award declaratory
   relief in this case. The Declaratory Judgment Act provides:
          In a case of actual controversy within its jurisdiction . . . any
          court of the United States, upon the filing of an appropriate
          pleading, may declare the rights and other legal relations of any
          interested party seeking such declaration . . . . Any such
          declaration shall have the force and effect of a final judgment
          or decree and shall be reviewable as such.
   28 U.S.C. § 2201(a). Here, the district court found that Xu only paid
   $867,889.11 for his membership interest, declared his unit certificates
   invalid, and ordered Dongtai to provide Xu with new certificates based on the
   amount he actually paid. The court also declared that Xu “owes and is
   indebted to Dongtai for $1,304,400.80.”
          Xu asserts that the district court violated § 101.107 of the Texas
   Business Organization Code by declaring part of his membership interest
   invalid, because the declaration is the functional equivalent of expelling him
   from the company. See Tex. Bus. Orgs. Code § 101.107 (“A member
   of a limited liability company may not withdraw or be expelled from the
   company.”). But the declaratory judgment does not expel Xu from the
   company. Though the judgment invalidated Xu’s current unit certificates on
   the basis that Xu had not paid for all the membership units he had
   contractually agreed to purchase, the district court ordered that Xu be
   provided new certificates based on the amount of capital he actually

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   contributed. We find no error in the district court’s determination in this
   regard.
          Xu also asserts that the district court’s declaratory relief violates
   § 101.112(d) of the Texas Business Organizations Code, which provides the
   “exclusive remedy” for satisfying a judgment out of the judgment debtor’s
   membership interest.       Tex. Bus. Orgs. Code § 101.112(d).             This
   contention lacks merit because the district court’s declaratory relief does not
   implicate § 101.112(d). The declaratory relief is not a satisfaction of a
   judgment out of Xu’s membership interest; it is a declaration of the
   percentage of Xu’s company ownership, based on the amount of capital Xu
   paid into the company.
          Similarly, Xu asserts that the declaratory relief violates the plain
   language of Dongtai’s operating agreement, which limits the liability of a
   member “for the losses, debts, liabilities and obligations” of Dongtai and
   provides that “[n]o member shall have the right to demand and receive any
   distribution from [Dongtai] in any form other than cash.”           But these
   provisions have no bearing on the district court’s declaration that Xu failed
   to pay for his full membership interest and is therefore only entitled to the
   membership units for which he paid.
          In sum, we discern no error in the declaratory relief fashioned by the
   district court in this case.
                                        D.
          Finally, “the entry of a turnover order is reviewed for an abuse of
   discretion.” Af-Cap, Inc. v. Republic of Congo, 462 F.3d 417, 425 (5th Cir.
   2006). Under Texas law, a court may order a “judgment debtor to turn over
   nonexempt property that is in the debtor’s possession or is subject to the
   debtor’s control.” Tex. Civ. Prac. & Rem. Code § 31.002(1). Here,
   the district court ordered that Xu turn over his remaining 14.45% membership

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   interest in Dongtai “in partial satisfaction of Dongtai’s Declaratory
   Judgment award of $1,304,400.80 against Xu.”
          The parties dispute whether the district court’s turnover order
   violates § 101.112 of the Texas Business Organizations Code, which states
   that “[t]he entry of a charging order is the exclusive remedy by which a
   judgment creditor of a member or of any other owner of a membership
   interest may satisfy a judgment out of the judgment debtor’s membership
   interest.” Tex. Bus. Orgs. Code § 101.112(d). Xu contends that
   because the district court’s order was a turnover order, rather than a charging
   order, it violates the plain language of § 101.112(d). Plaintiffs counter that
   the facts in this case fall under an exception to § 101.112(d).
          As set forth in Hux v. Southern Methodist University,
          In applying Texas law, we look first to the decisions of the
          Texas Supreme Court. If that court has not ruled on the issue,
          we make an Erie[8] guess, predicting what it would do if faced
          with the facts before us. Typically, we 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.
   819 F.3d 776, 780–81 (5th Cir. 2016) (internal citations omitted).
          The Texas Supreme Court has not spoken to the interplay between
   turnover orders and § 101.112(d), but Texas intermediate courts have held
   that § 101.112(d) does not preclude the turnover of a member’s interest in a
   limited liability company “when the judgment creditor seeking the
   membership interest is the entity from which the membership interest
   derives” and the turnover order “involves an explicit award of the

          8
              Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938).

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   membership interest itself from one party to the other as part of the
   judgment.” Gillet v. ZUPT, LLC, 523 S.W.3d 749, 758 (Tex. App.—
   Houston [14th Dist.] 2017, no pet.); see also Heckert v. Heckert, No. 02-16-
   00213-CV, 2017 WL 5184840, at *8 (Tex. App.—Fort Worth Nov. 9, 2017,
   no pet.). This is because “the reasoning behind requiring a charging order as
   the exclusive remedy is inapposite” in such circumstances. Gillet, 523
   S.W.3d at 758; accord Heckert, 2017 WL 5184840, at *8 (“[I]n these types of
   situations, the purpose of a charging order has not come into play: the
   charging order was developed to prevent a judgment creditor’s disruption of
   an entity’s business by forcing an execution sale of the . . . member’s entity
   interest . . . .”). In this case, Dongtai is the judgment creditor seeking Xu’s
   membership interest in Dongtai, and the turnover order involves an explicit
   award of the membership interest from Xu to Dongtai.             Accordingly,
   § 101.112(d) does not preclude the turnover of Xu’s interest to partially
   satisfy Dongtai’s judgment against him.
                                        IV.
          For the reasons discussed above, the district court properly denied
   Xu’s motion to dismiss. And we find no reversible error in the district court’s
   entry of a preliminary injunction, the declaratory relief it fashioned, or the
   court’s turnover order.
                                                                  AFFIRMED.

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