Lake Whillans Fund I LP v. Delaware Trust Company

April 30, 2024

Nathan Ochsner, Clerk

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

IN RE: §

§ CASE NO: 19-34508

SANCHEZ ENERGY §

CORPORATION, et al., § CHAPTER 11

§

Debtors. §

§

LAKE WHILLANS FUND I LP, §

et al., §

, §

§

VS. § ADVERSARY NO. 23-3151

§

DELAWARE TRUST §

COMPANY, et al., §

§

Defendants. §

MEMORANDUM OPINION

This adversary proceeding concerns the validity of a litigation

funding agreement. Delaware Trust Company, acting as the

representative of Sanchez Energy Corporation’s unsecured creditors,

entered into a litigation funding agreement with four of Sanchez’s

unsecured creditors. The purpose of the agreement was to fund

litigation seeking avoidance of certain liens held by purportedly secured

creditors of Sanchez. Lake Whillans and Clear Harbor are a group of

Sanchez unsecured creditors who raise multiple claims for relief against

Delaware Trust and the litigation funders. They claim the agreement

is in violation of Sanchez’s plan, the Court’s orders, and law. They also

raise claims for breaches of duty by Delaware Trust, as well as

conspiracy, aiding and abetting, and unjust enrichment claims against

the litigation funders. Delaware Trust and the litigation funders move

to dismiss. Lake Whillans’ and Clear Harbor’s claim that the litigation

funding agreement impermissibly modified the plan is dismissed with

prejudice. The remainder of the complaint may be amended.

BACKGROUND

Sanchez Energy Corporation was an exploration and production

company focused on acquiring and developing onshore oil and natural

gas resources. Case No. 19-34508, ECF No. 1 at 5. On August 11, 2019,

Sanchez and its affiliated entities filed for bankruptcy protection under

chapter 11 of the Bankruptcy Code. Case No. 19-34508, ECF No. 1.

Sanchez’s chapter 11 plan of reorganization was confirmed on April 30,

2020. Case No. 19-34508, ECF No. 1212.

In 2019, a group of purportedly secured lenders (who would

eventually become Sanchez’s bankruptcy DIP lenders) identified

deficiencies in collateral descriptions in certain deeds of trust that

secured Sanchez’s debt obligations to those lenders. Case No. 19-34508,

ECF No. 2808 at 6. The secured creditors filed correction affidavits to

fix the collateral descriptions. Case No. 19-34508, ECF No. 2808 at 6.

Sanchez’s plan of reorganization provided for post-confirmation

litigation of the avoidability of the deeds of trust and correction

affidavits (the “Lien-Related Litigation”), with its outcome to determine

the ownership of 80% of the equity of the reorganized Sanchez entity.

Case No. 19-34508, ECF No. 1212 at 36–37. The plan provides that,

upon resolution of the litigation, “Reorganized Debtors shall issue the

Post-Effective Date Equity Distribution in the amount of New Common

Stock allocated to Class 3, 4 and/or 5 Claims, to the extent such Claims

are entitled to receive New Common Stock, pursuant to an order of the

Bankruptcy Court.” Case No. 19-34508, ECF No. 1212 at 49. The plan

requires the post-effective date equity distribution to the allocated pro

rata within each class and in a manner “consistent with, as applicable,

the priorities set forth in sections 1129(b) and 726 of the Bankruptcy

Code.” Case No. 19-34508, ECF No. 1212 at 45–46. The plan also

provides that any issues regarding the proper allocation of the equity

distribution shall be determined by the Court in a manner consistent

with the §§ 1129(b) and 726 priorities. Case No. 19-34508, ECF No.

1212 at 51.

Pursuant to the plan, Delaware Trust was selected as the “Lien-

Related Litigation Creditor Representative” in order to represent all

“general unsecured creditors in the Lien-Related Litigation.” Case No.

19-34508, ECF Nos. 1212 at 36; 1289 at 1. It has “standing to pursue,

prosecute and sole authority to settle” the Lien-Related Litigation. Case

No. 19-34508, ECF No. 1212 at 53. With respect to financing the

litigation, the plan states that nothing “restricts the ability of the Lien-

Related Litigation Creditor Representative to employ professionals and

seek or secure funding or financing to pay for the reasonable fees and

expenses incurred in connection with the Lien-Related Litigation to the

extent permitted by otherwise applicable law.” Case No. 19-34508, ECF

No. 1212 at 50–51.

Following plan confirmation, the Creditor’s Committee moved for

the administration of the Lien-Related Litigation through a post-

effective date litigation trust. Case No. 19-34508, ECF No. 1238. The

Court denied the motion at a hearing on grounds that it would require

an impermissible amendment to Sanchez’s plan. Case No. 19-34508,

ECF No. 1256 at 34. However, the Court clarified that costs and

expenses of the Lien-Related Litigation would be paid out of the first

proceeds of the litigation and stated that the Creditor Representative

would receive common law protections to the extent it acts pursuant to

the Court’s orders. Case No. 19-34508, ECF Nos. 1256 at 7–8, 25–26,

26, 30. The Court then entered an order denying the creation of a trust

and appointed Delaware Trust as the Creditor Representative. Case No.

19-34508, ECF No. 1289. The order contains a provision for first-out

payment of costs and expenses of litigation and the common law

immunity provisions described at the hearing. Case No. 19-34508, ECF

No. 1289 at 2.

On July 23, 2020, Delaware Trust entered into a litigation

funding agreement with four of Sanchez’s unsecured creditors: Brigade

Capital, Avenue Capital, Benefit Street Capital, and Taconic Capital

(the “Litigation Funders”). ECF No. 1-1 at 2, 8–12. This agreement

raised $1.5 million in funding for the Lien-Related Litigation. ECF No.

1-1 at 2. On January 7, 2021, the parties amended the agreement and

raised an additional $95,000. ECF No. 1-2 at 2, 4–7. On March 29, 2021,

the parties further amended the agreement and raised an additional $4

million. ECF No. 1-3 at 2, 4–8. After repayment of funded amounts, the

agreement, as amended, provided that an aggregate of up to 90%1 of the

net recoveries of the litigation would be paid to the Litigation Funders.

Delaware Trust and the Litigation Funders allege that they have

entered into further litigation funding agreements, raising a total of $17

million. ECF No. 48 at 15. The additional agreements and their terms

are neither in the record nor the subject of this motion to dismiss. This

motion to dismiss solely involves the litigation funding agreement

totaling $5,595,000 in funding (the “Litigation Funding Agreement”).

The Lien-Related Litigation proceeded in three phases. On

August 3, 2023, the third phase of the litigation was complete, and the

Court issued its memorandum opinion and final order resolving the

Lien-Related Litigation. Case No. 19-34508, ECF Nos. 2808, 2809. The

Court found in favor of Delaware Trust and awarded 69.73% of the

equity interests in the reorganized Sanchez entity to “holders of Allowed

Class 4 and Allowed Class 5 Claims, their successors and assigns, pro

rata.” Case No. 19-34508, ECF No. 2809 at 1. The Court’s orders in all

three phases of the Lien-Related Litigation are currently on appeal.

Case No. 19-34508, ECF No. 2863 at 5.

Plaintiffs Lake Whillans and Clear Harbor are a group of general

unsecured creditors who did not participate in the Litigation Funding

Agreement. ECF No. 1 at 12. They filed this adversary proceeding on

August 11, 2023. ECF No. 1. They assert six claims for relief. The first

claim for relief essentially seeks declarations that the Litigation

Funding Agreement is void and unenforceable because it is inconsistent

with Sanchez’s plan of reorganization and the Court’s orders. ECF No.

1 The 90% was subject to reduction if less than the full amount had been funded.

1 at 31–32. The second claim for relief asserts a breach of fiduciary duty

by Delaware Trust. ECF No. 1 at 32. The third claim for relief alleges

that the Litigation Funders engaged in a conspiracy to cause Delaware

Trust to commit a breach of fiduciary duty. ECF No. 1 at 33. The fourth

claim for relief alleges that the Litigation Funders aided and abetted a

breach of fiduciary duty by Delaware Trust. ECF No. 1 at 36. The fifth

claim for relief alleges that Delaware Trust and the Litigation Funders

impermissibly modified and violated Sanchez’s plan of reorganization.

ECF No. 1 at 36. The sixth claim for relief alleges unjust enrichment

against the Litigation Funders. ECF No. 1 at 37. Delaware Trust and

the Litigation Funders filed their motion to dismiss on October 2, 2023.

ECF No. 48.

JURISDICTION

The District Court has jurisdiction over this proceeding under 28

U.S.C. § 1334(a). Venue is proper in this District pursuant to 28 U.S.C.

§ 1409. This is a core proceeding under 28 U.S.C. § 157(b)(2). The

dispute has been referred to the Bankruptcy Court under General Order

2012-6.

LEGAL STANDARD

The Court reviews motions under Federal Rule of Civil Procedure

12(b)(6) “accepting all well-pleaded facts as true and viewing those facts

in the light most favorable to the plaintiffs.” Stokes v. Gann, 498 F.3d

483, 484 (5th Cir. 2007). However, the Court will not strain to find

inferences favorable to the plaintiff. Southland Sec. Corp. v. INSpire

Ins. Solutions Inc., 365 F.3d 353, 361 (5th Cir. 2004).

Motions to dismiss for failure to state a claim upon which relief

can be granted “are viewed with disfavor and are rarely granted.”

Lormand v. US Unwired, Inc., 565 F.3d 228, 232 (5th Cir. 2009) (quoting

Test Masters Educ. Servs., Inc. v. Singh, 428 F.3d 559, 570 (5th Cir.

2005)). To avoid dismissal under Rule 12(b)(6), the plaintiff must

provide sufficient factual matter to state a claim for relief that is

plausible on its face when accepting that factual matter as true.

Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009) (quoting Bell Atlantic Corp.

v. Twombly, 550 U.S. 544, 570 (2007)). A claim is plausible on its face

when “the plaintiff pleads factual content that allows the court to draw

the reasonable inference that the defendant is liable for the misconduct

alleged.” Id. at 678 (citing Twombly, 550 U.S. at 556). The plausibility

standard asks for more than “a sheer possibility that the defendant

acted unlawfully.” Id.; see Lormand, 565 F.3d at 232 (“[A] complaint

‘does not need detailed factual allegations,’ but must provide the

plaintiff’s grounds for entitlement to relief—including factual

allegations that when assumed to be true ‘raise a right to relief above

the speculative level.’” (quoting Cuvillier v. Taylor, 503 F.3d 397, 401

(5th Cir. 2007))).

DISCUSSION

Lake Whillans and Clear Harbor assert multiple claims against

Delaware Trust and the Litigation Funders. Lake Whillans’ and Clear

Harbor’s claim that the litigation funding agreement impermissibly

modified the plan is dismissed with prejudice. The remainder of the

complaint may be amended.

I. LAKE WHILLANS’ AND CLEAR HARBOR’S FIRST CLAIM DOES NOT

STATE A PLAUSIBLE BASIS FOR RELIEF

Lake Whillans’ and Clear Harbor’s first claim for relief seeks

multiple declaratory judgments nullifying the Litigation Funding

Agreement. Lake Whillans and Clear Harbor request a declaration

“that the Post-Effective Date Equity Distribution to persons or entities

other than the Litigation Funding Agreements signatories . . . are in no

way diminished, impaired, or affected by any terms in the Litigation

Funding Agreements.” ECF No. 1 at 31–32. Lake Whillans and Clear

Harbor also request a declaration that Delaware Trust and the

Litigation Funders “have no right to make any application pursuant to

paragraph 5 of the Final Order or Article IV(C)(2) of the confirmed Plan

to issue, ratify, or authorize the issuance of equity in the Reorganized

Debtor other than for their pro rata share of the equity allocated and

vested in claimholders.” ECF No. 1 at 32. Lake Whillans and Clear

Harbor also request a declaration that “the Litigation Funding

Agreements are contrary to the Plan and Final Order and, as such, are

void and unenforceable.” ECF No. 1 at 32. Lake Whillans and Clear

Harbor essentially ask the Court to declare that the Litigation Funding

Agreement is inconsistent with Sanchez’s plan of reorganization and the

Court’s orders and has no effect on the equity distributions awarded in

the Lien-Related Litigation.

A. The Litigation Funding Agreement Is Not Facially

Inconsistent with Sanchez’s Plan and the Court’s

Orders

The Court first turns to the language of Sanchez’s plan of

reorganization. Section IV(D) of the plan addresses the Lien-Related

Litigation and the costs and expenses associated with the litigation.

Case No. 19-34508, ECF No. 1212 at 50. The relevant provision

regarding litigation financing is the following:

Without limiting the foregoing, for purposes of

clarification, nothing herein restricts the ability of the

Lien-Related Litigation Creditor Representative to employ

professionals and seek or secure funding or financing to

pay for the reasonable fees and expenses incurred in

connection with the Lien-Related Litigation to the extent

permitted by otherwise applicable law.

Case No. 19-34508, ECF No. 1212 at 50–51.

Lake Whillans and Clear Harbor argue this clause has two

limitations, the first being that the provision of financing be permitted

by “otherwise applicable law” and the second that the amount of

financing, including the rate of return, be reasonable. ECF Nos. 1 at 31;

54 at 21–24. The Court agrees only with the first limitation in a facial

challenge. The second limitation may arise under the breach of fiduciary

duty allegations, but is not a per se violation of the confirmed plan.

“[C]ourts regularly apply principles of contract interpretation to

clarify the meaning of the language in reorganization plans.” Compton

v. Anderson (In re MPF Holdings U.S. LLC), 701 F.3d 449, 457 (5th Cir.

2012). “The language of the contract, unless ambiguous, represents the

intention of the parties.” Kimbell Foods, Inc. v. Republic Nat’l Bank of

Dall., 557 F.2d 491, 496 (5th Cir. 1977), aff’d sub nom. U. S. v. Kimbell

Foods, Inc., 440 U.S. 715 (1979).

The clause’s language states that the Creditor’s Representative

may obtain litigation financing to pay for the Lien-Related Litigation to

the extent that such financing is permitted by “otherwise applicable

law.” The clause also requires that the actual fees and expenses of

litigation be reasonable. The 90% rate of return from the Litigation

Funding Agreement is not a fee or expense of litigation but rather a

conditional return on debt incurred to pay for the fees and expenses of

litigation. See Dopp v. Yari, 927 F. Supp. 814, 823–24 (D.N.J. 1996).

The Plaintiffs do not allege that the underlying legal fees and expenses

were unreasonable. The only limitation with respect to the 90% return

is that it be valid under other “otherwise applicable law.”

Lake Whillans’ and Clear Harbor’s next purported qualification

on Delaware Trusts’ ability to obtain litigation financing is the following

language in Sanchez’s plan: “The parties to the Lien-Related Litigation

shall use all reasonable efforts to minimize the costs of such litigation.”

Case No. 19-34508, ECF No. 1212 at 50. Lake Whillans and Clear

Harbor argue that Delaware Trust did not minimize costs of the Lien-

Related Litigation because it failed to engage in a market solicitation

process for litigation financing and obtained financing that resulted in

90% of net recoveries of the Lien-Related Litigation being allocated to

the Litigation Funders. ECF No. 54 at 20. This provision only requires

the parties to make reasonable efforts to minimize the costs of the Lien-

Related Litigation itself. There is no allegation that the $5.6 million in

fees and expenses were unreasonable. This provision does not

necessarily limit the 90% return in the Litigation Funding Agreement.

That is a challenge that is preserved for the various fiduciary claims

that survive dismissal.

Lake Whillans and Clear Harbor next argue that the Litigation

Funding Agreement violates the pro rata distribution provided in

Sanchez’s plan and allocated in the Court’s final order resolving the

Lien-Related Litigation. ECF Nos. 1 at 32; 54 at 23–26. The Court’s

final order allocated 69.73% of the equity interests “amongst the holders

of Allowed Class 4 and Allowed Class 5 Claims, their successors and

assigns, pro rata.” Case No. 19-34508, ECF No. 2809 at 1. Sanchez’s

plan also requires pro rata distribution of the equity interests. Case No.

19-34508, ECF No. 1212 at 45–46. Lake Whillans and Clear Harbor

assert that the Litigation Funding Agreement’s allocation of 90% of the

net returns of the Lien-Related Litigation to the Litigation Funders

necessarily violates the pro rata distribution by distributing the vast

majority of the returns to a select few unsecured creditors. ECF No. 54

at 23, 25.

The Litigation Funding Agreement does not alter the pro rata

allocation in the Court’s order. The Litigation Funding Agreement

compensates the Litigation Funders for their risk in financing the costs

of the Lien-Related Litigation. Although the Litigation Funders are

themselves unsecured creditors, the compensation they receive is not on

account of their claims but rather pursuant to a separate contribution.

See In re Peabody Energy Corp., 933 F.3d 918, 925 (8th Cir. 2019) (“[A]

reorganization plan may treat one set of claim holders more favorably

than another so long as the treatment is not for the claim but for district,

legitimate rights or contributions from the favored group separate from

the claim.”). It is true that a significant portion of the net recoveries are

allocated to the Litigation Funders under their agreement with

Delaware Trust. The remainder of the net recoveries will nevertheless

be distributed pro rata under Sanchez’s plan and the Court’s final order

resolving the Lien-Related Litigation.

The Litigation Funding Agreement is not inconsistent with

Sanchez’s plan and the Court’s orders. The issue of whether the 90%

allocation complies with applicable law is addressed below. But nothing

in the plan itself restricted the amount that could be allocated to the

Litigation Funders.

B. The Litigation Funding Agreement Is Not

Inconsistent with “Otherwise Applicable Law”

The next consideration is determining whether the Litigation

Funding Agreement is consistent with “otherwise applicable law.”

The parties contest whether the Litigation Funding Agreement

violates the Bankruptcy Code’s priority distribution scheme. Lake

Whillans and Clear Harbor point to language in Sanchez’s plan of

reorganization requiring any issues with the allocation of the final

equity distribution to be determined by the Court and consistent with

“the priorities set forth in sections 1129(b) and 726 of the Bankruptcy

Code.” Case No. 19-34508, ECF No. 1212 at 51. Sanchez’s plan also

requires the net proceeds of the Lien-Related Litigation to be allocated

to the general unsecured claims in a manner consistent with these

priorities. Case No. 19-34508, ECF No. 1212 at 46. Lake Whillans and

Clear Harbor argue that the “financing arrangements upend the Code’s

priority scheme by delivering almost all the recovery into the coffers of

a favored few.” ECF No. 54 at 18. Lake Whillans and Clear Harbor

seem to be alleging that the 90% rate of return violates § 726 of the

Bankruptcy Code. ECF No. 54 at 26. They make no arguments as to

how § 1129(b) is violated.

Section 726 of the Bankruptcy Code establishes “a waterfall for

the distribution of a debtor’s assets in a Chapter 7 liquidation.” In re

Ultra Petroleum Corp., 51 F.4th 138, 158 (5th Cir. 2022), cert. denied

sub nom. Ultra Petroleum Corp. v. Ad Hoc Comm. of OpCo Unsecured

Creditors, 143 S. Ct. 2495 (2023). It dictates the order of distribution of

the property of the bankruptcy estate. In re MortgageAmerica Corp.,

714 F.2d 1266, 1274 (5th Cir. 1983). This priority system applies to

payment on account of claims against the bankruptcy estate. See 11

U.S.C. § 726(a).

Although the Court does not agree that there is a violation of

§ 726, that issue is not relevant. Section 726 does not directly apply in

a chapter 11 case. It is certainly true that § 726 sets a baseline measure

for how a hypothetical chapter 7 case would be viewed for plan

confirmation. Confirmation has occurred. Moreover, the complaint fails

to even suggest how a hypothetical chapter 7 trustee would have funded

the litigation.

The compensation paid to the Litigation Funders under the

Litigation Funding Agreement is not payment on account of their claims

against Sanchez’s estate. It is a conditional payment made to

compensate the Litigation Funders for the provision of value separate

from their claims. See In re Peabody Energy Corp., 933 F.3d at 925; cf.

In re Latam Airlines Grp., S.A., 643 B.R. 756, 766 (S.D.N.Y. 2022)

(“Courts often approve reorganization plans that provide certain

claimants additional benefits—including backstop fees and additional

opportunities to invest in preferred equity—in exchange for their

agreement to backstop certain offerings.”). Although the Litigation

Funders may be unsecured creditors entitled to a distribution under the

Court’s final order, their compensation under the Litigation Funding

Agreement is a repayment of principal and payment of a rate of return.

The Litigation Funding Agreement does not violate the Code’s priority

scheme.

Lake Whillans and Clear Harbor next argue that the Litigation

Funding Agreement violates principles of lodestar. ECF No. 54 at 18.

Lodestar is a method applied to calculate court-awarded attorneys’ fees

and has no relevance to the Litigation Funding Agreement. See Fessler

v. Porcelana Corona De Mexico, S.A. DE C.V., 23 F.4th 408, 415–16 (5th

Cir. 2022). Lake Whillans and Clear Harbor also assert that the returns

of the Litigation Funding Agreement do not fall within a category of

taxable court costs. ECF No. 54 at 18–19. These payments are not court

costs. These arguments fail.

The parties next contest whether the common fund doctrine

supports the Litigation Funding Agreement. ECF Nos. 54 at 19; 57 at

13. Application of the doctrine is unnecessary. The common fund

doctrine is an equitable remedy used to reimburse litigation expenses

and costs out of a class recovery or a fund recovered for the benefit of a

group. US Airways, Inc. v. McCutchen, 569 U.S. 88, 96 (2013); City of

San Antonio, Texas v. Hotels.com, L.P., No. 5-06-CV-381-OLG, 2017 WL

1382553, at *17 (W.D. Tex. Apr. 17, 2017); In re Enron Corp. Sec.,

Derivative & "ERISA" Litig., No. CIV.A. H-01-3624, 2008 WL 2714176,

at *4 (S.D. Tex. July 10, 2008). It is “based on the principle that those

receiving the benefits of the suit should bear their fair share of the

expenses.” City of Dallas v. Arnett, 762 S.W.2d 942, 954 (Tex. App.

1988), writ denied (Apr. 26, 1989). Sanchez’s plan of reorganization

permits the Creditor Representative to finance the Lien-Related

Litigation. The Court’s order appointing Delaware Trust as the Creditor

Representative permits any of the litigation expenses advanced by the

Litigation Funders to be paid first out from the net recoveries of the

Lien-Related Litigation. Case No. 19-34508, ECF No. 1289 at 2.

Delaware Trust was permitted to obtain litigation financing with first-

out reimbursement through the proceeds of litigation by operation of

Sanchez’s plan and the Court’s orders.

Lake Whillans’ and Clear Harbor’s remaining arguments contest

whether Delaware Trust breached its fiduciary duties. ECF No. 54 at

19, 21–22. These arguments do not address whether the Litigation

Funding Agreement complies with applicable law. They also replicate

arguments made in the complaint’s second claim for relief. These

arguments are addressed below.

Lake Whillans’ and Clear Harbor’s first claim does not state a

plausible basis for relief. The complaint may be amended with respect

to this claim.

II. LAKE WHILLANS’ AND CLEAR HARBOR’S SECOND CLAIM DOES

NOT STATE A PLAUSIBLE BASIS FOR RELIEF

Lake Whillans’ and Clear Harbor’s second claim for relief alleges

a breach of fiduciary duty by Delaware Trust. ECF No. 1 at 32. They

contend that Delaware Trust owed duties to the unsecured claimholders

to “faithfully implement the Plan, not to misappropriate recoveries, and

not to charge unsecured claimholders for payments beyond the

reasonable value of services benefiting them,” as well as a duty to

“ensure fair processes, terms, and arrangements for any litigation

funding agreements.” ECF No. 1 at 32. They claim Delaware Trust

breached its duties by entering into the Litigation Funding Agreement

and agreeing to “transfer 90% of the net recoveries of general unsecured

claimholders to the Preferred Claimholders, in addition to repayment of

funds advanced.” ECF No. 1 at 32. Delaware Trust also allegedly

violated its duties “by failing to engage in a transparent, adequate, and

fair process for soliciting, negotiating, and securing funding

arrangements.” ECF No. 1 at 32–33. They finally allege that Delaware

Trust breached its duties “by appointing as a director of the Reorganized

Debtor a managing director of Benefit Street, one of the Preferred

Claimholders, who conspired to reallocate equity that rightfully belongs

pro rata to Plaintiffs and other unsecured claimholders.” ECF No. 1 at

33.

Delaware Trust owes fiduciary duties to the unsecured creditors

it represents. See Am. Med. Int'l, Inc. v. Giurintano, 821 S.W.2d 331,

339 (Tex. App. 1991) (“A fiduciary relationship exists when the parties

are under a duty to act for or give advice for the benefit of another upon

matters within the scope of that relationship. It exists where a special

confidence is placed in another who in equity and good conscience is

bound to act in good faith and with due regard to the interests of the one

placing confidence.”). Nevertheless, the Court has provided the Creditor

Representative certain protections against suit for breaches of duty.

The Court’s order appointing Delaware Trust as the Creditor

Representative provides:

The common law protections afforded to persons acting

pursuant to court orders shall apply to [Delaware Trust

Company], and its current and former directors, officers,

members, employees, partners, managers, independent

contractors, agents, representatives, principals,

professionals, consultants, financial advisors, attorneys,

accountants, investment bankers, and other professional

advisors (the “DTC Parties”), to the extent that the

common law protections arise under applicable non-

bankruptcy law.

Case No. 19-34508, ECF No. 1289 at 2.

The common law provides near-absolute protection against suit

to those acting pursuant to court orders, including for breaches of

fiduciary duties. See In re Ondova Ltd. Co., 914 F.3d 990, 993 (5th Cir.

2019). The immunity is derived from judicial immunity and is not lost

“even though ‘the action (the judge) took was in error, was done

maliciously, or was in excess of his authority . . . .’” Boullion v.

McClanahan, 639 F.2d 213, 214 (5th Cir. 1981) (quoting Stump v.

Sparkman, 435 U.S. 349, 356 (1978)). Only actions that fall outside the

scope of the protected individual’s duties are not entitled to near

absolute immunity. Ondova, 914 F.3d at 993.

When a bankruptcy trustee does not act directly pursuant to a

court order, but still acts within the scope of its duties as a trustee, it is

entitled to a qualified immunity. Id.; see In re Highland Cap. Mgmt.,

L.P., 48 F.4th 419, 437 (5th Cir. 2022) (“[T]he Independent Directors are

entitled to all the rights and powers of a trustee. . . . It follows that the

Independent Directors are entitled to the limited qualified immunity for

an actions short of gross negligence.”).

A trustee’s qualified immunity is akin to the business judgment

standard applied to corporate fiduciaries. In Texas, the business

judgment rule “protects corporate officers and directors, who owe

fiduciary duties to the corporation, from liability for acts that are within

the honest exercise of their business judgment and discretion.” Sneed v.

Webre, 465 S.W.3d 169, 173 (Tex. 2015). The rule has “been imported

into the bankruptcy courts based on the application of non-bankruptcy

law to the conduct of a fiduciary.” In re CNC Payroll, Inc., 491 B.R. 454,

461 (Bankr. S.D. Tex. 2013).

In Smyth, the Fifth Circuit addressed the proper standard to be

applied when a bankruptcy trustee faces personal liability in the

performance of its duties. In re Smyth, 207 F.3d 758, 761 (5th Cir. 2000).

The court first considered the 1997 Final Report of the National

Bankruptcy Review Commission. Id. The court noted that, after

examining conflicting policies,2 the “Commission ended up

recommending the adoption of a gross negligence standard for Chapter

7, 12 and 13 trustees, and tying a Chapter 11 trustee to the standard of

care applicable to officers and directors of a corporation in the state in

which the Chapter 11 case is pending.” Id. at 761–62.

The Court then analyzed a bankruptcy trustee’s duties. Id. The

Court found “[t]he requirement that a trustee maintain

disinterestedness often results in the selection of trustees who have

limited historical knowledge of the debtor’s business or prior

understanding of the industry in which the business is operated.” Id.

“In addition, the trustee must make enormously complex decisions

within tight time constraints and without the assistance of—in fact, in

the face of opposition or hostility from—both secured and unsecured

creditors.” Id. Faced with these considerations, the Court concluded

that “trustees should not be subjected to personal liability unless they

are found to have acted with gross negligence.” Id. The Court also held

that a trustee could be personally liable “for willfully and deliberately

breaching his fiduciary duty of loyalty.” Id.

This standard is sensible. “[C]laims for gross negligence are not

barred by the business judgment rule.” F.D.I.C. v. Benson, 867 F. Supp.

512, 523 (S.D. Tex. 1994) (citing Cates v. Sparkman, 11 S.W. 846, 849

(Tex. 1889). A breach of the duty of loyalty is also not protected by the

business judgment rule. See Gearhart Indus., Inc. v. Smith Int'l, Inc.,

2 “[T]oo little protection might expose a trustee to excessive personal liability and

dissuade capable people from becoming trustees, while too much protection would

jeopardize the goal of responsible estate management.” Id. at 761–62.

741 F.2d 707, 719–20 (5th Cir. 1984). The Smyth court essentially

applied the business judgment rule to the conduct of bankruptcy

trustees. See id.; Resol. Tr. Corp. v. Norris, 830 F. Supp. 351, 358 (S.D.

Tex. 1993).

Delaware Trust is not a bankruptcy trustee. Nevertheless, its

duties are substantially similar to those both of a bankruptcy trustee

and of an independent corporate fiduciary. Initially, both a bankruptcy

trustee and Delaware Trust owe comparable fiduciary duties to a

bankruptcy estate’s creditors. In re Performance Nutrition, Inc., 239

B.R. 93, 111 (Bankr. N.D. Tex. 1999) (“A trustee in bankruptcy owes a

duty of care and a duty of loyalty to the corporation and its shareholders,

similar to a director’s fiduciary duties, but also owes those same duties

to the creditors of the bankruptcy corporation.” (citing In re Schepps

Food Stores, Inc., 160 B.R. 792, 797–98 (Bankr. S.D. Tex. 1993))); In re

Huffman, 486 B.R. 343, 354 (Bankr. S.D. Miss. 2013) (“A bankruptcy

trustee is charged with the duty to maximize the value of the bankruptcy

estate for creditors.” (citing 11 U.S.C. § 704)).

One of the responsibilities of a chapter 11 trustee is pursuing

claims belonging to the bankruptcy estate in order to maximize recovery

for the estate and creditors. See In re MPF Holdings US LLC, 701 F.3d

449, 453–54 (5th Cir. 2012). In this case, Delaware Trust is responsible

for pursuing the Lien-Related Litigation on behalf of Sanchez’s

unsecured creditors. Case No. 19-34508, ECF Nos. 1212 at 36, 53. The

recovery from that litigation is to determine the ultimate distribution of

the bankruptcy estate. Case No. 19-34508, ECF Nos. 1212 at 36–37, 49.

Delaware Trust’s role in Sanchez’s bankruptcy faces the same

considerations as those posed by the Commission and Smyth court. Too

little protection to Delaware Trust would hinder its ability to perform

its duties, including securing financing to pay for the Lien-Related

Litigation. Smyth, 207 F.3d at 761–62; Case No. 19-34508, ECF No.

1212 at 50–51. Some form of financing was necessary for Delaware

Trust to perform its ultimate duty of pursuing claims and obtaining

recovery for the unsecured creditors. Case No. 19-34508, ECF No. 1256

at 21–22. These considerations support a finding that Delaware Trust’s

conduct should be analyzed under the same standard applied to

bankruptcy trustees and business fiduciaries.

The Court concludes that the qualified immunity standard

applies to Delaware Trust. For Delaware Trust to be held liable, Lake

Whillans and Clear Harbor must allege either gross negligence or willful

breach of fiduciary duty by Delaware Trust. These are defined through

common law standards. See In re Schooler, 725 F.3d 498, 509 (5th Cir.

2013). Gross negligence is:

The intentional failure to perform a manifest duty in

reckless disregard of the consequences. . . . It is an act or

omission respecting legal duty of an aggravated character

as distinguished from a mere failure to exercise ordinary

care. It amounts to indifference to present legal duty and

to utter forgetfulness of legal obligations so far as other

persons may be affected.

Smyth, 207 F.3d at 762. The duty of loyalty generally prevents

self-dealing transactions and conflicts of interest by a fiduciary. Resol.

Tr. Corp. v. Norris, 830 F. Supp. at 358 (citing Gearhart, 741 F.2d at

719–20.

There is no allegation that Delaware Trust was acting to line its

own pockets, that it was offered or accepted a bribe, or that it otherwise

engaged in criminal or quasi-criminal behavior that might remove its

protections.

Delaware Trust will have nearly full immunity for implementing

a direct order of the Court. If Delaware Trust was acting within the

scope of its duties, but not pursuant to an explicit direction of the Court,

it will be liable only for its gross negligence or intentional wrongdoing.

A. Lake Whillans and Clear Harbor Do Not Sufficiently

Plead a Breach of Fiduciary Duty with Respect to

Obtaining Litigation Financing

Sanchez’s plan of reorganization permits Delaware Trust to

obtain financing to pay for the costs of litigation. Case No. 19-34508,

ECF No. 1212 at 50–51. After plan confirmation, the Court held a

hearing on the Unsecured Creditor Committee’s emergency motion to

approve a litigation trust agreement. At the hearing, Delaware Trust

explained the need to obtain financing to fund the Lien-Related

Litigation. Case No. 19-34508, ECF No. 1256 at 21–22. Delaware Trust

also explained that this funding would likely come from Sanchez’s

unsecured creditors. Case No. 19-34507, ECF No. 1256 at 33.

At the hearing, the Court stated that, upon its appointment as

Creditor Representative, Delaware Trust would be operating with

immunity when acting pursuant to the Court’s orders. Case No. 19-

34508, ECF No. 1256 at 26, 30. The Court also permitted the Creditor

Representative to pay for the Lien-Related Litigation, with litigation

costs to be paid first out of any proceeds. Case No. 19-34508, ECF No.

1256 at 7–8, 25–26. Following the hearing, the Court issued an order

appointing Delaware Trust as the Creditor Representative. Case No.

19-34508, ECF No. 1289. The order contains a provision for first-out

payment of costs of Lien-Related Litigation from the proceeds of

litigation and provided common law quasi-judicial immunity, as

described above. Case No. 19-34508, ECF No. 1289 at 2.

The act of obtaining litigation financing itself is one taken

pursuant to Sanchez’s plan and the Court’s orders. The act would fall

under Delaware Trust’s quasi-judicial immunity. Lake Whillans and

Clear Harbor do not challenge Delaware Trust’s act of obtaining

litigation financing. Rather, they challenge the terms and surrounding

circumstances of the financing transaction. The Court’s order does not

specify under what terms Delaware Trust may obtain litigation

financing.

The need for financing and the potential sources were disclosed

prior to Delaware Trust taking any action as Creditor Representative.

Although not entitled to quasi-judicial immunity, the financing

agreement and the circumstances surrounding the agreement fall

within the scope of Delaware Trust’s duties under Sanchez’s plan and

the Court’s orders. Delaware Trust is entitled to qualified immunity for

these actions. To overcome the immunity, Lake Whillans and Clear

Harbor must demonstrate a willful breach of fiduciary duty or gross

negligence.

Lake Whillans and Clear Harbor only allege facts they believe are

on non-market terms; they then engage in a leap of faith that this must

indicate a breach of Delaware Trust’s fiduciary duties. ECF No. 1 at 32–

33. The complaint does not contain any factual allegations to show the

plausibility of intentional wrongdoing or gross negligence. With respect

to the duty of loyalty, in their response to the motion to dismiss, Lake

Whillans and Clear Harbor merely claim that the “complaint’s

allegations are centered on Creditor Representative’s conflicts of

interest, egregious misconduct, corrupt motive, and self-dealing.” ECF

No. 54 at 32. This is wholly insufficient. The complaint may not merely

assume self-dealing by the outcome of the transaction at issue. The

statement that Delaware Trust had a conflict of interest is not supported

by any facts. The statement that Delaware Trust engaged in egregious

misconduct is not supported by any facts. The statement that Delaware

Trust was corrupt is not supported by any facts. The statement that

Delaware Trust had a corrupt motive is not supported by any facts. The

statement that Delaware Trust was engaged in self-dealing is not

supported by any facts. The Plaintiffs may not conclude that any of

those facts are true merely because they do not like the ultimate result.

Any amended complaint must either delete or support those allegations

with facts that are supportable under Rule 9011. The Court will not

again tolerate these kinds of allegations if they are so speculative as to

violate Rule 9011. The complaint must make specific allegations of facts

sufficient to give rise to a plausible inference that Delaware Trust was

self-dealing.

Lake Whillans and Clear Harbor are granted leave to amend their

second claim with respect to Delaware Trust obtaining litigation

financing. They must allege gross negligence or self-dealing by

Delaware Trust. And those allegations must be factually supported in

accordance with Rule 9011.

B. Lake Whillans and Clear Harbor Do Not Sufficiently

Plead a Breach of Fiduciary Duty with Respect to

Appointing Mr. Buckley to Sanchez’s Board

Paragraph four of the Court’s final order resolving the Lien-

Related Litigation provides: “The Lien-Related Creditor Representative

may immediately designate a Director under Section 5.3(a)(iii) of the

Shareholder’s Agreement.” Case No. 19-34508, ECF No. 2809 at 1.

Delaware Trust filed a notice stating that “pursuant to ¶4 of the Final

Order Resolving Lien-Related Litigation [ECF No. 2809], the Lien-

Related Litigation Creditor Representative has designated Brent

Buckley of Benefit Street Partners as a Director of the Reorganized

Debtor.” Case No. 19-34508, ECF No. 2812 at 1.

Delaware Trust’s act of appointing Mr. Buckley to Sanchez’s

board of directors is an action taken pursuant to the Court’s order. This

act itself would fall under Delaware Trust’s quasi-judicial immunity.

Lake Whillans and Clear Harbor do not challenge Delaware Trust’s

right to appoint a director to Sanchez’s board. They challenge who was

appointed to the board. The Court’s order does not specify who is to be

selected to Sanchez’s board.

Although not entitled to quasi-judicial immunity, Delaware

Trust’s choice of director nevertheless falls within the scope of its duties

under the Court’s order and is entitled to qualified immunity. To

overcome the immunity, Lake Whillans and Clear Harbor must

demonstrate a willful breach of fiduciary duty or gross negligence.

Lake Whillans and Clear Harbor only allege that Delaware Trust

breached its fiduciary duties by appointing Mr. Buckley to Sanchez’s

board, “who is inherently conflicted as a managing director of Benefit

Street, one of the Preferred Claimholders who conspired to siphon away

Plaintiffs’ pro rata share of equity.” ECF No. 1 at 11. The complaint is

devoid of any factual allegations showing intentional wrongdoing or

gross negligence by Delaware Trust in appointing Mr. Buckley. The

complaint also fails to allege any self-dealing by Delaware Trust in

appointing Mr. Buckley to the board. As with litigation financing, the

complaint must make specific allegations of facts sufficient to give rise

to a plausible inference that Delaware Trust was grossly negligent or

self-dealing. Those allegations must comply with Rule 9011.

Lake Whillans and Clear Harbor are granted leave to amend their

complaint with respect to the second claim for relief.

III. LEAVE TO AMEND IS GRANTED WITH RESPECT TO LAKE

WHILLANS’ AND CLEAR HARBOR’S THIRD AND FOURTH CLAIMS

FOR RELIEF

Lake Whillans’ and Clear Harbor’s third claim for relief alleges

that the Litigation Funders engaged in a conspiracy to commit a breach

of fiduciary duty. ECF No. 1 at 33–35. They claim that the Litigation

Funders knew that Delaware Trust owed fiduciary duties to all

unsecured claimholders and they “knowingly participated in [Delaware

Trust’s] breach of its duties by funding its litigation expenses in

exchange for paying far more than the reasonable value of services

benefitting all unsecured claimholders.” ECF No. 1 at 34. Their fourth

claim for relief alleges that the Litigation Funders aided and abetted a

breach of fiduciary duty. ECF No. 1 at 36. They assert that the

Litigation Funders “knew of the fiduciary relationship between

[Delaware Trust] and all unsecured claimholders” and knew that

Delaware Trust’s “actions were tortious and that it breached its

fiduciary duties.” ECF No. 1 at 36. They allege that the Litigation

Funders acted with intent to assist and in fact “assisted and encouraged

fiduciary breaches and tortious conduct of [Delaware Trust].” ECF No.

1 at 36.

Delaware Trust and the Litigation Funders argue that Delaware

Trust’s immunity from suit for breach of fiduciary duty requires the

dismissal of the conspiracy and aiding and abetting claims. ECF No. 48

at 26, 30. Under Texas law, conspiracy and aiding and abetting are

dependent torts. W. Fork Advisors, LLC v. SunGard Consulting Servs.,

LLC, 437 S.W.3d 917, 921 (Tex. App. 2014). This means that “when an

underlying tort fails, there can be neither a conspiracy claim nor an

aiding and abetting claim related to that failed tort.” Id. (“West Fork’s

failure to establish independent tort liability against the named

defendant is fatal to its aiding and abetting claims as well as its

conspiracy claims.”). The principle applies regardless of the reason for

failure of the underlying tort. Id. at 920.

A dependent claim may be maintained even if no named

defendant faces liability for the underlying tort. United Biologics, L.L.C.

v. Allergy & Asthma Network/Mothers of Asthmatics, Inc., 819 F. App’x

204, 208–09 (5th Cir. 2020). In United Biologicals, plaintiffs brought

against defendants claims for Texas statutory violations, tortious

interference with contract, and civil conspiracy. Id. at 207. At the time

of trial, all but two defendants settled. Id. After trial, defendants moved

for a directed verdict, partly on grounds that “civil conspiracy was a

‘legal impossibility’ because Phadia [a defendant], which allegedly

committed the underlying tort, had settled.” Id. They argued that

“‘[t]he Court [could not] adjudicate the conduct of the parties who [were

not] before it,’ ‘there [was] no other way for the Court to adjudicate the

underlying tort at issue,’ and ‘Miss Winders [a defendant] could not

conspire with her own company.’” Id. The district court agreed with the

reasoning and entered a directed verdict on civil conspiracy. Id. The

Fifth Circuit disagreed and found that “Phadia’s settlement had no

bearing on the Plaintiff’s ability to prove a civil conspiracy case against

the Defendants based on an underlying tort committed by Phadia.” Id.

at 208–09. The court noted that under Texas law, “a defendant’s

liability for conspiracy depends on participation in some underlying tort

for which the plaintiff seeks to hold at least one of the named defendants

liable,” and that the co-conspirator need not actually face liability for the

tort. Id. (quoting Tilton v. Marshall, 925 S.W.2d 672, 681 (Tex. 1996)).

The court found that “Texas courts are well-versed in submitting for the

jury’s consideration the question of whether persons in the case

contributed to the wrongs alleged . . . .” Id. The court concluded that “a

settlement in general does not prevent submitting to the jury questions

about that party’s conduct (only pursuing an actual judgment against

the settling party).” Id. The court relied on § 33.003(a) of the Texas

Civil Practice and Remedies Code, under which the trier of fact “‘shall

determine the percentage of responsibility’ for claimants, defendants,

settling persons, and any responsible parties.” Id. (quoting Tex. Civ.

Prac. & Rem. Code Ann. § 33.003(a)).

At this time, the Court does not hold that Delaware Trust has

quasi-judicial immunity for any of the challenged actions. In the case

that it does so in its to-be-amended complaint, Delaware Trust’s

immunity is not a basis for dismissing the conspiracy and aiding and

abetting claims.

A. The Qualified Immunity Standard Applies to

Delaware Trust’s Conduct

The parties contest the application of the business judgment rule

to Lake Whillans’ and Clear Harbor’s aiding and abetting claim.

Delaware Trust and the Litigation Funders argue that Delaware Trust’s

protections under the business judgment rule require the dismissal of

the claim. ECF No. 48 at 28–30. Delaware Trust has qualified

immunity for the actions challenged by Lake Whillans and Clear

Harbor. Its qualified immunity would apply to both the third and fourth

claims for relief. This may lead to a finding that the Delaware Trust did

not breach its fiduciary duties, requiring dismissal of the claims.

The complaint may be amended with respect to the third and

fourth claims for relief. Lake Whillans and Clear Harbor must plead

gross negligence or self-dealing in order to state a plausible basis for a

breach of fiduciary duty by Delaware Trust. This claim cannot survive

unless there was a breach of duty by Delaware Trust.

B. Lake Whillans’ and Clear Harbor’s Aiding and

Abetting Allegations Are Otherwise Sufficient

Delaware Trust and the Litigation Funders argue that Lake

Whillans and Clear harbor have failed to sufficiently plead their aiding

and abetting claim. They assert that aiding and abetting of a breach of

fiduciary duty is subject to the Federal Rule of Civil Procedure 9(b)

heightened pleading standard and Lake Whillans’ and Clear Harbor’s

conclusory statements about actual knowledge are insufficient to

sustain their claim. ECF No. 48 at 27–28.

Rule 9(b)’s heightened pleading standard applies only when

fraud or mistake is an element of a claim or when “fraudulent conduct

is alleged to underlie a claim for which fraud is a possible—but not

necessary—element.” Tigue Inv. Co. v. Chase Bank of Texas, N.A., No.

CIV.A.3:03 CV 2490 N, 2004 WL 3170789, at *2 (N.D. Tex. Nov. 15,

2004). In the latter situation, “particularity is only required to the

extent that plaintiff in fact alleges fraud.” Id.

Lake Whillan’s and Clear Harbor’s aiding and abetting claim

alleges that the Litigation Funders knew of and assisted Delaware

Trust’s fiduciary breaches. ECF No. 1 at 36. Those fiduciary breaches

are based on Delaware Trust’s entry into the Litigation Funding

Agreement, which Lake Whillans and Clear Harbor argue benefited the

Litigation Funders at the expense of the other unsecured creditors. ECF

No. 1 at 32–33. The overarching allegation is that Delaware Trust failed

to act in the best interests of the unsecured creditors that it represents.

Lake Whillans and Clear Harbor do not claim that Delaware Trust or

the Litigation Funders engaged in conduct that defrauded the

unsecured creditors. Rule 9(b)’s heightened pleading standard does not

apply.

Delaware Trust and the Litigation Funders also argue that the

aiding and abetting claim fails to sufficiently plead the Litigation

Funders’ actual knowledge of Delaware Trust’s breaches. ECF No. 48

at 27. Lake Whillans’ and Clear Harbor’s claim for aiding and abetting

of a breach of fiduciary is based on assistance or encouragement. ECF

No. 1 at 36. The elements of this claim are (1) Delaware Trust breached

its fiduciary duties; (2) the Litigation Funders had knowledge that

Delaware Trust’s conduct constituted a breach of fiduciary duty; (3) the

Litigation Funders had the intent to assist Delaware Trust in

committing the tort; (4) the Litigation Funders gave Delaware Trust

assistance or encouragement; and (5) the Litigation Funders’ assistance

or encouragement was a substantial factor in causing the breach of

fiduciary duty. Fiamma Statler, LP v. Challis, No. 02-18-00374-CV,

2020 WL 6334470, at *12 (Tex. App. Oct. 29, 2020).

Under Federal Rule of Civil Procedure 8(a), a claim for relief

requires “a short and plain statement of a claim showing that the

pleader is entitled to relief.” Rule 8 is not satisfied where a party pleads

“the bare elements of his cause of action.” Iqbal, 556 U.S. at 687. “Post-

Twombly and Iqbal, courts have typically rejected conclusory allegations

of knowledge.” Wistron Corp. v. Phillip M. Adams & Assocs., LLC, No.

C-10-4458 EMC, 2011 WL 4079231, at *5 (N.D. Cal. Sept. 12, 2011).

Lake Whillans’ and Clear Harbor’s aiding and abetting claim

must provide a plausible factual allegation that “the Litigation Funders

had knowledge that the Creditor Representative’s conduct constituted a

breach of fiduciary duty.” The complaint states that the Litigation

Funders knew that Delaware Trust owed fiduciary duties to all the

unsecured claimholders and that it would breach those duties by

entering into the Litigation Funding Agreement “in exchange for paying

far more than the reasonable value of services benefiting all unsecured

claimholders.” ECF No. 1 at 34. The complaint also states that the

Litigation Funders knew that Delaware Trust would breach its duties if

it failed to engage in a transparent funding solicitation process and by

appointing a conflicted director to Sanchez’s board. ECF No. 1 at 34.

These allegations go beyond mere conclusory recitals of the elements of

an aiding and abetting claim. However, they do not go far enough to

demonstrate gross negligence by Delaware Trust.

Although the aiding and abetting claim must be amended due to

the failure to properly plead gross negligence or self-dealing, the aiding

and abetting allegations otherwise meet the pleading standard if the

Plaintiffs can demonstrate a plausible claim that Delaware Trust

breached its duties.

C. Lake Whillans’ and Clear Harbor’s Conspiracy

Allegations Are Otherwise Sufficient

Delaware Trust and the Litigation Funders also allege that Lake

Whillans’ and Clear Harbor’s conspiracy claim must be dismissed

because the complaint does not sufficiently plead the specific intent and

knowledge required for the claim. ECF No. 48 at 30–31.

A civil conspiracy “is a combination by two or more persons to

accomplish an unlawful purpose or to accomplish a lawful purpose by

unlawful means.” Massey v. Armco Steel Co., 652 S.W.2d 932, 934 (Tex.

1983). The elements of a civil conspiracy claim are: “(1) two or more

persons; (2) an object to be accomplished; (3) a meeting of minds on the

object or course of action; (4) one or more unlawful, overt acts; and (5)

damages as the proximate result.” Id. “[C]ivil conspiracy requires

specific intent. For a civil conspiracy to arise, the parties must be aware

of the harm or wrongful conduct at the inception of the combination or

agreement.” Johnston v. Dexel, No. CV H-16-3215, 2017 WL 11612500,

at *11 (S.D. Tex. Aug. 18, 2017) (quoting Triplex Commc’ns, Inc. v. Riley,

900 S.W.2d 716, 719 (Tex. 1995)). “A common intent to accomplish a

given goal, plus a tort in furtherance of that goal, are not enough. The

parties must have agreed to accomplish an unlawful goal or to

accomplish a lawful goal by unlawful means.” Id. (quoting Juhl v.

Airington, 936 S.W.2d 640, 644 (Tex. 1996)). “One cannot agree,

expressly or tacitly, to commit a wrong about which he has no

knowledge.” Firestone Steel Prod. Co. v. Barajas, 927 S.W.2d 608, 615

(Tex. 1996).

“The federal courts have recognized that the nature of

conspiracies often makes it impossible for the plaintiff to provide details

at the pleading stage and that the pleader should be allowed to resort to

the discovery process and not be subjected to a dismissal of his

complaint.” 5 Charles Alan Wright & Arthur R. Miller, Federal Practice

and Procedure § 1233 (4th ed. 2021).

The complaint alleges that the Litigation Funders knew that

Delaware Trust would be breaching its fiduciary duties by entering into

agreements that “agreed to pay more than the reasonable value of

services benefiting all unsecured claimholders.” ECF No. 1 at 34. It

states that, despite this knowledge, the Litigation Funders sought to

enter into deals that awarded them a total of 90% of the net recoveries

of the Lien-Related Litigation at the expense of the unsecured creditors.

ECF No. 1 at 35. And, as alleged, the Litigation Funders and Delaware

Trust took overt acts in furtherance of this “wrongful goal” by having “a

meeting of the minds and agree[ing] to enter into the Litigation Funding

Agreements . . . and agree[ing] to appointment of an inherently

conflicted director of the Board of the Reorganized Debtor.” ECF No. 1

at 34–35. The complaint also alleges that the Litigation Funders and

Delaware Trust intentionally failed to disclose the Litigation Funding

Agreement and its terms from the unsecured claimholders until long

after the agreement was entered. ECF Nos. 1 at 8; 54 at 33. The

accusations in the complaint suggest a secret agreement to alienate 90%

of litigation recoveries to the Litigation Funders at the unsecured

creditors’ expense. Nowhere does the complaint offer any factual

support for a theory that a grant of a 90% interest was grossly negligent.

Although the conspiracy claim must be amended, the conspiracy

allegations themselves otherwise meet the pleading standard if the

Plaintiffs can demonstrate a plausible claim that Delaware Trust

breached its duties.

With respect to both of these claims, the Court has substantial

doubt that Lake Williams and Clean Harbor can demonstrate any

reason why Delaware Trust would breach its fiduciary duties. Although

motive may not be an element of either of these claims, the Court is

given pause under Iqbal and Twombly. But, the Court finds that the

allegations are minimally sufficient.

Leave to amend is granted with respect to the third and fourth

claims for relief.

IV. LAKE WHILLANS’ AND CLEAR HARBOR’S FIFTH CLAIM DOES NOT

STATE A PLAUSIBLE BASIS FOR RELIEF

Lake Whillans’ and Clear Harbor’s fifth claim for relief alleges an

impermissible modification and violation of Sanchez’s plan of

reorganization. ECF No. 1 at 36–37. They assert that Delaware Trust

and the Litigation Funders “violated and modified the Confirmed Plan

by purporting to alter the required pro rata distributions owed to holders

of claims classified as unsecured or under-secured claims.” ECF No. 1

at 37. They further assert that Delaware Trust and the Litigation

Funders did not have a right to modify the plan, and even if they did,

they did not meet the procedures for plan modification. ECF No. 1 at

37.

Lake Whillans’ and Clear Harbor’s basis for alleging that the plan

was modified is that the Litigation Funding Agreement violates the pro

rata distribution called for in Sanchez’s plan of reorganization. ECF No.

1 at 37. For the reasons stated in Section I of this Opinion, the Litigation

Funding Agreement does not alter the plan’s pro rata distribution

requirement. The Litigation Funders’ conditional rate of return is

compensation separate from their claims. As explained in Section I of

this Opinion, Lake Whillans and Clear Harbor have also not met their

burden of creating a plausible claim that the agreements violate the

terms of Sanchez’s plan.

Lake Whillans’ and Clear Harbor’s fifth claim does not state a

plausible basis for relief. Lake Whillans and Clear Harbor may amend

their complaint only with respect to their plan violation claim. The plan

modification claim is dismissed with prejudice.

V. LAKE WHILLANS’ AND CLEAR HARBOR’S SIXTH CLAIM DOES NOT

STATE A PLAUSIBLE BASIS FOR RELIEF

Lake Whillans’ and Clear Harbor’s sixth claim for relief alleges

unjust enrichment by the Litigation Funders. ECF No. 1 at 37–38. They

assert the Litigation Funders “were and would be unjustly enriched by

receiving payment far greater than the value of services rendered, paid

from the net recovery in the Lien-Related Litigation designated for all

unsecured claimholders.” ECF No. 1 at 38. The argue the Litigation

Funders “would receive this benefit at the expense of all unsecured

claimholders who are not parties to the Litigation Funding

Agreements,” and that it would be unconscionable for the Litigation

Funders to retain these benefits beyond the fair value of their services

provided. ECF No. 1 at 38.

“Unjust enrichment is an equitable principle holding that one

who receives benefits unjustly should make restitution for those

benefits.” Texas Integrated Conveyor Sys., Inc. v. Innovative Conveyor

Concepts, Inc., 300 S.W.3d 348, 367 (Tex. App. 2009). “Unjust

enrichment occurs when the person sought to be charged has wrongfully

secured a benefit or has passively received one which it would be

unconscionable to retain.” Id. “A person is unjustly enriched when he

obtains a benefit from another by fraud, duress, or the taking of an

undue advantage.” Id. “The plaintiff must establish that the defendant

received money ‘which in equity and good conscience belongs to the

plaintiff.’” Texas Carpenters Health Ben. Fund v. Philip Morris, Inc., 21

F. Supp. 2d 664, 678 (E.D. Tex. 1998), aff’d, 199 F.3d 788 (5th Cir. 2000)

(quoting Amoco Prod. Co. v. Smith, 946 S.W.2d 162, 164 (Tex. App.

1997)).

“Unjust enrichment is not a proper remedy merely because it

‘might appear expedient or generally fair that some recompense be

afforded for an unfortunate loss’ to the claimant, or because the benefits

to the person sought to be charged amount to a windfall.” Heldenfels,

832 S.W.2d at 42 (quoting Austin v. Duval, 735 S.W.2d 647, 649 (Tex.

App. 1987)). “Rather, a claim for unjust enrichment lies where the

circumstances give rise to an implied or quasi-contractual obligation to

return benefits.” Texas Carpenters, 21 F. Supp. 2d at 678

Delaware Trust and the Litigation Funders argue there can be no

unjust enrichment claim because Sanchez’s plan of reorganization

constitutes an express contract that governs the parties and the subject

matter of this suit. ECF No. 48 at 31–34. Under Texas law, “when a

valid, express contract covers the subject matter of the parties’ dispute,

there can be no recovery under a quasi-contract theory.” Fortune Prod.

Co. v. Conoco, Inc., 52 S.W.3d 671, 684 (Tex. 2000). Unjust enrichment

claims are based on quasi-contract. N. Cypress Med. Ctr. Operating Co.

v. Cigna Healthcare, 781 F.3d 182, 204 (5th Cir. 2015) (quoting Fortune

Production Co. v. Conoco, Inc., 52 S.W.3d 671, 683 (Tex. 2000)).

It is unnecessary to address whether a chapter 11 plan of

reorganization is a contract for purposes of precluding an unjust

enrichment claim. Even if the plan were a contract that governs these

parties, it does not address the subject matter of this suit. The plan

merely permitted the Creditor Representative to obtain litigation

funding. The plan made no mention of the terms of the litigation

funding. Case No. 19-34508, ECF No. 1212 at 50–51. These terms,

including the terms providing an aggregate of 90% of the net recoveries

of the Lien-Related Litigation to the Litigation Funders, were all made

pursuant to separate agreements to which the unsecured creditors were

not parties. ECF Nos. 1-1 at 2; 1-2 at 2; 1-3 at 2. Delaware Trust and

the Litigation Funders may not rely on Sanchez’s plan as a basis of

precluding Lake Whillans’ and Clear Harbor’s unjust enrichment claim.

Unjust enrichment requires the plaintiff to allege fraud, duress,

or undue advantage. Texas Integrated Conveyor, 300 S.W.3d at 367.

Lake Whillans and Clear Harbor make no allegations of fraud or duress.

ECF No. 1 at 37–38. Although not well-defined under Texas law, courts

have found undue advantage in cases where an offending party took

advantage of a position of trust or where the offending party did not pay

for goods or services. Digital Drilling Data Sys., L.L.C. v. Petrolink

Servs., Inc., 965 F.3d 365, 382 (5th Cir. 2020). There is no allegation

that the Litigation Funders did not pay for goods and services. ECF No.

1 at 37–38. There also does not seem to be any allegation of the

Litigation Funders taking advantage of a position of trust. ECF No. 1

at 37–38. Lake Whillans’ and Clear Harbor’s unjust enrichment claim

appears to be based on the premise that the Litigation Funders “took

unfair and undue advantage of Plaintiffs by arranging to confiscate

90%+ of the equity, without prior notice or consent, as a 100x return for

self-funding their own claims.” ECF No. 54 at 34. This statement does

not explain how the Litigation Funders took advantage of any position

of trust between themselves and the unsecured creditors, nor does it

make any plausible allegations of how the Litigation Funders took

undue advantage of the unsecured creditors. Lake Whillans’ and Clear

Harbor’s complaint is even more vague when it alleges that it would be

unconscionable to permit the Litigation Funders to retain the benefits

of the agreements. ECF No. at 38.

These allegations are insufficient. An unjust enrichment claim

cannot simply be based on unfair or wrongful conduct or the obtaining

of a windfall. See Texas Carpenters, 21 F. Supp. 2d at 678; Heldenfels,

832 S.W.2d at 42. Lake Whillans and Clear Harbor must explain how

the Litigation Funders engaged in fraud, duress, or the taking of undue

advantage of the unsecured creditors.

Lake Whillans’ and Clear Harbor’s sixth claim does not state a

plausible basis for relief. The complaint may be amended with respect

to this claim.

CONCLUSION

The Court will enter an order consistent with this Memorandum

Opinion.

SIGNED 04/30/2024

rr

_S/—4—

Marvin Isgur

United States Bankruptcy Judge

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