Ruff v. Destination Development Partners, Inc

UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

SUZANN RUFF,

Appellant,

v. No. 4:22-cv-1035-P

DESTINATION DEVELOPMENT

PARTNERS, INC., ET AL.,

Appellees.

MEMORANDUM OPINION & ORDER

Before the Court is Suzann Ruff’s appeal of the Bankruptcy Court’s

Amended Final Judgment with brief in support. See ECF Nos. 1, 11.

Having considered the briefing, evidence of record, and applicable law,

the Court OVERRULES Ruff’s points on appeal and AFFIRMS the

Bankruptcy Court’s decision.

BACKGROUND

The Ruff’s relationship is rough. In fact, this bankruptcy proceeding

represents merely the latest chapter in a long saga of contention

between Suzann Ruff and her sons Mike and Mark. For at least a

decade, Suzann and her sons have thrown competing allegations of

impropriety against each other regarding their business dealings in an

array of closely held holding companies and related ranchland in Palo

Pinto County. The Ruffs took their differences to arbitration, where

Suzann obtained a favorable judgment against Mike and a constructive

trust on all properties Mike owned or held “in any capacity.” That award

was subsequently incorporated into a related probate court judgment.

Mike and Mark fell back on the tried-and-true delay tactic of frivolously

removing the case to federal court in August 2015. After remand of that

action and slow progress in state court, Suzann initiated the adversary

proceeding which gives rise to this appeal.

Suzann’s arbitration win expectedly caused several of Mike’s

businesses to declare Chapter 11 bankruptcy in 2018. All told, ten

relevant entities filed for bankruptcy that year. The separate Chapter

11 proceedings were consolidated in November 2018 and John Spicer

(the “Trustee”) was appointed as Chapter 11 Trustee. After an onerous

bankruptcy proceeding, seven of the cases were dismissed in May 2023,

leaving only CM Resorts LLC, Specfac Group LLC, and Sundance Lodge

LLC (collectively, the “Debtors”). The particulars of each relevant entity

are largely irrelevant; what matters is whether the Debtors’ assets fall

under Suzann’s constructive trust. The core proceeding was simple and

revolved around that single question: does Suzann’s constructive trust

under the Arbitration Order cover properties owned by the Debtors?

Suzann thinks it does; Mike disagrees.

As Suzann sees things, the Debtors are Mike’s alter egos. And even

if the Court won’t make that legal determination, Suzann nevertheless

contends the Debtors are transferees in clear privity with Mike vis-à-vis

the contested property and the probate court’s judgment. However the

Court gets there, Suzann contends the Debtors’ property is actually

Mike’s, meaning it falls into her constructive trust as outlined in the

Arbitration Order and incorporated in the judgment. Because Suzann

waived her other causes of action in the core proceeding, her briefing

relies solely on the constructive trust claim as articulated in the

Arbitration Order.1

The Bankruptcy Court denied relief for Suzann’s claims. Suzann

says the Bankruptcy Court was wrong on the facts, and she designated

issues on appeal in December 2022. Painting with a broad brush,

Suzann attacks the Bankruptcy Court’s legal reasoning on one point and

the Court’s factual determinations on four points. The legal

consideration on appeal relates to the Bankruptcy Court’s requirement

1Notably, the Bankruptcy Court couldn’t impose a new constructive trust on the

relevant property because Suzann waived her claims against the Debtors for fraud and

breach of fiduciary duty. And the law is clear that these claims are necessary

predicates for the imposition of a new constructive trust over the property. See Bankr.

Rec. at 126 (“Suzann has, for whatever reasons, strategically determined to forego the

fraud- and conspiracy-based causes of action and pursue only the remaining causes of

action against the debtor-defendants. Thus, it is with this backdrop that the Court

considers each of these remaining claims.”).

that certain disputed properties be deeded to Mike by name for Suzann’s

constructive trust to apply. The four factual disputes on appeal relate to

the evidence in support of Suzann’s contention that Mike constructively

owns properties currently held in the Debtors’ bankruptcy estates.

While not technically a point on appeal, Suzann separately argues the

Bankruptcy Court erred in declining to reach a determination as to

whether the Debtors are in privity with Mike. As discussed below,

however, the Court endorses the Bankruptcy Court’s decision not to rule

on this issue, as it was rendered moot by the Bankruptcy Court’s

determination that the probate court’s judgment doesn’t attach to the

Debtors under the doctrine of res judicata.

JURISDICTION

This Court has jurisdiction over appeals of a bankruptcy court’s

judgment pursuant to 28 U.S.C. § 158(a).

STANDARD OF REVIEW

When a district court reviews a bankruptcy court’s decision, it

functions as an appellate court and utilizes the same standard of review

generally applied by federal courts of appeals. In re Webb, 954 F.2d 1102,

1104 (5th Cir. 1992). Conclusions of law are reviewed de novo. In re

Young, 995 F.2d 547, 548 (5th Cir. 1993). And findings of fact are

reviewed for clear error. In re Allison, 960 F.2d 481, 483 (5th Cir. 1992).

These findings are reversed only if, based on the entire body of evidence,

the court is left “with the definite and firm conviction that a mistake has

been made.” Beaulieu v. Ragos, 700 F.3d 220, 222 (5th Cir. 2012).

ANALYSIS

As noted above, Suzann’s briefing broadly addresses five issues on

appeal: (1) whether the Bankruptcy Court erred in finding she failed to

establish that property from Exhibit A of the probate court’s judgment

was identified in the deed she executed to an entity called Icarus

Investments IV; (2) whether the Bankruptcy Court erred in holding

Mike’s name had to appear on the deed given the constructive trust’s

broad wording (applying to property Mike “held or owned . . . in any

capacity”); (3) whether the Bankruptcy Court erred in finding Suzann

inadequately traced the Debtors’ property to the Icarus Investments IV

transaction; (4) whether the Bankruptcy Court erred in finding the

Debtors weren’t Mike’s alter egos; and (5) whether the Bankruptcy

Court erred by finding a lack of privity between the Debtors and Mike.

See generally ECF No. 11 at 9. With the exception of (2), these are all

factual disputes. The Court briefly touches Suzann’s legal argument

below before proceeding to her factual disputes. To conclude, the Court

addresses the propriety of the Bankruptcy Court’s determination on res

judicata vis-à-vis the probate court’s judgment and the Debtors.

A. The Bankruptcy Court applied proper legal standards in

determining the relevant properties had to be deeded to

Mike by name absent other evidence of ownership.

“The fundamental fact—admitted by Appellant—is that title to the

property in question was never in the name of Mike Ruff.” ECF No. 17

at 24 (citing ECF No. 11 at 23–24). With those words, Appellee

appropriately cuts to the chase on this issue. That’s what lawyers call a

“bad fact” for Suzann, who asks the Court to apply her constructive trust

to properties that were never deeded to Mike. See ECF No. 11 at 23–24

(“Throughout its lengthy oral opinion, the bankruptcy court notes that

Mike never owned the property in question, i.e., his name, as an

individual, is not on any of the deeds. That is true. But the bankruptcy

court’s conclusion from this fact, that the constructive trust never

attached, is simply incorrect . . . .”). While the Court will later discuss

Suzann’s arguments that the Debtors were Mike’s alter egos, the fact

remains that the broad wording “held or owned . . . in any capacity”

doesn’t entitle Suzann to properties that were never deeded to Mike.

And try as she might in the briefing, Suzann fails to show the

Bankruptcy Court disregarded the probate court’s judgment by reaching

this conclusion. See id. (saying the Bankruptcy Court “ignore[d] the

plain language of the constructive trust clause in the Judgment”).

Semantics aside, it strains interpretive leniency too far to interpret

the judgment’s language as applying to property deeded to someone

other than Mike. Whatever “in any capacity” means, it is qualified by

the initial clause that the contested property must actually be held by

Mike. Moreover, as discussed in detail below, the Bankruptcy Court

rightly opined that “absolutely no evidence was introduced of Michael’s

holding or ownership in any capacity of any real estate claimed to be

owned by any of the debtor-defendants as of the bankruptcy filing, which

is now property of the respective debtor-defendants’ bankruptcy

estates.” Bankr. Rec. at 125. Thus, the Bankruptcy Court did not reject

wholesale the notion that property could be Mike’s even if not deeded to

him by name. Rather, the Bankruptcy Court merely observed that,

absent other evidence suggesting the property was Mike’s, the Court

cannot overlook the fact that the property was never deeded to him.

While not dispositive, the Court’s inquiry necessarily begins by looking

to the legal document that conveyed the disputed properties. If the legal

instrument conveyed the properties to someone other than Mike,

Suzann must carry a heavy evidentiary burden to convince the Court

that the instrument should be disregarded. See generally Jackson v.

Hernandez, 285 S.W.2d 184, 186–87 (Tex. 1955) (explicating long-

standing Texas jurisprudence on parol considerations that can overcome

the express terms of a conveying instrument). She failed to do so.

Suzann tries to skirt this bad fact by relying on Fitz-Gerald v. Hull,

237 S.W.2d 256 (Tex. 1951). There, the Texas Supreme Court found

equitable relief—a constructive trust—warranted under the case’s facts.

Id. at 261–62. Most salient among the case’s facts was the existence of a

breach of confidence/fiduciary duty. See id. (“While a confidential or

fiduciary relationship does not in itself give rise to a constructive trust,

an abuse of confidence rendering the acquisition of retention of property

by one person unconscionable against another suffices generally to

ground equitable relief in the form of the declaration and enforcement

of a constructive trust.”). The Court agrees with Fitz-Gerald that, for

such an extraordinary form of equitable relief to apply, the evidence of

record must clearly show the retention of disputed assets would be

unconscionable. But here, Suzann never litigated a claim for fraud or

breach of fiduciary duty against the Debtors, meaning the Bankruptcy

Court had no legally supportable grounds to impose a constructive trust,

no matter how vehemently Suzann cries foul. See id. Accordingly, the

Court OVERRULES Suzann’s issue on appeal relating to this point and

AFFIRMS the Bankruptcy Court’s legal reasoning.

B. The Bankruptcy Court did not clearly err in finding (1)

Suzann failed to establish that property from Exhibit A

was identified in the deed executed to Icarus Investments

IV and (2) Suzann failed to adequately trace the Debtors’

assets from Icarus Investments IV.

Suzann’s first and third factual disputes relate to the Bankruptcy

Court’s determination that she failed to sufficiently identify assets

funneled through Icarus Investments IV. See ECF No. 11 at 21–23. On

the front end, the Bankruptcy Court found Suzann failed to show the

Icarus IV assets were covered by Exhibit A of the probate court’s

judgment, which enumerates properties covered by Suzann’s

constructive trust. On the back end, the Bankruptcy Court found

Suzann failed to specifically trace assets subsequently deeded from

Icarus IV to Debtors. For context, Suzann deeded certain ranchland to

Icarus IV for Mike to develop, properties which were subsequently

deeded to Debtors.

For Suzann’s constructive trust to apply to the disputed properties,

she must specifically identify both the properties conveyed to Icarus IV

and the same properties then conveyed from Icarus IV to Debtors. This

claim isn’t small potatoes, as the only property independently owned by

many of the Debtors (except for unliquidated claims) was property

deeded from Icarus IV, rather than Suzann. See ECF No. 11 at 34. Thus,

control of significant assets rests on whether the property Suzann

deeded to Icarus IV falls under Exhibit A of the probate court’s judgment

(and whether Suzann can follow those assets all the way through the

series of relevant transfers). Suzann says it does; the Bankruptcy Court

disagreed.

With respect to the conveyance to Icarus, which primarily consists of

ranchland in Palo Pinto County, the evidence of record doesn’t

sufficiently establish asset tracing from A to B to C, such that the

properties could be transferred from the Debtors’ bankruptcy estates

into Suzann’s constructive trust. Supporting Suzann—and weighing

against the Bankruptcy Court’s determination—is Suzann’s personal

testimony that the property conveyed to Icarus was “all of her land in

Palo Pinto County.” See ECF No. 11 at 22 (quoting Bankr. Rec. at 6573).

When shown the Trustee’s subordination agreement vis-à-vis the

relevant Debtor properties, Suzann unequivocally testified that the

conveyance to Icarus consisted of ranchland Suzann received from her

late husband, Art. Id.; see also Bankr. Rec. at 6585. Suzann avers that

the Bankruptcy Court made the wrong call based upon this testimonial

evidence. But she places too much confidence in her testimonial

evidence, divorced as it is from other evidence within the record.

Texas law has long required heightened specificity when applying a

constructive trust to a particular res. See Longview Energy Co. v. Huff

Energy Fund, LLP, 533 S.W.3d 866, 868 (Tex. 2017) (noting “[d]efinitive,

designated property, wrongfully withheld from another, is the very

heart and soul of the constructive trust theory”) (citation omitted). To

require such specificity is an important safeguard that prevents the

judiciary from loose-handling private property without certainty as to

its origins. In light of this specificity requirement, the Bankruptcy Court

was left with far too little information to justify a finding in Suzann’s

favor, both as to the property she initially conveyed to Icarus IV and to

the property Icarus IV subsequently conveyed to Debtors.

Despite Suzann’s ostensible confidence in her testimony, she voiced

far more uncertainty as to the origins and identity of Icarus properties

when examined during the core proceeding. For instance, when

questioned about the relevant deed of conveyance from August 1, 2003,

Suzann stated simply: “I don’t know what the agreement is about.”

Bankr. Rec. at 6578. Beyond the deed itself, the closest Suzann ever got

to “identifying” the relevant properties was the conclusory statement

that they were “the family ranch” and consisted of “five-thousand plus

acres.” Id. She thus failed to provide any sufficient tracing of the

contested properties such that the Bankruptcy Court could determine

(1) they fall under Exhibit A of the probate court’s judgment or (2) they

were in fact the same properties incorporated into the Debtors’

bankruptcy estates. While the law doesn’t require photographic memory

from Suzann, such conclusory generalizations fall far short of the

specific tracing required to impose her constructive trust upon the

Debtors assets obtained via Icarus IV. See Longview Energy, 533 S.W.3d

at 866, 868. The Court thus OVERRULES these points on appeal and

AFFIRMS the Bankruptcy Court’s factual determination.

C. The Bankruptcy Court did not clearly err in finding the

Debtors aren’t Mike’s alter egos.

Suzann next contends the Bankruptcy Court erred in determining

the Debtors are not Mike’s alter egos, stating that “the evidence

overwhelmingly shows they are empty shells that he used and uses to

try and hide the assets he was found to have misappropriate[d] from

Suzy.” ECF No. 11 at 10. But the determination that an entity is an alter

ego is extraordinarily exacting, appropriate only “when there exists such

unity between corporation and individual that the corporation ceases to

be separate and when holding only the corporation liable would promote

injustice.” Castleberry v. Branscum, 721 S.W.2d 270, 272 (Tex. 1986). In

this regard, the Bankruptcy Court rightly noted that Texas law will not

apply the alter ego remedy absent evidence of direct ownership. Id.

Notions of “control” or “indirect ownership,” however persuasive they

might seem, won’t cut it. Id.; see also Bollore S.A. v. Imp. Warehouse,

Inc., 448 F.3d 317, 325 (5th Cir. 2006) (“The great weight of Texas

precedent indicates that, for the later ego doctrine to apply against an

individual under this test, the individual must own stock in the

company.”). And this obstacle aside, Suzann’s arguments are still

unsupported by any other evidence within the record suggesting the

entities were used as Mike’s alter egos.

As discussed ad nauseum in the core proceeding, the Debtors are

owned by the MAR Living Trust, not Mike in his personal capacity. See,

e.g., ECF No. 17 at 18 (and related record citations). While Suzann may

well suspect that Mike exerts control over the Debtors by virtue of his

control over the MAR Living Trust, she adduces no evidence of fraud,

comingling, or other impropriety that would show Mike singularly

controls the Debtors through the MAR Living Trust, let alone that he

owns them. The Court isn’t naïve regarding the capacity of individuals

to conceal their control over business entities through layers of legal

personhood—it doesn’t strain credulity to believe someone in a spot like

Mike’s could control the Debtors through the MAR Living Trust. The

Bankruptcy Court agreed, noting “I don’t think it is a stretch to say that

we have all of these entities in existence because Mike either created

them or participated in the creation of these entities.” Bankr. Rec. at

5933. But allegations aren’t evidence.

With respect to the Debtors, the Bankruptcy Court observed that

there’s “no there, there.” Id. at 5935. The Court agrees and is not

unsympathetic to Suzann’s arguments in this regard. However, absent

evidence of fraud, comingling, or other impropriety, there’s nothing

inherently wrong with the creation of liability-shield entities to hold or

manage assets. And the Court can’t base a ruling upon suspicion, no

matter how plausible the counter-explanation may be. Thus, the

Bankruptcy Court, without any reliable evidence showing Mike used the

MAR Living Trust to control the Debtors, could not act upon Suzann’s

unsubstantiated suspicions. See id. The Court will not fault the

Bankruptcy Court for going only as far as the evidentiary record could

take it.

So the Court is left with Suzann’s suspicions versus the Bankruptcy

Court’s decision, which is soundly based in the evidentiary record. Had

Suzann produced actual evidence that gave rise to an inference of

impropriety, the Bankruptcy Court’s analysis would look different. The

Bankruptcy Court rightly noted the severity of the remedy Suzann

seeks. See id. Corporations and LLCs are in effect “legal fictions”

designed to catalyze the free exchange of capital and drive the economy

forward while shielding constituent members from the threat of undue

liability. This isn’t to be taken lightly, and the Debtors’ bankruptcy

estates shouldn’t be meddled with absent clear evidence that

recognizing their liability-shield would result in manifest injustice.2 In

any event, Suzann attacks the Bankruptcy Court’s factual

determinations on appeal. The Court reviews those determinations for

clear error, and “[a] finding of fact is clearly erroneous only if ‘on the

entire evidence, the court is left with the definite and firm conviction

that a mistake has been committed.’” BFN Ops., LLC v. PLT Constr. Co.,

Inc., 616 B.R. 683, 687 (N.D. Tex. 2020) (quoting In re Perez, 954 F.2d

1026, 1027 (5th Cir. 1992)). Lacking evidence to support such a “definite

and firm conviction,” the Court AFFIRMS the Bankruptcy Court’s

2Here, Suzann also suggests the Bankruptcy Court erred by focusing

myopically on corporate formalities. See ECF No. 11 at 34 (citing TEX. BUS.

ORG. CODE § 21.223). But Suzann appeals to sections of the Texas Business

Code that don’t apply to the veil-piercing she seeks, rendering her argument

erroneous on this point.

determination that the Debtors aren’t alter egos for Mike and

OVERRULES Suzann’s dispute on this point.

D. The elements of res judicata aren’t met vis-à-vis the

Debtors and the probate court judgment.

To conclude with an overarching issue, Suzann’s arguments are all

predicated on the enforceability of her Arbitration Order, as

incorporated in the probate court’s judgment, against the Debtors. Put

differently, for Suzann’s constructive trust on Mike’s property to apply

to the Debtors, her Arbitration Order must be enforceable upon them—

i.e., it must have a preclusive effect upon subsequent rulings from the

Bankruptcy Court or other relevant tribunal. For her Arbitration Order

to be enforceable upon Mike, it had to first be incorporated in the probate

court’s final judgment. Ordinarily, judgments against one person don’t

apply to the assets of another. And because the law prohibits second

bites at the proverbial apple, subsequent rulings regarding the Debtors’

assets are precluded from enforcement if the probate court’s judgment

is found to apply.

For the probate court’s judgment to have such a preclusive effect,

four conditions must be present: “(1) the parties are identical or in

privity; (2) the judgment in the prior action was rendered by a court of

competent jurisdiction; (3) the prior action was concluded by a final

judgment on the merits; and (4) the same claim or cause of action was

involved in both cases.” Comer v. Murphy Oil USA, Inc., 718 F.3d 460,

467 (5th Cir. 2013). The probate court’s judgment incorporating the

Arbitration Order satisfies elements (2) and (3), meaning Suzann must

prove elements (1) and (4) for the Arbitration Order to apply to the

Debtors. While Suzann extensively briefs the privity requirement for

element one as between the Debtors and Mike, the Court agrees with

the Bankruptcy Court that this showing need not be addressed. Mike

isn’t a party to this adversary proceeding. See ECF No. 1. And the

Debtors weren’t involved with the state-court proceeding or related

arbitration. Id. Thus, even if Suzann prevailed in showing privity, she

fails to show that the proceedings involved identical claims. Sure they

may be similar insofar as they implicate the same corpus of assets, but

they aren’t the same claims. The Bankruptcy Court extensively detailed

its determination that the evidence shows no identicality between

Mike’s claims in the state-court case and the Debtors’ claims here. See

Bankr. Rec. at 110–131. Finding no reason to second-guess that

determination here, the Court AFFIRMS the Bankruptcy Court’s

decision and similarly declines to address Suzann’s privity arguments.

CONCLUSION

The duly rendered decision of a Bankruptcy Court is entitled to

deference unless the Court, upon review of the entire record, is left with

a “definite and firm conviction that a mistake has been made.” Beaulieu,

700 F.3d at 222. Having conducted such a review here, the Court sees

nothing to cast the Bankruptcy Court’s determination into doubt, much

less to support a “definite and firm conviction” that the Bankruptcy

Court missed the mark. See id. Accordingly, having OVERRULED Ms.

Ruff’s issues on appeal, the Court AFFIRMS the decision of the

Bankruptcy Court.

SO ORDERED on this 1st day of November 2023.