In this edition of Litigation Roundup, the Fifth Circuit issues a ruling that affects unnamed members of limited liability companies in a case of first impression, a North Texas software CEO gets 20 years in prison and a 156-year-old ban on distilling liquor at home is struck down.
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Harris County District Court
Kirkland Team Gets Eve-of-Trial Victory
A case that was litigated for two years and pitted Capital Storage against SpareBox Self Storage over a failed $323 million purchase and sale agreement won’t be going to trial after a judge in Houston determined there was nothing for a jury to decide.
Capital filed suit in October 2022, accusing SpareBox of fraud and of breaching its contractual obligations to buy 22 self-storage businesses from Capital at a price of $323 million. SpareBox decided not to go through with the deal because of debt-market volatility and forfeited its $3 million escrow deposit, it said.
The case was assigned to Harris County District Judge Mike Engelhart, who, on July 12, signed the order granting SpareBox a summary judgment win ending the case. Judge Engelhart found SpareBox had a right under the agreement not to close the deal.
Trial was slated to begin this week. Capital was seeking more than $60 million in damages.
Capital Storage is represented by David M. Peterson, Eric J. Mayer and Shawn L. Raymond of Susman Godfrey.
SpareBox Self Storage is represented by Judson Brown, Jeremy Fielding and Megan McGlynn.
The case number is 2022-71323.
Uvalde County District Court
Haynes Boone Gets Win in Uvalde Open Records Fight
A group of media outlets that have been fighting for the release of police body camera footage, 911 calls, emails, texts and other communications related to the fatal shooting at Robb Elementary School recently notched a victory.
The lawsuit — brought by the Texas Tribune, ABC News, the Associated Press, Gannett, Hearst, NBC News, the New York Times, the Washington Post and others — was brought against the city of Uvalde, its school district and Uvalde County in 2022 after officials repeatedly denied requests for open records.
Fourth Administrative Judicial Region Judge Sid Harle signed the order July 8, giving school officials 20 days to hand over the documents. But Judge Harle noted that, in light of ongoing settlement discussions, “the court reserves its ruling on plaintiff’s motion for summary judgment against the city of Uvalde.”
Haynes Boone partner Laura Prather, who is representing the media plaintiffs, called the ruling a “pivotal step towards ensuring transparency and accountability.”
“The public deserves to know the full details of the response to this tragic event, and the information could be critical in preventing future tragedies,” she said in a statement.
A Travis County district judge in June 2023 issued a similar ruling in a related case, requiring the Texas Department of Transportation to release certain records.
DPS has appealed that ruling.
Counsel information for the defendants wasn’t immediately available Monday.
The media plaintiffs are also represented by Haynes Boone associate Reid Pillifant.
The case number is 2022-08-34516-CV.
Northern District of Texas
Ban on At-Home Distilling Found Unconstitutional
The federal government has a little more than a week to decide whether to seek emergency appellate relief after a federal judge in Texas recently determined a law barring people from distilling their own liquor at home is unconstitutional.
U.S. District Judge Mark T. Pittman issued the 32-page ruling July 10, agreeing with a group of would-be home distillers that Congress’ regulation falls outside the scope of the governing body’s enumerated taxing power.
“What matters here is simple: notwithstanding its placement in the internal revenue code, and a facially tangential connection to taxes imposed on spirits, Section 5178(a)(1)(B), enforced by a criminal penalty in Section 5601(6), lacks ‘the essential feature of any tax,’” he wrote. “Because ‘Congress’s authority under the taxing power is limited to requiring an individual to pay money into the Federal Treasury,’ it follows that any law that does not require one to pay money into the treasury is not an exercise of the taxing power.”
Texas-based Hobby Distillers Association, which exists to advocate for the legalization of home distilling, filed this lawsuit Dec. 8, 2023, targeting two statutes — 26 U.S.C. § 5178(a)(1)(B), which prohibits having a still in a home, shed, yard or boat, and 26 U.S.C. § 5601(6), which makes violating the previous provision a felony.
The federal government had argued the challenged statutes were valid uses of its taxing authority “because they ensure protection of, and reduce fraud upon, the tax revenue generated on distilled spirits.”
Judge Pittman disagreed, noting that neither statute raises revenue, and explained the federal government had conflated the enumerated taxing power “with the incidental powers contained in the necessary and proper clause.”
Judge Pittman stayed his ruling for 14 days to allow the government time to lodge an emergency appeal. As of Monday afternoon, no notice of appeal had been filed.
Hobby Distillers is represented by Casey L. Griffith and Michael Barbee of Griffith Barbee in Dallas and Daniel Greenberg and Devin Watkins of Competitive Enterprise Institute in Washington, D.C.
The Alcohol and Tobacco Tax and Trade Bureau is represented by Elizabeth Tulis, Anna Deffebach and Hannah Solomon-Strauss of the Department of Justice in Washington, D.C.
The case number is 4:23-cv-011221.
Software Co. Founder, Convicted of $25M Fraud, Gets 20 Years in Prison
The founder of software company Slync, who was convicted of defrauding investors in his supply-chain management software out of at least $25 million in January, has been sentenced to 20 years in federal prison.
U.S. District Judge Mark Pittman handed down Christopher Kirchner’s sentence on July 11. Kirchner, 36, was convicted on four counts of wire fraud and seven counts of money laundering. He served as CEO of Slync from 2017 until 2022, when the board of directors removed him because of misconduct allegations.
He was indicted in February 2023. Prosecutors alleged he used some of the more than $71 million he fraudulently raised in investor funds for personal expenses, including the purchase of a $16 million private jet.
Jurors were told Kirchner made 100 transfers of funds from the company’s bank account, which held about $57 million in investor funds, into a different bank account that only Kirchner had access to — including a $20 million transfer into his personal checking account.
Judge Pittman ordered Kirchner pay $65 million in restitution.
“Even as his company was circling the drain, Chris Kirchner was spending millions of his investors’ money on himself,” U.S. Attorney Leigha Simonton said in a statement. “Apparently, projecting personal prosperity was more important to him than making payroll. His duplicity earned him 20 years in prison. We are proud to hold him accountable for his crimes and are committed to pursuing all businesspeople engaged in criminal conduct.”
Kirchner is represented by federal public defenders Christopher Weinbel and Michael A. Lehmann of Fort Worth.
The case was prosecuted by assistant U.S. attorneys Joshua D. Detzky, Nashonme Johnson and Jay Weimer.
The case number is 4:23-cr-00127.
Western District of North Dakota
Marathon Oil Co. Reaches $241.5M Settlement with DOJ
Houston-based Marathon Oil Co. has agreed to pay $241.5 million to resolve allegations it violated the Clean Air Act with its oil and gas operations in North Dakota.
Part of the money Marathon will pay includes $64.5 million to settle allegations it violated the CAA via “stationary sources,” such as oil and gas tank systems. The government has called that the largest penalty ever levied under that portion of the law.
The deal, announced July 11, is expected to reduce carbon dioxide emissions by about 2.3 million tons over the next five years and eliminate nearly 110,000 tons of volatile organic compound emissions. The government accused Marathon of violating federal pollution laws via its oil and gas operations on the Fort Berthold Indian Reservation in North Dakota.
Marathon is the first oil and gas company targeted by the government for these types of alleged CAA violations. It is ranked as the 22nd largest producer of oil, but the government has said the company is the 7th largest emitter of greenhouse gas emissions in the industry.
The government alleged Marathon was violating the CAA with its operations at nearly 90 facilities, resulting in thousands of tons of illegal emissions.
Marathon will be required to invest about $177 million to bring its facilities into compliance.
The case was assigned to U.S. District Judge Daniel M. Traynor.
The federal government is represented by Vanessa Morre and Laura Thoms of the Department of Justice in Washington, D.C.
Counsel information for Marathon wasn’t available Monday. The company’s executive vice president, M.A. Henderson, signed the consent decree for the company.
The case number is 1:24-cv-00136.
U.S. Court of Appeals for the Fifth Circuit
Panel Determines Unnamed LLC Members Can be Held Secondarily Liable
In a case of first impression, a panel of Fifth Circuit judges recently determined that the law allows for individuals who are not named as members of a limited liability company and individuals who are not named as shareholders, officers or directors of a corporation to be held secondarily liable in certain circumstances.
The unanimous July 11 ruling came in a dispute between produce broker Lonestar Produce Express and produce supplier A&A Concepts. A&A sued Lonestar under the Perishable Agricultural Commodities Act, seeking to recover about $221,000 in unpaid invoices.
Lonestar was started by brothers Leonidez Fernandez III and Eric Fernandez in 2015. The brothers leaned on their father’s experience in the produce industry and Leonidez Fernandez Jr. “frequently assisted them.”
“This case asks — how much help from dad is too much?” the Fifth Circuit explained.
Under PACA, if the merchant, dealer or broker doesn’t have sufficient funds to satisfy liability, “others may be held secondarily liable if they had some role in causing the corporate trustee to commit the breach of trust.”
Case law has established an individual shareholder, officer, director or managing member who was “in a position of control over the trust assets, and who breached his fiduciary duty to preserve those trust assets may be held secondarily liable under PACA,” the opinion explained.
But until this ruling, it was unclear if the Fifth Circuit allowed unnamed members to be held secondarily liable.
“We hold that these individuals may be held secondarily liable when the facts demonstrate that the individual maintains some control over the PACA trust assets,” the panel determined. “Although the district court erred in finding Leonidez Jr. could not be held secondarily liable because he lacked the requisite title of LLC member, the record supports a finding that Leonidez Jr. lacked the requisite control over the PACA trust assets.”
Judges Dana M. Douglas, Jerry E. Smith and Jacques L. Wiener Jr. sat on the panel.
Fernandez is represented by Ryan C. Reed and Anna MacFarlane of Pulman, Cappuccio & Pullen in San Antonio.
A&A is represented by Craig Stokes and Maurleen Cobb of Stokes Law Office in San Antonio.
The case number is 23-50757.