Big Rock Investors Association v. Big Rock Petroleum, Inc. and J.A. McEntire, III , 409 S.W.3d 845 ( 2013 )

COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 02-12-00396-CV
BIG ROCK INVESTORS APPELLANT
ASSOCIATION
V.
BIG ROCK PETROLEUM, INC. AND APPELLEES
J.A. MCENTIRE, III
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FROM THE 141ST DISTRICT COURT OF TARRANT COUNTY
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OPINION
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I. INTRODUCTION
The primary issue we address in this appeal is whether Appellant Big Rock
Investors Association (BRIA) possesses standing to assert any of the claims it
filed against Appellees Big Rock Petroleum, Inc. and J.A. McEntire, III. Because
we hold that it does not, we affirm the trial court’s judgment dismissing BRIA’s
claims.
II. FACTUAL AND PROCEDURAL BACKGROUND
BRIA is a nonprofit association registered under the Texas Uniform
Unincorporated Nonprofit Association Act. It was created to commence and
prosecute its members’ claims against Appellees. BRIA is comprised of
approximately 226 individual or entity investors who invested approximately
$26.8 million from November 1994 to June 2005 in approximately 117 different
oil and gas drilling projects offered by Big Rock. BRIA filed suit on behalf of its
member investors, alleging that Appellees and others participated in an oil and
gas Ponzi scheme causing financial damages to BRIA’s members.1 BRIA
pleaded that, following an FBI raid and the appointment of a receiver, ―the
Receiver has confirmed that a substantial majority of Projects . . . never existed
or that Big Rock never had any interests in the Projects.‖ On behalf of its
members, BRIA pleaded causes of action against Appellees for violations of the
Texas Securities Act, breach of fiduciary duty, constructive trust, and for
attorneys’ fees. BRIA prayed for the following relief: actual damages, special
damages, rescission, constructive trust, exemplary damages, attorneys’ fees,
court costs, and pre- and post-judgment interest.
Appellees filed a plea to the jurisdiction and asserted that ―[a]s a matter of
law, an association such as BRIA cannot pursue the individual claims of its
1
BRIA subsequently filed a first amended petition, but the trial court signed
an order striking it, and BRIA makes no complaint concerning this order on
appeal. Therefore, we consider only BRIA’s original petition.
2
members.‖ Appellees contended that BRIA’s claims, as well as the relief
requested by BRIA, required the participation of each individual member of BRIA
and that, therefore, BRIA could not satisfy the third prong of the associational
standing test established by the United States Supreme Court and adopted by
the Texas Supreme Court. See Hunt v. Wash. State Apple Adver. Comm’n, 432
U.S. 333, 343, 97 S. Ct. 2434, 2441 (1977) (setting forth three-pronged
associational standing test); Tex. Ass’n of Bus. v. Tex. Air Control Bd., 852
S.W.2d 440, 444 (Tex. 1993) (adopting associational standing test set forth in
Hunt).2 Following a hearing, the trial court signed an order granting Appellees’
plea to the jurisdiction and dismissing BRIA’s claims. BRIA perfected this
appeal; BRIA raises two issues claiming that the trial court erred by granting
Appellees’ plea to the jurisdiction because BRIA possesses associational
standing and because BRIA possesses standing as an agent.
III. STANDARD OF REVIEW
Standing is a component of subject-matter jurisdiction and must be
established in order to maintain a lawsuit under Texas law. Tex. Ass’n of Bus.,
852 S.W.2d at 443–44. A plea to the jurisdiction is proper to challenge a party’s
lack of standing. M.D. Anderson Cancer Ctr. v. Novak, 52 S.W.3d 704, 710–11
2
While we are obligated to follow the dictates of only the United States
Supreme Court and the Texas Supreme Court, we nonetheless draw on and
discuss the associational standing precedent of other courts that also apply the
Hunt test. See Penrod Drilling Corp. v. Williams, 868 S.W.2d 294, 296 (Tex.
1993).
3
(Tex. 2001); Waco Indep. Sch. Dist. v. Gibson, 22 S.W.3d 849, 850 (Tex. 2000).
A plea to the jurisdiction is a dilatory plea, the purpose of which is to defeat a
cause of action based on lack of subject-matter jurisdiction without regard to the
merits of the claim. Bland Indep. Sch. Dist. v. Blue, 34 S.W.3d 547, 554 (Tex.
2000); Bishop v. Bishop, 74 S.W.3d 877, 878 (Tex. App.––San Antonio 2002, no
pet.). The plaintiff bears the burden of alleging facts that affirmatively show the
trial court has subject-matter jurisdiction. Tex. Ass’n of Bus., 852 S.W.2d at 446;
Bishop, 74 S.W.3d at 878. When reviewing a grant or denial of a plea to the
jurisdiction, we consider the plaintiff’s pleadings, construed in favor of the
plaintiff, and any evidence relevant to the jurisdictional issue without considering
the merits of the claim beyond the extent necessary to determine jurisdiction.
Tex. Dep’t of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 226 (Tex. 2004);
Cnty. of Cameron v. Brown, 80 S.W.3d 549, 555 (Tex. 2002). Applying this view
of the pleadings and any jurisdictional evidence, whether the trial court has
subject matter jurisdiction is a question of law that we review de novo. Miranda,
133 S.W.3d at 226; Mayhew v. Town of Sunnyvale, 964 S.W.2d 922, 928 (Tex.
1998), cert. denied, 526 U.S. 1144 (1999); see also Frost Nat’l Bank v.
Fernandez, 315 S.W.3d 494, 502–03 (Tex. 2010) (―It has long been the rule that
a plaintiff’s good faith allegations are used to determine the trial court’s
jurisdiction.‖), cert. denied, 131 S. Ct. 1017 (2011).
4
IV. STANDING
A. BRIA Lacks Associational Standing
1. The Associational Standing Test
Article III of the United States Constitution limits the judicial power of the
United States to the resolution of ―cases‖ and ―controversies.‖ U.S. Const. art. III,
§ 2, cl. 1. One element of the case and controversy requirement under Article III
is that the plaintiff, including an association, must have standing to raise each
claim. See, e.g., Comm. for Reasonable Reg. of Lake Tahoe v. Tahoe Reg’l
Planning Agency, 365 F. Supp. 2d 1146, 1161 (D. Nev. 2005). An association
has standing to bring suit on behalf of its members when (1) its members would
otherwise have standing to sue in their own right, (2) the interests it seeks to
protect are germane to the organization’s purpose, and (3) neither the claim
asserted nor the relief requested requires the participation in the lawsuit of each
of the individual members. Hunt, 432 U.S. at 343, 97 S. Ct. at 2441; Tex. Ass’n
of Bus., 852 S.W.2d at 447.
Appellees concede that BRIA satisfies the first two prongs of the
associational standing test. BRIA’s individual members would have standing to
sue Appellees for Appellees’ alleged roles in the Ponzi scheme, and the interests
BRIA seeks to protect are germane to BRIA’s purpose. Whether BRIA
possesses associational standing therefore turns on the third prong of the
associational standing test, that is, whether BRIA’s pleadings and the record
demonstrate that neither the claims asserted by BRIA nor the relief requested by
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BRIA requires the participation in the lawsuit of each of BRIA’s individual
members. See Tex. Ass’n of Bus., 852 S.W.2d at 448.
2. The Law Concerning the Third Prong of the Associational Standing Test
The third prong of the associational standing test––requiring that neither
the claim asserted nor the relief requested requires the participation in the lawsuit
of each of the association’s individual members––is best seen as focusing on the
matters of administrative convenience and efficiency, not on elements of a case
or controversy within the meaning of the Constitution. United Food &
Commercial Workers Union Local 751 v. Brown Group, Inc., 517 U.S. 544, 557,
116 S. Ct. 1529, 1536 (1996). The third prong of the associational standing test
is not constitutional but is prudential and is based on concerns of judicial
economy.3 United Food, 517 U.S. at 556–57, 116 S. Ct. at 1536.
Under the third prong of the associational standing test, determining what
type of claims brought by an association and what type of relief sought by an
association would or would not require the participation in the litigation of the
association’s individual members and therefore would or would not advance
prudential concerns of administrative convenience, efficiency, and judicial
3
Because the third prong of the associational standing test is not
constitutional, Congress can abrogate this standing requirement in certain
circumstances. See, e.g., id. at 558, 116 S. Ct. at 1537 (holding that Congress
could authorize union to sue on behalf of its members); Or. Advocacy Ctr. v.
Mink, 322 F.3d 1101, 1109 (9th Cir. 2003) (recognizing that Congress had
authorized advocacy groups to sue on behalf of mentally ill criminal defendants).
But Congress has not abrogated the third prong of the associational standing
requirement in BRIA’s claims against Appellees.
6
economy is somewhat tricky. Usually, an association’s claim for damages on
behalf of its members is barred by want of the association’s standing to sue
because such suits typically require each individual member to participate in the
litigation to establish his own damages. See, e.g., Warth v. Seldin, 422 U.S. 490,
516, 95 S. Ct. 2197, 2214 (1975) (―Thus, to obtain relief in damages, each
member of Home Builders who claims injury . . . m[u]st be a party to the suit.‖);
Telecomms. Research & Action Ctr. on Behalf of Checknoff v. Allnet Comm.
Servs., Inc., 806 F.2d 1093, 1094 (D.C. Cir. 1986) (holding that ―the money
damages claims TRAC seeks to advance are the kind that ordinarily require
individual participation‖ and that associational standing did not exist). For
example, in Warth, the United States Supreme Court held that an association of
construction firms could not seek damages for the profits and business lost by its
members because ―whatever injury may have been suffered is peculiar to the
individual member concerned, and both the fact and extent of injury would
require individualized proof.‖ 422 U.S. at 515–16, 95 S. Ct. at 2214. The
Supreme Court explained:
[H]ere an association seeks relief in damages for alleged injuries to
its members. Home Builders [the association] alleges no monetary
injury to itself, nor any assignment of the damages claims of its
members. No award therefore can be made to the association as
such. Moreover, in the circumstances of this case, the damages
claims are not common to the entire membership, nor shared by all
in equal degree. To the contrary, whatever injury may have been
suffered is peculiar to the individual member concerned, and both
the fact and extent of injury would require individualized proof.
Thus, to obtain relief in damages, each member of Home Builders
who claims injury as a result of respondents’ practices m[u]st be a
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party to the suit, and Home Builders has no standing to claim
damages on his behalf.
Id., 95 S. Ct. at 2214. Thus, when claims for damages have not been assigned
to an association, when the relief sought by an association is monetary damages
for alleged injuries to individual members, and when the damages claimed are
not common to the entire membership, nor shared by all to an equal degree, then
each individual member must be a party to the suit; the association possesses no
standing to claim damages on behalf of its members. Id., 95 S. Ct. at 2214; see
also United Food, 517 U.S. at 546, 116 S. Ct. 1531 (recognizing general rule set
forth in Hunt is that ―an association’s action for damages running solely to its
members would be barred for want of the association’s standing to sue‖); Ga.
Cemetery Ass’n, Inc. v. Cox, 353 F.3d 1319, 1322–23 (11th Cir. 2003) (per
curiam) (holding associational standing did not exist to assert as-applied takings
claim because such claim ―will vary depending upon the economic
circumstances‖ of each member); Telecomms. Research & Action Ctr. on Behalf
of Checknoff, 806 F.2d at 1094–95 (holding claim for money damages required
participation of association’s individual members so that no associational
standing existed); Nat’l Ass’n of Coll. Bookstores, Inc. v. Cambridge Univ. Press,
990 F. Supp. 245, 248–49 (S.D.N.Y. 1997) (holding associational standing did
not exist to assert a takings claim because a particularized analysis of each
owner’s circumstances was required).
8
When, however, an association seeks a declaration, injunction, or some
other form of prospective equitable relief, it can reasonably be supposed that the
remedy, if granted, will inure to the benefit of those members of the association
actually injured and that, consequently, prudential concerns are advanced and
the association may possess standing to invoke the court’s remedial powers on
behalf of its members. Tex. Ass’n of Bus., 852 S.W.2d at 448 (holding that ―TAB
seeks only prospective relief, raises only issues of law, and need not prove the
individual circumstance of its members to obtain that relief, thus meeting the third
prong‖ of the associational standing test); see also Hunt, 432 U.S. at 343–44, 97
S. Ct. at 2441–42 (recognizing that neither the commission’s ―interstate
commerce claim nor [its] request for declaratory and injunctive relief requires
individualized proof and both are thus properly resolved in a group context‖); City
of Laredo v. Rio Grande H20 Guardian, No. 04-10-00872-CV, 2011 WL 3122205,
at *6 (Tex. App.––San Antonio July 27, 2011, no pet.) (mem. op.) (holding that
because Rio Grande sought ―prospective relief in the form of a declaration that
the enacted zoning ordinances were invalid, relief that is not dependent on proof
of the individual circumstances of its members,‖ Rio Grande had satisfied the
third associational standing prong). For example, in Texas Ass’n of Business,
the association possessed associational standing to assert a facial challenge to
the constitutionality of an administrative enforcement scheme for the assessment
of civil penalties. 852 S.W.2d at 443.
9
But merely pleading for equitable relief does not automatically satisfy the
third prong of the associational standing test. See Am. Acad. of Emergency
Med. v. Memorial Hermann Healthcare Sys., Inc., 285 S.W.3d 35, 44 (Tex.
App.—Houston [1st Dist.] 2009, no pet.) (holding no associational standing
existed to assert declaratory judgment action because declaration sought did not
present ―pure issues of law, but instead require[d] individualized inquiry and fact-
intensive analysis‖); see also Bano v. Union Carbide Corp., 361 F.3d 696, 714
(2d Cir. 2004) (recognizing associational standing was absent even though
injunctive relief sought when fact and extent of the injury giving rise to claims for
injunctive relief would require individualized proof). And, likewise, given the fact
that the third prong of the associational standing test is a prudential
consideration, the mere fact that some level of individualized evidence is required
does not automatically thwart the existence of associational standing. See, e.g.,
Assoc. of Am. Physicians & Surgeons, Inc. v. Tex. Med. Bd., 627 F.3d 547, 551–
52 (5th Cir. 2010) (recognizing that when claims can be proven by evidence from
representative injured members, without a fact-intensive-individual inquiry, the
participation of those individual members will not defeat associational standing);
Pa. Psychiatric Soc’y v. Green Spring Health Servs., Inc., 280 F.3d 278, 287 (3d
Cir.) (holding associational standing not defeated by need for limited individual
member participation), cert. denied, 537 U.S. 881 (2002). Instead, courts look to
whether a plaintiff association that is pleading for equitable relief on behalf of its
members has established that any individualized evidence required to prosecute
10
the claim would be duplicative and redundant, thus advancing prudential
concerns and judicial economy by granting associational standing. See, e.g.,
Hosp. Council of W. Pa. v. City of Pittsburgh, 949 F.2d 83, 89–90 (3rd Cir. 1991)
(recognizing associational standing not defeated by participation of
representative member hospitals in association’s claim for equitable and
injunctive relief from city’s efforts to ―coerce‖ payment of taxes by tax-exempt
member hospitals). In other words, when resolution of the claims can be proven
by evidence from representative injured members without a fact-intensive-
individual inquiry, the need for participation of those individual members will not
defeat associational standing. Retired Chicago Police Ass’n v. City of Chicago, 7
F.3d 584, 601–02 (7th Cir. 1993).
3. Analysis of the Claims Asserted and the Relief Requested by BRIA
BRIA pleaded that Appellees sold to hundreds of investors located
throughout the United States millions of dollars’ worth of fraudulent securities in
the form of fictitious working interests in oil and gas drilling projects and
pipelines. BRIA alleged that Appellees comingled investor funds and falsified oil
and gas production reports. BRIA pleaded causes of action for violations of the
Texas Securities Act, breach of fiduciary duty, constructive trust, and for
attorneys’ fees and prayed for actual damages, special damages, rescission,
constructive trust, exemplary damages, attorneys’ fees, court costs, and pre- and
post-judgment interest.
11
Appellees argue on appeal that BRIA’s 226 members do not share a
common investment portfolio, invested in over 100 separate projects in varying
amounts, and reaped profits or incurred losses in different amounts over a ten-
year period from November 1994 to June 2005. Appellees contend that each
investment transaction is unique and that the amount of each investor’s gains or
losses is unique, requiring a fact-intensive participation in the litigation by each
BRIA member. BRIA does not dispute these facts; BRIA does not deny that
each of the claims it asserts, as well as the relief it requests, requires proof of
investments made and damages suffered by each of its individual members.
Instead, BRIA claims that it intends to retain a damage expert and that the
expert’s testimony, coupled with the testimony of a receiver previously appointed
by the trial court,4 will minimize the need for the participation of the individual
members of BRIA in the litigation.5
4
BRIA attached an affidavit from the receiver to its appellate brief, quotes
extensively from the affidavit in the argument section of its brief, and requests
that we take judicial notice of the affidavit. We decline to take judicial notice of
the affidavit. See, e.g., Thornton v. Cash, No. 14-11-01092-CV, 2013 WL
1683650, at *14 (Tex. App.––Houston [14th Dist.] Apr. 18, 2013, no pet.) (mem.
op.) (declining to take judicial notice of documents attached to appellate brief and
noting that appellate court review is limited to consideration of material before
trial court). We nonetheless discuss the affidavit’s content because it is quoted
extensively in BRIA’s brief and shows that even if given the opportunity to
replead, BRIA cannot satisfy the third prong of the associational standing test.
See Tex. A&M Univ. Sys. v. Koseoglu, 233 S.W.3d 835, 839–840 (Tex. 2007)
(holding appellants are not entitled to replead a claim unless it is possible for
them to cure the jurisdictional defect).
5
BRIA cites Darocy v. Abildtrup for the proposition that minimal
participation of its individual members would be required in the prosecution of its
12
BRIA contends that individual member participation in the litigation would
be minimal because––in accordance with the following quoted statement in his
affidavit––the receiver ―could and would testify regarding the financial losses
sustained by the individual plaintiffs in this case with reasonable certainty, with
minimal participation by the individual plaintiffs.‖ This is not the type of non-fact-
intensive, minimal participation envisioned by the third prong of the associational
standing test; the evidence is not duplicative, redundant, or elicited from
representative injured members. See Assoc. of Am. Physicians & Surgeons,
Inc., 627 F.3d at 551–52; Pa. Psychiatric Soc’y, 280 F.3d at 287; Hosp. Council
of W. Pa., 949 F.2d at 89–90. Substituting the testimony of one person (the
receiver) concerning the individual profits and losses of each of BRIA’s 226
individual members is no less fact-intensive than simply permitting each
individual member to provide such testimony concerning his profits and losses.
This type of fact-intensive analysis, even if performed through one witness,
raises the type of real and substantial prudential concerns found to thwart a
determination of associational standing under the third prong of the associational
standing test. See Warth, 422 U.S. at 515, 95 S. Ct. at 2214.
We overrule BRIA’s second issue.
Texas Securities Act violations claim. 345 S.W.3d 129 (Tex. App.––Dallas 2011,
no pet.). But in Darocy, individual investors, not an association, brought suit.
See id. at 132. Thus, Darocy is not applicable to our associational standing
analysis.
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B. BRIA Lacks Standing to Sue as an Agent of its Members
In its first issue, BRIA contends that it possesses standing by virtue of the
claims management agreement signed by each BRIA member. BRIA
characterizes each of these agreements as a power of attorney and concedes
that its members did not execute an assignment of their claims to BRIA. 6 In
support of this contention, BRIA relies upon Rodarte v. Investco Group, 299
S.W.3d 400 (Tex. App.––Houston [14th Dist] 2009, no pet.).
Rodarte did not involve associational standing; it involved a man filing suit
in his own name pursuant to a power of attorney on behalf of his brother. Id. at
406–07. BRIA argues that just like the man in Rodarte, it filed suit on behalf of its
members pursuant to a power of attorney. But BRIA is a nonprofit association,
not an individual. BRIA cites no authority for the proposition that by virtue of
obtaining a power of attorney from its members, it exempted itself from
establishing the third prong of the associational standing test. To the contrary,
BRIA’s claims on behalf of 226 individual members seeking financial redress for
widely-varied investments made in diverse projects over a ten-year period raise
exactly the substantial prudential concerns identified by the third prong of the
associational standing test as precluding an association that is suing on behalf of
its members from invoking the court’s remedial powers.
6
Because BRIA acknowledges that the claims management agreements
do not constitute an assignment of its members’ claims to BRIA, we do not
address the cases BRIA cites concerning assignments.
14
We overrule BRIA’s first issue.
V. CONCLUSION
Having overruled both of BRIA’s issues, we affirm the trial court’s grant of
Appellees’ plea to the jurisdiction and its judgment dismissing BRIA’s claims.
SUE WALKER
JUSTICE
PANEL: GARDNER, WALKER, and MCCOY, JJ.
DELIVERED: August 15, 2013
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