united states district court northern district of … · 2019-07-25 · case no. 3:19-cv-01224-b...

MEMORANDUM IN SUPPORT OF MOTION TO DISMISS

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

TEXAS PACIFIC LAND TRUST and, solely in their respective capacities as trustees for Texas Pacific Land Trust, DAVID E. BARRY and JOHN R. NORRIS III,

Plaintiffs,

v. ERIC L. OLIVER,

Defendant.

and ERIC L. OLIVER, SOFTVEST, L.P., HORIZON KINETICS LLC, and ART-FGT FAMILY PARTNERS LIMITED,

Counter-Plaintiffs,

v.

DAVID E. BARRY and JOHN A. NORRIS III, in their individual capacities and in their capacities as trustees for the Texas Pacific Land Trust,

Counter-Defendants.

§ § § § § § § § § § § § § § § § § § § § § § § § § § § §

Case No. 3:19-CV-01224-B

COUNTER-DEFENDANTS’ MEMORANDUM IN SUPPORT OF THEIR

MOTION TO DISMISS COUNTER-PLAINTIFFS’ AMENDED COUNTERCLAIMS

Case 3:19-cv-01224-B Document 59 Filed 07/25/19 of 34 PageID 2250

Case 3:19-cv-01224-B Document 59 Filed 07/25/19 Page 1 of 34 PageID 2250

MEMORANDUM IN SUPPORT OF MOTION TO DISMISS i

TABLE OF CONTENTS

I. PRELIMINARY STATEMENT .........................................................................................1

II. BACKGROUND .................................................................................................................2

A. The Trust And Its Trustees ......................................................................................2

B. The Contested Trustee Election ...............................................................................3

C. Plaintiffs’ Claims .....................................................................................................4

D. Counter-Plaintiffs’ Counterclaims ...........................................................................5

III. ARGUMENT AND AUTHORITIES ..................................................................................5

A. Counter-Plaintiffs’ Amended Counterclaims Are Procedurally Improper ..............5

B. Counter-Plaintiffs Lack Standing To Assert Their Claims ......................................7

1. The Negligence And Gross Negligence Claims Are Derivative .................8

2. The Breach of Fiduciary Duty Claim Is Derivative .....................................9

3. The Waste Claim Is Derivative ..................................................................10

C. Counter-Plaintiffs Have Not Adequately Pled Claims Regarding The Trustees’ Management Of The Trust .....................................................................................11

D. Counter-Plaintiffs’ Claims Relating To David Barry’s 2017 Election Fail ...........15

1. There Is No Private Right Of Action For Violation Of NYSE Rules ........16

2. Counter-Plaintiffs Lack Standing To Challenge Other Shareholders’ Votes ..........................................................................................................19

3. Counter-Plaintiffs Fail To Adequately Plead Their 2017 Election Claims ........................................................................................................20

4. The Claims Are Barred By Laches And Other Equitable Doctrines .........23

IV. CONCLUSION AND REQUESTED RELIEF .................................................................25



MEMORANDUM IN SUPPORT OF MOTION TO DISMISS ii

TABLE OF AUTHORITIES

Page(s)

Cases

21st Century Ins. & Fin. Serv., Inc. v. Tex. Specialty Risk Programs, Inc., No. 3:10-cv-2076-M, 2011 WL 1869433 (N.D. Tex. 2011) .....................................................6

In re Aguilar, 344 S.W.3d 41 (Tex. App.—El Paso 2011, no pet.) ................................................................10

Am. Hardware Corp. v. Savage Arms Corp., 136 A.2d 690 (Del. 1957) ........................................................................................................21

Andy Thanh v. Oanh Tran, SACV 17-00953 JVS (KESx), 2018 WL 4944992 (C.D. Cal. Jan. 25, 2018) ..........................6

In re ATP Oil & Gas Corp., 711 F. App’x 216 (5th Cir. 2017) ......................................................................................11, 12

Bank of Am. NA v. Lebreton, No. CIV 14-0319 JB/KBM 2015 WL 2226266 (D.N.M. Apr. 20, 2015)..................................6

Barbara v. N.Y. Stock Exch., Inc., 99 F.3d 49 (2d Cir. 1996), abrogated on other grounds by Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, 136 S. Ct. 1562 (2016) .......................................................................................................16, 20

Bowman v. CitiMortgage Inc., No. 3:14-CV-4036-B, 2015 WL 4867746 (N.D. Tex. Aug. 12, 2015) ....................................20

Brody v. Brody, No. 07 Civ. 7981 (RJS), 2009 WL 436404 (S.D.N.Y. Feb. 17, 2009) ....................................10

Brown v. Bridges, 692 F. App’x 215 (5th Cir. 2017) ............................................................................................24

Cates v. Int’l Tel. & Tee., 756 F.2d 1161 (5th Cir. 1985) ...................................................................................................7

Clark v. Commercial State Bank, No. MO-00-CA-140, 2001 WL 685529 (W.D. Tex. Apr. 16, 2001) .........................................2

Cochran v. Astrue, No. 3:11-CV-1257-D, 2011 WL 5604024 (N.D. Tex. Nov. 17, 2011) ...................................25

Craighead v. E.F. Hutton & Co., 899 F.2d 485 (6th Cir. 1990) ...................................................................................................17



MEMORANDUM IN SUPPORT OF MOTION TO DISMISS iii

Dallas Cty., Tex. v. MERSCORP, Inc., 2 F. Supp. 3d 938 (N.D. Tex. 2014), aff’d sub nom. Harris Cty. Tex. v. MERSCORP Inc., 791 F.3d 545 (5th Cir. 2015) .......................................18

Debussy LLC v. Deutsche Bank AG, 242 F. App’x 735 (2d Cir. 2007) ...............................................................................................7

DL Capital Grp., LLC v. Nasdaq Stock Mkt., Inc., 409 F.3d 93 (2d Cir. 2005).......................................................................................................22

In re Enron Corp. Sec., Derivative & “ERISA” Litig., Nos. H-01-3624, H-03-4359, 2016 WL 4095973 (S.D. Tex. Aug. 2, 2016), aff’d sub nom. Giancarlo v. UBS Fin. Servs., Inc., 725 F. App’x 278 (5th Cir. 2018) ............................................................................................16

Exxon Corp. v. Oxxford Clothes, Inc., 109 F.3d 1070 (5th Cir. 1997) .................................................................................................24

F5 Capital v. Pappas, No. 14 Civ. 9356 (AT), 2016 WL 900389 (S.D.N.Y. Feb. 17, 2016), aff’d, 856 F.3d 61 (2d Cir. 2017) .............................................................................................13

Fernea v. Merrill Lynch Pierce Fenner & Smith, Inc., 559 S.W.3d 537 (Tex. App.—Austin July 12, 2011, no pet.) ............................................17, 18

Forney 921 Lot Dev. Partners I, L.P. v. Paul Taylor Homes, Ltd., 349 S.W. 3d 258 (Tex. App.-Dallas 2011, pet. denied) ...........................................................25

Gortat v. Capala Bros., INc., 257 F.R.D. 353 (E.D.N.Y. 2009) ...............................................................................................2

Guidry v. Bank of LaPlace, 954 F.2d 278 (5th Cir. 1992) ...................................................................................................14

Gurfein v. Ameritrade, 312 F. App’x 410 (2d Cir. 2009) .......................................................................................17, 18

Hanson v. Odyssey Healthcare, Inc., No. 3:04-CV-2751-N, 2007 WL 5186795 (N.D. Tex. Sept. 21, 2007) ...................................10

Hoxworth v. Blinder, Robinson & Co., 903 F.2d 186 (3d Cir. 1990).....................................................................................................17

Indemnified Capital Invs., SA. v. R.J. O’Brien & Assocs., Inc., 12 F.3d 1406 (7th Cir. 1993) .............................................................................................17, 18

Innova Hosp. San Antonio, Ltd. P’ship v. Blue Cross & Blue Shield of Ga., Inc., 892 F.3d 719 (5th Cir. 2018) ...............................................................................................3, 12



MEMORANDUM IN SUPPORT OF MOTION TO DISMISS iv

Johnson v. Roberts, Nos. 92-0052, 92-0066 (JHG), 1992 WL 151820 (D.D.C. June 9, 1992) ...............................21

Kowalski v. Tesmer, 543 U.S. 130 (2004) .................................................................................................................19

Kramer v. W. Pac. Indus., Inc., 546 A.2d 348 (Del. 1988) ........................................................................................................10

Lewis v. S.L. & E., Inc., 629 F.2d 764 (2d Cir. 1980).....................................................................................................10

Maass v. Lee, 189 F. Supp. 3d 581 (E.D. Va. 2016) ........................................................................................2

Marshal T. Simpson Tr. v. Invicta Networks, Inc., 249 F. Supp. 3d 790 (D. Del. 2017) ...........................................................................................7

In re Middle Bay Golfers’ Ass’n, Inc., No. 8-13-70361-DTE, 2013 WL 6355598 (Bankr. E.D.N.Y. Dec. 5, 2013) ...........................11

Mill Bridge V, Inc. v. Benton, No. 08-2806, 2009 WL 4639641 (E.D. Pa. Dec. 3, 2009) .......................................................17

Mraz v. JPMorgan Chase Bank, N.A., No. 17-CV-6380, 2018 WL 2075427 (E.D.N.Y. May 3, 2018) ..............................................18

Nat’l Prod. Inc. v. Arkon Res., Inc., No. C15-01553RSL, 2016 WL 9224046 (W.D. Wash. Nov. 8, 2016) ......................................6

Nauslar v. Coors Brewing Co., 170 S.W.3d 242 (Tex. App.—Dallas 2005, no pet.) ..................................................................7

Nevins v. Bryan, 885 A.2d 233 (Del. Ch.), aff’d, 884 A.2d 512 (Del. 2005) ......................................................24

Olivetti Underwood Corp. v. Jacques Coe & Co., 217 A.2d 683 (Del. 1966) ........................................................................................................21

Pagtakhan-So v. Cueto, 663 F. App’x 394 (6th Cir. 2016) ........................................................................................9, 10

In re Parkcentral Glob. Litig., No. 09-cv-0765-M, 2010 WL 3119403 (N.D. Tex. Aug. 5, 2010) ............................................8

Porter v. Shearson Lehman Bros., Inc., 802 F. Supp. 41 (S.D. Tex. 1992) ............................................................................................16



MEMORANDUM IN SUPPORT OF MOTION TO DISMISS v

Preston v. Allison, 650 A.2d 646 (Del. 1994) ........................................................................................................21

Reneker v. Offill, No. 3:08-CV-1394-D, 2009 WL 3365616 (N.D. Tex. Oct. 20, 2009) ..............................22, 23

Renfro v. F.D.I.C., 773 F.2d 659 (5th Cir. 1985) ...................................................................................................10

Salt Dome Oil Corp. v. Schenck, 41 A.2d 583 (Del. 1945) ..........................................................................................................21

In re SBMC Healthcare, LLC, No. 16-2947, 2017 WL 2062992 (S.D. Tex. May 11, 2017) .....................................................7

Schilling v. Rogers, 363 U.S. 666 (1960) .................................................................................................................18

Seidl v. Am. Century Co., Inc., 713 F. Supp. 2d 249 (S.D.N.Y. 2010), aff’d, 427 F. App’x 35 (2d Cir. 2011) ......................................................................................13

In re Series 7 Broker Qualification Exam Scoring Litig., 548 F.3d 110 (D.C. Cir. 2008) .................................................................................................22

Singleton v. Wulff, 428 U.S. 106 (1976) .................................................................................................................20

Steubner Realty 19, Ltd. v. Cravens Road 88, Ltd., 817 S.W.2d 160 (Tex. App.-Houston [14th Dist] 1991, no writ) ............................................25

Superior MRI Servs., Inc. v. Alliance Healthcare Servs., Inc., 778 F.3d 502 (5th Cir. 2015) ...................................................................................................19

Tatintsian v. Vorotyntsev, No. 16-cv-7203-GHW, 2019 WL 1746004 (S.D.N.Y. Apr. 18, 2019) .......................7, 8, 9, 10

Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44 (Del. Ch. 2015)..............................................................................................17, 18

Tex. Med. Ass’n v. Aetna Life Ins. Co., 80 F.3d 153 (5th Cir. 1996) .....................................................................................................18

Thompson v. Smith Barney, Harris Upham & Co., 709 F.2d 1413 (11th Cir. 1983) ...............................................................................................17

True v. Robles, No. SA-08-CA-53-OG, 2008 WL 11334971 (W.D. Tex. June 30, 2008) ...................14, 15, 22



MEMORANDUM IN SUPPORT OF MOTION TO DISMISS vi

In re VeriFone Sec. Litig., 11 F.3d 865 (9th Cir. 1993) .....................................................................................................17

Vincel v. White Motor Corp., 521 F.2d 1113 (2d Cir. 1975).....................................................................................................7

Ward v. Am. Red Cross, No. 3:13-cv-1042-L, 2013 WL 2916519 (N.D. Tex. June 14, 2013) ........................................5

Weissman v. Nat’l Ass’n of Sec. Dealers, Inc., 500 F.3d 1293 (11th Cir. 2007) ...............................................................................................16

White v. Padgett, 475 F.2d 79 (5th Cir. 1973) .....................................................................................................25

Statutes/Rules

15 U.S.C. § 78c(a)(26) ...................................................................................................................16

Fed. R. Civ. P. 12 .........................................................................................................................2, 5

Fed. R. Civ. P. 13 .............................................................................................................................6

Fed. R. Civ. P. 15 .........................................................................................................................6, 7

Fed. R. Civ. P. 23.1 ....................................................................................................................9, 10



MEMORANDUM IN SUPPORT OF MOTION TO DISMISS Page 1

I. PRELIMINARY STATEMENT

The Texas Pacific Land Trust (“TPL” or the “Trust”) and, in their respective capacities as

trustees for the Trust, John R. Norris III and David E. Barry (collectively, the “Trustees” and

with the Trust, “Plaintiffs”) filed this lawsuit to secure for Trust shareholders a fully informed

and properly-noticed vote for the election of a new trustee to fill a vacancy among the Trust’s

three trustees. Plaintiffs brought this action because one of the nominees, Defendant Eric Oliver

(“Defendant”), and his group of dissident shareholders (collectively, the “Dissident Group”),

made material misstatements and omissions during their proxy solicitation, while at the same

time purporting already to have elected Defendant as trustee at a sham “shareholder meeting”

(the “Invalid Meeting”) on May 22, 2019. Defendant and several members of his Dissident

Group, SoftVest L.P., Horizon Kinetics LLC, and ART-FGT Family Limited Partners

(collectively with Defendant, “Counter-Plaintiffs”) responded, asserting counterclaims against

the Trustees seeking not only a declaration that the Invalid Meeting and Defendant’s sham

election were valid, but also to hold the Trustees personally liable for damages based on various

ill-pled theories, including that the Trustees’ business decisions on behalf of the Trust breached

their fiduciary duties or otherwise were negligent or wasteful. None of these claims should

survive this Motion as a matter of law.

First, Counter-Plaintiffs improperly filed standalone “amended” counterclaims in

violation of Rule 7 of the Federal Rules of Civil Procedure, which prohibits the filing of

amended counterclaims as a standalone document, a procedural defect warranting dismissal by

the Court. Second, all of Counter-Plaintiffs’ claims for damages must be dismissed for lack of

standing: they are quintessential derivative claims that do not belong to shareholders but rather to

the Trust itself. Third, even if Counter-Plaintiffs had standing (and they do not), their claims are




inadequately pled, either because they are barred by the Business Judgment Rule or because

Counter-Plaintiffs fail to plead facts sufficient to support their bare allegations.

Counter-Plaintiffs also pursue a belated claim that one of the current Trustees was not

properly elected in 2017, more than two and a half years ago, because certain third-party brokers

allegedly violated a New York Stock Exchange (“NYSE”) rule by voting shares beneficially

owned by Trust shareholders without instruction. According to Counter-Plaintiffs, this alleged

technical violation is grounds for voiding the 2017 election and replacing a trustee who has

served for two years. This claim lays bare Counter-Plaintiffs’ true intentions – to effect a hostile

takeover of the Trust. Regardless, the claim is woefully deficient given that (i) it is based on a

NYSE rule for which there is no private right of action; (ii) Counter-Plaintiffs lack standing to

assert it given that they do not allege that their shares were improperly voted; (iii) it is

inadequately pled insofar as it seeks, without any basis in law or fact, to require one of the

Trustees to have enforced the NYSE’s rules as applied to third-party brokers; and (iv) Counter-

Plaintiffs’ claims are barred by the equitable doctrines of laches and quasi-estoppel. For these

reasons, the Trustees1 respectfully request that the Court dismiss the Amended Counterclaims.2

II. BACKGROUND

A. The Trust And Its Trustees

The Trust was created in 1888 and is among the largest private landowners in Texas,

1 The Trustees are the Counter-Defendants in this action. None of the amended counterclaims filed by Counter-Plaintiffs are against the Trust. 2 Counter-Defendants reserve the right to answer and file counterclaims against Counter-Plaintiffs after the Motion is decided pursuant to Rules 7 and 12 of the Federal Rules of Civil Procedure. Indeed, under established case law, “Rule 12(a)(4(A) suspends the deadline for answering.” Clark v. Commercial State Bank, No. MO-00-CA-140, 2001 WL 685529, at *1 (W.D. Tex. Apr. 16, 2001); see also Maass v. Lee, 189 F. Supp. 3d 581, 587 (E.D. Va. 2016) (noting that “Rule 12(a)(4) clearly contemplates that any motion under Rule 12 . . . suspends the time for the moving [party] to respond”); Gortat v. Capala Bros., Inc., 257 F.R.D. 353, 366 (E.D.N.Y. 2009) (applying Rule 12(a)(4) to suspend the time to answer counterclaims).




holding approximately 900,000 acres of land. CC ¶¶ 16-17.3 The Trust’s land is located chiefly

in the Permian Basin, and it derives much of its income from oil and gas royalties and land and

water sales. Id. ¶ 16. In addition to the administration and exploitation of its land, the Trust

recently invested in providing full-service water offerings to oil and gas companies. Id. ¶ 19.

The Trust has substantially outperformed most of its fellow S&P 500 members and has not only

declared an increased dividend for sixteen consecutive years, but, since Mr. Barry’s election as

Trustee, has generated substantial revenue and income growth of well over 75% annually. See

App. at 7, 10.4

The Trust is governed by a Declaration of Trust dated February 1, 1888. CC ¶ 17. Upon

election, trustees serve until “death, resignation or disqualification.” Id. ¶ 21. The Trust’s two

incumbent Trustees are John R. Norris III and David E. Barry, both of whom are plaintiffs and

counter-defendants in this action. Id. ¶¶ 11-12. Mr. Barry was elected as trustee on January 12,

2017, after a previous trustee passed away. Id. ¶¶ 54-57, 60. Mr. Barry was the only candidate

nominated for the vacant trustee position. Id. ¶ 58. As discussed below, Counter-Plaintiffs have

raised a belated and improper challenge to Mr. Barry’s election.

B. The Contested Trustee Election

On February 25, 2019, one of the Trust’s trustees, Maurice Meyer III, resigned as trustee

for health reasons. CC ¶ 30. Following this resignation, the Trust nominated retired four-star

General Donald G. Cook to serve as a trustee.5 Id. ¶ 35. The Dissident Group nominated

3 The notation “CC” refers to Counter-Plaintiffs’ amended counterclaims, dated June 18, 2019 (Dkt. 22). 4 TPL, Annual Report (Form 10-K), filed February 28, 2019, App. at 1. The Court can take judicial notice of this document; indeed, Defendant previously requested that the Court take judicial notice of the Trust’s public filings. See Innova Hosp. San Antonio, Ltd. P’ship v. Blue Cross & Blue Shield of Ga., Inc., 892 F.3d 719, 726 (5th Cir. 2018) ((noting that, at the pleading stage, the court “may rely on the complaint, its proper attachments, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice”) (quotation omitted). 5 The Trust had previously nominated Preston Young but withdrew his nomination. See CC ¶ 35.




Defendant as its candidate. CC ¶ 36. Since Defendant’s nomination, the Trustees have sought

information from him in order to evaluate his qualifications to serve as a trustee, with a focus on

Defendant’s potential conflicts of interest and business affiliations. See id. ¶ 48. Thus far,

Defendant has refused to respond to the same questionnaire General Cook completed.

A special meeting was originally scheduled for May 8, 2019, for shareholders to vote to

fill the trustee vacancy, but, upon receipt of Defendant’s nomination, this meeting was postponed

to May 22, 2019. CC ¶¶ 33, 40. After the Securities and Exchange Commission advised that the

Trust may be required to file a proxy supplement following General Cook’s voluntary

commitment to resign after three years if elected, the Trust announced that on May 8, 2019 it

would convene the May 22, 2019 meeting only to immediately adjourn it, without conducting

any business, until June 6, 2019. Id. ¶ 42. When it became clear that Defendant would not

provide the necessary disclosures, the Trust filed this suit and postponed the Special Meeting to

allow for the claims in this lawsuit to be resolved and for shareholders to be provided with

accurate information prior to voting. Nonetheless, Counter-Plaintiffs purported to hold a

“meeting” anyway and to “elect” Defendant as trustee without any Trustee present and without

the proper notice under the Declaration of Trust. Id. ¶¶ 4-5, 50-51.

C. Plaintiffs’ Claims

On May 21, 2019, Plaintiffs filed their original complaint, which sought to compel

Defendant to correct numerous material misstatements and omissions in the Dissident Group’s

proxy solicitation materials. Dkt. 1. On May 22, 2019, following the Invalid Meeting, Plaintiffs

filed the Amended Complaint, which additionally sought a declaratory judgment that the Invalid

Meeting was invalid and that Defendant has not been elected as a trustee of the Trust. Dkt. 15.




D. Counter-Plaintiffs’ Counterclaims

On May 28, 2019, Defendant answered the Amended Complaint. Dkt. 17. Defendant

and certain members of his Dissident Group also asserted counterclaims against the Trustees. Id.

On June 18, 2019, Counter-Plaintiffs purported to amend their counterclaims but without filing

an amended Answer. Dkt. 22. On June 17, 2019, the day before the “amended” counterclaims

were filed, Defendant filed a motion for judgment on the pleadings pursuant to Rule 12(c) (the

“Rule 12(c) Motion”).6 Dkt. 19.

Counter-Plaintiffs’ amended counterclaims seek a declaration that the Invalid Meeting

was valid and that Defendant was elected a trustee. CC ¶ 76. Counter-Plaintiffs seek a further

declaration that the election of Mr. Barry in 2017 was invalid, alleging that the voting at the 2017

election did not comply with NYSE Rule 452, which governs when brokers can vote the shares

of their customers. CC ¶¶ 53-69, 106. Counter-Plaintiffs also assert claims for negligence,

gross negligence, breach of fiduciary duty, and waste relating to the Trustees’ business decisions

regarding the Trust. Id. ¶¶ 77-100. As set forth below, these claims should be dismissed.

III. ARGUMENT AND AUTHORITIES

A. Counter-Plaintiffs’ Amended Counterclaims Are Procedurally Improper.

Counterclaims may only be pled as part of an answer and not as a standalone pleading.

Thus, the “amended” counterclaims should be dismissed as procedurally improper.

“Counterclaims under Rule 13 must be made in a pleading, and amendments to such pleadings to

6 Although Plaintiffs more fully briefed this issue in their Response in Opposition to Defendant’s Motion for Judgment on the Pleadings (Dkt. 51), the Trustees reiterate that Defendant’s Rule 12(c) Motion was premature and procedurally defective. A Rule 12(c) motion is permitted only “[a]fter the pleadings are closed.” Fed. R. Civ. P. 12(c). For purposes of Rule 12(c), the pleadings are not “closed” until Counter-Defendants answer Counter-Plaintiffs’ counterclaims. See Ward v. Am. Red Cross, No. 3:13-cv-1042-L, 2013 WL 2916519, at *1 (N.D. Tex. June 14, 2013) (if a “‘counterclaim . . . is interposed . . ., the filing of a reply to [the] counterclaim . . . normally will mark the close of the pleadings’”) (quotation omitted). Because Defendant chose to file counterclaims against Counter-Defendants and Counter-Defendants had not yet answered at the time the Rule 12(c) Motion was filed, the the Rule 12(c) Motion was premature. As a result, that motion should not be considered by the Court.




add omitted counterclaims are governed by Rule 15.” 21st Century Ins. & Fin. Serv., Inc. v. Tex.

Specialty Risk Programs, Inc., No. 3:10-cv-2076-M, 2011 WL 1869433, at *1 (N.D. Tex. 2011);

see also Comment to Fed. R. Civ. P. 13 (“An amendment to add a counterclaim will be governed

by Rule 15”). Rule 7’s definition of “pleadings” includes “only…(1) a complaint; (2) an answer

to a complaint; (3) an answer to a counterclaim designated as a counterclaim; (4) an answer to a

crossclaim; (5) a third-party complaint; (6) an answer to a third-party complaint; and (7) if the

court orders one, a reply to an answer.” Fed. R. Civ. P. 7(a). Courts in this District and

throughout the country have uniformly observed that standalone counterclaims are improper and

may only be filed in conjunction with a recognized pleading under Rule 7 (e.g., an answer).7

Counter-Plaintiffs may not file counterclaims without doing so together with a recognized

pleading under Rule 7—i.e., an answer—and may not amend their counterclaims without doing

so as part of an amended pleading—namely, an amended answer. See 21st Century Ins. & Fin.

Serv., 2011 WL 1869433, at *2; see also Bank of Am. NA v. Lebreton, No. CIV 14-0319

JB/KBM 2015 WL 2226266, at *35 (D.N.M. Apr. 20, 2015) (noting that the defendant “may still

be able to assert a counterclaim, but . . . because she has already filed an Answer . . . she should .

. . amend[] her Answer to include the counterclaim”). Accordingly, the “amended”

counterclaims should be dismissed in their entirety.8

7 See, e.g., 21st Century Ins. & Fin. Serv., 2011 WL 1869433, at *2 (granting plaintiff’s motion to strike standalone “Original Counterclaim” “because a counterclaim must be asserted as an amendment to its pleadings”); see also Baker Hughes Oilfield Operations LLC v. Packers Plus Energy Servs. Inc., No. 4:17-CV-1422, at *1 (S.D. Tex. Mar. 12, 2018) (noting that “[t]he Court agrees” a defendant “cannot assert its counterclaim as a ‘standalone document’” under Rules 7 and 13(a)); Andy Thanh v. Oanh Tran, SACV 17-00953 JVS (KESx), 2018 WL 4944992, at *1 (C.D. Cal. Jan. 25, 2018) (observing that “Defendants may not file a counterclaim without filing an answer. Rule 13 only contemplates the filing of a compulsory or permissive counterclaim in or concurrent with ‘a pleading.’”); Nat’l Prod. Inc. v. Arkon Res., Inc., No. C15-01553RSL, 2016 WL 9224046, at *3 (W.D. Wash. Nov. 8, 2016) (finding a standalone counterclaim to be procedurally deficient). 8 Pursuant to Rule 15, Counter-Plaintiffs were at liberty to file an amended answer with amended counterclaims by June 18, 2019, but they did not. As a result, Counter-Plaintiffs must now move this Court for leave to amend their Answer and Counterclaims. Fed. R. Civ. P. 15(a)(2).




B. Counter-Plaintiffs Lack Standing To Assert Their Claims.

Counter-Plaintiffs’ claims relating to the Trustees’ management of the Trust (negligence,

gross negligence, breach of fiduciary duty, and waste) are uniformly deficient because Counter-

Plaintiffs lack standing to assert them. It is well-settled that “[a]n individual stakeholder in a

legal entity does not have a right to recover personally for harms done to the legal entity.”

Nauslar v. Coors Brewing Co., 170 S.W.3d 242, 250 (Tex. App.—Dallas 2005, no pet.); see

also, e.g., In re SBMC Healthcare, LLC, No. 16-2947, 2017 WL 2062992, at *6 (S.D. Tex. May

11, 2017) (recognizing that, under Texas law, where “the harm suffered by [the shareholder] . . .

is not distinct from harm suffered by . . . the Trust . . . [the claims] should be dismissed for lack

of standing”). In Cates v. International Telephone & Telegraph, 756 F.2d 1161, 1178 (5th Cir.

1985), the Fifth Circuit recognized that the concept of derivative standing applies not only to

corporations, but also, for example, to trusts under Texas law.9 Beyond Texas, this bedrock

principle is recognized across numerous jurisdictions, including New York and Delaware.10 As

discussed below, Counter-Plaintiffs are pursuing derivative claims that belong to the Trust, not to

individual shareholders, and these claims should be dismissed for lack of standing.

9 The Cates court explained that “it has long been the rule that a beneficiary may sue to enforce a claim of the trust when the trustee wrongfully refuses to do so,” and noted that “[t]he availability of a derivative action [with respect to partnership interests] is…suggested” by the fact that a partnership interest “is fairly analogous to a share of stock in a corporation or a beneficial interest in a trust.” Id. (emphasis added) (citation omitted). The Cates court further explained that it was of no moment that Texas’s derivative statute (now Texas Business Organizations Code section 21.551, et seq.) explicitly references only corporations because “historically the stockholders’ derivative action was an equitable remedy devised by the courts, not a statutory one,” so “[w]hile it is now regulated to some degree by statute in Texas . . . its roots in Texas law are prestatutory.” Id. 10 Debussy LLC v. Deutsche Bank AG, 242 F. App’x 735, 736 (2d Cir. 2007) (affirming the lower court, which applied Delaware law and “reasoned that the action was derivative in nature because (1) the injury was to the trust, rather than to the investors individually; and (2) any recovery belongs to the trust”); Vincel v. White Motor Corp., 521 F.2d 1113, 1121 (2d Cir. 1975) (recognizing that, under New York law, an individual shareholder lacks standing to bring his or her claim where “the duty owed to the shareholder[] is . . . indistinguishable from the duty owed to the corporation”); Tatintsian v. Vorotyntsev, No. 16-cv-7203-GHW, 2019 WL 1746004, at *10 (S.D.N.Y. Apr. 18, 2019) (recognizing that “the determination of whether a claim is direct or derivative turns on who was harmed first, the member or the entity”); Marshal T. Simpson Tr. v. Invicta Networks, Inc., 249 F. Supp. 3d 790, 793 (D. Del. 2017) (“[W]hether a fiduciary duty claim is direct or derivative turns on: (1) who suffered the alleged harm . . . and (2) who would receive the benefit of any recovery or other remedy . . . ?”).




1. The Negligence And Gross Negligence Claims Are Derivative

Counter-Plaintiffs assert separate claims for negligence (Count III) and gross negligence

(Count IV), both relying on the same alleged misconduct. Counter-Plaintiffs allege that the

Trustees breached duties to Counter-Plaintiffs through “making grossly negligent business

decisions on behalf of TPL, conducting their duties while affected by undisclosed conflicts of

interest, and mismanaging TPL’s incentive structure.” CC ¶ 88. The negligence and gross

negligence claims identically allege that the negligence “caused TPL to lose money and harmed

TPL’s business, all of which redounds to the ultimate detriment of TPL’s shareholders.” Id. ¶¶

88, 92. Counter-Plaintiffs also allege that Mr. Norris was negligent in failing “to exercise

reasonable care in connection with the January 12, 2017 trustee election.” Id. ¶ 88.

Counter-Plaintiffs’ mismanagement claims plainly are derivative. The only direct harm

alleged is to the Trust (“caused TPL to lose money and harmed TPL’s business”), and any harm

to shareholders is indirect (“redounds to the ultimate detriment of TPL’s shareholders”). CC

¶¶ 88, 92 (emphases added); see In re Parkcentral Glob. Litig., No. 09-cv-0765-M, 2010 WL

3119403, at *5 & n.49 (N.D. Tex. Aug. 5, 2010) (collecting cases recognizing that

mismanagement claims, including claims of gross negligence, are derivative). The party that

allegedly “first” suffered the harm is the Trust itself. Vorotyntsev, 2019 WL 1746004, at *10. If

any business decision by the Trustees harmed the Trust, shareholders were harmed only

indirectly, presumably by ostensible diminution in the value of their shareholdings.

This fatal flaw also extends to the negligence claims that are based on the Trustees’

purported “misconduct during the recent proxy contest.” CC ¶ 89. Counter-Plaintiffs allege that

such misconduct “caused TPL to spend upwards of $5 million of shareholder capital” (CC ¶ 39),

but “shareholder capital” is merely a clever way to describe the Trust’s funds. A loss of




“shareholder capital” only impacts shareholders through a reduction in the value of their shares.

In other words, a classic derivative claim. See Vorotyntsev, 2019 WL 1746004, at *10.

In addition, any alleged injury resulting from Mr. Barry’s election is to the Trust, not to

Counter-Plaintiffs individually. The Sixth Circuit’s decision in Pagtakhan-So v. Cueto, 663 F.

App’x 394 (6th Cir. 2016), is instructive. In Pagtakhan-So, following a contested trustee

election, plaintiffs sought a declaration “to remove the offending board members from office.”

Id. at 397. Because the plaintiffs could not satisfy the requirements of Fed. R. Civ. P. 23.1 with

respect to derivative actions, they argued that their “challenge to the 2014 board election is ‘a

direct claim, not a derivative one. . . .’” Id. at 398. The Sixth Circuit held that it was “not a close

case” that a claim relating to “an election of trustees” amounts to “classic harms to the

association” and that “[a]ny injuries to the plaintiffs personally are incidental to the injury to the

[association].” Id. at 397. Accordingly, the appellate court rejected the plaintiffs’ attempt “to

skirt what they cannot conquer” by attempting to plead their claims directly. Id. at 398. So too,

here, to the extent there is any injury alleged, it is to the Trust, not individual shareholders.

2. The Breach of Fiduciary Duty Claim Is Derivative

Counter-Plaintiffs’ breach of fiduciary duty claim (Count V) is likewise derivative. The

fiduciary duty allegations track the negligence allegations almost verbatim with respect to

purported mismanagement of the Trust’s business. CC ¶¶ 95–96. These allegations are

derivative for the same reasons discussed above. Likewise, with respect to the 2017 election,

Counter-Plaintiffs expressly allege that the duty breached was not just to Counter-Plaintiffs, but

also “other shareholders” and that the harm was to “TPL’s business,” which “redounds to the

ultimate detriment of TPL’s shareholders.” Id. ¶ 95. That is a quintessential derivative claim.




See Vorotyntsev, 2019 WL 1746004, at *10; see also Pagtakhan-So, 663 F. App’x at 398. As a

result, this claim must be dismissed.

3. The Waste Claim Is Derivative

Although not addressed by courts in this Circuit, Delaware courts have held that

corporate waste claims are “entirely derivative in nature.” Kramer v. W. Pac. Indus., Inc., 546

A.2d 348, 353 (Del. 1988).11 This accords with other jurisdictions.12 This precedent makes

sense. Like Counter-Plaintiffs’ negligence and fiduciary duty claims, the harm alleged here

concerns the alleged waste of “TPL’s assets.” CC ¶¶ 98–99. Even the relief sought is intended

to “reimburse TPL.” Id. ¶ 100. The waste claim also must be dismissed for lack of standing.

* * * *

For these reasons, Counter-Plaintiffs’ claims other than those that relate to the validity of

Defendant’s “election” must be dismissed because Counter-Plaintiffs have neither pled them as

derivative claims nor met the requirements for derivative standing.13

11 Texas courts frequently apply Delaware law for guidance in the absence of controlling Texas law. See, e.g., In re Aguilar, 344 S.W.3d 41, 49 (Tex. App.—El Paso 2011, no pet.) (following Delaware’s approach in the absence of Texas authority and noting that “Delaware has been described as ‘the Mother Court of corporate law . . .’ Courts throughout the country look to Delaware for guidance on matters of corporate law.”). 12 See, e.g., Brody v. Brody, No. 07 Civ. 7981 (RJS), 2009 WL 436404, at *3 (S.D.N.Y. Feb. 17, 2009) (“The law is clear that a claim for corporate waste may not be brought in a direct suit by a shareholder on his own behalf.”); Lewis v. S.L. & E., Inc., 629 F.2d 764, 768 n.10 (2d Cir. 1980) (“[A] claim of waste must be brought derivatively, and cannot be asserted in a direct action.”). 13 Where a claim is derivative in nature, “Rule 23.1, Federal Rules of Civil Procedure, requires that such a complaint ‘allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority . . . and the reasons for his failure to obtain the action or for not making the effort.’” Renfro v. F.D.I.C., 773 F.2d 659, 659 (5th Cir. 1985). Thus, “shareholders who wish to initiate a derivative action must first demonstrate that the corporation itself had refused to proceed after suitable demand, unless excused by extraordinary conditions.” Hanson v. Odyssey Healthcare, Inc., No. 3:04-CV-2751-N, 2007 WL 5186795, at *2 (N.D. Tex. Sept. 21, 2007) (internal quotation marks omitted). Having not even attempted to plead their claims derivatively, Counter-Plaintiffs likewise have not made any effort to comply with Rule 23.1.




C. Counter-Plaintiffs Have Not Adequately Pled Claims Regarding The Trustees’ Management Of The Trust

Counter-Plaintiffs also have failed to adequately plead negligence, gross negligence,

breach of fiduciary duty, or waste with respect to the Trustees’ management of the Trust.

First, the business judgment rule (the “BJR”) requires dismissal of the negligence and

breach of fiduciary duty claims. “The business judgment rule in Texas generally 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.” In re ATP Oil

& Gas Corp., 711 F. App’x 216, 221 (5th Cir. 2017) (citation omitted)). “One important

outgrowth of the business judgment rule is that courts will not interfere with decisions made by a

corporation’s officers or directors based on allegations of mismanagement, neglect, or abuse of

discretion.” Id.; see also In re Middle Bay Golfers’ Ass’n, Inc., No. 8-13-70361-DTE, 2013 WL

6355598, at *11 (Bankr. E.D.N.Y. Dec. 5, 2013) (finding that the BJR applied to bankruptcy

trustees and stating, “so long as the trustee’s action falls within the proper scope of his business

judgment, his decision will be upheld”).

Counter-Plaintiffs’ negligence and fiduciary duty claims are expressly based on

“negligent business decisions” and “mismanagement.” CC ¶¶ 88, 95 (emphasis added).

Counter-Plaintiffs do not allege any basis to conclude that the business decisions they attack –

e.g., swapping surface acreage with Chevron, selling surface acreage to an energy company,

purchasing surface acreage on land with “little to no drilling activity,” spending funds on “an

active water business,” and spending funds on proxy solicitation (CC ¶¶ 24, 89) – are beyond the

“honest exercise” of the Trustees’ “business judgment and discretion.” In re ATP, 711 F. App’x

at 221. Rather, in an effort to evade the BJR, Counter-Plaintiffs plead that the Trustees engaged




in “rampant undisclosed conflicts of interest.” CC ¶¶ 22, 26-29. But these allegations are both

conclusory and unrelated to the purportedly “negligent” transactions at issue.

For instance, Counter-Plaintiffs allege that Counter-Defendants failed to disclose a

conflict of interest relating to a “5,200 percent increase to their own pay.” CC ¶ 26. But this

makes no sense: Counter-Plaintiffs know about this increase because the Trust did disclose, in a

public filing with the SEC, that compensation would be adjusted for the first time in 131 years.

See App. at 21 (“During 2018, the Trustees determined that an increase in the compensation paid

to the Trustees would be appropriate . . . The new annual amount of compensation payable to

each Trustee, including the Chairman, is $104,000, which, after inflation, yields approximately

the same value as the $2,000 amount set forth in the Declaration of Trust in 1888, when no

income taxes were in effect.”). Even so, the BJR bars such claims relating to a fiduciary’s

“decision to receive . . . compensation in exchange for performing corporate services,” and such

an action “does not constitute a per se duty of loyalty breach.” In re ATP, 711 F. App’x at 222.

Notably, Counter-Plaintiffs studiously avoid explaining that the “5,200 percent” pay increase

merely reflects an inflation adjustment that raised Trustees’ compensation from $2,000 to

$104,000 for managing a business entity with a market value of more than $6 billion.

Counter-Plaintiffs further allege that Counter-Defendants had undisclosed conflicts

because TPL retained the law firm at which Mr. Barry previously served as a partner. CC ¶ 28.

Again, this relationship was disclosed,14 and Counter-Plaintiffs do not allege that the retention of

the law firm was connected to the allegedly “negligent” transactions. Finally, Counter-Plaintiffs

allege that it is “unclear” whether a company in which Mr. Barry serves as president “engaged in

14 See Dkt. 21-1 at 63, 71, 74 (disclosing Mr. Barry’s affiliation with Kelley Drye and the Trust’s retention of Kelley Drye). Defendant already has requested that the Court take judicial notice of this document. Dkt. 21 at 2. Notably, Mr. Barry retired from Kelley Drye before he became a trustee and is a “life partner” with the firm – a classification reflecting that Mr. Barry no longer participates in any equity sharing arrangement with Kelley Drye.




any transactions relating to surface use rights” of Trust land. Id. ¶ 29. This utterly speculative

allegation, which does not identify a specific transaction, cannot possibly overcome the

presumptions of the BJR. See, e.g., Seidl v. Am. Century Co., Inc., 713 F. Supp. 2d 249, 260

(S.D.N.Y. 2010), aff’d, 427 F. App’x 35 (2d Cir. 2011) (holding that board members “will not be

considered conflicted based on non-specific or speculative allegations of wrongdoing”) (internal

quotation marks omitted). Thus, the BJR requires dismissal of both claims.15

Second, the waste claim also fails pursuant to the BJR. “The standard for overcoming

the business judgment presumption in a corporate waste claim is very high.” F5 Capital v.

Pappas, No. 14 Civ. 9356 (AT), 2016 WL 900389, at *7 (S.D.N.Y. Feb. 17, 2016), aff’d, 856

F.3d 61 (2d Cir. 2017) (internal citations and quotation marks omitted). “In order to succeed, a

plaintiff must show that an exchange was so one sided that no business person of ordinary, sound

judgment could conclude that the corporation has received adequate consideration.” Id. Thus,

“[c]onduct constituting corporate waste arises only in the unconscionable case where directors

irrationally squander or give away corporate assets, such as where the challenged transaction

served no corporate purpose or where the corporation received no consideration at all.” Id.

(internal citations and quotation marks omitted). Counter-Plaintiffs come nowhere close to

meeting this stringent standard, alleging only that (i) the Trustees increased their salaries 5,200

percent, which the counterclaims note was an increase against the $2,000 salary that was set

approximately 130 years ago in 1888 and had remained unchanged until the recent adjustment

for inflation, and which the Fifth Circuit has held cannot support even a claim for breach of

fiduciary duty, supra at 9-10, and (ii) that the Trustees chose to spend money on a proxy contest

15 Counter-Plaintiffs’ only other allegation is that TPL’s previous CEO engaged in a conflicted transaction, but that individual is not a party to this case, and Counter-Plaintiffs allege no basis to evade the BJR with respect to the Trustees’ role in a transaction in which neither of them were personally conflicted.




without any allegations suggesting that decision was “unconscionable” or served “no corporate

purpose” – quite the opposite, it is the Trustees’ express duty under the Trust’s governing

documents to ensure that the Trust is managed by appropriate and qualified trustees.

Third, while claims for “gross negligence” are not barred by the BJR, Counter-Plaintiffs

do not plead any facts to support their conclusory allegation that the Trustees acted with gross

negligence. “Gross negligence is defined as an entire want of care, which would raise the belief

that the act or omission complained of was the result of a conscious indifference to the rights or

welfare of the person or persons to be affected by it.” True v. Robles, No. SA-08-CA-53-OG,

2008 WL 11334971, at *5–6 (W.D. Tex. June 30, 2008) (citation omitted). “In Texas, gross

negligence has both an objective and subjective element: (1) viewed objectively from the

standpoint of the actor, the act or omission must involve an extreme degree of risk, considering

the probability and magnitude of the potential harm to others, and (2) the actor must have actual,

subjective awareness of the risk involved, but nevertheless proceed in conscious indifference to

the rights, safety, or welfare of others.” Id. (quotation omitted). In other words, the standard for

gross negligence is exceedingly difficult to satisfy.

Counter-Plaintiffs base their gross negligence claim on the same allegations underlying

their simple negligence claim, but “[m]erely alleging an act or failure to act constitutes gross

negligence is not sufficient.” True, 2008 WL 11334971, at *5-6. While they refer to the

elements of a gross negligence claim (CC ¶ 91), this bare recital does not constitute pleading

facts sufficient to support a claim. Guidry v. Bank of LaPlace, 954 F.2d 278, 281 (5th Cir. 1992)

(noting “[i]n order to avoid dismissal for failure to state a claim, a plaintiff must plead specific

facts not mere conclusory allegations”) (quotation omitted). Like in True, Counter-Plaintiffs

have “not alleged any facts that would remotely amount to gross negligence,” such as “a total




abdication of duties, an entire want of care, an act involving an extreme degree of risk of harm,

or a conscious indifference” to shareholder rights. 2008 WL 11334971, at *5-6. Instead, they

rely on business decisions squarely within the Trustees’ obligations pursuant to the Declaration

of Trust. See CC ¶ 17; Dkt. 15, Ex. A, Declaration of Trust, at FIRST (trustees have “all the

powers in respect of said property of an absolute owner, as to selling, granting, leasing . . . or

otherwise disposing of the same.”). Thus, even if Counter-Plaintiffs had standing (which they do

not), the “mismanagement” claims still fail because they have not met the required pleading

standard.

D. Counter-Plaintiffs’ Claims Relating To David Barry’s 2017 Election Fail

In a blatant effort to secure full control of the Trust, Counter-Plaintiffs seek to challenge

Mr. Barry’s 2017 election as Trustee. Specifically, they seek a declaration that the 2017 election

was “invalid and ineffective,” and that Mr. Norris was negligent and breached fiduciary duties by

failing to correct the “error” that led to Mr. Barry’s allegedly invalid election. CC ¶¶ 53-69, 88,

95, 101-106. Counter-Plaintiffs allege that many shareholders hold their shares through third-

party brokers and are, for this reason, referred to as the “beneficial owners” of their shares. Id. ¶

62. In the absence of voting instructions from beneficial owners, NYSE Rule 452 allows brokers

to use their discretion to vote beneficial owners’ shares only on “routine” matters (id. ¶¶ 64-66);

that the NYSE “erroneously” designated the 2017 election as routine and therefore improperly

allowed brokers to vote uninstructed shares, resulting in Mr. Barry’s election based on votes that

were “erroneously cast” (id. ¶¶ 67-69); that Mr. Norris and the Trust “failed to take corrective

action” and allowed the vote “to invalidly proceed;” and that Counter-Plaintiffs only recently

learned about this “error” from a NYSE “representative.” Id. ¶ 67.

These allegations fail because: (i) no private right of action for violation of NYSE rules

exists; (ii) Counter-Plaintiffs have no standing to pursue their claims, which are derivative and




do not concern any votes that they cast; (iii) the claims fail to state a claim insofar as they do not

adequately plead that Mr. Norris breached any duty or that Counter-Plaintiffs suffered any non-

speculative harm; and (iv) the claims are barred by laches and the doctrine of quasi-estoppel.

1. There Is No Private Right Of Action For Violation Of NYSE Rules

Counter-Plaintiffs’ 2017 election claims fail because they are based on an alleged

violation of NYSE Rule 452, under which no express or implied private right of action exists.

Under the Exchange Act, the NYSE is considered a “self-regulatory organization” (“SRO”). 15

U.S.C. § 78c(a)(26). SROs have “a variety of adjudicatory, regulatory, and prosecutorial

functions, including implementing and effectuating compliance with securities law;

promulgating and enforcing rules governing the conduct of [their] members.” Weissman v. Nat’l

Ass’n of Sec. Dealers, Inc., 500 F.3d 1293, 1296 (11th Cir. 2007). Thus, the NYSE “has a duty

to promulgate and enforce rules governing the conduct of its members.” Barbara v. N.Y. Stock

Exch., Inc., 99 F.3d 49, 51 (2d Cir. 1996), abrogated on other grounds by Merrill Lynch, Pierce,

Fenner & Smith Inc. v. Manning, 136 S. Ct. 1562 (2016).

Given the enforcement responsibilities explicitly delegated to the NYSE (and other

SROs), “the Fifth Circuit has been hesitant to recognize a private cause of action based only on a

violation of a NYSE or NASD rule.”16 In re Enron Corp. Sec., Derivative & “ERISA” Litig.,

Nos. H-01-3624, H-03-4359, 2016 WL 4095973, at *16 (S.D. Tex. Aug. 2, 2016), aff’d sub nom.

Giancarlo v. UBS Fin. Servs., Inc., 725 F. App’x 278 (5th Cir. 2018) (citation omitted). And,

district courts in the Fifth Circuit have outright rejected the existence of such a private right of

action, holding that NASD rules amount to mere “guideline[s]; not . . . rule[s] developed under

the authority of the SEC, a statute, or a law,” and because the “special focus of the NASD rules

16 “NASD” is the National Association of Securities Dealers, which was the predecessor to the Financial Industry Regulatory Authority (FINRA).




is not and has never been protecting the investor-public,” no basis exists to imply a private cause

of action under those rules. Porter v. Shearson Lehman Bros., Inc., 802 F. Supp. 41, 63 (S.D.

Tex. 1992). Similarly, the great weight of modern authority holds that there is no private right of

action to enforce SRO rules, and Counter-Defendants have failed to identify a single case in the

Fifth Circuit that finds that a violation of Rule 452 gives rise to a private cause of action.17

While Counter-Plaintiffs attempt to plead around this fatal limitation by crafting claims

sounding in negligence and breach of fiduciary duty, courts have rejected such gamesmanship.

For instance, in Teamsters Union 25 Health Services & Insurance Plan v. Baiera, 119 A.3d 44,

55 (Del. Ch. 2015), the plaintiff alleged that board members had breached their fiduciary duties

when determining that certain individuals were “independent under the NYSE Rules.” The court

found that, in this context, “to prove its breach of fiduciary duty claim, Plaintiff would be

prosecuting the functional equivalent of a claim to enforce the NYSE Rules.” Id. at 70. Under

the Exchange Act, however, “the NYSE is [solely] responsible for maintaining the compliance of

listed companies with the NYSE rules,” and, accordingly, the plaintiff lacked standing to seek to

enforce those rules independently. Id.

The same is true here; Counter-Plaintiffs do not allege that the NYSE made a formal

determination of any violation of Rule 452 or instituted a process to remedy any such violation.

17 See, e.g., Gurfein v. Ameritrade, 312 F. App’x 410, 413–14 (2d Cir. 2009) (holding no private right of action to enforce NASDAQ Rules); Indemnified Capital Invs., SA. v. R.J. O’Brien & Assocs., Inc., 12 F.3d 1406, 1412 (7th Cir. 1993) (holding the Exchange Act did not create a private right of action to enforce exchange rule violations); Mill Bridge V, Inc. v. Benton, No. 08-2806, 2009 WL 4639641, at *11 (E.D. Pa. Dec. 3, 2009) (stating “courts in [the Third Circuit] have ‘unanimously refused to recognize any private right of action for violation of a stock exchange rule’”) (citation omitted); Fernea v. Merrill Lynch Pierce Fenner & Smith, Inc., 559 S.W.3d 537, 543-45 (Tex. App.—Austin July 12, 2011, no pet.) (“The great weight of authority, however, holds against inferring a private cause of action for violations of NASD and NYSE rules.”); see also In re VeriFone Sec. Litig., 11 F.3d 865, 870 (9th Cir. 1993) (dismissing claims for violations of NASD and NYSE rules because “[i]t is well established that violations of an exchange rule will not support a private claim”); Hoxworth v. Blinder, Robinson & Co., 903 F.2d 186, 200 (3d Cir. 1990) (recognizing no private right of action for violation of NASD rules); Craighead v. E.F. Hutton & Co., 899 F.2d 485, 493 (6th Cir. 1990) (same); Thompson v. Smith Barney, Harris Upham & Co., 709 F.2d 1413, 1419 (11th Cir. 1983) (same).




Instead, just as in Teamsters, Counter-Plaintiffs effectively seek to enforce NYSE rules in the

first instance, an exercise that is committed to the discretion of the NYSE. The Teamsters court

ultimately found, as the Court should find here, that the plaintiff “ha[d] no standing” to assert a

claim, noting there was “no authority from Delaware or any other jurisdiction that supports the

proposition that a violation of the NYSE Rules . . . could sustain a claim for breach of fiduciary

duty.” Id.18

Finally, given the absence of a private right of action, Counter-Plaintiffs are precluded

from seeking a declaratory judgment regarding the 2017 election. It is well-settled that the

availability of relief under the Declaratory Judgment Act “presupposes the existence of a

judicially remediable right.” Schilling v. Rogers, 363 U.S. 666, 677 (1960). Courts consistently

reject declaratory relief claims where no private right of action otherwise exists. Tex. Med. Ass’n

v. Aetna Life Ins. Co., 80 F.3d 153, 158–59 (5th Cir. 1996) (holding plaintiffs not entitled to

declaration because regulations did not allow private right of action); Dallas Cty., Tex. v.

MERSCORP, Inc., 2 F. Supp. 3d 938, 947 (N.D. Tex. 2014), aff’d sub nom. Harris Cty. Tex. v.

MERSCORP Inc., 791 F.3d 545 (5th Cir. 2015) (“[D]eclaratory judgment is a remedy, and a

plaintiff may not obtain a declaratory judgment under a statute . . . that provides no private right

of action.”). Because the Exchange Act does not authorize a private right of action for violations

of NYSE rules, including NYSE Rule 452, and because Counter-Plaintiffs cannot plead around

this limitation, their claims based on the 2017 election should be dismissed.

18 See also Fernea, 559 S.W.3d at 545 (concluding that “there is no private cause of action for violation of NYSE and NASD rules”); Indemnified Capital Invs., 12 F.3d at 1412 (rejecting attempt to use violation of Chicago Board of Exchange Rule as predicate for breach of fiduciary duty claim); Mraz v. JPMorgan Chase Bank, N.A., No. 17-CV-6380, 2018 WL 2075427, at *5 n.4 (E.D.N.Y. May 3, 2018) (“[P]laintiff cannot recover for negligence based on the alleged violation of FINRA Rule . . . .”); Gurfein, 312 F. App’x at 414 (rejecting claim based on NASD, SEC, and AMEX rules fashioned as a breach of contract claim).




2. Counter-Plaintiffs Lack Standing To Challenge Other Shareholders’ Votes

Even if there were a private right of action for violation of NYSE rules (and there is not),

Counter-Plaintiffs would still lack standing because they do not allege that shares for which they

had beneficial ownership rights were improperly voted. As the Fifth Circuit has explained, in

addition to satisfying the immutable requirements of Article III, litigants must also satisfy the

criteria for prudential standing, including the requirement “that a plaintiff generally must assert

[her] own legal rights and interests and cannot rest [her] claim to relief on the legal rights or

interests of third parties.” Superior MRI Servs., Inc. v. Alliance Healthcare Servs., Inc., 778 F.3d

502, 504 (5th Cir. 2015). Exceptions to this rule are limited to situations where “the party

asserting the right has a ‘close’ relationship with the person [possessing] the right . . . [or] there

is a ‘hindrance’ to the possessor’s ability to protect [her] own interests.” Kowalski v. Tesmer,

543 U.S. 130 (2004).

Counter-Plaintiffs allege that Mr. Barry was elected improperly based on uninstructed

votes cast by brokers who held shares on behalf of “beneficial owners of TPL.” CC ¶¶ 61-69.

Counter-Plaintiffs, however, did not vote or give proxies to vote in favor of Mr. Barry, and their

shares are not alleged to have been improperly voted in violation of NYSE Rule 452. Id. ¶ 60.

Counter-Plaintiffs do not allege any facts sufficient to confer standing to assert claims that other

shareholders’ shares were counted improperly. Accordingly, even if some shares were

improperly voted in the 2017 election (and they have failed to provide any well-pleaded

allegations to support even that conclusion), Counter-Plaintiffs have neglected to allege a basis

for skirting the well-established prohibition on litigating third-party rights. To the extent

beneficial owners whose shares were allegedly improperly voted seek to litigate this issue, they

are free to do so on their own behalf. Absent that, “[f]ederal courts must hesitate before




resolving a controversy . . . on the basis of the rights of third person[s] not [party] to the

litigation.” Singleton v. Wulff, 428 U.S. 106, 113 (1976).

3. Counter-Plaintiffs Fail To Adequately Plead Their 2017 Election Claims

Even beyond the foregoing procedural deficiencies, Counter-Plaintiffs’ negligence and

breach of fiduciary duty claims related to Mr. Barry’s 2017 election as Trustee are inadequately

pled. These claims each require well-pled allegations of a duty, breach of that duty, and an

injury or damages proximately caused by the breach. See Bowman v. CitiMortgage Inc., No.

3:14-CV-4036-B, 2015 WL 4867746, at *3, 7 (N.D. Tex. Aug. 12, 2015) (Boyle, J.). Counter-

Plaintiffs plead no such allegations here.

First, Counter-Plaintiffs do not adequately plead that Mr. Norris19 breached any duty.

Rather, they allege that NYSE Rule 452 prohibits “brokers” from voting shares in director

elections without specific instructions from the beneficial owners of those shares. CC ¶ 66

(emphasis added). They further allege that a “representative” of the NYSE informed them in

2019 that the 2017 election was “erroneously classified” as a “routine” proposal in which brokers

could, in fact, vote “uninstructed shares.” Id. ¶¶ 65-67. Mr. Norris, however, is alleged only to

have “failed to take corrective action to notify the NYSE when [he] became aware . . . that such

mistake had been made.” Id. ¶ 67.

Critically missing from these allegations is any basis to impose on Mr. Norris a “duty” to

“take corrective action” with regard to an alleged mistake (i) made by the NYSE, an exchange

that functions as a regulator and whose exclusive job it is to apply and enforce its own rules20 and

(ii) that relates to a rule that, on its face and pursuant to Counter-Plaintiffs’ allegations, applies to

19 The portions of Counter-Plaintiffs’ negligence and breach of fiduciary duty claims that relate to the 2017 election are asserted against Mr. Norris only. 20 See Barbara, 99 F.3d at 51(recognizing that NYSE “has a duty to promulgate and enforce rules governing the conduct of its members”).




brokers, not issuers like the Trust. In effect, Counter-Plaintiffs seek to impose on Mr. Norris a

duty to police the NYSE and third-party brokers’ compliance with NYSE rules in the face of

contradictory instructions from the NYSE itself. This contention flies in the face of decades of

precedent holding that a business entity is “is entitled to confine itself to dealing with registered

stockholders in intra-corporate affairs such as mergers; it should avoid becoming involved in the

affairs of registered stockholders vis-à-vis beneficial owners.” Olivetti Underwood Corp. v.

Jacques Coe & Co., 217 A.2d 683, 593 (Del. 1966); see also Johnson v. Roberts, Nos. 92-0052,

92-0066 (JHG), 1992 WL 151820, at *6 (D.D.C. June 9, 1992) (recognizing the sound public

policy underlying Delaware’s rule).

Such a rule makes good sense; business entities “require certainty and expedience in the

decision-making process. . . [and thus the business entity] generally is entitled to rely on its own

stock list and recognize votes . . . only when initiated by the stockholder of record.” Preston v.

Allison, 650 A.2d 646, 649 (Del. 1994). To that end, “[i]f an owner of stock chooses to register

[her] shares in the name of a nominee, [she] takes the risks attendant upon such an arrangement.”

Am. Hardware Corp. v. Savage Arms Corp., 136 A.2d 690, 692 (Del. 1957). Accordingly,

Counter-Plaintiffs cannot establish the existence of a duty requiring Mr. Norris to look beyond

the record holder’s instructions in a proxy election. To the contrary, the weight of the case law

suggests that this burden falls on the beneficial owners themselves. “To rule otherwise would

lead to corporate chaos.” Salt Dome Oil Corp. v. Schenck, 41 A.2d 583, 585 (Del. 1945).

Second, Counter-Plaintiffs have failed to plead the existence of any breach by Mr. Norris.

As Counter-Plaintiffs tacitly admit, the NYSE advised brokers prior to the 2017 meeting that the

2017 proposal was “routine.” There was no basis for Mr. Norris to know about, let alone doubt,

the NYSE’s determination. SROs like the NYSE “effectively stand in the shoes of the SEC




because they preform regulatory functions that would otherwise be performed by the SEC . . .

[and are] rightly considered ‘quasi-governmental’ authorities.” DL Capital Grp., LLC v. Nasdaq

Stock Mkt., Inc., 409 F.3d 93, 95 (2d Cir. 2005). Given this unique role, “[t]here is no question

that an SRO and its officers are entitled to absolute immunity when they are . . . [as is alleged

here] acting under the aegis of their regulatory duties.” Id. at 97 (quotation omitted); see also,

e.g., In re Series 7 Broker Qualification Exam Scoring Litig., 548 F.3d 110, 115 (D.C. Cir. 2008)

(noting that “[t]he elaboration of duties, allowance of delegation and oversight by the SEC . . .

show Congress’s desire to protect SROs from liability”). There is no hint in the Amended

Counterclaims that a basis existed for any party, including the brokers, to disregard or challenge

the determination made by the NYSE. Counter-Plaintiffs allege no facts in support of the

conclusory allegation that Mr. Norris “became aware” of the NYSE’s alleged mistake in 2017

(and therefore that he would have had any reason to take “corrective action”). True, 2008 WL

11334971, at * 5 (“[C]onclusory allegations or legal conclusions masquerading as factual

conclusions will not suffice to prevent a motion to dismiss.” (quotation omitted). Nor do

Counter-Plaintiffs allege that the NYSE retracted its 2017 guidance to the Trust or otherwise

formally advised any party of a change in the 2017 application of Rule 452. Accordingly, even

if a duty did exist, no conceivable basis exists to find that Mr. Norris breached it.

Finally, Counter-Plaintiffs do not adequately plead that the alleged breaches proximately

caused any harm. In order to allege proximate causation, Counter-Plaintiffs need to plead that

the results of the election would have been different had the NYSE not provided the “erroneous”

instruction. See, e.g., Reneker v. Offill, No. 3:08-CV-1394-D, 2009 WL 3365616, at *6 (N.D.

Tex. Oct. 20, 2009) (“Under Texas law, proximate cause consists [partly] of cause in fact[,]”

which means that “without [the alleged act] harm would not have occurred.”). Counter-Plaintiffs




seek to satisfy this requirement by pleading – in a conclusory fashion – that, “[o]n information

and belief, but for the error that TPL failed to correct, Mr. Barry would not have received the

vote needed to claim an electoral win.” CC ¶ 68. But they do not plead a single fact – even

based on “information and belief” – that could support such a conclusion; especially in light of

the fact that Mr. Barry was the only candidate running for trustee in 2017. CC ¶ 58. Rather, they

allege only that, “because brokers typically vote in favor of uncontested company proposals,

most if not all of the votes that were erroneously cast in 2017 were cast in favor of Mr. Barry; as

a result, Mr. Barry did not receive a majority of the votes that were legally cast.” Id. ¶ 69. What

Counter-Plaintiffs do not, and cannot, allege is what would have happened had the NYSE

instructed brokers that they were not permitted to vote uninstructed shares.21 Without knowing

the answers to this question, the alleged harm is completely speculative. See Reneker, 2009 WL

3365616, at *6 (dismissing “speculative” allegations of proximate cause).

4. The Claims Are Barred By Laches And Other Equitable Doctrines

Counter-Plaintiffs’ 2017-election claims also should be dismissed for the simple reason

that they have waited too long to assert them. Mr. Barry was elected on January 12, 2017, well

over two years ago. CC ¶ 60. It is far too late to unscramble that egg. Under Texas law, laches

bars a claim where there is “(1) unreasonable delay by one having legal or equitable rights in

asserting them; and (2) a good faith change of position by another to his detriment because of the

delay.” Exxon Corp. v. Oxxford Clothes, Inc., 109 F.3d 1070, 1082 (5th Cir. 1997) (quotation

omitted). These elements are satisfied here.

21 For example, in that circumstance, would brokers have attempted to secure instructions? If so, how would shareholders have instructed the brokers to vote? Would the Trust have hired a proxy solicitation firm to assist in turning out the vote? If so, might they have secured enough votes to render moot the voting of uninstructed shares? Counter-Plaintiffs have no answers to these critical questions, nor are they likely to be able to resolve these issues with anything more than idle speculation.




Counter-Plaintiffs, including Horizon – the Trust’s largest shareholder –were

shareholders in 2017 at the time of the election. CC ¶¶ 2, 31. Indeed, Horizon alleges that it

voted against Mr. Barry’s election. Id. ¶ 60. They could easily have inquired as to the treatment

– routine or non-routine – of the 2017 election and whether “uninstructed shares” were counted

in the tally. While Counter-Plaintiffs allege that they only learned about this “error” recently

(CC ¶ 61), the standard is not when a party knew about a claim but when they reasonably should

have known about that claim, here, the very day that the election occurred. Brown v. Bridges,

692 F. App’x 215, 216 (5th Cir. 2017) (“As the district court correctly determined, the period for

laches begins when the plaintiff[s] knew or should have known of the defendant’s injurious

conduct, not . . . when they actually became aware of it.” (quotation omitted)).22

In addition, the detriment to the Trust as a result of Counter-Plaintiffs’ delay is clear. The

Delaware Chancery Court’s decision in Nevins v. Bryan, 885 A.2d 233, 247 (Del. Ch.), aff’d,

884 A.2d 512 (Del. 2005), is instructive. In Nevins, a party challenged the election of directors

slightly more than one year after the election took place. The court found that amount of time

sufficient to “constitute[] unreasonable delay that injured” the directors, given that “[t]he Board

took a number of actions during the intervening year,” and that, had the plaintiff “made a timely

objection, the Board easily could have given members proper notice and re-elected the director

defendants.” Id. “Therefore, all Defendants, including the Corporation, have been harmed by

[the plaintiff’s] unreasonable delay.” Id. So too, here, Counter-Plaintiffs themselves allege

numerous actions taken by Mr. Barry, as Trustee, since the 2017 election over two years ago.

See, e.g., CC ¶ 24. The Trust has lost the opportunity to re-elect Mr. Barry through the votes of

22 Notably, as alleged in Counter-Plaintiffs’ preliminary injunction papers, they were able to uncover this “error” through a single email to the NYSE. See Dkt. 37 at 17; Dkt. 38 at 11. However, rather than notify the Trust or its lawyers of this situation, they elected to proceed by adding to the Court’s burden by unnecessarily expanding the scope of this lawsuit.




the shareholder base as it existed in January 2017. Because Counter-Plaintiffs acted with

unreasonable delay to Plaintiffs’ detriment, their claims relating to the 2017 election are barred.

Moreover, Counter-Plaintiffs’ claim also is barred by the doctrine of quasi-estoppel,

which operates to “preclude a person from asserting, to another’s disadvantage, a right

inconsistent with a position previously taken.” Forney 921 Lot Dev. Partners I, L.P. v. Paul

Taylor Homes, Ltd., 349 S.W. 3d 258, 268 (Tex. App.-Dallas 2011, pet. denied); see also

Steubner Realty 19, Ltd. v. Cravens Road 88, Ltd., 817 S.W.2d 160, 164 (Tex. App.-Houston

[14th Dist] 1991, no writ) (noting that the doctrine of quasi estoppel applies to bar inconsistent

positions after “accept[ing] a benefit”). Counter-Plaintiffs have reaped the benefit of Mr. Barry’s

performance, through which the Trust has substantially outperformed most of its fellow S&P 500

members since Mr. Barry’s election as Trustee, generating substantial revenue and income

growth of well over 75% annually. See App. at 7, 10. And, as described above, they had all the

information necessary to assert their challenge to Mr. Barry’s election on January 12, 2017,

supra at 24, but instead acquiesced and accepted the substantial benefits of Mr. Barry’s service.

Accordingly, equity demands that this Court preclude Counter-Plaintiffs from taking the

inconsistent position that the 2017 election was invalid merely because such claim has now

become convenient.23

IV. CONCLUSION AND REQUESTED RELIEF

For these reasons, the Trustees respectfully request that the Court dismiss Counter-

Plaintiffs’ amended counterclaims in their entirety.

23 Although affirmative defenses, like quasi-estoppel, are not often decided at the pleading stage, “a claim may also be dismissed if a successful affirmative defense appears clearly on the face of the pleadings.” Cochran v. Astrue, No. 3:11-CV-1257-D, 2011 WL 5604024, at *1 (N.D. Tex. Nov. 17, 2011); see also White v. Padgett, 475 F.2d 79, 82 (5th Cir. 1973) (noting that a motion to dismiss may be granted “when the affirmative defense clearly appears on the face of the complaint”).




Respectfully submitted on July 25, 2019, SIDLEY AUSTIN LLP

s/ Yvette Ostolaza

Yvette Ostolaza Texas Bar No. 00784703 [email protected] Yolanda C. Garcia Texas Bar No. 24012457 [email protected] Tiffanie N. Limbrick Texas Bar No. 24087928 [email protected] SIDLEY AUSTIN LLP 2021 McKinney Avenue, Suite 2000 Dallas, TX 75201 Tel.: 214-981-3300 Fax: 214-981-3400

Andrew W. Stern NY Bar No. 2480465 (admitted pro hac vice application) [email protected] Alex J. Kaplan NY Bar No. 4160370 (admitted pro hac vice application) [email protected] Jon W. Muenz NY Bar No. 4705968 (admitted pro hac vice application) [email protected] SIDLEY AUSTIN LLP 787 7th Avenue New York, NY 10019 Tel.: 212-839-5300 Fax: 212-839-5599 Attorneys for Plaintiffs/Counterclaim-Respondents




CERTIFICATE OF SERVICE

I hereby certify that on this day, July 25, 2019, I caused Plaintiffs’ Memorandum in Support

of Motion to Dismiss, to be electronically served via the Court’s CM/ECF system on the

following parties:

Robert C. Walters [email protected] Russell H. Falconer [email protected] GIBSON, DUNN & CRUTCHER LLP 2100 McKinney Avenue Suite 1100 Dallas, TX 75201

Adam H. Offenhartz (admitted pro hac vice) [email protected] Aric H. Wu (admitted pro hac vice) [email protected] Peter M. Wade (admitted pro hac vice) [email protected] Luke A. Dougherty (admitted pro hac vice) [email protected] GIBSON, DUNN & CRUTCHER LLP 200 Park Avenue New York, NY 10166

Tyler H. Amass (admitted pro hac vice) [email protected] GIBSON, DUNN & CRUTCHER LLP 1801 California Street Suite 4200 Denver, CO 80202

Attorneys for Defendant/Counter-Plaintiff Eric L. Oliver and Counter-Plaintiffs SoftVest, L.P., Horizon Kinetics LLC, and ART-FGT Family Partners Limited

/s/ Tiffanie N. Limbrick Tiffanie N. Limbrick

ACTIVE 246350128



united states district court northern district of … · 2019-07-25 · case no. 3:19-cv-01224-b...

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