Greathouse v. Capital Plus Fin. LLC

690 F.Supp.3d 610

Eric GREATHOUSE, et al, Plaintiffs, v. CAPITAL PLUS FINANCIAL LLC, et al., Defendants.

No. 4:22-CV-0686-P

United States District Court, N.D. Texas, Fort Worth Division

Signed September 6, 2023

Joe Kendall, Kendall Law Group PLLC, Dallas, TX, Bart D. Cohen, Pro Hac Vice, Bailey & Glasser LLP, Villanova, PA, Justin A. Heller, Pro Hac Vice, Matthew M. Zapala, Pro Hac Vice, Nolan Heller Kauffman LLP, Albany, NY, Katherine C. Campbell, Pro Hac Vice, Friday Eldredge & Clark LLP, Rogers, AR, Lawrence J. Lederer, Pro Hac Vice, Bailey & Glasser LLP, Philadelphia, PA, Michael L. Murphy, Pro Hac Vice, Bailey & Glasser LLP, Charleston, WV, for Plaintiffs.

Katherine Treistman, Andrew David Bergman, Arnold & Porter Kaye Scholer LLP, Houston, TX, Christopher J. Schwegmann, Lynn Pinker Hurst & Schwegmann LLP, Dallas, TX, Michael P. Lynn, Lynn Pinker Cox & Hurst LLP, Dallas, TX, Eric N. Whitney, Kaye Scholer LLP, New York, NY, for Defendants.

OPINION & ORDER

Mark T. Pittman, United States District Judge

Before the Court are Defendants' Motions to Dismiss (ECF Nos. 31, 34, 36). For the reasons stated below, the motions are GRANTED IN PART and DENIED IN PART. Plaintiffs' unjust enrichment claims against all Defendants are DISMISSED. To the extent Defendants seek to dismiss Plaintiffs' other claims, the motions are DENIED.

INTRODUCTION

In 2020, Congress put their trust—to the tune of $800 billion—into private lenders to help alleviate the effects of the burdensome federal, state, and local regulations that crippled businesses and the livelihoods of millions of families across the country. As with any $800 billion government program, the trust placed in the actors carrying it out was often undeserved. Like magic, bad actors arrive wherever hundred-billion-dollar government programs occur.

In this case, Plaintiffs allege that Defendants were bad actors who capitalized on the exorbitant government fees given for approving PPP loans while never disbursing the funds to countless businesses in need. And because of the striking allegations in their complaint, this Court must allow many of Plaintiffs' claims to proceed. When such an egregious abuse of public trust is apparent, the Court cannot dismiss this case on the pleadings alone.

FACTUAL & PROCEDURAL BACKGROUND

In 2020, Congress passed the CARES Act, which provided for the Payroll Protection Program ("PPP")—a loan assistance program for businesses financially burdened by restrictions imposed on the country by local, state, and federal officials. This extraordinary act required a comprehensive plan to disburse billions of dollars to countless businesses in a very short window of time. Because of the logistical challenges that approving loans for millions of American businesses presented, the government worked with private lenders to streamline the approval process.

The approval and loan disbursal process promulgated by the SBAs rulemaking followed a 7-step process:

1. The business sent in the required information on an application to show eligibility for the PPP program.

2. The lender approved the application and sent notice to the SBA.

3. The SBA issues an "SBA number" to the loan, signifying its approval.

4. The lender makes a one-time, full disbursement of the PPP funds within 10 days of loan approval.

5. After disbursing the funds, the lender received the fees they are statutorily entitled to.

6. The lender monitors the loan and reviews the businesses' use of the funds to establish whether loan forgiveness applies.

7. The loan is either forgiven, forgiven in part, or paid back in whole by the business.

To assist lenders with the approval process, the Federal Reserve Bank of the United States also instituted the Paycheck Protection Program Liquidity Facility ("PPPFL"), which advanced funds through non-recourse loans to lenders who could provide proof of approvals and disbursements of PPP loans as collateral.

Defendant Capital Plus Financial LLC ("Capital Plus")—a wholly owned subsidiary of Defendant Crossroads Inc.—stepped up to the plate and began approving loans through the process authorized by the CARES Act and subsequent rulemaking procedures. And they did so at an astonishing pace. In less than five months, Capital Plus approved an astonishing 472,036 PPP loans. The volume of loans approved was so numerous that they were the second largest lender of PPP loans in 2021 by volume—assigning more loans than the combined efforts of many major financial behemoths. Indeed, Capital Plus enlisted help from outside providers to process loans due to capacity constraints. To make monetary matters even more astonishing, Capital Plus—due to their massive quantity of "approved" loans—drew down nearly $7.5 billion in funding from the PPPFL program.

The plan instituted by Capital Plus and its parent company, Crossroads, paid off as they amassed an astonishing $970.5 million in revenue—a 2,446% increase from the year before. In many shareholder letters and releases, Crossroads—through their directors including Defendants Alpert and Donnelly—talked about the success of the PPP lending craze and the income it was generating for the parent company. In some SEC filings directors touted the $930 million "windfall" from PPP lending. And they also often discussed strategies and other directives that Crossroads aimed toward regarding the lending program—often referring to Capital Plus and Crossroads as a single entity. One of the immediate strategies implemented with the new windfall of cash was a $238.9 million dividend that was quickly paid out after the PPP window closed. Most of the money went to insiders in the company like Defendants Alpert and Donnelly who together owned 62.8% of outstanding shares. This resulted in a $149,918,480 payday between the two individuals.

But while income soared for Capital Plus and Crossroads, complaints from individuals approved for loans did as well. Plaintiffs allege that—although they received SBA numbers—funds were never disbursed to them and others. In effect, Capital Plus and Crossroads collected the fees associated with approval and interest on the $7.5 billion in PPPFL funds but never completed their obligation to countless individuals who were in dire straits financially. Even worse, Plaintiffs could not go to another lender as they were restricted from processing any other applications once a valid SBA number was assigned to them. And further, Plaintiffs allege that because the SBA number was assigned to them, they are still under legal obligations to pay back money that they never received.

Because of the alleged faults of Crossroads, Capital Plus, and its directors, a group of Plaintiffs bring this suit under the Class Action Fairness Act seeking redress of their injuries under four theories: (1) Breach of Contract; (2) Unjust Enrichment; (3) California's Unfair Competition Law ("UCL"); and (4) North Carolina Unfair and Deceptive Trade Practices Act ("NCUDTPA").

A. The Parties

1. Plaintiffs

Plaintiff Eric Greathouse is a citizen of Arkansas who owns an insurance inspection business. Plaintiff Tiffany Sumrall is a citizen of Texas who owns a landscaping business. Plaintiff Cori Pericho is a citizen of Hawaii who owns a messenger and delivery service. Plaintiff John Pinkney is a citizen of Texas who owns a cable communications business. Plaintiff Alicia Mena is a citizen of Arizona who owns a house-cleaning business. These Plaintiffs collectively seek to represent a nationwide class and bring two claims for breach-of-contract and unjust enrichment.

Plaintiff Barbara Myles is a citizen of North Carolina who owns a business that assists independent artists. Myles seeks to represent a North Carolina subclass and brings a claim under the NCUDTPA in addition to claims for breach-of-contract and unjust enrichment.

Lastly, Plaintiff Ernesto Covarrubias is a citizen of California who owns an auto repair business. Plaintiff Joshua Smith is also a citizen of California who is an operates a delivery and human resource and consulting business. Covarrubias and Smith seek to represent a California subclass and bring a claim under the UCL in addition to claims for breach-of-contract and unjust enrichment.

All Plaintiffs were assigned an SBA number by Capital Plus, but never received PPP funds.

2. Corporate Defendants

Defendant Crossroads is a publicly traded Delaware corporation with its principal place of business in Dallas, Texas.

Defendant Capital Plus is a Texas limited liability company with its principal place of business in Bedford, Texas. Capital Plus is a wholly owned subsidiary of Crossroads.

3. Individual Defendants

Defendant Donnelly has continually served as a Director and CEO of Defendant Crossroads since December 2017. Donnelly also simultaneously served as CEO of Defendant Capital Plus from 2014 until August 30, 2021.

Defendant Alpert is the Chairman of the Board of Directors of Defendant Crossroads. Alpert has served in this role since 2017. Alpert also holds leadership positions with other Texas-based companies that engage in business with the Corporate Defendants through investment advisory services.

LEGAL STANDARD

A. Rule 12(b)(1)

Article III of the Constitution limits federal-court jurisdiction to "cases" or "controversies." U.S. CONST. art. III, § 2. To satisfy this requirement, a plaintiff must establish that he has a "personal stake" in the lawsuit. See Davis v. Fed. Election Comm'n, 554 U.S. 724, 732-33, 128 S.Ct. 2759, 171 L.Ed.2d 737 (2008). Because standing is a central concern of subject-matter jurisdiction, it is properly addressed under Rule 12(b)(1). Lee v. Verizon Commc'ns, Inc., 837 F.3d 523, 533 (5th Cir. 2016). The party seeking federal jurisdiction has the burden of establishing standing. Lujan v. Def. of Wildlife, 504 U.S. 555, 561, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992).

B. Rule 12(b)(2)

After personal jurisdiction has been raised in a 12(b)(2) motion, "the party seeking jurisdiction bears the burden of proof but must only...