Case: 20-20106 Document: 00516235282 Page: 1 Date Filed: 03/11/2022
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
March 11, 2022
No. 20-20106 Lyle W. Cayce
Clerk
Xiongen Jiao; Qianju Jiao; Zhonghua Yu; Jiatong Yu;
Pengfei Zhou; Xuanmei Zhou,
Plaintiffs—Appellees,
versus
Ningbo Xu; LCL Company, L.L.C.; Dongtai Investment
Group, L.L.C.,
Defendants—Appellants.
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:19-CV-1848
Before Smith, Costa, and Wilson, Circuit Judges.
Cory T. Wilson, Circuit Judge:
Assignors and assignees of membership interests in Dongtai
Investment Group, LLC sued Dongtai’s managing member, Ningbo
“Kevin” Xu, alleging that Xu committed various fraudulent acts. The
district court granted injunctive and declaratory relief and ordered Xu to turn
over his remaining Dongtai membership units partially to satisfy the
judgment. We affirm.
Case: 20-20106 Document: 00516235282 Page: 2 Date Filed: 03/11/2022
No. 20-20106
I.
In late 2016, Ningbo Xu, Xiongen Jiao, Zhonghua Yu, and Pengfei
Zhou formed Dongtai Investment Group, LLC for the purpose of acquiring
the Crowne Plaza Hotel in Houston. Jiao, Yu, and Zhou each made a capital
contribution of $1,000,000 for a 16.66% membership interest in Dongtai. Xu
was contractually obligated to pay $3,000,000 for a 50.02% membership
interest. Jiao, Yu, and Zhou later assigned their Dongtai membership
interests to their children, Qianju Jiao, Jiatong Yu, and Xuanmei Zhou.1
Upon discovering financial wrongdoing by Xu, the assignors and
assignees brought various claims against Xu and LCL Company, LLC
(collectively, Xu), alleging, inter alia, breach of contract, fraud, derivative
and non-derivative breach of fiduciary duty, and violations of § 10(b) of the
Securities Exchange Act.2 The parties entered an agreed order for temporary
relief, which suspended Xu’s powers as managing member of Dongtai and
prohibited him from accessing or withdrawing funds from Dongtai’s bank
accounts. Xu subsequently violated the agreed order on multiple occasions,
which led the district court to hold Xu in contempt and impose sanctions
against him.
Meanwhile, Plaintiffs filed a motion for injunctive and declaratory
relief. In response, Xu filed two motions to dismiss pursuant to Federal Rule
of Civil Procedure 12(b)(6), which the district court denied.3 The district
1
As discussed infra, Xu contends that the children were not proper assignees of
membership interests in Dongtai.
2
According to Plaintiffs’ complaint, Xu acted through LCL Company—an LLC
solely owned by Xu. Dongtai is named as a nominal defendant only; Plaintiffs “also bring
their claims derivatively on behalf of and for the benefit of Dongtai.”
3
For simplicity, we refer to Xu’s motions to dismiss as a singular motion in the
remainder of this opinion.
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court granted Plaintiffs’ motion for preliminary injunction and declaratory
judgment against Xu. In its order, the court found that Xu did not make the
agreed-upon $3,000,000 capital contribution for his membership interest in
Dongtai but instead only paid $867,889.11. Based on that finding, the court
declared Xu’s unit certificates invalid and ordered Dongtai to provide Xu
with new certificates reflecting the ownership interest derived from the
amount Xu had actually paid. Finally, the court declared that Xu owed
Dongtai $1,304,400.80 because of Xu’s numerous unauthorized withdrawals
from Dongtai’s accounts.4
The district court then entered a turnover order that required Xu to
return his membership interest in Dongtai to the company as a partial
satisfaction of the declaratory judgment award.
Xu now appeals the district court’s denials of his motions to dismiss,
its grant of injunctive and declaratory relief, and its turnover order.
II.
As an initial matter, we must examine the basis of our jurisdiction.
Lakedreams v. Taylor, 932 F.2d 1103, 1106 (5th Cir. 1991). We conclude that
we have jurisdiction to address the rulings challenged by Xu in this case: The
preliminary injunction is an interlocutory order made appealable by
28
U.S.C. § 1292(a)(1).5 The declaratory relief constitutes a final order, and we
4
According to the court’s order, this amount did “not include the amount in
consequential and other damages” or “attorneys’ fees and costs Plaintiffs.”
5
See 28 U.S.C. § 1292(a)(1) (providing appellate jurisdiction over appeals from
“[i]nterlocutory orders of the district courts of the United States . . . granting, continuing,
modifying, refusing or dissolving injunctions.”); Janvey v. Alguire,
647 F.3d 585, 591 (5th
Cir. 2011) (“We have jurisdiction over the appeal of the district court’s preliminary
injunction under
28 U.S.C. § 1292(a)(1).”).
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have appellate jurisdiction under 28 U.S.C. § 2201.6 The turnover order is
likewise final, and we have appellate jurisdiction to review it under
28 U.S.C.
§ 1291. See Hewlett-Packard Co. v. Quanta Storage, Inc.,
961 F.3d 731, 741–42
(5th Cir. 2020) (“Turnover Orders are final and . . . review is proper under
28 U.S.C. § 1291.”).
Typically, we would not have jurisdiction over the district court’s
denial of Xu’s motion to dismiss. See Lakedreams, 932 F.2d at 1107 (no
jurisdiction to review denial of motion to dismiss where record showed “no
indication that the district court consolidated the preliminary injunction with
a trial on the merits,” and “the order granting the preliminary injunction
ma[de] no mention of the motion to dismiss”). But to the extent the
underpinnings of Xu’s motion are inextricably intertwined with the district
court’s subsequent rulings challenged on appeal, we determine that we have
jurisdiction to address those issues. See Magnolia Marine Transp. Co. v.
Laplace Towing Corp.,
964 F.2d 1571, 1580 (5th Cir. 1992) (“[O]ur
jurisdiction is not limited to the specific [injunctive] order appealed from,
and we may review all matters which establish the immediate basis for
granting injunctive relief.”); see also In re Lease Oil Antitrust Litig. (No. II),
200 F.3d 317, 320 (5th Cir. 2000) (reaching denial of motion to dismiss as
part of § 1292(a)(1) appeal where issues were “so entangled as to arrive here
together” and “[d]elaying review . . . would make no practical sense”).
III.
A.
We briefly address Xu’s assertions regarding his motion to dismiss
that are intertwined with the rest of this appeal. Xu first contends the district
6
See 28 U.S.C. § 2201 (“Any [declaratory judgment] shall have the force and effect
of a final judgment or decree and shall be reviewable as such.”).
4
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court erred in denying his motion because Plaintiffs lack standing to assert
shareholder derivative claims. But under Texas law, a member of a closely
held limited liability company can bring a derivative proceeding. Tex. Bus.
Orgs. Code § 101.463(c). It is undisputed that Dongtai is a closely held
limited liability company. The original investors were members of Dongtai
and assigned their membership interests to their children. “An assignor of a
membership interest in a limited liability company continues to be a member
of the company and is entitled to exercise any unassigned rights or powers of
a member of the company until the assignee becomes a member of the
company.” Tex. Bus. Orgs. Code § 101.111(a). Thus, even if the
assignees failed to comply with the requirements set out in Dongtai’s
operating agreement for becoming members, as Xu alleges, the assignors
would still be members of Dongtai. Either way, at least one group, if not both,
has sufficient membership interest in Dongtai to confer standing to bring a
derivative proceeding. See, e.g., Rumsfeld v. F. for Acad. & Institutional Rts.,
Inc. (FAIR), 547 U.S. 47, 52 n.2 (2006) (“[T]he presence of one party with
standing is sufficient to satisfy Article III’s case-or-controversy
requirement.”)
Xu also contends that the district court erred in declining to dismiss
Plaintiffs’ securities fraud claims because (1) Plaintiffs fail to satisfy the
heightened pleading requirement for securities fraud claims; (2) Plaintiffs’
complaint fails to establish that the alleged securities fraud transaction
occurred in the United States, and (3) Plaintiffs’ security fraud allegations do
not implicate LCL Company or Dongtai. Again, we find no error in the
district court’s assessment of these issues.
To meet the heightened pleading requirements set forth in Federal
Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act
(PSLRA), “a plaintiff must plead (1) a material misrepresentation or
omission by the defendant; (2) scienter; (3) a connection between the
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misrepresentation or omission and the purchase or sale of a security;
(4) reliance upon the misrepresentation or omission; (5) economic loss; and
(6) loss causation.” Masel v. Villarreal, 924 F.3d 734, 743 (5th Cir. 2019)
(internal quotation marks and citation omitted). The district court properly
assessed Plaintiffs’ complaint under these requirements and denied Xu’s
argument that Plaintiffs did not satisfy the requisite heightened pleading
standard.
Similarly, the court properly overruled Xu’s contention that
Plaintiffs’ securities fraud claims should be dismissed because Plaintiffs’
complaint lacks evidence that the membership units were purchased in the
United States. As noted by the district court, “the complaint makes clear
that the purchase involved a Texas limited liability company’s member units,
and the exhibits attached to the complaint demonstrate . . . Plaintiffs paid
U.S. currency for domestic LLC member units.” But even if this were not
the case, whether § 10(b) reaches certain conduct is a merits question that
does not implicate subject matter jurisdiction. Morrison v. Nat’l Austl. Bank
Ltd., 561 U.S. 247, 253–54 (2010).
Finally, as stated above, Plaintiffs’ complaint alleges that Xu acted
through LCL Company—an LLC solely owned by Xu. So Xu’s contention
that “[n]one of the securities fraud allegations asserted by Plaintiffs
specifically implicate . . . LCL Company” is simply untrue. And, again,
Dongtai is named only as a nominal defendant.
B.
We next address the district court’s order granting a preliminary
injunction, which is “an extraordinary remedy.” Miss. Power & Light Co. v.
United Gas Pipe Line Co., 760 F.2d 618, 621 (5th Cir. 1985). To obtain a
preliminary injunction, the movant must establish four elements:
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(1) a substantial likelihood of success on the merits, (2) a
substantial threat of irreparable injury if the injunction is not
issued, (3) that the threatened injury if the injunction is denied
outweighs any harm that will result if the injunction is granted,
and (4) that the grant of an injunction will not disserve the
public interest.
Byrum v. Landreth, 566 F.3d 442, 445 (5th Cir. 2009) (quoting Speaks v.
Kruse,
445 F.3d 396, 399–400 (5th Cir. 2006)). We review the grant of a
preliminary injunction for abuse of discretion. Women’s Med. Ctr. of Nw.
Hous. v. Bell,
248 F.3d 411, 418–19 (5th Cir. 2001). “Factual findings are
reviewed for clear error, while legal conclusions are reviewed de novo.”
Moore v. Brown,
868 F.3d 398, 403 (5th Cir. 2017).
Xu’s sole contention is that the district court abused its discretion in
granting the preliminary injunction because Plaintiffs failed to establish a
substantial threat of irreparable injury. “[A] harm is irreparable where there
is no adequate remedy at law, such as monetary damages. However, the mere
fact that economic damages may be available does not always mean that a
remedy at law is ‘adequate.’” Janvey v. Alguire, 647 F.3d 585, 600 (5th Cir.
2011) (citation omitted). “[A]n exception exists where the potential
economic loss is so great as to threaten the existence of the movant’s
business.” Atwood Turnkey Drilling, Inc. v. Petroleo Brasileiro, S.A.,
875 F.2d
1174, 1179 (5th Cir. 1989).7
In holding that Plaintiffs faced irreparable injury, the district court
found that Plaintiffs were in imminent danger of losing the hotel’s IHG
franchise and even the hotel itself. The district court’s findings are
7
See also Fla. Businessmen for Free Enter. v. City of Hollywood, 648 F.2d 956, 958 n.2
(5th Cir. 1981) (“A substantial loss of business may amount to irreparable injury if the
amount of lost profits is difficult or impossible to calculate, especially where . . . the loss of
business may result in bankruptcy.”).
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supported by the record, including testimony of both fact and expert
witnesses, and are not clearly erroneous. Accordingly, the district court did
not abuse its discretion by concluding that Plaintiffs established a substantial
threat they would suffer irreparable injury if an injunction was not granted.
C.
Next, we consider the district court’s authority to award declaratory
relief in this case. The Declaratory Judgment Act provides:
In a case of actual controversy within its jurisdiction . . . any
court of the United States, upon the filing of an appropriate
pleading, may declare the rights and other legal relations of any
interested party seeking such declaration . . . . Any such
declaration shall have the force and effect of a final judgment
or decree and shall be reviewable as such.
28 U.S.C. § 2201(a). Here, the district court found that Xu only paid
$867,889.11 for his membership interest, declared his unit certificates
invalid, and ordered Dongtai to provide Xu with new certificates based on the
amount he actually paid. The court also declared that Xu “owes and is
indebted to Dongtai for $1,304,400.80.”
Xu asserts that the district court violated § 101.107 of the Texas
Business Organization Code by declaring part of his membership interest
invalid, because the declaration is the functional equivalent of expelling him
from the company. See Tex. Bus. Orgs. Code § 101.107 (“A member
of a limited liability company may not withdraw or be expelled from the
company.”). But the declaratory judgment does not expel Xu from the
company. Though the judgment invalidated Xu’s current unit certificates on
the basis that Xu had not paid for all the membership units he had
contractually agreed to purchase, the district court ordered that Xu be
provided new certificates based on the amount of capital he actually
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contributed. We find no error in the district court’s determination in this
regard.
Xu also asserts that the district court’s declaratory relief violates
§ 101.112(d) of the Texas Business Organizations Code, which provides the
“exclusive remedy” for satisfying a judgment out of the judgment debtor’s
membership interest. Tex. Bus. Orgs. Code § 101.112(d). This
contention lacks merit because the district court’s declaratory relief does not
implicate § 101.112(d). The declaratory relief is not a satisfaction of a
judgment out of Xu’s membership interest; it is a declaration of the
percentage of Xu’s company ownership, based on the amount of capital Xu
paid into the company.
Similarly, Xu asserts that the declaratory relief violates the plain
language of Dongtai’s operating agreement, which limits the liability of a
member “for the losses, debts, liabilities and obligations” of Dongtai and
provides that “[n]o member shall have the right to demand and receive any
distribution from [Dongtai] in any form other than cash.” But these
provisions have no bearing on the district court’s declaration that Xu failed
to pay for his full membership interest and is therefore only entitled to the
membership units for which he paid.
In sum, we discern no error in the declaratory relief fashioned by the
district court in this case.
D.
Finally, “the entry of a turnover order is reviewed for an abuse of
discretion.” Af-Cap, Inc. v. Republic of Congo, 462 F.3d 417, 425 (5th Cir.
2006). Under Texas law, a court may order a “judgment debtor to turn over
nonexempt property that is in the debtor’s possession or is subject to the
debtor’s control.” Tex. Civ. Prac. & Rem. Code § 31.002(1). Here,
the district court ordered that Xu turn over his remaining 14.45% membership
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interest in Dongtai “in partial satisfaction of Dongtai’s Declaratory
Judgment award of $1,304,400.80 against Xu.”
The parties dispute whether the district court’s turnover order
violates § 101.112 of the Texas Business Organizations Code, which states
that “[t]he entry of a charging order is the exclusive remedy by which a
judgment creditor of a member or of any other owner of a membership
interest may satisfy a judgment out of the judgment debtor’s membership
interest.” Tex. Bus. Orgs. Code § 101.112(d). Xu contends that
because the district court’s order was a turnover order, rather than a charging
order, it violates the plain language of § 101.112(d). Plaintiffs counter that
the facts in this case fall under an exception to § 101.112(d).
As set forth in Hux v. Southern Methodist University,
In applying Texas law, we look first to the decisions of the
Texas Supreme Court. If that court has not ruled on the issue,
we make an Erie[8] guess, predicting what it would do if faced
with the facts before us. Typically, we treat state intermediate
courts’ decisions as the strongest indicator of what a state
supreme court would do, absent a compelling reason to believe
that the state supreme court would reject the lower courts’
reasoning.
819 F.3d 776, 780–81 (5th Cir. 2016) (internal citations omitted).
The Texas Supreme Court has not spoken to the interplay between
turnover orders and § 101.112(d), but Texas intermediate courts have held
that § 101.112(d) does not preclude the turnover of a member’s interest in a
limited liability company “when the judgment creditor seeking the
membership interest is the entity from which the membership interest
derives” and the turnover order “involves an explicit award of the
8
Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938).
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membership interest itself from one party to the other as part of the
judgment.” Gillet v. ZUPT, LLC, 523 S.W.3d 749, 758 (Tex. App.—
Houston [14th Dist.] 2017, no pet.); see also Heckert v. Heckert, No. 02-16-
00213-CV,
2017 WL 5184840, at *8 (Tex. App.—Fort Worth Nov. 9, 2017,
no pet.). This is because “the reasoning behind requiring a charging order as
the exclusive remedy is inapposite” in such circumstances. Gillet,
523
S.W.3d at 758; accord Heckert,
2017 WL 5184840, at *8 (“[I]n these types of
situations, the purpose of a charging order has not come into play: the
charging order was developed to prevent a judgment creditor’s disruption of
an entity’s business by forcing an execution sale of the . . . member’s entity
interest . . . .”). In this case, Dongtai is the judgment creditor seeking Xu’s
membership interest in Dongtai, and the turnover order involves an explicit
award of the membership interest from Xu to Dongtai. Accordingly,
§ 101.112(d) does not preclude the turnover of Xu’s interest to partially
satisfy Dongtai’s judgment against him.
IV.
For the reasons discussed above, the district court properly denied
Xu’s motion to dismiss. And we find no reversible error in the district court’s
entry of a preliminary injunction, the declaratory relief it fashioned, or the
court’s turnover order.
AFFIRMED.
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