Preview
Filed 09 October 21 P9:46
2009-68627 / Court: 295 Loren J ackson - District Clerk
Harris Coun!
ED101) 015: 2658
By: Sharon Carlton
CAUSE NO.
MOURNING DOVE CAPITAL, L.L.C. IN THE DISTRICT COURT
Plaintiff
VS.
HARRIS COUNTY, TEXAS
GENE GILES DESIGN ASSOCIATES, LLC,
and EUGENE P. GILES
Defendants JUDICIAL DISTRICT
PLAINTIFF’S ORIGINAL PETITION; PLAINTIFF’S RE )UESTS FOR ADMISSIONS.
DISCLOSURES, AND PRODUCTION OF DOCUMENTS
TO THE HONORABLE COURT:
Mourning Dove Capital, L.L.C., complains of Gene Giles Design Associates, LLC, and Eugene
P. Giles individually, and for cause of action shows:
I
DISCOVERY CONTROL PLAN
Plaintiff intends to conduct discovery under Level 2 of Texas Rules of Civil Procedure 190.
I.
JURISDICTION AND VENU.
This Court has jurisdiction of all parties and the subject matter of this case as the damages sought
for the claims alleged herein are within the jurisdictional limits of this court.
Venue is proper in Harris County, Texas pursuant to Section 15.002(a)(1) of the Texas Civil
Practice and Remedies Code, because all or a part of the events giving rise to the claims alleged herein
occurred in Harris County, Texas.
il.
PARTIES
Plaintiff Mourning Dove Capital, L.L.C is a Texas limited liability company existing under the
laws of the State of Texas and having its principal place of business in Harris County, Texas.
Defendant Gene Giles Design Associates, LLC is a Texas limited liability company having its
principal place of business in Harris County, Texas, and can be served by serving its registered agent,
Brenton J. Allison, Gilman and Allison, LLP, at 9307 Broadway, Suite 407, Pearland, Texas, 77584.
Eugene P. Giles is an individual resident of Harris County, Texas, and can be served at 10226
Londonderry Dr., Houston, Texas, 77043. Gene Giles Design Associates, LLC is hereinafter referred to
as “GGDA”, and Eugene P. Giles is hereinafter referred to as “Giles”.
IV.
FACTS AND BACKGROUND
On or about July 28, 2008, Plaintiff and GGDA entered into that certain Purchase and Sale
Agreement, whereby Plaintiff agreed to sell to GGDA, and GGDA agreed to purchase from Plaintiff, two
(2) residential lots located at 4510 Shetland Lane and 4527 Ivanhoe Street in the Afton Oaks
neighborhood in Houston, Harris County, Texas (the “Property”). Defendant GGDA is a custom home
builder, and purchased the Property in order to construct two (2) custom homes thereon for sale to third
parties (the “Residences”). In order to pay for the construction of the Residences, GGDA obtained
financing from Encore Bank, N.A. in the form of two construction loans (the “Encore Loans”).
Plaintiff conveyed the Property to GGDA by Special Warranty Deed dated July 28, 2008, and
recorded as Harris County Clerk’s File No. 20080400809.
As part of the consideration for the sale of the Property, Plaintiff agreed to finance 100% of the
purchase price of the Property, which was $1,880,045.00. Accordingly, on or about July 28, 2008,
GGDA executed and delivered to Plaintiff that certain Promissory Note dated July 28, 2008, whereby
GGDA promised to pay to the order of Plaintiff the principal sum of $1,880,045.00, with interest thereon
at the rate of the Prime Rate as published in the Wall Street Journal from time to time, plus one percent
(1.0%) per annum until due (the “Note”). The Note further provides for interest after maturity at the
maximum rate allowed by law, which is currently eighteen percent (18%) per annum, and for payment of
attorneys’ fees and collection costs.
The Note was secured by that certain Deed of Trust and Security Agreement dated July 28, 2008,
executed by GGDA, and recorded as Harris County Clerk’s File No. 20080400810 (the “Deed of Trust”),
creating a security interest in the Property, being legally described in Exhibit “A” to the Deed of Trust
(the “Mortgaged Property”). A true and correct copy of the Note is attached hereto as Exhibit “A” and
incorporated herein by reference. A true and correct copy of the Deed of Trust is attached hereto as
Exhibit “B” and incorporated herein by reference.
Following the sale of the Property, GGDA commenced construction of the Residences and
financed this construction activity through draws made on the Encore Loans. However, GGDA ceased
work on the Residences in the early part of August 2009, leaving various subcontractors, suppliers, and
vendors unpaid, and leaving the two Residences incomplete.
Following GGDA’s abandonment of the Residences and cessation of work in early August 2009,
various subcontractors, suppliers and materialmen filed lien claims under Chapter 53 of the Texas
Property Code, seeking to perfect their mechanic’s liens on the Property. Attached hereto as Exhibit “C”
is a non-exhaustive schedule of the lien claims filed by GGDA’s subcontractors, suppliers and
materialmen.
On or about August 5", 2009, principals of Plaintiff, Mathew Smith and Cooper Richey, met
with Giles, demanding an explanation as to why construction had ceased, and what had happened to the
funds drawn by GGDA from Encore Bank. In a conversation that took place on the property located at
4510 Shetland Lane, Giles admitted that he had used funds received under the Encore Loans to pay debts
associated with other residential construction projects. Additionally, at that meeting and in subsequent
email correspondence, Plaintiff repeatedly communicated with Giles requesting applications for payment
submitted to Encore Bank, as well as documentation evidencing what had happened to the funds drawn
down from Encore Bank.
The Encore Loans matured on July 28, 2009. By letter dated August 21, 2009, counsel for
Encore Bank notified GGDA and Giles that they were in default under the Encore Loans as a result of
their failure to pay the debt at its maturity and failure to keep the Property free from mechanic’s liens.
GGDA and Giles failed to cure this default, and counsel for Encore Bank sent a second notice to GGDA
and Giles dated September 9, 2009, wherein the Encore Loans were accelerated, and it was stated that
Encore Bank intended to foreclose its liens on the Property. Despite this subsequent notice and demand
for cure, Giles and GGDA failed to cure their defaults under the Encore Bank loan documents.
Consequently, on October 6, 2009, Ferdinand Cribbs, the substitute trustee under the Encore
Bank deeds of trust, sold the Property in accordance with the terms of Section 51.002 of the Property
Code. In order to protect its investment in the Property, Plaintiff purchased the Property from the
substitute trustee at the foreclosure sale.
Vv.
GGDA’S DEFAULTS UNDER THE DEED OF TRUST
Section 4.8 of the Deed of Trust provides that GGDA “shall discharge all claims for labor
performed and material furnished therefor, and shall not suffer any lien of mechanics or materialmen to
attach to any part of the Mortgaged Property”. As a result of GGDA’s failure to timely pay its
subcontractors, suppliers, and vendors, the parties identified on Exhibit “C” filed lien claims against the
Property, and GGDA thus breached its obligations under Section 4.8 of the Deed of Trust.
Section 4.13 of the Deed of Trust provides that GGDA “shall promptly pay when due all
obligations regarding the ownership and operation of the Mortgaged Property except any such
obligations which are being diligently contested in good faith... » GGDA failed to timely pay its
subcontractors, suppliers, and vendors, who provided labor and materials for the Residences, as
evidenced by the schedule of lien claimants attached as Exhibit “C”. This is a breach of Section 4.13 of
the Deed of Trust.
Section 4.28 of the Deed of Trust required GGDA to achieve Substantial Completion of the
Residences no later than July 1, 2009. The Deed of Trust defined “Substantial Completion” as
“completion of the Residences in accordance with the Plans and Specifications, and so that they can be
occupied for residential purposes, with all necessary governmental permits and approvals, subject only to
completion of minor punch-list type items and warranty work” GGDA failed to achieve Substantial
Completion of the Residences by July 1, 2009, and thus breached Section 4.28 of the Deed of Trust.
Section 4.30 of the Deed of Trust required GGDA to provide Plaintiff with copies of GGDA’s
applications for payment under the Encore Loans, including all back-up and detail supplied to Encore
Bank justifying each application for payment, as well as copies of disbursements made by either Encore
Bank or GGDA its subcontractors, suppliers and vendors, and lien waivers executed by other parties
supplying materials or labor in connection with the construction of the Residences. Despite repeated
requests from Plaintiff, GGDA failed to provide Plaintiff with the required documentation, and thus
breached the terms of Section 4.30 of the Deed of Trust.
By letter dated September 1, 2009, counsel for Plaintiff gave defendant GGDA notice of the
above defaults under the Deed of Trust and demanded that GGDA cure the same. A true and correct
copy of such notice is attached hereto as Exhibit “D”. Despite such notice and demand, defendant
GGDA failed to cure the defaults or even respond to the letter.
In addition to the foregoing, Section 4.4 of the Deed of Trust required that GGDA pay all taxes
and assessments against or affecting the Mortgaged Property as the same become due and payable.
GGDA has failed to pay ad valorem taxes imposed on the Property for tax year 2008, thus breaching
Section 4.4 of the Deed of Trust.
Furthermore, Section 7.6 of the Deed of Trust provides that an Event of Default occurs if the
holder of another lien or security interest on the Property institutes foreclosure proceedings. Allowing
Encore Bank to initiate foreclosure proceedings on the Mortgaged Property was an Event of Default
under the Deed of Trust.
By letter dated October 8, 2009, counsel for Plaintiff sent GGDA a notice accelerating the
indebtedness under the Note based on GGDA’s failure to cure the above-described defaults, and based on
the above-described Events of Default under Article 7 of the Deed of Trust. The October 8, 2009 letter
demanded the unpaid principal balance of the Note, accrued and unpaid interest, as well as attorney’s
fees. Despite this demand, GGDA has failed and refused, and continues to fail and refuse to pay the
sums owed to Plaintiff under the Note and Deed of Trust.
VI.
CHAPTER
———E
CHAPTER 162, TEXAS
14.445
102,xEEE CONSTRUCTION
errr TRUST
re_— FUND ACT
Xr
The proceeds from the Encore Loans were “trust funds” as defined in Chapter 162 of the Texas
Property Code. Because GGDA and Giles, individually, received the trust funds and had control or
direction of the trust funds, GGDA and Giles, individually, are trustees of such funds.
GGDA and Giles drew funds from Encore Bank under the Encore Loans, based on applications
for payment submitted to Encore Bank. By submitting these applications for payment, GGDA and Giles
were representing to Encore Bank that the funds received in response to such applications for payment
would be used to pay GGDA’s costs and expenses associated with the Residences.
Giles and GGDA drew down the trust funds from Encore Bank by submitting a series of payment
applications. Under Chapter 162 of the Property Code, GGDA and Giles were required to hold these
funds in trust for the payment of the subcontractors, suppliers, and vendors providing labor and materials
for the Residences only. Upon information and belief, GGDA and Giles retained, used, or diverted some
of the funds drawn down under the Encore Loans without first fully paying all current or past due
obligations incurred by GGDA and Giles in connection with the Residences, and used such funds to pay
expenses on projects other than the Residences, in violation of Chapter 162 of the Property Code.
In failing to properly hold the funds and make payments when due and payable, GGDA violated
the Texas Construction Trust Fund Act as set forth in Chapter 162 of the Property Code, thereby creating
personal liability for its officers and directors, including Giles, for the sums misapplied. Defendants’
violation of the statute has caused and will continue to cause Plaintiff to incur damages. Plaintiff has
already incurred damages as a result of such violation in the form of the costs and expenses associated
with purchasing the Property from Encore Bank through the foreclosure sale, which foreclosure was a
6
direct result of Defendants failing to timely and adequately pay its subcontractors. Further, as Plaintiff
completes construction of the Residences, Plaintiff will continue to incur damages in the form of the
costs for materials and labor which were drawn from the Encore Loans, and should have been paid to
subcontractors supplying labor and materials to the Residences, but which were diverted for purposes.
VIL
DEMAND FOR PAYMENT
Demand for payment of all sums due under the Note and Deed of Trust as of October 8, 2009 has
been made upon GGDA by letter. A true and correct copy of such demand letter is attached hereto as
Exhibit “E”. Despite demand for payment made by Plaintiff after the Note became due and payable, no
part of the Note has been paid. As of the date of demand, there was due, owing, and unpaid from
Defendants to Plaintiff on the Note the amount of $1,978,113.10, consisting of $1,880,045.00 in unpaid
principal, accrued and unpaid interest of $88,068.10, and attorney’s fees and collection costs in the
amount of $10,000.00. This amount has accrued since default and continues to accrue interest at the
maximum rate allowed by law of eighteen percent (18%), or $975.50 per diem.
Vii.
CONDITIONS PRECEDENT
All conditions precedent to the bringing of this suit or to any of the recoveries sought herein have
occurred, have been performed, or have been excused.
Ix.
RULE 194 REQUESTS FOR DISCLOSURE
Under Texas Rule of Civil Procedure 194, Plaintiff requests that Defendant furnish the
information required under Rule 194.2 (a), 194.2 (b), 194.2 (c), 194.2 (d), 194.2 (e), 194.2 (f), 194.2 (g),
194.2 (h), 194.2 (i), and 194.2 (1) within fifty (50) days of the service of this document.
X.
RULE 196 REC DUESTS FOR PRODUCTION
(50) days of
Pursuant to Texas Rule of Civil Procedure 196, Plaintiff requests that, within fifty
the service of this document, Defendants produce the following:
of
1. True and correct copies of any and all federal income tax returns prepared by or on behalf
Defendants within the last three (3) years from the date of this notice;
True and correct copies of any and all records regarding each and every checking, savings or
other account to which Defendants have or have had either depository or withdrawal power
within three (3) years of the date of this notice;
True and correct copies of any and all records regarding each and every draw request made on
the Encore Loans to Encore Bank relating to the Property and/or the Residences;
True and correct copies of any and all records regarding each and every deposit and/or
expenditure of funds received from Encore Bank by Defendants relating to the Property and/or
the Residences;
man or
True and correct copies of any and all payments to any subcontractor, vendor, material
any type of supplier relating to the Property and/or the Residences;
vendor,
True and correct copies of any and all bills or fund requests from any subcontractor,
materialman or any type of supplier relating to the Property and/or the Residences;
True and correct copies of any and all demand notices, legal notices, petitions, or other legal
document from any subcontractor, vendor, materialman or any type of supplier relating to the
Property and/or the Residences;
Complete and accurate listings and descriptions of each and every item of realty owned by
Defendants within three (3) years of the date of this notice;
Complete and accurate listings and descriptions of each and every item of personal property
owned by Defendants within three (3) years of the date of this notice;
10. Complete and accurate records regarding each and every debt owed by Defendants within three
(3) years of the date of this notice;
ll True and correct copies of any and all financial statements prepared by or on behalf of
Defendants within three (3) years of the date of this notice;
12. True and correct copies of any and all loan applications prepared by or on behalf of Defendants
within three (3) years of the date of this notice;
13 True and correct copies of any and all records regarding each and every item of personal property
or real property transferred, sold, or conveyed by Defendants within three (3) years from the date
of this notice; and
14. Any and all other written information pertaining to the financial condition of Defendants within
three (3) years of the date of this notice.
15 Any and all plans and specifications, schematics, drawings, renderings, blueprints, elevations, or
similar documents which relate to the design and/or construction of the Residences or any part
thereof.
To the extent that any of the documents exist only in electronic or magnetic form, Plaintiff requests
disc in a
that the documents be produced in paper form, or, if that is impossible, that they be produced on
form that is accessible using Microsoft Office software.
XL
RULE 198 REQUESTS FOR ADMISSIONS
Pursuant to Texas Rule of Civil Procedure 198, Plaintiff requests that Defendants admit or deny
the following within fifty (50) days of the service of this document:
1 That GGDA commenced construction of the Residences on the Property and financed this
construction activity through draws made on the Encore Loans.
That GGDA ceased work on the Residences in or about August 2009, leaving various
subcontractors, suppliers, and vendors unpaid, and leaving the two Residences incomplete.
That in or after August 2009, various subcontractors, suppliers and materialmen filed lien claims
against the Property under Chapter 53 of the Texas Property Code.
That on or about August 5"", 2009, Giles admitted to Mathew Smith and/or Cooper Richey that he
had used funds received under the Encore Loans to pay debts associated with other residential
construction projects.
That on or about August 5", 2009, Mathew Smith and/or Cooper Richey requested copies of the
applications for payment submitted to Encore Bank, as well as documentation evidencing what
had happened to the funds drawn down from Encore Bank.
‘That after counsel for Encore Bank notified GGDA and Giles on August 21, 2009, that they were
in default under the Encore Loans, GGDA and Giles failed to cure this default.
That after counsel for Encore Bank sent a notice to GGDA and Giles dated September 9, 2009,
stating that the Encore Loans were accelerated and Encore Bank intended to foreclose its liens on
the Property, Giles and GGDA failed to cure their defaults under the Encore Bank loan
documents.
That GGDA failed to timely pay its subcontractors, suppliers, and vendors, who provided labor
and materials for the Residences.
That GGDA breached Section 4.13 of the Deed of Trust.
10. That GGDA failed to achieve Substantial Completion of the Residences by July 1, 2009.
11 That GGDA breached Section 4.28 of the Deed of Trust.
12, That GGDA failed and/or refused to provide Plaintiff with copies of GGDA’s applications for
payment under the Encore Loans, including all back-up and detail supplied to Encore Bank
justifying each application for payment, as well as copies of disbursements made by either
10
Encore Bank or GGDA its subcontractors, suppliers and vendors, and lien waivers executed by
other parties supplying materials or labor in connection with the construction of the Residences.
13 That GGDA breached the terms of Section 4.30 of the Deed of Trust.
14. That counsel for Plaintiff gave defendant GGDA notice of the defaults under the Deed of Trust
and demanded that GGDA cure the same.
15 That GGDA failed to cure the defaults under the Deed of Trust.
16. That GGDA has failed to pay ad valorem taxes imposed on the Property for tax year 2008.
17 That GDGA breached Section 4.4 of the Deed of Trust.
18 That allowing Encore Bank to initiate foreclosure proceedings on the Mortgaged Property was an
Event of Default under the Deed of Trust.
19. That GGDA has failed to pay the sums owed to Plaintiff under the Note and Deed of Trust.
20. That GGDA and Giles individually received the trust funds from the Encore Loans, and had
control or direction of the trust funds.
21 That GGDA and Giles individually are trustees of the trust funds received from the Encore Loans
under Chapter 162 of the Texas Property Code.
22 That GGDA and Giles represented to Encore Bank that the funds received in response to the
applications for payment under the Encore Loans would be used to pay GGDA’s costs and
expenses associated with the Residences.
23. That Giles and GGDA were required under Chapter 162 of the Property Code to hold the funds
drawn under the Encore Loans in trust for the payment of the subcontractors, suppliers, and
vendors providing labor and materials for the Residences only.
24, That GGDA and Giles retained, used, or diverted some of the funds drawn down under the
Encore Loans without first fully paying all current or past due obligations incurred by GGDA
and Giles in connection with the Residences.
11
25 That GGDA and Giles used the funds drawn under the Encore Loans to pay expenses on projects
other than the Residences, in violation of Chapter 162 of the Property Code.
26 That as of October 8, 2009, the amount of $1,978,113.10, consisting of $1,880,045.00 in unpaid
principal, accrued and unpaid interest of $88,068.10, and attorney’s fees and collection costs in
the amount of $10,000.00 was due, owing, and unpaid from Defendants to Plaintiff on the Note
and Deed of Trust.
27 That the amount due, owing and unpaid from Defendants to Plaintiff on the Note and Deed of
Trust has accrued since default and continues to accrue interest at the maximum rate allowed by
law of eighteen percent (18%), or $975.50 per diem.
28. That the terms of the Note and Deed of Trust require GGDA to pay all costs of collection,
including reasonable attorney’s fees, which shall bear interest from the date of its accrual at the
highest rate permitted by law.
XI.
ATTORNEY’S FEES
According to the terms of the Note and Deed of Trust, GGDA further promised to pay all costs of
collection, including reasonable attorney’s fees, which shall bear interest from the date of its accrual at
the highest rate permitted by law. As a result of GGDA’s failure to pay the sums due and owing on the
Note and Deed of Trust, as described above, Plaintiff has found it necessary to employ the undersigned
attorney to initiate this action. To compensate Plaintiff for attorney’s fees thereby incurred, Plaintiff is
entitled to recover reasonable attorney’s fees. In the even of an appeal to the court of appeals, Plaintiff
would be entitled to additional reasonable attorney’s fees; in the event of an appeal to the Supreme Court,
Plaintiff would be entitled to additional reasonable attorney’s fees.
WHEREFORE, Plaintiff requests that Defendants be cited to appear and answer, and that on
final trial Plaintiff have (i) judgment against defendant GGDA for:
12
1 $1,978,113.10, with interest at the rate of eighteen percent (18%) per annum from
October 9, 2009 until judgment;
2 Reasonable attorney’s fees, including fees in the event of appeal;
3 Interest after judgment as allowed by law;
4 Costs of suit; and
5 Such other and further relief to which Plaintiff may be justly entitled.
and (ii) judgment against defendant Eugene P. Giles individually for:
1 The amount of trust funds diverted from the Residences in violation of Chapter 162 of
the Property Code;
2 Costs of suit; and
3 Such other and further relief to which Plaintiff may be justly entitled.
Respectfully submitted,
James . “Jeb” Brown, II
State Bar No. 00793410
Kimberly Anne Grant
State Bar No. 00787346
3701 Kirby Drive, Suite 1130
Houston, Texas 77098
Telephone: 713-521-1614
Facsimile: 713-521-3077
jeb@jebbrownlaw.com
ATTORNEYS FOR PLAINTIFF
MOURNING DOVE CAPITAL, L.L.C.
13
Preview
Filed 09 October 21 P9:46 2009-68627 / Court: 295 Loren J ackson - District Clerk Harris Coun! ED101) 015: 2658 By: Sharon Carlton CAUSE NO. MOURNING DOVE CAPITAL, L.L.C. IN THE DISTRICT COURT Plaintiff VS. HARRIS COUNTY, TEXAS GENE GILES DESIGN ASSOCIATES, LLC, and EUGENE P. GILES Defendants JUDICIAL DISTRICT PLAINTIFF’S ORIGINAL PETITION; PLAINTIFF’S RE )UESTS FOR ADMISSIONS. DISCLOSURES, AND PRODUCTION OF DOCUMENTS TO THE HONORABLE COURT: Mourning Dove Capital, L.L.C., complains of Gene Giles Design Associates, LLC, and Eugene P. Giles individually, and for cause of action shows: I DISCOVERY CONTROL PLAN Plaintiff intends to conduct discovery under Level 2 of Texas Rules of Civil Procedure 190. I. JURISDICTION AND VENU. This Court has jurisdiction of all parties and the subject matter of this case as the damages sought for the claims alleged herein are within the jurisdictional limits of this court. Venue is proper in Harris County, Texas pursuant to Section 15.002(a)(1) of the Texas Civil Practice and Remedies Code, because all or a part of the events giving rise to the claims alleged herein occurred in Harris County, Texas. il. PARTIES Plaintiff Mourning Dove Capital, L.L.C is a Texas limited liability company existing under the laws of the State of Texas and having its principal place of business in Harris County, Texas. Defendant Gene Giles Design Associates, LLC is a Texas limited liability company having its principal place of business in Harris County, Texas, and can be served by serving its registered agent, Brenton J. Allison, Gilman and Allison, LLP, at 9307 Broadway, Suite 407, Pearland, Texas, 77584. Eugene P. Giles is an individual resident of Harris County, Texas, and can be served at 10226 Londonderry Dr., Houston, Texas, 77043. Gene Giles Design Associates, LLC is hereinafter referred to as “GGDA”, and Eugene P. Giles is hereinafter referred to as “Giles”. IV. FACTS AND BACKGROUND On or about July 28, 2008, Plaintiff and GGDA entered into that certain Purchase and Sale Agreement, whereby Plaintiff agreed to sell to GGDA, and GGDA agreed to purchase from Plaintiff, two (2) residential lots located at 4510 Shetland Lane and 4527 Ivanhoe Street in the Afton Oaks neighborhood in Houston, Harris County, Texas (the “Property”). Defendant GGDA is a custom home builder, and purchased the Property in order to construct two (2) custom homes thereon for sale to third parties (the “Residences”). In order to pay for the construction of the Residences, GGDA obtained financing from Encore Bank, N.A. in the form of two construction loans (the “Encore Loans”). Plaintiff conveyed the Property to GGDA by Special Warranty Deed dated July 28, 2008, and recorded as Harris County Clerk’s File No. 20080400809. As part of the consideration for the sale of the Property, Plaintiff agreed to finance 100% of the purchase price of the Property, which was $1,880,045.00. Accordingly, on or about July 28, 2008, GGDA executed and delivered to Plaintiff that certain Promissory Note dated July 28, 2008, whereby GGDA promised to pay to the order of Plaintiff the principal sum of $1,880,045.00, with interest thereon at the rate of the Prime Rate as published in the Wall Street Journal from time to time, plus one percent (1.0%) per annum until due (the “Note”). The Note further provides for interest after maturity at the maximum rate allowed by law, which is currently eighteen percent (18%) per annum, and for payment of attorneys’ fees and collection costs. The Note was secured by that certain Deed of Trust and Security Agreement dated July 28, 2008, executed by GGDA, and recorded as Harris County Clerk’s File No. 20080400810 (the “Deed of Trust”), creating a security interest in the Property, being legally described in Exhibit “A” to the Deed of Trust (the “Mortgaged Property”). A true and correct copy of the Note is attached hereto as Exhibit “A” and incorporated herein by reference. A true and correct copy of the Deed of Trust is attached hereto as Exhibit “B” and incorporated herein by reference. Following the sale of the Property, GGDA commenced construction of the Residences and financed this construction activity through draws made on the Encore Loans. However, GGDA ceased work on the Residences in the early part of August 2009, leaving various subcontractors, suppliers, and vendors unpaid, and leaving the two Residences incomplete. Following GGDA’s abandonment of the Residences and cessation of work in early August 2009, various subcontractors, suppliers and materialmen filed lien claims under Chapter 53 of the Texas Property Code, seeking to perfect their mechanic’s liens on the Property. Attached hereto as Exhibit “C” is a non-exhaustive schedule of the lien claims filed by GGDA’s subcontractors, suppliers and materialmen. On or about August 5", 2009, principals of Plaintiff, Mathew Smith and Cooper Richey, met with Giles, demanding an explanation as to why construction had ceased, and what had happened to the funds drawn by GGDA from Encore Bank. In a conversation that took place on the property located at 4510 Shetland Lane, Giles admitted that he had used funds received under the Encore Loans to pay debts associated with other residential construction projects. Additionally, at that meeting and in subsequent email correspondence, Plaintiff repeatedly communicated with Giles requesting applications for payment submitted to Encore Bank, as well as documentation evidencing what had happened to the funds drawn down from Encore Bank. The Encore Loans matured on July 28, 2009. By letter dated August 21, 2009, counsel for Encore Bank notified GGDA and Giles that they were in default under the Encore Loans as a result of their failure to pay the debt at its maturity and failure to keep the Property free from mechanic’s liens. GGDA and Giles failed to cure this default, and counsel for Encore Bank sent a second notice to GGDA and Giles dated September 9, 2009, wherein the Encore Loans were accelerated, and it was stated that Encore Bank intended to foreclose its liens on the Property. Despite this subsequent notice and demand for cure, Giles and GGDA failed to cure their defaults under the Encore Bank loan documents. Consequently, on October 6, 2009, Ferdinand Cribbs, the substitute trustee under the Encore Bank deeds of trust, sold the Property in accordance with the terms of Section 51.002 of the Property Code. In order to protect its investment in the Property, Plaintiff purchased the Property from the substitute trustee at the foreclosure sale. Vv. GGDA’S DEFAULTS UNDER THE DEED OF TRUST Section 4.8 of the Deed of Trust provides that GGDA “shall discharge all claims for labor performed and material furnished therefor, and shall not suffer any lien of mechanics or materialmen to attach to any part of the Mortgaged Property”. As a result of GGDA’s failure to timely pay its subcontractors, suppliers, and vendors, the parties identified on Exhibit “C” filed lien claims against the Property, and GGDA thus breached its obligations under Section 4.8 of the Deed of Trust. Section 4.13 of the Deed of Trust provides that GGDA “shall promptly pay when due all obligations regarding the ownership and operation of the Mortgaged Property except any such obligations which are being diligently contested in good faith... » GGDA failed to timely pay its subcontractors, suppliers, and vendors, who provided labor and materials for the Residences, as evidenced by the schedule of lien claimants attached as Exhibit “C”. This is a breach of Section 4.13 of the Deed of Trust. Section 4.28 of the Deed of Trust required GGDA to achieve Substantial Completion of the Residences no later than July 1, 2009. The Deed of Trust defined “Substantial Completion” as “completion of the Residences in accordance with the Plans and Specifications, and so that they can be occupied for residential purposes, with all necessary governmental permits and approvals, subject only to completion of minor punch-list type items and warranty work” GGDA failed to achieve Substantial Completion of the Residences by July 1, 2009, and thus breached Section 4.28 of the Deed of Trust. Section 4.30 of the Deed of Trust required GGDA to provide Plaintiff with copies of GGDA’s applications for payment under the Encore Loans, including all back-up and detail supplied to Encore Bank justifying each application for payment, as well as copies of disbursements made by either Encore Bank or GGDA its subcontractors, suppliers and vendors, and lien waivers executed by other parties supplying materials or labor in connection with the construction of the Residences. Despite repeated requests from Plaintiff, GGDA failed to provide Plaintiff with the required documentation, and thus breached the terms of Section 4.30 of the Deed of Trust. By letter dated September 1, 2009, counsel for Plaintiff gave defendant GGDA notice of the above defaults under the Deed of Trust and demanded that GGDA cure the same. A true and correct copy of such notice is attached hereto as Exhibit “D”. Despite such notice and demand, defendant GGDA failed to cure the defaults or even respond to the letter. In addition to the foregoing, Section 4.4 of the Deed of Trust required that GGDA pay all taxes and assessments against or affecting the Mortgaged Property as the same become due and payable. GGDA has failed to pay ad valorem taxes imposed on the Property for tax year 2008, thus breaching Section 4.4 of the Deed of Trust. Furthermore, Section 7.6 of the Deed of Trust provides that an Event of Default occurs if the holder of another lien or security interest on the Property institutes foreclosure proceedings. Allowing Encore Bank to initiate foreclosure proceedings on the Mortgaged Property was an Event of Default under the Deed of Trust. By letter dated October 8, 2009, counsel for Plaintiff sent GGDA a notice accelerating the indebtedness under the Note based on GGDA’s failure to cure the above-described defaults, and based on the above-described Events of Default under Article 7 of the Deed of Trust. The October 8, 2009 letter demanded the unpaid principal balance of the Note, accrued and unpaid interest, as well as attorney’s fees. Despite this demand, GGDA has failed and refused, and continues to fail and refuse to pay the sums owed to Plaintiff under the Note and Deed of Trust. VI. CHAPTER ———E CHAPTER 162, TEXAS 14.445 102,xEEE CONSTRUCTION errr TRUST re_— FUND ACT Xr The proceeds from the Encore Loans were “trust funds” as defined in Chapter 162 of the Texas Property Code. Because GGDA and Giles, individually, received the trust funds and had control or direction of the trust funds, GGDA and Giles, individually, are trustees of such funds. GGDA and Giles drew funds from Encore Bank under the Encore Loans, based on applications for payment submitted to Encore Bank. By submitting these applications for payment, GGDA and Giles were representing to Encore Bank that the funds received in response to such applications for payment would be used to pay GGDA’s costs and expenses associated with the Residences. Giles and GGDA drew down the trust funds from Encore Bank by submitting a series of payment applications. Under Chapter 162 of the Property Code, GGDA and Giles were required to hold these funds in trust for the payment of the subcontractors, suppliers, and vendors providing labor and materials for the Residences only. Upon information and belief, GGDA and Giles retained, used, or diverted some of the funds drawn down under the Encore Loans without first fully paying all current or past due obligations incurred by GGDA and Giles in connection with the Residences, and used such funds to pay expenses on projects other than the Residences, in violation of Chapter 162 of the Property Code. In failing to properly hold the funds and make payments when due and payable, GGDA violated the Texas Construction Trust Fund Act as set forth in Chapter 162 of the Property Code, thereby creating personal liability for its officers and directors, including Giles, for the sums misapplied. Defendants’ violation of the statute has caused and will continue to cause Plaintiff to incur damages. Plaintiff has already incurred damages as a result of such violation in the form of the costs and expenses associated with purchasing the Property from Encore Bank through the foreclosure sale, which foreclosure was a 6 direct result of Defendants failing to timely and adequately pay its subcontractors. Further, as Plaintiff completes construction of the Residences, Plaintiff will continue to incur damages in the form of the costs for materials and labor which were drawn from the Encore Loans, and should have been paid to subcontractors supplying labor and materials to the Residences, but which were diverted for purposes. VIL DEMAND FOR PAYMENT Demand for payment of all sums due under the Note and Deed of Trust as of October 8, 2009 has been made upon GGDA by letter. A true and correct copy of such demand letter is attached hereto as Exhibit “E”. Despite demand for payment made by Plaintiff after the Note became due and payable, no part of the Note has been paid. As of the date of demand, there was due, owing, and unpaid from Defendants to Plaintiff on the Note the amount of $1,978,113.10, consisting of $1,880,045.00 in unpaid principal, accrued and unpaid interest of $88,068.10, and attorney’s fees and collection costs in the amount of $10,000.00. This amount has accrued since default and continues to accrue interest at the maximum rate allowed by law of eighteen percent (18%), or $975.50 per diem. Vii. CONDITIONS PRECEDENT All conditions precedent to the bringing of this suit or to any of the recoveries sought herein have occurred, have been performed, or have been excused. Ix. RULE 194 REQUESTS FOR DISCLOSURE Under Texas Rule of Civil Procedure 194, Plaintiff requests that Defendant furnish the information required under Rule 194.2 (a), 194.2 (b), 194.2 (c), 194.2 (d), 194.2 (e), 194.2 (f), 194.2 (g), 194.2 (h), 194.2 (i), and 194.2 (1) within fifty (50) days of the service of this document. X. RULE 196 REC DUESTS FOR PRODUCTION (50) days of Pursuant to Texas Rule of Civil Procedure 196, Plaintiff requests that, within fifty the service of this document, Defendants produce the following: of 1. True and correct copies of any and all federal income tax returns prepared by or on behalf Defendants within the last three (3) years from the date of this notice; True and correct copies of any and all records regarding each and every checking, savings or other account to which Defendants have or have had either depository or withdrawal power within three (3) years of the date of this notice; True and correct copies of any and all records regarding each and every draw request made on the Encore Loans to Encore Bank relating to the Property and/or the Residences; True and correct copies of any and all records regarding each and every deposit and/or expenditure of funds received from Encore Bank by Defendants relating to the Property and/or the Residences; man or True and correct copies of any and all payments to any subcontractor, vendor, material any type of supplier relating to the Property and/or the Residences; vendor, True and correct copies of any and all bills or fund requests from any subcontractor, materialman or any type of supplier relating to the Property and/or the Residences; True and correct copies of any and all demand notices, legal notices, petitions, or other legal document from any subcontractor, vendor, materialman or any type of supplier relating to the Property and/or the Residences; Complete and accurate listings and descriptions of each and every item of realty owned by Defendants within three (3) years of the date of this notice; Complete and accurate listings and descriptions of each and every item of personal property owned by Defendants within three (3) years of the date of this notice; 10. Complete and accurate records regarding each and every debt owed by Defendants within three (3) years of the date of this notice; ll True and correct copies of any and all financial statements prepared by or on behalf of Defendants within three (3) years of the date of this notice; 12. True and correct copies of any and all loan applications prepared by or on behalf of Defendants within three (3) years of the date of this notice; 13 True and correct copies of any and all records regarding each and every item of personal property or real property transferred, sold, or conveyed by Defendants within three (3) years from the date of this notice; and 14. Any and all other written information pertaining to the financial condition of Defendants within three (3) years of the date of this notice. 15 Any and all plans and specifications, schematics, drawings, renderings, blueprints, elevations, or similar documents which relate to the design and/or construction of the Residences or any part thereof. To the extent that any of the documents exist only in electronic or magnetic form, Plaintiff requests disc in a that the documents be produced in paper form, or, if that is impossible, that they be produced on form that is accessible using Microsoft Office software. XL RULE 198 REQUESTS FOR ADMISSIONS Pursuant to Texas Rule of Civil Procedure 198, Plaintiff requests that Defendants admit or deny the following within fifty (50) days of the service of this document: 1 That GGDA commenced construction of the Residences on the Property and financed this construction activity through draws made on the Encore Loans. That GGDA ceased work on the Residences in or about August 2009, leaving various subcontractors, suppliers, and vendors unpaid, and leaving the two Residences incomplete. That in or after August 2009, various subcontractors, suppliers and materialmen filed lien claims against the Property under Chapter 53 of the Texas Property Code. That on or about August 5"", 2009, Giles admitted to Mathew Smith and/or Cooper Richey that he had used funds received under the Encore Loans to pay debts associated with other residential construction projects. That on or about August 5", 2009, Mathew Smith and/or Cooper Richey requested copies of the applications for payment submitted to Encore Bank, as well as documentation evidencing what had happened to the funds drawn down from Encore Bank. ‘That after counsel for Encore Bank notified GGDA and Giles on August 21, 2009, that they were in default under the Encore Loans, GGDA and Giles failed to cure this default. That after counsel for Encore Bank sent a notice to GGDA and Giles dated September 9, 2009, stating that the Encore Loans were accelerated and Encore Bank intended to foreclose its liens on the Property, Giles and GGDA failed to cure their defaults under the Encore Bank loan documents. That GGDA failed to timely pay its subcontractors, suppliers, and vendors, who provided labor and materials for the Residences. That GGDA breached Section 4.13 of the Deed of Trust. 10. That GGDA failed to achieve Substantial Completion of the Residences by July 1, 2009. 11 That GGDA breached Section 4.28 of the Deed of Trust. 12, That GGDA failed and/or refused to provide Plaintiff with copies of GGDA’s applications for payment under the Encore Loans, including all back-up and detail supplied to Encore Bank justifying each application for payment, as well as copies of disbursements made by either 10 Encore Bank or GGDA its subcontractors, suppliers and vendors, and lien waivers executed by other parties supplying materials or labor in connection with the construction of the Residences. 13 That GGDA breached the terms of Section 4.30 of the Deed of Trust. 14. That counsel for Plaintiff gave defendant GGDA notice of the defaults under the Deed of Trust and demanded that GGDA cure the same. 15 That GGDA failed to cure the defaults under the Deed of Trust. 16. That GGDA has failed to pay ad valorem taxes imposed on the Property for tax year 2008. 17 That GDGA breached Section 4.4 of the Deed of Trust. 18 That allowing Encore Bank to initiate foreclosure proceedings on the Mortgaged Property was an Event of Default under the Deed of Trust. 19. That GGDA has failed to pay the sums owed to Plaintiff under the Note and Deed of Trust. 20. That GGDA and Giles individually received the trust funds from the Encore Loans, and had control or direction of the trust funds. 21 That GGDA and Giles individually are trustees of the trust funds received from the Encore Loans under Chapter 162 of the Texas Property Code. 22 That GGDA and Giles represented to Encore Bank that the funds received in response to the applications for payment under the Encore Loans would be used to pay GGDA’s costs and expenses associated with the Residences. 23. That Giles and GGDA were required under Chapter 162 of the Property Code to hold the funds drawn under the Encore Loans in trust for the payment of the subcontractors, suppliers, and vendors providing labor and materials for the Residences only. 24, That GGDA and Giles retained, used, or diverted some of the funds drawn down under the Encore Loans without first fully paying all current or past due obligations incurred by GGDA and Giles in connection with the Residences. 11 25 That GGDA and Giles used the funds drawn under the Encore Loans to pay expenses on projects other than the Residences, in violation of Chapter 162 of the Property Code. 26 That as of October 8, 2009, the amount of $1,978,113.10, consisting of $1,880,045.00 in unpaid principal, accrued and unpaid interest of $88,068.10, and attorney’s fees and collection costs in the amount of $10,000.00 was due, owing, and unpaid from Defendants to Plaintiff on the Note and Deed of Trust. 27 That the amount due, owing and unpaid from Defendants to Plaintiff on the Note and Deed of Trust has accrued since default and continues to accrue interest at the maximum rate allowed by law of eighteen percent (18%), or $975.50 per diem. 28. That the terms of the Note and Deed of Trust require GGDA to pay all costs of collection, including reasonable attorney’s fees, which shall bear interest from the date of its accrual at the highest rate permitted by law. XI. ATTORNEY’S FEES According to the terms of the Note and Deed of Trust, GGDA further promised to pay all costs of collection, including reasonable attorney’s fees, which shall bear interest from the date of its accrual at the highest rate permitted by law. As a result of GGDA’s failure to pay the sums due and owing on the Note and Deed of Trust, as described above, Plaintiff has found it necessary to employ the undersigned attorney to initiate this action. To compensate Plaintiff for attorney’s fees thereby incurred, Plaintiff is entitled to recover reasonable attorney’s fees. In the even of an appeal to the court of appeals, Plaintiff would be entitled to additional reasonable attorney’s fees; in the event of an appeal to the Supreme Court, Plaintiff would be entitled to additional reasonable attorney’s fees. WHEREFORE, Plaintiff requests that Defendants be cited to appear and answer, and that on final trial Plaintiff have (i) judgment against defendant GGDA for: 12 1 $1,978,113.10, with interest at the rate of eighteen percent (18%) per annum from October 9, 2009 until judgment; 2 Reasonable attorney’s fees, including fees in the event of appeal; 3 Interest after judgment as allowed by law; 4 Costs of suit; and 5 Such other and further relief to which Plaintiff may be justly entitled. and (ii) judgment against defendant Eugene P. Giles individually for: 1 The amount of trust funds diverted from the Residences in violation of Chapter 162 of the Property Code; 2 Costs of suit; and 3 Such other and further relief to which Plaintiff may be justly entitled. Respectfully submitted, James . “Jeb” Brown, II State Bar No. 00793410 Kimberly Anne Grant State Bar No. 00787346 3701 Kirby Drive, Suite 1130 Houston, Texas 77098 Telephone: 713-521-1614 Facsimile: 713-521-3077 jeb@jebbrownlaw.com ATTORNEYS FOR PLAINTIFF MOURNING DOVE CAPITAL, L.L.C. 13