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CAUSE NO. 2018-06512
RSS MSBAM2014C17-TX HAH, LLC, § IN THE DISTRICT COURT OF
vs. HARRIS COUNTY, TEXAS
HOUSTON AIRPORT HOSPITALITY §
LP, PACIFICA HOSTS, INC. and
rd
PACIFICA HARBOR VIEW TWO L.P., § JUDICIAL DISTRICT
DEFENDANTS’ RESPONSE TO PLAINTIFF’S SPECIAL EXCEPTIONS
Defendants Houston Airport Hospitality LP (“HAH”), Pacifica Hosts, Inc., and Pacifica
Harbor View Two L.P. (collectively, “Defendants”) file this Response to Plaintiff’s Special
Exceptions.
INTRODUCTION
Without legal support, Plaintiff’s seek dismissal of Defendants’ properly pled declaratory
judgment action on the basis of the “mirror-image” rule. However, Texas courts do not support
the use of the “mirror-image” rule to dismiss claims under these circumstances, but merely to
address the award of attorneys’ fees under Chapter 37 of the Texas Civil Practices and Remedies
Code. Nevertheless, Defendants’ declaratory judgment action, at least in part, requests relief
independent of Plaintiff’s claims. As such, the “mirror-image” rule does not apply and Plaintiff’s
special exceptions should be denied.
FACTUAL BACKGROUND
Plaintiff provided Defendant HAH with a non-recourse loan with a 41 year old hotel
serving as the sole collateral. After default and foreclosure on the hotel, Plaintiff now seeks to
compel Defendants to finance an extensive renovation and upgrades that would turn the property
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into a far more valuable hotel than what it originally bargained for. Plaintiff should not be
permitted to obtain this windfall.
In this regard, Plaintiff filed suit against Defendants on January 30, 2018, bringing claims
for breach of contract, actual and constructive fraudulent transfer, and full-recourse under the non-
recourse loan documents. On May 28, 2019, Defendants filed an amended counterclaim against
Plaintiff for conversion and asserted a declaratory judgment action. Defendants’ declaratory
judgment action requests that the Court declare the following:
a) On or about March 3, 2017, HAH was not in violation of
Article VI(xv) of the Loan as it maintained adequate capital for the
normal obligations reasonably foreseeable in a business of its size
and character and in light of its contemplated business operations
provided there is positive cash flow from the operation of the Hotel
to do so;
b) On or about March 3, 2017, HAH was not in violation of
Article VI(xviii) because it did not fail to remain solvent or pay its
own liabilities;
c) The March 3, 2017 transfers were not fraudulent (actual or
constructive) transfers under Texas law;
d) The March 3, 2017 transfers were not Prohibited Transfers
as defined by Section 7.2 of the Loan;
e) Because the March 3, 2017 transfers were not fraudulent
transfers or in violation of the terms of the Loan, the Loan is a non-
recourse loan and Plaintiff’s remedies are limited to repossession of
the Hotel;
f) Plaintiff is further precluded from seeking recourse liability
because Plaintiff failed to provide HAH with notice of breach and
an opportunity to cure any alleged breaches of Article 6 and Article
7, as required by Article 15.1(c) of the Loan;
g) The Loan only makes HAH personally liable for Losses
resulting from any breach of Section 15.1(b)(i)-(xii) of the Loan;
h) HAH and Pacifica Hosts did not “commit or suffer any
material waste of the Property or make any change in the use of the
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Property which will in any way materially increase the risk of fire
or other hazard arising out of the operation of the Property” and thus
did not violate Section 5.3 of the Loan;
i) Any alleged breach of Article 5 of the Loan, by itself, does
not make HAH or Pacifica Hosts personally liable for losses caused
by any such breach;
j) HAH and Pacifica Hosts did not “do or permit to be done
thereon anything that may in any way impair the value of the
Property or the security for the loan” and thus did not violate Section
5.3 of the Loan;
k) The Loan does not provide that Counter-Defendant can
recover lost revenues or lost profits from HAH;
l) Section 18.9 of the Loan, which purports to waive all
counterclaims HAH may have against Counter-Defendant is void
and unenforceable under Texas law; and
m) Section 18.6 of the Loan, which purports to limit HAH’s
remedies to injunctive relief is void and unenforceable under Texas
law.
See Defendants’ Second Amended Answer and Counterclaim.
Defendants also seek an award of attorneys’ fees and costs with respect to their declaratory
judgment action pursuant to Section 37.009 of the Texas Civil Practice and Remedies Code.
On May 20, 2019, Plaintiff filed Special Exceptions pursuant to Texas Rule of Civil
Procedure 91. Plaintiff alleges that Defendants’ claim for a declaratory judgment is prohibited by
the mirror-image rule.
ARGUMENT AND AUTHORITIES
Plaintiff’s Special Exceptions should be denied because the “mirror-image rule” has never
been used to obtain dismissal of claims under these circumstances. Moreover, Defendants’ claims
for a declaratory judgment are not mere “denials” of Plaintiff’s claims and exist independent of
the Plaintiff’s causes of actions such that the mirror-image rule does not apply.
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A. Plaintiff cites no Texas case wherein the mirror-image rule is used to dismiss
affirmative claims under these circumstances.
While the mirror-image rule is used to assess the viability of a claim for attorneys’ fees
under Chapter 37 of the Texas Civil Practice and Remedies Code, it has never been used to dismiss
claims under the circumstances presented here.
The mirror-image rule states that “when a party brings a declaratory judgment action by
way of a counterclaim or amended petition and the declaratory judgment involves only issues
already raised by the original claim, the party is not entitled to an award of attorney's fees.” Adams
v. First Nat'l Bank of Bells/Savoy, 154 S.W.3d 859, 873 (Tex. App.—Dallas 2005, no pet.);
Tanglewood Homes Ass’n, Inc. v. Feldman, 436 S.W.3d 48, 70 (Tex. App.—Houston [14th Dist.]
2014, pet. denied). If the declarations obtained in the judgment “merely duplicated issues already
before the trial court,” the party may not recover fees. MBM Fin. Corp. v. Woodlands Operating
Co., 292 S.W.3d 660, 669 (Tex. 2009); see Anderson v. New Property Owners' Ass'n of Newport,
Inc., 122 S.W.3d 378, 390–91 (Tex. App.--Texarkana 2003, pet. denied). A counterclaim that
presents no new controversy, but exists solely to pave the way to an award of attorney's fees is
improper. John Chezik Buick Co. v. Friendly Chevrolet Co., 749 S.W.2d 591, 595 (Tex.App.—
Dallas 1988, writ denied). However, the mirror-image rule has never been used to obtain dismissal
of a pending counterclaim under these circumstances, as Plaintiff seeks to do here.
Plaintiff’s reliance on the mirror image rule to obtain dismissal of Defendants’
counterclaims for declaratory judgment have no basis under Texas law. Plaintiff cites three cases
for its proposition-- In re Shockley, 123 S.W.3d 642, 647 (Tex. App.—El Paso 2003, no pet.); Dig.
Imaging Associates, Inc. v. State, 176 S.W.3d 851, 855 (Tex. App.— Houston [1st Dist.] 2005, no
pet.); In re Hanby, No. 14-09-00896-CV, 2010 WL 1492863, at *2 (Tex. App.—Houston [14th
Dist.] Apr. 15, 2010, orig. proceeding) (per curium) (sub. mem. op.).
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8048835v1
All of these cases are distinguishable and do not support Plaintiff’s position. All three cases
involve the right of a party to non-suit its claims as long as the defendant has not made a claim for
affirmative relief. In that context, the cases hold that a declaratory judgment action that merely
present defenses are not claims for affirmative relief and thus the plaintiff could non-suit its claims.
If the declaratory judgment claims are found to have an independent basis for recovery, then they
would remain pending. However, nothing in these cases supports the notion that declaratory
judgment claims can be dismissed under the mirror-image rule when the Plaintiff’s claims are still
pending.
B. Defendants’ claim for declaratory judgment are not mirror-images of Plaintiff’s
claims.
Plaintiff’s attempts to use the mirror-image rule to obtain dismissal of Defendants’ request
for attorneys’ fees under Chapter 37.009 of the Texas Civil Practice & Remedies Code is also
misguided. As noted above, several of Defendants’ requests for declaratory judgment constitute
more than just a denial or alleged defense to Plaintiff’s claims. Particularly, the following requests
fall squarely outside the parameters of Plaintiff’s claims:
On or about March 3, 2017, HAH was not in violation of
Article VI(xv) of the Loan as it maintained adequate capital
for the normal obligations reasonably foreseeable in a
business of its size and character and in light of its
contemplated business operations provided there is positive
cash flow from the operation of the Hotel to do so;
On or about March 3, 2017, HAH was not in violation of
Article VI(xviii) because it did not fail to remain solvent or
pay its own liabilities;
Plaintiff is further precluded from seeking recourse liability
because Plaintiff failed to provide HAH with notice of
breach and an opportunity to cure any alleged breaches of
Article 6 and Article 7, as required by Article 15.1(c) of the
Loan;
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Section 18.9 of the Loan, which purports to waive all
counterclaims HAH may have against Counter-Defendant is
void and unenforceable under Texas law; and
Section 18.6 of the Loan, which purports to limit HAH’s
remedies to injunctive relief is void and unenforceable under
Texas law.
Defendants’ request for a declaratory judgment is not a “mirror-image” of Plaintiff’s
claims. In fact, some of them do not even involve issues raised in Plaintiff’s live petition—e.g.,
waiver of counterclaims, limitation of causes of actions, required notice under the Loan
Agreement. The request asks the court to declare the rights and obligations of the respective parties
under the Loan Agreement and related documents. This request is a viable request for a declaratory
judgment that does not run afoul of the “mirror-image rule.” Accordingly, the Court, in its
discretion, can make an award of attorneys’ fees under Chapter 37.009 based on these claims.
For the foregoing reasons, Plaintiff’s Special Exceptions should be denied.
Respectfully submitted,
ORTER EDGES LLP
By: /s/ Ray T. Torgerson
Ray T. Torgerson, SBN 24003067
rtorgerson@porterhedges.com
Amy C. Falcon, SBN 24053576
afalcon@porterhedges.com
David C. Martin, SBN 24052202
dmartin@porterhedges.com
Brett W. Chalke, SBN 24088793
bchalke@porterhedges.com
1000 Main Street, 36th Floor
Houston, Texas 77002-6336
Telephone: (713) 226-6000
Facsimile: (713) 226-1300
TTORNEYS FOR EFENDANTS/COUNTER
LAINTIFFS
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Certificate of Service
I hereby certify that a true and correct copy of the foregoing was electronically filed with
the Clerk of Court and served on the following on June 28, 2019, using efile notification, pursuant
to the Texas Rules of Civil Procedure:
John R. Hardin
Skyler M. Howton
Perkins Coie LLP
500 N. Akard Street, Suite 3300
Dallas, Texas 75201-2911
JohnHardin@perkinscoie.com
SHowton@perkinscoie.com
Counsel for Plaintiff
David M. Neff
Brian A. Audette
Perkins Coie LLP
131 S. Dearborn St., Ste. 1700
Chicago, IL 60603-5559
DNeff@perkinscoie.com
BAudette@perkinscoie.com
Counsel for Plaintiff
/s/ Ray T. Torgerson
Ray T. Torgerson
7
8048835v1
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CAUSE NO. 2018-06512 RSS MSBAM2014C17-TX HAH, LLC, § IN THE DISTRICT COURT OF vs. HARRIS COUNTY, TEXAS HOUSTON AIRPORT HOSPITALITY § LP, PACIFICA HOSTS, INC. and rd PACIFICA HARBOR VIEW TWO L.P., § JUDICIAL DISTRICT DEFENDANTS’ RESPONSE TO PLAINTIFF’S SPECIAL EXCEPTIONS Defendants Houston Airport Hospitality LP (“HAH”), Pacifica Hosts, Inc., and Pacifica Harbor View Two L.P. (collectively, “Defendants”) file this Response to Plaintiff’s Special Exceptions. INTRODUCTION Without legal support, Plaintiff’s seek dismissal of Defendants’ properly pled declaratory judgment action on the basis of the “mirror-image” rule. However, Texas courts do not support the use of the “mirror-image” rule to dismiss claims under these circumstances, but merely to address the award of attorneys’ fees under Chapter 37 of the Texas Civil Practices and Remedies Code. Nevertheless, Defendants’ declaratory judgment action, at least in part, requests relief independent of Plaintiff’s claims. As such, the “mirror-image” rule does not apply and Plaintiff’s special exceptions should be denied. FACTUAL BACKGROUND Plaintiff provided Defendant HAH with a non-recourse loan with a 41 year old hotel serving as the sole collateral. After default and foreclosure on the hotel, Plaintiff now seeks to compel Defendants to finance an extensive renovation and upgrades that would turn the property 8048835v1 into a far more valuable hotel than what it originally bargained for. Plaintiff should not be permitted to obtain this windfall. In this regard, Plaintiff filed suit against Defendants on January 30, 2018, bringing claims for breach of contract, actual and constructive fraudulent transfer, and full-recourse under the non- recourse loan documents. On May 28, 2019, Defendants filed an amended counterclaim against Plaintiff for conversion and asserted a declaratory judgment action. Defendants’ declaratory judgment action requests that the Court declare the following: a) On or about March 3, 2017, HAH was not in violation of Article VI(xv) of the Loan as it maintained adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations provided there is positive cash flow from the operation of the Hotel to do so; b) On or about March 3, 2017, HAH was not in violation of Article VI(xviii) because it did not fail to remain solvent or pay its own liabilities; c) The March 3, 2017 transfers were not fraudulent (actual or constructive) transfers under Texas law; d) The March 3, 2017 transfers were not Prohibited Transfers as defined by Section 7.2 of the Loan; e) Because the March 3, 2017 transfers were not fraudulent transfers or in violation of the terms of the Loan, the Loan is a non- recourse loan and Plaintiff’s remedies are limited to repossession of the Hotel; f) Plaintiff is further precluded from seeking recourse liability because Plaintiff failed to provide HAH with notice of breach and an opportunity to cure any alleged breaches of Article 6 and Article 7, as required by Article 15.1(c) of the Loan; g) The Loan only makes HAH personally liable for Losses resulting from any breach of Section 15.1(b)(i)-(xii) of the Loan; h) HAH and Pacifica Hosts did not “commit or suffer any material waste of the Property or make any change in the use of the 2 8048835v1 Property which will in any way materially increase the risk of fire or other hazard arising out of the operation of the Property” and thus did not violate Section 5.3 of the Loan; i) Any alleged breach of Article 5 of the Loan, by itself, does not make HAH or Pacifica Hosts personally liable for losses caused by any such breach; j) HAH and Pacifica Hosts did not “do or permit to be done thereon anything that may in any way impair the value of the Property or the security for the loan” and thus did not violate Section 5.3 of the Loan; k) The Loan does not provide that Counter-Defendant can recover lost revenues or lost profits from HAH; l) Section 18.9 of the Loan, which purports to waive all counterclaims HAH may have against Counter-Defendant is void and unenforceable under Texas law; and m) Section 18.6 of the Loan, which purports to limit HAH’s remedies to injunctive relief is void and unenforceable under Texas law. See Defendants’ Second Amended Answer and Counterclaim. Defendants also seek an award of attorneys’ fees and costs with respect to their declaratory judgment action pursuant to Section 37.009 of the Texas Civil Practice and Remedies Code. On May 20, 2019, Plaintiff filed Special Exceptions pursuant to Texas Rule of Civil Procedure 91. Plaintiff alleges that Defendants’ claim for a declaratory judgment is prohibited by the mirror-image rule. ARGUMENT AND AUTHORITIES Plaintiff’s Special Exceptions should be denied because the “mirror-image rule” has never been used to obtain dismissal of claims under these circumstances. Moreover, Defendants’ claims for a declaratory judgment are not mere “denials” of Plaintiff’s claims and exist independent of the Plaintiff’s causes of actions such that the mirror-image rule does not apply. 3 8048835v1 A. Plaintiff cites no Texas case wherein the mirror-image rule is used to dismiss affirmative claims under these circumstances. While the mirror-image rule is used to assess the viability of a claim for attorneys’ fees under Chapter 37 of the Texas Civil Practice and Remedies Code, it has never been used to dismiss claims under the circumstances presented here. The mirror-image rule states that “when a party brings a declaratory judgment action by way of a counterclaim or amended petition and the declaratory judgment involves only issues already raised by the original claim, the party is not entitled to an award of attorney's fees.” Adams v. First Nat'l Bank of Bells/Savoy, 154 S.W.3d 859, 873 (Tex. App.—Dallas 2005, no pet.); Tanglewood Homes Ass’n, Inc. v. Feldman, 436 S.W.3d 48, 70 (Tex. App.—Houston [14th Dist.] 2014, pet. denied). If the declarations obtained in the judgment “merely duplicated issues already before the trial court,” the party may not recover fees. MBM Fin. Corp. v. Woodlands Operating Co., 292 S.W.3d 660, 669 (Tex. 2009); see Anderson v. New Property Owners' Ass'n of Newport, Inc., 122 S.W.3d 378, 390–91 (Tex. App.--Texarkana 2003, pet. denied). A counterclaim that presents no new controversy, but exists solely to pave the way to an award of attorney's fees is improper. John Chezik Buick Co. v. Friendly Chevrolet Co., 749 S.W.2d 591, 595 (Tex.App.— Dallas 1988, writ denied). However, the mirror-image rule has never been used to obtain dismissal of a pending counterclaim under these circumstances, as Plaintiff seeks to do here. Plaintiff’s reliance on the mirror image rule to obtain dismissal of Defendants’ counterclaims for declaratory judgment have no basis under Texas law. Plaintiff cites three cases for its proposition-- In re Shockley, 123 S.W.3d 642, 647 (Tex. App.—El Paso 2003, no pet.); Dig. Imaging Associates, Inc. v. State, 176 S.W.3d 851, 855 (Tex. App.— Houston [1st Dist.] 2005, no pet.); In re Hanby, No. 14-09-00896-CV, 2010 WL 1492863, at *2 (Tex. App.—Houston [14th Dist.] Apr. 15, 2010, orig. proceeding) (per curium) (sub. mem. op.). 4 8048835v1 All of these cases are distinguishable and do not support Plaintiff’s position. All three cases involve the right of a party to non-suit its claims as long as the defendant has not made a claim for affirmative relief. In that context, the cases hold that a declaratory judgment action that merely present defenses are not claims for affirmative relief and thus the plaintiff could non-suit its claims. If the declaratory judgment claims are found to have an independent basis for recovery, then they would remain pending. However, nothing in these cases supports the notion that declaratory judgment claims can be dismissed under the mirror-image rule when the Plaintiff’s claims are still pending. B. Defendants’ claim for declaratory judgment are not mirror-images of Plaintiff’s claims. Plaintiff’s attempts to use the mirror-image rule to obtain dismissal of Defendants’ request for attorneys’ fees under Chapter 37.009 of the Texas Civil Practice & Remedies Code is also misguided. As noted above, several of Defendants’ requests for declaratory judgment constitute more than just a denial or alleged defense to Plaintiff’s claims. Particularly, the following requests fall squarely outside the parameters of Plaintiff’s claims: On or about March 3, 2017, HAH was not in violation of Article VI(xv) of the Loan as it maintained adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations provided there is positive cash flow from the operation of the Hotel to do so; On or about March 3, 2017, HAH was not in violation of Article VI(xviii) because it did not fail to remain solvent or pay its own liabilities; Plaintiff is further precluded from seeking recourse liability because Plaintiff failed to provide HAH with notice of breach and an opportunity to cure any alleged breaches of Article 6 and Article 7, as required by Article 15.1(c) of the Loan; 5 8048835v1 Section 18.9 of the Loan, which purports to waive all counterclaims HAH may have against Counter-Defendant is void and unenforceable under Texas law; and Section 18.6 of the Loan, which purports to limit HAH’s remedies to injunctive relief is void and unenforceable under Texas law. Defendants’ request for a declaratory judgment is not a “mirror-image” of Plaintiff’s claims. In fact, some of them do not even involve issues raised in Plaintiff’s live petition—e.g., waiver of counterclaims, limitation of causes of actions, required notice under the Loan Agreement. The request asks the court to declare the rights and obligations of the respective parties under the Loan Agreement and related documents. This request is a viable request for a declaratory judgment that does not run afoul of the “mirror-image rule.” Accordingly, the Court, in its discretion, can make an award of attorneys’ fees under Chapter 37.009 based on these claims. For the foregoing reasons, Plaintiff’s Special Exceptions should be denied. Respectfully submitted, ORTER EDGES LLP By: /s/ Ray T. Torgerson Ray T. Torgerson, SBN 24003067 rtorgerson@porterhedges.com Amy C. Falcon, SBN 24053576 afalcon@porterhedges.com David C. Martin, SBN 24052202 dmartin@porterhedges.com Brett W. Chalke, SBN 24088793 bchalke@porterhedges.com 1000 Main Street, 36th Floor Houston, Texas 77002-6336 Telephone: (713) 226-6000 Facsimile: (713) 226-1300 TTORNEYS FOR EFENDANTS/COUNTER LAINTIFFS 6 8048835v1 Certificate of Service I hereby certify that a true and correct copy of the foregoing was electronically filed with the Clerk of Court and served on the following on June 28, 2019, using efile notification, pursuant to the Texas Rules of Civil Procedure: John R. Hardin Skyler M. Howton Perkins Coie LLP 500 N. Akard Street, Suite 3300 Dallas, Texas 75201-2911 JohnHardin@perkinscoie.com SHowton@perkinscoie.com Counsel for Plaintiff David M. Neff Brian A. Audette Perkins Coie LLP 131 S. Dearborn St., Ste. 1700 Chicago, IL 60603-5559 DNeff@perkinscoie.com BAudette@perkinscoie.com Counsel for Plaintiff /s/ Ray T. Torgerson Ray T. Torgerson 7 8048835v1