BARBARA J. HOUSER, Bankruptcy Judge.
The Court tried this adversary proceeding (the "Adversary") on November 7-8, 2011. Plaintiff, Anjum A. Farooqi ("Farooqi"), is an individual residing in Irving, Texas, who moved to Texas from New
An issue arose at trial which had not been briefed by the parties. Thus, post-trial briefs were required, the last of which was submitted on November 23, 2011, after which the Court took the Adversary under advisement. For the reasons explained more fully below, the Court has authority to hear and determine the claims asserted in the Adversary pursuant to 28 U.S.C. §§ 1334 and 157(b). See infra at pp. 15-22. The Court may enter a final judgment and a monetary judgment in the Adversary. Morrison v. W. Builders of Amarillo (In re Morrison), 555 F.3d 473, 479-80 (5th Cir.2009). This Memorandum Opinion contains the Court's findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7051 and 9014.
At some point prior to the summer of 2009, Farooqi began to tire of life in New York City and of his job in the food service division of a local hospital. Farooqi visited his sister in Dallas in the late summer of 2009 in order to look for a new career opportunity. Ideally, Farooqi wanted to purchase a restaurant given his background in food service.
After being introduced by Miller, Farooqi and Carroll began to discuss the possibility of Farooqi purchasing the Las Colinas Salad Bowl. On September 25, 2009, Carroll sent Farooqi a Franchise Disclosure Document, dated June 5, 2009, containing information about (i) Franchise Corporation, and (ii) Carroll's personal bankruptcy filing in 2006.
On or about September 28, 2009, Farooqi attended a meeting with Carroll, Marshall and Leith Caddell ("Caddell"),
The parties met again the following day to finalize their proposed transaction. At that time Farooqi was asked to sign a 30-day option to purchase agreement with Inc. (the "Option Agreement"). See Plaintiff's Exhibit 1.
Farooqi testified that he understood and considered the $25,000 to be part of the purchase price of the franchise itself, rather than a separate fee for the Option Agreement.
According to Farooqi, Marshall and Caddell, after repeated assurances from Carroll that the 30-day period in the Option Agreement would not apply to the Opt-Out Provision and that Inc. would provide all financial information requested by Farooqi, Farooqi agreed to enter into the Option Agreement.
Marshall testified that (i) she had been researching financing options for Farooqi during September 2009; (ii) she encountered some difficulties obtaining a financing package, as Farooqi had only an average
Immediately after the Option Agreement was signed, Marshall began requesting information from Carroll in order to complete Farooqi's loan application with New England Commercial.
Farooqi testified that Carroll never informed him that the Option Agreement
In January 2010, Farooqi quit his job in New York City and prepared to move part of his family to Texas in anticipation of his purchase of the Las Colinas Salad Bowl.
At trial, Carroll ultimately admitted that he only provided "some" of the information requested by Marshall in order to complete Farooqi's loan application.
On or about February 1, 2010, while en route to Texas, Farooqi received a call from Marshall telling him that his loan had been denied by New England Commercial.
Notwithstanding the denial of his loan, Carroll and Farooqi continued to discuss a potential purchase of the Las Colinas Salad Bowl, although Farooqi testified that he was too discouraged to apply for another loan for such a purchase at that time.
Sometime after Farooqi informed Carroll that his loan application had been denied, Carroll told Farooqi that the 30-day option period had expired and a refund of the $25,000 franchise fee was no longer available.
In late February or early March 2010, Farooqi asked Carroll to refund his $25,000 franchise fee. Carroll initially testified at trial that he refused to return Farooqi's money because he needed to discuss returning the fee with counsel for the Salad Bowl Entities.
By March 2010, Farooqi had been unemployed for almost two months and was faced with an ever-growing number of unpaid bills. In order to obtain money to pay his various bills and expenses, Farooqi took out a $15,000 personal loan from BBVA Compass Bank.
After almost a year of asking Carroll for a refund without receiving one, Farooqi filed a lawsuit in state court.
While Farooqi is naive and relatively unsophisticated in business matters, he was a credible witness at trial. While there were some inconsistencies in his testimony, those inconsistencies were not material to the outcome of this dispute and are explained by the passage of time and fading memories. Moreover, much of Farooqi's testimony on key issues was corroborated by the testimony of other credible witnesses who were subpoenaed by Farooqi to testify at trial, including Marshall and Caddell.
With regard to this specific testimony, the Court believes Farooqi, not Carroll. Farooqi was never told that he could get his money back by signing non-compete and non-disclosure documents. It is clear to the Court that if he had been so told, he would have signed them in order to get his $25,000 back. Based on the credible evidence at trial, Carroll told Farooqi that Farooqi couldn't get his money back because it was too late, the Option Agreement had expired. With regard to other conflicting testimony between Carroll and Farooqi, the Court generally finds Farooqi's testimony credible and the testimony of Carroll not credible.
Farooqi seeks a monetary judgment against Carroll for fraudulent inducement, fraud,
From the Court's perspective, the Court must first consider whether Farooqi is entitled to a judgment against either or both of the Salad Bowl Entities on his claims of fraudulent inducement and/or violations of the DTPA. There is little doubt from the evidence that Carroll was dealing with Farooqi as an officer of one or both of the Salad Bowl Entities, not in his individual capacity. Second, if Farooqi is entitled to a judgment against one or both of the Salad Bowl Entities, the Court must consider whether Carroll can be held personally liable for that judgment. Finally, if Carroll can be held personally liable, the Court must consider whether that debt is dischargeable in Carroll's bankruptcy case.
However, before reaching these questions, the Court must consider a threshold issue relating to this Court's authority to hear and finally determine Farooqi's claims against Carroll, to which we now turn.
Carroll has questioned this Court's "subject matter jurisdiction" over the Adversary as a result of the Supreme Court's recent decision in Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). From this Court's perspective, Stern does not implicate the grant of subject matter jurisdiction over bankruptcy cases and proceedings arising in the bankruptcy case, under the Bankruptcy Code (like the Adversary) or related to the bankruptcy case under 28 U.S.C. § 1334. That subject matter jurisdiction is, and has been since 1984, vested in the United States District Court for the Northern District of Texas under 28 U.S.C. § 1334. Then, under 28 U.S.C. § 151, Congress granted bankruptcy courts the power to "exercise" certain "authority conferred" upon the district courts by title 28, but bankruptcy courts were not granted their own independent subject matter jurisdiction over bankruptcy cases and proceedings. Congress also provided further procedures in 28 U.S.C. § 157 pursuant to which the district court may refer bankruptcy cases and proceedings to the bankruptcy courts for either final determination or proposed findings and conclusions. So, as relevant here, this Court exercises authority with respect to Carroll's underlying chapter 13 bankruptcy case and the Adversary pursuant to a standing order of reference adopted in this District on August 3, 1984.
From this Court's perspective, Stern simply clarified bankruptcy courts' constitutional power, not their subject matter
In Stern, the Supreme Court held that a bankruptcy court, as an Article I tribunal, may not constitutionally enter a final judgment over a debtor's counterclaim that would not necessarily be resolved by the resolution of the debtor's objection to the claimant's proof of claim. Id. at 2618. According to the Supreme Court, although "public rights" disputes may be decided by non-Article III tribunals, public rights disputes must involve rights "integrally related to a particular federal government action." Id. at 2613. The debtor's counterclaim in Stern did not constitute a "public rights" dispute. Id. at 2614. Thus, according to the Supreme Court, entering a final judgment with respect to the debtor's counterclaim, which would not have been decided by the allowance of the claimant's proof of claim, would be an impermissible exercise of the judicial power of the United States by a non-Article III tribunal. Id. at 2615. This was so notwithstanding the fact that (i) the relevant statute—28 U.S.C. § 157(b)(1)—expressly authorized the bankruptcy judge to "hear and determine ... all core proceedings... arising in a case under title 11," that were referred to it by the district court under 28 U.S.C. § 157(a), and (ii) "counterclaims by the estate against persons filing claims against the estate" are expressly defined to be a "core proceeding." 28 U.S.C. § 157(b)(2)(C). While Chief Justice Roberts stated in his majority opinion that the Stern holding was quite narrow and would have a limited practical impact,
With this background in mind, the Court will address Carroll's arguments about its lack of "subject matter jurisdiction" or, as properly framed by this Court, its alleged Constitutional inability to hear and finally determine the claims asserted in the Adversary. The focal point of Carroll's argument is on Farooqi's failure to file a proof of claim in Carroll's underlying chapter 13 bankruptcy case before the bar date for the filing of such claims. According to Carroll, that failure to file a proof of claim somehow divests this Court of its "subject matter jurisdiction." There are several problems with this argument.
First, as just discussed, Stern is not a subject matter jurisdiction case. If anything, Carroll should be questioning this Court's Constitutional authority to hear and finally determine the state law claims asserted in the Adversary.
Second, while Farooqi did not file a formal proof of claim in Carroll's bankruptcy case prior to the bar date, he did file the Adversary in which he seeks to both liquidate his claim and hold Carroll responsible for that claim. Under clear Fifth Circuit precedent, Farooqi's filing of the Adversary constitutes an informal proof of claim, which gives him the right to participate in distributions from Carroll's bankruptcy estate. In Nikoloutsos v. Nikoloutsos (In re Nikoloutsos), 199 F.3d 233 (5th Cir.2000), the court adopted a 5-part test to determine what qualifies as an informal proof of claim, following the decisions of several sister circuits. Specifically, the Fifth Circuit stated that "to qualify as an informal proof of claim: (1) the claim must be in writing; (2) the writing must contain a demand by the creditor on the debtor's estate; (3) the writing must evidence an intent to hold the debtor liable for such debt; (4) the writing must be filed with the bankruptcy court; and (5) based upon the facts of the case, allowance of the claim must be equitable under the circumstances." Id. at 236. Each of these elements is established here. The Adversary complaint is in writing; it contains a demand by Farooqi on Carroll and his estate; it evidences an intent to hold Carroll liable for Farooqi's debt; it was filed with this Court prior to the expiration of the bar date; and, as explained in the balance of this Memorandum Opinion, allowance of Farooqi's claim is equitable under the circumstances. While the allowance of Farooqi's claim could have diluted distributions to Carroll's other unsecured creditors, Carroll's confirmed chapter 13 plan does not propose any distributions to unsecured creditors. Moreover, even if other unsecured creditors were diluted by the allowance of Farooqi's claim, Farooqi is entitled to his share of the estate while Carroll's bankruptcy case is pending and, if Farooqi is successful here in having his debt excepted from Carroll's discharge, Farooqi will be entitled to pursue Carroll following the conclusion of the bankruptcy case in order to collect any unpaid balance. Accordingly, the Court finds that Farooqi timely filed an informal proof of claim in Carroll's bankruptcy case and, to the extent that Farooqi's alleged failure to file a proof of claim is somehow an impediment to this Court's authority to hear and finally determine the Adversary, the Court concludes that Carroll's objection is without merit.
Finally, Stern does not implicate this Court's authority to hear and finally determine whether a creditor's claim is excepted from a debtor's discharge by 11 U.S.C. § 523(a)(2), even if the Court is required to first liquidate the creditor's
Taking the second issue first, there can be little doubt that this Court, as an Article I tribunal, has the Constitutional authority to hear and finally determine what claims are non-dischargeable in a bankruptcy case. Determining the scope of the debtor's discharge is a fundamental part of the bankruptcy process. As noted by the court in Sanders v. Muhs (In re Muhs), 2011 WL 3421546 (Bankr.S.D.Tex. Aug. 2, 2011), "[t]he Bankruptcy Code is a public scheme for restructuring debtor-creditor relations, necessarily including the `exercise of exclusive jurisdiction over all of the debtor's property, the equitable distribution of that property among the debtor's creditors, and the ultimate discharge that gives the debtor a `fresh start' by releasing him, her, or it from further liability for old debts.'" Id. at *1 (citing Central Va. Cmty. College v. Katz, 546 U.S. 356, 363-64, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006)). Congress clearly envisioned that bankruptcy courts would hear and determine all core proceedings, 28 U.S.C. § 157(b)(1), which include, as relevant here, "determinations as to the dischargeability of particular debts." 28 U.S.C. § 157(b)(2)(I). The Supreme Court has never held that bankruptcy courts are without Constitutional authority to hear and finally determine whether a debt is dischargeable in bankruptcy. In fact, the Supreme Court's decision in Stern clearly implied that bankruptcy courts have such authority when it concluded that bankruptcy courts had the Constitutional authority to decide even state law counterclaims to filed proofs of claim if the counterclaim would necessarily be decided through the claims allowance process. Stern, 131 S.Ct. at 2618.
So, the question becomes, does the analysis of Constitutional authority change if the bankruptcy court must first liquidate the claim? For the reasons explained below, this Court concludes it does not.
First, under Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568, 593, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985), a right closely integrated into a public regulatory scheme may be resolved by a non-Article III tribunal. This is the so-called "public rights exception" discussed by the Supreme Court in Stern. There is no question that liquidating Farooqi's state law claims against Carroll is "closely integrated" into the Bankruptcy Code. Farooqi needs an allowed claim in order to participate in distributions from Carroll's bankruptcy estate. Moreover, Farooqi needs an allowed claim in order for this Court to determine if that claim is dischargeable in Carroll's chapter 13 bankruptcy case.
Second, the Fifth Circuit has already determined that this Court has the authority to enter a judgment on an unliquidated claim when determining the dischargeability of that debt in a bankruptcy case. In In re Morrison, 555 F.3d 473, 478-79 (5th Cir.2009), the Fifth Circuit held that a bankruptcy court has the authority to liquidate a state law claim and enter a monetary judgment against a debtor when deciding if that claim/judgment is non-dischargeable in a debtor's bankruptcy case. In deciding this question, the Fifth Circuit followed several other circuit courts that had concluded that bankruptcy courts had the power to enter a judgment in exactly this manner. See, e.g., Cowen v. Kennedy (In re Kennedy), 108 F.3d 1015, 1017-18 (9th Cir.1997); Longo v. McLaren
Finally, at least one other court has come to the same conclusion—i.e., that Stern does not hold, directly or indirectly, that an Article I tribunal is without the Constitutional authority to liquidate a creditor's claim against a debtor through entry of a final dollar judgment and then determine whether that judgment is dischargeable in the debtor's bankruptcy case. See, e.g., Dragistic v. Boricich (In re Boricich), 2011 WL 5579062 at *1 (Bankr.N.D.Ill. Nov. 15, 2011) ("Stern left intact the authority of a bankruptcy judge to fully adjudge a creditor's claim. In this case, the claim was an adversary proceeding against debtor to bar dischargeability of a debt due to Plaintiff. Therefore, the authority to enter a final dollar judgment as part of the adjudication of nondischargeability, as recognized in Hallahan,
For all of these reasons, this Court concludes that it has the Constitutional authority to (i) liquidate Farooqi's state law claims against Carroll through the entry of a money judgment following trial, and (ii) determine whether that judgment is nondischargeable in Carroll's chapter 13 bankruptcy case.
Before turning to a discussion of the merits of Farooqi's fraudulent inducement claim against Carroll,
Carroll's counsel argued that because Farooqi's claims are based on fraud, they must meet the heightened pleading standard under FED.R.CIV.P. 9(b). There is no question that Fed.R.Civ.P. 9(b) requires particularity when pleading fraud or mistake. See Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1954, 173 L.Ed.2d 868 (2009). Courts have held that mere conclusory allegations of fraud are insufficient to meet the heightened standard of Fed.
In Keith, the Fifth Circuit noted that "at a minimum, [particularity] requires that the plaintiff allege the time, place and contents of the alleged misrepresentation, as well as the identity of the person making them." Keith, 915 F.2d at 999. In In re Compaq Securities Litigation, 848 F.Supp. 1307, 1310 (S.D.Tex. 1993), the court stated that "[s]ince Rule 9(b) is to be read in conjunction with Rule 8's general notice pleading requirement that pleadings contain a `short and plain statement of the claim,' it can be satisfied as long as the complaint contains information concerning the `time, place, and nature of fraudulent behavior and defendant's relationship thereto.'" Similarly, the Seventh Circuit has held that "Rule 9(b) does not require that the complaint explain the plaintiff's theory of the case, but only that it state the misrepresentation, omission, or other action or inaction that plaintiff claims was fraudulent." Midwest Commerce Banking v. Elkhart City Centre, 4 F.3d 521, 523 (7th Cir.1993) (citation omitted).
Here, the Court is satisfied that Farooqi's complaint sets forth specific misrepresentations that allegedly were made, and gives enough of a narrow time frame (the dates surrounding the negotiations of the Option Agreement) for Carroll to be aware of what Farooqi was complaining about. While Farooqi's complaint (in either the original or amended versions) is not artfully drafted,
Further, it is well established in the Fifth Circuit that a Joint Pre-Trial Order signed by the Court supersedes the pleadings in the case, in terms of determining the issues before the Court at the time of trial. Mid-Continent Casualty Co. v. Eland Energy, Inc., 2011 WL 2417158 at *38 (N.D.Tex. June 14, 2011) (citing E.E.O.C. v. Serv. Temps, Inc., 2010 WL 5108733 at *3 (N.D.Tex. Dec. 9, 2010)) ("[t]he joint pretrial order supersedes all pleadings and governs the issues and evidence to be presented at trial.")
Here, the Joint Pre-Trial Order was signed by both parties and entered by the Court on October 26, 2011, almost two weeks before the trial commenced. Docket #36. The parties had ample time to finalize their trial preparation based on the facts and claims contained therein. Listed under contested issues of fact in the Joint Pre-Trial Order were the following:
Id. The Joint Pre-Trial Order also listed dates and time frames when the purchase of a franchise was discussed, when documents were sent to Farooqi, the nature of the alleged misrepresentations, and that Carroll made the misrepresentations. If the Second Amended Complaint was at all deficient, any deficiency was cured in the Joint Pre-Trial Order.
While Carroll did object in the Joint Pre-Trial Order to any statement of facts that he deemed to be outside of the pleadings, Joint Pre-Trial Order, p. 2, the Court concludes that when the pleadings are considered along with the Joint Pre-Trial Order, Carroll was sufficiently on notice of the fraudulent inducement claim Farooqi intended to pursue against him at trial. In Thrift v. Hubbard, 44 F.3d 348 (5th Cir. 1995), Thrift argued that the Hubbards, who were both defendants and cross-plaintiffs, should not have been entitled to a recovery at trial on several of their causes of action because those causes of action were not pled. The Fifth Circuit noted that, as is true here, there could be no implication of consent based on the numerous objections made by Thrift, including an objection in the pre-trial order to the pleadings, which were perceived by Thrift to be defective. The Fifth Circuit noted that because the claim was raised in the pre-trial order, "even if objected to, Thrift cannot, and indeed did not, argue that admission of evidence on this issue caused any surprise." Thrift, 44 F.3d at 356 n.12. The Fifth Circuit also observed that a party's pleadings need not specify in detail every possible theory of recovery but need only plead sufficiently to give the defendant fair notice of the claim and the facts upon which it rests. Id. at 356. Finally, in determining that the trial court had not abused its discretion in determining that both claims were sufficiently pled, the Fifth Circuit stated that "while it is arguable whether the pleadings adequately distinguished between two causes of action, the pretrial order clearly identified both
For these reasons, the Court concludes that Farooqi's fraudulent inducement claim against Carroll was sufficiently pled to give Carroll fair notice of this claim and the facts upon which it rests.
A fraudulent inducement claim arises when a party is induced to enter into an agreement through fraud or misrepresentation. A claim for fraudulent inducement shares the same elements as a simple fraud claim, Amouri v. Southwest Toyota, Inc., 20 S.W.3d 165, 168 (Tex.App.-Texarkana 2000); DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 688 (Tex.1990), which are: (1) that a material misrepresentation was made that was false; (2) that was either known to be false when made or was asserted without knowledge of its truth; (3) that was intended to be acted on; (4) that was relied on; and (5) that caused injury. Amouri, 20 S.W.3d at 168-69; Formosa Plastics Corp. USA v. Presidio Engineers & Contractors, Inc., 960 S.W.2d 41, 47 (Tex.1998).
A misrepresentation is a false statement of fact or a promise of some future performance made with the intent not to perform. Eagle Properties, Ltd. v. Scharbauer, 807 S.W.2d 714, 723 (Tex. 1990); Trenholm v. Ratcliff, 646 S.W.2d 927, 930 (Tex.1983). To be a "material" misrepresentation, the statement must have induced Farooqi to enter into a transaction that he would not have entered into but for the representations. See, e.g., Reservoir Sys., Inc. v. TGS-NOPEC Geophysical Co., L.P., 335 S.W.3d 297, 305 (Tex. App.-Houston [14th Dist.] 2010); Am. Med. Int'l v. Giurintano, 821 S.W.2d 331, 338 (Tex.App.-Houston [14th Dist.] 1991).
Here, the alleged misrepresentations are (i) Carroll's statements about his willingness to provide full and prompt disclosure of all information necessary for Farooqi to obtain financing for his purchase of the Las Colinas Salad Bowl, and (ii) Carroll's statements that the Opt-Out Provision of the Option Agreement was not limited in time to the 30-days otherwise provided for in the Option Agreement. Based on the credible evidence presented at trial, the Court concludes that each of these statements was a misrepresentation and each of these misrepresentations was material.
Farooqi, Caddell and Marshall all testified that Carroll repeatedly represented to Farooqi that Inc. would provide any and all information necessary for Farooqi to obtain financing for his purchase of the Las Colinas Salad Bowl. Inc., acting through Carroll, did not provide the requested information. In fact, no documents were produced until the last day of the option period and what was produced on that date was a document Farooqi had been given before the Option Agreement was ever signed—i.e., the Financial Disclosure Document. There is no question based upon the evidence introduced at trial that Farooqi would not have signed the Option Agreement without this material misrepresentation by Carroll.
Farooqi and Caddell also testified that Carroll repeatedly represented to Farooqi that the Opt-Out Provision of the Option Agreement was not limited to 30 days.
Accordingly, the first element of a fraudulent inducement claim has been proven with respect to the Misrepresentations.
With respect to the Misrepresentations, the Court finds, based on its review of the credible evidence, that Carroll made the Misrepresentations with knowledge of their falsity. First, Carroll knew at the time he made the representation about producing needed information that he would not do so. As the testimony at trial established, Marshall began requesting information immediately. Despite repeated continuing assurances by Carroll that he would produce the requested information, not a single new document was produced during the 30-day option period. While Carroll's failure to provide the requested information, by itself, is insufficient evidence of his intent not to perform, that failure is a fact that can be considered with other circumstantial evidence to establish intent. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434-35 (Tex.1986).
Here, Caddell testified that the Salad Bowl Entities were having financial difficulties. Caddell testified that he was managing cash on a daily basis—reducing food orders at certain locations and negotiating with vendors to keep supplies in the restaurants.
Moreover, the Court finds, based upon its review of the credible evidence, that Carroll knew that he wouldn't return Farooqi's money even if one or both of the conditions was satisfied. Once again, the fact that this representation by Carroll was false when it was made is evidenced, at least in part, by Carroll's subsequent conduct. Based upon the circumstances found above, the Court finds that Carroll acted with fraudulent intent. Farooqi testified that he would not have signed the Option Agreement prior to his financing being approved without repeated assurances from Carroll that (i) Farooqi would be provided with any and all information required to complete his loan application, and (ii) Farooqi could opt out of the Option Agreement at any time and receive a return of his money if his financing wasn't approved. Instead, when Farooqi asked for a return of his $25,000 after his loan application was denied by New England Commercial, Carroll initially told Farooqi that it was too late to request a return of those funds because the Option Agreement had expired.
Further evidence of Carroll's fraudulent intent was shown by Carroll's past dealings with other prospective franchisees. For example, Caddell testified that Carroll attempted to sell a Salad Bowl Café in Roanoke, Texas to Joe Leszko ("Leszko") in the spring of 2009. According to Caddell, Leszko paid Carroll $12,000 for the option to purchase that Salad Bowl Café. When Leszko was unable to obtain his financing, Carroll repeatedly promised that he would return Leszko's money. However, Carroll never returned the $12,000.
With respect to each of the statements discussed above, the Court finds that Carroll made the Misrepresentations with the intent that Farooqi rely upon them, so as to induce Farooqi to sign the Option Agreement and pay Inc. a $25,000 franchise fee. As noted previously, Farooqi was concerned about his ability to obtain final loan approval within the 30-day time period provided by the initial draft of the Option Agreement. In an effort to convince Farooqi to go ahead and sign the Option Agreement, Carroll represented that he would cooperate fully in Farooqi's efforts to obtain financing by providing the information Farooqi needed to get his loan approved and, when Farooqi continued to express concerns over the 30-day time period provided in the Option Agreement, Carroll added the Opt-Out Provision, which he assured Farooqi would allow Farooqi to get a refund of his monies at any time if (i) Carroll (acting on behalf of Inc.) failed to provide requested information, or (ii) Farooqi's loan application was denied. On this record, there is no question that Carroll intended that Farooqi rely upon the Misrepresentations.
To prevail here, Farooqi must show that he actually relied on the Misrepresentations and that he was justified in doing so. Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex.2010). Based upon the credible evidence at trial, the Court finds that Farooqi actually relied on the Misrepresentations.
As noted previously, Farooqi is not particularly well educated or sophisticated. In fact, he comes across as a very nice, but naive, individual. Farooqi had never negotiated to purchase a business before and he relied heavily on others to assist him. For example, Farooqi wanted Marshall to come to his meetings with Carroll because he viewed her as his "financial advisor," when she was really just a loan broker.
For Farooqi's reliance to be justified, he is not required to show that he acted reasonably in relying on the Misrepresentations. Lewis v. Bank of Am. NA, 343 F.3d 540, 546 (5th Cir.2003). However, Farooqi cannot recover if he blindly relied on misrepresentations that would have been obviously false given a cursory investigation. Id. But, "it is only where, under the circumstances, the facts should be apparent to one of [plaintiff's] knowledge and intelligence from a cursory glance, or he has discovered something which should serve as a warning that he is being deceived, that he is required to make
Here, as just noted, Farooqi was an unsophisticated and naive purchaser, with no meaningful and/or relevant business experience. There is no evidence to suggest that Farooqi should have known that he was being misled by Carroll. Thus, even though Farooqi took the Misrepresentations at face value, Farooqi's reliance on the Misrepresentations was justified given his lack of knowledge and experience and his general lack of sophistication. Moreover, given Carroll's and Caddell's failure to disclose the Hinshaw Lawsuit prior to the signing of the Option Agreement, there were no "red flags" readily apparent that required Farooqi to make a further investigation.
Accordingly, the Court finds that Farooqi was justified in his reliance on the Misrepresentations.
The credible evidence at trial clearly established that Farooqi would never have signed the Option Agreement if he had known that the Misrepresentations were false. Moreover, that evidence clearly established that Farooqi was injured as a result of his reliance on the Misrepresentations.
Farooqi seeks to recover the following alleged damages: (i) $25,000 for the franchise fee; (ii) $4,500 for the loan processing fee with New England Commercial; (iii) $17,500 for lost wages between February and June, 2010; (iv) $6,114 in moving expenses; (v) $25,000 for mental anguish; and (vi) $200,000 in punitive damages under § 41.008 of the Texas Civil Practice and Remedies Code. The goal of direct measures of damages is to make the plaintiff whole. Henry S. Miller Co. v. Bynum, 836 S.W.2d 160, 162 (Tex. 1992). In order to recover actual or compensatory damages, Farooqi must prove that he suffered an actual loss due to Carroll's wrongful conduct. R.G. McClung Cotton Co. v. Cotton Concentration Co., 479 S.W.2d 733, 737 (Tex.Civ.App.Dallas 1972). Farooqi must show the extent of any injury he sustained and the amount of the damage sustained. Eberley v. First Nat'l Bank of Stanton, 272 S.W.2d 532, 538 (Tex.Civ.App.1954). Or, as stated by the Texas Supreme Court in Arthur Anderson & Co. v. Perry Equipment Corp., 945 S.W.2d 812, 816 (Tex. 1997), "[d]irect damages are the necessary and usual result of the defendant's wrongful act; they flow naturally and necessarily from the wrong. Direct damages compensate the plaintiff for the loss that is conclusively presumed to have been foreseen by the defendant from his wrongful act." When measuring direct or actual damages, the issue is not what Farooqi would have gained had Carroll's representations been true, but what Farooqi lost by being deceived. George v. Hesse, 100 Tex. 44, 93 S.W. 107, 107-08 (1906).
The Perry Equipment court went on explain consequential damages: "[c]onsequential damages, on the other hand, result naturally, but not necessarily from the defendant's wrongful acts. Under the common law, consequential damages need not be the usual result of the wrong, but must be foreseeable,
Finally, in Formosa Plastics Corp. v. Presidio Engineers and Contractors, 960 S.W.2d 41, 47 (Tex.1998), the Texas Supreme Court held that fraudulent inducement claims, even those related to contracts, sounded in tort and were eligible for exemplary damages even if the damages sustained by the plaintiff were purely economic.
With these legal principals firmly in mind, the Court finds that Farooqi was damaged by his reliance on the Misrepresentations. However, not all of Farooqi's requested damages are recoverable here as will be explained below.
Farooqi's direct damages are limited to (i) the $25,000 Farooqi paid to Inc. under the Option Agreement, and (ii) the $4,500 Farooqi paid to New England Commercial as a loan application fee. These damages "flow naturally and necessarily from the wrong" in that Farooqi would not have signed the Option Agreement or applied for a loan for his purchase of the Las Colinas Salad Bowl had Carroll not made the Misrepresentations. These are the amounts Farooqi lost by being deceived by Carroll.
Certain other damages sought by Farooqi are consequential damages—i.e., (i) the $17,500 of lost wages between February and June, 2010, and (ii) the $6,114 in moving expenses. The Court concludes that these damages are not recoverable because they were not foreseeable or directly traceable to Carroll's wrongful acts. The wrongful acts here are the Misrepresentations, which related only to Farooqi's ability to opt-out of the Option Agreement and get his $25,000 back. The Misrepresentations did not guarantee Farooqi that he would be successful in purchasing the Las Colinas Salad Bowl. Farooqi's decision to quit his job in New York City and move to Texas when he did were decisions he made independent of his reliance on the
Farooqi also seeks to recover damages of $25,000 for his mental anguish. In order to recover mental anguish damages in Texas, a plaintiff is required to show proof of feeling depressed, confused, frightened, angry or scared or show changes in physical appearance and demeanor. Higginbotham v. Allwaste, Inc., 889 S.W.2d 411, 417 (Tex.App.-Houston [14th Dist.] 1994). In Phar-Mor, Inc. v. Chavira, 853 S.W.2d 710, 712 (Tex.App.-Houston [1st Dist.] 1993), the court held that "[m]ental anguish is defined as intense pain of body or mind or a high degree of mental suffering. Mental anguish is something more than mere worry, anxiety, vexation or anger. It is more than disappointment, resentment or embarrassment."
Here, Farooqi testified that he was embarrassed as a result of his loan being denied because he was forced to go on food stamps.
Finally, Farooqi seeks to recover exemplary damages under section 41.008 of the TEX. CIV. PRAC. & REM. CODE. That section provides a formula limiting the amount of exemplary damages that may be awarded and provides:
TEX. CIV. PRAC. & REM.CODE ANN. § 41.008 (West 2009). Farooqi seeks damages of $200,000 under this section.
In turn, section 41.003 sets forth the standard for recovering exemplary damages and provides, in relevant part, that: "(a) ... exemplary damages may be awarded only if the claimant proves by clear and convincing evidence that the harm with respect to which the claimant seeks recovery of exemplary damages results from: (1) fraud...." TEX. CIV. PRAC. & REM.CODE ANN. § 41.003(a) (West 2003). Finally, "[i]n determining the amount of exemplary damages, the trier of fact shall consider evidence, if any, relating to: (1) the nature of the wrong; (2) the character of the conduct involved; (3) the degree of
Based upon its review of the credible evidence, the Court finds that Farooqi has satisfied the statutory requirements necessary for an award of exemplary damages. He has proven, by clear and convincing evidence, that the harm for which he seeks a recovery of exemplary damages resulted from Carroll's fraud. Thus, Farooqi is entitled to an award of exemplary damages. The only remaining question is the amount of exemplary damages the Court should award.
Here, the "wrong" is Carroll's fraudulent inducement of Farooqi's execution of the Option Agreement by making the Misrepresentations (and Carroll's taking of Farooqi's $25,000 knowing that he would not return the funds to Farooqi even if the conditions to the return were satisfied). In making the Misrepresentations, Carroll took advantage of someone he knew to be naive and unsophisticated and who he knew trusted him. Carroll was completely culpable and there was no credible evidence presented at trial that mitigated his conduct. Carroll's conduct offends a public sense of justice and propriety. However, Carroll has filed for relief under chapter 13 of the Bankruptcy Code and has a modest net worth based upon the information contained in his bankruptcy schedules. Moreover, according to Carroll, the Salad Bowl Entities are now defunct,
For all of these reasons, the Court concludes that Farooqi has proven his fraudulent inducement claim against Inc., the entity on whose behalf Carroll was acting when he negotiated the Option Agreement, and has proven his entitlement to a recovery of $88,500 on this claim, comprised of Farooqi's economic damages of $29,500 and exemplary damages of $59,000.
Farooqi also alleges that Carroll violated the DTPA,
Under Texas law it is clear that "only a consumer has standing to maintain a private cause of action...." Flenniken v. Longview Bank & Trust Co., 661 S.W.2d 705, 706 (Tex.1983). See also Knight v. Int'l Harvester Credit Corp., 627 S.W.2d 382, 388 (Tex.1982); Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 538 (Tex. 1981); Riverside Nat'l Bank v. Lewis, 603 S.W.2d 169, 173 (Tex.1980). The DTPA excludes wholly intangible property rights because intangibles do not qualify as goods or services. "The statutory definition of `goods' indicates an obvious legislative intent to exclude the purchase of intangibles from the scope of the DTPA." Hand v. Dean Witter Reynolds, Inc., 889 S.W.2d 483, 497 (Tex.App.-Houston [14th Dist.] 1994, writ denied); Moody Nat'l Bank v. Texas City Development Ltd., 46 S.W.3d 373, 379-80 (Tex.App.-Houston [1st Dist.] 2001); Lukasik v. San Antonio Blue Haven Pools, 21 S.W.3d 394, 402-03 (Tex. App.-San Antonio 2000, no. pet.).
The DTPA itself defines "consumer" as "an individual ... who seeks or acquires by purchase or lease, any goods or services...." TEX. BUS. & COM.CODE ANN. § 17.45(4) (West 2007). Accordingly, in order to be a "consumer," Farooqi must have been seeking to purchase or lease a good or service. In turn, the DTPA defines a "good" as "tangible chattels or real property purchased or leased for use," while a "service" is defined as "work, labor, or service purchased or leased for use, including services furnished in connection with the sale or repair of goods." TEX. BUS. & COM.CODE ANN. §§ 17.45 (1) and (2) (West 2007).
Thus, to determine if Farooqi was a "consumer," this Court must determine what, exactly, Farooqi was seeking to acquire. If Farooqi's central objective in his transaction with the Salad Bowl Entities and Carroll was the acquisition of goods or services, then Farooqi will be a "consumer," thereby satisfying the first statutory element. Flenniken, 661 S.W.2d at 705. If, however, Farooqi's central objective was merely the exchange of intangibles without seeking a good or service, then Farooqi would not qualify as a "consumer," and no claim under the DTPA would lie. Riverside Nat'l Bank, 603 S.W.2d 169 at 175.
Texas courts have held that the objective of any transaction must be examined from the perspective of the plaintiff. Flenniken, 661 S.W.2d at 707; see also Knight, 627 S.W.2d at 389 ("Knight's objective in the transaction was
Carroll argues that Farooqi is not a "consumer" under the DTPA because in the complained-of transaction Farooqi merely sought to acquire an option to purchase the Las Colinas Salad Bowl. In Carroll's mind, the Option Agreement, not the purchase of the Las Colinas Salad Bowl itself, was the transaction. And, according to Carroll, an option to purchase is considered an intangible in Texas because it merely grants a right and is not a good or service under the DTPA. Hand, 889 S.W.2d at 497-98. Therefore, according to Carroll, if the transaction at issue involved the purchase of an option and not the purchase of a franchise (or some other good or service), Farooqi is not a "consumer" under the DTPA.
Conversely, however, if Farooqi was seeking to acquire, among other things, a Salad Bowl franchise in his transaction with the Salad Bowl Entities and Carroll, he would be a "consumer" under the DTPA. Texas Cookie Co. v. Hendricks & Peralta, 747 S.W.2d 873, 876-77 (Tex.App.-Corpus Christi 1988, writ denied). As the court in Wheeler v. Box, 671 S.W.2d 75, 78-79 (Tex.App.-Dallas 1984, writ ref'd n.r.e.) held, "[a]lthough the [franchise] itself was an intangible, it encompassed both tangible personal property and services purchased for use in the function of the business. Indeed, we would have to adopt a very narrow and strained interpretation to conclude that the Boxes purchased neither tangible goods nor services."
Based upon its review of the credible evidence, the Court finds that Farooqi's objective from the outset of his relationship with the Salad Bowl Entities and Carroll was to acquire a Salad Bowl franchise; specifically, the Las Colinas Salad Bowl. Farooqi's objective was not to acquire just an option to purchase.
Moreover, important differences can be drawn between Hand, the primary case relied upon by Carroll, and this case. The contract at issue in Hand was an option contract for oil futures. The purchaser of the oil futures was seeking the right involved with a commodities option contract; that is, the right to buy something in the future at a set price. Generally speaking, the goal of options contracts is not to acquire the underlying good, but rather to acquire the right to purchase that good. It is the right, or option itself, that is valuable whether or not the purchaser actually wanted the oil. Here, however, Farooqi was not seeking the right to buy a
Finally, there is a line of cases in Texas, including the Flenniken case, which has held that where a plaintiff enters into an intangible contract with the end goal of acquiring a good or service, that plaintiff can be considered a consumer under the DTPA even though the contract was for an intangible. Texas courts have held that when a plaintiff has claims arising from a transaction where the ultimate objective of the transaction is the purchase of a good or service, a claim concerning the transaction also concerns the good or service for the purposes of the DTPA. See, e.g., Texas Cookie, 747 S.W.2d at 876-77 (finding that when eligible services were clearly an objective of a transaction that otherwise involved the acquisition of an intangible, the transaction at issue was covered under the DTPA). In the Flenniken case, the plaintiffs entered into a contract with a bank and exchanged intangibles. The bank accepted a note and an assignment of a mechanic's lien in return for financing the acquisition of a home. The Texas Supreme Court held that the plaintiffs were consumers under the DTPA because "from the Flennikens' perspective, there was only one transaction: the purchase of a house. The financing scheme Easterwood arranged with the bank was merely his means of making a sale ... the Flennikens did not seek to borrow money; they sought to acquire a house. The house thus forms the basis of their complaint." Flenniken, 661 S.W.2d at 707-08. In Knight v. International Harvester Credit Corp., the Texas Supreme Court overturned an appellate decision determining that the plaintiff was not a consumer because the sole basis for the complaint was the extension of credit for the purchase of a vehicle. Knight, 627 S.W.2d at 388. The Knight court held that the transaction needed to be viewed more broadly as a number of separate violations connected with the sale of a truck, which was clearly a good, even if each individual transaction may not have directly involved the good. The plaintiff had complained of a provision in the retail assignment contract that allegedly violated the DTPA. The Knight court held that the plaintiff had asserted a proper claim under the DTPA because the violations were connected with the sale of a good. Id. at 388-89.
Similar to the plaintiffs in Flenniken, Farooqi's ultimate objective in entering into the Option Agreement was the purchase of goods and services—i.e., the Las Colinas Salad Bowl, which included a franchise, a real property lease, equipment, and services from one or both of the Salad Bowl Entities as franchisor. Similar to the plaintiff in Knight, Farooqi's DTPA claims arose from a document signed while entering into a transaction connected to the sale or purchase of an eligible good or service. Farooqi testified that he understood the Option Agreement to mean only that Carroll would hold the Las Colinas Salad Bowl for him while he obtained a commercial loan to fund the remainder of the agreed upon purchase price. Farooqi and Carroll had negotiated a total purchase price for the Las Colinas Salad Bowl, and Farooqi frequently referred to the $25,000 option payment as a franchise fee or a down payment.
For all of these reasons, the Court concludes that Farooqi was a consumer under the DTPA.
Section 17.46(a) of the DTPA provides that "false, misleading, or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful and are subject to action by the consumer protection division...." Subsection (b) then goes on to define certain specific acts as "false, misleading, or deceptive" including "representing that an agreement confers or involves rights, remedies, or obligations which it does not have or involve, or which are prohibited by law." TEX. BUS. & COM.CODE ANN. § 17.46(b)(12) (West 2007).
While analyzing Farooqi's fraudulent inducement claim, the Court found that Carroll made the Misrepresentations, one of which was misrepresenting the duration of the Opt-Out Provision. Specifically, and as noted previously, Carroll repeatedly assured Farooqi that the Opt-Out Provision of the Option Agreement would permit Farooqi to receive a return of his $25,000 at any time, notwithstanding the 30-day limitation contained in the Option Agreement, if one of two conditions was satisfied: (i) Inc., acting through Carroll, did not provide requested information, or (ii) Farooqi's loan application was denied. See supra pp. 4-8. Texas courts have held that oral misrepresentations concerning the terms of a written contract are actionable under the DTPA. See, e.g., Best v. Ryan Auto Group, Inc., 786 S.W.2d 670, 671-72 (Tex.1990).
The Court also found, in the context of analyzing Farooqi's fraudulent inducement claim, that Farooqi actually and justifiably relied on the Misrepresentations, one of which was misrepresenting the duration of the Opt-Out Provision, when he signed the Option Agreement. See supra pp. 31-33. Thus, detrimental reliance has also been established.
Accordingly, Farooqi has established a claim under § 17.46(b)(12) of the DTPA.
Section 17.46(b)(24) sets forth another of the specific acts defined as "false, misleading or deceptive;" specifically, "failing to disclose information concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed." Here, Farooqi complains of Carroll's failure
In the Hinshaw Lawsuit, Carroll, Caddell and Gangler were sued for allegedly making fraudulent misrepresentations in connection with a Salad Bowl transaction. Specifically, the Hinshaws asked for, among other things, declaratory relief that any agreements made by them had been rescinded, are void and ordering a return of approximately $122,000 paid by the Hinshaws. Plaintiff's Exhibit 2. According to Farooqi, if he had known about the Hinshaw Lawsuit, he would not have done business with Carroll and the Salad Bowl Entities.
As a preliminary inquiry, this Court must determine whether Carroll had a duty to disclose the Hinshaw Lawsuit. When there is a duty to disclose information, silence is considered to be the equivalent of a false representation regarding the missing information. Myre v. Meletio, 307 S.W.3d 839, 843 (Tex.App.-Dallas 2010). A duty to disclose exists (i) when one voluntarily discloses information, the whole truth must be disclosed; (ii) when one makes a representation, new information must be disclosed when that new information makes the earlier representation misleading or untrue; and (iii) when one makes a partial disclosure and that disclosure conveys a false impression. Brown & Brown of Tex., Inc. v. Omni Metals, Inc., 317 S.W.3d 361, 384 (Tex.App.-Houston [1st Dist.] 2010).
Here, Carroll clearly had a duty to disclose the Hinshaw Lawsuit to Farooqi. In the Financial Disclosure Document Carroll represented that no litigation was pending, which therefore obligated him to disclose the entire truth about pending litigation once the Hinshaw Lawsuit was filed.
Based upon the credible evidence at trial, the Court concludes that Carroll failed to disclose the existence of the Hinshaw Lawsuit because he was concerned that if the Hinshaws' allegations were disclosed, it would cause Farooqi to walk away from any business dealings with him and the Salad Bowl Entities. In other words, the Court finds that Carroll failed to disclose the Hinshaw Lawsuit in order to induce Farooqi to (i) move forward with his intended purchase of the Las Colinas Salad Bowl, (ii) sign the Option Agreement, and (iii) pay the $25,000 franchise fee called for in the Option Agreement.
The Court is also satisfied that if Carroll had disclosed the Hinshaw Lawsuit, Farooqi would have refused to proceed forward with his attempt to purchase the Las Colinas Salad Bowl as he testified at trial.
Accordingly, Farooqi has established a claim under § 17.46(b)(24) of the DTPA.
Within the meaning of the DTPA, a "producing cause" of an injury is
Based upon the credible evidence at trial, the Court finds that Carroll's misrepresentation about the duration of the Opt-Out Provision was a producing cause of damage to Farooqi, in that this misrepresentation was both a cause in fact and a substantial factor in causing at least a portion of Farooqi's damages, as will be explained below. Moreover, the Court finds that Carroll's failure to disclose the Hinshaw Lawsuit was a producing cause of at least a portion of Farooqi's damages too.
Farooqi seeks to recover the following alleged damages: (i) $25,000 for the franchise fee; (ii) $4,500 for the loan processing fee to New England Commercial; (iii) $17,500 for lost wages between February and June, 2010; (iv) $6,114 in moving expenses; (v) $25,000 for mental anguish; and (vi) $234,342 in multiple damages under the DTPA. The Court has already liquidated Farooqi's economic damages in connection with its analysis of Farooqi's fraudulent inducement claim and awarded him $29,500. See supra pp. 33-39. Those remain Farooqi's economic damages under the DTPA since under the DTPA, "economic damages" are defined as "compensatory damages for pecuniary loss, including costs of repair and replacement. The term does not include exemplary damages or damages for physical pain and mental anguish..." TEX. BUS. & COM.CODE ANN. § 17.45(11) (West 2007). Moreover, Farooqi's consequential and mental anguish damages under the DTPA suffer from the same flaws discussed in connection with Farooqi's fraudulent inducement claim.
Section 17.50(b) sets forth the measure of damages for claims under the DTPA, specifically claims under subsection (b) of § 17.46. It provides:
TEX. BUS. & COM.CODE ANN. § 17.50(b)(1) (West 2005). The Texas Supreme Court has held that the maximum amount of damages for a knowing violation of the
TEX. BUS. & COM.CODE ANN. § 17.45(9) (West 2007). Moreover, the DTPA defines "intentionally" as
TEX. BUS. & COM.CODE ANN. § 17.45(13) (West 2007).
This Court has already found that Carroll, acting on behalf of Inc., made the Misrepresentations while aware of their falsity and with the intent that Farooqi act in detrimental reliance on them. See supra pp. 28-31. Moreover, the Court finds that Carroll failed to disclose the Hinshaw Lawsuit knowing that by failing to disclose it he was deceiving Farooqi with the intent that Farooqi rely upon his deception. Because Carroll acted intentionally, treble damages are available here. When Farooqi's economic damages of $29,500 are trebled under the DTPA, the total amount of his recoverable damages is $88,500.
For all of these reasons, the Court concludes that Farooqi has proven his DTPA claim against Inc., the entity on whose behalf Carroll was acting when he negotiated the Option Agreement, and has proven his entitlement to a recovery of $88,500 on this claim, comprised of a trebling of Farooqi's economic damages of $29,500.
Farooqi has not pled any claims based on alter ego or piercing the corporate veil. Therefore, in order for Farooqi to recover here, he must be able to hold Carroll personally liable for any of the Misrepresentations Carroll made as an officer of Inc. With respect to Farooqi's fraudulent inducement claim, the law of agency allows Farooqi to hold Carroll personally liable for his damages despite Farooqi's failure to plead any claims of alter ego or veil piercing. Under Texas law, "[a] corporation's agent is personally liable for his own fraudulent or tortuous acts, even when acting within the course and scope of his employment." Sanchez v. Mulvaney, 274 S.W.3d 708, 712 (Tex.App.-San Antonio 2008); see Miller v. Keyser, 90 S.W.3d 712, 717 (Tex.2002); Ward Family Foundation v. Arnette (In re Arnette), 454 B.R. 663, 697 (Bankr.N.D.Tex.
With respect to Farooqi's DTPA claims, the result is the same. In Miller v. Keyser, 90 S.W.3d 712 (Tex.2002), the Texas Supreme Court held that because the DTPA allows a consumer to bring suit against "any person," an agent for a disclosed principal may be held personally liable for the misrepresentations he makes when acting within the scope of his employment. The Miller court noted that "[i]n Weitzel we concluded that when corporate officers make affirmative misrepresentations in connection with the sale of a home, the agents are personally liable under the DTPA even though they were acting on behalf of the corporation. Liability attaches because the officers themselves made the misrepresentations," id. at 717 (emphasis in original), "[a]gents are personally liable for their own torts. There is no basis for concluding differently based on the claims brought under the DTPA. Accordingly, we hold that an agent may be held personally liable for his own violations of the DTPA." Id. at 718 (citations omitted).
For these reasons, Carroll is personally liable for the damages caused by the Misrepresentations as liquidated above. See supra at pp. 33-39 and 49-51.
Farooqi bears the burden of proving, by a preponderance of the evidence, that the debts at issue are excepted from Carroll's discharge under section 523(a)(2)(A) of the Bankruptcy Code. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re Acosta, 406 F.3d 367, 372 (5th Cir.2005). Section 523(a)(2) provides that "a discharge under section 727 . . . does not discharge an individual debtor from any debt for money, property, services, or an extension, renewal, or refinancing of credit to the extent obtained by: (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." 11 U.S.C. § 523(a)(2)(A). As this Court noted in In re Arnette, 454 B.R. at 698, "[a]lthough the general purpose of the Bankruptcy Code is to provide debtors with a fresh start, `section 523(a)(2)(A) is not designed to protect debtors; rather it is designed to protect the victims of fraud.'" (citations omitted).
In In re Acosta, the Fifth Circuit set forth a five-part test for determining nondischargeability under section 523(a)(2)(A). In order for a debt to be nondischargeable under that section, Farooqi must show that: (i) Carroll made a representation; (ii) Carroll knew the representation was false; (iii) Carroll made the representation with the intention to deceive Farooqi; (iv) Farooqi actually and justifiably relied on the representation; and (v) Farooqi sustained losses as a proximate result of his reliance. 406 F.3d at 372. See also RecoverEdge, L.P. v. Pentecost, 44 F.3d 1284, 1293 (5th Cir.1995).
Here, Farooqi has established the elements of his fraudulent inducement claim. As this Court previously found: (i) Inc., acting through Carroll, made the Misrepresentations, which induced Farooqi to sign the Option Agreement; (ii) Carroll was aware the Misrepresentations were
Accordingly, the elements of section 523(a)(2)(A) have been satisfied regarding Farooqi's fraudulent inducement claim. The testimony at trial clearly established that Farooqi was damaged in the amount of $88,500 as a result of Carroll's fraud, which debt is nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code.
Farooqi's section 17.46(b)(12) DTPA claim is based on the same conduct as the fraudulent inducement claim. Inc., acting through Carroll, represented that the Opt-Out Provision in the Option Agreement conferred or involved rights, remedies, or obligations which it did not have or involve; specifically, that the Opt-Out Provision would allow Farooqi to receive a refund of his $25,000 if either of two conditions was satisfied. Carroll intentionally or knowingly made the representation and Farooqi relied on that representation when signing the Option Agreement. Farooqi was injured as a result of Carroll's representations about the rights conferred or involved. See supra pp. 45-46. And, as the Court concluded previously, Carroll is personally liable for this DTPA violation. See supra pp. 51-52.
Accordingly, the elements of section 523(a)(2)(A) have been satisfied regarding this DTPA claim. The testimony at trial clearly established that Farooqi was damaged in the amount of $88,500 as a result of Carroll's DTPA violation, which debt is nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code. See Cohen v. de la Cruz, 523 U.S. 213, 223, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) ("`Any debt . . . for money, property, services, or. . . credit, to the extent obtained by' fraud encompasses any liability arising from money, property, etc., that is fraudulently obtained, including treble damages. . .").
In his section 17.46(b)(24) claim, Farooqi alleges that Carroll failed to disclose the Hinshaw Lawsuit. While the Court has concluded that Farooqi proved his DTPA claim under § 17.46(b)(24), Farooqi sought to have this claim declared nondischargeable under the wrong provision of the Bankruptcy Code. As noted previously, the Franchise Disclosure Document and the statements contained therein are statements of the financial condition of an insider of Carroll and, as such, those damages would only be nondischargeable under section 523(a)(2)(B) of the Bankruptcy Code, which claim was not pled. See supra n. 52. Accordingly, any damages owing to Farooqi for Carroll's violation of section 17.46(b)(24) are dischargeable in Carroll's chapter 13 bankruptcy case.
Farooqi has proven the following claims against Inc.: (i) fraudulent inducement, with actual and exemplary damages of $88,500; and (ii) violation of § 17.46(b)(12) and § 17.46(b)(24) of the DTPA, with actual and exemplary damages of $88,500. Farooqi has also proven that Carroll is personally liable for Farooqi's damages. Because Texas law forbids double recovery,
A judgment consistent with this Memorandum Opinion will be entered separately.
Carroll's counsel also attacked Caddell's credibility as a witness due to the "falling out" Carroll and Caddell had when Caddell left the employ of the Salad Bowl Entities. Trial Record: Closing Argument of Carroll's Counsel, Nov. 8, 2011 at 3:29-30 p.m. Caddell testified that he and Carroll had been good friends (in fact he had been in Carroll's wedding party), but that he left the employ of the Salad Bowl Entities because Carroll refused to pay Caddell's attorney fees incurred during the Hinshaw Lawsuit, after promising to do so. Trial Record: Testimony of Caddell, Nov. 7, 2011 at 3:23-24 p.m. Notwithstanding this attack and the fact that the Court may not like Caddell's business ethics much either (as he sat in the room with Farooqi while Carroll made false misrepresentations to Farooqi that Caddell knew were false and said nothing after Caddell had been sued by the Hinshaws for alleged false misrepresentations), the Court found Caddell's trial testimony to be credible. He was relaxed on the witness stand, made eye contact with the Court when answering questions and seemed forthcoming even about events that implicated his own possible misconduct.
Section 17.50 goes on to define the damages measure available to consumers for violations of the DTPA.