MARVIN ISGUR, Bankruptcy Judge.
For the reasons set forth below, the Court grants, in part, and denies, in part, Defendants' Motions to Dismiss Plaintiffs' First Amended Complaint.
On December 23, 2008, Yazoo Pipeline Co., LP, Sterling Exploration & Production Co., LLC, and Matagorda Operating Co., LLC, (collectively, "Debtors") filed for chapter 11 bankruptcy relief before this Court. Sterling was an oil and gas exploration and production company. Yazoo was an oil and gas pipeline company; Yazoo's pipelines transported Sterling's and other companies' oil and gas to shore for delivery to purchasers. Matagorda was the general partner of Yazoo and the manager of Sterling. Defendant Charles Cheatham was the CEO and sole owner of Yazoo and Sterling, and the president, manager, and sole owner of Matagorda.
This adversary proceeding was commenced on December 2, 2010 by Joseph Hill, chapter 7 Trustee of the Debtors' estates; Mining Oil, Inc.; and Randall Sorrels
Plaintiffs' filed their First Amended Complaint (ECF No. 52) on February 28, 2011. On March 14, 2011, NCE, Morgan, Thibeaux, Gulf Coast, and Coastland responded by filing Motions to Dismiss the Amended Complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) (ECF Nos. 56-59).
The Court assumes the veracity of the well-pleaded facts in the First Amended Complaint for the purposes of this Memorandum Opinion
Before delving into Plaintiffs' specific allegations, it is useful to discuss the unorthodox manner in which the Debtors' cases were prosecuted. The Debtors' jointly administered chapter 11 cases were marred by numerous instances of delay, disobedience, and rose-colored projection. The Court briefly summarizes a few noteworthy examples to provide the underlying context in which Plaintiffs' allegations arose. These events, which unfolded before
On June 4, 2009, the Court issued the following Show Cause Order after Debtors repeatedly failed to file necessary documents with the Court:
Case No. 08-38121, ECF No. 196.
Furthermore, on June 9, 2009, the Court removed Cheatham from his management position with the Debtors due to his unauthorized diversion of estate assets:
Case No. 08-38121, ECF No. 207. See also Mot. to Borrow Hr'g Tr. 13:23-18:23, June 9, 2009.
Multiple instances of delay and erroneous projection were intrinsically related to the Debtors' dealings with NCE. NCE, whose business representative was Defendant Dave Morgan, was the Debtors' debtor-in-possession ("DIP") lender as well as
On April 16, 2009, Cheatham testified that NCE was prepared to pay up to $7,000.000.00 to purchase an 80% ownership interest in the Debtors. Mot. to Borrow Hr'g Tr. 22:20-23:25, April 16, 2009. This payment allegedly would have enabled the Debtors to pay all of their creditors in full. Id. at 22:20-25. Cheatham also testified that he expected to finalize a deal with NCE in the very near future. Id. at 57:8-58:3.
On April 23, 2009, the Court authorized the Debtors to borrow up to $300,000.00 in DIP financing from NCE.
On April 28, 2009, the Court approved the Debtors' First Amended Disclosure Statement.
Case No. 08-38121, ECF No. 160.
Just over a month later, Morgan reaffirmed NCE's ability to fund the Debtors' reorganization. See Mot. to Use Cash Collateral Hr'g Tr. 14:1-5, June 5, 2009 (Morgan answering "yes" after being asked, "if the plan is confirmed in the next few weeks, ... will [NCE] have the financial wherewithal to fund the closing of $7 million?"); see also id. at 14:23-15:1 (Morgan testifying that he was not at all worried about NCE's ability to fund $7,000,000.00).
Unfortunately, despite multiple attempts to do so (and multiple amendments to their bankruptcy plan), the Debtors were unable to confirm a plan of reorganization. The claims filed against the Debtors' estates and the post-petition expenses incurred by the Debtors allegedly chilled NCE's willingness to finalize the transactions proposed in the First Amended Disclosure Statement. See Confirm. Hr'g Tr. 8:1-12:20, June 30, 2009. There were also questions that arose concerning NCE's financial ability to actually consummate the transactions contemplated in the First Amended Disclosure Statement.
Overall, after over a six month interval (from April 28, 2009 to December 8, 2009), the Debtors did not get any closer to finalizing their deal with NCE. The deal remained in a perpetual state of being "right around the corner."
The Debtors also filed numerous budgets that (i) understated expenses, and/or (ii) erroneously indicated that the Debtors would be operating at a positive cash flow. See Mot. to Borrow Hr'g Tr. 76:6-78:4, April 16, 2009; Mot. to Borrow Hr'g Tr. 13:4-22, June 9, 2009; Mot. to Compel Hr'g Tr. 28:17-30:17, Dec. 8, 2009. The budgets repeatedly proved to be wildly inaccurate. The Debtors continually operated at a loss while the chapter 11 cases were pending. See also Mot. to Compel Hr'g Tr. 28:17-30:17, Dec. 8, 2009.
On December 8, 2009, the Court found that the Debtors' unsuccessful reorganization efforts had gone on long enough and converted the cases to chapter 7 bankruptcy proceedings. The Court's explanation for ordering conversion provides a summation of the Debtors' shortcomings throughout the pendency of their chapter 11 proceedings:
Mot. to Compel Hr'g Tr. 36:24-38:23, Dec. 8, 2009 (emphasis added).
For the purposes of this Memorandum Opinion only, the Court accepts the Plaintiffs' well-pleaded factual allegations as true. Iqbal, 129 S.Ct. at 1950. Any apparent factual findings or conclusions (that are based upon Plaintiffs' allegations) are dispositive only under the framework of a Rule 12(b)(6) motion, and Defendants will remain free to contest the underlying factual basis of all Plaintiffs' allegations in the future. See also Briggs v. Oklahoma ex rel. Dept. of Human Servs., 472 F.Supp.2d 1288, 1290 (W.D.Okla.2007) ("It is not the objective of Rule 12(b)(6) to formulate issues for trial [and] ... the Court's task at this stage `is not to weigh potential evidence that the parties might present at trial,' or decide whether [the plaintiff] will ultimately prevail against [the] defendant.") (quoting Tal v. Hogan, 453 F.3d 1244, 1252 (10th Cir.2006)).
As discussed below, the Plaintiffs' allegations include, among other things, claims that one or more of the Defendants: (i) diverted estate assets without Court authorization, (ii) misrepresented NCE's interest in the Debtors' assets, (iii) permitted a valuable oil and gas lease to lapse and then purchased the lease for their benefit through an unrelated entity, (iv) misappropriated Debtors' data, and (v) filed inaccurate and misleading budgets and monthly operating reports.
Plaintiffs allege that, by May of 2009, Cheatham had ceded his managerial control of the Debtors' operations to Morgan and Defendant John Thibeaux.
Morgan and Thibeaux also allegedly failed to disclose material business plans, discussed below, that were taking place outside of the Debtors' ordinary course of business.
Plaintiffs also claim that Morgan and NCE wrongfully prolonged the chapter 11 proceedings by misrepresenting NCE's intention to purchase the Debtors' assets. According to Plaintiffs, by July 2009, NCE had determined that it was not interested in purchasing the assets. Thereafter, Morgan nevertheless continued to represent NCE's desire to purchase the Debtors' assets. As a consequence of NCE's alleged misrepresentations, the Debtors' remained in chapter 11 well beyond the point at which they could have been successfully reorganized. Had NCE voiced its change of heart earlier, the Debtors bankruptcy cases could have been converted to chapter 7 before December 8, 2009 and unnecessary expenses may not have been incurred.
Plaintiffs further argue that Cheatham, Morgan, and Thibeaux permitted one of the estate's most valuable assets, a lease from the State of Texas of the north half of High Island State Tract 52 ("N/2 ST52"), to be transferred out of the Sterling bankruptcy estate. The contentions are implicitly based upon an alleged step-transaction in which the Defendants allegedly allowed the lease to expire with the intent of repurchasing the lease from the State of Texas. The allegations are complex and are repeated in this section merely to set forth the Plaintiffs' arguments.
Cheatham was the first individual to learn that there were significant and valuable oil and gas reserves under N/2 ST52. Once Morgan and Thibeaux gained control of the Debtors, they also allegedly learned (through the course of geologic studies of the Sterling properties at the Sterling estate's expense) that Sterling's best reserves were likely under N/2 ST52.
Cheatham, Morgan, and Thibeaux knew the N/2 ST52 lease was scheduled to expire on October 19, 2009. Cheatham was aware that the Debtors could avoid the expiration of the lease by asking the Texas General Land Office ("GLO") to "pool" the N/2 ST52 lease with its neighboring leases. No such request was made. Similarly, no one informed the Court or the Plaintiffs that one of the most valuable assets of the Sterling estate was about to expire. Instead, Cheatham, Morgan, and Thibeaux remained silent and allowed the lease to lapse.
In March of 2010, the GLO conducted a seal-bid auction for the N/2 ST52 lease. Thibeaux allegedly informed the Trustee that he was going to purchase the lease but failed to mention that the lease had been property of the Sterling estate. Defendant Gulf Coast, a company owned by Thibeaux and for which Cheatham was employed, won the auction and acquired N/2 ST52 for $323,000.00. The sale price was approximately seven times greater than the purchase price of adjacent leases.
Plaintiffs also claim that Defendants misused the estates' data. Thibeaux and Morgan caused the copying of Sterling's proprietary seismic data from computers owned by the bankruptcy estates. Morgan
According to Plaintiffs, Defendants used this data in various ways with the goal of benefitting themselves, not the bankruptcy estates. Defendant Coastland
Coastland and/or NCE also learned of Sterling's potential opportunity to acquire certain properties owned by Main Energy, Inc. Defendants would not have discovered this opportunity without Sterling's data. Coastland and/or NCE acquired certain Main Energy properties that should have been purchased on behalf of Sterling.
Based on the factual allegations summarized above, Plaintiffs assert the following causes of action against one or more Defendants: (i) "undue influence and breach of fiduciary duty," (ii) aiding and abetting a breach of fiduciary duty, (iii) conspiracy, (iv) fraud, (v) "conversion/unjust enrichment/self-dealing," (vi) respondeat superior, and (vii) avoidance of post-petition transfer. Plaintiffs also seek an injunction prohibiting the transfer of N/2 ST52 and any proprietary date previously owned by the bankruptcy estate.
Defendants NCE, Morgan, Coastland, Gulf Coast, and Thibeaux have filed Motions to Dismiss the Plaintiffs' Amended Complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).
Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." This standard "does not require `detailed factual allegations,' but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Iqbal, 129 S.Ct. at 1949 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). "A pleading that offers `labels and conclusions' or `a formulaic recitation of the elements of a cause of action will not do.'" Id. (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). "Nor does a complaint suffice if it tenders `naked assertion[s]' devoid of `further factual enhancement.'" Id. (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955).
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to `state a claim to
Overall, "[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Id. at 1950. This is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id.
For the reasons set forth below, the Court dismisses the following claims:
1. Plaintiffs' claim for undue influence against Thibeaux and Morgan;
2. Plaintiffs' claim for fraud against Gulf Coast and Coastland;
3. Plaintiffs' claim for fraud by nondisclosure against all Defendants (except Cheatham);
4. Plaintiffs' claim for conversion against all Defendants (except Cheatham); and
5. Plaintiffs' claim for self-dealing against all Defendants (except Cheatham).
All other relief sought in Defendants' Motions to Dismiss Plaintiffs' First Amended Complaint is denied.
The first count raised in Plaintiffs' Amended Complaint is against Cheatham, Morgan, and Thibeaux for "undue influence and breach of fiduciary duty."
The Court concludes that the Plaintiffs have stated plausible claims against Morgan and Thibeaux for breach of their fiduciary duties and, therefore, denies dismissal of those claims. Below, the Court also discusses the claim for breach of fiduciary duty against Cheatham. Cheatham has not filed a motion to dismiss and any analysis
The Court finds that Plaintiffs have failed to raise a plausible claim for undue influence against either Thibeaux or Morgan. Plaintiffs' undue influence claim against those two individuals is dismissed.
The Court finds that the Plaintiffs have raised plausible and specific claims for breach of fiduciary duty against Morgan and Thibeaux. This conclusion is based upon the First Amended Complaint's well-pleaded facts and the Court's experience with the Debtors' cases over the past two years.
The Court's analysis begins with a discussion of the plausibility of Plaintiffs' theory that Cheatham, Morgan, and Thibeaux controlled the Debtors. After establishing the plausibility of control, the Court examines Plaintiffs' theory that Cheatham, Morgan, and Thibeaux breached the fiduciary duties that accompanied their control over the Debtors. See Lange v. Schropp (In re Brook Valley VII, Joint Venture), 496 F.3d 892, 900 (8th Cir.2007) ("Debtors in possession and those who control them owe fiduciary duties to the bankruptcy estate.").
On June 9, 2009, the Court removed Cheatham from his management position with the Debtors and appointed Carlton— who was, essentially, the Debtors' accountant and bookkeeper—in Cheatham's place. Due to Carlton's inexperience in managing the Debtors' affairs, the Court finds it plausible that other, more experienced individuals exerted control of the Debtors, essentially filling the vacuum created by Cheatham's reduced role. According to Plaintiffs, Thibeaux and Morgan are two such individuals.
Morgan's alleged control of the Debtors is plausible. He was the representative of NCE, which was both the Debtors' DIP lender and the most active potential purchaser of the Debtors' assets.
Plaintiffs have attached a September 25, 2009 e-mail communication to their First Amended Complaint indicating that Morgan intended to exercise managerial control over the Debtors through Coastland. Pls.' Ex. 2. The e-mail, which was sent by Morgan to Cheatham's personal attorney, provided, in part, "[u]nder the acquisition structure, Coastland Operations, LLC, which is in the process of being transferred to an entity under my control, will be the `Advisor' under an Advisory Agreement with Sterling/Yazoo and manage the operations of Sterling/Yazoo...." See id. (emphasis added).
Moreover, according to Plaintiffs, Morgan controlled the Debtors' financial operations. During his period of control, Morgan oversaw the near doubling of the estates' post-petition expenses. Morgan allegedly spent approximately $1.4 million of cash collateral without Court authorization. Such expenditures are consistent with the woefully inaccurate budgets and monthly operating reports that the Debtors created throughout the chapter 11 proceedings.
Plaintiffs have plausibly alleged that Morgan controlled the Debtors.
The Court also finds plausibility in Plaintiffs' claim that Thibeaux controlled the Debtors by handling their oil and gas operations. Given Carlton's inexperience in handling the oil and gas operations (which were normally handled by Cheatham), it is plausible that another individual stepped in to fill Cheatham's shoes.
Thibeaux provided consulting services to NCE. Plaintiffs contend that Thibeaux was also an officer and/or employee of Coastland, the entity that (i) planned to manage the Debtors' operations, and (ii) purchased leases in Matagorda Bay with the assistance of the Debtors' data.
Thibeaux also owned and controlled VGHI Gulf Coast Holdings, LLC ("VGHI") and its venture partner, Gulf Coast. It was Gulf Coast that purchased the N/2 ST52 tract after the alleged suspicious expiration of Sterling's lease.
Given Plaintiffs' assertions concerning Thibeaux's close dealings with the Debtors and intimate familiarity with the Debtors' assets and operations, it is plausible that Thibeaux controlled the Debtors (and therefore entered into a fiduciary relationship with the Debtors).
Thibeaux nevertheless argues that a third party does not become a fiduciary to a debtor merely through exercising control over the debtor. Thibeaux quotes the Fifth Circuit's decision in U.S. Abatement Corp. in support of his theory: "[debtor] appears to assert that the mere existence of control or domination over the debtor gives rise to a fiduciary relationship. Such a theory would ... turn the law of fiduciary relationships on its head." U.S. Abatement Corp. v. Mobil Exploration & Producing U.S., Inc. (In re U.S. Abatement Corp.), 39 F.3d 556, 561 n. 5 (5th Cir.1994). However, upon a complete reading of the Fifth Circuit's opinion, it becomes evident that the level of control alleged in this case is distinguishable from the control at issue in U.S. Abatement. Thibeaux's reliance upon U.S. Abatement is misplaced.
The debtor in U.S. Abatement argued that Mobil owed it a fiduciary duty due to Mobil's "economic leverage" over the debtor. Id. at 562. There was no claim that Mobil actually controlled the debtor's operations; Mobil was simply a third party that had contracted to do business with the debtor. Id. at 561. The alleged control arose through a provision in the parties' contract that permitted Mobil to withhold payment in the event that subcontractors asserted liens against Mobil's property. Id. at 559. This provision was inserted to create "leverage to ensure that [debtor] paid off all subcontractors who might assert liens against Mobil's property." Id. (emphasis added). Mobil subsequently withheld payment, which inhibited the debtor's cash flow to the point it was forced to file bankruptcy. Id. at 562.
The Fifth Circuit held that, despite the influence Mobil possessed due to its contractual right to withhold payment, Mobil did not owe the debtor a fiduciary duty:
Id. (emphasis added).
The control at issue in this case is quite different from the economic leverage found in U.S. Abatement. Plaintiffs here allege that Thibeaux actually controlled the Debtors
Individuals who control a debtor-in-possession owe it a fiduciary duty. Lange, 496 F.3d at 900. The economic leverage in U.S. Abatement is distinguishable from the actual control that was (plausibly) exercised by Thibeaux over the Debtors.
The Court also finds it plausible that Cheatham, although removed by Court order from his management position with the Debtors, maintained some degree of control over the Debtors' operations. Cheatham was the Debtors' owner and he has demonstrated a willingness to flaunt Court orders in the past. This flaunting of Court orders included the unauthorized expenditure of estate property. The Court finds it plausible that—given the allegation of numerous unauthorized expenditures (by Morgan and Thibeaux) and the Court's awareness of the Debtors' failure to provide accurate budgets and monthly operating reports—Cheatham may have been the recipient or beneficiary of additional unauthorized transfers or expenditures after his removal. Cheatham also may have induced such expenditures and/or transfers.
Plaintiffs also allege that Cheatham was employed by (and possibly an officer of) Coastland and Gulf Coast, two companies with close ties to Thibeaux, Morgan, and, to some degree, the Debtors. Cheatham's superior knowledge of the Debtors' operations would have been valuable to those entities, Morgan, and Thibeaux.
Furthermore, the Court finds it plausible that Cheatham, the Debtors' principal, remained silent while the N/2 ST52 lease expired because he stood to benefit alongside Thibeaux and Morgan from the lease's expiration.
Accordingly, given Cheatham's relationships with the other Defendants, it is plausible that Cheatham continued to exercise some level of control or influence over the Debtors even after his removal on June 9, 2009.
The Court finds the allegations that Cheatham, Morgan, and Thibeaux breached the fiduciary duties they owed to the bankruptcy estates and their creditors are plausible. See Lange, 496 F.3d at 900; see also Wolf v. Weinstein, 372 U.S. 633, 649, 83 S.Ct. 969, 10 L.Ed.2d 33 (1963) ("[S]o long as the Debtor remains in possession, it is clear that the corporation bears essentially the same fiduciary obligation to the creditors as does the trustee for the Debtor out of possession.").
Individuals controlling a DIP owe it the duties of care and loyalty. Lange, 496 F.3d at 900. "The duty of care requires the fiduciary to make good-faith decisions that can be attributed to a rational business purpose." Id. "In general, courts do not second-guess business decisions made in good faith." Id. "The duty of loyalty comes into play when there appears to be a conflict between the interests of the fiduciary and the entity to which he owes loyalty." Id. "For a debtor in possession, this duty `includes an obligation to refrain from self-dealing, to avoid conflicts of interests and the appearance of impropriety, to treat all parties to the case fairly and to maximize the value of the estate.'" Id. at 900-01 (quoting 7 Collier on Bankruptcy ¶ 1107.02[4]).
If the allegations are true, the Court fails to see a rational business purpose behind quietly allowing a valuable asset to exit the bankruptcy estate without receiving any value in return. The irrationality of such conduct is exacerbated by the likelihood that the lease could have been retained by the estate at little expense (especially when considering the cost of retention compared with the potential value of the asset). Accordingly, the Court finds that the Plaintiffs have alleged a plausible claim that Cheatham, Morgan, and Thibeuax breached their duties of care when they let the N/2 ST52 lease expire.
Moreover, Plaintiffs allege that after Cheatham, Morgan, and Thibeaux failed to prevent the lapsing of the N/2 ST52 lease, a company with which they were affiliated, and then bid $323,000.00 to acquire the lease. The N/2 ST52 bid was over seven times greater than bids made on neighboring leases. This allegedly shows that the lease did have significant value, of which Cheatham, Morgan, and Thibeaux were aware, that should have been retained by the estate. The magnitude of the bid also allegedly demonstrates that the three individuals may have breached the duty of loyalty they owed to the Debtors. See id. at 901 ("Courts have held that managers of debtors in possession breached their duty of loyalty by ... participating as an undisclosed bidder at an auction of estate property.") (citations omitted). Clearly, such allegations indicate that Cheatham, Morgan, and Thibeaux put their own interests ahead of the Debtors' interests: they reduced the estates' value in order to maximize the profit Gulf Coast could generate through the development of the N/2 ST52 reserves. This constitutes a plausible claim for breach of the duty of loyalty.
Plaintiffs also claim that Morgan, Cheatham, and Thibeaux took other actions that breached their fiduciary duties. However, since the Plaintiffs have stated a plausible claim for breach of fiduciary duty arising from the expiration and acquisition of the N/2 ST52 lease, the Court need not consider whether other alleged facts would satisfy a claim for breach of fiduciary duty.
The Plaintiffs also assert a claim for undue influence against Thibeaux, Cheatham,
Plaintiffs fail to cite authority standing for the proposition that Thibeaux and Morgan, as individuals in control of the Debtors, could also have exerted undue influence over the Debtors. The authority cited by Plaintiffs does not directly address the tort of undue influence and the Court is unaware of the existence of such a cause of action under the circumstances alleged by Plaintiffs. See Fillion v. Troy, 656 S.W.2d 912, 915-16 (Tex.App.-Houston [1st Dist.] 1983, writ ref'd n.r.e.) (undue influence in the execution of a deed); 10 Tex. Jur.3d Cancellation and Reformation § 30 (undue influence in the formation of wills, deeds, and other instruments). Plaintiffs simply place the label of undue influence upon Thibeaux's and Morgan's conduct, but fail to elaborate upon either the elements or the applicability (based upon their factual allegations) of an undue influence claim. Thus, dismissal is appropriate.
The Court further finds that Plaintiffs' allegations fail to comport with the basic definition of an undue influence claim.
Undue influence is generally defined as that "dominion acquired by one person over the mind of another that prevents the latter from exercising his or her discretion, that destroys his or her free agency, and that compels such a person to do something against his or her will from fear, or from a desire of peace, or from some feeling that he or she is unable to resist." 31A TEX. JUR. 3d Duress and Undue Influence § 15. "In order to prove undue influence, one must demonstrate that `persuasion, entreaty, importunity, argument, intercession, and solicitation' were so strong as to `subvert and overthrow the will of the person to whom they are directed.'" Lee v. Hunt, 631 F.2d 1171, 1178 (5th Cir.1980) (quoting DeGrassi v. DeGrassi, 533 S.W.2d 81, 85 (Tex.Civ.App. Amarillo 1976, writ ref. n.r.e.)).
Plaintiffs fail to plead facts consistent with a claim of undue influence. Generally speaking, an undue influence claim arises when one individual unduly asserts his or her will over that of another individual who possesses some form of control or authority over a potential course of action. Here, however, Plaintiffs allege that Thibeaux and Morgan were the individuals with control over the Debtors; Plaintiffs do not allege that Thibeaux and Morgan exercised undue influence over another individual who was in control. This failure to allege influence over another individual is fatal to Plaintiffs' undue influence claim.
Moreover, the Court finds that it would have been impossible for Thibeaux and Morgan to have exerted undue influence directly over the Debtors. The Debtors are business associations that function in accordance with the dictates of those individuals who control them. Undue influence requires the exercise of one person's will over the will of another person. Thibeaux and Morgan could not have exerted undue influence directly over the Debtors because the Debtors did not have an independent will for Thibeaux and Morgan to unduly influence.
A claim for undue influence has not been properly alleged in the Plaintiffs' First Amended Complaint. The Court dismisses Plaintiffs' claim for undue influence against Thibeaux and Morgan.
Plaintiffs' second cause of action is against Morgan and Thibeaux for allegedly aiding and abetting Cheatham in breaching his fiduciary duties. The Court finds that Plaintiffs have stated a plausible claim
Under Texas law, "where a third party knowingly participates in the breach of duty of a fiduciary, such third party becomes a joint tortfeasor with the fiduciary and is liable as such." Meadows v. Hartford Life Ins. Co., 492 F.3d 634, 639 (5th Cir.2007) (quoting Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 514 (1942)). To establish a claim for knowing participation in a breach of fiduciary duty, a plaintiff must allege: "(1) the existence of a fiduciary relationship; (2) that the third party knew of the fiduciary relationship; and (3) that the third party was aware that it was participating in the breach of that fiduciary relationship." Id. (citations omitted). "Participating" in wrongful conduct includes "[i]instigating, aiding or abetting" such conduct. Cotten v. Weatherford Bancshares, Inc., 187 S.W.3d 687, 701 (Tex. App.-Forth Worth 2006, pet. denied).
As set forth above, it is plausible that Cheatham, the Debtors' principal, owed a fiduciary duty to the Debtors even after he was removed from his management position by order of this Court. This satisfies the "existence of a fiduciary relationship" requirement.
Morgan and Thibeaux also knew that Cheatham was the Debtors' owner and, before he was relieved of his duties, manager. It is, therefore, plausible that Morgan and Thibeaux had knowledge of Cheatham's fiduciary duties to the Debtors.
Finally, it is plausible that Morgan and Thibeaux instigated, assisted, aided, or participated in Cheatham's alleged breaches of the fiduciary duties he owed the Debtors. For instance, while employing Cheatham, Thibeaux's company acquired the N/2 ST52 lease. According to Plaintiffs, Thibeaux also informed the Trustee that Gulf Coast was purchasing the N/2 ST52 lease, but failed to mention that the lease was previously property of the estate. The Trustee was also unaware that Cheatham was employed by Gulf Coast. It is plausible that Thibeaux assisted Cheatham in breaching his fiduciary duties to the Debtors through Gulf Coast. Thibeaux allegedly made it possible for Cheatham to benefit from the estates' loss of the N/2 ST52 lease, which encouraged Cheatham to remain silent while the lease expired.
Similarly, the Plaintiffs allege that Coastland, a company formed by Morgan (and employing Thibeaux), used estate data to evaluate and purchase leases in Matagorda Bay. Morgan also allegedly intended to use (and may, in fact, have used) Coastland to manage the operations of the Debtors. Coastland employed Cheatham. It is plausible that Morgan assisted Cheatham in breaching his fiduciary duties by using Cheatham's services for the benefit of Coastland and at the expense of the Debtors. It is plausible that Coastland, like Gulf Coast, was a vector through which Cheatham, Morgan, and Thibeaux depleted estate assets.
Morgan may also have assisted Cheatham in breaching his fiduciary duties during the course of Morgan's representation of NCE. Plaintiffs allege that NCE continued to represent (to the Court and creditors) that it intended to purchase the Debtors' assets months after NCE informed the Debtors that it was not interested in doing so. According to Plaintiffs, these representations prolonged the pendency of the Debtors' chapter 11 cases beyond the point at which a successful reorganization would have been possible. Morgan, Thibeaux, and Cheatham may have benefited from the perpetuation of the chapter 11 proceedings because it enabled
Plaintiffs have stated a plausible claim that Morgan and Thibeaux knowingly participated in Cheatham's breaches of fiduciary duties. The Motions to Dismiss Plaintiffs' claim for aiding and abetting are denied.
Plaintiffs' third cause of action is for civil conspiracy against Cheatham, Morgan, and Thibeaux. The Court finds that Plaintiffs have stated a plausible claim for civil conspiracy against Morgan and Thibeaux.
"The essential elements [of civil conspiracy] are: (1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as the proximate result." Massey v. Armco Steel Co., 652 S.W.2d 932, 934 (Tex.1983). However, "merely proving a joint `intent to engage in the conduct that resulted in the injury' is not sufficient to establish a cause of action for civil conspiracy.'" Juhl v. Airington, 936 S.W.2d 640, 644 (Tex.1996) (quoting Triplex Commc'ns Inc. v. Riley, 900 S.W.2d 716, 719 (Tex.1995)). "Instead, `civil conspiracy requires specific intent' to agree `to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means.'" Id. (quoting Triplex, 900 S.W.2d at 719).
"Civil conspiracy is a separate cause of action that requires, inter alia, an underlying tort and a `meeting of the minds' among the coconspirator[s] `on the object or course of action' to be taken." Floyd v. Hefner, 556 F.Supp.2d 617, 659-60 (S.D.Tex.2008) (citation omitted). "By contrast, a cause of action under Cox and Kinzbach [for aiding and abetting] requires only the knowing participation of a party in a breach of a fiduciary duty and does not require a conspiratorial agreement." Id. at 660 (citations omitted).
The plausibility of Plaintiffs civil conspiracy claim is exemplified in the allegations surrounding the expiration and subsequent acquisition of the N/2 ST52 lease. First, the alleged conduct of Cheatham, Morgan, and Thibeaux easily satisfies the first two civil conspiracy requirements. Based on facts set forth above, Plaintiffs have levied a plausible claim that the three individual defendants worked together to accomplish their goal of acquiring the Sterling estate's most valuable asset, the N/2 ST52 lease.
It is also plausible that the three defendants reached a meeting of the minds. It is unlikely that Cheatham would have remained quiet while one of the most valuable assets of a company he owned and managed exited the bankruptcy estate, unless he stood to gain from the asset's departure. Plaintiffs contend that all three defendants also worked together at Coastland and Gulf Coast, two companies with a keen interest in Debtors' assets. The connection of the three individuals to Gulf Coast is particularly revealing since Gulf Coast eventually acquired the N/2
Next, it is plausible that Plaintiffs' civil conspiracy claim satisfies the fourth requirement: the intent to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means. Obviously, there is nothing inherently unlawful in a company's act of submitting the winning bid for an oil and gas lease through a GLO auction. However, given the Defendants' alleged breaches of their fiduciary duties (allegations that are not dismissed), it is plausible that Cheatham, Morgan, and Thibeaux accomplished a lawful purpose by unlawful means. If it was unlawful for the individuals to remain quiet while the N/2 ST52 lease expired, then it is of no consequence that the act of submitting a winning bid was potentially lawful. It is plausible that Cheatham, Morgan, and Thibeaux knew they could not acquire the N/2 ST52 tract without first (unlawfully) permitting the Sterling estate's N/2 ST52 lease to expire. Accordingly, the fourth civil conspiracy requirement is satisfied.
Finally, the Plaintiffs have easily established the plausibility of the fifth requirement, damages proximately caused by the conspiracy. The N/2 ST52 lease was a valuable estate asset, a fact demonstrated by Gulf Coast's willingness to pay in excess of $300,000.00 to acquire it. Plaintiffs also allege that significant oil and gas reserves were under the N/2 ST52 tract. It is, therefore, plausible that Plaintiffs were damaged when the estate's interest in the N/2 ST52 lease, which allegedly could have been inexpensively retained, quietly expired.
The Court finds that Plaintiffs have stated a claim for civil conspiracy against Cheatham, Morgan, and Thibeaux. The Motions to Dismiss Plaintiffs' civil conspiracy claim are denied.
Claims for fraud must be pled with particularity. Fed.R.Civ.P. 9(b). "What constitutes `particularity' will necessarily differ with the facts of each case and hence the Fifth Circuit has never articulated the requirements of Rule 9(b) in great detail." Guidry v. Bank of LaPlace, 954 F.2d 278, 288 (5th Cir.1992). However, it is well-settled that the particularity standard requires "specificity as to the statements (or omissions) considered to be fraudulent, the speaker, when and why the statements were made, and an explanation why they are fraudulent." Brown v. Bilek, 2010 WL 4561397, at *4 (5th Cir. Nov.12, 2010).
Plaintiffs have alleged claims for common law fraud and fraud by nondisclosure against Defendants. As set forth below, the Court grants, in part, and denies, in part, Defendants' Motions to Dismiss the Plaintiffs' fraud claims.
The elements of common law fraud are:
In re FirstMerit Bank, N.A., 52 S.W.3d 749, 758 (Tex.2001).
The Court finds that Plaintiffs have alleged plausible claims for fraud against Thibeaux, NCE, and Morgan.
After the Court converted the Debtors' cases, Thibeaux allegedly offered to purchase Debtors' assets from the Trustee through an Australian company named Petsec Energy Co. Thibeaux made the offer on Petsec letterhead. However, Plaintiffs claim that Thibeaux neither sought nor received authorization or approval from Petsec to submit such an offer to the Trustee. The Trustee believed that Thibeaux represented Petsec and contemplated a sale of assets to the company. The Trustee later learned that Thibeaux had no authority to act on behalf of Petsec. The Trustee was then forced to terminate a proposed sale to Petsec. It can be inferred from these facts that the Debtors were potentially harmed by the opportunity cost and administrative expense associated with the time spent contemplating the allegedly false Petsec offer submitted by Thibeaux.
These facts satisfy all of the elements needed for a plausible fraud claim. Since Plaintiffs have stated a plausible claim for fraud against Thibeaux, Thibeaux's Motion to Dismiss is denied.
The Court finds plausibility is satisfied in Plaintiffs' claim that Morgan and NCE committed fraud by misrepresenting NCE's intent to purchase the Debtors' assets.
On multiple occasions, including during hearings before this Court, NCE (through Morgan and its counsel) represented that it intended to purchase the Debtors' assets. Plaintiffs have now alleged, however, that by July 2009 NCE had decided not to purchase Debtors' assets. Thus, all of the representations to the contrary, which occurred after July 2009, were allegedly made by NCE with knowledge that they were false. For instance, Plaintiffs allege that on September 16, 2009, Morgan caused a commitment letter from H.E.B., LLC to be published to the Court stating that H.E.B. agreed to commit $4,650,000.00 to NCE to fund the new plan of reorganization. According to Plaintiffs, neither Morgan nor NCE intended to fund this new plan when Morgan made this representation.
It is also quite plausible that the representations were made with the intent to induce the Court and other creditors to act upon them. In fact, at this juncture, the Court fails to see any other reason why the statements would have been made. Without the prospect of a sale of the Debtors' assets to NCE, the case would most likely have been converted to chapter 7 much sooner. It was the hope of consummating a sale of assets to NCE that primarily kept the chapter 11 proceedings alive. Thus, the Court and the creditors— many of whom repeatedly chose to avoid conversion in the hope of receiving a larger payoff through a chapter 11 sale to NCE—acted in reliance upon these alleged misrepresentations.
The Court finds Plaintiffs have raised a plausible claim for fraud against NCE and Morgan. Dismissal of this claim is denied.
Plaintiffs have not raised plausible claims for common law fraud against Gulf Coast and Coastland. Even when taking the complaint's allegations as true, the complaint does not consist of factual allegations against Gulf Coast and Coastland that satisfy all of the elements of fraud. To the extent Plaintiffs asserted claims for fraud against Gulf Coast and Coastland, the claims are dismissed.
The elements of fraud by nondisclosure are:
7979 Airport Garage, L.L.C. v. Dollar Rent A Car Sys., 245 S.W.3d 488, 507 n. 27 (Tex.App.-Houston [14th Dist.] 2007, pet. denied).
The Court finds Plaintiffs have failed to state a claim for fraud by nondisclosure with particularity against Thibeaux, Morgan, NCE, Gulf Coast, or Coastland. Each claim for fraud by nondisclosure contains gaps in the necessary elements that must be alleged to survive a motion to dismiss. Similarly, the fraud by nondisclosure claims contain conclusory allegations which lack the specificity mandated by Rule 9(b). Accordingly, the Court dismisses the fraud by nondisclosure claims against Thibeaux, Morgan, NCE, Gulf Coast, and Coastland.
Plaintiffs seek to avoid the transfer of the N/2 ST52 lease to Gulf Coast under 11 U.S.C. § 549. Section 549 provides, in relevant part, that "the trustee may avoid a transfer of property of the estate ... that occurs after the commencement of the case; and ... that is not authorized under this title or by the court." 11 U.S.C. § 549(a). The Court finds Plaintiffs have raised a plausible avoidance action.
Gulf Coast argues that dismissal of the Plaintiffs' § 549 claim is proper because the transfer of the estate's interest in N/2 ST52 to the GLO was authorized under §§ 362(b)(10) and 541(b)(2). Section 362(b)(10) provides, in relevant part, that the automatic stay does not apply to "any act by a lessor to the debtor under a lease of nonresidential real property that has terminated by the expiration of the stated term of the lease ... during a case under this title to obtain possession of such property."
The Court finds, however, that an avoidance action could exist if the lease's expiration (and reversion back to the GLO) was part of an unlawful step-transaction designed to accomplish the transfer of N/2 ST52 to Gulf Coast. The step transaction doctrine, which is most commonly associated with tax cases but is also applicable in bankruptcy proceedings, provides that "multistep transactions can be collapsed when the steps of the transaction are `part of one integrated transaction.'" Sher v. SAF Fin., Inc. 2010 WL 4034272, at *7 (D.Md. Oct. 14, 2010) (quoting United States v. Tabor Realty Corp., 803 F.2d 1288, 1302 (3d Cir.1986)). See also Del Commercial Props., Inc. v. Comm'r., 251 F.3d 210, 213 (D.C.Cir.2001) ("Under the step-transaction doctrine, a particular step in a transaction is disregarded for tax purposes if the taxpayer could have achieved its objective more directly, but instead included the step for no other purpose than to avoid U.S. taxes."). Courts must consider the substance over the form of the transactions at issue in determining whether to treat what appear to be multiple transactions as one. See also Del Commercial Props., 251 F.3d at 214 ("Although taxpayers `are entitled to structure their transactions in such a way as to minimize tax,' there must be a purpose for the `business activity ... other than tax avoidance' and that purpose cannot be a `facade.'") (quoting ASA Investerings v. Comm'r, 201 F.3d 505, 513 (D.C.Cir.2000)).
In this case, Gulf Coast may have been able to purchase the estate's interest in the N/2 ST52 tract directly from the estate before the lease's expiration. Instead, Gulf Coast—a company which was controlled by (and the employer of) insiders of the Debtors—allegedly waited for the lease to lapse before acquiring it. Gulf Coast, Cheatham, Thibeaux, and Morgan were allegedly aware, based on information obtained from the Debtors, that the reserves under N/2 ST52 were potentially lucrative. Gulf Coast later bid over $300,000.00 for the lease, even though leases for neighboring properties sold for approximately one-seventh the price of N/2 ST52. These allegations beg the question of whether the Defendants only purpose for permitting the lease to lapse was to enable Gulf Coast's subsequent acquisition of the lease at a bargain price. If so, it is plausible that the estate could reclaim the lease under the step-transaction doctrine.
In sum, it is plausible that the Defendants' sole purpose in allegedly allowing the N/2 ST52 lease to lapse was to enable Gulf Coast to acquire it. This set of facts raises a plausible avoidance action under § 549 and the step-transaction doctrine. Gulf Coast's motion to dismiss Plaintiffs' § 549 avoidance action is denied.
Plaintiffs assert a claim under the headnote of "conversion/unjust enrichment/selfdealing." See ECF No. 52 ¶ 63. As in Section 1 above, the Court considers the claim as three separate causes of action.
"Conversion is the unauthorized and wrongful assumption and exercise of dominion and control over personal property of another, to the exclusion of or inconsistent with the owner's rights." Dorchester Gas Producing Co. v. Harlow Corp., 743 S.W.2d 243, 252 (Tex.App.-Amarillo 1987, writ dism'd by agr.). To prove conversion, a claimant must establish: "(1) it owned or had legal possession of the property or entitlement to possession, (2) the defendant unlawfully and without authorization assumed and exercised dominion and control over the property to the exclusion of, or inconsistent with, the claimant's rights, (3) the claimant demanded return of the property, and (4) the defendant refused to return the property." Hunt v. Baldwin, 68 S.W.3d 117, 131 (Tex.App.-Houston [14th Dist.] 2001, no pet.).
Plaintiffs claim that Morgan, Thibeaux, Gulf Coast, and Coastland converted the Debtors' data. Plaintiffs also claim that Thibeaux and Gulf Coast converted the Debtors' interest in N/2 ST52. Finally, Plaintiffs claim that all Defendants (except NCE) took the Debtors' business opportunities and that Morgan wrongfully used or took cash collateral.
As set forth below, Plaintiffs fail to state a claim for conversion.
Plaintiffs have failed to assert a plausible claim for conversion of the Debtors' data against Morgan, Thibeaux, Gulf Coast, and Coastland. These Defendants allegedly used the Debtors' information for the purpose of appropriating Debtors' business opportunities and interest in the N/2 ST52 lease. According to Plaintiffs, such use of Debtors' data was without authorization and inconsistent with the Debtors' rights. However, Plaintiffs fail to allege all of the elements necessary for a claim of conversion, namely that Debtors' demanded a return of the data and that Defendants refused the demand. Accordingly, the Court dismisses Plaintiffs' claim that Morgan, Thibeaux, Gulf Coast, and Coastland converted Debtors' data.
Plaintiffs also claim that Thibeaux and Gulf Coast converted the Debtors' interest in the N/2 ST52 lease. This claim must fail because (i) conversion only applies to interests in personal property, and (ii) the N/2 ST52 lease was an interest in real property.
"[I]nterests in oil and gas rights—such as working interests and royalty interests in oil and gas leases—are considered interests in real property." Trutec Oil & Gas v. W. Atlas Int'l., Inc., 194 S.W.3d 580, 583 (Tex.App.-Houston [14th Dist.] 2006, no pet.) (citations omitted). See also Russell v. Panhandle Producing Co., 975 S.W.2d 702, 708 (Tex.App.-Amarillo 1998, no pet.) ("[A]n interest in an oil and gas lease is deemed to be an
Plaintiffs fail to allege that Thibeaux and Gulf Coast converted oil or gas that had previously been removed from the land. In fact, Plaintiffs state that the N/2 ST52 lease was not producing at the time of the alleged conversion. Plaintiffs only claim that the N/2 ST52 lease itself was converted. This claim is without merit. The N/2 ST52 lease was an interest in real property and conversion only applies to personal property.
Accordingly, Plaintiffs have failed to state a claim for conversion of the N/2 ST52 lease.
Finally, Plaintiffs have failed to state a claim for conversion based upon the allegations that (i) Defendants took Debtors' business opportunities, and (ii) Morgan took Debtors' cash collateral. Plaintiffs fail to allege anything more than the conclusory statement that Morgan took cash collateral. Plaintiffs also fail to allege that they demanded a return of the business opportunities (or the cash collateral) from Morgan.
Thus, Plaintiffs have failed to state a claim for conversion of business opportunities or cash collateral. Plaintiffs' conversion claim is dismissed.
Plaintiffs have raised plausible claims for unjust enrichment against Morgan, Thibeaux, Gulf Coast, and Coastland.
Texas courts have recognized the existence of an independent cause of action for unjust enrichment. Cristobal v. Allen, 2010 WL 2873502, at *6 (Tex.App.-Houston [1st Dist.] July 22, 2010, no pet.) ("Although unjust enrichment is usually characterized as a basis for quantum meruit recovery, we have held that it can be an independent cause of action.") (citing Pepi Corp. v. Galliford, 254 S.W.3d 457, 460 (Tex.App.-Houston [1st Dist.] 2007, pet. denied)). Unjust enrichment is based upon the equitable principle that one who receives benefits unjustly must make restitution for those benefits. Id. "Unjust enrichment occurs when the defendant wrongfully secures a benefit or passively receives a benefit which would be unconscionable to retain." Id. A plaintiff may recover under the theory of unjust enrichment if the defendant "obtains a benefit from the plaintiff `by fraud, duress, or the taking of an undue advantage.'" Id.
Plaintiffs have raised a plausible claim for unjust enrichment against Thibeaux and Gulf Coast based upon the expiration
Plaintiffs have also raised a plausible claim for unjust enrichment against Morgan and Coastland based upon their use of the Debtors' data. Morgan reviewed and copied Sterling's proprietary data from computers owned by the bankruptcy estate. Plaintiffs contend that Morgan then used this information for the benefit of Coastland; for instance, to enable Coastland to acquire certain leases in Matagorda Bay. Thus, Morgan and Coastland unjustly benefited from Morgan's use of the Debtors' data for Coastland's benefit and at the Debtors' expense.
Plaintiffs have raised a plausible unjust enrichment claim against Thibeaux, Morgan, Coastland, and Gulf Coast. Those defendants' Motions to Dismiss this claim are denied.
Plaintiffs completely fail to elaborate upon their self-dealing claim in their Complaint. Plaintiffs do not provide a legal basis for their claims and provide only a minimal amount of factual information (in the portion of the complaint concerning self-dealing) that could be construed as relating to a claim for self-dealing. The Court is also unaware of the existence of an independent cause of action for self-dealing, apart from one which arises in the context of a breach of a duty. See, i.e., Occidental Permian Ltd. v. Helen Jones Found., 333 S.W.3d 392, 402 (Tex.App. 2011) ("The Texas Supreme Court has noted that the implied covenant to reasonably market oil and gas serves to protect a lessor from the lessee's self dealing or negligence.") (citations omitted); Franks v. Roades, 310 S.W.3d 615, 624 (Tex.App.-Corpus Christi 2010, pet. denied) ("A breach of fiduciary duty occurs when an attorney benefits improperly from the attorney-client relationship by, among other things, ... engaging in self-dealing...."); Manges v. Guerra, 673 S.W.2d 180, 183 (Tex.1984) (holder of executive right is obligated not to engage in self-dealing to the detriment of the non-executive mineral owners). The Plaintiffs' claims for breach of fiduciary duty have been discussed above and will not be reexamined here. To the extent Plaintiffs assert separate claims for self-dealing against defendants Morgan, NCE, Thibeaux, Gulf Coast, and Coastland, those claims are dismissed.
For the reasons set forth above and in accordance with Federal Rule of Civil Procedure 12(b)(6), the Court dismisses the following claims:
1. Plaintiffs' claim for undue influence against Thibeaux and Morgan;
2. Plaintiffs' claim for fraud against Gulf Coast and Coastland;
3. Plaintiffs' claim for fraud by nondisclosure against all Defendants (except Cheatham);
5. Plaintiffs' claim for self-dealing against all Defendants (except Cheatham).
All other relief sought in Defendants' Motions to Dismiss Plaintiffs' First Amended Complaint is denied.
A separate order consistent with this Memorandum Opinion will be issued.
Disclosure Statement Hr'g Tr. 12:11-23, July 29, 2009.
Furthermore, the Motions to Dismiss do not address Plaintiffs' claims for respondeat superior and injunctive relief. Accordingly, the Court need not consider whether dismissal of those claims is appropriate.
