SM Energy Company v. Smackco Operating, LLC et al
ORDER granting in part and denying in part 44 Motion for Judgment on the Pleadings as set out; granting 59 Motion to Amend Complaint as to the Ltd but denied as to McMillan Ltd as set out. SM Energy's amended complaint shall be filed by 6/5/14. Signed by Judge Kristi K. DuBose on 5/29/2014. (cmj)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
SM ENERGY COMPANY,
SMACKCO OPERATING, LLC, et al,
CIVIL ACTION NO. 13-0594-KD-B
This action is before the Court on the motion for judgment on the pleadings or in the
alternative to dismiss for failure to join a necessary party, exhibits, and brief in support, filed by
defendants Smackco Operating, LLC, Thomas E. McMillan Jr., Estate of Ed Leigh McMillan II,
Elvira Tate Manley, Robert C. McMillan, Katherine Owens, Paul Owens and Roger Chapman (the
defendants) (doc. 44), the response filed by SM Energy Company (SM Energy) (doc. 53), and the
defendants’ reply (doc. 57). Upon consideration and for the reasons set forth herein, the motion is
GRANTED in part and DENIED in part.
This action is also before the Court on SM Energy’s motion for leave to amend the
complaint to join Smackco, Ltd. (the Ltd) and McMillan Ltd. as defendants (doc. 59). Upon
consideration and for the reasons set forth herein, the motion is GRANTED as to the Ltd but
denied as to McMillan, Ltd. Accordingly, SM Energy shall file its amended complaint on or
before June 5, 2014.
SM Energy and the Ltd. had an Offshore Operating Agreement (the OOA) for an offshore
oil and gas well - Vermillion 281. SM Energy was the operator and the Ltd was a working interest
or participating interest owner. After Hurricane Ike destroyed the well, SM Energy was required
to plug and abandon the well. Pursuant to the OOA, SM Energy invoiced the Ltd for its
proportionate share of the costs. SM Energy was instructed by the Ltd to send all invoices to
Smackco Operating, LLC (the LLC). Initially, the LLC paid the invoices, but then the Ltd refused
to pay its proportionate share of the costs. Neither the Ltd nor the LLC paid any more invoices.
In August 2011, SM Energy sued the Ltd and its general partner Coastal States
Exploration, Inc. (Coastal) in the Southern District of Texas, Houston Division, for breach of the
OOA and sworn account. Summary judgment was granted in favor of SM Energy and judgment
was entered against the Ltd and Coastal, jointly and severally. During post-judgment discovery,
SM Energy determined that the Ltd was a shell, with no assets, employees or bank account
because its assets had been transferred to the LLC. SM Energy then filed suit against the LLC and
the individual defendants in the Southern District of Texas, Houston Division. The action was
transferred to this District.
SM Energy brings four causes of action: claim A alleging alter ego / sham to perpetuate a
fraud against all defendants; claim B for suit on a sworn account against the LLC; claim C for
breach of contract against the LLC; and claim D for fraud against all defendants. Defendants have
now filed their motion for judgment on the pleadings and alternative motion to dismiss for failure
to join a necessary party.
The factual background is derived from the allegations in the complaint and construed in the
light most favorable to the SM Energy. Scottsdale Ins. Co. v. Pursley, 450 F. Appx. 888, 890 (11th
Pursuant to Rule 12(c), a party may move for judgment on the pleadings, after the
pleadings are closed. Fed. R. Civ. P. 12(c). “Judgment on the pleadings is proper when no issues
of material fact exist, and the moving party is entitled to judgment as a matter of law based on the
substance of the pleadings and any judicially noticed facts.” Interline Brands, Inc. v. Chartis
Specialty Ins. Co., --- F.3d ----, 2014 WL 1424432, *2 (11th Cir. April 15, 2014) (citing
Cunningham v. Dist. Attorney's Office for Escambia Cnty., 592 F.3d 1237, 1255 (11th Cir.2010)
(internal quotations marks omitted). Where the motion is based on allegations of failure to state a
claim upon which relief can be granted, it is evaluated the same as a Rule 12(b)(6) motion to
dismiss. See Sampson v. Washington Mut. Bank, 453 F. Appx. 863, 865 n. 2 (11th Cir.2011);
Strategic Income Fund, L.L.C. v. Spear, Leeds & Kellogg Corp., 305 F.3d 1293, 1295 n. 8 (11th
Cir.2002). In that regard, the allegations in the complaint must be accepted as true and the facts
and all inferences must be construed in the light most favorable to the nonmoving party. See
Scottsdale Ins. Co. v. Pursley, 450 F. Appx. 888, 890 (11th Cir. 2012). The complaint must
contain “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). To do so, the plaintiff must
plead sufficient facts that “allow the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173
L.Ed.2d 868 (2009). “Plausibility” in this context, must be more than a “sheer possibility that a
defendant has acted unlawfully,” and if the complaint alleges facts that are “merely consistent
with” liability, then the pleading “stops short of the line between possibility and plausibility of
‘entitlement to relief.’ ” Id. (citing Twombly, 550 U.S. at 557). Overall, the plaintiff must allege
more than “labels and conclusions” or a “formulaic recitation of the elements of [the] cause of
action”. Twombly, 550 U.S. at 555.
Additionally, the Court may not consider matters outside the pleadings without converting
the motion into a motion for summary judgment. Fed. R. Civ. P. 12(d).2 However, “[a] copy of a
written instrument that is an exhibit to a pleading is a part of the pleading for all purposes.” Fed.
R. Civ. P. 10(c). Thus the Court may consider any documents attached to the complaint. Also,
the Court may consider documents attached to an answer if the documents are “(1) central to the
Plaintiff's claim; and (2) undisputed, which “in this context means that the authenticity of the
document is not challenged.” Horsley v. Feldt, 304 F.3d 1125, 1134 (11th Cir.2002)
Claim B against Smackco Operating, LLC.
In claim B, SM Energy alleges a claim for sworn account seeking to hold the LLC liable
for the Ltd.’s account due to SM Energy and for the judgment entered in the Texas litigation.
(Doc. 1, p. 8) SM Energy argues that because of the LLC’s course of conduct - paying the Ltd.’s
invoices - it assumed the liability and obligation to pay the sworn account. The LLC argues that it
is due judgment on the pleadings because judicial estoppel applies to this claim.
Three factors typically inform the decision whether to invoke judicial estoppel: (1)
whether the present position is clearly inconsistent with the earlier position; (2)
whether the party succeeded in persuading a court to accept the earlier position, so
that judicial acceptance of the inconsistent position in a later proceeding would
create the perception that either the first or second court was mislead; and (3)
whether the party advancing the inconsistent position would derive an unfair
advantage. New Hampshire v. Maine, 532 U.S. 742, 750–51, 121 S.Ct. 1808, 149
L.Ed.2d 968 (2001)
Jaffe v. Bank of America, N.A., 395 Fed.Appx. 583, 587(11th Cir. 2010). The court finds
that judicial estoppel cannot be determined on the pleadings alone. Specifically, it is not
evident that SM Energy will derive an unfair advantage by advancing an inconsistent
“(d) Result of Presenting Matters Outside the Pleadings. If, on a motion under Rule 12(b)(6) or
12(c), matters outside the pleadings are presented to and not excluded by the court, the motion
must be treated as one for summary judgment under Rule 56. All parties must be given a
reasonable opportunity to present all the material that is pertinent to the motion.”
Claim C for breach of contract against Smackco Operating, LLC.
SM Energy alleges that the LLC’s “failure to pay the amounts due and owing constitutes a
breach of contract.” (Doc. 1, p. 9-10) As grounds, SM Energy alleges that the LLC “has the same
owners and managers” and “received the invoices and demands made to” the Ltd. (Id., p. 10) SM
Energy argues that it “has alleged that [the LLC] is liable for the breach of contract . . . because
[the LLC], through its conduct, had assumed that liability and that obligation to pay.” (Doc. 53, p.
To survive a Rule 12(b) motion, the complaint must contain “enough facts to state a claim
to relief that is plausible on its face.” Twombly, 550 U.S. at 570. To be facially plausible, the
plaintiff must plead sufficient facts that “allow the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged,” i.e., the brea ch of contract. Iqbal, 556 U.S. at 678.
SM Energy’s conclusory allegation that the LLC’s failure to pay the invoices constitutes a breach
of the OOA, presupposes the existence of a contract.3 However, SM Energy has failed to allege
SM Energy’s allegations focus on the breach of contract, alleging that “failure to pay the
amounts due and owing constitutes a breach of contract”, that the “breach of contract caused” SM
Energy’s damages”, and that the “damages were a natural, probably and foreseeable consequence”
of the breach. (Doc. 10, p. 9) The OOA contained a choice of law provision applying Texas law.
Under Texas law, “[t]he essential elements of a breach of contract action are: (1) the existence of a
valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of contract by
the defendant; and (4) damages sustained by the plaintiff as a result of the breach.” Smith Int'l,
Inc. v. Egle Group, LLC, 490 F.3d 380, 387 (5th Cir.2007); Aguiar v. Segal, 167 S.W.3d 443, 450
(Tex.App.-Houston [14th Dist.] 2005, pet. denied). The District Court in the Texas litigation
found that the Outer Continental Shelf Lands Act’s jurisdictional provisions trumped the choice of
law provision and therefore, applied Louisiana law. SM Energy Co. v. Smackco, Ltd., 2012 WL
4760841, *4 (S.D. Tex. Oct. 5, 2012). “Under Louisiana law, ‘[a] contract is an agreement by two
or more parties whereby obligations are created, modified, or extinguished’ . . . ‘A contract has the
effect of law between the parties.’ In order to prevail on a breach of contract claim, the plaintiff
must demonstrate three elements: (1) that the obligor undertook an obligation to perform; (2) that
the obligor failed to perform the obligation (the breach); and (3) that the failure to perform resulted
in damages to the obligee.” Walker v. Pelican Pub. Co., Inc., Civil Action No. 10–4389, 2011 WL
any facts from which a reasonable inference could be drawn that the LLC actually assumed the
OOA or that a new contract was formed between the LLC and SM Energy. Alleging that the Ltd
told SM Energy to send its invoices to the LLC and that the LLC paid some of the Ltd.’s invoices
is not sufficient to allege the formation of a contract or agreement. Accordingly, the LLC is
entitled to judgment as a matter of law as to SM Energy’s claim for breach of contract.
Claim A (alter ego) and Claim D (fraud) against all defendants - Statute of limitations
Defendants argue that the two year statute of limitation in Code of Alabama § 6-2-38(l) 4
began to run as early as July 2009 when SM Energy had knowledge that the LLC would not pay
any more of the Ltd.’s invoices, but no later than August 18, 2011, when with this knowledge SM
Energy filed suit against the Ltd. but not the LLC. (Doc. 44-1, p. 13) Specifically, defendants
argue that the invoices, billing statement, and demand letters among the Ltd, the LLC and SM
Energy from December 2009 through March 2011, “clearly would have provoked the inquiry of a
reasonable person5 as to the alleged fraud claims against the LLC. (Doc. 57, p. 9-10) Defendants
argue that because this suit was not filed until September 2013, that claim A (alter ego) and claim
D (fraud) are due to be dismissed.
2976271, *6 (W.D.La. July 22, 2011) (internal citations omitted). Under Alabama law, the
elements of a breach-of-contract claim are “(1) a valid contract binding the parties; (2) the
plaintiff’s performance under the contract; (3) the defendant's nonperformance; and (4) resulting
damages.” Shaffer v. Regions Fin.Corp., 29 So.3d 872, 880 (Ala.2009) (citations omitted). Thus,
under either jurisdiction, a breach of contract claim requires the existence of a valid contract
between the parties.
“All actions for any injury to the person or rights of another not arising from contract and not
specifically enumerated in this section must be brought within two years.” Ala. Code § 6-2-38(l).
Section 6–2–3, Ala.Code 1975, creates a “savings clause” regarding the accrual of a fraud claim.
The statute states as follows: “In actions seeking relief on the ground of fraud where the statute
has created a bar, the claim must not be considered as having accrued until the discovery by the
aggrieved party of the fact constituting the fraud, after which he must have two years within which
to prosecute his action.”
SM Energy responds that the fraud as plead is not the fact that the LLC initially paid the
invoices and then refused to pay, but instead is based on the misrepresentations that the Ltd “was
an active entity with employees and assets that would be responsible for its debts.” SM Energy
argues that it was not until post-judgment discovery (which the court presumes occurred
September 2011 or after) in the Texas litigation that it became aware of the misrepresentations.
Specifically, the fact that the Ltd. did not have assets or employees was not known until Paul
Owens was deposed and the general ledger of Ltd was produced.
In Dickinson v. Land Developers Const. Co., 882 So.2d 291 (Ala. 2003), the Supreme
Court of Alabama held that “a party will be deemed to have ‘discovered’ a fraud as a matter of law
upon the first of either the actual discovery of the fraud or when the party becomes privy to facts
that would provoke inquiry in a reasonable person that, if followed up, would lead to the discovery
of the fraud.” Id. at 298. Under Alabama law “[t]he question of when the party discovered or
should have discovered the fraud is generally one for the jury.” Wheeler v. George, 39 So.3d 1061,
1082 (Ala.2009). “The question of when a plaintiff should have discovered fraud should be taken
away from the jury and decided as a matter of law only in cases where the plaintiff actually knew
of facts that would have put a reasonable person on notice of fraud.” Id., at 1082-1083 (italics in
original) (finding that a receipt of an option agreement accompanied by an explanation regarding
the purchase of property were not circumstances from which the Court could find that plaintiffs
“actually knew of facts that would have put a reasonable person on notice of fraud.”).
There is no dispute of fact that SM Energy knew that the LLC initially paid the Ltd.’s debt
but then ceased. However, the Court cannot find that this fact alone was sufficient to “put a
reasonable person on notice of fraud” as plead in claim A and claim D. Accordingly, the Court
finds that at this stage of the litigation, these claims are not due to be dismissed based on statute of
limitations. Therefore, the motion for judgment on the pleadings based on a statute of limitations
defense as to Count A and Count D is denied.
Count A for alter-ego / sham to perpetuate a fraud
Defendants argue that SM Energy’s conclusory allegations that they exercised domination
and control over the Ltd because they were owners,6 are not sufficient to support a claim for alter
ego or piercing the corporate veil based upon a sham. Defendants also argue that the allegations
of a sham to perpetuate a fraud fail to meet the heightened pleading standard in Rule 9(b) of the
Federal Rules of Civil Procedure.
“Under Alabama law, a ‘separate corporate existence will not be recognized when a
corporation is so organized and controlled and its business conducted in such a manner as to make
it merely an instrumentality of another.” Canal Indem. Co. v. Regency Club Owners Ass'n, 924 F.
Supp. 2d 1304, 1312, 2013 WL 68933 (M.D. Ala. Jan. 7, 2013) (J. Fuller) (citation omitted). The
“determination of alter-ego status depends on the level of control one party has over another” and
that this is a “fact-intensive question” to be determined on a case-by-case basis. Id. at 1312. The
Supreme Court of Alabama has identified certain factors7 to consider in deciding whether to
Defendants point out that defendants Paul Owens and Roger Chapman have no ownership
interest in either the LLC or the Ltd. They argue that because SM Energy’s alleged theory is that
ownership equates with liability for the Ltd.’s debt and the ability to pierce the corporate veil, the
complaint does not state a claim for relief against Owens and Chapman.
“The Supreme Court of Alabama has emphasized that it is ‘impossible to catalogue the infinite
variations of fact that can arise but there are certain common circumstances which are important.”
Evntl. Waste Control, Inc. v. Browning–Ferris Indus., Inc., 711 So.2d 912, 914 (Ala.1997)
(quoting Duff v. S. Ry., 496 So.2d 760, 762–63 (Ala.1986)). These factors are: (1) one company
owns all or most of the capital stock of the other company; (2) the two companies have common
directors or officers; (3) one company finances the other company; (4) one company subscribes to
all the capital stock of the other company or otherwise causes its incorporation; (5) one company
has grossly inadequate capital; (6) one company pays the salaries and other expenses or losses of
the other; (7) one company has substantially no business or assets except that provided to it by
another company; (8) in the papers of one company or in the statements of its officers, the other
disregard the separate corporate existence and find that another entity was the entity’s alter ego.
But ultimately, the “[c]ourts will not apply alter-ego or instrumentality theories without sufficient
evidence of control.” Id. at 1313. In that regard, “the Alabama Supreme Court has found that a
mere overlap in management does not, by itself, result in a finding of alter-ego status. Similarly, a
loan of money from one company to another does not make the two companies liable for the
obligations of each other.” Id. (internal citations omitted).
Rule 9(b) requires that “[i]n alleging fraud or mistake, a party must state with particularity
the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). The Eleventh Circuit has
explained that “a plaintiff must allege: ‘(1) the precise statements, documents, or
misrepresentations made; (2) the time, place, and person responsible for the statement; (3) the
content and manner in which these statements misled the plaintiffs; and (4) what the defendants
gained by the alleged fraud.’” Am. Dental Ass'n v. Cigna Corp., 605 F.3d 1283, 1291 (11th
Cir.2010) (citation omitted)
With these factors in mind, the Court finds that SM Energy has failed to sufficiently plead,
against the McMillan family members, an alter-ego or sham to perpetuate a fraud claim. SM
Energy makes the conclusory allegations that the McMillans are the alter egos of the company,
perpetuated a fraud by keeping the Ltd as a shell or sham corporation and misrepresented this
status to SM Energy. However, these allegations “appear to be ‘threadbare recitations’ of factors
cited by [Alabama] courts in deciding whether to pierce the corporate veil.” Innotex Precision Ltd.
v. Horei Image Products, Inc., 679 F.Supp.2d 1356, 1360 (N.D.Ga.2009) (quoting Iqbal, 129 S.Ct.
company is described as a department or division of the first company, or its business or financial
responsibility is referred to as the first company's own; (9) one company uses the property of
another company as its own; (10) the directors or executives of one company do not act
independently but take orders from another company; (11) the formal legal requirements of a
subsidiary company are not observed.” Id. at 1313.
at 1949)). The only specific allegations against the McMillans role in the Ltd are that Thomas E.
McMillan was one of the “day-to day-managers” of the Ltd and that Ed Leigh McMillan, Robert
McMillan and Elvira Tate Manley “also served as managers or ‘bosses’”. (Doc. 1, p. 11) (There
are no allegations of management as to Katherine Owens.) The Court finds that SM Energy has
failed to allege sufficient facts from which a reasonable inference could be drawn that the
McMillans exercised control and domination over the Ltd such that they became its alter ego and
responsible for the debts. Therefore, the McMillans’ motion for judgment on the pleadings as to
claim A is granted.
SM Energy argues that it has alleged sufficient facts for an alter ego / sham to perpetuate a
fraud claim against Owens and Chapman8 because the degree of control over a corporate entity is
a question of fact and “in a small family-owned corporation, a supervisor could sufficiently
dominate and control the corporation so as to justify liability under an alter ego theory.” (Doc. 53,
p. 13) This argument is not well-taken since SM Energy has spent a good deal of its argument
pointing out that the McMillans have many corporate and trust interests, and thus, likely are not a
“small family-owned corporation.” But even if the Ltd was a “small family-owned corporation”,
SM Energy has failed to allege sufficient facts from which the Court could draw the reasonable
inference that Owens and Chapman exercised domination and control over the Ltd for them to be
its alter ego and responsible for its debt. Therefore, their motion for judgment on the pleadings as
to claim A is granted.
SM Energy alleges that Chapman was an employee of the Ltd, the LLC and that he also
managed Goodway Refining, LLC. SM Energy alleges that Owens was a manager of the LLC
and the Ltd, as well as Coastal Exploration, LLC, (the Ltd.’s co-defendant in the Texas litigation)
and that Owens testified as the corporate representative for the Ltd. (Doc. 1, p. 5-7, 11) SM
Energy does not allege that Owens or Chapman had an ownership interest in any of the McMillan
entities including the Ltd, or that Owens or Chapman personally paid any of the Ltd.’s debts, or
otherwise undertook to use the Ltd in a manner that would meet the relevant factors. See note 7.
However, accepting the allegations regarding the LLC as true and drawing all inferences in
favor of SM Energy, it appears that SM Energy has sufficiently pled a claim of alter ego and sham
to perpetuate a fraud as to the LLC under the Rule 12(b)(6) standard. Accordingly, the motion for
judgment on the pleadings as to claim A is denied as to defendant LLC.
Claim D for fraud - Failure to comply with Rule 9(b)
Defendants argue that the fraud claims in claim D fail to meet the heightened pleading
standard in Rule 9(b) of the Federal Rules of Civil Procedure because SM Energy has failed to
allege the time, date or substance of the alleged fraud or misrepresentation. Defendants also argue
that SM Energy failed to allege facts to support its allegation of a confidential relationship, which
is an essential element of any claim of concealment.
As an initial consideration, SM Energy alleges that “the Defendants” took certain actions
that constitute the fraudulent misrepresentation and fraudulent suppression. (Doc. 1, p. 10-11)
Pleading fraud without specificity as to the identity of the defendant and the specific action taken
by that defendant is not sufficient to meet the Rule 9(b) requirements.
SM Energy appears to allege two types of fraud: Fraudulent misrepresentation and
fraudulent suppression. As to the latter, SM Energy alleges that “defendants” failed to disclose
that the Ltd had no employees9 or assets and that the LLC would refuse to pay the Ltd.’s debts.
However, SM Energy has failed to allege any facts from which a reasonable inference could be
drawn that any of the defendants had a duty to disclose these facts. Under Alabama law, a claim
of fraudulent suppression requires a showing “(1) that the defendant had a duty to disclose
material facts; (2) that the defendant concealed or failed to disclose those facts; (3) that the
concealment or failure to disclose induced the plaintiff to act [or to refrain from acting]; and (4)
SM Energy alleges that Owens was present when Chapman testified regarding the employees.
(Doc. 1, p. 11)
that the defendant's action resulted in harm to the plaintiff.” Consolidated Const. Co. of Alabama
v. Metal Bldg. Components, L.P., 961 So.2d 820, 825 (Ala. 2007). As defendants point out, the
interactions between SM Energy and the defendants, in particular the Ltd, the LLC, Owens and
Chapman, were all arms-length business transactions. Therefore, to the extent that SM Energy has
alleged a claim of fraudulent suppression, the motion for judgment on the pleadings is granted as
to all defendants.
As to fraudulent misrepresentation, SM Energy alleges that during the Texas litigation,
Chapman testified at deposition that the Ltd had several employees including himself but during
the post-judgment deposition Owens testified that these same employees were employees of
McMillan, Ltd, were paid by McMillan, Ltd, and that “[t]hey also perform work for various
McMillan interests” including the LLC and Goodway Refining. (Doc. 1, ¶¶ 27, 45)
Defendants argue that SM Energy has failed to allege facts to support a claim that the LLC
or any of the individual defendants made any misrepresentation to SM Energy. (Doc. 44-1, p. 1517) In response, SM Energy argues that Chapman, Owens and the “defendants as owners and
controllers of” the LLC and the Ltd made the misrepresentations, “omissions and fraudulent
actions.” (Doc. 53. p. 10-11)
To establish the elements of fraudulent misrepresentation, SM Energy must show “(1) that
the representation was false, (2) that it concerned a material fact, (3) that it relied on the false
representation, and (4) that actual injury resulted from that reliance.” Consolidated Const. Co. of
Alabama v. Metal Bldg. Components, L.P., 961 So.2d 820, 825 (Ala. 2007). “To merit
consideration by a jury” claims of fraudulent misrepresentation “require some evidence of
reasonable reliance . . . upon the alleged false representation.” Maloof v. John Hancock Life Ins.
Co., 60 So.3d 263, 265 (Ala.2010).
SM Energy fails to tie any specific misrepresentation to any defendant other than
Chapman. SM Energy’s allegation that Chapman misrepresented the fact that the Ltd had
employees, which the Court must accept as true for purposes of this motion, could indicate that the
Ltd was a going concern with assets to at least pay the salary of four employees, is sufficient to
state a claim for fraudulent misrepresentation as to Chapman only.10 Therefore, to the extent that
SM Energy has alleged a claim of fraudulent misrepresentation, the motion for judgment on the
pleadings is denied as to Chapman but granted as to all other defendants.
Motion to dismiss for failure to add a necessary party under Rule 19
Defendants argue that in order to impose liability upon them, SM Energy must sufficiently
plead and prove that the Ltd was a fraudulent shell or sham corporation and that SM Energy
cannot do so because the Ltd is not a party to this action. SM Energy argues that it already has a
judgment against the Ltd and therefore the Ltd is not a necessary party.
However, SM Energy has now filed a motion for leave to amend its complaint to add the
Ltd. and McMillan, Ltd. as necessary parties. The Ltd is the entity as to which SM Energy seeks
to pierce the corporate veil and ascertain its alter ego. As such, it is a required party to the action
Fraudulent misrepresentation, as plead by SM Energy, does not require intent to defraud on the
part of Chapman. Code of Alabama § 6-5-101 defines two types of fraudulent misrepresentation:
“Misrepresentations of a material fact made willfully to deceive, or recklessly without knowledge,
and acted on by the opposite party, or if made by mistake and innocently and acted on by the
opposite party, constitute legal fraud.” (emphasis added); see Southern Energy Homes, Inc. v.
Washington, 774 So.2d 505, 512 (Ala. 2000) (“Except as to fraud claims based on
misrepresentations “made by mistake and innocently” (see § 6–5–101, Ala.Code 1975), in order to
succeed on a fraud claim the plaintiff must affirmatively establish: (1) a false representation
concerning an existing material fact; (2) the defendant's knowledge of the statement's falsity, the
defendant's recklessness with regard to the statement's truth or falsity, or the defendant's false
statement representing knowledge of the truth of the representation; (3) the plaintiff’s reliance on
the representation; and (4) damage as a proximate result of the reliance.”).
and the motion is granted as to the Ltd. See Fed. R. Civ. P. 19(a)(1)(A) (A “required party” is one
that in their absence, “the court cannot accord complete relief among existing parties[.]”)
As to McMillan Ltd., SM Energy alleges that McMillan Ltd. is the “official employer of
the persons who performed work for” the Ltd, the LLC and other “McMilla n interests” and that
there is an unwritten agreement by which McMillan Ltd. pays these employees. From this SM
Energy alleges “upon information and belief, McMillan Ltd. controls” the Ltd and the LLC “and is
the alter ego of both.” (Doc. 59) The gravamen of an action alleging that one entity is the alter ego
of another is to establish dominance and control over the corporate entity by another entity or
person. Paying the salaries of employees of another corporation is among the factors recognized
by the Alabama courts (see note 7, “(6) one company pays the salaries and other expenses or
losses of the other”). However, alleging this single factor is not sufficient to state a claim for
relief as to McMillan Ltd that is facially plausible. Therefore, the Court finds that while leave to
amend should be freely given when justice so requires, Fed. R. Civ. P. 15(a), granting leave to
amend the complaint to add McMillan Ltd. as a defendant would be futile in that the allegations
would be subject to a motion to dismiss. See Cockrell v. Sparks, 510 F.3d 1307, 1310 (11th Cir.
2007) (“Leave to amend a complaint is futile when the complaint as amended would still be
properly dismissed or be immediately subject to summary judgment for the defendant.”).
Accordingly, the motion for leave to amend as to McMillan Ltd. is denied.
DONE and ORDERED this the 29th day of May 2014.
/s/ Kristi K. DuBose
KRISTI K. DuBOSE
UNITED STATES DISTRICT JUDGE
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