Summers-Wood LP et al v Wolf et al

Filing 59

ORDER granting 32 Defendants' Motion to Dismiss. See the attached Memorandum of Decision. The Clerk is directed to close this case. Signed by Judge Vanessa L. Bryant on 11/6/09. (Engel, J.)

UNITED STATES DISTRICT COURT D IS T R IC T OF CONNECTICUT

S U M M E R S -W O O D LP d/b/a ROLY P O L Y TEXAS, SUMMERS-WOOD M AN AG E M E N T , LLC, JOHN W. S U M M E R S AND J. MICHAEL WOOD P la in tiffs , v. L IN D A WOLF AND JULIE REID, D e fe n d a n t.

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C IV IL ACTION NO. 3 : 0 8 -C V -8 4 7 (VLB) N o v e m b e r 6, 2009

M E M O R AN D U M OF DECISION AND ORDER GRANTING DEFENDANTS' MOTION TO DISMISS [Doc. #32] T h e Plaintiffs, Summers-Wood L.P. (d/b/a Roly Poly Texas), Summers-Wood M a n a g e m e n t L.L.C., John W. Summers and J. Michael Wood (collectively " P la in tiffs " or "Summers-Wood") brought this action against the Defendants, Linda W o lf and Julie Reid ("Defendants" or "Wolf and Reid"), alleging causes of action fo r fraud, interference with business or contractual relationships, breach of fid u c ia r y duty, violations of the Texas Deceptive Trade Practices Act (Tex. Bus. & C o m . Code § 17.565) and the Florida Franchise Act (Fla. Stat. § 817.416(2)), n e g lig e n c e , negligent misrepresentation, unfair competition, conversion, fraudulent c o n v e ya n c e , and breach of the covenant of good faith and fair dealing. The P la in tiffs seek a constructive trust, damages, interest, equitable relief and a tto r n e ys ' fees. Presently pending before the Court is the Defendants' motion to d is m is s for failure to state a claim upon which relief can be granted pursuant to F e d . R. Civ. P. 12(b)(6). For the reasons set forth below, the motion to dismiss [D o c . #32] is GRANTED.

I. Factual and Procedural Background T h e following facts are taken from the Plaintiffs' Complaint and documents o f public record that are incorporated therein by reference and are relevant to the m o tio n at bar. Wolf is the President and Reid is the Vice-President of Roly Poly F r a n c h is e Systems, LLC. ("Roly Poly"), a Georgia-based company. During the time p e r io d relevant to this case, the Defendants operated Roly Poly from their homes in J a c k s o n ville , and then Key West, Florida. The Defendants moved to Westport, C o n n e c tic u t in December 2006, more than one year before this case was filed. Plaintiffs John W. Summers and J. Michael Wood are Texas residents and c o n tr o llin g principals of Summers-Wood L.P. and Summers-Wood Management L L C . Both entities have their principal place of business in or around Dallas, Texas. T h e parties entered into a Master Development Agreement ("MDA") in late 2 0 0 1 o r early 2002, which granted the plaintiffs sub-franchise rights to sell Roly P o ly franchises in Texas. The parties' business relationship ultimately soured, a n d , in or about April 2005, Roly Poly terminated the MDA and filed suit against the P la in tiffs in Georgia. Thereafter, in July 2005, the Plaintiffs responded by filing suit in Texas against Roly Poly, and Wolf and Reid individually, alleging, inter alia, fr a u d , breach of contract, breach of fiduciary duty, interference with business or c o n tr a c tu a l relationships, violations of the Texas Deceptive Trade Practices Act, n e g lig e n t misrepresentation, and unfair competition. In addition to seeking d a m a g e s for these claims, the Plaintiffs sought a constructive trust, declaratory

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relief, punitive damages, and attorneys' fees. In the Texas action, the Plaintiffs a s s e r te d that Wolf and Reid were liable individually because they used the c o r p o r a te form of Roly Poly as a sham to perpetrate a fraud, thus permitting c o r p o r a te veil-piercing. Wolf and Reid objected to the Texas court's exercising jurisdiction over them o n a preliminary motion filed pursuant to Rule 120a of the Texas Rules of Civil P r o c e d u r e , which allows a defendant to enter a special appearance for the purpose o f challenging the personal jurisdiction of the Texas court. The Defendants argued th a t the court lacked jurisdiction over them on the basis of a Texas jurisdictional c o n c e p t known as the "fiduciary shield doctrine," which prevents corporate e m p lo ye e s from submitting themselves to Texas jurisdiction through acts c o m m itte d in Texas on behalf of a corporate entity. In connection with the special a p p e a r a n c e , the Plaintiffs conducted written discovery and took the deposition of e a c h defendant. The trial court also held an evidentiary hearing, during which the P la in tiffs offered the testimony of Plaintiff Wood. Following the hearing, the trial c o u r t denied the Defendants' special appearance. On appeal, the Court of Appeals of Texas, Dallas Division reversed the trial c o u r t's order denying Wolf and Reid's special appearance and rendered a judgment o f dismissal as to Wolf and Reid individually. See Wolf v. Summers-Wood, L.P., 2 1 4 S.W.3d 783, 793 (Tex. App. 2007). The Texas appellate court held that the P la in tiffs had "failed to plead or offer evidence of any facts establishing how Wolf a n d Reid purportedly used the corporate form of Roly Poly LLC to perpetrate fraud

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or how the corporate form was a sham or a fiction." Id. at 790. According to the a p p e lla te court, "Wood's testimony . . . did not establish facts or prove that Wolf a n d Reid used the corporation to perpetrate a fraud or that the corporate form was a fiction or sham. Nor did his testimony refute or contradict Reid's or Wolf's te s tim o n y regarding general jurisdiction or that Roly Poly LLC was not operated in a manner indistinguishable from her personal affairs or in a manner calculated to m is le a d those dealing with them to their detriment . . . Because appellees failed to m e e t their burden and Wolf's and Reid's testimony established that their individual c o n ta c ts were made solely as officers of and on behalf [of] Roly Poly LLC, we c o n c lu d e Wolf and Reid were protected by the fiduciary shield doctrine." Id. at 7919 2 . The case continued against Roly Poly, and is still pending in Texas court. The Plaintiffs thereafter filed a new action against Wolf and Reid in the C ir c u it Court for Escambia County (Pensacola), Florida. The case was removed to th e United States District Court for the Southern District of Florida on the basis of d iv e r s ity of citizenship, and was subsequently transferred to this Court on May 23, 2008. T h e Defendants filed the present motion to dismiss on June 26, 2008 [Doc. # 3 2 .]. They argue, among other things, that the Plaintiffs are barred from litigating th e ir case in this Court because their basis for liability against Wolf and Reid is that th e corporate form of Roly Poly is a sham and the Texas court in Wolf previously d e c id e d this issue in favor of the Defendants in the context of it's jurisdictional r u lin g . The Plaintiffs filed their opposition on July 28, 2008 [Doc. #40]. On

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December 11, 2008, this Court entered the following Order to Show Cause: The Court has examined the opinion of the Texas appeals court in the c a s e filed by the plaintiffs against the defendants in Texas, 214 S.W.3d 7 8 3 (Tex. App. 2007). That court determined that the plaintiffs failed to m e e t their burden to prove that the defendants are the alter ego of the d e fe n d a n ts ' company, Roly Poly. In this case, the plaintiffs appear to m a k e the same allegations against the defendants as they did in the T e x a s case. If the plaintiffs are making new allegations, the plaintiffs h a v e failed to explain w h y those allegations could not have been made in Texas. As the plaintiffs have already had an opportunity to litigate the is s u e , and now apparently wish to litigate the same issue in a new fo r u m , the plaintiffs are ordered to show cause why this case should not b e dismissed. The plaintiffs must brief that issue by 1/12/09, if they wish to pursue it, or the Court will dismiss the case. [Doc. #44] T h e Plaintiffs filed a response to the Court's Order to Show Cause on J a n u a r y 12, 2009 [Doc. #45]. In their response, the Plaintiffs assert that the Texas c o u r t's decision in Wolf was an interlocutory decision on the issue of personal ju r is d ic tio n only under Rule 120a of the Texas Rules of Civil Procedure. This rule a llo w s a defendant to enter a special appearance for the sole purpose of c h a lle n g in g the personal jurisdiction of the Texas court. According to the P la in tiffs , the text of the rule itself is dispositive of this Court's inquiry: Any motion to challenge the jurisdiction provided for herein shall be h e a r d and determined before a motion to transfer venue or any other p le a or pleading may be heard. No determination of any issue of fact in c o n n e c tio n with the objection to jurisdiction is a determination of the m e r its of the case or any aspect thereof. T e x . R. Civ. P. 12a(2). The Plaintiffs argue that, because the Texas appellate c o u r t's ruling in Wolf was a preliminary decision on the issue of jurisdiction only, th e y did not have the opportunity to litigate the corporate sham issue in the Texas c o u r t and cannot be barred from proceeding against Wolf and Reid in this Court o n the basis of the Texas court's jurisdictional ruling. 5

The Defendants argue in opposition that, although the Texas appellate c o u r t's jurisdictional ruling was not a ruling on the merits, Texas courts frequently m u s t resolve issues of fact when deciding whether there is a basis to exercise ju r is d ic tio n over the defendants. When a Plaintiff fails to present sufficient e v id e n c e to support an issue of fact necessary to establish a basis for jurisdiction a n d that basis for jurisdiction is also the basis for liability, such a finding may p r e c lu d e liability. Here, the Defendants assert, the Plaintiffs were provided ample o p p o r tu n ity for discovery and investigation in seeking to meet their burden of d e m o n s tr a tin g that the corporate form of Roly Poly was a sham in the Texas case. Since they were unable to establish corporate veil-piercing at the jurisdictional s ta g e in the Texas case, they cannot possibly establish liability in the present case b e c a u s e the burden of proof is lower at the jurisdictional stage. II. Discussion T h e United States Supreme Court recently reexamined the standard g o ve r n in g a motion to dismiss for failure to state a claim. "Under Federal Rule of C iv il Procedure 8(a)(2), a pleading must contain a `short and plain statement of the c la im showing that the pleader is entitled to relief.'" Ashcroft v. Iqbal, 129 S. Ct. 1 9 3 7 , 1949 (2009). While Rule 8 does not require detailed factual allegations, "[a] p le a d in g that offers labels and conclusions or a formulaic recitation of the e le m e n ts of a cause of action will not do. Nor does a complaint suffice if it te n d e r s `naked assertion[s]' devoid of `further factual enhancement.' To survive a m o tio n to dismiss, a complaint must contain sufficient factual matter, accepted as tr u e , to `state a claim to relief that is plausible on its face.' A claim has facial 6

plausibility when the plaintiff pleads factual content that allows the court to draw th e reasonable inference that the defendant is liable for the misconduct alleged." Id. (internal citations omitted). T h e doctrine of collateral estoppel, or issue preclusion, provides that "once a court has decided an issue of fact or law necessary to its judgment, that d e c is io n may preclude relitigation of the issue in a suit on a different cause of a c tio n involving a party to the first case." Burgos v. Hopkins, 14 F.3d 787, 789 (2d C ir . 1994) (quoting Allen v. McCurry, 449 U.S. 90, 94 (1980)). Pursuant to the full fa ith and credit statute, 28 U.S.C. § 1738, the preclusive effect of a state court r u lin g is determined by examining the law of the state where the ruling was made. Kulak v. City of New York, 88 F.3d 63, 71 (2d Cir. 1996). In Texas, "[t]o invoke the d o c tr in e of collateral estoppel, a party must show that: (1) the facts to be litigated in the second action were fully and fairly litigated in the first action; (2) those facts w e r e essential to the judgment in the first action; and (3) the present parties were a d v e r s a r ie s in the prior action." Norrell v. Aransas County Navigation Dist. No. 1, 1 S.W.3d 296, 302 (Tex. App. 1999). With respect to the first prong, a review of the record shows that the fact to b e litigated here was fully and fairly litigated in the prior Texas action. "[A]n issue h a s only been litigated, for purposes of collateral estoppel, if it was `properly r a is e d , submitted for determination, and determined.'" Indemnity Ins. Co. v. City o f Garland, 258 S.W.3d 262, 271 (Tex. App. 2008). In order to prove the D e fe n d a n ts ' liability in this action, the Plaintiffs would have to pierce the corporate v e il by showing that the corporate form of Roly Poly was a sham used by Wolf and 7

Reid to perpetrate a fraud. The Plaintiffs failed to establish that fact in the Texas c o u r t, despite having had the opportunity to conduct discovery and present their c a s e at an evidentiary hearing. See Wolf, 214 S.W.3d at 790. The Plaintiffs state in c o n c lu s o r y fashion that they did not have a full opportunity to litigate the c o r p o r a te sham issue because the Texas court's determination was made at a p r e lim in a r y stage of the litigation. However, they fail to articulate any specific r e a s o n s why the opportunity they were provided was inadequate or what evidence th e y expect to gather through discovery in this case in order to meet their burden o f establishing corporate veil-piercing. Notably, notwithstanding the discovery they were permitted in the Texas c a s e , the Complaint in this case fails to allege any facts at all to support the P la in tiffs ' claim that Wolf and Reid used the corporate form of Roly Poly as a sham to perpetrate a fraud. Instead, the Plaintiffs' only allegations relating to the c o r p o r a te sham issue constitute a series of conclusory statements and legal c o n c lu s io n s without supporting facts. See Complaint, ¶ 9.1 As the United States

Paragraph 9 of the Complaint alleges, in pertinent part: "Defendants used th e corporate form of Roly Poly Franchise Systems, LLC to protect them from in d ivid u a l liability for wrongful, fraudulent and tortious acts personally committed b y them or at their insistence. The corporate form of Roly Poly Franchise S ys te m s , LLC is a sham being used by these Defendants to perpetrate fraud and to r tio u s interference and other tortious acts on Plaintiffs. It is the specific intent o f these acts to perpetrate fraud, interference with business and contractual r e la tio n s h ip s and other tortious acts as more specifically alleged herein. Adherence to the corporate fiction of Roly Poly Franchise Systems, LLC to shield D e fe n d a n ts Wolf and Reid from their individual acts would promote injustice and le a d to an inequitable result. The cloak of corporate fiction is being used by these D e fe n d a n ts as a shield for fraud and other illegal and tortious activity. Consequently, Plaintiffs pray that the corporate existence of Roly Poly Franchise S ys te m s , LLC be disregarded and that the acts of Defendant Reid and Defendant 8

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Supreme Court has explained, "the tenet that a court must accept as true all of the a lle g a tio n s contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere c o n c lu s o r y statements, do not suffice." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2 0 0 9 ). Furthermore, the Court notes that, in their response to the Defendants' M o tio n to Dismiss, the Plaintiffs again failed to explain how they have sufficiently p le d facts to support their corporate sham theory, but instead simply block-quoted a n entire section of the Complaint. See Plaintiff's Response to Defendants' Motion to Dismiss, at 5-9 [Doc. #40-1]. Because the Plaintiffs have identified no basis for th e liability of Wolf and Reid other their corporate sham theory, dismissal is w a r r a n te d for this reason alone. T h e second prong of the collateral estoppel test requires that the facts at is s u e were essential to the determination of the prior action. In deciding whether p e r s o n a l jurisdiction could be exercised over Wolf and Reid, the Texas appellate c o u r t had to determine whether they were protected by the fiduciary shield d o c tr in e . See Wolf, 214 S.W.3d at 790 ("The fiduciary shield doctrine protects a n o n r e s id e n t corporate officer or employee from a trial court's exercise of [p e r s o n a l jurisdiction] when all of the individual's contacts with Texas were made o n behalf of the employer."). In order to make that judgment, the appellate court n e c e s s a r ily decided whether the corporate form of Roly Poly was a sham. Therefore, the second prong is satisfied.

W o lf be deemed by this court to be their own individual acts perpetrated for their o w n individual purposes." 9

Lastly, in order for issue preclusion to apply, the parties must have been a d v e r s a r ie s in the prior action. This part of the collateral estoppel test ensures th a t the persons against whom estoppel is being asserted have had a full o p p o r tu n ity to present and argue their case. Eagle Properties, Ltd. v. Scharbauer, 8 0 7 S.W.2d 714, 721 (Tex. 1990). The parties in the present action are exactly the s a m e as those who argued the corporate sham issue in the Texas court. Therefore, this prong is also satisfied. Nevertheless, the Plaintiffs argue that issue preclusion does not apply to th is case because findings made pursuant to a personal jurisdiction challenge c a n n o t be a determination of liability on the merits of the case. In support of their a r g u m e n t, the Plaintiffs cite Rule 120a of the Texas Rules of Civil Procedure, w h ic h provides that "[n]o determination of any fact in connection with the o b je c tio n to jurisdiction is a determination of the merits of the case or any aspect th e r e o f." As a general rule, the Plaintiffs are correct. Decisions made on ju r is d ic tio n a l issues are not decisions on the merits of a case. However, this g e n e r a lity is not dispositive of the present motion. T h e proper scope of the Texas appellate court's finding is embodied in the R e s ta te m e n t (First) of Judgments, § 49. The Restatement illustrates that ju d g m e n ts that are not on the merits of a case can and do have preclusive effect u p o n the issues actually decided. The pertinent section of the Restatement p r o v id e s that "[a]lthough, where a judgment for the defendant is not on the merits, th e plaintiff is not precluded from maintaining a new action on the same cause of a c tio n , he is precluded from relitigating the very question which was litigated in 10

the prior action." Restatement (First) of Judgments, § 49 Comment b (1942). As th e Fifth Circuit has explained, "the law is clear: a dismissal for [lack of ju r is d ic tio n ] while not binding as to all matters which could have been raised, is, h o w e v e r , conclusive as to matters actually adjudged." Equitable Trust Co. v. C o m m o d ity Futures Trading Comm'n, 669 F.2d 269, 272 (5th Cir. 1982) (internal q u o ta tio n marks omitted); see also Nichols v. Canoga Indus., 83 Cal. App. 3d 956, 9 6 7 (Cal. Ct. App. 1978) ("A dismissal for lack of jurisdiction is not res judicata and d o e s not . . . bar the relitigation of substantive issues raised except as to issues n e c e s s a r y for the determination of jurisdiction.") (internal citations omitted). Texas law is in accord with the Restatement. While the general rule in T e x a s is that determinations made for jurisdictional purposes do not decide the m e r its of the case, courts may and often must make findings that are related to an is s u e of liability. See, e.g., Hone v. Hanafin, No. 05-01-00897-CV, 2003 WL 2 2 0 2 0 7 7 8 , at *3 (Tex. App. Aug. 28, 2003) ([W]e disagree with [the] contention that in determining jurisdiction, the trial court can never make any finding that may r e la te to an ultimate issue . . . The fact that proof to defeat jurisdiction may also d is p r o v e an element of the plaintiff's cause of action cannot limit the right of the d e fe n d a n t to challenge jurisdiction."); Ross F. Meriwether Assocs., Inc. v. Au lb a c h , 686 S.W.2d 730, 732 (Tex. App. 1985) ("The fact that the showing of an a b s e n c e of the factual basis for exercise of jurisdiction also tends to show the a b s e n c e of liability . . . cannot in any way limit the right of defendant to establish th e non-existence of the essential jurisdiction fact."). In this case, the very q u e s tio n litigated in the Texas court was whether the corporate form of Roly Poly 11

is a sham used by Wolf and Reid to perpetrate a fraud. The decision that it is not, th o u g h made in the context of a ruling on jurisdiction, also relates to the ultimate is s u e of liability in the case at bar. Because that finding was necessary to the d e te r m in a tio n of jurisdiction and because the Plaintiffs had an opportunity to c o n d u c t discovery and participate in an evidentiary hearing on the corporate sham is s u e , they are precluded from relitigating the same question a second time. Without being able to prove their corporate sham theory in this Court, the P la in tiffs would be unable to establish the liability of Wolf and Reid, and thus, this a c tio n cannot stand. III. Conclusion B a s e d on the above reasoning, the Defendants' motion to dismiss [Doc. # 3 2 ] is GRANTED.

IT IS SO ORDERED.

/s/ Vanessa L. Bryant U n ite d States District Judge

D a te d at Hartford, Connecticut: November 6, 2009.

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