The Weston Group Inc v. Southwest Home Health Care LP et al
Filing
132
Memorandum Opinion and Order re 44 Motion: The defendants' motion to dismiss is GRANTED as to the plaintiff's joint enterprise claim, and DENIED as to the plaintiff's veil-piercing claim. (Ordered by Senior Judge A. Joe Fish on 3/11/2014) (twd)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
THE WESTON GROUP, INC., a
Pennsylvania Corporation,
Plaintiff,
VS.
SOUTHWEST HOME HEALTH CARE,
LP, ET AL.,
Defendants.
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CIVIL ACTION NO.
3:12-CV-1964-G
MEMORANDUM OPINION AND ORDER
Before the court is the defendants’ motion to dismiss the plaintiff’s complaint
(docket entry 44). For the reasons stated below, the motion is granted in part and
denied in part.
I. BACKGROUND
A. Factual Background
This case involves the breach of a rehabilitation services contract. The
plaintiff, The Weston Group, Inc., provides rehabilitation services. Plaintiff’s Second
Amended Complaint (“Complaint”) ¶ 22 (docket entry 28). The defendant corporate
entities were in the business of providing home health services to clients. See id. ¶ 23.
Ronald Bowers, Kevin Ruark, and James Casey were limited partners in Southwest
Home Health Care, LP (“Southwest”), and they were also officers and members of
various of the related defendant entities: Southwest Home Health Care - Central
Texas, LP; Southwest Home Health Care of Dallas, LLC; Southwest Home Health
Care of Harris, LLC; SWHHC Management, LLC; SWHHC Management - Central
Texas, LLC; NBM Healthcare Resource, Inc.; Southwest Home Health Care of East
Texas, LLC; FHHS, LLC d/b/a Family Home Health Services, LLC; Family Home
Health Services, LLC; Southwest Home Health Care Services of Texas, LLC; and
Southwest Home Health Care Holdings of San Antonio, LLC. Id. ¶¶ 2-12, 17, 37-39.
In January 2010, Weston’s CEO, Nicole Volek, entered into a contract with
Ronald Bowers, the CEO of Southwest, to provide various therapy services at
Southwest’s Houston location. Id. ¶ 27. In April 2011, Weston and Southwest
signed another service contract, this time to provide service to Southwest’s Dallas,
San Antonio, and Round Rock locations. Id. ¶ 28. Weston performed on these
contracts and sent Southwest invoices for its services, but in November 2011,
Southwest stopped paying Weston. Id. Weston contacted Bowers to notify him
about the unpaid invoices on November 8, 2011. Id. ¶ 30.
In December 2011, Southwest reached an agreement with American Biocare,
Inc. (“ABC”) whereby ABC assumed the contracts and liabilities of Southwest’s
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Dallas, Houston, and Round Rock locations. Id. ¶¶ 31-32. Weston continued to
contact the individual defendants about the overdue payments, and also spoke to
John Clarke of ABC regarding payment. Id. ¶¶ 34-35. The defendants made
promises to “catch up” on what they owed Weston, but their payments continued to
be late and incomplete. Id. ¶¶ 34-36. In May 2012, Weston sent letters to Casey,
Bowers, Ruark, and Clarke demanding payment of the past-due sums, but Weston
received no responses or payments. Id. ¶¶ 40-41.
B. Procedural Background
The plaintiff first sued many of the corporate defendants on June 22, 2012,
seeking the money owed on the service contracts. See Plaintiff’s Original Complaint
and Jury Demand (docket entry 2). On July 2, 2012, Weston amended its complaint
to add some details and an additional claim. See Plaintiff’s First Amended Complaint
and Jury Demand (docket entry 8). Later, on February 5, 2013, Weston filed a
second amended complaint adding claims against the individual defendants, Kevin
Ruark, James Casey, and Ronald Bowers, and against FHHS, LLC; Family Home
Health Services, LLC; Southwest Home Health Care Holdings of Texas, LLC; and
Southwest Home Health Care Holdings of San Antonio, LLC. See Complaint at 5-7.
These “new defendants” filed a motion to dismiss on April 8, 2013. See Motion to
Dismiss All Causes of Action for Failure to State a Claim in Accord with FED. R. CIV.
P. 12(b)(6) as to Defendants FHHS, LLC; Family Home Health Services, LLC; Kevin
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R. Ruark; James Casey; Ronald Bowers; Southwest Home Healthcare Holdings of
Texas, LLC; and Southwest Home Healthcare Holdings of San Antonio, LLC
(“Motion”) (docket entry 44). While the motion purports to request dismissal of all
claims against the “new defendants,” the motion actually only makes arguments
related to the vicarious liability of the individual defendants, Ruark, Casey, and
Bowers. See generally Brief in Support of Defendants’ Motion to Dismiss All Causes of
Action for Failure to State a Claim in Accord with FED. R. CIV. P. 12(b)(6) as to
Defendants FHHS, LLC; Family Home Health Services, LLC; Kevin R. Ruark; James
Casey; Ronald Bowers; Southwest Home Healthcare Holdings of Texas, LLC; and
Southwest Home Healthcare Holdings of San Antonio, LLC (“Brief”) (docket entry
44-1). Weston filed a response to the motion on April 29, 2013, see Plaintiff’s
Response to Motion to Dismiss, and Brief in Support (“Response”) (docket entry 49),
and the defendants filed a reply on May 10, 2013. See Reply Brief Regarding Motion
to Dismiss All Causes of Action for Failure to State a Claim in Accord with FED. R.
CIV. P. 12(b)(6) as to Defendants FHHS, LLC; Family Home Health Services, LLC;
Kevin R. Ruark; James Casey; Ronald Bowers; Southwest Home Healthcare Holdings
of Texas, LLC; & Southwest Home Healthcare Holdings of San Antonio, LLC
(“Reply”) (docket entry 53).
After filing this motion to dismiss (as well as a motion for summary judgment
on behalf of the original defendants), the attorneys for the defendants withdrew. See
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Order on Referred Motions and Recommendation of the Magistrate Judge on
Pending Deadlines (docket entry 80). The defendants were given time to secure new
counsel, but most of them failed to do so. Eventually, the court granted default
judgment against the unrepresented corporate defendants for the full amount of the
plaintiff’s claim. See Default Judgment (docket entry 123). However, that judgment
has not yet been satisfied, so the case must proceed against the remaining individual
defendants and the corporate defendants who have secured representation -- that is,
against Kevin Ruark; Ronald Bowers; James Casey (who is proceeding pro se); Family
Home Health Services, LLC; and FHHS, LLC.
II. ANALYSIS
A. Motion to Dismiss Standard
The defendants argue that because the plaintiff must prove “actual fraud”
under Texas Business Organizations Code section 21.223 to establish vicarious
liability, the plaintiff’s allegations must meet the higher pleading standard of Federal
Rule of Civil Procedure 9(b). See Brief at 3-4. Rule 9 instructs that “[i]n alleging
fraud . . ., a party must state with particularity the circumstances constituting fraud.”
FED. R. CIV. P. 9. “‘Although the language of Rule 9(b) confines its requirements to
claims of . . . fraud, the requirements of the rule apply to all cases where the gravamen
of the claim is fraud even though the theory supporting the claim is not technically
termed fraud.’” Frith v. Guardian Life Insurance Company of America, 9 F. Supp. 2d 734,
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742 (S.D. Tex. 1998) (quoting Toner v. Allstate Insurance Company, 821 F. Supp. 276,
283 (D. Del. 1993)) (alteration in original). However, as will be discussed below, the
requirements for showing actual fraud are less burdensome than those for establishing
fraud. See Spring Street Partners-IV, L.P. v. Lam, 730 F.3d 427, 442-43 (5th Cir.
2013). Since actual fraud requires showing “dishonesty of purpose or intent to
deceive,” see Archer v. Griffith, 390 S.W.2d 735, 740 (Tex. 1964), establishing actual
fraud is controlled by 9(b)’s guideline that “[m]alice, intent, knowledge, and other
conditions of a person’s mind may be alleged generally.” FED. R. CIV. P. 9.
Therefore, the plaintiff’s complaint will be evaluated under Rule 12(b)(6), not Rule
9(b).
“To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead
‘enough facts to state a claim to relief that is plausible on its face.’” In re Katrina
Canal Breaches Litigation, 495 F.3d 191, 205 (5th Cir. 2007) (quoting Bell Atlantic
Corporation v. Twombly, 550 U.S. 544, 570 (2007)), cert. denied, 552 U.S. 1182
(2008). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not
need detailed factual allegations, a plaintiff’s obligation to provide the grounds of [its]
entitlement to relief requires more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555
(citations, quotation marks, and brackets omitted). “Factual allegations must be
enough to raise a right to relief above the speculative level, on the assumption that all
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the allegations in the complaint are true (even if doubtful in fact).” In re Katrina
Canal, 495 F.3d at 205 (quoting Twombly, 550 U.S. at 555) (internal quotation marks
omitted). “The court accepts all well-pleaded facts as true, viewing them in the light
most favorable to the plaintiff.” Id. (quoting Martin K. Eby Construction Company, Inc.
v. Dallas Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004)) (internal quotation
marks omitted).
The Supreme Court has prescribed a “two-pronged approach” to determine
whether a complaint fails to state a claim under Rule 12(b)(6). See Ashcroft v. Iqbal,
556 U.S. 662, 678-79 (2009). The court must “begin by identifying the pleadings
that, because they are no more than conclusions, are not entitled to the assumption
of truth.” Id. at 679. The court should then assume the veracity of any well-pleaded
allegations and “determine whether they plausibly give rise to an entitlement of
relief.” Id. The plausibility principle does not convert the Rule 8(a)(2) notice
pleading to a “probability requirement,” but “a sheer possibility that a defendant has
acted unlawfully” will not defeat a motion to dismiss. Id. at 678. The plaintiff must
“plead[] factual content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.” Id. “[W]here the well-pleaded
facts do not permit the court to infer more than the mere possibility of misconduct,
the complaint has alleged -- but it has not ‘show[n]’ -- ‘that the pleader is entitled to
relief.’” Id. at 679 (alteration in original) (quoting FED. R. CIV. P. 8(a)(2)). The court,
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drawing on its judicial experience and common sense, must undertake the “contextspecific task” of determining whether the plaintiff’s allegations “nudge” its claims
against the defendant “across the line from conceivable to plausible.” See id. at 679,
683.
B. Weston’s Veil-Piercing Claim
1. Scope of the Motion as It Relates to the Veil-Piercing Claim
The defendants purport to be moving to dismiss all claims against the
individual defendants, Ruark, Casey, and Bowers. See Brief at 6. Insofar as the
motion relates to the plaintiff’s veil-piercing claim, however, the defendants focus
solely on the requirements of Texas Business Organizations Code section 21.223,
which applies only to Texas corporations and limited liability companies. See TEX.
BUS. ORGS. CODE §§ 21.223, 1.102, 1.104, 101.002. Therefore, the motion can only
affect the individual defendants’ liability as it relates to the following Texas limited
liability companies: Southwest Home Health Care Services of Texas, LLC; Southwest
Home Health Care Holdings of San Antonio, LLC; Southwest Home Health Care of
Dallas, LLC; Southwest Home Health Care of Harris, LLC; SWHHC Management,
LLC; and SWHHC Management - Central Texas, LLC; and to the following Texas
corporation: NBM Healthcare Resource, Inc. The motion does not relate to the
individual defendants’ liability through the following Texas limited partnerships:
Southwest Home Health Care, LP and Southwest Home Health Care - Central Texas,
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LP; nor to the following corporation and limited liability companies, which were
incorporated in other states: American Biocare, Inc. (Nevada); Southwest Home
Health Care of East Texas, LLC (Delaware); FHHS, LLC d/b/a Family Home Health
Services, LLC (Michigan); Family Home Health Services, LLC (Delaware).
Therefore, even if the motion were granted, that would not dispose of the plaintiff’s
veil-piercing claim against Ruark, Casey, and Bowers. Rather, it would simply
become limited as to the entities through which the individual defendants could be
held liable.
2. Legal Standard
Shareholders of Texas corporations and LLCs are generally insulated from
individual liability for “any contractual obligation of the corporation or any matter
relating to or arising from the obligation on the basis that the holder, beneficial
owner, subscriber, or affiliate is or was the alter ego of the corporation or on the basis
of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory”
or for “any obligation of the corporation on the basis of the failure of the corporation
to observe any corporate formality.” TEX. BUS. ORGS. CODE § 21.223. To hold those
shareholders liable, a plaintiff must “pierce the corporate veil.” “Under Texas law, ‘an
assertion of veil piercing or corporate disregard does not create a substantive cause of
action[;] . . . such theories are purely remedial and serve to expand the scope of
potential sources of relief by extending to individual shareholders or other business
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entities what is otherwise only a corporate liability.’” Spring Street Partners, 730 F.3d
at 443 (quoting In re JNS Aviation, LLC, 376 B.R. 500, 521 (Bankr. N.D. Tex. 2007)
(Jones, J.), aff’d, 395 Fed. Appx. 127, 128 (5th Cir. 2010)). To pierce the corporate
veil regarding a contractual obligation, a plaintiff must show that a shareholder
“caused the corporation to be used for the purpose of perpetrating and did perpetrate
an actual fraud on the obligee primarily for the direct personal benefit of the”
shareholder. TEX. BUS. ORGS. CODE § 21.223(b).
“‘Actual fraud’ is defined as ‘involv[ing] dishonesty of purpose or intent to
deceive.’” Spring Street Partners, 730 F.3d at 442 (quoting Tryco Enterprises, Inc. v.
Robinson, 390 S.W.3d 497, 508 (Tex. App.--Houston [1st Dist.] 2012, writ dism’d)).
“Courts may deduce fraudulent intent from all of the facts and circumstances.” Id. at
443. Furthermore, “in the context of piercing the corporate veil, actual fraud is not
equivalent to the tort of fraud.” Latham v. Burgher, 320 S.W.3d 602, 607 (Tex. App.
--Dallas 2010, no pet.).* In practice, courts generally look at the totality of a
shareholder’s actions to determine whether he committed actual fraud. See Spring
Street Partners, 730 F.3d at 445 (finding actual fraud where the defendant created an
*
“The elements of fraud in Texas are (1) the defendant made a
representation to the plaintiff; (2) the representation was material; (3) the
representation was false; (4) when the defendant made the representation the
defendant knew it was false or made the representation recklessly and without
knowledge of its truth; (5) the defendant made the representation with the intent
that the plaintiff act on it; (6) the plaintiff relied on the representation; and (7) the
representation caused the plaintiff injury.” Shandong Yinguang Chemical Industries Joint
Stock Company, Ltd. v. Potter, 607 F.3d 1029, 1032-33 (5th Cir. 2010).
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LLC to shift assets and allowed the company’s charter to lapse after litigation began);
In re Arnette, 454 B.R. 663, 694-95 (Bankr. N.D. Tex. 2011) (Houser, J.) (holding
that a party committed actual fraud by making material misrepresentations, failing to
disclose important information, and never intending to comply with the terms of the
parties’ agreement); Latham, 320 S.W.3d at 610 (“A rational juror could also have
decided Latham’s conduct in dissolving the corporation in the face of Burgher’s claim
represented dishonesty of purpose or an intent to deceive, i.e., actual fraud.”).
3. Application
The court concludes that the plaintiff’s complaint makes sufficient allegations
from which a jury could infer actual fraud. Weston alleges that the defendants
frequently promised to pay for Weston’s services, but then continued to make only
partial payments or not pay at all. Complaint ¶ 34. Furthermore, Weston alleges
that Bowers, Casey, and Ruark used one of their companies, Family Home Health
Services, LLC, as a “back office” to funnel money between their different companies.
Id. ¶¶ 67-68. According to Weston, Family Home Health Services received
reimbursements for government health programs, some of which should have been
paid to Weston for its services, but which were instead funneled toward improper
purposes. ¶ 69. Weston also alleges that the price for which ABC purchased the
Southwest entities shows that the individual defendants were allowing those entities
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to operate undercapitalized at the time that they entered into transactions with
Weston. Id. ¶¶ 71, 76.
The defendants rely upon Shandong to argue that Weston has not alleged
adequate facts to show actual fraud. See Brief at 5. In Shandong, the court evaluated
whether a plaintiff had alleged sufficient facts to support a claim for fraud. 607 F.3d
at 1032-33. The court found that evidence that the defendant corporation had
“funneled” money into other companies could constitute “slight circumstantial
evidence of fraud” -- which, notably, was not a comment regarding the weight of that
evidence, but a recitation of the evidentiary requirement for establishing fraudulent
intent -- but concluded that the plaintiff’s allegations “d[id] not rise above the level of
a conclusory description” and upheld the dismissal of the plaintiff’s complaint. Id. at
1034, 1036. The court concludes that Weston’s allegations of improperly funneling
money go beyond a mere “conclusory description” of wrongdoing. Furthermore,
Weston alleges that the individual defendants in this case did more than just funnel
money between entities -- they also allegedly made misrepresentations about fulfilling
their contractual obligations and undercapitalized their corporate entities. The court
therefore concludes that Weston has made sufficient allegations to survive a motion
to dismiss against its veil-piercing claim.
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C. Weston’s Joint Enterprise Claim
The defendants also move to dismiss the plaintiff’s claim that the individual
defendants are liable to Weston because they operated their businesses as a “joint
enterprise.” Brief at 6. Specifically, the defendants argue that Weston simply stated
the elements of a joint enterprise claim without offering any factual support for those
elements. Id. The court agrees. Even if Ruark, Casey, and Bowers were running
multiple business with a “common purpose,” there are no factual allegations
supporting the statements that they had “a community of pecuniary interest in that
common purpose” or “an equal right to direct and control that enterprise.” See
Complaint ¶ 79. Furthermore, Weston did not offer any defense of this claim in its
response to the defendants’ motion. See generally Response. Therefore, the plaintiff’s
joint enterprise claim against the individual defendants is dismissed.
III. CONCLUSION
For the reasons stated above, the defendants’ motion to dismiss is GRANTED
as to the plaintiff’s joint enterprise claim, and DENIED as to the plaintiff’s veilpiercing claim.
SO ORDERED.
March 11, 2014.
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A. JOE FISH
Senior United States District Judge
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