Hoffman et al v. AmericaHomeKey, Inc. et al
Filing
227
Memorandum Opinion and Order granting 126 Motion for Judgment. Plaintiffs claims against Shadle are hereby DISMISSED with prejudice. (Ordered by Judge Jane J Boyle on 6/3/2014) (ykp)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
KIMBERLY HOFFMAN and
PATTI PATE-SCHNURE,
Plaintiffs,
V.
AMERICAHOMEKEY, INC., et al.,
Defendants.
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CIVIL ACTION NO. 3:12-CV-3806-B
MEMORANDUM OPINION AND ORDER
Before the Court is Defendant Katherine Shadle’s Motion for Judgment on the Pleadings
(doc. 126), filed on November 12, 2013. For the reasons discussed below, the Court GRANTS the
Motion.
I.
BACKGROUND
This case arises out of an employer’s allegedly fraudulent representations concerning its
financial status as well as its alleged failure to transfer the full amount of retained bonus payments
as required under two employment contracts. In 2009, Plaintiffs Kimberly Hoffman and Patti PateSchnure both entered into employment contracts with Defendant AmericaHomeKey, Inc. (“AHK”)
in 2009 to serve as Senior Vice Presidents. Doc. 108, Am. Compl. ¶¶ 17-18. In these positions, both
assumed responsibilities to manage the company’s Southeast Branch offices. Id. Pursuant to these
contracts, Plaintiffs were entitled to receive a monthly bonuses equal to 50 % of the net, pre-tax
profits of the southeastern branches. Id. ¶ 19. Plaintiffs could request to receive less than their
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monthly bonuses in order to maintain reserves for future or anticipated losses, or in order to maintain
an operational reserve. Id. ¶ 20. The contracts also provided that when either party terminated the
contracts, any reserve funds, including bonuses, would be transferred to Plaintiffs within 30 days. Id.
¶ 21.
Plaintiffs requested to be paid less than their monthly bonuses for certain months in 2009,
and AHK withheld those funds for deposit in the future/anticipated losses or operational reserve.
Id. ¶¶ 22-23. AHK also allegedly withheld Plaintiffs’ bonuses for three months in 2011 without
authorization. Id. ¶ 24. When AHK terminated Plaintiffs’ employment contracts on November 15,
2011, it failed to pay Plaintiffs the bonus payments that it had withheld in 2009 and 2011 within 30
days. Id. ¶¶ 25-26.
Plaintiffs insist that Lane Terrell, Ida Alcazar, Katherine Shadle, Frank Caughron, and Lynn
Eaton (collectively “the Individual Defendants”) were all senior management of AHK who
participated in the decision to hire Plaintiffs. Id. ¶¶ 28, 30, 32-33, 35. They maintain that Terrell
represented to Plaintiffs that they could elect to be paid less in their bonuses in order to retain
reserves and that they would be paid any reserve within 30 days of the termination of the
employment contracts. Id. ¶¶ 28, 83-85. They insist that the other Individual Defendants all
authorized Terrell to make these statements, and that they all reviewed and approved the terms of
the employment contracts that contained these representations. Id. ¶ 85.1 Plaintiffs also aver that
Terrell, Alcazar, and Caughron each later assured them prior to their termination that they would
It is not clear from Plaintiffs’ allegations in ¶¶ 82-84 of their Complaint whether they intend to allege
that all of the Individual Defendants made representations concerning Plaintiffs’ retained bonuses, or that
Terrell made these representations with the other Individual Defendants’ authorization. Whatever Plaintiffs’
intent, however, it does not alter the Court’s analysis below.
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be paid the bonuses they were owed. Id. ¶¶ 29, 31, 34, 87, 101. Plaintiffs maintain that, when these
three Individual Defendants made these assurances, however, they knew that AHK would not repay
Plaintiffs’ bonuses. Id. Furthermore, Plaintiffs allege that although they regularly requested financial
and company information pertaining to AHK throughout their employment, all of the Individual
Defendants failed to provide Plaintiffs with accurate and timely financial information. Id. ¶¶ 36-37.
Plaintiffs maintain that Defendants “repeatedly and willfully misled [them] regarding the worsening
financial situation of Defendant [AHK] in order to induce Plaintiffs to continue working for” AHK
and to allow AHK to avoid paying the withheld bonus amounts. Id. ¶¶ 89, 103. They allege that the
Defendants specifically failed to inform them of an audit by the Texas Office of Inspector General
and that, had Plaintiffs known of the audit, they would have terminated their employment contracts
and demanded payment of the withheld bonus payments. Id. ¶¶ 37-40, 90, 104.
Plaintiffs filed a Complaint in the State Court of Cobb County in Georgia, alleging causes
of action for breach of contract, unjust enrichment, conversion, fraud, and negligent
misrepresentation. Doc. 1, Notice of Removal 1. Subsequently, Defendant Alcazar, with the consent
of all Defendants, removed the case to the United States District Court for the Northern District
of Georgia. Id. Following Defendant AHK’s Motion to Transfer Venue, the case was transferred to
this Court in the Northern District of Texas. Doc. 41, Order. All of the defendants have been
sporadically represented by counsel throughout the course of this litigation, and Shadle filed the
instant Motion for Judgment on the Pleadings during a period in which she was represented by
counsel, on November 12, 2014. Doc. 126, Def.’s Mot.
II.
LEGAL STANDARD
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A Rule 12(c) motion for judgment on the pleadings “is designed to dispose of cases where
the material facts are not in dispute and a judgment on the merits can be rendered by looking to the
substance of the pleadings and any judicially noticed facts.” Hebert Abstract Co. v. Touchstone Props.,
Ltd., 914 F.2d 74, 76 (5th Cir. 1990) (citing 5A CHARLES A. WRIGHT & ARTHUR R. MILLER,
FEDERAL PRACTICE AND PROCEDURE § 1367, at 509-10 (2d ed. 1990)). The standard for evaluating
a Rule 12(c) motion is the same as the standard for evaluating a Rule 12(b)(6) motion for failure to
state a claim. Doe v. MySpace, Inc., 528 F.3d 413, 418 (5th Cir. 2008) (citation omitted).
Under Rule 8(a)(2) of the Federal Rules of Civil Procedure, a complaint must contain “a
short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P.
8(a)(2). Rule 12(b)(6) authorizes the Court to dismiss a plaintiff’s complaint for failure to state a
claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). “[P]laintiffs must allege facts that
support the elements of the cause of action in order to make out a valid claim.” City of Clinton v.
Pilgrim’s Pride Corp., 632 F.3d 148, 152-53 (5th Cir. 2010) (citations omitted). In considering a Rule
12(b)(6) motion to dismiss “[t]he court accepts all well-pleaded facts as true, viewing them in the
light most favorable to the plaintiff.” In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir.
2007) (citing Martin K. Eby Constr. Co. v. Dall. Area Rapid Transit, 369 F.3d 464, 467 (5th Cir.
2004)).
In order to survive a motion to dismiss, Plaintiffs must plead “enough facts to state a claim
to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).
“Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements,
do not suffice.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the reasonable inference that the
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defendant is liable for the misconduct alleged.” Id. “The plausibility standard is not akin to a
‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted
unlawfully.” Id. (quoting Twombly, 550 U.S. at 556).
III.
ANALYSIS
Shadle moves for dismissal of all of Plaintiff’s claims against her, including breach of contract,
fraud, and negligent misrepresentation. Plaintiffs argue that they have properly pled each of these
claims against Shadle. The parties’ respective arguments as to each claim will be addressed separately
below.
A. Breach of Contract
Shadle first moves for dismissal of Plaintiffs’ breach of contract claim, arguing that, because
she acted solely as a representative for AHK and was not a party to the employment contracts, she
cannot be held individually liable for AHK’s breach of Plaintiffs’ employment contracts. In Texas,
a party generally must be a party to a contract before she can be held liable for a breach of that
contract. Ostrovitz & Gwinn, LLC v. First Specialty Ins. Co., 393 S.W.3d 379, 387 (Tex. App.–Dallas
2012, no pet.) (“Under the general law of contracts, a party must show either privity or third-partybeneficiary status in order to have standing to sue for breach of contract.”). As one federal court has
noted,
In Texas, it is an elementary rule of law that privity of contract is an essential
element of recovery in an action based on a contractual theory. . . . Indeed, except
for third-party beneficiary and tortious interference theories . . . in order to maintain
an action to recover for breach of contract, privity must exist between the party
damaged and the party sought to be held liable.
Norris v. Housing Auth. of Galveston, 980 F. Supp. 885, 892 (S.D. Tex. 1997). Here, the Plaintiffs
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allege that the contracts at issue were solely between AHK and Plaintiffs. Doc. 108, Am. Compl.
¶¶ 17-18. Nowhere in their Complaint do Plaintiffs allege that Shadle was a party to the contract;
instead, they only assert that she “approved” the contract terms. Id. ¶ 32. Such allegations are
insufficient to establish privity of contract between the parties, and are therefore insufficient to
support a breach of contract claim. See Norris, 980 F. Supp. at 892-93 (holding that a plaintiff’s
breach of contract claim failed because he could make no showing that the individual defendants
acted in their individual capacities when they signed the contract on behalf of the employer housing
authority).
Regardless of the lack of privity between Shadle and the plaintiffs, the parties focus much of
their argument on what a party must show in order to hold a corporate officer liable for a
corporation’s breach of contract. Shadle insists that, under Texas law, an officer or director cannot
be held liable for breach of contract when she acts in a representative capacity and in good faith on
behalf of the corporation. Doc. 126, Def.’s Br. 10. She reasons accordingly that because the
Amended Complaint does not allege that she acted for personal gain or interest, she cannot be held
personally liable for AHK’s breach. Id. at 10-11.
Plaintiffs respond by arguing that Texas law does, in fact, allow for a corporate agent who
participates in a corporation’s breach to be held personally liable for breach of contract. Doc. 128,
Pls.’ Resp. 3. They insist that their allegations that Shadle was a high-level executive, that she
approved the employment contracts’ terms regarding bonuses, and that she approved AHK’s breach
of these contracts are sufficient to hold Shadle personally liable for the corporation’s breach of
contract. Id. at 4.
The parties’ arguments are more appropriately geared towards a claim for tortious
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interference, a claim which Plaintiffs fail to affirmatively assert against the Individual Defendants.
Even if the Plaintiffs did assert a claim for tortious interference, however, their claim would fail
because they do not allege that Shadle “acted in a manner so contrary to the corporation’s best
interests that his or her actions could only have been motivated by personal interest.” ACS Investors,
Inc. v. McLaughlin, 943 S.W.2d 426, 432 (Tex. 1997). Indeed, Plaintiffs’ arguments run directly
contrary to the Texas Supreme Court’s holding in Holloway v. Skinner, 898 S.W.2d 793, 795-96
(Tex. 1995), wherein the Court held that a corporate representative cannot be held personally liable
for interference with a contract when she in good faith induces a corporation to violate a contractual
obligation. In reaching its holding, the court noted that because a corporation can only act through
its representatives, allowing a corporate representative to be held liable for tortious interference for
advising the corporation to breach a contract would effectively deprive a corporation of the ability
to abandon disadvantageous but valid contracts. Id. at 795. The court therefore stressed that a
plaintiff must show that a corporate agent acted for her own personal interests in order to establish
a claim for tortious interference. Id. at 796. Here, Plaintiffs merely allege that Shadle approved the
breach of contract and provide no other factual support to find that Shadle either approved the
contract or breached the contract to her own benefit. Doc. 108, Am. Compl. ¶ 16.
Finally, the cases that Plaintiffs rely on to show that a corporate officer can be held liable for
a corporation’s breach of contract are inapposite here. Specifically, and contrary to Plaintiffs’
arguments, these cases stand only for the principle that corporate officers are not allowed to use the
corporate veil as a shield to justify their own wrongdoing. Corpus Christi Development Corp. v.
Carlton, 644 S.W.2d 521, 523 (Tex. App.–Corpus Christi 1982, pet. denied). In Corpus Christ
Development Corp., for instance, the president of the corporation signed a real estate contract on
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behalf of the corporation. Id. at 522. He later informed the buyer that the corporation would not sell.
Id. The court was careful to note that generally agents are not liable on a contract made for a
principal, but that the case before it presented an exceptional situation in which the president
intended to use the corporation as a shield to justify his own wrongs. Id. at 523. Here, by contrast,
there are no allegations that Shadle attempted to use AHK as a corporate shield for her own bad acts
or to somehow insulate her from a contractual relationship with the Plaintiffs that she would have
otherwise entered into personally. Accordingly, Plaintiffs’ arguments that Shadle, as a corporate
agent, can be held individually liable for AHK’s breach of the employment contracts fails.2
Thus, for the reasons state above, Plaintiffs’ breach of contract claim against Shadle is hereby
DISMISSED with prejudice.
B. Fraud
Shadle also moves to dismiss Plaintiffs’ fraud claims against her. Although it is not clear from
Plaintiffs’ Complaint what fraud theory Plaintiffs sue under, Shadle maintains that Plaintiffs have
failed to allege sufficient facts to satisfy the Rule 9(b) heightened pleading standard under those
fraud theories most relevant to Plaintiffs’ allegations, including fraudulent inducement, fraud by
omission, or common law fraud.
To establish fraud in Texas, a plaintiff must show that
(1) a material representation was made; (2) it was false when made; (3) the
defendant either knew it was false or made it recklessly without any knowledge of its
Plaintiffs also assert that Defendants breached the cost-sharing provision of the arbitration clause
in their employment contracts. Doc. 108, Am. Compl. ¶ 67. Neither party addresses this claim at all in their
briefs, and it is unclear from the Complaint whether Plaintiffs intend to assert this claim against Shadle. See
id. ¶¶ 51-55. Even if Plaintiffs did intend to assert that Shadle breached the contract by not abiding by the
arbitration clause in Plaintiffs’ employment contracts, this claim would fail for the same reasons that Plaintiffs’
other breach of contract claims fail.
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truth; (4) the defendant made the false material representation with the intent that
it should be relied upon by the plaintiff; (5) the plaintiff relied on the representation;
and (6) the plaintiff suffered injury.
Smith v. BCE Inc., 225 F. App’x 212, 217 (5th Cir. 2007). Rule 9(b) provides, in pertinent part, 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 amount of particularity required for pleading fraud differs
from case to case. See Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719, 724 (5th Cir. 2003),
modified on other grounds, 355 F.3d 356 (5th Cir. 2003); see also Williams v. WMX Techs., Inc., 112
F.3d 175, 178 (5th Cir. 1997) (noting that “courts have emphasized that Rule 9(b)’s ultimate
meaning is context-specific”). In the Fifth Circuit, the Rule 9(b) 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 of why they were fraudulent.” Plotkin v. IP Axess, Inc.,
407 F.3d 690, 696 (5th Cir. 2005); see also Southland Secs. Corp. v. Inspire Ins. Solutions, Inc., 365 F.3d
353, 362 (5th Cir. 2004). In other words, the Complaint must provide “the essentials of the first
paragraph of any newspaper story, namely the who, what, when, where, and how.” Melder v. Morris,
27 F.3d 1097, 1100 n.5 (5th Cir. 1994). As noted above, Plaintiffs’ Complaint is not completely clear
as to what theory of fraud they intend to assert against Shadle; regardless, Rule 9’s heightened
pleading standard applies to all averments of fraud. Lone Star Ladies Inv. Club v. Schlotzsky’s Inc., 238
F.3d 363, 368 (5th Cir. 2001).
1.
Common law fraud
Plaintiffs allege that Defendants collectively made a number of misrepresentations that are
sufficient to support a claim of fraud. They specifically allege that Defendants, including Shadle,
authorized Terrell to represent to Plaintiffs that they could elect to be paid less in their monthly
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bonuses in order to retain reserves for future/anticipated losses and operational reserve, doc. 108,
Am. Compl. ¶¶ 82-84; that Defendants promised that Plaintiffs would be paid any of these reserve
amounts upon termination of their employment contracts, id. ¶ 85; that Defendants “willfully misled
Plaintiffs regarding the availability” of their bonuses, id. ¶ 87; and that Defendants “repeatedly and
willfully misled Plaintiffs regarding the worsening financial situation” of Defendant AHK, id. ¶ 89.
Plaintiffs maintain that these allegations were adequately specific to apprise Shadle of the nature of
the claim against her as well as the statements upon which the claim is based. Doc. 128, Pls.’ Resp.
5-6.
Shadle, in turn, argues that Plaintiffs’ allegations are insufficient to establish a fraud claim
because they fail to identify the time, place, or contents of any alleged false representations made by
Shadle individually. Doc. 126, Def.’s Br. 13.
Plaintiffs’ allegations that Defendants “willfully misled” Plaintiffs regarding their bonuses or
AHK’s financial situation lack the necessary specificity to satisfy the Rule 9(b) heightened pleadings
standard. Such allegations fail to identify the contents, timing, or circumstances surrounding any
statement made by Shadle, and therefore do not set out those facts that the Fifth Circuit has
indicated are necessary to reach the level of particularity that is required under Rule 9(b). Plotkin,
407 F.3d at 696; Kelly Law Firm, P.C. v. An Attorney for You, 679 F. Supp. 2d 755, 773 (S.D. Tex.
2009) (“Plaintiffs’ fraud allegations fail to specify any specific speaker making a fraudulent statement
or omission. . . . [T]he allegations do not specify which of the representations in the proposal it relied
on, nor does it specify the time, place, and manner in which the representations in this proposal were
presented to the plaintiffs.”). Plaintiffs’ allegations that they were willfully misled therefore fail to
make out a claim for common law fraud.
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Plaintiffs’ allegations that Shadle “authorized” Terrell to make specific representations
regarding their bonuses and that Shadle “approved” parallel terms in their employment contracts are
similarly insufficient to make out a claim for fraud. While more specific than Plaintiffs’ allegations
that Defendants “misled” them, these allegations are still not sufficiently specific under Rule 9(b)
because they do not provide any explanation as to why these statements were fraudulent. Plotkin,
407 F.3d at 696 (holding that a plaintiff must plead with “specificity as to the statements (or
omissions) considered to be fraudulent, the speaker, when and why the statements were made, and
an explanation of why they were fraudulent.”). Indeed, Plaintiffs plead no facts to show that Terrell’s
representations were false when made or that Shadle either knew they were false or authorized
Terrell to make the representations recklessly and without any knowledge of their truth, and thus
they also fail to make out two essential elements of their Texas common law fraud claim with any
degree of specificity. Smith, 225 F. App’x at 217; see also American Realty Trust, Inc. v. Hamilton Lane
Advisors, Inc., 115 F. App’x 662, 667 (5th Cir. 2004) (“a plaintiff must set forth specific facts that
support an inference of fraud”). The only allegation that Plaintiffs do make regarding the falsity of
Terrell’s representations is to claim that Defendants “willfully misled Plaintiffs regarding the
availability of [their bonuses] for the purpose of inducing Plaintiffs to enter into the Employment
Contracts.” Doc. 108, Am. Compl. ¶ 86. This conclusory statement is insufficient to show that
Terrell’s representations were false when made or that Shadle knew they were false. Moreover, the
fact that Defendants later breached the contract does not establish that Terrell’s representations
were false when made. See, e.g., Formosa Plastics Corp. USA v. Presidio Engineers & Contractors, Inc.,
960 S.W.2d 41, 48 (Tex. 1998) (“the mere failure to perform a contract is not evidence of fraud”);
Berry v. Indianapolis Life Ins. Co., 608 F. Supp. 2d 785, 798 (N.D. Tex. 2009) (holding that plaintiffs
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could not rely on the fact that the IRS ultimately ruled that defendants’ defined benefit plan was
illegal to retroactively show that defendants’ representations concerning the plan were false when
made). Accordingly, Plaintiffs do not provide a specific explanation of why the statements made by
Terrell were fraudulent, and therefore do not make sufficiently specific allegations to make out a
claim for fraud under Rule 9(b).
Thus, to the extent that Plaintiffs attempt to make out a claim for common law fraud based
on Shadle’s allegedly fraudulent representations, their claim is DISMISSED.3
2.
Fraudulent inducement
Fraudulent inducement “is a particular species of fraud that arises only in the context of a
contract and requires the existence of a contract as part of its proof.” Haase v. Glazner, 62 S.W.3d
795, 798 (Tex. 2001). In order to make out a claim for fraudulent inducement, therefore, a plaintiff
must establish the elements of fraud “as they relate to an agreement between the parties.” Id. at 79899. Furthermore, while a promise of future performance can constitute an actionable
misrepresentation, such a promise must be made “with no intention of performing at the time it was
Plaintiffs argue in their brief that the fact that Shadle has filed her Motion nearly 18 months after
this litigation commenced indicates that she was well apprised of the nature of the claims against her. Doc.
128, Pls.’ Resp. 5. Plaintiffs also reason that if the Complaint was so ill-pleaded, as Shadle alleges, then she
would not have answered the Complaint or engaged in discovery, but would have immediately sought
dismissal. Id. They also suggest that their claims must have adequate evidentiary support, or else Shadle would
have moved for summary judgment rather than dismissal on technical pleading grounds. Id. Plaintiffs’
arguments on this point are misleading, however, and fail to recognize that Defendants have only been
represented sporadically throughout the course of this litigation. Moreover, Shadle only filed her Motion once
she retained separate counsel from the other Defendants, and that counsel has also recently withdrawn.
Doc.157, Mot. to Withdraw. Shadle’s failure to file her Motion earlier in the litigation therefore appears more
a consequence of lack of financial means than subtle manipulation of the procedural rules. The Court refuses
to infer from the late filing of this Motion that Shadle is somehow trying to avoid trial based on technical
pleading grounds, especially when she was otherwise permitted by the Federal Rules to submit her Motion
when she did.
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made” in order to be actionable. Formosa, 960 S.W.2d at 48.
Plaintiffs rely on the same statements regarding bonuses to make out their claims for
fraudulent inducement as they do to make out their claims for common law fraud. Doc. 108, Am.
Compl. ¶¶ 81-86. Consequently, Plaintiffs’ claims of fraudulent inducement fail for similar reasons
that their claims for common law fraud fail. As noted above, Plaintiffs fail to plead sufficient facts
to show that the alleged statements are false or that Shadle knew them to be false. Moreover,
Plaintiffs provide no allegations to show that Terrell or any of the other Defendants had no intention
of ensuring that Terrell’s promises concerning their bonuses would be carried out. Instead, Plaintiffs
only allege that Terrell, Alcazar, and Caughron personally assured them, years after the contracts
were entered into, that their bonuses would be paid, even though these defendants knew that the
bonuses would not be paid. Doc. 108, Am. Compl. ¶¶ 29, 31, 34, 87. Such allegations say nothing
about the intent of the parties when the promises were initially made, and they do not provide any
basis for a fraudulent inducement claim against Shadle specifically.4
Thus, to the extent that Plaintiffs attempt to make out a claim for fraudulent inducement,
they fail to plead sufficiently specific facts to make out each element of their claim as to Shadle.
Their fraudulent inducement claim against Shadle is therefore DISMISSED with prejudice.
Although it is not clear from their pleadings, Plaintiffs may also intend to make out a claim for
fraudulent inducement based on (1) their allegations that Terrell, Alcazar, and Caughron personally assured
them that they would receive their bonuses, and (2) their allegations that Defendants willfully misled Plaintiffs
regarding the financial and legal situation of AHK. Doc. 108, Am. Compl. ¶¶ 87-90. These allegations are not
specific enough to meet Rule 9(b)’s pleading standard, however, because they do not identify the time, place,
or circumstances surrounding these statements, and they do not specify what statements, if any, were made
by Shadle. Moreover, Plaintiffs do not allege that these statements induced them to enter a contract, which
is a necessary showing for making out a fraudulent inducement claim. Haase, 62 S.W.3d at 798 (“Without a
binding agreement, there is no detrimental reliance, and thus no fraudulent inducement claim.”); Kevin M.
Ehringer Enterprises, Inc. v. McData Services Corp., 646 F.3d 321, 325 (5th Cir. 2011) (“Fraudulent inducement
also requires proof of an underlying contract which was induced.”).
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3.
Fraud by omission
Fraud by omission (or fraud based on nondisclosure) occurs where there is a duty to disclose
information as a matter of law. Smith, 225 F. App’x at 217-18. “To sustain a fraud by omission claim,
the plaintiff must prove all the elements of ‘fraud by affirmative misrepresentation, including
fraudulent intent, with the exception that the misrepresentation element can be proven by
[omission] of a material fact in light of a duty to disclose.’” Id. (citations omitted). Accordingly, in
order to make out a claim for fraud by omission, a plaintiff must show that a party with a duty to
disclose
(1) conceals or fails to disclose a material fact within the knowledge of that party; (2)
knows the other party is ignorant of the fact and does not have an equal opportunity
to discover the truth; (3) intends to induce the other party to take some action by
concealing or failing to disclose the fact; and (4) the other party suffers injury as a
result of acting without knowledge of the undisclosed fact.
CDI Corp. v. GT Solar Inc., No. H-11-3487, 2013 WL 873785, at *2 (S.D. Tex. Mar. 7, 2013) (citing
Bradford v. Vento, 48 S.W.3d 749, 755 (Tex. 2001)). Whether a party has a duty to disclose
information will depend on the circumstances, but some courts have recognized that such a duty may
arise
(1) when there is a fiduciary relationship; (2) when one voluntarily discloses
information, the whole truth must be disclosed; (3) when one makes a
representation, new information must be disclosed when that new information makes
the earlier representation misleading or untrue; and (4) when one makes a partial
disclosure and conveys a false impression.
Hoggett v. Brown, 971 S.W.2d 472, 487 (Tex. App.–Houston (14th Dist.) 1997, writ denied).
“Although the nature of an omission renders it more difficult to plead with particularity than
an affirmative misrepresentation, Plaintiffs must still comply with Rule 9(b).” Berry, 600 F. Supp. 2d
at 821. Because Rule 9(b) still applies to a plaintiff’s fraud by omission claim, a plaintiff must allege
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facts showing that a defendant had such a duty to disclose under Rule 9(b). In re Enron Corp. Sec.,
540 F. Supp. 2d 759, 771 (S.D. Tex. 2007). “In cases concerning fraudulent misrepresentation and
omission of facts, Rule 9(b) typically requires the claimant to plead the type of facts omitted, the
place in which the omissions should have appeared, and the way in which the omitted facts made
the representations misleading.” Carroll v. Fort James Corp., 470 F.3d 1171, 1174 (5th Cir. 2006).
Plaintiffs insist that they have sufficiently pled fraud by omission against Shadle. They argue
that Shadle had a duty to disclose information regarding AHK’s financial and legal troubles because
she was a high-level executive in the company and because she made representations and disclosures
to Plaintiffs concerning AHK. Doc. 128, Pls.’ Resp. 8. While Plaintiffs admit that their allegations
may lack specificity regarding the time, place, and content of Shadle’s fraudulent acts, they insist
that, because she committed fraud by omission, it is impossible for Plaintiffs to identify every instance
in which Shadle made a willfully inaccurate statement. Id. at 7.
Shadle maintains that Plaintiffs have failed to allege that she had a duty to disclose any
information to them. Doc. 126, Def.’s Br. 14. She asserts specifically that Plaintiffs allege no
circumstances that would impose a duty on Shadle, and she argues that the fact that she was a VicePresident of Operations imposes no duty to disclose information to Plaintiffs, who were also Senior
Vice Presidents of AHK. Id.
Plaintiffs fail to plead sufficient facts from which the Court could infer that Shadle owed
them a duty to disclose. Considering the different situations set forth in Hoggett, the Court first notes
that Shadle did not owe Plaintiffs a fiduciary duty. Plaintiffs argue that because Shadle, as a highlevel executive, owed AHK a fiduciary duty, she also owed them a duty as employees of AHK to
inform them of AHK’s financial situation or the Texas Inspector General audit. Plaintiffs point to
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no authority to support this point, however, and such a fiduciary relationship between co-directors
or co-employees of a company is not among the traditional formal relationships that Texas courts
have recognized. Entm’t Merch. Tech., LLC v. Houchin, 720 F. Supp. 2d 792, 796 (N.D. Tex. 2010)
(“Formal relationships are those for which fiduciary duties are owed as a matter of law, including the
relationship between attorney and client, partners, in trustee relationships, or between directors of
a corporation and the corporation and its stockholders.”). Moreover, the Court is hesitant to find
an informal fiduciary relationship under these circumstances. Hoggett, 971 S.W.2d at 488. Indeed,
Hoggett weighs against finding a fiduciary relationship here. In Hoggett, the Court held that a
defendant had no duty to inform the plaintiff of a proposed merger prior to a board meeting because
no fiduciary relationship, formal or informal, existed between the parties, even though both were
determined to be directors of the same company. Id. at 488-89; see also Van Bevel v. Oasis Design,
Inc., No. 03-97-00434-CV, 1998 WL 546342, at *6 (Tex. App.–Austin 1998, no pet.) (holding that
parties who were co-shareholders, co-officers, and co-directors did not, as a matter of law, owe one
another a fiduciary duty). Similarly, here, Shadle did not owe Plaintiffs, who were also Vice
Presidents of the company, a duty to disclose simply by virtue of her position as a Vice President in
the company.
As to the other three situations in which the court in Hoggett recognized that a duty may
arise, Plaintiffs have similarly failed to plead sufficient facts to establish that Shadle owed them a
duty of disclosure. Plaintiffs allege that Defendants failed to apprise them of AHK’s deteriorating
financial condition, despite Plaintiffs’ regular requests for financial and company information. Doc.
108, Am. Compl. ¶¶ 36-37, 89, 92. They also allege that Defendants failed to notify them of the
Texas Inspector General audit of AHK. Id. ¶¶ 38-41, 90. Plaintiffs maintain that these bare
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assertions are sufficient to show that Shadle (1) disclosed information, and therefore had a duty to
disclose “the whole truth”; (2) made representations regarding AHK’s financial situation, which then
obligated her to update Plaintiffs as to AHK’s financial condition; and (3) willfully omitted critical
information regarding AHK, thus falsely assuring them that the company was doing well. Doc. 128,
Pls.’ Resp. 8-9. Contrary to Plaintiffs’ assertions, however, none of the allegations in their Complaint
specify what information Shadle personally disclosed or what representations she personally made
that would obligate her to make further disclosures. See Kelly Law Firm, P.C., 679 F. Supp. 2d at 77374 (“Nor does the petition specify which disclosures made by Calliope were incomplete such that
Calliope had a duty to provide further disclosures.”). The only representations that could
theoretically support a fraud by omission claim are the representations concerning bonuses that
Shadle allegedly “authorized” Terrell to make and that she “approved” in the employment contracts,
but even these would not be sufficient to impose a duty on Shadle because Plaintiffs do not plead
any facts to show that Shadle was aware of new information indicating that AHK would not repay
their bonuses. Four Bros. Boat Works, Inc. v. Tesoro Petroleum Companies, Inc., 217 S.W.3d 653, 671
(Tex. App.–Houston (14th. Dist.) 2006, pet. denied) (“when one makes a representation, he has
a duty to disclose new information when he is aware the new information makes the earlier
representation misleading or untrue”) (italics added); Dewayne Rogers Logging, Inc. v. Propac Indus.,
Ltd., 299 S.W.3d 374, 391 (Tex. App.–Tyler 2009, pet. denied) (“[A] party cannot be guilty of
fraudulently or intentionally concealing facts of which he is not aware.”). Again, Shadle held a very
similar position in AHK to Plaintiffs (Vice-President), and the Court cannot reasonably infer,
without some sort of factual basis in the Complaint, that Shadle had any more awareness of AHK’s
financial situation than Plaintiffs. Accordingly, the Court concludes that Plaintiffs fail to plead
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sufficiently specific facts to establish that Shadle owed them a duty to disclose. Boutain v. Radiator
Specialty Co., No. 11-1907, 2011 WL 6130754, at *3 (E.D. La. Dec. 8, 2011) (“Because plaintiffs do
not articulate the basis for Exxon’s duty to disclose, their claim falls short of the requirements of Rule
9(b).”).
Even assuming that Shadle did have a duty to disclose under the circumstances here,
Plaintiffs have failed to provide any details as to the communications between the parties such that
the Court could determine “the place in which the omissions should have appeared” or “the way in
which the omitted facts made the representations misleading.” Carroll, 470 F.3d at 1174.
Accordingly, Plaintiffs’ allegations do not meet the heightened pleading standard of Rule 9(b) and
are insufficient to make out a claim for fraud by omission against Shadle. Accordingly, the Plaintiffs’
claims of fraud by omission against Shadle are hereby DISMISSED with prejudice.
C. Negligent Misrepresentation
When claims for fraud and negligent misrepresentation are based on the same set of alleged
facts, Rule 9(b)’s heightened pleading standard generally applies to both. Lone Star Fund V (U.S.),
L.P. v. Barclays Bank PLC, 594 F.3d 383, 387 n.3 (5th Cir. 2010); see Paul v. Aviva Life & Annuity
Co., No. 3:09-CV-1490-B, 2010 WL 5105925, at *8 (N.D. Tex. Dec. 14, 2010) (applying 9(b) to
fraud and negligent misrepresentation claims that arose out of same set of facts but were contained
in separate counts in complaint). The Court acknowledges that some courts, including the Fifth
Circuit, have expressed doubt as to whether this rule applies in all circumstances, see Am. Realty
Trust Inc. v. Hamilton Lane Advisors, Inc., 115 F. App’x 662, 668-69 (5th Cir. 2004); Nazareth Int’l,
Inc. v. J.C. Penney Corp., Inc., No. 3:04-CV-1265-M, 2005 WL 1704793, at *3-*4 (N.D. Tex. July
19, 2005). The Court does not need to consider whether Rule 9(b) is properly applied to Plaintiffs’
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negligent misrepresentation claims here, however, because Plaintiffs do not contest that Rule 9(b)
should apply. Doc. 128, Pls.’ Resp. 10. Moreover, because they are based on almost exactly the same
factual averments, Plaintiffs’ fraud and negligent misrepresentations claims are so intertwined that
it would be impossible to remove the inadequate fraud averments while preserving a viable negligent
misrepresentation claim. Nazareth Intern., Inc., 2005 WL 1704793, at *4. Plaintiffs’ negligent
misrepresentation claims fail to satisfy Rule 9(b) for the same reasons as its fraud claims above and
are therefore DISMISSED with prejudice.5
IV.
CONCLUSION
For the reasons stated above, Defendant Katherine Shadle’s Motion for Judgment on the
Pleadings is hereby GRANTED as to all claims. Plaintiffs claims against Shadle are hereby
DISMISSED with prejudice.6
Because the Court determines that Plaintiffs fail to plead sufficient facts to make out any of their
claims, it does not reach the parties’ arguments concerning the economic loss rule.
5
The Court acknowledges that courts will often afford a plaintiff the opportunity to overcome
pleading deficiencies upon granting a motion to dismiss; however, the decision to permit amendments is left
to the sound discretion of the district court, U.S. ex rel. Willard v. Humana Health Plan of Texas, Inc., 336 F.3d
375, 387 (5th Cir. 2003), and granting such relief under the circumstances of this case appears futile for a
number of reasons. See Hitt v. City of Pasadena, 561 F.2d 606, 608 (5th Cir. 1977). First, the Court permitted
an extension of the deadline to amend pleadings once in this case long after the originally established deadline.
Doc. 108, Order. In spite of the Court’s willingness to allow amendments to the pleadings, however, Plaintiffs
did not elect to amend the allegations against Shadle, even though they were clearly insufficient under Fifth
Circuit precedent and Texas law. Second, despite both parties’ demonstrated propensity for requesting
extensions in this case, Plaintiffs do not request in their Response that the Court allow them to amend their
pleadings to fix their deficiencies in the event that Shadle’s Motion is granted. Third, this case differs from
those like Hitt because the Court only dismisses the claims against Shadle and leaves those claims against the
remaining defendants intact. Thus, the Court’s decision does not stand to deprive Shadle of the opportunity
to recover from those Defendants against whom she has properly pled her claims. Finally, this case is set for
trial in a few short months, and permitting Plaintiffs to replead would likely only lead to another extension
of the remaining deadlines in this case and thus cause undue delay of the ultimate resolution of this matter.
6
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SO ORDERED.
SIGNED: June 3rd, 2014
_________________________________
JANE J. BOYLE
UNITED STATES DISTRICT JUDGE
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