Baker v. Great Northern Energy Inc et al
Filing
34
MEMORANDUM OPINION AND ORDER re: Defendants' Motion to Dismiss for Failure to State a Claim or, in the Alternative, Motion to Compel Arbitration and Dismiss Action or Stay Proceedings (doc. 25 ) (the "Motion"). The Court GRANTS the Mo tion to the extent it seeks dismissal for failure to state a claim, and DENIES AS MOOT the Motion to the extent it seeks to compel arbitration. If Baker seeks to file an amended complaint in an effort to overcome the deficiencies warranting dismissal stated in this Order, the Court ORDERS him to do so within thirty (30) days from the date on which this Order is entered. (Ordered by Judge Jane J Boyle on 12/3/2014) (ctf)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
BURDICK BAKER,
Plaintiff,
v.
GREAT NORTHERN ENERGY, INC.,
JOSEPH B. LOFTIS,
RONALD JAMES ABERCROMBIE,
ARKLATEX MINERALS, LLC
NICOLE L. MARTIN,
Defendants.
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CIVIL ACTION NO. 3:14-CV-0240-B
MEMORANDUM OPINION AND ORDER
Before the Court is Defendants’ Motion to Dismiss for Failure to State a Claim or, in the
Alternative, Motion to Compel Arbitration and Dismiss Action or Stay Proceedings (doc. 25) (the
“Motion”). For the reasons that follow, the Court GRANTS the Motion to the extent it seeks
dismissal for failure to state a claim, and DENIES AS MOOT the Motion to the extent it seeks to
compel arbitration.
I.
BACKGROUND
This case involves an oil and gas investment gone bad.1 The investor who filed this suit is
Burdick Baker (“Baker”), a resident of Colorado. Doc. 1, Compl. ¶ 5. Baker brings this action against
five Defendants including Great Northern Energy, Inc. (“Great Northern”), a Texas-based
1
The background that follows is drawn from the Complaint (doc. 1), with all non-conclusory factual
allegations “accepted as true.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
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corporation involved in oil and gas, three current and former executives at Great Northern—James
Loftis (“Loftis”), Ronald James Abercrombie (“Abercrombie”), and Nicole L. Marti (“Marti”)—and
Arkatex Minerals, LLC (“Arkatex”), a Texas-based entity “owned or controlled by Loftis and
Abercrombie.” Id. ¶¶ 6-10, 20.
The events in this case date back to “the summer of 2012,” when Baker first “met or spoke
over the phone at various times with Defendant Loftis (who held himself out as the President of
Great Northern) to discuss investment opportunities.” Id. ¶ 14. At that time, Loftis indicated “that
the investment would be very lucrative” and “would generate a substantial return.” Id. ¶¶ 13, 43.
Loftis also represented “that the oil and gas [interests] were already profitable and producing oil,”
and “that Great Northern was producing more than 300 gross barrels per day of oil from its
operations.” Id. ¶¶ 14, 43. Loftis further assured Baker “that he was experienced, well regarded and
honest operator with a long track record of successful results for investors.” Id. ¶ 15.
Relying “upon said representations,” Baker subsequently agreed to invest “with Great
Northern.” Id. ¶ 16. In accordance with this alleged agreement, Baker, “[o]n July 7, 2012 and
September 26, 2012 and on dates thereafter,” sent Great Northern a number of payments. Id. ¶ 23.
At some point, Baker discovered that his investment in Great Northern was not all that Loftis
had represented. For one, Baker claims that “Defendants did not have the resources necessary to
maximize the value of the assets” and “had substantial undisclosed debt[] and adverse claims.” Id. ¶
47. Loftis, Abercrombie, and Marti also allegedly “treated Great Northern as their own personal
business and ‘cookie jar’ . . . without regard for the business or financial rights or interests of the
investors.” Id. ¶¶ 30, 45, 47. Similarly, Defendants supposedly “concealed from [Baker] that [Great
Northern] had sold proceeds from production [] to Arkatex,” which Defendants Loftis and
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Abercrombie “owned or controlled.” Id. ¶¶ 20, 45. And unbeknownst to Baker, Loftis purportedly
had a $2 million default judgment entered against him shortly before negotiations with Baker and
was once convicted “of bank fraud in connection with the use of an (sic) proceeds from a
transaction.” Id. ¶¶ 15, 44.
Presumably distressed over his investment, Baker “entered into a written agreement” with
Great Northern on June 5, 2013 in which Great Northern “promis[ed], among other things, to
repurchase the interest sold to [Baker] and his two brothers.” Id. ¶ 25. Great Northern allegedly
“breached that agreement, when, it issued a check that was not backed by sufficient funds at the time
of issuance and by failing to perform the agreement by [the] June 29, 2013 date set for performance.”
Id. ¶ 26. After its “initial breach,” Great Northern “remitted to [Baker’s] counsel various funds that
counsel is holding in escrow,” which Baker has refused to accept. Id. ¶ 27.
On January 22, 2014, Baker filed suit against Defendants. His Complaint sets forth eleven
different “Claim[s] for Relief.” These include: (i) breach of contract (against Great Northern only);
(ii) common law fraud (against all Defendants except Arkatex); (iii) a single securities fraud claim
filed pursuant to § 10(b) of the Securities and Exchange Act of 1934, Rule 10b-5 promulgated
thereto, and analogous provisions of the Texas Securities Act and Colorado Securities Act (against
all Defendants except Arkatex); (iv) another securities fraud claim filed pursuant to § 12(2) of the
Securities Act of 1933 (against all Defendants except Arkatex); (v) negligence (against all
Defendants except Arkatex); (vi) misrepresentation (against all Defendants except Arkatex); (vii)
breach of duty of good faith and fair dealing (against Great Northern); (viii) conspiracy (against all
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Defendants except Arkatex); (ix) recission/mistake (against all Defendants);2 (x) a Texas Uniform
Fraudulent Transfer Act claim (against all Defendants); and (xi) a Texas Theft Liability Act claim
(against all Defendants). See id. ¶¶ 33-106.
On March 14, 2014, Defendants jointly filed the present Motion. In it, Defendants first seek
dismissal of all eleven claim in the Complaint for failure to properly state a claim upon which relief
may be granted. See Doc. 25, Def.’s Mot. 1-18. In the alternative, Defendants move to compel
arbitration and dismiss or stay the proceedings in light of an arbitration agreement between Baker
and Great Northern signed in 2012. See id. at 18-21; Doc. 25-1, Ex. A (Operating Agreement).3 In
response, Baker asks the Court to deny all relief requested in Defendants’ Motion. See Doc. 28, Pl.’s
Resp. 1. On May 2, 2014, Defendants filed their Reply (doc. 29), rendering this Motion ripe for
consideration. As seen below, the Court only reaches Defendants’ first requested relief at this
time—dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.
II.
RULE 12(b)(6) LEGAL STANDARD
Federal Rule of Civil Procedure 12(b)(6) authorizes dismissal for failure to state a claim upon
which relief may be granted. FED. R. CIV. P. 12(b)(6). For a complaint to survive a Rule 12(b)(6)
2
This claim, identified as “Ninth Claim for Relief—Rescission of 2012 Transaction—Mistake,” does
not specify which Defendants are charged, so the Court presumes Baker seeks liability against all Defendants.
3
Defendants note that the operating agreement is attached to their Motion “only with reference to
the Motion to Compel Arbitration, and is independent from Defendants’ Motion to Dismiss.” Def.’s Mot. 20
n.6. Accordingly, the Court does not consider the attached operating agreement in evaluating whether to
dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). See Hunter v. Branch Banking
& Trust Co., No. 3:12-CV-2437-D, 2013 WL 4052411, at *2 n.1 (N.D. Tex. Aug. 12, 2013) (“[A]ttaching
documents to support [a] motion to compel arbitration does not transform [a] motion to dismiss into a factual
attack; the two motions are separate.”).
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motion, it must contain “enough facts to state a claim to relief that is plausible on its face.” Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). A facially plausible complaint does more than
plead “facts that are ‘merely consistent with’ a defendant's liability.” Iqbal, 556 U.S. at 678 (quoting
Twombly, 550 U.S. at 557). Rather, a facially plausible complaint “pleads factual content that allows
the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
Id. If the allegations raise no entitlement to relief, “this basic deficiency should . . . be exposed at the
point of minimum expenditure of time and money by the parties and the court.” Cuviller v. Taylor,
503 F.3d 397, 401 (5th Cir. 2007) (quoting Twombly, 550 U.S. at 557).
In reviewing a Rule 12(b)(6) motion, courts “must accept [all] well-pleaded facts” as true.
Plotkin v. IP Axess Inc., 407 F.3d 690, 696 (5th Cir. 2005). Likewise, all well-pleaded facts must be
“construed . . . in the light most favorable to the plaintiffs.” Kopp v. Klien, 722 F.3d 327, 333 (5th Cir.
2013). However, courts need “not accept as true conclusory allegations, unwarranted factual
inferences, or legal conclusions.” Plotkin, 407 F.3d at 696 (citing Southland Sec. Corp. v. INSpire Ins.
Solutions, Inc., 365 F.3d 353, 361 (5th Cir. 2004)).
III.
ANALYSIS
Defendants’ Motion seeks dismissal of all eleven of Baker’s claims pursuant to Rule 12(b)(6),
including the Complaint’s breach of contract claim, various fraud-related claims, and other state tort
causes of action. While Defendants also move in the alternative to compel arbitration, the Court
only reaches Defendants’ request for dismissal pursuant to Rule 12(b)(6) in its below analysis. This
is because, for the reasons that follow, the Court agrees with Defendants that none of the
Complaint’s eleven claims are adequately pled, and as such, whether these claims should be
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arbitrated is, at present, a moot issue.
A.
Breach of Contract (First Claim for Relief)
Baker’s first claim is for breach of contract under Texas law. “In Texas, ‘the 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 the contract by the defendant; and (4)
damages sustained by the plaintiff as a result of the breach.’” Smith Int'l, Inc. v. Egle Grp., LLC, 490
F.3d 380, 387 (5th Cir. 2007) (quoting Valero Mktg. & Supply Co. v. Kalama Int'l, L.L.C., 51 S.W.3d
345, 351 (Tex. App. 2001)) (brackets omitted).
Baker’s Complaint asserts two contracts that Defendant Great Northern allegedly breached.
First, “[i]n 2012, [Baker] entered into an agreement with defendant Great Northern” whereby Baker
“purchased a working interest in certain wells and production,” and in return, “Great Northern was
required to account for operations and to pay [Baker] the sums he was due as a result of his interest.”
Compl. ¶¶ 33-34. Great Northern allegedly “breached its obligations” under this 2012 agreement “by
failing to account and pay the sums due.” Id. ¶ 35. Second, Great Northern and Baker also entered
into “a contract dated June 5, 2013,” which Great Northern allegedly “breached . . . by failing and
refusing the (sic) pay monies due [Baker] in accordance with its terms.” Id. ¶ 37.
Defendants argue that these allegations are too vague and conclusory to survive a Rule
12(b)(6) challenge. They highlight that the Complaint fails to identify “the alleged ‘sums’ [or]
‘monies’ due under either agreement,” and “is devoid of any contract language or provisions” related
to the two agreements. Def.’s Mot. 3. They also submit that the Complaint refers ambiguously to an
“agreement” or “the Agreement” without specifying which of the two agreements it is asserting. Id.
Baker counters that the Complaint “adequately alleges the elements of a breach of contract
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claim under Texas law” by asserting “that there were two separate agreements with agreed upon
terms, that he performed by sending money to [Great Northern], that [Great Northern] did not
deliver on the investment as promised, constituting a failure by [Great Northern] to perform and that
as a result [Baker] has incurred significant financial damage.” Pl.’s Resp. 2-3. Baker maintains that
these allegations are adequate “at this stage, prior to discovery.” Id. at 3. The Court disagrees.
The Complaint’s breach of contract claim fails “to enter the realm of plausible liability,”
because its allegations fall short of “the line between the conclusory and the factual.” Twombly, 550
U.S. at 557 n.5. Put differently, the Complaint “fail[s] to allege enough facts about the terms of the
[contracts] to raise [his] right to relief above the speculative level.” Innova Hosp. San Antonio, L.P.
v. Blue Cross & Blue Shield of Georgia, Inc., 995 F. Supp. 2d 587, 603 (N.D. Tex. 2014). Baker’s
pleadings fall short in this respect for two related reasons.
First, the Complaint “fail[s] to identify which provision[s]” of the two agreements Great
Northern “allegedly breached.” Williams v. Wells Fargo Bank, N.A., 560 Fed. App'x 233, 238 (5th Cir.
2014). This Court and others throughout this Circuit have consistently indicated that, as a general
rule, “‘a plaintiff suing for breach of contract must point to a specific provision in the contract that
was breached by the defendant.’”4 In Innova Hospital, for example, the plaintiffs’ breach of contract
claim was dismissed because the complaint failed to “identify what provisions were breached or
4
Lara v. Wells Fargo Bank, N.A., No. 3:13-CV-1686-B, 2013 WL 6242703, at *3 (N.D. Tex. Dec.
2, 2013) (quoting King v. Wells Fargo Bank, N.A., No. 3:11–CV–0945–M–BD, 2012 WL 1205163, at *2
(N.D. Tex. Mar. 20, 2012); see also Innova Hospital, 995 F. Supp. 2d at 602; Watson v. Citimortgage, Inc., 814
F. Supp. 2d 726, 732 (E.D. Tex. 2011); Garrison v. Select Portfolio Servicing, Inc., No. 5:14-CV-337-DAE,
2014 WL 4187207, at *5 (W.D. Tex. Aug. 21, 2014); Chapa v. Chase Home Fin. LLC, No. CIV.A. C-10-359,
2010 WL 5186785, at *5 (S.D. Tex. Dec. 15, 2010) (“[B]ecause Plaintiff has failed to provide the loan
documents and failed to indicate which loan documents—let alone which provisions—were breached,
Plaintiff has failed to satisfy the pleading standards of Rule 8(a).”).
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provide factual allegations about the terms” at issue. 995 F. Supp. 2d at 603. The court rejected the
complaint’s conclusory assertions that the defendants “failed to pay the reimbursement rate ‘required
by the contracts’ or the ‘contractually agreed upon amounts,’” because these assertions did not clarify
“what rates were required or contractually agreed upon by the parties.” Id.
Similarly, in this case, the Complaint merely concludes that Great Northern “breached its
obligations” under the two agreements at issue, without specifying which provisions or terms of the
two contracts Great Northern allegedly breached. Regarding the first agreement, the Complaint
simply states that Great Northern failed to pay Baker “the sums he was due” under the contract.
Compl. ¶ 35. It never specifies, however, what particular provision is at issue or even the “sums” that
Great Northern supposedly failed to pay in accordance with the agreement. Likewise, with respect
to the second agreement, the Complaint only alludes to the “terms” Great Northern breached,
without clarifying what those terms were or how Great Northern violated them. Id. ¶ 36. Such vague
and conclusory allegations deprive Great Northern of fair notice,5 and thus, fail to state a plausible
breach of contract claim.
Second, the Complaint further deprives Great Northern of fair notice through its confusing
and unspecified assertions regarding the two purported agreements supporting Baker’s single claim.
To illustrate, the allegations under the Complaint’s sole breach of contract heading begin by
identifying two agreements and the two ways in which Great Northern allegedly breached each
agreement. See id. ¶¶ 33-37. But thereafter, the allegations simply reference the parties’ actions in
5
Federal Rule of Civil Procedure 8(a)(2) requires, among other things, that a complaint “provide the
defendant with ‘fair notice of what the plaintiff’s claim is and the grounds upon which it rests.’” Pub.
Employees Ret. Sys. of Mississippi, Puerto Rico Teachers Ret. Sys. v. Amedisys, Inc., 769 F.3d 313, 320 (5th Cir.
2014) (quoting Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 346 (2005)).
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relation to “that agreement” or “the terms of the Agreement,” and assert entitlement to relief in
accordance with “the Agreement”—all without specifying which of the two agreements is being
addressed. Id. ¶¶ 38-40. And in the Complaint’s general fact allegations section, Baker similarly refers
only to “the Agreement” and “Great Northern’s initial breach,” without any additional clarification.
Id. ¶¶ 27, 29. These assertions further identify the Defendants’ purported “duties”—at least some of
which appear to relate to the alleged agreements—but again, the Complaint fails to specify which
contract, if either, these supposed obligations concern. See id. ¶¶ 30-32. Therefore, the Court
concludes, for all the reasons identified above, that the Complaint fails to plausibly allege a breach
of contract claim against Great Northern.
B.
Common Law Fraud (Second Claim for Relief)
The Complaint’s second claim asserts that Defendants Great Northern, Loftis, Abercrombie,
and Martin defrauded Baker in violation of Texas law. To state a fraud claim under Texas law, a
complaint must plausibly set forth the following elements:
(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 Chem. Indus. Joint Stock Co. v. Potter, 607 F.3d 1029, 1032-33 (5th Cir. 2010)
(citing Ernst & Young, L.L.P. v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001)).
In addition, fraud claims are subject to Federal Rule of Civil Procedure 9(b)’s heightened
pleading requirements. See id. at 1032. Rule 9(b) requires that fraud pleadings “state with
particularity the circumstances constituting the fraud.” FED. R. CIV. P. 9(b). This means that, as a
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general rule, “‘the who, what, when, where, and how [must] be laid out’” in the fraud pleadings to
satisfy Rule 9(b)’s requirements. Shandong Yinguang, 607 F.3d at 1032 (quoting Benchmark
Electronics, Inc. v. J.M. Huber Corp., 343 F.3d 719, 724 (5th Cir. 2003)).
Baker asserts two related theories for his common law fraud claim. First, the Complaint
alleges that “Loftis, on behalf of himself and the other defendants, made” a number of false
statements during the negotiation of Baker’s eventual investment in Great Northern. Compl. ¶ 43.
Specifically, the Complaint identifies five purportedly false or misleading statements made by Loftis:
(1) that the investment was already profitable and producing oil; (2) that plaintiff’s
investment would generate a substantial return; (3) that the investment would be
managed and protected; (4) that Loftis had a long history of success for investors,
who made a lot of money with him; [and] (5) that Great Northern Energy was
producing more than 300 gross barrels per day of oil from its operations.
Compl. ¶ 43. Second, the Complaint also claims that “Defendants also omitted to disclose material
facts” regarding Loftis’s prior criminal conviction and civil default judgment “prior to [Baker’s]
purchasing the unregistered securities in question.” Id. ¶ 44.
Defendants argue that the Complaint fails to adequately allege fraud under either of the two
theories asserted. With respect to the affirmative misrepresentations alleged, Defendants contend
that the Complaint fails to detail these “false” statements with sufficient particularity under Rule
9(b). Def.’s Mot. 5. Defendants further argue that the allegations supporting this theory fail to
adequately demonstrate the falsity of the purported statements. Id. With respect to Baker’s fraud by
omission allegations, Defendants assert that this theory is also inadequately pled, because “the
Complaint fails to identify . . . any duty Defendants were under to disclose these facts.” Id. at 5-6.
While Baker disputes each of these assertions, the Court, as follows, agrees with Defendants that the
Complaint fails to adequately plead common law fraud under either of the theories asserted.
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First, the Complaint does not allege the false statements at issue with sufficient particularity
under Rule 9(b). For example, the Complaint only vaguely asserts that Defendant Loftis made the
false statements “[b]eginning in the summer of 2012,” Compl. ¶ 43, which does not sufficiently
explain when the five statements at issue were made. The Complaint further fails to specify where the
false statements were made, other than to say that Baker “met or spoke over the phone various times
with Defendant Loftis.” Id. ¶ 12. The Complaint is also wholly devoid of any details surrounding the
Defendants’ supposed use of Great Northern “as their own personal business and ‘cookie jar.’” Id. ¶
30. While Baker urges that to require a greater degree of specificity “goes beyond the requirements
or intent of Rule 9(b),” and that the precise circumstances surrounding these alleged discussions “can
be assumed,” such assertions are inconsistent with the law. Pl.’s Resp. 4-5. As this Court has noted
in similar circumstances,6 the specificity required to satisfy Rule 9(b) cannot simply be assumed; at
the very least, the requisite details must be stated in the Complaint, rather than in a responsive brief,
which Baker has failed to do.
Second, the Complaint also fails to adequately plead how the statements underlying the fraud
claim are false. After identifying the five purportedly false or misleading statements mentioned above,
the Complaint asserts that these representations are “false and misleading in that:”
(1) Defendants did not have the resources necessary to maximize the value of the
assets; (2) Defendants had substantial undisclosed debt, and adverse claims and [3]
management had . . . used the financial and other resources of [Great Northern] as
a personal ‘cookie jar’ for their own personal gain and benefit.
6
See, e.g., Berry v. Indianapolis Life Ins. Co., 600 F. Supp. 2d 805, 817 (N.D. Tex. 2009) (“[I]f the
Court were to assume the representations alleged were made on the specific dates, it would essentially be
allowing Plaintiffs to amend their Complaint to add specificity through briefing—wherein Plaintiffs point to
the listed specific dates in response to various Defendants' arguments that they have not identified when the
alleged representations were made. Such an amendment would be improper.”).
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Id. ¶ 47. This brief explanation, however, does not satisfy Baker’s burden to plead falsity for any of
the five “misrepresentations” alleged.
With respect to the first false statement alleged, nowhere does the Complaint indicate that
“the investment” was not actually “profitable and producing oil” at the time Loftis made this statement
to Baker. Nor does the Complaint assert that Loftis was incorrect when he stated that Great
Northern, at the time, was “producing more than 300 gross barrels per day of oil from its operations.”
Similarly, even though the deal ultimately went poorly for Baker, the allegations do not sufficiently
demonstrate that Loftis was wrong to boast, during negotiations, that the “investment would generate
a substantial return” or “that the investment would be managed and protected.” Likewise, the
Complaint never actually says that Loftis’s statement regarding his “history of success for investors”
was a lie—he could have very well had a successful history notwithstanding his prior legal troubles.
And even assuming one or more of these statements was actually false or misleading, the way most
of them are currently pleaded makes them “so general as to constitute [lawful] puffing.”7 Southland
Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 373 (5th Cir. 2004).
Lastly, Baker’s alternative fraud theory—fraud by omission—is also inadequately pled. “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.’”8 Smith v. BCE
7
See also Texas Capital Sec., Inc. v. Sandefer, 58 S.W.3d 760, 776 (Tex. App. 2001) (“Johnson's
comments amounted to nothing more than puffing or dealers' talk. As such, they do not amount to actionable
misrepresentation.”) (citing Paull v. Capital Resource Management, 987 S.W.2d 214, 218–19 (Tex. App.
1999)).
8
For a concise statement of the elements of a fraud by omission claim, see CDI Corp. v. GT Solar Inc.,
No. H–11–3487, 2013 WL 873785, at *2 (S.D.Tex. Mar. 7, 2013).
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Inc., 225 Fed. App'x 212, 218 (5th Cir. 2007) (quoting United Teacher Assocs. Ins. Co. v. Union Labor
Life Ins. Co., 414 F.3d 558, 567 (5th Cir. 2005)) (brackets omitted). Accordingly, Baker’s fraud by
omission claim cannot be sustained “unless there is a duty to disclose the information,” which arises
“only when the particular circumstances impose a duty on the party to speak and he deliberately
remains silent.” Bradford v. Vento, 48 S.W.3d 749, 755 (Tex. 2001) (citations omitted). Texas courts
have found a duty to disclose in the following circumstances:
(1) when the parties have a confidential or fiduciary relationship, (2) when one party
voluntarily discloses information, which gives rise to the duty to disclose the whole
truth, (3) when one party makes a representation, which gives rise to the duty to
disclose new information that the party is aware makes the earlier representation
misleading or untrue, or (4) when one party makes a partial disclosure and conveys
a false impression, which gives rise to the duty to speak.
Ins. Co. of N. Solutioneers Consulting, Ltd. v. Gulf Greyhound Partners, Ltd., 237 S.W.3d 379, 385
(Tex. App. 2007) (citing Am. v. Morris, 981 S.W.2d 667, 674 (Tex.1998); Four Bros. Boat Works,
Inc. v. Tesoro Petroleum Cos., 217 S.W.3d 653, 670–71 (Tex. App. 2006)).
In this case, Baker argues that Defendants had a duty to disclose Loftis’s “conviction for bank
fraud and his separate $2,000,000 judgment against him,” because such information constituted “‘a
material fact which was necessary in order to make [other] statement[s] made not misleading.’” Pl.’s
Resp. 6 (quoting Duperier v. Texas State Bank, 28 S.W.3d 740, 745 (Tex. App. 2000)). More
specifically, Baker asserts that this omitted information made “every single statement [Loftis] and
his company made in an effort to solicit cash from Baker and any other investor misleading,” as “[i]t
would be material for any investor to know” these facts. Id. In other words, Baker advocates for a rule
under which a person is per se liable for fraud if he or she asks for or receive investors’ funds without
disclosing that he or she, or an affiliate manager, has been charged in the past of financial
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improprieties. Baker, however, provides no legal support for such a rule. Nor is the Court aware of
any. Without any authority to rely on, or more specificity as to the circumstances surrounding the
purported omissions, the Court cannot reasonably find that Defendants were legally obligated to
disclose Loftis’s legal history to Baker. Therefore, the Court concludes that Baker’s Complaint fails
to adequately state a fraud claim under either an affirmative fraud or fraud by omission theory.
C.
Securities Law Fraud (Third Claim for Relief)
Baker’s next claim alleges that all Defendants except Arkatex engaged in securities fraud in
violation of (1) § 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated
thereto, (2) the Texas Securities Act, and (3) Colorado Securities Act. See 15 U.S.C. § 78j(b); 17
C.F.R. § 240.10b-5; Tex. Rev. Civ. Stat. Ann. arts. 581-7 & 581-33; Colo. Rev. Stat. § 11-51-501.
The basic elements of a federal securities fraud claim are similar to those of a common law
fraud claim: “(1) a material misrepresentation (or omission) . . . ; (2) scienter . . . ; (3) a connection
with the purchase or sale of a security . . . ; (4) reliance . . . ; (5) economic loss . . . ; and (6) loss
causation . . . .” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342 (2005) (emphasis and citations
omitted). As with common law fraud claims, Rule 9(b) “appl[ies] to securities fraud claims.”
Goldstein v. MCI WorldCom, 340 F.3d 238, 245 (5th Cir. 2003) (citing Williams v. WMX Techs., Inc.,
112 F.3d 175, 177 (5th Cir. 1997)). In addition, Baker must satisfy the “high standards for pursuing
[a] federal securities fraud sui[t]” set by the Private Securities Litigation Reform Act (“PSLRA”).
Indiana Elec. Workers' Pension Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 532 (5th Cir. 2008)
(citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)). Specifically, the
Complaint must meet the PSLRA’s “enhanced [] particularity requirements for pleading fraud under
Federal Rule of Civil Procedure 9(b),” which include, among other requirements, that plaintiffs
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“‘specify each statement alleged to have been misleading, [and] the reason or reasons why the
statement is misleading . . .’” Id. (citing 15 U.S.C. § 78u-4(b)(1)(B)) (alterations in original).
Here, for similar reasons articulated above in connection with Baker’s common law fraud
claim, the Complaint fails to properly allege a material misrepresentation or omission for purposes
of its federal securities fraud claim. Simply put, the standards for pleading a federal securities fraud
cause of action require much more specificity than the Complaint provides for the misrepresentations
and omissions alleged, including when and where the statements were made, and how those
statements or omissions were false, misleading, or otherwise actionable under the federal securities
laws.9
For essentially the same reasons, the Court determines that the Complaint fails to adequately
state claims under the Texas Securities Act and Colorado Securities Act.10 The Texas Securities Act
generally allows security purchasers to sue “‘[a] person who offers or sells a security” that makes “‘an
untrue statement of a material fact’” or omits material facts “‘necessary in order to make the
statements, in the light of the circumstances under which they were made, not misleading.’” Dorsey
9
The Court does not, at present, address Defendants’ argument that this claim also violates the group
pleading prohibition in the PSLRA and fails to satisfy the scienter element. See Def.’s Mot. 7-9. These issues
are better addressed only if, and when, Baker sufficiently alleges the misrepresentation/omission element.
Defendants also argue that the Complaint fails to properly allege that the “interests” at issue
constitute a security subject to the federal securities laws. See id. at 7. But they provide the Court with no
reasonable basis to conclude that the alleged interests do not fall within the federal securities law’s “broad”
definition of a security. Landreth Timber Co. v. Landreth, 471 U.S. 681, 686 (1985). Thus, the Court disagrees
with Defendants that Baker has not adequately alleged a security subject to the federal securities laws.
10
Although the Complaint alleges that Defendants “failed to comply with the registration
requirements for either Texas or Colorado,” Compl. ¶¶ 54, 55, neither Baker nor the Complaint assert that
this conduct alone would support the state securities fraud claims alleged. Instead, Baker focuses exclusively
in his response on the purported misrepresentations and omissions underlying these alleged state law
violations. Thus, in finding dismissal warranted, the Court does not consider whether Baker’s claim could
survive solely on allegations concerning Defendants’ failure to register the securities at issue.
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v. Portfolio Equities, Inc., 540 F.3d 333, 343 (5th Cir. 2008) (quoting Tex. Rev. Civ. Stat. Ann. art.
581-33(A)(2)). Likewise, the Colorado Securities Act “makes it unlawful for any person, in
connection with the offer, sale, or purchase of any security, directly or indirectly, to,” among other
things, “‘make any untrue statement of a material fact or’” omit material facts “‘necessary in order
to make the statements, in the light of the circumstances under which they were made, not
misleading.’” Black Diamond Fund, LLLP v. Joseph, 211 P.3d 727, 734 (Colo. App. 2009) (quoting
Colo. Rev. Stat. § 11-51-501(1)). And since pleading these state securities law elements requires
Baker to “alleg[e] fraud,” Rule 9(b) applies as well. FED. R. CIV. P. 9(b). Given that these legal
requirements do not significantly differ from the insufficiently-pled elements of Baker’s common law
fraud claim, the Court concludes that the Complaint’s third claim also fails to properly allege
securities fraud under either Texas or Colorado law.
D.
Fraud Under § 12(2) of the 1933 Securities Act (Fourth Claim for Relief)
Baker’s fourth claim for relief similarly alleges that all Defendants except Arkatex engaged
in securities fraud in violation of § 12(2) of the Securities Act of 1933. See 15 U.S.C. § 77l(a)(2).
Like his second and third claims just discussed, Baker’s claim under § 12(2) of the Securities Act of
1933 requires well-pled allegations of “an untrue statement of a material fact or affirmative false
statement or omission of a material fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.” Id. Thus, for the same reasons its fraud
claim is insufficiently pled, the Complaint’s fourth claim also fails.
One additional defect with this claim warrants discussion at this time. Specifically, as
Defendants point out, Baker’s fourth claim is also deficient in that “the Complaint does not allege
any sale that was made ‘through a written prospectus or some oral communication related to a
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prospectus.’” Def.’s Mot. 11 (quoting James Jianhua Wu v. Weizhen Tang, No. 3:10-CV-0218-O, 2011
WL 145259, at *6 (N.D. Tex. Jan. 14, 2011)). Baker argues that this admitted pleading defect does
not warrant dismissal, because Defendants’ argument is based “on an unreported District Court case
[i.e., Jianhua Wu],” rather than “the actual language of the statute,” which as Baker notes, provides
that the fraud must relate to “‘a prospectus or oral communication.’” Pl.’s Resp. 7 (quoting 15 U.S.C.
§ 77l(a)(2)) (emphasis omitted). But as noted in the unreported district court opinion that Baker
asks the Court to disregard, the Supreme Court long ago rejected the very interpretation of § 12(2)
that Baker now suggests—holding that “‘the phrase oral communication [in § 12(2)] is restricted to
oral communications that relate to a prospectus.’” Jianhua Wu, 2011 WL 145259, at *6 (quoting
Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 569 (1995)) (emphasis added). Or, as the Fifth Circuit
put it, “Gustafson v. Alloyd Co. interpreted § 12(2) of the Securities Act to apply only to initial public
offerings or sales made to the public through a widely-disseminated prospectus.” Brunig v. Clark, 560
F.3d 292, 295 (5th Cir. 2009). Therefore, “[§] 12(2) is unavailable in a privately-negotiated”
securities agreement like the one alleged in Baker’s Complaint. Id. As such, Baker’s fourth claim fails
on this additional ground as well.
E.
Negligence & Misrepresentation (Fifth & Sixth Claims for Relief)
With respect to his next two “claims for relief,” Baker is not entirely clear as to what exactly
he is alleging. The Complaint’s fifth claim is titled “negligence,” and simply asserts that Defendants
engaged in “negligent conduct [that] proximately caused damages to [Baker] . . . in a sum in excess
of $250,000,” plus special damages. Compl. ¶¶ 71-73. Its sixth claim is titled “misrepresentation,”
and similarly provides conclusory allegations regarding Defendants’ purported breach of duty to
disclose material facts to Baker, their “intent to deceive, manipulate or defraud” Baker, Baker’s
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justifiable reliance “on such misrepresentations in entering into the Agreement,” and his “damages
in a sum in excess of $250,000,” plus special and punitive damages. Id. ¶¶ 75-80. Further
complicating matters, Defendants address three potential causes of action that could be embodied
in these two claims for relief—negligence, intentional misrepresentation, and negligent
misrepresentation—while Baker only explicitly defends his allegations as they relate to negligent
misrepresentation. Compare Def.’s Mot. 11-14, with Pl.’s Resp. 8-10. This confusion alone warrants
dismissal of both claims, as it leaves Defendants without fair notice of what Baker is even alleging.
Even if Defendants had fair notice of the three potential claims in the Complaint’s fifth and
sixth claims for relief, each would, nonetheless, warrant dismissal. To the extent Baker alleges a
negligence claim, the pleadings are inadequate with respect to at least two elements:11
(i) Defendants’ purported legal duty to Baker and (ii) Defendants’ breach of that duty. In fact, the
Complaint merely states that “[t]he conduct of Defendants, and each of them, constitutes negligence
and such negligent conduct proximately caused damages to Plaintiff,” without clarifying what
conduct was negligent and how. Compl. ¶ 71. Such conclusory and speculative allegations do not
suffice to state a plausible claim.12 Likewise, to the extent Baker alleges an intentional
misrepresentation claim, the Court finds dismissal warranted for the same reasons it dismissed Baker’s
common law fraud claim. Indeed, allegations recast under a “cause of action for ‘intentional
misrepresentation’ add nothing to [a] fraud caus[e] of action,” and thus, the Court is not even
11
See D. Houston, Inc. v. Love, 92 S.W.3d 450, 454 (Tex. 2002) (“A cause of action for negligence
in Texas requires three elements. There must be a legal duty owed by one person to another, a breach of that
duty, and damages proximately caused by the breach.”).
12
Given the lack of any detail surrounding this claim, the Court declines at this time to rule on
Defendants’ argument that Baker’s negligence claim is barred by the economic loss rule.
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obligated to analyze these allegations “separately from [Baker’s] fraud causes of action.” Smith v.
Tilton, 3 S.W.3d 77, 82 n.3 (Tex. App. 1999) (citations omitted).
To the extent the Complaint alleges a negligent misrepresentation cause of action, this claim
also fails. Under Texas law, the elements of a negligent misrepresentation claim include:
(1) the representation is made by a defendant in the course of his business, or in a
transaction in which he has a pecuniary interest; (2) the defendant supplies “false
information” for the guidance of others in their business; (3) the defendant did not
exercise reasonable care or competence in obtaining or communicating the
information; and (4) the plaintiff suffers pecuniary loss by justifiably relying on the
representation.
Plano Surgery Ctr. v. New You Weight Mgmt. Ctr., 265 S.W.3d 496, 502 (Tex. App. 2008) (citing Fed.
Land Bank Ass'n v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991); Prospect High Income Fund v. Grant
Thornton, LLP, 203 S.W.3d 602, 614 (Tex.App. 2006)). “‘Significantly, the sort of false information
contemplated in a negligent misrepresentation case is a misstatement of existing fact, not a promise
of future conduct.’” Dallas Firefighters Ass'n v. Booth Research Grp., Inc., 156 S.W.3d 188, 194 (Tex.
App. 2005) (citing Allied Vista v. Holt, 987 S.W.2d 138, 141 (Tex. App. 1999); Airborne Freight
Corp., v. C.R. Lee Enters., Inc., 847 S.W.2d 289, 294 (Tex. App. 1992)).
The Complaint in this case fails to adequately plead a negligent misrepresentation claim in
a number of respects. First, Defendants highlight that the Complaint contains “no allegations that
Defendants made claims in the course of business or in a transaction in which they had a pecuniary
interest or supplied information for the guidance of [Baker] in his business.” Def.’s Mot. 13 (emphasis
omitted). Baker says that this argument ignores the paragraph under the Complaint’s
“misrepresentation” heading that “incorporates the allegations made” in all previous paragraphs of
the Complaint. Pl.’s Resp. 9. Generally, this sort of “incorporated by reference” pleading—employed
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by plaintiffs to add claims not explicitly alleged in their complaint—does not suffice under the federal
rules.13 And such is the case here, where Baker’s “incorporated by reference” allegations never
mention or even imply that the missing elements of Baker’s un-pled claim are being asserted.
Second, to the extent Baker bases his negligent misrepresentation claim on the affirmative
representations alleged in the Complaint, these assertions fail because they either relate to future
conduct or information that is not alleged to be false. To illustrate, the two “false” statements
identified in the Complaint regarding the anticipated success and safe management of Baker’s
investment “fail as a matter of law because [these] statements . . . were promises of future conduct
rather than statements of existing fact.” Miller v. Raytheon Aircraft Co., 229 S.W.3d 358, 380 (Tex.
App. 2007) (collecting cases). The other three false statements alleged, while they each relate to
existing facts, the Complaint does not adequately allege that these statements contain “false
information” for reasons discussed above in connection with Baker’s fraud claim.
Finally, to the extent Baker’s negligent misrepresentation claim is based on Defendants’
alleged omissions, these assertions also fail, because “in Texas, non-disclosures cannot be negligent
unless there is a duty to disclose,” which as discussed above, Baker has failed to establish. Coburn
Supply Co. v. Kohler Co., 342 F.3d 372, 377 (5th Cir. 2003) (citations omitted).
F.
Breach of Duty of Good Faith and Fair Dealing, Rescission/Mistake, & Texas Uniform
Fraudulent Transfer Act (Seventh, Ninth, & Tenth Claims for Relief)
13
See, e.g., Bell v. Dallas Cnty., No. 3:08-CV-1834-K, 2011 WL 3874904, at *2 (N.D. Tex. Aug. 30,
2011) (“Such an incorporation is not a short and plain statement of the claim” under Rule 8(a)(2) as it
deprives the defendant of fair notice); Amazon Tours, Inc. v. Quest Global Angling Adventures L.L.C., No.
CIV.A. 303CV2551M, 2004 WL 1788078, at *4 (N.D. Tex. June 30, 2004) (“While the count incorporates
by reference the allegations underlying all of Plaintiff's claims, the Court is of the view that the Complaint
nevertheless fails to provide Defendants with fair notice of any conspiracy claim related to Plaintiff's other
tort claims.”).
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The Complaint’s seventh, ninth, and tenth claims for relief can be easily disposed of, since
Baker makes no effort whatsoever to address the pleading deficiencies that Defendants raise for each
claim. Regarding Great Northern’s supposed breach of a duty of good faith and fair dealing,
Defendants assert that “the Complaint alleges no special relationship that would impose” such a
duty, as required by Texas law.14 Def.’s Mot. 14. Defendants also argue that Baker’s “so-called
[ninth] ‘claim for relief’ states no causes of action under Texas law,” and even if it did, “it contains
no facts whatsoever indicating how the investment was premised upon a mistake” or how rescission
is otherwise warranted. Id. at 16. Finally, Defendants contend that Baker’s Texas Uniform
Fraudulent Transfer Act claim should also be dismissed, because Baker’s “allegations merely track
the language of the statute with no supporting facts to state a claim for relief.” Id. at 17. Since Baker
does not address any of these arguments—indeed, he never even mention these three causes of
action in his response—the Court has no reasonable basis to disagree with Defendants that dismissal
of all three claims is warranted.
G.
Conspiracy (Eighth Claim for Relief)
Baker’s conspiracy claim can also be quickly dismissed. For a civil conspiracy claim, the
“defendant's liability is derivative of an underlying tort; without independent tortious conduct, there
is no actionable civil conspiracy claim.” Arthur W. Tifford, PA v. Tandem Energy Corp., 562 F.3d 699,
709-10 (5th Cir. 2009) (citing Miller v. Raytheon Aircraft Co., 229 S.W.3d 358, 381 (Tex. App.
2007)). As discussed above and below, the Court dismisses each of the Complaint’s tort claims.
14
See Subaru of Am., Inc. v. David McDavid Nissan, Inc., 84 S.W.3d 212, 225 (Tex. 2002) (“A
common-law duty of good faith and fair dealing does not exist in all contractual relationships. Rather, the
duty arises only when a contract creates or governs a special relationship between the parties.”) (citations
omitted).
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Therefore, Baker’s derivative conspiracy claim must be dismissed as well.
H.
Texas Theft Liability Act (Eleventh Claim for Relief)
Baker’s last claim is brought pursuant to the Texas Theft Liability Act (“TLA”). See Tex. Civ.
Prac. & Rem. Code Ann. §§ 134.001 et seq. To establish a cause of action under the TLA, a
complaint generally must allege that: “(1) the plaintiff had a possessory right to property or was the
provider of services; (2) the defendant unlawfully appropriated property . . . ; and (3) the plaintiff
sustained damages as a result of the theft.” Olufemi-Jones v. Bank of Am., N.A., No. 3:12-CV-3428-L,
2013 WL 1482544, at *3 (N.D. Tex. Apr. 10, 2013) (citing Tex. Civ. Prac. & Rem.Code §§
134.002(2), 134.003; Tex. Penal Code §§ 31.03(a)).
Defendants argue that Baker’s TLA allegations do “not even purport to recite the elements
of a TLA claim, much less any supporting factual allegations. Indeed, nowhere does the Complaint
identify any property of [Baker’s] that Defendants allegedly ‘unlawfully appropriated.’” Def.’s Mot.
18. Baker, as he did before, highlights a paragraph under the Complaint’s TLA heading
“incorporating all previous paragraphs and allegations by reference.” Pl.’s Resp. 9. Then, without
citing any particular allegations, he argues that “[b]ased on the entirety of the complaint, Baker has
more than adequately alleged” each TLA element. Id. But as the Court detailed above, this sort of
pleading does not satisfy the federal pleading standards, which require Baker to set forth the elements
of his TLA claim, and support these elements with non-conclusory, factual allegations. Since the
Complaint fails on both these grounds, the Court finds dismissal warranted for Baker’s final claim.
IV.
CONCLUSION
For the foregoing reasons, the Court GRANTS Defendants’ Motion (doc. 25) to the extent
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it seeks dismissal of Baker’s claims pursuant to Rule 12(b)(6) and DISMISSES WITHOUT
PREJUDICE all eleven claims in Baker’s Complaint.
If Baker seeks to file an amended complaint in an effort to overcome the deficiencies
warranting dismissal stated in this Order, the Court ORDERS him to do so within thirty (30) days
from the date on which this Order is entered. These re-pleadings shall be accompanied by a synopsis
no longer than ten (10) pages explaining why the amendments overcome the deficiencies stated
herein. If Defendants wish to respond, the Court ORDERS them to do so within fourteen (14) days
of Baker’s filing of his amended pleadings, in a responsive brief no longer than ten (10) pages in
length.
In light of its ruling on Defendants’ Motion to Dismiss, the Court DENIES AS MOOT
Defendants’ Motion (doc. 25) to the extent it seeks an order compelling arbitration of Baker’s
dismissed claims. If necessary, the Court will allow Defendants to re-file a motion to compel in
accordance with the Court’s instructions following a review of Baker’s anticipated re-pleadings.
SO ORDERED
DATED: December 3, 2014.
_________________________________
JANE J. BOYLE
UNITED STATES DISTRICT JUDGE
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