VeroBlue Farms USA Inc v. Wulf et al
Filing
291
MEMORANDUM OPINION AND ORDER granting 215 Motion to Strike; granting in part 180 , 184 , 211 , 219 Motions to Dismiss; granting 207 , 227 Motions to Dismiss; granting 233 , 228 Motions to Strike Third-Party Complaint. The Court GRANTS LEAVE to VeroBlue to correct these deficiencies (within 28 days of this Order) as to the new fraud claims against the Founders. The Court severs and transfers the claims against Canaccord to the United States District Court for the Southern District of New York under section 1404 pursuant to the forum-selection clause (Civil case 3:20-cv-1452-X opened). (Ordered by Judge Brantley Starr on 6/5/2020) (axm) Modified on 6/5/2020 (axm).
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UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
VEROBLUE FARMS USA,
INC.,
Plaintiff,
v.
LESLIE A. WULF, BRUCE A.
HALL, JAMES REA, JOHN E.
RAE, KEITH DRIVER,
CANACCORD GENUITY LLC,
CHRISTINE GAGNE, and
SEAN MANIACI,
Defendants.
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Civil Action No. 3:19-CV-00764-X
MEMORANDUM OPINION AND ORDER
This case is a doozy. Several individuals founded VeroBlue Farms USA, Inc.
(VeroBlue) to revolutionize the farm-raised fish industry. It did not go well.
VeroBlue went bankrupt and sued its founders, former officer Keith Driver, a
New York investment-banking firm, a co-founder’s daughter, and a Canadian lawyer
who represents a sister company. VeroBlue’s general theories are mismanagement
and misrepresentations by its founders, and conspiracy and aiding and abetting by
the other defendants. Its founders, along with several VeroBlue directors, then sued
the investor who is now (after a bankruptcy discharge) VeroBlue’s only shareholder.
Their third-party complaint brings claims of tortious interference and breach of the
founders’ termination agreements.
1
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There are 10 pending motions at this dismissal phase. Defendants Leslie Wulf,
Bruce Hall, James Rea, and John (Ted) Rea (collectively, “the Founders”) and Driver
filed motions to dismiss [Doc. Nos. 184 & 180]. But VeroBlue moved to strike portions
of these motions to dismiss, and the Court GRANTS the motion to strike
[Doc. No. 215]. The Founders’ arguments on deficient fraud pleading could have been
raised in the Founders’ first motion to dismiss; therefore, Rule 12(g) bars them as
untimely. As far as the motion to strike pertains to Driver, his detailed factual
affidavit is inappropriate at the dismissal stage, and Rule 12(g) also bars his new
single-sentence incorporation by reference of the Founders’ motion to dismiss.
Of what remains of the Founders’ motion to dismiss [Doc. No. 184], the Court
GRANTS IT IN PART. The Court holds that VeroBlue has standing to contest the
waste of its corporate assets (and not to contest misrepresentations to nonparties).
But VeroBlue’s fraud pleading is deficient, and the Court GRANTS LEAVE to
VeroBlue to correct these deficiencies (within 28 days of this Order) as to the new
fraud claims against the Founders.1
The Court GRANTS IN PART Driver’s other dismissal arguments
[Doc. No. 180]. VeroBlue failed to plead its fraud allegations against Driver with the
required specificity and must cure these defects in its repleading. As to Driver’s
argument that a release bars the claims, the Court will defer on such a ruling until
VeroBlue has at least repleaded its fraud allegations.
1 The repleading should only address the deficiencies identified in this Order and not add
parties or claims.
2
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As to the Rule 12(b)(3) motion to dismiss [Doc. No. 211] from New York
investment-banking firm Canaccord Genuity LLC (Canaccord), there is a mandatory
forum-selection clause at play. The Court declines to dismiss the claims against
Canaccord but TRANSFERS them to the United States District Court for the
Southern District of New York.
As to Canadian attorney Sean Maniaci, the Court GRANTS his motion to
dismiss the claims against him for lack of personal jurisdiction [Doc. No. 206] because
his contacts with Texas neither confer general jurisdiction nor give rise to the claims
against him.
Three of the third-party defendants have responded to the Founders’ thirdparty complaint: Alder Aqua, Ltd. (Alder), Bjorn Thelander, and Norman McCowan.
All three sought to strike and dismiss the third-party complaint [Doc. Nos. 223 &
228]. The Court is obligated to address the three jurisdictional arguments before
addressing the motions to strike. First, the Court agrees with Alder’s jurisdictional
argument that the Court lacks jurisdiction over the Founders’ alter ego and contract
claims because the Founders never presented these claims to the bankruptcy court
(as Alder did with the tortious interference claims). Second, the Court disagrees with
Alder’s jurisdictional argument that service of process via a solicitor for a British
Virgin Islands company was defective under the Hague Convention.2 Finally on
2 As a result, the Court GRANTS IN PART (as to alter ego and breach of contract claims) and
DENIES IN PART (as to defective service) Alder’s motion to dismiss [Doc. No. 219].
3
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jurisdiction, the Court concludes that it lacks personal jurisdiction over Thelander
[Doc. No. 227].
Lastly, the Court GRANTS the motions to strike the third-party complaint
[Doc. Nos. 223 & 228]. The third-party complaint’s tortious interference claims do
not seek to make the third-party defendants liable for VeroBlue’s claims against the
Founders. As new and independent claims, Rule 14 prohibits the Founders from
injecting them into this lawsuit.
As a result of these rulings, the third-party
complaint is only operative against the third-party defendants who have not yet
responded.
I. Factual Background
The detailed facts of this case are more suited for a book than the pages of the
Federal Supplement. The Court will address the high points of the alleged facts that
are relevant to the many motions this ruling decides.
Leslie Wulf, Bruce Hall, James Rea, and John (Ted) Rea (the Founders), along
with Keith Driver, in 2014 founded VeroBlue, which is a sustainable fish-farm
business. The Founders didn’t invest their own money in VeroBlue. In July 2016,
Alder’s predecessor and FishDish LLC invested $34 million in VeroBlue through a
preferred stock purchase.
Dr. Otto Happel is the principal and primary
decisionmaker for Alder. Alder appointed Jens Haarkoetter and Bjorn Thelander as
its representatives to the VeroBlue board. Haarkoetter resigned his position as a
director in October 2017, and Thelander served as a director until early 2018. Eva
4
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Ebstein (Dr. Happel’s daughter) was appointed a director in June 2017, and Anders
Wester was appointed a director upon Haarkoetter’s resignation.
When Alder invested in VeroBlue, Amstar Funds (Amstar) also extended
VeroBlue a line of credit. Dr. Happel (who controls Alder) also owns and controls
Amstar. In exchange, VeroBlue issued warrants to Alder for Amstar debt that could
be exercised to obtain additional shares through a separate agreement. By July 2017,
VeroBlue had drawn down the Amstar loan, and Amstar extended VeroBlue an
additional $13 million loan facility—with Alder receiving more warrants for VeroBlue
stock. The Founders allege that Alder stopped VeroBlue from drawing on the second
$13 million loan facility, but Alder exercised warrants on both loan facilities. That
move enabled Alder to obtain a 54% interest in VeroBlue.
The Founders claim that as of July 2017, Alder so controlled VeroBlue that
VeroBlue became the alter ego of Alder. By early 2018, VeroBlue terminated the last
of the Founders, who had allegedly misappropriated or squandered over $90 million
in debt and equity.
VeroBlue filed for bankruptcy that year.
By March 2018,
VeroBlue investigated and allegedly began discovering the Founders’ bad actions.
Specifically,
VeroBlue
alleges
the
Founders
engaged
in
over
14
misappropriation schemes over three years. The first bucket of alleged misdeeds was
several separate misappropriation events. First, VeroBlue alleges that the Founders
transferred 1.25 million shares of stock to another company they owned and
controlled for a total of $1.25—when the stock was sold to others around that time for
$.90 per share (the BAJJER Stock Sale). Second, VeroBlue claims the Founders used
5
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VeroBlue to repay an alleged debt to American Growth Funding, LLC of $375,000
that benefited them personally and not VeroBlue. Third, VeroBlue alleges that the
Founders spent $107,490.51 for compensation and benefits to a VeroBlue employee
to oversee the rebuilding of Wulf’s lake house in Texas. Fourth, VeroBlue claims Wulf
authorized VeroBlue to issue 1.5 million shares of stock for no money to a friend’s
company, which procured additional investors in VeroBlue. Fifth, the Founders set
their compensation at $400,000 annually each (except Driver, whose was $325,000),
even though one person salaried at $250,000 annually replaced all five Founders.
Fifth, Wulf had VeroBlue pay compensation and benefits of $52,264.28 to his
daughter (Gagne) who had no authorization to work in the United States. Sixth, the
Founders incorporated a company (Opposing Flows Aquaculture, Inc.) and had
VeroBlue buy tanks from that company, which sold them to VeroBlue at a profit after
acquiring them from third parties. Seventh, the Founders didn’t invest their own
money in VeroBlue, but they had VeroBlue Canada issue its stock to entities the
Founders owned at $0.000001 per share while charging others $0.90 per share.
VeroBlue also alleges that the Founders engaged in other corporate waste, such
as purchasing a building for $400,000 in 2016 that could only be sold for $135,000 in
2018, and buying six tractor-trailers to deliver fish despite all customers being local.
Finally, VeroBlue alleges a variety of other miscellaneous allegations, such as the
Founders improperly reimbursing themselves $496,000 worth of expenses.
The next bucket of alleged wrongdoing is misrepresentations. VeroBlue alleges
that the Founders misrepresented key performance metrics, as well as the abilities of
6
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VeroBlue and themselves. Regarding performance metrics, VeroBlue alleges that the
Founders represented to directors false metrics for Feed/Fish Conversion Ratio (how
much feed it takes to make a fish gain a pound), density (the population density in
the tanks), mortality rates, water quality, and the amount of Earnings Before Interest
Taxes Depreciation and Amortization per pound of fish.
VeroBlue claims that
Canaccord assisted with these misrepresentations and breaches of fiduciary duty.
VeroBlue also alleges that the Founders continued the misconduct in 2019
after their ouster, including meddling in the bankruptcy proceeding. As to Canadian
attorney Steve Maniaci, VeroBlue alleges he aided and abetted the Founders in the
2019 misconduct and received shares for roughly 50% of the price others paid.
Veroblue also alleges the Founders misused other corporate counsel.
The other VeroBlue directors allegedly began questioning the Founders’ ability
to lead the company in late 2017, when VeroBlue suffered losses. On October 27,
2017, Hall and Ted Rea both signed a termination agreement that included a
purported release of some of VeroBlue’s claims against them. Wulf appears to have
signed the agreements for VeroBlue. The agreements included releases of VeroBlue’s
claims against, and $400,000 severance payments to, Hall and Ted Rea. In November
or December of 2017, VeroBlue signed a termination agreement with Wulf.3 Then-
3 VeroBlue claims this occurred December 1, 2017. See Second Amended Complaint ¶ 225 (“On
December 1, 2017, [VeroBlue] terminated Wulf pursuant to a separation agreement[.]”) [Doc. No. 159].
The counterclaim alleges this occurred November 6, 2017. See Amended Third-Party Complaint ¶ 44
(alleging that Wulf was terminated as CEO “effective November 6, 2017”) [Doc. No. 186].
7
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president McCowan signed for VeroBlue—the agreement contained no release but it
called for a $400,000 severance payment and payment of COBRA premiums.
On December 28, 2017, Wulf, on behalf of VeroBlue,4 signed an agreement
terminating Driver’s role as an independent contractor. Jackson Walker drafted the
agreement, which contained a release, a confidentiality agreement, and an obligation
of VeroBlue to pay Driver six installments payments totaling $550,000 and one
payment of $500,000 for the cancellation of certain shares in VeroBlue’s affiliate. On
January 8, 2018, VeroBlue terminated James Rea for “egregious cause” as defined in
his employment agreement.
VeroBlue filed suit on July 31, 2018. The live pleading (the second amended
complaint) brings the following claims:
(1)
breach of fiduciary duty against the Founders;5
(2)
fraudulent concealment against the Founders;
(3)
fraudulent misrepresentation against the Founders;
(4)
constructive fraud against the Founders;
(5)
a Uniform Voidable Transfers Act claim under Iowa Code section
684.4(1)(a) against the Founders;
(6)
a Uniform Voidable Transfers Act claim under Iowa Code
section 684.4(1)(b) against the Founders;
(7)
actual fraudulent transfer under Texas law against the Founders;
It is strange that Wulf allegedly signed a termination agreement on behalf of a company that
had already terminated him.
4
5 “The Founders,” as used in this opinion and pleadings other than the live complaint, does not
include Driver. The live complaint includes Driver among the Founders. The Court treats him
separately here because he has separate counsel and makes separate arguments.
8
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constructive fraudulent transfer under Texas law against the
Founders;
(9)
civil conspiracy against the Founders;
(10)
aiding and abetting against the Founders;
(11)
unjust enrichment against the Founders;
(12)
equitable accounting against the Founders;
(13)
a declaratory judgment that all transactions are void against the
Founders;
(14)
rescission of the termination agreements against Hall, Driver,
and Ted Rea;
(15)
a declaratory judgment that VeroBlue owes James Rea no
benefits under the employment agreement;
(16)
rescission of James Rea’s employment agreement;
(17)
rescission of Wulf’s separation agreement;
(18)
a declaratory judgment that VeroBlue owes Wulf no benefits
under the separation agreement;
(19)
restitution for benefits paid to Hall, Ted Rea, Driver, and Wulf
under their separation and termination agreements;
(20)
conspiracy against Canaccord;
(21)
aiding and abetting conspiracy against Canaccord;
(22)
conspiracy against Gagne;
(23)
aiding and abetting conspiracy against Gagne;
(24)
unjust enrichment against Gagne;
(25)
conspiracy against Maniaci;
(26)
aiding and abetting against Maniaci; and
(27)
violations of the Racketeer Influenced and Corrupt Organizations
Act against the Founders.6
6
This sentence contains 288 words, 64 parentheses, and 26 semicolons.
9
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VeroBlue also seeks attorney’s fees under Iowa and Texas fraudulent transfer laws.
Not to be outdone, the Founders filed a third-party complaint against seven
third-party defendants: Eva Ebstein, Jens Haarkoetter, Bjorn Thelander, Anders
Wester, Norman McCowan, Dr. Otto Happel, and Alder (collectively “the Alder
defendants”). Alder was the lead (and now is the only) investor in VeroBlue, and
Ebstein, Haarkoetter, Thelander, and Wester were representatives of Alder. Before
the VeroBlue bankruptcy, they were representatives of Amstar—VeroBlue’s largest
lender. McCowan is the current CEO of VeroBlue. Happel is allegedly the principal
and primary decisionmaker for Alder and Amstar. The Founders claim that “Ebstein,
Haarkoetter, Wester, and Thelander intentionally used their multiple positions as
directors of [VeroBlue], and as representatives of Alder and Amstar to induce
[VeroBlue], with the assistance of McCowan, to breach its obligations to Founder
Plaintiffs under their respective employment and severance agreements.”7 They
claim their ouster from the company and VeroBlue’s failure to meet its obligations
under their termination agreements were in response to the Founders alerting the
board to sexual harassment allegations against Haarkoetter.
Specifically, the third-party complaint brings the following claims:
(1)
tortious interference with Hall’s termination agreement against
all third-party defendants;
(2)
tortious interference with Ted Rea’s termination agreement
against all third-party defendants;
7 Third-Party Complaint, at 2. This case originated in Iowa, but the federal court transferred
it to the Northern District of Texas because of forum-selection clauses in a number of the agreements.
10
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tortious interference with Wulf’s separation agreement against
all third-party defendants;
(4)
tortious interference with James Rea’s employment agreement
against all third-party defendants;
(5)
alter ego against Alder;
(6)
breach of the Hall termination agreement against Alder as the
alter ego of VeroBlue;
(7)
breach of the Ted Rea termination agreement against Alder as
the alter ego of VeroBlue;
(8)
breach of the Wulf separation agreement against Alder as the
alter ego of VeroBlue; and
(9)
breach of the James Rea employment agreement against Alder as
the alter ego of VeroBlue.
All pending motions are ripe for the Court’s review and decision.
II. Motion to Dismiss Standard
Under Federal Rule of Civil Procedure 12(b)(6), the Court evaluates the
pleadings by “accept[ing] ‘all well-pleaded facts as true, viewing them in the light
most favorable to the plaintiff.’”8 To survive a motion to dismiss, the movant must
allege enough facts “to state a claim to relief that is plausible on its face.”9 “A claim
has facial plausibility when the plaintiff pleads factual content that allows the court
to draw the reasonable inference that the defendant is liable for the misconduct
alleged.”10 “The plausibility standard is not akin to a ‘probability requirement,’ but
8 In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir. 2007) (quoting Martin K. Eby
Constr. Co. v. Dall. Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004)).
9
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).
10
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
11
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it asks for more than a sheer possibility that a defendant has acted unlawfully.” 11
“[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.’”12
But this is no normal complaint, and, thus, no normal motions to dismiss. This
is a fraud case. For fraud, Federal Rule of Civil Procedure 9(b) requires the plaintiff
to “state with particularity the circumstances constituting fraud or mistake.”13 “Rule
9(b) requires the complaint to lay out the “who, what, when, where, why, and how the
false statements were made and to whom they were made.”14 “To plead an omission
with sufficient particularity, plaintiff must specifically plead when a given disclosure
should have been made.”15
This case also involves motions to strike a third-party complaint under Rule
14, a motion-to-dismiss argument for lack of standing under Rule 12(b)(1), motions to
dismiss for lack of personal jurisdiction under Rule 12(b)(2), a motion to dismiss for
failure to bring the case in the proper venue under Rule 12(b)(3), and a motion to
dismiss for defective service under Rule 12(b)(5).16 The Court will address the legal
standards for non-Rule 12(b)(6) issues when discussing those arguments.
Id. See also Twombly, 550 U.S. at 545 (“Factual allegations must be enough to raise a right
to relief above the speculative level[.]”).
11
12
Iqbal, 556 U.S. at 679 (quoting FED. R. CIV. P. 8(a)(2)).
13
FED. R. CIV. P. 9(b).
14
Askanase v. Fatjo, 130 F.3d 657, 676 (5th Cir. 1997).
15
Masel v. Villarreal, 924 F.3d 734, 749 (5th Cir. 2019).
16
Rules 12(b)(4) and (b)(7) must feel excluded.
12
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III. Application
This Order decides 10 pending motions.
First, the Founders moved to
dismiss—arguing lack of standing, insufficient fraud pleading, and Iowa choice of law
[Doc. No. 184]. Second, Driver moved on his own to dismiss—arguing a release bars
the claims and the complaint insufficiently pleads fraud [Doc. No. 180].
Third,
VeroBlue moved to strike parts of the Founders’ and Driver’s motions to dismiss
[Doc. No. 215]. Fourth, Canaccord moved to dismiss for lack of personal jurisdiction,
failure to state a claim, and for filing in the wrong venue [Doc. No. 211]. Fifth,
Maniaci moved to dismiss for lack of personal jurisdiction [Doc. No. 206]. Sixth and
seventh, Alder moved to dismiss [Doc. No. 219] and moved to strike the third-party
complaint [Doc. No. 223]. Eighth, Thelander and McCowan filed a joint motion to
strike the third-party complaint [Doc. No. 228]. Ninth, Thelander moved to dismiss
the third-party complaint for failure to state a claim and for lack of jurisdiction
[Doc. No. 227]. And tenth, McCowan moved to dismiss the third-party complaint
[Doc. No. 229]. The Court takes each motion in turn, mindful of its duty to address
jurisdictional arguments before reaching merits arguments.
A. Motion to Strike the Founders’ and Driver’s Motions to Dismiss [Doc. No. 215]
Before the Court can consider the Founders’ and Driver’s motions to dismiss,
it must resolve VeroBlue’s motion to strike them. Here, VeroBlue seeks to strike:
(1) Driver’s incorporation by reference of the Founders’ motion to dismiss; (2) Driver’s
declaration in support of his motion to dismiss; and (3) the Founders’ newly raised
arguments in the Founders’ motion to dismiss the second amended complaint that
13
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could have been raised in their motion to dismiss the first amended complaint. Driver
responds that VeroBlue waived the affidavit argument by not objecting when Driver
filed the affidavit with two prior motions to dismiss. And the Founders respond that
their arguments are allowed because, among other things, the Court dismissed as
moot their earlier motion to dismiss. The Court agrees with VeroBlue and grants the
motion to strike regarding the Founders and Driver.
Both Driver and the Founders have a Rule 12(g)(2) problem. Rule 12(g)(2) says,
“Except as provided in Rule 12(h)(2) or (3), a party that makes a motion under this
rule must not make another motion under this rule raising a defense or objection that
was available to the party but omitted from its earlier motion.”17 And Rule 12(h)(2)
says, “Failure to state a claim upon which relief can be granted . . . may be raised:
(A) in any pleading allowed or ordered under Rule 7(a) [such as an answer]; (B) by a
motion under Rule 12(c) [for judgment on the pleadings]; or (C) at trial.”18 The Fifth
Circuit interprets Rule 12(g) in this manner:
If a party seeks dismissal in a pretrial motion based on any of the
defenses set out in Rule 12(b), he must include in such motion any other
defense or objection then available which Rule 12 permits to be raised
by motion. If the party omits such defense or objection, Rule 12(g)
precludes him from making a further motion seeking dismissal based on
the omitted defense or objection.19
17
FED. R. CIV. P. 12(g)(2).
18
Id. 12(h)(2).
19
Albany Ins. Co. v. Almacenadora Somex, S.A., 5 F.3d 907, 909 (5th Cir. 1993).
14
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At least one sister court in Texas has acknowledged that the strictures of Rule 12(g)(2)
do not apply when the Court dismisses as moot the previous motion to dismiss due to
the filing of an amended complaint.20
Those principles bar new arguments that Driver and the Founders raise in
their motions to dismiss because they could have raised them in earlier motions to
dismiss. For example, Driver filed earlier motions to dismiss [Doc. Nos. 20 & 67]. His
only new argument in this motion to dismiss [Doc. No. 180] is a single sentence
incorporating by reference the arguments in the Founders’ motion to dismiss
[Doc. No. 184]. Regardless if that would bust the page limits as VeroBlue contends,
more fundamentally Driver is using that sentence to raise arguments he could have
raised earlier. And while the Court previously dismissed Driver’s second motion to
dismiss as moot due to the filing of an amended complaint [Doc. No. 161], there was
no such ruling mooting and setting a clean slate as to Driver’s original motion to
dismiss. Instead, the federal district court in Iowa granted it, transferring this case
to this Court [Doc. No. 50]. Under Rule 12(g), Driver’s chance to raise his Rule-12
arguments was in his first Rule-12 motion.21 His additional argument (the singlesentence incorporation by reference of the Founders’ dismissal arguments) is
untimely.
See Stoffels ex rel., SBC Concession Plan v. SBC Commc’ns, Inc., 430 F. Supp. 2d 642, 648
(W.D. Tex. 2006) (holding that the order dismissing original motion to dismiss upon the filing of an
amended complaint made “clear that the Court considered Plaintiffs’ Amended Complaint to wipe the
slate clean, and to provide Defendants a new, unobstructed opportunity to submit a 12(b)(6) motion”).
20
21 Timing is the issue, regardless if there would be a page-limit issue. As a result of this ruling
that Rule 12(g) forecloses Driver’s new arguments, the Court need not reach Driver’s request to file an
amended motion to dismiss that complies with the Court’s page limits.
15
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Likewise, the Founders moved to dismiss the original complaint under Rule
12(b)(3) for improper venue [Doc. No. 19]. The federal district court in Iowa agreed
and transferred the case to this Court [Doc. No. 50]. The Court did not moot the
Founders’ original motion to dismiss, and the Court provided no language
manifesting an intent to wipe the motion-to-dismiss slate clean.
The amended
complaint remained intact, and the Founders chose to answer the complaint when it
was transferred to this Court [Doc. No. 66]. Under Rule 12(g), the Founders’ time to
raise their Rule 12 arguments was in their first Rule-12 motion.
The Founders respond that the second amended complaint so substantially
changed the previous complaint that Rule 12(g) shouldn’t control. But the Founders
seek it both ways here. In responding to the motion to strike their motion to dismiss,
they say the second amended complaint is too long (such that their first motion to
dismiss could not have raised these arguments). And in their motion to dismiss, they
say the complaint is too short (and that it needs more fraud pleading and civil RICO
specificity). But the amended complaint (to which their original motion to dismiss
responded) raised claims for breach of fiduciary duty, fraudulent concealment,
fraudulent misrepresentation, constructive fraud, civil conspiracy, aiding and
abetting, unjust enrichment, equitable accounting, and a declaratory judgment. The
Founders’ newly raised arguments on specificity of fraud and civil RICO pleading
applied with even more force to the shorter amended complaint than to the second
amended complaint. Accordingly, the Court grants VeroBlue’s motion to strike the
portions of the Founders’ motion to dismiss that raise arguments for claims that
16
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VeroBlue filed in its amended complaint (the subject of the Founders’ first motion to
dismiss).22
Lastly, the Court addresses the motion to strike Driver’s affidavit attached to
his motion to dismiss. VeroBlue argues that only pleadings and attachments count
at the motion to dismiss phase. Driver responds that he attached, without objection,
the affidavit to his two prior motions to dismiss. The Court agrees with VeroBlue.
Jurisdictional motions to dismiss or motions to transfer can look to evidence
outside the motions, but motions for failure to state a claim generally cannot. And
the latter is what Driver filed—arguing that a release bars VeroBlue’s claims, and
that the claims fail to meet the fraud pleading standard. And so, the Court must limit
its inquiry to the complaint, the complaint’s attachments, and documents referred to
in the complaint that are central to the complaint’s claims.23 Driver’s affidavit is not
among those materials. Accordingly, the Court grants VeroBlue’s motion to strike
Driver’s affidavit.
The claims that were in both the amended complaint and second amended complaint are:
Count 1 for breach of fiduciary duty; Count 2 for fraudulent concealment; Count 3 for fraudulent
misrepresentation against the Founders; Count 4 for constructive fraud against the Founders; Count
9 for civil conspiracy; Count 10 for aiding and abetting against the Founders; Count 11 for unjust
enrichment; Count 12 for equitable accounting against the Founders; and Count 13 for a declaratory
judgment.
22
23 See Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498–99 (5th Cir. 2000) (“In
considering a motion to dismiss for failure to state a claim, a district court must limit itself to the
contents of the pleadings, including attachments thereto. . . . We note approvingly, however, that
various other circuits have specifically allowed that [d]ocuments that a defendant attaches to a motion
to dismiss are considered part of the pleadings if they are referred to in the plaintiff’s complaint and
are central to her claim.” (citations and quotation marks omitted) (alteration in original)).
17
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B. The Founders’ Motion to Dismiss [Doc. No. 184]
The Founders argue in their motion to dismiss that: (1) the complaint fails to
plead fraud claims with the required specificity; (2) the complaint omits key elements
of a civil RICO claim; (3) VeroBlue lacks standing to pursue losses from
misrepresentations to third parties; and (4) the complaint fails to show how Iowa law
applies. VeroBlue responds that it adequately pled its fraud and civil RICO claims,
and that there is no conflict of law, and so choice of law is irrelevant at this point.
1. Standing
The Court is compelled to address any jurisdictional arguments first. If the
Court lacks jurisdiction (due to lack of standing), then the Court has no authority to
reach a Rule 12(b)(6) merits argument.24 Under Rule 12(b)(1), the Court can dismiss
for lack of subject-matter jurisdiction on the complaint alone.25 There are two ways
a movant can challenge—and two ways the Court can consider—subject-matter
jurisdiction under Rule 12(b)(1):
When challenging subject matter jurisdiction under Rule 12(b)(1), a
party can make either a facial attack or a factual attack. If the party
merely brings a Rule 12(b)(1) motion, it is considered a facial attack, and
the court looks only at the sufficiency of the allegations in the pleading,
assuming them to be true. If the allegations are sufficient to allege
jurisdiction, the court must deny the motion. A party may make a
factual attack on subject matter jurisdiction by submitting evidence,
such as affidavits or testimony. When a movant provides evidence
factually attacking subject matter jurisdiction, the party attempting to
See Lewis v. Knutson, 699 F.2d 230, 237 (5th Cir. 1983) (“[I]f the jurisdictional challenge does
not implicate the merits of the cause of action, the jurisdictional basis must survive both facial and
factual attacks before the district court can address the merits of the claim.”).
24
25 See Williamson v. Tucker, 645 F.2d 404, 412–13 (5th Cir. 1981) (“A motion to dismiss for lack
of subject matter jurisdiction, Rule 12(b)(1), can be based on the lack of jurisdiction on the face of the
complaint.”).
18
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invoke jurisdiction must submit evidence and prove by a preponderance
of the evidence that the court has jurisdiction.26
The Founders submitted no evidence to controvert VeroBlue’s allegations of
jurisdiction, and so the Court construes the argument as a facial rather than factual
attack.
The Founders claim that the live complaint lacks allegations of injuries to
VeroBlue and instead alleges injuries to potential or actual investors, lenders, and
interested third parties.
VeroBlue responds that it was injured by the alleged
conduct, which squandered up to $90 million of its resources.
These arguments beg the question of just who VeroBlue is and whether it can
sue its founders for fraud. Typically, we see such actions as derivative shareholders
suits, where Federal Rule Civil Procedure 23.1 allows a shareholder to sue one who
aggrieved the corporation when the corporation chooses not to act.27 Despite its
frequency, this is the exception and not the rule. Rule 23.1 deems these shareholders
to be standing in the shoes of the corporation.28 Two Texas court of appeals cases
26 Reneker v. Offill, 2009 WL 804134, at *3 (N.D. Tex. Mar. 26, 2009) (Fitzwater, C.J.)
(quotation marks omitted).
See FED. R. CIV. P. 23.1 (“This rule applies when one or more shareholders or members of a
corporation or an unincorporated association bring a derivative action to enforce a right that the
corporation or association may properly assert but has failed to enforce.”).
27
28 See id. 23.1(a) (“The derivative action may not be maintained if it appears that the plaintiff
does not fairly and adequately represent the interests of shareholders or members who are similarly
situated in enforcing the right of the corporation or association.” (emphasis added)).
19
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make clear the general rule that the corporation may sue its directors for
mismanagement.29 And the same basic rule exists in Iowa.30
Here, VeroBlue alleges injury from a wasting of its own assets.31 VeroBlue’s
complaint does appear to contain stray factual allegations such as misstatements to
potential investors who did not invest. These are not actionable by VeroBlue.32 The
Court requires VeroBlue to replead due to insufficient fraud pleading, as explained
below. The Court directs VeroBlue to remove from its new pleading allegations of
fraud where VeroBlue was not the recipient of the fraudulent statement.33
2. Pleading Fraud with Particularity
Pleading fraud under “Rule 9(b) requires the who, what, when, where, and how
to be laid out in the complaint.”34 Perhaps this is due to the heightened sensitivity to
See, e.g., Mary E. Bivins Found. v. Highland Capital Mgmt. L.P., 451 S.W.3d 104, 115 (Tex.
App.—Dallas 2014, no pet.) (“[A]ny cause of action lay with the Fund to sue on its own behalf to recover
for the benefit of all its creditors.”); Sutton v. Reagan & Gee, 405 S.W.2d 828, 835 (Tex. Civ. App.—San
Antonio 1966, writ. ref’d n.r.e.) (“Since the breach in mismanagement cases is of a duty owed to the
corporation, and the primary injury is to the corporation, the right to recover therefor may be regarded
as a corporate asset.”).
29
30 See Adolf Gobel, Inc. v. Skipworth, 3 N.W.2d 551, 554 (Iowa 1942) (“It is obvious that the
defendant, as president and director, was in a fiduciary relationship to the bank. . . . For any willful
breach of trust or misapplication of the corporate funds, or for any gross neglect of or inattention to his
official duties, he was responsible to the corporation.” (quoting Farmers’ Sav. Bank v. Kaufmann,
207 N.W. 764, 765 (Iowa 1926))).
See Second Amended Complaint ¶¶ 25–53 (describing multiple instances of alleged
misappropriation by the Founders resulting in depletion of $5–10 million of VeroBlue’s assets).
31
32 If a tree falls in the woods, that doesn’t mean VeroBlue can sue. But if the tree hit VeroBlue,
then VeroBlue would have standing.
The parties debated this issue in terms of whether Rule 9 (governing fraud) requires pleading
who heard the fraud. While the Fifth Circuit does require pleading of to whom the statement was
made, more fundamentally this is argument a component of standing. For example, if the Founders
lied to Frodo Baggins, VeroBlue lacks the injury to have standing under Article III. Baggins would
have that injury. See supra note 32.
33
34
Pipefitters Local No. 636, 499 F. App’x at 349 (quotation marks omitted).
20
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labeling someone a fraudster, and that statements made in court are not actionable
as defamation. The Court must address three threshold issues before reaching the
substance of the deficient fraud pleading argument.
First, as explained earlier in this Order, the Court holds that several of the
Founders’ motion-to-dismiss arguments are barred because they should have been
brought in their original motion to dismiss. And so, the Court will only consider the
Founders’ dismissal arguments as to the new claims in the second amended
complaint.
The second threshold issue is whether Rule 9 applies to fraudulent transfer
claims. The Court concludes that Rule 9 applies to actual fraudulent transfer claims
but not to constructive fraudulent transfer claims. While the Fifth Circuit has not
decided the issue,35 judges in the Northern District of Texas have held that some
fraudulent transfer causes of action that do not have elements of a fraudulent state
of mind are not subject to Rule 9.36 Of course, this depends on the fraudulent transfer
claim the plaintiff brings. Claims under Texas Business and Commerce Code section
See Matter of Life Partners Holdings, Inc., 926 F.3d 103, 118 (5th Cir. 2019) (observing that
the Fifth Circuit has “not previously addressed the question of whether an actual fraudulent transfer
claim is subject to Rule 9(b)’s heightened pleading requirements”).
35
36 See Life Partners Creditors’ Tr. v. Black Diamond Lifeplan Fund, 2017 WL 9934885, at *5
(N.D. Tex. Nov. 27, 2017) (O’Connor, J.) (“In the parallel suit against Pardo, this Court refused to apply
Rule 9(b) to fraudulent transfer claims, citing as persuasive the reasoning of two additional precedents
in this District.”); Janvey v. Alguire, 846 F. Supp. 2d 662, 676 (N.D. Tex. 2011) (Godbey, J.) (not
applying Rule 9 to fraudulent transfer claims); U.S. Bank Ass’n v. Verizon Comm., Inc., 2012 WL
3100778, at *11 (N.D. Tex. July 31, 2012) (Fish, J.) (declining to hold fraudulent transfer claims under
Texas law to the Rule 9 standard because “fraud is simply not an aspect of a fraudulent transfer
claim”).
21
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24.005(a)(1) require “actual intent to hinder, delay, or defraud” a creditor or debtor.37
Here, the fraudulent-transfer claims and their intent are:
•
Count 5, the Iowa Uniform Voidable Transfers Act section
684.4(1)(a) (which requires actual intent);38
•
Count 6, the Iowa Uniform Voidable Transfers Act section
684.4(1)(b) (which doesn’t require actual intent);39
•
Count 7, the Actual Texas Fraudulent Transfer under Texas
Business and Commerce Code section 24.005(a)(1) (which
requires actual intent);40 and
•
Count 8, the Constructive Texas Fraudulent Transfer under
Texas Business and Commerce Code section 24.005(a)(2) (which
doesn’t require actual intent).41
As a result, the claims for fraudulent transfer under Iowa law and constructive
transfer under Texas law require no showing of fraudulent intent and are not subject
to Rule 9’s heightened pleading requirement.
37 TEX. BUS. & COM. CODE § 24.005(a)(1). See E. Poultry Distribs., Inc. v. Yarto Puez, 2001 WL
34664163, at *2 (N.D. Tex. Dec. 3, 2001) (Lynn, J.) (“If the fraudulent transfer statute Plaintiffs want
the Court to apply requires intent to defraud, the enhanced pleading requirements of Rule 9(b) apply;
if the statute allows for fraudulent transfer without intent to defraud, however, only the general
pleading rules of Rule 8(a) must be satisfied.”).
The statute requires an “actual intent to hinder, delay, or defraud” a creditor or debtor, IA.
ST. § 684.4(1)(a), which the live complaint alleges. See Second Amended Complaint ¶ 258.
38
39 The statute requires no actual intent to hinder, delay, or defraud, IA. ST. § 684.4(1)(b), and
the live complaint alleges no such intent. See Second Amended Complaint ¶¶ 263–70.
The statute requires an “actual intent to hinder, delay, or defraud,” TEX. BUS. & COM. CODE
§ 24.005(a)(1), which the live complaint alleges. See Second Amended Complaint ¶ 274.
40
41 The statute requires no actual intent to hinder, delay, or defraud, TEX. BUS. & COM. CODE
§ 24.005(a)(2), and the live complaint alleges no such intent. See Second Amended Complaint ¶¶ 280–
88.
22
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The third and final threshold matter is a dispute regarding whether Rule 9’s
heightened pleading requirement for fraud applies to other claims (such as rescission,
restitution, or a declaratory judgment). The Founders say yes and VeroBlue says no.
The Courts holds that it depends on the facts, and these facts indicate these ancillary
equity claims include and are inextricably intertwined with fraud allegations.
Therefore, these claims sound in fraud and must be pled with Rule 9 specificity. The
case law indicates that what triggers specific pleading for fraud claims is not the label
attached to the claims but the substance of the allegations.42 If the allegations in a
claim are not labeled “fraud,” but are labeled as such things like “unjust
enrichment,”43 “negligent misrepresentation,”44 or “conspiracy,”45 then Rule 9 applies
to those claims.
Here, VeroBlue has claims for rescission (of termination, separation, and
employment agreements for Hall, Driver, Ted Rea, James Rea, and Wulf), restitution
(for benefits paid to Hall, Ted Rea, Driver, and Wulf), and declaratory judgments (that
VeroBlue owes James Rea and Wulf no benefits under their agreements) that are not
styled as fraud claims. But all these claims include specific factual assertions of
See Lone Star Ladies Inv. Club v. Schlotzsky’s Inc., 238 F.3d 363, 369 (5th Cir. 2001) (refusing
to apply Rule 9 to “those claims do not ‘sound in fraud’”).
42
43 See Chau v. Aviva Life & Annuity Co., 2011 WL 1990446, at *8 (N.D. Tex. May. 20, 2011)
(Boyle, J.) (applying Rule 9 to unjust enrichment allegations that were “grounded in fraud”).
See JPA, Inc. v. USF Processors Trading Corp., Inc., 2005 WL 8158446, at *3 (N.D. Tex. July
15, 2005) (Solis, J.) (applying Rule 9 to unjust enrichment allegations that sounded in fraud).
44
45 See Smith v. HSBC Bank, 2015 WL 12911463, at *4 (N.D. Tex. Aug. 6, 2015) (Solis, J.)
(applying Rule 9 to conspiracy allegations that sounded in fraud).
23
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fraudulent conduct in the body of the count.46 Because VeroBlue’s equitable claims
rely on fraud allegations, the Court will include them in its assessment of whether
the claims satisfy Rule 9.
As a result, the Court must address the following claims that are subject to
Rule 9 (including equitable claims sounding in fraud but not fraudulent transfer
claims with no intent requirement) but were newly filed (such that the Court can
consider the arguments in the unstruck portions of the motion to dismiss). These
claims are:
•
Count 5, a Uniform Voidable Transfers Act claims under Iowa
Code § 684.4(1)(a) against the Founders;
•
Count 7, actual fraudulent transfer under Texas law against the
Founders;
•
Count 14, rescission of the termination agreements against Hall,
Driver, and Ted Rea;
•
Count 15, a declaratory judgment that VeroBlue owes James Rea
no benefits under the employment agreement;
•
Count 16, rescission of James Rea’s employment agreement;
•
Count 17, rescission of Wulf’s separation agreement;
•
Count 18, a declaratory judgment that VeroBlue owes Wulf no
benefits under the separation agreement; and
46 See, e.g., Second Amended Complaint ¶ 312 (rescission claim for Hall, Driver, and Ted Rea
termination agreements alleging that “Hall, Ted Rea, and Driver intended that [VeroBlue] and its
disinterested board members rely on their material misrepresentations and each defendant’s failure
to disclose the true facts of their fraud in order to secure the Termination Agreements”); id. ¶ 324
(declaratory judgment against James Rea alleging that he “misappropriated funds or assets of the
Company, committed willful acts or omissions of dishonesty or fraud, and was in gross neglect of his
duties to [VeroBlue] between 2014 and January 2018 in breach of his Employment Agreement”).
24
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•
Page 25 of 68 PageID 9864
Count 19, restitution for benefits paid to Hall, Ted Rea, Driver,
and Wulf under their separation and termination agreements.
The Court will only address the Founders’ fraud pleading arguments as to these
claims.
The Founders argue the live complaint: (1) contains impermissible group
pleading; (2) fails to identify when or where the purported misrepresentations took
place; (3) fails to allege who heard or received the misrepresentations; and (4) fails to
allege reliance on the misrepresentations.
VeroBlue responds that its second
amended complaint is legally sufficient. The Court finds VeroBlue’s fraud pleading
to be deficient.
The Fifth Circuit makes clear that the Public Securities Litigation Reform Act’s
language governing securities fraud claims is inconsistent with group pleading. This
is because the Act requires that “untrue statements or omissions be set forth with
particularity as to ‘the defendant’ and that scienter be pleaded with regard to ‘each
act or omission’ sufficient to give ‘rise to a strong inference that the defendant acted
with the required state of mind.’”47
This is not a securities fraud case.
But
importantly, the Fifth Circuit also makes clear that “this court has never adopted the
‘group pleading’ doctrine, even before the [Public Securities Litigation Reform Act].
While the [Public Securities Litigation Reform Act] does not explicitly abolish the
doctrine, it was not necessary to do so because Congress never made this judicial
47 Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 364 (5th Cir. 2004) (quoting
15 U.S.C. § 78u–4(b)).
25
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creation law to begin with.”48 The Court is unable to find whether the Fifth Circuit
established that group pleading is permissible for non-securities fraud claims (when
it is not for securities fraud claims). And this is logical, given that such fraud claims
also require such specific pleading as “who” made the statement and their state of
mind.49 Such a doctrine would “‘permit[] an inference of wrongdoing not based on
defendant’s conduct[.]’”50 This does not mean, however, that a fraud claim can only
name one defendant. Unless a specific statute says otherwise—and none does here—
then “plaintiffs are permitted under federal procedure to allege that more than one
defendant (i.e., a group of named defendants) committed the same alleged act.”51
Here, the fraud-based claims (that the unstruck portions of the motion-todismiss challenge) have headings saying they are “Against All Founders.” And the
text of such claims allege the transfers were made “with actual intent to . . . defraud”52
VeroBlue under various listed schemes, such as the BAJJER stock scheme. The
claims incorporate by reference the factual background. But the factual background
itself often fails to illuminate who made the fraudulent statements and what their
state of mind was at the time. For example, the BAJJER stock scheme factual
background alleges that BAJJER “is owned or controlled by some or all of the
48
Id.
See Williams v. WMX Tech., Inc., 112 F.3d 175, 177 (5th Cir. 1997) (providing the elements
of fraud and the pleading requirements in the Fifth Circuit).
49
50 Southland Sec., 365 F.3d at 364 (quoting Allison v. Brooktree Corp., 999 F. Supp. 1342, 1350
(S.D. Cal. 1998)).
Clapper v. Am. Realty Inv'rs, Inc., 2015 WL 3504856, at *4 (N.D. Tex. June 3, 2015)
(Fitzwater, J.).
51
52
Second Amended Complaint ¶¶ 258, 274.
26
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Founders” and that “the Founders directed [VeroBlue] to transfer 1,250,000 shares”
to BAJJER for $1.25 total.53 The complaint neither says which of the Founders
directed the transfer nor does it illuminate that person’s state of mind. This is not to
say that VeroBlue does not know how to plead fraud with particularity or lacks the
information to do so.
For example, part of the fraud allegations relates to the
remodeling of Wulf’s Texas lake house allegedly on VeroBlue’s dime.
VeroBlue
alleges the specific VeroBlue employee who oversaw the work (Tracy Arbanas) and
the VeroBlue director who authorized the work (James Rea). Given that the formerly
disinterested directors now control VeroBlue, VeroBlue presumably has access to its
own records.
VeroBlue responds to the Founders’ fraud pleading arguments with two
primary assertions.
The first is that group pleading is permissible because the
Founders acted in concert, and VeroBlue has claims for civil conspiracy and aiding
and abetting. The Court is unaware of any authority that allows plaintiffs to so easily
circumvent Rule 9, and VeroBlue certainly has not supplied any such authority. If
pleading a conspiracy is all it took to circumvent Rule 9, courts would never hear of
Rule 9 again. And if saying “you are a fraudster” is not enough, then saying “y’all are
fraudsters”54 likewise falls short of Rule 9’s standards—notwithstanding the
inestimable power of the word “y’all.”
53
Id. ¶¶ 26–27.
54
Or, if addressing a group of three or more, “All y’all are fraudsters.”
27
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Group pleading of fraud isn’t the only fraud pleading issue. Other deficiencies
exist, including failing to identify when misrepresentations took place and where they
occurred. VeroBlue’s response is largely that the fraud pleading standard is relaxed
when that information is peculiarly within the hands of the defendants. While there
is a relaxed fraud pleading standard,55 it does not apply here because VeroBlue can
only sue for the fraud the defendants perpetrated on it, and now that the disinterested
directors control VeroBlue, VeroBlue should be able to know what statements were
false or what material omissions were made. If there were ever a case to not relax
the fraud pleading standard, this is it.56
In short, the Court does not believe that labeling a group as fraudsters—and
then seeking discovery to tighten the allegations after the fact—is consistent with the
Fifth Circuit’s view of Rule 9’s heightened fraud pleading requirements. Accordingly,
the Court grants the Founders’ motion to dismiss VeroBlue’s new fraud claims. But
the Court will allow VeroBlue a final opportunity to replead—within 28 days of this
Order—the fraud claims at issue to comply with Rule 9.57
See U.S. ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903
(5th Cir. 1997) (“Although we have held that fraud may be pled on information and belief under such
circumstances, we have also warned that this exception must not be mistaken for license to base claims
of fraud on speculation and conclusory allegations. In addition, even where allegations are based on
information and belief, the complaint must set forth a factual basis for such belief.” (quotation marks
and citation omitted)).
55
56 The Founders also argue VeroBlue failed to plead reliance. But reliance is only an element
of fraudulent concealment (Count 2) and fraudulent misrepresentation (Count 3). Those were original
claims, and the Court granted the motion to strike these dismissal arguments. But, when repleading,
VeroBlue should be mindful that such deficiencies could preclude such a claim from going to trial. See
infra note 57.
It is true that because the Court struck the dismissal arguments relating to the original
claims, those original claims would survive the dismissal stage even if VeroBlue’s next and final
pleading is still deficient. But structurally, VeroBlue’s fraud claims (original and new alike), all
57
28
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3. Civil RICO
The Founders also make several arguments about the pleading deficiency of
the civil RICO claim. But this was an original claim, and the Court struck this portion
of the motion to dismiss because the Founders should have raised the argument in
their original motion to dismiss.
Thus, the Court will not address pleading
deficiencies in the civil RICO claim. However, VeroBlue should be mindful of the
claimed deficiencies as it repleads its new fraud claims.58
4. Choice of Law
The Founders lastly claim that the Court should dismiss the case because the
live complaint fails to adequately plead choice of law. The Court disagrees. The Fifth
Circuit has settled that “[a] court sitting in diversity need not conduct a choice-of-law
analysis when there is no conflict of law.”59 There is no conflict between Iowa and
Texas law on the topics the Court addresses today. Iowa and Texas law both allow
corporations to sue for their injuries. Both allow constructive fraudulent transfer
claims to not require proof of fraudulent intent. Both require actual fraudulent
transfer claims to have proof of fraudulent intent. Because no party has shown a
material difference in Texas and Iowa law, it would be premature for the Court to
incorporate the same factual allegations. So VeroBlue’s curing of deficiencies for the new fraud claims
should hopefully cure any lingering deficiencies with the original fraud claims that the defendants are
barred from moving to dismiss.
58
See supra note 57.
59 Cypress/Spanish Ft. I, L.P. v. Professional Serv. Inds., Inc., 814 F. Supp. 2d 698, 708 (N.D.
Tex. 2011) (Boyle, J.) (citing W.R. Grace & Co. v. Cont’l Cas. Co., 896 F.2d 865, 874 (5th Cir. 1990)).
29
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dismiss the live complaint for failure to demonstrate what it does not yet need to
demonstrate.
C. Driver’s Motion to Dismiss [Doc. No. 180]
On to Driver’s motion to dismiss. It contends that Driver’s termination letter
released all of VeroBlue’s known and unknown claims against him. It also argues
that the live complaint attempts to circumvent this by group pleading Driver in with
deficiently pled claims against the Founders for their alleged actions after his release.
VeroBlue responds that its claims are properly pled, the allegations against Driver
aren’t within the scope of the release, and, in any event, the release was fraudulently
procured.
The Court will address fraud pleading first and then the release. Driver says
that the fraud claims fail to allege what Driver actually did. Instead, he says, they
lump him into the group “the Founders” and claim the Founders committed fraud
(and raising most allegations as occurring after Driver’s employment was
terminated). The Court believes that Driver’s argument goes too far inasmuch as it
would call for dismissing VeroBlue’s complaint on the simple basis that each claim
incorporated all factual allegations. While it is annoying, this defect is not fatal. The
key question is whether VeroBlue pled the specific requirements of Rule 9 as to
Driver. There are some specific allegations as to Driver, such as the allegation that
the Founders caused VeroBlue to transfer 2.5 million shares to a company Driver
owned for $.000001 per share when the shares were worth $.90 per share at the time.
But as with the defects the Court identified in assessing the Founders’ motion to
30
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dismiss, the complaint does not say that Driver caused this allegedly fraudulent share
transfer. Likewise, other fraud pleading deficiencies exist as to Driver, such as
identifying when misrepresentations or omissions took place and where they
occurred.60
And VeroBlue is now uniquely positioned to have access to such
information.61
Regarding the release, the Court concludes it is premature to rule on this issue.
VeroBlue has raised the prospect that Driver procured the release through fraud. A
court may rescind releases a party obtained by fraud.62
Federal Rule of Civil
Procedure 8(c) draws a distinction between affirmative defenses and avoidances of
affirmative defenses, but it makes clear that both must be affirmatively pled: “In
responding to a pleading, a party must affirmatively state any avoidance or
affirmative defense, including: . . . fraud[.]”63
This Court routinely requires the
As with the Founders’ motion to dismiss, there is a dispute between Driver and VeroBlue on
whether Rule 9 requires pleading to whom the allegedly fraudulent statements were made. The Fifth
Circuit has held that Rule 9 requires “who, what, when, where, why, and how the false statements
were made and to whom they were made.” Askanase, 130 F.3d at 676 (emphasis added). Even if Rule
9 didn’t require pleading to whom the statements were made, Article III standing does because
VeroBlue as the plaintiff must be the injured party—the recipient who relied on the fraudulent
statements. VeroBlue’s repleading must omit allegations that Driver made allegedly fraudulent
statements or omissions to entities other than the plaintiff.
60
61 Driver spent much of his reply arguing that the release adequately disclaimed reliance under
Texas law. But that briefing neither cited the seminal case in Texas on disclaimer of reliance in a
contract—Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323 (Tex. 2011)—
nor was it responsive to an argument made in Driver’s motion to dismiss or VeroBlue’s response.
Thankfully, VeroBlue’s supplemental brief does cite Italian Cowboy. Regardless, the raising of the
issue in the reply means the Court will not consider the argument at this stage.
See Williams v. Glash, 789 S.W.2d 261, 264 (Tex. 1990) (“Under Texas law, a release is a
contract and is subject to avoidance, on grounds such as fraud or mistake, just like any other
contract.”); Shalla v. Shalla, 23 N.W.2d 814, 822–23 (Iowa 1946) (“‘A court of equity will not permit a
party to take and enjoy the benefits of ignorance or mistake of law on the part of another party who
knew and who did not correct.”)
62
63
FED. R. CIV. P. 8(c)(1).
31
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avoidance of affirmative defenses to be pled affirmatively and separately, and for
those pleadings to comply with the requirements of Twombly, Iqbal, and (if
applicable) Rule 9 for fraud-based avoidances.64
Here, however, VeroBlue seeks rescission of Driver’s termination agreement in
Count 14 due to fraud, and it seeks restitution under Count 19 due to fraud.
Accordingly, VeroBlue’s claims function as an avoidance of an affirmative defense and
comply with Rule 8(c). But given that VeroBlue wants to avoid the release because it
was allegedly obtained through fraud, it must still meet the requirements of Rule 9.
It has not met the requirements of Rule 9 on how Driver fraudulently procured his
termination agreement. But because VeroBlue will replead, the Court can reassess
this deficiency in VeroBlue’s final pleading.
Accordingly, the Court grants Driver’s motion to dismiss VeroBlue’s fraud
claims.65 But the Court will allow VeroBlue a final opportunity—within 28 days of
this Order—to replead the claims at issue to comply with Rule 9.
When such fraud-based avoidances are properly raised, it is premature to resolve them at
the motion-to-dismiss phase. Here, Driver also argues that VeroBlue knew of the fraud by 2017 and
terminated Driver in January 2017, indicating they cannot rely on their fraud theory for Driver. But
viewing “by 2017” in the light most favorable to VeroBlue, VeroBlue could have meant during 2017
and not before January 1, 2017. VeroBlue should use more precise language in its final pleading to
enable the Court to assess whether the fraud avoidance of the release affirmative defense complies
with Rule 9.
64
65 Because Driver has raised fraud pleading arguments all along, Rule 12 does not limit the
scope of his argument as to only newly raised fraud claims (as it does for the Founders). And as the
Court addressed previously, VeroBlue’s equity claims still sound in fraud and are held to the pleading
standard under Rule 9. As a result, this ruling applies to all of VeroBlue’s claims against Driver.
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D. Canaccord’s Motion to Dismiss [Doc. No. 211]
Canaccord’s motion to dismiss argues: (1) the Court lacks personal jurisdiction
over Canaccord; (2) a release bars the claims between the VeroBlue and Canaccord;
(3) the complaint fails to state a claim for relief; and (4) the forum selection clause in
the agreement between VeroBlue and Canaccord requires this case to be in New York.
VeroBlue responds that: (1) Canaccord’s physical presence in Texas confers
jurisdiction; (2) the release and failure-to-state-a-claim arguments are based on
documents Canaccord attaches that are not permissible at the dismissal stage; and
(3) the only remedy for a forum selection clause is transfer, not dismissal. The Court
holds that the mandatory forum-selection clause requires a transfer of this case under
28 U.S.C. § 1404 (rather than a dismissal under Rule 12(b)(3)) to the United States
District Court for the Southern District of New York.
While the Court agrees with VeroBlue that dismissal is inappropriate under
recent guidance from the Supreme Court of the United States, that same guidance
mandates a transfer of the claims against Canaccord without any regard to the
convenience of the parties. The Supreme Court made clear in 2013 that “[a]lthough
a forum-selection clause does not render venue in a court ‘wrong’ or ‘improper’ within
the meaning of § 1406(a) or Rule 12(b)(3), the clause may be enforced through a
motion to transfer under § 1404(a).”66 Further, “[w]hen the parties have agreed to a
valid forum-selection clause, a district court should ordinarily transfer the case to the
66
Atl. Marine Const. Co. v. U.S. Dist. Court for W. Dist. of Tex., 571 U.S. 49, 59 (2013).
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forum specified in that clause. Only under extraordinary circumstances unrelated to
the convenience of the parties should a § 1404(a) motion be denied.”67
The Supreme Court clarified that there are three variations to the section 1404
analysis when a forum-selection clause is at issue.68 First, “the plaintiff’s choice of
forum merits no weight.”69 Second, “a court evaluating a defendant’s § 1404(a) motion
to transfer based on a forum-selection clause should not consider arguments about
the parties’ private interests.”70 Third, “when a party bound by a forum-selection
clause flouts its contractual obligation and files suit in a different forum, a § 1404(a)
transfer of venue will not carry with it the original venue’s choice-of-law rules—a
factor that in some circumstances may affect public-interest considerations.”71
Procedurally, the presence of a forum-selection clause carries a distinct burden:
“the party acting in violation of the forum-selection clause . . . must bear the burden
of showing that public-interest factors overwhelmingly disfavor a transfer.”72 What
remains then is the public-interest factors, which include “the administrative
difficulties flowing from court congestion; the local interest in having localized
controversies decided at home; [and] the interest in having the trial of a diversity case
67
Id. at 62.
68
Id. at 63.
69
Id.
70
Id. at 64.
71
Id.
72
Id. at 67.
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in a forum that is at home with the law.”73 Finally, this Court observes that, based
on the Supreme Court’s guidance on the proper remedy, district courts routinely
transfer—rather than dismiss—when a party files a Rule 12(b)(3) motion due to a
forum-selection clause.74
With this legal background in mind, the Court turns to the forum selection
clause between Canaccord and VeroBlue. That agreement states: “[T]he parties
hereto consent to the exclusive jurisdiction and venue of the state and federal courts
of the State of New York, located in Manhattan.”75 VeroBlue’s only response to this
mandatory clause is that a Rule 12(b)(3) motion on a forum-selection clause should
not result in dismissal. But VeroBlue fails to acknowledge that courts routinely grant
transfers under section 1404 in response to a Rule 12(b)(3) motion for dismissal based
on a forum-selection clause. And so, VeroBlue has not carried its “burden of showing
that public-interest factors overwhelmingly disfavor a transfer.”76 Indeed, it could
not, given that the agreement between Canaccord and VeroBlue also selects New
Weber v. PACT XPP Techs., AG, 811 F.3d 758, 767 (5th Cir. 2016) (quotation marks omitted)
(alteration in original).
73
74 See, e.g., LeBlanc v. C.R. England, Inc., 961 F. Supp. 2d 819, 827 (N.D. Tex. 2013) (Boyle, J.)
(“[T]he moving party’s choice of procedural mechanisms—Rule 12(b)(3) or § 1404(a)—does not dictate
the court’s choice of analytical tools.”).
Appendix to Canaccord’s Motion to Dismiss, Exhibit A (Private Placement Engagement
Agreement), at Appx. 13 (Canaccord-VeroBlue Agreement) [Doc. No. 213]. That agreement also
contemplates any “action” or “claim” “brought by or against any person . . . in connection with or as a
result of . . . any untrue statement or alleged untrue statement of a material fact contained in any
Materials, or any omission or alleged omission to state therein a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they were made, not
misleading.” Id. at Appx. 12.
75
76
Atl. Marine, 571 U.S. at 67.
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York for choice of law,77 that New York courts have the greatest familiarity with that
law, that New York has a stronger interest than Texas in resolving this dispute, and
that congestion exists at both courts. Instead, the Court gives the agreed-upon forumselection clause the “controlling weight” it is due and finds no extraordinary
circumstances that warrant setting it aside.78
At oral argument, VeroBlue raised two additional arguments: (1) Canaccord
did not sign the agreement containing the forum-selection clause, and (2) the
agreement was fraudulent because a Founder signed it when continuing to perpetrate
a fraud on the company. Even assuming these arguments were not waived by only
raising them at the hearing, neither argument is availing. First, VeroBlue signed the
agreement, and, under New York law, agreements need only be signed by the party
the agreement will be enforced against.79 Second, a general invocation of fraud should
not so lightly bust up an agreement. VeroBlue is essentially claiming that everything
the Founders touched was fraudulent, and they touched this, and so this too must be
fraudulent. But fraud pleading must be very specific thing. And these are the most
general allegations one can possibly make to assert that the forum-selection clause
was procured with fraud.80 The Court will not proceed to essentially hold a trial on
77 See Canaccord-VeroBlue Agreement at Appx. 13 (specifying that the agreement “shall be
governed by and construed in accordance with the laws of the State of New York, applicable to contracts
made and to be performed therein and, in connection therewith”).
78
Atl. Marine, 571 U.S. at 60.
79 See Palmer v. Gould, 144 N.Y. 671, 678 (N.Y. 1895) (“[T]he case is similar to one where the
agreement, though only signed by the one party, may, nevertheless, be enforced against him by the
other[.]”).
Actually, VeroBlue’s briefing argued the release was procured through fraud. At oral
argument, it cross-applied its generic fraud allegations to the forum-selection clause as well. Even
80
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busting up a forum-selection clause from vague allegations of fraud involving a party
the Court may well not have personal jurisdiction over. New York courts are more
than equipped to resolve any issues of fraud in a court with personal jurisdiction over
Canaccord.
Accordingly, under section 1404, the Court grants Canaccord’s motion to
dismiss in part, severs the claims against Canaccord, and transfers them to the
United States District Court for the Southern District of New York.81
E. Maniaci’s Motion to Dismiss [Doc. No. 206]
Maniaci’s motion to dismiss is purely personal—jurisdiction, that is. Maniaci
is a Canadian citizen who argues the Court lacks general or specific jurisdiction over
him. VeroBlue responds that Maniaci purposefully established minimum contacts
with Texas by aiding and abetting the Texas-based Founders, by communicating into
Texas while representing VeroBlue, and by indirectly owning VeroBlue stock. The
Court agrees with Maniaci.
Legally, Federal Rule of Civil Procedure 12(b)(2) authorizes a district court to
dismiss an action for lack of personal jurisdiction. And on such a motion, the plaintiff
bears the burden of establishing a prima-facie case for jurisdiction over the
nonresident defendant.82 If a plaintiff makes that prima-facie case, the burden shifts
assuming this is proper, the generic invocation of the talisman of fraud cannot set aside an agreement
to try this case in New York.
81
As a result, the Court need not reach Canaccord’s remaining arguments.
82 See Ham v. La Cienega Music Co., 4 F.3d 413, 415 (5th Cir. 1993) (“Plaintiffs typically carry
the burden of proof on personal jurisdiction by making a prima facie showing.”).
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to the defendant to present “a compelling case that the presence of some other
consideration would render jurisdiction unreasonable.”83 The Court may resolve
jurisdictional facts by looking to “affidavits, interrogatories, depositions, oral
testimony, or any combination of the recognized methods of discovery.”84 And the
Court need only accept as true the complaint’s uncontroverted allegations if those
allegations are not conclusory.85
Additionally, a “federal district court sitting in diversity may exercise personal
jurisdiction over a nonresident defendant if (1) the long-arm statute of the forum state
confers personal jurisdiction over that defendant; and (2) exercise of such jurisdiction
by the forum state is consistent with due process under the United States
Constitution.”86 The Texas long-arm statute reaches to the limits of federal due
process, which means the court must determine whether (1) the “defendant has
established ‘minimum contacts’ with the forum state”; and (2) “the exercise of
jurisdiction over that defendant does not offend ‘traditional notions of fair play and
substantial justice.’”87 The minimum-contacts prong is satisfied when a defendant
83
Burger King Corp. v. Rudzewicz, 471 U.S. 462, 477 (1985).
84
Stuart v. Spademan, 772 F.2d 1185, 1192 (5th Cir. 1985).
85 See Panda Brandywine Corp. v. Potomac Elec. Power Co., 253 F.3d 865, 869 (5th Cir. 2001)
(noting that the district court in the case “correctly held that the prima-facie-case requirement does
not require the court to credit conclusory allegations, even if uncontroverted”).
86
Ruston Gas Turbines, Inc. v. Donaldson Co., Inc., 9 F.3d 415, 418 (5th Cir. 1993).
87
Id. (quoting Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)).
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“purposefully avails itself of the privilege of conducting activities within the forum
State, thus invoking the benefits and protections of its laws.”88
Courts subdivide the minimum-contacts inquiry into specific and personal
jurisdiction.89 General personal jurisdiction exists when the nonresident defendant’s
contacts with the forum state (even if unrelated to the lawsuit) are continuous,
systematic, and substantial.90 By contrast, specific jurisdiction is only appropriate
when the defendant’s contacts with the forum state arise from, or are directly related
to, the cause of action.91 “The inquiry whether a forum State may assert specific
jurisdiction over a nonresident defendant focuses on the relationship among the
defendant, the forum, and the litigation.”92 “For a State to exercise jurisdiction
consistent with due process, the defendant’s suit-related conduct must create a
substantial connection with the forum State.”93 Accordingly, “the relationship must
arise out of contacts that the defendant himself creates with the forum State.”94
88
Burger King, 471 U.S. at 475 (quoting Hanson v. Denckla, 357 U.S. 235, 253 (1958)).
89
Marathon Oil Co. v. A.G. Ruhrgas, 182 F.3d 291, 295 (5th Cir. 1999).
90 See Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414 n.9 (1984) (“When
a State exercises personal jurisdiction over a defendant in a suit not arising out of or related to the
defendant’s contacts with the forum, the State has been said to be exercising ‘general jurisdiction’ over
the defendant.”).
See id. at 414 n.8 (“It has been said that when a State exercises personal jurisdiction over a
defendant in a suit arising out of or related to the defendant’s contacts with the forum, the State is
exercising ‘specific jurisdiction’ over the defendant.”).
91
92
Walden v. Fiore, 571 U.S. 277, 283–84 (2014) (quotation marks omitted).
93
Id. at 284.
94
Id.
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If the plaintiff establishes minimum contacts, “the burden shifts to defendant
to show that the assertion of jurisdiction would be unfair.”95
When evaluating
whether the exercise of personal jurisdiction over the defendants would be unfair,
courts examine a number of factors, including: (1) the defendant’s burden; (2) the
forum state’s interests; (3) the plaintiff’s interest in convenient and effective relief;
(4) the judicial system’s interest in efficient resolution of controversies; and (5) the
state’s shared interest in furthering social policies.96
Here, Maniaci is a Canadian citizen who practices law in the Business Law
Group at Cassels Brock & Blackwell LLP. His employer’s three offices (Toronto,
Ontario; Calgary, Alberta; and Vancouver, British Columbia) are all in Canada.
Maniaci never represented clients who were Texas entities, but he did represent
VeroBlue, which has a Texas office and whose founders live in Texas. Maniaci has
never traveled to Texas to meet with VeroBlue representatives, has never attended
depositions, hearings, or trials in Texas, and has not solicited legal work in Texas.
(Maniaci is definitely missing out on the joys of connections with Texas.97) The live
complaint alleges that Maniaci interfered in the bankruptcy proceedings when he
95
Walk Haydel & Assocs., Inc. v. Coastal Power Prod. Co., 517 F.3d 235, 245 (5th Cir. 2008).
See Asahi Metal Indus. Co., Ltd. v. Superior Ct. of Ca., Solano Cnty, 480 U.S. 102, 113 (1987)
(listing factors to determine “the reasonableness of the exercise of jurisdiction” in each case involving
personal jurisdiction).
96
97 In the words of Lyle Lovett, “That’s right, you’re not from Texas. Texas wants you anyway.”
See
Wikipedia,
That’s
Right
(You’re
Not
from
Texas),
available
at
https://en.wikipedia.org/wiki/That’s_Right_(You’re_Not_from_Texas) (last updated on July 29, 2019).
In this case, Maniaci’s lack of contacts with Texas make Texas’s want for him subservient to the
Constitution’s Due Process Clause. The Court laments that Maniaci is missing the joys of hearing Lyle
Lovett at Gruene Hall and eating deep-fried everything at the State Fair of Texas.
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sent a letter on his firm letterhead to other VeroBlue shareholders, ostensibly to
garner opposition to the bankruptcy debtor’s plan. Maniaci’s firm disavowed that the
letter was legal advice approved by the firm. The complaint makes claims against
Maniaci for conspiracy with the Founders and aiding and abetting the Founders.
Applying those principles to these facts, the Court must first assess minimum
contacts for general jurisdiction and then for specific jurisdiction. There is little
argument for general personal jurisdiction over Maniaci in Texas.
Simply put,
Maniaci has precious few contacts with this forum, and certainly not ones that would
rise to the level of rendering Maniaci “at home” in Texas. In other words, Maniaci
would likely never be seen wearing this t-shirt:
And so it comes as no surprise that VeroBlue does not contend in its response that
there is general personal jurisdiction over Maniaci.98
98 Maniaci’s fact pattern is diametrically opposed to, say, a U.S. Senator who renounced his
Canadian citizenship, having always considered Texas to be home.
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To then establish minimum contacts, VeroBlue must show that this lawsuit
arose from or directly relates to the contacts Maniaci himself created with Texas, and
that connection must be substantial.99 VeroBlue has not carried this burden for
making its prima-facia case.
Generically, the live complaint asserts that all
defendants “committed torts in part in Texas.”100 But the Court cannot credit that
conclusory, group allegation to set aside the Constitution.101
The specific allegations against Maniaci fall into four buckets. The first bucket
is the acts of Maniaci as a lawyer. Maniaci represented VeroBlue’s Canadian parent
corporation—VeroBlue Farms, Inc. (referred to as VeroBlue Canada).
Maniaci’s
affidavit swears that neither his firm nor he himself “have ever represented
[VeroBlue] USA.”102 VeroBlue points out that one of Maniaci’s colleagues swore
otherwise in proofs of claim in the VeroBlue bankruptcy proceeding in an attempt to
get paid for legal bills totaling $275,349.21.103 Maniaci’s firm filed those proofs of
claim in November 2018, attaching legal invoices pertaining to VeroBlue Canada.
Invoices attached to the proof of claim listed Maniaci and others at his firm doing
99 See Walden, 571 U.S. at 283–84 (“For a State to exercise jurisdiction consistent with due
process, the defendant’s suit-related conduct must create a substantial connection with the forum
State.”).
100
Second Amended Complaint ¶ 17.
101 See, e.g., Rush v. Savchuk, 444 U.S. 320, 331–32 (1980) (“The Minnesota court also
attempted to attribute State Farm’s contacts to Rush by considering the ‘defending parties’ together
and aggregating their forum contacts in determining whether it had jurisdiction. The result was the
assertion of jurisdiction over Rush based solely on the activities of State Farm. Such a result is plainly
unconstitutional.”).
102
Affidavit of Sean Maniaci ¶ 26 [Doc. No. 208].
103 Appendix for VeroBlue’s Response to Maniaci’s Motion to Dismiss, Tab A-35 (CBB’s
November 7, 2019 Answers to Interrogatories in Adversary Action Related to the Bankruptcy
Proceeding), at Appx. 357 (claiming Maniaci assisted with drafting proofs of claim) [Doc. No. 247-7].
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legal work on restructuring. In February 2019, the amended disclosure statement for
VeroBlue’s Chapter 11 reorganization (signed by VeroBlue’s current president,
McCowan) nowhere mentions an executory contract between VeroBlue and Maniaci
or his firm.104 In August 2019, Maniaci’s firm filed a withdrawal of its claims without
providing its rationale for withdrawal. After the debtors objected, the firm filed a
response stating that its withdrawal was because the invoices were for VeroBlue
Canada. Specifically, the response stated that the firm
has and continues to take the straightforward demonstrable position
that [the firm] is a Canadian law firm that employs Canadian attorneys
that represented Canadian clients (including Veroblue Farms Inc., a
Canadian corporation), that performed legal services in Toronto,
Ontario, Canada and that its files with respect to those Canadian clients
are not the property of the Debtors, none of whom have ever been clients
of [the firm].105
The bankruptcy court granted the withdrawal after a telephonic hearing.
Maniaci’s contacts as a lawyer do not meet the refined test for nonresidentlawyer contacts sufficient to confer specific jurisdiction. For specific jurisdiction, “a
nonresident attorney’s act of entering into an attorney-client relationship with a
Texas resident, standing alone, does not provide the minimum contacts necessary to
See Affidavit of Michael D. Schwartz, Exhibit A (Amended Disclosure Statement for the
Joint Chapter 11 Plan of Reorganization of VeroBlue Farms USA, Inc. and its Affiliated Debtors), at
25–26 (“Any Executory Contract or unexpired lease that has not yet expired by its own terms on or
prior to the Effective Date . . . shall be deemed rejected by the Debtors, in the entry of the Confirmation
Order by the Bankruptcy Court will constitute approval of such rejection pursuant to section 365(a)
and 1123 of the Bankruptcy Code.”) [Doc. No. 265-1].
104
105 Id., Exhibit B (Cassels Brock & Blackwell LLP’s Response to Debtors’ Objection to
Withdrawal of Claims) ¶ 5 [Doc. No. 265-3].
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support personal jurisdiction over the nonresident attorney.”106 And performing legal
analysis in another state about Texas law and communicating that into Texas is
likewise insufficient to establish specific jurisdiction.107 What matters for personal
jurisdiction is that a nonresident lawyers “performance must be due in Texas.”108 The
Fifth Circuit has found personal jurisdiction over a nonresident lawyer when the
lawyer considered his Texas client a major client, his firm represented the Texas
company for eight years, he was present for a number of meetings in Texas, and he
represented the company on a matter in federal court in Texas for three years.109
This Court certainly does not condone Maniaci’s firm’s filing of bankruptcy
claims for an entity it later admitted in that proceeding (and in this proceeding) that
it did not represent.
But contrary to VeroBlue’s assertions, misconduct in a
bankruptcy court in Iowa does not create personal jurisdiction over Maniaci in Texas.
And it is for the bankruptcy court to determine the appropriate remedy, if any, for the
erroneous filing of the claims. That aside, Maniaci made communications into Texas
as the Founders lived and worked here. And he performed legal services in Canada
Gray, Ritter & Graham, PC v. Goldman Phipps PLLC, 511 S.W.3d 639, 657 (Tex. App.—
Corpus Christi 2015, pet. denied).
106
107 See Markette v. X–Ray X–Press Corp., 240 S.W.3d 464, 468–69 (Tex. App.—Houston [14th
Dist.] 2007, no pet.) (concluding an out-of-state attorney’s legal advice about Texas law was “still
insufficient to establish personal jurisdiction”).
Gray, Ritter & Graham, 511 S.W.3d at 658 (quoting Lisitsa v. Flit, 419 S.W.3d 672, 680
(Tex. App.—Houston [14th Dist.] 2013, pet. denied).
108
109 Trinity Indus., Inc. v. Myers & Assocs., Ltd., 41 F.3d 229, 231 (5th Cir. 1995) (“These contacts
amount to a substantial connection with Texas and cannot accurately be characterized as random,
fortuitous, or incidental. Rather, they indicate that the defendants deliberately availed themselves of
the benefits of an ongoing relationship with a Texas client and reasonably should have anticipated the
possibility of being haled into court in Texas for claims arising out of or related to that relationship.”
(citation omitted)).
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for a parent company whose subsidiary had a Texas office. VeroBlue claims that
Maniaci failed to distinguish his work for VeroBlue and his work for VeroBlue
Canada, and that he mailed invoices on multiple occasions to VeroBlue’s Plano
address. But Maniaci filed an affidavit with the Court indicating that he did not
perform legal services in Texas or for a Texas company. And nothing in VeroBlue’s
briefing or evidence demonstrates otherwise. This is not the same as performing legal
services in Texas, which is the proper test for personal jurisdiction over a nonresident
lawyer.110
The second bucket of Maniaci’s contacts is his ownership interest in VeroBlue
Canada. Maniaci and an entity he controls (Sailstreet Capital, Inc.) do own stock in
VeroBlue Canada. His ownership in VeroBlue Canada gives him a right to exercise
his option to buy stock in VeroBlue—which he has not exercised. The issue here is
specific personal jurisdiction, which requires the claims against Maniaci to arise from
the contacts with Texas.
These are contacts with a Canadian corporation—not
contacts with Texas. Yes, VeroBlue Canada is related to VeroBlue. And VeroBlue
has contacts with Texas. But by this logic, Maniaci is related to Canada; and through
NAFTA, Canada has contacts with the United States; and Texas is in the United
States. This may well be the methodology for “Six Degrees of Kevin Bacon,” and the
Supreme Court’s practice for aggregating under the Commerce Clause,111 but it is not
See Gray, Ritter & Graham, 511 S.W.3d at 657 (discussing the standard for personal
jurisdiction over nonresident lawyers as being that “performance must be due in Texas”).
110
111 See generally Wickard v. Filburn, 317 U.S. 111 (1942) (finding that growing wheat in your
backyard for personal consumption substantially affects interstate commerce, thereby subjecting the
activity to federal regulation).
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the Supreme Court’s methodology for jurisdictional contacts under the Due Process
Clause. Maniaci’s ownership in a Canadian corporation does not give rise to personal
jurisdiction in Texas.
The third bucket of contacts is Maniaci’s filing of a certificate of formation with
the Texas Secretary of State for Opposing Flow Aquaculture, Inc. That entity was
responsible for VeroBlue’s much acclaimed opposing-flow technology that helped it
raise capital.
The certificate lists the address of VeroBlue’s Plano office as the
principal address for Opposing Flow Aquaculture, Inc. An amended certificate of
formation removed Maniaci, prior to any meetings or actions by the company.
Maniaci’s signature on the original certificate of formation does not constitute
Maniaci purposefully availing himself.
At most, one who signs a certificate of
formation before his exclusion in an amended certificate is akin to a corporate director
or officer of a company incorporated in a particular jurisdiction. The Supreme Court
has made clear that such facts go to the choice-of-law analysis but do not constitute
purposefully availing oneself.112 In any event, the Court concludes that Maniaci’s
112 This is known as the fiduciary-shield doctrine, which generally prohibits the exercise of
jurisdiction over a company director or officer for their contacts with a forum involving representation
of the company. See Shaffer v. Heitner, 433 U.S. 186, 215 (1977) (“Appellee suggests that by accepting
positions as officers or directors of a Delaware corporation, appellants performed the acts required by
Hanson v. Denckla. . . . [T]his line of reasoning establishes only that it is appropriate for Delaware
law to govern the obligations of appellants to Greyhound and its stockholders. It does not demonstrate
that appellants have purposefully avail(ed themselves) of the privilege of conducting activities within
the forum State[.]” (quotation marks omitted) (alteration in original)). See Ragan & Massey, Inc. v.
Voluntary Purchasing Grps, Inc., 2009 WL 3157468, at *6 (E.D. Tex. Sept. 28, 2009) (holding that a
corporate director’s presence at 10 board meetings in Texas was insufficient to confer personal
jurisdiction) (citing Shaffer, 433 U.S. at 215).
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filing of the certificate and then removal before any meetings or action would not
make it reasonably foreseeable for Maniaci to be haled into court in Texas.113
The fourth and final bucket of Maniaci’s contacts is a letter to shareholders
during VeroBlue’s bankruptcy proceeding. VeroBlue claims this letter was designed
to garner opposition to the bankruptcy debtor’s plan and, on information and belief,
was sent to at least one shareholder in Texas. VeroBlue complains that Maniaci’s
letter disclosed that he was a minority shareholder but failed to disclose that he
served as counsel to VeroBlue. On that topic, Maniaci’s firm indicated the letter was
not sent with the knowledge of management and should not have been issued on firm
letterhead.
The Court agrees with VeroBlue that the test for jurisdiction over a
nonresident lawyer is inappropriate for analyzing whether Maniaci’s letter confers
jurisdiction (because the letter was in Maniaci’s capacity as a shareholder and not as
a lawyer).
And so, the question is whether under a typical minimum-contacts
analysis for specific jurisdiction Maniaci’s letter caused a harm in Texas that
VeroBlue can sue for. It didn’t. VeroBlue claims there was one Texas recipient of the
letter.
The appendix citation lists Gregory Pearl of Dallas as the only Texan
shareholder of VeroBlue. The Texas Supreme Court has held that one may not be
subject to jurisdiction in Texas courts merely for directing a tort at Texas from afar.114
113 See Shaffer, 433 U.S. at 216 (holding that corporate officers and directors of a Delaware
corporation who officed in a different state “had no reason to expect to be haled before a Delaware
court”).
See Michiana Easy Livin’ Country, Inc. v. Holten, 168 S.W.3d 777, 784 (Tex. 2005)
(reaffirming that the Texas Supreme Court has “expressly rejected jurisdiction based solely upon the
114
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Even though such rulings are based upon the Due Process Clause, the Fifth Circuit
has not yet adopted this approach. Instead, the Fifth Circuit has held that a single
communication constituting an intentional tort can confer specific jurisdiction.115 The
Fifth Circuit believes such isolated communications are purposeful availment which
ends the first step of the minimum-contacts inquiry.116 Importantly, under Supreme
Court and Fifth Circuit precedent, there must be proof that “the tort-feasor knows
that the brunt of the injury will be felt by a particular resident in the forum[.]”117
This analysis requires courts to go claim by claim to see if the forum contacts
(Maniaci’s letter) give rise to the claim.118 Here, the two claims against Maniaci are
for conspiracy and aiding and abetting. The conspiracy claim focuses on Maniaci
assisting the Founders while they controlled VeroBlue.119
There is one stray
allegation that is broader: “Further, Maniaci’s misconduct was willful and egregious,
effects or consequences of an alleged conspiracy in the forum state” (quotation marks and citation
omitted)).
115 See Lewis v. Fresne, 252 F.3d 352, 358–59 (5th Cir. 2001) (holding that a “single act by a
defendant can be enough to confer personal jurisdiction if that act gives rise to the claim being
asserted”).
See id. at 359 (“Recently, this Court explained that ‘[w]hen the actual content of
communications with a forum gives rise to intentional tort causes of action, this alone constitutes
purposeful availment.’” (quoting Wien Air Alaska, Inc. v. Brandt, 195 F.3d 208, 213 (5th Cir. 1999)
(alteration in original)).
116
117 Southmark Corp. v. Life Inv’rs, Inc., 851 F.2d 763, 772 (5th Cir. 1988) (citing Calder v. Jones,
465 U.S. 783, 789–90 (1984)).
See, e.g., Eagle Metal Prods., LLC v. Keymark Enters., LLC, 651 F. Supp. 2d 577, 587 (N.D.
Tex. 2009) (Lynn, J.) (assessing claim by claim whether Texas contacts gave rise to various tort claims).
118
119 See Second Amended Complaint ¶ 389 (“The Founders and Maniaci’s aim, through the
Founders-Maniaci Conspiracy, was to accomplish the unlawful objective of personally benefiting the
Founders and Maniaci at the expense of [VeroBlue], while concealing the same from [VeroBlue], and/or
making fraudulent misrepresentations to [VeroBlue] and its disinterested board members in the face
of the Founders’ duties of disclosure.”).
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or at least wanton, and warrants punitive damages in an amount to be determined at
trial as it continues into 2019 through the Bankruptcy Proceedings.”120 Charitably
understood, that pleading means that the alleged misconduct continued in the
bankruptcy proceeding (not just that the damages continued to mount during the
bankruptcy proceeding). The aiding and abetting claim contains similar allegations
to the conspiracy count, claiming that Maniaci’s misconduct occurred “through the
Bankruptcy Proceedings” and more specifically alleges that “his recent efforts to
solicit clients to join the Ad Hoc Committee of equity investors in [VeroBlue]’s
Bankruptcy Proceedings” are evidence of willful conduct supporting punitive
damages.121 If these allegations are true, VeroBlue still fails to show that Maniaci
knew the brunt of the injury would be felt by the particular resident in the forum now
bringing the claim. And, in any event, Pearl was the injured Texan. VeroBlue is the
one claiming the injury. But VeroBlue is not a Texas resident.122 Because the
defendant claiming to feel the brunt of Maniaci’s conduct is not a Texas resident, and
the only person who is a Texas resident is not a plaintiff, VeroBlue has failed to make
its prima-facia case that the Court has personal, specific jurisdiction over Maniaci.
Viewed another way, VeroBlue is upset that it had additional effort in the
bankruptcy proceeding in Iowa because of the Founders and Maniaci.
This
frustration is understandable, but it is up to the bankruptcy proceeding to redress
120
Id. ¶ 392.
121
Id. ¶¶ 392, 399.
122 VeroBlue’s live complaint makes clear that “[VeroBlue] is a Nevada corporation with its
principal place of business in Webster City, Iowa. [VeroBlue] is a citizen of Nevada and Iowa.” Id. ¶ 4.
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that issue. A Nevada/Iowa resident’s frustration over a Canadian letter aimed at an
Iowa bankruptcy proceeding doesn’t create personal jurisdiction over the Canadian
in Texas.123
F. Third Party Complaint [Doc. No. 186]
The Founders (Wulf, Hall, Ted Rea, and James Rea) also brought a third-party
complaint against Ebstein, Haarkoetter, Thelander, Wester, McCowan, Dr. Hapel,
and Alder. Of these third-party defendants, only Alder, Thelander, and McCowan
(collectively, “third-party defendants”) have appeared so far. Alder filed a motion to
strike [Doc. No. 223] and a motion to dismiss [Doc. No. 219] the third-party complaint.
That motion to dismiss contains a Rule 12(b)(1) jurisdictional argument that the alter
ego breach claims are property of the bankruptcy estate, and a Rule 12(b)(5)
jurisdictional argument on defective service under the Hague Convention. Thelander
and McCowan filed a joint motion to strike the third-party complaint [Doc. No. 228].
And they separately filed motions to dismiss raising Rule 12(b)(6) arguments for
failure to state a claim. Thelander filed a motion to dismiss the third-party complaint
[Doc. No. 227], contending the Court lacks personal jurisdiction over him under Rule
12(b)(2) and raising six merits defects in the tortious interference claim under Rule
12(b)(6).
Finally, McCowan filed a motion to dismiss the third-party complaint
[Doc. No. 229], raising the same six Rule 12(b)(6) arguments as Thelander.
123 Because Maniaci lacks sufficient minimum contacts with Texas, the Court need not wade
through whether the exercise of jurisdiction would offend traditional notions of fair play and
substantial justice. See Ruston Gas Turbines, 9 F.3d at 418 (saying that “[b]oth prongs of the due
process test must be met” if the district court is to “exercise personal jurisdiction” over a nonresident
defendant).
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Procedurally, the Court must consider jurisdiction arguments first under Rules
12(b)(1), (b)(2), and (b)(5) before considering the motions to strike under Rule 14 and
the motions to dismiss under Rule 12(b)(6).
1. Rules 12(b)(1), (b)(2), and (b)(5) Jurisdictional Arguments
Alder contends that the alter ego breach claims (Counts 5–9) are property of
the bankruptcy estate and that service was defective.124 Thelander argues that the
Court lacks personal jurisdiction over him. The Court takes each in turn.
Alder is a British Virgin Islands entity that invested significant sums in
VeroBlue. When VeroBlue filed for bankruptcy, Alder served as the plan sponsor,
injected additional capital, and became VeroBlue’s only shareholder through the plan
of reorganization. The Founders bring a mix of tort and contract claims in the thirdparty complaint, seeking to hold Alder liable for VeroBlue’s alleged breaches of
termination agreements with the Founders. But Alder claims in its motion to dismiss
that the debtor-in-possession in the VeroBlue bankruptcy had exclusive standing to
bring these claims. The Founders respond that the plan of reorganization expressly
excluded the Founders’ claims from the discharge and releases.
124 The Court appreciates Alder’s helpful briefing, explaining that district courts have
addressed, and can address, Rule 14 motions to strike before Rule 12(b)(5) motions on defective service.
Alder’s rationale is that a Rule 12(b)(5) defective service argument, if believed, would simply postpone
the Court getting to the inevitable Rule 14 motion to strike. As concerned as the Court is with
efficiency, the Court is more concerned with principle—if the Court lacks jurisdiction because of
defective service, it lacks the power to wade into a Rule 14 motion to strike. In any event, the principled
approach does not hinder judicial economy here because the Court concludes service was proper under
Rule 12(b)(5) but Rule 14 bars the third-party complaint.
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The Court agrees with Alder. The Fifth Circuit’s general rule is that “alter ego
claims are the property of the estate within the meaning of the Bankruptcy Code.”125
This imposes a notice requirement that one satisfies by proceeding in the bankruptcy
court or obtaining leave from the bankruptcy court to proceed in an independent
lawsuit.126 When, as here, the entity raising the bankruptcy argument is the alleged
alter ego, the Fifth Circuit has declined to extend these rules further because it “would
mean that allegedly liable ‘alter egos’ could escape liability should the trustee for a
‘shell’ corporation which it (the alleged ‘alter ego’) has thrown into bankruptcy simply
choose not to prosecute a potentially meritorious ‘alter ego’ claim.”127 But the Fifth
Circuit still requires either proceeding in the bankruptcy court or with leave of the
bankruptcy court in such situations.128 To the extent Texas law underlying the Fifth
Circuit precedent controlled that outcome, the other possible choice of law on this
question is Nevada law, which would yield the same outcome.129
125
Gibraltar Sav. v. LDBrinkman Corp., 860 F.2d 1275, 1285 (5th Cir. 1988) (quotation marks
omitted).
126 See, e.g., id. (noting that “Gibraltar sought and obtained leave, over LDBrinkman Corp.’s
vigorous objection, in both the bankruptcy proceedings and the court below, to prosecute the third
amended complaint, thereby satisfying the notice requirement expressed in S.I. Acquisition. 817 F.2d
at 1154 n.13”).
127
Id. at 1286.
128 See id. (“We decline to convert the recognized shield for the debtor’s estate into a shield for
potentially liable ‘alter egos’; should the bankruptcy trustee decline the gauntlet, the veil-piercing
sword is available to tort claimants or contract creditors, should they choose to attack in the
bankruptcy proceeding or, with the bankruptcy court’s leave, in another forum.”).
See Kalb, Voorhis & Co. v. Am. Fin. Corp., 8 F.3d 130, 132 (2nd Cir. 1993) (holding that the
“law of the state of incorporation determines when the corporate form will be disregarded and liability
will be imposed on shareholders”). VeroBlue is incorporated in Nevada. In S.I. Acquisition, the Fifth
Circuit acknowledged that Nevada law “is identical to Texas law” in that corporations can assert alter
ego against themselves. 817 F.2d at 1153. In any event, the bankruptcy court notice requirement this
issue turns on is an issue of federal procedure rather than state substantive law. See id. at 1154 n.13
(noting that available recourses went through the bankruptcy court); In re River Hills Apartments
129
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Here, the Founders objected to the plan of reorganization to preserve their
ability to defend and prosecute this specific proceeding. At the point they objected,
they noted (1) this case was pending, (2) this case had been transferred to this Court,
and (3) they had filed third-party claims for tortious interference against Ebstein,
Thelander, Wester, Haarkoetter, Happel, and Alder. At the time, the third-party
complaint only had claims for tortious interference (and not claims against Alder for
alter ego and breach of contract). The Founders concern was that, “[i]f confirmed, the
Amended Plan will allow [VeroBlue] to pursue claims against the Founder Parties
without allowing the Founder Parties to assert affirmative defenses against the
Debtors and the third-party claims against certain Non-Debtor Releasees.”130 This
was because section 9.14 of the reorganization plan at that time would have released
VeroBlue from all claims and causes of action, and section 9.15 would have released
holders of claims against VeroBlue in light of the consideration under the plan.
VeroBlue agreed to the Founders’ proposed modification of the reorganization plan,
which provides:
•
For Section 9.14: “Notwithstanding any provision in the Plan, upon
entry of the Confirmation Order, parties in the litigation pending as 19CV-764 in the United States District Court for the Northern District of
Texas may, to the full extent the Bankruptcy Code permits, plead any
and all defenses for an amount up to but not exceeding any recovery that
Fund, 813 F.2d 702, 706 (5th Cir. 1987) (interpreting the notice requirement as pursuant to the
bankruptcy stay statute, at 11 U.S.C. § 362(a)).
130 Appendix to Founders’ Response to Alder’s Motion to Dismiss Third-Party Complaint,
Exhibit A (Objection of Wulf, Hall, Ted Rea, and James Rea to Amended Joint Chapter 11 Plan of
Reorganization of VeroBlue and its Affiliated Debtors), at Appx. 4 [Doc. No. 251-1].
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may be obtained by the Debtors, without prejudice to each parties’ rights
to dispute such claims.”131
•
For Section 9.15: “For the avoidance of doubt, Section 9.15 does not apply
to the claims of any party to the litigation pending as 19-CV-764 in the
United States District Court for the Northern District of Texas, provided
that such party does not receive payment or distribution under the
Plan.”132
Of course, the scope of the amended plan carves out the claims in the original
third-party complaint for tortious interference. The question is whether it also carves
out the then not-yet-filed alter ego claims for breach of contract. The Court concludes
it does not.
While the Founders make the argument that, textually, the plan
modifications might encompass future claims by existing parties, this argument
steamrolls the Fifth Circuit’s requirement for the bankruptcy court to grant leave for
the claims or try them itself. The purpose of that requirement is that the “creditors
would receive notice of [the Founders’] allegations and hopefully prevent any
preferential benefit to any one creditor.”133 True, the Founders gave notice through
their objection of what was (the defense against VeroBlue and the tortious
interference claims against the third party defendants). It gave no notice of what was
131 Appendix to Alder’s Motion to Dismiss Third-Party Complaint, Exhibit 3 (Bankruptcy Court
Order, including VeroBlue Reorganization Plan), at Appx. 196–97 [Doc. No. 221].
Id. at Appx. 196. The bankruptcy court incorporated these modifications through its
confirmation order. Id. at Appx. 61 (“The Court notes that objections regarding the scope of release
provisions were resolved during the hearing, as set forth on the record. The Court finds that the release
provisions, as amended, are appropriate and concludes the release provisions are not in conflict with
the provisions of the Bankruptcy Code.”).
132
133
S.I. Acquisition. 817 F.2d at 1154 n.13.
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yet to come (the alter ego and breach claims). Although this is an alternative way of
seeking the same relief, it seems even more to violate the Fifth Circuit’s command.
The whole point of the automatic stay in bankruptcy is to protect the estate from
claims while resolving the debtor’s reorganization.
Allowing an alter ego claim
because an entity is essentially the debtor is even more grounds to require notice in
the bankruptcy court than for tort claims against third parties. The failure to give
notice through the bankruptcy proceeding and obtain leave of court (and the resulting
bankruptcy discharge) deprives the Founders of standing to assert Counts 5–9 of the
amended third-party complaint.
The second jurisdictional argument is that this Court lacks personal
jurisdiction over Thelander. Counts 1–4 of the third-party complaint allege tortious
interference against Thelander for allegedly inducing VeroBlue to (1) sue Hall and
Ted Rea, (2) refuse to pay Wulf his severance, and (3) terminate James Rea and refuse
to pay his severance. Thelander argues his contacts with Texas are so sporadic that
they do not confer general jurisdiction and the tortious interference claims do not
arise from them. The Founders respond that Thelander’s contacts are extensive
enough to make him aware he could be haled into court in Texas, he purposely availed
himself of Texas laws, and the tortious interference claims arise from his Texas
contacts. The Court fully laid out the legal standard for personal jurisdiction above
regarding Maniaci’s motion to dismiss and need not rehash it here.
Factually, Thelander is a Swedish national residing in London. Thelander’s
Texas contacts fall into two buckets—one for VeroBlue subsidiaries and another for
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VeroBlue itself. A series of corporate filings list Thelander as a director of VeroBlue
subsidiaries that had a Texas office.
The first is a written consent appointing
Thelander as an “Investor Director” of VBF IP, Inc.—a Texas corporation. VeroBlue
is the sole shareholder of VBF IP, Inc. VBF IP, Inc. lists its office address in Plano,
Texas, and the written consent references the Texas Business and Commerce Code
four times. The second filing was VBF IP, Inc.’s amended certificate of formation,
which listed Thelander’s address as the corporate address in Plano.
Another
VeroBlue subsidiary is Iowa’s First, Inc., which (as expected) is an Iowa corporation.
But the restated articles of incorporation filed in Iowa list Thelander’s address as
Plano. And Iowa’s First, Inc.’s application for authority to transact business in Illinois
lists another Plano address for Thelander.
The second bucket of contacts involves VeroBlue. First, Alder’s stock purchase
agreement with VeroBlue identified Plano as the location of the VeroBlue offices and
required Thelander to sign an indemnification agreement as part of the transaction.
Thelander participated in multiple board meetings that were initiated by conference
call from Plano. This included phone participation in an October 2017 board meeting
where the directors (particularly Thelander) discussed terminating Hall and Ted Rea.
Thelander helped draft those termination agreements, which called for Texas choice
of law. And he communicated with Ebstein and Wester about whether VeroBlue was
obligated to make payments under the termination agreements. Thelander also
communicated with Wulf in a manner indicating that Thelander was the lead
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representative of VeroBlue to negotiate Wulf’s termination—also governed by Texas
law and with a Texas forum selection clause.
The Founders argue Thelander’s Texas connections are substantial and
indicate that he purposefully availed himself of Texas law, such that general
jurisdiction is proper. But the Supreme Court has made clear that positions as an
officer or director of a corporation are appropriate for consideration in a choice-of-law
analysis, not a purposeful-availment analysis.134
And the Fifth Circuit has
crystalized the fiduciary-shield doctrine, which provides that “an individual’s
transaction of business within the state solely as a corporate officer does not create
personal jurisdiction over that individual though the state has in personam
jurisdiction over the corporation.”135
An exception the Court must address, however, is when a defendant is sued for
his own tortious conduct which had reasonably foreseeable consequences in Texas.
The Fifth Circuit’s seminal case for this exception is Donovan v. Grim Hotel Co.136 In
Donovan, the Fifth Circuit reviewed personal jurisdiction over a nonresident
corporate president, Charles Alberding, who “hired the managers” for five Texas
134 See Shaffer, 433 U.S. at 215 (“Appellee suggests that by accepting positions as officers or
directors of a Delaware corporation, appellants performed the acts required by Hanson v. Denckla. . . .
[T]his line of reasoning establishes only that it is appropriate for Delaware law to govern the
obligations of appellants to Greyhound and its stockholders. It does not demonstrate that appellants
have ‘purposefully avail(ed themselves) of the privilege of conducting activities within the forum
State[.]’” (quoting Hanson v. Denckla, 357 U.S. 235, 253 (1958)) (alteration in original)). See also
Ragan, 2009 WL 3157468, at *6 (holding that a corporate director’s presence at 10 board meetings in
Texas was insufficient to confer personal jurisdiction) (citing Shaffer, 433 U.S. at 215).
135
Stuart, 772 F.2d at 1197.
136
747 F.2d 966 (5th Cir. 1984).
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hotels, “regularly travelled to Texas in connection with the operation of the Texas
hotels,” “made personal loans to the Texas hotel corporations,” and “personally signed
loan agreements for Texas hotel improvements.”137 The Fifth Circuit observed that,
“[m]ost importantly, Alberding is sued for violations of the federal statute, under
which he is statutorily characterized as an employer and is personally responsible for
defaults because of his substantial personal control of the terms and conditions of the
Texas employee’s work in Texas.”138 In the end, the Fifth Circuit held that “his Texasconnected acts that produced injurious effects to the Texas-based employees cannot,
as a matter of law or fact, be regarded as performed solely in his corporate
capacity.”139 The Donovan Court never specified if its ruling or the exception to the
fiduciary-shield doctrine was rooted in the defendant’s substantial connections to
Texas or the fact that federal and state fair-wages laws made him personally liable
for the acts he was sued for.
Fortunately, the Fifth Circuit clarified this in General Retail Services, Inc. v.
Wireless Toyz Franchise, LLC in 2007.140
There, the Fifth Circuit summed up
Donavan’s application to that case: “So while the fiduciary-shield doctrine could
prohibit this court from ascribing acts of the [defendant corporation] to [the officer],
it does not prohibit [the officer] from being held personally liable for his own tortious
137
Id. at 973.
138
Id.
139
Id.
140
255 Fed. App’x 775 (5th Cir. 2007).
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conduct simply because he is an officer of a corporation.”141 The Fifth Circuit found
that the officer in that case sent marketing materials with alleged misrepresentations
into Texas, triggering the path for the smallest of contacts needed for specific
jurisdiction under Fifth Circuit precedent.142
It seems then that the fiduciary-shield doctrine and personal-tort exception
might simply be the application of specific jurisdiction: did the Founders sue
Thelander over his Texas contacts instead of VeroBlue’s Texas contacts? The first
thing this doctrine and exception make clear as to Thelander is that general
jurisdiction (through purposeful availment) does not exist because there is no
indication that Thelander himself signed these corporate filings (to enable a
purposeful-availment argument). Second, the Court concludes Thelander’s contacts
are insufficient to confer specific jurisdiction. Essentially, the Founders claim that
Thelander incited VeroBlue to breach the termination agreements between VeroBlue
and the Founders. But even if those termination agreements had been between
Thelander and the Founders, that would not have established specific jurisdiction.
The Fifth Circuit says that it “is well established that merely contracting with a
141
Id. at 795.
142 See id. (“General Retail established that Simtob purposefully directed his activities to Texas
because he created and intentionally sent the Offering Circular to Texas. Because General Retail’s
alleged injuries arise from those contacts, namely, the Offering Circular, Simtob has sufficient
minimum contacts with Texas.”).
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resident of the forum state is insufficient to subject the nonresident to the forum’s
jurisdiction.”143 Likewise, the Fifth Circuit
has repeatedly held that the combination of mailing payments to the
forum state, engaging in communications related to the execution and
performance of the contract, and the existence of a contract between the
nonresident defendant and a resident of the forum are insufficient to
establish the minimum contacts necessary to support the exercise of
specific personal jurisdiction over the nonresident defendant.144
These contract-specific fact patterns all contained more jurisdictional contacts
than Thelander possesses here. Instead, Thelander’s Texas contacts focus on the
creation of a contract—not the breach of the contract or interference with it. And so,
it cannot be said that the tortious interference claims “arise from” Thelander’s Texas
contacts. This analysis also complies with the Fifth Circuit’s articulation in General
Retail Services of the tort exception to the fiduciary-shield doctrine for corporate
directors: the tort must arise from the defendant’s forum contacts.
Here, the
Founders nowhere mention Thelander’s contacts with Texas which amounted to
tortious interference.
As a result, the Court lacks personal jurisdiction over
Thelander and grants his motion to dismiss under Rule 12(b)(2).
The third and final jurisdictional issue is whether the Founders served Alder
properly. Alder contends service was defective because it was not made through the
Freudensprung v. Offshore Tech. Servs., Inc., 379 F.3d 327, 344 (5th Cir. 2004) (quotation
marks omitted).
143
144 Id. See, e.g., Stuart, 772 F.2d at 1194 (“Considering the totality of the facts of this case, we
conclude that the inference of purposeful availment necessary to support the exercise of personal
jurisdiction over Spademan is not supported. The random use of interstate commerce to negotiate and
close a particular contract, the isolated shipment of goods to the forum at the instigation of the resident
plaintiffs, and the mailing of payments to the forum do not constitute the minimum contacts necessary
to constitutionally exercise jurisdiction over Spademan.”).
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designated authority for paragraph 10(c) service under the Hague Convention. The
Founders respond that service through a British Virgin Islands solicitor was proper.
The Court agrees with the Founders.
Alder is a British Virgin Islands company. Federal Rule of Civil Procedure 4(f)
governs service on foreign entities.
It allows service by (1) any “internationally
agreed means of service that is reasonably calculated to give notice, such as those
authorized by the Hague Convention”; (2) “if there is not an internationally agreed
means, or if an international agreement allows but does not specific other means,” by
several ways “reasonably calculated to give notice”; or (3) “any other means not
prohibited by international agreement,” if directed by the court.145
The United
Kingdom extended application of the Hague Convention to the British Virgin
Islands.146 And its declarations to paragraph 10(c) of the Hague Convention provide
that “documents for service through official channels will be accepted in the United
Kingdom only by the central or additional authorities and only from judicial, consular
or diplomatic officers of other Contracting States. . . .*”147 The asterisk is in the
declarations and indicates that the “declaration does not preclude any person in
another Contracting State who is interested in a judicial proceeding (including his
145
FED. R. CIV. P. 4(f).
Hague Conference on Private International Law, Extensions, 14: Convention of 15
November 1965 on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial
Matters, available at https://www.hcch.net/en/instruments/conventions/status-table/extensions/
?cid=17&mid=427 (last visited June 3, 2020).
146
147 Hague Conference on Private International Law, United Kingdom—Central Authority &
Practical Information, available at https://www.hcch.net/en/states/authorities/details3/?aid=278 (last
visited June 3, 2020).
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lawyer) from effecting service in the United Kingdom ‘directly’ through a competent
person other than a judicial officer or official, e.g., a solicitor.”148 The Supreme Court
has held that compliance with the Hague Convention is “mandatory in all cases to
which it applies[.]”149
Here, Leslie-Ann Theodore swore that she personally served the documents as
agent for Susan V. Demers, Esq., “a solicitor admitted to practice in the British Virgin
Islands and thus a competent person within the meaning of Article 10(c) [of the Hague
Convention].”150 And so, the Founders served through a solicitor, which complies with
the United Kingdom declarations to the Hague Convention. Accordingly, the Court
denies Alder’s motion to dismiss under Rule 12(b)(5) for insufficient service of process.
2. Motions to Strike
After resolving the jurisdictional attacks on the third-party complaint, the
Court turns to the motions to strike the third-party complaint under Rule 14. Alder
[Doc. No. 224], and McCowan and the now-dismissed Thelander151 [Doc. No. 228],
contend the Court should strike the complaint because third-party complaints are
only proper to assign liability under the complaint, which this third-party complaint
arguably does not do. The Founders respond that the third-party claims are to assign
148
Id.
149
Volkswagenwerk Aktiengesellschaft v. Schlunk, 486 U.S. 694, 705 (1988).
150
Affidavit of Service Upon Third-Party Defendant Alder ¶ 2 [Doc. No. 156].
151 Given that the Court lacks personal jurisdiction over Thelander, it need not assess this
secondary argument.
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liability under VeroBlue’s claims for rescission, declaratory judgment, and
restitution. The Court agrees with Alder and McCowan.
Federal Rule of Civil Procedure 14 provides that a “defending party may, as
third-party plaintiff, serve a summons and complaint on a nonparty who is or may be
liable to it for all or part of the claim against it.”152 The third-party summons frames
this secondary liability by notifying the third-party defendant that the “third-party
plaintiff is making [a] claim against [the third-party defendant] to pay part or all of
what the defendant may owe to the plaintiff[.]”153 The Fifth Circuit has fleshed out
what Rule 14’s derivative-liability requirement means. The Fifth Circuit maintains
that the assertion of third-party claims “under Rule 14 requires that the liability of
the third party be dependent upon the outcome of the main claim.”154 “[W]hen the
defendant’s right against the third party is merely an outgrowth of the same core of
facts which determines the plaintiff’s claim, impleader is properly used to reduce
litigation by having one lawsuit do the work of two.”155 By contrast, “an entirely
separate and independent claim cannot be maintained against a third party under
Rule 14, even though it does arise out of the same general set of facts as the main
claim.”156 And the Fifth Circuit established a limited exception for when “the liability
of the [defendants and third-party defendant] is an either/or proposition as a result
152
FED. R. CIV. P. 14(a)(1).
153
Summons on a Third-Party Complaint to Alder, at 1 [Doc. No. 94].
154
United States v. Joe Grasso & Son, Inc., 380 F.2d 749, 752 (5th Cir. 1967).
155
Id. at 751 (quotation marks omitted).
156
Id.
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of the law or the facts[.]”157 Rule 14 allows any party to “move to strike the thirdparty claim, to sever it, or to try it separately.”158
Lower courts have enforced these principles to strike third-party claims that
were independent, even if the same set of facts was underlying the primary and thirdparty claims.
For example, in Continental Western Casualty Company v. Steel
Stadiums, Ltd.,159 this Court struck third-party claims that arose from the same
underlying facts but involved a separate agreement that was allegedly breached.160
More on point, American Express Travel Related Services Company, Inc. v.
Beaumont161 involved American Express suing Linda Beaumont for failing to pay her
$674,249.82 credit card bill.162 Beaumont responded with third-party claims against
an art dealer for common law fraud, breach of fiduciary duty, and deceptive trade
practices for allegedly posting fraudulent charges to her card.163 In adopting the U.S.
Magistrate Judge’s findings, conclusions, and recommendation, this Court
determined that that the deceptive-trade-practice claim was separate and
independent from American Express’s claims against Beaumont and that Rule 14
157 Id. at 752. The Fifth Circuit held this exception inapplicable in Joe Grasso because the
third-party-defendant ship crewmen might not have been employees of Grasso or the ship captains
and instead might have been independent contractors. See generally id.
158
FED. R. CIV. P. 14(a)(4).
159
2011 WL 13228951 (N.D. Tex. Apr. 4, 2011) (Solis, J.).
160
Id. at *2.
161
2002 WL 31298867 (N.D. Tex. Oct. 9, 2002) (Buchmeyer, J.).
See id. at *1 (providing and adopting findings, conclusions, and recommendation of
magistrate judge). This case also demonstrates that American Express does actually offer cards
without credit limits.
162
163
Id.
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barred it.164 Regarding the fraud and fiduciary duty claims, this Court determined
that there was no possibility of secondary liability to the art dealer because American
Express could only win its primary claim if it proved Beaumont did not authorize the
charges or timely notify American Express of the fraud.165 If that occurred, Beaumont
could not then argue that the art dealer breached her agreement with American
Express through fraud or breach of a fiduciary duty.166
Likewise, in TRC & Associates v. NuScience Corp.,167 the plaintiff sued the
defendants for fraud and RICO violations.168 One defendant brought third-party
claims against the plaintiff’s controlling shareholder, which the U.S. District Court
for the Central District of California dismissed because the agreement between the
defendant and the controlling shareholder was “in no way central to the disposition
of [the plaintiff’s] claims against [the defendant]” and “[t]he fact that [the
shareholder] may have breached an employment agreement . . . does not make [the
defendant] any less liable for the alleged fraudulent conduct[.]”169
Here, the third-party claims are independent and not proper under Rule 14.
The primary claims the Founders seek to shift liability on involve VeroBlue seeking
(1) rescission of the Founders’ termination agreements, (2) a declaratory judgment
164
Id. at *2.
165
Id.
166
Id.
167
2014 WL 211781 (C.D. Cal. Jan. 13, 2014) (Wright, J.).
168
Id. at *1.
169
Id. at *3.
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that VeroBlue owes the Founders nothing further under the termination agreements,
and (3) restitution for benefits VeroBlue paid under the agreements. If VeroBlue
wins, the agreements are gone and VeroBlue gets back what it paid under them. In
the third-party claims, the Founders argue that Alder and McCowan incited VeroBlue
to sue over the agreements. But this is not derivative liability. If the Founders owe
money back to VeroBlue, it would be because the Founders were at fault for
mismanagement and self-dealing (not because Alder and McCowan urged VeroBlue
to sue the Founders). These third-party claims would only be proper if the Founders
alleged that Alder and McCowan are the ones who caused them to mismanage
VeroBlue (not caused VeroBlue to break up with them). Yes, these third-party claims
hinge on similar underlying facts as the primary claims. But Rule 14 only allows that
broader test for claims that third-party defendants bring.170
It does not allow
defendants to bring such broad claims against third parties. Because the Founders’
claims against Alder and McCowan are independent instead of derivative, the claims
violate Rule 14 and the Court grants the motions to strike. As a result, the Court
need not reach Alder and McCowan’s Rule 12(b)(6) arguments that the tortious
interference claims against them fail to state a claim.
170 See FED. R. CIV. P. 14(a)(2)(D) (“The person served with the summons and third-party
complaint—the ‘third-party defendant’: . . . may also assert against the plaintiff any claim arising out
of the transaction or occurrence that is the subject matter of the plaintiff’s claim against the thirdparty plaintiff.”).
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IV. Conclusion
To recap, the Court GRANTS VeroBlue’s motion to strike arguments that the
Founders could have raised earlier, Driver’s joinder in the Founders’ dismissal
arguments, and Driver’s affidavit [Doc. No. 215]. The Court GRANTS IN PART the
Founders’ motion to dismiss [Doc. No. 184], holds that VeroBlue insufficiently pled
its fraud allegations in its new claims, and requires VeroBlue to replead within 28
days. The Court GRANTS IN PART Driver’s motion to dismiss [Doc. No. 180] on
the ground that VeroBlue has insufficiently pled fraud, which VeroBlue should
address in its repleading.
The Court GRANTS Canaccord’s motion to dismiss
[Doc. No. 211] in part and severs and transfers the claims against Canaccord to the
United States District Court for the Southern District of New York under section 1404
pursuant to the forum-selection clause. And the Court GRANTS Maniaci’s motion
to dismiss for lack of personal jurisdiction [Doc. No. 207].
As to the third-party complaint, the Court GRANTS IN PART Alder’s motion
to dismiss [Doc. No. 219] on the ground that the Court lacks jurisdiction for alter ego
and breach of contract claims against Alder that the Founders failed to present to the
bankruptcy court before discharge. But the Court DENIES Alder’s motion to dismiss
argument that service was defective [Doc. No. 219]. Further, the Court GRANTS
Thelander’s motion to dismiss for lack of personal jurisdiction [Doc. No. 227]. Lastly,
the Court GRANTS the motions to strike the third-party complaint [Doc. Nos. 223 &
228].
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IT IS SO ORDERED this 5th day of June 2020.
BRANTLEY STARR
UNITED STATES DISTRICT JUDGE
68
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