Wealth Masters International, Ltd v. Kubassek et al

Filing 50

MEMORANDUM AND ORDER DENIED 44 MOTION to Dismiss 43 Answer to Amended Complaint, Counterclaim Pursuant to Federal Rules of Civil Procedure 9(b) & 12(b)(6) (Signed by Judge Nancy F. Atlas) Parties notified.(sashabranner, 4)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
WEALTH MASTERS
INTERNATIONAL, LTD.,
Plaintiff,
v.
JASON “JAY” KUBASSEK, et al.,
Defendants.

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CIVIL ACTION NO. H-12-3421

MEMORANDUM AND ORDER
This case is before the Court on the Motion to Dismiss [Doc. # 44] filed by
Counter-Defendant Wealth Masters International, Ltd. (“WMI”), to which CounterPlaintiffs Aaron Rashkin and Sophia Rashkin filed a Response [Doc. # 46]. WMI
neither filed a reply nor requested additional time to do so. Having reviewed the full
record and applied relevant legal authorities, the Court denies the Motion to Dismiss.
I.

BACKGROUND
WMI, a Texas limited partnership, is a network marketing company that offers

for sale products designed to educate individuals on financial planning. The Rashkins,
citizens of Colorado, were sales consultants for WMI.1

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By Memorandum and Order [Doc. # 35] entered June 19, 2013, the Court denied the
Rashkins’ Motion to Dismiss for Lack of Personal Jurisdiction.

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WMI filed this lawsuit alleging that the Rashkins and others misappropriated
its confidential information and trade secrets, and solicited WMI’s employees and
sales consultants to compete against WMI in violation of their fiduciary duties.
The Rashkins filed a Counterclaim [Doc. # 43], alleging that WMI is a pyramid
scheme. The Rashkins allege that WMI violated the Texas Deceptive Trade Practices
Act (“DTPA”), engaged in intentional misrepresentation and fraud, and breach its
consulting contract with them. WMI filed its Motion to Dismiss, which is now ripe
for decision.
II.

STANDARD FOR MOTION TO DISMISS
A motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil

Procedure is viewed with disfavor and is rarely granted. Turner v. Pleasant, 663 F.3d
770, 775 (5th Cir. 2011) (citing Harrington v. State Farm Fire & Cas. Co., 563 F.3d
141, 147 (5th Cir. 2009)). The complaint must be liberally construed in favor of the
plaintiff, and all facts pleaded in the complaint must be taken as true. Harrington, 563
F.3d at 147. The complaint must, however, contain sufficient factual allegations, as
opposed to legal conclusions, to state a claim for relief that is “plausible on its face.”
See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Patrick v. Wal-Mart, Inc., 681 F.3d
614, 617 (5th Cir. 2012). When there are well-pleaded factual allegations, a court

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should presume they are true, even if doubtful, and then determine whether they
plausibly give rise to an entitlement to relief. Iqbal, 556 U.S. at 679.
III.

ANALYSIS
A.

DTPA Claim

The elements of a DTPA claim under Texas law are that: (1) the plaintiff was
a consumer; (2) that the defendant engaged in false, misleading, or deceptive acts, and
(3) that those acts were a producing cause of the plaintiff’s damages. See Perez v.
DNT Global Star, LLC, 339 S.W.3d 692, 705 (Tex. App. – Houston [1st Dist.] 2011,
no pet.). The Rashkins have alleged that they are consumers. See Counterclaim [Doc.
# 43], ¶ 30. In the context presented, this allegation is sufficient to defeat WMI’s
Motion to Dismiss.
Under § 17.46(b) of the DTPA, “promoting a pyramid promotional scheme” as
defined by § 17.461 constitutes “false, misleading, or deceptive acts.” See Miller v.
Sexton, 2002 WL 1981391, *2 (Tex. App. – Dallas 2002, no pet.). Section 17.461
defines “promoting a pyramid promotional scheme” as “inducing or attempting to
induce one or more other persons to participate in a pyramid promotional scheme; or
(2) assisting another person in inducing or attempting to induce one or more other
persons to participate in a pyramid promotional scheme, including by providing
references.” Id. (quoting TEX. BUS. & COM. CODE § 17.461(a)(5)). “Pyramid

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promotional scheme” under the DTPA means “a plan or operation by which a person
gives consideration for the opportunity to receive compensation that is derived
primarily from a person's introduction of other persons to participate in the plan or
operation rather than from the sale of a product by a person introduced into the plan
or operation.” See TEX. BUS. & COM. CODE § 17.461(a)(6). The Rashkins have
adequately alleged that WMI uses a pyramid promotional scheme that has caused
them monetary damages. See Counterclaim, ¶¶ 9-27. As a result, WMI’s Motion to
Dismiss the DTPA claim is denied.
B.

Misrepresentation and Fraud Claim

Rule 9 of the Federal Rules of Civil Procedure requires that “[i]n all averments
of fraud or mistake, the circumstances constituting fraud or mistake shall be stated
with particularity.” FED. R. CIV. P. 9(b); see Leatherman v. Tarrant Cty. Narcotics
Intelligence Unit, 507 U.S. 163, 168-69 (1993); Hart v. Bayer Corp., 199 F.3d 239,
247 n.6 (5th Cir. 2000). In particular, the pleadings should “specify the statements
contended to be fraudulent, identify the speaker, state when and where the statements
were made, and explain why the statements were fraudulent.” Southland Securities
Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 362 (5th Cir. 2004) (quoting
Williams v. WMX Technologies, Inc., 112 F.3d 175, 177-78 (5th Cir. 1997)); see also
Shandong Yinguang Chem. Indus. Joint Stock Co., Ltd. v. Potter, 607 F.3d 1029, 1032

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(5th Cir. 2010) (“Put simply, Rule 9(b) requires the who, what, when, where, and how
to be laid out.” (internal quotation marks and citation omitted)). Rule 9(b) requires
a plaintiff to allege the existence of facts sufficient to warrant the pleaded conclusion
that fraud has occurred. See In Re Haber Oil Co., 12 F.3d 426, 439 (5th Cir. 1994).
In this case, the Rashkins allege that WMI made fraudulent statements through
its business model and compensation plan, which they allege constitute a pyramid
scheme. The Rashkins allege also that WMI failed to provide legally required income
disclosures, and falsely represented that the WMI consultant community includes “six,
multiple-six and even seven figure income earners.” See Counterclaim, ¶ 25. The
Rashkins allege further that WMI co-founder Karl Bessey and others falsely
represented on Internet websites that WMI’s business and products had been endorsed
by third parties, including “the world’s most successful people in order to deceive
consultants into participating in its pyramid scheme.” See id., ¶ 26. The Rashkins
allege that they relied on these misrepresentations to their detriment and incurred
monetary damages as a result. These allegations satisfy the pleading requirements of
Rule 9(b), and the Motion to Dismiss the intentional misrepresentation and fraud
claim is denied.

C.

Breach of Contract Claim

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As an alternative theory of relief, the Rashkins assert that WMI breached its
contract with them. In order to prevail on a breach of contract claim, a plaintiff must
establish the existence of a contract, the performance or tender of performance by the
plaintiff, a breach by the defendant, and damages as a result of that breach. Bridgmon
v. Array Sys. Corp., 325 F.3d 572, 577 (5th Cir. 2003) (citing Frost Nat’l Bank v.
Burge, 29 S.W.3d 580, 593 (Tex. App.—Houston [14th Dist.] 2000, no pet.)).
The Rashkins have alleged that they entered into a consulting agreement with
WMI. The consulting agreement specifically incorporates WMI’s “marketing plans,
rules and regulations, and policies and procedures.” WMI’s “Policies and Procedures”
include WMI’s compensation plan.

The Rashkins allege that they earned

commissions and other income under the consulting agreement and the compensation
plan, and that WMI has refused to pay those earnings. The Rashkins allege also that
WMI breached the consulting agreement with the Rashkins when it wrongfully
terminated the contract. The Rashkins allege that WMI’s breach of the consulting
agreement caused them to suffer monetary damages. As a result, the Rashkins have
adequately asserted a breach of contract claim and the Motion to Dismiss this claim
is denied.2
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WMI argues that the breach of contract claim should be dismissed because the
Rashkins seek rescission of the consulting agreement, yet have failed to allege that
“they will tender to WMI the benefits they obtained under the Agreement they want
(continued...)

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IV.

CONCLUSION AND ORDER
The Rashkins have adequately alleged the causes of action in their

Counterclaim against WMI. Accordingly, it is hereby
ORDERED that WMI’s Motion to Dismiss [Doc. # 44] is DENIED.
SIGNED at Houston, Texas, this 1st day of October, 2013.

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(...continued)
to cancel.” See Motion to Dismiss, p. 10. This argument appears to misapprehend the
Rashkins’ claim. They assert breach of contract as an alternative claim in which they
seek only monetary relief for the damages they allege resulted from WMI’s breach of
the consulting agreement. WMI cites no legal authority for the position that the
Rashkins cannot obtain monetary relief unless they offer to return amounts they
earned and received under the contract prior to the alleged breach.

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