Cypress Engine Accessories, LLC vs HDMS Limited Company et al

Filing 70

MEMORANDUM AND ORDER entered DENYING without prejudice 54 MOTION for Summary Judgment , GRANTING 53 MOTION for Summary Judgment , GRANTING 52 AMENDED 47 MOTION MOTION to Strike 45 Answer to Counterclaim Plai ntiff's First Amended Answer and Affirmative Defenses to HDMS' Second Amended Answer and Counterclaim, DENYING 55 MOTION for Summary Judgment on Plaintiff's Cause of Action, DENYING 59 Opposed MOTION for Leave to Fi le First Amended Answer and Affirmative Defenses to Second Amended Counterclaim of Defendant HDMS. A Status Conference is set for 5/17/2017 at 11:00 AM in Courtroom 11B before Chief Judge Lee H Rosenthal. Counsel are ordered to attend and bring a representative of their clients to the status conference.(Signed by Chief Judge Lee H Rosenthal) Parties notified.(leddins, 4)

United States District Court
Southern District of Texas

ENTERED
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

CYPRESS ENGINE ACCESSORIES, LLC,
Plaintiff,
v.
HDMS LIMITED COMPANY, d/b/a
PREMIUM POWER SOLUTIONS, et al.,
Defendants.

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May 03, 2017
David J. Bradley, Clerk

CIVIL ACTION NO. H-15-2227

MEMORANDUM AND ORDER
Cypress Engine Accessories, LLC, purchased prechambers, an engine part, from HDMS.
These prechambers were allegedly manufactured by Powertech Marine.1 A dispute arose when
Cypress Engine contended that the prechambers it purchased from HDMS were defective. Cypress
Engine and HDMS negotiated a settlement under which Cypress Engine would return the
prechambers it had purchased on a set schedule, and HDMS would repay the purchase price less a
restocking fee. The negotiations were through emails that resulted in a signed one-page document
the writer described as the “outline” of the parties’ settlement agreement.
Cypress Engine had not paid past-due invoices on unrelated purchases from HDMS. HDMS
deducted this past-due amount from the amount it owed under the settlement agreement for the
prechambers that Cypress Engine returned. Cypress Engine sued HDMS, alleging that it had
breached the settlement agreement by taking the offset. HDMS counterclaimed, alleging that Cypress
Engine had materially breached the settlement agreement earlier. As part of the settlement, Cypress
Engine agreed not to engage in business activities associated with prechambers during the time it was

1

Powertech Marine disputes whether it manufactured the prechambers. (Docket Entry No. 54).
Powertech Marine’s role in this dispute is not at issue at this phase in the case. See Section IV.

returning, and being reimbursed for, the prechambers it had purchased from HDMS. HDMS intended
to refurbish the prechambers returned from Cypress Engine and resell them. Within days of signing
the settlement agreement, however, Cypress Engine was selling refurbished prechambers. HDMS’s
counterclaim was for this alleged breach of the settlement agreement.

Based on a careful review of the motions, responses, and replies; the record; the relevant law;
and the arguments of counsel, the court grants HDMS’s motion for summary judgment, (Docket
Entry No. 53); denies Powertech Marine’s motion for summary judgment without prejudice and with
leave to reurge, (Docket Entry No. 54); denies Cypress Engine’s cross-motion for summary
judgment, (Docket Entry No. 55); denies Cypress Engine’s motion for leave to amend its answer,
(Docket Entry No. 59); and grants HDMS’s motion to strike Cypress Engine’s amended answer,
(Docket Entry No. 52). A status conference is set for May 17, 2017 at 11:00 a.m. Counsel are
ordered to attend and to bring a representative of their clients to the status conference.
The reasons for these rulings are set out below.
I.

Background2

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The summary judgment evidence includes internal Cypress Engine emails (Docket Entry No. 53,
Exs. 7, 10, 18, 29, 30, 38, 43, 54, 56, 57, 60, 61, 69, 70, 72, 73, 74, G, H, I, J, R; Docket Entry No. 60, Ex.
9; 35): internal HDMS communications (Docket Entry No. 60, Ex. U); emails between HDMS and Cypress
Engine (Docket Entry No. 53, Exs. 22, 23, 25, 34, 37, F, K, L, M, N, O, Q; Docket Entry No. 60; Ex. 26);
the Distributor Agreement between Cypress Engine and HDMS (Docket Entry No. 55, Ex. A); documents
related to the settlement agreement and negotiations (Docket Entry No. 53, Exs. 27, A, E, P; Docket Entry
No. 55, Ex. B-1, B-2); various other emails (Docket Entry No. 53, Exs. 58, 62); documents generated during
this litigation (Docket Entry No. 60, Exs. V, W; Docket Entry No. 53, Ex. D); and documents showing
Cypress Engine’s and Downin’s Engines sales (Docket Entry No. 53, Exs. 59, 68, 71, 75, ). The evidence
also includes deposition excerpts from Shawn Bailes, the designated representative of Cypress Engine
(Docket Entry No. 53, Ex. B; Docket Entry No. 60; Ex. T); Jon Yaunke, another designated representative
of Cypress Engine (Docket Entry No. 53, Ex. C; Docket Entry No. 60; Ex. S); Tracy Northington, a
consulting expert retained by Cypress Engine (Docket Entry No. 55, Ex. C); George Robert Erickson,
HDMS’s representative (Docket Entry No. 55, Ex. D; Docket Entry No. 60, Ex. X). The record also includes
an affidavit from Jon Yaunke, Cypress Engine’s representative. (Docket Entry No. 55, Ex. B; Docket Entry
No. 56, Ex. 2).

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Cypress Engine and HDMS entered into a Distributor Agreement on February 16, 2012.
(Docket Entry No. 55, Ex. A). Under that Agreement, Cypress Engine bought engine parts and
accessories from HDMS, and Cypress Engine resold them to its customers. (Id.).

The parts

included prechambers. In 2013, Cypress Engine claimed that the prechambers it purchased from
HDMS were defective. (Docket Entry No. 53, Ex. E).
HDMS and Cypress Engine engaged in settlement discussions through letters and emails.
Shawn Bailes, a “financial representative of the owners of Cypress Engine” and its wholly owned
subsidiary, Downin’s Engines, acting as their designated representative, handled the negotiations
on Cypress Engine’s behalf. On February 25, 2014 and again on March 7, 2014, Bailes sent a letter
to HDMS. In the letters, Bailes acknowledged the dispute, offered to settle if HDMS paid $300,000,
and threatened to refer the matter to legal counsel if no settlement was reached. (Id., Ex. A at 1–3;
Ex. 10; Ex. B at 82, 107). During the next few weeks, the parties exchanged emails negotiating what
became the settlement agreement. (Id., Ex. A). Among other things, the emails stated the parties’
intent to have the settlement agreement resolve the “entire issue” between the parties. (Id., Ex. A
at 8).
The exchanges ended with an email attaching what was described as an outline of the offer
and acceptance constituting the parties’ agreement. Bailes wrote in a March 21, 2014 email: “The
offer and acceptance outlined in this email string constitutes agreement between [HDMS] and
Cypress Engine on the return quantities, prices, and timetable.” (Id., Ex. A at 14). Attached to that
email was a one-page outline of the settlement agreement. The parties signed a hard copy of the
outline the same day. (Id., Exs. A at 14, F).
Under the agreement, Cypress Engine would return the 243 new prechambers it had

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purchased under a schedule that the parties negotiated, and the emails and letters proposed that
HDMS would pay Cypress Engine the full purchase price less a restocking fee. (Id., Ex. A at
11–12). Cypress Engine also agreed that “[a]ny amounts due to [HDMS] related to other materials
will be honored.” (Id., Ex. A at 12). HDMS included a requirement that Cypress Engine not
“engage, partner, and or enter into any agreement associated with the prechamber, prechamber
manufacturing, prechamber testing, and or prechamber design” during the scheduled period for
returning the prechambers. (Id., Ex. A at 14).
Between March 21 and May 2014, HDMS sent Cypress Engine two reminder invoices for
past-due amounts it owed for purchases unrelated to the prechambers. (Id., Exs. K, L). In May
2014, when it was time for HDMS to pay what it owed under the settlement agreement prechamber
return-and-reimbursement schedule, HDMS deducted the amount that Cypress Engine owed on the
unrelated purchases from the amount that HDMS owed under the settlement agreement. (Id., Ex.
M). After receiving the payment, with the reduction for the offset, HDMS and Cypress Engine
continued to perform under the settlement agreement. Cypress Engine sent prechambers back on
schedule. HDMS sent the money it owed for the returned prechambers on schedule as well.
HDMS did not know that six days after the parties signed the settlement agreement in March
2014, Cypress Engine was back in the business of selling prechambers. Cypress Engine used a
different supplier—not HDMS—to provide it refurbished prechambers, which it sold to its own
customers. (Id., Ex. 62; Ex. C at 101–102).

Between March 21, 2014 and August 31, 2014,

Cypress Engine sold 46 refurbished prechambers, for a total of $72,900, and it sold six prechamber
seal kits for a total of $783. (Id., Ex. 68; Ex. C at 176–82). Cypress Engine’s wholly owned
subsidiary, Downin’s Engines, sold 4 prechambers for a total of $6,400. (Id., Ex. 75; Ex. C at

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185–86, 234–37). During this period, Cypress Engine actively marketed and quoted prechambers
and prechamber parts to its customers and potential customers. (Id., Exs. 58, 59, 71, 72, 73, 74; Ex.
C at 188, 205–207, 220–22).
In August 2014, HDMS learned that Cypress Engine had continued to sell prechambers after
the parties signed the settlement agreement. HDMS sent Cypress Engine a letter stating that its
prechamber sales during the period covered by the settlement agreement violated the agreement, and
that as a result, the agreement was no longer in effect. (Id., Ex. 34). Cypress Engine responded by
complaining for the first time about the May 2014 offset. Cypress Engine also denied that it was
selling refurbished prechambers, asserting that Downin’s Engines was the only entity doing so. (Id.,
Ex. 37). This argument was curious, given Cypress Engine’s stipulation that, for the purposes of
the settlement agreement, its actions and the actions of Downin’s Engine, its wholly owned
subsidiary, “are the same.” (Docket Entry No. 53, Ex. D).
Cypress Engine sued, alleging that HDMS had breached the settlement agreement by taking
the offset, and had breached warranties and violated the DTPA by selling defective prechambers.
(Docket Entry No. 20). Cypress Engine also asserted claims against the alleged prechamber
manufacturer, Powertech Marine. (Id.). HDMS counterclaimed for, among other things, breach of
the settlement agreement’s provisions preventing Cypress Engine from selling prechambers during
the return-and-reimbursement period. (Docket Entry No. 35). These motions followed discovery
conducted by both Cypress Engine and HDMS. Each motion is analyzed below.
1.

The Legal Standards
a.

The Summary Judgment Standard

“Summary judgment is required when ‘the movant shows that there is no genuine dispute

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as to any material fact and the movant is entitled to judgment as a matter of law.’” Trent v. Wade,
776 F.3d 368, 376 (5th Cir. 2015) (quoting FED. R. CIV. P. 56(a)). “A genuine dispute of material
fact exists when the ‘evidence is such that a reasonable jury could return a verdict for the nonmoving
party.’” Nola Spice Designs, LLC v. Haydel Enters., Inc.,783 F.3d 527, 536 (5th Cir. 2015) (quoting
Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986)). “The moving party ‘bears the initial
responsibility of informing the district court of the basis for its motion, and identifying those
portions of [the record] which it believes demonstrate the absence of a genuine issue of material
fact.’” Id. (quoting EEOC v. LHC Grp., Inc., 773 F.3d 688, 694 (5th Cir. 2014)); see also Celotex
Corp. v. Catrett, 477 U.S. 317, 323 (1986).
“Where the non-movant bears the burden of proof at trial, the movant may merely point to
the absence of evidence and thereby shift to the non-movant the burden of demonstrating by
competent summary judgment proof that there is an issue of material fact warranting trial.” Id.
(quotation marks omitted); see also Celotex, 477 U.S. at 325. Although the party moving for
summary judgment must demonstrate the absence of a genuine issue of material fact, it does not
need to negate the elements of the nonmovant’s case. Boudreaux v. Swift Transp. Co., 402 F.3d 536,
540 (5th Cir. 2005). “A fact is ‘material’ if its resolution in favor of one party might affect the
outcome of the lawsuit under governing law.” Sossamon v. Lone Star State of Texas, 560 F.3d 316,
326 (5th Cir. 2009) (quotation omitted). “If the moving party fails to meet [its] initial burden, the
motion [for summary judgment] must be denied, regardless of the nonmovant’s response.” United
States v. $92,203.00 in U.S. Currency, 537 F.3d 504, 507 (5th Cir. 2008) (quoting Little v. Liquid
Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc)).
“Once the moving party [meets its initial burden], the non-moving party must ‘go beyond

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the pleadings and by her own affidavits, or by the depositions, answers to interrogatories, and
admissions on file, designate specific facts showing that there is a genuine issue for trial.’” Nola
Spice, 783 F.3d at 536 (quoting EEOC, 773 F.3d at 694). The nonmovant must identify specific
evidence in the record and articulate how that evidence supports that party’s claim. Baranowski v.
Hart, 486 F.3d 112, 119 (5th Cir. 2007). “This burden will not be satisfied by ‘some metaphysical
doubt as to the material facts, by conclusory allegations, by unsubstantiated assertions, or by only
a scintilla of evidence.’” Boudreaux, 402 F.3d at 540 (quoting Little, 37 F.3d at 1075). In deciding
a summary judgment motion, the court draws all reasonable inferences in the light most favorable
to the nonmoving party. Connors v. Graves, 538 F.3d 373, 376 (5th Cir. 2008); see also Nola Spice,
783 F.3d at 536.
When the parties cross-move for summary judgment, the court must review “each motion
independently, viewing the evidence and inferences in the light most favorable to the nonmoving
party.” Mid-Continent Cas. Co. v. Bay Rock Operating Co., 614 F.3d 105, 110 (5th Cir. 2010)
(alteration omitted) (quotation marks omitted).
B.

The Standard for Leave to File an Amended Answer

Under Federal Rule of Civil Procedure 15(a), a district court “should freely give leave [to
amend] when justice so requires.” Fed. R. CIV. P. 15(a)(2). “[T]he language of this rule evinces
a bias in favor of granting leave to amend.” Jones v. Robinson Prop. Grp., L.P., 427 F.3d 987, 994
(5th Cir.2005) (internal quotation marks omitted). Although leave to amend should not be
automatically granted, “[a] district court must possess a substantial reason to deny a request for leave
to amend[.]” Id. (internal quotation marks omitted). Under Rule 15(a), “[d]enial of leave to amend
may be warranted for undue delay, bad faith or dilatory motive on the part of the movant, repeated

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failure to cure deficiencies, undue prejudice to the opposing party, or futility of a proposed
amendment.” United States ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 270 (5th Cir.
2010). A proposed amendment is futile if “the amended complaint would fail to state a claim upon
which relief can be granted.” Stripling v. Jordan Prod. Co., LLC, 234 F.3d 863, 873 (5th Cir. 2000).
“[T]he same standard of legal sufficiency as applies under Rule 12(b)(6)” applies to determining
futility. Id. (internal quotation marks omitted).
III.

HDMS’s and Cypress Engine’s Cross-Motions for Summary Judgment
Although HDMS counterclaimed against Cypress Engine, HDMS’s summary judgment

motion is limited to Cypress Engine’s claims for breach of contract, breach of warranty, and DTPA
violations.3 Cypress Engine’s cross-motion for summary judgment is limited to its breach-ofcontract claims against HDMS based on the offset.
A.

The Cross-Motions for Summary Judgment on Cypress Engine’s Breach-ofContract Claim Based on the Offset

Cypress Engine alleged that HDMS breached the settlement agreement by offsetting the
amounts Cypress Engine owed on unrelated overdue invoices against the amount HDMS owed for
the returned prechambers. HDMS responded that the offset did not breach the settlement agreement
because that agreement required Cypress Engine to pay the amounts it owed HDMS even if they
were unrelated to the prechamber purchase.
One complication is that while HDMS and Cypress Engine agree that they had a valid
settlement agreement, they disagree about what it consists of. The letters and emails they sent

3

In its summary judgment motion, HDMS reserved the right to later move for summary judgment
on its counterclaims. (Docket Entry No. 53 at 8 n.2). Those remaining counterclaims will be addressed at
the status conference scheduled by this Order.

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negotiating the agreement culminated in the March 21, 2014 email from Shawn Bailes, Cypress
Engine’s representative, stating:
“The offer and acceptance outlined in this email string constitutes agreement
between [HDMS] and Cypress Engine on the return quantities, prices, and
timetable.”
(Docket Entry No. 53, Ex. A at 14). A one-page attachment to that email was characterized in the
email string as “accurately summariz[ing]” the agreement between the two parties. (Id.). The first
line of that one-page document states:
“This agreement outlines the terms and conditions of the return of 2-piece prechamber assemblies from Cypress Engine Accessories [] to [HDMS].”
(Id., Ex. F). HDMS argues that the one-page attachment outlining the email string plus the emails
constitute the parties’ agreement. Cypress Engine argues that only the one-page outline attached
to the email string, and not the email string that preceded and transmitted it, constitutes the
settlement agreement.
Cypress Engine relies on the merger or integration doctrine to support its argument that only
the one-page outline is the parties’ settlement agreement. None of the documents—not the outline
or the prior emails— has a merger or integration clause. Cypress Engine cannot draw on the parties’
express language to limit the settlement agreement to the one-page outline.
Under federal and Texas law, a court may look to extrinsic evidence to determine whether
a writing is a complete expression of the parties’ agreement and therefore a partially or fully
integrated agreement. See The York Grp., Inc. v. Horizon Casket Grp., Inc., Civ. No. 05-2181, 2007
WL 2021763, at *4 (S.D. Tex. July 11, 2007) (quoting Pennzoil Co. v. F.E.R.C., 645 F.2d 360, 388
(5th Cir. 1981). There is no indication in the email string or the one-page outline that the outline,
standing alone, was intended to be the parties’ fully integrated agreement. Cypress Engine neither
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points to nor submits record evidence that the parties intended the outline attached to the last email
Bailes sent to be a stand-alone fully integrated contract. 49 TEXAS PRACTICE: CONTRACT LAW § 8.3
(2006) (“If the parties intend for the written contract to be the final and complete expression of their
agreement, the contract is integrated.”). Bailes presented the one-page attachment as “summarizing”
the terms the parties had agreed to in the email string. (Docket Entry No. 53, Ex. A at 14). Bailes
attached the outline to an email stating that “[t]he offer and acceptance outlined in this email string
constitutes agreement between [HDMS] and Cypress Engine on the return quantities, prices, and
timetable.” (Id.). The most reasonable way to construe the email string and the one-page outline
is that together they constitute the settlement agreement.
Having identified the agreement, the next issue is whether HDMS’s offset breached it. In
the email string, Bailes states that Cypress Engine agreed to honor its past-due debts to HDMS. The
email stated that “[a]ny amounts due to [HDMS] related to other materials will be honored.”
(Docket Entry No. 53, Ex. A at 12). No term in the settlement agreement prohibited HDMS from
offsetting the amount it owed Cypress Engine for the returned prechambers by the amount Cypress
Engine owed for unrelated materials purchased from HDMS.
Even if the court accepted Cypress Engine’s argument that the one-page outline standing
alone was the entire settlement agreement, the record does not support an inference that HDMS
breached the agreement by taking the offset. The last sentence of the outline states: “[t]he return
schedule is irrespective of any prior credit extended to [Cypress Engine] or unrelated material
purchases and returns.” (Id., Ex. F). The outline makes clear that the parties did not intend to
condition Cypress Engine’s obligation to pay HDMS for the unrelated items on HDMS first
reimbursing Cypress Engine for the returned prechambers. Nor did the parties intend to make
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HDMS’s ability to enforce its right to require Cypress Engine to pay the outstanding invoices for
unrelated purchases depend on HDMS first paying Cypress Engine the amounts owed for the
returned prechambers. Cypress Engine breached the settlement agreement by failing to pay what
it owed for the unrelated purchases. HDMS did not breach the agreement by offsetting its payment
for the prechambers Cypress Engine returned by the amount Cypress Engine had failed to pay.
Although the settlement agreement is not ambiguous, the court notes that if it was, the result
would not change. The extrinsic evidence includes emails from a Cypress Engine employee asking
Bailes what the last sentence in the one-page outline meant. The employee stated: “I read [that line
in the settlement agreement] as [that HDMS] should stick with the Buy Back Agreement payment
schedule regardless of what we may or may not owe them.” (Docket Entry No. 53, Ex. 29). Bailes
responded: “The way the agreement was worded (as I wrote it) is that the return amounts were
irrespective of previous credits related to 2-piece pre-chambers. So, if we owed them anything on
non-pre-chamber materials (2pc) we would honor that debt but to my knowledge that was a minimal
amount.” (Id.). Bailes clearly states that, consistent with the settlement agreement, Cypress Engine
agreed to pay HDMS any outstanding amounts, including amounts for purchases unrelated to the
prechambers.
Cypress Engine’s belief that the amount it owed HDMS was minimal arose because one of
its employees had failed to enter bills from HDMS into Cypress Engine’s accounting software. (Id.,
Ex. 30). After receiving notice of the past-due amounts from HDMS, Cypress Engine verified that
the amounts were “legit[imate].” (Id.). After the offset, and after Cypress Engine verified that it had
failed to pay because of an internal error, Bailes stated that “ignoring valid invoices unrelated to the
pre-chamber issue [was] a gross mistake on our part” and that the offset “will be a difficult pill to
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swallow, but I will try to explain it to our management here.” (Id.). Bailes agreed to pay the
invoices even after he knew the amount was not “minimal.”
Cypress Engine’s motion faces an added problem. The uncontroverted record evidence
shows that, as a matter of law, Cypress Engine waived its right to assert HDMS’s offset as a breach
of the settlement agreement. Waiver is the intentional relinquishment of a known right. It can be
express or indicated by conduct that is inconsistent with an intent to claim the asserted right. Ulico
Cas. Co. v. Allied Pilots Ass’n, 262 S.W.3d 773, 778 (Tex. 2008). Bailes agreed that Cypress
Engine “gave up [the] right to complain” about the offset by voluntarily proceeding under the
agreement after HDMS took the offset and choosing not to dispute it. (Docket Entry No. 53, Ex.
B at 317). Bailes explained that after learning of the offset, he chose to “keep the agreement alive
by not complaining.” (Id.). The first time that Cypress Engine made a complaint about the offset
was after HDMS sent the August 2014 email notifying Cypress Engine that the settlement
agreement was void because Cypress Engine had breached it by continuing to sell prechambers.
Bailes described his complaint about the offset as Cypress Engine “tr[ying] to fire back with some
complaints of [its] own.” (Id., Ex. 38).
Cypress Engine responds that it did not waive its right to assert the offset as a breach because
HDMS “points only to the acceptance of partial payment as its only evidence of waiver.” (Docket
Entry No. 56 at 13). HDMS supported its waiver argument with more than just continued
performance. HDMS also provided uncontroverted summary judgment evidence in the form of
Bailes’s statements that he intended to overlook the offset and instead continue the parties’ business
relationship. The evidence shows that, as a matter of law, Cypress Engine waived its right to contest
the validity of the offset or to assert it as a breach. Trelltex, Inc. v. Intecx, L.L.C., 494 S.W.3d 781,
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790–91 (Tex. App.—Houston [14th Dist.] 2016, no pet.) (“Waiver is ordinarily a question of fact,
but when the surrounding facts and circumstances are undisputed, the question becomes one of
law.”); see also First Interstate Bank of Ariz., N.A. v. Interfund Corp., 924 F.2d 588, 595 (5th Cir.
1991) (“[T]he issue of waiver becomes a matter of law only where material facts and circumstances
are undisputed or clearly established and there is no room for argument or inference.”).
HDMS also asserts that even if it breached the contract by taking the offset from its May
2014 payment, Cypress Engine had materially breached the contract first by continuing to sell
prechambers, excusing HDMS from continued performance. The email string includes the following
request from HDMS: “[HDMS] and the manufacturer would also like the assurance that Cypress will
not engage, partner, and or enter into any agreement associated with the prechamber, prechamber
manufacturing, prechamber testing, and or prechamber design. Outside of [HDMS] for the duration
of the buy back agreement.” (Id., Ex. A at 14). The outline the parties signed contains this term as
a contract requirement: “[Cypress Engine] agrees not to engage in any pre-chamber partnerships
with outside entities while the return process is incomplete.” (Id., Ex. F).
While a material breach excuses the nonbreaching party from continued performance,
Mustang Pipeline Co., Inc. v. Driver Pipeline Co., Inc., 134 S.W.3d 195, 196 (Tex. 2004), if a
breach is immaterial, “the nonbreaching party is not excused from future performance but may sue
for the damages caused by the breach.” Levine v. Steve Scharn Custom Homes, Inc., 448 S.W.3d
637, 654 (Tex. App.—Houston [1st Dist.] 2014, pet. filed). HDMS presents uncontroverted record
evidence that Cypress Engine’s prechambers sales were a material breach. HDMS proposed the
term because it intended to refurbish the prechambers Cypress Engine returned and resell them.
(Docket Entry No. 53, Ex. 23; Docket Entry No. 60, Ex. S at 88–89). HDMS did not want to
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compete with Cypress Engine while it tried to sell the refurbished prechambers. (Docket Entry No.
53, Ex. 23). HDMS presents undisputed summary judgment evidence that Cypress Engine tried to
conceal its competing prechamber sales during this period by telling HDMS that only Downin’s
Engines, not Cypress Engine, was selling prechambers; the evidence shows that this was false, as
well as irrelevant. (Docket Entry No. 60, Ex. 35; Docket Entry No. 53, Ex. C at 188). Cypress
Engine also took steps to ensure that one of its customers would not tell HDMS that Cypress Engine
was getting refurbished prechambers from another supplier and reselling them during the period
covered by the settlement agreement. (Docket Entry No. 53, Ex. I). The uncontroverted record
evidence shows that even if HDMS breached the contract, Cypress Engine materially breached the
contract first, excusing HDMS’s continued performance.
HDMS’s summary judgment motion on Cypress Engine’s breach-of-contract claim is
granted, and Cypress Engine’s cross-motion is denied.
B.

Cypress Engine’s Breach-of-Warranty and DTPA Claims

HDMS contends that the settlement agreement extinguished Cypress Engine’s claims
relating to the defective prechambers. Cypress Engine has not responded to this argument. In the
emails the parties exchanged, Bailes wrote that Cypress Engine intended the settlement agreement
to “settle the entire issue by returning” the prechambers Cypress Engine had purchased to HDMS
in exchange for a refund. (Docket Entry No. 53, Ex. A at 8) (emphasis in original).
A compromise and settlement agreement “is the conclusion of a disputed or unliquidated
claim through a contract in which the parties agree to mutual concessions in order to avoid resolving
their controversy through litigation.” Kerrville HRH, Inc. v. City of Kerrville, 803 S.W.2d 377, 388
(Tex. App.—San Antonio 1990, writ denied); see also Miller v. Republic Nat’l Life Ins. Co., 559
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F.2d 426, 428 (5th Cir. 1977) (settlement agreements “are a means of amicably resolving doubts and
preventing lawsuits”). When parties enter into a compromise and settlement agreement, the original
claim is extinguished and the compromise and settlement agreement operates as an estoppel to a
later action asserting obligations or claims that were the subject matter of the settled dispute. See,
e.g., Estate of Pollack v. McMurrey, 858 S.W.2d 388, 392–93 (Tex. 1993) (an earlier compromise
and settlement of a dispute is a valid defense to a subsequent cause of action arising from the
dispute); Baker v. Fed. Exp. Corp., 224 S.W.3d 390, 394 (Tex. App.—Houston [1st Dist.] 2006, no
pet.). “[S]ettlement agreements, when fairly arrived at and properly entered into, are generally
viewed as binding, final and as conclusive of the rights of the parties as is a judgment entered by the
court.” Shepherd v. Wells Fargo Bank, 2016 WL 4435267, at *2 (W.D. Tex. Aug. 19, 2016)
(quoting Rodriguez v. VIA Metro. Transit Sys., 802 F.2d 126, 128 (5th Cir. 1986)).
Cypress Engine’s amended complaint makes clear that the breach-of-warranty and DTPA
claims arise out of its allegation that the prechambers it purchased from HDMS were defective. (See
Docket Entry No. 20 at 4–6). These claims fall squarely within the “entire issue” that the settlement
agreement resolved. Cypress Engine cannot now assert claims it released in its settlement agreement
with HDMS. See, e.g., Shepherd, 2016 WL 4435267, at *2; Estate of Pollack, 858 S.W.2d at
392–93; Baker, 224 S.W.3d at 394. HDMS’s summary judgment motion on Cypress Engine’s
breach-of-warranty and DTPA claims is granted.
IV.

Powertech Marine’s Summary Judgment Motion
Cypress Engine’s allegations against Powertech Marine for allegedly manufacturing the

prechambers HDMS sold are not currently at issue. In August 2016, the court limited discovery to
whether there was a breach of the settlement agreement between Cypress Engine and HDMS.
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(Docket Entry No. 28). Following that order, Cypress Engine and Powertech Marine have done no
discovery. (See Docket Entry No. 58). The record is inadequate to allow the court to decide
whether Powertech Marine manufactured prechambers for HDMS or whether they were defective.
Powertech Marine’s summary judgment motion is denied without prejudice and with leave to reurge
after the necessary discovery. (Docket Entry No. 54).
V.

Cypress Engine’s Late-Filed Amended Answer
Cypress Engine filed its first amended answer on December 5, 2016. (Docket Entry No. 45).

Cypress Engine’s amended pleading was due on November 10, 2016; HDMS’s second amended
answer and counterclaims were deemed filed on October 27, 2016. (See Docket Entry No. 43 at 3);
FED. R. CIV. P. 15(a)(3) (“Unless the Court orders otherwise, any required response to an amended
pleading must be made within the time remaining to respond to the original pleading or within 14
days after service of the amended pleading, whichever is later”). Cypress Engine did not file a
motion for leave to file this answer. HDMS moved to strike the answer as untimely, to which
Cypress Engine responded with a motion for leave to file the amended answer. (Docket Entry Nos.
52, 59). HDMS responded. (Docket Entry No. 62).
Cypress Engine’s proposed amended answer asserts a new defense—that HDMS did not
have the money to pay Cypress Engine under the settlement agreement, and therefore wrongfully
took the offset and falsely asserted that Cypress Engine had breached in order to excuse its own
nonperformance. (Docket Entry No. 45). As explained above, the undisputed facts show that, as
a matter of law, the offset was consistent with the parties’ settlement agreement and that Cypress
Engine breached the agreement by selling refurbished prechambers during the period it was
returning the ones it had purchased to HDMS. And these are not the only problems with Cypress
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Engine’s arguments on its proposed amended answer and newly raised defense.
Cypress Engine contends that it should be granted leave to amend after the deadline for doing
so, and after the deadline for discovery, because it did not learn the relevant information about
HDMS’s finances until after it took depositions at the end of the discovery period. Cypress Engine
states that it learned the relevant information during the depositions of Tracy Northington on
October 27, 2016 and of Robert Erickson on December 7, 2016.
The record undermines Cypress Engine’s explanation. First, Tracy Northington is Cypress
Engine’s own nonretained expert, and second, the record shows that Cypress Engine knew at least
some of this information before Mr. Northington’s deposition on October 27. (Docket Entry No.
59 at 3) (“In [] discussion with Mr. Northington prior to his deposition on October 27, 2016, it was
learned that he had additional information relative to the contract issue to be litigated.”). Even if
Cypress Engine did not learn the information about HDMS’s financial situation until the October
27 deposition, it could have filed an answer or motion for leave to file by the November 10 deadline.
Nor can Cypress Engine rely on Mr. Erickson’s testimony to explain the late filing. Mr.
Erickson was deposed on December 7, 2016, two days after the amended answer was filed. (Docket
Entry No. 59 at 2). During the December 7 deposition, Mr. Erickson refused on advice of counsel
to answer questions about HDMS’s financial condition around the time that the parties signed the
settlement agreement. (Docket Entry No. 59 at 4). Cypress Engine contends that “[t]he obvious
conclusion to be drawn from this testimony is that the claims of Cypress are accurate, that HDMS
was without funds to pay according to the contract terms . . . .” (Id. at 5). Speculating about the
reason for the instruction not to answer does not provide a basis for this inference. It seems equally
likely that Mr. Erickson was instructed not to answer a question asking for irrelevant information,
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given that Cypress Engine had not properly asserted HDMS’s finances as a defense.
Putting aside the instruction, the December 7 deposition cannot be the reason for the belated
amendment. The latest that Cypress Engine knew of HDMS’s finances was October 27, the date
Mr. Northingon was deposed—two weeks before the deadline for filing an amended pleading. It
also appears from Cypress Engine’s own summary judgment motion that it was informed as early
as February 2014 that HDMS may not have had the funds to pay under the settlement agreement.
(Docket Entry No. 55 at ¶¶ 8–9). Cypress Engine has offered no credible reason explaining why it
nonetheless filed its amended answer weeks late and failed to seek leave to do so at the time.
The amended answer was filed after discovery closed and two weeks before the summary
judgment motions and briefs were due. (See Docket Entry Nos. 41, 48). Allowing this amendment
would require reopening discovery and preparing new summary judgment motions and briefs. The
delay and added burden and expense are prejudicial to HDMS. The Fifth Circuit has approved
denying leave to amend in these circumstances. See Dueling v. Devon Energy Corp., 623 F. App’x
127, 131 (5th Cir. 2015) (“This Court and other courts have found prejudice, for instance, if the
amendment is asserted after the close of discovery; after dispositive motions have been filed,
briefed, or decided; or on the eve of or in the middle of trial.”); Solomon v. N. Am. Life & Cas. Ins.
Co., 151 F.3d 1132, 1139 (9th Cir. 1998) (affirming denial of leave to amend where the plaintiff
filed the motion “on the eve of the discovery deadline”).
Cypress Engine’s motion for leave to file its amended answer is denied. (Docket Entry No.
59). HDMS’s motion to strike Cypress Engine’s answer is granted. (Docket Entry No. 52).
VI.

Conclusion
HDMS’s motion for summary judgment is granted, (Docket Entry No. 53); Powertech
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Marine’s motion for summary judgment is denied without prejudice and with leave to reurge,
(Docket Entry No. 54); Cypress Engine’s motion for summary judgment is denied, (Docket Entry
No. 55); Cypress Engine’s motion for leave to amend its answer is denied, (Docket Entry No. 59);
and HDMS’s motion to strike the amended answer is granted, (Docket Entry No. 52).
A status conference is set for May 17, 2017 at 11:00 a.m. Counsel are ordered to attend and
to bring a representative of their clients to the status conference.
SIGNED on May 3, 2017, at Houston, Texas.

______________________________________
Lee H. Rosenthal
Chief United States District Judge

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