Cypress Engine Accessories, LLC vs HDMS Limited Company et al
MEMORANDUM AND ORDER entered: HDMS's motion for summary judgment is granted in part and denied in part. The court grants summary judgment for HDMS on its counterclaim for breach of contract for Cypress Engine's sale of prechambers, and di smisses HDMS's counterclaim for breach of contract for filing this litigation. The court grants HDMS's motion for summary judgment on its counterclaim that Cypress Engines DTPA claims were groundless, and grants Powertech Marine's motion for summary judgment that it is not a proper party to the suit. HDMS must submit evidence of recoverable fees no later than October 13, 2017. (Signed by Chief Judge Lee H Rosenthal) Parties notified.(leddins, 4)
United States District Court
Southern District of Texas
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
CYPRESS ENGINE ACCESSORIES, LLC,
HDMS LIMITED COMPANY, d/b/a
PREMIUM POWER SOLUTIONS, et al.,
October 06, 2017
David J. Bradley, Clerk
CIVIL ACTION NO. H-15-2227
MEMORANDUM AND ORDER
Three motions are pending:
Cypress Engine’s motion for reconsideration of the court’s May 3, 2017
Memorandum and Order interpreting the settlement agreement between Cypress
Engine and HDMS, (Docket Entry No. 85);
HDMS’s motion for summary judgment on its counterclaims against Cypress
Engine, (Docket Entry No. 78); and
Powertech Marine’s motion for summary judgment on Cypress Engine’s claims,
(Docket Entry No. 77).
Based on the motions and responses, the record, the arguments of counsel, and the applicable law,
the court: denies Cypress Engine’s motion for reconsideration; grants in part and denies in part
HDMS’s motion for summary judgment on its counterclaims, and orders that no later than October
13, 2017, HDMS must submit evidence of the fee amount on the DTPA claim, segregating the fees
it seeks for defending the DTPA claim from the other fees it incurred or, in the alternative, that the
fees were for claims so interrelated that segregation is not required; and grants Powertech Marine’s
motion for summary judgment.
The reasons for these rulings are set out below.
Cypress Engine purchased prechambers, an engine part, from HDMS. After Cypress Engine
alleged that the prechambers were defective, Cypress Engine and HDMS negotiated a settlement
under which Cypress Engine would return the prechambers within a certain time frame and HDMS
would refund the purchase price, less a restocking fee. The negotiations occurred through a series
of emails and a signed one-page “outline” of the settlement agreement.
Cypress Engine had unpaid, past-due invoices from HDMS for transactions unrelated to the
prechambers purchases. After the parties signed the settlement agreement, HDMS deducted the
past-due invoices from the refunded amounts it paid Cypress Engine for the returned prechambers.
Cypress Engine filed this suit against HDMS, alleging that it had breached the settlement agreement
by taking the offset. Cypress Engine also sued Powertech Marine, alleging that it manufactured the
defective prechambers that HDMS had sold.
HDMS counterclaimed, alleging that Cypress Engine had breached the settlement agreement
promise not to engage in competing business activities associated with prechambers during the
period Cypress Engine was returning prechambers it had bought from HDMS for a refund. HDMS
alleged that within days of signing the settlement agreement, Cypress Engine was selling
prechambers. HDMS intended to refurbish the returned prechambers and resell them, which would
compete with Cypress Engine’s sales. HDMS alleges in its counterclaim that Cypress Engine
breached the settlement agreement both by selling the prechambers and by filing this lawsuit
asserting claims that Cypress Engine had released in the settlement agreement.
HDMS and Cypress Engine cross-moved for summary judgment. (Docket Entry Nos. 53,
55). HDMS moved for summary judgment dismissing Cypress Engine’s claims, reserving the right
to seek summary judgment on its own counterclaims later. (Docket Entry No. 53). Powertech
Marine denies that it was the manufacturer of the prechambers and moved for summary judgment
P:\CASES\2015\15-2227\15-2227, summary judgment.c06.wpd
on that basis. (Docket Entry No. 54). On May 3, 2017, the court issued a Memorandum and Order,
granting HDMS’s motion for summary judgment and dismissing Cypress Engine’s claims against
HDMS; denying Cypress Engine’s motion for summary judgment and motion for leave to amend
its answer; and denying Powertech Marine’s motion for summary judgment, without prejudice and
with leave to reurge. (Docket Entry No. 70).
Cypress Engine has moved for reconsideration of the court’s Memorandum and Order,
arguing that the court improperly interpreted the settlement agreement. (Docket Entry No. 85).
HDMS has moved for summary judgment on its counterclaims against Cypress Engine. (Docket
Entry No. 78). Powertech Marine has filed a second motion for summary judgment, seeking a ruling
that it is not a proper party. (Docket Entry No. 77). Cypress Engine responded to both motions,
(Docket Entry Nos. 84, 86). The court heard argument from counsel, and both Cypress Engine and
HDMS supplemented their briefing. (Docket Entry Nos. 89, 90).
Each motion and response is analyzed below.
Cypress Engine’s Motion for Reconsideration
Cypress Engine urges the court to reconsider its interpretation of the parties’ settlement
agreement and its determination that the agreement consisted of the email exchanges and the onepage outline attached to the final email.
Cypress Engine and HDMS agreed that they had a settlement agreement, but they disputed
what that agreement consisted of. The court applied federal and Texas law to conclude that “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.” (Docket Entry No. 70 at 9). The one-page
outline was attached to the final email from Shawn Bailes, a Cypress Engine employee. The email
stated that “[t]he offer and acceptance outlined in this email string constitutes agreement between
[HDMS] and Cypress Engine on return quantities, prices, and timetable.” (Docket Entry No. 70 at
10). The court ruled that the email string and the one-page outline, taken together, constituted the
settlement agreement. Cypress Engine moves for reconsideration of this ruling.
The Federal Rules of Civil Procedure do not formally recognize a motion to reconsider. See
St. Paul Mercury Ins. Co. v. Fair Grounds Corp., 123 F.3d 336, 339 (5th Cir. 1997) (“[T]he Federal
Rules of Civil Procedure do not recognize a general motion for reconsideration.”). Motions to
reconsider are treated as motions to alter or amend a judgment under Federal Rule of Civil
Procedure 59(e), or as motions for relief from judgment under Rule 60(b), depending on when the
motion is filed. Demahy v. Schwarz Pharm. Inc., 702 F.3d 177, 182 n.2 (5th Cir. 2012). A motion
for reconsideration is considered under Rule 59(e) if it is filed within 28 days of the court’s ruling,
and under Rule 60(b) if it is filed after that. Id. This motion is considered under Rule 60(b) because
it was filed more than 28 days after the court’s May 3, 2017 order.
Rule 60(b) of the Federal Rules of Civil Procedure sets out five bases for relief from a final
judgment: (1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence;
(3) fraud, misrepresentation, or misconduct of an adverse party; (4) the judgment is void; and (5)
satisfaction, discharge, or release of the judgment. Fed. R. Civ. P. 60(b)(1)–(5). Rule 60(b)(6) also
allows a court to relieve a party from a final judgment for “any other reason justifying relief from
the operation of the judgment.” Fed. R. Civ. P. 60(b)(6). Relief under Rule 60(b)(6) is granted only
when it is not covered by the five enumerated grounds and when “extraordinary circumstances” are
present. Batts v. Tow-Motor Forklift Co., 66 F.3d 743, 747 (5th Cir. 1995) (citations omitted). “The
district court enjoys considerable discretion when determining whether the movant has satisfied any
of these Rule 60(b) standards.” Teal v. Eagle Fleet, Inc., 933 F.2d 341, 347 (5th Cir. 1991).
Rule 60(b) allows the trial court to “correct obvious errors or injustices.” Fackelman v. Bell,
564 F.2d 734, 736 (5th Cir. 1977). A party moving under Rule 60(b) must show “unusual or unique
circumstances.” Pryor v. U.S. Postal Serv., 769 F.2d 281, 286 (5th Cir. 1985). A motion to
reconsider may not be used to relitigate matters, raise arguments, or submit evidence that could have
been presented before the judgment or order was entered. 11 WRIGHT & MILLER § 2810.1 at 127–28
(footnotes omitted). “A party seeking reconsideration must show more than disagreement with the
court’s decision and recapitulation of the same cases and arguments already considered by the
court.” Texaco Exploration & Prod., Inc. v. Smackco, Ltd., No. Civ. A. 98–2293, 1999 WL 539548,
at *1 (E.D. La. July 26, 1999) (citing Plaskon Elec. Materials, Inc. v. Allied-Signal, Inc., 904 F.
Supp. 644, 669 (N.D. Ohio 1995)). A motion for relief under Rule 60(b) is “not a substitute for the
ordinary method of redressing judicial error—appeal.” Chick Kam Choo v. Exxon Corp., 699 F.2d
693, 696 (5th Cir. 1983) (citation omitted).
Cypress Engine fails to identify what part of Rule 60(b) justifies its motion for
reconsideration. Cypress Engine seeks to relitigate an issue it litigated and lost, but the motion
raises no new legal arguments or new facts. The record does not identify any “unusual or unique
circumstances,” “mistake, inadvertence, surprise, or neglect,” “newly discovered evidence,” “fraud,
misrepresentation, or misconduct,” or other reason to justify reconsideration. The record supports
the court’s finding as to what made up the settlement agreement.
The motion to reconsider is denied.
HDMS’s Motion for Summary Judgment
HDMS moves for summary judgment on its counterclaims that Cypress Engine breached the
parties’ settlement agreement by filing the present lawsuit and by selling prechambers during the
buyback period. (Docket Entry No. 78 at 8). HDMS asserts damages in the form of the attorneys’
fees it incurred in defending this lawsuit and the profits it lost from Cypress Engine’s prechambers
sales. (Docket Entry No. 78 at 8).
Is HDMS Entitled to Summary Judgment on its Counterclaim That Cypress
Engine Breached the Settlement Agreement By Filing this Suit?
HDMS argues that in the May 3, 2017 Memorandum and Order, (Docket Entry No. 70), this
court found that, as a matter of law, Cypress Engine released the claims it raises in this lawsuit.
(Docket Entry No. 78 at 15– 16). Cypress Engine responds that in the Memorandum and Order, the
court found that the claims were “covered by” the settlement agreement, but the court did not find
that Cypress Engine promised not to sue on the claims it asserted in this lawsuit. (Docket Entry No.
84 at 13). Cypress Engine argues that without a covenant not to sue, HDMS cannot recover
damages for fees incurred in defending those claims in this lawsuit. (Docket Entry No. 84 at 15).
In its May 3, 2017 Memorandum and Order, the court found that “[t]he 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.” (Docket Entry No. 70 at 12). The court found that
Cypress Engine’s claims for breach of warranty and DTPA violation “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.” (Docket Entry No. 70 at 15). Cypress Engine argues
HDMS could raise the release of claims under the settlement agreement as an affirmative defense
in this case, but HDMS does not have “the right to an affirmative action.” (Docket Entry No. 70 at
Cypress Engine cites National Prop. Holdings, L.P. v. Westergren, 453 S.W.3d 419 (Tex.
2015). In Westergren, the plaintiff signed a release of “all claims” and then sued the defendant on
those claims. Id. at 422. The defendant counterclaimed for breach of the release agreement. Id.
The Texas Supreme Court rejected the defendant’s argument that “a party who releases a claim and
later files suit on that claim necessarily breaches the release agreement.” Id. at 428. The Court
concluded that none of the cases the defendant relied on “reads a covenant not to sue into a release
that does not include such a promise.” Id. The Court held that a release of a claim does not equate
to a covenant not to sue on that claim. The issue is whether the specific release language “includes
a contractual obligation not to sue.” Id. The Court concluded:
We . . . find that the release is unambiguous as to this point. The
parties intended the release ‘to release all liability described’ within
the agreement. Like the [mediated settlement agreement], it includes
no language barring Westergren from bringing suit or stating that he
would breach the release by doing do.
Although the release provides an affirmative defense to future suits,
we cannot construe it as including a covenant not to sue where, in
fact, the plain language does not bar future suits.
Id. at 428–29.
HDMS cites Dallas Gas Partners, L.P. v. Prospect Energy Corp., 733 F.3d 148, 159 (5th
Cir. 2013), in support of its argument that when “an unambiguous settlement agreement bars the
plaintiff’s claims, the plaintiff’s breach of the settlement agreement may be deemed ‘obvious’ as a
matter of law.” (Docket Entry No. 78 at 16). Dallas Gas involved an express covenant not to sue
that specified attorneys’ fees as damages. 733 F.3d at 153. Here, the parties’ settlement agreement
resolves “the entire issue,” including a release of Cypress Engine’s claims, but the agreement does
not include an express covenant not to sue on those claims. (See Docket Entry No. 78, Ex. A).
The other cases HDMS cites are distinguishable. In Widener v. Arco Oil & Gas Co., 717 F.
Supp. 1211, 1213–14 (N.D. Tex. 1989), the plaintiffs signed a general release stating that they “do
hereby covenant not to file a lawsuit to assert” the claims released. The case involved an express
covenant not to sue that the plaintiffs breached by filing their lawsuit. This case does not. Palavan
v. McCulley, 498 S.W.3d 134 (Tex. App.—Houston [1st Dist.] 2016, no pet.), involved an express
promise by the plaintiff to dismiss the defendants from a pending lawsuit in exchange for a $1,200
settlement. The court held that by filing a notice of an appeal, the plaintiff in Palavan “kept the
defendants in the suit and continued to pursue his claims against them,” breaching the settlement
agreement in the same way that filing a lawsuit would violate an express covenant not to sue. Id.
at 142. The settlement agreement in this case did not include an express promise to dismiss a
pending lawsuit. Syrian American Oil Corporation v. Pecten Orient Company, 524 S.W.3d 350
(Tex. App.—Houston [1st Dist.] 2017, no pet.), addressed whether a defendant’s alleged fraudulent
inducement to enter a settlement agreement could excuse the plaintiff’s breach of that settlement
agreement by filing a lawsuit. There are no allegations of fraudulent inducement in this case.
HDMS attempts to distinguish Westergren by asserting that the release in that case is
different from the settlement agreement between Cypress Engine and HDMS. (Docket Entry No.
90 at 2). The critical document in Westergren was titled, “AGREEMENT AND RELEASE.” The
title as well as the contents undermine HDMS’s argument that the release in that case and the
settlement agreement here are different in kind. The relevant similarity is that the release in
Westergren and in the present case both released the claims that were the basis of the later suits, but
did not contain covenants not to sue on those claims.
HDMS cites Guffey v. Clark, No. 05-93-00849-CV, 1997 Tex. App. LEXIS 1609 (Tex.
App.—Dallas Mar. 31, 1997, writ denied), and Ganske v. WRS Group, Inc., No. 10-06-00050-CV,
2007 Tex. App. LEXIS 2991 (Tex. App.—Waco Apr. 18, 2007, no pet.), to support its argument that
a release of claims in a settlement agreement followed by filing a lawsuit on those claims is an
actionable breach of the agreement. Both are intermediate Texas appellate cases decided before the
Texas Supreme Court decided Westergren. The court in Guffey relied on the policy rationale that
denying an affirmative claim for breach of contract would deprive the non-breaching party of the
benefit of the original bargain. 1997 Tex. App. LEXIS 1609, at *11. The Westergren court rejected
that rationale. Ganske was also decided before Westergren and the language of the settlement
agreement in Ganske was more specific than the language in this case.1 2007 Tex. App. LEXIS
2991, at 10–11 (“[N]o one to this agreement is in any way admitting liability, but in the interest of
economy, they are compromising and settling these claims for the purposes of avoiding further
litigation and investigation on account of the aforementioned matter.”). Here, on the other hand,
HDMS asks the court to read a covenant not to sue into the settlement agreement, based on
statements by Cypress Engine that it would refer the matter to legal counsel if a settlement could not
be reached and the discussion of a resolution of the “entire issue” “to achieve closure” on the matter.
(Docket Entry No. 78-1, Ex. A). Westergren rejects this approach. 453 S.W.3d at 428. In this
diversity jurisdiction case, Westergren controls. Neither Guffey nor Ganske provides a basis to
HDMS cites several other cases, but they were decided long before Westergren and none
provides a basis to avoid it here. See McMillen v. Klingensmith, 467 S.W.2d 193 (Tex. 1971)
(differentiating between a release of a claim and the satisfaction of a claim when the plaintiff
released one tortfeasor to settle a pending lawsuit and subsequently sued two other tortfeasors on
the same claim); Rexroat v. Prescott, 570 S.W.2d 457 (Tex. App.—Amarillo 1979, writ ref’d n.r.e)
(applying the McMillen rule that a release applies only to those parties named in it and
distinguishing a release from a satisfaction of damages); Kerrville HRH, Inc. v. Kerrville, 803
Ganske has been cited by other courts. See Haubold v. Med. Carbon Research Inst., LLC, No. 0311-00115-CV, 2014 Tex. App. LEXIS 2863, at *21–22 (Tex. App.—Austin Mar. 14, 2014); Arbor Windsor
Court, Ltd. v. Weekley Homes, LP, 463 S.W.3d 131, 153–54 (Tex. App.—Houston [1st Dist.] 2015, pet.
denied) (J. Donovan, dissenting); Blackstone Med., Inc. v. Phoenix Surgicals, LLC, 470 S.W.3d 636, 653
(Tex. App.—Dallas 2015, no pet.); Leibovitz v. Sequoia Real Estate Holdings, L.P., 465 S.W.3d 331, 355
(Tex. App.—Dallas 2015, no pet.); In re Marriage of Pyrtle, 433 S.W.3d 152, 169–170 (Tex. App.—Dallas
2014, pet. denied); Vianet Grp. PLC v. Tap Acquisition, Inc., No. 3:14-CV-3601-B, 2016 U.S. Dist. LEXIS
108296, at *22 (N.D. Tex. Aug. 16, 2016); Reid v. GMC, 489 F. Supp. 2d. 614, 618 (E.D. Tex. 2007); Boyaki
v. John M. O’Quinn & Assocs., PLLC, No. 01-12-00984-CV, 2014 Tex. App. LEXIS 10862, at *38 (Tex.
App.—Houston [1st Dist.] 2014, pet. denied).
S.W.2d 377 (Tex. App.—San Antonio 1990, writ denied) (distinguishing between compromise and
settlement on the one hand and accord and satisfaction on the other to determine whether a novation
existed); Priem v. Shires, 697 S.W.2d 860 (Tex. App.—Austin 1985, no writ) (differentiating
between a settlement and compromise on the one hand and accord and satisfaction on the other to
determine whether a novation occurred).
Under Texas law, the court cannot imply a covenant not to sue on released claims from a
settlement releasing those claims. The court cannot grant HDMS relief on its damages counterclaim
that Cypress Engine breached the settlement agreement by filing the present lawsuit. HDMS could,
and did, raise the breach of the settlement agreement as an affirmative defense to Cypress Engine’s
claims, but HDMS cannot proceed with its counterclaim for damages for the breach. HDMS’s
motion for summary judgment on this counterclaim is denied.
B. Is HDMS Entitled to Summary Judgment on its Counterclaim that Cypress
Engine Breached the Settlement Agreement by Selling Prechambers?
HDMS also argues that Cypress Engine breached the settlement agreement when it sold
prechambers during the buyback period. (Docket Entry No. 78 at 21). In the May 3, 2017
Memorandum and Order, the court found that “HDMS presents uncontroverted record evidence that
Cypress Engine’s prechambers sales were a material breach” of the parties’ settlement agreement.
(Docket Entry 78 at 21 (citing Docket Entry No. 70 at 13)). The court’s ruling on this issue does
not limit HDMS to a defense to a claim by Cypress Engine. The undisputed record evidence shows
that, as a matter of law, Cypress Engine breached the settlement agreement when it sold
prechambers during the buyback period, competing with HDMS’s prechambers sales. HDMS is
entitled to summary judgment on this counterclaim.
HDMS seeks $46,016.40 in damages, the difference between the retail-price-less-restockingfee amount that HDMS refunded Cypress Engine for the returned prechambers ($98,528.40), and
the lower amount that HDMS could have paid for those prechambers by buying them on the
wholesale market ($52,512.00). HDMS labels this wholesale price the “fair market value.” (Docket
Entry No. 78 at 21). HDMS argues that had it known that Cypress Engine would continue to sell
prechambers during the time HDMS was repurchasing them from Cypress Engine, HDMS would
not have agreed to the repurchase arrangement in the settlement. (Docket Entry No. 78 at 22).
Cypress Engine responds that HDMS failed to mitigate its damages because it did not resell
the prechambers it acquired from Cypress Engine in the retail market and deduct the amount from
the amount it refunded Cypress Engine. (Docket Entry No. 84 at 16–17). HDMS argues that
Cypress Engine failed to plead mitigation as an affirmative defense, forfeiting the right to assert that
defense now. (Docket Entry No. 90 at 1).
Failure to mitigate damages is an affirmative defense. See, e.g., E.E.O.C. v. Serv. Temps
Inc., 679 F.3d 323, 334 n.30 (5th Cir. 2012); Branch Banking & Trust Co. v. Lexiam Enters., LLC,
No. 3:15-CV-2928-M, 2016 U.S. Dist. LEXIS 147305, at *8 (N.D. Tex. Oct. 24, 2016) (“Under
Texas law, the doctrine of mitigation of damages is an affirmative defense that ‘prevents a party
from recovering for damages resulting from a breach of contract that could be avoided by reasonable
efforts on the part of the plaintiff.’”) (citing Great Am. Ins. Co. v. N. Austin Mun. Utility Dist. No.
1, 908 S.W.2d 415, 426 (Tex. 1995)). “The failure to plead an affirmative defense generally results
in waiver of that defense.” Garrison Realty, L.P. v. Fouse Architecture & Interiors, P.C., 546 Fed.
App’x 458, 465 (5th Cir. 2013); see also Fed. R. Civ. P. 8(c). “A court may excuse the failure to
plead an affirmative defense, however, if the opposing party is not prejudiced.” Id. (citing
Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402 U.S. 313, 350 (1971) for the proposition that
“the purpose of the pleading requirement in Rule 8(c) is to give the opposing party notice and an
opportunity to argue why the defense is inappropriate.”). The Fifth Circuit “employs a fact-specific
analysis when deciding whether the plaintiff was unfairly surprised.” Id. See also Std. Waste Sys.
v. Mid-Continent Cas. Co., 612 F.3d 394, 398 (5th Cir. 2010) (excusing the failure to plead an
affirmative defense because it did not result in unfair surprise or prejudice to the opposing party).
HDMS received adequate notice of, and had an adequate opportunity to respond to, Cypress
Engine’s defense that HDMS failed to mitigate its damages. Cypress Engine argued that HDMS
failed to mitigate its damages in its response to HDMS’s motion for summary judgment, filed on
September 20, 2017. (Docket Entry No. 86). Counsel argued the merits at a hearing held on
October 2, 2017. (Docket Entry No. 91). The court allowed HDMS to supplement its submissions
with added case support. (Docket Entry No. 90). The defense raised issues relating to HDMS’s own
actions, and HDMS had the information it needed to respond to the defense. The court finds that
allowing Cypress Engine to raise the affirmative defense of HDMS’s failure to mitigate damages
at the summary judgment phase did not result in unfair surprise or prejudice to HDMS. The failure
to plead the affirmative defense is excused.
“The party asserting failure to mitigate has the burden of proving facts establishing lack of
mitigation and must prove the amount by which the damages were increased by failure to mitigate.”
Balfour Beatty Rail v. Kan. City S. Ry. Co., 173 F. Supp. 3d 363, 406 (N.D. Tex. 2016). Cypress
Engine has met that burden. Cypress Engine has shown that HDMS’s damages claim fails to take
into account the retail resale value of the 96 returned prechambers. (Docket Entry No. 84 at 16).
HDMS argues that it could have bought those 96 prechambers at wholesale for less than the retail
amount it paid Cypress Engine for the 96 prechambers, increasing its profit margin. (Docket Entry
No. 78 at 21–22). If HDMS had resold the 96 returned prechambers at retail value, it would not
have lost money, as Cypress Engine points out. (Docket Entry No. 84 at 16–17). There is no record
basis to find that HDMS attempted but was unable to resell the returned prechambers at the retail
price. HDMS’s failure to mitigate its damages by reselling the 96 prechambers Cypress Engine
returned caused the damages HDMS now seeks. HDMS is not entitled to recover damages for
Cypress Engine’s sale of prechambers during the period it was returning them to HDMS.
Is HDMS Entitled to Attorneys’ Fees?
HDMS’s claim for attorneys’ fees is based on two theories: (1) § 38.001(8) of the Texas
Civil Practice & Remedies Code provides for recovery of reasonable attorneys’ fees for a breach of
contract claim; and (2) Cypress Engine brought its DTPA claim in bad faith, which entitles HDMS
to fees and costs under § 17.50(c) of the Texas Business & Commerce Code.
In response, Cypress Engine argues that: (1) HDMS failed to plead its attorneys’ fees as
special damages; (2) Texas law does not support recovering attorneys’ fees as actual damages, not
only as damages incidental to actual damages, which HDMS cannot prove; (3) § 38.001(8) does not
apply to Cypress Engine because it is an LLC; (4) HDMS failed to present the fee claim to Cypress
Engine in a timely manner; (5) § 17.50(c) does not apply because the court has not yet addressed
the merits of Cypress Engine’s DTPA claim; (6) if § 17.50(c) does apply, Cypress Engine’s DTPA
claim is not groundless and was not brought in bad faith or to harass; (7) HDMS cannot show the
amount of attorneys’ fees it incurred in defending against Cypress Engine’s DTPA claim, since
HDMS successfully limited discovery to breach of the settlement agreement; and (8) HDMS seeks
unreasonable and excessive fees.
Are Attorneys’ Fees Recoverable under § 38.001?
Section 38.001(8) provides that “[a] person may recover reasonable attorney’s fees from an
individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for:
. . . an oral or written contract.” Tex. Civ. Prac. & Remedies Code § 38.001(8) (emphasis added).
Several district courts have made Erie guesses as to how § 38.001(8) applies to LLCs, as opposed
to individuals or corporations.
The Texas Supreme Court has yet to address whether an LLC is a “corporation” under §
38.001(8). HDMS cites eight cases in support of its argument that attorneys’ fees may be awarded
against an LLC. The cases HDMS cites assume without discussing that § 38.001(8) applies to an
LLC. There is no analysis of the issue. See Howard Indus. v. Crown Cork & Seal Co., LLC, 403
S.W.3d 347 (Tex. App.—Houston [1st Dist.] 2013, no pet.) (affirming an attorneys’ fees award
against an LLC after determining that a breach of warranty claim qualifies as a contract claim for
purposes of § 38.001(8)); Triton 88 v. Star Elec. LLC, 411 S.W.3d 42 (Tex. App.—Houston [1st
Dist.] 2013, no pet.) (affirming an attorneys’ fees award against an LLC after rejecting a challenge
to reasonableness); Lee-Way Prince Enters., LLC v. QAI Assur., Inc., No. 01-07-01004-CV, 2009
WL 3490982 (Tex. App.—Houston [1st Dist.] Oct. 29, 2009, no pet.) (affirming an attorneys’ fees
award against an LLC after rejecting a challenge to a promissory estoppel claim); Odela Grp., LLC
v. Double-R Walnut Mgmt. LLC, No. 05-16-00206-CV, 2017 WL 1360209 (Tex. App.—Dallas Apr.
13, 2017, no pet.) (affirming an attorneys’ fees award against an LLC under the DTPA and §
38.001(8)); Mobilelink San Antonio, LLC v. PNK Wireless Comm., Inc., No. 01-15-01048, 2016 WL
7368066 (Tex. App.—Houston [1st Dist.] Dec. 20, 2016, no pet.) (affirming an attorneys’ fees
award against an LLC after rejecting a challenge to the evidence of the fee amount); Expelled Grain
Prods., LLC v. Corn Mill Enters., LLC, No. 07-14-00398, 2016 WL 4413323 (Tex. App.—Amarillo,
Aug. 17, 2016, pet. denied) (affirming attorneys’ fees award against an LLC after rejecting a
challenge to the sufficiency of the evidence); Crisp Analytical Lab, LLC v. Jakalam Props. Ltd., 422
S.W.3d 85 (Tex. App.—Dallas 2014, pet. denied) (affirming an attorneys’ fees award against an
LLC under § 38.001(8)); Bohatch v. Butler & Binion, 977 S.W.2d 543 (Tex. 1998) (affirming an
attorneys’ fees award against a partnership under § 38.001(8)).
Cypress Engine cites a number of cases that raise the issue and specifically analyze the
availability of attorneys’ fees for a successful breach of contract claim against an LLC under §
38.001(8). These cases find no basis under § 38.001(8) to recover fees against an LLC. See
Hoffman v. L&M Arts, No. 3:10-CV-0953-D, 2015 U.S. Dist. LEXIS 27784, at *29 (N.D. Tex. Mar.
6, 2015), aff'd in part, rev'd in part on other grounds, 838 F.3d 568 (5th Cir. 2016) (concluding that
“based on the plain meaning of the terms ‘individual’ and ‘corporation,’ the history of § 38.001 and
its predecessor, Article 2226, and the construction given to § 38.001 by Texas courts of appeals and
federal courts (including judges of this court), the court makes an Erie prediction that the Supreme
Court of Texas would hold that an LLC is neither an ‘individual’ nor a ‘corporation’ within the
meaning of § 38.001, and that a party with a valid claim cannot recover attorney’s fees from an LLC
under § 38.001.”); Siwell, Inc. v. Leverage Fin., LLC, No. 5:12-CV-185-D, 2017 U.S. Dist. LEXIS
59149 (N.D. Tex. Apr. 18, 2017) (citing Hoffman and holding that § 38.001(8) does not allow the
recovery of attorneys’ fees from an LLC); J.D. Fields & Co. v. N.Am. Fabricators, LLC, No. H-15317, 2016 WL 7912455 (S.D. Tex. Nov. 7, 2016) (collecting cases supporting its conclusion that
courts have “narrowly construed”
§ 38.001 to prevent recovery from entities other than
corporations, including LLCS); Taylors Int’l Servs. v. Cuero Oilfield Hous., LLC, No. A-16-CA512-SS, 2016 U.S. Dist. LEXIS 186589, at *1–2 (W.D. Tex. Oct. 28, 2016) (“There is no logic to
the law eliminating attorney’s fees that would be owed by individuals and corporations, but that is
exactly what Texas has done. Texas Civil Practice and Remedies Code Section 38.001 allows
reasonable attorney’s fees for individuals or corporations. This has been interpreted as excluding
attorney’s fees against [LLCs].”); Solid Sys. CAD Servs. v. Total Risc Tech, Ltd., No. 4:12-CV-3176,
2016 U.S. Dist. LEXIS 141772 (S.D. Tex. Oct. 13, 2016) (attorneys’ fees are not recoverable against
an LLC under § 38.001 but are against an LLC that had previously identified itself as a corporation
to the court); Chaparral Energy, LLC v. Dudley, No. 4:13-CV-3540, 2015 WL 1294250 (S.D. Tex.
Nov. 3, 2015) (citing Hoffman in determining that § 38.001 does not allow recovery of attorneys’
fees against LLCs and rejecting cases awarding fees against LLCs without addressing the issue).
The Southern District of Texas recently examined the issue in BHL Boresight, Inc. v. GeoSteering Sols. Inc., No. 4-15-CV-00627, 2017 U.S. Dist. LEXIS 98057 (S.D. Tex. June 26, 2017).
Noting that “other courts to consider the issue since Hoffman have also overwhelmingly concluded
that § 38.001 does not support recovery of attorney’s fees from an LLC,” the court denied the fee
award. Id. at *52 (collecting cases).
The courts that have considered and analyzed the question make clear that HDMS’s right to
recover fees under § 38.001(8) should be rejected. HDMS’s motion for summary judgment on this
ground is denied.
Are Attorneys’ Fees Recoverable Under the DTPA?
HDMS also seeks the fees and expenses its incurred defending against Cypress Engine’s
DTPA claim. HDMS asserts that the DTPA claim is groundless and was brought in bad faith, for
the purpose of harassment. (Docket Entry No. 78 at 28). Cypress Engine responds that because
HDMS “successfully requested that this Court initially limit discovery to determine which party
breached the Agreement first,” the court did not decide the merits of Cypress Engine’s DTPA claim.
(Docket Entry No. 84 at 29). Without a merits decision, Cypress Engine argues, the claim cannot
be found groundless, as a matter of law. (Docket Entry No. 84 at 29). Cypress Engine alternatively
argues that its DTPA claim was neither groundless nor filed to harass. (Docket Entry No. 84 at
Texas Business and Commerce Code § 17.50(c) provides that, “[o]n a finding by the court
that an action under this section was groundless in fact or law or brought in bad faith,2 or brought
for the purpose of harassment, the court shall award to the defendant reasonable and necessary
attorneys’ fees and court costs.” See also Howard v. State Farm Lloyds, No. H-04-0352, 2005 U.S.
Dist. LEXIS 48236, at *22–23 (S.D. Tex. Oct. 13, 2005). “The term ‘groundless’ for DTPA
purposes has the same meaning as it does under civil procedure rule 13: ‘[N]o basis in law or fact
and not warranted by good faith argument for the extension, modification, or reversal of existing
law.’” Young v. Pulte Homes of Tex., L.P., No. 02-14-00224-CV, 2016 Tex. App. LEXIS 9485, at
*14 (Tex. App.—Fort Worth Aug. 26, 2016) (emphasis in original). The test for groundlessness is
“whether the totality of the tendered evidence demonstrates an arguable basis in fact and law for the
consumer’s claim.” Id. (citation omitted). “[G]roundless under the DTPA is not synonymous with
‘no evidence.’” Id.
HDMS argues that the undisputed facts in the summary judgment record demonstrate that
Cypress Engine’s DTPA claims are groundless. HDMS relies on the fact that Cypress Engine
released the claims it asserts in this litigation in the settlement agreement and could not recover on
those claims as a result. (Docket Entry No. 78 at 29). Cypress Engine responds that filing a released
HDMS argues that Cypress Engine’s bad faith is demonstrated by its ongoing “vexatious litigation”
tactics. (Docket Entry No. 78 at 29). Cypress Engine argues that it brought the claim because it believed the
prechambers to be defective and filed its lawsuit only after believing that HDMS had violated the settlement
agreement first by offsetting the refund amounts by unrelated outstanding invoices. (Docket Entry No. 84
at 30). To be brought in bad faith, “a defendant must show that the suit was motivated by a malicious or
discriminatory purpose.” Baroid Equip., Inc. v. Odeco Drilling, Inc., 184 S.W.3d 1, 20 (Tex. App.—Houston
[1st Dist.] 2005, pet. denied). “Malice may be inferred from the proof that the consumer did not have a good
faith belief that there was a basis for his claim.” Knebel v. Port Enterprises, Inc., 760 S.W.2d 829, 832 (Tex.
App.—Corpus Christ 1988, writ denied). The party alleging bad faith must “offer evidence and secure a
favorable fact finding on the issue of bad faith.” Id. The evidence offered by HDMS consists of an email
string in which Cypress Engine representatives suggest that it should“try to assert fraud” and “go for the
throat.” (Docket Entry No. 78 at 29). The quotes pulled from the emails ignore the full sentence: “[i]n short,
go for the throat so long as we are ethically able to do so.” (Docket Entry No. 78-5 at 1). Standing alone,
the discussion of legal strategies does not rise to the level of bad faith.
claim could not be the basis for HDMS to recover on a counterclaim for breach of contract. That
is correct. But Cypress Engine asserted the released claims knowing that HDMS had a valid
affirmative defense precluding Cypress Engine from recovery. That makes the assertion of the
DTPA claims groundless as a matter of law. Cf. Haynesville Shale Rentals, LLC v. Total Equip. &
Serv., No. H-12-0860, 2014 U.S. Dist. LEXIS 48478, at *15 (S.D. Tex. Apr. 8, 2014) (finding a
DTPA claim “precluded by express statutory language” that “Plaintiffs well knew or should have
known” barred their claim made the claim groundless) (citing Alcan Aluminum Corp. v. BASF Corp.,
133 F.Supp. 2d 482, 501, 506 (N.D. Tex 2001) (a DTPA claim that the plaintiff “was explicitly
excluded from bringing” was groundless)).
Under Texas law, the party seeking attorneys’ fees must segregate the fees incurred between
claims that permit recovery of attorneys’ fees and claims that do not. See, e.g., Frazin v. Haynes &
Boone, LLP, 413 B.R. 378, 413 (Bankr. N.D. Tex 2009) (citing Tony Gullo Motors I, L.P. v. Chapa,
212 S.W.3d 299, 310–11 (Tex. 2006)). The Texas Supreme Court held that attorneys’ fees need not
be segregated when the fees “rendered are in connection with claims arising out of the same
transaction and are so interrelated that their prosecution or defense entails proof or denial of
essentially the same facts.” Id. (citing Stewart Title Guar. Co. v. Sterling, 822 S.W.2d 1, 11 (Tex.
1991)). That rule, however, was modified in Chapa after the exception began to swallow the rule:
[Stewart Title] was certainly correct that many if not most legal fees
. . . cannot and need not be precisely allocated to one claim or the
other. Many of the services involved in preparing a contract or DTPA
claim for trial must still be incurred if tort claims are appended to it;
adding the latter claims does not render the former services
unrecoverable. Requests for standard disclosures, proof of
background facts, depositions of the primary actors, discovery
motions and hearings, voir dire of the jury, and a host of other
services may be necessary whether a claim is filed alone or with
others. To the extent such services would have been incurred on a
recoverable claim alone, they are not disallowed simply because they
do double service. Accordingly, we reaffirm the rule that if any
attorney's fees relate solely to a claim for which such fees are
unrecoverable, a claimant must segregate recoverable from
unrecoverable fees. Intertwined facts do not make tort fees
recoverable; it is only when discrete legal services advance both a
recoverable and unrecoverable claim that they are so intertwined that
they need not be segregated. . . . This standard does not require more
precise proof for attorney's fees than for any other claims or
Frazin, 413 B.R. at 414 (citing Chapa, 212 S.W.3d at 313–14).
Although HDMS is entitled to recover the attorneys’ fees it incurred in defending against
Cypress Engine’s DTPA claim, HDMS seeks the entire amount of attorneys’ fees—$393,300.87—it
incurred in defending against all the claims before the court’s May 3, 2017 ruling. HDMS does not
segregate the fees it incurred in defending the DTPA claim from those fees incurred in defending
against other claims. (Docket Entry No. 78 at 15, n.5; 78-6 at 8). That the facts are intertwined does
not make the fees incurred in defending against the other non-DTPA claims recoverable. No later
than October 13, 2017, HDMS must submit evidence of the fee amount on the DTPA claim,
segregating the fees it seeks for defending the DTPA claim from the other fees it incurred or, in the
alternative, that the fees were for claims so interrelated that segregation is not required.
Powertech Marine’s Motion for Summary Judgment
Powertech Marine moves for summary judgment dismissing the claims against it on the
ground that it is an improper party. (Docket Entry No. 77). Powertech Marine argues that it did not
manufacture the prechambers, did not issue a product warranty to Cypress Engine, and did not
contract with Cypress Engine. (Docket Entry No. 77 at 5). Powertech Marine asks the court to
declare Cypress Engine’s continued litigation against Powertech Marine groundless and in bad faith
and award Powertech Marine attorneys’ fees. (Docket Entry No. 77 at 10).
In response, Cypress Engine maintains that there are genuine factual disputes material to
deciding whether Powertech is the correct party. Cypress Engine asks to conduct discovery, but
does not specify what discovery it needs to respond to the summary judgment motion. (Docket
Entry No. 86 at 4).
Powertech submitted an affidavit from Steve Powers, the director of Powertech Marine and
the coowner of Premium OEM Parts, LLC, known as POEM, stating that POEM manufactured the
prechambers at issue. (Docket Entry No. 77-1). Powertech also submitted an affidavit from George
Erickson, the president of HDMS. (Docket Entry No. 77-2). Both affiants state that Powertech did
not manufacture the prechambers and that HDMS did not purchase any prechambers from
Powertech Marine. Powertech Marine also submitted invoices dated from January to December
2013, showing shipments of prechambers from POEM to a company called Premium Power
Solutions, then from Premium Power Solutions to Cypress Engine. (Docket Entry No. 77, Ex. A).
Cypress Engine submitted a number of invoices from the same period between Propulsion
Technologies and POEM, sent to POEM at the same address as Powertech Marine. (Docket Entry
No 86-1). Some, but not all, of the invoices appear to include prechambers. (Docket Entry No. 86
at 7). But neither Cypress Engine’s invoices nor the other evidence it points to show that Powertech
Marine is the same entity as POEM. The record evidence provides no explanation of why, after
repeatedly being told that POEM was the manufacturer of the prechambers and the correct entity
to sue, Cypress Engine refused to at least add POEM as a defendant.
Cypress Engine has failed to show why it could not respond to Powertech Marine’s motion
without additional discovery. See, e.g., Krim v. BancTexas Group, 989 F.2d 1435, 1442 (5th Cir.
1993) (“To obtain continuance of a motion for summary judgment in order to obtain further
discovery, a party must indicate to the court by some statement, preferably in writing . . . why he
needs additional discovery and how the additional discovery will create a genuine issue of material
fact. The nonmoving party may not simply rely on vague assertions that additional discovery will
produce needed, but unspecified facts.”) (internal citations omitted) (emphasis in original).
The undisputed record shows that, based on undisputed facts, Powertech Marine is not a
proper party defendant, as a matter of law. Its motion for summary judgment is granted.
HDMS’s motion for summary judgment is granted in part and denied in part. The court
grants summary judgment for HDMS on its counterclaim for breach of contract for Cypress Engine’s
sale of prechambers, and dismisses HDMS’s counterclaim for breach of contract for filing this
litigation. The court grants HDMS’s motion for summary judgment on its counterclaim that Cypress
Engine’s DTPA claims were groundless, and grants Powertech Marine’s motion for summary
judgment that it is not a proper party to the suit. HDMS must submit evidence of recoverable fees
no later than October 13, 2017.
SIGNED on October 6, 2017, at Houston, Texas.
Lee H. Rosenthal
Chief United States District Judge
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