Houston ARX, LL et al v. Osborn et al
MEMORANDUM AND OPINION entered : The motion to dismiss, (Docket Entry No. 14), is granted without prejudice and with leave to amend no later than September 22, 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
HOUSTON, ARX, LL, et al.,
MARK OSBORN, et al.,
August 23, 2017
David J. Bradley, Clerk
CIVIL ACTION NO. H-17-519
MEMORANDUM AND OPINION
The plaintiffs, Houston ARX, LLC and Houston ARX I LLC—together Houston ARX—
entered into a franchise agreement with ActiveRx Development Company to open “Active Aging
Centers,” selling a system designed to target aging individuals and treat their health needs. Within
two years of signing the franchise agreement, ActiveRx notified Houston ARX that it was closing
its business. Houston ARX sued, asserting negligence claims against ActiveRx and various
employees and directors for mismanaging the company, and fraud claims for failing to disclose or
affirmatively misrepresenting the company’s precarious financial situation.
Matt Darrah, an individual defendant and a Houston ARX director, moved to dismiss under
Rules 12(b)(6) and 9(b). (Docket Entry No. 14). Houston ARX did not respond. Based on the
complaint, the motion, and the applicable law, the motion to dismiss is granted without prejudice
and with leave to amend. Any amended complaint must be filed by September 22, 2017.
Houston ARX signed a franchise agreement with ActiveRx Development Company to sell
a “system . . . designed by Defendants to target aging individuals and  treat their specific health
needs.” (Docket Entry No. 1-2 at 4). The franchise agreement allowed Houston ARX the right to
operate an ActiveRx Active Aging Center and required Houston ARX to pay $229,00 as a
development fee and $49,000 as an “Initial Franchise Fee.” (Id. at ¶ 21).
Less than two years after Houston ARX signed the franchise agreement, ActiveRx
announced that it was “immediately closing down and ceasing its business.” (Id. at ¶ 22). Houston
ARX sued ActiveRx and five of its directors, officers, representatives, and agents asserting
negligence and fraud against all of the defendants. (Id. at ¶¶ 32, 34). Houston ARX also asserted
a breach of contract claim against ActiveRx. (Id. at ¶ 33). Houston ARX alleges that ActiveRx’s
officers and directors mismanaged the company in various ways, including moving the corporate
headquarters, “investing in a rebranding campaign with no purpose,” “hiring incompetent and
ineffective personnel,” failing to secure additional franchises, and failing to raise sufficient capital,
causing the company’s decline. (Id. at ¶¶ 23–29). Houston ARX also alleges that it relied on the
documents ActiveRx provided before signing the franchise agreement. (Id. at ¶ 18). Some of the
documents contained allegedly inaccurate information that was “self-serving” and “unsubstantiated,”
including inaccurate information about ActiveRx’s financial earnings and performance experience.
(Id. at ¶ 19).
The Legal Standard under Rule 12(b)(6)
Rule 12(b)(6) allows dismissal if a plaintiff fails “to state a claim upon which relief can be
granted.” In Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007), the Supreme Court
confirmed that Rule 12(b)(6) must be read in conjunction with Rule 8(a), which requires “a short
and plain statement of the claim showing that the pleader is entitled to relief.” FED. R. CIV. P.
8(a)(2). To withstand a Rule 12(b)(6) motion, a complaint must contain “enough facts to state a
claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570; see also Elsensohn v. St.
Tammany Parish Sheriff’s Office, 530 F.3d 368, 372 (5th Cir. 2008). In Ashcroft v. Iqbal, 556 U.S.
662 (2009), the Supreme Court elaborated on the pleading standards discussed in Twombly. The
Court explained that “the pleading standard Rule 8 announces does not require ‘detailed factual
allegations,’ but it demands more than an unadorned, the-defendant-unlawfully-harmed-me
accusation.” Id. at 678 (quoting Twombly, 550 U.S. at 555). Iqbal explained that “[a] claim has
facial plausibility when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly,
550 U.S. at 556).
When a plaintiff’s complaint fails to state a claim, the court should generally give the
plaintiff a chance to amend the complaint under Rule 15(a) before dismissing the action with
prejudice, unless it is clear that to do so would be futile. See Great Plains Trust Co. v. Morgan
Stanley Dean Witter & Co., 313 F.3d 305, 329 (5th Cir. 2002). A plaintiff should be denied leave
to amend a complaint if the court determines that “the proposed change clearly is frivolous or
advances a claim or defense that is legally insufficient on its face.” 6 CHARLES A. WRIGHT, ARTHUR
R. MILLER & MARY KAY KANE, FEDERAL PRACTICE AND PROCEDURE § 1487 (2d ed. 1990); see also
Ayers v. Johnson, 247 F.App’x 534, 535 (5th Cir. 2007) (“‘A district court acts within its discretion
when dismissing a motion to amend that is frivolous or futile.’” (quoting Martin’s Herend Imports,
Inc. v. Diamond & Gem Trading U.S. of Am. Co., 195 F.3d 765, 771 (5th Cir. 1999))).
The Negligence Claim
Darrah moves to dismiss Houston ARX’s negligence claim because the complaint did not
identify any legal duty Darrah owed Houston ARX. Negligence actions in Texas require “a legal
duty owed by one person to another, a breach of that duty, and damages proximately caused by the
breach.” Nabors Drilling, U.S.A., Inc. v. Escoto, 288 S.W.3d 401, 404 (Tex. 2009). The only duty
that Houston ARX alleges is the duty “Defendants had  to manage [ActiveRx] responsibly, to
disclose all relevant information, to operate the business in a reasonable manner, and to refrain from
making negligent misrepresentations.” (Docket Entry No. 1-2 at ¶ 32). Houston ARX does not
identify the duty that Darrah, as a director of the franchisor, owed to Houston ARX, the franchisee.
Because Houston ARX has not alleged the duty Darrah owed to Houston ARX, the motion to
dismiss the negligence claim is granted, without prejudice and with leave to amend.
The Fraud Claim
To assert a claim for common-law fraud, a plaintiff must plead that: (1) a material
representation was made; (2) the representation was false; (3) when the representation was made,
the speaker knew it was false or made it recklessly without any knowledge of the truth and as a
positive assertion; (4) the speaker made the representation with the intent that the other party should
act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered
injury. In re First Merit Bank, N.A., 52 S.W.3d 749, 758 (Tex. 2001). Fraud claims are subject to
the heightened pleading requirements of Federal Rule of Civil Procedure 9(b), which requires claims
for fraud to “state with particularity the circumstances constituting fraud or mistake.” FED. R. CIV.
P. 9(b). The Fifth Circuit has interpreted this to require a plaintiff pleading fraud “to 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.” Nathenson v. Zonagen Inc., 267 F.3d
400, 412 (5th Cir. 2001) (quoting Williams v. WMX Tech., Inc., 112 F.3d 175, 177 (5th Cir. 1997));
see also Askanase v. Fatjo, 148 F.R.D. 570, 574 (S.D. Tex. 1993) (“The allegations should allege
the nature of the fraud, some details, a brief sketch of how the fraudulent scheme operated, when
and where it occurred, and the participants.”). “A dismissal for failure to plead with particularity
. . . is treated the same as a Rule 12(b)(6) dismissal for failure to state a claim.” Kiper v. BAC Home
Loans Servicing, LP, 884 F.Supp.2d 561, 568 (S.D. Tex. 2012), aff’d, 534 F. App’x 266 (5th Cir.
2013) (citing Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir. 1996)).
Houston ARX’s fraud allegations parrot the elements of the cause of action. The complaint
alleges that the “Defendants made representations to Plaintiffs which were false and the Defendants
either knew they were false at the time such representations were made or recklessly made them
without knowledge of the truth.” (Docket Entry No. 1-2 at ¶ 34). The complaint does not allege
facts relating to the fraud, identify who made the alleged misrepresentations, when or how the
representations were made, the content of the representations, or why it was false when made. See
Nathenson, 267 F.3d at 412.
Nor does Houston ARX’s pleading allege any facts tying Darrah to the false representation.
A corporate officer may be held individually liable for a corporation’s fraudulent statements if he
knowingly participates in, or has actual or constructive knowledge of, the statements. Green Hills
Dev. Co., LLC v. Credit Union Liquidity Servs., LLC, No. 3:11-CV-1885-P, 2013 WL 12126783,
at *3 n.1 (N.D. Tex. May 14, 2013) (citing Portlock v. Perry, 852 S.W.2d 578, 582 (Tex.
App.—Dallas 1993, writ denied). Houston ARX has provided no facts showing that Darrah
knowingly participated in the fraudulent representations or that he had actual or constructive
knowledge of the representations and their falsity.
The motion to dismiss the fraud claim is granted without prejudice, and with leave to amend.
The motion to dismiss, (Docket Entry No. 14), is granted without prejudice and with leave
to amend no later than September 22, 2017.
SIGNED on August 23, 2017, at Houston, Texas.
Lee H. Rosenthal
Chief United States District Judge
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