Magna Equities II, LLC et al v. Heartland Bank
Filing
118
MEMORANDUM OPINION AND ORDER granting 61 MOTION for Summary Judgment (Signed by Judge Sim Lake) Parties notified. (aboyd, 4)
United States District Court
Southern District of Texas
ENTERED
August 27, 2018
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
MAGNA EQUITIES II, LLC; BTG
§
INVESTMENTS, LLC; AVI MIRMAN;
§
JAI ALAI INSURANCE, INC.;
§
DAVID A. FIELDS; MITCHELL LUKIN; §
BETTY ANN PURDIE; SHANNON P.
§
PRATT; FRANCIS JUNGERS;
§
GEORGE GILMAN; MONICA WEHBY;
§
and TOWNES PRESSLER,
§
David J. Bradley, Clerk
CIVIL ACTION NO. H-17-1479
§
Plaintiffs,
§
§
§
§
v.
HEARTLAND BANK,
§
§
Defendant.
§
MEMORANDUM OPINION AND ORDER
Plaintiffs, Magna Equities II, LLC, BTG Investments, LLC, Avi
Mirman, Jai Alai Insurance, Inc., David A. Fields, Mitchell Lukin,
Betty Ann Purdie, Shannon P. Pratt, Francis Jungers, George Gilman,
Monica Wehby,
and Townes
"Purchasers,"
or
Pressler 1
"Investors") ,
(collectively,
bring
causes
of
"Plaintiffs,"
action
against
defendant, Heartland Bank ("Heartland" or "Defendant") for fraud,
negligent
misrepresentation,
money
enrichment, and promissory estoppel.
had
and
unjust
Pending before the court is
Heartland Bank's Motion for Summary Judgment
1
received,
("Defendant's MSJ")
The parties have filed a Joint Stipulation for Dismissal of
Claims and Counterclaim as to Plaintiffs Timur Salikhbayev and
Frank Marshik Only (Docket Entry No. 75), which the court granted
(Docket Entry No. 76).
(Docket
Entry
No.
61)
For
the
reasons
set
forth
below,
Defendant's MSJ will be granted.
I.
In
August
of
2014
Background
Heartland
Bank
and
McLarty
Capital
("Lenders") entered into a Credit Agreement and an Account Purchase
Agreement with an oilfield services company called HII Technologies
("HII") . 2
Matthew Flemming was HII's Chief Executive Officer.
In
October of 2014 HII requested approval from Heartland to acquire a
profitable oilfield water management company called Water Transfer
LLC ("Water Transfer" or "WTLLC").
When Heartland did not approve
the acquisition, HII and Heartland discussed alternative methods of
acquiring Water Transfer.
By December of 2014 the terms of the
proposed acquisition of Water Transfer had changed with respect to
Water
Transfer's
lender,
Security
Bank.
suggested new terms for the acquisition. 3
Flemming
therefore
From February to April
of 2015 the Lenders became concerned about HII's financial status
but continued to discuss HII's acquisition of Water Transfer on the
condition that HII successfully raise around $3 million in equity. 4
2
Credit Agreement (Term Loan), August 12, 2014, Exhibit 1 to
Defendant Heartland Bank's Second Amended Answer to Plaintiffs'
Second Amended Complaint and Counterclaim ("Defendant's Second
Amended Answer"), Docket Entry No. 46-1, pp. 20-111.
3
See Dec. 31, 2014, Email, Subject: HII Technologies Requested
Information, Exhibit 30 to Defendant's MSJ, Docket Entry No. 68-3,
p. 20.
4
See, e.g., March 9, 2015, Email, Subject: HII Technologies,
Exhibit 29 to Defendant's MSJ, Docket Entry No. 68-3, p. 18;
(continued ... )
-2-
HII management engaged placement agent Roth Capital to raise the
capital by issuing shares of HII Series B convertible preferred
stock and warrants.
into
a
On April 30,
2015,
HII and Lenders entered
Third Modification and Waiver Agreement
Agreement
("Third
Agreement") . 5
Modification
to
the
Credit
In
the
Third
Modification Agreement HII acknowledged it was in default, agreed
to certain conditions to obtain a waiver of past defaults,
agreed to release claims HII might have against Lenders.
2015 HII raised the required equity from Plaintiffs'
and
In May of
purchase of
Series B preferred stock, and Lenders waived existing defaults and
the
default
rate
interest.
Purchase Agreement
their investments.
("SPA")
6
Plaintiffs
executed
a
Securities
with HII that governed the terms of
HII, Lenders, and Security Bank continued to
discuss the terms of a consent agreement to the Water Transfer
acquisition, but were unable to agree to a resolution.
July of 2015 HII had financial
In June and
trouble and could not meet its
4
( • • • continued)
Feb. 12, 2015, Email, Subject: HII, Exhibit 32 to Defendant's MSJ,
Docket Entry No. 69-1, p. 5i March 6, 2015, Email, Subject: HII
Technologies, Exhibit 33 to Defendant's MSJ, Docket Entry No. 69-2,
p. 3i April 9, 2015, Email, Subject: Request for Waiver of covenant
defaults, Exhibit 34 to Defendant's MSJ, Docket Entry No. 69-2,
p. Bi April 22, 2015, Email, Subject: FW: HII - Business Terms,
Exhibit 36 to Defendant's MSJ, Docket Entry No. 69-2, p. 14.
5
Third Modification Agreement, Exhibit 2 to Defendant's Second
Amended Answer, Docket Entry No. 46-1, pp. 112-127.
6
See Securities Purchase Agreement, Exhibit 14 to Defendant's
MSJ, Docket Entry No. 64-2.
-3-
obligations under the terms of the Third Modification Agreement. 7
On July 9,
2015, Heartland issued a Notice of Default and swept
HII's accounts pursuant to the Credit Agreement. 8
Heartland alleges that around July 15, 2015, it learned that
HII
instructed
its
customers
to no
longer make
lockbox account administered by Heartland,
Credit Agreement.
9
payments
to a
in violation of the
Plaintiffs allege that at a meeting on July 16,
2015, Heartland explained that "unbeknownst to HII or Plaintiffs,
it was going to foreclose on HII assets, create a new company, hire
HII's CFO as president to run the new company,
opportunity to purchase Water Transfer, LLC." 10
Heartland obtained a
Temporary Restraining
and usurp HII's
On July 30, 2015,
Order
in
the
129th
District Court of Harris County, Texas, against HII requiring HII
to direct all payments into the lockbox pursuant to the Credit
Agreement. 11
On August 7, 2015, Lenders, HII, and Magna Equities II
7
June 2,
2015, Email, Subject: Payments Sweep Request,
Exhibit 39 to Defendant's MSJ, Docket Entry No. 69-2, pp. 25-27;
July 2, 2015, Email, Subject: Cash Forecast 7-3-15, Exhibit 42 to
Defendant's MSJ, Docket Entry No. 70-1, p. 22; July 8, 2018, Email,
Subject: Cash Shortfall, Exhibit 43 to Defendant's MSJ, Docket
Entry No. 70-1, p. 24.
8
Notice of Default, Exhibit 28 to Plaintiffs' Response to
Defendant's Motion for Summary Judgment ("Plaintiffs' Response"),
Docket Entry No. 86-2, pp. 3-4.
9
Defendant's Second Amended Answer,
p. 15.
10
p. 9
~
Docket Entry No.
46-1,
Plaintiffs' Second Amended Complaint, Docket Entry No. 20,
27.
11
See Temporary Restraining Order and Order Setting Hearing For
Temporary Injunction, Exhibit 4 to Defendant's Second Amended
Answer, Docket Entry No. 46-1, pp. 195-99.
-4-
entered into a Fourth Modification and Forbearance Agreement to the
Credit Agreement. 12
On September 18, 2015, HII filed for Chapter 11
bankruptcy.
Plaintiffs,
who were the Series B preferred equity holders
that invested in HII, allege that Heartland promised that "if HII
raised at least $2.735 million, Defendant would issue a waiver of
covenants and waive any defaults [,]
acquire .
. Water Transfer LLC[,]
continue to operate as a going concern." 13
would permit HII to
[and] would allow HII to
Plaintiffs allege that
they relied on Heartland's fraudulent representations, relayed to
them through Matthew Flemming, Roth Capital, or from documents such
as SEC filings and placement documents, and that" [a]s a result of
Defendant's bad faith and gross and intentional misconduct,
the
value of Plaintiffs' investments was destroyed and HII wound up in
bankruptcy." 14
for fraud,
Plaintiffs bring causes of action against Heartland
negligent misrepresentation,
money had and received,
unjust enrichment, and promissory estoppel. 15
Plaintiffs brought
this action against Heartland only -- not against HII, Flemming, or
12
Fourth Modification to Credit Agreement, Exhibit 5 to
Defendant's Second Amended Answer, Docket Entry 46-1, pp. 200-12.
13
Plaintiffs' Second Amended Complaint, Docket Entry No. 20,
pp. 4-5 ~ 22.
14
Id. a t
15
Id. at 10-14
9
fT
11
29
•
~~
30-61.
-5-
Roth Capital.
On April 30, 2018, Heartland filed its Motion for
Summary Judgment 16 to which Plaintiff filed a Response. 17
II.
Standard of Review
Summary judgment is appropriate if the movant establishes that
there is no genuine dispute about any material fact and the movant
is entitled to judgment as a matter of law.
Fed. R. Civ. P. 56(a).
Disputes about material facts are genuine "if the evidence is such
that a reasonable jury could return a verdict for the nonmoving
party."
Anderson v.
Liberty Lobby,
Inc.,
106 S.
Ct.
2505,
2510
(1986).
The moving party is entitled to judgment as a matter of
law if "the nonmoving party has failed to make a sufficient showing
on an essential element of her case with respect to which she has
the burden of proof."
Celotex Corp. v. Catrett, 106 S. Ct. 2548,
2552 (1986).
A party moving for summary judgment "must 'demonstrate the
absence of a genuine issue of material fact,' but need not negate
the elements of the nonmovant' s case."
37 F.3d 1069, 1075 (5th Cir. 1994)
Celotex, 106 S. Ct. at 2553).
Little v. Liquid Air Corp. ,
(en bane)
(per curiam)
(quoting
"If the moving party fails to meet
this initial burden, the motion must be denied, regardless of the
nonmovant's response."
Rule 56(c)
Id.
If the moving party meets this burden,
requires the nonmovant to go beyond the pleadings and
16
See Defendant's MSJ, Docket Entry No. 61.
17
See Plaintiffs' Response, Docket Entry No. 82.
-6-
show
by
affidavits,
admissions on file,
depositions,
answers
to
interrogatories,
or other admissible evidence that specific
facts exist over which there is a genuine issue for trial.
Id.
The nonmovant "must do more than simply show that there is some
metaphysical doubt as to the material facts."
Matsushita Electric
Industrial Co., Ltd. v. Zenith Radio Corp., 106 S. Ct. 1348, 1356
(1986).
In
reviewing
the
evidence
"the
court
must
draw
all
reasonable inferences in favor of the nonmoving party, and it may
not make credibility determinations or weigh the evidence."
Reeves
v. Sanderson Plumbing Products, Inc., 120 S. Ct. 2097, 2110 (2000).
The court resolves factual controversies in favor of the nonmovant,
"but only when there is an actual controversy, that is, when both
parties have submitted evidence of contradictory facts."
Little,
37 F.3d at 1075.
III.
Heartland argues
because
Plaintiffs
that
lack
it
Analysis
is
entitled
standing
to
to
assert
summary
judgment
their
claims,
Plaintiffs' claims fail as a matter of law, and Plaintiffs' claims
are barred by release and waiver and by the bankruptcy court's
injunction. 18
Plaintiffs respond that they have standing under
Fifth Circuit precedent, material questions of fact exist as to
their claims that preclude summary judgment, and the release and
18
Defendant's MSJ, Docket Entry No. 61, pp. 6-7.
-7-
waiver provisions and the bankruptcy court's
injunction do not
apply to their claims. 19
A.
Standing
1.
Standard of Review
A motion to dismiss pursuant to Fed. R. Civ. P. 12(b) (1) for
lack of subject matter jurisdiction tests the court's statutory or
constitutional
power
to
adjudicate
the
case.
Home
Builders
Association of Mississippi, Inc. v. City of Madison, Mississippi,
143 F.3d 1006, 1010
Rule
12(b) (1)
motion
jurisdiction."
Cir.
S.
2001),
Ct.
2665
(5th Cir. 1998)
to
dismiss
"The burden of proof for a
is
on
the
party
asserting
Ramming v. United States, 281 F.3d 158, 161
cert.
denied sub nom.
( 2 0 0 2) .
Cloud v.
United States,
In examining a Rule 12 (b) (1)
motion,
(5th
122
the
district court can consider matters of fact that may be in dispute.
Lack of subject matter jurisdiction may be found in any
one of three instances: (1) the complaint alone; (2) the
complaint supplemented by undisputed facts evidenced in
the record; or
(3)
the complaint supplemented by
undisputed facts plus the court's resolution of disputed
facts.
Id.
(citing Barrera-Montenegro v. United States, 74 F.3d 657, 659
(5th Cir. 1996)).
Dismissal on jurisdictional grounds alone is not
a dismissal on the merits.
Id.
(citing Hitt v. City of Pasadena,
561 F.2d 606, 608 (5th Cir. 1977)
19
(per curiam)).
Plaintiffs' Response, Docket Entry No. 82, pp. 8-9.
-8-
2.
Applicable Law
Standing questions "whether the litigant is entitled to have
the
court
the
merits
Warth
issues."
decide
of
v.
Seldin,
the
95
dispute
S.
Ct.
or
of
2197,
particular
2205
(1975).
"[S]tanding is an essential and unchanging part of the case-orcontroversy requirement of Article III."
Wildlife, 112 S. Ct. 2130, 2136 (1992).
minimum,
three elements:
Lujan v.
Defenders of
"Standing requires, at a
injury in fact,
a
'fairly traceable'
causal link between that injury and the defendant's conduct, and
the likelihood that the injury will be 'redressed by a favorable
decision.'"
2009)
Cadle Co. v. Neubauer,
(quoting
Lujan,
112
S.
Ct.
562 F.3d 369,
at
2136).
371
"A
(5th Cir.
defect
in
Article III standing is a defect in subject-matter jurisdiction."
Id. at 374.
634
See also Harold H. Huggins Realty, Inc. v. FNC, Inc.,
F. 3d 787,
constitutional
12(b) (1)").
decide.
795 n. 2
(5th Cir.
2011)
should
standing
("dismissal for
be
granted
"Standing is a question of law"
lack of
under
Rule
for the court to
Friends of St. Francis Xavier Cabrini Church v. Federal
Emergency Management Agency, 658 F.3d 460, 466 (5th Cir. 2011).
deciding questions of law,
including standing,
based on state law, applicable state law governs.
In
involving claims
See Crocker v.
Federal Deposit Insurance Corp., 826 F.2d 347, 349 (5th Cir. 1987),
cert. denied, 108 S. Ct. 1075 (1988).
"In Texas, the standing doctrine requires a concrete injury to
the plaintiff and a real controversy between the parties that will
-9-
be resolved by the
court."
S.W.3d 137, 154 (Tex. 2012).
Heckman v.
Williamson County,
369
Because the Texas test for standing
parallels the federal test for Article III standing, Texas courts
"turn for guidance to precedent from the U.S. Supreme Court, which
has elaborated on standing's three elements."
inquiry
Id.
"The standing
'requires careful judicial examination of a complaint's
allegations
to
ascertain
whether
the
particular
plaintiff
is
entitled to an adjudication of the particular claims asserted.'"
Id. at 156 (quoting Allen v. Wright, 104 S.Ct. 3315, 3325 (1984)).
When a company is in bankruptcy,
[i]f a cause of action belongs to the estate, then the
trustee has exclusive standing to assert the claim. If,
on the other hand, a cause of action belongs solely to
the estate's creditors, then the trustee has no standing
to bring the cause of action.
Whether a particular state cause of action belongs to the
estate depends on whether under applicable state law the
debtor could have raised the claim as of the commencement
of the case.
Matter of Educators Group Health Trust,
Cir. 1994)
(citations omitted)
25 F.3d 1281,
1284
(5th
The court looks to the nature of
the injury for which relief is sought.
Id.
alleges only indirect harm to a creditor
"If a cause of action
(i.e.,
an injury which
derives from harm to the debtor), and the debtor could have raised
a claim for its direct injury under the applicable law,
cause of action belongs to the estate."
3.
then the
Id.
Application
The court must analyze each of Plaintiffs' claims to determine
whether they assert a
direct
injury to Plaintiffs
-10-
that
is not
merely derivative of injuries to the debtor, HII.
Petroleum,
Inc.,
522 F. 3d 575,
argues that all of Plaintiffs'
584
(5th Cir.
In re Seven Seas
2008).
Heartland
claims belong exclusively to the
bankruptcy trustee because Plaintiffs allege injuries derivative of
HII' s
injuries,
and
specifically that
misrepresentation
claims
are
misrepresentations
were
made
the
derivative
to
HII,
fraud
and negligent
because
not
to
the
alleged
Plaintiffs. 20
Plaintiffs respond that "HII could not have asserted the Investors'
claims -- which are based on the fraud and misrepresentations of
[Heartland]
-- because HII would not have been in a position to
assert the Investors' reliance on any alleged misrepresentations,
and
cannot
claim
to
have
suffered
damages
on
account
of
the
Investors' reliance." 21
a.
Fraud and Negligent Misrepresentation
(i)
Applicable Law
Investors in a company that files for bankruptcy may bring
claims for fraud and negligent misrepresentation when the claims
are
based
investors.
F.3d at 586.
million
in
on
the
defendant's
misrepresentations
made
to
the
See Educators Group, 25 F.3d at 1286; Seven Seas, 522
For example, in Seven Seas bondholders purchased $30
unsecured
notes
from
Seven
Seas
Petroleum
private transactions or in the secondary market.
through
Seven Seas, 522
20
Defendant's MSJ, Docket Entry No. 61, p. 17.
21
Plaintiffs' Response, Docket Entry No. 82, pp. 17-18.
-11-
F.3d at 578.
The debtor, Seven Seas, retained a consulting firm to
provide reserve estimates for oil and gas properties.
Id.
When
deciding whether to purchase the unsecured notes, the bondholders
relied
on
the
allegedly
false
reserve
estimates
incorporated into Seven Seas' annual reports.
Id.
that
were
After Seven
Seas entered bankruptcy the bondholders sued the consulting firm
for
negligent
fraud,
misrepresentation,
violation
securities law, and aiding and abetting fraud.
of
state
Id. at 580-81.
In
determining whether the bondholders' claims were property of the
bankruptcy
estate
the
Fifth
Circuit
held
that
defendants]
knew that the reserve estimates were false and used
" [ i] f
[the
them to induce the bondholders to purchase or refrain from selling
the
unsecured
notes,
then
there
was
a
direct
injury
to
the
bondholders that was independent of any injury to [the debtor]."
Id. at 586.
law,
The court also "doubt[ed] that, under applicable state
Seven
Seas
could
have
raised
either
claim
as
of
the
Seven Seas would not
commencement of the bankruptcy case.
have been in a position to assert the bondholders' reliance on any
alleged misrepresentations, or to claim to have suffered damages on
account of such reliance
Id. at 586.
"
In Educators Group a group of school districts obtained health
benefits
( "EGHT") .
for
their
teachers
Educators
Group,
from Educators
25
F.3d at
Group Health Trust
1283.
When EGHT went
bankrupt, the school districts became creditors of the estate and
sued the principals of EGHT's third-party administrator, which had
-12-
marketed EGHT' s
benefits
to
the
school
districts,
for
various
causes of action, including negligent management of EGHT and fraud.
Id.
at
1283.
The
court
held
that
the
claim
for
negligent
management of EGHT belonged exclusively to the estate because it
alleged a direct injury to EGHT, from which the school districts'
injury was derived.
Id. at 1285-86.
But the court also held that
certain claims such as "claims based on fraud,
and conspiracy to
commit fraud (to the extent that these claims are based on alleged
false misrepresentations to the plaintiff school districts)
and [] the claim that the defendants negligently misrepresented the
financial
status
of
EGHT
to
the
plaintiff
school
districts"
belonged exclusively to the school districts because they asserted
a direct injury "that the defendants intentionally misrepresented
to them the financial situation of EGHT, and that they materially
relied on such representations to their detriment."
Heartland argues
that
although
Plaintiffs'
Id. at 1285-86.
Second Amended
Complaint states that Plaintiffs were recipients of Heartland's
promises,
"their Interrogatory Responses make it clear that not a
single one of the alleged representations was made directly to
them. " 22
Heartland also argues that "Plaintiffs do not allege any
plausible
facts
to
suggest
allegedly
made
to
HII
were
that
any
intended
representations
to
reach
Plaintiffs." 23
22
Defendant's MSJ, Docket Entry No. 61, p. 21 n.5.
23
Id. at 22.
-13-
Heartland
Plaintiffs argue that Plaintiff Mirman received the representations
directly from Heartland,
that
the other investors received the
representations through Flemming or Roth Capital, and that in Texas
the misrepresentations do not need to be made directly to the
investors to be actionable. 24
(ii}
Analysis
Plaintiffs' claims for fraud and negligent misrepresentation
are
not
derivative
of
HII' s
injury and belong
exclusively
to
Plaintiffs if they materially relied on misrepresentations that
Heartland made to them.
Like the bondholders in Seven Seas and the
school districts in Educators Group,
Plaintiffs allege that they
suffered a direct injury because they relied on false information
Heartland provided to them, albeit indirectly, in deciding whether
to
purchase
"intended
dollars." 25
HII's
to
Plaintiffs'
induce
B
stock,
Plaintiffs
and
into
allege
that
investing
Heartland
millions
of
Plaintiffs seek compensation for the loss of their own
investment. 26
allegedly
Series
Although HII may have been harmed when Heartland
reneged
on
its
investments.
promises,
HII
was
not
harmed
by
Like the Fifth Circuit in Seven Seas,
this court doubts that HII could have raised either claim as of the
24
Plaintiffs' Response, Docket Entry No. 82, p. 25.
25
Plaintiffs' Second Amended Complaint, Docket Entry No.
p. 2 ~ 2.
26
Id. at 12-13
~~
44-46.
-14-
20,
commencement of the bankruptcy case because " [HII] would not have
been in a
position to assert
the
[investors']
reliance on any
alleged misrepresentations, or to claim to have suffered damages on
account of such reliance,
II
Seven Seas, 522 F.3d at 586.
Although Plaintiffs allege that Heartland committed wrongdoing
against HII,
27
"it is entirely possible for a bankruptcy estate and
a creditor to own separate claims against a third party arising out
of the same general series of events and broad course of conduct." 28
Id. at 585.
themselves
Plaintiffs have therefore alleged a direct injury to
to
the
extent
that
their
fraud
and
negligent
misrepresentation claims are based on representations Heartland
knew would reach Plaintiffs and induce their investments.
at 586.
See id.
Because Plaintiffs' fraud and negligent misrepresentations
claims allege an injury that is not merely derivative of an injury
to HII, and that HII could not have asserted as of the commencement
of the bankruptcy case, the claims belong to Plaintiffs rather than
to the bankruptcy estate.
27
Defendant' s MSJ, Docket Entry No. 61, p. 17.
28
As the Fifth Circuit explains, "there is nothing illogical
or contradictory about saying that [the defendant] might have
inflicted direct injuries on both the bondholders and [the debtor]
during the course of dealings that form the backdrop of both sets
of claims." Seven Seas, 522 F.3d at 587.
HII might have its own
claims against Defendant that are independent from Plaintiffs'
claims.
For example, claims that Defendant conspired to make HII
insolvent, commit fraud against HII, or that Defendant breached its
contract with HII would belong to the bankruptcy estate.
See
Educators Group, 25 F.3d at 1285-86.
-15-
The parties do not specifically address whether Plaintiffs'
claims for money had and received, unjust enrichment, or promissory
estoppel
belong
Heartland argues
to
the
bankruptcy
generally that
estate
each of
or
to
Plaintiffs.
Plaintiffs'
claims
is
property of the estate and that Plaintiffs' injury is derived from
HII' s injury. 29
b.
Money Had and Received and Unjust Enrichment
"A party may recover under the unjust enrichment theory when
one person has obtained a benefit from another by fraud, duress, or
the taking of an undue advantage."
Heldenfels Brothers,
City of Corpus Christi, 832 S.W.2d 39, 41 (Tex. 1992)
Inc. v.
(citing Pope
v. Garrett, 211 S.W.2d 559, 562 (Tex. 1948), and Austin v. Duval,
735 S.W.2d 647, 649 (Tex. App.- Austin 1987, writ denied)).
Unjust enrichment is an equitable principle holding that
one
who
receives
benefits
unjustly
should
make
restitution for those benefits.
"Unjust enrichment" occurs when the person sought to be
charged [has] wrongfully secured a benefit or [has]
passively received one which it would [be] unconscionable
to retain.
"Unjust enrichment" characterizes the
result o [f] failure to make restitution of benefits
received under such circumstances as to give rise to
implied or quasi-contract to repay . . . It has also been
said that recovery under unjust enrichment is an
equitable right and is not dependent on the existence of
a wrong.
Villarreal v. Grant Geophysical,
App. -
29
Inc., 136 S.W.3d 265,
San Antonio 2004, pet. denied)
270
(Tex.
(citations omitted).
When
Defendant's MSJ, Docket Entry No. 61, pp. 16-17.
-16-
unjust enrichment is proved defendants must make restitution of
benefits wrongfully received.
Id.
A claim for money had and received "'belongs conceptually to
the doctrine of unjust enrichment . . .
I
II
Edwards v. Mid-Continent
Office Distributors, L.P., 252 S.W.3d 833, 837 (Tex. App.- Dallas
2008, pet. denied)
An action for restitution
(citations omitted).
for money had and received "seeks to restore money where equity and
good conscience require restitution.
wrongdoing,
but
seeks
to
determine
justice, and law, the money belongs."
2 4 3 S . W. 2 d 6 8 6 ,
unconscionable
payee."
Abilene,
Id.
687
loss
(Tex.
to
at 837
19 51) ) .
the
it is not premised on
to which party,
Id.
763
(citing Staats v. Miller,
Such claims seek "to prevent
payor and unjust
(citing Bryan v.
628 S.W.2d 761,
(Tex.
in equity,
enrichment
to
the
Citizens National Bank in
1982)).
To prove a claim for
money had and received "a plaintiff must show that a defendant holds
money which in equity and good conscience belongs to him."
Edwards,
252 S.W.3d at 837 (citing Best Buy Co. v. Barrera, 248 S.W.3d 160,
162-63 (Tex. 2007)
(per curiam), and Staats, 243 S.W.3d at 687).
Plaintiffs allege
4 9.
Defendant holds money that, in equity and good
conscience,
belongs to Plaintiffs.
Shortly after
Plaintiffs made their investments, Defendant swept all of
HII's cash and foreclosed on its assets.
But for
Defendant's promises that it would issue a waiver of
covenants to waive HII' s defaults, and allow HII to
acquire Water Transfer LLC and continue operating,
Plaintiffs would not have made their investments. 30
30
Plaintiffs' Second Amended Complaint, Docket Entry No.
p. 13 ~ 49 (emphasis added).
-17-
20,
54.
[B]ut for Defendant's promises that it would issue
a waiver of covenants to waive HII's defaults, and allow
HII to acquire Water Transfer LLC and continue operating,
Plaintiffs would not have made their investments.
Shortly after Plaintiffs made their investments, however,
Defendant swept all of HII's cash and foreclosed on its
assets which unjustly enriched Defendant at the expense
of Plaintiffs. 31
Once Plaintiffs transferred their money to HII in exchange for
Series B stock, the money belonged to HII.
Therefore, any alleged
harm that occurred to HII after Plaintiffs' investment is shared by
all shareholders.
enriched"
when
HII was allegedly harmed and Heartland "unjustly
Heartland
sent
a
"foreclose[d] on HII's assets
and
swept
all
of
its
cash,
notice
of
default
to
HII,
froze HII's checking accounts
including
thereby causing HII to collapse." 32
Plaintiffs'
investments,
The harm alleged is to HII and
is not exclusive to Plaintiffs because the money invested belonged
to HII.
Because the alleged harm is to HII and because HII could
have brought this claim before the commencement of the bankruptcy
case,
Plaintiffs'
claim for unjust enrichment is derivative of
HII's injuries.
Similarly,
Plaintiffs'
derivative of HII' s
money-had-and-received
claim
is
injuries because the money that Plaintiffs
invested belonged to HII,
the alleged wrongdoing occurred before
HII filed for bankruptcy, and HII could have brought the claim "as
31
Id. at 13-14
32
Id. at 8-9
~~
~
54
(emphasis added).
26, 28.
-18-
of the commencement of the bankruptcy case .
522 F.3d
at 586.
Because Plaintiffs'
Seven Seas,
"
injury is derivative of
HII's injury, HII's bankruptcy estate is the proper party to bring
unjust
enrichment
and
money
had
and
received
claims
against
Heartland and Plaintiff lacks standing to assert these claims.
c.
Promissory Estoppel
Plaintiffs
allege
that
they
"substantially
relied
on
Defendant's promises to their detriment when they invested in HII,
only to have their investments swept away when Defendant suddenly
reneged on its promises and noticed HII' s default. " 33
of a promissory estoppel claim are
( 1)
"The elements
a promise,
( 2)
ability of reliance thereon by the promisor, and (3)
detrimental
reliance
by
the
promisee."
Trevino
foresee-
substantial
&
Associates
Mechanical, L.P. v. Frost National Bank, 400 S.W.3d 139, 146 (Tex.
App. -Dallas 2013, no pet.).
Like
Plaintiffs'
claims
for
fraud
and
negligent
misrepresentation, Plaintiffs' promissory estoppel claim is based
on their reliance to their detriment on Heartland's promises made
to Plaintiffs before they invested their money.
Because this claim
is based on the inducement to invest, rather than on harm suffered
after Plaintiffs invested -- which is shared by all investors and
for
which
33
HII
Id. at 14
could
~
bring
claims
60.
-19-
Plaintiffs'
harm
is
distinctive, and their promissory estoppel claim is not based on
injuries that are merely derivative of HII's injuries.
d.
Conclusion
The court concludes that Plaintiffs have standing to bring
m~srepresentation,
their claims for fraud, negligent
and promissory
estoppel, but their claims for unjust enrichment and money had and
received are derivative of HII's injuries and therefore belong to
the bankruptcy estate.
B.
Whether Fact Questions Exist for the Remaining Claims
Heartland argues that the court should grant summary judgment
and dismiss Plaintiffs' claims on the merits.
will dismiss Plaintiffs'
claims for money had and received and
unjust enrichment for lack of standing,
whether
there
Plaintiffs'
exists
claims
a
for
Because the court
genuine
issue
the court will consider
of
fraud,
negligent
that
Heartland
material
fact
as
misrepresentation,
to
and
promissory estoppel.
1.
Fraud
Plaintiffs
allege
knowingly
made
representations intending for Plaintiffs to rely on them. 34
false
The
alleged false representations were that "if Plaintiffs could raise
$2.735 million in equity"
34
Id. at 10
~~
32,
35-36.
-20-
(1) Heartland would issue a waiver of covenants to waive
HII's defaults;
(2) Heartland would permit HII to acquire Water Transfer
LLC; and
(3)
HII would be allowed to continue to operate as a
going concern. 35
Heartland argues
that Plaintiffs do not satisfy the heightened
pleading standard applicable to fraud claims under Rule
9 (b) . 36
Although failure to state a claim may serve as a basis for summary
judgment, because Heartland relies on summary judgment evidence in
its motion, the court will base its ruling on the summary judgment
evidence instead of the sufficiency of Plaintiffs' pleadings.
Ashe v. Corley, 992 F.2d 540, 544 (5th Cir. 1993)
See
("Where a motion
for summary judgment is based solely on the pleadings and makes no
reference to affidavits, depositions, or interrogatories, it makes
no difference whether the motion is evaluated under Rule 56 or
Rule
12 (b) (6)
because
both
standards
'reduce
to
the
question. '") .
Under Texas law, the elements of fraud are (1) that 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.
~
35
Id. at 10
36
Defendants' MSJ, Docket Entry No. 61, p. 22.
32.
-21-
same
Johnson v. World Alliance Financial Corporation, 830 F.3d 192, 198
(5th Cir. 2016)
(citation and quotation omitted)
Heartland argues
that
it
is
entitled
to
summary
judgment
because Plaintiffs cannot prove justifiable reliance, Heartland did
not
make
the
representations
Plaintiffs,
to
representations were true or vague. 37
and
certain
Heartland does not argue that
Plaintiffs do not satisfy the actual reliance element of fraud.
For clarity of the analysis, the court will begin with Heartland's
second
argument
that
it
did
not
make
representations
to
Plaintiffs.
a.
Representations
Heartland argues that Plaintiffs have not shown that it made
misrepresentations to Plaintiffs or to HII management,
or that
Heartland expected and intended the misrepresentations to reach
Plaintiffs. 38
In Plaintiffs'
Response they attach several email
exchanges and interrogatories as evidence that Heartland knew that
HII was using Heartland's representations to solicit investors. 39
Under the Second Restatement of Torts
makes a misrepresentation is
§
531
"a person who
liable to the person or class or
persons the maker intends or 'has reason to expect'
will act in
37
Id. at 22-30.
38
Id. at 28.
39
Plaintiffs' Response, Docket Entry No. 82, p. 33.
-22-
reliance upon the misrepresentation."
Ernst & Young,
Pacific Mutual Life Insurance Co., 51 S.W.3d 573, 578
(citing Restatement
(Second) of Torts § 531)
L.L.P.
v.
(Tex. 2001)
The Texas Supreme
Court held "that section 53l's reason-to-expect standard comports
with our jurisprudence
u
Id. at 580.
"To prove that an
alleged fraudfeasor had reason to expect reliance,
the misrepresentation must have
'[t]he maker of
information that
would
lead a
reasonable man to conclude that there is an especial likelihood
that
it
will
conduct.'"
reach
those
persons
and
will
influence
their
Id. at 581 (quoting Restatement (Second) of Torts§ 531
cmt. d (1977)).
Plaintiffs'
Second
conclusory allegations
would
reach
Amended
that
Plaintiffs. 40
Complaint
Heartland knew
Plaintiffs'
is
its
answers
replete
with
representations
to
Heartland's
interrogatories state that each Plaintiff relied on Heartland's
alleged
representations
in
their
decisions
to
invest
described who relayed the representations to them,
in
HII,
and believed
that Heartland knew and expected the representations to be repeated
to the Plaintiffs. 41
Moreover,
Plaintiffs provide evidence that
40
See Plaintiffs' Second Amended Complaint, Docket Entry
No. 20, p. 5 ' 22 ("Defendant knew and expected that its promises
and representations would be relayed to potential investors such as
Plaintiffs, so that HII could raise the requisite capital.").
41
See Plaintiff Magna Equities II, LLC's ("Magna"), Monica
Wehby' s, Townes Pressler's, Francis Jungers', BTG Investments,
LLC's, Betty Ann Purdie's, Avi Mirman's, Mitchell Lukin's, David
(continued ... )
-23-
Heartland had reason to expect that those representations would
reach Plaintiffs
March 5,
2015,
representative
representative
and
that
Plaintiffs
would
rely on
them.
On
Matthew Flemming sent an email to Phil Thomas, a
of
of
Heartland,
the
other
and
lender
Christopher
McLarty
Capital,
Flemming attached a memorandum that summarized HII' s
Smith,
to
a
which
plans and
stated that
[t]he equity investors' interest is not just in yield but
also in capital appreciation. Our solicitation of equity
41
( • • • continued)
Field's, Shannon R. Pratt's, and George Gilman's Answers and
Objections to Heartland Bank's First Set of Interrogatories,
Exhibits 1-3, 5-10, and 12-13 to Defendant's MSJ, Docket Entry
Nos. 63-1, 63-2, 63-3, 63-5, 63-6, 63-7, 63-8, 63-9, 63-10, and
64-1.
See, e.g., Plaintiff Shannon R. Pratt's Answers and
Objections to Heartland Bank's First Set of Interrogatories,
Exhibit 12 to Defendant's MSJ, Docket Entry No. 64-1, pp. 10-11 (In
her answers to the interrogatories, Plaintiff Pratt stated
. I spoke with Matt Flemming by telephone who stated
that the company's bank, Heartland Bank, would permit HII
Technologies to acquire Water Transfer LLC and One Flow
Energy if the company was successful in raising $3
million in equity during the May 2015 Series B offering.
Mr. Flemming also stated that if the equity raise was
successful,
that
Heartland Bank would waive
HII
Technologies' defaults.
Heartland Bank knew and expected these representations
would be
repeated to me
because Heartland Bank
conditioned the waiver of HII's existing defaults and the
purchase of Water Transfer LLC on a successful equity
raise by HII.
I and other investors were approached so
that this condition could be met . . . . But for Heartland
Bank's representations about HII, I would not have
participated in the HII Series B stock offering in May
2015.
Her statements are similar to those made by the other plaintiffs.).
-24-
has centered on plan of HIIT bringing in new working
capital for HIIT and to help the growth anticipated with
the acquisition of WTLLC.
Currently we anticipate
closing a Series B type of offering subject to approvals
by the end of this month made up of approximately 12
investors. 42
Smith responded to Flemming and Thomas:
we do not think [HII] is in a position to take on $12
more in debt to consummate the WTLLC acquisition.
All that being said, we would still be open to this
acquisition if concurrently HIIT was successful in
raising $3 million of new equity . . . . We will work with
you towards an acceptable outcome on covenants and the
WTLLC acquisition to the extent HIIT is successful on the
equity raise hopefully in the next two weeks. 43
In a May 1,
2015,
email Flemming wrote Thomas that although the
consent agreement for the Water Transfer acquisition was separated
from the other agreements,
consent]
in
guarantee
place
the
for
approval
Flemming "need [s]
of
[the WTLLC
did
not
the Water Transfer acquisition,
the
equity." 44
Although
to get
Heartland
summary judgment evidence shows that Heartland knew, or should have
known,
that
Flemming
was
using
Transfer to solicit investments.
the
promise
to
acquire
Water
It was therefore likely that
Heartland's representations would reach Plaintiffs and influence
42
Memorandum Re: Plan of Action for our business moving
forward, Exhibit 9 to Plaintiffs' Response, Docket Entry No. 84-4,
p. 6 (emphasis added).
43
March 9, 2015, Email, Subject: HII Technologies, Exhibit 10
to Plaintiffs' Response, Docket Entry No. 84-5, p. 2 (emphasis
added).
44
May 1, 2015, Email, Subject: Update from HII, Exhibit 26 to
Plaintiffs' Response, Docket Entry No. 85-11, p. 2.
-25-
See Ernst & Young,
their conduct.
concludes
that
51 S.W.3d at 581.
The court
Plaintiffs have provided sufficient evidence
to
create a fact issue as to whether Heartland had reason to expect
that Plaintiffs would rely on its representations.
b.
Justifiable Reliance
As to Heartland's alleged misrepresentation that HII would be
permitted
to acquire
Water Transfer
$2.735 million in equity,
if
Plaintiffs
would
raise
Heartland argues that any justifiable
reliance by Plaintiffs is negated as a matter of law.
Fraud requires that the plaintiff show actual and justifiable
reliance.
Grant Thornton LLP v.
S . w. 3d 913 ,
923
( Tex .
court must determine whether
characteristics,
314
In measuring justifiability,
2 o1 o)
Prospect High Income Fund,
the
"given a fraud plaintiff's individual
abilities,
and
appreciation
of
facts
circumstances at or before the time of the alleged fraud[,]
and
it is
extremely unlikely that there is actual reliance on the plaintiff's
part."
Id.
(quotations
and
citations
omitted) .
reliance usually presents a question of fact.
"Justifiable
But the element can
be negated as a matter of law when circumstances exist under which
reliance cannot be justified."
Assets G.P.,
L.L.C.,
JPMorgan Chase Bank, N.A. v. Orca
546 S.W.3d 648,
654
(Tex.
2018)
(internal
citations omitted) .
In determining whether justifiable reliance is negated as
a matter of law, courts "must consider the nature of the
[parties'] relationship and the contract."
[The
defrauded] party "cannot blindly rely on a representation
-26-
by a
defendant
where
the
plaintiff's
knowledge,
experience, and background warrant investigation into any
representations before the plaintiff acts in reliance
upon those representations."
Id.
"A person 'may not justifiably rely on a representation if
there are red flags
indicating such reliance is unwarranted.'"
North Cypress Medical Center Operating Company, Limited v. Aetna
Life
Insurance
Company,
3635231, at *7
(5th Cir. July 31, 2018)
314 S.W.3d at 923
540,
546
contract
No.
F.3d
Moreover,
2003))).
"a party to a
written
regarding the contract's unambiguous terms."
National Property
v.
Westergren,
on
343 F.3d
misrepresentations
L.P.
rely
WL
oral
Holdings,
justifiably
2018
(quoting Grant Thornton,
(quoting Lewis v. Bank of America NA,
(5th Cir.
cannot
16-20674,
453 S.W.3d 419,
424
(Tex.
2015).
"Either 'red flags' alone or direct contradiction alone can negate
justifiable reliance as a matter of law."
660 n.2.
while
JPMorgan, 546 S.W.3d at
The court must "view the circumstances in their entirety
for
accounting
sophistication."
Id.
parties'
the
at
656.
relative
Heartland
relies
levels
of
primarily on
JPMorgan to argue that Plaintiffs could not have justifiably relied
on its representations as a matter of law,
and Plaintiffs rely
primarily on Jacked Up, L.L.C. v. Sara Lee Corporation, 854 F.3d
797
(5th Cir.
2017),
to argue that this element of fraud is not
negated.
In JPMorgan the plaintiff, a company formed by an experienced
oil-and-gas businessman, signed an oil and gas lease for land that
-27-
turned out to be already leased to another entity.
652.
Id. at 650,
The plaintiff brought fraud and negligent misrepresentation
claims against the lessor's agent, JPMorgan, alleging that it had
justifiably relied on JPMorgan's statements that the land was open.
Id.
at
654.
JPMorgan argued
that
the
plaintiff's
claims
are
negated as a matter of law because the plaintiff could not have
justifiably relied on statements that the land was open considering
the number of
red flags present. 45
Circuit
that
held
a
letter
of
Id.
at
intent,
654-55.
which
The Fifth
placed
the
responsibility on the plaintiff to investigate title and contained
a
negation-of-warranty
provision,
directly
representations that the plaintiff relied on.
contradicted
the
Id.
The
at 659.
court concluded that the direct contradiction, the other red flags,
and the plaintiff's
sophistication in the oil-and-gas
45
The red flags that the defendant cited
plaintiff's justifiable reliance were that:
to
industry
preclude
( 1) [JPMorgan' s employee's] statement that he "would have
to check" whether the property was open for lease;
(2) JPMorgan's insistence on the stricter negation-ofwarranty provision; (3) JPMorgan's refusal to accept
responsibility for verifying title; (4) the letter of
intent itself; (5) [JPMorgan's employee's] statement that
other lessees were not doing careful title work; (6) [the
plaintiff's] knowledge that competitors might delay
recording their leases; ( 7) [the plaintiff's] knowledge
that it ceased checking property records after signing
the letter of intent; and (8) [the plaintiff's] landman's
"doubts" at the closing, manifested by her request that
[JPMorgan' s employee] confirm once more whether the
property was "open."
JPMorgan, 546 S.W.3d at 655.
-28-
the
negated any justifiable reliance that the plaintiff had on the
alleged misrepresentation.
Id. at 660.
Jacked up was a small start-up company that sold energy drinks
to
stores.
Jacked Up,
licensing agreement
854
with
the
F.3d at
802.
defendant,
It
entered
Sara Lee,
into
a
under which
Jacked Up agreed to license its brand name and proprietary energy
ingredients in exchange for royalties.
Id.
Although the initial
term of the licensing agreement was five years,
number
of
termination
clauses,
including
a
it contained a
change-of-control
termination provision in the event that Sara Lee sold one of its
divisions.
Id. at 802-03.
Shortly after the parties executed the
licensing agreement, Sara Lee announced the sale of North American
Beverage, the division that Jacked Up primarily worked with, and
discontinued Jacked Up products.
Id.
Jacked Up sued Sara Lee for
fraud and fraudulent inducement alleging that it relied on Sara
Lee's representation that it was not planning on terminating the
contract or selling North American Beverage.
Id.
at 810.
The
Fifth Circuit held that because some of Sara Lee's representations
"were clearly contradicted by the licensing agreement itself
Jacked
Up
could
not
justifiably
rely
on
these
misrepresentations regarding the contract's unambiguous
Id. at 811 (internal quotation and citation omitted).
oral
terms."
For example,
"Sara Lee's representation that it would not terminate the contract
was contradicted by the numerous
contract."
Id.
However,
termination provisions in the
the court held that whether Jacked Up
-29-
justifiably relied on Sara Lee's representation that it was not
planning on selling North American Beverage presented a genuine
issue of material fact.
Id.
"[m)erely
possibility
suggesting
the
at 812.
division 'did not serve as a warning'
planning a sale.
The court reasoned that
of
selling
the
beverage
that Sara Lee was actively
Even if it were such a warning, Jacked Up could
not have learned the truth with reasonable investigation."
Heartland
argues
Plaintiffs
that
are
Id.
experienced,
sophisticated investors, that numerous red flags negate justifiable
reliance, and that the alleged misrepresentation that HII would be
permitted to acquire Water Transfer LLC contradicted the SPAs. 46
Plaintiffs argue that like Sara Lee's representation about North
American Beverage in Jacked Up, "there was nothing obviously false
about Defendant's representation that it would waive the defaults
and permit the WTLLC acquisition,
(i)
II
47
Sophisticated Investors
Plaintiffs' Response does not rebut Heartland's argument that
each Plaintiff is highly sophisticated. 48
Flemming testified that
all Plaintiffs were "sophisticated investors. " 49
Plaintiffs BTG
46
Defendant' s MSJ, Docket Entry No. 61, p. 24.
47
Plaintiffs' Response, Docket Entry No. 82, p. 30.
48
Defendant' s MSJ, Docket Entry No. 61, p. 27.
49
0ral and Videotaped Deposition of Matthew C. Flemming
("Flemming Deposition"), Exhibit 15 to Defendant's MSJ, Docket
(continued ... )
-30-
Investments,
LLC and Magna Equities are both investment firms.
50
The SPA that Plaintiffs each signed 51 states that Plaintiffs "[have]
such
knowledge,
sophistication
and
experience
in
business
and
financial matters so as to be capable of evaluating the merits and
risks of the prospective investment in the Securities, and [have]
so evaluated the merits and risks of such investment." 52
Based on
this evidence and the fact that Plaintiffs do not dispute their
sophistication,
the
court
concludes
that
Plaintiffs
are
sophisticated investors for purposes of the justifiable reliance
inquiry.
Sophisticated participants in a
expected to recognize
overlook."
'red flags'
large deal
"should be
that the less experienced may
JPMorgan, 546 S.W.3d at 656.
(ii)
Red Flags
(A)
Heartland
argues
Purported Red Flags in the SPA
that
red
flags
negate
any
justifiable
reliance Plaintiffs had on its representations regarding the Water
49
continued)
Entry No. 64-3, p. 40 lines 4-6 and 8-10 (Q: "The individuals who
invested in the Series B declared to you they were sophisticated
investors in the documents, correct?"
A: "Correct.
I believe
every one of them were accredited investors and had to attest to
that in the documentation.").
50
( •••
Defendant' s MSJ, Docket Entry No. 61, p. 27.
51
The parties do not dispute that each Plaintiff signed
identical SPAs.
See Defendant's MSJ, Docket Entry No. 61, p. 24
n.6; Plaintiffs' Response, Docket Entry No. 82, p. 30 ("the
provisions at issue are identical in each of the Investors' SPAs").
52
Securities Purchase Agreement, Section 3.2(d), Exhibit 14 to
Defendant's MSJ, Docket Entry No. 64-2, p. 21.
-31-
Transfer acquisition. 53
Heartland cites multiple sections of the
SPA and the Third Modification Agreement.
The court will view the
purported red flags as a whole relative to the circumstances and
the parties' sophistication.
(1)
JPMorgan, 546 S.W.3d at 655-56.
Section 3.1(x)
Heartland first cites to Section 3.1(x), "Representations and
Warranties," of the SPA, which states:
Except with respect to the material terms
and conditions of the transactions contemplated by the
Transaction
Documents
(including
the
disclosure
schedules), [HII] confirms that neither it nor any other
Person acting on its behalf has provided any of the
Purchasers
or
their agents
or counsel
with any
information that it believes constitutes or might
constitute material, non-public information.
[HII]
understands and confirms that the Purchasers will rely on
the foregoing representation in effecting transactions in
securities of [HII] . All of the disclosure furnished by
or on behalf of [HII] to the Purchasers regarding [HII]
and its Subsidiaries, their respective businesses and the
transactions contemplated hereby, is true and correct and
does not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to
make the statements made therein, in light of the
circumstances
under
which
they
were
made,
not
misleading. 54
Disclosure.
Heartland argues that the alleged representation that HII would be
permitted to acquire Water Transfer was not included in and was
contradicted in the SPA. 55
tation in Section 3.1(x)
53
Plaintiffs respond that the represenwas given by HII,
not Heartland,
that
Defendant's MSJ, Docket Entry No. 61, p. 24.
54
Securities Purchase Agreement, Section 3.1(x), Exhibit 14 to
Defendant's MSJ, Docket Entry No. 64-2, pp. 16-17.
55
Defendant's MSJ, Docket Entry No. 61, p. 24.
-32-
"[n]owhere in the SPA do the Investors state that they have not
received the misrepresentations for which they now sue[,]"
Investors
did not
disclaim their
misrepresentations,
and
that
right
among
to
the
that
sue based on those
Transaction
Documents
referenced in Section 3.1(x) was a "Preliminary Term Sheet" that
indicated that use of the proceeds from the equity raised would be
to "fund acquisitions." 56
Heartland argues that if agents of HII
told Plaintiffs that HII would acquire Water Transfer,
then HII
"did provide material non-public information to Plaintiffs, which
is contrary to the representation made above and should have put
Plaintiffs on notice." 57
The
language of Section 3.1 (x)
weighs against
justifiable
reliance because it states that HII did not "provide[]any of the
Purchasers or their agents or counsel with any information that it
believes
constitutes
or
might
information." 58
As
reasonably
questioned
Transfer
have
constituted
constitute
sophisticated
investors,
whether
material,
material,
the
remaining portions of Section 3. 1 (x)
Plaintiffs
acquisition
non-public
non-public
should
of
Water
information.
The
do not caution Plaintiffs
56
Plaintiffs' Response, Docket Entry No. 82, pp. 30-31 (citing
Preliminary Term Sheet, Exhibit 31 to Plaintiffs' Response, Docket
Entry No. 86-5).
57
Heartland Bank's Reply to Plaintiffs' Response to Heartland
Bank's Motion for Summary Judgment ("Defendant's Reply"), Docket
Entry No. 93, pp. 6-7.
58
Securities Purchase Agreement, Section 3.1(x), Exhibit 14 to
Defendant's MSJ, Docket Entry No. 64-2, pp. 16-17.
-33-
against reliance on Heartland's representation, and may be fairly
read to support reliance.
the
language that
For example, Plaintiffs could have read
" [a] ll of
the disclosure
furnished by or on
behalf of [HII] to the Purchasers regarding [HII]
is true and
correct" to mean that the representation by Heartland, relayed to
Plaintiffs through HII,
Water
Transfer
Plaintiffs'
was
a
argument
that HII would be permitted to acquire
true
and
correct
they
that
statement.
justifiably
However,
relied
on
the
representation because the "Preliminary Term Sheet" indicated that
the use of proceeds from the equity raised would be used to "fund
acquisitions" has no merit.
Even if the Preliminary Term Sheet
constituted a "Transaction Document" as defined in the SPA,
not mention Heartland or Water Transfer,
prepared
"FOR
DISCUSSION
PURPOSES
INDICATION OF INTEREST ONLY,
ONLY"
59
it did
and stated that it was
and
that
it
"IS
AN
AND IS NON-BINDING ON THE PARTIES
PENDING EXECUTION OF A DEFINITIVE AGREEMENT. " 60
Therefore,
the
Preliminary Term Sheet does not support Plaintiffs' claim that it
justifiably
relied
on
Heartland's
concludes that Section 3.1(x)
representation.
The
court
is not necessarily a red flag that
should have cautioned Plaintiffs against reliance because parts of
59
Securi ties Purchase Agreement, Exhibit 14 to Defendant's MSJ,
Docket Entry No. 64-2, p. 6 ("'Transaction Documents' means this
Agreement, the Registration Rights Agreement, the Warrants, the
Certificate of Designation, and all exhibits and schedules thereto
and hereto and any other documents or agreements executed in
connection with the transactions contemplated hereunder.")
60
Preliminary Term Sheet,
April,
2015,
Exhibit
Plaintiffs' Response, Docket Entry No. 86-5, p. 2.
-34-
31
to
Section
3.1(x)
can
be
interpreted
to
support
either
party's
arguments.
(2)
Second,
Section 3.2(d)
Heartland cites
Section 3. 2 (d)
of
the
SPA,
which
states that each Plaintiff
understands that the Placement Agent [Roth] has acted
solely as the agent of [HII] in this placement of the
Securities and such Purchaser has not relied on the
business or legal advice of [Roth] or any of its agents,
counsel or affiliates in making its investment decision
hereunder, and confirms that none of such Persons has
made any representations or warranties to such Purchaser
in
connection with
the
transactions
contemplated
herein. 61
Heartland argues
allegation
that
that
they
"[t] his
directly contradicts
received
alleged
Plaintiffs'
misrepresentations
from
Roth. " 62
Because
Plaintiffs
argue
that
they
relied on Heartland's
representation regarding the Water Transfer acquisition, allegedly
relayed to them in part by Roth Capital, when deciding whether to
execute the SPA and invest their money, this representation would
be a
"representation
contemplated
herein."
3.2(d)
Roth
that
in connection with the transactions
Since
Capital
Plaintiffs
has
made
no
acknowledge
such
in
Section
representations,
Plaintiffs were alerted that they could not rely on Roth Capital's
61
Securities Purchase Agreement, Section 3.2(d), Exhibit 14 to
Defendant's MSJ, Docket Entry No. 64-2, p. 21.
62
Defendant' s MSJ, Docket Entry No. 61, p. 25.
-35-
representations
regarding
the
Water
deciding whether to execute the SPA.
Transfer
acquisition
when
Section 3.2(d) was therefore
a red flag against reliance.
(3)
Section 4.7
Third, Heartland argues that Section 4.7 of the SPA,
Proceeds,"
says
nothing
about
acquiring
Water
"Use of
Transfer. 63
Plaintiffs respond that this is not determinative because "[t]he
misrepresentation complained of is that upon a successful equity
raise, Defendant would allow HII to acquire WTLLC, not necessarily
that the proceeds of the raise would be used exclusively for that
purpose." 64
The court concludes that section 4.7 does not constitute a red
flag because Plaintiffs alleged that they relied on Heartland's
promise, relayed to them through Flemming, Roth, and others, that
Heartland would permit HII to acquire Water Transfer if HII could
raise
the
requisite
equity,
not
that
HII
would acquire
Water
Transfer with the raised equity. 65
63
Id. at 25 (citing Securities Purchase Agreement, Section 4. 7,
Exhibit 14 to Defendant's MSJ, Docket Entry No. 64-2, p. 26).
64
Plaintiffs' Response, Docket Entry No. 82, p. 31.
65
See, e.g. , Plaintiff Magna's Answers and Objections to
Heartland's First Set of Interrogatories, Exhibit 1 to Defendant's
MSJ, Docket Entry No. 63-1, p. 4 ("At that meeting, Matt Flemming
said that Heartland Bank would waive HII's exiting [sic] defaults
and permit HII to acquire Water Transfer LLC if HII could raise $3
million.") i Plaintiffs' Second Amended Complaint, Docket Entry
No. 20, pp. 4-5 , 22 ("Defendant promised that, upon a successful
equity raise, it would permit HII to acquire a profitable oilfield
water management company called Water Transfer LLC,
.").
-36-
(4)
Fourth,
Section 3.1(i)
Heartland cites
Section 3. 1 ( i)
of
the
SPA,
which
states:
Except for the issuance of the Securities contemplated by
this Agreement, no event, liability, fact, circumstance,
occurrence or development has occurred or exists or is
reasonably expected to occur or exist with respect to
[HII] or its Subsidiaries or their respective businesses,
properties, operations, assets or financial condition,
that would be required to be disclosed by [HII] under
applicable
securities
laws
at
the
time
this
representation is made or deemed made that has not been
publicly disclosed at least one (1) Trading Day prior to
the date that this representation is made. 66
Heartland argues that HII CEO, Matthew Flemming, acknowledged that
the
Water
Transfer
acquisition
Modification Agreement
because
was
removed
the Agreement
from
the
Third
would have
to be
disclosed to the SEC and HII could not announce the acquisition
yet. 67
Plaintiffs respond that this provision does not absolve
Heartland of keeping its promises, and does not raise a red flag
that Heartland's representations were false because HII was under
no obligation to disclose the Water Transfer acquisition to the SEC
while Heartland was still negotiating the acquisition's terms. 68
Section 3.1(i) of the SPA negates Plaintiffs' reliance because
it is an unambiguous contractual term that directly contradicts the
66
Securities Purchase Agreement, Section 3.1(i), Exhibit 14 to
Defendant's MSJ, Docket Entry No. 64-2, p. 13.
67
Defendant's MSJ, Docket Entry No. 61, p. 25 (citing Oral and
Videotaped Deposition of Matthew C. Flemming, March 28, 2018,
Exhibit 15 to Defendant's MSJ, Docket Entry No. 64-3, p. 72).
68
Plaintiffs' Response, Docket Entry No. 82, p. 32.
-37-
alleged misrepresentations made by Heartland.
See JPMorgan,
546
S.W.3d at 658 ("[A] party to a written contract cannot justifiably
rely
on
oral
misrepresentations
unambiguous terms.")
regarding
the
contract's
(internal citation and quotation omitted).
"Whether a contract is ambiguous is a question of law for the court
to decide."
8 61
Lopez v. Munoz, Hockema & Reed, L.L.P., 22 S.W.3d 857,
( Tex . 2 0 0 0 ) .
Section 3.1(i) states that no disclosable event
with respect to HII is reasonably expected to occur that has not
already been publicly disclosed at least one day before the SPA was
executed.
given
a
Section 3.1(i) is an unambiguous term because it can be
definite
meaning
reasonable interpretations.
and
is
not
See, id.
subject
to
two
or
more
Moreover, Plaintiffs do not
argue that Section 3.l(i) is ambiguous, only that this Section does
not "absolve Defendant of keeping its promises" or "raise a red
flag that Defendant's representations are false." 69
Although the court in JPMorgan acknowledged that "there is no
direct contradiction if a reasonable person can read the writing
and still plausibly claim to believe the earlier representation[,]"
it
concluded
that
the
court
of
appeals
applied
the
direct
contradiction standard incorrectly:
In reaching its conclusion, the court of appeals held
that for a
contradiction to preclude
justifiable
reliance,
both
the
contractual
clause
and
the
extra-contractual
representation
it
supposedly
contradicts must explicitly speak to the same subject
matter with sufficient specificity to correct and
69
Plaintiffs' Response, Docket Entry No. 82, p. 32.
-38-
contradict the prior oral representation.
Such a
requirement is simply too strict to be workable as it
essentially requires the contract and extra-contractual
representation to use precisely the same terms.
JPMorgan, 546 S.W.3d at 659.
Plaintiffs relied on the alleged promise that HII would be
permitted to acquire Water Transfer upon a
equity.
Section
3.1(i)
of
the
SPA
successful raise of
states
that
"no
event,
liability, fact, circumstance, occurrence or development .
. is
reasonably expected to occur or exist with respect to [HII]
that would be required to be disclosed by [HII]
securities laws."
under applicable
Matthew Flemming testified that the acquisition
of Water Transfer would have to be disclosed to the SEC. 7 °
Plaintiffs
to
rely on Heartland's
statement
For
that HII would be
permitted to acquire Water Transfer, they would have to ignore the
contractual provision explaining that no disclosable event, such as
Water Transfer's acquisition, was reasonably expected to occur with
respect to HII.
See id. at 659
("For [the plaintiff]
to rely on
[the agent's] statement that the trust had title, it would have to
ignore an express contractual provision explaining that JPMorgan
and the trust make no guarantees pertaining to title.").
Because
a reasonable person could not read Section 3.1(i) and still believe
that the Water Transfer acquisition was guaranteed, Section 3.1(i)
7
°Flemming Deposition, Exhibit 15 to Defendant's MSJ, Docket
Entry No. 64-3, p. 73, lines 12-13 (Flemming stated that "when the
third modification was
executed,
[the Water Transfer LLC
acquisition] was a disclosable event.")
-39-
directly contradicts
the
alleged
representation
that
Heartland
would permit HII to acquire Water Transfer.
(5)
Heartland
Third Modification Agreement
argues
that
the
terms
of
the
Third
Modification Agreement raise a red flag because it never mentioned
the acquisition of Water Transfer, and because it stated that there
were "NO UNWRITTEN ORAL AGREEMENTS" among the parties. 71
Plaintiffs
respond that "it is unclear that the Investors even had access to
the Third Modification and Waiver." 72 Plaintiffs argue that even if
they
were
required
to
take
notice
of
the
Third
Modification
Agreement, the fact that it does not mention the acquisition does
not raise a red flag because the parties had agreed to remove the
acquisition from the Third Modification Agreement to comply with
SEC rules, and that there were numerous writings between Heartland,
and
Flemming
regarding
the
consent
to
acquire
Water
Transfer. 73
Flemming testified that for SEC disclosure reasons the consent
agreement for the Water Transfer acquisition would be "broken out
separately" from the Third Modification Agreement. 74 Therefore, the
71
Defendant's MSJ, Docket Entry No. 61, p. 26.
72
Plaintiffs' Response, Docket Entry No. 82, p. 32.
73Id.
74
Flemming Deposition, Exhibit
Docket Entry No. 83-1, pp. 47-48.
-40-
1
to
Plaintiffs'
Response,
failure
to
mention
Agreement does not
Water
Transfer
in
the
Third
a
red
flag
necessarily raise
Modification
if
Plaintiffs
understood that there would be an independent document regarding
the
consent
to
acquire
Water
Transfer.
However,
an
oral
understanding that a separate document would govern the consent for
the Water Transfer acquisition contradicts the clause in the Third
Modification
Agreement
that
there
AGREEMENTS AMONG SUCH PARTIES. " 75
Plaintiffs'
were
"NO
UNWRITTEN
ORAL
The court is not persuaded by
argument that they may not have received the Third
Modification Agreement.
The SPAs that Plaintiffs signed reference
the Third Modification Agreement. 76
Sophisticated investors should
reasonably be expected to read documents that are referenced in the
agreements that they sign.
copies
of
the
requested them.
Third
If Plaintiffs were not provided with
Modification
Moreover,
Agreement,
Plaintiffs'
they
could
have
claim rests primarily on
statements relayed to them by Matthew Flemming.
Plaintiffs cannot
blame Flemming, a signatory to the Third Modification Agreement who
had intimate knowledge of its contents, for not giving Plaintiffs
access to the Agreement while arguing that Heartland is liable for
Flemming's
representations
to
Plaintiffs.
referenced the Third Modification Agreement,
Because
the
SPAs
which contained a
75
Third Modification and Waiver Agreement, Section 4.11,
Exhibit 22 to Defendant's MSJ, Docket Entry No. 66-2, p. 29.
76
See Securities Purchase Agreement, Schedule 3.1(d), 3.1(i),
3.1(1), Exhibit 14 to Defendant's MSJ, Docket Entry No. 64-2,
pp • 4 0 4 7 - 4 8 •
1
-41-
clause
stating
that
it
was
the
entire
agreement,
the
Third
Modification Agreement served as a red flag against any reliance on
Heartland's representations.
(6)
Section 5.2
Finally, Heartland argues that the SPA's merger clause makes
Plaintiffs' reliance unjustified.
77
The merger clause states:
The Transaction Documents, together
with the exhibits and schedules thereto, contain the
entire understanding of the parties with respect to the
subject matter hereof and thereof and supersede all prior
agreements and understandings, oral or written, with
respect to such matters, which the parties acknowledge
have been merged into such documents, exhibits and
schedules. 78
Entire Aqreement.
The merger clause
in Section 5. 2 of
the SPA was
a
warning to
sophisticated investors that they could not rely on representations
not covered explicitly by the SPA.
v.
MTL
Insurance
Company,
2015
See Freedom Equity Group, Inc.
WL 1135186
Houston [1st Dist.] March 12, 2015)
agreement forecloses
at
*3
(Tex.
App.
("[t]he merger clause in the []
[the plaintiff's]
alleged reliance on oral
promises made before the execution of the [] agreement.").
Because
Plaintiffs are sophisticated investors who could have conditioned
their investment on the express obligation that Heartland would
permit HII to acquire Water Transfer, the merger clause was a red
77
Defendant's MSJ, Docket Entry No. 61, pp. 26-27.
78
Securi ties Purchase Agreement, Section 5. 2,
Defendant's MSJ, Docket Entry No. 64-2, p. 29.
-42-
Exhibit 14 to
flag that cautioned against Plaintiffs'
reliance on Heartland's
alleged representation.
(B)
Conclusion
These red flags should have put Plaintiffs on notice that they
could not rely on Heartland's alleged representation that HII would
be
permitted
to
acquire
Water
Transfer.
Absent
adequate
contractual protection in the SPA or in the Third Modification
Agreement that HII would be allowed to acquire Water Transfer,
Plaintiffs assumed the risk that HII might never be allowed to
acquire Water Transfer.
See CBH Equity,
LLC v. Murphy Oil USA,
Inc., Civil Action No. 2:15-137, 2018 WL 3647087 at *5 (S.D. Tex.
Aug.
1,
2018)
(in
holding
that
the
plaintiff's
reliance
on
statements regarding the execution of an easement with Wal-Mart was
not justified,
measure,
the court reasoned "[a]bsent any other protective
[plaintiff's] recourse was to postpone or refuse to close
the transaction unless and until Wal-Mart executed the easement.
Absent that,
he took his chances that the cross-access easement
would be further delayed")
The court concludes that the "red flags"
together
with
Plaintiffs'
sophistication,
contradiction between Heartland's
discussed above,
and
representations
Water Transfer acquisition and Section 3.1(i)
the
direct
regarding the
of the SPA negate
Plaintiffs' justifiable reliance on Heartland's misrepresentations.
See
JPMorgan at
660
n.2
("Either
-43-
'red
flags'
alone
or direct
contradiction alone can negate justifiable reliance as a matter of
law."); North Cypress Medical, --- F.3d ---, 2018 WL 3635231 at *8
("Here, red flags, Aetna's independent investigation, and Aetna's
sophistication negate any justifiable reliance Aetna had on NCMC's
alleged misrepresentations.").
summary
judgment
on
Heartland is therefore entitled to
Plaintiffs'
fraud
claim
regarding
the
acquisition of Water Transfer.
c.
Truth of Alleged Misrepresentations
Heartland argues that it is entitled to summary judgment on
Plaintiffs'
fraud
claim
that
is
based
on
Heartland's
alleged
promise that it would waive HII's defaults because it did waive
HII' s then-existing defaults. 79
Plaintiffs respond that because the
Notice of Default that Heartland sent contained no description of
the default,
Notice
of
"there is a fact issue regarding whether Defendant's
Default
was
fraudulent,
or,
if
a
default
actually
existed, whether it was a default that Defendant had waived." 80
The Notice of Default stated that HII was "in default under
the Loan Agreement" and defined "Loan Agreement" as "[t]hat certain
Credit Agreement dated August 12,
time." 81
The
Third
2014,
as amended from time to
Modification Agreement
amended
the
79
Defendant' s MSJ, Docket Entry No. 61, p. 28.
80
Credit
Plaintiffs' Response, Docket Entry No. 82, p. 34.
81
Notice of Default, Exhibit 28 to Plaintiffs' Response, Docket
Entry No. 86-2, p. 3 (emphasis added)
-44-
Agreement.
82
Therefore, the Notice of Default referred to default
under the Credit Agreement as amended by the Third Modification
Agreement.
The Third Modification Agreement listed HII's defaults
as of the effective date,
"Existing Defaults." 83
May 20,
2015,
and defined them as the
Section 1.01(a) of the Third Modification
and Waiver Agreement expressly "waive[d] the Existing Defaults" of
HII. 84
Heartland reserved the right to enforce future defaults,
and Plaintiffs do not argue otherwise.
Morever,
85
the SPAs that
Plaintiffs signed state that "Heartland will waive all existing
defaults." 86
Because
Heartland
unequivocally
waived
existing
defaults in the Third Modification Agreement as allegedly promised,
Plaintiffs have failed to raise a fact issue regarding the falsity
of Heartland's representation.
The court concludes that Heartland
is entitled to summary judgment as to Plaintiffs' fraud claim based
on the alleged representation that Heartland would waive HII' s
defaults.
82
See Third Modification and Waiver Agreement, Exhibit 16 to
Defendant's MSJ,
Docket Entry No.
64-4,
p.
2.
The Third
Modification Agreement references the terms of the "Account
Purchase Agreement dated August 12, 2014," and sets out the
amendments to that agreement.
83
Id. at 2.
85
Id. Section 4. 05
I
at 11.
86
Securities Purchase Agreement, Schedules 3.1 (i), 3.1 (l),
Exhibit 14 to Defendant's MSJ, Docket Entry No. 64-2, pp. 47-48.
-45-
2.
Negligent Misrepresentation
Heartland argues that it is entitled to summary judgment on
Plaintiffs' negligent misrepresentation claim because there is no
justifiable reliance,
the claim is based on future promises,
the
promises were true, and the claim is based on the same operative
facts that form the fraud claim. 87
Plaintiffs respond that this
claim survives "for the same reason that its fraud claim concerning
the wavier [sic] of the defaults survives." 88
The elements of a cause of action for
[negligent
misrepresentation] are: (1) the representation is made by
a defendant in the course of his business, or in a
transaction in which he has a pecuniary interest; (2) the
defendant supplies 'false information' for the guidance
of others in their business, ( 3) the defendant did not
exercise reasonable care or competence in obtaining or
communicating the information, and (4) the plaintiff
suffers pecuniary loss by justifiably relying on the
representation.
LHC Nashua Partnership, Ltd. v. PDNED Sagamore Nashua, L.L.C., 659
F.3d 450,
458
n.8
(5th Cir.
2011)
(quoting
Federal
Association v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991))
both
fraud
and
negligent
misrepresentation
require
Land Bank
Because
that
the
plaintiff show actual and justifiable reliance and because the
court has concluded that Plaintiffs did not justifiably rely on
alleged representations regarding the Water Transfer acquisition,
to the extent that Plaintiffs' negligent misrepresentation claim is
87
Defendant's MSJ, Docket Entry No. 61, pp. 30-32.
88
Plaintiffs' Response, Docket Entry No. 82, p. 36.
-46-
based on the Water Transfer acquisition representation, it fails as
a matter of law.
See Grant Thornton,
314 S. W. 3d at 923
("Both
fraud and negligent misrepresentation require that the plaintiff
show actual and justifiable reliance.").
Because falsity of the
information is an element of a negligent misrepresentation claim
and because the court has concluded that Plaintiffs have not raised
a
genuine
issue of material fact
regarding Heartland's alleged
representation that it would waive HII's defaults,
to the extent
that Plaintiffs' claim for negligent misrepresentation is based on
the waiver-of-defaults representation, it fails as a matter of law.
Therefore, Heartland is entitled to summary judgment on this claim.
3.
Promissory Estoppel
Plaintiffs
allege
Heartland's promises
invested
covenants
$2.735
that
substantially
they
to their detriment
million
to waive HII' s
into
HII,
defaults,
it
that
would
allow HII
relied
"if the
issue
a
on
Investors
waiver of
to acquire Water
Transfer LLC, and permit HII to continue operating." 89
Heartland
argues that Plaintiffs' promissory estoppel claim fails because the
alleged promises were covered by the Third Modification Agreement,
were true, or were too vague or indefinite to support the claim. 90
89
Plaintiffs'
58, 60.
Second Amended Complaint, Docket Entry No.
~~
p. 14
90
Defendant's MSJ, Docket Entry No. 61, pp. 34-36.
-47-
20,
Plaintiffs respond that their claim is "not barred by the express
terms
of
a
contract because
contract with Defendant,
Investors
sue
Investors
nor are
the
covered within the
agreement. " 91
are not a
party to any
representations for which
express
terms
of
any written
Plaintiffs also cite multiple email exchanges to
argue that none of the promises were too vague to be enforceable. 92
Promissory
estoppel
"estops
a
promisor
from
denying
the
enforceability of the promise."
Wheeler v. White, 398 S.W.2d 93,
96
Texas
law
promise,
(2)
(Tex.
1965).
estoppel
are:
thereon by
Under
"(1)
the
a
promisor,
promisee to his detriment."
524
(Tex.
1983)
and
( 3)
the
elements
foreseeability
substantial
promissory
of
reliance
English v. Fischer,
In addition,
of
reliance
by
the
660 S.W.2d 521,
promissory estoppel
requires a
reasonable or justified reliance on the alleged promise.
Clardy
Manufacturing Co. v. Marine Midland Business Loans Inc.,
88 F.3d
347,
360
(5th Cir.
Capital Corp.,
1996);
Simulis,
439 S.W.3d 571,
577
L.L.C.
(Tex.
v.
General Electric
App.
-
Houston
[14th
Dist.] no pet. )
Plaintiffs'
alleged
promissory estoppel claim is based on the same
promises
as
Plaintiffs'
other
claims
that
upon
successfully raising equity Heartland would waive HII's defaults,
91
Plaintiffs' Response, Docket Entry No. 82, p. 40.
92
Id. at 40-41.
-48-
permit HII to acquire Water Transfer LLC, and allow HII to continue
to operate. 93
The court has already concluded that Heartland's
alleged promise to waive HII's defaults was true because it did
waive the defaults in the Third Modification Agreement.
The court
has also concluded that Plaintiffs' reliance on the alleged promise
regarding
the
Water
Transfer
acquisition
was
not
justified.
Therefore, Plaintiffs raise no genuine issue of material fact as to
their promissory estoppel
claim,
and Heartland
is
entitled to
judgment as a matter of law. 94
93
Plaintiffs' Second Amended Complaint, Docket Entry No. 20,
~
p. 14
58.
94
Plaintiffs also allege that Heartland represented that "HII
would be allowed to continue to operate as a going concern."
Plaintiffs' Second Amended Complaint, Docket Entry No. 20, p. 10
~
32.
For the same reasons the court has concluded that
Plaintiffs' reliance on the promise regarding the Water Transfer
acquisition was not justified, any reliance on the promise that HII
would be allowed to continue to operate is not justified. Nowhere
in the SPA or the Third Modification Agreement does Heartland make
this representation, and the merger clause of the SPA and Section
4. 11 of the Third Modification Agreement indicate that no oral
promises outside the agreements existed.
Moreover, because the
court concludes that Heartland waived existing defaults but not
future
defaults,
Plaintiffs'
reliance
on
this
alleged
representation was not justified.
Plaintiffs could not have
reasonably expected Heartland to permit HII to continue operating
and not issue a notice of default if HII defaulted on its
obligations to Heartland.
Heartland is therefore entitled to
summary judgment on Plaintiffs' fraud claim with respect to this
alleged representation. The same alleged representation is a basis
for Plaintiffs' negligent misrepresentation and promissory estoppel
claims.
Because the court will grant summary judgment on those
claims with respect to the first two alleged representations for
the same reasons as the fraud claim, discussed in Part III(B) (2)
and (B) (3),
the court will also grant summary judgment on
Plaintiffs' negligent misrepresentation and promissory estoppel
claims with respect to this alleged promise.
-49-
IV.
For
the
reasons
Conclusions and Order 95
stated
in
Part
III (A) ,
above,
the
court
concludes that Plaintiffs lack standing to bring their claims for
money had and received and unjust enrichment because those claims
are property of the bankruptcy estate.
For the reasons stated in
Part III(B), above, the court concludes that Plaintiffs have failed
to raise a genuine issue of material fact as to Plaintiffs' claims
for fraud,
negligent misrepresentation,
For these reasons,
and promissory estoppel.
Heartland Bank's Motion for Summary Judgment
(Docket Entry No. 61) is GRANTED.
SIGNED at Houston, Texas, on this 27th day of August, 2018.
SIM LAKE
UNITED STATES DISTRICT JUDGE
95
Because the court has concluded that Heartland is entitled
to summary judgment on Plaintiffs' claims, it will not address
Heartland's arguments that Plaintiffs' claims are barred by release
and waiver and the bankruptcy injunction.
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