Bear Ranch, LLC v. Heartbrand Beef, Inc. et al

Filing 70

MEMORANDUM OPINION AND ORDER Granting In Part and Denying In Part 60 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM of Fraudulent Inducement (Signed by Judge Gregg Costa) Parties notified.(lusmith, 3)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
VICTORIA DIVISION
BEAR RANCH, LLC, et al,
Plaintiffs,
VS.
HEARTBRAND BEEF, INC., et al,
Defendants.

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CIVIL ACTION NO. 6:12-CV-00014

MEMORANDUM OPINION AND ORDER
This is the second phase of a dispute over specialty Akaushi cattle between
Defendant HeartBrand Beef, Inc., a cattle ranching and beef production company,
and Plaintiff Bear Ranch, LLC, one of its contracted producers. After Bear Ranch
dropped its antitrust claims and filed an amended complaint, HeartBrand and its
co-Defendants, American Akaushi Association, Inc. (AAA) and Ronald Beeman,
moved to dismiss Bear Ranch’s fraudulent inducement claims. The Court has
considered the extensive briefing, the allegations, and the relevant law, and now
GRANTS IN PART and DENIES IN PART Defendants’ Partial Motion to
Dismiss (Docket Entry No. 60).

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I.

BACKGROUND1
Akaushi cattle are a specialty breed from Japan that produce beef “prized for

its rich flavor, tenderness, and juiciness.” Docket Entry No. 59 ¶ 9. Japanese laws
“protect Akaushi cattle as a national treasure and highly restrict their export.” Id. ¶
17. In the 1990s, HeartBrand’s predecessor acquired a small number of Akaushi
breeding cattle and HeartBrand steadily increased the herd size. Id.
In July 2010, Bear Ranch purchased 424 Akaushi cattle and 10,000 units of
Akaushi semen from HeartBrand for about $2.4 million. Id. ¶ 27. The purchase
contract included restrictions such as limitations on the sale of beef labeled as
“Akaushi” and the resale of offspring of the cattle, required registration of all
offspring, and prohibitions on the collection of semen from the cattle and its
offspring.2

See id. ¶¶ 21–23.

Prior to executing the contract, Heartbrand

represented orally and in writing to Bear Ranch “that it was the only source of fullblood Akaushi cattle and genetics outside of Japan.” Id. ¶ 36.
In its original complaint, Bear Ranch alleged that its contract with
HeartBrand violated the Sherman Antitrust Act and similar laws aimed at
anticompetitive conduct, and in the alternative, sought a declaration that the
contract restrictions were unenforceable because Bear Ranch was fraudulently
1

The background section is based on allegations in Plaintiff’s First Amended Complaint, see
Docket Entry No. 59, which the Court must assume to be true at this stage. Fed. R. Civ. P. 12.
2
There is a dispute about the scope of some of these restrictions, but it is raised in a different
breach of contract claim not at issue in this motion to dismiss.
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induced to enter into the contract by HeartBrand’s representations that it was the
sole source of Akaushi cattle outside of Japan. See Docket Entry No. 1. Bear
Ranch also asserted its fraudulent inducement defense in answering Defendants’
breach of contract counterclaims. See Docket Entry No 20 ¶ 38. After extensive
discovery, Bear Ranch requested leave to amend its complaint in order to drop its
antitrust claims and add a new damages claim for fraudulent inducement. See
Docket Entry No. 43. The Court allowed Bear Ranch to amend its complaint, see
Bear Ranch, LLC v. HeartBrand Beef, Inc., 2013 WL 4520425 (S.D. Tex. Aug. 26,
2013), and Defendants subsequently filed this motion to dismiss Bear Ranch’s
fraudulent inducement claims.
II.

STANDARD OF REVIEW
Federal Rule of Civil Procedure 12(b)(6) allows dismissal if a plaintiff fails

to state a claim upon which relief may be granted. Fed. R. Civ. P. 12(b)(6). In
evaluating a Rule 12(b)(6) motion, the “court accepts all well-pleaded facts as true,
viewing them in the light most favorable to the plaintiff.” Martin K. Eby Constr.
Co., Inc. v. Dallas Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004) (citation
and internal quotation marks omitted). To survive a motion to dismiss, a claim for
relief must be “plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,
570 (2007). A claim has facial plausibility “when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the defendant is
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liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(citing Twombly, 550 U.S. at 556).
For allegations of fraud, a complaint must meet the additional pleading
standards of Rule 9(b), which requires plaintiffs to “state with particularity the
circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b); Sullivan v. Leor
Energy, LLC, 600 F.3d 542, 550–51 (5th Cir. 2010). To meet this standard, the
plaintiff must “at a minimum . . . set forth the who, what, when, where, and how of
the alleged fraud.” United States ex rel. Steury v. Cardinal Health, Inc., 625 F.3d
262, 266 (5th Cir. 2010) (citations and internal quotation marks omitted).
III.

DISCUSSION
The motion to dismiss challenges the two remedies Bear Ranch seeks for its

allegations of fraudulent inducement. The first is its new claim for the damages it
allegedly “overpaid” for the cattle as a result of being misled into believing that
HeartBrand was the sole source of Akaushi cattle outside Japan. Defendants
contend this claim fails because the overpayment allegation lacks specificity. The
second seeks a declaratory judgment that Bear Ranch has a valid defense of
fraudulent inducement to its future obligations under the contract that requires
invalidating the contractual restrictions on resale and other use of the purchased
cattle. Defendants contend the law does not provide such a remedy for fraudulent
inducement.
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A. Remedy for “Overpayment” Damages
Under Texas law, a fraudulent inducement claim has six elements: a material
representation, its falsity, either the defendant’s knowledge of the falsity or
recklessness as to a positive assertion, intent to induce reliance, the plaintiff’s entry
into a contract in reliance on the representation, and injury. See Italian Cowboy
Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 337 (Tex. 2011)
(elements of fraud); Formosa Plastics Corp. USA v. Presidio Eng’rs &
Contractors, Inc., 960 S.W.2d 41, 47–48 (Tex. 1998) (fraudulent inducement is
fraud where reliance is entry into a contract); Beijing Metals & Minerals
Import/Export Corp. v. Am. Bus. Ctr., Inc., 993 F.2d 1178, 1185 (5th Cir. 1993).
In its amended complaint, Bear Ranch includes specific details alleging the
first five elements of fraudulent inducement, see Docket Entry No. 59 ¶¶ 35–40,
and then describes its injuries resulting from the alleged fraud—the sixth
element—as “damages from overpayment for cattle” and limitations on its “ability
to sell and market its cattle and beef.” Id. ¶ 39. Defendants challenge only the
sufficiency of the sixth element because “no facts are pled to support
‘overpayment’ . . . [or] to show any injury suffered by the [contract] limitations.”
Docket Entry No. 60 at 6. The complaint does not, for example, state how much
was overpaid, or cite any other sales of Akaushi cattle that show Bear Ranch
overpaid.
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Defendants contend that this “injury” element of a fraudulent inducement
claim, like most other elements of a fraud claim,3 must satisfy Rule 9(b)’s
“particularity” requirement. Docket Entry No. 60 at 5. But Rule 9(b)'s heightened
pleading standard is limited to the “circumstances constituting fraud,” Fed R. Civ.
P. 9(b), and the “reference to ‘circumstances’ in the rule is to matters such as the
time, place, and contents of false representations or omissions, as well as the
identity of the person making the misrepresentation or failing to make a complete
disclosure and what that defendant obtained thereby.” 5A Charles Alan Wright et
al., FEDERAL PRACTICE

AND

PROCEDURE § 1297 (3d ed. 1998); see also id. (“As

has been held by a significant number of federal courts, it is the pleading of the
circumstances of the alleged fraud with a certain amount of precision that serves
the federal rule’s purpose by apprising the defendant or defendants of the nature of
the claim and the acts or statements or failures to disclose relied upon by the
plaintiff as constituting the fraud being charged against each of them.”). For this
reason, numerous courts have held that the Rule’s language does not extend the
heightened pleading requirement to allegations concerning damages in a fraud
case. See, e.g., Andrews Farms v. Calcot, Ltd., 527 F. Supp. 2d 1239, 1252 (E.D.
Cal. 2007) (“Defendants fail to cite to any authority that Rule 9(b) requires more
particular pleading for the element of damages. While Rule 9(b) requires pleading
3

Rule 9(b) omits from its requirement allegations concerning “[m]alice, intent, knowledge, and
other conditions of a person’s mind.”
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the circumstances of fraud with particularity, defendants cite no case law, and the
Court finds none, requiring that fraud damages be pled with more specificity than
required under normal notice pleading.”); Williams v. Sabin, 884 F. Supp. 294,
297 (N.D. Ill. 1995) (“Rule 9(b) does not require any greater detail in pleading
damages unless the information is necessary to give the defendant notice of the
claims against him. . . . A detailed calculation of the damages alleged to have been
incurred by the plaintiff is not necessary to give the defendant notice.”). Although
the Fifth Circuit has not directly addressed this issue, it has repeatedly described
Rule 9(b) as requiring a fraud plaintiff to allege with particularity the “who, what,
when, where, and how of the alleged fraud,” see, e.g., United States ex rel. Steury,
625 F.3d at 266, a comprehensive list that makes no mention of damages. Cf.
Interserve, Inc. v. Fusion Garage PTE Ltd., 2011 WL 500497, at *3 (N.D. Cal
2011) (“The Ninth Circuit has not addressed this issue directly, but has described
Rule 9(b) as requiring a plaintiff to allege the ‘who, what, where, when, and how’
of the charged misconduct. . . . Accordingly, Rule 9(b) may not apply to the
reliance and damages elements of a fraud claim.” (citation omitted)).
Both cases Defendants did not require a focus on whether Rule 9(b)’s
language creates a heightened pleading standard for the damages element because
they held that other elements in addition to damages were insufficiently pleaded.
See, e.g., Oppenheimer v. Prudential Sec., Inc., 94 F.3d 189, 195 (5th Cir. 1996)
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(affirming dismissal of plaintiff’s fraud claims because the complaint made no
mention of “when” the fraudulent charge was incurred—a classic Rule 9(b)
requirement—or “the extent of [plaintiff’s] damages”); Luna v. Nationwide Prop.
& Cas. Ins. Co., 798 F. Supp. 2d 821, 828–29 (S.D. Tex. 2011) (dismissing
plaintiff’s fraud claim under either a Rule 8 or 9(b) standard for a number of
reasons including the failure to allege an actionable misrepresentation and because
the alleged injury of “undervalued” property damages provided “no indication of
how and how much”). These cases also had unique factual and procedural aspects
that led the courts to require quantification of damages at the pleading stage that is
not ordinarily required. See Oppenheimer, 94 F.3d at 195 (highlighting that the
district court had specifically ordered the plaintiff “to provide the amount of the
hidden sales charge” in an order for more definite statement, which he failed to
do); Luna, 798 F. Supp. 2d at 827 (emphasizing that plaintiff’s counsel had filed
“virtually identical” pleadings in numerous other lawsuits and failed to allege facts
specific to the individual’s claim of undervalued property damages).
In contrast, Bear Ranch alleges the first five elements of fraudulent
inducement in detail and links how HeartBrand’s allegedly fraudulent claim of
exclusivity caused Bear Ranch to overpay and agree to strict contract limitations.
The injury alleged by Bear Ranch is a well understood type of damages in contract
cases, certainly a “plausible” one within the meaning of Iqbal and Twombly, and is
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easily understood in the larger context of the fraud allegations in the complaint.
Cf. Cruz v. Allstate Tex. Lloyds, 2011 WL 3502772, at *1 (S.D. Tex. Aug. 10,
2011) (“Allegations against an [insurance] adjuster like . . . undervaluing damages
. . . [are] sufficient. Surely, the Defendants in this and similar cases can, without
much intellectual effort, divine from Plaintiffs’ allegations [what Defendant] is
being accused of.”). Just as “lost wages” or “lost profits” are commonly alleged
without much additional detail in the complaint about the scope of such damages,
the “overpayment” allegation provides sufficient notice.

See Nueces Cty. v.

MERSCORP Holdings, Inc., 2013 WL 3353948, at *11 (S.D. Tex. July 3, 2013)
(“Plaintiff has stated sufficient facts upon which Defendants can prepare an
effective response and defense to all Plaintiff’s [fraudulent filing] allegations.
Nothing more is required at this stage of the litigation.” (citation omitted));
Williams, 884 F. Supp. at 297.
It may turn out to be the case, as Defendants contend, that Bear Ranch
actually got a good deal and underpaid for the cattle. But that is an evidentiary
determination that the Court cannot consider at this stage. The allegation that Bear
Ranch

suffered

“overpayment”

damages

as

a

result

of

Defendants’

misrepresentations is sufficient for it to move on to the more challenging phase at
which it will have to offer proof to support that claim.

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B. Remedy for Declaratory Relief
HeartBrand’s second basis for dismissal has more force: Bear Ranch’s claim
seeking a declaration that the contract restrictions are unenforceable is not an
available remedy under Texas law. This is the issue that led the parties to file a
surreply, a rejoinder to the surreply, a reply to the rejoinder, and a “rejoinder
(supplemental) to Plaintiff’s reply to rejoinder.”

Docket Entry Nos. 66–69.

Despite the extensive briefing and citation to numerous cases, the Court agrees
with Defendants that basic principles of contract law resolve this contentious issue.
It “is well settled that one who is induced by fraud to enter into a contract
has his choice of remedies. ‘He may stand to the bargain and recover damages for
the fraud, or he may rescind the contract, and return the thing brought, and receive
back what he paid.’” Dallas Farm Machinery Co. v. Reaves, 307 S.W.2d 233
(Tex. 1957) (quoting Blythe v. Speake, 23 Tex. 429, 436 (1859)); see also Fortune
Prod. Co. v. Conoco, Inc., 52 S.W.3d 671, 676–77 (Tex. 2000).

Thus, the

remedies available to Bear Ranch for fraudulent inducement are to either (1) fully
rescind the contract or (2) affirm the contract and recover any monetary damages
for its injuries. Bear Ranch has made it clear that it does not seek rescission and
instead plans to keep the cattle. Thus, its only remedy is damages for its injuries
from the fraud. Within that world of a damages remedy, Bear Ranch contends it
may seek a declaration excusing it from future compliance with the contract
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restrictions as “an offsetting remedy for its loss from the fraud.” Docket Entry No.
63 at 1.
Bear Ranch essentially wants to “have its steak and eat it too” by seeking to
keep the cattle it purchased under the contract yet undo part of that deal—the
contract restrictions to which it agreed. The law does not allow such partial
rescission. See Costley v. State Farm Fire & Cas. Co., 894 S.W.2d 380, 387 (Tex.
App.—Amarillo 1994, writ denied) (finding it to be the “longstanding general rule
in Texas that a rescission of a contract must be in toto.” (citing Demaret v. Bennett,
29 Tex. 262, 269 (Tex. 1867))); Nat’l Aid Life of Okl. City v. Adams, 157 S.W.2d
957, 958 (Tex. Civ. App.—Eastland 1941) (“The principle, which must rule the
judgment in this case, is, that one cannot enforce an advantage existing only by
virtue of a contract, and at the same time repudiate the contract as one not binding
upon him, thereby avoiding some of its provisions.”); Sw. Cooperage Co. v.
Kivlen, 266 S.W. 826, 829 (Tex. Civ. App—Dallas 1924, no writ) (“[Partial
rescission would] permit the [plaintiffs] to set aside the contract in part for fraud, in
so far as against their interest, and to enforce that part of the contract beneficial to
them; in other words to retain all the benefits of the contract and escape its
obligation on account of the fraud, which would be in direct violation of the
fundamental principle governing the rescission of contracts, to wit, that same must
be repudiated as a whole or affirmed as a whole.” (citations omitted)). Such a
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remedy would violate the principle that a court cannot change the terms of a
contract to which the parties agreed. See Fawcett, Ltd. v. Id. N. & Pac. R.R. Co.,
293 S.W.3d 240, 251 (Tex. App.—Eastland 2009, pet. denied) (“Equity cannot be
invoked to create a contract that the court considers should have been made but
was not.” (citations omitted)). This case well illustrates the reason for that rule.
For business reasons a court is not in the best position to understand, Heartbrand
may not have entered into a contract with Bear Ranch—even if Bear Ranch had
been willing to pay a much higher price—had it known Bear Ranch would not be
bound by the restrictions on resale.
Bear Ranch asserts that this remedy is necessary to make it whole—in
addition to the damages it claims for past harm, the declaration would prevent
ongoing future injuries resulting from the fraud.

It seeks to offset its future

performance of in-kind, or nonmonetary, consideration—the competitive conduct
restrictions that were fraudulently induced. Performance of nonmonetary, or inkind, consideration is a recognized type of injury. See Austin v. United States, 509
U.S. 602, 609–10 (1993) (referencing “in cash or in kind” payments (citations
omitted)); Anderson, Greenwood & Co. v. Martin, 44 S.W.3d 200, 212 (Tex.
App.—Houston [14th Dist.] 2001, pet. denied).

However, injuries from

performance of nonmonetary consideration are incorporated into the out-of-pocket
damages measure by quantifying their value as part of the entire “value of what
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[was] received.”

Douglas Laycock, MODERN AMERICAN REMEDIES 55 (2002)

(“[T]he victim of fraud may always recover his reliance damages: the difference
between what he paid and the value of what he received.”); see Formosa Plastics
Corp. USA v. Presidio Engineers & Contractors, Inc., 960 S.W.2d 41, 49 (Tex.
1998) (“The out-of-pocket measure allows the injured party to recover the actual
injury suffered measured by the difference between the value of that which he has
parted with, and the value of that which he has received.” (quotation marks
omitted)); see, e.g., Anderson, 44 S.W.3d at 212 (“[Plaintiff] stated they refrained
from selling their new F80 valve designed by Mr. Powell because they would
violate their contract, and this abstention cost them money.”).
Bear Ranch argues that cases granting declarations of affirmative defenses
against future monetary damages (and there are many of those) have not explicitly
held that “the fraudulent inducement defense applies only to certain types of
breach actions,” and therefore that these courts have indicated the remedy is also
available for nonmonetary obligations. See, e.g., Mason v. Peterson, 250 S.W. 142
(Tex. Comm’n App. 1923) (awarding a defense against future monetary
obligations and not addressing whether the defense would apply to hypothetical
future nonmonetary obligations). Interpreting case law based on what an opinion
does not say is dubious at best, and even more so when Bear Ranch is unable to

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cite a case ever affirmatively recognizing the relief it seeks.4 Moreover, allowing
an offset of fraud damages against future monetary obligations under a contract
makes sense because it is easy to determine whether the offset is appropriate when
both sides of the equation are expressed in monetary terms. But the remedy Bear
Ranch seeks—a declaration that it no longer has to comply with the contractual
restrictions if it proves it was defrauded—appears to omit the vital step of
determining the extent of its fraud damages. See Gage v. Langford, 615 S.W.2d
934, 940 (Tex. Civ. App.—Eastland 1981) (“[W]here the [party] retains valuable
consideration received under the contract, he must establish the extent of his
damages.”). Bear Ranch would only be entitled to offset its future compliance
with the contractual restrictions if it proved that the damages resulting from
Defendants’ fraud equaled or exceeded the value of those contract restrictions. See
id. at 937–40 (explaining that a defendant who asserted against a claim for
payment of a note the defense that the plaintiff fraudulently induced him by
misrepresenting the number of wells available on certain leases could not
automatically avoid payment of the note upon a finding of fraud but must

4

The case Bear Ranch cites for its proposition that “the [fraudulent inducement] defense likewise
applies to breach claims based on nonmonetary obligations” did not actually provide the defense
Bear Ranch seeks. See Anderson, Greenwood & Co., 44 S.W.3d 200. In Anderson, the contract
at issue had already been terminated, so the party asserting fraud was not attempting to obtain an
abatement of ongoing contractual obligations as Bear Ranch seeks. Id. at 207. Furthermore, the
plaintiff in Anderson did not raise fraudulent inducement as a defense to nonmonetary
obligations, but asserted it against the manufacturer’s claims for monetary damages. Id. at 207,
211. Thus, Anderson, nor any other case presented, has awarded the relief Bear Ranch seeks.
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“establish by jury finding the amount of damages he has incurred as a result of
[the] fraudulent representations”).

That would require placing a dollar value on

the restrictions. But once all that is accomplished and the nonmonetary terms of
the contracts are given monetary values, the court would simply be able to award
the traditional damages remedy instead of invalidating a contractual term and
offending the rule against partial rescission.
For the same reason, Bear Ranch’s policy arguments about the difficulty and
inefficiency of estimating monetary damages for future contract restrictions do not
help its cause.

Bear Ranch’s entitlement to any remedy—whether it be the

traditional “overpayment” damages it seeks or its novel theory of declaratory relief
invalidating the contract restrictions going forward—depends on it showing that
the misrepresentations caused it to enter into a “bad deal.” See Gage, 615 S.W. 2d
at 640. And proving it got a bad deal requires valuing all the consideration in the
contract, including the restrictions that were an integral part of the consideration.
So assigning a monetary value to the restrictions seems unavoidable.
While an unavoidable task, it should not be an impossible, or even a
particularly difficult, one. Economists are able to monetize all sorts of things these
days, including assets that are much further afield from the financial realm than
restrictions in a contract between two businesses. It is such a damages calculation
that will have to serve as Bear Ranch’s remedy if it proves the allegations of fraud.
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A declaration invalidating the contract terms Bear Ranch now wishes to avoid, but
to which it agreed when it obtained the cattle, is not a permissible remedy.
IV. CONCLUSION
For the reasons discussed above, Defendants’ Partial Motion to Dismiss
(Docket Entry No. 60) is GRANTED with respect to Bear Ranch’s “Second
Claim” for “Declaration of Affirmative Defense of Fraudulent Inducement of
Contract and DENIED with respect to Bear Ranch’s “First Claim” for “Fraudulent
Inducement of Contract.”
SIGNED this 26th day of November, 2013.

___________________________________

Gregg Costa
United States District Judge

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