Freilich et al v. Green Energy Resources, Inc. et al

Filing 70

ORDER DENYING 49 Motion for Leave to File Amended Complaint; GRANTING IN PART AND DENYING IN PART 56 Motion for Entry of Default on Cross-Claims against Green Energy and Murray. Signed by Judge David A. Ezra. (wg)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION

ROBERT FREILICH, an individual,
and VALERIE FREILICH, an
individual,

)
)
)
)
Plaintiffs,
)
)
vs.
)
)
GREEN ENERGY RESOURCES,
)
INC., JOSEPH MURRAY, an
)
individual, and JACK HALPERIN, an )
individual,
)
)
Defendants.
)
________________________________ )

CV. NO. SA:12-CV-577-DAE

ORDER: (1) GRANTING IN PART AND DENYING IN PART HALPERIN’S
MOTION FOR DEFAULT JUDGMENT ON CROSS-CLAIMS AGAINST
DEFENDANTS GREEN ENERGY RESOURCES AND MURRAY;
(2) DENYING PLAINTIFFS’ MOTION FOR LEAVE TO AMEND
COMPLAINT WITHOUT PREJUDICE
Before the Court is a Motion for Default Judgment on Cross-Claims
against Defendants Green Energy Resources (“Green Energy”) and Joseph Murray
(“Murray”) filed by Defendant Jack Halperin (“Halperin”) (Dkt. # 56) and a
Motion for Leave to Amend Complaint filed by Robert and Valerie Freilich
(collectively, “Plaintiffs”) (Dkt. # 49). The Court heard oral argument on both
motions on January 13, 2014. Ronald W. Armstrong, II, Esq., and Jarom Todd
1

Tefteller, Esq., appeared on behalf of Plaintiffs. Joshua J. Newcomer, Esq.,
appeared on behalf of Halperin. For the reasons that follow, the Court GRANTS
IN PART AND DENIES IN PART Halperin’s Motion for Default on
Cross-Claims against Green Energy and Murray (Dkt. # 56) and DENIES
WITHOUT PREJUDICE Plaintiffs’ Motion for Leave to Amend Complaint
(Dkt. # 49).
BACKGROUND
On June 12, 2012, Plaintiffs filed a Complaint alleging that Green
Energy—through its officer and director, Murray, and its legal counsel, Halperin—
disseminated misleading press releases that Plaintiffs acted in reliance upon,
buying $89,253.03 worth of Green Energy stock between May 22, 2006 and June
8, 2010. (“Compl.,” Dkt. # 1 ¶¶ 9–10, 12–13.) According to Plaintiffs, on June
22, 2010 the United States Securities and Exchange Commission (“SEC”)
suspended trading in Green Energy securities due to questions regarding the
accuracy of statements made by Green Energy in press releases, and Plaintiffs’
stock became worthless. (Compl. ¶¶ 11, 16.)
The Complaint asserts causes of action against Green Energy, Murray,
and Halperin for breach of fiduciary duty, negligent misrepresentation, fraud,
constructive fraud, and for violations of Section 27.01 of the Texas Business and
Commerce Code. (Id. ¶¶ 22–36.) Plaintiffs also assert claims against Halperin and
2

Murray under Section 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C.
§ 78t(a), and against Green Energy under Section 10(b) of the same act, 15 U.S.C.
§ 78j(b). (Id. ¶¶ 14–21.) Plaintiffs seek actual, consequential, and exemplary
damages; pre- and post-judgment interest; rescission of Plaintiffs’ purchases of
Green Energy stock; and attorneys’ fees. (Id. ¶ 42.) Plaintiffs also ask the Court to
impose a constructive trust on the assets obtained by Defendants in connection
with the deceptive practices Plaintiffs allege they engaged in. (Id. ¶ 39.)
On August 10, 2012, Halperin filed an Answer and Cross-Claims
against Green Energy and Murray for indemnification. (Dkt. # 19.) On August 30,
2012, Murray filed an Answer to Plaintiffs’ Complaint. (Dkt. # 23.)
On October 11, 2012, the Court granted Green Energy defense
counsel’s Motion to Withdraw. (Dkt. # 31.) On October 15, 2012, Green Energy
and Murray filed a joint Answer to Halperin’s cross-claims. (Dkt. # 32.)
However, because the Answer was filed on behalf of Green Energy by Murray
himself, acting pro se, and the Court advised Murray that a corporation cannot
appear pro se in federal court, the Court struck Green Energy’s Answer. (Dkt.
# 33.) The Court reminded Green Energy that it was required to obtain counsel
and warned Green Energy that if it failed to make an appearance through licensed
counsel by November 10, 2012, an entry of default would be entered against it.

3

(Dkt. # 33.) The Court did not, however, strike Murray’s Answer to Halperin’s
cross-claims.
On June 5, 2013, Plaintiffs filed a Motion for Default Judgment,
asking the Court to enter default judgment against Green Energy and award them
$89,253.03 in actual damages; exemplary damages; attorneys’ fees; costs of court;
pre- and post-judgment interest; and any other relief the Court deems just. (Dkt.
# 41.) The Court ordered Green Energy to appear on Friday, June 21, 2013, to
show why default judgment should not be entered against it. (Dkt. # 42.) The
Court Security Officer called for Joseph Murray and Jack Halperin in the public
area three times, but neither appeared. On July 1, 2013, the Court granted
Plaintiffs’ Motion for Entry of Default against Green Energy. (Dkt. # 48.) The
Court ordered Green Energy to pay Plaintiffs $89,253.03 for economic damages,
$150,000.00 in mental anguish, $200,000.00 for exemplary damages, $49,500.00
for attorneys’ fees, $530.00 for costs of court, and $22,832.57 for pre- and postjudgment interest. (Id. ¶ 5.)
That same day, Plaintiffs filed a Motion for Leave to Amend
Complaint that is now before the Court. (Dkt. # 49.) Halperin filed a Response on
August 5, 2013. (Dkt. # 54.)
On August 7, 2013, Halperin filed a Motion for Entry of Default
against Green Energy and Murray that is also before the Court. (Dkt. # 56.)
4

On August 18, 2013, Murray filed an Advisory to the Court asserting
that he had taken a temporary job in New Jersey in May and his mail was not
forwarded. (Dkt. # 62.) He asked the court to rescind any actions the Court may
have taken resulting in fines or contempt because he was “fully unaware of any
continuing correspondence by the Court.” (Id.) Murray did, however, aver that
“Plaintiffs’ suit is false,” as he claimed to have “irrefutable documentation
regarding each and every claim alleged.” (Id.) He also relied on the failure of the
Securities and Exchange Commission to take any action to show that “there was no
wrong doing.” (Id.)
DISCUSSION
I.

Halperin’s Motion for Default Judgment on Cross-Claims Against Green
Energy and Murray
Halperin requests default judgment against Green Energy and Murray

because he asserts that they have failed to answer or otherwise respond to his
cross-claims asserted in his Answer. (See Dkt. # 56 at 1.) Halperin’s cross-claims
against Green Energy and Murray demand indemnification for costs of defending
the action against Plaintiffs and for any damages imposed on him. (See Dkt. # 19
at 8–9.)
Federal Rule of Civil Procedure 55 sets forth conditions under which
default may be entered against a party and the procedure by which a party may
seek the entry of default judgment. If a party “against whom a judgment for
5

affirmative relief is sought has failed to plead or otherwise defend,” and “that
failure is shown by affidavit or otherwise, the clerk must enter the party’s default.”
Fed. R. Civ. P. 55(a). Judgment by default may be entered when a party entitled to
a judgment by default moves the Court for entry of such judgment. Fed. R. Civ. P.
55(b). The Fifth Circuit has concisely summarized the steps leading up to default
judgment:
A default is when a defendant has failed to plead or otherwise respond
to the complaint within the time required by the Federal Rules. An
entry of default is what the clerk enters when the default is established
by affidavit or otherwise . . . . After defendant’s default has been
entered, plaintiff may apply for a judgment based on such default.
This is a default judgment.
N.Y. Life Ins. Co. v. Brown, 84 F.3d 137, 141 (5th Cir. 1996).
A.

Entry of Default
Because Defendant Green Energy has not answered or otherwise

responded to Halperin’s cross-claims,1 the Clerk of the Court shall enter a default
against Green Energy.
However, Defendant Murray has answered Halperin’s cross-claims.
Although the Court struck Green Energy’s Answer, the Court specifically stated,
“Therefore, the Court STRIKES Defendant Green Energy Resources, Inc.’s,

1

Defendant Murray purported to file an Answer to Halperin’s cross-claims on
behalf of Green Energy. (Dkt. # 32.) However, the Court struck the Answer
because Green Energy, as a corporation, was required to be represented by licensed
counsel—not by Murray, proceeding pro se. (Dkt. # 33.)
6

answer (Doc. No. 32) to Jack Halperin’s cross-claim.” (Dkt. # 33 (emphasis
added).) Defendant Murray has answered Halperin’s cross-claims by denying the
allegations. (Dkt. # 32.) Therefore, the Clerk of the Court shall not enter default
against Murray. Halperin’s Motion for Default Judgment against Murray is
DENIED.
B.

Default Judgment
Because default judgments are seen as drastic remedies, “a party is not

entitled to a default judgment as a matter of right, even where the defendant is
technically in default.” Ganther v. Ingle, 75 F.3d 207, 212 (5th Cir. 1996). This is
precisely because “[a] default judgment is a judgment on the merits that
conclusively establishes the defendant’s liability.” United States v. Shipco Gen.,
Inc., 814 F.2d 1011, 1014 (5th Cir. 1987). “There must be a sufficient basis in the
pleadings for the judgment entered; a request for default judgment may be denied
when the complaint is insufficient. Nishimatsu Constr. Co., Ltd. v. Houston Nat’l
Bank, 515 F.2d 1200, 1206 (5th Cir. 1975). Entering a default judgment is solely
within the discretion of the district court. Mason v. Lister, 562 F.2d 343, 345 (5th
Cir. 1977).
After a default judgment is entered, all well-pleaded factual
allegations in the plaintiff’s complaint are taken as true—except the amount of
damages. Shipco Gen., 814 F.2d at 1014. Unless the amount claimed is a
7

liquidated sum or otherwise capable of mathematical calculation, damages should
not be awarded pursuant to a default judgment “without a hearing or detailed
affidavits establishing the necessary facts.” United Artists Corp. v. Freeman, 605
F.2d 854, 857 (5th Cir. 1979); see also Fed. R. Civ. P. 55(b)(2) (providing that the
Court may conduct hearings when, to enter or effectuate judgment, it must conduct
an accounting, determine the amount of damages, establish the truth of any
allegation by evidence, or investigate any other matter).
Halperin’s cross-claims aver that pursuant to the by-laws of Green
Energy, Halperin is entitled to full indemnification from Green Energy for the
costs of defending this action and for any damages imposed on him. (See Dkt.
# 19 ¶ 50.) The Court finds that there is a sufficient basis for the indemnification.
Accordingly, the Court GRANTS default judgment against Green
Energy on Halperin’s cross-claims given Green Energy’s lack of a response to
Halperin’s cross-claims. However, because the amount of damages is not certain
at this time, and Halperin has not furnished an affidavit detailing the amount of
damages, Halperin is, therefore, ORDERED to prepare to present evidence to the
Court establishing the amount of damages he alleges he is due.
II.

Plaintiffs’ Motion for Leave to Amend
Plaintiffs filed their Motion for Leave to Amend “as a result of the

Final Judgment entered on July 1, 2013, against Defendant Green Energy
8

Resources, Inc.” (Dkt. # 49 at 1.) Plaintiffs seek leave to amend their complaint
“to include claims holding Defendant Murray and Defendant Halperin liable to
Plaintiffs as the alter-egos of Defendant Green Energy Resources, Inc.” (Id.) In
Plaintiffs’ proposed First Amended Complaint, attached to their Motion for Leave
to Amend as an exhibit, Plaintiffs add the following excerpt:
XII. ALTER-EGO LIABILITY
37) Plaintiffs incorporate paragraphs 9 through 36 above, as if fully
set forth herein.
38) Defendant Joseph Murray, Individually, is jointly and severally
liable for the conduct of Green Energy Resources, Inc. and for
payment of any judgment rendered against Defendant Green Energy
Resources, Inc. because Defendant Joseph Murray is the alter-ego of
Defendant Green Energy Resources, Inc. By the same token,
Defendant Jack Halperin, Individually, is also jointly and severally
liable for the conduct of Green Energy Resources, Inc. and for
payment of any judgment rendered against Defendant Green Energy
Resources, Inc. because Defendant Jack Halperin is also the alter-ego
of Defendant Green Energy Resources, Inc.
(Dkt. # 49, Ex. A. at 16.)
Under Federal Rule of Civil Procedure 15(a), leave to amend “shall be
freely given when justice so requires.” While granting leave to amend is entrusted
to the discretion of the trial court, Parish v. Frazier, 195 F.3d 761, 763 (5th Cir.
1999), the Fifth Circuit has explained that “the term ‘discretion’ in this context
‘may be misleading, because Fed. R. Civ. P. 15(a) evinces a bias in favor of
granting leave to amend.’” Mayeaux v. La. Health Serv. and Indem. Co., 376 F.3d
9

420, 425 (5th Cir. 2004). “[I]f the court lacks a substantial reason to deny leave,
its discretion is not broad enough to permit denial.” State of La. v. Litton Mortg.
Co., 50 F.3d 1298, 1303 (5th Cir. 1995) (emphasis added) (internal quotation
marks omitted). Following the Supreme Court’s guidance, the Fifth Circuit uses
five factors to determine whether to grant a party leave to amend a complaint: (1)
undue delay, (2) bad faith or dilatory motive, (3) repeated failure to cure
deficiencies by previous amendments, (4) undue prejudice to the opposing party,
and (5) futility of the amendment. Rosenzweig v. Azurix Corp., 332 F.3d 854, 864
(5th Cir. 2003) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)). Absent any of
these factors, leave should be “freely given.”
A.

Futility of Amendment
Halperin argues that granting Plaintiffs’ Motion to Amend would be

futile because Plaintiffs fail to “allege the elements necessary for recovery under
the ‘alter ego’ theory.” (Dkt. # 54 at 2.)
It is well within the district court’s discretion to deny a motion to
amend if it is futile. See Martin’s Herend Imports, Inc. v. Diamond & Gem
Trading U.S. Am. Co., 195 F.3d 765, 770 (5th Cir. 1999). The Fifth Circuit has
defined “futility” to mean that the amended complaint would fail to state a claim
upon which relief could be granted. Stripling v. Jordan Prod. Co., LLC, 234 F.3d
863, 873 (5th Cir. 2000). To determine futility, the Fifth Circuit instructs that
10

district courts are to “apply the same standard of legal sufficiency as applies under
Rule 12(b)(6).” Id. (internal citations and quotation marks omitted).
“The question therefore is whether in the light most favorable to the
plaintiff and with every doubt resolved in his behalf, the complaint states any valid
claim for relief.” Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498 (5th
Cir. 2000) (internal quotations omitted) (quoting Lowrey v. Tex. A & M Univ.
Sys., 117 F.3d 242, 247 (5th Cir. 1997)). To survive a Rule 12(b)(6) motion to
dismiss, the plaintiff must plead “enough facts to state a claim to relief that is
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 liable for the
misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A complaint
need not include detailed facts to survive a Rule 12(b)(6) motion to dismiss. See
Twombly, 550 U.S. at 555–56. In providing grounds for relief, however, a
plaintiff must do more than recite the formulaic elements of a cause of action. See
id. at 556–57. Thus, although all reasonable inferences will be resolved in favor of
the plaintiff, the plaintiff must plead “specific facts, not mere conclusory
allegations.” Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061, 1067 (5th Cir.
1994); see also Plotkin v. IP Axess Inc., 407 F.3d 690, 696 (5th Cir. 2005) (“We

11

do not accept as true conclusory allegations, unwarranted factual inferences, or
legal conclusions.”).
To prove an alter ego relationship exists between a corporation and an
individual, a plaintiff must show that “there is such unity between corporation and
individual [or parent corporation] that the separateness of the corporation has
ceased and holding only the corporation liable would result in an injustice.”
Gibraltar Sav. v. LDBrinkman Corp., 860 F.2d 1275, 1288 (5th Cir. 1988). Factors
to be considered include “the degree to which corporate formalities have been
followed and corporate and individual property have been kept separately, the
amount of financial interest, ownership and control the individual [or parent]
maintains over the corporation, and whether the corporation has been used for
personal [or parental] purposes.” Id.
Here, Halperin is correct that Plaintiffs’ proposed First Amended
Complaint in its present form does not furnish sufficient evidence to demonstrate
that Murray and Halperin were alter egos of Green Energy and as such, granting
Plaintiffs leave to amend would be futile. Plaintiffs’ First Amended Complaint
lacks any factual allegation that Murray and Halperin used Green Energy for
personal purposes. See Galvan v. Caviness Packing Co., Inc., 546 F. Supp. 2d 371,
379 (N.D. Tex. 2008) (holding that because there was no evidence of the level of
entanglement between the individuals and the corporation, no evidence of financial
12

information, and no evidence that individuals used the corporation for personal
purposes, the alter ego doctrine did not apply). Rather, the proposed First
Amended Complaint merely recites conclusory allegations that Halperin and
Murray are the alter egos of Green Energy. (See Dkt. # 49, Ex. A at 16.) Without
additional factual support, such conclusory allegations are insufficient under
Twombly and Iqbal. See Med. Supply Chain, Inc. v. Gen. Elec. Co., 144 F. App’x.
708, 713 (10th Cir. 2005) (affirming ruling that complaint failed to adequately
plead alter ego claim because it lacked any “factual allegations to support these
conclusory statements.”); De Jesus v. Sears, Roebuck & Co., 87 F.3d 65, 70 (2d
Cir. 1996) (affirming dismissal of alter ego claim because the pleadings were
“devoid of any specific facts or circumstances supporting this assertion”).
Because Plaintiffs have not set forth sufficient factual detail to support their alter
ego theory, their proposed Amended Complaint would fail to state a claim upon
which relief could be granted. Accordingly, granting Plaintiffs leave to amend
their Complaint with their proposed Amended Complaint would be futile. See
Stripling, 234 F.3d at 873 (holding that it is futile to grant leave to amend
complaint when amended complaint would fail to state a claim).
B.

Amending Complaint Requires Setting Aside Default Judgment
Although not listed as a Foman factor, Halperin also argues that the

Court should deny Plaintiffs’ Motion to Amend their Complaint because Plaintiffs
13

must first move to alter or amend the default judgment levied against Green
Energy under Federal Rule of Civil Procedure 59. (Dkt. # 54 at 1–2.)
It is well-settled in the Fifth Circuit that an amended complaint
supersedes the original complaint, and the original complaint has no legal effect,
except to the extent that it is incorporated by reference into the amended
complaint. See Easton v. Holt, 73 F.3d 600, 603 (5th Cir. 1996) (noting that Fifth
Circuit jurisprudence consistently reminds that an amended complaint supersedes
the original complaint); King v. Dogan, 31 F.3d 344, 346 (5th Cir. 1994) (“An
amended complaint supersedes the original complaint and renders it of no legal
effect unless the amended complaint specifically refers to and adopts or
incorporates by reference the earlier pleading.”).
Given that Fifth Circuit jurisprudence holds that an amended
complaint supersedes the original complaint in its entirety, district courts routinely
set aside entries of defaults when plaintiffs file amended complaints. See, e.g.,
Rossignol v. Tillman, Civil Action No. 10-3044, 2011 WL 1193017, at *2 (E.D.
La. Mar. 25, 2011) (“[B]ecause the petition is superseded by plaintiffs’ third
supplemental and amending petition, the Court grants defendants’ motion to set
aside the entries of default.”); Greater St. Louis Constr. Laborers Welfare Fund v.
A.G. Mack Contracting Co., No. 08–1947, 2009 WL 2916841, at *1 (E.D. Mo.
Sept. 4, 2009) (setting aside entry of default because plaintiff filed an amended
14

complaint); United States ex rel. SimplexGrinnel, L.P. v. Aegis Ins. Co., No. 08–
1728, 2009 WL 577286, at *1–2 (M.D. Pa. Mar. 5, 2009) (setting aside entry of
default because after plaintiff filed an amended complaint, “the original complaint
no longer exists”).
Although relief from a default judgment is usually granted on a
motion filed by the defaulting party, district courts have the discretion to grant
such relief sua sponte.” McDowell v. Celebrezze, 310 F.2d 43, 44 (5th Cir. 1962);
see also Hayes v. Miller, 292 F. App’x 389, 390 (5th Cir. 2008) (recognizing that a
district court may initiate relief under Rule 60(b) on its own motion). If a district
court does set aside a default judgment sua sponte, the Court must first notify the
parties in writing or provide “reasonable notice” to interested parties. Hayes, 292
F. App’x at 390–91.
At the hearing, Plaintiffs were unaware that amending their Complaint
would require the Court to set aside their default judgment.2 Given that Plaintiffs
indicated that they only sought to amend their Complaint and did not realize the
potential consequences of amendment, the Court declines to sua sponte set aside
the default judgment. Consequently, the Court DENIES WITHOUT
PREJUDICE Plaintiffs’ Motion for Leave to File an Amended Complaint because
Plaintiffs indicated that they sought to assess their default judgment against Green
Energy on Murray and Halperin by amending their Complaint to assert an alter ego
theory. However, allowing Plaintiffs to proceed in that fashion would operate as
an end-run around the due process protections afforded to Murray and Halperin.
15
2

doing so would trigger setting aside the default judgment. Plaintiffs must first
move to set aside the default judgment against Green Energy before amending
their Complaint to assert an alter ego theory, or may do so simultaneously.
CONCLUSION
Based on the foregoing reasons, the Court GRANTS IN PART AND
DENIES IN PART Halperin’s Motion for Default on Cross-Claims against Green
Energy and Murray (Dkt. # 56) and DENIES WITHOUT PREJUDICE
Plaintiffs’ Motion for Leave to Amend Complaint (Dkt. # 49).
IT IS SO ORDERED.
DATED: San Antonio, Texas, January 16, 2014.

_____________________________________
David Alan Ezra
Senior United States Distict Judge

16