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Haub v. Axon Downhole Tools, Inc.

United States District Court, Fifth Circuit

December 19, 2013

GARY HAUB, et al., Plaintiffs,
v.
AXON DOWNHOLE TOOLS, INC., et al., Defendants.

MEMORANDUM OPINION & ORDER

GRAY H. MILLER, District Judge.

This case began in Harris County district court when plaintiffs Gary Haub, Rex Inman, and Bart Powell (the "plaintiffs") filed a petition accusing multiple defendants of breaching an agreement, and committing several torts along the way, to purchase the plaintiffs' company HDD Rotary Sales LLC ("HDD") in bankruptcy. Dkt. 13, Ex. 2 (original petition) at 3-6.[1] Specifically, plaintiffs sued two groups of defendants: (1) the purported buyers of HDD: Gary Stratulate, Jeff Merecka, [2] Axon EP, Inc., Axon Downhole Tools, Inc., Axon Tubular Products, Inc., and Axon Energy Products, AS (collectively, the "Axon Defendants");[3] and (2) the buyers' chosen counsel: Leonard Simon and his law firm, Pendergraft & Simon, L.L.P. (collectively, the "Simon Defendants"). Id. at 1-3. Plaintiffs sued all defendants for tortious interference with contract, breach of contract, fraudulent misrepresentation, violations of the Texas Theft Liability Act, and civil conspiracy. Id. at 6-10. Plaintiffs further allege legal malpractice and violations of the Texas Deceptive Trade Practices Act ("DTPA") against the Simon Defendants only. Id. at 8-10.

The Simon Defendants removed the case to federal court on grounds that it was related to HDD's pending bankruptcy proceeding. Notice of Removal, Haub v. Axon Downhole Tools, Inc. ( In re HDD Rotary Sales, LLC ), Adv. No. 12-3236 (Bankr.S.D.Tex. May 13, 2012), Dkt. 1 ("Haub Adv."). For reasons explained further below, Judge Isgur issued a recommendation, which this court ultimately adopted, that the reference be withdrawn for a district court to adjudicate the plaintiffs' causes of action. Dkt. 1. Judge Isgur found that only a district court could exercise the constitutional power required to hear all of plaintiffs' claims, and a district court should hear the case because it implicated a potential abuse of judicial process and numerous violations of the federal Bankruptcy and Criminal Codes. Id. at 18-20.

Following withdrawal of the reference, the parties extensively briefed several issues, including whether this court should dismiss plaintiffs' petition on grounds that the claims depend on an allegedly unlawful, and thereby void, contract. Pending before the court are three motions: (1) Stratulate and Merecka's supplemental motion to dismiss (Dkt. 8); (2) Axon's supplemental motion to dismiss (Dkt. 9);[4] and (3) the Axon Defendants' motion for summary judgment. Dkt. 13. After considering the motions, responsive briefing, and applicable law, the Axon Defendants' supplemental motions to dismiss (Dkts. 8-9) are GRANTED, and plaintiffs' claims are DISMISSED WITH PREJUDICE. The Axon Defendants' motion for summary judgment (Dkt. 13) is DENIED AS MOOT.

I. BACKGROUND[5]

In June 2011, Stratulate and Merecka, on behalf of Axon, met with plaintiffs in Axon's offices in Harris County to discuss Axon's proposal to purchase HDD. Dkt. 13, Ex. 2 at 3-4. The consideration for the deal included Axon's payment of seventeen million dollars in return for HDD's assets and HDD's patented P-Tech technology. Id. at 4. Axon further proposed to (1) let plaintiffs retain a thirty-percent ownership interest in HDD, (2) pay plaintiffs an additional sum of $1, 867, 000.00, and (3) provide them with new employment contracts, including bonuses and medical benefits. Id. Before finalizing the deal, Axon began auditing HDD's accounting records. Id.

In September 2011, Stratulate and Merecka, plaintiffs, and HDD's corporate counsel Jeff Lamberth had a final meeting in Axon's offices. Id. at 4-5. Stratulate and Merecka announced that to conclude the deal, plaintiffs would have to agree to two additional conditions: (1) plaintiffs would file a Chapter 11 bankruptcy petition for HDD, and (2) do so with the assistance of a bankruptcy attorney of Axon's choice, Leonard Simon, who would represent the interests of HDD and the individual plaintiffs during the bankruptcy process. Id. Plaintiffs initially balked at Simon's representation in bankruptcy, but they relented when the defendants stated that the deal was contingent on Simon's involvement. Id. at 5 n.4. Axon further agreed to pay Simon's legal fees incurred for services to plaintiffs and HDD, and plaintiffs consented to HDD's sale for a reduced price, $9, 105, 000.00, while receiving the same individual benefits described above. Id. at 5.

Plaintiffs performed their purported obligations and Simon filed HDD's Chapter 11 bankruptcy petition on September 23, 2011. Chapter 11 Voluntary Petition, In re HDD Rotary Sales, LLC, Case No. 4:11-bk-38053 (Bankr.S.D.Tex. Sept. 23, 2011), Dkt. 1 ("HDD Bankr."). The defendants, however, did not perform their end of the bargain. Axon did not purchase HDD, nor did Axon pay plaintiffs any of the previously-contemplated additional payments or benefits. Dkt. 13, Ex. 2 at 5-6. Lastly, Axon did not pay Simon, who billed HDD approximately $290, 000.00 for his attorneys' fees and expenses related to the bankruptcy. Id.

In response, plaintiffs filed this suit on April 9, 2012. Id. The Simon Defendants removed the case on May 13, 2012, and it was assigned as an adversary proceeding to Judge Isgur, who was overseeing the HDD bankruptcy. Haub Adv. Dkt. 1. The Simon Defendants filed a motion to dismiss on May 24, 2012, arguing that plaintiffs lacked standing to bring their claims. Haub Adv. Dkt. 5. The Axon Defendants also filed a similar motion to dismiss on standing grounds. Haub Adv. Dkt. 8. Plaintiffs responded with a motion to remand, on June 8, 2012, alleging, inter alia, that the court lacked subject-matter and removal jurisdiction to hear their claims. Haub Adv. Dkt. 10.

Judge Isgur held a hearing on the various motions on July 18, 2012. Dkt. 1 at 4. On December 12, 2012, he issued a report and recommendation to the district court. Id. at 1. He recommended withdrawal of the reference for the adversary proceeding, as he found that he lacked bankruptcy jurisdiction over certain causes of action. Id. at 18. He further concluded that a district court could hear all of the claims under its supplemental jurisdiction, and it should do so to ensure federal consideration of troubling allegations regarding an abuse of the bankruptcy laws. Id.

On March 14, 2013, this court adopted Judge Isgur's report and recommendation and withdrew the reference. Dkt. 6. The court further denied plaintiffs' motion to remand (Haub Adv. Dkt. 10) and granted the defendants' motions to dismiss in part. Id. The court agreed with Judge Isgur that plaintiffs lacked standing to pursue their tortious interference claim, as it belonged exclusively to the HDD bankruptcy estate. Id.; Dkt. 1 at 10-11 ("The Plaintiffs allege intentional interference with contracts related to pipe sales. Any cause of action for tortious interference with those contracts would belong to the entity HDD, not the Plaintiffs as individuals.").

As to the plaintiffs' remaining claims, the Axon Defendants filed supplemental motions to dismiss on March 27, 2013, which the Simon Defendants joined. Dkts. 8-10. The defendants argue that if the court accepts plaintiffs' well-pleaded allegations as true, as it must on a 12(b)(6) motion to dismiss, then plaintiffs have alleged an illegal, unenforceable contract and cannot recover on their contract and related tort claims. Dkt. 8 at 2-3; Dkt. 9 at 2-3; Dkt. 10 at 1-2. The Axon Defendants also filed an alternative motion for summary judgment, offering extrinsic evidence to show that plaintiffs' claims fail on illegality and other grounds. Dkt. 13. The plaintiffs and defendants exchanged a series of responsive briefs, and the motions are ripe for disposition. Because the defendants' motions to dismiss on illegality grounds are meritorious, the court restricts its analysis to the live complaint and briefing on the motion to dismiss.

II. LEGAL STANDARD

"Federal Rule of Civil Procedure 8(a)(2) requires only a short and plain statement of the claim showing that the pleader is entitled to relief, ' in order to give the defendant fair notice of what the... claim is and the grounds upon which it rests.'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99 (1957)). "[A] complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, [but] a plaintiff's obligation to provide the grounds' of his entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. (citations omitted). In other words, to overcome a motion to dismiss for failure to state a claim, the complaint must contain sufficient factual allegations, when accepted as true, to "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937 (2009) (quoting Twombly, 550 U.S. at 570). Plaintiff demonstrates a "plausible" claim when he provides enough facts to create a reasonable expectation that discovery will produce further evidence tending to establish his claim. Twombly, 550 U.S. at 556. "Conversely, when the allegations in a ...


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