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Northern Frac Proppants, II, LLC v. 2011 NF Holdings, LLC

Court of Appeals of Texas, Fifth District, Dallas

July 27, 2017

NORTHERN FRAC PROPPANTS, II, LLC, LAMSTEX MATERIAL HANDLING, LLC, AND JEFFRIES ALSTON, Appellants
v.
2011 NF HOLDINGS, LLC F/K/A NF HOLDINGS, LLC AND NORTHERN FRAC PROPPANTS, LLC, AND ITS SERIES SUBSIDIARIES, Appellees BADGER MINING CORPORATION, Appellant
v.
2011 NF HOLDINGS, LLC F/K/A NF HOLDINGS, LLC AND NORTHERN FRAC PROPPANTS, LLC, AND ITS SERIES SUBSIDIARIES, Appellees 2011 NF HOLDINGS, LLC F/K/A NF HOLDINGS, LLC AND NORTHERN FRAC PROPPANTS, LLC, AND ITS SERIES SUBSIDIARIES, Appellants
v.
J & P CAPITAL, LLC AND PATRICK A. TESSON, Appellees

         On Appeal from the 162nd Judicial District Court Dallas County, Texas Trial Court Cause No. DC-15-01754

          Before Justices Lang, Brown, and Whitehill

          MEMORANDUM OPINION

          BILL WHITEHILL, JUSTICE

         This is an interlocutory appeal from orders granting and denying special appearances.

         Plaintiffs 2011 NF Holdings, LLC f/k/a NF Holdings, LLC, and Northern Frac Proppants, LLC, and its series subsidiaries sued six defendants on a variety of commercial torts. All defendants filed special appearances challenging personal jurisdiction. The trial court granted two defendants' special appearances and denied the others. The four defendants who lost their special appearances appealed, and plaintiffs appealed as to the two defendants whose special appearances were granted. We thus address six special appearances, all tied to the same series of transactions.

         Although we address both general and specific personal jurisdiction over each defendant, this appeal presents this central specific jurisdiction question: Do non-Texas residents who acquire and sell Wisconsin sand mines and related rights purposefully avail themselves of Texas if (i) Texas companies claim to be the assets' rightful owners and (ii) the non-residents know that much of the sand produced in Wisconsin will be sold to customers for use in Texas fracing[1]operations? We conclude that the answer is no based on this case's particular facts.

         Because Texas cannot constitutionally exercise either specific or general personal jurisdiction over any defendant, we affirm in part, reverse in part, and render judgment dismissing the case for lack of personal jurisdiction.

         I. Background

         Because plaintiffs are both appellants and appellees in this appeal, we will generally refer to the parties as "plaintiffs" and "defendants" instead of appellants and appellees.

         A. The Parties

         1. The Plaintiffs

         The plaintiffs are:

2011 NF Holdings, LLC f/k/a NF Holdings, LLC (NF Holdings) is a Delaware limited liability company with its principal office in Richardson, Texas.

         Northern Frac Proppants, LLC (NFP I) is a Delaware series limited liability company. [2]Plaintiffs allege that NFP I's principal office is in Richardson, Texas, but NFP I's limited liability company agreement reflects that its principal place of business is in Alexandria, Minnesota.

         Northern Frac Proppants Series-1, LLC (NFP Series-1) is a limited liability company with its principal office in Richardson, Texas. NFP Series-1 is an NFP I series subsidiary.

         Northern Frac Proppants Series-2, LLC (NFP Series-2) is a limited liability company with its principal office in Richardson, Texas. NFP Series-2 is an NFP I series subsidiary.

         Plaintiffs are (i) appellees regarding Northern Frac Proppants, II, LLC's, Lamstex Material Handling, LLC's, Jeffries Alston's, and Badger Mining Corporation's appeals from the trial court's orders denying their special appearances and (ii) appellants regarding the trial court's orders granting J&P Capital, LLC's and Patrick A. Tesson's special appearances.

         2. The Defendants

         The defendants are:

Northern Frac Proppants II, LLC (NFP II), a Delaware limited liability company. Plaintiffs allege that NFP II's principal place of business is in Houston, Texas.
Jeffries Alston, a Louisiana resident.
Lamstex Material Handling, LLC, which claims to be a Louisiana entity with Alston as its sole member.
Badger Mining Corporation, a Wisconsin corporation.
J&P Capital, LLC, [3] a Louisiana limited liability company.
Patrick A. Tesson, a Florida resident.

         B. Factual Allegations

         We draw these allegations from plaintiffs' live petition and their trial court brief opposing defendants' special appearances. See Flanagan v. Royal Body Care, Inc., 232 S.W.3d 369, 374 (Tex. App.-Dallas 2007, pet. denied) (a court considers the plaintiff's allegations in both its pleadings and its special appearance response).

         Recent technology advances have increased domestic oil and gas production through hydraulic fracturing or "fracing." Fracing involves using pressure to force proprietary liquids and special sand into the ground through a well bore to the producing zone. There, the liquids and sand open fractures in the formation that holds the hydrocarbons, thereby permitting the hydrocarbons to be recovered and sold. The sand used in fracing is called frac sand, and most or all frac quality sand is located in Wisconsin and Minnesota. This case involves the commercial exploitation of frac sand.

         In 2010 and 2011, these individuals began to explore entering the frac sand business: (i) James R. "Rusty" Miller and Richard E. Payne, who had offices in Richardson, Texas; (ii) Kenneth Landgaard, a Minnesotan (iii) Eugene E. Noonan, a Wisconsin land man, and (iv) defendant-appellant Jeffries Alston, a Louisiana engineer.[4] This group formed limited liability companies that in turn leased frac sand sites in Wisconsin and Minnesota.

         The group unanimously agreed to hire a Dallas, Texas law firm to formulate a suitable corporate structure. In September 2011, that firm formed NF Holdings to hold the group's assets, including trade secrets and confidentiality agreements. Miller and Payne served as two of NF Holdings' managers and officers.

         According to the initial estimate, the nascent frac sand business needed $150 million in funding. So, NF Holdings contracted with Windward Capital, LLC, to help raise that funding.

         In late 2012, Landgaard organized and chartered NFP I. NFP I had two series subsidiaries, NFP Series-1 and NFP Series-2. NFP I was intended to serve as NF Holdings' successor and to bring the frac sand business to completion. In 2012-2013, a detailed business plan was finalized and a marketing website was created.

         The boundaries between NF Holdings and NFP I, however, blurred as (i) NFP I began to use the website and (ii) NF Holdings' principals began to use NFP I business cards and advertising materials.

         In April 2013, NFP Series-2 acquired rights in a frac sand quarry in Goose Landing in Alma Center, Wisconsin. That same month, NFP Series-1 entered into a contract to sell frac sand, resulting in positive cash flow. NFP Series-2 eventually acquired the Goose Landing quarry outright.

         Alston allegedly embarked on a scheme to steal the frac sand business's assets. In August 2013, without plaintiffs' knowledge, he used Baker Botts's Houston office to charter defendant-appellant NFP II. Noonan and Windward Capital were members of NFP II.

         The plaintiffs and defendant group entities are shown below:

         (IMAGE OMITTED)

         In late 2013, NFP II obtained $77 million in funding from Deutsche Bank. At this same time, NFP II also began using the existing frac sand business's assets and trade secrets. In plaintiffs' words, those assets and trade secrets "magically and mysteriously appeared" within NFP II. NFP II also began using plaintiffs' website and conducted a frac sand business with many Texas contacts. At some point, Alston filed a fraudulent certificate of cancellation for NFP I.

         Defendants-appellees Tesson and J&P got involved in 2014. Tesson and Alston founded J&P in April of that year. J&P purportedly invested millions of dollars in NFP II in exchange for preferred equity, and Tesson became an NFP II manager and co-CEO.

         Also during 2014, the Goose Landing Plant came on line to process and sell sand.

         In late 2014, NFP II began secret negotiations to sell the frac sand enterprise to defendant-appellant Badger.

         C. Procedural History

         In February 2015, NF Holdings sued appellants NFP II, Alston, Lamstex, and others not relevant to this appeal. The original petition alleged most of the facts recited above, asserted several claims, and sought to enjoin NFP II from transferring its assets. NFP II, Lamstex, and Alston filed special appearances.

         Three months later, NF Holdings filed a second amended original petition that added NFP Series-1 as a plaintiff and Tesson, J&P, and Badger as defendants. This petition alleged that Tesson had testified in court that NFP II sold the "Frac Sand Enterprise" to Badger in a transaction that closed in April 2015. Tesson, J&P, and Badger also filed special appearances.

         An October 2015 third amended petition changed the plaintiffs to NF Holdings, NFP I, and NFP I's series subsidiaries. It also dropped some defendants, leaving only NFP II, Lamstex, Alston, Badger, Tesson, and J&P as defendants.

         The plaintiffs filed a fourth amended petition against the same defendants a few days later. That petition, which is the live pleading, asserts (i) statutory misappropriation of trade secrets; (ii) common law misappropriation of trade secrets; (iii) conversion; (iv) fraudulent transfer; and (v) conspiracy claims against all defendants. It also asserts a fiduciary breach claim against Alston. The petition further alleges that general and specific personal jurisdiction apply to all defendants.

         The parties filed special appearance briefs, evidence, and objections to and motions to strike their opponents' evidence.

         The trial court held a hearing at which plaintiffs introduced deposition excerpts and documents into evidence. The trial court later granted Tesson's and J&P's special appearances and denied the rest. The parties requested findings of fact and conclusions of law, but the trial court never made any.

         Alston, NFP II, and Lamstex filed a joint notice of interlocutory appeal; Badger filed a separate notice of appeal; and plaintiffs also filed a joint notice of appeal.

         The trial court later ruled on some of the objections and motions to strike evidence.

         II. Applicable Law

         A. The Law of Personal Jurisdiction

         Because the Texas long-arm statute, civil practice and remedies code § 17.042, reaches as far as due process allows, Texas courts may exercise personal jurisdiction over a nonresident defendant if (i) the defendant has minimum contacts with Texas and (ii) the exercise of jurisdiction comports with traditional notions of fair play and substantial justice. Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569, 575 (Tex. 2007).

         The minimum contacts test focuses on whether the defendant has purposefully availed itself of the privilege of conducting activities in the forum state. See Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777, 784 (Tex. 2005). In making this determination, we consider (i) only the defendant's own actions and not the unilateral activity of another, (ii) whether the defendant's actions were purposeful rather than random, isolated, or fortuitous, and (iii) whether the defendant sought some benefit, advantage, or profit by availing itself of the privilege of doing business in Texas. Id. at 785. "[J]urisdictional analysis always centers on the defendant's actions and choices to enter the forum state and conduct business." Kelly v. Gen. Interior Constr., Inc., 301 S.W.3d 653, 660 (Tex. 2010) (emphasis original). The minimum contacts test varies depending on whether the plaintiff relies on "specific jurisdiction" or "general jurisdiction." Lensing v. Card, 417 S.W.3d 152, 156 (Tex. App.-Dallas 2013, no pet.).

         For specific jurisdiction, minimum contacts are present if (i) the defendant purposefully availed itself of the forum state and (ii) there is a substantial connection between the defendant's forum contacts and the operative facts of the litigation. Id. We focus on the relationship among the defendant, the forum, and the litigation. Moki Mac, 221 S.W.3d at 575-76.

         Additionally, a nonresident's knowledge that its conduct outside the forum state will cause harmful effects to a forum resident, without more, is insufficient to create specific jurisdiction minimum contacts. See, e.g., Walden v. Fiore, 134 S.Ct. 1115, 1125 (2014); Searcy v. Parex Res., Inc., 496 S.W.3d 58, 68-69 (Tex. 2016).

         Furthermore, specific jurisdiction requires a claim-by-claim analysis unless all claims arise from the same forum contacts. Lensing, 417 S.W.3d at 156.

         If, however, the plaintiff's claims are unrelated to the defendant's forum contacts, the plaintiff must rely on general jurisdiction. General jurisdiction is proper only if the defendant's forum contacts are so continuous and systematic that the defendant is essentially at home in the forum state. See TV Azteca v. Ruiz, 490 S.W.3d 29, 37 (Tex. 2016). This "at home" standard means that the defendant's forum activities must be "comparable to a domestic enterprise" in the forum state. Daimler AG v. Bauman, 134 S.Ct. 746, 758 n.11 (2014).

         For a corporation, its state of incorporation and its principal place of business are paradigm bases for general jurisdiction. Id. Daimler, however, left open the possibility that in an "exceptional case" a corporation's operations in another state might be so substantial as to render it "at home" there. Id. at 761 n.19. But the Court recently explained that Perkins v. Benguet Consolidated Mining Co., 342 U.S. 437 (1952), in which Ohio was held to have jurisdiction over a Philippines corporation that had, during World War II, conducted its limited operations in Ohio, exemplified the "exceptional case" mentioned in Daimler. BNSF Ry. Co. v. Tyrrell, 137 S.Ct. 1549, 1558 (2017).

         "For an individual, the paradigm forum for the exercise of general jurisdiction is the individual's domicile . . . ." Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 924 (2011).

         But, even if minimum contacts are present, a state may not exercise personal jurisdiction over a nonresident defendant if doing so would violate traditional notions of fair play and substantial justice. Id. at 407. In this inquiry, relevant factors include (i) the burden on the defendant, (ii) the forum's interest in adjudicating the dispute, (iii) the plaintiff's interest in convenient and effective relief, (iv) the interstate judicial system's interest in the most efficient resolution of controversies, and (v) the states' shared interest in furthering substantive social policies. Id.

         B. The Parties' Burdens and the Standard of Review

         The plaintiff bears the initial burden to plead sufficient facts to bring a nonresident defendant within the long-arm statute's reach. Moki Mac, 221 S.W.3d at 574. "The plaintiff can satisfy this initial burden by alleging that a nonresident defendant is doing business in Texas." Proctor v. Buell, 293 S.W.3d 924, 930 (Tex. App.-Dallas 2009, no pet.). Doing business in this context includes (i) contracting with a Texas resident where either party is to perform the contract in whole or in part in Texas or (ii) committing a tort in whole or in part in Texas. See Tex. Civ. Prac. & Rem. Code § 17.042. We consider the allegations in both the plaintiff's live pleading and its special appearance response. Flanagan, 232 S.W.3d at 374.

         If the plaintiff carries its burden, the defendant must then negate all pled jurisdictional bases.[5] Proctor, 293 S.W.3d at 930. The defendant can do this: (i) factually, by presenting evidence establishing that its Texas contacts are insufficient and thus effectively disproving the plaintiff's allegations, or (ii) legally, by showing that even if the plaintiff's alleged facts are true they are legally insufficient to support jurisdiction. Kelly, 301 S.W.3d at 659.

         Whether a court can exercise jurisdiction over a nonresident is a question of law. Id. at 657. We thus review de novo a trial court's order granting or denying a special appearance. Moki Mac, 221 S.W.3d at 574.

         When deciding a special appearance, the trial court must resolve any factual disputes that arise. Am. Type Culture Collection, Inc., v. Coleman, 83 S.W.3d 801, 805-06 (Tex. 2002). The court, however, must accept as true the clear, direct, and positive evidence of an undisputed affidavit, even one by a party's agent. Nacho Remodeling Co., Inc. v. Calsherm Partners, L.P., No. 05-14-00048-CV, 2014 WL 3828219, at *4 (Tex. App.-Dallas Aug. 5, 2014, no pet.) (mem. op.).

         If the trial court does not file findings of fact and conclusions of law, we imply all fact findings necessary to support the judgment and supported by the evidence. Lensing, 417 S.W.3d at 155. But implied findings are not conclusive and may be challenged on appeal for legal and factual sufficiency of the evidence. Id.

         III. The Alston Defendants' Appeal

         Defendants Alston, Lamstex, and NFP II (the "Alston defendants") filed a joint appellants' brief. Their first three issues argue that the trial court erred by denying their respective special appearances. Their fourth issue argues that the trial court erred by overruling certain objections to two affidavits and attachments that plaintiffs filed and relied on. For the following reasons, we sustain the Alston defendants' first three issues and conclude that the trial court erred by denying their special appearances. Accordingly, we need not address their fourth issue.

         A. The Alston Defendants' First Issue: Did the trial court err by denying Alston's special appearance?

         We start with Alston because he is at the center of the alleged conspiracy to steal plaintiffs' assets. We first outline his Texas contacts and then determine whether they satisfy the minimum contacts test for general or specific jurisdiction.

         1. What are Alston's Texas contacts?

         Plaintiffs allege both that (i) Alston individually has contacts with Texas and (ii) the Texas contacts of certain business entities should be imputed to him under the alter ego doctrine. Accordingly, we first decide whether any other entity's Texas contacts should be treated as his contacts for jurisdictional purposes. We conclude that they should not because plaintiffs adduced no evidence that any of these entities were his alter ego.

         a. Alter Ego Allegations

         A plaintiff bears the burden of both pleading and proving a jurisdictional veil-piercing theory. See PHC-Minden, L.P. v. Kimberly-Clark Corp., 235 S.W.3d 163, 173 (Tex. 2007). Under an alter ego theory, a plaintiff must prove that the entity's owner (i) controls the entity's internal business operations and affairs and (ii) exercises a degree of control greater than that normally associated with ownership and directorship. Id. at 175. The control must be so great that the entity ceases to be a separate entity. Id. Alter ego cannot be based on mere stock ownership, duplication of some or all directors or officers, or exercise of the control that stock ownership gives to stockholders. Id. Moreover, an entity's owner may monitor the entity's performance, supervise its financial and capital budget decisions, and articulate general policies without becoming fused to the entity for jurisdictional purposes. Id. at 176.

         Here, plaintiffs allege four entities as potentially supporting an alter ego theory against Alston: NFP I, NFP II, Alston Equipment Company (AEC), and Lamstex. Alston asserts there is no evidence to support plaintiffs' alter ego theories for any such entity. We agree.

         NFP I

         Plaintiffs do not allege that Alston exercised an unusual degree of control over NFP I that would justify imputing NFP I's contacts to him. They instead allege only that Alston filed a certificate of cancellation with the Delaware secretary of state to dissolve NFP I. Although this allegation is supported with evidence, that fact does not show that Alston exercised an unusual degree of control over NFP I's operations and affairs for alter ego purposes. Thus, NFP I's Texas contacts may not be imputed to Alston.

         AEC

         As to AEC, plaintiffs allege that it is a Louisiana company authorized to do business in Texas. In an affidavit, Alston testified that he owns AEC and founded it in 1985 in Amite, Louisiana. He further said that Amite, Louisiana, has always been AEC's principal place of business. Although plaintiffs' appellees' brief asserts that "[f]or all intents and purposes, Alston is AEC, " they cite no evidence showing that Alston exerts an unusual degree of control over AEC, nor have we found any in the record. Accordingly, plaintiffs adduced no evidence that AEC was Alston's alter ego.

         Lamstex

         Plaintiffs allege that Lamstex is a Louisiana limited liability company, but they allege no specific facts to show that Lamstex is Alston's alter ego. Although their brief argues that "Alston is . . . Lamstex, " the evidence they cite is Alston's deposition testimony that Lamstex was not currently "an ongoing concern" and that based on his accountant's advice he was going to "[j]ust let it sit." This evidence does not show that Alston exerted an unusual degree of control over Lamstex, nor have we found such evidence elsewhere in the record. Accordingly plaintiffs adduced no evidence that Lamstex was Alston's alter ego.

         NFP II

         Finally we consider whether plaintiffs adduced sufficient evidence that NFP II was Alston's alter ego. Alston executed an affidavit on behalf of NFP II in which he said that NFP II is a limited liability company formed under Delaware law on August 22, 2013, and that he is its president and CEO.

         Plaintiffs pled and re-urge on appeal that Alston operated NFP II as if corporate formalities did not exist, but they offer no specific facts to support the assertion. Instead, they refer vaguely to other lawsuits filed against Alston and NFP II by NFP II's minority members, contending that the pleadings in those suits contain "additional allegations" about Alston's disregard of corporate formalities. We have reviewed those pleadings, which plaintiffs filed in this case as evidence. Although those pleadings accuse Alston of wrongdoing against NFP II and its minority members, we see no specific allegations in them, or any record evidence, establishing that Alston exercised enough control over NFP II to permit jurisdictional veil-piercing under PHC-Minden.

         In sum, there is no evidence that Alston exercised more than normal investor and director control over NFP I, NFP II, AEC, or Lamstex. Accordingly, those entities' Texas contacts are not imputed to him.

         b. What are Alston's non-alter ego based Texas contacts?

         Plaintiffs allege that the following facts support specific jurisdiction over Alston:

• Alston "took charge in the theft of" assets such as leases, options, and other real estate interests by creating NFP II and transferring the assets into NFP II. The stolen assets "impacted commerce within Texas, " and the theft was aimed at Texas companies.
• Alston also stole trade secrets such as customer lists, business plans, and models. These thefts were also aimed at a Texas company and "directly impact[ed] Texas commerce."
• The fraudulent transfer to Badger was an improper sale of assets rightfully belonging to Texas companies. It was a tort aimed at Texas companies that affected Texas commerce and harmed Texas companies and individuals.
• Alston's fiduciary breaches were directly aimed at plaintiffs, "both Texas companies."
• Alston conspired with the other defendants to accomplish the fraudulent transfer to Badger.

         Plaintiffs allege these additional facts support general jurisdiction against Alston:

• His principal place of business is his pickup truck, which is outfitted with state-of-the-art electronics allowing him to communicate and transact business wherever he is. When he is not at his home in Louisiana, he is generally in Texas, transacting business.
• He is the president, sole director, and primary stockholder of AEC, a Louisiana corporation authorized to do business in Texas. AEC's website identifies its offices as being in Houston and Rockwall, Texas. AEC's marketing materials claim that AEC has four offices that cover Louisiana, Mississippi, Oklahoma, and Texas.
• He is also the only member and manager of Lamstex, a Louisiana limited liability company that has done business in Texas and has a Texas sales tax ID number.
• He "consistently conducts business in Texas, personally and on behalf of AEC and Lamstex from his 'mobile office.'" And he has marketed himself and his businesses as having "'extensive business contacts with companies in Texas.'"
• In connection with the frac sand enterprise, he came to Texas ten times for meetings with various people and engaged in other business activities connected to Texas. These activities included a sales contract; an attempt to hire an employee; soliciting loans to fund NFP I; and the hiring of attorneys to (i) represent his interests during the formation of NF Holdings, (ii) charter NFP II, and (iii) defend him in two Houston lawsuits arising from NFP II's asset sale to Badger.

         Having identified Alston's Texas contacts, we turn to whether those contacts constitute sufficient minimum contacts to support a Texas court's general or specific jurisdiction over him.

         2. General Jurisdiction: Is Alston essentially at home in Texas?

         Plaintiffs allege that Alston is subject to general jurisdiction in Texas. Although he occasionally refers to evidence, Alston argues primarily that plaintiffs' allegations, even if true, fail to establish that he has sufficient minimum contacts with Texas. We consider his argument as a legal challenge to the sufficiency of plaintiffs' jurisdictional allegations. See Kelly, 301 S.W.3d at 659 (a defendant can prevail by showing that plaintiffs' allegations, even if true, are ...


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