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Magna Equities II, LLC v. Heartland Bank

United States District Court, S.D. Texas, Houston Division

February 28, 2018

MAGNA EQUITIES II, LLC; TIMUR SALIKHBAYEV; 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; FRANK MARSHIK; and TOWNES PRESSLER, Plaintiffs,
v.
HEARTLAND BANK, Defendant.

          MEMORANDUM OPINION AND ORDER

          SIM LAKE, UNITED STATES DISTRICT JUDGE.

         Plaintiffs, Magna Equities II, LLC, Timur Salikhbayev, 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, Frank Marshik, and Townes Pressler (collectively, "Plaintiffs"), bring causes of action against defendant, Heartland Bank ("Heartland" or "Defendant") for fraud, negligent misrepresentation, money had and received, unjust enrichment, and promissory estoppel. Pending before the court is Heartland Bank's Motion for Leave to Designate Responsible Third Parties ("Defendant's Motion to Designate") (Docket Entry No. 38) . For the reasons set forth below, Defendant's Motion to Designate will be granted for the fraud, negligent misrepresentation, money had and received, and unjust enrichment claims.

         I. Background

         In August of 2 014 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").[1] By spring of 2015 HII defaulted on its financial requirements of the Credit Agreement. On April 30, 2015, HII and Lenders entered into a Third Modification and Waiver Agreement to the Credit Agreement ("Third Modification to Credit Agreement").[2]In the Third Modification to Credit Agreement HII acknowledged it was in default, agreed to certain conditions to obtain a waiver of past defaults, and agreed to release claims HII might have against Lenders. Plaintiffs allege that Defendant promised that "if HII raised at least $2, 735 million, Defendant would issue a waiver of covenants and waive any defaults [, ] . . . would permit HII to acquire a profitable oilfield water management company called Water Transfer LLC[, ] . . . [and] would allow HII to continue to operate as a going concern."[3] Defendant cites the Third Modification to Credit Agreement to support its claim that "HII agreed to raise $2, 735, 000 in equity and that those funds were to be used to pay HII's creditors and the Lenders, not to purchase another entity."[4]HII management engaged placement agent Roth Capital to raise the capital by issuing shares of HII series B convertible preferred stock and warrants. Around May 20, 2015, HII raised the required equity from Plaintiffs' investments, and Lenders waived existing defaults and the default rate interest.

         Plaintiffs allege that on July 9, 2015, Defendant's attorneys issued a Notice of Default to HII, froze HII's checking accounts, and "swept all of its cash, including Plaintiffs' investments, thereby causing HII to collapse."[5] Defendant alleges that around July 15, 2015, it learned that HII instructed its customers to no longer make payments to a lockbox account administered by Defendant, in violation of the Credit Agreement.[6] Plaintiffs allege that at a meeting on July 16, 2015, Defendant 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, and usurp HII's opportunity to purchase Water Transfer, LLC."[7] On July 30, 2015, Defendant obtained a Temporary Restraining 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.[8] On August 7, 2015, Lenders, HII, and Magna Equities II entered into a Fourth Modification and Forbearance Agreement to the Credit Agreement.[9]On September 18, 2015, HII filed for Chapter 11 bankruptcy.

         Plaintiffs, who were investors in HII, allege that they relied on Heartland's fraudulent representations 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."[10] Plaintiffs bring causes of action for fraud, negligent misrepresentation, money had and received, unjust enrichment, and promissory estoppel.[11] On January 8, 2018, Defendant filed its Motion to Designate seeking to designate Roth Capital and HII CEO, Matthew Flemming, as responsible third parties.[12]

         II. Analysis

         A. Applicable Law

         Pursuant to Chapter 33 of the Texas Civil Practices and Remedies Code a defendant may "designate a person as a responsible third party by filing a motion for leave to designate that person as a responsible third party." Tex. Civ. Prac. & Rem. Code § 33.004(a). "The motion must be filed on or before the 60th day before the trial date . . . ." Id. With certain express exceptions, Chapter 33 applies to all common law torts, statutory torts that do not include a separate and conflicting legislative fault-allocation scheme, and actions under the Deceptive Trade Practices-Consumer Protection Act. Tex. Civ. Prac. & Rem. Code § 33.002; JCW Electronics, Inc. v. Garza, 257 S.W.3d 701, 704-06 (Tex. 2008) . Section 33.011 defines a responsible third party as:

any person who is alleged to have caused or contributed to causing in any way the harm for which recovery of damages is sought, whether by negligent act or omission, by any defective or unreasonably dangerous product, by other conduct or activity that violates an applicable legal standard, or by any combination of these.

Tex. Civ. Prac. & Rem. Code § 33.011(6). Responsible third parties are not limited to those who can be joined as parties to the litigation. Responsible third parties may be persons or entities outside the court's jurisdiction, unable to be sued by the plaintiff, or even unknown. See In re Unitec Elevator Services Co., 178 S.W.3d 53, 58 n.5 (Tex. App.--Houston [1st Dist.] 2005, no pet.); Tex. Civ. Prac. & Rem. Code §§ 33.004(j)-(k).

         "A court shall grant leave to designate the named person as a responsible third party unless another party files an objection to the motion for leave on or before the 15th day after the date the motion is served." Tex. Civ. Prac. & Rem. Code § 33.004(f). To successfully prevent designation of a responsible third party, the burden is on the plaintiffs to establish that

(1) the defendant did not plead sufficient facts concerning the alleged responsibility of the [third party] to satisfy the pleading requirement of the Texas Rules of Civil Procedure; and
(2) after having been granted leave to replead, the defendant failed to plead sufficient facts concerning the alleged responsibility of the person to satisfy the pleading requirements of the Texas Rules of Civil Procedure.

Tex. Civ. Prac. & Rem. Code § 33.004(g).

         A court's grant of a motion for leave to designate a responsible third party at this stage in the litigation does not preclude a party from later challenging the designation. "After adequate time for discovery, a party may move to strike the designation of a responsible third party on the ground that there is no evidence that the designated person is responsible for any portion of the claimant's alleged injury or damage." Tex. Civ. Prac. & Rem. Code § 33.004(1). "The court shall grant the motion to strike unless a defendant produces sufficient evidence to raise a genuine issue of fact regarding the designated person's responsibility for the claimant's injury or damage." Id. The burden is on the defendant to produce sufficient evidence to raise a genuine issue of fact regarding the designated party's responsibility for the claimant's injury or damage. Additionally, before trial the court must determine whether there is sufficient evidence to support the submission of a question to the jury regarding the designated party's responsibility. Tex. Civ. Prac. & Rem. Code § 33.003(b). Therefore, while the pleading requirements at the outset are not stringent, as trial approaches the requirement for sufficient evidence to support the actual submission of a question on the responsibility of the designated third parties becomes more demanding.

         Plaintiffs timely filed an objection to Defendant's Motion to Designate arguing that Defendant has failed to satisfy the pleading requirements of the Texas Rules of Civil Procedure to establish third party responsibility, that Section 33.004 is inapplicable to Plaintiffs' promissory estoppel claim, and that Defendant's motion is untimely.[13]

         B. Whether Heartland Met the Pleading Requirements

         The Texas Rules of Civil Procedure provide that a defendant's pleading must contain "a short statement of the cause of action sufficient to give fair notice of the claim involved." Tex.R.Civ.P. 47(a). Under this 'fair notice' standard, "[a] pleading is sufficient when” an opposing party can ascertain from the pleading the nature, basic issues, and the type of evidence that might be relevant to the controversy.'" Taylor v. TASER International, Inc., Civil Action No. H-17-673, 2017 WL 3506885, at *2 (S.D. Tex. Aug. 16, 2017) (quoting Low v. Henry, 221 S.W.3d 609, 612 (Tex. 2007)). To determine whether a defendant has pled sufficient facts, federal courts may "look at allegations in a defendant's answer and/or counterclaim[, ] . . . [and] allegations in a plaintiff's pleading that demonstrate responsibility of a third party." See Eisenstadt v. Telephone Electronics Corp., Civil Action No. 3:06-1196-0, 2008 WL 4452999, at *2 (N.D. Tex. Sept. 30, 2008); see also In re CVR Energy, Inc., 500 S.W.3d 67, 80 (Tex. App.--Houston [1st Dist.] 2016, no pet.) ("[Defendant] satisfied this low threshold. Its motion for leave to designate [the third party] quoted from Plaintiffs' own allegations against [the third party]."). "Given this liberal approach, courts in the Southern District of Texas have recognized with regard to motions to designate responsible third parties that the 'pleading requirements at the outset are not stringent.'" Brewer v. Suzuki Motor of America, Inc., Civil Action No. 4:15-00197, 2016 WL 4159754, at *3 (S.D. Tex. Aug. 3, 2016) (citation omitted). Because Chapter 33 defines "[r]esponsible third party" as "any person who is alleged to have caused or contributed to causing in any way the harm for which recovery of damages is sought, " Defendant only needs to plead facts capable of showing how the third-parties it seeks to designate as responsible third-parties caused or contributed to Plaintiffs' alleged injury.

         Defendant cites Plaintiffs' Second Amended Complaint to support its claim that Roth Capital and Matthew Flemming are responsible third parties.[14] Defendant argues "Plaintiffs allege that Roth Capital and Flemming made promises to them, and that these promises form the basis of Plaintiffs' claims."[15] In their Second Amended Complaint Plaintiffs allege that "Plaintiffs each were recipients of Defendant's promises directly from Defendant or through HII management, Roth, or both, and made the decision to purchase the HII series B convertible preferred stock and warrants based on Defendant's promises."[16] Plaintiffs also allege that they "received Defendant's promises and representations through oral and written communications with [either] Roth Capital [or] HII CEO, Matthew Flemming . . . ."[17]

         Plaintiffs argue that "Defendant's First Amended Answer and Counterclaim also does not contain any allegation sufficient to put Plaintiffs on notice of Defendant's position that Flemming or Roth somehow share legal responsibility for Plaintiffs' injuries."[18] Plaintiffs argue that

Simply regurgitating Plaintiffs' factual allegations that Roth and Flemming-unaware of Defendant's intentions and believing its representations to be true-passed along Defendant's false promises to Plaintiffs is insufficient to meet the pleading standard under Section 33.004 when those factual allegations do not give rise to any legal theory for liability. Merely relaying a representation or promise is not in and of itself a breach of any legal duty or standard.[19]

         The court is not persuaded by Plaintiffs' arguments. Plaintiffs' Second Amended Complaint alleges that Defendant communicated with Roth Capital and Flemming "with the intent and expectation that its promises and representations would be repeated to investors such as Plaintiffs."[20] Plaintiffs' argument that Roth Capital and Flemming did not violate a legal standard, even if ultimately found to be true, does not preclude Roth Capital and Flemming from being responsible third parties. See Tex. Civ. Prac. & Rem. Code § 33.011(6) (". . . or activity that violates an applicable legal standard, or by any combination of these") (emphasis added). Also, at this stage the court may not review the truth of the allegations. In re Unitec Elevator Services Co., 178 S.W.3d at 62. Therefore, even assuming that Roth Capital and Flemming were simply puppets used to relay information from Defendant, the allegations are sufficient to suggest that Roth Capital and Flemming "caused or contributed to causing in any way the harm for which recovery of damages is sought . . . ." Tex. Civ. Prac. & Rem. Code § 33.011(6).

         Because Plaintiffs' own allegations name Roth Capital and Flemming as involved in the alleged representations, Plaintiffs are easily on fair notice of the claim involved. At this early stage of the case Defendant meets the low pleading threshold of the Texas Rules of Civil Procedure for designating responsible third parties because the nature of Roth Capital's and Flemming's responsibility lies in Plaintiffs' Second Amended Complaint.

         C. Plaintiffs' Promissory Estoppel Claim

         Plaintiffs argue that Section 33.004 does not apply to its promissory estoppel claim because promissory estoppel sounds in contract law and Section 33.004 is limited to claims based in tort or the Texas Deceptive Trade Practices Act.[21] Defendant argues in its Reply that none of Plaintiffs' cited cases apply to responsible third parties, and that courts have granted motions to designate responsible third parties for promissory estoppel claims.[22] But since Defendant states that "Heartland need not seek to designate Roth and Flemming as responsible third parties as to the promissory estoppel claim, "[23] the court will not designate Roth Capital and Flemming as responsible third parties as to this claim.

         D. Whether Heartland's Motion is Timely

         Heartland filed its Motion to Designate on January 8, 2018.[24]Since docket call is scheduled for September 14, 2018, [25] Defendant filed its Motion more than 60 days prior to trial as required by Section 33.004(a). Plaintiffs argue that Defendant's Motion to Designate is untimely, however, because the applicable statute of limitations has expired with respect to ...


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