United States District Court, N.D. Texas, Dallas Division
MEMORANDUM OPINION AND ORDER
Sam A.
Lindsay United States District Judge.
Before
the court is the Defendants’ Motion to Dismiss Pursuant
to Federal Rules of Civil Procedure 12(b)(2) and 12(b)(5)
(Doc. 18), filed February 22, 2019. After considering the
motion, briefs, evidence submitted by the parties, record,
and applicable law, the court denies without prejudice
Defendants’ Motion to Dismiss Pursuant to Federal Rules
of Civil Procedure 12(b)(2) and 12(b)(5) (Doc. 18) and grants
Plaintiff’s request to conduct jurisdictional
discovery.
I.
Factual and Procedural Background
On June
14, 2018, Plaintiff ECAP Holdings, LLC
(“Plaintiff” or “ECAP”) brought this
action in state court against Defendants Quixotic Farming,
LLC (“Quixotic Farming”); T. Lane Constant
(“L. Constant”); Randy Constant (“R.
Constant”); William O’Connor
(“O’Connor”); Kent Dryer
(“Dryer”); Quixotic Investments, LLC
(“QI”); Pescado, LLC (“Pescado”);
True Son Leasing (“TSL”); The Zou Leasing
(“Zou”); and Innovative Aquaculture Alliance, LLC
(“IAA”) (collectively, “Defendants”).
The action was removed to federal court on August 20, 2018,
based on diversity jurisdiction. In its Amended Complaint
(“Complaint”), filed February 1, 2019, ECAP
requests relief in the form of a declaratory judgment and
asserts claims for breach of contract, quantum meruit,
tortious interference with existing and prospective contract
relations, common law fraud, fraud in a securities
transaction, negligent misrepresentation, and fraudulent
transfer.
In
support of these claims, ECAP alleges that:
14. ECAP is a merchant bank that specializes in accelerating
high quality, development stage companies through their
initial growth phase. ECAP assists early development stage
companies with their business planning, financial modeling,
and presentations for investors. After being hired by such
companies, ECAP presents opportunities for accredited
investors in a portfolio of companies that have the potential
to be industry leaders of tomorrow. ECAP typically makes
investments into its featured companies, which are 2-5 years
in duration and limits their representation to 2-4 companies
at a time, aligning their interests with both peer investors
and the company’s management.
15. Such was the situation when ECAP was introduced to
Quixotic Farming and its Management Team (R. Constant, L.
Constant, Dryer and O’Connor) in early 2016. R.
Constant and L. Constant were identified as two of the
principals of Quixotic Farming, CEO and COO respectively. R.
Constant is the father of L. Constant. O’Connor was
represented to be the CFO of Quixotic and to be
“heavily involved in the strategic growth of the
company” and to provide “hands-on analytical and
finance advisory services.” R. Constant, L. Constant,
Dryer and O’Connor are collectively referred to herein
as “Management Team”. Quixotic Farming and its
Management Team wanted to use the services of ECAP to raise
funds through investment from accredited investors to be
located by ECAP for that purpose, with a goal of raising at
least $7, 000, 000 in new capital to be injected into
Quixotic Farming.
16. Quixotic Farming was located in Chillicothe, Missouri and
was represented to ECAP in Texas by the Management Team in
one or more telephone calls to be a company engaged in
aquaculture-commercial for-profit fish farming, and also
claiming to be the largest producer/seller of pure fresh
water tilapia in the United States. It was further
represented to ECAP by Quixotic Farming and its Management
Team that since its founding in 2011, the Management Team had
invested over $9, 000, 000 of their own capital into Quixotic
Farming on research and development, facilities and
operations in the pursuit of perfecting their process of
growing and selling hormone-free, clean-diet tilapia.
17. During a conference call on May 4, 2016, which included
each member of the Management Team (R. Constant, L. Constant,
Dryer, and O’Connor), the Management Team specified the
purported assets of Quixotic Farming and represented to
ECAP’s members who were located in Texas at the time,
that all of the assets used in the business of Quixotic
Farming were owned by Quixotic Farming, free and clear of any
liens, debts and/or liabilities. This included the former
Wal-Mart store in Chillicothe, Missouri where Quixotic
Farming conducted its operations; as well as all fish tanks,
equipment, supplies and machinery located in that building.
It also was represented to ECAP’s members who were
located in Texas during that call that Quixotic Farming owned
all facilities and equipment located in Colorado where
Quixotic Farming had additional fish farming operations. The
bottom line is Quixotic Farming was represented to
ECAP’s representatives located in Texas during one or
more telephone calls with Quixotic Farming and its Management
Team (R. Constant, L. Constant, Dryer and O’Connor)
that Quixotic Farming was a company that had at least $9,
000, 000 of assets in its name, which were free and clear of
all liens, debts and/or liabilities. These representations
later turned out to be false, but it was based on those false
representations made to ECAP’s members located in Texas
by Quixotic Farming and its Management Team, that ECAP
detrimentally relied as it was induced into entering into a
contract to perform services for Quixotic Farming.
Pl.’s Compl. ¶¶ 14-17. ECAP alleges that,
based on the foregoing representations and financial
information provided to it in Texas, ECAP, on April 28, 2016,
agreed to enter into a Non-Disclosure and Non-Circumvent
Agreement (“NDA”) with Quixotic Farming pursuant
to which the parties agreed not to “engage in any
negotiations or to execute any agreement, understanding or
undertaking whatsoever with any person or entity that has a
business relationship with the other party[.], ” and,
on June 22, 2016, ECAP and Quixotic Farming entered into an
Advisory Services Agreement (“ASA”) in which ECAP
was hired by Quixotic Farming to secure investments for
Quixotic Farming for both cash and equity in Quixotic
Farming. That executed ASA was delivered to ECAP by Quixotic
Farming and its Management Team in Texas. Id.
¶¶ 18-19. ECAP also made a cash investment of $25,
000 in Quixotic Farming and, under the ASA, it was to receive
an initial 3.5% ownership interest in Quixotic Farming.
ECAP
alleges that it subsequently had found an investor who was
considering making a substantial investment in Quixotic
Farming in December 2016, but it discovered while gathering
due diligence information requested by the investor that the
assets previously represented to be owned by Quixotic Farming
were not actually owned by Quixotic Farming but, instead, by
members of the Management Team and various other related
entities (Pescado, Zou, QI, TSL) that were owned by members
of the Management Team. ECAP alleges that, when it confronted
R. Constant and other Management Team members and advised
that it would cease all work and correct unknowing
misrepresentations made to potential investors if they did
not immediately correct the ownership structure of all assets
used by Quixotic Farming from that point forward to be owned
100% by Quixotic Farming, free and clear:
R. Constant and/or the members of the Management Team, QI,
Pescado, Zou and TSL immediately promised and represented to
ECAP that all assets used by Quixotic Farming but not then
“owned” by Quixotic Farming or
“titled” in the name of Quixotic Farming would be
conveyed into and become part of Quixotic Farming and that
Quixotic Farming would then own all such assets – free
and clear of all liens, debts and/or liabilities. These
representations were made either in person and/or via
telephone to ECAP’s representatives who were located in
Texas at the time of such representations.
Id. ¶ 26.
ECAP
alleges that, based this representation and assurance, it
proceeded to negotiate with other potential investors. During
this same time, ECAP alleges that it “was assured in
Texas by Quixotic Farming and its Management Team (R.
Constant, L. Constant, Dryer and/or O’Connor), Zou,
Pescado, TSL and QI that the transfer/assignments of all
assets to Quixotic Farming would occur prior to the closing
of any investment by any outside accredited investor.”
Id. ΒΆ 27. ECAP alleges that it, in the first
quarter of 2017, it found and introduced a ...