Opinion
Civil Action No. 3:02-CV-2598-P.
March 31, 2005
MEMORANDUM OPINION AND ORDER
Now before the Court are the following motions:
1. Plaintiff/Counter-Defendant DDH Aviation, LLC f/k/a DDH, Inc.'s Motion to Dismiss Counterclaims and Supplemental Complaints (filed in Joint Motion Submission Format on June 27, 2003);
2. Third-Party Defendant Darwin Deason's Motion to Dismiss Third-Party Complaints (filed in Joint Motion Submission Format on June 27, 2003);
3. Third-Party Defendant Dennis Debo's Motion to Dismiss Third-Party Complaints and Supplemental Complaints (filed in Joint Motion Submission Format on June 27, 2003); and,
4. Third-Party Defendants Affiliated Computer Services, Inc., Star Chen, and William Deckelman, Jr.'s Motion to Dismiss Third-Party Complaints (filed in Joint Motion Submission Format on June 27, 2003).
Additionally, On March 1, 2005, the Court granted Holly's Partial and Limited Motion to Dismiss Without Prejudice as to William Deckleman, Jr. And Affiliated Computer Services, Inc. On March 8, 2005, the Court Granted a similar motion on behalf of Alcedo. Those motions released their claims only as they related to Holly's/Alcedo's "claim for Tortious Interference with a Contract on [Holly's/Alcedo's] commissions," and [Holly's/Alcedo's] "ownership stake in DDH," and Holly's/Alcedo's "Partial and Limited Motion to Dismiss without Prejudice of William Deckelman, Jr. only as it related to [Holly's/Alcedo's] claim for Tortious Interference with a Contract on [Holly's/Alcedo's] Commissions."
All four motions (collectively referred to herein as the "Current Motions") seek to dismiss claims brought by the Defendants/Third Party Plaintiffs Robert Holly ("Holly") and Anthony Alcedo ("Alcedo"). The Court held a hearing on these four motions on December 14, 2004. Because all four of the above listed motions involve the same issues of law, the discussion of the four motions is combined, with each issue of law being addressed in turn.
On January 3, 2005, this case was transferred to from Judge Buchmeyer to Judge Solis. Subsequently, on January 19, 2005, and January 20, 2005, both Holly and Alcedo filed their First Amended Counterclaim, First Amended Third Party Complaint and First Amended Supplemental Complaint (together the "Amended Actions"). Thereafter, on February 4, 2005, Movants filed Motions to Dismiss regarding the Amended Actions. On February 24, 2005, Holly and Alcedo filed their Responses, and on March 11, 2005, Movants filed their Replies. Excluding the Court's Orders on March 1, 2005, and March 8, 2005, supra note 1, the Court does not consider the Amended Actions, or the corresponding Responses and Replies. As Third Party Plaintiffs did not seek leave to file their Amended Actions, they were not properly before the Court.
Judge Buchmeyer presided over that hearing.
After considering the parties' arguments and briefing, and the applicable law, the Court hereby GRANTS in PART and DENIES in PART the Current Motions.
I. Background
The history of this case is rather complex and involves over twenty parties and countless claims, counter claims, and third party claims. The parties and legal questions at issue in the Current Motions, however, are significantly more limited.
a. Cast of Characters
A summary of the main cast of characters involved in the Current Motions may be most helpful. The following eight parties, two businesses, and six individuals are at issue in the motions now before this Court:
1. DDH Aviation, LLC, f/k/a DDH Aviation, Inc. ("DDH"). DDH is an airplane brokerage company that was founded in 1997 by Deason, Debo, and Holly wherein Deason supplied the capital to start the business and Debo and Holly supplied the labor (i.e., Debo and Holly were the brokers working for DDH). Initially, DDH was formed as a corporation but later altered its business form to become a limited liability company;
2. Darwin Deason ("Deason"). Deason is a financially wealthy business man who supplied the capital to allow Debo and Holly to start their airplane brokerage firm, DDH. Deason became the Board Chair upon the founding of the company. Deason at all times has been a shareholder/owner of DDH. Deason is also the founder and a shareholder of ACS, a Fortune 500 company headquartered in Dallas;
3. Dennis Debo ("Debo"). An aircraft salesman, Debo was approached by Holly in connection to Holly's idea for a new business. Debo connected Holly with Deason as a potential investor for Holly's business idea, an airplane brokerage endeavor. Debo and Holly invested their labor and expertise in buying/selling aircraft while Deason invested capital, and together, the three men founded DDH. Debo and Holly were paid under a commission structure that changed a few times throughout the relationship and is, in part, at issue in the pending motions;
4. Robert Holly ("Holly"). The man who had the initial idea for starting an airplane brokerage business, which with Debo's and Deason's assistance was born (DDH). Debo and Holly invested their labor and expertise in buying/selling aircraft while Deason invested capital. Together, the three men founded DDH. Debo and Holly were paid under a commission structure that changed a few times throughout the relationship and is, in part, at issue in the pending motions;
5. Anthony Alcedo ("Alcedo"). DDH hired Alcedo as an additional sales person upon recommendation from Holly. Alcedo acquired a small amount of stock in DDH and was paid under a commission structure;
6. Affiliated Computer Services, Inc. ("ACS"). ACS is a Fortune 500 company headquartered in Dallas that was founded by Deason. ACS is known as a business outsourcing company;
7. Star Chen ("Chen"). Chen was an Officer and Director of both ACS and DDH at times relevant to this case. Chen served as Senior Financial Advisor to ACS and as a financial advisor to DDH. At no point was Chen a shareholder or guarantor of DDH; and,
8. William Deckelman, Jr. ("Deckelman"). Deckelman was an Officer and Director of both ACS and DDH at times relevant to this case. Deckelman is General Counsel for ACS and has also served as an Officer and General Counsel for DDH. At no point, however was Deckelman a shareholder or guarantor of DDH.
b. Procedural History
This case began when DDH filed suit against Holly and Alcedo, as well as several foreign corporations, for claims arising primarily out of Holly's and Alcedo's alleged wrongdoings as DDH employees. The substance of the wrongdoings alleged in this initial complaint ("DDH's Complaint") is that Holly and Alcedo participated in side dealings wherein they pocketed full profits rather than reporting their sales to DDH and receiving a commission from the sales.
DDH's Complaint was filed on September 29, 2003.
Simultaneous with the filing of their Answers to DDH's Complaint, Holly and Alcedo (collectively referred to herein as the "Third Party Plaintiffs") filed counterclaims against DDH as well as third party complaints against Deason, Deckelman, Chen, and ACS. The counterclaims and third party complaints (collectively referred to as the "Third Party Complaints") allege a barrage of claims including, among others, claims for breach of contract, fraud, breach of fiduciary duty, conversion, fraudulent transfer, and shareholder oppression.
Holly and Alcedo styled the Third Party Complaints (both filed March 28, 2003) in the following manner: "Defendant Robert Holly's Answer and Counterclaim to DDH Aviation, L.L.C.'s f/k/a DDH Aviation, Inc. Original Complaint, and Third-Party Complaint Against Darwin Deason, Dennis Debo, Star Chen, William Deckelman, Jr. and ACS, Inc. and DDH Aviation, L.L.C. f/k/a/ DDH Aviation, Inc.'s Supplemental Complaint Against Darwin Deason, Dennis Debo, Star Chen, William Deckelman, Jr. and ACS, Inc." and "Anthony Alcedo's Counterclaim Against DDH Aviation, LLC f/k/a DDH Aviation, Inc., Third-Party Complaint Against Darwin Deason, Dennis Debo, Star Chen, William Deckelman, Jr. and ACS, Inc. and DDH Aviation, L.L.C. f/k/a DDH Aviation, Inc.'s Supplemental Complaint against Darwin Deason, Dennis Debo, Star Chen, William Deckelman, Jr. and ACS, Inc."
On November 9, 2004, Judge Buchmeyer issued an Order setting a hearing for the Current Motions. Due to the complex and at times confusing pleadings in this case, the Court therein ordered further that Third Party Plaintiffs submit a simple list of the claims they alleged against each party and the manner in which they were asserting each claim (directly, as a shareholder derivative suit on behalf of DDH, or based on an alter-ego type theory of liability). Holly and Alcedo complied with that Order and each filed their list of claims with this Court on November 19, 2004.
c. Facts Related to Third Party Complaints
In a fair attempt to summarize the heart of the Third Party Complaints, Third Party Plaintiffs' claims seem to arise from Deason's alleged pillaging of DDH to pay for his lavish lifestyle. Holly and Alcedo, in their Third Party Complaints, accuse Deason of pillaging DDH's resources to provide for his personal yachts, personal jet service, and personal limousine service. Third Party Plaintiffs claim Deason went so far in using his power and influence as to cause ACS to partake in a questionable dealing with DDH so to extend DDH's credit allowing Deason access to a greater line of credit (DDH's) to use in providing for his self-pampering.
Third Party Plaintiffs allege further that Debo, Chen, and Deckelman aided Deason in covering up his mis-use of DDH's resources and credit line. They assert that these three Officers/Directors of DDH were aware of Deason's pillaging, and permitted, or in some cases directly aided, Deason to continue to pillage DDH. Third Party Plaintiffs argue the tying up of resources prevented DDH from operating productively because the shortened line of available credit prevented DDH's brokers from entering deals they would otherwise have been able to make. As Holly and Alcedo were paid through a commission structure, this halt in brokering opportunities directly limited their ability to earn money.
According to Holly and Alcedo, once they questioned and brought attention to Deason's alleged abuse of DDH's resources, Deason used his power and influence to control the other members of the DDH Board of Directors to change the corporate form of DDH, thereby eliminating all of Holly's and Alcedo's ownership interest in the company without paying them for their shares in DDH.
II. Standard of Review
Federal Rule of Civil Procedure 12(b)(6) authorizes dismissal of a complaint for "failure to state a claim upon which relief can be granted." In considering the Current Motions, this Court must accept all well-pleaded facts as true and view the facts in the light most favorable to the Third Party Plaintiffs. See Campbell v. City of San Antonio, 43 F.3d 973, 975 (5th Cir. 1995). "[A] claim may not be dismissed unless it appears certain that the plaintiff cannot prove any set of facts in support of his claim that would entitle him to relief." Leffall v. Dallas Indep. Sch. Dist., 28 F.3d 521, 524 (5th Cir. 1994). "However, conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss." Fernandez-Montes v. Allied Pilots Ass'n, 987 F.2d 278, 284 (5th Cir. 1993).
III. Movants' Arguments
In sum, all four of the pending motions are based in three general arguments: (1) Third Party Plaintiffs lack standing to bring derivative claims, (2) Third Party Plaintiffs fail to establish a basis for Alter Ego, Joint Enterprise, and/or Single Business Enterprise theories of liability, and (3) Third Party Plaintiffs fail to state a claim for fraud, let alone with particularity. It should be noted that in making these three arguments, the specific claims in large part are not discussed. Several claims, in fact, would survive even if Movants are to succeed on all three of these arguments.
Most obviously, for example, the breach of contract/quantum meruit claims brought against DDH survive even if Movants were to be successful in all of their arguments now before this Court.
a. Standing
Movants challenge Third Party Plaintiffs' standing to assert any derivative claims on behalf of DDH. Two main issues arise regarding this argument. The first and preliminary issue is whether Third Party Plaintiffs have asserted any derivative claims whatsoever. The second issue is whether Third Party Plaintiffs are exempt from the typical demand requirements that are prerequisite to the filing of a derivative suit.
1. Derivative Claims
The preliminary issue regarding the standing argument is whether or not Third Party Plaintiffs have asserted any derivative claims in this action whatsoever. The nature of the actions and the styling of the Third Party Complaints strongly suggest that some portion of Third Party Plaintiffs' claims are derivative in nature. Many of the claims Third Party Plaintiffs make, most obviously those claims for breach of fiduciary duties, regard duties owed to DDH-not duties owed directly to Holly or Alcedo. Regarding the styling of the Third Party Complaints, Third Party Plaintiffs include in the title "DDH Aviation, L.L.C. f/k/a/ DDH Aviation, Inc.'s Supplemental Complaint Against Darwin Deason, Dennis Debo, Star Chen, William Deckelman, Jr. and ACS, Inc."
While it is hard to imagine how such claims made in a complaint with such a title could reflect anything other than an initial intent to bring claims in the form of a derivative proceeding, Third Party Plaintiffs adamantly deny that any of the claims they assert are derivative claims. However, in explaining that all claims are "direct" claims as opposed to derivative claims, Third Party Plaintiffs point to DDH's status as a closely held corporation and the laws that apply to derivative suits brought on behalf of closely held corporations. Specifically, Third Party Plaintiffs state that to the extent their claims
. . . are construed to be derivative it was unintentional. Alcedo/Holly brought his shareholder claims based on the fiduciary responsibilities of Deason, Debo, Deckelman, and Chen as a direct action as allowed per Texas Business Corporation Act Article 5.14(L).
Holly and Alcedo Responses ¶ 6. Thus, even though Third Party Plaintiffs maintain they are "directly" suing officers/directors of DDH, they clearly appear to be doing so in a derivative fashion.
Third Party Plaintiffs' insistence on referring to these claims as direct claims may, in part, be due to a mis-reading of Tex. Bus. Corp. Act Ann. art. 5.14(L). In relevant part, that law reads, "a derivative proceeding brought by a shareholder of a closely held corporation may be treated by a court as a direct action brought by the shareholder for his own benefit." Tex. Bus. Corp. Act Ann. art. 5.14(L)(1)(a) (emphasis added). In other words, the court may treat such an action as a direct action so to allow recovery to be paid directly to the plaintiff (as opposed to the corporation) if justice requires; however, this does not mean the action is no longer a derivative proceeding. See Tex. Bus. Corp. Act Ann. art. 5.14(L)(1)(b).
What is clear (or better said, clear enough) is that some of Third Party Plaintiffs' claims are derivative in nature, and accordingly, article 5.14 applies to those claims. The question then becomes whether DDH is a closely held corporation such that article 5.14(L) exempts Third Party Plaintiffs from the typical demand requirements.
2. Exemption from Demand Requirements
Movants argue that Third Party Plaintiffs' derivative claims should be dismissed for failure to meet the prerequisite demand requirements. See Tex. Bus. Corp. Act Ann. art. 5.14(C). The law requires that a shareholder file a written demand stating "the act, omission, or other matter that is the subject of the claim or challenge and requesting that the corporation take suitable action" prior to bringing a derivative action in the courts. Tex. Bus. Corp. Act Ann. art. 5.14(C)(1). In the case of closely held corporations, however, there is an exception to the demand requirement. See Tex. Bus. Corp. Act Ann. art. 5.14(L).
Movants argue that this exception should not apply because Third Party Plaintiffs failed to plead in the Third Party Complaints that DDH is a closely held corporation. Under Texas Law, a closely held corporation is a corporation with less than 35 shareholders that has no shares listed on a national securities exchange or regularly quoted in an over-the-counter market by one or more of a national securities association. Tex. Bus. Corp. Act. Ann. art. 5.15(L)(2). Although Third Party Plaintiffs may claim that DDH is a closely held corporation in their briefing, they do not allege so in their pleadings. As stated earlier, in considering the Current Motions (Motions to Dismiss), this Court must accept all well-pleaded facts as true and view the facts in the light most favorable to the Third Party Plaintiffs. See Campbell v. City of San Antonio, 43 F.3d 973, 975 (5th Cir. 1995). As Third Party Plaintiffs did not plead DDH to be a closely held corporation, this Court cannot accept it as such. In sum, in order to qualify for the exceptions of art. 5.14(L), the pleadings must allege sufficient facts.
Moreover, because some of Third Party Plaintiffs' claims are derivative in nature, Fed.R.Civ.P. 23.1 applies to those claims as well. That rule states in pertinent part that " [i]n a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association . . . the complaint shall be verified. . . ." Fed.R.Civ.P. 23.1 (emphasis added). Plaintiffs have failed to comply with this requirement.
Accordingly, Movants motion to dismiss Third Party Plaintiffs' derivative claims is GRANTED. Under Fed.R.Civ.P. 15(a), however, this Court grants Third Party Plaintiffs leave to file an amended complaint that comports with both Tex. Bus. Corp. Act Ann. art. 5.14(L), as well as Fed.R.Civ.P. 23.1, within 20 days of the date of this Order.
b. Disregarding the Corporate Form
Under Texas law, there are various theories for disregarding the corporate form. Zahra Spiritual Trust v. US, 910 F.2d 240 (5th Cir. 1990) (citing Castleberry v. Branscum, 721 S.W.2d 270, 271 (Tex. 1986)). Two such theories of liability are single business enterprise and alter ego. Id. Many of Third Party Plaintiffs' claims are based on these two bases of liability. Third Party Plaintiffs allege (1) ACS and DDH operate as a single business enterprise, (2) DDH is the alter ego of Deason and ACS, and (3) ACS operates as the alter ego of Deason.
More specifically, Third Party Plaintiffs allege:
• DDH was the alter ego of Deason and ACS.
• DDH was operated at the bequest of and for the benefit of ACS . . . ACS used DDH Aviation as a spin-off cash cow for Deason and ACS . . . ACS drained DDH of its assets.
• DDH was organized and operated as a mere tool of another corporation also controlled by Deason-ACS-to avoid legal obligations he had to ACS' stockholders to account for expenses, and ACS and DDH were operated as a single business enterprise. As such, Deason, Debo, Chen and Deckelman are liable in individual capacities without the benefit of hiding behind fraudulent corp shield.
• Deason operated at all times as if he and DDH were the same entity.
• DDH was operated as Deason's alter ego-a monetary vehicle to obtain a free yacht from DDH shareholders.
• ACS also operates as alter ego of Deason.
• ACS and DDH operated as a single business enterprise. Therefore, ACS should be liable for any judgment against DDH.
• From cradle to grave DDH was controlled by Deason through another of his alter egos, ACS. He operated these two allegedly separate entities together as a single business enterprise. DDH was the alterego of Deason and ACS.See Holly's Answer and Counterclaim ¶¶ 156-164; Alcedo's Counterclaim ¶¶ 9-17.
1. Single Business Enterprise
The single business enterprise theory is an equitable doctrine applied to reflect partnership-type liability principles when corporations integrate their resources and operations to achieve a common business purpose. North American Van Lines, Inc. v. Emmons, 50 S.W.3d 103, 119 (Tex.App.-Beaumont 2001, pet. denied). Under Texas law, when at least two corporations "are not operated as separate entities, but rather integrate their resources to achieve a common business purpose, each constituent corporation may be held liable for the debts incurred in pursuit of that business purpose." Nat'l Plan Administrators, Inc. v. Nat'l Health Ins. Co., 50 S.W.3d 718, 744 (Tex.App.-Austin 2004). Thus, under the single business enterprise theory, one corporation may be held liable for the debts of another corporation where (i) the two corporations share a common business purpose and (ii) the corporations have integrated their resources to achieve that common business purpose. In determining the second element, the courts are to apply an eleven-factor test.
To determine the integration of resources element, courts are to consider the following eleven factors: "(1) common employees; (2) common record keeping; (3) centralized accounting; (4) payment of wages by one corporation to another corporation's employees; (5) common business name; (6) services rendered by the employees of one corporation on behalf of another; (7) undocumented transfers between corporations; (8) unclear allocation of profits and losses between the corporations; (9) the same officers; (10) the same shareholders; and (11) the same telephone number." Olympic Fin. Ltd. v. Consumer Credit Corp., 9 F.Supp.2d 726, 728 (S.D. Tex. 1998).
In this case, the determination of whether single business enterprise theory applies can be determined by the first element, common business purpose, and consequently, this Court need not reach an analysis of the integrated resources test. As Movants emphasize, "[t]he sine qua non of the single business enterprise theory is the existence of a common business purpose." Deason and ACS Replies at 9 and 6 (citing In re U-Haul Int'l Inc., 87 S.W.3d 653, 657 (Tex.App.-San Antonio 2002, pet. granted)). DDH and ACS simply do not have a common business purpose nor do Third Party Plaintiffs even allege such. Rather, these two businesses clearly operate as separate entities. DDH is an airplane brokerage firm and ACS is a fully functioning Fortune 500 company whose business is focused on providing business process and information technology outsourcing solutions to its clients. The single enterprise doctrine does not apply in this case because ACS and DDH operate as separate entities and simply do not share a common business purpose.
Third Party Plaintiffs may argue that the "common business purpose" is to provide for Deason's indulgent lifestyle. However, a single questionable deal between the two companies that is discussed in the Third Party Complaints is far from sufficient to evidence a common business purpose.
Accordingly, Movants motion to dismiss Third Party Plaintiff's single business enterprise theories is GRANTED.
Having determined the single business enterprise theory of liability does not apply, this Court now turns to the second theory proposed for why the corporate form should be disregarded, the alter ego theory for liability.
2. Alter Ego
The second theory Third Party Plaintiffs argue justifies disregarding the corporate form is the alter ego theory. Third Party Plaintiffs make two general alter ego arguments: (1) DDH is the alter ego of both Deason and ACS, and (2) ACS operates as the alter ego of Deason. Federal courts look to the law of the state of incorporation to determine whether the corporate entity should be disregarded. See House v. 22 Texas Services, Inc., 60 F.Supp.2d 602, 609 (S.D. Tex. 1999); see also Albert v. Diversified Group, Inc., 55 F.3d 201, 203 (5th Cir. 1995). DDH is a Texas limited liability corporation and ACS is a Delaware corporation. Thus, Texas law applies to determine whether DDH's corporate form should be disregarded, while Delaware law applies to determine whether ACS's corporate form should be disregarded.
Third Party Plaintiffs argue that DDH is the alter ego of both Deason and ACS. Therefore, Third Party Plaintiffs' argument continues, Deason and ACS should be held derivatively liable for any wrongdoings by DDH. As DDH is organized in Texas, Texas law applies to determine whether its corporate form should be disregarded and Deason and/or ACS should be held derivatively liable under alter ego theory. Furthermore, because Deason and ACS are each DDH shareholders, Movants urge article 2.21(A) of the Texas Business Corporation Act applies. Thus, in order to hold Deason and ACS derivatively liable for DDH's wrongdoings, Third Party Plaintiffs must demonstrate not only that the alter ego doctrine applies but also that Deason and ACS used DDH to perpetrate an actual fraud. This Court now turns to the first requirement, alter ego under Texas law.
Once alter ego is found to exist, article 2.21(A) of the Texas Business Corporation Act requires that in order to impose liability on a shareholder or affiliate of the corporation, such as Deason or ACS, the plaintiff must show that the person on whom liability is sought to be imposed (1) "caused the corporation to be used for the purpose of perpetuating," and (2) "did perpetuate an actual fraud on the obligee for the direct personal benefit" for the person on whom liability is sought to be imposed. Tex. Bus. Corp. Act Ann. art. 2.21(A)(2).
In Texas, alter ego is a basis for disregarding the corporate fiction where "a corporation is organized and operated as a mere tool or business conduit of another corporation." Castleberry, 721 S.W.2d at 272. The alter ego doctrine is applied to disregard the corporate fiction when there is "such unity or a blurring of the identity between [the] two corporations . . . that the separateness of the single corporation has ceased and holding only the corporation liable would cause injustice. In re Great Southern Life Ins. Co. Sales Practice Litigation, 1999 WL 721968 at *5 (quoting Coastal Shurters Insulation, Inc. v. Derr, 809 S.W.2d 916, 921 (Tex.App.-Houston [14th Dist.] 1991, no writ)).
Third Party Plaintiffs' allegations as to DDH being the alter ego of Deason are sufficient to survive a motion to dismiss. The crux of the Third Party Complaints rests on the allegation that Deason pillaged DDH in order to provide for his lavish personal lifestyle. In sum, Third Party Plaintiffs claim Deason treated DDH like a personal checking account and in a manner that prevented DDH from operating for the purpose for which it was founded. The facts alleged present such unity between Deason and DDH to invoke the alter ego theory. Furthermore, Third Party Plaintiffs allege facts sufficient to meet the requirements of article 2.21.
Accordingly, Movants motion to dismiss Third Party Plaintiffs' claims against Deason based on derivative liability for DDH's alleged wrongdoings is DENIED.
Turning to ACS, to establish unity between the two corporations under Texas law, Third Party Plaintiffs must show that (1) ACS organized and operated DDH as a mere tool or business conduit of Deason, and (2) separateness between ACS and DDH has ceased to exist or never existed. See United States ex rel. Wilkins v. North American Constr. Corp., 173 F.Supp.2d 601, 644 (S.D. Tex. 2001) (finding common stock ownership, common officers, common business departments, that one entity on occasion paid the salaries and other expenses of the other entity, and that some operations are not kept separate, did not successfully articulate a claim of alter ego under TX law). Third Party Plaintiffs are required to prove absolute control of DDH by ACS, "not mere majority or complete stock control but such domination of finances, policies, and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is but a mere business conduit for its principal." Gardemal v. Westin Hotel Co., 186 F.3d 588, 594 (5th Cir. 1999).
Third Party Plaintiffs have simply failed to establish DDH may be the alter ego of ACS. The facts Holly and Alcedo do point to in support of their alter ego claim include:
(1) DDH employees were hired and paid by ACS with ACS funds;
(2) transactions between ACS employees and DDH were carried out without formal meetings of directors and shareholders and without notice to shareholders;
(3) ACS paid DDH's employee benefits;
(4) ACS and DDH interchangeably used ACS logos and trademarks;
(5) ACS owned 6% of DDH's stock;
(6) ACS and DDH shared some of the same officers and directors;
(7) ACS guaranteed up to $11.5 M of DDH's total $47 M line of credit;
(8) ACS and DDH had the same chairman;
(9) When Third Party Plaintiffs were hired, they received letters outlining the terms on ACS letterhead;
(10) ACS and DDH employees shared the same 401(k) retirement and medical plans; and
(11) ACS had access to DDH aircraft without payment.
E.g., Holly's Resp. to ACS's Mot. to Dismiss ¶¶ 19-23; Alcedo's Resp. to ACS's Mot. to Dismiss ¶¶ 19-23.
Third Party Plaintiffs' alleged facts, at most, create a situation similar to a parent/subsidiary relationship, but not that of absolute control of DDH by ACS. This Court is persuaded by Movants arguments that such a relationship is insufficient to establish alter ego grounds for liability. Having found Third Party Plaintiffs failed to allege facts sufficient to establish ACS is the alter ego of DDH under Texas law, this Court need not reach the question of article 2.21(A).
Accordingly, Movants motion to dismiss Third Party Plaintiff's claim that ACS is the alter ego of DDH is GRANTED.
Additionally, Third Party Plaintiffs allege ACS, a Delaware corporation, is the alter ego of Deason and therefore should be held derivatively liable for Deason's wrongdoings. Even assuming all of Third Party Plaintiffs' factual allegations regarding the relationship between ACS and Deason as true, Third Party Plaintiffs have failed to establish ACS is the alter ego of Deason under Delaware law.
Third Party Plaintiffs allege Deason owned forty-four percent of ACS' shares, was chairman of ACS' board and has the sole authority to appoint board members, used ACS' directors and officers "at his pleasure," caused ACS to guarantee $11.5 million of DDH debt, and caused ACS to purchase an aircraft form DDH at an inflated price. See Holly's Third-Party Complaint at ¶ 163; Alcedo's Third-Party Complaint at ¶ 16.
"Persuading a Delaware court to disregard the corporate entity is a difficult task." Wallace v. Wood, 752 A.2d 1175, 1183 (Del.Ch. 1999) (quoting Harco Nat'l Ins. Co. v. Green Farms, C.A. No. 1131, 1989 WL 110537, at *9-10 (Del.Ch. 1989)). In order for Delaware's alter ego doctrine to apply, "the corporation must be a sham and exist for no other purpose than as a vehicle for fraud." Id. at 1184. Under Delaware law, the prominent factors to consider under alter ego analysis are:
whether the corporation was adequately capitalized for the corporate undertaking; whether the corporation was solvent; whether dividends were paid, corporate records kept, officers and directors functioned properly, and other corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether in general the corporation simply functioned as a facade for the dominant shareholder.Alberto v. Diversified Group, Inc., 55 F.3d 201, 205 (5th 1995).
As previously discussed within the context of single business enterprise liability, ACS is a fully functioning Fortune 500 company in the field of business outsourcing. The record clearly demonstrates that ACS is not a sham business and that it does exist for a purpose other than as a vehicle for fraud. Having considered all of the prominent factors, this Court finds Delaware's alter ego doctrine cannot apply to hold ACS derivatively liable for any wrongdoings by Deason. ACS is simply not the alter ego of Darwin Deason under Delaware law.
Accordingly, Movants motion to dismiss Third Party Plaintiff's claim that ACS is the alter ego of Deason is GRANTED.
c. The Fraud Claims
In their pleadings, Third Party Plaintiffs simply fail to allege the basic elements of fraud. To prove fraud under Texas law, a party must show that: (1) a material misrepresentation was made; (2) the representation was false; (3) the speaker made the representation knowing it was false or made it recklessly without any knowledge of its truth; (4) the speaker made the representation with the intention that it should be relied upon by the party; (5) the party acted in reliance upon the misrepresentation; and (6) the party thereby suffered injury. Norman v. Apache Corp., 19 F.3d 1017, 1022 (5th Cir. 1994). Failure to disclose a material fact may also constitute fraud if the offending party had a duty to disclose the fact. Union Pac. Res. Group, Inc. v. Rhone-Poulene, Inc., 247 F.3d 574, 586 (5th Cir. 2001). A duty may arise under these purposes if, inter alia, a confidential or fiduciary relationship exists between the parties or if one party voluntarily discloses a portion of the material facts "so that he must disclose the whole truth . . . lest his partial disclosure convey a false impression." Id.
Additionally, Third Party Plaintiffs fail to plead any fraud claims with particularity as required under Fed.R.Civ.Pro. 9(b). "[A]rticulating the elements of fraud with particularity requires a plaintiff to specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent." ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336, 349 (5th Cir. 2002); Williams v. WMX Technologies, Inc., 112 F.3d 175, 178 (5th Cir., 1997). In other words, a party is required to set forth the "who, what, when, where, and how" of the alleged fraud. United States ex rel. John Doe v. Dow Chemical, 343 F.3d 325, 328 (5th Cir. 2003) (internal citations omitted).
Rule 9 provides, "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity."
Throughout the pleadings, Holly and Alcedo seem to refer to the big picture of what was going on as a "fraud," without alleging the basic elements, or without pleading their claims with particularity. In their response briefs, despite the fact that Movants listed out the elements of fraud, Holly and Alcedo never identify how their claims meet those conditions. Moreover, Holly and Alcedo make conclusory assertions that their fraud claims were pled with particularity without ever identifying what statements were fraudulent or who made those statements.
Specifically, Holly and Alcedo state the following:
The [first] fraud allegations . . . do plead the element of a false material representation with regard to the sales commission structure. The pleading is straightforward. DDH's chairman, Deason, together with Debo, misrepresented the commission structure and the percentage of the profit from each sale going to Debo and to DDH. Thus, Alcedo/Holly was defrauded in both his capacity as an employee selling the aircraft and as a shareholder in DDH. Alcedo's/Holly's [second] fraud claims . . . are primarily for misuse of corporate funds by Deason, Debo, Deckelman and Chen in violation of their fiduciary duties. Included in these claims were Deason's yacht purchases using corporate funds, Deason's misuse of corporate aircraft, and off-the-books aircraft sale, and the purchase of an aircraft by ACS from DDH in order to transfer money to DDH that Deason could then loot.See Holly's Resp. to Debo's Mot. to Dismiss ¶ 18; Holly's Resp. to DDH's Mot. to Dismiss ¶ 17; Alcedo's Resp. to Debo's Mot. to Dismiss ¶¶ 18, 19; Alcedo's Resp. to DDH's Mot. to Dismiss ¶¶ 17, 18.
While Third Party Plaintiffs may have said a lot about their "fraud" claims, they have failed to say what is necessary. As the Fifth Circuit noted, "A complaint can be long-winded, even prolix, without pleading with particularity." Williams, 112 F.3d at 178. For example, Third Party Plaintiffs' first fraud claim, that regarding the commission structure, fails to identify what statement was fraudulent, how it was fraudulent, or who made the statement knowing it would be relied upon by another party. Third Party Plaintiffs' remaining fraud claims suffer in comparable fashion.
Accordingly, Movants motion to dismiss Third Party Plaintiffs' fraud claims is GRANTED. Under Fed.R.Civ.Proc. 15(a), however, this Court grants Third Party Plaintiffs leave to file an amended complaint that comports with both the basic elements of fraud under Texas law, as well as the heightened pleading requirements of Fed.R.Civ.Proc. 9(b), within 20 days of the date of this Order.
IV. Conclusion
For all the foregoing reasons, the Current Motions are GRANTED in PART and DENIED in PART. Specifically:
1. First, Third Party Plaintiffs cannot obtain the demand exemption of Tex. Bus. Corp. Act Ann art. 5.14(L), because their pleadings fail to allege DDH is a closely held corporation under Texas law. Moreover, Third Party Plaintiffs fail to verify their derivative claims in accordance with Fed.R.Civ.P. 23.1. Accordingly, the Current Motions to dismiss Third Party Plaintiffs' derivative claims are GRANTED.
2. Next, Third Party Plaintiffs' claims do not allege sufficient facts to hold either ACS or DDH liable under the single business enterprise theory of liability. Additionally, Third Party Plaintiffs fail to allege sufficient facts to show DDH is the alter ego of ACS, or that ACS is the alter ego of Deason. However, Third Party Plaintiffs do allege sufficient facts that DDH could be the alter ego of Deason. Accordingly, the Current Motions to dismiss Third Party Plaintiffs' derivative theories of liability are GRANTED in PART and DENIED in PART.
3. Finally, Third Party Plaintiffs fail to plead the basic elements of fraud under Texas law. Moreover, Third Party Plaintiffs fail to state their fraud claims with particularity as required by Fed.R.Civ.P. 9(b). Accordingly, the Current Motions to dismiss Third Party Plaintiffs' fraud claims are GRANTED.
Additionally, under Fed.R.Civ.P. 15(a), this Court grants Third Party Plaintiffs leave to file an amended complaint, as noted above, within 20 days of the date of this Order.