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holding that since the court could disentangle the inadequately pleaded fraud claims from the plaintiff's DTPA causes of action, the defendant was not entitled to dismissal of the plaintiff's DTPA claims for failure to meet Rule 9(b) pleading requirements
Summary of this case from Kennard v. Indianapolis Life Ins. Co.Opinion
Civil Action No. 3:04-CV-1299-N.
February 7, 2005
ORDER
Before the Court are the following motions: (1) Metrowerks' Motion to Dismiss filed on June 30, 2004 (docket #5); (2) Embedix's Motion to Dismiss filed on July 1, 2004 (#10); (3) Embedix's Motion to Abate filed on July 2, 2004 (#12); (4) The Canopy Group's Motion to Dismiss filed on July 13, 2004 (#16); (5) Matthew Harris's Motion to Dismiss filed on August 23, 2004 (#33); (6) Embedix's Motion to Dismiss filed on August 24, 2004 (#36); (7) Infomart's Motion to Amend/Correct the Amended Complaint filed on September 24, 2004 (#43); (8) Infomart's Motion for Leave to File Amended Original Complaint to Add Jurisdictional Facts filed on October 1, 2004 (#46); and (9) Matthew Harris's Motion to Dismiss filed on November 9, 2004 (#65). Because Plaintiff Infomart amended its original complaint as of course, the Court denies Metrowerks' (#5) and Embedix's Motions to Dismiss the Original Complaint (#10) as moot. The Court grants in part and denies in part Embedix's Motion to Dismiss the First Amended Complaint (#36) for failure to plead the requisite elements of its tort claims and failure to comply with Rule 9(b). Because the Court denies Embedix's motion to dismiss the First Amended complaint as to the DTPA claims and holds that Infomart failed to prove it was excused from providing DTPA pre-suit notice, the Court grants Embedix's Motion to Abate (#12). The Court also grants in part and denies in part Harris's Motion to Dismiss the First Amended Complaint (#33) for failure to plead the requisite elements of its tort claims, failure to comply with Rule 9(b), and failure adequately to plead a basis for imposing personal liability on Harris. The Court grants The Canopy Group's ("Canopy") Motion to Dismiss for lack of personal jurisdiction (#16) because Infomart cannot establish the requisite minimum contacts or any alter ego doctrine allowing Infomart to impute Embedix's consent to the Court's jurisdiction to Canopy. The Court denies Infomart's Motion to Amend/Correct the Amended Complaint (#43) as futile because neither the Second nor the Third Amended complaint adequately addresses Defendants' meritorious grounds for dismissal. Finally, the Court denies Infomart's Motion for Leave to File Amended Original Complaint to Add Jurisdictional Facts (#46) as futile because the motion provides no basis to determine whether the proposed amendment would cure the jurisdictional defects.
I. BACKGROUND
In December 2001, Plaintiff Infomart contracted with Lineo for Lineo to develop software for Infomart's handheld computer. In 2002, Lineo had financial difficulties and Canopy, a creditor of Lineo, purchased Lineo's assets at a foreclosure sale on April 24, 2002. In April 2002, Canopy formed Embedix to operate Lineo's business and contributed Lineo's former assets to the new corporation. On November 19, 2002, Metrowerks acquired all of Embedix's assets. Neither Lineo nor any of its successors in interest ever provided the contracted-for software. Infomart filed this suit alleging breach of contract, promissory estoppel, fraud, negligent misrepresentation, DTPA and conspiracy claims.
As it must, the Court assumes Infomart's pled facts as true.
II. METROWERKS' MOTION TO DISMISS
Metrowerks moves to dismiss the Original Complaint under Federal Rules of Civil Procedure 9(b) and 12(b)(6). Metrowerks claims that, as a successor corporation, it never assumed Embedix's tort liability and that Metrowerks cannot be held liable for any torts Embedix committed before the asset purchase. Metrowerks also claims that Infomart failed to comply with the heightened pleading requirements of Rule 9(b). See Tel-Phonic Services, Inc. v. TBS Int'l, Inc., 975 F.2d 1134, 1139 (5th Cir. 1992). The Court agrees that Infomart wholly failed to comply with Rule 9(b) in its Original Complaint. However, as of August 2, 2004, Metrowerks had not served a responsive pleading, entitling Infomart to amend its complaint as of course. See FED. R. CIV. P. 15(a); Barksdale v. King, 699 F.2d 744, 747 (5th Cir. 1983). On August 2, 2004, Infomart filed its First Amended Complaint, which is the live pleading. Accordingly, the Court denies Metrowerks' motion to dismiss Infomart's Original Complaint as moot.
III. EMBEDIX'S MOTIONS A. Embedix's June 30, 2004, Motion to Dismiss
On June 30, 2004, Embedix filed its first Motion to Dismiss on the grounds that Infomart failed to plead its fraud, negligent misrepresentation, and DTPA claims with particularity as required by Fed.R.Civ.P. 9(b) and failed adequately to allege an underlying tort to support a claim of conspiracy. Alternatively, Embedix requested that the Court order Infomart to make a more definite statement of its claims. As already noted, Infomart filed its First Amended complaint on August 2, 2004. Even though Embedix filed its answer prior to Infomart's filing of the First Amended complaint, Infomart was still entitled to amend as of course. See Barksdale, 699 F.2d at 747 (holding that only one co-defendant's filing of a responsive pleading did not preclude a plaintiff's amendment as of course pursuant to Rule 15(a)). Accordingly, the Court denies Embedix's first Motion to Dismiss as moot.B. Embedix's Motion to Abate
On June 30, 2004, Embedix also filed a motion to abate the proceedings for failure to provide notice pursuant to the DTPA. TEX. BUS. COM. CODE § 17.505(b). Under the DTPA, once a "defendant specifically denies receiving notice, plaintiff must prove either that he provided it, or that he was excused from providing it, for example, by section 17.505(b)." Hines v. Hash, 843 S.W.2d 464, 467 (Tex. 1992). Here, Infomart pled that it was excused from providing notice under section 17.505(b) because giving notice would have resulted in the expiration of the statute of limitations. In Infomart's response to Embedix's Motion to Abate, Infomart provides no further guidance as to which claims would have been barred nor why they would have been barred. The Court holds that Infomart's bare allegation that it is excused from giving notice is insufficient. Accordingly, the Court abates this for 60 days case from the date of this order.
C. Embedix's August 24, 2004 Motion to Dismiss
On August 24, 2004, Embedix filed a second motion to dismiss, this time attacking the First Amended complaint. Embedix moves to dismiss on the following grounds: (1) Infomart's claim sounds only in contract because Infomart suffered only economic loss to the subject of a contract; (2) Infomart failed to comply with Rule 9(b) by specifying which Defendant made each alleged representation and impermissibly attributes nonparty representations to Embedix; (3) Infomart failed properly to allege the elements of fraud by failing to allege that the representations at issue were false when made and made with no intent of performance; (4) Infomart also failed to comply with Rule 9(b) by failing to allege why any of the alleged representations were false; (5) Infomart failed to comply with Rule 9(b)'s requirement that a plaintiff allege what the defendant attained by the fraud; (6) Infomart's negligent misrepresentation claims fail because Infomart alleged statements of future intention rather than then-existing fact; (7) because, under these circumstances, Rule 9(b) applies to Infomart's negligent misrepresentation and DTPA claims, those claims must be dismissed for the same reasons the fraud claims must be dismissed; and (8) because conspiracy is a derivative action requiring an underlying tort and all of Infomart's tort claims are properly dismissed, the conspiracy claim also fails.
Embedix claims that all of Infomart's noncontract claims must be dismissed because Infomart's injury results from a mere breach of contract. Embedix cites Southwestern Bell Tel. Co. v. Delanney, 809 S.W.2d 493, 495 (Tex. 1991) for the proposition that "[w]hen the injury is only the economic loss to the subject of a contract itself the action sounds in contract alone." While this is true as a general statement, Texas courts recognize that "tort damages are recoverable for a fraudulent inducement claim irrespective of whether the fraudulent representations are later subsumed in a contract or whether the plaintiff only suffers an economic loss related to the subject matter of the contract." Formosa Plastics Corp. USA v. Presidio Eng'rs Contrs., 960 S.W.2d 41, 47 (Tex. 1998). However, Texas authority does not limit plaintiffs in Infomart's circumstances to fraudulent inducement claims. The touchstone of whether an action sounds in tort or contract is whether at the time the promisor made the promise, he made it with no intention of performing — in other words — the promise must have been false when made. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex. 1986). Even when the promise was made after a contract was formed, a plaintiff can recover for fraud if he proves the promise was false when made. Kajima Int'l v. Formosa Plastics Corp., 15 S.W.3d 289, 293 (Tex.App.-Corpus Christi 2000, pet. denied) ("We can find no opinion precluding recovery for fraud because the fraud occurred after execution of a contract, and we decline to do so here."). Accordingly, because Infomart could theoretically state a fraud claim under these circumstances, Embedix is not entitled to dismissal on this ground.
Embedix argues that Infomart has failed to comply with Rule 9(b) by impressibly lumping Defendants together with respect to the accusations of fraud. When a plaintiff fails to specify who made a particular misrepresentation, the claim is subject to dismissal under Rule 9(b) for failure to plead fraud with specificity. Patel v. Holiday Hospitality Franchising, Inc., 172 F. Supp. 2d 821, 824-25 (N.D. Tex. 2001). All five of the misrepresentations alleged against Canopy are also alleged against Embedix. However, Infomart has also alleged that Embedix is the alter ego of Canopy. If adequately alleged, Canopy may be properly held liable for Embedix's misrepresentations. See generally Castleberry v. Branscum, 721 S.W.2d 270 (Tex. 1986) (detailing when a court may disregard the separateness of corporate entities), overruled in part by TEX. BUS. CORP. ACT art. 2.21(A)(3) (failing to observe corporate formalities no longer a permissible factor for proving alter ego). With nothing more than Embedix's conclusory statement that Infomart has not properly pled alter ego, the Court denies Embedix's motion on this ground.
Embedix argues that all fraud claims against it premised on promises must be dismissed because Infomart failed to allege that the representations at issue were false when made or made with no intention of performance. In Texas, a promise to perform in the future is actionable fraud only if made with no intent of performance at the time it was made. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex. 1986). Rather than responding to this argument, Infomart points to its proposed Second Amended Complaint as remedying this defect. Accordingly, the Court dismisses all fraud claims against Embedix based on promises to perform in the future.
Embedix also argues that all fraud claims against it must be dismissed under Rule 9(b) because Infomart failed to allege any of the reasons why the representations at issue were false when made. To comply with Rule 9(b)'s particularity requirement, a plaintiff must explain why the representations at issue were false. Williams v. WMX Tech. Inc., 112 F.3d 175, 177-78 (5th Cir. 1997); Frith v. Guardian Life Ins. Co. of America, 9 F. Supp. 2d 734, 742 (S.D. Tex. 1998). Infomart responds by pointing out that Embedix had a possible motive for committing fraud — the desire to preserve the Infomart contract, which was a valuable asset. Infomart misapprehends the "why" requirement of Rule 9(b). For example, Infomart claims that employees of Lineo (whose assets Embedix eventually acquired) represented that Lineo was capable of developing the software that was the subject of Infomart's contract with Lineo. Infomart merely alleges that this statement was false. Infomart does not explain what made the statement false by alleging, for example, that Lineo had fired all of its qualified programmers or any other fact to suggest why Lineo was incapable of developing the software at the time Lineo's employees represented that it could. This is a separate question from what motivation a defendant had to commit fraud. Accordingly, the Court dismisses all of Infomart's fraud claims against Embedix under Rule 9(b).
Embedix also moves for dismissal under Rule 9(b) for failure to allege Embedix's motive in committing fraud. Rule 9(b)'s specificity requirement dictates that a plaintiff plead what the defendant hoped to obtain by virtue of his alleged fraud. Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir. 1997). In its response, Infomart expands on a theme included in the First Amended complaint. Infomart claims that Embedix misrepresented certain facts to Infomart in order to keep Infomart from declaring Embedix in breach and refusing to perform further under the contract with Lineo. Infomart argues this contract was a valuable asset to Embedix, especially since Embedix eventually sold its assets, including the contract, to Metrowerks. However, Embedix also argues that any nonparty representations attributed to Embedix must be dismissed because Infomart did not and cannot allege a benefit to Embedix by virtue of Lineo's representations. In the "Embedix's Operative Facts" section of the First Amended complaint, Infomart attributes three alleged misrepresentations made by Lineo, a nonparty, to Embedix. These representations were made four months before Embedix was formed. Infomart does not allege what Embedix obtained by Lineo's alleged misrepresentations as required by Rule 9(b). Accordingly, the Court dismisses the fraud claims against Embedix premised on Lineo's representations for failure to allege what Embedix obtained by its alleged fraud.
Embedix also moves to dismiss Infomart's negligent misrepresentation claims based on statements of future intention rather than then-existing fact. To recover for negligent misrepresentation in Texas, a plaintiff must allege and prove that the defendant supplied false information. Federal Land Bank Ass'n of Tyler v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991). The alleged false information must be a statement of then-existing fact, rather than a statement of future intention. Airborne Freight Corp. v. C.R. Lee Enters., Inc., 847 S.W.2d 289, 294 (Tex.App.-El Paso 1992, writ denied). Infomart provides no argument in response to these contentions. The First Amended complaint alleges that Embedix represented that it would provide a project status report within seven days and provide the software stack within eight weeks. These are statements of future intention rather than of then-existing fact. Accordingly, the Court dismisses Infomart's negligent misrepresentation claims premised on these alleged misrepresentations.
Embedix also moves to dismiss Infomart's negligent misrepresentation and DTPA claims on the same Rule 9(b) grounds lodged against Infomart's fraud claims. Embedix argues that Rule 9(b) applies to many causes of action that are similar to fraud, including Texas Insurance Code violations, negligent misrepresentation, and even DTPA violations. However, Rule 9(b) makes no mention of negligent misrepresentation or any other cause of action. Rule 9(b) of the Federal Rules of Civil Procedure provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." By its express terms, Rule 9(b) only applies to "averments" — allegations of fraud. Both Infomart and Embedix mistakenly cite Fifth Circuit authority for the proposition that failure to provide with particularity the circumstances surrounding negligent misrepresentation and DTPA claims warrants dismissal of those claims. See Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719, 723 (5th Cir. 2003); Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir. 1997); Shushany v. Allwaste, Inc., 992 F.3d 517, 520 n. 5 (5th Cir. 1993). In each case, the Court rested its holding on the doctrine of waiver rather than straight applicability of Rule 9(b) to negligent misrepresentation claims.
In Shushany, Plaintiff alleged four causes of action: two securities fraud claims, a common law fraud claim, and negligent misrepresentation. Shushany, 992 F.3d at 520. Defendant moved to dismiss all four claims under Rule 9(b) and the District Court granted the motion. Id. On appeal, the Fifth Circuit held that Plaintiff had waived any argument it had regarding the application of Rule 9(b) to claims other than common law fraud. Id. at 520 n. 5 ("Shushany made no attempt to distinguish the claims in his brief. Likewise, because Shushany does not contest in his appellate brief the district court's dismissal of his negligent misrepresentation claim, we do not address it.") (internal cites omitted). Accordingly, the Court's decision rested on waiver rather than affirming that Rule 9(b) applies to negligent misrepresentation.
In Williams, Plaintiff alleged causes of action for mail and wire fraud, securities fraud, common law fraud and negligent misrepresentation. Williams, 112 F.3d at 177. Defendants moved to dismiss all claims under Rule 9(b) but the District Court denied the motion, finding that the allegations of fraud were barely sufficient. Id. In its discussion, the Fifth Circuit held that because Plaintiffs "do not attempt to distinguish [their] claims in their brief . . . we do not distinguish between them here." Id. (citing Shushany, 992 F.2d at 520 n. 5). Accordingly, by failing to "urge a separate focus" on its various claims, including negligent misrepresentation, Plaintiffs had waived any argument that Rule 9(b) did not apply.
Finally, in Benchmark, Plaintiff alleged fraud and negligent misrepresentation and the Defendant moved to dismiss under Rule 9(b). Benchmark, 343 F.3d at 723. The District Court granted the motion and on appeal, the Fifth Circuit reversed, holding that the complaint satisfied the requirements of Rule 9(b). Id. at 724. The Court acknowledged that "Rule 9(b) by its terms does not apply to negligent misrepresentation claims" but that the Court has applied Rule 9(b) when "the parties have not urged a separate focus on the negligent misrepresentation claims." Id. at 723 (citing Williams, 112 F.3d at 177). The Court also stated that the case at bar was such a case because Plaintiff's "fraud and negligent misrepresentation claims are based on the same set of alleged facts." Id. However, because the Court ultimately held that the complaint satisfied Rule 9(b), that statement was unnecessary to the holding. Furthermore, the Court cited Williams for its holding regarding waiver. Indeed, the Fifth Circuit recently explained that Rule 9(b) does not apply to claims for negligent misrepresentation and that Benchmark, Williams and Shushany rested on theories of waiver. American Realty Trust, Inc. v. Hamilton Lane Advisors, Inc., No. 03-10179, 2004 WL 2297150 *4 *5 nn. 29-30 (5th Cir. Oct 13, 2004) (reversing a dismissal of a negligent misrepresentation claim under Rule 9(b) and distinguishing Benchmark, Williams, and Shushany). Accordingly, the parties misapprehend the applicability of Rule 9(b).
In extraordinary circumstances, a motion to dismiss under Rule 9(b) can indirectly result in dismissal of claims other than fraud. In Lone Star Ladies Investment Club v. Schlotzky's, Inc., 238 F.3d 363, 368 (5th Cir. 2001), the Court provided the proper analysis for evaluating a complaint under Rule 9(b):
Where averments of fraud are made in a claim in which fraud is not an element, an inadequate averment of fraud does not mean that no claim has been stated. The proper route is to disregard averments of fraud not meeting Rule 9(b)'s standard and then ask whether a claim has been stated. There is a qualification. A district court need not rewrite such a deficient complaint. It may dismiss, without prejudice, placing that responsibility upon counsel. Therefore, dismissal of a claim such as negligent misrepresentation will result when the allegations of fraud are so general that allegations of fraud must be disregarded and the remaining complaint is rendered so incomprehensible that a claim for negligent misrepresentation is no longer stated. Here, all allegations of fraud are contained in paragraphs separate from Infomart's negligent misrepresentation and DTPA claims. The Court can disregard Infomart's inadequate allegations of fraud without affecting Infomart's remaining claims. Accordingly, Embedix is not entitled to dismissal of Infomart's negligent misrepresentation and DTPA claims under Rule 9(b).
Finally, Embedix moves to dismiss Infomart's conspiracy claim because all underlying tort claims warrant dismissal. Conspiracy is a derivative tort requiring a viable underlying tort claim in order to recover. Tilton v. Marshall, 925 S.W.2d 672, 681 (Tex. 1996). The Court has dismissed all of Infomart's fraud claims and Infomart's negligent misrepresentation claims based on statements of future intention. However, at least some of Infomart's negligent misrepresentation and DTPA claims survive. Accordingly, the Court denies Embedix's motion to dismiss Infomart's conspiracy claim.
IV. THE CANOPY GROUP'S MOTION TO DISMISS
Canopy moves for dismissal on the grounds that Canopy is not personally within the jurisdiction of this Court. The legal standards for exercise of personal jurisdiction are well-known:
When, as here, the district court did not conduct an evidentiary hearing on defendant's motion to dismiss, the party seeking to assert jurisdiction is required only to present sufficient facts to make out a prima facie case supporting jurisdiction. [ Alpine View Co. v. Atlas Copco A.B., 205 F.3d 208, 214 (5th Cir. 2000)] (citing cases). The court shall accept as true that party's uncontroverted allegations (so long as the allegations are not merely conclusory) and resolve all factual conflicts in favor of the party seeking to invoke the court's jurisdiction. Id. (citing cases).
In a diversity action, a federal court may exercise personal jurisdiction over a defendant only to the extent permitted by the applicable law of the forum state. See Fed.R.Civ.P. 4(e)(1), (h)(1), and (k)(1). In this case, it is well-established that the Texas long-arm statute authorizes the exercise of personal jurisdiction to the full extent allowed by the Due Process Clause of the Fourteenth Amendment. See TEX. CIV. PRAC. REM. CODE ANN. § 17.042 (West 1997); Alpine View 205 F.3d at 214; Schlobohm v. Schapiro, 784 S.W.2d 355, 357 (Tex. 1990).
The Due Process Clause of the Fourteenth Amendment protects an individual's liberty interest in not being subject to the binding judgments of a forum with which he has established no meaningful "contacts, ties, or relations." Int'l Shoe Co. v. Washington, 326 U.S. 310, 319 (1945). Exercising personal jurisdiction over a nonresident defendant is consistent with constitutional due process when "(1) that defendant has purposefully availed himself of the benefits and protections of the forum state by establishing 'minimum contacts' with the forum state; and (2) the exercise of jurisdiction over that defendant does not offend 'traditional notions of fair play and substantial justice.'" Mink v. AAAA Development LLC, 190 F.3d 333, 336 (5th Cir. 1999) (quoting International Shoe Co., 326 U.S. at 316 (1945)). "'Minimum contacts' can be established either through contacts sufficient to assert specific jurisdiction, or contacts sufficient to assert general jurisdiction." Id.; Alpine View, 205 F.3d at 215. When a nonresident defendant has "purposefully directed its activities at the forum state and the litigation results from alleged injuries that arise out of or relate to those activities," the defendant's contacts are sufficient to support the exercise of specific jurisdiction over that defendant. See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 (1985) (internal quotation marks omitted). General jurisdiction may be asserted when a defendant's contacts with the forum state are substantial and "continuous and systematic" but unrelated to the instant cause of action. See Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414 n. 8 (1984).Cent. Freight Lines, Inc. v. APA Transp. Corp., 322 F.3d 376, 380-81 (5th Cir. 2003).
Infomart claims that Canopy has sufficient minimum contacts with Texas because Canopy, as a creditor of Lineo (the party that originally contracted with Infomart) foreclosed on Lineo's assets, some undefined amount of which were located in Texas. Infomart admits that the foreclosure sale actually took place at a courthouse in Utah. Infomart does not specify whether Canopy is subject to specific or general personal jurisdiction. Infomart also makes no allegation regarding the relatedness of Canopy's contacts to this litigation. The Court holds that this contact is insufficient to subject Canopy to this Court's territorial jurisdiction.
Infomart also claims that Canopy is subject to the Court's jurisdiction because Embedix waived any objection to personal jurisdiction and that waiver should be imputed to Canopy because Embedix is Canopy's alter ego. When one corporation is the alter ego of another, it is consistent with Due Process to impute the first corporation's waiver of objection to personal jurisdiction to the other corporation. Patin v. Thoroughbred Power Boats Inc., 294 F.3d 640, 652-53 (5th Cir. 2002). Embedix filed an answer without objecting to the exercise of personal jurisdiction, thereby waiving any objection it may have had. Accordingly, to subject Canopy to this Court's personal jurisdiction, Infomart must prove that Embedix is the alter ego of Canopy.
Both Infomart and Canopy argue that various factors from Utah and Texas law apply to determine whether Embedix is the alter ego of Canopy. Both parties also argue that the Hargrave factors apply. Hargrave v. Fibreboard Corp., 710 F.2d 1154, (5th Cir. 1983). Courts in this circuit have applied the Hargrave factors as part of the federal Due Process inquiry. See Southmark Corp. v. Life Investors, Inc., 851 F.2d 763, 772 n. 15 (5th Cir. 1988); Villar v. Crowley Maritime Corp., 780 F. Supp. 1467, (S.D. Tex. 1992). The Court also finds that the Hargrave factors are sufficiently probative of whether alter ego applies in the context of personal jurisdiction under either Utah or Texas law. Accordingly, the Court will look to evidence of the Hargrave factors in determining whether Embedix is the alter ego of Canopy.
Infomart claims that it has proven that Embedix is the alter ego of Canopy. To prove Embedix is the alter ego of Canopy for personal jurisdiction purposes, Infomart must point to sufficient evidence of the following factors: "(1) amount of stock owned by the parent of the subsidiary; (2) did the two corporations have separate headquarters; (3) did they have common officers and directors; (4) did they observe corporate formalities; (5) did they maintain separate accounting systems; (6) did the parent exercise complete authority over general policy; (7) did the subsidiary exercise complete authority over daily operations." Hargrave, 710 F.2d at 1160. As the proponent of personal jurisdiction over Canopy, Infomart has the burden of showing facts justifying the exercise of personal jurisdiction. Product Promotions, Inc. v. Cousteau, 495 F.2d 483, 490-91 (5th Cir. 1974). However, Infomart "need only make a prima facie showing of jurisdiction, so that the allegations of the complaint are taken as true except as controverted by the defendant's affidavits and conflicts in the affidavits are resolved in plaintiff's favor." Travelers Indemnity Co. v. Calvert Fire Ins. Co., 798 F.2d 826, 831 (5th Cir. 1986), modified on other grounds, 836 F.2d 850 (1988).
Infomart points to the following facts as establishing that Embedix is the alter ego of Canopy: (1) Canopy owned a majority of Embedix's stock — approximately 75%; (2) Embedix and Canopy were located in the same industrial park in buildings Canopy owned or leased with a common address at some point in time; (3) Embedix and Canopy have at least some common directors; (4) from April 2003 to the present, Embedix has had no paid employees, no assets, no new contracts and no formal board meetings in 2004; and (5) Canopy and its President and CEO Ralph Yarro exercised control over Embedix by requiring Canopy's approval before Embedix could sell its assets to Metrowerks.
Canopy does not dispute the relevance of the degree of ownership Canopy has of Embedix. Canopy does dispute the amount of ownership — 66% as opposed to 75% — but, as already stated, the Court must assume Infomart's allegations are true. Canopy also does not dispute the fact that Embedix and Canopy were located in the same basic area and that this fact is also relevant. Canopy also acknowledges that Embedix and Canopy have two common directors on a board consisting of four members. However, Canopy disputes the relevance of the fact that Embedix has had no employees, assets, contracts, or board meetings since April 2003. Canopy argues that Embedix has little or no recent activity because the corporation is being wound up and exists only to satisfy various indemnity agreements with other companies not a party to this litigation. Canopy argues that these events, occurring after Embedix/Canopy's alleged misrepresentations, are irrelevant to the question of whether Embedix is the alter ego of Canopy. See Villar v. Crowley Maritime Corp., 780 F. Supp. 1467, 1477 (S.D. Tex. 1992) (holding that the fact that a corporation was dissolved after an injury it allegedly caused was insufficient to establish that the corporate form was used to defraud plaintiffs.) Even if the Court believed that these facts subsequent to the sale of Embedix's assets to Metrowerks in April 2003 were relevant, the Court holds that Infomart has failed to meet its burden.
Infomart fails to allege that Canopy exerted the requisite amount of control over Embedix. The last two factors in the Hargrave analysis are: (1) did the parent exercise complete authority over general policy; and (2) did the subsidiary exercise complete authority over daily operations. Hargrave, 710 F.2d at 1160. Infomart claims that the most important fact proving control is that Canopy required its approval before Embedix could sell its assets. However, Canopy was a shareholder of Embedix and Embedix was selling substantially all of its assets. Accordingly, under Utah law, Embedix was statutorily required to receive Canopy's approval before Embedix could sell its assets to Metrowerks. UTAH CODE ANN. § 16-10a-1202 ("Sale of property requiring shareholder approval."). Infomart makes no other allegation of Canopy's control over Embedix. Accordingly, the Court holds that Infomart has failed to meet its burden to show that Embedix was the alter ego of Canopy and dismisses Canopy for lack of personal jurisdiction.
V. MATTHEW HARRIS'S MOTIONS A. Harris's August 23, 2004, Motion to Dismiss
On August 23, 2004, Matthew Harris filed his first motion to dismiss. Harris argues that the First Amended complaint must be dismissed under Rules 9(b) and 12(b)(6) for failure properly to plead the elements of fraud and failure to plead fraud with particularity. As a threshold matter, Infomart claims that it need not put forth evidence of the elements of its fraud claim at the pleading stage, citing Fiess v. State Farm Lloyds, No. Civ. A. H-02-1912, 2003 WL 21659408 (E.D. Tex. June 4, 2003) for this proposition. Infomart argues that the District Court in Feiss only considered the elements of fraud after conducting its Rule 9(b) analysis, which shows that Infomart need not present evidence of these elements at the pleading stage. Infomart misapprehends the court's analysis in Feiss. While Infomart need not necessarily marshal all of its evidence at this stage, Infomart must plead sufficient facts to demonstrate the circumstances of fraud with the level of particularity that Rule 9(b) requires. In Feiss, the court conducted a separate analysis of the pleading requirements of Rule 9(b) and the evidence supporting the elements of fraud because the court was deciding both a Rule 12(b)(6) motion to dismiss and a motion for summary judgment. Feiss does not stand for the proposition that a plaintiff need not allege facts to support its fraud claim. In fact, the court stated:
Looking strictly at the fraud/intentional misrepresentation allegation in the complaint, the Fiesses have not alleged sufficient facts to meet the requirements of a fraud claim under Rule 9(b). Thus, the Fiesses' claim against State Farm for fraud is subject to dismissal for failure to state a claim upon which relief can be granted. Moreover, aside from failing to plead fraud properly, the Fiesses have not adduced evidence from which it could be inferred that State Farm committed fraud.Id. at *20 (emphasis added). Accordingly, nothing in Feiss prevents this Court from dismissing a complaint for either a failure to allege all the necessary elements of fraud or failing to allege with particularity the facts and circumstances surrounding the alleged fraud.
Harris argues that Infomart's fraud claim based on the "Lineo Update," including statements made in April 2002 of Lineo's financial condition, must be dismissed for failure adequately to allege the elements of fraud. Infomart claims that a Mr. Tan of Lineo sent an email with an attachment entitled "Lineo Update" to Infomart misrepresenting that Lineo's financial condition was solid. Infomart also claims that Harris represented that Canopy was just a financial backer and Lineo would be in good financial condition by June of 2002. Harris argues that Infomart failed to state the required elements that Harris made the Lineo Update misrepresentations, that Harris intended Infomart to rely on these statements, and that these statements were false. See Formosa, 960 S.W.2d at 47. Infomart does not respond to Harris's arguments on these points. Harris also argues that there is no allegation that Infomart relied on the Lineo Update or that Infomart was damaged by such reliance. Id. Infomart responds to this last argument by stating that Infomart relied on the Lineo Update by continuing to deal with the defendants rather than declaring them in breach and refusing to perform further. However, Infomart does not explain what additional costs they incurred as a result. Accordingly, Infomart has failed to plead the necessary elements of fraud and the Court dismisses Infomart's fraud claim based on the Lineo Update or statements of Lineo's financial condition under Rule 12(b)(6).
Harris claims that Infomart's fraud claims based on the Lineo Update and statements of Lineo's financial condition must also be dismissed under Rule 9(b). Harris argues that Infomart failed to plead any facts showing why the Lineo Update was false when made as required by Rule 9(b). See Williams, 112 F.3d at 177. Infomart fails to respond to this argument. Harris also argues that there are no facts alleged to support that Harris knew the Lineo Update was false when made. Infomart responds by citing Rule 9(b)'s relaxation of pleading scienter and argues it meets that standard with its conclusory allegation that Harris knew the statement was false. While Rule 9(b) is more relaxed terms of pleading scienter, Infomart must still make more than the bare accusation that Harris knew the Lineo Update was false. Lovelace v. Software Spectrum, 78 F.3d 1015, 1018 (5th Cir. 1996) ("A plaintiff will not survive a Rule 9(b) motion to dismiss on the pleadings by simply alleging that a defendant had fraudulent intent. In order to adequately plead scienter, a plaintiff must set forth specific facts to support an inference of fraud.") Finally, Harris argues that Infomart failed to plead Harris's motive in making any misrepresentation as required by Rule 9(b). See Williams, 112 F.3d at 177. Infomart responds to this argument by pointing out that Harris wanted to prevent Infomart from declaring Harris's company in breach of the contract, thereby preserving a valuable asset that was eventually sold to Metrowerks, a co-defendant. Although Infomart may have responded adequately to the motive argument, the Court holds that Infomart failed to comply with Rule 9(b) as to scienter and why the Lineo Update was false. Accordingly, the Court dismisses Infomart's fraud claim based on the Lineo Update and statements regarding Lineo's financial condition under Rule 9(b).
Harris argues that Infomart's fraud claims based on a business card given out at a May 3, 2003, Seattle meeting with Infomart must be dismissed because Infomart failed to allege that any statement on the card was false or that Infomart was damaged by any such statement. See Formosa, 960 S.W.2d at 47. Infomart does not defend its First Amended complaint, rather it points out that its proposed pleading amendments would provide that the business card contained the Lineo logo, thereby misrepresenting that Lineo was an ongoing concern and that Harris worked for Lineo. Even if the Court agrees with Infomart that this is sufficient, Infomart fails to address the issue of whether and how Infomart was damaged by these representations on Harris's business card. Accordingly, the Court dismisses Infomart's fraud claim premised on the business card for failure adequately to allege the elements of fraud.
Harris also claims that Infomart failed to comply with Rule 9(b) with respect to the business card because Infomart failed to allege the contents of any statements on the card, any facts showing why statements on the card were false, or Harris's motive for making the representations via the business card. See Williams, 112 F.3d at 177. Infomart responds once again by reference to its proposed amended complaint, arguing that the content of the business card statement was the Lineo logo. Infomart also contends that the implication that Lineo was an ongoing concern was false because Lineo's assets had been foreclosed on and Harris's motive for making this misrepresentation was to keep the Infomart contract as a business asset. Infomart has provided sufficient facts to demonstrate the contents, Harris's motive and why the statement on the business card was false. Accordingly, the fraud claim premised on the business card survives Rule 9(b).
Harris argues that Infomart's fraud claim premised on the oral statement that "Lineo's financial condition was solid" at the Seattle meeting must be dismissed for failure adequately to allege the elements of fraud because there is no allegation that Harris made the statement, that Infomart was damaged by the statement or that Infomart relied on the oral statement. See Formosa, 960 S.W.2d at 47. Infomart fails to respond to this argument, pointing instead to the proposed amended complaint and stating that it is clearly sufficient. Accordingly, the Court dismisses Infomart's fraud claim based on the oral statement at the Seattle meeting for failure adequately to plead the elements of fraud.
Harris also argues that Infomart's fraud claim based on the Seattle oral statement of financial condition must be dismissed under Rule 9(b) because Infomart failed to plead who made the statement, its exact content or why it was false. See Williams, 112 F.3d at 47. Again, Infomart fails to address the argument regarding this oral statement of financial condition. Accordingly, the Court dismisses Infomart's fraud claim premised on this statement for failure to comply with Rule 9(b).
Harris argues that Infomart's fraud claim based on the June 14, 2002, email from Harris stating that a status report would be provided within seven days, Embedix's CEO would be responsible for design of the hardware and that Harris would take on the Infomart project personally must be dismissed under Rules 9(b) and 12(b)(6). Harris argues for dismissal for failure properly to allege the elements of fraud because Infomart fails to allege that Infomart relied on these statements or that they were knowingly false. See Formosa, 960 S.W.2d at 47. Infomart fails to address this argument. Accordingly, the Court dismisses Infomart's fraud claims premised on the June 14, 2002, statements under Rule 12(b)(6).
Harris also argues that the June 14, 2002, statements must be dismissed under Rule 9(b) for failure to plead with particularity why the statements were false and Harris's motive for making the June 14, 2002, statements. See Williams, 112 F.3d at 177. Once again, Infomart fails to address this argument. Accordingly, the Court dismisses Infomart's fraud claims premised on the June 14, 2002, statements under Rule 9(b).
Harris claims that Infomart's fraud claims based on the August 2002 statements reaffirming the email from June 14, 2002, making undefined promises regarding the software and promising to develop the software within eight weeks must be dismissed for failure properly to allege the elements of fraud. Harris argues that Infomart failed to allege that Infomart relied on or was damaged by these statements. See Formosa, 960 S.W.2d at 47. Infomart fails to respond to this argument. Accordingly, the Court dismisses Infomart's fraud claims based on the August 2002 statements.
Harris also claims that Infomart's fraud claims premised on the August 2002 statements must be dismissed under Rule 9(b) for failure to plead the circumstances of fraud with particularity. Harris argues that Infomart failed to allege any facts showing why these statements were false, the specific contents of the statements, who said them, to whom they were said and specifically when they were made. See Williams, 112 F.3d at 177. Infomart fails to respond to this argument. Accordingly, the Court dismisses Infomart's fraud claims based on the August 2002 statements.
Like Embedix, Harris also lodges his same Rule 9(b) arguments against Infomart's negligent misrepresentation and DTPA claims. For the reasons stated in the Court's decision on Embedix's second motion to dismiss, Harris is not entitled to dismissal of the negligent misrepresentation and DTPA claims. Accordingly, Harris's motion to dismiss these claims is denied.
See supra Part III.C.
Harris also argues that Infomart's contract and promissory estoppel claims must be dismissed because Infomart failed adequately to plead any basis for imputing liability to Harris. Harris argues that Utah law applies because courts in the Fifth Circuit look to the state of incorporation in deciding whether to disregard the corporate form. Amoco Chem. Co. v. Tex Tin Corp., 925 F. Supp. 1192, 1201 (S.D. Tex. 1996). Harris claims that Utah law does not allow Infomart to hold Harris personally liable for his company Embedix's breach of contract or any promissory estoppel claim Infomart may have. Cascade Energy Metals Corp. v. Banks, 896 F.2d 1557, 1577 (10th Cir. 1990) (applying Utah law and citing Centurian Corp. v. Fiberchem, Inc., 562 P.2d 1252, 1253 (Utah 1977) (piercing not allowed in sales contract dispute); Dockstader v. Walker, 29 Utah 2d 370, 510 P.2d 526, 528 (Utah 1973) (piercing not allowed in employment contract dispute)). Infomart's only response is that it has adequately pled Harris's actual participation in the various tort claims. Accordingly, the Court dismisses Infomart's breach of contract and promissory estoppel claims against Harris.
B. Harris's November 9, 2004, Motion to Dismiss
On November 9, 2004, Harris filed his second motion to dismiss, attacking the Second and Third Amended complaints. As stated below, the Court denies Infomart's motions to file any further amended complaints. Accordingly, the Court denies Harris's second motion to dismiss as moot.
VI. INFOMART'S MOTIONS A. Infomart's Motion to Amend/Correct the Amended Complaint
On September 24, 2004, Infomart filed a motion to amend the First Amended complaint and attached its proposed Second Amended complaint. Infomart offered the Second Amended complaint to address defects Embedix and Harris raised in their motions to dismiss. Infomart's Second Amended complaint makes the same conclusory allegations that the alleged representations were false and that the speakers knew they were false. Infomart provides no facts to support these bare statements. The Second Amended complaint does include some allegations of reliance and motive. Infomart claims that it relied on the Defendants' misrepresentations by deciding not to declare Defendants in breach. This is also the alleged motive for Defendants' misrepresentations — to keep Infomart from declaring Defendants in breach. However, Infomart still fails to demonstrate how it was damaged by these representations. While leave to amend should be freely granted, leave may properly be denied where amendment would be futile. United States ex rel. Adrian v. Regents of Univ. of Cal., 363 F.3d 398, 403 (5th Cir. 2004). Accordingly, the Court denies Infomart's motion to amend the complaint as futile.
B. Infomart's Motion for Leave to File Amended Original Complaint to Add Jurisdictional Facts
On October 1, 2004, Infomart filed a motion for leave to add jurisdictional facts to its complaint in order to correct deficiencies Canopy raised in its motion to dismiss. The Court has read and considered Infomart's motion. The Court dismissed Canopy from the suit because Infomart failed sufficiently to plead facts showing Canopy's control over Embedix. While leave to amend a complaint should be freely granted, leave to amend can be properly denied when amendment would be futile. Adrian, 363 F.3d at 403. Aside from the argument in its response to Canopy's motion to dismiss, Infomart has provided the Court with no guidance as what facts Infomart would like to add. The local rules of this Court require Infomart to include the proposed amended pleading so that the Court can evaluate whether to grant the motion. See N.D. TEX. L.R. 15.1. With no indication that Infomart could plead additional facts demonstrating Canopy's control over Embedix, the Court holds that amendment would be futile. Accordingly, the Court denies Infomart's motion to add jurisdictional facts.C. Infomart's Motion to Amend in Its Response to Harris's Motion to Dismiss
In its response to Harris's first motion to dismiss, Infomart attached its proposed Third Amended complaint and asks the Court for leave to file this complaint. As already noted, leave to amend should be freely granted, but may properly be denied if futile. Adrian, 363 F.3d at 403. After reading the proposed Third Amended complaint, the Court still finds that amendment would be futile because the amendment fails to address how Infomart was damaged by the representations, why the statements were false or any facts to suggest that the statements were made knowingly. Accordingly, the Court denies Infomart's motion to file its Third Amended complaint.
VII. CONCLUSION
The Court grants Embedix's and Harris's motions to dismiss the First Amended Complaint as to all fraud claims and those negligent misrepresentation claims based on statements of future intention. The Court grants Embedix's motion to abate for 60 days from the date of this order. In addition, the Court grants Harris's motion to dismiss the contract and promissory estoppel claims as to him. The Court also dismisses Canopy for lack of personal jurisdiction. The Court denies all three of Infomart's motions to amend its complaint. Accordingly, the only remaining claims in this litigation are contract and promissory estoppel claims asserted against Embedix, the negligent misrepresentation claims not based on statements of future intention, the conspiracy and the DTPA claims against Embedix, the negligent misrepresentation, conspiracy and DTPA claims asserted against Harris and all claims asserted against Metrowerks as alleged in the First Amended Complaint.