Opinion
CIVIL ACTION NO. 4:19-CV-02818
2023-03-31
STEEL DUST RECYCLING, LLC, et al., Plaintiffs, v. Russ ROBINSON, et al., Defendants.
Emily Renzelli, Emily Luken, Orrick, Herrington & Sutcliffe LLP, Washington, DC, John A. Jurata, Jr., Dechert LLP, Washington, DC, Paul Joseph Stancil, Michael John Morehead, Orrick Herrington Sutcliffe LLP, Houston, TX, Heaven Chanel Chin Chee, Christina Elise Ponig, Leon Cosgrove Jimenez, LLP, Houston, TX, Elisa Beneze, Pro Hac Vice, Noah Becker, Pro Hac Vice, Dechert LLP, Philadelphia, PA, for Plaintiff Steel Dust Recycling, LLC. Christina Elise Ponig, Leon Cosgrove Jimenez, L.L.P., Houston, TX, Paul Joseph Stancil, Michael John Morehead, Orrick Herrington Sutcliffe LLP, Houston, TX, Emily Renzelli, Orrick, Herrington & Sutcliffe LLP, Washington, DC, Elisa Beneze, Pro Hac Vice, Noah Becker, Pro Hac Vice, Dechert LLP, Philadelphia, PA, for Plaintiff DRA, Inc. Emily Renzelli, Orrick, Herrington & Sutcliffe LLP, Washington, DC, Paul Joseph Stancil, Michael John Morehead, Orrick Herrington Sutcliffe LLP, Houston, TX, Heaven Chanel Chin Chee, Christina Elise Ponig, Leon Cosgrove Jimenez, LLP, Houston, TX, Elisa Beneze, Pro Hac Vice, Noah Becker, Pro Hac Vice, Dechert LLP, Philadelphia, PA, for Plaintiff Zinc Internacional, S.A. Jean C. Frizzell, Lindsey Hargrove Raspino, Zachary Thomas Burford, Reynolds Frizzell LLP, Houston, TX, for Defendants Russ Robinson, Zinc Resources, LLC. Jean C. Frizzell, Reynolds Frizzell, Houston, TX, for Defendants Zinc Resources Holding, LLC, U.S. SDR, LLC, Thomas Knepper, U.S. Global Steel Dust, Inc.
Emily Renzelli, Emily Luken, Orrick, Herrington & Sutcliffe LLP, Washington, DC, John A. Jurata, Jr., Dechert LLP, Washington, DC, Paul Joseph Stancil, Michael John Morehead, Orrick Herrington Sutcliffe LLP, Houston, TX, Heaven Chanel Chin Chee, Christina Elise Ponig, Leon Cosgrove Jimenez, LLP, Houston, TX, Elisa Beneze, Pro Hac Vice, Noah Becker, Pro Hac Vice, Dechert LLP, Philadelphia, PA, for Plaintiff Steel Dust Recycling, LLC. Christina Elise Ponig, Leon Cosgrove Jimenez, L.L.P., Houston, TX, Paul Joseph Stancil, Michael John Morehead, Orrick Herrington Sutcliffe LLP, Houston, TX, Emily Renzelli, Orrick, Herrington & Sutcliffe LLP, Washington, DC, Elisa Beneze, Pro Hac Vice, Noah Becker, Pro Hac Vice, Dechert LLP, Philadelphia, PA, for Plaintiff DRA, Inc. Emily Renzelli, Orrick, Herrington & Sutcliffe LLP, Washington, DC, Paul Joseph Stancil, Michael John Morehead, Orrick Herrington Sutcliffe LLP, Houston, TX, Heaven Chanel Chin Chee, Christina Elise Ponig, Leon Cosgrove Jimenez, LLP, Houston, TX, Elisa Beneze, Pro Hac Vice, Noah Becker, Pro Hac Vice, Dechert LLP, Philadelphia, PA, for Plaintiff Zinc Internacional, S.A. Jean C. Frizzell, Lindsey Hargrove Raspino, Zachary Thomas Burford, Reynolds Frizzell LLP, Houston, TX, for Defendants Russ Robinson, Zinc Resources, LLC. Jean C. Frizzell, Reynolds Frizzell, Houston, TX, for Defendants Zinc Resources Holding, LLC, U.S. SDR, LLC, Thomas Knepper, U.S. Global Steel Dust, Inc. ORDER Alfred H. Bennett, United States District Judge
Before the Court are Plaintiffs' Second Amended Complaint (Doc. #99), Defendants' Third Amended Answer and Counterclaims, and two motions: first, Plaintiffs' Motion to Strike (Doc. #131), Defendants' Response (Doc. #134), and Plaintiffs' Reply (Doc. #135); and second, Plaintiffs' Partial Motion for Summary Judgment (Doc. #132), Defendants' Response (Doc. #136), and Plaintiffs' Reply (Doc #137). Having reviewed the parties' submissions, arguments, and the applicable legal authority, the Court grants Plaintiffs' Motion to Strike and Plaintiffs' Partial Motion for Summary Judgment.
I. Background
a. Factual Background
In its Order addressing Defendants' Motion to Dismiss (Doc. #17), the Court detailed the factual background of this case. See Doc. #54. To summarize, Defendants Russ Robinson ("Robinson") and US SDR, LLC ("US SDR") sold their near-bankrupt steel dust recycling business, Steel Dust Recycling, LLC ("SDR"), to Zinc Nacional, S.A. ("ZN") and Plaintiff DRA, Inc. ("DRA") (collectively, the "Buyers") in 2009 for a purchase price of approximately $60 million. Doc. #99 ¶¶ 44-46. In connection with the sale, USSDR and the Buyers executed the Membership Interest Purchase Agreement ("MIPA"). Id. ¶ 45. Following the sale, Robinson stayed on as an SDR employee and signed an employment agreement containing restrictive covenants, noncompetition, and confidentiality provisions (the "Employment Agreement"). Id.¶¶ 48, 52, 64-65.
After the sale of SDR, Robinson formed Global Steel Dust Ltd. ("GSD"), a Swiss company, to build steel dust recycling plants worldwide. Id.¶ 70. USSDR was the majority shareholder of GSD. GSD embarked on building a recycling plant in South Korea through GSDK, Ltd. ("GSDK"), of which GSD owned 100% equity. Doc. #99 ¶ 71. In May 2012, ZN's affiliate company Zinc Recycling, S.A. ("Zinc Recycling") committed to a phased investment of $5.5 million in return for a 10% equity stake in GSD, the Robinson-controlled company. Id. ¶ 72; Doc. #132, Ex. 7. In 2014, Plaintiff Zinc Internacional, S.A. ("ZI") provided loans and eventually acquired a 50% stake in GSDK. Doc. #99 ¶¶ 71-75. In connection with ZI's investment in GSDK, Robinson and his corporate affiliates executed another noncompetition agreement (the "2014 NCA") and a bonus agreement (the "Zinc Bonus Payment Agreement"), in addition to other documents associated with the transaction (the "2014 Transaction"). Id. ¶ 75; Doc. #132, Ex. 12, Ex. 13. Under the 2014 NCA, Robinson agreed to modify his Employment Agreement and extend his previously existing non-solicitation and noncompetition obligations until July 18, 2021. Doc. #99 ¶¶ 75-77. In 2015, ZI acquired 100% ownership of GSDK. Id. ¶¶ 84-86. Two years later, Robinson approached Nucor, a long-time customer of SDR, "about entering into a steel dust recycling contract." Id. ¶¶ 94, 98. Then, on March 12, 2019, Robinson formed another company—Zinc Resources, LLC ("ZR")—to build a steel dust recycling plant in Arkansas. Id. ¶ 96.
b. Procedural Background
On July 31, 2019, SDR, DRA, and ZI (collectively, "Plaintiffs") initiated this suit against Robinson and ZR (collectively, "Defendants"), asserting causes of action for breach of contract, tortious interference, and fraudulent inducement. Doc. #1. Plaintiffs amended their Complaint on September 16, 2019, to bring causes of action for breach of contract, tortious interference with existing contract, and fraudulent inducement (the "Amended Complaint"). Doc. #15. Thereafter, Defendants filed their Motion to Dismiss (Doc. #17), which the Court resolved by dismissing Plaintiffs' fraudulent inducement claim. Doc. #54. Plaintiffs amended their Complaint for the second and final time on December 19, 2021 (the "Second Amended Complaint"). Doc. #99. Defendants filed their Third Amended Answer, Affirmative Defense, and Third Amended Counterclaims to Plaintiffs' Second Amended Complaint on January 11, 2022. Doc. #109. Plaintiffs filed their Motion to Strike Defendants' affirmative defense of fraudulent inducement on August 8, 2022, and their Motion for Partial Summary Judgment on consideration-based defenses on August 24, 2022. Doc. #131; Doc. #132.
II. Legal Standards
a. Federal Rule of Civil Procedure 9(b)
When pleading fraud-related matters, "a party must state with particularity the circumstances constituting fraud or mistake." FED. R. CIV. P. 9(b). An "affirmative defense is subject to the same pleading requirements as is the complaint." Woodfield v. Bowman, 193 F.3d 354, 362 (5th Cir. 1999). "A defendant must 'plead an affirmative defense with enough specificity or factual particularity to give the government "fair notice" of the defense that is being advanced.' " Rogers v. McDorman, 521 F.3d 381, 385 (5th Cir. 2008) (quoting Woodfield, 193 F.3d at 362). "[B]aldly 'naming' the broad affirmative defenses . . . falls well short of the minimum particulars needed to identify the affirmative defense in question . . . ." Woodfield, 193 F.3d at 362. To satisfy the Rule 9(b) particularity requirement, "a plaintiff must plead the time, place and contents of false representations, as well as the identity of the person making the misrepresentation and what [that person] obtained thereby." Davis v. City of Alvarado, 835 F. App'x 714, 720 (5th Cir. 2020).
b. Federal Rule of Civil Procedure 56
Summary judgment is proper where there is no genuine dispute of material fact and the moving party is entitled to a judgment as a matter of law. FED. R. CIV. P. 56(a). A district court "may accept as undisputed the movant's version of the facts and grant [the] motion . . . when the movant has made a prima facie showing of entitlement to summary judgment." Better Bags, Inc. v. III. Tool Works, Inc., 939 F. Supp. 2d 737, 740 (S.D. Tex. 2013). Additionally, "even where the underlying facts are undisputed, . . . the court must indulge every [r]easonable inference from those facts in favor of the party opposing the motion." Am. Tel. & Tel. Co. v. Delta Commc'ns Corp., 590 F.2d 100, 101-02 (5th Cir. 1979). However, summary judgment "may not be thwarted by conclusional allegations, unsupported assertions, or presentation of only a scintilla of evidence." Rogers v. Bromac Title Servs., LLC, 755 F.3d 347, 350 (5th Cir. 2014).
III. Analysis
a. Plaintiffs' Motion to Strike
Plaintiffs' move to strike Defendants' twelfth affirmative defense, fraudulent inducement. Doc. #131. Defendants' fraudulent inducement allegations are as follows:
Plaintiffs' claims are barred, in whole or in part, because Plaintiffs fraudulently induced Mr. Robinson to enter into the Non-Competition Agreement and associated agreements. Similarly, Plaintiffs' claims are barred, in whole or in part, because Plaintiffs entered into the Non-Competition Agreement and associated agreements without the requisite present intention to perform the same.Doc. #109 at 30, ¶ 345. "A defendant must 'plead an affirmative defense with enough specificity or factual particularity to give the government "fair notice" of the defense that is being advanced.' " Rogers, 521 F.3d at 385 (quoting Woodfield, 193 F.3d at 362). To satisfy the Rule 9(b) particularity requirement, "a plaintiff must plead the time, place and contents of false representations, as well as the identity of the person making the misrepresentation and what [that person] obtained thereby." City of Alvarado, 835 F. App'x at 720. A fraudulent inducement claim must be supported by pleadings establishing that a representation was "either known to be false when made or made without knowledge of the truth." IAS Servs. Grp., LLC v. Jim Buckley & Assocs., Inc., 900 F.3d 640, 647 (5th Cir. 2018).
Here, Defendants do not identify any specific representations made by Plaintiffs or explain why they were known to be false at the time they were made. Moreover, they do not identify the contents, timing, circumstances, or location of any alleged misrepresentations. Defendants' fraudulent inducement affirmative defense is pleaded in a conclusory, boilerplate fashion with no factual support. In response to Plaintiffs' Motion to Strike, Defendants argue that the Motion is untimely because it was filed "over seven months" after Defendants served their Answer. Doc. #134 at 3. However, Defendants untimeliness argument is based on Civil Rule of Procedure 12(f), not Rule 9(b). Id. at 3-4. Plaintiffs move to strike Defendants' affirmative defense under Rule 9(b), which imposes a heightened pleading standard for fraud-related claims and defenses and does not have the same time restrictions as Rule 12(f). See Array Holdings Inc. v. Safoco Inc., C.A. No. H-12-366, 2013 WL 4588506, at *1-2 (S.D. Tex. Aug. 28, 2013) (dismissing fraud-based affirmative defenses under Rule 9(b), without ever referencing Rule 12(f)). Moreover "district courts are vested with an inherent power to manage their own affairs so as to achieve the orderly and expeditious disposition of cases." Valdez v. Superior Energy Services, Inc., No. 20-40182, 2022 WL 1184371, at *2 (5th Cir. Apr. 21, 2022).
The Court previously dismissed Plaintiffs' fraudulent inducement claim, which was pleaded with more factual specificity than Defendants' current fraudulent inducement affirmative defense. Doc. #54; see Doc. #15. For the foregoing reasons and to uphold judicial consistency, the Court finds Defendants' fraudulent inducement defense insufficient under Rule 9(b). Therefore, Plaintiffs' Motion to Strike is granted and Defendants' twelfth affirmative defense, fraudulent inducement, is stricken.
b. Plaintiff's Partial Motion for Summary Judgment
Defendants assert fourteen affirmative defenses in their Third Amended Answer, at least two of which contend the 2014 NCA lacks consideration. Doc. #109 ¶¶ 333, 342. Plaintiffs move for summary judgment on Defendants' consideration-based defenses, arguing that Robinson forfeited the right to challenge the validity of his agreements. Doc. #132 at 1-2. Specifically, Plaintiffs argue that the 2014 NCA modified the MIPA and Employment Agreement to extend Defendants' noncompetition and non-solicitation obligations, and Defendants agreed to such modifications through the contract's signing and Robinson's subsequent actions. Id. at 11-12. Defendants argue in response that the 2014 NCA is unenforceable because it was not "ancillary to or part of an otherwise enforceable agreement" at the time the agreement was made. Doc. #136 at 11.
The first page of the 2014 NCA expresses that "in consideration for, among other things, Russ Robinson and GSD agree[ ] to modify the restive convents in the Purchase Agreement and in the Employment Agreement via one or more agreements referred to therein as the 'Noncompetition Agreements.' " Doc. #132, Ex. 12 at 2. Section 7(a) on page 3 of the 2014 NCA reads in relevant part:
(a) Entire Agreement. This Agreement, the Purchase Agreement, and the Employment Agreement shall constitute the entire agreement between the parties hereto and with respect to the restrictive covenants upon Robinson, USSDR or their affiliates. The parties acknowledge that this Agreement is intended to and does modify the provisions of Section 5.3 of the Purchase Agreement and Section 10.2 of the Employment Agreement. To the extent that anything in this Agreement is inconsistent with anything in those agreements, this Agreement shall control.Id. at 4 ¶ 7(a). The 2014 NCA also modified the term "Covenant Period"—a term common to both the 2014 NCA and the non-solicitation and noncompetition provisions of the 2009 Employment Agreement. Under the 2014 NCA, the Covenant Period was seven years from the 2014 NCA's Effective Date of July 18, 2014, replacing the old definition under the 2009 Employment Agreement. Id. at 3 ¶ 3.
Under Texas law, "[a] modification to a contract creates a new contract that includes the new, modified provisions and the unchanged old provisions." Boudreaux Civic Ass'n v. Cox, 882 S.W.2d 543, 547-48 (Tex. App.—Houston [1st Dist.] 1994). "Covenants that place limits on former employees' professional mobility or restrict their solicitation of the former employer's customers and employees are restraints on trade and are governed by the [Texas Covenants Not to Compete Act ("TCNCA")]." Marsh USA Inc. v. Cook, 354 S.W.3d 764, 768 (Tex. 2011). The TCNCA prohibits naked restraints on trade so that a covenant "cannot be a stand-alone promise from the employee lacking any new consideration from the [promisee]." Hunn v. Dan Wilson Homes, Inc., 789 F.3d 573, 584 (5th Cir. 2015) (citing Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006)).
Here, it is undisputed that ZI acquired a 50% stake in GSDK by way of the 2014 Transaction. It is also undisputed that the 2014 NCA was executed as a part of the 2014 Transaction. Doc. #132, Ex. 12. The 2014 clearly states that it is modifying the prior agreement from 2009. Id. at 4 ¶ 7(a). Through the 2014 NCA, Robinson agreed to extend his non-competition and non-solicitation obligations through July 18, 2021. Id. at 3 ¶ 3. Defendants contend that, other than extending his noncompetition obligations, the 2014 NCA did not modify the terms of Robinson's employment or agree to provide further employment, and therefore did not provide adequate consideration. Doc. #136 at 10-18. However, Robinson received new benefits under the 2014 NCA, including the removal of the 2009 Employment Agreement restriction on his participation in the zinc sulfate business. See Doc. #132, Ex. 12 at 3 ¶ 3, Ex. 6 at 6-7.
Defendants' argument understates the 2014 NCA's relevance and scope. Defendants seek to limit the context of the 2014 NCA solely to Robinson's continued employment. However, Robinson's noncompete obligations were integral to the entire 2014 Transaction, not just his projected role as an employee. Robinson's noncompete obligation was necessary for Plaintiffs to protect their investment in GSDK, a Robinson-founded company. Doc. #137 at 3. Absent the noncompete obligations imposed, Plaintiffs might not have had the security necessary to complete the 2014 Transaction. Therefore, the 2014 NCA was indeed "ancillary to or part of" an otherwise enforceable agreement at the time the agreement was made as required by Texas law. Marsh USA Inc. v. Cook, 354 S.W.3d 764, 770 (Tex. 2011) (citing TEX. BUS. & COM. CODE §§ 15.05, .50(a)). Accordingly, there is no question of fact as to whether there is consideration for the 2014 NCA. Plaintiffs' Partial Motion for Summary Judgment is granted.
IV. Conclusion
In conclusion, Defendants failed to sufficiently plead their fraudulent inducement defense and there is no fact question as to whether Defendants received consideration for the 2014 NCA. Therefore, Plaintiffs' Motion to Strike (Doc. #131) and Motion for Partial Summary Judgment (Doc. #132) are both GRANTED. Defendants' fraudulent inducement defense is hereby STRICKEN and Defendants' lack of consideration defenses are DISMISSED.
It is so ORDERED.