Citations
- 361 F. Supp. 3d 633
Full opinion text
XAVIER RODRIGUEZ, UNITED STATES DISTRICT JUDGE
On this date, the Court considered Defendant Mark Sylla's Motion to Dismiss pursuant to Rule 12(b)(2) for lack of personal jurisdiction (docket no. 86), Defendant Dewayne D. Naumann's Motion to Dismiss (docket no. 82), and Defendant Equity Liaison Company's Motion to Dismiss (docket no. 83), and the responses thereto.
Factual and Procedural Background
This lawsuit, which now involves multiple parties and claims, stems from a contract for the purchase of frac sand between Bates Energy Oil & Gas ("Bates Energy") and Complete Oilfield Services ("COFS"). The following facts alleged in the Third Amended Counterclaim ("TAC") (docket no. 68), which is COFS's live pleading, are taken as true for purposes of the pending motions.
COFS is a Utah company that was created in 2017 for the specific purpose of supplying frac sand to ProPetro, a pressure pumping and fracking company based in Midland, Texas. COFS and ProPetro have a Supply Agreement for COFS to acquire specific types of frac sand for ProPetro's use, and ProPetro agreed to deposit $ 4 million into an escrow account to pay COFS's eventual sand supplier for the purchase and delivery of sand.
COFS began researching to find an appropriate source for frac sand, and relied upon information provided by others such as Defendant Austin Howard of Howard Resources. In March 2017, Defendant Howard introduced COFS to Stanley Bates, the principal and CEO of Bates Energy, which was created in February 2017. Despite Bates's reputation as an unscrupulous businessman, Austin Howard firmly vouched for Bates as a trustworthy associate and assured COFS that Bates was well regarded in the frac sand industry. Bates represented to COFS that Bates Energy had the capacity to supply the required frac sand, specifically through its rights with mines in Wisconsin. Relying on Bates's representations about Bates Energy's delivery capabilities, as well as other representations, COFS entered into a Memorandum of Understanding ("MOU") with Bates Energy on April 18, 2017. Under the MOU, Bates Energy was to deliver specific amounts and types of frac sand to one of seven rail terminals in Texas on specific due dates, the first being May 10, 2017. COFS alleges that, "[o]nce Bates Energy became aware that COFS was a potential client, it promptly notified other Counter-Defendants, copying them on emails and giving rise to the conspiracy and other unlawful acts that led to the Counter-Defendants' theft of over $ 650,000 of COFS's funds." TAC ¶ 25.
COFS alleges that "[p]ublic allegations of improper conduct by Bates created COFS's need for caution if the parties were to proceed." TAC ¶ 30. COFS alleges that it moved forward based on Howard's endorsement, but "insisted on a legal structure to protect the funds entrusted by ProPetro," including the creation of two independent escrow accounts for ProPetro's monies, one with Counter-Defendant Equity Liaison Company ("ELC") and one with Amegy Bank. Id. Bates Energy originally insisted that all $ 4 million be held in escrow by ELC, which COFS later learned was a close associate of Bates's overseen by its principal Dewayne D. Naumann, ostensibly because Amegy Bank was not embedded in the oil and gas industry and in Bates's opinion, ELC was a "proven performance company." Id. ¶ 33. But because ELC was not a financial institution and was unknown to COFS, COFS insisted upon the creation of a second escrow account with Amegy Bank. ProPetro's money was placed into two escrow accounts, one with Amegy Bank with a deposit of $ 3 million, with Amegy serving as the escrow agent, and one with ELC with a deposit of $ 1 million in account no. 2917 at Chase Bank, with ELC acting as the escrow agent.
COFS, Bates Energy, and ELC entered into an April 14, 2017 Escrow and Distribution Agreement ("the Escrow Agreement"). Under the terms of the MOU between Bates Energy and COFS, Bates Energy could be paid from the escrow account the first 50% of each purchase upon delivery of a Bill of Lading ("BOL") for the sand, and could receive the outstanding balance within three business days after the sand was "loaded into the COFS or designated trucking company, and the BOL of the load-out are issued with the final invoice." TAC Ex. 3 ¶ 3. The Escrow Agreement required ELC to deposit and maintain COFS's funds in a separate escrow account under COFS's name, but, unbeknownst to COFS, account no. 2917 was a pre-existing Bates Energy escrow account that ELC/Naumann was already handling for Bates Energy, and thus the $ 1 million was immediately commingled with funds already in the account. TAC ¶¶ 35-36. COFS alleges that disbursements from the ELC escrow account required the joint instruction of both COFS and Bates Energy, and COFS alleges that the unusual arrangement was acceptable to it "because both escrow agreements required COFS's notice, signature and authorization to effectuate any disbursements of funds." Id. ¶ 37, 42. COFS alleges that "Naumann assured COFS that he and ELC recognized their legal obligations as a fiduciary" and all parties "knew that disbursement of escrowed funds was improper until COFS signed off on an invoice or disbursement authorization." Id. ¶ 42.
COFS alleges that Stanley Bates immediately began lying about frac sand being on its way, and in fact represented that Bates Energy had already begun acquiring sand and arranging for delivery by April 17, before the formal MOU was executed on April 18. Id. ¶ 44. Bates again promised that railcars were in Iowa on April 27 and would be leaving for Texas on April 29 with anticipated delivery on May 5. Id. ¶¶ 47-48. No sand was delivered either time, and Bates Energy provided no BOLs or other documents showing it ever loaded any railcar with sand. Id. ¶ 48.
After COFS became concerned about the truth of the statements and Bates Energy's ability to deliver, COFS's principal Sam Taylor went to Wisconsin on May 9 to investigate Bates Energy's purported mines and other frac sand sources. Id. ¶ 49. COFS alleges that Bates sent Mark Sylla, who was also in the frac sand business, as a "company representative," and Sylla "took Sam Taylor on a winding tour around Wisconsin, stopping at two mines along the way," neither of which "had the capacity to deliver any appreciable amount of frac sand and neither permitted Sylla/Bates Energy to access its premises." Id. ¶ 50.
Bates Energy failed to meet the May 10 initial delivery deadline. COFS alleges that Stanley Bates and David Bravo, who had been described alternatively as an owner, COO, and logistics coordinator of Bates Energy and worked closely with Bates/Bates Energy and was aware of the escrow agreements, knew that Stanley Bates faced imminent indictment for his role in the Four Winds Logistics frac sand scandal. Id. ¶ 102. Consequently, on May 11 or 12, Bravo, Sylla, and Bates's girlfriend Audra Vega, created a new company, Unlimited Frac Sand d/b/a Frac Sand Unlimited ("FSU"), a Texas LLC, "to maintain the parties' fraudulent and illegal acts against COFS, and drain COFS's escrowed funds." Id. Sylla is listed as a manager of FSU on the LLC formation documents. COFS alleges that FSU "was essentially one and the same as Bates Energy, and was operated by Bates and Bravo." Id. ¶ 103. COFS alleges that by July 2017, Bates was directing ELC/Naumann to use the name FSU on new escrow agreements and it was listed as the "assignee" on Bates/Bates Energy correspondence and false invoices referring to sand that was never procured or delivered. Id. ELC/Naumann directed numerous unauthorized payments to FSU from COFS's escrowed funds. Id. ¶ 104. On May 12, $ 50,000 was withdrawn from the ELC escrow account, and disbursed $ 16,666 each to ELC/Naumann, Bates/Bates Energy, and FSU/Bravo. Id. ¶ 67. That same day, Bates/Bates Energy approved an unauthorized wire transfer of $ 10,761.52 to purchase railcar insurance. Id. ¶ 68. On May 16, 2017, Stanley Bates was indicted based on his involvement in Four Winds Logistics.
COFS alleges that Bates Energy changed its strategy in early June to string COFS along, suggesting that it could deliver noncomplying sand. Id. ¶ 52. COFS alleges that Bates admitted that he had never scheduled any sand for delivery until June 9, when he made his first attempt to deliver compliant sand. But this attempt was also deficient. Id. ¶ 57. The railcar documentation indicated that the consignee of the product was "High Crush" rather than Bates Energy, and Bates insisted that Sam Taylor "fix that problem by falsely representing to railroad officials that Sam was with Frac Sand Unlimited, the company managed by David Bravo, Mark Sylla, and Bates' girlfriend Audra Vega." Id. After hours of searching the Odessa facility, Taylor never located the sand. Id. COFS alleges on information and belief that Bates Energy did not have a mine or other supplier that could provide the tonnage and type of sand COFS required under the MOU. Id. ¶ 54.
On June 15, COFS and Bates Energy agreed that COFS could use some of the escrowed money to buy sand from CSI, and funds were distributed from the ELC escrow account and then replenished from the Amegy account. Id. ¶ 59. COFS alleges that throughout this time, Defendants were "secretly and systematically raiding COFS's escrow funds" despite knowing that "funds should not have been distributed absent notice to and consent by COFS." Id. ¶ 61. COFS alleges that Defendants absconded with at least $ 652,000 of its funds and "used various techniques to conceal the unlawful disbursements." Id. ¶¶ 63-64. ELC/Naumann frequently transferred large sums of money among the Chase bank account that was supposed to be the segregated escrow account, ELC's high-interest money market account, FSU's checking account, and ELC/Naumann's personal checking account. Id. ¶ 64. COFS alleges that ELC also used at least three sets of "books" and improperly redacted information, making it impossible to identify all specific recipients of cash disbursements from the account. Id. ¶¶ 66-67.
On June 15, $ 65,000 was improperly disbursed as "liquidated damages," including $ 15,000 to ELC and $ 10,000 to Sylla. Id. ¶ 70. On June 30, there was an additional $ 28,500 disbursement as "liquidated damages and administration fee," including $ 7,500 to ELC and $ 5,000 to Sylla. Id. ¶ 71. COFS alleges there were also improper disbursements for attorney's fees to Bates Energy's attorneys, the Rosenblatt firm.
COFS alleges that Defendants also used a Boerne, Texas company called Tier 1 Sands, LLC for two substantial, fraudulent sand transactions, demanding that money be paid to Tier 1 Sands to purchase frac sand on July 6 and again on July 18. COFS alleges upon information and belief that Bates/Bates Energy and/or Bravo/FSU are either affiliated with Tier 1 Sands and/or have an illegal side agreement to share funds stolen from COFS. Id. ¶ 78-83.
On July 12, COFS did approve a disbursement of approximately $ 39,000 for frac sand based on supplied BOLs. Id. ¶ 73. FSU is listed as the consignee on 18 BOLs that were supplied to COFS as "proof" that Bates Energy had procured frac sand. Id. ¶ 104. COFS authorized a payment to Bates Energy in reliance upon those representations, but no sand was delivered, demonstrating that the BOLs were false and/or forged. Id.
Also on July 12, Bates/Bates Energy and ELC/Naumann facilitated another payment to Bates/Bates Energy for $ 6,500 in unauthorized "admin fees." Id. ¶ 74. On July 19, Bates/Bates Energy issued a request for the disbursement of funds for "liquidated damages and admin fees" of $ 69,000, distributed to Bates Energy ($ 20,000), Bravo ($ 20,000), Sylla ($ 7,500), Howard Resources ($ 6,500), and ELC ($ 15,000), plus $ 31,000 in legal fees likely paid to the Rosenblatt Firm. Id. ¶ 75.
On July 20, Bates Energy brought this lawsuit, asserting a claim against COFS for breach of contract and against its principal Sam Taylor for tortious interference with contract. COFS alleges that Bates Energy continued obtaining unauthorized disbursements on July 26 and 31. TAC ¶ 76. On July 30, Bates/Bates Energy attempted "to drain the entirety of the escrow account" by demanding that ELC/Naumann distribute all sums in the account to Bates Energy "due to Liquidated Damages, Cost of Goods, and Demurrage of Rail Cars." Id. ¶ 77. COFS alleges that Bravo and/or FSU have assisted and advised Bates/Bates Energy in its lawsuit. Id. ¶ 106. COFS alleges that, on August 11, Bravo and FSU participated with Bates/Bates Energy in a sham sand transaction involving Transload and Logistics LLC, after which ELC/Naumann transferred $ 204,266.97 of COFS's funds to FSU. Id. ¶ 105.
On August 15, Bates/Bates Energy requested that ELC/Naumann pay $ 106,970.56 for demurrage obligations purportedly incurred by Tier 1 Sands but divided among the Defendants Tier 1 Sands, Rosenblatt Firm, ELC, Bravo Construction, and Bates Energy. Id. ¶ 83. Also on August 15, COFS officially terminated the MOU, and Rosenblatt emailed the termination notice to Bates/Bates Energy and Bravo, but Defendants continued their conspiracy to drain the escrow funds through August 23, 2017. Id. ¶ 84. Bates sent the termination email to ELC/Naumann and Bravo with the note, "It's NOW or NEVER!" Id. Bates/Bates Energy and ELC/Naumann immediately exchanged an email regarding "Demurrage Invoice and Distribution of Funds." Id. ¶ 85 (Ex 9). The next day, Bates/Bates Energy sent to ELC/Naumann a fake "demurrage" invoice from Tier 1 Sands, LLC to FSU for $ 4,550. Id. ¶ 85. On August 23, Bates/Bates Energy sent another invoice to ELC/Naumann demanding payment to itself for $ 140,541.85 for "demurrage," based on yet more fake documents prepared by Bates/Bates Energy, and ELC/Nauman disbursed the funds without any supporting third-party documentation because Bates/Bates Energy had never delivered any sand. Id. ¶¶ 85-86. Because ELC/Naumann was concerned that the lack of documentation would expose it to liability, Rosenblatt wrote ELC/Naumann "demanding" that it pay the funds. Id. ¶ 87. (Ex 10).
COFS filed a counterclaim against Bates Energy for declaratory judgment, rescission, fraud, breach of contract, equitable accounting, and theft, and sought a writ of attachment to protect monies in the ELC escrow account. COFS and Taylor removed the case on the basis of diversity jurisdiction. After removal, COFS filed additional counterclaims against third-party defendants ELC and Naumann for declaratory judgment, breach of the Escrow Agreement, equitable accounting, breach of fiduciary duty, and "restitution or money had and received," and sought a writ of attachment. ELC answered and filed counterclaims against COFS and cross-claims against Bates for indemnity. Docket no. 36. Naumann filed a motion to dismiss the counterclaims against him for failure to state a claim for relief under Rule 12(b)(6). Docket no. 37. After a hearing, the Court granted the motion to dismiss the claims against Naumann individually, with leave to amend. Text Order dated January 24, 2018.
Thereafter, COFS filed a motion for leave to file amended pleadings and to join additional defendants, which this Court granted. COFS then filed its Third Amended Counterclaim ("TAC") (docket no. 68) against Bates Energy, ELC, and Naumann, and additional Defendants Stanley Bates, David Bravo, Lorena Silvistri Bravo, individually and d/b/a Bravo Consulting Services, Howard Resources, LLC, the Rosenblatt Law Firm, Mark B. Sylla, Tier 1 Sands, LLC, and Unlimited Frac Sand. As noted above, that is COFS's live pleading. In response, Naumann, ELC, and Sylla filed motions to dismiss (docket nos. 82, 83, & 86). Tier 1 Sands, Howard Resources, David Bravo, Lorena Silvistri Bravo, and Unlimited Frac Sand filed answers. Docket nos. 85, 89, & 102. COFS voluntarily settled its claims against the Rosenblatt Law Firm. Docket no. 108.
Analysis
I. Mark Sylla's Motion to Dismiss
Defendant Mark Sylla, an individual residing in Wisconsin, moves to dismiss the claims against him for lack of personal jurisdiction under Rule 12(b)(2).
A. Applicable Law
There is personal jurisdiction if the state's long-arm statute extends to the defendant and exercise of such jurisdiction is consistent with due process. Sangha v. Navig8 Ship Mgmt. Private Ltd. , 882 F.3d 96, 101 (5th Cir. 2018). "Because the Texas long-arm statute extends to the limits of federal due process, the two-step inquiry collapses into one federal due process analysis." Id. Due process requires that the defendant have "minimum contacts" with the forum state (i.e. , that the defendant has purposely availed himself of the privilege of conducting activities within the forum state) and that exercising jurisdiction is consistent with "traditional notions of fair play and substantial justice." Id.
"Minimum contacts" can give rise to either specific jurisdiction or general jurisdiction. In this case, COFS relies on specific personal jurisdiction. Specific jurisdiction may exist "over a nonresident defendant whose contacts with the forum state are singular or sporadic only if the cause of action asserted arises out of or is related to those contacts." Id. In other words, such jurisdiction exists "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." Id. "[S]pecific jurisdiction is confined to adjudication of issues deriving from, or connected with, the very controversy that establishes jurisdiction." Id.
The inquiry whether a forum state may assert specific jurisdiction over a nonresident defendant "focuses on the relationship among the defendant, the forum, and the litigation." Walden v. Fiore , 571 U.S. 277, 283-84, 134 S.Ct. 1115, 188 L.Ed.2d 12 (2014). The relationship must arise out of contacts that the defendant himself creates with the forum state, not contacts between the plaintiff or third parties and the forum state and not the contacts the defendant makes by interacting with other persons affiliated with the state. Id. at 284, 134 S.Ct. 1115. The plaintiff cannot be the only link between the defendant and the forum. Id.
Once a plaintiff establishes minimum contacts between the defendant and the forum state, the burden of proof shifts to the defendant to show that the assertion of jurisdiction is unfair and unreasonable. Navig8 Ship Mgmt. , 882 F.3d at 101. The defendant must make a "compelling case." Id. In determining whether the exercise of jurisdiction is fair and reasonable, the court must balance: (1) the burden on the nonresident defendant of having to defend itself in the forum, (2) the interests of the forum state in the case, (3) the plaintiff's interest in obtaining convenient and effective relief, (4) the interstate judicial system's interest in the most efficient resolution of controversies, and (5) the shared interests of the states in furthering fundamental social policies. Id.
B. COFS's Allegations Concerning Sylla
As the party seeking to invoke the power of the court, COFS "bears the burden of establishing jurisdiction, but is required to present only prima facie evidence." Pervasive Software, Inc. v. Lexware GmbH & Co. , 688 F.3d 214, 219 (5th Cir. 2012) (quoting Seiferth v. Helicopteros Atuneros, Inc. , 472 F.3d 266, 270 (5th Cir. 2006) ). "In determining whether a prima facie case exists, this Court must accept as true [COFS's] uncontroverted allegations, and resolve in [its] favor all conflicts between the [jurisdictional] facts contained in the parties' affidavits and other documentation." Pervasive Software , 688 F.3d at 219-20.
The Third Amended Counterclaim makes the following specific allegations concerning Sylla: (1) Sylla is an owner of FSU and operates FSU with Bates's girlfriend Audra Vega and David Bravo, and before FSU was formed, he was an independent contractor working for Bates/Bates Energy; (2) in May 2017, Sam Taylor traveled to Wisconsin to visit mines from which Bates Energy represented it obtained its frac sand, and Bates Energy sent "company representative" Mark Sylla; (3) Sylla took Taylor on a winding tour around Wisconsin, stopping at two mines along the way, neither of which had the capacity to deliver any appreciable amount of frac sand and neither of which allowed Sylla/Bates Energy access to its premises; (4) Sylla conspired with Bates/Bates Energy, Bravo, and others in falsely representing to COFS that Bates/Bates Energy had access to numerous legitimate sand mines in Wisconsin and elsewhere, and that sand was on the way, in part by pointing out to Taylor in Wisconsin mines in which Bates Energy allegedly had contracts and interests or allocations; (5) on May 12, 2017, Bravo, Sylla, and Vega created a new company, Unlimited Frac Sand d/b/a Frac Sand Unlimited ("FSU") in order to maintain the parties' fraudulent and illegal acts against COFS and drain COFS's escrowed funds, and FSU "was essentially one and same as Bates Energy, and was operated by [Stanley] Bates and Bravo" ; (6) by July 2017, Bates was directing ELC/Naumann to use the FSU name on new escrow agreements and it was listed as the "assignee" on Bates/Bates Energy correspondence and false invoices referring to sand that was never produced or delivered; (7) upon information and belief, ELC/Naumann established Chase Bank account no. 3761 as the "escrow account" for FSU, and thereafter ELC/Naumann directed numerous unauthorized payments to FSU from COFS's escrowed funds, and FSU is listed as the consignee on 18 BOLs that were supplied to COFS as proof that Bates Energy had procured frac sand, and for which COFS authorized payment to Bates Energy on July 12 in reliance upon those false representations; (8) ELC/Naumann paid Sylla, and Sylla accepted and retained, illegal payments of at least $ 22,500 from the COFS escrow account, without notice to or consent from COFS; (9) Sylla was at all times acting individually and in the course and scope of his agency with Bates Energy or in the course and scope of his employment by or ownership of FSU; and (10) on August 4, 2017, Bravo and Sylla were preparing to enter into another transaction, involving funding with a $ 5 million commitment, under the name Odessa Commodity Services, LLC.
COFS alleges a claim of conspiracy to commit fraud against all Counter-Defendants, including Sylla, asserting that they all had an object to be accomplished, namely the fraudulent actions towards COFS leading to the taking and retention of COFS's funds. COFS also alleges a claim of theft and conspiracy to commit theft against all Defendants, including Sylla, pursuant to the Texas Theft Liability Act, Texas Civil Practice & Remedies Code Chapter 134. COFS alleges that all Defendants conspired to commit the theft and retention of COFS's funds. Last, COFS asserts a claim for "restitution or money had and received" against all Defendants, including Sylla, alleging that they received escrow money that in equity and good conscience rightfully belongs to COFS.
C. Analysis
Sylla contends that the only act attributable to him occurred entirely within the state of Wisconsin and the complaint "contains virtually no allegations or suggestions that the parties' dispute 'arises out of' or 'relates to' any of Sylla's acts or omissions in or related to Texas," such that specific personal jurisdiction is lacking. COFS responds that Sylla's actions in Wisconsin were directed at and caused injury in Texas, and Sylla should have reasonably anticipated being haled into a Texas court "given his relationship with co-defendants Stanley Bates and David Bravo, his knowledge of and assistance with the subject of the MOU (performable in Texas), his participation in the formation of a Limited Liability Company in the State of Texas for the purpose of fulfilling the MOU, and his acceptance of illegal payments from Texas-based ELC out of funds under the care of COFS." Docket no. 97 at 1-2.
COFS asserts that personal jurisdiction does not require Sylla to have engaged in any specific act within Texas, and that when a nonresident defendant commits an act outside the state that causes tortious injury within the state, that tortious conduct amounts to sufficient minimum contacts to constitutionally permit a federal district court within the state to exercise personal jurisdiction over the tortfeasor, citing Guidry v. United States Tobacco Co. , 188 F.3d 619, 628 (5th Cir. 1999). Guidry confirms that "specific jurisdiction may arise without the nonresident defendant's ever stepping foot upon the forum state's soil or may arise incident to the commission of a single act directed at the forum," if the defendant purposefully availed himself of the privilege of conducting activities in the state, thereby invoking the benefits and protections of the forum's laws. Id. However, in Guidry , the defendant maintained regular telephone contact with the patient's doctor in Texas, shipped experimental drugs directly to the plaintiff in Texas, and the alleged tort took place in whole or in part in Texas.
Moreover, Guidry pre-dates Walden v. Fiore , 571 U.S. 277, 134 S.Ct. 1115, 188 L.Ed.2d 12 (2014), which emphasizes that the Court should focus on the defendant's contacts with the forum that the defendant himself creates, not the defendant's contacts with persons who reside in the forum. It is not enough that the plaintiff is injured in the forum state because the plaintiff cannot be the only link between the defendant and the forum. Id. at 284-86, 134 S.Ct. 1115. "A forum State's exercise of jurisdiction over an out-of-state intentional tortfeasor must be based on intentional conduct by the defendant that creates the necessary contacts with the forum." Id. at 286, 134 S.Ct. 1115. "To be sure, a defendant's contacts with the forum State may be intertwined with his transactions or interactions with the plaintiff or other parties. But a defendant's relationship with a plaintiff or third party, standing alone, is an insufficient basis for jurisdiction." Id.
Here, some of the contacts upon which COFS relies, such as the fact that the MOU was performable in Texas and was intended for the ultimate benefit of Texas-based ProPetro, are contacts by COFS or third parties, or are based on Sylla's relationship with them, rather than Sylla's purposeful contacts with the forum. Representations about or affecting a contract allegedly formed in Texas and performable in Texas between other parties have been held insufficient to support specific jurisdiction because those contacts with Texas were merely fortuitous. Navig8 Ship Mgmt. , 882 F.3d at 103 ("that the email communications were targeted at a contract formed in Texas, and that the emails concerned work that was to be performed in Texas - are legally insufficient to support a finding of specific jurisdiction"). This case does not present as clear a case for specific jurisdiction as COFS asserts.
However, COFS does point to some purposeful contacts by Sylla directed at Texas, and the Court finds those contacts sufficient to support specific personal jurisdiction. Walden reaffirmed long-standing Fifth Circuit principles that committing a tort in whole or in part in Texas will give rise to specific jurisdiction here. COFS alleges that Defendants, including Sylla, were conspiring to purposefully target specific, identifiable funds ($ 1 million) held in escrow in Texas. As part of that conspiracy, the allegations are that (1) Sylla conspired to misrepresent Bates Energy's ability to procure sand, to induce COFS to maintain its relationship with Bates Energy, and, specifically, to keep its money in the Texas escrow account with co-conspirator ELC, so that the members of the conspiracy could steal the funds and (2) participated in the creation of a Texas LLC, of which he was named manager, and used that LLC to create fraudulent invoices and BOLs that were used to misappropriate the specific funds from the Texas escrow account, both without COFS's consent and with its fraudulently obtained consent. And Sylla further personally received money from the Texas escrow account on at least three occasions in June and July 2017 as a result (TAC ¶¶ 70, 71, 75). Thus, fake documents were directed to Texas to further a fraudulent scheme and to cause the transfer of specified funds in a Texas account out of the account to participants in the scheme, including Sylla. These contacts are not fortuitous contacts with Texas based on the unilateral acts of COFS or third parties, and go beyond mere injury in Texas, instead establishing that Sylla's conduct connects him to Texas in a meaningful way.
Based on these purposeful contacts, Sylla should have reasonably anticipated being haled into Texas court for claims such as fraud, theft, conspiracy, and money had and received. Sylla further fails to demonstrate that the exercise of personal jurisdiction over him would be unfair or unreasonable. See Monkton Ins. Servs. v. Ritter , 768 F.3d 429, 433 (5th Cir. 2014) (if the plaintiff successfully establishes minimum contacts, the burden shifts to the defendant to show that exercising jurisdiction would be unfair or unreasonable). Sylla's motion to dismiss for lack of personal jurisdiction is denied.
II. ELC and Naumann's Motions to Dismiss
A. COFS's Allegations as to ELC and Naumann
COFS alleges that allegations of improper conduct by Bates created COFS's need for caution, and its insistence on a legal structure to protect the ProPetro funds, including the creation of two independent escrow accounts. TAC ¶ 30. Because the $ 4 million was prepayment towards ProPetro's expected receipt of 80,000 tons of frac sand, COFS contemplated that, once it could confirm through BOLs, rail car receipts, invoices, purchase orders, and other documentation that Bates Energy had delivered the correct sand to the correct location, that documentation would be sent to the escrow agent account manager for audit and, if the audit showed proper delivery, the escrow account manager was authorized to release payment funds to Bates Energy. Id. ¶ 32. Bates Energy insisted that the money be held in escrow by ELC because it was "a proven performance entity," but COFS later learned ELC/Naumann was a close associate of Bates, that ELC served as "escrow agent" for Bates Energy's business operating accounts, and that ELC was a creditor of Bates Energy. Id. ¶¶ 33-34. COFS alleges that ELC/Naumann held multiple bank accounts in Chase Bank for itself, Bates/Bates Energy, and FSU and "repeatedly transferred and commingled substantial amounts of funds in and out of these various accounts, and made illegal disbursements from the multiple accounts to itself and the other Counter-Defendants." Id. ¶ 34.
The signatories on the Escrow Agreement were Janis Kline for COFS and Stan Bates for Bates Energy. TAC ¶ 37. Naumann signed as "Managing Member" for ELC under the language "Equity Liaison Company, LLC, Escrow Agent, hereby accepts its appointment as Escrow Agent as described in the foregoing Agreement, subject to the terms and conditions set forth therein." Docket no. 82 Ex. A at 5.
COFS alleges that, under the terms of the Escrow Agreement, ELC/Naumann were contractually obligated to deposit and maintain COFS's funds in a separate escrow account under COFS's name, but ELC deposited it into Chase Bank account no. 2917, a pre-existing Bates Energy escrow account, and the $ 1 million was therefore immediately commingled with existing funds in the account. TAC ¶ 36. COFS notes that, under the Escrow Agreement, ELC was authorized to deliver the escrow funds to specified recipients "[u]pon receipt by ELC of the Disbursement Authorization (Exhibit A) executed by Buyer [defined as COFS]." Id. ¶ 39 (quoting Escrow Agrmt. ¶ 1.3). COFS alleges that Exhibit A obligated both Bates and COFS to sign off before a disbursement was made, and any disbursement required the joint instruction of both parties. TAC ¶¶ 37, 40. The Escrow Agreement further required that ELC "shall immediately notify and convey to Buyer [COFS] and Seller [Bates Energy] every request or other notice received from the other party or any other source regarding the subject escrow funds." Docket no. 82 Ex. A ¶ 2.1B. COFS further alleges that, if the MOU was terminated, ELC was obligated to return the balance of the funds in the escrow account to COFS. TAC ¶ 41; docket no. 82 Ex. A ¶ 2.2.
COFS alleges that the Counter-Defendants were "secretly and systematically raiding COFS's escrow funds" through at least August 23, 2017, at all times knowing that the funds should not be disbursed absent notice to and consent by COFS. TAC ¶ 61. COFS alleges that ELC disbursed at least $ 652,000 in escrow funds improperly, and used various techniques to conceal the unlawful disbursements, including: (1) commingling the funds in the Chase account no. 2917 with Bates Energy funds; (2) frequently transferring large sums of money among, at a minimum, four Chase bank accounts, the account no. 2917, ELC/Naumann's high-interest money market account, FSU's checking account, and ELC/Naumann's personal checking account; (3) using at least three sets of "books" in disbursing funds; and (4) inaccurate accounting intended to conceal monies taken from COFS. Id. ¶¶ 64-66. COFS alleges that ELC/Naumann approved substantial transfers out of the escrow account to others without knowledge or consent of COFS and in violation of the Escrow Agreement. COFS further alleges that "ELC/Naumann" made disbursements to itself, without knowledge or consent of COFS, including $ 16,666 on May 12, $ 15,000 on June 15, $ 7,500 on June 30, $ 15,000 on July 19, and $ 22,358.53 on August 15. Id. ¶¶ 67-83. COFS also alleges that ELC/Naumann transferred money out of the escrow account after receiving notice that COFS had terminated the MOU. Id. ¶¶ 84 -87.
COFS alleges that ELC/Naumann were at all times fiduciaries of COFS and authorized numerous payments from the ELC escrow account in contravention of the agreements and committed the actions intentionally. TAC ¶ 89. COFS alleges that "ELC/Naumann further breached duties owed to COFS by failing to disclose that it was the escrow agent for Bates Energy, and that it would transfer money in and out of the Bates Energy account, commingling those funds with COFS escrow funds" and that neither Bates Energy nor ELC/Naumann informed COFS of their conflicts of interest before the parties entered into the subject agreements. Id. ¶ 90. COFS alleges that "ELC/Naumann also breached duties to COFS by repeatedly refusing to provide information regarding the balance in the ELC escrow account," id. ¶ 91, that ELC/Naumann "was closely involved in Bates' attempts to justify their unlawful acts in secretly taking COFS' funds, id. ¶ 92, and that ELC/Naumann "fraudulently induced COFS to enter into the ELC escrow agreement," id. ¶ 94.
With regard to the fraudulent inducement claim, COFS alleges that the parties specifically negotiated contract language that obligated ELC/Naumann to immediately notify COFS of every request made by any party regarding the funds in the ELC Escrow Account, and to convey every request or other notice regarding the subject funds. TAC ¶ 94. COFS alleges that this language was incorporated into the Escrow Agreement upon COFS's request and was "in addition to language in the agreement already requiring COFS's approval before any funds could be disbursed." Id. COFS alleges that "ELC/Naumann expressly represented to COFS that no funds would leave the ELC Escrow Account absent notice to COFS, conveyance to COFS of any notice or request for funds, and COFS's signature approving the disbursement" and that "COFS relied on these material representations to its detriment." Id. COFS alleges that "[b]oth ELC and Naumann individually are liable for these and other transgressions because Naumann is using the corporate form of ELC to perpetrate a fraud on COFS, and adherence to the corporate fiction would promote injustice and lead to an inequitable result." Id.
The TAC contains a general section entitled "Respondeat Superior and Ratification," which alleges that all of the individual defendants "are liable in their individual capacities for the causes of action stated that are grounded in tort law, whether based on statute or common law." TAC ¶ 124. It further alleges, "In all cases, the individual named was acting on his own behalf, as well as in the course and scope of his employment or agency for the entity to which he or she was contracted.... Dwayne Naumann, as the only principal in ELC, was at all times acting both individually and in the course and scope of his employment for ELC." Id.
B. Equity Liaison Company's Motion to Dismiss
COFS asserts a breach-of-contract claim against ELC, as well as numerous tort causes of action. ELC moves to dismiss all the tort claims, asserting that COFS "has turned a breach of contract claim into a vast conspiracy of tortious conduct by numerous defendants" and arguing that the tort claims are barred by the economic loss rule. Docket no. 83 at 1. ELC further contends that the theft and negligent misrepresentation claims should be dismissed for failure to give fair notice, that the fraud claim should be dismissed for failure to plead fraud with particularity, and the equitable accounting claim should be dismissed for failure to plead the required elements. Id.
1. Whether the economic loss rule bars COFS's tort claims
COFS sues ELC for breach of contract, fraud, conspiracy to commit fraud, theft and conspiracy to commit theft, breach of fiduciary duty and conspiracy to commit breach of fiduciary duty, negligent misrepresentation, equitable accounting, and restitution or money had and received. ELC contends that the economic loss rule bars all of COFS's tort claims because a plaintiff may recover only under a contract theory when the plaintiff claims that the defendant's actions breached a duty that arose solely because the parties have contracted with one another and the injury is only the economic loss to the subject of the contract itself. ELC contends that the economic loss rule requires dismissal of all COFS's tort claims, including the fraudulent inducement and breach of fiduciary duty claims, because any duty, including any fiduciary duty, arises from the contractual agreement, and COFS has failed to identify any damages caused by ELC's actions other than the loss of escrow funds that are the subject of the parties' contract.
The economic loss rule is a defense that bars negligence and certain other tort claims (such as products liability) for recovery of economic loss when the loss is limited to the subject matter of a contract or to the product itself. However, it is not enough to simply say that all tort claims are barred when the economic loss is the subject of a contract, as "there is not one economic loss rule broadly applicable throughout the field of torts, but rather several more limited rules that govern recovery of economic losses in selected areas of the law." Sharyland Water Supply v. City of Alton , 354 S.W.3d 407, 415 (Tex. 2011) (quoting Vincent R. Johnson, The Boundary-Line Function of the Economic Loss Rule , 66 WASH. & LEE L. REV. 523, 534 (2009) ). The rule is not generally applicable, and its application depends on an analysis of its rationales in a particular situation. McCaig v. Wells Fargo Bank, N.A. , 788 F.3d 463, 474 (5th Cir. 2015).
Contractual relationships may create duties under both contract and tort law. Jim Walter Homes, Inc. v. Reed , 711 S.W.2d 617, 618 (Tex. 1986). The acts of a party may breach duties in tort or contract alone or simultaneously in both. Id. The Texas Supreme Court has held that when a plaintiff seeks damages for breach of a duty created solely under a contract, as opposed to a duty imposed by law, tort damages are unavailable. Sw. Bell Tel. Co. v. DeLanney , 809 S.W.2d 493 (Tex. 1991) (when duty arose solely from contractual promise to publish advertisement, the action was only one for breach of contract); see also Jim Walter Homes , 711 S.W.2d at 618 (when injury is solely that parties to construction contract did not get the house they were promised and paid for, that can only be characterized as a breach of contract). In such cases, losses are more appropriately addressed through common-law breach of contract claims than through tort claims. See Sharyland Water Supply , 354 S.W.3d at 418. In addition, the rule has been applied to unintentional tort claims made by plaintiffs who are not parties to a contract when the loss is the subject matter of the contract and the rationales of the rule justify its application. See LAN/STV v. Martin K. Eby Constr. Co. , 435 S.W.3d 234 (Tex. 2014).
negligent misrepresentation
The Court first considers whether COFS's negligent misrepresentation claim is barred by the economic loss rule. The Texas Supreme Court has indicated that the economic loss rule primarily applies to "actions for unintentional torts." LAN/STV , 435 S.W.3d at 235. The Restatement , which the Texas Supreme Court cited with approval, now concludes generally that "there is no liability in tort for economic loss caused by negligence in the performance or negotiation of a contract between the parties." Id. at 243 (quoting Restatement (Third) of Torts: Liability for Economic Harm ). The Court further held that the economic loss rule should apply equally to an action for negligent performance of services and an action for negligent misrepresentation in the same situation. LAN/STV , 435 S.W.3d at 246.
In D.S.A., Inc. v. Hillsboro Independent School District , 973 S.W.2d 662, 663 (Tex. 1998), the Court explained that, regardless of any independent duty, negligent misrepresentation claims are viable only if a party sustains an injury independent from those stemming from a contractual breach. see also Sharyland , 354 S.W.3d at 417 n.12 (noting that negligent misrepresentation claims are "viable only if a party sustains an injury independent from those stemming from a contractual breach"); Smith v. JPMorgan Chase Bank, N.A. , 519 F. App'x 861 (5th Cir. 2013) (a plaintiff may not bring a claim for negligent misrepresentation unless he can show that he suffered an injury that is distinct, separate, and independent from the economic losses recoverable under a breach of contract claim); New Century Financial, Inc. v. Olympic Credit Fund, Inc. , 487 F. App'x 912 (5th Cir. 2012) (negligent misrepresentation claim barred when plaintiff did not allege an injury distinct from that suffered under the contract and sought the same measure of damages). In D.S.A. , the plaintiff failed to distinguish between its out-of-pocket damages and its benefit-of-the bargain damages for its negligent misrepresentation claim, and thus failed to establish an independent injury.
The Fifth Circuit applied the rule to negligent misrepresentation claims in Ibe v. Jones , 836 F.3d 516, 526 (5th Cir. 2016), because, in tallying damages, the plaintiff alleged no damages independent from those resulting from the breach of contract. The Court cited TIB-The Independent BankersBank v. Canyon Community Bank , 13 F.Supp.3d 661, 671 (N.D. Tex. 2014), in which the district court stated that "Texas courts have held that where a plaintiff seeks to recover out-of-pocket expenses incurred in reliance on the defendant's misrepresentation, the plaintiff 'establish[es] an injury that is independent of its breach of contract claim.' " Thus, it held that because the plaintiff sought to recover out-of-pocket expenses incurred in connection with having to repurchase the loan, it sufficiently alleged an injury independent from the economic loss to the subject matter of the agreement (the loan). Id. The Court noted that its ruling was based on the pleadings, and indicated nothing about how a summary judgment ruling might go. Id. at 671 n.7.
As pled, COFS fails to allege an independent injury. COFS alleges that several Counter-Defendants, including ELC, "made representations to Counter-Plaintiff COFS in the course of [its] business and/or in a transaction in which [it] had a pecuniary interest" and "provided false information for the guidance of Counter-Plaintiff in those businesses." TAC ¶ 158. No specific damages are pled related to the negligent misrepresentation claim, other than a general assertion that COFS "suffered pecuniary loss as a result of its reliance." Id. The breach-of-contract action likewise indicates no specific damages. And the prayer simply seeks judgment "for actual, special, and consequential damages." While COFS may recover purely economic damages for a negligent misrepresentation claim, it must show damages independent of its breach-of-contract claim under the independent injury rule.
COFS's Response sheds no further light on possible independent injuries. It focuses on the fact that COFS has alleged that ELC breached independent duties, and the types of equitable relief it seeks, but fails to adequately demonstrate independent injury flowing from a negligent misrepresentation as opposed to a breach of contract. It is not sufficient to argue, as COFS does, that it seeks the equitable relief of forfeiture of the monies wrongfully taken, especially when that relief appears tied to its breach-of-fiduciary duty claim. In addition, a breach-of-contract claim sometimes permits restitution damages, and this relief is specifically tied neither to the contract claim nor the negligent misrepresentation claim.
COFS notes that the escrow agreement is a services contract, and therefore the subject of the agreement is the services rendered, such that it questions the premise that the subject of the agreement is the escrow funds. Docket no. 91 at 10 n.6. The term "loss of the subject matter of the contract" is used frequently in the cases without clarification. But the relevant question for the independent injury rule is whether COFS is alleging damages/injury flowing from reliance on a negligent misrepresentation independent of its claimed damages/ injury from the breach of the contract. In this regard, all the case law is clear that a party may not seek and recover benefit-of-the-bargain or expectancy damages for negligent misrepresentation, D.S.A. , 973 S.W.2d at 663, while such damages are available under a breach-of-contract claim. Chapman Custom Homes directs that the harm for a negligent misrepresentation claim must be "not merely the economic loss of a contractual benefit" or "only ... the economic loss of a contractual expectancy." Chapman Custom Homes, Inc. v. Dallas Plumbing Co. , 445 S.W.3d 716, 718 (Tex. 2014). Thus, COFS's request for leave to amend to seek lost profit damages as a "form of damages independent of the Escrow Agreement," docket no. 91 ¶ 24, is confusing, since the lost profits it seeks are clearly benefit-of-the-bargain damages as they represent the commissions COFS would have received had all gone according to plan. But if COFS is seeking leave to amend to seek lost profits for its breach-of-contract claim, such leave is granted.
Application of the economic loss rule becomes much more murky when the plaintiff seeks reliance or out-of-pocket damages for the negligent misrepresentation, when such damages are recoverable types of damages under both negligent misrepresentation and contract claims. Nevertheless, at the pleading stage, a plaintiff must at least attempt to differentiate the damages sought. AT & T Corp. v. Park I-10 Motors , No. 13-CV-644-XR, 2015 WL 150254 (W.D. Tex. Jan. 15, 2015) (the plaintiff's failure to identify an independent injury in its pleadings is sufficient to apply the independent injury rule).
Additional difficulty arises from the fact that, as Defendant's motion points out, all defendants and claims for negligent misrepresentation are lumped together in the cause of action. Thus, it is unclear exactly what negligent misrepresentations by ELC COFS is attempting to recover for and what damages may flow therefrom. In its Response, COFS argues that its negligent misrepresentation claim is based not on an affirmative misrepresentation, but on a failure to disclose information where there is a duty to do so, citing a case in which a bank was held to have a duty to use reasonable care to provide information to customers. COFS further points to the duties of disclosure of escrow agents. COFS relies on the fact that ELC refused to provide an accounting when asked by COFS and failed to disclose the unauthorized distributions. While these arguments may support COFS's assertion that ELC owed an independent duty under tort law, an issue the Court does not decide, COFS fails to identify the specific damages flowing from the alleged breach of duty. Accordingly, the motion to dismiss the negligent misrepresentation claim is granted as to ELC, with leave to replead.
fraud and fraudulent inducement
Application of the economic loss rule to a fraudulent inducement claim is more straightforward. In Formosa Plastics Corp. USA v. Presidio Engineers & Contractors, Inc. , 960 S.W.2d 41, 47 (Tex. 1998), the Texas Supreme Court declined to extend the economic loss rule to fraudulent inducement claims, holding 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." see also Peterson Grp., Inc. v. PLTQ Lotus Grp. , 417 S.W.3d 46, 62 (Tex. App.-Houston [1st Dist.] 2013, pet. denied) ("[W]hile the economic loss rule has been applied to bar negligence and products liability causes of action when the injury alleged was also the subject matter of a contract, it has not been extended to bar recovery for fraud or fraudulent inducement."). The Court noted that an independent legal duty, separate from the existence of the contract itself, precludes the use of fraud to induce a binding agreement, and excepted such claims from an independent injury requirement. Formosa , 960 S.W.2d at 47 ; see also Sharyland Water Supply Corp. , 354 S.W.3d at 417.
Formosa is still good law, and COFS alleges a fraudulent inducement claim against ELC. TAC ¶ 127 ("Naumann and ELC, by and through Naumann, made misrepresentations or omissions of material facts to induce Counter-Plaintiff COFS to enter into the ELC escrow agreement ...."). The fraudulent inducement claim is not barred by the economic loss rule.
COFS also alleges a fraud claim related to ELC's performance of the contract, specifically that ELC obtained COFS's "consent" to a payment from the fund through fraud. Whether such a claim is barred by the economic loss rule is more difficult to determine, as some courts have applied the rule to fraud claims while others have not. See Payne v. Wells Fargo Bank Nat'l Assn , 637 F. App'x 833, 837 (5th Cir. 2016) (applying rule to fraud claim where the misrepresentations were directly related to performance of the contract and arose solely from the contractual relationship); Sam v. Wells Fargo Bank, N.A. , No. 4:15-cv-03194, 2016 WL 4470111, at *12 (S.D. Tex. July 15, 2016) (noting that some courts have held that the rule bars fraud claims while "courts have also held that the economic loss rule does not necessarily bar fraud claims"); Experian Info. Solutions, Inc. v. Lexington Allen L.P. , 2011 WL 1627115, at *12 (E.D. Tex. Apr. 7, 2011), report and recommendation adopted , 2011 WL 1637935 (E.D. Tex. Apr. 28, 2011) (economic loss rule did not bar fraud claims, including claims for fraud in performance).
COFS is alleging that ELC conspired in a scheme to create fraudulent documentation, upon which COFS relied, to induce COFS to provide authorization to release escrow funds (the July 12 authorized disbursement). It appears to the Court that ELC had an independent duty not to fraudulently obtain consent to disbursements, and the damages flowing from that fraud do not appear recoverable as breach-of-contract damages. Thus the fraud claim related to the July 12 authorized disbursement is not barred by the economic loss rule. To the extent COFS is arguing that every un authorized disbursement was an actionable fraud, the Court concludes below that such claims are subsumed within the fraudulent inducement claim. Thus, thus the motion to dismiss based on the economic loss rule fails as to the fraudulent-inducement and fraud claims and related conspiracy claims.
theft and conspiracy to commit theft
There is not much case law addressing application of the economic loss rule to theft claims, and the cases discussing the rule for related claims for conversion and misappropriation are conflicting and confusing. Theft and conspiracy to commit theft are intentional torts, and thus would appear to be outside the purview of the economic loss rule. The Court has located very few cases discussing application of the rule to claims under the Texas Theft Liability Act ("TLA").
In MSMTBR, Inc. v. Mid-Atlantic Finance Co., Inc. , No. 01-12-00501-CV, 2014 WL 3697736, at *5 (Tex. App.-Houston [1st Dist.] July 24, 2014, no pet.), the court of appeals found that the plaintiff's conversion and TLA claims were not barred by the economic loss rule, because "[a] duty to refrain from unlawfully or wrongfully appropriating the property of another arises under statutory and common law." Id. Thus, if proven, the allegations of breach could give rise to liability because the defendant breached the agreement, but also could give rise to liability for conversion and theft if the elements of the torts were proven. Id. The court further noted that an award of the collateral and statutory penalties under the TLA were damages arising from statute and common law, independent of any benefit-of-the-bargain damages under the contract, and thus were not the subject of the contract. Id.
Similarly, the Southern District of Texas in SPP SWD Burns Ranch LLC v. Kent , No. 5:14-CV-88, 2015 WL 12841097, at *3 (S.D. Tex. Jan. 8, 2015), considered somewhat similar facts and found that the TLA claim was not barred by the economic loss rule. Pursuant to an operating agreement, plaintiffs were to fund a construction project, and transferred several million dollars into an account to be held by the defendant until all funds were transferred, at which point the funds could be used for their intended purpose. Plaintiff alleged that the defendant began using the funds to build the facility without first transferring its own funds, and plaintiff sued for breach of contract, conversion, theft, and fraud. The plaintiff then sought to join individual, non-diverse defendants on the conversion and theft claims, and to add a claim for fraud by non-disclosure, which would require remand. The court found that neither the conversion nor the TLA claim was barred by the economic loss rule even though the defendants breached the terms of the contract by using the funds contrary to the contract's terms. It held that "Texas law imposes no limitation on bringing both conversion and breach of contract claims based on a single set of facts and a single injury, nor is there a requirement that the damages stemming from such claims be separate and distinct." Id. (citing Nat'l Union Fire Ins. Co. v. Care Flight Air Ambulance Serv. , 18 F.3d 323, 327 (5th Cir. 1994) ("Texas courts have consistently found claims for both conversion and breach of contract based on a single set of facts and single injury" and "have not held that in order to allege both a breach of contract and the tort of conversion, the conversion damages must be separate and distinct from the contract damages.") ). It held that, even if the defendant's conduct breached the contract, "whatever the contractual terms, the law of conversion and bailment imposed an independent duty on Defendants with respect to those funds." SPP , 2015 WL 12841097, at *3. Further, although it noted that the plaintiff suffered the same injury of unauthorized use of the funds, the conversion claim was also predicated on the plaintiff's loss of control over the funds, and the plaintiff sought exemplary damages, which are unavailable for breach of contract.
Although not considering the TLA, the Fifth Circuit has also held that if a particular duty is defined in both a contract and a statutory provision, and a party violates the duty enumerated in both sources, the economic loss rule does not apply. McCaig v. Wells Fargo Bank, N.A. , 788 F.3d 463, 474 (5th Cir. 2015). Thus, it held that claims under the Texas Debt Collection Act were not barred even where the conduct also amounted to a breach of contract. Id. Applying that reasoning, the TLA imposes a duty not to commit theft under the circumstances described within the statute, and that duty can be violated even when the theft also violates a contractual duty. These cases thus support the conclusion that COFS's theft and conspiracy to commit theft claims are not barred by the rule even though ELC's conduct violated the terms of the contract.
But another recent Fifth Circuit opinion creates some uncertainty. In Lincoln General Ins. Co. v. U.S. Auto Insurance Services, Inc. , 787 F.3d 716, 725 (5th Cir. 2015), the Fifth Circuit noted that "[s]everal Texas cases have applied the economic loss rule to claims for misappropriating property entrusted under a contract." In Lincoln General , the plaintiff argued that the economic loss rule did not apply to a conversion claim against a party entrusted with funds who converted those funds because the defendant had a legal duty, separate and apart from any contractual duties, not to convert the funds. Id. The Fifth Circuit reasoned, "the conduct giving rise to liability arose from Lincoln entrusting property to U.S. Auto pursuant to the terms of a contract and the Defendants misappropriating that property." Id. "To determine the origin of the duty breached and the nature of the resulting injury, [Texas courts] examine the role of the contract in governing the use of the property" and "[t]he economic loss rule generally bars a tort claim when no factual basis for the tort claim would exist had the defendant complied with the contract." Id. Thus, the Fifth Circuit held, "if the use of the property constituted misappropriation only because it breached the parties' contract, then a breach of contract action is usually the plaintiff's sole remedy." Id. It found that to be the situation, because the conversion claims based on inflation of the commission and transferring expiring policies stemmed directly from alleged violations of contractual provisions -- the agreement contained "specific terms governing how to calculate the commissions and when to transfer expiring policies." Id. at 726.
Thus, the defendant's "alleged use of the funds and policies would amount to misappropriation because U.S. Auto violated a duty specified in the contract," and had the defendant complied with the contracts, "the factual predicate for a conversion claim would collapse." Id. The Court continued, "the injury suffered by Lincoln is the subject matter of the contract because it involved the same transactions contemplated by the contract." Id. Further, a related conversion claim concerning misuse of funds in a zero balance account was also found barred even though the contract did not explicitly refer to the account because "this claim still depends on provisions in the parties' contract" because the defendant used the account to pay more than plaintiff's contractually designated share on certain claims.
Lincoln General cited National Union Fire to support its finding that the economic loss rule applied, without attempting to distinguish it. In National Union Fire , the Fifth Circuit held that "the district court correctly found that the fact that Care Flight breached its lease contract did not preclude a finding that Care Flight also committed