Biliouris v. Sundance Resources, Inc.

• Decision Date: 02 June 2008
• Docket Number: Civil Action No. 3:07-CV-1591-N.
• Parties: Timothy L. BILIOURIS, et al., Plaintiffs, v. SUNDANCE RESOURCES, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

559 F.Supp.2d 733

Timothy L. BILIOURIS, et al., Plaintiffs, v. SUNDANCE RESOURCES, INC., et al., Defendants.

Civil Action No. 3:07-CV-1591-N.

United States District Court, N.D. Texas, Dallas Division.

June 2, 2008.

Tracie J. Renfroe, Alissa Brett Rubin, King & Spalding LLP, Houston, TX, Hubert A. Crouch, III, Kirk T. Florence, Crouch & Ramey, Dallas, TX, for Plaintiffs.

Stephen C. Carlin, R. Craig Woods, Russell J. DePalma, Greenberg Traurig, Jodie A. Slater, Kerry C. Peterson, Wick Phillips LLP, Dallas, TX, for Defendants.

ORDER

DAVID C. GODBEY, District Judge.

This Order addresses Defendant Sundance Resources, Inc.'s ("Sundance") motions to dismiss [39 & 90], Defendants Michael Patman and David P. Patman's motion to dismiss [43], and Plaintiffs' motion for the appointment of a receiver [82]. For the reasons given below, the Court grants in part and denies in part Defendants' motions. The Court will by separate order set Plaintiffs' motion for an evidentiary hearing.

I. FACTUAL BACKGROUND

Plaintiffs are investors who participated in one or more "Rig Bank Funds" set up by Sundance to finance the purchase of oil and gas drilling rigs. While the exact details of these Funds are not relevant for purposes of this Order, Plaintiffs generally allege the following facts. Between 2004 and 2006, Plaintiffs collectively loaned Sundance $14,629,500 for the purchase of five rigs in exchange for carried working interests in any wells drilled using those rigs and with Sundance's guarantee that all loan principal amounts would be repaid in full. Sundance initially made principal and working interest payments as promised, completely repaying the principal amounts of some loans, but later fell behind and eventually stopped making payments to Plaintiffs altogether. Unknown to Plaintiffs at the time, Sundance could not make these payments because, Plaintiffs allege, Defendants systematically transferred Sundance's assets to company insiders and their affiliated companies, including the Patmans and Patman Drilling International, Inc.,¹ and accumulated large amounts of debt in Sundance's name. This scheme allegedly shifted the funds acquired from Plaintiffs' loans to Sundance insiders while simultaneously driving the company into insolvency and leaving nothing to satisfy the company's obligations to Plaintiffs. In fact. Defendants continued to transfer Sundance's assets, including $4 million in cash to the Patmans, even after Sundance became insolvent.

Plaintiffs seek the appointment of a receiver and allege causes of action against Defendants for fraudulent transfer, common-law and statutory fraud, negligent misrepresentation, breach of contract, unjust enrichment, various forms of derivative liability, and violation of the Texas Securities Act. Defendants now move to dismiss all of Plaintiffs claims on various grounds.

II. MOTION TO DISMISS STANDARD

When faced with a Rule 12(b)(6) motion to dismiss, the Court must determine whether the plaintiff has asserted a legally sufficient claim for relief. Blackburn v. City of Marshall, 42 F.3d 925, 931 (5th Cir.1995). According to the Supreme Court, a viable complaint must include "enough facts to state a claim to relief that is plausible on its face," i.e., "enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of [the claim or element]." Bell Atlantic Corp. v. Twombly, ___ U.S. ___, 127 S.Ct. 1955, 1965, 1974, 167 L.Ed.2d 929 (2007). A plaintiff is required to provide "more than labels and conclusions, and a formulaic recitation of a cause of action will not do." Id. at 1965. "Factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Id. (citations omitted). In ruling on a Rule 12(b)(6) motion, the court must limit its review to the face of the pleadings, accepting as true all well-pleaded facts and viewing them in the light most favorable to the plaintiff. Spivey v. Robertson, 197 F.3d 772, 774 (5th Cir.1999).

III. PLAINTIFFS STATE A CLAIM FOR FRAUDULENT TRANSFER

Plaintiffs' pleadings state a claim for fraudulent transfer under the Texas Uniform Fraudulent Transfer Act (TUFTA), TEX. BUS. & COM.CODE §§ 24.001-13. To state a claim for fraudulent transfer under TUFTA, a creditor whose claim arose before the allegedly fraudulent transfer at issue must allege that the transfer was made "without receiving a reasonably equivalent value ... and the debtor was insolvent at that time." TEX. BUS. & COM.CODE § 24.006(a). Although the Fifth Circuit has not yet addressed whether Rule 9(b) of the Federal Rules of Civil Procedure applies to claims for fraudulent transfer, see Quilling v. Stark, No. 3:05-CV-1976-L, 2006 WL 1683442, at *5 (N.D.Tex. June 19, 2006), the Court need not decide that issue because Plaintiffs have pled facts sufficient to state a claim for fraudulent transfer under Rule 9(b)'s more stringent standard.

In paragraph 36 of their Complaint, Plaintiffs allege that "in late 2006, Michael E. and David P. Patman, who are Sundance insiders, took approximately $4 million in cash from Sundance while the company was insolvent." Therefore, Plaintiffs allege specific facts regarding a particular transfer from Sundance to the Patmans, at a particular time when Sundance was insolvent, and with Sundance receiving no — let alone reasonably equivalent — value in return. Plaintiffs need do no more. This allegation alone is sufficient to withstand Defendants' motions to dismiss.²

IV. PLAINTIFFS' REMAINING FRAUD CLAIMS ARE NOT PLED WITH SUFFICIENT PARTICULARITY

Plaintiffs' claims for common-law fraud, statutory fraud, and negligent misrepresentation, however, fail to meet the pleading requirements of Rule 9(b). To successfully plead fraud under Rule 9(b), a plaintiff must allege the "`time, place and contents of the false representations, as well as the identity of the person making the misrepresentation and what [that person] obtained thereby.'" Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir.1997) (quoting Tuchman v. DSC Commc'ns Corp., 14 F.3d 1061, 1068 (5th Cir.1994)).

Here, Plaintiffs rely heavily on group allegations that fail to specify which members of the group engaged in the alleged conduct. It is well established that "general allegations, which do not state with particularity what representations each defendant made, do not meet [the particularity] requirements" of Rule 9(b). Unimobil 84, Inc. v. Spurney, 797 F.2d 214, 217 (5th Cir.1986) (emphasis added) (citing 2A MOORE'S FEDERAL PRACTICE 119.03 (2d ed. 1985)). Here, Plaintiffs' Complaint is virtually devoid of any detailed individual allegations and therefore fails to state a cause of action for common-law or statutory fraud.³

Plaintiffs' pleadings also fail to state a claim for negligent misrepresentation. "Although Rule 9(b) by its terms does not apply to negligent misrepresentation claims, this court has applied the heightened pleading requirements when the parties have not urged a separate focus on the negligent misrepresentation claims." Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719, 723 (5th Cir. 2003). Once a fraud claim is dismissed under Rule 9(b), a claim for negligent misrepresentation based on the same operative facts must also be dismissed unless "it is possible for the Court to describe a simple redaction that removes allegations of fraud from the complaint, but leaves the plaintiffs valid and intelligible negligent misrepresentation claim intact." American Realty Trust, Inc. v. Travelers Cas. & Sur. Co. of Am., 362 F.Supp.2d 744, 752 (N.D.Tex.2005). Here, Plaintiffs group all relevant factual allegations into paragraphs 39 to 61 and simply recite the elements of each cause of action below under separate headings. For this reason, the Court can discern no distinct focus in the Complaint on negligent misrepresentation, separate from those allegations otherwise directed at pleading Plaintiffs' fraud-based causes of action, and, therefore, the Court cannot devise a "simple redaction" of Plaintiffs' allegations that would leave behind an intelligible claim for negligent misrepresentation. See id. ("[W]hen it would be necessary to engage in line-by-line redaction in order to excise inadequate averments of fraud from accompanying claims of negligent misrepresentation, several factors counsel in favor of dismissal."). Although Plaintiffs point out that they pled in one place that "Defendants did not exercise reasonable care or competence in obtaining or communicating the information," Pl.'s Compl. ¶ 73, a "vague statement" merely alleging that a defendant's conduct was negligent is not a sufficiently separate focus to avoid the heightened pleading standard of Rule 9(b). In re Enron Corp. Sec, Derivative & ERISA Litig., 540 F.Supp.2d 800, 827 (S.D.Tex.2007) (dismissing claim for negligent misrepresentation under Rule 9(b) where the plaintiffs pled only a "vague statement" that the defendants' conduct was "clearly negligent in derogation of the duty they owed"). Accordingly, the Court dismisses without prejudice to refiling Plaintiffs' claims for common-law fraud, statutory fraud, and negligent misrepresentation.

V. PLAINTIFFS STATE A CLAIM FOR THE APPOINTMENT OF A RECEIVER

Plaintiffs also successfully state a claim for the appointment of a receiver because TUFTA provides unsecured creditors with a substantive right to the prejudgment appointment of a receiver. There is much confusion in the case law regarding whether a federal court may appoint a receiver at the behest of an unsecured creditor who has not yet reduced his or her claim to a judgment. This confusion primarily stems from the fact that the United States Supreme Court last squarely addressed this topic in Pusey & Jones Co. v. Hanssen, 261 U.S. 491, 43 S.Ct. 454, 67 L.Ed. 763 (1923), prior to the Court's adoption of the Erie doctrine in Erie R.R. Co. v. Tompkins, 304...