In re Enron Corp. Securities

• Decision Date: 01 June 2009
• Docket Number: Civil Action No. H-01-3624.,Civil Action No. G-02-0299.,No. MDL-1446.,MDL-1446.
• Citation: 623 F.Supp.2d 798
• Parties: In Re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION. Mark Newby, et al., Plaintiffs v. Enron Corporation, et al., Defendants. American National Insurance Company, et al., Plaintiffs, v. J.P. Morgan Chase & Company, Defendant.
• Court: U.S. District Court — Southern District of Texas

Page 798

623 F.Supp.2d 798

In Re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION.

Mark Newby, et al., Plaintiffs v. Enron Corporation, et al., Defendants.

American National Insurance Company, et al., Plaintiffs, v. J.P. Morgan Chase & Company, Defendant.

No. MDL-1446.

Civil Action No. H-01-3624.

Civil Action No. G-02-0299.

United States District Court, S.D. Texas, Houston Division.

June 1, 2009.

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OPINION AND ORDER

MELINDA HARMON, District Judge.

Pending before the Court in G-02-0299 are the following motions: (1) Defendant JPMorgan Chase & Co.'s¹ motion for a summary judgment (# 99) dismissing with prejudice Plaintiffs American National Insurance Company, American National Investment Accounts, Inc., SM & R Investments, Inc., American National Property and Casualty Company, Standard Life and Accident Insurance Company, Farm Family Life Insurance Company, and Farm Family Casualty Insurance Company's² claims for aiding and abetting a primary violation of the Texas Securities Act ("TSA," Tex. Stat. Rev. art. 531-33), statutory fraud (Texas Business & Commerce Code § 27.01), common law fraud, and civil conspiracy to commit fraud, in connection with Plaintiffs' purchases of certain Enron-related securities; (2) Plaintiffs' motion for trial setting (# 72); (3) Defendant's motion to compel production of settlement agreements and related documents pursuant to Fed.R.Civ.P. 26(e) (# 116); and (4) Plaintiffs' motion for status conference (# 133).

Because the Court's resolution of Defendant's motion for summary judgment could moot the other motions, the Court addresses it first.

I. Defendant's Motion for Summary Judgment

Two threshold matters limit the scope of review of Defendant's summary judgment motion.

First, Plaintiffs and Defendant agree that the Court has previously made determinations that invalidate Plaintiffs' TSA claims; therefore Plaintiffs state they do not urge them again here (#105 at 2; #109 at 1).³ In re Enron Corp. Sec Derivative & "ERISA" Litig. (Am. Nat'l Ins. Co. v. Royal Bank of Canada), 540 F.Supp.2d 759, 797-99 (S.D.Tex.2007) (the "RBC decision"). In addition, Plaintiffs represent, and Defendant accepts, that they will not prosecute their common-law simple fraud claims against JPMorgan Chase. # 105 at 2; # 109 at 1. Therefore to clarify the record in this action against JPMorgan Chase, the Court grants Defendant's pending motion for summary judgment as to the TSA and common-law fraud claims.

Second, Defendant has expressly restricted its motion for summary judgment on the remaining claims to the absence of competent evidence on the single element of causation (Plaintiffs must prove their losses were the direct and proximate result of JPMorgan Chase's actions, and not of the myriad other factors that caused Enron's collapse) in both their statutory fraud claim and their civil conspiracy-to-defraud claim. Therefore the Court does not address arguments raised in the briefing about any of the other elements in the remaining statutory fraud and civil conspiracy-to-commit-fraud claims.

A. Remaining Causes of Action

The controlling pleading is the Second Amended Complaint (#25), minus those claims dismissed by the Court in its March 12, 2007 Opinion and Order # 61 and now summary judged supra here.⁴

1. Statutory Fraud, Section 27.01 of the Texas Business and Commerce Code (Vernon 2008)

Plaintiffs allege that Defendant conspired to violate and aided and/or abetted Enron in Enron's making material false misrepresentations and omissions for the purpose of inducing Plaintiffs to enter into contracts for the purchase of Enron securities, violations of Section 27.01.

They claim that Enron was a primary violator of the statute. The elements of a primary violation of Texas Business and Commerce Code § 27.01(a) in relevant part are:

(a) Fraud in a transaction involving real estate or stock in a corporation or joint stock company consists of a

(1) false misrepresentation of a past or existing material fact, when the false representation is

(A) made to a person for the purpose of inducing that person to enter into a contract; and

(B) relied on by that person in entering that contract . . . .

Under section 27.01(b), "A person who makes a false representation . . . commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for actual damages."

Under section 27.01(c), "A person who makes a false representation . . . with actual awareness of the falsity thereof commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages.⁵ Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness."⁶ See also Larsen v. Carlene Langford & Associates, Inc., 41 S.W.3d 245, 249 (Tex. App.-Waco 2001) (plaintiffs "can establish a statutory fraud claim under section 27.01 . . . by showing: 1. a representation of material fact; 2. which is false; 3. made to induce a person to enter a contract; 4. which was relied upon by that person in entering the contract; and 5. which caused injury [emphasis added by the Court]."), citing Scott v. Sebree, 986 S.W.2d 364, 371 (Tex.App.-Austin 1999, pet. denied); in accord Robbins v. Capozzi, 100 S.W.3d 18, 26 (Tex.App.-Tyler 2002). Statutory fraud differs from common law fraud⁷ "`only in that it does not require proof of knowledge or recklessness as a prerequisite to the recovery of actual damages.'" Id. Because the statute is derived from common law fraud, Plaintiffs must show that they actually and justifiably relied upon Enron's allegedly fraudulent misrepresentations. Haralson v. E.F. Hutton Group, Inc., 919 F.2d 1014, 1025 & n. 4 (5th Cir.1990), abrogated on other grounds, Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995).

Plaintiffs allege that Defendant JPMorgan Chase was a secondary violator of the statute. Section § 27.01(d) in relevant part addresses secondary liability for aiding and abetting a primary violator:

A person who (1) has actual awareness of the falsity of a representation . . . made by another person and (2) fails to disclose the falsity of the representation . . . to the person defrauded, and (3) benefits from the false representation . . . commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages. Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.

In Glazener v. Jansing, No. 03-02-00796-CV, 2003 WL 22207226, *5 (Tex. App.-Austin Sept. 25, 2003), appellants argued that they could not be held liable for actual damages under section 27.01(d) because it expressly provided only for exemplary damages against a person who knows of, fails to correct, and benefits from another's misrepresentations. The Austin appellate court rejected that argument, pointing out that section 27.01(d) also expressly states that a person who has actual awareness of the falsity of the other person's misrepresentation, remains silent, and benefits from it, commits the fraud described in section 27.01(a), and that section 27.01(b) states that a person who commits the fraud described in section 27.01(a) is liable for actual damages. Therefore a person who knows of another's misrepresentations, fails to disclose them to the person defrauded, and benefits therefrom can be liable for both actual and exemplary damages under the statute. Id.

Two appellate courts have concluded that the Texas Supreme Court's definition of "actual awareness" in a DTPA case⁸ "`would be similar, if not identical'" to that for section 27.01 of the Texas Business & Commerce clause:

actual awareness "does not mean merely that a person knows what he is doing; rather, it means that a person knows what he is doing is false, deceptive, or unfair. In other words, a person must think to himself at some point, "Yes, I know this is false, deceptive, or unfair to him, but I'm going to do it anyway.'"

Woodlands Land Development Co. v. Jenkins, 48 S.W.3d 415, 426 (Tex.App.-Beaumont 2001), and Scott v. Sebree, 986 S.W.2d 364, 371 (Tex.App.-Austin 1999, pet. denied), citing St. Paul Surplus Lines Ins. Co. v. Dal-Worth Tank Co., 974 S.W.2d 51, 53-54 (Tex.1998).

2. Common-Law Civil Conspiracy to Defraud

Plaintiffs allege that Defendant conspired with Enron to participate in deceptive transactions, including twelve Mahonia transactions, that would allow Enron to disseminate false financial information in filings with the SEC (overt acts) and promulgate information that would mislead credit rating agencies and the investing publicly generally.

A civil conspiracy is composed of two or more persons combining to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means. Massey v. Armco Steel Co., 652 S.W.2d 932, 934 (Tex.1983). The elements of a cause of action for civil conspiracy in Texas are (1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as the proximate result. Juhl v. Airington, 936 S.W.2d 640, 644 (Tex. 1990); Tri v. J.T.T., 162 S.W.3d 552, 556 (Tex.2005). To impose liability on a defendant for civil conspiracy to defraud, plaintiff must establish (1) that there was such a conspiracy and (2) that the particular defendant, here JPMorgan Chase, agreed with one or more of the conspirators about the claimed illegal object of the conspiracy and intended to have it brought about. Ward v. Sinclair, 804 S.W.2d 929, 931 (Tex.App.-Dallas 1990), citing Zervas v. Faulkner, 861 F.2d 823, 836 (5th Cir.1988).

The "meeting of the minds" element is "to accomplish an unlawful purpose or to accomplish a...