Deep Wilcox Oil & Gas LLC et al v. Texas Energy Acquisitions LP et al

RESPONSE to 44 Amended MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

S.D. Tex.March 12, 2019

1 4845.2485.8249.1 IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION Deep Wilcox Oil & Gas, LLC, a Limited Liability Corporation; and Hankerson Oil, LLC, a Limited Liability Corporation, Plaintiff, vs. Texas Energy Acquisitions, LP, a Limited Partnership; Alta Mesa GP, LLC, a Limited Liability Corporation; and Alta Mesa Services, LP, a Limited Partnership Defendants. § § § § § § § § § § § § § § § Civil Action No. 4:18-cv-02749 (Fraud) PLAINTIFFS’ RESPONSE TO DEFENDANTS’ AMENDED MOTION TO DISMISS Plaintiffs Deep Wilcox Oil & Gas, LLC (“Deep Wilcox”) and Hankerson Oil, LLC (“Hankerson Oil”) (collectively, “Plaintiffs”) respond to Defendants’ Texas Energy Acquisitions, LP (“TEA”), Alta Mesa, GP, LLC (“AMGP”) and Alta Mesa Services, LP (“AMS”) (collectively “Defendants”) amended motion to dismiss, made pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). (Doc. 44). Plaintiffs respectfully show the Court as follows: Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 1 of 23 2 4845.2485.8249.1 TABLE OF CONTENTS SUMMARY .....................................................................................................................................3 ARGUMENT AND AUTHORITIES ..............................................................................................6 I. Plaintiffs have successfully pleaded their fraud-based claims with the required particularity necessary to overcome Rule 9(b). .........................................6 II. Defendants’ 12(b)(6) motion fails, as Plaintiffs have alleged ample facts in support of their other claims. .................................................................................13 a. Plaintiffs can properly sue for fraudulent conversion and unjust enrichment..................................................................................................14 b. The economic loss rule does not bar Plaintiffs’ tort claims. ......................16 c. Plaintiffs’ claims for negligence and gross negligence are facially plausible. ....................................................................................................18 d. Defendants’ motion to dismiss Plaintiffs’ breach of contract claim is misguided because Plaintiffs are not relying on parol evidence. ...............19 e. Rescission of the Exploration Agreement is warranted. ............................20 f. Plaintiffs’ allegations survive this 12(b)(6) motion because at no point subsequent to Defendants’ fraud did they ever ratify the Exploration Agreement or waive the fraud. ...............................................20 CONCLUSION ..............................................................................................................................21 Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 2 of 23 3 4845.2485.8249.1 TABLE OF AUTHORITIES Cases ABC Arbitrage Plaintiffs Grp. v. Tchuruk, 291 F.3d 336 (5th Cir. 2002) ..................................................................................................... 7 Anderson v. Vinson Exploration, 832 S.W.2d 657 (Tex. App.-El Paso 1992, writ denied)................................................. 14, 15 Article 581-4 A of the Texas Securities Act. Dunbar v. RKG Engineering, Inc., 746 S.W.2d 314 (Tex. App.-Texarkana 1988, no writ) ........................................................ 15 Ashcroft v. Iqbal, 556 U.S. 662 (2009) ................................................................................................................. 13 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ................................................................................................................. 13 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) ....................................... 6, 7, 13, 14, 16, 22 Cornish v. Corr. Servs. Corp., 402 F.3d 545 (5th Cir. 2005) ............................................................................................. 14, 19 Cuvillier v. Taylor, 503 F.3d 397 (5th Cir. 2007) ................................................................................................... 13 Dallas Farm Mach. Co. v. Reaves, 307 S.W.2d 233 (Tex. 1957) .................................................................................................... 14 Davis v. Scherer, 468 U.S. 183 (1984) ................................................................................................................. 14 DeClaire v. G & B Mcintosh Family Ltd. P’ship, 260 S.W.3d 34 (Tex. App.-Houston [1st Dist.] 2008, no pet.) ............................................. 19 Doe v. Hillsboro Indep. Sch. District, 81 F.3d 1395 (5th Cir. 1996) ................................................................................................... 13 Ferguson v. DRG/Colony N., Ltd., 764 S.W.2d 874 (Tex. App.-Austin 1989) ............................................................................ 20 Formosa Plastics Corporation USA v. Presidio Eng’rs and Cont’rs, 960 S.W.2d 41 (Tex. 1998) .......................................................................................... 12, 14, 17 Harmon v. Harmon, No. CV07703, WL 7649298 at *1 (Tex. App.-Eastland, December 15, 2016) .................... 20 Herrmann Holdings Ltd. v. Lucent Techs., Inc., 302 F.3d 552 (5th Cir. 2002) ..................................................................................................... 7 International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567 (Tex. 1963) .................................................................................................... 20 IP Petroleum Co. v. Wevanco Energy, L.L.C., 116 S.W.3d 888 (Tex. App.-Houston [1st Dist.] 2003, pet. denied) ............................... 18, 19 Kennedy v. Bender, 135 S.W. 525 (Tex. 1911) ........................................................................................................ 21 Lormand v. United States Unwired, Inc., 565 F.3d 228 (5th Cir. 2009) ................................................................................................... 13 Mission Petroleum Carriers, Inc. v. Solomon, 106 S.W.3d 705 (Tex. 2003) .................................................................................................... 18 Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 3 of 23 4 4845.2485.8249.1 Montgomery Ward & Co. v. Scharrenbeck, 204 S.W.2d 508 (Tex. 1947) .................................................................................................... 17 Nazareth International, Inc. v. J.C. Penney Corp., 2005 U.S. Dist. LEXIS 14473 (N.D. Tex. 2005) ..................................................................... 13 Plotkin v. IP Axess Inc., 407 F,3d 690, 696 (5th Cir. 2005) ........................................................................................... 14 R2 Invs. LDC v. Phillips, 401 F.3d 638 (5th Cir. 2005) ..................................................................................................... 7 Reeder v. Wood Cty. Energy, LLC, 395 S.W.3d 789 (Tex. 2012) .................................................................................................... 18 Scheuer v. Rhodes, 416 U.S. 232 (1974) ................................................................................................................. 14 Searsy v. Commercial Trading Corporation, 560 S.W.2d 637 (Tex. 1977) .................................................................................................... 15 Southwestern Bell Telephone Co. v. Dellaney, 809 S.W.2d 493 (Tex. 1991) .............................................................................................. 16, 17 Spellman v. American Universal Investment Co., 687 S.W.2d 27 (Tex. App.-Corpus Christi 1984, writ ref’d n.r.e.) ....................................... 20 United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180 (5th Cir. 2009) ........................................................................................... 7, 8, 12 United States ex rel. Riley v. St. Luke’s Episcopal Hospital, 355 F.3d 370 (5th Cir. 2004) ..................................................................................................... 7 Williams v. WMX Techs., 112 F.3d 175 (5th Cir. 1997) ..................................................................................................... 7 Wise v. Pena, 552 S.W.2d 196 (Tex. Civ. App.-Corpus Christi 1977, writ dism’d) ................................... 20 Wolcott v. Sebelius, 635 F. 3d 757 (5th Cir. 2011) .................................................................................................. 16 Rules and Regulations Fed. R. Civ. P. 8(a)(2) ..................................................................................................................... 6 Fed. R. Civ. P. 9(b).................................................................................................................... 7, 12 Fed. R. Civ. P. 9(b) and 12(b)(6) .................................................................................................... 6 Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 4 of 23 5 4845.2485.8249.1 SUMMARY Contrary to Defendants’ assertion, this is not “a case of sour grapes.” (Doc 44, pg. 1). Rather, it is a case where Plaintiffs paid Defendants over $2,000,000.00 and received nothing in return. On July 1, 2009, Defendant TEA-and by law its general partner, AMGP-induced Plaintiffs to enter into an Exploration Agreement in which Plaintiffs purchased working interest ownership in Herrin Well #1 in exchange for the right to share in production revenues with other working interest owners, based on the percentage of working interest associated with the well. TEA retained its related entity, AMS, to drill the well and which sent invoices for work on the well for years. The agreement was genuinely intended to be for the mutual benefit of both parties. Plaintiffs put their faith in TEA’s expertise and assurances that the Well was economically viable. However, after just four short months, Defendants knew (or alternatively, should have known) that Herrin Well #1 was not, and never would be, economically viable. In spite of this, Defendants TEA and AMGP assured Plaintiffs the well was economically viable, and proceeded to mislead Plaintiffs by sending invoices for work on a well they now claim is a dry hole. (Doc. 43). Plaintiffs’ second amended complaint is replete with facts showing that Defendants TEA, AMGP, and AMS mercilessly spun a web of lies, siphoning millions of dollars from Plaintiffs by falsely claiming Herrin Well #1 would be economically viable, while Defendants had already decided to abandon the undertaking. Plaintiff’s second amended complaint exposes the callous and calculated measures Defendants took to defraud Plaintiffs of millions of dollars, including their failure to record Plaintiffs’ working interest ownership in the Well, despite sending Plaintiffs’ invoices-which Plaintiffs paid-confirming that Plaintiffs owned a working interest in the well. Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 5 of 23 6 4845.2485.8249.1 Defendants deceived Plaintiffs further by transferring all interests in Herrin Well #1 to Benchmark Oil & Gas Company (“Benchmark”), without Plaintiffs’ authorization. (Id., ¶ 30).1 Ultimately, Defendants, TEA, AMGP, and AMS’ fraudulent representations induced and caused Deep Wilcox and Hankerson Oil to pay and invest the sum of $2,018,547.00 for a non- existent working interest ownership, and equipment in and for Herrin Well #1, which Defendants’ fraudulently converted. This is not “a case of sour grapes,” but rather a complaint which vividly depicts the embodiment of secrecy and deception, while also satisfying Rule 9(b) and 12(b)(6)’s pleading requirements. Fed. R. Civ. P. 9(b) and 12(b)(6). ARGUMENT AND AUTHORITIES I. Plaintiffs have pleaded their fraud-based claims with the required particularity necessary to satisfy the pleading requirements of Rules 8(a)(2) and 9(b). Under Federal Rule of Civil Procedure 8(a)(2), a complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 548 (2007).2 “[D]etailed factual allegations” are not required, but rather the non-moving party is only required to show plausible factual allegations which, when accepted as true, “state a claim to relief that is plausible on its face.” Id. at 570. A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Id. at 556. When a complaint adequately states a claim, it may not be dismissed based on a district court’s assessment that the plaintiff will fail to find evidentiary support 1 Under Texas law, TEA and AMGP never transferred any ownership interest to Plaintiffs. Therefore, when TEA and AMGP, transferred its interest, it included Plaintiffs’ interest it had never transferred. 2 Plaintiffs object to the affidavit of David Murrell and documents attached to the Motion to Dismiss, as Defendants attempt to make the Motion to Dismiss a Motion for Summary Judgment. Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 6 of 23 7 4845.2485.8249.1 for his allegations or prove his claim to the satisfaction of the factfinder. Id. at 563. In essence, the plaintiff must state a legally cognizable claim, and a court may not accept strained inferences, conclusory allegations, unwarranted deductions, or legal conclusions. U.S. ex rel. Riley v. St. Luke’s Episcopal Hosp., 355 F.3d 370, 376 (5th Cir. 2004); R2 Invs. LDC v. Phillips, 401 F.3d 638, 642 (5th Cir. 2005). In addition to meeting the plausibility standard, under Federal Rule of Civil Procedure 9(b), if a party is alleging fraud or mistake, the pleading must “state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b); United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 185 (5th Cir. 2009) (noting that Rule 9(b) does not “supplant” Rule 8(a)). However, this particularity requirement “does not ‘reflect a subscription to fact pleading.’” Id. (quoting Williams v. WMX Techs., 112 F.3d 175, 178 (5th Cir. 1997). Instead, pleadings alleging fraud must contain “simple, concise, and direct allegations of the circumstances constituting the fraud, which…must make relief plausible, not merely conceivable, when taken as true.” Id. (internal quotations omitted) (referring to the standard enunciated in Twombly). The Fifth Circuit interprets Rule 9(b) strictly, “requiring a plaintiff pleading fraud to specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.” Id. (quoting Herrmann Holdings Ltd. v. Lucent Techs., Inc., 302 F.3d 552, 564-65 (5th Cir. 2002). Thus, Rule 9(b) generally requires the complaint to “set forth ‘the who, what, when, where, and how’ of the events at issue.” Id. (quoting ABC Arbitrage Plaintiffs Grp. v. Tchuruk, 291 F.3d 336, 350 (5th Cir. 2002)). Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 7 of 23 8 4845.2485.8249.1 As expressed below, Plaintiffs have pleaded facts that meet the requirements under Rule 9(b) as set forth in Grubbs and sufficiently allow this Court to draw the reasonable inference that Defendants are liable for the alleged misconduct.3 The Who. In their second amended complaint, Plaintiffs allege that over a number of meetings and conference calls between February 2, 2009 and July 1, 2009, TEA and its representatives including Mike McCabe (CFO), David Murrell, Hal H. Chappell (CEO), and geologist Ken Reiss solicited and induced Plaintiffs in Arizona to invest in the exploration of wells in Texas. (Doc. No. 43, ¶s 9-18). After convincing Plaintiffs and their Arizona investors to invest monies in the exploration and development of Herrin Well #1 in exchange for working interest ownership in the Well, the parties continued to negotiate the terms of an Agreement between Defendants TEA, and by law AMGP, and Plaintiffs. (Id. ¶ 19). The Agreement required TEA to send notices, updates, distributions, billing statements, invoices and other documents to Plaintiffs. (Id. ¶ 25). Specifically, from July 2009 to January 11, 2017, representatives and/or agents of TEA, AMGP and AMS, including Wanda M. Blair, regularly sent Plaintiffs billing statements and other documents. (Id.). Said representatives and agents continued to bill Plaintiffs even after they allegedly sold their interest to Benchmark. (Id. ¶ 33). The What. Deep Wilcox entered into the Agreement to purchase what was represented to be a fifteen percent (15%) working interest, and Hankerson Oil entered into the Agreement to purchase what was represented to be a two percent (2%) working interest. (Id. ¶ 22). Despite being billed for and paying $1,781,070.26 and $237,476.03 to TEA and AMGP, for work allegedly performed by AMS, Plaintiffs were never transferred any interest in the well and equipment. (Id.). The Agreement required TEA to send notices, updates, distributions, billing statements, invoices and other 3 Plaintiffs would refer the Court to its Second Amended Complaint. Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 8 of 23 9 4845.2485.8249.1 documents to Plaintiffs, which it did through the related entity AMS. (Id. ¶ 25). However, Defendants never filed any record of Plaintiffs’ working interest ownership, even though Defendants sent Plaintiffs invoices that Plaintiffs paid to obtain a working interest ownership in the Well and equipment. (Id. ¶ 30). A search of the real property records in Liberty County reveals that despite paying $1,781,070.26 and $237,476.03 for Plaintiffs working interest, Plaintiffs own nothing and TEA and AMGP have now transferred all interest in the Well and equipment to Benchmark. (Id.). Further, not only did representatives and/or agents of TEA, AMGP and AMS, including Wanda M. Blair, regularly sent Plaintiffs billing statements and other documents even after they allegedly sold their interest to Benchmark in January 2016. (Id. ¶¶s 25, 33). Plaintiffs allege Defendants stated that Herrin Well #1 was economically viable and continued to bill for work on a dry hole for years after Defendants had abandoned the Herrin Well #1. (Id., ¶¶ 26, 61). TEA continued to assure Plaintiffs the well would be economically viable even though TEA knew that it did not conduct industry standard testing and due diligence prior to enticing Plaintiffs to invest in extensive completion costs and infrastructure over several years. (Id. ¶ 27-28). Murrell’s September 22, 2009, email demonstrates TEA’s representation and continued assurance to Plaintiffs that TEA gave Plaintiffs working interest ownership in the well. (Id. ¶ 39). Knowing full well that TEA had not given Hankerson Oil their working interest, Murrell on October 12, 2009, solicited further investment from Deep Wilcox. (Id.). Plaintiffs further allege Defendants’ agents, including David Murrell, Ken Reiss, Mike McCabe, Hal Chappelle, and Wanda M. Blair, made additional assurances to Deep Wilcox and Hankerson Oil representatives during telephone conferences. (Id. ¶ 60). The When. Beginning November 2009, Defendants knew, were aware, consciously disregarded, or should have known that Herrin Well # 1 was not economically viable. (Id. ¶ 27). Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 9 of 23 10 4845.2485.8249.1 After learning and/or having actual or constructive notice that Herrin Well # 1 was not economically viable, Defendants TEA, AMGP and AMS, continued to assure Deep Wilcox and Hankerson Oil the Well would be economically viable while Defendants had already decided to abandon the Well. (Id.). Plaintiffs allege that Reiss, as a representative of Defendants, sent email correspondence to Hankerson on November 3, 2009, and the telephone conferences with David Murrell, Mike McCabe, and Hal Chappelle took place in November 2009. (Id., ¶¶s 59, 60). For the next several years, until at least 2016, Defendants TEA, AMGP, and AMS continued to send invoices for “work” on what is now alleged to be a dry hole and worthless. There can be no legitimate reason to continue to bill an investor for a “pumper/gauger” on a dry hole. From 2012 through 2016, TEA, AMGP and/or AMS billed Deep Wilcox and Hankerson Oil for AMS’s work, which TEA was required to perform but assigned, for among other things “pumper/gaugers.” (Id., ¶ 31). There is no need for a “pumper/gauger” if the Well was in fact not economically viable, and a dry hole as TEA, AMGP, and AMS now claim. (Id.). AMS as the operator billed and was paid for the pumper/gauger fees; and participated in the continuing fraud against Deep Wilcox and Hankerson Oil to convince them to believe the Well was viable and operating. (Id.). The invoices further prove that TEA, AMGP and the operator AMS even raised the amount billed for the pumper/gauger from $500.00 to $1,000, and even $2,000.00. (Id.). AMS, TEA and AMGP charged fees of $500.00, $1,000.00 and up to $2,000.00 per month for an unnecessary pumper/gauger for a dry well. (Id.). The action of sending a bill charging for work that would not be required on a dry hole well was intended to, and did, mislead and defraud Plaintiffs. (Id.). On or about April 7, 2016, TEA transferred all interests in Herrin Well #1 to Benchmark, which included Plaintiffs’ working interest ownership that TEA never transferred to Plaintiffs. (Id. ¶ 43). Because TEA and AMGP never transferred any interest to Plaintiffs, despite their having paid Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 10 of 23 11 4845.2485.8249.1 millions of dollars, when TEA transferred all interest, it necessarily included Plaintiffs’ 17% interest. There were no documents signed by Plaintiffs allowing TEA to exercise control over Plaintiffs’ working interest ownership when TEA transferred all interests in Herrin Well #1 to Benchmark. (Id. ¶ 44). Plaintiffs did not learn that Defendants TEA, and by law AMGP, as well as AMS converted Plaintiffs’ working interest ownership by transferring all interests in the Well to Benchmark for TEA’s benefit and unjust enrichment until July 15, 2016, when Hankerson inquired about the Well and Blair, for the first time, emailed Hankerson stating TEA assigned its interest in the Well to Benchmark. (Id. ¶ 45). The Where and How. Plaintiffs allege that Defendants’ statements in its emails, invoices, and telephone conferences were false and misleading. Specifically, Plaintiffs allege that Defendants represented to them that “we have a well and they see no obvious water sands,” and that Herrin Well #1 would be economically viable, even though TEA and AMS had not conducted industry standard testing and due diligence, unbeknownst to Plaintiffs. (Id., ¶¶ 59, 61). Three days later, Murrell emailed Hankerson reiterating the economic viability of Herrin Well #1, stating, “I anticipate you will receive an election and AFE next week and the money will be due no later than November 30.” (Id., ¶ 59). Thereafter, TEA continued to represented to Deep Wilcox and Hankerson Oil that Herrin Well #1 would be economically viable even though TEA knew, which Deep Wilcox and Hankerson Oil did not, that it did not conduct industry standard testing and due diligence prior to enticing Deep Wilcox and Hankerson Oil to invest in extensive completion costs and infrastructure which it did over the following years. (Id., ¶ 103). Defendants continued to bill Plaintiff for work on a dry hole for years, and even after they allegedly sold their interest to Benchmark in 2016. (Id. ¶ 24, 33). Plaintiffs establish the “who, what, when, where, and how” of Defendants’ fraud. Defendants counter that Plaintiffs do not specify which Defendant made which representation and how each Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 11 of 23 12 4845.2485.8249.1 representation was false. (Doc 44, pg. 12). They also contend that the email from Reiss never states the well would be “economically viable.” (Id.). Defendants held Reiss out as a representative of TEA and/or AMS. Although he may not use the words “economically viable” in the email correspondence, such a conclusion may properly be inferred from his statement, “we have a well and they see no obvious water sands.” (Id., ¶ 59). Furthermore, the act of sending invoices to Plaintiffs clearly created the appearance that the Well is a viable, producing well. Defendants billing for a “pumper/gauger,” and even raising the amount billed, on a dry hole, was intended to mislead the Plaintiffs. Regardless, at this stage of litigation, Rule 8(a)(2) requires only that Plaintiffs plead a short and plain statement of the claim. Further, Defendants’ arguments fail because Rule 9(b)’s ultimate meaning is context-specific. Grubbs, 565 F.3d at 185. A plaintiff may sufficiently “state with particularity the circumstances constituting fraud or mistake without including all the details of any single court-articulated standard-it depends on the elements of the claim at hand.” Id. (quoting Fed. R. Civ. P. 9(b)). Texas law has long imposed a duty to abstain from inducing another to enter into a contract through the use of fraudulent misrepresentations. Formosa Plastics Corporation USA v. Presidio Eng’rs and Cont’rs, 960 S.W.2d 41, 46 (Tex. 1998). To prevail on a common-law fraud claim, a plaintiff must demonstrate that the defendant (1) made a material misrepresentation that was false, (2) knew that the statement was false when he made it or asserted it without knowledge of its falsity, and (3) intended that the listener rely upon it. Id. at 47. Plaintiffs have undoubtedly pled sufficient facts to establish fraud. Plaintiffs have alleged that they relied on Reiss’ statement and further assurances made by Defendants’ other representatives, including but not limited to, David Murrell, Hal Chappelle, Mike McCabe, and Wanda M. Blair. Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 12 of 23 13 4845.2485.8249.1 (Doc. 43, ¶ 65). The determination of whether that reliance was reasonable will require a fact intensive examination, which is improper at this stage. See Nazareth Int’l, Inc. v. J.C. Penney Corp., 2005 U.S. Dist. LEXIS 14473, at *20 (N.D. Tex. 2005). Because it is possible for Plaintiffs to prove some set of facts that would establish they did, in fact, reasonably rely on these statements, Plaintiffs have sufficiently alleged that they reasonably relied on the misrepresentations. See id. From March 2009 and into 2016, TEA, AMGP, and AMS purposefully misled Deep Wilcox and Hankerson Oil with false information and assurances, causing Deep Wilcox and Hankerson Oil to gratuitously invest in extensive and unnecessary infrastructure. The Court should find that there are enough facts to raise a reasonable expectation that discovery will reveal evidence of this claim and should not dismiss their fraud claim. See id. Accordingly, Defendants’ motion to dismiss should be denied. Alternatively, Plaintiffs should be granted leave to amend their pleading. II. Defendants’ 12(b)(6) motion fails, as Plaintiffs have alleged ample facts in support of their other claims. In the Fifth Circuit, motions to dismiss under Rule 12(b)(6) are viewed with disfavor and rarely granted. Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 232 (5th Cir. 2009). “The issue [at the motion to dismiss stage] is not whether a plaintiff will prevail, but whether he is entitled to [pursue his complaint and] offer evidence [in support] thereof.” Doe v. Hillsboro Indep. Sch. Dist., 81 F.3d 1395, 1401 (5th Cir. 1996). “To survive a Rule 12(b)(6) motion to dismiss, a complaint ‘does not need detailed factual allegations,’ but must provide the plaintiff’s grounds for entitlement to relief - including factual allegations that when assumed to be true ‘raise a right to relief above the speculative level.’” Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir. 2007)(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). That is, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). A claim has facial plausibility “when the Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 13 of 23 14 4845.2485.8249.1 plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). When considering a defendant’s motion to dismiss, a court must construe the allegations in the complaint liberally and favorably to the pleading party, and accept all well-plead facts as true. Plotkin v. IP Axess Inc., 407 F,3d 690, 696 (5th Cir. 2005); Cornish v. Corr. Servs. Corp., 402 F.3d 545, 548 (5th Cir. 2005). Dismissal is improper unless it is beyond doubt that the plaintiff will be unable to prove the necessary facts in support of the allegations to entitle the plaintiff to relief.” Id. at 549; Scheuer v. Rhodes, 416 U.S. 232, 236 (1974) (stating that a well-pleaded complaint may proceed even if it appears “that a recovery is very remote and unlikely”) overruled on other grounds, Davis v. Scherer, 468 U.S. 183 (1984). a. Plaintiffs can properly sue for fraudulent conversion and unjust enrichment. Defendants incorrectly argue that Plaintiffs cannot bring fraud and unjust enrichment claims against them because “it is axiomatic that what one is contractually entitled to do cannot form the basis of a fraud or unjust enrichment claim.” (Doc 44, pg. 8). Defendants do not provide a citation for this proposition because it is untrue. A party is not bound by a contract procured by fraud. Formosa, 960 S.W.2d at 46. The legal duty not to fraudulently procure a contract is separate and independent from the duties established by the contract itself. Id. See, Dallas Farm Mach. Co. v. Reaves, 307 S.W.2d 233, 239 (Tex. 1957) (“The law long ago abandoned the position that a contract must be held sacred regardless of the fraud of one of the parties in procuring it”). In Anderson v. Vinson Exploration, 832 S.W.2d 657, (Tex. App.-El Paso 1992, writ denied), investors purchased an oil and gas lease from an operating company and entered into a joint operating agreement. The investors claimed they were led to believe the wells were probable producers and the operating expenses would be greatly less. When this turned out to be untrue, the investors refused to pay the company’s invoices, so the company filed suit for breach of the Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 14 of 23 15 4845.2485.8249.1 operating agreement and the investors counterclaimed. The trial court directed a verdict in favor of the operating company on the investors’ claims for securities act violations, DTPA violations, breach of contract, negligence, gross negligence and breach of warranty.4 Noting that the investors had not been made aware that the closest well was a dry hole, the offsetting field had been previously plugged and abandoned by the operating company in 1987, and the operating company had drilled its own dry well in 1986 between the only two good wells in the vicinity, the appellate court held that the trial court erred in directing a verdict on the company’s claims and remanded the case for a new trial. Id., at 663. Although the Anderson court considered a directed verdict and not a motion to dismiss, the underlying principle is the same: a party that procures a contract by fraud-or deceitfully perpetuates a valid contract-may not shield itself from fraud claims by virtue of the contract’s language. At issue in Anderson was an “investment contract” and assignment of an interest in an oil and gas lease, which are securities as defined in Article 581-4 A of the Texas Securities Act. Dunbar v. RKG Engineering, Inc., 746 S.W.2d 314, 315 (Tex. App.-Texarkana 1988, no writ). An “investment contract” is defined as (l) an investment of money, (2) in a common enterprise or scheme, (3) with the expectation of profits, (4) which profits will be derived solely from the efforts of others. Searsy v. Commercial Trading Corporation, 560 S.W.2d 637, 640 (Tex. 1977). The facts of the present case bear a striking resemblance to Anderson. The Exploration Agreement between the parties here also involved investing money in a common scheme, wherein profits were expected from others’ efforts. Here, the Defendants defrauded Plaintiffs by failing to transfer title in the well to Plaintiffs, despite Plaintiffs purchasing a working ownership in the well. (Doc. 43, ¶¶s 49, 95). Defendants unjustly enriched themselves via fraudulent conversion of 4 The investors also alleged fraud, but the trial court did not direct a verdict on their fraud claim. Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 15 of 23 16 4845.2485.8249.1 Plaintiffs working interest ownership in the well, when they transferred all interests in Herrin Well #1 to Benchmark, including Plaintiffs’ working interest ownership, and retaining the monies Plaintiffs paid for that ownership: $2,018,547. (Id., ¶¶s 50-54, 96-100). Plaintiffs need only show that their claims, when accepted as true, are plausible on their face. Wolcott v. Sebelius, 635 F. 3d 757, 763 (5th Cir. 2011). For the purposes of Defendants’ motion, it must be accepted as true that Plaintiffs entered into the agreements with Defendants- and continued to invest with Defendants-on the basis that the well was represented to be economically viable. It must further be accepted as true that Defendants deceived Plaintiffs into believing the well was economically viable when they knew it was not, and without Plaintiff’s authorization conveyed Plaintiffs’ ownership interest to unjustly enrich themselves. Plaintiffs paid millions of dollars and received nothing. Indeed, Plaintiffs have demonstrated that these claims are plausible and have alleged them with enough supporting facts that the Court may reasonably infer Defendants are liable for the misconduct alleged and accordingly, should deny Defendants’ motion. See Twombly, 550 U.S. at 556. b. The economic loss rule does not bar Plaintiffs’ tort claims. Defendants argue that because Plaintiffs’ tort claims are “purely economic losses resulting from the failure of a party to perform under a contract,” they may not recover in tort and Counts 1-5 of Plaintiffs’ second amended complaint are barred by the economic loss rule. (Doc. 44, pg. 9-10). Defendants are wrong. Tort damages are recoverable if the defendants’ conduct “would give rise to liability independent of the fact that a contract exists between the parties.” Southwestern Bell Telephone Co. v. Dellaney, 809 S.W.2d 493, 494 (Tex. 1991). In Delanney, the Texas Supreme Court explained that to determine whether the economic loss rule bars recovery in tort, a court should examine the source of the duty breached. 809 S.W.2d at 494. Texas law has long imposed a duty to abstain from Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 16 of 23 17 4845.2485.8249.1 inducing another to enter into a contract through the use of fraudulent misrepresentations…[This] legal duty…is separate and independent from the duties established by the contract itself.” Formosa, 960 S.W.2d at 46. Thus, in Texas “tort damages are recoverable for fraud claims 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.” Id. at 47. Plaintiffs allege that Defendants made misrepresentations to Plaintiffs regarding the viability of the project to induce Plaintiffs to invest additional sums into a project that they knew was doomed to fail. (Doc. 43, ¶ 73). Specifically, Plaintiffs allege that between November 3, 2009 and January 2017, Defendants assured Plaintiffs, through written and oral communications, that the well was economically viable, even though TEA had decided to abandon the well because it knew it was not economically viable. (Id., ¶ 73-74). Of course, Plaintiffs would not have invested in the infrastructure and completion costs had they known they were unnecessary. (Id., ¶ 75). Accordingly, Defendants are not entitled to dismissal of the fraud claims because said claims arise out of an independent duty owed to Plaintiffs and thus are not barred by the economic loss rule. Likewise, Defendants are not entitled to dismissal of Plaintiffs’ negligence claims on this ground. The Texas Supreme Court has long recognized that “[a]ccompanying every contract is a duty to perform with care, skill, reasonable expedience and faithfulness the thing agreed to be done, and a negligent failure to observe any of these conditions is a tort as well as a breach of contract.” Dellaney, 809 S.W.2d at 494, citing Montgomery Ward & Co. v. Scharrenbeck, 204 S.W.2d 508, 510 (Tex. 1947). Plaintiffs allege that Defendants failed to conduct industry standard testing and due diligence and failed to act as a reasonably prudent operator. (Doc. 43, ¶ 81). Such failure amounts to a breach of an independent duty owed to Plaintiffs. Scharrenbeck, S.W.2d at 510. Furthermore, Defendants should have known their failure to conduct industry standard testing and due diligence Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 17 of 23 18 4845.2485.8249.1 could lead to financial ruin by causing Plaintiffs to unnecessarily invest $1,327,944.00 in a well that was not economically viable. Accordingly, Defendants are not entitled to dismissal of Plaintiffs negligence claims because said claims arise out of an independent duty owed to Plaintiffs and thus are not barred by the economic loss rule. c. Plaintiffs’ claims for negligence and gross negligence are facially plausible. To prevail on a negligence claim, a plaintiff must show that: (1) the defendant owed him a duty, (2) the defendant breached its duty, (3) the defendant’s breach proximately caused his injuries, and (4) damages resulted from this breach. Mission Petroleum Carriers, Inc. v. Solomon, 106 S.W.3d 705, 710 (Tex. 2003). Gross negligence requires that a defendant know about the peril his conduct would cause and act in a way that shows he doesn’t care about the harm to others. Reeder v. Wood Cty. Energy, LLC, 395 S.W.3d 789, 796 (Tex. 2012). The harm anticipated must be extraordinary, such as financial ruin. IP Petroleum Co. v. Wevanco Energy, L.L.C., 116 S.W.3d 888, 897 (Tex. App.-Houston [1st Dist.] 2003, pet. denied). Defendants’ conscious decision to forego industry standard testing and due diligence, take Plaintiffs’ money to purchase a working interest and equipment in Herrin Well #1 without providing Plaintiffs with said interest, and their failure to act as a reasonably prudent operator amount to negligence and gross negligence. (Doc. 43, ¶ 81-82). They breached a separate and independent duty to Plaintiffs by taking Plaintiffs down a road that very well almost led to financial ruin, as they deceived Plaintiffs into unnecessarily investing a total of over $2,000,000.00 in a well that was non- economically viable, for which Plaintiffs did not even receive a working ownership interest. (Id., ¶ 83-84). Here too, Plaintiffs allege facts that, if proven, would amount to gross negligence. Accordingly, the Court should deny Defendants’ motion to dismiss Plaintiffs’ negligence and gross negligence claims. Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 18 of 23 19 4845.2485.8249.1 d. Defendants’ motion to dismiss Plaintiffs’ breach of contract claim is misguided because Plaintiffs are not relying on parol evidence. Defendants mistakenly argue that Plaintiffs are attempting to vary the terms of the Exploration Agreement with parol evidence. (Doc. 44, pg. 14). Contrary to Defendants’ assertion, Plaintiffs are looking no further than the four corners of the Exploration Agreement to show that Defendants breached the contract. Under the Agreement, TEA agreed to act as a reasonably prudent operator, with due diligence, and in accordance with general industry standards. (Doc. 43, ¶ 87). TEA’s failure to conduct industry standard due diligence testing and their subsequent failure to notify Plaintiffs that the well was not economically viable amounted to a breach of the Agreement, as did their decision to spend approximately $7.8 million more than authorized to develop the well. (Id., ¶ 89-90). Defendants argue that because the words “economically viable” do not occur anywhere in the Exploration Agreement, they were not obligated to disclose to Plaintiffs when they discovered the well was not economically viable. (Doc. 44, pg. 15). Moreover, Defendants maintain that the Agreement contemplated a dry hole. (Id.). Plaintiffs assert that Defendants breached the contract when they failed to act as a reasonably prudent operator when they were put on notice-actual or constructive-that the well was not economically viable. Plaintiffs further assert that Defendants misrepresentations to Plaintiffs regarding the viability of the project were made to induce Plaintiffs to invest additional sums into a project that they knew would fail. DeClaire v. G & B Mcintosh Family Ltd. P’ship, 260 S.W.3d 34, 45 (Tex. App.-Houston [1st Dist.] 2008, no pet.) (parol evidence may be used to show a contract was induced by fraud). Again, the standard is that dismissal is improper unless it is beyond doubt that the plaintiff will be unable to prove the necessary facts in support of the allegations. Cornish, 402 F.3d at 548. Based on the Plaintiffs’ pleadings, there is not enough information for the Court to conclude beyond Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 19 of 23 20 4845.2485.8249.1 a doubt that Plaintiffs will not be able to prove the facts they allege. Additionally, Plaintiffs may use parol evidence to show the contract, as alleged by Plaintiffs, was induced by fraud. e. Rescission of the Exploration Agreement is warranted. Rescission is an “equitable remedy that extinguishes legally valid contracts that must be set aside because of fraud, mistake, or other reasons in order to avoid unjust enrichment.” Harmon v. Harmon, No. CV07703, WL 7649298 at *1 (Tex. App.-Eastland, December 15, 2016). Additionally, a fraudulent representation that warrants rescission also authorizes a recovery of exemplary damages. Ferguson v. DRG/Colony N., Ltd., 764 S.W.2d 874, 885 (Tex. App.-Austin 1989), citing International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567 (Tex. 1963). Beginning in November 2009, Defendants had every reason to know that Herrin Well #1 was not economically viable. (Doc. 43, ¶ 103). Nevertheless, they misled Plaintiffs-and may have continued to mislead them indefinitely-until Plaintiffs learned the true nature of the well in July 2016. (Id.). Plaintiffs’ rescission claim should not be dismissed because Plaintiffs have alleged facts sufficient to show they will suffer irreparable harm if the contract is not rescinded. f. Plaintiffs’ allegations survive this 12(b)(6) motion because at no point subsequent to Defendants’ fraud did they ever ratify the Exploration Agreement or waive the fraud. As a final point, dismissal of Plaintiffs’ claims would be improper because Plaintiffs never acquiesced to Defendants’ double-dealing. Ratification occurs when one continues to accept benefits under the contract after he becomes aware of the fraud. Once a contract has been ratified by the defrauded party…the defrauded party waives any right of rescission or damages.” Spellman v. American Universal Investment Co., 687 S.W.2d 27 (Tex. App.-Corpus Christi 1984, writ ref’d n.r.e.), quoting Wise v. Pena, 552 S.W.2d 196, 199-200 (Tex. Civ. App.-Corpus Christi 1977, writ dism’d). In Spellman, plaintiffs were foreclosed from obtaining redress for fraud in the inducement because they had accepted delay rentals and royalties after learning of the fraud. Indeed, “acts done Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 20 of 23 21 4845.2485.8249.1 in affirmance of a contract can amount to a waiver of the fraud only where they are done with full knowledge of the fraud and of all material facts, and with the intention, clearly manifested, of abiding by the contract and waiving all right to recover for the deception. Kennedy v. Bender, 135 S.W. 525 (Tex. 1911). Acts carried out in affirmance of the contract that do not indicate any intention to waive the fraud, cannot be held to operate as a waiver. Id. On July 15, 2016, when Plaintiffs learned that Defendants had misled them about the economic viability of the well and the absence of any record of Plaintiffs’ working interest ownership, they ceased investing in this exploration. (Doc. 43, ¶ 45). Plaintiffs have demanded answers which were never given.. However, Plaintiffs did not affirm the contract and ratify or waive the contract in any way; instead, they filed suit to reveal Defendants’ deception, so they might recover the losses they sustained as a result of being overly trusting. g. Defendants’ motion should be denied, or, in the alternative, Plaintiffs should be allowed to amend their pleading. For the reasons stated herein, Defendants motion should be denied. Although Plaintiffs believe that the second amended complaint along with exhibits gives more than adequate notice and meets the pleading requirements, to the extent the Court disagrees, Plaintiffs would request the opportunity to amend the complaint to address any of the Court’s issues. CONCLUSION For the purposes of Defendants’ 9(b) and 12(b)(6) motion, Plaintiffs have sufficiently pleaded fraud with specificity as to the time, place, and content of the representations made, as well as the identity of the speakers, Reiss, Murrell, Chappelle, McCabe, and Blair, and the specific statements and actions they made which they knew to be fraudulent at the time they made them. Further, with regard to Plaintiffs’ other claims, Plaintiff has sufficiently pleaded facts establishing Defendants are liable for two reasons: (1) for years, Defendants concealed from Plaintiffs that Herrin Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 21 of 23 22 4845.2485.8249.1 Well #1 was not economically viable; and (2) Defendants never transferred Plaintiffs’ working interest ownership in the well, and then improperly converted this ownership to Benchmark. Plaintiffs’ factual allegations, when accepted as true, raise a right to relief that is more than speculative. See Twombly, 550 U.S. at 555. Therefore, this Court should deny Defendants’ 9(b) and 12(b)(6) motions to dismiss. Respectfully Submitted, LEWIS BRISBOIS BISGAARD AND SMITH /s/ W. Earl Touchstone_________________ W. Earl Touchstone Texas State Bar No. 20150500 S.D. Tex. #11381 24 Greenway Plaza, Suite 1400 Houston, Texas 77046 Telephone: 713.659.6767 Facsimile: 713.759.6830 Email: Earl.Touchstone@lewisbrisbois.com ATTORNEY FOR DEEP WILCOX OIL & GAS, LLC; and HANKERSON OIL, LLC Of Counsel: Macy A. Stavinoha Texas State Bar No. 24098465 S.D. Tex 3038472 24 Greenway Plaza, Suite 1400 Houston, Texas 77046 Telephone: 713.659.6767 Facsimile: 713.759.6830 Email: Macy.Stavinoha@lewisbrisbois.com Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 22 of 23 23 4845.2485.8249.1 CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the foregoing document has been served on the following counsel of record by electronic filing, e-mail, facsimile transmission, or certified mail on this the 12th day of March, 2019. Elizabeth E. Klingensmith Attorney-in-Charge State Bar No. 24046496 Fed. ID No. 576790 Jay T. Huffman Texas Bar No. 24059980 Fed. ID No. 870092 BLANK ROME LLP 717 Texas Avenue, Suite 1400 Houston, Texas 77002 Telephone: (713) 228-6601 Facsimile: (713) 228-6605 E-mail: lklingensmith@blankrome.com jhuffman@blankrome.com ATTORNEYS FOR PLAINTIFF TEXAS ENERGY, LP; ALTA MESA GP, LLC; AND ALTA MESA SERVICES, LP /s/ W. Earl Touchstone W. Earl Touchstone Case 4:18-cv-02749 Document 45 Filed on 03/12/19 in TXSD Page 23 of 23