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

REPLY in Support of 44 Amended MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

S.D. Tex.March 18, 2019

IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION DEEP WILCOX OIL & GAS, LLC, et al. Plaintiffs, v. TEXAS ENERGY ACQUISITIONS, LP, et al. Defendants. § § § § § § § § § Civil Action No. 4:18-cv-02749 DEFENDANTS’ REPLY IN SUPPORT OF THEIR AMENDED MOTION TO DISMISS Defendants Texas Energy Acquisitions, LP (“TEA”), Alta Mesa GP, LLC (“AMG”), and Alta Mesa Services, LP (“AMS”) (collectively, “Defendants”) submit this reply in support of their Amended Motion to Dismiss to address the arguments of Plaintiffs Deep Wilcox Oil & Gas, LLC (“Deep Wilcox”) and Hankerson Oil, LLC (“Hankerson”) in Plaintiffs’ Response to Defendants’ Amended Motion to Dismiss (Plaintiff’s “Response”). Plaintiffs’ have failed to demonstrate that they have met Federal Rule of Civil Procedure 9(b)’s heightened fraud pleading requirements or that they have sufficiently stated any of their claims under Rule 12(b)(6). Therefore, this Court should grant Defendants’ Amended Motion to Dismiss.1 I. Plaintiffs’ generalized fraud claims do not sufficiently set out the “who, what, when, where, and how” to overcome Rule 9(b)’s heightened pleading standard. Plaintiffs have not sufficiently “specif[ied] the statements contented to be fraudulent, identif[ied] the speaker[s], state[d] when and where the statements were made, [or] explain[ed] why the statements were fraudulent.” MDU Barnett Ltd. P’ship v. Chesapeake Expl. Ltd. P’ship, 1 Contrary to Plaintiffs’ assertion, Defendants have not attempted to make their motion to dismiss a motion for summary judgment. See Plaintiffs’ Response at p. 6 n. 2. The exhibits Defendants have attached to their motion are “central to the claim and referenced by the complaint,” and they therefore may be considered by this Court. Lone Start Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383, 387 (5th Cir. 2010). Case 4:18-cv-02749 Document 46 Filed on 03/18/19 in TXSD Page 1 of 8 2 No. CIV.A. H-12-2528, 2014 WL 585740, at *4 (S.D. Tex. Feb. 14, 2014) (citing Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir. 1997)). Plaintiffs have not demonstrated in their Response that their broad and conclusory allegations distinguish between Defendants TEA, AMG, and AMS, as required by Rule 9(b). See Hidden Values, Inc. v. Wade, No. 3:11-CV-1917-L, 2012 WL 1836087, at *4 (N.D. Tex. May 18, 2012) (plaintiff is obligated to distinguish among defendants). Plaintiffs cite to Paragraphs 9-19 of their Second Amended Complaint (Dkt. No. 43) as proof that they have adequately identified “The Who,” see Plaintiff’s Response at p. 8, but these paragraphs refer to TEA and AMGP interchangeably. Likewise, Plaintiffs cite to Paragraph 33 of the Second Amended Complaint, which refers repeatedly to “TEA and AMGP,” “TEA, AMGP, and AMS,” “TEA, AMGP, and/or AMS, and “TEA and AMGP.” Nor have Plaintiffs otherwise demonstrated that the Second Amended Complaint adequately provides “direct allegations” of the “who, what, when, where, and how.” United States ex rel. Gubbs v. Kanneganti, 565 F.3d 180, 185 (5th Cir. 1997). Plaintiffs are conclusory and unspecific even in their Response, failing to provide:  The nature of the alleged misrepresentations – Plaintiffs refer to “notice, updates, distributions, billing statements, invoices and other documents” that were sent to them as proof that they were defrauded out of their working interest in the Herrin Well #1, see the Response at p. 8, when these documents in fact prove the opposite. More particularly, Plaintiffs fail to point to any allegations in their Second Amended Complaint that describe specifically how “Defendants stated that the Herrin Well #1 was economically viable,” see the Response at p. 9, referencing instead Paragraphs 26 – 28 and 61, which are equally vague and conclusory—as are Plaintiffs’ statements regarding David Murrell’s September 22, 2009 email. See id.; Second Amended Complaint at ¶¶ 26-28, 39, 60, and 61.  How or why such representations were allegedly false – Plaintiffs lump “The Where and How” together and, as supposed proof that Defendants misrepresented to them that the Herrin Well #1 was economically viable, point to statements from Defendants such as “we have a well and they see no obvious water sands” and “I anticipate you will receive an election and an AFE next week and the money will be due no later than Case 4:18-cv-02749 Document 46 Filed on 03/18/19 in TXSD Page 2 of 8 3 November 30.” Plaintiff’s Response at p. 11 (citing Second Amended Complaint at ¶¶ 59 and 61). But the first of these statements was in fact a statement regarding Schlumberger’s opinion regarding the well.2 And in any event, these statements do not include any promises regarding economic viability, and Plaintiffs fail to indicate, whether in their Complaint or their Response, how the statements are in fact otherwise allegedly false. Furthermore, Plaintiffs have conveniently  When the representations were allegedly made – Plaintiffs have stated that the alleged misrepresentations were made anywhere from November 2009 to at least 2016. See Plaintiff’s Response at p. 9-10.3 This hardly constitutes “stat[ing] with particularity” when the alleged fraud occurred or making a “direct allegation[]” regarding it. Grubbs, 565 F.3d at 185. Furthermore, Plaintiffs wrongly attempt to make much of the fact that Fifth Circuit has noted that Rule 9(b) is context-specific and that 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. at 188; see also Plaintiff’s Response at p. 12. But the Fifth Circuit was making this qualification to distinguish the False Claims Act from common law fraud, which is at issue here. Of the latter, the Fifth Circuit in fact said: The “time, place, contents, and identity” standard originated in common law fraud and securities fraud cases making it no surprise that the elements of those claims match the pleading standard’s requirements….Given the elements of reliance and damages, pleading common law fraud with particularity demands the specifics of the false representation—without the precise contents of the misrepresentation the plaintiff cannot show he relied on the misrepresentation to his detriment. In other words, common law fraud’s elements of reliance and damages are intertwined with the misrepresentation and heighten the need for attention to the misrepresentation itself. 2 See Exhibit 8 to Plaintiff’s Second Amended Complaint (“Bill: Here is Sch. Interpretation of the well. They see 153 net feet of pay that is in excess of 12% porosity and that calculates 60% or less water saturation….Sch is totally convinced we have a well and they see no obvious water sands….” (emphasis added)). 3 Plaintiffs also make much of the fact that Defendants allegedly billed them for a “pumper/gauger” for a dry hole. See Plaintiff’s Response at p. 10. But even when a well is shut-in and not producing, it is standard industry practice to send a gauger or a pumper to monitor the well site from time to time. Case 4:18-cv-02749 Document 46 Filed on 03/18/19 in TXSD Page 3 of 8 4 Grubbs, 565 F.3d at 188–89 (emphasis added). Given the Fifth Circuit’s clear statement that “pleading common law fraud with particularity demands the specifics of the false representation,” including “time, place, contents, and identity,” Plaintiffs’ protestations that their fraud claims do not need to meet the entirety of the Rule 9(b) standard are vain. Plaintiffs have failed to state their fraud allegations with particularity as required by Rule 9(b), and Plaintiffs’ protestations to the contrary cannot disguise this fact. Therefore, this Court should grant Defendants’ Amended Motion to Dismiss. II. Plaintiffs have failed to demonstrate that they have stated any claims for which relief can be granted under Rule 12(b)(6). a. Plaintiffs’ blustering cannot change the facts that TEA had a right to sell its own assets to Benchmark, and their fraudulent and unjust enrichment claims should be dismissed. Plaintiffs’ arguments that their fraudulent conversion and unjust enrichment claims should survive a Rule 12(b)(6) motion to dismiss because a contract may be fraudulently induced is a red herring.4 TEA had a contractual right to sell its own assets to Benchmark. See Exploration Agreements, attached to Defendants’ Amended Motion to Dismiss as Exhibits A and B to Exhibit 1, at p. 8 (Section 11, “No Restrictions on Assignment”). And no matter how much Plaintiffs bluster about their own assets allegedly being sold to Plaintiff, the Benchmark Assignment states that TEA transferred only its own interests, not Plaintiffs’. See Exhibit C to Exhibit 1 (Benchmark Assignment). 4 Plaintiffs’ lengthy exposition of Anderson v. Vinson Exploration, 832 S.W.2d 657 (Tex. App.—El Paso 1992, writ denied) is also beside the point. Anderson is not a fraudulent conversion or unjust enrichment case and, as Plaintiffs acknowledge, deals with a directed verdict rather than a motion to dismiss. Case 4:18-cv-02749 Document 46 Filed on 03/18/19 in TXSD Page 4 of 8 5 b. Plaintiffs’ identify only contractually-based claims in seeking to avoid the dismissal of their tort claims under the economic loss rule. Plaintiffs argue that their tort claims are not barred by the economic loss rule because they are not contractual—but Plaintiffs seek to recover in tort for purely economic losses resulting from the alleged failure of TEA to perform under their contract with Deep Wilcox. See Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 12 (Tex. 2007). Plaintiffs have alleged tort damages for (1) alleged communications that Herrin Well #1 was economically viable when it in fact was not, failure to conduct (2) industry standard testing and (3) due diligence, and (4) failure to act as a reasonably prudence operator. See Plaintiff’s Response at p. 17. Plaintiffs state that these damages are independent of any contractual duties Defendants owed Plaintiffs. Id. But as Plaintiffs’ later argument regarding Defendants’ motion to dismiss Plaintiffs’ breach of contract claims makes clear, these are not independent duties: Under the Agreement, TEA agreed [4] to act as a reasonably prudent operator, with [3] due diligence, and in accordance with [2] general industry standards. [2, 3] TEA’s failure to conduct industry standard due diligence testing and their subsequent failure to [1] notify Plaintiffs that the well was not economically viable amounted to a breach of the Agreement. Id. at p. 19. Because the economic loss rule restricts contracting parties to contractual remedies for economic losses associated with their relationship, “even when the breach might be reasonably viewed as a consequence of a contracting party’s negligence,” Lamar Homes, 242 S.W.3d at 13, Plaintiffs’ tort claims must be dismissed. c. It cannot be gross negligence to exercise a contractual right, nor have Plaintiffs demonstrated that Defendants’ breached a duty to Plaintiffs, and therefore their negligence and gross negligence claims should be dismissed. Plaintiffs wrongly claim that their negligence and gross negligence claims are facially plausible. They do not even attempt to demonstrate that Defendants had a duty to inform Plaintiffs if the Herrin Well #1 was not “economically viable,” such that that failure would constitute Case 4:18-cv-02749 Document 46 Filed on 03/18/19 in TXSD Page 5 of 8 6 negligence. Moreover, Plaintiffs argue (in essence) that Defendants engaged in gross negligence by exercising their contractual right to charge Plaintiffs for their proportionate share of the costs of working the Well under the contract—but gross negligence does not arise even from “bad faith denials of contract rights.” IP Petroleum Co. v. Wevanco Energy, L.L.C., 116 S.W.3d 888, 897 (Tex. App.—Houston [1st Dist.] 2003, pet. denied). Still less can it arise from legitimately exercising them. Plaintiffs have failed to show that they have stated a claim for either negligence or gross negligence, and those claims should be dismissed. d. Plaintiffs have not pointed to any contractual language regarding “economic viability,” and their breach of contract claim should be dismissed. In responding to Defendants’ argument that Plaintiffs’ breach of contract claim should be dismissed because it relies on inadmissible parol evidence, Plaintiffs argue that Defendants had a duty to notify them if the Herrin Well #1 was not economically viable and that their failure to do so constituted a breach of the Exploration Agreements. See Plaintiff’s Response at p. 19. But Plaintiffs once again do not point to any language in the Exploration Agreements creating such a duty, nor do they legitimately dispute that the Agreements contemplated a dry hole. See id. Consequently, Plaintiffs’ breach of contract claim should be dismissed because it is “beyond doubt that [they] will be unable to prove the necessary facts in support of [their] allegations.” Id. (citing Cornish v. Corr. Servs. Corp., 402 F.3d 545, 548 (5th Cir. 2005). e. Plaintiffs have not demonstrated a material breach of the contract warranting rescission. Plaintiffs do not attempt to demonstrate in their Response that Defendants breached a material part of the Exploration Agreements as required for unilateral rescission, because they cannot. See Humphrey v. Camelot Ret. Cmty., 893 S.W.2d 55, 59 (Tex. App.—Corpus Christ- Case 4:18-cv-02749 Document 46 Filed on 03/18/19 in TXSD Page 6 of 8 7 Edinburg 1994, no writ). Accordingly, Plaintiffs have failed to state a claim for rescission, and their claim should be dismissed. III. Conclusion For the reasons given above and in Defendants’ Amended Motion to Dismiss, all of Plaintiffs claims should be dismissed because they have failed to plead their fraud claims with particularity and because they have failed to state a claim for which relief can be granted as to each of their claims. Respectfully submitted, BLANK ROME LLP /s/ Elizabeth E. Klingensmith Elizabeth E. Klingensmith Attorney-in-Charge Texas State Bar No. 24046496 Fed. ID No. 576790 E-mail: lklingensmith@blankrome.com Jay T. Huffman Texas State Bar No. 24059980 Fed. ID No. 870092 E-mail: jhuffman@blankrome.com 717 Texas Avenue, Suite 1400 Houston, Texas 77002 Telephone: (713) 228-6601 Facsimile: (713) 228-6605 ATTORNEYS FOR DEFENDANTS TEXAS ENERGY ACQUISITIONS, LP, ALTA MESA GP, LLC, AND ALTA MESA SERVICES, LP Case 4:18-cv-02749 Document 46 Filed on 03/18/19 in TXSD Page 7 of 8 8 CERTIFICATE OF SERVICE I HEREBY CERTIFY that a copy of the above and foregoing pleading has been served upon all counsel of record by electronic mail via the CM/ECF system this 18th day of March 2019. /s/ Elizabeth E. Klingensmith Elizabeth E. Klingensmith Case 4:18-cv-02749 Document 46 Filed on 03/18/19 in TXSD Page 8 of 8