Team Marketing Group Inc et al v. Hyde et al

REPLY to Response to Motion re MOTION for Partial Summary Judgment

W.D. La.March 18, 2019

1 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF LOUISIANA TEAM MARKETING GROUP, INC., * et al. * CIVIL ACTION NO. 5:17-cv-01389 * Plaintiffs, * * JUDGE DOUGHTY VERSUS * * ROBERT DANIEL HYDE, et al. * MAGISTRATE JUDGE HORNSBY * Defendants. * DEFENDANTS’ REPLY IN SUPPORT OF MOTION FOR PARTIAL SUMMARY JUDGMENT Defendants, Robert Daniel Hyde, III (“Hyde”), Budget PrePay, Inc. (“Budget”), and Budget Mobile, LLC (“Budget Mobile) (Hyde, Budget, and Budget Mobile collectively referred to as “Defendants”), hereby submit this Reply in Support of Motion for Partial Summary Judgment. I. INTRODUCTION As an initial matter, Defendants note that in the Response to Motion for Summary Judgment (“Response”) filed by the Plaintiffs, Team Marketing Group, Inc. (“Team”) and World Class Marketing Services, LLC (“World Class”) (collectively, Team and World Class referred to as “Plaintiffs”), Plaintiffs conceded dismissal of their claims for punitive damages, equitable relief, and conversion, as well as the dismissal of Budget Mobile. (See Doc. No. 91, p. 15-16). Thus, the only claims still at issue for purposes of Defendants’ Motion for Partial Summary Judgment (“Motion”) are the Plaintiffs’ fraud claim against Budget and Hyde, and their breach of contract claim against Hyde, individually. In support of their arguments on these remaining claims, Plaintiffs’ Response recites a litany of “facts” – many of which are irrelevant to the issues at hand, are untrue, unsubstantiated, Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 1 of 22 PageID #: 1935 2 or misleading, and or aren’t “facts” at all but rather, Plaintiffs’ unsubstantiated beliefs about the facts. For example, much of the Response focuses on modifications of contracts between the Plaintiffs and Budget, “evidence” that a promise to pay six months of residuals was in fact made by Hyde or other Budget personnel, and the purported meaning of, and breach of, that promise. The modification of the contracts, whether an oral promise to pay residuals was made, and the details of that alleged promise are not relevant to Defendants’ Motion. Rather, these “facts” all relate to the validity of Plaintiffs’ breach of contract claim, which is not subject to the Motion. Because these facts are not relevant to the Motion, Defendants will not address them in this Reply. Finally, Plaintiffs’ Response wholly fails to provide any viable evidence sufficient to controvert or otherwise create a material issue of fact concerning Defendants’ showing that (a) Arrow Sales Group, LLC (“Arrow”) was a legitimate business entity, operated entirely separate from Budget; (b) Arrow was created by Hyde and his brother, Stephen Hyde (collectively, the “Hydes”), solely as an avenue for them and Budget’s contractors to continue to make a profit through the Lifeline Program and to provide a new employment opportunity for many of Budget’s long-term employees after Budget made the decision to shut down the company because its business model was no longer profitable for the long-term and not to defraud Plaintiffs out of commissions; (c) assuming Hyde or other Budget personnel did make a promise to pay six months of residual commissions to Plaintiffs, there is no evidence that Hyde or other Budget personnel did not intend to fulfill the promise when it was made; (d) Budget was not the “alter ego” of Hyde; and (e) Hyde did not personally engage in any fraud, malfeasance, or criminal wrongdoing. Accordingly, Plaintiffs’ claims for fraud against all Defendants and for breach of contract against Hyde, individually, fail as a matter of law and summary judgment should be granted on all of Plaintiffs’ claims except their claim for breach of contract against Budget. Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 2 of 22 PageID #: 1936 3 II. ARGUMENT A. Plaintiffs’ Untimely Attachments and Documents Attached but Not Cited or Authenticated Should Not Be Considered By The Court Plaintiffs filed two exhibits to their Response on March 13, 2019 two days after their Response was due. (Doc. No. 92). Because the filing was untimely, the two exhibits should not be considered by the Court in connection with Defendants’ Motion. Moreover, in the second of these two exhibits, Plaintiffs inexplicably filed what appears to be every document they have produced during discovery in this case. (Doc. No. 92-2). The vast majority of these documents are not cited to by Plaintiffs in their Response, have not been authenticated in any manner, and/or are not relevant to this Motion (or in some cases, to this case). Pursuant to Rule 56(c)(1) of the Federal Rules of Civil Procedure, a party asserting that a fact cannot be or is genuinely disputed must support that assertion by “citing to particular parts of materials in the record.” Thus, even if the Court considered the untimely exhibits, it should not consider any evidence contained therein that is (a) not cited by the Plaintiffs in their Response or (b) not authenticated. B. Plaintiffs’ Response Cannot Salvage Their Failed Fraud Claim 1. Plaintiffs Fail to Produce Any Credible Evidence that Arrow Was a Sham Company As Plaintiffs note in their Response, “the real issue is when and to what extent Arrow … started operating as an entity distinct from Budget”. Defendants produced ample evidence in their Motion to show that Arrow operated as an entity wholly distinct from Budget from the day it was created, including, but not limited to, Arrow’s separate bank accounts and financials, separate tax return filing, separate insurance, separate internet, telephone, credit card, and payroll service accounts, separate agreement with Spin Solutions, LLC for use of that company’s software applications and online enrollment portal, office space rental payments, and payment of employees who provided services to or for the company. (Doc. No. 85-2, p. 16-17; Albritton Dec., ¶5-12, Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 3 of 22 PageID #: 1937 4 Appx. 1-4; Second Hyde Dec., ¶17)1. Plaintiffs have not produced any evidence to dispute these facts. Instead, the only “evidence” Plaintiffs cite that even possibly relates to the issue is that: (a) Budget’s Chief Financial Officer oversaw Arrow’s books and records; (b) Hyde received a salary from Budget during 2016 but not from Arrow; and (c) the Hydes received all of the proceeds from the sale of Arrow to a third party and there is no record of anyone else receiving money from the closing. (Doc. No. 91, p. 22-23). None of this in any way supports the contention that Arrow was a sham entity or otherwise not operated separately from Budget. First, while Plaintiffs are correct that Brad Albritton was Budget’s Chief Operating Officer they ignore the fact that he oversaw Arrow’s financial books and records in his capacity as an Arrow employee. As Albritton explains, a few employees, including Albritton, were employed by both Budget and Arrow. (Albritton Dec., ¶13-14). For those employees, each company paid a pro- rated portion of the person’s salary for work performed for that company. (Id. at ¶14). Second, although Hyde was a co-owner of Arrow, he was not paid a salary from the company because he was not an employee of, and did not otherwise have any day-to-day role or involvement with the company. (Hyde Dep., p. 15, 22).2 Hyde was President of Budget and as such, received a salary from Budget for his services. (Hyde Dep., p. 5, 21-22). Third, the Hydes were the only members of Arrow. (First Hyde Dec., ¶27; Hyde Dep., p. 15-16). They were, therefore, entitled to keep the proceeds from the sale of the company. The fact 1 The Declaration of R. Daniel Hyde, III dated January 2, 2019 is attached to Defendants’ Motion as Exhibit A and is referred to as “First Hyde Dec., ¶__, Ex. __”) (Doc. No. 85-3). The Declaration of R. Daniel Hyde, III dated February 14, 2019 is attached to Defendants’ Motion as Exhibit C and is referred to as “Second Hyde Dec., ¶__, Ex. __”. (Doc. No. 85-5). The Declaration of Bradley Albritton is attached to Defendants’ Motion as Exhibit D and is referred to as “Albritton Dec., ¶___, Apx. ___”). (Doc. No. 85-6). 2 Cited pages from the transcript of the Deposition of R. Daniel Hyde, III are attached hereto as Exhibit E and referred to herein as “Hyde Dep., p. __”. Cited pages and exhibits from the transcript of the Deposition of Todd Kornblit are attached hereto as Exhibit F and referred to herein as “Kornblit Dep., p. __, Ex. __”. Cited pages and exhibits from the transcript of the Deposition of Georganne Rogers are attached hereto as Exhibit G and referred to herein as “Rogers Dep., p. __, Ex. __”. Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 4 of 22 PageID #: 1938 5 that there is no record of anyone other than the Hydes receiving money from the closing is irrelevant. Hyde testified at his deposition that they paid off Arrow’s line of credit and other creditors. (Hyde Dep., p. 25). Whether they did so as part of the official closing rather than from Arrow’s accounts prior to closing or after closing using the proceeds they received does not somehow lead to the conclusion that Arrow was not a legitimate company. 2. Plaintiffs Fail to Produce Any Credible Evidence To Suggest Arrow Was Created to Defraud Them Out of Residual Commissions Plaintiffs’ primarily contend, without support, that Arrow must have been created to defraud them out of commissions because they cannot understand why Hyde would have created a company to do business in the Lifeline industry if he did not think the Lifeline Program was viable. (Doc. No. 91, 18-20). Plaintiffs misconstrue Hyde’s concerns and those of the other members of Budget’s management team. Their concerns were not about the viability of the Lifeline Program itself but rather, about Budget’s viability following changes to the program that rendered its business model no longer profitable for the long term. (Second Hyde Dec. at ¶7, Ex. 1; Hyde Dep., p. 10, 38-39, 45-46). Specifically, the government increased the number of minutes Eligible Telecommunications Carriers (“ETC”), like Budget, were required to offer, required the ETCs to offer free broadband services, and reduced the reimbursement paid to ETCs for providing these services. See In the Matter of Lifeline & Link Up Reform & Modernization, 31 F.C.C. Rcd. 3962, 3395-3337, 3999, 4003 (F.C.C. 2016). Because broadband was so expensive for Budget and the government would be reducing the reimbursement rates, Budget’s management realized that Budget would not be able to provide broadband at a profit and stay in business for any extended period of time. (Second Hyde Dec. at ¶7, Ex. 1; Hyde Dep., p. 10, 38-39, 45-46). As an ETC, Budget had significant responsibilities, expenses, and potential liabilities. Among many other things, ETCs pay for and provide telephone service (and now, broadband) Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 5 of 22 PageID #: 1939 6 provided to subscribers (either directly or through contracts with larger providers), pay for and distribute free handsets given to subscribers, bear the expense of marketing to and enrolling new subscribers, handle customer services issues related to the services and handsets, and ensure (and bear ultimate responsibility for) compliance with the Lifeline Program’s requirements. (First Hyde Dec., ¶4-6; Hyde Dep., p. 17; In the Matter of Lifeline & Link Up Reform & Modernization, 31 F.C.C. Rcd. 3962, 3395-3337, 3999, 4003 (F.C.C. 2016)). Arrow was a completely different business model. As explained in more detail in Defendants’ Motion, Arrow was not an ETC or an otherwise licensed telecommunications provider but rather, served merely as a middleman, contracting with third-party agents to provide services to market to and enroll potential subscribers in the Lifeline Program for Arrow’s licensed ETC clients. (First Hyde Dec., ¶28; Second Hyde Dec., ¶15; Hyde Dep., p. 16; Kornblit Dep., p. 71; Rogers Dep., p. 78). As such, Arrow had virtually none of the responsibilities or expenses of an ETC. (Id). Accordingly, the Hydes saw Arrow as an opportunity to continue to make a profit through the Lifeline Program where Budget could not do so.3 (Second Hyde Dec., ¶12). In support of their argument, Plaintiffs rely on their contention that Budget personnel told them in August or September of 2016 that, when the residual payments exceeded $100,000.00 in August of 2016 (for July commissions), Hyde said that payments in that amount “were going to end” and would never happen again. (Doc. No. 91, p. 9). These statements are classic hearsay and as such, are inadmissible and should not be considered. FED. R. EVID. 801-802. Even assuming, however, that these statements are admissible, and that they were made, they do not support Plaintiffs’ argument. The $100,000.00 residual payment to Team was made in August of 2016. 3 The Hydes also saw Arrow as a chance to provide a new employment opportunity to many long-term Budget employees who had experience in the industry and to provide Budget’s agents (including Plaintiffs) with a new business opportunity in the industry. (Second Hyde Dec., ¶13; Hyde Dep., p. 14). Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 6 of 22 PageID #: 1940 7 (Kornblit Dep., p. 45)4. Arrow was created on March 31, 2016. (Second Hyde Dec., ¶14, Ex. 2). Its contract with TracFone was signed on May 16, 2016. (Second Hyde Dec., ¶19, Ex. 3). As a matter of pure logic, Hyde’s dismay at paying out a large residual in August of 2016 could not possibly have been the reason for the decisions he (and others) made three to five months earlier. Further, Plaintiffs’ argument once again ignores the simple fact that had Budget had some sinister intent to stop paying Plaintiffs’ residuals, it did not need to concoct the alleged elaborate scheme of shutting Budget down and creating and operating Arrow. If this was the intent, Budget could simply have terminated the Plaintiffs’ contracts with Budget, without cause, as permitted by their terms. (Kornblit Dep., p. 22-26, Ex. 2-3; Rogers Dep., p. 25-26, 28-30, Ex. 10, 12). 3. The “Misrepresentations” and “Concealment” Alleged by Plaintiffs Cannot Support a Fraud Claim As discussed in Defendants’ Motion, it is well settled under Louisiana law that failure to perform as promised or non-performance of an agreement to do something in the future is not evidence of fraud. Under Louisiana law, fraud cannot be predicated on statements that are promissory in nature or that relate to future events. See Koerner v. CMR Construction & Roofing, L.L.C., 910 F.3d 221, 230 (5th Cir. 2018); Cent. Facilities Operating Co., L.L.C. v. Cinemark USA, Inc., 36 F.Supp.3d 700, 716 (M.D. La.2014); Taylor v. Dowling Gosslee & Associates, Inc., 44,654 (La.App. 2 Cir. 10/7/09), 22 So.3d 246, 255. Fraud may, however, be based on a promise made with no intention of performing. See Koerner, 910 F.3d at 230; Cent. Facilities Operating Co., L.L.C., 36 F.Supp.3d 700, 716; Taylor, 22 So.3d at 255. Thus, a party asserting fraud based on a promise to perform must also prove that the promisor “never intended to perform this promise.” Franz v. Iolab, Inc., a div. or subsidiary of Johnson & Johnson, Inc., 801 F.Supp. 1537, 1543 (E.D. 4 World Class was never paid $100,000 or more in residual commissions. (Rogers Dep., p. 94, Ex. 15). Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 7 of 22 PageID #: 1941 8 La. 1992). Plaintiffs cannot satisfy this burden. To support their fraud claim, Plaintiffs again rely on their contention that Hyde promised to pay them six months of residuals. (Doc. No. 91, p. 20-22). Under Louisiana law, Hyde’s alleged promise cannot support Plaintiff’s fraud claim unless they can prove that Hyde never intended to fulfill this promise.5 The only evidence Plaintiffs cite to is “the fact that these sums were never paid.” (Doc. No. 91, p. 21). As noted above, the mere fact that the alleged promise wasn’t fulfilled cannot create an inference of fraud. Moreover, contrary to Plaintiffs’ statement and as explained in more detail in Defendants’ Motion, Budget did pay residuals to Plaintiffs for a portion of the allegedly promised six months. (Kornblit Dep., p. 60-62). (Rogers Dep., p. 86-87). (Kornblit Dep., p. 82-83; Rogers Dep., p. 88, 90). Assuming a promise to pay six months of residuals was made, it defies logic that Hyde never intended to pay them when Budget did in fact pay the residuals for a portion of the alleged six months. Further, if a promise was made, and Budget failed to fulfill that promise, that is an issue of breach of contract, not fraud. For the first time, Plaintiffs now contend that their fraud claim is also based on Hyde “concealing and intentionally misrepresenting the nature of the deal between Budget and TracFone.” (Doc No. 91, p. 20).6 The only alleged “concealment” or “misrepresentation” Plaintiffs point to is that they were not told Budget would be receiving residual payments from 5 Plaintiffs also refer to comments made by Hyde that Arrow was a “big opportunity”, that Team’s compensation would increase overall under Arrow, and that Budget representatives threatened Plaintiffs that if they did not sign agreements with Arrow, they would be excluded. (Doc. No. 91, p. 6-9). These are nothing more than statements that relate to future events that cannot support a claim of fraud. 6 To bolster their claim that Hyde “lied” to them about Budget’s deal with TracFone, Plaintiffs’ Response misleadingly cites to testimony from Todd Kornblit that Hyde told him TracFone was not paying a residual. (Doc. No. 91, p. 21). Per Kornblit’s own testimony, however, this reference was that TracFone was not paying Arrow a residual under the contract between TracFone and Arrow and thus, Arrow would not be paying a residual to the Plaintiffs under their contracts with Arrow. (Kornblit Dep., p. 49-52). The statement had nothing to do with Budget’s deal with TracFone. Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 8 of 22 PageID #: 1942 9 TracFone on the customers Budget sold to TracFone. (Doc. No. 91, p. 19).7 Notably, when asked via interrogatories and in their depositions to describe every misrepresentation on which Plaintiffs based their fraud claim, neither Plaintiff even mentioned the TracFone deal. (Kornblit Dep., p. 49; Rogers Dep., p. 8-9, 48-51, 62-65, Ex. 9, p. 2-4). Nevertheless, even if true, Budget’s (and/or Hyde’s) failure to tell Plaintiffs that Budget was receiving residuals from TracFone cannot support a claim for fraud. To establish a claim of fraud, Plaintiffs must prove: (1) a misrepresentation of material fact, (2) made with the intent to deceive, (3) causing justifiable reliance with resulting injury. See Koerner v. CMR Construction & Roofing, L.L.C., 910 F.3d 221, 230 (5th Cir. 2018); Becnel v. Grodner, 2007-1041 (La. App. 4 Cir. 4/2/08), 982 So.2d 891, 894. For claims of fraud by omission, the defendant must have a legal duty to speak or disclose information. See Greene v. Gulf Coast Bank, 593 So.2d 630, 632 (La. 1992); First Am. Bankcard, Inc. v. Smart Bus. Tech., Inc., 178 F.Supp.3d 390, 401 (E.D. La.2016). Plaintiffs do not, and have never, alleged that Budget or Hyde had a legal duty to disclose the financial terms of their Customer Transfer Agreement with TracFone. Indeed, the existence of such a duty makes little sense. The terms, financial or otherwise, of Budget’s agreements with third parties are the business only of the parties to those agreements. Moreover, even if Budget did have such a duty, which it did not, Plaintiffs have not, and cannot, show that the omission was made with any intent to deceive them, or that they relied on, or were injured by, the omission. C. Plaintiffs’ Response Cannot Salvage Their Claims Against Hyde, Individually Although Plaintiffs cite the test for piercing the corporate veil as an alter ego in their 7 Plaintiffs’ Response does state that Hyde “misrepresent[ed] the reason for which Arrow was created.” (Doc. No. 91, p. 20. Plaintiffs, however, do not cite to any evidence to support this bald statement other than their personal disbelief of Hyde’s stated reasons. Their mere disbelief cannot be a legitimate basis for a claim. Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 9 of 22 PageID #: 1943 10 Response, they produce no evidence to support such a theory in this case. (Doc. No. 91, p. 16). As the Plaintiffs note, a determination of whether the corporate veil should be pierced requires analysis of a number of factors, including but not limited to: 1) commingling of corporate and shareholder funds; 2) failure to follow statutory formalities for incorporating and transacting corporate affairs; 3) undercapitalization; 4) failure to provide separate bank accounts and bookkeeping records; and 5) failure to hold regular shareholder and director meetings. See Riggins v. Dixie Shoring Co., Inc., 590 So.2d 1164, 1168 (La.1991). Plaintiffs do not dispute Budget’s corporate existence (Doc. No. 70, ¶13) and have not suggested that any of these factors exist in this case. In the absence of any evidence to indicate that Budget was an alter ego for Hyde, Budget’s corporate veil cannot be pierced under this theory. The corporate veil can also be pierced when a company’s shareholder, officer, or director, acting through the corporation, defrauds or deceives a third party. See Riggins, 590 So.2d at 1168- 69; Vince v. Metro Rediscount Co., Inc., 18-237, 3 (La.App. 5 Cir. 11/14/2018), 2018 WL 5960783, -- So.3d -- (2018). Plaintiffs do not contend Hyde engaged in malfeasance or criminal wrongdoing. As discussed in detail in Defendants’ Motion and in Section II(B) above, Plaintiffs’ claim of fraud fails as a matter of law. Because Hyde did not engage in fraud, he cannot be personally liable for Plaintiffs’ breach of contract (or fraud) claims. Therefore, Plaintiffs’ claims against Hyde, individually, fail as a matter of law. I. CONCLUSION Based on the foregoing, as well as the arguments contained in Defendants’ Motion for Partial Summary Judgment and supporting evidence, Defendants respectfully request that the Court grant it summary judgment dismissing with prejudice each of the claims asserted by Plaintiffs except their breach of contract claim against Budget PrePay, Inc. Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 10 of 22 PageID #: 1944 11 Respectfully submitted, WIENER, WEISS & MADISON A Professional Corporation By:_/s/ Marjorie L. Frazier____________ Frank H. Spruiell, Jr. BR#1611 R. Joseph Naus BR#17074 Marjorie L. Frazier BR#32991 330 Marshall Street, Suite 1000 (71101) P. O. Box 21990 Shreveport, LA 71120-1990 Telephone: (318) 226-9100 Facsimile: (318) 424-5128 ATTORNEYS FOR DEFENDANTS, ROBERT DANIEL HYDE, III, BUDGET PREPAY, INC., AND BUDGET MOBILE, LLC CERTIFICATE OF SERVICE I HEREBY CERTIFY that on the 18th day of March, 2019, the undersigned electronically filed the foregoing with the Clerk of Court through the CM/ECF system, which will send notification of such filing to all counsel of record. /s/ Marjorie L. Frazier_________________ Marjorie L. Frazier Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 11 of 22 PageID #: 1945 1 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF LOUISIANA TEAM MARKETING GROUP, INC., * et al. * CIVIL ACTION NO. 5:17-cv-01389 * Plaintiffs, * * JUDGE DOUGHTY VERSUS * * ROBERT DANIEL HYDE, et al. * MAGISTRATE JUDGE HORNSBY * Defendants. * DEFENDANTS’ REPLY IN SUPPORT OF MOTION FOR PARTIAL SUMMARY JUDGMENT Defendants, Robert Daniel Hyde, III (“Hyde”), Budget PrePay, Inc. (“Budget”), and Budget Mobile, LLC (“Budget Mobile) (Hyde, Budget, and Budget Mobile collectively referred to as “Defendants”), hereby submit this Reply in Support of Motion for Partial Summary Judgment. I. INTRODUCTION As an initial matter, Defendants note that in the Response to Motion for Summary Judgment (“Response”) filed by the Plaintiffs, Team Marketing Group, Inc. (“Team”) and World Class Marketing Services, LLC (“World Class”) (collectively, Team and World Class referred to as “Plaintiffs”), Plaintiffs conceded dismissal of their claims for punitive damages, equitable relief, and conversion, as well as the dismissal of Budget Mobile. (See Doc. No. 91, p. 15-16). Thus, the only claims still at issue for purposes of Defendants’ Motion for Partial Summary Judgment (“Motion”) are the Plaintiffs’ fraud claim against Budget and Hyde, and their breach of contract claim against Hyde, individually. In support of their arguments on these remaining claims, Plaintiffs’ Response recites a litany of “facts” – many of which are irrelevant to the issues at hand, are untrue, unsubstantiated, Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 12 of 22 PageID #: 1946 2 or misleading, and or aren’t “facts” at all but rather, Plaintiffs’ unsubstantiated beliefs about the facts. For example, much of the Response focuses on modifications of contracts between the Plaintiffs and Budget, “evidence” that a promise to pay six months of residuals was in fact made by Hyde or other Budget personnel, and the purported meaning of, and breach of, that promise. The modification of the contracts, whether an oral promise to pay residuals was made, and the details of that alleged promise are not relevant to Defendants’ Motion. Rather, these “facts” all relate to the validity of Plaintiffs’ breach of contract claim, which is not subject to the Motion. Because these facts are not relevant to the Motion, Defendants will not address them in this Reply. Finally, Plaintiffs’ Response wholly fails to provide any viable evidence sufficient to controvert or otherwise create a material issue of fact concerning Defendants’ showing that (a) Arrow Sales Group, LLC (“Arrow”) was a legitimate business entity, operated entirely separate from Budget; (b) Arrow was created by Hyde and his brother, Stephen Hyde (collectively, the “Hydes”), solely as an avenue for them and Budget’s contractors to continue to make a profit through the Lifeline Program and to provide a new employment opportunity for many of Budget’s long-term employees after Budget made the decision to shut down the company because its business model was no longer profitable for the long-term and not to defraud Plaintiffs out of commissions; (c) assuming Hyde or other Budget personnel did make a promise to pay six months of residual commissions to Plaintiffs, there is no evidence that Hyde or other Budget personnel did not intend to fulfill the promise when it was made; (d) Budget was not the “alter ego” of Hyde; and (e) Hyde did not personally engage in any fraud, malfeasance, or criminal wrongdoing. Accordingly, Plaintiffs’ claims for fraud against all Defendants and for breach of contract against Hyde, individually, fail as a matter of law and summary judgment should be granted on all of Plaintiffs’ claims except their claim for breach of contract against Budget. Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 13 of 22 PageID #: 1947 3 II. ARGUMENT A. Plaintiffs’ Untimely Attachments and Documents Attached but Not Cited or Authenticated Should Not Be Considered By The Court Plaintiffs filed two exhibits to their Response on March 13, 2019 two days after their Response was due. (Doc. No. 92). Because the filing was untimely, the two exhibits should not be considered by the Court in connection with Defendants’ Motion. Moreover, in the second of these two exhibits, Plaintiffs inexplicably filed what appears to be every document they have produced during discovery in this case. (Doc. No. 92-2). The vast majority of these documents are not cited to by Plaintiffs in their Response, have not been authenticated in any manner, and/or are not relevant to this Motion (or in some cases, to this case). Pursuant to Rule 56(c)(1) of the Federal Rules of Civil Procedure, a party asserting that a fact cannot be or is genuinely disputed must support that assertion by “citing to particular parts of materials in the record.” Thus, even if the Court considered the untimely exhibits, it should not consider any evidence contained therein that is (a) not cited by the Plaintiffs in their Response or (b) not authenticated. B. Plaintiffs’ Response Cannot Salvage Their Failed Fraud Claim 1. Plaintiffs Fail to Produce Any Credible Evidence that Arrow Was a Sham Company As Plaintiffs note in their Response, “the real issue is when and to what extent Arrow … started operating as an entity distinct from Budget”. Defendants produced ample evidence in their Motion to show that Arrow operated as an entity wholly distinct from Budget from the day it was created, including, but not limited to, Arrow’s separate bank accounts and financials, separate tax return filing, separate insurance, separate internet, telephone, credit card, and payroll service accounts, separate agreement with Spin Solutions, LLC for use of that company’s software applications and online enrollment portal, office space rental payments, and payment of employees who provided services to or for the company. (Doc. No. 85-2, p. 16-17; Albritton Dec., ¶5-12, Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 14 of 22 PageID #: 1948 4 Appx. 1-4; Second Hyde Dec., ¶17)1. Plaintiffs have not produced any evidence to dispute these facts. Instead, the only “evidence” Plaintiffs cite that even possibly relates to the issue is that: (a) Budget’s Chief Financial Officer oversaw Arrow’s books and records; (b) Hyde received a salary from Budget during 2016 but not from Arrow; and (c) the Hydes received all of the proceeds from the sale of Arrow to a third party and there is no record of anyone else receiving money from the closing. (Doc. No. 91, p. 22-23). None of this in any way supports the contention that Arrow was a sham entity or otherwise not operated separately from Budget. First, while Plaintiffs are correct that Brad Albritton was Budget’s Chief Operating Officer they ignore the fact that he oversaw Arrow’s financial books and records in his capacity as an Arrow employee. As Albritton explains, a few employees, including Albritton, were employed by both Budget and Arrow. (Albritton Dec., ¶13-14). For those employees, each company paid a pro- rated portion of the person’s salary for work performed for that company. (Id. at ¶14). Second, although Hyde was a co-owner of Arrow, he was not paid a salary from the company because he was not an employee of, and did not otherwise have any day-to-day role or involvement with the company. (Hyde Dep., p. 15, 22).2 Hyde was President of Budget and as such, received a salary from Budget for his services. (Hyde Dep., p. 5, 21-22). Third, the Hydes were the only members of Arrow. (First Hyde Dec., ¶27; Hyde Dep., p. 15-16). They were, therefore, entitled to keep the proceeds from the sale of the company. The fact 1 The Declaration of R. Daniel Hyde, III dated January 2, 2019 is attached to Defendants’ Motion as Exhibit A and is referred to as “First Hyde Dec., ¶__, Ex. __”) (Doc. No. 85-3). The Declaration of R. Daniel Hyde, III dated February 14, 2019 is attached to Defendants’ Motion as Exhibit C and is referred to as “Second Hyde Dec., ¶__, Ex. __”. (Doc. No. 85-5). The Declaration of Bradley Albritton is attached to Defendants’ Motion as Exhibit D and is referred to as “Albritton Dec., ¶___, Apx. ___”). (Doc. No. 85-6). 2 Cited pages from the transcript of the Deposition of R. Daniel Hyde, III are attached hereto as Exhibit E and referred to herein as “Hyde Dep., p. __”. Cited pages and exhibits from the transcript of the Deposition of Todd Kornblit are attached hereto as Exhibit F and referred to herein as “Kornblit Dep., p. __, Ex. __”. Cited pages and exhibits from the transcript of the Deposition of Georganne Rogers are attached hereto as Exhibit G and referred to herein as “Rogers Dep., p. __, Ex. __”. Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 15 of 22 PageID #: 1949 5 that there is no record of anyone other than the Hydes receiving money from the closing is irrelevant. Hyde testified at his deposition that they paid off Arrow’s line of credit and other creditors. (Hyde Dep., p. 25). Whether they did so as part of the official closing rather than from Arrow’s accounts prior to closing or after closing using the proceeds they received does not somehow lead to the conclusion that Arrow was not a legitimate company. 2. Plaintiffs Fail to Produce Any Credible Evidence To Suggest Arrow Was Created to Defraud Them Out of Residual Commissions Plaintiffs’ primarily contend, without support, that Arrow must have been created to defraud them out of commissions because they cannot understand why Hyde would have created a company to do business in the Lifeline industry if he did not think the Lifeline Program was viable. (Doc. No. 91, 18-20). Plaintiffs misconstrue Hyde’s concerns and those of the other members of Budget’s management team. Their concerns were not about the viability of the Lifeline Program itself but rather, about Budget’s viability following changes to the program that rendered its business model no longer profitable for the long term. (Second Hyde Dec. at ¶7, Ex. 1; Hyde Dep., p. 10, 38-39, 45-46). Specifically, the government increased the number of minutes Eligible Telecommunications Carriers (“ETC”), like Budget, were required to offer, required the ETCs to offer free broadband services, and reduced the reimbursement paid to ETCs for providing these services. See In the Matter of Lifeline & Link Up Reform & Modernization, 31 F.C.C. Rcd. 3962, 3395-3337, 3999, 4003 (F.C.C. 2016). Because broadband was so expensive for Budget and the government would be reducing the reimbursement rates, Budget’s management realized that Budget would not be able to provide broadband at a profit and stay in business for any extended period of time. (Second Hyde Dec. at ¶7, Ex. 1; Hyde Dep., p. 10, 38-39, 45-46). As an ETC, Budget had significant responsibilities, expenses, and potential liabilities. Among many other things, ETCs pay for and provide telephone service (and now, broadband) Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 16 of 22 PageID #: 1950 6 provided to subscribers (either directly or through contracts with larger providers), pay for and distribute free handsets given to subscribers, bear the expense of marketing to and enrolling new subscribers, handle customer services issues related to the services and handsets, and ensure (and bear ultimate responsibility for) compliance with the Lifeline Program’s requirements. (First Hyde Dec., ¶4-6; Hyde Dep., p. 17; In the Matter of Lifeline & Link Up Reform & Modernization, 31 F.C.C. Rcd. 3962, 3395-3337, 3999, 4003 (F.C.C. 2016)). Arrow was a completely different business model. As explained in more detail in Defendants’ Motion, Arrow was not an ETC or an otherwise licensed telecommunications provider but rather, served merely as a middleman, contracting with third-party agents to provide services to market to and enroll potential subscribers in the Lifeline Program for Arrow’s licensed ETC clients. (First Hyde Dec., ¶28; Second Hyde Dec., ¶15; Hyde Dep., p. 16; Kornblit Dep., p. 71; Rogers Dep., p. 78). As such, Arrow had virtually none of the responsibilities or expenses of an ETC. (Id). Accordingly, the Hydes saw Arrow as an opportunity to continue to make a profit through the Lifeline Program where Budget could not do so.3 (Second Hyde Dec., ¶12). In support of their argument, Plaintiffs rely on their contention that Budget personnel told them in August or September of 2016 that, when the residual payments exceeded $100,000.00 in August of 2016 (for July commissions), Hyde said that payments in that amount “were going to end” and would never happen again. (Doc. No. 91, p. 9). These statements are classic hearsay and as such, are inadmissible and should not be considered. FED. R. EVID. 801-802. Even assuming, however, that these statements are admissible, and that they were made, they do not support Plaintiffs’ argument. The $100,000.00 residual payment to Team was made in August of 2016. 3 The Hydes also saw Arrow as a chance to provide a new employment opportunity to many long-term Budget employees who had experience in the industry and to provide Budget’s agents (including Plaintiffs) with a new business opportunity in the industry. (Second Hyde Dec., ¶13; Hyde Dep., p. 14). Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 17 of 22 PageID #: 1951 7 (Kornblit Dep., p. 45)4. Arrow was created on March 31, 2016. (Second Hyde Dec., ¶14, Ex. 2). Its contract with TracFone was signed on May 16, 2016. (Second Hyde Dec., ¶19, Ex. 3). As a matter of pure logic, Hyde’s dismay at paying out a large residual in August of 2016 could not possibly have been the reason for the decisions he (and others) made three to five months earlier. Further, Plaintiffs’ argument once again ignores the simple fact that had Budget had some sinister intent to stop paying Plaintiffs’ residuals, it did not need to concoct the alleged elaborate scheme of shutting Budget down and creating and operating Arrow. If this was the intent, Budget could simply have terminated the Plaintiffs’ contracts with Budget, without cause, as permitted by their terms. (Kornblit Dep., p. 22-26, Ex. 2-3; Rogers Dep., p. 25-26, 28-30, Ex. 10, 12). 3. The “Misrepresentations” and “Concealment” Alleged by Plaintiffs Cannot Support a Fraud Claim As discussed in Defendants’ Motion, it is well settled under Louisiana law that failure to perform as promised or non-performance of an agreement to do something in the future is not evidence of fraud. Under Louisiana law, fraud cannot be predicated on statements that are promissory in nature or that relate to future events. See Koerner v. CMR Construction & Roofing, L.L.C., 910 F.3d 221, 230 (5th Cir. 2018); Cent. Facilities Operating Co., L.L.C. v. Cinemark USA, Inc., 36 F.Supp.3d 700, 716 (M.D. La.2014); Taylor v. Dowling Gosslee & Associates, Inc., 44,654 (La.App. 2 Cir. 10/7/09), 22 So.3d 246, 255. Fraud may, however, be based on a promise made with no intention of performing. See Koerner, 910 F.3d at 230; Cent. Facilities Operating Co., L.L.C., 36 F.Supp.3d 700, 716; Taylor, 22 So.3d at 255. Thus, a party asserting fraud based on a promise to perform must also prove that the promisor “never intended to perform this promise.” Franz v. Iolab, Inc., a div. or subsidiary of Johnson & Johnson, Inc., 801 F.Supp. 1537, 1543 (E.D. 4 World Class was never paid $100,000 or more in residual commissions. (Rogers Dep., p. 94, Ex. 15). Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 18 of 22 PageID #: 1952 8 La. 1992). Plaintiffs cannot satisfy this burden. To support their fraud claim, Plaintiffs again rely on their contention that Hyde promised to pay them six months of residuals. (Doc. No. 91, p. 20-22). Under Louisiana law, Hyde’s alleged promise cannot support Plaintiff’s fraud claim unless they can prove that Hyde never intended to fulfill this promise.5 The only evidence Plaintiffs cite to is “the fact that these sums were never paid.” (Doc. No. 91, p. 21). As noted above, the mere fact that the alleged promise wasn’t fulfilled cannot create an inference of fraud. Moreover, contrary to Plaintiffs’ statement and as explained in more detail in Defendants’ Motion, Budget did pay residuals to Plaintiffs for a portion of the allegedly promised six months. (Kornblit Dep., p. 60-62). (Rogers Dep., p. 86-87). (Kornblit Dep., p. 82-83; Rogers Dep., p. 88, 90). Assuming a promise to pay six months of residuals was made, it defies logic that Hyde never intended to pay them when Budget did in fact pay the residuals for a portion of the alleged six months. Further, if a promise was made, and Budget failed to fulfill that promise, that is an issue of breach of contract, not fraud. For the first time, Plaintiffs now contend that their fraud claim is also based on Hyde “concealing and intentionally misrepresenting the nature of the deal between Budget and TracFone.” (Doc No. 91, p. 20).6 The only alleged “concealment” or “misrepresentation” Plaintiffs point to is that they were not told Budget would be receiving residual payments from 5 Plaintiffs also refer to comments made by Hyde that Arrow was a “big opportunity”, that Team’s compensation would increase overall under Arrow, and that Budget representatives threatened Plaintiffs that if they did not sign agreements with Arrow, they would be excluded. (Doc. No. 91, p. 6-9). These are nothing more than statements that relate to future events that cannot support a claim of fraud. 6 To bolster their claim that Hyde “lied” to them about Budget’s deal with TracFone, Plaintiffs’ Response misleadingly cites to testimony from Todd Kornblit that Hyde told him TracFone was not paying a residual. (Doc. No. 91, p. 21). Per Kornblit’s own testimony, however, this reference was that TracFone was not paying Arrow a residual under the contract between TracFone and Arrow and thus, Arrow would not be paying a residual to the Plaintiffs under their contracts with Arrow. (Kornblit Dep., p. 49-52). The statement had nothing to do with Budget’s deal with TracFone. Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 19 of 22 PageID #: 1953 9 TracFone on the customers Budget sold to TracFone. (Doc. No. 91, p. 19).7 Notably, when asked via interrogatories and in their depositions to describe every misrepresentation on which Plaintiffs based their fraud claim, neither Plaintiff even mentioned the TracFone deal. (Kornblit Dep., p. 49; Rogers Dep., p. 8-9, 48-51, 62-65, Ex. 9, p. 2-4). Nevertheless, even if true, Budget’s (and/or Hyde’s) failure to tell Plaintiffs that Budget was receiving residuals from TracFone cannot support a claim for fraud. To establish a claim of fraud, Plaintiffs must prove: (1) a misrepresentation of material fact, (2) made with the intent to deceive, (3) causing justifiable reliance with resulting injury. See Koerner v. CMR Construction & Roofing, L.L.C., 910 F.3d 221, 230 (5th Cir. 2018); Becnel v. Grodner, 2007-1041 (La. App. 4 Cir. 4/2/08), 982 So.2d 891, 894. For claims of fraud by omission, the defendant must have a legal duty to speak or disclose information. See Greene v. Gulf Coast Bank, 593 So.2d 630, 632 (La. 1992); First Am. Bankcard, Inc. v. Smart Bus. Tech., Inc., 178 F.Supp.3d 390, 401 (E.D. La.2016). Plaintiffs do not, and have never, alleged that Budget or Hyde had a legal duty to disclose the financial terms of their Customer Transfer Agreement with TracFone. Indeed, the existence of such a duty makes little sense. The terms, financial or otherwise, of Budget’s agreements with third parties are the business only of the parties to those agreements. Moreover, even if Budget did have such a duty, which it did not, Plaintiffs have not, and cannot, show that the omission was made with any intent to deceive them, or that they relied on, or were injured by, the omission. C. Plaintiffs’ Response Cannot Salvage Their Claims Against Hyde, Individually Although Plaintiffs cite the test for piercing the corporate veil as an alter ego in their 7 Plaintiffs’ Response does state that Hyde “misrepresent[ed] the reason for which Arrow was created.” (Doc. No. 91, p. 20. Plaintiffs, however, do not cite to any evidence to support this bald statement other than their personal disbelief of Hyde’s stated reasons. Their mere disbelief cannot be a legitimate basis for a claim. Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 20 of 22 PageID #: 1954 10 Response, they produce no evidence to support such a theory in this case. (Doc. No. 91, p. 16). As the Plaintiffs note, a determination of whether the corporate veil should be pierced requires analysis of a number of factors, including but not limited to: 1) commingling of corporate and shareholder funds; 2) failure to follow statutory formalities for incorporating and transacting corporate affairs; 3) undercapitalization; 4) failure to provide separate bank accounts and bookkeeping records; and 5) failure to hold regular shareholder and director meetings. See Riggins v. Dixie Shoring Co., Inc., 590 So.2d 1164, 1168 (La.1991). Plaintiffs do not dispute Budget’s corporate existence (Doc. No. 70, ¶13) and have not suggested that any of these factors exist in this case. In the absence of any evidence to indicate that Budget was an alter ego for Hyde, Budget’s corporate veil cannot be pierced under this theory. The corporate veil can also be pierced when a company’s shareholder, officer, or director, acting through the corporation, defrauds or deceives a third party. See Riggins, 590 So.2d at 1168- 69; Vince v. Metro Rediscount Co., Inc., 18-237, 3 (La.App. 5 Cir. 11/14/2018), 2018 WL 5960783, -- So.3d -- (2018). Plaintiffs do not contend Hyde engaged in malfeasance or criminal wrongdoing. As discussed in detail in Defendants’ Motion and in Section II(B) above, Plaintiffs’ claim of fraud fails as a matter of law. Because Hyde did not engage in fraud, he cannot be personally liable for Plaintiffs’ breach of contract (or fraud) claims. Therefore, Plaintiffs’ claims against Hyde, individually, fail as a matter of law. I. CONCLUSION Based on the foregoing, as well as the arguments contained in Defendants’ Motion for Partial Summary Judgment and supporting evidence, Defendants respectfully request that the Court grant it summary judgment dismissing with prejudice each of the claims asserted by Plaintiffs except their breach of contract claim against Budget PrePay, Inc. Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 21 of 22 PageID #: 1955 11 Respectfully submitted, WIENER, WEISS & MADISON A Professional Corporation By:_/s/ Marjorie L. Frazier____________ Frank H. Spruiell, Jr. BR#1611 R. Joseph Naus BR#17074 Marjorie L. Frazier BR#32991 330 Marshall Street, Suite 1000 (71101) P. O. Box 21990 Shreveport, LA 71120-1990 Telephone: (318) 226-9100 Facsimile: (318) 424-5128 ATTORNEYS FOR DEFENDANTS, ROBERT DANIEL HYDE, III, BUDGET PREPAY, INC., AND BUDGET MOBILE, LLC CERTIFICATE OF SERVICE I HEREBY CERTIFY that on the 18th day of March, 2019, the undersigned electronically filed the foregoing with the Clerk of Court through the CM/ECF system, which will send notification of such filing to all counsel of record. /s/ Marjorie L. Frazier_________________ Marjorie L. Frazier Case 5:17-cv-01389-TAD-MLH Document 95 Filed 03/18/19 Page 22 of 22 PageID #: 1956