LINKERS PRODUCTS CORP., Plaintiff, v. CANARY, LLC, Defendant. CANARY, LLC and CANARY DRILLING SERVICES, LLC, Counterclaimants, v. LINKERS PRODUCTS CORP., DEMING M. GU, and XIN GU, Counter-Defendants. TIGER VALVE COMPANY, LLC, Plaintiff, v. CANARY, LLC, Defendant. CANARY, LLC and CANARY DRILLING SERVICES, LLC, Counterclaimants, v. TIGER VALVE COMPANY, LLC, DEMING M. GU, and XIN GU, Counter-Defendants.
CIVIL ACTION No. 4:16-cv-706 (Consolidated with No. 4:16-cv-707)
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION
February 24, 2017
Dena Hanovice Palermo, United States Magistrate Judge
ENTERED; David J. Bradley, Clerk
United States District Judge Kenneth M. Hoyt referred this consolidated case to this Court to conduct all proceedings pursuant to
I. BACKGROUND
A. Procedural History
Linkers, a California corporation, and Tiger Valve, a Texas limited liability company, sell parts to companies in the oil and natural gas industry. Canary provides oilfield services across the United States, and CDS is a wholly-owned subsidiary of Canary. In February 2016, Linkers and Tiger Valve filed separate suits in Texas state court against Canary seeking to recover damages based on Canary‘s alleged failure to pay for parts it ordered from them.
Canary removed the two suits to federal court based on diversity. On April 1, 2016, Canary filed an original answer and counterclaims in both the Linkers case and the Tiger Valve case. On April 22, Linkers and Tiger Valve filed answers to the counterclaims and two (now-moot) motions to dismiss pursuant to
B. Canary Parties’ Counterclaims
Canary Parties’ amended counterclaims allege that they ordered twenty-nine gate valves used in the hydraulic fracturing of oil and gas wells from Linkers and Tiger Valve; that the valves were supposed to function under working pressures of at least 10,000 pounds per square inch of fluid; that Linkers and Tiger Valve expressly warranted that the valves would work at pressures of up to 10,000 pounds per square inch and further represented that the valves could handle working pressures of up to 15,000 pounds per square inch; that when tested and/or used in the field, many of the valves failed under pressures at or below the 10,000 pounds per square inch threshold; that on September 23, 2014, Xin Gu and other representatives of Linkers and Tiger Valve visited Canary Parties’ valve repair facility, admitted that some of the valves had a defective design, and offered assistance in making the necessary repairs; that valves nonetheless continued to fail; that Canary Parties lost customers as a result; and that Canary Parties later learned that Linkers and Tiger Valve had previously sold some of the exact same valves to other companies and that the valves had been returned because they were defective. Canary Parties maintain that Linkers and Tiger Valve knowingly sold them defective valves, failed to disclose that other customers had returned at least some of the valves because they were defective, and
Canary Parties seek to recover: (1) against Linkers and Tiger Valve for breach of contract, breach of express and implied warranties, negligence, gross negligence, setoff, and recoupment (Linkers Am. Counterclaims ¶¶ 110–42, 171–79; Tiger Valve Am. Counterclaims ¶¶ 110–42, 171–79); (2) against Linkers, Tiger Valve, and Xin Gu for common law fraud, fraudulent inducement, and negligent misrepresentation (Linkers Am. Counterclaims ¶¶ 143–57, 166–70; Tiger Valve Am. Counterclaims ¶¶ 143–57, 166–70); and (3) against Linkers, Tiger Valve, and Deming Gu for fraudulent concealment (Linkers Am. Counterclaims ¶¶ 158–65; Tiger Valve Am. Counterclaims ¶¶ 158–65.) Canary Parties maintain that Deming Gu and Xin Gu are personally liable for all damages caused by Linkers and Tiger Valve based on a veil-piercing theory (Linkers Am. Counterclaims ¶ 93; Tiger Valve Am. Counterclaims ¶ 93), and that Linkers and Tiger Valve should be held jointly and severally liable because they were involved in a joint venture and/or joint enterprise, and because they acted as one another‘s agent (Linkers Am. Counterclaims ¶¶ 100–09; Tiger Valve Am. Counterclaims ¶¶ 100–09).
II. LEGAL STANDARD
Pursuant to
III. ANALYSIS
A. CDS Is A Proper Party and Its Counterclaims Are Adequately Stated under Rule 8.
Counter-Defendants move to dismiss CDS‘s counterclaims on grounds that CDS is not a proper party to this suit, and that, even if CDS is a proper party, it has failed to state its counterclaims with the particularity necessary to give Counter-Defendants fair notice. (Linkers Mot. Dismiss 3–4, ECF No. 11; Tiger Valve Mot. Dismiss 4–5, ECF No. 14.)
Because the amended counterclaims were properly filed without leave of court under
2. CDS‘s Counterclaims are Adequately Stated under Rule 8.
Counter-Defendants contend that even if CDS is a proper party to this suit, its counterclaims should be dismissed because the allegations, which refer to Canary and CDS in the collective, “fail[] to particularize what CDS is complaining about and thus . . . do[] not provide the required notice.” (Linkers Mot. Dismiss 4; Tiger Valve Mot. Dismiss 4–5.)
In the context of this case, the amended counterclaims provide fair notice to Counter-Defendants. Paragraph 44 of the amended counterclaims expressly states: “As used in all paragraphs following this one, ‘Canary’ refers collectively to CDS and Canary, LLC.” The import of the collective references to Canary and CDS is clear: each is separately asserting the same counterclaims against Counter-Defendants. Counter-Defendants note that Canary and CDS “cannot both sue for the same claims just because they are affiliates” (Linkers Mot. Dismiss 4 (citing cases)); however, nothing in the amended counterclaims suggests that CDS is suing solely because it is an affiliate of Canary. On the contrary, read in light of collective reference, the amended counterclaims plainly allege, inter alia, that Canary and CDS both “issued purchase orders for all of the[] gate valves” and paid consideration for them. (Linkers Am. Counterclaims ¶ 55.) Taking the well-pleaded factual allegations as true, CDS has stated a claim upon which relief can be granted. Counter-Defendants’ remaining arguments—that the amended counterclaims fail to “identify which valves, if any, CDS purchased from Linkers” and that none of the purchase orders attached to the amended counterclaims “show that they were placed by CDS, rather than Canary” (Linkers Mot. Dismiss 4)—are not appropriate for resolution on motions to dismiss and must be raised on a motion for summary judgment.
B. Canary Parties’ Veil-Piercing Allegations Should Not Be Dismissed.
Counter-Defendants move to dismiss Canary Parties’ counterclaims to the extent they seek to pierce Linkers’ corporate veil and Tiger Valve‘s entity veil. (Linkers Mot. Dismiss 4–6;
“Under California law, there is no litmus test to determine when the corporate veil will be pierced; rather the results will depend on the circumstances of the case. There are, nevertheless, two general requirements: (1) that there be such unity of interest and ownership that the separate personalities of the corporation and the person no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.” Harwood v. Int‘l Estate Planners, 33 F. App‘x 903, 906 (9th Cir. 2002) (internal quotation marks, brackets, and citation omitted); accord Gerritsen v. Warner Bros. Ent. Inc., 116 F. Supp. 3d 1104, 1136 (C.D. Cal. 2015); Automotriz del Golfo de Cal. S.A. de C.V. v. Resnick, 306 P.2d 1 (Cal. 1957).
Linkers argues that Canary Parties have failed to satisfy the second of these requirements because they have “not pled any cognizable inequitable result.” (Linkers Reply Supp. Mot. Dismiss 6 n.7.)5 “[F]actors signaling that it would be inequitable to respect separate corporate identities include[] inadequate capitalization, commingling of assets, [or] disregard of corporate formalities.” Nordberg v. Trilegiant Corp., 445 F. Supp. 2d 1082, 1102 (N.D. Cal. 2006) (internal quotation marks and citation omitted); accord Katzir‘s Floor & Home Design, Inc. v. M-MLS.com, 394 F.3d 1143, 1149 (9th Cir. 2004). The amended counterclaims allege precisely such factors. (Linkers Am. Counterclaims ¶ 94.)6 Contrary to Linkers’ assertion, Canary Parties
2. The Veil-Piercing Allegations Relating to Tiger Valve Should Not Be Dismissed.
Counter-Defendants argue that Canary Parties cannot pierce Tiger Valve‘s veil to impose liability on Linkers because Linkers is not a member of Tiger Valve. (Tiger Valve Mot. Dismiss 5–6.)7 In their response, Canary Parties refer only to Deming Gu and Xin Gu, both of whom are allegedly members of Tiger Valve. (Tiger Valve Resp. Opp. Mot. Dismiss 8, ECF No. 21.) The amended counterclaims, moreover, state that “the Court should disregard the corporate and limited liability company forms of Linkers and Tiger Valve and hold Michael Gu and James Gu personally liable for all damages caused by Tiger Valve or Linkers.” (Am. Counterclaims ¶ 93 (emphasis added).) In light of Canary Parties’ response, and because the pleadings themselves do not indicate otherwise, the Court does not read the amended counterclaims as seeking to hold Linkers itself liable under a veil-piercing theory with respect to Tiger Valve.8 Counter-Defendants’ argument for dismissal on this point is therefore moot.
Counter-Defendants also argue that Canary Parties cannot pierce Tiger Valve‘s veil to impose liability on Deming Gu and Xin Gu because there is no allegation that fraud was committed for Deming Gu and/or Xin Gu‘s “direct personal benefit.” (Tiger Valve Mot. Dismiss 6.) The amended counterclaims allege that Deming Gu and Xin Gu “used Tiger Valve . . . to perpetrate the actual fraud . . . for their direct personal benefit as owners and officers of Tiger Valve . . . who received salaries, dividends, and distributions as a direct result of the ill-gotten gains” and that they “committed this fraud in order to sell additional oilfield equipment to Canary [Parties] for their direct personal benefit.” (Tiger Valve Am. Counterclaims ¶ 93.) Counter-Defendants assert that the personal benefits so alleged were at most “indirect” because the “‘fruits of the fraud’ contributed generally to the revenues of the firm and some of those funds may have been paid out to” Deming Gu and Xin Gu. (Tiger Valve Mot. Dismiss 6–7.) The Court rejects this argument. Under Texas law, salaries and other benefits may constitute a “direct personal benefit” to an individual for veil-piercing purposes, even if they passed through a business entity beforehand. See In re Morrison, 361 B.R. 107, 120 (Bankr. W.D. Tex. 2007) (concluding that majority stockholder and president of corporation received “direct personal benefit” from misrepresenting the company‘s financial health to obtain a contract for corporation; he knew the contract was necessary to keep the corporation‘s “doors open” so that he could continue to draw his salary); Morgan v. Fuller, No. 07-15-00314-CV, 2016 WL 2766106, at *3 (Tex. App.—Amarillo May 11, 2016, no pet.) (evidence that corporation‘s president and sole shareholder received no salary during time alleged fraud occurred “tend[ed] to
C. Canary Parties’ Joint Enterprise Allegations Should Not Be Dismissed, But Their Joint Venture Allegations Should Be.
Canary Parties allege that Linkers and Tiger Valve entered into a joint enterprise and a joint venture with one another. (Linkers Am. Counterclaims ¶¶ 101–12.) Counter-Defendants argue that the joint enterprise allegations should be dismissed based on the Texas Supreme Court‘s rejection of the “single business enterprise” theory of joint liability in SSP Partners. (Linkers Mot. Dismiss 6–7; Tiger Valve Mot. Dismiss 7.) However, liability under a joint venture and/or joint enterprise theory was not at issue in SSP Partners, and the court specifically stated that those theories are “not to be confused with [a] single business enterprise” theory. 275 S.W.3d at 451–52 (noting that the single business enterprise theory “does not entail the level of agreement required” for liability under the other doctrines). As such, SSP Partners does not require dismissal of Canary Parties’ joint enterprise allegations.
Next, Counter-Defendants contend that the joint venture allegations should be dismissed because “Canary [Parties] make[] no allegation that Tiger Valve and Linkers agreed to share profits and losses, a necessary element of a joint venture.” (Linkers Mot. Dismiss 6–7.) There is merit to this argument. “Sharing in profits and losses is an essential element of a joint venture.” Blackburn v. Columbia Med. Ctr., 58 S.W.3d 263, 273 (Tex. App.—Fort Worth 2001, pet. denied); accord Coastal Plains Dev. Corp. v. Micrea, Inc., 572 S.W.2d 285, 287 (Tex. 1978) (“an agreement to share profits” is an “essential element” to a joint venture). While Canary Parties allege that Linkers and Tiger Valve shared “a community of pecuniary interest in the sale of oilfield equipment” (Linkers Am. Counterclaims ¶ 101), they do not allege that they shared profits and/or losses. See Blackburn, 58 S.W.3d at 273–74 (holding that the sharing of profits
D. Canary Parties’ Agency Allegations Should Not Be Dismissed.
Counter-Defendants seek dismissal of Canary Parties’ allegation that Linkers and Tiger Valve acted as one another‘s “agent with apparent and actual authority.” (Linkers Mot. Dismiss 7; Tiger Valve Mot. Dismiss 7; see also Linkers Am. Counterclaims ¶ 108.) In their amended counterclaims, Canary Parties specifically state that “in one e-mail, when Canary [Parties] e-mailed Michael Gu about Tiger Valve‘s stock of oilfield equipment, Michael Gu responded by offering Canary [Parties] oilfield equipment from Linkers.” (Linkers Am. Counterclaims ¶ 108.) Attached to the amended counterclaims is a copy of an email chain showing that on February 13, 2014, Michael Gu sent an email from e-mail address tigervalve@yahoo.com providing a product quote to a representative of Canary Parties. (Ex. C, Linkers Am. Counterclaims.) That email appears to have been written in response to an email Canary Parties sent to email addresses associated with both Linkers and Tiger Valve. (Id.) In addition, the amended counterclaims contain specific factual allegations to the effect that Linkers and Tiger Valve sold the same valves to each other‘s customers. (Linkers Am. Counterclaims ¶¶ 74–86.)
Construed in the light most favorable to Canary Parties, these allegations support a plausible inference that Linkers and Tiger Valve acted with at least apparent authority as each another‘s agents by offering and/or supplying products to customers on one another‘s behalf. See Ames v. Great S. Bank, 672 S.W.2d 447, 450 (Tex. 1984) (“Apparent authority in Texas . . . may arise either from a principal knowingly permitting an agent to hold herself out as having authority or by a principal‘s actions which lack such ordinary care as to clothe an agent with the indicia of authority, thus leading a reasonably prudent person to believe that the agent has the
With respect to the fraud-based counterclaims, Counter-Defendants maintain that the agency allegations should be dismissed for failure to satisfy the heightened pleading standard under
Counter-Defendants assert that Canary Parties’ counterclaims for negligence, gross negligence, and negligent misrepresentation must be dismissed because they are barred by Texas’ “economic loss rule.” (Linkers Mot. Dismiss 7–8; Tiger Valve Mot. Dismiss 8.) In response, Canary Parties first argue that California law may apply to these counterclaims, but that the parties have not yet conducted sufficient discovery to permit the Court to conduct an adequate choice-of-law analysis. Next, Canary Parties argue that their counterclaims survive a Rule 12(b)(6) analysis under both California and Texas law. Counter-Defendants reply that a choice-of-law analysis is unnecessary because California‘s economic loss doctrine also requires dismissal.
Under Texas law, “[t]he economic loss rule generally precludes recovery in tort where a plaintiff‘s only injury is an economic loss to the subject of a contract.” Worldpak Intern., LLC v. Diablo Valley Packaging, Inc., No. 4:08-CV-00469, 2009 WL 1577989, at *2 (E.D. Tex. June 4, 2009), adopted, No. 4:08-CV-00469, 2009 WL 1873784 (E.D. Tex. June 30, 2009). “The rule restricts contracting parties to contractual remedies for such economic losses, even when the breach might reasonably be viewed as a consequence of a contracting party‘s negligence.” Worldpak Intern., 2009 WL 1577989, at *2 (citation omitted). “Thus, in order for a tort duty to arise out of a contractual duty, . . . the liability must arise independent of the fact that a contract exists between the parties; the defendant must breach a duty imposed by law rather than by the contract.” Id. (internal quotation marks and citation omitted). With one relevant exception (discussed below), California‘s economic loss rule is the same as Texas‘. Id. at *2 n.1 (“California treats the economic loss rule in the same manner as Texas.“).
Canary Parties maintain that the negligent misrepresentation counterclaims are not subject to the economic loss rule, citing Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 418 & n.14 (Tex. 2011). However, in Sharyland, the Texas Supreme Court did not state that negligent misrepresentation claims are totally exempt from the economic loss rule; rather, it cited negligent misrepresentation as one example of “tort claims for which courts have allowed recovery of economic damages even absent physical injury or property damage.” Id. (emphasis added). Other courts have dismissed negligent misrepresentation claims based on the economic loss rule. See Miller v. Citi Mortgage, Inc., 970 F. Supp. 2d 568, 576 (N.D. Tex. 2013) (“Plaintiff‘s claim for negligent misrepresentation should be dismissed with prejudice because of the economic loss rule. The damages that Plaintiff seeks as a result of the alleged misrepresentations . . . are economic damages that are recoverable under Plaintiff‘s breach of contract claim.“).
Canary Parties also contend that dismissal is unwarranted due to California‘s “special relationship exception” to the economic loss rule, which provides that “[w]here a special relationship exists between the parties, a plaintiff may recover for loss of expected economic advantage through the negligent performance of a contract although the parties were not in contractual privity.” J‘Aire Corp. v. Gregory, 598 P.2d 60, 63 (Cal. 1979). However, Canary Parties point to no factual allegations in their amended counterclaims that, when accepted as true,
IV. CONCLUSION
For the foregoing reasons, the Court RECOMMENDS that Counter-Defendants’ motions to dismiss be GRANTED in part and DENIED in part, as follows:
- Canary Parties’ joint venture allegations should be dismissed;
- Canary Parties’ counterclaims for negligence, gross negligence, and negligent misrepresentation should be dismissed; and
- Linkers’ and Tiger Valve‘s motions to dismiss should be denied in all other respects.
Signed on February 24, 2017, at Houston, Texas.
Dena Hanovice Palermo
United States Magistrate Judge
Notes
Canary [i.e., Canary Parties] also alleges that, at all times pertinent hereto, a unity of interest and ownership existed and exists between and among Tiger Valve, Linkers, Michael Gu, and James Gu; Tiger Valve, Linkers, Michael Gu, and James Gu did not and do not maintain separateness or individuality between or among themselves; Tiger Valve, Linkers, Michael Gu, and James Gu failed and fail to maintain the formalities requisite to the status of a corporation or a limited liability company; Tiger Valve, Linkers, Michael Gu, and James Gu commingle their company and personal funds; Linkers was and is undercapitalized and a mere corporate shell which Linkers’ and Tiger Valve‘s owners used and use as a conduit for their personal business, property, and affairs; Linkers was and is the alter ego of Linkers’ and Tiger Valve‘s owners; and, therefore, that there was and is such a unity of interest, ownership, and control between and among Tiger Valve, Linkers, and their owners that adherence to the fiction of the separate existence of Linkers, Tiger Valve, and their owners would permit an abuse of the corporation and limited liability company privilege and sanction and promote injustice, unfairness, and inequity if the Court only permitted Canary to pursue and satisfy its claims herein only against and out of the assets of Linkers, which assets have not been and will not be sufficient to meet Linkers’ obligations to Canary.