United States District Court, W.D. Louisiana, Shreveport Division
DOUGLAS CRAIN, ET AL.
E&M OPERATING, L.L.C., ETAL.
HORNSBY, MAGISTRATE JUDGE.
ELIZABETH E. FOOTE, UNITED STATES DISTRICT JUDGE.
before the Court is a Renewed Motion for Default Judgment
filed by Douglas and Catherine Crain ("Plaintiffs")
against E&M Operating, L.L.C. ("E&M") and
Coleman Matthew Caldwell ("Caldwell")
(collectively, "Defendants"). [Record Document 20].
For the reasons discussed below, Plaintiffs' Renewed
Motion for Default Judgment is GRANTED in
part and DENIED in part.
are a married couple who claim to have invested a total of
$25, 750.00 with E&M, an oil and gas company, after being
induced to do so by Caldwell. Record Document 15-2, p. 4;
20-1, p. 11. According to Plaintiffs, Caldwell professed to
be the owner of E&M and induced them to purchase
twenty-five notes issued by E&M by falsely claiming that
this investment would result in a return of 200% plus an
additional 12% per annum for a three-year period. Record
Document 1, ¶s 9-12. Plaintiffs purchased these notes,
which they claim are securities under federal and state law,
for $25, 000.00 in May of 2016. Id. at ¶s 11
& 14. Defendants advised Plaintiffs in June of 2016 that
they would receive a 5% share membership in E&M and that
their two adult children would each receive a 1% share
membership in E&M. Id. at ¶s 16-17. These
share memberships were accompanied by "Membership
Certificates," which Plaintiffs claim were used to
further induce them to trust Defendants and to purchase
additional notes for a sum of $750.00. Id. at
¶s 18-20. Defendants told Plaintiffs that E&M's
remaining membership and shares were being acquired by
Striper Oil Company. Id. at ¶ 21. Plaintiffs
allege they have since spoken with Sam Smith
("Smith"), the owner of Striper Oil Company, who
stated that his company had no relationship with Defendants
and was not acquiring any interests in E&M. Id.
at ¶ 24. Plaintiffs claim that Defendants told Smith
that they do not intend to pay Plaintiffs' notes upon
maturity. Id. Defendants allegedly ceased
communications with Plaintiffs in late 2017 even though
Plaintiffs have tried repeatedly to reach them since that
time. Id. at ¶ 23. Plaintiffs assert that
Defendants are in anticipatory breach of their agreement
because Defendants have failed to respond to their attempts
at contact or acknowledge that the maturity date on the notes
is early May of 2019. Id. Plaintiffs claim that
Caldwell misrepresented the holdings and value of E&M and
that he converted the money they invested in E&M to his
own personal use. Id. at ¶s 25 & 30.
state that Defendants committed "a large number" of
frauds and misdeeds in connection with their investment
monies, including false material misrepresentations as to the
issuance and sale of securities to Plaintiffs, material
misrepresentations in the agreement and memorandum with
respect to the legitimacy and quality of the securities,
issuing false statements in connection with the issuance and
sale of securities, mail fraud, conversion of securities and
investment monies, fraud, violations of federal securities
laws, Louisiana Blue Sky Laws, and the Texas Securities Act,
and breaches of the duties of honesty, good faith, loyalty
and trust, and breach of fiduciary duties. Id. at
¶ 32. Plaintiffs claim that they have sustained a wide
variety of economic and non-economic damages. Id. at
¶s 33 & 71.
Court denied Plaintiffs' first motion for default
judgment because Plaintiffs did not present a clear legal
basis for recovery. Record Document 17, pp. 10-11. Plaintiffs
were granted permission to re-urge their motion "by
submitting additional evidence and more convincing
briefing." Id. at 11. Plaintiffs then filed the
instant renewed motion for default judgment.
default judgment involves three steps: (1) default, (2) entry
of default, and (3) default judgment. N.Y. Life Ins. Co.
v. Brown, 84 F.3d 137, 141 (5th Cir. 1996) (citing
A default occurs when a defendant has failed to plead or
otherwise respond to the complaint within the time required
by the Federal Rules. An entry of default is what the clerk
enters when the default is established by affidavit or
otherwise. After defendant's default has been entered,
plaintiff may apply for a judgment based on such default.
This is a default judgment.
Id. (citations omitted). Here, Defendants failed to
plead or otherwise defend against this lawsuit, Additionally,
Plaintiffs obtained an entry of default judgment from the
clerk against both E&M and Caldwell. [Record Documents 8
& 11]. Therefore, the first two requirements for a
default judgment have been met.
defaulting, a defendant admits to the plaintiffs well-pleaded
allegations of fact, at least with respect to liability.
Jackson v. FIE Corp., 302 F.3d 515, 525 (5th Cir.
2002) (citing Nishimatsu Constr. Co., Ltd. v.
Hous. Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir.
1975)). Even though the facts are admitted, the plaintiff
still has the burden of showing that those facts give rise to
a viable cause of action. See Nishimatsu, 515 F.2d
at 1206 ("[A] defendant is not held to admit facts that
are not well-pleaded or to admit conclusions of law.").
In addition, a default judgment "must not differ in kind
from, or exceed in amount, what is demanded in the
pleadings." Fed.R.Civ.P. 54(c). No party is entitled to
a default judgment as a matter of right, even where the
defendant is technically at fault. Lewis v. Lynn,
236 F.3d 766, 767 (5th Cir. 2001) (per curiam) (quoting
Ganther v. Ingle, 75 F.3d 207, 212 (5th Cir. 1996)).
The disposition of a motion for default judgment ultimately
rests within the sound discretion of the district court.
Mason v. Lister, 562 F.2d 343, 345 (5th Cir. 1977).
default judgment is a judgment on the merits that
conclusively establishes the defendant's liability.
" United States ex rel M-CO Constr. v. Shipco Gen.,
Inc., 814 F.2d 1011, 1014 (5th Cir. 1987). However, a
default judgment does not establish the amount of damages.
Id. Therefore, the Court must first determine (1)
whether Defendants are liable to Plaintiffs, and then (2)
what amount of damages, if any, are owed to Plaintiffs.
determining whether to enter a default judgment, the Court
must consider whether such a remedy is appropriate under the
circumstances of the case. See Sun Bank of Ocala v.
Pelican Homestead and Sav. Ass'n, 874 F.2d
274, 276 (5th Cir. 1989) ("Default judgments are a
drastic remedy, not favored by the Federal Rules and resorted
to by courts only in extreme situations.").
relevant to the entry of a default judgment include
whether material issues of fact are at issue, whether there
has been substantial prejudice, whether the grounds for
default are clearly established, whether the default was
caused by a good faith mistake or excusable neglect, the
harshness of a default judgment, and whether the court would
think itself obligated to set aside the default on the
Lindsey v. Prive Corp., 161 F.3d 886, 893 (5th Cir.
case, there can be no material issues of fact in dispute
because Defendants admitted to Plaintiffs' well-pleaded
allegations by failing to file any pleadings responsive to
the complaint. See Jackson, 302 F.3d at 525. This
failure to respond creates a basis for default and resulted
in prejudice to Plaintiffs in the form of lost investment
funds. Nothing in the record suggests that Defendants'
failure to respond is the result of a good faith mistake or
excusable neglect. In fact, an individual named Nick Darden,
E&M's agent for service of process, attempted to file
an answer on behalf of E&M. Record Document
Magistrate Judge Hornsby then ordered E&M to file an
answer signed by an authorized attorney, as required by Fifth
Circuit precedent. Record Document 5, p. 1. The order warned
E&M that a failure to do so would result in the answer
being stricken and expose E&M to a default judgment.
Id. at 2. No other answer was filed, and the answer
was stricken. Record Document 9. The Court views Darden's
attempt to file an answer on behalf of E&M as further
evidence that both Defendants had notice of the
instant law suit. See Record Document 1, ¶ 9
(stating that Caldwell claimed to be the owner of E&M).
Defendants' failure to respond to this lawsuit offsets
the harshness of a default judgment. Finally, the Court knows
of no facts that would provide good reason to set aside a
default judgment if Defendants were to challenge it. Based on
these reasons, the Court finds that the circumstances of this
case warrant a default judgment.
Court must now determine whether Plaintiffs' complaint
establishes a cause of action against Defendants.
Nishimatsu, 515 F.2d at 1206.
Louisiana,  fraud is defined as "a
misrepresentation or a suppression of the truth made with the
intention to obtain an unjust advantage for one party or to
cause a loss or inconvenience to the other . ..." La.
Civ. Code art. 1953. The elements of an action for fraud
against a party to a contract are: "(1) a
misrepresentation, suppression, or omission of true
information; (2) the intent to obtain an unjust advantage or
to cause damage or inconvenience to another; and (3) the
error induced by a fraudulent act must relate to a
circumstance substantially influencing the victim's
consent to (a cause of) the contract." Jones v.
Wells Fargo Bank, NA, 626 Fed.Appx. 500, 504-05 (5th
Cir. 2015) (per curiam) (quoting Shelton v. Standard/700
Assocs., 2001-0587 (La. 10/16/01); 798 So.2d 60, 64)).
Furthermore, "[f]raud need only be proved by a
preponderance of the evidence and may be established by
circumstantial evidence." La. Civ. Code art. 1957.
the elements of a fraud claim are supported by the factual
allegations in the complaint and by the documents attached to
the instant motion. The record reflects that Plaintiffs and
E&M, through Caldwell, entered into a contract for the
sale of the notes. Record Documents 20-13-20-15. These
documents show a wire transfer from a Regions Bank account in
the amount of $25, 000.00, a check written by Douglas Crain
("Grain") to Caldwell in the amount of $750.00, and
a subscription agreement showing that Crain purchased 25
notes at $1, 000 a note from E&M. See Id. In an
affidavit, Crain alleges that Caldwell made false, material
misrepresentations that were intended to induce Plaintiffs to
contract with E&M. See Record Document 20-5,
¶ 9. The main misrepresentation made by Defendants was
that Plaintiffs would be paid double their investment, plus
an additional 12% per annum simple interest on the principal
investments, for a total of 236% over the three-year period
from the date of the purchase. Id. at ¶ 22.
Plaintiffs also claim that Caldwell made other statements
indicating that E&M was profitable and sought-after by
investors. Id. at ¶s 11, 14, &16. These
statements allegedly induced Plaintiffs to invest money with
Defendants in exchange for what they thought were securities.
Id. at ¶s 8 & 18-20. However, when
Plaintiffs repeatedly asked Caldwell to produce the notes
they purchased, he claimed that an attorney and a CPA were
drawing up the documents. Id. at ¶ 72.
Plaintiffs state that they have never been provided with any
notes or any documentation substantiating their investments.
Id. Neither have Plaintiffs received any money in
return for their investments. Id. at ¶ 67.
Finally, and most troubling, Plaintiffs allege that Caldwell
ceased all communication with them in late 2017. Id.
at ¶ 108.
Court recognizes that an action for fraud cannot be based on
statements relating to future events or promises that went
unfulfilled. Taylor v. Dowling Gosslee & Assocs.,
Inc., 44, 654 (La.App. 2 Cir. 10/7/09); 22 So.3d 246,
255. "Failure to perform as promised or nonperformance
of an agreement to do something at a future time alone is not
evidence of fraud." Id. However, an action for
fraud may be based on a promise that was made without the
intention to perform at the time the promise was made.
Id. In this case, Plaintiffs explicitly allege that
Defendants intended to deceive them and steal their money.
Record Document 20-5, ¶s 9, 24, & 106. Plaintiffs
state that the "Private Placement Subscription
Agreement" [Record Document 20-11] and the "Private
Placement Memorandum" [Record Document 20-12] that
Caldwell supplied them with contained "nothing but lies
which defendants, through Caldwell, fabricated to deceive
[Plaintiffs] and to steal [Plaintiffs'] monies."
Id. at ¶ 24. Taking these allegations as true,
as the Court must on a motion for default judgment,
Plaintiffs have established a prima facie case of fraud under
Louisiana Civil Code article 1953.
Court finds that Caldwell fraudulently induced Plaintiffs to
enter into a contract with E&M for the sale of the notes
through material misrepresentations. Additionally, fraud
committed by Caldwell vitiates Plaintiffs' consent to the
contract with E&M. La. Civ. Code art. 1956 ("Fraud
committed by a third person vitiates the consent of a
contracting party if the other party knew or should have
known of the fraud."). Thus, Plaintiffs are entitled to
a rescission of the contract. See La. Civ. Code art.
1948 ("Consent may be vitiated by error, fraud, or
duress."). Accordingly, Plaintiffs' motion for
default judgment [Record Document 20] is hereby
GRANTED as to Plaintiffs' fraud claim
Claims Other than Fraud
addition to their fraud claim, Plaintiffs bring twelve other
causes of action against Defendants, including violations of
the Securities Acts of 1933 and 1934, violations of the Blue
Sky Laws of Texas and Louisiana, negligence, breach of trust
and fiduciary duty, misrepresentation, deceptive trade
practices under Texas law, unjust enrichment, breach of
contract and anticipatory breach of contract, civil
conspiracy, and vicarious liability. Record Document 1,
¶s 34-69. Most of these causes of action are vague,
overlapping, and not adequately articulated. See id.
ruling on Plaintiffs' first motion, the Court stated that
it was "unable to determine from the record whether any
money is due the Plaintiffs and, if so, the appropriate
amount." Record Document 17, p. 4. The Court noted that
the record did not contain any securities or proof of
indebtedness, nor did it contain the promissory notes that
were mentioned in other documents submitted by Plaintiffs.
Id. at 5 & 6. Without submitting any additional
evidence, Plaintiffs now contend that "the sale of notes
and promise to provide the notes, coupled with the
defendants' communications and the signed Subscription
Agreement and Private Placement Memo, collectively show that
the matters and transactions were 'securities' as
defined by federal and states' laws." Record
Document 20-1, p. 11. Specifically, Plaintiffs allege that
these documents combined to create a type of security known
as an investment contract. Id. at 4.
Plaintiffs' assertion, the Court finds that they have not
demonstrated that an investment contract existed between the
parties. While Plaintiffs may have a valid argument on this
point, the claim has not been adequately briefed. In lieu of
analysis, Plaintiffs' brief provides five pages of
quotations on the topic of investment contracts. Record
Document 20-1, pp. 5-9. Plaintiffs do not apply the law
regarding the elements of an investment contract to the facts
of this case or direct the Court's attention to any case
law where an investment contract was found to exist under
similar circumstances. This same lack of application and
analysis persists throughout Plaintiffs' briefing on
their other alleged causes of action. The Court holds that,
other than fraud, Plaintiffs have not applied the law or
elements of their claims to the facts of this case and
therefore have not shown that their claims give rise to a
viable cause of action other than fraud. Accordingly,
Plaintiffs' motion for default judgment [Record Document
20] is hereby DENIED as to all claims other