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Crain v. E&M Operating, L.L.C.

United States District Court, W.D. Louisiana, Shreveport Division

December 11, 2019

DOUGLAS CRAIN, ET AL.
v.
E&M OPERATING, L.L.C., ETAL.

          HORNSBY, MAGISTRATE JUDGE.

          MEMORANDUM RULING

          ELIZABETH E. FOOTE, UNITED STATES DISTRICT JUDGE.

         Now 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.

         BACKGROUND

         Plaintiffs 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.[1] 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.

         Plaintiffs 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.

         The 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 STANDARD

         A 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 Fed.R.Civ.P. 55(a)).

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.

         By 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).

         ANALYSIS

         "A 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.

         I. Liability

         In 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.").

         Factors 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 defendant's motion.

Lindsey v. Prive Corp., 161 F.3d 886, 893 (5th Cir. 1998).

         In this 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 4.[2] 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[3] 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.

         The Court must now determine whether Plaintiffs' complaint establishes a cause of action against Defendants. Nishimatsu, 515 F.2d at 1206.

         A. Fraud Claims

         In Louisiana, [4] 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.

         Each of 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.

         The 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.

         The 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.").[5] 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 against Defendants.

         B. Claims Other than Fraud

         In 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.

         In its 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.

         Despite 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 than fraud.

         II. ...


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