Case: 09-20268 Document: 00511124000 Page: 1 Date Filed: 05/27/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
May 27, 2010
No. 09-20268
Lyle W. Cayce
Clerk
SHANDONG YINGUANG CHEMICAL INDUSTRIES JOINT STOCK
COMPANY, LTD.
Plaintiff-Appellant
v.
MICHAEL POTTER
Defendant-Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before JONES, Chief Judge, and SMITH and ELROD, Circuit Judges.
PER CURIAM:
Appellant Shandong Yinguang Chemical Industries Joint Stock Co., Ltd.,
(“Yinguang”) sold explosive chemicals to Beston Chemical Corporation
(“Beston”), a company wholly-owned by Appellee Michael Potter. Beston failed
to make payments on two contracts and subsequently declared bankruptcy. In
an effort to recover its losses, Yinguang sued Potter personally for common law
fraud and fraudulent inducement, and sought to impose personal liability by
piercing Beston’s corporate veil. The district court dismissed the case, finding
that Yinguang failed to meet the pleading requirements of Fed. R. Civ. P. 9(b) on
the fraud claims. The district court also held that Yinguang did not have
standing to pursue the veil-piercing claim. For the reasons that follow, we
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No. 09-20268
conclude that Yinguang did not adequately plead fraud and affirm the district
court’s dismissal pursuant to Rule 12(b)(6).
I. Background
Beston and Yinguang entered into eight contracts for delivery of
chemicals. According to the well-pled allegations, Beston paid for the first six
contracts, but in an untimely manner. This appeal stems from the last two
contracts, Contracts No. 7 and No. 8. The parties entered into Contract No. 7
on February 25, 2004 for $1,369,216.80 and Contract No. 8 on June 1, 2004 for
$1,328,644.80. During Beston’s and Yinguang’s business relationship, Potter
often spoke with Yinguang’s president, Sun Bowen.
Yinguang asserts that Potter made two types of misrepresentations during
negotiations for these two contracts. First, on July 20, 2003, Potter represented
that Beston was in “sound financial condition” and that Beston would pay for
current and future shipments. Second, Potter represented repeatedly that
Beston would make regular payments on its purchases. On February 2, 2004,
when Bowen asked for a letter of credit to secure future payments, Potter replied
that a letter of credit was unnecessary because Beston would make regular,
timely payments. On April 26, 2004, Potter emailed Bowen describing Beston’s
financial difficulties, but he assured Bowen that Beston had remedied the
problems and that “Yinguang will see continual, constant payments from BCC
[Beston].” On April 30, 2004, Potter emailed Bowen again, promising that
Beston would make payments on a frequent basis. After Beston failed to make
payments on Contract No. 7, Yinguang refused to deliver any chemicals under
Contract No. 8. On August 21, 2004, Potter again promised that Beston would
pay Yinguang, and Yinguang proceeded to deliver the chemicals.1
1
Beston notes that some delay was caused by a State Department sanction, issued
in September 2004, against Yinguang’s shipping agent. The sanction prohibited U.S.
companies from doing business with the shipping agent and authorized payments only with
permission from the Treasury Department.
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Despite Potter’s assurances, he omitted to tell Yinguang that Beston had
been unprofitable in 2003. In the end, Beston made no regular payments on
either contract. Yinguang sued Beston in Texas in state court in August, 2005.
Beston and Yinguang entered into a settlement agreement and Beston made one
payment of $499,216.80 on March 1, 2006. Six weeks later, Beston filed for
Chapter 11 bankruptcy. Yinguang was left with a $2,198,644.80 unsecured
claim.
Yinguang next sued Potter personally in federal district court. Yinguang
alleges that Potter committed fraud and fraudulent inducement by lying to Sun
Bowen to entice Yinguang to enter into Contracts No. 7 and No. 8. Alleging
that Potter used Beston to perpetrate a fraud by funneling money out of Beston
into other Potter-owned corporate entities, it also seeks to impose Beston’s
contract liability on Potter by piercing the corporate veil. Potter moved to
dismiss under Fed. R. Civ. P. 12(b)(6). The district court granted the motion
because Yinguang did not meet the heightened pleading requirements of Fed. R.
Civ. P. 9(b) on the fraud claims. The district court also held that Yinguang
lacked standing to pursue the veil-piercing claim that was property of the Beston
bankruptcy estate. Yinguang now appeals.
II. Standard of Review
We review de novo a district court’s dismissal for failure to state a claim
under Rule 12(b)(6). Jones v. Greninger, 188 F.3d 322, 324 (5th Cir. 1999). The
ultimate question in a Rule 12(b)(6) motion is whether the complaint states a
valid claim when all well-pleaded facts are assumed true and are viewed in the
light most favorable to the plaintiff. In re Katrina Canal Beaches Litig.,
495 F.3d 191, 205 (5th Cir. 2007). The court’s task is to determine whether the
plaintiff has stated a legally cognizable claim that is plausible, not to evaluate
the plaintiff’s likelihood of success. Ashcroft v. Iqbal, 556 U.S. ___, 129 S. Ct.
1937, 1949 (2009). Further, with respect to the fraud and fraudulent
inducement claims, Fed. R. Civ. P. 9(b) requires that Appellant “state with
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particularity the circumstances constituting the fraud.” F ED. R. C IV. P. 9(b).
“Put simply, Rule 9(b) requires ‘the who, what, when, where, and how’ to be laid
out.” Benchmark Electronics, Inc. v. J.M. Huber Corp., 343 F.3d 719, 724 (5th
Cir. 2003).
III. Discussion
A. Fraud
Yinguang alleges that Potter committed fraud both by affirmative
misrepresentation and by omission. Specifically, Yinguang asserts that Potter’s
statement that Beston was in “sound financial condition” was a
misrepresentation because Beston was unprofitable in 2003 and failed to obtain
a line of credit. The elements of fraud in Texas are (1) the defendant made a
representation to the plaintiff; (2) the representation was material; (3) the
representation was false; (4) when the defendant made the representation the
defendant knew it was false or made the representation recklessly and without
knowledge of its truth; (5) the defendant made the representation with the
intent that the plaintiff act on it; (6) the plaintiff relied on the representation;
and (7) the representation caused the plaintiff injury. Ernst & Young, L.L.P. v.
Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001).
Yinguang’s allegations fail to meet the pleading requirements of
Rule 9(b) as to several of the fraud elements. First, Yinguang fails sufficiently
to allege that the “sound financial condition” statement was material. A false
representation is material if a reasonable person would attach importance to and
be induced to act on the information. Citizens Nat’l Bank v. Allen Rae Invs.,
142 S.W.3d 459, 478-79 (Tex. App.—Fort Worth 2004, no pet.). This statement
is inherently vague and ambiguous. Yinguang did not plead that Potter
presented any detailed, corroborating information, facts or figures to support the
statement that might entice a reasonable person to attach importance to the
statement. See id. Further, the statement is significantly attenuated from the
execution of Contract Nos. 7 and 8, which occurred, respectively, seven and ten
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months later. Potter also explains, without contradiction, that the statement
was made during a meeting to assure Yinguang that a late payment on Contract
No. 6 would be forthcoming. Further undermining an inference of materiality
in the “sound financial condition statement” is the reality that in the parties’
course of dealing on prior contracts, Beston’s payments had repeatedly been late
although it “generally” met its obligations to Yinguang. Under all of these
circumstances, Yinguang’s bare assertion of materiality rings hollow.
Second, Yinguang fails sufficiently to allege that the statement was false
when made. That Beston was unprofitable for the year 2003 and unable to
obtain a line of credit sometime in 2004 do not support a conclusion Beston was
not in “sound financial condition” in July 2003. Many companies have
unprofitable years but remain fiscally sound. As Yinguang’s pleadings admit,
Beston was able to make all of its payments due on prior contracts in 2003.
Similarly, Beston’s failure to obtain a line of credit does not necessarily imply
that Beston was financially unsound.
Insofar as Yinguang relies on the series of promises to pay during early
2004, all but one of these post-date Contract No. 7 and cannot have influenced
the decision to enter into that contract. The statements concerning Beston’s
present and future willingness to pay are alleged to be fraudulent under two
theories. Yinguang says they were false when made because Beston had no
ability to pay for the chemicals. Alternatively, they were false because Betson
never had an intent to perform the contract. The “false when made” theory
suffers from a lack of supporting details from which an inference of falsity could
derive. As previously noted, Yinguang offers no contemporary financial data
undercutting Potter’s assertion about the company’s willingness to pay. In fact,
those assertions are consistent with Beston’s history of paying Yinguang fully
but untimely. The April 26 statement, moreover, was accompanied by a frank
admission of some financial difficulties, an admission at odds with falsity.
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Yinguang’s alternative theory is that Potter fraudulently induced
Yinguang to enter into Contracts No. 7 and No. 8 by repeatedly promising to
make payments with no intention of performing. “A promise to do an act in the
future is actionable fraud when made with the intention, design and purpose of
deceiving, and with no intention of performing the act.” Spoljaric v. Percival
Tours, Inc., 708 S.W.2d 432, 434 (Tex. 1986). “While a party’s intent is
determined at the time the party made the representation, it may be inferred
from the party’s subsequent acts after the representation is made.” Id.
However, “failure to perform, standing alone, is no evidence of the promissor’s
intent not to perform when the promise was made.” Id. at 435. “‘Slight
circumstantial evidence’ of fraud, when considered with the breach of promise
to perform, is sufficient to support a finding of fraudulent intent.” Id. The court
should consider all the circumstantial evidence as a whole to determine whether
the evidence “transcend[s] mere suspicion.” IKON Office Solutions, Inc. v. Eifert,
125 S.W.3d 113, 124 (Tex.App.—Houston [14th Dist.] 2003, pet. denied).
Yinguang alleges, albeit without specifics, that Potter “funneled” money
from Beston into his other companies. It contends that this allegation
constitutes “slight circumstantial evidence of fraud” and, coupled with Beston’s
failure to perform, is sufficient to allege fraudulent inducement.
Certainly, “funneling” money from one entity to another could be “slight
circumstantial evidence of fraud,” but Yinguang’s pleadings do not rise above the
level of a conclusory description. Pleading standards demand “more than an
unadorned, the defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal,
556 U.S. __, 129 S.Ct. at 1949. The claim must be plausible on its face:
A claim has facial plausibility when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged. The plausibility
standard is not akin to a probability requirement, but it asks for
more than a sheer possibility that a defendant has acted unlawfully.
Where a complaint pleads facts that are merely consistent with a
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defendant’s liability, it stops short of the line between possibility
and plausibility of entitlement to relief.
Id. at 1949 (internal citations and quotations omitted). Further,
Rule 9(b) imposes an additional burden on the plaintiff to detail facts and lay out
the “the who, what, when, where, and how of a fraud.” Benchmark, 343 F.3d at
724.
That Potter transferred money away from Beston is not, standing alone,
sufficient under Rule 9(b) and Iqbal. Moving money from one company to
another may be consistent with fraud, but it does not create a reasonable
inference that Potter is liable for fraud. Beston could have had legitimate or
illegitimate reasons for transferring money. Yinguang has alleged no details
that would corroborate a fraudulent scheme, such as when or why Potter moved
the money, how much money was transferred, or whether this action was
inconsistent with the company’s past practices.2 In addition, Yinguang itself
pleads evidence that counters a fraudulent intent not to perform. A significant
amount of time passed between Potter’s first allegedly false representation to
Yinguang in July 2003 and the company’s ultimate failure to pay when it sought
bankruptcy in March 2006. Compare United States v. Shah, 44 F.3d 285, 293
n.14 (5th Cir. 1995)(short interval between alleged promise and failure to
perform may be probative of fraud). Beston’s initial missed payments on
Contracts No. 7 and 8 were predictable, given its history of untimely payments
on the first six contracts. The U.S. State Department sanctions created a change
in circumstance that prevented Beston from selling or delivering the chemicals
in the latter part of 2004. Beston made a significant payment of $499,216.80
in March 2006. See IKON, 125 S.W.3d at 124 (“Partial performance can negate
an intent not to keep a promise at the time it was made.”). All of these events
point away from an inference that Potter never intended to pay.
2
Compare Weinberger v. Longer, 222 S.W.3d 557, 563 (Tex. App.—Houston [14th Dist.]
2007, pet. denied) (contractor used plaintiff’s money to pay for materials on other projects).
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Although this may be a close case due to Spoljaric’s “slight circumstantial
evidence” language, given the heightened pleading requirements of Rule 9(b),
and the equipoise, on all the facts pleaded read as a whole, between an inference
of fraud and one of Beston’s business as usual, we conclude that Yinguang’s
allegations do not plausibly plead fraudulent intent not to pay at the time of
Potter’s representations.
Yinguang also asserts that Potter had a duty to disclose Beston’s financial
condition but did not do so, thereby committing fraud by omission. A defendant’s
failure to disclose information will support a claim for fraud only where the
defendant has a duty to disclose. Bradford v. Vento, 48 S.W.3d 749, 755 (Tex.
2001). While there is no general duty to disclose, a duty to speak arises between
non-fiduciaries when “one party learns later that his previous affirmative
statement was false or misleading.” Union Pac. Res. Group v. Rhone-Poulenc,
247 F.3d 574, 586 (5th Cir. 2005); Tempo Tamers, Inc. v. Crow-Houston Four,
Ltd., 715 S.W.2d 658, 669 (Tex. App.—Dallas 1986, writ ref’d n.r.e.) (a duty to
disclose arises when “a party later learns that previous affirmative
representations are in fact false”). We are persuaded that the “sound financial
condition” statement was not pled to be false when made in July 2003. Further,
Potter’s statement indicating no letter of credit was necessary in February 2004
is not sufficiently pled to have been false when made. Potter did, however, admit
the company was suffering financial difficulties in April 2004, when he coupled
his admission with a further promise to pay. For this statement to have involved
a fraudulent omission, Yinguang would have to assert facts showing its obvious
insufficiency and patent insincerity (amounting to fraudulent intent). Viewed
in the totality of the parties’ dealings—frequent late payments, full eventual
payment on the first six contracts, no relevance to the execution (in February)
of Contract No. 7—and the absence of corroborating financial facts aside from
the eventual default, we are reluctant to transform this admission into a
fraudulent omission claim.
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B. Veil-Piercing Claim
Last, Yinguang seeks to impose personal liability on Potter for Contracts
No. 7 and 8 by piercing Boston’s corporate veil. Piercing the corporate veil is not
a separate cause of action, but a method to impose personal liability on
shareholders and corporate officers who would otherwise be shielded from
liability for corporate debts. Gulf Reduction Corp. v. Boyles Galvanizing &
Plating Co., 456 S.W.2d. 476, 480 (Tex. App.—Fort Worth 1987, no writ).
Yinguang alleges that Potter used Beston as a sham to perpetrate a fraud, which
entitles it to pierce the corporate veil and impose personal liability. SSP
Partners v. Gladstrong Invs., 275 S.W.3d 444, 455 (Tex. 2008). This claim
requires proof that Potter committed an actual fraud against it. See T EX. B US.
O RGS. C ODE A NN. § 21.223(b);3 Kingston v. Helm, 82 S.W.3d 775, 765 (Tex.
App.—Corpus Christi 2002, pet. denied). As discussed above, Yinguang fails to
allege an actual fraud, and therefore fails to sustain a basis for holding Potter
personally liable for Contracts No. 7 and No. 8. Because the veil piercing claim
may be dismissed for this reason, we do not address whether Yinguang or the
Beston estate owned the right to pierce the corporate veil.4
3
Yinguang cites TEX BUS . CORP . ACT ANN . art. 2.21. “Sections A and B of this article,
after a legislative reorganization of the statutes governing business entities effective January
1, 2006, were recodified in substantially similar form in TEX . BUS . ORGS . CODE § 2.223, and
§§ 21.224-.225, respectively.” SSP Partners, 275 S.W.3d at 455 (citing Act of May 29, 2003,
78th Leg., R.S., ch. 182, §§ 1, 2, 2003 Tex. Gen. Laws 267, 427, 595).
4
In this circuit, we determine whether an asserted cause of action arising from a
corporate bankruptcy properly belongs to an individual creditor or, because it belongs to the
debtor’s estate or seeks to recover property of the estate, may only be pursued by the trustee
on behalf of all creditors. In re Schimmelpenninck, 183 F.3d 347, 355 (5th Cir. 1999).
Schimmelpenninck held that alter ego “and other” piercing the corporate veil theories must
be pursued only on behalf of the debtor. Id. (citing In re S.I. Acquisition, 817 F.2d 1142, 1153
(5th Cir. 1987). Texas, however, has codified species of veil-piercing that authorizes a contract
creditor to pierce the obligor’s corporate veil if the corporate form was used as a sham to
perpetrate a fraud and actual fraud was committed against that creditor. TEX . BUS . ORGS .
CODE ANN . § 21.223(b) (2008) (emphasis added). Other decisions have held a fraud claim, if
personal to the creditor, not to be property of the debtor’s estate even though the debtor might
also possess and litigate its own claims against the estate. See In re Seven Seas, Inc., 522 F.3d
575, 585 (5th Cir. 2008); In re Educators Group Health Trust, 25 F.3d 1281, 1285-86 (5th Cir.
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Conclusion
For the foregoing reasons, we affirm the district court’s dismissal pursuant
to Rule 12(b)(6). AFFIRMED.
1994). Neither Seven Seas nor Educators, however, disturbed the additional requirement of
S.I. Acquisitions, 817 F.2d at 1150, that an individual claim seeking recovery or control of the
debtor’s property is subject to the Code’s automatic stay. Here, it is argued, even if the
particular veil-piercing claim asserts fraud specifically committed against Yinguang,
nevertheless the recovery of assets wrongfully taken or “funneled” from Beston should inure
to the benefit of all of Beston’s creditors. Because we need not decide whether Yinguang’s
claim seeks to recover property of the estate, we do not address whether Yinguang has the
right to pursue the claim individually. These facts lie between Schimmelpenninck and Seven
Seas and their antecedents, and we leave definitive resolution of the issue for another day.
10