Messer v. TXON Partners I, LLC et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
MADISON WILLIAMS AND CO., LLC.
Debtor.
FOR PUBLICATION
Case No. 11-15896 (MG)
Chapter 7
Gregory Messer, as Chapter 7 Trustee,
Plaintiff,
v.
TX Onshore, LLC,
Defendant.
Adv. Proc. No. 13-01807 (MG)
MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN
PART TX ONSHORE’S MOTION TO DISMISS
A P P E A R A N C E S:
CARTER LEDYARD & MILBURN LLP
Attorneys for TX Onshore, LLC
2 Wall Street
New York, New York 10005
By: 	Aaron R. Cahn, Esq.
LAMONICA HERBST & MANISCALCO, LLP
Attorneys for Gregory Messer, Chapter 7 Trustee
3305 Jerusalem Avenue
Wantagh, New York 11793
By: 	Nicholas C. Rigano, Esq.
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Before the Court is TX Onshore, LLC’s (“TXON” or the “Defendant”) motion to dismiss
(the “Motion,” ECF Doc. # 9) the adversary proceeding filed by Gregory Messer, as chapter 7
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trustee (the “Trustee” or the “Plaintiff”) of the estate of Madison Williams and Co., LLC
(“Madison Williams” or the “Debtor”). The Trustee filed an opposition to TXON’s Motion (the
“Opposition,” ECF Doc. # 12), and TXON filed a reply (the “Reply,” ECF Doc. # 13).
The Debtor and TXON (the “Parties”) were parties to a written contract (the “Contract,”
Motion Ex. A) entered into on May 6, 2010, for a one-year term, followed by a one-year tail
period. TXON engaged Madison Williams, a former broker-dealer and financial advisor, to act
as TXON’s exclusive financial adviser in its quest to raise additional equity or debt in one or
more transactions. TXON agreed to compensate Madison Williams for any transaction that fell
within the terms of the contract and that closed within the one-year contract period, or during the
one-year tail period. In other words, absent an extension of the Contract, the tail period would
expire on May 6, 2012. On May 9, 2012, TXON allegedly closed a financing transaction that
would have required TXON to pay Madison Williams at least $500,000 under the Contract if the
Contract or the tail period was still in force. Madison Williams shut its business and filed a
petition under chapter 7 of the Bankruptcy Code on December 29, 2011.
While the Amended Complaint (the “Am. Compl.,” ECF Doc. # 15) asserts claims under
a number of legal theories, the principal issue at play is whether the one-year contract term was
extended beyond May 6, 2010, as the Trustee alleges, with the effect of also extending the one-
year tail period; or, alternatively, whether a “definitive agreement” for the May 9, 2012 financing
transaction was actually reached before the initial tail period expired on May 6, 2012.
For the following reasons, the Court GRANTS the Motion in part and DENIES the
Motion in part. Specifically, the motion to dismiss Count I (Turnover) is GRANTED, and
Count I is DISMISSED WITH PREJUDICE. The motion to dismiss Count II (Breach of
Contract) is GRANTED IN PART AND DENIED IN PART, with leave to amend. The
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motion to dismiss Count III (Breach of Implied-In-Fact Contract) is DENIED. The motion to
dismiss Counts IV (Breach of Contract (Substantial Performance)) and V (Unjust Enrichment) is
DENIED. The motion to dismiss Counts VI (Constructive Fraudulent Conveyance) and VII
(Actual Fraudulent Conveyance) is GRANTED WITH PREJUDICE. The motion to dismiss
Count VIII (Attorneys’ Fees) is DENIED.
I. 	BACKGROUND
On December 29, 2011 (the “Petition Date”), the Debtor filed a voluntary petition for
relief under Chapter 7 of the Bankruptcy Code. Madison Williams was a New York limited
liability company with principal places of business in New York and Texas. It was a licensed
broker-dealer and operated as a boutique integrated capital markets and investment banking firm,
serving clients as a financial advisor and/or placement agent. (Am. Compl. ¶¶ 9, 12, 13.) TXON
is a Delaware limited liability company with a principal place of business in Texas. (Id. ¶ 10.)
A. 	The Contract
On May 6, 2010, TXON and Madison Williams entered into the Contract, under which
Madison Williams served as TXON’s exclusive financial advisor, responsible for advising,
consulting with, and assisting TXON in identifying, evaluating, and executing one or more
“Transactions.” 1 (Contract at 1.) Madison Williams was to assist TXON by (1) familiarizing
itself with TXON’s businesses; (2) identifying and evaluating various strategic alternatives;
(3) assessing the viability of various equity and debt issuance; (4) advising on the capital
placement process; (5) conducting an examination of TXON; (6) performing a financial analysis
1 	“Transaction” is defined in the Contract as a “financial transaction involving the purchase of equity or
similar securities by one or more potential investors in the Company [TXON] (‘Investors’), and/or a sale transaction
of a substantial portion of the assets or equity interests in the Company to one or more potential buyers (the
‘Buyers’). As used in this Agreement, the term ‘Transaction’ also includes any merger, consolidation,
reorganization or other business combination pursuant to which the Company or a substantial portion of its assets
are combined with that of a Buyer or an Investor in one transaction or a series of transactions.” (Contract at 1.)
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of TXON; (7) developing financial projections for TXON; (8) developing presentations to be
made to potential investors and buyers; and (9) evaluating and recommending financial terms
with respect to the Transactions (collectively, the “TXON Services”). (Id.)
TXON agreed to pay Madison Williams a number of fees, including (1) an “initial fee of
$50,000 . . . due and payable in cash upon execution of this Agreement and . . . [to] be applied to
any Transaction Fee” (the “Engagement Fee”) (id. § 2(a)); (2) a “Transaction Fee” of
(i) 	In the case of a Transaction with a Buyer, a fee of 5% of the
Transaction Amount as hereinafter defined, subject to a minimum fee of
$500,000, payable in cash promptly upon closing of a Transaction during
the Term of Engagement . . . or during the 12-month period following
termination of this Agreement, and
(ii) 	In the case of a Transaction with an Investor, a fee of 5% of the
Committed 	Capital 	paid 	or 	received 	in 	a 	Transaction, subject 	to a
minimum fee of $500,000, payable in cash promptly upon closing of a
Transaction during the Term of Engagement . . . or during the 12-month
period following termination of this Agreement.
(id. § 2(b)); and (3) a “Warrant Fee,” entitling Madison Williams to buy shares of TXON’s
common stock or equivalent equity ownership under certain terms (collectively, the “Fees”) (id.
§ 2(c)).
The Contract defines the “Term of Engagement” as follows:
Madison Williams’ engagement will commence on the date hereof and
will continue for a period of twelve (12) months after the date hereof,
unless extended by mutual written consent or earlier terminated as
provided below. . . . It is also expressly agreed that, if any Transaction is
consummated within 12 months after termination of this Agreement, or if
a definitive agreement that results in a Transaction is entered into during
the term of this Agreement or within such 12-month period, Madison
Williams shall be entitled to its full fees as described above.
(Id. § 4 (emphasis added).) The engagement commenced on May 6, 2010; absent any extension,
the engagement would have terminated on May 6, 2011 (the “Initial Term”). Under the
Contract, Madison Williams was entitled to Fees accrued during the Initial Term or related to “a
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definitive agreement that result[ed] in a Transaction . . . entered into” during the 12 months
following the expiration or termination of the engagement—i.e., through May 6, 2012 (the
“Initial Tail Period”). (Id.)
B. 	The Closed Deal and the Amended Complaint
On May 9, 2012, TXON successfully closed a transaction that raised an undisclosed
amount in new equity and debt and resulted in the formation of a new entity, TXON Partners
LLC (the “Closed Deal”). (Am. Compl. ¶ 49.) The Plaintiff alleges that a “definitive
agreement” to close that deal was “reached” before the Initial Tail Period’s expiration on May 6,
2012. (Id. ¶ 50.) Since the Closed Deal is a “Transaction” within the meaning of the Contract,
the Trustee argues that the Debtor is entitled to Transaction Fees and Warrant Fees as provided
in the Contract. (Id. ¶¶ 50, 53–54.)
The Trustee additionally alleges that, “on or around May 6, 2011,” Madison Williams
and TXON agreed to extend the Initial Term through “approximately October 17, 2011.” (the
“Extended Contract”). (Id. ¶¶ 26–28.) Accordingly, following the original end date for the
engagement on May 6, 2011, Madison Williams “continued to provide extensive services to
TXON to facilitate the consummation of the TXON Deal,” including corresponding with
potential transaction counterparties, attending meetings with potential counterparties, and
drafting documents for a potential transaction. (Id. ¶ 27.) The Plaintiff argues that the Debtor is
entitled to Transaction Fees and Warrant Fees stemming from the Closed Deal because Madison
Williams’ continued work extended the Contract and pushed the tail period through October 17,
2012 (the “Extended Tail Period”).
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On October 17, 2011, TXON terminated the engagement by sending an e-mail to
Madison Williams (the “October 17, 2011 E-mail,” ECF Doc. # 14-1). 2 TXON’s CEO sent that
e-mail to Madison Williams, stating:
It’s with regret that I must cancel the TXON agreement with Madison
Williams, effective immediately, given the fact that Madison Williams
cannot conduct its business. 	Please consider all aspects of the contract
terminated, and that there are no future obligations of either party to the
other.
TXON is appreciative of the efforts put in by Madison Williams on our
behalf, and we wish your personnel success in their future endeavors.
(October 17, 2011 E-mail.)
The Amended Complaint alleges eight causes of action: (1) turnover of fees associated
with the Closed Deal as property of the estate pursuant to Bankruptcy Code sections 541 and
542; (2) breach of contract for failure to pay fees for the “definitive agreement” “reached” during
the Initial Tail Period or, alternatively, for the Transaction consummated during the Extended
Tail Period; (3) breach of common law contract under Texas law based upon the Extended
Contract, as defined by the Parties’ course of dealing; (4) breach of contract under a theory of
substantial performance; (5) unjust enrichment; (6) fraudulent transfer of rights to the Contract
and associated fees to TXON under section 548(a)(1)(B) of the Bankruptcy Code; (7) fraudulent
conveyance under section 548(a)(1)(A) of the Bankruptcy Code related to the rights transfer to
TXON; and (8) attorneys’ fees.
2 	The Plaintiff’s counsel filed the October 17, 2011 E-mail on ECF after the March 24, 2014 hearing at the
Court’s request. Since the October 17, 2011 E-mail is incorporated by reference in the Amended Complaint, the
Court may consider it in connection with the Motion to dismiss. See Blue Tree Hotels Inv. (Canada), Ltd. v.
Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir. 2004).
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II. 	DISCUSSION
A. 	Standard Governing Motion to Dismiss
To survive a motion to dismiss pursuant to FED. R. CIV. P. 12(b)(6), made applicable here
by FED. R. BANK. P. 7012, “a complaint must set out only enough facts to state a claim for relief
that is plausible on its face.” Vaughn v. Air Line Pilots Ass’n, Int’l, 604 F.3d 703, 709 (2d Cir.
2010) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “Where a complaint pleads facts that
are merely consistent with a defendant’s liability, it stops short of the line between possibility
and plausibility of entitlement to relief.” Iqbal, 556 U.S. at 678 (citation and internal quotation
marks omitted). Plausibility “is not akin to a probability requirement,” but rather requires “more
than a sheer possibility that a defendant has acted unlawfully.” Id. (citation and internal
quotation marks omitted).
Courts use a two-prong approach when considering a motion to dismiss. McHale v.
Citibank, N.A. (In re the 1031 Tax Group, LLC), 420 B.R. 178, 189–90 (Bankr. S.D.N.Y. 2009). 3
First, the court must accept all factual allegations in the complaint as true, discounting legal
conclusions clothed in factual garb. See, e.g., Iqbal, 556 U.S. at 677–78; Kiobel v. Royal Dutch
Petroleum Co., 621 F.3d 111, 124 (2d Cir. 2010) (stating that a court must “assum[e] all well-
pleaded, nonconclusory factual allegations in the complaint to be true”) (citing Iqbal, 556 U.S. at
678). 4 Second, the Court must determine if these well-pleaded factual allegations state a
“plausible claim for relief.” Iqbal, 556 U.S. at 679 (citation omitted).
3 	See also Weston v. Optima Commc’ns Sys., Inc., No. 09 Civ. 3732 (DC), 2009 WL 3200653, at *2
(S.D.N.Y. Oct. 7, 2009) (Chin, J.) (acknowledging a “two-pronged” approach to deciding motions to dismiss); S.
Ill. Laborers’ and Emp’rs Health and Welfare Fund v. Pfizer, Inc., No. 08 CV 5175 (KMW), 2009 WL 3151807, at
*3 (S.D.N.Y. Sept. 30, 2009) (same); Inst. for Dev. of Earth Awareness v. People for the Ethical Treatment of
Animals, No. 08 Civ. 6195 (PKC), 2009 WL 2850230, at *3 (S.D.N.Y. Aug. 28, 2009) (same).
4 	See also Rescuecom Corp. v. Google Inc., 562 F.3d 123, 127 (2d Cir. 2009) (stating that the court must
“accept as true all of the factual allegations set out in the plaintiff’s complaint, draw inferences from those
allegations in the light most favorable to plaintiff, and construe the complaint liberally”) (quoting Gregory v. Daly,
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Courts do not make plausibility determinations in a vacuum; it is a “context-specific task
that requires the reviewing court to draw on its judicial experience and common sense.” Id.
(citation omitted). A claim is plausible when the factual allegations permit “the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citation
omitted). A complaint that only pleads facts that are “merely consistent with a defendant’s
liability” does not meet the plausibility requirement. Id. at 678 (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 557 (2007)). “A pleading that offers ‘labels and conclusions’ or ‘a
formulaic recitation of the elements of a cause of action will not do.’” Id. (quoting Twombly,
550 U.S. at 555) (internal quotation marks omitted)). “Threadbare recitals of the elements of a
cause of action, supported by mere conclusory statements, do not suffice.” Id. (citation omitted).
“The pleadings must create the possibility of a right to relief that is more than speculative.”
Spool, 520 F.3d at 183 (citation omitted).
Courts deciding motions to dismiss must draw all reasonable inferences in favor of the
nonmoving party and must limit their review to facts and allegations contained in (1) the
complaint, (2) documents either incorporated into the complaint by reference or attached as
exhibits, and (3) matters of which the court may take judicial notice. Blue Tree Hotels, 369 F.3d
at 217 (citation omitted); Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993).
When dismissing complaints for failure to comply with the Federal Rules of Civil
Procedure, courts often grant leave to amend. Rule 15(a) provides that “leave [to amend] shall
be freely given when justice so requires.” FED. R. CIV. P. 15(a). Leave to amend is proper
“where the moving party has not been guilty of bad faith and is not acting for the purpose of
243 F.3d 687, 691 (2d Cir. 2001)); Boykin v. KeyCorp, 521 F.3d 202, 204 (2d Cir. 2008) (“In reviewing a motion to
dismiss, we accept the allegations in the complaint as true.”) (citation omitted); Spool v. World Child Int’l Adoption
Agency, 520 F.3d 178, 183 (2d Cir. 2008) (“Although we construe the pleadings liberally, bald assertions and
conclusions of law will not suffice.”) (internal quotation marks omitted).
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delay, the opposing party will not be unduly prejudiced, and the trial of issues will not be unduly
delayed.” 3 M OORE ’ S FEDERAL PRACTICE § 1508[2].
B. 	Count I: Turnover
In Count I, the Plaintiff alleges a right to payment of the Transaction and Warrant Fees
under Bankruptcy Code sections 541 and 542. The turnover claim, however, ignores “the well-
settled law in this district that § 542(b) cannot be used to recover a disputed pre-petition debt.”
In re Teligent, Inc., 325 B.R. 134, 137 (Bankr. S.D.N.Y. 2005); see also Calka v. Chuu, No. 02
Civ. 9769 (JSR), 2003 U.S. Dist. LEXIS 4090, at *4 (S.D.N.Y. Mar. 19, 2003) (stating that
“section 542(b) only applies to undisputed, liquidated claims”); Hirsch v. London S.S. Owners’
Mut. Life Ins. Ass’n Ltd. (In re Seatrain Lines, Inc.), 198 B.R. 45, 50 n.7 (S.D.N.Y. 1996)
(Sotomayor, J.) (“It is settled law that the debtor cannot use the turnover provisions to liquidate
contract disputes or otherwise demand assets whose title is in dispute.”) (quoting United States v.
Inslaw, Inc., 932 F.2d 1467, 1472 (D.C. Cir. 1991).
Here, the Defendant disputes the Plaintiff’s right to recover damages under the Contract;
no undisputed receivable remains unpaid. The Plaintiff cannot use the turnover provisions of the
Bankruptcy Code to recover a disputed prepetition debt, and Count I of the Amended Complaint
is therefore DISMISSED WITH PREJUDICE.
C. 	Count II: Breach of Contract
Count II of the Amended Complaint alleges that the Defendant breached the Contract by
failing to pay the Fees stemming from the Closed Deal. The Plaintiff advances two theories in
support of his contentions that the estate is entitled to Fees: (1) the Parties extended the Initial
Term until October 17, 2011 and the Closed Deal was therefore consummated within the
Extended Tail Period, and, in the alternative, (2) a definitive agreement in connection with the
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Closed Deal was reached before the termination of the Initial Tail Period. As explained below,
the Motion is granted with leave to amend with respect to the first theory, and it is denied with
respect to the second theory.
The Contract is governed by Texas law. (Am. Compl. ¶ 75.) There are four elements of
a breach of contract claim under Texas law: (1) the existence of a valid contract;
(2) performance or tendered performance by the plaintiff; (3) the defendant’s breach of the
contract; and (4) resulting damages to the plaintiff. See Mullins v. TestAmerica, Inc., 564 F.3d
386, 418 (5th Cir. 2009) (quoting Aguiar v. Segal, 167 S.W.3d 443, 450 (Tex. App. 2005));
Smith Intern., Inc. v. Egle Grp., LLC, 490 F.3d 380, 387 (5th Cir. 2007) (citing Valero Mktg. &
Supply Co. v. Kalama Int’l, L.L.C., 51 S.W.3d 345, 351 (Tex. App. 2001)); Rice v. Metro. Life
Ins. Co., 324 S.W.3d 660, 666 (Tex. App. 2010).
The Defendant does not contest the validity of the Contract, according to its original
terms. Instead, the Defendant argues that (1) the Plaintiff has not adequately pled that the
Contract was validly extended and, because the Closed Deal occurred after the termination of the
Initial Tail Period, the terms of the Contract do not cover the Closed Deal; and (2) to the extent
that the Plaintiff bases the breach of contract action on the allegation that a “definitive
agreement” between the parties had been reached before May 6, 2012—the end of the Initial Tail
Period—this is not “well-pleaded” considering that an examination pursuant to Federal Rule of
Bankruptcy Procedure 2004 preceded the Amended Complaint. The Court addresses both
arguments in turn.
1. 	The Plaintiff Has Not Sufficiently Pled the Existence of a Written
Extension
The Plaintiff alleges that, “[u]pon information and belief, on or around May 6, 2011, the
TXON Engagement and the terms of the [Contract] were extended by the parties.” (Am. Compl.
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¶ 26.) During the time between May 6, 2011, and the Debtor’s receipt of the October 17, 2011
E-mail canceling the Contract, the Debtor continued to perform services to TXON, including
corresponding and meeting with potential counterparties and drafting potential transaction
documents. (Id. ¶ 27.)
The Defendant challenges the Plaintiff’s description of the purported Extended Contract
because (1) the Plaintiff failed to plead that the alleged extension was in writing and signed by
the Parties, which the Contract required as a condition precedent to any extension, and (2) the
Parties’ agreement contained a “no oral modification clause,” so any alleged oral modification
would therefore be impermissible. Consequently, the Defendant argues, the Plaintiff has failed
to plead that a valid extension exists, and any cause of action based on the May 9, 2012
transaction must be dismissed pursuant to Rule 12(b)(6).
The Contract provides that the Initial Tail Period would expire on May 6, 2012, “unless
extended by mutual written consent or earlier terminated . . . by giving written 30 days prior
notice to the other party.” (Contract § 4.) The Contract does not define the phrase “mutual
written consent.” The Contract further provides that it “may not be amended or modified except
in a writing executed by [TXON] and Madison Williams.” (Id. § 10(c).) Like “mutual written
consent,” the Contract does not define an “executed” writing.
The Defendant argues that an instrument in writing, signed by the Parties, is a condition
precedent to any extension due to the “mutual written consent” requirement. In Texas, “the
question of whether a written contract must be signed to be binding is a question of the parties’
intent.” Bilello, 414 S.W.3d at 215 (quoting In re Bunzl USA, Inc., 155 S.W.3d 202, 209 (Tex.
App. 2004)) (internal quotation marks omitted). Texas courts focus on the parties’ conduct to
determine their intent. “Therefore, [the question of the parties’ intent] is generally a question of
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fact for the fact finder to answer.” Bunzl, 155 S.W.3d at 210; see also Scaife v. Associated Air
Ctr. Inc., 100 F.3d 406, 410 (5th Cir. 1996). In Bilello, “the evidence [indicated] that both
parties viewed signatures as a condition precedent to a new binding agreement . . . .” Bilello,
414 S.W.3d at 215. 	The parties entered into an agreement requiring modifications or
amendments to be in writing signed by all the parties. 414 S.W.3d at 215. Even so, the court
considered other evidence to determine whether the signed writing was actually a condition
precedent, including examining the parties’ e-mails.
Though the Plaintiff pleads that the Contract “[was] extended,” the Plaintiff does not
allege that the extension was in writing. (See Am. Compl. ¶ 26.) To the extent the Amended
Complaint alleges any written communication between TXON and the Debtor, it is limited to the
Debtor’s continued “correspond[ence] with [TXON]” after May 6, 2011. (Id. ¶ 80.) But the
Contract clearly requires that any extension be memorialized by “mutual written consent,” and
the Plaintiff has not alleged any such writing.
At the March 24, 2014 hearing, the Plaintiff’s counsel indicated e-mails in his
possession—sent by TXON directing Madison Williams to perform certain services after the
original May 6, 2011 expiration of the Contract—would support a finding that there was a
written extension. The Court cannot determine whether these e-mails—not currently before the
Court—would be sufficient under Texas law to qualify as “mutual written consent.” The
Amended Complaint alleges that TXON and the Debtor “continued to correspond . . . as if the
terms of the [Contract] were extended,” and, in certain instances, TXON “directed the Debtor to
correspond with potential-counterparties.” (Am. Compl. ¶¶ 80, 83.) These allegations are
insufficient to allege “mutual written consent” to extend the Contract.
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To the extent the Amended Complaint pleads a cause of action for contract damages
resulting from an extended contract—based on a written agreement between the parties
extending the term—that portion of the Amended Complaint is DISMISSED WITHOUT
PREJUDICE. 	But the Plaintiff is granted leave to amend. 5
2. 	The Plaintiff Has Adequately Pled that a “Definitive Agreement” Was
Reached During the Initial Tail Period
On the other hand, the Amended Complaint adequately alleges that, even if no valid
written extension of the Contract exists, the Closed Deal was “definitively” agreed to before the
May 6, 2012 termination of the Initial Tail Period. According to the Amended Complaint, the
Closed Deal was the culmination of a Transaction between (1) TXON, (2) a third-party secured
debt and equity investor, and (3) a third-party debt investor, all three combining to form TXON
Partners LLC. (Am. Compl. ¶ 49.) The Closed Deal occurred “on or around May 9, 2012,”
three days after the termination of the Initial Tail Period.
Even the Defendant concedes that “under normal circumstances, the mere pleading that a
‘definitive agreement’ had been entered into within the original [tail period] would be sufficient
to survive a motion to dismiss . . . .” (Reply at 8.) But due to the “extensive pre-action
discovery,” including Rule 2004 examination of the Defendant’s principal and document
production, the Defendant argues that the Court “should . . . require [the Plaintiff] to provide at
least some level of detail in order to subject Defendant to the ongoing expense, effort and
inconvenience of continuing to defend” itself. (Id.)
5 	The Plaintiff alleges possession of e-mails “dated after the Initial Term sent by the Defendant to the Debtor
explicitly directing the Debtor to perform the TXON Services.” (Opp. at 17 n.5.) Signed e-mail communications
are sufficient under Texas law to establish a signed writing to satisfy the statute of frauds. See TEX. BUS . & COM.
CODE § 322.007; Bocchi Ams. Assocs. v. Commerce Fresh Mktg., Inc., 515 F.3d 383, 391–92 (5th Cir. 2008). As
the Amended Complaint currently stands, though, none of the references to communications between the Debtor and
the Defendant are sufficient, under Texas law, to satisfy the Statute of Frauds, absent the “partial performance”
exception (see below for further discussion of the Texas Statute of Frauds).
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Failing to plead additional facts following pre-action discovery that would not otherwise
be required to sustain the complaint is not a basis to grant a motion to dismiss. In Wilder v.
Bernstein, 499 F. Supp. 980 (S.D.N.Y. 1980), the court considered a motion to dismiss a
successor-in-interest claim where the plaintiffs had taken extensive pre-action discovery. The
court stated that “the purpose of a motion to dismiss is ‘merely to assess the legal feasibility of
the complaint, not to assay the weight of the evidence which might be offered in support (of it.)’”
Id. at 989 (quoting Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980)). The court found
no merit to defendants’ intimation that insofar as the instant action is a
successor 	to 	Wilder 	I 	[a 	previous 	lawsuit] 	and 	plaintiffs 	have 	had
extensive discovery of the facts underlying the claims asserted in that
action and reasserted here they should have availed themselves of these
facts and refined their complaint allegations.
Id. at n.14. The Defendant has cited no authority for its contention that the Trustee’s Rule 2004
discovery in this adversary proceeding alters the Rule 12(b)(6) analysis.
Moreover, the Defendant’s contention that Madison Williams did not perform services
related to the Closed Deal for which it seeks fees (Reply at 2–3) is unpersuasive. The Defendant
argues that the Debtor is not entitled to any Fees related to the Closed Deal because it failed to
perform an obligation under the terms of the Contract and that, “[i]n fact, Plaintiff’s pleadings
conclusively establish that Madison Williams filed this bankruptcy on December 29, 2011, and
ceased operations six months before the ‘Closed Deal’ occurred.” (Id. at 3 (emphasis in
original).) Under the plain language of the Contract, however, Madison Williams was not
required to perform any services during the Tail Period. The Plaintiff does not allege that
Madison Williams conducted any services after receiving the October 17, 2011 termination e-
mail from the Defendant—two months before filing its bankruptcy petition and almost seven
months before the Closed Deal occurred. If, as the Plaintiff alleges (and the Court accepts as
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true for the purposes of this Motion), a definitive agreement was reached during the Initial Tail
Period, the Contract requires TXON to pay Madison Williams regardless of the extent of
Madison Williams’ involvement in the deal.
Accepting the Plaintiff’s allegations in the Amended Complaint as true, the Plaintiff pled
sufficient facts to infer that a definitive agreement was entered into before the expiration of the
Initial Tail Period. Therefore, the Trustee may seek damages for breach of contract even absent
an extension of the Contract. Therefore, the Motion to dismiss this portion of the claim is
DENIED.
D. 	Count III: Breach of Common Law Contract
Count III alleges that, “[t]o the extent it is determined that the Debtor and TXON did not
expressly agree to the Extension, the terms of the [Contract] were extended by the course of
dealing between the parties.” (Am. Compl. ¶ 74.) The Defendant argues that the Texas statute
of frauds (the “Statute of Frauds”) bars allegations by the Plaintiff that the Contract was
impliedly extended by the Parties’ course of conduct. (Motion at 11.) Since the Contract
provides that any extension must be in writing, and the agreement further contains a “no oral
modification clause,” the Defendant contends that the Plaintiff failed to plead a valid extension.
The Plaintiff, on the other hand, argues that the Amended Complaint has sufficiently pled facts
that would satisfy the “partial performance” exception to the Statute of Frauds and that a writing
is unnecessary.
1. 	The Plaintiff Has Adequately Pled that an Implied-in-Fact Extended
Contract Existed Under Texas Law
Under Texas law, a contract can be express or implied by the parties’ course of conduct.
An implied-in-fact contract exists where the parties’ conduct indicates a mutual intention to
contract, even absent a writing (e.g., accepting services where the other party would ordinarily
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expect to be paid regardless of a signed writing). See Preston Farm & Ranch Supply, Inc. v. Bio-
Zyme Enters., 625 S.W.2d 295, 298 (Tex. 1981).
“An extension of time for performance may be implied as well as express.” Intermedics,
Inc. v. Grady, 683 S.W.2d 842, 846 (Tex. App. 194) (citation omitted). If the parties do not
define the extension of time, “the law will imply a reasonable time.” Cotton v. Deasey, 766
S.W.2d 874, 877 (Tex. App. 1989) (citations omitted).
But Texas appellate courts differ on what terms should control a contract that was
impliedly extended. Under one line of cases, an extension does not alter any other provisions of
the contract. See id. Thus, Cotton and other similar Texas appellate cases consider an implied
extension of time to perform a contract as an implied extension of the original terms of the
contract. But a contrary line of Texas Appellate cases disagrees, holding instead that an implied
contract gives rise to rights under the new, implied contract. Under this line of cases, after the
expiration of the express contract, the rights of the parties under the new contract are to be
determined under implied contract principles, which is a question of fact. See Emmer v. Phillips
Petroleum Co., 668 S.W.2d 487 (Tex. App. 1984) (observing that, when a contract is implied in
fact, the law finds a mutual intent to contract from the facts and circumstances of the case).
Whether mutual intent exists is a question of fact. Id. In situations similar to this case, the
analysis is more difficult:
[t]he situation becomes more complex when parties initially operate under
an express contract, but continue to operate in essentially the same manner
after the express contract has expired. Although there is scant Texas law
on the problem, other jurisdictions have held that, after expiration of the
express contract, the rights of the parties are to be determined under
implied contract principles. Although their conduct may permit a finding
that the parties have impliedly agreed that their rights should continue to
be measured by the old contract, those rights arise from the new implied
contract, not the old expired contract.
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Id. (citations omitted).
The Plaintiff relies on Sieber & Calicutt, Inc. v. La Gloria Oil & Gas Co., 6 S.W.3d 340
(Tex. App. 2001) and Alcoa v. Hydrochem Indus. Servs., Inc., 2005 Tex. App. LEXIS 2010 (Tex.
App. 2005), for the proposition “that the continued performance by both parties under [a
contract] impliedly extend[s] the time for performance and all attending provisions.”
Hydrochem, 2005 Tex. App. LEXIS 2010, at *5 (citing Sieber, 66 S.W.3d at 344–47). In Sieber,
the court found that an indemnity provision of a contract continued to be in effect after both
parties to the contract performed under the contract following the express date of termination.
Sieber, 66 S.W.3d at 347. Similarly, in Hydrochem, the Texas Court of Appeals held that
continued performance under the contract at issue impliedly extended the time of performance
and all attending provisions. Hydrochem, 2005 Tex. App. LEXIS 2010 at *3.
The Amended Complaint alleges that the Parties corresponded on multiple occasions
after the conclusion of the initial term of the contract and that Madison Williams continued to
operate under the terms of the contract, providing services to the Defendant. (Am. Compl. ¶¶ 27,
78–84.) Specifically, the Plaintiff alleges that after the initial expiration date, “the Debtor
continued to provide extensive services to TXON to facilitate the consummation of [a
Transaction] . . . .” (Id. ¶¶ 27, 82.) Additionally, “[a]fter the Extension, TXON continued to
correspond with the Debtor as if the terms of the [Contract] were extended by the Parties.” (Id.
¶ 80.) “TXON knew that the Debtor was providing such services and, in several instances,
directed the Debtor to correspond with potential counter-parties.” (Id. ¶ 83.) “TXON never
objected to the Debtor providing the TXON Services after the Extension.” (Id. ¶ 84.)
Additionally, the Defendant sent e-mail notice of the termination of the Debtor’s engagement on
October 17, 2011, implying that it believed that the Contract was still in force. (Id. ¶¶ 28, 65, 85,
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104; October 17, 2011 E-mail.) These allegations support the Plaintiff’s argument that the
Parties continued to behave as if the Contract had been extended, even without an express
written extension of the Contract. The allegations are sufficient to allege, at this stage, that an
implied-in-fact contract existed.
Whether the implied contract would extend all of the terms of the original contract and
would therefore cover the Extended Tail Period or would operate as an entirely new contract
remains to be seen; this is a question of fact that will depend on the evidence produced by the
Plaintiff. This is not the proper time to make those determinations.
2. 	The Plaintiff Has Adequately Pled that the Implied-in-Fact Extended
Contract Satisfies the Statute of Frauds Exception for Part Performance
Under Texas law, statutes of frauds are considered “substantive,” so Texas law applies to
this issue. Lehman v. Dow Jones & Co., Inc., 606 F. Supp. 1152, 1156 (S.D.N.Y. 1985), aff’d in
part, rev’d in part, 783 F.2d 285 (2d Cir. 1986) (citing Byrd v. Blue Ridge Rural Elec. Co., 356
U.S. 525 (1958)). Section 26.01 of the Texas Business and Commerce Code states:
(a) A promise or agreement described in Subsection (b) of this section is
not enforceable unless the promise or agreement, or a memorandum of it,
is
(1) in writing; and
(2) signed by the person to be charged with the promise or
agreement or by someone lawfully authorized to sign for him.
(b) Subsection (a) of this section applies to:
. . .
(6) an agreement which is not to be performed within one year
from the date of making the agreement . . . .
TEX. BUS . & COM. CODE ANN. § 26.01 (West 2009).
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The Statute of Frauds governs contracts for performance that are intended to span a
period of more than one year, even if the contracts may be terminated within one year upon the
happening of some event other than completed performance. Westside Wrecker Serv., Inc. v.
Skafi, 361 S.W.3d 153, 164 (Tex. App. 2011). But “where the time for performance is indefinite
in that the agreement merely provides for the performance of a particular act or acts which can
conceivably be performed within one year, the Statute of Frauds is inapplicable, however
improbable performance within one year might be.” Hondo Oil and Gas Co. v. Texas Crude
Operator, 970 F.2d 1433, 1438 (5th Cir. 1992).
“In deciding whether an agreement is capable of being performed within one year, we
compare the date of the agreement to the date when the performance under the agreement is to be
completed.” Kalmus v. Oliver, 390 S.W.3d 586, 590 (Tex. App. 2012) (citing TEX. BUS . & COM.
CODE ANN.§ 26.01(b)(6); Young v. Ward, 917 S.W.2d 506, 508 (Tex. App. 1996)). If there is a
year or more between the reference points, a writing is required to render the agreement
enforceable. Id. (citing Young, 917 S.W.2d at 508).
The Defendant argues that a writing was required to render the agreement enforceable
because the difference between May 6, 2011, when the parties allegedly extended the Contract,
and October 17, 2012, when the extended tail period allegedly ended, was greater than one year.
Since the Amended Complaint does not contain any allegations of a written agreement, the
Defendant argues, any of the Plaintiff’s claims based upon an alleged contract extension are
barred by the Statute of Frauds. But the Plaintiff argues that the “one year” requirement is
inapplicable because the particular acts could have been performed any time within one year.
“Once that Transaction was consummated and the Debtor was paid its fee, the performance
under the [Contract] would be complete.” (Opp. at 17.)
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Despite the Plaintiff’s contention, the plain terms of the Contract do not anticipate a
single transaction but instead allow for multiple transactions. (See Contract § 2(b) (defining
multiple instances when Madison Williams could be entitled to a transaction fee).) Additionally,
the Defendant points to Mann v. NCNB Tex. Nat’l Bank, 854 S.W.2d 664, 668 (Tex. App. 1993),
which held that “[a]n agreement that fixes a definite time period longer than a year during which
performance shall continue indicates that the parties did not contemplate earlier performance.”
See also Walker v. Tafralian, 107 S.W.3d 665, 669 (Tex. App. 2003) (agreement with express
two year term fell within the statute of frauds). The existence of a year-long tail period further
supports the Defendant’s point: since multiple transactions are contemplated by the Contract, the
Defendant’s ongoing obligation to pay would last at least one year from the end of the time that
Madison Williams was required to provide services under the Contract, and longer in the event a
“definitive agreement” was reached during the tail period Therefore, in order for the implied-in-
fact contract to be enforceable, the Plaintiff is required to satisfy the Statute of Frauds by
pleading that a writing exists. Alternatively, the Plaintiff must show that an exception to the
Statute applies.
The Plaintiff does not plead the existence of a writing, but argues instead that the
Amended Complaint sufficiently pleads allegations that satisfy the “partial performance”
exception to the Statute of Frauds. Under the partial performance exception, contracts that have
been partly performed, but do not meet the requirements of the Statute of Frauds, may be
enforced in equity if denial of enforcement would amount to a virtual fraud. Carmack v. Beltway
Dev. Co., 701 S.W.2d 37, 40 (Tex. App. 1985). “Where one party fully performs a contract, the
Statute of Frauds is unavailable to the other party who knowingly accepts benefits and partly
performs.” Hydrochem, 2005 Tex. App. LEXIS 2010 at *12 (citing Avila v. Gonzalez, 974
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S.W.2d 237, 24 (Tex. App. 1998); 626 Joint Venture v. Spinks, 873 S.W.2d 73, 76 (Tex. App.
1993); Estate of Kaiser v. Gifford, 692 S.W.2d 525, 526 (Tex. App. 1985); Oak Cliff Realty
Corp. v. Mauzy, 354 S.W.2d 693, 695 (Tex. Civ. App. 1962); Wingart v. Baxter, 30 S.W.2d 522,
527 (Tex. Civ. App. 1930)).
The partial performance must be “unequivocally referable to the agreement and
corroborative of the fact that a contract actually was made.” Wiley v. Bertelsen, 770 S.W.2d 878,
882 (Tex. App. 1989) (citing Chevalier v. Lane's, Inc., 213 S.W.2d 530, 533–34 (Tex. 1948)).
The acts of performance relied upon to take an oral contract out of the Statute of Frauds must
have been undertaken with no other possible design than to fulfill the particular agreement to be
enforced; otherwise, the acts do not tend to prove the existence of the oral agreement relied upon
by the plaintiff. Teague v. Roper, 526 S.W.2d 291, 293 (Tex. Civ. App. 1975 ) (citing Francis v.
Thomas, 106 S.W.2d 257, 260 (Tex. 1937)).
The Plaintiff has sufficiently pled facts that would indicate that the “partial performance”
exception applies. In the Amended Complaint, the Plaintiff alleges that Madison Williams
continued to provide services consistent with the Contract and that the Defendant terminated the
contract by sending notice via e-mail on October 17, 2011 (id. ¶¶ 27–28). Additionally, TXON
“continued to correspond with the Debtor [after the Extension] as if the terms of the [Contract]
were extended by the Parties.” (Id. ¶ 80.) “TXON knew that the Debtor was providing such
services and, in several instances, directed the Debtor to correspond with potential counter-
parties.” (Id. ¶ 83.) These allegations are sufficient, at this stage, to infer that Madison Williams
performed in the manner contemplated under the Contract and that TXON knowingly accepted
the benefits of Madison Williams’ actions and partially performed, by directing the Debtor to
take particular actions.
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TXON argues that even during the tail period, Madison Williams “had the same right to
bring a potential transaction to TXON as it had during the original term, so any activity by the
Debtor during the unextended tail period is at least as referable to its rights under the original
contract as to any purported oral extension . . . .” (Motion at 12.) But, as noted above, Madison
Williams was not required to take any action during the Tail Period to be entitled to Fees
resulting from a Transaction consummated or definitively agreed to during that period.
According to the plain terms of the contract, the Tail Period begins upon termination of the
Engagement; no work is contemplated to be completed during the Tail Period. Whether the
actions taken by Madison Williams are “unequivocally referable” to the implied-in-fact contract
requires further factual analysis and dismissing Count III on these grounds is not appropriate at
the motion to dismiss stage.
Consequently, the Motion to dismiss Count III is DENIED.
E. 	Count IV and V: Substantial Performance and Unjust Enrichment
In Counts IV and V, the Plaintiff alleges that the Debtor is entitled to recover damages
for breach of contract based upon theories of substantial performance and unjust enrichment.
These Counts of the Amended Complaint rest upon a theory of quantum meruit. Under Texas
law,
[t]he right to recover on quantum meruit is maintainable where there has
been a partial performance of the contract. This right does not grow out of
the contract, but is independent of it. The basis of recovery is founded on
the theory that where an owner was benefitted by such part performance, it
would be inequitable for the owner to refuse to pay for what he has
received. . . . The right to recover on a quantum meruit is not based on the
contract, but upon an implied agreement by the owner to pay for the
benefits received.”
Ryan v. Thurmond, 481 S.W.2d 199, 204 (Tex. Civ. App. 1972) (citations omitted). However,
“[w]here the parties have a written contract and the contractor has not completed the work or
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does not comply with the terms of the contract, recovery on quantum meruit is not applicable.”
Id. (citing Simons v. Paine, 140 S.W. 855 (Tex. Civ. App. 1911)).
When ruling on quantum meruit, Texas courts consider whether:
(1) valuable services were rendered or materials furnished; (2) for the
person sought to be charged; (3) which services and materials were
accepted by the person sought to be charged, used and enjoyed by him;
and (4) under such circumstances as reasonably notified the person sought
to be charged that the plaintiff, in performing such services, was expecting
to be paid by the person sought to be charged.
Wood v. Tex. Farmers Ins. Co., 593 S.W.2d 777, 780 (Tex. Civ. App. 1979) (citations omitted).
If an express contract sets out all the obligations of the parties, an action in quantum meruit is not
available. Id. On the other hand, recovery under quantum meruit is available even though an
express contract exists between the parties where the action involves obligations outside the
scope of the express contract. Id. at 781.
The violation of the Statute of Frauds does not limit the Plaintiff’s ability to recover
under quantum meruit theories: “the Texas courts afford recovery in quantum meruit as an
alternative remedy for breach of promises rendered unenforceable by the statute of frauds.”
Pravel, Wilson & Matthews v. Voss, 471 F.2d 1186, 1189 (5th Cir. 1973) (citing Scott v. Walker,
170 S.W.2d 718 (Tex. Comm. App. 1943); Miller v. Graves, 185 S.W. 2d 745 (Tex. Civ. App.
1945)).
At this stage, the Plaintiff has alleged all of the elements of quantum meruit under Texas
law in the Amended Complaint: (1) Madison Williams continued to perform services for the
Defendant after May 6, 2011 (see Am. Compl. ¶¶ 27, 79, 82); (2) the services were provided to
TXON, and the Plaintiff seeks recovery from TXON (id.); (3) TXON accepted and benefitted
from the services provided by Madison Williams (id. ¶¶ 81, 83–84); and (4) the Defendant knew
that Madison Williams expected to be paid for such services (id. ¶¶ 80–87).
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To the extent that the Defendant argues that TXON did not expect to pay Madison
Williams, that is a question for a later stage. Additionally, whether the Plaintiff will be able to
recover the damages sought—i.e., the Fees Madison Williams was purportedly entitled to under
the Contract—is also a question inappropriate for a motion to dismiss. Whether the Plaintiff will
be able to show that Madison Williams provided services directly related to the Closed Deal is
unclear at best. But the Plaintiff has alleged facts sufficient to support a cause of action for
quantum meruit; how much he may be entitled to collect in damages, assuming he is able to
prove his claims, is another matter. The motion to dismiss Counts IV and V is therefore
DENIED.
F. 	Counts VI and VII: Constructive and Actual Fraudulent Transfer
In Counts VI and VII, the Plaintiff essentially tries to convert a garden-variety breach of
contract case (or one based on theories of quasi-contract) into a case with fraudulent transfer
claims. No actual “transfers” by Madison Williams are alleged, and the Plaintiff’s theory cannot
pass the Iqbal plausibility standard in asserting the fraudulent transfer claims. Both claims are
premised on the allegation that on “October 17, 2011, less than two years before the Filing Date,
the Debtor transferred or assigned its rights to the [Contract], the TXON Transaction Fees,
and/or the TXON Warrant Fees to TXON.” (Am. Compl. ¶ 119.) But the only thing alleged in
the Amended Complaint that occurred on October 17, 2011 was an e-mail from TXON to
Madison Williams terminating the Contract; no actions or transfers by Madison Williams are
alleged. But the Plaintiff does not assert a plausible argument that the October 17, 2011 E-mail
transferred anything. Indeed, the Plaintiff argues that the October 17, 2011 E-mail serves the
opposite effect, granting the Debtor continued rights to fees through October 17, 2012.
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Counts VI and VII are unsupported by any plausible allegations and must be
DISMISSED WITH PREJUDICE.
G. 	Count VIII: Attorneys’ Fees
Count VIII of the Amended Complaint demands attorneys’ fees and costs associated with
the Adversary Proceeding. Under the Contract, “[i]f it becomes necessary for one party to
institute legal proceedings against the other party to enforce this Agreement, the prevailing party
is entitled to recover, from the losing party, its legal fees, expert witness costs, and other
expenses incurred in connection with such proceeding.” (Contract § 10.)
Since the Plaintiff still has causes of action outstanding against the Defendant, the Motion
to dismiss Count VIII is DENIED.
III. 	CONCLUSION
For the reasons stated above, the Defendant’s Motion is GRANTED IN PART AND
DENIED IN PART as provided above. The Plaintiff is granted to leave to amend Count II
within thirty (30) days from the date of this Order.
IT IS SO ORDERED.
Dated: May 14, 2014
New York, New York
____Martin Glenn____
MARTIN GLENN
United States Bankruptcy Judge
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