Case 6:13-cv-00811-JDL Document 123 Filed 01/11/17 Page 1 of 21 PageID #: 707
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE EASTERN DISTRICT OF TEXAS
`TYLER DIVISION
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`LIHUA ZHANG,
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`Plaintiff,
`
`V.
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`MARGARET MONROE; SCOTT
`MONROE; CENTRAL MINING
`AMERICA, INC., a/k/a CENTRAL
`MINING AMERICA GROUP, CORP.;
`AND U.S. SALT INTERNATIONAL,
`INC., a/k/a FTC U.S. SALT
`MANAGEMENT LTD.,
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`Defendants.
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`CIVIL ACTION NO. 6:13-CV-811
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`MEMORANDUM OPINION AND ORDER
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`Before the Court is Plaintiff Lihua Zhang’s Motion for Summary Judgment (Doc. No.
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`114). Defendants Margaret Monroe and Scott Monroe (“the Monroes”), Central Mining
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`America, Inc. (“CMA”), Central Mining America Group, Corp. (“CMA Group”), and U.S. Salt
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`International, Inc. (“US Salt”) (collectively, “Defendants”) filed a Motion to Strike/Response
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`(Doc. No. 116). Having considered the parties’ arguments and the applicable law, the Court
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`GRANTS-in-part and DENIES-in-part Plaintiff’s Motion. To the extent Defendants assert any
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`counterclaims in their Motion to Strike/Response, the Court DENIES Defendants’ claims.
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`I. BACKGROUND
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`This is a diversity action arising out of an ongoing business relationship between Plaintiff
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`and Defendants. CMA was created in 2004 to offer salt mining production and operations
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`services in connection with the Monroe Salt Mine located in the Grand Saline Salt Dome in East
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`Texas. (P’s MSJ, Doc. No. 114 at 8). On September 28, 2007, Mr. Monroe, acting as President of
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`CMA, entered into an agreement to lease the Monroe Salt Mine from his wife, Mrs. Monroe, “for
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`the purpose of continuing the Developing, Constructing, Mining, Drilling, Producing, Operating,
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`Transporting, Selling, and Exporting, of that salt minerals that are mined and Produced from
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`underground.” (Land and Salt Mineral Lease Agreement, Ex. 9, Doc. No. 114).
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`Ms. Zhang was first introduced to the Monroes and CMA through her husband who is
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`involved with the mining services industry in China. (Unsworn Dec. of Lihua Zhang, Ex. 13 at ¶
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`2-3, Doc. No. 114). According to Ms. Zhang, the Monroes represented to her that they had salt
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`mine interests in East Texas that would prove profitable to potential investors. (Id. ¶ 4). In May
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`of 2011, Ms. Zhang met with Mrs. Monroe in Beijing, China, to discuss the possibility of
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`investing directly into CMA. (Id. ¶ 5). In December of 2011, Ms. Zhang traveled to the United
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`States, and stayed with the Monroes at their home in Canton, Texas. (Id. ¶ 6). During her stay,
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`the Monroes allegedly represented to her that she would be able to invest directly into CMA and
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`maintain a 5% stake in the company by entering into a Subscription Agreement. (Id. ¶ 6; see
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`Subscription Agreement, Ex. 14, Doc. No. 114). Ms. Zhang was further told that CMA was on
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`course to receive a $45 million capital injection from Mr. Andrew Garner, an English investor,
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`within the first six months of 2012 to jumpstart operations. (Id. ¶ 6).
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`Ms. Zhang entered into the Subscription Agreement on December 20, 2011, which in
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`relevant part states:
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`I, Li Hua Zhang [omitted] hereby subscribe for and purchase (5%) five percent of
`the common stock from Margaret Monroe of Central Mining America, Inc. a
`Texas corporation. The purchase price is USD 580,000 (five hundred eighty
`thousand US dollars) in cash plus other consideration and works.
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`(Ex. 14, Doc. No. 114). On December 28, 2011, Ms. Zhang wired approximately $80,000 to
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`Mrs. Monroe’s individual account. According to Ms. Zhang, the Defendants required $80,000 to
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`pay off a debt to Dynatec, a mining services company, and that until such a debt was paid, CMA
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`would be unable to secure the funding from Mr. Garner. (Ex. 13 at ¶ 6, Doc. No. 114).
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`On February 12, 2012, CMA’s charter was forfeited for its failure to file a franchise tax
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`return and/or pay a state franchise tax. (Ex. 7, Doc. No. 114).
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`In March of 2012, Ms. Zhang returned to the United States to apply for a green card
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`under the EB-5 Immigrant Investor Program1, under the alleged representation from the Monroes
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`that her investment in a U.S.-based enterprise would qualify her for such a program. (Id. ¶ 6, 9).
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`On March 16, 2012, Ms. Zhang wrote a check directly payable to Mrs. Monroe for $420,000 in
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`fulfillment of the Subscription Agreement. (Id. ¶ 11). That same day, Mrs. Monroe acting as the
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`CEO of CMA signed an agreement which stated:
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`“Li Hua Zhang [omitted] has made a payment of US$500,000.00 (five hundred
`thousand US Dollars) according to the subscription agreement signed on Dec 20,
`2011.”
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`(Ex. 18, Doc. No. 114).
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`Ms. Zhang states that by October of 2012, it had become clear to her that there were
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`numerous issues with the original Subscription Agreement and her investment in CMA. (Ex. 13
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`at ¶ 13, Doc. No. 114). Later that month, Ms. Zhang states she met with the Monroes in Beijing,
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`who “expressed confidence that CMA would be up and running in the near future and would be
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`able to pay me.” (Id. ¶ 13). Ms. Zhang states that because of the Monroes’ assurances she agreed
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`to enter into a Convertible Notes Agreement (Ex. 18, Doc. No. 114) which converted her initial
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`investment into a $500,000 loan to CMA, and which the company would be required to pay over
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`a period of three years at a 30% interest rate. (Id. ¶ 13). Mrs. Monroe is the signatory to this
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`agreement on behalf of CMA. (Id.).
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`1 The EB-5 Immigrant Investor Program is administered by the United States Citizenship and Immigration Services
`and allows foreign investors to apply for a green card if they make an investment of a statutory amount in a
`commercial enterprise in the United States, and the investment plans to create or preserve 10 permanent full-time
`jobs for qualified U.S. workers; See EB-5 Immigrant Investor Program, https://www.uscis.gov/eb-5.
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`On March 20, 2013, Ms. Zhang sent Mrs. Monroe a letter demanding a payment of
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`$650,000 ($500,000 principal and $150,000 interest) by March 30, 2013. (Ex. 19, Doc. No. 114).
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`In response, CMA sent a letter to Ms. Zhang on April 9, 2013, notifying Ms. Zhang that neither
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`CMA nor its representative issued or signed the Convertible Notes Agreement. (Ex. 20, Doc. No.
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`114).
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`On October 24, 2013, Ms. Zhang filed the instant case claiming a breach of contract,
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`common law fraud (fraudulent misrepresentation), negligent misrepresentation, and violations of
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`§ 27.01 of the Texas Business & Commerce Code against the Defendants stemming from the
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`Subscription Agreement and the Convertible Notes Agreement. Ms. Zhang further seeks to hold
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`the Monroes individually liable for the acts of CMA through piercing the corporate veil and
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`through § 171.255 of the Texas Tax Code.
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`II. APPLICABLE LAW
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`A. Summary Judgment Under Rule 56
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`Summary judgment is appropriate if there is no genuine issue as to any material fact, and
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`the movant is entitled to judgment as a matter of law. FED. R. CIV. P. 56(a). The movant bears
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`the initial burden of informing the court of the basis for its motion and identifying those portions
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`of the record it believes demonstrate the absence of a genuine issue of material fact. Celotex
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`Corp. v. Catrett, 477 U.S. 317, 323 (1986). Only when the moving party has discharged this
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`initial burden does the burden shift to the non-moving party to demonstrate that there is a
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`genuine dispute of material fact. Celotex, 477 U.S at 322.
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`A dispute is “genuine” if the evidence is such that a reasonable jury could return a verdict
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`for the nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986);
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`Cooper Tire & Rubber Co. v. Farese, 423 F.3d 446, 454 (5th Cir. 2005). A dispute is “material”
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`if its resolution could affect the outcome of the action. Anderson, 477 U.S. at 248.
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` Once a proper motion has been made, the nonmoving parties may not rest upon mere
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`allegations or denials in the pleadings but must present affirmative evidence, setting forth
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`specific facts, to show the existence of a genuine issue for trial. Celotex Corp., 477 U.S. 322 n.3
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`(quoting Fed. R. Civ. P. 56(e)). All the evidence must be construed in the light most favorable to
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`the nonmoving party, and the court will not weigh the evidence or evaluate its credibility. Reeves
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`v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000).
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`Furthermore, “only reasonable inferences in favor of the nonmoving party can be drawn
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`from the evidence.” Mills v. Warner-Lambert Co., 581 F.Supp.2d 772, 779 (E.D. Tex. 2008)
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`(citing Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 469 n. 14 (1992). “If
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`the [nonmoving party’s] theory is… senseless, no reasonably jury could find in its favor, and
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`summary judgment should be granted. Eastman, 504 U.S. at 468-69. “Unsubstantiated
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`assertions, improbable inferences, and unsupported speculation are not sufficient to defeat a
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`motion for summary judgment.” Brown v. City of Houston, 337 F.3d 539, 541 (5th Cir.2003).
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`Summary judgment is mandated if the nonmovant fails to make a showing sufficient to
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`establish the existence of an element essential to their case on which they bear the burden of
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`proof at trial. Nebraska v. Wyoming, 507 U.S. 584, 590 (1993); Celotex Corp., 477 U.S. at 322.
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`“In such a situation, there can be ‘no genuine issue as to any material fact,’ since a complete
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`failure of proof concerning an essential element of the nonmoving party's case necessarily
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`renders all other facts immaterial.” Celotex Corp., 477 U.S. at 322–23.
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`Defendants are proceeding pro se in this action. “A document filed pro se is ‘to be
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`liberally construed’ and a pro se complaint, however inartfully pleaded, must be held to less
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`stringent standards than formal pleadings drafted by lawyers.” Erickson v. Pardus, 551 U.S. 89,
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`94 (2007) (per curiam) (citing Estelle v. Gable, 249 U.S. 97 (1976)). However, “pro se status
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`does not exempt [a litigant] from the usual evidentiary requirements of summary judgment.” See
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`Ellis v. Principi, 246 F. App’x 867, 869 (5th Cir. Sept. 5, 2007) (per curiam) (citing Grant v.
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`Cuellar, 59 F.3d 523, 524 (5th Cir. 1995)).
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`III.
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`DISCUSSION
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`A. Breach of Contract
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`The first claim Ms. Zhang has brought against Defendants is a breach of contract claim
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`for the October 30, 2012 Convertible Notes Agreement. Notably, this is the only claim which
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`Defendants address or dispute in their response to Plaintiff’s Motion.
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`Under Texas law, the essential elements of a breach of contract action are (1) the
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`existence of a valid contract, (2) performance or tendered performance by the plaintiff, (3)
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`breach of the contract by the defendant, and (4) damages sustained by the plaintiff as a result of
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`the breach. Academy of Skills & Knowledge, Inc. v. Charter Schools, USA, Inc., 260 S.W.3d 529,
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`536 (Tex. App. – Tyler 2008, pet. denied).
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`Ms. Zhang argues that she and CMA had a valid contractual agreement pursuant to the
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`Convertible Notes Agreement which converted her stock purchase into a loan, and that
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`Defendants breached the contract by failing to pay over the course of the three-year period. Ms.
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`Zhang claims monetary damages in the amount of $500,00 plus interest on the loan.
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`In their response to Plaintiff’s Motion, Defendants essentially assert two affirmative
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`defenses to the enforcement of the Convertible Notes Agreement: fraud and unconscionability.
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`Defendants bear the burden of proof of establishing any affirmative defenses. See Tex. R.
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`Civ. P. 94. If the party opposing a summary judgment relies on an affirmative defense, he must
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`come forward with summary judgment evidence sufficient to raise an issue of fact on each
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`element of the defense to avoid summary judgment. Brownlee v. Brownlee, 665 S.W.2d 111, 112
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`(Tex.1984). Unless these affirmative defenses are established as a matter of law, the burden will
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`be upon Defendants to obtain jury findings to establish the necessary elements of these defenses.
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`Oilwell Division, U.S. Steel Corp. v. Fryer, 493 S.W.2d 487 (Tex. 1973); Texas Farmers Ins. v.
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`Murphy, 996 S.W.2d 873, 879-80 (Tex. 1999).
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`Defendants maintain that the Convertible Notes Agreement was fraudulently drafted and
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`produced by Ms. Zhang. (Defs.’ Resp. at ¶ 5, Doc. No. 116). Defendants claim they never
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`discussed, reviewed, approved, consented to or agreed to, or had seen the agreement before it
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`was produced. (Id. ¶ 2). Moreover, Defendants argue that the Convertible Notes Agreement was
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`drafted in Chinese and translated into English by Ms. Zhang herself, further evidence of a
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`fraudulent creation of the agreement. (Id. at ¶ 5).
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`Second, Defendants refer to the interest rate of 30% as “unlawful,” which the Court
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`interprets as an affirmative defense of
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`substantive unconscionability. Substantive
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`unconscionability refers to the fairness of the resulting agreement. Lopez v. Garbage Man, Inc.,
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`No. 12-08-00384-CV, 2011 WL 125923 at *12 (Tex. App. – Tyler 2011, no pet.). Some courts in
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`Texas have gone so far as to suggest that an agreement must be utterly lopsided, that is, there
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`must be no reasonable or subjective parity between the values exchanged, for a contract to be
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`substantively unconscionable. El Paso Natural Gas Co. v. Minco Oil & Gas Co., 964 S.W.2d 54,
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`62 (Tex. App. – Amarillo 1997), rev’d on other grounds, 8 S.W.3d 309 (Tex. 1999) (citing Wade
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`v. Austin, 524 S.W.2d 79, 85 (Tex. App. – Texarkana 1975, no writ)).
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`Here, Defendants fail to cite to summary judgment evidence in their response, and do not
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`establish their affirmative defenses as a matter of law. Nor have Plaintiffs filed a reply brief
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`rebutting Defendants’ affirmative defenses. As such, the Court finds that the issue remains
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`unresolved as to whether the Convertible Notes Agreement is a valid contract, and if it is,
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`whether a 30% interest rate is not unconscionable. Accordingly, the Court DENIES Plaintiff’s
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`Motion as to her breach of contract claim. The Court cautions the Defendants that to prevail on
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`their affirmative defenses at trial, Defendants will bear the burden of proof of obtaining jury
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`findings that establish the necessary elements of fraud, see infra Part III.B., and of
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`unconscionability.2
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`B. Common Law Fraud
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`The Court next considers Ms. Zhang’s claims of common-law fraud, i.e., fraudulent
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`misrepresentation. In Texas, to recover for fraud, a plaintiff must establish (1) a material
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`misrepresentation, (2) which was false, (3) and which was either known to be false when made
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`or was asserted without knowledge of its truth, (4) which was intended to be acted upon, (5)
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`which was relied upon, and (6) which caused injury.’” Zorrilla v. Aypco Construction II, LLC,
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`469 S.W.3d 143, 153 (Tex. 2015) (citing Formosa Plastics Corp. USA v. Presidio Eng’rs &
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`Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998)). In the instant case, the Court finds summary
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`judgment proper with regard to the fraudulent misrepresentation claims against Defendants.
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`As to the first two elements, a representation is material if it is important to the plaintiff
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`in making a decision – that is, if a reasonable person would attach importance to and be induced
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`to act on the information in determining whether to make a transaction. Italian Cowboy Partners
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`v. Prudential Ins., 341 S.W.3d 323, 337 (Tex. 2011). A false representation consists of words or
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`other conduct that suggest to the plaintiff that a fact is true when it is not. See Custom Leasing,
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`Inc. v. Texas Bank & Trust Co., 516 S.W.2d 138, 142 (Tex. 1974).
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`2 Defendants at this point are precluded from raising any counterclaims of usury under the Texas Finance Code
`against Plaintiff, and may only argue the interest rate as unconscionable for the purposes of establishing an
`affirmative defense to the breach of contract claim.
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`Ms. Zhang asserts that Defendants made a number of material factual misrepresentations
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`to her. First, Ms. Zhang claims that the nature of the December 20, 2011 Subscription Agreement
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`to purchase 5% common stock from CMA was misrepresented to her. (Ex. 14, Doc. No. 114). A
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`“subscription” is “an agreement between a subscriber and an entity, or a written offer made by a
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`subscriber to an entity before or after the entity’s formation, in which the subscriber agrees or
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`offers to purchase a specific ownership interest in the entity.” TEX. BUS. ORGS. CODE ANN. §
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`1.002(84) (emphasis added). While the terms and breadth of the agreement are sparse, Ms.
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`Zhang argues that the Subscription Agreement was not what it was purported to be by the
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`Monroes. Ms. Zhang states that she believed she was investing directly into CMA and acquiring
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`stock issued by the corporation. (Ex. 13 ¶ 6, Doc. No. 114). It was not until October of 2012 that
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`it became clear to Ms. Zhang that there were numerous issues with the original subscription
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`agreement and her investment. (Id. ¶ 13). According to Ms. Zhang, the stock was not issued by
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`the corporate entity as a subscription, as represented to her by the Monroes, rather it was a sale of
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`individual stock by Mrs. Monroe to Ms. Zhang.
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`Ms. Zhang also argues that Mrs. Monroe falsely represented to her that this investment
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`and Subscription Agreement would permit Plaintiff to apply for an immigrant visa under the EB-
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`5 category since she would be placing funds directly into a U.S.-based enterprise and therefore
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`obtaining a direct interest in a viable company. (See Ex.13 at ¶ 6, Doc. No. 114).
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`Finally, Ms. Zhang argues that Defendants misrepresented the status of CMA as an entity
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`legally authorized to conduct business in Texas. The record shows that at the time of accepting
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`the $420,000 payment in fulfillment of the Subscription Agreement, CMA had already forfeited
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`its charter status and became inactive a month earlier. (Ex. 7, Doc. No. 114). CMA did not apply
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`for reinstatement until April 29, 2014, over two years later, and after the filing of this suit. (Id.).
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`Ms. Zhang maintains that at the time, she “did not know that Monroe was merely accepting the
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`funds on her own behalf” and that had she known CMA was not an active corporation she
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`“would have refused to execute the check and pay the funds.” (Ex.13 at ¶ 11, Doc. No. 114).
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`The Court finds that Ms. Zhang has put forth sufficient evidence that Defendants made a
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`factual misrepresentation as to the true nature of the Subscription Agreement and the ability of
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`CMA to accept payment pursuant to the agreement. However, the summary judgment record is
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`insufficient to show that Defendants misrepresented Ms. Zhang’s immigration prospects. The
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`Court does not discount that Ms. Zhang invested in CMA to facilitate immigration, but that alone
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`does not support the allegation that the Monroes fraudulently misrepresented this fact.
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`As to the third element, a defendant makes a misrepresentation “knowingly” when the
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`defendant is aware of its falsity or understands it is false. Landers v. Aurora Loan Servs., 434
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`S.W.3d 291, 293-94 (Tex.App. – Texarkana 2014, no pet.). The Texas Supreme Court has held
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`that “[a] person is charged with constructive notice of the actual knowledge that could have been
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`acquired by examining public records.” Mooney v. Harlin, 622 S.W.83, 85 (Tex. 1981).
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`Constructive notice creates an irrebuttable presumption of actual notice. Id. A representation is
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`made “recklessly” when a defendant makes it without any knowledge of its truth and makes it as
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`a positive assertion of fact. Johnson & Higgins v. Kenneco Energy, Inc., 962 S.W.2d 507, 527
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`(Tex. 1998). In other words, a defendant makes a representation recklessly when it knows it does
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`not have sufficient information or basis to support the representation, or when the defendant
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`realizes it does not know whether the representation is true. Id. at 527. Direct or circumstantial
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`evidence may be used to prove the defendant made the statements with or without knowledge of
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`its truth. Id. at 526.
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`In their response, Defendants do not deny or refute Ms. Zhang’s allegations of
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`misrepresenting the individual stock transfer as a Subscription Agreement. Furthermore, the
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`evidence is uncontroverted that CMA had forfeited its charter to conduct business in the State of
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`Texas at the time of accepting payment from Ms. Zhang in fulfillment of the Subscription
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`Agreement.
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`As a corporate entity, CMA had constructive notice of actual knowledge that it was not
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`authorized to transact business in Texas at the time of accepting payment from Ms. Zhang as a
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`result of forfeiting its charter status. Likewise, as officers and registered agents of the
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`corporation, the Monroes also held constructive notice of actual knowledge of CMA’s status as a
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`business entity, as this knowledge is readily acquirable through examination of public records.
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`The Defendants therefore had actual knowledge of the falsity of the representations made to Ms.
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`Zhang about the Subscription Agreement and the payment made in fulfillment of the agreement.
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`Ms. Zhang also satisfies the fourth element of her fraud claim that (1) the defendant
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`intended for the plaintiff to act in reliance on the presentation or had reason to expect that the
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`plaintiff would do so and (2) the plaintiff incurred pecuniary loss in the type of transaction in
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`which the defendant intended or had reason to expect that the plaintiff’s conduct would be
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`influenced. Exxon Corp. v. Emerald Oil & Gas Co., 348 S.W.3d 194, 218-19 (Tex. 2011).
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`Ms. Zhang has established that Defendants intended for her or had reason to expect that
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`she would rely on their representations as to the nature of the Subscription Agreement and the
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`charter status of CMA. The parties do not dispute that Ms. Zhang intended to invest in CMA for
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`the purposes of immigrating to the United States under the EB-5 Immigrant Investor Program.
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`(See Defs.’ Resp. Doc. No. 116) (“Plaintiff, Zhang fully understood that the investment has no
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`guaranty of any profit/return or the investment must be at high risk according to US Immigration
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`program for Foreigner’s investment into U.S. companies.”). Defendants had reason to expect Ms.
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`Zhang would rely on their representations about her investment in CMA because it directly
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`affected her immigration prospects. Ms. Zhang also incurred pecuniary loss in the type of
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`transaction which Defendants intended Plaintiff’s conducted would be influenced by, i.e., Ms.
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`Zhang invested $500,000 pursuant to the Subscription Agreement.
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`Fifth, the summary judgment shows that Ms. Zhang relied and acted upon the
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`misrepresentations made to her. Ms. Zhang states that if she “had known that CMA was not an
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`active corporation, [she] would have refused to execute the check and pay the funds.” (Ex. 13,
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`Doc. No. 114). Ms. Zhang further states that she believed she was obtaining a direct interest in a
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`viable company when she signed the Subscription Agreement on December 20, 2011. (Id.) See
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`Schwartz v. Pinnacle Comms., 944 S.W.2d 427, 435 (Tex. App. – Houston [14th Dist.] 1997, no
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`writ) (where plaintiff’s testimony that he decided to make an investment based on
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`representations the defendant made about the creditworthiness of the company showed plaintiff’s
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`actual reliance).
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`Defendants aver that Ms. Zhang had performed intensive due diligence before making the
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`investment. However, a plaintiff does not normally have a duty to use due diligence to discover
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`whether the representation is fraudulent, Koral Indus v. Security-Conn. Life Ins., 802 S.W.2d
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`650, 651 (Tex. 1990), unless it knows of facts that would lead a reasonably prudent person to
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`investigate, Arroyo Shrimp Farm, Inc. v. Hung Shrimp Farm, Inc., 927 S.W.2d 146, 153-54
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`(Tex. App. – Corpus Christi 1996, no writ). Here, Ms. Zhang did not know of any facts that
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`would have led a reasonably prudent person to believe that CMA was going to lose its charter
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`status two months after entering into the Subscription Agreement, and that despite losing its
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`status, would still conduct business and accept payment from Ms. Zhang.
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`Lastly, as a result of Ms. Zhang’s reliance on Defendants’ representations, Ms. Zhang has
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`suffered damages of $500,000 from her investment in CMA. Defendants do not dispute that
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`CMA and Mrs. Monroe signed a document memorializing that Ms. Zhang paid $500,000
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`pursuant to the Subscription Agreement. (See Defs.’ Answer, Doc. No. 3 at ¶ 28; Defs.’ Resp.,
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`Doc. No. 116).
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`Ms. Zhang has provided uncontroverted summary judgment evidence to support each
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`element of her fraudulent misrepresentation claim. Defendants fraudulently misrepresented to
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`her the true nature of the Subscription Agreement and the legal status of CMA to conduct
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`business in Texas with the intention that Ms. Zhang would act upon such representations.
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`Though Defendants are pro se, as the non-moving party they still bear the burden to
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`present affirmative evidence setting forth specific facts showing the existence of a genuine issue
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`for trial once a plaintiff has made a proper motion. Defendants neither refute nor deny any of Ms.
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`Zhang’s claims of fraudulent misrepresentation, thereby failing to establish a genuine issue of
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`material fact. As summary judgment is mandated if the nonmovant fails to make a showing
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`sufficient to establish the existence of an element essential to their case on which they bear the
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`burden of proof at trial, Nebraska v. Wyoming, 507 U.S. 584, 590 (1993), the Court GRANTS
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`Plaintiff’s Motion for Summary Judgment as to her claim of common-law fraud (fraudulent
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`misrepresentation). See also Celotex Corp., 477 U.S. at 322.
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`C. Negligent Misrepresentations
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`Ms. Zhang’s negligent misrepresentation claims arise out of the same set of facts and
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`misrepresentations addressed above. Though these statements more properly align with a claim
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`of fraudulent misrepresentation, out of an abundance of caution, the Court considers Ms. Zhang’s
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`claims under the lens of negligent misrepresentation, and finds that even if Ms. Zhang did not
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`Case 6:13-cv-00811-JDL Document 123 Filed 01/11/17 Page 14 of 21 PageID #: 720
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`prevail in establishing fraud, Defendants would at the least still be liable for negligent
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`misrepresentation.
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`To establish a cause of action for negligent misrepresentation, a plaintiff must prove the
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`following elements: (1) the representation was made in the course of defendant’s business, (2)
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`false information was supplied for the guidance of others in their business, (3) Defendants did
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`not exercise reasonable care or competence in obtaining or communicating the information, and
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`(4) Plaintiff suffered pecuniary loss by justifiably relying on the representation. See Gen. Elec.
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`Capital Corp. v. Posey, 415 F.3d 391, 396–97 (5th Cir.2005); First Nat'l Bank of Durant v.
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`Trans Terra Corp. Int'l, 142 F.3d 802, 809 (5th Cir.1999) (citing Fed. Land Bank Ass'n of Tyler
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`v. Sloane, 825 S.W.2d 439, 442 (Tex.1991)).
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`As to the first element, the summary judgment evidence clearly shows that the
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`representations made by CMA and the Monroes to Ms. Zhang were made in the course of
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`business, that is, to acquire Ms. Zhang’s investment in CMA. Second, as the Court found above,
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`the Defendants provided false information, namely the individual stock transfer presented as a
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`subscription of stock and CMA’s ability to conduct business in the State of Texas to Ms. Zhang,
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`which she used to make her decision to invest in CMA. Third, Defendants failed to use
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`reasonable care when they communicated this false information to Plaintiff. CMA and the
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`Monroes, through constructive notice, had actual knowledge of CMA’s inactive status as a
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`business entity, and had constructive notice of the misleading nature of the Subscription
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`Agreement. And fourth, Ms. Zhang suffered the loss of $500,000 in purchasing stock from Mrs.
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`Monroe by justifiably relying on the Defendants’ representations.
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`Defendants again do not address the negligent misrepresentation claim in their response
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`to Ms. Zhang’s Motion. As Ms. Zhang has put forth sufficient summary judgment evidence to
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`support each element of her negligent misrepresentation claim, and as Defendants have failed to
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`show the existence of a genuine issue of material fact as to any of the elements, the Court
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`GRANTS Plaintiff’s Motion as to this claim as well.
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`D. Statutory Fraud in Stock Transactions
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`In addition to her common law claims, Ms. Zhang has brought forth a state statutory
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`fraud claim against Defendants pursuant to Texas Business & Commerce Code § 27.01. This
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`statute imposes civil liability for false representations of material facts that are relied on by a
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`plaintiff in entering into a real estate or stock transaction. U.S. Quest Ltd. v. Kimmons, 228 F.3d
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`399, 406 (5th Cir. 2000).
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`“Fraud under this section consists of either a ‘false representation of a past or existing
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`material fact, when the false representation is’ made to another person with the intent to induce
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`that person to enter into the contract and that person relies on that representation, or ‘a false
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`promise to do an act, when that false promise is material’ and made without the intention of
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`completing it. Id. (citing TEX. BUS. & COMM. CODE ANN. § 27.01(a)). Therefore, “[t]he elements
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`of statutory fraud in the sale of stock are substantially the same [as common law fraud] except
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`that to recover actual damages, a plaintiff does not have to prove that the defendant knew a
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`statement was false.” O’Hare v. Graham, 455 Fed. App’x. 377, 380 (5th Cir. 2011) (citing
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`Perenco Nigeria, Ltd. v. Ashland, Inc., 242 F.3d 299, 306 (5th Cir. 2011)) (interpreting TEX.
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`BUS. & COMM. CODE ANN. § 27.01). Section 27.01(a) also applies only to situations where there
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`is an actual conveyance of the stock, and not to situations where there is merely a breach of
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`contract to convey stock. U.S. Quest Ltd., 228 F.3d 406. “This narrow reading of Section
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`27.01(a) is consistent with the Supreme Court of Texas’ interpretation that the statute is penal in
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`nature and thus must be strictly construed.” Id.
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`First, Ms. Zhang argues that CMA and the Monroes made false representations of
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`existing facts specifically when they entered into what they described as a “subscription
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`agreement” to induce her into the stock transaction, knowing that Ms. Zhang was not actually
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`acquiring shares from the corporation itself. (Doc. No. 114 at 29). Mrs. Monroe, purportedly
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`acting on behalf of CMA, accepted Ms. Zhang’s payment in fulfillment of the subscription
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`agreement. The statutory fraud claim analysis as to false representations of a past or existing
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`material fact is subsumed within the fraudulent misrepresentation analysis, having already found
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`that Ms. Zhang established every element of the latter.
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`Ms. Zhang additionally argues that Defendants made false promises to act that were
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`material to Ms. Zhang’s decision to enter into the agreement, specifically that Defendants would
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`obtain $45 million in funding from Mr. Andrew Garner to buy mining equipment to make CMA
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`operable. (Doc. No. 114 at 30). Though the parties do not dispute that the promise w