ED F MAN BIOFUELS LTD. v. FASE

In response to Clariant's assertion that it had no duty to discharge the cargo under federal law, the Banks point to the an allegation in their Cross-Claim (#149 at 14-15) regarding Magistrate Judge Stacy's order (#101): "By granting M T Trust's Motion to Compel, the Court in effect confirmed that Clariant had, all along, a duty to remove its Cargo from the Vessel." Moreover the Banks accuse Clariant of attempting to confuse the physical discharge of the cargo (the cost of which was deemed to accrue for the benefit of all claimants and was thus a custodia legis expense) with Clariant's obligation to accept and dispose of the cargo once discharged (which the Court found to be solely Clariant's obligation despite Clariant's argument that it had no duty to accept the cargo and could abandon it). And although Clariant originally made an objection to the order, it later withdrew that objection. Letter to the Honorable Melinda Harmon, #125, June 30, 2009. The Banks cite the law of the case doctrine ("when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent states in the same case"). Christianson v. Colt Industries Operating Corp., 486 U.S. 800 (1988). They concede that the doctrine does not bar a district court from revisiting its own prior orders, United States v. Palmer, 122 F.3d 215, 220 (5^th Cir. 1997), but urge that it does "direct the court's discretion." Suzlon Wind Energy Corp. v. Shippers Stevedoring Co., 662 F. Supp. 2d 623, 2009 WL 197739 at *9 (S.D. Tex. 2009). In sum, the Banks contend that to the extent that the tortious interference with contract and trespass to chattel causes of action depend on a duty of Clariant to arrange for the discharge of and accept the cargo, prior orders demonstrate these claims are facially valid and Clariant's argument has no merit.

Moreover, maintain the Banks, they claimed that they had an interest in the chattel as a secured credit of the vessel long before the sale. See #149 at 3-8, ¶¶ 12-38; at 16, ¶ 78 ("Pursuant to the terms of M T Trust's preferred ship mortgage and its maritime lien, M T Trust had a legally protected interest in the Vessel. Clariant's willful failure to remove its Cargo when it was legally obligated to do so proximately resulted in a diminution in the value of the res and therefore interfered with the possessory rights of M T Trust [as a lienholder] in the Vessel itself and/or the res resulting from the eventual judicial sale of the Vessel."). The Banks disagree with Clariant's statement that they had no right to possess the vessel until the Court confirmed the sale; instead they contend that any party with a property interest in a damaged chattel has a possessory interest that can be vindicated by a claim for trespass to chattel, even if it did not have a direct right to possess the chattel at the time of the damage. Great American Insurance Co. v. Nicholas, 1989 WL 125350, *3 (D.N.J. 1989) ("Plaintiffs' maritime tort claim constitutes a cause of action for trespass to chattel. . . . One who has a property interest in a chattel is in possession of it even if he is not exercising physical control over it at the time of trespass. The perpetrator of a trespass to chattel is liable for damage caused to it."), citing Restatement (Second) of Torts, § 216, comment c; § 218, comment on clause (b). See also Armstrong v. Five Point Federal Credit Union, No. 09-07-263 CV, 2007 WL 5011554 (Tex. App. — Beaumont March 20, 2008, no pet.) (recognizing credit union's suit for trespass to chattel against third-party purchaser of truck because the credit union obtained a security interest in it when it lent money to the original buyer). The Banks argue that they had a right to immediate possession of the vessel upon the default of the corporate Defendants, and thus have stated a claim for trespass to chattel.

Finally, with respect to Clariant's potential affirmative defense of litigation privilege to the Banks' cross-claim for negligent misrepresentation, the Banks maintain that the fact that an attorney made such a statement does not bar a claim for damages against the lawyer's client. Hideca Petroleum Corp. v. Tampimex Oil Int'l, Ltd., 740 S.W. 2d 838, 847 (Tex. App. — Houston [1^st Dist. 1987, no writ) (holding that Hideca Petroleum, "as the supplier of information [that it would provide the necessary letter of credit] in the course of its business for the guidance of Tampimex in its business, owed a duty to Tampimex to exercise reasonable care in obtaining and communicating correct and reliable information, as well as a duty to perform competently its obligations assumed under the contract" for a sale of crude oil). See also Susser Petroleum Co. v. Latina Oil Corp., 574 S.W. 2d 830, 832 (Tex. App. — Texarkana 1978, no writ) ("When the information concerns a fact not known to the recipient, he is entitled to expect that the supplier will

exercise that care and competence in its ascertainment which the supplier's business or profession requires and which, therefore, the supplier professes to have by engaging in it. Thus the recipient is entitled to expect that such investigations as are necessary will be carefully made and that his informant will have normal business or professional competence to form an intelligent judgment upon the data collected."). Moreover, point out the Banks, in a claim for negligent misrepresentation, "it is immaterial whether or not such misrepresentation was made innocently or deliberately or with a fraudulent or dishonest intent." Id. Therefore, contrary to Clariant's suggestion, the allegations in the Cross-Claim are not a basis for a claim of "fraud on the court," but a tort claim against a business client. Furthermore, the affirmative defense of litigation privilege can be waived if it is not pleaded. Johnson v. Wichita Falls Housing Authority, No. 2-06-416 CV, 2007 WL 4126475, *2 (Tex. App. — Fort Worth Nov. 21, 2007, no pet.). It is well established that the possibility of an affirmative defense does not make a pleading subject to dismissal for failure to state a claim. Herron v. Herron, 255 F.2d 589 (5^th Cir. 1958). Additionally, argue the Banks, the litigation privilege cannot support a Rule 12(b)(6) dismissal here because the Cross-Claim does not allege that the misrepresentations were made in a hearing before the Magistrate Judge. #149 at 17, ¶ 79. Only Clariant's motion to dismiss makes such an assertion, but the Banks insist their Cross-Claim controls the issue and states a claim for negligent misrepresentation.

With respect to the Banks' claim for equitable relief, the Banks maintain that this Court could grant relief on the theories of restitution and unjust enrichment. They contend that Clariant was unjustly enriched at the Banks' expense when Clariant's cargo was held on the vessel, to the Banks' detriment, for an unconscionable amount of time.

Last of all, the Banks allege a Cross-Claim for damages in excess of the custodia legis expense, so the award of custodia legis does not fully compensate them or shield Clariant from liability. #149 at 16, ¶ 76. Furthermore, in addition to reimbursement of actual costs, the Banks seek damages for the reduced sale value of the vessel.

Insisting that the facts alleged by the Banks "bear no resemblance to the truth," Clariant insists that the Cross-Claim is based on conclusory allegations and unwarranted deductions of fact and "smacks of bad faith." Arguing that the Court knows from proceedings before it (when these hearings actually occurred before the Magistrate Judge, not the undersigned judge), Clariant states that the Court is aware that no mechanism was proposed that would have allowed it to "accept" the cargo in Houston even if it had a duty to do so, that Clariant does not operate a discharge facility in Houston, and that the Port of Houston did not have the capability to discharge the liquid cargo, the reason why the Banks ultimately took it to Louisiana. Clariant emphasizes that it met all the deadlines applicable to discharge.

Alternatively, referencing emails attached to its motion, Clariant urges the Court to treat the motion to dismiss as one for summary judgment. The Court, however, agrees with the Banks that they are entitled to more time for discovery. The parties can move for summary judgment down the road.

Clariant also argues that the law of the case doctrine does not bar this Court from reviewing the Magistrate Judge's discharge order; this Court agrees, but at the moment there is no pending motion requesting such, and the Banks must have an opportunity to respond. Clariant reiterates that it has no legal duty to discharge the cargo and contends the Magistrate Judge's order is erroneous to the extent it concluded otherwise. It further contends that the Banks have not pleaded facts to establish that they had the right to possess the M/V FASE and that Clariant deprived them of that right for a substantial period of time because Clariant continues to insist that the Banks had no right to possess the chattel and that the alleged trespass occurred when the vessel was arrested. Clariant argues that the Banks' reliance on Great American Ins. Co. v. Nicholas, citing the Restatement (Second) of Torts § 216, is misplaced because it construes New Jersey, not Texas trespass-to-chattel law.

Clariant reiterates that the negligent misrepresentation Cross-Claims must be dismissed because the Banks cannot prove reasonable reliance upon the misrepresentations they have alleged because they occurred in an adversarial context. Ortiz v. Collins, 203 S.W. 3d 414, 421-22 (Tex. App. — Houston [14^th Dist.] 2006) (and cases cited therein) ("[A]s a matter of law, reliance on any alleged misrepresentation is unjustified in this case because all representations were made in an adversarial context. Generally, reliance on representations made in a business or commercial transaction is not justified when the representation takes place in an adversarial context, such as litigation."); Swank v. Sverdlin, 121 S.W. 3d 785, 803 (Tex. App. — Houston [1^st Dist.] 2003, pet. denied) ("Reliance on representations made in a business or commercial transaction is not justified when the representation takes place in an adversarial context".). The alleged misrepresentations were made during the sale process, which occurred months after this litigation was filed, so the Cross-Claim fails.

Clariant also argues that the Banks have not pleaded claims for restitution or unjust enrichment, but even if they had, those claims would fail as a matter of law because they have not pled the factual basis for such. Clariant maintains that it could not have been unjustly enriched since the cargo contamination and discharge problems hurt it more than any other claimant.

Clariant also contends that the Banks have no legal basis for recovering custodia legis expenses already repaid to them, including custodial fees. They have not pled the harm of supposed reduced sale price of the vessel nor established what that reduction was. The Banks alone were the only prospective buyers.

The Banks quote their Cross-Claim to show they have adequately pleaded that Clariant "unjustifiably forced all parties to this litigation to suffer unnecessary and costly delay by failing to agree to allow the Vessel to be sold and Clariant's cargo discharged to Clariant in New Orleans." #159 at 3. They argue that the problem of finding a way to discharge the cargo in Houston "was a problem created by Clariant's own earlier intransigence." #159 at 3.

Having carefully reviewed the parties' submissions and the applicable law, the Court concludes that Clariant's motion to dismiss should be denied.

The Court finds that the Banks have adequately pleaded a plausible claim for tortious interference with contract with their mortgage lien on the vessel through a number of alleged delaying acts by Clariant. There are genuine issues of material fact about Clariant's intent. The Banks have not provided evidence, as would be required at the summary judgment stage, of their default judgments against the in personam Defendants and the resulting lien and have only stated that they are still owed $30,751,571,91 on the debt which the vessel secured. Neither side has cited any apposite precedent addressing competing and conflicting interests in vessel and cargo that applies to this situation.

The Banks have also stated a plausible claim for trespass to chattels, though again there are genuine issues of material fact as to whether Clariant's alleged "interference" was wrongful or whether it acted in good faith and diligence to arrange for the discharge, and whether it denied the Banks the use of the vessel for a "substantial period of time."

The Cross-Claim for negligent misrepresentation against Clariant, based on two alleged misrepresentations regarding the time of the contamination of the cargo and whether Clariant could or should have discharged the cargo sooner, fails as a matter of law because the Banks cannot show justifiable reliance if the misrepresentations were made by counsel for Clariant during this litigation, Valls, 2010 WL 2195446, at *7-8. The Cross-Claim does not specify who made the representations, and the Banks now argue they are suing not the lawyer, but the party, Clariant, for these statements, presumably then made through a corporate representative or agent in the course of a business transaction in which it had a pecuniary interest for the guidance of the Banks in their business. If so, who it was that made the representations must be clarified. Also unclear is whether the challenged statements were made in a hearing or pleadings before Magistrate Judge Stacy or this Court.

Clariant also argues that the negligent misrepresentation Cross-Claims must be dismissed because the Banks cannot prove reasonable reliance upon the misrepresentations because they occurred in an adversarial context. Ortiz, 203 S.W. 3d at 421-22; Swank v. Sverdlin, 121 S.W. 3d at 803. This Court concludes,

however, that Clariant has expanded this rule beyond its application in those cases in applying it here and that something more than an adversarial business or commercial context is required to negate justifiable reliance on an alleged misrepresentation. The Court acknowledges that there has been an expansion of the rule that a party cannot justifiably rely on representations made in an adversarial context, but not as broadly as Clariant argues.

Initially the McCamish court limited the negation of a third party's justifiable reliance on a representation to statements by opposing attorneys in litigation. 991 S.W. 2d at 794 ("Generally courts acknowledge that a third party's reliance on an attorney's representation is not justified when the representation takes place in an adversarial context.").

In Swank, 121 S.W. 3d at 803, as in other subsequent cases, there is more involved than just an adversarial commercial context. In that case, Anatoly Sverdlin was the founder, sole owner, and chief executive officer of Automated Marine Propulsion Systems, Inc. ("AMPS"), which mainly repaired diesel marine engines on large ships. Sverdlin developed a series of three patents for a new fluid control injections system ("FCIS") employed by AMPS. In 1995 AMPS began losing money, and Sverdlin hired James McCoy and Mark Swank to develop a business plan to attract investors. McCoy introduced Sverdlin to an investor, Marvin Chudnoff, who recruited other potential investors. During negotiations for AMPS to obtain a million dollar loan to continue development and marketing of FCIS, Chudnoff frequently spoke on behalf of investors while Swank often spoke on behalf of AMPS; both were represented by counsel. A letter agreement was signed on June 6, 1996. Sverdlin signed it without reading it and later complained that its terms were not what he had expected. Negotiations on the agreement continued and a second letter agreement was signed at the end of September, which Sverdlin also did not read prior to signing. Under the loan agreement reached, the lender LDE had the right to choose two of AMPS' three directors, and it named Chudnoff and another investor. Soon FCIS did not function as predicted, AMPS lost money, and the parties began to fight over control of the company. Ultimately Swank and McCoy exercised their stock options, the AMPS board terminated Sverdlin because his conduct was damaging the company, and AMPS continued to lose money. AMPS and the LDE obtained a temporary restraining order enjoining Sverdlin from physically threatening AMPS' officers and employees, contacting customers to disparage the company, entering the company's premises and disrupting activities, taking its equipment, technology and customer lists, and terminating its directors and employees. Sverdlin filed a counterclaim individually and on behalf of AMPS in his derivative capacity, alleging multiple causes of action. He also sued the law firm representing the investors and AMPS, but they settled for a confidential amount. The jury found for Sverdlin and AMPS and awarded them approximately $1.5 billion, but a amount was reduced later by remittitur. On appeal, the First Court of Appeals overturned the trial court's judgment for insufficient evidence. For purposes of the issue before this Court, justifiable reliance, Sverdlin argued that the trial court had erred in disregarding the jury's affirmative finding of negligent misrepresentation. The appeals court concluded that Sverdlin could not recover for negligent misrepresentation based on oral representations by the investors and AMPS' officers that they would not fire Sverdlin, would not take control of AMPS, and would not exercise stock options because these were promises of future conduct, not existing fact. More to the issue before this Court, the First Court of Appeals concluded that Sverdlin could not have justifiably relied upon these oral representations not only because they were made during adversarial negotiations, but because they were contrary to the terms of the agreements which Sverdlin failed to read and chose to sign anyway.

Subsequently in Coastal Bank SSB v. Chase Bank of Texas, N.A., 135 S.W. 3d 840, 843 (Tex. App. — Houston [1^st Dist.] 2004, no pet.), the First Court of Appeals addressed an alleged negligent misrepresentation that occurred between two sophisticated financial institutions, both represented by counsel, that had entered into a written agreement, supported by a confidential memorandum, to lend cash to a mortgage company as part of a bank syndicate, but that the contract and memorandum included clauses requiring that the plaintiff conduct "an independent investigation and analysis" relating to the transaction and not rely on the other institution's analysis. The plaintiff failed to make the appropriate inquiry, and after losing a substantial sum of money on the transaction, sued the other institution for fraud and negligent misrepresentation. In deciding that reliance under those circumstances was not justifiable, the appellate court examined the nature of the relationship and the contract entered into between them. It held that "[a] party to an arm's length transaction must exercise ordinary care and reasonable diligence for the protection of his own interests, and a failure to do so is not excused by mere confidence in the honesty and integrity of the other party." 135 S.W. 3d at 843. Furthermore, the court opined, "The circumstances surrounding the formation of the contract here and the nature of the disclaimers included in both the confidential memorandum and the contract persuade us that Coastal's reliance on [the Chase representative's] statement and Chase's silence was not justified." Id.

Two years later in Ortiz, 203 S.W. 3d at 422, the previous owner of a townhouse challenged the foreclosure sale of it by new purchasers Collins and Welsh, who attempted to gain possession of the house through a forcible detainer. Collins and Welsh hired an attorney, Twyman, to file such an action. Ortiz claimed that while that suit was pending, Collins agreed on his and on Welsh's behalf to sell Ortiz the property for $10,000 more than they paid for it at the foreclosure sale and to have a contract prepared to memorialize that agreement. Ortiz further asserted that Twyman told Ortiz's brother, acting as Ortiz's representative, that Twyman would wait fifteen days to execute on the writ of possession to allow the parties an opportunity to finalize their agreement and that Twyman would execute on the writ of possession only if Ortiz did not perform under the contract. Ortiz claims that relying on these representations, he did not attend the forcible detainer trial to assert his defenses. Furthermore Collins never prepared a contract. Ortiz then prepared one, but neither Collins nor Welsh, who denied there was any oral agreement to sell the townhouse to Ortiz, signed it. Fifteen days after the trial, Twyman executed the writ of possession and told Ortiz to vacate the property within twenty-four hours. Ortiz sued Collins and Walsh for fraud, negligent misrepresentation, promissory estoppel, breach

of contract, violation of the Deceptive Trade Practices Act ("DTPA") and conspiracy to defraud and violate the DTPA, and added more later. The trial court granted summary judgment to Collins and Walsh. The Fourteenth Court of Appeals examined the question of justifiable reliance by the former owner of a townhouse with respect to his claims for fraud, negligent misrepresentation and promissory estoppel based on the alleged misrepresentations during the negotiation period before the forcible detainer trial and all requiring justifiable reliance. The panel agreed with Collins and Walsh that as a matter of law there was no justifiable reliance because all representations were made in an adversarial context. 203 S.W. 3d at 422, citing and quoting Coastal Bank, 135 S.W. 3d at 843 ("A party to an arm's length transaction must exercise ordinary care and reasonable diligence for the protection of his own interests, and a failure to do so is not excused by mere confidence in the honesty and integrity of the other party."), and McCamish, 991 S.W. 2d at 794 ("Generally, court's have acknowledged that a third party's reliance on an attorney's misrepresentation is not justified when the representation takes place in an adversarial context."). Ortiz argued that there was a fact issue as to whether the parties' relationship remained adversarial because the parties had settled their dispute. The panel opined, "Even assuming that the parties entered into an oral agreement to sell Ortiz the property, the mere existence of that agreement did not align all parties' interests and remove the adversarial nature of the relationship, particularly considering that the written details had yet to be worked out"; it held that the parties' relationship remained adversarial as a matter of law and any reliance by Ortiz on statements allegedly made by Collins and Walsh during negotiations was unjustified and unreasonable. Id. at 422.

In the above cases, in addition to an adversarial context, there was another factor: an express contract whose contrary terms were ignored by the person claiming justifiable reliance or an attorney making the misrepresentations, or some kind of appearance of finality in an agreement. In the instant case, as alleged by the Banks, as noted it is unclear whether an attorney was involved in the misrepresentations, there was never any agreement carelessly reached without some kind of red flag such as earlier nonperformance or an admonishing contract clause or a failure to read the agreement that would indicate a need for investigation by the Banks. The Court concludes that something more than a commercial and/or adversarial context is required before negation of justifiable reliance on an alleged misrepresentation. Therefore the Court will not rule that as a matter of law that the Banks' reliance was unjustified.

Because the alleged negligent misrepresentations were also made in the context of the Banks' claims for tortious interference with contract, Clariant in essence has argued by fact if not by the verbal term an affirmative defense of legal justification based on its own claimed competing interest in the cargo and its legal right not to have to accept and remove it; Clariant bears the burden of proving that affirmative defense.

Furthermore, if Clariant seeks to challenge the Magistrate Judge's order determining that it is liable for the cargo's the transport, storage, and disposal costs that are not custodia legis expenses, it shall file an appropriate motion.

While the Banks have requested equitable relief and their factual allegations suggest that they could seek restitution for unjust enrichment, they have given only vague notice to Clariant and they have not provided specific supporting facts to identify in what amount and how they determined that sum. Allowing supplementation or amendment of the Cross-Claim for this purpose, as well as to clarify who made the alleged negligent misrepresentations, appears to be in the interests of justice; if further discovery is needed beforehand, the Banks should file an appropriate motion.

Last, the Court finds that the Banks have stated a claim for damages for the reduced sale value of the vessel, in excess of the custodia legis expenses, but it, too, needs some specific factual support.

Accordingly, for the reasons stated, the Court

ORDERS that Clariant's motion to dismiss the Banks' Cross-Claim (instrument # 152) is GRANTED as to any alleged misrepresentations made by Clariant's counsel in the course of this litigation; the motion is otherwise DENIED. The Court further

ORDERS that the Banks shall supplement or amend their Cross-Claim within twenty days (1) to identify the person(s) who made the alleged negligent misrepresentations; (2) to indicate whether they were made in pleadings or in a hearing before the Magistrate Judge or this Court; and (3) to provide factual allegations to support their claim for reduced value of the vessel and their prayer for the equitable remedy of unjust enrichment/restitution. Clariant may reurge any of its arguments if appropriate based on the new pleadings.