IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 09-20268

SHANDONG YINGUANG CHEMICAL INDUSTRIES JOINT STOCK

COMPANY, LTD. 

 Plaintiff-Appellant

v.

MICHAEL POTTER 

 Defendant-Appellee

Appeal from the United States District Court

for the Southern District of Texas

Before JONES, Chief Judge, and SMITH and ELROD, Circuit Judges.

PER CURIAM:

Appellant Shandong Yinguang Chemical Industries Joint Stock Co., Ltd.,

(“Yinguang”) sold explosive chemicals to Beston Chemical Corporation

(“Beston”), a company wholly-owned by Appellee Michael Potter. Beston failed

to make payments on two contracts and subsequently declared bankruptcy. In

an effort to recover its losses, Yinguang sued Potter personally for common law

fraud and fraudulent inducement, and sought to impose personal liability by

piercing Beston’s corporate veil. The district court dismissed the case, finding

that Yinguang failed to meet the pleading requirements of Fed. R. Civ. P. 9(b) on

the fraud claims. The district court also held that Yinguang did not have

standing to pursue the veil-piercing claim. For the reasons that follow, we

United States Court of Appeals

Fifth Circuit

F I L E D

May 27, 2010

Lyle W. Cayce

Clerk

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No. 09-20268

 Beston notes that some delay was caused by a State Department sanction, issued

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in September 2004, against Yinguang’s shipping agent. The sanction prohibited U.S.

companies from doing business with the shipping agent and authorized payments only with

permission from the Treasury Department.

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conclude that Yinguang did not adequately plead fraud and affirm the district

court’s dismissal pursuant to Rule 12(b)(6). 

I. Background

Beston and Yinguang entered into eight contracts for delivery of

chemicals. According to the well-pled allegations, Beston paid for the first six

contracts, but in an untimely manner. This appeal stems from the last two

contracts, Contracts No. 7 and No. 8. The parties entered into Contract No. 7

on February 25, 2004 for $1,369,216.80 and Contract No. 8 on June 1, 2004 for

$1,328,644.80. During Beston’s and Yinguang’s business relationship, Potter

often spoke with Yinguang’s president, Sun Bowen. 

Yinguang asserts that Potter made two types of misrepresentations during

negotiations for these two contracts. First, on July 20, 2003, Potter represented

that Beston was in “sound financial condition” and that Beston would pay for

current and future shipments. Second, Potter represented repeatedly that

Beston would make regular payments on its purchases. On February 2, 2004,

when Bowen asked for a letter of credit to secure future payments, Potter replied

that a letter of credit was unnecessary because Beston would make regular,

timely payments. On April 26, 2004, Potter emailed Bowen describing Beston’s

financial difficulties, but he assured Bowen that Beston had remedied the

problems and that “Yinguang will see continual, constant payments from BCC

[Beston].” On April 30, 2004, Potter emailed Bowen again, promising that

Beston would make payments on a frequent basis. After Beston failed to make

payments on Contract No. 7, Yinguang refused to deliver any chemicals under

Contract No. 8. On August 21, 2004, Potter again promised that Beston would

pay Yinguang, and Yinguang proceeded to deliver the chemicals. 

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Despite Potter’s assurances, he omitted to tell Yinguang that Beston had

been unprofitable in 2003. In the end, Beston made no regular payments on

either contract. Yinguang sued Beston in Texas in state court in August, 2005.

Beston and Yinguang entered into a settlement agreement and Beston made one

payment of $499,216.80 on March 1, 2006. Six weeks later, Beston filed for

Chapter 11 bankruptcy. Yinguang was left with a $2,198,644.80 unsecured

claim. 

Yinguang next sued Potter personally in federal district court. Yinguang

alleges that Potter committed fraud and fraudulent inducement by lying to Sun

Bowen to entice Yinguang to enter into Contracts No. 7 and No. 8. Alleging

that Potter used Beston to perpetrate a fraud by funneling money out of Beston

into other Potter-owned corporate entities, it also seeks to impose Beston’s

contract liability on Potter by piercing the corporate veil. Potter moved to

dismiss under Fed. R. Civ. P. 12(b)(6). The district court granted the motion

because Yinguang did not meet the heightened pleading requirements of Fed. R.

Civ. P. 9(b) on the fraud claims. The district court also held that Yinguang

lacked standing to pursue the veil-piercing claim that was property of the Beston

bankruptcy estate. Yinguang now appeals.

II. Standard of Review

We review de novo a district court’s dismissal for failure to state a claim

under Rule 12(b)(6). Jones v. Greninger, 188 F.3d 322, 324 (5th Cir. 1999). The

ultimate question in a Rule 12(b)(6) motion is whether the complaint states a

valid claim when all well-pleaded facts are assumed true and are viewed in the

light most favorable to the plaintiff. In re Katrina Canal Beaches Litig.,

495 F.3d 191, 205 (5th Cir. 2007). The court’s task is to determine whether the

plaintiff has stated a legally cognizable claim that is plausible, not to evaluate

the plaintiff’s likelihood of success. Ashcroft v. Iqbal, 556 U.S. ___, 129 S. Ct.

1937, 1949 (2009). Further, with respect to the fraud and fraudulent

inducement claims, Fed. R. Civ. P. 9(b) requires that Appellant “state with

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particularity the circumstances constituting the fraud.” FED. R. CIV. P. 9(b).

“Put simply, Rule 9(b) requires ‘the who, what, when, where, and how’ to be laid

out.” Benchmark Electronics, Inc. v. J.M. Huber Corp., 343 F.3d 719, 724 (5th

Cir. 2003).

III. Discussion

A. Fraud

Yinguang alleges that Potter committed fraud both by affirmative

misrepresentation and by omission. Specifically, Yinguang asserts that Potter’s

statement that Beston was in “sound financial condition” was a

misrepresentation because Beston was unprofitable in 2003 and failed to obtain

a line of credit. The elements of fraud in Texas are (1) the defendant made a

representation to the plaintiff; (2) the representation was material; (3) the

representation was false; (4) when the defendant made the representation the

defendant knew it was false or made the representation recklessly and without

knowledge of its truth; (5) the defendant made the representation with the

intent that the plaintiff act on it; (6) the plaintiff relied on the representation;

and (7) the representation caused the plaintiff injury. Ernst & Young, L.L.P. v.

Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001). 

Yinguang’s allegations fail to meet the pleading requirements of

Rule 9(b) as to several of the fraud elements. First, Yinguang fails sufficiently

to allege that the “sound financial condition” statement was material. A false

representation is material if a reasonable person would attach importance to and

be induced to act on the information. Citizens Nat’l Bank v. Allen Rae Invs.,

142 S.W.3d 459, 478-79 (Tex. App.—Fort Worth 2004, no pet.). This statement

is inherently vague and ambiguous. Yinguang did not plead that Potter

presented any detailed, corroborating information, facts or figures to support the

statement that might entice a reasonable person to attach importance to the

statement. See id. Further, the statement is significantly attenuated from the

execution of Contract Nos. 7 and 8, which occurred, respectively, seven and ten

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months later. Potter also explains, without contradiction, that the statement

was made during a meeting to assure Yinguang that a late payment on Contract

No. 6 would be forthcoming. Further undermining an inference of materiality

in the “sound financial condition statement” is the reality that in the parties’

course of dealing on prior contracts, Beston’s payments had repeatedly been late

although it “generally” met its obligations to Yinguang. Under all of these

circumstances, Yinguang’s bare assertion of materiality rings hollow. 

Second, Yinguang fails sufficiently to allege that the statement was false

when made. That Beston was unprofitable for the year 2003 and unable to

obtain a line of credit sometime in 2004 do not support a conclusion Beston was

not in “sound financial condition” in July 2003. Many companies have

unprofitable years but remain fiscally sound. As Yinguang’s pleadings admit,

Beston was able to make all of its payments due on prior contracts in 2003.

Similarly, Beston’s failure to obtain a line of credit does not necessarily imply

that Beston was financially unsound. 

Insofar as Yinguang relies on the series of promises to pay during early

2004, all but one of these post-date Contract No. 7 and cannot have influenced

the decision to enter into that contract. The statements concerning Beston’s

present and future willingness to pay are alleged to be fraudulent under two

theories. Yinguang says they were false when made because Beston had no

ability to pay for the chemicals. Alternatively, they were false because Betson

never had an intent to perform the contract. The “false when made” theory

suffers from a lack of supporting details from which an inference of falsity could

derive. As previously noted, Yinguang offers no contemporary financial data

undercutting Potter’s assertion about the company’s willingness to pay. In fact,

those assertions are consistent with Beston’s history of paying Yinguang fully

but untimely. The April 26 statement, moreover, was accompanied by a frank

admission of some financial difficulties, an admission at odds with falsity.

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Yinguang’s alternative theory is that Potter fraudulently induced

Yinguang to enter into Contracts No. 7 and No. 8 by repeatedly promising to

make payments with no intention of performing. “A promise to do an act in the

future is actionable fraud when made with the intention, design and purpose of

deceiving, and with no intention of performing the act.” Spoljaric v. Percival

Tours, Inc., 708 S.W.2d 432, 434 (Tex. 1986). “While a party’s intent is

determined at the time the party made the representation, it may be inferred

from the party’s subsequent acts after the representation is made.” Id.

However, “failure to perform, standing alone, is no evidence of the promissor’s

intent not to perform when the promise was made.” Id. at 435. “‘Slight

circumstantial evidence’ of fraud, when considered with the breach of promise

to perform, is sufficient to support a finding of fraudulent intent.” Id. The court

should consider all the circumstantial evidence as a whole to determine whether

the evidence “transcend[s] mere suspicion.” IKON Office Solutions, Inc. v. Eifert,

125 S.W.3d 113, 124 (Tex.App.—Houston [14th Dist.] 2003, pet. denied). 

Yinguang alleges, albeit without specifics, that Potter “funneled” money

from Beston into his other companies. It contends that this allegation

constitutes “slight circumstantial evidence of fraud” and, coupled with Beston’s

failure to perform, is sufficient to allege fraudulent inducement. 

Certainly, “funneling” money from one entity to another could be “slight

circumstantial evidence of fraud,” but Yinguang’s pleadings do not rise above the

level of a conclusory description. Pleading standards demand “more than an

unadorned, the defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal,

556 U.S. __, 129 S.Ct. at 1949. The claim must be plausible on its face: 

A claim has facial plausibility when the plaintiff pleads factual

content that allows the court to draw the reasonable inference that

the defendant is liable for the misconduct alleged. The plausibility

standard is not akin to a probability requirement, but it asks for

more than a sheer possibility that a defendant has acted unlawfully.

Where a complaint pleads facts that are merely consistent with a

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Compare Weinberger v. Longer, 222 S.W.3d 557, 563 (Tex. App.—Houston [14th Dist.] 2

2007, pet. denied) (contractor used plaintiff’s money to pay for materials on other projects).

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defendant’s liability, it stops short of the line between possibility

and plausibility of entitlement to relief.

Id. at 1949 (internal citations and quotations omitted). Further,

Rule 9(b) imposes an additional burden on the plaintiff to detail facts and lay out

the “the who, what, when, where, and how of a fraud.” Benchmark, 343 F.3d at

724. 

That Potter transferred money away from Beston is not, standing alone,

sufficient under Rule 9(b) and Iqbal. Moving money from one company to

another may be consistent with fraud, but it does not create a reasonable

inference that Potter is liable for fraud. Beston could have had legitimate or

illegitimate reasons for transferring money. Yinguang has alleged no details

that would corroborate a fraudulent scheme, such as when or why Potter moved

the money, how much money was transferred, or whether this action was

inconsistent with the company’s past practices. In addition, Yinguang itself 2

pleads evidence that counters a fraudulent intent not to perform. A significant

amount of time passed between Potter’s first allegedly false representation to

Yinguang in July 2003 and the company’s ultimate failure to pay when it sought

bankruptcy in March 2006. Compare United States v. Shah, 44 F.3d 285, 293

n.14 (5th Cir. 1995)(short interval between alleged promise and failure to

perform may be probative of fraud). Beston’s initial missed payments on

Contracts No. 7 and 8 were predictable, given its history of untimely payments

on the first six contracts. The U.S. State Department sanctions created a change

in circumstance that prevented Beston from selling or delivering the chemicals

in the latter part of 2004. Beston made a significant payment of $499,216.80

in March 2006. See IKON, 125 S.W.3d at 124 (“Partial performance can negate

an intent not to keep a promise at the time it was made.”). All of these events

point away from an inference that Potter never intended to pay. 

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Although this may be a close case due to Spoljaric’s “slight circumstantial

evidence” language, given the heightened pleading requirements of Rule 9(b),

and the equipoise, on all the facts pleaded read as a whole, between an inference

of fraud and one of Beston’s business as usual, we conclude that Yinguang’s

allegations do not plausibly plead fraudulent intent not to pay at the time of

Potter’s representations.

Yinguang also asserts that Potter had a duty to disclose Beston’s financial

condition but did not do so, thereby committing fraud by omission. A defendant’s

failure to disclose information will support a claim for fraud only where the

defendant has a duty to disclose. Bradford v. Vento, 48 S.W.3d 749, 755 (Tex.

2001). While there is no general duty to disclose, a duty to speak arises between

non-fiduciaries when “one party learns later that his previous affirmative

statement was false or misleading.” Union Pac. Res. Group v. Rhone-Poulenc,

247 F.3d 574, 586 (5th Cir. 2005); Tempo Tamers, Inc. v. Crow-Houston Four,

Ltd., 715 S.W.2d 658, 669 (Tex. App.—Dallas 1986, writ ref’d n.r.e.) (a duty to

disclose arises when “a party later learns that previous affirmative

representations are in fact false”). We are persuaded that the “sound financial

condition” statement was not pled to be false when made in July 2003. Further,

Potter’s statement indicating no letter of credit was necessary in February 2004

is not sufficiently pled to have been false when made. Potter did, however, admit

the company was suffering financial difficulties in April 2004, when he coupled

his admission with a further promise to pay. For this statement to have involved

a fraudulent omission, Yinguang would have to assert facts showing its obvious

insufficiency and patent insincerity (amounting to fraudulent intent). Viewed

in the totality of the parties’ dealings—frequent late payments, full eventual

payment on the first six contracts, no relevance to the execution (in February)

of Contract No. 7—and the absence of corroborating financial facts aside from

the eventual default, we are reluctant to transform this admission into a

fraudulent omission claim.

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Yinguang cites TEX BUS. CORP. ACT ANN. art. 2.21. “Sections A and B of this article, 3

after a legislative reorganization of the statutes governing business entities effective January

1, 2006, were recodified in substantially similar form in TEX. BUS. ORGS. CODE § 2.223, and

§§ 21.224-.225, respectively.” SSP Partners, 275 S.W.3d at 455 (citing Act of May 29, 2003,

78th Leg., R.S., ch. 182, §§ 1, 2, 2003 Tex. Gen. Laws 267, 427, 595).

In this circuit, we determine whether an asserted cause of action arising from a 4

corporate bankruptcy properly belongs to an individual creditor or, because it belongs to the

debtor’s estate or seeks to recover property of the estate, may only be pursued by the trustee

on behalf of all creditors. In re Schimmelpenninck, 183 F.3d 347, 355 (5th Cir. 1999).

Schimmelpenninck held that alter ego “and other” piercing the corporate veil theories must

be pursued only on behalf of the debtor. Id. (citing In re S.I. Acquisition, 817 F.2d 1142, 1153

(5th Cir. 1987). Texas, however, has codified species of veil-piercing that authorizes a contract

creditor to pierce the obligor’s corporate veil if the corporate form was used as a sham to

perpetrate a fraud and actual fraud was committed against that creditor. TEX. BUS. ORGS.

CODE ANN. § 21.223(b) (2008) (emphasis added). Other decisions have held a fraud claim, if

personal to the creditor, not to be property of the debtor’s estate even though the debtor might

also possess and litigate its own claims against the estate. See In re Seven Seas, Inc., 522 F.3d

575, 585 (5th Cir. 2008); In re Educators Group Health Trust, 25 F.3d 1281, 1285-86 (5th Cir.

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B. Veil-Piercing Claim 

Last, Yinguang seeks to impose personal liability on Potter for Contracts

No. 7 and 8 by piercing Boston’s corporate veil. Piercing the corporate veil is not

a separate cause of action, but a method to impose personal liability on

shareholders and corporate officers who would otherwise be shielded from

liability for corporate debts. Gulf Reduction Corp. v. Boyles Galvanizing &

Plating Co., 456 S.W.2d. 476, 480 (Tex. App.—Fort Worth 1987, no writ).

Yinguang alleges that Potter used Beston as a sham to perpetrate a fraud, which

entitles it to pierce the corporate veil and impose personal liability. SSP

Partners v. Gladstrong Invs., 275 S.W.3d 444, 455 (Tex. 2008). This claim

requires proof that Potter committed an actual fraud against it. See TEX. BUS.

ORGS. CODE ANN. § 21.223(b); Kingston v. Helm, 82 S.W.3d 775, 765 (Tex. 3

App.—Corpus Christi 2002, pet. denied). As discussed above, Yinguang fails to

allege an actual fraud, and therefore fails to sustain a basis for holding Potter

personally liable for Contracts No. 7 and No. 8. Because the veil piercing claim

may be dismissed for this reason, we do not address whether Yinguang or the

Beston estate owned the right to pierce the corporate veil. 

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1994). Neither Seven Seas nor Educators, however, disturbed the additional requirement of

S.I. Acquisitions, 817 F.2d at 1150, that an individual claim seeking recovery or control of the

debtor’s property is subject to the Code’s automatic stay. Here, it is argued, even if the

particular veil-piercing claim asserts fraud specifically committed against Yinguang,

nevertheless the recovery of assets wrongfully taken or “funneled” from Beston should inure

to the benefit of all of Beston’s creditors. Because we need not decide whether Yinguang’s

claim seeks to recover property of the estate, we do not address whether Yinguang has the

right to pursue the claim individually. These facts lie between Schimmelpenninck and Seven

Seas and their antecedents, and we leave definitive resolution of the issue for another day.

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Conclusion

For the foregoing reasons, we affirm the district court’s dismissal pursuant

to Rule 12(b)(6). AFFIRMED.

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