Liang "Benny" Zhao v. XO Energy LLC and XO Energy Worldwide, LLP

ACCEPTED

01-15-00937-CV

FIRST COURT OF APPEALS

HOUSTON, TEXAS

12/2/2015 6:38:02 PM

CHRISTOPHER PRINE

CLERK

CASE NO. 01-15-00937-CV

IN THE FIRST COURT OF APPEALS

HOUSTON, TEXAS FILED IN

1st COURT OF APPEALS

HOUSTON, TEXAS

12/2/2015 6:38:02 PM

LIANG “BENNY” ZHAO,

CHRISTOPHER A. PRINE

Defendant-Appellant, Clerk

v.

XO ENERGY, LLC, and XO ENERGY WORLDWIDE, LLLP,

Plaintiffs-Appellees.

ON ACCELERATED INTERLOCUTORY APPEAL FROM

THE OCTOBER 29, 2015, PRELIMINARY INJUNCTION ISSUED BY

THE 240th JUDICIAL DISTRICT COURT OF FORT BEND COUNTY, TEXAS

CAUSE NO. 15-DCV-226436

THE HONORABLE CHAD BRIDGES, PRESIDING

OPENING BRIEF OF DEFENDANT-APPELLANT LIANG “BENNY” ZHAO

STURM LAW, PLLC

Charles A. Sturm

Texas Bar # 24003020

csturm@sturmlegal.com

Shannon A. Lang

Texas Bar # 24070103

slang@sturmlegal.com

723 Main Street, Suite 330

Houston, Texas 77002

(713) 955-1800 tel.

(713) 955-1078 fax

Attorneys for Defendant-Appellant

Liang “Benny” Zhao

ORAL ARGUMENT REQUESTED

1

IDENTITY OF PARTIES AND COUNSEL

Pursuant to Texas Rule of Appellate Procedure 38.1(a), Defendant-

Appellant identifies the following parties to the trial court order from which this

appeal is taken and each party’s trial and appellate counsel:

Liang “Benny” Zhao

Defendant-Appellant

Charles A. Sturm

Shannon A. Lang

STURM LAW, PLLC

723 Main Street, Suite 330

Houston, Texas 77002

Trial and Appellate Counsel for Defendant-Appellant

Liang “Benny” Zhao

XO Energy LLC

XO Energy Worldwide, LLLP

Plaintiffs-Appellees

Tom Van Arsdel*

Zachary B. Allie**

James Bernhardt***

WINSTEAD PC

1100 JPMorgan Chase Tower

600 Travis Street

Houston, Texas 77002

Counsel for Plaintiffs-Appellees XO Energy LLC and

XO Energy Worldwide, LLLP

* Trial and appellate counsel

** Trial counsel only through November 18, 2015

*** Trial counsel as of November 18, 2015

i

TABLE OF CONTENTS

IDENTITY OF PARTIES AND COUNSEL ......................................................... i

TABLE OF CONTENTS ....................................................................................... ii

INDEX OF AUTHORITIES ................................................................................. iv

I. STATEMENT OF THE CASE .....................................................................1

II. STATEMENT REGARDING ORAL ARGUMENT .................................2

III. ISSUE PRESENTED .....................................................................................3

IV. STATEMENT OF FACTS ............................................................................4

A. The Wholesale Electricity Markets and the XO Entities. ........................4

B. Dr. Zhao’s Employment Agreement with Worldwide. ...........................5

C. Dr. Zhao’s Employment with Worldwide. ..............................................8

D. FERC Commences an Investigation into XO’s Trading Practices. .........9

E. Dr. Zhao’s Resignation from Worldwide. .............................................10

F. The Federal Lawsuit. .............................................................................14

G. The State Court Lawsuit. .......................................................................16

H. The Temporary Injunction Hearing. ......................................................16

I. The de novo Temporary Injunction Hearing. ........................................20

V. SUMMARY OF THE ARGUMENT ..........................................................22

VI. ARGUMENT................................................................................................24

A. Standard of Law .....................................................................................24

1. Temporary Injunction.....................................................................26

2. Writ of Attachment. ........................................................................30

3. The Court’s “Inherent Authority” to Attach Assets.......................33

B. Analysis..................................................................................................35

1. The Trial Court Abused its Discretion in Issuing a

Temporary Injunction over Dr. Zhao’s Income. ...........................37

a. XO did not establish a probable right to recovery. ................37

b. XO did not establish a “probable, imminent, and

irreparable” injury. .................................................................41

2. XO is Not Entitled to a Writ of Attachment....................................46

ii

3. The Trial Court Abused its Discretion in Exercising

“Inherent Discretion” to Order Dr. Zhao to Deposit his

2014 Bonus with the Registry of the Court. ..................................48

VII. PRAYER ...................................................................................................49

CERTIFICATE OF SERVICE ............................................................................51

CERTIFICATE OF COMPLIANCE ..................................................................52

iii

INDEX OF AUTHORITIES

CASES

Alliance Royalties, LLC v. Booth,

313 S.W.3d 493 (Tex. App.—Dallas 2010, no pet.) ............................... 33, 34, 48

Baca v. Hoover, Bax & Shearer,

No. A14-88-00418-CV, 1989 Tex. App. LEXIS 456

(Tex. App.—Houston [14th Dist.] March 9, 1989, no writ.) ........................ 25, 27

Baker v. Int’l Record Syndicate, Inc.,

812 S.W.2d 53 (Tex. App.—Dallas 1991, no writ) .............................................31

Ballenger v. Ballenger,

694 S.W.2d 72 (Tex. App.—Corpus Christi 1985, no writ) ......................... 28, 29

Behringer Harvard Royal Island, LLC v. Skokos,

No. 05-09-00332-CV, 2009 Tex. App. LEXIS 9456

(Tex. App.—Dallas Dec. 14, 2009, no pet. ............................................. 33, 34, 49

Berry v. Chase Home Fin. LLC,

No. C-09-116, 2010 U.S. Dist. LEXIS 12531 (S.D. Tex. Feb. 12, 2010) ...........34

BMG Direct Mktg. v. Peake, 178 S.W.3d 763 (Tex. 2005) .............................. 31, 46

Butnaru v. Ford Motor Co., 84 S.W.3d 198 (Tex. 2002) ........................................26

Camp Mystic, Inc. v. Eastland,

399 S.W.3d 266 (Tex. App.—San Antonio 2012, no pet.) ........................... 28, 29

Castilleja v. Camero, 414 S.W.2d 424 (Tex. 1967) ................................................34

Castilleja v. Camero, 414 S.W.2d 431 (Tex. 1967) ......................................... 25, 34

Chin Tuo Chen v. Braxton,

No. 06-09-00088-CV, 2010 Tex. App. LEXIS 171

(Tex. App.—Texarkana Jan. 13, 2010, pet. denied) ...........................................29

De Beers Consol. Mines v. United States, 325 U.S. 212 (1945) .............................29

iv

E.E. Maxwell Co. v. Arti Décor, Ltd.,

638 F. Supp. 749 (N.D. Tex. 1986) ......................................................... 30, 31, 46

El Paso Nat’l Bank v. Fuchs, 34 S.W. 206 (1896) ..................................................31

Ex parte Preston, 347 S.W.2d 938 (Tex. 1961) ......................................................33

Forrest Prop. Mgmt. v. Forrest,

No. 10-09-00338-CV, 2010 Tex. App. LEXIS 5863

(Tex. App.—Waco July 21, 2010, no pet.) ..........................................................24

Fox v. Tropical Warehouses, Inc.,

121 S.W.3d 853 (Tex. App.—Ft. Worth 2003, no pet.)................................ 25, 29

Harmon v. Daggett,

No. B14-88-00103-CV, 1988 Tex. App. LEXIS 2006

(Tex. App.—Houston [14th Dist.] Aug. 11, 1988, no pet.) .................................34

Harper v. Powell,

821 S.W.2d 456 (Tex. App.—Corpus Christi 1992, no pet.) ...............................27

In re Argyll Equities, LLC,

227 S.W.3d 268 (Tex. App.—San Antonio 2007, no pet.) ............... 24, 30, 32, 46

In re Bays, 355 S.W.3d 715 (Tex. App.—Ft. Worth 2011, no pet.)........................33

In re Deponte Invs., Inc.,

No. 05-04-01781-CV, 2005 Tex. App. LEXIS 898

(Tex. App.—Dallas, Feb. 3, 2005, no pet.) ............................................. 25, 28, 29

In re Reveille Res. (Texas), Inc.,

347 S.W.3d 301 (Tex. App.—San Antonio 2011, no pet.) ........................... 25, 32

In re Tex. Natural Res. Conservation Comm’n, 85 S.W.3d 201 (Tex. 2002) .........24

In re Wakefield,

No. 14-10-01160-CV, 2010 Tex. App. LEXIS 9922

(Tex. App.—Houston [14th Dist.] Dec. 15, 2010, no pet.) ..................................34

Law v. William Marsh Rice Univ.,

123 S.W.3d 786 (Tex. App.—Houston [14th Dist.] 2003, pet. denied) ..............30

v

Manheim v. Adam Dev. Props., L.P.,

No. 10-09-00259-CV, 2009 Tex. App. LEXIS 9824

(Tex. App.—Waco Dec. 30, 2009, no pet.)............................................. 27, 43, 44

N. Cypress Med. Ctr. Operating Co. v. St. Laurent,

296 S.W.3d 171 (Tex. App.—Houston [14th Dist.] 2009, no pet.) .....................24

Nowak v. Los Patios Investors,

898 S.W.2d 9 (Tex. App.—San Antonio 1995, no pet.) ............................... 28, 29

Nueva Generacion Music Group, Inc. v. Espinoza,

__ S.W.3d __, 2015 Tex. App. LEXIS 7958

(Tex. App.—Houston [1st Dist.], July 30, 2015, pet. filed).............. 26, 41, 42, 43

Reyes v. Burrus, 411 S.W.3d 921 (Tex. App.—El Paso 2013, pet. denied) ...........29

Rogers v. Daniel Oil & Royalty Co., 130 Tex. 386 (1937) .....................................26

Rushlake Hotels (USA) v. Hyatt Corp.,

No. 01-94-00827-CV, 1994 Tex. App. LEXIS 3140

(Tex. App.—Houston [1st Dist.] Dec. 22, 1994, no pet.) ....................................30

S.R.S. World Wheels v. Wnlow,

946 S.W.2d 574 (Tex. App.—Ft. Worth 1997, no pet.)................................ 30, 32

Shor v. Pelican Oil & Gas Mgmt., LLC,

405 S.W.3d 737 (Tex. App.—Houston [1st Dist.] 2013, pet. denied) .................27

State v. Sw. Bell. Tel. Co., 526 S.W.2d 526 (Tex. 1975) .........................................28

Tel. Equip. Network v. Ta/Westchase Place,

80 S.W.3d 601 (Tex. App.—Houston [1st Dist.] 2002, no pet.)..........................25

Victory Drilling, LLC v. Kaler Energy Corp.,

No. 04-07-000094-CV, 2007 Tex. App. LEXIS 4966

(Tex. App.—San Antonio June 27, 2007, no pet.) .................................. 26, 28, 29

Walling v. Metcalfe, 863 S.W.2d 56 (Tex. 1993) ............................................. 26, 27

Wash. DC Party Shuttle, LLC v. iGuide Tours, LLC,

406 S.W.3d 723 (Tex. App.—Houston [14th Dist.] 2013, pet. denied) ....... 25, 29

vi

World Football League v. Dallas Cowboys Football Club, Inc.,

513 S.W.2d 102 (Tex. App.—Dallas 1974, writ ref’d n.r.e.)...............................25

STATUTES

TEX. BUS. & COM. CODE § 2.718(a) .........................................................................31

TEX. CIV. PRAC. & REM. CODE § 61.001..................................................................30

TEX. CIV. PRAC. & REM. CODE § 61.002 ..................................................................32

TEX. CIV. PRAC. & REM. CODE § 61.005 ..................................................................31

vii

I. STATEMENT OF THE CASE

This case is, in relevant part, a suit for damages and injunctive relief

concerning the alleged breach of confidentiality and non-compete provisions of an

employment agreement. 1.CR.5–20. This accelerated interlocutory appeal is from

the issuance of a Temporary Injunction by the Honorable Chad Bridges of the

240th Judicial District Court of Fort Bend County, Texas, requiring that

Defendant-Appellant deposit into the Registry of the Court, where it is to stay

during the pendency of the case, the total sum of money damages sought by

Plaintiffs-Appellees. 3.CR.620–23.

1

II. STATEMENT REGARDING ORAL ARGUMENT

Despite the weight of settled case law disallowing the issuance of

prejudgment relief attaching Defendant-Appellant’s income in advance of final

judgment, the Trial Court issued a temporary injunction requiring that Defendant-

Appellant deposit with the Registry of the Court, during the pendency of litigation,

the sum of money damages sought by Plaintiffs-Appellees in their breach of

contract and breach of fiduciary duty case. The Trial Court’s Order effects an

unwarranted extension of long-standing Texas law. Defendant-Appellant believes

oral argument would be beneficial to enable the Court to fully explore the novel

ruling of the Trial Court and its implications on Texas residents.

2

III. ISSUE PRESENTED

Whether the Trial Court erred in issuing a prejudgment, temporary

injunction requiring that Defendant-Appellant deposit into the Registry of the

Court, during the pendency of the lawsuit, the total sum of money sought by

Plaintiffs-Appellees as money damages for their breach of contract and breach of

fiduciary duty claims.

3

IV. STATEMENT OF FACTS

A. The Wholesale Electricity Markets and the XO Entities.

Electricity is a commodity traded on a variety of wholesale electricity

markets that exist in the United States and elsewhere. 1.CR.216–217. Various

trading strategies and methodologies are employed by traders who buy and resell

electricity among power generators, retailers, and financial intermediaries.

1.CR.217–218. These markets are governed by federal regulations enacted by the

Federal Energy Regulatory Commission (“FERC”), various state agencies, and

market operators. 1.CR.218–219. Because of the ways in which trades are

effectuated, opportunities exist for an unscrupulous trader to manipulate the

markets for her personal gain. 1.CR.218. Thus, several markets utilize rules, such

as the so-called “Settlement Rule,” that require that traders disgorge profits under

certain circumstances to discourage and penalize improper trading activities.

1.CR.218.

Beginning in or around 2011, Shawn Sheehan began establishing a series of

entities to trade on wholesale electricity markets in the Unites States and/or to

provide services to trading entities. 1.CR.219. Among these are Plaintiffs-

Appellees XO Energy LLC (“XOE”) and XO Energy Worldwide, LLLP

(“Worldwide”) (collectively, “XO”), which provide various administrative and

technical services to entities and individuals engaged in wholesale electricity

4

trading market. 1.CR.219. XOE, for a monthly fee, provides “technology and

professional” services to Worldwide, including “executive management and

administration, product marketing and sales, information support and technology

services, centralized purchasing, engineering, procurement and logistics, cost

financing, customer support, test engineering, and/or quality control and product

warranty.” 1.CR.219–220. Worldwide is a technology company “in the business

of providing software services and support,” to other Sheehan-related trading

entities. 1.CR.219–220; 2.CR.299 & 301; 2.RR.26 & 60.

B. Dr. Zhao’s Employment Agreement with Worldwide.

In December 2012, Defendant-Appellant Dr. Liang “Benny” Zhao

commenced employment as a Transmission/Congestion Analyst with Worldwide.

1.CR.7 & 220. Dr. Zhao was to be paid a “Base Salary” of $125,000 per year and

participate in the company’s “discretionary employee incentive program.” 1.CR.7

& 23 & 220. As a condition of his employment, Dr. Zhao was required to spend

half his working time in St. Thomas, U.S. Virgin Islands. 1.CR.11 & 23 & 220.

He was otherwise permitted to work remotely from his home in Katy, Texas, and

was provided hardware, software, and supplies from Worldwide to facilitate his

work. 1.CR.220.

Dr. Zhao’s employment with Worldwide was also contingent upon his

execution of an “Employment Agreement” drafted by the company, the “main

5

intent” of which was to “protect the intellectual property” of the technology

company. 1.CR.7 & 220. However, in addition to provisions directed to

protection of Worldwide’s software and other technology, the Agreement

contained a variety of provisions setting forth the terms of Dr. Zhao’s employment

with the company. 1.CR.25–32; 2.CR.272–279.

For example, the Employment Agreement provides that Dr. Zhao would be

employed by Worldwide and expected to “perform such duties as may be assigned

from time to time” by Worldwide’s managers. 1.CR.25; 2.CR.272. In addition to

his Base Salary, the Agreement provides that Dr. Zhao “may be awarded certain

incentive compensation (Profits Share)” at Worldwide’s discretion and that

Worldwide “shall evaluate” whether Dr. Zhao would be awarded such “share of

profits” “[a]t the end of each calendar year.” 1.CR.25; 2.CR.272.

The Employment Agreement includes a “Non-Competition” provision

which, in relevant part, purports to prohibit Dr. Zhao, for two years following his

separation from Worldwide, from “[being] engaged, directly or indirectly, . . . or

attempting to become engaged in a business that competes with the business of

[Worldwide] or any of its subsidiaries or affiliates as it relates to [Worldwide’s]

business . . . .” 1.CR.26; 2.CR.273.

The Employment Agreement includes a “Confidentiality” provision that

6

provides that Dr. Zhao “shall not, directly or indirectly, disclose to anyone, or use

in competition with [Worldwide] or any of its subsidiaries or affiliates, any

Confidential Information of or pertaining to [Worldwide],” with “Confidential

Information” defined as “confidential or other proprietary information that is

owned by [Worldwide] or any of its subsidiaries or affiliates . . . .” 1.CR.28;

2.CR.275.

In the event of a breach of the intellectual property or Non-Competition

provisions of the Employment Agreement, Dr. Zhao’s termination for “Cause,” or

his resignation without “Good Reason,” the Employment Agreement provides that

Dr. Zhao “shall automatically forfeit any and all rights to any deferred Bonuses or

other deferred incentive compensation (including without limitation any options

relating to equity in [Worldwide] or its affiliates), and any grant by [Worldwide] of

such remuneration shall be automatically void.” 1.CR.27; 2.CR.274.

“Cause” for termination under the Employment Agreement is strictly

defined as “(i) [Dr. Zhao’s] willful and continued failure to perform and to

discharge his . . . duties and responsibilities under [the Employment] Agreement

for any reason (other than [Dr. Zhao’s] disability) after (x) [Worldwide] has

provided [Dr. Zhao] with written notice of its intent to terminate his employment

under this clause, and (y) [Dr. Zhao] has failed to resume the performance of such

duties within fifteen (15) days following receipt of such notice; (ii) any other

7

willful misconduct by [Dr. Zhao] that is materially and demonstrably injurious

economically to [Worldwide]; (iii) [Dr. Zhao’s] final conviction of any felony or

any misdemeanor involving moral turpitude; or (iv) [Dr. Zhao’s] violation of any

of the provisions of Section 5 of this Agreement [which includes the intellectual

property and Non-Competition provisions, but not the Confidentiality provisions,

of the Employment Agreement].” 1.CR.28; 2.CR.275.

C. Dr. Zhao’s Employment with Worldwide.

Upon commencement of employment with Worldwide, Dr. Zhao was tasked

with trading electricity on the “CAISO” market, which covers California and parts

of Nevada. 1.CR.223. Dr. Zhao had never before worked in energy trading.

1.CR.223. Accordingly, his trading activities were closely directed and supervised

by Worldwide’s other employee trading in the CAISO market, Neil Huber.

1.CR.223. Throughout his employment, Dr. Zhao traveled regularly to St.

Thomas, where Worldwide is located, and Landenberg, Pennsylvania, where XOE

operates, and was in constant contact with his co-workers, and in particular, Mr.

Huber, when he was working from Texas. 1.CR.224.

Dr. Zhao was a valuable, productive, and very profitable employee. He

earned a bonus in excess of $260,000 in his first year with Worldwide and in

excess of $800,000 his second year with Worldwide. 1.CR.224.

8

D. FERC Commences an Investigation into XO’s Trading Practices.

In late 2014, FERC and/or CAISO commenced an investigation into trading

practices by Mr. Sheehan’s companies. 1.CR.224. At issue was whether XO’s

corporate structure was designed to deliberately evade the Settlement Rule and

whether XO was engaging in improper trading activities on the CAISO market.

1.CR.224. Despite that he was a witness and potential target of the investigation

by virtue of his activities on the CAISO market, XO did not immediately inform

Dr. Zhao of the investigation and, as Dr. Zhao later learned, submitted statements

to FERC and/or CAISO purportedly concerning and/or on behalf of Dr. Zhao

without Dr. Zhao’s input or consent. 1.CR.224.

FERC subsequently requested an investigative interview with Dr. Zhao.

1.CR.224. Despite obvious conflicts of interest, Mr. Sheehan offered to provide

Dr. Zhao with legal representation, on the condition that Dr. Zhao accept Mr.

Sheehan’s chosen attorneys from the law firm Norton Rose Fulbright

(“Fulbright”), which would simultaneously represent XO, Dr. Zhao, and Mr.

Huber. 1.CR.224. Dr. Zhao, not understanding the serious implications of the

legal conflict, certain of his lack of involvement in any wrongdoing, and unable to

spend tens of thousands of dollars on attorneys’ fees for his employer’s alleged

wrongdoing, accepted Mr. Sheehan’s offer. 1.CR.224.

In preparation for his FERC investigative interview, Dr. Zhao learned for the

9

first time that his trading activities were not being conducted on behalf of his

employer, Worldwide, but in fact for other Sheehan entities with whom he had no

employment relationship, XO Energy CAL, Inc., XO Energy CAL, LLC, XO

Energy CAL2, Inc., and XO Energy CAL2, LLC. 1.CR.225; 2.RR.60.

In connection with the FERC investigation, Dr. Zhao was directed to retain,

and not to destroy, any data or materials potentially relevant to the investigation.

1.CR.225. Dr. Zhao took this mandate seriously. 1.CR.225. He consulted with

his employer’s IT staff to ensure that his computer and data were secure.

1.CR.225. Though he was informed that Worldwide remotely backed-up its

employees’ computers, Dr. Zhao was concerned about potential errors or backup

failures (especially given that he was working thousands of miles away from

Worldwide’s St. Thomas office), and took special care to protect his work

materials. 1.CR.225.

E. Dr. Zhao’s Resignation from Worldwide.

In February 2015, during a trip to St. Thomas, Dr. Zhao was informed by

Mr. Sheehan and Worldwide manager, Joel Bearden, that in order to continue

working for Worldwide, Dr. Zhao would have to relocate permanently to St.

Thomas or Landenberg. 1.CR.225.

During that meeting, Mr. Sheehan and Mr. Bearden also discussed the terms

of Dr. Zhao’s 2014 incentive compensation. 1.CR.9 & 225. Based on his

10

performance for the company, Dr. Zhao was to be awarded $834,131.00, of which

$50,000 constituted a “DB Plan Contribution,” $17,000 constituted “2014 Profit

Share,” and $18,000 constituted his 401(k) employer match. 1.CR.225. However,

Dr. Zhao was informed that the company was holding back approximately 10% of

his bonus, which would only be paid if Dr. Zhao cooperated with the company in

the FERC investigation such that the company was ultimately required to pay less

than some internally-targeted amount in regulatory fines. 1.CR.225–226.

Mr. Sheehan and Mr. Bearden advised Dr. Zhao to take time to consider his

options and asked Dr. Zhao to inform them of his decision to relocate after he

received his bonus at end of the month. 1.CR.226.

During that same trip to St. Thomas, Dr. Zhao attended a company meeting

during which Mr. Sheehan advised Dr. Zhao and his co-workers that Worldwide

intended to revise the Non-Competition provision of Worldwide’s employment

agreements for any employee who chose to resign following distribution of 2014

bonuses. 1.CR.226. Under the new Non-Competition agreement, the non-compete

period would extend only one year following an employee’s separation from the

company and the company would pay the employee his base salary for four months

of that period. 1.CR.226. Despite that his Employment Agreement is with

Worldwide, a technology company that provides “software services and support”

to companies engaged in electricity trading, Mr. Sheehan indicated his belief that

11

the Non-Competition provisions of Dr. Zhao’s Employment Agreement prevent

Dr. Zhao from engaging in electricity trading in any capacity anywhere in the

United States. 1.CR.226.

During the next couple weeks, Dr. Zhao asked the company follow-up

questions about the ultimatum, discussed his options with his family, and began

exploring other employment options. 1.CR.226; 2.RR.61. Concerned about the

ongoing FERC investigation, and facing a shortage of space on his work computer

hard drive, Dr. Zhao also took steps to ensure protection of company data and

backed up work materials to external hard drives he purchased and intended to

secure and provide to the company upon his resignation. 1.CR.9–10 & 226–227.

Unbeknownst to Dr. Zhao, in the days following delivery of the ultimatum,

Mr. Sheehan directed members of his staff to remotely monitor Dr. Zhao’s

computer activities. 1.CR.9–10 & 227. Supposedly, Mr. Sheehan concluded from

this monitoring that Dr. Zhao was planning to resign, despite Mr. Sheehan’s

attempts to entice him—with the promise of more than $84,000—to stay and assist

with the FERC investigation. 1.CR.10 & 227. According to XO, it had

evidence—an untranslated “to-do” list written in Chinese by Dr. Zhao—that Dr.

Zhao was researching the process for becoming a CAISO trader, which XO

determined was a violation of Dr. Zhao’s non-compete obligations. 1.CR.10. At

some point, XO decided that since one such step was to provide a $500,000

12

security deposit to CAISO, Dr. Zhao intended to fund his allegedly unlawful plan

to compete with his 2014 bonus, thereby “removing” the funds from Texas and

XO’s reach. 1.CR.15; 2.RR.21.

Nevertheless, despite claiming to have learned this damning information on

Wednesday, February 25, 2015, 2.RR.44–45, on Friday, February 27, 2015, Dr.

Zhao received his 2014 bonus, totaling $532,547.59, via direct deposit to his bank

(in California) and 401(k) account (also outside of Texas). 1.CR.10–12 & 68 &

227; 2.RR.17–18. On Saturday, February 28, 2015, Dr. Zhao contacted Mr.

Bearden by phone, informed Mr. Bearden that he could not relocate his family, and

resigned his position with Worldwide. 1.CR.227; 2.RR.63–64. Mr. Bearden did

not state, or even suggest, that Dr. Zhao was suspected of misconduct or that Dr.

Zhao may not be entitled to his 2014 bonus. 1.CR.227. Dr. Zhao was not asked to

return his 2014 bonus. 1.CR.227.

Shortly thereafter, a purported private investigator arrived at Dr. Zhao’s

home unannounced. 1.CR.227–228. The investigator claimed he had been sent by

XO to collect Worldwide’s computer, peripheral devices, and other company-

related material. 1.CR.227–228. Dr. Zhao readily assisted the investigator in

collecting all of Worldwide’s property, including the hard drives containing

backups of Dr. Zhao’s work materials. 1.CR.227–228; 2.RR.63–64. Dr. Zhao

later learned that the investigator was not sent by the company merely to collect

13

company property. 1.CR.228. Instead, Dr. Zhao’s own attorneys at Fulbright,

while still representing Dr. Zhao, hired the investigator in order to assist XO in

developing claims against Dr. Zhao that the company intended to use to persuade

FERC that any wrongdoing by the company was the fault of Dr. Zhao. 1.CR.228.

The following Monday, March 2, 2015, Dr. Zhao sent Mr. Sheehan and Mr.

Bearden an email expressing his gratitude for the opportunity to work for

Worldwide, confirming that the private investigator had retrieved Worldwide’s

property, inquiring about the cessation of health benefits, payment of his accrued

vacation time, and the status of the $84,000 held back from his bonus; and asking

about the revisions to the Non-Competition provision promised during the

February company meeting. 1.CR.228–229; 2.CR.281–282. Neither Mr. Sheehan

nor Mr. Bearden responded. 1.CR.229.

F. The Federal Lawsuit.

To effectuate its plan to scapegoat Dr. Zhao, XO concocted bogus legal

claims against him. 1.CR.229. Despite Dr. Zhao having resigned his position with

Worldwide on February 28, 2015, on which date Worldwide collected all of its

property from Dr. Zhao’s home, on March 6, 2015, “XO Energy” proclaimed it

was terminating him for “cause.” 1.CR.11–12 & 70 & 229. “XO Energy” did not

explain what the “cause” was for this supposed termination. 1.CR.70 & 229.

That same day, XOE and Worldwide filed a lawsuit against Dr. Zhao in the

14

United States District Court for the Southern District of Texas. See XO Energy

LLC v. Zhao, No. 4:15-CV-00599 (S.D. Tex.). Broadly, XO alleged that in

backing up company data to external hard drives, Dr. Zhao had impermissibly

“copied” confidential company data in violation of his Employment Agreement.

1.CR.229. XO further alleged that Dr. Zhao intended to misappropriate this data in

order to compete with XO in violation of the Non-Competition provision of his

Employment Agreement. 1.CR.229. XO alleged that immediately upon learning

of this alleged wrongdoing, it terminated Dr. Zhao for “Cause” and, as a result,

was somehow entitled to recoup Dr. Zhao’s 2014 bonus. 1.CR.229. XO brought

claims for breach of contract, “misappropriation of confidential information,” and

“breach of the common law duties of loyalty and confidentiality.” 1.CR.229. Dr.

Zhao moved for dismissal on the ground that the federal court lacked jurisdiction

over XO’s claims. 1.CR.230.

While Dr. Zhao’s motion was pending, the parties engaged in extensive

discovery, including forensic analyses of Dr. Zhao’s work computer, the external

hard drives, other flash drives, his work phone, personal computer, and e-mail.

1.CR.230. As confirmed via the sworn testimony of XOE’s Chief Financial

Officer, John Charette, these analyses and other discovery exchanged during the

federal case uncovered no evidence that Dr. Zhao had misappropriated, transferred

to any third party, or retained any of XO’s confidential company information.

15

2.RR.65–66.

G. The State Court Lawsuit.

In September 2015, the federal court held that it lacked jurisdiction over

XO’s case and dismissed XO’s suit. 1.CR.230. Despite having found no evidence

that Dr. Zhao engaged in wrongdoing, and unable to explain how it could terminate

an employee who no longer worked for it, XO refiled its case in this Court

(asserting identical allegations as in the federal case, but dropping its disproven

misappropriation claim) and sought an injunction, in relevant part, attaching Dr.

Zhao’s income and requiring him to deposit his 2014 bonus and 401(k) employer

match with the Registry of the Court pending resolution of the case. 1.CR.5–20 &

230.

H. The Temporary Injunction Hearing.

The underlying lawsuit was initially assigned to Fort Bend County Associate

Judge Stuti Patel. On September 30, 2015, Judge Patel held a hearing on XO’s

application for a Temporary Injunction. 2.RR.1. The sole issue in dispute

involved XO’s request that Dr. Zhao deposit with the Court the money damages

sought by XO. 2.RR.4–6. In a departure from its pleadings, XO abandoned its

request for a statutory writ of attachment over Dr. Zhao’s money, 1.CR.14–16,

instead relying on the Court’s “inherent authority” to issue an injunction requiring

the deposit of “disputed funds” with the Court. 1.CR.74–91; 2.RR.13–15 & 16–17

16

& 19–21 & 73. In support of its request that the Court exercise this alleged

authority, XO offered only the sworn testimony of XOE’s CFO, John Charette.

2.RR.23.

In an effort to prove a likelihood of success on XO’s breach of contract and

breach of fiduciary duty claims, Mr. Charette testified that Worldwide’s

employees, such as Dr. Zhao, have access to the company’s “confidential”

information, which he described broadly as “proprietary software, all of our trading

strategies, the . . . information that we as a company have provided to verify

strategies[, and] confidential maps of the electricity grid.” 2.RR.33. However, he

admitted that the software over which XO was claiming a proprietary interest, and

the bulk of the data it claims as its “confidential” information, is publicly available.

2.RR.68–69. Mr. Charette offered no further information about the nature of the

so-called “confidential” information giving rise to XO’s claims against Dr. Zhao.

Mr. Charette testified that after Dr. Zhao was presented with the ultimatum

concerning his future with Worldwide, company management began monitoring

Dr. Zhao’s computer activities and witnessed him coping “an exorbitant amount of

information” to external hard drives, including “maps” and unspecified

“proprietary software information.” 2.RR.46–47. Despite claiming on direct

examination that Dr. Zhao was terminated as a result of this “copying,” 2.RR.56,

Mr. Charette admitted that Dr. Zhao had, in fact, resigned his position with

17

Worldwide on February 28, 2015, the day after receiving his 2014 bonus, and

promptly and readily returned to XO all company devices and information,

including the external hard drives containing “copies” of XO’s allegedly

“confidential” information. 2.RR.62–64 & 66. Indeed, having returned all such

materials to the company, Mr. Charette conceded that it would have been

impossible for Dr. Zhao to have continued working for Worldwide between the

date of his resignation (February 28, 2015) and the date of his alleged termination

for “Cause” (March 2, 2015). 2.RR.64.1

Mr. Charette admitted that, despite the benefits of discovery in the federal

lawsuit, XO has no evidence that Dr. Zhao “took documents from the company and

gave them to anybody.” 2.RR.64–65. He admitted that XO has no evidence that

Dr. Zhao “put [company] documents on his personal computer.” 2.RR.66. And he

admitted that Dr. Zhao was not prohibited, in any way, from backing up documents

from his company computer to an external hard-drive, especially in connection

with a criminal investigation such as the FERC investigation of XO in progress at

the time of Dr. Zhao’s resignation. 2.RR.67–68.

In support of its claim that XO would suffer a “probable, imminent, and

irreparable injury” without injunctive relief, 1.CR.78, Mr. Charette offered

1

The hearing transcript suffers from several transcription errors due to the reporter’s

difficulty interpreting the electronic recording of the proceedings. 2.RR.12. In relevant part, the

transcript at page 64, lines 14–15 should read: “Can you explain how it is possible [for] a

terminated employee [to continue to] work for [you]?” 2.RR.64.

18

testimony about trading on the CAISO market. He explained that new participants

on the CAISO market are required to “deposit $500,000 in cash collateral or a line

of credit, which is also equivalent of cash to be held by [CAISO] as financial

security.” 2.RR.32–33. He stressed that the money is merely a security deposit—

“just to get into the market”—and is “not available to trade against.” 2.RR.33.

Mr. Charette explained that on top of the $500,000, individuals or entities wishing

to actually trade on the market must post additional financial security, based on

trading volume, that can easily exceed an additional $1,000,000. 2.RR.33.

Mr. Charette read into the record a few random English words in the

Chinese language “to-do” list (which he admittedly could not read), and stated his

concern that Mr. Zhao, having received his $500,000 (after-tax) bonus “now has

sufficient funds, liquid funds to actually make a deposit with the California ISO to

become a market member and compete with XO Energy.” 2.RR.48–54 & 57–58.

Mr. Charette offered no other testimony about Dr. Zhao’s financial status or his

ability to fund the additional millions necessary to actually operate as a CAISO

trader, as Mr. Charette described.

Based on this thin record, the Associate Judge issued a Temporary

Injunction. She explained that her interest was in “preserv[ing] the actual subject

matter of this litigation, which is the funds,” and that XO “has shown that there is a

potential for injury to that property.” 2.RR.82–83. She noted that XO, in fact, had

19

an “adequate remedy at law,” but reasoned that some unstated “exceptions”

justified attachment of Dr. Zhao’s income. 2.RR.83. She ordered that Dr. Zhao

promptly deposit his 2014 bonus and 401(k) employer match ($532,547.95) with

the Registry of the Court “until further order of the Court” and set trial for

December 1, 2015. 1.CR.197–200.

I. The de novo Temporary Injunction Hearing.

Pursuant to Section 54A.115(a) of the Texas Government Code, Dr. Zhao

promptly requested a de novo temporary injunction hearing before District Judge

Chad Bridges. 1.CR.201. In accordance with Texas law requiring leave of court

to submit supplemental pleadings or additional evidence in connection with a de

novo hearing, Dr. Zhao sought, and was granted, approval to file a responsive

brief. 1.CR.201 & 213. Dr. Zhao’s brief was filed in advance of the hearing.

2.CR.239–270.

XO did not seek leave of court to present additional evidence at the de novo

hearing, but nevertheless issued a trial subpoena commanding Dr. Zhao’s

testimony. 3.CR.613–615. Dr. Zhao filed a Motion for Protective Order to quash

the improperly-issued subpoena. 3.CR.608–609.

The morning of the October 22, 2015, hearing, XO apparently provided the

Trial Court with a transcript of the initial TI hearing before the Associate Judge.

1.RR.3. Mr. Charette did not appear and the Trial Court was presented no other

20

evidence. The Trial Court entertained only a few minutes of argument from

counsel before turning to the parties’ submissions. 1.RR.3–9. After reviewing

them, the Trial Court permitted only a few seconds of argument on Dr. Zhao’s

Motion for Protective Order before issuing his ruling. 1.RR.14–16.

The Trial Court held that it was “going to keep the temporary restraining

order in place” and require the parties to return the following week for a “full-on

injunction hearing,” during which the Court could hear testimony from Dr. Zhao.

1.RR.16. When the parties could not identify a mutually available time for the

hearing, the Trial Court changed course and held that it was simply “issuing the

TI.” 1.RR.17 & 20. However, the Trial Court indicated some confusion over the

procedural posture of the case, subsequently stating that it was only issuing a TRO

in advance of a December 15, 2015, trial on the merits. 1.RR.20–21. After the

parties clarified that at issue was a TI, the Trial Court reiterated that it was

“comfortable with [its] ruling” (which ruling remained unclear) while still noting

its desire to hear testimony from Dr. Zhao. 1.RR.21–22. Counsel for Dr. Zhao

argued that the Trial Court’s desire for additional testimony suggested that XO has

failed to meet its burden to justify injunctive relief and reminded the Trial Court of

the evidentiary failings in XO’s submission. 1.RR.22–23. The Court responded

that “[w]e’re going to get the December 15th trial date. You’re going to do a

docket control order and we’ll be set for trial and your client [Dr. Zhao] will do

21

whatever he needs to do.” 1.RR.23. The Court subsequently issued the TI and

clarified that it intended to set trial not for December 15, 2015, but for December

1, 2015—leaving the parties only 40 days to prepare. 3.CR.620–623. Dr. Zhao

subsequently deposited $532,547.59 with the Registry of the Court.

This appeal followed.2

V. SUMMARY OF THE ARGUMENT

At issue is an ordinary breach of contract case involving (disproven)

allegations that Defendant-Appellant Dr. Zhao, a former employee of Plaintiff-

Appellee Worldwide, copied XO’s “Confidential” company information to two

external hard drives in an attempt to start a competing business in violation of an

Employment Agreement. Based on a patently unreasonably and unsupportable

reading of the Employment Agreement, XO claims that this supposed breach

entitles it to recover from Dr. Zhao his 2014 bonus and 401(k) employer match

totaling $532,547.59. However, XO admits via sworn testimony that the mere

copying of data to hard drives does not constitute a breach of the Employment

Agreement and that no evidence exists that Dr. Zhao retained, used, or disclosed

any company data. 2.RR.64–68. XO concedes that “an employee may lawfully

2

Since the filing of this appeal, XO and Dr. Zhao agreed to a trial continuance to April 26,

2016. During a November 18, 2015, off-the-record hearing on the parties’ Agreed Motion for

Trial Continuance & Docket Control Order, the Trial Court instead set trial for March 22, 2015.

The Trial Court stated that it saw little reason for delay since the attachments to XO’s pleadings

(allegedly reflecting the copying of data from Dr. Zhao’s work computer to the external hard

drives) “speak for themselves” and stated that a March trial date would “take care of” this

appeal.

22

plan to compete with an employer and take active steps in furtherance of those

plans” and offers no evidence of any actual competitive activity by Dr. Zhao.

1.CR.82. XO acknowledges that the breach alleged can be remedied via money

damages—indeed, XO’s claim for money damages is the crux of its case. 1.CR.12

(seeking $532,547.59 in damages for Dr. Zhao’s alleged breach of contract);

1.CR.14 (seeking disgorgement or forfeiture of $532,547.95 [sic] for Dr. Zhao’s

alleged breach of fiduciary duty). Despite this, XO was granted a Temporary

Injunction attaching Dr. Zhao’s bonus and requiring him to place his earned

income into the Registry of the Court pending the outcome of this litigation in

order to secure XO’s collection of damages in the event of a final judgment in its

favor.

Texas law is clear and unequivocal that the facts presented here do not

warrant or justify this manner of prejudgment relief. XO has failed to establish a

“probable right to relief” on its claims as required for the issuance of a TI.

Additionally, XO’s alleged harms can be remedied via money damages, which

unquestionably undermines its entitlement to injunctive relief. XO failed to

establish any set of facts to overcome the presumption against injunctive relief to

secure money damages—an omission the Trial Court acknowledged, yet

unlawfully disregarded. Accordingly, as the Trial Court failed to abide by well-

settled law, the Temporary Injunction Order should be reversed and Dr. Zhao’s

23

money released from the Court Registry.

VI. ARGUMENT

A. Standard of Law

Pre-judgment remedies, such as temporary injunctive relief and pre-

judgment writs of attachment are considered extraordinary remedies that should

only be awarded in narrow circumstances. See, e.g., In re Tex. Natural Res.

Conservation Comm’n, 85 S.W.3d 201, 204 (Tex. 2002) (“An applicant for a

temporary injunction seeks extraordinary equitable relief. He seeks to immobilize

the defendant from a course of conduct which it may well be his legal right to

pursue.”); In re Argyll Equities, LLC, 227 S.W.3d 268, 271 (Tex. App.—San

Antonio 2007, no pet.) (“Pre-judgment attachment is a particularly harsh,

oppressive remedy. As a result, the statutes and rules governing this remedy must

be strictly followed.”).

The party seeking prejudgment injunctive relief bears the burden of proof

and must present admissible evidence in support of its claims. See, e.g., Forrest

Prop. Mgmt. v. Forrest, No. 10-09-00338-CV, 2010 Tex. App. LEXIS 5863, at

**9–10 (Tex. App.—Waco July 21, 2010, no pet.) (citing N. Cypress Med. Ctr.

Operating Co. v. St. Laurent, 296 S.W.3d 171, 177 (Tex. App.—Houston [14th

Dist.] 2009, no pet.)); Baca v. Hoover, Bax & Shearer, No. A14-88-00418-CV,

1989 Tex. App. LEXIS 456, at *12 (Tex. App.—Houston [14th Dist.] March 9,

24

1989, no writ.) (not designated for publication); World Football League v. Dallas

Cowboys Football Club, Inc., 513 S.W.2d 102, 105 (Tex. App.—Dallas 1974, writ

ref’d n.r.e.). Prejudgment relief “is not proper when the claimed injury is merely

speculative; fear of injury is not sufficient to support a temporary injunction.”

Wash. DC Party Shuttle, LLC v. iGuide Tours, LLC, 406 S.W.3d 723, 742 (Tex.

App.—Houston [14th Dist.] 2013, pet. denied); Fox v. Tropical Warehouses, Inc.,

121 S.W.3d 853, 861 (Tex. App.—Ft. Worth 2003, no pet.).

Even where a party demonstrates entitlement to a temporary injunction or

writ of attachment preventing a transfer of assets, a defendant cannot be ordered to

pay disputed funds into the court’s registry unless the movant offers evidence that,

despite the injunction or writ, the funds are nevertheless, “in danger of being ‘lost

or depleted.’” In re Reveille Res. (Texas), Inc., 347 S.W.3d 301, 304 (Tex. App.—

San Antonio 2011, no pet.) (citing Castilleja v. Camero, 414 S.W.2d 431, 433

(Tex. 1967)); In re Deponte Invs., Inc., No. 05-04-01781-CV, 2005 Tex. App.

LEXIS 898, at *4 (Tex. App.—Dallas, Feb. 3, 2005, no pet.).

A trial court’s issuance of a temporary injunction is reviewed for an abuse of

discretion. Tel. Equip. Network v. Ta/Westchase Place, 80 S.W.3d 601, 607 (Tex.

App.—Houston [1st Dist.] 2002, no pet.). Reversal is warranted where the trial

court’s actions were “so arbitrary as to exceed the bounds of reasonable discretion”

or where the trial court erroneously applied the law to undisputed facts. Id.

25

1. Temporary Injunction.

A temporary injunction “does not issue as a matter of right.” Butnaru v.

Ford Motor Co., 84 S.W.3d 198, 204 (Tex. 2002). To obtain one, an applicant

“must plead and prove: (1) a cause of action against the defendant; (2) a probable

right to the relief sought; and (3) a probable, imminent, and irreparable injury in

the interim.” Id. It is well-settled that “[a]n injury is irreparable if the injured

party cannot be compensated in damages or if the damages cannot be measured by

a certain pecuniary standard.” Id. Thus, “generally, a court will not enforce

contractual rights by injunction, because a party can rarely establish an irreparable

injury and an inadequate legal remedy when damages for breach of contract are

available.” Nueva Generacion Music Group, Inc. v. Espinoza, __ S.W.3d __, 2015

Tex. App. LEXIS 7958, at *11 n.5 (Tex. App.—Houston [1st Dist.], July 30, 2015,

pet. filed) (quoting Butnaru, 84 S.W.3d at 211); see also Victory Drilling, LLC v.

Kaler Energy Corp., No. 04-07-000094-CV, 2007 Tex. App. LEXIS 4966, at *8

(Tex. App.—San Antonio June 27, 2007, no pet.) (“[When] an adequate and

complete remedy at law is provided, our courts, though clothed with equitable

jurisdiction, will not grant equitable relief.” (quoting Rogers v. Daniel Oil &

Royalty Co., 130 Tex. 386 (1937))). “Damages are usually an adequate remedy at

law, and the requirement of demonstrating an interim injury is not to be taken

lightly.” Id. (quoting Walling v. Metcalfe, 863 S.W.2d 56, 57 (Tex. 1993)).

26

“Although it is unusual, circumstances can arise in which a temporary

injunction is appropriate to preserve the status quo pending an award of damages at

trial.” Walling, 863 S.W.2d at 58. Typically, these circumstances involve the

threatened transfer or destruction of real property or unique and irreplaceable

personal property or situations where the defendant’s conduct threatens to disrupt

an ongoing business. See, e.g., Shor v. Pelican Oil & Gas Mgmt., LLC, 405

S.W.3d 737, 750 (Tex. App.—Houston [1st Dist.] 2013, pet. denied) (collecting

cases). Where a claim is for pure money damages, unconnected to any unique

asset, courts have issued injunctions to freeze assets only where the defendant is

insolvent or likely to be insolvent at the time a judgment is rendered. See, e.g.,

Manheim v. Adam Dev. Props., L.P., No. 10-09-00259-CV, 2009 Tex. App.

LEXIS 9824, at **5–6 (Tex. App.—Waco Dec. 30, 2009, no pet.). However, strict

proof of insolvency and a showing that, absent an injunction, the plaintiff will be

left without any potential remedy whatsoever, is required. Id., at **6–7.

Thus, a plaintiff cannot merely claim that a defendant may be judgment-

proof by the time litigation concludes. Id. Nor can a plaintiff seek to attach or

enjoin funds merely to ensure a defendant has assets to satisfy a judgment. See,

e.g., Harper v. Powell, 821 S.W.2d 456, 457 (Tex. App.—Corpus Christi 1992, no

pet.). Such attempts “put[] the cart before the horse” and find no support in the

law, which does not “authorize[] courts to issue writs of injunction against

27

defendants restraining them from disposing of their property upon which a plaintiff

has no form of lien, pending litigation.” Id. Similarly, it is not enough to suggest

that a defendant may dissipate its assets during the course of litigation. See, e.g.,

Nowak v. Los Patios Investors, 898 S.W.2d 9, 6–7 (Tex. App.—San Antonio 1995,

no pet.). In such cases, the Texas Uniform Fraudulent Transfer Act has been held

to offer a viable remedy for such actions. See, e.g., Victory Drilling, LLC, 2007

Tex. App. LEXIS 4966, at *8; see Camp Mystic, Inc. v. Eastland, 399 S.W.3d 266,

274 (Tex. App.—San Antonio 2012, no pet.) (“Generally, a temporary injunction

is not available to secure a potential money judgment when a party has other

existing legal remedies.” (collecting cases)); see also Ballenger v. Ballenger, 694

S.W.2d 72, 77 (Tex. App.—Corpus Christi 1985, no writ) (holding that an injury is

not irreparable if it “can be cured by monetary damages, regardless of the passage

of time between entry of a judgment and satisfaction thereof”).

Lest the courts become tools of “injustice” utilized by plaintiffs to

“immobilize” a defendant as the sole aim of the litigation, the conditions to

issuance of a temporary injunction are strictly enforced. See State v. Sw. Bell. Tel.

Co., 526 S.W.2d 526, 528 (Tex. 1975). As Texas courts are quick to point out:

Every suitor who resorts to chancery for any sort of relief by

injunction may, on a mere statement of belief that the defendant can

easily make away with or transport his money or goods, impose an

injunction on him . . . disabling him to use so much of his funds or

property as the court deems necessary for security or compliance with

its possible decree. And, if so, it is difficult to see why a plaintiff in

28

any action for a personal judgment in tort or contract may not, also,

apply to the chancellor for a so-called injunction sequestrating his

opponent’s assets pending recovery and satisfaction of a judgment in

such a law action. No relief of this character has been thought

justified in the long history of equity jurisprudence.

Victory Drilling, LLC, 2007 Tex. App. LEXIS, at **6–7 (quoting De Beers

Consol. Mines v. United States, 325 U.S. 212, 222–23 (1945)); Nowak, 898 S.W.2d

at 11 (same).

Thus, appellate courts do not hesitate to reverse trial court injunctions that

are unsupported by adequate proof on each of the elements for temporary

injunctive relief. See, e.g., Reyes v. Burrus, 411 S.W.3d 921 (Tex. App.—El Paso

2013, pet. denied) (reversing order of and dissolving temporary injunction because

the plaintiff “failed to establish that she ha[d] no adequate remedy at law to secure

potential money damages”); Camp Mystic, Inc., 399 S.W.3d at 273–77 (same);

Chin Tuo Chen v. Braxton, No. 06-09-00088-CV, 2010 Tex. App. LEXIS 171, at

**9–10 (Tex. App.—Texarkana Jan. 13, 2010, pet. Denied) (same); Victory

Drilling, LLC, 2007 Tex. App. LEXIS 4966, at **6–8 (same); Fox, 121 S.W.3d at

861 (same); Nowak, 898 S.W.2d at 11 (same); Ballenger, 694 S.W.2d at 77 (same);

see also Wash. DC Party Shuttle, LLC, 406 S.W.3d at 741–43 (affirming denial of

a temporary injunction because the plaintiff failed to prove the money damage

were incapable of calculation and would not adequately compensate its alleged

injuries); Law v. William Marsh Rice Univ., 123 S.W.3d 786, 794 (Tex. App.—

29

Houston [14th Dist.] 2003, pet. denied) (same); Rushlake Hotels (USA) v. Hyatt

Corp., No. 01-94-00827-CV, 1994 Tex. App. LEXIS 3140, at **15–16 (Tex.

App.—Houston [1st Dist.] Dec. 22, 1994, no pet.) (not designated for publication)

(same).

2. Writ of Attachment.

A remaining option for a breach of contract plaintiff seeking prejudgment

relief is to seek a statutory writ of attachment. “A writ of attachment is available to

a plaintiff in a suit if it proves that: (1) the defendant is justly indebted to the

plaintiff; (2) the attachment is not sought for the purpose of injuring or harassing

the defendant; (3) the plaintiff will probably lose his debt unless the writ of

attachment is issued; and (4) specific grounds for the writ exist under Section

61.002 [of the Texas Civil Practice & Remedies Code].” TEX. CIV. PRAC. & REM.

CODE § 61.001.

A defendant is “justly indebted” to a plaintiff if, and only if, he is obligated

to pay a “liquidated debt” under a contract. See In re Argyll Equities, 227 S.W.3d

at 271. The “long-standing rule” in Texas “is that a writ of attachment will not

issue in a suit for unliquidated damages.” E.E. Maxwell Co. v. Arti Décor, Ltd.,

638 F. Supp. 749, 753 (N.D. Tex. 1986) (applying Texas law). The only exception

is where personal service cannot be made on the defendant. See id.; S.R.S. World

Wheels v. Wnlow, 946 S.W.2d 574, 575 (Tex. App.—Ft. Worth 1997, no pet.);

30

TEX. CIV. PRAC. & REM. CODE § 61.005.

“The term ‘debt’ has been defined as an obligation to pay a liquidated sum

on an express or implied contract.” E.E. Maxwell Co., 638 F. Supp. at 753 (citing

El Paso Nat’l Bank v. Fuchs, 34 S.W. 206, 207 (1896)). For the sum to be

“liquidated,” (1) the harm caused by the breach must be incapable of being

estimated or is difficult to estimate at the time of the agreement, and (2) the sum

charged must be a reasonable estimate of damages. See BMG Direct Mktg. v.

Peake, 178 S.W.3d 763, 766 (Tex. 2005); Baker v. Int’l Record Syndicate, Inc.,

812 S.W.2d 53, 55 (Tex. App.—Dallas 1991, no writ). The fee must be agreed

upon by the parties at the time of contract formation, though “a term fixing

unreasonably large liquidated damages is void as a penalty.” BMG Direct Mktg.,

178 S.W.3d at 767; Baker, 812 S.W.2d at 55 (quoting TEX. BUS. & COM. CODE §

2.718(a)).

Section 61.002 sets forth an exclusive list of circumstances that must also be

present in order to justify issuance of the writ:

(1) The defendant is not a resident of this state or is a foreign

corporation or is acting as such;

(2) The defendant is about to move from this state

permanently and has refused to pay or secure the debt due the

plaintiff;

(3) The defendant is in hiding so that ordinary process of law

cannot be served on him;

31

(4) The defendant has hidden or is about to hide his property

for the purpose of defrauding his creditors;

(5) The defendant is about to remove his property from this

state without leaving an amount sufficient to pay his debts;

(6) The defendant is about to remove all or part of his

property from the county in which the suit is brought with the intent to

defraud his creditors;

(7) The defendant has disposed of or is about to dispose of

all or part of his property with the intent to defraud his creditors;

(8) The defendant is about to convert all or part of his

property into money for the purpose of placing it beyond the reach of

his creditors; or

(9) The defendant owes the plaintiff for property obtained by

the defendant under false pretenses.

TEX. CIV. PRAC. & REM. CODE § 61.002.

In order to establish entitlement to a writ of attachment, a plaintiff must

submit sworn testimony, based on personal knowledge, setting forth specific facts

bearing on each element of the statute. See S.R.S. World Wheels, 946 S.W.2d at

575; TEX. CIV. PRAC. & REM. CODE § 61.022(a). This includes facts establishing

that the plaintiff is unlikely to recoup a future judgment absent the writ. In re

Argyll Equities, 227 S.W.3d at 272. Conclusory statements that the defendant is,

or is likely to become, insolvent are insufficient. Id. Instead, a plaintiff must offer

evidence of, for example, the defendant’s cash on hand, source of revenue, and

liabilities. See In re Reveille Res. (Texas), Inc., 347 S.W.3d at 304–05.

32

3. The Court’s “Inherent Authority” to Attach Assets.

Finally, Texas courts have an “inherent authority” to order that a “disputed

fund,” shown to be in danger of being “lost or depleted,” be placed into the registry

of the court during the pendency of litigation to determine the fund’s owner. See

Behringer Harvard Royal Island, LLC v. Skokos, No. 05-09-00332-CV, 2009 Tex.

App. LEXIS 9456, at **9–10 (Tex. App.—Dallas Dec. 14, 2009, no pet.).

Importantly, however, this inherent authority does not supersede “the

carefully constructed statutes concerning garnishment, attachment, receivership,

etc.” Alliance Royalties, LLC v. Booth, 313 S.W.3d 493, 497 (Tex. App.—Dallas

2010, no pet.). However, a trial court may be entitled to exercise broader authority

in accordance with statutory protective regimes, such as with respect to a court-

supervised guardianship proceeding. See, e.g., In re Bays, 355 S.W.3d 715 (Tex.

App.—Ft. Worth 2011, no pet.).

In all other cases, “disputed fund” has been narrowly construed to extend to

money for which the only question before the court is its owner. This “inherent

authority” has been utilized to protect, for example, (i) the proceeds from the sale

of community property being held by the husband-constructive trustee, who

threatened to dispose of the money rather than permit the court to distribute it in

accordance with divorce proceedings, Ex parte Preston, 347 S.W.2d 938 (Tex.

1961); (ii) lottery winnings over which multiple parties claimed ownership,

33

Castilleja v. Camero, 414 S.W.2d 424 (Tex. 1967) & 414 S.W.2d 431 (Tex. 1967);

and (iii) funds earmarked to pay receiver’s fees, Harmon v. Daggett, No. B14-88-

00103-CV, 1988 Tex. App. LEXIS 2006, at **6–7 (Tex. App.—Houston [14th

Dist.] Aug. 11, 1988, no pet.).

Efforts by litigants to invoke the court’s “inherent authority” to attach funds

to satisfy a potential future judgment have been soundly and summarily rejected.

See Alliance Royalties, LLC, 313 S.W.3d at 497; In re Wakefield, No. 14-10-

01160-CV, 2010 Tex. App. LEXIS 9922, at **1–2 (Tex. App.—Houston [14th

Dist.] Dec. 15, 2010, no pet.); Behringer Harvard Royal Island, LLC, 2009 Tex.

App. LEXIS 9456, at **8–10 (collecting cases); see also Berry v. Chase Home

Fin. LLC, No. C-09-116, 2010 U.S. Dist. LEXIS 12531, at **7–10 (S.D. Tex. Feb.

12, 2010) (applying Texas law).

Texas courts are clear: “[A] trial court does not have authority—beyond the

purview of the attachment statutes—to order that funds be deposited in the court’s

registry to generally secure payment of a possible future judgment.” Behringer

Harvard Royal Island, LLC, 2009 Tex. App. LEXIS 9456, at *11. Thus, “[i]f a

plaintiff wants to protect its right to collect a potential judgment, it must follow the

specific statutes designed for that purpose.” Alliance Royalties, LLC, 313 S.W.3d

at 497.

34

B. Analysis

The Trial Court abused its discretion in issuing a Temporary Injunction

requiring Dr. Zhao to deposit his 2014 incentive compensation with the Registry of

the Court in order to secure XO’s ability to recover damages in the event of a

judgment in its favor. In issuing the TI, the Trial Court ignored glaring

deficiencies in XO’s evidentiary submission and disregarded settled law

disallowing prejudgment injunctive relief over a litigant’s assets in an ordinary

case for money damages such as this.

Notably, XO did not come before the Trial Court with mere suspicions of

wrongdoing. For months, XO had the opportunity to pursue—and did pursue—

discovery in support of its case. It admits that it has found no evidence that Dr.

Zhao misappropriated, transferred to any third party, or retained any of XO’s

confidential company information. 2.RR.65–66. Instead, all that has been

discovered is that he backed-up data to hard drives that were immediately turned

over to XO upon his resignation from Worldwide and which remain in XO’s

possession. 2.RR.67–68. XO concedes that nothing in Dr. Zhao’s Employment

Agreement, or any other company policy, prohibits this conduct. 2.RR.68.

Equally unavailing are XO’s claims that Dr. Zhao was imminently planning

to compete with Worldwide in violation of any non-compete obligations, which is

supported entirely by XO’s speculative interpretation of a “rough” translation of a

35

document written in Chinese supposedly directed to plans by Dr. Zhao to become a

CAISO trader. 2.RR.48–54. Even if XO’s interpretation of this document had

evidentiary support, nothing in the so-called “to-do” list indicates any efforts by

Dr. Zhao to compete with Worldwide in its business of providing software and

support to trading entities. 1.CR.219–220; 2.CR.299 & 301; 2.RR.26 & 60. And

even if Dr. Zhao’s Employment Agreement could be judicially re-drafted to render

the XO CAL entities parties to it, and energy trading a “competitive” activity,

XO’s evidence establishes—at best—merely a plan. XO has offered no evidence

that Dr. Zhao has actually engaged in competing activities and concedes that “an

employee may lawfully plan to compete with an employer and take active steps in

furtherance of those plans.” 1.CR.82. Its speculative assertions that Dr. Zhao

intended to use his 2014 bonus to set up a competing business is devoid of fact,

illogical, and starkly undermines any claim that Dr. Zhao could not satisfy a

judgment in this action.

Indeed, despite ample opportunity to do so, XO has conspicuously avoided

seeking any discovery into Dr. Zhao’s ability to pay damages in this case. XO

simply proclaims that he will be unable to satisfy a judgment, ignoring entirely that

Dr. Zhao, a highly educated, high-performing professional, earned over $1,000,000

in his short time at XO alone, after working for decades in other employment, and

with ample opportunities to secure well-paying employment in the future. Absent

36

a showing of insolvency, an injunction to secure money damages cannot be had.

In short, XO rests on nothing more than hyperbole and speculation, ignoring

entirely the wealth of information that has been exchanged in discovery, none of

which support its insistent, but baseless, proclamation that Dr. Zhao has breached

contractual and fiduciary duties to Worldwide in a manner than cannot be

remedied by recoverable money damages. The Trial Court’s apparent conclusion

that XO established a “probable right to recovery” and a “probable, imminent, and

irreparable injury” is unsupported by fact or law. The Trial Court abused its

discretion in issuing the Temporary Injunction and the TI Order should be

reversed.

1. The Trial Court Abused its Discretion in Issuing a Temporary

Injunction over Dr. Zhao’s Income.

a. XO did not establish a probable right to recovery.

The Trial Court abused its discretion, and improperly applied fact to law, in

evaluating XO’s probable right to recovery—a key element that must be satisfied

in order to justify prejudgment injunctive relief. In its pleadings and submissions

in support of its request for a TI, XO engages in sleight of hand. It fails to connect

Dr. Zhao’s alleged misconduct to any language in the Employment Agreement

prohibiting such conduct and misstates the business of XOE and Worldwide in an

unsupportable attempt to broaden the scope of the Employment Agreement by fiat.

These failings are readily apparent and should have been acknowledged by the

37

Trial Court.

First, XO’s request for injunctive relief rests on its allegation that Dr. Zhao,

in advance of his resignation, “engaged in the wholesale copying of [XO’s]

Confidential Information onto two (2) external hard drives.” 1.CR.9–10. It

speculates that Dr. Zhao engaged in this “theft” of data so that he could “carry” it

away and use it “for his personal benefit or for the benefit of his competing

business.” 1.CR.10–12. However, mere allegations of wrongdoing are insufficient

to establish a probable right to recovery; instead, as XO concedes, such allegations

must be supported by admissible evidence. 1.CR.80. Here, XO offered no

evidence in support of its claim of data theft. Instead, it admits that there is no

evidence that any company information was misappropriated by Dr. Zhao.

1.RR.65–66. Additionally, as it must under the terms of Dr. Zhao’s Employment

Agreement, which does not prohibit him from backing up data to hard drives, but

only from “disclos[ing] to anyone, or us[ing] in competition with [Worldwide] or

any of its subsidiaries or affiliates, any Confidential Information of or pertaining to

[Worldwide],” XO concedes that merely copying information to hard drives is not

prohibited. 2.RR.67–68. In order to be legally viable, the TI Order issued by the

Trial Court must rest on evidence of wrongdoing; as no such evidence was

presented by XO, the TI Order must be reversed.

Second, notwithstanding the foregoing, while XO continues to insist that Dr.

38

Zhao was planning to compete with Worldwide in violation of his Employment

Agreement, it concedes, as it must, that merely “planning” to compete is not

unlawful. 1.CR.81. Yet, at best, XO only adduced evidence of a plan. XO does

not allege, and has to evidence to show, that Dr. Zhao was actually engaged in

competitive activities in breach of the Non-Compete provisions of his Employment

Agreement. The Trial Court’s apparent conclusion to the contrary is an abuse of

discretion and requires reversal of the TI Order.

Nevertheless, even if XO had evidence that Dr. Zhao had taken actual steps

toward establishing a company to trade on the CAISO market, such activity is not

prohibited by the terms of his Employment Agreement. The Non-Compete

provision of Dr. Zhao’s Employment Agreement plainly states that he is prohibited

only from “engag[ing] in a business that competes with the business of

[Worldwide] or any of its subsidiaries or affiliates as it relates to [Worldwide’s]

business.” 1.CR.26; 2.CR.273. XO admits that Worldwide is a technology

company “in the business of providing software services and support,” to trading

entities. 2.CR.299; 2.RR.26 & 60. XO does not allege, and has no evidence to

suggest, that Dr. Zhao was planning to engage in the software business. The Trial

Court erred in finding a probable breach of the Non-Compete provisions of the

Employment Agreement, further demonstrating the Trial Court’s error in issuing a

TI.

39

Third, even if XO could offer evidence that Dr. Zhao probably breached his

Employment Agreement, it offers no evidence that such breach amounted to

“Cause” for termination under the Agreement or that such “Cause” triggers an

automatic forfeiture of earned income from past years. XO cannot explain how it

could terminate an employee days after he resigned his employment, 2.RR.64, and

it offers no evidence that the misconduct that Dr. Zhao allegedly engaged in

constitutes “willful misconduct . . . that is materially and demonstrably injurious

economically to [Worldwide],” or, as noted above, violated the Non-Compete

provision of Dr. Zhao’s Employment Agreement. Such misconduct is required (in

relevant part) to terminate Dr. Zhao for “Cause.” 1.CR.28; 2.CR.275. Absent a

termination for “Cause,” XO has no conceivable claim over Dr. Zhao’s 2014

bonus. The Court’s apparent conclusion to the contrary is unsupported by fact or

law.

Moreover, XO’s claim that it can recoup Dr. Zhao’s bonus money relies on a

nonsensical reading of the Employment Agreement that renders all “deferred

incentive compensation” paid to any Worldwide employee at any time during the

employee’s tenure with the company subject to forfeiture. Such a position defies

logic, a plain reading of the Employment Agreement, and is almost certainly

unconscionable under Texas law. Instead, a fair reading of the Employment

Agreement provides that an employee who “(a) breaches any of the covenants [of

40

the Non-Compete provisions of the Employment Agreement], (b) is terminated for

Cause . . . , or (c) terminates his or her employment without Good Reason” forfeits

any rights to deferred compensation for the year in which the employee separates

from the company. 1.CR.27; 2.CR.274. XO’s claim that it can recover moneys

paid (and taxed) for past performance is dangerously farfetched. The Trial Court’s

failure to evaluate the legal and factual viability of such a reading constitutes an

abuse of discretion demanding reversal of the TI Order.

b. XO did not establish a “probable, imminent, and

irreparable” injury.

The Trial Court further erred in concluding that XO established a “probable,

imminent, and irreparable” injury, as required for issuance of a TI. XO’s entire

case is built around its efforts to secure—through a prejudgment remedy—money.

Texas law is clear that money damages constitute an “adequate legal remedy”

foreclosing injunctive relief and that an issuance of an injunction that effective

attaches funds merely to ensure payment of a possible future judgment constitutes

reversible error.

Two recent decisions of the Texas Court of Appeals are directly on point. In

Nueva Generacion Music Group, Inc. v. Espinoza, __ S.W.3d __, 2015 Tex. App.

LEXIS 7958 (Tex. App.—Houston [1st Dist.] July 30, 2015, pet. filed), the

plaintiff appealed from a decision of the district court denying issuance of a

temporary injunction. The plaintiff Nueva was an artist management company that

41

had previously represented the defendant musician pursuant to a Representation

Agreement. Id., at 2–3. The parties had a falling out that resulted in litigation that

was ultimately settled pursuant to a “Final Settlement Agreement” (“FSA”). Id., at

3. The FSA required, in relevant part, that the defendant continue to honor the

Representation Agreement while he made three payments totaling $4,500,000 over

the ensuing year. Id., at 4. After the defendant allegedly breached the agreement

by utilizing other artist managers and failing to pay the final $3,500,000 payment,

Nueva brought a new suit and sought a temporary injunction. Nueva claimed that

the defendant was booking performances through other artist managers, under-

reporting earnings, and failing to pay required commissions. Id., at 7. Nueva

argued that this alleged misconduct threatened its ability to ultimately collect the

$3,500,000 due under the FSA (which was complicated by the fact that the

defendant lived, and the FSA was performable, in Mexico) and that an injunction

was therefore required “to prohibit [the defendant] from engaging in other

representations.” Id., at 5–8.

The district and appellate courts disagreed. The appellate court noted that all

of Nueva’s claims—including related tort claims for breach of fiduciary duty and

fraud—“relate to its allegations that [the defendant] breached the Representation

Agreement and FSA by withholding commissions or failing to perform career

obligations obtained for him by Nueva in order to satisfy the terms of the FSA.”

42

Id., at 12. Although Nueva offered evidence that the defendant was using different

booking agencies to book performances, thus frustrating Nueva’s efforts to collect

the $3,500,000 due under the FSA, none of the evidence “demonstrate[d] a harm

that [could] not be adequately compensated in damages following a trial on the

merits of Nueva’s claim that [the defendant] breached the FSA.” Id., at 13.

Absent a “probable, imminent, and irreparable injury,” a temporary injunction

could not be had. Id., at 16.

In Manheim v. Adam Development Properties, L.P., No. 10-09-00259-CV,

2009 Tex. App. LEXIS 9824 (Tex. App.—Waco Dec. 30, 2009, no pet.), plaintiff-

appellee Adam Development Properties (“ADP”) alleged that the defendant

furniture manufacturer failed to fulfill contractual obligations to design, produce,

and deliver custom furniture to ADP and received funds under the contract from

ADP to which it was not entitled. Id., at **1–2. The manufacturer admitted that it

used funds from ADP to purchase inventory for other projects. Id., at *2. ADP,

seeking money damages, alleged that the manufacturer had insufficient assets to

satisfy a potential future judgment. Id. It sought, and was granted by the trial

court, an injunction placing ADP’s inventory under court supervision to prevent it

from being “destroy[ed], s[old], encumber[ed], secret[ed], or any way harm[ed].”

Id., at *3.

The appellate court reversed. The court noted that while the availability of

43

money damages typically forecloses the right to obtain temporary injunctive relief,

an injunction may be appropriate if “the defendant is insolvent.” Id., at *6.

However, the party seeking injunctive relief must adduce evidence “under standard

rules of evidence” establishing the defendant’s insolvency. Id. ADP offered

nothing more than a company representative’s testimony that he suspected that the

manufacturer was “hardly in strong financial shape.” Id., at **7–8. But this was

not enough, especially as the manufacturer had not “as of the time of the

injunction, . . . admitted that [it] was insolvent or financially unable to satisfy a

judgment obtained against him.” Id., at *8. Thus, ADP failed to meet its burden to

establish an “irreparable” injury and the injunction was dissolved.

The same result is compelled here. XO’s claimed harm for breach of

contract and breach of fiduciary duty, for which it seeks injunctive relief, can be

remedied entirely by the money damages it seeks to encumber via a prejudgment

remedy. This fact alone undermines its claim for injunctive relief. Moreover, XO

admits that it is seeking an injunction merely to protect its future ability to recover

a potential judgment. Texas law disallows this use of injunctive relief. The one

exception, where a defendant is insolvent, requires an evidentiary showing that XO

does not, and cannot make. Instead, all XO offered was its corporate

representative’s speculative opinion that Dr. Zhao might have been thinking about

potentially utilizing his 2014 bonus money as a security deposit with CAISO. The

44

problems with this testimony are manifest.

Aside from being purely speculative and entirely disconnected from

admissible factual evidence, XO’s claims are illogical. XO admits that in order for

Dr. Zhao to establish the CAISO trading entity it alleges, he would have to deposit,

in addition to the $500,000 “just to get into the market,” at least another

$1,000,000 in order to actually trade on the market. 2.RR.32–33. Thus, if XO’s

suspicions could fairly be taken as fact, as the Trial Court’s TI Order suggests they

were, Dr. Zhao must have at his disposal millions of dollars, starkly undermining

any claim by XO of Dr. Zhao’s insolvency and instead establishing his ready

ability to satisfy a judgment. Contrary to XO’s claim that once these funds are

provided to CAISO, they are lost forever, it admits that these funds are merely held

as security and are not dissipated by trading activity. 2.RR.32–33. Thus, if Dr.

Zhao has the means to engage in this allegedly “competing” enterprise, as XO

insists he does, he has the means to pay damages in the (unlikely) event of a

judgment against him in this suit, either through the millions in liquid assets he

must have if XO’s story is to be believed, or by recovering deposits made with

CAISO.

Thus, the Trial Court abused its discretion in concluding that XO faced a

“probable, imminent, and irreparable injury” absent prejudgment injunctive relief.

The TI Order should be reversed.

45

2. XO is Not Entitled to a Writ of Attachment.

Although XO requested a writ of attachment in its Original Petition, it

appeared to abandon that request at the TI hearings. Nevertheless, to the extent the

Trial Court’s Order could be interpreted as relying on the attachment statute, such

reliance is wholly supported by fact or law and an abuse of discretion.

First, Dr. Zhao is not “justly indebted” to XO. At issue in this case is

whether Dr. Zhao breached an Employment Agreement and, if so, the proper

measure of damages for such breach. The Employment Agreement does not

contain a liquidated damages provision and nothing in Texas law allows for a

discretionary bonus to be construed as “liquidated” damages. Given that the

amount of any such bonus could not be known by Dr. Zhao at the time the

Employment Agreement was executed, he could not possibly have agreed that such

sum would constitute a fair measure of damages for a breach of any of the myriad

provisions of the Agreement. See BMG Direct Mktg., 178 S.W.3d at 766. Nor can

it be said that the amount sought by XO here—more than half a million dollars—is

not an unlawful penalty under the contract, given the lack of any actual harm to

XO from Dr. Zhao’s backing-up company data to external hard drives. Id. Absent

a liquidated debt under a contract, a writ of attachment cannot be had. In re Argyll

Equities, 227 S.W.3d at 271; see also E.E. Maxwell Co., 638 F. Supp. at 753.

Second, given the vast discovery that has been exchanged in this case, and

46

the litigation of a previous lawsuit by XO against Dr. Zhao on identical allegations

as those presented here, it cannot be said that XO’s request for a writ “is not sought

for the purpose of injuring or harassing” Dr. Zhao. On the contrary, XO’s aim is

plainly apparent—to prevent Dr. Zhao from accessing his lawfully earned income

(income on which he has paid income taxes) to meet his financial obligations

following his resignation from employment and to mount a defense to XO’s

slanderous claims to FERC. XO’s conduct should not be countenanced through

the “extraordinary” award of a writ of attachment.

Third, XO can offer nothing more than pure speculation that it will

“probably lose its debt” unless a writ is issued. Having failed to pursue discovery

on this question, XO cannot simply rest on conclusory and xenophobic assertions

that Dr. Zhao intends to start a competing business or move his money to China.

2.RR.21, 58.

Fourth, especially having deposited Dr. Zhao’s 2014 bonus and 401(k)

employer match outside the state of Texas, where it remains, XO cannot establish

any of the Section 61.002 factors necessary to obtain a writ of attachment. There

can be no intention to remove property from the jurisdiction of the Trial Court that

was never within its jurisdiction in the first place.

Thus, absent a liquidated debt at risk of loss via the transfer of such funds

out-of-state, XO cannot establish entitlement to a writ of attachment. To the extent

47

the Trial Court’s TI Order could be interpreted as issuing a writ, such issuance

constitutes an abuse of discretion and should be reversed.

3. The Trial Court Abused its Discretion in Exercising “Inherent

Discretion” to Order Dr. Zhao to Deposit his 2014 Bonus with the

Registry of the Court.

Finally, Texas law is clear: XO cannot attempt an end-run around the legal

requirements for obtaining prejudgment relief via an injunction or writ of

attachment by resort to the Court’s “inherent authority” to issue injunctive relief.

To the extent the Trial Court relied on such authority, doing so constitutes an abuse

of discretion.

A Trial Court’s “inherent authority” to award prejudgment relief is to be

sparingly exercised in only the most limited of circumstances involving a “disputed

fund” in a case that does not implicate “the carefully constructed statutes

concerning garnishment, attachment, receivership, etc.” Alliance Royalties, LLC,

313 S.W.3d at 497. At issue here is not a fund whose ownership is in doubt.

Instead, XO presents an ordinary breach of contract action and request for damages

that can only be awarded upon a finding that Dr. Zhao breached his Employment

Agreement and caused XO recoverable damages.

Unlike marital assets, lottery winnings, or receivership fees, the parties to

this case do not concede that the only issue to be decided is who “owns” Dr.

Zhao’s 2014 bonus. On the contrary, at issue is whether Dr. Zhao breached an

48

enforceable agreement and thereby proximately caused XO recoverable damages.

While XO maintains that the proper measure of damages for Dr. Zhao’s alleged

breach is his 2014 bonus, its contractual theory does not convert Dr. Zhao’s bonus

into a “disputed fund.”

Moreover, XO offered evidence that the fund is in “danger of being lost or

depleted.” Again, despite ample opportunity to do so, XO adduced no evidence of

Dr. Zhao’s financial status and ability to pay a judgment in this case. Especially

after months of discovery, conclusory, speculative, and illogical claims are

insufficient to justify the extraordinary remedy sought.

The basis of the Trial Court’s TI Order is unclear, but to the extent it relied

on some “inherent authority” to issue the Order, doing so is in patent contravention

of well-settled and controlling Texas law holding that “[a] trial court does not have

authority—beyond the purview of the attachment statutes—to order that funds be

deposited in the court’s registry to generally secure payment of a possible future

judgment.” Behringer Harvard Royal Island, LLC, 2009 Tex. App. LEXIS 9456,

at *11. The Trial Court abused its discretion in issuing such extraordinary relief

and the TI Order should be reversed.

VII. PRAYER

XO alleges an ordinary breach of contract and fiduciary duty case for which

its seeks money damages. Nothing in XO’s allegations, and certainly nothing in

49

the facts developed through discovery or offered during the Temporary Injunction

hearings, justify prejudgment relief. The Trial Court abused its discretion in

issuing the TI Order, which is unsupported by fact or law. Accordingly, Dr. Zhao

respectfully requests that the Order be reversed, the Temporary Injunction

dissolved, and his income promptly returned to him by the Registry of the Court.

Dr. Zhao further requests an order awarding costs of suit and all other relief to

which he may be justly entitled.

Respectfully submitted,

STURM LAW, PLLC

/s/ Shannon A. Lang

Charles A. Sturm

Texas Bar No. 24003020

csturm@sturmlegal.com

Shannon A. Lang

Texas Bar No. 24070101

slang@sturmlegal.com

723 Main Street, Suite 330

Houston, Texas 77002

(713) 955-1800 tel.

(713) 955-1078 fax

Attorneys for Defendant-Appellant

Liang “Benny” Zhao

50

CERTIFICATE OF SERVICE

I hereby certify that on December 2, 2015, pursuant to Texas Rule of

Appellate Procedure 9.5(b)(1), a true and correct copy of the foregoing document

was served on counsel of record for Plaintiffs-Appellees identified below via the

electronic filing manager utilized to file this document with the Court.

Thomas C. Van Arsdel

tvanarsdel@winstead.com

WINSTEAD P.C.

1100 JPMorgan Chase Tower

600 Travis Street

Houston, Texas 77002

(713) 650-2728 tel.

(713) 650-2400 fax.

Attorney for Plaintiffs-Appellees XO Energy LLC

and XO Energy Worldwide, LLLP

/s/ Shannon A. Lang

Shannon A. Lang

51

CERTIFICATE OF COMPLIANCE

This brief complies with the Maximum Length requirement of Texas Rule

of Appellate Procedure 9.4(i)(2)(B) because this brief contains 11,041

words, excluding the parts of the brief exempted by Texas Rule of Appellate

Procedure 9.4(i)(1), as determined by the word count function of the word

processing program used to generate this document.

Dated: December 2, 2015 /s/ Shannon A. Lang

Shannon A. Lang

Attorney for Defendant-Appellant

Liang “Benny” Zhao

52

APPENDIX

CASE NO. 01-15-00937-CV

IN THE FIRST COURT OF APPEALS

HOUSTON, TEXAS

LIANG “BENNY” ZHAO,

Defendant-Appellant,

v.

XO ENERGY, LLC, and XO ENERGY WORLDWIDE, LLLP,

Plaintiffs-Appellees.

INDEX TO APPENDIX

Bookmark Document

(1) Amended Temporary Injunction Order

[3.CR.620–623]

(2) Employment Agreement

[1.CR.25–32]

(3) Transcript of Temporary Injunction Hearing

(September 30, 2015)

[2.RR.1–86]

(4) Transcript of de novo Temporary Injunction Hearing

(October 22, 2015)

[1.RR.1–24]

(5) Plaintiff’s Answers to Second Interrogatories

[2.CR.297–300]

(6) Technology & Professional Services Agreement

[3.CR.301–308]

620

621

622

623

EMPLOYMENT AGREEMENT

WITH LIANG "BENNY" ZHAO

DATE: November27,2012

The parties to this Employment Agreement (this "Agreement") are XO Energy,

Worldwide, LLLP (the "Employer"), and Liang "Benny" Zhao (the "Employee"). The Employer

desires to ensure itself of the services of the Employee as of XXX TBD XXX and the Employee

desires to accept such employment on the terms and conditions set forth in this Agreement.

Accordingly, the parties, intending to be legally bound, agree as follows:

I. Employment and Term. The Employer offers to employ the Employee as an

[Analyst], and the Employee accepts that employment with the Employer. Employee's

employment under this Agreement shall commence as of XXX TBD XXX (the

"Commencement Date") and shall continue on an "at will" basis until termination of Employee's

employment as provided in Section 7 of this Agreement (the "Term"). Upon approval of the

Employee's background check and due diligence package by the UVI Research and Technology

Park (RTP), Employee will become a Class B Limited Partner.

2. Duties. The Employee shall report to and perform such duties as may be

assigned from time to time by the Employer's Managing Members and/or such other senior

executives of the Employer as the Managing Members may designate. The Employee shall

devote his or her best efforts to promote the Employer's interests, and he or she shall perform his

or her duties and responsibilities fa.ithfully, diligently and to the best of his or her ability,

consistent with sound business practices and at the location designated by the Employer. The

Employee shall devote his or her full working time to the business and affairs of the Employer.

3. Base Salary/Vacation. Employer shall pay the Employee a base

salary/minimum distribution (the "Base Salarv") at an annual rate not less than .$125,000. The

Base Salary shall be payable in accordance with the Employer's regular payroll practices.

Employee's Base Salary may be adjusted at the discretion of the Employer at the end of each

fiscal year, and shall not be reduced during the course of any fiscal year. Upon becoming a

Partner, Base Salary will then be converted to a Minimum Distribution and reported to employee

at year end on a Kl. Income and Self Employment taxes are the responsibilty of the Partner.

Vacation days accrue during the Term. The initial level of vacation accural shall equal an

annualized rate of 15.0 days (3 weeks). Vacation days shall be pre-approved by Employee's

immediate supervisor.

4. Incentive Compensation. In addition to the Base Salary, Employee may be

awarded certain incentive compensation (Profits Share) as determined in the sole discretion of

the Employer. At the end of each calendar year, Employer shall evaluate whether Employee

shall be awarded a share of Profits for the year then ending.

5. Covenants of the Employee. In order to induce the Employer to enter into

this Agreement, the Employee hereby covenants and agrees as follows:

5611829.4

BOST_I912541.2

25

(a) Prior Restrictions. By accepting employment with Employer, the Employee

agrees that he or she is not currently bound by any agreement that could prohibit or restrict him

or her from being employed by Employer or from performing any duties under this Agreement.

(b) Assignment. The Employee irrevocably assigns to the Employer, or to any

party designated by the Employer, his or her entire right, title and interest in all Developments

that are made, conceived, or developed by the Employee, in whole or in part, alone or jointly

with others, within the scope of his or her affiliation with the Employer. Such assignment shall

include, without limitation, all Intellectual Property Rights in such Developments.

"Developments" shalt mean all discoveries, inventions, designs, improvements, enhancements,

ideas, concepts, techniques, know-how, software, documentation or other works of authorship,

whether or not copyrightable or patentable, in any form, related to any business or technology

that has been developed or is under development by the Employer. "Intellectual Property

Rights" shall mean all forms of intellectual property rights and protections that may be obtained

for, or pertain to, the Confidential Information (as defined in Section 6) and Developments, or

arise from work performed by Employee under this Agreement, and may include without

limitation all right, title and interest in and to (i) all letters patent and all filed, pending or

potential applications for letters patent, including any reissue, reexamination, division,

continuation or continuation-in-part applications throughout the world now or hereafter filed;

(ii) all trade secrets, and all trade secret rights and equivalent rights arising under the common

law, state law, Federal law and laws of foreign countries; (iii) all mask works, copyrights other

literary property or author's rights, whether or not protected by copyright or as a mask work,

under common law, state law, Federal law and laws of foreign countries; and (iv) all proprietary

indicia, trademarks, tradenames, symbols, logns and/or brand names under common law, state

law, Federal law and laws of foreign countries.

(c) Records. All papers, books and records of every kind and description

relating to the business and affairs of the Employer, or any of its affiliates, whether or not

prepared by the Employee, other than personal notes prepared by or at the direction of the

Employer, shall he the sole and exclusive property of the Employer, and the Employee shall

surrender them to the Employer immediately upon expiration of the Term and at any time upon

request by the Employer.

(d) Non-Comoetition. The Employee shall not, during the Term and for a period

of two (2) years following the expiration of the Term for any reason (the "Restricted Period"),

directly or indirectly:

(i) Be engaged, directly or indirectly, either as an agent, employee,

consultant, partner, officer, director, stockholder, proprietor, owner, or otherwise of any person,

firm, corporation or organization engaged or attempting to become engaged in a business that

competes with the business of the Employer or any of its subsidiaries or affiliates as it relates to

the Employer's business (hereinafter, "Competitive Business"), including without limitation all

existing and potential competitors and vendors of Employer, except for services rendered to

Employer or a successor of Employer; provided, however, that nothing contained in this Section

5(d)(i) shall restrict Employee from owning stock of a publicly held and traded utility company;

or

2

$611829.4

aOST_1912547,2

26

(ii) for Employee's own account, or for the account of any person,

firm, corporation or organization engaged or attempting to become engaged in any aspect of a

Competitive Business on a worldwide basis, sell to, solicit, contact or service to any person, firm,

corporation or other organization that is or was a customer or prospective customer of Employer,

with which Employee had contact during Employee's employment, regardless of the time when

said customer or prospective customer became a customer or prospective customer of Employer.

During the Restricted Period, Employee shall ioform every new employer, prio~ to accepting

employment, of the existence of this Agreement and the provisions of this Section 5.

(e) Non-Solicitation. The Employee shall not, during the Restricted Period,

directly or indirectly:

(i) Solicit for employment or engagment on the Employee's own

behalf, or on behalf of a Compteitive Business, any individual or entity who is or has been an

employee, agent or independent contractor of the Employer during the Restricted Period; or

(ii) Contact or attempt to persuade any agent, broker or employee of

Employer or its affiliated companies to terminate his or her relationship with Employer or do any

act that may result in the impairment of the relationship between Employer and such agent,

broker or employee.

(f) Blue Pencil. The provisions contained in this Section 5 as to the time

periods, geographic area and scope of activities restricted are severable, so that if any provision

contained in this Section 5 is determined to be invalid or unenforceable, that provision shall be

deemed modified so as to be valid and enforceable to the full extent lawfully permitted.

(g) Breach; Enforcement.

(i) Nothwithstanding any other remedy at law or in equity to which

Employer may be entitled or may pursue, in the event Employee (a) breaches any of the

covenants contained in this Section 5, (b) is terminated for Cause (as defined below), or (c)

terminates his or her Employment without Good Reason (as defined below), he or she shall

automatically forfeit any and all rights to any deferred Bonuses or other deferred incentive

compensation (including without limintation any options relating to equity in Employer or its

affiliates), and any grant by Employer of such remuneration shall be automatically void.

(ii) The Employee agrees and warrants that the covenants contained

herein are reasonable, that valid consideration has been and will be received therefor and that the

agreements set forth herein are the result of arms-length negotiations between the parties hereto.

The Employee recognizes that the provisions of this Section 5 are vitally important to the

continuing welfare of the Employer, and its affiliates, and that money damages constitute a

totally inadequate remedy for any violation thereof: Accordingly, in the event of any such

violation by the Employee, the Employer, and its affiliates, in addition to any other remedies

they may have, shall have the right to institute and maintain a proceeding to compel specific

performance thereof or to issue an injunction restraining any action by the Employee in violation

of this Section 5.

3

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27

6. Confidentiality. The Employee shall not, directly or indirectly, disclose to

anyone, or use in competition with the Employer or any of its subsidiaries or affiliates, any

Confidential Information of or pertaining to the Employer, including without limitation, any

trade secrets, advertising arrangements, costs, financial data, employee information or

information as to organization structure of the Employer or any of its subsidiaries or affiliates.

"Confidential Information" shall mean confidential or other proprietary information that is

owned by the Employer or any of its subsidiaries or affiliates, including without limitation,

hardware and software designs, product specifications and documentation, business and product

plans, customer lists, and other confidential business information. Confidential Information shall

not include information which: (i) is or becomes public knowledge without any action by, or

involvement of, the Employee in violation of this Agreement; (ii) is disclosed by the Employee

with the prior written approval of the Employer; or (iii) is disclosed pursuant to any judicial or

governmental order or in any dispute with the Employer, provided that the Employee gives the

Employer sufficient prior notice to contest such order. The Employee shall not disclose to the

Employer or any of its subsidiaries or affiliates, use in the Employer's or any of its subsidiaries'

or affiliates' business, or cause the Employer or any of its subsidiaries or affiliates to use, any

confidential or proprietary information or materials of any third party. Nothing in this S.ection 6

is designed to narrow the Employer's enforcement rights under any state of federal law.

7. Termination of Employment.

(a) Death or Disability. The Employee's employment under this Agreement

shall terminate upon his or her death or Permanent Disability. For purposes of this Agreement

"Permanent Disability" shall mean a physical or mental disability or infirmity that prevents the

material performance by Employee of his or her duties hereunder (i) lasting for a continuous

period of ninety (90) days or longer; or (ii) for ninety (90) days out of any one hundred· twenty

(120) day period.

(b) Termination by the Employer. The Employer may terminate the Employee's

employment under this Agreement with or without Cause (as defined below) by giving written

notice to the Employee of such termination. In the event of a termination without Cause, the

Employer shall provide the Employee with at least 30 days'. advance written notice of his

termination. For purposes of this Agreement, the Employer shall have "Cause" to terminate the

Employee's employment under this Agreement in the event of: (i) the Employee's willful and

continued failure to perform and to discharge his or her duties and responsibilities under this

Agreement for any reason (other than the Employee's disability) after (x) the Employer has

provided the Employee with written notice of its intent to terminate his employment under this

clause, and (y) the Employee has failed to resume the performance of such duties within fifteen

(15) days following receipt of such notice; (ii) any other willful misconduct by the Employee

that is materially and demonstrably injurious economically to the Employer; (iii) the

Employee's final conviction of any felony or any misdemeanor involving moral turpitude; or

(iv) the Employee's violation of any ofthe provisions of Section 5 of this Agreement.

(c) Termination by the Employee. The Employee may terminate his or her

employment under this Agreement with or without Good Reason (as defined below) by giving

prior written notice to the Employer. If the Employee terminates his or her employment without

Good Reason, he or she shall provide the Employer with at least 30 days advance written notice

4

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28

of his intent to terminate his or her employment. For purposes of this Agreement, the Employee

shall have "Good Reason" to terminate his or her employment upon: (i) the Employer's breach

of a material provision of this Agreement, (ii) written notice to the Employer describing the

nature of the breach proving an intent to terminate the Agreement for Good Reason under this

clause, and (iii) the Employer's failure to correct the breach within fifteen (15) days following

the written notice required in Section 7(c)(ii).

8. Compensation Upon Termination.

(a) Compensation uoon Termination for Any Reason. Subject to Section S(g) of

this Agreement, if the Employee's employment under this Agreement is terminated for any

reason, then the Employee shall be entitled to receive the following benefits (collectively, the

"Standard Termination Benefits"): (i) the amount of his or her Accrued Obligations (as defmed

below), to be paid in a single lump sum cash payment within thirty (30) days of the date of

termination, and (ii) any payments which the Employee, his or her spouse, beneficiaries or

estate may be entitled to receive pursuant to any employee benefits plan or program of the

Employer. As used in this Agreement, "Accrued Obligations" means, as of the date of

termination, (A) any accrued but unpaid Base Salary, (B) any accrued and unpaid reasonable

expense reimbursements, and (C) any accrued, but unpaid vacation.

(b) Additional Termination Comqensation. If the Employer terminates the

Employee's employment without Cause, if the Employee terminates his or her employment for

Good Reason, or if Employee's employment is terminated under Section 7(a) of this

Agreement, the Employee (or in the case of his or her death, his or her estate or beneficiary, as

the case may be) shall be entitled to receive, in addition to the Standard Termination Benefits

set forth in Section 8(a) above, the following additional benefits (the "Additional Termination

Benefits'') within thirty (30) business days following his/her termination of employment:

(i) a cash amount equal to two (2) months of the Employee's Base

Salary as of the date of termination, payable in a lump-sum; and

(ii) a pro-rata amount of his or her target bonus earned in the year of

termination.

The benefits referred to in this Section 8(b) ("Severance Pay") shall be

given in lieu of any other claims, termination benefits or payments held by or due to or the

Employee. In addition, all payments given hereunder shall be given only in exchange for the

execution and delivery of a general release, in a form and substance agreeable to the Company,

which releases any claims the Employee might have against the Company related to Employee's

employment. Employee will forfeit any and all amounts due as Severance Pay hereunder upon

the breach of any covenants in Section 5.

9. Miscellaneous.

(a) Binding Effect. This Agreement shall be binding upon and inure to the

benefit of the heirs and representatives of the Employee and the successors and assigns of the

Employer.

5

5611829.4

BOST_191l547.l

29

(b) Notices. Any notice or other communication under this Agreement shall be

in writing and shall be considered given when mailed by registered, return receipt requested

mail, to the parties at the following addresses (or at such other address as a party may specify by

notice to the others):

To the Employer: To the Employee:

XO ENERGY WORLDWIDE, LLLP

6501 Red Hook Plaza, Suite 201

St Thomas, VI 00802-1306

Attn: Shawn Sheehan/John Charette

Addresses may be changed by written notice sent to the other party at the last recorded address

of that party.

(c) Jurisdiction and Governing Law. This Agreement shall be governed by and

construed in accordance with the laws of the State of Delaware. The parties hereto consent to

the jurisdiction and venue of any state or federal court in the State of Delaware and agree that

any permitted lawsuit may be brought to such courts or other court of competent jurisdiction

upon the consent of both parties.

(d) Severability. If any provision of this Agreement, or the application of any

provision to any person or circumstance, shall for any reason and to any extent be invalid or

unenforceable, the remainder of this Agreement and the application of that provision to other

persons or circumstances shall not be affected but shall be enforced to the full extent permitted

by law.

(e) Prior Understandings. This Agreement embodies the entire understanding of

the parties hereof, and supersedes all other oral or written agreements or understandings

between them regarding the subject matter hereof. No change, alteration or modification hereof

may be made except in a writing, signed by each of the parties hereto.

(f) Successors,

(i) Employer's Successors. No rights or obligations of the Employer

under this Agreement may be assigned or transferred except that the Employer may assign this

Agreement to any successor (whether direct or indirect, by purchase, merger, consolidation or

otherwise) to all or substantially all of the business and/or assets of the Employer if such

successor expressly assumes and agrees to perfonn this Agreement in the same manner and to

the same extent that the Employer would be required to perform it if no such succession had

taken place. As used in this Agreement, "Employer" shall mean the Employer as herein before

defined and any successor to its business and/or assets (by merger, purchase or otherwise) which

executes and delivers the agreement provided for in this Section 9(f)(i) or which otherwise

becomes bound by all the terms and provisions of this Agreement by operation of law.

(ii) Employee's Successors. No rights or obligations of the Employee

under this Agreement may be assigned or transferred by the Employee other than his rights to

6

5611829.4

SOST_I912S47.2

30

payments or benefits hereunder, which may be transferred only by will or the laws of descent

and distribution. Upon the Employee's death, this Agreement and all rights of the Employee

hereunder shall inure to the benefit of and be enforceable by the Employee's beneficiary or

beneficiaries, personal or legal representatives, or estate, to the extent any such person succeeds

to the Employee's interests under this Agreement. The Employee shall be entitled to select and

change a beneficiary or beneficiaries to receive any benefit or compensation payable hereunder

following the Employee's death by giving the Employer written notice thereof. In the event of

the Employee's death or a judicial determination of his incompetence, reference in this

Agreement to the Employee shall be deemed, where appropriate, to refer to his beneficiary(ies),

estate or other legal representative(s). lf the Employee should die following his date of

termination while any amounts would still be payable to him hereunder if he had continued to

live, all such amounts unless otherwise provided herein shall be paid in accordance with the

terms of this Agreement to such person or persons so appointed in writing by the Employee, or

otherwise to his legal representatives or estate.

(g) Non-Disclosure. Unless otherwise required by applicable law or the rules of

any stock exchange or quotation system on which the securities of the Employer are listed, or

by legal process, each of the parties to this Agreement shall hold the terms of this Agreement in

the strictest confidence and shall not disclose or otherwise make public any of the terms and

conditions of. this Agreement; provided, that, any disclosure made by Executive to his spouse,

attomey(s) or financial adviser(s) shall not be deemed to be a breach of this Section 9(g).

(h) No Waiver. The failure of any party at any time or times to demand strict

performance by any other party of the terms, covenants, or conditions set forth in this

Agreement shall not be construed as a continuing waiver or relinquishment thereof, and any

party may at any time demand strict and complete performance of such terms, covenants, and

conditions.

(i) Integration. This Agreement constitutes the final, exclusive, and complete

expression of the agreement of the parties hereto, and it embodies all of the terms and

conditions of the Agreement between the parties with respect to the subject matter hereof. This

Agreement is expressly intended to replace and supersede all prior and contemporaneous

agreements, proposals, negotiations, representations, and warranties, if any, between the parties.

There are no agreements, representations, or warranties that have not been included in this

Agreement. It represents the result of arms length negotiation between the parties and shall be

interpreted and construed without regard to any presumption or other rule requiring construction

against the party who caused the Agreement to be drafted.

G) Execution in Counterparts. This Agreement may be executed in two or more

counterparts, each of which shall constitute an original, but all of which together shall constitute

but a single instrument.

[The remainder of this page is intentionally left blank.]

[Signature lines appear on the following page.]

7

l611829.4

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31

IN WITNESS WHEREOF, the parties hereto have exeouted and delivered this

Agreement as· of the day and yead'irst abQve written,

·.· ·.

EMPLOYER:

xo~.

GY:~.~oo~

~· ~Bi:P.'r

By=~s

Title:

EMPLOYEE;

L;o.nd zhao -

9

5-61 111~.4

BOS1cl911l4J.1

32

Temporary Injunction

September 30, 2015

1 REPORTER'S RECORD

2 VOLUME 2 OF 3 VOLUME FILED IN

1st COURT OF APPEALS

HOUSTON, TEXAS

3 TRIAL COURT CAUSE NO. 15-DCV-226436

11/12/2015 3:11:05 PM

4 CHRISTOPHER A. PRINE

Clerk

5 XO ENERGY LLC and ) IN THE DISTRICT COURT OF

XO ENERGY WORLDWIDE, LLLP )

6 Plaintiffs, )

)

7 VS. ) FORT BEND COUNTY, TEXAS

)

8 LIANG "BENNY" ZHAO, )

Defendant. ) 240TH JUDICIAL DISTRICT

9

10

11

12 TEMPORARY INJUNCTION

13

14

15 On the 30th day of September, 2015, the following

16 proceedings came on to be held in the above-titled and

17 numbered cause before the Honorable Stuti Patel,

18 Associate Judge Presiding, via digital recording under

19 Rule 199.1(c), held in Richmond, Fort Bend County,

20 Texas, pursuant to the Texas Rules of Civil Procedure.

21 TRANSCRIPTION UNDER RULE 203.6(a) by a Certified

22 Shorthand Reporter.

23

24

25

Temporary Injunction 2

September 30, 2015

1 APPEARANCES

2

3 MR. TOM VAN ARSDEL

SBOT NO. 24008196

4 Attorney at Law

1100 JP Morgan Chase Tower

5 600 Travis Street

Houston, TX 77002

6 Telephone: 713-650-2728

7 AND

8 MR. ZACHARY B. ALLIE

SBOT NO. 24063997

9 Attorney at Law

1100 JP Morgan Chase Tower

10 600 Travis Street

Houston, TX 77002

11 Telephone: 713-650-2728

12

Attorneys for Plaintiff XO Energy LLC and

13 XO Energy Worldwide, LLLP.

14

15

16

17

MS. SHANNON ASHLEY LANG

18 SBOT NO. 24070103

723 Main Street, Suite 330

19 Houston, TX 77002

Telephone: 713-955-1800

20

Attorney for Defendant Liang "Benny" Zhao

21

22

23

24

25

Temporary Injunction 3

September 30, 2015

1 WITNESS INDEX

2 John Charette Direct Cross V.Dire

3 By Mr. Van Arsdel 24 v2

4 By Ms. Lang 60 v2

5

6 Closing Statement by Mr. Van Arsdel ..............71 2

7 Closing Statement by Ms. Lang ....................74 2

8 The Court's Ruling by Judge Patel ................82 2

9 Reporter's Certificate ...........................86 2

10 * * * * * * *

11 EXHIBIT INDEX

12 EXHIBIT DESCRIPTION OFFERED ADMITTED

13 # 2. California Independent 28

System Operator Corp.

14 Electronic Tarniff

15 # 7. Offer of Employment to 37 38

Mr. Zhao

16

# 8. Employment Agreement to 41 41

17 Mr. Zhao

18 # 13. Exhibit D to Petition 53

Screen shots

19

# 14. Paystub for Mr. Zhao 56 56

20

# 16. Letter of Termination to 56 57

21 Mr. Zhao

22

23

24

25

Temporary Injunction 4

September 30, 2015

1 (The following hearing is being

2 transcribed from a digital audio recording

3 provided by Stuti Patel, Associate Judge

4 for the 240th District Court.)

5 (PROCEEDINGS)

6 THE COURT: We are on the record for

7 15-DCV-226436. If the attorneys could state their names

8 and who they represent for the record.

9 MR. VAN ARSDEL: Yes. Tom Van Arsdel for

10 XO Energy, LLC, and XO Energy Worldwide LLLP, the

11 Plaintiffs.

12 MR. ALLIE: Zachary Allie for the same

13 parties.

14 MS. LANG: Shannon Lang on behalf of the

15 Defendant, Liang Zhao.

16 THE COURT: Okay. Thank you, counsel. It

17 is my understanding before we got on the record this

18 morning that y'all had an opportunity to meet and have

19 reached I guess a partial agreement or the Defendant is

20 not opposed to entry of certain parts of the order; is

21 that correct?

22 MR. VAN ARSDEL: That's right.

23 MS. LANG: That's correct.

24 THE COURT: Okay. Do one of y'all want to

25 cite for the record just briefly -- and I'm referencing

Temporary Injunction 5

September 30, 2015

1 to the proposed temporary injunction order that was

2 filed on 9-29 of this year under this cause number. Do

3 one of the attorneys want to go ahead and state for the

4 record what part of that proposed order is not opposed

5 or unopposed?

6 MR. VAN ARSDEL: Sure. This order asks

7 for, starting on page 2, the middle of page 2, certain

8 elements of relief A, B, and C. As to A, the parties --

9 the Defendant is not opposed to the relief requested in

10 Section A of the order, so long as every part of the

11 phrase after the word "judgment" is struck. So, the

12 phrase would read, "Contacting or soliciting any and all

13 Plaintiffs' clients, customers, vendors, or suppliers

14 that the Defendant came into contact with as an employee

15 of Plaintiffs, or for which he obtained confidential

16 information about during his employment until final

17 judgment."

18 And then as to the relief requested in

19 Section B including all subparts and Section C, the

20 Defendant is unopposed to an entry of order for that

21 relief as well.

22 THE COURT: And is that correct, Ms. Lang?

23 MS. LANG: That is correct.

24 THE COURT: Okay. So, we have placed on

25 the record the part of the proposed order that is not

Opening Statement by Mr. Van Arsdel 6

September 30, 2015

1 opposed. It is my understanding that this afternoon

2 when we reconvene after the Court's recess, we will hear

3 arguments, law, evidence about the remaining issue,

4 which is the Plaintiffs' request for the deposit in the

5 Court registry. Is that the only issue remaining?

6 MR. VAN ARSDEL: That's right.

7 MS. LANG: Yes, and then perhaps some

8 changes to the preparatory language.

9 THE COURT: Yes. That is correct. And it

10 could affect the other language. So, with all that

11 being stated on the record, we are going to go off the

12 record at this time. The Court stands in recess in this

13 cause number until -- we will start exactly at 1:30 p.m.

14 Does that work for both parties?

15 MR. VAN ARSDEL: Okay. That would be

16 fine.

17 THE COURT: Okay. Then we are going to go

18 off the record at this time.

19 (Off the record.)

20 THE COURT: We are back on the record in

21 Cause Number 15-DCV-226436. If I could have the

22 attorneys state their name and who they represent for

23 the record again since we restarted it.

24 OPENING STATEMENT

25 MR. VAN ARSDEL: Yes. Tom Van Arsdel for

Opening Statement by Mr. Van Arsdel 7

September 30, 2015

1 XO Energy, LLC, and XO Energy Worldwide, LLLP, the

2 Plaintiffs.

3 MR. ALLIE: Zachary Allie for the same

4 Plaintiffs.

5 MS. LANG: Shannon Lang on behalf of the

6 Defendant.

7 THE COURT: Okay. Thank you. And,

8 Mr. Van Arsdel, are you going to be the primary

9 presenting for the Plaintiff?

10 MR. VAN ARSDEL: I will be.

11 THE COURT: And you are the movant today,

12 so, I will let you go ahead and give the Court some

13 opening remarks briefly about what you are asking for.

14 MR. VAN ARSDEL: Thank you, Your Honor.

15 XO Energy and XO Energy Worldwide are companies involved

16 in the wholesale of electricity trading market. They

17 operate out of an office in Saint Thomas U.S. Virgin

18 Islands. They also have an office in Landenberg,

19 Pennsylvania, outside of Philadelphia.

20 And to accomplish their business

21 objectives they hire a number of traders and analysts to

22 support their trading activity. Mr. Zhao, the

23 Defendant, was formally an analyst with XO Energy. He

24 was employed beginning in 2013, and his employment was

25 terminated earlier this year in March of 2015.

Opening Statement by Mr. Van Arsdel 8

September 30, 2015

1 As part of fulfilling his duties for XO

2 Energy as an analyst, Mr. Zhao was given access to

3 certain confidential information that was necessary for

4 the work he needed to do to facilitate trades and make

5 good decisions on what energy markets to trade in. So,

6 to receive this information he signed a number of

7 agreements that allowed him access to the information

8 and also required him to take certain measures to

9 protect it, and we will have evidence of that in the

10 record.

11 In addition to that, he had to sign an

12 employment agreement. The employment agreement said

13 that he was to receive a salary. That salary was

14 $125,000 annually. A number of benefits he was also

15 eligible for. And he was also eligible for deferred

16 compensation, essentially a year-end bonus based on

17 performance and the performance of the companies that

18 would be determined solely in the discretion of

19 management.

20 There are some additional provisions in

21 the agreement that impact whether or not he gets a

22 bonus. One of those is if he has violated Section 5 of

23 the agreement. The agreement says that, "All payments

24 of compensation are automatically void." Section 5 of

25 the agreement contained a non-compete clause for two

Opening Statement by Mr. Van Arsdel 9

September 30, 2015

1 years that prevents him from doing anything to compete

2 with XO Energy in this industry. The reason that's in

3 there, Your Honor, is because these analysts and traders

4 receive very specialized training, they receive not only

5 the confidential information, they receive some training

6 on how to use it. So, what they don't want is for

7 employees to come on board, get all this information,

8 learn the ropes, and then immediately set up shop next

9 door to compete. So, they have a two year non-compete

10 in there. And it says, again, that if that's violated

11 then any grant by the employer of such remuneration

12 shall be automatically void, and that includes deferred

13 bonuses.

14 What we have here is we discovered -- XO

15 Energy -- discovered in February of 2015 that Mr. Zhao

16 had been downloading and copying confidential

17 information that was contained in various parts of

18 XO Energy's computer system. He downloaded this on to

19 an external drive from his home in Katy. Incidentally,

20 Mr. Zhao was the only employee or representative of XO

21 that lived outside of either Landenberg, Pennsylvania or

22 Saint Thomas Virgin Islands, he lived in Katy.

23 THE COURT: His house is in Katy,

24 Fort Bend County?

25 MR. VAN ARSDEL: It is. And there is a

Opening Statement by Mr. Van Arsdel 10

September 30, 2015

1 computer software package that was activated on his

2 computer to capture all the activity and screen shots on

3 his computers during a period from roughly

4 February 13th, to February 27th. And what those screen

5 shots capture is his personal copying of various pieces

6 of confidential information contained in proprietary

7 software, contained in licensed software, contained in

8 emails, maps that had been obtained from the independent

9 service organizations that run these utility markets

10 that are provided in exchange for confidentiality

11 agreements --

12 THE COURT: Who put that software in his

13 computer to capture the screen shots?

14 MR. VAN ARSDEL: The company did. It's on

15 everyone's computer, but you have to manually turn it

16 on, and they did turn on the screen shot capability on

17 his computer in mid February of 2015. And all of the

18 information or a selection of the information that was

19 captured during those screen shots is attached to the

20 petition.

21 So, what we also saw, in addition to the

22 copying, was he was developing a to do list and

23 accessing the website for an organization called CAISO,

24 C-A-I-S-O, it's a California electricity company. And

25 what he was doing is he was looking for what the

Opening Statement by Mr. Van Arsdel 11

September 30, 2015

1 requirements are to set up to be a trader on that

2 utility grid, and he was making a to do list of

3 everything that he needed to do to set himself up to

4 trade on that ISO. So, we have evidence that he was

5 making imminent plans to compete against XO Energy. He

6 was going to quit the company, set up himself to compete

7 on the CAISO and violate his non-compete.

8 So, once that was discovered,

9 unfortunately the payment of the bonus that he was

10 supposed to get for his performance in 2014 was not

11 discovered in time to hold back that payment. Because

12 the company would have invoked and, in fact, has invoked

13 the breach and enforcement provision of the employment

14 contract which says that that remuneration is

15 automatically void. It was evidenced before he was to

16 be made the payment, it was just not discovered until

17 that payment was already in process and deposited in his

18 account.

19 So, what we are asking the Court to do is

20 enforce this part of the agreement, to compel Mr. Zhao

21 to pay that money into the registry of the Court pending

22 the outcome of this case. We are disputing the

23 ownership of the funds, and we believe that the

24 agreements in place and under Texas law, we are entitled

25 to this relief.

Opening Statement by Ms. Lang 12

September 30, 2015

1 THE COURT: So, you are asking that he be

2 ordered to pay that amount -- I think it was around 500

3 something thousand dollars -- I have it in your

4 pleadings, the exact amount. You are asking that he be

5 court ordered to pay that into the registry until this

6 case is either resolved by settlement or resolved by

7 trial?

8 MR. VAN ARSDEL: That's right, Your Honor.

9 THE COURT: Okay. Ms. Lang, do you want

10 to make some opening remarks about this hearing today?

11 OPENING STATEMENT

12 MS. LANG: Well, first, we take issue with

13 some of the stunning omissions from the callous

14 representations of the facts here.

15 THE COURT: I'm sorry, Ms. Lang, I just

16 really want to make sure we are all being recorded. I

17 don't mean to interrupt here, I apologize, but if you

18 will just talk a little bit louder. I just get

19 concerned because you both know you are entitled to a

20 transcript of today's proceedings and it has to be

21 recorded properly before that can even be made.

22 (REPORTER'S NOTE: AT THIS TIME THE JUDGE

23 TURNED UP THE MICROPHONES FOR A BETTER

24 RECORDING, BUT ACTUALLY NOW THERE IS A

25 LOUD NOISE, A KIND OF SQUELCH NOISE.)

Opening Statement by Ms. Lang 13

September 30, 2015

1 MS. LANG: Well, as I was saying, there

2 are stunning omissions in the representation of the

3 facts here. But I will start with the primary question

4 before the Court, which is what is the extent of the

5 Court's authority to order a writ of attachment on this

6 money, and how has XO demonstrated they are entitled to

7 it, and endorsed by the company of XO? Their position

8 that this is a simple question as far as the money to be

9 placed into the registry of the Court ignores that there

10 is only one legal method to do that in Texas, and that's

11 through a writ of attachment, which has been described

12 as an ineffectually harsh remedy that should only be

13 issued in the most narrow circumstances when various

14 statutory requirements have been met. None of those

15 have been met. In fact, none of them were mentioned.

16 And those include whether the Defendant (unintelligible)

17 indebted to the Plaintiff, and indebted for purposes of

18 a writ of attachment meaning there is liquidated damages

19 clause in the contract that can be enforced.

20 Two, the attachment is not sought for the

21 purpose of injuring or harassing the Defendant. I would

22 submit that this is very much about injuring and

23 harassing the Defendant, because -- well, I'll finish

24 with my recitation.

25 We have been engaged in litigation since

Opening Statement by Ms. Lang 14

September 30, 2015

1 March, have conducted full discovery and the discovery

2 has not brought out any facts to support their claim,

3 which they are full aware of.

4 Three, the Plaintiffs will probably lose

5 his debt once the writ of attachment is issued. And to

6 that end, Texas courts have held that there needs to be

7 an actual showing that, in fact, the party against whom

8 a writ is sought doesn't have the financial wherewithal

9 or ability to pay a judgment if one did, enforced

10 against him, again, has fairly stated that under a

11 contract. We have been in discovery for six months, so,

12 there has been ample opportunity to make discovery on

13 this issue.

14 And, four, the specific grounds for the

15 writ to exist, another statute, Section 61.002 of the

16 Texas Civil Practices and Remedies Code, and there is a

17 list there we can go through, but none of those factors

18 have been met either. So, the only issue for the Court

19 is whether as a matter of law they have presented you a

20 contract with a liquidated damages provision that

21 constitutes theft justly owed to the Plaintiff, that

22 they are not seeking to injure, harass or harass the

23 Defendant, and that they meet the proper showing that

24 there will be (unintelligible) in the event a judgment

25 is issued. If they can't meet their showing, the writ

Opening Statement by Ms. Lang 15

September 30, 2015

1 of attachment can't issue. That's really the entire

2 inquiry for this Court.

3 THE COURT: The thing that you mentioned

4 that the discovery has been completed between both

5 parties already on this case through the federal court?

6 MS. LANG: It was substantially completed.

7 They filed suit in federal court back in March. We

8 filed a motion to dismiss on the basis of jurisdiction,

9 but while that motion was being decided Dr. Zhao

10 permitted discovery to proceed. So, to that end, the

11 parties exchanged computers and related devices, and

12 then produced to the party's perspective experts, in

13 fact, one was here earlier. The devices have been

14 investigated and analyzed. We have exchanged documents

15 in discovery. Dr. Zhao has outstanding discovery that

16 wasn't due yet when the case was dismissed. But they

17 have propounded discovery only one set (unintelligible).

18 THE COURT: So, is there any discovery

19 that your client, Mr. Zhao, is still seeking?

20 MS. LANG: There are some things that

21 Dr. Zhao is seeking. In particular -- well, there are

22 several things. But in particular, going back to my

23 first point, which there are some incredible omissions

24 from the factual implications here. First of all,

25 Dr. Zhao was told in February, 2015, that he needed to

Opening Statement by Ms. Lang 16

September 30, 2015

1 make a choice. He needed to either relocate in

2 Saint Thomas, or Landenberg, Pennsylvania, or resign his

3 position. He was given time to consider that and, in

4 fact, was told that he should not reach his decision

5 until he had an opportunity to receive his 2014 bonus,

6 and that was only because they thought this attractive

7 bonus would encourage him to stay with the company. The

8 high performing employee earned a $700,000 bonus last

9 year. Dr. Zhao asked a question in an email about the

10 terms of the ultimatum, and in the meantime attended a

11 company-wide meeting where the company expressed it's

12 intent to offer Plaintiffs an amendment to their

13 non-compete obligations that would lesson the time of

14 two years to one, and include a severance provision. We

15 have not gotten those documents despite having asked for

16 those documents of the non-compete. And so, we are

17 seeking those, and some various other things that --

18 THE COURT: The various outstanding

19 discovery that you say your client is going to want at

20 some point?

21 MS. LANG: Yes. But not much.

22 THE COURT: Okay.

23 MS. LANG: But in the meantime, I think

24 the important point is that we have conducted all of

25 this discovery on the devices. Dr. Zhao's computer has

Opening Statement by Ms. Lang 17

September 30, 2015

1 been produced, various other devices have been produced.

2 And there have been no additional facts pled in this

3 complaint than there was in the original complaint. And

4 in looking through the binder of exhibits, there are no

5 new exhibits offered here that were exchanged in

6 (unintelligible) that would shed additional light on

7 their case. In fact, they have dropped the claims that

8 they are brought in the federal case, and that was a

9 claim for appropriation of trade secrets, which if you

10 look at the contract under which they are proceeding,

11 absent of the appropriation of trade secrets, there

12 really isn't any contract violation. And that brings us

13 back to the point of whether they are entitled to a writ

14 of attachment, because they can't show entitlement of

15 the contract and they haven't met the other legal

16 requirements for getting a writ. There is no means or

17 legal authority to order this money be placed into the

18 registry of the Court. I should also point out that

19 obviously the Court's (unintelligible).

20 THE COURT: Where was the money deposited?

21 MS. LANG: It was deposited into a savings

22 account in California. Under the 401(k) money of --

23 well, I don't know if the (unintelligible).

24 THE COURT: Mr. Van Arsdel, this money

25 that we are talking about, which is the sole issue

Opening Statement by Ms. Lang 18

September 30, 2015

1 today, I guess, remaining on the injunction --

2 MR. VAN ARSDEL: Yes.

3 THE COURT: -- that money is not in Texas?

4 MR. VAN ARSDEL: It's in the Bank of

5 America.

6 THE COURT: Okay.

7 MR. VAN ARSDEL: It's not as if it's

8 stuffed under a mattress in California. It's in the

9 Bank of America, which obviously the Court can take

10 judicial notice that the Bank of America has branches in

11 Texas. So, Mr. Zhao would have access to have those

12 funds in Texas.

13 More on the point, we have identified a

14 case, the Supreme Court of Texas, where the Supreme

15 Court affirms the trial court's order of $17,000 that

16 was held in a Mexican bank be paid into the registry of

17 the court.

18 THE COURT: Do you have a copy of that

19 case?

20 MR. VAN ARSDEL: I do.

21 THE COURT: Have you given one to --

22 MR. VAN ARSDEL: May I approach, Your

23 Honor?

24 THE COURT: Yes. Thank you, sir.

25 MR. VAN ARSDEL: Now, I'm sure opposing

Opening Statement by Ms. Lang 19

September 30, 2015

1 counsel would be quick to note there are some procedural

2 differences here. This is a post-judgment order and not

3 a pre-judgment order. But the greater point is that

4 this court said it was okay to compel money that is held

5 in another jurisdiction to be paid into the registry of

6 the court.

7 MS. LANG: Well, if I could respond

8 briefly. The fact that this is post-judgment makes it

9 entirely irrelevant. But moreover, this case is from

10 1967, and I believe the writ of attachment statute comes

11 after that. And the Texas courts have held that that's

12 the only thing under which unattached property where a

13 judgment can be met.

14 MR. VAN ARSDEL: And as to that point,

15 Your Honor, I would be happy to respond as I have a

16 string of cases on that.

17 THE COURT: Okay. This is 1967, and the

18 writ of attachment statute I guess is after that. What

19 were you saying you had a response to?

20 MR. VAN ARSDEL: Yes, Your Honor. And we

21 have another case that Mr. Allie will provide a copy of.

22 It's from 2009 which is after the writ of attachment

23 statute was enacted. It is from the Dallas Court of

24 Appeals. In this case there is a holding that the

25 parties --

Opening Statement by Ms. Lang 20

September 30, 2015

1 THE COURT: Counsel, just for the record,

2 if you will read into the record all the cases you have

3 handed to the Court, and the cites so we have them on

4 the record.

5 MR. VAN ARSDEL: Certainly. This is

6 Behringer, B-E-H-R-I-N-G-E-R, Harvard Royal Island, LLC

7 versus Skokos, S-K-O-K-O-S. The cite is 2009 TEX@9Lexus

8 9456 in 2009 WL4756579. It's a December 14th, 2009

9 opinion from the Court of Appeals in Texas, 5th District

10 in Dallas.

11 This case did hold that the applicant in

12 this particular matter should have followed the writ of

13 attachment statute. On page 10 of the opinion, this

14 Court does say that the trial court has some inherent

15 authority without implicating the attachment statutes to

16 order independently to deposit funds into the court's

17 registry. This authority arises when there is a dispute

18 as to a particular fund. Specifically if the Plaintiff

19 can show a dispute about a fund and show that the fund

20 is in danger of being depleted, the trial court can

21 order the funds to be deposited in the Court's registry.

22 And, again, this is without regard to the requirements

23 of the writ of attachment statute.

24 So, what we intend to show is that there

25 is a dispute about this fund. He is saying that it is

Opening Statement by Ms. Lang 21

September 30, 2015

1 now his property, and we are saying that under his

2 employment agreement that payment was void and needs to

3 be returned to the employer. So, there is a dispute.

4 We also intend to show that as long as

5 these funds are unprotected and are in Mr. Zhao's

6 hands -- Dr. Zhao's hands -- they are at risk of being

7 depleted. Number 1, he was researching the requirements

8 under the CAISO for becoming a trader on that exchange,

9 and we intend to show that one of those requirements is

10 the payment of a $500,000 deposit. That is very similar

11 to the amount that he just received from XO.

12 Number 2, we intend to show that he is a

13 Chinese citizen, has access to Chinese financial

14 assistance in the banks there, and that I think it is

15 well accepted that once money is overseas in China, it

16 becomes almost impossible to get it out of the Chinese

17 bank. Certainly they do not honor American court orders

18 to have those funds returned to the United States.

19 So, we do believe we can make the

20 requirements that were shown in 2009 in this Court of

21 appeals case, and incidentally, I will mention that this

22 is the same record that we brought to Judge Ellison in

23 the federal court and he granted the relief we asked

24 for. It was a slightly different variation, he did not

25 require a payment into the registry, but he did place a

Opening Statement by Ms. Lang 22

September 30, 2015

1 freeze on the funds. Under the same record without

2 regard to the writ of attachment requirements.

3 THE COURT: Is it 593 the statute number?

4 Do y'all know offhand?

5 MR. VAN ARSDEL: For the writ of

6 attachment?

7 THE COURT: Yes.

8 MS. LANG: It's Texas Civil Practices and

9 Remedies Code 61.001. Your Honor, I would be happy to

10 respond to his last argument.

11 THE COURT: Yes, if you want to respond,

12 you may go ahead and do so. I'm just checking something

13 out, but please go ahead.

14 OPENING STATEMENT

15 MS. LANG: Sure. The point isn't clear,

16 but the point here is, the holding, is that they should

17 have filed a writ of attachment and failed to do so and

18 calling it an injunction is not lawful. This said as it

19 is cited here it's not controlling. It is disputed by a

20 rash of (unintelligible). (Unintelligible) in the face

21 of a statute that is very clearly (unintelligible).

22 Moreover, the Plaintiffs have not

23 described any problem that any plaintiff would have in

24 filing a suit. The fact that my client has ties to

25 China cannot be used against him. He has got

John Charette - September 30, 2015 23

Direct Examination by Mr. Van Arsdel

1 (unintelligible) big part of the country. And like any

2 other litigant in a court in Texas, it's under very

3 narrow circumstances to have a writ. You get your

4 judgment first and you try to correct it later. Putting

5 all of that aside, and I should also point out that Dr.

6 Zhao (unintelligible). But on a legal question, there

7 is no question on a writ of attachment. They are

8 (unintelligible).

9 THE COURT: You said you wanted to put on

10 a witness for your factual basis to support -- that you

11 have met the requisite?

12 MR. VAN ARSDEL: Yes.

13 THE COURT: If you want to go ahead and do

14 that at this time, I will allow that.

15 MR. VAN ARSDEL: Okay. Yes, the

16 Plaintiffs would call John Charette.

17 THE COURT: Before we proceed, can you go

18 ahead and spell your name for the record.

19 THE WITNESS: John Charette,

20 C-H-A-R-E-T-T-E.

21 THE COURT: And I will ask you to speak up

22 and speak into the microphone. Go ahead, counsel.

23 MR. VAN ARSDEL: Thank you, Your Honor.

24

25

John Charette - September 30, 2015 24

Direct Examination by Mr. Van Arsdel

1 JOHN CHARETTE,

2 having been first duly sworn, testified as follows:

3 DIRECT EXAMINATION

4 Q. (BY MR. VAN ARSDEL) Good afternoon,

5 Mr. Charette. Could you please introduce yourself to

6 the Court?

7 A. Yes. My name is John Charette. I'm the CFO,

8 Chief Financial Officer for XO Energy.

9 Q. And how long have you been the Chief Financial

10 Officer for XO Energy?

11 A. Since the company was founded in 2011 -- April,

12 2011.

13 Q. And what was your job before you became CFO?

14 A. I was also a CFO of an energy trading company,

15 which was 50 percent owned by Shawn Sheehan, the owner

16 of XO Energy.

17 Q. And so, when you dissolved that company and

18 went with this company, he brought you along as the CFO?

19 A. Yes, that's correct.

20 Q. Okay. Can you talk a little bit about the

21 duties that you have and that position that you have as

22 CFO?

23 A. Well, we are relatively a small firm. We have

24 traders, IT, and then myself. So, as CFO, I do all the

25 financial statements. I handle all the banking, bank

John Charette - September 30, 2015 25

Direct Examination by Mr. Van Arsdel

1 reconciliations. I also handle some of the human

2 resource duties, some compliance duties, building

3 managements, procurement of supplies with computers and

4 whatnot. Pretty much anything that needs to get done.

5 Q. And what are some of the compliance issues that

6 you encounter, and before you answer that question, are

7 you basically the chief officer in charge of compliance?

8 A. I am the compliance officer, yes.

9 Q. Okay. And what sort of compliance issues are

10 you responsible for?

11 A. Well, we just have to do some annual

12 disbursements and announce to our employees the risk

13 management policies and various compliance policies.

14 It's a small company, there is not a lot involved with

15 handling that.

16 Q. Okay. Can you tell us just briefly what XO

17 Energy and XO Energy Worldwide do? What is their

18 business?

19 A. Yes. We trade electricity on the wholesale

20 financial markets throughout the United States. There

21 are five different markets we trade in. We basically

22 buy and sell electricity primarily on the

23 (unintelligible) markets, which is a one-day product.

24 We also trade in products that are traded on a monthly

25 basis.

John Charette - September 30, 2015 26

Direct Examination by Mr. Van Arsdel

1 Q. And what's the goal and division of duties

2 between XO Energy and XO Energy Worldwide?

3 A. XO Energy Worldwide is our entity that owns our

4 proprietary software that we developed and we use to

5 analyze and predict what is going to happen in the

6 market as well as with the trade of the various markets.

7 XO Energy, LLC is a management company that handles

8 personnel issues, legal matters, various housekeeping

9 stuff that is unique to our company.

10 Q. Where is XO Energy, LLC based?

11 A. We are in Landenberg, Pennsylvania.

12 Q. And that has been the case since 2011?

13 A. Yes.

14 Q. And where is XO Energy Worldwide based?

15 A. We are mainly based in Saint Thomas U.S. Virgin

16 Islands.

17 Q. About how many employees does XO Energy, LLC

18 have?

19 A. We have five in the main office.

20 Q. And how about XO Energy Worldwide?

21 A. XO Energy Worldwide has 18.

22 Q. Some of those are partners, right?

23 A. Yes.

24 Q. And to accomplish this business objective of

25 trading energy, how is that physically accomplished?

John Charette - September 30, 2015 27

Direct Examination by Mr. Van Arsdel

1 A. Of course you have to become a member of the

2 various ISO's, which are the markets set up around the

3 country.

4 Q. So, what does ISO stand for?

5 A. Independent System Operator.

6 Q. Okay.

7 A. They are attached with balancing the grid, and

8 basically keeping our clocks running at the same speed

9 all the time. So, they run these markets where they try

10 and predict, or everybody tries to predict the supply

11 and demand for the next day. And the companies will put

12 in their offers and buy or sell what they have and what

13 they need for the next day. We participate in those

14 markets. We are what is known as financial traders. So

15 we don't actually use or generate the power we are

16 buying and selling, but we act as competition for the

17 market.

18 Q. So, in your role with the company, are you

19 familiar with the requirements that these various ISO's

20 have for operating in that market?

21 A. Yes.

22 Q. And are you familiar specifically with the

23 California Independent System Operators Corporation and

24 what is required to operate in that market?

25 A. Yes, I am.

John Charette - September 30, 2015 28

Direct Examination by Mr. Van Arsdel

1 Q. All right. I'm going to direct you to Exhibit

2 No. 2. to the book in front of you. Do you recognize

3 that document?

4 A. Yes, I do.

5 Q. And can you tell us what it is?

6 A. This would be the California Independent System

7 Operator's tarniff, which is a document they need to

8 file with FERC to run their market.

9 Q. And just so the record is clear, can you tell

10 us what FERC is?

11 A. FERC is the Federal Energy Regulatory

12 Commission.

13 Q. And FERC not only regulates entities like

14 California Independent System Operator Corporation, they

15 regulate XO as well?

16 A. Yes, they regulate the entire market.

17 Q. So, this Exhibit 2 contains some of the

18 requirements that all market participants or traders,

19 such as XO, have to meet to be eligible for trade on

20 that market?

21 A. Yes.

22 Q. Okay.

23 MR. VAN ARSDEL: Your Honor, I would like

24 to offer Exhibit No. 2 into evidence.

25 THE COURT: Have you given that to

John C

This text is long and has been trimmed here. Open the source document for the complete record.