CFE International Defeats Summary Judgment Motion, Clearing Way for Trial on Over $1 Billion Breach of Fiduciary Duty Claim

Paul, Weiss secured a significant victory for CFE International (CFEi), the U.S. affiliate of Mexico’s state-owned utility company, in a breach of fiduciary duty lawsuit against its former CEO and COO when it defeated their summary judgment motion on damages and their Daubert motion to exclude an industry expert’s opinions.

One of the largest purchasers of natural gas in the United States, CFEi transports gas to Mexico to generate electricity for 35 million households and over 50% of industrial and commercial users in Mexico. In 2022, CFEi sued the former executives in the U.S. District Court for the Southern District of Texas for breach of fiduciary duty based on their alleged improper award of $27 billion in natural gas pipeline and supply contracts to their close friend and former business partner. CFEi’s experts determined that, as a result of those contracts being improperly awarded, the company suffered more than $1 billion in damages.

In April, the defendants moved for summary judgment on CFEi’s claims for damages and to exclude opinions of CFEi’s industry expert under Daubert, a standard that courts use to determine whether an expert witness’s testimony is reliable and relevant. With respect to summary judgment, the defendants argued that CFEi was “incapable” of being damaged because of the arrangement by which it resells gas to a sister company. Drawing on the U.S. Supreme Court’s century-old decision in Southern Pacific Co. v. Darnell-Taenzer Lumber Co. and its progeny in the Fifth and Ninth Circuits and the Delaware Supreme Court, Paul, Weiss argued that the defendants were making an impermissible “pass-through” defense that would effectively allow a fiduciary to escape accountability for awarding overpriced contracts in bad faith. In the Daubert motion, the defendants argued that CFEi’s industry expert was unqualified to provide opinions on how the defendants’ actions to bind the company to the contracts were against the best interests of CFEi. They further argued that the opinions constituted impermissible legal conclusions.

On August 7, litigation partner David Kessler argued both motions via remote hearing. At the close of arguments, U.S. District Judge Lee Rosenthal denied the Daubert motion, issuing a written decision the next day that detailed the expert’s 30-plus years of experience and confirmed each of the challenged opinions. On August 10, the court issued an opinion denying the defendants’ motion for summary judgment. Quoting Paul, Weiss’s briefs and arguments frequently, the court thoroughly rejected the defendants’ pass-through defense, stating that the existence of cost-center subsidiaries, shared-services entities and other intra-group procurement vehicles is not a defense against claims arising from disloyal management. This closed what the court described as the defendants’ attempted ”escape hatch,” in which they tried to escape liability by claiming that CFEi’s affiliates lack standing to sue while CFEi itself suffered no harm.

The trial is set to begin with jury selection on October 19 in Houston.

The Paul, Weiss trial team includes litigation partners Mark Mendelsohn, Bill Michael, Jacqueline Rubin, Joshua Hill, David Kessler and Daniel Mason, and counsel Justin Lerer and David Cole.