Affirmed and Opinion Filed July 28, 2021
S In The Court of Appeals Fifth District of Texas at Dallas No. 05-19-01295-CV
GEORGE H. CLEMENTS, III, Appellant V. HLF FUNDING, Appellee
On Appeal from the 134th Judicial District Court Dallas County, Texas Trial Court Cause No. DC-17-08411
MEMORANDUM OPINION Before Justices Molberg, Reichek, and Nowell Opinion by Justice Nowell George H. Clements, III appeals from a judgment awarding damages to HLF
Funding (HLF) for fraud. Following a nonjury trial, the trial court found Clements,
Jacob Verghese, and their company, Prime Sands, LLC, committed fraud against
HLF in connection with a Loan and Royalty Purchase Agreement between HLF and
Prime Sands. Only Clements appeals. He argues the evidence is legally and factually
insufficient to support the judgment and HLF failed to plead and prove that the
alleged fraud was committed primarily for Clements’s personal benefit under
business organizations code section 21.223(a), (b). We conclude the evidence is sufficient to support the judgment and section 21.223 does not apply. We affirm the
trial court’s judgment.
Background
This case involves two transactions between HLF and Prime Sands. In the
first, HLF loaned $30,000 to Prime Sands, which Prime Sands was able to repay
with interest. In the second transaction, HLF loaned $650,000 to Prime Sands, but
the transaction failed and is the subject of the fraud claim.
HLF is a general partnership whose members are lawyers in the Hartnett Law
Firm. Jim Hartnett is the managing partner of HLF. Clements was a political
consultant for Will Hartnett, also a member of HLF, for several years.
In 2014, Clements and Verghese formed Prime Sands to sell “frac sand” used
in oil and gas drilling operations. They were members and co-managers of Prime
Sands. Clements approached Will Hartnett about investing in or lending money to
Prime Sands. Clements and Verghese were interested in a letter of credit to secure a
lease for railcars needed to transport the sand. On October 8, 2014, Verghese emailed
Will Hartnett about rail logistics, stating they had secured forty railcars and needed
to obtain engine power for the first trip. The next day, HLF agreed to lend Prime
Sands $30,000, due in 75 days at 15% interest together with a royalty of $1 per ton
from sand shipments. Prime Sands signed the promissory note on October 10, 2014.
Prime Sands learned soon afterwards that it would not be able to ship the sand
as anticipated. But Verghese told the Hartnetts that Prime Sands had been able to
–2– gross $200,000 on a sublease of the railcars. Prime Sands paid the $30,000
promissory note to HLF with interest.
In December 2014, Prime Sands approached HLF about a $900,000 letter of
credit to secure a lease of railcars in exchange for a perpetual royalty of $1 per ton
of sand shipped. The parties continued discussing the transaction over the next
several months. At some point, the structure changed from a letter of credit to a loan
and royalty. During this time, Prime Sands was also in discussions with a company
known as PDI for an investment of $12 million in Prime Sands.
On April 29, 2015, Verghese emailed Will Hartnett about a favorable offer he
received to lease railcars for three years at a low rate. To secure the lease, Prime
Sands would need to pay six months up front at the rate of $540 per car for a total
investment of $638,280. Hartnett asked what specific investment he was seeking
from HLF. On May 4, 2015, Verghese responded with a spreadsheet showing a draw
schedule for $648,000 for the railcar lease and stated that this amount would be paid
back within ninety days at 10% per annum plus the royalty of $1 per ton of sand. As
with most of his emails, Verghese copied Clements on the email.
Verghese and Clements engaged in several telephone calls and meetings with
the Hartnetts about the potential loan. They told HLF that the loan would be safe
because Prime Sands could sublease the railcars if it was unable to transport sand,
referencing the earlier transaction where Prime Sands was able to sublease the
railcars and repay the $30,000 loan. –3– On May 6, 2015, Jim Hartnett emailed Clements with several questions about
the proposed deal. He asked what would happen if the $12 million investment did
not materialize, when the $650,000 loan from HLF would be due, and whether it
would be paid with the proceeds from use of the railcars or from the investor funds.
Hartnett asked how HLF would be protected by subleasing the railcars and how the
$650,000 loan amount was calculated.
On May 7, 2015, Verghese sent an email to Clements responding to Hartnett’s
questions. Clements forwarded the email to Hartnett. The email explained that:
Prime Sands would be paying up front for four months of a lease of 197 railcars at the rate of $540 per car ($425,520 total); $106,380 would remain in the account for auto-draft by the lessor for the fifth month of the lease; The remaining $116,380 would be used for moving the railcars to the mine in Wisconsin; “The main reason we need this investment from the Hartnett group is because obtaining the rail cars is on a tight schedule”; If the $12 million investment does not come through “it will not have a direct impact on the business model” as it would be used to secure larger contracts; and If Prime Sands could not use the railcars, it could sublease them to “many different clients.” On May 11, 2015, Jim Hartnett sent an email to Verghese and Clements
outlining specific terms for a $650,000 loan to be repaid within one year with
interest. In return for the loan, HLF would receive a royalty of $1 per ton of sand for
an unlimited time. The interest rate would vary based on whether Prime Sands met
a royalty target during each quarter, and if Prime Sands received an investment of at
–4– least $8 million during the year, the loan would be repaid within ten days of receipt
of the investment. Verghese sent a draft agreement to Hartnett on May 12, informing
him that, “We have to sign the lease today for the rail cars.” The parties signed the
Loan and Royalty Purchase Agreement (Agreement) on May 13, 2015. HLF
transferred the funds on May 15, 2015.
The Agreement recites that Prime Sands intends to sell “frac sand” for a profit
and HLF wishes to lend operating capital to Prime Sands and purchase a royalty
interest. HLF agreed to transfer $650,000 to Prime Sands as both a loan and as
consideration for the Royalty Interest defined in the Agreement. The Agreement
contains a merger clause stating it is the final agreement with respect to the subject
matter and “no additional terms or modification or alteration of this Agreement shall
be valid unless the same is specified in writing and signed by [HLF] and the [Prime
Sands].” The Agreement provides that the loan is also consideration for the Royalty
Interest, which is defined as entitling HLF to be paid “$1 for each short ton (‘2000
pounds’) of Sand sold by the [Prime Sands] for so long as [Prime Sands] sells Sand.”
The Agreement also states that no representations upon which HLF was relying were
made in connection with the offering of the Royalty Interest other than as set forth
in the agreement, HLF is an accredited investor able to bear the substantial risks of
investing in the Royalty Interest, HLF recognizes that Prime Sands is a start-up
company with no financial and operating history, and in making its investment
–5– decision, HLF “has relied solely on its own advisors, and not on the advice of the
[Prime Sands] or the [Prime Sand]’s legal counsel.”
While negotiating the loan and royalty agreement with HLF, and without
HLF’s knowledge, Prime Sands was also negotiating a deal with Domino Sand
Services, LLC to provide processing for barite. Barite is a mineral used in drilling
operations that could be sold to drilling companies. On May 11, 2015, Prime Sands
signed an agreement with Domino to process raw barite transported by barge to
Domino’s plant near Houston. Before receiving the loan from HLF, Prime Sands
committed to paying $250,000 to Domino as a down payment for the processing
agreement. HLF wired the loan funds to Prime Sands on May 15, 2015. Later that
day, Prime Sands used part of the loan to pay the $250,000 to Domino. Ultimately,
Prime Sands’s buyer, May-Cat Logistics, was unable to purchase the barite and
Prime Sands was unable to recover the $250,000 from Domino.
After making the loan, HLF contacted Prime Sands for updates on the lease
of the railcars and shipment of sand. On May 22, 2015, Verghese emailed Jim
Hartnett and Clements stating that “getting these rail cars have been a game
changer.” He stated they had spoken with the rail lessor to begin the process of
moving the cars to the mine and expected the first sand deal in mid to late June. In
fact, Prime Sands had not paid any money in advance for leasing the railcars and,
when it did pay for leasing railcars at the end of June 2015, the lease was only for
two months. Verghese admitted at trial that Prime Sands “never caused the railcars –6– to be moved anywhere.” Despite repeated assurances from Prime Sands that the
railcars were about to be moved to the mine and that orders were in process and
would be shipped, no sand was ever transported by Prime Sands. HLF’s inquiries
about whether the railcars were being subleased were not answered. In addition, PDI
never funded the $12 million investment. Without the investment from PDI,
Verghese and Clements were unable to buy, sell, and transport sand because buyers
demanded sixty-day to ninety-day payment terms, which Prime Sands could not
finance. Prime Sands was unable to repay the loan when it matured in May 2016.
HLF eventually learned that Prime Sands had used the loan proceeds for
salaries to Verghese and Clements, attorney expenses, insurance, office expenses,
and the $250,000 deposit to Domino. Only about $107,000 was used to secure the
rights to railcars for two months.
HLF sued Prime Sands for breach of the Agreement and fraud, and Verghese
and Clements for fraud. Following a nonjury trial, the trial court rendered judgment
in favor of HLF against Prime Sands, Verghese, and Clements for fraud and awarded
actual damages of $650,000. The parties filed pretrial proposed findings of fact and
conclusions of law but did not request them after trial. The trial court did not file
findings of fact and conclusions of law. Clements’s motion to modify the judgment
and for new trial was overruled by operation of law. Only Clements appeals.
–7– Standard of Review
In a nonjury trial, when neither party requests findings of fact and conclusions
of law, all fact findings necessary to support the trial court’s judgment are implied.
Sixth RMA Partners, LP v. Sibley, 111 S.W.3d 46, 52 (Tex. 2003); Holt Atherton
Indus., Inc. v. Heine, 835 S.W.2d 80, 83 (Tex. 1992). The trial judge’s decision will
be sustained on any reasonable theory consistent with the evidence and the
applicable law, considering only the evidence favorable to the decision. See Holt
Atherton, 835 S.W.2d at 83; Worford v. Stamper, 801 S.W.2d 108, 109 (Tex. 1990)
(per curiam); In re W.E.R., 669 S.W.2d 716, 717 (Tex. 1984) (per curiam). When a
reporter’s record is filed on appeal, the implied findings may be challenged for legal
and factual insufficiency. Shields Ltd. P’ship v. Bradberry, 526 S.W.3d 471, 480
(Tex. 2017); Holt Atherton, 835 S.W.2d at 83.
In evaluating the legal sufficiency of the evidence to support a finding, we
credit favorable evidence if a reasonable factfinder could, and disregard contrary
evidence unless a reasonable factfinder could not. City of Keller v. Wilson, 168
S.W.3d 802, 827 (Tex. 2005). Evidence is legally sufficient if it is more than a
“scintilla” of evidence on which a reasonable factfinder could find the fact to be true.
Crosstex N. Tex. Pipeline, L.P. v. Gardiner, 505 S.W.3d 580, 613 (Tex. 2016). In
reviewing the factual sufficiency of the evidence, we review all the evidence and
will set aside the finding only if the evidence is so weak or if the finding is so against
the great weight and preponderance of the evidence that it is clearly wrong and
–8– unjust. See Dow Chem. Co. v. Francis, 46 S.W.3d 237, 242 (Tex. 2001) (per curiam);
Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986) (per curiam). In a bench trial, the
trial court is the sole judge of the credibility of the witnesses and may believe one
witness over another and resolve any conflicts or inconsistencies in the testimony.
Shaw v. County of Dallas, 251 S.W.3d 165, 169 (Tex. App.—Dallas 2008, pet.
denied); Sanders v. Total Heat & Air, Inc., 248 S.W.3d 907, 917–18 (Tex. App.—
Dallas 2008, no pet.).
A plaintiff seeking to prevail on a fraud claim must prove that (1) the
defendant made a material misrepresentation; (2) the defendant knew the
representation was false or made the representation recklessly without any
knowledge of its truth; (3) the defendant made the representation with the intent that
the other party would act on that representation or intended to induce the party’s
reliance on the representation; and (4) the plaintiff suffered an injury by actively and
justifiably relying on that representation. Exxon Corp. v. Emerald Oil & Gas Co.,
348 S.W.3d 194, 217 (Tex. 2011).
Analysis
A. Sufficiency of the Evidence
In his first and third issues, Clements asserts the evidence is legally and
factually insufficient to support the judgment. Clements argues there is no evidence
he made a material misrepresentation to HLF. He argues that because the Agreement
was not of the same type as contemplated by defendants there is no evidence they
–9– induced HLF to enter into that contract. According to Clements, they originally
contemplated a letter of credit then a ninety-day loan. He contends HLF’s proposal
for a one-year loan was a totally different transaction and precludes HLF’s fraud
claim. We disagree.
The theory Clements references applies where the defendant makes
representations that a third party attempts to rely upon, such as when investors claim
to have relied on an audit report issued to a corporation. See Ernst & Young, L.L.P.
v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 574–75 (Tex. 2001) (holding accounting
firm not liable to investors because it had no reason to expect the investor’s reliance
on the audit report). Here, however, the misrepresentations were made directly to
HLF and both Verghese and Clements admitted they intended HLF to rely on the
representations in the May 7 email. Thus, the reason-to-expect standard of Ernst &
Young does not apply. But even if it did, that standard does not require that the
transaction be identical to the one the defendant contemplates. Id. at 580. Rather, the
transaction “must have the same essential character: ‘it may differ in matters of detail
or in extent, unless these differences are so great as to amount to a change in the
essential character of the transaction.’” Id. (quoting RESTATEMENT (SECOND) OF
TORTS § 531 cmt. g). Although the parties had discussed a letter of credit in January
2015, on May 4, Prime Sands proposed a $648,000 loan to be paid back with ten
percent interest in ninety days with a $1 per ton royalty on sand. The parties
ultimately agreed to a one-year loan for $650,000 with a varying interest rate and –10– the same royalty. The length of the loan and the interest rate were merely matters of
detail or extent and did not change the essential character of the transaction.
1. Material Representations
Clements argues he did not make a material misrepresentation of fact to HLF.
However, there is evidence in the record to support the trial court’s implied finding
that he did. Jim Hartnett asked Clements several specific questions about the
proposed transaction on May 6, 2015. Clements forwarded those questions to
Verghese, who replied to Clements on May 7. Clements reviewed the response,
thought it “looked reasonable,” and then forwarded the response to HLF intending
they should rely on it. By doing so, Clements adopted Verghese’s responses as his
own.
The May 7 email is evidence of representations that:
The loan from HLF was needed to secure the first five months of a lease of railcars and to pay the cost of transferring the cars; All of the money would be used for the lease and move of the railcars; If the investment from PDI did not come through, it would not directly impact Prime Sands’s business model because that investment would merely “speed up and secure larger contracts”; and If Prime Sands was unable to use the railcars to transport sand, they could be subleased for other purposes. In addition, the evidence indicates Clements participated in several meetings
and phone conversations with the Hartnetts about leasing the railcars and the
possibility of subleasing them. Clements agreed that HLF was told that all the money
–11– was to be paid in advance on the lease of the railcars, with the possibility of
subleasing the railcars as downside protection.
Clements contends his statements to HLF about Prime Sands’s business plan
and future prospects were merely opinion. Generally, pure expressions of opinion
are not representations of material fact and cannot be a basis for fraud. Italian
Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 337–38 (Tex.
2011). “Whether a statement is an actionable statement of ‘fact’ or merely one of
‘opinion’ often depends on the circumstances in which a statement is made.” Id.
(quoting Transport Ins. Co. v. Faircloth, 898 S.W.2d 269, 276 (Tex. 1995)). Special
or one-sided knowledge may help lead to the conclusion that a statement is one of
fact, not opinion. See id. A statement of opinion may be actionable if: (1) it is
“intertwined” with “direct representations of present facts;” (2) “the speaker has
knowledge of its falsity;” (3) it is “based on past or present facts;” or (4) the speaker
has “special knowledge of facts that will occur or exist in the future.” Trenholm v.
Ratcliff, 646 S.W.2d 927, 930–31 (Tex. 1983). “Superior knowledge by one party
may also provide the occasion for fraud.” Italian Cowboy, 341 S.W.3d at 338
(quoting Faircloth, 898 S.W.2d at 277).
“When a speaker purports to have special knowledge of the facts, or does have
superior knowledge of the facts—for example, when the facts underlying the opinion
are not equally available to both parties—a party may maintain a fraud action.” Matis
v. Golden, 228 S.W.3d 301, 307 (Tex. App.—Waco 2007, no pet.) (quoting Paull v. –12– Capital Res. Mgmt., Inc., 987 S.W.2d 214, 219 (Tex. App.—Austin 1999, pet.
denied)), disapproved on other grounds by Bonsmara Nat. Beef Co., LLC v. Hart of
Tex. Cattle Feeders, LLC, 603 S.W.3d 385 (Tex. 2020).
Clements argues on appeal he never represented that all the loan proceeds
would be used to lease railcars, but he admitted at trial that HLF was told all the
money would be paid in advance on the lease of the railcars. He represented that the
loan would be protected by the possibility of subleasing the railcars. For there to be
protection of the loan through subleasing, there had to be a lease to begin with. He
forwarded Verghese’s May 7 email to HLF in direct response to questions about
how the loan amount was determined and how the loan would be repaid. The email
states:
We will be paying for the first 4 months of lease up front at the rate of $540 per car ($425,520 total) which includes commissions and maintenance for all cars. A total of $106,380 for one month of lease rate will be left in the account for auto draft by the lessor for the 5th month. The remaining $116,380 will be used to pay for the empty rail cars to be moved from the storage/ shop to the mine in Blair, Wisconsin.
This is evidence Clements made the representation.
There is evidence Clements and Verghese had specialized knowledge of what
would be necessary to secure the favorable rates for leasing the railcars. Clements
as co-manager and the person in charge of finding investors, had access to
information not available to HLF. Considering the circumstances in which the
statements were made, the record supports that the statements were factual and, to
–13– the extent they were opinion, based on specialized knowledge. See Matis, 228
S.W.3d at 307–08. Based on the evidence before it, the trial court could reasonably
find that the representations were actionable.
There is also evidence in the record that the representations in the May 7 email
were material. Both Jim and Will Hartnett testified they would not have made the
loan without the representation the money would be used for the lease of railcars.
Jim Hartnett testified HLF would not have made the loan if they had known the
funds would be used for general overhead of Prime Sands. He testified that he knew
Prime Sands was looking for a large investor but based on the representations from
Clements and Verghese he believed repayment of the loan was not contingent on
obtaining the outside investor.
“Material means a reasonable person would attach importance to and would
be induced to act on the information in determining his choice of actions in the
transaction in question.” Italian Cowboy, 341 S.W.3d at 337 (quoting Smith v. KNC
Optical, Inc., 296 S.W.3d 807, 812 (Tex. App.—Dallas 2009, no pet.)). There is
evidence HLF would not have made the loan without the representations. Clements
admitted he never discussed the possibility the loan would be used for anything other
than the rail lease. Given the prior transaction and the negotiations between the
parties over several months, all centering on the leasing of railcars to transport sand,
a reasonable person would attach importance and act on the representations about
how the loan would be used, downside protection, and the impact of not obtaining –14– an outside investor. We conclude there is evidence supporting the finding that the
representations were material.
2. Recklessness
Clements argues there is no evidence he made the representations knowing
they were false or made them recklessly without knowledge of the truth. He contends
he believed the representations when he made them. HLF counters that there is
ample evidence Clements recklessly made the representations without knowing the
truth.
A party acts recklessly if he makes representations “without any knowledge
of the truth and as a positive assertion.” T.O. Stanley Boot Co. v. Bank of El Paso,
847 S.W.2d 218, 222 (Tex. 1992). A representation is recklessly made if the speaker
knows that he does not have sufficient information or basis to support it, Trenholm,
646 S.W.2d at 933, or if he realizes that he does not know whether or not the
statement is true. Custom Leasing, Inc. v. Texas Bank & Trust Co., 516 S.W.2d 138,
142 (Tex. 1974). Because intent to defraud is not susceptible to direct proof, “it
invariably must be proven by circumstantial evidence.” Spoljaric v. Percival Tours,
Inc., 708 S.W.2d 432, 435 (Tex. 1986). “Fraud is usually not discernible by direct
evidence and is usually so covert or attendant with such attempts at concealment as
to be incapable of proof other than by circumstantial evidence.” Cotten v.
Weatherford Bancshares, Inc., 187 S.W.3d 687, 707 (Tex. App.—Fort Worth 2006,
pet. denied). “While a party’s intent is determined at the time the party made the
–15– representation, it may be inferred from the party’s subsequent acts after the
representation is made.” Spoljaric, 708 S.W.2d at 434. Intent is a fact question
“uniquely within the realm of the trier of fact because it so depends upon the
credibility of the witnesses and the weight to be given to their testimony.” Id.
As discussed above, there is evidence Clements represented that all of HLF’s
loan would be used for leasing and transporting the railcars. Clements admitted the
payment to Domino was inconsistent with the representations made to HLF.
Although he denied knowing about the payment to Domino before the loan was
made, Clements admitted he knew a transaction was being made from a phone
conversation with Verghese. Clements testified he was in charge of finding investors
for Prime Sands. There is evidence that at the time of the loan, Prime Sands had only
one other investor, who had invested $100,000. The trial court could reasonably
conclude that without the HLF loan there were insufficient funds in the company to
make the $250,000 payment to Domino. This is evidence Clements was reckless in
representing that all the funds would be used for the rail lease.
Clements represented that the loan would be protected by the ability to
sublease railcars. Clements contends the loan was not tied to the railcars, but in that
event the representation that the loan would be protected by the ability to sublease
the railcars was false or made recklessly. Without obtaining the lease in the first
place, Clements’s representation of downside protection through subleasing was
–16– recklessly misleading. Without the lease of railcars, there would be no cars to
sublease.
Clements also testified he did not know some of the loan proceeds would be
used to pay his salary and other business expenses. He thought all the HLF money
would be safe in an account. However, he later testified that the loan funds could be
used for any business purpose, including salaries and overhead expenses.
It was up to the trial court to resolve the inconsistencies in the testimony and
make credibility determinations. Spoljaric, 708 S.W.2d at 435. We conclude there
is evidence supporting the implied finding that representations that the loan funds
would be used to secure the rail lease and the railcars could be subleased were made
recklessly.
There is also evidence Clements was reckless in representing that Prime
Sands’s business model would not be impacted by the failure to obtain the PDI
investment. Verghese testified, “we had no way of moving forward without that
investment money . . ..” At trial, Clements equivocated about the impact of failing
to get the PDI investment:
“Yes and no. I mean, there was a — I thought that we could go get some deals closed, create some revenues and kind of get up and running that way. But it certainly would have made it much faster if we had had the infusion of capital.
Clements was a co-manager with Verghese and responsible for obtaining
investors. There is evidence that other than the HLF loan, Prime Sands had one
–17– investor who invested $100,000. Even if it still held some funds from the transaction
in 2014, there is evidence Prime Sands lacked the capital to finance its business
model of buying and selling sand without the PDI investment. The trial court could
reasonably conclude the representation that Prime Sands did not need the additional
investment from PDI was made recklessly. See Matis, 228 S.W.3d at 309–10 (stating
trial court could reasonably conclude defendants did not understand investment’s
process and acted recklessly by misinforming plaintiffs regarding the investment’s
terms).
3. Justifiable Reliance
Clements argues there is no evidence HLF justifiably relied on Clements’s
representations based on the merger clause and the investor representations in the
Agreement. He also contends HLF failed to exercise ordinary care to protect its own
interests.
Initially, Clements contends clear and unequivocal language in the Agreement
expressly disclaims reliance on representations not included in the Agreement. See
Italian Cowboy, 341 S.W.3d at 332 (recognizing that when “sophisticated parties
represented by counsel disclaim reliance on representations about a specific matter
in dispute, such a disclaimer may be binding, conclusively negating the element of
reliance in a suit for fraudulent inducement”) (citing Schlumberger Tech. Corp. v.
Swanson, 959 S.W.2d 171, 179 (Tex. 1997)); Forest Oil Corp. v. McAllen, 268
S.W.3d 51, 60–61 (Tex. 2008) (applying Schlumberger analysis to settlement
–18– agreement intended to resolve both future and past claims). However, Clements did
not plead express disclaimer as an affirmative defense. MAN Engines &
Components, Inc. v. Shows, 434 S.W.3d 132, 136 (Tex. 2014) (holding defense of
disclaimer “is one of avoidance, rather than a defense in denial”); Samedan Oil Corp.
v. Intrastate Gas Gathering, Inc., 78 S.W.3d 425, 441 (Tex. App.—Tyler 2001, pet.
granted, judgm’t vacated w.r.m.) (holding disclaimer of reliance is affirmative
defense to fraud claim); see also Shoemake v. Fogel, Ltd., 826 S.W.2d 933, 937
(Tex. 1992) (“Generally, an affirmative defense is waived if it is not pleaded.”).
Further, a standard merger clause like that in the Agreement1 is insufficient to
expressly disclaim reliance. Italian Cowboy, 341 S.W.3d at 331–32. The investor
representations in paragraph 15 of the Agreement apply by their terms to the offering
of the Royalty Interest,2 not representations about the loan. HLF’s fraud claim is
1 Entire Agreement; Modification. This Agreement is the final agreement with respect to the subject matter hereof, and no additional terms or modification or alteration of this Agreement shall be valid unless the same is specified in writing and signed by Investor and the Company. 2 Investor Representations. The Investor hereby represents and warrants to the Company as follows: (a) The Investor acknowledges that all documents and other materials pertaining to this investment that the Investor has requested to examine have been made available for inspection by the Investor. The Investor, or a person or persons acting on the Investor’s behalf, has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the offering of the Royalty Interest and all such questions have been answered to the full satisfaction of the Investor. No representations (oral or otherwise) upon which the Investor is relying have been made to the Investor in connection with the offering of the Royalty Interest other than as set forth herein. .... (h) The Investor has carefully considered and has, to the extent it believes such discussion necessary, discussed with its professional legal, tax and financial advisors, the suitability of investing in the Royalty Interest for its particular tax and financial situation, and the Investor has determined that the Royalty Interest are a suitable investment for it. In making
–19– based on representations about the loan rather than the royalty interest. Therefore,
we limit our discussion to whether there is sufficient evidence that HLF justifiably
relied on the misrepresentations. See JPMorgan Chase Bank, N.A. v. Orca Assets
G.P., L.L.C., 546 S.W.3d 648, 654 n.1 (Tex. 2018) (noting distinction between
contractual terms that negate justifiable reliance and “Italian Cowboy-type
contractual clauses that expressly waive fraud causes of action”).
To prevail on a fraud claim, a plaintiff must show actual and justifiable
reliance. Mercedes-Benz USA, LLC v. Carduco, Inc., 583 S.W.3d 553, 554 (Tex.
2019). Whether reliance is justifiable is normally a fact question, but the element
may be negated as a matter of law when circumstances exist under which reliance
cannot be justified. Id. at 558. In determining whether justifiable reliance is negated
as a matter of law, courts must consider the nature of the parties’ relationship and
the contract. See Orca Assets, 546 S.W.3d at 658. Reliance may not be justified
where the representations are directly contradicted by the terms of the contract
between the parties or where there are “red flags” indicating such reliance is
unwarranted. Id.; see also Carduco, 583 S.W.3d at 559 (“Although Orca Assets
discusses both direct contradiction and other red flags, it does not require them both
to negate justifiable reliance.”); Orca Assets, 546 S.W.3d at 660 n.2.
its investment decision, the Investor has relied solely on its own advisors, and not on the advice of the Company or the Company’s legal counsel. (emphasis added). –20– “In an arm’s-length transaction[,] the defrauded party must exercise ordinary
care for the protection of his own interests. . .. [A] failure to exercise reasonable
diligence is not excused by mere confidence in the honesty and integrity of the other
party.” Nat’l Prop. Holdings, L.P. v. Westergren, 453 S.W.3d 419, 425 (Tex. 2015)
(per curiam) (quoting Thigpen v. Locke, 363 S.W.2d 247, 251 (Tex. 1962)). But see
Koral Indus. v. Sec.-Connecticut Life Ins. Co., 802 S.W.2d 650, 651 (Tex. 1990) (per
curiam) (“Failure to use due diligence to suspect or discover someone’s fraud will
not act to bar the defense of fraud to the contract.”); Trenholm v. Ratcliff, 646 S.W.2d
927, 933 (Tex. 1983) (“Where one has been induced to enter into a contract by
fraudulent representations, the person committing the fraud cannot defeat a claim
for damages based upon a plea that the party defrauded might have discovered the
truth by the exercise of proper care.”) (quoting Isenhower v. Bell, 365 S.W.2d 354,
357 (Tex. 1963)); Labbe v. Corbett, 6 S.W. 808, 811–12 (Tex. 1888).
Clements contends there is a direct contradiction between the representations
and the Agreement because the representations are not specifically mentioned in the
Agreement. But the silence of the Agreement on the use of the funds, the possibility
of subleasing the railcars, and the impact of the loss of the PDI investment, does not
directly and unambiguously contradict the representations. See Carduco, 583
S.W.3d at 559 (stating reliance on misrepresentation “that the written contract
directly and unambiguously contradicts” is red flag indicating reliance is not
justified). Put simply, silence is not direct contradiction. A reasonable person could –21– read the Agreement and still plausibly claim to believe the representations. See Orca
Assets, 546 S.W.3d at 659.
Clements points to the recital in the Agreement that HLF desired to lend
operating capital to the company and argues that operating capital can be used for
any business purpose. However, use of the loan for leasing railcars is not inconsistent
with the recital of the intent to lend operating capital. The purpose of Prime Sands
was to sell sand for a profit. In order to accomplish that purpose, Prime Sands would
have to buy sand from producers then transport and sell it to its buyers. Prime Sands
sought to secure favorable leasing rates for the railcars needed to transport the sand
from the suppliers to the ultimate buyers. Operating capital for the business would
certainly include the expense of securing rail transportation for the sand. The
operating capital HLF loaned was to secure the five-month lease of railcars.
Clements argues other red flags indicate that HLF’s reliance was not justified.
He argues he had no history of starting and operating a successful business other
than political consulting, and Prime Sands had no history of success in selling sand
and failed to sell sand in 2014. Although HLF knew Prime Sands had not been able
to sell sand in 2014, Prime Sands was successful at leasing railcars with the $30,000
loan from HLF and used those railcars to generate revenue used to repay the loan.
The lack of a history of success may have raised concerns that Prime Sands might
not be successful, but that lack of history does not indicate the representation that
the loan would be used to acquire five months of a rail lease was unreliable. –22– Clements contends it was a red flag that Prime Sands was undercapitalized
and needed a substantial outside investment to operate. The record indicates Jim
Hartnett knew Prime Sands had some money, but not enough to “do what they
needed to do.” He also knew they needed the railcars to sell sand for a profit. It is
also true that HLF knew Prime Sands was attempting to obtain a substantial
investment from PDI. Indeed, HLF specifically asked, “What happens if your
12,000,000 investor doesn’t come through/how does that effect your business
model?” Clements and Verghese responded that the PDI investment would be
needed secure the sand and lock in low rates, but if the investment did not come
through, “it will not have a direct impact on the business model” and was only to be
used to “speed up and secure larger contracts.” Thus, even if Prime Sands’s
capitalization was a warning about the representations, HLF “did the only thing [it]
could do to investigate,” it asked Clements how the lack of the investment would
impact the business model. See Jacked Up, L.L.C. v. Sara Lee Corp., 854 F.3d 797,
812 (5th Cir. 2017) (holding there was genuine fact issue whether plaintiff’s reliance
on defendant’s representations was justified).
Next, Clements argues that Will Hartnett did not believe that Prime Sands
could sublease the railcars for a profit and knew that subleasing was subject to
market conditions and would not eliminate the downside risk. While HLF did not
believe the railcars could be subleased for a profit, that does not raise a red flag that
the railcars could not be subleased at all and generate revenue to make payments on –23– the loan. And it certainly does not indicate the representation that the loan would be
used to lease the railcars in the first instance was unreliable.
We cannot say on this record that, as a matter of law, reliance was not justified.
Thus, whether reliance was justified was a fact question for the trial court to
determine. Because there is evidence to support the trial court’s implied finding that
HLF’s reliance was justified, we will not disturb that finding.
4. Summary
Based on the record in this case, we conclude there is legally sufficient
evidence to support the trial court’s implied findings. Considering all the evidence,
we conclude the evidence is not so weak as to make the trial court’s findings clearly
wrong or unjust.
We overrule Clements’s first and third issues.
B. Business Organizations Code
In his second issue, Clements argues there is legally insufficient evidence
because HLF did not plead or prove that Clements committed fraud “primarily for
[his] direct personal benefit,” as required by business organizations code section
21.223(a), (b). TEX. BUS. ORGS. CODE § 21.223(a), (b).
Section 21.223(a)(2) provides in relevant part that a shareholder of a
corporation may not be held liable to the corporation’s obligees with respect to
any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the holder, beneficial owner, subscriber, or affiliate is or was the alter ego of the corporation
–24– or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory.
Id. § 21.223(a)(2). Subsection (b) provides that subsection (a)(2) does not prevent or
limit the liability of a shareholder if the obligee demonstrates that the shareholder
“caused the corporation to be used for the purpose of perpetrating and did perpetrate
an actual fraud on the obligee primarily for the direct personal benefit” of the
shareholder. Id. § 21.223(b).
HLF is not seeking hold Clements liable for a contractual obligation of the
corporation. It seeks to hold Clements liable for his own fraudulent conduct. “Agents
are personally liable for their own torts.” Miller v. Keyser, 90 S.W.3d 712, 716-17
(Tex. 2002) (recognizing Texas’ longstanding rule that a corporate agent is
personally liable for his own fraudulent or tortious acts); see also Walker v.
Anderson, 232 S.W.3d 899, 918 (Tex. App.—Dallas 2007, no pet.). Because a
corporate agent is liable for his own torts, it is not necessary to pierce the corporate
veil to find liability. Walker, 232 S.W.3d at 918; Kingston v. Helm, 82 S.W.3d 755,
759, 765–67 (Tex. App.—Corpus Christi–Edinburg 2002, pet. denied). This claim
does not fall within the purview of section 21.223, so a finding that Clements used
the corporation to perpetuate fraud for his direct personal benefit is not required.
–25– Conclusion
Because legally and factually sufficient evidence supports the trial court’s
findings of fraud and section 21.223 does not apply, we overrule Clements’s issues
and affirm the trial court’s judgment.
/Erin A. Nowell/ ERIN A. NOWELL JUSTICE
191295F.P05
–26– S Court of Appeals Fifth District of Texas at Dallas JUDGMENT
GEORGE H. CLEMENTS, III, On Appeal from the 134th Judicial Appellant District Court, Dallas County, Texas Trial Court Cause No. DC-17-08411. No. 05-19-01295-CV V. Opinion delivered by Justice Nowell. Justices Molberg and Reichek HLF FUNDING, Appellee participating.
In accordance with this Court’s opinion of this date, the judgment of the trial court is AFFIRMED.
It is ORDERED that appellee HLF Funding recover its costs of this appeal from appellant George H. Clements, III.
Judgment entered July 28, 2021
–27–