Todd Enright v. Asclepius Panacea, LLC Asclepius Panacea GP, LLC Daily Pharmacy, LLC Daily Pharmacy GP, LLC And Toth Enterprises II, P .A. D/B/A Victory Medical Center
Opinion
ACCEPTED 03-15-00348-CV 6616789 THIRD COURT OF APPEALS AUSTIN, TEXAS 8/24/2015 10:54:52 AM JEFFREY D. KYLE CLERK NO. 03-15-00348-CV
______________________________________________
FILED IN 3rd COURT OF APPEALS IN THE COURT OF APPEALS AUSTIN, TEXAS THIRD JUDICIAL DISTRICT OF TEXAS 8/24/2015 10:54:52 AM AUSTIN, TEXAS JEFFREY D. KYLE _______________________________________________ Clerk TODD ENRIGHT, Appellant,
v.
ASCLEPIUS PANACEA, LLC; ASCLEPIUS PANACEA GP, LLC; DAILY PHARMACY, LLC; DAILY PHARMACY GP, LLC; AND TOTH ENTERPRISES II, P.A. D/B/A VICTORY MEDICAL CENTER, Appellees.
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 98TH JUDICIAL DISTRICT, CAUSE NO. D-1-GN-14-004689, THE HONORABLE GISELA D. TRIANA PRESIDING
APPELLEES’ BRIEF Eric J. Taube State Bar No. 19679350 Paul Matula State Bar No. 13234354 Rola Daaboul State Bar No. 24068473 etaube@taubesummers.com pmatula@taubesummers.com rdaaboul@taubesummers.com TAUBE SUMMERS HARRISON TAYLOR MEINZER BROWN LLP 100 Congress Avenue, 18th Floor Austin, Texas 78701 Telephone: 512/472-5997 Telecopier: 512/472-5248
ORAL ARGUMENT REQUESTED
IDENTITY OF PARTIES AND COUNSEL
Appellant Appellant and Trial Counsel Todd Enright Jonah Davis Jackson Jennifer B. Poppe Vinson & Elkins, LLP 2801 Via Fortuna, Suite 100 Austin, Texas 78746-7588 Telephone: 512/542-8400 Telecopier: 512/542-8612 jpoppe@velaw.com jjackson@velaw.com
Thomas S. Leatherbury Vinson & Elkins, LLP 2001 Ross Avenue, Suite 3700 Dallas, Texas 75201 Telephone: 214/220-7700 Telecopier: 214/999-7792 tleatherbury@velaw.com
Appellees Appellees and Trial Counsel Asclepius Panacea, LLC Eric J. Taube Asclepius Panacea GP, LLC Paul Matula Daily Pharmacy, LLC Rola Daaboul Daily Pharmacy GP, LLC Taube Summers Harrison Toth Enterprises II, P.A. d/b/a Taylor Meinzer Brown LLP Victory Medical Center 100 Congress Avenue, #1800 Austin, Texas 78701 Telephone: 512/472-5997 Telecopier: 512/472-5248 etaube@taubesummers.com pmatula@taubesummers.com rdaaboul@taubesummers.com
i
TABLE OF CONTENTS
IDENTITY OF PARTIES AND COUNSEL .........................................................i
INDEX OF AUTHORITIES ........................................................................... iv - vi
REFERENCE CITATION GUIDE .................................................................... vii
REQUEST FOR ORAL ARGUMENT.............................................................. viii
ISSUES PRESENTED ............................................................................................ix
STATEMENT OF FACTS ......................................................................................1
SUMMARY OF THE ARGUMENT ...................................................................11 STANDARD OF REVIEW ...................................................................................12
ARGUMENT ..........................................................................................................15
I. Enright failed to negate any bases of personal jurisdiction in VMC’s allegations .............................................................................15
II. The Fiduciary Shield Doctrine does not protect Enright from specific jurisdiction............................................................................19
III. The record contains ample evidence of minimum contacts to support personal jurisdiction over Enright ....................................20
A. The record reflects Enright purposefully availed himself of the privilege of doing business in Texas ...........................21
B. Enright’s Texas contacts were substantially connected to the claims alleged by VMC.....................................................26
1. Common Law Fraud .......................................................26 2. Texas Securities Act claim .............................................27 3. Tortious Interference claim ............................................29 4. Conversion Claim ...........................................................30 5. Money Had and Received Claim ....................................31 6. Action for Accounting ....................................................31
ii
C. The exercise of personal jurisdiction over Enright does not offend traditional notions of fair play and substantial justice ....................................................................32
1. Enright is not burdened by defending in a Texas forum...............................................................................34 2. The State of Texas has an interest in adjudicating the dispute .......................................................................37 3. VMC has an interest in obtaining convenient and effective relief .................................................................37 4. The interstate judicial system’s interest favors the Texas forum ....................................................................38 5. The shared interest of the several states in furthering substantive social policies favors the Texas forum ........ 39
PRAYER .................................................................................................................40
CERTIFICATE OF COMPLIANCE ..................................................................41
CERTIFICATE OF SERVICE ............................................................................41
APPENDIX:
A. December 13, 2014 initial email sent by Enright to Franklin.
B. Emails between QVL’s attorney and Enright regarding the “game plan” for QVL’s payments to VMC.
iii
INDEX OF AUTHORITIES CASES
Apple Imports, Inc., v. Koole, 945 S.W.2d 895 (Tex. App.–Austin 1997, writ denied) ..............................30
BMC Software Belg. v. Marchand, 83 S.W.3d 789 (Tex. 2002) ..........................................................................14
Burger King v. Rudzewicz, 105 S. Ct. 2174, 471 U.S. 462 (1985) ..........................................................26
Calder v. Jones, 465 U.S. 783, 104 S.Ct. 1482 (1984) ...........................................................15
Camac v. Dontos, 390 S.W.3d 398 (Tex. App.—Dallas 2012, reh’g denied) ................... passim
Citrin Holdings, LLC, v. Minnis, 305 S.W.3d 269 (Tex. App.–Houston [14th Dist.] 2009) .............................14
City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005) ........................................................................14
CSR Ltd. v. Link, 925 S.W.2d 591 (Tex. 1996) .................................................................. 12, 13
EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (Tex. App.–Corpus Christi 2003, no pet.) ...........................24
Ennis v. Loiseau, 164 S.W.3d 698 (Tex. App.—Austin 2005) .......................................... 13, 19
In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (S.D. Tex. 2002) ............................................................28
In re FirstMerit Bank, 52 S.W.3d 749 (Tex. 2001) ..........................................................................26
iv
Guardian Royal Exchange Assur., Ltd. v. English China Clays, PLC, 15 S.W.2d 223 (Tex. 1991) ..........................................................................32
Hodge v. Northern Trust Bank, 54 S.W.3d 518 (Tex. App.—Eastland 2001, pet. denied.) ...........................30
Horowitz v. Berger, 377 S.W.3d 115 (Tex. App.—Houston [14th Dist.] 2012) ..........................15
Hutchings v. Chevron U.S.A., 62 S.W.2d 752 (Tex. App.—El Paso 1993) .................................................32
Merry Homes, Inc. v. Luc Dao, 359 S.W.3d 881 (Tex. App.—Houston [14th Dist.] 2012) ..........................31
Michiana Easy Livin’ Country, Inc. v. Holten, 168 S.W.3d 777 (Tex. 2005) ........................................................................21
Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (Tex. 2007) ................................................................. 17, 21
Moncrief Oil Int’l v. OAO Gazprom, 414 S.W.3d 142 (Tex. 2013) ........................................................................16
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ACCEPTED 03-15-00348-CV 6616789 THIRD COURT OF APPEALS AUSTIN, TEXAS 8/24/2015 10:54:52 AM JEFFREY D. KYLE CLERK NO. 03-15-00348-CV
______________________________________________
FILED IN 3rd COURT OF APPEALS IN THE COURT OF APPEALS AUSTIN, TEXAS THIRD JUDICIAL DISTRICT OF TEXAS 8/24/2015 10:54:52 AM AUSTIN, TEXAS JEFFREY D. KYLE _______________________________________________ Clerk TODD ENRIGHT, Appellant,
v.
ASCLEPIUS PANACEA, LLC; ASCLEPIUS PANACEA GP, LLC; DAILY PHARMACY, LLC; DAILY PHARMACY GP, LLC; AND TOTH ENTERPRISES II, P.A. D/B/A VICTORY MEDICAL CENTER, Appellees.
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 98TH JUDICIAL DISTRICT, CAUSE NO. D-1-GN-14-004689, THE HONORABLE GISELA D. TRIANA PRESIDING
APPELLEES’ BRIEF Eric J. Taube State Bar No. 19679350 Paul Matula State Bar No. 13234354 Rola Daaboul State Bar No. 24068473 etaube@taubesummers.com pmatula@taubesummers.com rdaaboul@taubesummers.com TAUBE SUMMERS HARRISON TAYLOR MEINZER BROWN LLP 100 Congress Avenue, 18th Floor Austin, Texas 78701 Telephone: 512/472-5997 Telecopier: 512/472-5248
ORAL ARGUMENT REQUESTED
IDENTITY OF PARTIES AND COUNSEL
Appellant Appellant and Trial Counsel Todd Enright Jonah Davis Jackson Jennifer B. Poppe Vinson & Elkins, LLP 2801 Via Fortuna, Suite 100 Austin, Texas 78746-7588 Telephone: 512/542-8400 Telecopier: 512/542-8612 jpoppe@velaw.com jjackson@velaw.com
Thomas S. Leatherbury Vinson & Elkins, LLP 2001 Ross Avenue, Suite 3700 Dallas, Texas 75201 Telephone: 214/220-7700 Telecopier: 214/999-7792 tleatherbury@velaw.com
Appellees Appellees and Trial Counsel Asclepius Panacea, LLC Eric J. Taube Asclepius Panacea GP, LLC Paul Matula Daily Pharmacy, LLC Rola Daaboul Daily Pharmacy GP, LLC Taube Summers Harrison Toth Enterprises II, P.A. d/b/a Taylor Meinzer Brown LLP Victory Medical Center 100 Congress Avenue, #1800 Austin, Texas 78701 Telephone: 512/472-5997 Telecopier: 512/472-5248 etaube@taubesummers.com pmatula@taubesummers.com rdaaboul@taubesummers.com
i
TABLE OF CONTENTS
IDENTITY OF PARTIES AND COUNSEL .........................................................i
INDEX OF AUTHORITIES ........................................................................... iv - vi
REFERENCE CITATION GUIDE .................................................................... vii
REQUEST FOR ORAL ARGUMENT.............................................................. viii
ISSUES PRESENTED ............................................................................................ix
STATEMENT OF FACTS ......................................................................................1
SUMMARY OF THE ARGUMENT ...................................................................11 STANDARD OF REVIEW ...................................................................................12
ARGUMENT ..........................................................................................................15
I. Enright failed to negate any bases of personal jurisdiction in VMC’s allegations .............................................................................15
II. The Fiduciary Shield Doctrine does not protect Enright from specific jurisdiction............................................................................19
III. The record contains ample evidence of minimum contacts to support personal jurisdiction over Enright ....................................20
A. The record reflects Enright purposefully availed himself of the privilege of doing business in Texas ...........................21
B. Enright’s Texas contacts were substantially connected to the claims alleged by VMC.....................................................26
1. Common Law Fraud .......................................................26 2. Texas Securities Act claim .............................................27 3. Tortious Interference claim ............................................29 4. Conversion Claim ...........................................................30 5. Money Had and Received Claim ....................................31 6. Action for Accounting ....................................................31
ii
C. The exercise of personal jurisdiction over Enright does not offend traditional notions of fair play and substantial justice ....................................................................32
1. Enright is not burdened by defending in a Texas forum...............................................................................34 2. The State of Texas has an interest in adjudicating the dispute .......................................................................37 3. VMC has an interest in obtaining convenient and effective relief .................................................................37 4. The interstate judicial system’s interest favors the Texas forum ....................................................................38 5. The shared interest of the several states in furthering substantive social policies favors the Texas forum ........ 39
PRAYER .................................................................................................................40
CERTIFICATE OF COMPLIANCE ..................................................................41
CERTIFICATE OF SERVICE ............................................................................41
APPENDIX:
A. December 13, 2014 initial email sent by Enright to Franklin.
B. Emails between QVL’s attorney and Enright regarding the “game plan” for QVL’s payments to VMC.
iii
INDEX OF AUTHORITIES CASES
Apple Imports, Inc., v. Koole, 945 S.W.2d 895 (Tex. App.–Austin 1997, writ denied) ..............................30
BMC Software Belg. v. Marchand, 83 S.W.3d 789 (Tex. 2002) ..........................................................................14
Burger King v. Rudzewicz, 105 S. Ct. 2174, 471 U.S. 462 (1985) ..........................................................26
Calder v. Jones, 465 U.S. 783, 104 S.Ct. 1482 (1984) ...........................................................15
Camac v. Dontos, 390 S.W.3d 398 (Tex. App.—Dallas 2012, reh’g denied) ................... passim
Citrin Holdings, LLC, v. Minnis, 305 S.W.3d 269 (Tex. App.–Houston [14th Dist.] 2009) .............................14
City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005) ........................................................................14
CSR Ltd. v. Link, 925 S.W.2d 591 (Tex. 1996) .................................................................. 12, 13
EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (Tex. App.–Corpus Christi 2003, no pet.) ...........................24
Ennis v. Loiseau, 164 S.W.3d 698 (Tex. App.—Austin 2005) .......................................... 13, 19
In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (S.D. Tex. 2002) ............................................................28
In re FirstMerit Bank, 52 S.W.3d 749 (Tex. 2001) ..........................................................................26
iv
Guardian Royal Exchange Assur., Ltd. v. English China Clays, PLC, 15 S.W.2d 223 (Tex. 1991) ..........................................................................32
Hodge v. Northern Trust Bank, 54 S.W.3d 518 (Tex. App.—Eastland 2001, pet. denied.) ...........................30
Horowitz v. Berger, 377 S.W.3d 115 (Tex. App.—Houston [14th Dist.] 2012) ..........................15
Hutchings v. Chevron U.S.A., 62 S.W.2d 752 (Tex. App.—El Paso 1993) .................................................32
Merry Homes, Inc. v. Luc Dao, 359 S.W.3d 881 (Tex. App.—Houston [14th Dist.] 2012) ..........................31
Michiana Easy Livin’ Country, Inc. v. Holten, 168 S.W.3d 777 (Tex. 2005) ........................................................................21
Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (Tex. 2007) ................................................................. 17, 21
Moncrief Oil Int’l v. OAO Gazprom, 414 S.W.3d 142 (Tex. 2013) ........................................................................16
Prudential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74 (Tex. 2000) ............................................................................29
Retamco Operating, Inc. v Republic Drilling Co., 278 S.W.3d 333 (Tex. 2009) ........................................................... 13, 20, 21
Richardson v. First Nat'l Life Ins. Co., 19 S.W.2d 836 (Tex. 1967) ..........................................................................32
Rittenmeyer v. Grauer, 104 S.W.3d 725 (Tex. App.—Dallas 2003, no pet.) ....................................38
Russell v. A.E. Marketing, LLC, No. 05-00-01583-CV, 2001 WL 722509 (Tex. App.—Dallas June 28, 2001) ....................................................... 13, 24
v
Sauceda v. Wells Fargo Bank, N.A., No. SA-12-CV-01094-DAE, 2013 WL 690534 (W.D. Tex. Feb. 25, 2013) ............................................................................31
Spir Star AG v. Kimich, 310 S.W.3d 868 (Tex. 2010) .................................................................. 12, 26
Sterling Trust v. Adderley, 168 S.W.3d 835 (Tex. 2005) ........................................................................28
Tabacinic v. Frazier, 372 S.W.3d 658 (Tex. App.—Dallas 2012, no pet.) ....................................19
Televentures, Inc. v. International Game Technology, 12 S.W.3d 900 (Tex. App.—Austin 2000) ...................................................21
Texas Capital Securities Management, Inc. v. Sandefer, 80 S.W.3d 260 (Tex. App.—Texarkana 2002) .............................................28
TexVa, Inc. v. Boone, 300 S.W.3d 879 (Tex. App.—Dallas 2009, pet. denied) ....................... 20, 38
TransFirst Holdings, Inc. v. Phillips, No. 3-06-CV-2303-P, 2007 WL 631276 (N.D. Tex. Mar. 1, 2007) .............15
Wright v. Saga Engineering, Inc., 37 S.W.3d 238 (Tex. App.–Houston [1st Dist.] 2004) .................................36
STATUTES
Tex. Civ. Prac. & Rem. Code §17.042 ....................................................................15
Tex. Civ. Prac. & Rem. Code §17.045 ....................................................................15
Tex. Rev. Civ. Stat. Ann. art. 581-4(a) (Vernon Supp. 2013) ................................27
Tex. Rev. Civ. Stat. Ann. art. 581-33A(2) (Vernon Supp. 2013) .................... 27, 28
Tex. Rev. Civ. Stat. Ann. art. 581-33F (Vernon Supp. 2013) ................................37
vi
REFERENCE CITATION GUIDE
The Parties
In lieu of using the full names of the parties, this Brief may refer to the parties as follows:
Asclepius Panacea, LLC; collectively, “Appellees” or “VMC” Asclepius Panacea GP, LLC; Daily Pharmacy, LLC; Daily Pharmacy GP, LLC; and Toth Enterprises II, P.A. d/b/a Victory Medical Center
Todd Enright “Appellant” or “Enright”
QVL Pharmacy #181 GP, LLC; collectively, “QVL” QVL Pharmacy #162 GP, LLC; and QVL Pharmacy Holdings, Inc.
Enright and QVL collectively, the “Defendants”
The Record on Appeal
This Brief will refer to the record as follows:
Clerk’s Record “CR __”
Deposition Testimony in Clerk’s Record “CR __, [Name] Dep. at __”
Reporter’s Record “__ RR __”
Appellant’s Brief “App’t Br. at __”
Appendix “App. __”
vii
REQUEST FOR ORAL ARGUMENT
Appellees agree with Appellant that oral argument would be beneficial to
assist the Court’s review of the record supporting the trial court’s decision.
viii
ISSUES PRESENTED
VMC believes the following issues are presented in Enright’s appeal:
ISSUE 1: Did Enright satisfy his burden to negate all bases of personal
jurisdiction as alleged in VMC’s live pleading?
ISSUE 2: Did the trial court correctly conclude Enright had minimum contacts
with the State of Texas sufficient to establish specific jurisdiction,
based on the factually and legally sufficient evidence before it?
ISSUE 3: Did the trial court correctly conclude that the exercise of personal
jurisdiction over Enright would not offend traditional notions of fair
play and substantial justice, based on the factually and legally
sufficient evidence before it?
ix
STATEMENT OF FACTS
This case arises out of VMC’s equity purchase of two Texas pharmacies
from QVL in December 2013 and subsequent events involving VMC, QVL and
Enright. Enright resides out of state, but all the other individuals involved were in
Texas. CR 510-11, Enright Dep. at 185:15-186:9. Contrary to Enright’s
characterization, VMC’s representative Dr. William Franklin did not initiate the
relationship with Enright. CR 437-38(¶¶3, 4). In December 2013, Franklin and
his companies owned other retail pharmacies in Austin, and were familiar with the
attendant licensing requirements and day to day operations of such businesses. CR
532(¶13). Franklin’s initial contact with Enright was a phone call on December
12, 2013. CR 437(¶3). This was the day after QVL’s CEO Chad Collins first
called Franklin on or about December 11 to gauge his interest in purchasing one of
QVL’s Texas pharmacies. CR 436-37(¶2). Enright was not on the first call
between Collins and Franklin, but when Franklin expressed interest in acquiring
the pharmacy Collins told him he could not discuss specifics details, such as the
price, and that he needed to confirm with another individual. Id. Collins and
Franklin agreed to have another call. Id.
The second call was on December 12. CR 437(¶3). Collins and Franklin
were in Texas for the call, and Enright introduced himself to Franklin as a partner
of QVL’s lender White Winston, but did not elaborate on the details of that
relationship. Id. On this second call, and others, Franklin and Enright directly
discussed and negotiated the terms of the equity purchase, such as the price, the
structure of the sale, and the feasibility of transferring the licenses needed to
operate a pharmacy. Id. Collins said little on this second call and was not even
present for the subsequent calls between Enright and Franklin. Id. Based on this,
it was Franklin’s impression that Enright had authority to negotiate the terms of the
sale. Id.
On December 13, the day after their initial call, Enright emailed Franklin in
Texas to follow up on VMC’s interest in buying two QVL pharmacies in Texas.
App. A; CR 466; CR 437-38(¶4). Enright’s first email exchange with Franklin is
significant for several reasons. First, it was initiated by Enright, not Franklin. CR
466. Second, Enright refers to the QVL pharmacy in Austin as “our licensed
store” and further explained “we have a license owned by an LLC in Houston”. 1
Id. Third, Enright’s email exchange with Franklin, which discusses details of the
sale and how the license transfer would be facilitated, makes no mention of any
loans or financing by White Winston. Id. The exchange ended with Enright’s
invitation to Franklin for another call that afternoon “to explain the process”. Id.
Collins was not included on Enright’s last email. Id. Enright’s email to Franklin
merely identifies him as “T.M. Enright, Partner” but does not say the partner of 1 Collins initially contacted Franklin about purchasing QVL’s Austin store, which was located across the street from a VMC pharmacy, but the existence of a second QVL store for sale in Houston was also brought up, thus the references in Enright’s emails to a Houston store. CR 437-38(¶4).
what. Id.
Franklin and Enright had at least one other phone call to negotiate details
before the equity purchase closed on December 31, 2013. CR 438(¶5). Neither
Collins nor anyone else purporting to represent QVL was on the subsequent calls.
Id. Enright explained to Franklin that QVL was getting out of the retail pharmacy
business in order to focus on the development of pharmacy-related compliance
software, which would be a more lucrative venture for QVL. CR 438-39(¶6). The
two discussed not only White Winston’s financing of the purchase loan to VMC,
but details of the sale such as the price and operations after the sale. Id(¶¶5, 6).
The timing of the license transfer for the two stores, the so-called “transition”, was
particularly important to VMC, since it impacted their ability to purchase drug
inventory for the stores. Id(¶6). In this regard, Enright told Franklin that due to
the way the sale was structured during the transitional period all sales revenue for
the two pharmacies would be collected by QVL and deposited into a secure
lockbox bank account, which VMC could access at any time. CR 438(¶5). Enright
also told Franklin VMC could purchase its inventory during the transition through
QVL’s existing arrangements with its drug wholesaler American Bergin
Corporation (“ABC”). CR 438-39(¶6). Enright told Franklin QVL would provide
services to VMC during the transitional period, including help acquiring drug
inventory, and IT and billing-related services to facilitate collection of insurance
payments. Id(¶¶5, 6). These terms were spelled out in the Transition Services
Agreement (“TSA”) entered into by VMC and QVL, which was executed along
with the Partnership Interest Purchase Agreement at closing (collectively, the
“Transaction”). CR 20-36.
Among other terms, the TSA called for QVL to collect and account for
receipts for VMC drug sales (mostly reimbursements from insurance companies),
deposit those funds into QVL’s lockbox account, retain invoiced amounts as
compensation for QVL’s transition services, with the balance to be paid to VMC.
CR 22; CR 36. QVL’s transition services would be needed until VMC obtained
new pharmacy licenses and switched over billing software, a period the parties
anticipated would take several months. CR 534(¶16). VMC also entered into a
loan agreement with White Winston for approximately $675,000 to finance the
purchase. CR 58-85. During his calls with Franklin, Enright never explained he
was negotiating the Transaction terms only on behalf of White Winston, rather
than QVL, or that his sole role in the negotiations was limited to the loan. CR
437(¶4); CR 439(¶7). Enright now claims his communications with Franklin
involved only the terms of the White Winston loan, but Franklin recalled it
differently. CR 437-39(¶¶3-7). Moreover, emails produced in discovery by QVL
show its attorney sent a draft of the original letter of intent between QVL and
VMC to Enright and Collins for review prior to closing, and asked if it was “Good
to go to [VMC’s] counsel?”. CR 526. Enright’s involvement in the terms of the
sale were not limited to the White Winston loan. CR 437-39(¶¶3-7).
Immediately after the Transaction closed on December 31, 2013, VMC took
over operations of the two QVL pharmacies and changed the name to Victory. 2
RR 31:23-25. Owing to the TSA, VMC and QVL had an ongoing relationship that
required QVL to process, collect and account for insurance payments on QVL’s
sales, as well as provide other services, during the transition period. CR 22; CR
36. The transition did not go smoothly. In early January 2014, VMC was unable
to acquire drug inventory from ABC which was needed for the two stores, because
QVL had exceeded its credit limit with the wholesaler. CR 431; CR 438-39(¶6).
That same month, Enright traveled to Texas and met with Franklin and Collins to
discuss this problem with the TSA and QVL’s trouble buying inventory from
ABC. CR 209(¶4); CR 439(¶8). A month earlier, while the terms of the TSA were
being negotiated, Enright told Franklin that QVL “would have no trouble” ordering
the inventory VMC needed from ABC. CR 438-39(¶6). Enright never mentioned
QVL’s credit limits with ABC, or that those limits were cumulative of all QVL’s
other remaining pharmacy locations.2 Id. QVL and Enright promised VMC that
2 In early 2014, QVL had at least one other location in Tyler, Texas. CR 433-34. After the Transaction closed, Enright solicited VMC to buy QVL’s Tyler pharmacy too. CR 439(¶8). In a May 2014 email, Enright pitched the Tyler store to Franklin and offered “to have QVL do the transfer”, but Franklin declined. CR 433-34. The May 2014 email exchange between Enright and Franklin about QVL’s Tyler store is consistent with the type of negotiations the two had in
they would fix the problem and pay down QVL’s account with ABC in order to
free up credit, but the problem with ABC purchases persisted. CR 537-38(¶¶23-
24). This forced VMC to find other sources for drug inventory. CR 431.
Of larger concern was QVL’s accounting and paying over to VMC of the
amounts QVL collected in the lockbox bank account. In February 2014, VMC
received the first monthly TSA invoice from QVL, detailing the nature of the
services and what amounts had been charged against VMC’s sales receipts. CR
538(¶26). QVL’s invoice included unexplained “finance charges” and banking
fees related to QVL’s line of credit with White Winston. Id. These charges were
unrelated to QVL’s transition services and neither party to the TSA contemplated
passing on QVL’s banking charges to VMC. CR 482, Collins Dep. at 165:4-22.
Although neither Enright nor White Winston were parties to the TSA, QVL’s
bookkeepers in Texas 3 emailed the TSA invoices to Enright for review, at his
request, before sending them to VMC, so that Enright could add whatever QVL
operating expenses he believed should be passed on to VMC. CR 404-05. These
extra charges added by Enright improperly reduced the amounts VMC received
from QVL under the TSA. CR 407-10.
December 2013 for the Austin and Houston stores, and further demonstrates Enright’s hands-on role in marketing and selling off the QVL stores. Id. 3 The two bookkeepers, Sandra Gonzales and Joyce Montgomery, were still QVL employees when the TSA began in January 2014, and were tasked with providing QVL’s transition services under the TSA.
As the months progressed, the TSA invoices and related accounting
statements were delayed. Id. Funds QVL collected and owed VMC under the
TSA were paid late or not at all. Id. Despite requests, QVL could not provide
VMC with an accurate accounting of its insurance collections are a cogent
explanation of the transition service charges. Id. An April 2014 email exchange
illustrates the growing problem. Id. When VMC emailed Collins and QVL’s
bookkeepers requesting information on items detailed on the monthly TSA
invoices for the three prior months, including various expenses and charges QVL
passed on to VMC, the response came not from QVL, but directly from Enright.
Id. Enright explained to VMC that the QVL bookkeepers would respond in five
days and that QVL would need to obtain an advance on its line of credit from
White Winston in order to pay VMC. Id. In May, Enright assured Franklin that
QVL would continue providing transition services to VMC and that “we will allow
releases of cash from the lockbox” to pay VMC monthly. CR 431-34 (emphasis
added).
In reality, QVL was in the process of winding down and the company was
being run by Enright personally. CR 470-71, Collins Dep. at 44:23-45:4. The two
bookkeepers were no longer QVL employees, but reported to Enright under
consulting agreements with White Winston. CR 476, Collins Dep. at 52:8-11. By
spring, QVL had shuttered its operations, liquidated its assets and laid off its staff
in Texas. CR 474, Collins Dep. at 48:1-24. Even CEO Collins had quit and was
working as a consultant to White Winston, reporting to Enright. CR 474-75,
Collins Dep. at 48:19-49:5. All funds deposited into QVL’s lockbox account,
including VMC’s receipts, were swept out to pay QVL’s debt to White Winston
under the financing agreement between those two companies. CR 438(¶5). At any
given time, the balance in the lockbox account was zero. CR 490, Collins Dep. at
245:24-246:7. Notwithstanding its obligations under the TSA, QVL was not
permitted to transfer any funds out of the lockbox account, including funds
belonging to VMC, without prior approval from Enright. CR 438(¶5); CR 507,
Enright Dep. at 83:19-21. In order to pay its creditors, including VMC, QVL had
to request and receive additional advances from White Winston, through Enright.
CR 488, Collins Dep. at 243:2-15. But the two individuals who requested these
advances on behalf of QVL, bookkeepers Gonzales and Montgomery, took their
orders from Enright. Enright was the individual who decided which QVL creditors
would be paid and what amounts. CR 484-85, Collins Dep. at 187:12-188:5.
In April 2014, QVL charged VMC with violating the terms of the TSA by
depositing their cash receipts from sales at the two pharmacies into VMC’s own
bank account, rather than into QVL’s lockbox account. App. B; CR 414-16; CR
519-20. VMC denied any breach of the TSA. CR 517-18. But the TSA payments
from QVL slowed and by June 2014 stopped altogether. CR 371-72(¶9); CR 541-
42(¶32). When VMC demanded to know when QVL would pay the funds owed
under the TSA, QVL’s attorney in Texas, Amy Moss, emailed Enright seeking
“guidance” and a “game plan” from him on how to respond to VMC. App. B; CR
414-16. By this time, VMC had paid off its purchase loan to White Winston. CR
13(¶30). But the TSA was still in effect. CR 540(¶30). In response, Enright
directed Moss to tell VMC, among other things, that QVL would send only a
partial payment and keep the rest as “security for future service payments.” CR
415. Although the terms of the TSA clearly did not permit QVL to take this action
and withhold VMC’s funds, Moss complied with Enright’s guidance and promised
him to “put it out there” to VMC. App. B; CR 414. To make sure his orders were
followed in connection with the TSA, Enright directed the (former) QVL
bookkeeper: “Joyce, I don’t want anything going out for Franklin until I have
reviewed.” CR 412.
Enright’s game plan did not go over well with VMC. CR 541-42(¶32).
VMC’s repeated requests to QVL regarding payment went unanswered. Id. Then
in July 2014, after repeated demands by VMC, QVL finally issued a check to
VMC in the amount of approximately $65,000. CR 456-59. This amount was
represented to be partial payment for amounts that QVL collected in the lockbox
for the month of May. CR 523. None of the parties disputed QVL owed VMC the
money under the TSA. CR 373(¶12). At the time QVL issued the check in July,
Collins confirmed QVL had sufficient funds available under its line of credit with
White Winston to pay this amount. CR 486, Collins Dep. at 232:6-13. Moreover,
in July Enright had specifically directed bookkeepers Gonzales and Montgomery
in Texas to send VMC the check. CR 523. But when VMC received the QVL
check and attempted to negotiate it in August 2014, VMC was advised by its Texas
bank that QVL’s bank account was “frozen/blocked”. CR 420-22. Although
Enright’s brief claims there were simply insufficient funds in QVL’s account, the
record reflects QVL’s bank actually contacted Enright about the check when it was
presented and asked him “Is it okay to pay?” CR 424-25. Montgomery, who
signed the QVL check, was fully authorized to do so at that time. CR 487, Collins
Dep. at 241:7-16. But Enright directed QVL’s bank not to pay the check. CR 424-
25; CR 427-29. Although Enright had initially approved QVL’s July payment to
VMC and so-advised the bookkeepers, he later directed Collins and the
bookkeepers that QVL was not to pay VMC anything more under the TSA unless
and until VMC executed a release of any and all claims that VMC might have
against White Winston and Enright individually. CR 427-29; CR 443; CR 464;
CR 492, Collins Dep. at 250:12-17. When bookkeeper Gonzales reminded Enright
that he approved QVL’s release of the payment to VMC the previous month,
Enright replied that she had misunderstood. CR 427-29. There were no more
payments by QVL. CR 373(¶12).
Throughout this period, Enright communicated by email and phone directly
with QVL’s CEO Collins, bookkeepers Montgomery and Gonzales, and with the
company’s attorney Moss - all of them in Texas - advising them on how QVL
should handle the TSA problems and what to tell VMC about the overdue
payments. CR 412; CR 414-16; CR 418; CR 424-25; CR 427-29; CR 442-44; CR
456-59; CR 464-66; CR 516-21; CR 523-24. Enright also traveled to Texas at
least four times in 2014 and met with Franklin and the aforementioned individuals
to discuss the TSA. CR 209(¶4); CR 439(¶8). This included a trip on July 30
when Enright met with Gonzales and Montgomery to discuss the problems with
VMC and the TSA. CR 449-50(No.2). Three months after QVL’s last check to
VMC was dishonored, VMC filed suit against QVL and Enright. CR 3-8. QVL
answered the suit, but was soon out of business and its attorneys were granted
leave to withdraw. CR 174-76. The claims against Enright are common law fraud,
fraud under the Texas Securities Act, tortious interference with the TSA,
conversion of VMC’s funds, money had a received and a request for an equitable
accounting. CR 542-45.
SUMMARY OF THE ARGUMENT
A review of the record makes clear the trial court properly exercised
personal jurisdiction over Defendant Enright. VMC’s live petition asserts tort,
statutory and equitable claims against Enright, based on his actions in and toward
the State of Texas. VMC’s live petition and the evidence in the record detail
Enright’s purposeful and deliberate communications with individuals in Texas, by
phone and email, in connection with the facts that form the basis of VMC’s claims.
Further, Plaintiffs filed a lengthy response to Enright’s special appearance,
including 40 exhibits as support. Enright also traveled to Texas numerous times
last year in connection with the events that form the basis of VMC’s claims.
Enright’s argument that the fiduciary shield doctrine cloaks him from the
jurisdiction of Texas courts is not supported by the law, which provides an
individual is always liable for his own tortious actions, regardless of his title.
Having initiated and participated in a fraudulent transaction carried out within
Texas, Enright then directed co-defendant QVL’s unlawful actions in connection
with the TSA. Enright’s New Hampshire residency does not place him beyond the
jurisdiction of this state’s courts, and the principles of due process do not warrant a
different result. The trial court’s order denying Enright’s special appearance
should be affirmed.
STANDARD OF REVIEW Personal Jurisdiction When, as here, the trial court does not make findings of fact and conclusions
of law in support of its ruling, the Court of Appeals infers “all facts necessary to
support the judgment and supported by the evidence.” See Spir Star AG v. Kimich,
310 S.W.3d 868, 871 (Tex. 2010) (citing CSR Ltd. v. Link, 925 S.W.2d 591, 594
(Tex. 1996)). The trial court necessarily makes factual determinations when
making its decision regarding a defendant’s special appearance. See Ennis v.
Loiseau, 164 S.W.3d 698, 707 (Tex. App.—Austin 2005) (appellate court looks to
the trial court as the fact-finder and sole arbiter of the witnesses’ credibility and the
weight that their testimony should be afforded). Unless challenged on appeal, the
trial court’s findings of fact are binding upon the appellate court. Russell v. A.E.
Marketing, LLC, No. 05-00-01583-CV, 2001 WL 722509, *2 (Tex. App.—Dallas
June 28, 2001). If the record contains some probative evidence from which
reasonable inferences can be drawn or the findings are not so contrary to the
overwhelming weight of the evidence as to be manifestly wrong, the appellate
court may not disregard the trial courts findings on appeal. Id.
Under a constitutional due-process analysis, a court has personal jurisdiction
when “(1) the nonresident defendant has established minimum contacts with the
forum state, and (2) the assertion of jurisdiction complies with ‘traditional notions
of fair play and substantial justice’.” Retamco Operating, Inc. v Republic Drilling
Co., 278 S.W.3d 333, 338 (Tex. 2009). “A defendant establishes minimum
contacts with a state when it purposefully avails itself of the privilege of
conducting activities within the forum state, thus invoking the benefits and
protections of its laws.” Id. Three key principals govern analysis of whether a
nonresident defendant has purposefully availed itself of privilege of conducting
business in the form state: (1) the court considers the defendant’s own actions, not
the unilateral actions of others; (2) the court considers whether the defendant’s acts
were purposeful, rather than random, isolated or fortuitous; and (3) the defendant
must seek some benefit, advantage, or profit by availing itself of doing business in
Texas. Citrin Holdings, LLC, v. Minnis, 305 S.W.3d 269, 279 (Tex. App.–
Houston [14th Dist.] 2009).
Under the Texas long-arm statute, the plaintiff bears the initial burden of
pleading allegations sufficient to confer jurisdiction. BMC Software Belg. v.
Marchand, 83 S.W.3d 789, 793 (Tex. 2002). When the initial burden is met, the
burden shifts to the defendant to negate all potential bases for personal
jurisdiction the plaintiff pled. Id (emphasis added).
Legal and Factual Sufficiency
When reviewing for legal sufficiency, courts consider the evidence in the
light most favorable to the finding and indulge every reasonable inference that
supports the challenged finding. See City of Keller v. Wilson, 168 S.W.3d 802, 827
(Tex. 2005). The appellate courts credit favorable evidence if a reasonable fact-
finder could and disregard contrary evidence unless a reasonable fact-finder could
not. Id. The court will conclude that the evidence is legally insufficient to support
the finding only if (a) there is a complete absence of evidence of a vital fact, (b) the
court is barred by rules of law or of evidence from giving weight to the only
evidence offered to prove a vital fact, (c) the evidence offered to prove a vital fact
is no more than a mere scintilla, or (d) the evidence establishes conclusively the
opposite of the vital fact. Id. at 810. In reviewing for factual sufficiency, the court
considers all of the evidence and will set aside a finding only if it is so against the
great weight and preponderance of the evidence as to be clearly wrong and unjust.
Horowitz v. Berger, 377 S.W.3d 115, 122 (Tex. App.—Houston [14th Dist.] 2012).
ARGUMENT
I. Enright failed to negate any bases of personal jurisdiction in VMC’s allegations.
VMC’s petition establishes the trial court had specific jurisdiction over
Enright under the Texas Long Arm Statute, Tex. Civ. Prac. & Rem. Code §17.045,
because he actively engaged in business in Texas. Doing business in Texas
includes the commission of a tort, in whole or in part. Id., §17.042(2). It is not
necessary that a nonresident defendant’s conduct actually occur in Texas, as long
as the defendant’s acts were purposefully directed towards the state. Camac v.
Dontos, 390 S.W.3d 398, 412-13 (Tex. App.—Dallas 2012, reh’g denied); see also
TransFirst Holdings, Inc. v. Phillips, No. 3-06-CV-2303-P, 2007 WL 631276, *4
(N.D. Tex. Mar. 1, 2007) (false representations in legal documents, emails, letters,
and phone calls directed towards plaintiff's home office in Texas constituted
sufficient minimum contacts to support the exercise of specific jurisdiction over
defendant); Calder v. Jones, 465 U.S. 783, 789-90, 104 S.Ct. 1482, 1487 (1984).
VMC’s petition identifies specific actions by Enright that took place in
Texas, or were directed at Texas, in connection with the tort, statutory and
equitable claims against him. CR 529-547. These alleged actions include
Enright’s multiple and unsolicited communications with Franklin in Texas in
December 2013, wherein Enright negotiated the terms of the sale for QVL and
made fraudulent representations about the collection and accounting of VMC
insurance receipts and the ability of QVL to provide drug inventory through its
wholesaler account. Id. VMC’s petition alleges Enright then personally directed
QVL’s agents in Texas on how to carry out the TSA, including: (a) what charges
QVL was to bill VMC for; (b) what amounts of VMC’s funds should be paid and
when; and (c) what “game plan” QVL’s attorney in Texas should execute to
explain withholding VMC’s funds. CR 538-42(¶¶27, 29, 32). All of the other
individuals at issue were in Texas when all actions relevant to the claims regarding
the Transaction and subsequent events took place. CR 510-11, Enright Dep. at
185:15-186:9.
On its face, VMC’s petition alleges sufficient contacts between Enright and
Texas to support specific jurisdiction. See Moncrief Oil Int’l v. OAO Gazprom,
414 S.W.3d 142, 149 (Tex. 2013); see also Camac, 390 S.W.3d at 411 (Plaintiffs’
pleading that defendant committed torts in Texas by misrepresenting what
plaintiffs were acquiring as franchisees in Texas, the meetings in Texas at which
the allegedly fraudulent statements were made, the constant and systematic calls
and emails to and from Texas regarding the acquisition, the reliance by the
plaintiffs on the misrepresentations, and defendant’s role as the principal
spokesman and actor in the perpetration of wrongdoing that was the gravamen of
the lawsuit was enough to meet their initial burden of alleging a cause of action
sufficient to confirm jurisdiction under the long-arm statute). Accordingly, Enright
must negate all bases of jurisdiction in VMC’s allegations. See Moki Mac River
Expeditions v. Drugg, 221 S.W.3d 569, 574 (Tex. 2007). An examination of the
evidence before the trial court shows Enright failed to meet that burden.
Enright ignores or misrepresents much of the evidence in the record and
relies on vague and conclusory statements in his and Collins’ affidavits, which are
largely inconsistent with Franklin’s affidavit and other evidence. For example,
regarding VMC’s purchase of the two pharmacies, Franklin’s affidavit details the
fraudulent misrepresentations Enright made on multiple phone calls about the sale
and how the TSA would be carried out. CR 437-39(¶¶3-9). These include
Enright’s representations that VMC would have “no trouble” acquiring drug
inventory from QVL’s vendor, and that VMC’s sales receipts would be deposited
into QVL’s secure lockbox account where VMC could access them at any time.
CR 438-39(¶¶5, 6). In contrast, Enright’s affidavits (the record includes two) do
not explicitly deny he made these representations to Franklin. Rather, his affidavit
simply states he “did not discuss with Dr. Franklin other details of the proposed
transaction” on their initial call. CR 210(¶6). As for his subsequent calls with
Franklin, Enright’s affidavit merely states “our interaction again concerned only
the financing” of the sale. CR 210(¶7). Neither of Enright’s affidavits indicate
precisely what was said on the phone calls. As for Collins’ affidavit, he
participated only in Enright’s first call with Franklin on December 12, and would
have no knowledge of their subsequent calls. CR 171(¶6). Collins’ account of the
December 12 call is vaguely described as “limited to discussions regarding the
financing and the coordination of the same” but provides no details of what Enright
said. Id. Neither the Collins nor Enright affidavits explicitly deny the statements
Franklin attributes to Enright on their calls. CR 52-56; CR 170-73; CR 208-11.
In addition, Enright failed to negate the jurisdictional contacts with Texas he
established through his supervision and direction of QVL’s attorney, Montgomery,
Gonzales and Collins in connection with the TSA. Enright’s Brief overlooks the
2014 emails wherein he gave QVL’s attorney and the bookkeepers specific
directions on what amounts to pay VMC and when, and what to tell VMC about
the TSA. CR 404-05; CR 412; CR 416; CR 442-44; CR 523-24. For example,
when Enright learned of Franklin’s repeated demands to QVL for late TSA
payments in June 2014, he directed Gonzales “Let’s talk about sending him a
check for April, net of several items we spoke of. Thanks.” CR 516-521. As
discussed more fully herein, this specific evidence of Enright’s Texas contacts
supported the trial court’s decision.
II. The Fiduciary Shield Doctrine does not protect Enright from specific jurisdiction.
In footnote 9 of his brief, Enright attempts to discount his personal actions
under the fiduciary shield doctrine. App’t Br. at 14. That doctrine is not
applicable. VMC did not assert contract claims against Enright. CR 542-45.
VMC’s claims are based on Enright’s own tortious and fraudulent acts in Texas for
which he may be held personally liable. Id. Texas courts have either expressly
rejected the fiduciary shield doctrine as a defense to specific jurisdiction or have
limited its application, clarifying that the doctrine does not shield an officer or
employee for his own tortious, fraudulent actions. See Tabacinic v. Frazier, 372
S.W.3d 658, 668 (Tex. App.—Dallas 2012, no pet.). See also Ennis v. Loiseau,
164 S.W.3d 698, 707 (Tex. App.—Austin 2005) (“Even if the fiduciary shield
were adopted by this Court, it would not protect [defendant] from the exercise of
specific jurisdiction, even if all his contact were performed in a corporate capacity,
if the officer engaged in tortious or fraudulent conduct, directed at the forum state,
for which he may be held personally liable.”); Camac v. Dontos, 390 S.W.3d 398,
411 (Tex. App.—Dallas 2012, reh’g denied) (It is well settled that a corporate
agent or officer may be held personally liable for fraudulent statements or knowing
misrepresentations, even when such are made in his capacity as a corporate
representative).
In addition, as shown herein, Enright could not have been acting as White
Winston’s fiduciary when he negotiated the equity purchase and the TSA with
Franklin in December 2013. Enright claims White Winston had no ownership
interest or control over QVL. CR 461. These circumstances do not warrant a
departure from clear Texas authority establishing when the fiduciary shield
doctrine protects individual actors from personal jurisdiction. See TexVa, Inc. v.
Boone, 300 S.W.3d 879, 889-90 (Tex. App.—Dallas 2009, pet. denied) (Fiduciary
shield doctrine not available to shield defendants from liability or jurisdiction in
their personal capacity where defendants made misrepresentations to plaintiff in
their capacity as officers of corporation).
III. The record contains ample evidence of minimum contacts to support personal jurisdiction over Enright.
Courts consider three factors in determining whether an out-of-state
defendant purposefully availed itself of the privilege of conducting activities in
Texas: (1) only the defendant’s contacts with the forum are relevant, not the
unilateral activity of another party or a third person; (2) the contacts relied upon
must be purposeful rather than random, fortuitous, or attenuated; and (3) the
defendant must seek some benefit, advantage or profit by availing itself of the
jurisdiction. Retamco Operating, Inc. v Republic Drilling Co., 278 S.W.3d 333,
338-39 (Tex. 2009) (citing Moki Mac River Expeditions v. Drugg, 221 S.W.3d
569, 575 (Tex. 2007)). “Purposeful availment alone will not support an exercise of
specific jurisdiction . . . unless the defendant’s liability arises from or relates to the
forum contacts.” Retamco at 340 (quoting Moki Mac at 579). Courts look for a
“substantial connection between the defendant’s forum contacts and the operative
facts of the litigation.” Retamco at 340.
A. The record reflects Enright purposefully availed himself of the privilege of doing business in Texas.
i. Pre-Transaction contacts
Enright’s relevant actions in connection with the Transaction were his own
and not the unilateral acts of others. Collins claims he set up the first phone call
between Enright and Franklin, after he first contacted Franklin. Unlike the cases
Enright relies on, Michiana and TeleVentures (Michiana Easy Livin’ Country, Inc.
v. Holten, 168 S.W.3d 777 (Tex. 2005); Televentures, Inc. v. International Game
Technology, 12 S.W.3d 900 (Tex. App.—Austin 2000)), Franklin did not reach out
beyond the boundaries of Texas to initiate a relationship with Enright. Franklin
was contacted first by Collins, then by Enright. CR 436-38(¶¶2-4). Unilateral
actions by Franklin were not the genesis of Enright’s involvement in the
Transaction and the events that followed. CR 436-39(¶¶2-9). Enright reached out
to Franklin, not the other way around. CR 437-38(¶¶3-4).
On his own volition, Enright followed up with Franklin with an email the
day after their first call, stating:
Dr. Franklin, it was a pleasure to speak with you yesterday regarding your interest in purchasing the Austin and (potentially) our licensed store (to be moved to your target location) in Houston. . . . We look forward to working with you on this matter and speaking in the near future. Thanks.
T.M. Enright, Partner
App. A; CR 466. This friendly and unsolicited message from Enright hardly
demonstrates the actions of an individual who seeks to avoid establishing contacts
in Texas. Nor does Enright’s exchange with Franklin attempt to clarify what he
now claims was a limited role in the Transaction as White Winston’s agent for
purposes of discussing a loan. From the beginning, Enright referred to QVL’s
Austin location as “our licensed store” and later stated “we have a license owned
by an LLC in Houston”. Id. Enright’s initial emails imply he had an interest in the
QVL pharmacies and could negotiate their sale, or at least that he wished to convey
that impression to Franklin. Significantly, Collins is not even copied on Enright’s
last email to Franklin that day, wherein he invited Franklin “to speak this
afternoon.” Id. Enright’s emails do not mention financing or White Winston, but
do mention details of the proposed sale and how the transition could be
effectuated. Id. Enright’s initial written exchange with Franklin and the phone
calls with Franklin regarding the terms of the Transaction, detailed in the record,
demonstrate Enright’s willingness to do business in Texas, and were not limited to
details of the White Winston loan.
In this regard, the record establishes Enright sought the benefits of doing
business in Texas. Although he claims he acted at all times in his “official
capacity” for White Winston, the nature of Enright’s relationship with the
company is murky. Enright was not an employee, officer, or owner of White
Winston, and the term “partner” is merely a title. CR 500, Enright Dep. at 12:19-
24; CR 503, Enright Dep. at 23:7-9. Enright is “self-employed” as a consultant for
one of White Winston’s three members, a company called Lillian White
Investment, which pays him a fee for the services he provides, indirectly, to White
Winston. CR 501-02, Enright Dep. at 15:25-16:12; CR 503, Enright Dep. at 23:10-
25. Enright’s deliberate efforts to reach across state lines to market and sell
multiple Texas pharmacies that White Winston did not own or control suggests he
had a personal interest in the Transaction, and the events that followed.
The suggestion in Enright’s Brief that his pre-Transaction activities cannot
support personal jurisdiction because the fraud claims were released in 2014
improperly conflates his jurisdictional arguments with the merits of the case.
Enright cites no legal authority for this argument, and his claim that VMC does
“not dispute” the alleged release is flat wrong. At this stage of the proceeding, the
Court is not charged with determining the merits of VMC’s allegations against
Enright. See EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847, 856
(Tex. App.–Corpus Christi 2003, no pet.) (“When reaching a decision to exercise
or decline jurisdiction based on the defendant’s alleged commission of a tort, the
trial court should examine only the necessary jurisdictional facts and should not
reach the merits of the case.”); see also Camac v. Dontos, 390 S.W.3d 398, 409
(Tex. App.—Dallas 2012, reh’g denied) (At the special appearance stage, the
merits of a claim are not at issue, and the court of appeals does not determine
whether any claim asserted is viable.).
Enright asserted the affirmative defense of release in his answer to the
lawsuit. CR 39-56. But at this early stage, VMC has had no opportunity to
conduct discovery on this defense, and the trial court made no determination, either
express or implied, that Enright was covered by the purported release. CR 567-68.
Enright’s affirmative defense is premature and does not avoid the trial court’s
personal jurisdiction. See Russell, 2001 WL 722509 at *3 (Holding that out-of-
state defendants’ affirmative defense of agency did not shield them from personal
jurisdiction due to their own misrepresentations to individuals in Texas).
ii. Post-Transaction contacts
Following the sale, Enright traveled to Texas at least four times last year,
where he met with Collins, Franklin, Gonzales, Montgomery and Moss. CR 448-
50 (Nos. 1, 2). He admits VMC and/or the TSA were discussed at two of his
Texas meetings with QVL’s agents. CR 449-50(No.2). These Texas meetings
took place during the period of time Enright was acting as the de facto head of
QVL. No individual at White Winston ordered Enright to take any of these Texas
trips, nor was the company’s approval required. CR 504, Enright Dep. at 28:2-21.
Throughout the first half of 2014, Enright communicated frequently with
Montgomery and Gonzales in Texas, directing them via email on what items to
include on the TSA invoices, how much to pay VMC and when. CR 404-05; CR
412; CR 442-44; CR 523-24. In June 2014, QVL’s attorney in Texas dutifully
followed through with Enright’s “game plan” and communicated to VMC his
directions that QVL would withhold VMC’s funds as “security” for fabricated
future services, even though such action violated the terms of the TSA. App. B;
CR 414-16. The fact attorney Moss asked Enright for directions on how QVL
should proceed in light of the compounding problems with VMC is proof Enright
was the individual making all the decisions for QVL.
Enright’s directions continued through August 2014, when he directed
QVL’s bank not to pay the check in the amount of $64,752 that QVL had issued to
VMC, which had been deposited at VMC’s Texas bank. CR 420-22; CR 424-25.
The evidence establishes Enright controlled QVL, a company that had ceased to
exist for all intents and purposes by 2014 and whose agents took all their orders
from Enright. The record evidence supports the trial court’s conclusion that
Enright purposefully availed himself of the privilege of doing business in Texas.
B. Enright’s Texas contacts were substantially connected to the claims alleged by VMC.
Specific jurisdiction is limited to claims that “arise out of or relate to” a
nonresident’s forum contacts. Spir Star AG, 310 S.W.3d at 874 (citing Burger
King v. Rudzewicz, 105 S. Ct. 2174, 471 U.S. 462, 472 (1985)); Retamco, 278
S.W.3d at 338. In such cases, there must be a “substantial connection” between
defendant’s contacts and the operative facts of the litigation. Spir Star AG, 310
S.W.2d at 874. As detailed herein, Enright’s alleged contacts with Texas are
directly related to VMC’s claims.
1. Common Law Fraud
The elements of a common law fraud claim are: (1) the defendant made a
representation to the plaintiff, (2) the representation was material, (3) the
representation was false, (4) when the representation was made, the defendant
knew it was false, or made the representation recklessly, as a positive assertion,
and without knowledge of its truth, (5) the defendant made the representation with
the intent that the plaintiff act on it, (6) the plaintiff relied on the representation,
and (7) the representation caused plaintiff’s injury. In re FirstMerit Bank, 52
S.W.3d 749, 758 (Tex. 2001). The record includes extensive evidence of Enright’s
communications with Franklin in December 2013. In the phone calls with Franklin
Enright made representations regarding: (a) QVL’s plan to sell its stores (most of
them in Texas) and go into the pharmacy software business; (b) that VMC’s
receivables deposited into QVL’s lockbox account would be safe, secure, and
accessible at any time; and (c) the ability of VMC to acquire drug inventory for the
two stores through QVL’s wholesale account. CR 437-39(¶¶3, 5, 6). Those
material representations, made to Franklin in Texas, were knowingly false.
By the time Franklin and Enright first spoke, QVL’s board of directors had
decided months earlier not to enter into the software business, but instead wind
down the company and liquidate its assets. CR 479, Collins Dep. at 101:3-14.
Enright knew this. Enright also knew VMC’s funds in QVL’s lockbox account
would be neither secure nor accessible. That account was controlled by White
Winston and Enright, and all deposits were routinely swept out to pay down
QVL’s line of credit, through an arrangement that preexisted the sale and was
never disclosed to Franklin. CR 507, Enright Dep. at 83:4-21. Franklin relied on
these representations to his detriment. CR 542(¶34).
2. Texas Securities Act claim
The Texas Securities Act (the “Act”) prohibits the fraudulent sale in Texas
of “securities”, which is defined to include limited partnership interests like those
VMC purchased from QVL. TEX. REV. CIV. STAT. ANN. art. 581-4(a) (Vernon
Supp. 2013). Fraudulent sales include those that are accompanied by untruths or
omissions, described in the Act. Id.; TEX. REV. CIV. STAT. ANN. art. 581–33A(2)
(Vernon Supp. 2013). The Act establishes both primary and secondary liability for
securities violations. Sterling Trust v. Adderley, 168 S.W.3d 835, 839 (Tex.
2005). Primary liability arises when a person “offers or sells a security . . . by
means of an untrue statement of a material fact or an omission to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading.” Id.; 581–33A(2).
Both control persons and aiders are jointly and severally liable with the primary
violator “to the same extent as if [they] were” the primary violator. Id. To make a
prima facie case for control person liability, the plaintiff must demonstrate that the
defendant had actual power or influence over the controlled person and that the
defendant induced or participated in the alleged violation. In re Enron Corp.
Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549, 567 (S.D. Tex.
2002) (citing Texas Capital Securities Management, Inc. v. Sandefer, 80 S.W.3d
260, 261 (Tex. App.—Texarkana 2002)).
VMC alleges Enright’s liability as a “control person” under the Act. His
initial email exchange with Franklin, his role in negotiating the QVL pharmacy
sale, and his subsequent direction of QVL’s agents in connection with the TSA
demonstrate his power and influence over the company. Enright’s fraudulent
statements to Franklin made during those calls are detailed above.
3. Tortious Interference claim
The elements of a tortious interference claim are: (1) an existing contract
subject to interference, (2) a willful and intentional act of interference with the
contract, (3) that proximately caused the plaintiff’s injury, and (4) caused actual
damages or loss. Prudential Ins. Co. of America v. Financial Review Services,
Inc., 29 S.W.3d 74, 77-78 (Tex. 2000).
VMC alleges Enright tortiously interfered with the TSA by directing QVL to
withhold VMC’s funds, to bill VMC for illegitimate charges, and to withhold any
further payments to VMC unless he personally approved them. CR 544(¶¶38, 39).
Enright’s written directions to the QVL bookkeepers and the company’s attorney
appear throughout the record. App. B; CR 404-05; CR 414-16; CR 427-29; CR
442-44. Enright does not explicitly deny that QVL’s failure to pay VMC breached
the terms of the TSA. Further proof of Enright’s interference with the TSA is seen
in the August 26 email, where QVL’s bank asks Enright if it is “ok to pay” the
$64,752.44 check QVL issued to VMC the previous month. CR 424-25. QVL had
available credit to honor the check, but Enright directed QVL’s bank not to.
Enright’s actions directly caused VMC’s injuries. CR 427-29; CR 486, Collins
Dep. at 232:6-10.
4. Conversion Claim
The elements of a conversion claim are: 1) the plaintiff owned, possessed,
or had the right to immediate possession of property, 2) the property was personal
property, 3) the defendant wrongfully exercised dominion or control over the
property, and 4) the plaintiff suffered injury. Apple Imports, Inc., v. Koole, 945
S.W.2d 895, 899 (Tex. App.–Austin 1997, writ denied). Special bank deposits can
be converted. Hodge v. Northern Trust Bank, 54 S.W.3d 518, 522 (Tex. App.—
Eastland 2001, pet. denied.).
VMC contends Enright wrongfully exercised dominion and control over
VMC’s funds which QVL deposited into the lockbox under the TSA. Enright’s
direct control over the TSA and VMC’s funds in QVL’s lockbox account is clear
from his own emails. An example of Enright’s control appears in his May 2014
email in which he informs Franklin: “. . . the TSA is in place and QVL will keep
undertaking the work required in the agreement. We will allow releases of cash
from the lockbox on a monthly basis as set forth in the agreement.” CR 431-34
(emphasis added). The emails contained in the record show Enright knew who the
funds deposited in the lockbox belonged to, and knew QVL’s failure to pay them
over to VMC directly violated the TSA.
5. Money Had and Received Claim
Money had and received is an equitable doctrine designed to prevent unjust
enrichment. Merry Homes, Inc. v. Luc Dao, 359 S.W.3d 881, 883 (Tex. App.—
Houston [14th Dist.] 2012). This cause of action arises when a party obtains
money that, in equity and good conscience, belongs to another. Id. A claim for
money had and received is not based on wrongdoing; rather, the only question is
whether the defendant holds money that, in equity and good conscience, belongs to
another. Id. The same evidence described above supports personal jurisdiction
over Enright on this claim. The VMC funds that were swept out of QVL’s lockbox
account to pay QVL’s debt to White Winston were indirectly received by Enright,
owing to his consulting fee arrangement with Lillian White Investments. The
consulting fee, paid to Enright by Lillian White Investments, came from White
Winston. CR 503, Enright Dep. at 23:10-25.
6. Action for Accounting
VMC also seeks an equitable accounting by Enright of all of VMC’s funds
that were deposited into QVL’s lockbox account. “An action for accounting may
be a suit in equity, or it may be a particular remedy sought in conjunction with
another cause of action.” Sauceda v. Wells Fargo Bank, N.A., No. SA-12-CV-
01094-DAE, 2013 WL 690534, *2 (W.D. Tex. Feb. 25, 2013). An action for an
accounting is a proper action “when the facts and accounts in issue are so complex
that adequate relief cannot be obtained by law.” Id. at *2 (citing Hutchings v.
Chevron U.S.A., 862 S.W.2d 752, 762 (Tex. App.—El Paso 1993)); Richardson v.
First Nat'l Life Ins. Co., 419 S.W.2d 836, 838 (Tex. 1967).
The evidence described above, including Enright’s personal direction and
control over the QVL bookkeepers in Texas who were supposed to account for
VMC’s funds, supports jurisdiction over Enright on the action for accounting. The
bookkeepers reported directly to Enright, who ordered them not to issue any TSA
payments or invoices to VMC without his approval. CR 412; CR 418; CR 442-44.
VMC also sought an accounting of its funds from QVL. But counsel for QVL
withdrew early in the case and those defendants are not represented. CR 174-76.
These circumstances limit the trial court’s ability to grant meaningful equitable
relief on this claim, if there is no personal jurisdiction over Enright, who controlled
the accounting function for QVL. Enright’s contacts are substantially connected to
each of VMC’s claims; therefore the trial court’s ruling should be affirmed.
C. The exercise of personal jurisdiction over Enright does not offend traditional notions of fair play and substantial justice.
Once it is determined that a nonresident defendant purposefully established
minimum contacts with the forum state, the contacts are evaluated in light of other
factors to determine whether the assertion of personal jurisdiction comports with
fair play and substantial justice. Guardian Royal Exchange Assur., Ltd. v. English
China Clays, PLC, 815 S.W.2d 223, 228 (Tex. 1991). Only in “rare cases” will the
exercise of jurisdiction not comport with fair play and substantial justice. Camac
v. Dontos, 390 S.W.3d 398, 413 (Tex. App.—Dallas 2012, reh’g denied). The
factors include: (1) the burden on the defendant, (2) the interests of the forum state
in adjudicating the dispute, (3) the plaintiff’s interest in obtaining convenient and
effective relief, (4) the interstate judicial system’s interest in obtaining the most
efficient resolution of the controversies, and (5) the shared interest of the several
States in furthering fundamental substantive social policies. Id.
Enright’s Brief addresses none of these factors. App’t Br. 26-32; Camac,
390 S.W.3d at 413 (Defendant offered no authority or argument as to the factors
appellate court must consider in making fair play and substantial justice
determination and, therefore, did not meet his burden to disprove jurisdiction).
Instead, he argues jurisdiction in Texas is unfair because documents regarding
VMC’s loan agreement with White Winston called for mandatory venue in the
Commonwealth Massachusetts. Id. VMC did not sue Defendants for breach of
any document related to the loan agreement between VMC and White Winston.
CR 542-45. The claims asserted against Enright arise out of his negotiation of the
terms of the QVL purchase agreement, his pre-Transaction representations
regarding the TSA, and his subsequent interference with QVL’s performance of
the TSA. CR 529-47.
As shown herein, all these events took place in or were aimed at Texas. In
addition, the TSA, which Enright directly involved himself in from the beginning,
permits jurisdiction of related disputes in Texas courts. CR 20-36(¶6.08). Enright
was aware of this term since he received a draft of the TSA from QVL’s attorney
during the negotiations. CR 401-02. More importantly, under the five factors
listed above, personal jurisdiction over Enright in this case does not offend due
process.
1. Enright is not burdened by defending in a Texas forum.
Enright presented no evidence that defending a lawsuit in Texas poses a
burden to him. Enright has obtained counsel in Texas and is able to effectively
participate in litigation. To the extent his physical presence in Texas is required by
this suit, he travels to the state frequently, nearly a dozen times in the last two
years (as of last September). CR 448-49(No.1).
Further, it should come as no surprise to Enright that his actions had an
economic impact in Texas. Enright was well aware last summer that his “game
plan” for the TSA would likely end in a Texas lawsuit. He was warned on three
occasions. On July 10, 2014, QVL’s attorney Moss warned Enright in an email
that she expected “a potential lawsuit against QVL probably if the monies owed to
[Franklin] are not paid by the end of the week.” CR 456-59. Enright responded to
Moss:
Amy, a check was sent today per Sandra. While I understand [Franklin’s] frustration, a lawsuit will really grind things to a halt. Thanks.” CR 455-59 (emphasis added).
Ten days later on July 22, Franklin emailed Enright directly about the late TSA
payments, and charged Enright with blocking an earlier QVL check for part of the
May TSA payment. CR 461-62. Franklin warned Enright that he would be liable
for any damages that might result from withholding VMC’s money due to his
control over QVL. Id. Enright responded that neither he nor White Winston “have
any control or equity interest in QVL” and warned Franklin that if he was sued
personally “you and your firm will find yourself the subject of a swift and
deliberate counterclaim which will not recede when you realize the folly of
action.” Id (emphasis added).
The following month on August 15, 2014, ten days before Enright refused
QVL’s bank permission to honor the $64,752 check to VMC, QVL’s attorney
again emailed Enright warning of a lawsuit:
I know I sound like a broken record, but I talked to David [VMC’s lawyer] again. Patience is basically all gone and I expect a nasty letter – lawsuit shortly. QVL is in default under the terms of the TSA. Can we tell David how much Dr. Franklin is owed? Is it possible to deal with the release today or to expedite this? Please let me know how I can assist.” CR 464 (emphasis added).
Enright responded to Moss:
Amy, as I said yesterday, we are prepared to advance the 2nd half of the last TSA due under the LOC and I have said we would do so for weeks (it’s about $65k). They have a draft of the release, and it can be edited so that they only release WW upon execution. I am on my way to Nantucket now so if this is going to get addressed before Labor Day it should happen soon. Thanks. CR 464.
Enright reasonably anticipated being haled into a Texas court to answer for his
actions. See Wright v. Saga Engineering, Inc., 137 S.W.3d 238, 252 (Tex. App.–
Houston [1st Dist.] 2004) (Holding that there is a foreseeable injurious effect of
sending false information into Texas knowing it will be relied upon, for which the
defendant must reasonably anticipate being haled into court). Moss warned
Enright that QVL was in breach of the TSA by holding onto VMC’s funds and that
VMC had called foul on his “game plan”. CR 428. The evidence shows Enright
refused to permit the payment, even though Collins admitted QVL had available
credit and Gonzales believed Enright had approved sending the check. CR 427-29;
CR 486, Collins Dep. at 232:6-13.
Enright’s tortious and fraudulent conduct, directed toward individuals in
Texas, related to contractual obligations to be performed in Texas, and constitutes
the type of activity Texas courts have consistently held give rise to specific
personal jurisdiction. The fact Enright issued his commands from New Hampshire
or Nantucket hardly matters.
2. The State of Texas has an interest in adjudicating the dispute.
The retail pharmacies VMC purchased are in its home state of Texas. The
damages incurred by VMC, including the converted proceeds from drug sales in
Texas, had a direct impact in Texas. The contract Enright is alleged to have
interfered with, the TSA, was between Texas companies, and was to be carried out
in Texas, by individuals who reside here.
Furthermore, Texas has a direct interest in business practices that involve the
sale of securities in this state. As demonstrated by the terms of the Texas
Securities Act, this State’s laws govern the manner in which securities, including
limited partnership interests, are marketed and sold. As discussed above, civil
action may be brought under the Act for violations by those who directly or
indirectly control the seller of securities. See TEX. REV. CIV. STAT. art. 581-33F
(Vernon Supp. 2013). Texas, more so than any other jurisdiction, has an interest in
ensuring that the terms of the Act are met, and that an enforcement action is
effectively litigated.
3. VMC has an interest in obtaining convenient and effective relief.
Since the suit was filed, QVL has gone out of business and has no attorney
in the trial court. CR 174-76; CR 470-71, Collins Dep. at 44:23-45:4. The
location of QVL’s records and witnesses remain unknown for the most part, but
are presumed to be in Texas where the company was based. Enright’s suggestion,
implicit in his argument, that his home state of New Hampshire, or the
Commonwealth of Massachusetts, offer more suitable forums to litigate VMC’s is
not supported by the facts. All of the witnesses, save Enright, are in Texas. It
would be neither convenient nor effective for VMC to present these claims in a far-
away tribunal. Such action would require extensive travel by the attorneys and
witnesses located in Texas, and would likely require that court to apply and
interpret Texas statutory and common law governing the dispute. VMC’s interest
in pursuing its claims and obtaining relief are better served by proceeding in a
Texas court.
4. The interstate judicial system’s interest favors the Texas forum.
For the same reasons, the interests of the interstate judicial system are
furthered by proceeding in the Texas forum. Texas has a compelling interest in
providing a forum for redressing harm endured principally by a resident of this
State. See TexVa, Inc. v. Boone, 300 S.W.3d 879, 891 (Tex. App.—Dallas 2009,
pet. denied) (citing Rittenmeyer v. Grauer, 104 S.W.3d 725 (Tex. App.—Dallas
2003, no pet.)). The VMC entities were all formed in Texas, where they own and
operate retail businesses. The economic harm those entities have sustained is felt
in Texas.
5. The shared interest of the several states in furthering substantive social policies favors the Texas forum.
The shared interests of the several states are furthered by proceeding in the
Texas forum. According to Enright, White Winston is a Utah corporation, and its
offices are located in that state. CR 501, Enright Dep. at 15:9-17. But White
Winston is not a party to the case. Nor was it a party to the purchase agreement
and the TSA, the terms of which Enright and Franklin initially negotiated over the
phone. CR 437(¶3). The State of Utah has no substantive interest in the outcome
of this case.
Nor do the State of New Hampshire or the Commonwealth of
Massachusetts. Enright claims he performed his consulting work for White
Winston out of an office in his home state of New Hampshire. CR 501, Enright
Dep. at 15:9-17. But there is no evidence in the record that Enright was even in
New Hampshire when the phone calls and emails at issue in this case took place.
All of the face-to-face meetings at issue in the allegations took place in Texas,
including Enright’s meeting with the bookkeepers to discuss the TSA in late July
2014. CR 449-50(No.2). None of these facts support a substantive social policy
interest by the Commonwealth of Massachusetts, either. Enright is not a
Massachusetts resident, VMC and QVL are not Massachusetts entities, and White
Winston’s offices are in Utah.
PRAYER
For the foregoing reasons, Appellees Asclepius Panacea, LLC; Asclepius
Panacea GP, LLC; Daily Pharmacy, LLC; Daily Pharmacy GP, LLC; and Toth
Enterprises II, P.A. d/b/a Victory Medical Center respectfully request that, after
full briefing and oral argument, this Court affirm the Order of the Honorable
Gisela D. Triana denying Todd Enright’s Special Appearance.
Respectfully submitted,
TAUBE SUMMERS HARRISON TAYLOR MEINZER BROWN LLP 100 Congress Avenue, 18th Floor Austin, Texas 78701 Telephone: 512/472-5997 Telecopier: 512/472-5248
By: /s/ Paul Matula Eric J. Taube State Bar No. 19679350 Paul Matula State Bar No. 13234354 Rola Daaboul State Bar No. 24068473 etaube@taubesummers.com pmatula@taubesummers.com rdaaboul@taubesummers.com
ATTORNEYS FOR APPELLEES
CERTIFICATE OF COMPLIANCE
I hereby certify that this Appellees’ Brief complies with the typeface requirements of Tex. R. App. P. 9.4(e) because it has been prepared in a conventional typeface no smaller than 14-point for text and 12-point for footnotes. This document also complies with the word-count limitations of Tex. R. App. P. 9.4(i)(2)(B). According to the word count tool of the computer program used to prepare this document, this Brief contains 9,473 words, excluding any parts exempted by Tex. R. App. P. 9.4(i)(1).
CERTIFICATE OF SERVICE
I certify that a true and correct copy of this Appellees’ Brief was filed electronically and served on all counsel below via e-mail and certified mail, RRR in compliance with Tex. R. App. P. 9.5(b) and L.R.3 on the 24th day of August, 2015.
Jonah Davis Jackson (via email and Certified Mail, RRR) Jennifer B. Poppe Vinson & Elkins, LLP 2801 Via Fortuna, Suite 100 Austin, Texas 78746-7588
Thomas S. Leatherbury (via email and Certified Mail, RRR) Vinson & Elkins LLP 2001 Ross Avenue, Suite 3700 Dallas, Texas 75201
/s/ Paul Matula Paul Matula
APPENDIX
APPENDIX A
From: Dr. William Franklin [dr.williamfranklln@gmall.com] Sent: Friday, December 13, 2013 8:18 PM To: 'T.M. Enright' Subject: RE: Follow-up
Mr. Enright, I think I got it. We move the LLC to Austin. Billy From: T.M. Enright [mailto:tenrlght@whitewinston.com] Sent: Friday, December 13, 2013 1:45 PM To: Dr. William Franklin Subject: Re: Follow-up
Dr. We are saying the same thing, We have a license owned by an LLC in Houston. The plan would be for you to buy the LLC and immediately move the location/license to your new location in Dallas.
It may be easier to explain the process by phone. Are you available to speak this afternoon?
T,M.Emight 850.570.4793 Sent from my iPhone
On Dec 13, 2013, at 2:18 PM, "Dr. William Franldin" <dr.williarnfranklin@gmail.com> wrote:
Mr. Enright Thankyou for your prompt attention to this matter. There must have been some confusion about our interests during the conversation. We do not intend to move the pharmacy that we are purchasing. What we want to do is license a second pharmacy in Austin under the same Tax ID. Can this also expedite the licensing process? Will it cost less than lOOk? Can we just do it by applying for a second license once the deal is closed? I am going to forward this communication to my Administrator who will begin gathering the documents. Once again thankyou. And have a wonderful weekend. Billy
From: T.M. Enright [mailto:tenright@whitewlnston.com] Sent: Friday, December 13, 2013 12:37 PM To: Dr Franklin Cc: Chad Collins I Corp-CEO Subject: Follow-up
Dr Frnnldin, it was a pleasme to speak with you yestet'day regarding your intet'est in put'chasing the Austin (and potentially) our licensed store (to be moved to your target location) in Houston, As we discussed, I have attached a form of personal financial statement and foim release which should be prepared for any party that holds in excess of 20% of the stock/equity of your cull'ent business. Also, as we discussed, we would like to also view the following:
1. Last 2 full years of corporate tax retums for your companies practice. 2. 2013 YTD Consolidated Income Statement.
We look foiward to working with you on this matter and spealdng in the near future, Tbanlcs, T.M. Enright, Partner
APPENDIXB
From: Moss, Amy C. (Amy.Moss@chamberlalnlaw.com] Sent: Friday, June 13, 2014 3:56 PM To: 'T.M. Enright' CC: Chad Collins I Corp-CEO; Sandra Gonzalez I Corp-Accounting (sandra.gonzalez@qvlpharmacy.com); Joyce Montgomery I Corp-Accounting Ooyce.montgomery@qvlpharmacy.com) Subject: RE: Dr. F TSA
I understand. I will put it out there.
Amy Moss Chamberlain, Hrdlicka, White, Williams & Aughtiy Two Allen Center 1200 Smith Street, Suite 1400 Houston, TX 77002 Main: 713-658-1818 Direct: 713-654-9662 Fax: 713-658-2553 Email; amy.moss@chamberlainlaw.com
CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by U.S. Treasury Regulations, Chamberlain, Hrdlicka, White, Williams & Aughtry infonns you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be t1sed, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
CONFIDENTIALITY NOTICE: This electronic mail transmission is confidential, may be pdvileged and should be read or retained only by the intended recipient. If you have received this transmission in e1ro1; please immediately notify the sender and delete it from your system.
From: T.M. Enright [mallto:tenrlght@whltewlnston.com] Sent: Friday, June 13, 2014 10:52 AM To: Moss, Amy C. . Cc: Chad Collins I Corp-CEO; Sandra Gonzalez I Corp-Accounting (sandra.gonzalez@qvlpharmacy.com); Joyce Montgomery I Corp-Accounting ()oyce.montgomery@qvlpharmacy.com) Subject: Re: Dr. F TSA
Amy, here would be my position: (i) May charges are due so there is no question on those being deducted; (ii) June is 1/2 through (and there is no proration of costs), so that is not an issue andshot1ld be dedcuted; (iii) the company has no collateral (in the form on AR) to collect from so holding a month is reasonable; and (iv) Dr. Franklin's unilateral tra11sfer of the funds (in violation of the agreement) does not make anyone feel inclined to ex.tend him any credit courtesies, Thanks.
T.M. Enright, Partner
white winston llLltT Alllt •Ulll>S
f lilBJT 850.570.4793 (Direct Dial) 801.938.7540 (Administrative)
l-t11t1l:ih /' t £..
tenr!ght@whitewjoston.corn It. . _/!L5 /!',/ On Jun 13, 2014, at 11:41 AM, Moss, Amy C.<amy.moss@chamberlainlaw.com> wrote:
CONFIDENTIAL ENR000214
Ok. I will explaln this to David. I think he will not be happy With so many withholdings to the April payment. He is going to say what Is the justification for the deductions and we are going to have to hang our hat on the breach.
Amy Moss Chamberlain, Hrdlicka, White, Williams &Aughtry Two Allen Center 1200 Smith Street, Suite 1400 Houston, TX 77002 • Main: 713-658-1818 Direct: 713-654-9662 Fax: 713-658-2553 Email: amy.moss@ohamberlainlaw.com
CID.CULAR 230 NOTICE: To ensure compliance with requirements imposed by U.S. Treasuty Regulations, Chamberlain, Hrdlicka, White, Williams & Aughtry info1ms you that any U.S. tax advice contained in this communication (including any attachments)was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
CONFIDENTIALITY NOTICE: This electronic mail transmission is confidential, may be privileged and should be read or retained only by the intended recipient. If you have received this transmission in e11·or, please immediately notify the sender and delete it from your system.
From: T.M. Enright [mallto:tenrlght@whltewlnston.com1 Sent: Friday, June 13, 2014 10:17 AM To: Moss, Amy c. Cc: Chad Colllns I Corp-CEO; Sandra Gonzalez I Corp-Accounting (sandra.gonzalez@qvlpharmacy.com }; Joyce Montgomery I Corp-Accounting <ioyce.montgom ery@qvlpharmacy.com l Subject: Re: Dr. F TSA
Amy, here is what I understand:
1. QVL is going to account for May and deduct that amount due QVL from any balance due Toth for April. 2. QVL is going to hold one-month of average TSA charges (from ihe April TSA credit) as security for future services payments since they no longer hold any receivables under the TSA Agreement. 3. QVL is going to hold ihe full payoff for the 2 computer systems (as well as the tennination fees relating thereto) from the April TSA payment.
4. If there are any amounts remaining from 1he April TSA credit, (after the application of1 -3 above), QVL will send it to Toth in 5 days from the accounting of 1-3 above.
Let me know if you have questions. Thanks.
T.M. Enright, Partner
<lmage001 .glf>
85Q.570.4793 (Direct Dial) 801 .938.7640 (Admlnlstratlve} tenr!qht@whltew!nston.oom
CONFIDENTIAL ENR000215
On Jun 13, 2014, at 10:57 AM, Moss, Ainy C. <amy.moss@chamberlainlaw.com> wrote:
Ok- I need some guidance on the TSA. As I see it Dr. Fis still in breach (though David disagrees) from the movement of the lock box. QVL is holding its April and May money, which is giving Dr. F fits. Michelle is not in any position to tenninate the TSA. So what is QVL's next mo-ve? Do I send the notice of breach -which I have only held off because David has begged me not to upset Dr. F .further saying he will go postal if! send it? I can send it but then what? Will QVL pay his money? Tenninate the TSA? I need a game plan here, please. Thanks!
Amy Moss Chamberlain, Hrdlicka, White, Williams & Aughtry Two Allen Center 1200 Smith Street, Suite 1400 Houston, TX 77002 Main: 713-658-1818 Direct: 713-654-9662 Fax: 713-658-2553 Email: amy.moss@chamberlainlaw.com
CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by U.S. Treasury Regulations, Chamberlain, Hrdlicka, White, Williams &Aughtry infonns you that any U .S, tax advice contained in this communication (including any attachments) was not intended or wdtten to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. CONFIDENTIALITY NOTICE: This electronic mail transmission is confidentia~ may be privileged and should be read or retained only by the intended recipient. If you have received this transmission in error, please immediately notify the sender and delete it from your system,
CONFIDENTIAL ENR000216
SELECTED AUTHORITIES
Apple Imports, Inc. v. Koole, 945 S.W.2d 895 (1997)
[2] Appeal and Error KeyCite Yellow Flag - Negative Treatment Findings of fact and conclusions of law Distinguished by Elias v. Mr. Yamaha, Inc., Tex.App.-El Paso, Trial court's legal conclusion will not be reversed October 12, 2000 unless it is erroneous as matter of law.
945 S.W.2d 895 Cases that cite this headnote Court of Appeals of Texas, Austin.
[3] Antitrust and Trade Regulation APPLE IMPORTS, INC. dba Consumers, purchasers, and buyers; Apple Toyota, Appellant, consumer transactions v. To qualify as consumer under Deceptive Trade Debbie KOOLE and Pete Resendez, Appellees. Practices Act, person must seek or acquire goods or services by purchase or lease, and goods or No. 03–96–00524–CV. | May 15, services sought or acquired must form basis of 1997. | Rehearing Overruled June 19, 1997.
complaint. V.T.C.A., Bus. & C. § 17.45(4).
Buyers brought Deceptive Trade Practices Act claim against Cases that cite this headnote automobile dealer, claiming that their trade-in car was sold and mishandled, although they decided not to complete purchase. The County Court, Travis County, J. David [4] Antitrust and Trade Regulation Phillips, J., entered judgment on jury verdict in favor of Consumers, purchasers, and buyers; buyers on most claims but refused to set aside finding that consumer transactions dealer did not convert trade-in car. Dealer appealed and Antitrust and Trade Regulation buyers cross-appealed. The Court of Appeals, Jones, J., held Sale that: (1) buyers were “consumers” for purposes of Act; (2) From car buyer's point of view, trade-in of whether buyers were consumers was to be decided by judge, their previous car was simply means of making rather than jury; (3) evidence that dealer sold car before purchase, and thus buyers were “consumers” buyers returned following business day to cancel new car for purposes of Deceptive Trade Practices Act purchase was legally sufficient to support finding that dealer claim that trade-in was improperly handled violated Act; but (4) jury's finding that dealer did not convert after buyers decided not to complete purchase, buyers' trade-in car was supported by evidence that buyers despite seller's contention that handling of tradesaw trade-in car in parking lot, but did not pick it up on advice in was collateral service to purchase of new car. of their attorney. V.T.C.A., Bus. & C. § 17.45(4).
Affirmed. 1 Cases that cite this headnote
[5] Antitrust and Trade Regulation West Headnotes (13) Consumers, purchasers, and buyers;
consumer transactions Determination of consumer status, under [1] Antitrust and Trade Regulation Deceptive Trade Practices Act, is made Questions of law or fact by looking at transaction from plaintiff's Whether plaintiff is consumer, for purposes perspective. V.T.C.A., Bus. & C. § 17.45(4). of Deceptive Trade Practices Act, is generally question of law to be determined by trial court 1 Cases that cite this headnote from evidence. V.T.C.A., Bus. & C. § 17.45(4).
Cases that cite this headnote [6] Antitrust and Trade Regulation
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
Apple Imports, Inc. v. Koole, 945 S.W.2d 895 (1997)
Questions of law or fact Cases that cite this headnote Unless there is dispute concerning factual issues that create consumer status under Deceptive Trade Practices Act, question of consumer status [10] Antitrust and Trade Regulation is question of law for court to decide; if facts are Weight and sufficiency disputed, jury is called upon to resolve factual When dealer took possession of buyers' old issues, but court still must decide legal effect of car, for stated purpose of appraising it for its resolved issues. V.T.C.A., Bus. & C. § 17.45(4). “trade-in” value, dealer impliedly represented that it would not sell old car until new car 1 Cases that cite this headnote transaction was completed and dealer had title to old car, and thus evidence that dealer sold car [7] Antitrust and Trade Regulation before buyers returned following business day to Questions of law or fact cancel new car purchase was legally sufficient Dispute over whether car buyers were to support finding that dealer violated Deceptive “consumers” entitled to bring claim under Trade Practices Act. V.T.C.A., Bus. & C. §§ Deceptive Trade Practices Act revolved around 17.46–17.63. legal interpretation of facts, and thus was to be 3 Cases that cite this headnote decided by judge, rather than jury. V.T.C.A., Bus. & C. § 17.45(4).
[11] Appeal and Error Cases that cite this headnote Interrogatories and special verdicts Appeal and Error [8] Appeal and Error Extent of Review Verdict If party seeks to set aside adverse “non- Appeal and Error finding” by jury as matter of law, record must Total failure of proof be examined for evidence that supports jury's In reviewing legal sufficiency of evidence, findings, while ignoring all evidence to contrary, Court of Appeals considers only evidence and and if there is no evidence to support fact finder's inferences, viewed in light most favorable answer, entire record must then be examined to verdict, that tend to support finding, and to see if contrary proposition is conclusively disregards all evidence and inferences to established. contrary; if there is any evidence of probative Cases that cite this headnote force to support finding, it is upheld.
Cases that cite this headnote [12] Conversion and Civil Theft In general; nature and elements [9] Appeal and Error To establish conversion of personal property, Extent of Review plaintiff must prove that plaintiff owned or had Appeal and Error legal possession of property or entitlement to Clear or palpable weight or preponderance possession, defendant unlawfully and without authorization assumed and exercised dominion In reviewing factual sufficiency of evidence to and control over property to exclusion of, or support finding on which appellee had burden of inconsistent with plaintiff's rights as owner, proof at trial, Court of Appeals examines entire plaintiff demanded return of property, and record and sets aside judgment only if evidence defendant refused to return property.
as whole is so weak that finding is clearly wrong and unjust. 31 Cases that cite this headnote
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Apple Imports, Inc. v. Koole, 945 S.W.2d 895 (1997)
hour, appellees were unable to complete the necessary papers [13] Conversion and Civil Theft to consummate the transaction before the dealership closed Conversion or theft for the day. At an Apple employee's suggestion, appellees Jury's finding, that dealer did not convert buyers' drove the Mazda home and left their Dodge at Apple, trade-in car, was supported by evidence that planning to return on Monday to finalize the paperwork for buyers saw trade-in car in parking lot, but did not the purchase. Over the weekend, however, appellees changed pick it up on advice of their attorney, and thus their minds about buying the Mazda. When appellees returned finding would not be set aside. to the dealership on Monday to give back the Mazda and retrieve their Dodge Dynasty, however, they discovered that 1 Cases that cite this headnote Apple had already sold the Dodge to a wholesaler in Eagle Pass, Texas, without their authorization and without title to the car. Apple arranged to have appellees' car returned from Eagle Pass on Friday, December 9, 1994. However, appellees Attorneys and Law Firms did not pick up the vehicle until July of 1995. When appellees finally recovered their Dodge, they discovered it had an *897 David R. Sapp, Law Offices of David R. Sapp, Austin, additional 800 miles on the odometer and a long scratch on the for appellant.
driver's side of the car that had not been present in December Malcolm Greenstein, Greenstein & Kolker, Austin, for when they originally took it to the Apple dealership. appellees.
Appellees filed suit against Apple alleging violations of the Before POWERS, JONES and KIDD, JJ. DTPA and conversion. A jury found Apple to have engaged in a false, misleading, or deceptive act and awarded $2,000 in Opinion damages; however, the jury found that Apple did not convert appellees' Dodge. Apple appeals the trial court's judgment.
JONES, Justice.
In a cross-point, appellees argue that the trial court erred in Our opinion issued April 10, 1997 is withdrawn, and the failing to set aside the jury's finding that Apple did not convert following is issued in lieu thereof. appellees' car.
Appellant Apple Imports, Inc., doing business as Apple Toyota (“Apple”), appeals a judgment awarding damages to DISCUSSION Debbie Koole and Pete Resendez, appellees, for violations of the Texas Deceptive Trade Practices Act (“DTPA”). See [1] [2] In its first point of error, Apple contends appellees Tex. Bus. & Com.Code Ann. §§ 17.46–.63 (West 1987 lacked standing to bring suit under the DTPA because they & Supp.1997). In six points of error, Apple contends that do not qualify as “consumers” under the act. Whether a appellees lacked standing to bring suit under the DTPA and plaintiff is a consumer is generally a question of law to that the evidence was legally and factually insufficient to be determined by the trial court from the evidence. HOW support a finding that Apple engaged in any false, misleading, Ins. Co. v. Patriot Fin. Servs. of Texas, Inc., 786 S.W.2d or deceptive act. In a cross-point, appellees assert that the trial 533, 539 (Tex.App.—Austin 1990, writ denied), disapproved court erred in not setting aside the jury's determination that on other grounds, Hines v. Hash, 843 S.W.2d 464, 469– Apple did not convert appellees' automobile. We will affirm 70 (Tex.1992). The trial court's legal conclusion will not be the judgment of the trial court. reversed unless it is erroneous as a matter of law. Westech Eng'g, Inc. v. Clearwater Constructors, Inc., 835 S.W.2d 190, 196 (Tex.App.—Austin 1992, writ denied).
FACTUAL AND PROCEDURAL BACKGROUND [3] [4] Under the DTPA, a consumer is an individual On Saturday December 3, 1994, appellees visited Apple's who seeks or acquires, by purchase or lease, any goods or automobile dealership and decided to purchase a used Mazda services. See Tex. Bus. & Com.Code Ann. § 17.45(4) (West MX–3. As part of the consideration for the Mazda, appellees 1987). In order to qualify as a consumer under the DTPA, orally agreed to trade in their Dodge Dynasty. Due to the late two requirements must be met: (1) the person must seek or
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Apple Imports, Inc. v. Koole, 945 S.W.2d 895 (1997)
acquire goods or services by purchase or lease, and (2) the support the finding, it will be upheld. See Sherman v. First goods or services sought or acquired must form the basis of Nat'l Bank, 760 S.W.2d 240, 242 (Tex.1988). In reviewing the complaint. Sherman Simon Enters., Inc. v. Lorac Serv. the factual sufficiency of the evidence to support a finding *898 Corp., 724 S.W.2d 13, 14 (Tex.1987). Apple argues on which the appellee had the burden of proof at trial, we that appellees do not meet the second part of this test because examine the entire record and will set aside a judgment only appellees' complaint is based on the handling of their Dodge if the evidence as a whole is so weak that the finding is Dynasty, which Apple insists was a collateral service to their clearly wrong and unjust. Cain v. Bain, 709 S.W.2d 175, 176 purchase of the Mazda. We disagree. (Tex.1986).
[5] The determination of consumer status is made by [10] Apple contends that its act of selling appellees' Dodge looking at the transaction from the plaintiff's perspective. was merely a mistake and does not constitute or create a Flenniken v. Longview Bank & Trust Co., 661 S.W.2d misrepresentation. Under the particular circumstances of this 705, 707 (Tex.1983). From appellees' viewpoint, the only case, we disagree. When it took possession of appellees' car transaction was the purchase of the Mazda MX–3. The trade- to determine its “trade-in” value, Apple made an implied in of the Dodge Dynasty was simply a means to make the representation. Violation of an implied representation has purchase. See id. The planned trade-in was to form part of the been held to constitute a “laundry list” violation under the consideration for the purchase of the Mazda and, therefore, DTPA. See Rickey v. Houston Health Club, Inc., 863 S.W.2d was an integral part of the consumer transaction. Appellees' 148, 151 (Tex.App.—Texarkana 1993), writ denied per complaint arose out of a single transaction—the attempted curiam, 888 S.W.2d 812 (Tex.1994); Lone Star Ford, Inc. v. purchase of the Mazda. The trial court's conclusion that McGlashan, 681 S.W.2d 720, 724 (Tex.App.—Houston [1st appellees were consumers was not erroneous. Dist.] 1984, no writ). In Lone Star, the court said that when a dealer represents he can sell a used vehicle, “ he necessarily [6] [7] Apple argues, in the alternative, that the trial represents he can transfer a legal title to the new owner.” court erred in not submitting to the jury the question of Lone Star Ford, 681 S.W.2d at 724. Similarly, when Apple whether appellees were consumers. Unless there is a dispute took possession of appellees' Dodge Dynasty for the stated concerning the factual issues that create a consumer status, purpose of appraising it for its “trade-in” value, we believe the question of consumer status is a question of law for the Apple impliedly represented that it would not sell appellees' court to decide. See Leonard & Harral Packing Co. v. Ward, car until the transaction was completed and there was a clear 883 S.W.2d 337, 342 (Tex.App.—Waco 1994), rev'd on other showing of a valid complete transfer of ownership. 1 See grounds, 937 S.W.2d 425 (Tex.1996); 3Z Corp. v. Stewart *899 Tex. Transp. Code Ann. § 501.071 (West Supp.1997) Title Guar. Co., 851 S.W.2d 933, 937 (Tex.App.—Beaumont (prohibiting the sale of a motor vehicle without a transfer of 1993, writ denied). If the facts are disputed, the jury is called the certificate of title); cf. Najarian v. David Taylor Cadillac, upon to resolve the factual issues, but the court still must 705 S.W.2d 809, 811 (Tex.App.—Houston [1st Dist.] 1986, decide the legal effect of the resolved issues. See id. In the no writ) (in transfer of automobile, a clear showing of a present case, there is no dispute concerning the facts that valid and complete transfer of ownership is required). Apple's create appellees' consumer status. Rather, the parties' dispute general manager testified that the dealership “commonly” revolves around a legal interpretation of those facts. The sold vehicles without first securing legal title, and it is trial court did not err in failing to submit a jury question on undisputed that Apple sold appellees' Dodge before appellees appellees' consumer status. We overrule point of error one. completed the transfer of the automobile. Thus, looking at the evidence in the light most favorable to the verdict, we [8] [9] In points of error two through five, Apple argues cannot say the evidence is legally insufficient to support the that the evidence is legally and factually insufficient to jury's finding that Apple violated the DTPA. Further, after support the jury's finding that Apple violated the DTPA. reviewing the entire record, we conclude that the evidence In reviewing the legal sufficiency of the evidence, we supporting the jury's finding is not so weak as to make the consider only the evidence and inferences, viewed in the finding clearly wrong and unjust. We overrule points of error light most favorable to the verdict, that tend to support the two through five. Having overruled those points of error, we finding, and we disregard all evidence and inferences to the need not address point six. contrary. Davis v. City of San Antonio, 752 S.W.2d 518, 522 (Tex.1988). If there is any evidence of probative force to
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Apple Imports, Inc. v. Koole, 945 S.W.2d 895 (1997)
exclusion of, or inconsistent with the plaintiff's rights as an In a cross-point, appellees challenge the jury's negative owner; (3) the plaintiff demanded return of the property; and answer to question five of the jury charge, which asked (4) the defendant refused to return the property. Whitaker whether Apple converted appellees' automobile and whether v. Bank of El Paso, 850 S.W.2d 757, 760 (Tex.App.—El such conduct was a proximate cause of damages. Appellees Paso 1993, no writ). After carefully reviewing the record, we assert that the trial court erred in failing to set aside the conclude that the record contains some evidence to support jury's answer to question five because the jury's failure to find the jury's finding. Apple's general manager told appellees that that Apple converted appellees' Dodge was contrary to the their Dodge would be returned on Friday, December 9, 1994.
overwhelming weight and preponderance of the evidence. 2 Although the Dodge was at Apple on Friday, appellees did not pick it up. On Saturday, December 10, while appellees were [11] Appellees must overcome two hurdles to set aside an returning the Mazda MX–3 to the dealership, they saw their adverse “non-finding” by the jury as a matter of law. Sterner Dodge in the parking lot, but did not pick it up on the advice v. Marathon Oil Co., 767 S.W.2d 686, 690 (Tex.1989);
of their attorney. We conclude that the record contains more Holley v. Watts, 629 S.W.2d 694, 696 (Tex.1982). First, than a scintilla of evidence that Apple did not refuse to return the record must be examined for evidence that supports the appellees' car, a required element of conversion. We overrule jury's findings, while ignoring all evidence to the contrary. If appellees' cross-point.
there is no evidence to support the fact finder's answer, the entire record must then be examined to see if the contrary proposition is conclusively established. Sterner, 767 S.W.2d at 690. CONCLUSION
We affirm the judgment of the trial court.
[12] [13] To establish conversion of personal property, a plaintiff must prove that: (1) the plaintiff owned or had legal possession of the property or entitlement to possession; (2) All Citations the defendant unlawfully and without authorization assumed and exercised dominion and control over the property to the 945 S.W.2d 895
Footnotes 1 We do not hold that an implied representation like the one discussed above exists in all bailment situations. See, e.g., 8A Tex. Jur.3d Bailments § 1 (1995). The present case is not a typical bailment case, since possession of appellees' car was transferred only because it was going to form part of the consideration for their purchase of another car. Thus, Apple's very possession of the Dodge Dynasty was a necessary part of the transaction involving appellees' proposed or attempted purchase of the Mazda.
2 Because it is not readily apparent from the argument briefed that appellees were attempting to raise a factual sufficiency complaint, Pool v. Ford Motor Co., 715 S.W.2d 629, 632–33 (Tex.1986), and because the trial court would not have been authorized to disregard the jury's answer to question five merely because it was against the great weight and preponderance of the evidence, we construe appellees' cross-point as a challenge to the legal sufficiency of the evidence rather than the factual sufficiency. See Novy v. Employers Casualty Co., 536 S.W.2d 101, 103 (Tex.Civ.App.—Austin 1976, writ ref'd n.r.e.).
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BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (2002) 45 Tex. Sup. Ct. J. 930
A defendant challenging a Texas court's personal jurisdiction over it must negate all jurisdictional KeyCite Yellow Flag - Negative Treatment bases.
Distinguished by Spir Star AG v. Kimich, Tex., March 12, 2010 53 Cases that cite this headnote 83 S.W.3d 789 Supreme Court of Texas.
[3] Appeal and Error BMC SOFTWARE BELGIUM, N.V., Petitioner, Cases Triable in Appellate Court v. Appeal and Error Michel MARCHAND, Respondent. Proceedings preliminary to trial
No. 00–1019. | Argued Sept. 5, In an appeal of a decision denying a special appearance, the Court of Appeals should review 2001. | Decided June 27, 2002.
the trial court's factual findings for legal and | Rehearing Denied Aug. 29, 2002.
factual sufficiency and the trial court's legal Employee sued Houston based corporation and its conclusions de novo. foreign subsidiary for breach of contract, fraud, negligent 254 Cases that cite this headnote misrepresentation, and declaratory relief. The 127th District Court, Harris County, Sharolyn Wood, J., denied foreign subsidiary's special appearance contesting jurisdiction, and [4] Courts foreign subsidiary appealed. The Court of Appeals affirmed Determination of questions of jurisdiction and foreign subsidiary petitioned Supreme Court for review. in general The Supreme Court, James A. Baker, J., held that: (1) Whether a court has personal jurisdiction over a trial court did not have specific jurisdiction over foreign defendant is a question of law. subsidiary; (2) trial court did not have general jurisdiction over foreign subsidiary; (3) foreign subsidiary was not the 50 Cases that cite this headnote alter ego of its parent for jurisdictional purposes; and (4) trial court did not abuse its discretion in denying employee's [5] Appeal and Error request for a continuance of the special appearance hearing.
Proceedings preliminary to trial If a trial court enters an order denying a special Court of Appeals reversed, and judgment rendered.
appearance, and the trial court issues findings of fact and conclusions of law, the appellant may challenge the fact findings on legal and factual West Headnotes (36) sufficiency grounds.
115 Cases that cite this headnote [1] Courts Presumptions and Burden of Proof as to Jurisdiction [6] Appeal and Error Proceedings preliminary to trial The plaintiff bears the initial burden of pleading sufficient allegations to bring a nonresident In an appeal of a decision denying a special defendant within the provisions of the long-arm appearance, the Courts of Appeals may review statute. the fact findings for both legal and factual sufficiency.
62 Cases that cite this headnote 4 Cases that cite this headnote
[2] Courts Presumptions and Burden of Proof as to [7] Appeal and Error Jurisdiction Proceedings preliminary to trial
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BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (2002) 45 Tex. Sup. Ct. J. 930
In an appeal of a decision denying a special the reporter's and clerk's records, the trial court's appearance, Supreme Court's review of the implied findings are not conclusive and may be trial court's fact findings is limited to legal challenged for legal and factual sufficiency in the sufficiency. appropriate appellate court.
11 Cases that cite this headnote 197 Cases that cite this headnote
[8] Appeal and Error [13] Appeal and Error Findings of fact and conclusions of law Total failure of proof Appellate courts review a trial court's For legal sufficiency points, if there is more than conclusions of law as a legal question. a scintilla of evidence to support the finding, the no evidence challenge fails.
147 Cases that cite this headnote 40 Cases that cite this headnote [9] Appeal and Error Findings of fact and conclusions of law [14] Courts The appellant may not challenge a trial court's Actions by or Against Nonresidents, conclusions of law for factual insufficiency; Personal Jurisdiction In; “Long-Arm” however, the reviewing court may review the Jurisdiction trial court's legal conclusions drawn from the Broad language of the long-arm statute extends facts to determine their correctness. Texas courts' personal jurisdiction as far as the federal constitutional requirements of due 212 Cases that cite this headnote process will permit. V.T.C.A., Civil Practice & Remedies Code §§ 17.041-17.045.
[10] Appeal and Error 69 Cases that cite this headnote Rulings on questions of law If the reviewing court determines a conclusion of law is erroneous, but the trial court rendered [15] Constitutional Law the proper judgment, the erroneous conclusion of Non-residents in general law does not require reversal. Personal jurisdiction over nonresident defendants is constitutional when two conditions 100 Cases that cite this headnote are met: (1) the defendant has established minimum contacts with the forum state, and [11] Appeal and Error (2) the exercise of jurisdiction comports with Particular findings implied traditional notions of fair play and substantial justice.
When a trial court does not issue findings of fact and conclusions of law with its special 161 Cases that cite this headnote appearance ruling, all facts necessary to support the judgment and supported by the evidence are implied. [16] Courts Business contacts and activities;
127 Cases that cite this headnote transacting or doing business A nonresident defendant that has purposefully [12] Appeal and Error availed itself of the privileges and benefits of Conclusiveness in General conducting business in the foreign jurisdiction has sufficient contacts with the forum to confer When a trial court does not issue findings of fact personal jurisdiction.
with its ruling and the appellate record includes
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BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (2002) 45 Tex. Sup. Ct. J. 930
Related contacts and activities; specific 68 Cases that cite this headnote jurisdiction “Specific jurisdiction” is established if the [17] Courts defendant's alleged liability arises from or is Purpose, intent, and foreseeability; related to an activity conducted within the forum.
purposeful availment 24 Cases that cite this headnote Although not determinative, foreseeability is an important consideration in deciding whether the nonresident defendant has purposefully [22] Courts established minimum contacts with the forum Unrelated contacts and activities; general state such that the forum state has personal jurisdiction jurisdiction. “General jurisdiction” is present when a defendant's contacts in a forum are continuous 80 Cases that cite this headnote and systematic so that the forum may exercise personal jurisdiction over the defendant even if [18] Courts the cause of action did not arise from or relate to Nature, number, frequency, and extent of activities conducted within the forum state.
contacts and activities 118 Cases that cite this headnote A defendant should not be subject to a foreign court's jurisdiction based upon random, fortuitous, or attenuated contacts. [23] Courts Fraud, racketeering, and deceptive practices 4 Cases that cite this headnote Alleged discussion between foreign corporation's officers in Texas regarding [19] Courts their plans to defraud future employee Contacts with forum state in general did not establish special jurisdiction in Because of the unique and onerous burden placed Texas over employee's fraud and negligent on a party called upon to defend a suit in a foreign misrepresentation claims against foreign legal system, the minimum contacts analysis corporation, where all of corporation's contacts is particularly important when the defendant is with employee occurred outside of Texas, from a different country. employee was not a party to any of the conversation in Texas, negotiations on and offer 21 Cases that cite this headnote of stock options to employee occurred in Europe, and employee accepted employment offer in [20] Courts Belgium and worked in Belgium.
Unrelated contacts and activities; general 2 Cases that cite this headnote jurisdiction Courts [24] Courts Related contacts and activities; specific Unrelated contacts and activities; general jurisdiction jurisdiction Personal jurisdiction exists if the nonresident General jurisdiction may only be exercised when defendant's minimum contacts give rise to either the nonresident defendant's contacts in a forum specific jurisdiction or general jurisdiction.
are continuous and systematic.
36 Cases that cite this headnote 23 Cases that cite this headnote
[21] Courts [25] Courts
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BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (2002) 45 Tex. Sup. Ct. J. 930
Particular cases 43 Cases that cite this headnote Alleged discussion between foreign corporation's officers in Texas regarding their plans to defraud future employee did not [28] Corporations and Business Organizations constitute substantial activities within Texas Presumptions and burden of proof such as to establish general jurisdiction in The party seeking to ascribe one corporation's Texas over foreign corporation, where all of actions to another by disregarding their distinct corporation's contacts with employee occurred corporate entities must prove this allegation, as outside of Texas, employee was not a party the law presumes that two separate corporations to any conversations in Texas, negotiations on are indeed distinct entities. and offer of stock options to employee occurred in Europe, and employee accepted employment 24 Cases that cite this headnote offer in Belgium and worked in Belgium.
[29] Corporations and Business Organizations 1 Cases that cite this headnote Identity of directors, officers, or shareholders [26] Courts Courts will not because of stock ownership or Related or affiliated entities; parent and interlocking directorship disregard the separate subsidiary legal identities of corporations, unless such Foreign subsidiary's unrelated purchases of relationship is used to defeat public convenience, products from parent corporation headquartered justify wrongs, such as violation of the anti-trust in Texas were insufficient to establish general laws, protect fraud, or defend crime. jurisdiction in Texas over subsidiary, for purposes of employee's fraud and negligent 2 Cases that cite this headnote misrepresentation claims against subsidiary; there was not evidence establishing that [30] Corporations and Business Organizations subsidiary's contacts with Texas were continuous Jurisdiction and venue in general and systematic, and unrelated purchases were To “fuse” the parent company and its subsidiary not the type of contacts that justified a finding for jurisdictional purposes, the plaintiffs must that subsidiary could have reasonably anticipated prove the parent controls the internal business being haled into court in Texas.
operations and affairs of the subsidiary, and 7 Cases that cite this headnote the degree of control the parent exercises must be greater than that normally associated with common ownership and directorship; the [27] Corporations and Business Organizations evidence must show that the two entities cease Jurisdiction over shareholders, directors, or to be separate so that the corporate fiction should officers of foreign corporations be disregarded to prevent fraud or injustice.
Personal jurisdiction may exist over a nonresident defendant if the relationship 45 Cases that cite this headnote between the foreign corporation and its parent corporation that does business in Texas is one [31] Corporations and Business Organizations in which the parent corporation exerts such Parent and subsidiary corporations in domination and control over its subsidiary that general they do not in reality constitute separate and A subsidiary corporation will not be regarded as distinct corporate entities but are one and the the alter ego of its parent merely because of stock same corporation for purposes of jurisdiction, ownership, a duplication of some or all of the and the court can impute the parent corporation's directors or officers, or an exercise of the control doing business to the subsidiary.
that stock ownership gives to stockholders.
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BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (2002) 45 Tex. Sup. Ct. J. 930
A trial court abuses its discretion when it reaches 9 Cases that cite this headnote a decision so arbitrary and unreasonable as to amount to a clear and prejudicial error of law.
[32] Corporations and Business Organizations 70 Cases that cite this headnote Jurisdiction over shareholders, directors, or officers of foreign corporations Foreign subsidiary was not alter ego of Texas [36] Pretrial Procedure based parent corporation, for purposes of Grounds for continuance in general determining whether Texas courts had personal Trial court did not abuse its discretion jurisdiction over foreign subsidiary, though in overruling plaintiff's objection to special parent corporation had a senior vice-president appearance hearing and not allowing plaintiff for worldwide marketing and corporations more time to complete discovery, where hearing shared a letterhead, absent evidence that parent was held on special appearance seven months corporation considered subsidiary's revenue as after it was filed, plaintiff was able to serve its own, performed services for subsidiary numerous written discovery requests and depose that were not charged, offered subsidiary Chief Executive Officer of defendants, and financial assistance, treated its subsidiary as a plaintiff did not file motion to compel any mere department or office, typically recruited, discovery that defendants did not provide. controlled or approved subsidiary's personnel, or typically compensated subsidiary's employees 30 Cases that cite this headnote with stock options.
14 Cases that cite this headnote Attorneys and Law Firms [33] Corporations and Business Organizations *792 Merritt B. Chastain, III, Thomas H. Wilson, Houston, Labor and employment liabilities and Vinson & Elkins, for Petitioner.
violations A parent company's offering a stock option plan Stuart M. Nelkin, Carol Nelkin, Nelkin & Nelkin, Houston, to a subsidiary's employees is acceptable under for Respondent. Internal Revenue Service regulations and is not evidence of abnormal control over the subsidiary Opinion such that the subsidiary is the alter ego of the Justice BAKER delivered the opinion of the Court.
parent.
This is an interlocutory appeal from the denial of a foreign 3 Cases that cite this headnote corporation's special appearance. A divided court of appeals affirmed the trial court's ruling. 80 S.W.3d 52. We conclude [34] Appeal and Error that the foreign corporation's contacts with Texas are Continuance insufficient to create either specific or general jurisdiction. Supreme Court will not disturb a trial court's We also conclude that the trial court did not abuse its order denying a motion for continuance unless discretion in denying the plaintiff's motion to continue the the trial court has committed a clear abuse of special appearance hearing. We therefore reverse the court discretion. of appeals' judgment and render judgment dismissing the plaintiff's claims against the foreign corporation for want of 95 Cases that cite this headnote jurisdiction.
[35] Appeal and Error Abuse of discretion *793 I. BACKGROUND
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BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (2002) 45 Tex. Sup. Ct. J. 930
Michel Marchand, a Belgian citizen, was employed by Typically, a court of appeals judgment in an interlocutory Platinum Technologies in Belgium. In March 1996, appeal is conclusive and an appeal to this Court is not allowed. Marchand began negotiating with Gerd Ordelheide and Adri See TEX. GOV'T CODE § 22.225(b). However, because Kok for employment with BMC Software Belgium, N.V. there is a dissent in the court of appeals, we may exercise (BMCB). Ordelheide and Kok were directors of BMCB, a jurisdiction in this case. See TEX. GOV'T CODE § 22.225(c). wholly-owned subsidiary of BMC Software, Inc. (BMCS), a Delaware corporation headquartered in Houston.
III. APPLICABLE LAW On March 29, 1996, Marchand and BMCB signed a letter agreement outlining the terms of Marchand's employment with BMCB, including the offer of options to purchase A. SPECIAL APPEARANCE 20,000 shares of BMCS stock. The agreement did not specify —STANDARD OF REVIEW when the options would be granted or when Marchand [1] [2] The plaintiff bears the initial burden of pleading could exercise them. The letter agreement also referenced sufficient allegations to bring a nonresident defendant within a “management agreement” that Marchand had apparently the provisions of the long-arm statute. See McKanna v. Edgar, presented to BMCB. On June 13, 1996, BMCB and Marchand 388 S.W.2d 927, 930 (Tex.1965). A defendant challenging executed the management agreement between BMCB and a a Texas court's personal jurisdiction over it must negate all company called Procurement, N.V., of which Marchand was the sole officer and director. The record shows that Marchand jurisdictional bases. Kawasaki Steel Corp. v. Middleton, 699 S.W.2d 199, 203 (Tex.1985). This Court has never clearly asked BMCB to hire Procurement as a management company articulated the standard for reviewing a trial court's order so that Marchand could work for Procurement as an denying a special appearance. The Fourth Court of Appeals independent contractor rather than directly for BMCB.
has held that, because personal jurisdiction involves both Apparently, this arrangement enabled Marchand to reduce legal and factual questions, appellate courts should review his Belgian tax liability. The management agreement was in *794 the trial court's decision for an abuse of discretion. See, German, and it stated that Belgian law applies and the court e.g., Klenk v. Bustamante, 993 S.W.2d 677, 681 (Tex.App.-
at Brussels had exclusive jurisdiction.
San Antonio 1998, no pet.). However, other courts of appeals review the trial court's factual findings for legal and factual When Marchand actually began working for BMCB is sufficiency and review the trial court's legal conclusions unclear. But it is clear that in July 1997, BMCB discharged de novo. See, e.g., E.L.M. LeBlanc v. Kyle, 28 S.W.3d 99, Procurement and Marchand. Marchand was never granted any 101 (Tex.App.-Texarkana 2000, pet. denied); In re Estate options to purchase BMCS stock. He sued BMCB and BMCS of Judd, 8 S.W.3d 436, 440–41 (Tex.App.-El Paso 1999, for breach of contract, fraud, negligent misrepresentation, and no pet.); C–Loc Retention Sys., Inc. v. Hendrix, 993 S.W.2d declaratory relief. Marchand alleged both specific and general 473, 476 (Tex.App.-Houston [14th Dist.] 1999, no pet.);
jurisdiction over BMCB. BMCB filed a special appearance, Cadle v. Graubart, 990 S.W.2d 469, 471 (Tex.App.Beaumont which the trial court denied. BMCB appealed the trial court's 1999, no pet.); Ball v. Bigham, 990 S.W.2d 343, 347 interlocutory order. See TEX. CIV. PRAC. & REM.CODE § (Tex.App.Amarillo 1999, no pet.); Garner v. Furmanite 51.014(a)(7). The court of appeals affirmed, 80 S.W.3d at 55, Australia Pty, Ltd., 966 S.W.2d 798, 802 (Tex.App.-Houston and BMCB petitioned this Court for review.
[1st Dist.] 1998, pet. denied); Al–Turki v. Taher, 958 S.W.2d 258, 260–61 (Tex.App.-Eastland 1997, pet. denied).
II. THIS COURT'S JURISDICTION [3] [4] [5] [6] [7] We agree with the latter view and disapprove of those cases applying an abuse of discretion Until 1997, a trial court's order denying a special appearance was reviewable only on appeal after trial. Canadian standard only. 1 Whether a court has personal jurisdiction Helicopters Ltd. v. Wittig, 876 S.W.2d 304, 307 (Tex.1994). over a defendant is a question of law. See Hotel Partners But the Legislature amended section 51.014 of the Civil v. Craig, 993 S.W.2d 116, 120 (Tex.App.-Dallas 1994, Practice and Remedies Code to permit an interlocutory appeal writ denied) (stating that this Court's decision in Guardian from a trial court's ruling on a special appearance. Royal Exch. Assurance, Ltd. v. English China Clays, P.L.C., 815 S.W.2d 223, 226 (Tex.1991), suggests that personal
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jurisdiction is a legal question). However, the trial court frequently must resolve questions of fact before deciding B. IN PERSONAM JURISDICTION the jurisdiction question. See E.L.M. LeBlanc, 28 S.W.3d at 101; C–Loc Retention Sys., 993 S.W.2d at 476. If a trial [14] The Texas long-arm statute governs Texas courts' court enters an order denying a special appearance, and the exercise of jurisdiction over nonresident defendants. See trial court issues findings of fact and conclusions of law, TEX. CIV. PRAC. & REM.CODE §§ 17.041–.045. That the appellant may challenge the fact findings on legal and statute permits Texas courts to exercise jurisdiction over factual sufficiency grounds. See Hotel Partners v. KPMG nonresident defendants that “does business” in Texas, and the Peat Marwick, 847 S.W.2d 630, 632 (Tex.App.-Dallas 1993, statute lists some activities that constitute “doing business.” writ denied). Our courts of appeals may review the fact TEX. CIV. PRAC. & REM.CODE § 17.042. The list findings for both legal and factual sufficiency. Ortiz v. Jones,of activities, however, is not exclusive. We have held 917 S.W.2d 770, 772 (Tex.1996). This Court's review of the that section 17.042's broad language extends Texas courts' trial court's fact findings is limited to legal sufficiency. Ortiz, personal jurisdiction “as far as the federal constitutional 917 S.W.2d at 772. requirements of due process will permit.” U–Anchor Adver., Inc. v. Burt, 553 S.W.2d 760, 762 (Tex.1977). Thus, we [8] [9] [10] Appellate courts review a trial court's rely on precedent from the United States Supreme Court and conclusions of law as a legal question. Hitzelberger v. other federal courts, as well as our own State's decisions, Samedan Oil Corp., 948 S.W.2d 497, 503 (Tex.App.-Waco in determining whether a nonresident defendant has met its 1997, pet. denied). The appellant may not challenge a burden to negate all bases of jurisdiction. See Guardian trial court's conclusions of law for factual insufficiency; Royal, 815 S.W.2d at 226; U–Anchor Adver., 553 S.W.2d at however, the reviewing court may review the trial court's 762. legal conclusions drawn from the facts to determine their correctness. Templeton v. Dreiss, 961 S.W.2d 645, 656 n. 8 [15] [16] [17] [18] [19] Personal jurisdiction over (Tex.App.-San Antonio 1998, pet. denied); Dallas County v. nonresident defendants is constitutional when two conditions Sweitzer, 881 S.W.2d 757, 763 (Tex.App.-Dallas 1994, writ are met: (1) the defendant has established minimum contacts denied). If the reviewing court determines a conclusion of law with the forum state, and (2) the exercise of jurisdiction is erroneous, but the trial court rendered the proper judgment, comports with traditional notions of fair play and substantial the erroneous conclusion of law does not require reversal. justice. International Shoe Co. v. Washington, 326 U.S. Scholz v. Heath, 642 S.W.2d 554, 559 (Tex.App.-Waco 1982, 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945). A nonresident no writ). defendant that has “purposefully availed” itself of the privileges and benefits of conducting business in the foreign *795 [11] [12] [13] When a trial court does not issue jurisdiction has sufficient contacts with the forum to confer findings of fact and conclusions of law with its special personal jurisdiction. Burger King Corp. v. Rudzewicz, appearance ruling, all facts necessary to support the judgment 471 U.S. 462, 474–76, 105 S.Ct. 2174, 85 L.Ed.2d 528 and supported by the evidence are implied. See Worford v. (1985) (discussing the constitutional boundaries of personal Stamper, 801 S.W.2d 108, 109 (Tex.1990); Zac Smith & jurisdiction). Although not determinative, foreseeability is an Co. v. Otis Elevator Co., 734 S.W.2d 662, 666 (Tex.1987); important consideration in deciding whether the nonresident In re W.E.R., 669 S.W.2d 716, 717 (Tex.1984). When the defendant has purposefully established “minimum contacts” appellate record includes the reporter's and clerk's records, with the forum state. Guardian Royal, 815 S.W.2d at 227. these implied findings are not conclusive and may be However, a defendant should not be subject to a foreign challenged for legal and factual sufficiency in the appropriate court's jurisdiction based upon “random,” “fortuitous,” or appellate court. Roberson v. Robinson, 768 S.W.2d 280, 281 “attenuated” contacts. Burger King, 471 U.S. at 475, 105 (Tex.1989); Zac Smith & Co., 734 S.W.2d at 666. For legal S.Ct. 2174. Because of the unique and onerous burden sufficiency points, if there is more than a scintilla of evidence placed on a party called upon to defend a suit in a foreign to support the finding, the no evidence challenge fails. Holt legal system, the minimum contacts analysis is particularly Atherton Indus., Inc. v. Heine, 835 S.W.2d 80, 84 (Tex.1992). important when the defendant is from a different country.
CSR Ltd. v. Link, 925 S.W.2d 591, 595 (Tex.1996) (citing Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 114, 107 S.Ct. 1026, 94 L.Ed.2d 92 (1987)).
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not reach BMCB's argument that the evidence is not legally [20] [21] [22] Personal jurisdiction exists if the sufficient to establish that BMCB was BMCS's alter ego. 80 nonresident defendant's minimum contacts give rise to S.W.3d at 59. either specific jurisdiction or general jurisdiction. *796 Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 413–14, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984);
A. SPECIFIC JURISDICTION Guardian Royal, 815 S.W.2d at 226. Specific jurisdiction is established if the defendant's alleged liability arises from or is Marchand asserts that the trial court had specific jurisdiction related to an activity conducted within the forum. Guardian over BMCB because BMCB committed a tort in whole or Royal, 815 S.W.2d at 228. In contrast, general jurisdiction is in part in Texas. See TEX. CIV. PRAC. & REM.CODE § present when a defendant's contacts in a forum are continuous 17.042(2). Specifically, Marchand alleges that Ordelheide and systematic so that the forum may exercise personal and Max Watson, BMCS's chairman and chief executive jurisdiction over the defendant even if the cause of action officer, discussed in Texas the stock-options offer BMCB did not arise from or relate to activities conducted within the made to Marchand and, in this conversation, they planned to forum state. Guardian Royal, 815 S.W.2d at 228; Schlobohm defraud him. Marchand argues that the discussion Ordelheide v. Schapiro, 784 S.W.2d 355, 357 (Tex.1990). and Watson had in Texas forms the basis of his fraud and negligent misrepresentation claims about the stock options. In response, BMCB argues that there is no evidence in the record IV. ANALYSIS to support the trial court's implied fact findings to support specific jurisdiction. We agree with BMCB.
In his original petition in the trial court, Marchand alleged the following to support jurisdiction over BMCB: (1) BMCB [23] Here, Marchand alleges that his fraud and negligent is operated by and is a wholly owned subsidiary of BMCS; misrepresentation claims arise from the alleged Watson– (2) BMCS provides support to and uses its wholly owned Ordelheide conversation in Texas. See Schlobohm, 784 subsidiaries such as BMCB to jointly market BMCS's S.W.2d at 357 (“Where the activities of a defendant in a products worldwide; (3) BMCS and BMCB have the same forum are isolated or disjointed ... jurisdiction is proper if the officers; (4) BMCB has continuous and systematic contacts cause of action arises from a particular activity.”). But they do with BMCS; (5) BMCB uses stock in BMCS to entice not. The nature of the claims demonstrate that they can only employees to work for it; and (6) the stock allegedly offered arise from BMCB's contact *797 with Marchand, which to Marchand is located in Houston, Texas. all occurred outside of Texas. Even assuming Watson and Ordelheide talked in Texas about Marchand's employment The court of appeals determined that the trial court could and the stock options, Marchand was not a party to those have reasonably concluded that BMCB failed to negate conversations. BMCB negotiated with Marchand about his all possible bases for establishing specific jurisdiction. In employment, and offered the stock options to Marchand, in doing so, the court of appeals explained that the evidence Europe. Moreover, Marchand accepted the employment offer shows that BMCB and BMCS officers discussed Marchand in Belgium and worked in Belgium. Consequently, BMCB and the stock option offer in Texas. 80 S.W.3d at 59–60. made no representations to Marchand in Texas, and he did Furthermore, the court of appeals concluded that the record not rely to his detriment on the conversation in Texas. See showed that BMCB had sufficient continuous and systematic T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d contacts with BMCS and thus Texas to establish the trial 218, 222 (Tex.1992) (fraud requires showing that plaintiff court's general jurisdiction. In so concluding, the court of acted in reliance on defendant's material misrepresentation); appeals relied upon alleged conversations in Texas about Federal Land Bank Ass'n of Tyler v. Sloane, 825 S.W.2d 439, Marchand between BMCB and BMCS officers, BMCB's 442 (Tex.1991) (negligent misrepresentation requires that the selling BMCS's software and services, BMCS's including its plaintiff justifiably rely on the defendant's representation). subsidiaries' financial performance on annual reports, and Therefore, Marchand's alleged damages arose outside of BMCB providing its employees BMCS stock options as part Texas. See, e.g., Primera Vista S.P.R. de R.L. v. Banca of an employee incentive plan. 80 S.W.3d at 58–59. Because Serfin, S.A. Institucion de Banca Multiple Grupo Financiero the court of appeals determined the trial court could have Serfin, 974 S.W.2d 918, 926 (Tex.App.El Paso 1998, no found specific and general jurisdiction over BMCB, it did pet.) (holding that specific jurisdiction did not exist where
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defendant deposited money in Texas but misrepresentations Texas company, sent its employees to Texas for training, to plaintiffs about that money occurred elsewhere). and sent its chief executive officer to Houston for contract negotiation. Helicopteros, 466 U.S. at 416, 104 S.Ct. 1868.
There is no evidence to support the trial court's conclusion that The Supreme Court held that these contacts were insufficient BMCB committed a tort in whole or in part in Texas so that to warrant a Texas court's exercising general jurisdiction. specific jurisdiction exists. See Guardian Royal, 815 S.W.2d Helicopteros, 466 U.S. at 415–16, 104 S.Ct. 1868 (reversing at 227; TEX. CIV. PRAC. & REM.CODE § 17.042(2); see Hall v. Helicopteros, 638 S.W.2d 870 (Tex.1982)). The Court also Roberson, 768 S.W.2d at 281. Accordingly, we conclude noted that “mere purchases, even if occurring at regular that the trial court lacked specific jurisdiction over BMCB. intervals, are not enough to warrant a State's assertion of in personam jurisdiction over a nonresident corporation in a cause of action not related to those purchase transactions.” Helicopteros, 466 U.S. at 418, 104 S.Ct. 1868.
B. GENERAL JURISDICTION
Marchand also contends that the trial court has general This case is analogous to Helicopteros. Marchand's claims jurisdiction over BMCB. Marchand relies on the alleged against BMCB do not arise from the purchases BMCB made Watson–Ordelheide conversation and BMCB's purchasing from BMCS. To the contrary, Marchand's claims arise from products from BMCS in Texas. On the other hand, BMCB his employment with BMCB in Belgium and the alleged asserts that these events are not enough to establish general misrepresentations BMCB made to Marchand concerning his jurisdiction. We agree and conclude that neither of the eventsemployment. BMCB's unrelated purchases in Texas from Marchand relies upon are continuous or systematic so as to BMCS are not the type of contacts that justify a finding that establish general jurisdiction in Texas. BMCB could have “reasonably anticipate[d] being haled into court” here. World–Wide Volkswagen Corp. v. Woodson, 444 [24] [25] General jurisdiction may only be exercised U.S. 286, 297, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980); see also when the nonresident defendant's contacts in a forum are Helicopteros, 466 U.S. at 418, 104 S.Ct. 1868. continuous and systematic. Helicopteros, 466 U.S. at 414– 15, 104 S.Ct. 1868; Guardian Royal, 815 S.W.2d at 228; There is no evidence to support the trial court's conclusion that Schlobohm, 784 S.W.2d at 357. Though a single act may BMCB's contacts with Texas were continuous and systematic be enough to show general jurisdiction in some instances, so that they established general jurisdiction. See Helicopteros, the alleged conversation between Ordelheide and Watson in 466 U.S. at 414–15, 104 S.Ct. 1868; Guardian Royal, 815 Texas is not enough here. See Guardian Royal, 815 S.W.2d S.W.2d at 228; Schlobohm, 784 S.W.2d at 357; see also at 230 n. 12. We have recognized that “[g]eneral jurisdiction Roberson, 768 S.W.2d at 281. Thus, we conclude that the trial requires a showing that the defendant conducted substantial court lacked general jurisdiction over BMCB. activities within the forum, a more demanding minimum contacts analysis than for specific jurisdiction.” CSR Ltd., 925 S.W.2d at 595 (citing Guardian Royal, 815 S.W.2d at C. ALTER EGO 228). For the reasons discussed above, the alleged Watson– Ordelheide conversation does not constitute “substantial Marchand's jurisdictional allegations in his original petition activities” within the forum to meet the more onerous burden can be read to allege that the trial court has general jurisdiction of proving general jurisdiction. See Guardian Royal, 815 over BMCB because it is BMCS's alter ego. In response, S.W.2d at 228. BMCB contends that there is no evidence to support a determination that it is BMCS's alter ego.
[26] Furthermore, BMCB's purchasing products from BMCS in Texas to distribute in Europe is not enough to [27] [28] [29] Personal jurisdiction may exist over a establish general jurisdiction. In Helicopteros, the United nonresident defendant if the relationship between the foreign States Supreme Court examined a Colombian corporation's corporation and its parent corporation that does business contacts with Texas to decide if Texas courts could exercise in Texas is one that would allow the court to impute general jurisdiction. Helicopteros, 466 U.S. at 415–16, the parent corporation's “doing business” to the subsidiary. 104 S.Ct. 1868. The nonresident defendant had purchased Hargrave v. Fibreboard Corp., 710 F.2d 1154, 1159 (5th helicopters, equipment, and training services from *798 a Cir.1983); Walker v. Newgent, 583 F.2d 163, 167 (5th
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Cir.1978). The rationale for exercising jurisdiction is that Gentry dealt with whether a subsidiary corporation should be “the parent corporation exerts such domination and control regarded as its parent's alter ego for purposes of service of over its subsidiary ‘that they do not in reality constitute process, the Fifth Circuit and our courts of appeals have relied separate and distinct corporate entities but are one and the on its alter ego rule in determining personal jurisdiction. same corporation for purposes of jurisdiction.’ ” Hargrave, See Walker, 583 F.2d at 167; Gutierrez v. Raymond Int'l, 710 F.2d at 1159 (citations omitted); see also Conner v. Inc., 484 F.Supp. 241, 253 (S.D.Tex.1979); Conner, 944 ContiCarriers & Terminals, Inc., 944 S.W.2d 405, 418 S.W.2d at 419; 3–D Elec. Co. v. Barnett Constr. Co., 706 (Tex.App.-Houston [14th Dist.] 1997, no writ). The party S.W.2d 135, 139 (Tex.App.-Dallas 1986, writ ref'd n.r.e.). seeking to ascribe one corporation's actions to another by Accordingly, general jurisdiction does not extend to BMCB disregarding their distinct corporate entities must prove this to the extent Marchand relies on BMCB and BMCS having allegation. Walker, 583 F.2d at 167; Conner, 944 S.W.2d at duplicate officers. 418–19; see also Lucas v. Texas Indus., Inc., 696 S.W.2d 372, 375 (Tex.1984). This is because Texas law presumes that two In addition to alleging that BMCB and BMCS share the separate corporations are indeed distinct entities: same officers, Marchand argues that the record shows the following to establish BMCB's alter-ego status: (1)
The general rule seems to be BMCS's SEC documents incorporate BMCB's financial that courts will not because of performance, and BMCS's annual report includes BMCB's stock ownership or interlocking financial performance on a consolidated basis; (2) BMCS directorship disregard the separate gives BMCB financial assistance; (3) BMCS provides stock legal identities of corporations, unless options for BMCB's employees; (4) BMCS treats BMCB's such relationship is used to defeat offices, employees, and accounts receivable as its own public convenience, justify wrongs, property; (5) BMCS personnel has offices at its subsidiary such as violation of the anti-trust laws, facilities; (6) BMCS performs human resources, accounting, protect fraud, or defend crime. risk management, and marketing services for BMCB; (7)
BMCS recruits employees for BMCB and approves hiring Bell Oil & Gas Co. v. Allied Chem. Corp., 431 S.W.2d 336, and competition; (8) BMCB and BMCS use the same 339 (Tex.1968) (citations omitted).
letterhead and use the terms “BMC” and “BMC Software” interchangeably; and (9) Watson's deposition testimony *799 [30] To “fuse” the parent company and its subsidiary shows that BMCB is a mere BMCS operation or department.
for jurisdictional purposes, the plaintiffs must prove the parent controls the internal business operations and affairs of [32] There is no evidence in the record to support the subsidiary. Conner, 944 S.W.2d at 418–19 (discussing Marchand's assertions that BMCB is BMCS's alter ego.
Hargrave, 710 F.2d at 1160; Walker, 583 F.2d at 167). But There are no SEC filings in the record, and nothing in the degree of control the parent exercises must be greater BMCB's annual report supports a reasonable inference that than that normally associated with common ownership and BMCS considered its subsidiaries' revenue as its own or that directorship; the evidence must show that the two entities it offered BMCB financial assistance. The annual report's cease to be separate so that the corporate fiction should listing international sales figures could represent either the be disregarded to prevent fraud or injustice. See Hargrave, subsidiaries' revenue or BMCS's revenue from selling its 710 F.2d at 1160; Conner, 944 S.W.2d at 419; see also products to those subsidiaries. Moreover, the annual report's Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d 571, 573 listing Belgium as a location of both International Offices (Tex.1975).
and Independent Agents fails to show that BMCS treated its subsidiaries as mere departments or offices. BMCS's [31] We conclude that there is no evidence to support any referencing its subsidiaries in its annual report is a common implied findings by the trial court to support that BMCB was business practice, which the Internal Revenue Service, the BMCS's alter ego so that general jurisdiction exists in Texas.
SEC, and generally accepted accounting *800 principles In Gentry, this Court held that “[a] subsidiary corporation will recommend. See Calvert v. Huckins, 875 F.Supp. 674, 678– not be regarded as the alter ego of its parent merely because of 79 (E.D.Cal.1995). Finally, the annual report's stating that stock ownership, a duplication of some or all of the directors BMCS engaged in hedging transactions to protect against the or officers, or an exercise of the control that stock ownership gives to stockholders.” Gentry, 528 S.W.2d at 573. Though
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discovery. The trial court overruled the objection and denied volatility of foreign currency exchange rates is not evidence the motion for continuance. Marchand asserts that, even if that BMCS engaged in risk management for BMCB.
we reverse the court of appeals' judgment, we should remand his claims for further proceedings, because the trial court [33] Additionally, the letter agreement between Marchand prevented him from conducting sufficient discovery before and BMCB is not evidence that BMCS typically recruits, the special appearance hearing.
controls, and approves personnel whom BMCB employs or that BMCS typically compensates BMCB employees with [34] [35] [36] This Court will not disturb a trial court's stock options. And, in any event, a parent company's offering order denying a motion for continuance unless the trial court a stock option plan to a subsidiary's employees is acceptable has committed a clear abuse of discretion. Villegas v. Carter, under IRS regulations and is not evidence of abnormal control 711 S.W.2d 624, 626 (Tex.1986). A trial court “abuses over the subsidiary. See In re Silicone Gel Breast Implants its discretion when it reaches a decision so arbitrary and Prods. Liab. Litig. (MDL 926), 837 F.Supp. 1128, 1136 unreasonable as to amount to a clear and prejudicial error of (N.D.Ala.1993), vacated in part on other grounds by, 887 law.” Johnson v. Fourth Court of Appeals, 700 S.W.2d 916, F.Supp. 1455 (N.D.Ala.1995).
917 (Tex.1985). Here, the record shows that Marchand had ample time to conduct, and did conduct, discovery. BMCB Further, Watson's deposition testimony that BMCS filed its special appearance on January 29, 1999, and the employees were “from time to time ... in the offices of a trial court held the hearing seven months later on September variety of our subsidiaries” does not permit a reasonable 7, 1999. During that time, Marchand deposed Watson and inference that BMCS exerted such control over BMCB that served numerous written discovery requests on BMCS and the two entities ceased to be separate. See Hargrave, 710 F.2d BMCB. Although BMCB and BMCS objected to several at 1160; Conner, 944 S.W.2d at 418. Moreover, in discussing discovery requests, the record does not reveal that Marchand certain BMCS employees in his deposition, Watson identified ever filed a motion to compel *801 or otherwise attempted a senior vice-president for worldwide marketing and a vice—
to obtain any discovery BMCB and BMCS did not provide.
president for human resources. But the existence of these two Based on the record, we cannot conclude that the trial court positions for BMCS is not evidence that BMCS performed abused its discretion in overruling Marchand's objection to marketing and human resources for its subsidiaries, or that, the special appearance hearing and denying his motion for a even if BMCS did perform such services, the subsidiaries continuance to conduct further discovery.
were not charged for them. Similarly, BMCS and BMCB having letterhead with “BMC Software” is no evidence that the two entities do not observe corporate formalities, because both entities have “BMC Software” as part of their names. VI. CONCLUSION
In sum, the record does not reveal any evidence to support We hold that there is no evidence to support the trial court's the trial court's conclusion that BMCB was BMCS's alter ego. conclusion that BMCB's contacts with Texas were sufficient See Hargrave, 710 F.2d at 1160; Walker, 583 F.2d at 167; to confer either specific or general jurisdiction. In so holding, Conner, 944 S.W.2d at 419; see also Roberson, 768 S.W.2d we also conclude that there is no evidence to support a finding at 281. We therefore conclude that the trial court did not have that BMCB was BMCS's alter ego so that general jurisdiction general jurisdiction over BMCB based on BMCS's “doing in Texas exists. Finally, we hold that the trial court did business” in Texas. not abuse its discretion in denying its motion to continue the special appearance hearing. Accordingly, we reverse the court of appeals' judgment and render judgment dismissing Marchand's claims against BMC Software Belgium, N.V. for V. OTHER ISSUES want of jurisdiction.
Before the special appearance hearing, Marchand objected to the hearing going forward because of BMCB's and BMCS's All Citations alleged failure to cooperate in discovery and requested that the trial court continue the hearing so that he could complete 83 S.W.3d 789, 45 Tex. Sup. Ct. J. 930
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Footnotes 1 See Whalen v. Laredo Nat'l Bancshares Inc., 37 S.W.3d 89, 91 (Tex.App.-San Antonio 2000, pet. denied); Joe Guerra Exxon Station v. Michelin Tyre Pub. Ltd., 32 S.W.3d 383, 386 (Tex.App.-San Antonio 2000, no pet.); Case v. Grammar, 31 S.W.3d 304, 307–08 (Tex.App.-San Antonio 2000, no pet.); Jones v. J.P. Sauer & Sohn, 27 S.W.3d 157, 161 (Tex.App.- San Antonio 2000, pet. denied); Eakin v. Acosta, 21 S.W.3d 405, 407–08 (Tex.App.-San Antonio 2000, no pet.); Long Distance Int'l, Inc. v. Telefonos de Mexico, S.A., 18 S.W.3d 706, 711 (Tex.App.-San Antonio 2000), rev'd on other grounds, 49 S.W.3d 347 (Tex.2001); Transportes Aereos de Coahuila, S.A. v. Falcon, 5 S.W.3d 712, 717 (Tex.App.-San Antonio 1999, pet. denied); Jones v. Beech Aircraft Corp., 995 S.W.2d 767, 769–70 (Tex.App.-San Antonio 1999, pet. dism. w.o.j.); Magnolia Gas Co. v. Knight Equip. Mfg. Corp., 994 S.W.2d 684, 689 (Tex.App.-San Antonio 1998, no pet.); Klenk, 993 S.W.2d at 681.
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Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985) 105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541
3 Cases that cite this headnote KeyCite Yellow Flag - Negative Treatment Disagreement Recognized by TXU Energy Retail Co., LP v. Emanuel Medical Center, Inc., N.D.Tex., May 28, 2003 [2] Federal Courts Particular Cases, Contexts, and Questions 105 S.Ct. 2174 Parties cannot stipulate to a particular Supreme Court of the United States construction of state law, and thereby obtain jurisdiction over appeal to Supreme Court, BURGER KING CORPORATION, Appellant where state law might, in fact, be in harmony v.
with the Federal Constitution; Supreme Court's John RUDZEWICZ.
jurisdiction is properly invoked only where a Court of Appeals has squarely held that the No. 83–2097. | Argued Jan. 8, statute is unconstitutional on its face or as applied 1985. | Decided May 20, 1985.
and jurisdiction does not lie if the decision might Franchisor brought action against franchisee alleging breach rest on other grounds. 28 U.S.C.A. § 1254(2). of franchise obligations and trademark infringement. The 15 Cases that cite this headnote United States District Court for the Southern District of Florida entered judgment in favor of franchisor and franchisee appealed. The Court of Appeals for the Eleventh Circuit, [3] Constitutional Law 724 F.2d 1505,reversed and denied rehearing, 729 F.2d 1468. Non-residents in general The Supreme Court, Justice Brennan, held that: (1) where it Due process clause protects an individual's was not clear that Court of Appeals had found Florida long- liberty in not being subject to the binding arm statute unconstitutional as applied, Supreme Court did judgments of a forum with which he has not have jurisdiction over appeal; (2) jurisdictional statement established no meaningful contacts, ties, or would be treated as petition for writ of certiorari; and (3) relations; although the protection operates to exercise of long-arm jurisdiction over Michigan franchisee in restrict state power, it is ultimately a function Florida did not offend due process. of the individual liberty interest preserved by the due process clause rather than a function of Reversed and remanded. federalism concern. U.S.C.A. Const.Amend. 14.
Justice Stevens dissented and filed an opinion in which Justice 445 Cases that cite this headnote White joined.
[4] Federal Courts Purpose, intent, and foreseeability;
West Headnotes (27) purposeful availment Federal Courts Related contacts and activities; specific [1] Federal Courts jurisdiction Proceedings to Obtain Review Where forum seeks to assert specific jurisdiction Where it was unclear whether Court of Appeals over an out-of-state defendant who has not actually held statute unconstitutional as applied consented to suit there, fair-warning requirement to the circumstances of the case, jurisdiction is satisfied if the defendant has purposefully did not properly lie in the Supreme Court by directed his activities at residence of the forum appeal and appeal would be dismissed, with the and the litigation results from injuries that arise jurisdictional statement treated as a petition for out of or relate to those activities.
writ of certiorari, which would be granted. 28 U.S.C.A. § 1254(2). 2420 Cases that cite this headnote
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Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985) 105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541
purposefully directs activities toward forum [5] Constitutional Law residents.
Consent; forum-selection clauses Contracts 987 Cases that cite this headnote Agreement as to place of bringing suit;
forum selection clauses [9] Federal Courts Where forum selection provisions have been Purpose, intent, and foreseeability; obtained through freely negotiated agreements purposeful availment and are not unreasonable and unjust, their Constitutional touchstone in long-arm enforcement does not offend due process. jurisdiction cases is whether the defendant U.S.C.A. Const.Amend. 14. purposefully established minimum contacts in the forum state.
252 Cases that cite this headnote 2513 Cases that cite this headnote [6] Federal Courts Manufacture, Distribution, and Sale of [10] Constitutional Law Products Non-residents in general Publisher who distributes magazines in a distant Federal Courts state may fairly be held accountable in that forum Purpose, intent, and foreseeability; for damages resulting therefrom an allegedly purposeful availment defamatory story.
Foreseeability of causing injury in another state 10 Cases that cite this headnote is not a sufficient benchmark for exercising personal jurisdiction; foreseeability which is critical to due process analysis is that the [7] Federal Courts defendant's conduct and connection with the Unrelated contacts and activities; general forum state are such that he should reasonably jurisdiction anticipate being haled into court there. Parties who reach out beyond one state and create continuing relationships and obligations 868 Cases that cite this headnote with citizens of another state are subject to regulation and sanctions in the other state for the [11] Federal Courts consequences of their activities. Purpose, intent, and foreseeability;
purposeful availment 293 Cases that cite this headnote Purposeful availment requirement for long-arm jurisdiction insures that defendant will not be [8] Federal Courts haled into a jurisdiction solely as the result of Purpose, intent, and foreseeability; random, fortuitous, or attenuated contacts or the purposeful availment unilateral activity of another party or a third State generally has a manifest interest in person. providing its residents with a convenient forum for redressing injuries inflicted by out-of-state 3038 Cases that cite this headnote actors and, where those individuals purposefully derive benefit from their interstate activities, it [12] Federal Courts may be unfair to allow them to escape having to Nature, number, frequency, and extent of account in other states for the consequences that contacts and activities arise proximately from such activities and, for Jurisdiction is proper where the contacts of the those reasons, forum may legitimately exercise defendant proximately result from actions by personal jurisdiction over a nonresident who
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the defendant himself which create a substantial Weight and sufficiency connection with the forum. Where defendant who purposefully has directed his activities at forum residents seeks to defeat 626 Cases that cite this headnote jurisdiction, he must present a compelling case that the presence of some other considerations [13] Federal Courts would render jurisdiction unreasonable.
Nature, number, frequency, and extent of contacts and activities 1243 Cases that cite this headnote So long as it creates a substantial connection with the forum, even a single act can support [18] Courts jurisdiction. Construction and application of particular rules 204 Cases that cite this headnote Jurisdictional rules may not be employed in such a way as to make litigation so gravely [14] Federal Courts difficult and inconvenient that a party is unfairly Business contacts and activities; at a severe disadvantage in comparison to his transacting or doing business opponent. When defendant has availed himself of the 118 Cases that cite this headnote privilege of conducting business in a forum, jurisdiction cannot be avoided merely because the defendant did not physically enter the forum [19] Federal Courts state. Nature, number, frequency, and extent of contacts and activities 640 Cases that cite this headnote Individual's contact with an out-of-state party cannot alone automatically establish sufficient [15] Federal Courts minimum contacts in the other party's home Commercial Contacts and Activities; forum to permit exercise of jurisdiction in that Contracts and Transactions forum. So long as a commercial actor's efforts are 321 Cases that cite this headnote purposefully directed toward residents of another state, absence of physical contacts cannot defeat personal jurisdiction there. [20] Federal Courts Contract disputes 258 Cases that cite this headnote Parties' negotiations and contemplated future consequences, along with the terms of the [16] Constitutional Law contract and the parties' actual course of dealing, Non-residents in general must be evaluated in determining whether Once it has been decided that a defendant has the defendant has purposefully established purposefully established minimum contacts with minimum contacts with the forum. the forum state, the contacts may be considered 2558 Cases that cite this headnote in light of other factors to determine whether the assertion of personal jurisdiction would comport with fair play and substantial justice. [21] Federal Courts Investment, finance, and credit 3780 Cases that cite this headnote Michigan franchisee who deliberately reached out beyond his state of residence and negotiated [17] Federal Courts with a Florida franchisor for purchase of a
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long-term franchise and the manifold benefits To the extent that it is inconvenient for a that would derive from affiliation with the party who has minimum contacts with a forum nationwide organization, who entered into to litigate there, the considerations can be a carefully structured 20-year relationship accommodated through change of venue, rather which envisioned continuing and wide-reaching than denial of jurisdiction. contacts with Florida, who accepted regulation of his business from the Miami headquarters 6 Cases that cite this headnote of the franchisor, and who was required to make monthly payments to the franchisor in [25] Federal Courts Miami was constitutionally subject to long-arm Particular Contexts and Causes of Action jurisdiction in Florida in dispute arising out Inconvenience which Michigan franchisee of the franchise arrangement. West's F.S.A. § would suffer from litigating franchise dispute in 48.193(1)(g); U.S.C.A. Const.Amend. 14.
Florida was not so substantial as to render it 491 Cases that cite this headnote unconstitutional to subject him to jurisdiction in Florida.
[22] Federal Courts 32 Cases that cite this headnote Contract disputes Although choice-of-law provision on a contract, [26] Federal Courts standing alone, would be insufficient to confer Weight and sufficiency jurisdiction in forum whose law is to apply, Evidence sustained trial court's finding choice-of-law provision should not be ignored in that franchisee was not the victim of considering whether defendant has purposefully misrepresentation, fraud, or duress in connection invoked the benefits and protections of a state's with franchise agreement rendering it law.
unconstitutional to subject him to jurisdiction in 130 Cases that cite this headnote franchisor's state of residence.
24 Cases that cite this headnote [23] Federal Courts Purpose, intent, and foreseeability;
[27] Federal Courts purposeful availment Purpose, intent, and foreseeability;
State of residence of nationwide franchisor had purposeful availment more than a negligible interest in providing Quality and nature of an interstate transaction a convenient forum, notwithstanding the may sometimes be so random, fortuitous, or franchisor's size and ability to conduct litigation attenuated that it cannot fairly be said that the anywhere in the country; absent compelling potential defendant should reasonably anticipate consideration, defendant who has purposefully being haled into court in another jurisdiction.
derived commercial benefit from his affiliations in a forum may not defeat jurisdiction there 2045 Cases that cite this headnote simply because of his adversary's greater net wealth.
562 Cases that cite this headnote
**2176 Syllabus * [24] Federal Courts In general; convenience, fairness, and Appellant is a Florida corporation whose principal offices interest of justice are in Miami. It conducts most of its restaurant business through a franchise operation, under which franchisees are
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licensed to use appellant's trademarks and service marks not be avoided merely because the defendant did not in leased standardized restaurant facilities for a period physically enter the forum. Pp. 2181–2185. of 20 years. The governing contracts provide that the franchise relationship is established in Miami and governed (b) An individual's contract with an out-of-state party cannot by Florida law, and call for payment of all required monthly alone automatically establish sufficient minimum contacts in fees and forwarding of all relevant notices to the Miami the other party's home forum. Instead, the prior negotiations headquarters. The Miami headquarters sets policy and works and contemplated future consequences, along with the terms directly with the franchisees in attempting to resolve major of the contract and the parties' actual course of dealing, must problems. Day-to-day monitoring of franchisees, however, be evaluated to determine whether a defendant purposefully is conducted through district offices that in turn report to established minimum contacts within the forum. Pp. 2185– the Miami headquarters. Appellee is a Michigan resident 2186. who, along with another Michigan resident, entered into a 20-year franchise contract with appellant to operate a (c) Here, appellee established a substantial and continuing restaurant in Michigan. Subsequently, when the restaurant's relationship with appellant's Miami headquarters, and patronage declined, the franchisees fell behind in their received fair notice from the contract documents and the monthly payments. After extended negotiations among the course of dealings that he might be subject to suit in Florida. franchisees, the Michigan district office, and the Miami The District Court found that appellee is an “experienced and headquarters proved unsuccessful in solving **2177 the sophisticated” businessman who did not act under economic problem, headquarters terminated the franchise and ordered duress or disadvantage imposed by appellant, and appellee the franchisees to vacate the premises. They refused and has pointed to no other factors that would establish the continued to operate the restaurant. Appellant then brought a unconstitutionality of Florida's assertion of jurisdiction. Pp. diversity action in Federal District Court in Florida, alleging 2186–2190. that the franchisees had breached their franchise obligations and requesting damages and injunctive relief. The franchisees 724 F.2d 1505 (CA11 1984), reversed and remanded. claimed that, because they were Michigan residents and because appellant's claim did not “arise” within Florida, the District Court lacked personal jurisdiction over them. Attorneys and Law Firms But the court held that the franchisees were subject to Joel S. Perwin argued the cause and filed briefs for appellant.
personal jurisdiction pursuant to Florida's long-arm statute, which extends jurisdiction to any person, whether or not Thomas H. Oehmke argued the cause and filed a brief for a citizen or resident of the State, who breaches a contract appellee. in the State by failing to perform acts that the contract requires to be performed there. Thereafter, the court entered Opinion judgment against the franchisees on the merits. The Court Justice BRENNAN delivered the opinion of the Court.
of Appeals reversed, holding that “[j]urisdiction under these circumstances would offend the fundamental fairness which The State of Florida's long-arm statute extends jurisdiction is the touchstone of due process.” to “[a]ny person, whether or not a citizen or resident of this state,” who, inter alia, “[b]reach [es] a contract in this Held: The District Court's exercise of jurisdiction pursuant state by failing to perform acts required by the contract to to Florida's long-arm statute did not violate the Due Process be performed in this state,” so long as the cause of action Clause of the Fourteenth Amendment. Pp. 2181–2190. *464 arises from the alleged contractual breach. Fla.Stat. § 48.193(1)(g) (Supp.1984). The United States District Court *463 (a) A forum may assert specific jurisdiction over a for the Southern District of Florida, sitting in diversity, nonresident defendant where an alleged injury arises out relied on this provision in exercising personal jurisdiction of or relates to actions by the defendant himself that are over a Michigan resident who allegedly had breached a purposefully directed toward forum residents, and where franchise agreement with a Florida corporation by failing to jurisdiction would not otherwise offend “fair play and make required payments in Florida. The question presented substantial justice.” Jurisdiction in these circumstances may is whether this exercise of long-arm jurisdiction offended “traditional conception[s] of fair play and substantial justice”
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embodied in the Due Process Clause of the Fourteenth in Miami and governed by Florida law, and call for payment Amendment. International Shoe Co. v. **2178 Washington, of all required fees and forwarding of all relevant notices 326 U.S. 310, 320, 66 S.Ct. 154, 160, 90 L.Ed. 95 (1945). to the Miami headquarters. 5 The Miami headquarters sets policy and works directly with its franchisees in attempting to resolve major problems. See nn. 7, 9, infra. Day-to-day I monitoring of franchisees, however, is conducted through a network of 10 district offices which in turn report to the Miami headquarters.
A
The instant litigation grows out of Burger King's termination Burger King Corporation is a Florida corporation whose of one of its franchisees, **2179 and is aptly described by principal offices are in Miami. It is one of the world's largest the franchisee as “a divorce proceeding among commercial restaurant organizations, with over 3,000 outlets in the 50 partners.” 5 Record 4. The appellee John Rudzewicz, a States, the Commonwealth of Puerto Rico, and 8 foreign Michigan citizen and resident, is the senior partner in a nations. Burger King conducts approximately 80% of its Detroit accounting firm. In 1978, he was approached by business through a franchise operation that the company Brian MacShara, the son of a business acquaintance, who styles the “Burger King System”—“a comprehensive suggested that they jointly apply to Burger King for a restaurant format and operating system for the sale of uniform franchise in the Detroit area. MacShara proposed to serve as and quality food products.” App. 46. 1 Burger King licenses the manager of the restaurant if Rudzewicz would put up the its franchisees to use its trademarks and service marks for a investment capital; in exchange, the two would evenly share period of 20 years and leases standardized restaurant facilities the profits. Believing that MacShara's idea offered attractive to them for the same term. In addition, franchisees acquire a investment and tax-deferral opportunities, Rudzewicz agreed variety of proprietary information concerning the “standards, to the venture. 6 id., at 438–439, 444, 460. specifications, procedures and methods for operating *465 a Burger King Restaurant.” Id., at 52. They also receive Rudzewicz and MacShara jointly applied for a franchise market research and advertising assistance; ongoing training to Burger King's Birmingham, Michigan, district office in in restaurant management; 2 and accounting, cost-control, the autumn of 1978. Their application was forwarded to and inventory-control guidance. By permitting franchisees to Burger King's Miami headquarters, which entered into a tap into Burger King's established national reputation and to preliminary agreement with them in February 1979. During benefit from proven procedures for dispensing standardized the ensuing four months it was agreed that Rudzewicz and fare, this system enables them to go into the restaurant MacShara would assume operation of an existing facility in business with significantly lowered barriers to entry. 3 Drayton Plains, Michigan. MacShara attended the prescribed management courses in Miami during this period, see n.
In exchange for these benefits, franchisees pay Burger King 2, supra, and the franchisees purchased $165,000 worth of an initial $40,000 franchise fee and commit themselves restaurant equipment from Burger King's Davmor Industries to payment of monthly royalties, advertising and sales division in *467 Miami. Even before the final agreements promotion fees, and rent computed in part from monthly were signed, however, the parties began to disagree over gross sales. Franchisees also agree to submit to the site-development fees, building design, computation of national organization's exacting regulation of virtually every monthly rent, and whether the franchisees would be able to conceivable aspect of their operations. 4 Burger King assign their liabilities to a corporation they had formed. 6 imposes these standards and undertakes its rigid regulation During these disputes Rudzewicz and MacShara negotiated out of conviction that “[u]niformity of service, appearance, both with the Birmingham district office and with the and quality of product is essential to the preservation of the Miami headquarters. 7 With some misgivings, Rudzewicz Burger King image and the benefits accruing therefrom to and MacShara finally obtained limited concessions from both Franchisee and Franchisor.” Id., at 31. the Miami headquarters, 8 signed the final agreements, and commenced operations in June 1979. By signing the Burger King oversees its franchise system through a two- final agreements, Rudzewicz obligated himself personally to tiered administrative structure. The governing contracts *466 provide that the franchise relationship is established
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payments exceeding $1 million over the 20-year franchise After a 3-day bench trial, the court again concluded that it relationship. had “jurisdiction over the subject matter and the parties to this cause.” App. 159. Finding that Rudzewicz and MacShara *468 The Drayton Plains facility apparently enjoyed steady had breached their franchise agreements with Burger King business during the summer of 1979, but patronage declined and had infringed Burger King's trademarks and service after a recession began later that year. Rudzewicz and marks, the court entered judgment against them, jointly and MacShara soon fell far behind in their monthly payments to severally, for $228,875 in contract damages. The court also Miami. Headquarters sent notices of default, and an extended ordered them “to immediately close Burger King Restaurant period of negotiations began among the franchisees, the Number 775 from continued operation or to immediately Birmingham district office, and the Miami headquarters. give the keys and possession of said restaurant to Burger After several Burger King officials in Miami had engaged King Corporation,” id., at 163, found that they had failed to in prolonged but ultimately unsuccessful negotiations with prove any of the required elements of their counterclaim, and the franchisees **2180 by mail and by telephone, 9 awarded costs and attorney's fees to Burger King. headquarters terminated the franchise and ordered Rudzewicz and MacShara to vacate the premises. They refused and Rudzewicz appealed to the Court of Appeals for the Eleventh continued to occupy and operate the facility as a Burger King Circuit. 11 A divided panel of that Circuit reversed the *470 restaurant. judgment, **2181 concluding that the District Court could not properly exercise personal jurisdiction over Rudzewicz pursuant to Fla.Stat. § 48.193(1)(g) (Supp.1984) because “the circumstances of the Drayton Plains franchise and
B
the negotiations which led to it left Rudzewicz bereft of Burger King commenced the instant action in the United reasonable notice and financially unprepared for the prospect States District Court for the Southern District of Florida of franchise litigation in Florida.” Burger King Corp. v. in May 1981, invoking that court's diversity jurisdiction MacShara, 724 F.2d 1505, 1513 (1984). Accordingly, the pursuant to 28 U.S.C. § 1332(a) and its original jurisdiction panel majority concluded that “[j]urisdiction under these circumstances would offend the fundamental fairness which over federal trademark disputes pursuant to § 1338(a). 10 is the touchstone of due process.” Ibid.
Burger King alleged that Rudzewicz and MacShara had breached their franchise obligations “within [the jurisdiction [1] [2] Burger King appealed the Eleventh Circuit's of] this district court” by failing to make the required judgment to this Court pursuant to 28 U.S.C. § 1254(2), payments “at plaintiff's place of business in Miami, Dade and we postponed probable jurisdiction. 469 U.S. 814, 105 County, Florida,” ¶ 6, App. 121, and also charged that they S.Ct. 77, 83 L.Ed.2d 25 (1984). Because it is unclear whether were tortiously infringing *469 its trademarks and service the Eleventh Circuit actually held that Fla.Stat. § 48.193(1)
marks through their continued, unauthorized operation as a (g) (Supp.1984) itself is unconstitutional as applied to the Burger King restaurant, ¶¶ 35–53, App. 130–135. Burger circumstances of this case, we conclude that jurisdiction King sought damages, injunctive relief, and costs and by appeal does not properly lie and therefore dismiss the attorney's fees. Rudzewicz and MacShara entered special appearances and argued, inter alia, that because they were appeal. 12 Treating the jurisdictional *471 statement as a Michigan residents and because Burger King's claim did not petition for a writ of certiorari, see 2 8 U.S.C. § 2103, we grant “arise” within the Southern District of Florida, the District the petition and now reverse. Court lacked personal jurisdiction over them. The District Court denied their motions after a hearing, holding that, pursuant to Florida's long-arm statute, “a non-resident Burger II King franchisee is subject to the personal jurisdiction of this Court in actions arising out of its franchise agreements.” Id., at 138. Rudzewicz and MacShara then filed an answer A and a counterclaim seeking damages for alleged violations [3] [4] The Due Process Clause protects an individual's by Burger King of Michigan's Franchise Investment Law, liberty interest in not being subject to the binding Mich.Comp.Laws § 445.1501 et seq. (1979).
judgments of a *472 forum with which he has established
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no meaningful “contacts, ties, or relations.” **2182 “purposefully directs” his activities toward forum residents. International Shoe Co. v. Washington, 326 U.S., at 319, 66 A State generally has a “manifest interest” in providing its 13 residents with a convenient forum for redressing injuries S.Ct., at 160. By requiring that individuals have “fair warning that a particular activity may subject [them] to the inflicted by out-of-state actors. **2183 Id., at 223, 78 S.Ct., jurisdiction of a foreign sovereign,” Shaffer v. Heitner, 433 at 201; see also Keeton v. Hustler Magazine, Inc., supra, 465 U.S. 186, 218, 97 S.Ct. 2569, 2587, 53 L.Ed.2d 683 (1977) U.S., at 776, 104 S.Ct., at 1479. Moreover, where individuals (STEVENS, J., concurring in judgment), the Due Process “purposefully derive benefit” from their interstate activities, Clause “gives a degree of predictability to the legal system *474 Kulko v. California Superior Court, 436 U.S. 84, that allows potential defendants to structure their primary 96, 98 S.Ct. 1690, 1699, 56 L.Ed.2d 132 (1978), it may conduct with some minimum assurance as to where that well be unfair to allow them to escape having to account conduct will and will not render them liable to suit,” World- in other States for consequences that arise proximately from Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 such activities; the Due Process Clause may not readily be S.Ct. 559, 567, 62 L.Ed.2d 490 (1980). wielded as a territorial shield to avoid interstate obligations that have been voluntarily assumed. And because “modern [5] [6] [7] Where a forum seeks to assert specific transportation and communications have made it much less jurisdiction over an out-of-state defendant who has not burdensome for a party sued to defend himself in a State where he engages in economic activity,” it usually will not consented to suit there, 14 this “fair warning” requirement be unfair to subject him to the burdens of litigating in is satisfied if the defendant has “purposefully directed”
another forum for disputes relating to such activity. McGee his activities at residents of the forum, Keeton v. Hustler v. International Life Insurance Co., supra, 355 U.S., at 223, Magazine, Inc., 465 U.S. 770, 774, 104 S.Ct. 1473, 1478, 79 78 S.Ct., at 201.
L.Ed.2d 790 (1984), and the litigation results from alleged injuries that “arise out of or relate to” those activities, [9] [10] Notwithstanding these considerations, the *473 Helicopteros Nacionales de Colombia, S.A. v. Hall, constitutional touchstone remains whether the defendant 466 U.S. 408, 414, 104 S.Ct. 1868, 1872, 80 L.Ed.2d purposefully established “minimum contacts” in the forum 404 1984). 15 Thus “[t]he forum State does not exceed its State. International Shoe Co. v. Washington, supra, 326 powers under the Due Process Clause if it asserts personal U.S., at 316, 66 S.Ct., at 158. Although it has been argued jurisdiction over a corporation that delivers its products into that foreseeability of causing injury in another State should the stream of commerce with the expectation that they will be sufficient to establish such contacts there when policy be purchased by consumers in the forum State” and those considerations so require, 16 the Court has consistently held products subsequently injure forum consumers. World-Wide that this kind of foreseeability is not a “sufficient benchmark”
Volkswagen Corp. v. Woodson, supra, 444 U.S., at 297–298, for exercising personal jurisdiction. World-Wide Volkswagen 100 S.Ct., at 567–568. Similarly, a publisher who distributes Corp. v. Woodson, 444 U.S., at 295, 100 S.Ct., at 566. Instead, magazines in a distant State may fairly be held accountable “the foreseeability that is critical to due process analysis ... is in that forum for damages resulting there from an allegedly that the defendant's conduct and connection with the forum defamatory story. Keeton v. Hustler Magazine, Inc., supra;
State are such that he should reasonably anticipate being haled see also Calder v. Jones, 465 U.S. 783, 104 S.Ct. 1482, 79 into court there.” Id., at 297, 100 S.Ct., at 567. In defining L.Ed.2d 804 (1984) (suit against author and editor). And when it is that a potential defendant should “reasonably with respect to interstate contractual obligations, we have anticipate” out-of-state litigation, the Court frequently has emphasized that parties who “reach out beyond one state and drawn from the reasoning of Hanson v. Denckla, 357 U.S.
create continuing relationships and obligations with citizens 235, 253, 78 S.Ct. 1228, 1239–1240, 2 L.Ed.2d 1283 (1958):
of another state” are subject to regulation and sanctions in the other State for the consequences of their activities. Travelers Health Assn. v. Virginia, 339 U.S. 643, 647, 70 S.Ct. 927, 929, “The unilateral activity of those who claim some 94 L.Ed. 1154 (1950). See also McGee v. International Life relationship with a nonresident defendant cannot satisfy Insurance Co., 355 U.S. 220, 222–223, 78 S.Ct. 199, 200– the requirement of contact with the forum State. The 201, 2 L.Ed.2d 223 (1957). application *475 of that rule will vary with the quality and nature of the defendant's activity, but it is essential in [8] We have noted several reasons why a forum legitimately each case that there be some act by which the defendant may exercise personal jurisdiction over a nonresident who
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purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits [16] [17] [18] Once it has been decided that a and protections of its laws.” defendant purposefully established minimum contacts within [11] [12] [13] This “purposeful availment” requirement the forum State, these contacts may be considered in ensures that a defendant will not be haled into a jurisdiction light of other factors to determine whether the assertion solely as a result of “random,” “fortuitous,” or “attenuated” of personal jurisdiction would comport with “fair play contacts, Keeton v. Hustler Magazine, Inc., 465 U.S., at and substantial justice.” International Shoe Co. v. 774, 104 S.Ct., at 1478; World-Wide Volkswagen Corp. v. Washington, 326 U.S., at 320, 66 S.Ct., at 160. Thus Woodson, supra, 444 U.S., at 299, 100 S.Ct., at 568, or of *477 courts in “appropriate case[s]” may evaluate “the the “unilateral activity of another party or a third person,” burden on the defendant,” “the forum State's interest in Helicopteros Nacionales de Colombia, S.A. v. Hall, supra, adjudicating the dispute,” “the plaintiff's interest in obtaining 17 convenient and effective relief,” “the interstate judicial 466 U.S., at 417, 104 S.Ct., at 1873. Jurisdiction is proper, however, **2184 where the contacts proximately system's interest in obtaining the most efficient resolution result from actions by the defendant himself that create a of controversies,” and the “shared interest of the several “substantial connection” with the forum State. McGee v. States in furthering fundamental substantive social policies.” International Life Insurance Co., supra, 355 U.S., at 223, World-Wide Volkswagen Corp. v. Woodson, supra, 444 U.S., 78 S.Ct., at 201; see also Kulko v. California Superior at 292, 100 S.Ct., at 564. These considerations sometimes Court, supra, 436 U.S., at 94, n. 7, 98 S.Ct., at 1698, n. serve to establish the reasonableness of jurisdiction upon a lesser showing of minimum contacts than would otherwise be 7. 18 Thus where the defendant “deliberately” has *476 required. See, e.g., Keeton v. Hustler Magazine, Inc., supra, engaged in significant activities within a State, Keeton v.
465 U.S., at 780, 104 S.Ct., at 1481; Calder v. Jones, supra, Hustler Magazine, Inc., supra, 465 U.S., at 781, 104 S.Ct., 465 U.S., at 788–789, 104 S.Ct., at 1486–1487; McGee v.
at 1481, or has created “continuing obligations” between International Life Insurance Co., supra, 355 U.S., at 223– himself and residents of the forum, Travelers Health Assn.
224, 78 S.Ct., at 201–202. On the other hand, where a v. Virginia, 339 U.S., at 648, 70 S.Ct., at 929, he manifestly defendant who purposefully has directed his activities at has availed himself of the privilege of conducting business **2185 forum residents seeks to defeat jurisdiction, he there, and because his activities are shielded by “the benefits must present a compelling case that the presence of some and protections” of the forum's laws it is presumptively not other considerations would render jurisdiction unreasonable.
unreasonable to require him to submit to the burdens of Most such considerations usually may be accommodated litigation in that forum as well.
through means short of finding jurisdiction unconstitutional. For example, the potential clash of the forum's law with the [14] [15] Jurisdiction in these circumstances may not be “fundamental substantive social policies” of another State avoided merely because the defendant did not physically may be accommodated through application of the forum's enter the forum State. Although territorial presence frequently will enhance a potential defendant's affiliation with a State choice-of-law rules. 19 Similarly, a defendant claiming and reinforce the reasonable foreseeability of suit there, it substantial inconvenience may seek a change of venue. 20 is an inescapable fact of modern commercial life that a Nevertheless, minimum requirements inherent in the concept substantial amount of business is transacted solely by mail of “fair play and substantial *478 justice” may defeat and wire communications across state lines, thus obviating the reasonableness of jurisdiction even if the defendant the need for physical presence within a State in which has purposefully engaged in forum activities. World-Wide business is conducted. So long as a commercial actor's efforts Volkswagen Corp. v. Woodson, supra, 444 U.S., at 292, are “purposefully directed” toward residents of another State, 100 S.Ct., at 564; see also Restatement (Second) of Conflict we have consistently rejected the notion that an absence of Laws §§ 36–37 (1971). As we previously have noted, of physical contacts can defeat personal jurisdiction there. jurisdictional rules may not be employed in such a way as to Keeton v. Hustler Magazine, Inc., supra, 465 U.S., at 774– make litigation “so gravely difficult and inconvenient” that a 775, 104 S.Ct., at 1478; see also Calder v. Jones, 465 U.S., party unfairly is at a “severe disadvantage” in comparison to at 778–790, 104 S.Ct., at 1486–1487; McGee v. International his opponent. The Bremen v. Zapata Off-Shore Co., 407 U.S. Life Insurance Co., 355 U.S., at 222–223, 78 S.Ct., at 200– 1, 18, 92 S.Ct. 1907, 1917, 32 L.Ed.2d 513 (1972) (re forum- 201. Cf. Hoopeston Canning Co. v. Cullen, 318 U.S. 313, 317, selection provisions); McGee v. International Life Insurance 63 S.Ct. 602, 605, 87 L.Ed. 777 (1943). Co., supra, 355 U.S., at 223–224, 78 S.Ct., at 201–202.
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Travelers Health Assn. v. Virginia, 339 U.S., at 647, 70 S.Ct., at 929. Upon approval, he entered into a carefully structured 20-year relationship that envisioned continuing
B
and wide-reaching contacts with Burger King in Florida. In light of Rudzewicz' voluntary acceptance of the long-
(1) term and exacting regulation of his business from Burger King's Miami headquarters, the “quality and nature” of his [19] [20] Applying these principles to the case at hand, relationship to the company in Florida can in no sense be we believe there is substantial record evidence supporting viewed as “random,” “fortuitous,” or “attenuated.” Hanson the District Court's conclusion that the assertion of personal v. Denckla, 357 U.S., at 253, 78 S.Ct., at 1239; Keeton jurisdiction over Rudzewicz in Florida for the alleged breach v. Hustler Magazine, Inc., 465 U.S., at 774, 104 S.Ct., at of his franchise agreement did not offend due process. 1478; World-Wide Volkswagen Corp. v. Woodson, 444 U.S., At the outset, we note a continued division among lower at 299, 100 S.Ct., at 568. Rudzewicz' refusal to make the courts respecting whether and to what extent a contract contractually required payments in Miami, and his continued can constitute a “contact” for purposes of due process use of Burger King's trademarks and confidential business analysis. 21 If the question is whether an individual's contract information after his termination, caused foreseeable injuries with an out-of-state party alone can automatically establish to the corporation in Florida. For these reasons it was, at sufficient minimum contacts in the other party's home the very least, presumptively reasonable for Rudzewicz to be forum, we believe the answer clearly is that it cannot. The called to account there for such injuries. Court long ago rejected the notion that personal jurisdiction might turn on “mechanical” tests, International Shoe Co. v. The Court of Appeals concluded, however, that in light Washington, supra, 326 U.S., at 319, 66 S.Ct., at 159, or on of the supervision emanating from Burger King's district “conceptualistic ... theories of the place of contracting or of office in Birmingham, Rudzewicz reasonably believed that performance,” *479 Hoopeston Canning Co. v. Cullen, 318 “the Michigan office was for all intents and purposes the U.S., at 316, 63 S.Ct., at 604. Instead, we have emphasized embodiment of Burger King” and that he therefore had no the need for a “highly realistic” approach that recognizes “reason to anticipate a Burger King suit outside of Michigan.” that a “contract” is “ordinarily but an intermediate step 724 F.2d, at 1511. See also post, at 2190 (STEVENS, serving to tie up prior business negotiations with future J., dissenting). This reasoning overlooks substantial record consequences which themselves are the real object of the evidence indicating that Rudzewicz most certainly knew that business transaction.” Id., at 316–317, 63 S.Ct., at 604–605. It he was affiliating himself with an enterprise based primarily is these factors—prior negotiations and contemplated future in Florida. The contract documents themselves emphasize consequences, along with the terms of the contract and the that Burger King's operations are conducted and supervised parties' actual course of dealing—that must be evaluated in from the Miami headquarters, that all relevant notices and determining whether the defendant purposefully established payments must be sent there, and that the agreements minimum contacts within the forum. were made in and enforced from Miami. See n. 5, supra.
Moreover, the parties' actual course of dealing repeatedly **2186 [21] In this case, no physical ties to Florida can be confirmed that decisionmaking authority was vested in the attributed to Rudzewicz other than MacShara's brief training Miami headquarters *481 and that the district office served course in Miami. 22 Rudzewicz did not maintain offices in largely as an intermediate link between the headquarters Florida and, for all that appears from the record, has never and the franchisees. When problems arose over building even visited there. Yet this franchise dispute grew directly design, site-development fees, rent computation, and the out of “a contract which had a substantial connection with defaulted payments, Rudzewicz and MacShara learned that that State.” McGee v. International Life Insurance Co., 355 the Michigan office was powerless to resolve their disputes U.S., at 223, 78 S.Ct., at 201 (emphasis added). Eschewing and **2187 could only channel their communications to the option of operating an independent local enterprise, Miami. Throughout these disputes, the Miami headquarters Rudzewicz deliberately “reach[ed] out beyond” Michigan and the Michigan franchisees carried on a continuous course and negotiated with a Florida corporation for the purchase of of direct communications by mail and by telephone, and it a long-term franchise and *480 the manifold benefits that was the Miami headquarters that made the key negotiating would derive from affiliation with a nationwide organization.
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decisions out of which the instant litigation arose. See nn. 7, [24] [25] Nor has Rudzewicz pointed to other factors 9, supra. that can be said persuasively to outweigh the considerations discussed above and to establish the unconstitutionality of [22] [23] Moreover, we believe the Court of Appeals Florida's assertion of jurisdiction. We cannot conclude that gave insufficient weight to provisions in the various franchise Florida had no “legitimate interest in holding [Rudzewicz] documents providing that all disputes would be governed by answerable *483 on a claim related to” the contacts he Florida law. The franchise agreement, for example, stated: had established in that State. Keeton v. Hustler Magazine, Inc., 465 U.S., at 776, 104 S.Ct., at 1479; see also McGee “This Agreement shall become valid when executed and v. International Life Insurance **2188 Co., 355 U.S., at accepted by BKC at Miami, Florida; it shall be deemed 223, 78 S.Ct., at 201 (noting that State frequently will have a made and entered into in the State of Florida and shall be “manifest interest in providing effective means of redress for governed and construed under and in accordance with the its residents”). 25 Moreover, although Rudzewicz has argued laws of the State of Florida. The choice of law designation at some length that Michigan's Franchise Investment Law, does not require that all suits concerning this Agreement be Mich.Comp.Laws § 445.1501 et seq. (1979), governs many filed in Florida.” App. 72.
aspects of this franchise relationship, he has not demonstrated See also n. 5, supra. The Court of Appeals reasoned that how Michigan's acknowledged interest might possibly render choice-of-law provisions are irrelevant to the question of jurisdiction in Florida unconstitutional. 26 Finally, the Court personal jurisdiction, relying on Hanson v. Denckla for of Appeals' assertion that the Florida litigation “severely the proposition that “the center of gravity for choice-of- impaired [Rudzewicz'] ability to call Michigan witnesses who law purposes does not necessarily confer the sovereign might be essential to his defense and counterclaim,” 724 F.2d, prerogative to assert jurisdiction.” 724 F.2d, at 1511–1512, at 1512–1513, is wholly without support in the record. 27 And n. 10, citing 357 U.S., at 254, 78 S.Ct., at 1240. This even to the extent that it is inconvenient *484 for a party reasoning misperceives the import of the quoted proposition. who has minimum contacts with a forum to litigate there, The Court in Hanson and subsequent cases has emphasized such considerations most frequently can be accommodated that choice-of-law analysis —which focuses on all elements through a change of venue. See n. 20, supra. Although the of a transaction, and not simply on the defendant's conduct Court has suggested that inconvenience may at some point —is distinct from minimum-contacts jurisdictional analysis become so substantial as to achieve constitutional magnitude, —which focuses at the threshold *482 solely on the McGee v. International Life Insurance Co., supra, 355 U.S., defendant's purposeful connection to the forum. 23 Nothing at 223, 78 S.Ct., at 201, this is not such a case. in our cases, however, suggests that a choice-of-law provision should be ignored in considering whether a defendant has [26] The Court of Appeals also concluded, however, that “purposefully invoked the benefits and protections of a the parties' dealings involved “a characteristic disparity of State's laws” for jurisdictional purposes. Although such a bargaining power” and “elements of surprise,” and that provision standing alone would be insufficient to confer Rudzewicz “lacked fair notice” of the potential for litigation jurisdiction, we believe that, when combined with the in Florida because the contractual provisions suggesting 20-year interdependent relationship Rudzewicz established to the contrary were merely “boilerplate declarations in with Burger King's Miami headquarters, it reinforced his a lengthy printed contract.” 724 F.2d, at 1511–1512, and deliberate affiliation with the forum State and the reasonable n. 10. See also post, at 2190 (STEVENS, J., dissenting). foreseeability of possible litigation there. As Judge Johnson Rudzewicz presented many of these arguments to the argued in his dissent below, Rudzewicz “purposefully availed District Court, contending that Burger King was guilty of himself of the benefits and protections of Florida's laws” by misrepresentation, fraud, and duress; that it gave insufficient entering into contracts expressly providing that those laws notice in its dealings with him; and that the contract was would govern franchise disputes. 724 F.2d, at 1513. 24 one of adhesion. See 4 Record 687–691. After a 3-day bench trial, the District Court found that Burger King had made no misrepresentations, that Rudzewicz and MacShara “were and are experienced and sophisticated businessmen,”
(2) and that “at no time” did they “ac [t] under economic duress or disadvantage imposed by” Burger King. App. 157– 158. See also 7 Record 648–649. Federal Rule of Civil
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Procedure 52(a) requires that “[f]indings of fact shall not be be grounded on a contract whose terms have been obtained set aside unless clearly erroneous,” and neither Rudzewicz through “fraud, undue influence, or overweening bargaining nor the Court of Appeals has pointed to record evidence power” and whose application would render litigation “so that would support a “definite and firm conviction” that gravely difficult and inconvenient that [a party] will for all the District Court's findings are mistaken. United States practical purposes be deprived of his day in court.” The v. United States Gypsum Co., 333 U.S. 364, 395, 68 Bremen v. Zapata Off-Shore Co., 407 U.S., at 12, 18, 92 S.Ct. 525, 542, 92 L.Ed. 746 (1948). See also *485 S.Ct., at 1914, 1917. Cf. Fuentes v. Shevin, 407 U.S. 67, **2189 Anderson v. Bessemer City, 470 U.S. 564, 573– 94–96, 92 S.Ct. 1983, 2001–2002, 32 L.Ed.2d 556 (1972); 576, 105 S.Ct. 1504, –––– – ––––, 84 L.Ed.2d 518 (1985). National Equipment Rental, Ltd. v. Szukhent, 375 U.S. 311, To the contrary, Rudzewicz was represented by counsel 329, 84 S.Ct. 411, 421, 11 L.Ed.2d 354 (1964) (BLACK, J., throughout these complex transactions and, as Judge Johnson dissenting) (jurisdictional rules may not be employed against observed in dissent below, was himself an experienced small consumers so as to “crippl[e] their defense”). Just as accountant “who for five months conducted negotiations the Due Process Clause allows flexibility in ensuring that with Burger King over the terms of the franchise and commercial actors are not effectively **2190 “judgment lease agreements, and who obligated himself personally to proof” for the consequences of obligations they voluntarily contracts requiring over time payments that exceeded $1 assume in other States, McGee v. International Life Insurance million.” 724 F.2d, at 1514. Rudzewicz was able to secure a Co., 355 U.S., at 223, 78 S.Ct., at 201, so too does it modest reduction in rent and other concessions from Miami prevent rules that would unfairly enable them to obtain default headquarters, see nn. 8, 9, supra; moreover, to the extent that judgments against unwitting customers. Cf. United States v. Burger King's terms were inflexible, Rudzewicz presumably Rumely, 345 U.S. 41, 44, 73 S.Ct. 543, 545, 97 L.Ed. 770 decided that the advantages of affiliating with a national (1953) (courts must not be “ ‘blind’ ” to what “ ‘[a]ll others organization provided sufficient commercial benefits to offset can see and understand’ ”). the detriments. 28 *487 For the reasons set forth above, however, these dangers are not present in the instant case. Because Rudzewicz established a substantial and continuing relationship with III Burger King's Miami headquarters, received fair notice from the contract documents and the course of dealing that he might [27] Notwithstanding these considerations, the Court of be subject to suit in Florida, and has failed to demonstrate how Appeals apparently believed that it was necessary to jurisdiction in that forum would otherwise be fundamentally reject jurisdiction in this case as a prophylactic measure, unfair, we conclude that the District Court's exercise of reasoning that an affirmance of the District Court's judgment jurisdiction pursuant to Fla.Stat. § 48.193(1)(g) (Supp.1984)
would result in the exercise of jurisdiction over “outdid not offend due process. The judgment of the Court of of-state consumers to collect payments due on modest Appeals is accordingly reversed, and the case is remanded for personal purchases” and would “sow the seeds of default further proceedings consistent with this opinion.
judgments against franchisees owing smaller debts.” 724 F.2d, at 1511. We share the Court of Appeals' broader It is so ordered.
concerns and therefore reject any talismanic jurisdictional formulas; “the *486 facts of each case must [always] be weighed” in determining whether personal jurisdiction would comport with “fair play and substantial justice.” Kulko v. Justice POWELL took no part in the consideration or decision California Superior Court, 436 U.S., at 92, 98 S.Ct., at of this case. 1696–1697. 29 The “quality and nature” of an interstate transaction may sometimes be so “random,” “fortuitous,” or Justice STEVENS, with whom Justice WHITE joins, “attenuated” 30 that it cannot fairly be said that the potential dissenting. defendant “should reasonably anticipate being haled into In my opinion there is a significant element of unfairness court” in another jurisdiction. World-Wide Volkswagen Corp. in requiring a franchisee to defend a case of this kind in v. Woodson, 444 U.S., at 297, 100 S.Ct., at 567; see also n. the forum chosen by the franchisor. It is undisputed that 18, supra. We also have emphasized that jurisdiction may not appellee maintained no place of business in Florida, that he
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had no employees in that State, and that he was not licensed due Rudzewicz, including advertising and management to do business there. Appellee did not prepare his French consultation. Supervision, moreover, emanated from that fries, shakes, and hamburgers in Michigan, and then deliver office alone. To Rudzewicz, the Michigan office was them into the stream of commerce “with the expectation for all intents and purposes the embodiment *489 that they [would] be purchased by consumers in” Florida. of Burger King. He had reason to believe that his Ante, at 2182. To the contrary, appellee did business only working relationship with Burger King began and ended in Michigan, his business, property, and payroll taxes were in Michigan, not at the distant and anonymous Florida payable in that State, and he sold all of his products there. headquarters....
Throughout the business relationship, appellee's principal “Given that the office in Rudzewicz' home state conducted contacts with appellant were with its Michigan office. all of the negotiations and wholly supervised the contract, Notwithstanding its disclaimer, ante, at 2185, the Court seems we believe that he had reason to assume that the state of the ultimately to rely on nothing more than standard boilerplate supervisory office would be the same state in which Burger language contained in various documents, ante, at 2187, King would file suit. Rudzewicz lacked fair notice that *488 to establish that appellee “ ‘purposefully availed the distant corporate headquarters which insulated itself himself of the benefits and protections of Florida's laws.’ ” from direct dealings with him would later seek to assert Id., at 2187. Such superficial analysis creates a potential for jurisdiction over him in the courts of its own home state.... unfairness not only in negotiations between franchisors and “Just as Rudzewicz lacked notice of the possibility of their franchisees but, more significantly, in the resolution of suit in Florida, he was financially unprepared to meet its the disputes that inevitably arise from time to time in such added costs. The franchise relationship in particular is relationships.
fraught with potential for financial surprise. The device of the franchise gives local retailers the access to national Judge Vance's opinion for the Court of Appeals for the trademark recognition which enables them to compete Eleventh Circuit adequately explains why I would affirm the with better-financed, more efficient chain stores. This judgment of that court. I particularly find the following more national affiliation, however, does not alter the fact that persuasive than what this Court has written today:
the typical franchise store is a local concern serving at “Nothing in the course of negotiations gave Rudzewicz best a neighborhood or community. Neither the revenues reason to anticipate a Burger King suit outside of Michigan. of a local business nor the geographical range of its market The only face-to-face or even oral contact Rudzewicz prepares the average franchise owner for the cost of distant had with Burger King throughout months of protracted litigation.... negotiations was with representatives of the Michigan “The particular distribution of bargaining power in the office. Burger King had the Michigan office interview franchise relationship further impairs the franchisee's Rudzewicz and MacShara, appraise their application, financial preparedness. In a franchise contract, ‘the discuss price terms, recommend the site which the franchisor normally occupies [the] dominant role’....
defendants finally agreed to, and attend the final closing ceremony. There is no evidence that Rudzewicz ever “We discern a characteristic disparity of bargaining power negotiated with anyone in Miami or even sent mail there in the facts of this case. There is no indication that during negotiations. He maintained no staff in the state of Rudzewicz had any latitude to negotiate a reduced rent Florida, and as far as the record reveals, he has never even or franchise fee in exchange for the added risk of suit visited the state. in Florida. He signed a standard form contract whose terms were non-negotiable and which appeared *490 “The contracts contemplated the startup of a local in some respects to vary from the more favorable terms Michigan restaurant whose profits would derive solely agreed to in earlier discussions. In fact, the final contract from food sales made to customers in Drayton Plains. The required a minimum monthly rent computed on a base far in sale, which involved the use of an intangible trademark excess of that discussed in oral negotiations. Burger King in Michigan and occupancy of a Burger King facility resisted price concessions, only to sue Rudzewicz far from **2191 there, required no performance in the state of home. In doing so, it severely impaired his ability to call Florida. Under the contract, the local Michigan district office was responsible for providing all of the services
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due process.” 724 F.2d 1505, 1511–1513 (1984) (footnotes Michigan witnesses who might be essential to his defense omitted).
and counterclaim.
“In sum, we hold that the circumstances of the Drayton Accordingly, I respectfully dissent. Plains franchise and the negotiations which led to it left Rudzewicz bereft of reasonable notice and financially unprepared for the prospect of franchise litigation in All Citations Florida. Jurisdiction under these circumstances would 471 U.S. 462, 105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW offend the fundamental fairness which is the touchstone of 4541
Footnotes * The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader. See United States v. Detroit Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 287, 50 L.Ed. 499.
1 Burger King's standard Franchise Agreement further defines this system as “a restaurant format and operating system, including a recognized design, decor, color scheme and style of building, uniform standards, specifications and procedures of operation, quality and uniformity of products and services offered, and procedures for inventory and management control....” App. 43.
2 Mandatory training seminars are conducted at Burger King University in Miami and at Whopper College Regional Training Centers around the country. See id., at 39; 6 Record 540–541.
3 See App. 43–44. See generally H. Brown, Franchising Realities and Remedies 6–7, 16–17 (2d ed. 1978). 4 See, e.g., App. 24–25, 26 (range, “quality, appearance, size, taste, and processing” of menu items), 31 (“standards of service and cleanliness”), 32 (hours of operation), 47 (“official mandatory restaurant operating standards, specifications and procedures”), 48–50 (building layout, displays, equipment, vending machines, service, hours of operation, uniforms, advertising, and promotion), 53 (employee training), 55–56 (accounting and auditing requirements), 59 (insurance requirements). Burger King also imposes extensive standards governing franchisee liability, assignments, defaults, and termination. See id., at 61–74.
5 See id., at 10–11, 37, 43, 72–73, 113. See infra, at 2187. 6 The latter two matters were the major areas of disagreement. Notwithstanding that Burger King's franchise offering advised that minimum rent would be based on a percentage of “approximated capitalized site acquisition and construction costs,” id., at 23, Rudzewicz assumed that rent would be a function solely of renovation costs, and he thereby underestimated the minimum monthly rent by more than $2,000. The District Court found Rudzewicz' interpretation “incredible.” 7 Record 649.
With respect to assignment, Rudzewicz and MacShara had formed RMBK Corp. with the intent of assigning to it all of their interest and liabilities in the franchise. Consistent with the contract documents, however, Burger King insisted that the two remain personally liable for their franchise obligations. See App. 62, 109. Although the franchisees contended that Burger King officials had given them oral assurances concerning assignment, the District Court found that pursuant to the parol evidence rule any such assurances “even if they had been made and were misleading were joined and merged” into the final agreement. 7 Record 648.
7 Although Rudzewicz and MacShara dealt with the Birmingham district office on a regular basis, they communicated directly with the Miami headquarters in forming the contracts; moreover, they learned that the district office had “very little” decisionmaking authority and accordingly turned directly to headquarters in seeking to resolve their disputes. 5 id., at 292. See generally App. 5–6; 5 Record 167–168, 174–179, 182–184, 198–199, 217–218, 264–265, 292–294; 6 id., at 314–316, 363, 373, 416, 463, 496.
8 They were able to secure a $10,439 reduction in rent for the third year. App. 82; 5 Record 222–223; 6 id., at 500. 9 Miami's policy was to “deal directly” with franchisees when they began to encounter financial difficulties, and to involve district office personnel only when necessary. 5 id., at 95. In the instant case, for example, the Miami office handled all credit problems, ordered cost-cutting measures, negotiated for a partial refinancing of the franchisees' debts, communicated directly with the franchisees in attempting to resolve the dispute, and was responsible for all termination matters. See 2 id., at 59–69; 5 id., at 84–89, 94–95, 97–98, 100–103, 116–128, 151–152, 158, 163; 6 id., at 395–397, 436–438, 510–511, 524–525.
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10 Rudzewicz and MacShara were served in Michigan with summonses and copies of the complaint pursuant to Federal Rule of Civil Procedure 4. 2 id., at 102–103.
11 MacShara did not appeal his judgment. See Burger King Corp. v. MacShara, 724 F.2d 1505, 1506, n. 1 (CA11 1984). In addition, Rudzewicz entered into a compromise with Burger King and waived his right to appeal the District Court's finding of trademark infringement and its entry of injunctive relief. See 4 Record 804–816. Accordingly, we need not address the extent to which the tortious act provisions of Florida's long-arm statute, see Fla.Stat. § 48.193(1)(b) (Supp.1984), may constitutionally extend to out-of-state trademark infringement. Cf. Calder v. Jones, 465 U.S. 783, 788–789, 104 S.Ct. 1482, 1486–1487, 79 L.Ed.2d 804 (1984) (tortious out-of-state conduct); Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 776, 104 S.Ct. 1473, 1479, 79 L.Ed.2d 790 (1984) (same).
12 The District Court had found both that Rudzewicz fell within the reach of Florida's long-arm statute and that the exercise of jurisdiction was constitutional. The Court of Appeals did not consider the statutory question, however, because, as Burger King acknowledged at argument, that court “accepted the parties' stipulation” that § 48.193 reached Rudzewicz “in lieu of [making] a determination of what Florida law provides.” Tr. of Oral Arg. 12. Burger King contends that an appeal is proper “on the basis of the Circuit Court's holding that given that stipulation the statute was unconstitutional as applied.” Id., at 13 (emphasis added).
We disagree. Our “overriding policy, historically encouraged by Congress, of minimizing the mandatory docket of this Court in the interests of sound judicial administration,” Gonzalez v. Automatic Employees Credit Union, 419 U.S. 90, 98, 95 S.Ct. 289, 294, 42 L.Ed.2d 249 (1974) (construing 28 U.S.C. § 1253), would be threatened if litigants could obtain an appeal through the expedient of stipulating to a particular construction of state law where state law might in fact be in harmony with the Federal Constitution. Jurisdiction under 28 U.S.C. § 1254(2) is properly invoked only where a court of appeals squarely has “held” that a state statute is unconstitutional on its face or as applied; jurisdiction does not lie if the decision might rest on other grounds. Public Service Comm'n v. Batesville Telephone Co., 284 U.S. 6, 7, 52 S.Ct. 1, 76 L.Ed. 135 (1931) (per curiam ). Consistent with “our practice of strict construction” of § 1254(2), Fornaris v. Ridge Tool Co., 400 U.S. 41, 42, n. 1, 91 S.Ct. 156, 157, n. 1, 27 L.Ed.2d 174 (1970) (per curiam ), we believe that an appeal cannot lie where a court of appeals' judgment rests solely on the stipulated applicability of state law. Rather, it must be reasonably clear that the court independently concluded that the challenged statute governs the case and held the statute itself unconstitutional as so applied. The Court of Appeals did neither in this case, concluding simply that “[j]urisdiction under these circumstances would offend the fundamental fairness which is the touchstone of due process.” 724 F.2d, at 1513. Of course, if it were clear under Florida law that § 48.193(1)(g) governed every transaction falling within its literal terms, there could be no objection to a stipulation that merely recognized this established construction. But the Florida Supreme Court has not ruled on the breadth of § 48.193(1)(g), and several state appellate courts have held that the provision extends only to the limits of the Due Process Clause. See, e.g., Scordilis v. Drobnicki, 443 So.2d 411, 412– 414 (Fla.App.1984); Lakewood Pipe of Texas, Inc. v. Rubaii, 379 So.2d 475, 477 (Fla.App.1979), appeal dism'd, 383 So.2d 1201 (Fla.1980); Osborn v. University Society, Inc., 378 So.2d 873, 874 (Fla.App.1979). If § 48.193(1)(g) is construed and applied in accordance with due process limitations as a matter of state law, then an appeal is improper because the statute cannot be “invalid as repugnant to the Constitution ... of the United States,” 28 U.S.C. § 1254(2), since its boundaries are defined by, rather than being in excess of, the Due Process Clause. See, e.g., Calder v. Jones, supra, 465 U.S., at 787–788, n. 7, 104 S.Ct., at 1486, n. 7; Kulko v. California Superior Court, 436 U.S. 84, 90, and n. 4, 98 S.Ct. 1690, 1695–1696, and n. 4, 56 L.Ed.2d 132 (1978).
13 Although this protection operates to restrict state power, it “must be seen as ultimately a function of the individual liberty interest preserved by the Due Process Clause” rather than as a function “of federalism concerns.” Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702–703, n. 10, 102 S.Ct. 2099, 2104–2105, n. 10, 72 L.Ed.2d 492 (1982).
14 We have noted that, because the personal jurisdiction requirement is a waivable right, there are a “variety of legal arrangements” by which a litigant may give “express or implied consent to the personal jurisdiction of the court.” Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, supra, at 703, 102 S.Ct., at 2105. For example, particularly in the commercial context, parties frequently stipulate in advance to submit their controversies for resolution within a particular jurisdiction. See National Equipment Rental, Ltd. v. Szukhent, 375 U.S. 311, 84 S.Ct. 411, 11 L.Ed.2d 354 (1964). Where such forum-selection provisions have been obtained through “freely negotiated” agreements and are not “unreasonable and unjust,” The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15, 92 S.Ct. 1907, 1916, 32 L.Ed.2d 513 (1972), their enforcement does not offend due process.
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15 “Specific” jurisdiction contrasts with “general” jurisdiction, pursuant to which “a State exercises personal jurisdiction over a defendant in a suit not arising out of or related to the defendant's contacts with the forum.” Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S., at 414, n. 9, 104 S.Ct., at 1872, n. 9; see also Perkins v. Benguet Consolidated Mining Co., 342 U.S. 437, 72 S.Ct. 413, 96 L.Ed. 485 (1952).
16 See, e.g., World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 299, 100 S.Ct. 559, 568, 62 L.Ed.2d 490 (1980)
(BRENNAN, J., dissenting); Shaffer v. Heitner, 433 U.S. 186, 219, 97 S.Ct. 2569, 2588, 53 L.Ed.2d 683 (1977) (BRENNAN, J., concurring in part and dissenting in part).
17 Applying this principle, the Court has held that the Due Process Clause forbids the exercise of personal jurisdiction over an out-of-state automobile distributor whose only tie to the forum resulted from a customer's decision to drive there, World-Wide Volkswagen Corp. v. Woodson, supra; over a divorced husband sued for child-support payments whose only affiliation with the forum was created by his former spouse's decision to settle there, Kulko v. California Superior Court, 436 U.S. 84, 98 S.Ct. 1690, 56 L.Ed.2d 132 (1978); and over a trustee whose only connection with the forum resulted from the settlor's decision to exercise her power of appointment there, Hanson v. Denckla, 357 U.S. 235, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958). In such instances, the defendant has had no “clear notice that it is subject to suit” in the forum and thus no opportunity to “alleviate the risk of burdensome litigation” there. World-Wide Volkswagen Corp. v. Woodson, supra, 444 U.S., at 297, 100 S.Ct., at 567.
18 So long as it creates a “substantial connection” with the forum, even a single act can support jurisdiction. McGee v.
International Life Insurance Co., 355 U.S., at 223, 78 S.Ct., at 201. The Court has noted, however, that “some single or occasional acts” related to the forum may not be sufficient to establish jurisdiction if “their nature and quality and the circumstances of their commission” create only an “attenuated” affiliation with the forum. International Shoe Co. v. Washington, 326 U.S. 310, 318, 66 S.Ct. 154, 159, 90 L.Ed. 95 (1945); World-Wide Volkswagen Corp. v. Woodson, 444 U.S., at 299, 100 S.Ct., at 568. This distinction derives from the belief that, with respect to this category of “isolated” acts, id., at 297, 100 S.Ct., at 567, the reasonable foreseeability of litigation in the forum is substantially diminished.
19 See Allstate Insurance Co. v. Hague, 449 U.S. 302, 307–313, 101 S.Ct. 633, 637–640, 66 L.Ed.2d 521 (1981) (opinion of BRENNAN, J.). See generally Restatement (Second) of Conflict of Laws §§ 6, 9 (1971).
20 See, e.g., 28 U.S.C. § 1404(a) (“For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought”). This provision embodies in an expanded version the common-law doctrine of forum non conveniens, under which a court in appropriate circumstances may decline to exercise its jurisdiction in the interest of the “easy, expeditious and inexpensive” resolution of a controversy in another forum. See Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508–509, 67 S.Ct. 839, 843, 91 L.Ed. 1055 (1947).
21 See, e.g., Lakeside Bridge & Steel Co. v. Mountain State Construction Co., 445 U.S. 907, 909–910, 100 S.Ct. 1087, 1088– 1089, 63 L.Ed.2d 325 (1980) (WHITE, J., dissenting from denial of certiorari) (collecting cases); Brewer, Jurisdiction in Single Contract Cases, 6 U.Ark. Little Rock L.J. 1, 7–11, 13 (1983); Note, Long-Arm Jurisdiction in Commercial Litigation: When is a Contract a Contact?, 61 B.U.L.Rev. 375, 384–388 (1981).
22 The Eleventh Circuit held that MacShara's presence in Florida was irrelevant to the question of Rudzewicz's minimum contacts with that forum, reasoning that “Rudzewicz and MacShara never formed a partnership” and “signed the agreements in their individual capacities.” 724 F.2d, at 1513, n. 14. The two did jointly form a corporation through which they were seeking to conduct the franchise, however. See n. 6, supra. They were required to decide which one of them would travel to Florida to satisfy the training requirements so that they could commence business, and Rudzewicz participated in the decision that MacShara would go there. We have previously noted that when commercial activities are “carried on in behalf of” an out-of-state party those activities may sometimes be ascribed to the party, International Shoe Co. v. Washington, 326 U.S. 310, 320, 66 S.Ct. 154, 160, 90 L.Ed. 95 (1945), at least where he is a “primary participan[t]” in the enterprise and has acted purposefully in directing those activities, Calder v. Jones, 465 U.S., at 790, 104 S.Ct., at 1487. Because MacShara's matriculation at Burger King University is not pivotal to the disposition of this case, we need not resolve the permissible bounds of such attribution.
23 Hanson v. Denckla, 357 U.S., at 253–254, 78 S.Ct., at 1239–1240. See also Keeton v. Hustler Magazine, Inc., 465 U.S., at 778, 104 S.Ct., at 1480; Kulko v. California Superior Court, 436 U.S., at 98, 98 S.Ct., at 1700; Shaffer v. Heitner, 433 U.S., at 215, 97 S.Ct., at 2585.
24 In addition, the franchise agreement's disclaimer that the “choice of law designation does not require that all suits concerning this Agreement be filed in Florida,” App. 72 (emphasis added), reasonably should have suggested to Rudzewicz that by negative implication such suits could be filed there.
The lease also provided for binding arbitration in Miami of certain condemnation disputes, id., at 113, and Rudzewicz conceded the validity of this provision at oral argument, Tr. of Oral Arg. 37. Although it does not govern the instant
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Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985) 105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541
dispute, this provision also should have made it apparent to the franchisees that they were dealing directly with the Miami headquarters and that the Birmingham district office was not “for all intents and purposes the embodiment of Burger King.” 724 F.2d, at 1511.
25 Complaining that “when Burger King is the plaintiff, you won't ‘have it your way’ because it sues all franchisees in Miami,”
Brief for Appellee 19, Rudzewicz contends that Florida's interest in providing a convenient forum is negligible given the company's size and ability to conduct litigation anywhere in the country. We disagree. Absent compelling considerations, cf. McGee v. International Life Insurance Co., 355 U.S., at 223, 78 S.Ct., at 201, a defendant who has purposefully derived commercial benefit from his affiliations in a forum may not defeat jurisdiction there simply because of his adversary's greater net wealth.
26 Rudzewicz has failed to show how the District Court's exercise of jurisdiction in this case might have been at all inconsistent with Michigan's interests. To the contrary, the court found that Burger King had fully complied with Michigan law, App. 159, and there is nothing in Michigan's franchise Act suggesting that Michigan would attempt to assert exclusive jurisdiction to resolve franchise disputes affecting its residents. In any event, minimum-contacts analysis presupposes that two or more States may be interested in the outcome of a dispute, and the process of resolving potentially conflicting “fundamental substantive social policies,” World-Wide Volkswagen Corp. v. Woodson, 444 U.S., at 292, 100 S.Ct., at 564, can usually be accommodated through choice-of-law rules rather than through outright preclusion of jurisdiction in one forum. See n. 19, supra.
27 The only arguable instance of trial inconvenience occurred when Rudzewicz had difficulty in authenticating some corporate records; the court offered him as much time as would be necessary to secure the requisite authentication from the Birmingham district office, and Burger King ultimately stipulated to their authenticity rather than delay the trial. See 7 Record 574–575, 578–579, 582, 598–599.
28 We do not mean to suggest that the jurisdictional outcome will always be the same in franchise cases. Some franchises may be primarily intrastate in character or involve different decisionmaking structures, such that a franchisee should not reasonably anticipate out-of-state litigation. Moreover, commentators have argued that franchise relationships may sometimes involve unfair business practices in their inception and operation. See H. Brown, Franchising Realities and Remedies 4–5 (2d ed. 1978). For these reasons, we reject Burger King's suggestion for “a general rule, or at least a presumption, that participation in an interstate franchise relationship” represents consent to the jurisdiction of the franchisor's principal place of business. Brief for Appellant 46.
29 This approach does, of course, preclude clear-cut jurisdictional rules. But any inquiry into “fair play and substantial justice”
necessarily requires determinations “in which few answers will be written ‘in black and white. The greys are dominant and even among them the shades are innumerable.’ ” Kulko v. California Superior Court, 436 U.S., at 92, 98 S.Ct., at 1697.
30 Hanson v. Denckla, 357 U.S., at 253, 78 S.Ct., at 1239; Keeton v. Hustler Magazine, Inc., 465 U.S., at 774, 104 S.Ct., at 1478; World-Wide Volkswagen Corp. v. Woodson, 444 U.S., at 299, 100 S.Ct., at 568.
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Calder v. Jones, 465 U.S. 783 (1984) 104 S.Ct. 1482, 79 L.Ed.2d 804, 10 Media L. Rep. 1401
[2] Constitutional Law KeyCite Yellow Flag - Negative Treatment Non-residents in general Disagreement Recognized by Zellerino v. Roosen, E.D.Mich., July Due process clause of Fourteenth Amendment 29, 2015 permits personal jurisdiction over defendant 104 S.Ct. 1482 in any state in which defendant has certain Supreme Court of the United States minimum contacts such that the maintenance of the suit does not offend traditional notions Iain CALDER and John South, Appellants, of fair play and substantial justice; in judging v. minimum contacts, a court properly focuses on Shirley JONES. the relationship among the defendant, the forum and the litigation. U.S.C.A. Const.Amend. 14.
No. 82–1401. | Argued Nov. 8, 1983. | Decided March 20, 1984. 1916 Cases that cite this headnote
Respondent, a professional entertainer, brought suit in [3] Federal Courts California Superior Court claiming that she had been libeled Plaintiff's Residence; Nonresident Plaintiffs in an article written and edited by petitioners in Florida. The Superior Court granted petitioners' motion to quash A plaintiff's lack of “contacts” will not defeat service of process for lack of jurisdiction. The California otherwise proper jurisdiction but they may be so Court of Appeal, 138 Cal.App.3d 128, 187 Cal.Rptr. 825, manifold as to permit jurisdiction when it would reversed, and petitioners appealed. The Supreme Court, not exist in their absence. Justice Rehnquist, held that it was proper for a court 509 Cases that cite this headnote in California to exercise jurisdiction over two Florida newspapermen in a libel action arising out of their intentional conduct in Florida which was allegedly calculated to cause [4] Federal Courts injuries to plaintiff in California. Defamation It was proper for a court in California Affirmed. to exercise jurisdiction over two Florida newspapermen in a libel action arising out of their intentional conduct in Florida which was allegedly calculated to cause injuries to plaintiff West Headnotes (5)
in California.
[1] Federal Courts 1299 Cases that cite this headnote Particular Cases, Contexts, and Questions Federal Courts [5] Federal Courts Review of state courts Defamation Jurisdiction by appeal did not lie in Supreme First Amendment concerns did not enter into the Court over a ruling of the California Court of jurisdictional analysis in determining whether it Appeal which reversed an order quashing service was proper for a court in California to exercise of process for lack of personal jurisdiction jurisdiction over two Florida newspapermen in a against Florida defendants on First Amendment libel action. U.S.C.A. Const.Amend. 1. grounds; however, Supreme Court would treat the jurisdictional statement as a petition for writ 623 Cases that cite this headnote of certiorari and grant the petition. U.S.C.A. Const.Amend. 1; 28 U.S.C.A. § 2103.
82 Cases that cite this headnote
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Calder v. Jones, 465 U.S. 783 (1984) 104 S.Ct. 1482, 79 L.Ed.2d 804, 10 Media L. Rep. 1401
and edited an article that they *784 knew would have a potentially devastating impact upon respondent, and they **1483 *783 Syllabus * knew that the brunt of that injury would be felt by respondent in the State in which she lives and works and in Respondent, a professional entertainer who lives and works which the magazine has its largest circulation. Under these in California and whose television career was centered circumstances, petitioners must “reasonably anticipate being there, brought suit in California Superior Court, claiming haled into court there” to answer for the truth of the statements that she had been libeled in an article written and edited made in the article. P. 1487.
by petitioners in Florida and published in the National Enquirer, a national magazine having its largest circulation in (d) While petitioners' contacts with California are not to be California. Petitioners, both residents of Florida, were served judged according to their employer's activities there, their with process by mail in Florida, and, on special appearances, status as employees does not insulate them from jurisdiction, moved to quash the service of process for lack of personal since each defendant's contact with the forum State must be jurisdiction. The Superior Court granted the motion on the assessed individually. P. 1487.
ground that First Amendment concerns weighed against an assertion of jurisdiction otherwise proper under the Due (e) First Amendment concerns do not enter into the Process Clause of the Fourteenth Amendment. The California jurisdictional analysis. Such concerns would needlessly Court of Appeal reversed, holding that a valid basis for complicate an already imprecise inquiry. Moreover, the jurisdiction existed on the theory that petitioners intended to, potential chill on protected First Amendment activity and did, cause tortious injury to respondent in California.
stemming from defamation actions is already taken into account in the constitutional limitations on the substantive Held:
law governing such actions. P. 1487.
1. Jurisdiction by appeal does not lie, but under 28 U.S.C. § 138 Cal.App.3d 128, 187 Cal.Rptr. 825 (1982), affirmed.
2103 the jurisdictional statement will be treated as a petition for certiorari, which is hereby granted. P. 1486.
Attorneys and Law Firms 2. Jurisdiction over petitioners in California is proper because of their intentional conduct in Florida allegedly calculated to John G. Kester argued the cause for petitioners. With him on cause injury to respondent in California. Pp. 1486 – 1488. the briefs was Aubrey M. Daniel III.
**1484 (a) The Due Process Clause permits personal Paul S. Ablon argued the cause for respondent. With him on jurisdiction over a defendant in any State with which the the brief were Stephen S. Monroe and Richard P. Towne.* defendant has “certain minimum contacts ... such that the * Briefs of amici curiae urging reversal were filed for the maintenance of the suit does not offend ‘traditional notions of Association of American Publishers, Inc., by R. Bruce Rich;
fair play and substantial justice.’ ” International Shoe Co. v.
for the Authors League of America, Inc., by Irwin Karp; and Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158, 90 L.Ed.
for the Reporters Committee for Freedom of the Press et al.
95 (1945). In judging minimum contacts, a court properly by George R. Clark, Peter C. Gould, Barry D. Umansky, focuses on “the relationship among the defendant, the forum, Harvey Lipton, Robert C. Lobdell, W. Terry Maguire, Robert and the litigation.” Shaffer v. Heitner, 433 U.S. 186, 204, 97 D. Sack, Bruce W. Sanford, J. Laurent Scharff, and Richard S.Ct. 2569, 2579, 53 L.Ed.2d 683 (1977). P. 1486.
M. Schmidt, Jr.
(b) Here, California is the focal point both of the allegedly Opinion libelous article and of the harm suffered. Jurisdiction over petitioners is therefore proper in California based on the Justice REHNQUIST delivered the opinion of the Court. “effects” of their Florida conduct in California. P. 1486.
Respondent Shirley Jones brought suit in California Superior (c) Petitioners are not charged with mere untargeted Court claiming that she had been libeled in an article written negligence, but rather their intentional, and allegedly tortious, and edited by petitioners in Florida. The article was published actions were expressly aimed at California. They wrote in a national magazine with a large circulation in California.
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Calder v. Jones, 465 U.S. 783 (1984) 104 S.Ct. 1482, 79 L.Ed.2d 804, 10 Media L. Rep. 1401
Petitioners were served with process by mail in Florida and In considering petitioners' motion to quash service of process, caused special appearances to be entered on their behalf, the superior court surmised that the actions of petitioners in moving to quash the service of process for lack of personal Florida, causing injury to respondent in California, would *785 jurisdiction. The superior court granted the motion on ordinarily be sufficient to support an assertion of jurisdiction the ground that First Amendment concerns weighed against over them in California. 5 But the court felt that special an assertion of jurisdiction otherwise proper under the Due solicitude was necessary because of the potential “chilling Process Clause. The California Court of Appeal reversed, effect” on reporters and editors which would result from rejecting the suggestion that First Amendment considerations requiring them to appear in remote jurisdictions to answer for enter into the jurisdictional analysis. We now affirm. the content of articles upon which they worked. The court also noted that respondent's rights could be “fully satisfied”
Respondent lives and works in California. She and her in her suit against the publisher without requiring petitioners husband brought this suit against the National Enquirer, to appear as parties. The superior court, therefore, granted the Inc., its local distributing company, and petitioners for libel, motion. invasion of privacy, and intentional infliction of emotional harm. 1 The Enquirer is a Florida corporation with its The California Court of Appeal reversed. 138 Cal.App.3d principal place of business in Florida. It publishes a national 128, 187 Cal.Rptr. 825 (1982). The court agreed that neither weekly newspaper with a total circulation of over 5 million. petitioner's contacts with California would be sufficient About 600,000 of those copies, almost twice the level of *787 for an assertion of jurisdiction on a cause of action the next highest State, are sold in California. 2 Respondent's unrelated to those contacts. See Perkins v. Benguet Mining and her husband's **1485 claims were based on an article Co., 342 U.S. 437, 72 S.Ct. 413, 96 L.Ed. 485 (1952) that appeared in the Enquirer's October 9, 1979 issue. Both (permitting general jurisdiction where defendant's contacts the Enquirer and the distributing company answered the with the forum were “continuous and systematic”). But the complaint and made no objection to the jurisdiction of the court concluded that a valid basis for jurisdiction existed on California court. the theory that petitioners intended to, and did, cause tortious injury to respondent in California. The fact that the actions Petitioner South is a reporter employed by the Enquirer. causing the effects in California were performed outside the He is a resident of Florida, though he frequently travels to State did not prevent the State from asserting jurisdiction
California on business. 3 South wrote the first draft of the over a cause of action arising out of those effects. 6 The challenged article, and his byline appeared on it. He did most court rejected **1486 the superior court's conclusion that of his research in Florida, relying on phone calls to sources First Amendment considerations must be weighed in the scale against jurisdiction.
in California for the information contained in the article. 4 Shortly before publication, South called respondent's *786 [1] A timely petition for hearing was denied by the Supreme home and read to her husband a draft of the article so as to Court of California. J.A., at 122. On petitioners' appeal to this elicit his comments upon it. Aside from his frequent trips Court, probable jurisdiction was postponed. ––– U.S. ––––, and phone calls, South has no other relevant contacts with 103 S.Ct. 1766, 76 L.Ed.2d 341 (1983). We conclude that California.
jurisdiction by appeal does not lie. Kulko v. California, 436 U.S. 84, 90, and n. 4, 98 S.Ct. 1690, 1695, and n. 4, 56 L.Ed.2d Petitioner Calder is also a Florida resident. He has been to California only twice—once, on a pleasure trip, prior to 132 (1978). 7 Treating the jurisdictional statement as *788 the publication of the article and once after to testify in an a petition for writ of certiorari, as we are authorized to do, 28 unrelated trial. Calder is president and editor of the Enquirer. U.S.C. § 2103, we hereby grant the petition. 8 He “oversee[s] just about every function of the Enquirer.” J.A., at 24. He reviewed and approved the initial evaluation of [2] [3] The Due Process Clause of the Fourteenth the subject of the article and edited it in its final form. He also Amendment to the United States Constitution permits declined to print a retraction requested by respondent. Calder personal jurisdiction over a defendant in any State with which has no other relevant contacts with California. the defendant has “certain minimum contacts ... such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’ Milliken v. Meyer, 311
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Calder v. Jones, 465 U.S. 783 (1984) 104 S.Ct. 1482, 79 L.Ed.2d 804, 10 Media L. Rep. 1401
U.S. 457, 463 [61 S.Ct. 339, 342, 85 L.Ed. 278 (1940) ].” 458 P.2d 57 (1969); Gray v. American Radiator & Standard International Shoe Co. v. Washington, 326 U.S. 310, 316, Sanitary Corp., 22 Ill.2d 432, 176 N.E.2d 761 (1961), should 66 S.Ct. 154, 158, 90 L.Ed. 95 (1945). In judging minimum not be applied to the welder who has no control over and contacts, a court properly focuses on “the relationship among derives no direct benefit from his employer's sales in that the defendant, the forum, and the litigation.” Shaffer v. distant State. Heitner, 433 U.S. 186, 204, 97 S.Ct. 2569, 2579, 53 L.Ed.2d 683 (1977). See also Rush v. Savchuk, 444 U.S. 320, 332, 100 Petitioners' analogy does not wash. Whatever the status of S.Ct. 571, 579, 62 L.Ed.2d 516 (1980). The plaintiff's lack their hypothetical welder, petitioners are not charged with of “contacts” will not defeat otherwise proper jurisdiction, mere untargeted negligence. Rather, their intentional, and see Keeton v. Hustler Magazine, Inc., ––– U.S. ––––, –––– – allegedly tortious, actions were expressly aimed at California. ––––, 104 S.Ct. 1473, 1480 – 1482, 78 L.Ed.2d –––– (1984), Petitioner South wrote and petitioner Calder edited an article but they may be so manifold as to permit jurisdiction when that they knew would have a potentially devastating impact it would not exist in their absence. Here, the plaintiff is the upon respondent. And they knew that the brunt of *790 that focus of the activities of the defendants out of which the suit injury would be felt by respondent in the State in which she arises. See McGee v. International Life Ins. Co., 355 U.S. 220, lives and works and in which the National Enquirer has its 78 S.Ct. 199, 2 L.Ed.2d 223 (1957). largest circulation. Under the circumstances, petitioners must “reasonably anticipate being haled into court there” to answer [4] The allegedly libelous story concerned the California for the truth of the statements made in their article. Worldactivities of a California resident. It impugned the Wide Volkswagen Corp. v. Woodson, 444 U.S., at 297, 100 professionalism of an entertainer whose television career S.Ct., at 567; Kulko v. Superior Court, 436 U.S. 84, 97–98, was centered in California. 9 The article was drawn from 98 S.Ct. 1690, 1699–1700, 56 L.Ed.2d 132 (1978); Shaffer v. California sources, *789 and the brunt of the harm, in terms Heitner, 433 U.S. 186, 216, 97 S.Ct. 2569, 2586, 53 L.Ed.2d both of respondent's emotional distress and the injury to 683 (1977). An individual injured in California need not go to her professional reputation, was suffered in California. In Florida to seek redress from persons who, though remaining sum, California is the focal point both of the story and of in Florida, knowingly cause the injury in California. the harm suffered. Jurisdiction over petitioners **1487 is therefore proper in California based on the “effects” of their Petitioners are correct that their contacts with California are Florida conduct in California. World-Wide Volkswagen Corp. not to be judged according to their employer's activities v. Woodson, 444 U.S. 286, 297–298, 100 S.Ct. 559, 567–568, there. On the other hand, their status as employees does not 62 L.Ed.2d 490 (1980); Restatement (Second) of Conflicts of somehow insulate them from jurisdiction. Each defendant's Law § 37. contacts with the forum State must be assessed individually.
See Rush v. Savchuk, 444 U.S., at 332, 100 S.Ct., at 579 (“The Petitioners argue that they are not responsible for the requirements of International Shoe ... must be met as to each circulation of the article in California. A reporter and defendant over whom a state court exercises jurisdiction”). an editor, they claim, have no direct economic stake in In this case, petitioners are primary participants in an alleged their employer's sales in a distant State. Nor are ordinary wrongdoing intentionally directed at a California resident, employees able to control their employer's marketing activity. and jurisdiction over them is proper on that basis. The mere fact that they can “foresee” that the article will be circulated and have an effect in California is not sufficient for [5] We also reject the suggestion that First Amendment an assertion of jurisdiction. World-Wide Volkswagen Corp. concerns enter into the jurisdictional analysis. The infusion v. Woodson, 444 U.S., at 295, 100 S.Ct., at 566; Rush v. of such considerations would needlessly complicate an Savchuk, 444 U.S., at 328–329, 100 S.Ct., at 577–578. They already imprecise inquiry. Estin v. Estin, 334 U.S. 541, do not “in effect appoint the [article their] agent for service 545, 68 S.Ct. 1213, 1216, 92 L.Ed. 1561 (1948). Moreover, of process.” World-Wide Volkswagen Corp. v. Woodson, 444 the potential chill on protected First Amendment activity U.S., at 296, 100 S.Ct., at 566. Petitioners liken themselves stemming from libel and defamation actions is already to a welder employed in Florida who works on a boiler which taken into account in the constitutional limitations on the subsequently explodes in California. Cases which hold that substantive law governing such suits. See New York Times, jurisdiction will be proper over the manufacturer, Buckeye Inc. v. Sullivan, 376 U.S. 254, 84 S.Ct. 710, 11 L.Ed.2d Boiler Co. v. Superior Court, 71 Cal.2d 893, 80 Cal.Rptr. 113, 686 (1964); Gertz v. Robert Welch, Inc., 418 U.S. 323, 94
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Calder v. Jones, 465 U.S. 783 (1984) 104 S.Ct. 1482, 79 L.Ed.2d 804, 10 Media L. Rep. 1401
We hold that jurisdiction over petitioners in California S.Ct. 2997, 41 L.Ed.2d 789 (1974). To reintroduce those is proper because of their intentional conduct in Florida concerns at the jurisdictional stage would be a form of double calculated to cause injury to respondent in California. The counting. We have already declined in other contexts to judgment of the California Court of Appeal is grant special procedural **1488 protections to defendants in libel and defamation actions in addition to the constitutional Affirmed.
protections *791 embodied in the substantive laws. See, e.g., Herbert v. Lando, 441 U.S. 153, 99 S.Ct. 1635, 60 L.Ed.2d 115 (1979) (no First Amendment privilege bars inquiry into All Citations editorial process). See also Hutchinson v. Proxmire, 443 U.S. 111, 120 n. 9, 99 S.Ct. 2675, 2680 n. 9, 61 L.Ed.2d 411 (1979) 465 U.S. 783, 104 S.Ct. 1482, 79 L.Ed.2d 804, 10 Media L. (implying that no special rules apply for summary judgment). Rep. 1401
Footnotes * The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader. See United States v. Detroit Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 287, 50 L.Ed. 499.
1 Respondent's husband subsequently filed a voluntary dismissal of his complaint. 2 A geographic analysis of the total paid circulation for the September 18, 1979 issue of the Enquirer showed total sales, national and international, of 5,292,200. Sales in California were 604,431. The State with the next highest total was New York, with 316,911. J.A., at 39–41.
3 South stated that during a four-year period he visited California more than 20 times. J.A., at 32. A friend estimated that he came to California from 6 to 12 times each year. J.A., at 66.
4 The superior court found that South made at least one trip to California in connection with the article. South hotly disputes this finding, claiming that an uncontroverted affidavit shows that he never visited California to research the article. Since we do not rely for our holding on the alleged visit, see n. 6, supra, we find it unnecessary to consider the contention.
5 California's “long-arm” statute permits an assertion of jurisdiction over a nonresident defendant whenever permitted by the state and federal Constitutions. Section 410.10 of the California Code of Civil Procedure provides: “A court of this state may exercise jurisdiction on any basis not inconsistent with the Constitution of this state or of the United States.”
6 The Court of Appeal further suggested that petitioner South's investigative activities, including one visit and numerous phone calls to California, formed an independent basis for an assertion of jurisdiction over him in this action. In light of our approval of the “effects” test employed by the California court, we find it unnecessary to reach this alternate ground.
7 Kulko involved an assertion of jurisdiction under the same California statute at issue here. The Court held that the case was improperly brought to the Court as an appeal, since no state statute was “drawn into question ... on the ground of its being repugnant to the Constitution, treaties or laws of the United States,” 28 U.S.C. § 1257(2). Petitioners attempt to distinguish Kulko on the ground that the defendant in that case argued only that the Due Process Clause precluded the exercise of in personam jurisdiction over him, whereas petitioners argued below that the California statute as applied to them would be unconstitutional. We are unpersuaded by this shift in emphasis. The jurisdictional statute construed by the California Court of Appeal provides that the State's jurisdiction is as broad as the Constitution permits. See n. 5, supra. As in Kulko, the opinion below does not purport to determine the constitutionality of the California jurisdictional statute. Rather, the question decided was whether the Constitution itself would permit the assertion of jurisdiction. Under the circumstances, we find an appeal improper regardless of the terminology in which the petitioners couch their jurisdictional defense.
8 Although there has not yet been a trial on the merits in this case, the judgment of the California appellate court “is plainly final on the federal issue and is not subject to further review in the state courts.” Cox Broadcasting Corp. v. Cohn, 420 U.S. 469, 485, 95 S.Ct. 1029, 1041, 43 L.Ed.2d 328 (1975). Accordingly, as in several past cases presenting jurisdictional issues in this posture, “we conclude that the judgment below is final within the meaning of [28 U.S.C.] § 1257.” Shaffer v. Heitner, 433 U.S. 186, 195–196, n. 12, 97 S.Ct. 2569, 2575–2576, n. 12, 53 L.Ed.2d 683 (1977). See also Rush v. Savchuk, 444 U.S. 320, 100 S.Ct. 571, 62 L.Ed.2d 516 (1980); World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980); Kulko v. Superior Court, 436 U.S. 84, 98 S.Ct. 1690, 56 L.Ed.2d 132 (1978).
9 The article alleged that respondent drank so heavily as to prevent her from fulfilling her professional obligations.
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Camac v. Dontos, 390 S.W.3d 398 (2012)
390 S.W.3d 398 West Headnotes (33)
Court of Appeals of Texas, Dallas.
[1] Constitutional Law Brad CAMAC, Appellant Personal jurisdiction in general v. Courts Jordan DONTOS, Jennifer Jurisdiction of the Person in General Dontos, & Crave, LLC, Appellees. Personal jurisdiction concerns a court's power to bind a particular person or party, and that power No. 05–11–00765–CV. | April 17, is grounded in constitutional guarantees of due 2012. | Rehearing Overruled June 12, 2012. process. U.S.C.A. Const.Amend. 14.
Synopsis Cases that cite this headnote Background: Franchisee brought action against vending machine company, a foreign corporation, alleging fraud, breach of franchise agreement, interference with contractual [2] Constitutional Law and business relationships, and violations of multiple federal Non-residents in general and state trade regulations. Company representative specially Courts appeared and objected to court's exercise of personal Actions by or Against Nonresidents, jurisdiction over him. The 68th Judicial District Court, Dallas Personal Jurisdiction In; “Long-Arm” County, Martin Hoffman, J., denied representative's special Jurisdiction appearance, finding it had specific jurisdiction over him. Courts may exercise personal jurisdiction Representative appealed. over a nonresident defendant if the long-
arm statute permits the exercise of jurisdiction and the assertion of jurisdiction is consistent Holdings: The Court of Appeals, Murphy, J., held that: with federal and state constitutional due process guarantees. U.S.C.A. Const.Amend.
[1] franchisee pled jurisdictional facts sufficient to bring 14; Vernon's Ann.Texas Const. Art. 1, § 19; representative within provisions of long-arm statute; V.T.C.A., Civil Practice & Remedies Code § 17.042(2).
[2] operative facts of franchisee's claims were substantially Cases that cite this headnote connected to representative's Texas contacts;
[3] fiduciary shield doctrine did not apply to negate bases of [3] Courts specific personal jurisdiction over representative; Actions by or Against Nonresidents, Personal Jurisdiction In; “Long-Arm”
[4] representative made sufficient contacts with Texas and Jurisdiction thus purposefully availed himself of the laws of Texas; and The requirements of the long-arm statute are considered satisfied if the exercise of personal [5] trial court's assertion of personal jurisdiction over jurisdiction is consistent with federal due representative did not offend traditional notions of fair play process limitations. U.S.C.A. Const.Amend. 14; and substantial justice. V.T.C.A., Civil Practice & Remedies Code § 17.042(2).
Affirmed. Cases that cite this headnote
[4] Constitutional Law
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Camac v. Dontos, 390 S.W.3d 398 (2012)
Non-residents in general When the trial court does not issue findings of Due process permits a court to exercise personal fact or conclusions of law in support of its special jurisdiction over a nonresident defendant only appearance ruling, all facts necessary to support when the defendant has established minimum the judgment and supported by the evidence are contacts with the forum state, and the exercise implied. of jurisdiction comports with traditional notions 1 Cases that cite this headnote of fair play and substantial justice. U.S.C.A. Const.Amend. 14.
[9] Appearance 1 Cases that cite this headnote Objections relating to process or service A defendant claiming it is not amenable [5] Courts to process in Texas must file a verified Purpose, intent, and foreseeability; special appearance challenging the trial court's purposeful availment exercise of jurisdiction. Vernon's Ann.Texas Minimum contacts with the forum state Rules Civ.Proc., Rule 120a. are established as to permit a court to Cases that cite this headnote exercise personal jurisdiction over a nonresident defendant when the nonresident defendant purposefully avails itself of the privilege of [10] Courts conducting activities within the forum State, thus Allegations, pleadings, and affidavits invoking the benefits and protections of its laws. The plaintiff bears the initial burden of pleading jurisdictional facts sufficient to bring a Cases that cite this headnote nonresident defendant within the provisions of the long-arm statute, and the plaintiff's pleadings [6] Courts and its response to the special appearance may be Purpose, intent, and foreseeability; considered in determining whether the plaintiff purposeful availment satisfied its burden; the nonresident defendant A nonresident defendant establishes minimum then carries the burden of negating all bases contacts with the forum state as to permit of personal jurisdiction alleged by the plaintiff. a court to exercise personal jurisdiction over V.T.C.A., Civil Practice & Remedies Code § the defendant if the defendant's conduct and 17.042(2). connection with the state is such that the 1 Cases that cite this headnote defendant could reasonably anticipate being sued in the forum state.
[11] Courts Cases that cite this headnote Presumptions and Burden of Proof as to Jurisdiction [7] Appeal and Error The defendant can negate personal jurisdiction Cases Triable in Appellate Court on either a factual or legal basis. The question of whether a trial court has personal 1 Cases that cite this headnote jurisdiction over a nonresident defendant is one of law that is reviewed de novo.
[12] Courts 1 Cases that cite this headnote Presumptions and Burden of Proof as to Jurisdiction [8] Appeal and Error A factual attack against a plaintiff's assertion Particular findings implied of personal jurisdiction requires the defendant to present evidence that it has no contacts
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Camac v. Dontos, 390 S.W.3d 398 (2012)
with Texas, effectively disproving the plaintiff's When specific jurisdiction is alleged, the allegations; the plaintiff then responds with its minimum contacts analysis focuses on the own evidence that affirms its allegations. relationship among the defendant, the litigation, and the forum.
Cases that cite this headnote Cases that cite this headnote [13] Courts Allegations, pleadings, and affidavits [17] Constitutional Law Courts Non-residents in general Presumptions and Burden of Proof as to Courts Jurisdiction Purpose, intent, and foreseeability; In a legal attack on specific jurisdiction, purposeful availment the defendant takes the defendant's factual Courts allegations as true; under this challenge, the Related contacts and activities; specific defendant may prevail by showing (1) those jurisdiction assumed facts are insufficient to establish The minimum contacts analysis requires the jurisdiction; (2) the defendant's Texas contacts court to review whether (1) the defendant fall short of purposeful availment; (3) the claims purposefully availed itself of the privilege of do not arise from the contacts; or (4) traditional conducting activities in the forum state and (2) notions of fair play and substantial justice are whether the operative facts of the litigation bear a offended by the exercise of jurisdiction. substantial connection to the defendant's contacts with the state; if both requirements are met, Cases that cite this headnote the court then must determine if the exercise of specific jurisdiction over the nonresident [14] Courts defendant comports with traditional notions of Unrelated contacts and activities; general fair play and substantial justice.
jurisdiction Cases that cite this headnote Courts Related contacts and activities; specific jurisdiction [18] Courts A defendant's contacts with a forum can give rise Determination of questions of jurisdiction to either specific or general jurisdiction. in general The court determines a special appearance Cases that cite this headnote challenging exercise of personal jurisdiction based on the pleadings and any stipulations, [15] Courts affidavits, and other evidence relevant to the Related contacts and activities; specific jurisdictional dispute. Vernon's Ann.Texas Rules jurisdiction Civ.Proc., Rule 120a(3). Specific jurisdiction is established if the 1 Cases that cite this headnote defendant's alleged liability arises from or is related to the defendant's contacts with the state.
[19] Courts Cases that cite this headnote Allegations, pleadings, and affidavits Franchisee pled sufficient jurisdictional facts [16] Courts to bring representative of vending machine Related contacts and activities; specific company, a nonresident defendant, within jurisdiction provisions of long-arm statute, as was necessary for trial court to exercise personal jurisdiction
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over representative, in action alleging fraud, jurisdiction, the court focuses its analysis on the breach of franchise agreement, interference relationship among the defendant, the litigation, with contractual and business relationships, and forum. and violations of multiple federal and state trade regulations; franchisee alleged that Cases that cite this headnote representative had committed tortious acts in Texas by misrepresenting the routes franchisee [23] Courts was acquiring as franchisee in Texas, among Related contacts and activities; specific other tortious acts that occurred in Texas. jurisdiction V.T.C.A., Civil Practice & Remedies Code § Courts 17.042(2).
Determination of questions of jurisdiction 1 Cases that cite this headnote in general At the special appearance stage of a personal jurisdiction challenge, the merits of a claim are [20] Appeal and Error not at issue, and the court does not determine Questions of jurisdiction whether any claim asserted is viable; rather, in In reviewing an order denying a special determining whether the plaintiff's claims arise appearance challenge to personal jurisdiction, from or relate to the nonresident defendant's courts are not concerned with the merits of the forum contacts, the court looks for a connection plaintiff's claims. between those claims and the operative facts of the litigation, which are those facts that will be Cases that cite this headnote the focus of the trial.
[21] Courts Cases that cite this headnote Allegations, pleadings, and affidavits Operative facts of franchisee's claims against [24] Courts vending machine company's representative were Presumptions and Burden of Proof as to substantially connected to representative's Texas Jurisdiction contacts, as was necessary to establish personal It is only when a plaintiff fails to plead jurisdiction, in action alleging fraud, breach of jurisdictional allegations that a nonresident franchise agreement, and violations of multiple defendant can satisfy its burden of negating federal and state trade regulations; franchisee all bases of personal jurisdiction simply by alleged that, through false representations and presenting evidence that it is a nonresident. omissions, representative encouraged franchisee ultimately to close on the deal to become a 1 Cases that cite this headnote franchisee, and the focus at trial would be the role representative played in inducing franchisee to [25] Courts enter into the franchise agreement and purchase Tortious or intentional conduct; fraud and the vending machine routes.
breach of fiduciary duties Cases that cite this headnote Fiduciary shield doctrine did not apply to negate bases of specific personal jurisdiction over nonresident representative of vending [22] Courts machine company who allegedly made Related contacts and activities; specific misrepresentations and perpetrated fraud and jurisdiction other intentional torts against franchisee; that To determine whether a nonresident's liability representative's actions may have been taken arises from or relates to his contacts in the on behalf of his company did not alter the forum state, as is necessary to establish personal jurisdictional inquiry.
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Camac v. Dontos, 390 S.W.3d 398 (2012)
agreement, and violations of multiple federal Cases that cite this headnote and state trade regulations; representative did not deny franchisee's allegations of contacts in the [26] Courts forum state and did not deny that, as an officer in Fiduciary duties in general; fiduciary shield charge of franchise sales, it was to his personal advantage or benefit to complete the transaction Under the “fiduciary shield doctrine,”
in Texas, especially at a time when his company jurisdiction over an individual cannot be based was in dire financial straits.
upon jurisdiction over a corporation; thus, a nonresident corporate officer or employee is Cases that cite this headnote protected from the trial court's exercise of general jurisdiction over him when his only contacts with Texas were made on behalf of his [30] Courts employer. Purpose, intent, and foreseeability;
purposeful availment 1 Cases that cite this headnote There are three aspects to the purposeful availment inquiry to determine personal [27] Courts jurisdiction: first, only the defendant's contacts Tortious or intentional conduct; fraud and with the forum state count, not the unilateral breach of fiduciary duties activity of another; second, the contacts relied upon must be purposeful, rather than random, One's status as an employee does not necessarily isolated, or fortuitous; and third, the nonresident insulate him from jurisdiction; the fiduciary defendant must avail himself of the jurisdiction shield doctrine does not protect a corporate by seeking some benefit, advantage, or profit.
officer or employee from a trial court's exercise of specific jurisdiction as to intentional torts Cases that cite this headnote or fraudulent acts for which he may be held individually liable.
[31] Constitutional Law 1 Cases that cite this headnote Representatives of organizations; officers, agents, and employees [28] Corporations and Business Organizations Courts Fraud Tortious or intentional conduct; fraud and breach of fiduciary duties A corporate agent or officer may be held personally liable for fraudulent statements or Trial court's assertion of personal jurisdiction knowing misrepresentations, even when the over vending machine company's representative, statements or representations are made in his a nonresident defendant who had made sufficient capacity as a corporate representative. contacts with Texas and thus purposefully availed himself of the laws of the state, did 1 Cases that cite this headnote not offend traditional notions of fair play and substantial justice, in action alleging fraud, [29] Courts breach of franchise agreement, and violations of Tortious or intentional conduct; fraud and multiple federal and state trade regulations; even if representative had presented an argument that breach of fiduciary duties satisfied appellate briefing rules, action did not Vending machine company's representative present itself as the rare case in which exercise made sufficient contacts with Texas and thus of jurisdiction would not comport with fair play purposefully availed himself of the laws of and substantial justice. Rules App.Proc., Rule Texas, such that trial court could exercise 38.1(i).
personal jurisdiction over representative, in action alleging fraud, breach of franchise
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Camac v. Dontos, 390 S.W.3d 398 (2012)
Brad Camac appeals the trial court's order denying his special Cases that cite this headnote appearance in a *403 franchise dispute filed against him and others by Jordan and Jennifer Dontos and Crave, LLC [32] Constitutional Law (collectively, the Dontoses). 1 We affirm the trial court's Non-residents in general order.
When determining whether the trial court's assertion of personal jurisdiction over a nonresident defendant would offend traditional BACKGROUND notions of fair play and substantial justice, courts look to: (1) the burden on the defendant; (2) The underlying dispute involves a franchise agreement the the forum state's interest in adjudicating the Dontoses entered into with 24Seven Vending (USA) Limited, dispute; (3) the plaintiff's interest in obtaining a New Zealand company, for vending machine routes located relief; (4) the interstate judicial system's interest in Texas. Camac, a California resident, was the Vice President in obtaining efficient resolution of controversies; of Franchise Sales for 24Seven and handled the sale of the and (5) the shared interest of the several states in vending machine franchise in Texas to the Dontoses. furthering substantive social policies.
According to the Dontoses, they were promised two Cases that cite this headnote established vending machine routes within Farmers Branch and Carrollton, Texas, each of which was said to generate [33] Constitutional Law minimum average weekly gross sales of $6,730. The Non-residents in general Dontoses borrowed $333,000 from a bank recommended by 24Seven, paid that amount plus a $175,000 deposit to To establish that the trial court's assertion 24Seven, quit their jobs, and moved from Seattle, Washington of personal jurisdiction over a nonresident to Carrollton to manage their franchise. Ultimately, 24Seven defendant would offend traditional notions did not tender the described routes, and instead, the Dontoses of fair play and substantial justice, the were asked to accept below-average sales routes that required nonresident defendant bears the burden of greater driving distances between accounts. The Dontoses presenting a compelling case that the presence also later learned 24Seven was running into financial of some consideration would render jurisdiction difficulty in the time just before they became franchisees and unreasonable.
that 24Seven was to be sold to another company called Bacon Cases that cite this headnote Whitney Corporation. The Dontoses claim this information, as well as the availability of the promised routes, was either misrepresented or concealed from them.
Attorneys and Law Firms Camac is one of ten defendants 2 the Dontoses sued alleging violations of the Federal Trade Commission franchise rule, *402 Sean Higgins, Wilson, Elser, Moskowitz, Edelman 16 C.F.R. §§ 436.2, 436.9 (2004), the Texas Business & Dicker LLP, Houston, TX, John R. Henderson, Bank of Opportunity Act, TEX. BUS. & COM.CODE ANN. § 51.301 America Plaza, Dallas, TX, for Appellant. (West 2009), the Deceptive Trade Practices–Consumer Protection Act, TEX. BUS. & COM.CODE ANN. §§ Gary E. Smith, Gary E. Smith, P.C., Dallas, TX, for Appellee.
17.41–.926 (West 2011), and the Washington Franchise Before Justices O'NEILL, FRANCIS, and MURPHY. Investment Protection Act, WASH. REV.CODE ANN.. § 19.100.170 (West 2008). The Dontoses also alleged causes of action for fraud, breach of the franchise agreement, and interference with contractual and business relationships. As OPINION to Camac, the Dontoses specifically alleged he was the Opinion By Justice MURPHY. “principal spokesman and actor” in the fraud perpetrated on them by the defendants.
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Camac specially appeared and objected to the court's exercise “established minimum contacts with the forum state, and the of personal jurisdiction over him. Camac argued his only exercise of jurisdiction comports with ‘traditional notions contacts with Texas arose out of his employment with of fair play and substantial justice.’ ” Moki Mac River 24Seven. Camac verified his special appearance in which Expeditions v. Drugg, 221 S.W.3d 569, 575 (Tex.2007) he attested he never conducted business in Texas in his (quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 316, individual capacity, but rather, “any contacts [he] may 66 S.Ct. 154, 90 L.Ed. 95 (1945)). Minimum contacts are have had with the State of Texas were on behalf of [his] established when the nonresident defendant “purposefully former employer, 24Seven (USA) Limited.” The Dontoses avails itself of the privilege of conducting activities within the responded with an affidavit of Jordan Dontos, which they forum State, thus invoking the benefits and protections of its incorporated into their sixth amended petition. The trial laws.” Hanson v. Denckla, 357 U.S. 235, 253, 78 S.Ct. 1228, court denied the special appearance, finding it had specific 2 L.Ed.2d 1283 (1958); Michiana Easy Livin' Country, Inc. jurisdiction over Camac. 3 Camac appealed that ruling. See v. Holten, 168 S.W.3d 777, 784 (Tex.2005). The defendant's *404 TEX. CIV. PRAC. & REM.CODE ANN. § 51.014(a) conduct and connection with the state must be such that it (7) (West 2008) (interlocutory appeal). could reasonably anticipate being sued in the forum state.
See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474–75, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985); Am. Type Culture Collection, Inc. v. Coleman, 83 S.W.3d 801, 806 (Tex.2002).
DISCUSSION
Camac raises several arguments in his single issue challenging the trial court's denial of his special appearance. Standards & Burdens Those include assertions the Dontoses' jurisdictional facts pleaded and contained in Jordan Dontos's affidavit are [7] [8] The question of whether a trial court has personal insufficient, that Camac did not purposefully avail himself jurisdiction over a nonresident defendant is one of law that we of jurisdiction in Texas because his contacts were at the review de novo. Kelly, 301 S.W.3d at 657. When, as here, the direction of his employer, there is no connection between trial court does not issue findings of fact or conclusions of law the facts alleged and the operative facts of the case, and he in support of its special appearance ruling, all facts necessary negated the jurisdictional allegations. We conclude the trial to support the judgment and supported by the evidence are court properly found it had specific jurisdiction over Camac implied. Moki Mac, 221 S.W.3d at 574; BMC Software Belg., and limit our analysis accordingly. N.V. v. Marchand, 83 S.W.3d 789, 795 (Tex.2002).
*405 [9] [10] A defendant claiming it is not amenable to process in Texas must file a verified special appearance Due Process challenging the trial court's exercise of jurisdiction. See TEX.R. CIV. P. 120a; Petrie v. Widby, 194 S.W.3d 168, 174 [1] [2] [3] Personal jurisdiction concerns a court's power (Tex.App.-Dallas 2006, no pet.). The plaintiff bears the initial to bind a particular person or party. CSR Ltd. v. Link, 925 burden of pleading jurisdictional facts sufficient to bring a S.W.2d 591, 594 (Tex.1996) (orig. proceeding). That power nonresident defendant within the provisions of the Texas is grounded in constitutional guarantees of due process. Texas long-arm statute. Kelly, 301 S.W.3d at 658. The plaintiff's courts may exercise personal jurisdiction over a nonresident pleadings and its response to the special appearance may be defendant if the Texas long-arm statute permits the exercise considered in determining whether the plaintiff satisfied its of jurisdiction and the assertion of jurisdiction is consistent burden. Flanagan v. Royal Body Care, Inc., 232 S.W.3d 369, with federal and state constitutional due process guarantees.
374 (Tex.App.-Dallas 2007, pet. denied). The nonresident Kelly v. Gen. Interior Constr., Inc., 301 S.W.3d 653, 657 defendant then carries the burden of negating all bases of (Tex.2010). The requirements of the Texas long-arm statute personal jurisdiction alleged by the plaintiff. Kelly, 301 are considered satisfied if the exercise of personal jurisdiction S.W.3d at 658.
is consistent with federal due process limitations. Id.
[11] [12] [13] The defendant can negate jurisdiction [4] [5] [6] The due process clause of the federal on either a factual or legal basis. Id. at 659. A factual constitution permits a court to exercise personal jurisdiction attack requires the defendant to present evidence that it over a nonresident defendant only when the defendant has
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has no contacts with Texas, effectively disproving the and Jordan Dontos's opposing affidavit is conclusory and plaintiff's allegations. Id. The plaintiff then responds with speculative. its own evidence that affirms its allegations. Id. In a legal attack on specific jurisdiction, the defendant takes the [18] The court determines a special appearance based on the defendant's factual allegations as true. Under this challenge, pleadings and any stipulations, affidavits, and other evidence the defendant may prevail by showing (1) those assumed facts relevant to the jurisdictional dispute. *406 TEX.R. CIV. are insufficient to establish jurisdiction, (2) the defendant's P. 120a(3); Kelly, 301 S.W.3d at 658 n. 4; Flanagan, 232 Texas contacts fall short of purposeful availment, (3) the S.W.3d at 374. In this case, the record consists of the claims do not arise from the contacts, or (4) traditional notions Dontoses' sixth amended petition, Camac's verified special of fair play and substantial justice are offended by the exercise appearance, the affidavit of Jordan Dontos, and Camac's of jurisdiction. Id. supplemental affidavit. We begin with Camac's argument the Dontoses failed to meet their pleading burden.
Specific Jurisdiction The Dontoses' Initial Burden to Plead Jurisdictional Facts [19] Camac asserts the Dontoses' allegations against him [14] [15] [16] [17] A defendant's contacts with a forum are “conclusory” and fail to state “facts showing that Camac can give rise to either specific or general jurisdiction. BMC committed a tort in the state of Texas.” As such, he is Software, 83 S.W.3d at 795–96. Specific jurisdiction is assuming the truth of the allegations and is attempting to established if the defendant's alleged liability arises from negate jurisdiction on a legal basis. See Kelly, 301 S.W.3d at or is related to the defendant's contacts with the state.
659.
Spir Star AG v. Kimich, 310 S.W.3d 868, 873 (Tex.2010). When specific jurisdiction is alleged, the minimum-contacts The Dontoses alleged that Camac committed tortious acts analysis focuses on the relationship among the defendant, in Dallas County, Texas. Specifically, they pleaded the the litigation, and the forum. Retamco Operating, Inc. v.
following jurisdictional allegations as to Camac:
Republic Drilling Co., 278 S.W.3d 333, 338 (Tex.2009); Moki Mac, 221 S.W.3d at 575–76. This analysis requires [Camac] is an individual residing and the court to review whether (1) the defendant purposefully working, at all material times, through availed itself of the privilege of conducting activities in the 24Seven offices in Dallas County, the forum state and (2) whether the operative facts of the Texas. He is or was at all material litigation bear a substantial connection to the defendant's times, Vice President of Franchise contacts with the state. Moki Mac, 221 S.W.3d at 578–79. Sales for [24Seven] and the principal If both these requirements are met, we then must determine spokesman and actor for [24Seven] ... if the exercise of specific jurisdiction over the nonresident in the perpetration of the “shell defendant comports with traditional notions of fair play and game” that is the gravamen of this substantial justice. Asahi Metal Indus. Co., Ltd. v. Superior suit. He was in charge of sales at the Court of Cal., Solano Cnty., 480 U.S. 102, 113, 107 S.Ct.
Dallas office of 24Seven. He met with 1026, 94 L.Ed.2d 92 (1987).
[the Dontoses], in Dallas, on several occasions and communicated with them on a constant and systematic Analysis basis by email and phone both to and from Dallas, Texas.[ ] The Camac argues the trial court erred in denying his special first meeting was March 2, 2007, appearance as to specific personal jurisdiction because (1) he before [the Dontoses] had entered did not purposefully avail himself of jurisdiction in Texas into any agreements with any of the because his contacts were at the direction of his employer, (2) Defendants. At that time, he knew or the Dontoses did not meet their pleading burden of alleging should have known that 24Seven was facts showing Camac committed a tort in Texas, and the facts in dire financial straits, that it was alleged have no connection to the operative facts of the case, in or near receivership and that the and (3) he negated the Dontoses' jurisdictional allegations, Routes were not available. He had a
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duty to pass this information on to described above are, separately and [the Dontoses] but failed to do so. in tandem, purposeful, continuous, Had he done so, [the Dontoses] would systematic and longstanding. The not have entered into the Agreement Affidavit of Jordan Dontos, filed or paid the initial $175,000. He met concurrently herewith, is incorporated with [the Dontoses], in Dallas, after herein by reference. they had entered into the Agreement and paid the $175,000 but before the (Emphasis added). final closing on August 31, 2007. At that time, he represented that The referenced affidavit of Jordan Dontos, which was Routes 116 and 117 were available incorporated into the sixth amended petition, included attestations that:
when he knew or should have known they were not and represented that (1) “Jennifer and I moved to Dallas on July 3, 2007. From the acquisition by Bacon Whitney then until closing, [we] were in constant contact with was a “good deal” because it was Camac, by both phone and email. He was handling the adequately funded and that Bacon sale of the franchise to us.” Whitney would take over the Texas franchises, including [the Dontoses']. (2) “Before July 3rd, he called us and emailed us from Based upon a reasonable reliance on Dallas. He told us that ‘I am in Dallas all the time’. these material representations, [the After July 3rd, we were in Dallas and all of the calls Dontoses] closed and paid the rest and emails came to us in Dallas. Some of them were of the money and incurred the bank from him, in Dallas. He seemed anxious to hurry the loan. All of these statements were closing and we got the impression that he needed to get material to [the Dontoses'] decisions it closed to collect his commission.” and none of them were true. These tortuous [sic] acts of fraud were (3) “After being informed by a fellow franchisee that 24/ committed in Dallas County, Texas Seven was being sold to Bacon Whitney, I immediately and are sufficient specific minimum contacted Camac (via phone from Dallas) with contacts with the State of Texas to questions and concerns as to 1) why we were never confer personal jurisdiction on Camac made aware of the sale and 2) the potential impact in a Texas court; put Camac on it would have on our business, which we were being fair notice that he could be sued pressured (by Camac) to close as fast as possible. He in Texas as required by traditional was not forthcoming with any details about the sale, notions of fair play and substantial but assured us that it was good for us because [Halpert justice and the U.S. Constitution and & Denny, the financial backers for Bacon Whitney] the laws of the State of Texas. Also, were very well-funded so we wouldn't have to deal with his title, duties and apparent authority the financial or processing deficiencies of 24/Seven. He and constant presence in Texas as presented it as a more attractive alternative to 24/Seven “Head of Sales” of the Dallas Office —as if we were getting out of a bad deal—which was constitutes sufficient general contact more alarming given the fact we were never under the with the State of Texas to confer impression there was anything wrong with 24/Seven to personal jurisdiction on Camac in a begin with.” Texas court; put Camac on fair notice that he could be sued in Texas as (4) “After that phone call, we met Camac at the company required by the traditional notions warehouse in Dallas. Again he indicated the sale was of fair play and substantial justice best for everyone without giving any specifics. Just that and the U.S. Constitution and the we'd be better off because they would be able to better Laws of the State of Texas. Both the focus on the franchise model and franchisee needs, specific and general *407 contacts as well as obtain more clients and routes to sell. We
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went to dinner that evening and at the bar, while we they did not allege facts demonstrating Camac had a duty to waited for a table, I again tried to get information tell them 24Seven was in financial trouble or that the routes about the sale and Camac tried to avoid the subject by were unavailable. Even if Camac were correct, his complaints simply offering the same re-assurance that the sale was go to the merits of the Dontoses' claims. And in reviewing nothing but positive and not to worry.” an order denying a special appearance, we are not concerned with the merits of the plaintiff's claims. See Michiana, 168 (5) “If Camac had given us any information it would have S.W.3d at 790–91.
changed our decision to move forward with the deal. He never indicated that the sale would not even include our The Dontoses were required to plead sufficient allegations to franchise as an asset, (in fact, to the contrary, he lead us bring Camac within the reach of Texas's long-arm statute. See to believe it would) that we weren't even really part of Kelly, 301 S.W.3d at 658. Based on the specific allegations the same group in Dallas even though we were managed described above that Camac committed tortious acts in as such, and he certainly never told us of the financial Texas by misrepresenting the routes the Dontoses were difficulties at 24/7 at any point in the sales process.” acquiring as franchisees in Texas, the meetings in Texas at which the allegedly fraudulent statements were made, (6) “When he met with [us] in Dallas, the second the constant and systematic calls and e-mails to and from time, after we had entered into the Agreement and Texas regarding the acquisition, the reliance by the Dontoses paid the $175,000 but before the final closing on on those representations by acquiring substantial debt and August 31, 2007, he again represented that Routes leaving their home and moving to Texas, and Camac's role 116 and 117 were available when he *408 knew or as the principal spokesman and actor in the “perpetration should have known they were not and represented of the ‘shell game’ that is the gravamen” of the lawsuit, that the acquisition by Bacon Whitney was a ‘good we conclude the Dontoses satisfied their initial burden—
deal’ because it was adequately funded and that even if we do not consider the affidavit incorporated into Bacon Whitney would take over the Texas franchises, the pleading. See TEX. CIV. PRAC. & REM.CODE ANN. § including our Franchise.”
17.042(2) (West 2008) (allowing personal jurisdiction for any tort committed “in whole or in part” in Texas). We therefore (7) “Also, he told us his title, duties and apparent overrule Camac's sole issue to that extent.
authority were as “Head of sales” for the Dallas Office.”
Substantial Connection (8) “Because of his position with the 24/Seven, Brad [21] [22] Camac also argues he is not subject to the Camac knew or should have known that these Routes jurisdiction of the trial court because the allegations have no were not available and of the financial condition of the connection to the operative facts of the case. This argument VTL Group, 24Seven and Bacon Whitney.”
also assumes the truth of the allegations and is a legal (9) “Brad Camac was instrumental in obtaining and challenge to the second requirement for specific jurisdiction:
closing this loan through emails and phone calls made whether Camac's liability arises from or relates to his Texas from and to Dallas, Texas. The loan was set to close on contacts. Moki Mac, 221 S.W.3d at 579. In making this August 30 but it was delayed (by Camac) until August determination, we focus our analysis on the relationship 31. The reason for the delay, we found out later, was the among the defendant, the litigation, and forum. Id. at 575–76. transfer from 24/Seven to Bacon Whitney.”
*409 The Dontoses claim as to Camac that he was the (Emphasis added). “principal spokesman and actor” in the fraud perpetrated on them by all ten defendants. They specifically rely on [20] Camac asserts the allegations are vague and conclusory alleged representations and omissions by Camac during because the Dontoses did not set forth any facts to support meetings in Texas: (1) in the March 2007 meeting with the the allegations. For example, he contends that although the Dontoses in Dallas, Camac misrepresented the availability Dontoses alleged they were not told in the March 2007 of the promised routes and did not tell them 24Seven was meeting that 24Seven was facing financial difficulties, he facing financial difficulties; (2) in the meeting in Dallas argues they did not allege facts substantiating that claim that before their closing in August 2007, the Dontoses alleged 24Seven was actually in such condition. He further contends Camac again misrepresented the availability of the routes
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and the specifics regarding 24Seven's acquisition by Bacon of the ten defendants sued by the Dontoses. Bruno was Whitney (that the acquisition was a “good deal” and that the president of Bacon Whitney and met with the Dontoses Bacon Whitney would take over their franchise) and did not and other Texas franchisees in Dallas in November 2007 tell them relevant information about the acquisition (such to evaluate the Texas franchises before Bacon Whitney as, that Bacon Whitney would not be taking over their determined which ones to take over. Id. at 779. Bruno filed franchise but would be collecting their franchise fees). Based a special appearance, which was granted, and this Court on those allegations, the Dontoses assert causes of action for affirmed because the Dontoses “fail[ed] to establish any federal and state franchise disclosure rule violations, DTPA substantive connection between Bruno's contacts with Texas violations, fraud, breach of the franchise agreement, and and the operative facts of the litigation.” *410 Id. at 781. In interference with contractual or business relationships. reaching this conclusion, the Court emphasized that neither Bruno nor Bacon Whitney were parties to the franchise In arguing the Dontoses' liability theories are unrelated to agreement and did not play any role in inducing the Dontoses the operative facts, Camac goes through each cause of action to enter into the agreement or buy the routes or franchise from separately. He maintains: (1) the facts do not set forth a 24Seven. Id. violation of the FTC franchise rule, the business opportunity act, or DTPA; (2) any violation of the Washington franchise Unlike the allegations against Bruno, the Dontoses alleged act necessarily occurred in that state and not Texas; (3) the Camac, through false representations and omissions, allegations do not amount to fraud because the Dontoses encouraged them ultimately to close on the deal. Thus, must show the representations were material and were made the focus at trial will be the role he played in inducing knowingly or recklessly; (4) there is no allegation Camac them to enter into the franchise agreement and purchase the was a party to the franchise agreement; and (5) the Dontoses vending machine routes, as well as the effect his statements alleged no act of interference by Camac. He asserts the had on their decision to move forward with the deal. We Dontoses' “allegations against Camac are an attempt to therefore conclude the operative facts of the Dontoses' claims establish personal jurisdiction, not a cause of action.” are substantially connected to Camac's Texas contacts and overrule his issue to that extent.
[23] We observe first that we need not address each cause of action separately in conducting a “relatedness” analysis because all of the Dontoses' claims are based on the same Camac's Burden to Negate All Bases of Personal forum contacts. See Touradji v. Beach Capital P'ship, L.P., Jurisdiction 316 S.W.3d 15, 26 (Tex.App.-Houston [1st Dist.] 2010, no Once the Dontoses met their pleading burden, it became pet.). Additionally, Camac's arguments go to the merits of Camac's burden of negating, with evidence, all bases of the Dontoses' claims-that is, whether causes of action have personal jurisdiction alleged by the Dontoses. See Kelly, 301 been pleaded or can exist on the facts alleged. At the special S.W.3d at 658. He argues he did that. We therefore look to appearance stage, the merits of a claim are not at issue, and his verified special appearance and supplemental affidavit to we do not determine whether any claim asserted is viable. evaluate Camac's contention. Rather, in determining whether the Dontoses' claims arise from or relate to Camac's Texas contacts, we look for a In his special appearance, Camac argued the Dontoses failed connection between those claims and the operative facts of to allege “any specific contacts between Camac and Texas” the litigation. Moki Mac, 221 S.W.3d at 585. The operative and asserted the fiduciary shield doctrine protected him from facts are those that will be the focus of the trial. See id.; see personal jurisdiction in Texas because his only contacts also Pulmosan Safety Equip. Corp. v. Lamb, 273 S.W.3d 829, arose “solely in his capacity as an employee” of 24Seven, 839 (Tex.App.-Houston [14th Dist.] 2008, pet. denied). Here, the Dontoses' franchisor. The only bases Camac verified to the relevant focus is the Dontoses' allegations Camac was negate personal jurisdiction were that he (1) was a resident of the main actor in the fraudulent “shell game” perpetrated on California, (2) did not maintain a physical address, post office them. box, telephone number, or bank account in Texas, and (3)
“in his individual capacity” (a) had not engaged in business This point is to be distinguished from the conclusion reached in Texas, (b) did not maintain a place of business in Texas, by a panel of this Court in Dontos v. Bruno, 339 S.W.3d 777 (c) did not have employees or agents in Texas, (d) had not (Tex.App.-Dallas 2011, no pet.). Mark Bruno was another availed himself of the benefits and privileges of conducting
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activities in Texas, (e) had not committed a tort in Texas, principle that “jurisdiction over an individual cannot be and (f) did not own, lease, or rent real property or other based upon jurisdiction over a corporation.” Nichols v. assets in Texas. In his supplemental affidavit, Camac averred Tseng Hsiang Lin, 282 S.W.3d 743, 750 (Tex.App.-Dallas further that (1) all his dealings with the Dontoses were in his 2009, no pet.). Thus, a nonresident corporate officer or capacity as an employee or officer of 24Seven, (2) he never employee is protected from the trial court's exercise of acted in his individual capacity in any dealings, transactions, general jurisdiction over him when his only contacts with communications, meetings, correspondence, conversations, Texas were made on behalf of his employer. Siskind v. Villa “or the like” with the Dontoses, (3) he had not entered Found. for Educ., Inc., 642 S.W.2d 434, 438 (Tex.1982) into any contracts or agreements with the Dontoses in his (“Absent some allegation of a specific act in Texas, or one “individual capacity,” (4) he had not received any money with reasonably foreseeable consequences within this state's from the Dontoses, (5) he was a salaried employee of 24Seven borders, a nonresident employee of a foreign corporation and did not work on a commission basis or receive any money cannot be sued in Texas simply because his or her employer for execution of the franchise agreement, and (6) “[d]uring the solicits business here.”). relevant time period referred to” in Jordan Dontos's affidavit and in the petition, he worked in the 24Seven office in Los [27] [28] But one's status as an employee does not Angeles, and not in Texas. necessarily insulate him from jurisdiction. See Calder v.
Jones, 465 U.S. 783, 790, 104 S.Ct. 1482, 79 L.Ed.2d 804 In short, Camac provided verification that he had no (1984). The doctrine does not protect a corporate officer or individual contacts with Texas and everything he did was as employee from a trial court's exercise of specific jurisdiction an employee or officer of 24Seven. Significantly, he did not as to intentional torts or fraudulent acts for which he may negate any of the Dontoses' allegations and evidence that he be held individually liable. Wright v. Sage Eng'g, Inc., was in constant contact with the Dontoses in Texas by phone 137 S.W.3d 238, 250 (Tex.App.-Houston [1st Dist.] 2004, and e-mail, he misrepresented the promised routes, he assured pet. denied); SITQ E.U., Inc. v. Reata Rests., Inc., 111 them Bacon Whitney was well-funded, he failed to advise S.W.3d 638, 651 (Tex.App.-Fort Worth 2003, pet. denied). them of the financial and processing deficiencies of 24Seven, Instead, it is well settled that a corporate agent or officer he met with them in Dallas, he “told” them his title and duties may be held personally liable for fraudulent statements or with 24Seven were as “Head of Sales” for the Dallas office, knowing misrepresentations, even when the statements or and he handled the Dontoses' purchase of the Texas franchise. representations are made in his capacity as a corporate He further admits that he was the Vice President for 24Seven's representative. Wright, 137 S.W.3d at 250. Thus, under Franchise Sales. those principles, a nonresident who travels to Texas and makes purportedly fraudulent statements is subject to specific *411 [24] [25] It is only when a plaintiff fails to plead jurisdiction in Texas. Petrie, 194 S.W.3d at 175; Stein v. jurisdictional allegations that a nonresident defendant can Deason, 165 S.W.3d 406, 415 (Tex.App.-Dallas 2005, no satisfy its burden simply by presenting evidence that it is a pet.). nonresident. See id. at 659 & n. 5. Because the Dontoses satisfied their pleading burden, Camac had to do more than Here, having failed to refute the Dontoses' allegations (and show he was a nonresident in order to negate all bases related evidence) of his purportedly fraudulent statements, for jurisdiction. Camac failed to do so—rather, he asserted Camac has failed to negate all bases for the Texas court's he is not liable because his actions were as an officer and exercise of specific jurisdiction as to his acts. That employee of 24Seven. We therefore consider whether he can Camac's actions may have been taken on behalf of 24Seven insulate himself from the Dontoses' allegations of personal only does not alter the jurisdictional inquiry. Accordingly, jurisdiction on that basis. we overrule Camac's issue to the extent he contends he negated the Dontoses' jurisdictional allegations as to specific [26] In his special appearance, Camac cites the fiduciary jurisdiction. 4 shield doctrine as the basis for negating personal jurisdiction; on appeal, he asserts simply that the contacts he made in his corporate capacity should not count against him *412 Purposeful Availment for purposes of personal jurisdiction when he is sued [29] [30] Finally, Camac argues he did not purposefully individually. The fiduciary shield doctrine is based on the avail himself of jurisdiction in Texas. Minimum contacts
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with the forum state are established when the nonresident Applying the three parts of our “purposeful availment” defendant “purposefully avails itself of the privilege of inquiry to this record, we conclude Camac has not shown conducting activities within the forum State, thus invoking he negated the Dontoses' allegations he purposefully availed the benefits and protections of its laws.” Hanson, 357 U.S. himself of benefits of the forum. The first two points are at 253, 78 S.Ct. 1228. There are three aspects to our inapplicable—it is Camac's contacts that are being counted, “purposeful availment” inquiry. See Michiana, 168 S.W.3d and they are not “random, isolated, or fortuitous.” Michiana, at 785. First, only the defendant's contacts with the forum 168 S.W.3d at 785. He admits he was the Vice President state count, not the unilateral activity of another. Id. Second, of Franchise Sales for 24Seven. As to the third question the contacts relied upon must be “purposeful,” rather than of whether Camac *413 “availed” himself of the forum's “random, isolated, or fortuitous.” Id. (quoting Keeton v. laws or protection by seeking some benefit, advantage, or Hustler Magazine, Inc., 465 U.S. 770, 774, 104 S.Ct. 1473, profit, the fact that he did not receive a “commission” on the 79 L.Ed.2d 790 (1984)). Third, the nonresident defendant Dontoses' sale is not conclusive. He has not denied that as must “avail” himself of the jurisdiction by seeking some an officer in charge of franchise sales it was to his personal benefit, advantage, or profit. Id. (“Jurisdiction is premised on advantage or benefit to complete the transaction, especially notions of implied consent—that by invoking the benefits and at a time when the company was in dire financial straights protections of a forum's laws, a nonresident consents to suit according to the Dontoses' allegations. there.”).
Regardless of whether the Dontoses' claims have merit or Within the context of the special appearance proceeding, whether Camac ultimately is held liable for the actions Camac offered no evidence refuting the Dontoses' claims as he performed in connection with his employment with alleged and as attested in Jordan's affidavit about the financial 24Seven, Camac's contacts with Texas are sufficient to satisfy state of 24Seven, the availability of the promised routes, and the jurisdictional requirement that he purposefully availed the specifics of the Bacon Whitney acquisition. Significantly, himself of the laws of Texas. And he reasonably could Camac does not dispute that the alleged misrepresentations have anticipated being sued in Texas for the consequences and omissions were made in Texas. Rather, Camac contends of misrepresentations or omissions in connection with his contacts “resulted from the decisions of his employer, those franchise contacts. See Petrie, 194 S.W.3d at 175 24Seven” and “were in the course of his employment by (nonresident who travels to Texas and makes purportedly 24Seven, for the purpose of performing 24Seven's business.” fraudulent statements is subject to specific jurisdiction in Texas); Deason, 165 S.W.3d at 415 (same). The Dontoses'
As described above, the fiduciary shield doctrine does not allegations were sufficient to support the trial court's implied protect a corporate officer or employee from a trial court's finding that Camac purposefully established minimum exercise of specific jurisdiction as to intentional torts or contacts with Texas to support specific jurisdiction. fraudulent acts for which he may be held individually liable. Wright, 137 S.W.3d at 250; SITQ, 111 S.W.3d at 651. Camac did not address the purposefulness of his Texas contacts Fair Play and Substantial Justice or deny he made the representations or failed to disclose [31] [32] [33] Once minimum contacts sufficient to information. Nor did he refute the Dontoses' statements they support jurisdiction are established, we must consider these would not have entered into the agreement had they known contacts in light of other factors to determine whether the trial the truth or received the omitted information. Camac asserts court's assertion of personal jurisdiction over a nonresident only that “any contacts [he] may have had with the State defendant would offend traditional notions of fair play and of Texas were on behalf of [his] former employer, 24Seven substantial justice. See Asahi Metal Indus. Co., 480 U.S. at (USA) Limited.” In that context and in response to Jordan's 113. In making this determination, we look to (1) the burden statement in his affidavit he and his wife “got the impression on the defendant; (2) the forum state's interest in adjudicating [Camac] needed to get [the purchase] closed to collect his the dispute; (3) the plaintiff's interest in obtaining relief; (4) commission,” Camac denied in his supplemental affidavit the interstate judicial system's interest in obtaining efficient that he received a commission for the transaction with the resolution of controversies; and (5) the shared interest of Dontoses. the several states in furthering substantive social policies.
Id.; Spir Star AG, 310 S.W.3d at 878. Camac bears the burden of presenting “ ‘a compelling case that the presence of some consideration would render jurisdiction unreasonable’
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Even if Camac had presented something for us to review, ” to defeat jurisdiction. Spir Star AG, 310 S.W.3d at 879 once a court determines that a nonresident defendant has (quoting Guardian Royal Exch. Assurance, Ltd. v. English purposefully established minimum contacts, only in “rare China Clays, P.L.C., 815 S.W.2d 223, 231 (Tex.1991)).
cases” will the exercise of jurisdiction not comport with fair play and substantial justice. Deason, 165 S.W.3d at 415 Although he generally asserted in the trial court that (citing Guardian Royal, 815 S.W.2d at 231). This is not such a the “assumption of jurisdiction” over him would “offend rare case. See Petrie, 194 S.W.3d at 176; Deason, 165 S.W.3d traditional notions of fair play and substantial justice” and at 415.
would deprive him of “the right to due process,” he made no argument as to why the trial court's exercise of jurisdiction would be unfair. And on appeal, Camac has offered no authority or argument as to the factors we must consider in *414 CONCLUSION making the determination of whether the trial court's assertion of jurisdiction over him would offend notions of fair play and Based on our review of the pleadings and affidavits, we substantial justice; he does not address this part of our analysis conclude Camac had contacts with Texas out of which the at all in his opening brief or reply brief. When a party fails Dontoses' claims arose. Consequently, the trial court properly to adequately brief a contention, he presents nothing for our denied Camac's special appearance. We affirm the trial court's review. TEX.R.APP. P. 38.1(i); Devine v. Dallas Cnty., 130 order and overrule Camac's sole issue. S.W.3d 512, 512–14 (Tex.App.-Dallas 1999, pet. denied). Accordingly, we conclude Camac did not meet his burden.
All Citations
390 S.W.3d 398
Footnotes 1 Crave, LLC is a Texas limited liability company the Dontoses formed to enter into the vending machine franchise as described below.
2 The remaining defendants include 24Seven, VTL Group Limited, which was the parent or sister company of 24Seven, Vending Technology Limited, which is another company affiliated with 24Seven and VTL, Bacon Whitney, the bank that loaned the Dontoses the purchase money, and various individuals involved in the process. The other defendants are not parties to this appeal.
3 The Dontoses had alleged both general and specific jurisdiction. The transcript of the hearing is not part of the record before us. In its order, the trial court stated it reviewed the pleadings and affidavits filed, as well as considered arguments of counsel. The affidavits are part of our record. The Dontoses' sixth amended petition was the live pleading at the time of the trial court's ruling on Camac's special appearance.
4 Accordingly, we do not need to analyze further Camac's complaint Jordan's affidavit was defective because it was not made on personal knowledge, did not set forth facts that would be admissible in evidence, and did not show that Jordan was competent to testify. He further characterized Jordan's affidavit as conclusory and lacking foundation. Camac cites several statements in which he claims Jordan either “failed to set forth the factual basis for his statements” or did not explain how he knew the information. We observe, however, that beyond the affidavit recital that the statements were made based on Jordan's personal knowledge, the facts in the affidavit showed the statements were made based on his personal meetings and communications with Camac. Camac's arguments regarding details of Camac's knowledge and the meetings and other communications go to proof. As described above, the allegations and supporting affidavit statements were sufficient for purposes of the Dontoses' jurisdictional allegations, and Camac did not refute those statements.
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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)
Presumptions and Burden of Proof as to Jurisdiction 305 S.W.3d 269 Court of Appeals of Texas, The plaintiff bears the initial burden of pleading Houston (14th Dist.). sufficient allegations to bring a nonresident within the provisions of the Texas long-arm CITRIN HOLDINGS, LLC, Jacob statute, and burden then shifts to nonresident Citrin, Cargo Investors LLC, and defendant to negate all bases of personal Cargo Investors II LLC, Appellants, jurisdiction asserted by plaintiff. V.T.C.A., Civil v. Practice & Remedies Code § 17.042.
Matthew MINNIS and Cullen 130, LLC, Appellees.
Cases that cite this headnote No. 14–09–00186–CV. | Dec. 8, 2009.
[3] Appeal and Error Synopsis Questions of jurisdiction Background: Texas resident brought claims for fraud, Appellate court will not resolve any meritsfraudulent inducement, breach of contract, breach of fiduciary based questions on an appeal regarding a special duty, and negligent misrepresentation against New York appearance to contest personal jurisdiction.
resident and nonresident corporate defendants in connection Vernon's Ann.Texas Rules Civ.Proc., Rule 120a.
with business relationships relating to real estate transactions. The 133rd District Court, Harris County, Jaclanel McFarland, 1 Cases that cite this headnote J., denied defendants' special appearances to contest personal jurisdiction. Defendants appealed.
[4] Courts Business contacts and activities;
transacting or doing business [Holding:] The Court of Appeals, William J. Boyce, J., The broad language of long-arm statute's “does held that Texas had specific jurisdiction under due process business” requirement for exercise of personal “minimum contacts” analysis over both individual and jurisdiction reaches to the full extent authorized corporate nonresident defendants.
by federal due process requirements. U.S.C.A. Const.Amend. 14; V.T.C.A., Civil Practice & Affirmed. Remedies Code § 17.042.
Cases that cite this headnote
West Headnotes (40)
[5] Courts Actions by or Against Nonresidents, [1] Appeal and Error Personal Jurisdiction In; “Long-Arm”
Cases Triable in Appellate Court Jurisdiction Determining whether a trial court has personal Long-arm statute's requirements for exercise jurisdiction over a defendant presents a question of personal jurisdiction over a nonresident of law subject to de novo review. defendant are satisfied if the exercise of personal jurisdiction comports with federal due Cases that cite this headnote process requirements. U.S.C.A. Const.Amend.
14; V.T.C.A., Civil Practice & Remedies Code [2] Courts § 17.042.
Allegations, pleadings, and affidavits Cases that cite this headnote Courts
[6] Constitutional Law
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Non-residents in general forum state by structuring its transactions to Federal due process requirements for exercise neither profit from state's laws nor subject itself of personal jurisdiction over a nonresident to personal jurisdiction. U.S.C.A. Const.Amend. defendant are satisfied if (1) the nonresident 14. defendant has “minimum contacts” with forum 1 Cases that cite this headnote state and (2) the exercise of personal jurisdiction does not offend traditional notions of fair play and substantial justice. U.S.C.A. Const.Amend. [10] Constitutional Law 14. Non-residents in general Nonresident defendant's contacts with forum Cases that cite this headnote must be considered as a whole and not in isolation, focusing on the nature and quality [7] Constitutional Law of the contacts, in context of jurisdictional due Non-residents in general process analysis. U.S.C.A. Const.Amend. 14.
Minimum contacts are sufficient, under due Cases that cite this headnote process requirements for exercising personal jurisdiction over a nonresident defendant, when defendant purposefully avails itself of the [11] Constitutional Law privilege of conducting activities within the Non-residents in general forum state, thus invoking the benefits and When there are multiple nonresident defendants, protections of its laws. U.S.C.A. Const.Amend. the contacts of each defendant with forum must 14. be analyzed individually in determining whether exercise of personal jurisdiction comports with Cases that cite this headnote due process. U.S.C.A. Const.Amend. 14.
[8] Constitutional Law 1 Cases that cite this headnote Non-residents in general Three key principles govern analysis of whether [12] Constitutional Law nonresident defendant has purposefully availed Non-residents in general itself of privilege of conducting business in When specific jurisdiction is asserted against forum state, as requirement under due process a nonresident defendant, the court focuses on principles for exercise of personal jurisdiction: the relationship between the defendant, the first, the court considers the defendant's own forum, and the litigation when performing due actions and does not consider the unilateral process “minimum contacts” analysis. U.S.C.A. activity of another party; second, the court Const.Amend. 14. considers whether the defendant's actions were purposeful rather than random, isolated, or Cases that cite this headnote fortuitous; third, the defendant must seek some benefit, advantage, or profit by availing itself of [13] Constitutional Law the privilege of doing business in forum state. Non-residents in general U.S.C.A. Const.Amend. 14.
The cause of action must arise from or relate Cases that cite this headnote to the nonresident defendant's contacts with the forum in order to permit exercise of specific jurisdiction under due process “minimum [9] Constitutional Law contacts” analysis. U.S.C.A. Const.Amend. 14.
Non-residents in general In context of jurisdictional due process analysis, Cases that cite this headnote a nonresident defendant may purposefully avoid
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Court examines the nonresident defendant's [14] Constitutional Law contacts and forum-related activities up to Non-residents in general the time suit was filed in determining under Specific jurisdiction over a nonresident due process analysis whether defendant had defendant is established under due process continuous and systematic contacts with forum “minimum contacts” analysis if (1) the state sufficient to support general jurisdiction. defendant's activities were purposefully directed U.S.C.A. Const.Amend. 14. to the forum state; and (2) there is a substantial connection between the defendant's forum Cases that cite this headnote contacts and the operative facts of the litigation. U.S.C.A. Const.Amend. 14. [19] Courts Presumptions and Burden of Proof as to Cases that cite this headnote Jurisdiction Nonresident defendant must negate all bases [15] Constitutional Law for personal jurisdiction to prevail in a special Non-residents in general appearance to contest jurisdiction. Vernon's An assertion of general jurisdiction over a Ann.Texas Rules Civ.Proc., Rule 120a. nonresident compels a more demanding due process “minimum contacts” analysis than does 1 Cases that cite this headnote an assertion of specific jurisdiction, and requires a showing of substantial activities within the [20] Courts forum. U.S.C.A. Const.Amend. 14. Factors Considered in General
Cases that cite this headnote A single basis for personal jurisdiction is sufficient to confer jurisdiction over a nonresident defendant.
[16] Constitutional Law Non-residents in general 2 Cases that cite this headnote Under due process principles, the cause of action need not arise from or relate to the [21] Courts nonresident defendant's contacts with the forum Unrelated contacts and activities; general if general jurisdiction over defendant exists. jurisdiction U.S.C.A. Const.Amend. 14.
Courts 1 Cases that cite this headnote Related contacts and activities; specific jurisdiction The court need not address general jurisdiction if [17] Constitutional Law it finds that a nonresident defendant is subject to Non-residents in general specific jurisdiction.
Under due process analysis, general jurisdiction over a nonresident defendant is “dispute blind” 3 Cases that cite this headnote and requires contacts with forum state of a continuous and systematic nature. U.S.C.A.
[22] Courts Const.Amend. 14.
Related contacts and activities; specific Cases that cite this headnote jurisdiction If the court finds specific jurisdiction over a nonresident defendant based on one cause of [18] Constitutional Law action, the court need not address jurisdiction as Non-residents in general to any other causes of action.
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Appearance 2 Cases that cite this headnote Operation and Effect in General Corporations and Business Organizations [23] Constitutional Law Appearance Non-residents in general Individual nonresident defendant was not subject Once the court concludes under due process to personal jurisdiction based on personal analysis that nonresident defendant has sufficient service effected on him following his deposition minimum contacts with the state to establish in action arising from business relationships personal jurisdiction, the defendant bears the among that defendant, a resident plaintiff, and burden of establishing that the exercise of various corporate entities they created to engage personal jurisdiction would offend traditional in real estate transactions, where individual notions of fair play and substantial justice. and corporate defendants timely filed special U.S.C.A. Const.Amend. 14. appearances to contest jurisdiction and parties agreed that depositions were subject to the Cases that cite this headnote special appearance. Vernon's Ann.Texas Rules Civ.Proc., Rule 120a.
[24] Constitutional Law Cases that cite this headnote Non-residents in general To determine under due process analysis whether the exercise of personal jurisdiction [27] Process over nonresident defendant offends traditional Parties notions of fair play and substantial justice, The privilege against process is effective for a the court considers (1) the burden on the nonresident defendant who enters the state solely defendant; (2) the interests in the forum state to contest personal jurisdiction on any matter in adjudicating the dispute; (3) the plaintiff's connected with the contested action. Vernon's interests in obtaining convenient and effective Ann.Texas Rules Civ.Proc., Rule 120a. relief; (4) the interstate judicial system's interest in obtaining the most efficient resolution of Cases that cite this headnote controversies; and (5) the shared interest of the states in furthering fundamental substantive [28] Constitutional Law social policies. U.S.C.A. Const.Amend. 14. Business, business organizations, and corporations in general Cases that cite this headnote Courts Contract disputes [25] Constitutional Law Courts Non-residents in general Torts in general Only in rare cases will the exercise of personal Under due process analysis, Texas court had jurisdiction not comport with fair play and specific jurisdiction over individual nonresident substantial justice, as required under due process defendant on resident plaintiff's contractual principles, when a nonresident defendant has and tort claims involving business relationships purposefully availed itself of the privilege of among plaintiff, defendant, and corporate conducting business within a forum. U.S.C.A.
entities they created to engage in real estate Const.Amend. 14.
transactions; defendant had multiple Texas Cases that cite this headnote contacts over many months that were not unilaterally initiated by plaintiff, those contacts culminated in an operating agreement for [26] Appearance a corporate entity, plaintiff performed his Objections to jurisdiction in general obligations under that agreement in Texas,
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and defendant was also alleged to have made misrepresentations that induced plaintiff to sign 2 Cases that cite this headnote a “we are partners” document in Texas. U.S.C.A. Const.Amend. 14. [32] Constitutional Law Non-residents in general 2 Cases that cite this headnote In conducting due process analysis for personal jurisdiction over nonresident defendant on a tort [29] Constitutional Law claim, court should focus on the defendant's Consent; forum-selection clauses actual contacts with Texas rather than attempting Courts to discern whether a given set of circumstances Contract disputes amounts to “directing” a tort towards Texas.
Courts U.S.C.A. Const.Amend. 14.
Torts in general Cases that cite this headnote Under due process analysis for determining existence of personal jurisdiction of Texas court over New York resident on contractual [33] Constitutional Law and tort claims, New York resident's multiple Non-residents in general Texas-centered contacts outweighed a New York Specific jurisdiction over a nonresident resident choice-of-law provision in operating agreement on a fraud claim is not necessarily established, for corporate entity that he formed with plaintiff under due process “minimum contacts” analysis, for purpose of making real estate transactions. by evidence that nonresident defendant made U.S.C.A. Const.Amend. 14. misrepresentations in a single telephone call to a Texas resident. U.S.C.A. Const.Amend. 14.
1 Cases that cite this headnote Cases that cite this headnote
[30] Constitutional Law Non-residents in general [34] Constitutional Law Standing alone, entering a contract with a Non-residents in general resident of forum state does not necessarily Fraudulent misrepresentations made over a establish minimum contacts sufficient to series of contacts to induce a party to support personal jurisdiction over a nonresident enter a transaction can support personal defendant under due process principles, but jurisdiction over nonresident defendant under a single contract may establish sufficient due process “minimum contacts” analysis. minimum contacts when considered against a U.S.C.A. Const.Amend. 14. backdrop of prior negotiations and contemplated future consequences, along with the terms of the Cases that cite this headnote contract and the parties' actual course of dealing. U.S.C.A. Const.Amend. 14. [35] Constitutional Law Consent; forum-selection clauses 1 Cases that cite this headnote Courts Commercial Contacts and Activities;
[31] Courts Contracts and Transactions Contract disputes A choice-of-law clause selecting the laws Generally, a nonresident defendant party is of a different forum weighs against finding not subject to personal jurisdiction in Texas a nonresident defendant subject to personal on a contractual claim if contract calls for jurisdiction in Texas, but it is merely one performance out of state. V.T.C.A., Civil Practice & Remedies Code § 17.042(1).
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factor to consider under due process “minimum a purpose to do business in Texas. U.S.C.A. contacts” analysis. U.S.C.A. Const.Amend. 14. Const.Amend. 14.
1 Cases that cite this headnote 1 Cases that cite this headnote
[36] Constitutional Law [38] Constitutional Law Business, business organizations, and Business, business organizations, and corporations in general corporations in general Courts Courts Related or affiliated entities; parent and Contract disputes subsidiary Courts Only the contacts with Texas arising at the Torts in general time of and after the creation of Delaware Under due process “minimum contacts” holding company by New York resident would analysis, Texas court had specific personal be considered in analyzing, under due process jurisdiction, with respect to resident plaintiff's principles, whether Texas court could exercise contractual and tort claims, over New York personal jurisdiction over holding company on limited liability company (LLC) and Delaware Texas resident's contractual and tort claims LLC that plaintiff formed with New York arising from business relationships with New resident to engage in real estate transactions; York resident; court could not attribute to plaintiff's activities in Texas were attributable to that corporation a purpose to do business LLCs, were not random, isolated, or fortuitous, in Texas based upon contacts arising before and were designed to confer a benefit on corporation existed and before it conceivably LLCs, and claims at issue arose from and could have done any business anywhere. related to LLCs' contacts with Texas. U.S.C.A. U.S.C.A. Const.Amend. 14. Const.Amend. 14.
1 Cases that cite this headnote Cases that cite this headnote
[37] Constitutional Law [39] Constitutional Law Business, business organizations, and Business, business organizations, and corporations in general corporations in general Courts Constitutional Law Related or affiliated entities; parent and Representatives of organizations; officers, subsidiary agents, and employees Under due process “minimum contacts” Courts analysis, Texas court had specific personal Contract disputes jurisdiction on resident plaintiff's contractual Courts and tort claims over Delaware holding company Torts in general with principal place of business in New York that owned majority interest in a New York Courts company created by plaintiff and New York Jurisdiction of Agents, Representatives, or resident to engage in real estate transactions, Other Third Parties Themselves though operating agreement for the latter entity Under due process analysis, exercise of personal contained a New York choice-of-law provision; jurisdiction by Texas court over individual holding company contracted to create the latter and corporate nonresident defendants would entity, which conducted day-to-day business not offend traditional notions of fair play from 2004 until late 2006 through plaintiff as and substantial justice in contract and tort a Houston-based employee, thereby establishing action by resident plaintiff arising from business
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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)
relationships concerning real estate transactions; individual defendant had twice traveled to Texas Background to meet with plaintiff prior to signing an operating agreement for a corporate defendant, I. Parties that particular corporate defendant had already This case involves claims for fraud, fraudulent inducement, submitted to jurisdiction in Texas, and requiring breach of contract, breach of fiduciary duty, and negligent litigation of claims in multiple jurisdictions misrepresentation arising from business relationships among would be inefficient, burdensome on plaintiff, two individuals and various entities they created to engage in and a waste of juridical resources. U.S.C.A. real estate transactions. There are two plaintiffs: Const.Amend. 14.
• Matthew Minnis, a Texas resident.
Cases that cite this headnote • Cullen 130 LLC, a limited liability company formed under Delaware law. See Del.Code Ann. tit. 6, §§ 18– [40] Constitutional Law 201–18–216 (2009). Cullen 130 was formed in October Non-residents in general 2004 as a holding company for Minnis, who is the sole Due to modern transportation, distance to travel member of Cullen 130. is generally not a significant consideration in determining under due process analysis *275 Minnis and Cullen 130 sued five defendants: whether exercise of personal jurisdiction over nonresident defendant would offend traditional • Jacob Citrin, a New York resident. notions of fair play and substantial justice.
• Citrin Holdings LLC, a limited liability company U.S.C.A. Const.Amend. 14.
formed under Delaware law. See id. Citrin Holdings was Cases that cite this headnote formed on October 6, 2004 as a holding company for Citrin, who is the sole member of Citrin Holdings.
• Cargo Ventures LLC, a limited liability company formed under New York law. See N.Y. Ltd. Liab. Co.
Attorneys and Law Firms §§ 201–214 (McKinney 2009). Citrin originally created Cargo Ventures in December 2003 and served as its *274 Paul D. Clote, Larry R. Veselka, Kristen Lee only member until Citrin and Minnis executed the Cargo Mckeever, Christina A. Bryan, Houston, for Appellants.
Ventures Operating Agreement in October 2004. After Brandon Trent Allen, Jean C. Frizzell, Jennifer Horan Greer, executing the operating agreement, Citrin ceased to be a John Scott Black, Houston, for Appellees. member of Cargo Ventures. From October 2004 onward, Citrin Holdings owned 55 percent of Cargo Ventures and Panel consists of Justices ANDERSON and BOYCE. Cullen 130 owned 45 percent. Citrin and Minnis both signed the operating agreement individually. Citrin is the “manager” of Cargo Ventures.
OPINION • Cargo Investors LLC, a limited liability company WILLIAM J. BOYCE, Justice. formed under Delaware law. See Del.Code Ann. tit. 6, §§ 18–201–18–216. Cargo Investors was formed in March Appellants Jacob Citrin, Citrin Holdings LLC, Cargo 2005. Cargo Investors holds equity interests in real estate Investors LLC, and Cargo Investors II LLC challenge the trial investments in the freight and warehousing markets. court's order denying their special appearances. See Tex. Civ. Citrin Holdings owns 55 percent of Cargo Investors and Prac. & Rem.Code Ann. § 51.014(a)(7) (Vernon 2008). We Cullen 130 owns 45 percent. Citrin is the “manager” of affirm. Cargo Investors.
• Cargo Investors II LLC, a limited liability company formed under Delaware law. Id. Cargo Investors II was
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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)
formed in January 2006. Cargo Investors II holds equity well as their representative capacities on behalf of Citrin interests in real estate investments in the freight and Holdings and Cullen 130. Citrin and Minnis subsequently warehousing markets. Citrin Holdings owns 80 percent signed contracts creating Cargo Investors and Cargo Investors of Cargo Investors II and Cullen 130 owns 20 percent. II to hold equity interests in real estate investments in the Citrin is the “manager” of Cargo Investors II. freight and warehousing markets. Citrin, on behalf of Citrin Holdings, and Minnis, on behalf of Cullen 130, signed the Cargo Investors Operating Agreement in March 2005; they II. Facts signed the Cargo Investors II Operating Agreement in January Matthew Minnis and Jacob Citrin met while Citrin worked 2006. for a company that developed and leased warehouse space at airports. Minnis was a broker for a tenant who leased All three operating agreements obligated Citrin (in his warehouse and office space from Citrin's company in 2003. capacity as “manager”) and Minnis (in his capacity as “the controlling owner of Cullen 130”) to “devote such Citrin traveled to Houston, Texas to meet with Minnis in mid– time, attention, and effort to the Company as is reasonably 2003. Citrin states in an affidavit that the trip's purpose was to necessary for the management of the Company and the celebrate signing the lease. Minnis states in his affidavit that conduct of its business.” Minnis and Cullen 130 maintained he and Citrin began discussions during this trip focused on offices in Houston and operated out of Houston at all relevant starting a business together to purchase, develop, and manage times before and after execution of the Cargo Ventures real estate. Citrin states that “it is possible that Mr. Minnis Operating Agreement in October 2004. The operating and I generally and vaguely discussed the possibility of doing agreement's signature pages listed Houston addresses for further business together” during the 2003 Houston visit, “but Minnis and Cullen 130. According to Minnis's affidavit, “My I did not consider those discussions to be serious....” company, Cullen 130, is based solely in Houston, Texas.
Since its inception, its only place of business has been Citrin and Minnis continued their dialogue into 2004 Houston, Texas.” through telephone calls and e-mails, and during face-to-face discussions in Houston. Citrin traveled to Houston again In furtherance of the operating agreements related to Cargo in mid–2004 to meet with Minnis. During this meeting in Ventures, Cargo Investors, and Cargo Investors II, Minnis Houston, Citrin wrote on a piece of paper the following: asserts in his affidavit that he “actively pursued and developed “We are partners. 55% Jake, 45% Matt.” Citrin and Minnis potential projects, assisted in bringing potential projects both signed this document. Although no copies of this to closing, and participated in the ongoing management document were made and the original has disappeared, and direction of consummated projects, and fulfilled my Citrin and Minnis confirmed the writing's existence in management and decision-making responsibilities for the their affidavits and depositions. Minnis asserts the “we are Cargo Entities based out of Texas.” Minnis further states, partners” document created a partnership agreement. Citrin “From 2004 until late 2006, I conducted business on behalf contends this document is not an enforceable contract. of, and provided services to, the three Cargo Entities on a day-
to-day basis from my office in Houston, Texas.” Citrin and According to Minnis, Citrin made misrepresentations to Citrin Holdings operated out of New York and communicated induce him to sign the “we are partners” document. Minnis with Minnis and Cullen 130 in Houston by telephone, fax, e- alleges *276 that Citrin promised they would be partners; mail, and mail. that the two partners would build a real estate portfolio together; and that Citrin always would act in Minnis's best Cargo Ventures and Cargo Investors entered several interest. Minnis alleges that Citrin made these promises in transactions with Millennium Partners during 2004 and telephone calls, faxes, and e-mails directed to Minnis in 2005. Millennium Partners is partly owned by Citrin's Texas, and in person while Minnis and Citrin met in Houston. father-in-law. In 2005, another entity approached Cargo Ventures and Cargo Investors with an offer to participate In October 2004, the prolonged discussions between Citrin in future transactions on terms more favorable than those and Minnis culminated in a signed contract called the Cargo provided by Millennium Partners. Citrin and Citrin Holdings Ventures Operating Agreement. Citrin Holdings and Cullen wanted to continue transacting with Millennium Partners but 130 became the sole members of Cargo Ventures. Citrin and needed Minnis's consent on behalf of Cullen 130 to do so. Minnis signed the contract in their individual capacities as
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Negotiations continued for several months and ended with [1] Determining whether a trial court has personal Minnis consenting on Cullen 130's behalf to transactions with jurisdiction over a defendant presents a question of law Millennium Partners. subject to de novo review. BMC Software Belg., N.V. v.
Marchand, 83 S.W.3d 789, 794 (Tex.2002).
Minnis and Cullen 130 allege that Citrin made a series of misrepresentations to induce them to consent to transactions Trial courts frequently must resolve fact questions before with Millennium Partners. Minnis and Cullen 130 allege deciding the jurisdictional question. Id. If the trial court does that Citrin and Citrin Holdings promised to (1) grant not sign findings of fact and conclusions of law, all facts Cargo Ventures, Cargo Investors, and Cargo Investors II necessary to support the trial court's ruling and supported *277 greater profit interests in future transactions; and by the evidence are implied in favor of the trial court's (2) restructure certain existing partnerships and business decision. Id. at 794–95. When the appellate record includes relationships to compensate Cargo Ventures, Cargo Investors, the reporter's record and the clerk's record, parties may and Cargo Investors II for entering into less favorable challenge the legal and factual sufficiency of these implied agreements with Millennium Partners. Minnis and Cullen 130 findings. Id. If the appellate court determines that the trial assert that these misrepresentations were made in telephone court's findings are supported by sufficient evidence, or if the calls from Citrin to Minnis and Cullen 130 in Texas. material facts are undisputed, then the appellate court decides as a matter of law whether those facts negate all bases for Citrin, acting through Citrin Holdings, began proceedings personal jurisdiction. Id. to dissolve Cargo Ventures, Cargo Investors, and Cargo Investors II in late 2006. Minnis and Cullen 130 received [2] The plaintiff bears the initial burden of pleading notice in a fax sent to Houston that Citrin Holdings sufficient allegations to bring a nonresident within the had dissolved the three entities. Minnis and Cullen 130 provisions of the Texas long-arm statute. Id.; Cerbone v. subsequently filed this suit against Citrin, Citrin Holdings, Farb, 225 S.W.3d 764, 766–67 (Tex.App.-Houston [14th Cargo Ventures, Cargo Investors, and Cargo Investors II Dist.] 2007, no pet.). The burden then shifts to the nonresident on December 13, 2006 alleging six causes of action: (1) defendant to negate all bases of personal jurisdiction asserted fraud involving alleged misrepresentations relating to the by the plaintiff. Moki Mac River Expeditions v. Drugg, 221 “we are partners” document and the Millennium Partners S.W.3d 569, 574 (Tex.2007); Cerbone, 225 S.W.3d at 767. transactions; (2) breach of contract relating to the “we are partners” document and the Cargo Ventures Operating [3] The court will not resolve any merits-based questions Agreement; (3) breach of fiduciary duty and good faith; (4) on appeal regarding a special appearance. *278 Pulmosan negligent misrepresentation; (5) an action for an accounting; Safety Equip. Corp. v. Lamb, 273 S.W.3d 829, 839 and (6) an action for majority oppression. (Tex.App.-Houston [14th Dist.] 2008, pet. denied).
Defendants Citrin, Citrin Holdings, Cargo Investors, and Cargo Investors II challenged the existence of personal Governing Law jurisdiction in Texas by filing special appearances under Texas Rule of Civil Procedure 120a. The trial court denied the [4] [5] Texas courts may not exercise personal jurisdiction special appearances in an order signed on February 5, 2009. over a nonresident defendant unless federal due process Defendant Cargo Ventures did not file a special appearance. requirements and the Texas long-arm statute are satisfied. Citrin, Citrin Holdings, Cargo Investors, and Cargo Investors See Tex. Civ. Prac. & Rem.Code Ann. § 17.042(1) II timely filed a notice of appeal on February 25, 2009. See (Vernon 2008); Helicopteros Nacionales de Colombia, Tex. Civ. Prac. & Rem.Code Ann. § 51.014(a)(7) (Vernon S.A. v. Hall, 466 U.S. 408, 412–13, 104 S.Ct. 1868, 80 2008). Appellants timely filed a request for findings of fact L.Ed.2d 404 (1984). The Texas long-arm statute authorizes and conclusions of law under Texas Rule of Civil Procedure personal jurisdiction over a nonresident defendant who “does 296; none were filed.
business” in Texas. 1 Tex. Civ. Prac. & Rem.Code Ann. § 17.042; see also Schlobohm v. Schapiro, 784 S.W.2d 355, 356 (Tex.1990) ( “Our long arm statute authorizes the exercise of Standard of Review jurisdiction over those who do business in Texas.”). The long-
arm statute is limited by federal due process requirements;
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the broad language of section 17.042's “does business” Guardian Royal, 815 S.W.2d at 230 n. 11. When there are requirement reaches to the full extent authorized by federal multiple defendants, the contacts of each defendant must be due process requirements. See Moki Mac, 221 S.W.3d at analyzed individually. See Calder v. Jones, 465 U.S. 783, 575; Marchand, 83 S.W.3d at 795; Guardian Royal Exch. 790, 104 S.Ct. 1482, 79 L.Ed.2d 804 (1984); Shapolsky Assurance, Ltd. v. English China Clays, P.L.C., 815 S.W.2d v. Brewton, 56 S.W.3d 120, 135 (Tex.App.-Houston [14th 223, 226 (Tex.1991). Thus, the statute's requirements are Dist.] 2001, pet. denied), disapproved of on other grounds by satisfied if the exercise of personal jurisdiction comports with Michiana Easy Livin' Country, 168 S.W.3d at 788–89. federal due process requirements. See Guardian Royal, 815 S.W.2d at 226. Minimum contacts analysis is further analyzed in terms of (1)
specific jurisdiction; and (2) general jurisdiction.
[6] [7] Federal due process requirements are satisfied if (1) the nonresident defendant has “minimum contacts” with [12] [13] [14] When specific jurisdiction is asserted, Texas; and (2) the exercise of personal jurisdiction over the the court focuses on the relationship between the defendant, nonresident defendant does not offend “traditional notions the forum, and the litigation. Helicopteros, 466 U.S. at of fair play and substantial justice.” See Helicopteros, 466 414, 104 S.Ct. 1868; Moki Mac, 221 S.W.3d at 575–76. U.S. at 412–13, 104 S.Ct. 1868; Moki Mac, 221 S.W.3d at The cause of action must “arise from or relate to” the 575. Minimum contacts are sufficient when a nonresident nonresident defendant's contacts with the forum. Guardian defendant “ ‘purposefully avails itself of the privilege of Royal, 815 S.W.2d at 228. Specific jurisdiction over a conducting activities within the forum state, thus invoking the nonresident defendant is established if (1) the defendant's benefits and protections of its laws.’ ” Moki Mac, 221 S.W.3d activities were purposefully directed to the forum state; and at 575 (quoting Hanson v. Denckla, 357 U.S. 235, 253, 78 (2) there is a substantial connection between the defendant's S.Ct. 1228, 2 L.Ed.2d 1283 (1958)). forum contacts and the operative facts of the litigation. Moki Mac, 221 S.W.3d at 585.
I. Minimum Contacts [15] [16] [17] [18] An assertion of general jurisdiction To determine whether a nonresident defendant has sufficient compels a more demanding minimum contacts analysis and minimum contacts with Texas to support the exercise of requires a showing of substantial activities within the forum. personal jurisdiction, the court must determine whether the See Guardian Royal, 815 S.W.2d at 228. The cause of action nonresident defendant “purposefully availed” itself of the need not “arise from or relate to” the nonresident defendant's privilege of conducting business in Texas. Burger King Corp. contacts with the forum. See id. Rather, general jurisdiction v. Rudzewicz, 471 U.S. 462, 475, 105 S.Ct. 2174, 85 L.Ed.2d is “dispute blind” and requires contacts of a continuous 528 (1985); Michiana Easy Livin' Country, Inc. v. Holten, and systematic nature. See Helicopteros, 466 U.S. at 414– 168 S.W.3d 777, 784 (Tex.2005). Purposeful availment is 16, 104 S.Ct. 1868; Guardian Royal, 815 S.W.2d at 228. the “touchstone of jurisdictional due process.” Michiana Easy Thus, it is more difficult to establish general jurisdiction. Livin' Country, 168 S.W.3d at 784. See Helicopteros, 466 U.S. at 414–16, 104 S.Ct. 1868;
Guardian Royal, 815 S.W.2d at 228. To determine whether [8] [9] [10] [11] Three key principles govern analysisa nonresident defendant had continuous and systematic of purposeful availment. Id. at 785. First, the court considers contacts with Texas sufficient to support general jurisdiction, the defendant's own actions; it does not consider the unilateral the court examines the defendant's contacts and forum-related activity of another party. Id. Second, the court considers activities up to the time suit was filed. PHC–Minden, L.P. v. whether *279 the defendant's actions were purposeful Kimberly–Clark Corp., 235 S.W.3d 163, 170 (Tex.2007). rather than “random, isolated, or fortuitous.” Id. Third, the defendant must seek “some benefit, advantage, or profit by [19] [20] [21] [22] The defendant must negate all bases availing itself” of the privilege of doing business in Texas. for personal jurisdiction to prevail in a special appearance. Id. A defendant may purposefully avoid Texas by structuring See Shapolsky, 56 S.W.3d at 135. A single basis for its transactions to neither profit from Texas's laws nor subject personal jurisdiction is sufficient to confer jurisdiction over itself to personal jurisdiction. Burger King, 471 U.S. at a defendant. See id. The court need not address general 472, 105 S.Ct. 2174; Moki Mac, 221 S.W.3d at 575. The jurisdiction if it finds that a defendant is subject to specific defendant's contacts must be considered as a whole and not in jurisdiction. See id. If the court finds specific jurisdiction over isolation, focusing on the nature and quality of the contacts.
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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)
a defendant based on one cause of action, the court need not address jurisdiction as to any other causes of action. See id. A. Personal Service [26] Citrin filed his special appearance on April 13, 2007. On January 16, 2009, the trial court signed an order II. Fair Play and Substantial Justice compelling Citrin to appear for deposition by January 23, [23] Once the court concludes that the defendant has 2009. The trial court limited the scope of the deposition sufficient minimum contacts with the state to establish to “any pending or potential transactions, and any efforts personal jurisdiction, the defendant bears the burden of associated therewith, by any Defendant or affiliated person establishing that the exercise of personal jurisdiction would or entity, that would in any way affect, transfer, diminish, or offend traditional notions of fair play and substantial justice. dilute the assets made subject to Plaintiffs' claims.” Conner v. ContiCarriers & Terminals, *280 Inc., 944 S.W.2d 405, 411 (Tex.App.-Houston [14th Dist.] 1997, no Minnis and Cullen 130 effected personal service on Citrin writ). after his deposition was concluded on January 23, 2009.
Relying on Oates v. Blackburn, 430 S.W.2d 400, 402–03 [24] [25] To determine whether the exercise of personal (Tex.App.-Houston [14th Dist.] 1968, writ ref'd n.r.e.), they jurisdiction offends traditional notions of fair play and contend that personal service of process on Citrin in Texas is substantial justice, the court considers (1) the burden on the sufficient to establish personal jurisdiction in Texas. defendant; (2) the interests in the forum state in adjudicating the dispute; (3) the plaintiff's interests in obtaining convenient [27] We reject Minnis's and Cullen 130's contention in light and effective relief; (4) the interstate judicial system's interest of the parties' course of conduct. It is undisputed that Citrin, in obtaining the most efficient resolution of controversies; and Citrin Holdings, Cargo Investors, and Cargo Investors II (5) the shared interest of the states in furthering fundamental timely filed special appearances. “The issuance of process for substantive social policies. Burger King, 471 U.S. at 476– witnesses, the taking of depositions, the serving of requests 77, 105 S.Ct. 2174; Guardian Royal, 815 S.W.2d at 228. for admissions, and the use of discovery processes, shall Only in rare cases will the exercise of personal jurisdiction not constitute a waiver of such special appearance.” Tex.R. not comport with fair play and substantial justice when a Civ. P. 120a. “Every appearance, prior to judgment, not in nonresident defendant has purposefully availed itself of the compliance with this rule is a general appearance.” Id. The privilege of conducting business within a forum. Guardian “privilege against process is effective for a defendant who Royal, 815 S.W.2d at 231. enters the state solely to contest jurisdiction under Rule 120a on any matter connected with the contested action.” Oates, 430 S.W.2d at 403. Consistent with Rule 120a, counsel for Minnis and Cullen 130 stated during a January 13, 2009 Analysis hearing that “[w]e've been operating under the impression and Appellants Citrin, Citrin Holdings, Cargo Investors, and with the agreement that depositions are subject to the special Cargo Investors II contend the trial court erred in denying appearance....” their respective special appearances. We address each appellant in turn. *281 In light of the parties' agreement—acknowledged on the record by counsel for Minnis and Cullen 130—we conclude that Citrin is not subject to personal jurisdiction I. Jacob Citrin in this matter based on personal service effected upon him Minnis and Cullen 130 assert that personal jurisdiction over following his deposition. 2 Citrin is established because they effected personal service on him, and because the minimum contacts standard is satisfied. Minnis and Cullen 130 contend Citrin is subject to B. Minimum Contacts specific jurisdiction based on (1) the existence of long-term [28] [29] We next consider whether Citrin purposefully contractual relationships with Minnis and Cullen 130; and availed himself of the privilege of doing business in Texas. (2) misrepresentations Citrin allegedly made to Minnis and The circumstances relating to Citrin individually involve Cullen 130. Minnis and Cullen 130 do not contend that Citrin analysis of contacts relating to contract and tort claims. is subject to general jurisdiction in Texas.
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[30] Standing alone, entering a contract with a Texas Country teaches that courts should focus their jurisdictional resident does not necessarily establish minimum contacts analysis on the defendant's actual contacts rather than sufficient to support personal jurisdiction. Burger King, 471 attempting to discern whether a given set of circumstances U.S. at 478–79, 105 S.Ct. 2174; Nogle & Black Aviation, amounts to “directing” a tort towards Texas. See id. at 791. Inc. v. Faveretto, 290 S.W.3d 277, 283 (Tex.App.-Houston Because minimum contacts analysis addresses the actions [14th Dist.] 2009, no pet.); Ashdon, Inc. v. Gary Brown & and reasonable expectations of the nonresident defendant, Assocs., 260 S.W.3d 101, 113 (Tex.App.-Houston [1st Dist.] this court will weigh Citrin's alleged conduct in terms of 2008, no pet.); Olympia Capital Assocs., L.P. v. Jackson, its significance as evidence of contacts between Citrin and 247 S.W.3d 399, 417 (Tex.App.-Dallas 2008, no pet.). But Texas. See id. a single contract may establish sufficient minimum contacts when considered against a backdrop of “prior negotiations [33] [34] Specific jurisdiction is not necessarily and contemplated future consequences, along with the terms established by evidence that a nonresident defendant made of the contract and the parties' actual course of dealing [.]” misrepresentations in a single telephone call to a Texas Burger King, 471 U.S. at 478–79, 105 S.Ct. 2174; see also resident. Id. at 791–92. But fraudulent misrepresentations Fish v. Tandy Corp., 948 S.W.2d 886, 890 (Tex.App.-Fort made over a series of contacts to induce a party to Worth 1997, pet. denied) (nonresident defendant established enter a transaction can support personal jurisdiction. See purposeful availment by negotiating with Texas corporation Glencoe Capital Partners II, L.P. v. Gernsbacher, 269 through personal visits to Texas and through telephone, mail, S.W.3d 157, 164–67 (Tex.App.-Fort Worth 2008, no pet.) and faxes to and from Texas). (defendants were subject to personal jurisdiction in Texas based on misrepresentations during numerous telephonic [31] The contract's place of performance is an important board meetings over multiple years that induced Texas-based consideration. See Barnstone v. Congregation Am Echad, 574 board members, who called into the meetings from Texas F.2d 286, 288–89 (5th Cir.1978); Fleischer v. Coffey, 270 using a toll-free number, to enter certain transactions). S.W.3d 334, 338 (Tex.App.-Dallas 2008, no pet.). The Texas long-arm statute specifically references place of performance. [35] Citrin contends that he did not purposefully avail See Tex. Civ. Prac. & Rem.Code Ann. § 17.042(1) (“[A] himself of the privilege of doing business in Texas because nonresident defendant does business in this state if the the Cargo Ventures Operating Agreement contained a choice nonresident ... contracts by mail or otherwise with a Texas of law clause selecting New York law. A choice of law resident and either party is to perform the contract in whole clause selecting the laws of a different forum weighs against or in part in this state.”). Generally, a party is not subject to finding a defendant subject to personal jurisdiction in Texas. jurisdiction in Texas if a contract calls for performance out of See Michiana Easy Livin' Country, 168 S.W.3d at 792. state. See Am. Type Culture Collection, Inc. v. Coleman, 83 Choice of law clauses “should not be ignored in considering S.W.3d 801, 807–08 (Tex.2002); Ashdon, Inc., 260 S.W.3d whether a defendant has ‘purposefully invoked the benefits at 113; Jackson, 247 S.W.3d at 417–18. A contract calling and protections of a State's laws.’ ” Id. (quoting Burger for performance in Texas can support personal jurisdiction King, 471 U.S. at 482, 105 S.Ct. 2174). But neither are they in appropriate circumstances. See Fleischer, 270 S.W.3d at dispositive. See Electrosource, Inc. v. Horizon Battery Techs., 338; Nogle & Black Aviation, Inc., 290 S.W.3d at 283. It Ltd., 176 F.3d 867, 873 (5th Cir.1999). A choice of law is reasonable to subject a nonresident defendant to personal clause is merely one factor to consider in determining whether jurisdiction in Texas in connection with litigation arising from a forum state has personal jurisdiction over a nonresident a contract specifically designed to benefit from the skills defendant. Id. The “we are partners” document did not contain of a Texas resident who performs contractual obligations in a choice of law clause. Texas. See Nogle & Black Aviation, Inc., 290 S.W.3d at 283.
Citrin states in his affidavit that “[s]ince December 3, 2003, I [32] As noted above, Minnis and Cullen 130 also have have traveled to Texas approximately seven or eight times as asserted tort claims. They contend that a defendant subjects a representative of Cargo Ventures, and during three or four himself to personal jurisdiction in Texas by directing a tort of those trips, I visited the offices of Matthew Minnis ... the toward Texas. The Texas *282 Supreme Court addressed sole member of Delaware limited liability company Cullen this approach to personal jurisdiction in Michiana Easy 130, LLC....” Citrin nonetheless argues that he structured Livin' Country, 168 S.W.3d at 790–92. Michiana Easy Livin' his contractual relationship with Minnis to avoid subjecting
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himself to personal jurisdiction in Texas. A defendant can United States and Texas supreme courts have employed those avoid a forum by structuring his transactions so that he does concepts.”); cf. Info. Servs. Group, Inc. v. Rawlinson, No. 14– not profit from the forum's laws and does not subject himself 09–00242–CV, 2009 WL 3643515, at *6 (Tex.App.-Houston to its jurisdiction. Burger King, 471 U.S. at 472, 105 S.Ct. [14th Dist.] Nov. 5, 2009, no pet. h.) (“... Rawlinson did 2174; Moki Mac, 221 S.W.3d at 575; Michiana Easy Livin' not elect to visit Texas; it is undisputed that he attended the Country, 168 S.W.3d at 785. Citrin further contends that conferences at [the plaintiff's] direction.”). the “we are partners” document is not enforceable, and that the asserted misrepresentations are not actionable because These multiple contacts culminated in the Cargo Ventures they are at most vague statements regarding potential future Operating Agreement, which obligated Minnis and Citrin to activities. “devote such time, attention, and effort to the Company as is reasonably necessary for the management of the Company Weighing the parties' arguments in light of the considerations and the conduct of its business.” Minnis performed his discussed above, we conclude that Minnis and Cullen 130 obligations under the Cargo Ventures Operating Agreement have established specific jurisdiction as to Citrin individually in Texas. In his affidavit, Minnis states that he actively on this record. pursued and developed potential projects, assisted in bringing potential projects to closing, and participated in ongoing Citrin contracted with Minnis, a Texas resident, in management and decision-making responsibilities from his contemplation of an ongoing business relationship to be office in Texas. These facts demonstrate that the parties' performed at least in part in Texas. Citrin conducted *283 contractual dispute has a “ ‘substantial connection’ ” with prolonged discussions with Minnis before signing the “we Texas. See Burger King, 471 U.S. at 479, 105 S.Ct. 2174 are partners” document and the Cargo Ventures Operating (original emphasis) (quoting McGee v. Int'l Life Ins. Co., 355 Agreement. In the course of these discussions, Citrin traveled U.S. 220, 223, 78 S.Ct. 199, 2 L.Ed.2d 223 (1957)). to Houston in mid–2003 to meet with Minnis; communicated face-to-face with Minnis in Texas and via telephone, fax, In light of this evidence, the presence of a New York choice of e-mail, and mail; traveled to Houston again in mid–2004 law provision in the Cargo Ventures Operating Agreement is to meet with Minnis; drafted and signed the disputed “we not dispositive and is outweighed by the other Texas-centered are partners” document in Houston; and signed the Cargo contacts discussed above. The evidence of Texas-based Ventures Operating Agreement individually. Minnis and contractual performance in this case reinforces the exercise Cullen 130 allege that Citrin sought to obtain the benefits of of specific jurisdiction. See Tex. Civ. Prac. & Rem.Code Minnis's contacts and efforts without compensating Minnis. Ann. § 17.042(1); Nogle & Black Aviation, Inc., 290 S.W.3d at 283 (upholding exercise of personal jurisdiction in Texas These circumstances differ significantly from Michiana Easy over nonresident based on contract designed to benefit from Livin' Country, in which the transaction at issue originated the skills of a Texas resident who performed the contract in in a single outbound telephone call from a vehicle-seeking Texas); Fleischer, 270 S.W.3d at 338 (contract calling for Texas resident to an out-of-state dealer. Here, in contrast, performance in Texas supported jurisdiction in Texas). the circumstances involve multiple Texas contacts over many months in the course of an ongoing relationship that “was *284 Citrin also is alleged to have made misrepresentations not unilaterally initiated by the Texas resident.” See Nogle that induced Minnis to sign the “we are partners” document & Black Aviation, Inc., 290 S.W.3d at 283; cf. Michiana in Houston; these misrepresentations are alleged to have Easy Livin' Country, 168 S.W.3d at 784. These circumstances been made face-to-face to Minnis in Houston, and via demonstrate Citrin's purposeful contact with Texas along with faxes, e-mails, and mail sent to Minnis in Houston. an intent to obtain benefits from those contacts, and they Citrin made additional alleged misrepresentations during defeat any suggestion that Citrin's business-related presence multiple telephone calls to Minnis in Texas to obtain in Texas was merely “random, isolated, or fortuitous.” Minnis's consent, on behalf of Cullen 130, to pursue Michiana Easy Livin' Country, 168 S.W.3d at 785; see transactions with Millennium Partners. These multiple, also GJP, Inc. v. Ghosh, 251 S.W.3d 854, 879 (Tex.App.- significant contacts provide additional support for the Austin 2008, no pet.) (“We cannot agree ... that [the exercise of personal jurisdiction over Citrin individually defendant's] physical presence in Texas when closing the in Texas. See Gernsbacher, 269 S.W.3d at 165 (series of sale is ‘fortuitous' rather than ‘purposeful’ in the sense the fraudulent misrepresentations made to Texas resident to
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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)
induce participation in transaction supported jurisdiction); the Cargo Investors Operating Agreement in March 2005, Fish, 948 S.W.2d at 890 (pre-contract negotiations consisting and the Cargo Investors II Operating Agreement in January of personal trips to Texas, telephone calls, mail, and faxes 2006. Citrin Holdings and Cullen 130 constitute the entire to and from Texas supported jurisdiction). When Citrin membership of each entity. On this record, Cullen 130 responds by arguing that the alleged misrepresentations are performed its obligations and activities under each operating too vague or otherwise not actionable, and that the “we are agreement in Texas. Minnis and Cullen 130 assert that partners” document is not enforceable, he invites us to resolve Citrin Holdings regularly communicated *285 with them in the merits of Minnis's and Cullen 130's claims against him. Houston and sent a series of notices to Houston in furtherance Abundant case law teaches that we should not reach the merits of the operating agreements governing Cargo Ventures, of the parties' dispute in the course of addressing personal Cargo Investors, and Cargo Investors II. Citrin Holdings jurisdiction, and we decline to do so here. See, e.g., Pulmosan made alleged misrepresentations to induce Minnis and Cullen Safety Equip. Corp., 273 S.W.3d at 839. 130 into authorizing transactions with Millennium Partners.
Minnis and Cullen 130 allege these misrepresentations were This record supports the trial court's exercise of specific made in a series of communications to Minnis and Cullen 130 jurisdiction over Citrin individually and establishes a in Texas. substantial connection between Citrin's Texas contacts and the operative facts of the litigation. For its part, Citrin Holdings stresses that each of the operating agreements contains a choice of law clause selecting New York law (as to Cargo Ventures) or Delaware law (as to Cargo II. Citrin Holdings LLC Investors and Cargo Investors II). Citrin Holdings also relies [36] [37] We now turn to personal jurisdiction over Citrin heavily on TeleVentures, Inc. v. Int'l Game Tech., 12 S.W.3d Holdings, a Delaware limited liability company owned solely 900 (Tex.App.-Austin 2000, no pet.), in arguing that it did not by Citrin with its principal place of business in New York. purposefully avail itself of the privilege of doing business in Citrin Holdings was the majority owner of Cargo Ventures, Texas. Cargo Investors, and Cargo Investors II. Cullen 130 was the minority owner of these entities. The dispute in TeleVentures arose after IGT, a Nevada corporation with its principal place of business in Nevada, A threshold question arises regarding the universe of contacts signed two letters of intent in late 1995 with TeleVentures, that should be considered as to Citrin Holdings. Because a Texas corporation with its principal place of business it was formed in October 2004, Citrin Holdings contends in Texas. Id. at 904. The letters addressed the companies' that Texas contacts arising from Citrin's individual activities joint efforts to develop devices that would allow guests before that time are not germane to deciding whether it to play casino-style games on their hotel televisions. Id. is subject to personal jurisdiction. Minnis and Cullen 130 Under these letters, the parties stated their intent to sign contend that pre-October 2004 contacts can be considered a formal agreement if preliminary tests of the in-room because Citrin testified that he had planned to create Citrin hotel gaming system were satisfactory. Id. at 904–05. IGT Holdings while he was negotiating with Minnis. We base our and TeleVentures communicated via personal visits, faxes, analysis below as to Citrin Holdings on contacts arising when letters, and telephone calls for more than a year thereafter. Citrin Holdings was created in October 2004 and thereafter. Id. at 905. TeleVentures's employees traveled to Nevada, Regardless of Citrin's individual intent before October 2004 but no IGT employees or representatives came to Texas. to create Citrin Holdings at some later date, we cannot Id. The parties never signed a formal agreement; instead, attribute to Citrin Holdings a purpose to do business in Texas IGT sent a letter to TeleVentures in Texas in January 1997 based upon contacts arising before this entity existed and terminating all relations between the two companies. Id. The before it conceivably could have done any business anywhere. termination letter prompted TeleVentures to sue IGT for See Michiana Easy Livin' Country, 168 S.W.3d at 784–85 breach of contract, breach of fiduciary duty, fraud in the (purposeful availment must consider the defendant's own inducement, fraud, negligent misrepresentation, and tortious actions). interference. Id.
To support the exercise of personal jurisdiction, Minnis and The appellate court concluded that neither the letters of Cullen 130 rely heavily on Citrin Holdings' execution of intent nor communications directed to TeleVentures in Texas the Cargo Ventures Operating Agreement in October 2004,
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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)
provided a sufficient basis for specific jurisdiction over Aviation, Inc., 290 S.W.3d at 283 (citing Moki Mac, 221 IGT in Texas. Id. at 909. In so holding, the court stressed S.W.3d at 575, and Michiana Easy Livin' Country, 168 that TeleVentures's role in the project evaporated after IGT S.W.3d at 785). “Even though N & B may have made some chose a technological configuration that effectively excluded such choices, such as not locating any employees or offices TeleVentures from further participation. Id. TeleVentures in Texas and not targeting the Texas market, it specifically nonetheless continued to develop marketing tools and a chose to use the work of this Texas resident.” Nogle & device called the “game cube” that IGT never used, but Black Aviation, Inc., 290 S.W.3d at 283. “That work was these unilateral activities by TeleVentures were insufficient performed in Texas....” Id. These circumstances mean it is to establish purposeful availment by IGT. Id. “Although IGT “not unreasonable” to expect litigation in Texas arising in had knowledge of the game cube, IGT neither required nor connection with the performance of a contract in Texas by requested it.” Id. The court also noted that the second letter of an entity with whom Citrin Holdings purposefully chose intent contemplated the creation of a partnership between IGT to contract. See id.; see also Retamco Operating, Inc. v. and TeleVentures calling for performance in Nevada, and that Republic Drilling Co., 278 S.W.3d 333, 340 (Tex.2009) TeleVentures changed its state of incorporation from Texas to (“[W]e have found that, even in instances where a contract Nevada during its relationship with IGT. Id. at 905, 910. The was signed in another state, an out-of-state company with court concluded that “[t]he terms of the letters of intent and no physical ties to Texas still has minimum contacts with the history of the parties' negotiations do not reveal purposeful Texas when it is clear the company purposefully directed its conduct by IGT sufficient to subject it to the jurisdiction of activities towards Texas.”). Accordingly, the district court the Texas district court.” Id. at 910. properly concluded on this record that specific jurisdiction exists as to Citrin Holdings.
The circumstances here involving Citrin Holdings are distinguishable from those at issue in TeleVentures, in which the Texas corporation's role diminished over time and the III. Cargo Investors LLC and Cargo Investors II LLC center of gravity of the parties' relationship shifted towards [38] Minnis and Cullen 130 contend that Cargo Investors Nevada. Unlike TeleVentures, negotiations here ripened and Cargo Investors II are subject to general and specific into three formal contracts—including the Cargo Ventures jurisdiction because (1) Cullen 130, a member of both Cargo Operating *286 Agreement—to which Citrin Holdings was Investors and Cargo Investors II, maintains an office in a party. and operates out of Texas; and (2) Minnis and Cullen 130 performed work on behalf of Cargo Investors and Cargo In contrast to TeleVentures, in which the parties' activities Investors II in Texas. Appellants contend that the record does migrated away from Texas, the activities at issue here not support a finding that Minnis or Cullen 130 conducted maintained a consistent Texas connection and focus sufficient work on behalf of Cargo Investors or Cargo Investors II from to establish a purpose by Citrin Holdings to do business in Texas. Texas. Citrin Holdings contracted to create Cargo Ventures, which conducted day-to-day business from 2004 until late In support of their special appearances, Cargo Investors and 2006 through Minnis as a Houston-based Cargo Ventures Cargo Investors II submitted an affidavit signed by Jacob employee. The process leading to the Cargo Ventures Citrin. Among other things, Citrin averred that these two Operating Agreement was not unilaterally initiated or pursued entities by Minnis or Cullen 130. Additionally, Cargo Ventures • “simply hold equity interests in certain investments, does not challenge the exercise of personal jurisdiction but do not offer or provide real estate development or over it by a Texas court. This latter fact underscores that property management services;”
contractual performance occurred in Texas, and diminishes the importance of the New York choice of law provision • have no employees; and contained in the Cargo Ventures Operating Agreement.
• have never been organized under Texas law, never The circumstances here more closely parallel those described maintained an office or other place of business in Texas, in Nogle & Black Aviation. “The doctrine of purposeful do not conduct any business in Texas, have never owned availment recognizes that a defendant can make choices to or leased property in Texas, and do not maintain bank avoid benefitting from activities in Texas.” Nogle & Black accounts in Texas.
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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)
of the for-a-fee development work that you and Jake [Citrin]
*287 Citrin further stated that “Minnis was never an did together [was] done through Cargo Ventures....” employee of Cargo Investors I or Cargo Investors II, and to my knowledge as the manager of both entities, neither The record here demonstrates that a fact dispute exists Minnis nor Cullen 130 conducted business on behalf of regarding the extent to which Minnis's and Cullen 130's Texas Cargo Investors I or Cargo Investors II.” Citrin echoed these activities were performed on behalf of Cargo Investors and assertions in his deposition testimony. Cargo Investors II. As noted earlier, the district court did not file findings of fact; therefore, all facts necessary to support Minnis filed an affidavit in response to the special the trial court's ruling and supported by the evidence are appearances in which he referred to Cargo Ventures, Cargo implied in favor of the trial court's decision. Marchand, 83 Investors and Cargo Investors II collectively as the “Cargo S.W.3d at 794–95. We conclude that the evidence here is Entities.” Minnis averred that legally and factually sufficient to support the district court's implied finding that Minnis and Cullen 130 acted on behalf of • he has lived in Houston his entire life;
Cargo Investors and Cargo Investors II when they performed • his primary residence is in Houston; activities in Texas. The activities Minnis and Cullen 130 performed in Texas suffice to establish specific jurisdiction • Cullen 130 is based solely in Houston, where it has been in Texas as to Cargo Investors and Cargo Investors II because based since its inception; these activities (1) are attributable to these appellants; (2) are not random, isolated, or fortuitous; and (3) were designed • “From 2004 until late 2006, I conducted business on to confer a benefit, advantage or profit. See Michiana Easy behalf of, and provided services to, the three Cargo Livin' Country, 168 S.W.3d at 785. Furthermore, the claims Entities on a day-to-day basis from my office in at issue in this litigation arise from and relate to these contacts Houston, Texas;” and with Texas. Guardian Royal, 815 S.W.2d at 228. These contacts suffice to establish specific jurisdiction as to Cargo • “I actively pursued and developed potential projects, assisted in bringing potential projects to closing, Investors *288 and Cargo Investors II. 3 participated in the ongoing management and direction of consummated projects, and fulfilled my management C. Fair Play and Substantial Justice and decision-making responsibilities for the Cargo [39] Having concluded that the Texas contacts of Citrin, Entities based out of Texas.”
Citrin Holdings, Cargo Investors, and Cargo Investors II demonstrate purposeful availment and are substantially Cargo Investors and Cargo Investors II thereafter filed a connected to the operative facts of the litigation, we next supplemental affidavit signed by Jacob Citrin, in which he must determine whether exercising personal jurisdiction disputed the accuracy of Minnis's statement that Minnis over appellants offends traditional notions of fair play and conducted business on behalf of all three Cargo Entities on substantial justice.
a day-to-day basis in Texas. Citrin asserted that “[t]he vast majority, if not all, of Mr. Minnis' work for our business To answer this question, the court considers (1) the burden together was on behalf of Defendant Cargo Ventures.”
on the defendant; (2) the interests in the forum state Citrin added, “Although Mr. Minnis was given the title of in adjudicating the dispute; (3) the plaintiff's interests in President of Cargo Investors I, he did not actually do anything obtaining convenient and effective relief; (4) the interstate meaningful as a result of having that title. With regard to judicial system's interest in obtaining the most efficient Cargo Investors II, he was not even conferred with any title, resolution of controversies; and (5) the shared interest of the and performed no work for that holding company.” Citrin also states in furthering fundamental substantive social policies.
signed a second supplemental affidavit in which he disputed Burger King, 471 U.S. at 476–77, 105 S.Ct. 2174. Only the accuracy of Minnis's assertion “that he performed work in rare cases will the exercise of personal jurisdiction to identify and develop properties to be owned by Cargo offend traditional notions of fair play and substantial justice.
Investors I and Cargo Investors II.” Cargo Investors and Retamco Operating, Inc., 278 S.W.3d at 341–42. The Cargo Investors II also point to an excerpt from Minnis's defendant bears the burden of establishing that the exercise of deposition in which Minnis agreed with the assertion that “all
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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)
defendants in separate jurisdictions would be (1) inefficient;
personal jurisdiction would offend traditional notions of fair (2) burdensome on Minnis and Cullen 130; and (3) a waste play and substantial justice. Conner, 944 S.W.2d at 411.
of judicial resources. See Kelly v. Gen. Interior Constr., Inc., 262 S.W.3d 79, 86 (Tex.App.-Houston [14th Dist.] 2008, pet.
[40] After considering all of the factors, we conclude that granted).
the exercise of personal jurisdiction in this case is consistent with traditional notions of fair play and substantial justice.
*289 After weighing all of the relevant factors, we conclude Appellants contend that defending this suit in Texas would that exercising personal jurisdiction over appellants would be a “considerable burden” because (1) Citrin is a New not offend traditional notions of fair play and substantial York resident, and (2) Citrin Holdings, Cargo Investors, and justice.
Cargo Investors II are based in New York. Appellants may well incur greater expenses defending this suit in Texas compared to New York, but that is true for any nonresident defendant. See id. Distance to travel is generally not a Conclusion significant consideration due to modern transportation. See Gernsbacher, 269 S.W.3d at 168. Further, Citrin traveled We reject the issues raised on appeal and affirm the trial to Texas to personally meet with Minnis on two separate court's order denying the special appearances of Citrin, Citrin occasions prior to signing the “we are partners” document Holdings, Cargo Investors, and Cargo Investors II. and Cargo Ventures Operating Agreement. Also, defendant Cargo Ventures submitted to jurisdiction in Texas. Requiring Minnis and Cullen 130 to litigate their claims against the Former Justice GUZMAN not participating.
Footnotes 1 The Texas long-arm statute provides as follows:
In addition to other acts that may constitute doing business, a nonresident does business in this state if the nonresident: (1) contracts by mail or otherwise with a Texas resident and either party is to perform the contract in whole or in part in this state; (2) commits a tort in whole or in part in this state; or (3) recruits Texas residents, directly or through an intermediary located in this state, for employment inside or outside this state. Tex. Civ. Prac. & Rem.Code Ann. § 17.042(1)-(3).
2 Minnis and Cullen 130 contend that personal service on Citrin also established personal jurisdiction as to Citrin Holdings, Cargo Investors, and Cargo Investors II because Citrin was the sole owner of Citrin Holdings and the “manager” of the latter two entities. Given our holding that personal service upon Citrin in Texas did not establish personal jurisdiction in light of the parties' agreement, we do not address whether personal service effected upon Citrin would have been sufficient to establish personal jurisdiction in Texas as to these separate entities.
3 For diversity purposes in federal court, the citizenship of a limited liability company's members is attributed to the LLC itself. See, e.g., Harvey v. Grey Wolf Drilling Co., 542 F.3d 1077, 1080 (5th Cir.2008) (“[L]ike limited partnerships and other unincorporated associations or entities, the citizenship of a LLC is determined by the citizenship of all of its members.”) (citations omitted). However, personal jurisdiction is a separate inquiry. Cf. Goforit Entm't LLC v. Digimedia.com L.P., 513 F.Supp.2d 1325, 1331 (M.D.Fla.2007) (Rule for measuring citizenship in diversity cases does not mean that a limited partnership necessarily is subject to personal jurisdiction in every state of which its partners are citizens; “A limited partnership does not necessarily derive any benefit from the forum merely by virtue of having a limited partner there, nor does it necessarily do business there.”). The personal jurisdiction determination in this case does not depend upon attributing Texas citizenship to LLCs. Instead, it rests upon a sufficiently supported implied finding that the Texas-based activities of Minnis and Cullen 130 also are the Texas-based activities of Cargo Investors and Cargo Investors II. In light of this conclusion, we do not reach the parties' remaining contentions regarding specific jurisdiction as to Cargo Investors and Cargo Investors II. We also do not address general jurisdiction. See Shapolsky, 56 S.W.3d at 135.
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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
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City of Keller v. Wilson, 168 S.W.3d 802 (2005) 48 Tex. Sup. Ct. J. 848
To recover damages from city for inverse condemnation, landowners had to prove the city KeyCite Yellow Flag - Negative Treatment intentionally took or damaged their property Distinguished by Harris County Flood Control District v. Kerr, Tex., for public use, or was substantially certain that June 12, 2015 would be the result. Vernon's Ann.Texas Const.
168 S.W.3d 802 Art. 1, § 17.
Supreme Court of Texas.
3 Cases that cite this headnote The CITY OF KELLER, Petitioner, v. [2] Appeal and Error John W. WILSON, Grace S. Wilson, Johnny Total failure of proof L. Wilson and Nancy A. Wilson, Respondents. The traditional scope of no-evidence review does not disregard contrary evidence if there is No. 02–1012. | Argued Oct. 19, no favorable evidence, or if contrary evidence 2004. | Decided June 10, 2005.
renders supporting evidence incompetent or | Rehearing Denied Sept. 2, 2005.
conclusively establishes the opposite.
Synopsis 290 Cases that cite this headnote Background: Landowners brought action against city to recover damages for inverse condemnation and for violations of Water Code. The 96th District Court, Tarrant County, [3] Appeal and Error Jeff Walker, J., entered judgment on jury verdict in favor of Sufficiency of Evidence in Support landowners. City appealed. The Fort Worth Court of Appeals, When conducting a legal-sufficiency review, 86 S.W.3d 693, affirmed. City filed petition for review. evidence can be disregarded whenever reasonable jurors could do so, an inquiry that is necessarily fact-specific.
Holdings: The Supreme Court, Brister, J., held that: 132 Cases that cite this headnote
[1] both the “exclusive” and “inclusive” standards for no- evidence review are correct, in that the two standards reach [4] Appeal and Error the same result, and Sufficiency of Evidence in Support When courts conducting legal-sufficiency [2] no evidence established that city's approval of revised review use the “exclusive” standard and drainage plans, which resulted in flooding of landowners' disregard contrary evidence, they must recognize farm property, was an intentional taking. certain exceptions to it.
2 Cases that cite this headnote Judgment of Court of Appeals reversed; case remanded.
[5] Libel and Slander O'Neill, J., filed concurring opinion in which Medina, J., Construction of language used joined.
Publications alleged to be defamatory must be viewed as a whole—including accompanying statements, headlines, pictures, and the general West Headnotes (54) tenor and reputation of the source itself.
4 Cases that cite this headnote [1] Eminent Domain Nature and grounds in general [6] Appeal and Error
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City of Keller v. Wilson, 168 S.W.3d 802 (2005) 48 Tex. Sup. Ct. J. 848
Review of constitutional questions If evidence may be legally sufficient in one A court reviewing legal sufficiency, in an context but insufficient in another, the context action alleging a defamatory publication, cannot cannot be disregarded when conducting legaldisregard parts of a publication, considering only sufficiency review, even if that means rendering false statements to support a plaintiff's verdict or judgment contrary to the jury's verdict. only true ones to support a defense verdict.
2 Cases that cite this headnote 4 Cases that cite this headnote [12] Judgment [7] Contracts Evidence to sustain judgment Construction as a whole Judgment Reviewing courts must construe contracts as a Defects and objections whole; courts do not consider only the parts Incompetent evidence is legally insufficient to favoring one party and disregard the remainder, support a judgment, even if admitted without as that would render the latter meaningless. objection.
10 Cases that cite this headnote 11 Cases that cite this headnote
[8] Contracts [13] Appeal and Error Construing instruments together Extent of Review Writings executed at different times must be Evidence showing supporting evidence to considered together if they pertain to the same be incompetent cannot be disregarded when transaction. conducting legal-sufficiency review, even if the result is contrary to the verdict.
4 Cases that cite this headnote 3 Cases that cite this headnote [9] Appeal and Error Sufficiency of Evidence in Support [14] Appeal and Error In reviewing intentional infliction of emotional Extent of Review distress claims for legal sufficiency, appellate Evidence court considers the context and the relationship Opinions of Witnesses in General between the parties. When expert testimony is required, lay evidence supporting liability is legally insufficient; in such 4 Cases that cite this headnote cases, a no-evidence review cannot disregard contrary evidence showing the witness was [10] Appeal and Error unqualified to give an opinion.
Sufficiency of Evidence in Support 7 Cases that cite this headnote When conducting legal-sufficiency review, evidence cannot be taken out of context in a way that makes it seem to support a verdict when in [15] Appeal and Error fact it never did. Extent of Review If an expert's opinion is based on certain 5 Cases that cite this headnote assumptions about the facts, an appellate court conducting legal-sufficiency review cannot [11] Appeal and Error disregard evidence showing those assumptions Extent of Review were unfounded.
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City of Keller v. Wilson, 168 S.W.3d 802 (2005) 48 Tex. Sup. Ct. J. 848
favorable but all the circumstantial evidence, and 10 Cases that cite this headnote competing inferences as well.
308 Cases that cite this headnote [16] Appeal and Error Matters or Evidence Considered in Determining Question [21] Appeal and Error An appellate court conducting a no-evidence Matters or Evidence Considered in review cannot consider only an expert's bare Determining Question opinion, but must also consider contrary An appellate court conducting a legalevidence showing it has no scientific basis. sufficiency review cannot disregard undisputed evidence that allows of only one logical 5 Cases that cite this headnote inference; by definition, such evidence can be viewed in only one light, and reasonable jurors [17] Appeal and Error can reach only one conclusion from it.
Total failure of proof 56 Cases that cite this headnote Evidence that might be “some evidence” when considered in isolation is nevertheless rendered “no evidence” when contrary evidence shows it [22] Evidence to be incompetent. Uncontroverted evidence Trial 4 Cases that cite this headnote Uncontroverted facts or evidence Jurors are not free to reach a verdict contrary [18] Appeal and Error to undisputed evidence that allows of only one Sufficiency of Evidence in Support logical inference; indeed, uncontroverted issues In claims or defenses supported only by meager need not be submitted to a jury at all. circumstantial evidence, the evidence does not 9 Cases that cite this headnote rise above a scintilla, and thus is legally insufficient, if jurors would have to guess whether a vital fact exists. [23] Appeal and Error Sufficiency of Evidence in Support 138 Cases that cite this headnote Undisputed contrary evidence becomes conclusive, and thus cannot be disregarded when [19] Appeal and Error conducting legal-sufficiency review, when it Inferences from facts proved concerns physical facts that cannot be denied. When the circumstances are equally consistent 9 Cases that cite this headnote with either of two facts, neither fact may be inferred, and the appellate court must view each piece of circumstantial evidence, not in isolation, [24] Appeal and Error but in light of all the known circumstances. Sufficiency of Evidence in Support Undisputed contrary evidence may become 19 Cases that cite this headnote conclusive, such that it cannot be disregarded when conducting legal-sufficiency review, when [20] Appeal and Error a party admits it is true.
Sufficiency of Evidence in Support 23 Cases that cite this headnote When the circumstantial evidence of a vital fact is meager, a reviewing court conducting legal-sufficiency review must consider not just [25] Appeal and Error
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City of Keller v. Wilson, 168 S.W.3d 802 (2005) 48 Tex. Sup. Ct. J. 848
Sufficiency of Evidence in Support [30] Appeal and Error Evidence is conclusive, such that it cannot Verdict be disregarded during legal-sufficiency review, only if reasonable people could not differ in their Cases involving what a party knew or why it conclusions, a matter that depends on the facts of took a certain course of action are not amenable each case. to legal-sufficiency review under the “exclusive”
standard, under which all contrary evidence is 227 Cases that cite this headnote disregarded.
1 Cases that cite this headnote [26] Appeal and Error Sufficiency of Evidence in Support [31] Appeal and Error For purposes of conducting legal-sufficiency Province of jury review, undisputed evidence and conclusive evidence are not the same—undisputed evidence Appeal and Error may or may not be conclusive, and conclusive Province of jury or trial court evidence may or may not be undisputed. Jurors are the sole judges of the credibility of the witnesses and the weight to give their testimony.
18 Cases that cite this headnote 134 Cases that cite this headnote
[27] Appeal and Error Sufficiency of Evidence in Support [32] Appeal and Error Proper legal-sufficiency review prevents Conclusiveness in General reviewing courts from substituting their opinions Evidence on credibility for those of the jurors, but proper Credibility of witnesses in general review also prevents jurors from substituting Jurors may choose to believe one witness and their opinions for undisputed truth. disbelieve another, and reviewing courts cannot impose their own opinions to the contrary.
5 Cases that cite this headnote 76 Cases that cite this headnote [28] Appeal and Error Extent of Review [33] Appeal and Error When evidence contrary to a verdict is Verdict conclusive, it cannot be disregarded when Reviewing courts must assume jurors decided all conducting legal-sufficiency review. of credibility questions in favor of the verdict if reasonable human beings could do so.
47 Cases that cite this headnote 15 Cases that cite this headnote [29] Appeal and Error Sufficiency of Evidence in Support [34] Evidence The standard for legal sufficiency works in Uncontroverted evidence tandem with the standard of review—whenever Jurors may disregard even uncontradicted the standard of proof at trial is elevated, the and unimpeached testimony from disinterested standard of appellate review must likewise be witnesses. elevated.
5 Cases that cite this headnote 28 Cases that cite this headnote
[35] Evidence
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City of Keller v. Wilson, 168 S.W.3d 802 (2005) 48 Tex. Sup. Ct. J. 848
Testimony of Experts [41] Appeal and Error Uncontroverted expert testimony does not bind Verdict jurors unless the subject matter is one for experts alone. Courts reviewing all the evidence in a light favorable to jury's verdict must assume that 6 Cases that cite this headnote jurors resolved all conflicts in accordance with that verdict.
[36] Trial 27 Cases that cite this headnote Credibility of Witnesses Jury's decisions regarding credibility must be [42] Appeal and Error reasonable.
Verdict 1 Cases that cite this headnote In every circumstance in which reasonable jurors could resolve conflicting evidence either way, reviewing courts must presume they did so in [37] Evidence favor of the prevailing party, and disregard the Uncontroverted evidence conflicting evidence in their legal-sufficiency Jurors cannot ignore undisputed testimony that review. is clear, positive, direct, otherwise credible, free from contradictions and inconsistencies, and 35 Cases that cite this headnote could have been readily controverted.
39 Cases that cite this headnote [43] Trial Uncontroverted facts or evidence Trial [38] Evidence Inferences from evidence Credibility of witnesses in general Even if evidence is undisputed, it is the province Jurors are not free to believe testimony that is of the jurors to draw from it whatever inferences conclusively negated by undisputed facts.
they wish, so long as more than one is possible 20 Cases that cite this headnote and the jury must not simply guess.
6 Cases that cite this headnote [39] Appeal and Error Verdict [44] Appeal and Error Whenever reasonable jurors could decide what Verdict testimony to discard, a reviewing court must Courts reviewing all the evidence in a light assume they did so in favor of their verdict, and favorable to the verdict must assume jurors disregard it in the course of legal-sufficiency made all inferences in favor of their verdict if review.
reasonable minds could, and disregard all other 9 Cases that cite this headnote inferences in their legal-sufficiency review.
77 Cases that cite this headnote [40] Trial Conflicting evidence [45] Appeal and Error It is the province of the jury to resolve conflicts Verdict in the evidence.
Both the “exclusive” standard for scope of no-
25 Cases that cite this headnote evidence review, under which contrary evidence is disregarded, and the “inclusive” standard,
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City of Keller v. Wilson, 168 S.W.3d 802 (2005) 48 Tex. Sup. Ct. J. 848
under which reviewing court considers all of the The test for legal sufficiency should be the evidence in the light favorable to verdict, are same for summary judgments, directed verdicts, correct; the two standards reach the same result. judgments notwithstanding the verdict (JNOV), and appellate no-evidence review.
9 Cases that cite this headnote 72 Cases that cite this headnote [46] Appeal and Error Conclusiveness in General [50] Evidence A reviewing court cannot substitute its judgment Sufficiency to support verdict or finding for that of the trier-of-fact, so long as the The final test for legal sufficiency must always evidence falls within the zone of reasonable be whether the evidence at trial would enable disagreement. reasonable and fair-minded people to reach the verdict under review.
152 Cases that cite this headnote 692 Cases that cite this headnote [47] Appeal and Error Verdict [51] Appeal and Error Appeal and Error Verdict Inferences from facts proved Whether a reviewing court begins by considering Whether a reviewing court conducting legal- all the evidence or only the evidence supporting sufficiency review starts with all or only part the verdict, legal-sufficiency review in the of the record, the court must consider evidence proper light must credit favorable evidence if in the light most favorable to the verdict, and reasonable jurors could, and disregard contrary indulge every reasonable inference that would evidence unless reasonable jurors could not. support it; but if the evidence allows of only one 1885 Cases that cite this headnote inference, neither jurors nor the reviewing court may disregard it.
[52] Eminent Domain 769 Cases that cite this headnote Weight and sufficiency Evidence [48] Trial Nature of Subject Sufficiency of evidence No evidence established that city's approval Legal sufficiency of the evidence is a question of of revised drainage plans, which resulted in law, not of fact. flooding of landowners' farm property, was an intentional taking, although landowners'
159 Cases that cite this headnote expert testified that flooding was inevitable, city knew that development would increase [49] Appeal and Error runoff at the head of drainage system, and prior Sufficiency of Evidence in Support drainage plan had required drainage ditch across landowners' property; three sets of engineers Judgment had certified that revised plans met city's codes Weight and sufficiency and regulations and thus would not increase Judgment downstream flooding, and no evidence showed Where directed verdict or binding that city knew more than it was told by the instructions would have been proper engineers. Vernon's Ann.Texas Const. Art. 1, § Trial 17.
Nature and Grounds
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Senior Assistant City Attorney, Irving, Robert F. Brown, 5 Cases that cite this headnote Brown & Hofmeister, L.L.P., Richardson, Bruce S. Powers, Assistant County Attorney, Michael A. Stafford, Harris [53] Eminent Domain County Attorney, Houston, for Amicus Curiae.
Appeal and error Opinion In conducting legal-sufficiency review of finding that city's approval of revised drainage plans, Justice BRISTER delivered the opinion of the Court, in which resulted in flooding of landowners' farm which Chief Justice JEFFERSON, Justice HECHT, Justice property, was an intentional taking, appellate WAINWRIGHT, and Justice GREEN joined, and in which court could not disregard contrary evidence Justice O'NEILL and Justice MEDINA joined as to Parts I explaining why city had approved the revised through IV. drainage plans; critical question in the case was city's state of mind, i.e., whether city Must an appellate court reviewing a verdict for legal knew or should have known that flooding was sufficiency start by considering all the evidence or only part? substantially certain, and appellate court could Over the years, we have stated both as the proper scope not evaluate what city knew by disregarding of review. While some see the standards as opposing, we most of what it was told. Vernon's Ann.Texas disagree; like a glass that is half-full or half-empty, both arrive Const. Art. 1, § 17. at the same point regardless of where they start.
6 Cases that cite this headnote But both standards must be properly applied. Rules and reason sometimes compel that evidence must be credited or discarded whether it supports a verdict or contradicts [54] Evidence it. Under either scope of review, appellate courts must Testimony of Experts view the evidence in the light favorable to the verdict, When a case involves scientific or technical crediting favorable evidence if reasonable jurors could, and issues requiring expert advice, jurors cannot disregarding contrary evidence unless reasonable jurors could disregard a party's reliance on experts hired not. As we find the evidence here meets neither standard, we for that very purpose without some evidence reverse.
supplying a reasonable basis for doing so.
3 Cases that cite this headnote I. Factual and Procedural History
The City of Keller is one of several fast-growing communities Attorneys and Law Firms on the outskirts of *808 Fort Worth. 1 As part of that growth, the City approved plans for two new subdivisions, Estates of *807 Dabney D. Bassel, Larry Bracken, Law Snakard & Oak Run and Rancho Serena, including plans for storm water Gambill, P.C., Fort Worth, Douglas H. Conner III, L. Stanton drainage. Lowry, Boyle & Lowry, L.L.P., Irving, for petitioner.
The Wilsons own property southeast of the new subdivisions, James B. Barlow, Barlow & Garsek, Fort Worth, Robert L.
with a tract owned by Z.T. Sebastian lying between. Before Russell Bush, Bush & Morrison, Arlington, David R. Casey, development, surface water flowed generally north to south Hurst, for respondents.
from the land where the subdivisions were built, across the Jay Doegey, Assistant City Attorney for the City of Corpus Sebastian and Wilson properties, and into the Little Bear Christi, Texas, Corpus Christi, Theodore P. Gorski Jr., Office Creek Watershed. of the City Attorney for City of Fort Worth, Mark G. Daniel, Evans Gandy Daniel & Moore, Fritz Quast, Taylor In 1991, the City adopted a Master Drainage Plan providing Olson Adkins Sralla & Elam, LLP, Fort Worth, Monte for drainage easements across both the Sebastian and Wilson Akers, Texas Municipal League, Austin, Michael A. Bucek, properties, and thence into Little Bear Creek. The City's codes require developers to comply with the Master Plan, to provide
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drainage for a 100–year rain event, and to avoid increasing We have on many occasions stated the scope of review the volume or velocity of water discharged upon downhill precisely as the court of appeals says (the “exclusive” properties. standard). 6 But we have also stated that a reviewing court must consider “all of the evidence” in the light favorable to The developers of Oak Run and Rancho Serena submitted the verdict (the “inclusive” standard). 7 Sometimes we have plans to the City indicating they would buy a drainage mentioned neither reviewing all evidence nor disregarding easement and build a ditch forty-five feet wide and more than two hundred yards long across the Sebastian property, some part of it. 8 Finally, we have sometimes expressly
and deed both to the City upon completion. 2 The plans also mentioned both. 9 included detention basins on the subdivision properties, but omitted any drainage easement or ditch across the Wilsons' Although this Court has used both the exclusive and property. The City's director of public works approved the inclusive standards interchangeably over the years, the developers' plans, and the City accepted the works on commentators say the two are different. 10 Because this completion. *810 important issue is dispositive here, we address it in some detail, and reserve for another day the City's arguments In accordance with the Master Plan, the City built a box that a governmental entity cannot be liable for approving a culvert south of the Wilsons' property. But as the developers' developer's plans, or accepting rather than constructing the drainage ditch ended at the Wilsons' north property line, there works at issue. was no link between the two. The Wilsons alleged and the jury found this omission increased flooding on the Wilsons' property, ruining eight acres of farmland the jury valued at II. Contrary Evidence That Cannot Be Disregarded almost $300,000.
The question presented here is not a new one. More than [1] To recover damages for inverse condemnation, the 40 years ago, then Justice Calvert 11 addressed the standards Wilsons had to prove the City intentionally took or damaged for reviewing legal and factual sufficiency in the most-cited their property for public use, or was substantially certain that law review article in Texas legal history. 12 Frustrated that would be the result. 3 They do not allege the City intentionally despite this Court's efforts to explain those standards “a flooded their land, but do allege it approved revised plans that growing number of recent decisions indicate a continuing it knew were substantially certain to have that effect.
misunderstanding,” 13 the author summarized and attempted The City contends no evidence supports the jury's finding of to clarify Texas law up to 1960. 14 The article's impact an intentional taking. It presented evidence that engineers for remains substantial today, having been cited more than 100 the developers, for the City, and for an outside firm the City times by Texas courts in the last five years. retained all certified that the revised drainage plan complied with the City's codes and regulations—including the ban According to the article: against increasing downstream runoff. Thus, the City asserts “No evidence” points must, and it had no reason to be substantially certain the opposite would may only, be sustained when the occur, until it did.
record discloses one of the following situations: (a) a complete absence A divided court of appeals rejected this contention. 4 In its of evidence of a vital fact; (b) the legal sufficiency review, the court refused to consider the court is barred by rules of law or of various engineers' certifications because “we are to consider evidence from giving weight to the only the evidence and inferences that tend to support the only evidence offered to prove a vital finding and disregard all evidence and inferences to the fact; (c) the evidence offered to prove contrary.” 5 The City challenges *809 this omission as a vital fact is no more than a mere applying the wrong scope of review. scintilla; (d) the evidence establishes conclusively the opposite of the vital fact. 15
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statements, headlines, pictures, and the general tenor and
16
We have quoted a similar formulation on many occasions. reputation of the source itself. 20 A court reviewing legal sufficiency cannot disregard parts of a publication, Notably, Justice Calvert then proceeded to put the question considering only false statements to support a plaintiff's before us in the proper context: verdict or only true ones to support a defense verdict. 21
It is in deciding “no evidence”
[7] [8] Similarly, reviewing courts must construe contracts points in situation (c) that the courts as a whole; we do not consider only the parts favoring one follow the further rule of viewing the party and disregard the remainder, as that would render the evidence in its most favorable light in support of the finding of the vital fact, latter meaningless. 22 Even writings executed at different considering only the evidence and the times must be considered together if they pertain to the same inferences which support the finding transaction. 23 and rejecting the evidence and the inferences which are contrary to the [9] It is not just writings that reviewing courts must 17 consider in context. For example, in reviewing intentional finding.
infliction of emotional distress claims for legal sufficiency, “we consider the context and the relationship between the [2] Clearly, the traditional rule in Texas has never been that appellate courts must reject contrary evidence in parties.” 24 Acts that might constitute outrageous conduct every no-evidence review. Instead, the traditional scope of when dealing with a hearing-impaired consumer 25 may review does not disregard contrary evidence if there is no be legally insufficient between *812 business parties. 26 favorable evidence *811 (situation (a) above), or if contrary In our no-evidence reviews of successful claims, we have evidence renders supporting evidence incompetent (situation invariably reviewed not just evidence showing the conduct (b) above) or conclusively establishes the opposite (situation was outrageous, but also evidence showing that, in context, (d) above).
it was not. 27 [3] [4] As the following examples show, this has remained [10] More generally, evidence cannot be taken out of context the rule since. We do not presume to categorize all in a way that makes it seem to support a verdict when in fact circumstances in which contrary evidence must be considered in a legal sufficiency review. Evidence can be disregarded it never did. 28 If a witness's statement “I did not do that”
is contrary to the jury's verdict, a reviewing court may need whenever reasonable jurors could do so, 18 an inquiry that is to disregard the whole statement, but cannot rewrite it by necessarily fact-specific. But it is important that when courts disregarding the middle word alone.
use the exclusive standard and disregard contrary evidence, they must recognize certain exceptions to it.
[11] Thus, if evidence may be legally sufficient in one context but insufficient in another, the context cannot be disregarded even if that means rendering judgment contrary A. Contextual Evidence to the jury's verdict. Either “evidence contrary to the verdict”
must be defined to exclude material contextual evidence, or In Justice Calvert's first situation—a complete absence of it must be an exception to the general rule.
evidence of a vital fact—it is generally irrelevant whether a reviewing court considers contrary evidence. 19 If supporting evidence is absent, opposing evidence cannot change that B. Competency Evidence result. But in a number of cases, the lack of supporting evidence may not appear until all the evidence is reviewed in [12] [13] It has long been the rule in Texas that context. incompetent evidence is legally insufficient to support a judgment, even if admitted without objection. 29 Thus, [5] [6] For example, publications alleged to be defamatory evidence showing it to be incompetent cannot be disregarded, must be viewed as a whole—including accompanying even if the result is contrary to the verdict. If the rule were
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otherwise, incompetent evidence would always be legally sufficient, because the evidence showing it to be incompetent [18] [19] In claims or defenses supported only by meager could never be considered. circumstantial evidence, the evidence does not rise above a scintilla (and thus is legally insufficient) if jurors would Thus, for example, if an eyewitness's location renders a clear have to guess whether a vital fact exists. 41 “When the view of an accident “physically impossible,” it is no evidence circumstances are equally consistent with either of two facts, of what occurred, even if the eyewitness thinks otherwise. 30 neither fact may be inferred.” 42 In such cases, we must “view Similarly, an employee's testimony that he was in the course each piece of circumstantial *814 evidence, not in isolation, and scope of his employment is legally insufficient to support but in light of all the known circumstances.” 43 a verdict against his employer if the evidence shows that legal conclusion to be incompetent. 31 Justice Calvert argued there was “no necessity for the variation” because drawing an inference based on meager [14] [15] This exception frequently applies to expert evidence was unreasonable whether or not the reviewing testimony. When expert testimony is required, lay evidence court considered the opposing inferences. 44 Nevertheless, he
32
supporting liability is legally insufficient. In *813 recognized that “[t]he opposing inference is present and it such cases, a no-evidence review cannot disregard contrary does no harm to note its presence.” 45 evidence showing the witness was unqualified to give an opinion. 33 And if an expert's opinion is based on certain In subsequent cases this Court has continued to note rather assumptions about the facts, we cannot disregard evidence than disregard the presence of equal but opposite inferences, showing those assumptions were unfounded. 34 often because lower courts have overlooked them. Thus, for example, one might infer from cart tracks in spilled [16] After we adopted gate-keeping standards for expert macaroni salad that it had been on the floor a long testimony, 35 evidence that failed to meet reliability standards time, but one might also infer the opposite—that a sloppy was rendered not only inadmissible but incompetent as shopper recently did both. 46 Similarly, when injury or death well. 36 Thus, an appellate court conducting a no-evidence occurs without eyewitnesses and only meager circumstantial review cannot consider only an expert's bare opinion, but evidence suggests what happened, we cannot disregard other must also consider contrary evidence showing it has no meager evidence of equally likely causes. 47 scientific basis. 37 Similarly, review of an expert's damage estimates cannot disregard the expert's admission on cross- [20] Thus, when the circumstantial evidence of a vital fact is meager, a reviewing court must consider not just favorable examination that none can be verified. 38 but all the circumstantial evidence, and competing inferences as well.
[17] Thus, evidence that might be “some evidence” when considered in isolation is nevertheless rendered “no evidence” when contrary evidence shows it to be incompetent. Again, such evidence cannot be disregarded; it must be an exception D. Conclusive Evidence either to the exclusive standard of review or to the definition of contrary evidence. [21] [22] Next, Justice Calvert noted that Texas courts conducting a no-evidence review traditionally do not disregard contrary evidence that conclusively establishes the opposite of a vital fact. 48 He argued that this is to some C. Circumstantial Equal Evidence extent not a “true” no-evidence claim, as proponents may As noted above, Justice Calvert believed the exclusive have to show not only that no evidence supports the verdict standard applied only when a no-evidence challenge asserted but that the opposite was proved as a matter of law. 49 the evidence was no more than a scintilla. 39 But he went on There are several types of conclusive evidence. First, an to note a “variation” that required contrary inferences to be appellate court conducting a legal sufficiency review cannot “disregard undisputed evidence that allows of only one considered when the equal-inference rule applied. 40 logical inference.” 50 By definition, such evidence can be
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viewed in only one light, and reasonable jurors can reach only [26] There is another category of conclusive evidence, in one conclusion from it. Jurors are not free to reach a verdict which the evidence is disputed. Undisputed evidence and contrary to such evidence; 51 indeed, uncontroverted issues conclusive evidence are not the same—undisputed evidence may or may not be conclusive, and conclusive evidence may *815 need not be submitted to a jury at all. 52 or may not be undisputed.
Reviewing legal sufficiency in such cases encompasses Thus, for example, in Murdock v. Murdock, we found no a general no-evidence review, because if some evidence evidence to support a verdict establishing the defendant's supports the verdict then the contrary evidence was not paternity when blood tests conclusively proved he was not “undisputed.” But the review does not stop there; the evidence must also have only one logical inference. Undisputed the child's father. 64 The evidence was directly disputed—the evidence that reasonable jurors could disbelieve has two: (1) child's mother testified she had conjugal relations with no one it is true, or (2) it is not. else during the relevant time. 65 Nevertheless, we held there was no evidence to support the paternity verdict because of [23] Most often, undisputed contrary evidence becomes conclusive evidence to the contrary. 66 conclusive (and thus cannot be disregarded) when it concerns physical facts that cannot be denied. Thus, no evidence Similarly, in Texas & New Orleans Railroad Co. v. Compton, supports an impaired-access claim if it is undisputed that we found no evidence that a railroad's negligence caused an access remains along 90 percent of a tract's frontage. 53 automobile to slam into the sixtieth car of a slow-moving Evidence that a buyer believed a product had been repaired train. 67 Again, the evidence was hotly disputed—while is conclusively negated by an accompanying letter to railroad witnesses testified that warning signs were in place the contrary. 54 And an insured's liability has not been at the crossing, the car's driver and a passenger testified they determined by an “actual trial” if the insured did not appear, saw nothing, and would have been able to stop if they had. 68 present evidence, or challenge anything presented by his Nevertheless, we held there was no evidence to support the opponent. 55 claim because, if the driver could not see the side of a train before he hit it, he could not have seen a crossing sign [24] Undisputed contrary evidence may also become either. 69 conclusive when a party admits it is true. Thus, a claimant's admission that he was aware of a dangerous premises Of course, there are few instances in which disputed evidence condition is conclusive evidence he needed no warning about is conclusive, and many instances in which undisputed it. 56 Similarly, an ex-employee's admission that she obtained evidence is not. As our sister court has noted, testimony other employment may prove conclusively that she did not by a paid informant is legally sufficient to support a detrimentally rely on a defendant's promise to re-hire her. 57 conviction, even if “[t]wenty nuns testify that the defendant And jurors may not find that an indictment was based on was with them at the time, far from the scene of the a defendant's misleading report when the district attorney crime ... [and] [t]wenty more nuns testify that they saw the
admits it was his own mistake. 58 informant commit the crime.” 70 But a more famous clerical hypothetical by Judge Learned Hand shows the opposite [25] It is impossible to define precisely when undisputed limit: evidence becomes conclusive. For example, an injured employee's return to work may prove conclusively that an If, however, it were proved by twenty bishops that either injury was not total, 59 or it may not. 60 Circumstances in party, when he used the words [in a contract], intended which a body is found may conclusively establish suicide, 61 something else than the usual meaning which the law or allow *816 jurors to infer otherwise. 62 Evidence is imposes upon them, he would still be held.... 71 conclusive only if reasonable people could not differ in their While jurors may generally believe either sinners or saints, conclusions, 63 a matter that depends on the facts of each their discretion is limited when it is proved beyond question case. that an “eyewitness” was actually far away in prison or totally blind on the day of the crime.
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[27] [28] Proper legal-sufficiency review prevents a red light may not be legally sufficient evidence of gross reviewing courts from substituting *817 their opinions negligence if one's wife and daughter are bleeding to death on credibility for those of the jurors, but proper review in the back seat. 79 Reviewing courts assessing evidence of also prevents jurors from substituting their opinions for conscious indifference cannot disregard part of what a party undisputed truth. When evidence contrary to a verdict is was conscious of. 80 conclusive, it cannot be disregarded.
For the same reasons, the exclusive standard of review has proven problematic in insurance bad-faith cases. Liability E. Clear–and–Convincing Evidence in *818 such cases requires proof that the insurer denied coverage after it became reasonably clear. 81 But that [29] Since the time of Justice Calvert's article, new claims standard will always be met if reviewing courts must and burdens of proof have arisen that require additions to the four types of no-evidence review Justice Calvert disregard any evidence that coverage was unclear. 82 considered exhaustive. Beginning with the United States Subsequent cases show that reviewing courts are in fact Supreme Court's opinion in Jackson v. Virginia, appellate looking at all the evidence to determine whether coverage was courts have recognized that, while “one slender bit of reasonably clear. 83 evidence” may be all a reviewing court needs to affirm a verdict based on the preponderance of the evidence, a higher This problem arises in other contexts as well. In 72 discrimination cases, discharged employees will never have burden of proof requires a higher standard of review. As we recently stated, the standard for legal sufficiency works in to prove that the reason given for termination was a tandem with the standard of review—“whenever the standard pretext if no-evidence review must disregard that reason. 84 of proof at trial is elevated, the standard of appellate review Government officials will never be entitled to immunity must likewise be elevated.” 73 If the rule were otherwise, if we consider only evidence suggesting they should have legally sufficient evidence to support a preponderance-of-the- acted differently. 85 And limitations will never run under the evidence verdict would satisfy the higher burdens as well, discovery rule if reviewing courts must disregard all evidence thus rendering their differences meaningless. 74 that claimants knew of their claims. 86
Accordingly, we have held that a legal sufficiency review This is not to say a reviewing court may credit a losing party's must consider all the evidence (not just that favoring explanations or excuses if jurors could disregard them. For the verdict) in reviewing cases of parental termination, 75 example, while an insurer's reliance on an expert report may defamation, 76 and punitive damages. 77 In such cases, again, foreclose bad faith recovery, 87 it will not do so if the insurer evidence contrary to a verdict cannot be disregarded. had some reason to doubt the report. 88 But a reviewing court cannot review whether jurors could reasonably disregard a losing party's explanations or excuses without considering what they were.
F. Consciousness Evidence
[30] Further, we have had to particularize legal-sufficiency review in cases involving what a party knew or why it took a III. Contrary Evidence That Must Be Disregarded certain course, as they are not amenable to review under the exclusive standard. As trials normally focus on issues that jurors could decide either way, reviewing *819 courts must disregard evidence Long before gross negligence had to meet a clear-and- contrary to the verdict far more often than they must consider convincing burden, we recognized in Burk Royalty Co. v. it. Just as no-evidence review that starts by disregarding Walls that no-evidence review of such findings had to include contrary evidence often must end up considering considerably “all of the surrounding facts, circumstances, and conditions, more, no-evidence review that begins by considering all the not just individual elements or facts.” 78 As then Chief evidence must usually end up considering considerably less. Justice Greenhill noted in concurring, speeding and running
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Again, we do not presume to categorize all circumstances in on a 20–year warranty was not binding on jurors when the which contrary evidence must be disregarded; a few examples bid specifications he prepared included only much shorter serve to demonstrate that even under the inclusive standard, warranties. 96 Nor was an insured's uncontradicted testimony viewing all the evidence in a light favorable to the verdict about lost furnishings binding on jurors when the fire scene often requires that much of it be disregarded. contained several indications of arson but few of burnt furniture. 97 Even uncontroverted expert testimony does not bind jurors unless the subject matter is one for experts A. Credibility Evidence alone. 98 [31] [32] Jurors are the sole judges of the credibility of [36] [37] [38] [39] Of course, “[t]he jury's the witnesses and the weight to give their testimony. 89 They decisions regarding credibility must be reasonable.” 99 may choose to believe one witness and disbelieve another. 90 Jurors cannot ignore undisputed testimony that is clear, Reviewing courts cannot impose their own opinions to the positive, direct, otherwise credible, free from contradictions contrary. 91 and inconsistencies, and could have been readily controverted. 100 And as noted above, they are not free to [33] Most credibility questions are implicit rather than believe testimony that is conclusively negated by undisputed explicit in a jury's verdict. Thus, reviewing courts must facts. But whenever reasonable jurors could decide what assume jurors decided all of them in favor of the verdict if testimony to discard, a reviewing court must assume they did reasonable human beings could do so. Courts reviewing all so in favor of their verdict, and disregard it in the course of the evidence in a light favorable to the verdict thus assume legal sufficiency review. that jurors credited testimony favorable to the verdict and disbelieved testimony contrary to it. 92
B. Conflicting Evidence For example, viewing the evidence in the light favorable to the verdict means that if both parties in a traffic accident [40] [41] It is the province of the jury to resolve conflicts testify they had the green light, an appellate court must in the evidence. 101 Accordingly, courts reviewing all the presume the prevailing party did and the losing party did evidence in a light favorable to the verdict must assume not. If the parties to an oral contract testify to conflicting that jurors resolved all conflicts in accordance with that terms, a reviewing court must presume the terms were those asserted by the winner. When all the evidence is viewed in verdict. 102 the light most favorable to the jury verdict, some of it must be completely discounted. Though not disregarded at the outset, Again, this has always been the case even in those cases the end result is the same. using the inclusive scope of review. For example, in such cases we have sometimes detailed only the evidence that This has always been our practice in cases using the inclusive supported a jury's fraud finding. 103 We have affirmed a scope of review. Thus, we have concluded that a bailee bad-faith verdict for legal sufficiency despite “significant sold cotton without the bailor's consent, despite the former's evidence” that the insurer acted in *821 good faith. 104 We
93
denials, because the jury verdict favored the latter. And we have found some evidence of lost profits, even though income have affirmed a gross negligence verdict based on testimony tax returns showed the contrary. 105 And we have affirmed that the defendant's speed was 80 miles per hour, without a jury's negligence finding despite a defendant's evidence mentioning his own testimony to a speed half that. 94 asserting it could not have prevented the accident. 106
[34] [35] Nor is it necessary to have testimony In none of these cases did we state that the scope of review from both parties before jurors *820 may disbelieve required us to disregard evidence contrary to the verdict; either. Jurors may disregard even uncontradicted and instead, we started by considering the entire record in each. unimpeached testimony from disinterested witnesses. 95 But in each case we either discounted or never mentioned Thus, an architect's uncontradicted testimony that he relied conflicting evidence contrary to the verdict because viewing
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the evidence in the light favorable to the verdict required us exceptions to each, we turn to the question of which one is to do so. correct. For the reasons *822 discussed below, we believe the answer is both.
Of course, it is not always clear whether evidence is conflicting. Evidence is not conflicting just because the parties cannot agree to it. For example, evidence that a A. Goals: The Standards Must Be The Same hospital controlled a doctor's rotation and patient assignments raises no material conflict with evidence that a different [46] Whether a court begins by reviewing all the evidence entity controlled the details of medical treatment, as only or disregarding part in a legal-sufficiency review, there can the latter is material in a malpractice case. 107 Similarly, be no disagreement about where that review should end. If evidence showing the terms of one loan does not conflict the evidence at trial would enable reasonable and fair-minded with undisputed evidence that the parties never reached an people to differ in their conclusions, then jurors must be agreement regarding the terms of another. 108 allowed to do so. 112 A reviewing court cannot substitute its judgment for that of the trier-of-fact, so long as the evidence [42] But in every circumstance in which reasonable jurors falls within this zone of reasonable disagreement. 113 could resolve conflicting evidence either way, reviewing courts must presume they did so in favor of the prevailing [47] Similarly, there is no disagreement about how a party, and disregard the conflicting evidence in their legal reviewing court should view evidence in the process of that sufficiency review. review. Whether a reviewing court starts with all or only part of the record, the court must consider evidence in the light most favorable to the verdict, and indulge every reasonable C. Conflicting Inferences inference that would support it. 114 But if the evidence allows of only one inference, neither jurors nor the reviewing court [43] Even if evidence is undisputed, it is the province of may disregard it. 115 the jury to draw from it whatever inferences they wish, so long as more than one is possible and the jury must not Given these premises, it is no coincidence that the two simply guess. Thus, in product liability cases jurors may find standards should reach the same result—indeed they must.
evidence of a defect from subsequent modifications, even Any scope of appellate review smaller than what reasonable if there were plenty of other reasons for the changes. 109 jurors could believe will reverse some verdicts that are Even if a defendant admits approaching an intersection from perfectly reasonable; any scope of review larger than what the wrong way on a one-way street, jurors may infer the reasonable jurors could believe will affirm some verdicts that plaintiff failed to keep a proper lookout, as that is one possible are not. inference from the accident itself. 110 Similarly, jurors may infer that relatives tore down posters of a missing child to [48] Further, the two must coincide if this Court is to assist the child's father, even though another inference was perform its constitutional duties. Although factual sufficiency that the signs simply embarrassed them. 111 has been the sole domain of the intermediate appellate courts in Texas since 1891, our jurisdiction has always included [44] Accordingly, courts reviewing all the evidence in a legal sufficiency, as that is a question of law, not of fact. 116 light favorable to the verdict must assume jurors made all Construing either standard to require us to do less would be inferences in favor of their verdict if reasonable minds could, just as unconstitutional as construing either to allow us to do and disregard all other inferences in their legal sufficiency more. review.
This is not to say judges and lawyers will always agree whether evidence is legally *823 sufficient. As discussed more fully below, reasonable people may disagree about IV. Reconciling the Standards what reasonable jurors could or must believe. But once those [45] Having noted the dual lines of authority stating the boundaries are settled, any standard of review must coincide scope of no-evidence review, and the proper application and with those boundaries—affirming jury verdicts based on
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evidence within them and reversing jury verdicts based on courts do not disregard the evidence supporting the motion; evidence that is not. Any standard that does otherwise is *825 if they did, all summary judgments would be reversed. improperly applied.
In practice, however, a different scope of review applies when a summary judgment motion is filed without supporting
B. Other Motions: The Standards Must Be The Same evidence. 125 In such cases, evidence supporting the motion is effectively disregarded because there is none; under the [49] Just as the scope of no-evidence review must coincide rule, it is not allowed. Thus, although a reviewing court must with its goals, the scope of review should not depend upon the consider all the summary judgment evidence on file, in some motion in which it is asserted. Judgment without or against cases that review will effectively be restricted to the evidence a jury verdict is proper at any course of the proceedings contrary to the motion. only when the law does not allow reasonable jurors to decide otherwise. Accordingly, the test for legal sufficiency The standards for taking any case from the jury should be the should be the same for summary judgments, directed verdicts, same, no matter what motion is used. If only one standard judgments notwithstanding the verdict, and appellate no- were proper, we would not expect both to appear in cases evidence review. reviewing directed verdicts, judgments notwithstanding the verdict, and summary judgments. But both do.
Our statements of the standard for reviewing a directed verdict present the same mixed bag found with general no- evidence review. We have most often used the exclusive C. Federal Courts: The Standards Are The Same standard, stating that courts reviewing directed verdicts must consider only evidence supporting the nonmovant's case The federal courts have had a similar split of authority and disregard all contrary evidence. 117 But we have also between the inclusive and exclusive standards for scope stated that reviewing courts should use the inclusive standard, of review. But no longer—the United States Supreme considering all the evidence in a light contrary to the directed Court recently concluded in Reeves v. Sanderson Plumbing verdict. 118 And we have sometimes stated both, requiring Products, Inc. that the two tests are the same. 126 reviewing courts to consider all the evidence in a light contrary to the directed verdict and then to disregard all Under Rule 50 of the federal rules of procedure, a court should conflicting evidence that supports it. 119 render judgment as a matter of law when “there is no legally sufficient evidentiary basis for a reasonable jury to find for By contrast, cases concerning judgments non obstante that party on that issue.” 127 In deciding whether all or only veredicto most often utilize the inclusive scope of review. part of the evidence should be considered, the Supreme Court Beginning with the 1931 amendment authorizing trial judges stated: to grant them, 120 we have generally reviewed such orders by considering all the evidence in a light favorable to the The Courts of Appeals have articulated differing *824 verdict that was set aside. 121 In later years we formulations as to what evidence a court is to consider in have sometimes adopted the exclusive standard, 122 but our ruling on a Rule 50 motion. Some decisions have stated opinions doing so usually cite to general no-evidence cases in that review is limited to that evidence favorable to the which no judgment n.o.v. was involved. 123 nonmoving party, while most have held that review extends to the entire record, drawing all reasonable inferences in The one exception in which both standards do not expressly favor of the nonmovant. appear is in the scope of review for summary judgments.
On closer examination, this conflict seems more Here, there is only one standard—a reviewing court must semantic than real. Those decisions holding that review examine the entire record in the light most favorable to under Rule 50 should be limited to evidence favorable to the nonmovant, indulging every reasonable inference and the nonmovant appear to have their genesis in Wilkerson resolving any doubts against the motion. 124 Reviewing v. McCarthy 128 . In Wilkerson, we stated that “in passing upon whether there is sufficient evidence to submit an
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issue to the jury we need look only to the evidence and court cannot. It is not surprising that in drawing the general reasonable inferences which tend to support the case distinction between legal and factual sufficiency, courts of” the nonmoving party. 129 But subsequent decisions have not complicated that distinction by listing the several have clarified that this passage was referring to the exceptions in which the scope of review—though not the evidence to which the trial court should give credence, standard of review—may overlap. not the evidence that the court should review. In the analogous context of summary judgment under Rule 56, Second, it has been argued that the exclusive standard “is we have stated that the court must review the record an important prophylactic” against invasion of the jury's “taken as a whole.” And the standard for granting province, as appellate judges are less likely to consider summary judgment “mirrors” the standard for judgment contrary evidence when they should not if the exclusive as a matter of law, such that “the inquiry under each is the standard is used. 133 But if that is true, the opposite should same.” It therefore follows that, in entertaining a motion also be the case—appellate courts are less likely to consider for judgment as a *826 matter of law, the court should contrary evidence when they must (as shown in Part II) if the review all of the evidence in the record. 130 exclusive standard is used. No matter which standard is used, We address the Supreme Court's conclusion as to the appellate courts must take care not to consider or disregard most appropriate standard below; the relevant point here too little or too much. is its conclusion that differences between the inclusive and exclusive standards are more semantic than real. *827 Conversely, several factors appear to favor application of the inclusive standard. First, when we have said “we must look only at that evidence which tends to support the judgment,” 134 we could not have been speaking literally;
D. Objections: The Standards Are Not The Same no glasses filter evidence, and judges cannot abandon such While we have used the two standards for the scope of review judgments to law clerks or litigants. It is often hard to interchangeably for many years in many different contexts, say whether evidence does or does not support a verdict several arguments suggest they are not the same. —the same facts may support different conclusions, 135 or may support one part of a verdict but not another. 136 Nor First, the courts of appeals often use the two standards can evidence supporting a verdict be identified by which in illustrations of the difference between legal and factual party offered it—parties depend on admissions and crosssufficiency , with the exclusive standard tied to the former and examination during their opponent's case, and minimize the inclusive standard to the latter: damaging evidence by presenting it during their own. As a practical matter, a court cannot begin to say what evidence When [reviewing] legal sufficiency, supports a verdict without reviewing it all.
we consider only the evidence and inferences that tend to support the Second, an appellate court that begins by disregarding one award of damages and disregard party's evidence may strike many citizens as extending all evidence and inferences to the something less than justice for all. Concerns about open contrary.... When we review factual government and open courts suggest an appellate process sufficiency, we consider and weigh that considers all the evidence, though deferring to the jury's all of the evidence and will set aside verdict. While there is some dispute whether Lady Justice the verdict only if it is so against the great weight and preponderance of the should wear a blindfold, 137 the metaphor was surely never evidence that it is clearly wrong and intended to suggest that justice disregards the facts. unjust. 131 In sum, the exclusive standard is helpful in recognizing the distinctive roles of judge and jury, intermediate and But there have always been exceptions to this distinction. 132 supreme court. By contrast, the inclusive standard is helpful As demonstrated in Parts II and III above, it is generally in recognizing what courts actually do, and must be seen to true that the result of legal-sufficiency review is to disregard do. Both are important; we should avoid choosing between contrary evidence, but there are exceptions when a reviewing them if we can.
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justices of the Court of Civil Appeals who overruled a “no evidence” point of error and four dissenting justices of E. Conclusion: The Standards Are The Same the Supreme Court are not men 138 of As both the inclusive and exclusive standards for the scope “reasonable minds.” 139 of legal-sufficiency review have a long history in Texas, as both have been used in other contexts to review matter-of-law It is not hubris that occasionally requires an appellate court motions, as the federal courts have decided the differences to find a jury verdict has no reasonable evidentiary basis. As between the two are more semantic than real, and as both—
Justice Frankfurter stated long ago:
properly applied—must arrive at the same result, we see no compelling reason to choose among them. Only an incompetent or a wilful judge would take a case from the jury [50] [51] The key qualifier, of course, is “properly when the issue should be left to the applied.” The final test for legal sufficiency must always jury. But since questions of negligence be whether the evidence at trial would enable reasonable are questions of degree, often very and fair-minded people to reach the verdict under review. nice differences of degree, judges of Whether a reviewing court begins by considering all the competence and conscience have in evidence or only the evidence supporting the verdict, legal- the past, and will in the future, disagree sufficiency review in the proper light must credit favorable whether proof in a case is sufficient evidence if reasonable jurors could, and disregard contrary to demand submission to the jury. The evidence unless reasonable jurors could not. fact that [one] thinks there was enough to leave the case to the jury does not While judges and lawyers often disagree about legal indicate that the other [is] unmindful sufficiency in particular cases, *828 the disagreements are of the jury's function. The easy but almost always about what evidence jurors can or must credit timid way out for a trial judge is to and what inferences they can or must make. It is inevitable leave all cases tried to a jury for jury in human affairs that reasonable people sometimes disagree; determination, but in so doing he fails thus, it is also inevitable that they will sometimes disagree in his duty to take a case from the jury about what reasonable people can disagree about. This is not when the evidence would not warrant a new problem; Justice Calvert noted it almost fifty years ago: a verdict by it. A timid judge, like a biased judge, is intrinsically a lawless The rule as generally stated is that if reasonable minds cannot differ from judge. 140 the conclusion that the evidence lacks probative force it will be held to be the legal equivalent of no evidence.
V. Application to the Facts The application of the rule can lead to strange results. It is theoretically It remains to apply the scope of review to the facts presented. possible, and sometimes not far from actual fact, that five members of the [52] A majority of the court of appeals affirmed the verdict Supreme Court will conclude that the for the Wilsons, finding legally sufficient evidence that the evidence supporting a finding of a City knew increased flooding on the Wilsons' property was vital fact has no probative force, and substantially certain to occur. 141 The majority pointed to in reaching the conclusion through the following proof. First, the Wilsons' expert testified that application of the rule will thus hold, the revised plan was certain to *829 create flooding. 142 in effect, that the trial judge who Second, as the City admittedly knew that development would overruled a motion for instructed increase runoff and the Sebastian ditch would channel it verdict, the twelve jurors who found toward the Wilsons, so it knew “with absolute certainty”
the existence of the vital fact, the three that flooding would be the result. 143 Third, the City “did
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not explain” why the Master Plan required a drainage ditch no evidence that the City knew the advice it received in across the Wilsons' property but the revised plan did not, response was wrong. thus allowing jurors to infer that the City knew this omission would cause flooding. 144 The Wilsons also point to a letter Sebastian's attorney wrote the City demanding indemnity in case the new ditch flooded [53] Of course, the City did explain why it approved the new the Wilsons. But attorneys must protect a client from potential plan—because three sets of engineers said the omitted ditch liability whether it is *830 real or imagined—and justly so. was unnecessary—but the court felt compelled by the scope In the letter, the attorney never purports to be an expert in of review to disregard that evidence. hydrology, or cite the opinions of anyone who was. This letter may have required the City to investigate, but again is no For several of the reasons stated earlier, we believe the court evidence it knew the advice it received was wrong. 146 of appeals did not properly apply the scope of review. The critical question in this case was the City's state of mind— Our concurring colleagues believe reasonable jurors could the Wilsons had to prove the City knew (not should have nevertheless disregard what all the engineers certified known) that flooding was substantially certain. A reviewing because the City had a financial incentive to believe them court cannot evaluate what the City knew by disregarding rather than pay the Wilsons. Of course, defendants have a most of what it was told. financial incentive to avoid paying damages in every case;
if that incentive alone is some evidence of liability, then [54] Moreover, when a case involves scientific or technical plaintiffs create enough evidence to go to the jury every time issues requiring expert advice (as this one does), jurors cannot they file suit. disregard a party's reliance on experts hired for that very purpose without some evidence supplying a reasonable basis But more important, this ignores what the Wilsons had to 145 prove—not that the City might have disbelieved the engineers'
for doing so. Here, it was uncontroverted that three sets of engineers certified that the revised plans met the City's codes reports, but that it did. This requires evidence of “objective and regulations—and thus would not increase downstream indicia of intent” showing the City knew identifiable harm flooding. The same firm that drew up the original Master Plan was occurring or substantially certain to result. 147 Jurors' certified the revised one; unless the City had some reason to doubts about the engineers' reports or the City's motives could know the first certification was true and the second one was not supply them with objective indicia that the City knew false (of which there was no evidence), there was only one flooding would occur. Constitutional concerns about the roles logical inference jurors could draw. of judge and jury do not allow either to make such evidence up.
None of the evidence cited by the court of appeals showed the City knew more than it was told by the engineers. The We agree with the court of appeals that the Wilsons presented Wilsons' expert testified that flooding was (in his opinion) some evidence that the City damaged their property, and that inevitable, but not that the City knew it was inevitable. The in drawing up and approving drainage plans it was acting Wilsons' expert gave no opinion on the latter point. for a public purpose. The missing piece in the evidence here is proof that the City knew the plans it approved were Second, ending a ditch at a neighbor's property line may substantially certain to increase flooding on the Wilsons' be evidence that a defendant was substantially certain of properties. While the City certainly knew that fact after the the result in some cases, but not in the context of this flooding started, the Wilsons never pleaded or submitted one. City witnesses admitted knowing development would to the jury any takings theory other than the City's initial increase runoff at the head of this drainage system, but not approval. flooding at its foot. Calculating the effect of detention ponds and absorption in a grassy drainage ditch forty-five feet Crediting all favorable evidence that reasonable jurors could wide and over two hundred yards long required hydrological believe and disregarding all contrary evidence except that formulas, computer models, and mathematical calculations. which they could not ignore, we hold there was no evidence The omission of the ditch across the Wilsons' property the City's approval of the revised drainage plan was an obviously raised concerns that the City investigated, but was intentional taking.
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Accordingly, we reverse the court of appeals' judgment and the Wilsons presented some evidence that the City had against the City under article I, section 17 of the Texas independent knowledge flooding was substantially certain to Constitution. Because the court of appeals declined to address occur. In my view, the jury was the proper body to weigh the the jury's alternate verdict for the Wilsons on a claim under witnesses' credibility and resolve these disputed fact issues. I the Texas Water Code, we remand the case to that court to nevertheless agree that the City cannot be liable for a taking in determine that issue. this case because I believe that a city's mere act of approving a private development plan cannot constitute a taking for public use. Accordingly, I concur in the Court's judgment but not its reasoning.
Justice O'NEILL filed a concurring opinion in which Justice MEDINA joined.
Justice JOHNSON did not participate in the decision. I
Questions of intent are generally proved only by Justice O'NEILL, joined by Justice MEDINA, concurring.
circumstantial evidence; as the court of appeals in this The Court does an excellent job of explaining the appropriate case aptly noted, “defendants will rarely admit knowing scope of no-evidence review: the reviewing court “must to a substantial certainty that given results would follow view the evidence in the light favorable to the verdict, from their actions,” and therefore the jury must be “free to crediting favorable evidence if reasonable jurors could, and discredit defendants' protestations that no harm was intended disregarding contrary evidence unless reasonable jurors could and to draw inferences necessary to establish intent.” 86 not.” 168 S.W.3d at 807. I agree with this standard and join S.W.3d 693, 704. I agree with the Court that the jury's Parts I through IV of the Court's opinion. But I cannot join ability to disbelieve the City's protestations is not itself Part V, because the Court misapplies the standard that it so “evidence of liability.” 168 S.W.3d at 830. Instead, the jury's carefully *831 articulates by crediting evidence the jury ability to weigh the witnesses' credibility means that the could reasonably disregard.
City's testimony did not conclusively establish its lack of liability. Because liability is not conclusively negated, we The City of Keller's Master Drainage Plan required it must examine the record to see if there is legally sufficient in part to condemn a 2.8–acre drainage easement on the evidence from which the jury could infer that the City knew Wilson property for construction of an earthen channel flooding was substantially certain to occur. I would hold that forty-five feet wide and five feet deep that would funnel the evidence of intent that was presented in this case allowed water from the adjoining Sebastian property over the the jury to draw such an inference.
Wilson property into the Little Bear Creek Watershed. The City chose not to proceed with this portion of the plan, At trial, the Wilsons presented evidence that the City though, claiming reliance on engineers' assurances that the had independent sources of knowledge that flooding was developers' installation of retention ponds on neighboring substantially certain to occur. First, they demonstrated that land could prevent flooding. The drainage channel that was the developers' plan itself was flawed. Rather than incorporate actually built ended at the edge of the Sebastian property and a drainage ditch running across the Wilson property, as the funneled water directly onto the Wilsons' land, destroying City's Master Plan required, the developers' plan ended the eight acres of farmland worth almost $300,000. The Court drainage ditch abruptly at the edge of the Wilson property.
holds that the jury was required to believe the City's testimony The Wilsons' expert testified that the plan's implementation that it relied on the engineers' assurances and thus did not would necessarily “increase the volume and flow of water know flooding was substantially certain to occur, stating across the Wilson property from the rate of fifty-five cubic that when a case requires expert testimony “jurors cannot feet per second to ninety-three cubic feet per second.” *832 disregard a party's reliance on experts hired for that very 86 S.W.3d at 703. Second, the City was aware that water purpose without some evidence supplying a reasonable basis flowed across the Wilson property before the development for doing so.” 168 S.W.3d at 829. Even if this were an commenced, and, as the court of appeals pointed out, the appropriate review standard—which it hasn't been until today City's Director of Public Works admitted that the City knew —I believe the jury had a reasonable basis upon which the development would increase the water's flow and velocity;
to disregard the City's professed reliance; the City had a specifically, he testified that “the City knew the upstream financial incentive to disclaim knowledge of the flooding,
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water would be absorbed less and would flow faster due to Moreover, the Court's conclusion that juries cannot disregard the removal of trees and vegetation from the developments a party's reliance on expert opinions is not consistent with our and from the forty-five-foot-wide earthen channel” that ended jurisprudence. The Court cites two cases for this proposition, at the Wilson property's edge. Id. at 705. Finally, there but neither supports the Court's analysis; instead, both cases was evidence that the City received a letter warning that support the conclusion that the jury, as the finder of fact, the developers' plan would subject the Wilson property to should appropriately resolve factual disputes regarding a flooding. party's reliance on hired experts. Provident Am. Ins. Co. v.
Castañeda, 988 S.W.2d 189, 194–95 (Tex.1998); State Farm While I believe there is some evidence that the City knew Lloyds v. Nicolau, 951 S.W.2d 444, 448–50 (Tex.1997). flooding was substantially certain to occur, there is also some evidence that it did not. City officials testified that In Castañeda, a bad-faith insurance case, there was no they relied on the representations of engineers who assured question that the insurer had relied on an expert's assurances them retention ponds could substitute for a drainage easement and thus no dispute about whether the *833 jury could and the Wilson property would not be damaged. If the jury have disregarded that evidence. Castañeda, 988 S.W.2d accepted this evidence as true, I agree that the intent element at 194–95. In that case, we performed a traditional legal would be negated, which would preclude the City's takings sufficiency analysis and concluded there was no evidence that liability. But I do not agree that the jury was bound to the defendant acted in bad faith. Id. at 194. We did state that accept the City's testimony as true. The Court itself notes reliance on an expert's opinion will not preclude a finding that jurors “may choose to believe one witness and disbelieve of bad faith if the expert's opinion was “unreliable and the another,” and that “[c]ourts reviewing all the evidence in a insurer knew or should have known that to be the case.” Id. light favorable to the verdict thus assume that jurors credited However, we did not hold that the jury must credit a party's testimony favorable to the verdict and disbelieved testimony testimony that it relied on an expert. contrary to it.” 168 S.W.3d at 819. This statement mirrors our prior jurisprudence, which has long provided that a jury “has We reiterated this point in Nicolau, another bad-faith several alternatives available when presented with conflicting insurance case. There, the Court noted “we have never held evidence” because it “may believe one witness and disbelieve that the mere fact that an insurer relies upon an expert's report others,” “may resolve inconsistencies in the testimony of any to deny a claim automatically forecloses bad faith recovery as witness,” and “may accept lay testimony over that of experts.” a matter of law,” and again concluded that purported “reliance McGalliard v. Kuhlmann, 722 S.W.2d 694, 697 (Tex.1986) upon an expert's report, standing alone, will not necessarily (citations omitted). shield” the defendant from liability. Nicolau, 951 S.W.2d at 448. The Court conceded that “[w]ere we the trier of fact in As the Court itself states, jurors are required to credit this case, we may well have concluded that [the insurer] did undisputed testimony only when it is “clear, positive, not act in bad faith,” but concluded that the “determination is direct, otherwise credible, free from contradictions and not ours to make” because “the Constitution allocates that task inconsistencies, and could have been readily controverted.” to the jury and prohibits us from reweighing the evidence.” 168 S.W.3d at 820. The City's testimony does not meet this Id. at 450 (citing TEX. CONST. art. I, § 15, art. V, §§ 6, 10). standard. The City Manager did testify that the City “would not have approved the developments unless [it was] assured The same is true in this case. The jury was not required to that the developments did not increase the velocity of water believe that the City did not know flooding was substantially or the flow of water” onto the neighboring property. 86 certain to occur because it relied on assurances to the S.W.3d at 706. But the Wilsons disputed whether the City's contrary; as a reviewing Court, we should “assume that jurors protestations were credible, pointing out that the City had a credited testimony favorable to the verdict and disbelieved powerful incentive to profess a lack of knowledge through testimony contrary to it.” 168 S.W.3d at 819. Such credibility reliance on the engineers' assurances because it would then determinations are uniquely suited and constitutionally avoid the considerable expense of compensating the Wilsons committed to the fact finder. See TEX. CONST. art. I, § 15, for the property that would otherwise have been condemned art. V, § 6; see also Nicolau, 951 S.W.2d at 450. under the Master Drainage Plan. See id. at 705.
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Other courts, faced with similar facts, have also concluded
II
that a governmental entity cannot be liable for a taking Although I disagree with the Court's conclusion that the jury when its only action is to approve a private development was required to credit the City's testimony, I agree with plan. See Phillips v. King County, 136 Wash.2d 946, 968 its judgment in the City's favor because, in my view, the P.2d 871, 879 (1998); see also Pepper v. J.J. Welcome City's mere approval of the private development plans did not Constr. Co., 73 Wash.App. 523, 871 P.2d 601, 606 (1994). result in a taking for public use, as the constitutional standard In Phillips, the Washington Supreme Court observed that requires for a compensable taking. TEX. CONST. art. I, § there is no public aspect to a private development and 17. The City did not appropriate or even regulate the use concluded that “[i]f the county or city were liable for the of the Wilsons' land, nor did it design the drainage plan for negligence of a private developer, based on approval under the proposed subdivisions. Instead, the City merely approved existing regulations, then the municipalities, and ultimately subdivision plans designed by private developers, and that the taxpayers, would become the guarantors or insurers for the design included inadequate drainage capabilities. The City actions of private developers whose development damages argues, and I agree, that its mere approval of private plans did neighboring properties.” Phillips, 968 P.2d at 878. The court not transfer responsibility for the content of those plans from in Pepper similarly examined an inverse condemnation claim the developers to the City. Municipalities review subdivision based upon a county's approval of private developments with plats “to ensure that subdivisions are safely constructed and defective drainage plans; it, too, concluded that the county's to promote the orderly development of the community.” City approval did not cause the resultant flooding and did not of Round Rock v. Smith, 687 S.W.2d 300, 302 (Tex.1985); result in an unconstitutional taking. Pepper, 871 P.2d at 606. see TEX. LOC. GOV'T CODE § 212.002. Such a review The court noted that the flooding was “not the result of the is intended to protect the city's residents; it is not intended County appropriating or regulating their use of the land,” and to transfer responsibility for a flawed subdivision design held that “[t]he fact that a county regulates development and from the developers to the municipality. See, e.g., City of requires compliance with road and drainage restrictions does Round Rock, 687 S.W.2d at 302; see also Cootey v. Sun not transform a private development into a public project.” Inv., Inc., 68 Haw. 480, 718 P.2d 1086, 1091 (1986) (holding Id. The court concluded that because “land use regulation that “[t]he permit process by which the County approves of [the plaintiffs'] property did not cause the damages, no or disapproves the development of a proposed subdivision inverse condemnation was involved.” Id. I am persuaded by reflects an effort by government to require the developer the reasoning of the courts in Phillips and Pepper, and would to meet his responsibilities under the subdivision rules, similarly conclude that the City's plat approval in this case did regulations, and laws,” and that “the primary responsibility of not amount to an unconstitutional taking as a matter of law. providing an adequate and safe development rests with ... the developer, and not with the County”). The court of appeals in this case advanced an alternative reason for affirming the trial court's judgment, suggesting that Because the primary responsibility for a development's design even if the City could not be liable for merely approving rests with the developer, *834 and because the plat- a subdivision plat, it could nevertheless be held liable for approval process does not transfer such responsibility to the failing to condemn a drainage easement across the Wilson municipality, mere plat approval cannot be a basis upon property. 86 S.W.3d at 707. The court of appeals stated which to predicate takings liability. We have held that, to that “the City chose not to condemn any of the Wilson be liable for a taking, a governmental entity must “perform property,” but instead “allow[ed] the water flowing from certain acts in the exercise of its lawful authority ... which the Sebastian easement to discharge, uncontrolled, across the resulted in the taking or damaging of plaintiffs' property, Wilson property.” Id. As noted above, however, it was the and which acts were the proximate cause of the taking or developers' plan—not the City's actions—that allowed the damaging of such property.” State v. Hale, 136 Tex. 29, water to flood the Wilson property. Because the City's action 146 S.W.2d 731, 736 (1941) (emphasis added). In this case, did not cause the flooding, I disagree that the City's failure flooding resulted from the developers' defective drainage to condemn an easement is relevant to takings liability. If design, not from the City's approval of the plat; thus, the City's the City were responsible for the flooding but chose not approval was not the proximate cause of the damage to the to condemn the property, it might be subject to inverse- Wilson property. condemnation liability. See Tarrant County Reg'l Water Dist.
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—not the City's approval—caused the flooding damage in v. Gragg, 151 S.W.3d 546, 554 (Tex.2004) (“When the this case, I would hold that the City cannot be held liable for government takes private property without first paying for it, an unconstitutional taking under Article I, Section 17 of the the owner may recover damages for inverse condemnation.”).
Texas Constitution.
However, if a governmental entity's actions are not the *835 “proximate cause of the taking or damaging” of the property, then the entity cannot be liable for a taking. Hale, 146 S.W.2d at 736. Accordingly, the entity need not condemn property III merely because a private entity is causing damage. This rule does not leave owners of flooded property without a remedy; Because I believe the Court fails to give due regard to the when a private development floods neighboring land, the jury's right to make credibility determinations, I cannot join owner of the damaged property will ordinarily have recourse Part V of the Court's opinion. But because I conclude that against the private parties causing the damage. See TEX. the City's mere act of approving a private development plan WATER CODE § 11.086(a), (b) (providing that “[n]o person did not cause the Wilson property to be “taken, damaged or may divert or impound the natural flow of surface waters in destroyed for or applied to public use,” TEX. CONST. art. I, this state ... in a manner that damages the property of another § 17, I agree that the City cannot be held liable for a taking in by the overflow of the water diverted or impounded” and that this case. Accordingly, I concur in the Court's judgment. “[a] person whose property is injured by an overflow of water caused by an unlawful diversion or impounding has remedies All Citations at law and in equity and may recover damages occasioned by the overflow”). Because the developers' design of the plat 168 S.W.3d 802, 48 Tex. Sup. Ct. J. 848
Footnotes 1 The City of Fort Worth asserts in an amicus brief that in 2001 alone it approved 325 subdivision plats creating 5,857 residential lots within its extraterritorial jurisdiction, which of course excludes surrounding communities.
2 Evidence at trial and briefs by amici indicate that cities normally acquire title to these easements to ensure they are properly mowed and maintained after the developers' departure.
3 TEX. CONST. art. I, § 17; City of Dallas v. Jennings, 142 S.W.3d 310, 313–14 (Tex.2004). 4 86 S.W.3d 693, 715, 717. 5 Id. at 700. 6 See, e.g., Wal–Mart Stores, Inc. v. Canchola, 121 S.W.3d 735, 739 (Tex.2003) (per curiam); Bradford v. Vento, 48 S.W.3d 749, 754 (Tex.2001); City of Fort Worth v. Zimlich, 29 S.W.3d 62, 69 (Tex.2000); Wal–Mart Stores, Inc. v. Gonzalez, 968 S.W.2d 934, 936 (Tex.1998); Cont'l Coffee Prods. Co. v. Cazarez, 937 S.W.2d 444, 450 (Tex.1996); Burroughs Wellcome Co. v. Crye, 907 S.W.2d 497, 499 (Tex.1995); Browning–Ferris, Inc. v. Reyna, 865 S.W.2d 925, 928 (Tex.1993); Holt Atherton Indus., Inc. v. Heine, 835 S.W.2d 80, 84 (Tex.1992); Weirich v. Weirich, 833 S.W.2d 942, 945 (Tex.1992); Havner v. E–Z Mart Stores, Inc., 825 S.W.2d 456, 458 (Tex.1992); Lewelling v. Lewelling, 796 S.W.2d 164, 166 (Tex.1990); Burkard v. ASCO Co., 779 S.W.2d 805, 806 (Tex.1989) (per curiam); Brown v. Edwards Transfer Co., 764 S.W.2d 220, 223 (Tex.1988); City of Gladewater v. Pike, 727 S.W.2d 514, 518 (Tex.1987); King v. Bauer, 688 S.W.2d 845, 846 (Tex.1985); Tomlinson v. Jones, 677 S.W.2d 490, 492 (Tex.1984); Glover v. Tex. Gen. Indem. Co., 619 S.W.2d 400, 401 (Tex.1981) (per curiam); Holley v. Adams, 544 S.W.2d 367, 370 (Tex.1976); Garza v. Alviar, 395 S.W.2d 821, 823 (Tex.1965); Wininger v. Ft. Worth & D.C. Ry. Co., 105 Tex. 56, 143 S.W. 1150, 1152 (1912).
7 See, e.g., St. Joseph Hosp. v. Wolff, 94 S.W.3d 513, 519 (Tex.2002) (plurality op.); Associated Indem. Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 285–86 (Tex.1998); State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d 38, 40 (Tex.1998); Formosa Plastics Corp. v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 48 (Tex.1998); Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d 706, 711 (Tex.1997); White v. Southwestern Bell Tel. Co., 651 S.W.2d 260, 262 (Tex.1983); Burk Royalty v. Walls, 616 S.W.2d 911, 922 (Tex.1981); Harbin v. Seale, 461 S.W.2d 591, 592 (Tex.1970); De Winne v. Allen, 154 Tex. 316, 277 S.W.2d 95, 97 (1955); Hall v. Med. Bldg. of Houston, 151 Tex. 425, 251 S.W.2d 497, 498 (1952).
8 Tarrant Reg'l Water Dist. v. Gragg, 151 S.W.3d 546, 552 (Tex.2004); Bostrom Seating, Inc. v. Crane Carrier Co., 140 S.W.3d 681, 684 (Tex.2004); Lozano v. Lozano, 52 S.W.3d 141, 144 (Tex.2001) (per curiam); La.-Pac. Corp. v. Andrade,
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19 S.W.3d 245, 247 (Tex.1999); Latham v. Castillo, 972 S.W.2d 66, 68 (Tex.1998); Brown v. Bank of Galveston, Nat'l Ass'n, 963 S.W.2d 511, 513 (Tex.1998).
9 See, e.g., Coastal Transp. Co. v. Crown Cent. Petroleum Corp., 136 S.W.3d 227, 234 (Tex.2004); Szczepanik v. First S. Trust Co., 883 S.W.2d 648, 649 (Tex.1994) (per curiam); compare Biggers v. Cont'l Bus Sys., Inc., 157 Tex. 351, 303 S.W.2d 359, 363 (1957) (“We may consider only that evidence, if any, which, viewed in its most favorable light, supports the jury findings, and we must disregard all evidence which would lead to a contrary result.”) (emphasis added), with Biggers v. Cont'l Bus Sys., Inc., 157 Tex. 351, 298 S.W.2d 79, 81 (1956) (“[T]he duty of this Court [is] to examine and consider all of the evidence bearing on the controlling issues, and having done so to decide whether there is evidence of probative value to support the answers made by the jury to the issues.”) (quotation omitted) (emphasis added), and Cartwright v. Canode, 106 Tex. 502, 171 S.W. 696, 698 (1914) (“[W]e must reject all evidence favorable to the plaintiffs in error, and consider only the facts and circumstances which tend to sustain the verdict.... In considering this question, we must take into account all of the facts and circumstances attending the transaction.”).
10 See, e.g., W. Wendell Hall, Standards of Review in Texas, 34 ST. MARY'S L.J. 1, 159–62 (2002); William V. Dorsaneo, III, Judges, Juries, & Reviewing Courts, 53 SMU L.R. 1497, 1498, 1507–11 (2000); Phil Hardberger, Juries Under Siege, 30 ST. MARY'S L.J. 1, 40–41 (1998). But see William Powers, Jr., Judge & Jury in the Texas Supreme Court, 75 TEX. L.REV. 1699, 1699–1700, 1704–19 (1997) (concluding the Court is not changing the no-evidence standard of review but is moving away from broad definitions of duty and toward particularized definitions of duty).
11 Robert W. Calvert was an associate justice of this Court from 1950 to 1960, and Chief Justice from 1961 to 1972. 12 Robert W. Calvert, “No Evidence” & “Insufficient Evidence” Points of Error, 38 TEX. L.REV. 361 (1960). 13 Id. at 361. 14 “Most of what has been said here is repetitious of what has been said before in the cited cases and articles. The purpose of the writer here has been to try to bring former writings on the subject into compact form and under somewhat closer analysis.” Id. at 371.
15 Id. at 362–63. 16 See, e.g., King Ranch, Inc. v. Chapman, 118 S.W.3d 742, 751 (Tex.2003); Marathon Corp. v. Pitzner, 106 S.W.3d 724, 727 (Tex.2003) (per curiam); Uniroyal Goodrich Tire Co. v. Martinez, 977 S.W.2d 328, 334 (Tex.1998); Mar. Overseas Corp. v. Ellis, 971 S.W.2d 402, 409 (Tex.1998); Merrell Dow Pharm., Inc. v. Havner, 953 S.W.2d 706, 711 (Tex.1997); Anderson v. City of Seven Points, 806 S.W.2d 791, 795 n. 3 (Tex.1991); Cecil v. Smith, 804 S.W.2d 509, 510 n. 2 (Tex.1991); Juliette Fowler Homes, Inc. v. Welch Assocs., Inc., 793 S.W.2d 660, 666 n. 9 (Tex.1990).
17 Calvert, supra note 12, at 364. 18 See In re J.F.C., 96 S.W.3d 256, 266 (Tex.2002); Uniroyal, 977 S.W.2d at 340; Triton Oil & Gas Corp. v. Marine Contractors & Supply, Inc., 644 S.W.2d 443, 446 (Tex.1982).
19 Calvert, supra note 12, at 364 (“If there is an absolute absence of evidence of a vital fact ... an appellate court has no occasion to concern itself with an abstract rule such as how minds of reasonable men might view the situation.”).
20 New Times, Inc. v. Isaacks, 146 S.W.3d 144, 158–59 (Tex.2004); Turner v. KTRK Television, Inc., 38 S.W.3d 103, 114 (Tex.2000); Guisti v. Galveston Tribune, 105 Tex. 497, 150 S.W. 874, 877–78 (1912).
21 Bentley v. Bunton, 94 S.W.3d 561, 581 (Tex.2002) (considering remarks in context of series of talk-show programs);
Turner, 38 S.W.3d at 115 (holding defamation includes story in which details are right but gist is wrong).
22 Shell Oil Co. v. Khan, 138 S.W.3d 288, 292 (Tex.2004). 23 DeWitt County Elec. Co-op., Inc. v. Parks, 1 S.W.3d 96, 102 (Tex.1999). 24 Tiller v. McLure, 121 S.W.3d 709, 714 (Tex.2003) (per curiam); see also Tex. Farm Bureau Mut. Ins. Cos. v. Sears, 84 S.W.3d 604, 610–11 (Tex.2002); GTE Southwest, Inc. v. Bruce, 998 S.W.2d 605, 612 (Tex.1999).
25 See George Grubbs Enters., Inc. v. Bien, 881 S.W.2d 843, 852–53 (Tex.App.-Fort Worth 1994) (holding that efforts to pressure deaf-mute consumer to buy car were legally sufficient evidence of intentional infliction), rev'd on other grounds, 900 S.W.2d 337, 338 (Tex.1995).
26 See Tiller, 121 S.W.3d at 714 (holding efforts to pressure widow of contracting party to complete project were legally insufficient evidence of intentional infliction).
27 See, e.g., id. at 713–14 (discussing contrary evidence showing defendant's reasonable concerns about timeliness of plaintiff's work); Sears, 84 S.W.3d at 612 (discussing contrary evidence that defendant believed claimant was involved in suspicious dealings).
28 Bostrom Seating, Inc. v. Crane Carrier Co., 140 S.W.3d 681, 684, 685 (Tex.2004) (holding no evidence supported defect as comments from deposition “were read out of context”).
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29 Coastal Transp. Co. v. Crown Cent. Petroleum Corp., 136 S.W.3d 227, 232 n. 1 (Tex.2004) (citing Henry v. Phillips, 105 Tex. 459, 151 S.W. 533, 538 (1912)). This rule was changed for hearsay evidence in 1983. See TEX.R. EVID. 802 (“Inadmissible hearsay admitted without objection shall not be denied probative value merely because it is hearsay.”).
30 Tex. & P. Ry. Co. v. Ball, 96 Tex. 622, 75 S.W. 4, 6 (1903). 31 Minyard Food Stores, Inc. v. Goodman, 80 S.W.3d 573, 579 (Tex.2002) (holding defamation was not in course and scope of employment as duties required employee to cooperate in investigation but not to lie); Robertson Tank Lines, Inc. v. Van Cleave, 468 S.W.2d 354, 360 (Tex.1971) (holding truck driver was not in course of employment during social visit to his father).
32 Bowles v. Bourdon, 148 Tex. 1, 219 S.W.2d 779, 782–83 (1949) (affirming directed verdict against malpractice claim as inadequate expert testimony from doctor of same school or practice as defendant rendered proof legally insufficient).
33 See Leitch v. Hornsby, 935 S.W.2d 114, 119 (Tex.1996). 34 See Burroughs Wellcome Co. v. Crye, 907 S.W.2d 497, 499–500 (Tex.1995) (holding opinion that spray caused frostbite was legally insufficient as it assumed absence of redness when plaintiff admitted the contrary); Roark v. Allen, 633 S.W.2d 804, 809 (Tex.1982) (holding opinion that physician should have warned of possible skull fracture was legally insufficient as it assumed physician was aware of fracture when there was no proof he was).
35 See E.I. du Pont de Nemours & Co. v. Robinson, 923 S.W.2d 549, 556 (Tex.1995) (adopting reasoning of Daubert v.
Merrell Dow Pharms., Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993)).
36 Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d 706, 714, 720 (Tex.1997). 37 Id. at 711, 724–30. 38 Kerr–McGee Corp. v. Helton, 133 S.W.3d 245, 254–57 (Tex.2004). 39 Calvert, supra note 12, at 364. 40 Id. at 364–65. 41 Ford Motor Co. v. Ridgway, 135 S.W.3d 598, 601 (Tex.2004) (holding evidence that truck caught fire unaccompanied by proof identifying any defect did not exceed a scintilla, as jurors would have to guess cause); Marathon Corp. v. Pitzner, 106 S.W.3d 724, 729 (Tex.2003) (per curiam); Hammerly Oaks, Inc. v. Edwards, 958 S.W.2d 387, 392 (Tex.1997); W. Tel. Corp. v. McCann, 128 Tex. 582, 99 S.W.2d 895, 900 (Tex.1937); Calvert, supra note 12, at 365.
42 Tubelite, a Div. of Indal, Inc. v. Risica & Sons, Inc., 819 S.W.2d 801, 805 (Tex.1991); see also Litton Indus. Prods., Inc.
v. Gammage, 668 S.W.2d 319, 324 (Tex.1984) (citing Tex. Sling Co. v. Emanuel, 431 S.W.2d 538, 541 (Tex.1968)).
43 Lozano, 52 S.W.3d at 167. 44 Calvert, supra note 12, at 365. 45 Id. 46 Wal–Mart Stores, Inc. v. Gonzalez, 968 S.W.2d 934, 938 (Tex.1998). 47 See Marathon Corp. v. Pitzner, 106 S.W.3d 724, 729 (Tex.2003) (per curiam); McCann, 99 S.W.2d at 900. 48 Calvert, supra note 12, at 363–64. But other commentators disagree. See Powers, supra note 10, at 1703–10. We have held that a “conclusively and as a matter of law” point may be asserted under a “no evidence” point. O'Neil v. Mack Trucks, Inc., 542 S.W.2d 112, 113 (Tex.1976). And the cases in this section note that conclusive proof is often asserted by parties that do not carry the burden of proof. See also Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241 (Tex.2001) (per curiam) (court must first examine record for evidence supporting verdict, ignoring all evidence to the contrary; if there is no such evidence, the court then examines the entire record to see if the contrary finding is established as a matter of law).
49 Calvert, supra note 12, at 363–64. But see, e.g., Cecil v. Smith, 804 S.W.2d 509, 510 n. 2 (Tex.1991) (“Cecil's points that (1) there was no evidence to support the findings and (2) the contrary of each finding was established as a matter of law will hereinafter collectively be referred to as her “no evidence” points.”).
50 St. Joseph Hosp. v. Wolff, 94 S.W.3d 513, 519–20 (Tex.2002) (plurality op.) (quoting Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 51 n. 1 (Tex.1997)).
51 Tex. & N.O.R Co. v. Burden, 146 Tex. 109, 203 S.W.2d 522, 528, 530 (1947); see also Prudential Ins. Co. of Am. v. Krayer, 366 S.W.2d 779, 783 (Tex.1963) (finding evidence of suicide undisputed after disregarding disputed portion of facts).
52 Sullivan v. Barnett, 471 S.W.2d 39, 44 (Tex.1971); Wright v. Vernon Compress Co., 156 Tex. 474, 296 S.W.2d 517, 523 (1956) (“[T]he trial court is required to submit only controverted issues. No jury finding is necessary to establish undisputed facts.”); Clark v. Nat'l Life & Accident Ins. Co., 145 Tex. 575, 200 S.W.2d 820, 822 (1947) ( “Uncontroverted questions of fact need not be and should not be submitted to the jury for its determination.”); S. Underwriters v. Wheeler, 132 Tex. 350, 123 S.W.2d 340, 341 (Tex.1939).
53 County of Bexar v. Santikos, 144 S.W.3d 455, 460–61 (Tex.2004).
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54 PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd. P'ship, 146 S.W.3d 79, 97–98 (Tex.2004). 55 State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d 38, 40 (Tex.1998). 56 Wal–Mart Stores, Inc. v. Miller, 102 S.W.3d 706, 709–10 (Tex.2003) (per curiam). 57 See Johnson & Johnson Med., Inc. v. Sanchez, 924 S.W.2d 925, 930 (Tex.1996). 58 King v. Graham, 126 S.W.3d 75, 78–79 (Tex.2003) (per curiam) (holding no evidence supported malicious prosecution claim as district attorney admitted prosecution was due to item he overlooked rather than any false statements by defendants).
59 Travelers Ins. Co. v. Seabolt, 361 S.W.2d 204, 206 (Tex.1962) (return to regular job in which use of hand was required conclusively established claimant did not suffer total loss of use).
60 Navarette v. Temple Indep. Sch. Dist., 706 S.W.2d 308, 309–10 (Tex.1986) (return to work did not conclusively establish injury was not total as claimant could not do regular work and employer voluntarily accommodated her with lesser duties).
61 See, e.g., Prudential Ins. Co. of Am. v. Krayer, 366 S.W.2d 779, 783 (Tex.1963). 62 See Republic Nat'l Life Ins. Co. v. Heyward, 536 S.W.2d 549, 552 (Tex.1976). 63 Uniroyal Goodrich Tire Co. v. Martinez, 977 S.W.2d 328, 340 (Tex.1998); Triton Oil & Gas Corp. v. Marine Contractors & Supply, Inc., 644 S.W.2d 443, 446 (Tex.1982).
64 811 S.W.2d 557, 560 (Tex.1991). 65 Id. at 558. 66 Id. at 560. In defense of jurors, it should be noted that the trier-of-fact in Murdock was a judge. 67 135 Tex. 7, 136 S.W.2d 1113, 1115 (1940). 68 Id. 69 Id. 70 Clewis v. State, 922 S.W.2d 126, 133 n. 12 (Tex.Crim.App.1996) (en banc) (citation omitted). 71 Hotchkiss v. Nat'l City Bank, 200 F. 287, 293 (S.D.N.Y.1911). 72 443 U.S. 307, 320 n. 14, 99 S.Ct. 2781, 61 L.Ed.2d 560 (1979). 73 Southwestern Bell Tel. Co. v. Garza, 164 S.W.3d 607, 627 (Tex.2004). 74 Our sister court reviews the legal sufficiency of criminal convictions by considering “all evidence which the jury was permitted, whether rightly or wrongly, to consider” in the light most favorable to the prosecution. Moff v. State, 131 S.W.3d 485, 488 (Tex.Crim.App.2004); see also Vodochodsky v. State, 158 S.W.3d 502, 509 (Tex.Crim.App.2005).
75 In re J.F.C., 96 S.W.3d 256, 266 (Tex.2002). 76 Bentley v. Bunton, 94 S.W.3d 561, 596 (Tex.2002); Turner v. KTRK Television, Inc., 38 S.W.3d 103, 120 (Tex.2000). 77 Garza, 164 S.W.3d at 627. 78 616 S.W.2d 911, 922 (Tex.1981). 79 Id. at 926 (Greenhill, C.J., concurring). 80 See Coastal Transp. Co. v. Crown Cent. Petroleum Corp., 136 S.W.3d 227, 234–35 (Tex.2004). 81 Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 55–56 (Tex.1997). 82 See id. at 51 (noting same problem with previous test whether insurer had reasonable basis for denying claim). 83 See Rocor Int'l, Inc. v. Nat'l Union Fire Ins. Co., 77 S.W.3d 253, 262–63 (Tex.2002) (finding no evidence of bad faith based in part on defendant's correspondence showing misunderstanding regarding settlement terms); State Farm Fire & Cas. Co. v. Simmons, 963 S.W.2d 42, 45 (Tex.1998)(affirming bad-faith verdict after noting that insurer gave contradictory reasons for not interviewing potential arsonists); Minn. Life Ins. Co. v. Vasquez, 133 S.W.3d 320, 330 (Tex.App.-Corpus Christi 2004, pet. filed) (finding some evidence of bad faith because, though insurer showed hospital stymied its efforts to obtain records, insurer failed to seek same information from other sources); Allstate Tex. Lloyds v. Mason, 123 S.W.3d 690, 704–06 (Tex.App.-Fort Worth 2003, no pet.) (reversing bad-faith verdict for legal insufficiency because insurer reasonably relied on expert report); Allison v. Fire Ins. Exch., 98 S.W.3d 227, 249–50 (Tex.App.-Austin 2002, pet. granted, judgm't vacated w.r.m.) (affirming bad-faith verdict after reviewing insurer's reasons for delay and insured's responsive evidence); Oram v. State Farm Lloyds, 977 S.W.2d 163, 167 (Tex.App.-Austin 1998, no pet.) (reversing bad-faith verdict for legal insufficiency because insurer's interpretation of exclusion was reasonable though incorrect).
84 Wal–Mart Stores, Inc. v. Canchola, 121 S.W.3d 735, 740 (Tex.2003) (per curiam) (noting liability may be established by proof of discrimination plus proof employer's reason was pretext); Cont'l Coffee Prods. Co. v. Cazarez, 937 S.W.2d 444, 452 (Tex.1996) (same).
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85 See, e.g., Univ. of Houston v. Clark, 38 S.W.3d 578, 583 (Tex.2000) (noting good-faith test considers all circumstances on which official acted).
86 See, e.g., PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd. P'ship, 146 S.W.3d 79, 94 (Tex.2004) (holding no evidence supported jury verdict applying discovery rule based on contrary evidence that claimant's predecessor knew 3,000 windows had failed).
87 See, e.g., Provident Am. Ins. Co. v. Castaneda, 988 S.W.2d 189, 194–95 (Tex.1998) (finding no evidence insurer denied claim in bad faith due to conflicting medical evidence).
88 See, e.g., State Farm Lloyds v. Nicolau, 951 S.W.2d 444, 448 (Tex.1997) (holding some evidence showed expert report was pretext and thus denial of claim had no reasonable basis).
89 Golden Eagle Archery, Inc. v. Jackson, 116 S.W.3d 757, 761 (Tex.2003); Jaffe Aircraft Corp. v. Carr, 867 S.W.2d 27, 28 (Tex.1993); McGalliard v. Kuhlmann, 722 S.W.2d 694, 697 (Tex.1986); Edrington v. Kiger, 4 Tex. 89, 93 (1849).
90 McGalliard, 722 S.W.2d at 697; Silcott v. Oglesby, 721 S.W.2d 290, 293 (Tex.1986); Ford v. Panhandle & Santa Fe Ry.
Co., 151 Tex. 538, 252 S.W.2d 561, 563 (1952) (holding it was up to jurors “to resolve conflicts and inconsistencies in the testimony of any one witness as well as in the testimony of different witnesses”); Houston, E. & W.T. Ry. Co. v. Runnels, 92 Tex. 305, 47 S.W. 971, 972 (1898).
91 Turner v. KTRK Television, Inc., 38 S.W.3d 103, 120 (Tex.2000). 92 Runnels, 47 S.W. at 972. 93 Cochran v. Wool Growers Cent. Storage Co., 140 Tex. 184, 166 S.W.2d 904, 907 (1942) (noting the Court “read the entire statement of facts”).
94 Harbin v. Seale, 461 S.W.2d 591, 594 (Tex.1970); compare Harbin v. Seale, 454 S.W.2d 271, 272 (Tex.Civ.App.-Dallas 1970) (reporting defendant's testimony that he was traveling only 40 miles per hour), rev'd, 461 S.W.2d 591 (Tex.1970).
95 MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 653–54 (Tex.1999) (holding evidence allowed jurors to disbelieve defendant's experts' testimony even though plaintiff's expert's testimony was shown to be in error); Runnels, 47 S.W. at 972; Cheatham v. Riddle, 12 Tex. 112, 118 (1854).
96 PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd. P'ship, 146 S.W.3d 79, 100 (Tex.2004). 97 Anchor Cas. Co. v. Bowers, 393 S.W.2d 168, 169–70 (Tex.1965). 98 Uniroyal Goodrich Tire Co. v. Martinez, 977 S.W.2d 328, 338 (Tex.1998); McGalliard v. Kuhlmann, 722 S.W.2d 694, 697 (Tex.1986).
99 Bentley v. Bunton, 94 S.W.3d 561, 599 (Tex.2002). 100 See TEX.R. CIV. P. 166a(c); Wal–Mart Stores, Inc. v. Reece, 81 S.W.3d 812, 817 (Tex.2002) (finding no evidence that store knew of puddle based in part on uncontradicted testimony by only employee in the area); In re Doe 4, 19 S.W.3d 322, 325 (Tex.2000); WFAA–TV, Inc. v. McLemore, 978 S.W.2d 568, 574 (Tex.1998) (holding reporter's detailed explanation of foundation of report established lack of malice as matter of law).
101 See, e.g., Dresser Indus., Inc. v. Lee, 880 S.W.2d 750, 754 (Tex.1993); Lyons v. Millers Cas. Ins. Co., 866 S.W.2d 597, 601 (Tex.1993); Biggers v. Cont'l Bus Sys., Inc., 157 Tex. 351, 303 S.W.2d 359, 365 (1957); Howard Oil Co. v. Davis, 76 Tex. 630, 13 S.W. 665, 667 (1890) (holding reviewing court must uphold jury verdict despite strong evidence to the contrary if evidence is conflicting).
102 See, e.g., Gen. Motors Corp. v. Sanchez, 997 S.W.2d 584, 592 (Tex.1999); Caller–Times Publ'g Co. v. Triad Communications, Inc., 826 S.W.2d 576, 580 (Tex.1992); Bendalin v. Delgado, 406 S.W.2d 897, 899 (Tex.1966).
103 Formosa Plastics Corp. USA v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 48–49 (Tex.1998). 104 Associated Indem. Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 286 (Tex.1998). 105 White v. Southwestern Bell Tel. Co., 651 S.W.2d 260, 262–63 (Tex.1983). 106 Hall v. Med. Bldg. of Houston, 151 Tex. 425, 251 S.W.2d 497, 502 (1952). 107 St. Joseph Hosp. v. Wolff, 94 S.W.3d 513, 542–43 (Tex.2002) (plurality op.). 108 T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 221 (Tex.1992). 109 Uniroyal Goodrich Tire Co. v. Martinez, 977 S.W.2d 328, 341–42 (Tex.1998). 110 De Winne v. Allen, 154 Tex. 316, 277 S.W.2d 95, 98–99 (1955). 111 Lozano v. Lozano, 52 S.W.3d 141, 144 (Tex.2001) (per curiam); id. at 162–63 (Hecht, J., concurring and dissenting). 112 See Tarrant Reg'l Water Dist. v. Gragg, 151 S.W.3d 546, 552 (Tex.2004); Coastal Transp. Co. v. Crown Cent. Petroleum Corp., 136 S.W.3d 227, 234 (Tex.2004); Ford Motor Co. v. Ridgway, 135 S.W.3d 598, 601 (Tex.2004); Mobil Oil Corp. v. Ellender, 968 S.W.2d 917, 922 (Tex.1998); Merrell Dow Pharm., Inc. v. Havner, 953 S.W.2d 706, 711 (Tex.1997); Burroughs Wellcome Co. v. Crye, 907 S.W.2d 497, 499 (Tex.1995); Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 25
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(Tex.1994); Orozco v. Sander, 824 S.W.2d 555, 556 (Tex.1992); Kindred v. Con/Chem, Inc., 650 S.W.2d 61, 63 (Tex.1983); Corbin v. Safeway Stores, Inc., 648 S.W.2d 292, 297 (Tex.1983) (per curiam).
113 See William Powers, Jr. & Jack Ratliff, Another Look at “No Evidence” & “Insufficient Evidence,” 69 TEX. L.R. 515, 517– 20 (1991).
114 Gragg, 151 S.W.3d at 552; St. Joseph Hosp. v. Wolff, 94 S.W.3d 513, 519 (Tex.2002) (plurality op.); Southwestern Bell Mobile Sys., Inc. v. Franco, 971 S.W.2d 52, 54 (Tex.1998) (per curiam); Formosa Plastics Corp. USA v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 48 (Tex.1998); Havner, 953 S.W.2d at 711; Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 75 (Tex.1997) (Hecht, J., concurring); Preferred Heating & Air Conditioning Co. v. Shelby, 778 S.W.2d 67, 68 (Tex.1989) (per curiam); Burk Royalty Co. v. Walls, 616 S.W.2d 911, 922 (Tex.1981); Harbin v. Seale, 461 S.W.2d 591, 592 (Tex.1970); W. Tel. Corp. v. McCann, 128 Tex. 582, 99 S.W.2d 895, 898 (Tex.1937).
115 See St. Joseph Hosp., 94 S.W.3d at 519–20 (Tex.2002) (plurality op.); Giles, 950 S.W.2d at 51 n. 1 (citing Wininger v.
Ft. Worth & D.C. Ry. Co., 105 Tex. 56, 143 S.W. 1150, 1152 (1912) and Tex. & N.O. Ry. Co. v. Rooks, 293 S.W. 554, 556–57 (Tex.Comm'n.App.1927)).
116 Southwestern Bell Tel. Co. v. Garza, 164 S.W.3d 607, 620 (Tex.2004) (citing Choate v. San Antonio & A.P. Ry., 91 Tex.
406, 44 S.W. 69, 69 (1898); Muhle v. N.Y., T. & M. Ry., 86 Tex. 459, 25 S.W. 607, 608 (1894)).
117 Coastal Transp. Co. v. Crown Cent. Petroleum Corp., 136 S.W.3d 227, 234 (Tex.2004); Qantel Bus. Sys., Inc. v. Custom Controls Co., 761 S.W.2d 302, 303 (Tex.1988); Hart v. Van Zandt, 399 S.W.2d 791, 793 (Tex.1965); Triangle Motors v. Richmond, 152 Tex. 354, 258 S.W.2d 60, 61 (1953); Ford v. Panhandle & Santa Fe Ry. Co., 151 Tex. 538, 252 S.W.2d 561, 562 (1952); Anglin v. Cisco Mortgage Loan Co., 135 Tex. 188, 141 S.W.2d 935, 938 (1940).
118 Bostrom Seating, Inc. v. Crane Carrier Co., 140 S.W.3d 681, 684 (Tex.2004); S.V. v. R.V., 933 S.W.2d 1, 8 (Tex.1996);
Colvin v. Red Steel Co., 682 S.W.2d 243, 245 (Tex.1984); White v. Southwestern Bell Tel. Co., 651 S.W.2d 260, 262 (Tex.1983); Seideneck v. Cal Bayreuther Assocs., 451 S.W.2d 752, 753 (Tex.1970); Dunagan v. Bushey, 152 Tex. 630, 263 S.W.2d 148, 153 (1953); Fitz–Gerald v. Hull, 150 Tex. 39, 237 S.W.2d 256, 258 (1951); Kelly v. McKay, 149 Tex. 343, 233 S.W.2d 121, 122 (1950); White v. White, 141 Tex. 328, 172 S.W.2d 295, 296 (1943); McAfee v. Travis Gas Corp., 137 Tex. 314, 153 S.W.2d 442, 445 (1941); Wellington Oil Co. v. Maffi, 136 Tex. 201, 150 S.W.2d 60, 61 (1941); Chicago, R.I. & G. Ry. Co. v. Carter, 261 S.W. 135, 135 (Tex.Com.App.1924, judgm't adopted); Charles v. El Paso Elec. Ry. Co., 254 S.W. 1094, 1094–95 (Tex.Com.App.1923, holding approved, judgm't adopted).
119 Szczepanik v. First S. Trust Co., 883 S.W.2d 648, 649 (Tex.1994) (per curiam); Vance v. My Apartment Steak House of San Antonio, Inc., 677 S.W.2d 480, 483 (Tex.1984); Corbin v. Safeway Stores, Inc., 648 S.W.2d 292, 295 (Tex.1983); Jones v. Tarrant Util. Co., 638 S.W.2d 862, 865 (Tex.1982); Collora v. Navarro, 574 S.W.2d 65, 68 (Tex.1978); Henderson v. Travelers Ins. Co., 544 S.W.2d 649, 650 (Tex.1976); Jones v. Nafco Oil & Gas, Inc., 380 S.W.2d 570, 574 (Tex.1964).
120 Act of April 25, 1931, 42d Leg., R.S., ch. 77, § 1, 1931 Tex. Gen. Laws 119; Myers v. Crenshaw, 134 Tex. 500, 137 S.W.2d 7, 13 (Tex.1940); Hines v. Parks, 128 Tex. 289, 96 S.W.2d 970, 971 (Tex.1936). Cf. Deal v. Craven, 277 S.W. 1046, 1047 (Tex.Com.App.1925, judgm't adopted) (“It has long been settled in this state that the judgment must follow the verdict, and that the courts are without power to enter a judgment notwithstanding a verdict upon a material issue.”).
121 Brown v. Bank of Galveston, Nat'l Ass'n, 963 S.W.2d 511, 513 (Tex.1998) (“[W]e consider the evidence in the light most favorable to the verdict and reasonable inferences that tend to support it.”); Trenholm v. Ratcliff, 646 S.W.2d 927, 931 (Tex.1983) (“In acting on the motion [for judgment notwithstanding the verdict], all testimony must be viewed in a light most favorable to the party against whom the motion is sought, and every reasonable intendment deducible from the evidence is to be indulged in that party's favor.”) (emphasis added); Dowling v. NADW Mktg., Inc., 631 S.W.2d 726, 728 (Tex.1982) (same); Douglass v. Panama, Inc., 504 S.W.2d 776, 777 (Tex.1974) (same); Leyva v. Pacheco, 163 Tex. 638, 358 S.W.2d 547, 550 (1962) (same); Houston Fire & Cas. Ins. Co. v. Walker, 152 Tex. 503, 260 S.W.2d 600, 603–04 (1953) (affirming trial court's implied disregard of one jury answer based on “consideration of the transcript as a whole”); Burt v. Lochausen, 151 Tex. 289, 249 S.W.2d 194, 199 (1952) (“[W]e must consider all the testimony in the record from the standpoint most favorable to the plaintiff.”) (emphasis added); Neyland v. Brown, 141 Tex. 253, 170 S.W.2d 207, 211 (Tex.1943) (considering judgment non obstante veredicto “in the light of the record as a whole”); Le Master v. Fort Worth Transit Co., 138 Tex. 512, 160 S.W.2d 224, 225 (1942) (“[W]e must view LeMaster's testimony, as well as all other testimony in the record, from a standpoint most favorable to him.”) (emphasis added); McAfee v. Travis Gas Corp., 137 Tex. 314, 153 S.W.2d 442, 445 (1941) (“[W]e must regard the evidence contained in this record in its most favorable light for McAfee ... because of the instructed verdict and judgment non obstante veredicto.”); see also Ballantyne v. Champion Builders, Inc., 144 S.W.3d 417, 424–29 (Tex.2004) (upholding judgment non obstante veredicto based on conclusive evidence contrary to verdict).
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122 See Tiller v. McLure, 121 S.W.3d 709, 713 (Tex.2003) (per curiam); Wal–Mart Stores, Inc. v. Miller, 102 S.W.3d 706, 709 (Tex.2003) (per curiam); Mancorp, Inc. v. Culpepper, 802 S.W.2d 226, 227 (Tex.1990); Best v. Ryan Auto Group, Inc., 786 S.W.2d 670, 671 (Tex.1990) (per curiam); Navarette v. Temple Indep. Sch. Dist., 706 S.W.2d 308, 309 (Tex.1986); Tomlinson v. Jones, 677 S.W.2d 490, 492 (Tex.1984); Williams v. Bennett, 610 S.W.2d 144, 145 (Tex.1980); Freeman v. Tex. Comp. Ins. Co., 603 S.W.2d 186, 191 (Tex.1980); Dodd v. Tex. Farm Prods. Co., 576 S.W.2d 812, 814–15 (Tex.1979); Campbell v. Northwestern Nat'l Life Ins. Co., 573 S.W.2d 496, 497 (Tex.1978); Miller v. Bock Laundry Mach. Co., 568 S.W.2d 648, 650 (Tex.1977); Sobel v. Jenkins, 477 S.W.2d 863, 865 (Tex.1972); C. & R. Transp., Inc. v. Campbell, 406 S.W.2d 191, 193 (Tex.1966).
123 See Tiller, 121 S.W.3d at 713 (citing Bradford v. Vento, 48 S.W.3d 749, 754 (Tex.2001)); Miller, 102 S.W.3d at 709 (same); Best, 786 S.W.2d at 671 (citing King v. Bauer, 688 S.W.2d 845, 846 (Tex.1985)); Tomlinson, 677 S.W.2d at 492 (citing Glover v. Tex. Gen. Indem. Co., 619 S.W.2d 400, 401 (Tex.1981)); Campbell, 573 S.W.2d at 497 (citing Martinez v. Delta Brands, Inc., 515 S.W.2d 263, 265 (Tex.1974)); Campbell, 406 S.W.2d at 193 (citing Cartwright v. Canode, 106 Tex. 502, 171 S.W. 696, 697–98 (1914)).
124 IHS Cedars Treatment Ctr. of Desoto, Tex., Inc. v. Mason, 143 S.W.3d 794, 798 (Tex.2004); Provident Life & Accident Ins.
Co. v. Knott, 128 S.W.3d 211, 215–16 (Tex.2003); Wal–Mart Stores, Inc. v. Rodriguez, 92 S.W.3d 502, 506 (Tex.2002); Gonzalez v. Mission Am. Ins. Co., 795 S.W.2d 734, 736 (Tex.1990); Bayouth v. Lion Oil Co., 671 S.W.2d 867, 868 (Tex.1984).
125 See TEX.R. CIV. P. 166a(i). 126 530 U.S. 133, 150, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000). 127 FED.R.CIV.P. 50(a)(1). 128 336 U.S. 53, 69 S.Ct. 413, 93 L.Ed. 497 (1949). 129 Id. at 57, 69 S.Ct. 413. 130 Reeves, 530 U.S. at 149–50, 120 S.Ct. 2097 (citations omitted). 131 Carter v. Steverson & Co., 106 S.W.3d 161, 166 (Tex.App.-Houston [1st Dist.] 2003, pet. denied) (emphasis added)
(citation omitted); accord Long v. Long, 144 S.W.3d 64, 67 (Tex.App.-El Paso 2004, no pet.); Gore v. Scotland Golf, Inc., 136 S.W.3d 26, 29 (Tex.App.-San Antonio 2003, pet. denied); Exxon Corp. v. Breezevale Ltd., 82 S.W.3d 429, 438 (Tex.App.-Dallas 2002, pet. denied); N. Am. Van Lines, Inc. v. Emmons, 50 S.W.3d 103, 113 n. 3 (Tex.App.-Beaumont 2001, pet. denied); Molina v. Moore, 33 S.W.3d 323, 329 (Tex.App.-Amarillo 2000, no pet.); Wal–Mart Stores, Inc. v. Itz, 21 S.W.3d 456, 470 n. 3 (Tex.App.-Austin 2000, pet. denied); see also In re King's Estate, 150 Tex. 662, 244 S.W.2d 660, 661 (1951) (per curiam) (holding court of appeals erred in failing to distinguish between legal and factual sufficiency review by not weighing all the evidence when conducting the latter).
132 Burk Royalty Co. v. Walls, 616 S.W.2d 911, 922 (Tex.1981) (noting that review of gross negligence finding by considering all the evidence appeared to but did not conflict with traditional no-evidence test).
133 Dorsaneo, supra note 10, at 1503; see also Hardberger, supra note 10, at 17 (arguing exclusive standard is “designed to afford high deference to jury verdicts”).
134 State v. Biggar, 873 S.W.2d 11, 13 (Tex.1994). 135 See, e.g., CMH Homes, Inc. v. Daenen, 15 S.W.3d 97, 102 (Tex.2000) (noting plaintiff argued defendant's frequent inspections of stairs showed knowledge of inherent danger, while court held it showed the opposite as inspections found nothing); State Farm Fire & Cas. Co. v. Simmons, 963 S.W.2d 42, 45 (Tex.1998) (affirming bad-faith verdict after noting insurer's reasons for denial were contradictory).
136 See, e.g., Wal–Mart Stores, Inc. v. Alexander, 868 S.W.2d 322, 327 (Tex.1993) (noting evidence of single previous minor stumble supported negligence finding but not gross negligence).
137 See Judith Resnik, Managerial Judges, 96 HARV. L.R.. 374, 382–83 (1982) (noting that images of justice appeared blindfolded only within the last four hundred years).
138 Justice Calvert's use of the masculine in 1960 may perhaps be forgiven, for although Hattie Hennenberg, Hortense Ward, and Ruth Brazzil served temporarily on this Court in 1925, and Sarah T. Hughes was appointed as a state district judge ten years later, it was not until 1954 that the Texas Constitution was amended to allow women to serve as jurors, and not until 1973 that Mary Lou Robinson became the first women to serve as a state appellate judge. See James T. “Jim” Worthen, The Organizational & Structural Development of Intermediate Appellate Courts in Texas, 46 S. TEX. L.REV. 33, 75 (2004); Robert L. Dabney, Jr. We Were There, HOUSTON B.J. Nov.-Dec.1999, at 42, 44.
139 Calvert, supra note 12, at 364. 140 Wilkerson v. McCarthy, 336 U.S. 53, 65, 69 S.Ct. 413, 93 L.Ed. 497 (1949) (Frankfurter, J., concurring).
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141 86 S.W.3d 693, 709. 142 Id. at 703, 705. 143 Id. at 705. 144 Id. at 704–05. 145 Provident Am. Ins. Co. v. Castañeda, 988 S.W.2d 189, 194–95 (Tex.1998); see also State Farm Lloyds v. Nicolau, 951 S.W.2d 444, 448 (Tex.1997) (holding reliance on expert report did not foreclose bad-faith claim because claimant “presented evidence from which a fact-finder could logically infer that Haag's reports were not objectively prepared, that State Farm was aware of Haag's lack of objectivity, and that State Farm's reliance on the reports was merely pretextual.”).
146 Cf. Nissan Motor Co. Ltd. v. Armstrong, 145 S.W.3d 131, 140 (Tex.2004) (holding complaint letters may require manufacturer to investigate, but are not evidence complaints are true).
147 Tarrant Reg'l Water Dist. v. Gragg, 151 S.W.3d 546, 555 (Tex.2004) (emphasis added).
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CSR Ltd. v. Link, 925 S.W.2d 591 (1996) Prod.Liab.Rep. (CCH) P 14,666, 39 Tex. Sup. Ct. J. 767
Jurisdiction of the Person in General “Subject matter jurisdiction” refers to the court's KeyCite Yellow Flag - Negative Treatment power to hear a particular type of suit, while Superseded by Statute as Stated in Raymond Overseas Holding, Ltd. v. Curry, Tex.App.-Fort Worth, November 4, 1997 “personal jurisdiction” concerns the court's power to bind a particular person or party.
925 S.W.2d 591 Supreme Court of Texas. 43 Cases that cite this headnote
CSR LIMITED, Relator, [3] Constitutional Law v.
Non-residents in general The Honorable Scott LINK, Judge, Respondent.
Courts No. 95–0933. | Argued Dec. 13, Actions by or Against Nonresidents, 1995. | Decided June 14, 1996. | Personal Jurisdiction In; “Long-Arm”
Rehearing Overruled Aug. 16, 1996. Jurisdiction Court may assert personal jurisdiction over a Defendant in asbestos suit sought mandamus relief to prevent nonresident defendant only if the requirements trial court from asserting personal jurisdiction over it, after of both the due process clause of the Fourteenth special appearance was denied. The Supreme Court, Spector, Amendment to the United States Constitution J., held that: (1) defendant, an Australian seller of asbestos, and the Texas long-arm statute are satisfied. did not have systematic and continuous contacts sufficient U.S.C.A. Const.Amend. 14, § 1; V.T.C.A., Civil to support general jurisdiction; (2) defendant did not have Practice & Remedies Code § 17.042. minimum contacts sufficient to support specific jurisdiction even if it could have foreseen that its asbestos might be used in 120 Cases that cite this headnote Texas; and (3) special circumstances arising from the nature of mass tort litigation made mandamus relief appropriate.
[4] Courts Actions by or Against Nonresidents, Petition conditionally granted.
Personal Jurisdiction In; “Long-Arm” Jurisdiction Gonzalez, J., filed a concurring opinion.
The requirements of the Texas long-arm statute are satisfied if the exercise of personal Baker, J., filed a dissenting opinion.
jurisdiction comports with federal due process limitations. U.S.C.A. Const.Amend. 14, § 1; V.T.C.A., Civil Practice & Remedies Code § West Headnotes (15) 17.042.
78 Cases that cite this headnote [1] Judgment Jurisdiction of the person and subject-
[5] Constitutional Law matter Non-residents in general Court must possess both subject matter Under the due process clause of the Fourteenth jurisdiction over a case and personal jurisdiction Amendment, a defendant must have certain over a party to issue a binding judgment.
minimum contacts with the forum such that 20 Cases that cite this headnote the maintenance of the suit does not offend “traditional notions of fair play and substantial justice.” U.S.C.A. Const.Amend. 14.
[2] Courts Jurisdiction of Cause of Action 54 Cases that cite this headnote Courts
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CSR Ltd. v. Link, 925 S.W.2d 591 (1996) Prod.Liab.Rep. (CCH) P 14,666, 39 Tex. Sup. Ct. J. 767
to Texas, buyer had plants in at least four [6] Courts other states, and defendant did not advertise Business contacts and activities; its asbestos in Texas, did not provide advice transacting or doing business to Texas buyers or have any sales agents in A nonresident defendant that has purposefully Texas, and did not create, control, or employ the availed itself of the privileges and benefits of distribution system that brought the asbestos into conducting business in the foreign jurisdiction Texas. U.S.C.A. Const.Amend. 14. has sufficient contacts with the forum to confer personal jurisdiction, but a defendant 56 Cases that cite this headnote should not be subject to the jurisdiction of a foreign court based upon “random,” [9] Courts “fortuitous,” or “attenuated” contacts, and Manufacture, Distribution, and Sale of minimum contacts are particularly important Products when the defendant is from a different country.
Although foreseeability is a factor to consider U.S.C.A. Const.Amend. 14.
in a minimum contacts analysis, absent a 180 Cases that cite this headnote purposeful act directed toward selling or distributing product in state, foreseeability alone will not support personal jurisdiction. U.S.C.A.
[7] Courts Const.Amend. 14.
Corporations and business organizations Defendant did not have systematic and 31 Cases that cite this headnote continuous contacts with Texas sufficient to support general jurisdiction where defendant [10] Appearance was an Australian company which had no Objections to jurisdiction in general offices in Texas, no employees in Texas, and Courts no bank accounts in Texas, defendant had not Presumptions and Burden of Proof as to solicited business in Texas and had not sent any Jurisdiction correspondence to Texas, defendant had never owned property in Texas and had never paid Nonresident defendant must negate all bases taxes in Texas, and defendant had never entered of personal jurisdiction to prevail in a special into a contract in Texas. U.S.C.A. Const.Amend. appearance. 14, § 1; V.T.C.A., Civil Practice & Remedies 19 Cases that cite this headnote Code § 17.042.
23 Cases that cite this headnote [11] Mandamus Modification or vacation of judgment or [8] Courts order Defective, dangerous, or injurious products; Mandamus products liability Proceedings in civil actions in general Australian sales agent did not have minimum Mandamus relief was warranted following denial contacts with Texas sufficient to support specific of special appearance, when trial court exceeded jurisdiction in action for injuries allegedly the limitations imposed by the due process caused by asbestos sold by it and sent directly to clause and thus clearly abused its discretion Houston in 1957, despite contention that it could in denying defendant's special appearance and have foreseen that its raw asbestos fiber would where extraordinary circumstances were present be used in Texas, where title to the asbestos such that appeal was not adequate remedy passed to buyer in Australia and there was no because defendant was faced with mass tort evidence that defendant sales agent controlled litigation, which places significant strain on a or participated in the decision to ship the fiber defendant's resources and creates considerable
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CSR Ltd. v. Link, 925 S.W.2d 591 (1996) Prod.Liab.Rep. (CCH) P 14,666, 39 Tex. Sup. Ct. J. 767
pressure to settle the case, regardless of the underlying merits, and since trial on the merits 9 Cases that cite this headnote and appeal would not be efficient use of judicial resources.
50 Cases that cite this headnote Attorneys and Law Firms
*593 Robin P. Hartman, Haynes and Boone, Dallas, Lynne [12] Mandamus Liberato, Beth Fancsali, Haynes and Boone, Houston, for Nature and scope of remedy in general relator.
Mandamus is an extraordinary remedy that is available only in limited circumstances and is Hartley Hampton, Young & Hampton, Houston, Marvin B. appropriate only to correct a clear abuse of Peterson, Law Office of Marvin B. Peterson, Houston, Gary discretion or the violation of a duty imposed by D. Elliston, DeHay & Elliston, Dallas, Jeffrey D. Roberts, law when there is no other adequate remedy by Roberts Markel & Folger, Houston, James D. Smith, Dunn law. Kacal Adams Pappas & Law, Houston, T. John Ward, Brown McCarroll & Oaks Hartline, Longview, Kathryn Hermes, 38 Cases that cite this headnote Patterson Lamberty Stanford & Walls, Dallas, Sharla J. Frost, James H. Powers, Powers & Frost, Houston, J. Michael [13] Mandamus Myers, Ball & Weed, San Antonio, Russell Ramsey, Ramsey Remedy by Appeal or Writ of Error & Murray, Houston, David W. Starnes, Strong Pipkin Nelson & Bissell, Beaumont, Jeffrey B. McClure, Butler & Binion, Generally, increased cost and delay alone do not Houston, Mark R. Pharr, III, Galloway Johnson Tompkins make an ordinary appeal an inadequate remedy & Burr, Houston, Richard N. Countiss, Law Office of so as to warrant mandamus relief.
Richard N. Countiss, Houston, James Mayer Harris, Holmes 9 Cases that cite this headnote & Harris, Beaumont, David L. Lyle, Jr., Ness Motley Loadholt Richardson & Poole, Charleston, SC, Warren A. Gage, Cowles & Thompson, Dallas, Kevin J. Maguire, [14] Mandamus Strasburger & Price, Dallas, Robert E. Ballard, Abraham & Modification or vacation of judgment or Watkins, Houston, Stephen M. Vaughan, Mandell & Wright, order Houston, F. Richard Leach, Ross Banks May Cron & Cavin, Mandamus Houston, Gregg Morrison, Cook & Butler, Houston, C. Victor Proceedings in civil actions in general Haley, Fairchild Price Thomas & Haley, Center, Weldon Mandamus typically will not lie from the denial Funderburk, Funderburk & Funderburk, Houston, Michael R. of a special appearance but there may be Ross, Law Offices of Michael R. Ross, Houston, John E. extraordinary situations in which the denial Williams, Jr., Williams Bailey & Wesner, Houston, Steven of a special appearance cannot be adequately J. Kherkher, Williams Bailey Wesner & Kherkher, Houston, remedied on appeal, so that mandamus is Ned Johnson, Johnson & Associates, Houston, John L. Hill, appropriate. Liddell Sapp Zivley Hill & LaBoon, Houston, Peter A.
Moir, Baker & Botts, Dallas, William J. Cozort, Jr., Bean 8 Cases that cite this headnote & Manning, Houston, R. Lyn Stevens, Stevens & Baldo, Beaumont, Scott Baldwin, Baldwin & Baldwin, Marshall, [15] Mandamus Byron Sims, Brown Sims Wise & White, Houston, Brian Remedy by Appeal or Writ of Error S. Clary, Livingston & Markle, Houston, Sandra F. Clark, Mehaffy & Weber, Beaumont, Robert E. Thackston, Vial The most efficient use of the state's judicial Hamilton Koch & Knox, Dallas, for respondent.
resources is a factor court may consider in determining whether an ordinary appeal would provide an adequate remedy, so as to preclude mandamus relief.
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the respondent in this case, overruled the motion. The court Opinion of appeals denied CSR leave to file its petition for writ of mandamus. CSR now seeks mandamus relief in this Court SPECTOR, Justice, delivered the opinion of the Court, to prevent the trial court from asserting personal jurisdiction in which PHILLIPS, Chief Justice, HECHT, CORNYN, over it.
ENOCH, OWEN and ABBOTT, JJ., join.
This original proceeding concerns the exercise of personal jurisdiction over a foreign corporation by Texas courts. II. Although mandamus does not ordinarily lie from the denial of a special appearance, exceptional circumstances may warrant [1] [2] A court must possess both subject matter this extraordinary relief. In this case, we find that mandamus jurisdiction over a case and personal jurisdiction over a party is appropriate and conditionally grant the writ. to issue a binding judgment. See Insurance Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 701–03, 102 S.Ct. 2099, 2103–05, 72 L.Ed.2d 492 (1982). While subject matter jurisdiction refers to the court's power I.
to hear a particular type of suit, personal jurisdiction concerns CSR Limited is a corporation organized under the laws of the court's power to bind a particular person or party. See New South Wales, Australia, with its principal place of 1 CASAD, JURISDICTION IN CIVIL ACTIONS § 1.01 business in Sydney, Australia. For a period of time before (2d ed.1991). This case involves the trial court's personal 1967, CSR was the agent for sales of raw asbestos fiber jurisdiction over CSR. mined by a subsidiary, Australian Blue Asbestos Proprietary, Limited. The Johns–Manville Corporation purchased this raw [3] [4] A court may assert personal jurisdiction over a asbestos fiber and resold it *594 in the United States. Johns– nonresident defendant only if the requirements of both the Manville was the only company marketing CSR's fiber in this Due Process Clause of the Fourteenth Amendment to the country. U.S. Constitution and the Texas long-arm statute are satisfied.
See U.S. CONST. amend. XIV, § 1; TEX. CIV. PRAC. & On August 23, 1957, CSR sold 363 tons of raw Australian REM.CODE § 17.042; Helicopteros Nacionales de Colombia blue asbestos to Johns–Manville. CSR sold the asbestos to v. Hall, 466 U.S. 408, 413–14, 104 S.Ct. 1868, 1871–72, 80 Johns–Manville F.O.B. Fremantle, Australia, so that title to L.Ed.2d 404 (1984). The long-arm statute allows a court to the fiber passed to Johns–Manville when Johns–Manville exercise personal jurisdiction over a nonresident defendant loaded the fiber onto the ship in Australia. Johns–Manville that does business in Texas. In addition to a discrete list of shipped the asbestos to Houston; the fiber was eventually activities that constitute doing business in Texas, the statute used for the manufacture of transite pipe. The plaintiffs in the provides that “other acts” by the nonresident can satisfy underlying suit allege that they were injured by exposure to the requirement. See TEX. CIV. PRAC. & REM.CODE § CSR asbestos used to manufacture pipe. 17.042; Guardian Royal Exch. Assurance, Ltd. v. English China Clays, P.L.C., 815 S.W.2d 223, 226 (Tex.1991). Our Because of the large number of asbestos cases that have been Court has repeatedly interpreted this broad statutory language filed, the Harris County district courts have created a Master “to reach as far as the federal constitutional requirements Asbestos File under the authority of local rule. HARRIS of due process will allow.” Guardian Royal, 815 S.W.2d at COUNTY (TEX.) DIST. CT. LOC. RR. 3.2.3(c); In re: 226; see also U–Anchor Advertising, Inc. v. Burt, 553 S.W.2d Asbestos Cases, Cause No. 90–23333. The judge presiding 760, 762 (Tex.1977). Consequently, the requirements of the over the Master Asbestos File rules on issues common to the Texas long-arm statute are satisfied if the exercise of personal individual asbestos cases in Harris County. Those rulings in jurisdiction comports with federal due process limitations. the Master Asbestos File control all asbestos cases currently See Guardian Royal, 815 S.W.2d at 226. pending or that may be filed in Harris County. See Standing Order No. 2, In re: Asbestos Cases, Cause No. 90–23333 [5] [6] Under the Due Process Clause of the Fourteenth (Dist. Ct. of Harris County). CSR filed a special appearance Amendment, a defendant must have certain minimum in the Master Asbestos File asserting that the trial court contacts with the forum “such that the maintenance of the lacked personal jurisdiction over the company. Judge Link, suit does not offend ‘traditional notions of fair play and
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substantial justice.’ ” International Shoe Co. v. Washington, to ship the fiber to Texas. The plaintiffs contend, however, 326 U.S. 310, 316, 66 S.Ct. 154, 158, 90 L.Ed. 95 (1945) that CSR knew that one of Johns–Manville's plants was in (quoting Milliken v. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, Denison, Texas. The plaintiffs argue that CSR could have 343, 85 L.Ed. 278 (1940)). A nonresident defendant that has foreseen that its raw asbestos fiber would be used in Texas. purposefully availed itself of the privileges and benefits of Therefore, they argue, CSR should be subject to the personal conducting business in the foreign jurisdiction has sufficient jurisdiction of Texas courts. contacts with the forum to confer personal jurisdiction. See *595 Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475– [9] Although foreseeability is a factor to consider in 76, 105 S.Ct. 2174, 2183–84, 85 L.Ed.2d 528 (1985). A a minimum contacts analysis, foreseeability alone will defendant should not be subject to the jurisdiction of a foreign not support personal jurisdiction. See Guardian Royal, court based upon “random,” “fortuitous,” or “attenuated” 815 S.W.2d at 227. The defendant must take an action contacts. Id. Minimum contacts are particularly important “purposefully directed toward the forum state” to be subject when the defendant is from a different country because of to the jurisdiction of its courts. Asahi, 480 U.S. at 112, 107 the unique and onerous burden placed on a party called upon S.Ct. at 1032 (emphasis added). Assuming that CSR could to defend a suit in a foreign legal system. See Asahi Metal have known that the raw asbestos it sold to Johns–Manville Industry Co., Ltd. v. Superior Court, 480 U.S. 102, 114, 107 might be distributed in Texas, “a defendant's awareness that S.Ct. 1026, 1033, 94 L.Ed.2d 92 (1987). the stream of commerce may or will sweep the product into the forum state does not convert the mere act of placing A defendant's contacts with a forum can give rise to either the product into the stream into an act purposefully directed general or specific jurisdiction. General jurisdiction is present toward the forum State.” Id. Additionally, CSR's knowledge when a defendant's contacts are continuous and systematic, that there was a Johns–Manville plant in Texas is not permitting the forum to exercise personal jurisdiction over determinative in establishing jurisdiction because there are the defendant even if the cause of action did not arise from also Johns–Manville plants located in at least four other or relate to activities conducted within the forum state. See states: Louisiana, New Jersey, Illinois and California. See Schlobohm v. Schapiro, 784 S.W.2d 355, 357 (Tex.1990). State ex rel. CSR Ltd. v. MacQueen, 190 W.Va. 695, 441 General jurisdiction requires a showing that the defendant S.E.2d 658, 660 (1994). There must be some indication that conducted substantial activities within the forum, a more CSR intended to serve the Texas market. demanding minimum contacts analysis than for specific jurisdiction. See Guardian Royal, 815 S.W.2d at 228. In CSR did not advertise its asbestos in Texas. CSR did not contrast, specific jurisdiction is established if the defendant's provide advice to Texas buyers or have any sales agents alleged liability arises from or is related to an activity in Texas. CSR did not “create, control, or employ” the conducted within the forum. See id. at 227. distribution system that brought the asbestos into Texas.
Asahi, 480 U.S. at 112, 107 S.Ct. at 1032. There is no [7] CSR is an Australian company headquartered in Sydney. direct evidence that *596 CSR knew that Johns–Manville It has no offices in Texas, no employees in Texas, and no bank would distribute its fiber in Texas. In short, the record accounts in Texas. CSR has not solicited business in Texas contains no evidence that CSR took any act purposefully and has not sent any correspondence to Texas. CSR has never directed toward selling or distributing the raw asbestos fiber owned property in Texas and has never paid taxes in Texas. in Texas. Absent such a purposeful act, foreseeability alone CSR has never entered into a contract in Texas. Under these cannot create minimum contacts between CSR and Texas. facts, CSR did not have systematic and continuous contacts The Harris County courts, therefore, cannot exercise personal with Texas sufficient to support general jurisdiction. 1 jurisdiction over CSR consistent with due process.
[8] CSR also argues that the trial court does not have specific [10] In Texas, a nonresident defendant must negate all bases jurisdiction in this case because the company conducted no of personal jurisdiction to prevail in a special appearance. activity in or related to Texas. It is undisputed that CSR sold See Kawasaki Steel Corp. v. Middleton, 699 S.W.2d 199, Johns–Manville a shipment of 363 tons of raw asbestos that 203 (Tex.1985). CSR has demonstrated that it had no was sent directly to Houston in August of 1957. But title to the systematic and continuous contacts with Texas, that it did asbestos passed to Johns–Manville in Australia and there is no not purposefully direct any act toward Texas, and that it took evidence that CSR controlled or participated in the decision no act within Texas that gave rise to the plaintiffs' cause of
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action. We therefore conclude that CSR has carried its burden litigation”). Mass tort litigation such as this places significant to negate all bases of personal jurisdiction. strain on a defendant's resources and creates considerable pressure to settle the case, regardless of the underlying merits. See Matter of Rhone–Poulenc Rorer Inc., 51 F.3d 1293, 1297, 1298–1300 (7th Cir.1995). The large number of lawsuits to III.
which CSR could potentially be exposed is significant to our [11] [12] [13] [14] Because the trial court exceededdetermination that appeal is not an adequate remedy in this the limitations imposed by the Due Process Clause of the case. federal Constitution, it clearly abused its discretion in denying CSR's special appearance. We now decide whether CSR has [15] The most efficient use of the state's judicial met the second requirement for showing itself entitled to resources is another factor we consider in determining mandamus relief, that it does not have an adequate remedy whether an ordinary appeal would provide an adequate by ordinary appeal. Mandamus is an “extraordinary” remedy remedy. Over 1490 asbestos cases are pending in Harris that is “available only in limited circumstances.” Walker County alone as of April 30, 1996. HARRIS COUNTY v. Packer, 827 S.W.2d 833, 840 (Tex.1992). Mandamus is DISTRICT COURTS, JUSTICE INFORMATION AND appropriate “only to correct a clear abuse of discretion or MANAGEMENT SYSTEMS (May 13, 1996) (public the violation of a duty imposed by law when there is no document available at Harris *597 County District Clerk's other adequate remedy by law.” Johnson v. Fourth Court Office). As evidenced by the creation of the Master File in of Appeals, 700 S.W.2d 916, 917 (Tex.1985). Generally, Harris County, asbestos litigation in Texas is complicated, increased cost and delay alone do not make an ordinary appeal potentially involves a multitude of parties, and is usually an inadequate remedy. Walker, 827 S.W.2d at 842. Because quite lengthy: “No litigation in American history has involved in the ordinary case no circumstances apart from the increased as many individual claimants, been predicated upon the cost and delay of trial and appeal are present, we have held severity of injury, [or] consumed as many judicial resources ... that mandamus typically will not lie from the denial of a as asbestos litigation.” Brickman, The Asbestos Litigation special appearance. See Canadian Helicopters Ltd. v. Wittig, Crisis: Is There a Need for an Administrative Alternative?, 876 S.W.2d 304, 307 (Tex.1994). 13 CARDOZO L. REV. 1819, 1819 (1992). As a result, the state expends a large amount of its limited judicial This Court has recognized, however, that in some situations resources resolving these massive controversies. Under these a challenge to personal jurisdiction cannot be adequately circumstances, a trial on the merits and appeal would further remedied on appeal. For example, an ordinary appeal may overtax the state's judicial resources. See Walker, 827 S.W.2d be inadequate in cases involving family law or implicating at 843. The Arizona Supreme Court has noted that “in cases comity in foreign affairs. See id. at 306–07. In addition, this of this magnitude, the interests of all parties and of the Court has recognized that there may be other “extraordinary public demand that serious questions of law pertaining to ... situation[s]” in which the denial of a special appearance jurisdiction ... be decided by this court and settled at the cannot be adequately remedied on appeal. Id. at 309–10; see earliest possible moment.” United States v. Superior Court, also National Indus. Sand Ass'n v. Gibson, 897 S.W.2d 769, 144 Ariz. 265, 697 P.2d 658, 662 (1985). Because of the size 776 (Tex.1995). and complexity of the asbestos litigation, the most prudent use of judicial resources in this case is to permit a preliminary The extraordinary circumstances present in this case stem resolution of the fundamental issue of personal jurisdiction by from the problems inherent in many, if not all, mass tort writ of mandamus. cases. Although only five plaintiffs have sued CSR in the present case, thousands of potential claimants exist based on Our approach of permitting mandamus relief from the denial possible exposure to transite pipes containing CSR asbestos of a special appearance only when personal jurisdiction is clearly and completely lacking and when there are since 1957. 2 See, e.g., Reina, Recovery for Fear of Cancer exceptional circumstances is in accord with the approach of and Increased Risk of Cancer: Problems with Gideon and a other jurisdictions. See Canadian Helicopters, 876 S.W.2d Proposed Solution, 7 REV. LITIG. 39, 40 (1987) (estimating at 309–10 (citing United States v. Superior Court, 697 P.2d that more than 21,000,000 American workers have been at 662; Lupo v. Lineberger, 313 Ark. 315, 855 S.W.2d 293, exposed to asbestos, with Texas being “one of the five 294 (1993) (permitting writs of prohibition to lie only when states generating the greatest volume of asbestos-related
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a trial court is “clearly without jurisdiction or [has] acted tort lawsuits); Minnesota Mining & Mfg. Co. v. Nishika, without authority and the petitioner is unquestionably entitled Ltd., 885 S.W.2d 603, 639 (Tex.App.—Beaumont 1994, writ to such relief”); Conn v. ITT Aetna Fin. Co., 105 R.I. 397, 252 granted) (affirming $29,000,000 judgment in a suit between A.2d 184, 188 (1969) (finding that certiorari does not lie from *598 Nevada, Georgia, and Minnesota corporations that preliminary jurisdiction rulings except if “the circumstances involved no contacts with Texas). When a suit is brought have been unusual or exceptional ... or where not to act might against a party with no ties to Texas, it not only denies result in irreparable injury or loss”)); see also State ex rel. the non-forum defendant's constitutional rights, but it also Fogle v. Steiner, 74 Ohio St.3d 158, 656 N.E.2d 1288, 1292 clogs our already-crowded dockets. Alfaro, 786 S.W.2d at (1995) (finding that although mandamus does not normally lie 690 (Gonzalez, J. dissenting). Denying a defendant's special from the denial of a lack of jurisdiction, it will lie “where an appearance when the state clearly lacks personal jurisdiction inferior court patently and unambiguously lacks jurisdiction is inherently harmful, both to the defendant and to our court over the cause”). We emphasize that we do not relax or retreat system. Appeal is not an adequate remedy for such harm, from the requirement that a relator must show an inadequate and therefore mandamus relief is appropriate. I concur with remedy by appeal. While the question of personal jurisdiction the Court's judgment that mandamus should issue in this is remediable by appeal in most cases, we hold that under the case. I disagree with the Court's opinion, however, because circumstances of this case, the concerns of judicial efficiency it retains the requirement that a relator challenging the denial in mass tort litigation combined with the magnitude of the of a special appearance by mandamus must make a specific potential risk for mass tort actions against the defendant showing of irreparable harm. Such proof is not necessary makes ordinary appeal inadequate. because the harm is inherent. Further, I would address the tension between our opinions in Canadian Helicopters Ltd. v. Wittig, 876 S.W.2d 304 (Tex.1994) (orig.proceeding) and National Industrial Sand Association v. Gibson, 897 S.W.2d IV.
769 (Tex.1995) (orig.proceeding).
A single sale of 363 tons of raw asbestos in 1957 that was not purposefully directed toward this state is not sufficient Unfortunately, in this era of complex multi-party litigation, to establish minimum contacts between CSR and Texas defendants must take a hard look at whether they can afford for personal jurisdiction. The trial court therefore clearly to defend a case regardless of the merits. One notorious abused its discretion in denying CSR's special appearance. example is a mass products-liability lawsuit pending in Although a writ of mandamus will not ordinarily lie from Morris County, in which it is claimed that the products of the denial of a special appearance, this case presents an more that 300 defendants, including such items as paper extraordinary situation warranting such relief. Accordingly, clips, hand soap, marking pens, and metal tables, contributed we conditionally grant CSR's petition for writ of mandamus. to a “toxic cloud” that caused injury to more than 3,000 This writ will only issue if the trial court fails to withdraw its plaintiffs. See generally Able Supply Co. v. Moye, 898 S.W.2d order overruling CSR's special appearance. 766 (Tex.1995) (orig.proceeding); Union Carbide Corp.
v. Moye, 798 S.W.2d 792 (Tex.1990) (orig.proceeding); Hollandsworth, The Lawsuit from Hell, TEX. MONTHLY, June 1996, at 105, 141. Although the case had been pending GONZALEZ, J., concurs. for more than eight years, the plaintiffs had never been required to produce evidence or testimony linking their BAKER, J., dissents.
injuries to any of the defendants' products. Able Supply, 898 S.W.2d at 769. Despite this lack of evidence, many GONZALEZ, Justice, filed a concurring opinion. defendants have felt compelled to settle for millions of “ ‘As a moth is drawn to the light, so is a litigant drawn to dollars and cut their losses. By September 1994, nearly 200 the United States.’ ” Dow Chem. Co. v. Castro Alfaro, 786 defendants had settled for more than $66 million, and it is not S.W.2d 674, 707 (Tex.1990) (Hecht, J., dissenting) (quoting clear that the case is any closer now to being tried than when Smith Kline & French Labs. Ltd. v. Bloch, (1983) 2 All E.R. it was filed. Hollandsworth, supra, at 145. 72, 74). Texas courts seem to be the venue of choice. See Alfaro, 786 S.W.2d at 690 & n. 2 (Gonzalez, J., dissenting) The burdens of this sort of litigation are exacerbated when, (noting the danger of Texas becoming the forum for all mass- as in this case, the defendant has no contacts with the forum
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state. Such defendants face demands of travel and time When a trial court overrules a special appearance, the that go beyond “mere increased cost and delay.” Canadian moving party ordinarily has an adequate remedy on appeal Helicopters, 876 S.W.2d at 308–09. More important is the and consequently, may not secure extraordinary relief damage done to the defendants' fundamental rights of due through mandamus. K.D.F. v. Rex, 878 S.W.2d 589, process under the state and federal constitutions. See State ex 592 (Tex.1994). On the few occasions this Court has rel. Connor v. McGough, 46 Ohio St.3d 188, 546 N.E.2d 407, considered the issue in an original proceeding, we have found 410 (1989) (per curiam) (noting that fundamental notions of mandamus relief available “only in limited circumstances.” fairness and due process prohibited suit against a defendant See Canadian Helicopters v. Wittig, 876 S.W.2d 304, who had no known contacts with the forum state “other than 305 (Tex.1994). These “limited circumstances” are cases to attempt, unsuccessfully so far, to extricate himself from involving sovereign immunity, comity and the parent-child being sued here”). relationship. Otherwise, we have held that mandamus relief for the denial of a special appearance is available only We have struggled with this issue, first in Canadian in extraordinary situations. 1 We have held extraordinary Helicopters, then in National Industrial Sand. In Canadian relief available only upon a showing that the trial court Helicopters, the Court denied mandamus relief to correct abused its discretion to the extent that it acted with “such the special-appearance ruling in that case, but held that disregard for guiding principles of law that the harm to the mandamus might be appropriate in some cases. The Court defendant becomes irreparable, exceeding mere increased stated that mandamus might be available when the “trial cost and delay.” Canadian Helicopters, 876 S.W.2d at 308– court, in denying a special appearance, ... act[s] with such 09 (emphasis added). Consequently, the relator must show disregard for guiding principles of law that the harm to the that ordinary appeal is inadequate. See Walker v. Packer, defendant becomes irreparable, exceeding mere increased 827 S.W.2d 833, 842 (Tex.1992); National Indus. Sand Ass'n cost and delay.” Canadian Helicopters, 876 S.W.2d at 308– v. Gibson, 897 S.W.2d 769, 776 (Tex.1995)(Cornyn, J., 09. The Court did not explain what that harm might be. In dissenting). National Industrial Sand, we granted mandamus to correct a denial of a special appearance when the court clearly had no personal jurisdiction over the defendant. National Indus. Sand, 897 S.W.2d at 776. Although the holdings Special Appearance Hearing in Canadian Helicopters and National Industrial Sand are The hearing on a special appearance is for the receipt of superficially consistent, it is clear that the application of the evidence and proof, “not just argument.” See O'Connor & law to the facts in the two opinions is not reconcilable. The Davis, O'Connor's Texas Rules * Civil Trials, Ch. 3 § 7, at 118 defendant in Canadian Helicopters had no more contacts (1996); see also Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, with Texas than the defendant in National Industrial Sand.
269 n. 4 (Tex.1992). The non-resident defendant carries the Thus, I would overrule Walker v. Packer, 827 S.W.2d burden of proof to negate all bases of personal jurisdiction.
833 (Tex.1992) (orig.proceeding) and its progeny, including See Kawasaki Steel Corp. v. Middleton, 699 S.W.2d 199, 203 Canadian Helicopters, to the extent they hold that a foreign (Tex.1985). On mandamus review, the relator has the burden defendant *599 with no ties to Texas must make a separate of showing, based on the evidence presented to the trial court, showing of harm before mandamus will issue to correct an an abuse of discretion and the inadequacy of ordinary appeal.
order denying a special appearance.
Canadian Helicopters, 876 S.W.2d at 305.
BAKER, Justice, dissenting.
Abuse of Discretion–Standard of Review Because the Court improperly departs from sound precedent and in my opinion, invites an unnecessary increase in In any mandamus proceeding, we review the trial court's mandamus practice, I respectfully dissent. decision for an abuse of discretion. Johnson v. Fourth Court of Appeals, 700 S.W.2d 916, 917 (Tex.1985). To determine there is an abuse of discretion, we review the entire record.
The Special Appearance and Mandamus Relief See Morrow v. H.E.B., Inc., 714 S.W.2d 297 (Tex.1986). Our focus remains on the trial court order regardless of the court of appeals' decision. Johnson, 700 S.W.2d at 918. The party
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challenging the trial court's decision must establish that the facts and law permit the trial court but one decision. Johnson, National Sand v. Canadian Helicopters 700 S.W.2d at 917.
Unfortunately, I find today's opinion similar to National Sand, An appellate court may not reverse for an abuse of discretion 897 S.W.2d at 769. In National Sand, the Court granted a merely because it disagrees with the trial court's decision, defendant mandamus relief after the trial court denied its if that decision was within the trial court's discretionary special appearance without any showing by the defendant that authority. See Beaumont Bank, N.A. v. Buller, 806 S.W.2d it did not have an adequate remedy on appeal. See National 223, 226 (Tex.1991). The reviewing court must give Sand, 897 S.W.2d at 777 (Cornyn, J., dissenting). Here, as in deference to the trial court's resolution of a factual issue, and National Sand, CSR has not shown that without mandamus cannot set that decision aside unless it is clear from the record relief, its harm will be “irreparable, exceeding mere increased that the trial court could have reached only one decision. See cost and delay.” See Canadian Helicopters, 876 S.W.2d at Walker, 827 S.W.2d at 839–40. 308–09. In fact, the Court's opinion is based almost entirely on the assertions of CSR's counsel that without mandamus relief, An appellate court may not deal with disputed factual CSR may be forced to defend itself in numerous trials, which matters in a mandamus proceeding. Hooks v. Fourth Court could be both lengthy and complicated. 5 925 S.W.2d at 596.
of Appeals, 808 S.W.2d 56, 60 (Tex.1991); Dikeman v. Snell, The Court also relies on an unrelated case from the Seventh 490 S.W.2d 183, 187 (Tex.1973). An abuse of discretion does Circuit to declare that because “[m]ass tort litigation ... places not exist if the trial court bases its decision on conflicting significant strain on a defendant's resources,” CSR is entitled evidence and some evidence reasonably supports *600 the to extraordinary relief. 925 S.W.2d at 596 (citing Matter of trial court's decision. Davis v. Huey, 571 S.W.2d 859, 862 Rhone–Poulenc Rorer Inc., 51 F.3d 1293 (7th Cir.1995)).
(Tex.1978). 2 Here again, the Court misses the mark. CSR should not benefit from the Court's sympathetic logic drawn from a An abuse of discretion does not exist if some evidence 3 in case in federal court involving different issues and different the record shows the trial court followed guiding rules and parties. Instead, we should require CSR to meet its heavy principles. Morrow, 714 S.W.2d at 298. burden of showing irreparable harm.
CSR has not shown that the denial of its special appearance will compromise its ability to defend the underlying suit on Adequate Remedy on Appeal the merits so that it will suffer irreparable harm. Canadian In addition to showing that the trial court abused its discretion Helicopters, 876 S.W.2d at 308. The only proof directly from in reviewing the facts or in applying the law to the facts of CSR in support of its special appearance is the affidavit of a particular case, the relator must also make a mandamus Edwin Anthony Smith, CSR's group manager of financial record to show that ordinary appeal is not an adequate remedy. reporting. Despite his affidavit testimony that he is “familiar See Canadian Helicopters, 876 S.W.2d at 305. “This burden with the records of CSR Limited and the scope of CSR is a ‘heavy one.’ ” Canadian Helicopters, 876 S.W.2d at Limited's operations,” Smith's affidavit does not provide any 305. In its recent writings in the special appearance context, testimony, nor did CSR provide any other proof, that it would the Court has discussed this element in terms of forcing the suffer irreparable harm by its continued presence in this non-resident to show “irreparable harm.” See National Sand, *601 litigation pending an opportunity to pursue ordinary 897 S.W.2d at 776; Canadian Helicopters, 876 S.W.2d at appeal. Absent such a showing, I cannot comprehend how the 305. I do not agree with this amorphous standard because Court can rightfully conclude that CSR carried its burden of proving irreparable harm.
it “snarl[s] mandamus law with new distinctions”, 4 and as I discuss below, oversteps the bounds of mandamus review Although CSR's arguments about the trial court's lack of absent legislative or rules influence. Despite this unique and personal jurisdiction may be compelling, that issue ought to unfounded standard, the Court conducts a flawed analysis be resolved on appeal. As a majority of this Court recently under the standard and provides CSR with an undeserved stated:
short cut to appellate relief.
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(1966); see also Thode, In Personam Jurisdiction; Article The mere fact that a trial court's 2031B, The Texas “Long Arm” Jurisdiction Statute; And erroneous denial of a special The Appearance To Challenge Jurisdiction In Texas and appearance will result in an eventual Elsewhere, 42 TEX. L. REV. 279, 332 (1964)(recognizing reversal on appeal does not mean that that “[t]he possible abuse of the interlocutory appeal as a the trial will be a ‘waste of judicial vehicle for delay appears to outweigh the hardship presented resources' as that term was used in by lack of an interlocutory appeal.”). If Rule 120a should Walker. To hold otherwise would be changed to allow interlocutory appeal of an order on mean that virtually any trial court order a defendant's special appearance, that change should be constituting reversible error would be accomplished through the State Bar Rules Committee and a proper subject for mandamus review. in conjunction with the Court's rule-making authority, not Such a result is inconsistent with the by case law mandate. Amending Rule 120a to provide for rule that mandamus is an extraordinary interlocutory appeal of a denial of a special appearance as a remedy to be used only in limited part of a case would not be a novel addition to our rules of circumstances. civil procedure. See, e.g., TEX.R. CIV. P. 76a(8)(allowing for interlocutory appeal of order sealing court records).
Canadian Helicopters, 876 S.W.2d at 308 n. 11 (quoting Walker v. Packer, 827 S.W.2d at 843). As in Canadian Short of a rule change, the legislature could, if it desired, Helicopters, regardless of whether the trial court in this provide a statutory method for interlocutory appeal of the case erred, this is not the type of extraordinary situation where this Court should consider mandamus. See Canadian denial of a special appearance. 7 Again, this is not a *602 Helicopters, 876 S.W.2d at 309. To decide differently leaves novel idea. The Texas Civil Practices and Remedies Code this Court and the courts of appeals without clear guidelines provides for interlocutory appeal of a number of pre-trial for mandamus review in special appearance cases—not to rulings. See TEX. CIV. PRAC. & REM.CODE § 51.014. 8 In mention the guesswork trial courts face. my view, before the Court allows interlocutory appeals as a matter of course, or “[b]ecause of the size and complexity” of a case, we should await word from the legislature. 925 S.W.2d at 597.
Rule Change or Legislative Enactment
Beyond this Court's narrow exceptions that allow for mandamus relief when a trial court denies a special The Court's Authorities Are Flawed appearance, I believe that Rule 120a provides, at least by implication, that ordinary appeal is the remedy for the denial The Court relies upon four cases from other states to justify its 6 “approach” today. See United States v. Superior Court, 144 of a special appearance. See TEX.R. CIV. P. 120a(4). Until National Sand, Texas courts interpreted the rule to mean that Ariz. 265, 697 P.2d 658 (1985); Lupo v. Lineberger, 313 Ark. if a party properly filed its special appearance, and unless 315, 855 S.W.2d 293 (1993); State ex rel. Fogle v. Steiner, 74 the sovereign immunity/comity or parent-child exceptions Ohio St.3d 158, 656 N.E.2d 1288 (1995); Conn v. ITT Aetna applied, the moving party does not waive its special Fin. Co., 105 R.I. 397, 252 A.2d 184 (1969). Notwithstanding appearance and has an adequate remedy on appeal whenever the fact that our mandamus jurisprudence is fully developed, the trial court denied its special appearance. See, e.g., and until recently, appeared well-settled under the Walker Aktienggesellschaft v. Kirk, 859 S.W.2d 651, 652 (Tex.App. standard, all four cases are distinguishable. —Eastland 1993, orig. proceeding); N.H. Helicopters, Inc. v. Brown, 841 S.W.2d 424, 425–426 n. 1 (Tex.App.—Dallas In United States v. Superior Court, the Arizona Supreme 1992, orig. proceeding)(cited with approval in Canadian Court gave way to its “general policy of declining Helicopters, 876 S.W.2d at 306 n. 6); Sullivan v. Tab Sales jurisdiction” of an original proceeding because the case dealt Co., 576 S.W.2d 137 (Tex.Civ.App.—Texarkana 1978, orig. with adjudication and quantification of water rights, “one of proceeding); Carpenter Body Works, Inc. v. McCulley, 389 the most important issues conceivable in an arid state such as S.W.2d 331, 332 (Tex.Civ.App.—Houston 1965, writ ref'd), Arizona.” United States v. Superior Court, 697 P.2d at 662. cert. denied, 382 U.S. 979, 86 S.Ct. 550, 15 L.Ed.2d 469 CSR does not invoke such an issue in this case.
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In Lupo, the Arkansas Supreme Court considered whether it and rules of procedure allowed for interlocutory relief); Byrd should provide extraordinary relief to a physician who the v. Ontario Freight Lines Corp., 39 N.J.Super. 275, 120 trial court ordered to testify by deposition. Lupo, 855 S.W.2d A.2d 787 (1956)(discussing availability of statute allowing at 293. Not only did the supreme court deny the petitioner for interlocutory review of personal jurisdiction issue); extraordinary relief, but the case did not involve a special Poret v. State Personnel Comm'n, 74 N.C.App. 536, 328 appearance. Lupo, 855 S.W.2d at 295. It involved a discovery S.E.2d 880 (1985), overruled sub nom. on other grounds, dispute not unlike our recent “apex” deposition case where we Batten v. N. Carolina Dep't of Correction, 326 N.C. 338, afforded mandamus relief to corporate executive after the trial 389 S.E.2d 35 (1990)(immediate appeal of jurisdictional court ordered him to appear for deposition. Lupo, 855 S.W.2d question allowed by statute); United Erectors, Inc. v. at 294–96; see also Crown Cent. Petroleum Corp. v. Garcia, Pratt & Lambert Corp., 338 Pa.Super. 577, 488 A.2d 43 904 S.W.2d 125 (Tex.1995). Lupo is not instructive here. (1985)(discussing Pennsylvania Rule of Appellate Procedure allowing interlocutory relief from order sustaining personal In Steiner, the Ohio Supreme Court granted extraordinary or in rem jurisdiction). We do not. Without statute or rule relief to a mother involved in a custody battle over her two to provide interlocutory appeal, I do not believe mandamus children against her estranged mother-in-law. Steiner, 656 is appropriate after the denial of a special appearance except N.E.2d at 1290. Steiner offers no support for today's opinion in cases involving sovereign immunity, comity and child because this Court has previously recognized that an adequate custody issues. These limited exceptions invoke important, remedy on appeal may be lacking in special appearance and many times, immediate public policy concerns, which is cases involving the parent-child relationship. See Canadian not the case here, nor was it the case in National Sand. Helicopters, 876 S.W.2d at 307.
The Court's recent decisions in this area are troubling, and Conn is the only case closely analogous to today's facts; I believe, confirm my views. Compare National Sand, 897 however, it is distinguishable also. The Supreme Court S.W.2d at 769 (providing mandamus relief for denial of of Rhode Island decided Conn in 1969, at a time where, special appearance) with Canadian Helicopters, 876 S.W.2d because of a “changing economy” and greater “means at 304 (denying foreign defendant mandamus relief after of communication and transportation,” courts, “to keep denial of special appearance). These decisions, along with pace,” began “to relax the jurisdictional strictures of *603 today's opinion, do not square. There is little rhyme or reason Pennoyer v. Neff, 95 U.S. 714, 24 L.Ed. 565 (1877).” Conn, to these cases except perhaps the amorphous standard of 252 A.2d at 186. The Conn court allowed for interlocutory “clear and super clear” abuse of discretion. See Canadian review of the denial of a corporate defendant's special Helicopters, 876 S.W.2d at 310 (Hecht, J., dissenting). As appearance to interpret the state's new longarm statute and the Court has been reminded, hard cases make bad law. to “provide some guidance to the bar and to the courts on See Robinson v. Central Tex. MHMR Ctr., 780 S.W.2d 169, the scope of the statute....” Conn, 252 A.2d at 188. Except 172 n. 1. (Tex.1989)(Hecht, J., dissenting). CSR's position for the court's need to interpret the new longarm statute for in this case offers hard enough facts. Nevertheless, I believe “future litigation,” the court would have denied extraordinary that the Court's decision today sets bad precedent that adds relief. Conn, 252 A.2d at 188. Over a quarter of a century uncertainty to pretrial rulings and, as a result, encourages has passed since the Supreme Court of Rhode Island decided litigants to unnecessarily file original proceedings. 9 Conn. Today's opinion is not necessary to explain anything to our state's bench and bar about now fully-evolved principles of personal jurisdiction. Consequently, Conn's logic does not support the Court's action here. The Road of No Return–Ignoring Precedent
As the Court recently reminded us, “we adhere to In some other states, courts have the benefit of a statutory our precedents for reasons of efficiency, fairness, and guide or a rules device providing interlocutory relief legitimacy.” See Weiner v. Wasson, 900 S.W.2d 316, 320 following the denial of a special appearance or plea to (Tex.1995)(Cornyn, J., joined by Gonzalez, Enoch and the jurisdiction. See, e.g., Miller v. Miller, 506 So.2d Spector, JJ.). “[I]f we [do] not follow our own decisions, no 1084 (Fla.Dist.Ct.App.1987)(interlocutory relief allowed by issue could ever be considered resolved.” Weiner, 900 S.W.2d Florida Rules of Appellate Procedure); Healy v. Vaupel, 133 at 320 (Cornyn, J., joined by Gonzalez, Enoch and Spector, Ill.2d 295, 140 Ill.Dec. 368, 549 N.E.2d 1240 (1990)(statute JJ.). Following Canadian Helicopters, National Sand and
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Absent any legislative guidance, today's decision veers from today's opinion, it is apparent that the Court has only paid lip the design of Rule 120a and bolts from precedent. Because service to its self-proclaimed *604 judicial edict that “stare today's decision can only lead the Court down a road of no decisis is a sound policy.” Weiner, 900 S.W.2d at 320. The return, I respectfully dissent.
Court ought to practice what it preaches and “not succumb to a temptation to continually revisit prior decisions as new fact situations arise....” See Weiner, 900 S.W.2d at 332 (Owen, J., All Citations dissenting, joined by Phillips, C.J., and Hecht, J.). Mandamus should not issue simply because we disagree with a trial 925 S.W.2d 591, Prod.Liab.Rep. (CCH) P 14,666, 39 Tex. court's ruling. See Buller, 806 S.W.2d at 226. Sup. Ct. J. 767
Footnotes 1 The plaintiffs claim that CSR waived the right to contest personal jurisdiction in Texas because of admissions CSR allegedly made before the West Virginia Supreme Court during unrecorded oral argument. See State ex rel. CSR Ltd. v. MacQueen, 190 W.Va. 695, 441 S.E.2d 658 (1994). CSR disputes that contention. Because there is a dispute about what was said, we do not find a judicial admission that knowingly waives a constitutional right under these circumstances.
2 As of June 11, 1996, CSR had been sued by approximately 1610 plaintiffs in at least twelve different lawsuits. DOCKET, 80TH DISTRICT COURT, HARRIS COUNTY, TEXAS (June 11, 1996).
1 See Canadian Helicopters, 876 S.W.2d at 308–09. Remarkably, Canadian Helicopter's “situation” and its argument to this Court were similar to CSR's “situation” and argument here. Nevertheless, the Court denied Canadian Helicopters mandamus relief.
2 There is at least some dispute about whether CSR made admissions about its Texas contacts while arguing a case to the West Virginia Supreme Court. 925 S.W.2d at 595 n. 1. Nevertheless, and despite warnings that, “in cases turning on disputed factual issues, mandamus would not be proper,” the Court decides today that the trial court abused its discretion. See Canadian Helicopters, 876 S.W.2d at 312 (Hecht, J., dissenting)(citing Brady v. Fourteenth Court of Appeals, 795 S.W.2d 712, 714 (Tex.1990)); see also Huey, 571 S.W.2d at 862 (“[a]n abuse of discretion does not exist where the trial court bases its decision[ ] on conflicting evidence.”).
3 Part of my quarrel with the Court's opinion is that the majority reviews CSR's evidence in a light most favorable to CSR, which in effect, makes for a no evidence review. This is contrary to the more limited and proper standard of abuse of discretion.
4 See Canadian Helicopters, 876 S.W.2d at 311 (Hecht, J., dissenting). 5 While this Court's grant of writ may relieve CSR of defending itself in a Texas state court, it hardly relieves CSR from “numerous trials” in other states.
6 The rule provides:
If the court sustains the objection to jurisdiction, an appropriate order shall be entered. If the objection to jurisdiction is overruled, the objecting party may thereafter appear generally for any purpose. Any such special appearance or such general appearance shall not be deemed a waiver of the objection to jurisdiction when the objecting party or subject matter is not amenable to process issued by the courts of this State. TEX.R. CIV. P. 120a(4).
7 Commentators have recognized that a non-resident defendant may be highly inconvenienced by having to wait to appeal. However, they have urged that “[r]ather than the courts stretching the extraordinary remedy of mandamus to accommodate this need [for interlocutory review], the legislature could and should amend the Civil Practice and Remedies Code to contemplate interlocutory appeal of the denied special appearance.” See Muldrow & Gray, Treading the Mine Field: Suing and Defending Non–Residents in Texas State Courts, 46 BAYLOR L. REV. 581, 609 (1994).
8 The statute provides that:
A person may appeal from an interlocutory order of a district court, county court at law, or county court that:
(1) appoints a receiver or trustee; (2) overrules a motion to vacate an order that appoints a receiver or trustee; (3) certifies or refuses to certify a class in a suit brought under Rule 42 of the Texas Rules of Civil Procedure; (4) grants or refuses a temporary injunction or grants or overrules a motion to dissolve a temporary injunction as provided by Chapter 65;
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(5) denies a motion for summary judgment that is based on an assertion of immunity by an individual who is an officer or employee of the state or a political subdivision of the state; or (6) denies a motion for summary judgment that is based in whole or in part upon a claim against or defense by a member of the electronic or print media, acting in such capacity, or a person whose communication appears in or is published by the electronic or print media, arising under the free speech or free press clause of the First Amendment to the United States Constitution, or Article I, Section 8, of the Texas Constitution, or Chapter 73. TEX. CIV. PRAC. & REM.CODE § 51.014.
9 Following National Sand and today's opinion, one might ask what prudent Texas lawyer would advise a client to abide by Rule 120a(4). After today, there is little incentive to wait to appeal the denial of a special appearance when mandamus may be immediately available. Indeed, former Justice Barrow's mandamus “thicket” prophecy is now “reality.” Joachim v. Chambers, 815 S.W.2d 234, 245 (Tex.1991)(Gonzalez, J., dissenting)(quoting Jampole v. Touchy, 673 S.W.2d 569, 578 (Tex.1984)(Barrow, J., dissenting)).
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EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (2003)
the trial court's resolution of disputed factual issues under a factual sufficiency of the evidence KeyCite Yellow Flag - Negative Treatment standard, and review the trial court's conclusions Called into Doubt by Moore v. Pulmosan Safety Equipment Corp., of law de novo.
Tex.App.-Hous. (14 Dist.), December 9, 2008
97 S.W.3d 847 Cases that cite this headnote Court of Appeals of Texas, Corpus Christi-Edinburg. [3] Appeal and Error Cases Triable in Appellate Court EMI MUSIC MEXICO, S.A. De C.V., Appellant, If a special appearance is based on undisputed or v.
established facts, an appellate court conducts a Hermelinda RODRIGUEZ, individually de novo review of the trial court's order granting and as Representative of the Estate of a special appearance as a question of law. Silvestre Rodriguez, Jr., et al., Appellees.
Cases that cite this headnote No. 13–01–867–CV. | Jan. 30, 2003.
Members of musical group and relatives of deceased band [4] Appeal and Error members sued Mexican record company for negligence Proceedings preliminary to trial after car accident in Mexico. Record company filed In conducting review of an order granting or special appearance. The 93rd District Court, Hidalgo denying special appearance, the appellate court County, Rodolfo Delgado, District Judge, denied the special will consider all of the evidence that was before appearance. Record company filed interlocutory appeal. the trial court, including the pleadings, any The Court of Appeals, Yanez, J., held that: (1) company stipulations, affidavits and exhibits, the results of had substantial connection to Texas, and (2) exercise of discovery, and any oral testimony. jurisdiction did not offend traditional notions of fair play and substantial justice. Cases that cite this headnote
Affirmed. [5] Appeal and Error Appearance and representation by counsel In reviewing a grant or denial of special West Headnotes (32) appearance, all questions of fact are presumed to be found in support of the judgment if the record contains no findings of fact or conclusions of [1] Courts law.
Presumptions and Burden of Proof as to Jurisdiction 1 Cases that cite this headnote A nonresident defendant bears the burden of negating all bases of personal jurisdiction to [6] Constitutional Law prevail in a special appearance. Non-residents in general 1 Cases that cite this headnote Courts Actions by or Against Nonresidents, Personal Jurisdiction In; “Long-Arm”
[2] Appeal and Error Jurisdiction Cases Triable in Appellate Court A Texas court may assert personal jurisdiction Appeal and Error over a nonresident defendant only (1) when the Proceedings preliminary to trial Texas long-arm statute authorizes the exercise In considering an order granting or denying a of jurisdiction and (2) when the exercise is special appearance, the Court of Appeals reviews
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EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (2003)
consistent with the due process guarantees embodied in both the United States and Texas Cases that cite this headnote constitutions.
[11] Courts Cases that cite this headnote Related contacts and activities; specific jurisdiction [7] Courts Specific jurisdiction over a nonresident Actions by or Against Nonresidents, defendant is established if the defendant's alleged Personal Jurisdiction In; “Long-Arm” liability arises from or is related to an activity Jurisdiction conducted within the forum, which must be The Texas long-arm statute allows a court to purposefully directed at the forum so the exercise personal jurisdiction over a nonresident defendant could foresee being haled into court defendant as far as the federal constitutional there. requirements of due process will allow. V.T.C.A., Civil Practice & Remedies Code § Cases that cite this headnote 17.042.
[12] Courts Cases that cite this headnote Related contacts and activities; specific jurisdiction [8] Constitutional Law The number of the nonresident defendant's Non-residents in general contacts is not controlling in specific jurisdiction Due process permits a state court to exercise analysis; rather, the importance lies with the personal jurisdiction over a defendant only if quality and nature of these contacts. the defendant has some minimum, purposeful contacts with the state, and the exercise of Cases that cite this headnote jurisdiction will not offend traditional notions of fair play and substantial justice. U.S.C.A. [13] Courts Const.Amend. 14. Related contacts and activities; specific jurisdiction Cases that cite this headnote When specific jurisdiction is asserted, the minimum contacts analysis focuses on the [9] Courts relationship between the defendant, the forum, Business contacts and activities; and the litigation.
transacting or doing business A nonresident that purposefully avails itself Cases that cite this headnote of the privileges and benefits of conducting business in Texas is amenable to a suit in Texas. [14] Courts Related contacts and activities; specific Cases that cite this headnote jurisdiction A single contact with Texas, of substantial [10] Courts quality and nature, may be sufficient to Nature, number, frequency, and extent of establish specific jurisdiction over a nonresident contacts and activities defendant when the cause of action arises from A nonresident will not be subject to Texas that contact. jurisdiction based upon mere random, fortuitous, or attenuated contacts. 2 Cases that cite this headnote
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EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (2003)
interest in furthering fundamental substantive [15] Courts social policies.
Unrelated contacts and activities; general jurisdiction 1 Cases that cite this headnote When general jurisdiction is alleged, there must be continuous and systematic contacts between [19] Courts the nonresident defendant and Texas. Factors Considered in General
Cases that cite this headnote When an international dispute is involved in asserting in personam jurisdiction over a nonresident defendant, additional factors should [16] Courts be considered in determining whether the Unrelated contacts and activities; general exercise of jurisdiction comports with fair-play jurisdiction and substantial justice: (1) the unique burdens Contacts giving rise to general jurisdiction over placed upon the defendant who must defend a nonresident defendant would permit Texas itself in a foreign legal system; and (2) the courts to exercise personal jurisdiction over the procedural and substantive policies of other defendant even if the cause of action did not arise nations whose interests are affected as well as from or relate to activities conducted within the the foreign government's interest in its foreign state. relation policies.
Cases that cite this headnote Cases that cite this headnote
[17] Courts [20] Courts Unrelated contacts and activities; general Related contacts and activities; specific jurisdiction jurisdiction Courts The minimum contacts prong for specific Related contacts and activities; specific jurisdiction can be satisfied by a single act if the jurisdiction nonresident defendant purposefully avails itself General jurisdiction requires a showing of of the privilege of conducting activities within substantial activities by the nonresident the forum state, thus invoking the benefit and defendant in Texas, a more demanding minimum protection of its laws. contacts analysis than for specific jurisdiction.
2 Cases that cite this headnote Cases that cite this headnote [21] Courts [18] Constitutional Law Jurisdiction of the Person Non-residents in general When reaching a decision to exercise or decline In determining whether the exercise of in jurisdiction based on the nonresident defendant's personam jurisdiction over a nonresident alleged commission of a tort, the trial court defendant comports with fair-play and should examine only the necessary jurisdictional substantial justice, the court considers: (1) the facts and should not reach the merits of the case. burden on the nonresident defendant, (2) Texas's 2 Cases that cite this headnote interest in adjudicating the dispute, (3) the plaintiff's interest in getting convenient and effective relief, (4) the interstate judicial system's [22] Courts interest in obtaining the most efficient resolution Torts in general of the controversy, and (5) the states' shared Courts
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EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (2003)
Agents, Representatives, and Other Third Voluntarily assumed duties Parties, Contacts and Activities of as Basis for Texas courts have recognized that a duty to Jurisdiction use reasonable care may arise when a person Specific jurisdiction over a nonresident tort undertakes to provide services to another, either defendant is satisfied when the defendant, gratuitously or for compensation. personally or through an agent, is the author of an act or omission within the forum state, and the 1 Cases that cite this headnote petition states a claim in tort arising from such conduct. [27] Negligence Voluntarily Assumed Duty Cases that cite this headnote Negligence Voluntarily assumed duties [23] Negligence One who owes no legal duty, but who Elements in general gratuitously acts, assumes a duty to act with The elements of a negligence cause of action are: reasonable care so as to prevent harm to that (1) a legal duty, (2) breach of that duty, and (3) person or to others. damages proximately resulting from the breach.
1 Cases that cite this headnote 1 Cases that cite this headnote
[28] Courts [24] Labor and Employment Automobile accidents; nonresident Negligent Hiring motorists To successfully prosecute a claim of negligent Foreign record company undertook to provide hiring, supervision, or retention, a plaintiff is transportation services to band members in required to show that: (1) the employer owed forum state, and thus, car accident that occurred a legal duty to protect third parties from the in Mexico that injured and killed members of employee's actions, and (2) the third party band had substantial connection to company's sustained damages proximately caused by the act of picking of band members in forum employer's breach of that legal duty. state and transporting them to Mexico, which satisfied necessary element to establish long-arm 3 Cases that cite this headnote jurisdiction over foreign record company, where record company directed its employees to drive [25] Automobiles to Texas and pick-up band members and then Permitting operation by incompetent person transport them to Mexico.
Proof of negligent entrustment requires: (1)
Cases that cite this headnote entrustment of a vehicle by the owner, (2) to an unlicensed, incompetent, or reckless driver, (3) that the owner knew or should have known to [29] Constitutional Law be unlicensed, incompetent, or reckless, (4) the Business, business organizations, and driver's negligence on the occasion in question, corporations in general (5) proximately caused the accident. Courts Automobile accidents; nonresident 1 Cases that cite this headnote motorists Exercise of long-arm jurisdiction over [26] Negligence nonresident record company did not impose an Voluntarily Assumed Duty undue burden on company to defend negligence Negligence suit brought by band members and relatives
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EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (2003)
after car driven by company employee had Courts an accident that resulted in injury and death Automobile accidents; nonresident to bad members, to satisfy that element of motorists due process requirements of fair play and Interests of injured band members and substantial justice in asserting jurisdiction over relatives of deceased band members in nonresident defendant, where company had adjudicating against record company that offices in Mexico that were only two or three provided transportation from Texas to Mexico hours from place of suit. U.S.C.A. Const.Amend. negligence action arising from car accident in 14. Mexico satisfied that element of due process requirements of fair play and substantial justice Cases that cite this headnote in asserting long-arm jurisdiction over foreign record company, where state was forum in [30] Courts which entire dispute could be resolved. U.S.C.A.
Commercial Contacts and Activities; Const.Amend. 14.
Contracts and Transactions 2 Cases that cite this headnote Distance alone is not ordinarily sufficient to defeat long-arm jurisdiction over a nonresident defendant as modern transportation and communication have made it much less burdensome for a party sued to defend himself in Attorneys and Law Firms a state where he engages in economic activity.
*851 Barry A. Chasnoff, Roberta J. Sharp and Jo Beth 1 Cases that cite this headnote Eubanks, San Antonio, for EMI Music Mexico, S.A. de C.V.
Kevin Dubose, J. Brett Busby, Hogan, Dubose & Townsend, [31] Constitutional Law Houston, David H. Hockema, Joe Escobedo, Jr., Hockema, Media and publishing Tippit & Escobedo, McAllen, David W. Showalter, Bellaire, Courts Richard J. Plezia, David M. Valetutto, Houston, Roger G.
Automobile accidents; nonresident Bresnahan, San Antonio, Jose E. Chapa, Jr., Yzaguirre & motorists Chapa, Jay Joel Palacios, McAllen, for Appellees. Forum state had substantial interest in Jose E. Chapa, Jr., for Nicole Rodriguez, Minor. adjudicating negligence action brought by band members and relatives for injuries and death David W. Showalter and Kevin Dubose, for Rita Gonzalez resulting from accident in Mexico involving car Vigil, Audrey Gonzalez, Angela Gonzalez, Amber Gonzalez. driven by company employee, which satisfied that element of due process requirement of Jay Joel Palacios, for Gonzalez Minors. fair play and substantial justice in asserting Kevin Dubose, Richard J. Plezia, David M. Valetutto and J.
jurisdiction over nonresident defendant, where Brett Busby, for Hector Gonzalez, Dolores Gonzalez.
employee picked-up members in Texas and transported them to Mexico, and company Kevin Dubose and Roger G. Bresnahan, for Intocable, L.L.C., officials traveled to state six to eight times a Ricardo Munoz and Rene Martinez. year to meet musicians and coordinate events. U.S.C.A. Const.Amend. 14. Before Justices HINOJOSA, YAÑEZ, and CASTILLO.
1 Cases that cite this headnote OPINION [32] Constitutional Law Business, business organizations, and Opinion by Justice YAÑEZ.
corporations in general
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EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (2003)
Appellant, EMI Music Mexico, S.A. de C.V. (“EMI recording contract with EMI Latin. Thus, under the MEA, Mexico”), a Mexican corporation, brings this accelerated EMI Mexico is licensed to sell Intocable's recordings in interlocutory appeal of an order denying its special Mexico. appearance. See TEX. CIV. PRAC. & REM.CODE ANN. § 51.014(a)(7) (Vernon Supp.2003); TEX.R.APP. P. 28.1. When EMI Mexico organizes a promotional tour in Mexico The underlying lawsuit is a personal injury suit brought by by artists of another EMI repertoire owner, EMI Mexico appellees 1 for damages arising out of a 1999 car crash in is responsible for arrangements and related expenses inside Mexico, which resulted in the deaths of several musicians Mexico; travel costs in and out of Mexico, however, are borne and employees of a Texas musical group called “Intocable.” by the repertoire owner. In two issues, EMI Mexico contends the trial court erred in denying its special appearance because: (1) EMI Mexico's In January 1999, Lidia Salazar, then EMI Mexico's regional contacts with Texas are insufficient to support the exercise of marketing manager, arranged a promotional tour for Intocable general jurisdiction; and (2) EMI Mexico's conduct in sending in Mexico. Initially, EMI Latin made travel arrangements its employees into Texas to pick up members of the band for the band by booking a commercial flight from Texas to and transport them into Mexico is insufficient to support the Mexico City. Several days later, however, the plans were exercise of specific jurisdiction. We affirm the trial court's changed because the band had not received the appropriate ruling denying EMI Mexico's special appearance. visas for a direct international flight. Salazar therefore arranged for EMI Mexico's Monterrey office to rent two Suburbans in Mexico to pick the band members up in McAllen and take them to Monterrey to catch a flight to Background Mexico City. The circumstances regarding who initiated EMI Mexico is a Mexican corporation that is an indirect the backup travel plans are somewhat in dispute. 3 It is wholly-owned subsidiary *852 of EMI Group PLC, a United undisputed, however, that in accordance with such plans, EMI Mexico assigned two of its employees, David Perez and Kingdom holding company. EMI Latin 2 is an unincorporated Enrique *853 Herrera, to drive the Suburbans to McAllen division of Capitol Records, Inc. (“Capitol”), a United States and pick up the band and its equipment.
corporation, which, like EMI Mexico, is also a wholly-owned subsidiary of EMI Group PLC. EMI Mexico's principal On January 30, 1999, the night before the tour was to begin, office is in Mexico City; it has no offices outside Mexico.
the band played at a festival in McAllen. The concert and EMI Mexico is not a resident of Texas, is not authorized follow-up activities lasted until the early morning hours. As or registered to do business in Texas, has no agents or planned, Perez and Herrera picked up the band members at representatives in Texas, owns no property in Texas, does not the McAllen Holidome hotel around 7:30 a.m. on January advertise in Texas, has no employees who are residents of Texas, and maintains no bank accounts in Texas. 31, 1999. 4 The band members and the road manager rode in the Suburban driven by Perez; the Suburban driven by EMI Mexico enters into recording contracts with Mexican Herrera carried the band's equipment. At a checkpoint five artists, and promotes and sells those artists' recordings miles south of the border, the Suburban driven by Perez was in Mexico. Outside Mexico, recordings of EMI Mexico briefly delayed. According to deposition testimony of Rene artists are sold through a reciprocal license agreement with Martinez, one of the band members, Perez began speeding EMI Music International Services Limited (“EMIMUS”), following the delay to catch up with the other Suburban. a United Kingdom company also owned by EMI Group While traveling southbound on Highway 40 to Monterrey, PLC. Through the agreement, called a Matrix Exchange near China, in Nuevo Leon, the right rear passenger tire of Agreement (“MEA”), EMI Mexico has the exclusive right the Suburban driven by Perez suffered a tread separation, and to manufacture, distribute and sell in Mexico any recordings Perez was unable to retain control of the vehicle. The vehicle within the repertoire of any EMI company around the world. rolled over, and all but one of the passengers was thrown from In exchange, EMI Mexico: (1) grants to EMI Group an the vehicle. As a result of the crash, band members Sylvestre exclusive license to sell EMI Mexico repertoire everywhere Rodriguez, Jose Angel Farias, and road manager Jose Angel in the world except Mexico, and (2) agrees to pay a royalty Gonzalez were killed. Band owners Ricardo Munoz and Rene to EMI Group for each recording of another EMI company's Martinez, band members Sergio Serna and Daniel Sanchez, repertoire sold by EMI Mexico in Mexico. Intocable has a and the driver, Perez, suffered injuries.
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EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (2003)
In Texas, a party may contest personal jurisdiction by filing The band, the injured band members, and relatives of the a special appearance. TEX.R. CIV. P. 120a(1). A special deceased band members filed suit in Texas district court. appearance is determined by reference to the pleadings, any EMI Mexico was later added as a defendant. Appellees stipulations made by and between the parties, any affidavits allege acts of negligence by EMI Mexico and its employee, and attachments filed by the parties, discovery, and any oral Perez. EMI Mexico filed a special appearance challenging the testimony. TEX.R. CIV. P. 120a(3). court's in personam jurisdiction. Following a hearing, the trial court denied the special appearance. This interlocutory appeal [6] [7] A Texas court may assert personal jurisdiction over followed. a nonresident defendant only (1) when the Texas long-arm statute authorizes the exercise of jurisdiction and (2) when the exercise is consistent with the due process guarantees embodied in both the United States and Texas constitutions.
Standard of Review Ahadi v. Ahadi, 61 S.W.3d 714, 718 (Tex.App.-Corpus [1] We begin with the presumption that the court has Christi 2001, pet. denied) (citing CSR Ltd., 925 S.W.2d at jurisdiction over the parties. El Puerto de Liverpool v. 594). The long-arm statute authorizes jurisdiction over a Servi Mundo Llantero S.A. de C.V., 82 S.W.3d 622, 628 nonresident defendant “doing business” in Texas. TEX. CIV. (Tex.App.-Corpus Christi 2002, pet. dism'd w.o.j.) (citing PRAC. & REM.CODE ANN. § 17.042 (Vernon 1997). 5 The Kawasaki Steel Corp. v. Middleton, 699 S.W.2d 199, 203 Texas long-arm statute allows a court to exercise personal (Tex.1985)). A nonresident defendant bears the burden of jurisdiction over a nonresident defendant “as far as the federal negating all bases of personal jurisdiction to prevail in a constitutional requirements of due process will allow.” CSR special appearance. Id. (citing CSR Ltd. v. Link, 925 S.W.2d Ltd., 925 S.W.2d at 594 (quoting Guardian Royal Exch. 591, 596 (Tex.1996) (orig.proceeding)). Assurance, Ltd. v. English China Clays, P.L.C, 815 S.W.2d 223, 226 (Tex.1991)).
[2] [3] [4] [5] In considering an order granting or denying a special appearance, we review the trial [8] [9] [10] Due process permits a state court to exercise court's resolution of disputed factual issues under a factual personal jurisdiction over a defendant only if the defendant sufficiency of the evidence standard, and review the trial has some minimum, purposeful contacts with the state, court's conclusions of law de novo. Id. (citations omitted). and the exercise of jurisdiction will not offend traditional However, if a special appearance is based on undisputed notions of fair play and substantial justice. Dawson–Austin or established facts, an appellate court instead conducts a v. Austin, 968 S.W.2d 319, 326 (Tex.1998); Liverpool, 82 de novo review of the trial court's order granting a special S.W.3d at 629; Ahadi, 61 S.W.3d at 719. A nonresident appearance as a question of law. Id. In conducting its review, that purposefully avails itself of the privileges and benefits the appellate court will consider all of the evidence that of conducting business in Texas is amenable to a suit in was before the trial court, including the pleadings, any Texas. CSR Ltd., 925 S.W.2d at 594; Liverpool, 82 S.W.3d stipulations, affidavits and exhibits, the results of discovery, at 629; see Burger King Corp. v. Rudzewicz, 471 U.S. 462, and any oral testimony. BHP de Venezuela, C.A. v. Casteig, 475–76, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985). However, 994 S.W.2d 321, 326 (Tex.App.-Corpus Christi 1999, pet. a nonresident will not be subject to Texas jurisdiction denied) (op. on reh'g). Where, as here, the record contains no based upon mere random, fortuitous, or attenuated contacts. findings of fact or conclusions of law, all questions of fact CSR Ltd., 925 S.W.2d at 595; Liverpool, 82 S.W.3d at are presumed to be found in support *854 of the judgment. 629. Minimum contacts are particularly important when the Valsangiacomo v. Am. Juice Import, Inc., 35 S.W.3d 201, defendant is from a different country because of the unique 205 (Tex.App.-Corpus Christi 2000, no pet.). Because the and onerous burden placed on a party called upon to defend a appellate record includes a reporter's record, however, these suit in a foreign legal system. Liverpool, 82 S.W.3d at 629. implied findings are not conclusive and an appellant may challenge the sufficiency of the evidence on appeal. Id. [11] [12] [13] [14] A defendant's contacts with a forum can give rise to specific or general *855 jurisdiction. CSR Ltd., 925 S.W.2d at 594; Liverpool, 82 S.W.3d at 627. Specific jurisdiction is established if the defendant's alleged Applicable Law liability arises from or is related to an activity conducted
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EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (2003)
within the forum. CSR Ltd., 925 S.W.2d at 595. The activity also be considered: (1) the unique burdens placed upon must be purposefully directed at Texas so the defendant could the defendant who must defend itself in a foreign legal foresee being haled into court here. Id. The number of the system; and (2) the procedural and substantive policies of defendant's contacts is not controlling; rather, the importance other nations whose interests are affected as well as the lies with the quality and nature of these contacts. Ahadi, foreign government's interest in its foreign relation policies. 61 S.W.3d at 719. When specific jurisdiction is asserted, Liverpool, 82 S.W.3d at 638; see Guardian Royal, 815 the minimum contacts analysis focuses on the relationship S.W.2d at 229. Consideration of the fair-play analysis is between the defendant, the forum, and the litigation. Id.; separate and distinct from the minimum contacts issue, but it Guardian Royal, 815 S.W.2d at 228. A single contact with is unlikely the exercise of jurisdiction will fail the fair-play Texas, of substantial quality and nature, may be sufficient to analysis because the minimum contacts analysis encompasses establish specific jurisdiction when the cause of action arises so many considerations of fairness. Liverpool, 82 S.W.3d from that contact. Ahadi, 61 S.W.3d at 719; Mem. Hosp. Sys. at 638; see Ahadi, 61 S.W.3d at 721; Guardian Royal, 815 v. Fisher Ins. Agency, Inc., 835 S.W.2d 645, 650 (Tex.App.- S.W.2d at 231. Houston [14th Dist.] 1992, no writ). A substantial connection must exist between the contact and the cause of action in the forum state. Ahadi, 61 S.W.3d at 719. The concept of *856 Specific Jurisdiction “foreseeability” is implicit in the requirement that there be a “substantial connection” between the nonresident defendant In this case, appellees asserted the trial court had both and Texas arising from action or conduct of the nonresident specific and general jurisdiction over EMI Mexico. We first defendant purposefully directed toward Texas. Id. at 719–20. address EMI Mexico's challenge to the exercise of specific jurisdiction.
[15] [16] [17] When general jurisdiction is alleged, there must be continuous and systematic contacts between the [20] As noted, specific jurisdiction pertains to causes nonresident defendant and Texas. Liverpool, 82 S.W.3d at of action arising out of or relating to the defendant's 627; CSR Ltd., 925 S.W.2d at 595. Such contacts would contacts with Texas. Guardian Royal, 815 S.W.2d at 230. permit Texas courts to exercise personal jurisdiction over the The minimum contacts prong for specific jurisdiction can defendant even if the cause of action did not arise from or be satisfied by a single act if the nonresident defendant relate to activities conducted within the state. Liverpool, 82 “purposefully avails itself of the privilege of conducting S.W.3d at 627; CSR Ltd., 925 S.W.2d at 595; see Schlobohm activities within the forum state, thus invoking the benefit and v. Schapiro, 784 S.W.2d 355, 357 (Tex.1990). General protection of its laws.” Guyton v. Pronav Ship Mgmt., Inc., jurisdiction requires a showing of substantial activities by the 139 F.Supp.2d 815, 818 (S.D.Tex.2001) (citing Burger King, nonresident defendant in Texas, a more demanding minimum 471 U.S. at 475, 105 S.Ct. 2174). contacts analysis than for specific jurisdiction. Liverpool, 82 S.W.3d at 627; CSR Ltd., 925 S.W.2d at 595. [21] [22] When reaching a decision to exercise or decline jurisdiction based on the defendant's alleged commission of [18] [19] Upon finding that the nonresident defendant a tort, the trial court should examine only the necessary purposefully established minimum contacts with the forum jurisdictional facts and should not reach the merits of the case. state, we must then determine if the exercise of in personam Arterbury v. Am. Bank & Trust Co., 553 S.W.2d 943, 948 jurisdiction comports with fair-play and substantial justice. (Tex.Civ.App.-Texarkana 1977, no writ); see also Portland Liverpool, 82 S.W.3d at 637–38 (citing Schlobohm, 784 Sav. & Loan Ass'n v. Bernstein, 716 S.W.2d 532, 535 S.W.2d at 358). In making this determination, we consider: (Tex.App.-Corpus Christi 1985, writ ref'd n.r.e.), overruled (1) the burden on the nonresident defendant; (2) Texas's on other grounds by, Dawson–Austin, 968 S.W.2d at 328. interest in adjudicating the dispute; (3) the plaintiff's interest Specific jurisdiction over a tort defendant is satisfied when in getting convenient and effective relief; (4) the interstate “the defendant, personally or through an agent, is the author judicial system's interest in obtaining the most efficient of an act or omission within the forum state, and the petition resolution of the controversy; and (5) the states' shared states a claim in tort arising from such conduct.” Baldwin v. interest in furthering fundamental substantive social policies. Household Int'l, Inc., 36 S.W.3d 273, 277 (Tex.App.-Houston Id.; see Guardian Royal, 815 S.W.2d at 228. When an [14th Dist.] 2001, no pet.). The act or omission within the international dispute is involved, the following factors should state is a sufficient basis for the exercise of jurisdiction to
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EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (2003)
determine whether or not the act or omission gives rise to the roadway, without pulling over; again, the band members liability in tort. Id. (citing Bernstein, 716 S.W.2d at 535). told him to move out of the roadway. Serna described Perez as a “reckless, careless” and very aggressive driver. According Where an individual commits a tort in whole or in part to Serna, on prior occasions when Perez had been assigned in Texas, he satisfies the jurisdictional requirements of the to drive the band in Monterrey, he had engaged in reckless Texas long-arm statute. TEX. CIV. PRAC. & REM.CODE driving, and the band had complained about his driving. ANN. § 17.042 (Vernon 1997); Ring Power Sys. v. Int'l de Comercio Y Consultoria, S.A., 39 S.W.3d 350, 353 Rene Martinez, another member of the band, similarly (Tex.App.-Houston [14th Dist.] 2001, no pet.). testified that while still in McAllen, Perez ran a red light and stopped in the middle of the road, without pulling over to Here, EMI Mexico entered Texas to pick up and transport the side; on both occasions, the band told him he could be the band members to Mexico, and is being sued for ticketed for such conduct. Martinez testified that Perez was damages arising out of an accident that occurred during wearing sunglasses, even though it was not sunny. He stated that transportation. The pleadings show appellees alleged that Alan Baxter later told him Perez was seen drinking in various acts of negligence by EMI Mexico, including failure Monterrey until 4:00 a.m. the morning he picked them up. to provide appellees with safe transportation, negligent Martinez testified that after the Suburban driven by Perez was hiring and training of Perez, and negligent entrustment of briefly delayed at the checkpoint, Perez began speeding to a vehicle to Perez. Appellees allege that at the time EMI catch up with the other Suburban. Martinez said he and others Mexico negligently entrusted a vehicle to Perez, he was an told Perez to slow down. “incompetent and unfit” driver and that he was “untrained, unlicensed, overworked, exhausted, and fatigued.” Appellees EMI Mexico argues it is not subject to specific jurisdiction further allege that EMI Mexico failed to provide safe because even though the long-arm statute permits the exercise transportation for the band members “from Hidalgo County, of jurisdiction over a nonresident defendant who commits a Texas into Mexico.” They further allege EMI Mexico knew tort in whole or in part in Texas, the alleged torts in this or should have known that as an incompetent and unfit driver, case were committed wholly in Mexico. It further argues Perez would create an unreasonable risk of danger “on the jurisdiction cannot be predicated on any contract to be public streets and highways of Texas and Mexico at the time performed in whole or in part in Texas because there was of the [negligent] entrustment.” no contract between EMI Mexico and the band regarding EMI Mexico's transportation of the band from Texas into In support of allegations that Perez was an incompetent and Mexico. EMI Mexico argues it had no duty to provide unfit driver, appellees offered deposition testimony of various transportation to the band, and that it came to Texas and witnesses, including Alan Baxter, the manager of a singer provided transportation only because of the band's last-minute who performed at a concert in Monterrey on the evening of request that it do so. January 30, 1999. Baxter testified he saw Perez drinking beer at a party in Monterrey on the afternoon of the 30th and later Appellees cite Chew v. Dietrich, 143 F.3d 24, 30 (2d that evening, at the concert. He testified Perez did not leave Cir.1998), in support of their position that the fact the injury the concert until *857 around 3:00 a.m. on the 31st. Paul occurred outside Texas does not, by itself, preclude a finding Roland Olivarri, who works with Baxter, also testified he saw of specific jurisdiction. In Chew, the court found specific Perez drinking at the party and concert, and that Perez did jurisdiction based on a nonresident defendant's transportation not leave the concert until around 2:00 or 3:00 a.m. Sergio of people or goods from the forum state, even though the Serna, a member of the band, testified that although Perez was injury occurred outside the forum state. See id. Appellees also supposed to be at the McAllen Holidome Hotel at 7:00 a.m., argue the exercise of specific jurisdiction is proper in Texas he was not there, but was found a short time later at a different when any element of a tort, including breach of duty in a hotel, asleep in the Suburban. Serna testified that after loading negligence action, takes place in the forum state. Appellees up the band members and leaving the hotel, Perez ran a red contend that by sending Perez, a fatigued and unfit driver, into light in McAllen. Several of the band members reminded him Texas to pick up the band, EMI Mexico breached its duty in he was “not in Mexico,” and that it was necessary to stop Texas to provide appellees with safe transportation, and thus at red lights. Also, while still in McAllen, when the other committed part of a tort in Texas. Suburban stopped to get gas, Perez stopped in the middle of
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EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (2003)
Appellees also argue EMI Mexico's attempt to distinguish gratuitously acts, assumes a duty to act with reasonable care 6 so as to prevent harm to that person or to others. Wal–Mart Chew and other transportation cases on the basis that those cases involved contracts is unpersuasive. *858 Appellees Stores, Inc. v. Lane, 31 S.W.3d 282, 293 (Tex.App.-Corpus contend an agreement to transport people is not required Christi 2000, pet. denied); see also Munoz v. City of Pearsall, to be in writing to be an enforceable contract, and that 64 S.W.3d 119, 122 (Tex.App.-San Antonio 2001, no pet.). the band's acceptance of EMI Mexico's offer to arrange promotional events and provide transportation is supported [28] EMI Mexico argues that it came to Texas to provide by consideration. transportation to the band only because the band requested that it do so. It also argues that its mere “footfall” into Texas Appellees' claims arise out of the accident which resulted is insufficient to support jurisdiction because its contacts with from EMI Mexico's alleged negligence in sending Perez, an Texas were “incidental and immaterial” to the events which allegedly reckless, incompetent, and exhausted driver, into gave rise to appellees' claims and the band's location in Texas Texas to pick up the band. As noted, appellees also allege that was entirely incidental to the agreement to travel into Mexico. EMI Mexico's breach of its duty to provide safe transportation occurred in Texas. We are unpersuaded by EMI Mexico's argument that because it came to Texas only as an accommodation to the band, [23] The elements of a negligence cause of action are: its contact with Texas is insufficient to support jurisdiction. (1) a legal duty; (2) breach of that duty; and (3) damages A similar argument was rejected in Summit Mach. Tool proximately resulting from the breach. San Benito Bank & Mfg. Corp. v. Warren Transp., 920 F.Supp. 722, 725– Trust Co. v. Landair Travels, 31 S.W.3d 312, 317 (Tex.App.- 26 (S.D.Tex.1996), where a Mexican trucking company Corpus Christi 2000, no pet.) (citing Van Horn v. Chambers, that entered Texas to deliver equipment was found to 970 S.W.2d 542, 544 (Tex.1998)). have sufficient contact with Texas to support the exercise of specific jurisdiction, even though the *859 company [24] [25] To successfully prosecute a claim of negligent argued it came into Texas only as an accommodation hiring, supervision, or retention, a plaintiff is required to show to and at the request of the Texas equipment yard that: (1) the employer owed a legal duty to protect third parties owner where delivery was made. The court noted that from the employee's actions; and (2) the third party sustained “[w]hether or not [the defendant] was ‘enticed’ to come damages proximately caused by the employer's breach of to Texas, it nevertheless freely did so, presumably finding that legal duty. See Houser v. Smith, 968 S.W.2d 542, 544 it economically advantageous.” Id. at 726. Because the (Tex.App.-Austin 1998, no pet.); see also Estate of Arrington plaintiff's claims arose from the defendant's contacts with v. Fields, 578 S.W.2d 173, 178 (Tex.Civ.App.-Tyler 1979, Texas, the court found the exercise of jurisdiction was not writ ref'd n.r.e.) (holding basis of responsibility for negligent contrary to due process. Id. hiring is master's own negligence in hiring or retaining incompetent servant whom master knows or by exercise Here, the evidence shows EMI Mexico purposefully directed of reasonable care should have known was incompetent or its activities toward Texas by sending its employee, Perez, unfit, thereby creating unreasonable risk of harm to others). to Texas to pick up the band. Appellees' claims arise out of Proof of negligent entrustment requires: (1) entrustment of a EMI Mexico's alleged breach in Texas of its duty to provide vehicle by the owner; (2) to an unlicensed, incompetent, or safe transportation by sending an allegedly reckless, unfit, and reckless driver; (3) that the owner knew or should have known exhausted driver to pick up the band. to be unlicensed, incompetent, or reckless; (4) the driver's negligence on the occasion in question; (5) proximately EMI Mexico contends appellees' claims do not “arise out of or caused the accident. Williams v. Steves Indus., Inc., 699 relate to” EMI Mexico's contacts with Texas because the test S.W.2d 570, 571 (Tex.1985). requires “virtually a direct link” between the claim and the contacts, a relationship analogous to the issue of proximate [26] [27] Texas courts have recognized that a duty to cause in tort law. Appellees note a split in the federal circuit use reasonable care may arise when a person undertakes courts on the standard to be applied in determining if a tort to provide services to another, either gratuitously or for claim “relates” to the defendant's contacts within a state; compensation. Torrington Co. v. Stutzman, 46 S.W.3d 829, some courts require that conduct within the state must be a 837 (Tex.2000). One who owes no legal duty, but who proximate cause for the plaintiff's injury, while others hold
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EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (2003)
it sufficient if the conduct within the state is a “but for” substantial justice when *860 the nonresident defendant cause of the plaintiff's injury. See Chew, 143 F.3d at 29 has purposefully established minimum contacts with the (citing cases). Appellees further note that some state courts state. Id. at 231. With this standard in place, we apply the have adopted a “discernible relationship” or “substantial relevant fair play and substantial justice factors, which are: connection” standard between contacts and claims. Appellees (1) the nonresident's burden; (2) the forum state's interest contend this Court need not decide which test to apply in adjudicating the dispute; and (3) the plaintiff's interest in because the facts in this case satisfy even the most rigorous obtaining convenient and effective relief. Id. 7 standard. This Court, however, has adopted the “substantial connection” standard and has held that a single Texas contact [30] EMI Mexico asserts that its status as an international can support the exercise of specific jurisdiction if the suit defendant is a determinative factor in the fairness analysis. arises out of that contact: We disagree. EMI Mexico does not explain how it would be burdened by litigating this case in Texas, except to note that A substantial connection must exist the injuries occurred in Mexico and that many of the witnesses between the contact and the cause are in Mexico. Appellees note that many of EMI Mexico's of action in the forum state. The witnesses have testified by deposition in Mexico. Moreover, concept of “foreseeability” is implicit distance alone is not ordinarily sufficient to defeat jurisdiction in the requirement that there be as “modern transportation and communication have made it a “substantial connection” between much less burdensome for a party sued to defend himself the nonresident defendant and Texas in a State where he engages in economic activity.” See id.
arising from action or conduct of the (quoting McGee v. Int'l Life Ins. Co., 355 U.S. 220, 223, 78 nonresident defendant purposefully S.Ct. 199, 2 L.Ed.2d 223 (1957)). Although EMI Mexico's directed toward Texas.
principal office is located in Mexico City, it also has offices in Ahadi, 61 S.W.3d at 719–20 (citations omitted); see also, J & Monterrey, which is a two to three hour drive from McAllen. J Marine, Inc. v. Le, 982 S.W.2d 918, 923 (Tex.App.-Corpus We conclude that any inconvenience EMI Mexico may suffer Christi 1998, no pet.). defending this suit in Texas would not amount to a denial of due process.
If a nonresident defendant undertakes to provide transportation services to a forum resident, as EMI Mexico [31] Texas has a substantial interest in adjudicating this did here, he assumes a duty to act with reasonable care in matter because all but one of the members of the band doing so. See Otis Eng'g Corp. v. Clark, 668 S.W.2d 307, were Texas residents at the time of the accident and the 309 (Tex.1983) (“[o]ne who voluntarily enters an affirmative band itself, Intocable, L.L.C., is a Texas company. The course of action affecting the interests of another is regarded evidence shows EMI Mexico officials traveled to Texas six as assuming a duty to act and must do so with reasonable to eight times a year to meet musicians in Texas to coordinate care.”). If the defendant breaches such a duty by failing to promotional events in Mexico. On some of these occasions, act with reasonable care, there is a foreseeable consequence EMI Mexico officials picked up musicians in Texas and of injury to the forum resident. See Ahadi, 61 S.W.3d at 720. provided transportation into Mexico for the promotional We hold that a substantial connection exists between EMI events. Texas has a strong “interest in providing effective Mexico's contact with Texas and appellees' causes of action, means of redress of its residents.” McGee, 355 U.S. at 223, as required for the exercise of specific jurisdiction. 78 S.Ct. 199. We find there is sufficient evidence to support the trial court's conclusion that Texas has an interest in adjudicating this dispute.
Fair Play and Substantial Justice [32] The appellees' interests in convenient and effective relief also weigh in favor of finding that the exercise of [29] We now determine whether the trial court's exercise jurisdiction over EMI Mexico is proper. Appellees note Texas of personal jurisdiction over EMI Mexico comports with may be the only forum in which the entire dispute can traditional notions of fair play and substantial justice.
be resolved in a single proceeding because some plaintiffs Guardian Royal, 815 S.W.2d at 228. While conducting have also sued other entities and individuals that are subject this inquiry, we bear in mind that only in rare cases will to jurisdiction in Texas and that have filed answers in the the exercise of jurisdiction not comport with fair play and
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EMI Music Mexico, S.A. de C.V. v. Rodriguez, 97 S.W.3d 847 (2003)
appellant's second issue and AFFIRM the trial court's denial lawsuit. Adjudication of the dispute in Texas thus allows the of EMI Mexico's special appearance.
plaintiffs to obtain relief against all the parties in a single proceeding.
In light of our disposition of this issue, we need not address EMI Mexico's remaining issue. See TEX.R.APP. P. 47.1.
Taking into account all of the factors involved in a fairness analysis, we hold that the exercise of jurisdiction over EMI Mexico by a Texas court does not offend traditional notions All Citations of fair play and substantial justice. Accordingly, we overrule 97 S.W.3d 847
Footnotes 1 Appellees include surviving members of a Texas musical group called “Intocable,” and relatives of the deceased band members and its employees. Intocable is a Texas limited liability company. At the time of the accident, five of Intocable's six members were Texas residents.
2 EMI Latin is also a defendant, but is not involved in this appeal. 3 In her affidavit, Salazar states that EMI Latin arranged for the revised itinerary providing for the band's commercial flight from Monterrey to Mexico City. She further states she made arrangements for the ground transportation from McAllen to Monterrey in response to a call from Intocable's agent, Servando Cano, who asked her to contact the band's business manager, Nikki Sandoval, for the purpose of coordinating the ground travel plans between McAllen and Monterrey. In her deposition testimony, Sandoval stated she was unsure whose idea it was to arrange for the band to travel to Monterrey in the Suburbans, but that she did not suggest the arrangements and believed that the plan “might have been” Salazar's idea. Sandoval also stated that J.J. Cheng of EMI Latin's office was advised of the revised travel plans in a telephone conference call. Rene Martinez, a member of the band, stated in deposition testimony that because the work visas had not arrived, Sandoval called EMI Latin's California office to request the flight change and that she also coordinated travel arrangements with EMI Mexico.
4 Herrera met the band as scheduled around 7:00 a.m. at the McAllen Holidome. Perez, however, was not there, and was found by one of the band members asleep in the other Suburban at the McAllen Sheraton hotel.
5 The Texas long-arm statute authorizes the exercise of jurisdiction over a nonresident defendant who does business in Texas. See TEX. CIV. PRAC. & REM.CODE ANN. § 17.042 (Vernon 1997). In pertinent part, the Texas Civil Practice and Remedies Code characterizes nonresident activity as “doing business” in Texas where the nonresident:
(1) contracts by mail or otherwise with a Texas resident and either party is to perform the contract in whole or in part in this state; (2) commits a tort in whole or in part in this state; (3) recruits Texas residents, directly or through an intermediary located in this state, for employment inside or outside this state; or (4) performs any other acts that may constitute doing business. TEX. CIV. PRAC. & REM.CODE ANN. § 17.042 (Vernon 1997).
6 See Transportacion Especial Autorizada, S.A. de C.V. v. Seguros Comercial America, S.A. de C.V., 978 S.W.2d 716, 718–20 (Tex.App.-Austin 1998, no pet.).
7 The fourth and fifth factors, “the interstate judicial system's interest in obtaining the most efficient resolution of controversies [and] the shared interests of the several states in furthering fundamental substantive social policies,” need not be considered in cases involving a foreign defendant. Guardian Royal Exchange Assurance Ltd. v. English China Clays, P.L.C., 815 S.W.2d 223, 232 n. 17 (Tex.1991).
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Ennis v. Loiseau, 164 S.W.3d 698 (2005)
rule governing affidavits offered in a special appearance; after objecting to timeliness of KeyCite Yellow Flag - Negative Treatment receipt on day before hearing, the defendant Distinguished by Cenoplex, Inc. v. Fox, Tex.App.-Austin, February challenged the substance of the evidence and 21, 2014 never obtained ruling on objection. Rules 164 S.W.3d 698 App.Proc., Rule 33.1; Vernon's Ann.Texas Rules Court of Appeals of Texas, Civ.Proc., Rule 120a, subd. 3.
Austin.
1 Cases that cite this headnote Gene ENNIS, Appellant, v. [2] Courts Robert LOISEAU, Special Deputy Receiver Allegations, pleadings, and affidavits of American Benefit Plans, et. al., Appellee. Statements by corporate defendant's president in special appearance affidavits could be No. 03–04–00748–CV. | May 5, 2005.
excluded as conclusory in determining personal Synopsis jurisdiction; the president stated that he lacked Background: Insurance Commissioner's special deputy any substantial connection with Texas arising receiver sued fraudulent health insurers, administrators, and from any actions or conduct purposefully their nonresident president to liquidate them and collect directed toward Texas, the plaintiff's claims did their assets. The 53rd Judicial District Court, Travis County, not arise from and were not related to any Darlene Byrne, J., denied president's special appearance activity conducted by president as an individual challenging personal jurisdiction. President appealed. in Texas, and president lacked any continuing or systematic contacts with Texas and did not commit tort in state.
Holdings: The Court of Appeals, Jan P. Patterson, J., held 6 Cases that cite this headnote that:
[3] Courts [1] president did not waive claim by failing to file motion to Allegations, pleadings, and affidavits quash;
In attempting to subject a nonresident defendant [2] proving that nonresident corporate officer engaged in to personal jurisdiction in state, the plaintiff intentionally tortious activity is not necessary to subject him bears the initial burden of pleading sufficient to specific personal jurisdiction; and allegations to satisfy the long-arm statute.
V.T.C.A., Civil Practice & Remedies Code § [3] exercising personal jurisdiction did not violate due 17.042. process.
2 Cases that cite this headnote
Affirmed. [4] Courts Presumptions and Burden of Proof as to Jurisdiction West Headnotes (21) Plaintiff's pleading of sufficient allegations to satisfy the long-arm statute shifts the burden to the defendant to affirmatively negate all bases of [1] Appeal and Error jurisdiction asserted by the plaintiff. V.T.C.A., Rulings on evidence in general Civil Practice & Remedies Code § 17.042; Defendant failed to preserve error on whether Vernon's Ann.Texas Rules Civ.Proc., Rule 120a. plaintiff's exhibits were timely filed under
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Ennis v. Loiseau, 164 S.W.3d 698 (2005)
V.T.C.A., Civil Practice & Remedies Code § Cases that cite this headnote 51.014(a)(7).
5 Cases that cite this headnote [5] Courts Waiver of Objections Failure by corporate defendant's nonresident [9] Appeal and Error president to file a motion to quash did not result Particular findings implied in waiver of claim that plaintiff failed to allege If the trial court denied special appearance the necessary minimum contacts for personal without delineating findings of fact and jurisdiction; the president did not complain of conclusions of law, all facts necessary to support any error regarding the service of process, the order are implied in its favor, if they are but alleged non-curable defect, and the special supported by the record. appearance was the proper method for president to assert the claim. 5 Cases that cite this headnote
Cases that cite this headnote [10] Appeal and Error Sufficiency of Evidence in Support [6] Appearance When a clerk's and reporter's record are included Objections to jurisdiction in general on appeal, implied findings may be challenged A special appearance is the proper method for for both legal and factual sufficiency. a nonresident defendant to assert that, based on the capacity in which he was sued, the plaintiff Cases that cite this headnote failed to allege sufficient minimum contacts to establish amenability to process and personal [11] Appeal and Error jurisdiction. Manifest weight
1 Cases that cite this headnote The Court of Appeals will set aside a trial court's implied finding only if it is so against the great weight and preponderance of the evidence as to [7] Courts be manifestly erroneous or unjust.
Allegations, pleadings, and affidavits Plaintiff's original pleadings as well as its 2 Cases that cite this headnote response to the defendant's special appearance can be considered in determining whether the [12] Courts plaintiff satisfied its burden of pleading a Actions by or Against Nonresidents, sufficient basis upon which to subject defendant Personal Jurisdiction In; “Long-Arm” to personal jurisdiction. Vernon's Ann.Texas Jurisdiction Rules Civ.Proc., Rule 120a, subd. 3.
The broad language of the long-arm statute 3 Cases that cite this headnote allows it to reach as far as the federal constitution permits under the due process clause. U.S.C.A. Const.Amend. 14; V.T.C.A., Civil Practice & [8] Appeal and Error Remedies Code § 17.042.
Cases Triable in Appellate Court On interlocutory appeal of order granting 1 Cases that cite this headnote or denying special appearance, the Court of Appeals reviews de novo the legal question [13] Constitutional Law of whether a court can properly exercise Non-residents in general personal jurisdiction over nonresident defendant.
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Ennis v. Loiseau, 164 S.W.3d 698 (2005)
A three-prong test must be satisfied in the wrongful conduct or the central figure in the order to subject a nonresident defendant to challenged corporate activity. personal jurisdiction in compliance with the due process clause: (1) the defendant must establish 7 Cases that cite this headnote minimum contacts by purposefully doing some act or consummating some transaction in the [17] Corporations and Business Organizations forum state; (2) the cause of action must Tortious acts in general arise from or be connected with such act or Corporations and Business Organizations transaction, as to support specific jurisdiction, Fraud or the defendant's contacts with state must As a general rule, corporate agents are be continuing and systematic, as to support individually liable for fraudulent or tortious general jurisdiction; and (3) the assumption of acts committed while in the service of their jurisdiction by the forum state must not offend corporation.
traditional notions of fair play and substantial justice. U.S.C.A. Const.Amend. 14. 9 Cases that cite this headnote Cases that cite this headnote [18] Courts Tortious or intentional conduct; fraud and [14] Courts breach of fiduciary duties Tortious or intentional conduct; fraud and breach of fiduciary duties Proving that nonresident corporate officer engaged in intentionally tortious activity is not A corporate officer is not protected from the necessary to subject him to specific personal exercise of specific jurisdiction, even if all of his jurisdiction; rather, the plaintiff must establish contacts were performed in a corporate capacity, that the officer committed fraudulent or tortious if the officer engaged in tortious or fraudulent acts for which he may be held individually liable.
conduct, directed at the forum state, for which he may be held personally liable. 13 Cases that cite this headnote 11 Cases that cite this headnote [19] Courts Tortious or intentional conduct; fraud and [15] Courts breach of fiduciary duties Jurisdiction of Agents, Representatives, or Other Third Parties Themselves If the evidence suggests that nonresident officer of corporation participated in tortious or One's status as an employee does not somehow fraudulent activities, which were directed at state insulate him from personal jurisdiction, and there and for which he may be held personally liable, is no blanket protection from jurisdiction simply then there is a sufficient basis to assert specific because a defendant's alleged acts were done in personal jurisdiction over him.
a corporate capacity.
8 Cases that cite this headnote Cases that cite this headnote
[20] Constitutional Law [16] Corporations and Business Organizations Representatives of organizations; officers, Participation in unauthorized or wrongful agents, and employees acts of corporation in general Courts A corporate officer may not escape liability Tortious or intentional conduct; fraud and where he had direct, personal participation in the breach of fiduciary duties wrongdoing, as to be the guiding spirit behind
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Ennis v. Loiseau, 164 S.W.3d 698 (2005)
Exercising specific personal jurisdiction over corporation's nonresident president did not Before Chief Justice LAW, Justices PATTERSON and violate due process in suit arising out of PURYEAR. multi-state network of fraudulent health insurers with which corporation had administrative and service agreements; the evidence indicated OPINION that president entered contracts with insurers, engaged in frequent communications with JAN P. PATTERSON, Justice. insurers' owner, traveled to state to facilitate After being appointed by the Texas Insurance Commissioner business, knew of the fraudulent insurance to serve as a Special Deputy Receiver for a conglomerate scheme, could be held personally liable even of entities 1 accused of participating in a multi-state *701 if he acted in corporate capacity, and had scheme of insurance fraud, appellee Robert Loiseau brought minimum contacts with state as individual, suit, as the assignee of the victims' claims, to liquidate and the number of claims filed by state residents collect the entities' assets on behalf of the victims. Among the indicated nexus between the contacts, forum, 140 defendants sued in the receivership action, Gene Ennis and the litigation, and the president should was named in his individual capacity as a “general agent,”
have anticipated being haled into a Texas court.
and two companies for which Ennis is president, Fidelity U.S.C.A. Const.Amend. 14.
Benefit Administrators and NetPay USA, were named as 9 Cases that cite this headnote corporate defendants. Ennis filed a special appearance, which was denied. He appeals, claiming in four issues that the trial court erred by denying his special appearance, admitting [21] Appeal and Error certain affidavits and exhibits offered by Loiseau, sustaining Necessity of finding facts objections to Ennis's affidavit, and failing to enter findings Appeal and Error of fact and conclusions of law. Because the evidence in the Insufficiency of verdict or findings record is legally and factually sufficient to support the trial Court of Appeals would not require trial court court's denial of Ennis's special appearance and no reversible to issue findings of fact and conclusions of law error was committed, we affirm the trial court's order. regarding personal jurisdiction over defendant; the defendant challenged the lack of findings and conclusions only in the alternative stating BACKGROUND that he did not want the expense of returning to the trial court, if the Court of Appeals was able In 2002, the State of Texas began the process of shutting down to determine the jurisdictional issues without a multi-state network of fraudulent insurers based in Fort the trial court's findings and conclusions, and Worth and primarily operated by Fort Worth resident Robert the Court of Appeals was able to do so. Rules David Neal and his companies, American Benefit Plans App.Proc., Rule 28.1. (ABP), United Employers Voluntary Employees Beneficiary Association (UEVEBA), and National Association of 6 Cases that cite this headnote Working Americans (NAWA). In May 2002, a final judgment and a permanent injunction were entered against many of the fraudulent insurers and Loiseau was appointed as the Special Deputy Receiver. The receiver took over and ceased all Attorneys and Law Firms operations at Neal's Fort Worth offices. Thereafter, hundreds of victims of the scheme assigned their claims to Loiseau, and *700 Toni Hunter, Douglas M. Becker, Gray & Becker, PC, he filed the underlying receivership action to liquidate and Austin, TX, for appellant.
collect the assets on their behalf.
Jane M.N. Webre, Cynthia S. Connolly, S. Abraham Kuczaj, Scott, Douglass & McConnico, LLP, Austin, TX, for Gene Ennis, Fidelity Benefit Administrators, and NetPay appellee. USA were three of the defendants sued in the receivership
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action. Ennis is a Florida resident and is president of Fidelity he agreed that NetPay contracted with NAWA, collected and NetPay, both of which are incorporated in Florida. funds from Texas employers to support a carrier that Loiseau's petition named Ennis as a “General Agent who insured Texas employees, and sold insurance documents to engages in business in the State of Texas” and claimed Texas employers via its website. Loiseau contended that the that, despite the duties of care owed to “the employers, evidence established “abundant” contacts made by Ennis as employee groups, enrollees, and insureds that purchased the agent of Fidelity and NetPay and argued that Ennis was health insurance plans marketed by ABP, et al.,” many not shielded from personal jurisdiction simply by wearing general agents operated without a license and all “negligently his “president of Fidelity hat” while committing torts and failed to use due diligence to determine whether the ABP engaging in a conspiracy to defraud Texas consumers. programs were properly authorized and licensed,” including the “fail [ure] to discover, through readily available open The trial court denied the special appearances. Ennis records, that ABP/NAWA was not licensed, that Robert requested that the trial court issue findings of fact and David Neal was subject to numerous complaints,” and “the conclusions of law, but the court declined to do so, stating true nature of any alleged reinsurance or other financial that “[b]ased on this short evidentiary hearing, the Court finds backing for the programs.” Loiseau further alleged that each that Findings of Fact would be unnecessary in this case.” of the defendants “committed torts in the State of Texas and NetPay did not challenge the denial of its special appearance. entered into contracts with one or more of the Receivership Ennis filed this interlocutory appeal, claiming that it is not Defendants in the State of Texas” and profited from its appropriate to exercise jurisdiction over him as an individual involvement in the insurance scheme to the detriment of because he is protected by the fiduciary shield doctrine, Texas and its residents. Finally, Loiseau asserted that there and that the trial court also committed reversible error by were “numerous communications between the Defendants admitting evidence that was untimely offered by Loiseau, by in this case and the ABP/NAWA headquarters in Texas by sustaining Loiseau's objections to Ennis's affidavit, and by not way of telephone, fax, United States Postal Service, internet, issuing findings of fact and conclusions of law. and overnight courier services.” Based on these allegations, Loiseau asserted that the defendants were subject to personal jurisdiction in Texas *702 and were liable for negligence, ANALYSIS gross negligence, negligent misrepresentation, conspiracy, violation of Texas Insurance Code section 101.201, 2 and Evidentiary Challenges breach of fiduciary duty. Loiseau also sought disgorgement As an initial matter, we address Ennis's second and third and exemplary damages, asserting that “the defendants had issues, in which he asserts two evidentiary errors pursuant to and/or should have had actual, subjective awareness of the Rule 120a: He claims that the trial court erred in admitting risk involved, but proceeded with conscious indifference to affidavits and exhibits that were untimely filed by Loiseau the rights, safety, or welfare of others.” and in sustaining Loiseau's objections to portions of Ennis's affidavits. See Tex.R. Civ. P. 120a(3). We address these In response, Ennis and NetPay specially appeared. Fidelity claims initially because Ennis's primary issue on appeal, did not challenge the court's jurisdiction. Ennis invoked the whether he is subject to personal jurisdiction *703 in Texas, fiduciary shield doctrine by challenging that Texas lacked relies in part on the contested evidence. personal jurisdiction over him as an individual because all of his contacts with the state were performed in his corporate [1] In support of his challenge to Ennis's special appearance, capacity as the president of Fidelity and NetPay. Ennis Loiseau offered seventy affidavits at the special appearance asserted that the jurisdictional pleadings were insufficient hearing; each affidavit was attested to by Loiseau, as the because they only named Ennis as an individual, while all Special Deputy Receiver on behalf of Texas Insurance of the receiver's evidence pertained to Ennis's corporate Commissioner Jose Montemayor, and each certified that the capacity, and because the pleadings did not establish alter attached records were held by Loiseau “in the course of ego or allege a cause of action for which Ennis could be delinquency proceedings against American Benefit Plans, et. held personally liable. However, Ennis acknowledged that al.” Ennis asserts that, because Loiseau did not provide copies he was the “man in charge” of both Fidelity and NetPay; he to him until the day before the hearing, they were untimely did not dispute the substantial connections between Fidelity filed and the trial court should have excluded them based on and Texas-based Neal, ABP, UEVEBA, and NAWA; and
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the requirement that, in a special appearance, “affidavits, if Here, the trial court overruled objections to portions of any, shall be served at least seven days before the hearing.” Id. Ennis's affidavits that contained factual information and only sustained objections to the above statements, which were At the hearing, Ennis objected by saying, “Your Honor, I'd legal conclusions and did not set forth specific facts. In his like to address for a few minutes the response that [Loiseau] brief, Ennis agrees that these statements were conclusory, made to—in opposition to Gene Ennis's special appearance, but claims they “had to be conclusory to some extent in and I'd like to object because it's not very—it's not timely, just the absence of allegations of specific facts by the plaintiff.” last evening at 4:30 or so. But speaking to its content....” Ennis Because Loiseau satisfied his pleading burden, *704 this then continued with a lengthy challenge to the substance of claim does not justify the conclusory nature of Ennis's the evidence; he never returned to the timeliness issue and affidavits. Thus, the trial court did not err in excluding the never obtained a ruling, express or implied, on that objection. conclusory portions of Ennis's affidavits, and we do not In order to preserve error for appeal, a party must make a consider those statements in weighing the sufficiency of the timely objection “with sufficient specificity to make the trial evidence. In any event, even if we were to consider the court aware of the complaint” and obtain a ruling on the contested portions of Ennis's affidavit, it would not alter our record. Tex.R.App. P. 33.1. Because Ennis failed to preserve conclusion. Ennis's third issue is overruled. error on whether Loiseau's exhibits were timely filed under Rule 120a(3), the seventy exhibits offered by Loiseau may be properly relied on as support for subjecting Ennis to personal Personal Jurisdiction jurisdiction. Ennis's second issue is overruled. In his first issue, Ennis challenges the court's exercise of jurisdiction over him, asserting that the receiver failed to [2] Ennis also claims that the trial court erred by sustaining plead sufficient jurisdictional facts, that he satisfied his Loiseau's objections that portions of Ennis's affidavit and burden of negating the bases of jurisdiction pled, and that the supplemental affidavit were conclusory. The trial court evidence does not show that he, as an individual, purposefully sustained objections to the following statements, thereby established minimum contacts with Texas. Loiseau counters excluding them as evidence to be considered in determining that, by not filing a motion to quash, Ennis failed to preserve the special appearance: error on the sufficiency of Loiseau's pleadings. Loiseau further asserts that the record evidence supports subjecting • As an individual, I do not have any substantial connection Ennis, individually as an agent of Fidelity and NetPay, to with Texas arising from any of my actions or conduct specific jurisdiction in Texas; Loiseau does not contend that purposefully directed toward Texas. Ennis should be subjected to general jurisdiction.
• The Plaintiffs' claims do not arise from and are not related to any activity conducted by me as an individual in Motion to Quash Texas. [3] [4] [5] In attempting to subject a nonresident defendant to jurisdiction in Texas, the plaintiff bears the • As an individual, I do not have any continuing or initial burden of pleading sufficient allegations to satisfy systematic contacts with Texas. the Texas long-arm statute. BMC Software Belgium, N.V. v.
Marchand, 83 S.W.3d 789, 793 (Tex.2001); see Tex. Civ.
• As an individual ... [I have not] committed any tort, in Prac. & Rem.Code Ann. § 17.042 (West 1997) (jurisdiction whole or in part, within the state.
proper upon showing that defendant is “doing business” in Rule 120a(3) states that affidavits offered in a special Texas, which includes entering contract with Texas resident appearance “shall be made on personal knowledge [and] shall and committing tort within Texas). The burden then shifts to set forth specific facts as would be admissible in evidence.” the defendant to affirmatively negate all bases of jurisdiction Tex.R. Civ. P. 120a(3). Further, special appearance affidavits asserted by the plaintiff. Tex.R. Civ. P. 120a; BMC Software, must be “direct, unmistakable, and unequivocal as to the 83 S.W.3d at 793. Loiseau asserts that, because Ennis did not facts sworn to.” Wright v. Sage Eng'g, Inc., 137 S.W.3d 238, file a motion to quash, Ennis waived his complaint that the 250 n. 8 (Tex.App.-Houston [1st Dist.] 2004, pet. denied) “[p]laintiff failed to allege the necessary minimum contacts ... (nonresident's statement that he had committed no torts in to bring [Ennis] under the jurisdiction of a Texas court.” Texas was properly excluded as conclusory). Loiseau bases this claim on language in Kawasaki Steel Corp.
v. Middleton stating that “defective jurisdictional allegations
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in the petition ... must be challenged by a motion to quash, 293 (Tex.App.-Fort Worth 2001, no pet.) (same). Ennis not a special appearance.” 699 S.W.2d 199, 203 (Tex.1985). does not complain of any error regarding the service of process. Rather, he raises a standard special appearance However, reading Kawasaki as a whole, it is clear that challenge, asserting that the plaintiff failed to establish proof the supreme court required a motion to quash only for the of minimum contacts between himself, in his individual purpose of challenging curable, procedural defects with the capacity, and the forum. Ennis, therefore, did not waive his service of process. Id. at 202 (motion to quash required to first issue by raising it in a special appearance rather than a challenge such things as failure to serve defendant or defect in motion to quash. citation). The Court explained that the “jurisdictional facts” to be challenged with a motion to quash are those allegations [7] Although Ennis preserved his challenge that Loiseau “required for service under the long-arm statute” concerning failed to plead a sufficient basis for subjecting him to personal why the secretary of state is an appropriate substituted agent jurisdiction, this does not provide grounds for reversal for serving process on a nonresident defendant. Id. at 202; see because Loiseau satisfied his burden. The plaintiff's original also Tex. Civ. Prac. & Rem.Code Ann. § 17.044 (West 1997) pleadings as well as its response to the defendant's special (cited in Kawasaki as “article 2031(b), R.C.S.”). appearance can be considered in determining whether the plaintiff satisfied its burden. Wright, 137 S.W.3d at 249 n. 7.
Facts regarding the service of process, which are properly Rule 120a also states that, in determining whether the special challenged with a motion to quash, are distinguishable from appearance should be granted or denied, courts may consider jurisdictional allegations establishing that the nonresident is evidence from “the pleadings, any stipulations made by and amenable to personal jurisdiction based on his minimum between the parties, such affidavits and attachments as may contacts with this state. If a defendant wishes to challenge be filed by the parties, the results of discovery processes, jurisdictional pleadings “on the ground that such party or and any oral testimony.” Tex.R. Civ. P. 120a(3); see also property is not amenable to process issued by the courts of this Gutierrez v. Deloitte & Touche, 100 S.W.3d 261, 273 (Tex. State,” then his proper tool is a special appearance. Compare App.-San Antonio 2002, pet. dism'd). Tex.R. Civ. P. 122 (motion to quash), with id. 120a (special appearance). The Kawasaki court recognized this distinction: Loiseau's pleadings alleged that, as a general agent, Ennis “A curable defect in service of process does not affect a *705 engaged in business and committed torts in the State of Texas; nonresident defendant's amenability to service of process.” entered into contracts with Texas entities; communicated 699 S.W.2d at 202. The distinction is based on the cures via facsimile, telephone, and e-mail with Texas entities; and available from each motion. Id.; Wright, 137 S.W.3d at 245– profited from his involvement with these entities, to the 46. Because a citation error is procedural and curable, the detriment of Texas residents. The pleadings also set forth remedy provided by a motion to quash is additional time for specific allegations concerning how Ennis, as a general agent, the defendant to answer. Kawasaki Steel Corp., 699 S.W.2d had been negligent and breached his fiduciary duty. Loiseau at 202. However, a substantive defect in the pleading is also filed a response to Ennis's special appearance, further not curable and, thus, the remedy for a defendant's special detailing why the court had personal jurisdiction over Ennis appearance is dismissal from suit. Id. as an individual. He alleged that Ennis may be held personally liable for playing a “key role in the creation, marketing, and [6] Accordingly, nonresidents routinely file special administration of the bogus health plans,” provided a specific appearances to challenge jurisdiction; it follows that a special list of activities demonstrating Ennis's participation in the appearance is the proper method for a nonresident defendant fraudulent scheme, explained why Ennis's corporate capacity to assert that, based on the capacity in which he was sued, did not shield him from jurisdiction, and offered proof that the plaintiff failed to allege sufficient minimum contacts Ennis was aware that Fort Worth was the home base of the between the defendant and Texas to establish his amenability fraudulent programs. Seventy-six exhibits were admitted in of process in this state. See Morris v. Powell, 150 S.W.3d 212, support of Loiseau's response. 221 (Tex.App.-San Antonio 2004, no pet.) (nonresidents filed special appearance to assert that plaintiff's allegations were Loiseau, therefore, satisfied his initial burden of pleading insufficient to establish jurisdiction over them individually a sufficient basis upon which to subject Ennis to personal because all contacts were made in corporate capacity); jurisdiction. *706 To avoid litigating in Texas, it was then Brown v. General Brick Sales Co., Inc., 39 S.W.3d 291, Ennis's burden to negate Loiseau's pleadings. After the special
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appearance hearing, the trial court determined that Ennis of the Texas statute allows it to reach as far as the federal failed to do so. We now review that determination. Constitution permits and thus the due process analysis under state law is consistent with the federal test. Guardian Royal Exch. Assurance, Ltd. v. English China Clays, P.L.C., 815 Standard of Review S.W.2d 223, 226 (Tex.1991). Accordingly, a three-prong test [8] A trial court's order granting or denying the special must be satisfied in order to subject a nonresident defendant to appearance is subject to an interlocutory appeal in which personal jurisdiction *707 in Texas: (i) the defendant must we review de novo the legal question of whether a Texas establish minimum contacts by purposefully doing some act court can properly exercise personal jurisdiction over the or consummating some transaction in the forum state; (ii) nonresident defendant. Tex. Civ. Prac. & Rem.Code Ann. the cause of action must arise from or be connected with § 51.014(a)(7) (West Supp.2004–05); BMC Software, 83 such act or transaction, as to support specific jurisdiction, S.W.3d at 794. Questions of fact must frequently be resolved or the defendant's contacts with Texas must be continuing by the trial court before reaching the jurisdictional inquiry. and systematic, as to support general jurisdiction; and (iii) Id. While a special appearance is not the appropriate stage the assumption of jurisdiction by the forum state must not to make a determination on liability, we must consider facts offend traditional notions of fair play and substantial justice. regarding the defendant's actions that could foreseeably cause Schlobohm, 784 S.W.2d at 358. harm in Texas in order to determine whether the defendant should have anticipated being haled into a Texas court. Ennis claims that any contacts he purposefully directed at Wright, 137 S.W.3d at 251. Texas were performed in his corporate capacity and, thus, pursuant to the fiduciary shield doctrine, it is inappropriate [9] [10] [11] If the trial court denied the special for a Texas court to exercise jurisdiction over him as an appearance without delineating findings of fact and individual. 4 We need not determine whether the fiduciary conclusions of law, all facts necessary to support the order shield doctrine should be adopted in this case, however, are implied in its favor, if they are supported by the record. 3 because the courts that have adopted it have expressly limited BMC Software, 83 S.W.3d at 795. When a clerk's and its application to general jurisdiction, and Loiseau does not reporter's record are included on appeal, as here, these assert that Ennis should be subjected to general jurisdiction. implied findings may be challenged for both legal and See, e.g., Wright, 137 S.W.3d at 250. factual sufficiency. Id. In determining whether the evidence is sufficient to support a trial court's factual determinations, we [14] [15] [16] [17] Even if the fiduciary shield were consider the entire record and conduct an ordinary sufficiency adopted by this Court, it would not protect Ennis from review. French v. Glorioso, 94 S.W.3d 739, 744 (Tex.App.- the exercise of specific jurisdiction. Courts recognize that a San Antonio 2002, no pet.). We will set aside a trial court's corporate officer is not protected from the exercise of specific implied finding only if it is so against the great weight and jurisdiction, even if all of his contacts were performed in preponderance of the evidence as to be manifestly erroneous a corporate capacity, if the officer engaged in tortious or or unjust. Id. The trial court, as the fact-finder, is the sole fraudulent conduct, directed at the forum state, for which he arbiter of the witnesses' credibility and the weight that their may be held personally liable. Id.; see SITQ E.U., Inc. v. testimony should be afforded. Wyatt v. Wyatt, 104 S.W.3d Reata Rest., Inc., 111 S.W.3d 638, 651 (Tex.App.-Fort Worth 337, 340 (Tex.App.-Dallas 2003, no pet.). This Court will not 2003, pet. denied); see also Morris v. Kohls–York, No. 03– disturb a trial court's resolution of conflicting evidence that 04–00371–CV, 164 S.W.3d 686, 696, 2005 WL 1034082, turns on the credibility or weight of the evidence. Benoit v. at * 8 (Tex.App.-Austin May 5, 2005, no pet. h.). This Wilson, 150 Tex. 273, 239 S.W.2d 792, 796 (1951). rule is not based on an exception to the fiduciary shield doctrine, but rather on the well-established principle that “a corporate officer is primarily liable for his own torts.”
Minimum Contacts and the Fiduciary Shield Doctrine Morris, 150 S.W.3d at 219, 221 (specific jurisdiction satisfied [12] [13] A Texas court may exercise personal jurisdiction based on allegations that officers committed negligence, over a nonresident defendant if it is authorized by the Texas fraud, and/or negligent misrepresentation in carrying out long-arm statute and if it comports with the constitutional corporate activities). One's “status as an employee does not guarantees of due process. Schlobohm v. Schapiro, 784 somehow insulate [him] from jurisdiction” and “there is S.W.2d 355, 356 (Tex.1990); see Tex. Civ. Prac. & no blanket protection from jurisdiction simply because a Rem.Code Ann. § 17.042 (West 1997). The broad language
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defendant's alleged acts were done in a corporate capacity.” jurisdiction can be asserted over individual officer based on Calder v. Jones, 465 U.S. 783, 790, 104 S.Ct. 1482, 79 “torts for which the employee may be individually liable,” L.Ed.2d 804 (1984); SITQ E.U., Inc., 111 S.W.3d at 651. without requiring that the torts be intentionally committed, A corporate officer may not escape liability where he had because “a corporate officer is primarily liable for his own direct, personal participation in the wrongdoing, as to be the “ torts”). Moreover, the Fort Worth court has stated that a ‘guiding spirit’ behind the wrongful conduct” or the “ ‘central corporate officer is not protected from specific jurisdiction figure’ in the challenged corporate activity.” Mozingo v. if the officer performed any action for which he may be *708 Correct Mfg. Corp., 752 F.2d 168, 174 (5th Cir.1985) individually liable, including unintentional torts. SITQ E.U., (citations omitted). Hence, “[i]t is the general rule in Texas Inc., 111 S.W.3d at 651. that corporate agents are individually liable for fraudulent or tortious acts committed while in the service of their [18] We agree with our sister courts that it is not necessary corporation.” Shapolsky v. Brewton, 56 S.W.3d 120, 133 to prove that the corporate officer engaged in intentionally (Tex.App.-Houston [14th Dist.] 2001, pet. denied). tortious activity to subject him to specific jurisdiction;
rather, the plaintiff must establish that the officer committed Citing Wright v. Sage Engineering, Ennis asserts that, in fraudulent or tortious acts for which he may be held order to exercise specific jurisdiction over a nonresident individually liable. In any event, there is sufficient evidence corporate officer, the plaintiff must produce evidence of an in the record to support the trial court's implied finding that intentional tort or fraud committed by the officer. See 137 Ennis engaged in intentionally tortious or fraudulent activity S.W.3d at 250 (corporate officer not protected “from specific for which he may be personally liable. personal jurisdiction as to intentional torts or fraudulent acts for which he may be held individually liable”). It is true that [19] Because “ultimate liability in tort is not a jurisdictional an officer is not protected from specific jurisdiction if he has fact, and the merits of the cause are not at issue,” our committed an intentional tort; yet, Wright does not stand for jurisdictional inquiry focuses on whether Loiseau *709 the proposition that specific jurisdiction can only be exercised sufficiently established facts suggesting that Ennis should over the corporate officer upon proof of an intentional tort. have anticipated being haled into a Texas court based As noted in Wright, the key to subjecting an individual officer on his actions. Wright, 137 S.W.3d at 251; French, 94 to specific jurisdiction is whether he may be held individually S.W.3d at 743–44 (jurisdictional determination only requires liable for those actions constituting minimum contacts with sufficient evidence to support implied findings that suggest, the forum, even if the actions were performed in his corporate but do not ultimately prove, liability). Hence, if the evidence capacity. Id. at 250–51 (because corporate officer could be suggests that the nonresident officer participated in tortious individually liable for misrepresentations made as corporate or fraudulent activities, which were directed at Texas and representative, specific jurisdiction was proper over him in for which he may be held personally liable, then there is individual capacity). The court in Wright relied on cases that a sufficient basis to assert specific jurisdiction over him. do not require proof of an intentional tort in order to exercise Wright, 137 S.W.3d at 251. specific jurisdiction over corporate officers. See, e.g., Jackson v. Kincaid, 122 S.W.3d 440, 448 (Tex.App.-Corpus Christi [20] Ennis agrees that substantial connections exist between 2003, pet. granted) (holding that is was proper to subject his companies—Fidelity and NetPay—and the Texas-based defendant-attorneys to specific jurisdiction based on proof companies run by Neal that comprised the nucleus of the that they had appeared pro hac vice in a Texas court, for which fraudulent insurance scheme—ABP, UEVEBA, and NAWA. they could be individually liable, without stating that their Ennis testified that Fidelity hired Neal as a consultant actions were intentionally tortious or fraudulent); Shapolsky, and used his services to develop and sell three “limited 56 S.W.3d at 133–34 (specific jurisdiction appropriate over benefit plans with a reduced prescription benefit,” and that individual officer based on fraudulent misrepresentations both Fidelity and NetPay used UEVEBA as a “funding made in corporate capacity); General Elec. v. Brown & Ross mechanism.” In connection with these arrangements, Ennis Int'l Distribs., Inc., 804 S.W.2d 527, 532–33 (Tex.App.- signed an “administrative and service agreement” on behalf Houston [1st Dist.] 1990, writ denied) (allegations of bribery of Fidelity identifying services Fidelity would provide and conspiracy sufficient evidence of “tortious activity” to UEVEBA in exchange for a fee of 20% of all to support exercise of specific jurisdiction over corporate contributions collected. Ennis also testified about the “bank officer); see also Morris, 150 S.W.3d at 219, 221 (specific draft authorization” contract between Fidelity and NAWA:
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individual employees who were members of NAWA would testimony—suggests that Ennis participated in a fraudulent enroll in the ABP program and provide preauthorized scheme, operating out of Texas, for which he may be bank drafts so that their monthly contributions could be held personally responsible. Ennis acknowledged that Neal's automatically deducted from their checking accounts. The actions were fraudulent and testified that, during the time their record contains copies of many of these preauthorized checks, companies were working together, he was aware that Neal had evidencing that several of the participating employees were come under “regulatory scrutiny,” with which he was “not Texas residents. Fidelity then processed these automated comfortable.” Ennis also testified that he had been the subject transactions; wired a portion of the money to a bank account of insurance regulators' investigations based on his interaction that was co-signed by NAWA, Neal, and Fidelity; and kept with Neal. 6 Ennis testified that, because of this regulatory a percentage of the monthly contribution as its fee. Fidelity scrutiny, when he sent Fidelity's insurance documents to Neal, sent a letter to all participating employees, including those he attached a note advising Neal to “guard the complete set in Texas, stating that ABP had contracted with Fidelity to from our competitors and everyone except those in your inner handle the automated monthly payments. Ennis testified that circle” and to “reformat them to appear different from ours he understood Neal was responsible for distributing the wired for the regulators.” money to the reinsurance carriers, but that at some point Neal began to fraudulently divert these funds. 5 This evidence suggests, for purposes of this special appearance, that Ennis took actions—such as entering Ennis further testified that he was the “man in charge” contracts and engaging in frequent communications with Neal of Fidelity and NetPay, that he was the “ultimate person and his entities, and traveling to Texas to facilitate business in charge of putting together and finalizing the UEVEBA- with Neal—with knowledge that the arrangements between related programs,” and that, as president, it was his his and Neal's companies were part of a fraudulent insurance responsibility to be aware of and authorize all activities that scheme. Ennis acquiesces to these facts, only challenging that his company engaged in with Neal or his entities. As such, they do not establish minimum contacts because he was acting Ennis signed several contracts establishing relations between on behalf of his corporations. Even if Ennis performed these his and Neal's companies and frequently communicated with actions in a corporate capacity, he can be held personally Neal. Ennis testified about numerous e-mails, facsimiles, and liable for fraudulent activity and, therefore, should have telephone calls that he directed to Neal in Texas. Loiseau anticipated being haled into a Texas court to answer for these testified that this “raft of correspondence” shows Ennis and actions. Ennis's uncontroverted actions establish minimum Neal to “clearly [be] on a first-name basis, writing in a very contacts between him, as an individual, and the State of personal, familiar tone.” Additionally, Ennis testified that he Texas. traveled to Texas to meet with Neal about the business deals between their various companies.
Specific Jurisdiction: Nexus and Due Process *710 Ennis disputes that he knew he was directing Considerations his actions toward Texas; he claims that he believed Having established that Ennis purposefully directed UEVEBA was a California company with a Nevada domicile. minimum contacts toward Texas, thereby satisfying the Contrary to Ennis's claim, however, the record establishes first prong of Texas's three-part jurisdictional inquiry, the his knowledge that he was dealing with a Texas resident and determination of whether it is appropriate to subject him to Texas-based companies. Ennis acknowledged that he traveled specific jurisdiction depends on (i) whether a nexus exists to Texas to meet with Neal, entered a contract with UEVEBA between those contacts, the forum, and the litigation and listing its address as located in Fort Worth, signed a document (ii) whether the exercise of jurisdiction would comport with stating that all UEVEBA notices from Fidelity should be due process considerations. See BMC Software, 83 S.W.3d at directed to Neal in Fort Worth, and communicated with Neal 795–96. and several employees of Neal's companies in Fort Worth.
The insurance activities that occurred between Ennis's Regardless of whether Ennis is ultimately held liable for two companies and the Texas-based ABP, UEVEBA, and the actions he performed in connection with Neal, ABP, NAWA, are undisputably connected to the underlying UEVEBA, and NAWA, the evidence presented in the context litigation. Loiseau testified, and Ennis conceded, that of the of the special appearance—primarily from Ennis's own 3,040 proofs of claims filed against Ennis, Fidelity, and
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NetPay, 409 of them were filed by Texas residents. Based on Findings of Fact and Conclusions of Law this, a nexus is present between *711 Ennis's contacts, the [21] In his fourth issue, Ennis contends that the trial court forum, and the litigation. erred by not issuing findings of fact and conclusions of law upon his request. Ennis recognizes that Texas Rule of Ennis does not assert that it would be burdensome for him Appellate Procedure 28.1 gives the trial court discretion to litigate in Texas. See Burger King Corp. v. Rudzewicz, whether to issue these. See Tex.R.App. P. 28.1 (“The trial 471 U.S. 462, 477, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985) court need not, but may—within 30 days after the order (nonresident defendant has burden to present “compelling is signed—file findings of fact and conclusions of law.”) case” of why litigation in forum would be unduly burdensome (emphasis added). Also, Ennis brings this claim only in the to avoid jurisdiction). Even if his special appearance were alternative, stating that “if this Court is able to determine granted, Ennis must be in Texas as a part of this litigation as the jurisdictional issues without the trial court's findings and the president of Fidelity, which did not challenge jurisdiction, conclusions,” then “he does not want the expense of returning and of NetPay, which filed a special appearance but did to the trial court” to obtain them. Because we are able to not challenge its denial. Because Ennis does not contest this determine the jurisdictional issues on the record before us, we issue, and because he does not assert that any greater burden hold that the trial court did not abuse its discretion in deciding results from appearing individually than already exists from to not issue findings and conclusions. Ennis's fourth issue is appearing as a corporate representative, we determine that overruled. it does not violate the traditional notions of fair play and substantial justice to subject Ennis to personal jurisdiction in Texas.
CONCLUSION It is, therefore, appropriate to exercise specific jurisdiction Holding that the record contains sufficient evidence to subject over Ennis, in his individual capacity, based on the evidence Ennis individually to specific personal jurisdiction in Texas suggesting that he participated in a fraudulent scheme for and that no reversible error occurred, we overrule Ennis's which he may be personally liable. Because these actions issues and affirm the trial court's order denying his special established minimum contacts, which were substantially appearance.
connected to Texas and the underlying litigation, and because it comports with due process considerations for Ennis to litigate in Texas, we affirm the trial court's order denying his All Citations special appearance. Ennis's first issue is overruled.
164 S.W.3d 698
Footnotes 1 Appellee is the Special Deputy Receiver for the following entities: American Benefit Plans; National Association of Working Americans a/k/a National Association for Working Americans; United Employers Voluntary Employees Beneficiary Association; United Employers Voluntary Employees Beneficiary Association I; Electronic Benefits Group, Inc.; Enhanced Health Management, Inc.; Four Corners Company, LLC a/k/a Four Corners Co. LLC, a/k/a Four Corners Corp.; American Association of Agriculture, Forestry and Fishing Workers; American Association of Transportation, Communication, Electrical, Gas and Sanitary Workers; American Association of Wholesale Trade Workers; American Association of Manufacturer Workers; American Association of Service Workers; American Association of Construction Workers; and American Association of Professional Workers.
2 Section 101.201(a) states that “[a]n insurance contract effective in this state and entered into by an unauthorized insurer is unenforceable by the insurer. A person who in any manner assisted directly or indirectly in the procurement of the contract is liable to the insured for the full amount of a claim or loss under the terms of the contract if the unauthorized insurer fails to pay the claim or loss.” Tex. Ins.Code Ann. § 101.201(a) (West Supp.2004–05).
3 Ennis asserts, without citing any authority, that “no facts should be implied in favor of the trial court's judgment” when a clerk's and reporter's record are provided. This is contrary to well-established precedent that such facts should be implied. See, e.g., Sixth RMA Partners, L.P. v. Sibley, 111 S.W.3d 46, 52 (Tex.2003); Tempest Broad. Corp. v. Imlay, 150 S.W.3d 861, 867–68 (Tex.App.-Houston [1st Dist.] 2004, no pet.) (rejecting defendant's argument in special appearance case
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Ennis v. Loiseau, 164 S.W.3d 698 (2005)
that, because findings were properly requested yet not issued, a less deferential standard of review should be applied to implied findings); Smith v. Lanier, 998 S.W.2d 324, 329–30 (Tex.App.-Austin 1999, pet. denied).
4 See SITQ E.U., Inc. v. Reata Rest., Inc., 111 S.W.3d 638, 651 (Tex.App.-Fort Worth 2003, pet. denied) (fiduciary shield protects corporate officer, individually, from general jurisdiction if all contacts made in corporate capacity, unless alter ego is proven); see also, Morris v. Powell, 150 S.W.3d 212, 221 (Tex.App.-San Antonio 2004, no pet.); Wright v. Sage Eng'g, Inc., 137 S.W.3d 238, 250 & n. 9 (Tex.App.-Houston [1st Dist.] 2004, pet. denied); Jackson v. Kincaid, 122 S.W.3d 440, 448 (Tex.App.-Corpus Christi 2003, pet. granted); D.H. Blair Inv. Banking Corp. v. Reardon, 97 S.W.3d 269, 277 (Tex.App.-Houston [14th Dist.] 2002, pet. dism'd w.o.j.); Tuscano v. Osterberg, 82 S.W.3d 457, 467 (Tex.App.-El Paso 2002, no pet.). Although not formally adopted by the supreme court, the doctrine is consistent with the court's language in Siskind v. Villa Found. for Educ., Inc., 642 S.W.2d 434, 437–38 (Tex.1982) (can impute individual liability to corporate officers upon proof of alter ego), and with the Supreme Court's holding in Calder v. Jones, 465 U.S. 783, 790, 104 S.Ct. 1482, 79 L.Ed.2d 804 (1984) (jurisdiction proper over corporate officers, individually, because they were “primary participators in an alleged wrongdoing intentionally directed at” forum state).
5 Ennis claims that he stopped wiring money to the NAWA account as soon as he discovered this fraudulent activity, which he states did not happen until February 25, 2002. However, Ennis acknowledged in his deposition that, prior to that date, he was aware that both he and Neal were under investigation by insurance regulators. Even with this knowledge, Ennis continued to wire money to the NAWA account and otherwise transact business with Neal.
6 The Florida Department of Insurance informed Ennis in 2001 that their investigation determined Fidelity had engaged in unauthorized insurance practices.
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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002) Fed. Sec. L. Rep. P 92,239
(8) investors stated § 10(b) claims against various banks by alleging loans disguised as trades, participation in phony KeyCite Yellow Flag - Negative Treatment IPO, particular interests in SPE transactions, and cooperation Declined to Follow by S.E.C. v. Lucent Technologies, Inc., D.N.J., with corporation's mark-to-marketing accounting, in various April 6, 2005 combinations; (9) investors stated § 10(b) claim against 235 F.Supp.2d 549 law firm by alleging participation in SPE creation, drafting United States District Court, of “true sales” opinions, and drafting of false SEC filings S.D. Texas, and press releases; (10) investors failed to state § 10(b) Houston Division. claim against second law firm by alleging representation of SPEs only; and (11) investors stated §10(b) claim In re ENRON CORPORATION SECURITIES, against accounting firm by alleging violation of GAAP and DERIVATIVE & ERISA LITIGATION. GAAS, destruction of documents, intimate knowledge of This Document Relates to All Cases. corporation's fraudulent activities, and decision by firm's Mark Newby, et al., Plaintiffs, partners to continue working for corporation despite fraud v. based on lucrative nature of relationship.
Enron Corporation, et al., Defendants.
Motions granted in part and denied in part.
The Regents of the University of California, et al., Individually and on Behalf of All See also 227 F.Supp.2d 1389.
Others Similarly Situated, Plaintiffs, v.
Kenneth L. Lay, et al., Defendants.
West Headnotes (67)
MDL No. 1446 | Civil Action No. H–01–3624. | Dec. 19, 2002.
[1] Federal Civil Procedure Investors brought securities fraud actions against corporation, Fraud, mistake and condition of mind individual executives, and others, alleging elaborate and In securities fraud actions, federal civil large-scale Ponzi scheme to artificially inflate corporation's procedure rule governing particularity of fraud earnings and to conceal debt using corporation-controlled pleadings is applied and strictly interpreted, but unrecognized special purpose entities (SPEs). Secondary requiring plaintiff to specify statements defendants, i.e. accounting firms, law firms, and investment contended to be fraudulent, identify speaker, banks/integrated financial services institutions, moved to state when and where statements were made, dismiss. The District Court, Harmon, J., held that: (1) and explain why statements were fraudulent. misrepresentation about value of particular security is not Securities Exchange Act of 1934, § 10(b), as condition precedent for § 10(b) and Rule 10b-5 liability; amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § (2) secondary actor who creates material misstatement on 240.10b-5; Fed.Rules Civ.Proc.Rule 9(b), 28 which investor relies can be liable as primary violator under U.S.C.A. § 10(b) even if actor's identity is not disclosed to investor; (3) knowledge gained in banks' lending and commercial Cases that cite this headnote areas was imputable to their analysts for purpose of stating scienter element of § 10(b) claim; (4) mere presence of [2] Securities Regulation disclaimers in financial services institutions' analysts' reports Persons liable did not preclude statement of reliance element of § 10(b)
Under TexasSecuritiesAct section governing claim; (5) Washington state investor had right of action fraud liability of sellers, liability may be under TexasSecuritiesAct; (6) investors partially stated imposed against defendant as long as defendant scienter element of § 10(b) claim by alleging defendants'
constituted any link in chain of fraudulent selling participation for their own gain in creation of SPEs; (7)
process. Vernon's Ann.Texas Civ.St. art. 581-33, investors failed to state § 10(b) claim against bank based on subd. A(2).
private placement letter and executives' subsequent profits;
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ambit. Vernon's Ann.Texas Civ.St. art. 581-33, Cases that cite this headnote subd. F(1).
1 Cases that cite this headnote [3] Securities Regulation Fraudulent or other prohibited practices To prevail under TexasSecuritiesAct section [7] Securities Regulation governing fraud liability of sellers, plaintiff Persons liable must show that seller in offering or selling Under TexasSecuritiesAct'scontrolperson security made untrue statement of material fact section, controlperson at corporation can be or omission of material fact that was essential sued directly without joining corporation as to make statement not misleading. Vernon's defendant. Vernon's Ann.Texas Civ.St. art. Ann.Texas Civ.St. art. 581-33, subd. A(2). 581-33, subd. F(1).
Cases that cite this headnote 1 Cases that cite this headnote
[4] Securities Regulation [8] Securities Regulation Fraudulent or other prohibited practices Persons liable Misrepresentation or omission is material, under To establish aider and abettor liability under TexasSecuritiesAct section governing fraud TexasSecuritiesAct, plaintiff must demonstrate: liability of sellers, if there is substantial (1) existence of primary violation of securities likelihood that proper disclosure would have law; (2) that aider has general awareness been viewed by reasonable investor as of its role in violation; (3) that aider gave significantly altering total mix of information substantial assistance in violation; and (4) that made available. Vernon's Ann.Texas Civ.St. art. aider intended to deceive plaintiff or acted with 581-33, subd. A(2). reckless disregard for truth of representations made by primary violator. Vernon's Ann.Texas Cases that cite this headnote Civ.St. art. 581-33, subd. F(2).
5 Cases that cite this headnote [5] Securities Regulation Fraudulent or other prohibited practices Under TexasSecuritiesAct section governing [9] Securities Regulation fraud liability of sellers, investor/buyer has no Fraud on the market; price manipulation duty to perform due diligence nor to discover “Manipulation” as used in § 10(b) refers to truth by exercising ordinary care. Vernon's practices such as wash sales, matched orders, Ann.Texas Civ.St. art. 581-33, subd. A(2). or rigged prices, that are intended to mislead investors by artificially affecting market activity.
Cases that cite this headnote Securities Exchange Act of 1934, § 10(b), as amended, 15 U.S.C.A. § 78j(b).
[6] Securities Regulation 2 Cases that cite this headnote Persons liable To make out prima facie case for controlperson liability under TexasSecuritiesAct, plaintiff [10] Securities Regulation must demonstrate that defendant had actual Misrepresentation power or influence over controlled person and To satisfy particularity requirement in § 10(b) that defendant induced or participated in alleged and Rule 10b-5 complaint, plaintiff must: (1) violation; status alone is insufficient to establish specify each statement alleged to have been that defendant is controlperson within statute's misleading; (2) identify speaker; (3) state when and where statement was made; (4) plead with
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particularity contents of false representations; Exchange Act of 1934, § 10(b), as amended, 15 (5) plead with particularity what person making U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5. misrepresentation obtained thereby; (6) explain reason or reasons why statement is misleading; 1 Cases that cite this headnote and (7) state with particularity all facts on which that belief is formed. Securities Exchange Act [14] Securities Regulation of 1934, §§ 10(b), 21D(b)(1), as amended, 15 Scienter, Intent, Knowledge, Negligence or U.S.C.A. §§ 78j(b), 78u-4(b)(1); 17 C.F.R. § Recklessness 240.10b-5; Fed.Rules Civ.Proc.Rule 9(b), 28 Severe recklessness, i.e. highly unreasonable U.S.C.A.
omissions or misrepresentations that involve 1 Cases that cite this headnote extreme departure from standard of ordinary care, and that present danger of misleading buyers or sellers which is either known to [11] Securities Regulation defendant or is so obvious that defendant Misrepresentation must have been aware of it, is sufficient to When plaintiff in federal securities fraud action satisfy scienter requirement of § 10(b). Securities based on “information and belief” relies on Exchange Act of 1934, §§ 10(b), 21D(b)(1), as confidential sources but also on other facts, he amended, 15 U.S.C.A. §§ 78j(b), 78u-4(b)(2); 17 need not name his sources as long as such C.F.R. § 240.10b-5. other facts provide adequate basis for believing that defendants' statements were false. Securities Cases that cite this headnote Exchange Act of 1934, §§ 10(b), 21D(b)(1), as amended, 15 U.S.C.A. §§ 78j(b), 78u-4(b)(1); 17 [15] Securities Regulation C.F.R. § 240.10b-5. Misrepresentation, nondisclosure, and insider trading Cases that cite this headnote Circumstantial evidence may be used to give rise to strong inference of scienter required [12] Securities Regulation under Private Securities Litigation Reform Act Pleading (PSLRA). Securities Exchange Act of 1934, §§ When federal securities fraud action is based 10(b), 21D(b)(1), as amended, 15 U.S.C.A. §§ on “investigation of counsel,” same pleading 78j(b), 78u-4(b)(2); 17 C.F.R. § 240.10b-5. requirements as for “upon information and belief” apply. Securities Exchange Act of 1934, 1 Cases that cite this headnote §§ 10(b), 21D(b)(1), as amended, 15 U.S.C.A. §§ 78j(b), 78u-4(b)(1); 17 C.F.R. § 240.10b-5. [16] Securities Regulation Scienter, Intent, Knowledge, Negligence or Cases that cite this headnote Recklessness Allegations of motive and opportunity to [13] Securities Regulation commit fraud, by themselves, are generally Manipulative, Deceptive or Fraudulent insufficient to plead scienter in § 10(b) action, Conduct but may be employed along with other facts To state claim under § 10(b) and Rule and circumstances to reach level of severe 10b-5, plaintiff must allege, in connection with recklessness. Securities Exchange Act of 1934, purchase or sale of securities: (1) misstatement §§ 10(b), 21D(b)(1), as amended, 15 U.S.C.A. §§ or omission; (2) of a material fact; (3) made with 78j(b), 78u-4(b)(2); 17 C.F.R. § 240.10b-5. scienter; (4) on which plaintiff relied; and (5) which proximately caused his injury. Securities Cases that cite this headnote
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Securities Exchange Act of 1934, § 10(b), as [17] Securities Regulation amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § Accountants, attorneys, underwriters and 240.10b-5.
brokers Mere publication of inaccurate accounting 1 Cases that cite this headnote figures or failure to follow Generally Accepted Accounting Principles (GAAP), without more, [21] Securities Regulation does not establish scienter in § 10(b) action Materiality of violation against accounting firm; plaintiff must show that Under truth-on-the-market defense to fraud-onfirm deliberately misrepresented material facts the-market doctrine's presumption that § 10(b)
or acted with reckless disregard about accuracy defendant's misrepresentations affected price of of its audits or reports. Securities Exchange Act stock, misrepresentation is rendered immaterial of 1934, § 10(b), as amended, 15 U.S.C.A. § if information was already known to market.
78j(b); 17 C.F.R. § 240.10b-5.
Securities Exchange Act of 1934, § 10(b), as 2 Cases that cite this headnote amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5.
[18] Securities Regulation 1 Cases that cite this headnote Questions of law or fact; jury questions Materiality of alleged misrepresentation in § [22] Securities Regulation 10(b) action is mixed question of fact and law Duty to Disclose or Refrain from Trading and generally for jury. Securities Exchange Act When § 10(b) cause of action is based on of 1934, § 10(b), as amended, 15 U.S.C.A. § allegation of material omission, plaintiff must 78j(b); 17 C.F.R. § 240.10b-5.
demonstrate that defendant had fiduciary duty to Cases that cite this headnote disclose to plaintiff. Securities Exchange Act of 1934, § 10(b), as amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5.
[19] Securities Regulation Reliance 1 Cases that cite this headnote Reliance element of § 10(b) action generally requires that plaintiff have known of particular [23] Securities Regulation misrepresentation complained of, have believed Scienter, Intent, Knowledge, Negligence or it to be true, and because of that knowledge and Recklessness belief purchased or sold security in question.
Under Private Securities Litigation Reform Act Securities Exchange Act of 1934, § 10(b), as (PSLRA) safe harbor provision, if forwardamended , 15 U.S.C.A. § 78j(b); 17 C.F.R. § looking statement is accompanied by meaningful 240.10b-5.
cautionary statements, defendant's state of mind Cases that cite this headnote is irrelevant. Securities Exchange Act of 1934, §§ 21D(b)(2), 21E(c)(1)(A)(i), (i)(1)(A), as amended, 15 U.S.C.A. §§ 78u-4(b)(2), 78u-5(c)
[20] Securities Regulation (1)(A)(i), 78u-5(i)(1)(A).
Presumptions and burden of proof Defendant in § 10(b) action may rebut 5 Cases that cite this headnote presumption of reliance arising under fraud- on-the-market doctrine by any showing that [24] Securities Regulation severs link between alleged misrepresentation Forecasts, estimates, predictions or and either price received or paid by plaintiff projections or his decision to trade at fair market price.
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Private Securities Litigation Reform Act qualifies as deceptive device under § 10(b). (PSLRA) safe harbor provision does not apply Securities Exchange Act of 1934, § 10(b), as where defendants knew at time they were issuing amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § statements that statements contained false and 240.10b-5. misleading information and thus lacked any reasonable basis for making them. Securities 1 Cases that cite this headnote Exchange Act of 1934, § 21E(c)(1)(A)(i), as amended, 15 U.S.C.A. § 78u-5(c)(1)(A)(i). [28] Securities Regulation Scienter, Intent, Knowledge, Negligence or 6 Cases that cite this headnote Recklessness In order for insider trading to be probative of [25] Securities Regulation scienter under Sec. 10(b), plaintiff must allege Forecasts, estimates, predictions or trading that occurred in suspicious amounts or projections at suspicious times, out of line with trading Securities Regulation practices or at times calculated to maximize Materiality personal profit. Securities Exchange Act of 1934, Bespeaks caution doctrine cannot be applied § 10(b), as amended, 15 U.S.C.A. § 78j(b); 17 as per se bar to liability for securities fraud C.F.R. § 240.10b-5. under Sec. 10(b); rather, appropriate inquiry is Cases that cite this headnote whether, under all circumstances, omitted fact or prediction without reasonable basis is one that reasonable investor would consider significant in [29] Securities Regulation making decision to invest. Securities Exchange Scienter, Intent, Knowledge, Negligence or Act of 1934, § 10(b), as amended, 15 U.S.C.A. § Recklessness 78j(b); 17 C.F.R. § 240.10b-5. Even unusual sales by one insider do not give rise to strong inference of scienter in § 10(b) class Cases that cite this headnote action, when other defendants do not sell some or all of their shares during class period. Securities [26] Securities Regulation Exchange Act of 1934, § 10(b), as amended, 15 Manipulative, Deceptive or Fraudulent U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5.
Conduct 2 Cases that cite this headnote Misrepresentation about value of particular security is not condition precedent for liability under § 10(b) and Rule 10b-5; liability may also [30] Securities Regulation be based on participation in course of business Fraud on the market; price manipulation or device, scheme or artifice that operated as Section 10(b) claim based on market fraud on sellers or purchasers or stock, without manipulation must allege direct participation materially false or misleading statement or in scheme to manipulate market for securities. omission. Securities Exchange Act of 1934, § Securities Exchange Act of 1934, § 10(b), as 10(b), as amended, 15 U.S.C.A. § 78j(b); 17 amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § C.F.R. § 240.10b-5(a, c). 240.10b-5(a, c).
5 Cases that cite this headnote 1 Cases that cite this headnote
[27] Securities Regulation [31] Securities Regulation Duty to Disclose or Refrain from Trading Fraud on the market; price manipulation Insider's trading in securities of his company To state claim for market manipulation under based on material nonpublic information § 10(b) and Rule 10b-5 against parties that
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employed manipulative and deceptive practices Exchange Act of 1934, § 10(b), as amended, 15 in scheme to defraud, plaintiff must allege: U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5. (1) that it was injured; (2) in connection with purchase or sale of securities; (3) by relying 11 Cases that cite this headnote on market for securities; (4) controlled or artificially affected by defendants' deceptive [35] Securities Regulation and manipulative conduct; and (5) defendants In general; controlpersons engaged in the manipulative conduct with Person who prepares truthful and complete scienter. Securities Exchange Act of 1934, § portion of document cannot be liable as primary 10(b), as amended, 15 U.S.C.A. § 78j(b); 17 violator under § 10(b) for misrepresentations in C.F.R. § 240.10b-5(a, c).
other portions of document. Securities Exchange 5 Cases that cite this headnote Act of 1934, § 10(b), as amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5.
[32] Securities Regulation Cases that cite this headnote Fraud on the market; price manipulation In § 10(b) and Rule 10b-5 claim alleging [36] Conspiracy market manipulation, where exact mechanism of Conspiracy to defraud scheme is likely to be unknown to plaintiffs, Securities Regulation allegations of nature, purpose, and effect of In general; controlpersons fraudulent conduct and role of defendants are There is no private cause of action merely for sufficient for alleging participation. Securities conspiracy to violate § 10(b) and Rule 10b-5;
Exchange Act of 1934, § 10(b), as amended, 15 however, group of defendants may be liable U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5(a, c).
based on allegations that they acted together to 3 Cases that cite this headnote violate securities laws, as long as each defendant committed manipulative or deceptive act in furtherance of scheme, and plaintiff pleads and [33] Securities Regulation proves other requirements for primary liability Existence of private cause of action as to each defendant, i.e. scienter and reliance.
Private plaintiff may not bring aiding and Securities Exchange Act of 1934, § 10(b), as abetting claim under § 10(b) and Rule 10b-5. amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § Securities Exchange Act of 1934, § 10(b), as 240.10b-5(a, c). amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5. 6 Cases that cite this headnote
Cases that cite this headnote [37] Securities Regulation Grounds of and Defenses to Liability [34] Securities Regulation Alleged controlling person in federal securities In general; controlpersons fraud action can meet requirements of good faith When secondary actor in alleged securities defense by showing that he used reasonable care fraud scheme, acting alone or with others, to prevent securities violation. Securities Act creates misrepresentation on which investor- of 1933, § 15, 15 U.S.C.A. § 77o; Securities plaintiff relies, such defendant “makes” material Exchange Act of 1934, § 20(a), as amended, 15 misstatement and thus can be liable as primary U.S.C.A. § 78t(a). violator under § 10(b) if he acts with requisite scienter, even if defendant is not initiator Cases that cite this headnote of misrepresentation, and even if defendant's identity is not disclosed to investors. Securities [38] Securities Regulation
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Scienter, Intent, Knowledge, Negligence or rule. Securities Act of 1933, § 11, 15 U.S.C.A. § Recklessness 77k; Fed.Rules Civ.Proc.Rule 8, 28 U.S.C.A. Negligence alone is insufficient to support 1 Cases that cite this headnote controlling person liability in federal securities fraud action. Securities Act of 1933, § 15, 15 U.S.C.A. § 77o; Securities Exchange Act of [42] Securities Regulation 1934, § 20(a), as amended, 15 U.S.C.A. § 78t(a). False Statements or Omissions; Accuracy Securities Regulation Cases that cite this headnote Misrepresentation False statements in registration statement can [39] Securities Regulation create liability under both Securities Act of 1933 In general; controlpersons and Securities Exchange Act of 1934; remedies To establish controlperson liability in federal are cumulative. Securities Act of 1933, § 11, securities fraud action, plaintiff need only show 15 U.S.C.A. § 77k; Securities Exchange Act of that alleged controlperson possessed power 1934, § 10(b), as amended, 15 U.S.C.A. § 78j(b); to control primary violator, not that alleged 17 C.F.R. § 240.10b-5. controlperson actually exercised power to control; however, plaintiff must allege some 1 Cases that cite this headnote facts beyond alleged controlperson's position or title that show power to control. Securities Act [43] Securities Regulation of 1933, § 15, 15 U.S.C.A. § 77o; Securities Controlpersons or groups and underwriters Exchange Act of 1934, § 20(a), as amended, 15 dealing with them U.S.C.A. § 78t(a).
To state claim for controlperson liability 2 Cases that cite this headnote under Securities Act of 1933, plaintiff must allege: (1) underlying primary violation by controlled person of Act's provision governing [40] Securities Regulation false registration statements; (2) control by In general; controlpersons defendant over controlled person; and (3)
Controlperson liability in federal securities particularized facts as to controlling person's fraud action is derivative, i.e. depends on culpable participation in, i.e. exercise of control primary, independent violation by controlled over, fraud perpetrated by controlled person. person. Securities Act of 1933, §§ 11, 12, 15, 15 Securities Act of 1933, §§ 11, 15, 15 U.S.C.A. U.S.C.A. §§ 77k, 77l, 77o; Securities Exchange §§ 77k, 77o. Act of 1934, §§ 10(b), 20(a), as amended, 15 U.S.C.A. §§ 78j(b), 78t(a); 17 C.F.R. § Cases that cite this headnote 240.10b-5.
[44] Attorney and Client Cases that cite this headnote Duties and liabilities to adverse parties and to third persons [41] Securities Regulation Ethical rules of conduct for attorneys, such as Scienter, absolute or strict liability disciplinary rules, do not create corresponding Securities Regulation legal duties nor constitute standards for Pleading imposition of civil liability on lawyers.
Where federal claim for false registration Cases that cite this headnote statement is grounded in negligence rather than fraud, there is no scienter requirement and complaint need only satisfy liberal pleading [45] Securities Regulation requirements of general federal civil procedure
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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002) Fed. Sec. L. Rep. P 92,239
Conduct of accountants, attorneys or other duty, followed by non-client's justifiable reliance professionals and resulting in pecuniary loss to non-client, Even though in general lawyers are accountable is negligent misrepresentation. Restatement only to their clients, not to third parties, for the (Second) of Torts § 552. sufficiency of their legal opinions, attorney who Cases that cite this headnote prepares signed opinion letter for use by third party is potentially liable for primary violation of Rule 10b-5 for material misstatement in letter [49] Accountants upon which third party relies. 17 C.F.R. § Duties and liabilities to third persons 240.10b-5. Independent public accountant who certifies public reports that collectively depict 1 Cases that cite this headnote corporation's financial status owes ultimate allegiance to corporation's creditors and [46] Attorney and Client stockholders, as well as to investing public.
Duties and liabilities to adverse parties and to third persons Cases that cite this headnote
Under Texas law, attorney may be liable to non-client for fraudulent misrepresentation if [50] Securities Regulation attorney knowingly makes misrepresentation Persons Liable intending that it be relied on by non-clients, Securities Regulation or makes misrepresentation knowing that it is Conduct of underwriters especially likely that it will be relied on by Underwriter of public offering risks exposure to non-clients, or enters into conspiracy with client liability under Securities Act section governing to defraud non-clients. Restatement (Second) of false registration statements, as well as under Torts §§ 531, 536.
§ 10(b), for any material misstatements or Cases that cite this headnote omissions in registration statement made with scienter, and thus has duty to investigate issuer and securities that underwriter offers to [47] Fraud investors. Securities Act of 1933, § 11(a), 15 Intent U.S.C.A. § 77k(a); Securities Exchange Act of Fraud 1934, § 10(b), as amended, 15 U.S.CA. § 78j(b).
Knowledge of defendant 4 Cases that cite this headnote Texas common law fraud requires that defendant knew that his representation was false or made recklessly without any knowledge of its truth and [51] Securities Regulation that defendant intended to induce plaintiff to act Accountants, attorneys, underwriters and upon that representation. brokers Knowledge gained in lending and commercial Cases that cite this headnote areas of banks and financial services institutions that were alleged to be secondary actors in [48] Attorney and Client corporation's fraudulent Ponzi scheme was Duties and liabilities to adverse parties and imputable to banks' and institutions' analysts, for to third persons purpose of stating scienter element of § 10(b) Under Texas law, attorney has duty to non- and Rule 10b-5 claim, even though absence of client not in privity to use reasonable care to effective “Chinese walls” was only conclusorily supply accurate information, where attorney is asserted; totality of circumstances, including aware of non-client's identity and intends that facts unearthed in investigation by Securities and non-client rely on information; breach of such Exchange Commission (SEC) and New York
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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002) Fed. Sec. L. Rep. P 92,239
attorney general, rendered allegations adequate. occurred outside Texas. Vernon's Ann.Texas Securities Exchange Act of 1934, § 10(b), as Civ.St. art. 581-33. amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5(a, c). 2 Cases that cite this headnote
Cases that cite this headnote [55] Securities Regulation Fraud on the market [52] Securities Regulation Reliance under “device, scheme, or artifice” and In general; admissibility fraudulent “act, practice, or course of business”
Evidence of alleged misconduct that had prongs of Rule 10b-5, as well as under material occurred outside limitations period of § 10(b) untrue statement prong, can be established and Rule 10b-5 suit, i.e. too early to be by fraud-on-the-market doctrine. 17 C.F.R. § actionable, was admissible solely for purpose 240.10b-5. of establishing scheme and/or scienter, in action alleging elaborate and long-running Ponzi 2 Cases that cite this headnote scheme. Securities Exchange Act of 1934, § 10(b), as amended, 15 U.S.C.A. § 78j(b); 17 [56] Securities Regulation C.F.R. § 240.10b-5(a, c). Accountants, attorneys, underwriters and brokers 1 Cases that cite this headnote Investors partially stated scienter element of securities fraud action against banks, accounting [53] Securities Regulation firms and law firms by alleging that for their Reliance own gain they had participated with defendant Mere presence of disclaimers in financial corporation in repeated creation of unlawful, services institutions' analysts' reports did not corporation-controlled but unrecognized special preclude investors from stating reliance element purpose entities (SPEs), and in sale of of securities fraud claim against institutions corporation's unwanted assets to those entities based on their alleged involvement in fraudulent in non-arm's-length transactions and often with Ponzi scheme, since disclaimers in question guarantees of no risk, in order to shift debt were generic and cursory and did not off corporation's balance sheet and sham profits track substance of alleged misrepresentations. onto its books at critical times when quarterly Securities Exchange Act of 1934, § 10(b), as or year-end reports to Securities and Exchange amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § Commission (SEC) were due, followed in many 240.10b-5(a, c). cases by undoing of same deals once reports had been made. Securities Exchange Act of 1934, Cases that cite this headnote § 10(b), as amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5(a, c).
[54] Securities Regulation Cases that cite this headnote Persons who may assert illegality in general Washington state investor had right of action under TexasSecuritiesAct arising from alleged [57] Securities Regulation misconduct occurring in Texas, i.e. issuance Accountants, attorneys, underwriters and of registration statement for sale of notes that brokers made materially false statements about entities Securities Regulation formed by employees of Texas issuer, even Pleading though damage from misconduct, i.e. investor's Securities Regulation purchase of notes at artificially inflated prices, Scienter
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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002) Fed. Sec. L. Rep. P 92,239
Investors fell short of particularity and against corporation's default but insurer scienter requirements of securities fraud contested payment after default on fraud claim against bank alleging participation in grounds, and excessive interest rate charged for defendant corporation's alleged Ponzi scheme “trades.” Securities Exchange Act of 1934, §§ involving creation of corporation-controlled but 10(b), 21D(b)(1-2), as amended, 15 U.S.C.A. §§ unrecognized special purpose entities (SPEs) 78j(b), 78u-4(b)(1-2); 17 C.F.R. § 240.10b-5. for purpose of hiding debt and artificially inflating earnings, by alleging that bank issued 1 Cases that cite this headnote private placement memorandum/invitation-to- invest for SPE expressly indicating that [59] Securities Regulation corporation executive would be serving as Accountants, attorneys, underwriters and officer for both corporation and SPE, and brokers promising extraordinary returns to investors, Securities Regulation and by alleging that bank's executives invested Pleading in and profited handsomely from SPE;
Securities Regulation memorandum was sufficient to raise red flags, Scienter but additional details were required concerning bank's knowledge at specific times, and its Investors satisfied particularity pleading specific dealings. Securities Exchange Act of requirement and stated scienter element of 1934, §§ 10(b), 21D(b)(1-2), as amended, 15 securities fraud claim against bank for its U.S.C.A. §§ 78j(b), 78u-4(b)(1-2); 17 C.F.R. participation in defendant corporation's alleged § 240.10b-5; Fed.Rules Civ.Proc.Rule 9(b), 28 scheme to hide debt and artificially inflate U.S.C.A. earnings, by alleging that bank participated in fraudulent IPO in which bank made sham loan to 1 Cases that cite this headnote corporation to fund creation of fraudulent special purpose entity (SPE) and received “total return [58] Securities Regulation swap” guarantee to protect it from any loss, and Accountants, attorneys, underwriters and that bank made loans to corporation totaling $2.4 brokers billion, never disclosed on corporation's balance sheet, that were disguised as “pre-paid” swap Securities Regulation transactions involving bank subsidiary, under Pleading which bank paid estimated fair value of its Securities Regulation portion of swap immediately, but corporation Scienter was only obliged to repay cash over five Investors satisfied particularity pleading years, with interest rate nearly double normal requirement and stated scienter element of borrowing rate. Securities Exchange Act of securities fraud claim against bank for its 1934, §§ 10(b), 21D(b)(1-2), as amended, 15 participation in defendant corporation's alleged U.S.C.A. §§ 78j(b), 78u-4(b)(1-2); 17 C.F.R. § scheme to hide debt and artificially inflate 240.10b-5. earnings, by alleging that bank on several occasions made $5 billion loans to corporation 2 Cases that cite this headnote disguised as commodities trades, always at critical junctures just before quarter-end or [60] Securities Regulation year-end, as a contrivance to keep debt Accountants, attorneys, underwriters and off corporation's books, and that “trades” brokers were overseen by bank's senior credit officer, Securities Regulation especially given existence of other similar Pleading contemporaneous transactions, fact that bank Securities Regulation had purchased performance bond to insure Scienter
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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002) Fed. Sec. L. Rep. P 92,239
Investors satisfied particularity pleading return swap” guarantee to protect it from any requirement and stated scienter element of loss; and that bank cooperated with corporation's securities fraud claim against bank for its misuse of mark-to-marketing accounting to participation in defendant corporation's alleged improperly accelerate and record over $100 Ponzi scheme to hide debt and artificially million of profits in risky entertainment joint inflate earnings, by alleging that bank served venture. Securities Exchange Act of 1934, §§ as lead underwriter for fraudulent IPO in which 10(b), 21D(b)(1-2), as amended, 15 U.S.C.A. §§ bank made sham loan to corporation to fund 78j(b), 78u-4(b)(1-2); 17 C.F.R. § 240.10b-5. creation of fraudulent special purpose entity (SPE) and received “total return swap” guarantee 1 Cases that cite this headnote to protect it from any loss; that bank made loan disguised as “swap” in which bank paid [62] Securities Regulation corporation up front but corporation was to repay Accountants, attorneys, underwriters and bank over two years in payments varying with brokers cost of oil; and that named bankers regularly Securities Regulation designed, structured and funded corporation-
Pleading controlled but unrecognized SPEs used to falsify Securities Regulation corporation's financial condition by purchasing Scienter assets from corporation at inflated prices. Securities Exchange Act of 1934, §§ 10(b), Investors satisfied particularity pleading 21D(b)(1-2), as amended, 15 U.S.C.A. §§ 78j(b), requirement and stated scienter element of 78u-4(b)(1-2); 17 C.F.R. § 240.10b-5. securities fraud claim against bank for its participation in defendant corporation's alleged 1 Cases that cite this headnote scheme to hide debt and artificially inflate earnings, by alleging that bank was directly [61] Securities Regulation involved in formation and funding of fraudulent, Accountants, attorneys, underwriters and corporation-controlled but unrecognized special brokers purpose entities (SPEs), including one SPE that was created as sham independent entity to buy Securities Regulation purported outsider's interest in second SPE, that Pleading bank loaned SPE $240 million and also lent Securities Regulation money to two strawmen to provide necessary Scienter three percent independent equity investment in Investors satisfied particularity pleading SPE, and that bank demanded that corporation requirement and stated scienter element of provide secret guarantee that bank would be securities fraud claim against bank for its repaid and that SPE would establish cash reserve participation in defendant corporation's alleged to insure against bank's risk of loss. Securities scheme to hide debt and artificially inflate Exchange Act of 1934, §§ 10(b), 21D(b)(1-2), as earnings, by alleging that bank contributed more amended, 15 U.S.C.A. §§ 78j(b), 78u-4(b)(1-2); than its allocated share to prefund improper 17 C.F.R. § 240.10b-5. corporation-controlled but unrecognized special purpose entity (SPE), with bank executives Cases that cite this headnote among those receiving corporation's private placement memorandum predicting large returns [63] Securities Regulation and also among those secretly investing in SPE Accountants, attorneys, underwriters and and reaping huge returns; that bank served as brokers lead underwriter for fraudulent IPO in which Securities Regulation bank made sham loan to corporation to fund Scienter creation of fraudulent SPE and received “total
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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002) Fed. Sec. L. Rep. P 92,239
Investors failed to satisfy particularity and of defendant corporation's controlled-butscienter requirements of securities fraud claim unrecognized special purpose entities (SPEs) against banks and financial services companies and partnerships allegedly used to conceal debt by alleging only that their executives were and artificially inflate earnings; complaint did among those who personally invested in not allege any investment in SPEs by firm, allegedly fraudulent special purpose entity (SPE) or profit on part of firm from any dealings controlled by defendant corporation but not with corporation other than performance of recognized as such, and that those executives routine legal services for SPEs and partnerships, reaped profits from investment; events should and indicated possible conflict of interest and have raised red flags, but were insufficient breach of professional ethics at worst. Securities by themselves to establish strong inference of Exchange Act of 1934, §§ 10(b), 21D(b)(1-2), as scienter. Securities Exchange Act of 1934, §§ amended, 15 U.S.C.A. §§ 78j(b), 78u-4(b)(1-2); 10(b), 21D(b)(1-2), as amended, 15 U.S.C.A. §§ 17 C.F.R. § 240.10b-5. 78j(b), 78u-4(b)(1-2); 17 C.F.R. § 240.10b-5.
1 Cases that cite this headnote 2 Cases that cite this headnote [66] Securities Regulation [64] Securities Regulation Conduct of accountants or attorneys Conduct of accountants, attorneys or other Investors satisfied particularity pleading professionals requirement of securities fraud claim against Investors stated § 10(b) and Rule 10b-5 claim accounting firm for its participation in defendant against law firm by alleging that firm for corporation's alleged scheme to hide debt its own gain engaged in structuring for client and artificially inflate earnings, by alleging corporation illicit partnerships and off-the- with specificity that firm violated Generally books special purpose entities (SPEs), controlled Accepted Accounting Principles and Auditing by corporation but not recognized as such, Standards (GAAP and GAAS), ignored risk which were used to conduct Ponzi scheme to factors for fraud, and violated accounting rules hide corporation's debt and artificially inflate and rules of professional conduct in its work earnings, drafted “true sales” opinions essential for corporation, yet certified that corporation's to effect SPEs' fraudulent transactions, and on financial statements were in compliance with frequent occasions drafted corporation's SEC GAAP and that its audits of those statements filings and press releases knowing that they were in compliance with GAAS, and by alleging contained false statements about corporation's that firm destroyed documents to conceal its financial condition. Securities Exchange Act of fraudulent accounting. Securities Exchange Act 1934, §§ 10(b), 21D(b)(1-2), as amended, 15 of 1934, §§ 10(b), 21D(b)(1), as amended, 15 U.S.C.A. §§ 78j(b), 78u-4(b)(1-2); 17 C.F.R. § U.S.C.A. §§ 78j(b), 78u-4(b)(1); 17 C.F.R. § 240.10b-5. 240.10b-5.
3 Cases that cite this headnote 5 Cases that cite this headnote
[65] Securities Regulation [67] Securities Regulation Conduct of accountants, attorneys or other Accountants, attorneys, underwriters and professionals brokers Securities Regulation Investors stated scienter element of securities Conduct of accountants or attorneys fraud claim against accounting firm for its Investors failed to state § 10(b) and Rule participation in defendant corporation's alleged 10b-5 claim against law firm by alleging Ponzi scheme designed to hide debt and conclusorily that firm had represented some artificially inflate earnings, by alleging that
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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002) Fed. Sec. L. Rep. P 92,239
firm's comprehensive accounting, auditing and Alan Cunningham, Cunningham Darlow et al, Houston, TX, consulting services to corporation necessarily Martin D. Chitwood, Jeffrey H. Konis, Chitwood & Harley, made it intimately privy to smallest details Atlanta, GA, Sidney S. Liebesman, Grant & Eisenhofer PA, of corporation's fraudulent activity, that firm Wilmington, DE, Jay W. Eisenhofer, Grant & Eisenhofer, had engaged in similar prior fraudulent audits Wilmington, DC, Edward H. Nicholson, Jr., Chitwood & of other companies, that the Securities and Harley, Atlanta, GA, Ronald Joseph Kormanik, Sydow Exchange Commission (SEC) and courts had Kormanik Carrigan & Eckerson, Gregory Sean Jez, Fleming repeatedly imposed penalties on firm and & Associates, Houston, TX, David C. Mattax, Office of its employees arising from those audits, that Attorney General, Rose Ann Reeser, Texas Attorney General, senior firm partners at one point discussed Austin, TX, Stephen D. Oestreich, Entwistle & Cappuci LLP, corporation's various fraudulent practices and New York, NY, Deborah R. Gross, Law Offices Bernard M. firm's own fraudulent accounting for corporation Bross PC, Philadelphia, PA, James F. Marshall, Attorney at but decided to retain it as client due to lucrative Law, San Marino, CA, Meredith Cavallo, Larry E. Klayman, nature of relationship, and that thereafter firm Judicial Watch Inc, Steven J. Toll, Cohen Milstein et al, issued clean audit opinion on corporation's Washington, DC, Theodore C. Anderson, Kilgore & Kilgore financial statements. Securities Exchange Act PLLC, Dallas, TX, David R. Scott, Attorney at Law, Neil of 1934, §§ 10(b), 21D(b)(2), as amended, 15 Rothstein, James E. Miller, Scott & Scott LLC, Colchester, U.S.C.A. §§ 78j(b), 78u-4(b)(2); 17 C.F.R. § CT, John A. Lowther, James I. Jaconette, Alexandra S. 240.10b-5. Bernay, Milberg Weiss et al, San Diego, CA, Hector G.
Gancedo, Gancedo & Nieves LLP, Pasadena, CA, Herbert 3 Cases that cite this headnote Blake Tartt, Jr., Beirne Maynard et al, Houston, TX, Robert M. Kornreich, Wolf Popper LLP, New York, NY, Allyson L. Mihalick, Beirne Maynard et al, Houston, TX, Robert C. Finkel, Wolf Popper LLP, New York, NY, Thomas G.
Attorneys and Law Firms Shapiro, Shapiro Haber et al, Boston, MA, Joseph Albert McDermott, III, Attorney at Law, Houston, TX, Jonathan M.
*559 Eric D. Green, pro se, Resolutions LLC, Boston, MA, Plasse, Goodkind Labaton et al, New York, NY, David B. for Mediator. Kahn, Attorney at Law, Northfield, IL, Saul Roffe, Sirota & Sirota LLP, New York, NY, Sean F. Greenwood, Robins Richard J. Zook, Cunningham Darlow et al, Roger B.
Cloud et al, John G. Emerson, Jr., The Emerson Firm, Greenberg, Schwartz Junell et al, Houston, TX, William S.
Richard Frankel, Hackerman Peterson et al, Houston, TX, Lerach, Milberg Weiss et al, San Diego, CA, Earnest W.
Aaron Brody, Stull Stull et al, New York, NY, James D.
Wotring, Connelly Baker et al, Houston, TX, Ira Press, Kirby Baskin, III, The Baskin Law Firm, Austin, TX, Klari Neuwelt, McInerney et al, *560 New York, NY, Michael I. Behn, Attorney at Law, New York, NY, Michael D. Donovan, Futterman & Howard Chtd, Chicago, IL, Charles R. Parker, Donovan Searles LLC, Philadelphia, PA, Steven E. Cauley, Hill and Parker, Houston, TX, James M. Finberg, Richard Cauley Geller et al, Little Rock, AR, George M. Fleming, M. Heimann, Melanie M. Piech, Lieff Cabraser et al, San Fleming & Associates, Jeffery B. Kaiser, Sydow, Kormanik, Francisco, CA, Stephen Lowey, Neil L. Selinger, Lowey Carrigan & Eckerson, LLP, Houston, TX, Andrew J. Mytelka, Dannenberg et al, White Plains, NY, Elizabeth Cabraser, Greer Herz & Adams, Galveston, TX, Debra Brewer Hayes, Lieff Cabraser et al, San Francisco, CA, Sherrie Savett, Paul Thomas Warner, Reich & Binstock, Houston, TX, Arthur Stock, Berger & Montague PC, Philadelphia, PA, Harvey Greenfield, Attorney at Law, Laura M. Perrone, Thomas W. Sankey, Sankey & Luck, Houston, TX, Paul F.
Law Firm of Harvey Greenfield, New York, NY, Edward Bennett, Gold Bennett et al, San Francisco, CA, Thomas Morgan Carstarphen, III, Ellis Carstarphen et al, Houston, E. Bilek, Hoeffner Bilek & Eidman, Houston, TX, Helen TX, Fredrick F. Neid, Ass't Atty Gen, Lincoln, NE, Daniel J. Hodges, Milberg Weiss et al, San Diego, CA, William Dean Gartner, Gartner Law Firm, PC, Robin L. Harrison, B. Federman, Federman & Sherwood, Oklahoma City, OK, Campbell Harrison et al, Houston, TX, Lynn Lincoln Sarko, Richard A. Speirs, Jeffrey C. Zwerling, Zwerling Schachter Derek W Loeser, Britt L. Tinglum, Keller Rohrback LLP, et al, New York, NY, Jack Edward McGehee, McGehee Seattle, WA, Steve W. Berman, Hagens Berman LLP, Erin & Pianelli, Houston, TX, Robert B. Weintraub, Daniel W.
M. Riley, Keller Rohrback LLP, Seattle, WA, Baxter Ward Krasner, Wolf Haldenstein et al, New York, NY, Tom
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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002) Fed. Sec. L. Rep. P 92,239
Banowsky, Banowsky Betz & Levine, Dallas, *561 TX, Smith, Samuel Rosenthal, Curtis Mallet–Prevost et al, New Gary Benjamin Pitts, Pitts & Asoc, Houston, TX, Kenneth York, NY, Barry G. Flynn, Attorney at Law, George W. F. McCallion, McCallion & Associates, New York, NY, Billy Shepherd, III, Cruse Scott et al, Houston, TX, Michael Damon Michael Young, Young Pickett et al, Texarkana, TX, D. Warden, Luisa Caro, Sidley Austin et al, Washington, Jeffrey R. Krinsk, Attorney at Law, San Diego, CA, Curtis DC, Eric J.R. Nichols, Beck Redden & Secrest, Clayton L. Bowman, Cauley Geller et al, Little Rock, AR, Keith Alan C. Cannon, Stumpf Craddock et al, Houston, TX, Scott B. Ward, Porter Rogers et al, Austin, TX, Mike Lange, Reinhardt Schreiber, John C. Massaro, Justin S. Antonipillai, Arnold & Lange, Fairfield, CT, John Lee Ringgenberg, Attorney at Potter, Washington, DC, Mark K. Glasser, King & Spalding, Law, Englewood, CO, John A. Huettner, Attorney at Law, Charles G. King, III, King & Pennington, Houston, TX, Cleveland, OH, Richard A. Lockridge, Lockridge Grindal Gregory A. Markel, Cadwalader Wickersham et al, New et al, Minneapolis, MN, Stanley M. Grossman, Pomerantz York, NY, Paul R. Bessette, Brobeck Phleger et al, Austin, Haudek et al, New York, NY, Steven N. Williams, Joseph TX, Ronit Setton, Nancy I. Ruskin, Cadwalader Wickersham W. Cotchett, Bruce L. Simon, Mark C. Molumphy, Cotchett et al, New York, NY, Lawrence David Finder, Haynes & Pitre et al, Burlingame, CA, Lynn W. Jinks, III, Jinks Daniel Boone LLP, Houston, TX, Richard W. Clary, Karin A. et al, Union Springs, AL, Ted L. Mann, Mann Cowan et al, DeMasi, Margaret K. Dooley, Rachel G. Skaistis, Julie Ann Birmingham, AL, L. Shane Seaborn, Penn & Seaborn LLC, North, Melissa J. Baily, Joseph R. Wallin, Cravath Swaine Clayton, AL, R. Paul Yetter, Yetter and Warden, Houston, et al, New York, NY, Barry Abrams, Abrams Scott et al, TX, Philip T. Reinstein, Reinstein & Sherman, Howard C. Houston, TX, David H. Braff, Sullivan & Cromwell, New Goode, Attorney at Law, Northbrook, IL, John H. Boone, York, NY, William H. Knull, III, *562 Mayer Brown et al, Attorney at Law, Joseph M. Alioto, Alioto Law Firm, San Houston, TX, Alan N. Salpeter, Mark McLaughlin, Andrew Francisco, CA, Autry W. Ross, Yetter & Warden LLP, D. Campbell, Michele L. Odorizzi, Mayer Brown et al, Houston, TX, Thomas Walter Umphrey, Provost & Umphrey, Chicago, IL, Mark F. Pomerantz, Paul Weiss et al, New Beaumont, TX, Bonnie E. Spencer, Spencer and Associates, York, NY, Jacalyn D. Scott, Wilshire Scott et al, Houston, Houston, TX, Andy Wade Tindel, Provost & Umphrey Law TX, Richard A. Rosen, Claudia Hammerman, Robyn F. Firm, Tyler, TX, for Plaintiffs/Consolidated Plaintiffs. Tarnofsky, Jonathan Hurwitz, Michael E. Gertzman, Brad S. Karp, Alyssa A. Qualls, Robert C. Weisz, Margaret Stephen D. Susman, Susman Godfrey, Scott David Lassetter, E. McGuinness, Todd A. Kipnes, Paul Weiss et al, New John B. Strasburger, Weil Gotshal and Manges, Kenneth S. York, NY, Joel M. Androphy, Berg & Androphy, Houston, Marks, Susman Godfrey LLP, Craig Smyser, Jr., Smyser TX, Lawrence Byrne, Owen Pell, Lance Croffoot–Suede, Kaplan & Veselka, Richard Bruce Drubel, Jr., Boies Schiller Timothy Pfeifer, White & Case LLP, New York, NY, et al, Hanover, NH, John W. Keker, Jan Nielsen Little, Christa Taylor M. Hicks, Jr., Hicks Thomas et al, Houston, TX, M. Anderson, Keker & Van Nest LLP, San Francisco, CA, Robert F. Serio, Gibson Dunn & Crutcher, Christopher M. James E. Coleman, Jr., Carrington Coleman et al, Dallas, Joralemon, Clifford Chance et al, Marshall R. King, Gibson TX, Robin C. Gibbs, Gibbs & Bruns, Houston, TX, Charles Dunn et al, Herbert S. Washer, James B. Weidner, James F. Richards, Jr., Richards Layton et al, Wilmington, DE, D. Miller, Ignatius Grande, Clifford Chance et al, New David Clarke, Jr., Keara M. Gordon, Piper Marbury et York, NY, Charles A. Gall, Jenkens & Gilchrist, Dallas, TX, al, Washington, DC, Glenn E. Coe, Brenda M. Hamilton, Richard Warren Mithoff, Jr., Mithoff and Jacks, Houston, Rome McGuigan et al, Hartford, CT, Ronald Gene Woods, TX, John D. Roesser, David J. Woll, Thomas C. Rice, Attorney at Law, Houston, TX, Bruce A. Hiler, O'Melveny Jonathan K. Youngwood, Bruce D. Angiolillo, Christopher & Myers, Washington, DC, Jeffrey Kilduff, O'Melveny & M. Caparelli, Jill M. O'Toole, George S. Wang, William M. Myers, McLean, VA, Robert M. Stern, Attorney at Law, Tong, Nihara K. Choudhri, Pieter H.B. Van Tol, Simpson Washington, DC, Russell“ Rusty” Hardin, Jr., Rusty Hardin Thacher et al, New York, NY, Keith Carter Hannigan, Jenkins and Associates, Houston, TX, Daniel F. Kolb, Sharon Katz, & Gilchrist, Chicago, IL, Ronald Earl Cook, Cook Roach Davis Polk et al, New York, NY, Theresa Ann Foudy, Benard et al, Houston, TX, James F. Moyle, James N. Benedict, V. Preziosi, Eliot Lauer, Curtis Mallet–Prevost et al, New Rogers & Wells, Mark A. Kirsch, Clifford Chance et al, York, NY, Warren B. Lightfoot, Lightfoot Franklin et al, New York, NY, Kelly M. Klaus, Ronald L. Olson, Dennis C. Birmingham, AL, Catherine E. Palmer, Latham & Watkins, Brown, John W. Spiegel, Kevin S. Allred, Kristin L. Myles, New York, NY, Miles N. Ruthberg, Latham & Watkins, Munger, Tolles, & Olson, LLP, San Francisco, CA, Jack C. Los Angeles, CA, Peter Wald, Latham & Watkins, Stan G. Nickens, Nickens Keeton et al, Houston, TX, Elizabeth T. Roman, Krieg Keller et al, San Francisco, CA, Turner P.
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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002) Fed. Sec. L. Rep. P 92,239
Parker, Pepper Hamilton LLP, Philadelphia, PA, Stephen J. al, San Francisco, CA, Stephen Lowey, Lowey Dannenberg Crimmins, Pepper Hamilton LLP, Washington, DC, Robert et al, White Plains, NY, Wendy Hope Zoberman, Berman C. Micheletto, Jones Day et al, Chicago, IL, David L. Carden, DeValerio et al, West Palm Beach, FL, Johnston de Forest Jones Day et al, New York, NY, Brian A. Troyer, Jones Day Whitman, Jr., AndrewJ. Entwistle, Entwistle & Cappucci et al, Cleveland, OH, David Elliott Miller, Hugh R. Whiting, LLP, New York, NY, Neil L. Selinger, Lowey Dannenberg et Jones Day et al, Houston, TX, William Edward Matthews, al, White Plains, NY, Roger B. Greenberg, Schwartz Junell Gardere Wynne et al, Harvey G. Brown, Jr., Orgain Bell et et al, Houston, TX, Bonnee Linden, Dr, Hewlett, NY, Don al, Matthew D. Shaffer, Schechter McElwee et al, Houston, R. Sampen, Illinois Ass't Atty Gen, Chicago, IL, Joseph D. TX, Michael G. Davies, Hoguet Newman et al, New York, Jamail, II, Jamail and Kolius, Houston, TX, John K. Villa, NY, James P. Pennington, King & Pennington LLP, Houston, Mary G. Clark, George A. Borden, Williams & Connolly TX, Paul Vizcarrondo, Jr., Jonathan E. Pickhardt, Wachtell LLP, Washington, DC, Mark D. Starr, Fredrick F. Neid, Don Lipton et al, Max Gitter., Cleary Gottlieb et al, New York, Stenberg, Ass't Atty Gen, L. Steven Grasz, Deputy Atty Gen, NY, Murray J. Fogler, McDade Fogler et al, Houston, Lincoln, NE, Daniel J. Doyle, Office of Atty Gen, Harrisburg, TX, Roger E. Zuckerman, Steven M. Salky, Deborah J. PA, Thomas J. Blessington, Office of Atty Gen, Philadelphia, Jeffrey, Amy M. McNamer, Norman L. Eisen, Zuckerman PA, G. William Scott, Timothy Hauser, Robin Springberg Spaeder LLP, Washington, DC, Barnes H. Ellis, David Parry, Michael Schloss, U.S. Dept of Labor, Washington, H. Angeli, Stoel Rives LLP, Portland, OR, Amy Joseph DC, Damon Michael Young, Young Pickett et al, Texarkana, Pedersen, William F. Martson, Zachary W.L. Wright, Tonkon TX, Jeffrey S. Boyd, Deputy Atty Gen for Litigation, Austin, Torp LLP, Portland, OR, Edward John O'Neill, Jr., Jason TX, Brian D. Salwowski, Deputy Atty Gen, Indianapolis, Carrington Norwood, Clements O'Neill et al, Houston, TX, IN, Linda L. Addison, Fulbright and Jaworski, Houston, Jennifer Piskun, John J. McKetta, III, Graves Dougherty et TX, David H. Donaldson, Jr., George & Donaldson, Austin, al, Austin, TX, Mark J. Rochon, Emmett B. Lewis, Miller TX, James L. Petersen, Ice Miller, Indianapolis, IN, Mike & Chevalier Chartered, Washington, DC, H. Bruce Golden, McKool, Jr., McKool Smith, Dallas, TX, George David Golden & Owens LLP, Houston, TX, Dennis H. Tracey, Brad Gordon, Baggett Gordon & Deison, Conroe, TX, Brian D. M. Johnston, David Wertheimer, Hogan & Hartson LLP, New Hail, Milbank Tweed et al, New York, NY, for Movants. York, NY, Amelia Rudolph, Sutherland Asbill et al, Atlanta, GA, Kathryn Schaefer Zecca, Gary A. Orseck, Robbins Joseph A. Grundfest, Stanford Law School, Stanford, CA, Russell Englert Orseck & Untereiner, LLP, Lawrence S. Stephen Webster, SEC, Legal Counsel, Fort Worth, TX, for Robbins, Robbins Russell et al, Washington, DC, Billy Jack Amicus. Shepherd, Cruse Scott et al, Houston, TX, Peter Fleming, Jr., Carolyn S. Schwartz, pro se, New York, NY, for Trustee.
Michael J. Moscato, Curtis Mallet–Prevost et al, New York, NY, David E. Ross, Mark C. Hansen, Kellogg Huber et al, Washington, DC, Henry F. Schuelke, III, Janice Schuelke et al, Washington, DC, Robert Hayden Burns, Burns Wooley et MEMORANDUM AND ORDER al, Houston, TX, J. Clifford Gunter, III, Abigail K. Sullivan, Bracewell & Patterson LLP, Houston, TX, Damon Michael RE SECONDARY ACTORS' MOTIONS TO DISMISS Young, Young Pickett et *563 al, Texarkana, TX, Walter J. Cicack, Adams & Reese, Houston, TX, Paul D. Clote, HARMON, District Judge. Attorney at Law, Rodney Acker, Jenkens & Gilchrist, Dallas, The above referenced putative class action, brought on behalf TX, for Defendants/Consolidated Defendants.
of purchasers of Enron Corporation's publicly traded equity William S. Lerach, Milberg Weiss et al, San Diego, CA, and debt securities during a proposed federal Class Period Thomas E. Bilek, Hoeffner Bilek & Eidman, Houston, from October 19, 1998 through November 27, 2001, alleges TX, Steven G. Schulman, Milberg Weiss Bershad Hynes securities violations (1) under Sections 11 and 15 of the and Lerach, New York, NY, R. Paul Yetter, Yetter and Securities Act of 1933 (“1933 Act”), 15 U.S.C. §§ 77k Warden, Houston, TX, Michael J. Pucillo, Burt & Pucillo, and 77o; (2) under Sections 10(b), 20(a), and 20A of the West Palm Beach, FL, Glen DeValerio, Jeffrey C. Block, Securities Exchange Act of 1934 (“Exchange Act” or “the Berman DeValerio et al, Boston, MA, Vincent R. Cappucci, 1934 Act”), 15 U.S.C. §§ 78j(b), 78t(a), and 78t–1, and Entwistle & Cappucci, New York, NY, James M. Finberg, Rule 10b–5 promulgated thereunder by the Securities and Richard M. Heimann, Melanie M. Piech, Lieff Cabraser et Exchange Commission (“SEC”), 17 C.F.R. § 240.10b–5; and
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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002) Fed. Sec. L. Rep. P 92,239
(3) under the TexasSecuritiesAct, Texas Rev. Civ. Stat. Ann. Plaintiff the Washington State Investment Board asserts a art. 581–33 (Vernon's 1964 & 2002 Supp.). class action claim under the TexasSecuritiesAct against Defendants Arthur Andersen LLP, JP Morgan, and Lehman [1] Pending before the Court inter alia are motions to Brothers and against individual Enron Defendants Belfer, dismiss pursuant to Rules 8(e)(1), 1 9(b), 2 and 12(b)(6) 3 Blake, Buy, Causey, Chan, John Duncan, Fastow, Foy, of the *564 Federal Rules of Civil Procedure, the Private Gramm, Harrison, Jaedicke, Lay, LeMaistre, Meyer, Jeffrey Securities Litigation Reform Act of 1995 (the “PSLRA”), Skilling, Urquhart, Wakeham, Walker, Willison, Winokur codified at 15 U.S.C. § 78u–4(b)(3)(A), and Central Bank in connection with the sale to the Washington Board and of Denver v. First Interstate Bank of Denver, 511 U.S. proposed subclass of $250 million of 6.95% Notes due July 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994), filed by the 15, 2028 and $250 million of 6.40% Notes due July 15, 2006. following accounting firms, law firms, and investment banks/ integrated financial services institutions (“secondary actors [2] Article 581–33 of the TexasSecuritiesAct, Tex.Rev.Civ. Stat. (Vernon's Supp.2002), provides in in securities markets” 4 ): (1) Canadian Imperial Bank of relevant portion, Commerce (“CIBC”)(# 615); (2) CitiGroup Inc. (# 629); (3) J.P. Morgan Chase & Co.(# 632); (4) Vinson & Elkins L.L.P. Civil Liabilities (# 648); (5) Arthur Andersen LLP (# 650); (6) Barclays PLC (# 653); (7) Credit Suisse First Boston (# 658); (8) Kirkland & A. Liability of Sellers. Ellis (# 660); (9) Bank of America Corporation (# 664); (10) Merrill Lynch & Co. (# 667); (11) Lehman Brothers Holdings .....
5
Inc. (# 679); and (12) Deutsche Bank AG (# 716).
(2) Untruth or Omission. A person who offers or sells a security (whether or not the security or transaction is *565 In essence Lead Plaintiff's consolidated complaint exempt under Section 5 or 6 of this Act) by means of an alleges that these and other named Defendants “are liable for untrue statement of material fact or an omission to state (i) making false statements, or failing to disclose adverse facts a material fact necessary in order to make the statements while selling Enron securities and/or (ii) participating in a made, in light of the circumstances under which they are scheme to defraud and/or a course of business that operated made, not misleading, is liable to the person buying the as a fraud or deceit on purchasers of Enron's public securities security from him, who may sue either at law or in equity during the Class Period....” Consolidated complaint (# 441)
for rescission, or for damages if the buyer no longer owns at 254.
the security. However, a person is not liable if he sustains the burden of proof that either (a) the buyer knew of the untruth or omission or (b) he (the offeror or seller) did not APPLICABLE LAW know, and in the exercise of reasonable care could not have known of the untruth or omission. The issuer of the security The rapid collapse of Enron Corporation (“Enron”) and (other than a *566 government issuer identified in Section the resulting scope, variety, and severity of losses are 5M) is not entitled to the defense in clause (b) with respect unprecedented in American corporate history. It is not to an untruth or omission (i) in a prospectus required in surprising that this consolidated action raises a number of connection with a registration statement under 7A, 7B, or novel and/or controversial issues that the law has thus far 7C, or (ii) in a writing prepared and delivered by the issuer not addressed or about which the courts are in substantial in the sale of a security.... disagreement. Lead Plaintiff Regents of the University of California's claims are grounded in securities statutes, but F. Liability of ControlPersons and Aiders judicial construction of those statutes spans the full spectrum of possibilities. After a careful review of frequently divergent (1) A person who directly or indirectly controls a seller, case law and extensive deliberation, the Court applies the buyer, or issuer of a security is liable under Section 33A, following law to the allegations in the consolidated complaint 33B, or 33C jointly and severally with the seller, buyer, and, where appropriate, explains the bases for its selection. or issuer, and to the same extent as if he were the seller, buyer, or issuer, unless the controlling person sustains the burden of proof that he did not know, and in the exercise of I. TexasSecuritiesAct
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reasonable care could not have known, of the existence of the seller or issuer of the securities, i.e., whether they the facts by reason of which the liability is alleged to exist. made a material misrepresentation, not on the conduct of the individual buyers.”); Anheuser–Busch Companies, Inc.
(2) A person who directly or indirectly with intent to v. Summit Coffee Co., 858 S.W.2d 928, 936 (Tex.App.- deceive or defraud or with reckless disregard for the truth Dallas 1993, writ denied); Rio Grande Oil Co., 539 S.W.2d or the law materially aids a seller, buyer, or issuer of a at 921;Summers v. WellTech, Inc., 935 S.W.2d 228, 234 security is liable under Section 33A, 33B, or 33C jointly (Tex.App.-Houston [1st Dist.] n.w.h.). *567 Nor does the and severally with the seller, buyer, or issuer, and to the plaintiff have to demonstrate scienter under the Texas Act. same extent as if he were the seller, buyer, or issuer.... Wood v. Combustion Engineering, Inc., 643 F.2d 339, 345
Tex.Rev.Civ. Stat. art. 581–33(A)(2), (F)(1) and (2)(Vernon (5th Cir.1981). 6 Supp.2002). “Person” inter alia includes a corporation, partnership, limited partnership, company, and firm. Art. Where there are similarities, Texas courts turn to cases 581–4(B). “Sells” is defined as any act by which a sale is construing federal securities laws for guidance in interpreting made, including a solicitation to sell, an offer to sell, or an the TexasSecuritiesAct. In re Westcap Enterprises, 230 attempt to sell, and encompasses “subscription, an option for F.3d 717, 726 (5th Cir.2000); Beebe v. Compaq Computer sale, a solicitation of sale, a solicitation of an offer to buy, Corp., 940 S.W.2d 304, 306–07 (Tex.App.-Houston [14th an attempt to sell, or an offer to sell, directly by an agent or Dist.] 1997, no writ)(“While cases dealing with the salesman, by circular, letter, or advertisement or otherwise.” federal securities laws are not dispositive concerning our Texas Capital Securities Inc. v. Sandefer, 58 S.W.3d 760, 775 interpretation of the TexasSecuritiesAct, they may provide (Tex.App.-Houston [1st Dist.] 2001, review denied), citing persuasive guidance.”); Searsy v. Commercial Trading Corp., art. 581–4(e). Moreover, liability may be imposed against a 560 S.W.2d 637, 639 (Tex.1977); Star Supply Co. v. Jones, defendant as long as the defendant constituted any link in the 665 S.W.2d 194, 196 (Tex.App.-San Antonio 1984, no chain of the selling process. Brown v. Cole, 155 Tex. 624, 291 writ); Campbell v. Payne, 894 S.W.2d 411, 417 (Tex.App.- S.W.2d 704, 708 (Tex.1956); Rio Grande Oil Co. v. State, 539 Amarillo 1995, writ denied). S.W.2d 917, 922 (Tex.Civ.App.-Houston [1st Dist.] 1976, writ ref'd n.r.e.); Texas Capital Securities, Inc. v. Sandefer, [3] [4] [5] Thus to prevail under art. 581–33(A)(2), a 58 S.W.3d at 775. The TexasSecuritiesAct is to be construed plaintiff must show that the defendant seller in offering or “to protect investors” and “because article 581–33 is remedial selling a security made an untrue statement of material fact in nature in the civil context, it ‘should be given the widest or an omission of material fact that was essential to make possible scope.’ ” Texas Capital Securities, 58 S.W.3d at the statement not misleading. Duperier v. Texas State Bank, 775,citingTex.Rev.Civ. Stat. art. 581–10–1(b)(Vernon 2001) 28 S.W.3d 740, 745 (Tex.App.-Corpus Christi, 2000), review and Flowers v. Dempsey–Tegeler & Co., 472 S.W.2d 112, dismissed by agreement (Jan. 4, 2001). A misrepresentation 115 (Tex.1971). or omission is “material if there is a substantial likelihood that proper disclosure would have been viewed by a reasonable Article 581–33(A) has some significant differences from investor as significantly altering the total mix of information § 10(b) and from common law fraud in that it does not made available.... In other words, the issue is whether a require reliance by the purchaser on the seller's material reasonable investor would consider the information important misrepresentation or omission, i.e., the purchaser does in deciding whether to invest.” Id. (and cases cited therein). not have to demonstrate that it would not have bought The investor/buyer has no duty to perform due diligence nor the security if it had known of the misrepresentation or to discover the truth by exercising ordinary care. Id.; In re omission. Granader v. McBee, 23 F.3d 120, 123 (5th Westcap Enterprises, 230 F.3d at 726. Cir.1994); Weatherly v. Deloitte & Touche, 905 S.W.2d 642, 648–49 (Tex.App.-Houston [14th Dist.] 1995, writ [6] [7] Although the TexasSecuritiesAct does not define dism'd w.o.j.)(“An omission or misrepresentation is material “controlperson,” comments to the statute note, “control is if there is a substantial likelihood that a reasonable investor used in the same broad sense as in federal securities law” would consider it important in deciding to invest. An and that “[d]epending on the circumstances, a controlperson investor is not required to prove that he would have acted might include an employer, an officer or director, a large differently but for the omission or misrepresentation.... [T]he shareholder, a parent company, and a management company.” focus under the TexasSecuritiesAct is on the conduct of Art. 581–33F cmt. “The rationale for controlperson liability
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is that a controlperson is in the position to prevent the public interest or for the protection of violation and may be able to compensate the injured investor investors. when the primary violator (e.g., a corporate issuer which has gone bankrupt) is not.” Summers v. WellTech, Inc. 935 15 U.S.C. § 78j(b). S.W.2d 228, 231 (Tex.App.-Houston [1st Dist.] 1996); Texas Capital Securities Management, Inc., 80 S.W.3d at 268. To Rule 10b–5, which implements § 10(b), in turn provides in make a prima facie case for controlperson liability under relevant part, the Texas statute, the plaintiff must demonstrate that the defendant had actual power or influence over the controlled It shall be unlawful for any person, directly or indirectly, person and that the defendant induced or participated in the by the use of any means or instrumentality of interstate alleged violation. Texas Capital Securities, 80 S.W.3d at 261, commerce, or of the mails or of any facility of any national citing Dennis v. Gen. Imaging, Inc., 918 F.2d 496, 509 (5th securities exchange, Cir.1990); G.A. Thompson & Co. v. Partridge, 636 F.2d 945, (a) To employ any device, scheme, or artifice to defraud, 958 (5th Cir.1981). Status alone is insufficient to establish that a defendant is a controlperson within the ambit of (b) To make any untrue statement of material fact or to the statute. Id. at 268, citing Dennis, 918 F.2d at 509. A omit to state a material fact necessary in order to make the controlperson at a corporation can be sued directly without statements made, in light of the circumstances under which joining the corporation as a defendant. Summers v. WellTech, they were made, not misleading, or Inc. 935 S.W.2d at 231. If the buyer still owns the securities at issue, rescission is the sole remedy available; only if he has (c) To engage in any act, practice, or course of business sold the securities, may he *568 obtain money damages. Id.; which operates or would operate as a fraud or deceit upon Texas Capital Securities, Inc., 58 S.W.3d at 775. any person, in connection with the purchase or sale of any security.
[8] To establish aider and abettor liability under art. 581– 33(F)(2), a plaintiff must demonstrate (1) the existence of 17 C.F.R. § 240.10b–5. The scope of Rule 10b–5 is a primary violation of the securities laws, (2) that the aider coextensive with the coverage of § 10(b). United States v. has a general awareness of its role in the violation, (3) that O'Hagan, 521 U.S. 642, 651, 117 S.Ct. 2199, 138 L.Ed.2d the aider gave substantial assistance in the violation, and (4) 724 (1997); Ernst & Ernst, 425 U.S. at 214, 96 S.Ct. that the aider intended to deceive the plaintiff or acted with 1375;SEC v. Zandford, 535 U.S. 813, 122 S.Ct. 1899, 1901 reckless disregard for the truth of the representations made n. 1, 153 L.Ed.2d 1 (2002). by the primary violator. Frank v. Bear, Stearns, & Co., 11 S.W.3d 380, 384 (Tex.App.-Houston [14th Dist.] 2000, writ One objective underlying the enactment of § 10(b) following the 1929 stock market crash was “to insure honest securities denied). 7 markets and thereby promote investor confidence.” United States v. O'Hagan, 521 U.S. at 658, 117 S.Ct. 2199.
II. Federal Securities Law Furthermore Congress tried “ ‘to substitute a philosophy of full disclosure for the philosophy of caveat emptor and A. Section 10(b) of the 1934 Act and Rule 10b–5 thus to achieve a high standard of business ethics in the [9] Section 10(b) of the Exchange Act states in relevant part, securities industry.’ ” Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 150, 92 S.Ct. 1456, 31 L.Ed.2d 741 It shall be unlawful for any person, (1972), quoting SEC v. Capital Gains Research Bureau, Inc., directly or indirectly ... (b) To use 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963).
or employ, in connection with the The Supreme Court has indicated that the statute should be purchase or sale of any security ...
“construed ‘not technically and restrictively, but flexibly to any manipulative 8 or deceptive 9 effectuate its remedial purposes.’ ” Affiliated Ute Citizens of device or contrivance *569 10 in Utah v. United States, 406 U.S. at 151, 92 S.Ct. 1456,quoting contravention of such rules and SEC v. Capital Gains Research Bureau, Inc., 375 U.S. at 195, regulations as the [SEC] may proscribe 84 S.Ct. 275;Zandford, 122 S.Ct. at 1903. as necessary or appropriate in the
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*570 a. Misleading Statements or Omissions (2) identify the speaker; The PSLRA amends the Exchange Act and applies to private class actions brought pursuant to the Federal Rules of Civil (3) state when and where the statement was made; Procedure. Pub.L. No. 104–67, 109 Stat, 737, codified at 15 (4) plead with particularity the contents of the false U.S.C. §§ 77k, 77l, 77z–1, 77z–2, 78a, 78j–1. 78t, 78u, 78u– representations;
4, 78u–5.
(5) plead with particularity what the person making the [10] Under the PSLRA, 15 U.S.C. § 78u–4(b)(1) & (2), misrepresentation obtained thereby;
(b) Requirements for securities fraud actions (6) explain the reason or reasons why the statement is misleading, i.e., why the statement is fraudulent .... the (1) Misleading statements and omissions In any private ‘who, what, when, where, and how’ required under Rule action arising under this chapter in which the plaintiff 9(b) ... [and] under 15 U.S.C. § 78u–4(b)(1), for allegations alleges that the defendant—
made on information and belief, ... and (A) made an untrue statement of a material fact; or (7) state with particularity all facts on which that belief is (B) omitted to state a material fact necessary in formed, i.e., set forth a factual basis for such belief.
order to make the statements made in the light of Id. at 350.
the circumstances in which they were made, not misleading;
[11] In most cases, at the pre-discovery stage, the allegations the complaint shall specify each statement alleged to have in the complaint are not based upon a plaintiff's personal been misleading, the reason or reasons why the statement is knowledge and thus are based on “information and belief” misleading, and, if an allegation regarding the statement or regardless of whether they are so characterized. The Fifth omission is made on information and belief, the complaint Circuit, relying on the Second Circuit's reasoning in Novak shall state with particularity all facts on which that belief v. Kasaks, 216 F.3d 300, 313–14 & n. (2d Cir.2000), cert. is formed. denied,531 U.S. 1012, 121 S.Ct. 567, 148 L.Ed.2d 486 (2000), has held with respect to the last requirement, (2) Required state of mind [O]ur reading of the PSLRA rejects In any private action under this chapter in which the any notion that confidential sources plaintiff may recover money damages only on proof that must be named as a general matter. In the defendant acted with a particular state of mind, the our *571 view, notwithstanding the complaint shall, with respect to each act or omission use of the word “all,” [§ 78u–4(b)(1) alleged to violate this chapter, state with particularity facts ] does not require that plaintiffs plead giving rise to a strong inference that the defendant acted with particularity every single fact with the required state of mind. upon which their beliefs concerning false or misleading statements are If the facts are not pled with the requisite particularity, the based. Rather, plaintiffs need only action is to be dismissed. 15 U.S.C. § 78u–4(b)(3)(A). The plead with particularity sufficient facts Fifth Circuit views the standard of the PSLRA to “at a to support those beliefs. Accordingly, minimum, incorporate the standard for pleading fraud under” where plaintiffs rely on confidential Rule 9(b). ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 sources but also on other facts, they F.3d 336, 349–50 (5th Cir.2002). Thus to plead a false or need not name their sources as long misleading statement or omission as the basis for a § 10(b) as the latter facts provide an adequate and Rule 10b–5(b) securities fraud claim and avoid dismissal, basis for believing that the defendants' a plaintiff must statements were false. Moreover, even if personal sources must be (1) specify ... each statement alleged to have been identified, there is no requirement misleading, i.e., contended to be fraudulent;
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that they be named, provided they negligence is insufficient)). Because the PSLRA does not are described in the complaint with define generally the required scienter for private securities sufficient particularity to support the fraud claims under § 10(b) and Rule 10b–5, but only mandates probability that a person in the that the plaintiff plead facts with particularity to give rise to position occupied by the source would a strong inference of the requisite state of mind, the Fifth possess the information alleged. In Circuit has held that severe recklessness, “limited to those both of these situations, the plaintiffs highly unreasonable omissions or misrepresentations that will have pleaded enough facts to involve not merely simple or even inexcusable negligence, support their belief, even though some but an extreme departure from the standard of ordinary care, arguably relevant facts have been left and that present a danger of misleading buyers or sellers out. Accordingly, a complaint can which is either known to the defendant or is so obvious that meet the new pleading requirement the defendant must have been aware of it,” is sufficient to imposed by paragraph (b)(1) by satisfy the scienter requirement. Nathenson, 267 F.3d at 408. providing documentary evidence and/ or a sufficient general description of [15] To survive a motion to dismiss, the plaintiff must the personal sources of the plaintiffs' plead specific facts with *572 particularity giving rise to a beliefs. “strong inference” of scienter. Nathenson, 267 F.3d at 407.
Circumstantial evidence may be used to give rise to a strong Id. at 352. Nevertheless “if the other facts, i.e., documentary inference of scienter. Abrams, 292 F.3d at 430;Nathenson, evidence, do not provide an adequate basis for believing 267 F.3d at 410. Rather than a piecemeal analysis, this court that the defendants' statements or omissions were false and must view the totality of alleged facts and circumstances, the descriptions of the personal sources are not sufficiently together as a whole, to determine whether they raise the particular to support the probability that a person in requisite strong inference of scienter. Abrams, 292 F.3d at the position occupied by the source would possess the 431. information pleaded to support the allegations of false or misleading statements made on information and belief, the [16] Allegations of motive and opportunity to commit fraud, complaint must name the personal sources.” Id. at 353. by themselves, are generally insufficient to plead scienter in the Fifth Circuit, but may be employed along with other facts [12] Moreover, the Fifth Circuit also noted that where and circumstances to reach the level of severe recklessness. the complaint states that its allegations were made on Abrams, 292 F.3d at 430;Nathenson, 267 F.3d at 410–411. “investigation of counsel,” the same pleading requirements Nor does a conclusory assertion that a defendant should as for “upon information and belief” apply. Id. at 351 n. 70, have known about internal corporate problems based merely citing In re Sec. Litig. BMC Software, Inc., 183 F.Supp.2d on his position or status within the corporation suffice. Id. 860, 885 n. 33 (S.D.Tex.2001). at 432. Moreover, “[a]n unsupported general claim about the existence of confidential corporate reports that reveal [13] [14] To state a securities fraud claim under § 10(b) of information contrary to reported accounts is insufficient to the Exchange Act and Rule 10b–5(b), a plaintiff must allege, survive a motion to dismiss. Such allegations must have in connection with the purchase or sale of securities, (1) a corroborating details regarding the contents of the allegedly misstatement or omission (2) of a material fact, (3) made contrary reports, their authors and recipients.” Id. at 432. with scienter, (4) on which the plaintiff relied and (5) which Rejecting the need for pleading comprehensive, detailed proximately caused his injury. Abrams v. Baker Hughes, Inc., evidentiary matter in securities litigation and embracing the 292 F.3d 424, 430 (5th Cir.2002), citing Shushany v. Allwaste, more “sensible standard” of Novak, discussed supra, the Inc., 992 F.2d 517, 520–21 (5th Cir.1993); Nathenson v. Fifth Circuit requires “at least some specifics from these Zonagen, Inc., 267 F.3d 400, 406–07 (5th Cir.2001). Scienter reports,” such as “who prepared internal company reports, for a private cause of action under § 10(b), means “intent how frequently the reports were prepared and who reviewed to deceive, manipulate or defraud” (Abrams, 292 F.3d at them.” ABC Arbitrage, 291 F.3d at 355. 430,citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)) or at least knowing [17] In addition, the Fifth Circuit has concluded that “the misconduct (Herman & MacLean v. Huddleston, 459 U.S. mere publication of inaccurate accounting figures or failure to 375, 382–83, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983)(mere
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follow GAAP, 11 without more, does not establish scienter; the-market” doctrine. The Supreme Court has stated that a plaintiff must show that the accounting firm deliberately this theory “is based on the hypothesis that in an open and misrepresented material facts or acted with reckless disregard developed securities market, the price of a company's stock about the accuracy of its audits or reports. The party must is determined by the available material information regarding know that it is publishing materially false information, or the company and its business. .... Misleading statements will must be severely reckless in publishing such information.” therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements. ....” Basic, 485 Abrams, 292 F.3d at 430. 12 See also Melder v. *573 Morris, U.S. at 241–42, 108 S.Ct. 978,citing Peil v. Speiser, 806 F.2d 27 F.3d 1097, 1103 (5th Cir.1994)(“boilerplate averments 1154, 1160–61 (3d Cir.1986). Thus the presumption is that that the accountants violated particular standards are not, the plaintiff relied on the value of the stock, which is the without more, sufficient to support inferences of fraud”).
market's reflection of available material information about a company including the company's fraudulent statements.
Allegations that a defendant was motivated to commit fraud Fine v. American Solar King Corp., 919 F.2d 290, 298 (5th to enhance his incentive compensation or to raise capital are Cir.1990), cert. dism'd sub nom. Main Hurdman v. Fine, 502 also inadequate to establish scienter because “the executives U.S. 976, 112 S.Ct. 576, 116 L.Ed.2d 601 (1991).
of virtually every corporation in the United States would be subject to fraud allegations.” Abrams, 292 F.3d at 434 (“It [20] [21] A defendant may rebut “the presumption of does not follow that because executives have components reliance by ‘any showing that severs the link between the of their compensation keyed to performance, one can infer alleged misrepresentation and either the price received (or fraudulent intent.”).
paid) by the plaintiff, or his decision to trade at a fair market price.’ ” Id., citing Basic, 485 U.S. at 248, 108 S.Ct. 978. Thus [18] A plaintiff must also demonstrate that the challenged the defendant can rebut the presumption by demonstrating misrepresentations in dispute were material, that he relied that the nondisclosure had no effect on the stock's market on them, and that as a proximate result, he was damaged.
price or that the plaintiff would have purchased the stock Misrepresentations or omissions are material if there is a at the same price even if he had known the information substantial likelihood that a reasonable investor would have that was not disclosed to the market or that the plaintiff viewed the allegedly false, misleading or omitted statement actually knew about the information that was not disclosed as having significantly altered the total mix of information to the market when he purchased the stock. Id.; Nathenson, available to him in deciding whether to buy or sell his stock 267 F.3d at 414. As a corollary to the fraud-on-the-market or, phrased another way, “if there was a substantial likelihood doctrine and a defense to rebut that doctrine's presumption that a reasonable investor would consider the information that the defendant's misrepresentations affected the price of important in making a decision to invest.”Basic Inc. v.
the company's stock, the truth-on-the-market doctrine views a Levinson, 485 U.S. 224, 230–31, 108 S.Ct. 978, 99 L.Ed.2d misrepresentation as immaterial if the information is already 194 (1988); ABC Arbitrage, 291 F.3d at 359. Although known to the market because that misrepresentation therefore materiality is a mixed question of fact and law and generally cannot defraud the market. In re Sec. Litig. BMC Software, a decision for the jury, nevertheless, in reviewing a motion Inc., 183 F.Supp.2d 860, 905–06 n. 46 (S.D.Tex.2001).
to dismiss, the court can determine that representations are immaterial as a matter of law. ABC Arbitrage, 291 F.3d at The fraud-on-the-market theory is particularly relevant where 359;Nathenson, 267 F.3d at 422.
a § 10(b) and Rule 10b–5 case alleges market manipulation.
[19] “Reliance ... generally requires that the plaintiff have Market manipulation schemes which known of the particular misrepresentation complained of, are intended to distort the price of have believed it to be true and because of that knowledge and a security, if successful, necessarily belief purchased or sold the security in question.” Nathenson, defraud investors who purchase the 267 F.3d at 413. 13 security in reliance on the market's integrity. Absent the ... theory, the *574 To satisfy the reliance element in § 10(b) and parties injured by such manipulative Rule 10b–5 securities violation action, where a plaintiff schemes could not plead the necessary investor who may not have read or heard the purported element of reliance. misrepresentations, a plaintiff may employ the “fraud-on-
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Scone Investments, L.P. v. American Third Market Corp., No. (E) any report issued by an outside reviewer retained by 97 CIV 3802(SAS), 1998 WL 205338, *5 (S.D.N.Y. Apr.28, an issuer, to the extent that the report assesses a forward- 1998). looking statement made by the issuer....
[22] When the cause of action under § 10(b) is based 15 U.S.C. § 78u–5(i)(1)(A). on an allegation of a material omission, the plaintiff must demonstrate that the defendant had a fiduciary duty to [23] The safe harbor protects individuals and corporations disclose to the plaintiff.Central Bank, 511 U.S. at 174, 114 from liability for forward-looking statements that prove false S.Ct. 1439 (“When an allegation of fraud is based upon if the statement is “accompanied by meaningful cautionary nondisclosure, there can be no fraud absent a duty to speak.”). statements identifying important factors that could cause Such a duty to disclose under the federal securities laws actual results to differ materially from those in the forward- “arises from the relationship between parties.” Dirks v. SEC, looking statement” or where the forward-looking statement 463 U.S. 646, 657–58, 103 S.Ct. 3255, 77 L.Ed.2d 911 is immaterial. 15 U.S.C. § 78u–5(c)(1)(A)(i) and (ii). If (1983). The plaintiff must be “entitled to know because of a statement is “accompanied by meaningful cautionary a fiduciary or other similar relation of trust and confidence statements,” the defendants' state of mind is not relevant. between them.” Chiarella v. United States, 445 U.S. 222, Harris v. Ivax Corp., 182 F.3d 799, 803 (11th Cir.1999), 226, 228, 230 n. 12, 100 S.Ct. 1108, 63 L.Ed.2d 348 citingH.R. Conf. Rep. 104–369, at 44 (1995), reprinted (1980)(holding that when a person engages in insider trading, in 1995 U.S.C.A.A.N. 730, 743 (“The first prong of the thus not disclosing inside information, to violate § 10(b) the safe harbor requires courts to examine only the cautionary trader must have an *575 independent duty of disclosure; statement accompanying the forward-looking statement. in dicta the court observed that corporate insiders violate a Courts should not examine the state of mind of the person fiduciary duty to shareholders when they trade on nonpublic making the statement.”) See also Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1213 (1st Cir.1996)(“when statements information). 14 of ‘soft’ information such as forecasts, estimates, opinions, or projections are accompanied by cautionary disclosures The PSLRA establishes a “safe harbor” shielding a “forwardthat adequately warn of the possibility that actual results or looking” statement from Rule 10b–5 liability where such a events may turn out differently, the ‘soft’ statements may statement is made by a natural person unless defendants prove not be materially misleading under the securities laws”).
that it was made with “actual knowledge ... that the statement Where the forward-looking statement is not accompanied was false and misleading.” 15 U.S.C. § 78u–5 and § 78u–5(c)
by cautionary language, plaintiffs must demonstrate that the (1)(B)(i). A statement is “forward-looking” if, inter alia, it is defendant made the statement with “actual knowledge” that (A) a statement containing a projection of revenues, it was “false or misleading.” 15 U.S.C. § 78u–5(c)(1)(B). income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, *576 [24] The safe harbor provision does not apply where capital structure, or other financial items; the defendants knew at the time that they were issuing statements that the statements contained false and misleading (B) a statement of the plans and objectives of management information and thus lacked any reasonable basis for making for future operations, including plans or objectives relating them. Shaw v. Digital Equipment Corp., 82 F.3d 1194, to the products or services of the issuer; 1213 (1st Cir.1996); Gross v. Medaphis Corp., 977 F.Supp.
1463, 1473 (N.D.Ga.1997); In re MobileMedia Sec. Litig., 28 (C) a statement of future economic performance, including F.Supp.2d 901, 930 (D.N.J.1998). any such statement contained in a discussion and analysis of financial condition by the management or in the results The PSLRA restricts review of forward-looking statements of operations included pursuant to the rules and regulations to those specified in the complaint. 15 U.S.C. § 78u–4(b)(1). of the Commission; Thus the Court must examine piecemeal the statements made by the company as expressed in the pleadings.
(D) any statement of the assumptions underlying or relating to any statement described in subparagraph (A),(B), or (C);
There is a judicially created equivalent to the PSLRA's “safe harbor” provision, the “bespeaks caution” doctrine,
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which the Eleventh Circuit in Bryant v. Avado Brands, the prediction without a reasonable basis ‘is one [that] a Inc., 187 F.3d 1271, 1276 n. 7 (11th Cir.1999) explains reasonable investor would consider significant in [making] “operates similarly, protecting statements in the nature of the decision to invest, such that it alters the total mix of projections that are accompanied by meaningful cautionary information available about the proposed investment.’ ” Id. at statements and specific warnings of the risks involved, 168, citing Krim, 989 F.2d at 1445. so as to ‘bespeak caution’ to investors that actual results may differ, thereby shielding the statements from § 10(b) Similarly, vague optimistic statements are not actionable and Rule 10b–5 liability.” Id., citing Saltzberg v. TM because a reasonable investor would not rely on them in Sterling/ Austin Assoc., 45 F.3d 399 (11th Cir.1995)(per deciding to buy or sell securities. Grossman v. Novell, curiam )(holding that explicit cautionary language in private Inc., 120 F.3d 1112, 1119 (10th Cir.1997); San Leandro placement memorandum rendered alleged misstatements Emergency Medical Group Profit Sharing Plan v. Philip immaterial and made them not actionable under the “bespeaks Morris Cos., 75 F.3d 801, 811 (2d Cir.1996)(statement that caution” doctrine). company was “ ‘optimistic’ about [its earnings] in 1993”
and “should deliver income growth consistent *577 with [25] The Fifth Circuit has rejected the application of the its historically superior performance” held to be “puffery” “bespeaks caution” doctrine as a per se bar to liability. and to “lack the sort of definitive positive projections that Rubinstein v. Collins, 20 F.3d 160, 162 (5th Cir.1994). might require later correction”); Raab v. General Physics Observing that the use of the doctrine by district courts Corp., 4 F.3d 286, 289 (4th Cir.1993)(statements in Annual “reflects a relatively recent, ongoing, and somewhat uncertain Report that corporation predicted “10% to 30% growth evolution in securities law,” the Fifth Circuit skeptically rate over the next several years” and was “poised to carry comments, the growth and success of 1991 well into the future”
held to be mere puffery or immaterial statements); In In essence, predictive statements re Sec. Litig. BMC Software, Inc., 183 F.Supp.2d 860, are just what the name implies: 888 (S.D.Tex.2001)(“Vague, loose optimistic allegations predictions. As such, any optimistic that amount to little more than corporate cheerleading are projections contained in such ‘puffery,’ ‘projections of future performance not worded as statements are necessarily contingent. guarantees,’ and are not actionable under federal securities Thus the “bespeaks caution” doctrine law because no reasonable investor would consider such has developed to address situations vague statements material and because investors and analysts in which optimistic projections are are too sophisticated to rely on vague expressions of optimism coupled with cautionary language rather than specific facts”)(citing Krim v. BancTexas Group, —in particular, relevant specific Inc., 989 F.2d 1435, 1446 (5th Cir.1993)). facts or assumptions—affecting the reasonableness of the reliance on and the materiality of those projections. b. Manipulative or Deceptive Contrivance or Scheme to To put it another way, the “bespeaks Deceive or Course of Business caution” doctrine merely reflects Securities fraud actions under § 10(b) and Rule 10b–5 are the unremarkable proposition that not merely limited to the making of an untrue statement of statements must be analyzed in material fact or omission to state a material fact. Section context. 10(b) prohibits “any manipulative or deceptive contrivance,”
which, as indicated above, the Supreme Court, relying on Id. at 167 [footnotes and citations omitted]. Under Fifth Webster's International Dictionary, includes “a scheme to Circuit precedent, “[C]autionary language is not necessarily deceive” or “scheme, plan or artifice.” Ernst & Ernst, 425 sufficient in and of itself, to render predictive statements U.S. at 199 n. 20, 96 S.Ct. 1375. While subsection (b) immaterial as a matter of law. Rather, ... materiality is of Rule 10b–5 provides a cause of action based on the not judged in the abstract, but in light of the surrounding “making of an untrue statement of a material fact and the circumstances.” Id. at 167–68, citing Krim v. BancTexas omission to state a material fact,” subsections (a) and (c) Group, 989 F.2d 1435, 1448–49 (5th Cir.1993). The Fifth “are not so restricted” and allow suit against defendants Circuit has defined the test: “The appropriate inquiry is who, with scienter, participated in “a ‘course of business' whether, under all the circumstances, the omitted fact or or a ‘device, scheme or artifice’ that operated as a fraud”
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on sellers or purchasers of stock even if these defendants the meaning of § 10(b) and Rule 10b–5. 122 S.Ct. at 1900–01. did not make a materially false or misleading statement or The Court emphasized that “neither the SEC nor this Court omission. Affiliated Ute Citizens v. United States, 406 U.S. has ever held that there must be a misrepresentation about the 128, 152–53, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). See value of a particular security in order to run afoul of the Act.” also Superintendent of Ins. v. Bankers Life & Cas. Co. 404 122 S.Ct. at 1903. U.S. 6, 11 n.7, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971)(“[I]t [is not] sound to dismiss a complaint merely because the alleged Furthermore, employing a flexible approach to construing § scheme does not involve the type of fraud that is ‘usually 10(b), the Supreme Court clarified the statutory language, “in associated with the sale or purchase of securities.’ We believe connection with the purchase or sale of any security.” Noting that § 10(b) and Rule 10b–5 prohibit all fraudulent schemes in that the stock sales and the broker's fraudulent practices were connection with the purchase or sale of securities, whether the interdependent, the high court observed that the broker, who artifices employed involve a garden type variety of fraud, or had discretion to manage his clients' investment account and a present a unique form of deception.”); Zandford, 122 S.Ct. at general power of attorney to engage in securities transactions 1903–04 (broker's “continuous series of unauthorized” sales without their prior authorization or approval, wrote checks to of securities and personal retention of the proceeds without himself from the clients' mutual fund account that required his client's knowledge to further his fraudulent scheme “are the sale of securities to pay him. 122 S.Ct. at 1901. Thus properly viewed” as a “ ‘course of business' that operated as the broker did not merely lawfully sell his clients' stock a fraud or deceit on a stockbroker's customer” in connection and then decide to misappropriate the proceeds. 122 S.Ct. with the sale of securities). Novel or atypical methods should at 1904. Instead, the fraud coincided with the sales, each of not provide immunity from the securities laws.; Santa Fe, 430 which furthered his scheme, through a “course of business,” U.S. at 475–76 and n. 15, 97 S.Ct. 1292 (stating that § 10(b) to defraud his clients and misappropriate their assets. 15 covers deceptive “practices” and “conduct”); Central Bank, 511 U.S. at 177, 114 S.Ct. 1439 (“we again conclude that the [27] [28] [29] An insider's trading in securities of his statute prohibits only the making of a material misstatement company based on material nonpublic information “qualifies or the commission of a manipulative act [emphasis added].”); as a ‘deceptive device’ under § 10(b).” United States v. In re Splash Technology Holdings, Inc. Sec. Litig., 2000 WL O'Hagan, 521 U.S. 642, 643, 117 S.Ct. 2199, 138 L.Ed.2d 1727377, *13 (N.D.Cal. Sept.29, 2000)(“Whereas 10b 5(b) 724 (1997), quoting Chiarella v. United States, 445 U.S. 222, focuses on fraudulent statements, 10b–5(a) and (c) are not 228, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980). The simple by their terms restricted to statements. In this case, plaintiffs allegation that a defendant was motivated to sell his company allege both fraudulent statements and acts as their requisite stock at a high price without an allegation that the defendant manipulative or deceptive practices”). profited from such inflation also will not give rise to a strong inference of scienter. Abrams, 292 F.3d at 434. To be *578 [26] In Zandford, a unanimous Supreme Court probative of scienter, a plaintiff must allege insider trading opinion, leaving aside the misrepresentation and omission that occurred in suspicious amounts or at suspicious times, language since it was not relevant to the case, the high court “out of line with trading practices or at times calculated to focused on § 10(b)'s alternative basis for liability, “unlawful maximize personal profit. Further, even unusual sales by one for any person ... [t]o use or employ, in connection with insider do not give rise to a strong inference of scienter when the purchase or sale of any security ..., any manipulative or other defendants do not sell some or all of their shares during deceptive device or contrivance in contravention of such rules the Class Period.”Id. at 435. and regulations as the [SEC] may prescribe” and Rule 10b–5's ban on the use, “in connection with the purchase or sale of any *579 [30] Market manipulation, employment of a security,” of “any device scheme, or artifice to defraud” or any manipulative device, and engaging in manipulative schemes other “act, practice, or course of business ” that “operates ... such as a scheme to artificially inflate or deflate stock as a fraud or deceit [emphasis added].” 122 S.Ct. at 1903. prices, falsifying records to reflect non-existent profits, and The Supreme Court held that allegations of a stock broker's creating and distributing false research reports favorably fraudulent scheme of “selling his customer's securities and reviewing a company are other types of conduct prohibited using the proceeds for his own benefit without the customer's by § 10(b) 16 and Rule 10b–5 that do not fall within the knowledge or consent” constituted “fraudulent conduct ‘in connection with the purchase or sale of any security’ ” within category of misleading statements and omissions. 17 See, e.g., United States v. Langford, 946 F.2d 798 (11th Cir.1991),
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cert. denied,503 U.S. 960, 112 S.Ct. 1562, 118 L.Ed.2d 209 broker, are insufficient to state a claim of primary liability 18 under Central Bank. Blech II, 961 F.Supp. at 584 (“[T]he (1992) ; In re Blech Securities Litigation (Blech III), No. 94 CIV. 7696 RWS, 2002 WL 31356498, *3 (S.D.N.Y. Oct.17, Complaint crosses the line dividing secondary liability from 2002)(concluding that stock-purchaser plaintiffs' allegations primary liability when it claims that Bear Stearns ‘directed’
or ‘contrived’ certain allegedly fraudulent trades. Under these that Bear Stearns & Co. 19 with scienter “directed” or circumstances, the Complaint adequately alleges that Bear “contrived” and agreed to fund specific fraudulent trades by Stearns engaged in conduct with scienter, in an attempt Blech & Company, which Bear Stearns knew had a history of sham trading, and also processed the transactions, in an to affect the price of the Blech securities.”) 20 ; McDaniel attempt to artificially inflate the price of Blech securities v. Bear Stearns & Co., Inc., 196 F.Supp.2d 343, 353 and reduce Blech's debit balance, and thereby knowingly (S.D.N.Y.2002)(“[W]here a clearing firm moves beyond engaged in a scheme to defraud through sham transactions, performing mere ministerial or routine clearing functions stated a claim for primary liability under § 10(b)); Scone and [with actual knowledge] becomes actively involved in Investments, L.P. v. American Third Market Corp., No. the introductory broker's [fraudulent] action, it may expose 97 CIV. 3802, 1998 WL 205338, *5 (S.D.N.Y. Apr.28, itself to liability with respect to the introductory broker's 1998); In re Blech Sec. Litig. (Blech II), 961 F.Supp. misdeeds.”). 569, 580 (S.D.N.Y.1997)(“a plaintiff asserting a [§ 10(b) and Rule 10b–5] market manipulation claim must allege [31] Thus to state a claim for market manipulation under direct participation in a scheme to manipulate the market § 10(b) and Rule 10b–5 against parties that employed for securities”), citing Ernst & Ernst v. Hochfelder, 425 manipulative and deceptive practices in a scheme to defraud, U.S. at 199, 96 S.Ct. 1375 (defining market manipulation a plaintiff must allege (1) that it was injured (2) in connection as conduct “designed to deceive or defraud investors by with the purchase or sale of securities (3) by relying on a controlling or artificially affecting the price of securities”). market for securities (4) controlled or artificially affected In Blech III, the court identified as practices constituting by defendants' deceptive and manipulative conduct, and (5) manipulation of the market “trades with controlled entities, the defendants engaged in the manipulative conduct with fictitious trades, wash sales, prearranged matched trades, scienter. 21 Blech II, 961 F.Supp. at 582,citing Ernst & Ernst and ‘painting the tape,’ ” together with lending money or v. Hochfelder, 425 U.S. at 199, 96 S.Ct. 1375. securities or borrowing money or securities from a customer, guaranteeing any account against loss, entering purchase or [32] Furthermore because courts acknowledge the difficulty sale orders designed to raise or lower the price of a security of satisfying Rule 9(b) in pleading a claim of market or to give the appearance of trading for purposes of inducing manipulation, “where the exact mechanism of the scheme others to trade (i.e., “marking the close” or “prearranged is likely to be unknown to the plaintiffs, allegations of trading”) and “making arrangements to ‘park’ any security the nature, purpose, and effect of the fraudulent conduct away from the true owner.” 2002 WL 31356498, *5. The and the roles of the defendants are sufficient for alleging Blech court also made clear that plaintiffs in that suit had to participation.” Blech II, 961 F.Supp. at 580;see also allege facts giving rise to a strong inference of scienter and Vandenberg v. Adler, No. 98 CIV. 3544 WHP, 2000 WL assert that “Bear Stearns caused or directed trading by Blech 342718, *5 (S.D.N.Y. Mar.31, 2000); *581 In re Sterling & Co.'s customers or solicited or induced them to buy Blech Foster & Co., Inc. Sec. Litig., 222 F.Supp.2d 216, 278– Securities at inflated prices,” i.e., “in addition to alleging 79 (E.D.N.Y.2002)(“Courts have found allegations of fraud scienter of the Blech scheme, Plaintiffs must also allege to have been pled with sufficient particularity when the that Bear Stearns itself engaged in the kind of manipulative complaint specifies (1) the manipulative acts performed; (2) conduct that Section 10(b) prohibits in this context.” Blech which defendants performed them; and (3) the effect the II, 961 F.Supp. at 582–83 (Section 10(b) requires allegation scheme had on the market for the securities at issue.”). that Bear Stearns “directly and knowingly participated in deceptive or manipulative *580 conduct that caused damage Moreover, to effectuate the Congressional purpose behind to the [plaintiff].”). the 1934 Act of “ ‘insur[ing] honest securities markets and thereby promot[ing] investor confidence,’ ” by requiring full Furthermore, conclusory “allegations that are consistent with disclosure “ ‘to achieve a high standard of business ethics in the normal activity” of such a business entity, standing alone, the securities industry,’ ” the Supreme Court has repeatedly e.g., in Blech the normal legitimate activity of a clearing “construed [the statute] ‘not technically and restrictively, but
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flexibly....’ ” Zandford, 122 S.Ct. at 1903 (citations omitted). duty coincide” and the breaches were thus “ ‘in connection The SEC has also “consistently adopted a broad reading with’ securities sales within the meaning of § 10(b).” Id. at of the phrase, ‘in connection with the purchase or sale of 1905–06. any security’ ” and “maintained that a broker who accepts payments for securities that he never intends to deliver, or who sells customer securities with intent to misappropriate c. Central Bank and Primary Violations the proceeds” violates § 10(b) and Rule 10b–5, and the [33] Of substantial relevance to the motions this Court now Supreme Court, in deference to the agency, followed suit reviews is the Supreme Court's holding in a 5–4 decision in Zandford. Id. at 1903. In Zandford, concerned that “this in Central Bank of Denver, N.A. v. First *582 Interstate statute must not be construed so broadly as to convert every Bank of Denver, N.A., 511 U.S. 164, 114 S.Ct. 1439, 128 common-law fraud that happens to involve securities into a L.Ed.2d 119 (1994), based on the language and legislative violation of § 10(b)” and focusing on the broker's scheme history of the statute, that a private plaintiff may not bring an over a two-year period during which he made a number aiding and abetting claim under § 10(b) and Rule 10b–5. 22 of transactions and converted the proceeds of the sales of The high court construed the general anti-fraud provision as his clients' securities to his own use, the Supreme Court prohibiting only the making of a material misstatement or a concluded, material omission or the commission of a manipulative act;
therefore it does not prohibit giving aid to another, who then The securities sales and [the broker's] fraudulent practices commits a primary § 10(b) violation. Id. at 177, 114 S.Ct. were not independent events. This is not a case in which, 1439. It further emphasized that none of the express private after a lawful transaction had been consummated, a broker causes of action in both the Securities Act of 1933 and the decided to steal the proceeds and did so. Nor is it a case 1934 Exchange Act imposes liability on one who aids or abets in which a thief simply invested the proceeds of a routine such primary violators. Id. at 179, 184, 114 S.Ct. 1439. Thus conversion in the stock market. Rather respondent's fraud it reasoned, “[t]here is no reason to think that Congress would coincided with the sales themselves. have attached aiding and abetting liability only to § 10(b) and not to any of the express private rights of action in the Act.”
Taking the allegations in the complaint as true, each sale Id. at 180, 114 S.Ct. 1439,citing Blue Chip Stamps v. Manor was made to further respondent's fraudulent scheme; each Drug Stores, 421 U.S. 723, 736, 95 S.Ct. 1917, 44 L.Ed.2d was deceptive because it was neither authorized by, nor 539 (1975)(it would be “anomalous to impute to Congress disclosed to, the [clients].... In the aggregate, the sales are an intention to expand the plaintiff class for a judicially properly viewed as a “course of business” that operated as implied cause of action beyond the bounds it delineated for a fraud or deceit on a stockbroker's customer.....
comparable express causes of action.”). The court rejected as The fact that [the broker] misappropriated the proceeds of implausible the argument that silence in the statute constituted the sales provides persuasive evidence that he had violated an “implicit congressional intent to impose § 10(b) aiding § 10(b) when he made the sales, but misappropriation is not and abetting liability.” Id. Furthermore, the Supreme Court an essential element of the offense.... It is enough that the pointed out that the critical element for recovery under Rule scheme to defraud and the sale of the securities coincide. 10b–5, reliance, would be eliminated if liability were imposed for aiding and abetting. Id. at 180, 114 S.Ct. 1439 (“Were Id. at 1903–04. The high court found that this type of we to allow the aiding and abetting action proposed in this fraud, based on silence, “represents an even greater threat to case, the defendant could be liable without any showing that investor confidence in the securities industry” than merely an the plaintiff relied upon the aider and abettor's statements affirmative misrepresentation, in view of the fiduciary duty or actions.”). Nor did it find that anything in the legislative owed by a broker to a client with a discretionary account history “even implies that aiding and abetting was covered and the fact that this relationship of trust and confidence by the statutory prohibition on manipulative and deceptive therefore gives rise to a duty to disclose. Id. at 1905. The conduct.” Id. at 183, 114 S.Ct. 1439. 23 Supreme Court concluded that because the broker “sold the [clients'] securities while secretly intending from the very Nevertheless, the Supreme Court did not conclude that beginning to keep the proceeds” and deprive the clients of that secondary actors such as lawyers, accountants, banks, and benefit, the “SEC complaint describes a fraudulent scheme underwriters were therefore always shielded from § 10(b) and in which the securities transactions and breaches of fiduciary Rule 10b–5 liability:
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be a primary violator, since the plaintiffs had not alleged such Because the text of § 10(b) does a claim. not prohibit aiding and abetting, we hold that a private plaintiff may not In sum, the Supreme Court left it to the lower courts to maintain an aiding and abetting suit determine when the conduct of a secondary actor makes it a under § 10(b). The absence of § primary violator under the statute. In the aftermath of Central 10(b) aiding and abetting liability Bank, two divergent standards, the “bright line” test and the does not mean that secondary actors “substantial participation” test, have emerged. in securities markets are always free from liability under the securities Under the “bright line” test, in order for the conduct of a Act. Any person or entity, including secondary actor to rise to the level of a primary violation, the a lawyer, accountant, or bank, who secondary actor must not only make a material misstatement employs a manipulative device or or omission, but “the misrepresentation must be attributed to makes a material misstatement (or the specific actor at the time of public dissemination,” i.e., in omission) on which a purchaser or advance of the investment decision, so as not to undermine seller of securities relies may be liable the element of reliance required for § 10(b) liability. Wright as a primary violator under 10b–5, v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir.1998), assuming all of the requirements for cert. denied,525 U.S. 1104, 119 S.Ct. 870, 142 L.Ed.2d 772 primary liability under Rule 10b–5 (1999); see also Shapiro v. Cantor, 123 F.3d 717, 720 (2d are met. .... In any complex securities Cir.1997)(“ ‘If Central Bank is to have any real meaning, a fraud, moreover, there are likely to be defendant must actually make a false or misleading statement multiple violators.... in order to be held liable under Section 10(b). Anything short of such conduct is merely aiding and abetting, and Id. at 191, 114 S.Ct. 1439.
no matter how substantial that aid may be it is not enough to trigger liability under Section 10(b).’ ”)(quoting In re Furthermore, in Central Bank the defendant bank was the MTC Electronic Technologies Shareholders Litigation, 898 indenture trustee for $26 million in bonds issued by a public F.Supp. 974, 987 (E.D.N.Y.1995)). For example, according building authority, some in 1986 and more *583 in 1988.
to the investor-plaintiffs' complaint in Wright, 152 F.3d The bonds were secured by landowner assessment liens and 169, Ernst & Young LLP, an outside auditor for BT Office contained covenants requiring that the subject land had to Products, Inc. (“BT”), violated § 10(b) by privately and be worth at least 160% of the bonds' outstanding principal orally approving false and misleading financial statements and interest and that the developer had to give the defendant that the auditor knew would be passed on to investors. BT bank an annual appraisal showing that the value of the subsequently made these statements public during a press land met this requirement. Even though the developer did release, but represented that the information was unaudited so in 1998, the bank learned through the underwriter that and did not mention Ernst & Young. The district court granted the appraisal was questionable and that the value of the the accounting firm's motion to dismiss based on Central property securing the 1996 bonds may have declined, a fact Bank's rejection of aiding and abetting liability. On appeal, confirmed by the bank's own in-house appraiser. Nevertheless the Second Circuit affirmed, finding that a contrary result the bank continued working with the developer and delayed would in effect “revive aiding and abetting liability under a obtaining an independent review of the developer's valuation different name, and would therefore run afoul of the Supreme of the land while the bank issued more bonds in 1988.
Court's holding in Central Bank.” Id. at 175. It also required Subsequently the building authority defaulted on the bonds that the defendant, to be liable, must have known or should and the bond purchasers did not only sue the authority, the have known that his representation would be disseminated bonds' underwriters, and the land developer, but they also to investors, although the defendant need not communicate sued the bank, but only as “secondarily liable under § 10(b)
the misrepresentation directly to them. Wright, 152 F.3d at for its conduct in aiding and abetting the [other defendants']
175,citing *584 Anixter v. Home–Stake Production Co., 77 fraud.” 511 U.S. at 164, 114 S.Ct. 1439. The high court F.3d 1215, 1226 (10th Cir.1996). The Second Circuit noted examined only the aiding and abetting claim pled against the that because in BT's press release BT did not mention Ernst bank and did not address the question whether the bank might
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& Young, nor Ernst & Young's private prior approval of the by statement or omission, made by the defendant, that is relied statements made in the press release by BT, the auditor upon by the plaintiff,” states,
neither directly nor indirectly communicated Clearly, accountants may make representations in their role misrepresentations to investors. Therefore, the amended as auditor to a firm selling securities. See, e.g., Herman & complaint failed to allege that Ernst & Young made “a MacLean v. Huddleston, 459 U.S. 375, 103 S.Ct. 683, 74 material misstatement (or omission) on which a purchaser L.Ed.2d 548 (1983)(defendant accountant found primarily or seller of securities relie[d].” Moreover ... because the liable for violating § 10(b) based on representations press release contained a clear and express warning that no filed with the SEC). Typical representations include audit had yet been completed, there is no basis for Wright certifications of financial statements and opinion letters. to claim that Ernst & Young had endorsed the accuracy of See DiLeo v. Ernst & Young, 901 F.2d 624, 628 those results. (7th Cir.), cert. denied,498 U.S. 941, 111 S.Ct. 347, 112 L.Ed.2d 312 (1990). An accountant's false and 152 F.3d at 175. The Second Circuit has found that words misleading representations in connection with the sale such as “assisting,” “participating in,” “complicity in,” and of any security, if made with the proper state of mind synonyms employed throughout a complaint, “all fall within and if relied upon by those purchasing or selling a the prohibitive bar of Central Bank.” Shapiro, 123 F.3d at security, can constitute a primary violation. Central Bank 720. of Denver, 511 U.S. at 190–91, 114 S.Ct. at 1455; ...
There is no requirement that the alleged violator directly Other cases applying the “bright line” test include In re communicate misrepresentations to plaintiffs for primary Kendall Square Research Corporation Securities Litigation, liability to attach.... Nevertheless, for an accountant's 868 F.Supp. 26, 28 (D.Mass.1994)(accounting firm's “review misrepresentation to be actionable *585 as a primary and approval” of financial statements and prospectus were violation, there must be a showing that he knew or not sufficient to impose liability on it under § 10(b)); should have known that his representation would be Vosgerichian v. Commodore International, 862 F.Supp. communicated to investors because § 10(b) and Rule 10b– 1371, 1378 (E.D.Pa.1994)(the accountant's advice to and 5 focus on fraud made “in connection with the sale or guidance of a client, who then made allegedly false purchase” of a security. and misleading statements, were not enough to impose primary liability on accountant); Anixter, 77 F.3d at 1223– Id. at 1225. 1227 & nn. 7–12;Ziemba v. Cascade Intern'l, Inc., 256 F.3d 1194, 1205, 1207 (11th Cir.2001)(“[I]n order for [a The less stringent “substantial participation” test provides secondary actor, such as a law firm or an accounting for primary liability where there is “substantial participation firm,] to be primarily liable under § 10(b) and Rule 10b– or intricate involvement” of the secondary party in the 5, the alleged misstatement or omission upon which a preparation of fraudulent statements “even though that plaintiff relied must have been publicly attributable to the participation might not lead to the actor's actual making of the defendant at the time that the plaintiff's investment decision statements.” Howard v. Everex Systems, Inc., 228 F.3d 1057, was made”; for an omission there must be a duty to 1061 n. 5 (9th Cir.2000). disclose as determined by a multi-factor test); In re Kendall Square Research Corp. Securities Litigation, 868 F.Supp. 26 Cases applying the “substantial participation” rule include (D.Mass.1994)(accountant's review and approval of false or In re Software Toolworks, 50 F.3d 615, 628 n. 3, 629 misleading financial statements does not support imposition (9th Cir.1994)(accountant may become a primary violator of primary liability). under antifraud provision of § 10(b) where it reviews and plays a “significant role in drafting and editing”
Unlike the Second Circuit, the Tenth Circuit does not require two letters, one not identifying the accounting firm, sent attribution of the alleged misrepresentation to the secondary by the issuer client to the SEC; a reasonable factfinder actor at the time of the statement's dissemination to the public. could find that the accountants “as members of the For instance, the Tenth Circuit in Anixter, emphasizing that drafting group, ... had access to all information that was “[t]he critical element separating primary from aiding and available and deliberately chose to conceal the truth”), cert. abetting violations is the existence of a representation, either denied sub nom. Montgomery Securities v. Dannenberg, 516 U.S. 907, 116 S.Ct. 274, 133 L.Ed.2d 195 (1995);
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In re ZZZZ Best Securities Litigation, 864 F.Supp. 960, (3d Cir.1998), rehearing en banc granted, judgment vacated 970 (C.D.Cal.1994)(where accounting firm was “intricately (Mar. 9, 1998). 24 As framed by the SEC, the issue is, involved” in the creation of false and misleading documents and the “resulting deception,” it may be liable as a primary violator of § 10(b)); Cashman v. Coopers & Lybrand, 877 [i]s a person who makes a material misrepresentation, F.Supp. 425, 432–34 (N.D.Ill.1995)(primary liability may while acting with the requisite scienter, but who does not be established against accountants “centrally involved” in himself disseminate the misrepresentation to investors, and preparation of alleged false or misstated information for whose name is not made known to them, only an aider and prospectuses or promotional material issued to investors that abettor of the fraud, or is that person a primary violator the accounting firm certified, audited, prepared or reported.); subject to liability [under § 10(b) ]? McNamara v. Bre–X Minerals Ltd., 57 F.Supp.2d 396, 426 Brief at 5. More specifically, the issue is whether the (E.D.Tex.1999)(“if a defendant played a ‘significant role’ phrase, “makes a material misstatement (or omission),” in in preparing a false statement actually uttered by another, Rule 10b–5 “means that a law firm or other secondary actor primary liability will lie”). can be primarily liable for a misrepresentation only if it signs the document containing the misrepresentation or is A number of courts have criticized the substantial otherwise identified to investors,” in other words, does not participation test as inconsistent with Central Bank's disclose its identity to investors. The SEC argues that such prohibition of aiding and abetting liability under § 10(b). a person is a primary violator under § 10(b), and in doing See, e.g., Anixter, 77 F.3d at 1226 n. 10 (“To the extent so, attacks the “bright line” test as an improper reading of that these cases allow liability to attach without requiring Central Bank. a representation be made by defendant and reformulate First, the SEC highlights the fact that the Supreme Court's use the ‘substantial assistance’ element of aiding and abetting of the word, “makes,” 25 in Central Bank does not mandate liability into primary liability, they do not comport with *587 that an allegedly material misstatement be signed by or Central Bank of Denver.”). Nevertheless the Court notes that attributed to the secondary party so that the secondary party this criticism typically issued before Zandford, which made is identified to investors. Brief at 13–14. The statute only crystal clear that a misrepresentation need not be involved and makes it unlawful “for any person, directly or indirectly ... that a suit could be based on Rule 10b–5(a) or (c). [t]o use or employ ... any manipulative deceptive device or contrivance” and the interpretation of “makes” must be This Court recognizes that without a clearer definition and consistent with that “directly or indirectly” language.Id. at a narrowing of the kind of conduct and circumstances 10, 20. The SEC proposes “creates,” as opposed to the bright required to constitute “substantial participation” or “intricate line test's interpretation, “signs,” as the appropriate synonym involvement,” the substantial participation test may fail for the term, “makes,” in Central Bank; the SEC contends to differentiate between primary liability and aiding and that “[a] person who creates a misrepresentation 26 but takes abetting, or even unrestricted conspiracy, and that the area care not to be identified publicly with it, ‘indirectly’ uses of overlap may be significant under such an expansive test.
or employs a deceptive device or contrivance and should be Until or unless Congress addresses the question that definition liable” under § 10(b). Id. at 14. The SEC argues that the bright appears to be the task of the courts.
line test's requirement of identification of the misrepresenter to investors at the time of dissemination [34] The SEC, in the role of amicus curiae, has filed a brief in this action that warrants consideration because it addresses the reasons why the bright-line test misses the mark. Brief would have the unfortunate and unwarranted consequence attached to the SEC's motion for leave, as amicus curiae, to of providing a safe harbor from liability for everyone submit briefs (instrument # 821). The majority of its pleading except those identified with the misrepresentations by is a submission filed on behalf of the plaintiffs in a case name. Creators of misrepresentations could escape liability that was pending in the Third Circuit, but *586 which was as long as they concealed their identities. Not only outside settled before that appellate court could review the issue en lawyers would benefit from such a rule; others who banc. Klein v, Boyd, 949 F.Supp. 280 (E.D.Pa.1996), aff'd, are retained to prepare information for dissemination to –––– F.3d ––––, 1998 WL 55245, Fed. Sec. L. Rep. P 90,136 investors, including accountants and public relations firms, could immunize themselves by remaining anonymous.
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Indeed, in-house counsel and other corporate officials plaintiff must plead and prove the elements of scienter and and employees could avoid liability for misrepresentations reliance. they created, as long as their identities were not made known to the public. In sum, by providing a safe harbor [35] Because § 10(b) expressly delegated rule-making for anonymous creators of misrepresentations, a rule that authority to the agency, 28 which it exercised inter imposes liability only when a person is identified with a alia in promulgating Rule 10b–5, this Court accords misrepresentation would place a premium on concealment considerable weight to the SEC's construction of the statute and subterfuge rather than on compliance with the federal since the Court finds that construction is not arbitrary, securities laws. capricious or manifestly contrary to the statute. Bragdon v. Id. The SEC maintains that “[t]he Supreme Court did not Abbott, 524 U.S. 624, 642, 118 S.Ct. 2196, 141 L.Ed.2d set forth a bright line rule for liability, much less one that 540 (1998)(“[T]he well-reasoned views of the agencies turns on whether the identity of a defendant is disclosed.” implementing a statute constitute a body of experience Id. at 15. Moreover, under the SEC's construction of and informed judgment to which courts and litigants may the statute, third-party defendants are still substantially properly resort for guidance”); Chevron, U.S.A., Inc. v. protected from frivolous suits by the scienter requirement. Natural Resources Defense Council, 467 U.S. 837, 842–44, Id. at 16. As for the element of reliance, the SEC insists that 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984)(“considerable weight should be accorded to an executive department's construction [t]he reliance a plaintiff in a securities fraud action must of a statutory scheme it is entrusted to administer, and plead is reliance on a misrepresentation, not on the the principle of deference to administrative interpretations fact that a particular person made the misrepresentation.
‘has been consistently followed by this Court whenever a The Supreme Court stated in Central Bank that liability decision as to the meaning or reach of a statute has involved exists where “[a]ny person or entity, including a lawyer, reconciling conflicting policies ...’ ” if that construction is accountant, or bank ... makes a material misstatement (or reasonable); United States v. Mead Corp., 533 U.S. 218, 226– omission) on which a purchaser or seller of securities relies.” ... Thus the Court placed the focus on the 27, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001) 29 ; *589 SEC v. misrepresentation, not on the fact that a particular person Zandford, 535 U.S. 813, 122 S.Ct. 1899, 1903, 153 L.Ed.2d made it. 1 (2002)(“[The agency's] interpretation of the ambiguous text of § 10(b), in the context of formal adjudication, is entitled to *588 Id. at 17, citing Central Bank, 511 U.S. at 191, 114 deference if it is reasonable,” citing Mead, 533 U.S. at 229– S.Ct. 1439. 27 30, 121 S.Ct. 2164). The SEC proposes instead the following rule for primary liability of a secondary party under § 10(b): “when a person, Furthermore, this Court concludes that not only material acting alone or with others, creates a misrepresentation [on misrepresentations, but also the statute's imposition of which the investor-plaintiffs relied], the person can be liable liability on “any person” that “directly or indirectly” as a primary violator ... if ... he acts with the requisite uses or employs “any manipulative or deceptive device scienter.” Brief at 18. “Moreover it would not be necessary or contrivance” in connection with the purchase or sale for a person to be the initiator of a misrepresentation in of security should be “construed ‘not technically and order to be a primary violator. Provided that a plaintiff restrictively, but flexibly to effectuate its remedial purposes.’ can plead and prove scienter, a person can be a primary ” 30 15 U.S.C. § 78(j)(b); Affiliated Ute Citizens of Utah v. violator if he or she writes misrepresentations for inclusion United States, 406 U.S. at 151, 92 S.Ct. 1456,quoting SEC in a document to be given to investors, even if the idea v. Capital Gains Research Bureau, Inc., 375 U.S. at 195, 84 for those misrepresentations came from someone else.” S.Ct. 275;Zandford, 122 S.Ct. at 1903. 31 Id. Furthermore, “a person who prepares a truthful and complete portion of a document would not be liable as *590 This Court finds that the SEC's approach to a primary violator for misrepresentations in other portions liability under § 10(b) and Rule 10b–5(b) is well of the document. Even assuming such a person knew of reasoned and reasonable, balanced in its concern for misrepresentations elsewhere in the document and thus had protection for victimized investors as well as for meritlessly the requisite scienter, he or she would not have created harassed defendants (including *591 businesses, law firms, those misrepresentations.”Id. at p. 19. Finally, of course, the accountants and underwriters), in addition to the policies
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underlying the statutory private right of action for defrauded Thus whether or not the word “conspire” is used, to survive investors and the PSLRA. Moreover, it is consistent with a motion to dismiss, a complaint alleging that more than one the language of § 10b(b), Rule 10b–5, and Central Bank. defendant participated in a “scheme” to defraud must allege Therefore since the SEC's proposed test is a reasonable a primary violation of § 10(b) by each defendant. interpretation of the text of the statute and serves its underlying policies, the Court adopts and applies it in this For example, in SEC v. U.S. Environmental, Inc., 155 F.3d litigation to claims under § 10(b) and Rule 10b–5(b). 107 (2d Cir.1998), cert denied,526 U.S. 1111, 119 S.Ct. 1755, 143 L.Ed.2d 787 (1999), the Second Circuit held that the [36] Central Bank's holding (that there is no cause of SEC had successfully pled a primary violation of § 10(b) action for aiding and abetting under § 10(b) and that “all (“the making of a material misstatement (or omission) or requirements for primary liability under Rule 10b–5” must commission of a manipulative act”) by a secondary actor, be satisfied), 511 U.S. at 191, 114 S.Ct. 1439, affects i.e., an employee, John Romano, of a securities brokerpleading standards where the plaintiffs allege that a group of dealer, Castle Securities Corporation (“Castle”). *592 defendants participated in a scheme or a course of business Castle allegedly had agreed to participate in a scheme with to defraud investors under § 10(b) and Rule 10b–5. It is other entities to manipulate upward the price of stock of U.S. generally agreed that Central Bank foreclosed a cause of Environmental, Inc. The complaint asserted that the employee action merely for conspiracy to violate § 10(b) and Rule 10b– had knowingly and recklessly participated in and furthered 5, in addition to aiding and abetting. See, e.g., Dinsmore v. the market manipulation in following a stock promoter's Squardron, Ellenoff, Plesent, Sheinfeld & Sorkin, 135 F.3d directions to execute stock trades that the employee knew, 837, 841 (2d Cir.1998)(and cases cited therein) 32 ; In re or was reckless in not knowing, were manipulative. In that GlenFed, Inc. Sec. Litig., 60 F.3d 591, 592 (9th Cir.1995); litigation the district court had dismissed the complaint In re Gupta Corp. Sec. Litig., 900 F.Supp. 1217, 1243–44 because it had concluded that the employee was only an (N.D.Cal.1994)(dismissing scheme claims as recharacterized aider and abettor because he merely “followed directions ... conspiracy claims); Stack v. Lobo, 1995 WL 241448 *10 and ‘did not, himself make wash sales, match orders, or (N.D.Cal. Apr.20, 1995)(noting that in civil cases, conspiracy use undisclosed nominees to artificially affect the price is a theory of liability available only after a completed tort of securities' ” and “did not share the promoter's ultimate exists, so where there is no primary violation pled under § ‘manipulative ... purpose.’ ” 155 F.3d at 110. The Second 10(b) and Rule 10b–5, any secondary conspiracy claims must Circuit disagreed. Noting that scienter was a separate issue fail as well). Nevertheless, “Central Bank does not preclude and not relevant to the Supreme Court's holding in Central liability based on allegations that a group of defendants Bank that aiders and abettors cannot be primary violators acted together to violate the securities laws, as long as under § 10(b), the Second Circuit focused on the complaint's each defendant committed a manipulative or deceptive act in allegations about the nature of the employee's own acts, furtherance of the scheme.” Cooper v. Pickett, 137 F.3d 616, not his state of mind when he performed them. Id. at 624 (9th Cir.1997). Cooper relied on a key passage in Central 111. The SEC claimed that the employee “ ‘participated Bank, 511 U.S. at 191, 114 S.Ct. 1439: in the fraudulent scheme,’ ” by “effecting the very buy and sell orders that artificially manipulated USE's stock price upward,” i.e. by “commi[tting] a manipulative act.”
The absence of § 10(b) aiding and abetting liability does Id. at 112. The appellate court observed, “Indeed, if the not mean that secondary actors in the securities markets trader who executes manipulative buy and sell orders is are always free from liability under the securities Acts. not a primary violator, it is difficult to imagine who would Any person or entity, including a lawyer, accountant, or remain liable after Central Bank.” Id. It further found “of bank, who employs a manipulative device or makes a no relevance that [the stock promoter] masterminded the material misstatement (or omission) on which a purchaser USE stock manipulation and that the ‘stock promoter's' group or seller of securities relies may be liable as a primary ‘directed’ [the employee] to effect the illegal trades.” Id. The violator under 10b–5, assuming all of the requirements for Second Circuit emphasized, primary liability under Rule 10b–5 are met. In any complex securities fraud, moreover, there are likely to be multiple Like lawyers, accountants, and banks violators.... who engage in fraudulent or deceptive practices at their clients' direction, Romano is a primary violator despite
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the fact that someone else directed U.S.C. § 78u–4(f). This express scheme for damages liability the market manipulation scheme. The seems incompatible with Lead Plaintiff's argument that a Supreme Court in Central Bank participant is liable for damages caused by all participants, never intended to restrict § 10(b) known or unknown, in the scheme. liability to supervisors or directors of securities fraud schemes while Since the passage of the PSLRA with its procedural hurdles excluding from liability subordinates and stringent pleading standards to eliminate strike suits, who also violated the securities law. this country has been overwhelmed with corporate scandals In sum, the complaint alleges that that place Congress' goal in enacting the PSLRA in a much Romano is primarily liable under § wider perspective. Given the usual recent judicial focus on 10(b) and Rule 10b–5 for manipulation dismissing frivolous suits under the PSLRA, Judge Robert M. of USE stock. Parker provided balance in his concurrence in Abrams, 292 F.3d at 435–36, Id.
History reminds us of the Thus secondary actors may be liable for primary violations consequences when financial under an alleged scheme to defraud if all the requirements statements of publicly held companies for liability under Rule 10b–5 have been satisfied as to each do not accord with reality. Indeed it secondary-actor defendant and any additional heightened was to protect against them that our pleading requirements have been met. Id. If a plaintiff meets nation's securities laws were enacted. the requirements of pleading primary liability as to each At the same time we must pay heed defendant, i.e., alleges with factual specificity (1) that each to a different set of consequences— defendant made a material misstatement (or omission) or those brought about by the overzealous committed a manipulative or deceptive act in furtherance of prosecution of specious securities the alleged scheme to defraud, (2) scienter, and (3) reliance, fraud actions. Congress, in passing the that plaintiff can plead a scheme to defraud and still satisfy Private Securities Litigation Reform Central Bank. See, e.g., Cooper v. Pickett, 137 F.3d 616 Act of 1995, took pains to deter (9th Cir.1997); Dinsmore, 135 F.3d at 842 (“We simply such strike suits. Its findings and hold that where the requirements for primary liability are legislative history suggest that the cost not independently met, they may not be satisfied based of protecting against fraud was unduly solely on one's participation in a conspiracy in which other impairing the efficient operation parties have committed a primary violation”; “secondary of lawful business. Today, when actors who conspire to commit ... violations will still be applying the PSLRA, courts must keep subject to liability so long as they independently satisfy this policy consideration foremost in requirements for private liability.”); Pegasus Holdings v. mind. But we must also recognize that Veterinary Centers of America, Inc., 38 F.Supp.2d 1158, Congress left unaffected shareholders' 1163–65 (C.D.Cal.1998). right to sue for recompense when they are made the victims of self-
Lead Plaintiff, using older cases, argues that a defendant that dealing and deceit. The PSLRA is a participates in a *593 scheme to defraud is liable for the mechanism for winnowing out suits damages caused by all the other acts taken by participants in that lack a requisite level of specificity. a scheme in furtherance of the fraud. In addition to requiring It was not meant to let business that each participant be a primary violator of the act by and management run amuck to the itself making a material misrepresentation or omission or detriment of shareholders. using a deceptive device or contrivance to defraud investors, this Court notes that under § 10(b), the PSLRA provides The PSLRA's significance as a protective shield for business for joint and several liability only if the defendant is found must be viewed within the context of the private right of to have knowingly committed the fraud, and otherwise the action, granted decades before, to defrauded investors injured defendant, if only reckless, is liable only for the percentage of by corporate management, auditors, outside counsel, and his responsibility for the fraud, i.e., proportionate liability. 15
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investment bankers where their conduct allegedly violated the control liability may assert a defense that he acted in good federal securities laws. The Supreme Court has repeatedly faith with respect to the securities violation, i.e., that he acted emphasized the deterrent value of those private rights of reasonably and did not act recklessly. A defendant can meet action, which “provide ‘a most effective weapon in the the requirements of a good faith defense by showing that he enforcement’ of the securities laws and are a ‘necessary used reasonable care to prevent the securities violation. G.A. supplement to Commission action.’ ” J.I. Case Co. v. Borak, Thompson & Co. v. Partridge, 636 F.2d 945, 957–58, 960 377 U.S. 426, 432, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). (5th Cir.1981); Donohoe v. Consolidated Operating & Prod. See also Blue Chip Stamps v. Manor Drug Stores, 421 Corp., 30 F.3d 907, 912 (7th Cir.1994). Negligence alone is U.S. 723, 729–30, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975); insufficient to support controlling person liability. Id. Randall v. Loftsgaarden, 478 U.S. 647, 664, 106 S.Ct. 3143, 92 L.Ed.2d 525 (1986). Indeed, in adopting the PSLRA, Although worded in different ways, the controlperson Congress emphasized that “[p]rivate securities litigation is liability provisions of § 15 of the 1933 Securities Act and an indispensable tool with which defrauded investors can § 20(a) of the 1934 Exchange Act are interpreted the same recover their losses” and that private lawsuits “promote public way. Pharo v. Smith, 621 F.2d 656, 672,on rehearing in and global confidence in our capital markets and help to deter part,625 F.2d 1226 (5th Cir.1980); First Interstate Bank v.
wrongdoing and to guarantee that corporate officers, auditors, Pring, 969 F.2d 891, 897 (10th Cir.1992), rev'd on other directors, lawyers and others properly perform their jobs.” grounds,511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 Joint Explanatory Statement of the Committee of Conference, (1994). See also Abbott v. Equity Group, Inc., 2 F.3d 613, 619 Conference Report on Securities Litigation Reform, H.R. n. 15 (5th Cir.1993)(“The controlperson sections of both acts Conf. Rep. No. 104–369, at 31 (Nov. 28, 1995), 1995 *594 are interpreted the same, at least with respect to the definition U.S.C.A.A.N. at 730. The importance of this tool has been of ‘controlling person,’ ” citing G.A. Thompson, 636 F.2d highlighted by recent disclosures of extraordinary corporate at 958 & n. 22),cert. denied sub nom. Turnbull v. Home misconduct. 33 Insurance Co., 510 U.S. 1177, 114 S.Ct. 1219, 127 L.Ed.2d 565 (1994). Furthermore, *595 the provision for controlling person liability under the TexasSecuritiesAct, article 581– 2. Controlling Person Liability Under the 1934 Act 33(F), is modeled after and parallel to that for section 15 [37] [38] Section 20(a) of the Exchange Act, 15 U.S.C. of the 1933 Securities Act and section 20 of the 1934 Act. § 78t(a)(liability of controlling persons and those who aid Tex.Rev.Civ. Stat. Ann. art. 581–33 cmt; Frank v. Bear, and abet violations), establishes a derivative liability for Stearns & Co., 11 S.W.3d 380, 383–84 (Tex.App.-Houston persons who “control” those who are primarily liable under [14th Dist.] 2000, review denied); Busse v. Pacific Cattle the Exchange Act. It provides, Feeding Fund # 1, Ltd., 896 S.W.2d 807, 814 (Tex.App.-
Texarkana 1995, writ denied); Marshall v. Quinn–L Equities, Joint and several liability; good faith defense Inc., 704 F.Supp. 1384, 1391 (N.D.Tex.1988). Every person who, directly or indirectly, controls any [39] [40] There is a split among the Circuits as to whether person liable under any provision of this chapter or any in a prima facie case a person must show that the alleged rule or regulation thereunder shall also be liable jointly and controlperson actually exercised control over the primary severally with and to the same extent as such controlled violator's general affairs or merely that the controlperson person to any person to whom such controlled person is had the power to exercise such control. Maher v. Durango liable, unless the controlling person acted in good faith Metals, Inc., 144 F.3d 1302, 1306 n. 8 (10th Cir.1998)(and and did not directly or indirectly induce the act or acts cases cited and discussed therein). The Fifth Circuit has constituting the violation or cause of action.
stated that a plaintiff need only show that the alleged liability is an alternate ground for liability from that of a controlpersons possessed “the power to control [the primary primary violation. Thus a plaintiff may allege a primary violator], not the exercise of the power to control.” G.A. § 10(b) violation by a person controlled by the defendant Thompson, 636 F.2d at 958 (rejecting as a requirement for and culpable participation by the same defendant in the a prima facie case an allegation that the controlling person perpetration of the fraud. SEC v. First Jersey Sec., Inc., 101 actually participated in the underlying primary violation); F.3d 1450, 1472 (2d Cir.1996), cert. denied,522 U.S. 812, Abbott v. Equity Group, Inc., 2 F.3d at 620. Nevertheless, 118 S.Ct. 57, 139 L.Ed.2d 21 (1997). A person charged with a plaintiff needs to allege some facts beyond a defendant's
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position or title that show that the defendant had actual or valuation which is used in connection with the power or control over the controlled person. Dennis v. registration statement, with respect to the statement in General Imaging, Inc., 918 F.2d 496, 509–10 (5th Cir.1990); such registration statement, report, or valuation, which Kunzweiler v. Zero.Net, Inc., No. CIV. A. 3:00–CV–2553– purports to have been prepared or certified by him; [and] P, 2002 WL 1461732, *13–14 (N.D.Tex. July 3, 2002). Furthermore, controlperson liability is derivative; a failure (5) every underwriter with respect to such security. to plead a primary, independent violation by the controlled Under § 77k(f), such individuals are jointly and severally person § 10(b) and Rule 10b–5 precludes such a claim for liable.
secondary liability against the controlling person under § 20(a) of the Exchange Act, or, a violation of §§ 11 or 12 for To prevail on a claim under § 11, a plaintiff must controlperson liability under section 15 of the Securities Act show “(1) that the registration statement contained an of 1933. 15 U.S.C. §§ 78j(b), 78t(a); 15 U.S.C. § 77o; ABC omission or misrepresentation and (2) that the omission or Arbitrage, 291 F.3d at 348 n. 57, 362 n. 123. 34 misrepresentation was material, that it would have misled a reasonable investor about the nature of his or her investment.” Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir.1994), cert.
*596 3. Section 11 of the Securities Act of 1933 denied,516 U.S. 810, 116 S.Ct. 58, 133 L.Ed.2d 21 (1995);
Section 11, 15 U.S.C. § 77k(a), creates a private remedy Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1445 (5th for anyone who purchases a security based on a materially Cir.1993).
misleading registration statement at the time it became effective against the issuer of the securities, the issuer's [41] A plaintiff generally is not required to demonstrate directors or partners, the underwriters of the offering, and scienter under § 11, and a defendant will be liable for innocent accountants named as preparers or certifiers of the registration or negligent material misrepresentations. Id. Where claims statement. Section 11(a)(1–5) states in relevant part, under Sections 11 and 12 of the Securities Act are grounded in (a) Persons possessing cause of action; persons liable negligence rather than fraud, there is no scienter requirement and it need only satisfy the liberal pleading requirements of In case any part of the registration statement, when such Fed. R. of Civ. P. 8. See, e.g., In re NationsMart Corp. Sec. part became effective, contained an untrue statement of a Litig., 130 F.3d 309, 314–16 (8th Cir.1997)(“the particularity material fact or omitted to state a material fact required requirement of Rule 9(b) does not apply to claims under § to be stated therein or necessary to make the statements 11 of the Securities Act because proof of fraud or mistake therein not misleading, any person acquiring such security is not a prerequisite to establishing liability under § 11”), (unless it is proved that at the time of such acquisition he cert. denied,524 U.S. 927, 118 S.Ct. 2321, 141 L.Ed.2d knew of such untruth or omission) may, in any court of 696 (1998); Steiner v. Southmark Corp., 734 F.Supp. 269, competent jurisdiction, sue— 277 (“Section 11 violations need not, however, be pleaded with the specificity required of fraud claims governed by (1) every person who signed the registration statement; Rule 9(b)”), clarified on other grounds,739 F.Supp. 1087 (N.D.Tex.1990); *597 Degulis v. LXR Biotechnology, Inc., (2) every person who was a director of (or person 928 F.Supp. 1301, 1310 (S.D.N.Y.1996)(Rule 9(b) does not performing similar functions) or partner in the issuer apply to Sections 11 and 12(2) of the Securities Act of 1933 at the time of the filing of the part of the registration because proof of scienter is not required).
statement with respect to which his liability is asserted;
(3) every person who, with his consent, is named in the Nevertheless, where § 11 claims actually sound in fraud registration statement as being or about to become a rather than negligence, the plaintiff is required to plead the director, person performing similar functions, or partner; circumstances constituting the alleged fraud with particularity satisfying Rule 9(b). Melder v. Morris, 27 F.3d 1097, 1100 (4) every accountant, engineer, or appraiser, or any person n. 6 (5th Cir.1994); 35 In re Stac Electronics Sec. Litig., 89 whose profession gives authority to a statement made F.3d 1399, 1405 & n. 3 (9th Cir.1996), cert. denied sub by him, who has with his consent been named as nom. Anderson v. Clow, 520 U.S. 1103, 117 S.Ct. 1105, 137 having prepared or certified any part of the registration L.Ed.2d 308 (1997). The Fifth Circuit subsequently limited statement, or as having prepared or certified any report the holding of Melder and made clear that where a complaint
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does not allege that the defendants are liable for fraudulent extent as such controlled person to or intentional conduct, especially where it disavows and any person to whom such controlled disclaims any allegations of fraud in its strict liability 1933 person is liable, unless the controlling Securities Act claims, its claims do not “sound in fraud” *598 person had no knowledge of and they cannot be dismissed for failure to satisfy Rule 9(b) or reasonable ground to believe in the if they can state a negligence claim under § 11. Lone Star existence of facts by reason of which Ladies Inv. Club v. Schlotzsky's Inc., 238 F.3d 363, 368 (5th the liability of the controlled person is Cir.2001)(“The proper route is to disregard averments of alleged to exist. fraud not meeting Rule 9(b)'s standard and then ask whether a claim has been stated.”). See also In re Stac Electronics 15 U.S.C. § 77o (West 1997).
Securities Litig., 89 F.3d at 1404–05 and n. 3 36 ; In re [43] To survive a motion to dismiss a claim for controlling NationsMart, 130 F.3d at 315.
person liability under Section 15 of the 1933 Act, Lead Plaintiff must allege (1) an underlying primary violation Section 11 of the 1933 Act provides that liability to be of § 11 by the controlled person, (2) control by the imposed on an issuer, underwriter, and anyone that signs defendant over the controlled person, and (3) particularized a registration statement containing a materially false or facts as to the controlling person's culpable participation misleading statement. All except an issuer may assert certain in (exercising control over) the “fraud perpetrated by the statutory defenses: (1) the person conducted a “reasonable controlled person.” Ellison v. American Image Motor Co., 36 investigation” under § 11(b)(3)(A)(the “due diligence”
F.Supp.2d 628, 637–38 (S.D.N.Y.1999)(applying same test defense); (2) the person relied on the opinion of an expert to 1933 Securities Act Section 15 claims and 1934 Exchange under § 11(b)(3)(B); the person's misconduct did not cause Act Section 20(a) claims, 15 U.S.C. § 78t(a))(“Every person the investors' loss under § 11(e); and the right of contribution who, directly or indirectly, controls any person liable under from more culpable parties under § 11(f).
any provision of this chapter or rule or regulation thereunder shall also be liable jointly and severally with and to the [42] False statements in a registration statement can create same extent as such controlled person to any person to whom liability under both the 1933 and 1934 Acts. Huddleston, 459 such controlled person is liable”); Sanders Confectionery U.S. at 382–83, 103 S.Ct. 683. The remedies are cumulative.
Products, Inc. v. Heller Financial Inc., 973 F.2d 474, 486 Id. at 383, 103 S.Ct. 683.
(6th Cir.1992), cert. denied,506 U.S. 1079, 113 S.Ct. 1046, 122 L.Ed.2d 355 (1993); Metge v. Baehler, 762 F.2d 621, 631 4. Controlling Person Liability Under the 1933 Act (8th Cir.1985), cert. denied,474 U.S. 1057, 106 S.Ct. 798, 88 Title 15 U.S.C. § 77o, Section 15 of the 1933 Securities Act, L.Ed.2d 774 (1986). entitled “Liability of controlling persons,” imposes joint and several liability upon controlling persons for acts committed Because a primary violation of § 11 is a necessary element by those under their control that violate §§ 11 and/or 12. Thus of a § 15 claim, if a plaintiff fails to state a claim for a if a plaintiff fails to state a primary security violation under primary violation, he has also failed to state a claim under Section 77k, the plaintiff also fails to state a claim under § 15. Cooperman v. Individual, Inc., 171 F.3d 43, 52 (1st § 15. Lone Star Ladies Investment Club, 238 F.3d at 369. Cir.1999); SEC v. First Jersey, 101 F.3d at 1472. Specifically § 77o reads, Although whether a defendant is a controlperson is Every person, who, by or through usually a question of fact, dismissal is appropriate where stock ownership, agency, or otherwise, the plaintiff fails to plead any facts from which it can or who, pursuant to or in connection reasonably be inferred that the particular defendant was a with an agreement or understanding controlperson. Maher v. Durango Metals, Inc., 144 F.3d at with one or more other persons by 1306;Sanders, 973 F.2d at 485–86. Control can be established or through stock ownership, agency, by demonstrating that the defendant possessed the power or otherwise, controls any person to direct or cause the direction of the management and liable under sections 77k or 77l of policies of a person through ownership of voting securities, by this title, shall also be liable jointly contract, business relationships, interlocking directors, family and severally with and to the same
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relationships, and the power to influence and control the to answer any allegations in any proceeding about the lawyer's activities of another. Ellison, 36 F.Supp.2d at 638. representation of the client.
Pursuant to ABA Model Rule of Professional Conduct 1.2(d)
C. Professional Conduct/Duty to Nonclient Investors an attorney “shall not counsel a client to engage, or assist a client in, conduct that the lawyer knows is criminal or 1. Attorneys The issue of attorney liability involving a duty to disclose fraudulent ...,” 38 but the attorney may discuss the legal nonmisleading information to nonclients and third parties is consequences of any proposed conduct and help the client a thorny one, complicated by tension between the need to make a good faith effort to determine the application of the provide remedy to parties suffering monetary loss because of law to that proposed conduct. Comment 6 to the rule states, a lawyer's conduct and the attorney-client relationship with its “The fact that a client uses advice in the course of action that attendant confidentiality, loyalty and zealous representation is criminal or fraudulent does not, of itself, make a lawyer requirements and policy concerns. party to the course of action. However, a lawyer may not knowingly assist a client in criminal or fraudulent conduct.
[44] Ethical rules of conduct such as disciplinary rules There is a critical distinction between presenting an analysis do not create corresponding legal duties nor constitute of legal aspects of questionable conduct and recommending standards for imposition of civil liability on lawyers. See, the means by which a crime or fraud might be committed with e.g., Schatz v. Rosenberg, 943 F.2d 485, 492 (4th Cir.1991), impunity.” cert. denied,503 U.S. 936, 112 S.Ct. 1475, 117 L.Ed.2d 619 (1992); Preliminary Statement, Model Code of Professional If the attorney learns that his client is involved in ongoing Responsibility (admonishing that the Code does not attempt criminal or fraudulent acts, under ABA Model Rule 1.16 “to define standards for civil liability of lawyers for (2001), professional conduct”); Section 15 of the Preamble to the (a) Except as stated in paragraph (c), a lawyer shall ...
Texas Disciplinary Rules of Professional Conduct (“These withdraw from the representations of a client if: (1) the rules do not undertake to define standards of civil liability representation will result in violation of the rules of of lawyers for professional conduct. Violation of a rule does professional conduct or other law; ...
not give rise to a private cause of action nor does it create any presumption *599 that a legal duty to a client has (b) except as stated in paragraph (c) a lawyer may withdraw been breached.”). They do, however, reflect public policy from representing a client ... if: (1) the client persists in concerns. See, e.g., Law Offices of Windle Turley v. Giunta, a course of action involving the lawyer's services that the No. 05–91–00776–CV, 1992 WL 57464 (Tex.App.-Dallas lawyer reasonably believes is criminal or fraudulent; (2) the Mar. 23, 1992); Polland & Cook v. Lehmann, 832 S.W.2d client has used the lawyer's services to perpetrate a crime 729, 736 (Tex.App.-Houston [1st Dist.] 1992, writ denied); or fraud; and ... Kuhn, Collins & Rash v. Reynolds, 614 S.W.2d 854, 856 (Tex.App.-Texarkana 1981, writ ref'd n.r.e.). (c) When ordered to do so by a tribunal, a lawyer shall continue representation notwithstanding good cause for ABA Model Rule of Professional Conduct 1.6 (2001) terminating the representation. states, “A lawyer shall not reveal information relating to representation of a client unless the client consents after (d) Upon termination of representation, a lawyer shall consultation,” except that the lawyer may, but does not have take steps to the extent reasonably practicable to protect to, reveal confidential information (1) to the extent that the a client's interests, such as giving reasonable notice to the lawyer reasonably believes is necessary to prevent the client client, allowing time for employment of other counsel, from committing a criminal act which the lawyer believes surrendering papers and property to which the client is is likely to result in imminent death or substantial bodily entitled....
harm, 37 or (2) to establish a claim or defense by the lawyer After withdrawal the lawyer must also refrain from disclosing in a controversy between the lawyer and the client, or to the client's confidences except as allowed under Rule 1.6. establish a defense to a criminal or civil charge against the lawyer based on conduct in which the client was involved, or
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*600 Model Rule 1.07 also bars a lawyer from representing Withdrawal from the representation, a party where there is a substantial risk that the lawyer's therefore, may be required. representation would be materially and adversely affected by the lawyer's or his law firm's own interest. Rule 1.05(c)(7) allows the lawyer to reveal confidential information of the client or former client “[w]hen the lawyer The Texas Rules of Professional Conduct have similar but not has reason to believe it is necessary to do so in order to identical provisions. Under Rule 1.02 of the Texas Rules of prevent the client from committing a criminal or fraudulent Professional Conduct (1990)(emphasis added), act.” Only where “the lawyer has confidential information clearly establishing that a client is likely to commit a criminal ..... or fraudulent act that is likely to result in death or substantial bodily harm to a person,” must he disclose information (c) A lawyer shall not assist or counsel a client to engage in adverse to the client; otherwise his first obligation is to conduct that the lawyer knows is criminal or fraudulent. A try to dissuade the client from continuing is such conduct. lawyer may discuss the legal consequences of any proposed Rule 1.05(e) and Comments 18 and 19. Nevertheless, if the course of conduct with a client and may counsel and client “persists in a course of action involving the lawyer's represent a client in connection with the making of a good services that the lawyer reasonably believes may be criminal faith effort to determine the validity, scope, meaning or or fraudulent” or “the client has used the lawyer's services application of the law. to perpetrate a crime or fraud,” the lawyer must withdraw.
Rule 1.15(b)(2) and (3) and Comment 2. See also Rule 1.15(a)
(d) When a lawyer has confidential information clearly (1) (withdrawal required if “the representation will result in establishing that a client is likely to commit a criminal violation of ... rules of professional conduct or other law....”). or fraudulent act that is likely to result in substantial injury to the financial interests or property of another, the Relevant to Vinson & Elkins' undertaking of the investigation lawyer shall promptly make reasonable efforts under the for Enron in the fall of 2001, Rule 1.06(a)(2) bars a circumstances to dissuade the client from committing the lawyer from representing a client where that representation crime or fraud. “reasonably appears to be or becomes limited ... by the lawyer's or law firm's own interests.” Comment 5 provides in (e) When a lawyer has confidential information clearly relevant part, establishing that the lawyer's client has committed a criminal or fraudulent act in the commission of which the *601 The lawyer's own interests lawyer's services have been used, the lawyer shall make should not be permitted to have an reasonable efforts under the circumstances to persuade the adverse effect on representation of a client to take corrective action. [emphasis added] client.... If the probity of a lawyer's own conduct in a transaction is in Comment 8 to Rule 1.02 states, question, it may be difficult for the When a client's course of action has lawyer to give a client detached already begun and is continuing, the advice.... lawyer's responsibility is especially See also Roger C. Cramton, “Enron and the Corporate delicate. The lawyer may not reveal Lawyer: Professional Responsibility Issues,” 1324 PLI/Corp.
the client's wrongdoing, except as 841, 853 (Aug.2002). According to the Restatement of Law permitted or required by Rule 1.05.
Governing Lawyers § 122(2)(c), a client's consent is not However, the lawyer also must effective “ ‘if, in the circumstances, it is not reasonably avoid furthering the client's unlawful likely that the lawyer will be able to provide adequate purpose, for example, by suggesting representation....’ ” Id.
how it might be concealed. A lawyer may not continue assisting a client The common law regarding attorney liability to nonclients in conduct that the lawyer originally for misstatements that are attributed specifically to him has supposes is legally proper but then been evolving steadily to address increasing concerns about discovers is criminal or fraudulent.
attorney accountability or the lack thereof.
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the custodian for the GNMAs when counsel knew that the [45] The Fifth Circuit has only twice addressed the issue law firm did not have the certificates, but only assignments of an attorney's duty to disclose information accurately to a of interest in the certificates. third party in the context of alleged securities violations. In 1988, the Fifth Circuit, in a suit challenging the accountability As noted earlier in footnote 24 of this memorandum and of an underwriter's counsel for the alleged inaccuracy of order, in Klein v. Boyd, a panel of the Third Circuit Court the underwriter's offering statement to the investing public, of Appeals held that once the law firm “elected to speak” reaffirmed the traditional rule that “lawyers are accountable by creating or participating in the creation of documents it only to their clients for the sufficiency of their legal opinions” knows would be distributed to investors, it could not make because “any significant increase in attorney liability to third material misrepresentations or omit material facts in drafting parties could have a dramatic effect upon our entire system the non-confidential documents.Fed. Sec. L. Rep. (CCH) ¶ of legal ethics,” established to require the attorney to avoid 90,136, 90,323. The law firm's duty did “not arise from a conflicting duties, “remain loyal to the client,” and “keep fiduciary duty to the investors; rather, the duty arose when attorney client confidences.” Abell v. Potomac Ins. Co., 858 the law firm undertook the affirmative act of communicating F.2d 1104, 1124 & nn. 18 and 19(5th Cir.1988), vacated on with investors....” Id. at 90,323–24. 40 Thus the Third Circuit other grounds,492 U.S. 914, 109 S.Ct. 3236, 106 L.Ed.2d 584 panel concluded that although the firm may not have a duty to (1989). The panel observed, “In general, the law recognizes blow the whistle on its client, once it chooses to speak, a law such suits [by third parties] only if the non-client plaintiff firm does have a duty to speak truthfully, to make accurate can prove that the attorney prepared specific legal documents or correct material statements, even where the document does that represent explicitly the legal opinions of the attorney not indicate that the attorney authored it. Id. and at 90,325. preparing them, for the benefit of the plaintiff.” Id. at 1124 The panel did require that the lawyer's “participation in the & n. 20 (noting that this rule, adopted by a growing number statement containing a misrepresentation or omission of a of states, reflects the increasing influence of the Restatement material fact [be] sufficiently significant that the statement (Second) of Torts § 552, discussed infra ). The Fifth Circuit can properly be attributed to the person as its author or codid concede that an attorney who prepared a signed opinion author,” so that it would not fall within the parameter of letter for use by a third party might be liable under Rule 10b– conduct constituting aiding and abetting. Id. 5, but otherwise declined to depart from the traditional rule because it found “no binding authority creating a special rule Similarly, in Rubin v. Schottenstein, Zox & Dunn, 143 F.3d in the field of securities law.” Id. at 1124–25. In 1993 the Fifth 263, 267 (6th Cir.1998), relying on the text of Rule 10b–5 (it Circuit held that even though its opinion in Abell was vacated is unlawful for any person [not excepting lawyers] to “omit to by the Supreme Court as to issues under RICO, the decisions state a material fact necessary in order to make the statements “remains authoritative on the non-RICO issues.” Abbott v. made, in the light of the circumstances under which they The Equity Group, Inc., 2 F.3d at 621 n. 23. were made, not misleading ....”), the Sixth Circuit, sitting en banc, concluded that an attorney for a corporation issuing Nevertheless, in Trust Company of Louisiana v. N.N.P., securities, who agreed to speak directly to two potential 104 F.3d 1478 (5th Cir.1997), which makes only passing investors about the corporation's financial condition as it reference to Abell, 39 the Fifth Circuit concluded that *602 related to the investment, had a duty not to misrepresent the plaintiff, a non-client and the payee of notes (which or omit material facts to those investors. The Sixth Circuit the Court concluded were “securities” within the federal explained, securities law) purportedly secured by the Government National Mortgage Association certificates (“GNMAs”), had Although under Rule 10b–5(b) and its predecessor, “only satisfied all the elements of proof to show that the attorney those individuals who had an affirmative obligation to and his firm owed the payee a duty under Louisiana law for reveal what was allegedly omitted can be held liable as negligent misrepresentation and for the imposition of primary primary participants in the alleged deception [, a] duty to liability under Rule 10b–5 (i.e., that the lawyer knowingly and disclose naturally devolve[s] on those who h[ave] direct with scienter made material misstatements in connection with contacts with ‘the other side.’ ” SEC v. Coffey, 493 F.2d the purchase of a security upon which the plaintiff justifiably 1304, 1315 (6th Cir.1974). “Direct contacts may take relied and suffered injury). Specifically the attorney had many forms. An accountant or lawyer, for instance, who assured the plaintiff that his firm had possession of and was prepares a dishonest statement is a primary participant in
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a violation even though someone else may conduct the that an attorney who knowingly provided materially false personal negotiations with a *603 security purchaser.” Id. or misleading information to investors may be liable as a at 1315 n. 24. “A person undertaking to furnish information primary participant under § 10(b)). which is misleading because of a failure to disclose a material fact is a primary participant.” SEC v. Washington [46] In Texas, it has long been established that a lawyer County Util. Dist., 676 F.2d 218, 223 (6th Cir.1982). may be liable if he knowingly commits a fraudulent act or enters into a conspiracy with his client to defraud a third Id. at 267. 41 It concluded that initially the attorney could person. Poole v. Houston & T.C. Ry. Co., 58 Tex. 134, have remained silent with no affirmative duty to disclose, 138 (1882)(where an attorney acting on behalf of his client but that once he chose to speak and make representations participates in fraudulent activities, his conduct is “foreign on behalf of the issuer, either alone or in participation with to the duties of an attorney”); Likover v. Sunflower Terrace others, he had a duty to be accurate and complete about II, Ltd., 696 S.W.2d 468, 472 (Tex.Civ.App.-Houston [1st material matters and could not hide behind the attorney/ Dist.] 1985, no writ)(“an attorney is liable if he knowingly client privilege. “In sum, while an attorney representing the commits a fraudulent act that injures a third person, or if seller in a securities transaction may not always be under an he knowingly enters into a conspiracy to defraud a third independent duty to volunteer information about the financial person”); Lewis v. American Exploration Co., 4 F.Supp.2d condition of his client, he assumes a duty to provide complete 673, 678 (S.D.Tex.1998); Querner v. Rindfuss, 966 S.W.2d and nonmisleading information with respect to the subjects 661, 666, 670 & n. 1 (Tex.App.-San Antonio 1998, writ on which he undertakes to speak.” 143 F.3d at 268. In dictum, denied). In the instant action, Lead Plaintiff alleges that the appellate court commented, “Admission to the bar, if Enron's lawyers, accountants, and underwriters participated anything, imposes a heightened, not a lessened, requirement together with Enron in a Ponzi scheme to enrich themselves, of probity.” Id. at 270.See also Caiola v. Citibank, N.A., which, in a significant and essential part of the plan, defrauded 295 F.3d 312, 331 (2d Cir.2002)(citing Rubin, 143 F.3d third-party investors in Enron securities to keep funds flowing at 267–68, and concluding that if the plaintiff/investor can into the corporation. prove his allegations, “the lack of an independent duty [of Citibank to disclose its hedging strategy] is not, under such The Restatement (Second) of Torts § 531 (1977) provides, circumstances, a defense to Rule 10b–5 liability because upon “One who makes a fraudulent misrepresentation is subject to choosing to speak, one must speak truthfully about material liability to the person or class of persons whom he intends issues.”). See also Ackerman v. Schwartz, 947 F.2d 841, or has reason to expect to act or to refrain from action 846, 848 (7th Cir.1991)(Easterbrook, J.) 42 (“Federal law in reliance upon the misrepresentation for pecuniary loss requires persons to tell the truth about material facts once suffered by them through their justifiable reliance in the type they commence speaking, but with rare exceptions it does of transaction in which he intends or has reason to expect their not oblige them to start speaking”; “Under Rule 10b–5 ... the conduct to be influenced.” Although Texas has not formally lack of an independent duty does not excuse a material lie. A adopted § 531, which does not require privity, the Texas subject of a tender offer or a merger bid has no duty to issue Supreme Court recently stated that Texas' “jurisprudence, a press release, but if it chooses to speak it must tell the truth which focuses on the defendant's knowledge and intent to about material issues.... Although the *604 lack of duty to induce reliance, is consistent with the Restatement and with investors meant that [attorney] Schwarz had no obligation to the law in other jurisdictions that have considered the issue.” blow the whistle ..., Schwarz cannot evade responsibility to Ernst & Young, L.L.P. v. Pacific Mutual Life Ins. Co., the extent he permitted the promoters to release his letter [to 51 S.W.3d 573, 578 (Tex.2001). The high court observed, agents of the investors].”). “[Texas] fraud jurisprudence has traditionally focused not on whether a misrepresentation is directly transmitted to a This Court notes that the circumstances in Trust Company of known person alleged to be in privity with the fraudfeasor, Louisiana v. N.N.P., 104 F.3d 1478 (5th Cir.1997), in which but on whether the misrepresentation was intended to reach an attorney was found liable for direct misrepresentations to a third person to induce reliance” and pointed out instances a nonclient-prospective investor, fall within the parameters where Texas courts “have held that a misrepresentation made of the Sixth Circuit's en banc rule in Rubin v. Schottenstein. through an intermediary is actionable if it is intended to See also Molecular Technology Corp. v. Valentine, 925 F.2d influence a third person's conduct.” Id. The Texas Supreme 910, 917–18 (6th Cir.1991)(holding under direct contacts test Court further commented, “While it is true that Texas courts
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have not used the words ‘reason to expect’ when discussing that Pacific Mutual had to show that the auditor had direct fraud's intent element, a defendant who acts with knowledge intent to induce Pacific Mutual to rely on Ernst & Young's that a result will follow is considered to intend that result.” audit opinion and that Texas law requires privity to establish Id. at 579, citing Formosa Plastics Corp. v. Presidio Eng'rs fraud. Nevertheless, the high court determined that the & Contractors, Inc., 960 S.W.2d 41, 48–49 (Tex.1998). appeals court had not properly applied the reason-to-expect standard to the summary judgment evidence. Id. at 580.
The facts in Pacific Mutual, summarized at 51 S.W.3d at Finding that “[g]eneral industry practice or knowledge may 575–77, were that in *605 1982 InterFirst Corporation establish a basis for foreseeability to show negligence, but it is issued a series of notes. Subsequently, encountering financial not probative of fraudulent intent,” the Texas Supreme Court problems, InterFirst tried to negotiate a merger with focused on the language of comment d of § 531, stating that RepublicBank, which appeared to be a more profitable bank to show that an asserted “fraudfeasor had reason to expect and had Ernst & Young audit RepublicBank's financial reliance,” statements for the year ending in December 1996. The [t]he maker of the misrepresentation auditor's report gave an unqualified opinion 43 that these must have information that would lead financial statements fairly represented Republic Bank's a reasonable man to conclude that financial situation.
there is an especial likelihood that it will reach those persons and will RepublicBank then incorporated that audit report and the influence their conduct. There must be audited financial statement into the 1996 annual report that something in the situation known to RepublicBank provided to its shareholders and the audited the maker that would lead a reasonable financial statement into its 1996 Form 10–K annual report man to govern his conduct on the filed with the SEC. The merger took place in June 1987, and assumption *606 that this will occur.
RepublicBank contemporaneously offered several securities.
If he has the information, the maker is With InterFirst, Republic Bank issued a Joint Proxy and subject to liability under the rule stated Prospectus requesting their shareholders to vote to approve here. [emphasis added]
the merger, as well as several other prospectuses for other stock and notes that incorporated by reference the Joint 51 S.W.3d at 581. Proxy and Prospectus. All three prospectuses incorporated RepublicBank's 1986 Form 10K. Furthermore Republic During the summary judgment litigation Pacific Mutual Bank incorporated all three prospectuses into the Form S– submitted evidence consisting of affidavits from two experts 3 registration statements that it filed with the SEC. Ernst and an Ernst & Young employee demonstrating, in essence, & Young consented to the inclusion of its audit opinion that Ernst & Young had reason to expect that Pacific Mutual and of its accounting information, as well as mention of (based on generalized industry practice or understanding its name in the “Experts” section of the prospectuses. In that prospectuses and proxy materials are widely distributed 1987, after reviewing public information about the merger throughout the investment community), like other investors, including the three prospectuses, Plaintiff Pacific Mutual Life would rely on such information. Id. at 580–81. Pacific Mutual Insurance purchased $415,725 of the 1982 InterFirst notes a cited as authority Restatement (Second) of Torts § 536 month after the merger and another $8 million a few months (1977), which states, later, allegedly in reliance inter alia on the audit reports. Significantly it did not purchase any of the securities that If a statute requires information to were offered in the three prospectuses. RepublicBank filed be ... filed ... for the protection of a for bankruptcy soon afterwards, and Pacific Mutual sued the particular class of persons, one who auditing firm among others for fraudulent misrepresentation makes a fraudulent misrepresentation and noncompliance with GAAS. 44 in so doing is subject to liability to the persons for pecuniary loss suffered In Pacific Mutual, after the trial court granted summary through their justifiable reliance upon judgment to Ernst & Young, the appellate court reversed, and the misrepresentation in a transaction Ernst & Young appealed. On review, rendering judgment, the of the kind in which the statute is Texas Supreme Court rejected Ernst & Young's contention intended to protect them.
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information under certain circumstances by adopting the 51 S.W.3d at 581. Comment c to § 536 states that one Restatement (Second) of Torts § 552 (1977), defining a tort of who meets “a statutory filing [with the SEC] requirement is negligent misrepresentation. Federal Land Bank Association presumed to have reason to expect that the information will v. Sloane, 825 S.W.2d 439, 442 (Tex.1991). Section 552 reach and influence the class of persons the statute is trying provides, to protect.” Id. Comment d to § 536 further indicates that in identifying the protected class, “the focus is on the statute's (1) One who, in the course of his business, profession purpose rather than the person furnishing the information.” or employment, or in any transaction in which he has Id. Pacific Mutual argued that the laws and rules requiring a pecuniary interest, supplies false information for the SEC filings, which were enacted after the 1929 stock market guidance of others in their business transactions, is subject crash, were “generally designed to protect investors.” Id. at to liability for pecuniary loss caused to them by their 582. Pacific Mutual emphasized that in deciding to purchase justifiable reliance upon the information, if he fails to the InterFirst 1982 notes, it had relied on all the publicly exercise reasonable care or competence in obtaining or available information, including documents mandated by law communicating the information. to be filed with the SEC, that had incorporated subsequent audits prepared by Ernst. Id. at 581–82. (2) Except as stated in Subsection (3), the liability in Subsection (1) is limited to loss suffered The Texas Supreme Court disagreed with Pacific Mutual (a) by the person or one of a limited group of persons and narrowly construed § 536. Id. at 582. It observed that for whose benefit and guidance he intends to supply the Comment e of § 536 makes clear that the general purpose information or knows that the recipient intends to supply behind the law requiring public filings is to make the it; and information available to anyone who considers it important in deciding what to do “in any type of transaction with the (b) through reliance upon it in a transaction that he intends corporation in question.” Id. at 582 [emphasis added by this the information to influence or knows that the recipient so Court]. Pacific Mutual's purchase of InterFirst notes that were intends or in a substantially similar transaction. issued by InterFirst in 1982 prior to the merger with Republic was not a transaction with RepublicBank or with the proposed (3) The liability of one who is under a public duty to give merger entity described in the offering by RepublicBank that the information extends to loss suffered by any of the class incorporated the SEC filings. The court expressly chose not of persons for whose benefit the duty is created, in any of to decide if purchasers of securities issued by the merged the transactions in which it is intended to protect them. entity or Republic Bank shareholders, which did not include Section 552 thus requires a species of intent that is closer to Pacific Mutual, could rely on SEC filings, but emphasized that for fraud than to that for negligence. Texas common law that § 536's “reach [did not extend] to open-market purchases fraud requires that the defendant know that his representation of unrelated securities.” Id. at 582. Moreover, (1) because was false or made recklessly without any knowledge of its there was no counterpart to § 536 in Texas common law truth and that the defendant intend to induce the plaintiff to and other courts have rarely applied it, (2) because the case act upon that representation. Trenholm v. Ratcliff, 646 S.W.2d was originally brought in federal court under § 10(b) but 927, 930 (Tex.1983).
was dismissed as time-barred, and (3) because investors have other remedies under federal and state securities laws, the [48] Moreover, eleven years after the Fifth Circuit issued Texas Supreme Court stated that “we are reluctant to apply Abell, which had followed the traditional rule that an attorney section 536's presumption and subject market participants owes no duty regarding the sufficiency of its legal opinions to liability for fraud damages to an almost limitless class to a third party in absence of privity of contract, but which of potential plaintiffs.” Id. Because Pacific Mutual therefore also had noted the increasing influence of § 552, the Texas had failed to prove the element of intent, under the high Supreme Court held that § 552 applies to lawyers. McCamish, court's narrowly construed reason-to-expect standard, the Martin, Brown & Loeffler v. F.E. Appling Interests, 991 court rendered judgment for the auditor.
S.W.2d 787 (Tex.1999).
*607 [47] As a relevant standard for comparison, in The Texas Supreme Court observed that other courts, both 1991 Texas has also recognized a duty of a professional state and federal, under Texas and other states' laws, have to a nonclient to use reasonable care to supply accurate
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applied § 552 to other professions in addition to lawyers, limitation on potential claimants to known parties to whom including auditors, physicians, securities placement agents, the attorney provided information for a known purpose and accountants, real estate brokers, title insurers, as well as who justifiably relied upon that information. Id. at 793–94. other types of evaluations issued by the professional, e.g., Comment h to § 552 explains the restrictions on standing to warranty deeds, title certificates, offering statements, offering sue for negligent misrepresentation to “[p]ersons for whose memoranda, placement memoranda, deeds of trust, annual guidance the information is supplied” and distinguishes it reports, and opinion letters. It determined that there “was from standing to sue for fraudulent misrepresentation: no reason to exempt lawyers.” McCamish, 991 S.W.2d at 791, 793, 795. Recognizing that “[t]he theory of negligent [The negligent supplier of misrepresentation permits plaintiffs who are not parties to information's liability] is somewhat a contract for professional services to recover from the more narrowly restricted than that contracting professionals” and “imposes a duty to avoid of the maker of a fraudulent negligent misrepresentation irrespective of privity,” the misrepresentation (see § 531), which Texas Supreme Court held that where a nonclient, not extends to any person whom the maker in privity with the attorney, receives and relies on an of the representation has reason to evaluation, such an opinion letter, prepared by another entity's expect to act in reliance upon it. attorney, he may sue under § 552 if the attorney is aware Under this Section, as in the case of of the nonclient and intends that the nonclient rely on the the fraudulent misrepresentation (see § information. Id. at 792–93. The high court also noted that 531), it is not necessary that the maker the application of section 552 to attorneys was validated by should have any particular person in what was then a tentative *608 draft of the Restatement mind as the intended, or even the (Third) of the Law Governing Lawyers § 73 (entitled “Duty probable, recipient of the information.
In other words, it is not required of Care to Certain Nonclients”), which is now final. 45 That that the person who is to become the draft (as well as the final version) incorporates section 552 plaintiff be identified or known to the and provides in relevant part that irrespective of privity an defendant as an individual when the attorney “owes a duty of care to a nonclient ‘when and to the information is supplied. It is enough extent that: (a) a lawyer ... invites the non-client to rely on that the maker of the misrepresentation the lawyer's opinion or provision of other legal services, and intends to reach and influence either the non-client so relies, and (b) the non-client is not, under a particular person or persons, known applicable tort law, too remote from the lawyer to be entitled to him, or a group or class of persons to protection.’ ” McCamish, 991 S.W.2d at 794–95.
distinct from the much larger class who might reasonably be expected The high court distinguished between liability for legal sooner or later to have access to malpractice, which is based on “the breach of a duty that the information and foreseeably take a professional owes his clients or others in privity,” and some action in reliance upon it. It is liability for negligent misrepresentation, which is “based enough, likewise, that the maker of the on an independent duty to a nonclient based on the representation knows that his recipient professional's manifest awareness of the nonclient's reliance intends to transmit this information to on the misrepresentation and the professional's intention a similar person, persons or group. It that the nonclient so rely.” Id. at 792. The Texas Supreme is sufficient, in other words, insofar Court found that “applying section 552 to attorneys does as the plaintiff's identity is concerned, not offend the policy justifications for the strict privity rule that the maker merely knows of the in legal malpractice cases” because a client still has control ever-present possibility of repetition to over the attorney-client relationship and potential liability anyone, and the possibility of action in to third parties does not create a conflict of duties nor reliance upon *609 it, on the part of threaten the attorney-client privilege because ethical rules, anyone to whom it may be repeated.
including Texas Disciplinary Rule of Professional Conduct 2.02 protect against such. Id. at 793. Nor does § 552 expose See also Trust Co. of Louisiana v. N.N.P., Inc., 104 F.3d 1478 an attorney “to almost unlimited liability” because of its (5th Cir.1997)(under Louisiana law, to prevail on a claim by a
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nonclient against an attorney for negligent misrepresentation, is appropriate and necessary. In this suit, Lead Plaintiff has the plaintiff must show that the attorney provided legal alleged as a crucial part of the Ponzi scheme that at least some services and knew that the third party intended to rely on fraudulent misrepresentations were made by Vinson & Elkins them). 46 and Arthur Andersen and were aimed at investors to attract funds into Enron, as well as at credit rating agencies to keep Thus, with respect to both fraudulent misrepresentation Enron's credit rating high and bank loans flowing. Therefore and negligent misrepresentation, Texas recognizes that an the “limited group” that the attorneys or accountants allegedly attorney has an established duty to third parties not to intended, or might reasonably have expected, to rely on their make material misrepresentations on which the attorney material misrepresentations, and who allegedly did rely and “knew or had reason-to-expect” that the parties would rely suffered pecuniary loss, included Plaintiffs in this suit. or the attorney intended to reach and influence a limited group that might reasonably be expected to have access 2. Accountant/Auditor to that information and act in reliance on it. 47 Plaintiffs [49] There is no accountant/client privilege analogous to must still prove *610 that they did justifiably rely on that accorded to lawyers. The United States Supreme Court the attorney's (or accountant's) misrepresentations about a has held, “By certifying the public reports that collectively corporation's financial strengths and suffered monetary loss depict a corporation's financial status, the independent as a result in deciding to purchase that corporation's securities. auditor assumes a public responsibility transcending any The standard for scienter (actual knowledge or reckless employment relationship with the client. The independent disregard) for liability under § 10(b) and Rule 10b–5 is closer public accountant performing this special function owes to that for fraudulent misrepresentation than for negligent ultimate allegiance to the corporation's creditors and misrepresentation. Therefore in light of the Texas high court's stockholders, as well as to the investing public.” United States conclusion that § 531 is fully compatible with the Texas v. Arthur Young & Co., 465 U.S. 805, 817–18, 104 S.Ct. 1495, common law of fraud, the standard in § 531 is particularly 79 L.Ed.2d 826 (1984). relevant to this Court's analysis of an attorney's duty to third parties under § 10(b), although, as noted, the intent element Significantly, although a major goal of the PSLRA was in § 552 is closer to fraud than negligence. to limit the exposure of corporations to frivolous strike suits targeting “deep-pocket” defendants by heightening This Court concludes that professionals, including lawyers pleading standards and imposing procedural hoops, in and accountants, when they take the affirmative step of contrast Congress expanded independent public accountants' speaking out, whether individually or as essentially an author watchdog duties. Harvey L. Pitt, et al., “Promises Made, or co-author in a statement or report, whether identified Promises Kept: The Practical Implications of the Private or not, about their client's financial condition, do have a Securities Litigation Reform of 1995,” 33 San Diego L.Rev. duty to third parties not in privity not to knowingly or with 845, 848–51 (1996). Under 15 U.S.C. § 78j–1(a)(1), every severe recklessness issue materially misleading statements audit must have “procedures designed to provide reasonable on which they intend or have reason to expect that those assurance of detecting illegal acts that would have a direct third parties will rely. Such a duty has been established in and material effect on the determination of financial statement cases including Klein v. Boyd, Caiola v. Citibank, Rubin amounts[.]” If the accountant discovers a possibly illegal act, v. Schottenstein, Ackerman v. Schwartz, Trust Company of he must decide whether if it is likely to have occurred and Louisiana v. N.N.P., and Ernst & Young v. Pacific Mutual determine its potential effect. 15 U.S.C. § 78j–1(b)(1)(A). Life Ins. Moreover, with respect to the element of reliance, If he finds an illegal act has taken place and that it is of for purposes of § 10(b) as well as the tort of fraudulent consequence, he must as soon as “practicable” inform the misrepresentation, the Court is concerned about avoiding the appropriate management personnel of the issuer and “assure” danger of opening the professional liability floodgates to its audit committee or, if there is no audit committee, its board any and every potential investor or foreseeable user of the of directors of its conclusions. 15 U.S.C. § 78j–1(b)(1)(B). allegedly misleading information *611 who might obtain That committee or board must notify the SEC within one day and rely on the statement. Therefore this Court finds that and send a copy of the notice to the accountant. 15 U.S.C. a restrictive approach with respect to the group to which 78j–1(b)(2). If the accountant does not receive that notice, the attorney or accountant owes the duty and which thus he must resign and report to the SEC. 15 U.S.C. § 78j-1(b) should have standing to sue, such as that taken by Texas, (3). The report must be submitted to the SEC within one
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day, regardless. Id. See generally William F. Dietrich, “Legal underwriter has a duty to investigate an issuer and may be and Ethical Issues for Attorneys Dealing with Financial Data: liable under Rule 10b–5 for reckless failure to do so); SEC v. Heightened Scrutiny after the Enron and Andersen Debacle,” Dain Rauscher, 254 F.3d 852, 857–58 (9th Cir.2001). 1325 PLI/Corp 925, 945–46 (Aug.2002).
This investigative duty is placed on the underwriter because, GAAS and GAAP represent the industry standard for as noted by the Seventh Circuit, its role is critical to the measuring the performance of an examination by an integrity of the market and the confidence of the investing accountant. Escott v. BarChris Const. Corp., 283 F.Supp. public: 643, 703 (S.D.N.Y.1968); In re Ikon Office Solutions, Inc., 277 F.3d 658, 663 n. 5 (3d Cir.2002); SEC v. Arthur Young An underwriter's relationship with the & Co., 590 F.2d 785, 788 n. 2 (9th Cir.1979). issuer gives the underwriter access to facts that are not equally available The discussions above regarding liability under § 10(b) to members of the public who must and the duty of the professional to nonclients apply to rely on published information. And the accountants. relationship between the underwriter and its customers implicitly involves Under § 11, an accountant may be civilly liable for certifying a favorable recommendation of or preparing any financial report that is included in a the issued security. Because the registration *612 statement or prospectus which contains a public relies on the integrity, material misrepresentation or omission. 15 U.S.C. § 77k. See independence and expertise of Herman & MacLean v. Huddleston, 459 U.S. at 382 n. 11, the underwriter, the underwriter's 103 S.Ct. 683 (“Accountants are liable under § 11 only for participation significantly enhances those matters which purport to have been prepared or certified the marketability of the security. by them.”). An accountant may establish a defense of due And since the underwriter is diligence to a § 11 claim if he demonstrates that “he had, after unquestionably aware of the nature reasonable investigation, reasonable grounds to believe and of the public's reliance on his did believe, at the time such part of the registration statement participation in the sale of the issue, became effective, that the statements therein were true and the mere fact that he has underwritten that there was no omission to state a material fact required to it is an implied representation that he be stated therein or necessary to make the statements therein has met the standards of his profession not misleading.” 15 U.S.C. § 77k(b)(3)(B)(i). in his investigation of the issuer [footnotes omitted].
3. Underwriters Sanders, 524 F.2d at 1070. The Second Circuit has observed, [50] Section 11 imposes liability “[i]n case any part of [a]
Self-regulation is the mainspring of registration statement ... contain[s] an untrue statement of a the federal securities laws. No greater material fact or omit[s] to state a material fact required to reliance in our self-regulatory system be stated therein or necessary to make the statements therein is placed on any single participant in not misleading” on a number of players and specifically on the issuance of securities than upon the “every underwriter with respect to such security.” 15 U.S.C.
underwriter. He is most heavily relied § 77k(a). An underwriter of a public offering risks exposure upon to verify published materials to such liability under § 11, as well as to liability under because of his expertise in appraising § 10(b) for any material misstatements or omissions in the the securities issue and the issuer, registration statement made with scienter, and thus has a duty and because of his incentive to do to investigate an issuer and the securities that the underwriter so. He is familiar with the process offers to investors. Hanly v. SEC, 415 F.2d 589, 595–96 (2d of investigating the business condition Cir.1969)(holding that brokers and salesmen have a duty to of a company and possesses extensive investigate and to analyze sales literature and must not blindly resources for doing so. Since he often accept recommendations made about a security); Sanders v.
has a financial stake in the issue, John Nuveen & Co., 554 F.2d 790, 793 (7th Cir.1977)(an
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he has a special motive thoroughly submitted to them. They may not rely to investigate the issuer's *613 solely on the company's officers or on strengths and weaknesses. Prospective the company's counsel. A prudent man investors look to the underwriter, a in the management of his own property fact well known to all concerned would not rely on them. and especially to the underwriter, to pass on the soundness of the security In addition to the availability of a due diligence defense, an and the correctness of the registration underwriter may rely on expertised parts of a prospectus, such statement and prospectus. as financial statements certified by an accountant, unless it had reasonable grounds to believe the statements were untrue.
Chris–Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 15 U.S.C. § 77k(b)(3)(C); In re Software Toolworks, Inc., 50 341, 370 (2d Cir.1973), cert. denied,414 U.S. 910, 94 S.Ct.
F.3d at 623.
231, 232, 38 L.Ed.2d 148 (1973).
The underwriter also may protect itself from liability by III. Lead Plaintiff's Allegations in Consolidated establishing a “due diligence” defense under Section 11, i.e., Complaint prove that it “had after reasonable investigation, reasonable ground to believe and did believe ... that the statements A. The Scheme, Generally therein were true and that there was no omission to state Lead Plaintiff asserts that Defendants participated in “an a material fact required to be stated therein or necessary enormous Ponzi scheme, the largest in history,” involving to make the statements therein not misleading.” 15 U.S.C. illusory profits “generated by phony, non-arm's-length § 77k(b)(3). The legal standard for measuring whether the transactions with Enron-controlled entities and improper underwriter satisfies the due diligence test is “the standard accounting tricks” in order to inflate Enron's reported of reasonableness ... required of a prudent man in the revenues and profits, conceal its growing debts, maintain management of his own property.” 15 U.S.C. § 77(k)(c); its artificially high stock prices and investment grade Toolworks, 50 F.3d at 621. Thus due diligence is “[i]n effect ... credit rating, as well as allow individual defendants to a negligence standard.” Id., quoting Hochfelder, 425 U.S. at personally enrich themselves by looting the corporation, 208, 96 S.Ct. 1375. while continuing to raise money from public offerings of Enron or related entities' securities to sustain the scheme The court in Escott v. BarChris Construction Corp., 283 and to postpone the collapse of the corporation, a scenario F.Supp. 643, 697 (S.D.N.Y.1968), observed in an influential characterized by Lead Plaintiff as “a hall of mirrors inside opinion, a house of cards.” Consolidated Complaint at 12. The consolidated complaint sets out an elaborate scheme of To effectuate the statute's purpose off-the-books, illicit partnerships, secretly controlled by the phrase “reasonable investigation” Enron and established at times critical for requisite financial must be construed to require more disclosures by Enron in order to conceal its actual financial effort on the part of the underwriters status. These Enron-controlled entities typically *614 would than the mere accurate reporting in buy troubled assets from Enron, which Enron would have the prospectus of “data presented” had difficulty selling in an arm's length transaction to an to them by the company. It should independent entity and which otherwise would have to be make no difference that this data is reported on Enron's balance sheet, by means of sham swaps, elicited by questions addressed to the hedges, and transfers, to record phony profits and conceal company officers by the underwriters, debt on Enron's balance sheet. Lead Plaintiff further paints a or that the underwriters at the time picture of participation in the scheme by Enron's accountants, believed that the company's officers outside law firms, and banks, which all were the beneficiaries are truthful and reliable. In order to of such enormous fees and increasing business, as well as make the underwriter's participation investment opportunities for personal enrichment, with the in this enterprise of any value to the result that their opinions were rubber stamps that deceived investors, the underwriters must make investors and the public. a reasonable attempt to verify the data
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According to the consolidated complaint, in 1997 Enron According to the complaint, Kirkland & Ellis helped structure suffered a substantial financial setback because of a British these deals and represented the straw parties, Little River natural gas transaction, resulting in a loss of one-third and Big River, as part of the scheme to conceal Enron's debt of its stock's value and analysts' downgrading its stock and losses, and therefore the law firm had knowledge of the and lowering their forecasts of its future earnings' growth. manipulation. Consolidated complaint at 275, 277. Barclays Moreover, Enron had been involved in transactions with a and the Enron Defendants prepared the documentation special purpose entity (“SPE”) 48 known as Joint Energy characterizing the advances as loans, while Enron and Development Incorporated (“JEDI”), which Enron, as a Chewco characterized them as equity contributions to serve partner, had established in 1993 with an outside investor as the 3% equity investment needed for nonconsolidation that held a 50% interest in JEDI. Because initially JEDI was of JEDI. Consolidated complaint at 276. The loans were independent, Enron was able to report JEDI's profits, but noted in documents that resembled promissory notes and loan not carry JEDI's debt on Enron's books. According to the agreements, but which were titled “certificates” and “funding complaint, JEDI generated 40% of the profits that Enron agreements” that required the borrowers to pay “yield” at reported in 1997 alone. In December 1997, ten months before a particular percentage rate, i.e., interest. Id. Nevertheless, the Class Period, a crisis arose when the independent investor reflecting Barclays' knowledge about Chewco's lack of an sought to withdraw, forcing Enron either to restructure with a independent third-party investor and the resulting creation new, independent investor or to consolidate JEDI with Enron, of strawmen Little River and Big River, Barclays insisted and thereby wipe out 40% of the profits that Enron had that the borrowers/Enron secretly establish cash “reserve reported earlier in 1997, and to report JEDI's $700 million accounts” in the amount of $6.6 million to secure repayment debt on Enron's balance sheet, as well as lose the ability to of Barclay's $11.4 million. The complaint further states that a generate future profits by utilizing JEDI as an SPE. clandestine agreement for Enron to provide the $6.6 million to fund Chewco's reserve accounts for Big River and Little Unable to find a legitimate, independent outside investor to River was drawn up by Vinson & Elkins, which therefore had replace the one withdrawing, Enron, along with Vinson & to have knowledge of the manipulation and of the absence of Elkins and Kirkland & Ellis, resorted to forming another outside equity. Id. at 276, 277. To fund the reserve accounts, entity, Chewco, totally controlled by Enron, to buy the JEDI wired $6.58 million to Barclay's on 12/30/97, thus outsider's investment in JEDI. Enron then arranged with cutting in half Chewco's illusory 3% equity interest in JEDI, Barclays Bank to lend $240 million to Chewco to allow essential for JEDI to be independent of Enron. Id. Because Chewco to invest in JEDI and obtain the necessary 3% Chewco did not have the requisite equity at risk and did not equity interest to maintain the appearance that JEDI was qualify as an adequately capitalized SPE, it, like JEDI, should independent. According to the consolidated complaint at 275, have been consolidated into Enron's consolidated financial pursuant to advice from Vinson & Elkins, Michael Kopper statements from the outset, but was not. Id. (an Enron employee who worked for Andrew Fastow) was made manager of Chewco because he was not a senior The complaint further alleges that Enron guaranteed the officer of Enron and therefore his role in Chewco would not $240 million unsecured loan from Barclays to Chewco in have to be disclosed. Vinson & Elkins prepared the legal December 1997, and that in exchange, Chewco agreed to documentation for JEDI and Chewco. On December 12, 1997 pay Enron a guaranteed fee of $10 million up front (cash Kopper transferred his ownership interest in Chewco to his at closing) plus 315 basis points annually on the average domestic partner, William Dodson, in a sham transaction outstanding balance of the loan. The fee calculation was effected solely to make it appear that Kopper, and through not based on the risk involved, but on benefitting Enron's him, Enron, had no formal interest in Chewco. financial statement. Furthermore, during the year the loan was outstanding, JEDI, through Chewco, paid Enron $17.4 Because in actuality there was no outside, independent equity million under the fee arrangement. Enron characterized these investor with a 3% stake in Chewco, Enron arranged for payments as “structuring fees” and recognized income from *615 Barclays Bank to lend $11.4 million to two “straw” the $10 million up-front fee in December 1997, when in parties, Little River and Big River, to permit them to make the actuality, the payments were improper transfers from one requisite 3% “equity” investment in Chewco. Id. at 275–76. Enron pocket to another.
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Thus Chewco was allegedly financed with debt, not equity, and Mordaunt, and lesser amounts for the others, totaling and neither JEDI nor Chewco was a valid SPE because $70,000. They quickly received extraordinary returns on their neither met the requirements for nonconsolidation. 49 The investments: on May 1, 2000, Fastow received $4.5 million, establishment of Chewco not only allowed Enron to report while Glisan and Mordaunt within a couple of months JEDI profits *616 of $45 million illicitly, inflating Enron's received approximately $1 million. Consolidated complaint 1997 reported profits, and to keep $700 million of debt off at 282. Enron's books, but it also provided Enron with the opportunity in the future to do non-arm's-length-transactions with an Lead Plaintiff labels the transactions with the two Enron- Enron-controlled entity that no independent entity would controlled LJM partnerships (“where Enron insiders would have done nor agreed to do and which provided a stream of be on both sides of the transactions”) as “the primary sham profits onto Enron's books. manipulative devices used to falsify Enron's financial results during the Class Period.” Fastow, in particular, wore two hats, Chewco became a template for subsequent entities that Enron which allowed him to self-deal, according to the consolidated continued to establish in increasing numbers and size, all complaint. Because Enron insiders were on both sides of secretly controlled by Enron, which Enron and its banks all LJM2 transactions, Defendants knew that LJM2 would would use to generate enormous phony profits and conceal be an extremely lucrative investment as the alleged Ponzi massive debt. Moreover, contrary to representations made to scheme proceeded, as evidenced by LJM1's early dealings. investors, many of these entities were capitalized with Enron Lead Plaintiff alleges that therefore, top Enron officials common stock, and Enron guaranteed that if the stock price and Merrill Lynch sent a confidential private placement declined below a certain “trigger” price level and Enron lost memorandum, which Vinson & Elkins participated in its investment grade credit rating, Enron would become liable drafting, to certain favored investment banks (including JP for the debt of those entities. To pay such a debt, Enron Morgan, Merrill Lynch, CIBC, and CitiGroup) and the banks' would have to issue substantial amounts of new stock, which high-level officers and privileged Merrill Lynch clients. The in turn would dilute the holdings of current stockholders to memorandum, which was not a public document, invited their detriment. In sum, Chewco was less than 3% owned them (1) to benefit from this “unusually attractive investment by parties independent of Enron, was improperly excluded opportunity” arising from LJM2's connection to Enron, (2) from Enron's financial statements despite being controlled emphasized that Fastow was Enron's CFO, (3) informed by Enron, and was never disclosed in Enron's SEC filings them that LJM2's day-to-day activities would be managed during the Class Period. Furthermore, Enron continued to use by Enron insiders Fastow, Michael Kopper, and Ben Glisan, Chewco/JEDI in non-arm's-length transactions to generate (4) explained that LJM2 “expects that Enron will be the false profits and conceal Enron's actual indebtedness from Partnership's primary source of investment opportunities” 1997 through 2001 in transactions that Vinson & Elkins and that it “expects to benefit from having the opportunity participated in structuring and provided false “true sale” to invest in Enron-generated investment opportunities that opinions to effectuate. would not be available otherwise to outside investors,” (5)
noted that Fastow's “access to Enron's information pertaining to potential investments will contribute to superior returns,”
Two other SPEs, LJM Cayman L.P. (“LJM1”) 50 and LJM2 pointed out that investors in JEDI, another Fastow-controlled Co–Investment, L.P. (“LJM2”), were structured, reviewed, partnership, had done similar transactions with Enron and and approved by Arthur Andersen LLP, Vinson & Elkins, investors had tripled their investment in two years, (6)
Kirkland & Ellis, individual Enron Defendants, and certain anticipated overall returns of 2,500% for LJM2 investors, Enron bankers, and controlled by Enron's Chief Financial and (7) and assured that investors would not be required to Officer Andrew Fastow to inflate Enron's financial results contribute additional capital if Fastow's dual role ended. Lead by more than a billion dollars, as well as to enrich Fastow Plaintiff alleges that Enron's banks and high-level bankers and selected others by tens of millions of dollars. 51 LJM1 were offered this investment opportunity as a reward for provided Enron *617 employees an opportunity to enrich their ongoing participation in the Ponzi scheme. JP Morgan, themselves personally and quickly. For instance, in March CitiGroup, Credit Suisse Boston, CIBC, Merrill Lynch, 2000, Enron employees Andrew Fastow, Michael Kopper, Lehman Brothers, Bank America, Deutsche Bank and/or their Ben Glisan, Kristina Mordaunt, Kathy Lynn and Anne top executives invested about $150 million and, at the same Yaeger Patel obtained financial interests in LJM1 for initial time, continued to issue positive analyst reports about Enron. contributions of $25,000 by Fastow, $5,800 each for Glisan
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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002) Fed. Sec. L. Rep. P 92,239
the transferor has surrendered control over the assets, if the Lead Plaintiff claims that LJM2 was used to create a following three conditions are met: number of SPEs known as the Raptors, 52 which Defendants 1. The transferred assets have been isolated from the utilized in turn to artificially inflate profits and conceal debt transferor, i.e., they are beyond the reach of the transferor that should have been included on Enron's balance sheet.
and its creditors.
Enron or Enron-related entities entered into twenty-four business relationships from June 1999 through September 2. One of the following is met:
53 2001, crucially timed *618 just before financial reporting deadlines. These transactions included asset sales by Enron a. The transferee obtains the unconditional right to pledge to LJM2 or vice versa; purchases of debt or equity interests or exchange the transferred assets. by LJM1 or LJM2 in Enron affiliates or Enron SPEs or other b. The transferee is a qualifying special-purpose entity and entities in which Enron was an investor; purchases of equity the holders of beneficial interests in that entity have the investments by LJM1 or LJM2 in SPEs designed to mitigate unconditional right to pledge or exchange those interests.
market risk in Enron's investments; sale of a call option and a put option by LJM2 on physical assets; and a subordinated 3. The transferor does not maintain effective control over loan to LJM2 from an Enron affiliate. Furthermore these the transferred assets either through an Offering that transactions were recorded as generating $229 million in obligates the transferor to repurchase or redeem the assets “earnings” for Enron in the second half of 1999, out of total before their maturity or through an Offering that entitles the reported earnings of $549 million during that period. transferor to repurchase or redeem transferred assets that are not readily obtainable.
Again with the help of its lawyers and bankers, Enron used other SPEs (Firefly and JV–Company) to conceal Furthermore for the accounting scheme to work, Enron had debt. Consolidated complaint at 292–93. It also manipulated to conceal its affiliation with and control of these entities, so financial results by treating transfers of assets, including Defendants created materially false and misleading financial energy related projects and dark-fiber broadband, to another statement disclosures during the Class Period to hide Enron's Enron-related entity, e.g., the Osprey Trust and the Marlin related-party transactions. 54 SFAS No. 57, Related Party Trust, as sales rather than loans so as to generate income Disclosures, requires financial statements to include the and conceal debt. Consolidated complaint at 293. Enron following disclosures in related-party transactions:
guaranteed these transfers with promises to issue more Enron stock if the assets diminished in value and established triggers for the issuance of additional shares of Enron stock if the (a) the nature of the relationship(s) involved; (b) a price of Enron stock declined below a certain point. Former description of the transactions ... for each of the periods Enron employees reported that many of the transferred assets for which income statements are presented and such other declined in value by the second half of 2000 and that top information deemed necessary to an understanding of the management, including Jeffrey Skilling, was aware of the effects of the transactions on the financial statements; (c) decline because of a daily 2–3 page report detailing the the dollar amounts of the transactions for each of the positions of the assets held by the company. Nevertheless periods for which income statements are presented; and Enron did not record charges to show the liabilities Enron had (d)amounts due from or to related parties as of the date incurred and continued to record income from transactions of each balance sheet presented, and, if not otherwise with these entities. apparent, the terms and manner of settlement.
Moreover ¶ 3 of No. 57 provides that related-party The complaint asserts that these kinds of transfers of assets, transactions cannot be presumed to have been effected on with continuing involvement of and control by Enron, an arm's length basis. violated GAAP, SFAS No. 125, Accounting for Transfers Similarly Item 404 of SEC Regulation S–K imposes and Servicing of Financial Assets and Extinguishments of requirements for disclosure *620 of related-party Liabilities, and should have been viewed as secured *619 transactions in non-financial statement portions of SEC borrowings. SFAS No. 125 permits accounting for transfers filings, including proxy statements and the annual reports of financial assets as sales to the extent that consideration on Form 10–K. Among other things, Item 404(a) requires other than beneficial interests is received in exchange, when
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disclosure of transactions over $60,000 in which an executive was intentional, as evidenced by significant discussion officer has a material interest, within Enron management and outside advisors as to how Enron could circumvent the mandated disclosure of Fastow's naming such person and indicating the compensation from the related parties. person's relationship to the registrant, the nature of such person's interest in Citing specific examples, 55 the complaint charges that the transaction(s), the amount of such Enron's proxy statements, *621 Form 10Q and 10–K filings transaction(s), and, where practicable, obfuscated the true nature of the LJM partnerships and falsely the amount of such person's interest in assured investors that transactions with them were fair to the transaction(s).
Enron when they were not, while the illicit transactions According to the instructions to this section, whether the involving these entities allowed Enron to pay off key Enron information was material was determined by “the significance insiders, including Fastow, as well as reward favored banks of the information in light of all the circumstances,” including and bankers for their participation in the scheme. “[t]he importance of the interest to the person having the interest, the relationship of the parties to the transaction with Timing, standardly at the end of a financial year, was critical each other and the amount involved in the transaction.” with these SPE transactions to allow Enron to record huge sales gains and conceal debts to meet the rosy forecasts Furthermore under GAAP, financial statements are complete made by the corporation and other participants in the scheme only when they contain all material information required and to conceal Enron's true debt levels. LJM2 had to be to represent validly the underlying events and conditions. formed before the end of 1999 so it could be utilized to Statements of Financial Accounting Concepts 2, ¶ 279. In consummate transactions with Enron to create huge profits addition, a financial statement must disclose the financial for Enron in the final quarter of that year and allow Enron effects of transactions and events that have occurred not only to meet, but to exceed, its forecasted 1999 earnings. previously. Statement of Financial Accounting Concepts 1, ¶ When Merrill Lynch was unable to raise sufficient funds 21. from outside investors to fund the partnership before the close of 1999, Enron, Fastow, Kopper, Arthur Andersen, Moreover, the complaint alleges that, as expected, during the Vinson & Elkins, Kirkland & Ellis, JP Morgan, CIBC, next two years these LJM2 investors realized extraordinary Deutsche Bank, and Credit Suisse First Boston created distributions of hundreds of millions of dollars from the documentation that allowed the banks to advance virtually Raptor SPEs generated by illegal transactions (“manipulative all of the moneys needed to “pre-fund” LJM2, much more devices”) between Enron and the Raptors to falsify Enron's than their allocated shares. After LJM2 was fully funded and financial status. Thus the banks and bankers who became after other investors contributed money, the banks' original partners in LJM2 not only participated in the scheme to “over-funding” in December 1999 was adjusted in subsequent defraud, but were economic beneficiaries of that scheme, in capital contributions. Moreover, because LJM2 needed bank addition to receiving their huge advisory fees, underwriter financing to effectuate Defendant's scheme to manipulate fees, and interest and loan commitment fees. Enron continued Enron's profits and debt, JP Morgan first gave a $65 million to sell to the SPEs assets that no independent third party would line of credit to LJM2, and then increased it to $120 million, have purchased and that Enron wanted to get off its books. while Credit Suisse Boston lent money to it insure that Enron, which was conducting deals 56 with LJM2 and its SPEs that The complaint states that Enron did not disclose Chewco were essential to avoid Enron's reporting a bad *622 4th and JEDI as related parties during the Class Period; its quarter for 1999. The complaint further states that JP Morgan 2000 Form 10–K reported only that it had “entered into and CitiGroup administered all financial affairs of LJM2, transactions with limited partnerships (the Related Party) about which they were fully knowledgeable. whose general partner's managing member is a senior officer of Enron.” It did not identify that the managing member In these end-of-the-year transactions, according to the of the general partners of LJM1 and LJM2 was Fastow or complaint, Enron typically promised to and did, in the next disclose that he received more than $30 million relating to year, buy back the assets it sold to LJM2 before the close his management and investment activities, a violation of of the financial year and in the process gave the LJM2 SFAS No. 57 and Item 404 of Regulation S–K. The omission partnership large profits on each transaction even if the asset
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had declined in market value, while the transactions created profit on the transaction was properly hedged, Enron was “earnings” on the books for Enron. Often Enron in advance of required in each following quarter to *623 recompute or the transaction guaranteed the LJM partnerships against any readjust the profit computation, taking into account changing loss. In this manner the LJM partnerships functioned solely as economic values. Mark-to-market accounting is appropriate vehicles to aid Defendants in the manipulation, falsification, only where the company has a long track record that and artificial inflation of Enron's reported financial results allows it to estimate accurately and forecast future values while simultaneously enriching LJM2's favored investors at with some certainty. Enron abused this mark-to-market exorbitant rates. accounting first by assigning unrealistic values to the ultimate transaction, which in turn inflated current period profits.
The consolidated complaint additionally alleges that as part Moreover, in reviewing its computations on a quarterly basis, of the pattern of fraud, Enron repetitively engaged in hedging it consistently increased the estimated value of the transaction transactions that gave an appearance that a third party was even when data revealed a decrease in the estimated value to obligated to pay Enron the amount of large losses from its compensate for the anticipated loss, a practice known within trading investments when the third party actually was an Enron as “moving or shifting the curve.” 58 The complaint entity in which Enron had a substantial economic stake, e.g., alleges that during the Class Period, Enron misused markfunding the SPEs with Enron common stock so that if the to-market accounting throughout its business operations in value of the investments and the value of its stock fell at order to swell its reported revenues and profits, helped by the same time, the SPEs would not be able to meet their managers who obtained larger bonuses from the inflated obligations and the hedges would fail. This possibility put values. 59 The abuse was particularly evident in Enron's great pressure on participants in the fraudulent scheme to keep wholesale energy transactions, where unrealistic valuation the price of the stock at artificially inflated levels. Once in greatly inflated current period income. In its new retail energy late 2000 and again in 2001 the Raptors experienced such a services operation Enron had no long-term track record dangerous decline. 57 They lacked sufficient credit capacity to support use of mark-to-market accounting, but Enron to pay Enron on the sham hedges and were in danger of used the technique anyway, falsifying the requisite historical coming unwound, with the potential of causing Enron to earnings. Enron also used it to record huge current period take a multi-million-dollar charge against its earnings and profits on long-term, highly speculative retail energy riskexposing the earlier falsification of its financial results. That management contracts where Enron had no basis on which in turn would cause the stock price to plunge and trigger to project the amount of any future revenue streams, no the issuance of more stock. To avoid disaster, with the less a profit, and where it knew that losses were likely. participation of Arthur Andersen, Vinson & Elkins, Kirkland Similarly it had no track record in its broadband business, & Ellis, and some of the banks, Enron restructured and which, itself, was not a proven market, but abused the capitalized the Raptor SPEs in December 2000 through more technique to create millions of dollars of illusory profits sham transactions that transferred rights to more shares of in several transactions, in particular its Blockbuster/Enron Enron stock to these SPEs in exchange for notes. Video–On–Demand (“VOD”) joint venture. Application of mark-to-market accounting was particularly improper in the Furthermore, the complaint alleges that Enron employed broadband context because it involved service contracts, for accounting tricks to defraud investors. In particular it used services that had not yet been provided, rather than income and abused “mark-to-market” or “fair value” accounting from commodity components. 60 to inflate the current and future success of the company by computing the economic value or profit that it would *624 Falsified rosy financial statements were also issued ultimately obtain on a multi-year contract, discount that regarding Enron's retail energy services business (EES), figure to present value, and recognize the entire profit which attempted to manage energy needs of corporate in the current period. In other words, Enron improperly customers for multi-year periods in return for fees to be paid and prematurely accelerated revenue recognition. Such over a number of years (demand-side management (“DSM”)
accounting is permissible under GAAP only where contract contracts). During the Class Period, Enron presented EES as revenue streams are predictable and are based on historical tremendously successful by continually signing new multirecords of similar transactions. Enron had no historical track million or multi-billion dollar contracts that exceeded Enron's record for many of the transactions to which it applied internal forecasts and representing that EES had become mark-to-market accounting. In addition, unless the expected profitable in the 4th quarter of 1999 and achieved substantial
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profits afterward. In actuality it was losing hundreds of being launched nationwide, Enron abandoned the venture. millions of dollars because to induce large corporations to Yet Enron did not reverse the huge profits that it had sign long-term energy management contracts and make the clandestinely and improperly reported on this transaction business seem instantly successful from the start, Enron previously because such a disclosure would have exposed its entered into contracts that it, along with its accountants and ongoing abuse and misuse of mark-to-market accounting and lawyers, knew would probably result in enormous losses and caused the price of its stock to decline, thus triggering prices that required Enron to make immediate, large expenditures in the SPEs that would obligate Enron to pay off investors for more efficient energy equipment and thereby additionally in the SPEs. Furthermore, aware of the fragility of Enron's further strap Enron for cash. 61 Mark-to-market accounting financial condition and CIBC's overall exposure to Enron, was applied to EES also to overvalue grossly the ultimate CIBC did not demand that Enron honor its secret guarantee worth of these contracts and to inflate greatly current period and refused to disclose its economic relationship with Enron profits from transactions that in reality were producing or its affiliates, but instead used boilerplate disclosures in its little or no current period cash. To conceal the huge losses analyst reports on Enron to conceal its investment and its that the EES was suffering, Enron moved the losses into resulting conflicts of interest. a larger wholesale energy operation and abused mark-to-
In 2000, Enron owned millions of shares of stock in market accounting and phony hedges with SPEs. 62 and controlled a private company known as New Power. According to the complaint, to obtain desperately needed *625 Enron also misrepresented the status and growth of profit to perpetuate its alleged Ponzi scheme, Enron decided its broadband services business (“EBS”), an 18,000–mile to take New Power public and create a trading market in fiber optic network that Enron was constructing and using its stock in order to recognize a profit on the gain in value to engage in trading access to Enron's and other companies'
on its shares by a sham hedging transaction with an LJM2 fiber optic cable capability (“Broadband Intermediation”).
SPE. With Credit Suisse Boston, CitiGroup, and CIBC, It represented that the network was being and had been Enron effected a huge New Power initial public offering successfully constructed, that it was state of the art and offered (“IPO”) (27.6 million shares at $21 per share) in October unparalleled quality of service, and that the trading business 2000. Meanwhile Enron retained 13.6 million shares of New was succeeding and achieving much higher trading volume Power common stock and warrants to purchase 42 million and revenues than expected, i.e., “exponential growth.” One more shares. Pursuant to a deal structured before the IPO, of its ventures was the Blockbuster VOD, mentioned supra.
Enron, along with Vinson & Elkins, Arthur Andersen and Enron stated that the twenty-year agreement, announced in CIBC, used LJM2 to hedge Enron's gain in the value of July 2000, had a billion dollar value and was a first-of-itsits New Power stock and create an enormous phony profit kind whereby consumers would be able to enjoy video-onof $370 million in the fourth quarter of 2000. Immediately demand, provided by Blockbuster, in their homes via Internet after the October IPO, Enron, Vinson & Elkins, Kirkland because of technological advances made possible by the high & Ellis, Arthur Andersen, and CIBC created an SPE quality of Enron's fiber optic network. 63 The consolidated designated Hawaii 125–0. CIBC and several other Enron complaint charges that along with an investment from CIBC banks, including Credit Suisse First Boston, made a sham in the deal after a no-loss guarantee from Enron, Enron abused “loan” of $125 million to Hawaii 125–0, but actually Enron mark-to-market accounting to claim a profit of over $110 gave the banks a secret “total return swap” guarantee that million in the fourth quarter of 1999 and the first quarter of protected them from any loss. Enron sold millions of its 2000. In reality EBS was a failure because Enron lacked the New Power warrants to Hawaii 125–0 to “secure” the banks' technology to deliver the product as represented and because loans while recording a $370 million profit on the claimed Blockbuster had not and could not obtain the legal right to gain on the New Power warrants made possible by the IPO. deliver movies from movie studios in a digital format, a Hawaii 125–0 simultaneously allegedly hedged the warrants necessity for VOD. According to the complaint at 301, when with another entity created and controlled by Enron called the deal was announced, Defendant Ken Rice told an engineer “Porcupine,” into which LJM2 had placed $30 million to whom Rice was recruiting that Enron “can't deliver” on the capitalize it and facilitate the sham hedge of the New Power deal. 64 Eight weeks after the deal was *626 announced warrants; a week later, however, Porcupine paid back the with great fanfare and only weeks after representing that the $30 million to LJM2 along with $9.5 million profit, leaving system had been successfully tested in four cities and was Porcupine stripped of assets. When New Power stock fell
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sharply in 2001, Enron's alleged gain on its Power equity contracts, amounting to $2.2 billion, were loans to Enron holdings was converted into a loss of about $250 million. The disguised as hedging contracts. Enron never intended to consolidated complaint alleges that Enron, Vinson & Elkins, deliver the crude oil and natural gas, as is evidenced by (1) Kirkland & Ellis, and Arthur Andersen agreed to, and did, its failure to enter into contracts with suppliers to hedge its conceal that loss until October 2001, when Enron disclosed a obligations to deliver the crude oil and gas under the six $1 billion write-off and a $1 billion reduction in shareholder contracts; (2) the fact that Mahonia did not enter into contracts equity. for delivery of the oil and gas to be supplied by Enron under the terms of the contracts, but instead secured them with Lead Plaintiff further alleges that in September 2001, when surety bonds; (3) and the fact that Mahonia was not listed Enron's stock value was dipping to precarious “trigger” levels as a firm transportation customer of any of the pipelines at and threatening the possibility of large asset write downs, which the natural gas deliveries were to be made under the Enron and Qwest, another Arthur Andersen client, with the sales contracts, even though Mahonia expressly represented aid of Arthur Andersen and Vinson & Elkins, effected another and warranted that it had the capacity and intended to take deal to limit the writeoffs and conceal Enron's financial delivery of the natural gas and that it was acquiring the natural situation by creating an appearance of healthy operating gas in the ordinary *628 course of business. Complaint at earnings. On September 30, 2001, the final day of the third 311–12. Furthermore on the same day that Enron entered quarter, solely for accounting purposes, they arranged a into the forward sales contracts with Mahonia, December “swap” by which Quest agreed to overpay for Enron's “dark 28, 2000, Enron entered into an agreement with Stoneville (i.e., not yet active) fiber” *627 between Salt Lake City and Aegean Ltd. to buy the same quantity of gas that Enron New Orleans, Enron agreed to buy “lit wavelength” (active was supposed to sell to Mahonia, to be delivered on the fiber optic cable services) from Quest's network over a same future dates that Enron was supposed to deliver the twenty-five year period, and the companies exchanged checks same quantities of gas to Mahonia. Moreover, Mahonia and for about $112 million. Enron thus reported a sale and avoided Stoneville are offshore corporations established by the same reporting a loss on its dark fiber assets, 65 whose value on the company, Mourant du Feu & Jeune, with the same director, Ian James, and the same shareholders, Juris Ltd. and Lively open market was far lower than the price on Enron's books. 66 Ltd. Mahonia, had agreed in its contract to pay Enron $330 million for gas on the same day that they entered into the As another “manipulative device” to conceal its true financial contract, December 28, 2000; Enron agreed to pay Stoneville condition, the complaint claims that with some of Enron's $394 million to buy back the same quantities of gas on the banks Enron engaged in loans disguised as commodity (oil same delivery schedule, but with the $394 million to be paid and gas) trades, with the ultimate cost differential in favor of at specified future dates, i.e., the equivalent of a 7% loan.
the banks actually constituting the “interest” on the hidden loan. For example, JP Morgan set up, controlled, and utilized In a valid pre-paid forward sales contract, the purchaser an entity known as “Mahonia,” located in the Channel Islands wants long-term delivery of gas, but is exposed to the risk off the coast of England. Enron, Mahonia, and JP Morgan got that the market price may decrease during the month and Vinson & Elkins to provide a false legal opinion that these will be lower than the price pre-paid by the purchaser. Here disguised loans were legitimate commodities trades. Through J.P. Morgan assumed no economic risk that the price of this manipulative device, JP Morgan and Enron concealed natural gas might change because it or its related companies some $3.9 billion in debt.
simultaneously bought and sold the same quantities of gas at pre-arranged prices to the same party, Enron. Thus the price The loans were disguised as hedging or derivative or the availability of the gas was irrelevant; the transaction transactions so that Enron would not have to record the was a loan rather than a pre-paid sales contract.
$3.9 billion as debts on Enron's balance sheet. For instance, between December 1997 and December 2000, Enron Furthermore, allegedly knowing Enron's actual precarious Natural Gas Marketing Corporation or Enron North America financial condition, JP Morgan attempted to insure against Corporation, as sellers, entered into six different agreements, default by Enron on the “loans” by buying performance bonds characterized as “forward sales contracts,” supposedly to from several insurance companies. After Enron defaulted provide for the delivery of crude oil and natural gas over on the trade contracts after filing for bankruptcy, those a four-to-five-year period, with either Mahonia or Mahonia insurers subsequently have refused to pay and contend that the Gas serving as the purchasers. In actuality the forward sales
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commodity trades were fraudulent and a subterfuge to hide announced a write down of $1 billion in assets on October the fact that the transactions were done to disguise loans to 16, 2001, even though the impairment occurred long before. Enron. Consolidated complaint at 319–25.
The consolidated complaint also asserts that CitiGroup (from The complaint further alleges that Enron, in a phony early 1999 through early 2002) engaged in subterfuge to transaction on June 29, 2001, sold its interest in Project disguise large loans amounting to $2.4 billion to Enron as a Timber, a methanol and MTBE refinery, to Enron Oil series of prepaid swaps, 67 and that Credit Suisse First Boston Transportation and Trade (“EOTT”), an entity in which Enron (in 2000) made loans of $150 million to Enron disguised was one-third owner and general partner, after Enron was as trades in derivatives, in order to paint a false picture unable for six years to sell that interest legitimately. MTBE of Enron's liquidity, financial condition, and balance sheet. is water soluble and is a potential carcinogen. The best price Specifically, CitiGroup lent Enron $2.4 billion in a series offered to Enron for Project Timber during the six years was of “pre-paid” swaps (the *629 “Delta transactions”) by $50 million, but Enron sold it to EOTT for $200 million. utilizing a CitiGroup Cayman Island subsidiary named Delta, EOTT agreed to the terms because Enron guaranteed that it based in the Cayman Islands. CitiGroup paid the estimated would purchase all the MTBE that the plant produced and fair value of its portion of the swaps, hundreds of millions of would cover any liability. From that sale Enron improperly dollars, immediately each time, but Enron was only obliged recognized $117 million, more *631 than a third of its to repay the cash over five years. These Delta transactions second quarter 2001 earnings, even though the revenue was were actually loans, though never disclosed as such on not realizable and the transaction was not arm's length. The Enron's balance sheet, which reported them as assets and transaction was a total return swap and should not have been liabilities from price risk management and accounts payable recognized as revenue. Furthermore, Enron did not disclose and receivable. that it recognized earnings from the “sale” or that it assumed liabilities under the contract.
Similarly Credit Suisse First Boston allegedly made loans disguised as trades in derivatives to Enron. In 2000, it gave The complaint summarizes that these improper accounting Enron $150 million, to be repaid over two years with those tactics violated GAAP because they violated general, fundamental accounting principles: that interim financial repayments to vary based on the price of oil. 68 Enron kept reporting should be based on the same accounting principles the loans from Credit Suisse First Boston and CitiGroup and practices used to prepare annual financial statements off its balance sheet by characterizing them as “assets from (APB No. 28, ¶ 10); that financial reporting should provide price risk management” and perhaps as “accounts receivable”
information that is useful to present and potential investors according to Arthur Andersen spokesman Charlie Leonard, and creditors and other users in making rational investment, so that investors, credit rating agencies, and industry analysts credit, and similar decisions (FASB Statement of Concepts would not perceive the risk created by the debt incurred in No. 1 ¶ 34); that financial reporting should provide obtaining new financing. 69 information about the economic resources of an enterprise, the claims to those resources, and the effects of transactions, The consolidated complaint details other fraudulent practices, events and circumstances that alter those resources and claims such as Enron's inflation of revenues with respect to long- to those resources (FASB Statement of Concepts No. 1, term construction contracts 70 and improper snowballing of ¶ 40); that financial reporting should provide information costs on unsuccessful bids, 71 *630 followed by obfuscated about how the management of an enterprise had discharged “disclosures” to mislead investors about the true nature of its stewardship responsibilities to its stockholders for the the write down. Consolidated complaint at 316–19. The use of enterprise resources entrusted to it, especially when complaint claims that Enron also falsified its financial it voluntarily heightens its responsibility of accountability statements by omitting losses for the impairment or to prospective investors and the public generally when it deterioration in value of long-term assets and investments, offers securities of the enterprise to the public (FASB e.g., of Azurix Corporation, Broadband Services, the New Statement of Concepts No. 1 ¶ 50); that financial reporting Power Company, TGSS, the Dabhol Power Plant, PromiGas, should provide information about an enterprise's financial and projects in Nicaragua, Puerto Rico, and Brazil, in performance during a period so investors can assess the enterprise's prospects (FASB Statement of Concepts No. 1 violation of GAAP, SFAS No. 115. 72 Enron only belatedly
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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002) Fed. Sec. L. Rep. P 92,239
¶ 42); that financial reporting should be reliable (FASB same deception. For the same purpose, CitiGroup sold Enron- Statement of Concepts No. 2); that the information is linked securities as notes, including the Delta loans. complete and nothing is omitted that is necessary to insure that the financial report represents the underlying events The complaint represents that Enron has conceded that and conditions (FASB Statement of Concepts No. 2 ¶ 79); in prior years it did not make audit adjustments and and that conservatism should be used as a prudent reaction reclassifications proposed by Arthur Andersen that would to uncertainty in an attempt to ensure that uncertainties have reduced Enron's net income because it considered and risks inherent in business situations are adequately the adjustments “immaterial.” For instance the proposed considered and the report truly represents what it purports adjustment for 1997 was $51 million, or 48% of its net income to represent (FASB Statement of Concepts No. 2 ¶¶ 95, and 10% of its recurring net income. 73 97). Consolidated complaint at 326–27. Furthermore SEC regulations, regulations of the national stock exchanges, and Ultimately Enron did restate its financial statements for customary business practice require disclosure of the kind of 1997 through the second quarter of 2001, an action which information concealed by Defendants, as corporate officials the complaint characterizes as “an admission that the and their legal and financial advisors knew. financial statements originally issued were false and that the overstatement of revenues and income was material.”
During 2001, Enron's stock price precipitously declined and Consolidated complaint at 299. Under GAAP, APB No. the Raptor SPEs were imperiled by a lack of credit capacity, 20 at ¶¶ 7–14, the type of restatement made by Enron portending a “death spiral” for Enron. Fully aware of the was to correct material errors in prior financial statements, situation, JP Morgan and CitiGroup, when Enron's “financial a disfavored procedure because it diminishes investor chicanery” had created a desperate “liquidity crunch,” greatly confidence in financial statements. GAAP approves of increased the monies flowing into Enron as phony oil and restricting restatements to limited circumstances, e.g., when gas trades and swaps to prop up Enron's diminished finances there is a change in the reporting entity or in accounting without disclosing that these two banks had just lent Enron principles or to correct an error in a previously issued between $4–6 billion, according to the complaint. If these financial statement. In Enron's case, Lead Plaintiff quotes a phony commodity and swap trades had been treated as February 22, 2002 article on Accounting Malpractice.com: the loans they were, the internal procedures at both banks “The emerging question is not whether a more conservative would have required a syndication of those loans to other restatement would have reflected smaller profits, but whether banks, thus increasing the number of entities with knowledge a proper restatement would have reflected any profits from of Enron's liquidity problems. Moreover, even structuring 1997 and forward.” Consolidated complaint at 300. consolidation of loans of this size would have exposed Enron's problems to the financial community and would have In sum, the consolidated complaint charges that Defendants been reported in specialized journals and then in the financial caused Enron to violate GAAP and SEC rules in order to press focusing on bank lending syndication activity. With overstate Enron's assets, shareholders' equity, net income and its financial fragility exposed, a substantial downgrade of earnings per share, and to understate its debt. Defendants Enron's credit rating would likely have followed, endangering also caused Enron to present materially misleading statements its ability to borrow and activating stock issuance *632 price in Enron's financial statements (including press releases and triggers. Lead Plaintiff emphasizes that even though under SEC filings, such as Form 10–Qs for interim results and Enron's investment-grade rating at the time, Enron could Form 10–Ks for annual results), which were incorporated have borrowed money at 3.75–4.25% interest, the fraudulent into (Registration Statements and Prospectuses filed during Mahonia and Delta transactions were structured to pay off the Class Period). Enron also made misrepresentations JP Morgan and CitiGroup with, under the circumstances, about Defendants' manipulations, all concealed *633 by “extortionate” interest rates between 6.5–7.0%, amounting to the following numerous, improper accounting ploys: not a big profit for the banks. Moreover, to reduce the economic consolidating illicit SPEs into Enron's financial statements risk, JP Morgan purchased security bond insurance by to properly reflect reduced earnings and debt on Enron's attempting to deceive the insurance companies into believing balance sheet; improperly accounting for common stock they were insuring commodity trades rather than loans, and issued to a related-party entity that should have been obtained letters from other financial institutions with the treated as a reduction in shareholders' equity, but was identified as a note receivable; improperly accounting for
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broadband transactions; abusing mark-to-market accounting; more than $800 million of contracts to receive Enron stock characterizing loans as forward contracts to conceal Enron's for no consideration; this transfer was accounted for as an debt; improperly accounting for long-term contracts; failing increase in equity and assets, in violation of GAAP. As with to record required write-downs for impairment in value of so many other previously described contrivances, the transfer Enron's investments, long-term assets, and its broadband and allowed the participants in the scheme to continue concealing technology investments in a timely manner; failing to record losses in Enron's merchant investments 74 *634 and kept an aggregate of $92 million in proposed audit adjustments the alleged Ponzi scheme working. Yet during early 2001, from 1997 until the end of the Class period; failing to disclose Enron also continued to report record results, certified by related-party transactions; and misstating Enron's debt-to- Arthur Andersen, and Enron's lawyers and bankers continued equity ratio (measured as debt to total capitalization, a figure to make very positive statements about the business. which rating agencies use to determine a company's credit rating) and ratio of earnings to fixed charges. Even while In June 2001, when Enron stock was trading at around demonstrating the contrast between Enron's original financial $48.50 a share, statements made at a meeting between an statements and its restatement results, the consolidated Enron manager and two Credit Suisse First Boston managing complaint notes that many of Defendants' manipulations are directors reflected that Credit Suisse First Boston knew about not included in the restatement, such as the effects of Enron's the nature and extent of Enron's off-balance sheet exposure abuse of accounting techniques. and Enron's falsification of its financial statements. The bank's directors made the following comments to the Enron Lead Plaintiff describes Enron's “corporate culture” as manager: “How can you guys keep doing this?,” in reference characterized by “a fixation on the price of Enron stock” to Enron's repeated statements to the market that its stock and on pushing that price ever higher. Throughout Enron's was under valued. Even at $40 per share, Enron's stock Houston corporate headquarters, TV monitors constantly was still overvalued in the bank directors' view, as reflected displayed the current market price of its stock. A repeated in their comments to the Enron manager: “Do employees maxim was that managers were always to be “ABCing,” actually believe it's worth what management is saying?”; i.e., “always be closing” deals to create revenue and profit “[Y]ou guys are at a critical price point right now”; that if even if they were questionable. Corporate managers and Enron's stock price continued to fall, that drop would cause executives were compensated for closing transactions and Raptor to unwind and the debt balance to come due; when placing high values on them, regardless of the economic the Enron executive stated that he thought Enron's off-balance realities of the deals, to generate profit when “marked to sheet debt was between one and two billion dollars, the bank market.” There was pressure to do anything necessary to representatives responded, “Try eight to 12 billion.”; and that make the numbers, and it was common knowledge that if Enron's stock dips to $20 per share, things would come revenues and earnings were being falsified at the direction falling down and “you guys are gonna be fucked.” Complaint of top executives. Bonuses went to those who facilitated the at 37–38. Yet despite this knowledge, Credit Suisse First company-wide fraudulent behavior. In August 2001, Sherron Boston issued a report on August 14, 2001, rating Enron a Watkins, an Enron executive and a former Arthur Andersen “Strong Buy” with a price target of $84. accountant, wrote to Kenneth Lay that Enron was “nothing but an elaborate accounting hoax” and that nothing “will According to the complaint, on July 13, 2001, Jeffrey Skilling protect Enron if these [SPE] transactions are ever disclosed told Kenneth Lay that he was going to quit because he knew in the bright light of day,” while warning that many Enron that the Enron house of cards was crumbling. They and other employees believe, “[W]e're such a crooked company.” top Enron officials made up a story that Skilling was resigning for personal reasons to hide the true reason and limit damage In 2001, matters at Enron began to fall apart, according to the price of Enron's stock. On August 14, 2001, Fastow, to the complaint. In March 2001, just prior to the end of Skilling and other top executives and bankers announced that the quarter, it appeared that Enron would have to take a Skilling, who had only become CEO a few months earlier, pre-tax charge against more than $500 million because of was resigning for personal reasons, that his departure did not a shortfall in the credit capacity of the Raptor SPEs. To raise “any accounting or business issues of any kind,” that avoid the loss and its more dire consequences, Enron, Arthur Enron's financial state “had never been *635 stronger” and Andersen, Vinson & Elkins, Kirkland & Ellis and some of its “future had never been brighter,” that there was “nothing to the banks “restructured” the Raptors by transferring to them disclose,” that Enron's “numbers look good,” that there were
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“no problems” or “accounting issues,” and that the Enron extensive the fraud had really been.” Consolidated complaint “machine was in top shape and continues to roll on—Enron's at 42. the best of the best.”
In October 2001, in an effort to limit their own legal exposure The consolidated complaint quotes Enron management and to stop Enron from becoming insolvent and preclude employees in August 2001 complaining to the Board about the investigations and revelations that insolvency would give the fraud 75 Nevertheless, Enron's directors *636 did rise to, Enron insiders, JP Morgan, and CitiGroup tried to not investigate or disclose the matters the employees had effectuate the sale of Enron to, or a “salvation merger” with, raised. Instead, according to the consolidated complaint, they Dynegy, a transaction that would also provide each bank with brought in Vinson & Elkins to cover up the wrongdoing. a $45 million fee. Consolidated complaint at 43. To preclude Vinson & Elkins issued a whitewash report dismissing these exposure of the two banks' participation in the alleged Ponzi detailed complaints of fraud even though the law firm scheme, according to the complaint, in late November 2001 knew the allegations were true because it was involved in Robert Rubin, the Vice Chairman of CitiGroup, and William structuring many of the manipulative devices. Harrison, *637 the Chairman of JP Morgan, called Moody's Investment Service (“Moody's”) and pressured it to keep By May 2001, as the price of Enron stock continued to fall, Enron's investment grade credit rating in place until the sale of criticism of Enron's aggressive accounting, termination of Enron to Dynegy was completed. They failed. Dynegy's due the Blockbuster VOD venture, and worries about Enron's diligence investigations uncovered and its investment bankers broadband business caused the price to fall below “trigger” discovered that Enron's financial condition was much worse levels, thus forcing Enron to issue large amounts of additional than had been publicly disclosed at that point, Dynegy refused stock to its SPEs. The Raptors' credit problems became to acquire Enron. By November 28, 2001 the rating agencies unsolvable. Unable to avoid any longer a multi-million dollar had downgraded Enron's publicly traded debt to “junk” status, loss in the third quarter of that year and recognizing the and Enron filed for bankruptcy on December 2, 2001. threat of disclosure of their previous misconduct, Enron and Arthur Andersen allegedly began destroying documents that The consolidated complaint charges that Enron's publicly reflected their fraudulent course of conduct. On October filed reports disclosed the existence of the LJM partnerships, 16, 2001 Enron revealed charges of $1 billion and a but not the essence of the transactions between Enron and the reduction of shareholders' equity by $1.2 billion. The SEC partnerships, nor the nature or extent of Fastow's financial began investigating and Fastow resigned. In a Form 8– interests in the partnerships. Instead the disclosures were K filed on November 8, 2001 Enron announced it would crafted and approved by Enron's outside Arthur Andersen restate its annual financial statements for the years 1997, auditors and counsel (Vinson & Elkins and Kirkland & 1998, 1999 and 2000, and conceded that Chewco had Ellis) in meetings with Enron top insiders. Moreover, never met SPE accounting requirements and, because JEDI's Enron's manipulative devices, contrivances, and related-party nonconsolidation status depended on Chewco's, neither did transactions were extraordinarily lucrative for Fastow and JEDI. Enron then consolidated Chewco and JEDI retroactive investors in the LJM partnerships despite the relatively to 1997, resulting in a massive reduction in Enron's reported risk-free deals that protected them. Lead Plaintiff quotes net income and a massive increase in its reported debt. In a Newsweek article from the January 28, 2002 edition: addition Enron confessed that it had failed to correct $51 “The key to the Enron mess is that the company was million in errors found by Arthur Andersen for 1997 and allowed to give misleading financial information to the that it was restating its 1997, 1998, 1999 and 2000 financial world for years.” Lead Plaintiff concludes that “the scheme results to eliminate $600 million in previously reported profits to defraud Enron investors was extraordinary in its scope, and approximately $1.3 billion in shareholders' equity. Yet, duration and size,” that it “was accomplished over a multiaccording to the complaint, the restatements “just scratched year period through numerous manipulative devices and the surface of the true extent of the prior falsification of contrivances and misrepresentations to investors,” and that Enron's financial statements, failing to eliminate additional it “was designed and/or perpetrated only via the active and hundreds of millions of dollars of phony profits as Enron, knowing involvement of Enron's general counsel, Vinson Arthur Andersen, Vinson & Elkins and the banks were & Elkins, the law firm for the LHM2 entity and its SPEs, still trying to keep Enron afloat and trying to conceal how Kirkland & Ellis, Enron's accounting firm, Arthur Andersen, and Enron's banks, including JP Morgan, CitiGroup, CS First
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Boston, Merrill Lynch, Deutsche Bank, Barclays, Lehman supporting the price of Enron stock through issuance of Brothers and Bank America.” Consolidated complaint at 45. glowing research reports with misleading information about Enron.
The Consolidated Complaint at 328–39 lists the offering documents and describes the kinds of allegedly false and JP Morgan, CitiGroup, and Credit Suisse First Boston misleading statements in Enron's offering documents for also concealed billions of dollars in loans to Enron that securities offerings from July 7, 1998 through July 18, were disguised as sales transactions. In return for their 2001, which incorporated by reference prior Enron Form participation in the Ponzi scheme, the banks and/or their 10–Ks and 10–Qs, and which also misstated or misled top executives were rewarded in part with the opportunity the public about material matters and failed to disclose to invest in the LJM2 partnership, with expectations of the fraudulent activity described above and its resulting exorbitant returns because Enron officials were wearing the deceptive version of Enron's financial status and results. hats on both sides of its transactions, a conflict of interest These acts included Enron's deliberate failure to consolidate constituting “blatant self-dealing” that was made explicit in non-qualifying SPEs, straw transactions with banks, bogus the private offering memorandum inviting the banks and bank hedging transactions leveraging Enron's own stock equity as officers' investment. As discussed supra, the bank and banker credit support, misleading the public about Enron's financial Defendants knew that for Enron to avoid a very bad fourth risk management and credit risk, and false statements about quarter and 1999 year-end report, LJM2 had to be formed its failing nascent businesses that were more conceptual than before the end of 1999 for Enron to create illusory profit real, including EBS, EIN, and EBOS. and hide debt. Because Merrill Lynch was unable to raise the necessary funds from outside, J.P. Morgan, CIBC, CitiGroup, Deutsche Bank, Credit Suisse First Boston, Lehman Brothers B. Defendant–Specific Allegations and Merrill Lynch (the underwriter of LJM2), 76 aware of the 1. The Banks fact that Enron officers would improperly control both sides Lead Plaintiff alleges that the banks participated in the of its transactions and thus insure high returns, on December Ponzi scheme for personal enrichment and for continuing 22, 1999 put up virtually 100% of the funds (far more than business generating spectacular fees (such as the “long gravy their allocated shares) needed to fund LJM2, with JP Morgan train” of lucrative underwriting of Enron stock and bond additionally providing a loan of $65 million. This infusion offerings). Moreover, according to the complaint, once they of cash enabled Enron to engage in the deals involving were involved, their continued participation was also to limit Whitewing, CLO, Nowa Sarzyna Power Plan, MEGS natural their exposure to risk, salvage their financial investments, and gas and Yosemite certificates to create phony profits and save their reputations. conceal debt before the year's end. They also benefitted from the distributions from the Raptor SPEs to LJM2, generated The charges against the banks are a blend of repetitive, by illicit transactions between Enron and the Raptors used conclusory, cookie-cutter contentions and of assertions that to falsify Enron's financial results. Furthermore the banks are unique or limited to only a few Defendants. *638 In enjoyed enormous financial benefits from participating in the the former group, the consolidated complaint alleges that the scheme in the form of interest and underwriting, consulting, banks structured and/or financed the partnerships and non- and advisory fees, which by inference caused them to act qualifying SPEs secretly controlled by Enron and advanced contrary to their profession's principles and requirements. these illicit entities funds at key times to allow them and Enron to complete bogus transactions just before year- or The complaint asserts that the banks as lenders had to have quarter-end in order to create fake profits and to conceal detailed information about the actual financial condition of billions of dollars of Enron debt that should have been Enron throughout the Class Period and had to know that its reported on its balance sheet. Aware of Enron's financial financial condition was far worse than Enron was publicly fragility, the banks further made loans to Enron to insure disclosing. Banks are required not only by their individual its liquidity and continuing operations, while simultaneously internal procedures, but by the governmental regulation and aiding Enron in selling securities to public investors so that oversight to perform an extensive credit analysis of any Enron could continue to pay down its short-term commercial applicant for a commercial loan or credit facility and retain paper and bank debt and keep the fraudulent Ponzi scheme documentation in their files. Such an analysis must include afloat. The banks were central players in inflating and the borrower's actual and contingent liabilities, *639 its
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liquidity position, any equity issuance obligations with the to inflate its reported profits and conceal debt by moving it off potential of adversely affecting its shareholders' equity, any its balance sheet into the SPEs. As a reward for JP Morgan's potential debt even if it is not directly on the borrower's books, participation, top executives in JP Morgan were given the the quality of the borrower's earnings, and its actual liquidity, opportunity to invest and did invest at least $25 million in including sources of funds to repay any loans. For large loans the lucrative LJM2. Lead Plaintiff pleads that during the for commitments to credit facilities for a corporation, the Class Period top officials of the bank constantly interacted bank had to monitor the company closely, frequently review on an almost daily basis with Enron's top executives, i.e., its financial condition and ongoing operations for material Lay, Skilling, Causey, McMahon, and Fastow, with whom changes, and require the borrower's top financial officers to it discussed all aspects of Enron's business. JP Morgan's keep the bank informed of the borrower's current business and specific involvement in the fraudulent course of conduct and financial condition. business included loans of over $4 billion to Enron during the Class Period, helping to structure and finance certain The complaint further asserts that in addition to knowledge of the illicit SPEs and partnerships controlled by Enron to about the nature and purpose of LJM2, the bank Defendants serve as vehicles for false reporting of its financial results, knew that Chewco was engaging in the same kind of non- and engaging in transactions with Enron to disguise loans to arm's-length transactions with Enron for the same purpose. Enron and to falsify for public perception Enron's financial Lead Plaintiff also claims that the banks knew about condition, liquidity, and creditworthiness. Enron's actual precarious financial position and false public disclosure because Enron was falsifying its financial results, The complaint charges that JP Morgan acted as a was manipulating mark-to-market accounting, was utilizing consolidated, unified entity without *640 “Chinese walls” to illicit entities that it secretly controlled to move debt off its seal off from its securities analysts information garnered by its own balance sheets, and was involved in transactions, which commercial and investment banking service section. 77 Even Enron supported with its own stock and which would require if restrictions were imposed on the flow of such information, Enron to issues millions of shares of common stock if the the complaint alternatively asserts that the Chinese was price of its stock dropped below a specified trigger price so inadequate and therefore the knowledge and scienter of as to make the debt of the SPEs become recourse to Enron. JP Morgan's commercial and investment entity should be imputed to its analysts.
a. JP Morgan Chase & Co.
The complaint at 349–50 lists five Enron offerings (two JP Morgan, an integrated financial services institution that, within the Class Period), for which the bank acted as through its subsidiaries and divisions (J.P. Morgan Securities underwriter or reseller of billions of dollars of Enron and Chase Securities, collectively, “JP Morgan”), is sued securities, two (both within the Class Period) of other Enronunder § 10(b) and § 11 of the federal statutes and under the related securities, and six instances (three within the Class TexasSecuritiesAct. According to the complaint, JP Morgan Period) where it served as lender on Enron's main credit provided commercial and investment banking services and facilities, while helping to syndicate over $4 billion in loans advisory services, including acting as an underwriter in the to Enron and related entities. Two of the loans, a $1 billion sale of Enron securities and issuing investment analyses and and $3 billion commercial paper back up of credit facilities, opinions about Enron.
permitted Enron to remain liquid and maintain access to the commercial paper market so that it could borrow billions The complaint alleges that JP Morgan helped to structure to finance its day-to-day operations, for which JP Morgan or finance one or more of Enron's illicit partnerships or received huge commitment fees. JP Morgan also arranged SPEs, including LJM2, and to falsify its financial statements, about $1.5 billion (lending part of the money and syndicating misrepresenting Enron's financial condition by hiding almost the rest) so that Enron could finance the illicit Sequoia, $4 billion in debt that should have been on Enron's balance Choctaw, Cherokee and Cheyenne SPE/partnerships and the sheet. Concurrently JP Morgan's analysts issued rosy, false JEDI partnerships to move debt off Enron's balance sheet and and misleading reports on Enron. JP Morgan was a main improperly recognize millions in illusory profits. Not only did bank lender to LJM2 and provided more than a $65 million JP Morgan receive enormous fees and interest payments for credit line to that partnership. That money enabled LJM2 to the loans and syndication services, but it was also limiting its form and finance several SPEs including the Raptors, which Enron in turn used in manipulative devices and transactions own risk of exposure 78 by working to maintain for Enron
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an investment-grade credit rating, credible strong forecasts of condition was precarious and the company might default, JP revenue and profit growth, and access to the capital markets Morgan insured the “contracts” to protect itself from loss. to raise fresh capital from public investors so that Enron could After Enron filed for bankruptcy and JP Morgan filed claims continue to repay or reduce its commercial paper debt and with the insurance carriers that had issued surety bonds for the loans, including those from JP Morgan. purported commodities trades between Enron and JP Morgancontrolled entities, the carriers refused to pay on the grounds The complaint further charges that JP Morgan as a lead that the trades were fraudulent and were in reality a series of underwriter made false statements in Registration Statements loans from JP Morgan to Enron. The complaint points out that and Prospectuses, including interim and financial statements the Mahonia transactions were also frequently timed to occur as well as statements regarding Enron's relationship to SPEs just before the end of a quarter or of a year reporting periods. and related parties and the value and condition of its business operations and assets. JP Morgan is allegedly liable for its The complaint also reiterates that in November 2001, participation in Enron's February 1999, 27.6–million–share desperate to arrange the sale of the failing Enron to Dynegy stock offering, and its resale of Enron zero coupon convertible the Chairman of JP Morgan and Vice Chairman of CitiGroup notes on and after July 18, 2001. called Moody's to pressure it to keep Enron's investment grade credit rating in place.
Lead Plaintiff also alleges that JP Morgan analysts' reports (including those dated 6/9/99, 7/15/99, 9/23/99, 11/26/99, As a similar instance of JP Morgan's and Citigroup's 1/21/00, 2/9/00, 5/3/00, 5/15/00/ 7/3/00, 7/19/00, *641 practice of keeping the alleged Ponzi scheme operational, 9/15/00, 9/29/00, 3/13/01, 3/23/01, 5/18/01, 6/15/01, 7/10/01, the complaint points to another lawsuit Unicredito Italiano 7/21/01, 8/15/01, 8/17/01, 10/17/01, 10/20/01, 10/23/01, v. JPMorgan Chase Bank and CitiGroup. In that suit 79 the and 11/2/01) contained false and misleading statements plaintiff, an Italian bank, has claimed that JP Morgan and to the securities markets about Enron's business, finances, CitiGroup had represented to Unicredito that there had been and financial condition and prospects and thereby helped no changes in Enron's financial condition as of 10/25/01. to artificially inflate the value of Enron's publicly traded Unicredito relied on that representation and, to its detriment, securities. JP Morgan knew that if the value of the stock funded a $22 million credit facility for Enron. fell below the various “trigger” prices, Enron would have to issue millions of additional shares of stock, thus reducing As evidence that JP Morgan's conduct was intentional shareholder equity by hundreds of millions, if not billions, and a regular course of business used to defraud, the of dollars and endangering its investment-grade rating and complaint states that JP Morgan used the same contrivance in access to capital markets, a threat to the alleged ongoing Ponzi previous years with Sumitomo Trading Company, employing scheme feeding profits and repayments to JP Morgan and its ostensible trading on copper futures to disguise what were partners.
actually loans. 80 The complaint asserts *642 that it was JP Morgan that suggested to Enron the idea of using disguised JP Morgan also purportedly participated in the scheme commodity trades to hide Enron's debt, while Enron provided to finance or otherwise involve itself in manipulative JP Morgan with profits through excessive interest rates and devices and illicit transactions that would enable Enron fees for its services in putting together the sham Mahonia to continue to falsify its financial condition. Specifically, transactions.
as detailed previously, JP Morgan and Enron engaged in fraudulent transactions involving over $5 billion, structured Lead Plaintiff also claims that JP Morgan knew that to appear to be natural gas futures contracts, or commodity Enron was falsifying its publicly reported financial results trades, between Enron and Mahonia, Ltd., an entity secretly and situation because, as Enron's lead lending bank, JP controlled by JP Morgan. In fact the transactions were Morgan had access to Enron's internal business and financial disguised loans from JP Morgan to Enron to appear to information and because it intimately interacted on a nearly boost its liquidity since Enron booked them as revenue daily basis with Enron's top executives (Lay, Skilling, while concealing over $3.9 billion in debt that should Causey, McMahon and Fastow).
have been recorded on Enron's balance sheet. Because JP Morgan knew these transactions were manipulative devices and contrivances and because it knew that Enron's financial b. CitiGroup
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Citigroup, sued under § 10(b) of the Exchange Act, is a to hold. Furthermore during the Class Period CitiGroup large integrated financial services institution. Through its was one of Enron's principal lending banks, acting with JP subsidiaries and divisions, including Salomon Smith Barney Morgan as lead bank on Enron's main credit facilities, loaning (collectively, “Citigroup”), Citigroup provided commercial hundreds of millions of dollars to Enron, and participating in and investment banking services, commercial loans, and syndicating over $4 billion in bank loans to Enron. CitiGroup advisory services regarding the structuring of financial was involved in a 6/01 loan of over $600 million to the transactions, including those at issue relating to derivatives disastrous Indian Dabhol power project, a 7/01 $582 million and hedging. CitiGroup also acted as an underwriter in the loan to Enron, an 8/01 $3 billion transaction for an Enron sale of securities to the public and provided investment credit facility to back up commercial paper, an 11/01 $1 analysis and opinions through reports by its securities billion secured loan to Enron, and a 5/98 $500 million loan analysts. to JEDI.
The complaint asserts that like JP Morgan, CitiGroup enjoyed According to the complaint, because CitiGroup knew that huge underwriting, advisory and transactional fees, interest, Enron's financial position was far more unstable than it *643 and commitment charges, and that some of its was disclosing to the public and that Enron was falsifying executives were given the opportunity to invest and did its financial position and results, in an unusual procedure, invest $15 million in LJM2 for lucrative returns. Its senior purportedly the largest hedge of its kind ever, CitiGroup executives also allegedly interacted nearly daily with top created securities issued from 8/00 to 5/01 that functioned executives at Enron, discussing its business in detail. It as insurance policies for its own potential credit exposure participated in the fraudulent course of conduct and business of $1.4 billion to Enron. CitiGroup set up paper companies through loans to Enron of over $4 billion during the Class in the Channel Islands, the first in 8/00 and three more in Period, helping Enron raise over $2 billion from the investing 5/01, that offered highly rated five-year, credit-linked notes, public through the sale of securities during the Class Period; i.e., notes linked to Enron's credit status, to investors. The it helped to structure and finance one or more of the illicit arrangement was that if all went well, CitiGroup would return partnerships or SPEs that Enron used to inflate its earnings investors' principal when the five years had elapsed. Should and conceal its debt; and it engaged in disguised loans to Enron end up in bankruptcy, however, CitiGroup would stop Enron that allowed Enron to falsify its financial situation. paying the premium return to investors, take possession of the high-quality securities and keep the investors' principal, and Lead Plaintiff also claims that CitiGroup functioned as give the investors Enron's worthless or impaired unsecured a unified entity and there was no “Chinese wall” to debt. seal its analysts from information collected by CitiGroup's commercial and banking services, or if there were restraints, The complaint asserts that CitiGroup enjoyed and would they were inadequate and therefore all knowledge and continue to enjoy enormous profits, fees, interest payments scienter possessed by the CitiGroup commercial and for loans and syndication services as long as the Enron investment entity should be imputed to its securities analysts. scheme continued in operation. *644 As long as Enron retained its investment-grade credit rating and continued to The complaint at 358 lists fifteen instances (four within report (though not actually have) strong current financial the Class Period) when CitiGroup served as an underwriter results with credible forecasts of future revenue and profit for Enron securities, and one within the Class Period for growth, Enron's access to capital markets would permit it Enron-related (Yosemite) securities. CitiGroup also was lead regularly to raise enormous sums of money, fresh capital, underwriter in the sale of 27.6 million shares of New Power from public investors that Enron could then use to repay its stock in its IPO at $21 per share by means of an allegedly existing commercial and bank indebtedness, including that to false and misleading prospectus. The complaint asserts that CitiGroup. CitiGroup, by deceiving the public and creating a market for these shares, knowingly enabled Enron, using a bogus, non- The complaint alleges that CitiGroup helped to finance or arm's-length transaction with an SPE controlled by LJM2, participated in illicit transactions with Enron that CitiGroup to report a $370 million, fourth-quarter 2000 profit by knew would contribute materially to Enron's ability to claiming a gain in value on the 13.6 million shares and continue to falsify its financial conditions and keep the 42.1 million warrants of New Power that Enron continued Ponzi operational. From late 1999 until 2001, CitiGroup lent
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Enron $2.1 billion in a series of manipulative devices and First Boston's securities analysts continued to issue rosy transactions, i.e., the Delta pre-paid swaps discussed earlier. reports about Enron's business success and positive prospects for strong revenue and earnings growth in the future. Its CitiGroup purportedly also made false and misleading top executives also regularly interacted with Enron's top statements in the Registration Statements and Prospectuses executives during the Class Period and discussed Enron's for Enron securities sales for which it was an underwriter, business *645 and financial situation in detail. Credit Suisse including false interim and annual financial statements and First Boston participated in over $4 billion of loans and in statements regarding the structure of and Enron's relationship syndicating loans to Enron 82 and helped Enron raise over to SPEs and related parties. The complaint asserts that $3 billion from the investing public through sales of new CitiGroup is liable for its participation as lead underwriter in securities during the Class Period. The complaint charges the resale of the Enron zero coupon convertible notes on or that Credit Suisse First Boston also had no “Chinese Wall” after 7/18/01. 81 to preclude information from its commercial and investment banking services to Enron flowing to its securities analysts, Lead Plaintiff further complains that CitiGroup issued or, if there were restraints, they were inadequate to preclude numerous analysts' reports on Enron that contained false imputation of all knowledge and scienter by one section to and misleading statements about Enron's financial condition, the other. including those dated 10/22/98, 1/27/99, 5/25/99, 7/20/99, 8/20/99, 9/20/99, 10/20/99, 4/12/00, 9/21/00, 3/12/01, Credit Suisse First Boston served as underwriter for nine 3/22/01, 5/18/01, 6/7/01, 7/13/01, 10/16/01, and 10/19/01, sales (three during the Class Period) of Enron securities. all serving to artificially inflate the price of Enron's publicly Complaint at 365. Furthermore it was lead underwriter in the traded securities. New Power IPO on 10/4/00, selling 27.6 million shares at $21, and bogus hedge transaction with an LJM2–controlled The complaint also charges CitiGroup with active SPE, leading to Enron's recording of a $370 million profit on participation in structuring and financing LJM2 and notes the gain in value of the New Power shares and warrants that that CitiGroup's top executives were rewarded with the Enron continued to hold. It also acted as underwriter in the opportunity to invest about $13 million in that vehicle. These Azurix IPO, selling 38.5 million shares of Azurix stock at $19 executives invested their money early, around 12/22/99, to per share. Enron sold 19.5 million shares of Azurix stock in enable LJM2 to fund four SPEs to effect deals with Enron the offering and received $370 million in new capital. Credit before year end to create huge profits so that Enron could meet Suisse First Boston also acted as underwriter for other Enronits ′99 profit forecasts. related securities, including $1 billion in notes for Osprey Trust/Osprey I Inc., $500 million 6.19% and 6.31% notes The complaint references the last-minute effort to arrange the for Marlin Water Trust/Marlin Water Capital Corporation II, “salvation merger” with Dynegy in October–November 2001, and $650 million in 10.375% and 10.75% senior notes for for which CitiGroup was paid a fee of $45 million. Azurix. It also served as an Enron advisor about the $2 billion sale of Portland General Electric and helped Enron dispose of its international asset portfolio in the second half of ′01 for c. Credit Suisse First Boston between $5–7 billion in assets. It further advised Enron on Credit Suisse, which provided both commercial banking and several other merger and acquisition transactions. investment banking services to Enron, is sued under § 10(b) of the 1934 Act and Rule 10b–5. According to the complaint, The complaint claims that Credit Suisse First Boston this financial services enterprise received huge fees, interest participated in the fraudulent Ponzi scheme for enormous and commitment charges from Enron, and its executives were profits through syndication and investment banking fees and rewarded by the opportunity to invest and did invest at least interest payments and so that Enron would have continued $22.5 million in LJM2. access to capital from investors to pay off its commercial paper debt and loans from the banks, thus limiting Credit The complaint states that Credit Suisse First Boston helped Suisse First Boston' own risk. structure and finance several of Enron's illicit partnerships or SPEs and helped Enron to falsify its financial statements The complaint charges that Credit Suisse First Boston made and misrepresent its financial condition, while Credit Suisse false and misleading statements (including interim and annual
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financial statements and statements about the structure and including Jeff McMahon or Ben Glisan (successive treasurers nature of Enron's relationship to SPEs and related parties) of Enron), and create a solution in order to doctor the Enron in the Registration Statements and Prospectuses for Enron books. According to the complaint, most of the vehicles securities sales where Credit Suisse First Boston was an created in this manner by Nath shared the same unusual underwriter. Credit Suisse First Boston was lead underwriter feature: the SPEs held Enron stock to reassure lenders and in a February 1999 sale of 27.6 million shares of Enron secure an investment grade rating, but there were set “trigger stock at $31.34 each and the resale of Enron zero coupon points,” or prices between $83–$19 per share, at which the convertible notes on or after July 18, 2001. It also issued stock's declining value would require Enron to put more analysts' reports containing false and misleading statements, shares into the entity or even force liquidation if Enron's credit including those dated 7/6/99, 7/13/99, 9/2/99, 9/22/99, rating was downgraded. At that point the debt of the SPEs 10/12/99, 11/30/99, 1/18/00, 1/21/00, 2/28/00, 4/13/00, became recourse to Enron. A knowledgeable banker stated, 10/18/00, 2/20/01, 4/17/01, 8/14/01, 8/17/01, 10/19/01, and “Taken in combination, these partnerships clearly posed a 10/23/01, directed at the investing public to keep Enron's material risk for the company.” Complaint at 369. An Enron stock price inflated. insider remarked, “There's no question that senior people at CSFB knew what was going on and that it was a house In addition to the bank's own false and misleading statements, of cards.” Id. One individual who attended stated that the the complaint asserts, Credit Suisse First Boston participated triggers were discussed by senior Enron executives and Credit in the fraudulent scheme by financing or otherwise becoming Suisse First Boston bankers at a meeting in July 2001, when involved in illicit transactions with Enron that would Enron's stock had fallen into the $40s. It was reported that materially support Enron's ability to continue to misrepresent the bankers remarked, “If this thing hits the $20s, you better its financial conditions and support the Ponzi scheme. *646 run for the hills,” and “There was no question that they knew Like JP Morgan and CitiGroup, Credit Suisse First Boston exactly what lay inside the structures, when the triggers went made disguised loans to Enron to hide Enron's actual credit off—everything. You could almost say they knew more about situation, liquidity, and debt levels. Initially it lent Enron the company than people in Enron did.” Id. at 369–70. money using trades in derivatives: in 2000, it gave Enron $150 million, to be repaid over two years by payments As another indication that the bankers had knowledge about that varied with the price of oil. Although the deal was the nature and extent of Enron's off-balance sheet exposure characterized as a swap and misrepresented on Enron's was the discussion during a meeting in June 2001 between an books, Credit Suisse First Boston, through spokesman Pen Enron manager and two Credit Suisse First Boston managing Pendleton, admitted that it paid Enron up front so that it was directors, described on pages 147–48 of this memorandum in essence “a floating-rate loan.” and order.
Credit Suisse First Boston, through a group of ten of its The complaint asserts that Credit Suisse First Boston also bankers headed by Lawrence Nath, also created some of helped to structure and finance LJM2 and that some of its the illicit SPEs, a process dubbed “structured products,” senior executives invested $22.5 million in equity money into including Marlin, Firefly, Mariner, Osprey, Whitewing, and it by using DLJ Fund Investing Trust Partners and Merchant the Raptors. Moreover Credit Suisse First Boston helped Capital. They invested the money early enough in December Enron sell assets at inflated prices to these entities, even 1999 to allow LJM2 to fund four SPEs for timely deals though Enron could never have sold them at such prices in with Enron to create huge end-of-′99 profits so Enron could arm's-length transactions for profit, and thereby created sham meet Wall Street forecasts. Credit Suisse *647 First Boston profits and concealed massive debt. Lead Plaintiff alleges that additionally provided LJM2 with a credit line of more than Laurence Nath and Credit Suisse First Boston worked closely $120 million to engage in such transactions to falsify its with Vinson & Elkins and Arthur Andersen to create and financial results for the year. document these SPEs and transactions. When an asset was sold to one of the SPEs as a quick-fix solution to remove The complaint states that Credit Suisse First Boston knew that that asset from Enron's balance sheet, it was referred to as Enron was falsifying its publicly reported financial results “monetising” the asset. Laurence Nath would go to Houston and that its financial position was more endangered than the for a week or two, meet with a group from Enron's treasury public knew because, as Enron's lead lending bank, it had and global finance departments (“Fastow's field marshals”), unlimited access to Enron's internal business and financial
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information and because it enjoyed intimate interaction with sham hedge transaction with an LJM2–controlled *648 SPE, Enron's top officials almost daily. effected by Vinson & Elkins, Arthur Andersen, CIBC, and Enron, together. See previous discussion at 130–31 of this memorandum and order.
d. CIBC CIBC is sued under both the 1933 and the 1934 Acts. The Where it acted as an underwriter, CIBC allegedly made false complaint alleges that CIBC, which provided commercial and and misleading statements in the Registration Statements and investment banking services to Enron, also helped structure Prospectuses. Lead Plaintiff asserts that CIBC is liable under and/or finance one or more of the illicit partnerships or § 11 in particular for its participation in May 1999 in an offer SPES, 83 helped Enron falsify its financial statements and of $500 million, 7–and–3/4% Enron notes. 85 misrepresent its financial condition at the same time that CIBC analysts were providing rosy reports about Enron's Furthermore, throughout the class period, CIBC analysts business success, strong financial condition, and prospects issued reports with false and misleading statements to the for strong revenue and earnings growth. Its top executives securities market about Enron's business, including those also allegedly met nearly daily with top officials at Enron to dated 7/15/98, 10/14/98, 1/25/99, 4/14/99, 7/14/99, 10/7/99, discuss Enron's business picture. The complaint alleges that 10/13/99, 1/6/00, 1/18/00, 1/21/00, 4/12/00/ 10/19/00, there was no “Chinese wall” to seal off information known 4/19/01, 8/15/01, and 10/17/01, which helped to artificially by its commercial banking and investment services from its inflate the price of Enron's publicly traded securities. securities analysts, or that any such restraint was ineffectual, so that the knowledge and scienter of one area should be In addition, according to the complaint, CIBC and Enron imputed to the other. Like the others, CIBC involved itself engaged in fraudulent transactions using an entity controlled in the alleged Ponzi scheme because of the enormous profits by the two known as “Project Braveheart,” discussed at page it generated for CIBC, including huge fees and interest 128 n. 63 of this memorandum and order, to improperly report payments for millions of dollars of loans and syndication more than $110 million in sham profits in the fourth quarter services, as long as the participants could keep the scheme of 2000 and the first quarter of 2001, relating to Enron's VOD operating and Enron's access to capital markets open so that joint venture with Blockbuster. Although Enron and CIBC Enron could raise additional fresh capital from investors made glowing statements about the joint venture after it was through offerings underwritten in part by CIBC to repay or first announced in July 2000, the complaint asserts that Enron reduce its commercial debt and loans, including CIBC's. and CIBC knew the joint venture was risky and plagued by technical and legal problems that made it unlikely that it CIBC purportedly joined in and furthered Enron's fraudulent would ever, or at least for a long time, advance beyond a pilot conduct and course of business through various acts. First, it project stage. Nevertheless CIBC and Enron worked together participated in loans of over $3 billion to Enron during the so that Enron could employ mark-to-market accounting to the Class Period. It also raised over $3 billion for Enron or the project to improperly accelerate and record over $110 million entities Enron controlled from the investing public through in desperately needed profit for Enron from the Blockbuster sales of securities during the Class Period. Specifically, CIBC joint venture in year-end 2000 and first quarter of 2001 to acted as an underwriter on six offerings, two during the Class conceal Enron's actual financial condition. Period, listed in the complaint at page 372. In addition it acted as one of Enron's principal commercial lending banks. Id. 84 Specifically, on December 28, 2000, CIBC and Enron formed Moreover, in July 2001, CIBC acted as an underwriter for a partnership, EBS Content Systems LLC, known as “Project some Enron-related securities, specifically $1 billion, 6.31% Braveheart.” They immediately assigned an arbitrary and and 6.19% Marlin Water Trust II and Marlin Water Capital unrealistic value of $124 million to the partnership, and Corporation II notes. Furthermore, CIBC, along with Credit CIBC agreed to invest, not loan, $115 million in it in return Suisse First Boston and CitiGroup, was a lead underwriter for a large up-front fee and the right to receive 93% of in the New Power IPO on October 4, 2000, which sold Enron's profits from the VOD joint venture over the next 27.6 million shares at $21. By creating a trading market 20 years. This investment enabled Enron to recognize over and a purported value for New Power stock, CIBC enabled $110 million in fraudulent profits for what was actually no Enron to report enormous profit on the gain in value of the more than a failing pilot project, in the fourth quarter of 80 million shares that Enron continued to hold through a 2000 and the first quarter of 2001. 86 Moreover because the
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*649 CIBC–Enron project was a sham, CIBC demanded Lynch also functioned as a consolidated and unified entity and got Enron to secretly guarantee repayment of CIBC's without effective Chinese walls to keep its securities analysts investment in Braveheart on the event of failure, so that CIBC from information obtained by Merrill Lynch's commercial was not a true investor nor at risk. Moreover, to create the and investment banking services, so that all knowledge and appearance of a legitimate SPE with a 3% outside equity scienter possessed by the entity should be imputed to the investor participation, CIBC and Enron got a company known analysts. as nCUBE, a contractor for Enron on the VOD project, to invest $2 million in Braveheart at year-end 2000, but CIBC Merrill Lynch served as lead underwriter for Enron on a and Enron secretly promised to return the $2 million right number of public offerings. *650 The complaint at 381 lists after the year end. As noted, not only was the financing phony, six, two of which occurred in the Class Period. Moreover, its but the entire VOD partnership was an illusion because Enron relationship with Enron was of such wide scope that Merrill did not have workable technology to deliver the content over Lynch underwrote the sale of about one third of Enron's its fiber optic network, as evidenced by its failure in a test outstanding bond issues. of the system in late 2000, and Blockbuster did not have the legal right, nor could it obtain that legal right, to provide Merrill Lynch helped Enron structure Azurix, Enron's wouldthe VOD venture content (movies) in digital form. Although be global water company. The complaint asserts that Merrill Enron abandoned the VOD venture in February 2001, only Lynch knew that Enron's main reason for purchasing Wessex eight months after it was commenced, significantly Enron did Water for $2.3 billion to create Azurix and take it public was not reverse the more than $110 million in sham profits that to compensate Rebecca Mark–Jusbasche after she lost out in a it had recorded from the project. Furthermore, because CIBC power struggle with Jeffrey Skilling to become Enron's CEO. knew that Enron was unable to honor its secret guarantee to Merrill Lynch was fully aware that the price Enron paid for repay CIBC its $115 million investment in Braveheart, CIBC Wessex Water was more than excessive, that the purchase was agreed to carry that amount for Enron until later on so that the made without a detailed feasibility study or carefully designed alleged Ponzi scheme could continue. business plan, and that Enron's worldwide water business was unlikely to succeed. In February 2000 Merrill Lynch acted as a lead underwriter for the Azurix IPO of 38.5 million shares e. Merrill Lynch & Co. at $19 per share, which brought in $370 million of needed Merrill Lynch, a financial services firm that provided capital for Enron. Later it was lead underwriter of over $650 investment banking services to Enron, is sued under § million of 10.375% and 10.75% Azurix senior notes, raising 10(b) and Rule 10b–5. According to the complaint it millions for the water company. helped structure and finance one or more of Enron's illicit partnerships at the same time that its securities Merrill Lynch allegedly participated in creating LJM2, which analysts were issuing very positive reports about Enron's was an essential part of the Ponzi scheme, with full awareness financial circumstances. As with the other banks, Merrill that Enron officials would be operating on both sides of the Lynch's top executives had daily contact with Enron's, transactions, virtually insuring certain enormous profits for its including Lay, Skilling, Causey, McMahon and Fastow, investing partners. Merrill Lynch's placement memorandum and they discussed Enron's business and financial condition, made clear that Enron would be the “source” of most, if not plans, needs, partnerships, SPEs, and future prospects in all, the deals to be done by LJM2, that Fastow, Kopper and detail. Furthermore, the wife of Schyler Tilney, head of Glisan would run the deals, and that LJM2 would benefit Merrill Lynch's Energy Investment banking operation, was from investment opportunities that “would not be available an Enron Managing Director, involved in Enron's EES otherwise to outside investors.” See discussion on pages operations, thereby providing Schyler Tilney with unique 111–12 of this memorandum and order. Merrill Lynch also access to information about the serious problems affecting told potential investors in LJM2 that in an earlier similar EES operations. Merrill Lynch allegedly furthered Enron's partnership run by Fastow doing deals with Enron, i.e., fraudulent course of conduct and business by helping to JEDI, investors had tripled their money in two years. The raise billions of dollars from investors through the sale of complaint at 382 states that Merrill Lynch made a “blatant new securities during the Class Period, as well as aiding in offer to the investors to profit from self-dealing transactions structuring and financing some of Enron's illicit SPEs and with Enron whereby the investors were virtually guaranteed partnerships, the primary vehicle used by Enron to falsify its to reap huge returns.” Lead Plaintiff alleges that Merrill reported financial results. The complaint asserts that Merrill
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Lynch participated in the decision to allow favored banks trigger points in its capitalization of a number of Enronor officers of those banks to invest in LJM2. Moreover, controlled entities and that Enron's investment grade credit top Merrill Lynch executives, including Bayly, Tilney, and rating would be in danger, Merrill Lynch's securities analysts Vice Chairman Thomas Davis, invested almost $22 million issued reports containing false and misleading statements in LJM2 in late 1999, early enough to give LJM2 cash to to the securities markets about Enron's business, finances, fund four SPEs to do deals with Enron at year-end ′99 to financial condition, and future prospects, including reports create huge profits so that Enron could meet its ′99 profit dated 1/20/99, 3/31/99, 4/13/99, 4/15/99, 7/14/99, 10/12/99 forecasts. In addition, Merrill Lynch placed the remaining (Donato Eassey, Bloomberg ), 10/12/99, 1/18/00, 1/24/00, LJM2 partnership units with highly favored clients of Merrill 4/12/00, 4/13/00 (Donato Eassey, Houston Chronicle ), Lynch. All this time Merrill Lynch knew that LJM2 was not 10/17/00, and 10/9/01. independent of Enron, that the partnership would be used for non-arm's-length transactions to boost Enron's reported The complaint asserts that from the beginning of the Class profits while improperly keeping debt off its balance sheets Period Merrill Lynch knew that Enron was falsifying its on terms that could not have been acceptable to independent, financial results and that its financial condition was far unrelated third parties. Merrill Lynch also provided a $120 more precarious than it was disclosing to the public because million line of credit to LJM2 to provide financing needed Merrill Lynch had access to Enron's internal business and for LJM2 to engage in transactions with the illicit SPEs financial information as one of Enron's main underwriters and and Enron, so that the falsification of Enron's records could financial advisors, as well as its daily interaction with Enron continue. executives. 87
Lead Plaintiff alleges that Merrill Lynch's motivation to participate in the Ponzi scheme increased in 2000–01 when *652 f. Barclays PLC Merrill Lynch pocketed millions of dollars by writing Barclays, a financial services institution, which is sued only hundreds of millions of dollars of “credit default puts” on under § 10(b), provided commercial banking and investment Enron's publicly traded debt securities, especially Enron's banking services to Enron, helped Enron structure and zero coupon convertible notes. These “puts” required Merrill finance one or more of its illicit partnerships or SPEs, Lynch to pay Enron's publicly traded debt if Enron defaulted including the year-end deal in 1997 where Chewco was within a given time period, thus exposing Merrill Lynch formed to purchase an outside investor's interest in JEDI. potentially to enormous *651 losses. As long as Merrill Barclay's senior executives interacted with Enron's on an Lynch could keep Enron looking strong, Enron would almost daily basis during the Class Period and discussed the continue to have access to the credit market to raise additional details of Enron's business and finances. Barclays allegedly money that could be used to repay or reduce its commercial knew that Enron was falsifying its financial results because paper debt and loans. of its unlimited access as one of Enron's lead lending banks, to Enron's internal business and financial information.
As with the other banks, Merrill Lynch participated in the Moreover, Barclays participated in the fraudulent course of ongoing fraudulent scheme for continuing enormous profits, conduct and business by participating in loans to Enron of fees for services, and opportunities for its executives to gain over $3 billion during the Class Period, helped raise almost personally from LJM2 investments. $2 billion from investors through the sale of new securities during the Class Period, and helped Enron structure and Merrill Lynch also issued false and misleading statements in finance some of the illicit SPEs and partnerships controlled Registration Statements and Prospectuses for securities sales by Enron and used to falsify its reported financial results. for which it was one of the lead underwriters, in particular the offering of 27.6 million shares of Enron stock at $31.34 Along with CitiGroup, Deutsche Bank, JP Morgan, and Bank in February 1999. America, Barclays acted as a placement agent or reseller in a February 2001 public offering of $1.9 billion zero coupon Furthermore, to help artificially inflate the trading prices convertible bonds. 88 It underwrote sales of Enron-related of Enron's publicly traded securities, because Merrill Lynch securities, including $240 million 8.75% Yosemite–Enron– knew that Enron would have to issue substantial additional linked obligations. It was also one of the principal commercial shares of stock if the price dropped below the various lending banks to Enron during the Class Period in more
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than $3 billion of bank loans. For instance, Barclays was participated in the fraudulent scheme by helping Enron and lead lender on a $2.3 billion debt facility to finance Enron's its related entities to raise over $4 billion through the sale purchase of Wessex Water in 1998; it was co-arranger of a of securities to public investors, helped structure and finance $250 million loan to Enron in November 1997; it participated some of the illicit partnerships and SPEs that served as in the September 1998, $1–billion credit facility for Enron Enron's main vehicles to falsify its reported financial results, and the August 2001, $3–billion debt facility, both used and engaged in transactions with Enron to conceal loans to to back up Enron's commercial paper debt; it participated Enron and helped misrepresent its actual financial condition, in a September 1998, $250–million revolving credit facility liquidity and creditworthiness. According to the complaint, for Enron in November 1998; and it helped to arrange and Lehman Brothers, too, functioned as a unified entity and had participated in a $500–million credit facility for JEDI in May no effective Chinese wall to seal off its securities analysts 1998. from information known to its commercial and investment bankers. Lehman was motivated to participate in the Ponzi As with the other bank Defendants, Barclays allegedly scheme for past and future enormous profits, huge investment participated in the scheme to receive the huge investment banking and syndication fees, and interest payments that the banking fees, interest payments, and syndication fees. It scheme provided to Lehman. Lehman allegedly was limiting viewed its risk as limited because as long as it and the other its risk because it knew that with the involvement of the banks helped Enron maintain its investment-grade credit other banks helping Enron to maintain its investment-grade rating and reports of strong financial results and credible credit rating and issuing continued reports of strong current expectations of continuing revenue and profit growth, Enron financial results and credible forecasts of strong ongoing would have access to the capital markets to raise additional revenue and profit growth, Enron could continue to raise fresh money to continue to repay or reduce its commercial paper capital from investors to pay off or reduce its commercial debt and loans, including its indebtedness to Barclays. paper debt and loans, including those from Lehman.
In addition to loans to Enron and entities associated with More specifically, the complaint alleges that Lehman acted the SPEs secretly controlled by Enron, Barclays and Enron as an underwriter for billions of dollars of Enron securities. engaged *653 in fraudulent transactions using Chewco. See The complaint at 390 lists eight instances, four within the pages 106–110 of this memorandum and order. When the Class Period. It also lists two instances when Lehman served scheme finally collapsed and Enron was forced to restate its as an underwriter for billions of dollars of Enron-related earlier financial results, the impact of Barclays' and Enron's securities: (1) in October 2000 for 27.6 million shares of illicit transactions with Chewco was tremendous. New Power at $21 per share and (2) in July 2001 for $1 billion 6.375% and 7.79% Osprey Trust and Osprey I Inc.
g. Lehman Brothers Holding Inc.is sued under both § notes. The complaint asserts that Lehman is liable under 10(b) and § 11 and under the TexasSecuritiesAct. § 11 for allegedly making false and misleading statements in the Registration Statements and Prospectuses for a May The complaint repeats many of the same general claims 1999, $500–million sale of 7–and–3/8% Enron notes and asserted against other banks against Lehman Brothers: during a May 2000, $500–million sale of Enron notes, for which the Class Period Lehman Brothers provided Enron with Lehman served as an underwriter, including interim and commercial and investment banking services, helped to annual financial statements and false statements about the structure and finance one or more of Enron's illicit SPEs or structure and nature of Enron's relationships to the SPEs and partnerships, and helped Enron falsify its financial statements partnerships, as well as the financial condition of Enron's and misrepresent its financial condition while Lehman's business operations and assets. analysts continued to issue very positive reports about the company. As a reward, top executives of Lehman's were The complaint further charges Lehman with liability for invited to invest and did invest at least $10 million in false and misleading statements by its analysts in reports to the lucrative LJM2 partnership. Top officials from Lehman the securities markets, knowingly made to help artificially Brothers interacted on a daily basis with Enron executives inflate the trading prices of *654 Enron's publicly traded and discussed Enron's business and finances in detail, and securities so that the various trigger prices in Enron's deals therefore Lehman knew that Enron was falsifying its publicly would not be reached and the Ponzi scheme endangered. The reported financial results and financial condition. Lehman Lehman analysts' reports included those issued on 12/9/98,
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4/7/99, 5/7/99, 9/21/99, 10/1/99 (Ted. A. Izatt, Lehman or reduce Enron's commercial paper and bank indebtedness, Brothers Senior Vice President, quoted in CFO Magazine including indebtedness to Bank America. ), 1/21/00, 4/13/00, 10/18/00, 3/12/01, 4/18/01, 7/26/01, 8/14/01, 8/15/01, 8/17/01, 10/23/01, and 10/24/01. More particularly, Bank America is allegedly liable under § 11 for false and misleading statements that it made in Registration Statements and Prospectuses for offerings where h. Bank America Corporation it served as lead underwriter, including a May 1999 sale of Bank America, which is sued under § 10(b) and § 11, $500 million of 7.375% Enron notes, an August 1999 sale of provided both commercial and investment banking services $222 million of 7% Enron exchangeable notes, and a May to Enron during the Class Period. The complaint generally 2000 sale of $500 million of 8.375% Enron notes. 89 *655 asserts that it, too, helped to structure and finance one or Furthermore, throughout the Class Period, Bank America's more illicit partnerships or SPEs, and helped Enron falsify its analysts issued reports to the securities markets containing financial statements and misrepresent its financial condition false and misleading statements about Enron's business, while Bank America's analysts issued glowing reports about finances, financial conditions, and prospects, including Enron. In return Bank America received huge underwriting those dated 9/30/99, 10/12/99, 10/15/99, 12/16/99, 1/12/00, and consulting fees and other payments, while top officials 1/18/00, 1/20/00, 4/17/00, 10/17/00, 8/15/01, 8/28/01, and of Bank America were allowed personally to invest and did 10/16/01. These false and misleading statements were invest at least $45 million in the LJM2 partnership. Bank intended to inflate the trading prices of Enron securities to America's top executives also interacted nearly daily with avoid the trigger prices that would require Enron to issue those of Enron and they discussed Enron's business and additional shares of stock, substantially reduce shareholders'
financial situation in detail throughout the Class Period. Thus equity, and endanger Enron's credit rating, which in turn Bank America knew that Enron was falsifying its financial would adversely affect its ability to raise new capital by new situation, which in actuality was precarious. Bank America sales of securities so that it could repay its indebtedness to the became involved in the fraudulent scheme by participating banks and would expose the Ponzi scheme from which all the in loans of over $4 billion during the Class Period, helping banking defendants were profiting.
to raise over $2 billion from the investing public through securities sales during the Class Period, helped structure Bank America also is alleged to have helped structure and and finance some of the illicit partnerships and SPEs that finance LJM2. Bank America's top executives, too, were served as the primary vehicles for manipulating Enron's given the opportunity to invest and did invest about $45 financial results, and engaged in transactions with Enron million in equity money to finance the LJM2 early enough to disguise loans to Enron and thereby conceal its actual in December 1999 to allow LJM2 to fund four other SPEs to financial condition, liquidity and creditworthiness from the manipulate year-end profits for Enron.
public. The complaint here, too, charges that Bank America acted as a unified entity without effective Chinese walls to preclude information from its commercial and investment i. Deutsche Bank AG banking services from reaching its securities analysts and Lead Plaintiff sues Deutsche Bank only under §§ 10(b) thus all knowledge and scienter of the former should be and 20(a) of the 1934 Act and Rule 10b–5. The complaint imputed to Bank America as an entity. Like the others, Bank alleges that Deutsche Bank provided Enron with commercial America was allegedly motivated to participate in the Ponzi banking and investment banking services during the Class scheme by past, and hope for continuing, enormous profits Period, helped structure or finance one or more of the illicit that the scheme generated for Bank America, including SPEs and partnerships, and helped Enron falsify its financial huge investment banking and syndication fees and interest statements and misrepresent its financial condition as well as payments. Bank America, too, believed that it was limiting its prospects for strong earnings and revenue growth, even its risk because it knew the other banks would be shoring up while Deutsche Bank's securities analysts 90 were issuing Enron, helping to maintain its investment-grade credit rating glowing reports about Enron. Deutsche Bank's top officials with reports of strong financial results and projections for had detailed daily interchanges with Enron's executives about continued strong revenue and profit growth so that Enron Enron's business and financial situation and knew that Enron could continue to obtain fresh capital from sales of securities was falsifying its financial reports. Deutsche Bank joined the to the investing public and to use those monies to repay fraudulent scheme and furthered it by participating in loans of
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over $2 billion to Enron during the Class Period and helping Deutsche Bank also purportedly made false and misleading to raise over $5 billion from the investing public through sales statements in Registration Statements and Prospectuses for of securities. It also helped structure and finance some of sales of Enron securities where Deutsche Bank served as the illicit partnerships and SPEs and engaged in transactions a lead underwriter. Specifically the complaint asserts that with Enron to disguise loans to Enron and help it falsify Deutsche Bank is liable for its participation in Enron's 27.6 its actual financial condition, liquidity, and creditworthiness. million-share common stock offering in February 1999 and The complaint also claims that Deutsche Bank functions as in the resale of the Enron zero coupon convertible notes on a unified entity without effective Chinese Walls or restraints or after July 18, 2001. to seal off from its securities analysts information obtained by its commercial and investment banking services and Throughout the Class Period, Deutsche Bank's analysts issued thus the latter's knowledge and scienter should be attributed reports containing false and misleading statements about to the bank as a whole. Deutsche Bank willingly joined Enron's financial picture to the securities market to artificially the fraudulent scheme because of the enormous profits, inflate Enron's stock price, including reports dated 1/13/99, huge commercial and investment banking fees, and interest 1/20/99. 4/13/99, 5/25/99, 1/28/00, 4/14/00, 5/26/00, 7/25/00, payments, as well as syndicating fees that it received from and 9/15/00. that scheme. Deutsche Bank also helped Enron structure and finance LJM2. As a reward for Deutsche Bank's participation As one of Enron's principal commercial lending banks during in the alleged Ponzi scheme, its top executives were permitted the Class Period, Deutsche Bank, along with CitiGroup, to invest at least $10 million in LJM2. The executives *656 functioned as a lead bank on Enron's main credit facilities, made the investments early enough for LJM2 to fund four loaning over a billion dollars to Enron while helping to other SPEs to help manipulate Enron's year-end profit report. syndicate over $4 billion in loans to Enron or related entities. Deutsche Bank also allegedly believed it was limiting its The complaint lists four examples, including two in the Class risk because it knew the other banks participating in the period: In November 1998 a $582 million Enron credit line scheme would help Enron maintain its investment-grade and in July 2001 a $650 million Enron credit line. credit rating and report current strong financial revenue and provide credible forecasts of future performance to keep the Ponzi scheme afloat and maintain access to capital markets 2. Law Firms for fresh infusions of funds from investors to repay Enron's The consolidated complaint claims that Vinson & Elkins, indebtedness, including to Deutsche Bank. Enron's outside general counsel during the Class Period, and Kirkland & Ellis participated in writing, reviewing, Specifically the complaint at 398 lists three instances that and approving Enron's SEC filings, shareholder reports and Deutsche Bank acted as an underwriter for billions of dollars financial press releases, and in creating Chewco, JEDI, of Enron securities, two of which (February 1999 for 27.6 LJM1, LJM2, and nearly all the related SPEs' transactions. million shares of Enron common stock at $31.34 per share; They knew that LJM2's principal purpose was to engage and February 2001 for $1.9 billion Enron zero coupon in transactions with Enron and that Enron insiders Fastow, convertible notes) were within the Class Period. It lists two Kopper and Glisan were operating on both sides of the other times during the Class Period that Deutsche Bank transactions, to virtually insure lucrative returns for the acted as underwriter for the sale of Enron-related securities: entities' partners. July 2001, for $1 billion 6.31% and 6.19% Marlin Water Trust I and Marlin Water Capital Corporation II notes; and a. Vinson & Elkins L.L.P.
September 2000 for $1 billion of 6.375% and 7.797% Osprey Enron was Vinson & Elkins' largest client, accounting for Trust and Osprey I Inc. notes.
more than 7% of the firm's revenues. Over the years more than twenty Vinson & Elkins lawyers have left the firm and joined In addition Deutsche Bank served as underwriter for the Enron's in-house legal department.
Azurix IPO on June 9, 1999, selling 38.5 million shares at $19 each. In that offering Enron sold at least 19.5 million shares of *657 The complaint recites a long history of alleged Azurix stock to obtain $370 million in much needed capital.
improprieties by Vinson & Elkins as part of the elaborate Ponzi scheme.
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The complaint asserts that Vinson & Elkins participated in the Marlin; Newco; Osprey; Red River; Sonoma; Sundance; negotiations for, prepared the transactions for, participated Wessex; Whitewing; Yosemite; and Yukon. Vinson & Elkins in the structuring of, and approved the illicit partnerships allegedly had to know about and joined in the fraudulent (Chewco/JEDI and the LJMs) and the SPEs (Raptors/Condor, Ponzi scheme because of its continuing, intimate involvement etc.) with knowledge that they were manipulative devices, in the formation of and transactions with these blatantly not independent third parties and not valid SPEs, designed to fraudulent entities, created solely to cook Enron's books. move debt off Enron's books, inflate its earnings, and falsify Enron's reported financial results and financial condition For instance, Lead Plaintiff points to Vinson & Elkins' at crucial times. Vinson & Elkins repeatedly provided involvement in the eleventh-hour formation of Chewco in “true sale” 91 and other opinions that were false and were late 1997 when JEDI's outside investor withdrew and JEDI indispensable for the sham deals to close and the fraudulent had to be restructured or Enron would have to consolidate scheme to continue. Vinson & Elkins also allegedly drafted JEDI on its books, carry JEDI's debt on its balance sheet, and/or approved the adequacy of Enron's press releases, and lose its ability in the future to continue to generate shareholder reports, and SEC filings, including Form 10Ks profits from an independent SPE. See pages 106–110 of and Registration Statements that Vinson & Elkins knew this memorandum and order. Vinson & Elkins prepared the were false and misleading. Vinson & Elkins also drafted documents for Chewco's financing and falsified them to make the disclosures about the related party transactions, which it it appear that Chewco was independent of Enron. Because also knew were false and misleading because they concealed the arrangement had to be completed by year's end, Vinson material facts. It also was involved in structuring and & Elkins with Kirkland & Ellis drafted a side agreement, providing advice about the bogus commodity trades utilized dated December 30, 1997, providing for Enron to give the by JP Morgan and Enron with the involvement of Mahonia. required $6.6 million in cash to fund Chewco by means Moreover, the firm continually issued false opinions about of clandestine reserve accounts for Big River Funding and the illegitimate business transactions, such as that they Little River Funding. Furthermore, to avoid disclosure of the were “true sales.” When the scheme began to collapse in arrangement, because making Fastow manager of Chewco August 2001 and Skilling resigned, whistle-blower Sherron would necessitate disclosing that interest in Enron's SEC filings and potentially expose the non-arm's-length nature Watkins 92 sent her August 9, 2001 memorandum *658 of the whole transaction, Vinson & Elkins, with Fastow, warning Kenneth Lay not to use Vinson & Elkins to handle an arranged *659 for Michael Kopper to be the manager and investigation of her voiced concerns about Enron's accounting thus conceal Enron's financial relationship with Chewco from practices because Vinson & Elkins had a conflict in that “they Enron shareholders. Kopper allegedly objected that there was provided some ‘true sale’ opinions on some of the [Condor a conflict of interest because Kopper was also an Enron and Raptor] deals.” Complaint at 402, 404. Despite Watkins's employee, but the two law firms disregarded his concern.
warning, Vinson & Elkins was called and allegedly conducted Neither law firm insisted on disclosure of the arrangement a whitewash investigation of what it knew were accurate in Enron's SEC filings even though the impropriety was allegations of fraudulent misconduct that also involved obvious. Moreover, Enron continued to use Chewco/JEDI to Vinson & Elkins. Vinson & Elkins received over $100 million generate sham profits from 1997 through 2001 in transactions in legal fees from Enron.
that Vinson & Elkins participated in structuring and providing bogus “true sale” opinions to facilitate, all for the same Specifically, the complaint asserts that Vinson & Elkins purpose.
provided advice in structuring virtually every Enron off- balance sheet transaction and prepared the transaction In another example, Vinson & Elkins issued opinions to documents, including opinions, for deals involving the Enron, Mahonia and JP Morgan stating that the forward following vehicles used to defraud investors and the securities sales contracts of natural gas and oil by Enron were markets: Azurix; Canvasback; CASHco.; Cayco; Condor;
legitimate commodities trades when it knew they were a Cortez Energy; EES; Egret; Enron Brazil; Enron Broadband;
sham, manipulative devices to disguise loans from JP Morgan Enron Global Power; Firefly; Iguana; JEDI; JEDI/Big River/ to Enron so that it would not have to record approximately Little River; JEDI/Condor; JEDI/Osprey/Whitewing/Condor;
$3.9 billion of loans as debts on Enron's balance sheet.
JEDI/Whitewing; JEDI II; JEDI I/Ontario; LJM; LJM/ Physical delivery of the gas and oil was not required or even Condor/Raptor; LJM/Brazil Power Plant; LJM2; LJM2/ contemplated.
Chewco; LJM2/Raptors I, II, III, IV; Mahonia Ltd.; Marengo;
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more than $800 million of contracts to receive Enron stock Similarly Vinson & Elkins participated in the creation before the quarter end. That transfer insured that Enron would of both LJM partnerships and knew the reason for their not have to take a pre-tax charge of more than $500 million establishment, i.e., so that Enron could effectuate transactions against earnings, and so that it could conceal substantial that it could not otherwise do with an independent entity, such losses in its merchant investments and remove millions of as purchasing Enron assets that Enron otherwise was unable dollars of debt from its balance sheet, thus keeping the alleged to sell at prices it would never otherwise receive. As discussed Ponzi scheme afloat. previously, LJM2, formed at the critical end of 1999, pursuant to documentation prepared by Vinson & Elkins that allowed According to the complaint, Vinson & Elkins was also the banks to advance 100% of the money needed to fund involved in the New Power transactions. Before the IPO it the partnership in sufficient time to falsify the books for the structured the deal which permitted Enron to take a large reporting period. LJM2 was one of the primary manipulative phony profit by utilizing LJM2. After the IPO, Vinson & devices to misrepresent Enron's financial results, was also Elkins created Hawaii 125–0, with which, Vinson & Elkins secretly controlled by Enron, and was used to create a number knew, CIBC and several other banks finagled a “total return of SPEs, including the Raptors, which in turn served to falsely swap” that guaranteed CIBC's loan of $125 million to the inflate Enron's profits and conceal its debts. Usually Enron SPE. Disclosures in the following SEC filings, drafted and provided the bulk of the capital to set up the SPEs, which the approved by Vinson & Elkins, concealed material facts about SPEs would then pay to Enron, so that Enron was always at the JEDI/Chewco, LJM, and/or Raptor transactions: risk. Furthermore Fastow's dual role at Enron and LJM2, by which he could and did self-deal to enrich himself and the A. Quarterly Reports (on Form 10–Q) filed on: 8/16/99; other favored investors in the lucrative partnership, rewarded 11/15/99; 5/15/00; 8/14/00; 11/14/00; 5/15/01; and various participants in the Ponzi scheme for their roles. 8/14/01. Vinson & Elkins structured a number of critical year-end B. Annual Reports (on Form 10–K) filed on 3/31/98;
transactions involving LJM2, including the Collateralized 3/31/99; 3/30/00; and 4/02/01.
Loan Obligations (“CLOs”), Nowa Sarzyna power plant, MEGS, LLC, and Yosemite. 93 See page 113 n. 53 and pages C. Annual Proxies filed on: 3/30/99; 5/02/00; 5/01/01. 120–21 n. 56 of this memorandum and order. Typically transactions were timed near the end of financial reporting D. Report on Form 8–K, filed 2/28/01. periods to manipulate, falsify, and artificially inflate Enron's Furthermore, Enron related-party disclosures from Enron's reported financial results while enriching the investors in previous Report on Form 10–K and Report on Form LJM2. Enron frequently agreed in advance to, and did, buy 10–Q were incorporated by reference into the following back the assets after the close of the financial reporting period, Registration Statements and Prospectuses for Enron securities always at a profit for the LJM partnerships even if the market offerings: the resale of zero coupon convertible senior value of the assets declined, or the corporation promised notes, due 2021, filed 7/25/01; 7.875% notes due 6/15/03, to protect the LJM partnerships against any loss. Other filed 6/2/00; 8.375% notes due 5/23/05, filed 5/19/00; 7% transactions that Vinson & Elkins participated in that served exchangeable notes due 7/31/02, filed 8/11/99; 7.375% notes as contrivances and manipulative devices to circumvent due 5/15/2019, filed 5/20/99; common stock, filed 2/12/99;
accounting rules and misrepresent Enron's financial results 6.95% notes due 7/15/2028, filed 11/30/98; and floating included the sham hedging transactions involving *660 notes due 3/30/00, filed 9/28/98. The disclosures consistently Rhythms stock and the Raptor SPEs that were funded misrepresented that terms of Enron's transactions with related principally with Enron's own stock to “hedge” against loss of third parties were representative of terms that could have value in Enron's merchant investments.
been obtained from independent third parties. Both Sherron Watkins' letter and the Powers' Report 94 concluded that As the end of 2000 neared, two of the Raptor SPEs were the transactions *661 were not arm's length, lacked true in danger of unwinding. Vinson & Elkins and Enron then economic import, and were such that no independent third restructured and capitalized them by transferring even more party would have accepted.
Enron stock to them, only adding to the pressure to keep the price of Enron's stock artificially high. Again in March 2001, Vinson & Elkins restructured the Raptors by transferring
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More specifically, the complaint states that in Enron's Reports extent of Fastow's financial interest on Form 10–K for year-end 1997–2000, Vinson & Elkins in the LJM partnerships. This was approved a description of JEDI as an unconsolidated affiliate the result of an effort to avoid only 50% owned by Enron. In its Report on Form 10–K filed disclosing Fastow's financial interest 3/30/00, Vinson & Elkins drafted and approved the following and, in some respects, to disguise their disclosure: “At December 31, 1999 JEDI held approximately substance and import. 12 million shares of Enron Corp. common stock. The value of the Enron Corp. common stock has been hedged. In addition, Tracking the language in the Powers' report, the complaint an officer of Enron has invested in the limited partner of asserts that common to all Enron related-party disclosures, JEDI and from time to time acts as agent on behalf of the drafted and approved by Vinson & Elkins, was *662 limited partner's management.” These purported disclosures concealment of the following material matters known to were false and misleading because Chewco, which was not Vinson & Elkins: (1) that the transactions were not true independent of Enron, was not capitalized with outside equity commercial, economic transactions comparable to those with at risk, but was capitalized by JEDI and an Enron guaranty. independent third-parties; (2) the “disclosures” concealed the Enron did not disclose that Chewco was a limited partner of real substance and effect of the transactions on Enron and JEDI until Enron announced its catastrophic restatement on on its financial statements, e.g., that the transactions should 11/8/01. Nor was it disclosed that JEDI's transactions were have been consolidated on Enron's financial statements; and not true commercial, economic transactions comparable to (3) they failed to disclose Fastow's actual financial interest those of independent third-parties in arm's-length bargains. in or compensation from the LJM partnerships. Instead the disclosures in SEC filings through the Class Period gave the The complaint speaks to Vinson & Elkins' alleged false impression that each transaction was fair to the company, not and misleading disclosures about JEDI/Chewco. In March contrived, but made at arm's length as it would have been 2001, Enron paid Michael Kopper and his domestic partner, if made with an independent third party. 96 In actuality the William Dodson, $35 million in a “purchase” of Chewco's transactions, which were controlled only by Enron, Fastow or limited partnership interest in JEDI so that Kopper could Kopper through the LJM entities, were bogus, contrived to buy Fastow's interest in the LJM partnerships. The deceptive enrich individual Defendants, and, according to the Powersdisclosure 95 about the buyout, drafted and approved by led special investigative committee, designed “to accomplish Vinson & Elkins for inclusion in Enron's reports on Form financial results, not achieve bona fide economic objectives 10–Q filed on 5/15/01 and 8/14/01, never stated that it was or to transfer risk.” Complaint at 405, 420. 97 In nearly a deal among some Enron officers, Kopper and Fastow every transaction, Fastow or Kopper made millions of dollars or that it included the $2.6 million gift to Kopper and while bearing little or no risk, and Enron obtained favorable Dodson. Moreover, the buyout was erroneously characterized financial-statement results while bearing all the risk. as having a net positive effect on Enron's financial statements, when in actuality the consolidation of JEDI resulted in In Enron's report on Form 10–Q, approved by Vinson & a massive reduction in Enron's reported net income and Elkins and filed on 8/14/01, a statement “disclosed” that shareholders' equity and a massive increase in its reported Fastow, “who previously was the general partner of [the LJM] debt. partnerships, sold all of his financial interests ... and no longer has any management responsibilities for these entities.” In The complaint quotes the Powers' report regarding false and actuality, Fastow sold his interest to Kopper, who was also misleading disclosures relating to LJM and the Raptor entities closely connected to and controlled by Enron, so the LJM that were drafted and approved by Vinson & Elkins: partnerships were no more legitimate than when Fastow owned them.
[T]hese disclosures were obtuse, did not communicate the essence of the The complaint contends that Vinson & Elkins throughout transactions completely or clearly, and the Class Period drafted and approved as adequate disclosure failed to convey the substance of what statements with false and misleading descriptions about was going on between Enron and related-party transactions using LJM and the Raptors. These the partnerships. The disclosures also include disclosures in Enron's Reports on Form 10–Q filed did not communicate the nature or
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8/16/99 and 11/15/99 that only relate to, but fail to identify, at 422 quotes from “disclosures” describing the Raptors' the Rhythms transactions: transactions with related parties, drafted and approved by Vinson & Elkins, made in Enron's reports on Form 10–Q, In June 1999, Enron entered into filed on 8/14/00 98 and 11/14/00 99 , on Form 10–K filed on a series of transactions involving a third party and LJM Cayman, L.P. 4/01/01, 100 and references to similar statements in reports (LJM). LJM is a private investment on Form 10–Q filed on 5/15/01 and 8/14/01 and in a Proxy company which engages in acquiring filed on 3/17/01. The complaint states that these alleged or investing primarily in energy related disclosures were *664 false and misleading because (1) the investments. *663 A senior officer of “share settled options” were purchased by Enron when the Enron is managing member of LJM's transaction was actually based on a future material decrease in general partner. The effect of the the price of Enron's stocks; (2) the disclosures of related party transactions was (i) Enron amended transaction did not disclose that Enron controlled the entities with the third party certain forward or vehicles; and (3) the transactions were structured to permit contracts to purchase shares of Enron LJM2 to receive its profits and capital up front before any common stock, resulting in Enron hedging (risk of loss), and because Enron carried the ultimate having forward contracts to purchase risk of the investment. These concealed matters, if disclosed, 3.3. million Enron common shares would have revealed that Enron was not dealing with valid at the market price on that day, (ii) SPEs and there was no real hedging since the hedges were of LJM received 3.4 million shares of Enron investments with the value of Enron stock. Enron common stock subject to certain restrictions and (iii) Enron received The complaint asserts that Vinson & Elkins also drafted a note receivable and a put option and approved related-party disclosures concerning Enron's related to an investment held by Enron. merchant assets sales and purchases that were false Enron recorded the assets received and and misleading because they hid facts that would have equity issued at estimated fair value.... demonstrated that Enron was playing a shell game to falsely Management believes that the terms of inflate its 1999 net income by more than $130 million. The the transactions were reasonable and complaint quotes the related-party disclosures in Enron's no less favorable than the terms of report on Form 10–K filed on 3/30/00: “In the fourth quarter similar arrangements with unrelated of 1999, LJM2, which has the same general partner as third parties. LJM, acquired, directly or indirectly, approximately $360 million of merchant assets and investments from Enron, on The complaint charges that this “disclosure” was false and which Enron recognized pre-tax gains of approximately $16 misleading because there was no true third party to give a million.” Similar disclosures were made in Enron's report on stamp of legitimacy to the transaction, but only self-dealing: Form 10–K, filed on 4/02/01: “In 1999, the Related Party Fastow filled the shoes of the third party, and LJM's general acquired approximately $371 million, merchant assets and partner was capitalized with Enron stock provided by Enron. investments and other assets from Enron. Enron recognized Because it did not consolidate LJM, Enron was able to pre-tax gains of approximately $16 million related to these overstate its net income by $95 million in 1999 and by $8 transactions.” A Proxy filed on 3/27/01 states, “[D]uring million in 2000. 2000, LJM2 sold to Enron certain merchant investment interests for a total consideration of approximately $76 Similar oblique references are made in inadequate million.” Complaint at 423. Lead Plaintiff claims that these “disclosures” of bogus hedges involving the Raptors, the disclosures are false and misleading because Enron was purported “third parties” that were actually entities created by merely buying back the same assets and investments that it Enron and LJM2 and capitalized with Enron's stock, while was selling to Fastow. Sometimes the repurchase of assets the Raptors' credit capacity was largely determined by the was made within months, even before Enron filed its report price of Enron stock. In these transactions, LJM2 received on Form 10–K on 3/30/00 with the related-party disclosures its profits and capital from the Raptors up front, before any indicating that Enron was selling the assets. Furthermore, ostensible hedging took place, so Enron was the only entity in the third and fourth quarters of 1999, Enron sold seven left with a stake in the purported counterparty. The complaint assets to LJM to rid its balance sheet of debts before the
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end of the financial reporting period. After the close of the & Elkins despite this obvious conflict, agreed to conduct an reporting period, Enron bought back five of the seven assets investigation into the charges and to issue a letter or report in the transactions referenced, including the sale in 9/99 and dismissing the allegations of fraud that Vinson & Elkins knew subsequent repurchase of Enron's stake in the Cuiaba, Brazil were true. Vinson & Elkins also agreed not to “second guess” power plant construction; the sale on 12/22/99 and subsequent the accounting work or judgments of Arthur Andersen and to repurchase of ENA collateralized loan obligations; the sale limit its inquiry to top level executives at Enron. Vinson & on 12/21/99 and subsequent repurchase of Enron's interest Elkins' review took place between August 15 and October 15, in the Nowa Sarzyna, Poland power plant construction; the 2001. sale on 12/29/99 and subsequent repurchase of Enron's equity interest in MEGS LLC; and the sale in 5–6/00 and subsequent The complaint at 427–28 also quotes from a letter sent resale of dark fiber (Enron's EBS sold the dark fiber to LJM2 on August 29, 2001 by a management level employee at and then resold it for LJM2). The disclosures drafted and Enron's EES operation to Enron's Board of Directors detailing approved by Vinson & Elkins did not reveal that in each concealed losses and misrepresentations at Enron's EES. 102 repurchase, the LJM partnerships profited by millions of The complaint claims the letter describing another *666 area dollars, even when the assets had lost value. of fraud caused “an explosion” at Enron.
The Enron investigative committee led by Dean Powers During its investigation, according to the complaint, Vinson further found, “The failure to set forth Fastow's compensation & Elkins only interviewed top level executives that Vinson from the LJM transactions and the process leading to that & Elkins knew were involved in the fraud and would deny decision raise substantial issues.” The complaint asserts it. On October 15, 2001 the law firm issued a letter to that Vinson & Elkins knew important facts about Fastow's Enron dismissing all of Sherron Watkins' allegations even interest in the LJM transactions but did not reveal them though Vinson & Elkins knew they were true from its own in related-party disclosures 101 drafted and approved by involvement. The letter is quoted in part in the complaint at Vinson & Elkins during the Class Period, in spite of specific 429–31 [emphasis added by the complaint]: requirements in SEC regulations that such economic interests *665 be disclosed. Had these facts been disclosed, they You requested that Vinson & Elkins L.L.P. (“V & E”) would have alerted investors that Fastow and the LJM conduct an investigation into certain allegations initially partnerships were paid to move debt off of Enron's financial made on an anonymous basis by an employee of Enron statements and not as part of commercial transactions. As Corp. (“Enron”). Those allegations question the propriety a specific example, the complaint focuses on the Rhythms of Enron's accounting treatment and public disclosures transaction which, before the Proxy was filed on 5/02/00, for certain deconsolidated entities known as Condor or was terminated by a $30 million payment to Fastow's Swap Whitewing and certain transactions with a related party, Sub. Enron's special investigative committee determined LJM, and particularly transactions with LJM known as that the termination was effected on the following terms: Raptor vehicles. The anonymous employee later identified the Rhythms options held by Fastow's Swap Sub. were herself as Sherron Watkins, who met with Kenneth L. terminated; Fastow's Swap Sub. returned 3.1 million Enron Lay, Chairman and Chief Executive Officer of Enron, shares to Enron, but retained $3.75 million in cash received for approximately one hour to express her concerns and from LJM1; and Enron paid Fastow's Swap Sub. $16.7 provided him with materials to supplement her initial million, which included $30 million, plus $500,000 accrued anonymous letter.... dividends on Enron's stock held by Swap Sub., less $3.75 In general, the scope of V & E's undertaking was to review million in cash in Swap Sub., less $10.1 million in principal the allegations raised by Ms. Watkins' anonymous letter and interest on a loan Enron made to Swap Sub. just before and supplemental materials to conduct an investigation to the transaction's termination.
determine whether the facts she has raised warrant further independent legal or accounting review.
The complaint points out that although Sherron Watkins' August 2001 letter to Ken Lay represented that Vinson & By way of background, some of the supplemental Elkins had been involved in the fraud and had a clear conflict materials provided by Ms. Watkins proposed a series of interest, Lay still turned to top Vinson & Elkins partners to of steps for addressing the problems she perceived, find out how to cover up the allegations. Furthermore, Vinson which included retention of independent legal counsel to
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conduct a wide-spread investigation, and the engagement accounting firm to second guess the accounting advice of independent auditors, apparently for the purpose of and audit treatments provided by AA. Based on interviews analyzing transactions in detail and opining as to the with representatives of AA and Mr. Causey, all material propriety of the accounting treatment employed by Enron facts of the Condor/Whitewing and Raptor vehicles, as and its auditors Arthur Andersen L.L.P. (“AA”). In well as other transactions involving LJM, appeared to have preliminary discussions with you, it was decided that our been disclosed to and reviewed by AA. In this regard, AA initial approach would not involve the second guessing reviewed the LJM solicitation materials and partnership of the accounting advice and treatment provided by AA, agreement to assure that certain safeguards were provided that there would be no detailed analysis of each and every that would permit LJM to be a source of third party transaction and that there would be no full scale discovery equity in transactions conducted with Enron. AA likewise style inquiry. Instead the inquiry would be confined reviewed specific transactions between Enron and LJM to a determination whether the anonymous letter and to assure that LJM had sufficient equity in transaction to supplemental materials raised new factual information justify the accounting and audit principles being applied. that would warrant a broader investigation.
****** ****** Enron and AA representatives both acknowledge that Interviews were also conducted with various Enron the accounting treatment on the Condor/Whitewing and personnel based either on *667 their connection with Raptor transactions is creative and aggressive, but no the transactions involving Condor/Whitewing, LJM and one has reason to believe that it is inappropriate from a Raptor, or because they were identified in materials technical standpoint. In this regard, AA consulted with its provided by Ms. Watkins as persons who might share senior technical experts in its Chicago office regarding the her concerns. Those persons interviewed were: Andrew technical accounting treatment on the Condor/Whitewing S. Fastow, Executive Vice President and Chief Financial and Raptor transactions, and the AA partners on the Enron Officer; Richard B. Causey, Executive Vice President and account consulted with AA's senior practice committee in Chief Accounting Officer; Richard B. Buy, Executive Vice Houston on other aspects of the transactions. Enron may President and Chief Risk Officer; Greg Whalley, President also take comfort from AA's audit opinion and report to the and Chief Operating Office (formerly Chairman of Audit Committee which implicitly approves the transaction Enron Wholesale); Jeffrey McMahon, President and Chief involving Condor/Whitewing and Raptor structures in the Executive Officer, Enron Industrial Markets (formerly context of the approval of Enron financial statements. Treasurer of Enron); Jordan H. Mintz, Vice President and General Counsel of Enron Global Finance; Mark ****** E. Koenig, Executive Vice President, Investor Relations;
Notwithstanding the expression of concern in Ms. Watkins'
Paula H. Rieker, Managing Director, Investor Relations;
anonymous letter and supporting materials regarding and Sherron Watkins, the author of the anonymous letter the adequacy of Enron's disclosures as to the Condor/ and supplemental materials.
Whitewing and Raptor vehicles (which, to a large extent, Interviews were also conducted with David B. Duncan and reflect her opinion), AA is comfortable with the disclosure Debra A. Cash, both partners with AA assigned to the in the footnotes to the financials describing the Condor/ Enron audit engagement. Whitewing and Raptor structures and other relationships and transactions with LJM. *668 AA points out that the ****** transactions involving Condor/Whitewing are disclosed in aggregate terms in the unconsolidated equity footnote In summary, none of the individuals interviewed could and that the transactions with LJM, including the Raptor identify any transaction between Enron and LJM that transactions, are disclosed in aggregate terms in the related was not reasonable from Enron's standpoint or that was party transactions footnote to the financials. contrary to Enron's best interests....
The concern with adequacy of disclosures is that one can As stated at the outset, the decision was made early in always argue in hindsight that disclosures contained in our preliminary investigation not to engage an independent proxy solicitations, management's discussion and analysis
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and financial footnotes could be more detailed. In this Counsel of Enron Global Finance, referred to the firm as regard, it is our understanding that Enron's practice is to “Fastow's attorneys.” provide its financial statements and disclosure statements to V & E with a relatively short time frame with which to Lead Plaintiff asserts that Enron hand-picked Kirkland & respond with comments. Ellis to provide ostensibly “independent” representation for Chewco, JEDI, LJM1, LJM2, and other SPEs, but in ****** actuality that the firm was selected by Fastow because it was willing to take direction from Fastow and Enron.
Based on the findings and conclusions set forth Along with Arthur Andersen, Vinson & Elkins, and Enron's with respect to each of the four areas of banks, Kirkland & Ellis under Enron's direction participated primary concern discussed above, the facts disclosed in structuring the manipulative devices at the heart of the through our preliminary investigation do not, in our scheme, including the partnerships and SPEs (LJM1 and judgment, warrant a further widespread investigation by 2, Chewco and the Raptors) and their related transactions independent counsel and auditors.... to present a false picture of Enron's financial condition and results, with the law firm's full knowledge of that ... Finally we believe that some response should be purpose. In addition to structuring the entities, Kirkland & provided to Ms. Watkins to assure her that her concerns Ellis allegedly participated in the monetization of assets, were thoroughly reviewed, analyzed, and although found in the preparation of partnership and loan agreements for not to raise new or undisclosed information, were given Chewco, LJM1, and LJM2, and in the offering and sale serious consideration. of partnership interests in LJM2 through private placement memoranda. The firm also allegedly generated false legal We have previously reported verbally to Mr. Lay and you opinions about the structure, legality and bona fides of regarding our investigation and conclusions and, at your the SPEs and their transactions, representing that these request, have reported the same information to Robert were legitimate business deals. The complaint charges that K. Jaedicke, in his capacity of Chairman of the Audit Kirkland & *670 Ellis issued opinions related to numerous Committee of Enron's Board of Directors. At Dr. Jaedicke's transactions and entities, including the following: JEDI I, Big request, we gave a verbal summary of our review and River LLC, Little River LLC, LJM1, LJM2, Raptor I, Raptor conclusions to the full Audit Committee. 103 II (Timberwolf), Raptor III (Condor), Raptor IV (Bobcat), Honer, Chewco, Bob West Treasure LLC, Cortez LLC, ENA *669 The complaint recites that although Lay wanted to fire CLO, Yosemite Securities, Southampton Place, Condor, Watkins, he and Vinson & Elkins agreed that discharge would SONR# 1 LLC, and SONR# 2 LLC. The firm's opinions were be a mistake and would lead to a wrongful termination suit, essential for effecting the transactions. Nevertheless, because disclosing Watkins' allegations about transactions at Enron.
the transactions were shams to inflate Enron's financial So she was shifted to another position at Enron where she performance while favored insiders siphoned off Enron's would have less exposure to information damaging to Enron.
assets and because the transactions were conducted on terms inconsistent with disclosures being made to investors by b. Kirkland & Ellis Enron, Vinson & Elkins, the banks, and Arthur Andersen, The complaint alleges that Kirkland & Ellis actively engaged Kirkland & Ellis' opinions were also false. Kirkland & Ellis in the scheme to defraud and course of business that operated knew that the SPEs were contrived, manipulative devices that as a fraud on Enron investors. Kirkland & Ellis began working were not independent of Enron, but, like Kirkland & Ellis, with Fastow, Enron, and Vinson & Elkins in the early #90's to acting under the control and direction of Fastow, Kopper, create and use off balance sheet investment partnerships and Skilling, Lay and other Enron officials. These Enron insiders SPEs that allowed Enron to engage in transactions designed directed the SPEs without regard for the legal or economic to increase or maintain its credit rating by artificially inflating interests or rights of the SPEs, in whose behalf Kirkland its profits and moving debt off of its balance sheet. The & Ellis was purportedly served as independent counsel. law firm's relationship with Fastow began in the 1980's Kirkland & Ellis received tens of millions of dollars in fees when Fastow worked for Continental Bank in Chicago and for its work, and most of that money was paid directly to intensified during the Class Period at Enron; in light of this it by Enron, even though the law firm was supposed to be close relationship, Jordon Mintz, Vice President and General
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representing entities independent of Enron and with economic with Arthur Andersen, Fastow, Kopper and Vinson & Elkins, interests adverse to those of Enron. participated in the concealment of Kopper's managerial position with Chewco by “transferring” Kopper's ownership More specifically, the complaint asserts that when Enron interest in Big River Funding and Little River Funding was unable to find a legitimate buyer for the outside to Kopper's domestic partner, Dodson, and completing the investor's interest in JEDI in 1997 in time for year-end purchase of the 50% interest in JEDI by Chewco. Kirkland reporting, Kirkland & Ellis, directed by Fastow and Enron, & Ellis knew that Chewco/JEDI was not a valid SPE, should along with Vinson & Elkins, Fastow and Kopper, created have been consolidated, and was now available for Enron to Chewco (controlled by Enron and Michael Kopper), Big use in more non-arm's-length transactions, which the law firm River Funding and Little River Funding to purchase that stake would also help structure from 1998–2001, to create billions in JEDI. Kirkland & Ellis did so even though it was supposed of dollars of sham profits for Enron and conceal the true to be providing independent representation of Chewco and nature of its indebtedness. its equity investors. Kirkland & Ellis knew that Chewco lacked an independent outside investor with a 3% stake, Even though Kirkland & Ellis was supposed to be providing required for independent third-party status for Chewco, and independent representation of the LJM partnerships and their that Barclays' loan of $240 million to Chewco (guaranteed by SPEs, Kirkland & Ellis participated in creating, structuring, Enron) and loans to straw parties by means of a $6 million reviewing and approving the two LJM partnerships, which cash deposit with Barclays to provide the money for the equity served as manipulative devices for Fastow and others to investment in Chewco, were an improper effort to circumvent enrich themselves and for Enron to inflate its financial results. that requirement for a valid SPE. Kirkland & Ellis and Vinson Kirkland & Ellis knew the partnerships were established & Elkins prepared the documentation for Chewco's financing to allow Enron to effect transactions that it would have and falsified the documents to make it appear that Chewco been unable to accomplish with independent third-parties. was independent. They also prepared a side agreement, dated Kirkland & Ellis was involved in transactions between the 12/30/97, reflecting that Enron would provide the necessary LJMs and Enron or its affiliates that occurred close to the cash to fund Chewco through clandestine reserve accounts end of financial reporting periods to perpetuate the alleged for Big River Funding and Little River Funding. The Kopper/ Ponzi scheme, including Enron's sale of interests in seven Enron side agreement drawn up by the two firms indicates assets near the end of the third and fourth quarters of that no outside equity was used to fund Chewco and therefore 1999, five of which Enron bought back after the close of it was not a viable SPE, but merely a manipulative device to the period as previously agreed among the parties, and on further the fraud. all of which the LJMs made profits even when the value of the assets had declined. The firm participated in June Kirkland & Ellis did more to conceal the real situation. If, as 1999 in structuring LJM1's purchase of an equity interest in originally intended, Fastow were to have managerial control Enron's Cuiaba power plant in Brazil, which was burdened of Chewco, that interest would have to be disclosed in Enron's with substantial debt that Enron did not want on its balance SEC filings and the non-arm's-length nature of the deal would sheet. Enron sold to LJM1, with a promise to make LJM1 be revealed. Kirkland & Ellis therefore arranged for Kopper, whole, a 13% stake in the Cuiaba plant, effective 9/99, and Fastow's subordinate, to manage the SPE. thus reduced Enron's ownership below the level at which it would have to consolidate its interest, so that Enron could In addition, during December 1997, Kirkland & Ellis once again “cook its books,” but repurchased it in August restructured the transaction to avoid disclosure of Enron's 2001. The transaction was neither arm's length nor bona financial relationship to Chewco at year end. Kirkland & fide. Kirkland & Ellis also helped structure sham hedging Ellis converted the general partner of Chewco from a limited transactions, including in 6/99 the Enron Rhythms stock deal, liability company to a limited partnership and made Kopper and transactions involving Enron's merchant assets with the the manager of the general *671 partner instead of Fastow. Raptors in 2000–01. Kirkland & Ellis also helped to create Although Kopper expressed concern about the conflict of the documentation to enable the banks to advance essentially interest because he was simultaneously an Enron employee all the money needed to fund LJM2 just before year-end and the owner of both Chewco's general partner and of the 1999 to avoid reporting a very bad quarter for Enron, as equity of limited partner Big River Funding, Kirkland & well as to write the offering memorandum for LJM2, with Ellis went ahead anyway. Furthermore, Kirkland & Ellis, its invitation to benefit from insider self-dealing transactions.
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In accordance with direction from Enron or Fastow, the unwound because of insufficient credit capacity to support firm also helped structure transactions and provided opinions their credit obligations. If that happened Enron would have required for year-end deals between LJM2 and Enron before to take a multi-million dollar charge against earnings, which the close of 1999 so that Enron could report strong growth: the would expose the earlier falsification of Enron's financial CLOs, the Nowa Sarzyna (Poland Power Plant), MEGS LLC, results, cause its stock price to plunge, and activate the stock and Yosemite. 104 These deals were then reversed in *672 issuance triggers, i.e., precipitate a death spiral for the Ponzi the first quarter of 2000, reflecting that they were merely scheme. To avoid this impending catastrophe, Kirkland & manipulative devices and contrivances designed by Kirkland Ellis helped restructure and capitalize the Raptor SPEs at & Ellis and others to manipulate Enron's financial results. the end of 2000 by transferring even more shares of Enron stock to them. Again in 2001, to avoid taking a pre-tax On March 20, 2000, with Fastow and Kopper, Kirkland & charge against Enron's earnings of more than $500 million Ellis created a partnership agreement for Southampton Place because of a credit capacity shortfall by Raptor entities and to L.P., with its general partner being Big Doe LLC, and funded conceal substantial losses in Enron's merchant investments, it with $70,000 contributed by several Enron employees Kirkland & Ellis again helped restructure Raptor vehicles by (Glisan, Mordaunt, Lynn and Patel) for the purpose of having Enron transfer to them just before year's end more than acquiring part of the interest held in LJM1 by an existing $800 million of contracts to receive Enron's stock, with no limited partner. Glisan even objected to Kirkland & Ellis that consideration and in violation of accounting rules. the transaction should be accounted for as a related-party transaction and should be disclosed. To further the fraudulent Kirkland & Ellis also participated in the New Power scheme, however, the law firm opined that even though these transaction by involvement in the creation of the Hawaii 125– Enron employees were involved, Southampton's transaction 0 SPE, which the law firm knew was financed by a $125 with LJM1 and/or Enron did not have to be disclosed. million “loan” from the banks that were guaranteed against loss through a “total return swap” by Enron.
In May 2000, to generate revenue in Enron's fiber optic business (EBS) so that Enron could meet its earnings Finally, Kirkland & Ellis participated in Enron's misleading estimates for the quarter, when no legitimate purchaser could disclosures. Indeed, *673 near the close of the Class be found Fastow and Kirkland & Ellis structured a sale of Period, the law firm admitted to a senior Enron employee Enron's dark fiber optic cable to LMJ2 for $100 million even responsible for preparing Enron's SEC disclosures that there though it was not worth even close to that amount. A second was no precedent for the law firm's rationalization for not deal was effected in the third quarter of 2000 for more than disclosing various LJMs and LJM transactions. Kirkland & $300 million so that Enron could make its numbers. Ellis reviewed the SEC filings by Enron and knew that the related party transactions were unfair to Enron contrary to its During 2000 Kirkland & Ellis and Vinson & Elkins structured false assertion that the transactions were on terms similar to increasingly aggressive SPEs to perpetuate the alleged Ponzi those it could have obtained with independent third parties. scheme. Functioning as both Fastow's personal counsel and Kirkland & Ellis continued to work on restructuring LJM2 as counsel to LJM2, Kirkland & Ellis devised mechanisms in May 2001 to avoid having to disclose that SPE under for Enron to abuse mark-to-market accounting to create sham Regulation S–K. Indeed throughout the Class Period the law income through the four Raptor entities, which were created firm evaded or finagled applicable disclosure requests by by Kirkland & Ellis working with Fastow, Arthur Andersen, various means, including having Fastow and Kopper sell and Vinson & Elkins. Kirkland & Ellis knew the transactions some of their ownership interests to others. One senior Enron were structured so that if the value of Enron's stock fell, the employee responsible for Enron's SEC disclosures was so SPEs would be unable to meet their obligations and the sham suspicious of Kirkland & Ellis that it hired another law firm hedges with Enron stock would fail. to review Kirkland & Ellis' work.
In late 2000 and in early 2001, the Raptor SPEs lacked sufficient credit to pay Enron on the hedges and Enron faced 3. The Accountant/Auditor: Arthur Andersen LLP 105 having to record a “credit reserve” that would reveal the Noting that an independent auditor is supposed to be the change in value of its merchant investments. Moreover by “investing public's watch dog,” the complaint at 447 quotes year-end 2000 two Raptor SPEs were in danger of coming the United States Supreme Court in United States v. Arthur
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Young & Co., 465 U.S. 805, 817–18, 104 S.Ct. 1495, 79 three hundred accounting and finance positions at Enron, L.Ed.2d 826 (1984): many in mid-level and senior management, that were filled with former Arthur Andersen auditors and professionals.
By certifying the public reports that The complaint comments that Enron Defendants were collectively depict a corporation's comfortable with this fact because they knew the Arthur financial status, the independent Andersen auditors were less likely to question improper auditor assumes a public responsibility accounting if done by their former co-workers and bosses, transcending any employment who were now officers and managers at Enron. relationship with the client. The independent public accountant Arthur Andersen examined and opined on Enron's financial performing this special function owes statements for 1997–2000 and reviewed its interim results ultimate allegiance to the corporation's and press releases from 1997–2001. Lead Plaintiff charges creditors and stockholders, as well that Arthur Andersen not only permitted Enron to falsify as to the investing public. This its financial results, but falsely represented that Enron's “public watchdog” function demands financial statements from 1997–2001 were in accordance that the accountant maintain total with GAAP, claimed that its audits of Enron's financial independence from the client at all statements were performed in accordance with Generally times and requires complete fidelity to Accepted Auditing Standards (“GAAS”), 106 certified the the public trust.
fraudulent figures, and actively engaged and participated The complaint charges that Arthur Anderson, which is sued in structuring the transactions (including involvement in under § 10(b) and § 11 of the federal statutes and under the the illicit partnerships and SPEs, misuse of mark-to-market TexasSecuritiesAct, abandoned its responsibilities to Enron accounting, and arranging dark fiber swaps with other Arthur investors and to the investing public and violated professional Andersen clients, including Qwest and Global Crossing, in standards in perpetrating a massive accounting fraud. the telecom business) to participate in falsifying Enron's financial results. Anderson also agreed that its reports on The consolidated complaint maintains that Arthur Andersen Enron's financial statements could be incorporated into was not independent of its client. Enron was Arthur Enron's Form 10–Ks for those years and into ten of Enron's Andersen's second largest client and Arthur Andersen Registration statements: registration of $1 billion in Enron was economically dependent on Enron, which generated Debt Securities, Warrants, Preferred Stock and Depository approximately $50 million in fees annually for Arthur Shares filed on 12/17/97; registration of 488,566 shares of Andersen and expectations for more in the future. Indeed common stock filed on 1/12/98; registration of 34.4 million Arthur Andersen estimated internally that its fees for services shares of common stock filed on 4/28/98; registration of $1 for Enron could increase to $100 million per year. To generate billion in Enron Debt Securities, Warrants, Preferred Stock even more fees, Arthur Andersen pressured, and provided and Depository Share filed on 1/12/99; registration of 7.6 incentive compensation to, its audit partners to solicit and million shares of common stock filed on 4/5/99; registration market non-audit consulting services, which were far more of ten million Exchangeable Notes filed on 7/23/99; lucrative, from Enron as well as other clients. David Duncan registration of 4.9 million shares of common stock filed on in the Houston office was earning as much as $2 million a year 4/4/00; registration of 616,778 shares of common stock on based largely on the level of fees he “controlled” or sold to his 6/15/00; registration of $1 billion in Enron Debt Securities, clients. The complaint asserts that the pressures on partners to Warrants, Preferred Stock and Depositor Shares filed on generate more fees created a conflict of interest for auditors on 7/19/00; and registration of $1.9 billion in Zero Coupon the Enron engagement and were a substantial factor in Arthur Convertible Senior Notes due 2021 and filed on 6/01/01. Andersen's abandonment of its independence, objectivity, and Arthur Andersen agreed to the use of its name as an expert in integrity on the Enron financial statement audits and reviews. each Prospectus filed and issued pursuant to these offerings, including the Prospectus for the Zero Coupon Notes filed Furthermore, Arthur Andersen's close relationship with on 7/25/01/. 107 In the fall of 2001, after Enron's collapse Enron's management *674 also impaired the auditor's and the federal investigation began, despite its professional independence and objectivity in its audits of Enron during duty to retain and preserve any documents and information the Class Period. The complaint points to more than *675 needed to support and defend the conclusions it had
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reached and the work it had performed during its audit many critics' complaints that the dual role was an outrageous and review services for Enron, Arthur Andersen, along with conflict of interest. The complaint maintains that by stripping Enron, destroyed documentary evidence that would implicate Enron of its internal audit function and assuming most of it in fraud at Enron and reveal that Arthur Andersen had those responsibilities, Arthur Andersen in essence eliminated violated an SEC consent decree arising out of its involvement the possibility that another, independent body might discover in the Waste Management accounting scandal 108 by again and report the fraud. An Enron employee involved in the participating in the cover-up of accounting fraud at another transition commented, “Going forward, Skilling was left to of its biggest clients. The complaint emphasizes that Arthur run a casino for a business with a day-care center for an Andersen “is a repeat offender with a history of failed audits, auditor.” conflicts of interest and document destruction in some of the most egregious cases of accounting fraud in history.” Arthur Andersen's commitment to generating fees and Complaint at 455. After describing Arthur Andersen's its assumption of Enron's internal audit function together impaired its integrity, objectivity and independence. On improper conduct in Waste Management, 109 Sunbeam March 11, 2002, after Paul Volker accepted the chairmanship Corporation, 110 Baptist Foundation of Arizona, 111 Colonial of the blue ribbon committee, established and funded by Realty Company, 112 *676 Lincoln Savings/ACC, 113 the Arthur Andersen to look into its policies because of Enron's complaint 114 maintains that Arthur Andersen's conduct in collapse, Volker rapidly concluded that if the conflicts of these cases shares certain common characteristics with its role interest and impairment of independence that caused the in Enron's fall and that Arthur Andersen has had a callous, problems in its Enron's audits were to be remedied, Arthur reckless disregard for its duty to investors and the public Andersen had to split its auditing and consulting practices, to trust for decades. The complaint contends that rather than ban current financial incentives that connected the auditors' change its improper behavior, Arthur Andersen merely sees compensation to their sales of consulting services, to refrain the settlement sums as a cost of doing business. from reporting internal audit work on audit clients, and to adopt a waiting period before Arthur Andersen partners could Arthur Andersen knew that the critical factor to increasing its become employees of a client. fees was to maintain Enron's investment-grade credit rating, requiring a careful balance between creating outside entities The complaint identifies a number of “red flags,” or to hold assets and the debt Enron was incurring to finance significant indicators, of financial statement fraud at Enron, them and making it appear that Enron was not controlling discussed below. these entities to avoid consolidation of their assets and debts into Enron's financial statements under GAAP. Aware of the The complaint alleges that Arthur Andersen had direct risk, in a meeting on February 2001 about Enron's accounting knowledge of Enron's improper accounting and knew the risk issues, top level Arthur Andersen partners from the Houston of fraudulent financial reports was very high. Professional and Chicago offices decided that the potential for doubling accounting standards, pursuant to SAS No. 82 (AU 115 §§ its fees to $100 million a year justified retaining Enron as a 316, 110), require that in designing and effecting audit client. Furthermore when partner Carl Bass objected to and procedures, auditors assess the risk of material misstatements opposed the improper accounting practices used at Enron in due to fraud and plan an audit to increase the likelihood that 1999–2000, and thereby upset Enron management, top level fraud will be discovered. AU § 316 sets out categories of Arthur Andersen partners removed him from his oversight fraud risk factors for making that assessment. The complaint role on the Enron audits. charges that Arthur Andersen knew that Enron possessed many of the risk factors delineated in AU § 316.16–.18, Arthur Andersen operated its consulting services in a including, manner that revealed its lack of independence in audits and reviews. During the early to mid–90's, to take audit *677 oversight away from Enron's internal auditors and Overly complex organizational structure involving have Arthur Andersen provide such services on an outsourced numerous or unusual legal entities, managerial lines of contract basis, Arthur Andersen and the other big accounting authority, or contractual arrangements without apparent firms successfully lobbied the AICPA to allow them to business purpose. provide both internal and external auditor services, despite
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The complaint charges that Arthur Andersen knew Enron Significant related-party transactions not in the ordinary management had an excessive and an unusual interest in course of business or with related entities not audited or maintaining the company's stock price. Arthur Andersen audited by another firm. knew that Enron was recognizing income from the inflation of its own stock, that Enron's hedges depended upon keeping Significant, unusual, or highly complex transactions, the price up, that insider trading constituted a substantial especially those close to the year end, that pose difficult portion of management's income, and that Enron executives “substance over form” questions.
were enjoying millions of dollars from bonuses when they Significant bank accounts or subsidiary or branch successfully hit a series of stock-price targets based on a operations in tax haven jurisdictions for which there program dubbed “Performance Unit Plan.” Enron's business appears to be no clear business justification. and management practices were focused on highly aggressive Arthur Andersen was fully aware of Enron's unusually targets. Arthur Andersen also knew that Enron had failed to complex organization because it helped structure hundreds make audit adjustments of about $51 million recommended of complicated partnerships, many with no business purpose by Arthur Andersen in 1997 (discussed at ¶ 517 of the other than to conceal debt and losses. The number of complaint). The presence of other risk factors at Enron, related-party transactions was enormous, and in many identified in AU § 316.17(c), included unusually rapid Enron maintained control over the entities and deliberately growth or profitability, especially compared with that of other and improperly did not consolidate them. Andersen knew companies in the same industry, and significant pressure to *678 that Enron utilized at least 600 offshore tax haven obtain additional capital necessary to stay competitive in view entities to shift income, minimize taxation, circumvent of the financial position of the entity, including the need for United States laws, and maintain secrecy. It also knew that funds to finance major research and development or capital many of the Fastow-controlled partnerships were formed in expenditures. Lead Plaintiff charts Enron's dramatic growth offshore havens. Even Arthur Andersen's tax and consulting in net sales between 1995 and 2000 at 461 of the complaint: departments knew that Enron's use of such entities was 1995, $9.2 billion; 1996, $13.3 billion; 1997, $20.3 billion; excessive and that many had no business justification. 1998, $31.3 billion; 1999, $40.1 billion; and 2000, $100.8 billion.
AU § 316.17(a) lists as risk factors relating to management's characteristics and influence over the control environment: Thus because of its extensive audit, review, tax, internal control, and other consulting services that Arthur Andersen Management failing to correct known reportable rendered to Enron (its fees in 2000 alone were $52 million), conditions on a timely basis. Arthur Andersen knew that all these and nearly every other fraud factor identified by AU § 316 applied to Enron during Management setting unduly aggressive financial targets the Class Period. As a result, Arthur Andersen knew that and expectations for operating personnel.
these risk factors at Enron, taken collectively, meant that the risk of fraudulent financial reporting was extremely high.
A significant portion of management's compensation In fact in 2002 Arthur Andersen acknowledged this fact represented by bonuses, stock options, or other incentives, during Congressional hearings: a 10/9/01 e-mail, sent by an the value of which is contingent upon the entity achieving Arthur Andersen Chicago “risk-management” auditor Mark unduly aggressive targets for operating results, financial Zajac to Arthur Andersen partners on the Enron account, position, or cash flow.
including David Duncan, was disclosed that reflected the An excessive interest by management in maintaining or same conclusion. The e-mail warned the partners that after increasing the entity's stock price or earnings trend through these and other risk factors had been considered in a routine the use of unusually aggressive accounting practices. analysis to *679 determine the risk of fraud, the test had triggered a “red alert,” meaning a heightened risk of fraud.
A practice by management of committing to analysts, Moreover, Arthur Andersen knew that these factors were creditors, and other third parties to achieve what appear to present throughout the Class Period, but turned a blind eye be unduly aggressive or clearly unrealistic forecasts. to the many red flags and continued to issue “clean” audit opinions in order to generate big fees and increase the compensation of Arthur Andersen partners.
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could receive, and a few weeks later Arthur Andersen issued A number of surviving Arthur Andersen documents reveal a “clean” audit opinion on Enron's 2000 financial statements. that Arthur Andersen knew, was concerned about, yet covered up or ignored fraudulent accounting practices by Enron. *680 On August 20, 2001, Sherron Watkins called For instance, Arthur Andersen Professional Standards Group Arthur Andersen audit partner James A. Hecker and (“PSG”) 116 partner Carl Bass sent an e-mail on 12/19/99 to warned him about ongoing improper accounting practices Defendants Steward and Neuhausen expressing opposition to at Enron. Hecker called an emergency meeting the next Enron's accounting for LJM2 and urged that Arthur Andersen day with other Arthur Andersen partners, including Duncan, not support it. Again on 2/4/00 Bass sent another e-mail Swanson, Cash, and Odom, to discuss Watkins' concerns to Stewart stating that Bass thought that a particular SPE about “the propriety of accounting for certain relatedhad no real substance and that he was annoyed that Enron party transactions” with LJM, which were similar to those would receive appreciation on the Enron stock that had been expressed and then dismissed by Arthur Andersen in contributed to that SPE. That information was also sent to February 2001: Enron's repeated addition of its own stock Bauer, Cash, and David Duncan. In an e-mail to Stewart to the collateral underlying an obligation owed to Enron and Neuhausen three days before, Bass had described several by a related party without recognizing that fact in its transactions at a different partnership and commented that financial statement; the failure to record on Enron's books “this whole deal looks like there is no substance.” Later, Enron's stock contributions/issuances to LJM; incomplete or on March 4, 2001, just before Bass was removed as PSG incomprehensible disclosures on Enron's financial statements advisor for the Enron audit team, Bass sent Stewart another about the Fastow entities and transactions; and the e-mail criticizing Enron's accounting for the Blockbuster and distribution of LJM's equity to its shareholders, including Raptor transactions, which, aggregated, constituted at least Fastow and CIBC concurrently or shortly after LJM's original $150 million in improperly recognized income or avoided formation. Watkins told Hecker that “she was concerned losses at year-end 2000. The complaint asserts that David enough about these issues that she was going to discuss them Duncan, Cash, Steward and Neuhausen, with others, were with Ken Lay, Enron's Chairman, on Wed., 8/22/01.” heavily involved in structuring LJM2 and decisions to allow Enron to account improperly for the entity, as well as aware of Arthur Andersen also consulted on and reviewed many of Bass' disagreement with LJM2 accounting beginning in 2000. the manipulative transactions involving Enron's broadband business and signed off on Enron's related mark-to-market During a meeting on February 5, 2001, top Arthur Andersen accounting, which resulted in reporting more than $110 executives from the Chicago headquarters participated in a million in earnings, as discussed previously. The New York teleconference with top Houston and Gulf Coast partners Times reported on 1/30/02, “ ‘Nobody in the division could assigned to the Enron engagement about whether to retain comprehend how they got Arthur Andersen to sign off on Enron as a client. Defendants Swanson, Stewart, Jones, that,’ one former senior executive in the broadband division David Duncan, Bauer, Lowther, Odom, Goolsby, Goddard, said. ‘It just didn't make any sense. When we heard what Bennett and partner Kutsenda were among those attending. they did, everybody's mouth just hung open. We weren't The minutes of the meeting reflect a discussion, and therefore doing business on any scale even close to those numbers.’ the participants' knowledge, of the accounting issues that ” Complaint at 464. Arthur Andersen's destruction of the ultimately caused Enron's collapse, including significant documents relating to broadband, including documents in its related-party transactions with LJM, the materiality of such Portland office where much of the broadband work was done, amounts to Enron's income statement, and the amount shows that it was involved in the improper accounting for the retained “off balance sheet”; Fastow's conflict of interest broadband swaps. The Associated Press reported on 3/15/02, in serving as CFO of Enron and LJM fund manager;
Last October or November, after Arthur Andersen learned Fastow's compensation for his services and participation in that the U.S. Securities and Exchange Commission was LJM; disclosures of transactions in the financial footnotes;
investigating Enron, a team of auditors from Houston asked Enron's mark-to-market earnings, described as “intelligent a Portland employee to “clean up the files,” Wilborn told gambling” 117 ; Enron's reliance on its credit rating to the newspaper. maintain solvency; and Enron's aggressive transaction structuring. They decided to keep Enron as a client despite the red flags because of the potential $100 million fee they
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It knew that Enron's employees and officers had interests in The files were for Enron Broadband, the now-defunct and control over certain SPEs; that Enron had recorded as an telecommunications arm that for a time was based in asset a note receivable in exchange for stock issued in 2000; Portland, he said. that Barclay's investment in the Chewco deal had a reserve of $6.6 million so that there was not 3% independent equity Enron Broadband is now the focus of investigators because in the partnership and Chewco (and by extension, JEDI) was it booked hundreds of dollars worth of revenue by posting not a qualifying SPE; and that Arthur Andersen's extensive sales to Enron's notorious partnerships and by swapping involvement with JEDI and Chewco transactions is reflected capacity on its fiberoptic network with struggling telecom in the $5.7 million it billed Enron for its work.
companies, a technique that investors claim was fraudulent.
The complaint asserts that Arthur Andersen and partners The complaint claims that Enron's practice of not Steward, Petersen, and Neuhausen, continued to approve consolidating its joint investments can be traced back to at Enron's use of mark-to-market accounting, while Enron's least 1993 with the formation and capitalization of the JEDI revenue recognition became even more flagrant. joint venture, the first red flag signaling possible fraud. The formation of Chewco, in which Arthur Andersen assisted and According to the complaint, the Enron Defendants, Arthur for which it billed Enron $80,000 (equivalent to about 400 Andersen, and Enron's lawyers and banks, which participated hours of review at an hourly rate of $200) at the end of in a scheme of structuring and accounting to keep debt 1997, discussed previously, raised numerous significant red off Enron's books and record income from purported third flags regarding Enron's control of the SPE and the substance parties, knew that whenever Enron retained control over or questionable business purpose of the SPE. Specifically, entities that it had created to doctor its books, GAAP required Arthur Andersen knew (1) that Chewco's general partners consolidation of the SPEs and partnerships into Enron's were senior *682 financial employees at Enron; (2) that consolidated financial statements. GAAS also required the arrangement did not meet the minimum requirement of a certain strategies, methods, and procedures to conduct a 3% independent, at risk, controlling capital because Barclays proper audit. As noted, because of the comprehensive services collateralized the loans with a reserve account deposit of $6.6 it provided to Enron, *681 Arthur Andersen knew of million and, according to Enron employees, Arthur Andersen the audit risks inherent at Enron and in the industries in was provided with documentation demonstrating the reserve; which it operated. The complaint highlights the fact that and (3) that Barclays' funding was more like a loan than Arthur Andersen billed Enron $5.7 million for its advice an equity investment. Nevertheless Arthur Andersen ignored regarding the LJM and Chewco entities, a sum that reflects what it knew and helped Enron improperly keep the Chewco 28,000 hours of consulting and accounting work at an deal off its books, overstate its profits by $405 million, and average hourly rate of $200. Moreover, the accounting understate its debt by hundreds of millions of dollars. decisions relating to the SPEs were made at the highest levels of Arthur Andersen. Enron communicated with Arthur The LJM transactions also sent up red flags that Arthur Andersen Houston partners, including Cash, Duncan, Bauer, Andersen ignored. With Arthur Andersen's approval, Enron and Bass, with Arthur Andersen's National Office Group designed and entered into the transactions with LJM mainly (“NOG”), and with PSG in Chicago. A former Enron tax to hide debt and losses and to enrich personally certain manager stated that Enron's internal policies about whether Enron financial officers, including Fastow. Arthur Andersen certain SPEs would be consolidated on Enron's books were read the partnership's private placement memorandum, the determined by Arthur Andersen and that whenever anyone at first few pages of which state clearly that (1) Enron Enron asked how to structure a deal, the question was referred would retain significant economic or operating interests in to Arthur Andersen engagement partner David Duncan, who the investments; (2) the General Partner was owned and would then consult with the Chicago office. controlled by Fastow, Kopper and Glisan; (3) some of the banks that were original investors in LJM2 which were Arthur Andersen was required by AU § 334.09 to evaluate guaranteed that their investment would be returned and they would enjoy large profits before LJM2 entities could enter Chewco, JEDI, and LJM transactions carefully. 118 Arthur into hedging transactions with Enron; (4) senior-level Enron Andersen ignored its duty to understand the transactions and financial executives would manage LJM2 on a day-to-day the business purpose for them and failed to demand that Enron basis; (5) LJM2 would invest in the assets “sold” by Enron, make adequate disclosure and proper accounting for them.
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but Enron would also require that LJM2 retain significant economic or operating interests in them. The document's “Basic Accounting”
representation that the investors would enjoy superior returns because LJM2's general partners were senior Enron finance “What we teach in college is that you don't record equity executives, with access to inside information and resources, until you get cash for it, and a note is not cash,” said Turner, also raised a red flag. The memorandum further disclosed who is now director of the Center for Quality Financial that $17 billion of Enron assets, or 33%, were “financed Reporting at Colorado State University. “It's a mystery how off-balance sheet” and that even though Enron might sell both the company would violate, and the auditors would some, “in many cases, [Enron sought] to maintain an active miss, such a basic accounting rule, when the number is one or controlling role in the underlying investment.” billion dollars.”
The complaint asserts that Arthur Andersen knowingly Arthur Andersen's accounting work on LJM2 informed it violated several accounting rules: (1) a company may not clearly of the following accounting improprieties in LJM2 recognize an increase in the value of its capital stock in and other SPEs: (1) Enron management controlled LJM2, its income statement except under limited circumstances not which should have been consolidated in accordance with present here, yet the substance of the Raptors and other accounting rules; (2) Arthur Andersen's failure to investigate transactions allowed Enron to report net income and gains thoroughly the business purpose and substantive reasons for on its income statement that were secured almost entirely accounting about 33% of Enron's total assets on an off- by Enron stock and contracts to receive Enron stock that balance sheet basis, especially in view of the fact that Enron were held by the Raptors (i.e., the transactions created net had at least $17 billion in assets and associated liabilities income out of the air); (2) in the frequent consultations with carried off of its balance sheet; (3) Enron's regular retention of the PSG in Chicago, which originally required the Enron control of its off-balance sheet investments; (4) Enron finance engagement team to analyze whether there was a minimum executives and insiders received tens of millions of dollars in 3% independent, at-risk equity investment at the inception management fees and quick profits; (5) the “sale” to LJM2 and each time a derivative transaction was commenced, and swift reacquisition of Enron's assets at a gain for LJM2, Arthur Andersen later improperly agreed that the analysis even when the value of the assets had declined; (6) Enron's only needed to be done at the inception and that a subsequent use of its own stock as security for alleged hedges of other deterioration of the interest was insignificant; (3) e-mails Enron investments. among Cash, David Duncan and Stewart throughout the Class Period reveal that Arthur Andersen officials, including David According to the complaint, Arthur Andersen also knew Duncan, Cash, Lowther, Odom, and Steward among others, about the improper accounting for the Raptors. It permitted were responsible for Arthur Andersen's decision to allow Enron to improperly account for notes received for stock Enron to improperly record individual impairment charges issued. Arthur Andersen billed Enron in 2000 at least for Raptor investments that had significantly and permanently $335,000 (about 1,675 hours at $200 per hour) for its work declined in value; (4) Arthur Andersen accountants failed to relating to the Raptor deals, which resulted ultimately in a $1 demonstrate objectivity, charged Enron about $1.3 million billion reduction in shareholders' equity when the accounting for Raptor-related services, offered advice throughout the errors were corrected. The complaint at 470 quotes an article Raptors' existence that Enron followed, and, in the 2001 from Bloomberg, dated 11/12/01: restatement, did not require revision of the $1 billion in prior earnings improperly derived from the Raptors.
Lynn Turner, who was the SEC's chief accountant for three years until he *683 resigned in August, said Enron In its audits of Enron's financial statements in 1997, Arthur and Andersen ignored a basic accounting rule when they Andersen identified $51 million of adjustments where the overstated shareholder's equity.
accounting was improper. Arthur Andersen knew these Explaining the equity reduction last week, Enron said adjustments altogether constituted almost 50% of Enron's it had given common stock to companies created by $105 million net income for that year and were therefore Enron's former chief financial officer in exchange for notes clearly material to the financial statements and needed to receivable, and then improperly increased shareholder be made if those statements were not to be misleading. equity in its balance sheet by the value of the notes. Nevertheless, Enron informed Arthur Andersen it did not want to make those adjustments, which would radically
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reduce the net income that management wanted to report to the public. Arthur Andersen acquiesced in order to retain In sum, the complaint lists Enron's “woefully inadequate” its lucrative client, and it abandoned its role as a public disclosures regarding its accounting practices and related watch dog and violated GAAS. To justify not making parties, many known to Arthur Andersen because it such large adjustments, Arthur Andersen obfuscated the helped develop accounting for them, including transactions information by calculating the $51 million as an immaterial involving Chewco, management involvement in LJM, 8% of a contrived figure that it denominated as “normalized manipulative transactions involving the Raptors, improper earnings,” requiring no adjustment, instead of as a very and abusive use of mark-to-market accounting, improper material 51% of Enron's net income for 1997, which would use of its own stock to generate income, manipulative require an adjustment. The complaint asserts that in 2001, too practices involving broadband, and many other accounting late for thousands of investors who lost billions of dollars manipulations. because they relied on earlier years' financial statements, Enron restated its financial statements for 1997–2000 and From September to November 2001, believing that civil *684 Arthur Andersen commented that the audit reports litigation and government investigation of Enron was covering the year-end financial statements for 1997–2000 imminent, in compliance with Arthur Andersen's “document “should not be relied upon.” retention policy” developed in the wake of its Waste Management debacle, Arthur Andersen offices destroyed Arthur Andersen was required by GAAS to consider whether “tons” of documents in the United States (in Houston, Enron's disclosures accompanying its financial statements Portland, and Chicago) and in London that could implicate were adequate. SAS No. 32, set forth in AU §§ 431.02–.03 Arthur Andersen in fraud at Enron. Arthur Andersen was provides, indicted for obstruction of justice in the Justice Department's investigation of the collapse of Enron. 120 The complaint at .02 The presentation of financial statements in conformity 474–77 discusses alleged memoranda and e-mails exchanged with generally accepted accounting principles includes between Arthur Andersen's *685 Chicago and Houston adequate disclosure of material matters. These matters offices; Arthur Andersen's in-house lawyer, Nancy Temple's relate to the form, arrangement, and content of the “reminder” to personnel about the document retention policy financial statements and their appended notes, including, and insistence on deletion of key e-mail, as well as for example, the terminology used, the amount of detail removal of any references to her on accounting memoranda;
given, the classification of items in the statements, and Michael Odom's October 10, 2001 conference regarding the bases of amounts set forth. An independent auditor importance destruction of documents; meetings held among considers whether a particular matter should be disclosed Arthur Andersen officials; and the subsequent shredding. The in light of the circumstances and facts of which he is aware complaint also identifies a number of Principles and Rules at the time.
of the Code of Professional Conduct, which the bylaws of .03 If management omits from the financial statements, AICPA require members to abide by, that Arthur Andersen including the accompanying notes, information that is allegedly violated. 121 required by generally accepted accounting principles, the auditor should express a qualified or an adverse opinion Arthur Andersen had the responsibility as Enron's and should provide the information in his report, if independent auditor, but failed, to gather “[s]ufficient practicable, unless its omission from the auditor's report competent evidential matter ... to afford a reasonable basis is recognized as appropriate by a specific Statement on for an opinion regarding the financial statements under Auditing. audit” as to “the fairness with which they present, in all material respects, financial position, results of operations, The requisite disclosures included information about related and its cash flows in conformity with generally accepted parties, about which auditors must gather sufficient accounting principles.” AU §§ 150, 110. Arthur Andersen information to ensure that they understand the relationships also intentionally ignored information indicating that Enron's between or among the parties and the effects of any financial statements did not “present fairly” Enron's financial transactions on financial statements. The auditor must position. By its false statements, its knowledge of improper be satisfied after his investigation that the disclosure is accounting, its failure to identify and modify its reports adequate. 119 to reveal Enron's false financial reporting, and its lack of
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independence, Arthur Andersen violated numerous GAAS and subsequently, once caught in the scheme, shored it 122 up in order to limit their exposure to liability and obtain standards.
what payments they could on Enron's debts to them, are inherently irrational, implausible, and/or illogical and the *686 4. Fraud–On–The–Market Doctrine and Safe alleged actions are against Defendants' own self-interest. This Harbor Court notes that what may have been implausible two or Finally, the consolidated complaint insists that the three years ago is hardly so today, in light of a plethora presumption of reliance under the fraud-on-the-market of revelations, investigations, evidence, indictments, guilty doctrine applies here to its § 10(b) and Rule 10bS–5 claims. pleas, and confessions of widespread corporate corruption It points out that at all relevant times the market for Enron's and fraud by companies, auditors, brokerage houses, and publicly traded securities was efficient for a number of banks. Lining one's pockets with gold, at the expense of reasons including that (1) Enron's securities were listed and investors, employees, and the public, appears too often to be a actively traded on the NYSE and the Over–the–Counter dominating ambition, and public scepticism about the market Market, both of which are efficient markets; (2) as a regulated is very prevalent. issuer, Enron filed periodic public disclosure reports with the SEC; (3) Enron communicated with public investors *687 The third-party entities have objected with through established market mechanisms on a regular basis, justification to the undifferentiated, boiler-plate allegations including press releases, analyst conferences, and conference repetitively applied to all or many defendants or with calls; (4) and several securities analysts followed Enron and generalized references to “the bank defendants” or “the wrote reports that were published, distributed, and entered law firm defendants,” without the requisite entity-specific the public market place. The market promptly absorbed and particularized factual allegations for pleading fraud all current information from all publicly available sources under § 10(b), as required by Rule 9(b) and the PSLRA. and reflected that information in the price of Enron stock. They also criticize claims of misconduct based on what Therefore, concludes the complaint, all purchasers of Enron are common, legitimate business actions or practices (e.g., publicly traded securities during the Class Period suffered loans, commodity swaps, passive investments, underwriting similar injury by purchasing these securities at artificially securities offerings, regular working relationships with a inflated prices. company's executives, issuance of analyst reports, and desire to earn profits) that are not inherently improper or fraudulent.
Finally Lead Plaintiff contends that the PSLRA's statutory This Court responds that the activities must be viewed in safe harbor does not apply to the forward-looking statements context, i.e., within the totality of surrounding circumstances, pled in the complaint because (1) it does not apply to to determine whether they are merely ordinary and legitimate Enron's financial statements or financial results; (2) with acts or contrivances and deceptive devices used to defraud. the exception of conference calls on 11/12/01 and 11/14/01 Moreover it is fully aware that more is needed than conclusory Enron did not give any safe harbor warning in its conference allegations to defeat a motion to dismiss under § 10(b) and calls during the Class Period; (3) the cautionary statements Rule 10b–5. issued by Enron during the Class Period were not meaningful because the Enron Defendants all actually knew of Enron's Emphasizing the complaint's reliance on language like financial problems and each speaker knew that each forward “assisting,” “participating in,” “helped,” and “complicity in,” looking statement he made was false and that it was the motions also argue that, at most, Plaintiff in essence is authorized and/or approved by an executive officer of Enron charging these third-party defendants with aiding and abetting who also knew that it was false. violations that are barred in claims under § 10(b) and Rule 10b–5 by Central Bank. Defendants argue that they made no public misrepresentations or omissions in misreporting III. Motions to Dismiss and the Court's Rulings Enron's financial condition, but point the finger at Enron as the responsible party for any such conduct. Moreover some A. Defendants' Common Objections Defendants have argued that they can only be liable under A number of Defendants argue that Lead Plaintiff's § 10(b) and Rule 10b–5 for a material misrepresentation or allegations that Defendants knew of the Ponzi scheme and yet omission.
poured millions of dollars into it or risked their reputations to conceal the scheme merely for fees, payments and profits,
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The Court has indicated its interpretation of and the test it has in current investigations by the SEC and by prosecutors selected for liability under Central Bank and will apply both like Eliot Spitzer, the attorney general of New York. It has to determine whether the allegations against each Defendant been widely reported that internal documents from firms constitute a primary violation or merely an aiding and abetting including Merrill Lynch and Credit Suisse First Boston violation. See “Applicable Law” section of this memorandum have revealed that their analysts issued recommendations and order at 39–61. The Court has also indicated that in to buy or sell stock even though their own research results addition to claims under Rule 10b–5(b), plaintiffs may sue were contrary to those recommendations, and that they for securities law violations under Rule 10b–5(a) and (c) for conceded that the recommendations served to help attract conduct other than material misrepresentations or omissions. business to their investment banking service. Moreover, ten of Wall Street's largest brokerage firms and investment banks In addition, Defendants emphasize that the complaint lacks are currently working with Mr. Spitzer and Stephen M. particularized factual allegations that would give rise to Cutler, director of enforcement for the SEC, to work out a strong inferences of scienter, which in turn under Fifth settlement agreement with regulators to cure problems with Circuit law requires pleading more than financial motive stock research and possibly to subsidize stock research by and opportunity. They justifiably underline that instead, Lead independent companies that do not also operate investment Plaintiff substantially relies on conclusory allegations, such banks underwriting stocks. In addition, Citigroup has just as that Defendants knew of the fraudulent scheme because announced that it is separating its stock research and their executives interacted almost daily with Enron's or that brokerage, in a new unit to be called Smith Barney, from its they had unlimited access to Enron's business and financial investment banking service to eliminate possible conflicts of information as Enron's lead lending banks, or that the banks interest. in extending commercial loans or credit facilities were required to perform extensive credit analyses of the borrower Moreover reports abound daily as to what appears to be a financial situation. As will be discussed, such allegations are standard absence of effective Chinese walls on Wall Street. In insufficient under Rule 9(b) and the PSLRA. recent weeks the news has been filled with allegations about an e-mail suggesting that Salomon Smith Barney's former The Defendants contend that the complaint only conclusorily telecom analyst Jack Grubman raised his rating on AT & T's negates the existence of “Chinese Walls” that would keep stock from “hold” to “buy” in 1999 to obtain admittance of any information from research analysts that was known his twin children into an exclusive nursery school through to the investment banking services section of the banks. efforts of Citigroup's chairman Sandy Weill, who sat on the Defendants additionally object that the complaint charges that board of AT & T and asked Grubman to “take a fresh look” at Defendants' analysts issued misleading reports, but fails to his rating of its stock. A few months later, after Weill's firm identify any misleading statements or plead any specific facts reaped large fees from helping AT & T to sell investors shares showing that the analysts had contemporaneous knowledge in its wireless division and after obtaining admission for his of facts contradicting specific statements in their reports. twins, Grubman downgraded the stock, but only after it lost 50% of its value between Grubman's upgrading of the stock In the complaint Lead Plaintiff explains that for decades after when it was valued at $57.43 and downgrading it when it was it was enacted following *688 the stock market crash of selling at $28.88. Investors lost approximately $80 billion in 1929, the Glass Steagall Act prohibited banks from acting value. 123 in dual capacities as both commercial banks and brokerages, making loans to and selling the securities of their corporate [51] Defendants contend that Lead Plaintiff has not customers. The Glass Steagall Act was repealed in 1999 adequately pleaded facts *689 showing that the analysts did and financial establishments were permitted to offer both not merely accurately report information provided to them by commercial and investment banking services and trusted to Enron and argue that the statements in those reports constitute establish Chinese walls between the two. either puffery or opinion and are therefore not actionable.
The Court observes that Lead Plaintiff's complaint for claims While the Court agrees that the absence of effective Chinese under § 10(b) focuses in large part on pleading adequately walls is only conclusorily asserted by Lead Plaintiff, the Court the secondary-actors Defendants' involvement, with scienter, observes that the Chinese wall issue is another allegation that in acts, deceptive devices, contrivances, and scheme and/ must be viewed in the total context, including facts unearthed or course of business to defraud the public, i.e., primary
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violations of Rule 10b 5(a) and (c). The very nature of “we believe,” “we forecast,” “we expect,” “we feel very Defendants' personal and intimate knowledge of the fraud comfortable”), but also because of express disclaimers, such from the alleged direct participation in the Ponzi scheme as “does not warrant its completeness or accuracy,” “past necessarily makes their highly positive public statements and performance is not indicative of future results,” or “the buy-stock recommendations misrepresentations of the truth. recipient of this report must make its own independent Thus the legal basis of the claims makes irrelevant a specific decisions regarding any securities or financial instruments analysis of each statement, which would be required if they mentioned herein.” The Court disagrees. Generally a were asserting only claims of a material misrepresentation disclaimer is *690 enforceable only where it “tracks the or omission under Rule 10b–5(b). The alleged absence of substance of the alleged misrepresentation.”Grumman Allied effective Chinese walls, which the Court has found adequate Indus. v. Rohr Indus., Inc., 748 F.2d 729, 735 (2d Cir.1984). in light of the totality of the circumstances, makes knowledge See also Manufacturers Hanover Trust Co. v. Yanakas, 7 F.3d gained in the lending and commercial areas of the banks 310, 316 (2d Cir.1993)(to be effective a disclaimer “must imputable to their analysts. contain explicit disclaimers of the particular representations that form the basis” of the fraud claim). Under both the [52] Various Defendants have contended that specific statutory safe harbor and the bespeaks caution doctrine, as claims under § 10(b) and Rule 10b–5 are time-barred as discussed, the warnings may not be vague, generic, cursory a matter of law. A private right of action under § 10(b) disclaimers, but instead must be “meaningful cautionary “must be commenced within one year after discovery of the statements” identifying important factors that might cause facts constituting the violation and within three years after material differences in actual results, or must be adequate and such violation.” Lampf, Pleva, Lipkind, Prupis & Petigrow v. specific. Moreover if the party is found to have the requisite Gilbertson, 501 U.S. 350, 364, 111 S.Ct. 2773, 115 L.Ed.2d scienter for fraud, i.e., knows the statements or omissions are 321 (1991). materially misleading or untrue or is severely reckless about the truth of his statements, the safeguards will not apply.
Lead Plaintiff has responded that it is not seeking to recover damages for alleged misconduct that occurred more than three Some Defendants have also argued that the plaintiff who years before suit was filed, but is pleading such purported purchased 7% Notes on November 5 and 9, 2001, Murray van violations solely to establish evidence of a scheme and de Velde, did so more than two years after the effective date of of scienter. Such evidence is admissible for this purpose. the registration (August 10, 1999) and after the issuance of an Ashdown, 509 F.2d 793 (5th Cir.1975)(mail fraud); United earning statement covering at least twelve months thereafter, States v. Blosser, 440 F.2d 697, 699 (10th Cir.1971)(same); not to mention a number of negative public disclosures about Fitzgerald v. Henderson, 251 F.3d 345 (2d Cir.2001)(Title Enron. 124 Therefore van de Velde cannot plead or prove the VII). The Court agrees and considers those allegations to be requisite actual reliance of the alleged misstatements in the admissible solely for the purpose of establishing a scheme prospectus, as required by § 11, 15 U.S.C. § 77k(a). 125 See, and/or scienter.
e.g., Greenwald v. Integrated Energy, Inc., 102 F.R.D. 65, 71 n. 2 (S.D.Tex.1984)(“Reliance is required under the one Defendants have also argued that despite Lead Plaintiff's year provision of Section 11(a)....”); Rudnick v. Franchard disclaimer that it is not grounding its Section 11 claims in Corp., 237 F.Supp. 871, 873 n. 1 (S.D.N.Y.1965)(“in all fraud, Lead Plaintiff has incorporated allegations of fraud likelihood, the purchase and price of the security purchased and its claims are based on the same fraudulent scheme as after publication of [a subsequent earning statement] will be its § 10(b) and Rule 10b–5 claims, and therefore must be predicated on that statement rather than on the information pleaded, but have not been, with Rule 9(b) particularity. Lone disclosed upon [the original] registration”)(citing H.R.Rep.
Star Ladies Inv. Club, 238 F.3d at 368;Melder, 27 F.3d at No. 1838 (1934)).
1100 & n. 6. The Court disagrees. See pages 70–71 of this memorandum and order.
Lead Plaintiff has conceded this point and no longer pursues
[53] A few Defendants have maintained that they are not claims based on the 7% Exchangeable Notes. 126 liable for alleged misstatements in analysts' reports because the investors could not have reasonably relied on them, *691 Defendants also insist that no facts have been pleaded not only in light of their use of qualified language (e.g., to support the conclusory allegations of controlling person liability under § 15 of the 1933 Act, § 20(a) of the 1934 Act,
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and article 581– § 33(F) of the TexasSecuritiesAct. Lead in fraudulent practices even if those injured are outside its Plaintiff has not addressed the question of controlling person borders.”). Lead Plaintiff insists it “does not have to show liability in its response to the secondary-actor Defendants' that the sale of the securities was primarily linked to Texas arguments that the complaint does not plead that any because the statute applies if any act in the selling process of defendant exerted actual control over Enron or the other securities covered by the Act occurs in Texas.” Id. at 921–22; defendants so all claims under the appropriate provisions of see also Texas Capital Sec., Inc. v. Sandefer, 58 S.W.3d 760, the three statutes should be dismissed. The Court defers ruling 776 (Tex. App.-Houston [1st Dist.] 2001, pet. ref'd)(same). on the issue under the federal and Texas statutes until it has thoroughly reviewed all the individual Defendants' motions. The Court agrees with Lead Plaintiff and finds that the objection to the TexasSecuritiesAct claims lacks merit.
[54] In addition, Defendants have moved to dismiss the Washington State Investment Board's claim relating to the underwriters of the 6.95% Notes and the 6.40% Notes under B. Section 10(b) Claims Against Defendants Individually the TexasSecuritiesAct, Tex.Rev.Civ. Stat. Ann. art. 581– Rather than focusing upon deficiencies in the complaint, 33, for lack of a nexus between the sales of the securities and especially conclusory or boiler plate allegations, of which the the State of Texas, i.e., an allegation that the sales occurred Court agrees that there are many, the Court examines what in Texas. Moreover, they maintain, because the claim also Lead Plaintiff has specifically and successfully pled in this sounds in fraud, it must be pleaded with particularity under complaint against each Defendant to determine whether it Rule 9(b). One Defendant claims that Plaintiff has not pleaded adequately states a claim with specificity under § 10(b) and under which provision in the TexasSecuritiesAct the Board's raises a strong inference of the requisite scienter that warrants claims are brought. denial of its motion to dismiss.
Lead Plaintiff responds that the misconduct alleged, including 1. Legal Standards false statements to sell Enron debt, occurred in and/or As indicated for violations of § 10(b), Lead Plaintiff may emanated from Texas in substantial part, justifying suing assert and has asserted claims under all three prongs of Rule under article 581–33. Therefore, Lead Plaintiff maintains that 10b–5, and is not limited to the second prong's material Defendants cannot meet their burden of proof under Texas misrepresentation or omission category:
law for claiming foreign law applies: they must show the existence of a true conflict of laws and demonstrate which (a) To employ any device, scheme, or artifice to defraud, law should apply to Lead Plaintiff's claims based on state contacts. Weatherly v. Deloitte & Touche, 905 S.W.2d 642, (b) To make any untrue statement of material fact or to 650 (Tex.App.-Houston [14th Dist.] 1995, writ dism'd w.o.j.). omit to state a material fact necessary in order to make the As an example Lead Plaintiff contends that Enron's Form statements made, in light of the circumstances under which 10–K for 1997, which was incorporated into the Registration they were made, not misleading, or Statement for the sale of the Notes, was materially false (c) To engage in any act, practice, or course of business because it concealed the debt moved off Enron's balance which operates or would operate as a fraud or deceit upon sheets and into the JEDI/Chewco entity. This illicit entity any person, in connection with the purchase or sale of any was formed inter alia by Vinson & Elkins, Enron, Enron security.
employees, and Arthur Andersen employees in Houston, Texas.
Furthermore, Plaintiff must allege specific facts sufficient to give rise to a strong inference of scienter, i.e., intent Moreover, Lead Plaintiff observes that the Texas statute to deceive, manipulate or defraud, or at least knowing is a broad remedial statute *692 intended not only misconduct, which in this Circuit must reach the level to protect Texas residents but also “non-Texas residents of severe recklessness, “highly unreasonable omissions or from fraudulent securities practices emanating from Texas.”
misrepresentations [and/or use of manipulative and deceptive Baron v. Strassner, 7 F.Supp.2d 871, 875 (S.D.Tex.1998);
devices and contrivances to defraud and/or engagement in Rio Grande Oil Co. v. State, 539 W.W.2d 917, 921 a practice or scheme or course of business that operated (Tex.Civ.App.-Houston [1st Dist.] 1976, writ ref'd n.r.e.)
as a fraud upon the public in connection with the sale (“A state is damaged if its citizens are permitted to engage and purchase of Enron securities] that involve not merely
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simple or even inexcusable negligence, but an extreme 658, 117 S.Ct. 2199;Zandford, 122 S.Ct. at 1903. Reliance departure from the standard of ordinary care, and that present under prongs (a) and (c) can also be established by the a danger of misleading buyers or sellers which is either fraud-on-the-market doctrine: Lead Plaintiff has alleged that known to the defendant or is so obvious that the defendant the identified contrivances, deceitful devices, schemes and must have been aware of it.”Nathenson, 267 F.3d at 408. courses of business operated to present a falsely positive Furthermore, scienter must be evaluated in view of the totality picture of Enron's financial condition and maintain its high of alleged facts and circumstances, together as a whole, with credit ratings, thereby artificially inflating the value of all reasonable inferences drawn in Lead Plaintiff's favor. Enron's publicly traded securities and continuing to attract Abrams, 292 F.3d at 431. funds from the investing public or encouraging shareholders not to sell.
This Court applies the SEC's test for primary liability for a material misrepresentation or omission under § 10(b) and the second prong of Rule 10b–5: “when a person, 2. Primary Violations by Specific Defendants acting alone or with others, creates a misrepresentation [on Lead Plaintiff alleges a scheme or course of business in which which the investor-plaintiffs relied], the person can be liable the various participant Defendants engaged in and concealed as a primary violator ... if ... he acts with the requisite a pattern of conduct involving the creation of unlawful scienter.” SEC's Brief *693 (# 821) at 18. “Moreover it SPEs and utilizing fraudulent transactions with these entities would not be necessary for a person to be the initiator of a having no economic purpose other than as contrivances or misrepresentation in order to be a primary violator. Provided deceptive devices to misrepresent Enron's financial condition that a plaintiff can plead and prove scienter, a person can and defraud investors into continuing to pour money into be a primary violator if he or she writes misrepresentations Enron securities to keep the Ponzi scheme afloat and thereby for inclusion in a document to be given to investors, even enrich themselves in a variety of ways. It has also asserted if the idea for those misrepresentations came from someone that as part of this scheme Defendants knowingly made else.” Id. Furthermore, “a person who prepares a truthful material misrepresentations upon which investors in Enron and complete portion of a document would not be liable as securities relied. Moreover, the purchase of Enron securities a primary violator for misrepresentations in other portions by unknowing investors was an integral part of the scheme, of the document. Even assuming such a person knew of necessary to keep the house of cards out of bankruptcy and to misrepresentations elsewhere in the document and thus had further a scheme so lucrative for Defendants. the requisite scienter, he or she would not have created those misrepresentations.” Id. at p. 19. [56] As a factor common to all, the Court initially finds that the scienter pleading requirement is partially satisfied by Lead Plaintiff must plead reliance on the alleged material allegations of a regular pattern of related and repeated conduct misrepresentation or omission. As discussed supra, the fraud- involving the creation of unlawful, Enron-controlled SPEs, on-the-market theory is applicable. sale of unwanted Enron assets to these entities in clearly non-
arm's length transactions and often with guarantees of no risk, [55] Moreover, under Rule 10b–5(a) and (c), where a group in order to shift debt off Enron's balance sheet and sham of Defendants allegedly participated in the scheme to defraud profits onto its *694 books at critical times when quarterly the public and enrich themselves in connection with the or year-end reports to the SEC, and by extension the public, purchase or sale of securities, any Defendant that itself, with were due, followed in many cases by the undoing of these the requisite scienter, actively employed a significant material very deals once the reports had been made. These transactions device, contrivance, scheme, or artifice to defraud or actively were not isolated, one-of-a-kind instances of violations of engaged in a significant, material act, practice, or course of the statutes, but deliberate, repeated actions with shared business that operated as a fraud or deceit upon any person characteristics that were part of an alleged common scheme in connection with the purchase or sale of any security may through which Defendants all profited handsomely, many be primarily liable. As noted, the phrase “in connection with exorbitantly. The very pattern that is alleged undermines the purchase or sale of any security” must be construed claims of unintentional or negligent behavior and supports broadly and flexibly to effectuate Congress' remedial goal allegations of intent to defraud. Furthermore, the intrinsic in enacting the statute of insuring honest securities markets nature of these devices and contrivances was fraudulent so and promoting investor confidence. O'Hagan, 521 U.S. at that those intimately involved in structuring the entities and arranging the deals, especially more than one, would have to
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have been aware that they were an illicit and deceptive means complained that they are being targeted for performing the to misrepresent Enron's actual financial state and mislead normal functions of their businesses, e.g., lending money, investors about Enron securities, or at minimum, would have underwriting stocks, accounting and auditing, or drafting had to have been severely reckless as to that danger. legal documents. Obviously, regular business conduct within the bounds of the law would not support a claim of Moreover, Lead Plaintiff has pleaded effectively the common securities law violation; instead *695 the allegations must motive of, fixation on, and obsession with monetary gain. It demonstrate that they knowingly or with reckless disregard has not only alleged that extraordinary fees, interest rates, stepped outside the boundary of legitimate and professionally etc., were pocketed by the secondary actor Defendants, which acceptable activities in performing material acts to defraud only inflated with the expanding mirage of corporate success the public. that they allegedly fraudulently created. It has also described credit default puts that obligated Defendants to maintain The Court addresses party-specific, concrete factual Enron's strong financial image to avoid exposure to large allegations against each Defendant whose motion to dismiss losses. It has claimed that Defendants not only aided in is under review to see if Lead Plaintiff has asserted with structuring and funding the fraudulent entities from which specificity some material misrepresentation or omission, they derived concrete, extraordinary benefits, but they also use of a deceptive device or contrivance or participation sold stock to the public investors and were repaid from in a scheme or course of business to defraud investors the proceeds of those sales. The Court finds that the facts in connection with the purchase or sale of securities that pled here constitute allegations of motive and opportunity would raise a strong inference of scienter, sufficient for that meaningfully enhance the strength of the inference of Lead Plaintiff's § 10(b) claims to survive. Where Lead scienter, though they do not alone suffice. Nathenson, 267 Plaintiff has once adequately alleged that a party took such F.3d at 412. an affirmative step with scienter, not only that immediate act or material misrepresentation or omission, which without Similarly, conclusory allegations asserted against all or most adequate public disclosure directly or indirectly manipulated of the secondary actor Defendants, such as the long-term, the financial picture of Enron or the value of its securities, any continuous, intimate and extensive relationships with Enron alleged subsequent activity by that party, such as continuing and daily interaction with Enron's top executives, necessarily to lend funds to Enron-controlled SPEs or soliciting or selling raise the specter of potential and unusual opportunities to Enron securities or even silence, necessarily becomes suspect learn about and take an active role in Enron's financial affairs, as further complicity in, expansion of, and perpetuation of the open access to nonpublic information about Enron, intimacy alleged Ponzi scheme. blending into complicity fueled by financial interests, and involvement in formulating, funding, drafting, and decision- making about key aspects of Enron's business, including a. The Banks the structuring and financing of Enron's secretly controlled (i) J.P. Morgan partnerships with no economic purpose other than to [57] Viewing the specific allegations together, the Court defraud. In addition, the provision of both commercial finds that Plaintiff has stated a claim against J.P. Morgan banking and investment banking services to Enron raises as a primary violator under § 10(b) and Rule 10b–5.
the possibility of conflicts of interest and the standard Among the alleged circumstances that portray J.P. Morgan mandatory in-depth credit analyses required of borrowers as knowingly or at least with severe recklessness making a by lenders, etc., which should have raised red flags, are all material misrepresentation or employing a device, scheme, background factors to be considered. Nevertheless, without or artifice to defraud or engaging in an act, practice, or some particular facts about specific involvement of each course of business that operated as a fraud or deceit upon Defendant in fraud that would alert a reasonable party Enron investors and that in combination give rise to a strong to recognize its participation in a fraudulent scheme and inference of scienter are the following.
indicate either actual knowledge or reckless disregard by that Defendant of the wrongdoing to misrepresent Enron's The private placement memorandum/invitation-to-invest for financial condition, such general allegations applied to every LJM2, with its express indication that Andrew Fastow Defendant across the board are not sufficient by themselves would be wearing two hats in a blatant conflict of interest to raise a strong inference of scienter. Defendants have and with an obvious opportunity for self-dealing, and its
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promise of extraordinary returns to investors, 127 among why, how, when or what J.P. Morgan or any of the other which were J.P. Morgan's executives, who invested at least pre-funders learned about the individual SPEs and their $25 million, allegedly served as a reward to executives transactions. The complaint does assert that J.P. Morgan of Defendants that participated in the Ponzi scheme. The funded at least four SPEs (Sequoia, Choctaw, Cherokee, and allegations constitute an invitation for a highly lucrative, Cheyenne, generally as additional Enron-controlled entities potentially illicit investment opportunity. More, however, is used solely to artificially inflate Enron's profits and conceal needed for pleading liability under § 10(b) and Rule 10b– its debt), but gives no particulars about their deals or what, 5. Lead Plaintiff argues that the “prefunding” in amounts when or how J.P. Morgan knew about them. higher than each Defendant's allocated share just before the Lead Plaintiff has also generally alleged that J.P. Morgan ′99 year-end reports were due gave rise to the requisite scienter. The Court disagrees. The Court finds that Lead and Citigroup administered the financial affairs of LJM2, Plaintiff has failed to allege precise facts that would have including profit distributions and capital calls, and were thus alerted any of the various Defendant investors to suspect informed about LJM2's deals, finances and distributions to that their December 22, 1999 secret initial investment funds investors. Such a role would necessarily have given both to capitalize LJM2 were to be used specifically to fund banks access to confidential information about the entity. the CLOs, Nowa Sarzyna power plant, MEGS, LLC, and These general allegations, along with many others in the Yosemite deals through LJM2 in order to doctor Enron's complaint, are significant factors for consideration, but are balance sheet in time for the 1999 year-end reports or that clearly inadequate by themselves to raise a strong inference of these investors would have known *696 any particulars scienter without some detailed facts pled that would indicate about those four deals merely because they put up money when and what particular information J.P. Morgan was aware on an expedited basis. The Court does find, however, that of or that what it was severely reckless in disregarding. Lead Plaintiff's claim that in a short time these investors were rewarded by actual, exorbitant returns (up to 2,500% [58] Lead Plaintiff does provide sufficient details to meet on one deal and 51% overall within the first year), in view the pleading and scienter standards for § 10(b) claims relating of the implied promises of private placement memorandum, to J.P. Morgan regarding JP Morgan's repeated “loans” would raise red flags to any objective party investing in it of about $5 billion to Enron, disguised as commodities and especially a party having other business dealings with trades between 1997 and 2000. These loans were frequently Enron. Nevertheless Lead Plaintiff provides no details about made for years at critical junctures, just before quarterhow , when, where or who of the investors learned what end or year-end, by J.P. Morgan, utilizing its controlled about the various entities and transactions involving Chewco. entity Mahonia, as alleged manipulative or deceptive acts Moreover, Lead Plaintiff states generally that the greatest or contrivances, overseen by a senior credit officer at J.P. returns to the investors occurred sometime from 2000 to Morgan, Mark Shapiro, to falsify Enron's financial condition. 2001 from deals involving the Raptors, somewhat later in the These allegations do raise a strong inference of scienter. Ponzi scheme. Thus the Court finds that further involvement, Lead Plaintiff has further asserted that these loans resemble beyond the fact of prefunding and investment in LJM2, is a scheme that J.P. Morgan is accused of perpetrating earlier necessary to raise a strong inference of scienter regarding with a commodities trader from Sumitomo Corporation, each Defendant's alleged participation in the purported Ponzi which is currently being challenged as fraudulent in another scheme. suit. Lead Plaintiff's additional claims regarding the efforts *697 of J.P. Morgan to insure against Enron's default on Moreover in light of the substantial sum J.P. Morgan, a the disguised loans by purchasing performance bonds from sophisticated business banking entity, poured into LJM2 in insurance companies, also at issue in litigation elsewhere, the prefunding personal investment and the $65 million line and the alleged excessive rate of interest J.P. Morgan of credit J.P. Morgan extended to the partnership, the Court charged for the disguised loans (more than 3% higher than finds noncredible any contention that the bank would not normal rates, yielding an extra $120 million per year to have reviewed the structure and activities of that entity with be collected by J.P. Morgan) imply that it was aware of care and would sooner or later have discovered its alleged Enron's precarious financial condition and that it sought illicit purpose. Nevertheless, as noted, Plaintiff has made personal gain out of the ordinary from its fraudulent conduct, cookie cutter allegations against all the bank Defendants, but while simultaneously contributing to a strong inference of failed to provide crucial specific facts identifying specifically scienter. Moreover, these alleged disguised loans, which, the
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complaint notes, investigating Congressional officials have business with Enron. By themselves, however, the Court finds criticized as having no legitimate economic purpose but these investments insufficient, without more, to raise a strong instead as appearing to be devices to “allow Enron to covertly inference of scienter. borrow hundreds of millions of dollars in undisclosed loans,” are part of a pattern of subterfuge loans painted by the In light of the substantial sums of money Citigroup, a complaint that include the Delta transactions with Citigroup sophisticated business banking entity, poured into LJM2, i.e., and the fake swap in which Credit Suisse First Boston lent $1,500,000 in pre-funding on 12/22/99 (many times more Enron $150 million to be repaid over two years. Along than its allocated share), and a $15 million dollar personal with all the other general allegations of J.P. Morgan's investment by its executives, the Court finds noncredible extensive involvement with Enron, the pleadings relating any contention that the *698 bank would not over time to the bank's participation in, inflated benefits from, and have scrutinized the structure and activities of the illicit failure to adequately disclose these transactions, as well as its entity. Moreover, beyond the significant investment in the awareness that LJM2, with its conflict of interest and potential partnership, Lead Plaintiff has alleged that Citigroup and for self-dealing, was enjoying extraordinary returns, imply JP Morgan administered the financial affairs of LJM2 from J.P. Morgan had knowledge of the alleged illegitimacy of 1999–2001, including profit distributions and capital calls, Enron's ongoing business dealings and the inaccuracy of its and Citigroup thus would have been access to information financial reports. Furthermore, according to the complaint, about LJM2's financial operations and transactions, and those there were material misrepresentations in its analysts' with its “spin-off” SPEs. consistently positive reports and registration statements, which purportedly did not change in any substantive way [59] More specific are the allegations of Citigroup's from the formation of LJM2 and the executives' undisclosed involvement in the New Power IPO scheme in 10/00. With pre-funding. See pages 132–35, 159–65 of this memorandum other banks it made a loan to fund Hawaii 125–0 and received and order. a “total return swap” guarantee to protect it from any loss, while Enron sold its New Power warrants to that entity and For these reasons, the Court finds that Lead Plaintiff has falsely hedged it with the help of Enron-controlled LJM2 and alleged primary violations of § 10(b) and Rule 10b–5 and Porcupine. raised a strong inference of scienter, and it accordingly denies J.P. Morgan's motion to dismiss. In addition, Citigroup, through its Cayman Island subsidiary, also allegedly participated in a repeated pattern of pre-paid swaps, i.e., disguised large loans to Enron totaling $2.4 billion (ii) Citigroup that were never disclosed on its balance sheet, through the Viewing the specific allegations together, the Court finds Delta transactions, at interest rates nearly double the normal that Plaintiff has stated a claim against Citigroup as a borrowing rate, providing Citigroup with nearly $70 million primary violator under § 10(b) and Rule 10b–5. Among the annually for its participation in the Ponzi scheme. Moreover, alleged circumstances that portray Citigroup as knowingly, Lead Plaintiff additionally alleges that to reduce Citigroup's or at least with severe recklessness, making a material own risk exposure in the event that Enron defaulted on what misrepresentation or employing a device, scheme, or artifice Citigroup knew were very dangerous transactions, Citigroup to defraud or engaging in an act, practice, or course of sold Enron-linked securities as notes, including the disguised business that operated as a fraud or deceit upon Enron Delta loans. While the Court does not disagree with Citigroup investors, and that together give rise to a strong inference of that credit-linked notes are “a well-recognized derivatives scienter, are the following. instrument, issued and traded in huge volumes each year by a wide variety of entirely proper purposes” in order to spread As indicated, the private placement memorandum/invitation- risk over a larger number of guarantors, as allegedly used to-invest for LJM2, with its express indication that Andrew in the context of the allegations in this case, they raise an Fastow would be wearing two hats in a blatant conflict of inference that Citigroup knew how precarious the financial interest and obvious opportunity for self-dealing, and its condition of Enron was in contrast to its positive public promise of extraordinary returns to investors, among which representations. 128 were Citigroup executives, and, most importantly, followed in a short time by actual, exorbitant returns, would raise flags to any objective party investing in it and doing continuing
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The Court finds that the allegations of primary violations of banks' loans and to create a $370 million profit for itself § 10(b) and Rule 10b–5, which simultaneously raise a strong on the purported gain on these warrants. Hawaii 125–0 inference of scienter, warrant denial of Citigroup's motion to then purportedly “hedged” the warrants with Porcupine, also dismiss. controlled by Enron, which LJM2 had previously capitalized with $30 million for the hedge of the New Power warrants. One week later, Porcupine emptied its coffers when it paid (iii) Credit Suisse First Boston back the money plus $9.5 million to LJM2, another source Viewing the specific allegations together, the Court finds of significant and suspicious fast returns for LJM's investors, that Plaintiff has stated a claim against Credit Suisse as a which included top officials of Credit Suisse First Boston. See primary violator under § 10(b) and Rule 10b–5. Among the pages 130–31 of this memorandum and order. alleged circumstances that portray Credit Suisse First Boston as knowingly or at least with severe recklessness employing Credit Suisse First Boston is also alleged to have made a device, scheme, or artifice to defraud or engaging in an another disguised “loan” or sham swap of $150 million, to be act, practice, or course of business that operated as a fraud or repaid over two years to Enron in 2000 in payments varying deceit upon Enron investors, and that together give rise to a with the cost of oil. According to the complaint, it was not strong inference of scienter, are the following. a swap because Enron was paid up front. Moreover, Credit Suisse First Boston's spokesman, Pen Pendleton, is quoted as The private placement memorandum/invitation-to-invest for conceding, “It was like a floating-rate loan. We booked it as LJM2, with its express indication that Andrew Fastow a loan.” would be wearing two hats in a blatant conflict of interest and obvious opportunity for self-dealing, and its promise Lead Plaintiff's specific explanation of how Credit Suisse of extraordinary returns to investors, among which were First Boston regularly participated in the Ponzi scheme by Credit Suisse First Boston executives, and, most importantly, designing, structuring and funding the SPEs that were the followed in a *699 short time by actual, exorbitant returns, primary vehicles utilized by Enron to falsify its financial would raise flags to any objective party investing in it and condition and misrepresent profits also constitutes a scheme doing continuing business with Enron. Moreover, in light of to defraud investors raises a strong inference of scienter. The the substantial sums of money Credit Suisse First Boston, a complaint charges that a group of ten bankers from Credit sophisticated business banking entity, poured into LJM2, i.e., Suisse First Boston, headed by Laurence Nath, created some a $120 million plus credit line to the partnership and a $22.5 of the illicit SPEs, a process dubbed “structured products,” million dollar personal investment by its executives, the Court including Marlin, Firefly, Mariner, Osprey, Whitewing, and finds noncredible any contention that the bank would not over the Raptors, to which Credit Suisse First Boston helped Enron time have scrutinized the structure and activities of the illicit sell assets at inflated prices in non-arm's-length transactions entity. Lead Plaintiff, however, has failed to plead sufficiently to create sham profits and conceal massive debt for Enron. specific facts that would demonstrate scienter with respect to Lead Plaintiff specifically explains that Laurence Nath and the investments. Credit Suisse First Boston worked closely with Vinson & Elkins and Arthur Andersen to create and document these [60] Lead Plaintiff does succeed in pleading claims SPEs and transactions. When an asset was sold to one of the cognizable under § 10(b) and Rule 10b–5 with its additional SPEs as a quick-fix solution to remove that asset from Enron's allegations relating to Credit Suisse First Boston's alleged balance sheet, it was referred to as “monetising” the asset. involvement in Enron's scheme to recognize a profit by taking Laurence Nath would regularly go to Houston for a week New Power public. The complaint asserts that pursuant to a or two, meet with a group from Enron's treasury and global secret deal made before and carried out after the New Power finance departments *700 (“Fastow's field marshals”), IPO, for which Credit Suisse First Boston served as lead including Jeff McMahon or Ben Glisan (successive treasurers underwriter, Credit Suisse First Boston, together with other of Enron), and create a solution to new problems in order to banks, made a sham loan of $125 million to Hawaii 125–0, doctor the Enron books. According to the complaint, most when the banks actually and secretly received a total return of the vehicles created in this manner by Nath shared the swap guarantee from Enron against any loss. Credit Suisse same unusual feature: the SPEs held Enron stock to reassure under these allegations would have known its loan was a lenders and secure an investment grade rating, but there were deceptive device or contrivance. Enron then sold millions set “trigger points,” or prices between $83 $19 per share, at of New Power warrants to Hawaii 125–0 to “secure” the
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which the stock's declining value would require Enron to put In light of these specific allegations, Plaintiff's somewhat more shares into the entity or even force liquidation if Enron's conclusory allegations that Credit Suisse First Boston's credit rating was downgraded. At that point the debt of the analysts' reports and recommendations and its Registration SPEs became recourse to Enron. Not only does such specific statements contained material misrepresentations about involvement in the scheme give rise to a strong inference Enron's stock and financial condition carry more weight than of scienter, but the alleged acts of Nath and his team would they might otherwise be entitled to. Lead Plaintiff has pointed constitute primary violations of the statute. out that the bank's boilerplate disclosures remained the same as they were before the funding of LJM2 in December The complaint also describes discussions that it claims 1999, never mentioning specifically the investments of its top reflect Credit Suisse First Boston's actual knowledge of *701 executives in the entity, its funding of the partnership Enron's real financial condition underneath the cloak of false during 2001, its concealed loan transactions, or any of the representations. The complaint quotes an Enron insider as significant conflicts of interest that would cast doubt on its remarking, “There's no question that senior people at CSFB analysts' objectivity and honesty in evaluating Enron stock. knew what was going on and that it was a house of cards.” One It has also identified specific positive statements in reports, individual who attended a meeting in July 2001, when Enron's including those in paragraphs 154, 158, 167, 171, 180, 191, stock had fallen into the $40s, stated that the triggers were 198, 205, 213, 229, 268, 285, 290, 319, 345, 354, 374, 378, discussed by senior Enron executives and Credit Suisse First 612–41, and 704 of the complaint, which, when set against Boston bankers. It was reported that the bankers remarked, its factual allegations of ongoing fraud which the Court “If this thing hits the $20s, you better run for the hills,” and presumes for purposes of the motion to dismiss to be true, “There was no question that they knew exactly what lay inside constitute material misrepresentations. While Plaintiff has not the structures, when the triggers went off—everything. You sufficiently alleged scienter as to most of them, it has asserted could almost say they knew more about the company than reasons why from early in the Class Period Credit Suisse people in Enron did.” See page 173–74 of this memorandum First Boston was aware of, or recklessly disregarded, obvious and order. While the content of these remarks may be subject warning signs of illicit, fraudulent conduct by Enron and its to other interpretation, with respect to a Rule 12(b)(6) motion, officers more than sufficient for it to question if not truth or the Court views the pleaded facts in favor of Lead Plaintiff. accuracy of its statements about particular matters, certainly the truth or accuracy of its unqualified, glowing picture of The complaint also refers to a discussion at a meeting in Enron, which in turn served to increase the sales and price June 2001, when Enron stock was trading at around $48.50 of Enron's publicly traded securities, from which it derived a share, between an Enron manager and two Credit Suisse monetary benefits. First Boston managing directors reflecting that Credit Suisse First Boston knew about the nature and extent of Enron's off-balance sheet exposure and Enron's falsification of its (iv) CIBC financial statements. The bank's directors asked an Enron [61] Beyond the global allegations of the complaint, such as manager: “How can you guys keep doing this?,” in reference that the bank “had an extensive and extremely close relations” to Enron's repeated statements to the market that its stock with Enron, provided it with commercial and investment was under valued. Even at $40 per share, Enron's stock banking services, lent Enron substantial sums, underwrote was still overvalued in the bank directors' view, as reflected numerous Enron-related securities and raised billions from in their comments to the Enron manager: “Do employees the sale of Enron and Enron-related securities, helped actually believe it's worth what management is saying?”; structure and fund several of Enron's controlled partnerships “[Y]ou guys are at a critical price point right now”; that if and illicit transactions with its SPEs, and pocketed millions Enron's stock price continued to fall, that drop would cause annually in interest payments and fees, Lead Plaintiff makes Raptor to unwind and the debt balance to come due; when specific assertions against CIBC that, if true, would constitute the Enron executive stated that he thought Enron's off-balance primary violations of § 10(b) and Rule 10b–5 and give rise to sheet debt was between one and two billion dollars, the bank a strong inference of scienter. representatives responded, “Try eight to 12 billion.”; and that if Enron's stock dips to $20 per share, things would come CIBC allegedly provided $2.25 million, much more than falling down and “you guys are gonna be fucked.” its allocated share, to prefund LJM2, with CIBC executives among those receiving the suggestive private placement memorandum and secretly invested in LJM2 and, from
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its self-dealing transactions, management by Fastow with for Enron on the VOD project, to put $2 million (or 3% Enron insiders on both sides of the transactions, enjoyed outside equity) into Project Braveheart at the end of 2000 the extraordinarily lucrative returns that should have alerted by secretly promising that the money would be returned them to questionable dealings and practices. Ultimately CIBC immediately in 2001. Just a few months later, in March 2001 invested $15 million in LJM2. Enron abandoned the VOD venture, but it did not reverse the more than $110 million in sham profits that it had recognized Second, Lead Plaintiff alleges that the New Power on its books. The complaint also asserts that because CIBC transactions permitted Enron again to falsify its financial knew that Enron's financial situation was precarious, it did results and improperly recognize sham profits and not require Enron to honor its guarantee but carried over the perpetuated the Ponzi scheme. According to the complaint, loan so that the Ponzi scheme could continue. The complaint while serving as the lead underwriter in the New Power IPO, in addition quotes a statement from Blockbuster employee CIBC engaged in the secret deal structured before the New Ms. Raskopf about the venture found in a Wall Street Journal Power IPO to create and fund Hawaii 125–0 after it. CIBC article: “ ‘It was nothing but a pilot project ... I don't know and other banks “lent” money to Hawaii 125–0, but were how anyone could have been booking revenues' ” and that protected from any risk by a total return swap, so that Enron “Blockbuster ... never accounted for any financial gain or could transfer millions of New Power warrants to the SPE and loss from the short-lived venture.” The article further states create a $370 million profit from the purported gain on them, that three former Enron employees familiar with the pattern which Enron recognized in the fourth quarter of 2000. Enron of partnership deals employed by Enron, commented that in a sham hedge “to secure” the banks' loan had LJM2 put the kind of guarantee made to CIBC to repay full value if $30 million into another Enron-controlled SPE, Porcupine, the investment fails, “was designed to attract investors who but Porcupine paid LJM2 back with profit in a week, so that otherwise might worry about the viability of the deals. ‘The there was no hedge. New Power stock's swift collapse shortly banks didn't care about the assets they invested in and that's afterward turned the “gain” into a loss of about $250 million, how it got out of control,’ says one former Enron employee which was concealed. who helped create some of the partnerships.”
Third, according to the complaint, in 2000–01 CIBC was also During the New Power and Project Braveheart deals, in which involved in the Blockbuster VOD venture and worked with CIBC's alleged involvement would have had to give rise to Enron to make this risky venture appear to be successful, its actual knowledge or a reckless disregard of fraud, the first of its kind, *702 and worth more than $1 billion complaint points out that CIBC continued to issue positive to Enron. The complaint states that to maintain Enron's analyst reports with boilerplate disclosures that did not public image as a highly successful business, including its change from the time its executives first secretly invested in new Broadband content delivery business, CIBC cooperated LJM2. with Enron's misuse of mark-to-marketing accounting to improperly accelerate and record over $100 million of profits in year end 2000 and first quarter 2001. CIBC also (v) Merrill Lynch & Co. allegedly participated in the creation of EBS Content Systems Merrill Lynch also allegedly was “intimately involved in LLC, a/k/a Project Braveheart, to which without, any basis, creating, structuring and helping to finance” LJM2. As they arbitrarily assigned a value of $124 million. CIBC the placement manager it sold interests in LJM2 (though purportedly “invested,” not loaned, $115 million to Project no allegations of specific day-to-day control or knowledge Braveheart, but only after demanding and receiving a secret gained through particular exposure are made), purportedly to guarantee from Enron so that CIBC was not at risk from other participants in the Ponzi scheme to reward them for their what it knew was a troubled business without the necessary participation, its executives invested at minimum $22 million technology or rights to provide the VOD venture content in in LJM2, lent money to it in the form of a $120 million line of digital form from the movie studios, and thus most unlikely credit in December 1999, and raised $390 million in private to succeed. Enron then recognized $110 million in profits equity funds for LJM2. It too reaped the excessive returns from this transaction in the fourth quarter of 2000 and first that should have served as a red flag that LJM2 was involved quarter of 2001. Moreover, to give the appearance that the in illicit transactions. *703 But such conclusory allegations partnership was a valid SPE, CIBC and Enron purportedly alone are insufficient to create a strong inference of scienter. got a company named nCUBE, which worked as a contractor The complaint fails to assert any specific facts to give rise to actual knowledge of or reckless disregard of fraud.
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give rise to a strong inference of Barclay's intent to keep the Nevertheless, the Court notes that Lead Plaintiff was Ponzi scheme in operation. required without any discovery to file its consolidated complaint on an expedited schedule to allege securities violations in an extraordinarily complex scheme that even (vii) Lehman Brothers Holding, Inc. experts are struggling to decipher. In his opposition to [63] The Court finds that Lead Plaintiff has failed to plead Merrill Lynch's motion to dismiss Lead Plaintiff has made adequately a cause of action under § 10(b) against Lehman. reference to Merrill Lynch's role in the purported Nigerian Although the complaint alleges that Lehman executives were barge transaction in 1999. As the Court has indicated in among those who personally invested in LJM2, prefunding it footnote 87 of this memorandum and order, it is one with $1.5 million and ultimately putting $10 million into it, of two potential sham transactions between Enron and the profits of which should have raised red flags to the bank Merrill Lynch, the other involving ENA, which in the to ask questions, that alone is not sufficient to establish the wake of Congressional investigations have raised significant requisite strong inference of scienter. Unlike with respect to questions about possible fraud that have drawn substantial the other Defendants discussed thus far, the complaint fails to attention through media reports. Moreover, these two identify any specific act or material statement or omission or transactions fit the patterns of the scheme alleged by Lead involvement in the alleged Ponzi scheme that would give rise Plaintiff throughout the complaint. See footnote 87 of this to a strong inference of scienter. memorandum and order. In the interests of justice, this Court will allow Lead Plaintiff to supplement its claims to *704 (viii) Bank America Corporation include one or both these issues. Because the facts asserted Bank America is sued under both § 11 of the 1933 Act and § about these two transactions in the news would raise a 10(b) of the 1934 Act and Rule 10b–5. As is the case with the strong inference of scienter, provided that Lead Plaintiff § 10(b) claims against Lehman, the § 10(b) allegations against supplements its complaint, the Court denies Merrill Lynch's Bank America fail to raise a strong inference of scienter. The motion to dismiss.
complaint's only specific allegations relate to Bank America and/or its executives' investment of $45 million in LJM2, (vi) Barclays which made it the largest investor in LJM2. This investment [62] Barclays, which provided commercial lending and was not properly disclosed to the investing public, and Bank underwriting services to Enron, is sued only under § 10(b) America enjoyed lush returns from it. As indicated, the Court for alleged affirmative acts in furtherance of the fraudulent does not find the mere fact that it invested in a questionably scheme. Lead Plaintiff's allegations about Barclays' direct profitable entity, without more to indicate how, when, and involvement in the formation and funding of JEDI/Chewco what it learned about the nature of the entities LJM2 dealt in 1997 are sufficient by the very nature of the transactions with and of the transactions it effected, sufficient to state a to state a claim under § 10(b) and Rule 10b–5. According to securities violation under § 10(b) and Rule 10b–5. the complaint Barclays, along with Lay, Skilling, and Fastow, formed Chewco, which Enron and Barclays controlled, as (ix) Deutsche Bank AG a sham independent entity to buy a purported independent, Deutsche Bank is sued only under the 1934 Act. Lead outsider's interest in JEDI. Barclays purportedly loaned Plaintiff alleges that Deutsche Bank's top executives Chewco $240 million and money to the two strawmen, Little (through BT Investment Partners) were among those who River and Big River, to provide the $11.4 million for the prefunded LJM2. Deutsche Bank executives purportedly 3% equity investment in Chewco. In addition, giving rise to provided $1.5 million for that purpose and subsequently a strong inference of scienter that it knew the transactions invested personally $10 million in LJM2, and thereafter were non-arm's length and fraudulent, it demanded that Enron enjoyed extraordinary distributions from that investment.
provide a secret guarantee that it would be repaid and that Nevertheless, the complaint fails to allege any other Chewco would establish a $6.6 million cash reserve deposit involvement that would give rise to a strong inference paid to Barclays to insure against risk of loss. Barclays lent an of scienter, sufficient to establish liability based on its additional $500 million to JEDI in 1998. Its subsequent loans alleged false and misleading statements or loans or securities and lending commitments of over $4 billion and the $1.9 offerings under Rule 10(b) and Rule 10b–5.
billion in raised by underwriting and selling Enron securities
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But the complaint goes into great detail to demonstrate b. The Law Firms that Vinson & Elkins did not remain silent, but chose not once, but frequently, to make statements to the public about (i) Vinson & Elkins Enron's business and financial situation. See pages 203–22 [64] Contrary to Vinson & Elkins' contention, the situation alleged in the consolidated complaint is not one in which of this memorandum and order. 129 Moreover in light of its Vinson & Elkins merely represented and kept confidential alleged voluntary, essential, material, and deep involvement the interests of its client, which has “the final authority to as a primary violator in the ongoing Ponzi scheme, Vinson control the contents of the registration statement, other filing, & Elkins was not merely a drafter, but essentially a coor prospectus.” Vinson & Elkins' motion to dismiss (# 648) author of the documents it created for public consumption at 11 n. [citation omitted]. Instead, the complaint alleges that concealing its own and other participants' actions. Vinson the two were in league, with others, participating in a plan, & Elkins made the alleged fraudulent misrepresentations to with each participant making material misrepresentations potential investors, credit agencies, and banks, whose support or omissions or employing a device, scheme or artifice to was essential to the Ponzi scheme, and Vinson & Elkins defraud, or engaging in an act, practice or course of business deliberately or with severe recklessness directed those public that operated as a fraud, in order to establish and perpetuate a statements toward them in order to influence those investors Ponzi scheme that was making them all very rich. to purchase more securities, credit agencies to keep Enron's credit high, and banks to continue providing loans to keep the Vinson & Elkins was necessarily privy to its client's Ponzi scheme afloat. Therefore Vinson & Elkins had a duty to confidences and intimately involved in and familiar with the be accurate and truthful. Lead Plaintiff has alleged numerous creation and structure of its numerous businesses, and thus, inadequate disclosures by Vinson & Elkins that breached that as a law firm highly sophisticated in commercial matters, duty. had to know of the alleged ongoing illicit and fraudulent conduct. Among the complaint's specific allegations of acts Vinson & Elkins protests that its purported “whitewash” in furtherance of the scheme are that the firm's involvement investigation and report in the wake of Sherron Watkins' in negotiation and structuring of the illicit partnerships August 1999 memorandum were not disclosed to the public and off-the-books SPEs, whose formation documentation it until after Enron waived the attorney/client privilege and drafted, as well as that of the subsequent transactions of produced the report for Congressional hearings in 2002, after these entities. It advised making Kopper manager of Chewco the Class Period ended, and thus cannot be the basis of a § so that Enron's involvement in and control of the SPE 10(b) misrepresentation claim by the investors. Nevertheless would not have to be disclosed, drafted “true sales” opinions the investigation and report can serve as the basis of a § that Lead Plaintiff asserts were essential to effect many of 10(b) and Rule 10b–5(a) or (c) claim alleging use of a the allegedly fraudulent transactions. Vinson & Elkins was device, scheme or artifice to defraud or engagement in an act, materially involved in the New Power IPO, and it structured practice or course of business that operated as a fraud in the and provided advice on the Mahonia trades, all actions perpetuation of the Ponzi scheme. constituting primary violations of § 10(b). In other words, it “effected the very” deceptive devices and contrivances that Furthermore, the complaint references, summarizes, and were the heart of the alleged Ponzi scheme. SEC v. U.S. quotes from the Powers' investigative committee report the Environmental, 155 F.3d at 112. According to the allegations negatively critical findings about Vinson & Elkins' substantial in the complaint, Vinson & Elkins chose to *705 engage in and dubious role in the events of the Class Period, as illegal activity for and with its client in return for lucrative delineated in the complaint, which support Lead Plaintiff's fees. Contrary to the Rules of Professional Conduct, it did allegations. See pages 206–08, 213–14 of this memorandum not resign and thereby violated its professional principles and and order. ethics. Nevertheless, had Vinson & Elkins remained silent publicly, the attorney/client relationship and the traditional For these reasons the Court finds that Lead Plaintiff has stated rule of privity for suit against lawyers might protect Vinson claims under § 10(b) against Vinson & Elkins. & Elkins from liability to nonclients for such alleged actions on its client's (and its own) behalf.
(ii) Kirkland & Ellis
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[65] The Court agrees with Kirkland & Ellis that Lead comprehensive accounting, auditing, and consulting services Plaintiff has only alleged that Kirkland & Ellis represented to Enron necessarily made it intimately privy to the smallest some of the illicit Enron-controlled, non-public *706 SPEs details of Enron's alleged fraudulent activity. Lead Plaintiff and partnerships that Enron, but not Kirkland & Ellis, has described several similar prior fraudulent audits of other used for transactions (devices or contrivances) to hide its companies, establishing a pattern of such conduct, and debt and record sham profits, disguising its true financial the SEC's and courts' repeated imposition of penalties on condition, and performed legal services on their and Enron's Arthur Andersen and its employees, including the consent behalf. The complaint does not allege that Kirkland & decree and injunction from the Waste Management fraud Ellis invested in any partnership or profited from any which was in effect at the time Lead Plaintiff alleges that dealings with Enron other than performing routine legal Arthur Andersen violated § 10(b) in auditing Enron. Lead services for the partnerships. All the assertions against Plaintiff has also alleged details of the February 5, 2001 the firm are conclusory and general. While the allegations teleconference meeting of senior Arthur Andersen partners against Kirkland & Ellis may indicate that it acted with (including individual Defendants Bauer, Bennett, Goddard, significant conflicts of interests and breached professional Goolsby, Jones, Lowther, Odom, Steward and Swanson) from ethical standards, unlike its claims against Vinson & Chicago and Houston and the Gulf Coast when they discussed Elkins, Lead Plaintiff has not alleged that Kirkland & Ellis material concerns at the heart of the consolidated complaint: exceeded activities would be protected by an attorney client related-party transactions with LJM, Fastow's conflicts of relationship and the traditional rule that only a client can interest, disclosures of transactions in financial footnotes, sue for malpractice because it never made any material Enron's mark-to-market earnings, and Enron's aggressive misrepresentations or omissions to investors or the public transaction structuring, in essence the risk of continuing generally that might make it liable to nonclients under § 10(b). fraudulent accounting for Enron and *707 retaining it as Any documents that it drafted were for private transactions a client. They decided to continue because Enron's business between Enron and the SPEs and the partnerships and were was so lucrative, and a few weeks later they issued a clean not included in or drafted for any public disclosure or audit opinion on the 2000 financial statements. Moreover, shareholder solicitation. Any opinion letters that the firm it has described e-mails and internal memoranda between wrote are not alleged to have reached the plaintiffs nor been and among Arthur Andersen employees (Carl Bass, who had drafted for the benefit of the plaintiffs. It was not Enron's previously objected on December 18, 1999 to accounting counsel for either its securities filings or its SEC filings. Thus on an Enron entity, Thomas Bauer, John Stewart, John the Court grants Kirkland & Ellis' motion to dismiss. Stewart Benjamin Neuhausen, and Debra Cash) before the ′99 financial statements were issued that reflect Arthur Andersen's knowledge and intent to continue in the fraudulent c. The Accountant/Auditor: Arthur Andersen scheme. Lead Plaintiff even mentions that Sherron Watkins [66] Lead Plaintiff has identified numerous violations in August 2001 called Arthur Andersen audit partner James by Arthur Andersen of GAAS, GAAP, risk factors for Hecker about her concerns regarding improper accounting fraud, accounting rules, and rules of professional conduct practices 130 at Enron and that she was going to discuss them for accounts that Arthur Andersen violated. Yet Arthur with Ken Lay. Hecker called an emergency meeting of Arthur Andersen certified that Enron's financial statements for 1997– Andersen partners on August 21, 2001, one day after Sherron 2000 were in compliance with GAAP and its audits of the Watkins' wrote her memorandum to Lay.
financial statements complied with GAAS. Moreover it knew its reports would be relied upon by present and potential Because Lead Plaintiff has alleged numerous violations of investors in Enron securities. It also consented to having GAAP and GAAS and pleaded facts giving rise to a strong the audited financial statements included in registration inference of scienter, he has pleaded a securities fraud statements, prospectuses, and annual shareholders' reports claim against Arthur Andersen. Melder, 27 F.3d at 1103 that were filed by Enron during the Class Period. Lead (“[T]he mere publication of inaccurate accounting figures, or Plaintiff has also alleged that Arthur Andersen destroyed a failure to follow GAAP, without more does not establish documents to conceal its fraudulent accounting. All of these scienter. The party must know that it is publishing materially constitute primary violations under § 10(b).
false information or the party must be severely reckless in publishing such information.”).
[67] Furthermore Lead Plaintiff has alleged specific facts giving rise to a strong inference of scienter. Arthur Andersen's
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Accordingly, for the reasons indicated above, the Court C. Section 11 Claims To plead a claim under § 11, a plaintiff must allege ORDERS the following: (1) that the defendant's registration statement contained an omission or misrepresentation and (2) that the omission or (1) CIBC's motion to dismiss(# 615) is DENIED; misrepresentation was material, that it would have misled a reasonable investor about the nature of his investment. Krim (2) Citigroup's motion to dismiss (# 629) is DENIED; v. BancTexas Group, Inc., 989 F.2d at 1445.
(3) J.P. Morgan Chase & Co.'s motion to dismiss (# 632) is Lead Plaintiff has alleged numerous material transactions DENIED; (deceptive devices and contrivances) in the complaint that were not clearly and adequately disclosed in registration (4) Barclays' motion to dismiss (# 653) is DENIED; statements. Moreover, given the fact that the complaint is filled with allegations of red flags and warnings at least some (5) Credit Suisse First Boston's motion to dismiss (# 658) is of which should have alerted an underwriter doing a due DENIED; diligence investigation to look deeper and question more, the Court finds that the complaint adequately alleges Section (6) Bank of America Corporation's motion to dismiss (# 664) 11 claims grounded in negligence and/or fraud against the is GRANTED as to claims under § 10(b) and Rule 10b–5, but following Defendants: DENIED as to Lead Plaintiff's claim under § 11 for the 7.35% Notes due on 5/15/09, pursuant to the Registration Statement (1) Credit Suisse First Boston for material of 5/19/99;
misrepresentations or omissions in registration statements filed on 2/99 for an offering of 27.6 million shares of Enron (7) Provided that Lead Plaintiff supplements its complaint as stock; on 10/00 for New Power stock; around July 18, 2001 indicated supra, Merrill Lynch & Co.'s motion to dismiss (# for the resale of Enron zero coupon convertible notes;
667) is DENIED;
(2) CIBC for its 5/99 Registration Statement of $500 million of Enron 7.375 *708 notes due on 5/15/2019; 2/99 (8) Lehman Brothers Holdings Inc.'s motion to dismiss (# Registration Statement for sale of 27.6 million shares of 679) is GRANTED as to Lead Plaintiff's claims under § 10(b) Enron stock at $31.34; 5/99 Registration Statement filed on and Rule 10b–5, but DENIED as to claims under § 11 and the 5/20/99 for the sale of $500 million of Enron 7.375% notes; TexasSecuritiesAct; and the 10/00 New Power Registration Statement for sale of 27.6 million shares of New Power stock; (9) Deutsche Bank AG's motion to dismiss (# 716) is GRANTED;
(3) Lehman with regard to the registration statements for the sale of Enron's 7.375% Notes in May 1999 and the (10) Kirkland & Ellis's motion to dismiss (# 660) is 7.875% Notes in May 2000; and GRANTED;
(4) Bank America for the sale of $500 million of 7.375% (11) Vinson & Elkins L.L.P.'s motion to dismiss (# 648) is Enron Notes due 5/15/2019, pursuant to the Registration DENIED; and Statement filed on 5/15/99.
(12) Arthur Andersen LLP's motion to dismiss (# 650) is DENIED; and D. Claims under the TexasSecuritiesAct, Article 581–33 Because there are no heightened pleading requirements and (13) Lead Plaintiff's § 10(b) claims relating to the 7% because the Texas Act does not require proof of reliance, Exchangeable Notes and 8.375% Notes are DISMISSED.
scienter, or a duty to disclose on the part of the offeror or sellers, the Court finds that Lead Plaintiff has stated a claim under the TexasSecuritiesAct against J.P. Morgan, Lehman, and Arthur Andersen.
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All Citations
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Footnotes 1 “Each averment of a pleading shall be simple, concise, and direct.” 2 Rule 9(b) provides, Fraud, Mistake, Condition of Mind In all averments of fraud, or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally. In securities fraud actions, the Fifth Circuit applies and strictly interprets Rule 9(b) as requiring a plaintiff to “specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.” Abrams v. Baker Hughes, Inc., 292 F.3d 424, 430 (5th Cir.2002); Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir.)(citing Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir.1993)), cert. denied,522 U.S. 966, 118 S.Ct. 412, 139 L.Ed.2d 315 (1997). The Fifth Circuit treats a dismissal for failure to plead fraud with particularity under Rule 9(b) as a dismissal for failure to state a claim upon which relief can be granted under Rule 12(b)(6). Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir.1996), citing Shushany v. Allwaste, Inc., 992 F.2d 517, 520 (5th Cir.1993).
3 In reviewing the sufficiency of a complaint in response to a motion to dismiss for failure to state a claim under Fed.R.Civ.P.
12(b)(6), before any evidence has been submitted, the district court's task is limited. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support its claims. Id. The district court should consider all allegations in favor of the plaintiff and accept as true all well-pleaded facts in the complaint. Lawal v. British Airways, PLC, 812 F.Supp. 713, 716 (S.D.Tex.1992). Dismissal is not appropriate “unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of [his] claim which would entitle him to relief”. Conley v. Gibson, 355 U.S. 41, 45–46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
Nevertheless, conclusory allegations or legal conclusions masquerading as factual conclusions do not defeat a motion to dismiss. Fernandez–Montes v. Allied Pilots Assoc., 987 F.2d 278, 284 (5th Cir.1993). Courts need only accept well- pleaded factual allegations as true. Shushany v. Allwaste, Inc., 992 F.2d 517, 520, 523 (5th Cir.1993); Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir.1994)(courts should “not accept as true conclusory allegations or unwarranted deductions of fact.”). In the instant action, as discussed above and below, Plaintiff must also satisfy the pleading requirements of Rule 9(b)(fraud must be pled with particularity) and for scienter under the PSLRA and Rule 10b–5.
4 Central Bank v. First Interstate Bank, 511 U.S. at 191, 114 S.Ct. 1439. 5 Plaintiff's consolidated complaint asserts claims against various subsidiaries and affiliates of J.P. Morgan Chase & Co., which Plaintiffs refer to collectively as “JPMorgan Chase.” J.P. Morgan Chase & Co. objects that these corporations are separate entities. J.P. Morgan Chase & Co. was formed on December 31, 2000 by the merger of J.P. Morgan & Co. Incorporated and The Chase Manhattan Corporation.
Although the consolidated complaint names Lehman Brothers Holdings Inc. as a defendant, Lehman Brothers asserts, and points to paragraph 108 in the complaint to show that Lead Plaintiff concedes that the banking and advisory services at issue are provided only by its subsidiary, Lehman Brothers Inc. Similarly in its memorandum supporting its motion to dismiss (# 630 at 10 n. 3), Citigroup writes, “For purposes of this motion only, we accept as true plaintiff's allegation that the entity that did those things [alleged by plaintiff] was Citigroup, Inc. In fact, however, any business dealings with Enron were those of Citigroup's subsidiaries, including Citibank, N.A. and Salomon Smith Barney, Inc.” Bank of America raises a similar challenge with respect to its subsidiary, Bank of America Securities LLC. # 665 at 1 n. 1 and 9–10. These objections cannot be dealt with in the context of a motion to dismiss. Defendants who remain in this litigation may file an appropriate motion with a supporting brief and evidence challenging Plaintiff's one-entity approach, but for purposes of the motion to dismiss this Court will assume that Plaintiff's characterization is proper.
6 Article 33(a) was based on § 12(a)(2) of the 1933 Act, 15 U.S.C. § 77l(a)(2), and like § 12(a)(2) is basically a strict liability statute (unless one of the express exceptions applies) with no scienter requirement. Texas Capital Securities, 58 S.W.3d at 775,citing Flowers, 472 S.W.2d at 115.
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7 This Court has found no cases addressing the effect of Central Bank v. First Interstate Bank, 511 U.S. 164, 191, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994)(holding that a “private plaintiff may not maintain an aiding and abetting suit under § 10(b).”) on the TexasSecuritiesAct. Because the Supreme Court relied on the language and legislative history of the federal 1934 Act, and because the Texas statute contains language expressly providing for aiding and abetting liability, this Court assumes the holding of Central Bank does not apply to the express provision for such secondary liability under article 581–33(F) in the TexasSecuritiesAct.
8 The United States Supreme Court has held that the term “manipulation” as used in § 10(b) is “ ‘virtually a term of art when used in connection with securities markets' ” and refers to practices “such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity.” Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977), quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)(Market “manipulation” “connotes intentional and willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities.”). The Supreme Court explained, “Wash sales” are transactions involving no change in beneficial ownership. “Matched” orders are orders for the purchase/sale of a security that are entered with the knowledge that orders of substantially the same size, at substantially the same time and price, have been or will be entered by the same or different persons for the sale/ purchase of such security. Section 9(a) of the 1934 Act, 15 U.S.C. § 78i(a)(1), proscribes wash sales and matched orders when effectuated “(f)or the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange, or ... with respect to the market for any such security.” Ernst & Ernst, 425 U.S. at 205 n. 25, 96 S.Ct. 1375. “[T]he basic aim of the antifraud provisions is to ‘prevent rigging of the market and to permit operation of the natural law of supply and demand.’ ” SEC v. First Jersey, Inc., 101 F.3d 1450, 1466 (2d Cir.1996)(citing United States v. Stein, 456 F.2d 844, 850 (2d Cir.)), cert. denied, (408 U.S. 922, 92 S.Ct. 2489, 33 L.Ed.2d 333 (1972)), cert. denied,522 U.S. 812, 118 S.Ct. 57, 139 L.Ed.2d 21 (1977). “The gravamen of manipulation is deception of investors into believing that prices at which they purchase and sell securities are determined by the natural interplay of supply and demand, not rigged by manipulators.” Gurary v. Winehouse, 190 F.3d 37, 45 (2d Cir.1999).
9 In Santa Fe the Supreme Court defined “deception” as used in § 10(b) as the making of a material misrepresentation or the nondisclosure of material information in violation of a duty to disclose. 430 U.S. at 470, 97 S.Ct. 1292. Thus the statute prohibits only the making of a material misstatement (or omission) or the commission of a manipulative or deceptive act. Because “manipulation” is essentially a limited term of art, the focus in most securities violations is on deception or misrepresentation. Santa Fe, 430 U.S. at 476, 97 S.Ct. 1292.Id. at 473, 97 S.Ct. 1292 (material misstatement (or omission)); at 475–77 (§ 10(b) must be, read flexibly, not technically and provides a cause of action for any Plaintiff who suffers an injury as a result of a deceptive practice touching its sale or purchase of a security. “No doubt Congress meant to prohibit the full range of ingenious devices that might be used to manipulate securities prices.”). Nevertheless aiding and abetting liability is not covered by § 10(b). Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. at 177, 114 S.Ct. 1439 (“The [statute's] proscription does not include giving aid to a person who commits a manipulative or deceptive act.”).
10 In Ernst & Ernst, the Supreme Court turned to Webster's International Dictionary (2d ed.1934) for definitions of “device” and “contrivance” in concluding that “[t]he words ‘manipulative or deceptive’ used in conjunction with ‘device or contrivance’ strongly suggest that § 10(b) was intended to proscribe knowing or intentional conduct,” and not merely negligence. 425 U.S. at 197, 199, 96 S.Ct. 1375. The dictionary defined “ ‘device’ as ‘(t)hat which is devised, or formed by design’; a contrivance; an invention; project; scheme; often a scheme to deceive; a stratagem; an artifice, and ‘contrivance’ in pertinent part as ‘(a) thing contrived or used in contriving; a scheme, plan, or artifice.’ In turn, ‘contrive’ in pertinent part is defined as ‘(t)o devise; to plan, to plot ... (t)o fabricate ... design; invent ... to scheme.’ ” 425 U.S. at 199 n. 20, 96 S.Ct. 1375.
11 GAAP, or Generally Accepted Accounting Principles, “ ‘are the official standards adopted by the American Institute of Certified Public Accountants (the “AICPA”), a private professional association, through three successor groups that it established, the Committee on Accounting Procedure, the Accounting Principles Board (the “APB”), and the Financial Accounting Standards Board (the “FASB”).’ ” In re K-tel Intern., Inc. Securities Litigation, 300 F.3d 881, 889 (8th Cir.2002), quoting Ganino v. Citizens Utils. Co., 228 F.3d 154, 160 n. 4 (2d Cir.2000). These rules apply to preparation of regular reports such as the 10–K and 10–Q form statements that publicly traded corporations must file annually or quarterly with the SEC. “ ‘There are 19 different GAAP sources, any number of which might present conflicting treatments of a particular accounting question.’ ” Id. at 889, quoting Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87, 101, 115 S.Ct. 1232, 131 L.Ed.2d 106 (1995). Thus GAAP “ ‘are far from being a canonical set of rules that will ensure identical accounting
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treatment of identical transactions. [GAAP], rather, tolerate a range of “reasonable” treatments, leaving the choice among alternatives to management.’ ” Id., quoting Thor Power Tool Co. v. C.I.R., 439 U.S. 522, 544, 99 S.Ct. 773, 58 L.Ed.2d 785 (1979). “ ‘When ... conflicts arise, the accountant is directed to consult an elaborate hierarchy of GAAP sources to determine which treatment to follow.’ ” Id. “ ‘In the event there is no official pronouncement, the consensus of the accounting profession, as manifested in textbooks, for example, determines GAAP.’ ” Id., quoting Providence Hosp. of Toppenish v. Shalala, 52 F.3d 213, 218 n. 7 (9th Cir.1995).
12 In accord on the proposition that allegations of GAAP violations, standing alone, are insufficient to raise an inference of scienter under the federal securities laws are DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385, 390 (9th Cir.2002); City of Philadelphia v. Fleming Cos., Inc., 264 F.3d 1245, 1261 (10th Cir.2001)( “Only where such allegations [of violations of GAAP] are coupled with evidence that the violations or irregularities were the result of the defendant's fraudulent intent to mislead investors may they be sufficient to state a claim.”); Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1208 (11th Cir.2001); In re K–tel Intern'l, Inc. Securities Litigation, 300 F.3d 881;Chill v. Gen. Elec. Co., 101 F.3d 263, 270 (2d Cir.1996)( “Allegations of a violation of GAAP provisions or SEC regulations, without corresponding fraudulent intent, are not sufficient to state a securities fraud claim”).
13 In Nathenson, the Fifth Circuit quotes the following passage from Abell v. Potomac Ins. Co., 858 F.2d 1104, 1117–18 (5th Cir.1988), vacated on other grounds sub nom. Fryar v. Abell, 492 U.S. 914, 109 S.Ct. 3236, 106 L.Ed.2d 584 (1989), to explain the meaning of reliance for purposes of § 10(b) and Rule 10b–5:
The element of reliance is the subjective counterpart to the objective element of materiality. Whereas materiality requires the plaintiff to demonstrate how a “reasonable” investor would have viewed the defendants' statements and omissions, reliance requires a plaintiff to prove that it actually based its decisions upon the defendants' misstatements or omissions. “Reliance is causa sine qua non, a type of ‘but for’ requirement: had the investor known the truth he would not have acted.” ... Thus, [c]ourts sometimes consider the reliance component of the Rule 10b–5 action to be a part of the causation element. In this context, the term “transaction causation” is used to describe the requirement that the defendant's fraud must precipitate the investment decision.... On the other hand, “loss causation” refers to a direct causal link between the misstatement and the claimant's economic loss. [citations omitted] 267 F.3d at 413.
14 Corporate insiders do not have a duty to disclose all material information to the public; but rather their duty is either to disclose the confidential information which is the basis for their wanting to sell their stock or to abstain from trading until such disclosure is made. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir.1968)(en banc ), cert. denied,394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969); Chiarella, 445 U.S. at 228, 100 S.Ct. 1108.
15 Lead Plaintiff has alleged a scheme or course of business in which the various participant Defendants concealed a pattern of creating unlawful SPEs and utilizing fraudulent transactions with these entities as contrivances or deceptive devices to defraud investors into continuing to pour investment money into Enron securities to keep afloat the Ponzi scheme and thereby enrich themselves in a variety of ways. The Court finds that the purchase of Enron securities by misled investors was allegedly an integral part of the alleged scheme and necessary to further that scheme.
16 15 U.S.C. § 78j. 17 Common to claims of deceptive statements about the financial condition of an issuing corporation and to claims based on market manipulation through deceptive trading activity is the introduction of inaccurate information into the marketplace. GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 205 (3d Cir.2001), cert. denied,536 U.S. 923, 122 S.Ct. 2588, 153 L.Ed.2d 778 (2002).
18 Although criminal violations of § 10(b) require a showing that the act was done willfully, the elements of a civil and criminal violations of the statute are otherwise the same, and courts in criminal cases frequently cite civil interpretations of the statute to determine whether there has been a violation.
19 Bear Stearns & Co. is a clearing broker for different brokerage houses. 20 In Blech II, the complaint alleged that Bear Stearns “acted as a direct participant in the alleged manipulative scheme”;
that Bear Stearns “knew that the market prices of Blech Securities had to be maintained at artificially inflated levels in order for Blech to liquidate sufficient amounts of those securities to eliminate the debit balance outstanding at Bear Stearns and thereby eliminate Bear Stearns' own exposure to the risk of incurring losses”; that Bear Stearns had access to insider information about Blech's “financial condition, liquidity and net capital position”; that Blech had pledged its securities as collateral to lending banks and if the price declined, the banks would seize that collateral and sell it, thus lowering the market price; that if the stock went down, so would Blech's ability to borrow from the banks and it would be unable to meet margin calls on its own securities accounts, including accounts at Bear Stearns; that Bear Stearns had the “power to extend or deny credit to Blech ... based on the value of Blech securities held as collateral” and “the
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power and control to determine whether or not to execute securities transactions on behalf of Blech & Co. and its clients,”; and that Bear Stearns insisted that Blech sell the securities to reduce the debt that Blech owed to Bear Stearns and to eliminate Bear Stearns' exposure. 961 F.Supp. at 577–78. Judge Sweet, in denying Bear Stearns' motion to dismiss, found that the alleged “pressure exerted by Bear Stearns on Blech to reduce his debit balance, when combined with Bear Sterns' knowledge of Blech's sham trading and its clearing of such trades, does not ‘reflect ... the standard of [a] clearing broker.’ ” Id. at 585.
21 This Court, under the Fifth Circuit, applies a different standard for pleading scienter than the Second Circuit, which regularly allows pleading motive and opportunity by themselves to suffice.
22 From 1966 until 1994, private party suits against secondary actors for aiding and abetting primary violators of Section 10(b) had been allowed to proceed in federal court.
23 In contrast, in 1995 the PSLRA authorized the SEC to bring enforcement actions against those who “knowingly provide[ ]
substantial assistance to another person” in violation of the federal securities laws, but did not create a parallel private cause of action. 15 U.S.C. § 78t(f).
24 In Klein v. Boyd, a panel of the Third Circuit Court of Appeals found that the law firm in the dispute could be liable as a primary violator of securities fraud even though the attorney did not sign the documents and was never known to the investor as a participant in the documents' creation. The appellate court concluded that once the law firm “elected to speak” by creating or participating in the creation of the documents it could not make material misrepresentations or omit material facts in drafting non-confidential documents such as opinion letters. Fed. Sec. L. Rep. (CCH) ¶ 90,136, 90,323 (3d Cir.1998)(citing and quoting from its earlier opinion, Kline v. First W. Gov't Sec., Inc., 24 F.3d 480, 490–91 (3rd Cir.1994)). The law firm's duty did “not arise from a fiduciary duty to the investors; rather, the duty arose when the law firm undertook the affirmative act of communicating with investors....” Id. at 90,323–24. Thus the court concluded that although the firm may not have a duty to blow the whistle on its client, once it chooses to speak, a law firm does have a duty to speak truthfully, to make accurate or correct material statements, even though the document may not be facially attributed to the lawyer. Id. at 90,325. The panel did require that the lawyer's “participation in the statement containing a misrepresentation or omission of a material fact [be] sufficiently significant that the statement can properly be attributed to the person as its author or co-author,” so that it would not fall within the parameter of conduct constituting aiding and abetting. Id. In sum, the Third Circuit panel held that when a person participates in the creation of a statement for distribution to investors that is misleading due to a material misstatement or omission, but the person is not identified to the investors, the person may still be liable as a primary violator of section 10(b) and Rule 10b–5 so long as (1) the person knows (or is reckless in not knowing) that the statement will be relied upon by investors, (2) the person is aware (or is reckless in not being aware) of the material misstatement or omission, (3) the person played such a substantial role in the creation of the statement that the person could fairly be said to be the “author” or “co-author” of the statement, and the other requirements of primary liability are satisfied. Id. at 90,325. The SEC's brief, submitted in this action, was written for the en banc review in Klein, but the case settled before the entire court could examine the issue.
25 As noted, § 10(b) uses the phrase “employs a manipulative device”; Rule 10b–5(b) uses the phrase, “makes a material misstatement (or omission).” As indicated in footnote 9 of this memorandum and order, the Supreme Court has interpreted “deception” as used in § 10(b) as meaning the making of a material misrepresentation or the nondisclosure of material information in violation of a duty to disclose, Santa Fe, 430 U.S. at 470, 97 S.Ct. 1292, and has thus concluded that the statute prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act. Santa Fe, 430 U.S. at 473, 97 S.Ct. 1292 (holding that § 10(b) does not apply to breaches of fiduciary duty by majority shareholders against minority shareholders without an allegation of misrepresentation or lack of disclosure); Central Bank, 511 U.S. 164, 177, 114 S.Ct. 1439 (1994)(“The proscription does not include giving aid to a person who commits a manipulative or deceptive act.”).
26 The requirement that the secondary party, itself, allegedly make a misleading or false representation (or omission) or commit a deceptive act that violates § 10(b) brings the party within the primary liability definition of the statute and avoids aiding and abetting pitfalls of the too expansive “substantial participation” test.
27 The Attorneys General of a number of states have also submitted an amicus curiae memorandum and agree (see instruments # 861 at 9–10 and # 876).
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28 Section 10(b) makes it “unlawful for any person ... [t]o use or employ, in connection with the purchase or sale of any security ..., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe [emphasis added].” 15 U.S.C. § 78j.
29 The Supreme Court stated in Mead, 533 U.S. at 229, 121 S.Ct. 2164, This Court in Chevron recognized that Congress not only engages in express delegation of specific interpretive authority, but that [s]ometimes the legislative delegation to an agency on a particular question is implicit.... Congress, that is, may not have expressly delegated authority or responsibility to implement a particular provision or fill a particular gap. Yet it can still be apparent from the agency's generally conferred authority and other statutory circumstances that Congress would expect the agency be able to speak with the force of law when it addresses ambiguity in the statute or fills a space in the enacted law, even one about which “Congress did not have an intent” as to a particular result.... When circumstances implying such an expectation exist, a reviewing court has no business rejecting an agency's exercise of its generally conferred authority to resolve a particular statutory ambiguity simply because the agency's chosen resolution seems unwise, ... but is obliged to accept the agency's position if Congress has not previously spoken to the point at issue and the agency's interpretation is reasonable [citations omitted]....
30 Congress passed the post-depression era securities fraud laws to achieve “broad remedial goals.” Pinter v. Dahl, 486 U.S. 622, 653, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988). The Supreme Court identified these goals in Basic, 485 U.S. at 230, 108 S.Ct. 978:
The 1934 Act was designed to protect investors against manipulation of stock prices. See S.Rep. No. 792, 73d Cong., 2d Sess., 1–5 (1934). Underlying the adoption of extensive disclosure requirements was a legislative philosophy: “There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy.” H.R.Rep. No. 1383, 73d Cong., 2d Sess., 11 (1934). This Court “repeatedly has described the ‘fundamental purpose’ of the Act as implementing a ‘philosophy’ of full disclosure.' ” Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477–78, 97 S.Ct. 1292, 51 L.Ed.2d 480 ... (1977), quoting SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237 ... (1963).
31 The Attorneys General of the States of Arkansas, California, Connecticut, Georgia, Illinois, Louisiana, Massachusetts, Montana, Nebraska, New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Washington, West Virginia, and Wisconsin have filed an amicus curiae memorandum (# 861), joined by the Attorneys General of Indiana, Kentucky, Louisiana, Maryland, Michigan, Nevada, Oklahoma, and the Commonwealth of Puerto Rico (# 876). The Attorneys General also argue that Defendants have ignored the “scheme” or “course of business” liability or erroneously assumed that subsections (a) and (c) were impliedly struck down in Central Bank merely because it addressed only subsection (b) misrepresentation and omission and only secondary (aiding and abetting) liability. They point to the Supreme Court's subsequent opinion in Zandford, upholding scheme and course-of-business liability, as indicating that liability under subsections (a) and (c) remains intact. Construing Rule 10b–5 flexibly with a view to Congressional intent behind § 10(b) and noting that Rule 10b–5 was issued by the SEC in 1942 pursuant to § 10(b)'s authorization that the SEC define “manipulative or deceptive devices” or “contrivances” through rules and regulations, the Attorneys General argue, and the Court agrees, that the express language of the Rule's subdivisions, (a)(scheme liability),(b) (misrepresentation or omission liability), and (c)(course of business liability), establishes eight different types of manipulative or deceptive devices or contrivances that Defendants can commit and for which they can be held primarily liable:
1. Employing a device to defraud (Rule 10b–5(a)); 2. Employing a scheme to defraud (Rule 10b–5(a)); 3. Employing an artifice to defraud (Rule 10b–5(a)); 4. Making any untrue statement of material fact (Rule 10b–5(b)); 5. Omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading (Rule 10b–5(b)); 6. Engaging in an act which operates or would operate as a fraud or deceit upon anyone (Rule 10b–5(c)); 7. Engaging in a practice which operates or would operate as a fraud or deceit upon anyone (Rule 10b–5(c)); 8. Engaging in a course of business which operates or would operate as a fraud or deceit upon anyone (Rule 10b–5(c)). Amicus Curiae Memorandum (# 876) at 4. Thus the Attorneys General concur with this Court, contrary to the arguments of some Defendants, that liability is not limited to the making of a material misstatement or omission, nor to a few very technical forms of manipulation. See, e.g., Santa Fe, 430 U.S. at 477, 97 S.Ct. 1292 (“No doubt Congress meant to prohibit the full range of ingenious devices that might be used to manipulate securities prices”); Herman & MacLean, 459 U.S. at 386, 103 S.Ct. 683 (“In furtherance of its objective, § 10(b) makes it unlawful to use ‘any manipulative
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or deceptive device or contrivance’ in connection with the purchase or sale of any security [emphasis in original]”); Superintendent of Insurance v. Bankers Life and Casualty Co., 404 U.S. 6, 11 n. 7, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971)(“#10(b) and Rule 10b–5 prohibit all fraudulent schemes in connection with the purchase or sale of securities whether the artifices employed involved a garden type variety of fraud, or present a unique form of deception [emphasis in original].” [citation omitted] ); Cooper v. Pickett, 137 F.3d 616, 624 (9th Cir.1997) (Central Bank “does not preclude liability based on allegations that a group of defendants acted together to violate the securities laws, as long as each defendant committed a manipulative or deceptive act in furtherance of the scheme”); ZZZZ Best, 864 F.Supp. at 971 (“It appears that the scope of deceptive devices or schemes prohibited by subsections (a) and (c) is quite extensive”) (rejecting dismissal of plaintiffs' allegations that Ernst & Young was primarily liable for its participation in creating publicly released statements, issuing a review report, and failing to disclose additional material facts because the allegations taken as a whole might make it liable under a scheme to defraud). This Court does disagree with the Attorneys General where they step over the line to conspiracy and argue that participants in a scheme to defraud, no matter how small, are liable for other participants' conduct in furtherance of the scheme even if the participants did not commit a key act that itself violated § 10(b) and Rule 10b–5. The Court also differs with respect to Lead Plaintiff's analogy of liability under the securities statutes to that for criminal liability under wire fraud or mail fraud statutes in contending that a participant is liable for the conduct of all other participants in the scheme. The Court observes that in Central Bank, in rejecting the argument that the statute's language, “directly or indirectly,” shows that the Congress intended to reach everyone who engages even indirectly in the proscribed activities, the Supreme Court noted that “the problem is that aiding and abetting liability extends beyond persons who engage even indirectly, in a proscribed activity; aiding and abetting liability reaches persons who do not engage in the proscribed activities at all, but who give a degree of aid to those who do.” 511 U.S. at 176, 114 S.Ct. 1439. “Aiding and abetting is ‘a method by which courts create secondary liability’ in persons other than the violator of the statute.” Id. at 184, 114 S.Ct. 1439 (quoting Pinter v. Dahl, 486 U.S. 622, 648 n. 24, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988)). The Supreme Court commented that Congress “knew how to impose aiding and abetting liability when it chose to do so, did so in the general criminal statute” in 1995. Id. at 176, 114 S.Ct. 1439. Nevertheless Congress did not provide for private aiding and abetting liability in any of the causes of action in the securities statutes nor has it passed a general civil aiding and abetting statute, but has specified, when it desires to impose such liability, such liability in selected, individual statutes. Id. at 179, 182–83, 114 S.Ct. 1439. In 1995 in the PSLRA, Congress expressly gave only the SEC the right to pursue enforcement actions against aiders and abettors in securities actions, but did not proffer that right to plaintiffs in private civil actions.Id. at 183, 114 S.Ct. 1439;15 U.S.C. § 78t(f). As will be further discussed, § 10(b) is silent about conspiracy liability and the securities statutes do not contain any provision authorizing a private cause of action for conspiratorial conduct. Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin, 135 F.3d 837, 840–43 (2d Cir.1998)(holding “that where the requirements for primary liability [under § 10(b) ] are not independently met, they may not be satisfied solely on one's participation in a conspiracy in which other parties have committed a primary violation”); In re Syntex Corp. Sec. Litig., 855 F.Supp. 1086, 1098 (N.D.Cal.1994), aff'd,95 F.3d 922 (9th Cir.1996).
32 The Dinsmore panel, 135 F.3d at 841, noted that the dissent in Central Bank recognized that the majority opinion barred conspiracy as the basis for a securities violation claim: “The Court's rationale would sweep away the decisions recognizing that a defendant may be found liable in a private action for conspiring to violate § 10(b) and Rule 10b–5.” Central Bank, 114 S.Ct. at 1460 n. 12 (Stevens, J., dissenting).
33 In the September 8, 2002 edition of The New York Times, which extensively discussed the broad effects of the terrorist attacks on the World Trade Center, including on the stock market, Gretchen Morgenson commented, But perhaps a more significant lesson learned by investors is that, fearful though we all are of future attacks, a far greater risk to our continued prosperity and economic strength comes from within our shores, not without. The risk emanates from people in positions of power at corporations who cheat their shareholders, lie to investors and make millions in outsized compensation or well timed stock sales just before their games are exposed. Gretchen Morgenson, “Market Watch: Rebound From Ruin, if Not From Distrust,” Section 3 (Money and Business) at 1, The New York Times, (Sept. 8, 2002). The author included in her indictment “the huge financial institutions ... that appear to have helped companies hide their true financial positions from investors, earning handsome fees for their efforts.” Id.
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34 Although inapplicable to the entities whose motions to dismiss are under review in this memorandum and order, because the Court will be addressing the issue of insider trading in motions filed by individual defendants, it includes relevant law under § 20A of the 1934 Act.
Section 20A of the Exchange Act, as amended, 15 U.S.C. § 78t–1(a), provides a private cause of action against a corporate insider for insider trading based on contemporaneous trading:
Any person who violates any provision of this chapter or the rules or regulations thereunder by purchasing or selling a security while in the possession of material, nonpublic information shall be liable .... to any person who, contemporaneously with the purchase or sale of securities that is the subject of such violation, has purchased (where such violation is based on a sale of securities) or sold (where such violation is based on a purchase of securities) securities of the same class. Thus to have standing to sue under § 20A, a private plaintiff “must have ‘purchased ... or sold ... securities of the same class' ‘contemporaneously’ with the insider transaction at issue.” Clay v. Intern. Corp., 157 F.3d 1259, 1263 n. 5 (11th Cir.1998), vacated in part on other grounds,176 F.3d 1381 (11th Cir.1999). As with controlperson liability under § 20(a) of the 1934 Act, liability under § 20A is derivative and requires proof of a separate underlying violation of the Act, such as a violation of § 10(b) and Rule 10b–5.In re Advanta Corp. Sec. Litig., 180 F.3d 525, 541 (3d Cir.1999); Jackson National Ins. Co. v. Merrill Lynch & Co., Inc., 32 F.3d 697, 703 (2d Cir.1994)(reference to “this chapter” means that a plaintiff must plead a predicate violation of the 1934 Act or of rules and regulations promulgated thereunder); In re VeriFone Sec. Litig., 11 F.3d 865, 872 (9th Cir.1993).
35 In Melder, the Fifth Circuit concluded that Rule 9(b) applied to the plaintiffs' 1933 Securities Act claims because their complaint adopted wholesale all their allegations under the securities fraud claims for purposes of their 1933 Securities Act claims.
36 Lead Plaintiff has made such disclaimers in the consolidated complaint regarding its § 11 claims. 37 Economic harm is not identified as a basis for the exception. 38 The Terminology section defines “knows” as “actual knowledge of the fact in question” and states that a “person's knowledge may be inferred from circumstances.”
39 Rather than focusing on Abell's decision to follow the traditional privity rule for malpractice claims, Trust Company instead cites Abell for the proposition, “In order for an attorney to have a legal duty to supply correct information that he is liable to a non-client for malpractice, the plaintiff must show that the attorney provided legal services and that the attorney knew that the third party intended to rely upon those legal services.” 104 F.3d at 1487,citing Abell, 858 F.2d at 1133. In Trust Company, the Court found the attorney liable for negligent misrepresentation under Louisiana law, based on a duty to a third party “that flows from the codal provision that establishes liability for a stipulation pour autrui,” or third party beneficiary. Having found that duty, the panel then determined that the plaintiff had satisfied all the elements for imposition of liability against the lawyer and his firm under Rule 10b–5.
40 See also Anixter, 77 F.3d at 1226–27 n. 12 (even where there is no fiduciary or other relationship of trust and confidence with non-clients, accountants may still have a “special duty to disclose when they make affirmative statements on which they know the investors will rely”).
41 The Sixth Circuit's interpretation of “direct contacts” is broad. In SEC v. Washington County Utility District, 676 F.2d 218, 223 (6th Cir.1982), it explained, A duty to disclose naturally devolved on those who had direct contacts with the ‘other side.’ Direct contacts require neither physical presence nor face to face conversation. A person undertaking to furnish information which is misleading because of a failure to disclose material facts is a primary participant. While SEC v. Washington County dealt with aiding and abetting claims before Central Bank was issued, Rubin, applying the same test, applies it to a primary Rule 10b–5 violator.
42 In Ackerman, 106 bilked investors in a fraudulent tax shelter, as third parties, sued an attorney, Howard Schwarz, and his law firm for securities violations on the grounds that he wrote an opinion letter for the promoters representing that the venture was legitimate and stating that investors could rely on the credits and reductions that the promoters of the tax shelter were touting to sell the securities. The promoters subsequently absconded with the money and the IRS disavowed the deductions and credits and imposed interest and penalties on the investors. Schwarz argued that his duty ran only to the promoters to whom the opinion letter was addressed, and because the promoters knew the truth, the opinion letter's misrepresentations could not deceive them. Disagreeing, Judge Easterbrook wrote for the panel that Schwartz had consented to the distribution of his letter to accountants, attorneys, and tax advisors, who were agents of the investors, and that “[t]o give information to an agent is to give it to the principal ... so that it will affect the choice of investment.” 947 F.2d at 847. Emphasizing that the case dealt with fraud, not negligence, the court concluded that Schwarz had acted
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recklessly, constituting the scienter for fraud, and that once he spoke and permitted the promoters to release his letter, he had a duty to tell the truth about material issues under Basic, 485 U.S. at 232–36, 108 S.Ct. 978.947 F.2d at 847–48.
43 “An ‘unqualified’ or clean audit is the highest level of assurance that an auditor can give an organization's financial statements. Accountants will ‘qualify’ their opinion where discrepancies are identified in a client's financial statements.” In re Ikon Office Solutions, Inc., 277 F.3d 658, 663 n. 4 (3d Cir.2002).
44 Ernst & Young was the successor-in-interest to the actual auditing firm, Arthur Young & Co. 51 S.W.3d at 574 n. 1. 45 The final version of the part cited by the Texas Supreme Court in McCamish, and employing the same language as the draft, is Section 51, subsection 2 of the Restatement of Law Third–The Law Governing Lawyers (2000).
46 A number of other states have applied Section 552 to make attorneys liable to nonclients for negligent misrepresentation.
See Mehaffy, Rider, Windholz & Wilson v. Central Bank Denver, N.A., 892 P.2d 230, 236–37 (Colo.1995)(based on attorney's opinion letter that the suit against his client had no merit); Petrillo v. Bachenberg, 139 N.J. 472, 655 A.2d 1354, 1360 (1995)(“a lawyer's duty may run to third parties who foreseeably rely on the lawyer's opinion or other legal services”); Hines v. Data Line Sys., Inc., 114 Wash.2d 127, 787 P.2d 8, 21 (1990); Garcia v. Rodey, Dickason, Sloan, Akin & Robb, P.A., 106 N.M. 757, 750 P.2d 118, 122–23 (1988); Collins v. Binkley, 750 S.W.2d 737 (Tenn.1988); Stinson v. Brand, 738 S.W.2d 186, 190 (Tenn.1987). Federal courts, applying state law, have done the same. See, e.g., Greycas, Inc. v. Proud, 826 F.2d 1560, 1564–65 (7th Cir.1987)(applying Illinois law and concluding that an attorney owed a lender a duty to reveal the borrower's true financial status), cert. denied,484 U.S. 1043, 108 S.Ct. 775, 98 L.Ed.2d 862 (1988); Menuskin v. Williams, 145 F.3d 755, 760 (6th Cir.1998)(applying Tennessee law and holding that the attorney of a title insurance company who prepared warranty deeds on property bought by the plaintiff, stating that the property was free of all liens and encumbrances, might be liable if the plaintiff reasonably relied on the warranty deeds in making the purchase).
47 The Court is aware that the Fifth Circuit, in discussing what it surmised would be Texas' application of § 552 to accountants, reviewed three basic approaches to determining the scope of accountant liability for negligent representations to third parties that use and rely on the accountant's audit: (1) privity (the most restrictive); (2) foreseeability (the most expansive); and (3) the Restatement (Second) of Torts § 552, which falls in between, has been adopted by the majority of states, and is found by many courts “to be the most consistent with the policy foundations underlying the tort of negligent misrepresentation.” Scottish Heritable Trust, PLC v. Peat Marwick Main & Co., 81 F.3d 606, 611–14 (5th Cir.1996), cert. denied,519 U.S. 869, 117 S.Ct. 182, 136 L.Ed.2d 121 (1996). In its analysis the Fifth Circuit observed that § 552's limitation of standing “to a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it” has been held by a number of jurisdictions to not include all potential investors because that “would render the requirement meaningless.” Id. at 613. The appellate court feared that “[t]o predicate an accountants' duty to third parties on such things as the general knowledge that accountants possess about typical investors or tenuous inferences concerning future events would be to eviscerate the Restatement rule in favor of a de facto foreseeability approach—an approach which the Texas courts have refused to embrace.” Id. at 614. It concluded after examining dicta in several Texas cases that “the Texas Supreme Court is unlikely to adopt a rule so universally avoided by sister states.” Nevertheless the Fifth Circuit qualified that comment in a subsequent statement that “we conclude that such a potential investor is generally not within a ‘limited group’ under Texas law [emphasis added by this Court].” Id. at 613, 614. In reaching its view of how Texas might apply § 552 to accountants, the panel merely relied on dicta in Cook Consultants v. Larson, 700 S.W.2d 231, 236 (Tex.App.-Dallas 1985, writ ref'd n.r.e.)(observing that the defendant was a surveyor “[u]nlike, for example, future purchasers of shares of stock attempting to hold an accountant liable, Larson is not a member of an unlimited class....”); Blue Bell, Inc. v. Peat, Marwick, Mitchell & Co., 715 S.W.2d 408, 411 (Tex.App.-Dallas 1986, writ ref'd)(holding that “actual knowledge of a particular plaintiff is not necessary if the defendant should have had this knowledge” and that “when the auditors supplied the corporation with a number of audit reports, indicating knowledge by the auditors that third parties would be given these reports, ‘one of a limited number of existing [as opposed to potential] trade creditors' was in a ‘limited group’ under Texas law.”) 81 F.3d at 614. Nevertheless, the Fifth Circuit did state, “[W]e do not suggest that a potential purchaser can never be a member of a limited group.” Id. at 614.
This Court finds that the facts in Scottish Heritable and the Texas cases it discusses are easily distinguishable from those alleged here, in many ways that are not necessary to explain. The key factor is that in Newby, Lead Plaintiff has alleged that a vital part of the Ponzi scheme was to draw in continually more and more investors' funds through the continued sale of Enron securities so that Enron could expand its operations (an expensive proposition given the allegations that the sham transactions it engaged in through the SPEs were financial “losers” and the SPEs served to conceal Enron's ever-increasing debt) and to pay down its existing debt, including to the bank Defendants participating with Enron in the scheme. Thus the potential investors were allegedly the intended targets of the reports and documents
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drafted and issued by Arthur Andersen and Vinson & Elkins, whether for Enron which they allegedly expected to use the misrepresentations to lure in more investment funds or for the public via SEC filings. As the Texas Supreme Court indicated in McCamish, the “limited group” restriction protects against unlimited liability: “[t]his formulation limits liability to situations in which the attorney who provides the information is aware of the nonclient and intends that the nonclient rely on the information.”991 S.W.2d at 793. That is the circumstance alleged in the consolidated complaint. Furthermore, in Pacific Mutual, although a fraudulent misrepresentation case, the plaintiff was an institutional investor that relied on audits subsequently included in statements and filings following a merger. The reason why the plaintiff lost was not that it was merely a potential investor, but because the statements it relied on were issued by a different entity than the one whose notes the plaintiff purchased and the prospectuses related to other securities issued later by the bank with which the first issuer merged.
48 As one means of effectuating the alleged Ponzi scheme to defraud investors, a series of partnerships and SPEs clandestinely controlled by Enron were allegedly created, structured, financed and utilized by Defendants to inflate Enron's profits and conceal its debt. The complaint explains, “A public company that conducts business with an SPE may treat the SPE as if it were an independent entity only if it does not control the SPE. At a bare minimum, two conditions must be met: (i) an owner independent of the company must make an equity investment of at least 3% of the SPE's assets, and that 3% must remain at risk throughout the transaction; and (ii) the independent owner must exercise control of the SPE.” Consolidated complaint at 15 (emphasis added by complaint).
49 Lead Plaintiff points out that GAAP, Accounting Research Bulletin (“ARB”) No. 51, states, There is a presumption that consolidated statements are more meaningful than separate statements and that they are usually necessary for a fair presentation when one of the companies in the group directly or indirectly has a controlling financial interest in the other companies. Consolidated complaint at 272. Moreover, FASB Statement of Financial Accounting Standards (“SFAS”) No. 94 mandates consolidation of all majority-owned subsidiaries unless control is temporary or does not rest with the majority owner. Consolidated complaint at 273. The complaint also quotes from FASB Emerging Issues Task Force Abstracts (“EITF”), Topic No. D–14, which provides guidance for non-consolidation of an SPE:
Generally, the SEC staff believes that for nonconsolidation and sales recognition by the sponsor or transferor to be appropriate, the majority owner (or owners) of the SPE must be an independent third party who has made a substantive capital investment in the SPE, has control of the SPE, and has substantive risks and rewards of ownership of the assets of the SPE (including residuals). Conversely, the SEC staff believes that nonconsolidation and sales recognition are not appropriate by the sponsor or transferor when the majority owner of the SPE makes only a nominal capital investment, the activities of the SPE are virtually all on the sponsor's or transferor's behalf, and the substantive risks and rewards of the assets or the debt of the SPE rest directly or indirectly with the sponsor or transferor. Consolidated complaint at 273 n. 7.
50 Lead Plaintiff asserts that LJM1 was utilized to allow Enron to engage in phony hedging transactions largely dependent on the value of Enron's own stock. The consolidated complaint details Enron's use of LJM1 to hedge its position in Rhythms NetConnections (“Rhythms”) (at pp. 280–82, 413). Briefly, in 1999, to hedge Enron's gains on the value of Rhythms' stock, Enron transferred Enron stock to Rhythms in exchange for a note. The hedge was a sham because if the SPE had to pay Enron on the “hedge,” Enron stock would be the source of that payment. Enron recognized $100 million from the hedging transaction in 1999.
51 As one reflection of their lack of independence, employees of both LJM partnerships allegedly were regular, full-time employees of Enron for benefits purposes. Consolidated complaint at 279.
52 See consolidated complaint at 287–92 for specific allegations about the Raptors and their purposes. 53 The consolidated complaint lists examples of manipulative transactions relating to unsuccessful assets acquired by Enron that were sold to, and thereby shifted losses to, LJM1 or LJM2 when a legitimate buyer could not be found because the assets for sale were unattractive. Lead Plaintiff briefly describes how each transaction was used to falsify Enron's financial results and financial condition. For instance, Enron shifted a 13% stake (sufficient to relieve it of “control” of that entity so that it did not have to consolidate its interest and report it on Enron's balance sheet) in a troubled power plant construction in Cuiaba, Brazil, to LJM1 for $11.3 billion in September 1999 so that Enron realized $34 million of mark-to- market income in the third quarter of 1999 and $31 million in the fourth quarter and another $41 million of mark-to-market income in the fourth quarter of 1999. (For an explanation of mark-to-market accounting, see pages 123–25 and nn. 58, 59 of this memorandum and order.) Then in August 2001 Enron repurchased LJM1's purchase for $14.4 million, giving
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LJM1 investors a tidy profit. Because Enron had always promised to make LJM1 whole, LJM1's investment in the Cuiaba power plant was never “at risk.” Other examples included Enron North America (“ENA”) collateralized loan obligations, the lowest rated of which were sold to Enron-controlled Whitewing Associates, LLP and to LJM2 with assurances from Enron that the investors would be made whole; the Nowa Sarzyna power plant under construction in Poland, which Enron temporarily “sold” to LJM2 for $30 million so that Enron could record a profit of $16 million, but then repurchased later for $31.9 million, giving LJM2 an approximately 25% rate of return; a 90% interest in MEGS LLC (a company owning a natural gas gathering system in the Gulf of Mexico), which Enron sold to and repurchased from LJM2 at the maximum allowed rate; certificates of a trust known as Yosemite, improperly sold to LJM2 on December 29, 1999 to hold for one day and then sold to Condor, allowing Enron to avoid reporting its interest in Yosemite in its year-end financial statement; and Backbone telecommunications assets, i.e., unactivated (“dark”) fiber optic cable, sold to LJM2 in May 2000 so that Enron could meet its second quarter numbers. Consolidated complaint at 284–87.
54 The Court notes that SEC Regulation S–X, 17 C.F.R. § 210.4–08(k)(1)(2001), requires identification of related party transactions and transaction amounts to be stated on the face of the balance sheet, income statement or statement of cash flows. William F. Dietrich, “Legal and Ethical Issues for attorneys dealing with Financial Data: Heightened Scrutiny After the Enron and Andersen Debacle,” 1325 PLI/Corp 925, 947 and n. 57 (Aug.2002). While “related parties” include the parent company and its subsidiaries, an enterprise and its principal owners, management and members of their immediate families, and affiliates, the FASB's definition of “related parties” also reaches “other parties with which the enterprise may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.”Id. at 947 and nn. 58–60, citing FINANCIAL ACCOUNTING STANDARDS BOARD, Statement of Financial Accounting Standards No. 57: Related Party Disclosures, in 1 FINANCIAL ACCOUNTING STANDARDS BOARD, ORIGINAL PRONOUNCEMENTS: FASB STATEMENTS OF STANDARDS 1–100, at 556–57 (2001)(“FAS 57”). There must also be disclosure of any control relationship when the reporting enterprise and another entity are under common ownership or management control that might affect the operating results or the financial status of the reporting enterprise, even if there are no transactions involved. Id. at 947–48,citing FAS 57 at ¶ 4 at 554.
55 For instance, in its May 2000 proxy statement Enron described each LJM partnership as “a private investment company that primarily engages in acquiring or investing in energy and communications related to investments,” a statement that would not disclose to the reader either the nature of the transactions or their import. A similar statement was made in the Form 10–Q for second quarter 1999, with a nonspecific footnote saying, “A senior officer of Enron is managing member of LJM's general partner.” Virtually identical “disclosures” were made in the third quarter Form 10–Q and the 1999 10–K. In its Form 1–Q for the second quarter of 2000, Enron stated about the LJM partnerships, “In the first half of 2000, Enron entered into transactions with limited partnerships (the Related Party) whose general partner's managing member is a senior officer of Enron. The limited partners of the Related Party are unrelated to Enron.” From that time on, Enron did not identify LJM1 or LJM2 by name in financial statement disclosures. Consolidated complaint at 297–98.
56 The complaint identifies four examples. On December 22, 1999, Enron pooled purchaser collateralized loan rights (“CLOs”) and sold the lowest-rated portion to an Enron Affiliate (Whitewing LLP) and LJM2. Whitewing in turn lent LJM2 the money to purchase Whitewing's interest in the CLOs. Enron surreptitiously guaranteed Whitewing's investment and its loan to LJM2. The deal allowed Enron to record a sale of millions of dollars in the fourth quarter of 1999 to an entity that was not independent and that should have been consolidated, with its debts listed on Enron's balance sheet.
Second, when it was unable to find an independent buyer before the end of 1999, Enron sold LJM2 a 75% interest in Nowa Sarzyna power plant for $30,000,000 (part loan, part equity). This transaction removed millions of dollars of debt from Enron's balance sheet and allowed Enron to record a gain of about $16 million from the sale. Although the debt financing required that Enron retain ownership of at least 47.5% of the equity until the project was completed, the lender waived this requirement until March 31, 2000, by which time Enron and Whitewing reacquired LJM2's equity interest and repaid the loan for a total of $31.9 million, providing LJM2 with a 25% rate of return. Similarly, on December 29, 1999 Enron sold to LJM2 a 90% equity in MEGS LLC, a natural gas system in the Gulf of Mexico, thus avoiding consolidation and having to report millions of dollars in debt on Enron's balance sheet for that year. Enron also repurchased LJM2's interest in MEGS early the next year. Finally, Enron made it appear that it sold certificates in a trust named Yosemite to LJM2 on December 29, 1999, to reduce Enron's interest in Yosemite from 50% to 10%, to avoid disclosing the certificates on Enron's 1999 financial statement. In actuality the transaction did not actually occur until February 28, 2000, but the legal documentation was clearly and deliberately back-dated to December 29, 1999. Meanwhile on December 29, 1999, Condor, which was an
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affiliate of Whitewing and was controlled by Enron, loaned $35 million to LJM2 so that it could buy the certificates. The next day, LJM2 transferred the certificates to Condor, satisfying the one-day loan.
57 According to the complaint, in phony hedging arrangements in 2000–01 Enron funded the Raptors with its own stock, supposedly to hedge against declines in the value of Enron's merchant investments, but the “hedges” were actually manipulative or deceptive devices to circumvent accounting rules. Enron always retained most of the risk because it provided most of the capital with which the SPES would pay; if the value of Enron stock declined, the SPEs could not meet their obligations and the “hedges” would fail.
58 The complaint recites, “A former employee noted, ‘shifting the curve and making new deals to bury the losses from the past is constantly the strategy.’ Another former trader stated: ‘It was very simple. You just tweaked the assumptions on different variables, which were changed to make the return higher.’ ” Consolidated complaint at 305.
59 The complaint states, “Because most DSM deals were losing money when their curves were re-marked, Enron had to keep signing new contracts each quarter to show a profit—what a DSM manager described as ‘feeding the beast.’ ” Complaint at 305–06. Recognizing earnings for long-term contracts in the quarter when the contract was signed forced Enron into increasingly aggressive and riskier deals, gave rise to enormous and growing accumulation of off-balancesheet debt, contingent liabilities, and, by early in 2001, restricted opportunities to re-finance and restructure old deals, as well as to create new deals. Consolidated complaint at 306.
60 The complaint at 465 quotes from U.S. News & World Report regarding Enron's aggressive abuse of mark-to-market accounting since the early 1990's:
... Traditional accounting would book revenue from a long-term contract when it came in. But Skilling wanted Enron to book all anticipated revenue immediately. The practice is known as mark-to-market—or more colloquially, counting your chickens before they hatch. Whatever the term, it was the third time in five years that Enron had significantly changed its accounting. Tallying all expected profits immediately would mean a huge earning kick for a company obsessed with debt. But it would also put Enron on a treadmill: To keep growing, it would have to book bigger and bigger deals every quarter. The result, in hindsight, was predictable: a shift from Enron developing economically sound partnerships to doing deals at all costs. “The focus wasn't on maintaining relationships and serving customers,” says a former Enron official. “The quality of the deals deteriorated.” The turning point, some say, was a deal involving a British power facility that earned Enron brass big bonuses. Yet, says one executive, the deal was “a disaster” that forced Enron to cough up $400 million when gas prices moved the wrong way. The new accounting made workers eligible for fatter payoffs. Enron employees were urged to work together on deals. But the new arrangements created an incentive to cut out colleagues, because bringing them in meant carving more slices in the bonus pie. “It was a very intense and urgent form of accounting,” says Dan Riser, a former employee who worked with Skilling.
61 As an example of such abuse in order to permit Enron to book improperly huge, illusory profits up front, the complaint at 306–07, describes a DSM with Eli Lilly. The complaint at 307 quotes from The Washington Post, 2/18/02:
Eli Lilly and Co., the Indianapolis pharmaceutical manufacturer, signed a $1.3 billion contract in February 2001 turning all its energy requirements over to Enron for 15 years. But Enron paid Eli Lilly $50 million upfront to win the deal, according to a former senior executive of Enron.
.....
Such upfront payments were not unusual, said Glenn Dickson, a former EES director of asset operations. “It was fairly common on the really big deals to pay the customer to lose money, in effect, on the contract, whether you were paying the customer or losing the money you were charging less than it really cost.” What made it all work, Dickson said, was a form of accounting in which the company counted future projected earnings as current income. “It [w]as huge amounts of money that covered up those cash outlays.” The complaint also identifies companies which made deals with Enron to which Enron improperly applied mark-to- market accounting, including J.C. Penney, IBM, Owens Illinois, and Quaker Oats. Id. at 307, 310–11.
62 Lead Plaintiff quotes several passages of a letter written to Enron's Board by an EES manager in August 2001:
One can only surmise that the removal of Jeff Skilling was an action taken by the board to correct the wrongdoings of the various management teams at Enron ... (i.e., EES's management's ... hiding losses/SEC violations). ... [I]t became obvious that EES had been doing deals for 2 years and was losing money on almost all deals they had booked. ... [I]t will add up to over $500MM that EES is losing and trying to hide in Wholesale. Rumor on the 7th floor is that it is closer to $1 Billion ... [T]hey decided ... to hide the $500MM in losses that EES was experiencing.... EES
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has knowingly misrepresented EES['s] earnings. This is common knowledge among all the EES employees, and is actually joked about. But it should be taken seriously.
63 The complaint alleges that at the commencement of the deal, Enron created another partnership, EBS Content Systems LLC, or “Project Braveheart,” again finagling to make it appear to be an independent entity when it was not and obtaining funding from CIBC with a guarantee from Enron, to improperly record $111 million in revenue from the sham Blockbuster deal. Consolidated complaint at 300–01. EBS then transferred its interest in the Blockbuster deal, fraudulently valued at $124.8 million, to Braveheart. No revenue should have been recorded from the Blockbuster deal because (1) Braveheart was not independent of Enron; (2) EBS could not provide the service it promised and thus could not earn the projected revenue; (3) most of the projected customers did not yet exist and were unlikely to pay for the severely restricted services (40 movies loaded onto a Sun Server in four test cities) that were actually provided; and (4) the improper use of mark-to- market accounting resulted in sham estimates of future revenue streams. A former employee stated, “[T]he Blockbuster deal was a fraud, and Enron's top management knew it.”
The complaint describes another misuse of mark-to-market accounting in a broadband deal involving Rice University. The deal, for $14 million over ten years, was that EBS would provide broadband to Breimen University in Germany, a sister university to Rice. Enron recognized all $14 million earnings up front by applying mark-to-market accounting during the second and third quarters of 2000. Furthermore, to secure the deal, Lay gave Rice a $5 million donation to build a wing. Under the deal Breimen could cancel at any time and did so in early 2001. Thus the revenue stream had not been earned and was not collectible at the time it was recognized. Consolidated complaint at 308.
64 The complaint asserts that, as is typical of Enron's usual unfounded projections and manipulated calculations, in trying to decide how much it would cost to do VOD per subscriber, Enron developers “came up with a figure out of thin air- $1.20. There was no rational basis for this amount. However, it was used to calculate future profits to be derived from the project.” Consolidated complaint at 301. In contrast, McKinsey Consulting told EBS that it would have to spend between $1,200–$1,600 per subscriber for equipment to get VOD to work.
65 “Dark fiber” refers to fiber optic cables that have been laid, but are not yet in use, or “lit.” Consolidated complaint at 302. 66 The complaint asserts that Enron had a practice of engaging in swapping capacity of deliberately overvalued dark fiber and broadband trading with other telecom companies (including Dynegy, Williams, El Paso, Metromedia Fiber, Acrie Networks, Qwest, Level 3, 360 Networks, and Touch America). Many of these swaps were effected to create the illusion of trading activity and to report sham income, thus manipulating Enron (and other entities') financial results. Most of the $120 million of revenue in 1999 that Enron reported for broadband was from such dark fiber swaps. Consolidated complaint at 302–03. In June 2000, for example, Enron sold dark fiber cable for $100 million to LJM2. LJM2 paid Enron $30 million in cash and gave Enron an interest-bearing note for $70 million, even though the dark fiber was not worth even close to that price. Enron recognized $67 million in pre-tax earnings that year from the asset sale. In the third quarter of 2000, a similar deal took place worth more than $300 million, so that Enron could “make its numbers,” but that arrangement failed to follow protocol because network developers and traders were not informed about it until after it was accomplished. Complaint at 303. Sometimes the broadband traders traded among various Enron-controlled entities, breaking one transaction into a number of transactions, to create the impression of multiple and increasing numbers of deals.
67 In a “true swap,” according to the complaint, two parties trade the future returns on investments over a set period of time. One party pays a small amount to receive a fixed interest rate on a corporate bond in lieu of uncertain gains on the same corporation's stock. The counterparty accepts the payment and swaps the return on the bond for the return on the stock. Neither party actually needs to hold the underlying assets as long as the payments are made. Typically, neither party in a true swap exchange receives all the agreed payments up front. In the Enron transactions, though, CitiGroup paid up front an estimate of the fair value of its portion of the swaps—hundreds of millions of dollars each time—payments made immediately. Enron was obliged to repay the cash over five years. These Delta transactions, though technically derivative trades known as prepaid swaps, perfectly replicated loans and were, in fact, manipulative devices to disguise what were, in reality, loans. Enron's balance sheet misrepresented these transactions. Enron posted the loans as “assets from price risk management” and as “accounts receivable,” admitted Charlie Leonard, a spokesperson for Andersen. The repayments that Enron owed the banks were listed as “liabilities from price risk management” and possibly a small amount of accounts payable, Leonard said. Consolidated complaint at 361.
68 The complaint quotes The New York Times on February 17, 2002:
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Technically, the transaction was a swap. But because CS First Boston paid Enron up front, the transaction took on the characteristics of a loan—a reality noted by the bank. “It was like a floating-rate loan,” said Pam Pendleton, a CS First Boston spokesman. “We booked the transaction as a loan.” Complaint at 314.
69 The complaint discusses similar loans disguised as transactions, e.g., at p. 315–16, with the Connecticut Resources Recovery Authority (“CRRA”) and Connecticut Light and Power Company (“CL & P”), which involved a loan disguised as an energy contract for which revenue could be reported. In March 2001 the CL & P paid an Enron subsidiary $220 million, purportedly for the Enron entity to assume a contract to purchase the CRRA's trash-generated steam electricity, with the Enron subsidiary agreeing to repay CRRA in monthly installments nearly $2.4 million per month (constituting interest plus principal) until May 31, 2012, when the contract would expire. Enron never actually purchased the electricity; Enron entered into the transaction to obtain the immediate $220 million cash infusion, another deal in its regular practice of shoring up the company's precarious financial condition for the present through a deal that made no long-term financial sense.
70 Enron International, a subsidiary of Enron, could properly recognize as revenue approximately 5% of a contract's value for construction services provided to Enron. Former employees, however, have reported that Enron International, in violation of GAAP, improperly recognized as revenue 10% of construction services contract values upon signing. Furthermore, it utilized a percentage of completion method of accounting, recognizing income as work progresses on the contract, for long-term construction contracts, a business practice which was false and misleading and resulted in an overstatement of revenues and earnings.
71 In 1997 and 1998, according to the complaint, Enron regularly capitalized, rather than expensed, costs related to unsuccessful bids for projects and improperly included them in costs for future projects. The costs were finally written off in the first quarter of 1999, but to conceal the true nature of the writedown, the expenses were attributed to a “change in accounting.” This practice of accumulating capital expenditures incurred on unsuccessful project proposals was known by accounting and finance personnel throughout Enron as “snowballing.” The complaint alleges that the “snowball grew exponentially,” to the point that an international accounting officer told Enron's CAO Richard Causey that Enron had to take a writedown because so many proposals were no longer even arguably viable. But Causey, directed by Jeffrey Skilling, responded that “corporate did not have room” to take a writedown because reducing the snowball would result in Enron's earnings going below expectations. By 1997, the snowball on about 75 projects in Central and South America and the Dabhol power plant in India was about $100 million and dwarfed revenue returns. When Enron recorded an after-tax charge of $131 million in the first quarter of 1999, it misled investors by making the accumulated writeoff costs (improperly recorded as assets rather than expenses on the balance sheet for years) appear to be the result of the initial adoption of two new accounting pronouncements, including Statement of Position 98–5, Reporting on the Costs of Start- up Activities, which requires that costs for all start-up activities and organization costs be expensed as they are incurred.
72 The complaint maintains that SFAS No. 121 requires companies to review long-term assets to determine if they are impaired and in ¶ 5 identifies the following as circumstances requiring reassessment:
a. A significant decrease in the market value of an asset b. A significant change in the extent or manner in which an asset is used or a significant physical change in an asset c. A significant adverse change in legal factors or in the business climate that could affect the value of an asset or an adverse action or assessment by a regulator d. An accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset e. A current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an asset used for the purpose of producing revenue. ... 6. If the examples of events or changes in circumstances set forth in paragraph 5 are present or if other events or changes in circumstances indicate that the carrying amount of an asset that an entity expects to hold and use may not be recoverable, the entity shall estimate the future cash flows expected to result from the use of the asset and its eventual disposition. Future cash flows are future cash inflows expected to be generated by an asset less the future cash outflows expected to be necessary to obtain those inflows. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, the entity shall recognize an impairment loss in accordance with this Statement. Otherwise, an impairment loss shall not be recognized; however, a review of depreciation policies may be appropriate. SFAS No. 115 also requires that a loss be recorded for impairment in investments if the impairment is not temporary. Consolidated complaint at 319–20.
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73 The complaint quotes SEC Staff Accounting Bulletin No. 99, which, although issued in August 1999 after Enron and Arthur decided not to make the adjustments, states that it did not create new GAAP, but merely reemphasized existing GAAP:
Even though a misstatement of an individual amount may not cause the financial statements taken as a whole to be materially misstated, it may nonetheless, when aggregated with other misstatements, render the financial statements taken as a whole to be materially misleading. Registrants and the auditors of their financial statements accordingly should consider the effect of the misstatement on subtotals or totals. The auditor should aggregate all misstatements that affect each subtotal or total and consider whether the misstatements in the aggregate affect the subtotal or total in a way that causes the registrant's financial statements taken as a whole to be materially misleading.
74 Under GAAP, SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, companies must record unrealized gains and losses on investments in securities that do not have readily determinable values as a separate component of stockholders' equity. Only unrealized holding gains and losses for trading securities, i.e., securities bought and held primarily to be sold in the near future, should be included in current earnings. SFAS No. 115 further provides that the fair value of an equity security is readily determinable if sales prices or bid-and-ask quotations are currently available on a securities exchange registered with the SEC or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated System or by the National Quotation Bureau. Restricted stock does not qualify. Complaint at 309–10.
The complaint, id., asserts that during the Class Period, Enron made false and misleading financial statements, first overvaluing holdings in various portfolio companies (“Merchant Assets”), and then misrepresenting that many had pretax gains of easily determinable values under the definition in SFAS No. 115, permitting Enron to record such unrealized gains as current income. They should have been reported as unrealized gains and losses and reported net of applicable income taxes in a separate component of stockholders' equity. For instance Enron recognized pretax gains from sales of merchant assets and investments by an Enron division known as Assets and Investments, which inter alia was involved with building power plants worldwide, operating them, selling off pieces of them and investing in debt and equity securities of energy- and technology-related business. The complaint states that Enron recognized pretax gains from sales of merchant assets and investments totaling $628 million in 1998 and $756 million in 1999 and claimed much of them had readily determinable value recordable as income. Id. at 309.
75 Sherron Watkins wrote, Skilling's abrupt departure will raise suspicions of accounting improprieties and valuation issues. Enron has been very aggressive in its accounting—most notably the Raptor transactions and the Condor vehicle. We do have valuation issues with our international assets and possibly some of our EES MTM positions. The spotlight will be on us, the market just can't accept that Skilling is leaving his dream job.... How do we fix the Raptor and Condor deals? ... [W]e will have to pony up Enron stock and that won't go unnoticed. We have recognized over $550 million of fair value gains on stock via our swaps with Raptor, much of that stock has declined significantly—Avici by 98% from $178 mm to $5 mm. The New Power Co. by 70%, from $20/share to $6/ share. The value in the swaps won't be there for Raptor, so once again Enron will issue stock to offset these losses. Raptor is an LJM entity. It sure looks to the layman on the street that we are hiding losses in a related company and will compensate that company with Enron stock in the future. I am incredibly nervous that we will implode in a wave of accounting scandals.... [T]he business world will consider the past successes as nothing but an elaborate accounting hoax.... [W]e booked the Condor and Raptor deals in 1999 and 2000, we enjoyed a wonderfully high stock price, many executives sold stock, we then try and reverse or fix the deals in 2001 and it's a bit like robbing the bank in one year and trying to pay it back 2 years later. Nice try, but investors were hurt, they bought at $70 and $80/share looking for $120/share and now they're at $38 or worse. We are under too much scrutiny and there are probably one or two disgruntled “redeployed” employees who know enough about “funny” accounting to get us in trouble. I realize that we have a lot of smart people looking at this.... None of that will protect Enron if these transactions are ever disclosed in the bright light of day .... There is a veil of secrecy around LJM and Raptor. Employees question our accounting propriety consistently and constantly .... a. Jeff McMahon was highly vexed over the inherent conflicts of LJM. He complained mightily to Jeff Skilling .... 3 days later, Skilling offered him the CEO spot at Enron Industrial Markets.... b. Cliff Baxter complained mightily to Skilling and all who would listen about the inappropriateness of our transactions with LJM.
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c. I have heard one manager level employee ... say “I know it would be devastating to all of us, but I wish we would get caught. We're such a crooked company.” ... Many similar comments are made when you ask about these deals. A second Enron employee wrote the following statements:
One can only surmise that the removal of Jeff Skilling was an action taken by the board to correct the wrong doings of the various management teams at Enron. However ... I'm sure the board has only scratched the surface of the impending problems that plague Enron at the moment. (i.e., EES's ... hiding losses/SEC violations ... lack of product, etc.) [I]t became obvious that EES had been doing deals for 2 years and was losing money on almost all the deals they had booked. (JC Penney being a $60MM loss alone, then Safeway, Albertson's, GAP, etc.) Some customers threatened to sue if EES didn't close the deal with a loss (Simon Properties-$8MM loss day one).... Overnight the product offerings evaporated.... Starwood is also mad since EES has not invested the $45MM in equipment under the agreement.... Now you will loos [sic] at least $45MM on the deal.... You should also check on the Safeway contract, Albertson's, IBM and the California contracts that are being negotiated.... It will add up to over $500MM that EES is losing and trying to hide in Wholesale. Rumor on the 7th floor is that it is closer to $1 Billion.... This is when they decided to merge the EES risk group with Wholesale to hide the $500MM in losses that EES was experiencing. But somehow EES, to everyone's amazement, reported earnings for the 2nd quarter. According to FAS 131 Statement of Financial Accounting Standards (SFAS) # 131, “Disclosures about Segments of an Enterprise and related information”, EES has knowingly misrepresented EES' earnings. This is common knowledge among all the EES employees and is actually joked about.... Some would say the house of cards are falling.... You, the board have a big task at hand. You have to decide the moral, or ethical things to do, to right the wrongs of your various management teams. But all of the problems I have mentioned, they are very much common knowledge to hundreds of EES employees, past and present. Consolidated complaint at 39–41.
76 The Consolidated Complaint at 345 quotes an article from Business Week, 2/11/02, stating that “[a]s many as 100 of Merrill's own top executives put their personal money into the deal.”
77 Section 15(f) of the Exchange Act, 15 U.S.C. § 78o(f) provides, Every registered broker or dealer shall establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such broker's or dealer's business, to prevent misuse ... of material, nonpublic information by such broker or dealer or any person associated with such broker or dealer. The Act also permits the SEC to make appropriate rules or regulations about these policies and procedures. See17 C.F.R. §§ 230.137, 230.138, 230.139. Thus an investment bank is required to erect a Chinese wall between its securities analysts' research department and its divisions providing commercial banking, underwriting, or other services to issuers of securities to prevent information from the latter influencing the former.
78 As a prominent example, the complaint at 351 highlights the fact that JP Morgan wrote hundreds of millions of dollars of “credit default puts” on Enron's publicly traded debt securities, including zero coupon notes that it helped Enron to sell in 2001. (Zero coupon notes pay no interest, but are sold at a discount and redeemed upon maturity at face value.) These “puts” required JP Morgan to make good on Enron's publicly traded debt if Enron defaulted. Thus JP Morgan had an additional reason to keep Enron solvent.
79 This case, which is still pending, was recently transferred from the United States District Court for Delaware to the Southern District of New York. No. 02–104 GMS, 2002 WL 1378226 (D.Del. June 26, 2002).
80 The New York Times has reported a number of times that in 1996 the Sumitomo Corporation of Japan learned that one of its copper traders, Yasuo Hamanaka, during the previous ten years had lost $2.6 billion. Sumitomo sued J.P. Morgan and Chase Manhattan, which had not yet merged, alleging that the two banks engineered loans disguised as trades, or copper swaps, that allowed Hamanaka to hide the losses. The swaps appeared to involve the purchase of copper and exposure to fluctuating copper prices over time, but in actuality there was no copper physically traded nor financial transactions whose value was dependent on copper prices.
As discussed on pages 133–35 and 162–65 of this memorandum and order, in the instant litigation JP Morgan allegedly entered into deals to transfer commodities (oil and gas) that in reality were just paper transactions camouflaging loans. JP Morgan paid Enron upfront for the ostensible future deliveries. According to the complaint, knowing the “trades” were fraudulent, JP Morgan attempted to limit its risk exposure by “guaranteeing” Enron's performance on
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the purported trades (through Mahonia) by obtaining surety bonds from eleven insurance companies. After Enron declared bankruptcy and defaulted on payments, the insurance companies refused to pay JP Morgan, arguing that the banks deliberately camouflaged loans as trades to hide their fraudulent scheme. JP Morgan then sued the insurance companies in federal district court in Manhattan for a declaratory judgment that the insurance companies were liable on six surety bonds because Enron entities had defaulted on their performance on the natural gas and crude oil forward sales contracts. The defendant insurers responded with a fraudulent inducement/fraudulent concealment claim that the sales contracts “were part of otherwise undisclosed circular transactions that, when revealed in their entirety, were nothing more than disguised loans that the defendants could not and would not have insured if they had known the full facts.” JPMorgan Chase Bank v. Liberty Mut. Ins. Co., 209 F.R.D. 361, 362–63 (S.D.N.Y.2002). The judge, the Honorable Jed S. Rakoff, rejected a motion for summary judgment by J.P. Morgan to force immediate payment on the bonds and ruled that there was sufficient evidence to raise a factual issue for trial about whether the surety bonds were part of a larger fraudulent scheme involving Stoneville Aegean Ltd. to disguise loans as a sale of gas. JPMorgan Chase Bank v. Liberty Mut. Ins. Co., 189 F.Supp.2d 24, 29 (S.D.N.Y.2002). Judge Rakoff has also ruled that JP Morgan may pursue a breach of contract claim against the insurers. The suit is currently being tried. An attorney for three of the insurance companies being sued by JP Morgan was also the attorney for the Sumitomo Corporation in the still pending suit that Sumitomo filed against JP Morgan in 1999, and he has contended there is a pattern of such loans disguised as trades by JP Morgan.
81 Lead Plaintiff now concedes that it no longer pursues claims on the 7% Exchangeable notes regarding which it previous asserted a claim against Citigroup inter alia.
82 The complaint at 366 lists five facilities for Enron in which Credit First Suisse Boston was involved. 83 As with the other banks, the complaint alleges that CIBC helped structure and finance LJM2, and that its executives were rewarded for participation in the Ponzi scheme by being allowed to invest and did invest approximately $15 million in the partnership. They, too, provided the funds around December 22, 1999 to provide cash for LJM2 to fund four SPEs by year-end so that Enron could “cook its books” for 1999 year-end and first-quarter 2000 reports.
84 The complaint at 372 lists three transactions before the Class Period and one in August 2001, a $3 billion committed credit facility for Enron to back up its commercial paper.
85 CIBC has objected that CIBC World Markets Corporation, and not CIBC, was the underwriter of the May 1999 offering and that CIBC, which represents that it is the parent company, is the only CIBC-related entity Lead Plaintiff has sued. It objects that Lead Plaintiff has defined “CIBC” to refer to the Bank and to its “controlled subsidiaries and divisions (such as CIBC Oppenheimer or CIBC World Markets).” As with JP Morgan and Lehman Brothers, if CIBC wishes to challenge Lead Plaintiff for naming the wrong party as a defendant, or to join others, it needs to file an appropriate motion with evidence and a brief.
86 The complaint, at 376–77, quotes an article from the Wall Street Journal reporting the bogus transaction. It notes that the partnership had no separate staff and no assets other than Enron's stake in the venture. It reports a Blockbuster spokesperson as stating, “It was nothing but a pilot project.... I don't know how anyone could have been booking revenues,” and that Blockbuster never accounted for any financial gain or loss from the short-lived venture. The article also quotes an Enron employee who helped create some of the SPEs and was familiar with the partnership deals and the secret guarantees by Enron to repay investment amounts fully in order to attract investors who would otherwise doubt the deals: “The banks didn't care about the assets they invested in and that's how it got out of control.” In view of the fact that Enron claimed a multi-million dollar profit within the first two weeks of commencing the Blockbuster venture, the article quotes one Enron employee as asking at the time, “How can they monetize this asset when we're still putting it together? It doesn't make any sense to me.” (“Monetize” was a buzzword at Enron for a quick-fix solution for undesirable assets by selling them off to Enron-controlled SPEs to conceal debt and recognize sham profits.) When Enron recorded another $57.9 million profit from Blockbuster in the first quarter of 2001, that same employee noted that he “was just floored. I mean, I couldn't believe it.”
87 Although the Consolidated Complaint does not mention two significant potential sham transactions between Merrill Lynch and Enron in December 1999 that have been in the news recently with respect to Congressional investigations and criminal complaints arising out of the Enron debacle, the Court notes that the allegations regarding these transactions fit the pattern of fraudulent activities alleged in the complaint.
In December 1999 Enron sold Merrill Lynch an interest in a group of barges located off the coast of Nigeria in time to record a multi-million dollar profit in the final quarter of the year and meet Wall Street projections. (Although not included in the complaint, Lead Plaintiff briefly references this deal in its opposition to Vinson & Elkins' motion to dismiss (# 843 at 13) and in its opposition to Merrill Lynch's motion to dismiss (# 846 at 14–15)). Purportedly Enron guaranteed
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that it would repurchase the ownership stake within six months. After six months LJM bought the barges from Merrill Lynch, again at a purported profit of $8 million for Merrill Lynch, even though no arm's-length independent buyer could be found. Moreover, during the same time, Merrill Lynch analysts continued to promote Enron's stock to investors by positive statements about its financial performance. Lead Plaintiff does mention the barges in its opposition to the motions to dismiss: Lead Plaintiff alleges that “Merrill Lynch also helped Enron artificially boost its 99 results by taking a $500,000 payoff to pretend to purchase electricity-producing barges off the coast of Nigeria from Enron, accepting a secret a no-loss guarantee from Enron, as well as a promise by Enron to re-purchase or find a buyer for Merrill Lunch's Nigerian barges within six months, which Enron did in 7/00 causing LJM2 to repurchase the barges from Merrill Lynch.” # 846 at 14–15. Also during the final days of 1999, there was purportedly a much larger deal involving Enron North America (“ENA”), whose chairman was J. Clifford Baxter, who committed suicide last year. The deal involved a complex set of gas and power trades regarding the future output of a group of power plants under construction in the Midwest. When no third- party energy company could be found to participate, Enron made the deal with Merrill Lynch, which operated its own energy trading unit. The deal allowed Enron to record a year-end $60 million profit from the purported sham transaction. Moreover, Enron and Merrill Lynch allegedly had agreed that the deal would be canceled after the end of 1999, and after Enron had met earnings forecasts, and purportedly it was.
88 According to the complaint at 188, after the price of its stock surged, Enron, as usual in desperate need of cash, sold this extraordinarily large offering of zero coupon convertible notes to the banks, which then resold the notes or hedged their risk of loss on the notes by shorting Enron common stock. Enron had promised to register and did register the zero coupon convertible notes with the SEC within six months so that the purchasers could resell them. The proceeds were used by Enron to reduce its short-term debt, i.e., commercial paper and/or bank debt to JP Morgan or CitiGroup and to keep the Ponzi scheme alive.
89 Bank America contends that Lead Plaintiff's claims under § 10(b) and § 11 with respect to the 8.375% Notes fail because neither of the proposed representatives for the subclass (Hawaii Laborers Pension Plan and the Archdiocese of Milwaukee), as reflected in their certifications (Appendix Exs. 5 and 6), purchased any of these notes at any time. Lead Plaintiff has not responded to the objection. Bank America also argues that the § 11 claims based on the 7% Exchangeable Notes must be dismissed because the only Plaintiff to have purchased them, Murray Van de Velde, bought them more than two years after the securities issued and thus cannot plead or prove reliance on the offering statements. In response Lead Plaintiff has stated that it no longer pursues its § 11 claims based on those notes and the 7% Exchangeable Notes. Memorandum in Opposition to Motion to Dismiss by Bank of America at p. 51, n. 38. and 92.
90 Deutsche Bank identifies Deutsche Bank Ales. Brown as its research arm. 91 The complaint explains, “[T]rue sales opinions are letters that law firms write vouching for the fact that the business transactions meet particular legal requirements.” Complaint at 404.
92 Sherron S. Watkins was an Enron executive, a vice president of corporate development, who had come to Enron eight years earlier from Arthur Andersen, LLP and was very knowledgeable about accounting practices. The complaint at 425– 27 quotes excerpts from her letter and references portions of it at various times. See footnote 75 of this memorandum and order for the contents of Watkins' memorandum. Other portions not quoted in footnote 75 (pp. 148–50) of this memorandum and order include the following:
Skilling is resigning now for “personal reasons” but I think he wasn't having fun, looked down the road and knew this stuff was unfixable and would rather abandon ship now than resign in shame in 2 years. Is there a way our accounting guru's can unwind these deals now? I have thought and thought about how to do this, but I keep bumping into one big problem—we booked the Condor and Raptor deals in 1999 and 2000, we enjoyed a wonderfully high stock price, many executives sold stock, we then try and reverse or fix the deals in 2001 and it's a bit like robbing the bank in one year and trying to pay it back 2 years later. Nice try, but investors were hurt, they bought at $70 and $80/share looking for $120/share and now they're at $38 or worse. We are under too much scrutiny and there are probably one or two disgruntled “redeployed” employees who know enough about the “funny” accounting to get us in trouble. My concern explain the transactions. If adequately explained, the investor would know that the “Entities” described in our related party footnote are thinly capitalized, that equity holders have no skin in the game, and all the values in the entities comes from the underlying value of the derivatives (unfortunately in this case, a big loss) AND Enron stock and N/P. Looking at the stock we swapped, I also don't believe any other company would have entered into the equity derivative transactions with us at the same prices or without substantial premiums from Enron.
******
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Raptor looks to be a big bet, if the underlying stocks did well, then no one would be the wiser. If Enron stock did well, the stock issuances to these entities would decline and the transactions would be less noticeable. All has gone against us. The stocks, most notably Hanover, The New Power Co., and Avici are underwater to great or lesser degrees.
****** I firmly believe that the probability of discovery significantly increased with Skilling's shocking departure. Too many people are looking for a smoking gun. Summary of Raptor Oddities:
****** 2. The equity derivative transactions do not appear to be at arms length. a. Enron hedged New Power, Hanover, and Avici with the related party at what now appears to be the peak of the market. New Power and Avici have fallen away significantly since. The related party was unable to lay off this risk. This fact pattern is once again very negative for Enron. b. I don't think that any other unrelated company would have entered into these transactions at any price. What else is going on here? What was the compensation to the related party to induce it to enter into such transactions?
93 The complaint asserts that the one-week Yosemite fraudulent transaction was created and structured by Fastow, Vinson & Elkins, Kirkland & Ellis and others, and that its legal documents were drafted by Kirkland & Ellis and approved by Vinson & Elkins, then clearly and deliberately back dated during February 2000. See footnote 56 on pp. 120–21 of this memorandum and order.
94 After revelations of Sherron Watkins' letter of August 2001 raising concerns about the questionable partnerships and accounting and after being briefed on Vinson & Elkins' subsequent investigation report in October, 2001, Enron's board of directors created a special investigative committee, composed of a number of individuals who had been involved in some way in either creating the partnerships at issue or reviewing the transactions, but headed by outsider William C. Powers, Jr., dean of the University of Texas School of Law. The committee performed a review and issued a 217–page report (the “Powers' report”), drafted by a former enforcement director of the SEC, William McLucas, partner in Wilmer, Cutler & Pickering, in February, 2002 that concluded that Enron executives had intentionally manipulated the company's profits and inflated them through a series of transactions with a complex tangle of partnerships that served no economic purpose other than such manipulation and failed to comply with federal securities and accounting law, while personally enriching themselves. It also criticized Enron's auditor, Arthur Andersen, and lawyers at Vinson & Elkins, as well as Enron's board of directors.
95 The disclosure was as follows:
In March 2001, Enron acquired the limited partner's interests in an unconsolidated equity affiliate, Joint Energy Development Investments Limited Partnership (JEDI), for $35 million. As a result of the acquisition, JEDI has been consolidated. JEDI's balance sheet as of the date of acquisition consisted of net assets of approximately $500 million, including an investment of 12 million shares of Enron common stock valued at approximately $785 million, merchant investments and other assets of approximately $670 million and third-party debt and debt owed to Enron of approximately $950 million. Enron repaid the third-party debt of approximately $620 million prior to March 31, 2001.
96 For example, in Enron's Report on Form 10–Q, filed on 8/16/99, is a statement drafted and approved by Vinson & Elkins:
“Management believes that the terms of the transactions were reasonable and no less favorable than the terms of similar arrangements with unrelated third parties.”
97 The complaint at 405–06 quotes additional critical passages from the Powers' report:
1. The Powers' report “sharply criticizes the firm for ‘an absence of ... objective and critical professional advice.’ ” 2. A number of transactions among the SPEs and partnerships “were implemented—improperly, as we are informed by our accounting advisors—to offset losses”. They allowed Enron to conceal from the market very large losses resulting from Enron's merchant investments by creating an appearance that those investments were hedged ... when in fact that third party was simply an entity in which only Enron had a substantial economic stake. 3. Vinson & Elkins “provided advice and documentation” for many of the partnership deals and “assisted Enron with the preparation of its disclosures of related-party transaction in the proxy statements and the footnotes to the financial statements in Enron's periodic SEC filings.” 4. Enron's board and management “relied heavily on the perceived approval by Vinson & Elkins of the structure and disclosure of the transactions.” It concludes that Vinson & Elkins “should have brought a stronger, more objective and more critical voice to the disclosure process.”
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98 The statement provides, In the second quarter of 2000, Enron entered into transactions with the Related Party to hedge certain merchant investments. As part of the transactions Enron contributed to newly-formed entities (the Entities) assets valued at approximately $800 million, including 3.7 million restricted shares of outstanding Enron common stock, $100 million in Enron notes payable and the right to receive up to 11.7 million shares of outstanding Enron common stock in March 2003 (subject to certain conditions).
99 This disclosure stated, In the third quarter of 2000, Enron entered into derivative transactions with the Entities with a combined notational value of approximately $1.2 billion to hedge certain merchant investments and other assets.
100 The 4/02/01 Form 10–K disclosure provides, In 2000, Enron entered into transactions with the Related Party to hedge certain merchant investments and other assets. As part of the transactions, Enron (i) contributed to newly-formed entities (the Entities) assets valued at approximately $1.2 billion, including $150 million in Enron notes payable, 3.7 million restricted shares of outstanding Enron common stock and the right to receive up to 18.0 million shares of outstanding Enron common stock in March 2003 (subject to certain conditions) and (ii) transferred to the Entities assets valued at approximately $309 million, including a $50 million note payable and an investment in an equity that indirectly holds warrants convertible into common stock of an Enron equity method invitee.... In 2000, Enron entered into derivative transactions with entities with a combined notational amount of approximately $2.1 billion to hedge certain merchant investments and other assets.
101 As examples, the complaint at 424 references disclosures in Enron's Proxies filed on 5/02/00 and 5/01/01. 102 The letter stated, One can only surmise that the removal of Jeff Skilling was an action taken by the board to correct the wrong doings of the various management teams at Enron. However, based on my experience with this company, I'm sure the board has only scratched the surface of the impending problems that plague Enron at the moment. (i.e., EES's ... hiding losses/SEC violations ... lack of product, etc.). ... I feel it is my responsibility to bring to the Board's attention the various ongoing [sic] that I observed during my short tenure (9 months) with the company. EES Management ... [I]t became obvious that EES has been doing deals for 2 years and was long money on almost all the deals they had booked. (JC Penney being a $60MM loss alone, then Safeway, Alberto's, GAP, etc.). Some customers threatened to sue if EES didn't close the deal with a loss (Simon Properties—$8MM loss day one).... Overnight the product offerings evaporated. The only product left is for the hotel and mall customers. Except that Starwood is also mad since EES has not invested the $45MM in equipment under the agreement. Enron was supposed to invest $45MM over the first 3 years of the contract. The people who negotiated the contract FORGOT to put in, at Enron's discretion ... it turns out that it doesn't make financial sense for Enron to put in the equipment, but Starwood wants it. Now you will loose [sic] at least $45MM on the deal. The Crisis was set in motion. You should also check on the Safeway contract, Alberto's, IBM and the California contracts that are being renegotiated.... It will add up to over $500MM that EES is losing and trying to hide in Wholesale. Rumor on the 7th floor is that it is closer to $1 Billion.... This is when they decided to merge the EES risk group with Wholesale to hide the $500MM in losses that EES was experiencing. But somehow EES, to everyone's amazement, reported earnings for the 2nd quarter. According to FAS 131 Statement of Financial Accounting Standards (SFAS) # 131, “Disclosures about Segments of an Enterprise and Related Information,” EES has knowingly misrepresented EES' earnings. This is common knowledge among all the EES employees, and is actually joked about.... There are numerous operational problems with all the accounts.
****** ... Some would say the house of cards are falling.... You are potentially facing Shareholder lawsuits, Employee lawsuits ... Heat from the Analysts and newspapers. The market has lost all confidence, and it's obvious why. You, the board have a big task at hand. You have to decide the moral, or ethical things to do, to right the wrongs of your various management teams.
****** ... But of all the problems I have mentioned, they are very much common knowledge to hundreds of EES employees, past and present.
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Check out the 7th floor.... They are very talkative at the moment.
103 The Court observes that this letter alone raises issues of a serious conflict of interest and the propriety of Vinson & Elkins' undertaking this investigation on behalf of Enron. In light of the fact that Enron was Vinson & Elkins' biggest client and of Vinson & Elkins' extensive involvement in the structuring and documenting of the specific transactions with the SPEs that Lead Plaintiff has identified as devices and contrivances manipulated to defraud investors, commentator Roger C. Cramton, evaluating the ethical and legal implications of the law firm's investigation, has opined, “The investigation required V & E to assess objectively, as if it had not been there at all, the soundness and propriety of its prior representations. Thus the situation presented a huge conflict between Enron's presumed interest in an objective investigation and V & E's own interests.... [T]here remains a serious question whether [Enron's] consent was a valid one, and even if it was, whether ... the objective standard that the lawyer reasonably believe the representation will not be adversely affected by the lawyer's conflict of interest ... was satisfied.” Cramton, 1324 PLI/Corp at 854. Cramton critically observes, In any event, there remains a serious doubt whether V & E's conflict would not “adversely affect” its performance of the investigation. V & E's opinion letter stated that the Enron transactions it facilitated and approved were “creative and aggressive,” suggesting that they went to the outer edge of legality. The letter also concluded that “because of bad cosmetics involving the LJM entities and Raptor transactions, coupled with the poor performance of the merchant investment assets placed in those vehicles and the decline in the value of Enron stock, there is a serious risk of adverse publicity and litigation.” It was reasonably foreseeable, as has happened, that the litigation would include V & E as a defendant and that Enron officers, directors, and other co-defendants would defend themselves by blaming V & E for giving poor advice. Under these circumstances, the conflict appears to be too severe to be undertaken: a reasonable lawyer would not believe that his representation would not be adversely affected. ... The adequacy of the investigation is also questionable. V & E interviewed only seven high-level officials, most of whom were directly implicated in the self-dealing and fiduciary violations raised by the Watkins allegations. V & E relied on the denials of wrong doing by those officers and on the fact that none of the persons interviewed could identify a specific transaction that was illegal. Although McMahon, one of those interviewed, mentioned nine lowerlevel employees who might be good sources of information concerning Fastow's self-dealing, V & E failed to interview any of them. V & E was informed of the “mistake” that was made concerning the failure of the Chewco transaction to meet the required degree of outside equity participation, but never pursued the issue. The investigation as a whole, when compared to the subsequent investigation by the board's special committee, using the services of Wilmer, Cutler & Pickering, appears perfunctory. As the Powers Report stated, the result of the V & E investigation “was largely predetermined by the scope and nature of the investigation and the process employed.” It was performed with “insufficient skepticism.” ... There is a serious question of whether adequate representation was provided to the entity client, as distinct from satisfying the manager's apparent desire to have a protective document. Id. at 854. Cramton closes with the suggestion that these issues regarding the investigation might provide grounds not only for a malpractice claim against the law firm by Enron, but, along with other allegations, might give rise to a suit by shareholders and employees charging that Vinson & Elkins “participated as a principal along with Enron managers and directors and others in intentional violations of the federal securities acts.” Id.
104 The complaint asserts that the documents for the Yosemite transaction that were prepared in February 2000, but deliberately back-dated to make it look as if the sale occurred before year-end 1999 and to conceal the fraudulent scheme from Enron's shareholders, were approved and drafted by Kirkland & Ellis.
105 The Court does not address the allegations against the international Arthur Andersen entities because they have reached a proposed settlement for which they are in the process of obtaining approval.
106 GAAS are standards established by the Auditing Standards Board of the American Institute of Certified Public Accountants for the conduct of auditors in the performance of an examination. In re Ikon Office Solutions, Inc., 277 F.3d 658, 663 n. 5 (3d Cir.2002), citing SEC v. Arthur Young & Co., 590 F.2d 785, 788 n.2 (9th Cir.1979); Ziemba, 256 F.3d at 1200 n. 3. The complaint charges Arthur Andersen with violating the public's trust and the American Institute of Certified Public Accountant's (“AICPA's”) Code of Professional Ethics which calls for “an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage” and “discharge [of] their responsibilities with integrity, objectivity, due professional care, and a genuine interest in serving the public.” Complaint at 449.
107 The complaint asserts that Arthur Andersen's issuance of and multiple consents to reissue materially false reports on Enron's 1997–2000 financial statements are violations of GAAS.
108 The complaint, at 455–56, states that following a 1998 investigation of accounting fraud at Waste Management, which during that year restated its 1992–96 financial statements that had been audited by Houston's Arthur Andersen office,
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the SEC found that Arthur Andersen's internal documents demonstrated that Arthur Andersen not only knew of Waste Management's fraud, but was deeply involved in covering it up. Once exposed, Arthur Andersen, which signed the consent decree, was enjoined from such fraudulent conduct in the future and penalized with a $7 million fine, the largest civil penalty imposed on an accounting firm in the SEC's history, while several high-level partners were sanctioned for inappropriate behavior.
109 The complaint asserts at 456, As with Enron, Andersen's willingness to keep quiet about fraudulent accounting to protect the huge fees it earned played a significant role in Waste Management's ability to perpetrate one of the largest frauds in history. Andersen recognized Waste Management's “aggressive” accounting as early as 88, according to SEC documents, and by 93, Andersen had documented that Waste Management was a “high-risk client” and that the client inflated profits by more than $100 million. However, during the same time frame, Andersen was relentlessly marketing its consulting services to the client, resulting in consulting fees more than double the size of the audit fees. Even when Waste Management refused to fix the improper accounting practices recommended by Andersen in prior years, Andersen caved in and continued to sign off on the company's annual audits. This went on for the next three years. According to the SEC those decisions were backed at the highest levels of Andersen's Chicago office, including Andersen's Practice Director, the firm's Managing Partner and the Audit Division Head for the firm's National office in Chicago.... Several parallels exist between Andersen's conduct on Waste Management and Enron. For example: Enron and Waste Management were Andersen's two largest clients. Andersen's Houston office audited both Waste Management and Enron. Further Andersen partners, including Swanson and Goolsby [who signed the consent decree for Andersen in the Waste Management SEC action], had oversight responsibility over both the Waste Management and Enron engagements.
110 The complaint at 456–57 asserts, In 5/01, the SEC filed an injunctive action against Andersen partner Philip E. Harlow, the former engagement partner on the Sunbeam account, for authorizing the issuance of unqualified audit opinions on Sunbeam's 96 and 97 financial statements, even though he was aware of many of the company's accounting improprieties and disclosure failures. In 01, Andersen paid $110 million to settle shareholder lawsuits in connection with Sunbeam's restatement of six quarters of financial results.... In this case, as in Enron, Andersen's document destruction was a common theme. In fact, an Andersen partner testified that months after the restatements were announced and after the shareholder lawsuits had been filed, the firm ordered its Fort Lauderdale employees to dispose of any work papers or correspondence that did not agree with the final documentation of the Sunbeam restatement.
111 The complaint at 457–58 observes that the Arizona Attorney General filed suit on behalf of investors, many retirees, who lost $590 million of their savings in a Ponzi scheme run by individuals at the Baptist Foundation of Arizona, which was audited by Arthur Andersen. In a settlement Arthur Andersen agreed to pay the investors $217 million, and Arizona is in the process of revoking the licenses of three auditors, while three individuals from the Foundation have pled guilty to felony charges and five others have been indicted. A senior Arthur Andersen partner on the audit, Jay Steven Ozer, who had also been involved in audits of Charles Keating's Lincoln Savings & Loan, has agreed to give up his Arizona accounting license. As was typical of accounting in the Enron debacle, the Foundation used off-balance-sheet entities to hide significant losses in real estate investments from investors. The Foundation sold real estate at inflated prices to a company known as ALO, a related-party controlled by the Foundation, in exchange for an IOU rather than cash. Although several outside accountants and professionals warned the Arthur Andersen auditors for two years that they were suspicious of fraudulent accounting at the Foundation, Arthur Andersen paid no heed. Review of public records of AOL revealed that it had a negative worth of $106 million and was not capable of making good on its debt to the Foundation. From the first warning until the Foundation failed, Arthur Andersen issued two more unqualified opinions that permitted the Foundation to raise another $200 million of investor savings.
112 The complaint represents that the State of Connecticut revoked Arthur Andersen's license to practice because of audits for a national real estate syndication firm, Colonial Realty Company, following its collapse. Colonial Realty was involved in a Ponzi scheme arising from exaggerated valuations of Colonial Realty properties. Arthur Andersen provided unqualified opinions supporting the inflated values and claims and assisted in preparing private placement memoranda in connection with public offerings that caused investors to suffer substantial losses. Furthermore, in conduct like that alleged at Enron, the Connecticut Attorney General found that Arthur Andersen employees had destroyed incriminating documents under the excuse that it was complying with Arthur Andersen's document retention policy.
113 In 1984 and 1985, according to the complaint at 458, Arthur Andersen issued “clean” or unqualified audit opinions on the ACC/Lincoln financial statements that were included in SEC filing and aided Charles Keating to “promote an illusion of
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prosperity that was used to market notes to investors” and to bilk them out of more than $500 million. Arthur Andersen paid approximately $30 million to settle the suit that arose out of the fraud.
114 See complaint at 455–59. 115 The complaint explains at 449 that “AU” refers to the American Institute of Certified Public Accountants' Auditing Standards, which are “recognized by the AICPA as the interpretation of GAAS.”
116 Elsewhere Lead Plaintiff identifies PSG as “Andersen's oversight authority.” # 854 at 1–2. 117 In a 2/01 e-mail, Arthur Andersen Partner Michael D. Jones wrote, “A significant discussion was also held regarding Enron's MTM earnings and the fact that it was ‘intelligent gambling.’ We discussed Enron's risk management activities including authority, limits, valuation and position monitoring.” Complaint at 465.
118 AU § 334.09 provides, .09 After identifying related party transactions, the auditor should apply the procedures he considers necessary to obtain satisfaction concerning the purpose, nature, and extent of these transactions and their effect on the financial statements. The procedures should be directed toward obtaining and evaluating sufficient competent evidential matter and should extend beyond inquiry of management. Procedures that should be considered include the following: a. Obtain an understanding of the transaction. b. Examine invoices, executed copies of agreements, contracts, and other pertinent documents, such as receiving reports and shipping documents. c. Determine whether the transaction has been approved by the board of directors or other appropriate officials. d. Test for reasonableness the compilation of amounts to be disclosed, or considered for disclosure, in financial statements. e. Arrange for the audits of intercompany account balances to be performed as of concurrent dates, even if the fiscal years differ, and for the examination of specified, important, and representative related party transactions by the auditors for each of the parties, with appropriate exchange of relevant information. f. Inspect or confirm and obtain satisfaction concerning the transferability and value of collateral.
119 AU § 334.11, complaint at 473, provides, For each material related party transaction (or aggregation of similar transactions) or common ownership or management control relationship, for which FASB Statement No. 57 [AC section R36] requires disclosure, the auditor should consider whether he has obtained sufficient competent evidential matter to understand the relationship of the parties and, for related party transactions, the effects of the transaction on the financial statements. He should then evaluate all the information available to him concerning the related party transaction or control relationship and satisfy himself on the basis of his professional judgment that it is adequately disclosed in the financial statements.
120 Since Lead Plaintiff's complaint was filed, Arthur Andersen has been found guilty of obstruction of justice by a jury and sentenced by this Court.
121 ET § 53—Article II—The Public Interest Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. ET § 102 Integrity and Objectivity .02 Knowing misrepresentation in the preparation of financial statements or records. A member shall be considered to have knowingly misrepresented facts in violation of rule 102 [ET section 102.01] when he or she knowingly—
a. Makes, or permits or directs another to make, materially false and misleading entries in an entity's financial statements or records shall be considered to have knowingly misrepresented facts in violation of rule 102 [ET section 102.01].... ET § 501—Acts Discreditable .05 501.4—Negligence in the preparation of financial statements or records. A member shall be considered to have committed an act discreditable to the profession in violation of rule 501 [ET section 501.01] when, by virtue of his or her negligence, such member—
a. Makes, or permits or directs another to make, materially false and misleading entries in the financial statements or records of an entity; or b. Fails to correct an entity's financial statements that are materially false and misleading when the member has the authority to record an entry; or c. Signs, or permits or directs another to sign, a document containing materially false and misleading information. AU § 220 Independence
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.01 The second general standard is:
In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors. .02 This standard requires that the auditor be independent; aside from being in public practice (as distinct from being in private practice), he must be without bias with respect to the client since otherwise he would lack that impartiality necessary for the dependability of his findings, however excellent his technical proficiency may be. However, independence does not imply the attitude of a prosecutor but rather a judicial impartiality that recognizes an obligation for fairness not only to management and owners of a business but also to creditors and those who may otherwise rely (in part, at least) upon the auditor's report, as in the case of prospective owners or creditors.
122 As examples the complaint lists the following: (1) that the audit should be performed by persons having adequate technical training and proficiency as auditors; (2) auditors should maintain independence in mental attitude in all matters relating to the engagement; (3) due professional care should be exercised in the audit and preparation of the report; (4) the audit should be properly planned and assistants properly supervised; (5) the auditor should obtain a sufficient understanding of internal controls to be able to plan the audit and determine the nature, timing and extent of the tests to be performed; (6) the auditor should obtain sufficient competent evidential matter to constitute a reasonable basis for an opinion on the financial statements under audit; (7) the report should state whether the financial statements are presented in accordance with GAAP; (8) the report shall identify circumstances in which GAAP has not been consistently observed; the informative disclosures are regarded as reasonably adequate unless the report indicates otherwise; and (9) the report shall contain an expression of opinion or present reasons why an opinion cannot be given.
123 Gretchen Morgenson, “Does the Rot on Wall Street Reach Right to the Top?,” Section 3 (Money & Business) at 1, The New York Times, Nov. 17, 2002. In an article on the Op–Ed page of November 15, 2002's New York Times at A27, a former research analyst at Goldman Sachs, in defending analysts by explaining the difficulties of predicting what the stock market will do and the reasons why their role is misunderstood, perfunctorily stated, “[A]nalysts are subject to internal and external pressures to be positive on essentially every stock they cover. From the inside, investment bankers armtwist analysts to write and speak favorably about their firms' existing and prospective clients. From the outside, some executives bypass their bankers and go straight to the analysts, hoping to win a higher rating (and hoping, no doubt, that the fruits of that rating will enable them to buy more gold umbrellas stands and diamond-studded shower rods).” See also Marcia Vickers & Mike France, “Wall Street: How Corrupt is It?,” Business Week, May 13, 2002 at 36–44, Ex. 1 to Lead Plaintiff's Appendix in Support of Plaintiffs' Oppositions to Motions to Dismiss (# 858), To dismiss Lead Plaintiff's allegation of ineffective Chinese walls and to not consider it as a circumstance relevant to the alleged fraud would be remiss and contrary to common sense.
124 For instance by November 1, 2001, a number of securities fraud and shareholder derivative suits had already been filed against Enron alleging that its public disclosures were materially misleading, the SEC had launched a formal investigation into its accounting practices, and Moody's had downgraded its long-term debt ratings. On November 8, 2001 Enron filed a Form 8–K stating that it would be restating previous financial statements back to 1997 and warned investors not to rely on those prior statements, which included those incorporated into the prospectus for the 7% Notes.
125 Section 77k(a) provides in relevant part, If such a person acquired the security after the issuer has made generally available to its security holders an earning statement covering a period of at least twelve months beginning after the effective date of the registration statement, then the right of recovery under this subsection shall be conditioned on proof that such person acquired the security relying upon such untrue statement in the registration statement or relying upon the registration statement and not knowing of such omission, but such reliance may be established without proof of the reading of the registration statement of such person.
126 Defendants have also contended that Van de Velde has not claimed that he purchased in the initial public offering of those notes. They argue that the rule in Gustafson v. Alloyd Co., Inc. 513 U.S. 561, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995), that standing to sue under § 12(2) of the 1933 Act, 15 U.S.C. § 771(a)(2), is restricted to persons who purchased securities in the initial public offering, and thus those who purchased their securities in private initial offerings or on the secondary market are deprived of the antifraud protection of § 12(2), also applies to claims under § 11, 15 U.S.C. § 77k(a).
After reviewing the law, this Court is persuaded by the three federal appellate courts that have thus far addressed this issue. They have concluded that the Gustafson rule does not apply to § 11 in part because (1) § 11's language, “any person acquiring such security ... may sue,” is more expansive that § 12(2)'s language providing that any person who “offers or sells a security” by means of a “prospectus or oral communication” that contains a material false statement or omission shall be liable to “the person purchasing such security from him”; (2) § 11(a)'s provision that a person who has
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acquired a security “after the issue has made generally available to its security holders an earning statement covering a period of at least twelve months beginning after the effect date of the registration statement” must prove actual reliance on the registration statement to recover would be redundant or meaningless; (3) the same would be true of § 11(e)'s damages provision establishing as the baseline for damages the difference in the amount for which the security is sold and the amount paid, not exceeding the price at which it was offered to the public, if the only plaintiffs with standing were those who bought at the initial offering at the offering price; and (4) the Congressional purpose behind the statutes, i.e., the 1933 Act was intended to regulate the initial distribution of securities while the 1934 Act was passed to regulate trading in the open market. Lee v. Ernst & Young, LLP, 294 F.3d 969, 976–77 (8th Cir.2002); Joseph v. Wiles, 223 F.3d 1155, 1159–60 (10th Cir.2000); Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1079–82 (9th Cir.1999).
127 Some Defendants argue that the private placement memorandum also discussed significant steps that Enron would take to avoid a conflict of interest, such as that “Richard Causey, Executive Vice President and Chief Accounting Officer of Enron, will, in behalf of Enron, monitor and mediate conflict-of-interests between Enron and the Partnership.” The Court notes that the allegations in the complaint imply that such steps were either never initiated or ineffective.
128 The Court is also aware from reports in the press of current Congressional investigations of two particular deals between Enron and Citigroup that fit the pattern of many alleged by Lead Plaintiff. One, an off-the-books partnership known as Bacchus, in which Citigroup invested 3% equity, is an echo of the 3% equity investment in JEDI by Barclays via Chewco, with an alleged guarantee by Enron that Citigroup's investment in Bacchus would not be at risk. The second is a venture known as Sundance, which Citigroup's own risk managers and other employees objected was too aggressive and risky, but which Citigroup purportedly went forward with despite the warnings.
129 Lead Plaintiff has charged Vinson & Elkins with drafting and approving over years a great many of Enron's “disclosures”
for public SEC filings, press releases, and shareholder reports, which it knew or had reason to expect potential investors to have access to and rely upon in deciding to invest in Enron securities. The complaint asserts that these fraudulent “disclosures” were necessary to expand and perpetuate the scheme. The public reports and statements contained numerous alleged fraudulent misrepresentations, carefully detailed by Lead Plaintiff, with respect to various transactions (devices or contrivances) involving the Enron-controlled SPE. See pages 203–23 of this memorandum and order.
130 The complaint at 463 lists the following as examples:
How Enron could, with its own capital stock, repeatedly add to the collateral underlying an obligation owed to Enron from a related party without recognizing it in the financial statements. Enron's stock contributions/ issuances to LJM did not appear to be recorded on Enron's books. Enron's financial statement disclosures related to the Fastow investment-company relationships and transactions were (putting it kindly) hard to understand or incomplete. The LJM equity had been distributed to its shareholders, including Fastow and CIBC, concurrently, or shortly after, its original formation.
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a legal duty when there is no other adequate remedy at law.
KeyCite Yellow Flag - Negative Treatment Declined to Follow by Figueroa v. THI of New Mexico at Casa Arena 8 Cases that cite this headnote Blanca, LLC, N.M.App., July 18, 2012
52 S.W.3d 749 [3] Mandamus Supreme Court of Texas. Remedy at Law When a trial court erroneously denies a party's In re FIRSTMERIT BANK, N.A. f/k/a Signal motion to compel arbitration under the Federal Bank, N.A. and Mobile Consultants, Inc., Relators.
Arbitration Act (FAA), the movant has no No. 00–0548. | Argued Feb. 14, adequate remedy at law and is entitled to a writ of mandamus. 9 U.S.C.A. § 1 et seq.
2001. | Decided June 14, 2001.
30 Cases that cite this headnote Mobile home buyers and donees, their child and son-inlaw , brought action against lender and its servicing agent to recover for breach of contract, revocation of acceptance, [4] Mandamus breach of warranty, negligence, and fraud in connection Civil proceedings other than actions with condition of the home. The trial court denied motion A party seeking to compel arbitration by by lender and agent to compel arbitration. Lender and mandamus must first establish the existence of agent petitioned for writ of mandamus. The Supreme Court, an arbitration agreement subject to the Federal Enoch, J., held that: (1) the installment contract related to Arbitration Act (FAA). 9 U.S.C.A. § 1 et seq. interstate commerce and, therefore, was subject to the Federal Arbitration Act (FAA); (2) claims by buyers and donees 53 Cases that cite this headnote were subject to arbitration; (3) the donees were subject to the arbitration clause; (4) the clause was not unconscionable; (5)
[5] Alternative Dispute Resolution sellers' alleged fraud did not invalidate the agreement; and (6)
Disputes and Matters Arbitrable Under the revocation issue concerning the installment contract was Agreement subject to arbitration.
Once the movant seeking arbitration establishes Writ conditionally granted. an agreement, the court must then determine whether the arbitration agreement covers the nonmovant's claims.
West Headnotes (24) 32 Cases that cite this headnote
[1] Mandamus [6] Alternative Dispute Resolution Nature and scope of remedy in general Evidence
Mandamus is an extraordinary remedy available A presumption exists favoring agreements to only in limited circumstances. arbitrate under the Federal Arbitration Act (FAA). 9 U.S.C.A. § 1 et seq.
5 Cases that cite this headnote 26 Cases that cite this headnote
[2] Mandamus Remedy at Law [7] Alternative Dispute Resolution Construction in favor of arbitration Mandamus Nature of acts to be commanded Courts must resolve any doubts about an arbitration agreement's scope in favor of A court should issue mandamus only to correct arbitration.
a clear abuse of discretion or the violation of
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or other matters arising out of or relating to the 48 Cases that cite this headnote loan, its interpretation, validity, performance, or breach; the arbitration clause defined “loan” to [8] Alternative Dispute Resolution include the installment contract and all other loan Discretion documents and was thus not limited to claims relating directly to financing.
Alternative Dispute Resolution Remedies and Proceedings for Enforcement 33 Cases that cite this headnote in General Once the trial court concludes that an arbitration [12] Alternative Dispute Resolution agreement encompasses the claims and that the Sales contracts disputes party opposing arbitration has failed to prove its defenses, the trial court has no discretion but to The question whether mobile home sellers made compel arbitration and stay its own proceedings. any misrepresentations in the inducement of the underlying contract related to the validity 56 Cases that cite this headnote of the contract and, therefore, was subject to arbitration in buyers' suit against lender and its agent; the agreement required arbitration of all [9] Commerce disputes, claims, or other matters arising out of Arbitration or relating to the loan, its interpretation, validity, Installment contract for sale of mobile home performance, or breach and defined “loan” to related to interstate commerce and, therefore, include the installment contract and all other loan was subject to the Federal Arbitration Act documents.
(FAA); secured lender and its servicing agent were corporations in another state and received 23 Cases that cite this headnote installment payments there, and the arbitration addendum stated that the loan involved interstate [13] Alternative Dispute Resolution commerce and was governed by the FAA. 9 Persons affected or bound U.S.C.A. § 1 et seq.
Mobile home donees' suit against lender and 16 Cases that cite this headnote its agent based on parents' installment contract as buyers and borrowers subjected residents to the contract's terms, including the arbitration [10] Alternative Dispute Resolution agreement, even though they never signed it.
Disputes and Matters Arbitrable Under Agreement 10 Cases that cite this headnote To determine whether a party's claims fall within an arbitration agreement's scope, courts focus on [14] Alternative Dispute Resolution the complaint's factual allegations, rather than Validity of assent the legal causes of action asserted.
Alternative Dispute Resolution 61 Cases that cite this headnote Unconscionability Defenses of unconscionability, duress, [11] Alternative Dispute Resolution fraudulent inducement, and revocation needed to Sales contracts disputes specifically relate to the arbitration agreement itself, not the contract as a whole, in order to Mobile home buyers' claims against lender and defeat arbitration; defenses that pertained to the its agent to challenge right to repossess the home entire installment contract could be arbitrated.
and to recover for condition of the home and sellers' failure to remedy defects were covered 39 Cases that cite this headnote by agreement to arbitrate all disputes, claims,
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recover for condition of the home and sellers'
[15] Alternative Dispute Resolution failure to remedy defects.
Evidence Since the law favors arbitration, the burden of 10 Cases that cite this headnote proving a defense to arbitration is on the party opposing arbitration. [20] Contracts Unconscionable Contracts 34 Cases that cite this headnote The basic test for unconscionability is whether, given the parties' general commercial [16] Alternative Dispute Resolution background and the commercial needs of the Unconscionability particular trade or case, the clause involved is The possibility that arbitration could subject so one-sided that it is unconscionable under mobile home buyers to substantial costs and the circumstances existing when the parties fees did not make the arbitration agreement made the contract; the principle is one of unconscionable without specific evidence that preventing oppression and unfair surprise and the buyers would actually be charged excessive not of disturbing allocation of risks because of fees to arbitrate claims against lender and its superior bargaining power. agent.
46 Cases that cite this headnote 14 Cases that cite this headnote
[21] Alternative Dispute Resolution [17] Alternative Dispute Resolution Validity of assent Unconscionability Mobile home sellers did not commit duress by The party opposing arbitration on the ground stating only that they would not sell the home that fees and costs make the arbitration clause if the buyers refused to sign the arbitration unconscionable must prove the likelihood of agreement; the sellers had a legal right to refuse incurring such costs. to sell under that condition.
24 Cases that cite this headnote 2 Cases that cite this headnote
[18] Alternative Dispute Resolution [22] Alternative Dispute Resolution Unconscionability Validity of assent Some specific information of future costs is Mobile home sellers' alleged fraud by required in order to show that an arbitration representing ownership of the land under the agreement is made unconscionable by subjecting home and the existence of a septic system parties to substantial costs and fees. and driveway, by failing to refer to an arbitration clause in advertisements and pre-
34 Cases that cite this headnote sale statements, and by inadequately explaining the consequences of signing the agreement did [19] Alternative Dispute Resolution not invalidate the agreement; nothing indicated Unconscionability that the sellers actually misrepresented the Lender's right to seek judicial relief to enforce agreement's terms or made any false material its security agreement, recover payments from representations with regard to the agreement mobile home buyers, and foreclose did not itself. render unconscionable an arbitration agreement 29 Cases that cite this headnote covering their claims against the lender to challenge right to repossess the home and to [23] Fraud
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Elements of Actual Fraud Pete and Janie de los Santos purchased a mobile home The elements of fraud are that: (1) a material for their daughter, Sarah, and her husband, Gary Alvarez. representation was made; (2) the representation They bought the home from Verde Homes under Verde's was false; (3) when the representation was retail installment financing agreement. Verde assigned this made, the speaker knew it was false or made it contract, which Pete and Janie signed, to Signal Bank (now recklessly without any knowledge of the truth FirstMerit Bank). The agreement contained an Arbitration and as a positive assertion; (4) the speaker made Addendum, which required binding arbitration for “all the representation with the intent that the other disputes, claims, or other matters in question arising out of or party should act upon it; (5) the party acted in relating to this Loan, its interpretation, validity, performance reliance on the representation; and (6) the party or the breach thereof.” The word “Loan” referred to “all thereby suffered injury. manufactured home loan documents, including but not limited to the retail installment contract....” The Addendum 234 Cases that cite this headnote further stated that “the scope of arbitrability is broad and includes, without limitation, contractual, tort, statutory, and caselaw claims.” The Addendum also permitted the bank to [24] Alternative Dispute Resolution seek judicial relief to enforce its security interest, recover the Existence and validity of agreement buyers' monetary loan obligation, and foreclose. *753 But The issue of whether the underlying installment aside from these three exceptions, the Addendum required contract for sale of a mobile home was revoked arbitration for all other disputes relating to the installment was subject to arbitration in buyers' suit against contract.
lender and its agent; the issue arose from or related to the contract.
After Verde delivered the home, the de los Santoses tried to 8 Cases that cite this headnote revoke their acceptance, claiming that the home was defective and that Verde failed to perform certain promised repairs. Although Verde Homes refused to rescind the sale, the de los Santoses apparently stopped making their monthly loan payments. In response, Signal Bank took possession of the Attorneys and Law Firms home. The de los Santoses then sued Signal Bank, Mobile *752 John A. Seib, Jr., The Seib Law Firm, Dallas, Michael Consultants (Signal's servicing agent), Verde Homes, and two Deitch, Law Offices of Michael Deitch, Austin, Steven Marc Verde employees, alleging breach of contract, revocation of Reback, Law Offices of Michael Deitch, Austin, for Relator. acceptance, breach of warranty, negligence, and fraud. They also alleged violations of the Deceptive Trade Practices Act, F. Terry Callahan, Law Offices of F. Terry Callahan, San Fair Debt Collection Practices Act, Equal Credit Opportunity Antonio, for Respondent. Act, and Fair Credit Reporting Act. Additionally, the de los Santoses claimed that their successful revocation of Opinion acceptance entitled them to a security interest in the home, equal to the amount they had paid on the installment contract.
Justice ENOCH delivered the opinion of the Court.
To enforce their security interest, they requested an injunction FirstMerit Bank and Mobile Consultants seek mandamus forcing FirstMerit to return possession of the home until it relief after the trial court denied their motion to compel refunded the de los Santoses' loan payments. arbitration. Because the Federal Arbitration Act (FAA) requires the trial court to compel arbitration in this case, we In response, FirstMerit and Mobile moved to compel conditionally grant their petition and order the trial court to arbitration. 1 The trial court denied their motion. FirstMerit compel arbitration in accordance with the parties' agreement. Bank and Mobile then petitioned the Third Court of Appeals for a writ of mandamus, which the court denied. FirstMerit and Mobile now ask this Court for mandamus relief.
I. BACKGROUND
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payment checks drawn on a Texas bank that Signal Bank had deposited in Ohio. And both Signal and Mobile Consultants II. WHETHER TO ORDER ARBITRATION corresponded with the de los Santoses from Ohio. The de los [1] [2] [3] Mandamus is an extraordinary remedy Santoses also listed Signal's Ohio address at the top of their revocation of acceptance letter. Moreover, the Arbitration available only in limited circumstances. 2 A court should Addendum, which Pete and Janie de los Santos both signed, issue mandamus only to correct a clear abuse of discretion or states that the loan “involves interstate commerce ... and shall the violation of a legal duty when there is no other adequate be governed by the Federal Arbitration Act....” In light of remedy at law. 3 When a trial court erroneously denies a these facts, we conclude that the installment contract relates party's motion to compel arbitration under the FAA, the to interstate commerce and is subject to the FAA. 14 movant has no adequate remedy at law and is entitled to a writ of mandamus. 4 Thus, we must determine whether the [10] [11] Because FirstMerit and Mobile have established movants established their right to arbitration. the existence of an agreement to arbitrate under the FAA, we must next determine whether the Arbitration Addendum [4] [5] [6] [7] [8] A party seeking to compel arbitration covers the de los Santoses' claims. To determine whether a by mandamus must first establish the existence of an party's claims fall within an arbitration agreement's scope, arbitration agreement subject to the FAA. 5 Once the movant we focus on the complaint's factual allegations rather than establishes an agreement, the court must then determine the legal causes of action asserted. 15 And again, we resolve whether the arbitration agreement covers the nonmovant's any doubts about the Arbitration Addendum's factual scope claims. 6 Because state and federal policies continue to favor in favor of coverage. Further, we reiterate that the parties'
7 Arbitration Addendum covers “all disputes, claims, or other arbitration, a presumption exists favoring agreements to matters in question arising out of or relating to this Loan, its arbitrate under the FAA, 8 and courts must resolve any interpretation, validity, performance, or the breach thereof”
doubts about an arbitration agreement's scope in favor of and states that “the scope of arbitrability is broad and arbitration. 9 Once the trial court *754 concludes that the includes, without limitation, contractual, tort, statutory, and arbitration agreement encompasses the claims, and that the case law claims.” party opposing arbitration has failed to prove its defenses, 10 the trial court has no discretion but to compel arbitration and We now turn to the de los Santoses' factual allegations. The 11 de los Santoses asserted that the sellers misrepresented that stay its own proceedings.
they owned the homesite, and that the homesite included a driveway and septic system. They also claimed that the sellers were not properly licensed, misrepresented *755 A. SCOPE OF ARBITRATION the terms of the loan, failed to provide a credit report to [9] Here, there is no dispute about the Arbitration Sarah and Gary Alvarez, and failed to make other disclosures Addendum's existence. The de los Santoses instead contend regarding interest rates and credit. The de los Santoses further that the installment contract was completed entirely in Texas, alleged that the sellers fraudulently double-charged them for did not involve interstate commerce, and, accordingly, was insurance that was already paid for in the installment contract. not subject to the FAA. As defined in the FAA, however, In addition, the de los Santoses asserted that after taking “interstate commerce” is not limited to the interstate shipment possession of the home, they learned that the home was not of goods, but includes all contracts “relating to” interstate yet complete, that it lacked carpeting and air conditioning, and that it was not installed properly. They also charged commerce. 12 In fact, the United States Supreme Court has that the sellers failed to repair these defects in a timely construed the FAA to extend as far as the Commerce Clause and workmanlike manner, that they never installed an air of the United States Constitution will reach. 13 In this case, conditioner, and that the sellers' attempts to repair the septic the evidence demonstrates that the loan was made in interstate tank were untimely and defective. Finally, the de los Santoses commerce. Signal Bank and Mobile Consultants were Ohio asserted that the bank wrongfully denied their attempt to corporations, while the de los Santoses were Texas residents. revoke the contract, criminally trespassed on their property, The installment contract stated that Signal Bank was located and wrongfully repossessed the home. in Ohio. The record includes several photocopies of loan
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[12] In light of the Addendum's broad language, all of Accordingly, unless the de los Santoses can prove one of the de los Santoses' factual allegations fall within the their defenses to the Arbitration Addendum, the FAA requires Addendum's scope. The de los Santoses contend that because arbitration. 19 the Addendum “relat(es) to the Loan,” it only covers claims that relate directly to the home's financing, and does not cover their allegations about the home's post-sale condition and repairs. But this interpretation ignores the Addendum's B. DEFENSES TO ARBITRATION broad definition of “Loan” to include the installment contract [14] [15] The de los Santoses assert the defenses and all other loan documents. Further, irrespective of the of unconscionability, duress, fraudulent inducement, and Addendum's broad language, we also note that the home revocation. We again note that these defenses must was the bank's collateral under the Loan. The de los specifically relate to the Arbitration Addendum itself, not Santoses alleged that the sellers' failure to remedy the home's physical problems entitled them to a security interest in the contract as a whole, if they are to defeat arbitration. 20 the home, which would prevent the bank from repossessing Defenses that pertain to the entire installment contract can
its collateral. 16 Thus, the home's post-sale condition, and be arbitrated. 21 We further note that the de los Santoses' the sellers' post-sale failure to remedy the home's problems, defenses against the Addendum are governed by Texas relate to the bank's right to repossess its collateral under the law. 22 Again, since the law favors arbitration, the burden loan. In sum, all of the de los Santoses' factual allegations of proving a defense to arbitration is on the party opposing arise out of or relate to either the sellers' conduct in arbitration. 23 selling the home and negotiating the installment contract, or to the performance or alleged breach of the installment [16] [17] The de los Santoses contend that the Arbitration contract. Furthermore, while fraud in the inducement of an Addendum is unconscionable because arbitration might arbitration agreement is a defense to arbitration, whether the subject them to substantial costs and fees. On this issue, sellers made any misrepresentations in the inducement of in Green Tree Financial Corp. v. Randolph, the United the underlying contract relates to the contract's validity and States Supreme Court recognized that “the existence of large can be arbitrated. 17 As for the de los Santoses' wrongful arbitration costs could preclude a litigant ... from vindicating repossession allegations, the Addendum provides that “any her federal statutory rights....” 24 Nonetheless, the Supreme counterclaims in suits brought by Seller/Assignee pursuant Court concluded that an arbitration agreement's mere silence to this provision,” including complaints about foreclosure, with respect to costs and fees, by itself, is a “plainly may be arbitrated. Given the Addendum's language on insufficient” basis for invalidating the agreement. 25 Instead, counterclaims, the Arbitration Addendum covers all of the de the party opposing arbitration must prove the likelihood of los Santoses' complaints about the bank's right to repossess the home. incurring such costs. 26 To hold otherwise would “undermine the liberal federal policy favoring arbitration agreements.” 27 [13] As a specific challenge, Sarah and Gary Alvarez contend that their claims are exempt from the Arbitration [18] While the Supreme Court did not specify “how detailed Addendum because they did not sign the contract. But a the showing of prohibitive expense must be,” there is no doubt litigant who sues based on a contract subjects him or herself that some specific information of future costs is required. 28 18 In Green Tree, the party resisting arbitration cited what to the contract's terms. Here, the Alvarezes fully joined the de los Santoses' contract claims. In fact, the de los Santoses' she claimed were American Arbitration Association (AAA) original petition *756 makes no distinction between the figures on arbitration costs, but she provided no evidence that parents' claims and the Alvarezes' claims. Thus, by suing the AAA would actually conduct the arbitration or charge FirstMerit based on the de los Santoses' installment contract, her the fees she identified. 29 Because of this uncertainty, the the Alvarezes subjected themselves to the contract's terms, Supreme Court deemed the evidence insufficient to defeat including the Arbitration Addendum.
arbitration. 30
Here, the de los Santoses testified, in two sworn affidavits, that the AAA charged a minimum $2,000 filing fee and
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a $250/day/party hearing fee, along with several other of mobile *758 home financing agreements, 38 we find unspecified fees, for hearings before a three-member panel. that the Arbitration Addendum in this case, by excepting But we *757 need not decide whether these costs would be claims essentially protecting the bank's security interest, is not excessive. As in Green Tree, the de los Santoses provided no unconscionable. 39 We also recognize that the plaintiffs are evidence that the AAA would actually conduct the arbitration free to pursue their unconscionability defense in the arbitral or charge the specified fees. The Arbitration Addendum does forum.
not state that the AAA will conduct the arbitration, and it makes no mention of arbitration costs. We also note that [21] Moreover, the de los Santoses cannot prevail on their the most recent AAA commercial arbitration rules provide duress defense, since there is no evidence that the sellers that “the AAA may, in the event of extreme hardship on threatened to do anything they did not have a legal right to the part of any party, defer or reduce the administrative do. 40 At most, the sellers stated only that they would not sell fees.” 31 Moreover, in the event the de los Santoses do not the home if the de los Santoses would not sign the Addendum, avail themselves of FirstMerit Bank's choice of arbitrators, the FAA permits the trial court to choose an alternate set which is not evidence of duress. 41
of arbitrators. 32 The de los Santoses also complain that [22] [23] The de los Santoses also alleged fraud in the the requirement of three arbitrators is inherently costly. But inducement of the Arbitration Addendum. The elements of again, without any specific information on what the costs fraud are: (1) that a material representation was made; (2)
will be, this requirement is not evidence of unconscionability.
the representation was false; (3) when the representation was Finally, in agreeing to the Addendum, Pete and Janie de los made, the speaker knew it was false or made it recklessly Santos agreed “that arbitration is a less expensive method without any knowledge of the truth and as a positive assertion;
of dispute resolution that decreases servicing costs of this (4) the speaker made the representation with the intent that loan....” Because the record contains no specific evidence the other party should act upon it; (5) the party acted in that the de los Santoses will actually be charged excessive reliance on the representation; and (6) the party thereby arbitration fees, we conclude that there is legally insufficient evidence that the plaintiffs would be denied access to suffered injury. 42 In this case, the de los Santoses alleged arbitration based on excessive costs. that the sellers fraudulently represented that they owned the land under the home, and that the home had a septic system [19] [20] The de los Santoses also argue that the and driveway. They also allege that the sellers' advertisements agreement's terms are unconscionable because they force and pre-sale statements made no reference to an arbitration the weaker party to arbitrate their claims, while permitting clause, and that the sellers did not adequately explain the consequences of signing the Addendum. However, there the stronger party to litigate their claims. 33 They point is no evidence that the sellers actually misrepresented the us to decisions in other jurisdictions that have found this Addendum's terms, or that they made any false material type of clause to be unconscionable. 34 Most federal courts, representations with regard to the Arbitration Addendum however, have rejected similar challenges on the grounds itself. Accordingly, we decline to invalidate the Arbitration that an arbitration clause does not require mutuality of Addendum based on fraud. obligation, so long as the underlying contract is supported by adequate consideration. 35 In any event, the basic test [24] Finally, the de los Santoses argue that their alleged for unconscionability is whether, given the parties' general revocation of the installment contract also applies to the commercial background and the commercial needs of the Arbitration Addendum, rendering it unenforceable. But this particular trade or case, the clause involved is so one-sided claim really pertains to the entire installment contract and that it is unconscionable under the circumstances existing not just the Arbitration Addendum. Again, the Arbitration when the parties made the contract. 36 The principle is one Addendum's validity is a separate issue from the validity of of preventing oppression and unfair surprise and not of the whole contract. 43 And given that the FAA's primary disturbing allocation of risks because of superior bargaining objective is to encourage the arbitration of contract-related power. 37 Here, the Arbitration Addendum allows the bank issues, the issue of whether the underlying contract was to seek judicial relief to enforce its security agreement, revoked is an issue that should be arbitrated, since it “arises recover the buyers' monetary loan obligation, and foreclose. from or relates to” the contract. 44 Given the weight of federal precedent and the routine nature
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In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001) 44 Tex. Sup. Ct. J. 900
proceed to arbitration. The clerk is instructed to issue *759 III. CONCLUSION the writ only if the trial court fails to do so.
Because the claims in this lawsuit are within the scope of the parties' agreement to arbitrate, we conditionally grant the writ of mandamus and direct the trial court to order that all claims All Citations
52 S.W.3d 749, 44 Tex. Sup. Ct. J. 900
Footnotes 1 The other parties did not answer the suit, and a default judgment was entered against them. 2 In re Masonite Corp., 997 S.W.2d 194, 197 (Tex.1999). 3 Id. 4 EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 88 (Tex.1996). 5 In re Oakwood Mobile Homes, 987 S.W.2d 571, 573 (Tex.1999). 6 Cantella & Co. v. Goodwin, 924 S.W.2d 943, 944 (Tex.1996). 7 Id.; Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 91, 121 S.Ct. 513, 522, 148 L.Ed.2d 373 (2000). 8 Cantella, 924 S.W.2d at 944. 9 Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985);
Prudential Sec., Inc. v. Marshall, 909 S.W.2d 896, 899 (Tex.1995).
10 See In re Oakwood, 987 S.W.2d at 573. 11 Cantella, 924 S.W.2d at 944. 12 See Lost Creek Mun. Util. Dist. v. Travis Indus. Painters, Inc., 827 S.W.2d 103, 105 (Tex.App.—Austin 1992, writ denied). 13 Allied–Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 272–74, 276–78, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995). 14 See, e.g., Mesa Operating Ltd. P'ship v. Louisiana Intrastate Gas Corp., 797 F.2d 238, 243 (5th Cir.1986); Snyder v.
Smith, 736 F.2d 409, 418 (7th Cir.1984), cert. denied, 469 U.S. 1037, 105 S.Ct. 513, 83 L.Ed.2d 403 (1984).
15 Prudential Sec., 909 S.W.2d at 900. 16 See TEX. BUS. & COM.CODE § 2.608(a), 2.711(c). 17 See Pepe Int'l Dev. Co. v. Pub Brewing Co., 915 S.W.2d 925, 930 (Tex.App.—Houston [1st Dist.] 1996, no writ); New Process Steel Corp. v. Titan Indus. Corp., 555 F.Supp. 1018, 1022 (S.D.Tex.1983).
18 See Nationwide of Bryan, Inc. v. Dyer, 969 S.W.2d 518, 520 (Tex.App.—Austin 1998, no pet.). 19 See In re Oakwood, 987 S.W.2d at 573. 20 See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–04, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). 21 See id. 22 In re Oakwood, 987 S.W.2d at 574. 23 Id. at 573. 24 531 U.S. 79, 91, 121 S.Ct. at 522, 148 L.Ed.2d 373. 25 Id. 26 Id. 27 Id. 28 Id. at 522–23. 29 Id. at 522 & n. 6. 30 See id. 31 American Arbitration Association, Arbitration Rules for the Real Estate Industry, Rule 51. 32 See 9 U.S.C. § 5. 33 See In re Conseco Fin. Servicing Corp., 19 S.W.3d 562, 569 n. 3 (Tex.App.—Waco 2000, pet. dism'd by agr.). 34 See, e.g., Armendariz v. Foundation Health Psychcare Servs., 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669, 691–94 (Cal.2000); Iwen v. U.S. West Direct, 293 Mont. 512, 977 P.2d 989, 995–96 (1999).
35 See, e.g., Harris v. Green Tree Fin. Corp., 183 F.3d 173, 183 (3d Cir.1999); Doctor's Assoc., Inc. v. Distajo, 66 F.3d 438, 451–53 (2d Cir.1995); Wilson Elec. Contractors, Inc. v. Minnotte Contracting Corp., 878 F.2d 167, 168–69 (6th Cir.1989); Young v. Jim Walter Homes, Inc., 110 F.Supp.2d 1344, 1350 (M.D.Ala.2000); Pridgen v. Green Tree Fin. Servicing Corp.,
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88 F.Supp.2d 655, 658–59 (S.D.Miss.2000); Gray v. Conseco, Inc., 2000 WL 1480273, 2000 U.S. Dist. LEXIS 14821, 13–16 (C.D.Cal. Sept. 29, 2000).
36 TEX. BUS. & COM.CODE § 2.302 cmt. 1. 37 Id. 38 See Palm Harbor Homes, Inc. v. McCoy, 944 S.W.2d 716, 723 n. 8 (Tex.App.—Fort Worth 1997, orig. proceeding). 39 See Pridgen, 88 F.Supp.2d at 658–59; see also Conseco Fin. Servicing Corp. v. Wilder, 47 S.W.3d 335 (Ky.App.2001). 40 In re Oakwood, 987 S.W.2d at 574. 41 See id. 42 Formosa Plastics Corp. v. Presidio Engrs. & Contractors, Inc., 960 S.W.2d 41, 47 (Tex.1998). 43 See Miller v. Puritan Fashions Corp., 516 S.W.2d 234, 238–39 (Tex.Civ.App.—Waco 1974, writ ref'd n.r.e.). 44 See Mewbourne Oil Co. v. Blackburn, 793 S.W.2d 735, 737 (Tex.App.—Amarillo 1990, orig. proceeding).
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Guardian Royal Exchange Assur., Ltd. v. English China..., 815 S.W.2d 223 (1991) 59 USLW 2547
Nature, number, frequency, and extent of contacts and activities KeyCite Yellow Flag - Negative Treatment Exercise of personal jurisdiction over Declined to Extend by Clark v. Noyes, Tex.App.-Dallas, January 13, 1994 nonresident defendant is proper when contacts proximately result from actions of nonresident 815 S.W.2d 223 defendant purposely directed toward forum state Supreme Court of Texas. which creates substantial connection with forum state. V.T.C.A., Civil Practice & Remedies Code GUARDIAN ROYAL EXCHANGE § 17.042; U.S.C.A. Const.Amends. 5, 14.
ASSURANCE, LTD., Petitioner, v. 52 Cases that cite this headnote ENGLISH CHINA CLAYS, P.L.C. et al., Respondent.
[3] Constitutional Law No. C–8367. | Feb. 27, 1991. | Non-residents in general Rehearing Overruled Sept. 11, 1991.
Courts English company and American subsidiaries brought action Purpose, intent, and foreseeability; against English insurer who had issued policy to English purposeful availment company. The District Court Number 25, Gonzales County, While “foreseeability” is important Gus J. Strauss, J., granted insurer's special appearance and consideration in deciding whether nonresident dismissed cause. Appeal was taken. The Corpus Christi defendant had purposely established “minimum Court of Appeals, Thirteenth Judicial District, 762 S.W.2d contacts” with forum state so that personal 927, Noah Kennedy, J., reversed and remanded for trial. jurisdiction could be exercised over defendant Appeal was taken. The Supreme Court, Hightower, J., held without offending due process, “foreseeability” that it would be inconsistent with federal constitutional is not necessarily determinative. V.T.C.A., Civil requirements of due process for Texas courts to assert in Practice & Remedies Code § 17.042; U.S.C.A. personam jurisdiction over insurer. Const.Amends. 5, 14.
Reversed. 164 Cases that cite this headnote
Mauzy, J., dissented and issued an opinion. [4] Constitutional Law Insurers and insurance Courts West Headnotes (12) Insurers and insurance When nonresident defendant is insurance company, court should consider insurer's [1] Courts awareness that it was responsible to cover Actions by or Against Nonresidents, losses arising from substantial subject of Personal Jurisdiction In; “Long-Arm”
insurance regularly present in forum state, Jurisdiction and nature of particular insurance contract Texas long-arm statute reaches as far as federal and its coverage, when determining whether constitutional requirements of due process will defendant had purposely established “minimum allow. V.T.C.A., Civil Practice & Remedies contacts” with forum state such that personal Code § 17.042; U.S.C.A. Const.Amends. 5, 14.
jurisdiction could be exercised over defendant 97 Cases that cite this headnote without offending due process. V.T.C.A., Civil Practice & Remedies Code § 17.042; U.S.C.A. Const.Amends. 5, 14.
[2] Courts
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Guardian Royal Exchange Assur., Ltd. v. English China..., 815 S.W.2d 223 (1991) 59 USLW 2547
19 Cases that cite this headnote 60 Cases that cite this headnote
[5] Courts [8] Constitutional Law Unrelated contacts and activities; general Non-residents in general jurisdiction Courts General jurisdiction may be asserted over Factors Considered in General nonresident defendant when cause of action does Courts not arise from or relate to nonresident defendant's Nature, number, frequency, and extent of purposeful conduct within forum state but there contacts and activities are continuous and systematic contacts between Forum state's regulatory interests are important nonresident defendant and forum state, but consideration in deciding whether exercise of when general jurisdiction is asserted, minimum personal jurisdiction over nonresident defendant contacts analysis is more demanding than when is reasonable, and state's regulatory interests personal jurisdiction is asserted and requires may establish reasonableness of jurisdiction showing of substantial activities in forum state.
upon lesser showing of minimum contacts V.T.C.A., Civil Practice & Remedies Code § then would otherwise be required, but state's 17.042.
regulatory interests alone are not sufficient to 222 Cases that cite this headnote provide basis for jurisdiction. V.T.C.A., Civil Practice & Remedies Code § 17.042; U.S.C.A. Const.Amends. 5, 14.
[6] Constitutional Law Non-residents in general 3 Cases that cite this headnote Once it has been determined that nonresident defendant purposely established minimum [9] Courts contacts with state, contacts are evaluated in light Unrelated contacts and activities; general of other factors to determine whether assertion of jurisdiction personal jurisdiction over nonresident defendant Courts comports with fair play and substantial justice.
Related contacts and activities; specific V.T.C.A., Civil Practice & Remedies Code § jurisdiction 17.042; U.S.C.A. Const.Amends. 5, 14.
For Texas to exercise jurisdiction over 229 Cases that cite this headnote nonresident defendant, nonresident must have purposely established “minimum contacts” with Texas, there must be “substantial connection”
[7] Constitutional Law between defendant and Texas arising from action Non-residents in general or conduct of defendant purposely directed When nonresident defendant is resident of toward Texas, when specific jurisdiction is another nation, district court, when determining asserted, cause of action must arise out whether exercise of personal jurisdiction over of or relate to defendant's contacts with nonresident defendant would comport with Texas, when general jurisdiction is alleged, due process, must consider procedural and there must be continuous and systematic substantive policies of other nations whose contacts between defendant and Texas, and interests are affected by assertion of jurisdiction, assertion of jurisdiction must comport with fair and consider unique burdens place upon play and substantial justice. V.T.C.A., Civil defendant who must defend itself in foreign legal Practice & Remedies Code § 17.042; U.S.C.A. system. V.T.C.A., Civil Practice & Remedies Const.Amends. 5, 14. Code § 17.042; U.S.C.A. Const.Amends. 5, 14.
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Guardian Royal Exchange Assur., Ltd. v. English China..., 815 S.W.2d 223 (1991) 59 USLW 2547
Related or affiliated entities; parent and 322 Cases that cite this headnote subsidiary Assertion of personal jurisdiction over English [10] Constitutional Law insurer which issued policy to English company Insurers and insurance with American subsidiaries—including Texas When determining whether assertion of corporations—would not comport with fair play personal jurisdiction over nonresident defendant and substantial justice; insurer was unaffiliated comports with fair play and substantial justice, with American companies, dispute was between court should consider burden on defendant, English insurer, and American insurers who interests of forum state in adjudicating dispute sought “reimbursement” for contribution to —including state's special regulatory interest settlement of wrongful death suits against in areas such as insurance, plaintiff's interest English company's subsidiaries, and Texas' in obtaining convenient and effective relief, interest in adjudicating dispute was diminished interstate judicial system's interest in obtaining since neither insurers were Texas consumers or most efficient resolution of controversies, insureds. V.T.C.A. Civil Practice & Remedies and shared interest of several states in Code § 17.042; U.S.C.A. Const.Amends. 5, 14. furthering fundamental substantive social 2 Cases that cite this headnote policies. V.T.C.A., Civil Practice & Remedies Code § 17.042; U.S.C.A. Const.Amends. 5, 14.
198 Cases that cite this headnote Attorneys and Law Firms [11] Courts *225 Gayle A. Boone, Edward S. Hubbard, Michael L.
Related or affiliated entities; parent and Dinnin and J. Clifford Gunter, III, Houston, for petitioner.
subsidiary English insurance company with office and Elizabeth J. Lindell, Donald D. Gavlick, San Antonio, for principal place of business in England respondent. purposefully established “minimum contacts” with Texas by issuing policy and endorsements providing coverage for third-party liability OPINION occurring anywhere in world that English company with American subsidiaries— HIGHTOWER, Justice. including Texas corporations—did business;
The issue before this court is whether it is consistent with insurer could reasonably anticipate significant the requirements of due process of law under the United risk that subsidiary would become involved States Constitution for Texas courts to assert in personam in disputes and litigation in many countries jurisdiction over Guardian Royal Exchange Assurance, in world including United States, and Ltd. (“Guardian Royal”), an English insurance company.
policy language acknowledged formation of Southern Clay Products, Inc. (“Southern Clay”), Gonzales significant relationship between insurer and each Clay Corporation (“Gonzales Clay”), English China Clays subsidiary. V.T.C.A., Civil Practice & Remedies Overseas Investments Ltd. (“Overseas Investments”) and Code § 17.042; U.S.C.A. Const.Amends. 5, 14.
English China Clays, P.L.C. (“English China”) 1 sued 5 Cases that cite this headnote Guardian Royal in Gonzales County, Texas. The trial court granted Guardian Royal's special appearance and dismissed the cause. The court of appeals reversed the judgment of the [12] Constitutional Law trial court and remanded the cause for trial. 762 S.W.2d 927.
Insurers and insurance We reverse the judgment of the court of appeals and affirm Courts the judgment of the trial court.
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Guardian Royal Exchange Assur., Ltd. v. English China..., 815 S.W.2d 223 (1991) 59 USLW 2547
Guardian Royal is an English insurance company with its The court of appeals reversed the judgment of the trial court office and principal place of business in England. English and remanded the cause for trial. 762 S.W.2d 927. China is an English company with American subsidiaries including Southern Clay and Gonzales Clay, which are Guardian Royal argues that it is inconsistent with federal Texas corporations. In 1980–81, Guardian Royal issued an constitutional requirements of due process for Texas courts to insurance policy including several endorsements 2 to English assert in personam jurisdiction over Guardian Royal in this China providing coverage for third party liability occurring cause. We agree. anywhere in the world English China and its subsidiary companies did business. These transactions occurred in [1] The Texas long-arm statute authorizes the exercise England between an English insurer and an English insured. of jurisdiction over nonresidents “doing business” in All acts concerning the negotiation, implementation and Texas. TEX.CIV.PRAC. & REM.CODE ANN. § 17.042 performance of the policy and endorsement (including (Vernon 1986). Although it lists particular acts which the payment of premiums) occurred in England between constitute “doing business,” the statute also provides that the Guardian Royal and English China. nonresident's “other acts” may satisfy the “doing business”
requirement. Id. See Schlobohm v. Schapiro, 784 S.W.2d Guardian Royal asserts that the coverage was extended to the 355, 357 (Tex.1990). The broad language of the long-arm American subsidiaries on the understanding that they would statute's “doing business” requirement permits the statute to obtain underlying liability insurance from American insurers. reach as far as the federal constitutional requirements of due Although the endorsement to the policy listed Southern process will allow. Schlobohm, 784 S.W.2d at 357; U–Anchor Clay and Gonzales Clay as located in the “U.S.A.”, there Advertising, Inc. v. Burt, 553 S.W.2d 760, 762 (Tex.1977). As was no indication that these subsidiaries were located in a result, we consider only whether it is consistent with federal constitutional requirements of due process for Texas courts Texas. 3 Furthermore, Guardian Royal did not know whether to assert in personam jurisdiction over Guardian Royal. See English China or its American subsidiaries did business in Helicopteros Nacionales de Colombia v. Hall, 466 U.S. 408, Texas or sent products to Texas. Subsequently Southern Clay 413–14, 104 S.Ct. 1868, 1871–72, 80 L.Ed.2d 404, 410–11 acquired liability coverage from United States Fire Insurance (1984).
Company (“U.S. Fire”) and others.
Federal constitutional requirements of due process limit the In 1982, an employee of Southern Clay was killed in an onpower of the state to assert personal jurisdiction over a the-job accident in Gonzales County, Texas. The deceased's nonresident defendant such as Guardian Royal. Helicopteros, family filed wrongful death lawsuits against the English 466 U.S. at 413–14, 104 S.Ct. at 1872. The United States China entities and others in federal and state courts in Texas.
Supreme Court divides the due process requirements into two The English China entities settled the lawsuits and U.S.
parts: (1) whether the nonresident defendant has purposely Fire contributed approximately $600,000 to the settlement.
established “minimum contacts” with the forum state; and Asserting that the policy covered English China and its (2) if so, whether the exercise of jurisdiction comports with subsidiaries only for liability in excess of the coverage “fair play and substantial justice.” Burger King Corp. v.
provided by American insurers, Guardian Royal declined to Rudzewicz, 471 U.S. 462, 475–76, 105 S.Ct. 2174, 2183–84, participate in or contribute to the settlement of the lawsuits.
85 L.Ed.2d 528, 542–43 (1985). See Helicopteros, 466 U.S.
The English China entities asserted that Guardian Royal at 414, 104 S.Ct. at 1872.
should “reimburse” U.S. Fire 4 for its settlement contribution on their behalf because Guardian Royal was the “primary insurer.” After *226 Guardian Royal refused to “reimburse” U.S. Fire, the English China entities sued Guardian Royal. I. Guardian Royal filed a special appearance pursuant to Rule Under the minimum contacts analysis, we must determine 120a of the Texas Rules of Civil Procedure asserting that it did whether the nonresident defendant has purposefully availed not have such minimum contacts with Texas as would allow itself of the privilege of conducting activities within the the court to exercise personal jurisdiction without offending forum state, thus invoking the benefits and protections of traditional notions of fair play and substantial justice. The trial its laws. Burger King, 471 U.S. at 474–75, 105 S.Ct. at court granted the special appearance and dismissed the cause.
2183. This “purposeful availment” requirement ensures that
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Guardian Royal Exchange Assur., Ltd. v. English China..., 815 S.W.2d 223 (1991) 59 USLW 2547
a nonresident defendant will not be haled into a jurisdiction 980 (1st Cir.1978). These authorities upheld the assertion based solely upon “random,” “fortuitous” or “attenuated” of personal jurisdiction over insurance companies based contacts or the “unilateral activity of another party or a third primarily upon “foreseeability.” 5 Rossman, 832 F.2d at 286– person.” Burger King, 471 U.S. at 475, 105 S.Ct. at 2183; 87 (automobile liability); Eli Lilly, 794 F.2d at 720–21 Helicopteros, 466 U.S. at 417, 104 S.Ct. at 1873; World– (pharmaceutical products); Colocotroni, 628 F.2d at 668– Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 298, 100 70 (maritime “vessels” such as oil tankers); American & S.Ct. 559, 567, 62 L.Ed.2d 490, 502 (1980). Furthermore, Foreign Insurance Ass'n, 575 F.2d at 981–82 (glass bottles). individuals must have fair warning that a particular activity “Foreseeability” was based upon the insurer's awareness may subject them to the jurisdiction of a foreign sovereign. “that it was responsible to cover losses arising from a Burger King, 471 U.S. at 472, 105 S.Ct. at 2182; Zac Smith substantial subject of insurance regularly present in” the & Co. v. Otis Elevator Co., 734 S.W.2d 662, 663 (Tex.1987). forum state, Colocotroni, 628 F.2d at 669 and American & Foreign Insurance Ass'n, 575 F.2d at 982, or the nature of [2] The exercise of personal jurisdiction is proper when the the particular insurance contract and coverage, 6 Rossman, contacts proximately result from actions of the nonresident 832 F.2d at 286 and Eli Lilly, 794 F.2d at 720–21. Thus, defendant which create a substantial connection with the when the nonresident defendant is an insurance company, the forum state. Burger King, 471 U.S. at 474–75, 105 S.Ct. at following factors, when appropriate, should be considered 2183–84. The substantial connection between the nonresident when determining whether the nonresident defendant has defendant and the forum state necessary for a finding of purposely established “minimum contacts” with the forum minimum contacts must come about by action or conduct of state: (a) the insurer's awareness that it was responsible to the nonresident defendant purposefully directed toward the cover losses arising from a substantial subject of insurance forum state. Burger King, 471 U.S. at 472–76, 105 S.Ct. at regularly present in the forum state; and (b) the nature of the 2182–84. However, “the constitutional touchstone remains particular insurance contract and its coverage.
whether the [nonresident] *227 defendant purposefully established ‘minimum contacts' in the forum State.” Burger The United States Supreme Court has refined the minimum King, 471 U.S. at 474, 105 S.Ct. at 2183.
contacts analysis into specific and general jurisdiction. When specific jurisdiction is asserted, the cause of action must arise [3] [4] Foreseeability is also an important consideration out of or relate to the nonresident defendant's contact with in deciding whether the nonresident defendant has purposely the forum state in order to satisfy the minimum contacts established “minimum contacts” with the forum state.
requirement. Helicopteros, 466 U.S. at 414 n. 8, 104 S.Ct.
However, “foreseeability” is not necessarily determinative at 1872 n. 8. See World–Wide Volkswagen, 444 U.S. at when considering whether the nonresident defendant 293–94, 100 S.Ct. at 565. However, the contact must have purposefully established “minimum contacts” with the forum resulted from the nonresident defendant's purposeful conduct state. Although not an independent component of the and not the unilateral activity of the plaintiff or others. See minimum contacts analysis, the concept of “foreseeability”
*228 Helicopteros, 466 U.S. at 417, 104 S.Ct. at 1873;
is implicit in the requirement that there be a “substantial World–Wide Volkswagen, 444 U.S. at 298, 100 S.Ct. at connection” between the nonresident defendant and Texas 567–68. Furthermore, the nonresident defendant's activities arising from action or conduct of the nonresident must have been “purposefully directed” to the forum and the defendant purposefully directed toward Texas. World–Wide litigation must result from alleged injuries that “arise out of Volkswagen, 444 U.S. at 297, 100 S.Ct. at 567; Burger or relate to” those activities. Burger King, 471 U.S. at 472, King, 471 U.S. at 474, 105 S.Ct. at 2183. “Foreseeability”
105 S.Ct. at 2182; Zac Smith & Co., 734 S.W.2d at 663.
is especially pertinent when the nonresident defendant is When specific jurisdiction is asserted, the minimum contacts an insurance company. See Rossman v. State Farm Mutual analysis focuses on the relationship among the defendant, the Ins. Co., 832 F.2d 282 (4th Cir.1987); Eli Lilly & Co. v.
forum and the litigation. Helicopteros, 466 U.S. at 414, 104 Home Ins. Co., 794 F.2d 710 (D.C.Cir.1986), cert. denied, S.Ct. at 1872; Schlobohm, 784 S.W.2d at 357.
479 U.S. 1060, 107 S.Ct. 940, 93 L.Ed.2d 990, 991 (1987); Commonwealth of Puerto Rico v. S.S. Zoe Colocotroni, [5] General jurisdiction may be asserted when the cause 628 F.2d 652 (1st Cir.1980), cert. denied, 450 U.S. 912, of action does not arise from or relate to the nonresident 101 S.Ct. 1350, 67 L.Ed.2d 336 (1981); American & defendant's purposeful conduct within the forum state but Foreign Insurance Ass'n v. Commercial Ins. Co., 575 F.2d there are continuous and systematic contacts between the
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Guardian Royal Exchange Assur., Ltd. v. English China..., 815 S.W.2d 223 (1991) 59 USLW 2547
nonresident defendant and the forum state. Helicopteros, calls for a court to consider the procedural and substantive 466 U.S. at 414–16, 104 S.Ct. at 1872–73; Schlobohm, policies of other nations whose interests are affected 784 S.W.2d at 357. When general jurisdiction is asserted, by the assertion of jurisdiction by the California court. the minimum contacts analysis is more demanding and The procedural and substantive interests of other nations requires a showing of substantial activities in the forum state. in a state court's assertion of jurisdiction over an Schlobohm, 784 S.W.2d at 357. alien defendant will differ from case to case. In every case, however, those interests, as well as the Federal Government's interest in its foreign relations policies, will be best served by a careful inquiry into the reasonableness II.
of the *229 assertion of jurisdiction in the particular case, [6] Once it has been determined that the nonresident and an unwillingness to find the serious burdens on an defendant purposefully established minimum contacts with alien defendant outweighed by minimal interests on the the forum state, the contacts are evaluated in light of part of the plaintiff or the forum State. “Great care and other factors to determine whether the assertion of personal reserve should be exercised when extending our notions jurisdiction comports with fair play and substantial justice. of personal jurisdiction into the international field.” United Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 113– States v. First National City Bank, 379 U.S. 378, 404, 15, 107 S.Ct. 1026, 1033–34, 94 L.Ed.2d 92, 105 (1987); 85 S.Ct. 528, 542, 13 L.Ed.2d 365 (1965) (Harlan, J., Burger King, 471 U.S. at 476, 105 S.Ct. at 2184. These factors dissenting). include (1) “the burden on the defendant,” (2) the interests of Asahi, 480 U.S. at 115, 107 S.Ct. at 1034–35 (emphasis the forum state in adjudicating the dispute, (3) “the plaintiff's in original). “The unique burdens placed upon one who interest in obtaining convenient and effective relief,” 7 (4) must defend oneself in a foreign legal system should “the interstate judicial system's interest in obtaining the have significant weight in assessing the reasonableness of most efficient resolution of controversies,” and (5) “the stretching the long arm of personal jurisdiction over national shared interest of the several States in furthering fundamental borders.” Asahi, 480 U.S. at 114, 107 S.Ct. at 1034. Thus, substantive social policies.” World–Wide Volkswagen, 444 when an “international dispute” is involved, the following U.S. at 292, 100 S.Ct. at 564; Burger King, 471 U.S. at factors, when appropriate, should also be considered: (a) 477, 105 S.Ct. at 2184; Asahi, 480 U.S. at 113, 107 S.Ct. at the unique burdens placed upon the defendant who must 1033–34. “These considerations sometimes serve to establish defend itself in a foreign legal system; and (b) the procedural the reasonableness of jurisdiction upon a lesser showing of and substantive policies of other nations whose interests are minimum contacts than would otherwise be required.” Burger affected as well as the federal government's interest in its King, 471 U.S. at 477, 105 S.Ct. at 2184. However, regardless foreign relations policies. of these factors, it must be established that the nonresident defendant purposely established minimum contacts with the [8] The state's regulatory interests are also an important forum state. Even if the nonresident defendant has purposely consideration in deciding whether the exercise of jurisdiction established minimum contacts with the forum state, the is reasonable. Other courts have recognized that the states exercise of jurisdiction may not be fair and reasonable under have a legitimate concern in areas in which the state possesses the facts in a particular case. Burger King, 471 U.S. at 477– a manifest regulatory interest such as insurance, securities 78, 105 S.Ct. at 2185. and hazardous and toxic waste. See Shaffer v. Heitner, 433 U.S. 186, 222–26, 97 S.Ct. 2569, 2589–91, 53 L.Ed.2d 683, [7] When the defendant is a resident of another nation, 708–12 (1977) (Brennan, J., concurring in part and dissenting the court must also consider the procedural and substantive in part). 8 Traditionally, regulation of the “business of policies of other nations whose interests are affected by the insurance” has been delegated to the states by the federal assertion of jurisdiction by a state court:
government. See McCarran–Ferguson Act, 15 U.S.C. § 1012 World–Wide Volkswagen also admonished courts to (1976); Reyes, Insurance Company Liquidation in Texas take into consideration the interests of the “several —“The Basics,” 51 TEX.B.J. 957 (1988). States,” in addition to the forum State, in the efficient judicial resolution of the dispute and the advancement The State of Texas has a special interest in regulating of substantive policies. In the present case, this advice certain areas such as insurance, and the Texas courts
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Guardian Royal Exchange Assur., Ltd. v. English China..., 815 S.W.2d 223 (1991) 59 USLW 2547
have implicitly recognized the role of that interest for (Tex.1982); Hall v. Helicopteros Nacionales de Colombia, purposes of determining personal jurisdiction. See First 638 S.W.2d 870, 872 (Tex.1982), rev'd on other grounds, National Bank of Libby, Montana v. Rector, 710 S.W.2d 466 U.S. 408, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984); Zac 100, 106 (Tex.App.—Austin 1986, writ ref'd n.r.e.); Texas Smith & Co., 734 S.W.2d at 664; Schlobohm, 784 S.W.2d Commerce Bank v. Interpol '80 Ltd., 703 S.W.2d 765, at 358. However, during the past 24 years, the parameters 773–74 (Tex.App.—Corpus Christi 1985, no writ); GRM v. of personal jurisdiction have evolved as the United States Equine Inv. & Management Group, 596 F.Supp. 307, 317 Supreme Court has continued to examine, develop and refine (S.D.Tex.1984); but see Beechem v. Pippin, 686 S.W.2d the permissible reach of federal due process. 10 Therefore, 356, 360–61 (Tex.App.—Austin 1985, no writ). We find under appropriate circumstances, the jurisdictional formula that a state's regulatory interest in a certain area or activity may be reviewed, and, if necessary, modified to ensure such as insurance is an important consideration in deciding compliance with federal constitutional requirements of due whether the exercise of jurisdiction is reasonable and that a process. This court recently acknowledged the necessity to state's regulatory interest may establish the reasonableness of review the jurisdictional formula, and, as a result, modified jurisdiction upon a lesser showing of minimum contacts than the second part of the formula to include the concept of would otherwise be required. However, a state's regulatory general jurisdiction. Schlobohm, 784 S.W.2d at 358. interest alone is not in and of itself sufficient to provide a basis for jurisdiction.
IV.
III. [9] Today, we further clarify the jurisdictional formula to ensure compliance with federal constitutional requirements In O'Brien v. Lanpar Co., 399 S.W.2d 340 (Tex.1966), this of due process. First, the nonresident defendant must have court adopted the following “formula” articulated by the purposefully established “minimum contacts” with Texas. 11 Supreme Court of Washington in *230 Tyee Construction Co. v. Dulien Steel Products, Inc., 62 Wash.2d 106, 381 P.2d There must be a “substantial connection” 12 between the 245, 251 (1963), to determine when assertion of jurisdiction nonresident defendant and Texas arising from action or over a nonresident defendant is proper: conduct of the nonresident defendant purposefully directed toward Texas. When specific jurisdiction is asserted, the (1) the nonresident defendant or foreign corporation must cause of action must arise out of or relate to the nonresident purposefully do some act or consummate some transaction defendant's contacts with Texas. When general jurisdiction in the forum state; is alleged, there must be continuous and systematic contacts between the nonresident defendant and Texas. General (2) the cause of action must arise from, or be connected jurisdiction requires a showing of substantial activities by the with, such act or transaction; and nonresident defendant in Texas. (3) the assumption of jurisdiction by the forum state must [10] *231 Second, the assertion of personal jurisdiction not offend traditional notions of fair play and substantial must comport with fair play and substantial justice. In this justice, consideration being given to the quality, nature, inquiry, it is incumbent upon the defendant to present “a and extent of the activity in the forum state, the relative compelling case that the presence of some consideration convenience of the parties, the benefits and protection of would render jurisdiction unreasonable.” Burger King, 471 the laws of the forum state afforded the respective parties, U.S. at 477, 105 S.Ct. at 2185; see also Zac Smith & Co., 734 and the basic equities of the situation.
S.W.2d at 664. 13 The following factors, when appropriate, O'Brien v. Lanpar Co., 399 S.W.2d at 342. This jurisdictional should be considered: (1) the burden on the defendant; (2) formula 9 was designed in an effort to ensure compliance the interests of the forum state in adjudicating the dispute with the federal constitutional requirements of due process. (including the state's special regulatory interest in areas Schlobohm, 784 S.W.2d at 358. Since 1966, this court has such as insurance); (3) the plaintiff's interest in obtaining dutifully repeated this jurisdictional formula. See, e.g., U– convenient and effective relief; (4) the interstate judicial Anchor Advertising, 553 S.W.2d at 762; Siskind v. Villa system's interest in obtaining the most efficient resolution of Foundation for Education, Inc., 642 S.W.2d 434, 436
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Guardian Royal Exchange Assur., Ltd. v. English China..., 815 S.W.2d 223 (1991) 59 USLW 2547
controversies; and (5) the shared interest of the several states [11] We must first determine whether Guardian Royal in furthering fundamental substantive social policies. purposefully established “minimum contacts” with Texas; in other words, whether there was a “substantial connection”
Only in rare cases, however, will the exercise of jurisdiction between Guardian Royal and Texas arising from action or not comport with fair play and substantial justice when the conduct of Guardian Royal purposefully directed toward nonresident defendant has purposefully established minimum Texas. The policy and endorsements provided coverage contacts with the forum state. See Burger King, 471 U.S. at for third party liability occurring anywhere in the world 477–78, 105 S.Ct. at 2185; see also Schlobohm, 784 S.W.2d at English China did business. Among other things, the policy 358 (“it has become less likely that the exercise of jurisdiction stated that “[t]he words ‘The Insured’ wherever they appear will fail a fair play analysis.”). 14 The stringent standard to be shall apply to each party described in the Schedule as applied is set forth in Burger King: *232 if a separate insurance had been issued to each....” 15 The endorsements to the policy (1) extended coverage to English China's subsidiaries including Southern Clay and [W]here a defendant who purposefully has directed his Gonzales Clay, (2) extended the definition of “Insured” to activities at forum residents seeks to defeat jurisdiction, include any associated and subsidiary company of English he must present a compelling case that the presence China anywhere in the world, and (3) deleted the policy's of some other considerations would render jurisdiction geographical limits. Furthermore, under these facts and unreasonable. Most such considerations usually may be circumstances, it is apparent that the nature of the insurance accommodated through means short of finding jurisdiction contract between Guardian Royal and English China and unconstitutional. For example, the potential clash of the its coverage are sufficient to establish that Guardian Royal forum's law with the “fundamental substantive social purposefully established “minimum contacts” with Texas. 16 policies” of another State may be accommodated through As the insurer of English China and its approximately 120 application of the forum's choice-of-law rules. Similarly, a subsidiary companies located in many countries in the world defendant claiming substantial inconvenience may seek a including the United States and the issuer of an insurance change of venue.
policy providing coverage for third party liability occurring 471 U.S. at 477, 105 S.Ct. at 2185 (emphasis added)
anywhere in the world English China and its subsidiary (footnotes omitted); see also Zac Smith & Co., 734 companies did business, Guardian Royal could reasonably S.W.2d at 664 (quoting same language). Nor is distance anticipate the significant risk (if not the probability) that a alone ordinarily sufficient to defeat jurisdiction: “modern subsidiary would become involved in disputes and litigation transportation and communication have made it much less in many countries in the world including any state in the burdensome for a party sued to defend himself in a State United States. In addition, Guardian Royal could reasonably where he engages in economic activity.” McGee, 355 U.S.
anticipate the significant risk that an insurance coverage at 223, 78 S.Ct. at 201.
dispute or question with a subsidiary would arise concerning the litigation brought in one of many countries including any V. state in the United States. Furthermore, the policy language that “[t]he words ‘The Insured’ wherever they appear shall In applying the jurisdictional formula to a particular case, the apply to each [subsidiary] ... as if a separate insurance facts must be carefully weighed and mechanical application [policy] had been issued to each [subsidiary]” acknowledges of any test, including the Texas formula, must be avoided. the formation of a significant relationship between Guardian Schlobohm, 784 S.W.2d at 358. See Burger King, 471 U.S. Royal and each subsidiary including Southern Clay. Under at 477–78, 105 S.Ct. at 2185. In addition, Texas courts these facts and circumstances, we find that Guardian Royal should strive to utilize a realistic approach when applying purposefully established “minimum contacts” with Texas. the jurisdictional formula. See Burger King, 471 U.S. at 478– 79, 105 S.Ct. at 2185. The jurisdictional formula is a useful jurisdictional checklist which ensures that all aspects of the necessary analysis have been considered. See Schlobohm, 784 VI. S.W.2d at 358.
[12] Second, we must determine whether the assertion of personal jurisdiction comports with fair play and substantial justice. In making this determination, the following factors,
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Guardian Royal Exchange Assur., Ltd. v. English China..., 815 S.W.2d 223 (1991) 59 USLW 2547
when appropriate, should be considered: (1) the burden insurers. Under these facts and circumstances, we find that on the defendant; (2) the interests of the forum state the assertion of personal jurisdiction over Guardian Royal in adjudicating the dispute; (3) the plaintiff's interest in is unreasonable and does not comport with fair play and obtaining convenient and effective relief; (4) the interstate substantial justice. Accordingly, we hold that it is inconsistent judicial system's interest in obtaining the most efficient with federal constitutional requirements of due process for resolution of controversies; and (5) the shared interest of the Texas courts to assert in personam jurisdiction over Guardian several states in furthering fundamental substantive social Royal in this cause. policies. 17 World–Wide Volkswagen, 444 U.S. at 292, 100 S.Ct. at 564; Burger King, 471 U.S. at 477, 105 S.Ct. at 2184; For the reasons explained herein, we reverse the judgment of Asahi, 480 U.S. at 113, 107 S.Ct. at 1033–34. After a careful the court of appeals and affirm the judgment of the trial court. analysis of these factors, we conclude that the assertion of personal jurisdiction over Guardian Royal is unreasonable.
MAUZY, J., dissents.
Requiring Guardian Royal, an English insurer, to submit its dispute with its English insured to a foreign nation's judicial system is burdensome. All acts concerning the MAUZY, Justice, dissenting. negotiation, implementation and performance of the policy I respectfully dissent. The pertinent inquiry in this due process and endorsements (including the payment of premiums) analysis is whether, based upon the conduct of Guardian occurred in England. Frequently the interests of the forum Royal, it would have been reasonably foreseeable that the state and the plaintiff will justify the severe burden placed Company would be “haled into court” in Texas. See, World– upon the nonresident defendant. See Asahi, 480 U.S. at 114, Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 107 S.Ct. at 1033. In this case, however, the interests of S.Ct. 559, 567, 62 L.Ed.2d 490 (1980) An insurer should Texas in adjudicating the dispute and the English China foresee being sued in any jurisdiction in which its insured entities in obtaining convenient and effective relief are has substantial contacts. Eli Lilly and Co. v. Home Ins. Co. minimal. Like California, Texas “has a manifest interest in 794 F.2d 710, 721 (D.C.Cir.1986), cert. denied, 479 U.S. providing *233 effective means of redress for its residents 1060, 107 S.Ct. 940, 93 L.Ed.2d 990, 991 (1981). In the when their insurers refuse to pay claims. These residents endorsements to the English China policy, Guardian Royal would be at a severe disadvantage if they were forced to extended coverage to the Texas subsidiaries Southern Clay follow the insurance company to a distant State in order and Gonzales Clay, extended the definition of “Insured” to hold it legally accountable.” McGee, 355 U.S. at 223, to include any subsidiary of English China anywhere in 78 S.Ct. at 201. However, this is a dispute between two the world, and specifically deleted the policy's geographical insurers—Guardian Royal and U.S. Fire as subrogee to the limits. Clearly, Guardian Royal should have foreseen being rights of the English China entities. Among other things, “haled into court” in a jurisdiction where English China U.S. Fire is seeking “reimbursement” for its contribution to subsidiaries are located. the settlement of the wrongful death lawsuits against the English China entities. The family of the deceased employee Insurance companies offer broad-based coverage to induce of Southern Clay has been compensated and the English customers to buy policies and pay higher premiums for them. China entities, the insureds, were defended and indemnified. Substantial financial benefits may accrue to companies which Thus, in reality, U.S. Fire is the real party in interest offer such policies. If Guardian Royal had desired to avoid and neither the family of the deceased employee nor the suit in Texas, it could have refused to insure entities located English China entities have an interest in the outcome of in Texas and refused to provide coverage for acts occurring this lawsuit. In addition, since Guardian Royal and U.S. Fire in Texas. As was the case in Rossman v. State Farm Mutual are neither Texas consumers nor insureds, Texas' interest Auto Ins. Co., 832 F.2d 282 (4th Cir.1987), Guardian Royal's in adjudicating the dispute (including its special interest willingness to being haled into court in a foreign state was in regulating insurance) is considerably diminished. While an express, and very marketable, feature of its policy. Id. at Texas “has a manifest interest in providing effective means 286. The company's contacts with the state of Texas cannot of redress for its residents when their insurers refuse to be viewed as “random” or “fortuitous.” Since Guardian Royal pay claims,” Texas does not have a compelling interest in purposefully availed itself of the privilege of conducting providing a forum for resolution of disputes between these business with English China and its Texas subsidiaries, it
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in the shoes” of his subrogor. Fox v. Kroeger, 119 Tex.
now has the burden of presenting “a compelling case that 511, 35 S.W.2d 679, 681 (Tex.1931). This holding extends the presence of some other considerations would render to procedural as well as substantive matters. See Seale v.
jurisdiction unreasonable.” Burger King Corp. v. Rudzewicz, Hudgens, 538 S.W.2d 459, 460 (Tex.Civ.App.—San Antonio 471 U.S. 462, 477, 105 S.Ct. 2174, 2185, 85 L.Ed.2d 528, 1976, writ dism'd) (venue). The result here should be no 543–44 (1985). 1 different than if Gonzales Clay and Southern Clay brought this lawsuit directly, rather than as subrogees. Texas has *234 There is no such compelling case here. In determining an interest in encouraging subrogation since it facilitates reasonableness of the exercise of jurisdiction in a case, the recovery of injured plaintiffs and functions to distribute the court should evaluate several factors. The court must consider incidence of loss in accordance with responsibility for the the burden on the defendant, the interests of the forum state, loss. Considering Guardian Royal's purposeful contacts with and the plaintiff's interest in obtaining relief. Asahi Metal the state, it cannot be said that the exercise of jurisdiction does Industry Co. v. Superior Court of California, 480 U.S. 102, not comport with fair play and substantial justice. I would 113–115, 107 S.Ct. 1026, 1033–34, 94 L.Ed.2d 92, 105 affirm the decision of the court of appeals.
(1987). The insured subsidiaries in this case, Southern Clay and Gonzales Clay are Texas corporations and their principal places of business are in Texas. Texas has a manifest interest All Citations in providing a forum for its residents. The fact that United States Fire Insurance Company subrogated to the interests 815 S.W.2d 223, 59 USLW 2547 of the insured should not be relevant. A subrogee “stands
Footnotes 1 In this opinion these parties are collectively referred to as the “English China entities.” 2 The endorsements substantially altered the terms of the original policy. Among other things, the endorsements (1)
extended coverage to English China's subsidiaries including Southern Clay and Gonzales Clay, (2) extended the definition of “Insured” to include any associated or subsidiary company of English China anywhere in the world, and (3) deleted the policy's geographical limits.
3 Of approximately 120 subsidiaries of English China identified in the endorsement, only 9 subsidiaries were located in the United States.
4 As a result of the settlement, U.S. Fire has been subrogated to the rights of the English China entities in this cause.
Therefore, U.S. Fire is the real party in interest.
5 These authorities also considered the insurer's ability to protect itself based upon, among other things, its power to limit the coverage to specific jurisdictions and by charging higher premiums. Rossman, 832 F.2d at 287; Eli Lilly, 794 F.2d at 721; Colocotroni, 628 F.2d at 669–70. However, while an insurer may undoubtedly protect itself by limiting coverage to specific jurisdictions and charging higher premiums, this is irrelevant in determining whether the insurer purposefully established “minimum contacts” with the forum state.
6 “As an automobile liability insurer, Consolidated [the insurer] could anticipate the risk that its clients would travel in their automobiles to different states and become involved in accidents and litigation there.” Rossman, 832 F.2d at 286. The insurers “knew that their insured, Lilly, distributed its [pharmaceutical] products nationwide” and “therefore were aware that Lilly was likely to be sued in any jurisdiction in the nation....” Eli Lilly, 794 F.2d at 720. Furthermore, “an insurer has a commercial interest in knowing how, and to what degree, an insured manufacturer has contacts with a forum state.” Id. at 721.
7 This factor was fully described in World–Wide Volkswagen as “the plaintiff's interest in obtaining convenient and effective relief ... at least when that interest is not adequately protected by the plaintiff's power to choose the forum....” 444 U.S. at 292, 100 S.Ct. at 564 (citations omitted).
8 A “State's valid substantive interests are important considerations in assessing whether it constitutionally may claim jurisdiction over a given cause of action.” Shaffer, 433 U.S. at 223, 97 S.Ct. at 2589 (Brennan, J., concurring in part and dissenting in part). “[S]tate courts have legitimately read their jurisdiction expansively when a cause of action centers in an area in which the forum State possesses a manifest regulatory interest.” 433 U.S. at 223, 97 S.Ct. at 2590 (Brennan, J., concurring in part and dissenting in part). See, e.g., McGee v. International Life Ins. Co., 355 U.S. 220, 223, 78 S.Ct. 199, 201, 2 L.Ed.2d 223, 226 (1957) (insurance regulation: “It cannot be denied that California has a manifest interest
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in providing effective means of redress for its residents when their insurers refuse to pay claims.”); O'Neil v. Picillo, 682 F.Supp. 706, 714 n. 1 (D.R.I.1988) (heavily regulated activities—hazardous/toxic substances); Wichita Federal Savings & Loan Ass'n v. Landmark Group, Inc., 674 F.Supp. 321, 326 (D.Kan.1987) (securities regulation: “It is also relevant to this inquiry that the defendants are engaging in a highly regulated activity, making it more foreseeable that they might have to litigate in a distant forum.”).
9 In Schlobohm, the second part of the jurisdictional formula was modified to incorporate the concept of general jurisdiction:
(2) The cause of action must arise from, or be connected with, such act or transaction. Even if the cause of action does not arise from a specific contact, jurisdiction may be exercised if the defendant's contacts with Texas are continuing and systematic. 784 S.W.2d at 358.
10 See, e.g., Shaffer v. Heitner, 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977); World–Wide Volkswagen Corp. v.
Woodson, 444 U.S. 286, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980); Helicopteros Nacionales de Colombia v. Hall, 466 U.S. 408, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984); Burger King Corp. v. Rudzewicz, 471 U.S. 462, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985); Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 107 S.Ct. 1026, 94 L.Ed.2d 92 (1987).
11 In analyzing minimum contacts, it is not the number, but rather the quality and nature of the nonresident defendant's contacts with the forum state that is important. Texas Commerce Bank v. Interpol '80 Ltd., 703 S.W.2d 765, 772 (Tex.App. —Corpus Christi 1985, no writ).
12 “So long as it creates a ‘substantial connection’ with the forum, even a single act can support jurisdiction.” Burger King, 471 U.S. at 475 n. 18, 105 S.Ct. at 2184 n. 18. See McGee, 355 U.S. at 223, 78 S.Ct. at 201.
13 We have previously held that the nonresident defendant must negate all bases of personal jurisdiction. Zac Smith & Co., 734 S.W.2d at 664; Siskind v. Villa Foundation for Education, Inc., 642 S.W.2d at 438.
14 Accord Asahi, 480 U.S. at 116, 107 S.Ct. at 1035 (Brennan, J., concurring) (“This is one of those rare cases in which ‘minimum requirements inherent in the concept of ‘fair play and substantial justice’ ... defeat the reasonableness of jurisdiction even [though] the defendant has purposefully engaged in forum activities.' Burger King Corp. v. Rudzewicz, 471 U.S. 462, 477–78, 85 L Ed 2d 528, 105 S Ct 2174 (1985).”).
15 The “Schedule” of the policy identified “THE INSURED” as “ENGLISH CHINA CLAYS LIMITED and Subsidiary Companies as within specified.”
16 Since we have determined that Guardian Royal has purposefully established “minimum contacts” with Texas based upon the nature of the insurance contract between Guardian Royal and English China and its coverage, it is not necessary to consider whether Guardian Royal was aware that it was responsible to cover losses arising from a substantial subject of insurance regularly present in Texas.
17 Since this is an international dispute and not a dispute between coequal sovereigns in our federal system, we need not consider the interstate judicial system's interest in obtaining the most efficient resolution of controversies or the shared interest of the several states in furthering fundamental substantive social policies.
1 It should be noted that the Uniform Interstate and International Procedure Act, 13 Uniform Laws Ann. 361 (Master Ed.1986), which has been adopted by several states provides:
§ 1.03 [Personal Jurisdiction Based Upon Conduct] (a) A court may exercise personal jurisdiction over a person, who acts directly or by an agent, as to a [cause of action] [claim for relief] arising from the person's .... (6) Contracting to insure any person, property, or risk located within this state at the time of contracting. Under the provisions of the act, Guardian Royal would have subjected itself to state court jurisdiction solely by reason of its contracting to insure Gonzales Clay and Southern Clay.
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Hodge v. Northern Trust Bank of Texas, N.A., 54 S.W.3d 518 (2001)
1 Cases that cite this headnote 54 S.W.3d 518 Court of Appeals of Texas, Eastland. [2] Banks and Banking Relation between bank and depositor in Darrell HODGE, Appellant, general v. Banks and Banking NORTHERN TRUST BANK Title to and Disposition of Deposits OF TEXAS, N.A., Appellee. Ordinarily, a “general deposit” of money with a bank creates a creditor-debtor relationship No. 11–00–00350–CV. | Aug. 16, 2001.
between the depositor and the bank; title to Beneficiary of certificate of deposit (CD) brought action the money passes to the bank, subject to the against bank, alleging bank wrongfully placed funds depositor's demand for payment. belonging to him in his mother's account and then seized 4 Cases that cite this headnote those funds by applying them against the mother's debts to bank. The District Court, Dallas County, David W. Evans, J., entered summary judgment for bank on limitations grounds. [3] Banks and Banking Beneficiary appealed. The Court of Appeals, McCall, J., Title to and Disposition of Deposits held that: (1) beneficiary's conversion action against bank Banks and Banking accrued when bank withdrew funds without requisite court Special deposits authorization, and two-year statute of limitations on action A “special deposit” of money with a bank began to run when beneficiary later reached majority; (2) creates a bailor-bailee relationship whereby the statute of limitations applicable to action for breach of bank keeps or transmits identical property or depository contract did not apply to action; and (3) CD was funds entrusted to it; the bank receives no title a special deposit, and not a negotiable instrument, and thus, to money deposited for a special purpose but six-year limitations period applicable to an action to enforce instead becomes responsible for the safekeeping, the obligation of a party to a certificate of deposit to pay the return, or disbursement of the money in question. instrument did not apply.
1 Cases that cite this headnote Affirmed.
[4] Banks and Banking Certificates of deposit West Headnotes (20) A certificate of deposit (CD) can be either a general or a special deposit, depending on the agreement between the bank and the depositor.
[1] Banks and Banking Certificates of deposit Cases that cite this headnote Banks and Banking Special deposits [5] Banks and Banking Certificate of deposit (CD) issued to mother Actions by Depositors or Others for “as next best friend to” her son was a “special Deposits deposit,” where money that funded the deposit Because a general deposit becomes the property resulted from settlement of personal injury of the bank, the depositor generally has no action lawsuit on behalf of son, and court ordered for conversion when the bank wrongfully pays that bank restrict account so as to prevent any out the deposit; a special deposit, on the other withdrawal of funds, except as ordered by the hand, remains the property of the depositor and court.
is subject to an action for conversion.
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Hodge v. Northern Trust Bank of Texas, N.A., 54 S.W.3d 518 (2001)
Limitation of Actions 1 Cases that cite this headnote Injuries to property Beneficiary of certificate of deposit (CD) had [6] Banks and Banking constructive notice of court records concerning Application of funds deposited by one as personal injury lawsuit on his behalf when he trustee was a minor, including an agreed settlement When a bank has knowledge that a general and court-ordered transfer of settlement funds to deposit is held by the depositor in trust for a third the CD account subject to specific instructions, party, the bank may not offset the trust funds and thus, beneficiary's conversion action against against the depositor's individual debt, and the bank accrued when bank withdrew funds without bank becomes liable for conversion if it does so. requisite court authorization, and two-year statute of limitations on action began to run when Cases that cite this headnote beneficiary later reached majority. V.T.C.A., Civil Practice & Remedies Code §§ 16.003(a), [7] Limitation of Actions 16.001(b).
Limitation as affected by nature or form of Cases that cite this headnote remedy in general Pleading [11] Limitation of Actions Sufficiency of amendment In general; what constitutes discovery A plaintiff may not recast his claim in The discovery rule delays the running of the language of another cause of action to limitations in cases in which the injury involved avoid limitations or compliance with mandatory is inherently undiscoverable.
statutes or to circumvent existing case law contrary to the plaintiff's position. 1 Cases that cite this headnote 2 Cases that cite this headnote [12] Limitation of Actions Fraud of person acting in official or [8] Conversion and Civil Theft fiduciary capacity Assertion of ownership or control in general Injuries from a breach of fiduciary duty are Conversion occurs when one person makes presumed to be inherently undiscoverable, for an unauthorized and wrongful assumption and limitations purposes.
exercise of dominion and control over the personal property of another, to the exclusion of 1 Cases that cite this headnote or inconsistent with the owner's rights.
Cases that cite this headnote [13] Judgment Presumptions and burden of proof [9] Limitation of Actions By filing a motion for summary judgment under Nature of statutory limitation traditional summary judgment rule, defendant in conversion action assumed plaintiff's burden Limitations, unlike other defenses, do not reach as to application of discovery rule and had the merits of a cause of action, they merely to conclusively negate the discovery rule by challenge the availability of a remedy.
establishing that plaintiff knew, or should have Cases that cite this headnote known with the exercise of reasonable diligence, of the alleged conversion. Vernon's Ann.Texas Rules Civ.Proc., Rule 166a(c); V.T.C.A., Civil [10] Limitation of Actions Practice & Remedies Code § 16.003(a).
Infancy
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Hodge v. Northern Trust Bank of Texas, N.A., 54 S.W.3d 518 (2001)
action alleging bank wrongfully withdrew funds Cases that cite this headnote from CD account without requisite authorization by court order. V.T.C.A., Bus. & C. §§ 3.602, [14] Judgment 3.118(e).
Personal knowledge or belief of affiant 1 Cases that cite this headnote Judgment Matters of fact or conclusions [18] Judgment Summary judgment affidavit containing mere Sufficiency of pleading conclusions or beliefs was insufficient to raise a genuine issue of material fact as to date While pleadings do not constitute summary beneficiary of certificate of deposit (CD) knew judgment evidence, a party may plead itself out of bank's alleged conversion of the funds, as of court by pleading facts that bar a claim. required to preclude summary judgment on Cases that cite this headnote limitations grounds. Vernon's Ann.Texas Rules Civ.Proc., Rule 166a(c).
[19] Banks and Banking Cases that cite this headnote Repayment in general When a bank makes a wrongful payment from [15] Notice a general deposit, there is no violation of the Constructive Notice deposit agreement because the bank has title to A person is charged with constructive notice the funds as the general depositor is simply a of the actual knowledge that could have been creditor of the bank; it is when the bank refuses acquired by examining public records. a demand for payment of the general deposit that the bank breaches its relationship with the Cases that cite this headnote depositor.
5 Cases that cite this headnote [16] Banks and Banking Time to sue and limitations [20] Banks and Banking By its terms, statute of limitations applicable Title to and Disposition of Deposits to action for breach of depository contract was limited to a “deposit contract without a maturity Banks and Banking date,” and thus did not apply to action against Special deposits bank alleging wrongful taking of funds in a Limitation of Actions certificate of deposit (CD), where CD had a Breach of contract in general specific maturity date. V.T.C.A., Finance Code Unlike a general deposit, the special deposit § 34.301(b). keeps title in the depositor, and the bank is subject to a specific set of instructions for Cases that cite this headnote payment; thus, when the bank wrongfully pays a special deposit, the wrong has occurred at that [17] Banks and Banking point, for limitations purposes.
Time to sue and limitations 3 Cases that cite this headnote Certificate of deposit (CD) issued to mother “as next best friend to” her son was a special deposit, and not a “negotiable instrument,” and thus, six- year limitations period applicable to an action to enforce the obligation of a party to a certificate of deposit to pay the instrument did not apply to
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received severe electrical burns while playing at his family's Attorneys and Law Firms apartment complex. The settlement awarded $45,000 to Murray, as Hodge's next friend, for the use and benefit of *520 David Kelley II, Loe, Warren, Rosenfield, Kaitcer & Hodge. The agreed judgment entered in the case ordered Hibbs, Fort Worth, for appellant.
that the money be placed into interest-bearing time deposits Patricia Lehtola, Lehtola & Associates, Dallas, for appellee. and that Murray obtain a court order before she made any withdrawals. In 1983, Murray obtained a court order allowing Panel consists of ARNOT, C.J., WRIGHT and McCALL, JJ. her to transfer the money to the predecessor in interest of Northern. 1 The transfer order stated, in pertinent part:
Opinion It is further ORDERED that the cashier's check or other McCALL, Justice. order representing the transfer of such funds shall bear the notation: “For account of Connie Murray, Individually and The principal issue in this summary judgment case is whether as Next Friend of Darrell Hodge, subject to restrictions and Darrell Hodge's claims against Northern Trust Bank of Texas, final judgment in Cause No. 79 CI 4822, 131st Judicial N.A. (Northern) are barred by limitations. Hodge alleges that District Court, Bexar County, Texas.”
in 1983 Northern wrongfully placed funds belonging to him in his mother's account and then seized those funds by applying It is further ORDERED that upon receipt of such funds, them against the mother's debts to Northern. We affirm the [Northern] shall create one or more interest bearing trial court's summary judgment for Northern. accounts for Connie Murray, as Next Friend of Darrell Hodge, each account to be restricted so as to prevent any withdrawal of funds, except as expressly authorized by Standard of Review Order of this Court.
Northern issued a certificate of deposit (CD) to “Connie A trial court must grant a motion for summary judgment if Murray as next Best Friend to Darrell Hodge” on April 26, the moving party *521 establishes that no genuine issue of 1983. The CD bore a maturity date of October 25, 1983. On material fact exists and that he is entitled to judgment as a October 25, 1983, Northern credited the individual account matter of law. TEX.R.CIV.P. 166a(c); Lear Siegler, Inc. v. of Murray with the proceeds from the CD and then debited Perez, 819 S.W.2d 470, 471 (Tex.1991). A trial court properly her account for the payment of several notes, each apparently grants summary judgment for a defendant if he establishes representing the individual debt of Murray to Northern. all the elements of an affirmative defense. American Tobacco Company, Inc. v. Grinnell, 951 S.W.2d 420, 425 (Tex.1997). Hodge reached majority on July 30, 1987. He did not make a Once the movant establishes his right to a summary judgment, demand on Northern for payment of the CD until March 12, the non-movant must come forward with evidence or law that 1999. Hodge filed his lawsuit on January 11, 2000. Northern precludes summary judgment. City of Houston v. Clear Creek contended in the trial court, and contends here, that Hodge's Basin Authority, 589 S.W.2d 671, 678–79 (Tex.1979). When only viable cause of action is for conversion and that his reviewing a summary judgment, the appellate court takes as suit is barred by the two-year statute of limitations set forth true evidence favorable to the non-movant and indulges every in TEX. CIV. PRAC. & REM. CODE ANN. § 16.003(a) reasonable inference and resolves any doubts in favor of the (Vernon Supp.2001). The trial court agreed with Northern non-movant. American Tobacco Company, Inc. v. Grinnell, and granted summary judgment against Hodge *522 on the supra at 425; Nixon v. Mr. Property Management Company, grounds of limitations. Hodge argues that the discovery rule Inc., 690 S.W.2d 546, 548–49 (Tex.1985). applies to toll the running of limitations on his conversion claim. Hodge also argues that he can assert causes of action for breach of depository contract and to enforce payment of the CD because those causes of action do not accrue and Summary Judgment Evidence limitations do not begin to run until demand for payment is In 1980, Hodge's mother, Connie Murray, individually and made. See TEX. BUS. & COM. CODE ANN. § 3.118(e) as Hodge's next friend, settled a lawsuit brought after Hodge (Vernon Supp.2001); see also TEX. FIN. CODE ANN. § 34.301(b) (Vernon Supp.2001).
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Hodge v. Northern Trust Bank of Texas, N.A., 54 S.W.3d 518 (2001)
[Northern] on notice that it was accepting this deposit for a special purpose, the trust character of these funds, that it was assuming certain fiduciary responsibilities, and/or that General Deposits versus Special Deposits Plaintiff was the true owner of these funds.
[1] [2] [3] [4] Texas law divides bank deposits into Northern contends that Hodge is estopped from contending “general deposits” and “special deposits.” See Bandy v.
that the CD represented anything but a special deposit and First State Bank, Overton, Texas, 835 S.W.2d 609, 618–19 that Hodge's real claim is for conversion which is barred by (Tex.1992); Hudnall v. Tyler Bank and Trust Company, 458 limitations.
S.W.2d 183, 186 (Tex.1970). Ordinarily, a general deposit of money with a bank creates a creditor-debtor relationship [7] A plaintiff may not recast his claim in the language between the depositor and the bank. Title to the money passes of another cause of action *523 to avoid limitations or to the bank, subject to the depositor's demand for payment.
compliance with mandatory statutes or to circumvent existing Bandy v. First State Bank, Overton, Texas, supra at 618– case law contrary to the plaintiff's position. See Earle v.
19, n. 4; Mesquite State Bank v. Professional Investment Ratliff, 998 S.W.2d 882, 893 (Tex.1999)(essence of plaintiff's Corporation, 488 S.W.2d 73, 75 (Tex.1972); City Nat. Bank claim was that defendant was negligent by not conforming of Bryan v. Gustavus, 130 Tex. 83, 106 S.W.2d 262 (1937). A to the applicable standard of care despite labeling claims as “special deposit” creates a bailor-bailee relationship whereby DTPA causes of action); In re Kimball Hill Homes Texas, the bank keeps or transmits identical property or funds Inc., 969 S.W.2d 522, 526 (Tex.App.—Houston [14th Dist.]
entrusted to it. The bank receives no title to money deposited 1998, orig. proceeding)(nature of claim controls and plaintiff for a special purpose but instead becomes responsible for cannot, by artful pleading, recast claim to avoid adverse effect the safekeeping, return, or disbursement of the money in of statute); Martz v. Weyerhaeuser Company, 965 S.W.2d question. See Citizens National Bank of Dallas v. Hill, 505 584, 589 (Tex.App.—Eastland 1998, no pet'n). Despite his S.W.2d 246, 248 (Tex.1974). A CD can be either a general contentions, Hodge's underlying claim is for conversion.
or a special deposit, depending on the agreement between the bank and the depositor. Texas Bank and Trust Co. v. Spur Security Bank, 705 S.W.2d 349, 352 (Tex.App.—Amarillo 1986, no writ). It is clear from the court order that the CD in Conversion this case was a special deposit.
[8] [9] In its motion for summary judgment, Northern [5] [6] The designation of a deposit has great significance asserted that Hodge's claim was for conversion and that in an attempted action for conversion. Because a general Hodge's claim was barred by the two-year prescription period deposit becomes the property of the bank, the depositor has set forth in TEX. CIV. PRAC. & REM. CODE ANN. § no action for conversion when the bank wrongfully pays out 16.003(a) (Vernon Supp.2001). Conversion occurs when one the deposit. A special deposit, on the other hand, remains person makes an unauthorized and wrongful assumption and the property of the depositor and is subject to an action for exercise of dominion and control over the personal property conversion. Houston National Bank v. Biber, 613 S.W.2d of another, to the exclusion of or inconsistent with the owner's 771, 774 (Tex.Civ.App.—Houston [14th Dist.] 1981, writ rights. Waisath v. Lack's Stores, Inc., 474 S.W.2d 444, 447 ref'd n.r.e.). There is an exception to the rule for general (Tex.1971). A cause of action for conversion, if it did occur, 2 deposits when the bank has knowledge that a general deposit accrued in 1983. Because Hodge was a minor at that time, is held by the depositor in trust for a third party. In that case, limitations did not begin to run until July 30, 1987, when he the bank may not offset the trust funds against the depositor's reached majority. TEX. CIV. PRAC. & REM. CODE ANN. individual debt, and the bank becomes liable for conversion if § 16.001(b) (Vernon Supp.2001). The discovery rule could it does so. See National Indemnity Company v. Spring Branch further delay limitations, if it applies. State Bank, 162 Tex. 521, 348 S.W.2d 528, 529 (1961). Hodge, in his first amended petition, pleaded that: [10] [11] [12] [13] Hodge argues that the discovery rule applies to his conversion claim. The discovery rule delays the The certificate of deposit ... clearly stated on its face running of limitations in cases in which the injury involved that the account was opened by “Connie Murray as Next is inherently undiscoverable. HECI Exploration Company v. Best Friend to Darrell Hodge.”... This notation clearly put Neel, 982 S.W.2d 881, 886 (Tex.1998). Hodge pleaded a
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cause of action for breach of fiduciary duty. Injuries from a breach of fiduciary duty are presumed to be inherently Hodge's Remaining Claims undiscoverable. Computer Associates International, Inc. v. Altai, Inc., 918 S.W.2d 453, 456 (Tex.1994). A plaintiff, Hodge's principal contention is that his causes of action for nevertheless, must be diligent in protecting his rights. At breach of depository contract and to enforce payment of a trial, Hodge would have the burden on the discovery rule certificate of deposit are not barred because these causes of issues; the presumption aids him in carrying that burden. By action did not begin to accrue until he made a demand on filing a motion for summary judgment under Rule 166a(c), Northern in 1999. These claims are simply an effort by Hodge Northern assumed that burden and had to conclusively negate to avoid his limitations problem. the discovery rule by establishing that Hodge knew, or should have known with the exercise of reasonable diligence, of the [16] In support of his breach of depository contract claim, alleged conversion. Burns v. Thomas, 786 S.W.2d 266, 267 Hodge relies upon Canyon Lake Bank v. New Braunfels (Tex.1990). Utilities, 638 S.W.2d 944, 949 (Tex.App.—Austin 1982, no writ). The only claim against the bank in Canyon Lake Bank [14] Northern introduced a 1992 report of the Dallas County was for breach of depository contract. Hodge directs our Adult Probation Department which stated that: attention to the following language by the court in Canyon Lake Bank:
The defendant [Hodge] mentioned he has had a large trust fund since he was Having concluded the trial court ten years old after he was burned in correctly interpreted suit to be an electrocution accident. He said his for the breach of a depository mother initially received the monthly contract, it necessarily follows payments but that he took them over the four-year statute of limitations when he was eighteen years old. of TEX.REV.CIV.STAT.ANN. arts.
342–701 (1973) and 5527 (1981)
Thus, Hodge knew of the fund in 1992. Hodge sought to applies. Where a deposit of money create a fact issue regarding *524 his knowledge through is made, the statute of limitations is an affidavit, but his affidavit contains mere conclusions or four years and does not begin to run beliefs which are insufficient to raise an issue of fact. See against the depositor until demand is Texas Division—Tranter, Inc. v. Carrozza, 876 S.W.2d 312, made and refused or an adverse claim 314 (Tex.1994); Brownlee v. Brownlee, 665 S.W.2d 111, 112 is asserted. Hinds v. Southwestern (Tex.1984).
Savings Association, 562 S.W.2d 4 (Tex.Civ.App.—Beaumont 1977, writ [15] Hodge also had constructive notice of the court ref'd n.r.e.).
records concerning his 1980 lawsuit. Those records include the agreed judgment establishing the fund, as well as the Hinds involved a general deposit, not a special deposit. court's transfer order quoted above. A person is charged Article 342–701 was a predecessor to TEX. FIN. CODE with constructive notice of the actual knowledge that could ANN. § 34.301(b). By its terms, Section 34.301(b) does have been acquired by examining public records. See HECI not apply to the CD in this case because Section 34.301(b) Exploration Company v. Neel, supra at 887; Mooney v. is limited to a “deposit contract without a maturity date.” Harlin, 622 S.W.2d 83, 85 (Tex.1981); “Moore” Burger, Section 34.301(b) would appear to apply to the ordinary Inc. v. Phillips Petroleum Company, 492 S.W.2d 934, 939 general deposit that has no maturity date, such as a checking (Tex.1972). account. Article 5527 was a predecessor to TEX. CIV. PRAC.
& REM. CODE ANN. § 16.004 (Vernon Supp.2001) which Limitations began to run on July 30, 1987, when Hodge includes suits for a debt and which would include the ordinary reached majority and expired two years later. See TEX. general deposit. As mentioned earlier, general deposits may CIV. PRAC. & REM. CODE ANN. § 16.003(a). The trial be held in trust by the depositor for a third party. Canyon Lake court properly granted summary judgment on Northern's Bank involved trustee accounts that the court considered to limitations defense to Hodge's conversion claims. 3 be general deposits. See *525 Upper Valley Aviation, Inc.
v. Mercantile National Bank, 656 S.W.2d 952 (Tex.App.—
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bearer or to order” before an instrument can be a negotiable Dallas 1983, writ ref'd n.r.e.), another general deposit case, instrument; here the CD was payable to “Connie Murray which cites Canyon Lake Bank for the proposition that an as next Best Friend to Darrell Hodge.” Any withdrawal of action for breach of depository contract (an action based on funds from the account had to be expressly authorized by debt) is appropriate where the deposit is a general deposit.
court order. The CD in this case was a special deposit; it was Upper Valley Aviation, Inc. v. Mercantile National Bank, not a negotiable instrument. Therefore, Sections 3.602 and supra at 955.
3.118(e) are not applicable. Hodge pleaded that the transfer order set forth restrictions on this deposit and that withdrawals [17] Hodge's argument supporting his claim to enforce were subject to approval by court order. While pleadings do payment of a certificate of deposit is more involved. Hodge not constitute summary judgment evidence, a party may plead pleaded that Northern cashed the CD in 1983; that, by cashing itself out of court by pleading facts that bar a claim. See the CD, Northern “acquired possession of the certificate of Texas Department of Corrections v. Herring, 513 S.W.2d 6, 9 deposit and [Hodge] was unable to present the certificate to (Tex.1974); Martz v. Weyerhaeuser Company, supra at 588.
[Northern] for payment”; that Hodge demanded payment on March 12, 1999; and that Northern refused to comply with [19] [20] Hodge fails to note the distinction between his demand in violation of TEX. BUS. & COM. CODE ANN.
a general account and a special account and the legal Chapters 3 and 4 (Vernon 1994 & Supp.2001). On appeal, consequences flowing from that categorization. A CD can be Hodge bases his argument on Chapter 3, and he does not refer either a general or a special deposit. Texas Bank and Trust to Chapter 4.
Co. v. Spur Security Bank, supra at 352. The cases relied upon by Hodge deal with general deposits and are not applicable.
[18] Hodge claims that Northern never “paid” the CD When a bank makes a “wrongful payment” from a *526 because any payment by Northern was in violation of TEX.
general deposit, there is no violation of the deposit agreement BUS. & COM. CODE § 3.602. Based on this premise, Hodge because the bank has title to the funds. The general depositor argues that TEX. BUS. & COM. CODE ANN. § 3.118 is is simply a creditor of the bank. It is when the bank refuses the statutory provision most directly applicable to this case.
a demand for payment of the general deposit that the bank Section 3.118(e) provides:
breaches its relationship with the depositor. Unlike a general An action to enforce the obligation of deposit, the special deposit keeps title in the depositor, and the a party to a certificate of deposit to pay bank is subject to a specific set of instructions for payment. the instrument must be commenced When the bank wrongfully pays a special deposit, the wrong within six years after demand for has occurred at that point. payment is made to the maker, but if the instrument states a due date and the maker is not required to pay before that This Court's Ruling date, the six-year period begins when a demand for payment is in effect and The summary judgment of the trial court is affirmed. the due date has passed.
As the State Bar Committee Comments following All Citations Section 3.118 note, Chapter 3 only applies to negotiable 54 S.W.3d 518 instruments. 4 TEX. BUS. & COM. CODE ANN. § 3.104(a) requires an unconditional promise or order 5 to pay money “to
Footnotes 1 We shall refer to Northern's predecessor in interest as “Northern” for purposes of simplicity. 2 This case is before us solely on the issue of Northern's limitations defense. Limitations, unlike other defenses, do not reach the merits of a cause of action, they merely challenge the availability of a remedy. Russell v. Ingersoll–Rand Company, 841 S.W.2d 343, 359 (Tex.1992); Robinson v. Weaver, 550 S.W.2d 18, 20 (Tex.1977). Thus, we do not decide whether Northern properly or improperly placed the proceeds from the CD into Murray's account or properly used them
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to offset her personal debt. Questions regarding whether Northern made proper payment of the CD are part of Hodge's claims or Northern's defenses.
3 Hodge's claim of breach of fiduciary duty is for conversion by the fiduciary. Even if TEX. CIV. PRAC. & REM. CODE ANN. § 16.004(a)(5) (Vernon Supp.2001) applied, the four-year period expired long before Hodge filed this suit.
4 The Uniform Commercial Code Comment following Section 3.118 points out that:
The only purpose of Section 3–118 is to define the time within which an action to enforce an obligation, duty, or right arising under Article 3 must be commenced. (Emphasis added)
5 “Order” means a written instruction to pay money signed by the person giving the instruction. TEX. BUS. & COM. CODE ANN. § 3.103(6). If payable to order, a negotiable instrument must be payable to order at the time it is issued or first comes into possession of a holder. Section 3.104(a)(1).
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Horowitz v. Berger, 377 S.W.3d 115 (2012)
377 S.W.3d 115 Holdings: The Court of Appeals, Tracy Christopher, J., held Court of Appeals of Texas, that:
Houston (14th Dist.).
[1] defective special appearance was cured by agent's filing Chana HOROWITZ, Appellant of a verified amended special appearance before the hearing v. on the matter;
Francisc BERGER; Tiberiu Roman; Sara Bergman;
Pinchas Bergman; Alexander Davidovich; Inna [2] agent did not waive her special appearance by filing a Davidovich; Aron Eherentrew; Ronnie Eilam; motion to compel discovery; Yitshak Eliyahu; Revital Eliyahu; Arnon Erez; Netanel Feiger; Noam Fishman; Hadas Fishman; [3] agent's failure to address alternative theory raised by Frank Freedland; Gisa Freedland; Israel Freedland; purchasers in her original appellate brief did not serve to abandon her arguments in remaining appellate proceedings;
Rivka Freedland; Shmuel Freedland; Tzipora Faige; Tova Shnitman; Naftali Friedlander;
[4] agent's conversation in another country about the real Michael Gitik; Daniel Glinert; D. Glinert Holdings, property in the forum state did not demonstrate the sort of Ltd.; Sagi Goldberg; Moshe Gotlib; Yuray Gross; contact with forum state that was necessary to support trial Eva Gross; Arie Guttman; Tzipora Hellmanm; court's exercise of personal jurisdiction; Henry Kalb; Miriam Raskin Kiryati; Bruria Klein; Avraham Krakover; Shulamit Krakover; Aharon [5] agent's act of convincing purchasers to enter purchase Laher; Sara Shterna–Lando; Nida Laohachai; agreement that referenced agreement to arbitrate claims Moshe Lavi; Malka Lavi; Amir Levi; Sandra Levi; in accordance with American arbitration rules did not Rivka Likvornik; Adina Mastbaum; Menahem demonstrate the sort of contact with forum state that Nagar; Gavriel Nesgi; Nahum Olschwang; Mishel was necessary to support trial court's exercise of personal jurisdiction; and Haim Papismedov; Moshe Peleg; Yossef Potash; Yaakov Rabinovits; Avraham Raizman; Hadasa [6] agent's previous visit to Texas condominiums was not Raizman; Elad Regev; Bien Shai; Liron Rukach;
a sufficient contact with forum state to support trial court's Shlomit Shaked; Iris Shany; Eliezer Spund; exercise of specific jurisdiction. Moshe Spund; Yadin Terem; Tzachi Naim; Nir Ventura; Dan Willner; Dganit Willner; Arie Chaim Yoffe; Gad Zeitlin; Rachel Zeitlinm; Ezra Kaim; Reversed and remanded. Dan Schwarz; and Zahava Schwarz, Appellees.
Kem Thompson Frost, J., issued concurring opinion.
No. 14–11–00576–CV. | June 21, 2012.
Synopsis Background: Nonresident real estate agent, against whom West Headnotes (31) purchasers of Texas condominiums brought action, entered special appearance to contest venue and personal [1] Constitutional Law jurisdiction. The 122nd District Court, Galveston County, Non-residents in general John A. Ellisor, Jr., J., denied special appearance upon Courts finding that agent had sufficient contacts with Texas to Contacts with forum state in general support the exercise of specific personal jurisdiction. Agent appealed. Requirements of long-arm statute are fulfilled if the defendant has certain minimum contacts with the forum state such that the maintenance of the suit does not offend traditional notions of
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Horowitz v. Berger, 377 S.W.3d 115 (2012)
fair play and substantial justice. V.T.C.A., Civil Practice & Remedies Code § 17.042. Cases that cite this headnote
Cases that cite this headnote [6] Courts Unrelated contacts and activities; general [2] Courts jurisdiction Purpose, intent, and foreseeability; Courts purposeful availment Related contacts and activities; specific Minimum contacts are sufficient to support the jurisdiction exercise of personal jurisdiction if they show Personal jurisdiction may be general or specific. that the nonresident defendant has purposefully availed herself of the privilege of conducting Cases that cite this headnote activities within the forum state, thus invoking the benefits and protections of its laws.
[7] Courts Cases that cite this headnote Unrelated contacts and activities; general jurisdiction A trial court properly may exercise general [3] Courts jurisdiction over a defendant whose contacts Purpose, intent, and foreseeability;
with the forum state have been continuous and purposeful availment systematic.
In determining whether the purposeful availment requirement is satisfied as to establish personal Cases that cite this headnote jurisdiction over nonresident defendant, courts consider only the defendant's contacts with the [8] Courts forum state, and not the unilateral activity of a Unrelated contacts and activities; general third party.
jurisdiction Cases that cite this headnote When general jurisdiction is at issue, only the defendant's pre-suit contacts are relevant.
[4] Courts Cases that cite this headnote Purpose, intent, and foreseeability;
purposeful availment [9] Courts To satisfy purposeful availment requirement for Related contacts and activities; specific personal jurisdiction, the nonresident defendant's jurisdiction contacts with the forum state must be purposeful When there is a substantial connection between rather than merely fortuitous.
the defendant's purposeful contacts with the Cases that cite this headnote forum state and the operative facts of the litigation, a trial court properly may exercise specific jurisdiction over the defendant.
[5] Courts Purpose, intent, and foreseeability; Cases that cite this headnote purposeful availment To satisfy purposeful availment requirement for [10] Courts personal jurisdiction, the nonresident defendant Allegations, pleadings, and affidavits must seek some benefit, advantage, or profit by Courts availing herself of the forum.
Presumptions and Burden of Proof as to Jurisdiction
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Horowitz v. Berger, 377 S.W.3d 115 (2012)
A defendant challenging a forum state court's exercise of personal jurisdiction must negate all [13] Appeal and Error jurisdictional bases alleged; thus, the plaintiff Cases Triable in Appellate Court has the initial burden of pleading sufficient facts Whether a trial court has personal jurisdiction to bring the nonresident defendant within the over a defendant is a question of law that is provisions of the long-arm statute. V.T.C.A., reviewed de novo. Civil Practice & Remedies Code § 17.042.
1 Cases that cite this headnote Cases that cite this headnote [14] Appeal and Error [11] Courts Proceedings preliminary to trial Allegations, pleadings, and affidavits When the trial court issues findings of fact If the plaintiff fails to satisfy the initial and conclusions of law in connection with its burden of pleading sufficient facts to bring ruling on special appearance contesting its the nonresident defendant within the provisions exercise of personal jurisdiction, the defendant of the long-arm statute, then proof of the may challenge the trial court's factual findings defendant's nonresidency is sufficient to negate for legal and factual sufficiency. personal jurisdiction. V.T.C.A., Civil Practice & Remedies Code § 17.042. 3 Cases that cite this headnote
Cases that cite this headnote [15] Appeal and Error Extent of Review [12] Constitutional Law On appeal of ruling on special appearance Non-residents in general contesting a trial court's exercise of personal Courts jurisdiction, the scope of review includes all Unrelated contacts and activities; general evidence in the record.
jurisdiction 3 Cases that cite this headnote Courts Related contacts and activities; specific jurisdiction [16] Appeal and Error If the plaintiff alleges sufficient jurisdictional Findings of Court or Referee facts to bring the nonresident defendant within When reviewing factual findings for legal the provisions of the long-arm statute, then sufficiency, the appellate court considers the the defendant can defeat jurisdiction by, for evidence in the light most favorable to the instance, introducing evidence contradicting the finding and indulges every reasonable inference plaintiff's factual allegations, showing that the that supports the challenged finding. defendant's contacts with the forum state fall Cases that cite this headnote short of purposeful availment, demonstrating that traditional notions of fair play and substantial justice are offended by the exercise of [17] Appeal and Error jurisdiction, or, if specific jurisdiction is at issue, Findings of Court or Referee showing that the plaintiff's claims do not arise When reviewing factual findings for legal from the defendant's contacts with the forum sufficiency, the appellate court credits favorable state. V.T.C.A., Civil Practice & Remedies Code evidence if a reasonable fact finder could and § 17.042. disregards contrary evidence unless a reasonable fact finder could not.
Cases that cite this headnote
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Horowitz v. Berger, 377 S.W.3d 115 (2012)
before the hearing on the matter; rather than 1 Cases that cite this headnote waiving special appearance, the amended special appearance related back, curing and [18] Appeal and Error replacing the original special appearance.
Sufficiency of Evidence in Support Vernon's Ann.Texas Rules Civ.Proc., Rule 120a. Appeal and Error 5 Cases that cite this headnote Total failure of proof When reviewing factual findings for legal [22] Appearance sufficiency, the appellate court will conclude General or Special Appearance that the evidence is legally insufficient to support the finding only if: (1) there is a complete Special appearance rule does not require a absence of evidence of a vital fact; (2) the defendant to forego the filing of other pleadings appellate court is barred by rules of law or of and motions in order to preserve the right to evidence from giving weight to the only evidence cure a defective special appearance. Vernon's offered to prove a vital fact; (3) the evidence Ann.Texas Rules Civ.Proc., Rule 120a. offered to prove a vital fact is no more than a 1 Cases that cite this headnote mere scintilla; or (4) the evidence establishes conclusively the opposite of the vital fact.
[23] Appearance Cases that cite this headnote Motions in general Nonresident real estate agent against whom [19] Appeal and Error purchasers of Texas condominiums brought Extent of Review action did not waive her special appearance Appeal and Error by filing a motion to compel discovery; by Clearly, plainly, or palpably contrary its express terms, motion to compel discovery was made subject to defendant's special In reviewing factual findings for factual appearance and her motion to dismiss for sufficiency, the appellate court considers all of forum non conveniens. Vernon's Ann.Texas the evidence and will set aside a finding only if it Rules Civ.Proc., Rule 120a(2).
is so against the great weight and preponderance of the evidence as to be clearly wrong and unjust. 3 Cases that cite this headnote 2 Cases that cite this headnote [24] Courts Construction and application of particular [20] Appeal and Error rules Cases Triable in Appellate Court Courts cannot ignore the plain meaning of Rules The trial court's conclusions of law are reviewed of Civil Procedure, which have the same effect de novo.
as statutes, and must construe the rules to ensure Cases that cite this headnote a fair and equitable adjudication of the rights of litigants.
[21] Appearance Cases that cite this headnote General or Special Appearance Nonresident real estate agent's initial filing [25] Appeal and Error of defective special appearance that did not To jurisdiction include a verification as required by special Nonresident real estate agent's failure to appearance rule was cured by her filing address, in her original appellate brief, of a verified amended special appearance plaintiff purchasers' alternative theory that
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Horowitz v. Berger, 377 S.W.3d 115 (2012)
denial of agent's special appearance was warranted due to waiver did not serve Cases that cite this headnote to abandon agent's right to oppose the alternative theory in remaining appellate [29] Courts proceedings; trial court expressly found that Nature, number, frequency, and extent of agent had sufficient contacts to support its contacts and activities exercise of specific jurisdiction, meaning trial Personal jurisdiction cannot be based on court impliedly rejected purchasers' alternative contractual provisions that pertain only to the theories, including the argument that agent conduct and not to the substance of the litigation, waived her special appearance.
and that do not demonstrate a tie between the Cases that cite this headnote nonresident defendant and the forum state.
Cases that cite this headnote [26] Courts Nature, number, frequency, and extent of [30] Courts contacts and activities Factors Considered in General Nonresident real estate agent's conversation in Courts another country about the real property in the Related contacts and activities; specific forum state did not demonstrate the sort of jurisdiction contact with forum state that was necessary A state is powerless to create jurisdiction over to support trial court's exercise of personal a nonresident by establishing a remedy for a jurisdiction over her, in action brought by private wrong and a mechanism to seek that purchasers of Texas condominiums.
relief; jurisdictional analysis always centers on 1 Cases that cite this headnote the defendant's actions and choices to enter the forum state and conduct business.
[27] Courts Cases that cite this headnote Nature, number, frequency, and extent of contacts and activities [31] Courts Personal jurisdiction cannot be sustained Related contacts and activities; specific solely on the content of the nonresident's jurisdiction communications outside of the forum state.
Nonresident real estate agent's previous visit to Cases that cite this headnote Texas condominiums, which were the subject of action brought by purchasers, was not a sufficient contact with forum state to support trial [28] Courts court's exercise of specific jurisdiction; there was Nature, number, frequency, and extent of no substantial relationship between agent's visit contacts and activities and the operative facts of the litigation.
Nonresident real estate agent's act of convincing purchasers to enter purchase agreement that 1 Cases that cite this headnote referenced agreement to arbitrate claims in accordance with American arbitration rules did not demonstrate the sort of contact with forum state that was necessary to support trial Attorneys and Law Firms court's exercise of personal jurisdiction over her, in action brought by purchasers of Texas *119 George Vie, III, Houston, for Appellant. condominiums; agent was not a party to any of the contracts and she did not prepare them.
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Horowitz v. Berger, 377 S.W.3d 115 (2012)
Danny M. Sheena, Jerry L. Elmore, Stephen M. Loftin, Victor • Horowitz is a citizen and resident of Israel. Weitao Zhao, Houston, Stretch R. Lewis Jr., Galveston, for Appellees. • She worked as an independent contractor for Founders Israel from August 2002 through June 26, 2005.
Panel consists of Justices FROST, BROWN, and CHRISTOPHER. • Under her contract with Founders Israel, she was required to follow its instructions. Founders Israel provided all sales tools, marketing materials, advertising, contracts, and other documents. She was not required to travel to OPINION Texas or perform any duties here.
TRACY CHRISTOPHER, Justice.
• She has never lived, worked, contracted, owned property, In this interlocutory appeal, Chana Horowitz challenges the or paid taxes in Texas. trial court's denial of her special appearance. We reverse and *120 • She has never maintained an office, address, remand with instructions to the trial court to dismiss Horowitz telephone number, or bank account in Texas.
from the suit for lack of personal jurisdiction.
• In her individual capacity, Horowitz has never entered into a contract or conducted any business with a Texas I. FACTUAL AND PROCEDURAL BACKGROUND business, citizen, or resident.
Chana Horowitz is an Israeli citizen residing in Israel, where • She does not advertise or provide any services in Texas. she worked as an independent contractor for the Israeli • She does not direct any mass mailings to Texas or have company, Founders T–M Real Estate & Investments, Ltd.
an ownership interest in any business located in Texas.
(“Founders Israel”). Most of the seventy-two plaintiffs also are Israeli; none resides in the United States. The plaintiffs • She is not licensed or regulated by any Texas authority. allege that Horowitz made representations to some of them in Israel 1 that persuaded them to purchase condominiums in a • She has never conducted any business in Texas or development referred to as “the Fairways Project” in League interacted with any of the plaintiffs in Texas. City, Texas from Roam Development Group, LP, a Texas • All of the contracts and documents she provided to limited partnership. Horowitz responded by filing a single the plaintiffs were prepared and provided by Founders document that included an unverified special appearance, Israel.
a general denial, and a motion to dismiss for forum non conveniens. She subsequently served discovery requests to • All of her meetings and communications with the the plaintiffs and filed a motion to compel fuller responses to plaintiffs took place in Israel. that discovery, and she later amended and verified her special appearance. • She did not attend any of the property closings, all of which occurred after she stopped working for Founders In the meantime, Founders Israel and two other defendants Israel. moved to compel the plaintiffs to arbitrate the claims against them. These defendants relied on an arbitration provision • Any payments by the plaintiffs would have been made to found in the Declaration of Condominium that applied to Founders Israel, who would then pay Horowitz and the the property that the plaintiffs had purchased. Based on other sales agents. Founders Israel paid her only in Israel. this motion, the plaintiffs argued that the trial court could • English is not Horowitz's native language and she never exercise specific jurisdiction over Horowitz because she advised any of the plaintiffs that she was giving them a caused the plaintiffs to execute documents that incorporated professional translation of any documents.
the Declaration of Condominium.
• It was not part of her job to train or advise other sales Horowitz supported her amended special appearance with agents. an affidavit in which she attested as follows:
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the forum state, thus invoking the benefits and protections of • As a reward for their services, Founders Israel sent its laws. See id. at 319, 66 S.Ct. at 160; Michiana Easy Livin'
Horowitz and other sales agents on a five-day trip to Country, Inc. v. Holten, 168 S.W.3d 777, 784 (Tex.2005). In Las Vegas. On the way, the agents stopped in Texas for determining whether the purposeful-availment requirement is one-and-one-half days and viewed the Fairways Project, satisfied, courts consider only the defendant's contacts with which is the property that is the subject of this suit. the forum state, and not the unilateral activity of a third party. Michiana, 168 S.W.3d at 785. The defendant's contacts • The only other time that Horowitz visited Texas was after with the forum state must be purposeful rather than merely she ceased working for Founders Israel in 2005.
fortuitous. Id. In addition, the defendant must seek some benefit, advantage, or profit by availing herself of the forum.
The plaintiffs opposed Horowitz's special appearance and Id.
supported their opposition with affidavits in which they attested that they executed documents in English and [6] [7] [8] [9] Personal jurisdiction may be “general”
in Hebrew; that English was not their native language;
or “specific.” Zinc Nacional, S.A. v. Bouche Trucking, Inc., that Horowitz told them the English documents contained 308 S.W.3d 395, 397 (Tex.2010). A trial court properly may information similar to the information contained in the exercise general jurisdiction over a defendant whose contacts Hebrew documents; and that they never were given copies of with the forum state have been continuous and systematic.
the Declaration of Condominium.
Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569, 575 (Tex.2007); BMC Software, 83 S.W.3d at 796. When general Before any of Horowitz's other motions were heard, the trial jurisdiction is at issue, only the defendant's pre-suit contacts court heard and denied her special appearance, concluding are relevant. PHC–Minden, L.P. v. Kimberly–Clark Corp., that Horowitz had sufficient contacts with Texas to support 235 S.W.3d 163, 169 (Tex.2007). On the other hand, when the exercise of specific personal jurisdiction. At Horowitz's there is a substantial connection between the defendant's request, the trial court also made findings of fact and purposeful contacts with Texas and the operative facts of conclusions of law in support of that ruling. In two appellate the litigation, a trial court properly may exercise specific issues, Horowitz challenges the legal and factual sufficiency jurisdiction over the defendant. Moki Mac, 221 S.W.3d at of the trial court's factual findings, and argues that the trial 585.
court erred in concluding that it properly could exercise specific jurisdiction over her.
[10] [11] [12] A defendant challenging a Texas court's personal jurisdiction must negate all jurisdictional bases alleged. BMC Software, 83 S.W.3d at 793; Nat'l Indus. Sand II. GOVERNING LAW Ass'n v. Gibson, 897 S.W.2d 769, 772 (Tex.1995). Thus, the plaintiff has the initial burden of pleading sufficient facts [1] [2] [3] [4] [5] The Texas Supreme Court has to bring the nonresident defendant within the provisions of interpreted the broad language of the Texas long-arm statute the Texas long-arm statute. BMC Software, 83 S.W.3d at to extend Texas courts' exercise of personal jurisdiction “ ‘as 793; Brocail v. Anderson, 132 S.W.3d 552, 556 (Tex.App.- far as the federal constitutional requirements of due process Houston [14th Dist.] 2004, pet. denied). If the plaintiff will permit.’ ” BMC Software Belgium, N.V. v. Marchand, fails to do so, then proof of the defendant's nonresidency 83 S.W.3d 789, 795 (Tex.2002) (quoting U–Anchor Adver., is sufficient to negate personal jurisdiction. Kelly v. Gen. Inc. v. Burt, 553 S.W.2d 760, 762 (Tex.1977)). Those Interior Constr., Inc., 301 S.W.3d 653, 658–59 (Tex.2010). requirements are fulfilled if the defendant has “certain If the plaintiff does allege sufficient jurisdictional facts, minimum contacts with [the forum state] such that the then the defendant can defeat jurisdiction in several ways. maintenance of *121 the suit does not offend ‘traditional The defendant can introduce evidence contradicting the notions of fair play and substantial justice.’ ” Int'l Shoe Co. v.
plaintiff's factual allegations, 2 or show that the defendant's Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158, 90 L.Ed.
contacts with the forum state “fall short of purposeful 95 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, 343, 85 L.Ed. 278 (1940)). Minimum contacts are availment”; 3 or demonstrate that “traditional notions of fair sufficient to support the exercise of personal jurisdiction if play and substantial justice are offended by the exercise of they show that the nonresident defendant has purposefully jurisdiction.” 4 If specific jurisdiction is at issue, then the availed herself of the privilege of conducting activities within
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defendant also can show that the plaintiff's claims do not arise from the defendant's contacts with Texas. 5 IV. ABSENCE OF WAIVER
As a threshold matter, the plaintiffs contend that we must affirm the trial court's ruling because Horowitz waived her III. STANDARD OF REVIEW special appearance or entered a general appearance. The [13] [14] [15] Whether a trial court has personal plaintiffs further point out that an appellant may not raise new jurisdiction over a defendant is a *122 question of law arguments in a reply brief, and contend that because Horowitz we review de novo. Moki Mac, 221 S.W.3d at 574; BMC failed to argue in her original appellate brief that she did Software, 83 S.W.3d at 794. When, as here, the trial court not waive her special appearance, she subsequently could issues findings of fact and conclusions of law in connection not challenge the plaintiffs' assertion that she did waive her with its special-appearance ruling, the defendant may special appearance. We address each of these arguments in challenge the trial court's factual findings for legal and factual turn. sufficiency. BMC Software, 83 S.W.3d at 794. On appeal, the scope of review includes all evidence in the record. Vosko v.
A. Cure of Defective Special Appearance Chase Manhattan Bank, N.A., 909 S.W.2d 95, 99 (Tex.App.-
[21] The plaintiffs' waiver arguments focus on the chain of Houston [14th Dist.] 1995, writ denied).
events that began when Horowitz initially filed her special appearance without including a verification as required by [16] [17] [18] [19] [20] We review the challenged the Texas Rules of Civil Procedure. See TEX.R. CIV. P.
factual findings by applying the same standards used in 120a. She instead filed a single unverified document that reviewing jury findings. Wiese v. Pro Am Servs., Inc., 317 incorporated her special appearance, a general denial, and a S.W.3d 857, 860 (Tex.App.-Houston [14th Dist.] 2010, no motion to dismiss for forum non conveniens. She then set the pet.) (citing Anderson v. City of Seven Points, 806 S.W.2d special appearance and the motion to dismiss for hearing, 791, 794 (Tex.1991)). When reviewing for legal sufficiency, and served the plaintiffs with requests for admission and we consider the evidence in the light most favorable to the interrogatories. Some of these requests and interrogatories are finding and indulge every reasonable inference that supports related to Horowitz's challenge to the trial court's exercise the challenged finding. See City of Keller v. Wilson, 168 of personal jurisdiction over her, but other requests concern S.W.3d 802, 827 (Tex.2005). We credit favorable evidence if the merits of the plaintiffs' claims. Before the date set for a reasonable factfinder could and disregard contrary evidence the hearing on Horowitz's special appearance, the plaintiffs unless a reasonable factfinder could not. Id. We will conclude served answers to the discovery, *123 and Horowitz filed that the evidence is legally insufficient to support the finding a motion in which she asked the trial court to overrule only if (a) there is a complete absence of evidence of a the plaintiffs' objections, deem certain matters admitted, and vital fact, (b) we are barred by rules of law or of evidence compel the plaintiffs to respond more fully to her discovery from giving weight to the only evidence offered to prove a requests. Finally, on the day originally set for the hearing vital fact, (c) the evidence offered to prove a vital fact is no on her special appearance, the plaintiffs filed a response more than a mere scintilla, or (d) the evidence establishes and Horowitz filed an amended special appearance that was conclusively the opposite of the vital fact. Id. at 810. In both verified and supported by her affidavit. The hearing reviewing for factual sufficiency, we consider all of the was reset at the plaintiffs' request, and the plaintiffs filed a evidence and will set aside a finding only if it is so against supplemental response in which they argued that (1) Horowitz the great weight and preponderance of the evidence as to be waived her special appearance; and (2) in any event, she had clearly wrong and unjust. Meehl v. Wise, 285 S.W.3d 561, 565 sufficient minimum contacts to subject her to the trial court's (Tex.App.-Houston [14th Dist.] 2009, no pet.) (citing Ortiz v.
jurisdiction.
Jones, 917 S.W.2d 770, 772 (Tex.1996)). We review the trial court's conclusions of law de novo. Greenfield Energy, Inc.
[22] We disagree with the plaintiffs' assertion that by v. Duprey, 252 S.W.3d 721, 730 (Tex.App.-Houston [14th this conduct, Horowitz waived her special appearance. By Dist.] 2008, no pet.).
filing a verified amended special appearance before the hearing on the matter, Horowitz cured her initial failure to verify the special appearance. Rule 120a expressly
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provides that if a special appearance is filed, “any other are not pleas, pleadings, or motions. See Exito, 142 S.W.3d at plea, pleading, or motion may be contained in the same 305 n. 11 (noting that the “pleadings” in a suit are the petition instrument or filed subsequent thereto without waiver of and answer, and a “motion” is an “ ‘application requesting a such special appearance; and may be amended to cure court to make a specified rule or order’ ”) (citing TEX.R. CIV. defects.” TEX.R. CIV. P. 120a (emphasis added). The P. 45 and quoting BLACK'S LAW DICTIONARY 1031 (7th plaintiffs' reading of the rule would make these two options ed.1999)). mutually exclusive, because a defendant who filed any other pleading or motion with or after a special appearance Further, Horowitz did not waive her special appearance by would, in effect, have caused any defects in the special filing a motion to compel discovery. By its express terms, the appearance to become incurable. We do not believe that motion was made subject to Horowitz's special appearance Rule 120a will bear this construction. See TEX.R. CIV. and her motion to dismiss for forum non conveniens. See Puri P. 1 (requiring that the Rules of Civil Procedure “shall be v. Mansukhani, 973 S.W.2d 701, 707 (Tex.App.-Houston given a liberal construction”); Dawson–Austin v. Austin, 968 [14th Dist.] 1998, no pet.) (holding that defendant did not S.W.2d 319, 322 (Tex.1998) ( “By ‘cure,’ the rule means to waive his special appearance by filing a motion for new restore the special appearance.... An amendment that adds trial subject to the special appearance). The motion to a verification cures the special appearance.”). The amended compel was not heard or decided before the trial court heard special appearance relates back, curing and replacing the and ruled on the special appearance. Cf. TEX.R. CIV. P. original special appearance. See TEX.R. CIV. P. 62 (“The 120a(2) (“Any motion to challenge the jurisdiction provided object of an amendment ... is to add something to, or withdraw for herein shall be heard and determined before a motion to something from, that which has been previously pleaded so transfer venue or any other plea or pleading may be heard.”) as to perfect that which may be deficient....”); TEX.R. CIV. (emphasis added); Xenos Yuen v. Fisher, 227 S.W.3d 193, P. 65 (explaining that, with limited exceptions inapplicable 199 (Tex.App.-Houston [1st Dist.] 2007, no pet.) (holding here, a substituted instrument takes the place of the original, that the defendant did not waive his special appearance by and the original “shall no longer be regarded as part of the filing a motion for sanctions that was made “subject to” and pleading in the record of the cause”). Thus, Rule 120a does in the alternative to his special appearance, and where the not require a defendant to forego the filing of other pleadings motion for sanctions was not heard or ruled upon). and motions in order to preserve the right to cure a defective special appearance. See Dennett v. First Cont'l Inv. Corp., 559 S.W.2d 384, 386 (Tex.Civ.App.-Dallas 1977, no writ) C. Absence of Briefing Waiver (“[I]n special appearances, ... the crucial focus is on the [25] Finally, the plaintiffs point out that they argued to the allowance of amendment, and the timing of the amendment trial court that Horowitz had waived her special appearance, is not determinative.”). and they contend that we must affirm because, in her original appellate brief, Horowitz failed to challenge this alternative basis for the trial court's ruling. Again, we disagree. Although B. Discovery and Related Dispute the plaintiffs argued in the trial court that there were several [23] [24] Horowitz also did not waive her special reasons to deny Horowitz's special appearance, we are not appearance by serving the plaintiffs with discovery requests. presented with a case in which the trial court failed to state the “[T]he plain language of Rule 120a requires only that a basis for its ruling or made findings that supported multiple special appearance be filed before any other ‘plea, pleading theories. To the contrary, the trial court expressly found that or motion.’ ” Exito Elecs. v. Trejo, 142 S.W.3d 302, 305 Horowitz had sufficient contacts to support its exercise of (Tex.2004) (per curiam) (explaining that a party does not specific jurisdiction. Thus, the trial court impliedly rejected waive a special appearance by first filing a Rule 11 the plaintiffs' alternative theories—including the argument agreement because the latter is not a “plea, pleading, or that Horowitz waived her special appearance. See Knight motion”). “Courts cannot ignore the plain meaning of the Corp. v. Knight, Nos. 14–11–00770–CV & 14–11–00994– Texas Rules of Civil Procedure, which have the same effect CV, 2012 WL 1059389, at *2–3 (Tex.App.-Houston [14th as statutes, and must construe the rules to ensure a fair and Dist.] Mar. 29, 2012, orig. proceeding) (noting *125 that equitable adjudication of the rights of litigants.” *124 Esty there was no finding of waiver where the argument was raised v. Beal Bank S.S.B., 298 S.W.3d 280, 297 (Tex.App.-Dallas in the trial court, but the trial court ruled on the special 6 appearance on its merits). Inasmuch as the trial court rejected 2009, no pet.). Interrogatories and requests for admission the plaintiffs' contention that Horowitz waived her special
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Horowitz v. Berger, 377 S.W.3d 115 (2012)
appearance, she had no reason to revisit that argument on purposefully availed herself of the privilege of conducting appeal. Compare TEX.R. CIV. P. 299 (“The judgment may business in the forum state, only her own conduct matters. not be supported upon appeal by a presumed finding upon See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474– any ground of recovery or defense, no element of which 75, 105 S.Ct. 2174, 2183, 85 L.Ed.2d 528 (1985) (explaining has been included in the findings of fact ....”) with Boyce that the purposeful-availment requirement ensures that a Iron Works, Inc. v. Sw. Bell Tel. Co., 747 S.W.2d 785, 787 nonresident will not be haled into a foreign jurisdiction (Tex.1988) (explaining that when there are favorable findings based on “ ‘[t]he unilateral activity of those who claim on alternative theories, the prevailing party may seek recovery some relationship’ ” with the defendant or as the result of under an alternative theory if the judgment is reversed on “ ‘random,’ ‘fortuitous,’ or ‘attenuated’ contacts.” (quoting appeal). We therefore may consider the merits of Horowitz's Hanson v. Denckla, 357 U.S. 235, 253, 78 S.Ct. 1228, 1239– challenge to the trial court's findings of fact and conclusions 40, 2 L.Ed.2d 1283 (1958))). Thus, language employed solely of law. by other defendants cannot support the trial court's exercise of specific jurisdiction *126 over Horowitz. Moreover, the other defendants' reliance on an arbitration clause is not an operative fact of the litigation. Jurisdiction cannot be based on V. FAILURE OF SPECIFIC JURISDICTION contractual provisions that pertain only to the conduct and not The trial court made twenty-nine findings of fact, and to the substance of the litigation, and that do not demonstrate although Horowitz challenges the sufficiency of the evidence a tie between the nonresident defendant and the forum state. to support some of the findings, she primarily argues that Rush v. Savchuk, 444 U.S. 320, 329, 100 S.Ct. 571, 578, 62 the findings, even if true, are insufficient to support the trial L.Ed.2d 516 (1980); Moki Mac, 221 S.W.3d at 584. court's exercise of specific jurisdiction. We agree.
Most of the trial court's remaining findings fall into even [26] [27] Seventeen of the factual findings concern weaker versions of the two categories we have just discussed, representations that Horowitz allegedly made to some of the i.e., those that concern Horowitz's role in persuading other nonresidents to execute sales documents in Israel for the plaintiffs in Israel. 7 But, jurisdiction cannot be sustained purchase of Texas real estate from a third party; and those solely on the content of the nonresident's communications that concern the connection between those documents and outside of the forum state. See Michiana, 168 S.W.3d at an arbitration provision relied on by other defendants. None 791 (observing that virtually all plaintiffs will allege that the of them constitutes purposeful availment of the privilege of communication was tortious and virtually all defendants will conducting activities in Texas.
deny wrongdoing). A conversation in another country about real property in the forum state is not itself a sufficient contact The findings concerning Horowitz's role in the allegedly to support the forum state's exercise of specific jurisdiction fraudulent transactions are as follows:
over the speaker. Moreover, Horowitz is not a party to any of the contracts that were the subject of the alleged (a) Horowitz, at the relevant time, was in the business of misrepresentations, and neither Horowitz nor the plaintiffs recruiting investors in Israel to invest in real estate in Texas with whom she spoke were Texas residents. See Peredo v. and the United States, including the property that is the M. Holland Co., 310 S.W.3d 468, 474 (Tex.App.-Houston subject of this suit (the “Fairways Project”). [14th Dist.] 2010, no pet.) (reversing the denial of special appearance by a nonresident who responded to inquiries by (b) Horowitz's actions were purposeful and taken with the Texas resident concerning contracts to which the nonresident goal in mind of recruiting Israeli investors to purchase real was not a party). property in Galveston County, Texas, namely the Fairways Project.
[28] [29] One finding concerns only the contentions that other defendants in this case made in their motion to (c) Among these investors are several plaintiffs (her “Client Plaintiffs”). While she was employed by co-Defendant compel arbitration, 8 and in another finding, the trial court Founders T–M Real Estate and Investments, Ltd., she was a quoted “[t]he purported arbitration language relied on by principal salesperson in Israel selling units in the Fairways other Defendants, which is contained in the Declaration of Project.
Condominium.” 9 But in determining whether Horowitz has
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Horowitz v. Berger, 377 S.W.3d 115 (2012)
... (z) Horowitz procured an arbitration provision that contains language for her protection, as the principal sales (t) She was instrumental in causing the sale documents to and marketing agent for the Fairways Project. be executed by the Client Plaintiffs.
It is undisputed that Horowitz did not prepare any of these ...
documents, and was not a party to any of these agreements;
(aa) Horowitz profited monetarily from defendants' real thus, even if true, these findings would not support the estate transactions with the Client Plaintiffs. exercise of personal jurisdiction in Texas because none constitutes a contact with Texas by Horowitz. Id.
...
[31] Of the trial court's twenty-nine findings of fact, only a (cc) Horowitz was an instrumental “but for” cause of portion of the following finding is both a contact with Texas the Client Plaintiffs executing the documents necessary to and supported by the record: purchase units at the Fairways Project.
(p) [Horowitz] visited the Fairways [30] These are the kind of findings that might be relevant Project personally, and informed the in addressing the merits of the plaintiffs' claims, but these Client Plaintiffs the same in an attempt facts, even if true, 10 are not contacts with Texas. As the to bolster her credibility when selling Texas Supreme Court has explained, facts that might justify units in the Fairways Project. the imposition of liability do not substitute for facts necessary to establish jurisdiction. “The mere existence of a cause In this statement, the trial court actually found two facts: first, of action does not automatically satisfy jurisdictional due that Horowitz visited the Fairways Project, and second, that process concerns. A state is powerless to create jurisdiction in an effort to bolster her credibility, Horowitz told some over a nonresident by establishing a remedy for a private of the plaintiffs that she had visited the project. The first wrong and a mechanism to seek that relief.” Kelly, 301 took place in Texas, and it is a contact with the forum state; S.W.3d at 660. To the contrary, “jurisdictional analysis the second took place in Israel, and as with the trial court's always centers on the defendant's actions and choices to other findings about Horowitz's alleged misrepresentations, enter the forum state and conduct business.” Id. (emphasis it is not a contact with the forum state. It instead is simply added). In contrast, each of the findings cited above concerns a representation made in Israel by one resident of Israel Horowitz's business in Israel. to another resident of that country. Thus, we need concern ourselves only with the trial court's finding that Horowitz With one exception, the remaining findings appear intended visited the Fairways Project. to link Horowitz to an arbitration provision invoked by the other defendants in the suit. These are as follows: We conclude, however, that Horowitz's visit to the Fairways Project is not a sufficient contact with Texas to support (v) The English sale documents incorporated by reference the trial court's exercise of specific jurisdiction. There is an arbitration provision, *127 which other sales[-]agent no substantial relationship between Horowitz's visit and the defendants are now seeking to enforce. operative facts of the litigation. See Moki Mac, 221 S.W.3d at 578. The plaintiffs asserted claims against Horowitz for (a)
...
fraud, (b) fraud in a real estate transaction, 11 (c) violations (y) Horowitz was the sales person and marketing agent of the Texas Theft Liability Act, 12 (d) breach of fiduciary who got the Customer Plaintiffs to execute the English duty, (e) negligent misrepresentation, (f) conversion, (g) language purchase agreement that contains reference to conspiracy to defraud, (h) breach of warranty of title, (i) the above arbitration provision. Said arbitration provision violations of the Texas Securities Act, 13 (j) violations of requires arbitration of all claims against sales personnel and marketing agents in accordance with “American” the Securities Exchange Act, 14 (k) unjust enrichment, (l ) Arbitration Association rules. defalcation, and (m) civil racketeering. Each of their claims concerns statements that Horowitz allegedly made or failed to
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make to some of the plaintiffs. It is undisputed, however, that S.W.2d 623, 627 (Tex.1996). This well-reasoned approach Horowitz interacted with the plaintiffs exclusively in Israel. enables appellate courts to dispose of cases on grounds fully vetted in the trial court even when the trial court did not base In concluding that these findings support the exercise of its ruling on those grounds. Today, this court should follow specific jurisdiction, the trial court seems to have relied on the high court's lead and hold that procedures analogous to the fact that the plaintiffs have alleged fraud in a real estate those announced in Cincinnati Life Ins. Co. v. Cates apply in transaction, and the real property at issue is located in Texas. the review of a trial court's ruling on a special appearance. Cf. Retamco Operating, Inc. v. Republic Drilling *128 Co., 278 S.W.3d 333, 341 (Tex.2009) (“[T]he real property itself The appellees/plaintiffs in today's case urged the trial court will also be an operative fact, or at the very least, will have to deny the appellant/defendant Chana Horowitz's special a substantial connection to the operative facts. Without an appearance on multiple grounds that included waiver and asset, no fraudulent transfer can occur....”). But unlike the the existence of minimum contacts justifying the exercise nonresident defendant in Retamco, Horowitz never owned the of personal jurisdiction based upon specific jurisdiction. The Texas real estate at issue. See also Michiana, 168 S.W.3d at trial court denied the special appearance, basing its ruling 787 (“It is true that in some circumstances a single contract only upon the specific-jurisdiction theory. Noting that the may meet the purposeful-availment standard, but not when trial court did not base its ruling upon the waiver arguments, it involves a single contact taking place outside the forum Horowitz, in her opening appellate brief, did not present any state.”). argument challenging the waiver grounds asserted in the trial court. Curiously, the majority analyzes the waiver arguments, Because the evidence fails to support the trial court's exercise rejects them, and then concludes that Horowitz did not need to of personal jurisdiction over Horowitz, we sustain the first challenge them in her appellate briefing because the trial court issue presented for our review. did not base its ruling on waiver. The majority never explains this unusual approach nor reveals why this court addresses the waiver arguments given that the trial court's ruling was not based upon waiver and that Horowitz did not have to VI. CONCLUSION challenge these arguments on appeal. Though the majority's Having concluded that Horowitz lacks sufficient contacts waiver analysis in this case seems to be without purpose, such with Texas to support the trial court's exercise of personal an analysis could serve a useful function and also further the jurisdiction over her, we reverse the trial court's order denying worthy goals of judicial economy in this type of appeal. her special appearance and remand the case to the trial court with instructions to sever and dismiss the claims against her. *129 Today, this court should conclude that, on appeal from See Peredo, 310 S.W.3d at 476 (when the minimum-contacts an order denying a special appearance, while an appellate requirement has not been met, it is unnecessary to address the court must consider whether the trial court erred in denying “fair play” portion of the due-process test). appellant's special appearance on the grounds that the trial court made the basis of its ruling, in the interests of judicial economy, the reviewing court may also consider the merits of waiver arguments advanced by the appellees but not adopted FROST, J., concurring. by the trial court.
KEM THOMPSON FROST, Justice, concurring. The interests of litigants are best served when courts This court should hold that procedures analogous to adopt and utilize measures that foster and enhance judicial those announced in Cincinnati Life Ins. Co. v. Cates economy. The Supreme Court of Texas has recognized apply in appeals from a trial court's ruling on a special the importance of taking this approach and has adopted appearance. such measures in summary judgment appeals, holding that In response to Horowitz's special appearance, appellees/ appellate courts reviewing summary judgments may consider plaintiffs asserted that Horowitz had waived her special all summary-judgment grounds presented to the trial court, appearance by taking various actions. The majority correctly including grounds that the trial court rejected as a basis for its concludes that because the trial court rejected these waiver summary judgment. See Cincinnati Life Ins. Co. v. Cates, 927 arguments in denying the special appearance, Horowitz was
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not required to attack them on appeal. But, the majority does broad construction that the United States Supreme Court, not address whether or how this court could affirm the trial the Supreme Court of Texas, and this court *130 have court's order based upon the waiver arguments. In keeping given as to what a “contact with the forum state” is for with our high court's commitment to enhancing judicial purposes of a personal-jurisdiction analysis. See Burger King economy and the sound approach adopted in Cincinnati Corp. v. Rudzewicz, 471 U.S. 462, 476, 105 S.Ct. 2174, Life Ins. Co. v. Cates for summary-judgment appeals, this 2184, 85 L.Ed.2d 528 (1985) (“So long as a commercial court should hold that parallel procedures apply in the actor's efforts are ‘purposefully directed’ toward residents special-appearance context. of another state, we have consistently rejected the notion that an absence of physical contacts can defeat personal In Cates, the Supreme Court of Texas held that, in reviewing jurisdiction there.”); Retamco Operating, Inc. v. Republic a summary judgment, appellate courts should consider all Drilling Co., 278 S.W.3d 333, 337–40 (Tex.2009) (holding summary-judgment grounds on which the trial court ruled that a defendant's acceptance in California of an assignment and the movant preserved error that are necessary for final of oil and gas leases was a contact with Texas for personaldisposition of the appeal. See Cincinnati Life Ins. Co. v. jurisdiction purposes because the assignment was of real Cates, 927 S.W.2d 623, 627 (Tex.1996). In addition, the property interests located in Texas, even though the defendant high court held that, in the interest of judicial economy, never physically entered Texas); Alenia Spazio, S.p.A. v. appellate courts may consider other grounds that the movant Reid, 130 S.W.3d 201, 212 (Tex.App.-Houston [14th Dist.] preserved for appellate review and the trial court did not make 2003, pet. denied) (considering a wide variety of alleged a basis of its summary judgment. See id. Today, this court connections between the defendant and Texas to be “contacts should implement this procedure and hold that, in reviewing with Texas,” even if these contacts did not involve conduct by a denial of a special appearance to determine whether the the defendant in Texas). Even though the majority correctly trial court erred in overruling the jurisdictional challenges, concludes that Horowitz's contacts with Texas do not justify the reviewing court, in the interest of judicial economy, may the exercise of specific jurisdiction in this case, the majority's consider waiver arguments that were presented to the trial characterization of the contacts is incongruent with binding court but not made a basis of the trial court's ruling on precedent. the special appearance. See id. Under this procedure, if the trial court could not exercise personal jurisdiction over The majority concludes that none of the following constitute a the defendant under either general or specific jurisdiction, contact with Texas for the purposes of a personal-jurisdiction the appellate court, in the interest of justice, could consider analysis: the preserved waiver arguments, even though the trial court rejected these arguments. This would mean that even though (1) being in the business of recruiting investors in Israel to an appellant like Horowitz is not required to attack the waiver invest in real estate in Texas, arguments in her opening appellate brief, the reviewing (2) taking purposeful action with the goal of recruiting court could consider the waiver grounds as a possible basis Israeli investors to purchase real property in Texas, for affirming the trial court's order. See id. This approach would allow appellate courts the greatest opportunity to (3) being a principal salesperson at T–M Real Estate and review all special-appearance grounds presented, examined, Investments, Ltd. selling Texas real property to people and preserved in the trial court and thereby dispose of in Israel, time-sensitive special-appearance appeals in a manner that maximizes efficiency. (4) being instrumental in causing sale documents to be executed by people in which they purchase real property in Texas, The majority defines “contact with Texas” in a narrow manner that conflicts with controlling precedent. (5) profiting monetarily from the sale of real property located in Texas, Though this court reaches the correct result in this appeal, the majority's specific-jurisdiction analysis is flawed. In several (6) being an instrumental “but for” cause of the parts of its opinion, the majority states that various actions in people executing documents necessary to purchase real Israel regarding land known to be in Texas do not constitute property in Texas, contacts with Texas. These conclusions conflict with the
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at 2184; Retamco Operating, Inc., 278 S.W.3d at 337–40;
(7) being the principal sales and marketing agent who got Alenia Spazio, S.p.A., 130 S.W.3d at 212.
certain people to execute English language agreements under which they purchased land in Texas, and
(8) telling certain people in Israel of a visit to real property *131 Conclusion in Texas in an effort to bolster one's credibility in selling Texas real property to people in Israel. Under the applicable standard of review, because the evidence before the trial court negated both specific and general See ante at pp. 125–27. Some of these purported contacts jurisdiction, the trial court erred in finding that it could may not be supported by the evidence before the trial court, exercise personal jurisdiction over Horowitz. 1 Though the and some of these contacts may not be high-quality contacts trial court rejected appellees' waiver arguments, this court with Texas. But that does not mean they are not contacts with nevertheless would have good reason to address these Texas.
arguments if this court were to adopt procedures akin to The evidence before the trial court shows that Horowitz those announced by the Supreme Court of Texas in Cates. 2 did not have sufficient contacts with Texas to support the This approach not only would bring meaning and purpose exercise of personal jurisdiction because Horowitz is a to today's waiver analysis but also would advance important citizen and resident of Israel who did not purposefully avail principles of judicial economy and lay the groundwork for herself of the privilege of conducting activities within Texas, application of the Cates rule in future special-appearance thus invoking the benefits and protections of its laws. See cases. Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777, 784 (Tex.2005). Nonetheless, contrary to the majority's All Citations analysis, the above-mentioned contacts are “contacts with Texas.” See Burger King Corp., 471 U.S. at 476, 105 S.Ct. 377 S.W.3d 115
Footnotes 1 Other plaintiffs have no connection with Horowitz. 2 See Parker v. Robert Ryan Realtors, Inc., No. 14–10–00325–CV, 2010 WL 4226550, at *3 (Tex.App.-Houston [14th Dist.]
Oct. 26, 2010, no pet.) (mem. op.) (“[B]oth parties can present evidence either proving or disproving the allegations.”) (citing Kelly, 301 S.W.3d at 659).
3 Kelly, 301 S.W.3d at 659. 4 Id. 5 Id. 6 Cf. Dawson–Austin, 968 S.W.2d at 323. In that case, the court held that the defendant who filed a special appearance and a motion to quash and sought a continuance of the hearings on both matters did not waive her jurisdictional challenge. Id. at 323–24. The court explained that because the defendant requested a continuance of the hearing on the special appearance, she also had to request a continuance of the hearings on non-jurisdictional matters in order to stay within the requirement of Rule 120a(2) that jurisdictional challenges “shall be heard and determined before ... any other plea or pleading may be heard.” Id. at 323. The court distinguished the case that would have been presented if the defendant had sought and obtained a continuance of the special-appearance hearing in order to conduct non-jurisdictional discovery before the special appearance was decided. Id. The court noted that in such circumstances, it would be important that the defendant delayed conducting non-jurisdictional discovery until after the special appearance was decided. Id. Here, however, Horowitz did not require the court's intervention in order to take nonjurisdictional discovery. When she found the plaintiffs' answers to the discovery unsatisfactory, she filed a motion to compel, but the record does not show that she set the motion for hearing or submission or that the court ruled on it.
7 These are findings (d)-(o), (q)-(s), (u), and (bb). 8 Finding (w). 9 Finding (x). 10 There is no evidence, however, that Horowitz was “a principal salesperson.” 11 See TEX. BUS. & COM.CODE ANN. § 27.01 (West 2009).
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12 See TEX. CIV. PRAC. & REM.CODE ANN. § 134.003(a) (West 2011). 13 TEX.REV.CIV. STAT. ANN.. art. 581–1, et seq. (West 2010). 14 Specifically, 15 U.S.C.A. § 78j(b) and 17 C.F.R. § 240.10b–5. 1 Nonetheless, in reaching this conclusion, the majority erroneously concludes that various alleged connections between Horowitz and Texas are not “contacts with Texas.” See ante at pp. 125–27.
2 The Supreme Court of Texas has not yet addressed whether engaging in discovery regarding the merits of a plaintiff's claims constitutes a waiver of a defendant's special appearance and today's opinion appears to be the first time that the Fourteenth Court of Appeals has addressed this issue. Though the majority correctly concludes that this conduct does not waive a special appearance, the majority fails to cite language from Rule 120a and cases from sister courts that support this conclusion. See, e.g., Tex.R. Civ. P. 120a (stating that “the issuance of process for witnesses, the taking of depositions, the serving of requests for admissions, and the use of discovery processes, shall not constitute a waiver of such special appearance” and containing no limitation of this language to jurisdictional issues); Silbaugh v. Ramirez, 126 S.W.3d 88, 93 (Tex.App.-Houston [1st Dist.] 2002, no pet.) (holding that defendant does not waive special appearance by engaging in discovery regarding merits of plaintiff's claims); Minucci v. Sogevalor, S.A., 14 S.W.3d 790, 799–801 (Tex.App.-Houston [1st Dist.] 2000, no pet.) (same as Silbaugh ).
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Hutchings v. Chevron U.S.A., Inc., 862 S.W.2d 752 (1993)
favorable to nonmovant is to be taken as true, and in that connection, every reasonable inference 862 S.W.2d 752 must be indulged in favor of nonmovant and any Court of Appeals of Texas, doubts resolved in his favor.
El Paso.
Cases that cite this headnote Robert K. HUTCHINGS, et al., Appellants, v.
CHEVRON U.S.A., INC., Appellee. [3] Contracts Intention of Parties No. 08–91–00404–CV. | Sept. 8, When parties disagree over meaning of 1993. | Rehearing Denied Oct. 6, 1993. unambiguous contract, court must determine intent of parties.
Lessee sought declaratory judgment defining its royalty obligations under long-term oil and gas lease. Royalty owners 1 Cases that cite this headnote counterclaimed for underpaid royalties. The 143rd District Court, Ward County, Bob Parks, J., by partial summary judgment, interpreted casinghead gas royalty clause of lease [4] Contracts to provide for a one eighth of four cents per 1,000 cubic Intention of Parties feet (mcf) royalty on casinghead gas sold by lessee, and Determination as to intent of parties to subsequently entered judgment on jury verdict that lessee unambiguous contract must be based upon had not underpaid royalties. Royalty owners appealed. The objective intent of parties as expressed in Court of Appeals, Koehler, J., held that: (1) sale of casinghead agreement, and not their present interpretation. gas was governed by lease provision related to saving and 2 Cases that cite this headnote utilization of casinghead gas; (2) royalty owners did not prove as matter of law or by great weight and preponderance of evidence that lessee underpaid royalties; and (3) trial court [5] Contracts properly declined to order accounting. Questions for Jury Construction of unambiguous contract is Affirmed. question of law for court.
Cases that cite this headnote
West Headnotes (32)
[6] Contracts Construing whole contract together [1] Appeal and Error To determine objective intent of parties to Extent of Review Dependent on Nature of contract, court should examine entire instrument Decision Appealed from in effort to harmonize and give effect to all In summary judgment appeal, Court of Appeals provisions of contract so that none will be must determine whether successful movant in rendered meaningless. trial court carried its burden of showing that there is no genuine issue of material fact and that it is 3 Cases that cite this headnote entitled to judgment as matter of law.
Cases that cite this headnote [7] Mines and Minerals Amount and time of payment Under oil and gas lease, sale of casinghead [2] Judgment gas was governed by lease provision relating Presumptions and burden of proof to saving and utilization of casinghead gas, In deciding whether there is disputed fact rather than natural gas royalty provision, and, issue precluding summary judgment, evidence
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Hutchings v. Chevron U.S.A., Inc., 862 S.W.2d 752 (1993)
therefore, lessee was required to pay royalties on Reviewing court cannot substitute its casinghead gas that it sold at rate of one eighth of conclusions for those of jury; rather, if there is four cents per 1,000 cubic feet (mcf), rather than sufficient competent evidence of probative force at rate of one eighth of net proceeds from sale. to support jury's finding, it must be sustained.
Cases that cite this headnote Cases that cite this headnote
[8] Mines and Minerals [12] Appeal and Error Rights and liabilities Province of jury Fact that casinghead gas is form of natural gas Appeal and Error was not dispositive of whether parties, upon On conflicting evidence entering into oil and gas lease in 1925, intended Appeal and Error and desired that sales of casinghead gas be Province of jury or trial court governed by lease's natural gas royalty provision, It is not within province of Court of Appeals rather than provision relating to saving and to interfere with jury's resolution of conflicts in utilization of casinghead gas, where authorities evidence or to pass on weight or credibility of indicated that, in 1925, casinghead gas was witness' testimony.
considered part of oil.
Cases that cite this headnote Cases that cite this headnote
[13] Appeal and Error [9] Appeal and Error On conflicting evidence Interrogatories and special verdicts When there is conflicting evidence, jury's In considering legal insufficiency or “proved verdict on such matters is generally regarded as as a matter of law” point, appellate court conclusive.
considers only evidence which tends to support jury's findings and disregards all evidence and Cases that cite this headnote inferences to the contrary.
Cases that cite this headnote [14] Mines and Minerals Rights and liabilities
[10] Appeal and Error Natural gas produced from oil well through Extent of Review perforations in well casing at level of gas reservoir, or “gas cap,” when “gas cap” exists Appeal and Error at horizon above oil reservoir, will not be Manifest weight of evidence “casinghead gas”; only gas produced from oil Factual insufficiency point requires examination stratum is “casinghead gas.” of all evidence in determining whether finding in question is so against great weight and Cases that cite this headnote preponderance of evidence as to be manifestly unjust.
[15] Mines and Minerals Cases that cite this headnote Actions In action to recover allegedly underpaid royalties under oil and gas lease, evidence was sufficient [11] Appeal and Error to support jury's implied finding that all gas Conclusiveness in General drawn from lessee's oil wells was casinghead Appeal and Error gas, rather than natural gas produced from gas Sufficiency of Evidence in Support stratum, and that there was no commingling
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Hutchings v. Chevron U.S.A., Inc., 862 S.W.2d 752 (1993)
of casinghead gas with natural gas produced Under oil and gas lease, lessee is held to standard through oil wells. of care of reasonably prudent operator under same or similar circumstances.
Cases that cite this headnote Cases that cite this headnote [16] Mines and Minerals Rights and liabilities [21] Mines and Minerals Reservoir is considered “oil stratum,” and gas Actions produced therefrom is “casinghead gas,” if well On claim by royalty owners for underpaid produces 100,000 cubic feet of gas or less per royalties under oil and gas lease, jury could barrel of oil. reasonably have found that lessee did not breach its implied duty to market gas, but 1 Cases that cite this headnote acted as reasonably prudent operator under circumstances, where royalty owners were paid [17] Mines and Minerals at rate equal to or greater than market rate.
Implied obligation Cases that cite this headnote Oil and gas lease includes lessee's implied duty to manage and administer lease.
[22] Evidence Cases that cite this headnote Testimony of Experts Expert opinion testimony does not establish any [18] Mines and Minerals material fact as matter of law.
Extent of production, paying quantities, and Cases that cite this headnote marketing Lessee's implied duty under oil and gas lease to manage and administer lease includes duty [23] Evidence to obtain best price reasonably possible for Testimony of Experts marketed production. When circumstances tend to discredit or impeach expert testimony, that testimony does no more 1 Cases that cite this headnote than raise fact issue.
Cases that cite this headnote [19] Mines and Minerals Extent of production, paying quantities, and marketing [24] Mines and Minerals Mines and Minerals Actions Amount and time of payment Royalty owners, who claimed that royalties were Lessee's implied duty under oil and gas lease underpaid by oil and gas lessee, bore burden of to obtain best price reasonably possible for proving by preponderance of evidence that lessee marketed production did not apply to sale of failed to make proper royalty payments based on casinghead gas, where lease provided for set volume. royalty amount on that gas, and royalty was not Cases that cite this headnote dependent upon proceeds from sale of gas.
1 Cases that cite this headnote [25] Mines and Minerals Actions [20] Mines and Minerals Royalty owners did not prove as matter of Construction, Breach, and Penalties law or by great weight and preponderance
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Hutchings v. Chevron U.S.A., Inc., 862 S.W.2d 752 (1993)
of evidence that oil and gas lessee underpaid its implied duty to prudently market gas, and, royalties, even though owners' expert accounting therefore, testimony was admissible with respect witness found discrepancies between production to royalty owners' claims that lessee underpaid volumes reported to Railroad Commission and royalties. volumes used to calculate royalties, where owners' expert's own testimony regarding his Cases that cite this headnote use of computational shortcut and his errors in calculation discredited his testimony to some [30] Account degree. Complicated transactions or circumstances
Cases that cite this headnote Equitable accounting is proper when facts and accounts presented are so complex that adequate relief may not be obtained at law.
[26] Trial Admission of evidence in general 17 Cases that cite this headnote Admission or exclusion of evidence is matter within trial court's discretion. [31] Mines and Minerals Actions Cases that cite this headnote Trial court properly declined to order oil and gas lessee to render accounting of royalty payments [27] Appeal and Error made and that should have been made on gas Rulings on admissibility of evidence in produced from lease, where royalty owner did general not explain why standard discovery procedures, To obtain reversal of judgment based upon trial such as requests for production, interrogatories, court's decision to admit or exclude evidence, and subpoena duces tecum, were inadequate to appellant must show that trial court abused its provide it with information sought regarding discretion in making decision, and that error payment of royalties. was reasonably calculated to cause and probably did cause rendition of improper judgment. Rules 4 Cases that cite this headnote App.Proc., Rule 81(b)(1).
[32] Mines and Minerals 2 Cases that cite this headnote Actions Royalty owner's request for accounting from oil [28] Evidence and gas lessee was moot, since jury's finding that Determination of question of competency lessee had not underpaid royalties was binding Wide discretion is afforded to trial court in on owner, and, thus, foreclosed any possibility determining whether to admit or exclude expert that owner was entitled to recover such damages. testimony regarding ultimate fact issues in case.
Cases that cite this headnote 2 Cases that cite this headnote
[29] Mines and Minerals Actions Attorneys and Law Firms
Oil and gas lessee's expert's testimony *755 Andrew M. Taylor, Bracewell & Patterson, Austin, comparing prices on which royalties were paid William Key Wilde, Bracewell & Patterson, Van E. with spot market prices was relevant to best price McFarland, Van McFarland & Associates, Houston, William reasonably obtainable by reasonably prudent gas B. Browder, Jr., Stubbeman, McRae, Sealy, Laughlin & seller, and was highly relevant to whether lessee Browder, Midland, for appellants. acted as reasonably prudent lessee or breached
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Hutchings v. Chevron U.S.A., Inc., 862 S.W.2d 752 (1993)
utilize[d]” royalty provision, which provides a royalty of # of Hal Upchurch, Monahans, J. Knox Moore, Brady, Wm. four cents per mcf. The suit then went to trial, the jury finding Randall Lundy, Jr., Texaco Inc., Denver, CO, C.B. McDaniel, that Chevron had not underpaid royalties. The court rendered Hondo Oil & Gas Co., Roswell, NM, Charles Tighe, Julia a take-nothing judgment against the royalty owners, and they E. Vaughan, Cotton, Bledsoe, Tighe & Dawson, Midland, appeal. Richard Henderson, Victoria, for appellee.
Before KOEHLER, BARAJAS and LARSEN, JJ.
ISSUES PRESENTED
OPINION The royalty owners argue 1 that the trial court erred both in granting Chevron's motion, and in denying their motion, KOEHLER, Justice. for partial summary judgment and in rendering judgment for Chevron based on the jury's answer to Question No. 1. They This is an oil and gas case in which Chevron U.S.A. assert that, as a matter of law under terms of the lease, they sought a declaratory judgment defining its royalty obligations were entitled to # of Chevron's net proceeds from the sale under a long term lease. The royalty owners, represented of the casinghead gas, not just # of four cents per mcf. The here by two groups (the Abel Appellants and Mobil–OXY), royalty owners also contend that they proved as a matter of counterclaimed for underpaid royalties. By partial summary law or by the great weight and preponderance of the evidence judgment, the trial court interpreted the casinghead gas that Chevron had underpaid royalties, contrary to the jury's royalty clause of the lease to provide for a # of four cents finding. The Abel Appellants further contest the admission of per mcf royalty on casinghead gas Chevron sold. At trial, the one expert witness's testimony. Appellant Mobil also appeals jury found that Chevron had not underpaid royalties. From a from the trial court's refusal to order an accounting of royalties judgment on the verdict and the summary judgment, the two due and paid. By a conditional cross-point, Chevron argues groups of Appellants bring this appeal. We affirm. that the trial court should have ruled that limitations barred any claims for royalties underpaid more than four years before the royalty owners filed their claims.
RELEVANT FACTS
On August 4, 1925, the Hutchings Joint Stock Association *756 SUMMARY JUDGMENT executed an oil and gas lease with Gulf Production Co. (“HSA Lease”). The HSA Lease covers 30,450 acres of land in Ward [1] [2] In a summary judgment appeal, we must determine County, Texas, south of Monahans. Chevron U.S.A., Inc. whether the successful movant in the trial court carried its (“Chevron”) is Gulf's successor in interest. The Appellants burden of showing that there is no genuine issue of a material (the “Abel Appellants” and Mobil–OXY or “Mobil”) are fact and that it is entitled to judgment as a matter of law. Nixon some of the present royalty owners under the HSA Lease. v. Mr. Property Management Co., Inc., 690 S.W.2d 546, 548 (Tex.1985). In deciding whether or not there is a disputed fact The lease contains different royalty provisions relating to oil, issue precluding summary judgment, evidence favorable to natural gas, and casinghead gas. Chevron filed this suit for the non-movant is to be taken as true, and in that connection, a declaratory judgment interpreting the royalty provisions. every reasonable inference must be indulged in favor of the Chevron claims that the casinghead gas sold by it is and non-movant and any doubts resolved in his favor. Nixon, 690 should be controlled by the royalty provision relating to S.W.2d at 548–49. casinghead gas. The royalty owners counterclaimed for underpaid royalties. They contend that casinghead gas sold by Chevron is governed by the royalty clause for natural gas “used off the premises or marketed,” which requires the LEASE CONSTRUCTION royalty payment to be based on net proceeds. The trial judge [3] [4] [5] [6] Because the partial summary judgment granted partial summary judgment declaring that the lease was based on a question of law, the first issue is whether required royalties on casinghead gas sold by Chevron to be the court correctly determined the construction of the royalty paid only in accordance with the casinghead gas “save[d] and
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Hutchings v. Chevron U.S.A., Inc., 862 S.W.2d 752 (1993)
provisions of the HSA Lease. The parties agree that the lease gas well.” Williams and Meyers, MANUAL OF OIL AND was unambiguous. When parties disagree over the meaning of GAS TERMS, (8th ed. 1991). It has been judicially noticed an unambiguous contract, the court must determine the intent that until about 1918, casinghead gas was a by-product of of the parties. This determination must be based upon the oil production that was “more often than not permitted to objective intent of the parties as expressed in the agreement, go to waste.” Gulf Prod. Co. v. Taylor, 28 S.W.2d 914, 917 and not their present interpretation. The construction of an (Tex.Civ.App.—Eastland 1930, writ dism'd). Chevron has unambiguous contract is a question of law for the court. sold casinghead gas drawn from its oil wells on this tract since Coker v. Coker, 650 S.W.2d 391, 393 (Tex.1983); First City 1937. As previously noted, Chevron maintains that the second Nat'l Bank of Midland v. Concord Oil Co., 808 S.W.2d 133, royalty term of the lease applies, requiring it to pay royalties 137 (Tex.App.—El Paso 1991, no writ). To determine the on the casinghead gas it sold at the rate of # of four cents per objective intent of the parties, a court should examine the mcf. Appellants argue that casinghead gas sold by Chevron entire instrument in an effort to harmonize and give effect to was governed by the third royalty clause, and Chevron should all provisions of the contract so that none will be rendered have paid royalties at the rate of # of the net proceeds from meaningless. Coker, 650 S.W.2d at 393. the sale of the gas. The trial court agreed with Chevron and granted partial summary judgment interpreting the contract to [7] The royalty provisions of the lease provided as follows: require Chevron to pay only # of 4 cents per mcf as royalty on the casinghead gas it sold. The parties proceeded to trial [1] If oil shall be found on said under this interpretation of the lease. premises, Lessee shall deliver as royalty to Lessor, free of expense, In their challenge of the trial court's holding, the royalty an [sic] one eighth (#) part of the owners rely primarily upon Southland Royalty Co. v. Pan oil saved from that produced after Am. Petroleum *757 Corp., 378 S.W.2d 50 (Tex.1964). The deducting such part as maybe used for lease in Southland contained three royalty provisions: the first drilling and operating on the landand provided for a royalty of # of the oil produced and saved and [sic] treating the oil or gas as to # of the proceeds from potash and other minerals; the second make it merchantable; .... [2] If Lessee paragraph provided for a flat-rate royalty on gas-well gas used shall operate so as to save and utilize off the premises; and the third provided for a flat royalty casing head gas from said premises, on gas produced from oil wells and used off the premises. then Lessee shall pay as royalty to Southland Royalty Co., 378 S.W.2d at 52. The Supreme Court Lessor, one eighth (#) part of the value determined that gas was included within “other minerals” on of such gas, calculated at the rate which a # of proceeds royalty was due, and that gas “used off of four cents (4) per one thousand the premises” did not include gas sold for use off the premises. (1000) cubic feet of the casing head Id. at 54, 57. The royalty owners analogize Southland to the gas, .... [3] If any well on said premises case at bar, arguing that if Chevron markets casinghead gas, shall produce natural gas in paying it is governed by the royalty provision for natural gas “used quantities, andssuch [sic] natural gas off the premises or marketed” rather than the flat-rate royalty is used off the premises or marketed by on casinghead gas “save[d] and utilize[d].” Unlike the case Lessee, then Lessor shall bepaid [sic] at bar, the Supreme Court held that the clause “used off the at the rate of one-eighth (#) of the net premises” in the Southland lease was ambiguous. Southland, proceeds of the sale of such gas at the 378 S.W.2d at 56. The Southland ruling was based upon a mouth of the well. [Emphasis added]. perceived conflict between the # of net proceeds royalty for “other minerals,” including gas, and the flat-rate royalties The lease was signed on August 4, 1925. We are faced with on gas “used off the premises.” Southland, 378 S.W.2d at the question of whether the lease required Chevron to pay 57. Because it held that gas was included within “other royalties on casinghead gas it sold in accordance with the minerals,” the Supreme Court was forced to reconcile that second or the third provision.
royalty provision with the ones governing gas used off the premises. The Court did so by deciding that gas sold by the Casinghead gas is “[g]as produced with oil in oil wells, the lessee was not included within gas “used off the premises.”
gas being taken from the well through the casinghead at the The Court wrote that the expression “used off the premises”
top of the well, as distinguished from gas produced from a
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Hutchings v. Chevron U.S.A., Inc., 862 S.W.2d 752 (1993)
did not necessarily exclude gas sold by the lessee, but that shall pay as *758 royalty to lessor in the Southland lease, it was the only way to reconcile the one-eighth (#) of the value calculated various royalty provisions. 2 Southland, 378 S.W.2d at 56– at the rate of four (4) cents per 57. thousand (1000) cubic feet, of the casinghead gas so saved, in addition [8] Although casinghead gas is a form of natural gas, a to the royalty to which lessor may fact admitted by Chevron, that fact is not dispositive of be entitled on the oil produced from whether the parties in 1925 intended and desired sales of such oil well ... and if any well on casinghead gas to be governed by the natural gas royalty said premises shall produce natural provision, rather than the one relating to casinghead gas gas in paying quantities, and such royalties. Significantly, a 1925 hornbook on oil and gas natural gas be used off the premises law defines casinghead gas as a component part of oil. or marketed by said Company, then Thornton, THE LAW RELATING TO OIL AND GAS, at lessor shall be paid one-eighth of the net proceeds received from the sale 391 (4th ed. 1925). 3 The case of Livingston Oil Corp. v.
of gas at the mouth of the well....
Waggoner, 273 S.W. 903 (Tex.Civ.App.—Amarillo 1925, [Emphasis added].
writ ref'd) is also probative. The lease in that case provided for a # royalty on oil produced, and a flat royalty on gas Taylor, 28 S.W.2d at 915. The royalty owner was paid # of from each well where gas only was found. The Amarillo four cents per mcf for casinghead gas produced on the lease Court of Civil Appeals determined that casinghead gas was which was processed into gasoline and sold by the lessee. a constituent element of oil, and that the lessee was required The lessor sought additional royalties in the amount of # of to pay a # royalty on production of casinghead gas under the value of the gasoline, under the oil royalty provision of the oil royalty provision. Livingston Oil Corp., 273 S.W. the lease. Taylor, 28 S.W.2d at 915. The Eastland Court of at 906. See also Poe v. Humble Oil & Refining Co., 288 Civil Appeals rejected his argument, writing that the parties S.W. 264, 266 (Tex.Civ.App.—Eastland 1926) (“The courts had clearly intended to distinguish oil, gas, and casinghead will take judicial knowledge that casing-head gas or gasoline gas as different substances on which different royalties would is oil.”), rev'd on other grounds, 29 S.W.2d 1019, 1020 be due. Id. at 916–17. The Court rejected a limitation on the (Tex.Comm'n App.1930, judgm't adopted) (“There is a well- casinghead gas royalty provision based upon the use made of defined distinction in law between gas produced from a the casinghead gas. Id. at 917. The Court wrote that it was gas well and casing-head gas.”). These authorities indicate not limited to a particular utilization of the casinghead gas, that in 1925, casinghead gas was considered a part of oil. and that the sale of the gas to third parties was a means of The net result of these cases is that in 1925, the “natural “utiliz[ing]” it within the meaning of the royalty provision for gas” royalty provision of the HSA Lease did not necessarily casinghead gas “save[d] and utilize[d].” Id. The only royalty include casinghead gas which was considered a constituent of due on the casinghead gas was the specified # of four cents oil at the time. per mcf. Id.
More persuasive than Southland is the case of Gulf Prod. Co. Additionally, the Taylor Court wrote that as a matter of v. Taylor, cited above, in which the Court was confronted by a common knowledge at the time the lease was executed, 1918 oil and gas lease with royalty provisions nearly identical “casinghead gas, or the gas produced from oil wells, was to those in the case sub judice. The Taylor lease read: relatively less important than natural gas or gas from a well producing gas only.” Id. at 916. This indicates a distinction If oil shall be found in paying made at the time between casinghead gas and natural gas, quantities on said premises, the bolstering Chevron's argument that the “natural gas” royalty Company shall deliver as royalty to provision of the HSA Lease was not intended to include said lessor, free of expense, one-eighth casinghead gas.
(#) part of the oil saved from that produced ... if said Company shall Taylor provides a nearly contemporaneous interpretation of operate so as to save and utilize royalty terms almost identical to those of the case at bar.
casinghead gas from said premises, The Taylor Court noted a distinction between casinghead (as it may do if it wishes) then it gas and natural gas, found that the parties had recognized
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Hutchings v. Chevron U.S.A., Inc., 862 S.W.2d 752 (1993)
that distinction in drafting the royalty provisions, stated that Ameritrust Texas, N.A., 840 S.W.2d 131, 136 (Tex.App.—El “utiliz[ing]” casinghead gas includes the sale of that gas, Paso 1992, writ denied). and held that the only royalty due on casinghead gas sold by the lessee was # of four cents per mcf. This 1930 case Because the royalty owners presented several theories in provides highly persuasive authority for interpreting the 1925 support of their claim that Chevron had failed to pay the HSA Lease to allow a royalty of only # of four cents per royalties properly, the jury's “No” answer to Question No. 1 mcf on casinghead gas sold by Chevron. We conclude, based of the charge required the jury to make the following implied in part on the similarities of Taylor and the distinctions of findings, based on the instructions in the charge: (1) All gas Southland that the trial court's interpretation of the lease was drawn from Chevron's oil wells was “casinghead gas,” rather correct. We therefore hold that the sale of casinghead gas is than natural gas produced from a gas stratum, and there was governed by the second lease provision relating to the saving no commingling of casinghead gas with natural gas produced and utilization of casinghead gas. Abel Point of Error No. through oil wells; (2) Chevron prudently marketed the gas One and Mobil Points of Error Nos. One through Eight are produced from the lease; and (3) Chevron did not make overruled. accounting errors based upon volume discrepancies resulting in improper royalty payments. Because the royalty owners challenge the factual and legal sufficiency of the evidence to support each of these findings, they will be addressed SUFFICIENCY OF THE EVIDENCE separately.
[9] [10] [11] [12] [13] The royalty owners also challenge the legal and factual sufficiency of the evidence to support the jury's finding that Chevron had not failed ALL GAS WAS CASINGHEAD GAS to pay royalties due them. They contend that they proved underpayment of royalties as a matter of law or by the great [14] [15] The royalty owners theorize that Chevron weight and preponderance of the evidence. In considering a illegally produced natural gas from its oil wells and legal insufficiency or “proved as a matter of law” point, the wrongfully characterized that gas as casinghead gas in order appellate court considers only the evidence which tends to to pay a smaller royalty on the gas. As explained by the Texas support the jury's findings and disregards all evidence and Supreme Court in Amarillo Oil Co. v. Energy–Agri Products, inferences to the contrary. Garza v. Alviar, 395 S.W.2d 821 Inc., 794 S.W.2d 20, 25 (Tex.1990), separate reservoirs of (Tex.1965); Worsham Steel Co., 831 S.W.2d 81. A factual oil and natural gas may exist at different subsurface planes insufficiency point requires examination of all of the evidence under the same well. If a gas reservoir, or “gas cap,” exists in determining whether the finding in question is so against at a horizon above an oil reservoir, then natural gas may the great weight and preponderance of the evidence as to be produced from an oil well through perforations in the be manifestly unjust. In re King's Estate, 150 Tex. 662, well casing at the level of the gas cap. This gas will not be 244 S.W.2d 660 (Tex.1951); Worsham Steel Co. v. Arias, casinghead gas; only gas produced from the oil stratum is 831 S.W.2d 81 (Tex.App.—El Paso 1992, no writ). The casinghead gas. See generally Amarillo Oil Co., 794 S.W.2d reviewing court cannot substitute its conclusions for those at 20–25. Texas Railroad Commission Rule 13(b)(4)(B) of the jury. If there is sufficient competent evidence of requires oil well casings to be perforated in the oil-saturated probative force to support the finding, it must be sustained. portion of a reservoir below the gas-oil contact, defined as the Carrasco v. Goatcher, 623 S.W.2d 769 (Tex.App.—El Paso line between the oil zone and the gas zone of a reservoir. 16 1981, no writ). It is not within the *759 province of the TEX.ADMIN.CODE § 3.13(b)(4)(B) (West 1993); Williams Court to interfere with the jury's resolution of conflicts in the and Meyers, MANUAL OF OIL AND GAS TERMS, (8th evidence or to pass on the weight or credibility of the witness's ed. 1991). Perforations in the gas cap are referred to as testimony. Benoit v. Wilson, 150 Tex. 273, 239 S.W.2d 792 “high perfs.” The royalty owners argue that illegal “high (1951); Reynolds v. Kessler, 669 S.W.2d 801, 807 (Tex.App. perfs” caused the production of natural gas from gas caps —El Paso 1984, no writ). Where there is conflicting evidence, through oil wells, on which Chevron underpaid royalty by the jury's verdict on such matters is generally regarded as mischaracterizing the gas as casinghead gas. conclusive. Montgomery Ward & Co. v. Scharrenbeck, 204 S.W.2d 508 (Tex.1947); Clark v. National Life & Accident The evidence on this issue was conflicting. The royalty Ins. Co., 145 Tex. 575, 200 S.W.2d 820 (1947); Oechsner v. owners' expert concluded that Chevron had produced natural
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Hutchings v. Chevron U.S.A., Inc., 862 S.W.2d 752 (1993)
gas from high perfs. However, Chevron presented evidence The trial court further instructed the jury that with respect that any gas cap which may have once existed in the field had to certain royalty owners who had settled a prior lawsuit, been dissipated by the late 1950's. Other Chevron witnesses Chevron's duty to market production was embodied in a letter testified that there was no gas/oil contact in the field after a from Morgan Copeland, Chevron's former general counsel waterflood 4 in the 1950's. and negotiator of the settlement, to Preston Shirley (known as the “Copeland Letter”). Chevron objected to this instruction.
[16] The royalty owners rely heavily upon a statement The royalty owners argue that there is no reason to distinguish by Kevin Sullivan, Chevron's petroleum engineer, that two the settling royalty owners from them, and therefore the wells were perforated in gas pockets. Sullivan went on to Copeland Letter also reflects Chevron's duty to prudently explain that one well was cement-squeezed to eliminate gas market with respect to them. production from that well. A “cement squeeze” is defined as “[a] method whereby perforations and fissures in well The Copeland Letter, dated January 16, 1980, provided that walls may be sealed off.” Williams and Meyers, MANUAL Chevron would calculate the net proceeds from the sale of OF OIL AND GAS TERMS, (8th ed. 1991). The other well gas on the basis of the “prevailing price” for the gas, as was actually drilled to supply gas for an injection project on agreed upon by Chevron and Valero Industrial Gas Company the leasehold. In 1963, that well was cement-squeezed and (“Valero”), which was not to exceed the maximum lawful deepened to produce from an oil strata. Sullivan's testimony price under the Natural Gas Policy Act of 1978 (NGPA). does not demonstrate that Chevron produced and sold natural The royalty owners contend that the prevailing price was the gas from oil wells or commingled natural gas with casinghead price established by NGPA section 102, and royalties should have been based on that price. However, Thomas Liles, *760 gas. 5 Chevron's gas marketing expert, testified that the NGPA section 102 price was not the “prevailing price” under the Because the evidence on this matter was conflicting, the jury's contract until 1985, when a price established in 1980 for 1985 verdict may not be overturned; the jury could reasonably sales exceeded the NGPA price. Valero never paid that price have determined that the royalty owners failed to prove that because by a December 27, 1984 letter, Valero and Chevron Chevron produced natural gas from its oil wells. Since the agreed to a lower price pursuant to a portion of the contract jury was justified in making this determination, it could also permitting renegotiation in case of economic hardship to have found that there was no commingling of casinghead gas with natural gas produced from oil wells. This argument either party. 7 Liles testified that the agreed-upon price was provides no basis for reversal. a reasonable market price for the gas. The royalty owners contend that this agreement did not affect Chevron's duty to pay royalties based upon the maximum lawful price under the NGPA, because the contract price was modified under CHEVRON PRUDENTLY MARKETED the economic hardship provision, rather than the “prevailing price” section.
[17] [18] [19] [20] [21] The royalty owners argue that Chevron underpaid royalties by failing to obtain the best Liles opined that Chevron marketed the gas prudently. He possible price for the gas it produced, breaching its duty stated that from March 1985 to September 1986, royalty was to market the gas prudently. An oil and gas lease includes paid at *761 a rate in excess of the market price. For some an implied duty to manage and administer the lease. Cabot time prior thereto, the royalty was based upon the NGPA Corp. v. Brown, 754 S.W.2d 104, 106 (Tex.1987). This duty section 102 price, or the maximum lawful price for gas. The includes a duty to obtain the best price reasonably possible royalty owners brought forth no evidence demonstrating that for the marketed production. 6 Id. “Under a gas royalty clause Chevron could have obtained a higher price for gas than providing for royalties based on market value, the lessee it actually received. The jury could reasonably have found has an obligation to obtain the best current price reasonably that Chevron did not breach its implied duty to market the available.” Cabot Corp., 754 S.W.2d at 106. The lessee is held gas, but acted as a reasonably prudent operator under the to the standard of care of a reasonably prudent operator under circumstances because the royalty owners were paid at a rate the same or similar circumstances. Id. The jury was instructed equal to or greater than the market rate. This argument affords on this standard. no ground for reversal.
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Hutchings v. Chevron U.S.A., Inc., 862 S.W.2d 752 (1993)
discretion. Syndex Corp. v. Dean, 820 S.W.2d 869, 873 (Tex.App.—Austin 1991, writ denied); Dudley v. Humana VOLUME DISCREPANCIES Hosp. Corp., 817 S.W.2d 124, 126 (Tex.App.—Houston The royalty owners' expert accounting witness, Mark Layton, [14th Dist.] 1991, no writ). To obtain a reversal of a judgment reviewed Chevron's royalty calculation worksheet volumes based upon a trial court's decision to admit or exclude and compared those volumes to the production volumes evidence, the Appellant must show: (1) that the trial court reported to the Railroad Commission. The royalty owners abused its discretion in making the decision; and (2) that the contend that discrepancies between the production volumes error was reasonably calculated to cause and probably did reported to the Railroad Commission and the volumes used cause rendition of an improper judgment. Gee v. Liberty Mut. to calculate royalties demonstrate that Chevron underpaid Fire Ins. Co., 765 S.W.2d 394 (Tex.1989); TEX.R.APP.P. royalties. The discrepancy amounted to about 8,500 mcf, the 81(b)(1). Wide discretion is afforded to the trial court in royalty on which Layton valued at $35,000. determining whether to admit or exclude expert testimony regarding ultimate fact issues in a case. Herrera v. FMC Layton admitted to taking a “shortcut” in his calculations, Corp., 672 S.W.2d 5, 7 (Tex.App.—Houston [14th Dist.] because “it would cost more to make this calculation than 1984, writ ref'd n.r.e.); Dillard v. Broyles, 633 S.W.2d 636, the affect on our calculation.” Layton also admitted error 643–44 (Tex.App.—Corpus Christi 1982, writ ref'd n.r.e.), in failing to deduct certain expenses in his calculations. No cert. denied, 463 U.S. 1208, 103 S.Ct. 3539, 77 L.Ed.2d 1389 other evidence was presented on the volume discrepancies (1983). identified by Layton. The issue for this Court is whether the jury was required to accept Layton's conclusions. [29] The royalty owners contend that Liles' testimony was irrelevant because his testimony comparing spot market [22] [23] [24] [25] Expert opinion testimony does notprices with prices obtained by Chevron for the gas was not establish any material fact as a matter of law. McGalliard probative of the best price obtainable for the gas, i.e., the price v. Kuhlmann, 722 S.W.2d 694, 697 (Tex.1986). When under the long-term contract with Valero. However, Liles' circumstances tend to discredit or impeach expert testimony, testimony was relevant to the best price reasonably *762 that testimony does no more than raise a fact issue. Id. obtainable by a reasonably prudent gas seller. The testimony Layton's own testimony regarding his use of a computational was highly relevant to whether Chevron acted as a reasonably shortcut and his errors in calculation discredited his testimony prudent lessee, or breached its implied duty to prudently to some degree. The royalty owners bore the burden of market the gas. Therefore, the trial court did not abuse his proving by a preponderance of the evidence that Chevron had discretion in admitting the evidence. The Abel Appellants' failed to make proper royalty payments based on volume. Point of Error No. Four is overruled. The jury was free to find that Layton's testimony alone did not satisfy this burden of proof. There is no basis here for a reversal. ACCOUNTING
In sum, the royalty owners did not prove as a matter of law In addition, Appellant Mobil contends that the trial court or by the great weight and preponderance of the evidence that erred in refusing to order Chevron to render an accounting Chevron underpaid royalties. The Abel Appellants' second of royalty payments made and which should have been made and third points of error and Mobil Points of Error Nos. Nine on the gas produced from the lease. Mobil argues that it was and Ten are overruled. impossible or impracticable for them to ascertain the amount of royalties paid and the amount legally due and payable, and therefore the trial judge should have ordered Chevron to render an accounting of royalties paid. In response, Chevron ADMISSION OF EVIDENCE contends that an equitable accounting need not be ordered [26] [27] [28] The royalty owners complain that the when the party seeking an accounting has an adequate trial court erred in admitting into evidence the testimony alternative remedy, and Mobil has failed to explain the of Chevron expert Thomas Liles, comparing the prices on inadequacy of standard discovery procedures to obtain the which royalties were paid with spot market prices. Admission information it desired. or exclusion of evidence is a matter within the trial court's
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Hutchings v. Chevron U.S.A., Inc., 862 S.W.2d 752 (1993)
Dist.] 1989), vacated as settled, 796 S.W.2d 707 (Tex.1990)
[30] [31] An equitable accounting is proper when the facts (request for an accounting abandoned when the party seeking and accounts presented are so complex that adequate relief it sought to prove damages at trial and asked the jury to may not be obtained at law. Richardson v. First National determine damages). Mobil's Points of Error Nos. Eleven and Life Ins. Co., 419 S.W.2d 836, 838 (Tex.1967). Mobil has Twelve are overruled.
not explained why the standard discovery procedures, such as requests for production, interrogatories, and subpoena duces tecum, were inadequate to provide it with the information sought regarding the payment of royalties. Mobil could have LIMITATIONS obtained adequate relief at law by the use of those legal procedures. The trial court did not err by failing to order an By a conditional cross-point, Chevron contends that if the accounting. suit is reversed, the Court should rule that limitations bars the royalty owners' claims for royalties underpaid more than four [32] Furthermore, Mobil did not object to the submission years before the filing of their counterclaim. In view of our of Question No. 1 to the jury, asking whether Chevron had resolutions of the Appellants' points of error, it is unnecessary underpaid royalties. The jury's determination that Chevron for us to consider this cross-point. had not underpaid royalties, supported by sufficient evidence, is binding on Mobil. Therefore, Mobil's request for an Judgment of the trial court is affirmed. accounting is moot; the jury's finding that Chevron had not underpaid royalties forecloses any possibility that Mobil was All Citations entitled to recover such damages. Compare Advertising and Policy Comm. of the Avis Rent A Car Sys. v. Avis Rent 862 S.W.2d 752 A Car Sys., 780 S.W.2d 391 (Tex.App.—Houston [14th
Footnotes 1 The Abel Appellants in four points of error and the Mobil–Oxy Appellants in twelve points of error. 2 Another way to reconcile the conflict which had been adopted by this Court in Southland before its appeal to the Supreme Court, was to read “other minerals” to exclude gas. The Supreme Court found this interpretation to conflict with a large body of case law. Southland, 378 S.W.2d at 53–54.
3 Attached as Exhibit 4 to Chevron's brief. 4 Water flooding is a method of secondary recovery of oil “in which water is injected into an oil reservoir for the purpose of washing the oil out of the reservoir rock and into the bore of a producing well.” Williams and Meyers, MANUAL OF OIL AND GAS TERMS, (8th ed. 1991).
5 The royalty owners also point to a “gas-oil ratio” showing that one well produced as much as 85,000 cubic feet of gas per barrel of oil. However, a reservoir is considered an oil stratum, and the gas produced therefrom is casinghead gas, if a well produces 100,000 cubic feet of gas or less per barrel of oil. Amarillo Oil Co., 794 S.W.2d at 25.
6 This duty does not apply to the sale of casinghead gas, because the lease provided for a set royalty amount on that gas, and the royalty was not dependent upon the proceeds from sale of the gas. See Cabot Corp., 754 S.W.2d at 106; El Paso Natural Gas Co. v. American Petrofina Co. of Texas, 733 S.W.2d 541, 550 (Tex.App.—Houston [1st Dist.] 1986, writ ref'd n.r.e.), cert. dism'd, 485 U.S. 930, 108 S.Ct. 1102, 99 L.Ed.2d 264 (1988). (“The operator of an oil and/or gas lease has an implied duty to act in good faith in marketing the gas of its royalty owners when the amount of the royalty depends upon the price at which the product is marketed.”) [Emphasis added].
7 In fact, Valero did not purchase any gas under the contract from 1985 to December 1990.
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Merry Homes, Inc. v. Luc Dao, 359 S.W.3d 881 (2012)
[3] Implied and Constructive Contracts 359 S.W.3d 881 Nature of right Court of Appeals of Texas, Money had and received is an equitable doctrine Houston (14th Dist.).
designed to prevent unjust enrichment.
MERRY HOMES, INC., Appellant, 4 Cases that cite this headnote v.
LUC DAO, Appellee.
[4] Implied and Constructive Contracts No. 14–11–00259–CV. | Jan. 31, 2012. Nature of right A cause of action for money had and received Synopsis arises when a party obtains money that, in equity Background: After a trial court entered declaratory judgment and good conscience, belongs to another.
that commercial lease was void, plaintiff, who was not a party to the lease but who had paid money to landlord to secure the 5 Cases that cite this headnote leased premises, brought action against landlord for money had and received. The 151st District Court, Harris County, Mike Engelhart, J., granted summary judgment to plaintiff. [5] Implied and Constructive Contracts Landlord appealed. Nature of right A claim for money had and received is not based on wrongdoing; rather, the only question is whether the defendant holds money that, in [Holding:] The Court of Appeals, Adele Hedges, C.J., held equity and good conscience, belongs to another.
that two-year limitations period applies to a claim for money had and received. 5 Cases that cite this headnote
Reversed and remanded. [6] Limitation of Actions Implied Contracts and Debts and Obligations Not Evidenced by Writing Because money had and received is an equitable West Headnotes (7)
doctrine designed to prevent unjust enrichment, the proper statute of limitations for such a claim [1] Appeal and Error is that applicable to claims for unjust enrichment, Cases Triable in Appellate Court which is the two-year statute of limitations for A trial court's summary judgment is reviewed de “taking or detaining the personal property of novo. another.” V.T.C.A., Civil Practice & Remedies Code § 16.003(a).
1 Cases that cite this headnote 1 Cases that cite this headnote
[2] Appeal and Error Judgment [7] Appeal and Error Time of bringing suit, limitations, and In reviewing a summary judgment, the appellate laches court takes as true all evidence favorable to the nonmovant, indulging every reasonable Court of Appeals would not consider argument inference, and resolves any doubts in the raised by plaintiff for first time on appeal, on nonmovant's favor. defendant commercial landlord's appeal from the summary judgment for plaintiff in action for Cases that cite this headnote money had and received, that plaintiff's claim did not accrue, for limitations purposes, until
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Merry Homes, Inc. v. Luc Dao, 359 S.W.3d 881 (2012)
the commercial lease was declared void; plaintiff had paid under the lease, but because Dao was neither a party had not made that argument in his summary to the lease nor to the declaratory judgment action, it did not judgment motion. Vernon's Ann.Texas Rules *883 award Dao the $6,000 he had paid Merry Homes. Civ.Proc., Rule 166a(c).
Dao sued Merry Homes on April 16, 2009, seeking to 2 Cases that cite this headnote recover his $6,000 as money had and received. He moved for summary judgment on his claim in February 2011. Merry Homes did not file its own motion for summary judgment, instead responding to Dao's motion by asserting that the two-
Attorneys and Law Firms year statute of limitations provided by section 16.003(a) of the Texas Civil Practice and Remedies Code applied to Dao's *882 Jennifer M. Dean, Kerrville, for appellant. claim. Thus, Merry Homes contended that Dao's claim was barred because it accrued when he paid the money to Merry John Fason, Houston, for appellee.
Homes in May 2005, which was four years before Dao filed Panel consists of Chief Justice HEDGES and Justices suit. BROWN and CHRISTOPHER.
The trial court granted Dao's summary judgment. In its final judgment awarding Dao $6,000, it stated:
OPINION The Court is persuaded by the clear, unequivocal language ADELE HEDGES, Chief Justice. of Amoco Production Co. v. Smith, 946 S.W.2d 162, 164–65 (Tex.App.-El Paso 1997, no pet.), that a cause In this appeal from a summary judgment granted in favor of of action for “money had and received is an action for appellee, Luc Dao, appellant Merry Homes, Inc. contends the debt, governed by the four-year statute of limitations.” trial court erred in concluding that Dao's claim for money had The Court recognizes the argument that Defendant has and received was subject to a four-year statute of limitations. asserted regarding the language about unjust enrichment Because a claim for money had and received is a quasi- and the Supreme Court's holding in Elledge v. Friberg– contract action based on a promise implied in law, not an Cooper Water Supply Corp., 240 S.W.3d 869, 870–71 action for breach of contract, it is governed by the two-year (Tex.2007) regarding a 2 year statute of limitations for statute of limitations for “taking or detaining the personal unjust enrichment actions. However, the two causes of property of another.” Tex. Civ. Prac. & Rem.Code Ann. § action are not identical. The Court will not conclude that a 16.003(a) (West 2002). Accordingly, we reverse and remand two-year statute of limitations applies to “money had and for further proceedings. received” absent a clear statement from our appellate courts to that effect.
Merry Homes timely appealed the trial court's final summary BACKGROUND judgment.
In May 2005, Chi Hung Luu leased property from Merry Homes to operate a night club. Luu paid $6,000 under the lease; Luc Dao paid Merry Homes an additional $6,000 to ANALYSIS secure the leased property. Dao was not a party to the lease contract. In a single issue, Merry Homes asserts that the trial court erred in determining that the four-year statute of limitations period Luu later discovered that the property was not eligible for applies to a claim for money had and received. use as a bar or night club because it was located too close to a school. Luu sued Merry Homes for a declaration that the [1] [2] We review a trial court's summary judgment de lease was void and to recover the money he had paid. The trial novo. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, court declared the lease void and entered a final judgment on 661 (Tex.2005). In reviewing a summary judgment, we take February 9, 2009. The trial court awarded Luu the $6,000 he as true all evidence favorable to the nonmovant, indulging every reasonable inference, and we resolve any doubts in
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Merry Homes, Inc. v. Luc Dao, 359 S.W.3d 881 (2012)
declared “categorically” that “[u]njust enrichment claims are the nonmovant's favor. Nixon v. Mr. Prop. Mgmt. Co., 690 governed by the two-year statute of limitations in section S.W.2d 546, 549 (Tex.1985).
16.003 of the Civil Practice and Remedies Code.” 240 S.W.3d [3] [4] [5] Money had and received is an equitable at 871. In light of this clear precedent, we hold that Dao's claim for money had and received is subject to the two-year doctrine designed to prevent unjust enrichment. London v.
statute of limitations provided by section 16.003 of the Civil London, 192 S.W.3d 6, 13 (Tex.App.-Houston [14th Dist.]
Practice and Remedies Code. Tex. Civ. Prac. & Rem.Code 2005, pet. denied). This cause of action arises when a party Ann. § 16.003(a)
obtains money that, in equity and good conscience, belongs to another. Hunt v. Baldwin, 68 S.W.3d 117, 132 (Tex.App.-
[7] For the first time on appeal, Dao asserts that his cause of Houston [14th Dist.] 2001, no pet.). A claim for money had action to recover the $6,000 accrued only once the lease was and received is not based on wrongdoing; rather, the only declared void in the earlier lawsuit between Luu and Merry question is whether the defendant holds money that, in equity Homes. But because he did not make this argument in his and good conscience, belongs to another. See London, 192 summary-judgment motion, we may not consider it on appeal.
S.W.3d at 13.
See Tex.R. Civ. P. 166a(c). Accordingly, we sustain Merry [6] Because money had and received is an equitable doctrine Home's sole issue on appeal. designed to prevent unjust enrichment, the proper statute of limitations for such a claim is that applicable to claims for unjust enrichment. Cf. Autry v. Dearman, 933 S.W.2d CONCLUSION 182, 190 n. 7 (Tex.App.-Houston [14th Dist.] 1996, writ denied) (noting that plaintiff's claims for money had and We have sustained Merry Home's issue and hold that the tworeceived and unjust enrichment would be barred by the two- year statute of limitations applies to Dao's claim for money year statute of limitations). In a series of three decisions, the had and received. Because Merry Homes did not file its Supreme Court of Texas has concluded that unjust enrichment own summary-judgment motion conclusively establishing the claims are governed by the two-year statute of limitations accrual date of Dao's claim, however, we reverse and remand provided by section 16.003 of the Texas Civil Practice and to the trial court for further proceedings. Remedies Code. See Elledge v. Friberg–Cooper Water *884 Supply Corp., 240 S.W.3d 869, 871 (Tex.2007) (per curiam);
All Citations Wagner & Brown, Ltd. v. Horwood, 58 S.W.3d 732, 737 (Tex.2001); HECI Exploration Co. v. Neel, 982 S.W.2d 359 S.W.3d 881 881, 885 (Tex.1998). Indeed, in Elledge, the Supreme Court
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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005) 48 Tex. Sup. Ct. J. 789
897, French v. Glorioso, 94 S.W.3d 739, and Runnells v. Firestone, 746 S.W.2d 845; and KeyCite Yellow Flag - Negative Treatment Declined to Follow by Staton Holdings, Inc. v. Hilton Apparel Group, [4] contractual forum selection clause could not be ignored, N.D.Tex., July 5, 2007 in the purposeful availment analysis.
168 S.W.3d 777 Supreme Court of Texas.
Reversed and rendered.
MICHIANA EASY LIVIN' COUNTRY, INC., d/b/a Michiana R.V., Petitioner, David M. Medina, J., filed a dissenting opinion, in which v. O'Neill, J., joined.
James G. HOLTEN, Respondent.
No. 04–0016. | Argued Jan. 6, West Headnotes (26)
2005. | Decided May 27, 2005. | Rehearing Denied Sept. 2, 2005.
[1] Appeal and Error Synopsis Organization and Jurisdiction of Lower Background: Buyer brought action against nonresident seller Court of recreational vehicle (RV), among others, alleging violation Petition for review filed by nonresident seller of Deceptive Trade Practices Consumer Protection Act, of recreational vehicle (RV), stating the issue common law fraud, breach of warranty, and breach of presented as whether factually and legally contract. The 334th District Court, Harris County, J. Dale sufficient evidence existed in clerk's record to Wainwright, J., denied seller's special appearance. Seller support implied finding by trial court that seller brought interlocutory appeal. On rehearing, the Houston committed a tort in Texas, and stating that Court of Appeals, First District, 127 S.W.3d 89, affirmed. such implied finding was the only basis for Review was granted. personal jurisdiction over seller by Texas courts, necessarily included subsidiary question of whether seller had sufficient minimum contacts Holdings: The Supreme Court, Scott Brister, J., held that: with Texas, as required by due process; thus, seller did not improperly raise the due process [1] purposeful availment requirement in due process minimum contacts issue for first time in its minimum contacts analysis was not satisfied, because appellate merits brief. U.S.C.A. Const.Amend. nonresident seller's only contact with Texas was buyer's 14; Rules App.Proc., Rule 55.2. decision to place an order from Texas;
3 Cases that cite this headnote [2] purposeful availment requirement is not necessarily established by allegations or evidence, in support of specific [2] Appeal and Error jurisdiction, that a nonresident committed a tort during a Appearance and representation by counsel conversation initiated by a person with a Texas telephone Supreme Court would not presume that evidence number, disapproving of Boissiere v. Nova Capital, LLC, 106 was presented at special appearance hearing in S.W.3d 897, Ahadi v. Ahadi, 61 S.W.3d 714, Ring Power action against nonresident seller of recreational Sys. v. Int'l de Comercio Y Consultoria, 39 S.W.3d 350, and vehicle (RV), as basis for further presumption Memorial Hosp. Sys. v. Fisher Ins. Agency, 835 S.W.2d 645; that evidence was presented that supported trial court's order, where buyer and seller conceded [3] purposeful availment requirement does not turn on that evidence was not presented at the special whether nonresident defendant's contacts were tortious, as appearance hearing. basis for specific jurisdiction, disapproving of Mabry v. Reid, 130 S.W.3d 385, Boissiere v. Nova Capital, LLC, 106 S.W.3d
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Bar Rules, V.T.C.A., Government Code Title 3 Cases that cite this headnote 2, Subtitle G App. A, Art. 10, § 9, Rules of Prof.Conduct, Rule 3.03.
[3] Appeal and Error Cases that cite this headnote Questions and Objections in General For pretrial proceedings in the trial court, a reporter's record is required, to establish harmful [7] Appeal and Error error on appeal, only if evidence is introduced Nature of remedy by dismissal in open court; for nonevidentiary hearings in The appellate rules are designed to resolve the trial court, a reporter's record is superfluous. appeals on the merits, and the appellate court Rules App.Proc., Rule 34.1. must interpret and apply them whenever possible to achieve that aim.
20 Cases that cite this headnote 4 Cases that cite this headnote [4] Appeal and Error Matters not included or shown in general [8] Constitutional Law If all the evidence in the pretrial proceeding in Non-residents in general the trial court is filed with the court clerk and For due process purposes with respect only arguments by counsel are presented in open to personal jurisdiction over nonresident court, the appeal should be decided on the clerk's defendants, it is essential in each case that there record alone. be some act by which the defendant purposefully avails itself of the privilege of conducting 8 Cases that cite this headnote activities within the forum State, thus invoking the benefits and protections of its laws. U.S.C.A.
[5] Appeal and Error Const.Amend. 14.
Presentation and Reservation of Grounds of 95 Cases that cite this headnote Review Appeal and Error Failure to set forth evidence in general [9] Constitutional Law Non-residents in general If the pretrial proceeding's nature, the trial court's order, the party's briefs, or other indications show It is only the nonresident defendant's contacts that an evidentiary hearing took place in open with the forum state, and not unilateral activity court, then a complaining party must present a of another party or a third person, that counts, record of that hearing, to establish harmful error, under purposeful availment requirement in but otherwise, appellate courts should presume due process minimum contacts analysis for that pretrial hearings are nonevidentiary, and that personal jurisdiction over nonresident defendant. the trial court considered only the evidence filed U.S.C.A. Const.Amend. 14. with the court clerk.
177 Cases that cite this headnote 37 Cases that cite this headnote [10] Constitutional Law [6] Attorney and Client Manufacture, distribution, and sale Candor, and disclosure to opponent or court Under due process minimum contacts analysis The rules of professional conduct, which require for personal jurisdiction, nonresident sellers who candor toward a tribunal, prohibit a lawyer from reach out beyond one state and create continuing asserting to the appellate court that a pretrial relationships and obligations with citizens of hearing was evidentiary, when it was not. State another state are subject to the jurisdiction of the latter in suits based on their activities; by
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contrast, a defendant will not be haled into Under purposeful availment requirement in due a jurisdiction solely based on contacts that process minimum contacts analysis for personal are random, isolated, or fortuitous. U.S.C.A. jurisdiction over nonresident, a nonresident that Const.Amend. 14. directs marketing efforts to Texas in the hope of soliciting sales is subject to suit in Texas 21 Cases that cite this headnote in disputes arising from that business. U.S.C.A.
Const.Amend. 14.
[11] Constitutional Law 23 Cases that cite this headnote Non-residents in general Under purposeful availment requirement in due process minimum contacts analysis for personal [15] Constitutional Law jurisdiction, the nonresident defendant must seek Manufacture, distribution, and sale some benefit, advantage, or profit by availing Courts itself of the jurisdiction, and jurisdiction is Contract disputes premised on notions of implied consent, i.e., Courts by invoking the benefits and protections of a Fraud, racketeering, and deceptive practices forum's laws, a nonresident consents to suit there.
Purposeful availment requirement in due process U.S.C.A. Const.Amend. 14.
minimum contacts analysis was not satisfied, as 133 Cases that cite this headnote to personal jurisdiction in Texas over Indianabased seller of recreational vehicle (RV), in action by Texas-resident buyer for common law [12] Constitutional Law fraud, breach of warranty, breach of contract, Non-residents in general and violation of Deceptive Trade Practices Under purposeful availment requirement in Consumer Protection Act, where nonresident due process minimum contacts analysis seller's only contact with Texas was buyer's for exercising personal jurisdiction over a decision to place an order from Texas. U.S.C.A. nonresident, a nonresident may purposefully Const.Amend. 14; V.T.C.A. Bus. & C., § 17.41 avoid a particular jurisdiction by structuring its et seq. transactions so as neither to profit from the forum's laws nor be subject to its jurisdiction. 40 Cases that cite this headnote U.S.C.A. Const.Amend. 14.
[16] Constitutional Law 20 Cases that cite this headnote Non-residents in general Financial benefits accruing to the nonresident [13] Constitutional Law defendant from a collateral relation to the Manufacture, distribution, and sale forum State will not support personal jurisdiction In the context of product sales, a nonresident if they do not stem from a constitutionally seller need not have offices or employees in cognizable contact with that State under due a forum state in order to meet the purposeful process minimum contacts analysis. U.S.C.A. availment test in due process minimum contacts Const.Amend. 14. analysis for personal jurisdiction over the nonresident. U.S.C.A. Const.Amend. 14. 7 Cases that cite this headnote
7 Cases that cite this headnote [17] Constitutional Law Manufacture, distribution, and sale [14] Constitutional Law Courts Manufacture, distribution, and sale
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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005) 48 Tex. Sup. Ct. J. 789
Manufacture, Distribution, and Sale of committed a tort during a conversation initiated Products by a person with a Texas telephone number; Courts disapproving of Boissiere v. Nova Capital, LLC, Fraud, racketeering, and deceptive practices 106 S.W.3d 897, Ahadi v. Ahadi, 61 S.W.3d 714, Ring Power Sys. v. Int'l de Comercio Nonresident seller's conduct in arranging with Y Consultoria, 39 S.W.3d 350, and Memorial shipper to deliver recreational vehicle (RV) to Hosp. Sys. v. Fisher Ins. Agency, 835 S.W.2d buyer for use in Texas did not satisfy purposeful 645. U.S.C.A. Const.Amend. 14; V.T.C.A., Civil availment requirement in due process minimum Practice & Remedies Code § 17.042(2).
contacts analysis for personal jurisdiction over seller in Texas courts, in action by Texas- 14 Cases that cite this headnote resident buyer for common law fraud, breach of warranty, breach of contract, and violation of Deceptive Trade Practices Consumer Protection [21] Constitutional Law Act; delivery in Texas was at buyer's sole request Non-residents in general and sole expense. U.S.C.A. Const.Amend. 14; Purposeful availment requirement in minimum V.T.C.A. Bus. & C., § 17.41 et seq. contacts due process analysis for personal jurisdiction over nonresidents does not turn 30 Cases that cite this headnote on whether nonresident defendant's contacts were tortious, as basis for specific jurisdiction;
[18] Courts disapproving of Mabry v. Reid, 130 S.W.3d 385, Torts in general Boissiere v. Nova Capital, LLC, 106 S.W.3d 897, French v. Glorioso, 94 S.W.3d 739, and The broad language of the Texas long-arm Runnells v. Firestone, 746 S.W.2d 845. U.S.C.A.
statute, authorizing personal jurisdiction over Const.Amend. 14; V.T.C.A., Civil Practice & a nonresident defendant who commits a tort Remedies Code § 17.042(2).
in whole or in part in Texas, extends only as far as the Due Process Clause of the 3 Cases that cite this headnote United States Constitution will permit. U.S.C.A. Const.Amend. 14; V.T.C.A., Civil Practice & Remedies Code § 17.042(2). [22] Constitutional Law Consent; forum-selection clauses 9 Cases that cite this headnote Courts Of the person [19] Courts Generally, a forum selection clause in a Determination of questions of jurisdiction contract operates as consent to jurisdiction in in general one forum, not proof that the Due Process Personal jurisdiction is a question of law for the Clause would allow no other forum to court, even if it requires resolving questions of exercise personal jurisdiction over a nonresident. fact. U.S.C.A. Const.Amend. 14.
9 Cases that cite this headnote 8 Cases that cite this headnote
[20] Constitutional Law [23] Constitutional Law Particular Parties or Circumstances Manufacture, distribution, and sale Purposeful availment requirement in minimum Courts contacts due process analysis for personal Manufacture, Distribution, and Sale of jurisdiction over nonresidents is not necessarily Products established by allegations or evidence, in support Insertion, in contract for sale of recreational of specific jurisdiction, that a nonresident vehicle (RV), of forum selection clause
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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005) 48 Tex. Sup. Ct. J. 789
designating Indiana as forum for litigation Jurisdiction and Venue between buyer residing in Texas and seller The Due Process Clause ensures that the States, located in Indiana could not be ignored, through their courts, do not reach out beyond when determining whether purposeful availment the limits imposed on them by their status as requirement, in due process minimum contacts coequal sovereigns in a federal system. U.S.C.A. analysis, was satisfied with respect to Texas Const.Amend. 14. court exercising personal jurisdiction over seller; forum selection clause suggested that seller Cases that cite this headnote did not intend to avail itself of benefits and protections of Texas laws. U.S.C.A. Const.Amend. 14.
Attorneys and Law Firms 155 Cases that cite this headnote *780 William G. Rossick, Watson & Rossick, Austin, [24] Stipulations Charles A. Watson, Kelly Michael Kowis, Watson, Kowis & Necessity for writing in general Rossick, Houston, Larry D. Thompson, and Robert G. Smith Jr., Lorance & Thompson, P.C., Houston, for Petitioner.
Stipulations Oral stipulations in court *781 Brock C. Akers and Neal Kieval, Phillips & Akers, Stipulations P.C., Houston, for Respondent.
Entry, filing, or record Craig Madison Patrick, Craddock Reneker & Davis, L.L.P., Alleged concession by counsel for nonresident Dallas, and Evelyn L. Becker, O'Melveney & Myers LLP, seller of recreational vehicle (RV), at special Washington, DC, for Others.
appearance hearing in Texas regarding personal jurisdiction over seller, that forum selection Opinion clause in sales contract, designating Indiana as forum for litigation between buyer and seller was Justice BRISTER delivered the opinion of the Court, in which inapplicable, was unenforceable in the Texas Chief Justice JEFFERSON, Justice HECHT, Justice OWEN, action, where there was no reporter's record of and Justice GREEN joined. the hearing; Texas civil procedure rule required an agreement between counsel or parties to be in James Holten decided to buy a $64,000 Coachmen writing or to be made in open court and entered recreational vehicle sight unseen. Eschewing every RV dealer of record. Vernon's Ann.Texas Rules Civ.Proc., in Texas, he sought a lower price from Michiana Easy Livin' Rule 11. Country, Inc., an outlet store that only did business in Indiana.
Holten called Michiana in Indiana, sent payment to Indiana, 2 Cases that cite this headnote paid for delivery from Indiana, and agreed to resolve every dispute in Indiana. But when a dispute actually arose, he filed suit in Texas.
[25] Contracts Agreement as to place of bringing suit;
The trial court and court of appeals denied Michiana's special forum selection clauses appearance. Because of a conflict in the decisions of the courts Enforcement of a contractual forum selection of appeals, 1 we have jurisdiction to review this conclusion. 2 clause is mandatory absent a showing that Finding Michiana does not have minimum contacts with enforcement would be unreasonable and unjust, Texas, we reverse.
or that the clause was invalid due to fraud or overreaching.
18 Cases that cite this headnote I
[26] Constitutional Law
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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005) 48 Tex. Sup. Ct. J. 789
[3] [4] What is clear is that a reporter's record is required only if evidence is introduced in open court;
A. Petition and Brief for nonevidentiary hearings, it is superfluous. 11 If all the We first address two questions of error preservation. evidence is filed with the clerk and only arguments by counsel are presented in open court, the appeal should be decided on [1] First, Holten argues that Michiana cannot assert a the clerk's record alone. 12 minimum-contacts challenge because it was raised for the first time in Michiana's brief on the merits rather than in The difficulty of course is that the absence of a reporter's its petition for review. 3 In its petition for review, Michiana record does not tell us whether a pretrial hearing was stated the issue presented as follows: nonevidentiary, or evidentiary but not preserved. Presuming them all the former unfairly penalizes a party that presents evidence in open court that the other party does not bother Whether factually and legally sufficient evidence exists in to preserve. But presuming them all the latter would require the Clerk's Record to support the implied finding by the every hearing to be recorded—whether evidentiary (to show trial court that Michiana committed a tort in Texas—the what was presented) or not (to show nothing was). Besides only basis for personal jurisdiction over Michiana by Texas being wasteful, this would frustrate the intent of our appellate courts. rule requiring a reporter's record only “if necessary to the Both the opinion below and the petition for review here appeal.” 13 list undisputed facts showing that Michiana had no contact with Texas or Texans except for the alleged tort. Michiana's For some years now the trend has been away from full petition is correct—the sole ground on which the court of evidentiary hearings in open court for most pretrial matters.
appeals based jurisdiction was the commission of a tort in While we have generally encouraged oral hearings when Texas. 4 The argument that this conclusion was incorrect arguments may be helpful, 14 both the Legislature and this necessarily included the subsidiary argument detailed in Court have discouraged oral presentation of testimony and Michiana's brief—that without that ground, jurisdiction did evidence when they can be fairly submitted in writing. 15 not exist. This is all the rules require. 5 Counsel can almost always direct the trial court's attention to pertinent deposition excerpts, discovery responses, or affidavits in less time *783 than it takes to recreate them B. The Record in Pretrial Hearings in open court. Presuming that most pretrial proceedings are evidentiary would not only discourage this trend, but would [2] Second, the appellate record contains no reporter's encumber thousands of routine hearings by requiring formal record of the special appearance hearing. Though candidly proof that no proof was offered.
conceding that no oral testimony or new exhibits were presented at that hearing, Holten nevertheless argues we must [5] Accordingly, we have in the past presumed that pretrial presume evidence was presented that supports the trial court's hearings are nonevidentiary absent a specific indication or order.
assertion to the contrary. 16 If the proceeding's nature, the It is difficult to state a bright-line rule regarding unrecorded trial court's order, the party's briefs, or other indications show pretrial proceedings, as they come in so many shapes and that an evidentiary hearing took place in open court, then sizes. Many pretrial “hearings” take place entirely on paper, a complaining party must present a record of that hearing
while others involve a personal *782 appearance in court. 6 to establish harmful error. 17 But otherwise, appellate courts should presume that pretrial hearings are nonevidentiary, and In some the parties must file all evidence with the clerk; 7 in that the trial court considered only the evidence filed with the others they must present it in open court; 8 in most the manner clerk. of presentation is discretionary; 9 in at least one the answer is unclear. 10 It is true that a dozen years ago in Piotrowski v. Minns we stated: “[a] litigant who fails to request that the reporter record pretrial proceedings risks waiver of any complaint
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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005) 48 Tex. Sup. Ct. J. 789
with respect to error occurring during those proceedings.” 18 obtained from Michiana, a “factory outlet.” Holten obtained But the appellant there conceded that the special appearance Michiana's number from the factory and placed the call that initiated the transaction here.
hearing was evidentiary. 19 Moreover, since that time the rules have changed so that court reporters no longer attend The RV was constructed and equipped outside Texas. It was court and make a record only “when requested” but now must paid for outside Texas. It was shipped to Texas at Holten's do so “unless excused by agreement of the parties.” 20 The request and entirely at his expense. former rule implied a lack of diligence when the losing party requested no record; 21 the current rule implies an agreement The question presented is whether suit can be brought in that no record was made because none was needed. Texas based on a nonresident's alleged misrepresentations in a telephone call with a Texas resident. The courts of [6] Either party, of course, may allege that a hearing was appeals are split on this question of specific jurisdiction 24 — evidentiary, but that allegation must be specific. Merely some holding it would violate constitutional standards, 25 and asserting that the trial court “considered evidence at the hearing” is not enough—trial courts do that when a hearing others (including the lower court here) that it would not. 26 is conducted entirely on paper, or based solely on affidavits and exhibits filed beforehand. Instead, there must be a specific indication that exhibits or testimony was presented in open B. Purposeful Availment court beyond that filed with the clerk. As the rules of professional conduct prohibit assertions that a hearing was [8] For half a century, the touchstone of jurisdictional due evidentiary when it was not, 22 and *784 as events in open process has been “purposeful availment.” Since Hanson v. court can usually be confirmed by many witnesses, there is no Denckla, “it is essential in each case that there be some act by reason to expect that such assertions will be lightly fabricated. which the defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking [7] Our appellate rules are designed to resolve appeals on the benefits and protections of its laws.” 27 the merits, and we must interpret and apply them whenever possible to achieve that aim. 23 Accordingly, we decline to *785 [9] Three aspects of this requirement are relevant presume the special appearance hearing here was evidentiary here. First, it is only the defendant's contacts with the forum when everyone concedes it was not. that count: purposeful availment “ensures that a defendant will not be haled into a jurisdiction solely as a result of ... the ‘unilateral activity of another party or a third person.’ ” 28
II
[10] Second, the acts relied on must be “purposeful” rather than fortuitous. 29 Sellers who “reach out beyond one state A. Background and create continuing relationships and obligations with citizens of another state” are subject to the jurisdiction of As its name invertedly suggests, Michiana is located in Indiana a few miles from the Michigan border. It is a separate the latter in suits based on their activities. 30 By contrast, a legal entity from the manufacturer or any other dealers of defendant will not be haled into a jurisdiction solely based on Coachmen RVs. It has neither employees nor property in contacts that are “random, isolated, or fortuitous.” 31 Texas, and is not authorized to do business here. It does not advertise in Texas or on the Internet, and thus did not solicit [11] [12] Third, a defendant must seek some benefit, business from Holten or anyone else in Texas. advantage, or profit by “availing” itself of the jurisdiction. 32 Jurisdiction is premised on notions of implied consent—
The sale at issue here was initiated entirely by Holten. that by invoking the benefits and protections of a forum's Seeking a cheaper price than he could get from any of laws, a nonresident consents to suit there. 33 By contrast, a Coachmen's many dealers in Texas, Holten called the nonresident may purposefully avoid a particular jurisdiction Coachmen factory. He was informed that Coachmen did not sell directly from the factory, but that a lower price could be
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by structuring its transactions so as neither to profit from the place large numbers of RVs in a “stream of commerce”
34 flowing to Texas; as we have noted before, stream-offorum 's laws nor be subject to its jurisdiction.
commerce jurisdiction requires a stream, not a dribble. 45 Nor is there any evidence of any “additional conduct”— Michiana did not design, advertise, or distribute RVs in C. Stream of Commerce Texas. Exercising jurisdiction here would go far beyond [13] In the context of product sales, a nonresident need not anything we have approved in other commercial cases. have offices or employees in a forum state in order to meet the purposeful availment test. In International Shoe Co. v. Washington, a nonresident corporation had neither offices nor D. Single Sales inventory in the state of Washington, but did have a dozen resident salesmen on commission who exhibited samples, The court of appeals relied on several cases by intermediate solicited orders, and transmitted them to other states for courts in Texas holding that a single contact with the shipment to resident consumers. 35 The operation of a sales state is sufficient to establish jurisdiction. 46 But the and distribution network rendered the nonresident subject to United States Supreme Court has emphatically answered the the state's jurisdiction. 36 question whether a single contract with a Texas resident can automatically establish jurisdiction—“the answer clearly is [14] Thus, a nonresident that directs marketing efforts to that it cannot.” 47 Texas in the hope of soliciting sales is subject to suit here in disputes arising from that business. Advertising in telephone Both the United States Supreme Court and this Court have 37 found no purposeful availment in cases involving isolated directories in Texas cities, operating an office for sales 38 sales solicited by consumers who proposed to use the product information and support, and certain activities over the in a state where the defendant did no business. In World–
39
Internet all meet this standard. Wide Volkswagen Corp. v. Woodson, the Supreme Court held that dealers who sold a car in New York could not be sued in *786 It is less clear whether a nonresident “purposefully Oklahoma just because the buyers were involved in a collision avails” itself of a forum when it benefits from a major market there: without doing any of the marketing. Almost twenty years ago, four justices of the United States Supreme Court held that a [W]e find in the record before us nonresident's mere awareness that thousands of its products a total absence of those affiliating were ultimately being sold in the forum state established circumstances that are a necessary purposeful availment; 40 four others held that “additional predicate to any exercise of stateconduct ” was required (e.g., designing the product for or court jurisdiction. Petitioners carry on no activity whatsoever in Oklahoma.
advertising it in the forum State); 41 the ninth held that, They close no sales and perform no assuming “additional conduct” was required, regular sales services there. They avail themselves resulting in thousands of products reaching the forum state of none of the privileges *787 over many years would suffice “[i]n most circumstances.” 42 and benefits of Oklahoma law. They solicit no business there either through Since that time, we have noted that our cases appear to follow salespersons or through advertising the “additional conduct” standard. 43 Thus, for example, we reasonably calculated to reach the have held that shipping hundreds of tons of raw asbestos State. Nor does the record show that to Houston was insufficient to establish jurisdiction absent they regularly sell cars at wholesale evidence that a nonresident participated in the decision to or retail to Oklahoma customers send it there. 44 or residents or that they indirectly, through others, serve or seek to [15] Whichever of these standards is ultimately correct, serve the Oklahoma market. In short, Michiana's conduct meets none of them. Michiana did not respondents seek to base jurisdiction on one, isolated occurrence and
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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005) 48 Tex. Sup. Ct. J. 789
whatever inferences can be drawn Everything Michiana wanted out of the contract it had in therefrom: the fortuitous circumstance hand. Indeed, it is hard to imagine how Michiana would have that a single Audi automobile, sold conducted its activities any differently if Texas had no law in New York to New York residents, at all. happened to suffer an accident while passing through Oklahoma. 48 *788 [16] Clearly, Michiana anticipated some profit from this single sale, at least until the litigation started. But “financial benefits accruing to the defendant from a collateral The facts here are not the same as those in Woodson, but relation to the forum State will not support jurisdiction if they do not differ in any material respect. Michiana knew Holten do not stem from a constitutionally cognizable contact with would take his RV to Texas, while it was merely foreseeable to the defendant in Woodson that its buyer would drive his that State.” 57 We find none here. Audi to Oklahoma. 49 But in either case the choice was entirely that of the purchaser; the seller had no say in the matter. Under Holten's theory, Michiana could be sued in any III state or country from which he chose to place his call and take delivery. But as the Supreme Court stated, “unilateral The court of appeals affirmed on the basis of two activity ... cannot satisfy the requirement of contact with the contacts between Michiana and Texas: (1) misrepresentations Michiana allegedly made in response to a phone call from forum State.” 50 Holten, and (2) Michiana's arrangements with a shipper to deliver the RV to Holten for use in Texas. Neither is This Court addressed the same question in 1996 in CMMC sufficient.
v. Salinas. 51 In that case, a French manufacturer had made no effort to market its winepress equipment in Texas, had made only one other sale in Texas, and did not initiate the A. Shipping to Texas sale at issue to a Texas buyer. 52 We held that the Due Process Clause prohibited specific jurisdiction of a tort suit in [17] The second ground is easily disposable. Delivery in 53 Texas was at Holten's sole request and sole expense. If a seller Texas based on injuries resulting from alleged defects. As Michiana's contacts here are certainly no more and arguably of chattels is subject to suit wherever a customer requests somewhat less than those in CMMC, the result must be the delivery, then the chattel has become its agent for service of same, as the Due Process Clause has not changed in the process—a conclusion the United States Supreme Court has interim. expressly rejected. 58
It is true that in some circumstances a single contract may We too rejected this argument in CMMC, in which we stated: meet the purposeful-availment standard, but not when it “The sole question in this case is whether the Fourteenth involves a single contact taking place outside the forum state. Amendment permits a state court to take personal jurisdiction A long-term franchise agreement may establish minimum over a foreign manufacturer merely because it knew its contacts because, though it stems from a single contract, allegedly defective product would be shipped to that state. We it involves many contacts over a long period of time. 54 answer no, and thus reverse....” 59 Accordingly, we must do Similarly, a life-insurance policy may stem from a single the same here. contract, but necessarily involves a series of contacts until death does the parties part. 55 B. Committing a Tort “in” Texas Certainly a nonresident corporation ought to be subject to suit in any jurisdiction where it “enjoys the benefits and protection The court of appeals relied most heavily on the first ground— of the laws of that state.” 56 Here, it is hard to imagine Holten's allegation that Michiana committed a tort in Texas. what possible benefits and protection Michiana enjoyed from Texas law. Holten paid for the RV in advance, and could not [18] Allegations that a tort was committed in Texas satisfy have planned on taking it to Indiana regularly for service. the Texas Long–Arm Statute, 60 but not necessarily the U.S.
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Constitution; the broad language of the former extends only A companion case decided by the same Court on the same 61 day as Calder shows that the important factor was the extent as far as the latter will permit. Thus, for example, the plaintiffs in both Woodson and CMMC alleged torts, and the of the defendant's activities, not merely the residence of the defendants surely foresaw that defective products could harm victim. In Keeton v. Hustler Magazine, Inc., the victim of local buyers—but in neither case was that enough to establish another allegedly defamatory article sued not in the state where she lived, but in a different state with a longer statute of jurisdiction. 62 limitations. 68 Noting that the defendant had sold more than The court below joined many of its sister courts in stating 10,000 copies of its magazine every month in the forum state, the following as a rule of jurisdiction: “If a tortfeasor knows the Supreme Court held that “it must reasonably anticipate that the brunt of the injury will be felt by a particular resident being haled into court there.” 69 in the forum state, he must reasonably anticipate being haled into court there to answer for his actions.” 63 But neither this Our dissenting colleagues cite no other authority that a single Court nor the *789 United States Supreme Court has ever conversation with a private citizen constitutes purposeful said so. availment of any jurisdiction in which that citizen happens to live. While torts were alleged in some of the cases cited in the To the contrary, twenty years ago the United States Supreme dissent, the defendant's conduct in each case was much more Court wrote: “Although it has been argued that foreseeability extensive and was aimed at getting extensive business in or of causing injury in another State should be sufficient to *790 from the forum state. 70 Exercising jurisdiction here establish such contacts there when policy considerations so would go far beyond anything we have approved in other tort require, the Court has consistently held that this kind of cases. foreseeability is not a ‘sufficient benchmark’ for exercising personal jurisdiction.” 64 This Court too has expressly rejected jurisdiction “based solely upon the effects or C. The Consequences
65
consequences of an alleged conspiracy” in the forum state. Instead, it is “the defendant's conduct and connection with the Several problems arise if jurisdiction turns not on a defendant's contacts, but on where it “directed a tort.” First, forum” that are critical. 66 it shifts a court's focus from the “relationship among the
It is true that on one occasion the United States Supreme Court defendant, the forum, and the litigation” 71 to the relationship found specific jurisdiction based on alleged wrongdoing among the “plaintiff, the forum ... and the litigation.” 72 intentionally directed at a forum resident. In Calder v. Jones, The place where a plaintiff relies on fraud may determine a reporter and editor collaborated on an allegedly defamatory the choice of law, 73 but choice-of-law analysis considers article, but they did so knowing the article was for their all parties, local courts, legal policies, interested states, employer, the National Enquirer, which sold more than and the interstate and international systems. 74 By contrast,
67
600,000 copies in the forum state every week. Whether or minimum-contacts analysis focuses solely on the actions and not a jury found the article defamatory, there was no question reasonable expectations of the defendant. 75 the defendant's article constituted a substantial “presence” in the state.
[19] Second, directed-a-tort jurisdiction confuses the roles of judge and jury by equating the jurisdictional inquiry with Texas courts that base jurisdiction on torts committed during the underlying merits. If purposeful availment depends on the receipt of an out-of-state phone call apparently assume whether a tort was directed toward Texas, then a nonresident that Calder would have come out the same way if the defamation had occurred in a single unsolicited phone call a may defeat jurisdiction by proving there was no tort. 76 nonresident answered from a single private individual in the Personal jurisdiction is a *791 question of law for the court, forum state. But if “the defendant's conduct and connection even if it requires resolving questions of fact. 77 But what if with the forum” must play a critical role, the two cases cannot a judge and jury could disagree? May a trial judge effectively be the same. grant summary judgment in a local jurisdiction by deciding contested liability facts in favor of the defendant? And if a jury absolves a defendant of tort liability, is the judgment void
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because the court never had jurisdiction of the defendant in Texas number, 81 or that (2) specific jurisdiction turns on
78
the first place? whether a defendant's contacts were tortious rather than the contacts themselves. 82 Business contacts are generally a matter of physical fact, while tort liability (especially in misrepresentation cases) turns on what the parties thought, said, or intended. Far better that judges should limit their jurisdictional decisions to the IV former rather than involving themselves in trying the latter.
Finally, the one-page contract signed by the parties provided that any litigation between them would occur in Indiana:
Third, in cases dealing with commerce, a plaintiff often has the option to sue in either contract or tort. Here, for example, CONTROLLING LAW AND PLACE Holten alleged tort, contract, and statutory claims, as Texas OF SUIT. The law of the State, in law often allows a plaintiff to do. 79 If directing a tort at Texas which I [Holten] sign this contract, is enough, then personal jurisdiction arises when plaintiffs is the law which is to be used in allege a tort, but not when they allege breach of contract. interpreting the terms of the contract. Thus, the defendant's purposeful availment depends on the You [Michiana] and I agree that if form of claim selected by the plaintiff. any dispute between us is submitted to a court for resolution, such legal Fourth, changes in technology have made reliance on phone proceeding or suit shall take place in calls obsolete as proof of purposeful availment. While the the county in which your principle ubiquity of “caller ID” may allow nonresidents to know a [sic.] offices are located. caller's telephone number, that number no longer necessarily indicates anything about the caller's location. If jurisdiction Michiana asserted this clause as a separate ground for can be based on phone conversations “directed at” a forum, granting its special appearance, and moved to dismiss on that how does a defendant avail itself of any jurisdiction when it basis, but has not sought mandamus to enforce it. Instead, can never know where the other party has forwarded calls or Michiana asserts the clause as additional proof that it never traveled with a mobile phone? purposefully availed itself of the benefits and protections of Texas law.
In their dissenting opinion, our colleagues remind us seven times that Michiana did not deny Holten's fraud allegations. [22] We agree with the court of appeals that a forum- Of course, Michiana did deny his allegations in its answer, selection clause designating Indiana does not necessarily but rightly focused its jurisdictional affidavits on lack of indicate Michiana had no minimum contacts anywhere contacts rather than lack of culpability. Jurisdiction cannot else. 83 Generally, a forum-selection clause operates as turn on whether a defendant denies wrongdoing—as virtually consent to jurisdiction in one forum, not proof that the all will. Nor can it turn on whether a plaintiff merely alleges Constitution would allow no other. 84 wrongdoing—again as virtually all will. If committing a tort establishes jurisdiction, our colleagues will have to decide [23] But this Court has held that deletion of a forumwho is correct—and then the Texas jurisdictional rule will selection clause designating a foreign jurisdiction is some be: guilty nonresidents can be sued here, innocent ones cannot. The dissenting opinion shows little doubt on that evidence that local jurisdiction was anticipated. 85 By the same token, insertion of a clause designating a foreign forum score; 80 but if we address jurisdictional questions in this suggests that no local availment was intended. The Supreme spirit, nonresidents will avoid not just our courts but our state Court has held that choice-of-law provisions should not be and all its residents as well.
ignored in considering whether a defendant has “purposefully
86
[20] [21] For the reasons stated above, we disapprove invoked the benefits and protections of a State's laws.” of those opinions holding that (1) specific jurisdiction is For the same reasons, *793 the forum-selection clause here necessarily established by allegations or evidence that *792 cannot be ignored either. a nonresident committed a tort in a telephone call from a
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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005) 48 Tex. Sup. Ct. J. 789
[24] Holten asserts three arguments in response. First, he asserts the forum-selection clause was waived because ● a nonresident automobile dealer whose only contact with Michiana raised it shortly before the special appearance the forum was a customer's decision to drive there; 93 hearing, and at the hearing “agreed the clause was inapplicable.” Although the special appearance was not decided until two years after filing, the record before us ● a nonresident father whose only contact with the forum reflects little activity other than the special appearance, was his ex-wife's decision to move there; 94 and and nothing to suggest any prejudice to Holten from the *794 ● a nonresident trustee whose only contact with delay. 87 As there was no reporter's record of the hearing, the the forum was the settlor's exercise of a power of alleged concession by counsel was not only unrecorded but appointment there. 95 unenforceable. 88 Because Michiana's only contact with Texas was Holten's decision to place his order from there, we reverse the court of Second, Holten argues the forum-selection clause is limited to appeals' judgment and render judgment dismissing the claims disputes regarding “interpreting the terms of the contract,” a against Michiana for want of jurisdiction.
phrase appearing in the same section but a preceding sentence. But the title of the paragraph shows that two different topics were addressed in it, and the forum-selection clause itself refers only to “any dispute between us” (emphasis added). Justice MEDINA filed a dissenting opinion, in which Justice The parties were not required to put these two sentences in O'NEILL joined. two different paragraphs to show that one did not modify the Justice WAINWRIGHT and Justice JOHNSON did not other.
participate in the decision.
[25] Third, Holten argues it was within the trial court's discretion to refuse to enforce this clause. But enforcement of Justice MEDINA, joined by Justice O'NEILL, dissenting. a forum-selection clause is mandatory absent a showing that Today the Court holds that an out-of-state defendant who “enforcement would be unreasonable and unjust, or that the intentionally defrauds a Texas resident, with full knowledge clause was invalid due to fraud or overreaching.” 89 Holten that reliance and damages will occur in Texas, cannot be made does not assert that the clause itself was fraudulently induced, to answer for its conduct in a Texas court simply because and presented no evidence showing why enforcement would the defrauded Texan initiated the phone call. Because the be unreasonable or unjust. Accordingly, he should be held to assumption of jurisdiction by Texas courts in this case does it. not offend the due process clause, I dissent.
*** I
[26] The Due Process Clause “ensure[s] that the States, This special appearance case arises out of James Holten's through their courts, do not reach out beyond the limits purchase of a motor home from Michiana Easy Livin' imposed on them by their status as coequal sovereigns in Country, Inc. Holten, a resident of Harris County, contacted Michiana regarding the purchase of a Class A a federal system.” 90 In the sixty years since International Coachmen Catalina motor home, customized to meet certain Shoe, the United States Supreme Court has decided only specifications. According to Holten's affidavit, he informed about a dozen minimum-contacts cases, but two of them Michiana that he resided in Texas and wanted the motor reversed Texas courts: once for reaching too far, 91 and once home delivered to his residence. Holten further avers that for preventing a sister state from reaching far enough. 92 Ours Michiana agreed to sell him the motor home, manufactured is certainly a large state, but we must recognize our own limits to his specifications, and to deliver its product to Texas, but and those of our coequal sovereigns. that the motor home did not meet his specifications. Although Michiana's affidavit disputes whether delivery in Texas was The Due Process Clause of the United States Constitution planned from the start, its affidavits do not dispute Holton's forbids jurisdiction over: averments concerning Michiana's misrepresentations.
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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005) 48 Tex. Sup. Ct. J. 789
World–Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, Holten sued Ford Motor Company, Coachmen Industries, 297, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980). Coachmen Recreational Vehicle Company, and Michiana for violations of the Texas Deceptive Trade Practices Consumer A defendant's contacts with a forum state can support either Protection Act, fraud, breach of warranty, and breach of general or specific jurisdiction. Helicopteros Nacionales de contract. Holten alleged that at the time he purchased the Colombia, S.A. v. Hall, 466 U.S. 408, 414, nn. 8, 9, 104 motor home, Michiana represented to him that the motor S.Ct. 1868, 80 L.Ed.2d 404 (1984). The parties agree that home would (1) be constructed of solid wood fastened with Michiana's contacts with Texas are insufficient to give rise screws, (2) not contain nails or staples, (3) contain a bathtub to general jurisdiction, in which a state exercises jurisdiction and shower, (4) contain a double-pedal foot-flush toilet, and in a suit that does not arise out of the defendant's contacts (5) be serviceable by any authorized Ford dealer. Holten avers with the forum. See id. at 414 n. 9. But contacts that are that these representations turned out to be false. insufficient to support general jurisdiction may still support specific jurisdiction. “Even a single purposeful contact may Nevertheless, the Court concludes that the undisputed be sufficient to meet the requirements of minimum contacts evidence of misrepresentations regarding the custom motor when the cause of action arises from the contact.” Micromedia home are not actionable in Texas because the contacts with v. Automated Broadcast Controls, 799 F.2d 230, 234 (5th Texas are too attenuated to support jurisdiction here. Because Cir.1984), citing McGee v. Int'l Life Ins. Co., 355 U.S. 220, I believe that torts perpetrated in Texas on Texas residents are 78 S.Ct. 199, 2 L.Ed.2d 223 (1957). actionable in this state, I dissent.
“Where a forum seeks to assert specific jurisdiction over an out-of-state defendant who has not consented to suit there,” the defendant must have “ ‘purposefully directed’
II
his activities at residents of the forum,” and the suit must A nonresident defendant who commits a tort in Texas or result from “injuries that ‘arise out of or relate to’ those transacts business with a Texas resident may be subject to activities.” Burger King, 471 U.S. at 472, 105 S.Ct. 2174 the jurisdiction of a Texas court under the long-arm statute. (citations omitted). For our part, we have held that for a Texas TEX. CIV. PRAC. & REM.CODE § 17.042. The tort of court to exercise specific jurisdiction over a defendant, (1) the misrepresentation occurs in Texas when reliance occurs in defendant's contact with Texas must be purposeful, and (2) Texas. See Siskind v. Villa Found. for Educ., *795 Inc., 642 the cause of action must arise from those contacts. See Am.
Type Culture Collection, Inc. v. Coleman, 83 S.W.3d 801, 806 S.W.2d 434, 437 (Tex.1982). 1 The record contains evidence (Tex.2002). Furthermore, “assumption of jurisdiction by the that Michiana, knowing that Holten was a Texas resident and forum state must not offend traditional notions of fair play wished any motor home he purchased to be delivered to him and substantial justice.” O'Brien v. Lanpar Co., 399 S.W.2d in Texas, made misrepresentations to Holten upon which he 340, 342 (Tex.1966).
relied in Texas. Therefore, on this record, it is undisputed that Michiana committed the tort of misrepresentation in Texas.
Holten claims that Michiana is subject to specific jurisdiction. There is evidence, based on the affidavits, that Michiana The Texas long-arm statute extends “as far as the federal had two significant contacts with Texas: (1) Michiana made constitutional requirements of due process will permit.” BMC misrepresentations about the motor home to Holten, knowing Software Belgium, N.V. v. Marchand, 83 S.W.3d 789, 795 that he would rely on them in Texas and that any resulting (Tex.2002). The due process clause prevents an individual damages would be suffered in Texas; and (2) Michiana from being subjected to jurisdiction in a forum “with which shipped its product to Holten in Texas. This action clearly he has established no meaningful ‘contacts, ties, or relations.’
arises out of those contacts. The *796 question remains ” Burger King Corp. v. Rudzewicz, 471 U.S. 462, 471–72, 105 whether Michiana's contact with Texas was purposeful.
S.Ct. 2174, 85 L.Ed.2d 528 (1985) quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 319, 66 S.Ct. 154, 90 L.Ed. 95 (1945). This “allows potential defendants to structure their primary conduct with some minimum assurance as to where III that conduct will and will not render them liable to suit.”
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S.Ct. 2174; see also No. Am. Philips Corp. v. Am. Vending Sales, Inc., 35 F.3d 1576, 1578–79 (Fed.Cir.1994). One court
A
has gone so far as to hold that “[o]nce a defendant knowingly The unilateral actions of a plaintiff cannot form the basis enters into a contract through a website, ... that defendant has for long arm jurisdiction. See World–Wide Volkswagen, 444 purposefully availed him or herself of the privileges of the U.S. at 298, 100 S.Ct. 559. But when a tortfeasor commits forum state .... [and] may be subject to suit there.” Stewart a tort in the forum state by directing its actions toward the v. Hennesey, 214 F.Supp.2d 1198, 1203 (D.Utah 2002). I do forum state with full knowledge that injury will occur in not endorse that rule, but it further illustrates that finding the forum state, jurisdiction is appropriate. See Wien Air jurisdiction on this record falls well within the pale. Alaska, Inc. v. Brandt, 195 F.3d 208, 211 (5th Cir.1999), citing Calder v. Jones, 465 U.S. 783, 789–90, 104 S.Ct. In World–Wide Volkswagen, New York residents, who had 1482, 79 L.Ed.2d 804 (1984); see also Mem. Hosp. Sys. v. purchased their automobile from a dealership in New York, Fisher Ins. Agency, Inc., 835 S.W.2d 645, 650–52 (Tex.App.- were injured when their car caught fire in Oklahoma. The Houston [14th Dist.] 1992, no writ) (holding that a single United States Supreme Court held that an Oklahoma court phone call was sufficient). Here, although Holten initiated could not exercise personal jurisdiction over the dealership, contact, Michiana made the decision to deal with him, made which operated only in the northeast and had no way of misrepresentations to him knowing that he was in Texas, and knowing the automobile would end up in Oklahoma. See shipped the motor home to Texas. Michiana's conduct was World–Wide Volkswagen Corp., 444 U.S. 286, 100 S.Ct. therefore sufficiently purposeful to support jurisdiction. 559. But the Court further stated that a “forum State does not exceed its powers under the due process clause if it The Court makes much of the fact that this transaction arises asserts personal jurisdiction over a corporation that delivers primarily out of a single phone call. However, it is not the its products into the stream of commerce with the expectation quantity or duration of contacts that matters in the specific that they will be purchased by consumers in the forum jurisdiction context but the nature of the contacts. Miss. State.” Id. at 297–98, 100 S.Ct. 559; see also Keen v. Ashot Interstate Exp. Inc. v. Transpo, Inc., 681 F.2d 1003, 1006 (5th Ashkelon, Ltd., 748 S.W.2d 91, 93 (Tex.1988) (overruled Cir.1982); see also Am. Type Culture Collection, 83 S.W.3d in part on other grounds by Gen. Motors Corp. v. Sanchez, at 810. When a defendant purposefully directs tortious 997 S.W.2d 584, 594 (Tex.1999)). Contrary to the Court's conduct at a forum, whether in person, by correspondence, assertion, the facts here materially differ from those in World– or in a single phone call, that defendant should expect to be Wide Volkswagen. In that case, the defendant never agreed to send its product to Oklahoma—it was merely foreseeable subject to the forum's jurisdiction. 2 that the car might end up in Oklahoma because car purchasers in New York sometimes drive to Oklahoma. Here, Michiana A defendant's mere knowledge that its product will end up in not only shipped its motor home to Texas with the full the forum does not, without more, give rise to jurisdiction.
knowledge that a Texas resident would use it, but also See CMMC v. Salinas, 929 S.W.2d 435, 439 (Tex.1996).
directed misrepresentations toward Texas.
However, numerous courts have held that under the right circumstances, a single sale by an out-of-state defendant can The Court also maintains that Michiana's contacts with give rise to jurisdiction in an action arising out of that sale. 3 Texas are no more substantial than those of the defendant And in McGee v. International Life Insurance Company, the in CMMC v. Salinas, 929 S.W.2d 435 (Tex.1996). In Supreme Court held that a single insurance contract mailed that case, the plaintiff ordered a winepress from CMMC, to the forum could support specific jurisdiction. 355 U.S. a foreign corporation, through an out-of-state middleman. at 223, 78 S.Ct. 199. Furthermore, when a plaintiff in a The plaintiff's only causes of action were for negligence patent-infringement action alleges that the defendant *797 and strict products liability; there was no evidence that shipped the infringing material into the forum state “through CMMC committed any intentional torts in Texas by directing an established distribution channel,” and “[t]he cause of misrepresentations at a Texas buyer. Arguably, CMMC could action is alleged to arise out of these activities[,][n]o more have foreseen injury in Texas; but here, Michiana knew that is usually required to establish specific jurisdiction.” Beverly injury would occur in Texas when it deliberately committed a Hills Fan Co. v. Royal Sovereign Corp., 21 F.3d 1558, 1565 tort there, as Holten avers. Southmark Corp. v. Life Investors, (Fed.Cir.1994), cert. dismissed, 512 U.S. 1273, 115 S.Ct. 18, Inc., 851 F.2d 763, 772 (5th Cir.1988), is distinguishable on 129 L.Ed.2d 917, citing Burger King, 471 U.S. at 472–73, 105
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the same grounds. In that case, the Fifth Circuit held that no jurisdiction existed because there was no evidence that Here, there were uncontroverted averments of a purposeful the defendant had “expressly aimed” its tortious conduct at act directed toward Texas, which Michiana did not bother to Texas. See id. Injury only “occurred” in Texas because of refute. Thus, it can hardly be said that Michiana negated this the fortuity that the plaintiff's principal place of business was basis of jurisdiction. See BMC Software, 83 S.W.3d at 793. in Texas. See id. at 773. Here, there is evidence that any The trial court therefore had jurisdiction to determine whether misrepresentation was knowingly aimed at Texas because the alleged acts were in fact tortious. Michiana, with the knowledge that Holten was a Texas resident who expected the motor home to be delivered to Texas, *798 made representations to him regarding the
B
custom motor home.
The Court makes much of the forum-selection clause in the The Court further errs in its analysis of the special appearance contract of sale. Michiana's brief refers to the forum selection process when it states that “[i]f committing a tort establishes clause only as evidence of its own desire that litigation jurisdiction ... guilty nonresidents can be sued here[;] take place in Indiana. Sufficient contacts do not become innocent ones cannot.” 168 S.W.3d at 791. To establish insufficient simply because the defendant does not want to jurisdiction, a plaintiff must plead facts sufficient to support travel. jurisdiction; to overcome this, a defendant must negate all bases of jurisdiction. See BMC Software, 83 S.W.3d at Furthermore, this interlocutory appeal under section 793. Because jurisdiction under the long arm statute's tort 51.014(a)(7) of the Civil Practice and Remedies Code provision turns on whether the defendant committed a tort in concerns the special appearance only. Texas law provides no Texas, facts supporting jurisdiction often relate to the merits interlocutory appeal from a denial of a motion for summary of the case. However, to establish jurisdiction, there need judgment based on a forum-selection clause. See TEX. CIV. only be a prima facie showing of a purposeful contact with PRAC. & REM.CODE § 51.014. Even if the issue could be Texas, not proof of liability in tort. See Arterbury v. Am. considered here, Michiana has not briefed the validity and Bank & Trust Co., 553 S.W.2d 943, 947–48 (Tex.Civ.App.— enforceability of the clause, and it is thus not *799 properly Texarkana 1977, no writ). Sometimes, as here, the same act a part of this interlocutory appeal. is alleged to be both the purposeful contact and the tort, and under these circumstances prima facie proof of a potentially tortious act may be required. See French v. Glorioso, 94 S.W.3d 739, 746 (Tex.App.—San Antonio 2002, no pet.). IV Such a showing gives the trial court jurisdiction to determine Finally, “the exercise of jurisdiction [must] comport[ ] with ultimate liability in tort. See Arterbury, 553 S.W.2d at 948. traditional notions of fair play and substantial justice.” BMC A subsequent finding that a tort was not committed does not Software, 83 S.W.3d at 795; Asahi Metal Indus. Co. v.Super. mean that the trial court lacked jurisdiction. 4 Ct., 480 U.S. 102, 113, 107 S.Ct. 1026, 94 L.Ed.2d 92 (1987).
Factors courts consider are the burden on the defendant, the The Court's suggestion that plaintiffs will always allege a tort forum state's interest in adjudicating the controversy, the to get jurisdiction is also misplaced. If a plaintiff can secure plaintiff's interest in obtaining efficient resolution of the case, jurisdiction by averring that the defendant committed a tort, and the shared interest of states in furthering their respective why can the plaintiff not achieve the same result by averring interests. See Burger King, 471 U.S. at 477, 105 S.Ct. 2174. that the defendant traveled to Texas (which, I assume, the The burden on Michiana is not great. This case arises out of Court would agree is sufficient)? Either case can easily turn Michiana's decision to avail itself of a business opportunity into a swearing contest, but that is no justification for failure in Texas and to commit the tort of misrepresentation in to give Texas residents the full protection of the long arm Texas (intentionally, according to the only evidence in the statute. We choose to decide jurisdiction based on allegations record). Surely Texas has the right to expect that companies and averments. See BMC Software, 83 S.W.3d at 793. In any doing business with Texas residents can reasonably anticipate event, it is not the tortiousness of the defendant's conduct that having to answer in Texas courts for torts they commit in creates jurisdiction; it is its purposefulness. Whether a tort Texas. was committed is a question for the trial on the merits.
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even ruled in Michiana's favor. See French, 94 S.W.3d at 747.
The Court urges that relying on where a tort was directed But Michiana did not attempt to refute Holten's averment that impermissibly shifts our focus from the defendant's relation it committed a tort in Texas. The trial court therefore did not to the forum to the plaintiff's relation to the forum. It does err in denying Michiana's special appearance, and the court not, however, because knowingly directing a tort at a forum, of appeals correctly affirmed the judgment of the trial court.
as Michiana allegedly did, is itself a contact with the forum. The Court attempts to cloud the issue with hypotheticals about cell phones. 168 S.W.3d at 791. Certainly, if a defendant did not know, or were mistaken about, where it was directing its **** conduct, that “direction” could not serve as a valid basis for jurisdiction but that is not this case. Let there be no mistake: This action arises out of Michiana's contacts with Texas. under the Court's opinion, a defendant who intentionally Because those contacts are sufficient to support specific defrauds a Texas resident, with full knowledge that reliance jurisdiction in this case without violating due process, I would and damages will occur in Texas, cannot be made to answer affirm the judgment of the court of appeals. for its conduct in a Texas court so long as the plaintiff initiated the phone call. 5 All Citations
Nothing prevented Michiana from producing evidence to 168 S.W.3d 777, 48 Tex. Sup. Ct. J. 789 negate jurisdiction, if it existed. The trial court might have
Footnotes 1 See infra notes 25–26. 2 TEX. GOV'T CODE § 22.001(a)(2), § 22.225(c). 3 See TEX.R.APP. P. 55.2 (“The petitioner's brief on the merits must be confined to the issues or points stated in the petition for review....”).
4 127 S.W.3d 89, 96–99. 5 TEX.R.APP. P. 55.2(f) (providing that issues presented “will be treated as covering every subsidiary question that is fairly included”).
6 Martin v. Martin, Martin & Richards, Inc., 989 S.W.2d 357, 359 (Tex.1998) (per curiam) (“Unless required by the express language or the context of the particular rule, the term ‘hearing’ does not necessarily contemplate either a personal appearance before the court or an oral presentation to the court.”).
7 See, e.g., TEX.R. CIV. P. 87(3)(b) (motion to transfer venue); id. 166a(c) (summary judgment). 8 See, e.g., Millwrights Local Union No. 2484 v. Rust Eng'g Co., 433 S.W.2d 683, 687 (Tex.1968) (holding temporary injunction may not be proved by affidavit unless parties agree otherwise); see also Union Carbide Corp. v. Moye, 798 S.W.2d 792, 794 (Tex.1990) (Hecht, J., concurring) (arguing trial court is “obliged ... to hear live testimony when it is necessary to resolve issues that cannot be determined on a written record”).
9 See, e.g., TEX.R. CIV. P. 120a(3) (special appearance); 193.4(a) (privilege objections); 199.6 (deposition objections);
compare Henry Schein, Inc. v. Stromboe, 102 S.W.3d 675, 702 (Tex.2003) (noting five-day certification hearing included twelve bound volumes of exhibits and six volumes of testimony) with Snyder Communications, L.P. v. Magana, 142 S.W.3d 295, 297 (Tex.2004) (per curiam) (noting thirty-minute certification hearing included only brief deposition testimony of one claimant).
10 Union Carbide Corp., 798 S.W.2d at 793 (reserving question whether transfer of venue alleging local prejudice required or allowed oral testimony).
11 Tilton v. Moye, 869 S.W.2d 955, 957 (Tex.1994); Otis Elevator Co. v. Parmelee, 850 S.W.2d 179, 181 (Tex.1993). 12 Parmelee, 850 S.W.2d at 181. 13 TEX.R.APP. P. 34.1. 14 Martin v. Martin, Martin & Richards, Inc., 989 S.W.2d 357, 359 (Tex.1998) (per curiam) (“An oral hearing on a motion for summary judgment may be helpful to the parties and the court, just as oral argument is often helpful on appeal.”).
15 See, e.g., Act of June 17, 1983, 68th Leg., R.S., ch. 385, § 2, 1983 Tex. Gen. Laws 2119, 2124 (repealing TEX.REV.CIV.
STAT. art.2008, which provided for plea of privilege hearings); TEX.R. CIV. P. 120(a) (amended to allow proof by affidavit in special appearances, 785–786 S.W.2d (Tex.Cases) xlviii (1990)).
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16 See Tilton, 869 S.W.2d at 957 (“The order at issue, however, indicates that the trial court's consideration of the motion to compel was based only on the argument of counsel. Additionally, at oral argument, counsel for Smith conceded that the trial court took no testimony at the hearings. Thus, no statement of facts is necessary.”); Otis Elevator Co., 850 S.W.2d at 181 (“The court of appeals held that defendants were precluded from raising their complaint on appeal because they had failed to bring forward a statement of facts from [other pretrial] hearings. This holding, too, is incorrect. There is no indication or assertion that any other hearing to which [plaintiff] alludes involved the taking of evidence.”).
17 See, e.g., TEX.R.APP. P. 44.1, 61.1; Walker v. Packer, 827 S.W.2d 833, 837 (Tex.1992) (“Since an evidentiary hearing was held, the Walkers had the burden of providing us not only a petition and affidavit, but also a statement of facts from the hearing.”) (citation omitted); see also RP&R, Inc. v. Territo, 32 S.W.3d 396, 401 (Tex.App.—Houston [14th Dist.] 2000, no pet.) (reversing temporary injunction as record contained no testimony from claimant).
18 873 S.W.2d 368, 370–71 (Tex.1993). 19 Id. at 370. 20 Compare TEX.R.APP. P. 11(a), 49 TEX. B.J. 961 (1986, superseded 1997) with TEX.R.APP. P. 13.1(a) (adopted in 1997); see also TEX. GOV'T CODE § 52.046(a) (requiring a court reporter to attend court and make a record “on request”); id. § 54.046(c) (granting Supreme Court authority to adopt rules governing court reporter's duties in civil proceedings).
21 Piotrowski, 873 S.W.2d at 370–71. 22 TEX. DISCIPLINARY R. PROF'L CONDUCT 3.03 (requiring candor toward tribunal); TEX. LAWYER'S CREED: A MANDATE FOR PROFESSIONALISM IV(6) (“I will not knowingly misrepresent, mischaracterize, misquote or miscite facts or authorities to gain an advantage.”).
23 Bennett v. Cochran, 96 S.W.3d 227, 230 (Tex.2002) (per curiam). 24 See BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789, 796 (Tex.2002) (“Specific jurisdiction is established if the defendant's alleged liability arises from or is related to an activity conducted within the forum.”).
25 City of Riverview, Michigan v. Am. Factors, Inc., 77 S.W.3d 855, 858 (Tex.App.—Dallas 2002, no pet.); Hayes v. Wissel, 882 S.W.2d 97, 98–100 (Tex.App.—Fort Worth 1994, no pet.); Laykin v. McFall, 830 S.W.2d 266, 269 (Tex.App.— Amarillo 1992, no pet.); C.W. Brown Mach. Shop, Inc. v. Stanley Mach. Corp., 670 S.W.2d 791, 793 (Tex.App.—Fort Worth 1984, no writ).
26 127 S.W.3d at 95; Boissiere v. Nova Capital, LLC, 106 S.W.3d 897, 904 (Tex.App.—Dallas 2003, no pet.); Ahadi v. Ahadi, 61 S.W.3d 714, 720 (Tex.App.-Corpus Christi 2001, pet. denied); Ring Power Sys. v. Int'l de Comercio Y Consultoria, 39 S.W.3d 350, 353–54 (Tex.App.—Houston [14th Dist.] 2001, no pet.); Mem. Hosp. Sys. v. Fisher Ins. Agency, 835 S.W.2d 645, 650–51 (Tex.App.—Houston [14th Dist.] 1992, no writ).
27 357 U.S. 235, 253, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958) (emphasis added). 28 Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985). 29 Id. 30 Id. at 473 (citing Travelers Health Assn. v. Virginia, 339 U.S. 643, 647, 70 S.Ct. 927, 94 L.Ed. 1154 (1950)). 31 Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 774, 104 S.Ct. 1473, 79 L.Ed.2d 790 (1984). 32 See MERRIAM WEBSTER'S COLLEGIATE DICTIONARY 79 (10th ed. 1993) (“Avail: ... to be of use or advantage to:
profit.”).
33 World–Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 S.Ct. 559 (1980) (“The Due Process Clause ... gives a degree of predictability to the legal system that allows potential defendants to structure their primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit.”); Am. Type Culture Collection, Inc. v. Coleman, 83 S.W.3d 801, 808 (Tex.2002).
34 Burger King, 471 U.S. at 473, 105 S.Ct. 2174. 35 326 U.S. 310, 313–14, 66 S.Ct. 154, 90 L.Ed. 95 (1945). 36 Id. at 320, 66 S.Ct. 154. 37 Siskind v. Villa Found. for Educ., Inc., 642 S.W.2d 434, 436 (Tex.1982). 38 Kawasaki Steel Corp. v. Middleton, 699 S.W.2d 199, 201 (Tex.1985) (per curiam). 39 See, e.g., Reiff v. Roy, 115 S.W.3d 700, 705–06 (Tex.App.-Dallas 2003, pet. denied) (surveying Texas law on Internet activities).
40 Asahi Metal Ind. Co., Ltd. v. Superior Court, 480 U.S. 102, 121, 107 S.Ct. 1026, 94 L.Ed.2d 92 (1987) (Brennan, J., concurring in part).
41 Id. at 112, 107 S.Ct. 1026 (O'Connor, J., plurality opinion). 42 Id. at 122, 107 S.Ct. 1026 (Stevens, J., concurring in part).
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43 CMMC v. Salinas, 929 S.W.2d 435, 440 (Tex.1996) (“If anything, Keen suggests that we would follow Justice O'Connor's formulation of the stream-of-commerce rule in Texas.”).
44 CSR Ltd. v. Link, 925 S.W.2d 591, 595–96 (Tex.1996). 45 CMMC, 929 S.W.2d at 439. 46 127 S.W.3d at 96. 47 Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 n. 18, 478, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985). 48 World–Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 295, 100 S.Ct. 559 (1980). 49 Id. at 296–97, 100 S.Ct. 559. 50 Id. at 298, 100 S.Ct. 559. 51 929 S.W.2d 435 (Tex.1996). 52 Id. at 436. 53 Id. at 439. 54 Id. at 480. 55 McGee v. Int'l Life Ins. Co., 355 U.S. 220, 223, 78 S.Ct. 199, 2 L.Ed.2d 223 (1957). 56 Int'l Shoe, 326 U.S. at 319, 66 S.Ct. 154. 57 Woodson, 444 U.S. at 299, 100 S.Ct. 559. 58 Id. at 296, 100 S.Ct. 559. 59 929 S.W.2d 435, 436 (Tex.1996) (emphasis added). CMMC also made clear that, to the extent of any conflict, our earlier opinion in Keen v. Ashot Ashkelon, Ltd., 748 S.W.2d 91 (Tex.1988) should not be read to extend stream-of-commerce jurisdiction to a single sale. 929 S.W.2d at 439–40.
60 TEX. CIV. PRAC. & REM.CODE § 17.042(2). 61 BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789, 795 (Tex.2002); U–Anchor Adver., Inc. v. Burt, 553 S.W.2d 760, 762 (Tex.1977).
62 Woodson, 444 U.S. at 288, 100 S.Ct. 559; CMMC, 929 S.W.2d at 437; see also Antonio v. Marino, 910 S.W.2d 624, 628 (Tex.App.—Houston [14th Dist.] 1995, no writ) (holding nonresident shipowner whose agent assaulted and denied wages to seamen in Texas port had not purposefully availed itself of Texas as ship's location was fortuitous).
63 127 S.W.3d at 95; Morris v. Powell, 150 S.W.3d 212, 221 (Tex.App.—San Antonio 2004, no pet.); Stern v. KEI Consultants, Ltd., 123 S.W.3d 482, 490 (Tex.App.—San Antonio 2003, no pet.); AmQuip Corp. v. Cloud, 73 S.W.3d 380, 386 (Tex.App.—Houston [1st Dist.] 2002, no pet.); Ahadi v. Ahadi, 61 S.W.3d 714, 720 (Tex.App.—Corpus Christi 2001, pet. denied); Shapolsky v. Brewton, 56 S.W.3d 120, 134 (Tex.App.—Houston [14th Dist.] 2001, pet. denied); Royal Mortg. Corp. v. Montague, 41 S.W.3d 721, 731 (Tex.App.—Fort Worth 2001, no pet.); Mem'l Hosp. Sys. v. Fisher Ins. Agency, Inc., 835 S.W.2d 645, 650 (Tex.App.—Houston [14th Dist.] 1992, no writ); see also Southmark Corp. v. Life Investors, Inc., 851 F.2d 763, 772 (5th Cir.1988).
64 Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985). 65 National Indus. Sand Ass'n v. Gibson, 897 S.W.2d 769, 773 (Tex.1995). 66 Burger King, 471 U.S. at 474, 105 S.Ct. 2174 (quoting Woodson, 444 U.S. at 297, 100 S.Ct. 559). 67 Calder v. Jones, 465 U.S. 783, 785 n. 2, 104 S.Ct. 1482, 79 L.Ed.2d 804 (1984). 68 465 U.S. 770, 772, 778, 104 S.Ct. 1473, 79 L.Ed.2d 790 (1984). 69 Id. at 781, 104 S.Ct. 1473. 70 See D.J. Invs., Inc. v. Metzeler Motorcycle Tire Agent Gregg, Inc., 754 F.2d 542, 547 (5th Cir.1985) (basing jurisdiction on nonresident's transfer of its distributorship rights in forum state); Union Carbide Corp. v. UGI Corp., 731 F.2d 1186, 1189–90 (5th Cir.1984) (basing jurisdiction on acts that sought to obtain business in Texas); Brown v. Flowers Indus., Inc., 688 F.2d 328, 333–34 (5th Cir.1982) (basing jurisdiction on defamatory phone call to district attorney attempting to wrest business from resident); Miss. Interstate Exp. Inc. v. Transpo, Inc., 681 F.2d 1003, 1006, 1008 (5th Cir.1982) (basing jurisdiction on nineteen shipping contracts between nonresident broker and resident trucking firm). Especially troubling is the Court's reliance on Thompson v. Chrysler Motors Corp., 755 F.2d 1162 (5th Cir.1985), in which not only were the dispositive acts entirely different from anything here (i.e., a post-sale shipment of a defective replacement part to the forum state), but the court expressly acknowledged that jurisdiction would not exist on facts identical to those here. Id. at 1171 (“[T]he mere knowledge that [defendant] was selling to [forum state] residents would be insufficient to support the exercise of jurisdiction.”).
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71 Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984) (quoting Shaffer v. Heitner, 433 U.S. 186, 204, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977)) (emphasis added).
72 See Rush v. Savchuk, 444 U.S. 320, 332, 100 S.Ct. 571, 62 L.Ed.2d 516 (1980) (emphasis added). 73 See, e.g., Tracker Marine, L.P. v. Ogle, 108 S.W.3d 349, (Tex.App.-Houston [14th Dist.] 2003, no pet.); RESTATEMENT (SECOND) CONFLICT OF LAWS § 148(2)(a).
74 RESTATEMENT § 6. 75 Burger King, 471 U.S. at 481–82, 105 S.Ct. 2174. 76 See, e.g., Nat'l Indus. Sand Ass'n v. Gibson, 897 S.W.2d 769, 774 (Tex.1995) (holding opposition to silica regulation could not form basis of jurisdiction as it was constitutionally protected activity); Mabry v. Reid, 130 S.W.3d 385, 389 (Tex.App.—Beaumont 2004, no pet.) (affirming order granting special appearance as some evidence supported trial court's factual determination that either there was no settlement agreement or it was not fraudulent); Boissiere v. Nova Capital, LLC, 106 S.W.3d 897, 904 (Tex.App.—Dallas 2003, no pet.) (affirming order denying special appearance as some evidence supported trial court's factual determination that nonresidents committed misrepresentation); French v. Glorioso, 94 S.W.3d 739, 746–47 (Tex.App.—San Antonio 2002, no pet.) (affirming order granting special appearance as some evidence supported trial court's factual determination that nonresident never made any misrepresentations to resident); Runnells v. Firestone, 746 S.W.2d 845, 851–52 (Tex.App.—Houston [14th Dist.] 1988), writ denied, 760 S.W.2d 240 (Tex.1988) (affirming order granting special appearance as some evidence supported trial court's factual determination that there was no contract).
77 Am. Type Culture Collection, Inc. v. Coleman, 83 S.W.3d 801, 805–06 (Tex.2002). 78 See CSR Ltd. v. Link, 925 S.W.2d 591, 594 (Tex.1996). 79 See, e.g., PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd. P'ship, 146 S.W.3d 79, 83 (Tex.2004) (noting that Texas law allows consumers to assert warranty claims as breach of contract or violation of DTPA); Formosa Plastics Corp. USA v. Presidio Eng'rs and Contractors, Inc., 960 S.W.2d 41, 46 (Tex.1998) (holding Texas law allows party fraudulently induced to sign contract to sue in contract or tort).
80 See, e.g., 168 S.W.3d at 794 (“Today the Court holds that an out-of-state defendant who intentionally defrauds a Texas resident, with full knowledge that reliance and damages will occur in Texas, cannot be made to answer for its conduct in a Texas court simply because the defrauded Texan initiated the phone call.”).
81 Boissiere v. Nova Capital, LLC, 106 S.W.3d 897, 904–05 (Tex.App.—Dallas 2003, no pet.); Ahadi v. Ahadi, 61 S.W.3d 714, 720 (Tex.App.—Corpus Christi 2001, pet. denied); Ring Power Sys. v. Int'l de Comercio Y Consultoria, 39 S.W.3d 350, 353–54 (Tex.App.—Houston [14th Dist.] 2001, no pet.); Mem. Hosp. Sys. v. Fisher Ins. Agency, 835 S.W.2d 645, 650–51 (Tex.App.—Houston [14th Dist.] 1992, no writ).
82 Mabry v. Reid, 130 S.W.3d 385, 389 (Tex.App.—Beaumont 2004, no pet.) (affirming order granting special appearance as some evidence supported trial court's factual determination that either there was no settlement agreement or it was not fraudulent); Boissiere v. Nova Capital, LLC, 106 S.W.3d 897, 904 (Tex.App.—Dallas 2003, no pet.) (affirming order denying special appearance as some evidence supported trial court's factual determination that nonresidents committed misrepresentation); French v. Glorioso, 94 S.W.3d 739, 746–47 (Tex.App.—San Antonio 2002, no pet.) (affirming order granting special appearance as some evidence supported trial court's factual determination that nonresident never made any misrepresentations to resident); Runnells v. Firestone, 746 S.W.2d 845, 851–52 (Tex.App.—Houston [14th Dist.] 1988), writ denied, 760 S.W.2d 240 (Tex.1988) (affirming order granting special appearance as some evidence supported trial court's factual determination that there was no contract).
83 127 S.W.3d at 98. 84 See, e.g., Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 595, 111 S.Ct. 1522, 113 L.Ed.2d 622 (1991) (upholding forum-selection clause without discussing contacts between nonresident passengers and forum state).
85 See Siskind v. Villa Found. for Educ., Inc., 642 S.W.2d 434, 437 (Tex.1982). 86 Burger King, 471 U.S. at 482, 105 S.Ct. 2174. 87 In re Automated Collection Techs., Inc., 156 S.W.3d 557, 559 (Tex.2004) (per curiam) (holding forum-selection clause was not waived without showing of prejudice).
88 See TEX.R. CIV. P. 11. 89 Automated Collection Techs., Inc., 156 S.W.3d at 559 (Tex.2004) (quoting In re AIU Ins. Co., 148 S.W.3d 109, 112 (Tex.2004)).
90 Woodson, 444 U.S. at 292, 100 S.Ct. 559. 91 See Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984).
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92 See McGee v. Int'l Life Ins. Co., 355 U.S. 220, 78 S.Ct. 199, 2 L.Ed.2d 223 (1957). 93 Woodson, 444 U.S. at 296–99, 100 S.Ct. 559. 94 Kulko v. Superior Court of California, 436 U.S. 84, 93–94, 98 S.Ct. 1690, 56 L.Ed.2d 132(1978). 95 Hanson v. Denckla, 357 U.S. 235, 251–54, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958). 1 See also Ring Power Sys. v. Int'l de Comercio Y Consultoria, 39 S.W.3d 350, 354 (Tex.App.—Houston [14th Dist.] 2001, no pet.); Union Carbide Corp. v. UGI Corp., 731 F.2d 1186, 1189–90 (5th Cir.1984) (stating that for jurisdictional purposes, a tort occurs in Texas if the resulting injury occurs in Texas).
2 See D.J. Invs. v. Metzeler Motorcycle Tire Agent Gregg, Inc., 754 F.2d 542, 547 (5th Cir.1985); Brown v. Flowers Indus., Inc., 688 F.2d 328, 333–34 (5th Cir.1982) (holding that a single defamatory phone call directed at a forum was sufficient), cert. denied, 460 U.S. 1023, 103 S.Ct. 1275, 75 L.Ed.2d 496 (1983); Union Carbide, 731 F.2d at 1189–90 (holding that out of state acts that caused in-state injury were sufficient); see also Ahadi v. Ahadi, 61 S.W.3d 714 (Tex.App.—Corpus Christi 2001, pet. denied); Ring Power Sys., 39 S.W.3d at 354; Rowland & Rowland, P.C. v. Tex. Employers Indem. Co., 973 S.W.2d 432, 435–36 (Tex.App.—Austin 1998, no pet.); Mem. Hosp. Sys., 835 S.W.2d at 650–52.
3 See Thompson v. Chrysler Motors Corp., 755 F.2d 1162 (5th Cir.1985) (“The sale and shipment of the master cylinder into Mississippi represented an affirmative act by Crimson to introduce its product into Mississippi for use in that state. By this shipment, Crimson purposefully availed itself of the privilege of conducting activities in Mississippi and its connection with the forum is such that it should reasonably anticipate being haled into court there....”); Ajax Realty Corp. v. J.F. Zook, Inc., 493 F.2d 818 (4th Cir.1972), cert. denied, 411 U.S. 966, 93 S.Ct. 2148, 36 L.Ed.2d 687 (1973); Edwards v. Radventures, Inc., 164 F.Supp.2d 190 (D.Mass.2001) (finding specific jurisdiction where Massachusetts plaintiff purchased a monoski via fax from a defendant with no other contacts with Massachusetts and was injured when the ski malfunctioned); Houston Technical Ceramics, Inc. v. Iwao Jiki Kogyo, Co., 742 F.Supp. 387 (S.D.Tex.1990).
4 BMC Software, 83 S.W.3d at 793. See also Boissiere v. Nova Capital, LLC, 106 S.W.3d 897, 904 (Tex.App.—Dallas 2003, no pet.). This stands in contrast to subject-matter jurisdiction. See Tex. A & M Univ. v. Bishop, 156 S.W.3d 580 (Tex.2005) (determining that no subject-matter jurisdiction existed only after a trial on the merits).
5 For example, the Court argues that a single defamatory phone call to an individual in the forum state is not enough to support jurisdiction in an action for libel. 168 S.W.3d at 791. However, the Fifth Circuit has held precisely the opposite that a single defamatory phone call to a United States Attorney in Mississippi was sufficient to create jurisdiction in Mississippi. See Brown, 688 F.2d at 333–34.
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Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (2007) 50 Tex. Sup. Ct. J. 498
KeyCite Yellow Flag - Negative Treatment West Headnotes (26)
Overruling Recognized by Waller Marine, Inc. v. Magie, Tex.App.- Hous. (14 Dist.), March 26, 2015 [1] Courts 221 S.W.3d 569 Review by or certificate to Supreme Court Supreme Court of Texas. by Court of Civil Appeals of questions where its decision conflicts with or overrules that of MOKI MAC RIVER EXPEDITIONS, Petitioner, another Court of Civil Appeals or that of the v. Supreme Court Charles DRUGG and Betsy Drugg, Individually, Generally, a Texas Court of Appeals' decision and as Representatives of the Estate of in an interlocutory appeal in a civil case is Andrew Patrick Drugg, Respondents. final, so that a petition for review is not allowed to the Texas Supreme Court, but if the No. 04–0432. | Argued Nov. 17, Court of Appeals holds differently from a prior 2005. | Decided March 2, 2007. decision of another Texas Court of Appeals, the Texas Supreme Court, or the United States Synopsis Supreme Court, has jurisdiction to resolve the Background: Parents of 13-year-old child who died while disagreement or conflict. V.T.C.A., Government hiking with nonresident expedition company out-of-state Code §§ 22.001(a)(1, 2), 22.225(b)(3), (c).
sued company for wrongful death and intentional and negligent misrepresentation. The 134th District Court, Dallas Cases that cite this headnote County, Anne Ashby, J., denied company's request for special appearance. Company appealed. The Dallas Court of Appeals, 2004 WL 100389, affirmed. Review was granted. [2] Courts Allegations, pleadings, and affidavits The plaintiff bears the initial burden of pleading sufficient allegations to invoke jurisdiction under Holdings: The Supreme Court, Harriet O'Neill, J., held that:
the Texas long-arm statute. V.T.C.A., Civil Practice & Remedies Code § 17.001 et seq.
[1] as a matter of first impression, for a nonresident defendant's forum contacts to support an exercise of specific 19 Cases that cite this headnote jurisdiction, for purposes of minimum contacts element of federal due-process analysis for exercising personal jurisdiction, there must be a substantial connection between [3] Courts those contacts and the operative facts of the litigation, and Presumptions and Burden of Proof as to Jurisdiction [2] nonresident expedition company's contacts with Texas If the plaintiff meets the initial burden were not substantially connected with operative facts of the of pleading sufficient allegations to invoke litigation. jurisdiction under the Texas long-arm statute, the nonresident defendant then assumes the burden of negating all bases of jurisdiction in Reversed and remanded. those allegations. V.T.C.A., Civil Practice & Remedies Code § 17.001 et seq.
Phil Johnson, J., filed a dissenting opinion, in which Medina, J., joined. 33 Cases that cite this headnote
[4] Appeal and Error Cases Triable in Appellate Court
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Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (2007) 50 Tex. Sup. Ct. J. 498
Because the question of a trial court's exercise statute. V.T.C.A., Civil Practice & Remedies of personal jurisdiction over a nonresident Code § 17.042(1, 2). defendant is one of law, the appellate court reviews a trial court's determination on a request Cases that cite this headnote for a special appearance de novo.
[8] Courts 33 Cases that cite this headnote Business contacts and activities;
transacting or doing business [5] Appeal and Error The Texas long-arm statute's broad doing-
Necessity of finding facts business language allows the statute to reach When the trial court does not make findings as far as the federal constitutional requirements of fact and conclusions of law in support of of due process will allow, and thus, the its ruling, the appellate court infers all facts requirements of the Texas long-arm statute are necessary to support the judgment and supported satisfied if an assertion of jurisdiction accords by the evidence. with federal due-process limitations. U.S.C.A.
Const.Amend. 14; V.T.C.A., Civil Practice & 5 Cases that cite this headnote Remedies Code § 17.042(1, 2).
36 Cases that cite this headnote [6] Constitutional Law Non-residents in general Courts [9] Constitutional Law Actions by or Against Nonresidents, Non-residents in general Personal Jurisdiction In; “Long-Arm” Under federal due-process requirements, Jurisdiction personal jurisdiction is proper when the Texas courts may assert in personam jurisdiction nonresident defendant has established minimum over a nonresident if: (1) the Texas long-arm contacts with the forum state, and the exercise statute authorizes the exercise of jurisdiction, of jurisdiction comports with traditional notions and (2) the exercise of jurisdiction is consistent of fair play and substantial justice. U.S.C.A. with federal and state constitutional due- Const.Amend. 14. process guarantees. U.S.C.A. Const.Amend.
45 Cases that cite this headnote 14; Vernon's Ann.Texas Const. Art. 1, § 19; V.T.C.A., Civil Practice & Remedies Code § 17.001 et seq. [10] Constitutional Law Non-residents in general 44 Cases that cite this headnote Nonresident's contacts with forum state are sufficient, for purposes of minimum [7] Courts contacts element of federal due-process Fraud, racketeering, and deceptive practices analysis for exercising personal jurisdiction Negligent and intentional misrepresentation over nonresident defendant, when nonresident claims brought by parents of 13-year-old child defendant purposefully avails itself of privilege who died outside of state while hiking with of conducting activities within forum state, thus nonresident expedition company, which claims invoking benefits and protections of its laws. were based on brochures which company had U.S.C.A. Const.Amend. 14. sent to Texas resident who shared them with 99 Cases that cite this headnote child and his family and release form which company sent to child's family in Texas, satisfied the doing-business requirement for [11] Constitutional Law personal jurisdiction under Texas long-arm Non-residents in general
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Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (2007) 50 Tex. Sup. Ct. J. 498
Only nonresident defendant's contacts with If nonresident defendant has made continuous forum state are relevant to purposeful availment, and systematic contacts with forum, general for purposes of minimum contacts element jurisdiction is established whether or not of federal due-process analysis for exercising defendant's alleged liability arises from those personal jurisdiction; unilateral activity of contacts. another party or third person is irrelevant. U.S.C.A. Const.Amend. 14. 58 Cases that cite this headnote
26 Cases that cite this headnote [16] Constitutional Law Non-residents in general [12] Constitutional Law When specific jurisdiction is alleged, court Non-residents in general focuses the federal due process minimum-
For purposes of minimum contacts element contacts analysis for exercising personal of federal due-process analysis for exercising jurisdiction on the relationship among the personal jurisdiction, nonresident defendant's nonresident defendant, the forum, and the contacts with forum state must be purposeful litigation. U.S.C.A. Const.Amend. 14. rather than random, fortuitous, or attenuated. U.S.C.A. Const.Amend. 14. 21 Cases that cite this headnote
18 Cases that cite this headnote [17] Courts Related contacts and activities; specific [13] Constitutional Law jurisdiction Manufacture, distribution, and sale Specific jurisdiction is established if the Sellers who reach out beyond one state and nonresident defendant's alleged liability arises create continuing relationships and obligations out of or is related to an activity conducted within with citizens of another state are subject to the the forum. jurisdiction of the latter in suits based on their activities, under federal due-process principles. 19 Cases that cite this headnote U.S.C.A. Const.Amend. 14.
[18] Constitutional Law 4 Cases that cite this headnote Manufacture, distribution, and sale A nonresident defendant that directs marketing [14] Constitutional Law efforts to Texas in the hope of soliciting sales is Non-residents in general subject to suit in Texas, based on federal due-
A nonresident defendant may purposefully process principles, for alleged liability arising avoid a particular forum, so that federal due- from or relating to that business. U.S.C.A. process principles preclude the forum's exercise Const.Amend. 14. of personal jurisdiction over defendant, by structuring its transactions in such a way as to 2 Cases that cite this headnote neither profit from forum's laws nor subject itself to jurisdiction there. U.S.C.A. Const.Amend. 14. [19] Constitutional Law Manufacture, distribution, and sale 5 Cases that cite this headnote A nonresident who places products into the “stream of commerce” with the expectation that [15] Courts they will be sold in the forum state is subject to Unrelated contacts and activities; general personal jurisdiction in the forum, under federal jurisdiction due-process principles. U.S.C.A. Const.Amend.
14.
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Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (2007) 50 Tex. Sup. Ct. J. 498
Fraud, racketeering, and deceptive practices Cases that cite this headnote Nonresident expedition company purposefully directed action toward Texas, for purposes [20] Constitutional Law of minimum contacts element of federal Non-residents in general due-process analysis for exercising personal While a nonresident defendant's single jurisdiction, in action for intentional and contact with the forum state can support negligent misrepresentation brought by parents personal jurisdiction, under federal due-process of 13-year-old child who died outside of principles, if that contact creates a substantial state while hiking with company; company connection with the forum, jurisdiction cannot knowingly sold rafting trips to Texas residents be established where the contact creates only an and purposefully directed marketing efforts to attenuated affiliation with the forum. U.S.C.A. Texas, including mass and targeted direct- Const.Amend. 14. marketing email campaigns and the use of particular customers as de facto group leaders 1 Cases that cite this headnote who planned, organized, and promoted its trips.
U.S.C.A. Const.Amend. 14.
[21] Constitutional Law 25 Cases that cite this headnote Manufacture, distribution, and sale A nonresident defendant's mere sale of a product [24] Negligence to a Texas resident will not generally suffice to Necessity of causation confer specific jurisdiction upon Texas courts, for purposes of minimum contacts element Negligence of federal due-process analysis for exercising Foreseeability personal jurisdiction; instead, the facts alleged Proximate cause, as element of negligence, must indicate that the seller intended to serve the requires the defendant's conduct to be both the Texas market. U.S.C.A. Const.Amend. 14. cause in fact and the foreseeable cause of injury.
10 Cases that cite this headnote 4 Cases that cite this headnote
[22] Constitutional Law [25] Constitutional Law Business, business organizations, and Non-residents in general corporations in general For a nonresident defendant's forum contacts In determining whether nonresident defendant to support an exercise of specific jurisdiction, purposefully directed action toward Texas, for purposes of minimum contacts element for purposes of minimum contacts element of federal due-process analysis for exercising of federal due-process analysis for exercising personal jurisdiction, there must be a substantial personal jurisdiction, court may look to conduct connection between those contacts and the beyond the particular business transaction at operative facts of the litigation. U.S.C.A. issue, because additional conduct of defendant Const.Amend. 14. may indicate intent or purpose to serve market in forum state. U.S.C.A. Const.Amend. 14. 70 Cases that cite this headnote
34 Cases that cite this headnote [26] Constitutional Law Services and service providers [23] Constitutional Law Courts Services and service providers Fraud, racketeering, and deceptive practices Courts
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Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (2007) 50 Tex. Sup. Ct. J. 498
Nonresident expedition company's contacts with we reverse and remand the case to the court of appeals to Texas were not substantially connected with determine whether general jurisdiction exists. operative facts of the litigation, and thus, specific jurisdiction was not a basis for satisfying minimum contacts element of federal I. Background due-process analysis for exercising personal jurisdiction, in action for wrongful death Charles and Betsy Drugg's thirteen-year-old son, Andy, died and intentional and negligent misrepresentation on a June 2001, river-rafting trip in Arizona with Moki Mac brought by parents of 13-year-old child who River Expeditions, a Utah-based river-rafting outfitter. Moki died outside of state while hiking with company; Mac did not directly solicit the Druggs to participate in the even if child might not have gone on expedition trip. Instead, the Druggs learned about Moki Mac's excursions if company had not made representations, from a fellow Texas resident, Annie Seals, who had contacted in promotional materials reviewed by child's the company regarding a rafting trip in the Grand Canyon. family in Texas, regarding safety of company's There was no space available for her at that time, but Seals's river rafting trips, operative facts of case contact information was placed on Moki Mac's computerized principally concerned guides' conduct of the mailing list so that she would automatically receive a hiking expedition and whether they exercised brochure for the 2001 season when it became available. reasonable care in supervising child. U.S.C.A. Moki Mac subsequently sent two brochures to Seals in Texas Const.Amend. 14. detailing pricing and schedules for upcoming excursions.
Seals informed Moki Mac of the interest of several others in 41 Cases that cite this headnote Texas with whom she shared the literature, including Andy and members of his family.
Betsy Drugg reviewed the brochures and information from Attorneys and Law Firms Moki Mac's website. After corresponding with Moki Mac representatives from her home in Texas, Betsy ultimately *572 E. Thomas Bishop, Alexander N. Beard and Stephanie decided to send Andy on the rafting trip. Andy's grandmother Ann Finch, Bishop & Hummert, P.C., Dallas, for Petitioner.
sent Moki Mac an application and payment for herself Steven E. Aldous, Michael Braden and Robert Ray Varner Jr., and Andy. As was its practice, Moki Mac sent a letter Braden, Vamer & Aldous, P.C., Dallas, for Respondent. confirming payment to the Druggs' home in Texas along with an acknowledgment-of-risk and release form, which the Douglas Alexander, Alexander Dubose Jones & Townsend, company requires participants to sign as a prerequisite to LLP, Austin, for Amicus Curiae. attendance. Both Andy and his mother signed the form and returned it to Moki Mac.
Opinion The Druggs allege that on the second day of Andy's fourteen-
Justice O'NEILL delivered the opinion of the Court, in day trip, Moki Mac guides led the group up an incline on which Chief Justice JEFFERSON, Justice HECHT, Justice a trail that narrowed around and was obstructed by a large WAINWRIGHT, Justice BRISTER, Justice GREEN, and boulder. The guides were positioned at the head and rear of Justice WILLETT joined.
the group, but no guide was present near the boulder. As Andy A Texas court may assert specific jurisdiction over an out- attempted to negotiate the boulder-blocked path, requiring of-state defendant if *573 the defendant's contact with this him to lean back while attempting to cross a very narrow state is purposeful and the injury arises from or relates to those ledge, he fell backwards approximately fifty-five feet and was contacts. In this wrongful-death case against a Utah-based fatally injured. river-rafting outfitter, the defendant contends the plaintiff's death on a Grand Canyon hiking trail did not arise from or The Druggs filed suit in Texas for wrongful death due to relate to its instate commercial activities so as to establish Moki Mac's negligence and for intentional and negligent specific jurisdiction over it in Texas. We agree. Accordingly, misrepresentation. 1 The trial court denied Moki Mac's special appearance and the court of appeals affirmed on
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the basis of specific jurisdiction, holding that the Druggs' determination of a special appearance de novo. Id. at 794. misrepresentation claim arose from, and related to, Moki When, as here, the trial court does not make findings of fact Mac's purposeful contacts with Texas. 2004 WL 100389. and conclusions of law in support of its ruling, we infer “all Because the court of appeals found specific jurisdiction, it facts necessary to support the judgment and supported by the did not consider whether general jurisdiction was proper. evidence....” Id. at 795. We granted Moki Mac's petition for review to consider the extent to which a claim must “arise from or relate to” forum [6] [7] Texas courts may assert in personam jurisdiction contacts in *574 order to confer specific jurisdiction over a over a nonresident if (1) the Texas long-arm statute authorizes nonresident defendant. 2 the exercise of jurisdiction, and (2) the exercise of jurisdiction is consistent with federal and state constitutional due- process guarantees. Schlobohm v. Schapiro, 784 S.W.2d 355, 356 (Tex.1990). Our long-arm statute describes what, “[i]n II. Jurisdiction addition to other acts,” may constitute doing business in this state. TEX. CIV. PRAC. & REM.CODE § 17.042. Pertinent [1] As a threshold matter, the Druggs contend we do to this case are the first two subsections, which provide that a not have jurisdiction over Moki Mac's interlocutory appeal nonresident does business in Texas if it:
in this case. Generally, a court of appeals' decision in an interlocutory appeal is final. TEX. GOV'T CODE § 22.225(b) (1) contracts by mail or otherwise with a Texas resident and (3). When, however, the court of appeals holds differently either party is to perform the contract in whole or in part from a prior decision of another court of appeals, this Court, in this state; [or] or the United States Supreme Court, we have jurisdiction to resolve the disagreement or conflict. TEX. GOV'T CODE (2) commits a tort in whole or in part in this state; §§ 22.001(a)(1), (2) and 22.225(c); Henry Schein, Inc. v. Stromboe, 102 S.W.3d 675 (Tex.2002). Moki Mac contends Id. § 17.042(1), (2). The Druggs' negligent and intentional the court of appeals' decision in this case conflicts, inter alia, misrepresentation claims based on Moki Mac's brochures with Laykin v. McFall, 830 S.W.2d 266 (Tex.App.-Amarillo and release form satisfy the doing-business requirement for 1992, orig. proceeding). There, the court of appeals held that jurisdiction under the plain *575 language of the statute. a Texas court could not assert jurisdiction over an out-of-state But the exercise of jurisdiction under the statute must be defendant in a suit by a Texas resident alleging fraud and consistent with federal and state constitutional guarantees of conversion because the “focal point” of the allegedly tortious due process. See Schlobohm, 784 S.W.2d at 356. activity and the plaintiff's damages did not lie in Texas. Id.
[8] We have said that the long-arm statute's broad doingat 270. In this case, in contrast, the court of appeals held that the Texas court could assert jurisdiction without regard to thebusiness language allows the statute to “reach as far as likely focus of the parties' efforts in the underlying lawsuit.the federal constitutional requirements of due process will 2004 WL 100389, at *4. We have jurisdiction to resolve the allow.” Guardian Royal Exch. Assurance, Ltd. v. English conflict in this interlocutory appeal. TEX. GOV'T CODE § China Clays, P.L.C., 815 S.W.2d 223, 226 (Tex.1991); see 22.001(a)(2). also Schlobohm, 784 S.W.2d at 357; U–Anchor Adver., Inc. v. Burt, 553 S.W.2d 760, 762 (Tex.1977). Thus, the requirements of the Texas long-arm statute are satisfied if an assertion of jurisdiction accords with federal due-process III. In Personam Jurisdiction limitations. Am. Type Culture Collection, 83 S.W.3d at 806; CSR Ltd. v. Link, 925 S.W.2d 591, 594 (Tex.1996);
[2] [3] [4] [5] The plaintiff bears the initial burden of Schlobohm, 784 S.W.2d at 357.
pleading sufficient allegations to invoke jurisdiction under the Texas long-arm statute. Am. Type Culture Collection v.
[9] [10] Federal due-process requirements limit a state's Coleman, 83 S.W.3d 801, 807 (Tex.2002). The nonresident power to assert personal jurisdiction over a nonresident defendant then assumes the burden of negating all bases of defendant. See Guardian Royal, 815 S.W.2d at 226. Personal jurisdiction in those allegations. BMC Software Belgium, N.V.
jurisdiction is proper when the nonresident defendant has v. Marchand, 83 S.W.3d 789, 793 (Tex.2002). Because the established minimum contacts with the forum state, and the question of a court's exercise of personal jurisdiction over a exercise of jurisdiction comports with “ ‘traditional notions nonresident defendant is one of law, we review a trial court's
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Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (2007) 50 Tex. Sup. Ct. J. 498
of fair play and substantial justice.’ ” Int'l Shoe Co. v. is established if the defendant's alleged liability “aris[es] out Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. of or [is] related to” an activity conducted within the forum. 95 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463, Helicopteros, 466 U.S. at 414 n. 8, 104 S.Ct. 1868; see also 61 S.Ct. 339, 85 L.Ed. 278 (1940)). Minimum contacts CSR Ltd., 925 S.W.2d at 595. The United States Supreme are sufficient for personal jurisdiction when the nonresident Court has provided relatively little guidance on the “arise defendant “ ‘purposefully avails itself of the privilege of from or relate to” requirement, nor have we had occasion conducting activities within the forum State, thus invoking to examine the strength of the nexus required to establish the benefits and protections of its laws.’ ” Hanson v. Denckla, specific jurisdiction. 357 U.S. 235, 253, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958) (quoting Int'l Shoe Co., 326 U.S. at 319, 66 S.Ct. 154); Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d IV. Jurisdictional Analysis 777, 784 (Tex.2005).
The Druggs assert that Moki Mac established sufficient [11] [12] [13] [14] We have recently explained thatminimum contacts with Texas by making material there are three parts to a “purposeful availment” inquiry. misrepresentations to them here, upon which they relied, Michiana, 168 S.W.3d at 784–85. First, only the defendant's regarding the nature of the services that would be provided contacts with the forum are relevant, not the unilateral activity on its trips. The wrongful death of their son, the Druggs of another party or a third person. Id. at 785. Second, the argue, arose from or related to the fact that Moki Mac's contacts relied upon must be purposeful rather than random, services did not meet the standards it represented in Texas. fortuitous, or attenuated. Id.; see also Burger King Corp. Moki Mac's principal argument is that there is an insufficient v. Rudzewicz, 471 U.S. 462, 476 n. 18, 105 S.Ct. 2174, nexus between any alleged misrepresentations that it made 85 L.Ed.2d 528 (1985); World–Wide Volkswagen Corp. v. in Texas and Andy's wrongful death in Arizona to satisfy Woodson, 444 U.S. 286, 297, 100 S.Ct. 559, 62 L.Ed.2d 490 jurisdictional due process. According to Moki Mac, Andy's (1980). Thus, “[s]ellers who ‘reach out beyond one state and death might have arisen out of or related to alleged negligence create continuing relationships and obligations with citizens that occurred in Arizona, but it had no meaningful connection of another state’ are subject to the jurisdiction of the latter to Moki Mac's alleged misrepresentations in Texas. in suits based on their activities.” Michiana, 168 S.W.3d at 785 (quoting Burger King, 471 U.S. at 473, 105 S.Ct. 2174). For a Texas forum to properly exercise specific jurisdiction in Finally, the “defendant must seek some benefit, advantage this case, (1) Moki Mac must have made minimum contacts or profit by ‘availing’ itself of the jurisdiction.” Michiana, with Texas by purposefully availing itself of the privilege 168 S.W.3d at 785. In contrast, a defendant may purposefully of conducting activities here, and (2) Moki Mac's liability avoid a particular forum by structuring its transactions in such must have arisen from or related to those contacts. Am. Type a way as to neither profit from the forum's laws nor subject Culture Collection, Inc., 83 S.W.3d at 806. Before deciding itself to jurisdiction there. Burger King, 471 U.S. at 472, 105 whether Moki Mac's liability arose from or related to its S.Ct. 2174. forum contacts, we must first examine the nature of those contacts and whether Moki Mac purposefully availed itself of [15] [16] [17] A nonresident defendant's forum-state the privilege of conducting business here. See Michiana, 168 contacts may give rise to two types of personal jurisdiction. S.W.3d at 784–85. BMC Software, 83 S.W.3d at 795–96. If the defendant has made continuous and systematic contacts with the forum, general jurisdiction is established whether or not the defendant's alleged liability arises from those contacts. Id. A. Purposeful Availment at 796; CSR Ltd., 925 S.W.2d at 595. In contrast, when [18] A nonresident defendant that directs marketing efforts specific jurisdiction is alleged, we focus the minimum- to Texas in the hope of soliciting sales is subject to suit contacts analysis on the “relationship among the defendant, here for alleged liability arising from or relating to that the forum [,] and the *576 litigation.” Guardian Royal, 815 business. Id., 168 S.W.3d at 785. In Michiana, we concluded S.W.2d at 228 (citing Helicopteros Nacionales de Colombia that a single product sale stemming from a single phone v. Hall, 466 U.S. 408, 414, 104 S.Ct. 1868, 80 L.Ed.2d 404 call initiated from Texas to a nonresident defendant was (1984); Schlobohm, 784 S.W.2d at 357). Specific jurisdiction not a purposeful contact sufficient to satisfy the due-process
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Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (2007) 50 Tex. Sup. Ct. J. 498
minimum-contacts test because the seller did not purposefully [21] [22] Thus, the mere sale of a product to a direct marketing efforts here to solicit sales. Id. at 781, 785–Texas resident will not generally suffice to confer specific 86. In that case, Holten, a Texas resident, called Michiana, jurisdiction upon our courts. Instead, the facts alleged must the nonresident defendant, to purchase an RV manufactured indicate that the seller intended to serve the Texas market. outside of Texas, which Michiana delivered to Texas entirely CSR Ltd., 925 S.W.2d at 595; see Asahi Metal Ind. Co. at Holten's expense. Id. at 784. Michiana did not advertise in v. Superior Court, 480 U.S. 102, 112, 107 S.Ct. 1026, 94 Texas and undertook no affirmative efforts to solicit business L.Ed.2d 92 (1987). This rule accords with the due-process here. Id. We held that the alleged commission of a tort by requirement that a nonresident defendant must take action making misrepresentations during a phone call initiated by that is purposefully directed toward the forum state. See Holten was insufficient, by itself, to establish jurisdiction. Id.
Asahi, 480 U.S. at 112, 107 S.Ct. 1026. In determining at 791–92. Such a test, we reasoned, would improperly focus whether the defendant purposefully directed action toward the purposeful-availment analysis on the form of the action Texas, we may look to conduct beyond the particular business chosen by the plaintiff rather than on the defendant's efforts to transaction at issue: “[a]dditional conduct of the defendant avail itself of the forum. Id. at 791. We also held that, standing may indicate an intent or purpose to serve the market in the alone, delivery of the single RV to Texas to accommodate forum State.” Id.; see also Michiana, 168 S.W.3d at 786 Holten was a similarly deficient basis for jurisdiction. Id. at (stating that Texas “cases appear to follow the ‘additional 786–88. conduct standard’ ”). Examples of additional conduct that may indicate whether a defendant purposefully availed itself [19] [20] The United States Supreme Court has recognized of a particular forum include advertising and establishing that a nonresident *577 who places products into the “stream channels of regular communication to customers in the forum of commerce” with the expectation that they will be sold in the state. Asahi, 480 U.S. at 112, 107 S.Ct. 1026. forum state is subject to the forum's jurisdiction. World–Wide Volkswagen, 444 U.S. at 297–98, 100 S.Ct. 559. Although [23] Unlike in Michiana, the evidence in this cases indicates the Court has also stated that a single contact can support that Moki Mac does intend to serve the Texas market. jurisdiction if that contact creates a “substantial connection” Moki Mac knowingly sells rafting trips to Texas residents with the forum, jurisdiction cannot be established where the and purposefully directs marketing efforts to Texas with contact creates only an “ ‘attenuated’ affiliation with the the intent to solicit business from this state. In addition to forum.” Burger King, 471 U.S. at 475 n. 18, 105 S.Ct. 2174 sending the brochures and release to the Druggs, the evidence (quoting World–Wide Volkswagen, 444 U.S. at 299, 100 S.Ct. shows that Moki Mac regularly advertised in Texas. It has 559). Indeed, in World–Wide Volkswagen, the Court held placed advertisements in a variety of nationally circulated that a New York dealership that did not advertise or solicit publications that have Texas subscribers. Moki Mac also business in Oklahoma was not subject to suit there simply hired public relations firms to target media groups and tour because it sold a car to New York residents in New York operators, some of whom were located in Texas. In 1996, who “happened to suffer an accident while passing through” Moki Mac promoted its trips within Texas by taking out an Oklahoma. World–Wide Volkswagen, 444 U.S. at 295, 100 advertisement in the Austin Chronicle. We have said that a S.Ct. 580. The Court reasoned that this one occurrence was nonresident defendant's advertising in local media “in and of mere fortuity and too attenuated to support jurisdiction, given itself, is a sufficiently purposeful act that is done in Texas.” the dealership's complete lack of affiliation with Oklahoma. Siskind v. Villa *578 Found. for Educ., Inc., 642 S.W.2d Id. Similarly, Michiana's single contact with Texas was too 434, 436 (Tex.1982). attenuated to support jurisdiction in Texas. Michiana had no control over the point of customer contact that generated Moki Mac's efforts to solicit business in Texas, however, go the sale and, like the defendant in World–Wide Volkswagen, further. It solicited Texas residents through mass and targeted had no say over where the RV would end up. Michiana, direct-marketing email campaigns. Moki Mac compiled a 168 S.W.3d at 787. Rather, Michiana's sale to Texas resulted mailing list by collecting contact information from interested from the mere fortuity that Holten happened to reside here, parties either by phone, email, or through the company's and Holten's unilateral activity could not subject Michiana to website. In addition, Moki Mac obtained a list of potential specific jurisdiction here. Id. at 787. customers from a commercial source. Both its own mailing list and the commercial mailing list included Texas residents. The company would automatically send brochures and trip
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information to people who had previously expressed interest advertise, or distribute RVs in Texas, and because the in a trip, even in years when that person had not expressed single relationship with Holten would end once the sale was interest. As part of those promotions, Moki Mac offered “a consummated. Id. at 785–86, 794. Moki Mac, conversely, free float” as an incentive to customers who coordinated a sought and obtained profit from Texas residents, with whom group of ten or more. Moki Mac provided this compensation the company maintained communications, and it derived a to at least two Texas residents. Moki Mac occasionally substantial amount of its business from Texas. Unlike in provided musicians to accompany float trips free of charge. Michiana, where we characterized a single sale resulting On one particular trip, Moki Mac permitted a string quartet from a single phone call originating from a Texas number from Fort Worth to accompany a Texas group on its float trip, as a “dribble,” id. at 786, the *579 “stream of commerce” free of charge to the musicians. Moki Mac also paid a fee to Moki Mac tapped into was significant. There is evidence that, a travel agency located in Houston, resulting in multiple trips over the preceding five years, between 105 and 128 of Moki involving Texas residents. Mac's customers (between 7–11%) were from Texas. We have emphasized that mere profit originating from the forum, In addition, Moki Mac established channels of regular if unrelated to a contact with the forum, is not purposeful communication with its customers in Texas. It was Moki availment. Id. at 787–88; see also World–Wide Volkswagen, Mac's practice to utilize particular customers, who would 444 U.S. at 299, 100 S.Ct. 559. But Moki Mac's business become de facto group leaders, to plan, organize, and with Texas residents stems from its marketing and advertising promote its trips. Annie Seals was one such contact. activities purposefully directed at gaining Texas customers, By communicating with all of its customers through and it thus availed itself of doing business here. correspondence with a single group leader, Moki Mac streamlined its reservations process. The company kept This Court found purposeful availment in a similar case these communication channels open; it was Moki Mac's concerning an out-of-state school that sent information to practice to automatically send information regarding new a Texas individual upon his request. Siskind, 642 S.W.2d trips, schedules, and prices to those on its mailing list who at 435. In Siskind, we held that an exercise of personal had been a customer or who had simply expressed interest in jurisdiction was proper over a school for troubled children a trip within a three-year period. located in Arizona. Id. at 435. Siskind paid tuition for his son to attend Villa with the understanding from the school's We stated in Michiana that the contacts of “[s]ellers brochures and Siskind's modified enrollment contract that who ‘reach out beyond one state and create continuing he would be reimbursed if his son left during the school relationships and obligations with citizens of another state’ ” year. Id. Villa expelled Siskind's son, but when Villa refused are purposeful rather than fortuitous. Michiana, 168 S.W.3d to refund the tuition, Siskind sued the school in Texas at 785 (quoting Keeton v. Hustler Magazine, Inc., 465 for breach of contract, misrepresentation, and violation of U.S. 770, 774, 104 S.Ct. 1473, 79 L.Ed.2d 790 (1984)). the Texas Deceptive Trade Practices Act. Id. at 435–36. A Moki Mac's contacts with Texas did not result, as did the significant number of Villa's students were Texas residents, defendant's in Michiana, from the mere fortuity that the and the school advertised in the El Paso, Houston, and Druggs happened to reside here. Rather, the contacts it had Lubbock telephone directories as well as solicited business with Texas resulted from additional conduct through which it in a number of national publications that were circulated aimed to get extensive business in or from this state. in Texas. Id. at 435. We held that Villa's advertisements, “in conjunction with its practice of mailing informational Purposeful availment requires that “a defendant must seek packets, applications for admission, invitations to re-enroll, some benefit, advantage, or profit by ‘availing’ itself of and enrollment contracts to Texas residents,” indicated that the jurisdiction.” Id. at 785. The notion necessarily implies the school had affirmatively sought business in Texas. Id. at that the nonresident submit to suit in the forum, and that a 436. Here, Moki Mac not only sent brochures and release nonresident may avoid being haled into court in a particular forms to the Druggs in Texas, it also engaged in additional forum by purposefully conducting business so as not to conduct demonstrating that, like the defendant in Siskind, it derive benefit or profit from a forum's laws. Id. We held actively solicited business in Texas. in Michiana that the defendant did not purposefully avail itself of the benefits and protections of Texas law because We conclude that Moki Mac had sufficient purposeful it did not regularly sell RVs in Texas, did not design, contact with Texas to satisfy the first prong of jurisdictional
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due process. But purposeful availment alone will not support an exercise of specific jurisdiction. Specific- Courts that support the but-for approach have said that a cause jurisdiction analysis has two co-equal components. For of action arises from or relates to a defendant's forum contacts specific-jurisdiction purposes, purposeful availment has no when, but for those contacts, the cause of action would never jurisdictional relevance unless the defendant's liability arises have arisen. See Shute v. Carnival Cruise Lines, 897 F.2d 377, from or relates to the forum contacts. Moki Mac contends 385 (9th Cir.1990), rev'd on other grounds, 499 U.S. 585, there was an insufficient nexus between Andy's injuries 111 S.Ct. 1522, 113 L.Ed.2d 622 (1991); see also Prejean and Moki Mac's contacts with Texas to establish specific v. Sonatrach, Inc., 652 F.2d 1260, 1270 n. 21 (5th Cir.1981) jurisdiction, an argument to which we now turn. (holding that a “contract [was] a but for causative factor”
for the tort suit); cf. Lanier v. Am. Bd. of Endodontics, 843 F.2d 901, 909 (6th Cir.1988) (interpreting “arising out of” language in Michigan's long-arm statute and concluding that B. Relatedness Requirement alleged discrimination would not have occurred but for the The “arise from or relate to” requirement lies at the heart of defendants' contacts with the forum). Rather than considering specific jurisdiction by defining the required nexus between only isolated contacts that relate to a specific element of the nonresident defendant, the litigation, and the forum. To proof or the proximate cause of injury, the but-for analysis support specific jurisdiction, the Supreme Court has given considers jurisdictional contacts that occur over the “entire relatively little guidance as to how closely related a cause course of events” of the relationship between the defendant, of action must be to the defendant's forum activities. In the forum, and the litigation. See Shute, 897 F.2d at 384. assessing the relationship between a nonresident's contacts and the litigation, most courts have focused on causation, As the sole jurisdiction to explicitly adopt the but-for test, but they have differed over the proper causative threshold. the Ninth Circuit Court of Appeals has been its staunchest See Nowak v. Tak How Invs., Ltd., 94 F.3d 708, 714 (1st advocate, and Shute's progeny have generally demonstrated Cir.1996) (discussing various causative approaches). Some the circuit's continuing support. Nowak, 94 F.3d at 714 courts have pursued an expansive but-for causative approach, (noting the Ninth Circuit as “the most forceful defender of the others have adopted a restrictive relatedness view requiring ‘but for’ test”); see Ballard v. Savage, 65 F.3d 1495, 1500 (9th forum contacts to be relevant to a necessary element of proof, Cir.1995); Terracom v. Valley Nat'l Bank, 49 F.3d 555, 561 and some have applied a sliding-scale analysis that attempts (9th Cir.1995); but see Omeluk v. Langsten Slip & Batbyggeri *580 to strike a balance between the two. See Mark M. A/S, 52 F.3d 267, 271 (9th Cir.1995) (noting that “[t]he Maloney, Specific Jurisdiction and the “Arise From or Relate authority of our decision in Shute is questionable”). Applying to” Requirement ... What Does it Mean?, 50 WASH. & the but-for test, the Shute court held that a passenger's LEE L.REV. 1265, 1276, 1299 (1993). Each approach has personal injuries suffered aboard a cruise ship arose out of the proponents and detractors, for the reasons we examine below. nonresident cruise line's contacts with Washington because, but for the cruise line's advertisements there, the passenger would not have purchased a ticket and boarded the ship. Shute, 897 F.2d at 386. The cruise line advertised in local 1. “But–For” Relatedness media and sent brochures to the state. Id. at 379. The court reasoned that, when a defendant demonstrates “continuing In Helicopteros Nacionales de Colombia v. Hall, the Supreme efforts to solicit business in the forum state,” whether a cause Court evaluated a Colombian corporation's limited contacts of action arises from those efforts must be viewed over the with Texas and decided they were not sufficiently continuous entire course of events. Id. at 385–86. The court did not limit and systematic to support general jurisdiction over the its relatedness analysis to the passenger's reservation contract, defendant in Texas. 466 U.S. at 418–19, 104 S.Ct. 1868. The but instead analyzed the range of the cruise line's solicitation Court did not reach specific jurisdiction because the parties activities. Id. at 385–86.
had conceded that the plaintiffs' claims did not arise from or relate to the defendant's activities in Texas. Id. at 415–16, 104 The Fifth Circuit appeared to apply relatedness in a similarly S.Ct. 1868. Justice Brennan, though, dissented, espousing a expansive manner in Prejean, 652 F.2d at 1270. There, the broad “but-for” approach to relatedness, and courts that have spouses of passengers who died in a plane crash brought a applied that test have generally relied on his view. Id. at 427– wrongful-death action in *581 Texas against, among others, 28, 104 S.Ct. 1868.
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an Algerian oil company that chartered the flight. Id. In F.2d 427, 430 (1st Cir.1986)). One iteration of this standard reversing the trial court's dismissal for want of personal is known as the “proximate cause” test, reasoning that a jurisdiction and remanding for further factual inquiry, the contact that is the proximate or legal cause of an injury is Fifth Circuit stated that, assuming the defendant had chartered substantively relevant to a cause of action that arises from the plane, the wrongful-death suit would arise from that it. The First, Second, and Eighth Circuits appear to have charter because the charter contract would be a but-for followed this approach. See United Elec., Radio & Mach. causative factor for the tort of wrongful death. Id. Workers of Am. v. 163 Pleasant St. Corp., 960 F.2d 1080, 1089 (1st Cir.1992); Pizarro v. Hoteles Concorde Int'l, C.A., Several justifications have been posited for the but-for 907 F.2d 1256, 1259–60 (1st Cir.1990); Marino, 793 F.2d approach. See Shute, 897 F.2d at 385. In Shute, the at 429–30; Morris v. Barkbuster, Inc., 923 F.2d 1277, 1281 court explained that the but-for test preserves the specific- (8th Cir.1991); Pearrow v. Nat'l Life & Accident Ins. Co., 703 jurisdiction requirement that there be a nexus between the F.2d 1067, 1068–69 (8th Cir.1983); Gelfand v. Tanner Motor cause of action and the defendant's activities in the forum. Id. Tours, 339 F.2d 317, 321–22 (2d Cir.1964). At the same time, the court opined, the expansive approach is more fundamentally fair because it does not allow a defendant [24] Proximate cause requires the defendant's conduct to be to engage in significant purposeful activities in the forum yet both the cause in fact and the foreseeable cause of injury. still avoid jurisdiction when the relationship of the cause of See Doe v. Boys Clubs of Greater Dallas, Inc., 907 S.W.2d action to those activities is tenuous. Id. at 385–86. 472, 477 (Tex.1995). Under this more stringent relatedness standard, the purposeful contact that is a proximate cause of On the other hand, the but-for approach has been widely injury is an essential liability element and is thus substantively criticized for the expanse of its seemingly unlimited relevant to a plaintiff's claim of harm. jurisdictional reach: “[a] ‘but for’ requirement ... has in itself no limiting principle; it literally embraces every event In Marino, for instance, a Massachusetts resident brought that hindsight can logically identify in the causative chain.” suit in her home state against Hyatt, a Delaware corporation, Nowak, 94 F.3d at 715; see also Lea Brilmayer, Related for injuries sustained when she slipped in the bathtub of Contacts and Personal Jurisdiction, 101 HARV. L.REV.. her Hawaii hotel room. Marino, 793 F.2d 427. Applying 1444, 1462 (1988) (criticizing the but-for test for its limitless the relatedness requirement restrictively, the court concluded reach). Although the Shute court posited that the required that Marino's claim did not “arise from” any business that reasonableness inquiry would act as a check on the but- Hyatt transacted in Massachusetts. Id. at 431. The court for test's expansiveness, commentators have questioned the reasoned that “[the] plaintiffs' advance reservation agreement efficacy of the reasonableness safeguard, calling it “highly with Hyatt would hardly be an important, or perhaps even deferential.” See, e.g., Maloney, supra at 1298. a material, element of proof in [the] slip and fall case,” and emphasized that to accept the plaintiffs' argument “would Few courts beyond the Ninth Circuit have adopted the but-for be to render the ‘arising from’ requirement ... a virtual approach to relatedness. Specifically, both the Fifth and Sixth nullity.” Id. at 430; see also Pizarro, 907 F.2d at 1259– Circuits have signaled a movement away from such a broad 60 (holding that personal injuries sustained in an Aruban test. 3 We agree with those courts and commentators who hotel did not arise out of or result from advertisements in view the but-for test as too broad and judicially unmoored to Puerto Rico). Courts in the Third and Tenth Circuits have satisfy due-process concerns. similarly applied the substantive-relevance/proximate-cause standard. See Wims v. Beach Terrace Motor Inn, Inc., 759 F.Supp. 264, 267–69 (E.D.Pa.1991) (holding that the causal link between brochures the Inn sent to Pennsylvania and the 2. Substantive Relevance/Proximate Cause injury sustained at the Inn in New Jersey was “simply too attenuated to say that the injury arose from Beach Terrace's Far more structured than the but-for approach is the restrictive activities in the Commonwealth of Pennsylvania”); Dirks v.
view of relatedness *582 known as “substantive relevance.”
Carnival Cruise Lines, 642 F.Supp. 971, 975 (D.Kan.1986)
As the name implies, this test requires forum-related contacts (finding the connection between the cruise ship operator's to be substantively relevant, or even necessary, to proof of negligent preparation of food on board ship in California and the claim. See Tecre Co. v. Buttonpro, Inc., 387 F.Supp.2d 927, 933 (E.D.Wis.2005) (citing Marino v. Hyatt Corp., 793
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its acts of soliciting passengers and sending tickets to Kansas a “sliding scale” approach that examines the relationship too tenuous to support jurisdiction). between forum contacts and the litigation along a continuum.
Under this view, as the extent of forum contacts goes up, the In Gelfand, the Second Circuit implicitly rejected the but-for degree of relatedness to the litigation necessary to establish approach on facts largely similar to those before us. 339 F.2d specific jurisdiction goes down, and vice versa. Maloney, at 321–22. There, the Gelfands sued a tour bus company for supra at 1299–1300. As articulated by the Supreme Court injuries sustained during a motor vehicle crash. Id. at 318. of California, “as the relationship of the defendant with the The court held that the sale of bus tickets in New York was state seeking to exercise jurisdiction over him grows more an insufficient basis to establish personal jurisdiction over the tenuous, the scope of jurisdiction also retracts, and fairness non-resident defendant because the claim did not arise from is assured by limiting the circumstances under which the the sale. Id. at 321–22; see also Reich v. Signal Oil & Gas plaintiff can compel him to appear and defend.” Vons Cos. Co., 409 F.Supp. 846, 852 (S.D.Tex.1974) (concluding that a v. Seabest Foods, Inc., 14 Cal.4th 434, 58 Cal.Rptr.2d 899, contract signed in Texas to build a helicopter that crashed in 926 P.2d 1085, 1094 (1996); see also Davis v. Baylor Univ., Ghana, killing *583 two oil rig workers, was too tenuous a 976 S.W.2d 5, 9 (Mo.Ct.App.1998); William M. Richman, contact to say that the tort arose from it). Jurisdiction in Civil Actions, 72 CAL. L.REV. 1328, 1338– 40 (1984) (review essay).
Although Moki Mac urges us to follow the substantive- relevance approach, we have generally eschewed pinning Although the sliding scale jurisdictional analysis studiously jurisdictional analysis on the type of claim alleged. See, e.g., avoids the extremes that the other two relatedness tests Michiana, 168 S.W.3d at 791–92. In Michiana, we warned present, it too presents a number of problems. Most against the dangers of the plaintiff's pleadings driving the significantly, deciding jurisdiction based on a sliding analysis, stating that such an approach “shifts a court's focus continuum blurs the distinction between general and specific from the relationship among the defendant, the forum, and jurisdiction that our judicial system has firmly embraced the litigation to the relationship among the plaintiff, the and that provides an established structure for courts to forum ... and litigation.” Id. at 790 (emphasis in original) analyze questions of in personam jurisdiction. See Maloney, (internal citations omitted). We reject a categorical approach supra at 1299–1300. Removing the jurisdictional analysis that runs the danger of posing too narrow an inquiry. from these judicial underpinnings allows general and Although ostensibly imbued with a bright-line benefit, in specific jurisdiction “to melt together in the middle ... practice it would require a court to delve into the merits severely weaken[ing] the defendant's ability to anticipate the to determine whether a jurisdictional fact is actually a legal jurisdictional consequences of its conduct.” Linda Sandstrom cause of the injury. See Maloney, supra at 1290. Moreover, Simard, Meeting Expectations: Two Profiles for Specific ease of application should not overshadow the principal Jurisdiction, 38 IND. L.REV. 343, 366 (2005). In sum, “this constitutional due-process inquiry, which is whether the tradeoff does not fulfill the underlying goals of either general defendant has “certain minimum contacts with [the forum or specific jurisdiction” and “may raise far more difficult state] such that the maintenance of the suit does not offend questions than it resolves.” Id. at 366–67. *584 For these ‘traditional notions of fair play and substantial justice.’ ” Int'l reasons, we decline to adopt the sliding-scale approach to Shoe, 326 U.S. at 316, 66 S.Ct. 154 (quoting Milliken v. relatedness. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, 85 L.Ed. 278 (1940)). We note, too, that the substantive-relevance/proximate-cause standard is more stringent than the Supreme Court has, at least 4. Substantial Connection to Operative Facts thus far, required. Helicopteros, 466 U.S. at 415 n. 10, 104 S.Ct. 1868. As we have said, the but-for relatedness test is too broad and conceptually unlimited in scope, the substantive-relevance/ proximate-cause test poses too narrow an inquiry, and the 3. “Sliding Scale” Relationship sliding-scale analysis conflates the fundamental distinction between general and specific jurisdiction that is firmly Attempting to moderate the seemingly categorical effects embedded in our jurisprudence. In light of these concerns, of the but-for and substantive-relevance tests, some some courts have applied alternative approaches, requiring commentators have espoused, and a few courts have adopted, that a cause of action “lie in the wake of the [defendant's]
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commercial activities” in the forum, Deluxe Ice Cream at 229–33. In Guardian Royal, we spoke in terms of a Co. v. R.C.H. Tool Corp., 726 F.2d 1209, 1215–16 (7th “substantial connection” between the nonresident defendant Cir.1984), or that the forum contacts be “critical steps and Texas arising from purposeful action or conduct directed in the chain of events that led to the [injury],” In re here. Id. at 226 (citing Burger King, 471 U.S. at 475 n. 18, Oil Spill by Amoco Cadiz, 699 F.2d 909, 915–16 (7th 105 S.Ct. 2174) (stating “[s]o long as it creates *585 a Cir.1983). The Sixth Circuit has generally applied a test that ‘substantial connection’ with the forum, even a single act falls somewhere between “proximate cause” and “but-for,” can support jurisdiction”); see also Shell Compania Argentina requiring a “substantial connection” between the defendant's de Petroleo, S.A. v. Reef Exploration, Inc., 84 S.W.3d 830, contacts and the plaintiff's claim to warrant the exercise of 837 (Tex.App.-Houston [1st Dist.] 2002, pet. denied) (stating specific jurisdiction. See WEDGE Group, Inc., 882 F.2d at contacts “must have a ‘substantial connection’ that results in 1091 (6th Cir.1989); Southern Mach. Co. v. Mohasco Indus., the alleged injuries”) (citing Guardian Royal, 815 S.W.2d at Inc., 401 F.2d 374, 384 n. 27 (6th Cir.1968). In WEDGE 226). Considering our own jurisprudence and the Supreme Group, Inc., the court explained that the specific jurisdiction's Court's analysis in Rush, we believe that for a nonresident relatedness element “does not require that the cause of action defendant's forum contacts to support an exercise of specific formally ‘arise from’ defendant's contacts with the forum [but jurisdiction, there must be a substantial connection between instead requires] that the cause of action, of whatever type, those contacts and the operative facts of the litigation. See have a substantial connection with the defendant's in-state Guardian Royal, 815 S.W.2d at 229–33; Rush, 444 U.S. at activities.” WEDGE Group Inc., 882 F.2d at 1091 (emphasis 329, 100 S.Ct. 571. in original) (quoting Southern Mach. Co., 401 F.2d at 384 n. 27).
C. Relatedness of Moki Mac's Contacts The Supreme Court has yet to explicate the degree of relatedness necessary to support specific jurisdiction over [26] Betsy Drugg alleges she was induced to send Andy a nonresident defendant. However, in Rush v. Savchuk, the on the rafting trip by Moki Mac's direct solicitation, which Court did consider the relation between forum contacts and included statements made in Moki Mac's brochures and in the litigation in a case filed in Minnesota for personal injuries the release it sent to the Druggs. Specifically, Andy's mother arising from an Indiana automobile accident. 444 U.S. 320, claims she made the decision to send Andy on the trip based 324, 100 S.Ct. 571, 62 L.Ed.2d 516 (1980). The plaintiff on Moki Mac's assurances that “[y]ou don't need ‘mountain claimed jurisdiction was proper in Minnesota because the man’ camping skills to participate in one of our trips,” defendant's insurance company did business there, and the children age twelve or above are suited to participate, and insurer's obligation to defend and indemnify its insured in “Moki Mac has taken reasonable steps to provide you with the accident litigation was inevitably the focus that would appropriate equipment and/or skilled guides.” But for these determine the victim's rights and obligations. Id. at 327–28, promises, the Druggs claim, they would not have sent Andy 100 S.Ct. 571. Holding that the insurance company's contacts on the rafting trip and he would not have fallen on the hiking could not be imputed to the defendant for the purpose of trail. establishing jurisdiction, the Court concluded there were not “significant contacts between the litigation and the forum” Certainly on a river rafting trip safety is a paramount concern, because “the insurance policy is not the subject matter of the and we accept as true the Druggs' claim that Andy might case ... nor is it related to the operative facts of the negligence not have gone on the trip were it not for Moki Mac's action.” Id. at 329, 100 S.Ct. 571. The Court concluded that representations about safety. However, the operative facts of the insurance contract pertained only to the conduct and “not the Druggs' suit concern principally the guides' conduct of the the substance [ ] of the litigation,” and therefore the forum's hiking expedition and whether they exercised reasonable care jurisdiction was not affected. Id. in supervising Andy. The events on the trail and the guides'
supervision of the hike will be the focus of the trial, will [25] Our limited jurisprudence similarly suggests a middle consume most if not all of the litigation's attention, and the ground, more flexible than substantive relevance but more overwhelming majority of the evidence will be directed to structured than but-for relatedness, in assessing the strength that question. Only after thoroughly considering the manner of the necessary connection between the defendant, the in which the hike was conducted will the jury be able to assess forum, and the litigation. See Guardian Royal, 815 S.W.2d the Druggs' misrepresentation claim. In sum, “the [alleged
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misrepresentation] is not the subject matter of the case ... nor a defendant's forum advertising. In Oberlies v. Searchmont is it related to the operative facts of the negligence action.” Resort, Inc., a Michigan resident visited a Canadian ski Rush, 444 U.S. at 329, 100 S.Ct. 571. Whatever connection resort after seeing the resort's advertisement in a Michigan there may be between Moki Mac's promotional materials sent newspaper. 246 Mich.App. 424, 633 N.W.2d 408, 411 (2001). to Texas and the operative facts that led to Andy's death, we Claiming she was injured when resort employees negligently do not believe it is sufficiently direct to meet due-process loaded her onto a ski lift, the plaintiff filed suit in Michigan. concerns. Analogous cases from other courts support our Id. The court concluded that the resort's advertising activities view. in the forum were insufficient to support in personam jurisdiction, and that it would violate due process to hale the Federal district courts in Texas have generally held that a Canadian resort into a Michigan court: nonresident's in-state advertising is insufficiently related to a negligence claim based on personal injury that occurs out of [n]otwithstanding defendant's state to support an exercise of specific jurisdiction. In Kervin purposeful availment of Michigan v. Red River Ski Area, Inc., for example, the plaintiff fell while business opportunities through its descending a flight of wooden steps leading to her ski lodge in advertising, we are compelled to New Mexico. 711 F.Supp. at 1385. The Kervins sued the ski find that the presence of other resort in Texas alleging negligence in failing to maintain safe factors render the exercise of premises. Id. The plaintiffs asserted in personam jurisdiction jurisdiction unreasonable. Simply put, based on the resort's contacts with Texas, which included the connection between plaintiff's television and print advertising and mailing brochures to cause of action [negligence] and potential customers. Id. at 1386. The court determined that defendant's Michigan advertising is so “[i]n personam jurisprudence has taken a restrictive view attenuated that it is unreasonable to of the relationship between causes of action and contacts, exercise jurisdiction over defendant.... seemingly to require virtually a direct link between [the] claim and [the] contacts.” Id. at 1389. Although the court Id. at 416 (internal citations omitted). 4 ultimately determined *586 that general jurisdiction was proper, it held that specific jurisdiction was not because there Somewhat analogous to advertising cases are those that was no substantial connection between the resort's advertising concern efforts to recruit forum residents. Most courts have in Texas and its negligent maintenance of the stairwell in New held that merely mailing letters and exchanging phone calls Mexico. Id. in recruitment efforts is insufficient to support specific jurisdiction over nonresidents for claims that arise outside In Gorman v. Grand Casino of Louisiana, Inc.-Coushatta, the the forum, although some courts have exercised jurisdiction plaintiff, a Texas resident, sued a Louisiana casino in Texas when the defendant *587 physically recruited in the forum. claiming that its employee intentionally served her a drink For example, in Cassell v. Loyola University, a Florida containing Benzodiazepine (one of the “date-rape” drugs) and student who was a resident of Tennessee was recruited to play then made advances to her. 1 F.Supp.2d at 658. The court held basketball for a New Orleans university. 294 F.Supp. 622, that there was an insufficient link between Gorman's sexual- 622–23 (E.D.Tenn.1968). When the university subsequently harassment claim and the casino's marketing scheme in Texas refused to grant Cassell a scholarship, he sued for breach of to support the exercise of specific jurisdiction, concluding contract in Tennessee. Id. at 623. The only connections with “[b]illboard advertisements of slot machine payouts ... ha[ve] the forum were that it was the student's domicile, it was where nothing to do with the conduct of that casino's employees.” his father had signed the recruitment contract, and agents of Id.; see also Luna, 851 F.Supp. at 832–33 (holding claim the university had communicated there by mail and telephone. involving plaintiff's death in a plane crash over Panama Id. The court held that the “asserted cause of action does not arose not from her ticket purchase in Texas but from alleged arise out of business transacted in Tennessee” and thus there negligence in Panama). was an insufficient connection between the forum and the litigation to justify personal jurisdiction. Id. at 624. 5 Courts in other jurisdictions have similarly addressed the issue, concluding that claims arising out of personal injury In Kelly v. Syria Shell Petroleum Development B. V., two that occurs outside the forum do not arise from or relate to Texas oil well workers who had contracted their services to
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Syrian oil companies were killed while performing work in Texas healthcare group regarding Brocail's progress. Id. at Syria. 213 F.3d at 855. Their families sued for wrongful death 558. Brocail also asserted jurisdiction was proper because in Texas, but the Fifth Circuit held there was no specific Anderson had made misrepresentations in Texas by failing to jurisdiction over their claims. Id. at 844. The court noted fully disclose the true extent of Brocail's injuries in his forum that, even assuming the Syrian company possessed minimum contacts. Id. at 563. The court of appeals held that Brocail's contacts with Texas, including signing a contract for the claims did not arise from or relate to any Texas contacts well workers' services, “specific jurisdiction does not exist ... because “Brocail is complaining about a physical injury based because Appellants' claims do not arise out of those contacts. on a course of treatment. Any tort occurred in the exercise of Instead, they arise out of alleged tortious acts committed ... in medical judgment in prescribing a course of physical therapy Syria.” Id. at 855 (emphasis in original). 6 in Michigan, not from the communication of that prescription [to Texas].” Id.
The Druggs cite our decision in Siskind to support their claim that Moki Mac's solicitations in Texas and Andy's Similarly, the injuries for which the Druggs seek recovery death on the Arizona hiking trail are sufficiently related to are based on Andy's death on the hiking trail in Arizona, and support specific jurisdiction. Siskind, 642 S.W.2d at 437. the relationship between the operative facts of the litigation But the operative facts in Siskind that supported liability and and Moki Mac's promotional activities in Texas are simply related to the defendant's forum contacts differ significantly too attenuated to satisfy specific jurisdiction's due-process from those presented here. The school solicited students in concerns. Texas through national magazines and local telephone books and the contract between Siskind and the school specifically provided that, if Siskind's son left during the school year, V. Conclusion his tuition would be reimbursed. Id. at 435–36. When his son was expelled, the school refused to refund Siskind's We reverse the court of appeals' judgment and remand the tuition. Id. Siskind sued the school in Texas for the promised case to that court to consider the Druggs' assertion that Moki refund. Id. Under these circumstances, we held there was “a Mac is subject to general jurisdiction in Texas. connection between Siskind's claim for breach of contract and Villa's contacts *588 with Texas.” Id. at 437. Here, however, Moki Mac's statements in its brochures and release do not Justice JOHNSON filed a dissenting opinion, in which Justice bear the same direct link to Andy's injury as did Siskind's MEDINA joined.
claim to recover money lost under the contract. Moki Mac's promotional representations, while theoretically related to Andy's injury on the hiking trail in the sense that but for them Justice JOHNSON, joined by Justice MEDINA, dissenting. he might not have been there, are not sufficiently related to the Texas' long-arm jurisdiction over non residents reaches as far operative facts underlying Andy's injury for which the Druggs as the federal constitution allows. See Guardian Royal Exch. seek recovery in wrongful death to sustain the exercise of Assurance, Ltd. v. English China Clays, P.L.C., 815 S.W.2d specific jurisdiction. 223, 226 (Tex.1991). But, just how far the constitution allows has not been a simple question since International Shoe Co.
This case more closely resembles the situation presented in v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 Brocail v. Anderson, 132 S.W.3d 552 (Tex.App.-Houston (1945). See Mark Maloney, Specific Personal Jurisdiction [14th Dist.] 2004, pet. denied). In that case, Brocail, a former and the “Arise From or Relate To” Requirement ... What Detroit Tigers baseball player, underwent treatment by a team Does It Mean?, 50 WASH. & LEE L. REV. 1265, 1266– physician in Michigan. Id. at 555. Of his own volition, Brocail 67 (1993). As to a state's exercising in personam jurisdiction moved to his home in Texas during his rehabilitation, and at over a non resident, federal due process requires “only that Brocail's request, his doctor, Anderson, prescribed follow-up in order to subject a defendant to a judgment in personam, if treatments that were administered by a healthcare group in he be not present within the territory of the forum, he have Houston. Id. at 555–56. Brocail sued Anderson in Texas for certain minimum contacts with it such that the maintenance medical negligence and fraud related to his physical therapy, of the suit does not offend ‘traditional notions of fair play and alleged Texas had specific jurisdiction because Anderson and substantial justice.’ ” International Shoe, 326 U.S. at 316 had faxed prescriptions to Texas and communicated with the (quoting Milliken v. *589 Meyer, 311 U.S. 457, 463, 61
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Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (2007) 50 Tex. Sup. Ct. J. 498
S.Ct. 339, 85 L.Ed. 278 (1940)). Specific jurisdiction over include targeting particular persons to whom it sends a nonresident defendant comports with federal constitutional brochures describing Moki Mac's rafting and hiking trips. Its due process if the defendant's alleged liability arises from targeted audience includes persons who previously inquired or is related to an activity conducted within the forum state. about or have taken its trips. At and for several years Helicopteros Nacionales de Colombia v. Hall, 466 U.S. 408, prior to the time reservations were made for Andy's trip 414 & n. 8, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984). It is “the in 2001, Moki Mac's targeted audience included Texas defendant's conduct and connection with the forum” that are residents. As the Court sets out, some of Moki Mac's efforts critical. Michiana Easy Livin' Country, Inc. v. Holten, 168 which were directed toward Texas residents included regular S.W.3d 777, 789 (Tex.2005) (citing Burger King Corp. v. advertising in Texas, hiring public relations firms to target Rudzewicz, 471 U.S. 462, 474, 105 S.Ct. 2174, 85 L.Ed.2d media groups and tour operators in Texas, soliciting Texas 528 (1985)). residents through mass and targeted direct-mail campaigns, and utilizing particular customers to become de facto group There is nothing wrong with an enterprise arranging its affairs leaders to plan, organize and promote Moki Mac trips. so that it avoids doing business in or engaging in activities Moki Mac also has given discounted trip prices to some directed toward a particular forum and thereby precludes Texas clients who brought potential customers to Moki Mac's that forum's exercise of jurisdiction over it. See World–Wide attention. Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980). The key inquiry is whether a Participants on Moki Mac's guided rafting and hiking trips defendant has so arranged its affairs. If not, then “he should engage in activities and encounter conditions which Moki reasonably anticipate being haled into court” in the forum. Mac recognizes pose risks of injury and death. Its brochures Id. The Supreme Court has not been overly restrictive in and “Visitors Acknowledgment of Risk” form (the VAR its view of federal due process limits on a forum's exercise agreement) identify certain risks, warn that enumerated risks of jurisdiction over nonresidents that purposefully direct and “other unknown or unanticipated risks may cause injury activities toward the forum's residents: or death,” and state that Moki Mac has taken reasonable steps to provide “appropriate equipment and/or skilled guides so [W]here a defendant who purposefully you can enjoy *590 an activity for which you may not be has directed his activities at skilled.” One of the specific dangers warned of was falling forum residents seeks to defeat during a hike with resulting injury or death. Andy Drugg fell jurisdiction, he must present a during a hike and was killed. compelling case that the presence of some other considerations would The Druggs received Moki Mac's brochures from a render jurisdiction unreasonable. Most Texas acquaintance. After reviewing the brochures and such considerations usually may be corresponding with Moki Mac from Texas, the Druggs accommodated through means short of decided to allow thirteen-year-old Andy to go on one of finding jurisdiction unconstitutional. the trips. Moki Mac confirmed Andy's reservation and in For example, the potential clash of accordance with its usual procedures forwarded to the Druggs the forum's law with the “fundamental a VAR agreement which Moki Mac required to be signed substantive social policies” of another before persons could take one of their trips. Betsy and Andy State may be accommodated through signed the agreement in Texas and returned it to Moki application of the forum's choice- Mac. The agreement set out several risks which could be of-law rules. Similarly, a defendant encountered on a Moki Mac trip and specified the possibility claiming substantial inconvenience of injury or death: may seek a change of venue.
In consideration of the services of Moki Mac River Burger King, 471 U.S. at 477. Expeditions, Inc., their officers, agents, employees, and stockholders, and all other persons or entities associated Moki Mac is a Utah company which has conducted guided with those businesses, (hereinafter collectively referred to tours in the Grand Canyon for many years. In addition to as “Moki Mac”), I agree as follows: ... general advertising and maintaining a website for potential clients to access, Moki Mac's efforts to attract customers
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Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (2007) 50 Tex. Sup. Ct. J. 498
including previous guests living in Massachusetts. The I agree to assume responsibility for the risks identified.... company employing Mr. Nowak in Massachusetts had an Therefore, I assume full responsibility for myself, agreement with Tak How for rates when its employees stayed including my minor children, for bodily injury, death, loss at the hotel. When *591 its employees went to Hong Kong of personal property, and expenses thereof as a result of for business the company booked reservations at the hotel. those inherent risks an/or of my negligence in participating Mrs. Nowak accompanied her husband to Hong Kong on in this activity. a business trip and they stayed at the hotel pursuant to reservations made by the company. Mrs. Nowak drowned in ...
the hotel swimming pool. Mr. Nowak and his children sued [T]his agreement shall be effective and binding upon Tak How in Massachusetts. Tak How removed the case to myself, my heirs, assigns, personal representatives, estate, federal court and the federal district court refused to dismiss and all members of my family, including any minors for lack of personal jurisdiction. The First Circuit affirmed. accompanying me. In doing so, the court surveyed and discussed the various approaches taken to the due process relatedness issue, just as At its special appearance hearing, Moki Mac's representative the Court does in its opinion. The Nowak court then noted the testified that Moki Mac considered the VAR agreement to First Circuit's reputation as a proponent of the more restrictive have been effective when and where it was signed by the “proximate-cause” standard as to the relatedness issue and Druggs—in this case, Texas. the importance of foreseeability in the due process analysis:
“Foreseeability is a critical component in the due process The Court notes that for Texas courts to properly exercise inquiry, particularly in evaluating purposeful availment, and specific jurisdiction over Moki Mac as a non resident, Moki we think it also informs the relatedness prong.” Id. at 715 Mac must have had (1) minimum contacts with Texas by (emphasis added). See also Burger King, 471 U.S. at 474 purposefully availing itself of the privilege of conducting (“[T]he foreseeability that is critical to due process analysis ... activities here, and (2) liability arising from or related to is that the defendant's conduct and connection with the forum those contacts. 221 S.W.3d 569. The Court concludes that State are such that he should reasonably anticipate being haled Moki Mac's contacts with Texas were targeted to a particular into court there.”) (quoting World–Wide Volkswagen, 444 audience, were purposeful, not a “mere fortuity,” and thus U.S. at 297). The Nowak court concluded that adherence to satisfied the first prong of the jurisdictional due process the proximate cause construct in jurisdictional issues should inquiry. See id. at 578. However, the Court determines that not be so strict as in tort issues: the Druggs' suit did not “arise from or relate to” Moki Mac's activities in Texas and that the second prong of the due We see no reason why, in the context of a relationship process inquiry was not met. between a contractual or business association and a subsequent tort, the absence of proximate cause per se As part of its analysis the Court references a “restrictive should always render the exercise of specific jurisdiction proximate-cause” test used by the First Circuit Court of unconstitutional. Appeals. See Nowak v. Tak How Invs., Ltd., 94 F.3d 708 When a foreign corporation directly targets residents (1st Cir.1996), cert. denied 520 U.S. 1155, 117 S.Ct. 1333, in an ongoing effort to further a business relationship, 137 L.Ed.2d 493 (1997). The Nowak facts are analogous and achieves its purpose, it may not necessarily be to those before us and in my view the opinion sets out a unreasonable to subject that corporation to forum fair and reasonable approach to the relatedness aspect of the jurisdiction when the efforts lead to a tortious result. The jurisdictional question.
corporation's own conduct increases the likelihood that a specific resident will respond favorably. If the resident Tak How was a Hong Kong corporation which owned a is harmed while engaged in activities integral to the hotel in Hong Kong and had no place of business outside relationship the corporation sought to establish, we think Hong Kong. It had no shareholders, assets, or employees the nexus between the contacts and the cause of action is in Massachusetts. It advertised in national and international sufficiently strong to survive the due process inquiry at magazines and listed the hotel in various hotel guides used least at the relatedness stage.
at travel agencies in Massachusetts. On one occasion it sent direct mail solicitations to former Tak How guests, ...
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Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (2007) 50 Tex. Sup. Ct. J. 498
conduct was particularly designed to and did increase the While the nexus between Tak How's solicitation of likelihood that Texas residents would respond favorably.
[Nowak's employer's] business and Mrs. Nowak's death Andy Drugg's death occurred while he was engaged in does not constitute a proximate cause relationship, it does activities integral to the relationship Moki Mac induced by represent a meaningful link between Tak How's contact and its efforts specifically directed toward Texas residents. Moki the harm suffered.
Mac should have reasonably foreseen that an injury to a client Id. at 715–16. such as Andy while the client participated in activities integral to the relationship directly produced through Moki Mac's The court then applied further considerations articulated by activities directed toward Texas residents would subject Moki the Supreme Court as being appropriate to determining if Mac to being sued over the injury in Texas. There was a the exercise of personal jurisdiction by a forum over a non meaningful link between Moki Mac's actions directed toward resident defendant would be constitutional: Texas residents and the Druggs' suit. Accordingly, I would hold that the substance of the Druggs' suit is related to Moki Our conclusion ... does not end the inquiry. Personal Mac's activities which were purposefully directed toward jurisdiction may only be exercised if it comports with Texas residents; the second prong of the due process inquiry traditional notions of “fair play and substantial justice.” is satisfied; it is not unreasonable or unfair to Moki Mac International Shoe, 326 U.S. at 320. Out of this for Texas to exercise jurisdiction over Moki Mac as to the requirement, courts have developed a series of factors that Druggs' suit; and subject to a “fair play and substantial bear on the fairness of subjecting a nonresident to a foreign justice” analysis, the exercise of jurisdiction by Texas in this tribunal ... as follows: “(1) the defendant's burden of case falls within the boundaries of federal constitutional due appearing, (2) the forum state's interest in adjudicating the process requirements. See Nowak, 94 F.3d at 715–16. dispute, (3) the plaintiff's interest in obtaining convenient and effective relief, (4) the judicial system's interest in The court of appeals performed the “fair play and substantial obtaining the most effective resolution of the controversy, justice” analysis which the Supreme Court has indicated both and (5) the common interests of all sovereigns *592 in protects a non resident from improper exercise of jurisdiction promoting substantive social policies.” by a forum, and yet might allow a lesser showing for the exercise of jurisdiction over a defendant who purposefully Id. at 717 (quoting United Elec., Radio & Mach. Workers directs activities toward the forum. See Burger King, 471 U.S.
v. Pleasant St. Corp., 960 F.2d 1080, 1088 (1st Cir.1992));
at 477–78 (noting considerations which sometimes “serve see Burger King, 471 U.S. at 477–78. Such an approach to establish the reasonableness of jurisdiction upon a lesser properly focuses on and emphasizes the actions of a showing of minimum contacts than would otherwise be nonresident defendant that has purposefully directed actions required”). I agree with the court of appeals' analysis and at a forum's residents, and on the reasonable foreseeability to determination that the exercise of specific jurisdiction over the defendant that its actions will make it amenable to suit in Moki Mac by Texas would not offend traditional notions of that forum.
fair play and substantial justice. 221 S.W.3d 569.
While Moki Mac might have a strong forum non conveniens I would affirm the judgment of the court of appeals.
argument, see TEX. CIV. PRAC. & REM. CODE § 71.051, the facts before us do not present a compelling case that Texas' exercise of jurisdiction over Moki Mac would be All Citations unreasonable. See Burger King, 471 U.S. at 477. Moki Mac's 221 S.W.3d 569, 50 Tex. Sup. Ct. J. 498
Footnotes 1 The Druggs also claimed Moki Mac breached its agreement to provide the safety measures represented in its materials.
Because the Druggs did not argue their breach-of-contract claim in the court of appeals and do not do so in their briefs to this Court, we only address the Druggs' wrongful-death claim.
2 We received an amicus brief supporting Moki Mac's position from Grand Canyon Outfitters Association and America Outdoors.
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Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (2007) 50 Tex. Sup. Ct. J. 498
3 See Felch v. Transportes Lar–Mex SA DE CV, 92 F.3d 320, 324 (5th Cir.1996) (finding no specific jurisdiction over a Mexican trucking company that was sued in Texas when a truck hit the plaintiff's mother's vehicle on a Mexican highway); Kelly v. Syria Shell Petroleum Dev. B. V., 213 F.3d 841, 855–56 (5th Cir.2000) (concluding that Syrian oil companies were not amenable to specific jurisdiction in Texas because the wrongful-death claims of workers killed in Syria were not closely related to the companies' recruiting activities in Texas); Gorman v. Grand Casino of La., Inc.-Coushatta, 1 F.Supp.2d 656, 658 (E.D.Tex.1998) (holding plaintiff's claim of sexual assault by a casino employee did not support specific jurisdiction because the claim did not arise out of the casino's extensive advertising in Texas but arose from the casino's Louisiana operations); Luna v. Compania Panamena De Aviacion, S.A., 851 F.Supp. 826, 832 (S.D.Tex.1994) (holding no specific jurisdiction in Texas because plaintiff's death in a plane crash over Panama did “not result from the fact that she purchased the ticket for her airline travel in Texas”); Kervin v. Red River Ski Area, Inc., 711 F.Supp. 1383, 1389 (E.D.Tex.1989) (holding plaintiffs could not assert specific jurisdiction over nonresident ski resort because their negligence claim did not arise out of its advertising contacts with Texas but arose as a result of the resort's alleged negligence in failing to maintain safe premises in New Mexico); Third Nat'l Bank in Nashville v. WEDGE Group, Inc., 882 F.2d 1087, 1091 (6th Cir.1989) (moving away from the court's previous emphasis on a “made possible by” interpretation of the arise from requirement to a focus on the cause of action having a “substantial connection” to the defendant's in- state activities).
4 See also Wims, 759 F.Supp. at 269 (concluding that the Pennsylvania plaintiff's injuries at a New Jersey motel did not arise from defendant's forum contacts because there was no causal link between the motel's brochures sent to Pennsylvania and the plaintiff's action for “negligent willful, wanton and reckless conduct”); Coleman v. Chen, 712 F.Supp. 117, 122 (S.D.Ohio 1988) (holding that a slip-and-fall claim arose not from the defendant's solicitation in Ohio but from the condition of the hotel parking lot outside the forum); Smith v. Jefferson County Chamber of Commerce, 683 F.Supp. 536, 538– 39 (D.Md.1988), aff'd without opinion, 885 F.2d 865 (4th Cir.1989) (holding that a personal injury claim that occurred at a West Virginia crafts festival did not arise out of the defendant's contacts with Maryland); Slocum v. Sandestin Beach Resort Hotel, Div. of Beachside # 1 Condo Ass'n, 679 F.Supp. 899, 901–02 (E.D.Ark.1988), appeal dismissed, 855 F.2d 856 (8th Cir.1988) (holding that the plaintiff's injuries at a Florida resort were not related to the defendant's solicitation in the forum state); Morse v. Walt Disney World Co., 675 F.Supp. 42, 43–44 (D.Mass.1987) (same); Szakacs v. Anheuser– Busch Cos., 644 F.Supp. 1121, 1123–24 (N.D.Ind.1986) (same).
5 In doing so, the court distinguished college athletic recruiting from ordinary commercial activities. 6 See also Hardnett v. Duquesne Univ., 897 F.Supp. 920, 922–24 (D.Md.1995) (holding that the student's negligence claim against the Pennsylvania university for injuries sustained while attending a rock concert there did not “arise out of” the university's forum-related contacts with Maryland which included mailing materials and an acceptance letter to the student's home); Tung v. Am. Univ. of the Caribbean, 353 N.W.2d 869, 871–72 (Iowa Ct.App.1984) (holding that employer's forum contacts that included sending two letters and making three telephone calls were not sufficiently related to the plaintiff's claim for breach of an employment contract to support specific jurisdiction); City of Riverview v. Am. Factors, Inc., 77 S.W.3d 855, 858–59 (Tex.App.Dallas 2002, no pet.) (holding that a telephone conversation between a city employee and the company was insufficient to establish minimum contacts with Texas). Cf. Barile v. Univ. of Va., 2 Ohio App.3d 233, 441 N.E.2d 608, 612–15 (1981) (holding that two visits to the forum by university agents for the purpose of recruiting the plaintiff to play football was sufficient to establish in personam jurisdiction over the plaintiff's breach of contract claim); Davis v. Baylor University, 976 S.W.2d 5, 13–14 (Mo.Ct.App.1998) (holding that the dispatching of agents to the forum state to actively recruit a resident is of a quality and quantity sufficient to support specific jurisdiction for breach of contract and fraudulent misrepresentation claim).
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Moncrief Oil Intern. Inc. v. OAO Gazprom, 414 S.W.3d 142 (2013) 56 Tex. Sup. Ct. J. 1023
414 S.W.3d 142 West Headnotes (36)
Supreme Court of Texas.
MONCRIEF OIL [1] Courts INTERNATIONAL INC., Petitioner, Related contacts and activities; specific v. jurisdiction OAO GAZPROM, Gazprom Export, LLC, and What the parties thought, said, or intended Gazprom Marketing & Trading, Ltd., Respondents. is generally irrelevant to their jurisdictional contacts needed for specific personal jurisdiction No. 11–0195. | Argued Feb. 6, over a nonresident defendant. 2012. | Decided Aug. 30, 2013.
3 Cases that cite this headnote Synopsis Background: Texas oil and natural gas company brought [2] Courts action against Russian oil and natural gas company Actions by or Against Nonresidents, and its subsidiaries for tortious interference, trade-secret Personal Jurisdiction In; “Long-Arm”
misappropriation, conspiracy to tortiously interfere, and Jurisdiction conspiracy to misappropriate trade secrets. The District Court, Tarrant County, Melody Wilkinson, J., granted special Courts may exercise personal jurisdiction over appearances filed by Russian companies, and Texas company a nonresident if (1) the Texas long-arm statute appealed. The Court of Appeals, Sue Walker, J., 332 S.W.3d authorizes the exercise of jurisdiction, and (2) the 1, affirmed. Texas company sought review which was exercise of jurisdiction is consistent with federal granted. and state constitutional due-process guarantees.
V.T.C.A., Civil Practice & Remedies Code § 17.042(2).
Holdings: The Supreme Court, Guzman, J., held that: 8 Cases that cite this headnote
[1] defendants' contacts with Texas were not random [3] Courts and fortuitous and, thus, supported exercise of personal Allegations, pleadings, and affidavits jurisdiction with regard to trade secrets claim;
Under the Texas long-arm statute, the plaintiff bears the initial burden of pleading allegations [2] assertion of jurisdiction over defendants did not offend sufficient to confer jurisdiction. V.T.C.A., Civil traditional notions of fair play and substantial justice with Practice & Remedies Code § 17.042(2).
regard to trade secrets claim;
2 Cases that cite this headnote [3] exercise of specific jurisdiction by Texas courts over tortious interference claim would not comport with long-arm statute or due process; and [4] Constitutional Law Non-residents in general [4] trial court did not abuse its discretion in refusing to Courts allow deposition of deputy chairman of Russian oil and gas Allegations, pleadings, and affidavits company and representative of bank. Although allegations that a tort was committed in Texas satisfy the long-arm statute, such allegations do not necessarily satisfy the Due Affirmed in part, reversed in part, and remanded.
Process Clause of the United States Constitution. U.S.C.A. Const.Amend. 14; V.T.C.A., Civil Practice & Remedies Code § 17.042(2).
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Moncrief Oil Intern. Inc. v. OAO Gazprom, 414 S.W.3d 142 (2013) 56 Tex. Sup. Ct. J. 1023
Related contacts and activities; specific Cases that cite this headnote jurisdiction Continuous and systematic contacts with a state [5] Courts give rise to general jurisdiction, while specific Presumptions and Burden of Proof as to jurisdiction exists when the cause of action Jurisdiction arises from, or is related to, purposeful activities When the initial burden of pleading allegations in the state. sufficient to confer jurisdiction under the long-
5 Cases that cite this headnote arm statute is met, the burden shifts to the defendant to negate all potential bases for personal jurisdiction the plaintiff pled. V.T.C.A., [9] Appeal and Error Civil Practice & Remedies Code § 17.042(2). Necessity of finding facts When the trial court does not issue findings 5 Cases that cite this headnote of fact and conclusions of law, Supreme Court implies all relevant facts necessary to support the [6] Constitutional Law judgment that are supported by evidence.
Non-residents in general 3 Cases that cite this headnote Asserting personal jurisdiction under the long- arm statute comports with due process when (1) the nonresident defendant has minimum [10] Appeal and Error contacts with the forum state, and (2) asserting Cases Triable in Appellate Court jurisdiction complies with traditional notions Courts of fair play and substantial justice. U.S.C.A. Determination of questions of jurisdiction Const.Amend. 14. in general
5 Cases that cite this headnote The ultimate question of whether a court has personal jurisdiction over a nonresident defendant is a question of law that Supreme [7] Constitutional Law Court reviews de novo.
Non-residents in general Courts 2 Cases that cite this headnote Purpose, intent, and foreseeability;
purposeful availment [11] Constitutional Law A defendant establishes minimum contacts with Non-residents in general a forum, as required for the exercise of long- Courts arm jurisdiction over it to satisfy due process, Related contacts and activities; specific when it purposefully avails itself of the privilege jurisdiction of conducting activities within the forum state, Claim of specific jurisdiction requires Supreme thus invoking the benefits and protections of Court to conduct analysis of jurisdictional its laws. U.S.C.A. Const.Amend. 14; V.T.C.A., contacts with regard to whether exercise of Civil Practice & Remedies Code § 17.042(2).
jurisdiction satisfies due process on a claim-by-
3 Cases that cite this headnote claim basis. U.S.C.A. Const.Amend. 14.
4 Cases that cite this headnote [8] Courts Unrelated contacts and activities; general [12] Constitutional Law jurisdiction Non-residents in general Courts
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Moncrief Oil Intern. Inc. v. OAO Gazprom, 414 S.W.3d 142 (2013) 56 Tex. Sup. Ct. J. 1023
If a defendant does not have enough contacts contacts as required to satisfy due process, the to justify the exercise of general jurisdiction, contacts relied upon must be purposeful, rather the Due Process Clause prohibits the exercise of than random, fortuitous, or attenuated; thus, jurisdiction over any claim that does not arise out sellers who reach out beyond one state and of or result from the defendant's forum contacts. create continuing relationships and obligations U.S.C.A. Const.Amend. 14. with citizens of another state are subject to the jurisdiction of the latter in suits based on their 3 Cases that cite this headnote activities. U.S.C.A. Const.Amend. 14; V.T.C.A., Civil Practice & Remedies Code § 17.042(2).
[13] Constitutional Law Cases that cite this headnote Non-residents in general Courts Related contacts and activities; specific [16] Constitutional Law jurisdiction Non-residents in general A court need not assess jurisdictional contacts When determining whether a nonresident on a claim-by-claim basis to determine whether purposefully availed itself of the privilege of exercise of specific jurisdiction satisfies due conducting activities in Texas as required for process if all claims arise from the same forum the exercise of specific jurisdiction under the contacts. U.S.C.A. Const.Amend. 14. long-arm statute on the basis of jurisdictional contacts as required to satisfy due process, the 9 Cases that cite this headnote defendant must seek some benefit, advantage, or profit by availing itself of the jurisdiction. U.S.C.A. Const.Amend. 14; 14; V.T.C.A., Civil [14] Constitutional Law Practice & Remedies Code § 17.042(2).
Non-residents in general Courts 2 Cases that cite this headnote Related contacts and activities; specific jurisdiction [17] Constitutional Law When determining whether a nonresident Non-residents in general purposefully availed itself of the privilege of Analysis of jurisdictional contacts used to conducting activities in Texas as required for the establish that specific jurisdiction under the exercise of specific jurisdiction under the longlong -arm statute comports with due process arm statute on the basis of jurisdictional contacts assesses the quality and nature of the contacts, as required to satisfy due process, Supreme Court not the quantity. U.S.C.A. Const.Amend. 14;
considers only the defendant's contacts with the V.T.C.A., Civil Practice & Remedies Code § forum, not the unilateral activity of another party 17.042(2).
or a third person. U.S.C.A. Const.Amend. 14; V.T.C.A., Civil Practice & Remedies Code § Cases that cite this headnote 17.042(2).
3 Cases that cite this headnote [18] Constitutional Law Non-residents in general [15] Constitutional Law A substantial connection with a jurisdiction, Non-residents in general such that long-arm jurisdiction over non-resident defendant comports with due process, can result When determining whether a nonresident from even a single act; but, the unilateral activity purposefully availed itself of the privilege of of another person cannot create jurisdiction.
conducting activities in Texas as required for U.S.C.A. Const.Amend. 14; V.T.C.A., Civil the exercise of specific jurisdiction under the Practice & Remedies Code § 17.042(2).
long-arm statute on the basis of jurisdictional
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Moncrief Oil Intern. Inc. v. OAO Gazprom, 414 S.W.3d 142 (2013) 56 Tex. Sup. Ct. J. 1023
Non-residents in general Cases that cite this headnote Courts Torts in general [19] Constitutional Law Although a forum's interest in protecting against Non-residents in general torts may operate to enhance the substantiality Courts of the connection between the defendant and Purpose, intent, and foreseeability; the forum in determination of whether a purposeful availment nonresident's conduct and connection to a forum Physical presence in the state is not required are such that it could reasonably anticipate for long-arm jurisdiction over a non-resident being haled into court in the forum so that defendant to comport with due process, but the exercise of long-arm jurisdiction would not frequently will enhance a potential defendant's violate due process, the interest cannot displace affiliation with a State and reinforce the the purposeful availment inquiry. U.S.C.A. reasonable foreseeability of suit there. U.S.C.A. Const.Amend. 14; V.T.C.A., Civil Practice & Const.Amend. 14; V.T.C.A., Civil Practice & Remedies Code § 17.042(2). Remedies Code § 17.042(2).
2 Cases that cite this headnote Cases that cite this headnote [23] Constitutional Law [20] Constitutional Law Business, business organizations, and Non-residents in general corporations in general At its core, the purposeful availment analysis Courts seeks to determine whether a nonresident's Property disputes; wills, trusts, and estates conduct and connection to a forum are such Contacts of Russian oil and natural gas company that it could reasonably anticipate being haled and its subsidiaries with Texas were not into court there so that the exercise of long- random and fortuitous, or unilateral activities by arm jurisdiction would not violate due process. Texas oil and natural gas company, as would U.S.C.A. Const.Amend. 14; V.T.C.A., Civil render the exercise of personal jurisdiction Practice & Remedies Code § 17.042(2). under the long-arm statute a violation of due process in action against Russian company for Cases that cite this headnote trade-secret misappropriation, where Russian company agreed to attend meetings in Texas [21] Courts and accepted Texas company's alleged trade Torts in general secrets regarding a proposed Texas joint A state has an especial interest in exercising venture, which was the crux of the matter, at judicial jurisdiction over those who commit those meetings, contacts were purposeful and substantial because their activity was aimed at torts within its territory; torts involve wrongful getting extensive business in or from the forum conduct which a state seeks to deter, and state, and Russian company benefited from against which it attempts to afford protection, Texas. U.S.C.A. Const.Amend. 14; V.T.C.A., by providing that a tortfeasor shall be liable for Civil Practice & Remedies Code § 17.042(2).
damages which are the proximate result of his tort. Restatement (Second) of Conflicts of Laws 2 Cases that cite this headnote § 36, cmt. c.
Cases that cite this headnote [24] Courts Jurisdiction to Be Shown by Record [22] Constitutional Law Record did not support an implied finding that Russian oil and gas company and its subsidiaries
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Moncrief Oil Intern. Inc. v. OAO Gazprom, 414 S.W.3d 142 (2013) 56 Tex. Sup. Ct. J. 1023
did not receive the alleged trade secrets at the Business contacts and activities; meetings in Texas, where Texas oil and gas transacting or doing business company presented evidence that the defendants A nonresident may structure its business so as to accepted alleged trade secrets at the Texas not profit from a forum's laws and not be subject meetings, including an affidavit of meeting to its jurisdiction under the long-arm statute. attendee stating that Texas company provided V.T.C.A., Civil Practice & Remedies Code § the defendants updated versions of the trade 17.042(2). secrets at meetings.
Cases that cite this headnote 2 Cases that cite this headnote
[28] Courts [25] Constitutional Law Of the person Business, business organizations, and A nonresident consents to suit through the corporations in general long-arm statute by invoking the benefits and Courts protections of a forum's laws. V.T.C.A., Civil Property disputes; wills, trusts, and estates Practice & Remedies Code § 17.042(2).
Previous meetings between Russian oil and gas company and its subsidiaries and Texas Cases that cite this headnote oil and gas company in Moscow, Boston, and Washington, D.C. did not render two Texas [29] Constitutional Law meetings random and fortuitous, as opposed Non-residents in general to purposeful contacts that were required for In addition to minimum contacts, due process exercise of personal jurisdiction under the longrequires the exercise of personal jurisdiction arm statute to comport with due process in over a non-resident defendant through the longaction against Russian company for trade-secret arm statute to comply with traditional notions misappropriation, where the discussions were of fair play and substantial justice. U.S.C.A.
regarding a joint venture in Texas, and Texas Const.Amend. 14.
company was headquartered in Texas. U.S.C.A. Const.Amend. 14; V.T.C.A., Civil Practice & 1 Cases that cite this headnote Remedies Code § 17.042(2).
1 Cases that cite this headnote [30] Constitutional Law Non-residents in general If a nonresident has minimum contacts with [26] Constitutional Law the forum, rarely will the exercise of jurisdiction Non-residents in general over the nonresident through the long-arm statute For a non-resident defendant's contacts to not comport with traditional due process notions be purposeful, as would support notion that of fair play and substantial justice. U.S.C.A.
jurisdiction under the long-arm statute comports Const.Amend. 14; V.T.C.A., Civil Practice & with due process, the defendant must seek Remedies Code § 17.042(2).
some benefit, advantage, or profit by availing itself of the forum. U.S.C.A. Const.Amend. 14; 1 Cases that cite this headnote V.T.C.A., Civil Practice & Remedies Code § 17.042(2).
[31] Constitutional Law Cases that cite this headnote Non-residents in general To determine whether exercise of personal jurisdiction over nonresident defendant through [27] Courts long-arm statute complies with traditional
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Moncrief Oil Intern. Inc. v. OAO Gazprom, 414 S.W.3d 142 (2013) 56 Tex. Sup. Ct. J. 1023
notions of fair play and substantial justice as required for due process, court evaluates Cases that cite this headnote the following factors, when appropriate: (1) the burden on the defendant; (2) the interests [33] Constitutional Law of the forum in adjudicating the dispute; (3) Business, business organizations, and the plaintiff's interest in obtaining convenient corporations in general and effective relief; (4) the international Courts judicial system's interest in obtaining the most Torts in general efficient resolution of controversies; and (5)
Texas oil and gas company's claim against the shared interest of the several nations Russian oil and gas company and its subsidiaries in furthering fundamental substantive social of tortious interference with existing and policies. U.S.C.A. Const.Amend. 14; V.T.C.A., prospective business relationships did not arise Civil Practice & Remedies Code § 17.042(2).
from Texas meetings or receipt of information 2 Cases that cite this headnote from Texas oil and gas company, and, thus, exercise of specific jurisdiction by Texas courts would not comport with long-arm [32] Constitutional Law statute or due process, where claim was Business, business organizations, and principally concerned with a California meeting corporations in general and the competing Texas enterprise, not the Courts purported misappropriation of alleged trade Property disputes; wills, trusts, and estates secrets. U.S.C.A. Const.Amend. 14; V.T.C.A., Assertion of jurisdiction over Russian oil and Civil Practice & Remedies Code § 17.042(2). gas company and its subsidiaries through long- arm statute did not offend traditional notions of 1 Cases that cite this headnote fair play and substantial justice, as required for personal jurisdiction under the long-arm statute [34] Constitutional Law to comport with due process in action by Texas Non-residents in general oil and natural gas company for trade-secret A nonresident directing a tort at Texas from misappropriation, although subjecting Russian afar is insufficient for exercise of specific defendants to suit in Texas imposed a burden jurisdiction under long-arm statute to comport on them, and Russian government was majority with due process. U.S.C.A. Const.Amend. 14;
owner of Russian company, where burden was V.T.C.A., Civil Practice & Remedies Code § somewhat mitigated by the convenience to Texas 17.042(2).
company of litigating in the forum where the alleged trade secrets were appropriated and 1 Cases that cite this headnote purportedly used, Texas company alleged that Russian defendants committed a tort in Texas, [35] Constitutional Law which implicated a serious state interest in Business, business organizations, and adjudicating the dispute, and it promoted judicial corporations in general economy to litigate in a Texas court claims against Russian company with claims against Courts Russian company's U.S. subsidiary, and Russian Torts in general company was not wholly owned by the Russian Allegation by Texas oil and gas company that government, and Texas company's claims did Russian oil and gas company's U.S. subsidiary not implicate government officials. U.S.C.A. established a competing enterprise in Texas did Const.Amend. 14; V.T.C.A., Civil Practice & not support exercise of specific jurisdiction Remedies Code § 17.042(2). over Russian company and its subsidiaries under due process analysis and long-arm statute in action for tortious interference, where Texas
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company did not allege that Russian company [1] We have observed that the business contacts needed for and its subsidiaries provided the trade secrets specific personal jurisdiction over a nonresident defendant to the subsidiary in Texas, and, therefore, the “are generally a matter of physical fact, while tort liability contacts regarding the competing enterprise (especially misrepresentation cases) turns on what the parties could not be imputed to the defendants. U.S.C.A. thought, said, or intended. Far better that judges should Const.Amend. 14; V.T.C.A., Civil Practice & limit their jurisdictional decisions to the former rather than Remedies Code § 17.042(2). involving themselves in trying the latter.” 1 Here, nonresident defendants allegedly committed the tort of misappropriating Cases that cite this headnote purported trade secrets from a Texas company concerning a proposed Texas venture during two meetings in Texas.
[36] Pretrial Procedure The defendants claim their intent in attending the meetings Corporate officers, agents, and employees was to discuss an unrelated matter and that they informed Trial court did not abuse its discretion the plaintiff of that intent at the meetings. But what the in refusing to allow deposition of deputy parties thought, said, or intended is generally irrelevant to chairman of Russian oil and gas company and their jurisdictional contacts. Regardless of the defendants' representative of bank in action by Texas oil subjective intent, their Texas contacts are sufficient to confer and gas company for tortious interference, trade- specific jurisdiction over the defendants as to the trade secret misappropriation, conspiracy to tortiously secrets claim. interfere, and conspiracy to misappropriate trade secrets, where Texas company did not The nonresident defendants also face claims of tortious demonstrate what additional jurisdictional facts interference with the Texas corporation's relationship with a the depositions would have provided. California corporation. But the tortious interference claims either arise from a meeting in California (which cannot 1 Cases that cite this headnote support jurisdiction in Texas) or the formation of a competing enterprise in Texas by an entity not subject to jurisdiction in this proceeding. The trial court granted the special appearance, which the court of appeals affirmed. Because Attorneys and Law Firms we hold there is jurisdiction over the trade secrets claim, but not over the tortious interference claims, we reverse in part *147 Clarence Andrew Weber, Kelly Hart & Hallman LLP, and affirm in part the court of appeals' judgment and *148 Harriet O'Neill, Law Office of Harriet O'Neill, PC, Austin, remand to the trial court for further proceedings. TX, John H. Cayce, Jr., Marshall M. Searcy, Jr., Michael Dana Anderson Kelly Hart & Hallman LLP, Fort Worth, TX, for Petitioner Moncrief Oil International, Inc.
I. Background Aaron M. Streett, Lauren Elizabeth Tanner, Michael S. Goldberg, Timothy Conway Shelby, Baker Botts, L.L.P., Moncrief Oil International, Inc. (Moncrief) is a Texas-based Houston, TX, Jerry D. Bullard, Neal W. Adams, Adams, company that entered into a series of contracts in 1997 and Lynch & Loftin, P.C., Thomas R. Phillips, Baker Botts LLP, 1998 with two subsidiaries of OAO Gazprom (Gazprom) Austin TX, for Respondent OAO Gazprom, Gazprom Export, regarding development of a Russian gas field known as the LLC, and Gazprom Marketing & Trading, Ltd. Y–R Field. Moncrief Oil Int'l Inc. v. OAO Gazprom, 481 F.3d 309, 310 (5th Cir.2007). Gazprom, a Russian company, George S. Christian, Austin, TX, for Amicus Curiae Texas is among the world's largest producers of natural gas. After Civil Justce League, Inc., Texas Oil & Gas Assoc., Texas assuring Moncrief it would honor the contractual obligations Assoc. of Manufacturers, Assoc. of Electric Companies of of its subsidiaries, Gazprom later contracted with German Texas, and Texas Assoc., of Business entities to develop the Y–R Field. Moncrief, 481 F.3d at 311.
Opinion In the fall of 2003, Gazprom announced its intention to sell liquified natural gas to the United States and contacted Justice GUZMAN delivered the opinion of the Court.
oil companies in the American market. When Moncrief
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asked Gazprom to recognize its claimed interest or sell it subsidiary of Gazprom Export (Gazprom Marketing & an interest in the Y–R Field, Gazprom replied that it was Trading, Ltd.) then established Gazprom Marketing & interested only in trading its resources for access to the Trading USA, Inc. (GMT USA) in Houston to import *149 American downstream market. Along those lines, Moncrief Gazprom's liquified natural gas, regasify it, and sell it in the had developed alleged trade secret information regarding Unites States. a proposed joint venture with California-based Occidental Petroleum Corporation to import liquified natural gas to a Moncrief sued Gazprom, Gazprom Export, and GMT regasification facility to be built in Ingleside, Texas. USA in state court for tortious interference, trade-secret misappropriation, conspiracy to tortiously interfere, and Moncrief and Gazprom engaged in a series of conspiracy to misappropriate trade secrets. Gazprom and communications (including phone calls, emails, and in- Gazprom Export (collectively the Gazprom Defendants) person meetings) to discuss Moncrief's rights in the Y–R specially appeared, asserting that their contacts with Texas Field and the establishment of a consortium with Moncrief, were random, not purposeful, and that Moncrief unilaterally Occidental, and Gazprom to import liquified natural gas disclosed the trade secrets. After a special appearance to Texas. Gazprom Export, LLC (Gazprom Export)—the hearing with no live testimony, the trial court granted the Gazprom subsidiary that exports natural gas to countries Gazprom Defendants' special appearances. Findings of fact outside the former Soviet Union—also took part in the and conclusions of law were not requested or filed. discussions.
The court of appeals affirmed, holding that legally and These discussions began with a meeting in Moscow in factually sufficient evidence supported an implied finding September 2004, where Moncrief proposed that: (1) Gazprom that the location of the two Texas meetings was “merely would grant Moncrief an interest in the Y–R Field; (2) random or fortuitous” as to Moncrief's trade secrets claim. Moncrief would grant Gazprom an interest in the proposed 332 S.W.3d 1, 19–20. As to the tortious interference claims, Texas regasification facility; and (3) Moncrief would grant the court held that the record conclusively established that any Occidental a share of its interest in the Y–R Field. At the alleged tortious interference that might have occurred took meeting, Moncrief provided Gazprom alleged trade secrets place in California. Id. at 13–14. The court of appeals further concerning the Texas facility and marketing plan. Later that held that the trial court did not abuse its discretion in refusing month, Moncrief and Gazprom met in Washington, D.C., to allow Moncrief additional depositions. 2 Id. at 22–23. 3 where Moncrief again provided Gazprom the alleged trade secrets. The parties then exchanged a series of emails and phone calls regarding the proposal.
II. Discussion In February 2005, Gazprom informed Moncrief it would not accept Moncrief's proposal. In June 2005, Moncrief sued A. Standard of Review Gazprom and the two subsidiaries it dealt with regarding the Y–R Field in federal court in Texas over its interest in the [2] [3] [4] Texas courts may exercise personal Y–R Field. Moncrief, 481 F.3d at 311. Ultimately, the Fifth jurisdiction over a nonresident if “(1) the Texas long- Circuit Court of Appeals affirmed the dismissal of Gazprom arm statute authorizes the exercise of jurisdiction, and (2) due to lack of personal jurisdiction but noted that “even the exercise of jurisdiction is consistent with federal and without other contacts, jurisdiction would exist if Gazprom state constitutional due-process guarantees.” Moki Mac River committed a tort while in the state.” Id. at 314–15. Expeditions v. Drugg, 221 S.W.3d 569, 574 (Tex.2007).
Under the Texas long-arm statute, the plaintiff bears the In late 2005, the parties resumed in-person discussions, initial burden of pleading allegations sufficient to confer with meetings in Houston, Boston, and Fort Worth, where jurisdiction. Retamco Operating, Inc. v. Republic Drilling Moncrief provided updated versions of the alleged trade Co., 278 S.W.3d 333, 337 (Tex.2009). The long-arm secrets to Gazprom. Gazprom representatives later met statute allows the exercise of personal jurisdiction over a directly with Occidental representatives in California, and nonresident defendant who “commits a tort in whole or in Occidental terminated the proposed venture with Moncrief part in this state.” TEX. CIV. PRAC. & REM.CODE § after Gazprom refused to participate in the venture. A 17.042(2). Although allegations that a tort was committed
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in Texas satisfy our long-arm statute, such allegations [11] [12] [13] As an initial matter, specific jurisdiction do not necessarily satisfy the U.S. Constitution. Michiana requires us to analyze jurisdictional contacts on a claim- Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777, by-claim basis. See, e.g., Kelly v. Gen. Interior Constr., 788 (Tex.2005). Here, Moncrief pled that the Gazprom Inc., 301 S.W.3d 653, 660 (Tex.2010) (separately analyzing Defendants committed torts in Texas by misappropriating jurisdictional contacts for fraud and trust fund claims to Moncrief's alleged trade secrets at Texas meetings. Thus, determine specific jurisdiction). The Fifth Circuit has Moncrief has met its initial burden of alleging a cause of expressly held that a “plaintiff bringing multiple claims action sufficient to confer jurisdiction under the long-arm that arise out of different forum contacts of the defendant statute. See TEX. CIV. PRAC. & REM.CODE § 17.042(2). must establish specific jurisdiction for each claim.” Seiferth v. Helicopteros Atuneros, Inc., 472 F.3d 266, 275 (5th [5] [6] [7] When the initial burden is met, the burden Cir.2006). As the Court explained, shifts to the defendant to negate all potential bases for personal jurisdiction the plaintiff pled. Retamco, 278 S.W.3d This result flows logically from at 337. As Moncrief's sole allegation as to personal the distinction between general and jurisdiction is that the *150 Gazprom Defendants committed specific jurisdiction and is confirmed torts in Texas, the Gazprom Defendants must negate that by the decisions of our sister circuits. basis. In response, the Gazprom Defendants argue that If a defendant does not have enough exercising jurisdiction over them would violate due process. contacts to justify the exercise of Asserting personal jurisdiction comports with due process general jurisdiction, the Due Process when (1) the nonresident defendant has minimum contacts Clause prohibits the exercise of with the forum state, and (2) asserting jurisdiction complies jurisdiction over any claim that does with traditional notions of fair play and substantial justice. not arise out of or result from the Id. at 338. A defendant establishes minimum contacts with defendant's forum contacts. a forum when it “purposefully avails itself of the privilege of conducting activities within the forum state, thus invoking the Id. at 274–75. 5 Of course, a court need not assess contacts benefits and protections of its laws.” Id. (quoting Hanson v. on a claim-by-claim basis if *151 all claims arise from Denckla, 357 U.S. 235, 253, 78 S.Ct. 1228, 2 L.Ed.2d 1283 the same forum contacts. 6 Because we determine that the (1958)). tortious interference claims arise from separate jurisdictional contacts than the trade secrets claim, we analyze those [8] A nonresident's contacts can give rise to general or contacts separately. specific personal jurisdiction. Id. Continuous and systematic contacts with a state give rise to general jurisdiction, while specific jurisdiction exists when the cause of action arises B. Trade Secrets Claim from or is related to purposeful activities in the state. Id. Here, Moncrief's asserted basis is specific jurisdiction, which focuses on the relationship between the defendant, Texas, and 1. Minimum Contacts the litigation to determine whether the claim arises from the The parties primarily dispute whether Gazprom's Texas Texas contacts. See id.
contacts relating to the trade secrets claim were purposeful. The Gazprom Defendants assert that any contacts with [9] [10] When, as here, the trial court does not issue Texas were not purposeful because Moncrief unilaterally findings of fact and conclusions of law, we imply all relevant disclosed the alleged trade secrets and the meetings in Texas facts necessary to support the judgment that are supported by were simply fortuitous—as evidenced by meetings held evidence. 4 Id. at 337 (quoting BMC Software Belgium, N.V. in Moscow, Boston, and Washington, D.C. The Gazprom v. Marchand, 83 S.W.3d 789, 795 (Tex.2002)). The ultimate Defendants assert they informed Moncrief at the meetings question of whether a court has personal jurisdiction over a that they would only discuss the potential venture once nonresident defendant is a question of law we review de novo. Moncrief dismissed the lawsuit regarding the Y–R Field. Moki Mac, 221 S.W.3d at 574. Moncrief contends the disclosure was not unilateral because:
(1) the purpose of discussions was to settle the dispute relating to the Y–R Field in exchange for Gazprom's participation in
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the venture, and (2) the Texas meetings were not fortuitous “frequently will enhance a potential defendant's affiliation because they were located in the state where Moncrief is with a State and reinforce the reasonable foreseeability of headquartered and where the proposed regasification facility suit there.” Id. at 476, 105 S.Ct. 2174. At its core, the would be located. We agree with Moncrief that the contacts purposeful availment analysis seeks to determine whether a were purposeful but for different reasons. nonresident's conduct and connection to a forum are such that it could reasonably anticipate being haled into court there. Id.
[14] [15] [16] [17] When determining whether aat 474, 105 S.Ct. 2174. nonresident purposefully availed itself of the privilege of conducting activities in Texas, we consider three factors: [21] The Court has also recognized “it is beyond dispute that [a forum] has a significant interest in redressing injuries that First, only the defendant's contacts actually occur within the State.” Keeton v. Hustler Magazine, with the forum are relevant, not the Inc., 465 U.S. 770, 776, 104 S.Ct. 1473, 79 L.Ed.2d 790 unilateral activity of another party or (1984). As the Court has expounded: a third person. Second, the contacts relied upon must be purposeful A state has an especial interest in rather than random, fortuitous, or exercising judicial jurisdiction over attenuated. Thus, sellers who reach out those who commit torts within its beyond one state and create continuing territory. This is because torts involve relationships and obligations with wrongful conduct which a state seeks citizens of another state are subject to to deter, and against which it attempts the jurisdiction of the latter in suits to afford protection, by providing that based on their activities. Finally, the a tortfeasor shall be liable for damages defendant must seek some benefit, which are the proximate result of his advantage or profit by availing itself of tort. the jurisdiction.
Id. (quoting Leeper v. Leeper, 114 N.H. 294, 319 A.2d 626, Retamco, 278 S.W.3d at 338–39; see Burger King Corp. 629 (1974); RESTATEMENT (SECOND) OF CONFLICTS v. Rudzewicz, 471 U.S. 462, 473, 475, 105 S.Ct. 2174, OF LAWS § 36, cmt. c (1971)). 7 Of course, states have 85 L.Ed.2d 528 (1985); World–Wide Volkswagen Corp. v. an interest in protecting against more than torts, and the Woodson, 444 U.S. 286, 297, 100 S.Ct. 559, 62 L.Ed.2d 490 Supreme Court has recognized state interests in protecting (1980). This analysis assesses the quality and nature of the regulatory schemes and contracts as well. See Travelers contacts, not the quantity. Retamco, 278 S.W.3d at 339. Health Ass'n, 339 U.S. at 648, 70 S.Ct. 927 (recognizing the “state's interest in faithful observance” of its regulatory [18] [19] [20] The United States Supreme Court has scheme by nonresidents); McGee, 355 U.S. at 223, 78 S.Ct. specified that a nonresident's contacts are not unilateral or 199 (observing that the forum “has a manifest interest in random and fortuitous when the defendant “has created providing effective means of redress for its residents” in ‘continuing obligations' between himself and residents of relation to contract disputes). the forum,” which shields the nonresident with the benefits and protections of the forum's laws. Burger King, 471 U.S. [22] Although a forum's interest in protecting against torts at 475, 105 S.Ct. 2174 (quoting Travelers Health Ass'n v. may operate to enhance the substantiality of the connection Virginia, 339 U.S. 643, 648, 70 S.Ct. 927, 94 L.Ed. 1154 between the defendant and the forum, it cannot displace the (1950)). Further, the Court has stated that jurisdiction is purposeful availment inquiry. We have previously observed proper “where the contacts proximately result from actions by that Texas's interest in protecting its citizens against torts the defendant himself that create a substantial connection with is insufficient to automatically exercise personal jurisdiction the forum State.” Id. (quotation marks omitted). A substantial upon an allegation that a nonresident directed a tort from connection can result from even a single act. *152 McGee v. outside the forum against a resident. Michiana, 168 S.W.3d Int'l Life Ins. Co., 355 U.S. 220, 223, 78 S.Ct. 199, 2 L.Ed.2d at 790–91. In Michiana, a Texan placed a phone call to 223 (1957). But the unilateral activity of another person an Indiana recreational vehicle dealer, paid for the vehicle cannot create jurisdiction. Burger King, 471 U.S. at 475, 105 in Indiana, and arranged to have the vehicle shipped from S.Ct. 2174. Physical presence in the state is not required but Indiana to Texas. Id. at 784. He later sued the dealer in
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Texas, claiming a misrepresentation in the phone call from were not *154 unilaterally from Moncrief, nor were they Texas subjected the dealer to specific personal jurisdiction in random and fortuitous. 12 Texas court. Id. We held that, although the dealer allegedly committed a tort against a resident, its contacts with Texas The Gazprom Defendants protest that their subjective intent were only receiving the phone call and transferring the vehicle in attending the meetings was solely to discuss settlement of to the shipper the buyer had designated to transport the the Y–R Field dispute, indicating they did not purposefully vehicle to Texas. Id. at 786–87. Neither contact constituted avail themselves of doing business in Texas. But the Gazprom purposeful availment because the dealer “had no say in the Defendants attended the two Texas meetings where they matter.” 8 Id. at 787. accepted the alleged trade secrets regarding a proposed Texas joint venture, which is the crux of the matter. As we stated in Michiana overruled a myriad of court of appeals cases where Michiana, courts at the jurisdiction phase examine business jurisdiction was predicated solely on the receipt of an out- contacts, not what the parties thought or intended—which of- *153 state phone call or that analyzed whether the is the role of the fact-finder in assessing the merits of the defendant's contacts were tortious rather than examining the claim. See 168 S.W.3d at 791. For example, if a nonresident contacts themselves. Id. at 791–92. But, importantly, we defendant intended to drive through Texas and caused a differentiated cases where the defendant's conduct “was much vehicular accident in the state, her intent to simply pass more extensive and was aimed at getting extensive business through the state would not negate the fact that she caused a in or from the forum state.” Id. at 789–90 & n. 70. We cited vehicular accident. Here, the Gazprom Defendants intended as an example a case predicating jurisdiction on acts seeking to, and did, come to Texas for two meetings, at which they to obtain business in Texas. Id. at 790 n. 70 (citing Union accepted alleged trade secrets from Moncrief that involved a Carbide Corp. v. UGI Corp., 731 F.2d 1186, 1189–90 (5th proposed joint venture in Texas. The Gazprom Defendants' Cir.1984)). subjective intent does not negate their business contacts. See id.
[23] [24] [25] Here, the Gazprom Defendants' contacts with Texas were neither unilateral activities by Moncrief nor [26] [27] [28] Finally, the Gazprom Defendants random and fortuitous. Unlike in Michiana, the Gazprom benefitted from Texas. For contacts to be purposeful, the Defendants had a “say in the matter.” 168 S.W.3d at 787. defendant must seek some “benefit, advantage, or profit” by They were not unilaterally haled into forming contacts with availing itself of the forum. Id. at 785. This is premised on Texas; rather, they agreed to attend Texas meetings. 9 And implied consent: a nonresident consents to suit by invoking the Gazprom Defendants accepted Moncrief's alleged trade the benefits and protections of a forum's laws. 13 Id. at secrets at those meetings. 10 See Retamco, 278 S.W.3d at 784. We have found jurisdiction over nonresidents with no 340 (affirming exercise of specific personal jurisdiction when physical ties to Texas when an out-of-state contract was defendant “was a willing participant in a transaction with an formed “for the sole purpose of building a hotel in Texas,”
Zac Smith & Co., Inc. v. Otis Elevator Co., 734 S.W.2d affiliated Texas company”). 11 662, 665–66 (Tex.1987), and when enrollment for out-of- state school was executed in Arizona but was “actively Additionally, the Gazprom Defendants' contacts were and successfully solicited” in Texas, Siskind v. Villa Found.
purposeful and substantial because their activity “was aimed for Educ., Inc., 642 S.W.2d 434, 437 (Tex.1982); see also at getting extensive business in or from the forum state.”
Michiana, 168 S.W.3d at 789–90 (discussing cases finding Michiana, 168 S.W.3d at 789–90. While we have held that specific jurisdiction when forum contact “was aimed at a single business transaction occurring outside the state is getting extensive business in or from the forum state”).
insufficient to confer specific jurisdiction, id. at 787–88, Here, Gazprom attended two Texas meetings with a Texas the United States Supreme Court concluded that forming an corporation and accepted alleged trade secrets created in enterprise in one state to send payments to a corporation in Texas regarding a potential joint venture in Texas with the the forum state was sufficient to confer specific jurisdiction, Texas corporation. Far from seeking to avoid Texas, Gazprom Burger King, 471 U.S. at 468, 478, 105 S.Ct. 2174. Because sought out Texas and the benefits and protections of its laws.
the Gazprom Defendants attended two Texas meetings, Burger King, 471 U.S. at 474, 105 S.Ct. 2174; Michiana, 168 at which they accepted Moncrief's alleged trade secrets S.W.3d at 785; BMC Software, 83 S.W.3d at 795.
regarding a proposed joint venture in Texas, their contacts
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claims as to all parties in one court. See id. (“[B]ecause the claims against [the resident defendant] will be heard in 2. Fair Play and Substantial Justice Texas, it would be more efficient to adjudicate the entire [29] [30] [31] In addition to minimum contacts, due case in the same place.”). On balance, the burden on the process requires the exercise of personal jurisdiction to Gazprom Defendants of litigating in a foreign jurisdiction is comply with traditional notions of fair play and substantial minimal and outweighed by Texas's interests in adjudicating justice. Retamco, 278 S.W.3d at 338. If a nonresident has the dispute. Id. at 879–80. minimum contacts with the forum, rarely will the exercise of jurisdiction *155 over the nonresident not comport with The Gazprom Defendants counter that the Russian traditional notions of fair play and substantial justice. Id. at government is the majority owner of Gazprom and 341. We undertake this evaluation in light of the following government officials at the highest level are aware of factors, when appropriate: (1) the burden on the defendant; (2) Moncrief's claims. In support, the Gazprom Defendants cite the interests of the forum in adjudicating the dispute; (3) the to Solgas Energy Ltd. v. Global Steel Holdings Ltd., where plaintiff's interest in obtaining convenient and effective relief; a nonresident was sued over an alleged bribe to a Nigerian (4) the international judicial system's interest in obtaining the official to terminate its contract with the plaintiff. No. 04– most efficient resolution of controversies; and (5) the shared 06–00731–CV, 2007 WL 1892206, at *2, 7 (Tex.App.–San interest of the several nations in furthering fundamental Antonio July 3, 2007, no pet.) (mem.op.). There, the court substantive social policies. Spir Star AG v. Kimich, 310 of appeals held that Texas's interest in resolving the dispute S.W.3d 868, 878 (Tex.2010); see Asahi Metal Indus. Co. v. was tenuous because the United States federal government Superior Court of Cal., 480 U.S. 102, 113, 107 S.Ct. 1026, has an interest in foreign relations and the bribery allegations 94 L.Ed.2d 92 (1987). implicated Nigerian law. *156 Id. at *7. But here, Gazprom is not wholly owned by the Russian government, Moncrief's [32] On balance, asserting personal jurisdiction over the claims against the Gazprom Defendants do not implicate Gazprom Defendants as to the trade secrets claim would any government officials, and no other jurisdiction has as not offend traditional notions of fair play and substantial significant an interest as Texas does in resolving a claim for a justice. Subjecting the Gazprom Defendants to suit in tort committed in Texas against a Texas resident. On balance, Texas certainly imposes a burden on them, but the same this is not one of the rare cases where exercising jurisdiction can be said of all nonresidents. Distance alone cannot fails to comport with fairplay and substantial justice. 15 ordinarily defeat jurisdiction. Spir Star, 310 S.W.3d at Accordingly, we hold that the trial court has jurisdiction over 879 (“Nor is distance alone ordinarily sufficient to defeat the Gazprom Defendants as to the trade secrets claim. jurisdiction: ‘modern transportation and communication have made it much less burdensome for a party sued to defend himself in a State where he engages in economic activity.’
C. Tortious Interference Claims ” (quoting McGee, 355 U.S. at 223, 78 S.Ct. 199)). Given the Gazprom Defendants' meetings with Moncrief in Texas Moncrief also brought claims against the Gazprom and their increased familiarity with the forum and legal Defendants for tortiously interfering with existing and system through establishing a subsidiary headquartered here, prospective business relationships. Moncrief contends the the burden of litigating in Texas is not so severe as Gazprom Defendants' appropriation of the alleged trade to defeat jurisdiction. See id. (holding jurisdiction was secrets in Texas and use of the information to form a appropriate where German company officers traveled to competing enterprise destroyed Moncrief's existing and Houston to establish a distributing company). And this burden prospective relationships with Occidental. The Gazprom is somewhat mitigated by the convenience to Moncrief, a Defendants respond, and the court of appeals held, that the Texas resident, of litigating in the forum where the alleged tortious interference claims do not arise from the Texas trade secrets were appropriated and then purportedly used. meetings or their receipt of the information from Moncrief. Moreover, the allegations that the Gazprom Defendants We agree. committed a tort in Texas against a resident implicate a serious state interest in adjudicating the dispute. 14 Finally, Specific jurisdiction exists only if the alleged liability arises because these claims will be litigated with GMT USA in out of or is related to the defendant's activity within the forum. a Texas court, it promotes judicial economy to litigate the Moki Mac, 221 S.W.3d at 573. In considering competing
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interpretations of the phrase, we ultimately determined “for Arizona, the tortious interference claim here is principally a nonresident defendant's forum contacts to support an concerned with the California meeting and the competing exercise of specific jurisdiction, there must be a substantial Texas enterprise—not the purported misappropriation of connection between those contacts and the operative facts of alleged trade secrets. See id. the litigation.” Id. at 585. In Moki Mac, a Texas teenager fell to his death in Arizona while on a hike supervised by [34] Neither the California meeting nor the competing a Utah-based company. Id. at 573. His parents filed suit enterprise in Texas can form the basis for specific against the company in Texas for wrongful death, maintaining jurisdiction over the Gazprom Defendants in Texas. As we the claim arose from misrepresentations in documents the held in Michiana, a nonresident directing a tort at Texas company mailed to them in Texas as well as the company's from afar is insufficient to confer specific jurisdiction. 168 other Texas contacts. Id. at 573, 576. We disagreed, holding S.W.3d at 790–92. The focus is properly on the extent of the “the operative facts of the [plaintiffs'] suit concern principally defendant's activities in the forum, not the residence of the the guides' conduct of the hiking expedition and whether they plaintiff. Id. at 789. Thus, the Gazprom Defendants' alleged exercised reasonable care in supervising” the teenager. Id. tortious conduct in California against a Texas resident is at 585. We further observed the “events on the trail and the insufficient to confer specific jurisdiction over the Gazprom guides' supervision of the hike will be the focus of the trial, Defendants as to Moncrief's tortious interference claims. See will consume most if not all of the litigation's attention, and id. at 789–92. the overwhelming majority of the evidence will be directed to that question.” Id. [35] Moreover, Moncrief's allegation that the Gazprom Defendants established a competing enterprise in Texas Here, Moncrief alleges the Gazprom Defendants tortiously cannot support specific jurisdiction. Moncrief alleges interfered with its agreement and relationship with Gazprom Marketing & Trading, Ltd., a Gazprom subsidiary, Occidental, causing Occidental to breach its agreement and formed GMT USA as a competing enterprise in Texas. cease its relationship with Moncrief. See Wal–Mart Stores, But the court of appeals rejected Moncrief's theory that Inc. v. Sturges, 52 S.W.3d 711, 721–22, 727 (Tex.2001) GMT USA is the alter ego of Gazprom Marketing & (discussing tortious interference with contract and tortious Trading, Ltd. 332 S.W.3d at 20–22; see PHC–Minden, L.P. interference with prospective contractual or business relations v. Kimberly–Clark Corp., 235 S.W.3d 163, 175 (Tex.2007) claims). Under the framework we established in Moki Mac, (imputing jurisdictional contacts to another entity requires Moncrief's tortious inference claims principally concern two assessing “the amount of the subsidiary's stock owned by the activities: (1) discussions between Gazprom and Occidental parent corporation, the existence of separate headquarters, the in California where Gazprom allegedly attempted to convince observance of corporate formalities, and the degree of the Occidental to proceed with a joint venture that did not include parent's control over the general policy and administration Moncrief, and (2) the Gazprom Defendants' establishment of the subsidiary”). Moncrief does not challenge that ruling of a competing enterprise in Texas, thereby diminishing here. Additionally, Moncrief does not allege the Gazprom the value of a joint venture between Occidental and *157 Defendants provided the trade secrets to GMT USA in Texas. Moncrief to accomplish the same purpose. See Moki Mac, 221 Therefore, we cannot impute the Texas contacts regarding the S.W.3d at 585. competing enterprise to the Gazprom Defendants. In sum, we conclude neither the California contacts nor the establishment [33] Moncrief also argues its tortious interference claims of a competing enterprise supports an exercise of jurisdiction arise from a third set of contacts: the Gazprom Defendants' over the Gazprom Defendants as to the tortious interference purported misappropriation of Moncrief's alleged trade claims. secrets in Texas. We disagree. Much like the accident in Moki Mac would not have occurred but for executing contract materials in Texas, the establishment of a competing D. Additional Depositions enterprise arguably would not be possible without the Gazprom Defendants' purported acquisition of the alleged Finally, Moncrief contends the trial court erred in refusing trade secrets. See id. at 585. However, but-for causation alone to allow the deposition of Gazprom's deputy chairman and a is insufficient. Id. Just as the wrongful death claim in Moki representative of Gazprom Bank. The court of appeals held Mac was principally concerned with alleged negligence in the trial court did not abuse its discretion because it could have
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abuse its discretion in denying Moncrief's motion to compel reasonably concluded the testimony would be cumulative as the depositions. See BMC Software, 83 S.W.3d at 800– to the jurisdictional facts. 332 S.W.3d at 23. We agree.
01 (holding trial court did not abuse discretion in denying continuance before special appearance hearing).
Initially, we note that because we have concluded the trial court has specific jurisdiction over the Gazprom Defendants as to the trade secrets claim, further deposition testimony regarding these claims is unnecessary. But we have III. Conclusion also determined there is no specific jurisdiction over the Gazprom Defendants as to the tortious *158 interference The Gazprom Defendants attended two Texas meetings with claims. If the depositions Moncrief sought could yield a Texas corporation and accepted alleged trade secrets created jurisdictional facts that support jurisdiction as to the tortious in Texas regarding a potential Texas-based joint venture interference claims, then the trial court abused its discretion. with the Texas corporation. These contacts were neither unilaterally from Moncrief nor random and fortuitous, and [36] Because Moncrief has not demonstrated what they indicate the Gazprom Defendants were benefitting from additional jurisdictional facts the depositions would provide, the protection of Texas laws. Therefore, we conclude the trial we conclude the trial court did not abuse its discretion. court has specific personal jurisdiction over Moncrief's trade Moncrief claims Gazprom's deputy chairman sent a secrets claim, and the court of appeals erred in affirming representative of Gazprom Bank to California to meet the special appearance as to this claims. 16 But we agree with Occidental. In its motion to compel, Moncrief with court of appeals that the trial court has no specific sought to depose Gazprom's deputy chairman because it personal jurisdiction over the Gazprom Defendants as to believed he would provide testimony regarding the meetings Moncrief's tortious interference claims and that the trial court with Moncrief. It also sought to depose the Gazprom did not abuse its discretion in refusing to compel additional Bank representative because it believed he would provide depositions. Accordingly, we reverse the judgment of the testimony regarding his meeting with Occidental. But court of appeals in part, affirm in part, and remand to the trial Moncrief already deposed the consultant for Gazprom who court for further proceedings consistent with this opinion. attended the meeting with Occidental (as well as both Texas meetings) and one of Occidental's representatives from that meeting—who both testified as to what the Gazprom Chief Justice JEFFERSON did not participate in the decision.
Bank representative said. Moncrief has not identified what additional testimony the depositions of the Gazprom Bank Parallel Citations representative or Gazprom's deputy chairman would provide regarding Texas contacts with respect to the tortious 56 Tex. Sup. Ct. J. 1023 interference claims. Therefore, we hold the trial court did not
Footnotes 1 Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777, 791 (Tex.2005). 2 Moncrief also sued Gazprom Marketing & Trading, Ltd. and Gazprom Bank. Gazprom Bank was allegedly part of Gazprom's meeting with Occidental in California. The trial court granted its special appearance, and the court of appeals granted Moncrief's motion to dismiss Gazprom Bank. 332 S.W.3d at 5, n. 1. Further, the court of appeals held that there was no jurisdiction over Gazprom Marketing & Trading, Ltd.—which Moncrief does not complain of here. Id. at 20–22.
3 The Texas Civil Justice League, the Texas Oil & Gas Association, the Texas Association of Manufacturers, the Association of Electric Companies of Texas, and the Texas Association of Business collectively submitted an amicus curiae brief in support of Moncrief.
4 Moncrief's briefing asserts that an appellate court should review a trial court's implied findings on a special appearance de novo when there is no live testimony. But we need not address this issue because the relevant facts are undisputed. As to the trade secrets claim, the Gazprom Defendants' contacts with Texas are sufficient to support specific jurisdiction under our existing framework for reviewing special appearance rulings. See infra Part II.B. And as to the tortious interference claims, we agree with the courts below that the claims do not arise from or relate to Texas contacts—
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a question of law unaffected by the operation of implied findings of relevant fact necessary to support the special appearance ruling. See infra Part II.C; see also Moki Mac, 221 S.W.3d at 588–89.
5 See also Touradji v. Beach Capital P'ship, 316 S.W.3d 15, 25–26 (Tex.App.–Houston [1st Dist.] 2010, no pet.); Barnhill v. Automated Shrimp Corp., 222 S.W.3d 756, 766–67 (Tex.App.–Waco 2007, no pet.); Remick v. Manfredy, 238 F.3d 248, 255–56 (3d Cir.2001); Phillips Exeter Acad. v. Howard Phillips Fund, Inc., 196 F.3d 284, 289 (1st Cir.1999).
6 See, e.g., Touradji, 316 S.W.3d at 26; Sutton v. Advanced Aquaculture Sys., Inc., 621 F.Supp.2d 435, 442 (W.D.Tex.2007).
7 The Restatement provides that “[a] state has power to exercise judicial jurisdiction over an individual who has done, or has caused to be done, an act in the state with respect to any cause of action in tort arising from the act.” RESTATEMENT (SECOND) OF CONFLICTS OF LAWS § 36 (1971).
8 See also CMMC v. Salinas, 929 S.W.2d 435, 439 (Tex.1996) (a French winepress maker shipping a winepress to a Texas customer was insufficient to constitute purposeful availment).
9 See Woodson, 444 U.S. at 299, 100 S.Ct. 559 (no jurisdiction over a nonresident automobile distributor whose only tie to the state was a customer's unilateral decision to drive there); Kulko v. Cal. Superior Court, 436 U.S. 84, 93–94, 98 S.Ct. 1690, 56 L.Ed.2d 132 (1978) (no jurisdiction over a nonresident divorced husband owing child support to a former spouse who unilaterally decided to move to another state); Hanson, 357 U.S. at 251, 78 S.Ct. 1228 (no jurisdiction over a nonresident trustee whose only connection to the state resulted from the settlor's unilateral decision to exercise her power of appointment in that state).
10 Moncrief substantiated its allegations with evidence that the Gazprom Defendants accepted the alleged trade secrets at the Texas meetings. For example, an affidavit and deposition testimony of Richard Moncrief, who attended the Texas meetings, stated that Moncrief provided the Gazprom Defendants updated versions of the trade secrets at both meetings. The Gazprom Defendants cite to evidence that they announced an intent not to discuss the proposed joint venture at the meetings and did not agree to keep the alleged trade secrets confidential in exchange for receiving them. But the Gazprom Defendants do not cite, and we cannot locate, any evidence in the record that the Gazprom Defendants did not receive the alleged trade secrets at the meetings. Therefore, we cannot imply a finding that the Gazprom Defendants did not receive the alleged trade secrets because such a finding is not supported by evidence. See Retamco, 278 S.W.3d at 337.
11 Moreover, the previous meetings in Moscow, Boston, and Washington, D.C. did not render the two Texas meetings random and fortuitous because: (1) the discussions were regarding a joint venture in Texas, see Michiana, 168 S.W.3d at 789–90 & n. 70, and (2) Moncrief was headquartered in Texas, see Asahi Metal Indus. Co. v. Superior Court of Cal., 480 U.S. 102, 114, 107 S.Ct. 1026, 94 L.Ed.2d 92 (1987). Moreover, the information was revised and updated before the Texas meetings.
12 Moncrief also asserts in its briefing the additional contacts by the Gazprom Defendants of use of the trade secrets in Texas. But Moncrief's live pleading alleges GMT USA is using those trade secrets in Texas and does not allege that the Gazprom Defendants provided the trade secrets to GMT USA in Texas. Moreover, the court of appeals rejected Moncrief's theory that GMT USA is the alter ego of another Gazprom subsidiary, which Moncrief does not appeal here. 332 S.W.3d at 20–22. Accordingly, we will not analyze these contacts for our purposeful availment analysis.
13 A nonresident may structure its business so as to not profit from a forum's laws and not be subject to its jurisdiction.
Michiana, 168 S.W.3d at 785.
14 See Keeton, 465 U.S. at 776, 104 S.Ct. 1473 (“A state has an especial interest in exercising judicial jurisdiction over those who commit torts within its territory.”); see also Asahi Metal, 480 U.S. at 114, 107 S.Ct. 1026 (“Because the plaintiff is not a California resident, California's legitimate interests in the dispute have considerably diminished.”).
15 The Gazprom Defendants also contend the information they received from Moncrief did not constitute trade secrets.
Although they may well ultimately prevail on this theory, it is a merits issue that is inappropriate at the jurisdiction stage. Michiana, 168 S.W.3d at 790–91.
16 Moncrief's conspiracy claims (for conspiracy to tortiously interfere and conspiracy to misappropriate trade secrets) are not factually distinct from the underlying trade secret and tortious interference claims. See 332 S.W.3d at 10 n. 7 (“[B]ecause no factually distinct basis exists for Moncrief Oil's conspiracy claims, they add nothing to our jurisdictional analysis.”). Accordingly, the exercise of jurisdiction is proper over the conspiracy to misappropriate trade secrets claim, see supra Part II.B, and improper over the conspiracy to tortiously interfere claim, see supra Part II.C.
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KeyCite Yellow Flag - Negative Treatment West Headnotes (15)
Called into Doubt by Baty v. ProTech Ins. Agency, Tex.App.-Hous. (14 Dist.), November 29, 2001 [1] Torts 29 S.W.3d 74 Contracts Supreme Court of Texas. The elements of tortious interference with an existing contract are (1) an existing contract The PRUDENTIAL INSURANCE subject to interference, (2) a willful and COMPANY OF AMERICA, Petitioner, intentional act of interference with the contract, v. (3) proximately caused injury, and (4) actual FINANCIAL REVIEW damages or loss.
SERVICES, INC., Respondent.
91 Cases that cite this headnote No. 98–1053. | Argued Oct. 6, 1999. | Decided June 29, 2000.
[2] Torts | Rehearing Overruled Nov. 9, 2000.
Defense, justification or privilege in general Auditing company for collection of hospitals' bills brought As an affirmative defense, a defendant may action against health insurer for tortious interference with negate liability for tortious interference with an contract or prospective business relations. The District Court existing contract on the ground that its conduct entered partial summary judgment and directed verdict in was privileged or justified. favor of the insurer. Company appealed. The Court of Appeals, Wanda McKee Fowler, J., affirmed in part, reversed 25 Cases that cite this headnote in part, and remanded. Review was granted. The Supreme Court, Gonzales, J., held that: (1) company's status as [3] Torts hospitals' agent to collect for uncharged services and supplies Physicians and health care; health was not a barrier to its suit; (2) the insurer had a privilege insurance to communicate with its insureds about claims against their Auditing company's status as hospitals' agent to policies and with hospitals about the propriety of the charges; collect for uncharged services and supplies was (3) the privilege would not authorize the insurer to falsely and not a barrier to its suit against a health insurer maliciously disparage the company; (4) letters to the insureds for tortious interference with its contract with did not amount to trade disparagement and did not defeat the the hospitals; even though the company was paid privilege; (5) the insurer's right to challenge the hospitals' bills a commission, it lacked a sufficient identity of would not entitle the insurer to falsely accuse the company of interest with the hospitals. fraud; and (6) evidence created jury questions on the privilege defense. Cases that cite this headnote
Affirmed.
[4] Torts Defense, justification or privilege in general Hecht, J., dissented and filed opinion joined by Owen and Baker, JJ. Justification is an affirmative defense to tortious interference with contract and tortious Enoch, J., dissented and filed opinion joined by Owen and interference with prospective business relations. Baker, JJ.
53 Cases that cite this headnote
[5] Torts Defense, justification or privilege in general
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The justification defense to tortious interference with contract and tortious interference with 9 Cases that cite this headnote prospective business relations can be based on the exercise of either (1) one's own legal rights or [9] Torts (2) a good-faith claim to a colorable legal right, Defense, justification or privilege in general even though that claim ultimately proves to be Generally, justification as a defense to tortious mistaken.
interference with contract or prospective 49 Cases that cite this headnote business relations is established when the acts the plaintiff complains of as tortious interference are merely the defendant's exercise of its own [6] Torts contractual rights.
Business relations or economic advantage, in general 68 Cases that cite this headnote Torts Contracts in general [10] Torts The question whether a communication was Defense, justification or privilege in general privileged or justified or merely the exercise A party may not exercise an otherwise legitimate of a colorable right is a one of law in a suit privilege by resort to illegal or tortious means alleging tortious interference with contract and to interfere with contract or prospective business prospective business relations. relations.
3 Cases that cite this headnote 4 Cases that cite this headnote
[7] Torts [11] Torts Contracts Absence of justification or privilege The issue of the defendant's good faith is Torts pertinent only if the court determines the Improper means; wrongful, tortious or defendant had a colorable right, but not a illegal conduct privilege, to engage in the conduct claimed to Torts have interfered with a contract.
Defense, justification or privilege in general 8 Cases that cite this headnote If the plaintiff pleads and proves methods of interference with contract or prospective business relations that are tortious in themselves, [8] Torts then the issue of privilege or justification never Physicians and health care; health arises.
insurance Health insurer that was sued by hospitals' 3 Cases that cite this headnote auditing company for tortious interference with contract and prospective business relations had [12] Libel and Slander a privilege to communicate with its insureds Actionable words or conduct relating to about claims against their policies and with quality or value hospitals about the propriety of the charges, but The general elements of a claim for business the privilege would not authorize the insurer to disparagement are publication by the defendant falsely and maliciously disparage the company;
of the disparaging words, falsity, malice, lack of the insurer had a right to challenge the bills.
privilege, and special damages.
V.A.T.S. Insurance Code, art. 21.55, §§ 2, 3.
13 Cases that cite this headnote
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[13] Torts Attorneys and Law Firms Physicians and health care; health insurance *76 James McConn, Jr., Craig S. Wolcott, Susan C.
Stevenson, Hays McConn Rice & Pickering, Houston, for Health insurer's letters to insureds about Petitioner.
hospitals' unpaid bills allegedly uncovered by auditing company did not amount to trade Norman Riedmueller, Houston, for Respondent. disparagement and did not defeat privilege against liability to company on claims of Opinion tortious interference with contract or prospective business relations; the letters merely informed Justice GONZALES delivered the opinion of the Court, in the insureds of the insurer's position with respect which Chief Justice PHILLIPS, Justice ABBOTT, Justice to the bills. V.A.T.S. Insurance Code, art. 21.55, HANKINSON, and Justice O'NEILL joined. §§ 2, 3.
The principal issue we consider is whether the defendant, 1 Cases that cite this headnote The Prudential Insurance Company of America, conclusively established its justification defense in this tortious interference case. The trial court granted Prudential a partial [14] Torts summary judgment on some issues and directed a verdict Physicians and health care; health on the remaining issues after the plaintiff rested its case.
insurance The court of appeals reversed the judgment and remanded Evidence created jury questions whether health to the trial court, holding that fact issues remained for the insurer falsely accused auditing company of factfinder to resolve. ––– S.W.3d ––––. We conclude that fraud in seeking to collect hospitals' bills Prudential did not conclusively establish that its interference for uncharged services or supplies, whether with the plaintiff's contracts and future business relations was causation existed, and, thus, whether the insurer justified. Accordingly, we affirm the judgment of the court of was liable for tortious interference with contract appeals. or prospective business relations.
4 Cases that cite this headnote Background
[15] Torts Financial Review Services, Inc. (FRS) audits hospital bills, Physicians and health care; health looking for uncharged services and supplies omitted from insurance patients' hospital bills. FRS provides its services to hospitals Health insurer's right to challenge hospitals' for an equal share of the otherwise-lost charges it collects. bills uncovered by auditing company would not Two of FRS's early audit contracts were with hospitals entitle the insurer to falsely accuse the company affiliated with Hospital Corporation of America (HCA), one of fraud, knowing its charges are baseless, and, of the major healthcare corporations in the United States. In therefore, would not protect it from liability for June 1991, FRS obtained contracts with two HCA hospitals in tortious interference with contract or prospective Houston, HCA Women's Hospital of Texas and HCA Medical business relations. Center Hospital. These two Houston hospitals together are known as the HCA Center for Health Excellence (CHE). Each 1 Cases that cite this headnote CHE hospital gave FRS a six-month contract to discover and collect their unbilled medical services, and the parties renewed both contracts for another six months at the end of the initial terms. Meanwhile, FRS began negotiating a similar contract with an HCA hospital in another city, HCA Rio Grande.
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After it audited CHE, FRS sent out an initial group of about 2000 bills for previously unbilled services. Approximately At trial on these remaining issues, FRS presented its case 100 of the bills went to Prudential for hospital services for breach of contract and tortious interference and then rendered to its policyholders. Prudential responded with rested. Prudential orally moved for directed verdict on all a letter to John Gilbert, CHE's chief financial officer, issues. Prudential argued that the trial court's partial summary stating that Prudential would not consider the claims unless judgment reduced the issues to whether Prudential breached a CHE first billed the patients and provided their complete contract with FRS and whether Prudential's communications medical records to Prudential for review. CHE complied concerning FRS tortiously interfered with FRS's auditing with this request. Prudential then conducted its own audit contracts. Prudential urged that it was entitled to judgment and denied all the claims as unsupported by CHE records. because (1) there was no evidence of a contract and (2) all Meanwhile, Prudential sent letters to its policyholders of Prudential's communications and conduct were justified about the status of these claims. A significant number of and did not cause FRS to lose its contracts. The court granted Prudential policyholders, other patients, doctors, and the the motion, rendering a final take-nothing judgment on all of Better Business Bureau complained to CHE about the back- FRS's claims. billing. Eventually, CHE terminated its contracts with FRS. Also, FRS lost the contract it had obtained with HCA Rio On appeal, FRS challenged both the partial summary Grande. judgment and the directed verdict. The court of appeals affirmed the partial summary judgment and the breach of FRS sued Prudential, claiming that it tortiously interfered contract portion of the directed verdict. ––– S.W.3d ––––. with FRS's “business and contractual relationships with HCA But the court of appeals reversed and remanded the remainder and its hospitals,” in particular, FRS's existing contracts with of the directed verdict. The court held that there were fact CHE and HCA Rio Grande, and that Prudential breached an questions about whether some of Prudential's conduct and oral agreement with FRS to abide by the results of Prudential's communications tortiously interfered with FRS's contracts audit of FRS's bills. FRS contended that Prudential tortiously and business relationships. ––– S.W.3d ––––. Prudential has interfered in five ways: (1) Prudential refused to pay FRS's petitioned this Court for review. bills and other bills *77 from HCA hospitals, (2) Prudential “maligned” FRS to CHE and the patients, (3) Prudential harassed HCA officials with “sham” audits, pressure tactics, Standard of Review and unreasonable, bad faith demands, (4) Prudential stirred up the insureds to make patient complaints to CHE, and (5) A court may instruct a verdict if no evidence of probative Prudential started false rumors about FRS, intending that they force raises a fact issue on the material questions in the suit. reach HCA management. See Szczepanik v. First S. Trust Co., 883 S.W.2d 648, 649 (Tex.1994). A directed verdict for a defendant may be proper Prudential moved for summary judgment on all claims. The in two situations. First, a court may direct a verdict when a trial court granted a partial summary judgment resolving plaintiff fails to present evidence raising a fact issue essential some of the tortious interference issues against FRS. The to the plaintiff's right of recovery. See Latham v. Castillo, 972 court decided that FRS had no cause of action for Prudential's S.W.2d 66, 67–68, 70–71 (Tex.1998). Second, as other courts handling of bills audited by FRS, because Prudential owed have held, a trial court may direct a verdict for the defendant if FRS no duty to pay CHE's bills in the first place. The the plaintiff admits or the evidence conclusively establishes a court also determined Prudential had an absolute right to defense to the plaintiff's cause of action. See, e.g., Villegas v. object to, question, and investigate the bills, and had the Griffin Indus., 975 S.W.2d 745, 748–49 (Tex.App.—Corpus right to complain about the practice of late billing in Christi 1998, pet. denied); Davis v. Mathis, 846 S.W.2d 84, general and FRS's procedures in particular. Finally, the court 86 (Tex.App.—Dallas 1992, no writ); see generally Elliot, decided that Prudential had an absolute right to communicate Jury Trial: General, in 4 MCDONALD TEXAS CIVIL with its insureds about the billing. However, it denied PRACTICE § 21:52 (Allen et al. eds., 1992 ed.). summary judgment on FRS's complaints about Prudential's communications to the insureds and CHE because, the [1] [2] We have identified the elements of tortious trial court concluded, the communications could be tortious interference with an existing contract as: (1) an existing depending on their content. contract subject to interference, (2) a willful and intentional
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act of interference with the contract, (3) that proximately purposes, an agent and principal are treated as one, and caused the plaintiff's injury, and (4) caused actual damages one cannot interfere with one's own contract. From these or loss. See ACS Investors, Inc. v. McLaughlin, 943 S.W.2d premises, Prudential contends that an agent cannot sue a third 426, 430 (Tex.1997). Also, as an affirmative defense, a *78 party for the commissions the agent would have received on defendant may negate liability on the ground that its conduct a contract between the third party and the agent's principal. was privileged or justified. See id. at 431. Under a directed We understand Prudential's arguments as pertaining only to verdict standard, then, a judgment for Prudential could be FRS's claim of tortious interference with existing contracts proper if (1) FRS failed to present evidence about one of the with CHE and HCA Rio Grande, because only those entities elements of the tort, (2) Prudential conclusively negated one had a principal-agent relationship with FRS. of those elements, or (3) Prudential conclusively established its justification defense. To properly consider Prudential's arguments it is important to identify the contractual relationships between Prudential, In addition to FRS's claim of tortious interference with its CHE, HCA Rio Grande, and FRS. CHE and HCA Rio Grande existing contracts with CHE and HCA Rio Grande, FRS's have a contractual relationship with Prudential, because pleadings claimed Prudential's conduct caused FRS to lose Prudential's insureds assigned their policy rights to those its “business and contractual relationship with HCA and its hospitals when they were patients. But FRS brought suit for hospitals.” After the CHE contracts were terminated, FRS had claimed interference with its auditing contracts with CHE and no existing contracts with HCA. Therefore, FRS's pleadings HCA Rio Grande, not the contracts between Prudential and seem to seek damages for the lost opportunity to obtain the hospitals. contracts in the future with other HCA affiliated hospitals. In other words, FRS appears to be asserting a claim for tortious Prudential argues that the contracts are inseparable, because interference with prospective contracts with other HCA CHE employed FRS to assist it in CHE's relations with affiliated hospitals. We have never enumerated the elements Prudential and others like it. Prudential claims that FRS's of a cause of action for tortious interference with prospective suit is, in essence, a suit for the commissions FRS would contracts, although we have concluded that justification is an have received if Prudential had paid its bills to the hospitals. affirmative defense to tortious interference with prospective Thus, Prudential contends that the identity of interests of the business relations as well as to tortious interference with hospitals and their agent, FRS, prevents FRS from suing for an existing contract. See Calvillo v. Gonzalez, 922 S.W.2d tortious interference. Prudential bases this argument on three 928, 929 (Tex.1996). Neither the courts below nor the parties cases, Holloway v. Skinner, 898 S.W.2d 793 (Tex.1995), in their briefing here have distinguished between the two *79 Morgan Stanley & Co. v. Texas Oil Co., 958 S.W.2d torts. But we may address Prudential's specific arguments 178 (Tex.1997), and LA & N Interests, Inc. v. Fish, 864 without deciding what all of the elements of proof for tortious S.W.2d 745 (Tex.App.—Houston [14th Dist.] 1993, no writ), interference with prospective business relations might be. disapproved on other grounds by, Trammell Crow Co. No.
60 v. Harkinson, 944 S.W.2d 631 (Tex.1997). Prudential asks Prudential contends that the trial court correctly directed us to draw a broad principle from these cases—that an agent a verdict because FRS's status as CHE's and HCA Rio cannot sue a third party for lost commissions on a contract Grande's agent precludes FRS's tortious interference claim, between the third party and the agent's principal. and nothing Prudential did caused FRS to lose its contracts and relationships. Additionally, Prudential claims that the In Holloway, the holder of a corporation's promissory note evidence conclusively established its justification defense. sued the director of a corporation for tortiously interfering We consider first Prudential's agency arguments. by inducing the corporation to default on the note. 898 S.W.2d at 794. We noted that a suit against a corporation's agent posed special problems for the second element of a tortious interference claim, that a non-party to the contract Tortious Interference with an Agent's Contract interfered with the contract. See id. at 796. We recognized [3] Prudential argues that because FRS is CHE's and HCA the fundamental principle that a party to a contract cannot Rio Grande's agent for collecting payment, FRS cannot bring tortiously interfere with its own contract. See id. at 795. Yet a claim for tortious interference with contract. Prudential's a corporation can only act through its agents, so that it is arguments are based on the proposition that, for many necessary to differentiate between the acts of an agent on
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Prudential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74 (2000) 43 Tex. Sup. Ct. J. 980
behalf of the principal from those done in the agent's self- this argument on LA & N Interests, Inc. v. Fish, 864 S.W.2d interest. See id. at 795–96. Consequently, we held that to hold 745, 749 (Tex.App.—Houston [14 th Dist.] 1993, no writ), an agent liable under such circumstances, the plaintiff had to in which the court of appeals held that a real- *80 estate show that the agent acted so contrary to the principal's best agent had no tortious interference claim against a prospective interests that his actions could only have been motivated by purchaser based on the purchaser's breach of contract that personal interests. See id. at 796. denied the agent's commission. See LA & N Interests, Inc., 864 S.W.2d at 749. But LA & N does not apply because there In Morgan Stanley, we applied the Holloway rule to a claim the only claimed injury was the commission the agent would for tortious interference with a prospective business relation, have realized from the sale to the third party. Here, FRS is emphasizing that the plaintiff cannot recover without proof not merely seeking its lost commissions on Prudential's bills, that the agent acted in its own interest at the expense of the FRS also alleges that Prudential interfered with its contract principal. Morgan Stanley, 958 S.W.2d 178, 179 (Tex.1997). to audit bills of all CHE and HCA Rio Grande patients. The We also held that if a corporation does not complain about its majority of patient accounts that FRS audited for CHE did agent's actions, then the agent cannot be held to have acted not concern Prudential policyholders. Of the initial 2,000 contrary to the corporation's interests. See id. at 182; see also bills that FRS sent out for CHE, fewer than 100 were to Powell Indus., Inc. v. Allen, 985 S.W.2d 455, 457 (Tex.1998). Prudential policyholders. FRS eventually sent out 9,000 bills.
HCA Rio Grande terminated its contract before FRS sent Prudential argues that Morgan Stanley stands for the out any bills, so we do not know if any bills would have proposition that if the principal does not complain about been sent to Prudential policyholders. The fact that FRS was another party's conduct on a matter of interest to the principal, CHE's and HCA Rio Grande's agent, paid on commission, then neither can the agent. While we noted in Holloway and does not establish the identity of interest between FRS and Morgan Stanley that the interests of an agent and a principal those hospitals that was important in LA & N. are often the same, those cases do not otherwise apply. In those cases the agent was the defendant, and the issue was Accordingly, we conclude that FRS's agency status is not how to differentiate whether the defendant was acting in a barrier to a tortious interference claim involving FRS's the company's interest or in the agent's self-interest when auditing contracts with CHE and HCA Rio Grande. We turn the agent allegedly interfered with a third party's contract. next to Prudential's arguments that it conclusively established In Holloway and Morgan Stanley, we held, “for reasons of its justification defense and that it did nothing to cause FRS logic and law,” that a third party generally has no cause of to lose its contracts. action against an agent for inducing the principal to breach a contract with a third party. Morgan Stanley, 958 S.W.2d at 179; Holloway, 898 S.W.2d at 796. We held in both cases that to recover for tortious interference in such a situation, a Justification Defense plaintiff must prove that the agent willfully or intentionally [4] [5] Prudential claims that it established its justification acted to advance the agent's own interests at the principal's defense as a matter of law. Justification is an affirmative expense. See Morgan Stanley, 958 S.W.2d at 179; Holloway, defense to tortious interference with contract and tortious 898 S.W.2d at 798.
interference with prospective business relations. See Calvillo v. Gonzalez, 922 S.W.2d 928, 929 (Tex.1996). As we But here, FRS, the agent, is the plaintiff complaining that explained in Texas Beef Cattle Co. v. Green, 921 S.W.2d Prudential interfered with its auditing contracts with CHE and 203, 211 (Tex.1996), the justification defense can be based HCA Rio Grande. Prudential is neither a party to, nor an agent on the exercise of either (1) one's own legal rights or (2)
of the hospitals under those contracts. Because the concerns a good-faith claim to a colorable legal right, even though in Holloway and Morgan Stanley are not implicated here, that claim ultimately proves to be mistaken. We stated that neither case supports the absolute rule that Prudential urges.
if a trial court finds as a matter of law that the defendant had a legal right to interfere with a contract, the defendant Prudential also argues that, because FRS was paid on has conclusively established the justification defense, and the commission, its interests are essentially the same as the motive is irrelevant. See id. Alternatively, if the defendant hospitals', and because the hospitals may not sue Prudential in cannot prove justification as a matter of law, it can still tort for not paying the bills, neither can FRS. Prudential bases establish the defense if the trial court determines that the
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Prudential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74 (2000) 43 Tex. Sup. Ct. J. 980
defendant interfered while exercising a colorable right, and taken with respect to the claim. See TEX.INS.CODE ANN. the jury finds that, although mistaken, the defendant exercised art. 21.55, §§ 2, 3 (Supp.2000). that colorable right in good faith. See id.
[9] With respect to Prudential's communications to CHE, the The trial court here granted summary judgment against FRS trial court determined in its partial summary judgment: on all of its tortious interference claims except those based on Prudential's communications to its own policyholders and to [Prudential] had an absolute right to CHE. The court of appeals affirmed the summary judgment, object to the bills, question[ ] the characterizing Prudential's privilege to communicate to its bills, investigate the bills, complain policyholders and CHE as a “qualified” privilege. ––– S.W.3d about the procedures used to come ––––. The court of appeals's opinion implied that an insurance up with the bills, and to complain company's communications to its policyholders, other than generally about the practice of latethose conveying truthful information, can never be privileged charge billing. as a matter of law, and necessarily present a fact question Generally, justification is established as a matter of law when about good faith. ––– S.W.3d ––––. The opinion also held the acts the plaintiff complains of as tortious interference are that Prudential's communications with the hospitals were merely the defendant's exercise of its own contractual rights.
privileged only if it had a good faith belief in a colorable right, See ACS Investors, Inc. v. McLaughlin, 943 S.W.2d 426, a fact question for the jury. ––– S.W.3d ––––.
431 (Tex.1997); Friendswood Dev. Co. v. McDade + Co., 926 S.W.2d 280, 283 (Tex.1996); Calvillo v. Gonzalez, 922 [6] [7] There well may be a fact question about what S.W.2d 928, 929 (Tex.1996). As Prudential was obligated Prudential said to CHE or the policyholders. But, as Texas only for reasonable charges under its policies, it had the Beef explains, whether the communication was privileged or contractual right to challenge the propriety of the FRS bills.
justified, or merely the exercise of a colorable right, is a question of law for the court. See Texas Beef, 921 S.W.2d at [10] [11] We, therefore, conclude that Prudential had 211. The issue of the defendant's good faith is pertinent only a privilege to communicate with its insureds about claims if the court determines the defendant had a colorable right, against their policies and with CHE about the propriety of but not a privilege, to engage in the conduct claimed to have charges. But that does not mean that Prudential could say or interfered with a contract.
do anything under the guise of exercising a privilege. A party may not exercise an otherwise legitimate privilege by resort *81 [8] We agree with the trial court that Prudential would to illegal or tortious means. As Prosser and Keeton observed:
be justified as a matter of law to communicate with its policyholders and CHE about certain subjects. As the trial Methods tortious in themselves are court determined in its partial summary judgment: of course unjustified and liability is appropriately imposed where the [Prudential] had an absolute right plaintiff's contract rights are invaded to communicate with its insureds by violence, threats and intimidation, regarding the claims that were defamation, misrepresentation, unfair billed against the insureds' policies;
competition, bribery and the like.
and that [Prudential was] not limited to communications that KEETON ET AL., PROSSER AND KEETON ON THE requested information regarding LAW OF TORTS § 129, at 992 (5th ed.1984). Thus, if services rendered and statements of the plaintiff pleads and proves methods of interference that benefits paid; and that Defendants are tortious in themselves, then the issue of privilege or were not limited to any particular justification never arises. number of communications to their insureds. Here, FRS pleaded that Prudential interfered with FRS's contracts and business relations by (1) falsely accusing FRS Prudential is statutorily obligated to communicate with its of double billing in letters to policyholders by referring insureds to acknowledge receipt of a claim, commence any to items as having been “previously considered”; (2)
investigation of the claim, and advise claimants of any actions
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Prudential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74 (2000) 43 Tex. Sup. Ct. J. 980
“maligning” FRS to CHE in a meeting by accusing FRS of billing for undocumented items that were documented; Sheryl Kapella, a registered nurse who co-founded FRS (3) harassing CHE with sham audits, requesting hundreds with Michael P. Lewis, testified at trial that this letter was of records and asserting that CHE charged for medically false, because she could point to charges that Prudential unnecessary procedures; (4) pressuring CHE to stop using had not considered from that time period. We disagree that FRS by refusing to pay any FRS bill and withholding sending the letters to the insureds constitute a tortious act other claims until FRS was terminated; and (5) agitating the by Prudential. Prudential has a legal duty to communicate policyholders to complain about FRS. with its policyholders about the status of potential claims.
The letters merely inform the policyholder of the position [12] Absent special exceptions, we construe a petition Prudential took with respect to the bills, and do not disparage liberally in favor of the pleader. See Roark v. Allen, 633 FRS in any way. There is no suggestion that FRS's actions S.W.2d 804, 809 (Tex.1982). FRS pleaded that Prudential or intentions were dishonest. Companies should be able to interfered with its business and contractual relations with communicate frankly about disputes without fear of a claim HCA hospitals by “maligning” FRS to hospital officials by third parties for tortious interference. We conclude that the and Prudential policyholders. Given a liberal construction, contents in Prudential's letters to its insureds did not make FRS's pleadings allege that Prudential interfered by conduct them tortious. constituting business disparagement, a means of interference which is tortious in itself. See *82 Hurlbut v. Gulf [14] FRS also contends that Prudential falsely maligned Atl. Life Ins. Co., 749 S.W.2d 762, 766 (Tex.1987). The FRS to CHE. Kapella claimed that one of Prudential's auditors general elements of a claim for business disparagement told her that “they would like to see all firms like [FRS] go are publication by the defendant of the disparaging words, out of business.” Kapella further testified that Prudential's falsity, malice, lack of privilege, and special damages. See auditors had asserted that FRS had double billed but she was id. Accordingly, Prudential was privileged to speak to its able to convince them that they were mistaken. But later policyholders and complain to CHE, but that privilege would Prudential made the same accusations of double billing in not authorize Prudential to falsely and maliciously disparage front of CHE officials. Kapella said, “I was very upset at FRS. Because Prudential would not be privileged to interfere the mention I was double billing or fraudulently billing for with FRS's contract through means tortious in themselves, a items that weren't documented.” Also, there was a letter from directed verdict would not be proper if there is evidence that Gilbert, CHE's chief financial officer, to FRS's Lewis stating Prudential tortiously disparaged FRS. that he had heard that Prudential was spreading the word that FRS double billed and billed for service items that CHE To raise an issue of whether Prudential interfered with normally did not bill. FRS's contract by tortiously disparaging FRS, there must be evidence that Prudential made statements rising to the level [15] The evidence is not conclusive about what Prudential's of trade disparagement. To do so, FRS must first present representatives actually said about FRS. Prudential clearly evidence that Prudential made false statements of fact about was entitled to challenge FRS's accounting methods and take FRS. See id. the position that FRS's methods resulted in unfair charges.
It also was entitled to disagree strongly, even in front of [13] FRS argues that several instances show that Prudential representatives of CHE, with the actions taken by FRS intended to cause FRS to lose its HCA contracts by falsely representatives. In matters of settlement, businesses should accusing FRS of fraudulent business practices. FRS contends be given leeway to take, and express candidly, hard positions first, that the letters to the insureds accused it of fraudulent without risking tortious interference claims from third parties. double billing. For example, one states: But the right to challenge the bills would not entitle Prudential to falsely accuse FRS of fraud, knowing its charges are Please be advised that we have baseless. Here we must indulge all reasonable inferences in determined the late billings totaling favor of FRS, the nonmovant. See Szczepanik v. First S. $585.48 for the period of February 12, Trust Co., 883 S.W.2d 648, 649 (Tex.1994). That being the 1991 have been previously considered case, Kapella's testimony and Gilbert's letter are at least some by Prudential. We have notified the evidence *83 that Prudential disparaged FRS's business by hospital accordingly. accusing it of fraud knowing the charge was baseless. We conclude Prudential did not establish its justification defense
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Prudential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74 (2000) 43 Tex. Sup. Ct. J. 980
as a matter of law with respect to FRS's theory of tortious interference by business disparagement. If there is some Justice HECHT filed a dissenting opinion, in which Justice evidence that Prudential caused FRS injury through tortious OWEN and Justice BAKER joined.
conduct, then directed verdict was not proper. And if the directed verdict was improper as to this theory, we need not Justice ENOCH filed a dissenting opinion, in which Justice resolve here whether FRS has sufficiently alleged any other OWEN and Justice BAKER joined. acts of interference by means tortious in themselves. We turn now to Prudential's causation arguments.
Justice HECHT, joined by Justice OWEN and Justice BAKER, dissenting. The Court concludes that Prudential was justified as a matter Causation of law in writing to its insureds that it was being doublebilled by their hospital, even if there was some evidence that Prudential argues that there is no evidence that anything its statements were false, but Prudential was not justified it did caused CHE to terminate its contracts with FRS. Prudential refers to the testimony of Judith Novak, CHE's in complaining of double-billing to the hospital itself. 1 chief executive officer, who testified that she terminated the Any logic lurking in this reasoning eludes me. How can contracts with FRS because of public relations problems telling policyholders that their hospital is overbilling be more caused by the late billing and her disagreement with FRS justified than telling the hospital to its face? business practices, not because of anything Prudential said or did. However, under the proper standard for reviewing The Court says that Prudential had no right to falsely accuse a directed verdict, we must disregard this evidence. See FRS of fraud. In some circumstances, that would be true. But Szczepanik, 883 S.W.2d at 649. what harm does it do to tell X that Y is a fraud if X knows it is not true? The hospital could look at its own records and decide We limit our inquiry here to whether there is evidence for itself whether FRS was overbilling. The hospital had no that Prudential's alleged business disparagement caused FRS need to rely on Prudential's view on the subject; indeed, *84 injury. There is evidence that after the meeting between FRS, the hospital had every reason to disbelieve Prudential. Prudential, and CHE, Novak directed FRS not to send out any further bills, and ultimately terminated FRS's contract. In fact, the hospital did look at its records. And having looked, Also there is evidence that because of Prudential's allegations has it complained that Prudential forced it to terminate its of double billing, an HCA official decided to prohibit HCA relationship with FRS even though FRS was acting properly? hospitals in the Western Region from doing any business No. The hospital takes the opposite position: that it terminated with FRS. Thus we conclude there is some evidence that the relationship because it, too, was concerned about FRS's Prudential's alleged disparagement caused injury to FRS's bills. How did Prudential disparage FRS's billing to the contractual relations. Therefore, Prudential was not entitled hospital when the hospital itself was troubled by FRS's bills? to a directed verdict on the issue of causation.
The rule in this case is that if a person complains that he has been overcharged, and his creditor agrees and terminates its agent who sent the bill, the agent may sue the person who Conclusion complained for tortious interference. I disagree with this rule and therefore dissent.
In summary, we conclude that FRS's agency status did not create such a unity of interest with CHE so as to preclude FRS from suit for tortious interference with its auditing contracts. Justice ENOCH, joined by Justice OWEN and Justice We also conclude Prudential did not conclusively negate BAKER, dissenting. causation, nor did it conclusively establish its justification The Center for Health Excellence precipitated a fee dispute defense. Thus, we hold that the trial court erred in directing a with an insurer of a number of the Health Center's patients verdict for Prudential. Accordingly, we affirm the judgment when it hired a bill collecting firm, Financial Review of the court of appeals. Services. Financial Review promised the Health Center that it could find unbilled charges, that it would bill those who owed for uncharged services, and that the cost of its billing
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Prudential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74 (2000) 43 Tex. Sup. Ct. J. 980
services would be a percentage of what it collected. Not the elements of tortious interference with a contract for its surprisingly, when notified of charges due, the insurer was claim against Prudential. unpersuaded that services had been provided to its insureds for which it had, either directly or indirectly on behalf of its The Court errs in permitting Financial Review to act as the insureds, not been previously billed. And it fought back. But Health Center's agent in billing Prudential and then allowing what is surprising, is this Court's conclusion that the insurer it to interpose its agency contract to split its identity from seemingly owes a duty to the bill collecting firm to not get it the Health Center, enabling it to hold Prudential liable for fired by the Health Center as a result of the dispute. Because its being fired because Prudential objected to that billing. I believe that, as a matter of law, Financial Review cannot The great flaw in the Court's adopting Financial Review's establish the elements of tortious interference with contract, theory that it can sue Prudential for tortiously interfering with I respectfully dissent. its agency contract is that this theory potentially converts into a tort every breach of contract claim when one party to To reach its decision, the Court initially concludes that the contract is represented by an agent. The mischief of the although Financial Review is the Health Center's agent for Court's reasoning is particularly evident in this case. Here, collecting unbilled charges, that fact is no barrier to Financial the Health Center has not even claimed that its contract with Review's tortious interference with contract cause of action Prudential has been breached, but rather it fired its agent for against Prudential. The Court then holds that Prudential did mishandling that contract. not conclusively establish that its interference with Financial Review's contracts was justified. But the fact that Financial The Court, rejecting Prudential's position, asserts that Review was the Health Center's agent to collect the unbilled Prudential asks us to draw too broad a principle—that an charges against Prudential is the dispositive fact. agent cannot sue a third-party for tortious interference with its agency contract. But the Court recasts Prudential's argument Only a stranger to a contract can tortiously interfere with in order to avoid a critical element of the argument. Prudential that contract. 1 The parties to a contract, therefore, cannot is not a third-party to Financial Review's agency contract with the Health Center because that contract makes Financial as a matter of law tortiously interfere with that contract. 2 Review one with the Health Center with respect to Prudential.
Nor can the parties' agents while they are acting in their This does not foreclose actions against true third-parties.
principals' interests. 3 The efficacy of this latter proposition is Another bill auditing company seeking to replace Financial self-evident in the context of corporate entities. Corporations Review, for example, could interfere with Financial Review's cannot act but through agents, who are usually but not agency contract with the Health Center. This is so because always, its employees. 4 Necessarily then, Texas law views a Financial Review's agency contract does not make it one principal and its agent as the same legal entity when the agent with the Health Center with respect to this other auditing deals with others on behalf of the principal. 5 company. As well, were Prudential to have engaged in some conduct, not related to its dispute with the Health Center over Holding, as the Court does, that one contracting party may the billing, with the intent that Financial Review's agency be exposed to tort liability for the firing of the other party's be terminated, then that would be tortious interference. And agent unduly muddles this established principle. Moreover, this is so because outside the context of Prudential's contract the decision's effect is heedless of the potential for unlimited with the Health Center, Prudential would not be dealing with expansion of the tort. For example, any employee of the Financial Review as the Health Center's agent. Health Center who is discharged by the Health Center because of the Health Center's dispute with Prudential *85 will Finally, the Court suggests that the concerns in Morgan have a cause of action for tortious interference with contract Stanley 6 and Holloway 7 are not present here, and that against Prudential. But the foundation of agency law is that those cases are therefore inapposite. But the Court errs in the agent and its principal are the same entity with respect its judgment because in its reasoning, it too easily dismisses to the principal's contracting party. A corollary proposition these cases. On the surface, Morgan Stanley and Holloway then is that the contracting party cannot be a third-party to can be distinguished because in those cases the principal's the other party's agency relationship. Because in this case agent did not sue, but was sued, for tortious interference. Financial Review is the same entity as the Health Center as far Below the surface of those decisions, though, underlies the as Prudential is concerned, Financial Review cannot establish agency principle that pervades this decision.
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Prudential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74 (2000) 43 Tex. Sup. Ct. J. 980
Both cases are predicated on the principle that because principals and agents are legally the same entity, they are Conclusion both considered party to a contract the principal makes with another. And both cases recognize that if both principal and Financial Review was hired by the Health Center to negotiate agent are party to a contract for which tortious interference on its behalf for payment of previously unbilled services from is alleged, the tort is confounded because parties to a Prudential. As a matter of law, Financial Review, the agent, contract cannot tortiously interfere with it as a matter of law. and the Health Center, the principal, are the legal equivalent Consequently, to allow the claim to proceed, the Court had to for the purposes of bill collecting under the Health Center's identify some factor that would separate the legal identity of contract with Prudential. Now that it has been fired, Financial principal and agent such that the agent could be considered a Review cannot cleave its legal identity from that of the Health third-party to the contract. Thus, those cases held that when Center's and point to its agency contract in order to claim agents are sued for tortious interference *86 by a party to tortious interference with contract. Because as a matter of law the principal's contract, the agents are only liable if they break Prudential is not a third-party to Financial Review's agency the identity of interests between principal and agent by acting relationship with the Health Center, Financial Review cannot establish the elements of tortious interference with contract in their own self-interest at the expense of the principal's. 8 as a matter of law. Therefore the court of appeals' judgment should be reversed. I respectfully dissent.
Here, by contrast, it is not even suggested that Financial Review's identity of interests that bonded its legal identity to that of its principal was abrogated. And Holloway flatly states All Citations that “[w]hen there is a complete identity of interests [between principal and agent], there can be no interference as a matter 29 S.W.3d 74, 43 Tex. Sup. Ct. J. 980
9
of law.”
Footnotes 1 Ante at 81. 1 See Morgan Stanley & Co. v. Texas Oil Co., 958 S.W.2d 178, 179 (Tex.1997) (citing Holloway v. Skinner, 898 S.W.2d 793, 797 (Tex.1995)).
2 See Baker v. Welch, 735 S.W.2d 548, 549 (Tex.App.-Houston [1 st Dist.] 1987, writ dism'd).
3 See Morgan Stanley, 958 S.W.2d at 179. 4 See Holloway, 898 S.W.2d at 795. 5 Morgan Stanley, 958 S.W.2d at 182 (Enoch, J., concurring). 6 958 S.W.2d 178. 7 898 S.W.2d 793. 8 See Morgan Stanley, 958 S.W.2d at 179 (quoting Holloway, 898 S.W.2d at 797.). 9 Holloway, 898 S.W.2d at 797.
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Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333 (2009) 171 Oil & Gas Rep. 266, 52 Tex. Sup. Ct. J. 395
Under the Texas long-arm statute, plaintiff has the initial burden to plead sufficient allegations KeyCite Yellow Flag - Negative Treatment to confer jurisdiction.
Distinguished by Parex Resources, Inc. v. ERG Resources, LLC, Tex.App.-Hous. (14 Dist.), January 28, 2014 15 Cases that cite this headnote 278 S.W.3d 333 Supreme Court of Texas. [2] Courts Presumptions and Burden of Proof as to RETAMCO OPERATING, INC., Petitioner, Jurisdiction v.
Defendant seeking to avoid being sued in Texas REPUBLIC DRILLING COMPANY, Respondent.
has the burden to negate all potential bases for jurisdiction pled by the plaintiff.
No. 07–0599. | Argued Sept. 11, 2008. | Decided Feb. 27, 2009. 3 Cases that cite this headnote
Synopsis Background: Following an interlocutory default judgment [3] Appeal and Error against Texas corporation in action over unpaid royalties Necessity of finding facts related to oil and gas interests, plaintiff, another Texas When the trial court does not make findings corporation, amended its petition to include claim against of fact and conclusions of law in support of nonresident transferee of such gas and oil interests. Transferee its ruling, all facts necessary to support the filed special appearance arguing lack of jurisdiction. The judgment and supported by the evidence are trial court denied special appearance and transferee filed implied. interlocutory appeal. The Court of Appeals for The Fourth District of Texas, Karen Angelini, J., 2007 WL 913206, 10 Cases that cite this headnote reversed. Plaintiff appealed.
[4] Appeal and Error Cases Triable in Appellate Court Holdings: The Supreme Court, Green, J., held that: Personal jurisdiction is a question of law which the Texas Supreme Court reviews de novo.
[1] transferee had purposely availed itself of privilege of conducting activities in Texas; 4 Cases that cite this headnote
[2] allegations were sufficient to demonstrate alleged tort [5] Constitutional Law occurred at least, in part, in Texas; and Non-residents in general Courts [3] exercise of specific jurisdiction over nonresident Actions by or Against Nonresidents, transferee of Texas oil and gas interests would not offend Personal Jurisdiction In; “Long-Arm”
traditional notions of fair play and substantial justice.
Jurisdiction Texas courts may assert in personam jurisdiction Reversed and remanded. over a nonresident if (1) the Texas long-arm statute authorizes the exercise of jurisdiction, and (2) the exercise of jurisdiction is consistent with federal and state constitutional due-process West Headnotes (27)
guarantees.
17 Cases that cite this headnote [1] Courts Allegations, pleadings, and affidavits
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Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333 (2009) 171 Oil & Gas Rep. 266, 52 Tex. Sup. Ct. J. 395
To establish personal jurisdiction over a [6] Courts nonresident defendant, defendant's activities, Business contacts and activities; whether they consist of direct acts within transacting or doing business Texas or conduct outside Texas, must justify a Texas long-arm statute's broad doing-business conclusion that the defendant could reasonably language allows the statute to reach as far as anticipate being called into a Texas court. the federal constitutional requirements of due process will allow. U.S.C.A. Const.Amend. 14. 2 Cases that cite this headnote
12 Cases that cite this headnote [11] Courts Unrelated contacts and activities; general [7] Constitutional Law jurisdiction Non-residents in general Courts Under constitutional due-process analysis, Related contacts and activities; specific personal jurisdiction is achieved when (1) the jurisdiction nonresident defendant has established minimum A nonresident's contacts with a jurisdiction can contacts with the forum state, and (2) the give rise to either specific or general jurisdiction. assertion of jurisdiction complies with traditional notions of fair play and substantial justice. 4 Cases that cite this headnote U.S.C.A. Const.Amend. 14.
21 Cases that cite this headnote [12] Courts Unrelated contacts and activities; general jurisdiction [8] Courts General jurisdiction arises when the defendant's Factors Considered in General contacts with the forum are continuous and Texas Supreme Court focuses on a defendant's systematic. activities and expectations when deciding whether it is proper to call the defendant before 6 Cases that cite this headnote a Texas court.
1 Cases that cite this headnote [13] Courts Related contacts and activities; specific jurisdiction [9] Courts Specific jurisdiction arises when (1) the Purpose, intent, and foreseeability;
defendant purposefully avails itself of purposeful availment conducting activities in the forum state, and (2)
A defendant establishes minimum contacts with the cause of action arises from or is related to a state, for purposes of determining whether those contacts or activities. personal jurisdiction exists, when it purposefully avails itself of the privilege of conducting 20 Cases that cite this headnote activities within the forum state, thus invoking the benefits and protections of its laws.
[14] Courts 34 Cases that cite this headnote Related contacts and activities; specific jurisdiction In a specific jurisdiction analysis, the Texas [10] Courts Supreme Court focuses on the relationship Purpose, intent, and foreseeability;
among the defendant, the forum, and the purposeful availment litigation.
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Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333 (2009) 171 Oil & Gas Rep. 266, 52 Tex. Sup. Ct. J. 395
transferee to enjoy the benefits and protection 3 Cases that cite this headnote of Texas laws, contacts with Texas were not the result of unilateral actions of a third party, and [15] Courts transferee had reaped benefits from the property.
Purpose, intent, and foreseeability;
15 Cases that cite this headnote purposeful availment Courts Agents, Representatives, and Other Third [18] Mines and Minerals Parties, Contacts and Activities of as Basis for Interest in real estate Jurisdiction Oil and gas interests are real property interests. Texas Supreme Court considers three issues in 1 Cases that cite this headnote determining whether a defendant purposefully availed itself of the privilege of conducting activities in Texas: first, only the defendant's [19] Courts contacts with the forum are relevant, not the Factors Considered in General unilateral activity of another party or a third Jurisdiction may not be avoided merely because person; second, the contacts relied upon must the defendant did not physically enter the forum be purposeful rather than random, fortuitous, or state. attenuated; and finally, the defendant must seek some benefit, advantage or profit by availing 1 Cases that cite this headnote itself of the jurisdiction.
[20] Courts 31 Cases that cite this headnote Nature, number, frequency, and extent of contacts and activities [16] Courts Purchase of real property in Texas does not Nature, number, frequency, and extent of establish a single contact, for purposes of contacts and activities determining whether a nonresident defendant is In determining whether personal jurisdiction subject to personal jurisdiction, like that of a sale over a nonresident defendant exists, minimum- of personal property. contacts analysis is focused on the quality and nature of the defendant's contacts, rather than 1 Cases that cite this headnote their number.
[21] Courts 8 Cases that cite this headnote Related contacts and activities; specific jurisdiction [17] Courts Purposeful availment alone will not support Property disputes; wills, trusts, and estates an exercise of specific jurisdiction unless the Purchases of oil and gas interests located in defendant's liability arises from or relates to the Texas by nonresident transferee of Texas oil forum contacts. and gas interests were purposeful, not random, fortuitous, or attenuated contacts with Texas, 6 Cases that cite this headnote and thus transferee had purposely availed itself of the privilege of conducting activities in [22] Courts Texas, as required to support finding of specific Related contacts and activities; specific jurisdiction over transferee in action over jurisdiction unpaid royalties related to oil and gas interests, In determining whether a nonresident defendant despite transferee's having never physically is subject to personal jurisdiction, the Texas entered the State; such ownership allowed
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Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333 (2009) 171 Oil & Gas Rep. 266, 52 Tex. Sup. Ct. J. 395
Supreme Court looks for a substantial connection between defendant's forum contacts and the 17 Cases that cite this headnote operative facts of the litigation.
[26] Constitutional Law 6 Cases that cite this headnote Non-residents in general Only in rare cases will the exercise of jurisdiction [23] Courts not comport with fair play and substantial justice Fraud, racketeering, and deceptive practices when the nonresident defendant has purposefully Allegations that nonresident transferee of Texas established minimum contacts with the forum oil and gas interests received transfer of Texas state. real property from a Texas resident, during the pendency of a Texas suit, for the purpose of 9 Cases that cite this headnote defrauding a Texas resident were sufficient to demonstrate alleged tort occurred at least, in [27] Constitutional Law part, in Texas, as required to support finding of Non-residents in general specific jurisdiction over transferee. V.T.C.A., In determining whether an assertion of Civil Practice & Remedies Code § 17.042.
jurisdiction over defendant comports with 13 Cases that cite this headnote traditional notions of fair play and substantial justice, the Texas Supreme Court considers: (1) burden on the defendant; (2) interests of [24] Constitutional Law the forum state in adjudicating the dispute; (3)
Manufacture, distribution, and sale plaintiff's interest in obtaining convenient and Courts effective relief; (4) interstate judicial system's Property disputes; wills, trusts, and estates interest in obtaining the most efficient resolution Exercise of specific jurisdiction over of controversies; and (5) shared interest of nonresident transferee of Texas oil and gas the several States in furthering fundamental interests would not offend traditional notions substantive social policies. of fair play and substantial justice; controversy 11 Cases that cite this headnote began in Texas, action involved real property within Texas border, prior litigation dealt with this property and it was most efficient to continue to use Texas as the forum to resolve the dispute, and transferee's forum state had much less of an Attorneys and Law Firms interest in resolving Texas real property disputes.
*335 James L. Drought, Calhoun Bobbitt, Drought Drought 14 Cases that cite this headnote & Bobbitt LLP, James W. Carter IV, San Antonio TX, for Petitioner.
[25] Constitutional Law Juan M. Castillo, Ray B. Jeffrey, Patricia F. Miller, Stumpt Non-residents in general Craddock Massey & Farrimond, PC, Jeffrey D. Small, Law Having determined that a nonresident defendant Office of Jeff Small, San Antonio, Douglas Alexander, has minimum contacts with Texas sufficient Alexander Dubose Jones & Townsend, LLP, Austin TX, for to support specific jurisdiction, the Texas Respondent. Supreme Court must determine whether an Opinion assertion of jurisdiction over defendant comports with traditional notions of fair play and Justice GREEN delivered the opinion of the Court. substantial justice.
In this case, we decide whether a Texas court has personal jurisdiction over an out- *336 of-state company accused of
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Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333 (2009) 171 Oil & Gas Rep. 266, 52 Tex. Sup. Ct. J. 395
violating the Uniform Fraudulent Transfer Act (UFTA) by acting as the transferee of Texas oil and gas interests. We hold
II
that, under the facts of this case, the defendant is subject to the jurisdiction of the Texas courts and, therefore, reverse the [1] [2] [3] Under the Texas long-arm statute, the plaintiff court of appeals' judgment and remand for trial. has the initial burden to plead sufficient allegations to confer jurisdiction. American Type Culture Collection, Inc. v. Coleman, 83 S.W.3d 801, 807 (Tex.2002). The defendant I seeking to avoid being sued in Texas then has the burden to negate all potential bases for jurisdiction pled by the plaintiff.
Retamco Operating, Inc. (ROI), a Texas corporation, sued Id. When, as here, the trial court does not make findings Paradigm Oil, Inc. (Paradigm), another Texas corporation, of fact and conclusions of law in support of its ruling, “all in a Texas district court, over unpaid royalties related to oil facts necessary to support the judgment and supported by and gas interests in several Texas counties. After a finding the evidence are implied.” BMC Software Belgium, N.V. of discovery abuse, sanctions were assessed against Paradigm v. Marchand, 83 S.W.3d 789, 795 (Tex.2002) (citations and the trial court entered a $16 million default judgment omitted). Here, ROI has pled that Republic is subject to against Paradigm. 1 Following this interlocutory judgment, personal jurisdiction because it is the fraudulent transferee ROI amended its petition to include a claim against Republic of Texas real property—oil and gas interests. Republic does Drilling Company (Republic), a California corporation, for not dispute that the property at issue is located in Texas or violation of the Uniform Fraudulent Transfer Act. See TEX. that it was transferred from Paradigm to Republic. However, BUS. & COM.CODE § 24.001–.013. ROI claimed that Republic argues that because the transaction causing the during the pendency of the litigation, Paradigm assigned to transfer occurred in California, jurisdiction is negated. For the reasons discussed below, we disagree.
Republic 2 a 72% interest in Paradigm's oil and gas wells and leases in Fayette County and a 72% interest in an option to [4] [5] Personal jurisdiction is a question of law which acquire an interest in a lease in Dimmit and Webb Counties. 3 we review de novo. Id. at 794. “Texas courts may assert in ROI alleged that these transfers were fraudulent, and that they personam jurisdiction over a nonresident if (1) the Texas led to Paradigm's insolvency, rendering it unable to satisfy long-arm statute authorizes the exercise of jurisdiction, and ROI's claims. (2) the exercise of jurisdiction is consistent with federal and state constitutional due-process guarantees.” Moki Mac River In response to the amended petition, Republic filed a special Expeditions v. Drugg, 221 S.W.3d 569, 574 (Tex.2007). appearance, arguing that it does not have minimum contacts with Texas, and that even if it did, ROI's cause of action did not arise from or relate to those contacts. It also argued that (1) The Long Arm Statute the trial court's assertion of jurisdiction offended traditional [6] As an initial matter, Republic argues that ROI “never notions of fair play and substantial justice. Specifically, fulfilled its initial pleading burden to bring Republic within *337 Republic argued that because the allegedly fraudulent the reach of the long-arm statute,” because ROI alleged assignment of the Texas leases occurred entirely outside no acts that constitute “doing business” under the long-arm of Texas—in California—the Texas court did not have statute. But the Texas long-arm statute's broad doing-business personal jurisdiction over Republic. Following a hearing, the language “allows the statute to reach as far as the federal trial court denied Republic's special appearance, making no constitutional requirements of due process will allow.” Id. findings of fact or conclusions of law. Republic then filed at 575 (citations omitted); accord Michiana Easy Livin' an interlocutory appeal with the court of appeals. The court Country, Inc. v. Holten, 168 S.W.3d 777, 788 (Tex.2005). 4 of appeals reversed, holding that Republic is not subject Therefore, we only analyze whether Republic's acts would to personal jurisdiction in Texas. 2007 WL 913206, *6–7. bring Republic within Texas' jurisdiction consistent with Because we conclude that by its actions Republic subjected constitutional due process requirements. See *338 Moki itself to the jurisdiction of Texas courts, we reverse the court Mac, 221 S.W.3d at 575 (citations omitted); Guardian Royal of appeals' judgment. Exch. Assur., Ltd. v. English China Clays, P.L.C., 815 S.W.2d 223, 226 (Tex.1991). 5
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Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333 (2009) 171 Oil & Gas Rep. 266, 52 Tex. Sup. Ct. J. 395
(2) Due Process Constraints *339 First, only the defendant's [7] [8] Under constitutional due-process analysis, personal contacts with the forum are relevant, jurisdiction is achieved when (1) the nonresident defendant not the unilateral activity of another has established minimum contacts with the forum state, and party or a third person. Second, (2) the assertion of jurisdiction complies with “traditional the contacts relied upon must notions of fair play and substantial justice.” Moki Mac, 221 be purposeful rather than random, S.W.3d at 575 (quoting Int'l Shoe Co. v. Washington, 326 fortuitous, or attenuated. Thus, sellers U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945)). We focus who reach out beyond one state and on the defendant's activities and expectations when deciding create continuing relationships and whether it is proper to call the defendant before a Texas court. obligations with citizens of another Int'l Shoe Co., 326 U.S. at 316, 66 S.Ct. 154. state are subject to the jurisdiction of the latter in suits based on their activities. Finally, the defendant must (A) Minimum Contacts seek some benefit, advantage or profit [9] [10] [11] [12] [13] [14] A defendant establishes by availing itself of the jurisdiction. minimum contacts with a state when it “purposefully avails itself of the privilege of conducting activities within the Moki Mac, 221 S.W.3d at 575 (internal citations and forum state, thus invoking the benefits and protections of quotations omitted). Additionally, the minimum-contacts its laws.” Hanson v. Denckla, 357 U.S. 235, 253, 78 S.Ct. analysis is focused on the quality and nature of the defendant's 1228, 2 L.Ed.2d 1283 (1958) (citing Int'l Shoe Co., 326 U.S. contacts, rather than their number. Am. Type Culture at 319, 66 S.Ct. 154). “The defendant's activities, whether Collection, 83 S.W.3d at 806. Here, these considerations lead they consist of direct acts within Texas or conduct outside us to conclude that Republic purposefully availed itself of the Texas, must justify a conclusion that the defendant could privilege of conducting activities in Texas. reasonably anticipate being called into a Texas court.” Am. Type Culture Collection, 83 S.W.3d at 806 (citing World– [17] [18] [19] Republic's contacts with Texas were Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, purposeful, not random, fortuitous, or attenuated. Oil and 100 S.Ct. 559, 62 L.Ed.2d 490 (1980)). A nonresident's gas interests are real property interests. Renwar Oil Corp. contacts can give rise to either specific or general jurisdiction. v. Lancaster, 154 Tex. 311, 276 S.W.2d 774, 776 (1955); Am. Type Culture Collection, 83 S.W.3d at 806. General State v. Quintana Petroleum Co., 134 Tex. 179, 133 S.W.2d jurisdiction arises when the defendant's contacts with the 112, 115 (1939) (citing Sheffield v. Hogg, 124 Tex. 290, 77 forum are continuous and systematic. Id. at 807. Specific S.W.2d 1021, 1030 (1934)). Republic was aware that the oil jurisdiction, which is alleged here, arises when (1) the and gas interests it received were located in Fayette, Dimmit, defendant purposefully avails itself of conducting activities and Webb Counties, Texas. Thus, Republic purposefully in the forum state, and (2) the cause of action arises from took assignment of Texas real property. And while Republic or is related to those contacts or activities. Burger King may not have actually entered the state to purchase this Corp. v. Rudzewicz, 471 U.S. 462, 472, 105 S.Ct. 2174, real property, “[j]urisdiction ... may not be avoided merely 85 L.Ed.2d 528 (1985); National Indus. Sand Ass'n v. because the defendant did not physically enter the forum Gibson, 897 S.W.2d 769, 774 (Tex.1995). In a specific state.” Burger King, 471 U.S. at 476, 105 S.Ct. 2174 (“So long jurisdiction analysis, “we focus ... on the ‘relationship among as a commercial actor's efforts are ‘purposefully directed’ the defendant, the forum [,] and the litigation.’ ” Moki Mac, toward residents of another state, we have consistently 221 S.W.3d at 575–76 (citing Guardian Royal, 815 S.W.2d rejected the notion that an absence of physical contacts at 228). can defeat personal jurisdiction there.”). Republic, by taking assignment of Texas real property, reached out and created a continuing relationship in Texas. Under the assignment, it 1. Purposeful Availment is liable for obligations and expenses related to the interests. [15] [16] We consider three issues in determining whether This ownership also allows Republic to “enjoy ... the benefits a defendant purposefully availed itself of the privilege of and protection of [Texas laws.]” Michiana, 168 S.W.3d at conducting activities in Texas: 787 (citing Int'l Shoe, 326 U.S. at 319, 66 S.Ct. 154). Unlike personal property, Republic's real property will always be in
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Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333 (2009) 171 Oil & Gas Rep. 266, 52 Tex. Sup. Ct. J. 395
Texas, which leaves no doubt of the continuing relationship conduct beyond a particular business transaction at issue....”). that this ownership creates. Republic has reaped benefits from the property in the amount of approximately $1.2 million in revenues, and has sold some [20] We noted in Michiana that “in some circumstances a of the property. single contract may meet the purposeful-availment standard, but not when it involves a single contact taking place outside We have said that “a nonresident may purposefully avoid the forum state.” Id. at 787. (emphasis in original) (holding a particular jurisdiction by structuring its transactions so as that an Indiana RV dealer did not have minimum contacts to neither profit from the forum's laws nor be subject to its with Texas where the dealer's only contact with Texas was jurisdiction.” Michiana, 168 S.W.3d at 785. Certainly this is the Texas resident's decision to place an order from Texas). true in some transactions, such as the purchase of personal But the purchase of real property in Texas does not establish property or out-of-state services. See, e.g., BMC Software a single contact like that of the sale of the recreational vehicle Belgium, 83 S.W.3d at 793 (finding no personal jurisdiction in Michiana. See id. Rather, the purchase and ownership of where details of a personal services contract were discussed real property could “involve[ ] many contacts over a long in Texas); U–Anchor Advertising, Inc. v. Burt, 553 S.W.2d period of time,” which would carry with it certain continuing 760, 763 (Tex.1977) (finding no personal jurisdiction over obligations; e.g., valuation and tax issues, and potential Oklahoma defendant where the contract for installation of expenses of maintaining the interest. See id. In Michiana, highway advertisement signs by Texas company was signed we found it “hard to imagine what possible benefits and and performed in Oklahoma). But we have found that, even protection Michiana enjoyed from Texas law.” Id. at 787, 794. in instances where a contract was signed in another state, an To the RV dealer, the destination of the RV was fortuitous. out-of-state company with no physical ties to Texas still has Here, the location of the transferred asset is not fortuitous; minimum contacts with Texas when it is clear the company the property's location is fixed in this state. This case, then, is purposefully directed its activities towards Texas. See, e.g., different from Michiana, and we have no difficulty imagining Zac Smith & Co., Inc. v. Otis Elevator Co., 734 S.W.2d just how Republic would benefit *340 from the processes 662, 665–66 (Tex.1987) (finding personal jurisdiction where and protections of Texas law. Should Republic ever wish to out-of-state contract was formed “for the sole purpose of enforce rights under its interest in Texas oil and gas leases building a hotel in Texas”); Siskind v. Villa Found. for Educ., and wells, it is this state where those rights can be enforced, Inc., 642 S.W.2d 434, 437 (Tex.1982) (finding personal not California. jurisdiction where enrollment for out-of-state school was “actively and successfully solicited” in Texas even though Republic's contacts with Texas were also not the result of the defendant signed the contract in Arizona). Here, we find the unilateral actions of a third party. Republic was a willing the same. Republic, by purchasing Texas real property, has participant in a transaction with an affiliated Texas company purposefully availed itself of the privilege of conducting to purchase Texas real property. Unlike in Michiana, where activities in Texas. See Michiana, 168 S.W.3d at 784–85. the contacts with Texas and the sale at issue was “initiated entirely by [the plaintiff],” 168 S.W.3d at 784, Republic here went well beyond answering a phone call from a Texas 2. Arise From or Related to resident or shipping goods to Texas. Where a phone call [21] [22] “[P]urposeful availment alone will not support originates or where a shipment ends up may be random or an exercise of specific jurisdiction ... unless the defendant's fortuitous, but when purchasing real property, the location liability arises from or relates to the forum contacts.” matters. Moki Mac, 221 S.W.3d at 579. We look for a “substantial connection between [the defendant's forum] contacts and the Lastly, Republic has sought a “benefit, advantage or profit” operative facts of the litigation.” Id. at 585. Thus, we must in Texas. Id. at 785. The assignment gave Republic valuable consider the claims involved in the litigation to determine the assets in Texas, including the right to enforce warranties and operative facts. ROI alleges that Republic is the transferee of covenants related to the real property. Republic's additional a fraudulent transfer in *341 violation of the UFTA. The conduct since the transfer also indicates that Republic UFTA provides, in part, that “[a] transfer ... is fraudulent ... sought a benefit from the transaction. See Moki Mac, 221 if the debtor made the transfer ... with actual intent to S.W.3d at 577 (“In determining whether the defendant hinder, delay, or defraud any creditor of the debtor; or purposefully directed action towards Texas, we may look to without receiving a reasonably equivalent value in exchange for the transfer or obligation.” TEX. BUS. & COM.CODE
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Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333 (2009) 171 Oil & Gas Rep. 266, 52 Tex. Sup. Ct. J. 395
jurisdiction over Republic comports with “traditional notions § 24.005(a)(1), (2); Trigeant Holdings, Ltd. v. Jones, 183 of fair play and substantial justice.” Guardian Royal, 815 S.W.3d 717, 726 (Tex.App.-Houston [1st Dist.] 2005, pet.
S.W.2d at 228. “Only in rare cases, however, will the exercise denied) (noting that “the UFTA not only creates liability of jurisdiction not comport with fair play and substantial against ‘the person for whose benefit the transfer was made,’
justice when the nonresident defendant has purposefully such as the debtor, but also against ‘the first transferee of the established minimum contacts with the forum state.” Id.
asset,’ or any ‘subsequent transferee’ ”).
at 231 (citing Burger King, 471 U.S. at 477, 105 S.Ct. 2174). Nonetheless, we still consider: (1) the burden on the Republic argues that the focus of the litigation will be on the defendant; (2) the interests of the forum state in adjudicating assignment that took place in California because the operative the dispute; (3) the plaintiff's interest in obtaining convenient facts involved will be whether reasonably equivalent value and effective relief; (4) the interstate judicial system's interest was given for the property and whether the leases were taken in obtaining the most efficient resolution of controversies;
in good faith. See TEX. BUS. & COM.CODE §§ 24.005(a)
and (5) the shared interest of the several States in furthering (2), .006, .009. We agree that the assignment will be an fundamental substantive social policies. Guardian Royal, 815 operative fact, but the real property itself will also be an S.W.2d at 228, 231 (citing Burger King, 471 U.S. at 477– operative fact, or at the very least, will have a substantial 78, 105 S.Ct. 2174). These factors weigh heavily in ROI's connection to the operative facts. Without an asset, no favor. ROI has an interest in resolving this controversy in fraudulent transfer can occur under the UFTA. See id. § Texas because that is where the litigation began. Texas has 24.002(12) ( “ ‘Transfer’ means ... disposing of or parting an interest in resolving controversies involving real property with an asset or an interest in an asset ....”) (emphasis added).
within its borders *342 and, given that the prior litigation Here, the Texas oil and gas interests are the assets. Proof that deals with this property, it is most efficient to continue to these assets were transferred and an assessment of their value use Texas as the forum to resolve the dispute. Moreover, will be essential to the UFTA analysis; without that proof, the California has much less of an interest in resolving Texas real UFTA claim fails.
property disputes than does Texas. Republic may be burdened by litigating outside its home state, but these other factors [23] Republic is alleged to have received transfer of Texas weigh heavily against this burden.
real property from a Texas resident, during the pendency of a Texas suit, for the purpose of defrauding a Texas resident. As a result of this transaction, assets ROI may have recovered from Paradigm are now in the possession of Republic. These III contacts are sufficient to demonstrate that this alleged tort occurred at least, in part, in Texas. See TEX. CIV. PRAC. & Republic has established minimum contacts with Texas, and REM.CODE § 17.042 (“a nonresident does business in this the trial court's assertion of jurisdiction over Republic does state if the nonresident ... commits a tort in whole or in part in not offend traditional notions of fair play and substantial this state”); see also In re Tex. Am. Express, Inc., 190 S.W.3d justice. See Guardian Royal, 815 S.W.2d at 228. Therefore, 720, 725 (Tex.App.-Dallas, no pet.) (noting that a fraudulent we reverse the court of appeals' judgment and remand to the transfer under the UFTA is a tort). trial court for further proceeding consistent with this opinion.
(B) Traditional Notions of Fair Play and Substantial All Citations Justice 278 S.W.3d 333, 171 Oil & Gas Rep. 266, 52 Tex. Sup. Ct.
[24] [25] [26] [27] Having determined that Republic has J. 395 minimum contacts with Texas sufficient to support specific jurisdiction, we must determine whether an assertion of
Footnotes 1 Numerous appeals have been spawned by the ROI v. Paradigm litigation. First, the “death penalty” discovery sanctions against Paradigm were upheld on appeal, but the court of appeals remanded the case for a determination of unliquidated damages. Paradigm Oil, Inc. v. Retamco Operating, Inc., 161 S.W.3d 531, 540 (Tex.App.-San Antonio 2004, pet. denied). The trial court then found actual damages of $5.6 million, as well as, attorney's fees and exemplary damages. Paradigm
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Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333 (2009) 171 Oil & Gas Rep. 266, 52 Tex. Sup. Ct. J. 395
Oil, Inc. v. Retamco Operating, Inc., 242 S.W.3d 67, 70 (Tex.App.-San Antonio 2007, pet. denied). Next, the court of appeals reversed this finding due to insufficient evidence and remanded for another hearing on unliquidated damages. Id. at 75. ROI also originally sued Finley Oilwell Service, but the claim was severed. The result was the same. Finley Oilwell Service, Inc. v. Retamco Operating, Inc., 248 S.W.3d 314, 317 (Tex.App.-San Antonio 2007, pet. denied). Following a default judgment, the trial court entered actual damages of $5.6 million, along with attorney's fees and exemplary damages. Id. The court of appeals reversed this due to insufficient evidence. Id. Finally, one other case arising from this litigation involved a severed claim against the alleged alter ego of Paradigm and Finley. See Carone v. Retamco Operating, Inc., 138 S.W.3d 1, 15 (Tex.App.-San Antonio 2004, no pet.) (dismissing claim against alleged alter ego of companies due to lack of personal jurisdiction).
2 Paradigm and Republic are affiliated, but the record is unclear as to the extent and structure of that affiliation. 3 ROI also sued Douglas McCallum, LLC (DMLLC), a Colorado limited liability company, alleging fraudulent transfer.
DMLLC was the recipient of the remaining 28% of the assignment of interests and options. DMLLC also filed a special appearance, which was granted following the court of appeals holding in this case. DMLLC's special appearance ruling was then appealed and affirmed. Retamco Operating, Inc. v. McCallum, 2008 WL 939196, *5 (Tex.App.-San Antonio 2008). ROI has appealed this ruling to the Court as well. These two cases pose almost identical issues, as DMLLC argues it is not subject to personal jurisdiction because the contract to assign the oil and gas interests was signed in Colorado. See Retamco Operating, Inc. v. McCallum, 278 S.W.3d 778 (Tex.2009) (per curiam).
4 The Texas long-arm statute provides:
“In addition to other acts that may constitute doing business, a nonresident does business in this state if the nonresident: (1) contracts by mail or otherwise with a Texas resident and either party is to perform the contract in whole or in part in this state; (2) commits a tort in whole or in part in this state; or (3) recruits Texas residents, directly or through an intermediary located in this state, for employment inside or outside this state.” TEX. CIV. PRAC. & REM.CODE § 17.042.
5 Republic also argues that the business certification waiver provision of section 8.01B(13) of the Texas Business Corporation Act limits jurisdiction. TEX. BUS. CORP. ACT § 8.01B(13) (“a foreign corporation shall not be considered to be transacting business in this state ... by reason of ... acquiring, in transactions outside of Texas, royalties and other non-operating mineral interests”). The certification provisions of the Business Corporation Act do not limit the scope of the Texas long-arm statute. Moki Mac, 221 S.W.3d at 575 (“the long-arm statute's broad doing-business language allows the statute to ‘reach as far as the federal constitutional requirements of due process will allow’ ”). Thus, the Act has no bearing on constitutional due-process analysis. See Amer. Type Culture Collection, 83 S.W.3d at 806 (“We rely on precedent from the United States Supreme Court as well as our own state's decisions in determining whether a nonresident defendant has met its burden to negate all bases of jurisdiction.”) Further, the business certification requirements do not act as a definitive list of those out-of-state defendants that would or would not have a reasonable expectation of being called into a Texas courtroom.
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
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Richardson v. First Nat. Life Ins. Co., 419 S.W.2d 836 (1967)
General residuary jurisdiction of district court is not concurrent with the jurisdiction of other KeyCite Yellow Flag - Negative Treatment courts, but is an exclusive jurisdiction within its Distinguished by Mr. W. Fireworks, Inc. v. Mitchell, Tex., October 7, field. Vernon's Ann.Civ.St. art. 1909; Vernon's 1981 Ann.St.Const. art. 5, § 8.
419 S.W.2d 836 Supreme Court of Texas. Cases that cite this headnote
Kent W. RICHARDSON, Petitioner, [3] Courts v. County courts FIRST NATIONAL LIFE INSURANCE Where plaintiff alleged that defendant had failed COMPANY, Respondent. to pay him commissions due on policies sold according to agency contract with defendant No. A—11613. | July 26, 1967.
and that defendant owed him “at least” $314.37 | Rehearing Denied Nov. 1, 1967.
and where plaintiff demanded that defendant Suit for accounting and payment of commissions due and make an accounting of commissions, suit was owing to plaintiff from insurance policies sold according to not an equitable action but a money demand contract with defendant. The District Court, Bexar County, in an ordinary suit on a written contract and dismissed at plaintiff's costs on jurisdictional grounds. On being within jurisdiction of county court, could appeal, the San Antonio Court of Civil Appeals of the Fourth not be heard in district court. Rules of Civil Supreme Judicial District, 408 S.W.2d 524, affirmed and Procedure, rule 172; Vernon's Ann.Civ.St. art. plaintiff brought error. The Supreme Court, Griffin, J., held 1909; Vernon's Ann.St.Const. art. 5, § 8. that allegations asking for an accounting and for recovery in 8 Cases that cite this headnote the sum of ‘at least’ $314.37 did not present a suit in equity within general residuary jurisdiction of the District Court but merely presented a money demand for less than $500, the [4] Courts jurisdictional minimum of District Court. Texas Allegation seeking an accounting of commission Affirmed. due under employment contract did not make an equitable action of plaintiff's demand Smith, Walker, and Steakley, JJ., dissented. within general residuary jurisdiction of district court. Vernon's Ann.Civ.St. art. 1909; Vernon's Ann.St.Const. art. 5, § 8.
West Headnotes (7) 4 Cases that cite this headnote
[1] Courts [5] Courts Texas Allegations, pleadings, and affidavits District court has general residuary jurisdiction Allegations of plaintiff's petition must state facts only in those cases for which a remedy or which affirmatively show the jurisdiction of the jurisdiction is not provided by law or the court in which action is brought. Constitution. Vernon's Ann.Civ.St. art. 1909; Vernon's Ann.St.Const. art. 5, § 8. 35 Cases that cite this headnote
1 Cases that cite this headnote [6] Pleading General and specific allegations [2] Courts If plaintiff pleads generally a state of facts, Exclusive or Concurrent Jurisdiction and goes further and pleads specifically and
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Richardson v. First Nat. Life Ins. Co., 419 S.W.2d 836 (1967)
particularly on the same subject, he cannot rely but that defendant has failed and refused to pay plaintiff upon the general allegations but is confined in the commissions due him on the policies ‘pursuant to the his recovery to those specifically and particularly provisions of said contract.’ Plaintiff further alleged that pleaded since specific allegations control those he has ‘demanded an accounting for said commissions' and of a general character. has been refused such accounting by defendant at all times.
Then follows the only allegation of any sum due plaintiff by 8 Cases that cite this headnote defendant: ‘That plaintiff believes that at least the amount of Three Hundred Fourteen and 37/100 Dollars ($314.37) is [7] Courts due him for commissions from the policies sold under said Allegations and prayers in pleadings contract.’
Jurisdiction of various courts to determine suits In his prayer plaintiff prays that defendant be required to for debts is based on allegations in petition as to make an accounting, ‘that plaintiff have judgment against the amount in controversy. defendant for at least $314.37, and for such other sums as shall be found due on such accounting,’ and for general relief.
18 Cases that cite this headnote [1] [2] Petitioner's contention is based upon the fact that the constitutional and statutory provisions confer upon the district court general residuary jurisdiction. This contention has application only when considered in connection with Attorneys and Law Firms the language of Art. V, Sec. 8 of our State Constitution, *837 Colunga & Wennermark, John D. Wennermark, San Vernon's Ann.St. That language does not say the district court Antonio, for petitioner. has jurisdiction of all suits that may be brought. The exact language of the residuary clause is, ‘The District Court shall Heath & Davis, Dudley D. McCalla, Austin, for respondent. have original jurisdiction * * * (in enumerated cases) when the matter in controversy shall be valued at or amount to five Opinion hundred dollars exclusive of interest * * * and shall have general original jurisdiction over all causes of action whatever GRIFFIN, Justice.
For which a remedy or jurisdiction is not provided by law Petitioner, as plaintiff below, filed suit in a district court of or this Constitution * * *.’ Art. 1909, Revised Civil Statutes Bexar County, Texas, against respondent, as defendant, for 1925, as amended, contains language of similar import. The commissions due him as agent for the defendant. He alleged residuary clause of the Constitution applies Only to those ‘that plaintiff believes that at least the amount of Three cases ‘for which a remedy or jurisdiction Is not provided’ Hundred Fourteen and 37/100 Dollars ($314.37) is due him by law or the Constitution. The jurisdiction given by this for commissions from the policies sold under said contract.’ language is not concurrent with the jurisdiction of the other He further asked for an accounting. Defendant filed its plea courts, but is an exclusive *838 jurisdiction within its field. to the jurisdiction of the court because it appeared ‘from the (All emphasis is that of this Court.) face of the petition that the matter in controversy, exclusive of interest, amounts in value to less than $500.00,’ etc. The trial [3] The only way the district court's jurisdiction could be court sustained this plea and dismissed the suit at plaintiff's sustained would be to hold that this is a suit in equity. costs. On appeal, the Court of Civil Appeals affirmed. 408 That is not correct. This suit is an ordinary suit on a S.W.2d 525. We affirm the judgments of the courts below. written contract of employment which plaintiff attaches to his petition. Plaintiff's demand is a money demand. The Petitioner says that his suit was one for an accounting and residuary clause of Art. V, Sec 8 applies only to causes of that it was properly brought in the district court, as that action for which a remedy or jurisdiction Is not provided by court is a court of general jurisdiction. The allegations of law or the Constitution. The Constitution provides that suit plaintiff's petition are that on February 13, 1961, plaintiff must be brought in the county court for a debt that exceeds entered into a contract with defendant to sell insurance $200.00 and does not exceed $500.00. Rule 172, Texas Rules policies in defendant's company as defendant's agent; that of Civil Procedure, provides among other things that when plaintiff has in all things complied with the ‘stipulations, an investigation of accounts or examination of vouchers is conditions, and agreements' placed on him by the contract,
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Richardson v. First Nat. Life Ins. Co., 419 S.W.2d 836 (1967)
necessary in any suit, the trial court ‘shall appoint an auditor there are mutual accounts between the or auditors to state the accounts between the parties,’ etc. parties, that is, where each of them has received and paid on account of the other, as distinguished from matters This plaintiff's cause of action herein is not an equitable of set-off and accounts on one side action; it is not an action for which no remedy nor jurisdiction only. (2) Where the accounts are all is provided by the Constitution and the law. Therefore, it is on one side but there are circumstances not entitled to be heard in the district court, but must be heard of great complication or difficulties in in the county court. the way of adequate relief at law. To [4] With regard to the contention that the allegation determine what degree of complication is seeking an accounting makes an equitable action of plaintiff's required for a pure accounting the rule demand and also makes the residuary clause of Art. V, was established by the English courts Sec. 8 controlling, there is an excellent annotation in 3 that the account be so complicated that A.L.R.2d 1310, entitled ‘Availability of Equitable Remedy of a court of law would be incompetent Accounting Between Principal and Agent.’ In this annotation to examine it by application of the there is quoted from Restatement of Agency, Vol. 2, Sec. 399, trial procedure at nisi prius proceedings the rules governing an accounting suit between principal and although many of the present statutes and agent: practice rules governing courts of general ‘A principal does not have a bill for jurisdiction enable matters of accounting an account or other equitable relief to be referred to officers or referees. The against an agent merely from the fact only test recognized by modern decisions of agency or from the fact that the is that if the facts and accounts presented agent has received something for the relate to so many different transactions principal. Equitable relief may, however, and items in such relationship to each be granted not only on the ground that other that it is doubtful whether adequate there is no adequate remedy of law, relief could be obtained at law, equity as where an injunction is sought, but should entertain jurisdiction. * * *’ also where there is a close fiduciary relationship. * * * On the other hand, unless there is such a complication *839 From the above annotation and the excerpts we have of accounts that it is difficult for the cited, we find that this suit does not qualify as an equitable machinery of the law courts to cope proceeding for which our Constitution and statutes provide no with them, the principal ordinarily cannot remedy or jurisdiction. bring a bill in equity for money due; if his [5] The general rule is that the allegations of the plaintiff's remedy otherwise would be solely in the petition must state facts which affirmatively show the courts of law, he cannot bring a bill for jurisdiction of the court in which the action is brought. Brown an account merely on the ground of the v. Peters, 127 Tex. 300, 94 S.W.2d 129 (1936); Smith v. agency relationship.’ Horton, 92 Tex. 21, 46 S.W. 627 (1898); Texas & N.O.R.R.
Co. v. Farrington (Tex.Com.App., 1905), 40 Tex.Civ.App. 205, 88 S.W. 889.
These same rules apply to an action of an agent against his [6] ‘The rule of law seems to be well settled in this state principal. 3 A.L.R.2d 1369 et seq., s 19. This annotation also that, if plaintiff Pleads generally a state of facts, and Goes quotes from 4 Pomeroy Equity Jurisprudence, 5th Edition, further and pleads specifically and particularly on the same Sec. 1421, subject, He cannot rely upon the general allegations, but is ‘The instances in which legal remedies confined in his recovery to those specifically and particularly are held to be inadequate and thus a pleaded. Specific allegations will control those of a general suit in equity for an accounting may character.’ (Citing authorities.) Houston Printing Company v. be brought are stated to be: (1) Where
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Richardson v. First Nat. Life Ins. Co., 419 S.W.2d 836 (1967)
Hunter (Tex.Civ.App. 1937), 105 S.W.2d 312, 318, aff'd 129 ($314.37), is due him for commissions from the policies sold Tex. 652, 106 S.W.2d 1043. under said contract.’ Then, follows the prayer:
‘Wherefore, premises considered, Plaintiff prays that [7] In our case the Constitution and statutes do give Defendant be required to make an accounting, that Plaintiff jurisdiction to various courts to determine suits for debt, have Judgment against the Defendant for at least the sum based on the allegations in the petition as to the amount in of Three Hundred Fourteen and 37/100 Dollars ($314.37), controversy. Also, in our case the only allegation as to a and for such further sums as shall be found due on such definite debt is $314.37, and that amount is not within the accounting, for a reasonable *840 sum as attorneys' fees, for jurisdiction of a district court. cost of suit, and for such other and further relief to which he may be entitled either at law or in equity.’ (Emphasis added.)
We affirm the judgments of both courts below.
There are certain provisions of the contract which conclusively demonstrate that Richardson by the decision of CALVERT, C.J., concurs in the result.
this Court has been deprived of his constitutional right to a trial. His petition alleges that ‘Defendant is a foreign Life Insurance Company, having its home office at * * * Phoenix Dissenting Opinion On Motion for Rehearing 14, Arizona, which has designated * * * Commissioner SMITH, Justice. of Insurance, State Board of Insurance, * * * as its duly authorized agent and attorney in fact, etc.’ So far as this record I respectfully dissent. This case presents the narrow question indicates, all accounts and records of premium collections are of whether the district or county court has jurisdiction to kept by the Company at its home office in Phoenix, Arizona. entertain the suit. In order to determine this question, the Regardless of where such records are kept, Richardson can nature of the relief sought must be first determined. This never successfully obtain a judgment until First National is is a suit for equitable relief in a situation where the terms compelled to perform its part of the agreement. It follows that of the contract reveal a close fiduciary relationship between he could not at the time of filing suit know the exact amount Richardson and First National. Richardson alleged in his due him. Consider the following provisions of the contract petition facts showing that he was seeking an accounting. in determining whether this is a suit for an accounting, an The contract attached to the petition reflects that First equitable action, or is, as stated by this Court, ‘* * * an National was under a duty to keep an accurate account of all ordinary suit on a written contract of employment.’ commissions due Richardson. The contract specifically states To be found in the contract are provisions that all life that ‘(t)he ledger account of the Company shall be competent policies written by Richardson, the face amount of which and conclusive evidence of the state of accounts between you is $50,000.00 or more, First National has the right to fix (Richardson) and the Company.’ It is clear that any records the Amount of the first year commission. The contract kept by Richardson would be of no avail in the event of the provides that this commission shall not be reduced below the failure of First National to divulge the contents of its ledger commission provided in Paragraph A, Section 4 by More than accounts pertaining to Richardson. First National collected 10% Of the first year premium. To further complicate the all premiums, but, according to Richardson's pleadings, ‘* * matter of accounting and to point up the error of this Court's * failed and refused, and still fails and refuses, to perform holding, there appears as a part of the contract a ‘supplement said contract on its part, in that Defendant, notwithstanding to agent's agreement’, dated June 2, 1959, which reads:
said contract, did collect monies on the policies sold by Plaintiff pursuant to said contract, and has failed and refused 'It is further understood and agreed that, to pay Plaintiff the commissions due on said policies to him on all earned premiums, after the first pursuant to the provisions of said contract. That Plaintiff premium, you will receive a servicing has demanded an accounting for said commissions from Commission of 15% Of premiums; such Defendant repeatedly since May 1st, 1964, and has been servicing commission to continue so long refused such accounting by Defendant at all times.’ Then, as the business remains in force with the follows the allegation: ‘* * * Plaintiff believes that at least Company, and provided that this contract the amount of Three Hundred Fourteen and 37/100 Dollars is in full force and effect, and further provided that you are actually servicing
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Richardson v. First Nat. Life Ins. Co., 419 S.W.2d 836 (1967)
said business to the satisfaction of the Daily, 161 Ill. 379, 43 N.E. 1096, we Company.' held that, as a general rule, in matters of account courts of equity have a general jurisdiction where the accounts Finally, I point to the provision of the contract dealing with are mutual; also where they are on but ‘Commissions on Conversions.’: one side, a discovery being sought which ‘Commissions on conversions, policies is material to the relief prayed. And substituted or rewritten for another on again in the case of Gleason & Bailey the same life, modified forms of policies Manf. Co. v. Hoffman, 168 Ill. 25, 48 and policies other than as specified above N.E. 143, it was held that jurisdiction shall be governed, irrespective of any in equity exists where there are mutual other provisions of this agreement, by the accounts between the parties, or where rules and practices of the Company as the account is all on one side, and there established from time to time.’ are complications or difficulties in the way of an adequate remedy at law, or where a fiduciary relation exists, and a Under the record in this case, Richardson's suit should be duty rests upon the respondent to render classed as a proceeding in equity. He has clearly brought an account. In the case of Crown Coal & a suit where all of the essential facts are peculiarly within Tow Co. v. Thomas, 177 Ill. 534, 52 N.E. the knowledge of First National. Therefore, Richardson 1042, it was again held that equity may was required only to allege, as he did, with reasonable take jurisdiction in matters of account certainty the employment as agent for First National, the when the state of account between the Manner of Compensation, the performance of services parties is intricate and complicated, or so showing some commissions to be due, and the facts and involved with the rights of third parties circumstances demonstrating that the correct amount could that it would be difficult for a jury to not be ascertained without an accounting. See Brea v. unravel the numerous transactions, and McGlashan (1934) 3 Cal.App.2d 454, 39 P.2d 877; Arbuckle that the jurisdiction of equity in matters v. Clifford F. Reid, Inc. (1931) 118 Cal.App. 272, 4 P.2d 978; of account does not depend upon the Shepard v. Brown (1863) 9 Jur.NS (Eng) 195; Williams v. existence of a remedy at law, but upon Finlaw, Mueller & Co. (1928) 292 Pa. 244, 141 A. 47; Miller the adequacy and practicability of such v. Russell (1906) 224 Ill. 68, 79 N.E. 434. This latter case remedy and upon the discretion of the emphasizes the fact that the agent in that case, as here, was court. Bispham's Principles of Equity without adequate means of ascertaining the true status of the (4th Ed.) p. 536, and cases cited in accounts. The Supreme Court of Illinois in Miller, supra, a note 2. We think the facts in this case case factually similar to the present case, held against the clearly within the rule. The defendant contention of Miller that the cause of action was an ordinary in error entered into a contract with the suit on a contract. The Court rejected Miller's contention that association, represented by the plaintiffs the Company occupied no fiduciary relation to Russell and in error, under which he made many that the Company did not hold *841 the money received sales of land in conformity with said by it in trust for Russell. The Court also rejected Miller's development contract. He was to receive contention that Russell had ‘an ample and adequate remedy compensation in small amounts on each at law’. of the sales, and this compensation was paid to the association, and entered The Court, after stating that Russell's ‘objections go to the upon their books. The payments were jurisdiction of a court of equity’, held: not made to him, but by the terms of ‘A similar question has been before us on the contract were all payable to the other occasions, and the law settled, at association. He had no means of telling least in this state, against the contention when or in what amounts such payments of plaintiffs in error. In Hair Co. v. were made except through its books,
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Richardson v. First Nat. Life Ins. Co., 419 S.W.2d 836 (1967)
and it is apparent from the evidence Vernon's Annotated Texas Statutes 1 , Article 1949; Article that the association neglected and refused 1950. Jurisdiction in the district court, on the other hand, to give him this information. He made commences at $500 and is without limit. See Tex.Const., frequent demands upon its officers for Article V, Section 8, Vernon's Ann.St. Article 1906. Thus, that purpose, which were refused. While between $500 and $1,000 the county courts and the district the account was, therefore, upon one courts have concurrent jurisdiction. To be considered in side, the information as to the state of connection with the above provisions are the statutory and the account was entirely in the possession constitutional provisions which confer upon the district court of the association. The account stated by general, residual jurisdiction. Thus, by Article V, Section 8 of the master was shown to be complicated the State Constitution, it is provided in part: and very intricate, and covered many 'The District Court * * * shall have general original pages of the abstract. Manifestly it jurisdiction over all causes of action whatever for which would have been practically impossible a remedy or jurisdiction is not provided by law or for a jury, even with the books in this Constitution, and such other jurisdiction, original or evidence, to figure out the amount due appellate, as may be provided by law.' the complainant. For that, if no other, Article 1909, provides: reason, the claim of the complainant 'Such (district) court shall have general was the proper subject of an accounting original jurisdictions over all causes of by the master. Moreover, the bill not action, for which a remedy or jurisdiction only prays for an accounting, but for is not provided by law or the constitution, a discovery against the association. The and such other jurisdiction, original and contract between the parties provided appellate as may be provided by law.'
that complainant should have the right to make resale of all forfeited shares, and the evidence shows that 186 shares were forfeited by the association, and no report First National argues that it affirmatively appears from the whatever of them made to him. He had no pleadings that the amount in controversy is less than $500 and adequate means of ascertaining this fact therefore jurisdiction for this case is not in the district court. I except by a bill for discovery. The bill is disagree with this conclusion. It does not affirmatively appear not, however, a bill for general discovery, from the pleadings that this cause falls within the jurisdiction but one seeking the discovery of facts of the county court. In fact, if the suit had been brought in upon which the complainant bases his the county court, the sustaining of a plea to the jurisdiction action, which he alleges are wrongfully would have been proper. As the county court is a court of withheld from him.’ limited jurisdiction, it is without power to render a judgment which exceeds its constitutional limit of $1,000. If, of course, jurisdiction in the instant case were improperly placed in the If Courts of equity have general jurisdiction, we turn to the county court an entry of a judgment exceeding $1,000 would question we have before us.
be void. No authority need be cited for the proposition that a In determining whether the district or county court has void judgment is an absolute nullity and, as such, confers no jurisdiction to entertain this suit in equity, I pose the rights and binds no one. These propositions are elementary. hypothetical question: What would happen if, under *842 As was stated in Freeman v. Freeman, 160 Tex. 148, 327 the same allegations, suit had been brought in the county S.W.2d 428 (1959): court? In deciding this question, it should be kept in mind 'Judgments are void for lack of power that, disregarding certain types of suits (none of which in courts to render them when they are involved here) where jurisdiction is determined by the are rendered contrary to constitutional subject matter of the case, the county court has potential or valid statutory prohibition or outside jurisdiction when the amount in controversy is between $200 limiting constitutional or statutory and $1,000. See Texas Constitution, Article V, Section 16; authority.'
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Richardson v. First Nat. Life Ins. Co., 419 S.W.2d 836 (1967)
it should be pointed out that the contract contains the usual Thus, if the present case were brought in the county court, provisions *843 for commissions for the sale of policies.
and if a plea to the jurisdiction was not sustained and if In my view of the case, however, this is immaterial as this subsequently developed that Richardson was entitled to a Court is here concerned solely with determining the proper judgment of more than $1,000, the court would be powerless court in which this lawsuit should be maintained on the basis to enter the judgment. The point is that an Allegation that of the pleadings. The proper forum for this case is in the Richardson is entitled to at least $314.37 plus whatever an district court pursuant to Article V, Section 8 of the State accounting may reveal he is entitled to could yield a total of Constitution, supra, and Article 1909, supra.
more than $1,000. The county court being unable to enter a judgment for more than $1,000, Richardson would then be The judgments of the trial court and the Court of Civil forced to seek his relief in a district court. This Court should Appeals should be reversed and the cause remanded to the refuse to countenance such a spectacle. district court for a trial on the merits. As I read the pleadings, Richardson believes he is entitled to at least $314.37, and such additional sums to which an WALKER and STEAKLEY, JJ., join in this dissent. accounting may reveal he is owed. As the case has not gone to a trial on its merits and there is no statement of facts, All Citations this Court has no way of knowing what, if anything, First 419 S.W.2d 836 National may owe Richardson under the contract, although
Footnotes 1 All statutory references hereinafter contained are to Vernon's Annotated Texas Civil Statutes.
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Rittenmeyer v. Grauer, 104 S.W.3d 725 (2003)
Actions by or Against Nonresidents, Personal Jurisdiction In; “Long-Arm”
KeyCite Yellow Flag - Negative Treatment Jurisdiction Distinguished by TexVa, Inc. v. Boone, Tex.App.-Dallas, November 12, 2009 A Texas court may exercise jurisdiction over a nonresident defendant if (1) the Texas long-
104 S.W.3d 725 arm statute authorizes the exercise of jurisdiction Court of Appeals of Texas, and (2) the exercise of jurisdiction is consistent Dallas. with federal and state guarantees of due process.
V.T.C.A., Civil Practice & Remedies Code §§ Ronald A. RITTENMEYER, Solely in his Capacity 17.041–17.045.
as Plan Administrator of AFD Fund, The Post– Confirmation Estate of the Bankruptcy Cases Cases that cite this headnote of AmeriServe Food Distribution, Inc., and its Affiliates, and Not Individually, Appellant, [2] Constitutional Law v. Non-residents in general Peter GRAUER, Benoit Jamar, Federal due process mandates that non-resident and Leif F. Onarheim, Appellees. defendant “purposefully avail” itself of the privilege of conducting activity within the forum No. 05–02–01866–CV. | April 17, state, thus invoking the benefits and protections 2003. | Rehearing Overruled May 20, 2003. of its laws, in order to be subject to state's jurisdiction. U.S.C.A. Const.Amend. 14.
Bankruptcy plan administrator of corporate estate sued various directors and companies alleging breach of fiduciary Cases that cite this headnote duty resulting from corporate merger. Directors filed special appearance and contested jurisdiction. The County Court at Law No. 2, Dallas County, Fred Harless, J., sustained the [3] Courts special appearance and dismissed claims against the directors. Purpose, intent, and foreseeability; Administrator appealed. The Court of Appeals, James, J., held purposeful availment that: (1) evidence supported implied finding that corporate In order to establish personal jurisdiction over a headquarters were not in state; (2) state of incorporation non-resident defendant, the defendant's conduct was crucial factor in determining personal jurisdiction over and connection with the state must be such that directors; (3) voting for merger in another forum was not it could reasonably anticipate being sued in the purposefully availing directors of privilege of acting in state; forum state. (4) directors were not transacting business in state; (5) voluntary association with corporation did not lead directors Cases that cite this headnote to anticipate being haled into state court; and (6) directors actions out-of-state did not result in direct injury within state. [4] Appeal and Error Extent of Review Dependent on Nature of Affirmed. Decision Appealed from On appeal of order dismissing claims for lack of personal jurisdiction, the West Headnotes (22) Court of Appeals determines whether (1)
the nonresident defendant has purposefully established minimum contacts with Texas and, if [1] Constitutional Law so, (2) the exercise of jurisdiction comports with Non-residents in general notions of fair play and substantial justice.
Courts 1 Cases that cite this headnote
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Rittenmeyer v. Grauer, 104 S.W.3d 725 (2003)
[5] Courts Cases that cite this headnote Unrelated contacts and activities; general jurisdiction [9] Courts Courts Presumptions and Burden of Proof as to Related contacts and activities; specific Jurisdiction jurisdiction When a nonresident defendant challenges a trial A defendant's contacts with a forum can give rise court's exercise of personal jurisdiction through to either specific or general jurisdiction. a special appearance, it carries the burden of negating all bases for personal jurisdiction.
1 Cases that cite this headnote Cases that cite this headnote [6] Courts Related contacts and activities; specific [10] Courts jurisdiction Determination of questions of jurisdiction For a court to exercise specific jurisdiction over in general a nonresident defendant, two requirements must The exercise of personal jurisdiction requires the be met: (1) the defendant's contacts with the trial judge to resolve any factual disputes before forum must be purposeful, and (2) the cause of applying the jurisdictional formula. action must arise from or relate to those contacts.
Cases that cite this headnote 3 Cases that cite this headnote
[11] Appeal and Error [7] Courts Cases Triable in Appellate Court Related contacts and activities; specific On appeal, the appropriate standard of review jurisdiction of the trial court's order granting or denying a Courts special appearance is a de novo review.
Agents, Representatives, and Other Third Parties, Contacts and Activities of as Basis for Cases that cite this headnote Jurisdiction In evaluating whether there are sufficient [12] Appeal and Error contacts between forum state and nonresident Cases Triable in Appellate Court defendant to establish specific jurisdiction, Appeal and Error the defendant's purposeful conduct, not the Proceedings preliminary to trial unilateral activity of the plaintiff or others, must The Court of Appeals applies a factual have caused the contact.
sufficiency of the evidence review to all of the 3 Cases that cite this headnote evidence before the trial judge on the question of jurisdiction, and once all factual disputes are resolved the court examines de novo whether the [8] Courts facts negate all bases for personal jurisdiction.
Presumptions and Burden of Proof as to Jurisdiction Cases that cite this headnote The plaintiff has the initial burden of pleading facts sufficient to bring a nonresident defendant [13] Appeal and Error within the provisions of the Texas long-arm Particular findings implied statute.
When a trial court does not issue findings of fact and conclusions of law with its special
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Rittenmeyer v. Grauer, 104 S.W.3d 725 (2003)
appearance ruling, all facts necessary to support courts personal jurisdiction over nonresident the judgment and supported by the evidence are directors who voted for merger that led to tort implied on appeal. allegations by corporation; incorporating state had strong, compelling interest to provide forum Cases that cite this headnote for resolution of disputes, only a portion of corporate assets were located in Texas.
[14] Appeal and Error 6 Cases that cite this headnote Proceedings preliminary to trial When the appellate record of a special appearance ruling includes the reporter's and [18] Courts clerk's records, these implied findings are not Tortious or intentional conduct; fraud and conclusive and may be challenged for legal and breach of fiduciary duties factual sufficiency in the appellate court. Nonresident directors did not “purposefully avail” themselves of privilege of acting in Texas, Cases that cite this headnote to be subject to personal jurisdiction of Texas court, by voting for merger that resulted in [15] Appeal and Error allegations of breach of fiduciary duty, given that Proceedings preliminary to trial vote was taken in Florida during board meeting. For legal sufficiency points of a special Cases that cite this headnote appearance ruling on appeal, if there is more than a scintilla of evidence to support the finding, the no evidence challenge fails. [19] Courts Tortious or intentional conduct; fraud and Cases that cite this headnote breach of fiduciary duties A breach of fiduciary duty by a corporate [16] Appeal and Error director's action of voting at a board meeting Particular findings implied occurs in the state where the meeting was held, making it forum state for subsequent tort action There were no findings of fact and conclusions for purposes of specific jurisdiction.
of law for special appearance ruling finding court lacked personal jurisdiction over nonresident Cases that cite this headnote directors of corporation, and thus, conflicting evidence of location of corporate headquarters on date of alleged breach of fiduciary duty [20] Courts by directors required implied finding that Tortious or intentional conduct; fraud and headquarters were not in Texas, where various breach of fiduciary duties officers and directors testified that headquarters Nonresident directors did not purposefully were not in Texas or were in transition to Texas choose to move corporate headquarters to Texas, as time of alleged breach. and thus, they were not transacting business in Texas to confer personal jurisdiction in Cases that cite this headnote Texas court in action brought by Chapter 11 plan administrator alleging directors breached [17] Courts their fiduciary duty in approving a merger, Tortious or intentional conduct; fraud and where administrator failed to introduce evidence breach of fiduciary duties that directors “purposefully” chose to move headquarters to state or that directors were Mere fact that Delaware corporation had responsible for headquarters being consolidated its headquarters in Texas at the time of in Texas.
alleged breach of fiduciary duty was not sufficient minimum contacts to give Texas
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Rittenmeyer v. Grauer, 104 S.W.3d 725 (2003)
2 Cases that cite this headnote
OPINION [21] Courts Tortious or intentional conduct; fraud and Opinion By Justice JAMES.
breach of fiduciary duties Ronald A. Rittenmeyer, solely in his capacity as plan Nonresident directors' voluntary association with administrator of AFD Fund, the post-confirmation estate corporation with headquarters in Texas did of the bankruptcy cases of AmeriServe Food Distribution, not lead them to reasonably anticipate being Inc., and its affiliates, and not individually, appeals the haled into Texas court, but did subject them to interlocutory orders of the trial court granting the special jurisdiction of court in state of incorporation, in appearances of Peter Grauer, Benoit Jamar, and Leif action brought by Chapter 11 plan administrator Onarheim and dismissing Rittenmeyer's claims against them. alleging directors breached fiduciary duty in See TEX. CIV. PRAC. & REM.CODE ANN. § 51.014(a) approving merger that eventually led corporation (7) (Vernon Supp.2003). Appellant brings a single issue on to file for bankruptcy protection. appeal: whether Texas courts may exercise specific personal jurisdiction *728 over nonresident directors of a foreign 1 Cases that cite this headnote corporation headquartered in Texas for the directors' acts occurring outside Texas. We hold that a nonresident director [22] Courts of a foreign corporation is not subject to personal jurisdiction Jurisdiction of Agents, Representatives, or solely because the corporation has its headquarters in Texas.
Other Third Parties Themselves We also hold the trial court did not err in determining Merger of nonresident corporations that resulted appellees lacked sufficient minimum contacts with Texas to in financial collapse and bankruptcy was not permit the Texas courts to exercise personal jurisdiction over result of nonresident directors' action directed them. We affirm the trial court's orders sustaining appellees' at Texas or resulting in injury in Texas to special appearances and dismissing appellant's claims against confer Texas courts with specific personal them. jurisdiction over directors; “brunt of injury” occurred to nonresident majority shareholder, directors did not intend that merger would result FACTUAL BACKGROUND in bankruptcy, chief executive officer, rather than directors, was central figure or guiding light Appellees are three of the eight directors of AmeriServe of merger proposal, and majority of corporate Food Distribution, Inc. (AmeriServe) and are not residents operations and personnel was not located in of the State of Texas. Grauer and Jamar are residents Texas. of Connecticut, and Onarheim is a resident of Norway.
AmeriServe is incorporated in Delaware, its executive and 3 Cases that cite this headnote management offices were in Wisconsin and Connecticut, and its operational headquarters were in Texas. On January 29, 1998, at a meeting in Miami, Florida, the board of directors of AmeriServe approved the merger of AmeriServe with a larger Attorneys and Law Firms food distribution company, ProSource, Inc. Onarheim was not physically present at the Florida meeting but participated *727 James E. Coleman, Jr., Fletcher L. Yarbrough, Jeffrey by telephone from Norway. AmeriServe's fortunes after the S. Levinger, Carrington, Coleman, Sloman & Blumenthal, merger were not good, and on January 31, 2000, AmeriServe L.L.P., Dallas, for Appellant.
filed for bankruptcy.
Rodney Acker, Jenkens & Gilchrist, P.C., Jay J. Madrid, Winstead Sechrest & Minick, P.C., Dallas, for Appellees. Appellant was appointed the plan administrator of AmeriServe's post-confirmation estate, the purpose of which Before Justices JAMES, BRIDGES, and RICHTER. was to acquire funds, including through litigation, for
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Rittenmeyer v. Grauer, 104 S.W.3d 725 (2003)
distribution to AmeriServe's unpaid creditors. Appellant, on A defendant is not subject to jurisdiction here if its Texas behalf of the post-confirmation estate, brought suit in Dallas contacts are random, fortuitous, or attenuated. Am. Type County Court at Law No. 2 against AmeriServe's parent Culture Collection, Inc., 83 S.W.3d at 806. companies, its officers and directors, and the companies that advised and financed the merger. Appellant alleged the [5] [6] [7] A defendant's contacts with a forum can give directors, including appellees, breached their fiduciary duty rise to either specific or general jurisdiction. Id. For a court by voting to approve the merger with ProSource. Appellant to exercise specific jurisdiction over a nonresident defendant, also alleged that Jamar and Grauer, who were executives two requirements must be met: (1) the defendant's contacts of the company financing the merger, 1 and which earned with the forum must be purposeful, and (2) the cause of millions of dollars from the merger, breached their fiduciary action must arise from or relate to those contacts. Id. Specific duties by not disclosing their conflict of interest to the other jurisdiction is established if the defendant's alleged liability board members. Appellees filed special appearances, and arises from or is related to an activity conducted within the the parties filed voluminous evidence in support of their forum. Helicopteros Nacionales de Colombia, S.A. v. Hall, positions. 466 U.S. 408, 414 & n. 8, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984); CSR Ltd. v. Link, 925 S.W.2d 591, 595 (Tex.1996).
On November 8, 2002, the trial court granted appellees' The defendant's purposeful conduct, not the unilateral activity special appearances and dismissed appellant's claims against of the plaintiff or others, must have caused the contact. them. Appellant timely filed his notice of appeal on Helicopteros, 466 U.S. at 417, 104 S.Ct. 1868 (focus is on November 26, 2002. See TEX.R.APP. P. 26.1(b). relationship among defendant, forum, and litigation); Am.
Type Culture Collection, Inc., 83 S.W.3d at 806.
SPECIAL APPEARANCE Burden of Proof [1] [2] [3] [4] A Texas court may exercise jurisdiction over a nonresident defendant if (1) the Texas long-arm statute [8] [9] The plaintiff has the initial burden of pleading authorizes the exercise of jurisdiction and (2) the exercise of facts sufficient to bring a nonresident defendant within the jurisdiction is consistent with federal and state guarantees of provisions of the Texas long-arm statute. See Hotel Partners due process. See TEX. CIV. PRAC. & REM.CODE ANN. §§ v. KPMG Peat Marwick, 847 S.W.2d 630, 633 (Tex.App.- 17.041–045 (Vernon 1997 & Supp.2003); Am. Type Culture Dallas 1993, writ denied). When a nonresident defendant Collection, Inc. v. Coleman, 83 S.W.3d 801, 806 (Tex.2002); challenges a trial court's exercise of personal jurisdiction Kelly Inv., Inc. v. Basic Capital Mgmt., Inc., 85 S.W.3d 371, through a special appearance, it carries the burden of negating 374 (Tex.App.-Dallas 2002, no pet.). Federal due process all bases for personal jurisdiction. See Kawasaki Steel Corp. mandates that the defendant “purposefully avail” itself of v. Middleton, 699 S.W.2d 199, 203 (Tex.1985). the privilege of conducting activity within the forum state, thus invoking the benefits and protections of its laws. *729 Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474–76, Standard of Review 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985) (random, fortuitous, or attenuated contacts insufficient). The defendant's conduct [10] [11] [12] The exercise of personal jurisdiction and connection with the state must be such that it could requires the trial judge to resolve any factual disputes reasonably anticipate being sued in the forum state. Id. before applying the jurisdictional formula. Hotel Partners v. We determine whether (1) the nonresident defendant has Craig, 993 S.W.2d 116, 120–21 (Tex.App.-Dallas 1994, pet. purposefully established minimum contacts with Texas and, denied). On appeal, the appropriate standard of review of the if so, (2) the exercise of jurisdiction comports with “notions trial court's order granting or denying a special appearance is of fair play and substantial justice.” Id. The defendant's a de novo review, applying the supreme court's jurisdictional activities, whether they consist of direct acts within Texas formula. See Craig, 993 S.W.2d at 120. We apply a factual or conduct outside Texas, must justify a conclusion that the sufficiency of the evidence review to all of the evidence defendant could reasonably anticipate being called into a before the trial judge on the question of jurisdiction. Craig, Texas court. World–Wide Volkswagen Corp. v. Woodson, 993 S.W.2d at 120; KPMG Peat Marwick, 847 S.W.2d at 632. 444 U.S. 286, 297, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980). Once all factual disputes are resolved we examine de novo
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whether the facts negate all bases for personal jurisdiction. were consolidated in Texas. However, the evidence is Am. Type Culture Collection, Inc., 83 S.W.3d at 806; Craig, disputed whether AmeriServe's headquarters were in Texas 993 S.W.2d at 120. on January 29, 1998. Kevin Rogan, the Senior Vice– President, Secretary, and General Counsel for AmeriServe [13] [14] [15] When, as in this case, a trial court does not from October 1997 to late 2000, testified in his affidavit issue findings of fact and conclusions of law with its special that from the time he joined AmeriServe in October 1997 appearance ruling, all facts necessary to support the judgment until its liquidation, its principal place of business and and supported by the evidence are implied. BMC Software headquarters were in Texas. 2 Diana Moog, AmeriServe's Belgium, N.V. v. Marchand, 83 S.W.3d 789, 795 (Tex.2002). Senior Vice–President–Finance and Treasurer from July When the appellate record includes the reporter's and clerk's 1997 to January 1998, and AmeriServe's Chief Financial records, *730 these implied findings are not conclusive and Officer from January 1998 to November 2000, stated in her may be challenged for legal and factual sufficiency in the affidavit that in November or December 1997, AmeriServe's appellate court. Id. For legal sufficiency points, if there is Wisconsin office had only a skeletal crew of five to ten more than a scintilla of evidence to support the finding, the employees, and the other employees had either moved to no evidence challenge fails. Id. Texas or been let go. A January 30, 1998 press release from AmeriServe and ProSource announced the merger and stated, “AmeriServe will continue to have its headquarters Location of Corporate Headquarters in Dallas.... AmeriServe also has customer support offices in Wichita, KS, Louisville, KY, and Irvine, CA, in addition to [16] Appellant first asserts appellees are subject to the its corporate headquarters in Dallas.” personal jurisdiction of Texas courts as a matter of law because AmeriServe had its headquarters in Texas at the time *731 However, Holten, AmeriServe's chief executive of the alleged breach of fiduciary duty, January 29, 1998. officer and chairman of the board, testified in his affidavit: Because a finding that AmeriServe's headquarters were not in Texas on January 29, 1998 supports the trial court's orders, Prior to December 1997, AmeriServe's we must imply that finding unless it is not supported by more strategic and capital markets than a scintilla of evidence. headquarters were located in Greenwich, Connecticut, and its The record shows that before July 1997, AmeriServe's operational headquarters were located executive offices were in Wisconsin, and that its chief in Brookfield Wisconsin, although executive officer and chairman of the board, John Holten, key management functions were also had his office in Connecticut, which was where AmeriServe's located in other states across the parent company was based. In July 1997, AmeriServe U.S. Beginning in or about December acquired a significantly larger food distribution company, 1997, ... certain operational, financial PepsiCo Food Service (PFS), which distributed food for the and other management functions were restaurant chains owned by PepsiCo, Inc. PFS had its main gradually moved from Brookfield, accounts processing staff of 300 to 400 people in Texas, Wisconsin to Dallas, Texas, although but its marketing staff was located in California, Kansas, key management personnel and and Kentucky, with each location handling the marketing for executive functions were also located one of the major chains. After acquiring PFS, AmeriServe in other states, including California, fired PFS's executives and replaced them with AmeriServe's Kansas, Nebraska, Kentucky, etc. executives. However, the record contains evidence that the (Emphasis added.) Additionally, Onarheim testified, “The work of the executives was performed mostly in Wisconsin operational headquarters was [sic] in Brookfield, Missouri and Connecticut, with frequent visits to Dallas and other [sic], but most of the—I would say, all the time till the locations around the country.
Chapter 11 the strategic and financial decisions were taken or were developed in Greenwich, Connecticut.” Jamar testified, ProSource had its headquarters in Miami. Press releases, “From my point of view the headquarters of the company letterhead, SEC filings, etc. indicate that by March 1998, the were always Greenwich Connecticut....” Grauer testified, “As operational headquarters of AmeriServe, PFS, and ProSource it relates to any of the AmeriServe activities, all of the
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decisionmaking and interaction with, on anything to do with could not assert personal jurisdiction over them. Id. Appellant AmeriServe, ProSource or anything else, was always done in asserts Pittsburgh Terminal Corp. held the fact that the Greenwich, Connecticut.” Grauer also testified he expected corporation's principal place of business was in West Virginia any lawsuit related to his actions as a director to be filed in gave the West Virginia courts personal jurisdiction over the Connecticut, not Texas. directors. The Fourth Circuit said no such thing. The Fourth Circuit held the fact that the corporation was incorporated Thus, where the headquarters were actually located at the in West Virginia, and thus controlled by West Virginia law, time of the alleged breach of fiduciary duty, January 29, made the actions of the directors subject to West Virginia law. 1998, was not clear from the evidence. Holten's and appellees' Id. at 527. The location of the principal place of business was testimony suggests AmeriServe's headquarters were not irrelevant to the Fourth Circuit's reasoning. located in Texas but were spread throughout the country, with its strategic headquarters in Connecticut, the operational Wherever the acts took place in soliciting the proxy or headquarters in Wisconsin and in transition to Texas, and with wherever the proxy was mailed from and to, it could have other key management and executive functions in other states. been given effect only in West Virginia by virtue of the law Because appellant did not request, and the trial court did not of West Virginia under which Mid Allegheny operated.... file, findings of fact and conclusions of law, we must imply Each act which each of them [the nonresident directors] the finding that will support the trial court's order, in this case, took with respect to this transaction was given effect in that on January 29, 1998, the “headquarters” for AmeriServe West Virginia by virtue of West Virginia law just as surely were not located in Texas. as if they had been in the principal office of the corporation in West Virginia, present and voting in person....
This implied finding is also supported by the January 29, 1998 Excellent reasons exist for allowing a State to assert Agreement and Plan of Merger of AmeriServe and ProSource.
jurisdiction over non-resident directors of domestic The agreement did not explicitly list the headquarters or corporations. A chartering State has a strong, even principal place of business for AmeriServe, but it did list compelling interest in providing a forum for redressing AmeriServe's address as being in Connecticut for the address harm done by corporate fiduciaries, harm endured to which all notices, requests, and other communications principally by a resident of that State, the corporation....
required by the agreement had to be sent. Accordingly, Given the high degree of regulation over corporate appellant's argument that appellees are, as a matter of law, fiduciaries, the State's interest in providing a convenient subject to personal jurisdiction in Texas because they were forum for a derivative suit charging misfeasance or directors of a corporation headquartered in Texas at the time nonfeasance of a director cannot be overemphasized.
of their allegedly wrongful actions lacks a factual basis.
Id. at 527–28. Applying Pittsburgh Terminal Corp. to this [17] However, even if the evidence conclusively established case, we would conclude appellees were deemed to have been that AmeriServe's headquarters on January 29, 1998 were in transacting business in Delaware, the state of incorporation, Texas, appellant's argument—that appellees are, as a matter and not Texas, by voting for the merger. of law, subject to the personal jurisdiction of the Texas courts because AmeriServe's headquarters were located in Appellant's other principal case, International Harvester Co. Texas on January 29, 1998—would still lack merit. Appellant v. Mann, 460 So.2d 580 (Fla.Dist.Ct.App.1984), overruled relies principally on two cases in support of its argument by Doe v. Thompson, 620 So.2d 1004 (Fla.1993), involved that a state where a corporation's headquarters are located a Delaware corporation, Mann International, Inc. (MI) has personal jurisdiction over the corporation's directors for whose physical assets and operations were entirely within breach of fiduciary duty. Pittsburgh Terminal Corp. v. Mid Florida. Id. at 582. The plaintiff and the defendants were Allegheny Corp., 831 F.2d 522 (4th Cir.1987), concerned a the board of directors of the corporation; the defendants West Virginia corporation with its principal place of business owned all the voting shares, and the plaintiff owned all in West *732 Virginia. Id. at 524. A merger involving the nonvoting shares. Id. at 581. The defendants held a the corporation occurred, and plaintiff, a stockholder in the meeting in Delaware without notifying the plaintiff, and they corporation, brought a derivative action in West Virginia voted to dissolve the corporation. The plaintiff brought a against the directors. Id. Two of the directors were not derivative action and a personal breach of fiduciary duty residents of West Virginia, and they asserted West Virginia action against the defendants in Florida. The defendants,
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who were Georgia residents, asserted the Florida courts communications regarding corporate business,” and that the lacked personal jurisdiction over them. The Florida court directors had “purposefully chosen Texas as the consolidated stated, “Although MI was formed as a corporation under the headquarters of AmeriServe and ProSource.” Thus, appellant laws of Delaware, its physical assets and it operation as a argues, quoting Pittsburgh Terminal Corp., appellees were business were solely within the state of Florida. Therefore, “ ‘transacting business' in Texas ‘just as surely as if any injury to its inventory or operation as a business concern, they had been in the principal office of the corporation as alleged must have occurred within Florida.” Id. at 582. in [Texas], present and voting in person.’ ” Pittsburgh Unlike the facts of International Harvester, AmeriServe Terminal Corp., 831 F.2d at 527 (bracketed material added did not have all its assets and operations solely within the by appellant). As discussed above, appellant misapplies state of Texas; instead, AmeriServe's assets and operations Pittsburgh Terminal Corp. because the Fourth Circuit held were spread throughout the United States, Mexico, and the fact that the corporation was a West Virginia corporation Canada. International Harvester does not support appellant's made the director's actions occur in West Virginia; the argument. The other cases appellant cites are equally location of the corporate headquarters was irrelevant to the inapplicable. *733 See DeCook v. Envtl. Sec. Corp., 258 Fourth Circuit's analysis. Id. at 527–28. Furthermore, the N.W.2d 721, 728 (Iowa 1977) (nonresident directors of Iowa record shows the directors did not “purposefully [choose] corporation subject to personal jurisdiction in Iowa); Ellwein Texas as the consolidated headquarters of AmeriServe and v. Sun–Rise, Inc., 295 Minn. 109, 203 N.W.2d 403, (1972) ProSource.” Jamar's testimony indicates he was aware the (nonresident directors of Minnesota corporation subject to headquarters were going to be consolidated in Texas, he personal jurisdiction in Minnesota); Springs Indus. v. Gasson, listened to arguments before the decision about whether the 923 F.Supp. 823, 826 & n. 1 (D.S.C.1996) (nonresident headquarters should be moved to Miami, but he did not directors of South Carolina corporation subject to personal “have a position” on the issue. Appellant does not cite to jurisdiction in South Carolina). the record any evidence showing the directors “purposefully”
chose to consolidate AmeriServe's headquarters in Texas.
The mere fact that a Delaware corporation had its Appellant also argues appellees “were responsible for the headquarters in Texas at the time of the allegedly wrongful operational headquarters of AmeriServe being consolidated act is not sufficient minimum contacts to give Texas courts in Dallas when they made the conscious (and fatal) decision personal jurisdiction over a nonresident director who commits to approve the ProSource acquisition.” This argument is not a tort against the corporation. Appellant's argument to the supported by the record, which shows the consolidation was contrary lacks merit. underway before the vote on the ProSource merger took place.
Also, appellees testified the focal point of communications regarding corporate business was Connecticut, not Texas. Appellant's argument lacks merit.
Location of Actions
[18] [19] Appellant next asserts Texas courts have specific [21] Appellant next argues appellees are subject to Texas jurisdiction over appellees because they “purposefully jurisdiction because they created “continuing obligations” availed” themselves of the privilege of acting in Texas by with Texas by virtue of their service on AmeriServe's *734 committing torts in Texas. The “tort” appellant alleges is board. Appellant again cites Pittsburgh Terminal Corp. in breach of fiduciary duty. A breach of fiduciary duty by a support of this argument. As discussed above, the focus of corporate director's action of voting at a board meeting occurs the Fourth Circuit was the fact that the corporation was in the state where the meeting was held. Heil v. Morrison incorporated in West Virginia, which gave the directors Knudsen Corp., 863 F.2d 546, 550–51 (7th Cir.1988). In this continuing obligations under West Virginia law. Id. at 529. case, the meeting was held in Florida; thus, any breach of Appellant also argues, quoting Oakridge Holdings, Inc. v. fiduciary duty by appellees was committed in Florida and not Brukman, 528 N.W.2d 274 (Minn.Ct.App.1995), “Because in Texas. the directors thus voluntarily associated themselves with a Texas-based company, ‘they cannot argue that they could [20] Appellant next argues appellees are amenable to not reasonably anticipate defending an action in [Texas] jurisdiction in Texas because they effectively transacted by their [Texas] corporation asserting acts harmful to the business in Texas by their decision to acquire ProSource. corporation.’ ” Id. at 277 (bracketed material added by Appellant asserts Texas was “the focal point of all appellant). The flaw in the argument is that AmeriServe
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is not a Texas corporation. Oakridge Holdings concerned commission of a tort in Florida could give California courts a Minnesota corporation suing nonresident directors for specific jurisdiction over the defendants because their actions breaches of fiduciary duty. The company's headquarters were were expressly aimed at California and “they knew that the in Arizona and later in California. Id. at 276. The directors brunt of that injury would be felt by [the plaintiff] in the resided in Arizona and California. Citing Pittsburgh Terminal State in which she lives.” Id. at 789–90, 104 S.Ct. 1482. 4 Corp., the Minnesota Court of Appeals held the nonresident In that case, the plaintiff, a resident of California, sued two directors were subject to the Minnesota courts' jurisdiction Florida journalists for libel based on an article they wrote for a because they were directors of a Minnesota corporation. Id. nationwide newspaper. Id. at 785, 104 S.Ct. 1482. In this case, at 277. We conclude Oakridge Holdings does not support the record supports implied findings that appellees did not appellant's argument. Applying Pittsburgh Terminal Corp. know “the brunt” of injury from the merger decision would be and Oakridge Holdings leads to the conclusion that appellees felt in Texas. The record shows that on December 31, 1999, created continuing obligations in Delaware, not Texas, by AmeriServe: virtue of their service on AmeriServe's board. Appellant's argument lacks merit.
had approximately 8,300 full-time employees, approximately 600 of whom were employed in corporate support functions and approximately 7,700 of whom were Location of Injury warehouse, transportation, sales, and administrative staff at [22] Appellant also argues the record supports the Texas the distribution centers. courts' exercise of specific jurisdiction over appellees because After the merger with ProSource, AmeriServe had more their action of voting to approve the ProSource merger, than seventy-five distribution centers in the United States, although occurring outside of Texas, produced injury within but it planned to reduce those to twenty-two distribution Texas. Appellant cites to Springs Industries, Inc. v. Gasson, centers. As of the date it filed its petition in bankruptcy, where the federal district court stated a nonresident corporate AmeriServe leased 150,000 square feet of office space agent could be subject to jurisdiction in the corporation's for its headquarters in Addison, Texas. AmeriServe also home state for an act occurring outside that state where the operated or was constructing forty-two distribution centers injury is caused by the agent's direct personal involvement in twenty-four states as well as Mexico and Canada. Three and “the defendant agent is the guiding spirit behind the of the distribution centers were in Texas, but New York and wrongful conduct, or the central figure in the challenged Illinois also had three distribution centers, and California corporate activity.” Springs Indus., Inc., 923 F.Supp. at 827 had four. Most of the distribution centers were between (quoting Magic Toyota v. SE Toyota Distribs., Inc., 784 100,000 and 200,000 square feet in size. Onarheim testified F.Supp. 306, 315 (D.S.C.1992)). Thus, appellant appears that Texas was not the most important part of AmeriServe. to argue Jamar and Grauer are the “guiding spirit” and Additionally, the trial court could conclude Holten, a “central figure” behind the vote of the board of directors Connecticut resident and the prime shareholder of the because they had the authority to veto any board decision. companies owning AmeriServe, suffered the “brunt” of the The record shows Jamar and Grauer rarely spent more than injury from AmeriServe's collapse. Based on this evidence, five to ten percent of their time on AmeriServe's business. the trial court could make the implied finding that the The record also shows Jamar and Grauer were “extensively” “brunt” of the injury would not be felt in Texas. and “fully” briefed on the ProSource merger by Holten. Appellant also relies on Guidry v. United States Tobacco Co., The trial court could conclude from the record that Holten, 188 F.3d 619 (5th Cir.1999), where the Fifth Circuit stated, AmeriServe's chief executive officer and the sole stockholder “an act done outside the state that has consequences or effects within the state will suffice as a basis for jurisdiction in a suit of the company that owned the majority of AmeriServe, 3 was arising from those consequences if the effects are seriously the true “guiding spirit” and “central figure” of the merger harmful and were intended or highly likely to follow from decision, and that Jamar and Grauer were neither “guiding the nonresident defendant's conduct.” Id. at 628. Nothing in spirit[s]” nor “central figure[s]” of the merger decision.
the record shows appellees intended for their vote to merge Appellant's argument lacks merit.
AmeriServe and ProSource to result in the financial collapse, bankruptcy, and liquidation of AmeriServe. Nor does any In Calder v. Jones, 465 U.S. 783, 104 S.Ct. 1482, 79 L.Ed.2d 804 (1984), the Supreme *735 Court held the defendants'
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Rittenmeyer v. Grauer, 104 S.W.3d 725 (2003)
headquarters were moved to Texas, the record does not show evidence show these consequences “were highly likely to where AmeriServe's “major place of business” was located, follow from [appellees'] conduct.” Guidry is not applicable.
or even if it had one. Likewise, the record supports an implied finding that AmeriServe's “pocketbook” was not in Texas:
Appellant also relies on Mergenthaler Linotype Co. v.
Jamar testified AmeriServe's “accounting controls, that kind Leonard Storch Enterprises, Inc., 66 Ill.App.3d 789, 23 of thing was clearly in Dallas. But the financing function was Ill.Dec. 352, 383 N.E.2d 1379 (1978), for the proposition clearly in Greenwich, Connecticut.” All appellees testified that “the injury” occurred in Texas. In that case, plaintiff and that the financial information they received about AmeriServe defendant were New York corporations in the business of came from Connecticut, not Texas. Appellant's argument manufacturing and selling fonts. Id. at 1382. Besides being lacks merit.
incorporated in New York, both companies had their principal places of business and all their manufacturing facilities in After reviewing the entire record, we conclude the record the state of New York. The plaintiff sued the defendant supports the trial court's implied finding that appellees' vote for unlawful *736 competition, alleging the defendant was in Florida to approve the AmeriServe–ProSource merger, inexpensively copying the plaintiff's fonts and selling them two Delaware corporations with continent-wide operations, at a lower cost. Id. at 1382–83. The Illinois Appellate Court did not constitute sufficient purposeful availment of doing determined, “The injury to the plaintiff in this case is only business in Texas or the performance of an act purposefully to its pocketbook. It is alleging that it lost sales because of directed toward Texas or Texas residents. We conclude the defendants' misdeeds and because it lost sales, it lost the trial court did not err in determining appellees lacked profits. But the plaintiff's pocketbook is located in New sufficient minimum contacts with Texas to give the Texas York where it resides, i.e., has its major place of business.”
courts specific personal jurisdiction over them.
Id. at 1384. Thus, appellant argues, because AmeriServe “has its major place of business” in Texas, the injury We resolve appellant's issue against him. We affirm the trial occurred in Texas. However, although Texas may have been court's orders.
AmeriServe's corporate headquarters, the record supports an implied finding that Texas was not AmeriServe's “major place of business.” The record shows that fewer than fourteen All Citations percent of AmeriServe's employees were in corporate support functions, and many of these employees may not have 104 S.W.3d 725
5
been located at the headquarters in Texas. Even after the
Footnotes 1 This company had financed previous expansions by AmeriServe. As a condition of the financing, the company got to appoint two directors who had authority to veto any decision by the remaining directors.
2 Appellant asserts in his brief that the location of AmeriServe's headquarters was established as being in Texas “when AmeriServe filed its Form 10–K with the SEC for the fiscal year ended December 27, 1997,” which listed Dallas, Texas as the address of principal executive offices, and which was signed by appellees. Although the financial information in the Form 10–K was for the fiscal year ended December 27, 1997, appellees signed the Form on March 27, 1998, by which time the executive offices had been moved to Dallas. Thus, the Form 10–K is no evidence of where the headquarters were located on January 29, 1998, when the board approved the merger.
3 In his petition, appellant sets out the chain of ownership leading to AmeriServe. At the top of the chain is Holten, who owns 100% of Holberg Inc., which owns 66% of Holberg Industries, Inc., which owns 92.9% of Nebco Evans Distributors, Inc., which owns 100% of Nebco Evans Holding Co., which owns 100% of AmeriServe. It is AmeriServe and its subsidiaries that actually conduct the food-distribution operations.
4 Appellant also cites Global Fin. Corp. v. Triarc Corp., 93 N.Y.2d 525, 693 N.Y.S.2d 479, 715 N.E.2d 482, 485 (1999), for the proposition, “When an alleged injury is purely economic, the place of injury usually is where the plaintiff resides and sustains the economic impact of the loss.” That case, however, involved application of New York statute of limitations, not the long-arm statute or minimum contacts.
5 Holten testified in an affidavit that after the headquarters were moved to Texas, “key management personnel and executive functions were also located in other states, including California, Kansas, Nebraska, Kentucky, etc.”
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Russell v. A.E. Marketing, L.L.C., Not Reported in S.W.3d (2001)
Nevada. Following the purchase of the Maxim, Premier relocated its principal business office to Dallas, Texas.
2001 WL 722509 Only the Westlaw citation is currently available.
Sometime in the early formation of Premier, A.E. Marketing, NOTICE: NOT DESIGNATED FOR PUBLICATION. through its President, Gary Kornman, invested in Premier. UNDER TX R RAP RULE 47.7, UNPUBLISHED Saunders asserts Kornman requested the opportunity for A.E.
OPINIONS HAVE NO PRECEDENTIAL Marketing to invest in Premier, while Kornman contends VALUE BUT MAY BE CITED WITH THE A.E. Marketing was solicited to invest by Saunders. A.E. NOTATION “(not designated for publication).” Marketing's initial investment in Premier in November of 1998, was a $375,000 contribution wired from a Texas Court of Appeals of Texas, Dallas. bank to a Nevada title company. This initial investment represented one-half of the $750,000 initial deposit on the Thomas K. RUSSELL, Hillel A. Meyers purchase of the Maxim hotel and casino. In exchange, and Donald G. Saunders, Appellants, A.E. Marketing became a 24 1/2 percent shareholder in v. Premier. To accommodate A.E. Marketing's ownership A.E. MARKETING, L.L.C., Appellee. interest, appellants reduced Saunders' interest in Premier to 24 1/2 percent and awarded Russell a one percent ownership No. 05-00-01583-CV. | June 28, 2001. interest. Meyers maintained a 50% ownership interest.
On Appeal from the 193rd Judicial District Court, Dallas In January 1999, appellants requested that A.E. Marketing County, Texas, Trial Court Cause No. DV99-07896-L.
provide further financing for Premier. A.E. Marketing paid Before LAGARDE, BRIDGES, and RICHTER, JJ. an additional $750,000, representing the second deposit due on the Maxim purchase. A.E. Marketing's investment in Premier ultimately grew to a total of $1.5 million, and A.E.
OPINION Marketing's ownership interest was adjusted accordingly to reflect the increased investment.
RICHTER.
Following A.E. Marketing's initial funding of the Premier *1 A.E. Marketing, L.L.C., (“A.E.Marketing”) filed suit transaction, appellants made several unsuccessful attempts in Texas against Meyers, Russell, and Saunders for breach to secure funding for the remaining purchase price of of fiduciary duty, fraud, conspiracy to commit fraud, the Maxim hotel and casino. A.E. Marketing eventually Texas Securities Act violations, and declaratory judgment. secured a forty-two million dollar loan from a Georgia Appellants filed a special appearance contesting the court's limited partnership to purchase the Maxim. At the scheduled jurisdiction. After a hearing, the trial court overruled Maxim hotel and casino closing, Meyers demanded payment appellant's special appearance. In this interlocutory appeal, of one million dollars to sign the closing papers. The appellants contend the trial court erred in holding they were papers remained unsigned. Therefore, a merger was arranged subject to jurisdiction in Texas. We affirm the trial court's between Premier and the current owner of the Maxim hotel order overruling appellants' special appearance. and casino, Maxim Holdings, a Nevada corporation. The merger provided for Premier's acquisition of the Maxim assets. A.E. Marketing, Saunders, and Russell voted in favor Factual and Procedural Background of the merger on behalf of Premier. As a consequence of the merger, A.E. Marketing received 99.85% of Premier's issued Appellants are the founders of Premier, a Nevada corporation. and outstanding common stock, as well as voting control of At Premier's inception, Meyers and Saunders each held a Premier. 50% ownership interest. Appellants formed Premier for the sole purpose of acquiring the Maxim, a Las Vegas, Nevada *2 Appellants filed suit in Clark County, Nevada against hotel and casino. Meyers is a Florida resident, while Russell Kornman and others. Appellee filed suit in Dallas County, and Saunders reside in California. At the time of formation, Texas, seeking relief for breach of contract and fiduciary duty, Premier maintained places of business in California and fraud, civil conspiracy, violations of the Texas Securities Act,
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Russell v. A.E. Marketing, L.L.C., Not Reported in S.W.3d (2001)
and for declaratory relief as to the validity of the merger between Premier and Maxim Holdings. Appellants filed their Exercise of Jurisdiction special appearance, which the trial court denied, holding appellants were subject to Texas jurisdiction. In particular, the Personal jurisdiction consists of two elements: (1) the trial court found appellant's intentional tort conduct supported defendant must be amenable to the jurisdiction of the court the exercise of jurisdiction. Appellants appeal the trial court's under either specific or general jurisdiction; and (2) the order. plaintiff must validly invoke the court's jurisdiction through valid service of process. Kawaski Steel Corp., 699 S.W.2d at 200; Guardian Royal Exch., 815 S.W.2d at 227-28. Amenable Burden of Proof to process means the Texas court validly obtains jurisdiction over the person with regard to the cause of action pleaded The plaintiff has the burden of pleading facts sufficient under federal and state constitutions, and appropriate state to bring a nonresident defendant within the provisions of statutes. Kawaski, 699 S.W.2d at 202. the Texas long-arm statute. Hotel Partners v. KPMG Peat Marwick, 847 S.W.2d 630, 633 (Tex.App.-Dallas 1993, writ *3 A Texas court may exercise jurisdiction over a nondenied ). When a nonresident defendant challenges a trial resident defendant if authorized by the Texas long-arm statute court's exercise of personal jurisdiction through a special and the exercise of that jurisdiction comports with federal appearance, it carries the burden of negating all grounds for due process. See TEX.CIV.PRAC. & REM.CODE ANN. § personal jurisdiction. Kawasaki Steel Corp. v. Middleton, 699 17.041-17.045 (Vernon 1997); Schlobohm v. Schapiro, 784 S.W.2d 199, 203 (Tex.1985). S.W.2d 355, 356 (Tex.1990). Review of whether the exercise of jurisdiction comports with federal due process is a two part inquiry. First, the non-resident defendant must purposely establish minimum contacts with the forum state. Second, if Standard of Review minimum contacts are established, the exercise of jurisdiction The exercise of personal jurisdiction requires the trial must comport with fair play and substantial justice. Asahi court to resolve any factual disputes before applying Metal Indus. v.Super. Ct of Calif., 480 U.S. 102, 108-15 the jurisdictional formula. Hotel Partners v. Craig, 993 (1987); Burger King v. Rudzewicz, 471 U.S. 462, 476 (1985); S.W.2d 116, 120 (Tex.App.-Dallas 1994, writ denied). The Int'l Shoe Co. v. State of Wash., 326 U.S. 310, 316 (1945). appropriate standard for reviewing a trial court's order sustaining or overruling a special appearance is de novo review, applying the supreme court's jurisdictional formula. Agency Craig, 993 S.W.2d at 120. We apply a factual sufficiency review to all of the evidence before the trial judge on Appellants assert any contacts they established with Texas the question of jurisdiction. KPMG Peat Marwick, 847 were as agents of Premier. Therefore, they are shielded S.W.2d at 632; see also Guardian Royal Exch. Assurance, from the court's exercise of personal jurisdiction in Texas. Ltd. v. English China Clays, P.L.C., 815 S.W.2d 223, 226 Jurisdiction over an individual generally cannot be based on (Tex.1991). Once all factual issues are resolved or if the facts jurisdiction over a corporation with which he is associated are undisputed, we examine de novo whether the facts negate unless the corporation is the alter ego of the individual. Vosko all grounds for personal jurisdiction. Craig, 993 S.W.2d at v. Chase Manhattan Bank, N.A., 909 S.W.2d 95, 99-100 120. Unless challenged on appeal, the trial court's findings (Tex.App.-Houston [14th Dist.] 1995, writ denied). However, of fact are binding upon the appellate court. KPMG Peat appellee is not asserting that jurisdiction over the defendants Marwick, 847 S.W.2d at 632 (citations omitted). If the record is derivative of jurisdiction over Premier; rather, he asserts contains some probative evidence from which reasonable appellants individually have minimum contacts with Texas inferences can be drawn or the findings are not so contrary to to authorize the exercise of jurisdiction. Appellants confuse the overwhelming weight of the evidence as to be manifestly the nature of jurisdiction with that of liability. Agency wrong, we may not disregard the trial courts findings on is an affirmative defense to liability. Seale v. Nicholas, appeal. Id. 505 S.W.2d 251, 254 (Tex.1974). An agency relationship does not shield an individual from jurisdictional contacts with a state: only from possible liability for the activities
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Russell v. A.E. Marketing, L.L.C., Not Reported in S.W.3d (2001)
conducted within the state. E.g. Smith v. Lanier, 998 S.W.2d A.E. Marketing would perform its portion of the contract from 324, 334-35 (Tex.App.-Austin 1999, pet. denied) (citing Texas. Appellants do not dispute the requirements of the long Zac Smith & Co. v. Otis Elevator, 734 S.W.2d 662, 666 arm statute have been met. Accordingly, we will determine (Tex.1987); Solow v. Century Assets Corp., 12 S.W.3d 512, whether jurisdiction over appellants violates due process. 516 (Tex.App.-Beaumont 1999, no pet.); Vosko, 909 S .W.2d at 100. We conclude appellants are not shielded from the exercise of jurisdiction solely based upon agency principles.
Specific Jurisdiction Accordingly, we will examine whether appellants' contacts are sufficient to establish jurisdiction. The United States Supreme Court has refined the minimum contacts analysis into specific and general jurisdiction. Helicopteros Nacionales de Colombia v. Hall, 466 U.S. 408, The Long-arm Statute 414-15 (1984) Specific jurisdiction arises when a defendant commits an act in Texas that gives rise to the cause of Personal jurisdiction under the long-arm statute extends action against him. Schlobohm, 784 S.W.2d at 357. General to non-resident defendants that either continuously or jurisdiction arises when a defendant has continuing and systematically “do business” in Texas or who are parties to systematic contacts with Texas. Id . When general jurisdiction litigation arising from or related to business they conducted is asserted, the minimum contacts analysis is more demanding in Texas. TEX.CIV.PRAC. & REM.CODE ANN. § 17.042 and requires a showing of substantial activities in the forum (Vernon 1997). Under section 17.042 of the civil practices state. Id. A.E. Marketing does not contest the lack of general and remedies code, a non-resident “does business” in Texas if jurisdiction. It asserts only that appellants are subject to they (1) contract with a Texas resident, by mail or otherwise, specific jurisdiction. and either party is to perform the contract in whole or in part in Texas; (2) commit a tort in whole or in part in When reviewing an assertion of specific jurisdiction, the Texas; or (3) recruit Texas residents, directly, or through minimum contacts analysis focuses on the relationship among an intermediary located in Texas, for employment inside or the defendant, the forum, and the litigation. Guardian outside the state. The doing business reach of the Texas long- Royal, 815 S.W.2d at 228. To satisfy the minimum contacts arm statute extends as far as the federal constitutional limits of requirements, the cause of action must arise out of or relate due process. Guardian Royal, 815 S.W.2d at 226 (Tex.1991). to the non-resident defendant's contact with the forum state.
Helicopteros, 466 U.S. 408 at 414 n. 8. In addition, the non-
*4 In its amended petition, appellees assert appellants were resident defendant's activities must have been purposefully doing business in Texas because they (1) contracted with directed to the forum and the litigation must result from or a Texas resident by mail and appellee was to perform the relate to those activities. In re S.A.V., 837 S.W.2d 80, 85 contract in Texas, and (2) appellees misrepresented the terms (Tex.1992). of the Premier investment to appellee while in Texas, thus committing a tort in Texas.
Minimum Contacts When reaching a decision to exercise or decline jurisdiction based on the alleged commission of a tort by a defendant, Appellants contend their telephone, mail, and personal the trial court relies only on the necessary jurisdictional facts contacts are insufficient to establish minimum contacts with and not the underlying merits of the case. Arterbury v. Am. Texas. Appellants assert that any contact with appellee Bank & Trust Co., 553 S.W.2d 943, 948 (Tex.Civ.App.- in Texas was fortuitous, involving the negotiation of a Texarkana 1977, no writ). Ultimate tort liability is not at contract to be performed in Nevada, and not an attempt issue in determining the jurisdictional facts. Portland Sav. & to purposefully avail themselves of the benefits of Texas. Loan Ass'n v. Bernstain, 716 S.W.2d 532, 535 (Tex.App.- Moreover, appellants contend the trial court erred in holding Corpus Christi 1985, writ ref'd n.r.e .). The proof necessary appellants were subject to tort jurisdiction, because appellee to sustain jurisdiction based upon the commission of a tort failed to allege a tort was committed in Texas, and any is that the purposeful act was committed in Texas. Aterbury, acts committed were not purposefully directed toward Texas. 553 S.W.2d at 947. Here, appellees alleged that appellants Appellee asserts appellants' telephone calls, faxes, and visit made misrepresentations to Kornman in Texas, and knew to Texas establish minimum contacts, and that appellants'
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Russell v. A.E. Marketing, L.L.C., Not Reported in S.W.3d (2001)
misrepresentations and breaches of contract were committed by the appellants in telephone calls and other contacts in Texas, caused harm to appellee while in Texas, and were occurring within the State. We find sufficient support in sufficiently plead. the record to conclude that appellants could reasonably foresee that A.E. Marketing would rely on the statements *5 In their special appearance, each appellant offered made by appellants. If a tortfeasor knows that the brunt affidavit testimony specifically asserting they were not of the injury will be felt by a particular resident in the residents of, and did not maintain offices, addresses, or forum state, it must reasonably anticipate being haled into telephone service in Texas. Meyers and Russell stated they court there to answer for its actions. Mem'l Hosp. Sys. v. had visited Texas many years ago for unrelated matters. Fisher Ins. Agency, Inc., 835 S.W.2d 645, 650 (Tex.App.- Saunders asserts that although he traveled to Texas and met Houston [14th Dist.] 1992, no writ)(op. on reh'g) (holding with Kornman on one occasion, the contact dealt with an a single fraudulent telephone call is sufficient to establish unrelated business venture. Appellants presented no other minimum contacts). We are satisfied the trial court could have evidence. found appellants established sufficient minimum contacts with Texas to exercise jurisdiction.
A.E. Marketing presented Kornman's testimony that appellants solicited him to invest in Premier while he was in Texas. Kornman received all correspondence and executed Fair Play and Substantial Justice all contracts regarding the Premier transaction in Texas. During Saunders' trip to Texas, he and Kornman discussed *6 Because we hold that a Texas court's exercise of the Premier investment, as well as other investments held jurisdiction in these circumstances withstands a minimum by Kornman's son. A.E. Marketing also presented a list contacts analysis, we must now determine whether the of appellants' contacts with Kornman or A.E. Marketing assertion of personal jurisdiction comports with traditional representatives over the months preceding and following the notions of fair play and substantial justice. Burger King, transaction. The list revealed no less than 95 telephone or 471 U.S. at 476. When the non-resident defendant has mail contacts made with A.E. Marketing in Texas. In addition, purposefully established minimum contacts with the forum appellee presented telephone bills of Saunders, Meyers, and state, it will only be in rare cases that the exercise of Russell for calls ranging from December 1998, through jurisdiction does not comport with fair play and substantial September 1999, as evidence of the contacts established justice. Guardian Royal, 815 S.W.2d at 231. In making by appellants. Kornman testified he spoke with appellants this determination, we are guided by (1) the burden on the an average of once a day. Moreover, the funds for the defendant, (2) the interests of the forum state in adjudicating Premier investment were transferred from Texas to Nevada. the dispute, (3) the plaintiff's interest in obtaining convenient All agreements between Premier and A.E. Marketing were and effective relief, (4) the interstate judicial system's interest signed in Texas. in obtaining the most efficient resolution of controversies, and (5) the shared interests of the several states in furthering A review of the record reveals sufficient evidence to support substantive social policies. Id. To avoid being haled into a conclusion that appellants purposefully communicated the a foreign court, the defendants must “present a compelling alleged misrepresentations to A.E. Marketing in Texas by case that the presence of some consideration would render phone, mail, facsimile, and in person. Based on these facts, we jurisdiction unreasonable.” Burger King, 471 U.S. at 477. find that appellants' contacts with Texas were not random or fortuitous. Appellants purposefully established contacts with Appellants contend the assertion of jurisdiction over them Texas. does not comport with fair play and substantial justice because appellants are not residents of Texas. As non-
Having concluded appellant's contacts were, in fact, residents, it would be costly and time-consuming to litigate purposeful, we must now determine whether those contacts in Texas. The mere fact that appellants are not physically establish a substantial connection between the nonresident present in Texas is not persuasive when deciding personal defendant and the forum state. Guardian Royal, 815 S.W.2d jurisdiction. Burger King, 471 U.S. at 476. Distance alone is at 230. Here, a strong nexus exists between the tort that ordinarily insufficient to defeat jurisdiction because “modern occurred in Texas and appellants' contacts with Texas. A.E. transportation and communication have made it much less Marketing contends it relied on the misrepresentations made burdensome for a party sued to defend himself in a State
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Russell v. A.E. Marketing, L.L.C., Not Reported in S.W.3d (2001)
this dispute fails to weigh in favor or against any particular where he engages in economic activity.” Guardian Royal, forum. Although Nevada law is involved due to the merger 815 S.W.2d at 231 (citing McGee v. Int'l Life Ins. Co., 355 of two Nevada corporations, so, too, is Texas tort law;
U.S. 220, 223 (1957)). In the present case, appellants are thus, Texas possesses an interest in the resolution of the residents of states on each coast. It is likely that at least one dispute. We conclude the trial court's exercise of jurisdiction appellant would be required to travel across the county to over appellants does not offend traditional notions of litigate wherever suit is brought. Appellants' trips to Nevada fair play and substantial justice. Appellant has failed to and Texas, indicate that traveling to Texas does not present negate all grounds for the exercise of personal jurisdiction.
an undue hardship.
Consequently, the trial court correctly overruled appellants' special appearance. We overrule appellants' issues and Appellants further contend traditional notions of fair play affirm the trial court's order.
and substantial justice would be offended because Texas has a low interest in adjudicating the suit. Texas' interest in ensuring that its citizens are protected from tortious acts All Citations by others and appellants' interest in obtaining convenient and effective relief weigh in favor of exercising jurisdiction Not Reported in S.W.3d, 2001 WL 722509 over the dispute. The wide range of law to be applied in
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Sauceda v. Wells Fargo Bank, N.A., Not Reported in F.Supp.2d (2013) 2013 WL 690534
2013 WL 690534 STANDARD OF REVIEW Only the Westlaw citation is currently available.
United States District Court, Rule 12(b)(6) authorizes dismissal of a complaint for “failure W.D. Texas, to state a claim upon which relief can be granted.”Review is San Antonio Division. limited to the contents of the complaint and matters properly subject to judicial notice. See Tellabs, Inc. v. Makor Issues Robert G. SAUCEDA, Plaintiff, & Rights, Ltd., 551 U.S. 308, 322 (2007). In analyzing a v. motion to dismiss for failure to state a claim, “[t]he court WELLS FARGO BANK, N.A., Defendant. accepts ‘all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff.’ “ In re Katrina Canal CV. No. SA–12–CV–01094– Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007) (quoting DAE. | Feb. 25, 2013. Martin K. Eby Constr. Co. v. Dallas Area Rapid Transit, 369 F.3d 464, 467 (5th Cir.2004)). To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead “enough facts to ORDER GRANTING DEFENDANT'S state a claim to relief that is plausible on its face.” Bell Atl.
MOTION TO DISMISS Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual content DAVID ALAN EZRA, Senior District Judge. that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v.
*1 Before the Court is a Motion to Dismiss brought by Iqbal, 556 U.S. 662, 678 (2009). Defendant Wells Fargo Bank, N.A. (“Defendant”). (Doc. # 2.) After careful consideration, the Court GRANTS Defendant's A complaint need not include detailed facts to survive a Rule Motion to Dismiss. 12(b)(6) motion to dismiss. See Twombly, 550 U.S. 544, 555–56 (2007). In providing grounds for relief, however, a plaintiff must do more than recite the formulaic elements BACKGROUND of a cause of action. See id. at 556–57.“The tenet that a court must accept as true all of the allegations contained On or about August 31, 2004, Plaintiff Robert Sauceda in a complaint is inapplicable to legal conclusions,” and (“Plaintiff”) entered into a loan transaction which was secured courts “are not bound to accept as true a legal conclusion by a mortgage encumbering real property located at 9910 couched as a factual allegation.”Iqbal, 556 U.S. at 678 Shady Meadows, San Antonio, Texas 78245 (the “Subject (internal quotations and citations omitted). Thus, although Property”). (“Mot.,” Doc. # 2 ¶ 2.) The Deed of Trust was all reasonable inferences will be resolved in favor of the recorded the Official Public Records of Bexar County. (Id.) plaintiff, the plaintiff must plead “specific facts, not mere conclusory allegations.”Tuchman v. DSC Commc'ns Corp., On November 5, 2012, Plaintiff filed suit in Texas state court 14 F.3d 1061, 1067 (5th Cir.1994); see also Plotkin v. IP seeking equitable relief in the form of an accounting and Axess Inc., 407 F.3d 690, 696 (5th Cir.2005) (“We do not an injunction preventing the foreclosure sale of the Subject accept as true conclusory allegations, unwarranted factual Property scheduled for November 6, 2012. (Doc. # 1 Ex. inferences, or legal conclusions.”). C.) Plaintiff obtained an ex parte temporary restraining order preventing Defendant from “posting or selling Plaintiff's *2 When a complaint fails to adequately state a claim, homestead at auction .”(Id.) such deficiency should be “exposed at the point of minimum expenditure of time and money by the parties and the On November 19, 2012, Defendant removed the instant court.”Twombly, 550 U.S. at 558 (citation omitted). However, case to federal court. (Doc. # 1.) On November 28, 2012, the plaintiff should generally be given at least one chance Defendant filed a Motion to Dismiss. (Doc. # 2.) Plaintiff did to amend the complaint under Rule 15(a) before dismissing not file any Response in Opposition. the action with prejudice.Great Plains Trust Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 329 (5th Cir.2002).
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Sauceda v. Wells Fargo Bank, N.A., Not Reported in F.Supp.2d (2013) 2013 WL 690534
DISCUSSION Additionally, to the extent Plaintiff appears to argue that an In his pleading, Plaintiff seeks “a complete accounting of the accounting might serve as a remedy for some type of “bad sums paid and a reasonable opportunity to satisfy or reinstate faith” claim, his action for an accounting fails because he Plaintiff's mortgage note owing to Defendant.”(Mot. Ex. C fails to state a claim for bad faith. The Texas Supreme Court ¶ 8.) In support of this request, he alleges that Defendant has expressly refused to impose an obligation of good faith acted in bad faith by “failing to negotiate fairly and justly and fair dealing on the performance of contracts absent a toward fixing the extent of and curing any default [on the “special relationship marked by shared trust or an imbalance mortgage].”(Id. ¶ 6.) in bargaining power.”See Arnold v. Nat'l Cnty. Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex.1987); see also City “An action for accounting may be a suit in equity, or it of Midland v. O'Bryant, 18 S.W.3d 209, 215 (Tex.2000). may be a particular remedy sought in conjunction with Moreover, “[t]he relationship of mortgagor and mortgagee another cause of action.”Michael v. Dyke, 41 S.W.3d 746, 754 ordinarily does not involve a duty of good faith.”FDIC (Tex.App.2001). To be entitled to an accounting, a plaintiff v. Coleman, 795 S.W.2d 706, 708–09 (Tex.1990) (citing usually must have a contractual or fiduciary relationship English v. Fischer, 660 S.W.2d 521, 522 (Tex.1983)). In the with the party from which the plaintiff seeks the accounting. instant case, Plaintiff does not even plead a formal cause of T.F.W. Mgmt., Inc. v. Westwood Shores Prop. Owners Ass'n, action for the tort of bad faith, let alone allege some kind of 79 S.W.3d 712, 717 (Tex.App.2002). An action for an “special relationship” with Defendant that would give rise to a accounting is a proper action “when the facts and accounts in bad faith claim under Texas law. As such, Plaintiff has failed issue are so complex that adequate relief cannot be obtained to state a claim for bad faith, and the remedy of an action for by law.”Hutchings v. Chevron U.S.A., 862 S.W.2d 752, accounting must therefore also fail. 762 (Tex.App.1993) (citing Richardson v. First Nat'l Life Ins. Co., 419 S.W.2d 836, 838 (Tex.1967)). Granting an accounting is within the discretion of the trial court. Sw.
CONCLUSION Livestock & Trucking Co. v. Dooley, 884 S.W.2d 805, 809 (Tex.App.1994). *3 For the reasons stated above, the Court GRANTS Defendant's Motion to Dismiss. (Doc. # 2.)
In the instant case, Plaintiff has not argued that the facts surrounding his mortgage payments “are so complex that IT IS SO ORDERED. adequate relief cannot be obtained by law.”Thus, to the extent that Plaintiff seeks to pursue a stand-alone equitable action for an accounting, he has not plead sufficient facts to warrant All Citations such an action.
Not Reported in F.Supp.2d, 2013 WL 690534
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Spir Star AG v. Kimich, 310 S.W.3d 868 (2010) Prod.Liab.Rep. (CCH) P 18,380, 53 Tex. Sup. Ct. J. 423
provides no haven from the jurisdiction of a Texas court. U.S.C.A. Const.Amend. 14.
KeyCite Yellow Flag - Negative Treatment Distinguished by Cornerstone Healthcare Group Holding, Inc. v. Reliant 4 Cases that cite this headnote Splitter, L.P., Tex.App.-Dallas, June 5, 2014
310 S.W.3d 868 [2] Judgment Supreme Court of Texas. Jurisdiction of the person and subject-
matter SPIR STAR AG, Petitioner, To render a binding judgment, a court must v.
have both subject matter jurisdiction over the Louis KIMICH, Respondent.
controversy and personal jurisdiction over the parties.
No. 07–0340. | Argued Dec. 10, 2008. | Decided March 12, 2010. 7 Cases that cite this headnote
Synopsis Background: Worker who was seriously injured by rupture [3] Appeal and Error of high-pressure hose brought products liability action against Cases Triable in Appellate Court distributor and German manufacturer. The 125th District Courts Court, Harris County, John A. Coselli, Jr., J., denied Determination of questions of jurisdiction manufacturer's special appearance. Manufacturer appealed. in general The Houston Court of Appeals, First District, Evelyn V.
Whether a court has personal jurisdiction over a Keyes, J., 311 S.W.3d 1, affirmed. Manufacturer's petition for defendant is determined as a matter of law, which review was granted.
appellate courts review de novo.
12 Cases that cite this headnote Holdings: The Supreme Court, Jefferson, C.J., held that:
[4] Appeal and Error [1] manufacturer purposefully availed itself of benefits and Particular findings implied protections of Texas law by using Texas distributor, and When a trial court does not issue findings of fact or conclusions of law to support its determination [2] exercising jurisdiction was consistent with traditional on motion for special appearance, appellate court notions of fair play and substantial justice.
presumes that all factual disputes were resolved in favor of the trial court's ruling.
Affirmed.
13 Cases that cite this headnote
[5] Courts West Headnotes (26) Actions by or Against Nonresidents, Personal Jurisdiction In; “Long-Arm”
[1] Constitutional Law Jurisdiction Manufacture, distribution, and sale Long-arm statute reaches as far as the federal Foreign manufacturer is subject to specific constitutional requirements for due process will personal jurisdiction in Texas consistently with allow; consequently, the statute's requirements due process clause when it intentionally targets are satisfied if exercising jurisdiction comports Texas as the marketplace for its products, and with federal due process limitations. U.S.C.A. using a distributor-intermediary for that purpose Const.Amend. 14; V.T.C.A., Civil Practice & Remedies Code § 17.042.
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Spir Star AG v. Kimich, 310 S.W.3d 868 (2010) Prod.Liab.Rep. (CCH) P 18,380, 53 Tex. Sup. Ct. J. 423
7 Cases that cite this headnote [10] Courts Related contacts and activities; specific jurisdiction [6] Constitutional Law Non-residents in general A court has “specific jurisdiction” over a defendant if its alleged liability arises from or is Personal jurisdiction over nonresident related to an activity conducted within the forum.
defendants is constitutional under the due process clause only when: (1) the defendant 5 Cases that cite this headnote has established minimum contacts with the forum state, and (2) the exercise of jurisdiction comports with traditional notions of fair play and [11] Courts substantial justice. U.S.C.A. Const.Amend. 14. Related contacts and activities; specific jurisdiction 23 Cases that cite this headnote To determine specific jurisdiction, courts focus on the relationship among the defendant, the [7] Constitutional Law forum, and the litigation.
Non-residents in general 2 Cases that cite this headnote When a nonresident defendant has purposefully availed itself of the privilege of conducting business in a foreign jurisdiction, it is both fair [12] Courts and just, under the due process clause, to subject Related contacts and activities; specific that defendant to the authority of that forum's jurisdiction courts. U.S.C.A. Const.Amend. 14; V.T.C.A., Specific jurisdiction is appropriate when (1) Civil Practice & Remedies Code § 17.042. the defendant's contacts with the forum state are purposeful, and (2) the cause of action arises 2 Cases that cite this headnote from or relates to the defendant's contacts.
13 Cases that cite this headnote [8] Courts Unrelated contacts and activities; general jurisdiction [13] Constitutional Law Courts Non-residents in general Related contacts and activities; specific The touchstone of jurisdictional due process is jurisdiction purposeful availment which requires a defendant A defendant's contacts with a forum can give rise to seek some benefit, advantage, or profit to either specific or general jurisdiction. by availing itself of the jurisdiction. U.S.C.A.
Const.Amend. 14.
5 Cases that cite this headnote 3 Cases that cite this headnote
[9] Courts Unrelated contacts and activities; general [14] Courts jurisdiction Commercial Contacts and Activities;
Contracts and Transactions “General jurisdiction” exists when a defendant's contacts are continuous and systematic, even if Sellers who reach beyond one state and the cause of action did not arise from activities create continuing relationships with residents performed in the forum state. of another state are subject to the specific jurisdiction of the latter in suits arising from 5 Cases that cite this headnote those activities. V.T.C.A., Civil Practice & Remedies Code § 17.042.
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Spir Star AG v. Kimich, 310 S.W.3d 868 (2010) Prod.Liab.Rep. (CCH) P 18,380, 53 Tex. Sup. Ct. J. 423
there been the source of injury to its owner or to 4 Cases that cite this headnote others. U.S.C.A. Const.Amend. 14.
Cases that cite this headnote [15] Constitutional Law Manufacture, distribution, and sale Seller's awareness that the stream of commerce [19] Courts may or will sweep the product into the forum Commercial Contacts and Activities; state does not convert the mere act of placing Contracts and Transactions the product into the stream into an act that is Stream-of-commerce analysis is relevant only to purposefully directed toward the forum state the exercise of specific jurisdiction; it provides and could subject seller to personal jurisdiction no basis for exercising general jurisdiction over consistently with due process; rather, some a nonresident defendant. additional conduct in required indicating intent or purpose to serve the market in the forum state. 2 Cases that cite this headnote U.S.C.A. Const.Amend. 14.
[20] Courts 7 Cases that cite this headnote Related contacts and activities; specific jurisdiction [16] Corporations and Business Organizations Specific jurisdiction is limited to claims that Jurisdiction and venue in general arise out of or relate to a nonresident's To fuse two corporations for jurisdictional forum contacts; there must be a substantial purposes, a parent must control the internal connection between the defendant's contacts and business operations and affairs of the subsidiary the operative facts of the litigation. to an extent beyond its role as an investor.
5 Cases that cite this headnote Cases that cite this headnote [21] Courts [17] Constitutional Law Agents, Representatives, and Other Third Manufacture, distribution, and sale Parties, Contacts and Activities of as Basis for Nonresident defendant's purposeful availment of Jurisdiction local markets potentially subjecting defendant Courts to specific personal jurisdiction consistently Related or affiliated entities; parent and with due process may be either direct, through subsidiary defendant's own offices and employees, or When a nonresident's only contacts with Texas indirect, through affiliates or independent involve indirect sales through a distributor or distributors. U.S.C.A. Const.Amend. 14. subsidiary, specific jurisdiction is limited to claims arising out of those sales.
1 Cases that cite this headnote 1 Cases that cite this headnote [18] Constitutional Law Manufacture, distribution, and sale [22] Constitutional Law If sale of a product is not simply an isolated Manufacture, distribution, and sale occurrence, but arises from the efforts of the Nonresident manufacturer must have intended manufacturer to serve directly or indirectly, the to serve the Texas market to be subject to market for its product in other states, it is not specific personal jurisdiction consistently with unreasonable under due process clause to subject due process clause. U.S.C.A. Const.Amend. 14. it to specific personal jurisdiction in one of those states if its allegedly defective merchandise has
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Spir Star AG v. Kimich, 310 S.W.3d 868 (2010) Prod.Liab.Rep. (CCH) P 18,380, 53 Tex. Sup. Ct. J. 423
established minimum contacts with the forum 3 Cases that cite this headnote state. U.S.C.A. Const.Amend. 14.
13 Cases that cite this headnote [23] Constitutional Law Manufacture, distribution, and sale Courts [26] Courts Particular cases Appellate jurisdiction of Supreme Court in general German manufacturer of high-pressure hoses purposefully availed itself of benefits and Supreme Court's jurisdiction over interlocutory protections of Texas law by using Texas appeal was given by Court of Appeals' disparate distributor and satisfied additional conduct holding differing from Supreme Court opinion standard for exercising specific personal on consideration of international interest in jurisdiction consistently with due process efficient resolution as factor in due process clause in products liability action, even challenge to personal jurisdiction. U.S.C.A. though manufacturer's shareholders formed the Const.Amend. 14; V.T.C.A., Government Code distributor and manufacturer relinquished title in § 22.225(c, e). Europe and did not receive distributor's profits;
Cases that cite this headnote manufacturer directly targeted state's market. U.S.C.A. Const.Amend. 14.
2 Cases that cite this headnote Attorneys and Law Firms
[24] Constitutional Law *870 Sarah B. Duncan, Elissa Gail Underwood, Mike A.
Manufacture, distribution, and sale Hatchell, Locke Lord Bissell & Liddell, LLP, Austin, TX, Courts Rick Lee Oldenettel, Oldenettel & Associates, P.C., Houston, Particular cases TX, for Petitioner.
Exercising specific personal jurisdiction over Scott Rothenberg, Law Offices of Scott Rothenberg, Keith M.
German manufacturer of high-pressure hoses Fletcher, Simmons & Fletcher, Houston, TX, for Respondent.
was consistent with traditional notions of fair play and substantial justice and, thus, with Opinion due process clause in products liability action; manufacturer's president spent six months of *871 Chief Justice JEFFERSON delivered the opinion of year in Texas as distributor's president, other the Court. directors had traveled to state, manufacturer's directors owned most of distributor, and [1] A foreign manufacturer sold its products in Texas adjudicating claims against distributor and through a Texas distributor. We must decide whether the manufacturer in same place would be more use of that distributorship insulates the manufacturer from efficient. U.S.C.A. Const.Amend. 14. the reach of a Texas court when one of the products injures a Texas citizen. We hold that a manufacturer is subject to 2 Cases that cite this headnote specific personal jurisdiction in Texas when it intentionally targets Texas as the marketplace for its products, and that using a distributor-intermediary for that purpose provides no [25] Constitutional Law haven from the jurisdiction of a Texas court. Because, in this Non-residents in general case, personal jurisdiction comports with traditional notions Only in rare cases will the exercise of jurisdiction of fair play and substantial justice, we affirm the court of not comport with due process requirements appeals' judgment. of fair play and substantial justice when the nonresident defendant has purposefully I. Factual and Procedural Background
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Spir Star AG v. Kimich, 310 S.W.3d 868 (2010) Prod.Liab.Rep. (CCH) P 18,380, 53 Tex. Sup. Ct. J. 423
Spir Star AG (“AG”), a German corporation headquartered which appellate courts review de novo. BMC Software Belg., in Rimbach, Germany, manufactures high-pressure hoses N.V. v. Marchand, 83 S.W.3d 789, 794 (Tex.2002). When, as and fittings for sale throughout the world. AG is owned by here, a trial court does not issue findings of fact or conclusions three German citizens: Werner Büchner, Gerhard Strobach, of law to *872 support its special-appearance determination, and Walter de Graaf. In 1995, AG decided that Houston we presume that all factual disputes were resolved in favor of would be the optimal location for a distributorship because the trial court's ruling. Id. the Texas coastal region's numerous refineries were well suited for AG's energy-related products. AG's executives [5] Texas courts have personal jurisdiction over a traveled to Houston, leased office space, and established a nonresident defendant when (1) the Texas long-arm statute Texas distributorship, Spir Star Inc., now Spir Star Limited provides for it, and (2) the exercise of jurisdiction is (“Limited”). AG's directors gave Limited permission to use consistent with federal and state due process guarantees. the trademarked “Spir Star” name free of charge. Although Am. Type Culture Collection, Inc. v. Coleman, 83 S.W.3d it sells products other than AG's, Limited is AG's exclusive 801, 806 (Tex.2002). Our long-arm statute reaches “ ‘as far distributor in Texas and North America. as the federal constitutional requirements for due process will allow.’ ” Id. (quoting Guardian Royal Exch. Assur., AG manufactures hoses that are used primarily in the Ltd. v. English China Clays, P.L.C., 815 S.W.2d 223, 226 energy industry. Each month, Limited purchases a maritime (Tex.1991)). Consequently, the statute's requirements are container full of AG's products, which are then shipped to satisfied if exercising jurisdiction comports with federal due the port of Houston. Limited assembles the hoses using AG– process limitations. Id. provided training and tools and sells them to customers in Texas and elsewhere. Title to the hoses passes to Limited [6] If a defendant has never invoked the protections that in Europe. The Texas distributorship accounts for thirty-five a forum offers its residents, or has no purposeful contact percent of AG's annual sales, although Limited and AG do with it, the forum court's jurisdiction is confined. Personal not share profits or finances with each other. jurisdiction over nonresident defendants is constitutional only when: (1) the defendant has established minimum contacts De Graaf, AG's president, is also the president of Limited. He with the forum state, and (2) the exercise of jurisdiction splits his time between Houston and Germany, and regularly comports with traditional notions of fair play and substantial conducts AG's business in Texas. De Graaf and AG's other justice. Int'l Shoe Co. v. Washington, 326 U.S. 310, 316, two officers own seventy-five percent of Limited; twenty-five 66 S.Ct. 154, 90 L.Ed. 95 (1945); PHC–Minden, L.P. v. percent is owned by Limited employees. Kimberly–Clark Corp., 235 S.W.3d 163, 167 (Tex.2007). The catchphrase “traditional notions of fair play and substantial In 2003, an AG high-pressure hose ruptured and seriously justice,” first used in Milliken v. Meyer, 311 U.S. 457, 463– injured Louis Kimich. AG had sold the hose to Limited, 64, 61 S.Ct. 339, 85 L.Ed. 278 (1940), has its origins in a which in turn sold it to Kimich's employer. Kimich sued his 1917 decision that referred to both “fair play” and “substantial employer and the premises owner, and later added claims justice” when the Supreme Court considered whether service 1 by publication comported with the due process clause. See against AG and Limited.
McDonald v. Mabee, 243 U.S. 90, 91–92, 37 S.Ct. 343, AG filed a special appearance, which the trial court and the 61 L.Ed. 608 (1917) (reversing a judgment of the Supreme court of appeals denied. 311 S.W.3d 1. We granted AG's Court of Texas). Since that time, we have incorporated the petition for review, 51 Tex. Sup.Ct. J. 1403, 1416 (Sept. 26, phrase into our own jurisprudence, beginning with O'Brien v. 2008), and now affirm. Lanpar Co., 399 S.W.2d 340, 342 (Tex.1966) (quoting Int'l Shoe, 326 U.S. at 316, 66 S.Ct. 154). The phrase remains a hallmark of personal jurisdiction today. See, e.g., Retamco II. Applicable Law Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333, [2] [3] [4] To render a binding judgment, a court must 337 (Tex.2009); PHC–Minden, 235 S.W.3d at 166; Moki Mac have both subject matter jurisdiction over the controversy and River Expeditions v. Drugg, 221 S.W.3d 569, 574 (Tex.2007). personal jurisdiction over the parties. CSR Ltd. v. Link, 925 S.W.2d 591, 594 (Tex.1996). Whether a court has personal [7] Although this “fair play” and “substantial justice” test is jurisdiction over a defendant is determined as a matter of law, well known to appellate courts, the expression is imprecise.
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It gains meaning, however, when viewed in light of the continuing relationships with residents of another state are “minimum contacts” a defendant has with the forum. Int'l subject to the specific jurisdiction of the latter in suits arising Shoe, 326 U.S. at 316, 66 S.Ct. 154. Significant contacts from those activities. Moki Mac, 221 S.W.3d at 575. suggest that the defendant has taken advantage of forum- related benefits, while minor ones imply that the forum itself [15] Notably, however, a seller's awareness “ ‘that the was beside the point. When a nonresident defendant has stream of commerce may or will sweep the product into purposefully availed itself of the privilege of conducting the forum State does not convert the mere act of placing business in a foreign jurisdiction, it is both fair and just to the product into the stream into an act purposefully directed subject that defendant to the authority of that forum's courts. toward the forum State.’ ” CSR, 925 S.W.2d at 595 (quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475, 105 S.Ct. Asahi Metal Indus. Co., Ltd. v. Superior Court of Cal., 2174, 85 L.Ed.2d 528 (1984). 480 U.S. 102, 112, 107 S.Ct. 1026, 94 L.Ed.2d 92 (1987)
(plurality opinion)). Instead, our precedent generally follows [8] [9] A defendant's contacts with a forum can give Justice O'Connor's plurality opinion in Asahi, which requires rise to either specific or general jurisdiction. CSR, 925 some “additional conduct”—beyond merely placing the S.W.2d at 595. General jurisdiction exists when a defendant's product in the stream of commerce-that indicates “an intent contacts are continuous and systematic, even if the cause of or purpose to serve the market in the forum State.” Asahi, action did not arise from activities performed in the forum 480 U.S. at 112, 107 S.Ct. 1026; Moki Mac, 221 S.W.3d state. Id. Here, the court of appeals concluded that AG's at 577; Michiana, 168 S.W.3d at 786. Examples of this continuous and systematic contacts with Texas established additional conduct include: (1) “designing the product for general jurisdiction. 311 S.W.3d at 5. We do not reach that the market in the forum State,” (2) “advertising in the forum issue, however, because we conclude instead that the trial State,” (3) “establishing channels for providing regular advice court had specific jurisdiction over AG. to customers in the forum State,” and (4) “marketing the product through a distributor who has agreed to serve as the sales agent in the forum State.” Asahi, 480 U.S. at 112, 107 *873 III. AG satisfies the “additional conduct” S.Ct. 1026; see also Moki Mac, 221 S.W.3d at 577; Michiana, standard required for specific jurisdiction. 168 S.W.3d at 786; Kawasaki Steel Corp. v. Middleton, 699 [10] [11] [12] A court has specific jurisdiction over a S.W.2d 199, 201 (Tex.1985). In this case, Kimich argues defendant if its alleged liability arises from or is related to that AG's substantial sales plus utilization of Limited as its an activity conducted within the forum. CSR, 925 S.W.2d distributor meets this standard. at 595. Unlike general jurisdiction, which requires a “more demanding minimum contacts analysis,” id. at 595, specific [16] AG relies on a different line of cases that reject jurisdiction “may be asserted when the defendant's forum jurisdiction “[w]hen a nonresident defendant purposefully contacts are isolated or sporadic, but the plaintiff's cause structures transactions to avoid the benefits and protections of of action arises out of those contacts with the state.” 4 a forum's laws.” Am. Type Culture, 83 S.W.3d at 808. Twice CHARLES ALAN WRIGHT & ARTHUR R. MILLER, recently we have rejected attempts to sue foreign subsidiaries FEDERAL PRACTICE & PROCEDURE § 1067.5 (3d ed. in Texas based on a parent corporation's contacts, holding 2002). In such cases, “we focus on the ‘relationship among that jurisdiction over one does not automatically establish the defendant, the forum[,] and the litigation.’ ” Moki Mac, jurisdiction over the other. PHC–Minden, 235 S.W.3d at 172; 221 S.W.3d at 575–76 (quoting Guardian Royal, 815 S.W.2d see also BMC Software, 83 S.W.3d at 800. Instead, to “fuse” at 228). Specific jurisdiction is appropriate when (1) the two corporations for jurisdictional purposes, a parent must defendant's contacts with the forum state are purposeful, and “control[ ] the *874 internal business operations and affairs (2) the cause of action arises from or relates to the defendant's of the subsidiary” to an extent beyond its role as an investor. contacts. See Retamco, 278 S.W.3d at 338. PHC–Minden, 235 S.W.3d at 175.
[13] [14] The “touchstone of jurisdictional due process AG argues the same principles apply here, even though [is] ‘purposeful availment.’ ” Michiana Easy Livin' Country, this case involves a foreign corporation's use of a Texas Inc. v. Holten, 168 S.W.3d 777, 784 (Tex.2005). Purposeful distributorship rather than a parent/subsidiary relationship. availment requires a defendant to seek some “benefit, The issue is not, however, whether Limited's actions in Texas advantage, or profit by ‘availing’ itself of the jurisdiction.” Id. at 785. Thus, sellers who reach beyond one state and create
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can be imputed to AG. Rather, our concern is with AG's own a foreign manufacturer like AG could be sued in Texas for conduct directed toward marketing its products in Texas. labor practices occurring in Germany even though they had nothing to do with Texas.
[17] [18] When an out-of-state manufacturer like AG specifically targets Texas as a market for its products, that [20] [21] Second, specific jurisdiction is limited to manufacturer is subject to a product liability suit in Texas claims that “arise out of or relate to” a nonresident's forum based on a product sold here, even if the sales are conducted contacts. Burger King, 471 U.S. at 472, 105 S.Ct. 2174; through a Texas distributor or affiliate. See Asahi, 480 U.S. Retamco, 278 S.W.3d at 338. In such cases, there must be at 112, 107 S.Ct. 1026 (“Additional conduct of the defendant a “substantial connection” between the defendant's contacts may indicate an intent or purpose to serve the market in the and the operative facts of the litigation. See Moki Mac, forum State, for example, ... marketing the product through 221 S.W.3d at 585. So when a nonresident's only contacts a distributor who has agreed to serve as the sales agent in with Texas involve indirect sales through a distributor or the forum State.”). In such cases, it is not the actions of subsidiary, specific jurisdiction is limited to claims arising the Texas intermediary that count, but the actions of the out of those sales. See, e.g., Alpine View Co. Ltd. v. foreign manufacturer who markets and distributes the product *875 Atlas Copco AB, 205 F.3d 208, 216 (5th Cir.2000) to profit from the Texas economy. As the United States (“Appellants are correct in noting that we have not, in Supreme Court stated in World–Wide Volkswagen Corp. v. our decisions dealing with the stream-of-commerce theory, Woodson, purposeful availment of local markets may be entirely foreclosed its application to cases not involving either direct (through one's own offices and employees) or product liability claims. We need not decide here whether the indirect (through affiliates or independent distributors): theory is, or is not applicable to a broader range of cases.”).
[I]f the sale of a product of a Third, not every product claim against a foreign manufacturer manufacturer ... is not simply an is included; there must be a substantial connection. That isolated occurrence, but arises from similar products were sold in Texas would not create a the efforts of the manufacturer ... to substantial connection as to products that were not. Similarly, serve directly or indirectly, the market a nonresident that buys a Texas distributor might have for its product in other States, it is not no substantial connection with sales that occurred before unreasonable to subject it to suit in one that purchase. See Commonwealth Gen. Corp. v. York, 177 of those States if its allegedly defective S.W.3d 923, 924 (Tex.2005). merchandise has there been the source of injury to its owner or to others. [22] Finally, the manufacturer must have intended to serve the Texas market. CSR, 925 S.W.2d at 596. While use of World–Wide Volkswagen v. Woodson, 444 U.S. 286, 297, 100 a Texas distributor may satisfy this requirement, there may S.Ct. 559, 62 L.Ed.2d 490 (1980) (emphasis added).
be situations in which it does not. A Texas distributorship may increase the manufacturer's bottom line because it is [19] There are several limitations inherent in this rule. First, more efficient or has greater access to economies of scale, it is limited to the specific jurisdiction context, because and not because it is intended to serve Texas consumers. Cf.
stream-of-commerce analysis “is relevant only to the exercise Asahi, 480 U.S. at 112, 107 S.Ct. 1026 (“Additional conduct”
of specific jurisdiction; it provides no basis for exercising may include “marketing the product through a distributor general jurisdiction over a nonresident defendant.” Purdue who has agreed to serve as the sales agent in the forum Research Found. v. Sanofi–Synthelabo, S.A., 338 F.3d 773, State.” (emphasis added)).
788 (7th Cir.2003); accord D'Jamoos ex rel. Estate of Weingeroff v. Pilatus Aircraft Ltd., 566 F.3d 94, 106 (3rd Many transactions can be structured to avoid any benefit Cir.2009); Nuovo Pignone, SpA v. STORMAN ASIA M/V, 310 from or availment of Texas law—but not all. A nonresident F.3d 374, 380 (5th Cir.2002); Barone v. Rich Bros. Interstate manufacturer does not avoid Texas law merely by forming Display Fireworks Co., 25 F.3d 610, 612 (8th Cir.1994); Moki a Texas affiliate or utilizing a Texas distributor to sell its Mac, 221 S.W.3d at 579; Joseph S. Pevsner and Gregory W.
products in Texas markets. Just as manufacturers cannot Curry, Down the Block But Outside Jurisdiction: Personal escape liability for defective products by selling them through Jurisdiction in a Modern World, 29 TEX. TECH L.REV. 977, 991 (1998). If sales alone created general jurisdiction,
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a subsidiary or distributor, neither can they avoid jurisdiction foreign manufacturer or seller [which] rids itself of title related to such claims by the same means. by a sale F.O.B. a foreign port [does not] insulate [itself]
from jurisdiction if there is the other type of activity”
[23] The question is whether AG has purposefully directed indicating purposeful availment); Gulf Consol. Servs., Inc. v. acts towards Texas or purposefully availed itself of the Corinth Pipeworks, S.A., 898 F.2d 1071, 1073 (5th Cir.1990) benefits and protections of Texas law. We conclude that it has. (observing that “the simple fact that a sales transaction is consummated outside that jurisdiction does not prevent the sale from forming the basis of jurisdiction”); Benitez–Allende A. AG marketed its products exclusively through v. Alcan Aluminio Do Brasil, S.A., 857 F.2d 26, 30 (1st Limited, a Texas distributor. Cir.1988) (holding that title passing in Brazil “is beside AG argues that its individual owners—rather than AG itself the point” in a specific jurisdiction analysis); Charles W. —established Limited. Even if that were true, by “marketing “Rocky” Rhodes, The Predictability Principle in Personal [its] product through a distributor who has agreed to serve Jurisdiction Doctrine: A Case Study on the Effects of a as the sales agent in the forum state,” AG has met Asahi's “Generally” Too Broad, but “Specifically” Too Narrow “additional conduct standard.” Asahi, 480 U.S. at 112, 107 Approach to Minimum Contacts, 57 BAYLOR L.REV. 135, S.Ct. 1026. 213 (2005).
AG also contends that, because it receives none of Limited's profits and relinquishes title to the hoses before they B. AG intended to serve the Texas market, and Kimich's reach Texas, AG does not benefit from Limited's Texas claim arose from AG's purposeful direction of acts connections. But AG reaps substantial economic gain through towards Texas. its sales to Limited, its largest distributor by far, responsible Not only did AG market its products through a distributor in for over one-third of AG's annual sales. See Moki Mac, the forum state, AG directly targeted the Texas market. In 221 S.W.3d at 578 (finding purposeful availment because CSR, we held that there was no specific jurisdiction over of foreign corporation's “additional conduct through which CSR, a foreign asbestos supplier whose product wound up in it aimed to get extensive business in or from this state”). Texas: CSR's knowledge that its buyer, a pipe manufacturer, Indeed, specific jurisdiction over foreign manufacturers is had a plant in Texas was not determinative because that often premised on sales by independent distributors. See, manufacturer also had plants in at least four other states, and e.g., Bridgeport Music, Inc. v. Still N The Water Publ'g, CSR's awareness that the stream of commerce may sweep the 327 F.3d 472, 483–84 (6th Cir.2003) (finding specific product into Texas “ ‘[did] not convert the mere act of placing jurisdiction under “additional conduct” standard based in the product into the stream into an act purposefully directed part on nationwide distribution agreement with independent toward the forum State.’ ” CSR, 925 S.W.2d at 595 (quoting distributor); Kuenzle v. HTM Sport–Und Freizeitgeräte AG, Asahi, 480 U.S. at 112, 107 S.Ct. 1026). Instead, we held that 102 F.3d 453, 458 (10th Cir.1996) (noting that “[t]he actions “there must be some indication that CSR intended to serve the of an independent distributor may not insulate a foreign Texas market.” Id. at 595. company from specific jurisdiction”); Tobin v. Astra Pharm. *876 Prods., Inc., 993 F.2d 528, 533–34 (6th Cir.1993) This is consistent with federal authority holding that no (holding that foreign drug manufacturer who marketed its specific jurisdiction exists over a manufacturer whose product in Kentucky through independent distributor was product just happens to end up in the forum state. For nonetheless subject to personal jurisdiction in forum under example, the Seventh Circuit Court of Appeals recently held Asahi's “additional conduct” standard); see also Pennzoil that a Danish jack manufacturer was not subject to specific Prods. Co. v. Colelli & Assocs., 149 F.3d 197, 206–07 jurisdiction in Indiana, because there was no evidence that (3d Cir.1998) (applying “additional conduct” standard and the manufacturer had “an awareness or expectation that some finding specific jurisdiction in Pennsylvania over Ohio of its products would be purchased in Indiana”: chemical producer who sold products to independent Ohio oil well producers that then sold oil to Pennsylvania refineries). In World–Wide Volkswagen, the Supreme Court held that personal Thus, it is not persuasive that title to the hoses passed jurisdiction was lacking because, in in Europe, rather than in Texas. See Renner v. Lanard part, there was no evidence in Toys Ltd., 33 F.3d 277, 282 (3d Cir.1994) (noting that “a the record that any products that
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the defendants distributed (in that be the best place for a distributor] because we knew that— case, automobiles) were ever sold we thought that would be the greatest need, because of the to retail customers in the forum immediate vicinity of all the refineries.” Strobach traveled state. Similarly in this case, Jennings to Houston because “we wanted to establish an office in produced no evidence that any of Houston.” The Board's selection of a Houston office preceded AC Hydraulic's products (including by a few days the arrival of Walter De Graaf, president of the jack at issue in this suit) were both AG and Limited and an employee of each, who signed ever sold in Indiana. Jennings claims the documents that created Limited. De Graaf spends half the that an Indiana company purchased year working in Houston and is paid by both AG and Limited the jack, but even if we were to while there; his contract with AG authorizes him to act on its accept this unsubstantiated allegation behalf no matter where he is. as evidence, Jennings does not tell us in what state or from whom this After deciding to establish Limited, AG authorized Limited company purchased the *877 jack. to use the “Spir Star” name, and Limited became AG's Additionally, Jennings established that exclusive distributor in Texas and throughout North America. AC Hydraulic sells some of its According to one of AG's directors, Limited has been “very products to two distributors in Florida, successful indeed,” and it is AG's largest customer by far. but she did not present any volume AG has sold millions of dollars worth of hoses to Limited; information for these sales or provide each month, AG sells Limited a maritime container full of us with information about where the reels of hose, which are shipped to the port of Houston. distributors resell the products, so the AG supplies Limited with crimping and assembly tools and scope of any alleged distribution in the written assembly standards, and AG personnel train Limited's rest of the United States, and whether employees in hose assembly. any AC Hydraulic products have been distributed in Indiana, cannot be AG's website, authored by one of its employees, states that: determined. The bottom line is that, relying on the sparse evidence that In order to cover the world-wide Jennings presented, we do not know market and provide quick service how the jack in question got to Indiana, to our customers, office [sic] were or if any other AC Hydraulic products opened in the following countries: have ever been sold there. It is possible SPIR STAR France, S.A.R.L. 1991 that the “unilateral activity” of a in Haguenau/France, SPIR STAR Inc. third party, rather than the defendant's [Limited] 1995 in Housten [sic]/Texas distribution scheme, landed the jack in (U.S.A.) and SPIR STAR Asia Pty. Indiana, which is the very scenario that Ltd. 1999 in Singapore. doomed the plaintiffs' case in World– Limited's website, which is written from AG's perspective, Wide Volkswagen.
states that “the decision was made that the company should Jennings v. AC Hydraulic A/S, 383 F.3d 546, 550–51 (7th expand its activities outside of Europe” and that “we ventured across the Atlantic and *878 founded SPIR STAR, Ltd.
Cir.2004) (internal citations omitted)(emphasis added); 2 see in Houston, Texas.” The same website touts Limited as also Boit v. Gar–Tec Prods., Inc., 967 F.2d 671, 683 (1st “the main link for our growing market share in North and Cir.1992) (finding no specific jurisdiction over foreign South America.” Under the heading “Spir Star Companies,”
corporation because there was “no evidence that [corporation]
four entities are listed: AG, Limited, Spir Star France, intended to serve the market in Maine”).
and Spir Star Asia, PTE Ltd. De Graaf, AG's president, testified that he reviewed the content of both websites prior Contrast those cases with the situation here. AG's board to their publication. The trial court could have believed, of directors created Limited because AG wanted to take as Kimich argues, that AG, acting through its directors advantage of “the biggest economy in the world.” Strobach and officers, created Limited or that the website statements testified that “the whole board ... decided that [Houston would were admissions by AG. Or the trial court simply could
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have determined that AG “marketed [its] product through a nations or states in furthering fundamental substantive social distributor who has agreed to serve as the sales agent in the policies. 3 Id. at 231. To defeat jurisdiction, *879 AG forum State.” Asahi, 480 U.S. at 112, 107 S.Ct. 1026. If the must present “ ‘a compelling case that the presence of some foregoing evidence does not indicate “an intent or purpose to consideration would render jurisdiction unreasonable’ ”— serve the market in [Texas],” it is difficult to imagine what something AG has not done. See id. (quoting Burger King, would. Cf. id. (finding no specific jurisdiction in California 471 U.S. at 477, 105 S.Ct. 2174). because “respondents have not demonstrated any action by Asahi to purposefully avail itself of the California market”). Requiring AG to defend Kimich's claim in Texas would not pose an undue burden for the company. The fact that Finally, Kimich's claim arose from AG's Texas contacts. See AG is headquartered in Germany cannot, by itself, defeat World–Wide Volkswagen, 444 U.S. at 297, 100 S.Ct. 559 jurisdiction. See id. at 231 (“Nor is distance alone ordinarily (“[I]f the sale of a product of a manufacturer ... is not simply sufficient to defeat jurisdiction: ‘modern transportation and an isolated occurrence, but arises from the efforts of the communication have made it much less burdensome for a manufacturer ... to serve directly or indirectly, the market for party sued to defend himself in a State where he engages in its product in other States, it is not unreasonable to subject economic activity.’ ” (quoting McGee v. Int'l Life Ins. Co., it to suit in one of those States if its allegedly defective 355 U.S. 220, 223, 78 S.Ct. 199, 2 L.Ed.2d 223 (1957))). merchandise has there been the source of injury to its owner Houston is familiar territory for AG's leadership: its president or to others.”); Bearry v. Beech Aircraft Corp., 818 F.2d 370, spends six months of the year there (and can carry on AG's 374 (5th Cir.1987) (“When the contact stems from a product, business while there), 4 two of AG's directors traveled to sold or manufactured by the foreign defendant, which has Houston to establish Limited, and one of them returned—at caused harm in the forum state, the court has [specific]
AG's expense—to celebrate Limited's fifth anniversary. Cf.
jurisdiction” provided defendant purposefully availed itself id. at 232–33, 78 S.Ct. 199 (finding jurisdiction unreasonable of the privilege of conducting activities within the forum);
because, among other things, the English defendant was cf. Hicks v. Kawasaki Heavy Indus., 452 F.Supp. 130, 134 unaffiliated with any American companies). Three of AG's (M.D.Pa.1978)(noting that “there exists a direct relationship directors collectively own seventy-five percent of Limited, between the cause of action and [Kawasaki's] contacts with which will be litigating in Houston.
the state,” as motorcycle sold by foreign manufacturer to distributor “is alleged to have caused injury in the state to a Moreover, Texas has a significant interest in exercising resident of the state”), cited in Asahi, 480 U.S. at 112–13, 107 jurisdiction over controversies arising from injuries a Texas S.Ct. 1026.
resident sustains from products that are purposefully brought into the state and purchased by Texas companies. Cf. Asahi, IV. Exercising jurisdiction over AG comports with 480 U.S. at 114, 107 S.Ct. 1026 (“Because the plaintiff traditional notions of fair play and substantial justice. is not a California resident, California's legitimate interests [24] [25] [26] Because AG's Texas contacts support in the dispute have considerably diminished.”); Guardian, specific jurisdiction, we must now determine whether 815 S.W.2d at 233 (“[S]ince Guardian Royal and U.S. Fire jurisdiction is consistent with traditional notions of fair play are neither Texas consumers nor insureds, Texas' interest in and substantial justice. Retamco, 278 S.W.3d at 341. “Only adjudicating the dispute ... is considerably diminished.”). Not in rare cases, however, will the exercise of jurisdiction not only would Kimich face an undue burden were he forced to comport with fair play and substantial justice when the litigate his product liability claim against AG in Germany, but nonresident defendant has purposefully established minimum because the claims against Limited will be heard in Texas, it contacts with the forum state.” Guardian Royal, 815 S.W.2d would be more efficient to adjudicate the entire case in the at 231 (citing Burger King, 471 U.S. at 477, 105 S.Ct. same place. See Retamco, 278 S.W.3d at 341 (“[The plaintiff] 2174). To evaluate this component, we must consider AG's has an interest in resolving this controversy in Texas because contacts in light of: (1) “the burden on the defendant”; that is where the litigation began.”). We recognize “the unique (2) “the interests of the forum state in adjudicating the and onerous burden placed on a party called to defend a dispute”; (3) “the plaintiff's interest in obtaining convenient suit in a foreign legal system.” CSR, 925 S.W.2d at 595 and effective relief”; (4) the interstate or international judicial (citing Asahi, 480 U.S. at 114, 107 S.Ct. 1026). In this case, system's interest in obtaining the most efficient resolution that burden is minimal and is outweighed by Kimich's and of controversies; and (5) the shared interest of the several Texas's interests *880 in adjudicating the dispute here. See
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and AG undoubtedly “intended to serve the Texas market,”
Asahi, 480 U.S. at 114, 107 S.Ct. 1026. Asserting personal CSR, 925 S.W.2d at 595. Further, AG's potential liability jurisdiction over AG comports with traditional notions of fair arises out of its contacts with Texas, and exercising personal play and substantial justice.
jurisdiction over AG does not offend traditional notions of fair play and substantial justice. The court of appeals and the V. Conclusion trial court correctly concluded that Texas courts have personal Under the appropriate standard of review, our task ends when, jurisdiction over this claim against AG. We affirm the court as here, some evidence supports the trial court's denial of AG's of appeals' judgment. TEX.R.APP. P. 60.2(a). special appearance. BMC, 83 S.W.3d at 794–95. AG did not merely set its products afloat in a stream of commerce that happened to carry them to Texas. AG “marketed [its] product All Citations through a distributor who has agreed to serve as [its] sales 310 S.W.3d 868, Prod.Liab.Rep. (CCH) P 18,380, 53 Tex. agent in [Texas],” Asahi, 480 U.S. at 112, 107 S.Ct. 1026, Sup. Ct. J. 423
Footnotes 1 Limited has not challenged jurisdiction. 2 The court did not resolve whether Justice O'Connor's or Justice Brennan's Asahi standard should be applied, because the plaintiff failed to make even a threshold showing that AC Hydraulic had an awareness or expectation that some of its products would be purchased in Indiana. Jennings, 383 F.3d at 551 n. 2.
3 There is some confusion about a court's need to evaluate the fourth and fifth considerations in cases involving a foreign defendant. In Guardian Royal, we held that in cases involving a foreign defendant rather than two “coequal sovereigns in our federal system, we need not consider the interstate judicial system's interest in obtaining the most efficient resolution of controversies or the shared interest of the several states in furthering fundamental substantive social policies,” Guardian Royal, 815 S.W.2d at 232 n. 17, considerations that would be relevant in a dispute among residents of differing states. While this is true, we failed to explain that in such cases courts must instead consider the interests of “other nations whose interests are affected by the assertion of jurisdiction.” Asahi, 480 U.S. at 115, 107 S.Ct. 1026. Here, the court of appeals examined the international interest in obtaining the most efficient resolution of controversies but failed to consider the shared interest of the several nations in furthering fundamental substantive social policies. 311 S.W.3d at 8 (“We will not address the fifth factor as only one state is involved in this dispute.”). This disparate holding gives us jurisdiction over this interlocutory appeal. TEX. GOV'T CODE § 22.225(c), (e) (noting that one court “holds differently from another when there is inconsistency in their respective decisions that should be clarified to remove unnecessary uncertainty in the law and unfairness to litigants”).
4 De Graaf has established a residence in Houston and obtained a “green card” in 2000.
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168 S.W.3d 835 West Headnotes (7)
Supreme Court of Texas.
STERLING TRUST COMPANY, Petitioner, [1] Securities Regulation v. Construction and Operation in General Roderick ADDERLEY, et al., Respondents. The Legislature intended the Texas Securities Act (TSA) to be interpreted in harmony with No. 03–1001. | Argued Sept. 29, federal securities law. Vernon's Ann.Texas 2004. | Decided June 17, 2005. Civ.St. art. 581–10–1, subd. A. | Rehearing Denied Aug. 26, 2005.
2 Cases that cite this headnote Synopsis Background: Investors in qualified securities, who were [2] Securities Regulation defrauded by broker seller in illegal Ponzi scheme, filed Persons Liable lawsuit against broker, brokerage firm he worked for, and third-party trustee for investors' retirement accounts. Broker Texas Securities Act's (TSA) requirement of died and claims against brokerage firm were severed, leaving “reckless disregard for the truth or the law,” trustee as sole defendant. The 236th District Court, Tarrant as element for liability for aiding a securities County, Thomas Wilson Lowe III, J., after jury found that violation, means an alleged aider is subject trustee aided and abetted broker in committing securities to liability as secondary violator only if it fraud and that it breached its fiduciary duty to investors, rendered assistance to primary violator in face of rendered judgment against trustee for over $6 million based perceived risk that its assistance would facilitate on jury's actual damages findings, and awarded investors untruthful or illegal activity by primary violator, $250,000, the amount of exemplary damages found by jury, which does not mean that aider must know for trustee's malicious breach of fiduciary duty. Upon denial of exact misrepresentations or omissions made of its motions for new trial and judgment notwithstanding by primary violator, but does mean that aider the verdict (JNOV), trustee appealed. The Ft. Worth Court must be subjectively aware of primary violator's of Appeals, 119 S.W.3d 312, affirmed the award of actual improper activity. Vernon's Ann.Texas Civ.St. damages but reversed the award of exemplary damages. art. 581–33, subd. F(2). Review was granted.
18 Cases that cite this headnote
[3] Appeal and Error Holdings: The Supreme Court, Harriet O'Neill, J., held that:
Failure or Refusal to Charge
[1] aider liability under Texas Securities Act requires Error in failing to instruct jury on subjective defendant's subjective awareness of primary violator's awareness requirement for aider liability under improper activity; Texas Securities Act (TSA) was not harmless, though jury was instructed that defendant trustee [2] instructional error on aider liability was not harmless; and for plaintiff investors' retirement accounts had to have acted with reckless disregard for the [3] instruction on breach of fiduciary duty was overly broad truth or the law in order to be liable for and defective. aiding securities broker-seller's securities law violations; jury might well have thought that reckless disregard could be based on evidence Court of Appeals reversed; remanded. of trustee's negligent handling of accounts even if trustee had no actual knowledge of broker- seller's improprieties, and investors themselves created such risk of misinterpretation by arguing
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repeatedly at trial that trustee either knew whether trustee knew of broker-seller's improper fully what broker-seller was doing or exercised activity in general. Vernon's Ann.Texas Civ.St. reckless disregard by ignoring trustee's internal art. 581–33, subds. A(2), F(2). procedures that would have brought broker- seller's activities to light. Vernon's Ann.Texas 15 Cases that cite this headnote Civ.St. art. 581–33, subd. F(2).
[7] Trusts 11 Cases that cite this headnote Trial Failure of instruction on standard for breach [4] Securities Regulation of fiduciary duty to account for contractual Persons Liable modifications of trustee's fiduciary duties The Texas Securities Act (TSA) does not require rendered the instruction overly broad and the aider to have had direct dealing with the defective, in investors' action against trustee defrauded party, in order to be liable for aiding for their Individual Retirement Accounts (IRA), a securities violation; a person who “materially relating to investors' losses from Ponzi scheme aids a seller” may have no contact at all with the run by securities broker, into which scheme investors. Vernon's Ann.Texas Civ.St. art. 581– investors self-directed funds from IRAs for 33, subd. F(2). which trustee served as custodian. V.T.C.A., Property Code § 113.059.
4 Cases that cite this headnote 5 Cases that cite this headnote [5] Securities Regulation Persons Liable The Texas Securities Act (TSA) does not provide Attorneys and Law Firms an affirmative defense, to aider liability as secondary violator under TSA, that alleged aider *837 Donald E. Herrmann, Dee J. Kelly, Todd W. Spake, did not know, and in exercise of reasonable care John Thomas Wilson IV, Kelly Hart & Hallman, P.C., Fort could not have known, of the untruth or omission Worth, Robert B. Gilbreath, V. Elizabeth Kellow, Alan by primary violator. Vernon's Ann.Texas Civ.St. R. Bromberg, Jenkens & Gilchrist, P.C., Dallas, Sharon art. 581–33, subds. A(2), F(2). E. Callaway, Crofts & Callaway, P.C., San Antonio, for Petitioner.
8 Cases that cite this headnote Rickey J. Brantley, David E. Keltner, Jose Henry Brantley & [6] Securities Regulation Keltner, L.L.P., Thomas G. Farrier, Murphy Mahon Keffler Persons Liable & Farrier, L.L.P., Fort Worth, James Dan Moorhead, Law Office of James Dan Moorhead, Arlington, for Respondents.
Jury's finding that defendant trustee for plaintiff investors' retirement accounts did not know Karen Sue Neeley, Joseph R. Knight, Baker & Botts, L.L.P., and could not have reasonably known of the Austin, Philip John Kuhl Jr., Sanford & Kuhl, N. Scott untruth or omission made by broker-seller, Fletcher, Houston, Royal B. Lea III, Bingham & Lea, P.C., which finding provided affirmative defense to San Antonio, for Amici Curiae. trustee's primary liability to investors under Texas Securities Act (TSA), did not preclude Opinion as matter of law a finding that trustee acted with reckless disregard for the truth or the law, Justice O'NEILL delivered the opinion of the Court. as element for liability to investors under TSA The Texas Securities Act (TSA) imposes liability on a person for aiding broker-seller's securities violations;
who sells securities “by means of an untrue statement of a finding on affirmative defense to trustee's material fact or an omission to state a material fact,” and liability as primary violator did not establish imposes liability on a person who “materially aids a seller,
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buyer, or issuer of a security” if the person acts “with intent misrepresented the uses of investment funds, and to deceive or defraud or with reckless disregard for the truth misrepresented the commingling and misappropriation of or the law.” TEX. REV. CIV. STAT. ANN. ART. 581– funds. Avalon was forced into receivership, and the Avalon 33F(2) (Vernon Supp.2004–2005). The trial court and court investors collectively lost millions of dollars. A number of of appeals interpreted the latter provision to allow aider elderly investors lost their entire retirement savings. The liability even if the aider was unaware of its role in the investors sued Cornelius, Sunpoint Securities, Van Lewis securities violation. We conclude, however, that the TSA's (the owner of Sunpoint), and Sterling Trust. After suit was requirement of “reckless disregard for the truth or the law” filed, but before the case was tried, Cornelius died and means that an alleged aider is subject to liability only if it Sunpoint entered receivership. The claims against Sunpoint rendered assistance to the seller in the face of a perceived risk were severed from the suit as a result of the receivership, but that its assistance would facilitate untruthful or illegal activity Sunpoint was still included in the charge as a party to which by the primary violator. This standard does not mean that the the jury could apportion responsibility. aider must know of the exact misrepresentations or omissions made by the seller, but it does mean that the aider must be At trial, the investors put forth several theories of liability. subjectively aware of the primary violator's improper activity. The jury charge asked (1) whether each of the defendants Accordingly, we reverse the court of appeals' judgment and offered or sold securities “by means of an untrue statement of remand this case to the trial court for further proceedings material fact or the omission to state a material fact necessary consistent with this opinion. in order to make the statements made, if any, in light of the circumstances under which they were made not misleading”; (2) whether Sterling aided Cornelius in committing securities fraud by “directly or indirectly with intent to deceive or
I
defraud or with reckless disregard for the truth or the law During the early to mid–1990s, Norman Cornelius formed materially aid[ing] a seller of a security”; (3) whether Sterling Avalon Custom Homes and a number of related corporate was “part of a conspiracy that damaged [the investors]”; entities (collectively referred to as “Avalon”) designed to (4) whether Sterling “fail[ed] to comply with its fiduciary develop and sell luxury homes. At that time, Cornelius duty” to its account holders; and (5) whether the defendants worked as an investment advisor and broker for Sunpoint committed fraud against the investors. Securities. Cornelius operated Avalon out of his Sunpoint office and encouraged his brokerage clients to invest their In support of these contentions, the investors provided money in Avalon. Cornelius also persuaded members of evidence that Cornelius told investors that investing in his church and retirees from Mrs. Baird's Bakery to invest Avalon carried “no risk” and that any principal invested in Avalon, offering investors promissory notes that bore as would be protected. There was also evidence that Avalon much as an eighteen percent rate of *838 return and allowed was not profitable and that early investors were paid with the conversion to Avalon stock. proceeds of later investors, thus creating a pyramid effect that collapsed when new investments dried up. 1 Many of the investors chose to invest their retirement savings in Avalon. Because certain retirement accounts such as IRAs The investors argued that Sterling played an essential and lump-sum pension distributions must be held by a third- role in allowing the investment scheme to continue as party trustee to maintain their preferential tax status, Avalon long as it did. They argued that Sterling had a duty to needed a third-party trustee in order to accept such funds. In undertake a “suitability analysis” and that it should have 1994, Cornelius began recommending that Avalon investors informed the investors that “too much of their net worth” use Sterling Trust Company, a custodian of self-directed IRA was held in “overly risky investments.” The investors accounts, as their IRA custodian. From 1994 until 1997, provided evidence that Sterling's failure to comply with Sterling served as the exclusive trustee over the retirement several of its *839 own internal procedures facilitated money that the investors self-directed to Cornelius. Cornelius's pyramid scheme and allowed Cornelius to hide the nature of his scheme from the investors. For example, the In 1997, the Securities and Exchange Commission (SEC) investors showed that, although Sterling's policies prohibited filed suit against Cornelius, alleging that Cornelius it from holding promissory notes that were in default, it misrepresented the risks associated with the investments, nevertheless held such notes. The investors also provided
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evidence that Sterling failed to obtain many of the Avalon made, in the light of the circumstances under which they are stock certificates and original promissory notes; ordinarily, made, not misleading.” TEX. REV. CIV. STAT. ANN. art. Sterling employees could not enter transactions into Sterling's 581–33A(2) (Vernon Supp.2004–2005). Secondary liability computer system without such documents. When lower- is derivative liability for another person's securities violation; level Sterling employees alerted management to the lack it can attach to either a control person, defined as “[a] person of such documents, they were told that Sterling had made who directly or indirectly controls a seller, buyer, or issuer an agreement allowing Avalon to retain those documents. of a security,” or to an aider, defined as one “who directly or There was also evidence that Sterling failed to obtain copies indirectly with intent to deceive or defraud or with reckless of the security agreements for the promissory notes that disregard for the truth or the law materially aids a seller, purported to be secured by real estate, even though Sterling's buyer, or issuer of a security.” Id. art. 581–33F(1)–(2). Both internal procedures required it to keep such documents on control persons and aiders are jointly and severally liable with file. In addition, the investors provided evidence that Sterling the primary violator “to the same extent as if [they] were” the was aware that Cornelius was commingling investors' funds primary violator. Id. by having one or more of the Avalon companies make payments on notes for which another Avalon company was *840 In this case, the jury found that Sterling was indebted, and that at least one of Sterling's internal memos secondarily liable as an aider. Sterling argues that the trial questioned this practice. Finally, the investors demonstrated court erred by failing to instruct the jury that an alleged aider that Cornelius did not pay the principal balance on a number cannot be held secondarily liable unless it had a “general of notes as they became due, but instead transferred the awareness” of its role in the primary violation. See Frank investors' money into new investment vehicles in other v. Bear, Stearns & Co., 11 S.W.3d 380, 384 (Tex.App.- Avalon entities. There was evidence that Sterling allowed Houston [14th Dist.] 2000, pet. denied) (holding that “[i]n Cornelius to unilaterally make such transfers despite its own order to establish liability” for aiding a securities violation, policy requiring documentation of investor approval for new “a plaintiff must demonstrate ... that the alleged aider had investments. ‘general awareness' of its role in this violation”) (citations omitted). At the charge conference, Sterling objected to the The jury returned a verdict against Cornelius on all counts. trial court's proposed instruction on aider liability because it On the issues pertaining to Sterling, however, the verdict made no mention of the “general awareness” requirement. was mixed. Specifically, the jury found that Sterling was The trial court overruled this objection. The court of appeals not a “seller” of securities, that Sterling did not conspire held that the failure to include such an instruction was not to damage the investors, and that Sterling did not commit error, concluding that “the TSA does not require proof that an fraud. However, the jury found that Sterling aided Cornelius's aider is generally aware of its role in the securities violation securities violation and that Sterling breached its fiduciary to be liable as an aider.” 119 S.W.3d at 320. Sterling contends duty to its account holders. The investors elected to recover on the court of appeals' holding conflicts with opinions from the aiding-and-abetting finding, and the trial court rendered other Texas courts of appeals that have held that the TSA does judgment against Sterling for $6 million in actual damages impose such a requirement. See Goldstein v. Mortenson, 113 and $250,000 in exemplary damages. The court of appeals S.W.3d 769, 776 (Tex.App.-Austin 2003, no pet.); Crescendo affirmed the trial court's award of actual damages, but Invs., Inc. v. Brice, 61 S.W.3d 465, 472 (Tex.App.-San reversed the exemplary damages award. 119 S.W.3d 312. We Antonio 2001, pet. denied); Bear, Stearns & Co., 11 S.W.3d granted Sterling's petition for review to consider the scope of at 384. In this case, the court of appeals noted the conflict but its potential liability to the investors and related issues. concluded that, because the “language of the TSA” does not explicitly impose such a requirement, the proper course was to “decline to follow those opinions ... that have concluded that the TSA contains a general awareness requirement.” 119
II
S.W.3d at 319–20.
The Texas Securities Act establishes both primary and secondary liability for securities violations. Primary liability [1] We disagree with the court of appeals' conclusion arises when a person “offers or sells a security ... by means that the TSA contains no awareness requirement. The of an untrue statement of a material fact or an omission to statute's history demonstrates that the Legislature intended state a material fact necessary in order to make the statements the TSA to be interpreted in harmony with federal securities
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law, and the TSA itself instructs that “[t]his Act may be time that the Legislature enacted the TSA, this Court had construed and implemented to effectuate its general purpose long held that “recklessness” required evidence of “conscious to maximize coordination with federal and other states' law indifference” in the context of gross negligence. See Rowan v. and administration.” TEX. REV. CIV. STAT. ANN. art. 581– Allen, 134 Tex. 215, 134 S.W.2d 1022, 1025 (1940) (holding 10–1A (Vernon Supp.2004–2005). When the Legislature that “reckless disregard of the rights of [the] plaintiff” means added the aider-liability provision to the TSA in 1977, most “a conscious indifference to her rights or welfare”). The federal courts considering the issue had held that aider United States Supreme Court has noted a number of other liability could be imposed under the federal securities law civil actions in which recklessness requires a subjective only when the aider was generally aware of its role in an awareness of, and indifference to, the risk posed by the improper scheme. 2 See Gould v. American–Hawaiian S.S. defendant's conduct. See Kolstad v. Am. Dental Ass'n, 527 Co., 535 F.2d 761, 779–80 (3d Cir.1976) (stating that “[t]he U.S. 526, 535, 119 S.Ct. 2118, 144 L.Ed.2d 494 (1999). In required knowledge of the act has been defined as a ‘general Kolstad, the Court stated that “recklessness in its subjective awareness (on the part of the aider and abettor) that his role form” requires “a ‘subjective consciousness' of a risk of was part of an overall activity that is improper’ ” and that injury or illegality and a ‘criminal indifference to civil “the proof offered must establish conscious involvement in obligations.’ ” Id. at 536, 119 S.Ct. 2118. The Court noted impropriety or constructive notice of intended impropriety”) that “recklessness in its subjective form” has been applied (quoting SEC v. Coffey, 493 F.2d 1304, 1316 (6th Cir.1974)); to the recovery of punitive damages in certain civil-rights Woodward v. Metro Bank of Dallas, 522 F.2d 84, 96 (5th actions and has also been applied in defamation cases, which Cir.1975) (“The postman who mails a fraudulent letter is require “knowledge of falsity or reckless disregard *842 not covered by the Act, nor is the company that *841 for the truth,” id., a requirement that has been interpreted manufactured the paper on which the violating documents are to mean that the defendant “in fact entertained serious doubts as to the truth of his publication.” St. Amant v.
printed.... [T]he proof must demonstrate actual awareness 3 of Thompson, 390 U.S. 727, 731, 88 S.Ct. 1323, 20 L.Ed.2d 262 the party's role in the fraudulent scheme.”) (citations omitted).
(1968). In Kolstad, the Court applied this subjective standard to the award of punitive damages in certain employment The investors argue that the federal cases are irrelevant discrimination actions, holding that the statute's “reckless because the Texas Legislature chose a different, lesser indifference” requirement meant that “an employer must at standard for aider liability under the TSA; specifically, the least discriminate in the face of a perceived risk that its actions investors point out that liability may be imposed on an aider will violate federal law to be liable in punitive damages.”
who acted “with intent to ... defraud or with reckless disregard Kolstad, 527 U.S. at 536, 119 S.Ct. 2118 (emphasis added).
for the truth or the law,” and argue that “reckless disregard” may be shown even if the aider had no awareness of its role We conclude that the TSA's scienter requirement of “reckless in an improper scheme. See TEX. REV. CIV. STAT. ANN.
disregard for the truth or the law” is similarly intended art. 581–33F(2). As support for this proposition, the investors to impose a requirement of “recklessness in its subjective point to a Texas court of appeals case which held that a form,” and this recklessness must be directly related to “failure to conduct minimal investigation and inquiry” before the primary violator's securities violation. Id. When the rendering assistance with a securities transaction can suffice Texas Legislature adopted the aider provision of the TSA, it to create liability under the “reckless disregard” standard. See explicitly stated that aider liability should be imposed “only if Goldstein, 113 S.W.3d at 777.
the aider has the requisite scienter.” TEX. REV. CIV. STAT. ANN. art. 581–33, Comment—1977 Amendment (Vernon [2] We disagree that the “reckless disregard” standard Supp.2004–2005). Furthermore, at the time this amendment either imposes a lesser standard than the “general awareness”
was adopted, some scholars had suggested that the policy requirement or allows liability to be imposed for a mere concerns favoring a subjective scienter standard outweighed failure to investigate. Instead, we conclude that the statute's the potential investor protections available under a “should use of the phrase “reckless disregard for the truth or the have known” standard:
law” accords with the requirement that an aider must be aware of the primary violator's improper activities before it In most cases, the alleged aider and may be held liable for assisting in the securities violation. abettor ... will merely be engaging The Legislature's use of the phrase “reckless disregard” is in customary business activities, consistent with a requirement of subjective awareness; at the such as loaning money, managing
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a corporation, preparing financial had no actual knowledge of Cornelius's improprieties; the statements, distributing press releases, plaintiffs themselves created such a risk of misinterpretation completing brokerage transactions, or by arguing repeatedly at trial that Sterling “either knew fully giving legal advice. If each of these what Cornelius was doing” or “exercised reckless disregard” parties will be required to investigate by ignoring internal procedures that would have brought the ultimate activities of the party Cornelius's activities to light. Ignoring internal procedures whom he is assisting, a burden may that might have alerted Sterling to Cornelius's scheme may be imposed upon business activities be negligence, but it is not “reckless disregard for the truth that is too great.... The essential or the law.” Therefore, “consider[ing] the pleadings of the point is that imposition of a duty parties, the evidence presented at trial, and the charge in to investigate under the guise of a its entirety,” we conclude that the absence of an instruction “should have known” standard in on the subjective awareness requirement “was reasonably essence would amount to eliminating calculated [to] and probably did cause the rendition of scienter as a necessary element in an improper judgment.” Island Recreational Dev. Corp. v. imposing aiding and abetting liability Republic of Tex. Sav. Ass'n, 710 S.W.2d 551, 555 (Tex.1986). and the substitution of a negligence standard.
Ruder, Multiple Defendants in Securities Law Fraud III Cases: Aiding and Abetting, Conspiracy, In Pari Delicto, [4] Sterling makes two other arguments that it should be Indemnification, and Contribution, 120 U. PA. L. REV.
absolved of liability for aiding a securities violation. First, 597, 632–33 (1972). The Legislature presumably weighed it argues that it cannot be liable as an aider “with respect to these policy concerns when it chose to adopt the “reckless transactions and persons with which Sterling had no contact.”
disregard” standard instead of a lower negligence or “should As the court of appeals correctly noted, however, the TSA have known” standard.
does not require the aider to have had direct dealing with the defrauded party; indeed, a person who “materially aids a We therefore hold that the TSA's “reckless disregard for the seller” may have no contact at all with the investors. See TEX.
truth or the law” standard means that an alleged aider can REV. CIV. STAT. ANN. art. 581–33F(2).
only be held liable if it rendered assistance “in the face of a perceived risk” that its assistance would facilitate untruthful [5] Sterling also argues that it cannot be liable as an or illegal activity by the primary violator. TEX. REV. CIV.
aider because the jury found in Sterling's favor on its STAT. ANN. art. 581–33F(2); Kolstad, 527 U.S. at 536, 119 affirmative defense that it did not know, and could not have S.Ct. 2118. In order to perceive such a risk, the alleged aider known, of the particular misrepresentations or omissions must possess a “ ‘general awareness that his role was part of made by Cornelius. This affirmative defense is available to an overall activity that is improper.’ ” Gould, 535 F.2d at 780.
persons alleged to have committed a primary violation of the securities laws. As noted above, the statute provides that a [3] We further hold that the trial court's failure to include seller of a security may be held liable if it “offers or sells a the subjective awareness requirement in the jury charge was security ... by means of an untrue statement of a material fact harmful error. The investors assert that no such instruction or an omission to state a material fact necessary in order to was needed; they acknowledge that “the TSA aider liability make the statements made, in the light of the circumstances ‘reckless disregard for the truth or the law’ language is not under which they are made, not misleading.” Id. art. 581– inconsistent with the federal ‘general awareness' language,”
33A(2). The statute permits the seller to avoid liability by but argue that the charge's inclusion of the “reckless proving the affirmative defense that “he (the offeror or seller)
disregard” requirement was sufficient to instruct the jury on did not know, and in the exercise of reasonable care could not the standard for liability. We disagree. The trial court is have known, of the untruth or omission.” Id.
required to “submit such instructions *843 and definitions as shall be proper to enable the jury to render a verdict.”
Because the jury was asked whether Sterling should be TEX. R. CIV. P. 277. In this case, the jury may well have held liable as a seller, it was also asked if Sterling had thought that “reckless disregard” could be based on evidence established this affirmative defense; specifically, the question of Sterling's negligent handling of accounts even if Sterling
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asked whether Sterling “did not know, and in the exercise of reasonable care, could not have known of the untruth or Id. art. 581–33F(2) (emphasis added). Instead of requiring the omission” made by the seller. The jury found that Sterling aider to establish lack of knowledge as an affirmative defense, lacked such knowledge and thereby absolved Sterling of the section on aider liability requires a plaintiff to prove that primary liability as a seller. Sterling argues that this lack of the aider acted with “intent to deceive or defraud or with knowledge also establishes that it cannot be liable as an aider. reckless disregard for the truth or the law.” Id. We disagree.
The legislative history of this provision reflects that the The TSA provides different knowledge requirements for Legislature intended to apply distinct liability standards to the different classes of defendants; one standard applies to sellers, different categories of defendants. The Legislature's comment another applies to control persons, and a third standard applies to section 33F states that the provision “derives in part from to aiders. As noted above, sellers are absolved of liability Uniform Securities Act § 410(b).” Id. art. 581–33, Comment if they prove that they lacked knowledge of the “untruth or —1977 Amendment. Unlike the TSA, however, this section omission.” Id. Control persons may invoke a similar, but not of the Uniform Securities Act applies the same standard to identical, lack-of-knowledge defense: control persons and to aiders:
*844 A person who directly or Every person who directly or indirectly controls a seller, buyer, or indirectly controls a seller liable [for issuer of a security is liable under unlawful sales of securities], every Section 33A, 33B, or 33C jointly and partner, officer, or director of such a severally with the seller, buyer, or seller, ... every employee of such a issuer, and to the same extent as if he seller who materially aids in the sale, were the seller, buyer, or issuer, unless and every broker-dealer or agent who the controlling person sustains the materially aids in the sale are also burden of proof that he did not know, liable jointly and severally with and to and in the exercise of reasonable care the same extent as the seller, unless could not have known, of the existence the nonseller who is so liable sustains of the facts by reason of which the the burden of proof that he did not liability is alleged to exist. know, and in exercise of reasonable care could not have known, of the Id. art. 581–33F(1) (emphasis added). The control-person existence of the facts by reason of defense differs slightly from the one applied to sellers; which the liability is alleged to exist. instead of proving that they did not know of the “untruths or omissions,” control persons must show that they did not know UNIF. SECURITIES ACT § 410(b), 7C U.L.A. 266 (1956). of “the facts by reason of which liability is alleged to exist.” Id. It thus appears that the TSA adopted the Uniform Securities Act's liability standard for control persons but modified its Finally, the knowledge requirement for aiders is different standard for aiders; while the TSA allows a broader class from both the standard for control persons and the standard of persons to qualify as aiders, it imposes a stricter scienter for sellers: restriction on them. For example, the Uniform Securities Act of 1956 limited aider liability to a seller's employees, A person who directly or indirectly brokers, or agents, id., but the TSA permits “[a] person” with intent to deceive or defraud or who provides material aid to be held liable. TEX. REV. with reckless disregard for the truth CIV. STAT. ANN. art. 581–33F(2). In contrast to its narrow or the law materially aids a seller, class of defendants, the Uniform Securities Act imposed buyer, or issuer of a security is liable a more relaxed scienter requirement, allowing liability to under Section 33A, 33B, or 33C jointly be imposed on an aider if it negligently failed to discover and severally with the seller, buyer, or the facts creating liability. § 410(b). Conversely, the TSA issuer, and to the same extent as if he creates a broader class of defendants, but requires more were the seller, buyer, or issuer. than mere negligence to impose liability; the TSA only
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imposes liability if the aider *845 acted with “intent to The investors acknowledge that Sterling may not have known deceive or defraud or with reckless disregard for the truth or the exact misrepresentations that Cornelius was making to the the law.” TEX. REV. CIV. STAT. ANN. art. 581–33F(2). investors, but they argue that Sterling did know that Cornelius Furthermore, the TSA places the burden of proof on the was operating an illegal pyramid scheme. We agree that plaintiff to prove that the defendant acted with the requisite knowledge of such an illegal scheme, if proven, could support scienter, id., while the Uniform Securities Act required the a finding that Sterling acted “with reckless disregard for the defendant to prove that it acted with reasonable care. § 410(b). truth or the law” even if Sterling could not have known of the Finally, the TSA focuses on the aider's reckless disregard particular misrepresentations made by Cornelius. See State ex “for the truth or the law,” art. 581–33F(2), instead of the rel. Goettsch v. Diacide Distribs., Inc., 561 N.W.2d 369, 382 aider's knowledge “of the existence of the facts by reason of (Iowa 1997) (permitting aider liability under Iowa's securities which the liability is alleged.” § 410(b). These modifications statute to be based on the aider's knowledge that the primary indicate that the Legislature gave significant consideration to violator was engaging in “atypical business transactions [that] the proper scienter standard for aiders. We decline to imply amounted to a Ponzi scheme”); see also Graham v. Sec. & an additional defense not offered to aiders under the text of Exch. Comm'n, 222 F.3d 994, 1005 (D.C.Cir.2000) (scienter the statute. established when aider continued to assist primary violator despite knowledge of his “irrational trading” and financial Sterling argues that the failure to imply such a defense renders difficulties). the statute illogical and allows secondary violators to be held liable even when a primary violator could escape liability [6] We acknowledge that there is some tension between by invoking an affirmative defense. We disagree. First, the jury's finding that *846 Sterling acted with “reckless a secondary violator's liability depends upon the primary disregard for the truth or the law” and its finding that Sterling violator's culpability; even without an additional affirmative did not know and could not have reasonably known of “the defense, a secondary violator may only be held liable “to the untruth or omission” made by Cornelius. However, Sterling same extent as” the primary violator. TEX. REV. CIV. STAT. does not argue in this Court that the two findings conflict, and ANN. art. 581–33F(2). Thus, if it were proven that the seller Sterling did not seek to have the jury harmonize these two reasonably believed its statements to be true, there would answers in the trial court. See TEX. R. CIV. P. 295 (providing be no primary violation and no derivative liability to attach that, when a jury's verdict contains conflicting answers, “the to the aider. Second, the Legislature did not act illogically court shall in writing instruct the jury in open court of the by adopting different scienter standards for primary and nature of the ... conflict, provide the jury such additional secondary violators; the different standards make sense in instructions as may be proper, and retire the jury for further light of the facts that these parties may reasonably be expected deliberations”). Instead, Sterling argues only that its lack of to know. A primary violator is the party actually making the knowledge of Cornelius's “untruth or omission” establishes misrepresentations or misleading omissions, and it therefore as a matter of law that it cannot have acted “with reckless makes sense to focus on whether it knew the statements were disregard for the truth or the law.” We disagree. Because the untrue. On the other hand, an aider may know that the primary finding referred specifically to knowledge “of the untruth or violator is engaging in improper activity, but, if the aider is omission,” we conclude that this finding does not establish not involved in the actual sale or offer of the securities, it may whether Sterling knew of Cornelius's improper activity in not know what particular misrepresentations or misleading general, and therefore does not necessarily trump the jury's omissions were made to the investors. Consequently, it makes finding that Sterling acted “with intent to deceive or defraud sense to predicate liability on the aider's “reckless disregard or with reckless disregard for the truth or the law.” for the truth or the law” rather than the aider's knowledge of specific misrepresentations or omissions. In this case, In this case, the jury may have agreed that Sterling could for example, Sterling argued to the jury that its answer to not have known what Cornelius was telling the investors but Question 8—whether Sterling lacked knowledge of the untrue nevertheless believed that Sterling knew that Cornelius was statement or omission found to constitute securities fraud operating an illegal pyramid scheme. Because the jury in this in Question 1—had to be “yes” because “Sterling Trust case was asked only whether Sterling knew of “the untruth Company had no way of knowing what Norman Cornelius or omission,” the jury's “no” answer does not shed light was telling or not telling these people.” on whether the jury believed that Sterling knew Cornelius was engaged in illegal activity. Sterling's argument to the
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contractual limitation of its fiduciary duties. For example, in jury also focused on whether Sterling had knowledge of a document signed by all account holders, Sterling provided Cornelius's statements, not whether it had knowledge of the that “Sterling Trust has no responsibility to question any underlying scheme. Specifically, Sterling argued that the jury investment directions given by the individual regardless of must find that Sterling “did not know, and in the exercise the nature of the investment,” and that “Sterling Trust is in no of reasonable care, could not have known of the untruth or way responsible for providing investment advice.” The Texas omission” because Sterling “had no way of knowing what Trust Code allows parties to contractually limit a trustee's Norman Cornelius was telling or not telling these people.”
duties. See TEX. PROP. CODE § 113.059. Because the Consequently, we hold that the jury's finding that Sterling question on breach of fiduciary duty did not account for these “did not know, and in the exercise of reasonable care could contractual modifications, it was overly broad and rendered not have known of the untruth or omission” is not dispositive the question defective. See Spencer v. Eagle Star Ins. Co. of of the question of whether Sterling had knowledge of the Am., 876 S.W.2d 154, 157 (Tex.1994) (holding that a question underlying wrongdoing.
in the jury charge that defined the “unfair practice in the business of insurance” as “any act or series of acts which is arbitrary, without justification, or takes advantage of a person IV to the extent that an unjust or inequitable result is obtained”
was defective because the statute limited the actions for which [7] Sterling also argues that the trial court improperly the defendant could be liable and the instruction did not reflect instructed the jury on the standard for breach of fiduciary those limitations).
duty. The trial court instructed the jury that Sterling failed to comply with its fiduciary duties if:
a. Sterling Trust Company did not make reasonable use of *** the confidence placed in it; or For the foregoing reasons, we reverse the court of appeals'
b. Sterling Trust Company did not act in the utmost good judgment and remand the case to the trial court for further faith and did not exercise the most scrupulous honesty proceedings consistent with this opinion. toward the plaintiffs; or
c. Sterling Trust Company did not place the interests of the plaintiffs before its own, used the advantage of its Justice JOHNSON did not participate in the decision. position to gain benefit for itself at the expense of the plaintiffs, and placed itself in a position where its self- All Citations interest might conflict with its obligations as a fiduciary. 168 S.W.3d 835, Blue Sky L. Rep. P 74,547, 48 Tex. Sup.
Ct. J. 887 At the charge conference, Sterling objected to this instruction, 4 arguing that it *847 failed to reflect Sterling's
Footnotes 1 This type of pyramid scheme is often referred to as a “Ponzi scheme,” a term “derived from one Charles Ponzi, a famous Boston swindler. With a capital of $150, Ponzi began to borrow money on his own promissory notes at a 50% rate of interest payable in 90 days. Ponzi collected nearly $10 million in 8 months ... using the funds of new investors to pay off those whose notes had come due.” United States v. Shelton, 669 F.2d 446, 449 n. 2 (7th Cir.1982).
2 The United States Supreme Court later held that Congress did not intend to create a private cause of action for aiding and abetting a securities violation under section 10(b) of the Securities Exchange Act. Cent. Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 191, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994). However, that decision does not affect the SEC's ability to impose penalties against parties who have “willfully aided” another's violation of the securities laws. 15 U.S.C. § 78u–2(a)(2). Such SEC actions still require “ ‘a general awareness by the aider and abettor that his role was part of an activity that was improper.’ ” Howard v. Sec. & Exch. Comm'n, 376 F.3d 1136, 1142 (D.C.Cir.2004) (citations omitted).
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3 The Fifth Circuit has clarified that its use of the term “actual awareness” did not encompass a different standard than the term “general awareness.” Abell v. Potomac Ins. Co., 858 F.2d 1104, 1126 (5th Cir.1988) (“In Woodward, we explained what these scienter requirements mean. ‘General awareness,’ we said, means knowledge which, though it may be adduced from reckless conduct, means actual awareness.”) (citing Woodward, 522 F.2d at 96). Federal courts have typically used the term “general awareness” as a shorthand to describe actual awareness of general wrongdoing. See, e.g., Investors Research Corp. v. Sec. & Exch. Comm'n, 628 F.2d 168, 178 (D.C.Cir.1980) (noting that the SEC “failed to consider whether Driehaus had a general awareness that he was assisting Stowers in wrongful conduct”); see also K & S P'ship v. Cont'l Bank, N.A., 952 F.2d 971, 977 (8th Cir.1991) (“[A] defendant's general awareness of its overall role in the primary violator's illegal scheme is sufficient knowledge for aiding and abetting liability.... If an illegal scheme exists and a bank's loan assists in that scheme, the bank's knowledge of the scheme is the crucial element that prevents it from suffering automatic liability for the conduct of insiders to whom it loaned the money.”).
4 The investors argue that Sterling waived error by agreeing to this instruction in an earlier pretrial hearing and by submitting a proposed charge that included a similar instruction. However, the proposed charge was superseded by a subsequent amended charge that contained no such instruction, and the alleged pretrial agreement is not part of the record. Because Sterling made a clear, timely objection and obtained a ruling, we conclude that it preserved error. See State Dep't of Highways & Pub. Transp. v. Payne, 838 S.W.2d 235, 241 (Tex.1992).
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
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Tabacinic v. Frazier, 372 S.W.3d 658 (2012)
KeyCite Yellow Flag - Negative Treatment Distinguished by Stull v. LaPlant, Tex.App.-Dallas, August 28, 2013 West Headnotes (30)
372 S.W.3d 658 Court of Appeals of Texas, [1] Courts Dallas. Determination of questions of jurisdiction in general Moris and Lillian TABACINIC, Appellants Whether a trial court has personal jurisdiction v. over a nonresident defendant is a question of Dr. William J. and Veronica FRAZIER, Appellees. law. V.T.C.A., Civil Practice & Remedies Code § 17.041 et seq.
No. 05–11–00286–CV. | April 19, 2012.
1 Cases that cite this headnote Synopsis Background: Purchasers of residential real property in Texas brought action in Texas state court against individual [2] Appeal and Error nonresident defendants, as the putative vendors, for Cases Triable in Appellate Court fraudulent inducement, negligent misrepresentation, and Because the trial court's exercise of personal breach of warranty. Defendants filed special appearance, jurisdiction over a nonresident defendant is one asserting lack of personal jurisdiction. Following an of law, an appellate court reviews the trial court's evidentiary hearing, the County Court at Law No. 1, Dallas determination of a special appearance de novo. County, denied the special appearance. Defendants appealed. V.T.C.A., Civil Practice & Remedies Code § 17.041 et seq.
1 Cases that cite this headnote Holdings: The Court of Appeals, Richter, J., held that:
[1] purchasers met burden of pleading sufficient jurisdictional [3] Appeal and Error facts for exercise of personal jurisdiction; Appearance and representation by counsel When a party challenges a trial court's ruling [2] defendants, who formed corporate entities for purpose of on a special appearance to contest personal investing in and selling real estate in Texas, had sufficient jurisdiction, and the trial court did not make purposeful contacts with Texas to support exercise of specific findings of fact and conclusions of law, the personal jurisdiction over them on breach of warranty claims; Court of Appeals infers all facts necessary to support the judgment if they are supported by the [3] defendants were not protected under fiduciary shield evidence. doctrine from exercise of personal jurisdiction;
Cases that cite this headnote [4] with respect to negligent misrepresentation and fraudulent inducement claims, defendants purposefully [4] Constitutional Law availed themselves of privilege of conducting activities in Non-residents in general Texas; and The Due Process Clause of the Fourteenth Amendment operates to limit the power of a state [5] exercise of specific personal jurisdiction over defendants to assert personal jurisdiction over a nonresident comported with traditional notions of fair play and substantial defendant. U.S.C.A. Const.Amend. 14.
justice.
Cases that cite this headnote
Affirmed.
[5] Constitutional Law
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Tabacinic v. Frazier, 372 S.W.3d 658 (2012)
Non-residents in general personal jurisdiction over nonresident defendant:
The Due Process Clause protects an individual's (1) only the nonresident defendant's contacts liberty interest in not being subject to the with the forum are relevant, not the unilateral binding judgments of a forum with which he activity of another party or a third person; (2) the has established no meaningful contacts, ties, or contacts relied on must be purposeful rather than relations. U.S.C.A. Const.Amend. 14. random, fortuitous, or attenuated; and (3) the nonresident defendant must seek some benefit, Cases that cite this headnote advantage, or profit by availing itself of the jurisdiction. U.S.C.A. Const.Amend. 14.
[6] Constitutional Law Cases that cite this headnote Non-residents in general Under the Due Process Clause, personal [10] Courts jurisdiction over a nonresident defendant is Purpose, intent, and foreseeability;
constitutional when the nonresident defendant purposeful availment has established minimum contacts with the forum state and the exercise of jurisdiction Personal jurisdiction over a nonresident comports with traditional notions of fair play and defendant is based on notions of implied consent, substantial justice. U.S.C.A. Const.Amend. 14. i.e., that a nonresident consents to suit in forum state by invoking the benefits and protections of 2 Cases that cite this headnote its laws.
Cases that cite this headnote [7] Constitutional Law Non-residents in general [11] Constitutional Law Purposeful availment of forum statute is Non-residents in general the touchstone of due process analysis with respect to forum state's exercise of When specific jurisdiction is asserted over a personal jurisdiction over nonresident defendant. nonresident defendant, the minimum-contacts U.S.C.A. Const.Amend. 14. due process analysis focuses on the relationship between the nonresident defendant, the forum Cases that cite this headnote state, and the litigation. U.S.C.A. Const.Amend.
14.
[8] Constitutional Law 1 Cases that cite this headnote Non-residents in general In order for exercise of personal jurisdiction [12] Courts over nonresident defendant to satisfy due Related contacts and activities; specific process, nonresident defendant's activities must jurisdiction be purposefully directed toward the forum state so that the nonresident defendant could For a court to exercise specific jurisdiction over foresee being haled into court there. U.S.C.A. a nonresident defendant, two requirements must Const.Amend. 14. be met: (1) the nonresident defendant's contacts with the forum state must be purposeful; and (2)
Cases that cite this headnote the cause of action must arise from or relate to those contacts.
[9] Constitutional Law 2 Cases that cite this headnote Non-residents in general There are three parts to the purposeful availment [13] Courts inquiry under Due Process Clause for exercise of Contract disputes
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Tabacinic v. Frazier, 372 S.W.3d 658 (2012)
Courts signed contract of sale with purchasers, who Fraud, racketeering, and deceptive practices were Texas residents, that included a “punch Purchasers of new home located in Texas list” of tasks to be completed in connection met burden of pleading sufficient jurisdictional with sale, and defendants signed those contracts facts for exercise of personal jurisdiction in their individual, as opposed to their over nonresident individual defendants in corporate, capacities. U.S.C.A. Const.Amend. action for fraudulent inducement, negligent 14; V.T.C.A., Civil Practice & Remedies Code § misrepresentation, and breach of contract; 17.041 et seq. purchasers, who were Texas residents, pleaded Cases that cite this headnote that defendants invested in multiple Texas properties, including property at issue, through corporate entities they created for that purpose, [16] Contracts that no major decisions concerning property at Particular capacity issue were made without approval of defendants, A signatory is personally liable on an instrument and that defendants accepted $1.5 million from that does not show he signed in a representative purchasers but failed to provide purchasers a capacity. completed home as agreed. V.T.C.A., Civil Practice & Remedies Code § 17.041 et seq. Cases that cite this headnote
Cases that cite this headnote [17] Constitutional Law Particular Parties or Circumstances [14] Courts A single contract with a resident of forum Allegations, pleadings, and affidavits state does not automatically establish specific Court considers the original pleadings, as personal jurisdiction over a nonresident well as plaintiff's response to a nonresident defendant, but a single contract may meet the defendant's special appearance contesting “purposeful availment” due process standard personal jurisdiction, in examining whether where the agreement involves many contacts plaintiff has met burden of pleading sufficient between the defendant and the forum over a jurisdictional facts to satisfy long-arm statute. period of time. U.S.C.A. Const.Amend. 14. V.T.C.A., Civil Practice & Remedies Code § 17.041 et seq. Cases that cite this headnote
Cases that cite this headnote [18] Constitutional Law Manufacture, distribution, and sale [15] Constitutional Law While a contract for an isolated sale in a state Manufacture, distribution, and sale where the defendant does no business does Courts not rise to the level of purposeful availment, Corporations and business organizations other types of contracts, such as a franchise Under Due Process Clause and long-arm statute, agreement, may establish the minimum contacts individual nonresident defendants who formed necessary under Due Process Clause for exercise corporate entities for purpose of investing of personal jurisdiction over a nonresident in and selling real estate in Texas had defendant. U.S.C.A. Const.Amend. 14. sufficient purposeful contacts with Texas to support exercise of specific personal jurisdiction Cases that cite this headnote over them on breach of warranty claims by purchasers of residential property; defendants [19] Constitutional Law first purchased property in Texas by signing Manufacture, distribution, and sale a contract to be performed in Texas, then
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Tabacinic v. Frazier, 372 S.W.3d 658 (2012)
A contract for the purchase or assignment of Jurisdiction of Agents, Representatives, or Texas real property may establish minimum Other Third Parties Themselves contacts necessary under Due Process Clause Personal jurisdiction over a nonresident for exercise of personal jurisdiction over individual generally cannot be based on nonresident defendant. U.S.C.A. Const.Amend. jurisdiction over a corporation with which he is 14. associated unless the corporation is the alter ego of the individual.
Cases that cite this headnote 4 Cases that cite this headnote [20] Courts Fiduciary duties in general; fiduciary shield [24] Courts Individual nonresident defendants who formed Jurisdiction of Agents, Representatives, or corporate entities for purpose of acquiring and Other Third Parties Themselves selling real estate in Texas were not protected While nonresident individuals' contacts with a under the fiduciary shield doctrine from the forum state are not to be analyzed based on their exercise of specific personal jurisdiction in employer's activities in that forum, their status as action by Texas residents asserting negligent employees does not somehow insulate them from misrepresentation and fraudulent inducement in personal jurisdiction. connection with their purchase of residential real estate; case involved allegations sounding in tort 1 Cases that cite this headnote for which defendants might be held individually liable.
[25] Corporations and Business Organizations 5 Cases that cite this headnote Participation in unauthorized or wrongful acts of corporation in general A corporate officer may not escape liability [21] Corporations and Business Organizations where he had direct, personal participation in Tortious acts in general the wrongdoing, as the guiding spirit behind the Corporations and Business Organizations wrongful conduct or the central figure in the Fraud challenged corporate activity.
Corporate agents are individually liable for fraudulent or tortious acts committed while in the Cases that cite this headnote service of their corporation.
[26] Courts 4 Cases that cite this headnote Fraud, racketeering, and deceptive practices When examining fraud allegations as a basis for [22] Courts specific personal jurisdiction over a nonresident Tortious or intentional conduct; fraud and defendant, court must be careful to focus on the breach of fiduciary duties defendant's conduct and its relationship to the A corporate officer is not protected from the forum rather than where the plaintiff relies on the exercise of specific personal jurisdiction, even if fraud. all of his contacts were performed in a corporate capacity, if the officer engaged in tortious or 1 Cases that cite this headnote fraudulent conduct directed at the forum state for which he may be held personally liable. [27] Constitutional Law Manufacture, distribution, and sale 5 Cases that cite this headnote Courts Fraud, racketeering, and deceptive practices [23] Courts
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Tabacinic v. Frazier, 372 S.W.3d 658 (2012)
Nonresident individual defendants purposefully Due Process Clause, courts evaluate: (1) availed themselves of privilege of conducting the defendant's burden; (2) the forum state's activities in Texas, thus meeting one due process interest in adjudicating the dispute; (3) the requirement for exercise of personal jurisdiction plaintiff's interest in obtaining convenient and on claims of negligent misrepresentation and effective relief; (4) the interstate judicial system's fraudulent inducement brought by purchasers interest in the most efficient resolution of of residential real estate, though defendants controversies; and (5) the states' shared interest created corporate entities to structure sale; in furthering fundamental substantive social alleged misrepresentations related to tasks to policies. U.S.C.A. Const.Amend. 14. be completed in Texas on Texas real estate being sold to Texas residents, those alleged Cases that cite this headnote misrepresentations were purportedly contained in contract of sale that defendants signed in [30] Constitutional Law their individual capacity, and defendants stood Non-residents in general to reap financial benefits through alleged fraud.
Only rarely will the exercise of personal U.S.C.A. Const.Amend. 14.
jurisdiction over nonresident not comport with Cases that cite this headnote fair play and substantial justice, so as to violate due process, when the nonresident has purposefully established minimum contacts with [28] Constitutional Law the forum state. U.S.C.A. Const.Amend. 14.
Manufacture, distribution, and sale Courts Cases that cite this headnote Fraud, racketeering, and deceptive practices Texas court's exercise of specific personal jurisdiction over nonresident defendants living in Florida comported with traditional notions of Attorneys and Law Firms fair play and substantial justice, as necessary *662 John K. Broussard, Jr., N. Terry Adams, Jr., Houston, to satisfy due process, in action by purchasers TX, Sawnie A. McEntire, Dallas, TX, Beirne, Maynard & of residential property in Texas who asserted Parsons, L.L.P., for Appellant.
breach of warranty, negligent misrepresentation, and fraudulent inducement claims in connection Joan R. Tarpley, Tarpley Dispute Resolutions, Robert H. with the sale; distance between Texas and Osburn, Billy R. McGill, Robert H. Osburn, P.C., Dallas, TX, Florida was not sufficient alone to defeat for Appellee. jurisdiction, purchasers had significant interest in seeking convenient and effective relief Before Justices MORRIS, RICHTER, and LANG–MIERS. in Texas, and Texas had strong interest in adjudicating disputes concerning real property and contracts to be performed within its borders. OPINION U.S.C.A. Const.Amend. 14.
Opinion by Justice RICHTER.
Cases that cite this headnote In this interlocutory appeal from the trial court's denial of their special appearance, appellants Moris and Lillian Tabacinic [29] Constitutional Law assert their contacts with the State of Texas are insufficient Non-residents in general to support personal jurisdiction because all of the actions In determining whether exercise of personal forming the basis of the lawsuit occurred in Florida and jurisdiction over nonresident defendant were undertaken in their corporate capacities. Because we comports with traditional notions of fair play conclude the Tabacinics' individual contacts with Texas are and substantial justice, as required under sufficient to support specific jurisdiction and the exercise of
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Tabacinic v. Frazier, 372 S.W.3d 658 (2012)
jurisdiction is consistent with traditional notions of fair play [1] [2] [3] Whether a trial court has personal jurisdiction and substantial justice, we affirm the trial court's order. over a nonresident defendant is a question of law. Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777, 790– 91 (Tex.2005). Because the trial court's exercise of personal jurisdiction over a nonresident defendant is one of law, an I. BACKGROUND appellate court reviews the trial court's determination of a This case arises out of contract for the purchase of special appearance de novo. Moki Mac River Expeditions v. residential real property in Texas. William and Vernica Drugg, 221 S.W.3d 569, 574 (Tex.2007); BMC Software, 83 Frazier, the Texas residents who purchased the property, S.W.3d at 794. When a party challenges a trial court's ruling sued Moris and Lillian Tabacinic and others in a on a special appearance, and the court did not make findings Texas state court for fraudulent inducement, negligent of fact and conclusions of law, we infer all facts necessary to misrepresentation, and breach of warranty. The Tabacinics support the judgment if they are supported by the evidence. filed a special appearance, asserting their contacts with Texas Moki Mac, 221 S.W.3d at 574; BMC Software, 83 S.W.3d at are insufficient to support the exercise of personal jurisdiction 794–95. over them because they acted only in Florida in their corporate capacity. The Fraziers responded to the special appearance, [4] [5] [6] The Due Process Clause of the Fourteenth and the trial court conducted an evidentiary hearing. Upon Amendment operates to limit the power of a state to assert conclusion of the hearing, the trial court denied the special personal jurisdiction over a nonresident defendant. Asahi appearance. The trial court did not make any findings of fact Metal Indus. Co., Ltd. v. Superior Court of Cal., Solano or conclusions of law. County, 480 U.S. 102, 108, 107 S.Ct. 1026, 94 L.Ed.2d 92 (1987); Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 413–14, 104 S.Ct. 1868, 80 L.Ed.2d 404, (1984). The Due Process Clause protects an individual's II. DISCUSSION liberty interest in not being subject to the binding judgments of a forum with which he has established no meaningful In two issues, the Tabacinics assert the Fraziers did not meet contacts, ties, or relations. Burger King Corp. v. Rudzewicz, their burden to plead or prove facts to satisfy the exercise 471 U.S. 462, 471–72, 105 S.Ct. 2174, 85 L.Ed.2d 528 of personal jurisdiction, and because the jurisdictional (1985); World–Wide Volkswagen Corp. v. Woodson, 444 U.S.
allegations are not supported by the record, any implied 286, 294, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980); Int'l Shoe finding “fails on legal and/or factual sufficiency grounds.”
Co. v. Washington, 326 U.S. 310, 319, 66 S.Ct. 154, 90 We will address these issues together.
L.Ed. 95 (1945). Under the Due Process Clause, personal jurisdiction over a nonresident defendant is constitutional A. Applicable Law and Standard of Review when the nonresident defendant has established minimum Texas courts may exercise personal jurisdiction over contacts with the forum state and the exercise of jurisdiction nonresident defendants in *663 accordance with the Texas comports with traditional notions of fair play and substantial long-arm statute. TEX. CIV. PRAC. & REM.CODE ANN. justice. Burger King, 471 U.S. at 476, 105 S.Ct. 2174; Int'l § 17.041–.045 (West 2008). The plaintiff bears the initial Shoe, 326 U.S. at 320, 66 S.Ct. 154. burden of pleading facts sufficient to bring the defendant within the reach of the Texas long-arm statute. Id.; BMC [7] [8] [9] [10] Purposeful availment is the touchstone Software, Belgium, N.V. v. Marchand, 83 S.W.3d 789, 795 of the jurisdictional due process analysis. Asahi, 480 (Tex.2002); Alliance Royalties, LLC v. Boothe, 329 S.W.3d U.S. at 108–09, 107 S.Ct. 1026; Capital Technology 117, 120 (Tex.App.-Dallas 2010, no pet.). Once the plaintiff Information Services, Inc. v. Arias & Arias, 270 S.W.3d meets his initial burden, the burden then shifts to the 741, 750 (Tex.App.-Dallas 2008, pet. denied). A nonresident defendant to negate all bases for personal jurisdiction asserted defendant's activities must be purposefully directed toward by the plaintiff. Id. If the defendant does so, the burden shifts the forum state so that the nonresident defendant could back to the plaintiff to show the court has personal jurisdiction foresee being haled into court there. See Burger King, over the defendant as a matter of law. Id. 471 U.S. at 474, 105 S.Ct. 2174. There are three parts to a purposeful availment inquiry: (1) only the nonresident defendant's contacts with the forum are relevant, not the
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unilateral activity of another party or a third person; (2) the in Texas if the non-resident contracts by mail or otherwise contacts relied on must be purposeful rather than random, with a Texas resident and either party is to perform the fortuitous, or attenuated; and (3) the nonresident defendant contract in whole or in part in this state, or commits a tort must seek some benefit, advantage, or profit by availing itself in whole or in part in this state. See id. According to the of the jurisdiction. Michiana, 168 S.W.3d at 785; see also petition, the Tabacinics sold the Fraziers a new home (the Moki Mac, 221 S.W.3d at 575; Capital Tech., 270 S.W.3d “Home”) that was not properly constructed in accordance at 750. *664 “Jurisdiction is based on notions of implied with the parties' agreement. Although a partnership was consent—that by invoking the benefits and protections of a the purported seller, the Fraziers were told the Tabacinics forum's laws, a nonresident consents to suit there.” Michiana, were really the sellers. Upon completion of the Home, 168 S.W.3d at 784. numerous subcontractors were not paid and subsequently filed mechanics and materialmen's liens against the property.
[11] [12] A defendant's contacts with a forum may give rise The petition asserts the Tabacinics and other defendants made to either general or specific jurisdiction. Specific jurisdiction negligent misrepresentations concerning the construction of may exist over a nonresident defendant in a lawsuit that arises the home and payment of subcontractors. In the alternative, out of or is related to the nonresident defendant's contacts the petition asserts the Fraziers were fraudulently induced to with the forum state. Capital Tech., 270 S.W.3d at 749 (citing purchase the home. The petition further alleges the defendants Moki Mac, 221 S.W.3d at 576). When specific jurisdiction breached express and implied warranties that the home was is asserted, the minimum-contacts analysis focuses on the habitable, built in a good an workmanlike manner, fit for relationship between the nonresident defendant, the forum ordinary use, and fit for its particular purpose. state, and the litigation. Moki Mac, 221 S.W.3d at 575–576. For a court to exercise specific jurisdiction over a nonresident *665 In the Fraziers' response to the special appearance defendant, two requirements must be met: (1) the nonresident they assert: (1) the Tabacinics invested in multiple properties defendant's contacts with the forum state must be purposeful; in Dallas, Texas through corporate entities they created for and (2) the cause of action must arise from or relate to this express purpose; (2) the Tabacinics knew that their those contacts. See Burger King, 471 U.S. at 474–75, 105 actions concerning the property in the instant case would S.Ct. 2174; World–Wide Volkswagen, 444 U.S. at 297, 100 have an effect on the Fraziers as Texas residents; (3) Tex S.Ct. 559; Moki Mac, 221 S.W.3d at 576. In the present Dynasty, LLC (“Tex Dynasty”) was one of the entities the case, the Fraziers assert the Texas court has specific, rather Tabacinics created for the purpose of managing the real estate than general jurisdiction over the Tabacinics. Our inquiry is they purchased in Dallas, Texas; (4) the Tabacinics also 1 created 6418 Royalton, L.P. (the “Royalton Partnership”), limited accordingly.
and only the Tabacinics could authorize actions taken by the Royalton Partnership and Tex Dynasty; (5) the Tabacinics, B. Did the Fraziers Plead Sufficient Jurisdictional Facts? through the Royalton Partnership, purchased the property [13] [14] First, we examine whether the Fraziers met at 6418 Royalton Drive (the “Royalton Property”) as an their burden to plead sufficient jurisdictional facts to satisfy investment property; (6) the Home was built on the Royalton the long-arm statute. In doing so, we consider the original Property; (7) the Tabacinics' niece, Sandy Tabacinic, was one pleadings as well as the response to the special appearance. of the builders of the Home; (8) Moris Tabacinic approved See Proctor v. Buell, 293 S.W.3d 924, 930 (Tex.App.-Dallas the transfer of funds from Tex Dynasty to the Royalton 2009, no pet.); Wright v. Sage Eng'g, Inc., 137 S.W.3d 238, Partnership to fund the construction of the Home; (9) Moris 249 n. 7 (Tex.App.-Houston [1st Dist.] 2004, pet. denied). Tabacinic stayed informed about the Royalton Property and approved or disapproved wire transfers relating to the The Fraziers' petition asserts the Tabacinics reside in Florida construction of the Home; (10) Moris Tabacinic made all and engage in business in the state of Texas. The long- major and final decisions concerning the Royalton Property, arm statute permits Texas courts to exercise jurisdiction over including but not limited to how much money to invest in non-resident defendants that do business in Texas. See BMC the Royalton Partnership; (11) the Home was still under Software, 83 S.W.3d at 795. The statute sets out a list of construction when the Fraziers decided to purchase it, leaving activities that constitute doing business in Texas. See TEX. the Fraziers the option to make certain decisions about CIV. PRAC. & REM.CODE ANN. § 17.042 (West 2008). construction and decor; (12) no major decisions concerning Among other acts, a non-resident defendant does business the Royalton Property were made without the approval of the
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Tabacinic v. Frazier, 372 S.W.3d 658 (2012)
Tabacinics; (13) the Tabacinics promised the Fraziers that the initials “DS,” “MT,” and “LT,” with no reference to the certain tasks would be completed with regard to the Home, partnership at all. and signed a “punch list” agreeing to complete these items; (14) the items the Tabacinics agreed to complete were not The Tabacinics testified they signed the foregoing documents completed; (15) the Tabacinics were aware that the items in their corporate capacity on the lines designated for “seller,” had not been completed, but refused to fund the repairs; (16) and argue that the contract defines “seller” as the Royalton the Tabacinics accepted $1.5 million from the Fraziers but Partnership. The general warranty deed for the property failed to provide them with a completed home as agreed; identifies the Royalton Partnership as the grantor. Dr. Frazier (17) the Tabacinics made the conscious decision not to fund testified in his deposition that he understood the Royalton the completion of the Home and this undercapitalization and Partnership was the seller. refusal of funding requests resulted in the Home having significant defects; and (18) the Tabacinics knew their actions The record also reflects that on the same day the Tabacinics would have an adverse impact on the Fraziers. signed the sales contract for the Royalton Property, Moris Tabacinic signed two other corporate documents to form the Based on the foregoing, we conclude the Fraziers satisfied Royalton Partnership. Both of these documents reflect that their initial burden to plead a sufficient basis upon which they were signed by Moris Tabacinic in his representative to subject the Tabacinics to personal jurisdiction. To avoid capacity for Tex Dynasty (the general partner of the Royalton litigating in Texas, it was then the Tabacinics burden to Partnership). negate the bases for jurisdiction asserted by the Fraziers. After the special appearance hearing, the court determined the [16] It is well-established that a signatory is personally Tabacinics failed to do so. We now review that determination. liable on an instrument that does not show he signed in a representative capacity. See A. Duda & Sons, Inc. v. Madera, 687 S.W.2d 83, 85 (Tex.App.-Houston [1st Dist.]
C. Do the Facts Underlying The Contract Claims Support 1985, no writ). Here, however, we are not charged with Jurisdiction? determination of the Tabacinics' liability on the contract, [15] The Tabacinics contend the documents relating to the but whether the manner in which they signed the contract purchase and sale of the Home were signed in a representative constitutes a sufficiently purposeful contact to justify the capacity on behalf of the Royalton Partnership and are exercise of jurisdiction. See Michiana, 168 S.W.3d at 791– therefore not germane to our consideration of individual 92 (stating special appearance involves consideration of jurisdiction. Thus, we must first resolve the threshold only jurisdiction, not merits or liability); Pulmosan Safety question as to the universe of contacts to be considered. Equip. Corp. v. Lamb, 273 S.W.3d 829, 839 (Tex.App.- The record reflects that the Tabacinics purchased the Houston [14th Dist.] 2008, pet. denied) (same). The Fraziers Royalton Property from Kinneret Custom Homes. Although argue that the manner in which the Tabacinics signed the the introductory paragraph of the purchase contract identifies documents forming the Royalton Partnership, as contrasted Royalton Partnership as the buyer, Moris Tabacinic signed with the manner in which they signed the contract for the sale the signature line for buyer without indicating he was of the Royalton Property demonstrates their understanding signing in a representative capacity. Likewise, the contract of the distinction between an individual and representative the Fraziers signed to purchase the property, which was made signature. We agree. Despite his testimony that he signed the using a Texas Real Estate *666 Commission form, identifies Royalton Property documents in a representative capacity, the seller as the Royalton Partnership. The signature lines Moris Tabacinic admitted that unlike the documents forming for the seller are signed by: Daniel Sragowicz (“Daniel”) on the Royalton Partnership, the signatures on the Royalton behalf of the Royalton Partnership, and Moris and Lillian Property contract and addenda include no such designation or Tabacinic. Neither of the Tabacinics indicated they were notation. signing in a representative capacity. Three addenda to the contract are similarly signed. Specifically, the “Addendum [17] [18] [19] The Tabacinics further assert that specific to New Home Contract” and the “Third Party Financing jurisdiction fails “when the only jurisdictional allegation Condition Addendum” are signed by Daniel on behalf of the is that the individual defendant signed a document in an partnership, and Moris and Lillian Tabacinic individually. A individual capacity.” We agree that a single contract with a third document, referred to as the “punch list,” shows only Texas resident does not automatically establish jurisdiction.
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But a single contract may meet the purposeful availment reported back to Moris Tabacinic. During the construction standard where the agreement involves many contacts of the Home, Daniel and Moris Tabacinic had discussions between the defendant and the forum over a period of time. concerning the progress of the construction, including See Michiana, 168 S.W.3d at 786–87. Thus, while a contract whether the work was completed on time and within the for an isolated sale in a state where the defendant does no budget. business does not rise to the level of purposeful availment, other types of contracts, such as a franchise agreement, The punch list that the Tabacinics initialed and agreed to may establish minimum contacts. See id; see also Rogers consisted of a number of items the Fraziers requested be v. TexWest, L.L.C., 261 S.W.3d 818, 822 (Tex.App.-Dallas completed in connection with the construction of the Home. 2008, no pet.) (signing limited partnership agreement for The Fraziers testified they would not have purchased the creation of partnership to operate *667 in Texas). A contract Home but for the Tabacinics' representation that the punch list for the purchase or assignment of Texas real property is such items would be completed. Moris Tabacinic testified that he a contract. See Retamco Operating, Inc. v. Republic Drilling had discussions with Daniel about the punch list and paying Co., 278 S.W.3d 333, 339 (Tex.2008). for the items on the list, and admitted that he and his wife made the decisions about whether to fund the items on the list.
In Retamco, the Texas Supreme Court observed that, unlike the sale of a recreational vehicle in Michiana, the purchase There appears to be no dispute that the punch list items were of real property does not establish a single contact. Id. not completed. Moris Tabacinic testified he was not aware Instead, the purchase and ownership of real property could the items had not been completed until the lawsuit was filed. ‘involve many contacts over a long period of time,’ which Dr. Frazier testified that the items on the punch list were would carry with it certain continuing obligations.” Id. (citing not completed, as well as numerous other construction items. Michiana, 168 S.W.3d at 787). Unlike personal property, real In addition to the punch list, the contract for the purchase property will always be in Texas, “which leaves no doubt of the property provides for the substantial completion of of the continuing relationship that this ownership creates.” improvements by the specified date. The contract further Retamco, 278 S.W.3d at 339. provides:
The Tabacinics testified that they do not have a residence, Seller represents that as of the maintain an agent, a place of business, or real or personal Closing Date there will be no property in Texas, and have never paid taxes in Texas. The liens, assessments, or security interests Tabacinics further testified they have been to Texas only against the Property which will not be twice for personal reasons. They have never met the Fraziers satisfied. or communicated with them by telephone or correspondence.
Dr. Frazier testified, however, that after closing, he Moris Tabacinic testified that he made the decision to discovered that many of the subcontractors who worked on invest in the Royalton Property. Tex Dynasty and Dynasty the Home had not been paid and filed liens against the Investments (“DI”) funded the purchase of the lot and property in excess of $45,000. Neither the Tabacinics nor construction. Moris Tabacinic approved the design and our review have identified any evidence to contravene the budget for the construction of the Home, and along with Fraziers' *668 allegations concerning these liens or the his wife, made all of the financial decisions concerning construction items that were not completed. construction. He also approved six to twelve wire transfers from Tex Dynasty for the construction, and acknowledged Given the arguments and proof, we conclude the manner in that he knew his decisions would have an impact on the which the Tabacinics signed the contract, coupled with the construction of the Home and the final product. nature of the contract itself, constitute sufficiently purposeful contacts to support the exercise of jurisdiction. Moris Daniel was an employee of the Royalton Partnership and Tabacinic properly limited the capacity in which he signed the reported to Moris Tabacinic concerning the construction documents forming the Royalton Partnership by indicating of the Home. Daniel was charged with supervision of the he signed in a representative capacity. In contrast, the construction and payments to subcontractors, and traveled to contract with the Fraziers contains no such designation. The Texas several times for this purpose. When he did so, he signature line immediately above the Tabacinics' indicates
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that Daniel is the party signing the contract on behalf of 1990, writ denied). Corporate agents are individually liable the Royalton Partnership. By failing to indicate they signed for fraudulent or tortious acts committed while in the service in a representative capacity and initialing the punch list, of their corporation. Shapolsky v. Brewton, 56 S.W.3d 120, the Tabacinics undertook a purposeful act that engendered a 133 (Tex.App.-Houston [14th Dist.] 2001, pet. denied). relationship between the Tabacinics, the Texas forum, and Thus, a corporate officer is not protected from the exercise the subject matter of the pending litigation. Unlike a single of specific jurisdiction, even if all of his contacts were contract for an isolated sale of a product to a Texas resident, performed in a corporate capacity, if the officer engaged in the contract at issue here involves continuous contacts with tortious or fraudulent conduct *669 directed at the forum Texas. These contacts are neither random nor fortuitous. The state for which he may be held personally liable. See Ennis Tabacinics first purchased real property in Texas by signing a v. Loiseau, 164 S.W.3d 698, 707 (Tex.App.-Austin 2005, contract to be performed in Texas. Then, they sold the Texas no pet.). Because this specific jurisdiction case includes real property by signing a contract with Texas residents that allegations sounding in tort for which the Tabacinics may be required development of the property in Texas. Through these held individually liable, the fiduciary shield doctrine does not purposeful actions, the Tabacinics invoked the benefits and apply. protections of the laws of this state and created continuing obligations between themselves and residents of this state. The Tabacinics' efforts to cloak themselves in the protection Thus, the Tabacinics manifestly availed themselves of the of the corporate veil similarly fail. 2 Citing Wolf v. Summers– privilege of conducting business in Texas. Wood, L.P., 214 S.W.3d 783, 793 (Tex.App.-Dallas 2007, no pet.), the Tabacinics assert they acted only in a corporate capacity and are not subject to personal jurisdiction because D. Do the Facts Underlying the Tort Claims Support the Fraziers failed to pierce the corporate veil. We are not Jurisdiction?
persuaded by this argument.
[20] In addition to the claims sounding in contract, the Fraziers also assert the Tabacinics made negligent [23] Jurisdiction over an individual generally cannot be misrepresentations and fraudulently induced them to based on jurisdiction over a corporation with which he is purchase the Home. Relying on the fiduciary shield doctrine, associated unless the corporation is the alter ego of the the Tabacinics insist they cannot be individually hailed into individual. Davey v. Shaw, 225 S.W.3d 843, 856 (Tex.App.-
Texas because they acted exclusively in their corporate Dallas 2007, no pet.). Under an alter ego theory, personal capacity. We disagree.
jurisdiction may be established by imputing the jurisdictional contacts of one person to its alter ego. BMC Software, 83 [21] [22] The fiduciary shield doctrine protects a S.W.3d at 798; Ramirez v. Hariri, 165 S.W.3d 912, 916 nonresident corporate officer or employee from the exercise (Tex.App.-Dallas 2005, no pet.). To defeat the protection of jurisdiction when all of his contacts with Texas were of the fiduciary shield doctrine, the plaintiff must show the made on behalf of his employer. Nichols v. Tseng Hsiang individual was an alter ego of his employer. Brown v. Gen.
Lin, 282 S.W.3d 743, 750 (Tex.App.-Dallas 2009, no pet.).
Brick Sales Co., Inc., 39 S.W.3d 291, 298 (Tex.App.-Fort Courts that have applied the fiduciary shield doctrine, Worth 2001, no pet.).
however, have limited its application to attempts to exercise general jurisdiction over a nonresident defendant. Crithfield Here, it is undisputed that the alter ego claim asserted in the v. Boothe, 343 S.W.3d 274, 287 (Tex.App.-Dallas 2011, third amended petition was not before the court at the time the no pet.); Brown v. Gen. Brick Sales Co., 39 S.W.3d 291, 300 (Tex.App.-Fort Worth 2001, no pet.); see also Garner special appearance was heard. 3 Moreover, we have already v. Furmanite Australia Pty., Ltd., 966 S.W.2d 798, 803 concluded that the fiduciary shield doctrine is inapplicable (Tex.App.-Houston [1st Dist.] 1998, pet. denied). A corporate in this specific jurisdiction case. Therefore, the Fraziers were officer or employee is not shielded from the exercise not required to defeat the fiduciary shield doctrine by piercing of specific jurisdiction as to torts for which the officer the corporate veil to establish alter ego. In so concluding, or employee may be held individually liable. Tuscano v. we note that the Tabacinics' reliance on Wolf is misplaced. Osterberg, 82 S.W.3d 457, 467–68 (Tex.App.-El Paso 2002, In Wolf, plaintiffs alleged the corporate entity was used as a no pet.); see also Gen. Elec. v. Brown & Ross Int'l Distribs., sham to perpetrate a fraud, but offered no evidence in support Inc., 804 S.W.2d 527, 532–33 (Tex.App.-Houston [1st Dist.] of these allegations. Id. at 790. Significantly, there were no allegations of specific individual acts. Id. at 792. Instead,
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Tabacinic v. Frazier, 372 S.W.3d 658 (2012)
the Wolf plaintiffs relied on conclusory allegations that the On this evidence, we cannot conclude the Tabacinics' contacts individual defendants used the corporate form for “wrongful, with Texas did not include those made in their individual fraudulent, and tortious acts personally committed by [the capacity. To the contrary, the evidence shows the Tabacinics individuals].” As a result, the court concluded the pleadings had sufficient minimum contacts to support the exercise of failed to provide facts to support plaintiffs' allegations or meet specific jurisdiction over them individually, even if all of plaintiffs' burden. Id. their activities in Texas were done in their capacity as an officer, manager or employee of the Royalton Partnership, [24] [25] In the present case, in addition to the fact Tex Dynasty, or DI. We also cannot conclude the Tabacinics' that there was no alter ego claim before the court, the conduct was limited to Florida. The record reflects that the alleged fraudulent acts and omissions were not imputed to Tabacinics had a “substantial presence” in Texas. the Tabacinics; they were attributed to them individually. While individuals' contacts with a forum state are not to be [26] The Tabacinics complain that jurisdiction may not be analyzed based on their employer's activities in that forum, based on whether a defendant “directed a tort in Texas.” “their status as employees does not somehow insulate them We do not dispute that courts have been instructed to from jurisdiction.” Calder v. Jones, 465 U.S. 783, 790, 104 focus on “where the defendant's actions were carried out” S.Ct. 1482, 79 L.Ed.2d 804 (1984). A corporate officer may and “the contacts themselves,” as opposed to “whether the not escape liability where he had direct, personal participation contacts were tortious.” Michiana, 168 S.W.3d at 792. When in the wrongdoing, as to be the “guiding spirit behind the examining tort allegations as a basis for specific jurisdiction, wrongful conduct” or the “central figure in the challenged we must be careful to focus on the defendant's conduct and its *670 corporate activity.” Mozingo v. Correct Mfg. Corp., relationship to the forum rather than where the plaintiff relies 752 F.2d 168, 174 (5th Cir.1985). on the fraud. See Michiana, 168 S.W.3d at 790.
The record reflects that the Royalton Partnership was formed [27] In the present case, the alleged torts, fraudulent for the purpose of acquiring the Royalton Property. The inducement and negligent misrepresentation, are premised on formation documents for the Royalton Partnership were the representations the Tabacinics made concerning the Home signed on the same day as the contract for the sale of the to be constructed in Texas. These alleged misrepresentations Home. Tex Dynasty owns 0.05% of the Royalton Partnership were purportedly contained in the contract and addenda and is its general partner. DI is the single limited partner of the Tabacinics signed in their individual capacity. Although the Royalton Partnership and owns 99%. DI also owns Tex he contends he signed on behalf of the partnership, Dynasty. The Tabacinics are managers of Tex Dynasty, which Moris Tabacinic acknowledged that initialing the punch list Moris Tabacinic testified “could have” been formed to invest constituted a representation that the items listed on the punch in Texas property. In addition to the Royalton Property, Tex list would be completed. There is no dispute that these Dynasty has invested in three other pieces of Texas real estate. actions were to occur in Texas. Because the representations Moris Tabacinic is also the president of Tex Dynasty. DI underlying the tort claims concerned activity relating to Texas is owned by the MOTL trust, of which the Tabacinics are real property, sold to Texas residents, to occur in Texas, we discretionary beneficiaries. conclude the Tabacinics purposefully directed their activities to the forum state and could reasonably *671 anticipate Moris Tabacinic testified that the only assets that the Royalton being haled into a Texas court to defend a lawsuit. Partnership ever possessed were the Royalton Property and the cash funds infused into it by DI and Tex Dynasty. The We further conclude the Tabacinics sought some benefit, Home sold to the Fraziers for $1.5 million. These proceeds advantage, or profit by availing themselves of the benefits were initially paid to the Royalton Partnership, and then and protections of Texas. See Michiana, 168 S.W.3d at 785. subsequently transferred to DI and Tex Dynasty, leaving the Despite the existence of the various entities the Tabacinics Royalton Partnership with no assets. As a result, the Royalton created to structure the transaction, the Tabacinics stood to Partnership no longer exists. Moris Tabacinic also testified reap financial benefits from the money obtained from the that the funds DI received from the sale of the Home were Texas residents through the alleged fraud. See SITQ E.U., Inc. used to make other investments. The decisions concerning the v. Reata Rest. Inc., 111 S.W.3d 638, 650–52 (Tex.App.-Fort other investments were made by the Tabacinics. Worth 2003, pet. denied). The proceeds and benefits from the sale of the Home were used to make other investments
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defending against the claims in the Texas litigation does not through entities the Tabacinics created and controlled. Both render jurisdiction over them in Texas unfair or unjust. There the decision to make other investments as well as the decision is nothing in the record showing that litigation in Texas would concerning the investments to be made were made by the be unfair or unjust to the Tabacinics. Although there is some Tabacinics.
geographical distance between Texas and Florida, distance alone is not sufficient to defeat jurisdiction. Guardian Royal, On this record, the Tabacinics' contacts with Texas were 815 S.W.2d at 231. On the other hand, the Fraziers have sufficient to implicate the need for Texas to provide a forum a significant interest in seeking convenient and effective for redress to its citizens. Accordingly, all three factors relief in the state in which they purchased the property at described in Michiana are resolved in favor of determining issue. Texas has a strong interest in adjudicating disputes the Tabacinics' contacts constitute “purposeful availment” of concerning real property and contracts to be performed within the privilege of conducting activities in Texas. See Michiana, its borders, and the efficiency of the interstate judicial system 168 S.W.3d at 785.
is best served by determining such suits in the state where the real property is located. Similarly, the states' shared E. Fair Play and Substantial Justice interest in furthering fundamental substantive social policies [28] [29] [30] The exercise of personal jurisdiction strongly supports the notion that the forum state's jurisdiction must also comport with traditional notions of fair play and over the Tabacinics is neither unfair nor unjust. To permit substantial justice. Burger King, 471 U.S. at 477, 105 S.Ct. out of state residents to acquire and sell Texas property 2174. We evaluate the contact in light of: (1) the defendant's without subjecting themselves to specific jurisdiction as to burden; (2) the forum state's interest in adjudicating the lawsuits concerning that property would invite such residents dispute; (3) the plaintiff's interest in obtaining convenient to avail themselves of the privileges of conducting business and effective relief; (4) the interstate judicial system's interest in this state free from the corresponding obligations. The in the most efficient resolution of controversies; and (5) the fundamental interest of state *672 courts in discouraging states' shared interest in furthering fundamental substantive such activity, in conjunction with the other factors, supports social policies. Id.; TexVa, Inc. v. Boone, 300 S.W.3d 879, the conclusion that the exercise of jurisdiction in this case 891 (Tex.App.-Dallas 2009, pet. denied). Only rarely will comports with the notions of fair play and substantial justice. the exercise of jurisdiction not comport with fair play and The Tabacinics' issues are overruled. The trial court's order substantial justice when the nonresident has purposefully denying the special appearance is affirmed. established minimum contacts with the forum state. Guardian Royal Exch. Assurance, Ltd. v. English China Clays, P.L.C., All Citations 815 S.W.2d 223, 227 (Tex.1991).
372 S.W.3d 658 Considering these factors in the context of this case, we first conclude the Tabacinics' burden and inconvenience in
Footnotes 1 The Tabacinics also argue on appeal they are not subject to general jurisdiction. The Fraziers, however, do not allege the Tabacinics are subject to general jurisdiction or had continuous or systematic contacts with Texas, and expressly limited their argument to specific jurisdiction at the special appearance hearing and during oral argument on appeal.
2 Although they fail to specify, the Tabacinics' corporate veil argument appears to be based on alter ego. Alter ego is one of several veil piercing theories. See Service Corp. Intern., v. Guerra, 348 S.W.3d 221, 228 n. 2 (Tex.2011).
3 The alter ago claim was asserted in the third amended petition two days before the special appearance hearing. Following the Tabacinics' objection, the Fraziers informed the court the hearing could proceed on the second amended petition and the court indicated it would so proceed.
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TeleVentures, Inc. v. International Game Technology, 12 S.W.3d 900 (2000)
plaintiff. V.T.C.A., Civil Practice & Remedies Code §§ 17.041-17.045.
KeyCite Yellow Flag - Negative Treatment Distinguished by Holk v. USA Managed Care Organization, Inc., Cases that cite this headnote Tex.App.-Austin, July 15, 2004
12 S.W.3d 900 [2] Appeal and Error Court of Appeals of Texas, Cases Triable in Appellate Court Austin. Court of Appeals reviews the trial court's conclusions of law de novo, and conclusions TELEVENTURES, INC., Appellant, of law will not be reversed unless they are v.
erroneous as a matter of law.
INTERNATIONAL GAME TECHNOLOGY and IGT, Appellees. 3 Cases that cite this headnote
No. 03–99–00116–CV. | Feb. 25, 2000.
[3] Constitutional Law | Rehearing Overruled March 30, 2000.
Non-residents in general Corporation with its principal place of business in Texas Courts sued nonresident corporation for breach of contract, breach of Actions by or Against Nonresidents, fiduciary duties, fraud in the inducement of letters of intent, Personal Jurisdiction In; “Long-Arm” fraudulent concealment, negligent misrepresentation, and Jurisdiction tortious interference, and nonresident corporation specially Texas court may exercise personal jurisdiction appeared challenging personal jurisdiction. The 250th over a nonresident defendant if: (1) jurisdiction Judicial District Court, Travis County, Ernest C. Garcia, J., is authorized by the Texas long-arm statute, and sustained nonresident corporation's special appearance, and (2) the exercise of jurisdiction is consistent with plaintiff appealed. The Court of Appeals, Yeakel, J., held that: federal and state due process standards. U.S.C.A. (1) letters of intent and parties' negotiations did not reveal Const.Amend. 14; V.T.C.A., Civil Practice & purposeful conduct by nonresident corporation sufficient to Remedies Code §§ 17.041-17.045. establish jurisdiction over it; (2) parties' communications were not sufficiently related to causes of action to justify 3 Cases that cite this headnote exercise of jurisdiction; (3) fact that plaintiff hired employees in Texas to help it develop system did not justify exercise [4] Constitutional Law of jurisdiction; and (4) nonresident corporation made no Non-residents in general communication that, if false, gave rise to cause of action, and thus jurisdiction was not justified on basis of such Courts communication. Actions by or Against Nonresidents, Personal Jurisdiction In; “Long-Arm”
Affirmed. Jurisdiction Long-arm statute allows Texas courts jurisdiction to the full extent permitted by the United States Constitution, and thus, West Headnotes (25)
the only limitations on Texas courts in asserting personal jurisdiction over a nonresident [1] Appearance defendant are those imposed by the due process Objections to jurisdiction in general clause of the Fourteenth Amendment. U.S.C.A.
Const.Amend. 14; V.T.C.A., Civil Practice & In interposing a special appearance, the Remedies Code §§ 17.041-17.045.
nonresident defendant challenging personal jurisdiction bears the burden of proof to negate 4 Cases that cite this headnote all bases of personal jurisdiction alleged by the
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TeleVentures, Inc. v. International Game Technology, 12 S.W.3d 900 (2000)
Related contacts and activities; specific [5] Constitutional Law jurisdiction Non-residents in general In analyzing minimum contacts for purposes To establish jurisdiction over a nonresident of Texas courts' specific jurisdiction over a defendant, due process requires a showing nonresident defendant, court focuses on the that the nonresident defendant has purposefully relationship among the nonresident defendant, established minimum contacts with Texas and the forum, and the litigation. V.T.C.A., Civil that the maintenance of the suit does not Practice & Remedies Code §§ 17.041-17.045. offend traditional notions of fair play and substantial justice. U.S.C.A. Const.Amend. 14; 3 Cases that cite this headnote V.T.C.A., Civil Practice & Remedies Code §§ 17.041-17.045.
[9] Courts 5 Cases that cite this headnote Unrelated contacts and activities; general jurisdiction Assertion of general jurisdiction over a [6] Courts nonresident defendant compels a more Nature, number, frequency, and extent of demanding minimum-contacts analysis and contacts and activities requires a showing of substantial activities Although the jurisdiction of Texas courts is within the forum state. V.T.C.A., Civil Practice always dependent on the defendant's having & Remedies Code §§ 17.041-17.045. some minimum contacts with Texas, the requisite extent of those contacts varies Cases that cite this headnote depending on the type of in personam jurisdiction sought to be imposed. V.T.C.A., [10] Courts Civil Practice & Remedies Code §§ Unrelated contacts and activities; general 17.041-17.045.
jurisdiction Cases that cite this headnote To establish general jurisdiction over a nonresident defendant, the cause of action need not arise from or relate to the nonresident [7] Courts defendant's purposeful conduct within the forum Related contacts and activities; specific state, but there must be continuous and jurisdiction systematic contacts between the nonresident Courts defendant and the forum state. V.T.C.A., Civil Agents, Representatives, and Other Third Practice & Remedies Code §§ 17.041-17.045.
Parties, Contacts and Activities of as Basis for Jurisdiction 4 Cases that cite this headnote To establish specific jurisdiction over a nonresident, the cause of action must arise out of [11] Constitutional Law or relate to the nonresident defendant's contact Non-residents in general with the forum state and the conduct must Courts have resulted from that defendant's purposeful Related contacts and activities; specific conduct, not the unilateral conduct of the jurisdiction plaintiff or others. V.T.C.A., Civil Practice & Remedies Code §§ 17.041-17.045. To establish specific jurisdiction over a nonresident defendant, the nonresident 4 Cases that cite this headnote defendant must have purposefully established minimum contacts with Texas, the cause of action must arise out of or relate to these [8] Courts contacts, the contacts must give rise to a
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TeleVentures, Inc. v. International Game Technology, 12 S.W.3d 900 (2000)
substantial connection between Texas and the nonresident, and the assumption of jurisdiction Cases that cite this headnote by Texas must comport with fair play and substantial justice. V.T.C.A., Civil Practice & [15] Courts Remedies Code §§ 17.041-17.045. Nature, number, frequency, and extent of contacts and activities 6 Cases that cite this headnote Isolated contacts with the forum state or its residents are not sufficient for a court to [12] Courts assume personal jurisdiction over a nonresident Purpose, intent, and foreseeability; defendant. V.T.C.A., Civil Practice & Remedies purposeful availment Code §§ 17.041-17.045. In order to exercise jurisdiction over a nonresident defendant, the nonresident Cases that cite this headnote defendant must have purposely availed itself of the privilege of conducting activities within [16] Courts the forum state, thus invoking the benefits and Partnerships and joint ventures protection of its laws. V.T.C.A., Civil Practice & Terms of letters of intent and history of Remedies Code §§ 17.041-17.045.
negotiations between plaintiff and nonresident Cases that cite this headnote corporation regarding agreement to jointly develop in-room gaming system did not reveal purposeful conduct by nonresident [13] Courts corporation sufficient to subject it to Purpose, intent, and foreseeability; jurisdiction of Texas district court, even purposeful availment though nonresident corporation requested that Courts plaintiff develop business summary, and Agents, Representatives, and Other Third plaintiff developed game cube and marketing Parties, Contacts and Activities of as Basis for materials, where business summary was just Jurisdiction part of ongoing communication, plaintiffs Purposeful availment requirement for exercise independently developed game cube and of jurisdiction over a nonresident defendant marketing tools, nonresident corporation did not ensures that a nonresident defendant will not use game cube, and letter agreements did not be haled into a foreign jurisdiction based solely indicate place of performance or state where on random, fortuitous, or attenuated contacts, contemplated partnership was to be formed or or unilateral activity of another party or a third domiciled. V.T.C.A., Civil Practice & Remedies person. V.T.C.A., Civil Practice & Remedies Code §§ 17.041-17.045. Code §§ 17.041-17.045.
2 Cases that cite this headnote Cases that cite this headnote [17] Courts [14] Courts Commercial Contacts and Activities;
Factors Considered in General Contracts and Transactions Nonresident defendant must have fair warning Merely contracting with a Texas corporation that a particular activity may subject it to the does not satisfy the minimum-contacts jurisdiction of a foreign sovereign in order for requirement for the purpose of establishing it to have jurisdiction over the nonresident. specific jurisdiction over a nonresident V.T.C.A., Civil Practice & Remedies Code §§ defendant. V.T.C.A., Civil Practice & Remedies 17.041-17.045. Code §§ 17.041-17.045.
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be exercised over a nonresident, it is not the 4 Cases that cite this headnote number, but rather the quality and nature of the nonresident's contacts with Texas that are [18] Courts important. V.T.C.A., Civil Practice & Remedies Business contacts and activities; Code §§ 17.041-17.045.
transacting or doing business Cases that cite this headnote To establish jurisdiction over a nonresident defendant, courts must apply a highly realistic approach that recognizes that a contract is [22] Courts ordinarily merely an intermediate step serving Partnerships and joint ventures to tie up prior business negotiations with Telephone, mail, and facsimile communications future consequences which themselves are between parties were not sufficiently related to the real object of the business transaction. breach of contract and fraud causes of action V.T.C.A., Civil Practice & Remedies Code §§ to justify exercise of specific jurisdiction over 17.041-17.045. nonresident corporation on basis of purposeful availment of benefits and protections of Texas Cases that cite this headnote law, even though nonresident corporation admitted that decisions regarding proposed joint [19] Courts project were made in such communication, Commercial Contacts and Activities; and plaintiff alleged that termination letter Contracts and Transactions sent to Texas constituted complained of breach of contract, where communications consisted Prior negotiations, contemplated future for most part of development updates and consequences, the terms of the contract, and travel arrangements, and if there was a the parties' actual course of dealing must breach, it occurred when and where nonresident be evaluated in determining whether the corporation ceased its performance of contract, nonresident defendant purposefully established not in letter. V.T.C.A., Civil Practice & minimum contacts within the forum, for the Remedies Code §§ 17.041-17.045.
purpose of establishing specific jurisdiction over the defendant. V.T.C.A., Civil Practice & 8 Cases that cite this headnote Remedies Code §§ 17.041-17.045.
3 Cases that cite this headnote [23] Courts Commercial Contacts and Activities;
Contracts and Transactions [20] Courts Commercial Contacts and Activities; Minimum contacts, for the purpose of Contracts and Transactions establishing specific jurisdiction over a nonresident defendant, may not be satisfied Partial performance of a contract in Texas is by merely engaging in communications with not the sine qua non of personal jurisdiction.
a Texas corporation during performance of a V.T.C.A., Civil Practice & Remedies Code §§ contract. V.T.C.A., Civil Practice & Remedies 17.041-17.045.
Code §§ 17.041-17.045.
1 Cases that cite this headnote 9 Cases that cite this headnote
[21] Courts [24] Courts Nature, number, frequency, and extent of Particular cases contacts and activities Fact that plaintiff hired employees in Texas In a minimum-contacts analysis, for the purpose to help it develop in-room gaming system, of determining whether personal jurisdiction can
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which it had agreed to develop with nonresident corporation, did not satisfy section of long-arm statute condition that provided jurisdiction over BACKGROUND nonresident corporation that recruited Texas residents through an intermediary located in In early 1995, Chris Tyson, the president and principal owner Texas. V.T.C.A., Civil Practice & Remedies of TeleVentures, Inc. (“TeleVentures”), contacted IGT, a Code § 17.042. manufacturer of slot machines, to discuss his concept for
Cases that cite this headnote “in-room gaming.” 2 Tyson's first contact with IGT was by telephone from Tyson's office in Texas to IGT's office in Reno, Nevada. Tyson followed his call with a personal visit [25] Courts to IGT's Reno office. IGT is a Nevada corporation with its Corporations and business organizations principal place of business in Nevada. It neither does business No communication by nonresident corporation nor is authorized to do business in Texas. It has no agents, was directed to and intended to be relied upon offices, or property in Texas and is not a party to any contract by plaintiff that, if false, gave rise to any requiring acts to be performed in Texas. IGT has not directly cause of action alleged by plaintiff, and thus hired any employees in Texas nor has it asked others such as Texas court could not exercise jurisdiction over TeleVentures to hire employees in Texas. The same is true of nonresident corporation on the basis of such IGT's parent corporation, International Game Technology. 3 a communication. V.T.C.A., Civil Practice & Ultimately, TeleVentures and IGT signed two letters of intent. Remedies Code §§ 17.041-17.045. At the time the letters of intent were signed, TeleVentures was a Texas corporation with its principal place of business Cases that cite this headnote in Austin. 4
After IGT expressed an initial interest in the in-room gaming concept, other meetings followed, always in Nevada. IGT Attorneys and Law Firms and TeleVentures concluded that there were two ways to *903 Jerry Galow, Watson, Bishop, London & Galow, P.C., connect hotel televisions to IGT's gaming technology. Tyson Austin, for appellant. had previously developed one of these alternatives with the assistance of U.S. West Marketing Resources Group Inc.
John L. Foster, Minton, Burton, Foster & Collins, P.C., (“U.S.West”), a Colorado corporation. The process consisted Austin, for appellee. of attaching an IGT game board to a U.S. West switch, which would in turn be attached to an On Command Video (“OCV”)
Before Chief Justice ABOUSSIE, Justices B.A. SMITH and YEAKEL. switch. 5 The second concept, developed by IGT during its relationship with TeleVentures, involved directly attaching Opinion an IGT game board to an OCV switch, thus eliminating the need for the intermediate use of the U.S. West switch.
LEE YEAKEL, Justice.
U.S. West demonstrated its technology to IGT and This is an appeal arising from the district court's sustaining TeleVentures at its offices in Colorado in September 1995.
appellees' special appearance. 1 The sole issue on appeal is While in Colorado, IGT and TeleVentures signed the first whether Texas courts can assert in personam jurisdiction of two letters of intent. The letter provided that IGT and over a Nevada corporation in a suit concerning termination TeleVentures would develop an in-room gaming system; of its relationship with a Texas corporation. Appellees the two would “work together using their best efforts to International Game Technology and IGT specially appeared develop and install the System by combining the existing and challenging *904 the district court's personal jurisdiction. future technology and equipment of TeleVentures with the The district court sustained their special appearance and existing and future technology of IGT”; they would “mutually dismissed appellant TeleVentures, Inc.'s suit for want of agree upon a hotel property designated as a test location in jurisdiction. We will affirm. which to install and evaluate the performance of the system”;
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the test would be conducted and the results evaluated; and the calls, visits, and written communications. TeleVentures if both agreed that those results were satisfactory, they prepared and forwarded a proposed draft of a partnership and would enter into a formal agreement to develop, market, operating agreement to IGT in Nevada, but IGT never signed or install the system on a commercial basis. Following the them. September letter, IGT and TeleVentures signed the second letter of intent “wherein a mutually beneficial business TeleVentures established offices and a payroll in Austin, relationship is contemplated between Hospitality Network, Texas, and created several marketing devices: (1) a study of Ltd., a Texas limited *905 partnership, 6 and a newly potential test sites and marketplaces for the system; (2) an formed partnership [to be called Game Ventures] consisting updated business plan introducing the name “CasinoVision”; of IGT, a Nevada corporation (‘IGT’) and TeleVentures, (3) brochures, a logo, and other marketing material to promote Inc., a Texas corporation.” This letter was prepared by “CasinoVision”; and (4) at IGT's request, a “Business TeleVentures in its Austin office and mailed to Nevada, Summary.” TeleVentures asked IGT for a videotape that where it was signed by IGT. TeleVentures could implant onto a CD ROM, which could be used to demonstrate “hotel in-room gaming using a remote After considering the two alternatives for linking IGT's control like in a hotel room.” All TeleVentures' activities were devices to hotel room television sets, IGT decided, for reasons performed in Texas. of cost, convenience, and security, that the direct-attachment system was the better choice. IGT made this decision after the In March 1996, IGT connected one of its gaming boards first few meetings with TeleVentures but continued to work to an OCV switch and conducted a mini-demonstration in with TeleVentures because TeleVentures had “the concept” Nevada. IGT and TeleVentures also planned to travel to of in-room gaming, “an understanding of in-room television,” Aruba to conduct a hotel test of the in-room gaming system. and a personal connection with Hospitality Network, which The trip never occurred, and in June 1996, IGT announced its had a “good understanding of in-room television in the hotel decision to discontinue pursuing the idea of in-room gaming business.” with TeleVentures. The parties attempted to rework their arrangement, but the effort was abandoned on January 9, Although IGT had anticipated that some of the technology 1997 when IGT sent a final letter unilaterally terminating any and equipment for the concept would be provided by relations with TeleVentures (the “termination letter”). TeleVentures, IGT's decision not to use the U.S. West system resulted in IGT's dealing directly with OCV because TeleVentures filed this suit against IGT accusing IGT of for reasons not indicated in the record, OCV refused to breach of contract, breach of fiduciary duties, fraud in the work with TeleVentures. Additionally, IGT did not share inducement of the letters of intent, fraudulent concealment, any information regarding its gaming technology with negligent misrepresentation, and tortious interference. IGT TeleVentures. As a result, TeleVentures did not contribute specially appeared challenging the district court's personal further to the development of the direct-attachment system. jurisdiction. See *906 Tex.R. Civ. P. 120a. The district court However, TeleVentures, on its own initiative, began to sustained IGT's challenge. TeleVentures appeals. explore a third alternative, the “game cube,” that could be used in hotels not wired with the OCV system. IGT was aware of TeleVentures' work but never incorporated the game cube DISCUSSION into its development plans.
In its sole issue on appeal, TeleVentures claims that the During their relationship, IGT and TeleVentures district court erred in sustaining IGT's special appearance communicated via personal visits, facsimiles, letters, and dismissing the suit for lack of in personam jurisdiction and telephone calls. TeleVentures' employees traveled to because: (1) IGT purposefully directed activities into Texas; Nevada; however, no IGT employees or representatives (2) this lawsuit arises from and relates directly to such came to Texas. The record reflects at least seventy activities and torts committed in this state; and (3) the written communications to and from Texas consisting district court's exercise of jurisdiction over IGT does of development updates, travel arrangements, meeting not offend traditional notions of fair play and substantial schedules, and even a Christmas card. Decisions regarding justice. TeleVentures argues that IGT entered into a contract how the project was to move forward were made during with a Texas corporation knowing that the majority of
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TeleVentures' work was to be done in Texas, and through “findings” and “conclusion” are, in actuality, all conclusions IGT's constant contact with TeleVentures by phone calls, of law and we will consider them as such. We review the letters, facsimiles, and personal visits, IGT was aware of trial court's conclusions of law de novo. See Piazza v. City of and approved the work done in Texas. TeleVentures also Granger, 909 S.W.2d 529, 532 (Tex.App.—Austin 1995, no argues that IGT, through TeleVentures, recruited Texas writ). Conclusions of law will not be reversed unless they are residents located in Texas for performance of their joint erroneous as a matter of law. See id. (citing Westech Eng'g, objectives. TeleVentures further asserts that its causes of Inc. v. Clearwater Constructors, Inc., 835 S.W.2d 190, 196 action, which include breach of contract, breach of fiduciary (Tex.App.—Austin 1992, no writ)). duties, fraud in the inducement, fraudulent concealment, negligent misrepresentation, and tortious interference arise from and are related to IGT's contacts with Texas because: Jurisdiction (1) the breach of contract and breach of fiduciary duties [3] [4] [5] A Texas court may exercise personal involve a contract that was to be partially performed in jurisdiction over a nonresident defendant if: (1) jurisdiction Texas; (2) the breach of contract, breach of fiduciary duties, is authorized by the Texas long-arm statute, 8 and (2) the fraud in the inducement, fraudulent concealment, negligent exercise of jurisdiction is consistent with federal and state misrepresentation, and tortious interference occurred in due process standards. See Guardian Royal, 815 S.W.2d at Texas when IGT sent the termination letter to TeleVentures 226; Transportacion Especial Autorizada, S.A. v. Seguros in Texas; and (3) the causes of action for fraud in Comercial America, S.A., 978 S.W.2d 716, 719 (Tex.App. the inducement, negligent misrepresentation, and tortious —Austin 1998, no pet.). The long-arm statute allows Texas interference are based, in part, upon statements IGT made courts jurisdiction to the full extent permitted by the United in communications to TeleVentures in Texas with the intent States Constitution. See Guardian Royal, 815 S.W.2d at of inducing TeleVentures to enter into the two letters of 226. Thus, the only limitations on Texas courts in asserting intent. Finally, TeleVentures asserts that the assumption of personal jurisdiction over a nonresident defendant are those jurisdiction in Texas does not offend notions of fair play imposed by the Due Process Clause of the Fourteenth and substantial justice because IGT is a multi-million dollar Amendment. See Helicopteros Nacionales de Colombia v. conglomerate that does business throughout the world. Thus, Hall, 466 U.S. 408, 413–14, 104 S.Ct. 1868, 80 L.Ed.2d 404 litigation in Texas would not be excessively burdensome to (1984). Due process requires a showing that the nonresident IGT, in contrast to the burden that litigation in Nevada would defendant has purposefully established “minimum contacts” impose on TeleVentures, a start-up company with little or no with Texas and that the maintenance of the suit does revenue. not offend “traditional notions of fair play and substantial justice.” See International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945); Guardian Royal, Burden of Proof and Standard of Review 815 S.W.2d at 230–31. [1] In interposing a special appearance, the nonresident defendant challenging personal jurisdiction bears the burden [6] Although the jurisdiction of Texas courts is always of proof to negate all bases of personal jurisdiction alleged dependent on the defendant's having some minimum contacts by the plaintiff. See Guardian Royal Exch. Assurance, Ltd. with Texas, the requisite extent of those contacts varies v. English China Clays, P.L.C., 815 S.W.2d 223, 231 n. 13 depending on the type of in personam jurisdiction sought to be (Tex.1991) (citing Zac Smith & Co. v. Otis Elevator Co., imposed. Thus, the United States Supreme Court has refined 734 S.W.2d 662, 664 (Tex.1987); Siskind v. Villa Found. for the minimum-contacts analysis into specific and general Educ., Inc. 642 S.W.2d 434, 438 (Tex.1982)); Kawasaki Steel jurisdiction. See Guardian Royal, 815 S.W.2d at 227 (citing Corp. v. Middleton, 699 S.W.2d 199, 203 (Tex.1985). Helicopteros, 466 U.S. at 414–16, 104 S.Ct. 1868).
[2] The district court filed findings of fact and a conclusion [7] [8] To establish specific jurisdiction, the cause of action 7 of law. See *907 Tex.R. Civ. P. 296–297. TeleVentures must arise out of or relate to the nonresident defendant's asserts that the “findings of fact are not findings at all, contact with the forum state and the conduct must have but rather, legal conclusions.” The parties do not dispute resulted from that defendant's purposeful conduct, not the the material facts before the district court in any significant unilateral conduct of the plaintiff or others. See id. (citing degree. We agree with TeleVentures that the district court's Helicopteros, 466 U.S. at 414 n. 8, 417, 104 S.Ct. 1868;
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World–Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, [12] [13] [14] [15] [16] We must first decide whether 293–94, 298, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980)). TeleVentures' causes of action arise out of or relate to “Furthermore, the nonresident defendant's activities must IGT's contacts with Texas. The nonresident defendant must have been ‘purposefully directed’ to the forum and the have purposely availed itself of the privilege of conducting litigation must result from alleged injuries that ‘arise out of activities within the forum state, thus invoking the benefits or relate to’ those activities.” Id. at 228, 100 S.Ct. 559 (citing and protection of its laws. See Burger King, 471 U.S. at 474– *908 Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472, 75, 105 S.Ct. 2174. The purposeful-availment requirement 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985); Zac Smith & Co., ensures that a nonresident defendant will not be haled into 734 S.W.2d at 663). Thus, in analyzing minimum contacts for a foreign jurisdiction based solely on random, fortuitous, or purposes of Texas courts' specific jurisdiction, we focus on attenuated contacts or unilateral activity of another party or the relationship among the nonresident defendant, the forum, a third person. See id. at 475, 105 S.Ct. 2174. A nonresident and the litigation. See id. (citing Helicopteros, 466 U.S. at defendant must have fair warning that a particular activity 414, 104 S.Ct. 1868; Schlobohm v. Schapiro, 784 S.W.2d 355, may subject it to the jurisdiction of a foreign sovereign. See 357 (Tex.1990)). id. at 472, 105 S.Ct. 2174. Isolated contacts with the forum state or its residents are not sufficient for a court to assume [9] [10] An assertion of general jurisdiction compels a personal jurisdiction over a nonresident defendant. See id. at more demanding minimum-contacts analysis and requires 475, 105 S.Ct. 2174. In assessing IGT's contacts with Texas, a showing of substantial activities within the forum state. we will look first to the letters of intent. See id. (citing Schlobohm, 784 S.W.2d at 357). The cause of action need not arise from or relate to the nonresident defendant's purposeful conduct within the forum state, but Letters of Intent there must be “continuous and systematic contacts” between [17] [18] [19] [20] TeleVentures argues that personal the nonresident defendant and the forum state. See id. jurisdiction is established because its suit concerns (citing Helicopteros, 466 U.S. at 414–16, 104 S.Ct. 1868; agreements (the letters of intent) made between TeleVentures, Schlobohm, 784 S.W.2d at 357). In the present case, the a Texas corporation, and IGT that were to be partially parties agree that the district court does not have general performed in Texas. However, merely contracting with a jurisdiction over IGT; therefore, we will address only specific Texas corporation does not satisfy the minimum-contacts jurisdiction. requirement. See *909 Burger King, 471 U.S. at 478, 105 S.Ct. 2174; Magnolia Gas Co. v. Knight Equip. & [11] To ensure compliance with the federal constitutional Mfg. Corp., 994 S.W.2d 684, 691 (Tex.App.—San Antonio requirements of due process, the Texas Supreme Court 1998, no pet.). Instead, courts must apply a “highly realistic” has developed what it terms a “formula” for determining approach that recognizes that a “contract ... [is] ordinarily jurisdiction. See generally Guardian Royal, 815 S.W.2d at but an intermediate step serving to tie up prior business negotiations with future consequences which themselves are 229–31. 9 Initially, the nonresident defendant must have the real object of the business transaction.” Burger King, 471 purposefully established minimum contacts with Texas, and U.S. at 478, 105 S.Ct. 2174. Prior negotiations, contemplated when, as here, specific jurisdiction is asserted, the cause future consequences, the terms of the contract, and the parties'
of action must arise out of or relate to these contacts. See actual course of dealing must be evaluated in determining id. at 230. Also, the action or conduct of the nonresident whether the defendant purposefully established minimum defendant purposefully directed toward Texas must give contacts within the forum. See id. at 478–79, 105 S.Ct. 2174.
rise to a “substantial connection between” Texas and the Likewise, partial performance of a contract in Texas is “not nonresident. See id. Second, the assumption of jurisdiction by the sine qua non of personal jurisdiction.” Magnolia Gas Texas must comport with fair play and substantial justice. See Co., 994 S.W.2d at 692; see also U–Anchor Advertising, id. at 230–31 (citing Burger King, 471 U.S. at 477, 105 S.Ct.
Inc. v. Burt, 553 S.W.2d 760, 763 (Tex.1977) (finding no 2174; Zac Smith & Co., 734 S.W.2d at 664).
personal jurisdiction even though plaintiff's cause of action was connected with contractual obligations that were partially performable in Texas).
Minimum Contacts The crux of both letters of intent is the agreement by TeleVentures and IGT to develop an “in-room gaming
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system.” The first letter refers only to TeleVentures and IGT. that a subsequent agreement regarding marketing would be The second letter refers to “a newly formed partnership” prepared after successful testing of the in-room gaming between TeleVentures and IGT that “shall be called system. The preparation *910 of the business summary ‘Game Ventures' ” and will establish a “beneficial business was no more than a part of the ongoing communications relationship” with Hospitality Network. The system to be between TeleVentures and IGT and was not required by either developed by TeleVentures and IGT, as Game Ventures, is letter agreement. See Magnolia Gas Co., 994 S.W.2d at 692 the same as referenced in the earlier letter. Neither letter (no minimum contacts where defendant “neither required indicates a place of performance nor gives any guidance nor bargained for” work to be done in Texas). Simply with regard to the state in which either TeleVentures or IGT asking TeleVentures to produce a business summary does not will perform any obligation arising from the letters. The establish a “substantial connection” between IGT and Texas. second letter does not disclose the state in which the new See Guardian Royal, 815 S.W.2d at 230 (requiring substantial Game Ventures partnership is to be formed or domiciled. connection between non-resident and forum state). IGT acknowledges that it anticipated TeleVentures would contribute to the technological development of the system. The unexecuted proposed formal partnership agreement However, once the decision was made to use the direct prepared by TeleVentures provided for performance in attachment system, TeleVentures did not participate in the Nevada. TeleVentures changed its state of incorporation further development of that system for two reasons: (1) OCV from Texas to Nevada during its relationship with IGT. would not participate if TeleVentures was present at any The terms of the letters of intent and the history of the discussions between itself and IGT; and (2) IGT did not parties' negotiations do not reveal purposeful conduct by IGT give TeleVentures its gaming board information, which was sufficient to subject it to the jurisdiction of the Texas district necessary to develop the in-room gaming system. As a result, court. TeleVentures' contributions were limited to its unilateral decisions to develop the game cube and various marketing tools. Numerous Contacts & Recruiting Texas Employees [21] [22] [23] TeleVentures argues that the numerous Although IGT had knowledge of the game cube, IGT neither and repeated contacts between it and IGT by telephone, required nor requested it. IGT had decided to use the direct- mail, and facsimile establish the requisite minimum contacts attachment system. In addition, IGT did not use the game by IGT. In a minimum-contacts analysis, it is not the cube. The focus of the analysis must be on the actions of number, but rather the quality and nature of the nonresident's IGT, not TeleVentures, and the contacts that give rise to contacts with Texas that are important. See Guardian Royal, jurisdiction must come from IGT's purposeful conduct, not 815 S.W.2d at 230 n. 11 (citing Texas Commerce Bank the one-sided activity of TeleVentures. See Helicopteros, v. Interpol '80 Ltd., 703 S.W.2d 765, 772 (Tex.App.— 466 U.S. at 417, 104 S.Ct. 1868; World–Wide Volkswagen, Corpus Christi 1985, no writ)); Memorial Hosp. Sys. v. 444 U.S. at 292, 100 S.Ct. 559. TeleVentures' independent Fisher Ins., 835 S.W.2d 645, 650 (Tex.App.—Houston [14th action in developing the game cube is not sufficient to confer Dist.] 1992, no writ). After reviewing the communications jurisdiction over IGT. See Barnstone v. Congregation Am. between the parties contained in the record, we conclude Echad, 574 F.2d 286, 288–89 (5th Cir.1978) (dismissing that they are not sufficiently related to the cause of action. case for lack of jurisdiction because contract with Texas They consist for the most part of development updates architect to design and oversee construction of synagogue and travel arrangements. While IGT admits that decisions was wholly performable in Maine, negotiations took place regarding the project were made while in communication through mail, and only connection with Texas was unilateral with TeleVentures, these contacts are insufficient to establish activity of architect in preparing sketches for building at in personam jurisdiction. Minimum contacts may not be architect's office in Texas). For the most part, TeleVentures' satisfied by merely engaging in communications with a Texas act of developing various marketing tools was also unilateral. corporation during performance of a contract. See Magnolia While a “Business Summary” was prepared at IGT's request, Gas Co., 994 S.W.2d at 691 (citing Gundle Lining Constr. such request does not establish jurisdiction. According to Corp. v. Adams County Asphalt, Inc., 85 F.3d 201, 205–08 Tyson, the business summary was designed to serve as (5th Cir.1996)). The exchange of communications between a marketing tool and to solicit and attract interest from TeleVentures and IGT in the course of developing and third-party investors. The letters of intent each contemplate carrying out the contract is in itself insufficient to constitute purposeful availment of the benefits and protections of Texas
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TeleVentures, Inc. v. International Game Technology, 12 S.W.3d 900 (2000)
law. See Holt Oil & Gas Corp. v. Harvey, 801 F.2d 773, 1482. The defendants were Florida residents, one a reporter 778 (5th Cir.1986) (citing Patterson v. Dietze, Inc., 764 F.2d for and the other the president of the Enquirer. See id. at 1145, 1147 (5th Cir.1985)) (numerous telephone calls from 785–86, 104 S.Ct. 1482. Most of the research and writing defendant to forum during course of performance insufficient of the article was done in Florida. See id. at 785, 104 S.Ct. to support specific jurisdiction). 1482. The Calder court held that the defendants, who between them wrote and edited the article, could anticipate being haled TeleVentures also posits that Texas has jurisdiction over into a California court when the article was published, as IGT because the termination letter, which it argues breached California was the state in which the subject of the article the agreement created by the letters of intent, was sent into resided and where the Enquirer had its largest circulation. See Texas from without the state. TeleVentures cites no authority id. at 789–90, 104 S.Ct. 1482. The article itself was the basis for this proposition. The breach, if any, was not created of the injury and the cause of action. by the termination letter; rather, if there was a breach, it occurred when and where IGT ceased its performance of the McGee v. International Life Insurance Co., 355 U.S. 220, 78 contract. See Methodist Hosps. v. Corporate Communicators, S.Ct. 199, 2 L.Ed.2d 223 (1957), involved the mailing of a Inc., 806 S.W.2d 879, 882 (Tex.App.—Dallas 1991, writ reinsurance certificate to a California resident, Franklin, by a denied) (breach of contract occurs when party fails or refuses Texas insurance company. See 355 U.S. at 221, 78 S.Ct. 199. to perform); see also Restatement (Second) of Contracts § The certificate was an offer by the Texas company to insure 235(2) (when performance is due, any non-performance is Franklin in accordance with an insurance contract Franklin breach). The termination letter gives TeleVentures notice that held with an Arizona insurance company whose insurance IGT will no longer pursue the concept of in-room gaming and obligations had been assumed by the Texas company. See will proceed no further with TeleVentures. Considering that id. Franklin accepted the offer and from then until his death (1) contracting with a Texas resident is not enough to confer mailed premiums from California to Texas. See id. at 221– jurisdiction; 10 and (2) communications between *911 the 22, 78 S.Ct. 199. California jurisdiction was proper because resident and non-resident during performance of a contract the contract itself had a substantial connection with that state and California had “a manifest interest in providing effective will not confer jurisdiction, 11 we hold that the mailing of means of redress for its residents when their insurers refuse to a notice that IGT will no longer pursue in-room gaming is pay claims.” Id. at 223, 78 S.Ct. 199. That “manifest interest”
likewise not sufficient to establish jurisdiction.
is largely a creature of regulatory law and is not applicable to
[24] TeleVentures' argument that IGT recruited Texas the facts before us. 12 residents for employment is not substantiated by the record. The fact that TeleVentures hired employees to help it develop Rowland & Rowland v. Texas Employers Indemnity Co., the in-room gaming concept does not satisfy the long-arm 973 S.W.2d 432 (Tex.App.—Austin 1998, no pet.), centered statute condition that IGT recruit Texas residents through on a single letter written by the nonresident defendant, a an intermediary located in Texas. See Tex. Civ. Prac. & Tennessee law firm, to the plaintiff, a Texas indemnity Rem.Code § 17.042. company. See 973 S.W.2d at 434. The Texas company, relying on representations in the letter that the Tennessee firm would protect its interest in a wrongful death suit Tortious Acts pending in Tennessee, did not intervene in the Tennessee TeleVentures argues that IGT's alleged fraudulent and litigation. See id. At the conclusion of the suit, the law firm negligent misrepresentations made by way of phone calls, distributed the entire recovery to the wrongful death claimants letters, and facsimiles constitute tortious acts committed by to the exclusion of the Texas company, which then sued IGT in Texas. TeleVentures directs us to the decisions of the Tennessee firm in Texas for negligent misrepresentation. several state and federal courts to support its position. We do See id. Texas jurisdiction was upheld on two bases: the not find these cases persuasive. In each, the communication letter itself *912 constituted a purposeful contact directed to itself was the specific conduct that constituted the tortious Texas with the intent that its representations be relied upon, act. In Calder v. Jones, 465 U.S. 783, 104 S.Ct. 1482, 79 and the Tennessee law firm unilaterally decided to distribute L.Ed.2d 804 (1984), the National Enquirer published an all of the proceeds to the wrongful death claimants and their allegedly libelous story concerning the California activities lawyers, all of whom were residents of Texas. See id. at 435– of a California resident. See 465 U.S. at 784–85, 104 S.Ct. 36.
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TeleVentures, Inc. v. International Game Technology, 12 S.W.3d 900 (2000)
F.2d at 330–31. The Mississippi court had jurisdiction over Karlis because, in the specific call initiated by Karlis, he In Memorial Hospital System v. Fisher Insurance Agency, allegedly committed an intentional tort, the injurious effect of Inc., 835 S.W.2d 645 (Tex.App.—Houston [14th Dist.]
which was felt in Mississippi and was foreseeable at the time 1992, no writ), the plaintiff hospital telephoned the of the call. See id. at 334.
defendant, a Mississippi insurance agency, to verify workers' compensation insurance coverage prior to admitting an [25] In the record before us, we find no communication injured worker. See 835 S.W.2d at 648. Relying on by IGT directed to and intended to be relied upon by the Mississippi agency's affirmative response, the hospital TeleVentures in Texas that, if false, gives rise to any cause of admitted and treated the worker. See id. When it discovered action alleged by TeleVentures.
that there was in fact no coverage, the hospital brought suit in Texas against the Mississippi agency. See id. The court of appeals affirmed jurisdiction in Texas because the specific representation in the call was relied upon in Texas. CONCLUSION See id. Both Rowland & Rowland and Memorial Hospital System demonstrate allegedly tortious conduct in a specific We hold that IGT did not conduct purposeful activities in communication intended to be relied upon within the state Texas in its dealings with TeleVentures. The record reveals of Texas. While TeleVentures directs us to a quantity of much activity in Texas by TeleVentures but no activity of communications between it and IGT, it fails to point to any substance by IGT. IGT's Texas contacts were incidental and specific representation that constitutes an allegedly tortious immaterial to the purpose of the contract, the development of act, as distinguished from general, ongoing communications an in-room gaming system, and were not instigated by IGT. during the performance of a contract. See Guardian Royal, We overrule TeleVentures' issue. 13 815 S.W.2d at 230 n. 11 (quality, not quantity, determines sufficiency of nonresident's contacts with Texas); Magnolia We hold that the district court properly found it could not Gas Co., 994 S.W.2d at 691 (minimum contacts not satisfied exercise in personam jurisdiction over IGT and affirm the by merely engaging in communications during performance district court's order sustaining IGT's special appearance of contract). and dismissing TeleVentures' suit for lack of personal jurisdiction.
Finally, in Brown v. Flowers Industries, Inc., 688 F.2d 328 (5th Cir.1982), Brown alleged that he lost the chance to obtain a loan because of a defamatory statement made in a telephone All Citations call made by Karlis, an Indiana resident, from his office in 12 S.W.3d 900 Indiana to the United States Attorney in Mississippi. See 688
Footnotes 1 In its brief, TeleVentures states that it is appealing pursuant to Tex. Civ. Prac. & Rem.Code Ann. § 51.014(a)(7) (West Supp.2000) (appeal may be brought from interlocutory order granting or denying special appearance). However, the district court's “Order” dismisses the entire case: “IT IS ... ORDERED by the Court that [appellees'] special appearance motion is hereby sustained, and that this cause is dismissed for want of jurisdiction with prejudice for refiling same in Texas.” We will address the appeal as one from a final order of the district court.
2 For purposes of this case, “in-room gaming” is a concept where a hotel guest would be able to gamble and play games such as blackjack, slots, or poker on the television set in the guest's hotel room.
3 This suit arises from IGT's dealings with TeleVentures. International Game Technology was sued on alter ego theories based on its relationship with IGT. Their interests do not diverge. We will refer to appellees jointly as “IGT.”
4 During the events preceding this suit, TeleVentures merged with a Nevada corporation of the same name. TeleVentures thus became a Nevada corporation but maintained its principal place of business in Austin, Texas.
5 On Command Video is a California corporation that IGT testified could bring “secure and undistorted data from IGT's devices to hotel rooms.”
6 Hospitality Network, Ltd. is a provider of interactive hotel television services. 7 The district court made five “findings of fact”:
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TeleVentures, Inc. v. International Game Technology, 12 S.W.3d 900 (2000)
1. Neither IGT nor International Game Technology have maintained continuous or systematic contacts with the State of Texas; 2. The liability of IGT and International Game Technology alleged by [TeleVentures] does not arise from, nor is it related to, activity by those companies conducted in Texas; 3. The injuries alleged in [TeleVentures'] pleadings do no[t] arise from, nor are they related to, activities of IGT or International Game Technology purposefully directed to the State of Texas; 4. The contact[s] of IGT and International Game Technology with the State of Texas were minimal and fortuitous and not a result of their purposefully conducted activities with the State of Texas; and 5. The exercise of personal jurisdiction over IGT [and] International Game Technology in the State of Texas would not comport with traditional notions of fair play and substantial justice; and one “conclusion of law”: The courts of the State of Texas may not, consistent with the Constitution of the United States, exercise personal jurisdiction over IGT and International Game Technology.
8 See Tex. Civ. Prac. & Rem.Code Ann. §§ 17.041–.045 (West 1997). The long-arm statute provides a non-exclusive enumeration of acts by a nonresident that constitute doing business in Texas: “(1) contract [ing] by mail or otherwise with a Texas resident and either party is to perform the contract in whole or in part in [Texas]; (2) commit [ting] a tort in whole or in part in [Texas]; or (3) recruit[ing] Texas residents, directly or through an intermediary located in [Texas], for employment inside or outside of [Texas].” Id. § 17.042; see also Guardian Royal Exch. Assurance, Ltd. v. English China Clays, P.L.C., 815 S.W.2d 223, 226 (Tex.1991); Schlobohm v. Schapiro, 784 S.W.2d 355, 357 (Tex.1990).
9 This formula was first expressed by the supreme court in O'Brien v. Lanpar Co., 399 S.W.2d 340 (Tex.1966), when the court adopted the Washington Supreme Court's articulation in Tyee Construction Co. v. Dulien Steel Products, Inc., 62 Wash.2d 106, 381 P.2d 245 (1963). The formula has been reviewed and modified as the United States Supreme Court has examined, developed, and refined the permissible reach of federal due process. See Guardian Royal, 815 S.W.2d at 230; Schlobohm, 784 S.W.2d at 358.
10 See, e.g., Burger King Corp. v. Rudzewicz, 471 U.S. 462, 478, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985). 11 See, e.g., Magnolia Gas Co., 994 S.W.2d at 691. 12 The Texas Supreme Court has specifically discussed McGee in such a context. See Guardian Royal, 815 S.W.2d at 229 n. 8.
13 Because we hold that IGT did not have the requisite minimum contacts with Texas to be subject to the jurisdiction of the district court, we need not address the second inquiry of the jurisdictional formula—whether the assertion of personal jurisdiction would comport with fair play and substantial justice. See Guardian Royal, 815 S.W.2d at 231.
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Texas Capital Securities Management, Inc. v. Sandefer, 80 S.W.3d 260 (2002)
[2] Judgment KeyCite Yellow Flag - Negative Treatment Scope and Extent of Estoppel in General Disagreed With by Fernea v. Merrill Lynch Pierce Fenner & Smith, Inc., Collateral estoppel, also known as issue Tex.App.-Austin, July 12, 2011 preclusion, is more narrow than res judicata in 80 S.W.3d 260 that it only precludes the relitigation of identical Court of Appeals of Texas, issues of fact or law that were actually litigated Texarkana. and essential to the judgment in a prior suit.
TEXAS CAPITAL SECURITIES 3 Cases that cite this headnote MANAGEMENT, INC., et al., Appellants, v. [3] Judgment J.D. SANDEFER, III, et al., Appellees. Matters Actually Litigated and Determined Judgment No. 06–01–00131–CV. | Submitted Essentials of Adjudication May 30, 2002. | Decided June 19, 2002.
Under the doctrine of collateral estoppel, Investors, who had successfully sued brokerage firm for once an actually litigated and essential issue damages stemming from sale of certain stock, sued officers of is determined, that issue is conclusive in a firm and firm's management company, alleging that they were subsequent action between the same parties. liable for firm's violations of the Texas Securities Act. The Cases that cite this headnote 270th Judicial District Court, Harris County, Brent Gamble, J., granted summary judgment in favor of investors. Officers and management company appealed. The Texarkana Court [4] Judgment of Appeals, Donald R. Ross, J., held that: (1) fact questions Matters Which Might Have Been Litigated as to whether defendants were in privity with brokerage Unlike the broader res judicata doctrine, firm precluded application of collateral estoppel to establish collateral estoppel analysis does not focus on Securities Act violations, and (2) fact questions as to whether what could have been litigated, but only on defendants qualified as “control persons” of brokerage firm what was actually litigated and essential to the precluded summary judgment on Securities Act claims. judgment.
Reversed and remanded. 2 Cases that cite this headnote
[5] Judgment West Headnotes (24) Identity of Persons in General Judgment Scope and Extent of Estoppel in General [1] Appeal and Error Extent of Review Dependent on Nature of Judgment Decision Appealed from Facts Necessary to Sustain Judgment
Since a no-evidence summary judgment is In order to invoke collateral estoppel, a party essentially a pretrial directed verdict, reviewing must establish that: (1) the facts sought to be court will apply the same legal sufficiency litigated in the first action were fully and fairly standard in reviewing a no-evidence summary litigated in the prior action; (2) those facts were judgment as it applies in reviewing a directed essential to the judgment in the first action; and verdict. (3) the parties were cast as adversaries in the first action.
4 Cases that cite this headnote Cases that cite this headnote
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Texas Capital Securities Management, Inc. v. Sandefer, 80 S.W.3d 260 (2002)
[6] Judgment [10] Constitutional Law Mutuality of Estoppel in General Conclusiveness Mutuality is not required for the invocation of Due process requires that the rule of collateral collateral estoppel; rather, it is only necessary estoppel operate only against persons who have that the party against whom the plea of collateral had their day in court either as a party to the prior estoppel is being asserted be a party or in privity suit or as a privy. U.S.C.A. Const.Amend. 14. with a party in the prior litigation.
Cases that cite this headnote 1 Cases that cite this headnote [11] Judgment [7] Judgment What Constitutes Privity in General Presumption and Burden of Proof There is no general definition of privity, The party seeking to invoke collateral estoppel for purposes of collateral estoppel, and the has the burden to present sufficient evidence to determination of who are privies requires a establish that the doctrine of collateral estoppel careful examination into the circumstances of is applicable. each case.
1 Cases that cite this headnote 1 Cases that cite this headnote
[8] Judgment [12] Judgment Evidence as to Identity of Issues or Matters Persons Participating in or Promoting Decided Action or Defense While party relying on doctrine of collateral Judgment estoppel is usually required to introduce into What Constitutes Privity in General evidence both the prior judgment and pleadings Judgment from the prior suit, so long as the record Successive Estates or Interests before the court in the second case adequately The word “privy,” for purposes of collateral provides what was determined in the earlier case, estoppel, includes those who control an action pleadings need not be filed.
although not parties to it, those whose interests 1 Cases that cite this headnote are presented by a party to the action, and successors in interests.
[9] Judgment Cases that cite this headnote Evidence as to Identity of Issues or Matters Decided [13] Judgment Investors seeking to invoke collateral estoppel What Constitutes Privity in General in suit to hold officers of brokerage firm and Privity, for purposes of collateral estoppel, firm's management company liable for violations connotes those who are in law so connected of Texas Securities Act were not required to with a party to the judgment as to have such an introduce into evidence the pleadings from prior identity of interest that the party to the judgment suit against brokerage firm, since investors had represented the same legal right.
filed a copy of the judgment and jury charge from the prior action and they clearly stated what Cases that cite this headnote was determined in that case. Vernon's Ann.Texas Civ.St. art. 581–1 et seq.
[14] Judgment 1 Cases that cite this headnote
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Texas Capital Securities Management, Inc. v. Sandefer, 80 S.W.3d 260 (2002)
Corporations and Corporate Officers and Stockholders [18] Judgment Corporations and Corporate Officers and A party's status as shareholder or officer of a Stockholders corporation does not automatically show that the party had control over prior action involving Judgment corporation or that its interests were represented Evidence as to Identity of Parties in that action, so as to establish the privity needed Management company's status as wholly owned to invoke collateral estoppel. subsidiary of brokerage firm was insufficient, without more evidence, to establish privity with 3 Cases that cite this headnote firm, as required to invoke collateral estoppel based on earlier lawsuit against firm.
[15] Judgment Cases that cite this headnote Privity in General Question of privity, for purposes of collateral estoppel, revolves around the prior cause of [19] Judgment action, not the time of injury. Corporations and Corporate Officers and Stockholders Cases that cite this headnote Fact that officers of brokerage firm and firm's management company, who were being sued [16] Judgment by investors, used same attorney as firm had Effect of Prior Decision used in prior suit was insufficient to establish privity with firm, as required to invoke collateral Fact questions as to whether officers of estoppel based on prior suit.
brokerage firm and firm's management company were in privity with firm, such that collateral 1 Cases that cite this headnote estoppel prevented them from contesting earlier determination that firm had violated Texas Securities Act, precluded summary judgment for [20] Securities Regulation investors in suit to hold officers and management Persons Liable company liable for firm's violations of the National Association of Securities Dealers Securities Act. Vernon's Ann.Texas Civ.St. art. (NASD) form which listed brokerage firm's 581–1 et seq. president, vice-president, and secretary/treasurer as control persons did not conclusively establish Cases that cite this headnote that these officers were “control persons” within meaning of Texas Securities Act. Vernon's [17] Judgment Ann.Texas Civ.St. art. 581–33, subd. F(1).
Corporations and Corporate Officers and 1 Cases that cite this headnote Stockholders Judgment Evidence as to Identity of Parties [21] Securities Regulation Persons Liable Individual's status as secretary and treasurer of brokerage firm was insufficient, without more Status alone does not automatically cause evidence, to establish privity with firm, as officers to be deemed “control persons” under required to invoke collateral estoppel based on Texas Securities Act, and evidence is also earlier lawsuit against firm. required that an officer had influence over at least the direction of the corporation. Vernon's Cases that cite this headnote Ann.Texas Civ.St. art. 581–33, subd. F(1).
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Texas Capital Securities Management, Inc. v. Sandefer, 80 S.W.3d 260 (2002)
1 Cases that cite this headnote Patrick A. Zummo, Zummo, Mitchell & Perry, Houston, for appellee.
[22] Judgment Before GRANT, ROSS and CORNELIUS, * JJ.
Stock and Stockholders, Cases Involving Fact question as to whether president of brokerage firm was “control person” precluded *263 OPINION summary judgment on investors' claim that president was liable for firm's Texas Securities Opinion by Justice ROSS. Act violations. Vernon's Ann.Texas Civ.St. art. 581–33, subd. F(1). Thomas Buckley, Patrick Smetek, Thomas R. Reckling, IV, and Texas Capital Securities Management, Inc. (TCSM)
Cases that cite this headnote (collectively Appellants) appeal the trial court's granting of summary judgment in favor of J.D. Sandefer, III, and [23] Judgment Stephen F. Smith (Appellees) on their claims under the Texas Stock and Stockholders, Cases Involving Securities Act. 1 Appellees sued Appellants for common-law Fact question as to whether secretary/treasurer of fraud, statutory fraud, violation of the Texas Securities Act, brokerage firm was “control person” precluded and constructive fraud. Appellees nonsuited as to the fraud summary judgment on investors' claim that claims, leaving only the violation of the Texas Securities Act secretary/treasurer was liable for firm's Texas claim. Securities Act violations. Vernon's Ann.Texas Civ.St. art. 581–33, subd. F(1). Appellants contend that the trial court erred in granting Appellees' motion for summary judgment and that the trial Cases that cite this headnote court erred in not reducing the sum of money awarded in the summary judgment, or in not deeming the judgment satisfied. Reckling further contends the trial court erred by not granting [24] Judgment his post-trial motions.
Stock and Stockholders, Cases Involving Fact question as to whether management In Texas Capital Securities v. Sandefer, Appellees sued company for brokerage firm was “control various defendants and recovered damages stemming from person” precluded summary judgment on the sale of stock in Titan Resources, Inc. Tex. Capital investors' claim that company was liable for Sec., Inc. v. Sandefer, 58 S.W.3d 760 (Tex.App.-Houston firm's Texas Securities Act violations. Vernon's [1st Dist.] 2001, two pets. denied). Appellants were not Ann.Texas Civ.St. art. 581–33, subd. F(1).
parties to that lawsuit. The evidence in that case showed 1 Cases that cite this headnote that Sandefer and Smith each invested in Titan based on the recommendation and representations of Steven Johnson, a stockbroker with Texas Capital Securities, Inc., and that both suffered losses when the value of the stock fell. Appellees sued Titan, Harris D. Ballow (a stock promoter Attorneys and Law Firms and principal at Titan), Johnson, and Texas Capital Securities, *262 Robert M. Corn, McFall Sherwood & Breitbeil, PC, Inc. Titan and Johnson settled before trial. A jury found that Houston, for Texas Capital Securities Management, Thomas Ballow and Texas Capital Securities, Inc. made fraudulent Buckley, Patrick Smetek. misrepresentations to Appellees. The jury further found Ballow and Texas Capital Securities, Inc. jointly and Randall L. Brim, Kurt M. Hanson, Singleton, Cooksey, severally liable for the $359,063.00 purchase price of the Hanson & Lamberth, LLP, Houston, for Thomas Reckling, stock and determined that Ballow should pay eight million IV. dollars in punitive damages.
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Texas Capital Securities Management, Inc. v. Sandefer, 80 S.W.3d 260 (2002)
In this case, Appellees sued Appellants individually for judgment as we apply in reviewing a directed verdict. violations of the Texas Securities Act, contending they are McCombs v. Children's Med. Ctr., 1 S.W.3d 256, 258–59 control persons and aiders under Article 581–33 of the Texas (Tex.App.-Texarkana 1999, pet. denied); Jackson v. Fiesta Securities Act and are therefore liable for the conduct of Mart, Inc., 979 S.W.2d 68, 70 (Tex.App.-Austin 1998, no Texas Capital Securities, Inc. Appellees contend that, as pet.). control persons, Appellants were in a position to prevent the violations of the Act found against Texas Capital Securities, [2] [3] [4] Appellants contend Appellees failed to Inc. in the Texas Capital case. Id. at 775–76. establish the requisites of collateral estoppel. Collateral estoppel is also known as issue preclusion. Van Dyke v.
Appellants first contend the trial court erred in holding Boswell, O'Toole, Davis & Pickering, 697 S.W.2d 381, 384 them jointly and severally liable for the sums for which (Tex.1985). Collateral estoppel is more narrow than res Texas Capital Securities, Inc. is liable to Appellees under judicata in that it only precludes the relitigation of identical the final judgment in the Texas Capital case. Appellees issues of fact or law that were actually litigated and essential moved for a traditional summary judgment under TEX.R. to the judgment in a prior suit. Id.; see Barr v. Resolution CIV. P. 166a(c), based on the principle of collateral estoppel, Trust Corp., 837 S.W.2d 627, 628 (Tex.1992). Once an contending Appellants are prevented from contesting the actually litigated and essential issue is determined, that issue liability of Texas Capital Securities, Inc. for violating the is conclusive in a subsequent action between the same parties. Texas Securities Act. Appellees contend the issue of Texas Van Dyke, 697 S.W.2d at 384. Thus, unlike the broader res Capital Securities, Inc.'s liability has already been litigated, judicata doctrine, collateral estoppel analysis does not focus and because Appellants were in privity with Texas Capital on what could have been litigated, but only on what was Securities, Inc., the Texas Capital judgment establishes actually litigated and essential to the judgment. their liability under the Texas Securities Act. Appellees also moved for traditional summary judgment based on [5] [6] In order to invoke collateral estoppel, a party must Appellants' status as “control persons,” as defined by the establish that: 1) the facts sought to be litigated in the first Texas Securities Act. Appellees contend Appellants are also action were fully and fairly litigated in the prior action; liable for the actions of Texas Capital Securities, Inc. pursuant 2) those facts were essential to the judgment in the first to *264 this status. Appellees further moved for traditional action; and 3) the parties were cast as adversaries in the first summary judgment that Appellants cannot prevail on one of action. Eagle Props., Ltd. v. Scharbauer, 807 S.W.2d 714, the elements of their affirmative defense. Appellees finally 721 (Tex.1991). Mutuality is not required for the invocation moved for a no-evidence summary judgment under TEX.R. of collateral estoppel; rather, it is only necessary that the party CIV. P. 166a(i) because they contend there is no evidence to against whom the plea of collateral estoppel is being asserted support Appellants' affirmative defenses. be a party or in privity with a party in the prior litigation. Id.
Summary judgment under Rule 166a(c) may only be granted [7] [8] Appellees had the burden to present sufficient in favor of the movants if they prove there is no genuine issue evidence to establish that the doctrine of collateral estoppel of material fact and they are entitled to judgment as a matter is applicable. See Scurlock Oil Co. v. Smithwick, 787 S.W.2d of law. Randall's Food Mkts., Inc. v. Johnson, 891 S.W.2d 560, 562 (Tex.App.-Corpus Christi 1990, no writ). “To meet 640, 644 (Tex.1995). Because the movant bears the burden of this burden, the party relying on the doctrine is required proof, all conflicts in the evidence are disregarded, evidence to introduce into evidence both the prior judgment and favorable to the nonmovant is taken as true, and all doubts as pleadings from the prior suit.” Jones v. City of Houston, 907 to the genuine issue of material fact are resolved in favor of S.W.2d 871, 874 (Tex.App.-Houston [1st Dist.] 1995, writ the nonmovant. Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d denied); see Cuellar v. City of San Antonio, 821 S.W.2d 250, 546, 548–49 (Tex.1985). Every reasonable inference must be 256 (Tex.App.-San Antonio 1991, writ denied); Smithwick, indulged in favor of the nonmovant and any doubts resolved 787 S.W.2d at 562 (party asserting collateral estoppel must in the nonmovant's favor. Id. at 549. introduce into evidence judgment and pleadings from prior suit or doctrine will *265 not apply); Traweek v. Larkin, [1] A no-evidence summary judgment is essentially a 708 S.W.2d 942, 945 (Tex.App.-Tyler 1986, writ ref'd n.r.e.) pretrial directed verdict. We therefore apply the same legal (doctrine of collateral estoppel not applicable in second suit if sufficiency standard in reviewing a no-evidence summary party does not introduce both prior judgment and pleadings);
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Texas Capital Securities Management, Inc. v. Sandefer, 80 S.W.3d 260 (2002)
but see Bass v. Champion Int'l Corp., 787 S.W.2d 208, party to the action * * *; successors in interests.” Benson, 468 214 (Tex.App.-Beaumont 1990, no writ) (finding no error S.W.2d at 363; see Getty Oil Co. v. Ins. Co. of N. Am., 845 in basing summary judgment on judgment alone without S.W.2d 794, 800–01 (Tex.1992); Dairyland County Mut. Ins. pleadings because judgment so clearly stated what was Co., 650 S.W.2d at 774. Privity connotes those who are in law determined by earlier court there was no need to resort to so connected with a party to the judgment as to have such an pleadings). We agree with the reasoning in Bass that, so long identity of interest that the party to the judgment represented as the record before the court in the second case adequately the same legal right. Benson, 468 S.W.2d at 363; Cannon v. provides what was determined in the earlier case, pleadings Tex. Indep. Bank, 1 S.W.3d 218, 224 (Tex.App.-Texarkana need not be filed. 1999, pet. denied).
[9] In this case, Appellees filed a copy of the judgment and Appellants contend their interests were not actually and jury charge with their motion for summary judgment, but did adequately represented in the Texas Capital case, so it is not include a copy of the pleadings from the Texas Capital not fair to bind them to the prior results. See Eagle Props., case. Appellees contend the judgment and jury charge satisfy Ltd., 807 S.W.2d at 721. Appellees argue that directors of a the purpose of attaching the pleadings. Appellees further corporation are automatically in privity with the corporation contend that, at any rate, the pleadings from the Texas Capital *266 and cite Eagle Properties for their position. See id. The case were part of the record before the trial court because directors in Eagle Properties, as in this suit, were defendants. Reckling included the plaintiffs' fourth amended original However, unlike this suit, the directors in Eagle Properties petition from that case in his response to Appellees' motion were the ones seeking to assert collateral estoppel against the for summary judgment in this case. Actually, what Reckling plaintiffs. The Texas Supreme Court's specific holding was included in his response was a copy of Sandefer and Smith's that mutuality is not required for the invocation of collateral motion for leave to join additional parties in the Texas Capital estoppel; rather, it is only necessary that the party against case. It was this motion that had a copy of plaintiffs' fourth whom the plea of collateral estoppel is being asserted be a amended original petition attached as an exhibit. The record party or in privity with a party in the prior litigation. Id. No shows the trial court in the Texas Capital case denied the one asserted collateral estoppel against the directors in Eagle motion to join additional parties. Therefore, plaintiffs' fourth Properties, and the Texas Supreme Court did not hold the amended original petition never became a live pleading in the directors were in privity with anyone in the prior suit. Id. Texas Capital case. Appellees' reliance on Eagle Properties is misplaced; they have not directed us to any other case holding that a party's Despite the lack of pleadings, the record before us contains the status as director or officer automatically makes the party a jury charge and judgment from the Texas Capital case and, privy, and we have not found a case so holding. taken together, clearly state what was determined in that case.
[14] [15] Federal courts have held stockholders and [10] [11] [12] [13] Appellants contend that Appelleesofficers are not in privity to their corporations. Dudley v. have failed to prove there is no genuine issue of material fact Smith, 504 F.2d 979, 982 (5th Cir.1974); Am. Range Lines, and that Appellants were, as a matter of law, in privity to the Inc. v. Comm'r of Internal Revenue, 200 F.2d 844, 845 (2d parties in the Texas Capital case. “Due process requires that Cir.1952). This status does not automatically show the parties the rule of collateral estoppel operate only against persons had control over the prior action or that their interests were who have had their day in court either as a party to the represented by a party to the action. Benson, 468 S.W.2d at prior suit or as a privy, ....” Benson v. Wanda Petroleum Co., 363. The question of privy revolves around the prior cause 468 S.W.2d 361, 363 (Tex.1971); see Eagle Props., Ltd., of action, not the time of injury. See Myrick v. Moody Nat'l 807 S.W.2d at 721; Bonniwell v. Beech Aircraft Corp., 663 Bank, 590 S.W.2d 766, 769 (Tex.Civ.App.-Houston [14th S.W.2d 816, 819 (Tex.1984). There is no general definition Dist.] 1979, writ ref'd n.r.e.). of privity, and the determination of who are privies requires a careful examination into the circumstances of each case. [16] [17] Appellees present evidence that, when they Dairyland County Mut. Ins. Co. v. Childress, 650 S.W.2d 770, purchased the Titan stock in 1996, an unamended form filed 774 (Tex.1983); Benson, 468 S.W.2d at 363. “[T]he word in 1993 with the National Association of Securities Dealers ‘privy’ includes those who control an action although not (NASD) lists Smetek, Reckling, and Buckley as officers of parties to it * * *; those whose interests are represented by a Texas Capital Securities, Inc. Appellees provide no evidence
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Texas Capital Securities Management, Inc. v. Sandefer, 80 S.W.3d 260 (2002)
that at the time of the Texas Capital case these three appellants writ denied). Appellees would have us extend this principle still held these positions. Smetek and Reckling both create of imputed knowledge to the circumstances of this case, genuine issues of material fact in their affidavits. Smetek where Appellants hired the attorney who represented Texas states he was president and a director until 1997. The Texas Capital Securities, Inc. in the Texas Capital case. Appellees Capital case was instigated in late 1997. Reckling denies contend this mutual representation in separate actions imputes being an officer or director of Texas Capital Securities, Inc. privity. The caselaw on which they rely deals with settled in his affidavit. Each of these affidavits creates genuine issues law that imputes the knowledge of an attorney to the client of material fact on the issue of privity. The evidence clearly in that attorney-client relationship. The mere fact that these shows all three are shareholders, but a party's mere status as Appellants enlisted the services of the same attorney who shareholder does not create privity absent further evidence. defended Texas Capital Securities, Inc. in the previous case Although Buckley did not dispute being an officer during the does not prove privity between Appellants and Texas Capital Texas Capital case, the only evidence put forth by Appellees Securities, Inc. was that Buckley was the secretary and treasurer. This status alone, without more evidence, does not, as a matter of law, Genuine questions of fact remain regarding each of the establish privity. Appellees presented no evidence Buckley, Appellants and whether they were in privity with Texas Smetek, Reckling, or TCSM participated in the Texas Capital Capital Securities, Inc. We hold the trial court erred in lawsuit. In fact, Reckling contends he had no knowledge of applying collateral estoppel to the Appellants. the suit until the very end.
Appellants' second point of error concerns the determination [18] Appellees contend TCSM, a wholly owned subsidiary by the trial court in its summary judgment that Appellants of Texas Capital Securities, Inc., is in privity with Texas are liable as control persons under the Texas Securities Act. Capital Securities, Inc., based on a management role. The Appellees seek to establish joint and several liability of evidence provided to show TCSM's management role is the Appellants as control persons for Texas Capital Securities, 1997 annual report which states: Inc.'s violations of the Texas Securities Act. Appellants contend the trial court erred in holding they are control Texas Capital Securities Management persons under the Act. TEX.REV.CIV. STAT. ANN. art. Co., Inc. has entered into an agreement 581–33(F)(1) (Vernon Supp.2002). to indemnify the Company, assume primary liability related to certain Under the Act, a control person is: settlement agreements with former customers and pay certain legal fees. A person 2 who directly or indirectly The Company paid Texas Capital controls a seller, buyer, or issuer of Securities Management Co., Inc. a security is liable ... jointly and $154,000 during 1997. This amount is severally with the seller, buyer, or reflected in management fees. issuer, and to the same extent as if he were the seller, buyer, or issuer, unless *267 No further evidence is provided as to what TCSM did.
the controlling person sustains the There is no evidence TCSM exerted control over or managed burden of proof that he did not know, Texas Capital Securities, Inc. in any way. Buckley's affidavit and in the exercise of reasonable care states TCSM has never been in a position of control over could not have known, of the existence Texas Capital Securities, Inc. and that it is merely a service of the facts by reason of which the provider and is not engaged in the securities business.
liability is alleged to exist.
[19] Appellees also contend the fact that Appellants used the same attorney as Texas Capital Securities, Inc. shows they Id. are in privity with Texas Capital Securities, Inc. They direct our attention to caselaw stating that an attorney's knowledge The burden rested on the Appellees to establish that the gained during the existence of the attorney-client relationship Appellants are control persons under the statute. Appellants is imputed to the client. Allied Res. Corp. v. Mo–Vac Serv. contend genuine issues of material fact remain as to whether Co., 871 S.W.2d 773, 778 (Tex.App.-Corpus Christi 1994,
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Texas Capital Securities Management, Inc. v. Sandefer, 80 S.W.3d 260 (2002)
they are control persons, and therefore the trial court See id. Smetek states in his affidavit that he was not improperly granted summary judgment. responsible for reviewing information that companies seeking investors wanted forwarded to Texas Capital Securities, Inc.
The Texas Securities Act does not provide a definition of customers, that he was unaware any Texas Capital Securities, “control persons.” Id. The comments to the statute state, Inc. customer had invested with Titan, and that he had “control is used in the same broad sense as in federal no knowledge of the investments and no reason to have securities law.” TEX.REV.CIV. STAT. ANN. art. 581–33F knowledge of the investments. Genuine issues of material cmt. “Depending on the circumstances, a control person fact remain regarding whether Smetek was a control person, might include an employer, an officer or director, a large and the trial court erred in granting summary judgment. shareholder, a parent company, *268 and a management As for Buckley, the evidence shows he was secretary and company.” Id. 3 The rationale for control person liability is treasurer of Texas Capital Securities, Inc., but his affidavit that a control person is in a position to prevent the violation shows that he did not hold a license entitling him to and may be able to compensate the injured investor when the supervise registered representatives and that he was not primary violator is not. Id. The United States Fifth Circuit responsible for supervising Texas Capital Securities, Inc. Court of Appeals has held that, to make a prima facie case brokers or representatives, did not review information that that the defendant is a control person, a plaintiff must prove companies seeking investors wanted forwarded to Texas that each had actual power or influence over the controlled Capital Securities, Inc. customers, and had no knowledge or person and that each induced or participated in the alleged reason to have knowledge of the purchase of Titan stock by violation. Dennis v. Gen. Imaging, Inc., 918 F.2d 496, 509 Texas Capital Securities, Inc. customers. Because genuine (5th Cir.1990); G.A. Thompson & Co. v. Partridge, 636 F.2d issues of material fact remain regarding Buckley's status as 945, 958 (5th Cir.1981). a control person, the trial court erred in *269 granting summary judgment on this issue as to Buckley.
[20] As evidence of Smetek's, Buckley's, and Reckling's status as control persons, Appellees rely partly on the “Form [24] Although the NASD forms list Reckling as a vice BD” filed by Texas Capital Securities, Inc. in 1993 with the president, Reckling's affidavit states his relationship with NASD, which lists Smetek, Buckley, and Reckling as control Texas Capital Securities, Inc. was that of a shareholder and persons. Appellants contend this form does not prove they that he was not an officer or director. This clearly creates a fact are control persons for purposes of the Texas Securities Act. question as to Reckling's status. The trial court improperly They contend Appellees have not proved the term “control granted summary judgment holding that Reckling was a person” has the same meaning for purposes of the NASD control person. as under the Texas Securities Act. NASD “Form BD” has instructions defining the term “control,” but this definition We finally consider whether it was proper to grant summary was not included in Appellees' summary judgment evidence. judgment holding that TCSM, a wholly owned subsidiary of In the absence of such definition, we cannot say the label of Texas Capital Securities, Inc., was a control person under the “control person” on the NASD form conclusively establishes Texas Securities Act. The only evidence provided regarding Appellants as control persons under the Texas Securities Act. TCSM is the 1997 annual report calling the fees paid to TCSM “management fees.” The evidence shows TCSM agreed to [21] [22] [23] The evidence presented clearly proves indemnify Texas Capital Securities, Inc., assume primary Smetek was president, a director of Texas Capital Securities, liability related to certain settlement agreements with former Inc., and owned between ten and twenty-five percent of the customers, and pay certain legal fees. This evidence does stock when the transactions occurred in 1996. According to not show any form of power or influence over Texas Capital the forms filed with the NASD, Buckley owned between Securities, Inc. or over Johnson, the Texas Capital Securities, ten and twenty-five percent of the stock. Both the form and Inc. broker who arranged for the sale of the Titan stock. Buckley's affidavit reveal he was secretary and treasurer of Buckley's affidavit states TCSM has no responsibility to Texas Capital Securities, Inc. However, status alone does not supervise or otherwise monitor any securities salesmen at automatically cause defendants to be deemed control persons Texas Capital Securities, Inc. Appellees failed to produce under the statute. See Dennis, 918 F.2d at 509. Evidence sufficient evidence to prove as a matter of law that TCSM was required that Smetek and Buckley had influence over was a control person for its parent company, Texas Capital at least the direction of Texas Capital Securities, Inc. Securities, Inc., and evidence presented by Appellants raises
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Texas Capital Securities Management, Inc. v. Sandefer, 80 S.W.3d 260 (2002)
genuine issues of material fact regarding this issue. The trial We reverse the summary judgment and remand the case to the court erred in holding TCSM was a control person of Texas trial court for further proceedings.
Capital Securities, Inc.
Because we find the trial court erred in granting summary All Citations judgment against Appellants, we need not address Appellants' remaining points. 80 S.W.3d 260
Footnotes * William J. Cornelius, C.J., Retired, Sitting by Assignment. 1 TEX.REV.CIV. STAT. ANN. art. 581–1, et seq. (Vernon 1964 & Supp.2002). 2 The Act defines “person” to include a corporation. TEX.REV.CIV. STAT. ANN. art. 581–4(B) (Vernon Supp.2002). 3 Although in Busse v. Pac. Cattle Feeding Fund # 1, 896 S.W.2d 807, 815 (Tex.App.-Texarkana 1995, writ denied), we found Busse, who was a majority shareholder and a director, to be a control person, we do not construe this case to mean evidence solely of status creates a prima facie showing of control person.
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TexVa, Inc. v. Boone, 300 S.W.3d 879 (2009)
A plaintiff bears the initial burden of pleading sufficient allegations to establish personal 300 S.W.3d 879 jurisdiction over a defendant.
Court of Appeals of Texas, Dallas. Cases that cite this headnote TEXVA, INC. and R. Bradley Bierman, Appellants v. [2] Courts James BOONE and Cindy Hayes, Appellees. Presumptions and Burden of Proof as to Jurisdiction No. 05–08–01564–CV. | Nov. 12, 2009. When a nonresident challenges personal jurisdiction through a special appearance, it Synopsis carries the burden of negating all bases for Background: Texas officer of corporation brought jurisdiction.
action against California officers of corporation, alleging breach of contract, breach of fiduciary duty, negligent Cases that cite this headnote misrepresentation, and shareholder oppression. The 416th Judicial District Court, Collin County, Chris Oldner, J., granted special appearances of California officers. Texas [3] Appeal and Error officer appealed. Proceedings preliminary to trial Where a trial court denies a special appearance for personal jurisdiction purposes and the court issues findings of fact and conclusions of law, the Holdings: The Court of Appeals, Richter, J., held that:
findings of fact may be challenged on legal and factual sufficiency grounds.
[1] California officers' contacts with Texas were not continuous and systematic, and thus trial court lacked general Cases that cite this headnote jurisdiction over them;
[2] California officers purposefully availed themselves of [4] Appeal and Error privilege of conducting business in Texas, as required for Particular findings implied assertion of specific jurisdiction over them; Appeal and Error Proceedings preliminary to trial [3] action arose from and was related to California officers' Legal conclusions may not be challenged for contacts with Texas, as required for assertion of specific factual insufficiency, in an appeal of a trial jurisdiction over them; and court's denial of a special appearance, and if the trial judge does not issue findings of fact [4] assertion of personal jurisdiction over California officers and conclusions of law then all facts necessary would comport with traditional notions of fair play and to support the judgment and supported by the substantial justice. evidence are implied.
Cases that cite this headnote Reversed and remanded.
[5] Appeal and Error Sufficiency of Evidence in Support West Headnotes (26) When the clerk's and court reporter's record are included in the appellate record, the implied findings of facts necessary to support the [1] Courts judgment are not conclusive and may be Allegations, pleadings, and affidavits
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TexVa, Inc. v. Boone, 300 S.W.3d 879 (2009)
challenged on appeal for legal and factual over a nonresident defendant: (1) the defendant sufficiency. had sufficient minimum contacts with the forum state, and (2) maintenance of the suit does Cases that cite this headnote not offend traditional notions of fair play and substantial justice. U.S.C.A. Const.Amend. 14.
[6] Appeal and Error 3 Cases that cite this headnote Total failure of proof When considering the legal sufficiency of implied factual findings necessary to support a [10] Constitutional Law judgment, a no-evidence challenge fails if there Non-residents in general is more than a scintilla of evidence to support the Minimum contacts, for purposes of establishing finding. personal jurisdiction over a nonresident defendant so as to comport with due Cases that cite this headnote process, requires that the nonresident defendant purposefully avail itself of the privilege of [7] Appeal and Error conducting activities within the forum state, thus Manifest weight invoking the benefits and protections of its laws.
U.S.C.A. Const.Amend. 14.
When the factual sufficiency of implied factual findings necessary to support a judgment is Cases that cite this headnote challenged, the trial court's decision may only be set aside if its ruling is so contrary to the overwhelming weight of the evidence as to be [11] Courts clearly wrong and manifestly unjust. Unrelated contacts and activities; general jurisdiction Cases that cite this headnote Courts Related contacts and activities; specific [8] Constitutional Law jurisdiction Non-residents in general A nonresident defendant's minimum contacts Courts with a forum can give rise to either general or Actions by or Against Nonresidents, specific jurisdiction: general jurisdiction is found Personal Jurisdiction In; “Long-Arm” when the defendant's contacts are continuous Jurisdiction and systematic so that the state would have jurisdiction even if the claim did not arise A court may exercise jurisdiction over a from the activities conducted in the forum, and nonresident defendant when two conditions specific jurisdiction is limited to where the are met: first, the Texas long arm statute defendant's alleged liability arises from or is authorizes the exercise of jurisdiction, and related to activity conducted in the forum state.
second, the exercise of jurisdiction must satisfy U.S.C.A. Const.Amend. 14.
the requirement of due process. U.S.C.A. Const.Amend. 14; V.T.C.A., Civil Practice & Cases that cite this headnote Remedies Code § 17.042.
Cases that cite this headnote [12] Courts Tortious or intentional conduct; fraud and breach of fiduciary duties [9] Constitutional Law Non-residents in general Contacts of California officers of corporation with Texas were not continuous and systematic, There are two requirements to satisfy due process and thus Texas trial court lacked general for purposes of establishing personal jurisdiction jurisdiction over them in action by Texas
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TexVa, Inc. v. Boone, 300 S.W.3d 879 (2009)
officer of corporation against California officers for breaches of contract and fiduciary duty, [16] Courts negligent misrepresentation, and shareholder Purpose, intent, and foreseeability; oppression, where California officers' contacts purposeful availment with Texas were limited to their business Courts relationship with Texas officer, and California Business contacts and activities; officers did not own any real property in Texas, transacting or doing business did not have any personal bank accounts or Courts offices in Texas, and did not frequent Texas Agents, Representatives, and Other Third for personal reasons, but rather resided and Parties, Contacts and Activities of as Basis for conducted most of their business operations in Jurisdiction California. U.S.C.A. Const.Amend. 14.
The Court of Appeals must consider three 1 Cases that cite this headnote issues in determining whether a defendant has purposefully availed itself of the privilege of conducting business or other activities in Texas, [13] Constitutional Law so as to be subject to personal jurisdiction in Non-residents in general Texas courts: first, the court should consider The minimum contacts inquiry, in determining only the defendant's contacts with the forum, not whether a court has personal jurisdiction over the actions of a third party, second, the relevant a nonresident defendant so as to comport with contacts must be purposeful and not random, due process, is broader and more demanding isolated, or fortuitous, and third, the defendant when general jurisdiction is alleged, requiring must seek some benefit, advantage or profit a showing of substantial activities in the forum by availing itself of the jurisdiction. U.S.C.A. state. U.S.C.A. Const.Amend. 14. Const.Amend. 14.
Cases that cite this headnote 1 Cases that cite this headnote
[14] Courts [17] Constitutional Law Related contacts and activities; specific Representatives of organizations; officers, jurisdiction agents, and employees Specific jurisdiction over a nonresident Courts defendant has two requirements: (1) the Tortious or intentional conduct; fraud and defendant's contacts with the forum must be breach of fiduciary duties purposeful, and (2) the cause of action must arise California officers of corporation purposefully from or relate to those contacts. availed themselves of privilege of conducting business in Texas, as required for trial Cases that cite this headnote court's assertion of personal jurisdiction over them within requirements of due process, [15] Constitutional Law in action by Texas officer of corporation Non-residents in general for breaches of contract and fiduciary duty, The touchstone of jurisdictional due process is negligent misrepresentation, and shareholder purposeful availment, in determining whether oppression, where California officers agreed a trial court can establish personal jurisdiction to incorporate company with Texas officer over a nonresident defendant. U.S.C.A. and accepted roles as corporate officers, Const.Amend. 14. corporation conducted activities in Texas, its domain name was established in Texas and its Cases that cite this headnote trademark registrations utilized Texas address, and California officers visited Texas on two
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TexVa, Inc. v. Boone, 300 S.W.3d 879 (2009)
occasions to discuss what Texas officer wanted to do with business. U.S.C.A. Const.Amend. 14. 2 Cases that cite this headnote
Cases that cite this headnote [21] Courts Tortious or intentional conduct; fraud and [18] Constitutional Law breach of fiduciary duties Manufacture, distribution, and sale A corporate officer is not protected from the Sellers who reach out beyond one state and create exercise of specific jurisdiction under Texas' continuing relationships and obligations with fiduciary shield doctrine, even if all of his citizens of another state engage in purposeful contacts were performed in a corporate capacity, contacts with the latter state, and therefore are if the officer engaged in tortious or fraudulent subject to the jurisdiction of that state in suits conduct, directed at the forum state, for which he based on their activities, under federal due- may be held personally liable. process principles. U.S.C.A. Const.Amend. 14.
2 Cases that cite this headnote Cases that cite this headnote [22] Constitutional Law [19] Corporations and Business Organizations Representatives of organizations; officers, Tortious acts in general agents, and employees Corporations and Business Organizations Courts Jurisdiction and venue Tortious or intentional conduct; fraud and Courts breach of fiduciary duties Tortious or intentional conduct; fraud and Action by Texas officer of corporation against breach of fiduciary duties California officers of corporation for breaches Fiduciary shield doctrine under Texas law was of contract and fiduciary duty, negligent not available to shield California officers of misrepresentation, and shareholder oppression, corporation from liability or jurisdiction in their arose from and was related to California personal capacity, in action brought in Texas officer's contacts with Texas and its residents, court by Texas officer of corporation against including incorporation in Texas, as required California officers for breaches of contract and under due process for Texas court to assert fiduciary duty, negligent misrepresentation, and personal jurisdiction over California officers, shareholder oppression, as Texas officer alleged as underlying litigation concerned whether one in original pleading that California officers party breached agreement or fiduciary duty directed number of tortious activities toward arising from business relationship. U.S.C.A. Texas. Const.Amend. 14.
1 Cases that cite this headnote Cases that cite this headnote
[20] Courts [23] Courts Fiduciary duties in general; fiduciary shield Related contacts and activities; specific jurisdiction The fiduciary shield doctrine under Texas law protects nonresident officers and employees of a There must be a substantial connection between corporation from being subject to the jurisdiction a nonresident defendant's contacts with a forum of the Texas courts when all of the individual's state and the operative facts of the litigation, contacts with the state are on behalf of the in order to establish specific jurisdiction over a corporation. defendant.
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TexVa, Inc. v. Boone, 300 S.W.3d 879 (2009)
for breaches of contract and fiduciary duty, Cases that cite this headnote negligent misrepresentation, and shareholder oppression would comport with traditional [24] Constitutional Law notions of fair play and substantial justice for Non-residents in general due process purposes, even though California officers resided and worked in California and Once the Court of Appeals has concluded it would be burdensome for them to litigate in that the minimum contacts requirement is Texas, as Texas had strong interest in redressing met, in determining whether a trial court can alleged wrong by corporate fiduciaries, in that assert personal jurisdiction over a nonresident corporation was formed in Texas, half of defendant within the requirements of due corporate shares were owned by Texas officer, process, the Court must still consider whether and corporation conducted some business in the exercise of personal jurisdiction comports Texas. U.S.C.A. Const.Amend. 14.
with traditional notions of fair play and substantial justice, and the Court considers the 1 Cases that cite this headnote following five factors in making that decision: (i) the burden on the nonresident defendant; (ii) the forum state's interest in adjudicating the dispute; (iii) the plaintiff's interest in Attorneys and Law Firms obtaining convenient and effective relief; (iv) the interstate judicial system's interest in obtaining *883 Raymond V. Jobe, Dallas, TX, for Appellant. the most efficient resolution of controversies, and (v) the shared interest of several states in Mark A. Alexander, Addison, TX, Abhay Dhir, Irving, TX, furthering substantive social policies. U.S.C.A. for Appellee. Const.Amend. 14.
Before Chief Justice WRIGHT, and Justices RICHTER and 4 Cases that cite this headnote LANG.
[25] Constitutional Law Non-residents in general OPINION
Only in rare cases will the exercise of personal Opinion By Justice RICHTER. jurisdiction by a trial court not comport with the traditional notions of fair play and substantial TexVa, Inc. (“TexVa”) and R. Bradley Bierman (“Bierman”) justice, for purposes of due process, when appeal the trial court's order granting the special appearances the nonresident defendant has purposefully of Cindy Hayes (“Hayes”) and James Boone (“Boone”), both established minimum contacts with the forum residents of California. Appellants contend that the trial court state. U.S.C.A. Const.Amend. 14. erred in sustaining the special appearances of Boone and Hayes. For the reasons set forth below, we conclude that 4 Cases that cite this headnote Hayes' and Boone's contacts with the State of Texas are sufficient to support specific jurisdiction, and the exercise [26] Constitutional Law of jurisdiction over them by a Texas court is consistent Representatives of organizations; officers, with traditional notions of fair play and substantial justice.
agents, and employees Accordingly, we reverse the trial judge's order and remand this case for further proceedings.
Courts Tortious or intentional conduct; fraud and breach of fiduciary duties Assertion of personal jurisdiction by Texas BACKGROUND court over California officers of corporation in action by Texas officer of corporation
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TexVa, Inc. v. Boone, 300 S.W.3d 879 (2009)
Bierman, a resident of Texas, and TexVa, a Texas corporation, filed suit against Boone and Hayes, both It is undisputed that CoreTex is headquartered in Bakersfield, residents of California. The claims raised in this proceeding California. Almost all of CoreTex's business is conducted are for breach of contract, breach of fiduciary duty, negligent out of its Bakersfield office. All corporate brochures and misrepresentation and shareholder oppression related to a invoices list the Bakersfield address. However, Bierman business they own. Currently, the parties *884 operate a retains an office in his home in Plano, Texas and conducts company known as CoreTex Products, Inc. (“CoreTex”). some CoreTex business from that location. Bierman was CoreTex is in the business of formulating and selling skin care primarily responsible for EPA and FDA regulations and products. It is organized as a Texas corporation. However, helped create formulations and trademarks. Bierman filed Bierman, Hayes and Boone, first started doing business trademark registrations for CoreTex. Three Certificates of in 1999 through a partnership called CoreTex Products Registration were issued by the U.S. Patent and Trademark (“CoreTex Partnership”). CoreTex Partnership was owned Office in November of 2004. All three certificates show equally by CoreLinks Systems (“CoreLinks”), a partnership CoreTex as the owner, and use the Plano, Texas address. The owned by appellees, Boone and Hayes, and TexVa, owned in location of the registered agent is also in Plano, Texas. From part by Bierman. the commencement of the relationship as partners, through the present, CoreTex has had some suppliers and customers When the parties first commenced business as CoreTex in Texas, although the number is disputed. Partnership they agreed to operate out of their respective homes. Bierman has continuously operated from his home in The appellees testified at the special appearance hearing Plano, Texas and Hayes and Boone operate from Bakersfield, that they have traveled to Texas only four times. Two trips California. During this time period, Bierman's son was hired were for personal reasons and two were business trips as to develop a domain for CoreTex Products. Bierman's son is representatives of CoreTex. The first of the two business also a resident of Texas, although he was a student at Tulane trips took place after Bierman's role in the corporation had University at that time. Bierman testified that his son had sole diminished and Boone and Hayes *885 wanted to find out responsibility for creating the web site, while Boone claimed what Bierman wanted to do with the company. The issue of that they created it together. This dispute is not material to our selling his interest was raised, but it is disputed who raised analysis because the business records admitted at the hearing the issue. Hayes had people in California, including his son, show that Bierman's son was the technical and administrative who were interested in possibly purchasing TexVa's interest contact for issues with the website and provided a Texas in the business. Bierman was uncertain what he wanted to do contact number and Plano address on behalf of CoreTex with the business or its worth and requested some financial Products. Tax returns filed on behalf of CoreTex Partnership records. establish that the parties operated as a partnership for two years prior to incorporation. Schedule K–1 shows that profits Bierman subsequently obtained copies of the tax returns or losses were split evenly between CoreLinks and TexVa for and was surprised by the amount of salary that Boone was operations in 1999 and 2000. being paid. Bierman testified that TexVa was not receiving payments regularly and Hayes and Boone had told him it In late 2000, the parties decided to incorporate and CoreTex was because they were short on funds. After Bierman had Products, Inc. (“CoreTex”), a Texas corporation, was formed. reviewed the tax returns there was a second meeting in Texas. The parties agreed to have Bierman's father, a Texas There is also a factual dispute concerning what transpired at lawyer, incorporate CoreTex for them. The parties offered this meeting, however, it is clear that the meeting was very conflicting testimony as to why Texas was chosen as the short because a dispute arose over Boone's salary. state of incorporation. Boone testified that it was merely as a convenience because Bierman's father would prepare It is undisputed that Bierman is not currently involved in the the documents for free. Bierman testified that Texas was day to day management of CoreTex. There has also been little, chosen because of its favorable tax rate and other advantages. to no contact, between the parties for the past year or more. CoreTex is equally owned by TexVa and CoreLinks. Bierman is the president of CoreTex, Boone is the vice-president and Suit was filed on March 24, 2008, against CoreTex, Boone treasurer and Hayes is the secretary. Bierman and Boone are and Hayes. Boone and Hayes filed special appearances and a the directors of CoreTex.
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TexVa, Inc. v. Boone, 300 S.W.3d 879 (2009)
hearing was held on July 3, 2008. The trial court granted the jurisdiction. Second, the exercise of jurisdiction must satisfy special appearances, but did not issue findings of fact. the constitutional requirement of due process. American Type Culture Collection, Inc. v. Coleman, 83 S.W.3d 801, 806 (Tex.2002). The Texas long arm statute authorizes Texas courts to exercise jurisdiction over a nonresident defendant BURDEN OF PROOF AND STANDARD OF REVIEW who “does business” in the state, including the commission [1] [2] The plaintiff bears the initial burden of pleading of a tort, in whole or in part, in this state. TEX. CIV. PRAC. sufficient allegations to establish personal jurisdiction over & REM.CODE ANN. § 17.042 (Vernon 2008). The broad a defendant. BMC Software Belgium, N.V. v. Marchand, 83 language of the Texas long arm statute has been interpreted S.W.3d 789, 793 (Tex.2002). When a nonresident challenges to allow Texas courts to exercise jurisdiction “as far as jurisdiction through a special appearance, it carries the burden the federal constitutional requirements of due process will of negating all bases for jurisdiction. Id. permit.” BMC Software, 83 S.W.3d at 795.
[3] [4] [5] [6] [7] Whether a trial court has personal[9] [10] There are two requirements to satisfy the jurisdiction over a defendant is a legal issue, which is subject constitutional requirement of due process: (1) the defendant to de novo review. BMC Software, 83 S.W.3d at 794. Where had sufficient “minimum contacts” with the forum state, the trial court denies a special appearance and the court issues and (2) maintenance of the suit does not offend “traditional findings of fact and conclusions of law, the findings of fact notions of fair play and substantial justice.” International may be challenged on legal and factual sufficiency grounds. Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. Id. Legal conclusions may not be challenged for factual 154, 90 L.Ed. 95 (1945). Minimum contacts requires that insufficiency. Id. If the trial judge does not issue findings the nonresident defendant “purposefully avails itself of the of fact and conclusions of law then “all facts necessary to privilege of conducting activities within the forum State, thus support the judgment and supported by the evidence are invoking the benefits and protections of its law.” Id., 326 U.S. implied.” BMC Software, 83 S.W.3d at 795. When the clerk's at 319, 66 S.Ct. 154. and court reporter's record are included in the appellate record the implied findings are not conclusive and may be challenged [11] The defendant's minimum contacts with the forum can on appeal for legal and factual sufficiency. Id. In this case give rise to either general or specific jurisdiction. General the trial court did not issue findings of fact and conclusions jurisdiction is found when the defendant's contacts are of law, but the clerk's and court reporter's record have been “continuous and systematic” so that the state would have included in the appellate record. Therefore, this Court reviews jurisdiction even if the claim did not arise from the activities both legal and factual sufficiency. When considering legal conducted in the forum. BMC Software, 83 S.W.3d at 796. sufficiency, “the no-evidence challenge fails if there is more On the other hand, specific jurisdiction is limited to where the than a scintilla of evidence to support the finding.” Id. When defendant's alleged liability arises from or is related to activity factual sufficiency is challenged the trial court's decision conducted in the forum state. Id. may only be set aside if “its ruling is so contrary to the overwhelming weight of the evidence as to be clearly wrong B. General Jurisdiction and manifestly unjust.” Tempest Broadcasting Co. v. Imlay, [12] [13] Appellants argue that Hayes' and Boone's 150 S.W.3d 861 (Tex.App.-Houston [14th Dist.] 2004, no contacts with Texas are sufficient for a Texas court to pet.), quoting, In re King's Estate, 150 Tex. 662, 244 S.W.2d exercise general jurisdiction over them. The “minimum 660, 661 (1951).
contacts inquiry is broader and more demanding when general jurisdiction is alleged, requiring a showing of substantial activities in the forum state.” Schlobohm v. Schapiro, 784 PERSONAL JURISDICTION S.W.2d 355, 357 (Tex.1990) (emphasis added). This Court recently analyzed the requirements for general jurisdiction A. Long Arm Statute and Minimum Contacts. in Moki Mac River Expeditions v. Drugg, 270 S.W.3d 799 [8] Appellees Hayes and Boone are residents of California. (Tex.App.-Dallas 2008, no pet.). In Moki Mac we noted that A Texas court *886 may exercise jurisdiction over a general jurisdiction is “dispute blind” and the availability of nonresident defendant when two conditions are met. First, jurisdiction may be tested against a hypothetical claim that the Texas long arm statute authorizes the exercise of has no connection with the forum. Id. at 802. We therefore
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TexVa, Inc. v. Boone, 300 S.W.3d 879 (2009)
examine Hayes' and Boone's activities in Texas to determine if they satisfy this requirement. Excellent reasons exist for allowing a State to assert jurisdiction over The record shows that Hayes' and Boone's contacts with the non-resident directors of domestic State of Texas are limited to their business relationship with corporations. A chartering State has Bierman and TexVa, first as partners and later as officers a strong, even compelling interest and director of CoreTex. They own no real property in the in providing a forum for redressing state. They do not personally have any bank accounts or harm done by corporate fiduciaries, offices in the state. Nor do they frequent the State of Texas harm endured principally by a resident for personal reasons. Instead, their activities in or directed at of that State, the corporation....Given Texas have been limited to involvement with CoreTex. When the high degree of regulation over we consider those facts in contrast with the fact that Hayes and corporate fiduciaries, the State's Boone reside in California and conduct most of their business interest in providing a convenient operations in California, we conclude that their contacts with forum for a derivative suit charging Texas are not continuous and systematic and are not sufficient misfeasance or nonfeasance of a to exercise general jurisdiction over them. director cannot be overemphasized.
Rittenmeyer, 104 S.W.3d at 732, quoting Pittsburgh *887 C. Specific Jurisdiction Terminal, 831 F.2d at 527–28. Unlike Rittenmeyer, but [14] Specific jurisdiction has two requirements: “(1) the similar to Pittsburgh Terminal, Hayes and Boone are defendant's contacts with the forum must be purposeful, and nonresident officers of a Texas corporation, and Boone is (2) the cause of action must arise from or relate to those also one of only two directors. In addition, like Pittsburgh contacts.” American Type Culture, 83 S.W.3d at 806. We Terminal, this suit charges misfeasance in the operation of have already noted that all of the appellees' contacts with the domestic corporation and injury to the remaining director Texas relate to the management and control of Core Tex. and shareholder of the corporation, both residents of this Appellants allege that Boone, as an officer and director of a state. Finally, the relevant long arm statute is similar to that Texas corporation, and Hayes as an officer, have taken control in Pittsburgh Terminal. The Texas long arm statute confers of the corporation resulting in injury to the remaining director jurisdiction over any nonresident “doing business” in the and shareholder, both residents of Texas. Appellants argue state, while the West Virginia statute confers jurisdiction that the ongoing business relationship between the California over any nonresidents “transacting any business.” WEST and Texas residents, and subsequent dispute over control VIRGINIA CODE § 56–3–33(a)(1) (2008). of a Texas corporation satisfies the conducting business requirement in this state for purposes of personal jurisdiction. The Texas Supreme Court has issued numerous opinions We agree. on the scope of personal jurisdiction. It has not, however, offered a bright line test that permits Texas courts to In Rittenmeyer v. Grauer, 104 S.W.3d 725, 732 (Tex.App.- exercise jurisdiction over nonresident directors and officers Dallas 2003, no pet.) this Court held that “a nonresident of domestic corporations. Nor has the Texas legislature director of a foreign corporation is not subject to indicated in either the long-arm statute or the Business personal jurisdiction solely because the corporation has its Organization Code that a nonresident consents to jurisdiction headquarters in Texas.” (Emphasis in original). However, in when it accepts the position as an officer or director in a reaching this conclusion we discussed and distinguished the domestic corporation. Therefore, while we find the appellees' facts in Rittenmeyer from those in Pittsburgh Terminal Corp. contacts with this state based upon their roles as corporate v. Mid Allegheny Corp., 831 F.2d 522, 527 (4th Cir.1987). officers significant, we *888 will also analyze their contacts In Pittsburgh Terminal, the Fourth Circuit concluded that under a traditional minimum contacts test. personal jurisdiction existed over a nonresident director of a corporation that was incorporated in West Virginia 1. Purposeful Availment and controlled by West Virginia law, even where the acts [15] [16] The “touchstone of jurisdictional due process [is]
complained of were taken by the director when he was ‘purposeful availment.’ ” Michiana Easy Livin' Country, Inc.
physically outside the forum state. We quoted the court's v. Holten, 168 S.W.3d 777, 785 (Tex.2005). In Michiana the reasoning:
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TexVa, Inc. v. Boone, 300 S.W.3d 879 (2009)
Texas Supreme Court directed the courts to consider three and accepted roles as officers and director of that corporation. issues in determining whether a defendant has purposefully They also agreed that a Texas resident would be the President availed itself of the privilege of conducting business or other and that he would conduct his share of the business from activities in Texas. First, the court should consider only the Texas. Although there is a factual dispute over why Texas defendant's contacts with the forum, not the actions of a third was chosen as the state of incorporation, the fact remains party. Second, the relevant contacts must be purposeful and that Bierman, Hayes and Boone had a choice of where to not “random, isolated or fortuitous.” Third, the “defendant incorporate and they chose Texas. Finally, Hayes and Boone must seek some benefit, advantage or profit by ‘availing’ traveled to Texas on two occasions to discuss what Bierman itself of the jurisdiction.” Id.; see also Moki Mac River wanted to do with the business. Based upon this record we Expeditions v. Drugg, 221 S.W.3d 569, 575 (Tex.2009). conclude that Hayes' and Boone's contacts with Texas were not the result of conduct by another person, but were a direct In Michiana the court addressed the narrow issue whether an result of their voluntary decisions and actions. out of state seller could be hailed into a Texas court for an alleged misrepresentation made during a single telephone call [18] The second Michiana factor requires us to analyze initiated by a Texas resident. The court in Michiana relied whether the defendants' contacts were “purposeful” rather heavily on Burger King Corp. v. Rudzewicz, 471 U.S. 462, *889 than “random, isolated or fortuitous.” Id. Again, 477, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985) a case involving we consider the facts cited above that Hayes and Boone a long term contractual relationship between residents of agreed to form an ongoing business relationship with Texas different states that is more analogous to this case. Burger residents, form a Texas corporation and act as officers King involved a breach of a franchise agreement entered into and director of that corporation. They also agreed at the between a Michigan resident and Burger King, headquartered outset that each would conduct operations from their homes; in Florida. The Court found that Florida had jurisdiction for Bierman that meant he would operate from his home over the Michigan resident based upon the parties long term in Plano, Texas. This required Hayes and Boone to have contractual relationship that involved negotiations and course ongoing communications with Texas and its residents as of dealing between both states. It noted: long as their business relationship continued. The evidence is undisputed that CoreTex is headquartered in and conducts It is these factors, prior most of its operations from California. It is also undisputed negotiations and contemplated future that there has always been some business conducted in consequences, along with the terms Texas. The domain for CoreTex Products was established of the contract and the parties' in and shown as Plano, Texas. Boone had a role in either actual course of dealing, that must hiring Bierman's son or working with his son to develop the be evaluated in determining whether website for CoreTex Products. Trademark registrations also the defendant purposefully established utilize the Plano, Texas address. CoreTex has always had minimum contacts with the forum. some suppliers and customers in Texas. Finally, Hayes and Boone attended at least two meetings related to the ongoing Id., 471 U.S. at 479, 105 S.Ct. 2174.
business relationship between the parties in Texas. All of these events could hardly be described as “fortuitous.” As the [17] With these guidelines in mind, we turn to the first factor Texas Supreme Court noted in Michiana and Moki Mac the whether Hayes' and Boone's contacts with Texas were the contacts of “[s]ellers who ‘reach out beyond one state and result of “unilateral activity of another person.” Michiana, create continuing relationships and obligations with citizens 168 S.W.3d at 785. Hayes and Boone have had ongoing of another state’ are purposeful rather than fortuitous.” Moki contacts with Texas residents since they initially agreed to Mac, 221 S.W.3d at 578, (quoting Michiana, 168 S.W.3d at form CoreTex Partnership. Prior to incorporating CoreTex, 785).
Hayes and Boone, through CoreTex Partnership, agreed to establish a business with a Texas resident. They later agreed The remaining factor requires the defendants to seek some to incorporate that business under the laws of the State benefit, advantage or profit by ‘availing’ itself of the state.
of Texas. The parties disputed where the pre-incorporation In this case, Hayes and Boone clearly sought to profit from meeting took place. However, we do not find the location of their ongoing business relationship with Bierman through that meeting dispositive to our analysis. Hayes and Boone formation of a Texas corporation. All of these facts lead participated in the decision to organize a Texas corporation
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TexVa, Inc. v. Boone, 300 S.W.3d 879 (2009)
us to conclude that Hayes and Boone purposefully availed [21] Appellants alleged in their original pleading that the themselves of the privilege of conducting business in Texas. appellees directed a number of tortious activities toward See also Lewis v. Indian Springs Land Corp., 175 S.W.3d Texas, including that they usurped CoreTex for their own 906 (Tex.App.-Dallas 2005, no pet.) (a Florida resident was personal benefit, used their positions as officers of CoreTex to subject to jurisdiction in Texas based upon his position as take control of CoreTex, breached a fiduciary duty to CoreTex a founder, shareholder and owner of companies organized and its shareholders and that they made misrepresentations under Texas law; he executed a promissory note payable in to Bierman during the course and scope of their positions Dallas, Texas and governed by Texas law; and the ongoing as officers of CoreTex. “Courts recognize that a corporate business relationship required him to communicate with officer is not protected from the exercise of specific Texas business associates.) jurisdiction, even if all of his contacts were performed in a corporate capacity, if the officer engaged in tortious or [19] [20] Appellees argue that all of those contacts with fraudulent conduct, directed at the forum state, for which he Texas and Bierman, as more fully described above, were as may be held personally liable.” Ennis, 164 S.W.3d at 707. either representatives of CoreLinks, or officers and directors Therefore, we conclude that the fiduciary shield doctrine is of CoreTex. They also testified that when they met with not available to shield Hayes and Boone from liability or Bierman in Texas to discuss what Bierman wanted to do with jurisdiction in their personal capacity. the business that it was as representatives of CoreTex. They argue that they cannot be subject to personal jurisdiction in a Texas court when all of their activities related to Texas 2. Arise From or Related to were in a representative capacity. This argument, however, [22] [23] We now turn to the final requirement to confuses application of the fiduciary shield doctrine. The establish specific jurisdiction-the litigation must arise from fiduciary shield doctrine protects officers and employees of or be related to those contacts. This requires that there a corporation from being subject to the jurisdiction in this “be a substantial connection between those contacts and the state when all of the individual's contacts with this state are operative facts of the litigation.” Moki Mac, 221 S.W.3d on behalf of the corporation. Wolf v. Summers–Wood, L.P., at 585. All of appellees contact with Texas relate to 214 S.W.3d 783, 790 (Tex.App.-Dallas 2007, no pet.). The their business relationship with appellants. The underlying fiduciary shield doctrine has been limited by Texas courts litigation concerns whether one of the parties has breached to the exercise of general jurisdiction, it does not shield an agreement or a fiduciary duty arising from that business an officer or employee for their actions that are tortious relationship. Therefore, we have no difficulty concluding that or fraudulent. See, SITQ E.U., Inc. v. Reata Restaurants, the litigation in this case arises from the appellees' contacts Inc., 111 S.W.3d 638, 650–51 (Tex.App.-Fort Worth 2003, with the forum. pet. denied) (nonresident officer of a foreign corporation subject to personal jurisdiction where the officer participated The remaining cases cited by appellees in support of their in the decision to terminate tenants' leases *890 while contention that they did not have sufficient minimum contacts directing others to assure tenants that building would be with Texas to create personal jurisdiction are inapposite. rebuilt); D.H. Blair Investment Banking Corp. v. Reardon, None of those cases involved a controversy concerning the 97 S.W.3d 269 (Tex.App.-Houston [14th Dist.] 2002, pet. internal management of a Texas corporation, by officers of dism'd w.o.j.) (nonresident officers of a corporation subject that domestic corporation. Michiana involved a suit by a to jurisdiction in Texas in a suit by shareholders of that purchaser of an RV against an out of state distributor of the corporation for fraud, negligent misrepresentation, breach RV. The only contact between the Texas and the foreign of fiduciary duty and conspiracy); Smith v. Lanier, 998 distributor was a single phone call initiated by the Texas S.W.2d 324, 334–35 (Tex.App.-Austin 1999, pet. denied) resident. In Commonwealth Gen. Corp. v. York, 177 S.W.3d (“[a]n agency relationship does not shield an individual from 923 (Tex.2005) the court held that it did not have jurisdiction jurisdictional contacts with a state....”); Ennis, 164 S.W.3d at over a foreign corporation that was the sole shareholder 708 (plaintiff need not prove that the defendant committed of corporation headquartered in Texas. Although employees intentionally tortious acts, a corporate officer is subject to of the foreign corporation traveled to Texas for meetings jurisdiction if he or she committed any tortious act for which related to corporate business, none of those activities related he is liable individually). to the plaintiffs' complaint that benefits had been wrongfully denied under an insurance policy issued by the subsidiary headquartered in Texas. In Nichols v. Lin, 282 S.W.3d 743
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TexVa, Inc. v. Boone, 300 S.W.3d 879 (2009)
(Tex.App.-Dallas 2009, no pet.), this court considered only [26] The fact that the appellees reside and work in California general jurisdiction and did not reach the specific jurisdiction and it would be burdensome to litigate in Texas does analysis.
not offend traditional notions of fair play and substantial justice. In multi state disputes, someone will always be *891 The evidence established that Hayes and Boone had inconvenienced. Accordingly, this argument has frequently numerous contacts with Texas and its residents. They agreed been rejected as a basis for denying personal jurisdiction.
to partner with and establish a business with a Texas resident.
Burger King, 471 U.S. at 477, 105 S.Ct. 2174. Moreover, They agreed to form a Texas corporation and accepted roles as we noted in Rittenmeyer, Texas has “a strong, even as officers and director of that corporation. When problems compelling interest in providing a forum for redressing harm arose in that business relationship, they traveled to Texas done by corporate fiduciaries, harm endured principally by on two occasions to attempt to resolve those issues. They a resident of that State.” Rittenmeyer, 104 S.W.3d at 732. In allegedly made false misrepresentations to Bierman, who at this case Texas has an even stronger interest in redressing the all times resided in Texas, and allegedly breached a fiduciary alleged wrong done by the corporate fiduciaries, not only is duty owed to the remaining shareholders of CoreTex who are the corporation a domestic corporation, but 50% of the shares residents of Texas. Now Bierman and TexVa are asking a of the corporation are owned by a Texas resident and some of Texas court to resolve those disputes and management and the corporation's business is conducted in Texas. Therefore, control of CoreTex. Even if Hayes and Boone were acting in we conclude that the exercise of jurisdiction over appellees their corporate capacity when they performed these actions, does not offend traditional notions of fair play and substantial they can be held personally liable for those tortious acts and justice.
subject to jurisdiction in Texas.
D. Traditional Notions of Fair Play and Substantial CONCLUSION Justice [24] [25] Once we have concluded that the minimum The appellees had the burden to negate all jurisdictional contacts requirement is met, we must still consider whether bases at the special appearance hearing. BMC Software, 83 the exercise of personal jurisdiction comports with traditional S.W.3d at 793. We conclude that the evidence admitted at notions of fair play and substantial justice. We consider the the hearing conclusively established the existence of specific following five factors in making that decision: “(i) the burden jurisdiction. Therefore, the trial court's ruling was against the on the nonresident defendant; (ii) the forum state's interest overwhelming weight and preponderance of the evidence. in adjudicating the dispute; (iii) the plaintiff's interest in For all the foregoing reasons, we conclude that appellees obtaining convenient and effective relief; (iv) the interstate have failed to carry their burden of negating all bases for the judicial system's interest in obtaining the most efficient exercise of personal jurisdiction by a Texas court and reverse resolution of controversies, and (v) the shared interest of the trial court's order granting the *892 appellees' special several states in furthering substantive social policies.” Wolf, appearance and remand this case for further proceedings. 214 S.W.3d at 789. “Only in rare cases, however, will the exercise of jurisdiction not comport with fair play and substantial justice when the nonresident defendant has All Citations purposefully established minimum contacts with the forum 300 S.W.3d 879 state.” Id.
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TransFirst Holdings, Inc. v. Phillips, Not Reported in F.Supp.2d (2007) 2007 WL 631276
Motion is also DENIED. Plaintiffs' also filed a motion for leave to file a surreply on January 30, 2007. A response was KeyCite Yellow Flag - Negative Treatment filed on the same day, and a reply was filed on February 8, Distinguished by Ranger Steel Services, L.P. v. Orleans Materials & 2007. In light of this Order, the Court hereby DENIES AS Equipment Co., Inc., S.D.Tex., January 14, 2010 MOOT the Motion for Leave to File a Surreply.
2007 WL 631276 Only the Westlaw citation is currently available.
United States District Court, I. BACKGROUND N.D. Texas, Plaintiff TransFirst Holdings, Inc. (“TransFirst”) is a provider Dallas Division. of transaction processing services and payment processing technology. (App. Pls.' Resp. Magliarditi Mot. at 1.) In March TRANSFIRST HOLDINGS, INC., TransFirst of 2004, TransFirst purchased substantially all the assets of Merchant Services, Inc., and Payment Defendant Payment Resources International (“PRI, Inc.”), Resources International, LLC, Plaintiffs, a Nevada Corporation operating out of Newport Beach, California. (Id. at 2) Among the principal shareholders of PRI, v.
Inc. were Defendants Nick Magliarditi and John Blaugrund.
Andrew M. PHILLIPS, Dominic J. Magliarditi, (Id.) Pursuant to the Asset Purchase Agreement (“APA”) of John S. Blaugrund, Payment Resources March 1, 2004 TransFirst paid over $30 million for the assets International, a Nevada Corporation, SSF of PRI, Inc. PRI, Inc's assets were acquired by TransFirst's Holdings, LLC, DII Investments, Inc., wholly owned subsidiary Payment Resources International, and TP Investments, LLC, Defendants. LLC (“PRI”).(Id.)
Civil Action No. 3:06- The APA is a lengthy and detailed document and by its CV-2303-P. | March 1, 2007. own terms compromises a number of other materials attached as schedules and exhibits. (See generally id. at 7-72.)The Attorneys and Law Firms APA was negotiated in California and Dallas, Texas.(Id. at David R. McAtee, II, Brian Matthew Collins, Charles Stephen 4.) Pursuant to its own terms, the APA closed in Dallas on Cantu, Peter D. Marketos, Haynes & Boone, Dallas, TX, for March 1, 2004. (Id. at 32-33.)The APA includes non-compete Plaintiffs. provisions. The owners of PRI Inc., including Defendants Magliarditi and Blaugrund, agreed that they would not Brian W. Clark, Bruce M. Flowers, Michael A. Logan, Kane directly or indirectly (i) engage in competing business; Russell Coleman & Logan, G. Michael Gruber, Elizabeth K. (ii) render competitive services for existing clients; (iii) Hameline, Rodolfo Rodriguez, Jr., Gruber Hurst Johansen & become agents, consultants, or representatives of competing Hail, Karl W. Koen, Robert J. Collins, Grau Koen, Dallas, businesses; (iv) become a shareholder, joint venturer or TX, for Defendants. owner of a competing business; or (v) attempt to solicit any TransFirst customer or client to conduct business with a competitor or persuade a customer or client to reduce MEMORANDUM OPINION & ORDER the amount of business it conducted with TransFirst. (Id.
at 54.)The APA does not contain a forum selection clause JORGE A. SOLIS, United States District Judge. for dispute resolution. (See id. at 7-72.)The APA does provide that “the legal relations between the parties and the *1 Now before the Court are Emergency Motion of adjudication and the enforcement thereof shall be governed Defendants Dominic J. Magliarditi and DII Investments, by and interpreted and construed in accordance with the Inc. To Dismiss for Lack of Personal Jurisdiction and internal substantive laws of the state of Texas.”(Id. at 69.)
Improper Venue (“Magliarditi Motion”) and Defendant John Blaugrund's Motion to Dismiss for Improper Venue The sale of PRI Inc.'s assets to TransFirst under the APA was (“Blaugrund Motion”), both filed on January 8, 2007.
conditioned in part on the understanding that Magliarditi and Responses were filed on January 15, 2007, and replies were Blaugrund, among others, would serve in PRI. Pursuant to filed on January 19, 2007. For the reasons stated below, the their obligations under the APA, Magliarditi and Blaugrund Magliarditi Motion is hereby DENIED and the Blaugrund entered into identical Employment Agreements (“EAs”)
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TransFirst Holdings, Inc. v. Phillips, Not Reported in F.Supp.2d (2007) 2007 WL 631276
with PRI.(Id. at 89-104; 105-120.) The EAs provided that termination for cause when discussing the ability of Magliarditi and Blaugrund would be employed as senior vice Defendants to achieve Earn Out amounts. Earn-Out amounts presidents. (Id. at 90; 106.) Section 1.01 of the EAs state that were additional sums to be paid by TransFirst should the the employee business reach certain growth targets over three years.
(Compl. at 9, ¶ 31.) Thus, they could be affected by *2 agrees to devote his full business terminations for cause. The APA states that the employment time, energy and skill to his duties of Defendants Magliarditi and Blaugrund (referred to as at Employer. Employee's duties will “Principal Shareholders”) could be deemed terminated for include, but not be limited to, those cause where there had been a duties normally performed by a company senior vice president as well material breach by such Principal as any other reasonable duties that may Shareholder of any of the terms be assigned to him from time to time of this Agreement or any other by the Employer's Board of Directors. agreement entered into between (Id.) such Principal Shareholder and Holdings or Purchaser (including The EAs were executed on the same day that the APA closed, without limitation any non-disclosure, March 1, 2004. In August of 2004, the management comittee confidentiality, non-compete, and/or of PRI elected Magliarditi and Blaugrund to serve as vice employment agreement. (Id. at 22.) presidents of PRI. (Id. at 121.)
Magliarditi is a California resident. He is president Section 6.02 of the EAs (“Section 6.02”) is a dispute of Defendant DII Investments Inc. (“DII”), a Nevada resolution provision containing a forum selection clause. The corporation. (Magliarditi Mot. at 3, 5.) Magliarditi asserts that provision reads, in relevant part, neither he nor DII has ever transacted any business in Texas.
In the event of any dispute or (Id. at 4, 5.) claim relating to arising out of Employee's employment relationship Plaintiffs make several allegations of wrongful conduct with Employer, this Agreement against Defendant Magliarditi. It is alleged that at the or the termination of Employee's time of entering into the APA, Magliarditi made fraudulent employment with Employer for any representations directed at the TransFirst office in Dallas, reason (including, but not limited to, particularly about the non-compete provisions. (App. Pls.' any claims of breach of contract, Resp. Magliarditi Mot. at 2.) Plaintiffs allege that Magliarditi, wrongful termination or age, sex, through DII, engaged in competitive activity in violation race, sexual orientation, disability or of the APA and actively concealed such competition from other discrimination or harassment), PRI and TransFirst. (Id. at 4.) Plaintiffs allege that on Employee and Employer agree that all June 1, 2006, Magliarditi informed TransFirst's accounting such disputes shall be fully, finally and personnel, Charlene Strahs, that TransFirst owed $160,000 exclusively resolved by means of a to Easy Pay Financial Services LLC (“Easy Pay”) for court trial conducted in (i) the Superior merchant referral services. (Id.) According to Plaintiffs, Court of Orange County, California, or Magliarditi was an officer of Easy Pay, a direct competitor (ii) any federal district court located in and customer of PRI and TransFirst. (Id.) Plaintiffs also allege that county. (Id. at 96; 112.) that Magliarditi, acting individually and on behalf of DII, directed false communications to TransFirst offices in Dallas Section 4.01 of the EAs (“Section 4.01”) discusses Texas over the course of three months. (Id.) It is alleged termination for cause. The definition of “cause” includes that Magliarditi falsely denied any association with Easy Pay, “any material breach by Employee of any of the terms particularly in an email to Andrew Rueff, a TransFirst officer of this Agreement, the Asset Purchase Agreement, or in Dallas, TX. (Id. at 125.)Plaintiffs assert that Magliarditi any other agreement entered into between Employee and never conceded the true nature of his ownership of Easy Pay. Employer.”(Id. at 92; 108.) The APA similarly defines (Id. at 5.) Plaintiffs submit documents to show Magliarditi
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TransFirst Holdings, Inc. v. Phillips, Not Reported in F.Supp.2d (2007) 2007 WL 631276
included the value of his ownership of Easy Pay on DII's balance sheet in calculating his personal net worth. (Id. at III. ANALYSIS 126.)Magliarditi ultimately resigned from employment in A. Personal Jurisdiction November of 2006. (Compl. at 17, ¶ 58.)
Defendants Magliarditi and DII assert that this court does not have personal jurisdiction over them. To exercise *3 John Blaugrund was terminated from employment on personal jurisdiction over a nonresident defendant, the December 14, 2006. He received a termination letter stating Court must determine that due process standards are that he owned and operated a competitive company and satisfied by engaging in a two-pronged analysis. First, the deprived TransFirst and its affiliate companies of his honest Court determines whether the defendant has purposefully services. The letter stated that Blaugrund had breached established “minimum contacts” in the foreign state. If so, his fiduciary duties as an employee and corporate officer.
the Court must then assess whether the exercise of personal Blaugrund was deemed “terminated for ‘Cause’.” (App.
jurisdiction would offend “traditional notions of fair play Reply Blaugrund Mot. at 83.)
and substantial justice.”See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 473-75, 476, 105 S.Ct. 2174, 85 L.Ed.2d 528 Plaintiffs' assert claims against Magliarditi and Blaugrund (1985); Bullion v. Gillespie, 895 F.2d 213, 216 (5th Cir.1990).
based on RICO violations, fraud, breach of fiduciary duties, Defendant Magliarditi also argues that even if these tests are and breach of the APA. (Compl. at 17-30.) Magliarditi and met, this court cannot exercise personal jurisdiction over him DII assert that this Court lacks personal jurisdiction over because he is protected by the fiduciary shield doctrine.
them, and Magliarditi, DII, and Blaugrund seek to have this case dismissed based on improper venue.
1. Minimum Contacts *4 Sufficient minimum contacts can be established through II. LEGAL STANDARD a showing of the existence of general or specific jurisdiction.
The plaintiff bears the burden of establishing a district See Freudensprung v. Offshore Technical Serv. Inc., 379 F.3d court's personal jurisdiction over a nonresident defendant 327, 343 (5th Cir.2003). Plaintiffs argue in this case that who moves for dismissal. See Wilson v. Belin, 20 F.3d specific jurisdiction exists. “A court may exercise specific 644, 648 (5th Cir.1994). When a court rules on a challenge jurisdiction over a nonresident defendant if the lawsuit arises to personal jurisdiction without an evidentiary hearing, from or relates to the defendant's contact with the forum the plaintiff has only to establish a prima facie case of state.”Icee Distribs. Inc. v. J & J Snack Foods Corp., 325 F.3d personal jurisdiction. See id.The Court must accept as true all 586, 591 (5th Cir.2003). Specific jurisdiction exists where uncontroverted allegations in the complaint, and all factual a defendant “purposefully avails itself of the privilege of conflicts presented by the parties must be resolved in favor of conducting activities within the forum state, thus invoking the the plaintiff. See id.
benefits and protections of its laws.”Burger King, 471 U.S. at 475. The “purposeful availment” necessary for specific The standard for determining if venue is proper is similar jurisdiction protects a defendant from being brought into to the personal jurisdiction standard. 28 U.S.C. § 1406(a)
a jurisdiction based solely on “random,” “fortuitous,” or instructs District Courts to dismiss or transfer a case if venue “attenuated” contacts. Id. A single act may form a sufficient is improper where filed. A party may move to dismiss an basis for personal jurisdiction if the claim arises from that action based on improper venue pursuant to Fed.R.Civ.P.
single act and the defendant can reasonably foresee being 12(b)(3).See Psarros v. Avior Shipping, Inc., 192 F.Supp.2d brought into court in the forum state. See Icee Distribs., 325 751, 754 n. 4 (S.D.Tex.2002); Mitsui & Co. (USA), Inc.
F.3d at 591. Merely contracting with a resident of the forum v. MIRA M/V, 111 F.3d 33, 37 (5th Cir.1997). Once a state does not sufficiently support the exercise of jurisdiction defendant raises the issue of proper venue by motion, the over the defendant. See Id.
burden of sustaining venue lies with the plaintiff. Psarros, 192 F.Supp.2d at 753. In the absence of an evidentiary hearing, a plaintiff meets this burden by setting forth facts a. Personal Jurisdiction Over Magliarditi that, taken as true, establish venue. Id. The court should accept The commission of an intentional tort aimed at the forum state all uncontroverted facts as true and resolve all disputed facts will satisfy the purposeful availment inquiry of the minimum in favor of the plaintiff. Id. contacts requirement. See Lewis v. Fresne, 252 F.3d 352,
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359 (5th Cir.2001); Wien Air Alaska Inc. v. Brandt, 195 directed at Texas. While Magliarditi may dispute the truth F.3d 208, 213 (5th Cir.1999). In Fowler v. Broussard, No. of Mr. Travis's statements, a court must resolve all disputed Civ.A.3:00-CV-1878-D, 2001 WL 184237, * 5, the court facts in favor of the plaintiffs when it considers personal found that the introduction of evidence of misrepresentations jurisdiction. transmitted to a Dallas, Texas office through e-mail and telephone conversations was sufficient to assert personal Magliarditi asserts that Plaintiffs have merely made jurisdiction. conclusory allegations. To the contrary, Plaintiffs did submit the Declaration of Mark W. Travis as evidentiary support of Plaintiffs argues that the Court has specific jurisdiction the allegedly tortious activity. The court in Wien Air Alaska, over Magliarditi because he directed fraudulent statements 195 F.3d at 212, established minimum contacts through the and misrepresentations at Texas. These allegedly fraudulent use of a sworn affidavit and records of communications, communications include false representations in the APA, such as faxes and letters. Similarly, in Double G Energy emails, letters, and phone calls directed towards TransFirst's Inc. v. At Gas Gathering, Inc., No.Civ.A 3:05-CV-0749- homes office in Texas. TransFirst's evidence of these P, 2005 WL 1837953, at * 4, n. 3 (N.D.Tex. July 28, fraudulent conduct consists primarily of the signed 2005), the Court found that a declaration was sufficient Declaration of Mark W. Travis, CFO and Senior Vice evidence for the purpose of establishing a prima facie case President of TransFirst. (See generally App. Pl.'s Resp. of personal jurisdiction. The Declaration, copies of emails, Magliarditi Mot. at 1-5.) Plaintiffs assert that Magliarditi and the balance sheet submitted to the Court are competent directed false representations to TransFirst in Dallas, TX evidence to establish personal jurisdiction. to induce TransFirst to enter into the APA. These alleged fraudulent representations were specifically in regards to Magliarditi challenges the truth of Plaintiffs' factual the non-compete provisions of the APA. (Id. at 4.) It is allegations. Plaintiffs allege that Magliarditi's email to further alleged that Magliarditi directed false representations Andrew Rueff, stating that he was not an officer, director, to TransFirst in Dallas, Texas to conceal Magliarditi's or owner of Easy Pay, was fraudulent. Magliarditi contends ownership of Easy Pay between August and November of that this was a true statement, and to demonstrate this 2006. (Id. at 4-5.)Plaintiffs submit a copy of an email to submits Easy Pay's Articles of Organization, which lists only Andrew Rueff, who they assert is a TransFirst officer, in Charles Oliverio as an Easy Pay officer. (App. Magliarditi which Magliarditi denies any affiliation with Easy Pay. (Id. Mot. at 21-23.) Plaintiffs have submitted a balance sheet at 125.)Plaintiffs attempt to show the fraudulent nature of the prepared by Magliarditi which lists Easy Pay among the email by submitting a copy of Magliarditi's DII balance sheet assets of DII. Magliarditi has conceded an ownership interest in which Easy Pay is included as an asset. (Id. at 126.)These in DII. Given the contradictory evidence of whether the false representations, according to Plaintiffs, were directed at statements about Magliarditi's relationship with Easy Pay TransFirst's officers in Dallas, Texas. (Id. at 5.) were true or false, the court must resolve the issue in Plaintiffs'
favor. Since Plaintiffs submit evidence tending to show that *5 Plaintiffs argue that these fraudulent representations Magliarditi made fraudulent communications, the Court may directed towards Dallas, Texas are sufficient minimum accept Plaintiffs argument for personal jurisdiction based on contacts for the court to establish personal jurisdiction over intentionally tortious acts directed at Texas. Magliarditi, since an intentional tort aimed at a forum states satisfies the standard. Magliarditi disputes the admissibility Magliarditi also contends that Andrew Rueff was an officer of and sufficiency of the evidence that Plaintiffs present to PRI, working in California, and therefore any representations establish their prima facie case of personal jurisdiction. made to him would not have been directed at Dallas, Texas. Magliarditi makes a number of challenges to Plaintiffs' He submits a PRI document appointing Andrew Rueff as vice evidence, but the court need not deal with every challenge president and secretary of PRI in support of his contention. as even a single contact may be sufficient if the defendant (App. Magliarditi Reply at 26.) However, in his declaration, can reasonably foresee being brought before the court of the Mark Travis, a CFO and Senior Vice President of TransFirst, forum state. See Icee Distribs., 325 F.3d at 591. Magliarditi contends that Andrew Rueff is an officer of TransFirst. Once contends that there is no evidence that he did not intend again, where facts are disputed, the court must resolve the to comply with the APA non-compete provisions, and thus issue in favor of Plaintiffs. Plaintiffs have presented evidence there is no evidence that he made fraudulent representations
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that any false statements made to Rueff would have been doctrine does not protect a corporate officer who engages in aimed at TransFirst in Dallas, Texas. tortious conduct, even if such acts were performed within the scope of employment. Fowler v. Broussard, No. Civ.A.3:00-
*6 Plaintiffs allege that Magliarditi and DII never revealed CV-1878-D, 2001 WL 184237, at *4 (N.D.Tex. Jan.22, to Plaintiffs that through DII, Magliarditi was engaged in 2001). directly competitive activity. (App. Resp. Magliarditi Mot. at 4.) Magliarditi asserts that if such conduct did occur, the The fiduciary shield doctrine is inapplicable here. It is alleged harm was directed towards PRI, a California corporation. that Magliarditi concealed his competitive activity on his own While PRI would have been harmed by the concealment behalf and on behalf of DII, and was not acting in his capacity of competitive activity, TransFirst, in Dallas, Texas, was as an officer or employee of PRI. The fiduciary shield doctrine also harmed. Magliarditi had obligations to TransFirst under protects a corporate officer from being haled into court, the APA. Magliarditi should reasonably have foreseen that in districts that would not otherwise have jurisdiction over the harm resulting from fraudulently concealing competitive him for activities solely related to his corporate position. activity would flow to Texas. Thus, if competitive activity Precedent in no way suggests that the fiduciary shield doctrine was concealed as Plaintiffs allege, the harm from the should protect a corporate officer from jurisdiction where he intentional tort would have been directed, at least in part, at engaged in activity on his own behalf, and not in his capacity Texas. The exercise of personal jurisdiction over Magliarditi as a corporate officer. See Pessina, 77 S.W.3d at 300. is appropriate.
*7 Furthermore, Plaintiffs alleged that Magliarditi committed fraud when he represented in the APA that he b. Personal Jurisdiction Over DII would not engage in competitive activity. This occurred Plaintiffs have alleged that Magliarditi, through DII, engaged before Magliarditi was even elected a PRI officer. Therefore, in activity competitive with the business of TransFirst, and he could not have been acting on behalf of PRI at the time then concealed such activity. Magliarditi was the sole owner of the events surrounding the execution of the APA. The and president of DII. (Id. at 4.) Plaintiffs allege that when fiduciary shield doctrine would not prevent the exercise of making fraudulent representations to TransFirst, Magliarditi personal jurisdiction with respect to these claims. was acting on behalf of DII. (App. Resp. Magliarditi Mot. at 4.) Any knowledge Magliarditi had about the propriety Magliarditi has not convincingly asserted a basis for the of concealing competitive activity, in light of the APA, application of the fiduciary shield doctrine since Plaintiffs and any knowledge he had about the effects of tortious allegations center around activity unrelated to his corporate actions on Texas must be ascribed to DII as well. Plaintiffs position. Even if Magliarditi was acting as an officer of allege and present supporting evidence through the Travis PRI, as he asserts, Plaintiffs allege he engaged in intentional Declaration that DII, through the actions of its owner tortious activity. Allegations of tortious activity overcome and officer Magliarditi, engaged in tortious conduct with the application of the fiduciary shield doctrine. See Fowler, foreseeable effects in Dallas. This is a sufficient allegation of 2001 WL 184237, at *4. The fiduciary shield doctrine minimum contacts to support the court's exercise of personal does not prevent this court from exercising jurisdiction over jurisdiction. Magliarditi.
2. Fiduciary Shield Doctrine 3. Traditional Notions of Fair Play and Substantial Justice Magliarditi argues that the fiduciary shield doctrine Magliarditi argues that it would offend traditional notions prevents this Court from exercising jurisdiction over him. of fair play and substantial justice for the Court to exercise The fiduciary shield doctrine holds that “an individual's personal jurisdiction over him. Magliarditi contends that the transaction of business within the state solely as a corporate venue clause in the EA gave him a justifiable expectation officer does not create personal jurisdiction over that that a dispute such as this would be litigated in Orange individual.”Stuart v. Spademan, 772 F.2d 1185, 1197 (5th County, California. According to Magliarditi, allowing this Cir.1985).“The doctrine shields a nonresident defendant proceeding to occur in Texas violates his due process rights from suit in a forum state when his or her only contacts under the Texas and United States constitutions. with that state are in a representative capacity.”Pessina v. Rosson, 77 S.W.3d, 293, 200 (Tex.App.-Austin 2001.)The
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A defendant bears the burden of showing that this Court's A court may find venue is proper where a defendant assertion of jurisdiction would offend traditional notions of directs communications toward a particular forum if the fair play and substantial justice. See Burger King, 471 U.S. at communications are sufficiently related to the cause of action. 476-77. Once minimum contacts are established, as they have See U.S. Titan, Inc. v. Guangzhou Zhen Hua Shipping been above, the defendant must make a “compelling case” Co., Ltd., 241 F.3d 135, 153 (2d Cir.2001); FC Investment against the exercise of personal jurisdiction. Wien Air Alaska, Group LC v. Lichtenstein, 441 F.Supp.2d 3, 11 (D.D.C.2006) 195 F.3d at 215. A court must balance the burden on the (interpreting Titan and a parallel statutory provision, 28 defendant to litigate in this forum; the plaintiff's interests in U.S.C. § 1391(a)(2)). The fact that a plaintiff residing in a convenient and effective relief; the judicial system's interest particular judicial district feels the effect of a defendant's in efficient resolution of controversies; and the state's shared conduct in that district does not necessarily mean that the interest in furthering fundamental social policies. Id. events or omissions occurred there. See Bigham v. Envirocare of Utah, 123 F.Supp.2d 1046, 1048 (S.D.Tex.2000).
Defendant Magliarditi's argument as to why the exercise of jurisdiction over him offends traditional notions of fair play Plaintiffs' allegations do more than state that the effects of and substantial justice is far from compelling. He has not Defendants' actions were felt in the forum state. Plaintiffs shown that there would be any burden on him in litigating allege that DII, through the actions of its officer and owner in Texas. As will be discussed below, Magliarditi was not Magliarditi, directed false communications to TransFirst justified in expecting the forum selection clause of his EA to officers in Dallas, Texas. (App. Resp. Magliarditi Mot. at apply to a suit of this nature. Magliarditi has not shown that 4). These false communications are the focus of Plaintiffs' the state or judicial system has an interest in this case being claims of fraudulent representations. Therefore, they are litigated in California. Since minimum contacts have been sufficiently related to the cause of action to support venue. established, and Magliarditi has not made a compelling case The direction of fraudulent misrepresentations to Dallas, otherwise, the Court finds its exercise of personal jurisdiction Texas can establish that the events or omissions giving rise to does not offend traditional notions of fair play and substantial the cause of action occurred in Dallas, Texas. Plaintiffs have justice. made allegations and offered factual support sufficient for the purpose of establishing that this district is the proper venue for the claims against DII.
B. Venue *8 Defendants Magliarditi, DII, and Blaugrund assert that Plaintiffs' claims should be dismissed because venue is 2. Magliarditi and Blaugrund improper. DII asserts that 28 U.S.C. § 1391(b)(2) does not Defendants Magliarditi and Blaugrund argue that venue is provide a basis for venue in this District in relation to improper in this district because each of their EAs contained the claims against it. Defendants Magliarditi and Blaugrund valid, enforceable forum selection clauses that require this argue that venue is not proper because the EAs contain a valid, litigation be conducted elsewhere. Section 6.02 of the EAs enforceable forum selection clause that requires this litigation read, in relevant part, to be pursued elsewhere. 1 The validity and enforcement of In the event of any dispute or a forum selection clause is a question of law. Mitsui & Co., claim relating to arising out of 111 F.3d at 35.
Employee's employment relationship with Employer, this Agreement 1. DII or the termination of Employee's Plaintiffs rely on 28 U.S.C. § 1391(b)(2) as the basis employment with Employer for any to establish that this is an appropriate venue. Under this reason (including, but not limited to, provision, an action may be brought in a judicial district “in any claims of breach of contract, which a substantial part of the events or omissions giving rise wrongful termination or age, sex, to the claim occurred.”DII contends that it was not a party to race, sexual orientation, disability or the APA, received no payment from Texas under the APA, other discrimination or harassment), and undertook no actions in this district. Employee and Employer agree that all such disputes shall be fully, finally and exclusively resolved by means of a
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court trial conducted in (i) the Superior EA's forum selection clause would apply whenever there was Court of Orange County, California, or a breach of the APA. This interpretation of the contracts is (ii) any federal district court located not reasonable. The EAs merely state that a violation of the in that county. (App. Resp. Magliarditi APA may be a basis for termination of employment for cause. Mot. at 96; 112.) (App. Resp. Magliarditi Mot. at 92, 108.) This does not mean that a breach of the APA is automatically a breach of the EAs.
*9 Plaintiffs do not dispute that the dispute resolution Blaugrund refers to Section 3.1(b)(v) and (vi) of the APA, provision and forum selection clause of the EAs are valid which defines termination for cause to include a violation of and enforceable in relation to employment disputes. Rather, the EA for the purpose of making determinations related to Plaintiffs argue that because the causes of action in this Earn-Out amounts. The purpose of 3.1(b) (v) and (vi) of the suit are unrelated to the employment relationship between APA is not to link breaches of the EAs to breaches of the the parties, the forum selection clauses of the EAs are APA, but rather to set terms for Defendants ability to achieve inapplicable. Plaintiffs assert that the fraud in the inducement Earn-Out amounts. claims and breach of the APA claims relate to the APA and not to employment. Further, the breach of fiduciary duty *10 While the APA and EAs are certainly related, the Court claims relate to Defendants roles as officers of PRI, and not does not find that reading the documents together aids in to their employment relationship with PRI. Finally, Plaintiffs interpretation of either document because each document assert that the RICO claims do not relate to Defendants' deals with, and was intended to deal with, a distinct aspect employment. of the parties' relationship. Even if the Court were to accept as true the proposition that the APA and EAs were interdependent and intertwined, it would still not be inclined a. Is Section 6.02 of the EAs Necessarily Implicated by to find that the dispute resolution provisions of the EAs were Claims of APA Violations? applicable to every cause of action against Magliarditi or Defendants Magliarditi and Blaugrund both argue that the Blaugrund arising out of the APA. The fact that two contracts APA and the EA are integrated and interdependent in such were executed on the same day, by the same parties, and a way as to require the court to read the contracts together about the same general subject matter does not mean that as one agreement. Therefore, a breach of one contract, would the terms of one contract apply to the other contract. The necessarily implicate the terms of the other. Magliarditi and existence of the two separately signed documents indicates Blaugrund support this argument by citing references within that the employment aspects of the relationship were distinct, the APA to the EAs. For instance, Defendants' employment to at least some degree, from the asset purchase aspects of the could be terminated for cause due to violations of the APA. transaction. Magliarditi and Blaugrund were required to enter into their respective EAs as a condition of the APA. The APA states The plain language of the EAs themselves limit the that all schedules and exhibits are incorporated by reference application of Section 6.02 to “any dispute or claim relating into the APA, and the EAs are included among the schedules. to or arising out of Employee's employment relationship The EAs and APA were all executed on the same date, with Employer, this Agreement [defined in the document March 1, 2004. Blaugrund cites Nova Ribbon Product Inc. v. as the Employment Agreement], or the termination of Lincoln Ribbon, Inc., Civ. A. No. 89-4340, 1992 WL 211544, Employee's employment with Employer for any reason.”The *5 (E.D.Pa. Aug.24 1992) for the proposition that where plain language does not suggest an intent to cover obligations “documents are executed at the same time and are intertwined arising pursuant to the asset purchase aspects of the parties' by the same subject matter, they should be construed together relationship. The EAs' dispute resolution provision is limited and interpreted as a whole. This rule applies even though the to employment matters parties to the separate writings may not be the same as long as the writings pertain to the same transaction and interpretation By comparing the contracts, it does not appear that in is aided by reading them together.” executing the EAs and the APA, the parties intended that every violation of the APA would result in a breach of an EA, Defendants essentially argue that a violation of the APA is and that the EA's dispute resolution provision would become necessarily a violation of the EA. Thus, the EA would be applicable. The APA did not contain a forum selection implicated in Plaintiffs' claims of APA violations, and the provision, although the parties certainly knew how to create
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one. The language of the contracts does not show that the Bldg. Sys. v. CMI Terex Corp., No. Civ.A.3:04-CV-0210-G, parties intended the forum selection provision of the EAs, 2004 WL 1283966, at *4 (N.D.Tex. June 9, 2004) (alterations lodged in one document among the fifty or so attached to the in original). APA, to apply to violations of the APA. If the parties intended every violation of the APA to be litigated in Orange County, Defendants argue for an expansive interpretation of the California, they could have set this out in the APA itself. The contractual language, stating that the EAs dispute resolution APA contains a Texas choice of law provision, while the EAs provisions are very broad. Section 6.02 covers “any dispute mandate that California law apply. (App. Resp. Magliarditi or claim relating to or arising out of Employee's employment Mot. at 98; 114.) If violations of the APA were necessarily relationship with Employer.”As discussed above, the court violations of the EAs, the choice of law provisions in the is unconvinced that the parties intended for Section 6.02 of two documents would conflict. The mere fact that the APA the EAs to apply so broadly that every kind of dispute about and EAs were part of the same complex transaction does not the APA would always be covered by the EA. Magliarditi suggest that the parties intended a violation of one agreement and Blaugrund argue that the EAs use expansive language to trigger the provisions of the other, except where expressly such as “any dispute” in order to encompass nearly all suits stated. It is unreasonable to read the contract otherwise or involving Magliarditi and Blaugrund. However, the language suggest that the parties intended otherwise. of the contract itself suggests that the parties intended to limit the dispute resolution provisions of the EAs to traditional employment-related issues. The claims must relate to or arise b. Do Plaintiffs' Claims Fall Within the Scope of Section out of the employment relationship, which suggests more 6.02 of the EAs? than a tangential connection to employment is necessary for While not every breach of the APA invokes the provisions of the forum selection clause to apply. Section 6.02 specifically the EAs, the Court must assess whether Plaintiffs' allegations lists certain types of disputes that are covered, including in this case fall within the scope of the dispute resolution discrimination, wrongful termination, and harassment. While provisions of the EAs. Section 6.02 of the EAs provides that this list is not exhaustive, it illuminates the understanding of the parties as to what kind of disputes would be governed *11 [i]n the event of any dispute by Section 6.02 of the EAs. The parties clearly were or claim relating to arising out of contemplating the dispute resolution provisions of the EAs to Employee's employment relationship apply to traditional employment disputes.
with Employer, this Agreement or the termination of Employee's Defendants note that included in the list of types of disputes employment with Employer for any to be resolved under Section 6.02 is “any claims of breach reason (including, but not limited to, of contract.”Section 6.02 does not explicitly limit the forum any claims of breach of contract, selection provision to breaches of the EAs. The Court does not wrongful termination or age, sex, race, find that this language changes its analysis. It is unreasonable sexual orientation, disability or other to assert that the parties intended that this parenthetical phrase discrimination or harassment)
would make every dispute related to an APA violation subject the claims shall be litigated in Orange County, California. to the terms of the EAs. The better reading is to understand (App. Resp. Magliarditi Mot. at 96; 112.) Magliarditi and the term in the EAs to refer to employment-related contracts. Blaugrund argue that the claims against them do relate to their employment relationships, while Plaintiffs contend that the causes of action and facts at issue are separate from i. Fraud, Breach of the APA employment.
*12 Plaintiffs' argue that their claims for fraud and breach A court looks to the parties' contract to determine which of the APA are not related to Magliarditi or Blaugrund's causes of action are governed by a forum selection clause. employment relationship. The Court agrees that these causes Marine Chance Shipping, Ltd. v. Sebastian, 143 F.3d 216, 22 of action relate to the APA and not to employment or the (5th Cir.1998).“[I]f the substance of [the plaintiff's] claims, employment contract. These causes of action and the facts at stripped of their labels, does not fall within the scope of the issue involve representations made and obligations incurred [forum selection] clause [ ], the clause[ ] cannot apply.”Soil as part of the asset purchase transaction. This transaction
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is separate from the parties' employment relationship. Health Plans of the Gulf Coast, 141 F.3d 243, 245, 250 (5th Therefore, these claims do not fall within the scope of the Cir.1998); Hearthshire v. Braeswood Plaza Ltd. Partnership employment contract's dispute resolution provision. v. Bill Kelly Co., 849 S.W.2d 380, 391 (Tex.App.-Houston 1993). In Ford, 141 F.3d at 250, the contract stated that Defendant Blaugrund argues that his termination letter stated all disputes “arising out of or relating to” the contract must that he was terminated for breach of the APA and the EAs. be arbitrated. The Ford court's analysis focused on whether (App. Reply Blaugrund Mot. at 83.) He argues that this means the cause of action could be maintained independent of that the terms of the EA are necessarily relevant to the APA- the contract to determine whether the claim was related to based claims at hand. This argument is unavailing because, the contract. Id. at 251.In Hearthshire, 849 S.W.2d at 383, whatever the reasons for firing Blaugrund, this suit is not the relevant contract read, “[a]ll claims or disputes between about his termination from employment. Rather, Plaintiffs the Contractor and the Owner arising out [of] or relating allege fraud, breach of the APA, and RICO claims. Therefore, to the Contract, or the breach thereof, shall be decided even though a breach of the EA might have occurred, that by arbitration.”In deciding whether the arbitration provision breach is not relevant to this suit because the claims do not applied, the Hearthshire court similarly focused on whether concern a breach of the EAs. Therefore, the forum selection reference to the contract was necessary in order to maintain provisions of the EA are not applicable to these claims. the plaintiff's tort claims.
*13 These cases are inapposite to this situation where the EAs' forum selections clause covers matters broader ii. Breach of Fiduciary Duty, RICO than disputes arising out the EAs themselves. Section 6.02 While the claims related to fraudulent representations and of the EAs covers disputes “arising out of Employee's breach of the APA do not appear to be employment-related, employment relationship with Employer, this Agreement, or it is not so clear whether Plaintiffs' claims based on RICO the termination of Employee's employment.”This contract and breach of fiduciary duties are covered by the dispute provision applies to more than disputes arising out of the resolution provisions of the EAs. The RICO claims are employment agreement-it applies to matters arising out of the based on mail and wire fraud, allegedly undertaken to employment relationship itself as well. The test of whether deprive Plaintiffs of honest services. (Compl. at 18.) The the action could be maintained independently of the contract breach of fiduciary duty claims are based on Magliarditi is not helpful where the dispute resolution provision explicitly and Blaugrund's positions with PRI. Plaintiffs assert that the encompasses matters beyond the scope of the contract. breach of fiduciary duty claims relate solely to Magliarditi and Blaugrunds roles as corporate officers and not to their The Court believes that Defendants Magliarditi and roles as employees. Maintaining this distinction is difficult in Blaugrund's roles as corporate officers cannot be light of the fact that each held only one position-that of senior distinguished from their roles as employees for the purposes vice president. Cf. Loy v. Harter, 128 S.W.3d 397, 404-05 of the RICO claims for deprivation of honest services or (Tex.App.-Texarkana 2004) (finding employment agreement the breach of fiduciary duty claims. Although a corporate pertained to party's role as employee (CFO) of corporation officer is not necessarily an employee by virtue of holding his and not to his role as a director ). Determining the scope position (see William Meade Fletcher, Fletcher Cyclopedia of of the EAs' coverage depends upon whether the Defendants' the Law of Corporations § 266 (2006), in this case Magliarditi duties as corporate officers can be separated from their and Blaugrund were clearly considered employees under obligations as employees. If these two aspects of Defendants' the EAs. Importantly, the EAs state that Magliarditi and roles with PRI cannot be separated, then Plaintiffs' allegations Blaugrund will be employed as senior vice presidents. It does fall within the scope of the EAs because the claims relate not appear that the parties contemplated a distinction between to Defendants' responsibilities as employees. If the role of the roles of officer and employee. Section 1.01 of the EAs officer and employee can be divided, then the EAs are not provide that each Defendant will “devote his full business necessarily implicated in this lawsuit and the forum selection time, energy and skill to his duties at Employer.”(App. clause would not necessarily be applicable here. Resp. Magliarditi Mot. at 90; 106.) Defendants' duties included “duties normally performed by a company senior Plaintiffs cite cases involving the applicability of a contract's vice president.”(Id.) The substance of the breach of fiduciary arbitration provisions to tort claims. See Ford v. NYLCARE duty and RICO claims relate to the services Magliarditi and
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Blaugrund were required to render as employees under the for the parties. Id. The court held that “because all the EAs. These claims, as alleged, could not be brought in the 1404(a) factors [were] neutral or weigh against transfer,” and absence of the employment relationship. because requiring litigation in two courts would not “serve the interests of judicial economy,” the court would not enforce The plain language of the EAs purport to encompass all the forum selection clause. Id. Similarly, in Somerset Marine claims arising out of the employment relationship. The Court Inc. v. Olympic Marine Co., No. Civ.A. 97-3451, 1998 WL can find no principled way to separate the duties owed as 433801, *2 (E.D.La.1998), the court declined to give effect a fiduciary and corporate officer from those owed as an to a forum selection clause where the court had personal employee where Defendants were employed as corporate jurisdiction over all parties. The court stated, “transferring officers, specifically as senior vice presidents. Plaintiffs' only the cross-claim to another venue makes little sense claims based on RICO and breach of fiduciary duty are related in terms of judicial economy, economy to the parties, and to Defendants' obligations and responsibilities as employees convenience to the parties and witnesses.”Id. The court also and corporate officers. The Court must find that these claims noted that “one fact-finder should have all the evidence before arise out of the employment relationship. While the claims it.”Id. could be maintained without any reference to the EAs, the forum selection provisions of the EAs encompass these 18 U.S.C. § 1965 (“§ 1965”) is a statutory venue provision claims. that applies specifically to RICO claims. 2 Section 1965 has been interpreted to establish that “if one defendant before While the forum selection clause of the EAs may cover the court has the required minimum contacts with the forum the RICO and breach of fiduciary duty claims, the Court state, then, other parties are subject to nationwide service nevertheless declines to give effect to the forum selection of process.”Hawkins v. Upjohn Co., 890 F.Supp. 601, 606 clause in the interest of judicial economy. “A motion to (E.D.Tex.1994). With § 1965, Congress has shown an intent enforce a forum selection clause is governed by 28 U.S.C to allow plaintiffs to bring RICO claims against multiple § 1404(a)” (“§ 1404(a)”).Brock v. Entre Computer Centers, defendants in one forum where, in the absence of the statute, Inc., 740 F.Supp. 428, 431 (E.D.Tex.1990) (citing Stewart venue or jurisdiction in that forum might not otherwise be Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 27-28, 108 proper. See Butcher's Union Local No. 498 v. United Food S.Ct. 2239, 101 L.Ed.2d 22 (1988)).Section 1404(a) reads, and Commercial Workers, 788 F.2d 535 (9th Cir.1986); “For the convenience of parties and witnesses, in the interest Snider, 672 F.Supp. at 981. of justice, a district court may transfer any civil action to any other district or division where it might have been brought.”A In Snider v. Lone Star Art Trading Co., Inc., 672 F.Supp. “district court must weigh the plaintiff's forum choice against 977, 979 (E.D.Mich.1987) the court refused to give effect to considerations of convenience, cost, judicial economy, and a forum selection clause contained in one of six agreements. expedition of discovery and trial processes.”Brock, 740 The Snider court states, “Equity, as well as an efficient F.Supp. at 431. The factors to be considered under 1404(a) administration of justice, militate against requiring a RICO are (1) the plaintiff's choice of forum, (2) the convenience claim involving six Defendants (and not a claim in contract) of the parties, (3) the convenience of witnesses, and (4) the to be brought in the location which is specified in a contract interest of justice. Stewart Organizations, 487 U.S. at 28. with one of the Defendants.”Id. The court further supported The presence of a forum selection clause is not dispositive, its determination by looking to § 1965. The Snider court noted but “a significant factor to figure centrally in the district that “the RICO venue provision evinces Congress' desire courts' calculus.”Brock, 740 F.Supp. at 431-32 (citing Stewart to give to a plaintiff the authority to bring suit [wherever] Organization, 487 U.S. at 28-29.) the transaction occurred.”Snider, 672 F.Supp. at 981. The contract was governed by Texas law, and the Court found that, *14 Courts often choose not to enforce forum selection under Texas law, forum selection clauses were disfavored. clauses when to do so would contravene the interests of Therefore, the Court held that “under Texas law, the broad judicial economy. In Brown v. Petroleum Helicopters Inc., RICO venue statutory section takes precedence over a venue 347 F.Supp.2d 370, 374 (S.D.Tex.2004), the court noted provision in a private [contract].”Id. at 982-83. that since some claims would not be transferred out of the district, severing and transferring the claims subject to the *15 California law is the governing law designated by the forum selection clause would increase cost and inconvenience EAs. (App. Resp. Magliarditi Mot. 98; 114.) In California,
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TransFirst Holdings, Inc. v. Phillips, Not Reported in F.Supp.2d (2007) 2007 WL 631276
In addition, the Court finds that the RICO venue statute, § a forum selection clause is prima facie valid, but can 1965, provides another basis for it to decline to enforce the be set aside if enforcement is not reasonable under the forum selection clause. In this case, venue is proper for all circumstances. See Furda v. Superior Court, 161 Cal.App.3d claims, and only the forum selection clause would suggest 418, 425, 207 Cal.Rptr. 646 (1984). Enforcement of a forum otherwise. The remaining RICO claims against defendants selection may be unreasonable where it would violate the other than Blaugrund and Magliarditi will be litigated in this principle of judicial economy. See Bancomer, S.A. v. Superior district. This court, by declining to apply the forum selection Court, 44 Cal.App.4th 1450, 1462, 52 Cal.Rptr.2d 435 (1996)
clause of the EAs, acts in keeping with the Congressional (finding it unreasonable to enforce a forum selection clause purpose of § 1965 to bring all RICO claims and Defendants where a party would be required to litigate similar matters involved in the alleged scheme before one court.
simultaneously in two different forums).
Interpreting the forum selection clause of the employment The Court will not enforce the parties' forum selection clause contracts in light of California law further supports this court's because, given the circumstances at hand, it would not be maintenance of the claims in this court. Under California in the interest of justice or judicial economy to sever the law, a court may decline to enforce a forum selection clause RICO and breach of fiduciary claims against Blaugrund and where it would be unreasonable to do so. In this case, for Magliarditi from the other claims in this case. The Court the reason of judicial economy discussed above, it would does have personal jurisdiction over all the defendants in be unreasonable to sever particular claims against Blaugrund this suit, and venue has been uncontested or been found and Magliarditi from the rest of the action. Both the RICO proper as to all of the claims apart from the forum selection venue statute and principles of judicial economy should take clause. To dismiss some of the claims against two of the precedence over the parties' contractual choice of forum.
defendants in this multi-defendant, multi-claim lawsuit would result in similar facts and arguments being brought before, *16 The Court believes that the interests of judicial economy and decided by, two different fact finders. The principles of dictate that the forum selection clause not be enforced in these judicial efficiency and economy weigh in favor of retaining circumstances. Therefore, although the dispute resolution the RICO and breach of fiduciary duty claims here rather than provisions of the EAs would apply to the breach of fiduciary handling the claims in a piecemeal fashion and running the duty and RICO claims, the Court does not find that these risk of conflicting judgments.
claims should be dismissed.
The breach of contract and fraud causes of action against Blaugrund and Magliarditi will have to be defended in this IV. CONCLUSION forum. These claims involve the same core of facts and For the foregoing reasons, the Court hereby DENIES similar legal theories. Since some claims will be litigated in Defendants' Motions. In light of this Order, the Court also this forum, the parties will be inconvenienced by having other DENIES AS MOOT Plaintiffs' Motion for Leave to File a related claims decided elsewhere. As some of Magliarditi and Surreply. Blaugrund's claims will be litigated here, their expectations regarding the forum the claims would be litigated in does IT IS SO ORDERED. not factor heavily in the analysis. See Nippon Fire & Marine Ins. Co. v. M/V Spring Wave, 92 F.Supp.2d 574, 577 (E.D.La.2000). All Citations
Not Reported in F.Supp.2d, 2007 WL 631276
Footnotes 1 Defendants Magliarditi and Blaugrund have filed separate motions contending that a valid arbitration agreement between the parties requires that this matter be arbitrated. Thus, they do not desire for this case to be transferred to another judicial district, but rather seek dismissal.
2 18 U.S.C. § 1965-Venue and process (a) Any civil action or proceeding under this chapter against any person may be instituted in the district court of the United States for any district in which such person resides, is found, has an agent, or transacts his affairs.
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(b) In any action under section 1964 of this chapter in any district court of the United States in which it is shown that the ends of justice require that other parties residing in any other district be brought before the court, the court may cause such parties to be summoned, and process for that purpose may be served in any judicial district of the United States by the marshal thereof. (c) In any civil or criminal action or proceeding instituted by the United States under this chapter in the district court of the United States for any judicial district, subpenas issued by such court to compel the attendance of witnesses may be served in any other judicial district, except that in any civil action or proceeding no such subpena shall be issued for service upon any individual who resides in another district at a place more than one hundred miles from the place at which such court is held without approval given by a judge of such court upon a showing of good cause. (d) All other process in any action or proceeding under this chapter may be served on any person in any judicial district in which such person resides, is found, has an agent, or transacts his affairs.
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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)
KeyCite Yellow Flag - Negative Treatment West Headnotes (41)
Distinguished by Cenoplex, Inc. v. Fox, Tex.App.-Austin, February 21, 2014 [1] Appearance 137 S.W.3d 238 Objections to jurisdiction in general Court of Appeals of Texas, The special appearance rule applies only when Houston (1st Dist.). a defendant contends he is not amenable to process. Vernon's Ann.Texas Rules Civ.Proc., A.C.S. WRIGHT, Appellant, Rule 120a.
v.
SAGE ENGINEERING, INC., John S. Templeton, Cases that cite this headnote III, and Ronald L. Boggess, Appellees.
[2] Appearance No. 01–03–01018–CV. | April 8, 2004.
Objections to jurisdiction in general Synopsis The words “not amenable to process issued by Background: Manufacturer of oilfield testing equipment the courts of this state” in the rule governing sued sole director of shareholder corporation, and others, special appearances mean that the special alleging defendants stole design technology related to appearance is available solely to establish that miniature testing equipment. Director, who was Swiss the Texas court cannot, under the federal and citizen and resident, filed special appearance asserting lack state constitutions and the appropriate state of personal jurisdiction. The 133rd District Court, Harris statutes, validly obtain jurisdiction over the County, Lamar McCorkle, J., denied special appearance, and person or the property of the defendant. Vernon's director appealed. Ann.Texas Rules Civ.Proc., Rule 120a.
2 Cases that cite this headnote
Holdings: The Court of Appeals, Laura Carter Higley, J., held that: [3] Process Defects and irregularities in service or [1] defendant improperly claimed defective service in special return or proof thereof appearance; Curable defect in service of process does not defeat a nonresident's amenability to the court's [2] fiduciary shield doctrine did not apply to protect director process and serves only to provide the nonfrom specific personal jurisdiction of state court; resident defendant with more time to answer.
Vernon's Ann.Texas Rules Civ.Proc., Rule 122.
[3] director had sufficient minimum contacts with state to confer personal jurisdiction; 3 Cases that cite this headnote
[4] exercise of personal jurisdiction did not offend traditional [4] Courts notions of fair play and substantial justice. Highest appellate court Absent a clear expression that a decision of state Affirmed. Supreme Court has been overruled, Court of Appeals is bound by its decisions.
Cases that cite this headnote
[5] Appearance
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Objections relating to process or service Actions by or Against Nonresidents, Process Personal Jurisdiction In; “Long-Arm”
Quashing or vacating service or return or Jurisdiction proof thereof in general Two conditions must be met for state Nonresident defendant improperly raised claim court to exercise personal jurisdiction over a in special appearance that service of process nonresident defendant: state long-arm statute of misappropriation of trade secrets complaint must authorize the exercise of jurisdiction, was defective for plaintiffs' failure to serve him and exercise of jurisdiction must be consistent in compliance with Hague Convention, given with the guarantees of due process. U.S.C.A. that defective service of process claim did not Const.Amend. 14; V.T.C.A., Civil Practice & affect state court's personal jurisdiction over Remedies Code § 17.042. defendant, and that motion to quash service 2 Cases that cite this headnote was proper method for raising defective service claim. Vernon's Ann.Texas Rules Civ.Proc., Rule 120a; Vernon's Ann.Texas Rules Civ.Proc., [9] Courts Rule 122. Actions by or Against Nonresidents, Personal Jurisdiction In; “Long-Arm”
1 Cases that cite this headnote Jurisdiction Because the language of state long-arm statute is [6] Appearance broad, its requirements are considered satisfied Defects in Process or Service if the exercise of personal jurisdiction comports Requirement that defendant raise defective with federal due process limitations. U.S.C.A. service of process claim in motion to quash rather Const.Amend.14; V.T.C.A., Civil Practice & than in special appearance does not waive claim Remedies Code § 17.042. that defendant is not amenable to process issued 3 Cases that cite this headnote by a state court, as complaining defendant can limit his special appearance rule arguments to lack of minimum contacts issue, and then, if that [10] Constitutional Law fails, he can immediately file a motion to quash. Non-residents in general Vernon's Ann.Texas Rules Civ.Proc., Rule 120a. The cornerstone of due process in the context of personal jurisdiction is the minimum contacts 1 Cases that cite this headnote analysis. U.S.C.A. Const.Amend. 14.
[7] Pretrial Procedure Cases that cite this headnote Process, defects and objections as to Process [11] Constitutional Law Defects and irregularities in service or Non-residents in general return or proof thereof Goal of minimum contacts analysis is to protect a The remedy for defective service in state court is defendant from being unjustifiably called before additional time to answer the suit, not dismissal. the courts of a foreign state in violation of due Vernon's Ann.Texas Rules Civ.Proc., Rule 122. process rights. U.S.C.A. Const.Amend. 14.
Cases that cite this headnote Cases that cite this headnote
[8] Constitutional Law [12] Constitutional Law Non-residents in general Non-residents in general Courts
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For purposes of obtaining personal jurisdiction The exercise of personal jurisdiction over over nonresident defendant, to establish nonresident defendant is proper, for purpose of minimum contacts with a state required to satisfy due process, when contacts proximately result due process, the defendant must do something from actions of the nonresident defendant that purposeful to avail himself of the privilege of create a substantial connection with the forum conducting activities in the forum, thus invoking state. U.S.C.A. Const.Amend. 14. the benefit and protection of its laws. U.S.C.A. Const.Amend. 14; V.T.C.A., Civil Practice & Cases that cite this headnote Remedies Code § 17.042.
[17] Constitutional Law 1 Cases that cite this headnote Non-residents in general Although not determinative, foreseeability is [13] Constitutional Law an important consideration in deciding whether Non-residents in general the nonresident defendant has purposefully A nonresident defendant should not be subject established minimum contacts with the forum to the personal jurisdiction of state court, state to satisfy due process. U.S.C.A. under federal due process, based upon random, Const.Amend. 14. fortuitous, or attenuated contacts. U.S.C.A. Const.Amend. 14. Cases that cite this headnote
Cases that cite this headnote [18] Constitutional Law Non-residents in general [14] Constitutional Law Foreseeability is not an independent component Non-residents in general of the minimum contacts analysis in determining Under due process minimum contacts analysis whether exercise of personal jurisdiction for personal jurisdiction over nonresident over nonresident defendant comports with defendant, purposeful availment requirement due process requirements, but is implicit in ensures that the nonresident defendant's contact the requirement that there be a “substantial must result from its purposeful contact, not the connection” between the nonresident defendant unilateral activity of the plaintiff or a third party. and forum state arising from the action U.S.C.A. Const.Amend. 14. or conduct of the nonresident defendant purposefully directed toward forum state.
Cases that cite this headnote U.S.C.A. Const.Amend. 14.
1 Cases that cite this headnote [15] Constitutional Law Non-residents in general It is the quality and nature of nonresident [19] Constitutional Law defendant's contacts with state, rather than Non-residents in general their number, that is important in determining Individuals must have fair warning that a whether exercise of personal jurisdiction over particular activity may subject them to the nonresident defendant comports with due jurisdiction of a foreign sovereign to satisfy due process requirements. U.S.C.A. Const.Amend. process requirements. U.S.C.A. Const.Amend. 14. 14.
Cases that cite this headnote Cases that cite this headnote
[16] Constitutional Law [20] Constitutional Law Non-residents in general Non-residents in general
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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)
Important inquiry in analysis of whether exercise Related contacts and activities; specific of personal jurisdiction over nonresident jurisdiction defendant comports with due process is whether For purposes of asserting specific jurisdiction the defendant's conduct and connection with the over nonresident defendant, it is not necessary forum state is such that he should reasonably that a nonresident defendant's conduct actually anticipate being haled into court there. U.S.C.A. occur in state, as long as the defendant's acts were Const.Amend. 14. purposefully directed toward the state. V.T.C.A., Civil Practice & Remedies Code § 17.042.
Cases that cite this headnote 2 Cases that cite this headnote [21] Courts Unrelated contacts and activities; general [25] Constitutional Law jurisdiction Non-residents in general Courts For purposes of due process, nonresident Related contacts and activities; specific defendant should reasonably anticipate being jurisdiction haled into court where the effects of its conduct Personal jurisdiction exists if the nonresident have been intentionally caused through the defendant's minimum contacts give rise to either purposeful direction of activity toward the forum specific jurisdiction or general jurisdiction. state, even if the defendant never physically U.S.C.A. Const.Amend. 14; V.T.C.A., Civil enters the state. U.S.C.A. Const.Amend. 14. Practice & Remedies Code § 17.042.
3 Cases that cite this headnote Cases that cite this headnote [26] Appeal and Error [22] Courts Cases Triable in Appellate Court Related contacts and activities; specific Whether a state court has personal jurisdiction jurisdiction over a defendant is a question of law, which is Specific jurisdiction is established if the reviewed de novo. nonresident defendant's alleged liability arises from or is related to the defendant's purposeful Cases that cite this headnote contact with the forum. V.T.C.A., Civil Practice & Remedies Code § 17.042. [27] Appeal and Error Necessity of finding facts Cases that cite this headnote When trial court does not issue findings of fact and conclusions of law with its [23] Constitutional Law special-appearance ruling regarding personal Non-residents in general jurisdiction over nonresident defendant, all facts When specific jurisdiction over nonresident necessary to support the judgment and supported defendant is asserted, the minimum contacts by the evidence are implied. V.T.C.A., Civil analysis for due process focuses on the Practice & Remedies Code § 17.042. relationship among the defendant, the forum, and the litigation. U.S.C.A. Const.Amend. 14; Cases that cite this headnote V.T.C.A., Civil Practice & Remedies Code § 17.042. [28] Appeal and Error Conclusiveness in General 1 Cases that cite this headnote Appeal and Error Sufficiency of Evidence in Support [24] Courts
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Where appellate record includes both the purposefully avails himself of the privilege of reporter's and clerk's records, implied findings of conducting activities within the forum state. trial court, necessary to support judgment, are not U.S.C.A. Const.Amend. 14; V.T.C.A., Civil conclusive and may be challenged for legal and Practice & Remedies Code § 17.042. factual sufficiency.
Cases that cite this headnote 1 Cases that cite this headnote [33] Courts [29] Appeal and Error Fiduciary duties in general; fiduciary shield Cases Triable in Appellate Court Fiduciary shield doctrine protects a corporate Court of Appeals reviews trial court's decision officer or employee from the trial court's exercise to grant or deny special appearance de novo of general personal jurisdiction when all of the when underlying facts are undisputed or individual's contacts with Texas were on behalf otherwise established. V.T.C.A., Civil Practice of his employer. V.T.C.A., Civil Practice & & Remedies Code § 17.042; Vernon's Ann.Texas Remedies Code § 17.042. Rules Civ.Proc., Rule 120a.
14 Cases that cite this headnote Cases that cite this headnote [34] Courts [30] Courts Fiduciary duties in general; fiduciary shield Presumptions and Burden of Proof as to Fiduciary shield doctrine did not apply to Jurisdiction negate bases of specific personal jurisdiction Plaintiff bear initial burden to make sufficient over nonresident director of corporation holding allegations to bring nonresident defendant within shares in manufacturer, asserted by manufacturer the personal jurisdiction of the trial court. in action alleging director misappropriated trade V.T.C.A., Civil Practice & Remedies Code § secrets and confidential information held by 17.042. manufacturer, given that director could be held personally liable for misrepresentations directed 2 Cases that cite this headnote to shareholders in state regarding terms under which trade secrets and confidential information [31] Courts would be held, and fiduciary shield doctrine Presumptions and Burden of Proof as to applied only to general personal jurisdiction.
Jurisdiction V.T.C.A., Civil Practice & Remedies Code § 17.042.
A defendant challenging a Texas court's personal jurisdiction over it must negate all jurisdictional 11 Cases that cite this headnote bases. V.T.C.A., Civil Practice & Remedies Code § 17.042.
[35] Courts 3 Cases that cite this headnote Tortious or intentional conduct; fraud and breach of fiduciary duties [32] Constitutional Law The fiduciary shield doctrine does not protect Non-residents in general a nonresident corporate officer from specific personal jurisdiction as to intentional torts or Due process considerations for personal fraudulent acts for which he may be held jurisdiction under state long-arm statute are individually liable in Texas. V.T.C.A., Civil satisfied if a defendant directs his tortious Practice & Remedies Code § 17.042.
conduct toward the forum state with the foreseeable knowledge that his actions will cause 16 Cases that cite this headnote harm to a resident of the forum and the defendant
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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)
in furthering fundamental substantive social [36] Corporations and Business Organizations policies. U.S.C.A. Const.Amend. 14; V.T.C.A., Fraud Civil Practice & Remedies Code § 17.042.
Corporate agent can be held individually liable for fraudulent statements or knowing 1 Cases that cite this headnote misrepresentations even when they are made in the capacity of a corporate representative. [39] Constitutional Law Non-residents in general 3 Cases that cite this headnote When nonresident defendant is resident of another nation, trial court, when determining [37] Constitutional Law whether exercise of personal jurisdiction over Manufacture, distribution, and sale nonresident defendant would comport with due Courts process, must consider unique burdens placed Tortious or intentional conduct; fraud and upon defendant who must defend itself in foreign breach of fiduciary duties legal system, and procedural and substantive Nonresident director of corporation holding policies of other nations whose interests are shares in local manufacturer had sufficient affected as well as the federal government's minimum contacts with state to satisfy due interest in its foreign relations policies. U.S.C.A. process requirements for state court to exercise Const.Amend. 14; V.T.C.A., Civil Practice & personal jurisdiction in manufacturer's suit Remedies Code § 17.042. alleging director misappropriated its trade 5 Cases that cite this headnote secrets and confidential information; director allegedly made intentional misrepresentations to other shareholders in state by telephone and e- [40] Courts mail that induced them to contribute trade secrets Presumptions and Burden of Proof as to and confidential information to manufacturer, Jurisdiction by which he availed himself of benefits of Where nonresident defendant has purposefully state, and it was foreseeable to director that established minimum contacts with forum he might be haled into state court as result of state, burden is on defendant to present a misrepresentations. U.S.C.A. Const.Amend. 14; “compelling” case that presence of some V.T.C.A., Civil Practice & Remedies Code § other considerations would render jurisdiction 17.042. unreasonable. U.S.C.A. Const.Amend. 14;
V.T.C.A., Civil Practice & Remedies Code § Cases that cite this headnote 17.042.
[38] Constitutional Law Cases that cite this headnote Non-residents in general Factors considered in assessing whether exercise [41] Constitutional Law of personal jurisdiction over nonresident Manufacture, distribution, and sale defendant offends traditional notions of fair Courts play and substantial justice required by Tortious or intentional conduct; fraud and due process are: (1) burden on defendant, breach of fiduciary duties (2) interests of forum state in adjudicating Texas had strong interest in adjudicating dispute, (3) plaintiff's interest in obtaining alleged misappropriation of trade secrets and convenient and effective relief, (4) interstate confidential information held by resident judicial system's interest in obtaining most manufacturing corporation by which exercise of efficient resolution of controversies, and specific personal jurisdiction over nonresident (5) shared interest of the several states director of Swiss corporation holding shares
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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)
in manufacturer did not offend traditional in 1995 with its principal place of business in Houston. notions of fair play and substantial justice, even SEI designs, manufactures, and sells miniature penetrometer though defendant had considerable burden in testing equipment used in offshore oilfield production. The defending suit in Texas, given that defendant founding shareholders of SEI were John S. Templeton, III, allegedly committed tortious act directed at state (“Templeton”), Ronald L. Boggess (“Boggess”), and Sage residents that caused injury in state. U.S.C.A. Holding AG (“Sage Holding”). Const.Amend. 14; V.T.C.A., Civil Practice & Remedies Code § 17.042. Wright is the sole director of Sage Holding. In November 2000, Wright signed an agreement for the sale of Sage 8 Cases that cite this headnote Holding to Thales, Inc. Thales eventually merged Sage Holding into Thales Geosolutions, Inc. SEI, Templeton, and Boggess (collectively referred to as “appellees”) sued Wright, Sage Holding, and several Thales entities. 2 Appellees allege Attorneys and Law Firms that the defendants stole their design technology related to the miniature penetrometer testing equipment. The claims *243 Mario Alejandro Martinez, David L. Countiss, Fred asserted by appellees included misappropriation of trade Lee Butler, Adams And Reese, LLP, Houston, TX, for secrets, breach of fiduciary duty, unjust enrichment, breach Appellant.
of contract, conversion, conspiracy, fraud, and fraudulent Melanie Goins Cowart, Akin, Gump, Strauss, Hauer & Feld, inducement. LLP, San Antonio, TX, David E. Warden, Eric P. Chenoweth, Yetter & Warden, L.L.P, Houston, TX, for Appellees. In their original petition, appellees made the following factual allegations:
Panel consists of Justices TAFT, HANKS, and HIGLEY.
· Boggess and Templeton provided SEI with their design technology for miniature penetrometer testing OPINION equipment.
LAURA CARTER HIGLEY, Justice. · The design technology is the trade secrets and confidential information of the appellees.
A.C.S. Wright (“Wright”) appeals the denial of his special · SEI was “the exclusive provider of the miniature appearance 1 in a suit brought against him by appellees Sage penetrometer testing equipment to Sage Holding” and Engineering, Inc., John S. Templeton, III, and Ronald L.
Sage Holding's corporate affiliates.
Boggess. In addressing Wright's three issues raised on appeal, we *244 determine (1) whether Wright properly asserted · Sage Geodia, a corporate affiliate of Sage Holding, in the trial court his complaint that appellees failed to serve purchased equipment and parts from SEI. Rather, than him in accordance with the Hague Convention, (2) whether using this equipment to service their clients, Sage Wright had the requisite minimum contacts with Texas for Geodia and “other affiliates” “reverse engineered” and the trial court to exercise personal jurisdiction over him, and duplicated the equipment and technology. (3) whether the exercise of personal jurisdiction over Wright comports with traditional notions of fair play and substantial · Wright negotiated the purchase of Sage Holding by justice. Thales. Under the terms of this agreement, Sage Holding agreed to provide Thales with “the technology, trade We affirm. secrets, confidential information and other property and rights” of appellees.
· The Sage parties and Thales agreed to keep the Factual and Procedural Background negotiations secret from SEI and to exclude SEI from the corporate acquisition.
Wright is a citizen and resident of Switzerland. Sage Engineering, Inc. (“SEI”) is a Texas corporation formed
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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)
obtain jurisdiction over the person or the property of the · Thales purchased Sage Holding in November 2000. defendant. Kawasaki, 699 S.W.2d at 202.
At that time, Thales “folded” Sage Holding and SEI's misappropriated technology into Thales Geosolutions, [3] Our supreme court held in Kawasaki that defective which then used SEI's technology, i.e., trade secrets, service of process must be challenged by a motion to quash to market and sell miniature penetrometer testing rather than by a special appearance. Id. This is because equipment. a curable defect in service of process does not defeat a nonresident's amenability to the court's process and serves Wright filed a special appearance asserting that he was only to provide the non-resident defendant with more time to not amenable to process issued by a Texas court. Wright answer. See id. at 202; see also TEX.R. CIV. P. 122. argued that the trial court lacked personal jurisdiction *245 over him because (1) appellees' failed to serve him through Wright acknowledges the holding in Kawasaki but argues the Hague Convention; (2) Wright lacked the requisite that it has been called into question by the Unites States minimum contacts with Texas to satisfy the requirements of Supreme Court's decision in Murphy Bros. v. Michetti Pipe due process; and (3) the trial court's exercise of personal Stringing, 526 U.S. 344, 346, 119 S.Ct. 1322, 1325, 143 jurisdiction over him does not comport with traditional L.Ed.2d 448 (1999). In Murphy Bros., the court held that notions of fair play and substantial justice. The trial court mere receipt of a complaint unattended by any formal service denied Wright's special appearance. This interlocutory appeal did not trigger a defendant's time to remove a case from followed. state court. Murphy Bros., 526 U.S. at 347–48, 119 S.Ct. at 1325. Wright cites Murphy Bros. for the proposition that “[a]n individual or entity named as a defendant is not obliged to Defective Service of Process engage in litigation unless notified of the action, and brought under a court's authority by formal process.” Murphy Bros., In his first issue, Wright contends that the trial court should 526 U.S. at 347–48, 119 S.Ct. at 1325. Wright contends have granted his special appearance on the basis that appellees *246 that requiring him to raise his complaint regarding failed to serve him with process in compliance with the defective service in a motion to quash, rather than in a special Hague Convention. Appellees counter that Wright's special appearance, violates this principle because it requires him appearance was properly denied on this basis because, if to make an appearance in a suit for which he has not been he thought that service was defective, Wright should have properly served and forces him to waive his complaint that he raised that complaint in a motion to quash, not in a special is not amenable to process issued by a Texas court. appearance. 3 [4] As an intermediate court of appeals, we must follow our [1] [2] A special appearance is a specific procedural state supreme court's expressions of the law and leave changes mechanism to litigate one issue: that is, a special appearance in the law to that court. See Lubbock County v. Trammel's is “for the purpose of objecting to the jurisdiction of the court Lubbock Bail Bonds, 80 S.W.3d 580, 585 (Tex.2002) (“It over the person or property of the defendant on the ground is not the function of a court of appeals to abrogate or that such party or property is not amenable to process issued modify established precedent. That function lies solely with by the courts of this State.” TEX.R. CIV. P. 120a; see also [the Supreme] Court.”); Lofton v. Texas Brine Corp., 777 Tex. Commerce Bank N.A. v. Interpol 1980 Ltd. P'ship, 703 S.W.2d 384, 386 (Tex.1989) ( “This court need not defend S.W.2d 765, 775 (Tex.App.-Corpus Christi 1985, no writ). its opinions from criticism from courts of appeals; rather The rule applies only when a defendant contends he is not they must follow this court's pronouncements.”). Absent a amenable to process. See Kawasaki Steel Corp. v. Middleton, clear expression that a decision of our supreme court has 699 S.W.2d 199, 201–02 (Tex.1985); Oliver v. Boutwell, 601 been overruled, we are bound by its decisions. See Trammel's S.W.2d 393, 395 (Tex.Civ.App.-Dallas 1980, no writ). The Lubbock Bail Bonds, 80 S.W.3d at 585; Lofton, 777 S.W.2d words “not amenable to process issued by the courts of this at 386. Murphy Bros. does not contain such a clear expression state” mean that the special appearance is available solely to with regard to our supreme court's decision in Kawasaki. We establish that the Texas court cannot, under the federal and also note that, since the issuance of the decision in Murphy state constitutions and the appropriate state statutes, validly Bros., the Texas Supreme Court has cited Kawasaki for the proposition that a motion to quash is the appropriate device to
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object to procedural error in service. See Baker v. Monsanto, Schlobohm v. Schapiro, 784 S.W.2d 355, 356 (Tex.1990). 111 S.W.3d 158, 161 (Tex.2003). Thus, we leave to our The long-arm statute provides for the assertion of jurisdiction state supreme court—or the United States Supreme Court— over any nonresident “doing business” in Texas, which by the determination of whether the decision in Kawasaki is in statutory definition includes those defendants who commit conflict with the decision in Murphy Bros. Until that time, we torts in whole or in part in this state. TEX. CIV. PRAC. & are bound by Kawasaki. REM.CODE ANN. § 17.042(2) (Vernon 1997). Because the language of the long-arm statute is broad, its requirements [5] [6] [7] Applying the principles enunciated in are considered satisfied if the exercise of personal jurisdiction Kawasaki to the present case, we conclude that it was not comports with federal due process limitations. CSR Ltd. v. appropriate for Wright to assert his complaint regarding Link, 925 S.W.2d 591, 594 (Tex.1996). Thus, in practice, defective service of process in his special appearance. A the two conditions are conflated into one requirement of due complaint regarding a curable defect in service of process, process. City of Riverview, Michigan v. Am. Factors, Inc., 77 such as the one raised by Wright, does not defeat a S.W.3d 855, 857 (Tex.App.-Dallas 2002, no pet.). nonresident's amenability to the court's process; thus, it should not be brought via a special appearance. 4 See [10] [11] [12] The cornerstone of due process in the Kawasaki, 699 S.W.2d at 202; see also TEX.R. CIV. P. 120a. context of jurisdiction is the minimum contacts analysis. Id. Rather, a motion to quash is the appropriate procedural device The goal of this analysis is to protect a defendant from being to raise such objection. See Wheat v. Toone, 700 S.W.2d unjustifiably called before the courts of a foreign state. Id. To 915, 915 (Tex.1985); Tex. Dept. of Pub. Safety v. Kreipe, establish minimum contacts with a state, the defendant “must 29 S.W.3d 334, 336 (Tex.App.-Houston [14th Dist.] 2000, do something purposeful to avail himself of the privilege of pet. denied). The remedy for defective service in Texas state conducting activities in the forum, thus invoking the benefit and protection of its laws.” Schlobohm, 784 S.W.2d at 357;
court is additional time to answer the suit, not dismissal. 5 see also Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474– See Kawasaki, 699 S.W.2d at 202–03; Alcala v. Williams, 908 76, 105 S.Ct. 2174, 2183–84, 85 L.Ed.2d 528 (1985).
S.W.2d 54, 56 (Tex.App.-San Antonio 1995, no writ); see also TEX.R. CIV. P. 122. Accordingly, we hold that the trial [13] [14] [15] [16] A defendant should not be subject court did not err in failing to grant Wright's special *247 to the jurisdiction of a Texas court based upon random, appearance on the basis that appellees did not serve him with fortuitous, or attenuated contacts. CSR, 925 S.W.2d at process in accordance with the Hague Convention.
595. The purposeful availment requirement ensures that the nonresident defendant's contact must result from its We overrule Wright's first issue.
purposeful contact, not the unilateral activity of the plaintiff or a third party. See Guardian Royal, 815 S.W.2d at 227. It is the quality and nature of the contacts, rather than their Amenability to Service of Process number, that is important. Id. at 230, n. 11. The exercise of personal jurisdiction is proper when the contacts proximately In his second issue, Wright contends that the trial court erred result from actions of the nonresident defendant that create a in denying his special appearance because he does not have substantial connection with the forum state. Id. at 226. sufficient minimum contacts with this forum for a Texas court to exercise personal jurisdiction over him.
Foreseeability [17] [18] [19] [20] Although not determinative, General Principles of Personal Jurisdiction foreseeability is an important consideration in deciding whether the nonresident defendant has purposefully Due process considerations established minimum contacts with the forum state. Id.
[8] [9] Two conditions must be met for a Texas court to at 227. Foreseeability is not an independent component exercise personal jurisdiction over a nonresident defendant of the minimum contacts analysis but is implicit in the such as Wright: the Texas long-arm statute must authorize the requirement that there be a “substantial connection” between exercise of jurisdiction, and the exercise of jurisdiction must the nonresident defendant and Texas arising from the action be consistent with the guarantees of due process. Software or conduct of the nonresident defendant purposefully directed Belgium, N.V. v. Marchand, 83 S.W.3d 789, 795 (Tex.2002);
toward Texas. Id. Individuals must have fair warning that a
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*248 particular activity may subject them to the jurisdiction implied findings are not conclusive and may be challenged of a foreign sovereign. Burger King, 471 U.S. at 472, 105 for legal and factual sufficiency. Id. In contrast, we review the S.Ct. at 2182; Guardian Royal, 815 S.W.2d at 226. In other trial court's decision de novo when the underlying facts are words, an important inquiry in the jurisdictional analysis is undisputed or otherwise established. AmQuip Corp. v. Cloud, whether “the defendant's conduct and connection with the 73 S.W.3d 380, 384 (Tex.App.-Houston [1st Dist.] 2002, no forum State [is] such that he should reasonably anticipate pet.); Experimental Aircraft Ass'n v. Doctor, 76 S.W.3d 496, being haled into court there.” World–Wide Volkswagen Corp. 502–03 (Tex.App.-Houston [14th Dist.] 2002, no pet.). v. Woodson, 444 U.S. 286, 297, 100 S.Ct. 559, 567, 62 L.Ed.2d 490 (1980).
Specific Jurisdiction Based on Torts “Committed in Whole or in Part in Texas”
Specific Jurisdiction [30] [31] We begin our review of the trial court's denial of [21] [22] Personal jurisdiction exists if the nonresident Wright's special appearance by determining whether specific defendant's minimum contacts give rise to either specific jurisdiction exists over Wright. As plaintiffs, appellees bore jurisdiction or general jurisdiction. Helicopteros Nacionales the initial burden to make sufficient allegations to bring de Colombia, S.A. v. Hall, 466 U.S. 408, 413–14 & nn. 8– Wright within the personal jurisdiction of the trial court. 9, 104 S.Ct. 1868, 1872 & nn. 8–9, 80 L.Ed.2d 404 (1984); Marchand, 83 S.W.3d at 793; McKanna v. Edgar, 388 Guardian Royal, 815 S.W.2d at 227. Specific jurisdiction S.W.2d 927, 930 (Tex.1965). Once appellees met this burden, is established if the nonresident defendant's alleged liability then Wright was required to negate *249 all possible arises from or is related to the defendant's purposeful contact grounds for personal jurisdiction. Marchand, 83 S.W.3d at with the forum. Helicopteros, 466 U.S. 414 & n. 8, 104 S.Ct. 793. at 1872 & n. 8; Guardian Royal, 815 S.W.2d at 228.
[32] Appellees alleged in their original petition—the live [23] [24] [25] When specific jurisdiction is asserted, pleading at the time the trial court decided the special the minimum contacts analysis focuses on the relationship appearance—that Wright committed tortious acts in Texas. among the defendant, the forum, and the litigation. Guardian Appellees correctly assert that our long-arm statute allows Royal, 815 S.W.2d at 227–28. It is not necessary that a personal jurisdiction for any tort “committed in whole or in nonresident defendant's conduct actually occur in Texas, as part in Texas.” TEX. CIV. PRAC. & REM.CODE ANN. § long as the defendant's acts were purposefully directed toward 17.042(2). Due process considerations are also satisfied if a the state. Calder v. Jones, 465 U.S. 783, 789–90, 104 S.Ct. defendant directs his tortious conduct toward the forum state 1482, 1487, 79 L.Ed.2d 804 (1984); CSR, 925 S.W.2d at 595. with the foreseeable knowledge that his actions will cause “[A] defendant should reasonably anticipate being haled into harm to a resident of the forum and the defendant purposefully court where the effects of its conduct have been intentionally avails himself of the privilege of conducting activities within caused through the purposeful direction of activity toward the forum state. See Burger King, 471 U.S. at 474–76, 105 the forum state, even if the defendant never physically enters S.Ct. at 2182–84; Calder, 465 U.S. at 789–90, 104 S.Ct. at the state.” Cole v. Tobacco Inst., 47 F.Supp.2d 812, 815 1487. (E.D.Tex.1999).
Appellees also alleged in their original petition that Wright induced Templeton and Boggess to contribute their trade Standard and Scope of Review secrets and “confidential information” to SEI. Appellees [26] [27] [28] [29] Whether a court has personalasserted, “Wright misrepresented the terms upon which these jurisdiction over a defendant is a question of law, which we assets of Plaintiffs were contributed to SEI, as evidenced by ... review de novo. Marchand, 83 S.W.3d at 794. However, the misappropriating the trade secrets, confidential information, trial court frequently must resolve questions of fact before corporate assets and corporate opportunities of Plaintiffs deciding the jurisdiction question. Id. When, as here, the Templeton and Boggess.” trial court does not issue findings of fact and conclusions of law with its special-appearance ruling, all facts necessary Appellees expounded on these allegations in their response to support the judgment and supported by the evidence to Wright's special appearance. In support of their response, are implied. Id. at 795. In cases in which the appellate appellees submitted the affidavit testimony of Templeton. record includes both the reporter's and clerk's records, these
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Regarding misrepresentations made by Wright in Texas, pet. filed); Brown v. Gen. Brick Sales Co., 39 S.W.3d 291, Templeton's affidavit provided as follows: 297–98 (Tex.App.-Fort Worth 2001, no pet.). Texas courts applying the fiduciary shield doctrine have expressly limited At the time of the formation of its application to attempts to exercise general jurisdiction SEI, numerous representations were over a nonresident defendant. Stern v. KEI Consultants, Ltd., made by Wright and Sage Holding 123 S.W.3d 482, 488 (Tex.App.-San Antonio 2003, no pet. that equipment design technology, h.); SITQ, 111 S.W.3d at 651; Brown, 39 S.W.3d at 300; that I, along with Ronald Boggess, cf. Garner v. Furmanite Australia Pty., Ltd., 966 S.W.2d held at that time would remain 798, 803 (Tex.App.-Houston [1st Dist.] 1998, pet. denied) the property of SEI, as would (holding that fiduciary shield doctrine protected Australian all corporate opportunities arising resident from trial court's exercise of general jurisdiction from the production and sale of because his only contacts with Texas were on his employer's that equipment. Those representations business) (emphasis added). were made to me and Boggess and supported repeatedly by Wright in a [34] [35] [36] The fiduciary shield doctrine does not series of telephone calls to me and SEI protect a corporate officer from specific personal jurisdiction in Texas and e-mail correspondence as to intentional torts or fraudulent acts for which he sent to Texas, all of which occurred at may be held individually liable. Jackson v. Kincaid, 122 the time of the formation of SEI in and S.W.3d 440, 448 (Tex.App.-Corpus Christi 2003, no pet. around December 1995. 6 h.); SITQ, 111 S.W.3d at 651; see also Gen. Elec. v.
Brown & Ross Int'l Distribs., Inc., 804 S.W.2d 527, 532– We conclude that appellees met their burden of pleading 33 (Tex.App.-Houston [1st Dist.] 1990, writ denied) (holding sufficient jurisdictional allegations to bring Wright within the that corporate officers, who had personally arranged theft of design plans, ordered counterfeit and mislabeled parts, specific personal jurisdiction of the trial court. 7 and made misrepresentations to customers were subject to personal jurisdiction in Texas). It is well-settled that a Fiduciary Shield Doctrine corporate agent can be held individually liable for fraudulent Because appellees met their initial burden, Wright was statements or knowing misrepresentations even when they are required to negate all possible grounds for personal made in the capacity of a corporate representative. Shapolsky jurisdiction. Within the context of the special appearance v. Brewton, 56 S.W.3d 120, 133 (Tex.App.-Houston [14th proceeding, Wright offered no evidence refuting appellees' Dist.] 2001, pet. denied); *251 see also Miller v. Keyser, 90 claim that he *250 made the “numerous representations” S.W.3d 712, 714–18 (Tex.2002) (holding sales agent may be held individually liable under DTPA for misrepresentations);
referenced in Templeton's affidavit. 8 Wright neither disputes Barclay v. Johnson, 686 S.W.2d 334, 336–37 (Tex.App.-
that the alleged representations were directed toward Texas Houston [1st Dist.] 1985, no writ) (holding corporate agent nor denies that appellees' tort claims arise out of or relate personally liable for false representations). The causes of to the representations. Wright also does not contend that action asserted by appellees against Wright individually, he could not have reasonably foreseen being subject to which are based on Wright's alleged misrepresentations, are jurisdiction in Texas because of such representations. Rather, claims for which Wright could be held individually liable.
Wright contends that he lacks the requisite minimum contacts Therefore, the fiduciary shield doctrine is not available to with Texas because he performed the alleged tortious acts as Wright as a defense to the trial court's exercise of specific a corporate representative of Sage AG, not in his individual personal jurisdiction based on his alleged misrepresentations.
capacity.
See D.H. Blair Investment Banking Corp. v. Reardon, 97 S.W.3d 269, 278 (Tex.App.-Houston [14th Dist.] 2002, pet.
[33] In this respect, Wright invokes the fiduciary shield dism'd w.o.j.) (refusing to apply fiduciary shield doctrine doctrine, which protects a corporate officer or employee to protect defendant from personal jurisdiction based on from the trial court's exercise of general personal jurisdiction alleged misrepresentations that were directed into Texas and when all of the individual's contacts with Texas were on foreseeably relied on in Texas, despite defendant's claim behalf of his employer. 9 SITQ E.U., Inc. v. Reata Rests., that he acted only in corporate capacity); Shapolsky, 56 Inc., 111 S.W.3d 638, 650–51 (Tex.App.-Fort Worth 2003,
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S.W.3d at 133–34 (same). We conclude that, by invoking the Wright's misrepresentations induced Templeton and Boggess fiduciary shield doctrine, Wright has not satisfied his burden to transfer their proprietary information to SEI, a corporation of negating the assertion of personal jurisdiction based on formed under the laws of Texas, with its principal place specific jurisdiction. of business in Houston. By making misrepresentations in Texas with the ultimate goal of obtaining the trade secrets of Texas residents, Wright purposefully availed himself of Minimum Contacts Analysis the benefits and protections of Texas law. See Shapolsky, That Wright is alleged to have committed a tort in Texas is 56 S.W.3d at 134. When, as here, a defendant intentionally not dispositive of the jurisdictional issue presented here; such sends false information into a state, knowing it will be relied allegations alone do not give Texas courts jurisdiction over a on by a resident of the forum state, there is a foreseeable nonresident. Shapolsky, 56 S.W.3d at 133. Rather, there must consequence of direct economic injury to the resident at be a substantial connection between the contact and the cause its domicile. Id. Thus, it should have been foreseeable of action in the forum state. 10 See id. to Wright that he might be haled into a Texas court to defend a lawsuit arising out of the alleged misrepresentations.
[37] Comporting with well-settled law, this and other See id. Relatedly, a nexus exists between the torts that appellate courts have held that a misrepresentation made by appellees claim against Wright and the alleged contacts with a nonresident defendant directed toward Texas is sufficient Texas; that is, Wright's alleged misrepresentations give rise to assert specific jurisdiction. Michiana Easy Livin' Country, to some of the causes of action appellees assert against Inc. v. Holten, 127 S.W.3d 89, 98–99 (Tex.App.-Houston him, particularly appellees' claims for fraud and fraudulent [1st Dist.] 2003, pet. filed) (holding that nonresident inducement. See id. (finding nexus between contacts and defendant had sufficient minimum contacts to subject it allegations that misrepresentations induced plaintiff to enter to specific personal jurisdiction in Texas in case in which into contract with nonresident defendant). Thus, we conclude plaintiff alleged that, during negotiations conducted by that Wright's alleged misrepresentations constitute sufficient telephone, nonresident defendant made misrepresentations purposeful minimum contacts with Texas to satisfy due regarding product defendant sold to plaintiff and that these process considerations. 11 misrepresentations constituted violations of the DTPA, fraud, breach of warranty, and breach of contract); Boissiere v. We overrule Wright's second issue. Nova Capital, 106 S.W.3d 897, 904–06 (Tex.App.-Dallas 2003, no pet.) (concluding that allegations asserted in fraud and negligent misrepresentation case that nonresident Fair Play and Substantial Justice defendants made misrepresentations in telephone calls to [38] [39] [40] Having concluded that Wright had Texas resident, who relied on representations in Texas and sufficient contacts with Texas, we next consider Wright's was induced to provide defendants with plaintiff's trade third issue in which he contends that the exercise of secret information, were sufficient to support *252 specific jurisdiction over him offends traditional notions of fair play jurisdiction in Texas); Shapolsky, 56 S.W.3d at 135 (holding and substantial justice. See Guardian Royal, 815 S.W.2d that plaintiff's allegations that nonresident defendant made at 231. The following factors, when appropriate, should intentional misrepresentations to plaintiff in Texas by phone, be considered in making this assessment: (1) the burden fax, and mail to induce plaintiff to contract with defendant on the defendant, (2) the interests of the forum state were sufficient to support specific jurisdiction). in adjudicating the dispute, (3) the plaintiff's interest in obtaining convenient and effective relief, (4) the interstate Regardless of what the evidence may ultimately show judicial system's interest in obtaining the most efficient on full trial of this matter, the uncontroverted allegations resolution of controversies, and (5) the shared interest of the and evidence presented within the context of the special several states in furthering fundamental substantive social appearance proceeding show the following: (1) Wright policies. Id. When an international dispute is involved, made numerous representations, oral and written, on the following factors, when appropriate, should also be which Templeton and Boggess relied, ultimately to their considered: (1) the unique burdens placed upon the defendant economic detriment; (2) Wright directed the alleged who must defend itself in a foreign legal system; *253 misrepresentations toward Texas residents who received and (2) the procedural and substantive policies of other and relied on the misrepresentations in Texas; and (3) nations whose interests are affected as well as the federal
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government's interest in its foreign relations policies. Id at expense to have to travel to Texas to litigate this dispute 229. But only in rare cases will the exercise of jurisdiction while leaving my children behind in Switzerland. The not comport with fair play and substantial justice when, as financial expense of traveling to Texas while leaving my here, the nonresident defendant has purposefully established children behind in Switzerland, would place great strain on minimum contacts with the forum. Id. at 231. Thus, the myself, and my family. burden is on the defendant to “ ‘present a compelling case that the presence of some other considerations would render On July 1, 2003, Thales Overseas Holdings Limited jurisdiction unreasonable.’ ” Id. (quoting Burger King, 471 (“Thales Overseas”) lodged a Request for Arbitration U.S. at 477, 105 S.Ct. at 2185) (emphasis added). against me in accordance with Article 4 of the 1998 Rules of Arbitration of the International Chamber of [41] Wright first asserts that his status as an international Commerce. Thales Overseas request for Arbitration defendant is a determinative factor in the fairness analysis. seeks monetary damages from me personally. The In support of this contention, Wright relies on our holding laws of Switzerland exclusively govern the Request for in Minucci v. Sogevalor, S.A., 14 S.W.3d 790 (Tex.App.- Arbitration. Thales Overseas acknowledges Switzerland's Houston [1st Dist.] 2000, no pet.). In Minucci, we held that exclusive jurisdiction in its request. The arbitration is to subjecting an Italian citizen to jurisdiction in Texas did not take place in Zurich, Switzerland. comport with traditional notions of fair play and substantial ... [H]aving to litigate one dispute in Texas and one dispute justice. Id. at 799. In reaching this decision, we reasoned as in Switzlerland over substantially the same issues would be follows:
a great hardship on me, and my children.
Texas has no interest in adjudicating this dispute. The cause of action did Undoubtedly, litigation away from home creates hardship for not occur in Texas; neither party is a defendant; however, there is no legal requirement that this a resident of this state; Swiss law hardship must be borne instead by the plaintiff whenever the governs the dispute, none of the defendant is not *254 found in the state of the plaintiff's investors were Texas citizens, and residence. See Brown & Ross Int'l Distribs., 804 S.W.2d the contract was written in Italian. at 531–32 (rejecting nonresident defendant's argument that Thus, Texas would not be protecting defending suit in Texas was financially burdensome because its citizens from the potential future it would be equally burdensome for plaintiff to litigate in actions of Minucci. nonresident defendant's forum). While the burden on the nonresident defendant is a consideration in our due process Id. at 798. In this case, the opposite can be said. Here, Texas analysis, it is not determinative. See Guardian Royal, 815 has a strong interest in adjudicating this dispute. As discussed S.W.2d at 231 (stating that nonresident defendant must in the minimum contacts analysis, Wright is alleged to have present compelling case of presence of other considerations, committed tortious acts in Texas against Texas residents. The outside inconvenience, and distance to render jurisdiction State of Texas has an obvious interest in providing a forum unreasonable). This is particularly true when, as in this case, for resolving disputes involving its citizens, particularly those Texas has a strong interest both in providing a forum for its disputes in which the defendant allegedly committed a tort in residents and in holding parties who committed tortious acts whole or in part in Texas. Shapolsky, 56 S.W.3d at 135. against its residents accountable. See id. at 232 (recognizing that interests of forum state and plaintiff will frequently In support of his contention that defending this case in Texas justify severe burden placed on nonresident defendant) (citing would subject him to extreme financial and personal burdens, Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 114, Wright testified as follows in his affidavit offered in support 107 S.Ct. 1026, 1033, 94 L.Ed.2d 92 (1987)). We conclude of his special appearance: that the exercise of personal jurisdiction over Wright in this case comports with traditional notions of fair play and At the present time, I am the sole custodian for my substantial justice. three children who live with me in Switzerland. If I were compelled to appear in Texas to defend this lawsuit[,] it We overrule Wright's third issue. would be an extreme burden upon my children, and myself, to be away from them. It would also be a tremendous
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and substantial justice. We affirm the order of the trial court Conclusion denying Wright's special appearance.
We hold that the trial court properly denied Wright's special appearance. Wright did not successfully negate specific jurisdiction and failed to show that the exercise of personal All Citations jurisdiction over him offends traditional notions of fair play 137 S.W.3d 238
Footnotes 1 See TEX. CIV. PRAC. & REM.CODE ANN. § 51.014(a)(7) (Vernon Supp.2004) (providing parties may challenge by interlocutory appeal trial courts' orders regarding special appearances).
2 Other defendants in the underlying suit include Thales Geosolutions, Inc., Thales S.A., Thales Geosolutions Group Ltd., and Sage Holding AG. These defendants are not parties to this interlocutory appeal.
3 Appellees also contend that this issue is moot because they have served Wright in accordance with the Hague Convention since the trial court denied Wright's special appearance. In the appendix to their brief, appellees have attached documents purportedly showing service in compliance with the treaty; however, because these documents are not part of the appellate record in this case, we may not consider them. See Carlton v. Trinity Univ. Ins. Co., 32 S.W.3d 454, 457–58 (Tex.App.-Houston [14th Dist.] 2000, pet. denied).
4 Irrespective of the supreme court's opinion in Kawasaki, we also disagree with Wright's contention that requiring him to raise his complaint regarding defective service in a motion to quash rather than in a special appearance forces him to waive his complaint that he is not amenable to process issued by a Texas court. As noted by the intermediate appellate court in Kawasaki, such complaint is without merit because a complaining defendant can limit his rule 120a special appearance arguments to the lack of minimum contacts issue, and then, if that fails, he can immediately file a motion to quash. Middleton v. Kawasaki Steel Corp., 687 S.W.2d 42, 47(Tex.App.-Houston [14th Dist.] 1985), writ ref'd n.r.e. per curiam, 699 S.W.2d 199 (Tex.1985).
5 Although Federal Rules of Civil Procedure 12(b)(4) and 12(b)(5) provide for dismissal of a suit for failure to serve process or for insufficient service of process, the Texas Rules of Civil Procedure do not contain analogous provisions. See FED.R.CIV.P. 12(b)(4), 12(b)(5).
6 Wright objects to Templeton's affidavit on numerous grounds; however, none of these objections are specifically directed at Templeton's testimony regarding Wright's “numerous representations.” For this reason, we do not address Wright's complaints regarding Templeton's affidavit.
7 We need not separately evaluate whether the trial court had jurisdiction over Wright based solely on the allegations in appellees' original petition. For purposes of this opinion, we assume, without deciding, that the allegations in appellees' original petition that Wright committed torts in Texas, either alone or coupled with appellees' later assertions, offered in support of their response to Wright's special appearance, meet appellees' initial burden to plead sufficient jurisdictional facts. See El Puerto de Liverpool, S.A. de C.V. v. Servi Mundo Llantero, S.A. de C.V., 82 S.W.3d 622, 629 (Tex.App.- Corpus Christi 2002, pet. dism'd w.o.j.) (concluding that plaintiff who pled that nonresident defendant was “doing business in the State of Texas” and had “committed torts in Texas” had pled sufficiently clear jurisdictional facts).
8 In an affidavit offered in support of his special appearance, Wright testified that he had committed no torts in Texas. Rule 120a provides affidavits shall “set forth specific facts as would be admissible in evidence....” TEX.R. CIV. P. 120a(3). Further, the affidavit must be direct, unmistakable, and unequivocal as to the facts sworn to, allowing perjury to be assigned on it. See Burke v. Satterfield, 525 S.W.2d 950, 955 (Tex.1975); Int'l Turbine Service, Inc. v. Lovitt, 881 S.W.2d 805, 808 (Tex.App.-Fort Worth 1994, writ denied). We agree with appellees that Wright's testimony that he committed no torts in Texas is a legal conclusion without any probative force. See Tex.R. Civ. P. 120a(3); Brownlee v. Brownlee, 665 S.W.2d 111, 112 (Tex.1984) (holding that affidavit must set forth facts, not mere legal conclusions). Thus, we do not consider Wright's statement in evaluating the propriety of the trial court's ruling on Wright's special appearance.
9 The fiduciary shield doctrine has not been expressly adopted by the Texas Supreme Court. The doctrine's application by Texas intermediate appellate courts was discussed in depth by the Fort Worth Court of Appeals in Brown v. General Brick Sales Co., 39 S.W.3d 291, 297–99 (Tex.App.-Fort Worth 2001, no pet.).
10 In reaching a decision to exercise or decline jurisdiction based on the defendant's alleged commission of a tort, the trial court should rely only on the necessary jurisdictional facts and should not reach the merits of the case. Ring Power Sys. v. Int'l de Comercio Y Consultoria, 39 S.W.3d 350, 353 (Tex.App.-Houston [14th Dist.] 2001, no pet.); Arterbury v. Am.
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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)
Bank & Trust Co., 553 S.W.2d 943, 949 (Tex.Civ.App.-Texarkana 1977, no writ). In other words, ultimate liability in tort is not a jurisdictional fact, and the merits of the cause are not at issue. Ring Power Sys., 39 S.W.3d at 353. Rather, the purpose of a special appearance is to determine whether the actions alleged by a plaintiff suggest that a defendant should expect to be subject to jurisdiction in Texas. Michiana Easy Livin' Country, Inc. v. Holten, 127 S.W.3d 89, 97 (Tex.App.-Houston [1st Dist.] 2003, pet. filed). Accordingly, if the plaintiff alleges an action in tort that arose out of an act committed in Texas, the necessary proof is only that the purposeful act was committed in this State. Ring Power Sys., 39 S.W.3d at 353; Arterbury, 553 S.W.2d at 947.
11 Because a nonresident defendant must successfully negate all bases of personal jurisdiction to prevail in a special appearance, we need not address appellees' other jurisdictional allegations advancing additional bases to support both general and specific jurisdiction over Wright. See Boissiere v. Nova Capital, 106 S.W.3d 897, 906 (Tex.App.-Dallas 2003, no pet.); D.H. Blair Investing Banking Corp. v. Reardon, 97 S.W.3d 269, 278 (Tex.App.-Houston [14th Dist.] 2002, pet. dism'd w.o.j.).
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Art. 581-4. Definitions, TX CIV ST Art. 581-4
Vernon's Texas Statutes and Codes Annotated Civil Statutes (Refs & Annos)
Title 19. Blue Sky Law--Securities (Refs & Annos)
Vernon's Ann.Texas Civ.St. Art. 581-4
Art. 581-4. Definitions
Effective: September 1, 2003 Currentness
The following terms shall, unless the context otherwise indicates, have the following respective meanings:
A. The term “security” or “securities” shall include any limited partner interest in a limited partnership, share, stock, treasury stock, stock certificate under a voting trust agreement, collateral trust certificate, equipment trust certificate, preorganization certificate or receipt, subscription or reorganization certificate, note, bond, debenture, mortgage certificate or other evidence of indebtedness, any form of commercial paper, certificate in or under a profit sharing or participation agreement, certificate or any instrument representing any interest in or under an oil, gas or mining lease, fee or title, or any certificate or instrument representing or secured by an interest in any or all of the capital, property, assets, profits or earnings of any company, investment contract, or any other instrument commonly known as a security, whether similar to those herein referred to or not. The term applies regardless of whether the “security” or “securities” are evidenced by a written instrument. Provided, however, that this definition shall not apply to any insurance policy, endowment policy, annuity contract, optional annuity contract, or any contract or agreement in relation to and in consequence of any such policy or contract, issued by an insurance company subject to the supervision or control of the Texas Department of Insurance when the form of such policy or contract has been duly filed with the Department as now or hereafter required by law.
B. The terms “person” and “company” shall include a corporation, person, joint stock company, partnership, limited partnership, association, company, firm, syndicate, trust, incorporated or unincorporated, heretofore or hereafter formed under the laws of this or any other state, country, sovereignty or political subdivision thereof, and shall include a government, or a political subdivision or agency thereof. As used herein, the term “trust” shall be deemed to include a common law trust, but shall not include a trust created or appointed under or by virtue of a last will and testament or by a court of law or equity.
C. The term “dealer” shall include every person or company other than an agent, who engages in this state, either for all or part of his or its time, directly or through an agent, in selling, offering for sale or delivery or soliciting subscriptions to or orders for, or undertaking to dispose of, or to invite offers for any security or securities and every person or company who deals in any other manner in any security or securities within this state. Any issuer other than a registered dealer of a security or securities, who, directly or through any person or company, other than a registered dealer, offers for sale, sells or makes sales of its own security or securities shall be deemed a dealer and shall be required to comply with the provisions hereof; provided, however, this section or provision shall not apply to such issuer when such security or securities are offered for sale or sold either to a registered dealer or only by or through a registered dealer acting as fiscal agent for the issuer; and provided further, this section or provision shall not apply to such issuer if the transaction is within the exemptions contained in the provisions of Section 5 1 of this Act.
D. The term “agent” shall include every person or company employed or appointed or authorized by a dealer to sell, offer for sale or delivery, or solicit subscriptions to or orders for, or deal in any other manner, in securities within this state, whether by direct
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Art. 581-4. Definitions, TX CIV ST Art. 581-4
act or through subagents; provided, that the officers of a corporation or partners of a partnership shall not be deemed agents solely because of their status as officers or partners, where such corporation or partnership is registered as a dealer hereunder.
E. The terms “sale” or “offer for sale” or “sell” shall include every disposition, or attempt to dispose of a security for value. The term “sale” means and includes contracts and agreements whereby securities are sold, traded or exchanged for money, property or other things of value, or any transfer or agreement to transfer, in trust or otherwise. Any security given or delivered with or as a bonus on account of any purchase of securities or other thing of value, shall be conclusively presumed to constitute a part of the subject of such purchase and to have been sold for value. The term “sell” means any act by which a sale is made, and the term “sale” or “offer for sale” shall include a subscription, an option for sale, a solicitation of sale, a solicitation of an offer to buy, an attempt to sell, or an offer to sell, directly or by an agent, by a circular, letter, or advertisement or otherwise, including the deposit in a United States Post Office or mail box or in any manner in the United States mails within this State of a letter, circular or other advertising matter. Nothing herein shall limit or diminish the full meaning of the terms “sale,” “sell” or “offer for sale” as used by or accepted in courts of law or equity. The sale of a security under conditions which entitle the purchaser or subsequent holder to exchange the same for, or to purchase some other security, shall not be deemed a sale or offer for sale of such other security; but no exchange for or sale of such other security shall ever be made unless and until the sale thereof shall have been first authorized in Texas under this Act, if not exempt hereunder, or by other provisions of law.
F. The terms “fraud” or “fraudulent practice” shall include any misrepresentations, in any manner, of a relevant fact; any promise or representation or predication as to the future not made honestly and in good faith, or an intentional failure to disclose a material fact; the gaining, directly or indirectly, through the sale of any security, of an underwriting or promotion fee or profit, selling or managing commission or profit, so gross or exorbitant as to be unconscionable; any scheme, device or other artifice to obtain such profit, fee or commission; provided, that nothing herein shall limit or diminish the full meaning of the terms “fraud,” “fraudulent,” and “fraudulent practice” as applied or accepted in courts of law or equity.
G. “Issuer” shall mean and include every company or person who proposes to issue, has issued, or shall hereafter issue any security.
H. “Broker” shall mean dealer as herein defined.
I. “Mortgage” shall be deemed to include a deed of trust to secure a debt.
J. If the sense requires it, words in the present tense include the future tense, in the masculine gender include the feminine and neuter gender, in the singular number include the plural number, and in the plural number include the singular number; “and” may be read “or” and “or” may be read “and”.
K. “No par value” or “non-par” as applied to shares of stock or other securities shall mean that such shares of stock or other securities are without a given or specified par value. Whenever any classification or computation in this Act mentioned is based upon “par value” as applied to shares of stock or other securities of no par value, the amount for which such securities are sold or offered for sale to the public shall be used as a basis of such classification or computation.
L. The term “include” when used in a definition contained in this Act shall not be deemed to exclude other things or persons otherwise within the meaning of the term defined.
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Art. 581-4. Definitions, TX CIV ST Art. 581-4
M. “Registered dealer” shall mean a dealer as hereinabove defined who has been duly registered by the Commissioner as in Section 15 of this Act provided.
N. “Investment adviser” includes a person who, for compensation, engages in the business of advising another, either directly or through publications or writings, with respect to the value of securities or to the advisability of investing in, purchasing, or selling securities or a person who, for compensation and as part of a regular business, issues or adopts analyses or a report concerning securities, as may be further defined by Board rule. The term does not include:
(1) a bank or a bank holding company, as defined by the Bank Holding Company Act of 1956 (12 U.S.C. Section 1841 et seq.), as amended, that is not an investment company;
(2) a lawyer, accountant, engineer, teacher, or geologist whose performance of the services is solely incidental to the practice of the person's profession;
(3) a dealer or agent who receives no special compensation for those services and whose performance of those services is solely incidental to transacting business as a dealer or agent;
(4) the publisher of a bona fide newspaper, news magazine, or business or financial publication of general and regular circulation; or
(5) a person whose advice, analyses, or report does not concern a security other than a security that is:
(A) a direct obligation of or an obligation the principal or interest of which is guaranteed by the United States government; or
(B) issued or guaranteed by a corporation in which the United States has a direct or indirect interest and designated by the United States Secretary of the Treasury under Section 3(a)(12), Securities Exchange Act of 1934 (15 U.S.C. Section 78c(a) (12)), as amended, as an exempt security for purposes of that Act.
O. “Federal covered investment adviser” means an investment adviser who is registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.), as amended.
P. “Investment adviser representative” or “representative of an investment adviser” includes each person or company who, for compensation, is employed, appointed, or authorized by an investment adviser to solicit clients for the investment adviser or who, on behalf of an investment adviser, provides investment advice, directly or through subagents, as defined by Board rule, to the investment adviser's clients. The term does not include a partner of a partnership or an officer of a corporation or other entity that is registered as an investment adviser under this Act solely because of the person's status as an officer or partner of that entity.
Q. “Registered investment adviser” means an investment adviser who has been issued a registration certificate by the Commissioner under Section 15 of this Act.
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Art. 581-4. Definitions, TX CIV ST Art. 581-4
Credits Acts 1957, 55th Leg., p. 575, ch. 269, § 4. Amended by Acts 1971, 62nd Leg., p. 1085, ch. 235, § 1, eff. May 17, 1971; Acts 1979, 66th Leg., p. 348, ch. 160, § 1, eff. May 15, 1979; Acts 1989, 71st Leg., ch. 733, § 1, eff. Sept. 1, 1989; Acts 1993, 73rd Leg., ch. 917, § 3, eff. Jan. 1, 1994; Acts 1995, 74th Leg., ch. 228, § 3, eff. Sept. 1, 1995; Acts 2001, 77th Leg., ch. 1091, § 2.01, eff. Sept. 1, 2001; Acts 2003, 78th Leg., ch. 108, § 1, eff. May 20, 2003.
Notes of Decisions (132)
Footnotes 1 Vernon’s Ann.Civ.St. art. 581-5. Vernon's Ann. Texas Civ. St. Art. 581-4, TX CIV ST Art. 581-4 Current through Chapters effective immediately through Chapter 46 of the 2015 Regular Session of the 84th Legislature
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Art. 581-33. Civil Liability with Respect to Issuance or Sale..., TX CIV ST Art. 581-33
Vernon's Texas Statutes and Codes Annotated Civil Statutes (Refs & Annos)
Title 19. Blue Sky Law--Securities (Refs & Annos)
Vernon's Ann.Texas Civ.St. Art. 581-33
Art. 581-33. Civil Liability with Respect to Issuance or Sale of a Security
Effective: September 1, 2001 Currentness
A. Liability of Sellers. (1) Registration and Related Violations. A person who offers or sells a security in violation of Section 7, 9 (or a requirement of the Commissioner thereunder), 12, 23C, or an order under 23A or 23-2 of this Act is liable to the person buying the security from him, who may sue either at law or in equity for rescission or for damages if the buyer no longer owns the security.
(2) Untruth or Omission. A person who offers or sells a security (whether or not the security or transaction is exempt under Section 5 or 6 of this Act) by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, is liable to the person buying the security from him, who may sue either at law or in equity for rescission, or for damages if the buyer no longer owns the security. However, a person is not liable if he sustains the burden of proof that either (a) the buyer knew of the untruth or omission or (b) he (the offeror or seller) did not know, and in the exercise of reasonable care could not have known, of the untruth or omission. The issuer of the security (other than a government issuer identified in Section 5M) is not entitled to the defense in clause (b) with respect to an untruth or omission (i) in a prospectus required in connection with a registration statement under Section 7A, 7B, or 7C, or (ii) in a writing prepared and delivered by the issuer in the sale of a security.
B. Liability of Buyers. A person who offers to buy or buys a security (whether or not the security or transaction is exempt under Section 5 or 6 of this Act) by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, is liable to the person selling the security to him, who may sue either at law or in equity for rescission or for damages if the buyer no longer owns the security. However, a person is not liable if he sustains the burden of proof that either (a) the seller knew of the untruth or omission, or (b) he (the offeror or buyer) did not know, and in the exercise of reasonable care could not have known, of the untruth or omission.
C. Liability of Nonselling Issuers Which Register.
(1) This Section 33C applies only to an issuer which registers under Section 7A, 7B, or 7C of this Act, or under Section 6 of the U.S. Securities Act of 1933, 1 its outstanding securities for offer and sale by or for the owner of the securities.
(2) If the prospectus required in connection with the registration contains, as of its effective date, an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, the issuer is liable to a person buying the registered security, who may sue either at law or in equity for rescission or for damages if the buyer no longer owns the securities. However, an issuer is not liable if it sustains the burden of proof that the buyer knew of the untruth or omission.
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Art. 581-33. Civil Liability with Respect to Issuance or Sale..., TX CIV ST Art. 581-33
D. Rescission and Damages. For this Section 33:
(1) On rescission, a buyer shall recover (a) the consideration he paid for the security plus interest thereon at the legal rate from the date of payment by him, less (b) the amount of any income he received on the security, upon tender of the security (or a security of the same class and series).
(2) On rescission, a seller shall recover the security (or a security of the same class and series) upon tender of (a) the consideration he received for the security plus interest thereon at the legal rate from the date of receipt by him, less (b) the amount of any income the buyer received on the security.
(3) In damages, a buyer shall recover (a) the consideration the buyer paid for the security plus interest thereon at the legal rate from the date of payment by the buyer, less (b) the greater of:
(i) the value of the security at the time the buyer disposed of it plus the amount of any income the buyer received on the security; or
(ii) the actual consideration received for the security at the time the buyer disposed of it plus the amount of any income the buyer received on the security.
(4) In damages, a seller shall recover (a) the value of the security at the time of sale plus the amount of any income the buyer received on the security, less (b) the consideration paid the seller for the security plus interest thereon at the legal rate from the date of payment to the seller.
(5) For a buyer suing under Section 33C, the consideration he paid shall be deemed the lesser of (a) the price he paid and (b) the price at which the security was offered to the public.
(6) On rescission or as a part of damages, a buyer or a seller shall also recover costs.
(7) On rescission or as a part of damages, a buyer or a seller may also recover reasonable attorney's fees if the court finds that the recovery would be equitable in the circumstances.
E. Time of Tender. Any tender specified in Section 33D may be made at any time before entry of judgment.
F. Liability of Control Persons and Aiders.
(1) A person who directly or indirectly controls a seller, buyer, or issuer of a security is liable under Section 33A, 33B, or 33C jointly and severally with the seller, buyer, or issuer, and to the same extent as if he were the seller, buyer, or issuer, unless the controlling person sustains the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist.
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Art. 581-33. Civil Liability with Respect to Issuance or Sale..., TX CIV ST Art. 581-33
(2) A person who directly or indirectly with intent to deceive or defraud or with reckless disregard for the truth or the law materially aids a seller, buyer, or issuer of a security is liable under Section 33A, 33B, or 33C jointly and severally with the seller, buyer, or issuer, and to the same extent as if he were the seller, buyer, or issuer.
(3) There is contribution as in cases of contract among the several persons so liable.
G. Survivability of Actions. Every cause of action under this Act survives the death of any person who might have been a plaintiff or defendant.
H. Statute of Limitations.
(1) No person may sue under Section 33A(1) or 33F so far as it relates to Section 33A(1):
(a) more than three years after the sale; or
(b) if he received a rescission offer (meeting the requirements of Section 33I) before suit unless he (i) rejected the offer in writing within 30 days of its receipt and (ii) expressly reserved in the rejection his right to sue; or
(c) more than one year after he so rejected a rescission offer meeting the requirements of Section 33I.
(2) No person may sue under Section 33A(2), 33C, or 33F so far as it relates to 33A(2) or 33C:
(a) more than three years after discovery of the untruth or omission, or after discovery should have been made by the exercise of reasonable diligence; or
(b) more than five years after the sale; or
(c) if he received a rescission offer (meeting the requirements of Section 33I) before suit, unless he (i) rejected the offer in writing within 30 days of its receipt, and (ii) expressly reserved in the rejection his right to sue; or
(d) more than one year after he so rejected a rescission offer meeting the requirements of Section 33I.
(3) No person may sue under Section 33B or 33F so far as it relates to Section 33B:
(a) more than three years after discovery of the untruth or omission, or after discovery should have been made by the exercise of reasonable diligence; or
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Art. 581-33. Civil Liability with Respect to Issuance or Sale..., TX CIV ST Art. 581-33
(b) more than five years after the purchase; or
(c) if he received a rescission offer (meeting the requirements of Section 33J) before suit unless he (i) rejected the offer in writing within 30 days of its receipt, and (ii) expressly reserved in the rejection his right to sue; or
(d) more than one year after he so rejected a rescission offer meeting the requirements of Section 33J.
I. Requirements of a Rescission Offer to Buyers. A rescission offer under Section 33H(1) or (2) shall meet the following requirements:
(1) The offer shall include financial and other information material to the offeree's decision whether to accept the offer, and shall not contain an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.
(2) The offeror shall deposit funds in escrow in a state or national bank doing business in Texas (or in another bank approved by the commissioner) or receive an unqualified commitment from such a bank to furnish funds sufficient to pay the amount offered.
(3) The amount of the offer to a buyer who still owns the security shall be the amount (excluding costs and attorney's fees) he would recover on rescission under Section 33D(1).
(4) The amount of the offer to a buyer who no longer owns the security shall be the amount (excluding costs and attorney's fees) he would recover in damages under Section 33D(3).
(5) The offer shall state:
(a) the amount of the offer, as determined pursuant to Paragraph (3) or (4) above, which shall be given (i) so far as practicable in terms of a specified number of dollars and a specified rate of interest for a period starting at a specified date, and (ii) so far as necessary, in terms of specified elements (such as the value of the security when it was disposed of by the offeree) known to the offeree but not to the offeror, which are subject to the furnishing of reasonable evidence by the offeree.
(b) the name and address of the bank where the amount of the offer will be paid.
(c) that the offeree will receive the amount of the offer within a specified number of days (not more than 30) after receipt by the bank, in form reasonably acceptable to the offeror, and in compliance with the instructions in the offer, of:
(i) the security, if the offeree still owns it, or evidence of the fact and date of disposition if he no longer owns it; and
(ii) evidence, if necessary, of elements referred to in Paragraph (a)(ii) above.
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Art. 581-33. Civil Liability with Respect to Issuance or Sale..., TX CIV ST Art. 581-33
(d) conspicuously that the offeree may not sue on his purchase under Section 33 unless:
(i) he accepts the offer but does not receive the amount of the offer, in which case he may sue within the time allowed by Section 33H(1)(a) or 33H(2)(a) or (b), as applicable; or
(ii) he rejects the offer in writing within 30 days of its receipt and expressly reserves in the rejection his right to sue, in which case he may sue within one year after he so rejects.
(e) in reasonable detail, the nature of the violation of this Act that occurred or may have occurred.
(f) any other information the offeror wants to include.
J. Requirements of a Rescission Offer to Sellers. A rescission offer under Section 33H(3) shall meet the following requirements:
(1) The offer shall include financial and other information material to the offeree's decision whether to accept the offer, and shall not contain an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.
(2) The offeror shall deposit the securities in escrow in a state or national bank doing business in Texas (or in another bank approved by the commissioner).
(3) The terms of the offer shall be the same (excluding costs and attorney's fees) as the seller would recover on rescission under Section 33D(2).
(4) The offer shall state:
(a) the terms of the offer, as determined pursuant to Paragraph (3) above, which shall be given (i) so far as practicable in terms of a specified number and kind of securities and a specified rate of interest for a period starting at a specified date, and (ii) so far as necessary, in terms of specified elements known to the offeree but not the offeror, which are subject to the furnishing of reasonable evidence by the offeree.
(b) the name and address of the bank where the terms of the offer will be carried out.
(c) that the offeree will receive the securities within a specified number of days (not more than 30) after receipt by the bank, in form reasonably acceptable to the offeror, and in compliance with the instructions in the offer, of:
(i) the amount required by the terms of the offer; and
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Art. 581-33. Civil Liability with Respect to Issuance or Sale..., TX CIV ST Art. 581-33
(ii) evidence, if necessary, of elements referred to in Paragraph (a)(ii) above.
(d) conspicuously that the offeree may not sue on his sale under Section 33 unless:
(i) he accepts the offer but does not receive the securities, in which case he may sue within the time allowed by Section 33H(3) (a) or (b), as applicable; or
(ii) he rejects the offer in writing within 30 days of its receipt and expressly reserves in the rejection his right to sue, in which case he may sue within one year after he so rejects.
(e) in reasonable detail, the nature of the violation of this Act that occurred or may have occurred.
(f) any other information the offeror wants to include.
K. Unenforceability of Illegal Contracts. No person who has made or engaged in the performance of any contract in violation of any provision of this Act or any rule or order or requirement hereunder, or who has acquired any purported right under any such contract with knowledge of the facts by reason of which its making or performance was in violation, may base any suit on the contract.
L. Waivers Void. A condition, stipulation, or provision binding a buyer or seller of a security or a purchaser of services rendered by an investment adviser or investment adviser representative to waive compliance with a provision of this Act or a rule or order or requirement hereunder is void.
M. Saving of Existing Remedies. The rights and remedies provided by this Act are in addition to any other rights (including exemplary or punitive damages) or remedies that may exist at law or in equity.
N. Limitation of Liability in Small Business Issuances. (1) For purposes of this Section 33N, unless the context otherwise requires, “small business issuer” means an issuer of securities that, at the time of an offer to which this Section 33N applies:
(a) has annual gross revenues in an amount that does not exceed $25 million; and
(b) does not have a class of equity securities registered, or required to be registered, with the Securities and Exchange Commission under Section 12 of the Securities Exchange Act of 1934, as amended (15 U.S.C. Section 78l).
(2) This Section 33N applies only to:
(a) an offer of securities made by a small business issuer or by the seller of securities of a small business issuer that is in an aggregate amount that does not exceed $5 million; and
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(b) a person who has been engaged to provide services relating to an offer of securities described by Section 33N(2)(a), including an attorney, an accountant, a consultant, or the firm of the attorney, accountant, or consultant.
(3) The maximum amount that may be recovered against a person to which this Section 33N applies in any action or series of actions under Section 33 relating to an offer of securities to which this Section 33N applies is an amount equal to three times the fee paid by the issuer or other seller to the person for the services related to the offer of securities, unless the trier of fact finds the person engaged in intentional wrongdoing in providing the services.
(4) A small business issuer making an offer of securities shall provide to the prospective buyer a written disclosure of the limitation of liability created by this Section 33N and shall receive a signed acknowledgement that the disclosure was provided.
Credits Acts 1957, 55th Leg., p. 575, ch. 269, § 33; Amended by Acts 1963, 58th Leg., p. 473, ch. 170, § 12; Acts 1977, 65th Leg., p. 344, ch. 170, § 1, eff. Aug. 29, 1977; Acts 1979, 66th Leg., p. 361, ch. 160, § 8, eff. May 15, 1979; Acts 1997, 75th Leg., ch. 638, § 1, eff. Sept. 1, 1997; Acts 2001, 77th Leg., ch. 1091, § 3.14, eff. Sept. 1, 2001; Acts 2001, 77th Leg., ch. 1091, § 3.16, eff. Sept. 1, 2001; Acts 2001, 77th Leg., ch. 1091, § 3.17, eff. Sept. 1, 2001; Acts 2001, 77th Leg., ch. 1091, § 3.15, eff. Sept. 1, 2001.
Editors' Notes
SAVED FROM REPEAL
<The Uniform Commercial Code, enacted by Acts 1965, 59th Leg., vol. 2, p. 1, ch. 721, provided that the Act did not repeal or diminish arts. 581-1 through 581-39, and further provided that if in any respect there was any inconsistency between those articles and the Commercial Code, the provisions of those articles should control. Acts 1965, 59th Leg., vol. 2, p. 1, ch. 721, was itself repealed by Acts 1967, 60th Leg., vol. 2, p. 2343, ch. 785, adopting the Business & Commerce Code effective September 1, 1967. However, the latter Act specifically provided that the repeal did not affect the prior operation of the 1965 Act or any prior action taken under it.>
GENERAL NOTES
LAW REVIEW COMMENTARIES
Annual survey of Texas Law: Corporations and partnerships. Robert W. Hamilton, 32 Sw.L.J. 221 (1978); 36 Sw.L.J. 227 (1982). Civil liability under Texas Securities Act § 33 (1977) and related claims. Alan R. Bromberg, 32 Sw.L.J. 867 (1978). Civil remedies under Texas securities laws. Claude P. Bordwine, Jr., 8 Hous.L.Rev. 657 (1971). Recent developments--Texas Securities Act. J. Leon Lebowitz, 28 Sw.L.J. 861 (1974). Securities Act; annual survey of Texas law. J. Leon Lebowitz, 26 Sw.L.J. 112 (1972). Securities litigation: 1977 modernization of § 33 of Texas Securities Act. Hal M. Bateman, 15 Hous.L.Rev. 839 (1978). The sky is still blue in Texas: State law alternative to federal securities remedies. Keith A. Rowley. 50 Baylor L.Rev. 99 (Winter 1998). Statutory attorney fees in Texas: Update. Ralph H. Brock, 41 Tex.B.J. 65 (1978).
RESEARCH REFERENCES
2015 Electronic Update
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ALR Library
26 ALR, Federal 495, Construction and Application of § 14 of Securities Act of 1933 (15 U.S.C.A. § 77n) and § 29(A) of Securities Exchange Act of 1934 (15 U.S.C.A. § 78cc(A)), Voiding Waiver of Compliance With Statutory... 183 ALR, Federal 141, Liability of Officer, Director, Employee, or Other Individual Associated With Seller or Issuer of Securities as “Control Person” Under § 15 of Securities Act (15 U.S.C.A. § 77) and § 20(A) of Securities Exchange Act... 59 ALR 2nd 1030, Who, Other Than Officers and Directors of a Corporation, is Civilly Liable Under the State Securities Acts (Blue Sky Laws) for Purchase Price of Unauthorized Securities.
Encyclopedias
TX Jur. 3d Oil and Gas § 729, Regulation Under Texas Securities Act.
Forms
Texas Jurisprudence Pleading & Practice Forms 2d Ed § 17:18, Illegality--Violation of Blue Sky Law. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:2, Civil Liability for Issuance or Sale. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:4, Other Remedies. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:7, Petition--Fraud--Stock Sale Induced by Seller's Misrepresentation that Company Owned Valuable Patent. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:8, Petition--False Misrepresentation--Fraudulent Inducement to Open Commodities Trading Account. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:9, Petition--To Recover Purchase Price of Stock Sold in Violation of Securities Act. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:11, Answer--Affirmative Defense--In Damage Action Against Offeror, Seller, Control Person--Three-Year Statute of Limitations. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:12, Answer--Affirmative Defense--In Damage Action Against Offeror, Seller, Issuer, Control Person for Untruth or Omission--Three-Year Statute of... Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:13, Answer--Affirmative Defense--In Damage Action Against Offeror, Buyer, or Control Person for Untruth or Omission--Three-Year Statute of Limitations. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:14, Answer--Affirmative Defense--In Damage Action Against Offeror, Seller, Issuer, Buyer, or Control Person for Untruth or Omission--Five-Year Statute of... Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:15, Answer--Affirmative Defense--Failure of Corporation to Secure Permit from Securities Commissioner. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:16, Answer--Affirmative Defense--In Action by Purchaser Against Offeror or Seller--For False Statement of Material Fact--Buyer Knew of Untruth or... Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:17, Answer--Affirmative Defense--In Action by Purchaser Against Offeror or Seller--For False Statement of Material Fact--Offeror or Seller Did Not Know of Untruth or... Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:18, Answer--Affirmative Defense--In Action Against Buyer for Untruth or Omission--Seller Knew of Untruth or Omission. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:19, Answer--Affirmative Defense--In Action Against Buyer for Untruth or Omission--Buyer Did Not Know of Untruth or Omission. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:20, Answer--Affirmative Defense--In Action by Buyer Against Issuer for Untruth or Omission in Prospectus--Buyer Knew of Untruth. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 220:21, Answer--Affirmative Defense--In Action by Purchaser Against Controlling Person--Controlling Person Did Not Know of Untruth or Omission. Texas Jurisprudence Pleading & Practice Forms 2d Ed § 200B:83, Securities Act. 3 West's Texas Forms § 2.10.1, Defendant's Original Counterclaim(S). 3 West's Texas Forms § 2.11.1, Defendant's Original Cross-Claim. 3 West's Texas Forms § 2.8.31, Defendant's Original Answer--Affirmative Defense--Illegality.
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3 West's Texas Forms § 2.8.70, Defendant's Original Answer--Affirmative Defense--Statute of Limitations. 3A West's Texas Forms § 4.1, Class Action Petition--General Form. 3A West's Texas Forms § 9.9.2, Answer. 3A West's Texas Forms § 10.1.1, Petition. 3A West's Texas Forms § 10.2.1, Petition. 3A West's Texas Forms § 10.2.2, Answer. 3A West's Texas Forms § 10.3.1, Petition. 3A West's Texas Forms § 10.3.2, Answer. 3A West's Texas Forms § 10.4.1, Petition. 3A West's Texas Forms § 10.4.2, Answer. 3A West's Texas Forms § 10.5.1, Petition. 3A West's Texas Forms § 10.5.2, Answer. 3A West's Texas Forms § 10.6.1, Petition. 3A West's Texas Forms § 10.6.2, Answer. 3A West's Texas Forms § 10.7.1, Petition. 3A West's Texas Forms § 10.8.2, Answer. 3A West's Texas Forms § 9.10.2, Answer. 3A West's Texas Forms Ch. 10 Intro., Introduction. 3A West's Texas Forms Ch. 9.3 Intro., Introduction. 3A West's Texas Forms Ch. 10.1 Intro., Introduction. 3A West's Texas Forms Ch. 10.2 Intro., Introduction. 3A West's Texas Forms Ch. 10.3 Intro., Introduction. 3A West's Texas Forms Ch. 10.4 Intro., Introduction. 3A West's Texas Forms Ch. 10.5 Intro., Introduction. 3A West's Texas Forms Ch. 10.6 Intro., Introduction. 3A West's Texas Forms Ch. 10.8 Intro., Introduction.
Treatises and Practice Aids
Blue Sky Law § 9:160, Liability of the Investor's Broker-Dealer or Agent for the Wrongful Acts of the Independent Investment Adviser--Bases of Potential Liability--Liability Under the Uniform Securities Acts. McDonald & Carlson Texas Civil Practice § 9:72, Express Limitations for Statutory Causes of Action. NOTES OF DECISIONS
In general
To prevail under Texas Securities Act section governing fraud liability of sellers, plaintiff must show that seller in offering or selling security made untrue statement of material fact or omission of material fact that was essential to make statement not misleading. In re Enron Corp. Securities, Derivative & ERISA Litigation, S.D.Tex.2002, 235 F.Supp.2d 549. Securities Regulation 278
In respect to the requirement subd. B of this article that the false statement or omission concern a material fact, it would be presumed, having at hand a technical definition of the term “material” within the field of federal securities regulation, that the Texas legislature intended to employ the word in that same precise sense. American General Ins. Co. v. Equitable General Corp., 1980, 493 F.Supp. 721. Securities Regulation 278
Texas Securities Act (TSA) applies to persons and corporations who offer or sell unregistered securities. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 256.1
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In adopting Securities Act, legislature is presumed to have been familiar with decisions of the court of last resort that corporations generally could not be prosecuted for violations of the criminal statutes. Dempsey-Tegeler & Co. v. Flowers (Civ.App. 1971) 465 S.W.2d 208, error granted, reversed 472 S.W.2d 112. Securities Regulation 246
Definition of “sales” taken directly from Securities Act was not erroneous in purchaser's suit to recover price paid for unregistered stock sold by defendants. Christie v. Brewer (Civ.App. 1964) 374 S.W.2d 908, ref. n.r.e. Securities Regulation 299
Construction with other laws
Unlike the Texas Securities Act (TSA), which is the Texas Blue Sky Law, investors have neither an express nor an implied private right of action for securities fraud under New York's Blue Sky Law, the Martin Act. In re Enron Corp. Securities, Derivative & ERISA Litigation, S.D.Tex.2011, 761 F.Supp.2d 504. Securities Regulation 297
Texas general fraud statute (V.T.C.A. Bus. & C. § 27.01) and this article were applicable to securities transaction in which stock broker recommended that client purchase certain securities, and client could not maintain strict liability action under Texas Deceptive Trade Practices-Consumer Protection Act (V.T.C.A. Bus. & C. § 17.41 et seq.), in that permitting such an action would emasculate the due diligence defense permitted under Blue Sky Law. Allais v. Donaldson, Lufkin & Jenrette, S.D.Tex.1982, 532 F.Supp. 749. Antitrust And Trade Regulation 219
When interpreting “control,” for purposes of a control person's secondary liability under the Texas Securities Act (TSA), Texas courts use the same general definitions of control used under federal securities law. Darocy v. Abildtrup (App. 5 Dist. 2011) 345 S.W.3d 129. Securities Regulation 302
Interpretations of Securities Act of 1933 may be reliable guidelines in interpreting Texas Securities Act when they contain virtually same wording, but when statutes use materially different language, court bases its interpretation of Texas Securities Act on legislature's language. Anheuser-Busch Companies, Inc. v. Summit Coffee Co. (App. 5 Dist. 1996) 934 S.W.2d 705, writ dismissed by agreement. Securities Regulation 246
Securities Litigation Uniform Standards Act (SLUSA) did not preempt claims raised by investors' state-law petition alleging violations of the Texas Securities Act and other state-law claims since action was not a “covered class action;”investors were composed of only eight entities that did not seek damages on behalf of others similarly situated, and their suit was not consolidated by the state court with any other state court securities actions. In re Enron Corp. Securities, Derivative & ""ERISA'' Litigation, S.D.Tex.2002, 2002 WL 32107216, Unreported. Securities Regulation 278; States 18.77
Standing
Limited partners' loss of value of their investments in two energy funds did not provide them standing to bring claims against the funds and individuals who ran them directly as opposed to derivatively, for conversion, violation of the Texas Theft Liability Act, money had and received, breach of fiduciary duty, negligence, common law fraud, and violation of the Texas Securities Act; rather, Texas law required limited partners to bring all such claims, which arose from misrepresentations made after they had invested in the funds, derivatively. Wesolek v. Layton, S.D.Tex.2012, 871 F.Supp.2d 620. Partnership 370
Rules of construction
Texas Securities Act (TSA) must be construed so as to give affect to intent of enacting legislature. Quest Medical, Inc. v. Apprill, C.A.5 (Tex.)1996, 90 F.3d 1080, rehearing and suggestion for rehearing en banc denied 99 F.3d 1137. Securities Regulation 246
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“Control,” for purposes of a control person's secondary liability under the Texas Securities Act (TSA), means the possession, direct or indirect, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract, or otherwise. Darocy v. Abildtrup (App. 5 Dist. 2011) 345 S.W.3d 129. Securities Regulation 302
In civil context, provision of Texas Securities Act prohibiting misrepresentation in connection with offer or sale of security is remedial in nature, and should be given widest possible scope. Anheuser-Busch Companies, Inc. v. Summit Coffee Co. (App. 5 Dist. 1996) 934 S.W.2d 705, writ dismissed by agreement. Securities Regulation 278
Sections of the Securities Act will be considered in pari materia, but in interpreting this article, creating civil cause of action, the court will give consideration to all applicable sections of the Act and not look solely to one particular section. Dempsey-Tegeler & Co. v. Flowers (Civ.App. 1971) 465 S.W.2d 208, error granted, reversed 472 S.W.2d 112. Securities Regulation 246
Unregistered stock
Stock seller's and buyer's practical construction of sale of 2,000 shares in a Texas corporation as the legal equivalent of sale of 6,000 shares of a Delaware corporation, which was successor of Texas corporation, was binding upon seller and upon buyer who sued seller for rescission on ground that stock was not registered. Prokop v. Krenek (Civ.App. 1964) 374 S.W.2d 265, ref. n.r.e. Securities Regulation 299
Tender of stock
Minority shareholder of closely-held natural gas exploration company, who agreed to redemption of his stock before company was sold for 20 times the value used to determine redemption price of his interest, could not, on his claim under Texas Securities Act (TSA), recover the amount paid by company's buyer to acquire the minority shareholder's prior ownership interest in company as “income” under the TSA. Allen v. Devon Energy Holdings, L.L.C. (App. 1 Dist. 2012) 367 S.W.3d 355, review granted, judgment set aside, and remanded by agreement, opinion after remand from supreme court 2013 WL 273026. Securities Regulation 297
Offer or sell
Texas Securities Act is limited to those who are actively engaged in sale process, and does not reach those who merely participate in preparing offering. Huddleston v. Herman & MacLean, C.A.5 (Tex.)1981, 640 F.2d 534, certiorari granted 102 S.Ct. 1766, 456 U.S. 914, 72 L.Ed.2d 173, affirmed in part, reversed in part 103 S.Ct. 683, 459 U.S. 375, 74 L.Ed.2d 548, on remand 705 F.2d 775. Securities Regulation 256.1
Like the Securities Act provision governing prospectus liability, the Texas Security Act's (TSA) provision prohibiting offers or sales of a security by means of an untrue statement of a material fact or an omission, imposes liability only on persons who actually pass title or who actively engage in solicitation of the securities purchased by a plaintiff. Securities Act of 1933, § 12(a)(2), 15 U.S.C.A. § 77l(a)(2); Vernon's Ann.Texas Civ.St. In re Enron Corp. Securities, Derivative & ERISA Litigation, S.D.Tex.2011, 761 F.Supp.2d 504. Securities Regulation 302
Bank's sales of trust certificates secured by nearly worthless assets purchased from energy trading company, as part of alleged conspiracy to manipulate company's financial statements and defraud institutional investors, did not constitute primary violation of Texas Security Act (TSA), prohibiting offers or sales of security by means of fraud emanating from Texas based on untrue statement of material fact or omission by offeror or seller in privity with buyer, since sales took place in New York, and energy
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company was only Texas-based entity but was neither seller nor offeror in privity with investors. In re Enron Corp. Securities, Derivative & ERISA Litigation, S.D.Tex.2011, 761 F.Supp.2d 504. Securities Regulation 302
Provision of Texas Securities Act prohibiting misrepresentation in connection with offer or sale of security applies to private, secondary securities transactions. Anheuser-Busch Companies, Inc. v. Summit Coffee Co. (App. 5 Dist. 1996) 934 S.W.2d 705, writ dismissed by agreement. Securities Regulation 262.1
Corporation's agent in preparation of private placement memorandum and in placement and offering of corporation's bonds to investors was “seller” within meaning of Texas Securities Act. Lutheran Broth. v. Kidder Peabody & Co., Inc. (App. 6 Dist. 1992) 829 S.W.2d 300, writ dismissed, writ withdrawn, writ granted, set aside 840 S.W.2d 384. Securities Regulation 256.1
Provision of Texas Securities Act prohibiting misrepresentations by persons who offer or sell a security applies if defendant was any link in chain of selling process; thus, one who “offers or sells” security is not limited to those who pass title. Lutheran Broth. v. Kidder Peabody & Co., Inc. (App. 6 Dist. 1992) 829 S.W.2d 300, writ dismissed, writ withdrawn, writ granted, set aside 840 S.W.2d 384. Securities Regulation 256.1
Offers to buy or buys
Term “offers to buy or buys,” as used in State Securities Act prohibition of fraud by person who “offers to buy or buys” security, includes every acquisition of, or attempt to acquire, security for value. Pitman v. Lightfoot (App. 4 Dist. 1996) 937 S.W.2d 496, writ denied, rehearing of writ of error overruled. Securities Regulation 278
Fraud, untruth or omission
Under Texas law, as predicted by the Court of Appeals, absent any allegation of acquiring company's fraudulent intent, stockholders of acquired company failed to state a claim for violation of the Texas Securities Act (TSA) based on acquiring company's untrue promise of future performance, even if such a claim was cognizable under the TSA. Herrmann Holdings Ltd. v. Lucent Technologies Inc., C.A.5 (Tex.)2002, 302 F.3d 552. Securities Regulation 278
Limited partners in two energy funds failed to plead fraud with particularity required to state claims against the funds and individuals who ran them for common law fraud arising from misrepresentations that induced them to purchase fund units and for violation of the Texas Securities Act, where they did not allege facts showing exactly when and where the statements were made, to whom they were made, or why they were material to their decisions to purchase fund units, nor did they allege facts that if true would show that when the statements were made, defendants knew they were untrue or, in light of the circumstances in which they were made, misleading. Wesolek v. Layton, S.D.Tex.2012, 871 F.Supp.2d 620. Federal Civil Procedure 636
Retrospective desire on part on investors in limited partnership to have effects of general partner's management authority spelled out in painstakingly detailed chapter and verse did not amount to meritorious claim for securities fraud under the Texas Securities Act (TSA); sour grapes and hindsight did not a securities fraud action make. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
Failed investment is not necessarily a mark of securities fraud, of kind actionable under the Texas Securities Act (TSA). In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
For purposes of a claim under the Texas Securities Act, cautionary statements and warnings may render allegedly misleading statements immaterial, but only when they exhaust the misleading statement's capacity to influence the reasonable investor. Highland Capital Management, L.P. v. Ryder Scott Co. (App. 1 Dist. 2012) 402 S.W.3d 719. Securities Regulation 278
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Genuine issues of material fact existed regarding whether damages suffered by minority shareholder of closely-held natural gas exploration company, who agreed to redemption of his stock before company was sold for 20 times the value used to determine redemption price of his interest, were too speculative, precluding summary judgment on issue of damages with respect to minority shareholder's claims for fraud, breach of fiduciary duty, and violations of Texas Securities Act (TSA). Allen v. Devon Energy Holdings, L.L.C. (App. 1 Dist. 2012) 367 S.W.3d 355, review granted, judgment set aside, and remanded by agreement, opinion after remand from supreme court 2013 WL 273026. Judgment 181(31)
Claims by holders of oil and gas company's unsecured subordinated notes against reservoir-evaluation consulting firm, asserting that firm fraudulently or negligently misrepresented company's proven reserves and violated the Texas Securities Act, were not property of company's bankruptcy estate, and thus holders had standing to pursue fraud, negligent misrepresentation and Securities Act action against firm in state court, as company could not have asserted such claims at the commencement of its bankruptcy; holders' claims were based upon their reliance on firm's representations, claims were based on direct harm to holders and not a derivative harm to company, and company could not have pursued Securities Act claim against firm as claim arose from holders' purchase of securities. Highland Capital Management, L.P. v. Ryder Scott Co. (App. 1 Dist. 2006) 212 S.W.3d 522, rehearing overruled, review denied, on remand 2009 WL 8620816. Bankruptcy 2154.1; Bankruptcy 2553; Bankruptcy 2556
Trial court's error in failing to give brokerage firm's mitigating instruction that jury could not draw inference, from 30-minute videotape in which stock broker asserted privilege against self-incrimination in response to nearly every question about stock purchasers' civil claims of fraud in the sale of securities, of brokerage's involvement in criminal activity, was harmless, where brokerage was sued for its individual actions in failing to supervise the broker and for violating the Texas Securities Act's anti-fraud provision, and stock purchasers did not claim that brokerage firm and broker were acting in collusion to defraud potential investors. Texas Capital Securities, Inc. v. Sandefer (App. 1 Dist. 2001) 58 S.W.3d 760, review denied. Appeal And Error 1067
Statements by broker's employee that World Bank's currency-based promissory notes were a safe and suitable investment for a bank and its trust department and that there was no realistic chance the yield would fall to zero due to European currency rates were “opinions” and were not actionable as securities fraud; the statements are the employee's attempts to compare the notes to his knowledge of the bank's past investments and to its investment philosophy, and the employee was merely providing his assessment for the future of the notes based on the information he possessed at the time. Duperier v. Texas State Bank (App. 13 Dist. 2000) 28 S.W.3d 740, review dismissed by agreement. Securities Regulation 278
Characterization of investment in oil and gas waterflood project as “low risk,” and representation in field summary that unit could reasonably be expected to produce large revenues for a long time, were statements of opinion that were not actionable as fraud under Texas Securities Act or common law, or as negligent misrepresentation, despite seller's greater expertise, where purchasers had equal access to information on which opinions were based, and made no showing that field summary statements lacked reasonable basis. Paull v. Capital Resource Management, Inc. (App. 3 Dist. 1999) 987 S.W.2d 214, rehearing overruled, review denied. Fraud 11(2); Securities Regulation 278
Securities fraud action may be brought under either the Texas Securities Act [Civ. St. art. 581-1 et seq.] or the Deceptive Trade Practices Act [Bus. & C. § 17.41 et seq.], although double recovery for the same act is precluded. Frizzell v. Cook (App. 4 Dist. 1990) 790 S.W.2d 41, writ denied, rehearing of writ of error overruled. Antitrust And Trade Regulation 282; Damages 15; Securities Regulation 278
For investor to prevail in action against seller brought under Texas Securities Act for alleged fraudulent misrepresentations, investor must introduce evidence that untrue statements related to security purchased and induced purchase thereof; untrue statements made after purchase are not the “means” by which the security was sold. Nicholas v. Crocker (App. 12 Dist. 1984) 687 S.W.2d 365, ref. n.r.e. Securities Regulation 278
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Materiality
Allegations that, at the time acquiring company agreed to use “its reasonable best efforts to prepare, file and cause [the S-3 registration statement] to become effective, as promptly as practicable after [acquiring company] shall have received all relevant information,” acquiring company had, in fact, already received “all relevant information” from acquired company, stated claim under the Texas Securities Act (TSA) for an untrue promise to do a future act, as opposed to an untrue statement of existing material fact. Herrmann Holdings Ltd. v. Lucent Technologies Inc., C.A.5 (Tex.)2002, 302 F.3d 552. Securities Regulation 278
Under Texas securities law, a misrepresentation or omission is “material” if there was an appreciable likelihood that it could have significantly affected the investment decisions of a reasonable investor by substantially altering the information available to him in deciding whether to invest. In re Westcap Enterprises, C.A.5 (Tex.)2000, 230 F.3d 717, rehearing and rehearing en banc denied 239 F.3d 367. Securities Regulation 278
Brokers' alleged representations that investor could sell its support class principal-only (PO) collateralized mortgage obligation (CMO) bonds for profit before settlement date, that investor could purchase and sell PO bonds for profit before actually having to pay for them, and that mortgage interest rate spike was merely buying opportunity, did not constitute material misrepresentations that were actionable under Texas securities fraud statute; investor knew that profit depended on changes in mortgage interest rate and how quickly mortgages were refinanced, and investor knew that brokers' opinions or predictions were based on unpredictable changes in interest rate. In re Westcap Enterprises, C.A.5 (Tex.)2000, 230 F.3d 717, rehearing and rehearing en banc denied 239 F.3d 367. Securities Regulation 278
Failure of brokers, who sold support class principal-only (PO) collateralized mortgage obligation (CMO) bonds to treasurer who handled investment portfolio for group of colleges, to inform treasurer that bonds were unsuitable in light of colleges' conservative investment policy and that high-risk bonds made up disproportionately large share of colleges' portfolio were not material, and, thus, were not actionable under Texas securities fraud statute; treasurer had been purchasing CMOs for several years before dealing with defendant-brokers, treasurer gave every indication of being sophisticated investor to brokers, treasurer was aware of risks of CMOs, treasurer refused to disclose portfolio to brokers, treasurer did not tell brokers about colleges' cashflow needs, colleges' board of trustees was aware of increased purchases of CMOs, and outside auditor made no mention that purchase of CMOs violated colleges' investment policy. In re Westcap Enterprises, C.A.5 (Tex.)2000, 230 F.3d 717, rehearing and rehearing en banc denied 239 F.3d 367. Securities Regulation 278
Investor's appearance of sophistication is relevant to determination of whether broker's omission constituted securities fraud under Texas law, because it speaks to whether broker knew about materiality of its omission to investor. In re Westcap Enterprises, C.A.5 (Tex.)2000, 230 F.3d 717, rehearing and rehearing en banc denied 239 F.3d 367. Securities Regulation 278
Although reliance is not required in securities fraud action brought under Texas Security Act, materiality is required. Granader v. McBee, C.A.5 (Tex.)1994, 23 F.3d 120. Securities Regulation 278
Omitted facts in prospectus is “material” under Texas Securities Act if there is substantial likelihood that, under all circumstances, amended fact would have assumed actual significance in deliberations of reasonable shareholder. Granader v. McBee, C.A.5 (Tex.)1994, 23 F.3d 120. Securities Regulation 278
While prospectus provided to investors, to induce them to purchase class B shares in limited partnership, indicated that some of general partner's management decisions were subject to approval of investment committee, its failure, when advising that entity controlled by general partner had unfettered discretion with respect to appointment of members of committee, to specifically advise that committee members might be replaced with employees of real estate brokerage firm with ties to general partner, did not significantly alter total mix of information that was made available, and was not “material” omission which would permit
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investors to pursue rescission claim under fraud provision of the Texas Securities Act (TSA); it was enough that prospectus disclosed broad authority possessed by entity controlled by general partner in appointment of committee members, without having to anticipate all possible outcomes of that broad authority. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
While prospectus provided to investors, to induce them to purchase class B shares in limited partnership, touted real estate business acumen of the three Class A limited partners, its failure to disclose that these Class A limited partners were subject to change, or that partnership agreement contained “buy/sell” provision that allowed Class A limited partners to transfer their partnership interests to one another, did not significantly alter total mix of information that was made available, and were not “material” omissions which would permit investors to pursue rescission claim under fraud provision of the Texas Securities Act (TSA), where prospectus specifically warned that general partner, an entity controlled by one of these Class A limited partners, had complete authority to manage partnership without consent of other Class A limited partners, such that a reasonable investor would not have presumed that partnership would be managed at all times by “tripartite” management team consisting of original Class A limited partners, and where prospectus not only referred to attached partnership agreement and specifically advised investors to read it carefully, but adequately summarized “buy/sell” provision. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
Omission is “material,” for purpose of fraud provision of the Texas Securities Act (TSA), if there is substantial likelihood that proper disclosure would have been viewed by reasonable investor as significantly altering total mix of information made available. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
Omission of fact is “material,” for purpose of fraud provision of the Texas Securities Act (TSA), if there is substantial likelihood that reasonable investor would consider it important in deciding to invest. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
For purposes of the Texas Securities Act, an omission or misrepresentation is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding to invest. Highland Capital Management, L.P. v. Ryder Scott Co. (App. 1 Dist. 2012) 402 S.W.3d 719. Securities Regulation 278
Evidence established defendant's general awareness of his role in primary violations of Texas Securities Act (TSA) by corporate offeror of unregistered securities for participation in oil and gas joint ventures and that defendant provided substantial assistance in the violations, as basis for defendant's liability under TSA for aiding offeror's primary violations in selling securities to venturers in violation of TSA and in making untrue statements of material fact or failing to state material facts necessary so that offeror's statements would not be misleading; defendant was secretary and treasurer of offeror, he had access to offeror's accounts and control over how those accounts were set up and was authorized to pay expenses of offeror, which served as managing partner for the ventures, and after he became aware of problems in funding of oil and gas operations, he sent an e- mail to venturers stating that “up to date reports” would be sent to all venturers, which did not occur. Darocy v. Abildtrup (App. 5 Dist. 2011) 345 S.W.3d 129. Securities Regulation 302
Brokerage firm was liable, under the Texas Securities Act's rescission remedy for a seller's untruth or omission to purchasers of stock regarding a material fact, to stock purchasers who still held the stock, for the purchase price of their stock, even if the purchasers did not have actual damages. Texas Capital Securities, Inc. v. Sandefer (App. 1 Dist. 2001) 58 S.W.3d 760, review denied. Securities Regulation 299
Stock's classification as a penny stock and the fact the stock was not registered were “material facts,” within meaning of Texas Securities Act's provision making a securities seller liable for an untruth or omission regarding a material fact. Texas Capital Securities, Inc. v. Sandefer (App. 1 Dist. 2001) 58 S.W.3d 760, review denied. Securities Regulation 278
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An omission or misrepresentation is “material” if there is a substantial likelihood that proper disclosure would have been viewed by a reasonable investor as significantly altering the total mix of information made available. Duperier v. Texas State Bank (App. 13 Dist. 2000) 28 S.W.3d 740, review dismissed by agreement. Securities Regulation 278
Simple interest of ten percent was the rate of prejudgment interest in a securities fraud suit. Duperier v. Texas State Bank (App. 13 Dist. 2000) 28 S.W.3d 740, review dismissed by agreement. Interest 31; Interest 60
Under Texas Securities Act, omission or misrepresentation is material if there is substantial likelihood that reasonable investor would consider it important in deciding to invest; investor is not required to prove that he would have acted differently but for omission or misrepresentation. Weatherly v. Deloitte & Touche (App. 14 Dist. 1995) 905 S.W.2d 642, rehearing overruled, writ dismissed w.o.j., rehearing of writ of error overruled, motion to file mandamus granted, subsequent mandamus proceeding 951 S.W.2d 394. Securities Regulation 278; Securities Regulation 297
For purposes of determining whether to certify securities fraud suit by investors who purchased debentures from corporation as class action, misrepresentation that was material to one class member as reasonable investor would be considered material as to all class members; focus under Texas Securities Act was on conduct of seller or issuer of securities and whether they made material representation, not on conduct of individual buyers. Weatherly v. Deloitte & Touche (App. 14 Dist. 1995) 905 S.W.2d 642, rehearing overruled, writ dismissed w.o.j., rehearing of writ of error overruled, motion to file mandamus granted, subsequent mandamus proceeding 951 S.W.2d 394. Parties 35.85
Elements of an action under the antifraud provision of Texas Securities Act include an offer or sale of a security by means of an untrue statement of a material fact or an omission of a material fact which is necessary in order to make the statement may not misleading under the circumstances; security buyer may sue at law or in equity for rescission, or for damages if the buyer no longer owns the security. Anderson v. Vinson Exploration, Inc. (App. 8 Dist. 1992) 832 S.W.2d 657, rehearing overruled, writ denied. Securities Regulation 278
Evidence was sufficient to create a jury question as to whether there were misstatements and omissions of material fact, as required to bring an action under the Texas Securities Act; lease operator testified he was aware that investors were seeking a “reasonably low risk” investment, there was expert testimony that the lease was a “fairly high risk” investment, investors were not made aware that nearby wells were dry or had been plugged and abandoned, some by lease operator, that operators had been rejected by four or five oil companies when they previously tried to sell the prospect that was sold to investors, and the current instance was only the second time in 25 years in which lease operator had not taken a working interest in the operation. Anderson v. Vinson Exploration, Inc. (App. 8 Dist. 1992) 832 S.W.2d 657, rehearing overruled, writ denied. Securities Regulation 309
Liability under Texas Securities Act and for negligent misrepresentation may be based, not only on false statement, but on omissions to state material fact necessary to make other statements not misleading. Lutheran Broth. v. Kidder Peabody & Co., Inc. (App. 6 Dist. 1992) 829 S.W.2d 300, writ dismissed, writ withdrawn, writ granted, set aside 840 S.W.2d 384. Fraud 16; Securities Regulation 278
Opinion
In considering whether an expression of opinion can be actionable under the Texas securities fraud statute, courts look to the statement's specificity and the relative knowledge of the speaker and the recipient. In re Westcap Enterprises, C.A.5 (Tex.)2000, 230 F.3d 717, rehearing and rehearing en banc denied 239 F.3d 367. Securities Regulation 278
Statements of opinion or “puffing” are to be expected of securities dealers and are generally not actionable under the Texas Securities Act (TSA). In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
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Scienter
Unlike a claim for seller liability under the Texas Securities Act (TSA), a claim for aider and abettor liability requires that a plaintiff plead and prove scienter. Dorsey v. Portfolio Equities, Inc., C.A.5 (Tex.)2008, 540 F.3d 333. Securities Regulation 278
Unlike a common law fraud cause of action, a claim for seller liability under the Texas Securities Act (TSA) does not require “scienter,” that is, proof that the speaker knew that the representation was false, or made it without regard to its truth or falsity. Dorsey v. Portfolio Equities, Inc., C.A.5 (Tex.)2008, 540 F.3d 333. Securities Regulation 278
Plaintiffs seeking to recover under the 1933 Securities Act antifraud provision and under this section cannot recover if they know of misstatement or omission upon which the claim of fraud is based; knowing that misstatement or omission has been made is not the same as knowing the true fact which was misrepresented or omitted. Haralson v. E.F. Hutton Group, Inc., C.A.5 (Tex.)1990, 919 F.2d 1014, rehearing denied. Securities Regulation 27.39; Securities Regulation 297
Texas Securities Act contains no requirement of scienter. American General Ins. Co. v. Equitable General Corp., 1980, 493 F.Supp. 721. Securities Regulation 297
Even if minority shareholder of closely held natural gas exploration company, who agreed to redemption of his stock after letter from majority shareholder indicated that wells in expansion area were non-economic and that drilling could result in the decline of company's value, had knowledge that natural gas prices had increased during eight months between letter and redemption of his stock, such knowledge did not preclude his claim under the Texas Securities Act (TSA), to extent that minority shareholder relied on other statements in letter about state of drilling technology and its effect on profitability of drilling in expansion area which, by time of company's actual redemption of minority shareholder's interest, were no longer accurate. Allen v. Devon Energy Holdings, L.L.C. (App. 1 Dist. 2012) 367 S.W.3d 355, review granted, judgment set aside, and remanded by agreement, opinion after remand from supreme court 2013 WL 273026. Securities Regulation 278
Minority shareholder of closely held natural gas exploration company, who agreed to redemption of his stock after letter from majority shareholder indicated that wells in expansion area were non-economic and that drilling could result in the decline of company's value, had knowledge that natural gas prices had increased during eight months between letter and redemption of his stock, precluding his claim under the Texas Securities Act (TSA) to extent that minority shareholder alleged he was misled by statements in letter as to company's value at the time of redemption, changes in company's value during the eight month period, and the redemption. Allen v. Devon Energy Holdings, L.L.C. (App. 1 Dist. 2012) 367 S.W.3d 355, review granted, judgment set aside, and remanded by agreement, opinion after remand from supreme court 2013 WL 273026. Securities Regulation 278
Texas Securities Act does not require proof of scienter. Busse v. Pacific Cattle Feeding Fund No. 1, Ltd. (App. 6 Dist. 1995) 896 S.W.2d 807, rehearing overruled, writ denied. Securities Regulation 297
Reliance
In view of admission by buyer that he could not prove that he relied upon representation, communication, or statement by bank president when he purchased bank's stock, buyer failed to establish cause of action under Texas law for common-law or securities fraud. Granader v. McBee, C.A.5 (Tex.)1994, 23 F.3d 120. Fraud 20; Securities Regulation 278
Investment company could not have justifiably relied on representations of investor's ownership interest in savings and loan association when entering into agreement to resolve investor's debt to the company where the two employees in the investment company who best knew the investor knew of investor's ownership interest in savings and loan association, and that knowledge would be imputed to the investment company and it could not recover for common-law, statutory, or securities fraud under
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federal or Texas law. Haralson v. E.F. Hutton Group, Inc., C.A.5 (Tex.)1990, 919 F.2d 1014, rehearing denied. Fraud 23; Securities Regulation 297
Investment company could not have justifiably relied on concealment of fact that savings and loan association, the proceeds of the sale of which were being offered to secure agreement to resolve investor's trading losses, had entered into supervision agreement with the Texas Savings and Loan Department where there was abundant evidence that there were problems between the owner of the savings and loan association and the Department; investment company thus could not recover on theories of common-law or statutory fraud or federal or state securities fraud. Haralson v. E.F. Hutton Group, Inc., C.A.5 (Tex.)1990, 919 F.2d 1014, rehearing denied. Fraud 23; Securities Regulation 60.48(1); Securities Regulation 297
The Texas Securities Act (TSA) does not require a buyer of a security to prove reliance on the sellers' misrepresentation or omission, nor does the TSA require proof of scienter or causation. In re Enron Corp. Securities, Derivative & ERISA Litigation, S.D.Tex.2011, 761 F.Supp.2d 504. Securities Regulation 278
Texas Security Act (TSA) does not require buyer to prove reliance as part of claim against seller of security for alleged omission or misrepresentation of material fact regarding sale of security. Geodyne Energy Income Production Partnership I-E v. Newton Corp. (App. 5 Dist. 2003) 97 S.W.3d 779, review denied, rehearing of petition for review granted, withdrawn, reversed in part 161 S.W.3d 482. Securities Regulation 278
Reliance was not element of investor's claims under Texas Securities Act against accounting firm that provided auditing, tax, and transaction verification services to dealer. Hendricks v. Thornton (App. 9 Dist. 1998) 973 S.W.2d 348, rehearing overruled, review denied. Securities Regulation 278
Due diligence
Under the Texas securities fraud statute, the buyer is not required to prove his own due diligence, nor that he relied on the alleged misrepresentations or omissions. In re Westcap Enterprises, C.A.5 (Tex.)2000, 230 F.3d 717, rehearing and rehearing en banc denied 239 F.3d 367. Securities Regulation 278
Under Texas Securities Act section governing fraud liability of sellers, investor/buyer has no duty to perform due diligence nor to discover truth by exercising ordinary care. In re Enron Corp. Securities, Derivative & ERISA Litigation, S.D.Tex.2002, 235 F.Supp.2d 549. Securities Regulation 278
The investor has no duty of due diligence; the securities fraud statute merely requires proof of a misrepresentation or omission by the seller. Duperier v. Texas State Bank (App. 13 Dist. 2000) 28 S.W.3d 740, review dismissed by agreement. Securities Regulation 278
Expert testimony in a securities fraud suit that broker had not done enough due diligence on the World Bank's currency-based promissory notes prior to sale to investor did not establish a misrepresentation by broker's employee when he claimed that broker had done more due diligence on the notes than on any other; no evidence compared the amount of due diligence performed on these notes with that performed for other notes. Duperier v. Texas State Bank (App. 13 Dist. 2000) 28 S.W.3d 740, review dismissed by agreement. Evidence 571(3)
There is no fundamental inconsistency between the Texas Securities Act [Civ. St. art. 581-33 A(2)] due diligence defense and the defenses of Bus. & C. § 17.506. Frizzell v. Cook (App. 4 Dist. 1990) 790 S.W.2d 41, writ denied, rehearing of writ of error overruled. Securities Regulation 246
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Reasonable investor
Under “reasonable investor” standard applied in cause of action under fraud provision of the Texas Securities Act (TSA), reasonable investor will at least have read memorandum describing investment opportunity. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
Under “reasonable investor” standard applied in cause of action under fraud provision of the Texas Securities Act (TSA), test for reasonable investor is objective one, which inquires whether information disclosed would have been misleading, upon those points about which information's adequacy is questioned, to a reasonable, potential investor who read information as whole. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
While investor asserting a claim under fraud provision of the Texas Securities Act (TSA) is held to “reasonable investor” standard, it is no defense that investor could have discovered the truth by exercising ordinary care. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
Rescission of sale
Buyer's complaint that he would not have purchased stock if he had known that stock was going to be issued in his name rather than his children's names, did not, as matter of law, rise to level of “materiality” required to establish fraud under Texas Securities Act. Granader v. McBee, C.A.5 (Tex.)1994, 23 F.3d 120. Securities Regulation 278
Rescission remedy of the Texas Securities Act (TSA) is intended to restore investors to their original position, and does not require a showing of actual damages. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 299
Rescission of sale was appropriate remedy for buyer of security regarding interest in oil well following jury's determination that seller violated Texas Security Act (TSA) by making omission or misrepresentation of material fact regarding sale, since buyer still owned security. Geodyne Energy Income Production Partnership I-E v. Newton Corp. (App. 5 Dist. 2003) 97 S.W.3d 779, review denied, rehearing of petition for review granted, withdrawn, reversed in part 161 S.W.3d 482. Securities Regulation 299
Stock buyer's tender of 6,000 shares of Delaware corporation prior to suing seller for rescission of sale of 2,000 shares of Texas corporation, which was predecessor of Delaware corporation, on ground that stock was not registered would be a proper tender where the only stock delivered to buyer was the 6,000 shares and they were treated as the legal equivalent of the 2,000 shares. Prokop v. Krenek (Civ.App. 1964) 374 S.W.2d 265, ref. n.r.e. Securities Regulation 304
Recovery of consideration
In suit to recover the consideration paid for shares of stock on ground that they were sold in violation of Securities Act wherein plaintiff pleaded that through his attorney he had made written demand on seller to refund the amount paid and that plaintiff had tendered two written assignments for the stock but there was neither pleading nor evidence that before suit plaintiff tendered the securities sold in proper form for transfer as required by act, nor that plaintiff had tendered the amount of all dividends, interest and other income distributions received while he was in possession of the stock, and plaintiff demanded that he be paid a specific sum in cash which was in excess of twice the value of his equity in machinery sold for the stock as found by the jury, plaintiff's failure to comply with requirements of the Act was fatal to his recovery. Riggs v. Riggs (Civ.App. 1959) 322 S.W.2d 571. Securities Regulation 306
In suit to recover considerations paid for shares of stock sold in alleged violation of Securities Act, the burden was on defendant to prove facts to bring himself within exemption provisions of the Act, but his failure to show his exemption was harmless error
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in view of holding that plaintiff was not entitled to judgment because of his failure to comply with the Act. Riggs v. Riggs (Civ.App. 1959) 322 S.W.2d 571. Appeal And Error 1029; Securities Regulation 307
Where named lessee, a person who engaged in dealing in oil lands, took mineral lease only upon learning of another person's interest therein and, on same day lease was executed, made an assignment to that person for certain consideration, named lessee was not entitled to recover the consideration expressed in assignment contract without showing compliance with Texas Securities Act, even if compensation were due under contract. Mecom v. Hamblen (Sup. 1956) 155 Tex. 494, 289 S.W.2d 553. Securities Regulation 292
Damages
Exemplary damages are unavailable under Texas Securities Act (TSA). Quest Medical, Inc. v. Apprill, C.A.5 (Tex.)1996, 90 F.3d 1080, rehearing and suggestion for rehearing en banc denied 99 F.3d 1137. Securities Regulation 309
Section of Civil Practice and Remedies Code relating to “exemplary damages” did not create right to recover exemplary damages under Texas Securities Act (TSA); provisions were not intended to create new avenues for recovery of exemplary damages, but to provide ascertainable standards for and reasonable limits upon recovery of such damages under those causes of action already determined to support such claims. Quest Medical, Inc. v. Apprill, C.A.5 (Tex.)1996, 90 F.3d 1080, rehearing and suggestion for rehearing en banc denied 99 F.3d 1137. Securities Regulation 309
Plaintiff could not tack any exemplary damages award based on his statutory or common-law fraud theories onto actual damages award under Texas Securities Act (TSA), which did not allow recovery of exemplary damages. Quest Medical, Inc. v. Apprill, C.A.5 (Tex.)1996, 90 F.3d 1080, rehearing and suggestion for rehearing en banc denied 99 F.3d 1137. Securities Regulation 309
Trial court could not tack jury's punitive damages award for malicious breach of fiduciary duty against third-party trustee onto actual damages award against trustee for aiding and abetting securities fraud in violation of state securities act, in lawsuit by investors defrauded by broker in Ponzi scheme, although investors argued that saving language in civil liability article of act allowed addition of punitive damages recovered under alternative theory; investors could not pick and choose actual damage award under one theory and punitive damages under alternative theory. Sterling Trust Co. v. Adderley (App. 2 Dist. 2003) 119 S.W.3d 312, rehearing overruled, review granted, reversed 168 S.W.3d 835, rehearing denied. Securities Regulation 309
Plaintiff's failure to mitigate damages does not reduce defendant's liability for securities fraud. Duperier v. Texas State Bank (App. 13 Dist. 2000) 28 S.W.3d 740, review dismissed by agreement. Securities Regulation 297
Investors were not limited to seeking rescission under Texas Securities Act on grounds that they still owned securities in question, but could also seek damages as result of placement agent's alleged misrepresentations. Lutheran Broth. v. Kidder Peabody & Co., Inc. (App. 6 Dist. 1992) 829 S.W.2d 300, writ dismissed, writ withdrawn, writ granted, set aside 840 S.W.2d 384. Securities Regulation 299
Persons liable
Broker could not be held liable under Texas law for aiding and abetting securities fraud absent showing of a primary violation by issuer or dealer which sold issuer's commercial paper to plaintiff insurance companies and investment companies as issuer's alleged agent. In re Enron Corp. Securities, Derivative & ""ERISA'' Litigation, S.D.Tex.2007, 491 F.Supp.2d 690. Securities Regulation 302
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Under Texas Securities Act section governing fraud liability of sellers, liability may be imposed against defendant as long as defendant constituted any link in chain of fraudulent selling process. In re Enron Corp. Securities, Derivative & ERISA Litigation, S.D.Tex.2002, 235 F.Supp.2d 549. Securities Regulation 302
Holder of bankrupt oil and gas company's secured notes was not aware of the company's improper activities under the Texas Securities Act (TSA), as required for holder's of company's unsecured notes to bring action against secured note holder as an aider in the securities violation; affidavits explicitly stated that holder was not aware that the proved reserve estimates supplied by reservoir-evaluation consulting firm were inaccurate or contained irregularities, and the holder was unaware that the proved reserve estimates would later be reduced by firm. Highland Capital Management, L.P. v. Ryder Scott Co. (App. 1 Dist. 2012) 402 S.W.3d 719. Securities Regulation 302
“Primary liability” under the Texas Securities Act (TSA) arises when a person offers to sell or buy a security by means of an untrue statement of a material fact or an omission of the statement of a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading. Darocy v. Abildtrup (App. 5 Dist. 2011) 345 S.W.3d 129. Securities Regulation 302
A two-prong test is applied to determine whether a person is a control person, for purposes of secondary liability under the Texas Securities Act (TSA): (1) the person exercised control over the operations of the corporation in general, and (2) the person had the power to control the specific transaction or activity upon which the primary violation is predicated. Darocy v. Abildtrup (App. 5 Dist. 2011) 345 S.W.3d 129. Securities Regulation 302
Attorney representing limited partnership and general partner was not liable to non-client limited partner, under Texas Securities Act (TSA), for aiding and abetting securities fraud, regarding inaccuracies in partner ownership percentages, in absence of evidence of scienter, i.e., that attorney acted with intent to deceive or defraud or with reckless disregard for the truth. Kastner v. Jenkens & Gilchrist, P.C. (App. 5 Dist. 2007) 231 S.W.3d 571. Securities Regulation 278
Evidence was sufficient that third-party trustee directly or indirectly, with intent to deceive or defraud or with reckless disregard for truth or law, materially aided broker in committing securities fraud against qualified securities investors, as required to hold trustee secondarily liable as aider-abetter under state securities act; trustee knew that broker was commingling qualified and unqualified funds but did nothing despite duty to keep funds segregated, and trustee unilaterally transferred investments between broker's entities, enabling broker to avoid paying principal balance of notes as they became due. Sterling Trust Co. v. Adderley (App. 2 Dist. 2003) 119 S.W.3d 312, rehearing overruled, review granted, reversed 168 S.W.3d 835, rehearing denied. Securities Regulation 308
Fact questions as to whether officers of brokerage firm and firm's management company were in privity with firm, such that collateral estoppel prevented them from contesting earlier determination that firm had violated Texas Securities Act, precluded summary judgment for investors in suit to hold officers and management company liable for firm's violations of the Securities Act. Texas Capital Securities Management, Inc. v. Sandefer (App. 6 Dist. 2002) 80 S.W.3d 260, petition stricken. Judgment 181(13)
Individual's status as secretary and treasurer of brokerage firm was insufficient, without more evidence, to establish privity with firm, as required to invoke collateral estoppel based on earlier lawsuit against firm. Texas Capital Securities Management, Inc. v. Sandefer (App. 6 Dist. 2002) 80 S.W.3d 260, petition stricken. Judgment 701; Judgment 955
Fact that officers of brokerage firm and firm's management company, who were being sued by investors, used same attorney as firm had used in prior suit was insufficient to establish privity with firm, as required to invoke collateral estoppel based on prior suit. Texas Capital Securities Management, Inc. v. Sandefer (App. 6 Dist. 2002) 80 S.W.3d 260, petition stricken. Judgment 701
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In order to establish liability under provision of Texas Securities Act (TSA) imposing joint and several liability for anyone who directly or indirectly with intent to deceive or defraud or with reckless disregard for the truth or the law materially aids a seller, buyer, or issuer of a security, a plaintiff must demonstrate: (1) that a primary violation of the securities laws occurred, (2) that the alleged aider had general awareness of its role in this violation, (3) that the actor rendered substantial assistance in this violation, and (4) that the alleged aider either intended to deceive plaintiff or acted with reckless disregard for the truth of the representations made by the primary violator. Frank v. Bear, Stearns & Co. (App. 14 Dist. 2000) 11 S.W.3d 380, review denied. Securities Regulation 302
Underwriters did not have duty to communicate riskiness of investment to investors, and thus were not liable under Texas Securities Act (TSA) for aiding corporation that allegedly sold securities in violation of TSA, where there was no showing that underwriters knew of any securities law violation by, or enforcement action against, corporation that solicited investors and sold securities. Frank v. Bear, Stearns & Co. (App. 14 Dist. 2000) 11 S.W.3d 380, review denied. Securities Regulation 260
Failure to disclose the SEC injunction against syndicator of oil and gas partnerships and failure to adequately disclose poor performance of past programs of syndicator to investors were violations of the Texas Security Act on part of insurer which was liable as aider and abettor through its underwriting program and marketing of partnerships in connection with sale of surety bonds guarantying investor's investments, and such securities fraud was defense to investors to payment of notes. Insurance Co. of North America v. Morris (App. 14 Dist. 1996) 928 S.W.2d 133, rehearing overruled, writ granted, affirmed in part, reversed in part 981 S.W.2d 667. Bills And Notes 106; Securities Regulation 278
Person or corporation who offers or sells unregistered security is liable to the buyer, who may sue for damages, under Texas Securities Act. Busse v. Pacific Cattle Feeding Fund No. 1, Ltd. (App. 6 Dist. 1995) 896 S.W.2d 807, rehearing overruled, writ denied. Securities Regulation 302
Investors in corporate bonds could litigate Texas Securities Act claims against corporation's placement agent in Texas, even if they had no connection with Texas and purchase of bonds did not occur in Texas, where placement agent had office in Texas and did business there. Vernon's Ann.Texas Civ.St. art. 581-33. Lutheran Broth. v. Kidder Peabody & Co., Inc. (App. 6 Dist. 1992) 829 S.W.2d 300, writ dismissed, writ withdrawn, writ granted, set aside 840 S.W.2d 384. Courts 13.5(12)
Failure of company hired to train investment company's Chinese employees on the day trading of stocks to properly register as an investment adviser, as required under Texas Securities Act, precluded contractual and quasi-contractual claims against investment company. S & D Trading Academy, LLC v. AAFIS Inc., C.A.5 (Tex.)2009, 336 Fed.Appx. 443, 2009 WL 1885881, Unreported, certiorari denied 130 S.Ct. 1054, 558 U.S. 1111, 175 L.Ed.2d 883. Securities Regulation 293
Secondary liability
For purposes of secondary aider liability under the Texas Securities Act (TSA), an alleged aider can only be held liable if it rendered assistance in the face of a perceived risk that its assistance would facilitate untruthful or illegal activity by the primary violator; in order to perceive such a risk, the alleged aider must possess a general awareness that his role was part of an overall activity that is improper. Highland Capital Management, L.P. v. Ryder Scott Co. (App. 1 Dist. 2012) 402 S.W.3d 719. Securities Regulation 302
To prove secondary aider liability under the Texas Securities Act (TSA), the plaintiff must demonstrate: (1) a primary violation of the securities laws occurred; (2) the alleged aider had general awareness of its role in this violation; (3) the actor rendered substantial assistance in this violation; and (4) that the alleged aider either (a) intended to deceive the plaintiff or (b) acted with reckless disregard for the truth of the representations made by the primary violator. Highland Capital Management, L.P. v. Ryder Scott Co. (App. 1 Dist. 2012) 402 S.W.3d 719. Securities Regulation 302
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“Secondary liability” under the Texas Securities Act (TSA) is derivative liability for another person's securities violation either because he is a control person or because he aided the seller or buyer of the securities. Darocy v. Abildtrup (App. 5 Dist. 2011) 345 S.W.3d 129. Securities Regulation 302
Control persons and aiders
For purposes of secondary liability, Texas Securities Act (TSA) does not require aider to have had direct dealing with the defrauded party or an investor to prove that he relied on the alleged misrepresentations or omissions. In re Enron Corporation Securities, Derivative & "ERISA" Litigation, S.D.Tex.2007, 540 F.Supp.2d 759. Securities Regulation 302
A prerequisite for establishing secondary liability for aiding and abetting under the Texas Securities Act (TSA) is a primary violation under the statute. In re Enron Corporation Securities, Derivative & "ERISA" Litigation, S.D.Tex.2007, 540 F.Supp.2d 759. Securities Regulation 302
To state claim for aider and abettor liability under Texas Securities Act (TSA), plaintiff must allege that: (1) there was primary violation of securities laws; (2) aider and abettor had general awareness of his role in violation; (3) aider and abettor gave substantial assistance in violation; and (4) aider and abettor intended to deceive plaintiff or acted with reckless disregard for truth of primary violator's misrepresentations. In re Enron Corp. Securities, Derivative & ""ERISA'' Litigation, S.D.Tex.2007, 490 F.Supp.2d 784. Securities Regulation 302
To make out prima facie case for control person liability under Texas Securities Act, plaintiff must demonstrate that defendant had actual power or influence over controlled person and that defendant induced or participated in alleged violation; status alone is insufficient to establish that defendant is control person within statute's ambit. In re Enron Corp. Securities, Derivative & ERISA Litigation, S.D.Tex.2002, 235 F.Supp.2d 549. Securities Regulation 302
Under Texas Securities Act's control person section, control person at corporation can be sued directly without joining corporation as defendant. In re Enron Corp. Securities, Derivative & ERISA Litigation, S.D.Tex.2002, 235 F.Supp.2d 549.
Considering that the language of subd. F of this article pertaining to controlling person liability tracks that contained in the federal statute, and the commentary so suggesting, the district court would interpret the Texas statute to impose the same requirements as are established under the federal provisions. American General Ins. Co. v. Equitable General Corp., 1980, 493 F.Supp. 721. Securities Regulation 302
Since the element of scienter was not proved with respect to those individual defendants who were outside directors of the corporate defendant, liability would not lie against them under § 10(b) of the Securities Exchange Act [15 U.S.C.A. § 78j(b)] or Rule 10b-5; furthermore, absent the requisite element of scienter or any evidence of culpable conduct whatever, those defendants could not be held liable as controlling persons under the Securities Exchange Act or the Texas Securities Act. American General Ins. Co. v. Equitable General Corp., 1980, 493 F.Supp. 721. Securities Regulation 60.45(1); Securities Regulation 302
Genuine issue of material fact existed as to whether investment firm, as employer of securities broker, had power to control or influence the broker's sale of his interests in outside corporations to purchaser, precluding summary judgment in purchaser's action against employer in which purchaser alleged control person liability under Texas Securities Act. Fernea v. Merrill Lynch Pierce Fenner & Smith, Inc. (App. 3 Dist. 2011) 2011 WL 2769838, appeal abated 2011 WL 4424291, withdrawn, appeal dismissed 2014 WL 5801862. Judgment 181(18)
The word “control,” as used in the Texas Securities Act provision governing control person liability, is used in the same broad sense as in federal securities law and means the possession, direct or indirect, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract, or otherwise. Fernea v.
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Merrill Lynch Pierce Fenner & Smith, Inc. (App. 3 Dist. 2011) 2011 WL 2769838, appeal abated 2011 WL 4424291, withdrawn, appeal dismissed 2014 WL 5801862. Securities Regulation 302
To prove aider-and-abettor liability under the Texas Securities Act, the plaintiff must demonstrate: (1) that a primary violation of the securities laws occurred; (2) that the alleged aider had general awareness of its role in this violation; (3) that the actor rendered substantial assistance in this violation; and (4) that the alleged aider either intended to deceive plaintiff or acted with reckless disregard for the truth of the representations made by the primary violator. Fernea v. Merrill Lynch Pierce Fenner & Smith, Inc. (App. 3 Dist. 2011) 2011 WL 2769838, appeal abated 2011 WL 4424291, withdrawn, appeal dismissed 2014 WL 5801862. Securities Regulation 302
In a trial for control person liability under the Texas Securities Act, the plaintiff must prove that the alleged controlling person: (1) had actual power or influence over the controlled person, and (2) had the power to control or influence the specific transaction or activity that gave rise to the underlying violation; the plaintiff need not prove that the alleged controlling person culpably participated in the primary violation. Fernea v. Merrill Lynch Pierce Fenner & Smith, Inc. (App. 3 Dist. 2011) 2011 WL 2769838, appeal abated 2011 WL 4424291, withdrawn, appeal dismissed 2014 WL 5801862. Securities Regulation 302
Investment firm that employed securities broker was not liable as an aider and abettor for broker's violation of the Texas Securities Act in selling unregistered securities to purchaser, absent showing that firm had general awareness about the nature of specific transaction at issue, as opposed to merely general awareness that broker was trying to sell his companies. Fernea v. Merrill Lynch Pierce Fenner & Smith, Inc. (App. 3 Dist. 2011) 2011 WL 2769838, appeal abated 2011 WL 4424291, withdrawn, appeal dismissed 2014 WL 5801862. Securities Regulation 302
The standard of reckless disregard for the truth or the law, as required to prove aider-and-abettor liability under the Texas Securities Act (TSA, means that an alleged aider can be held liable only if it rendered assistance in the face of a perceived risk that its assistance would facilitate untruthful or illegal activity by the primary violator; in order to perceive such a risk, the alleged aider must possess a general awareness that his role was part of an overall activity that is improper. Willis v. Marshall (App. 8 Dist. 2013) 401 S.W.3d 689. Securities Regulation 302
To prove aider-and-abettor liability under the Texas Securities Act (TSA), the plaintiff must demonstrate: (1) that a primary violation of the securities laws occurred; (2) that the alleged aider had general awareness of its role in this violation; 3) that the alleged aider rendered substantial assistance in this violation; and (4) that the alleged aider either intended to deceive plaintiff or acted with reckless disregard for the truth of the representations made by the primary violator. Willis v. Marshall (App. 8 Dist. 2013) 401 S.W.3d 689. Securities Regulation 302
Accounting firm that prepared financial reports in preparation for sale of partnership interests did not rendered substantial assistance in a primary violation of the Texas Securities Act (TSA), as required for firm to be liable as an aidor and abettor for TSA violation by client who sought to sell the interests, in action by investors who had purchased the interests; disclaimer letters accompanying the reports and addressed to the partners warned that firm had not audited or reviewed the financial statements comprising compilation, explained that a compilation was the mere presentation of information that was the representation of management upon which it did not express an opinion or any other form of assurance, that management had elected to omit substantially all of the disclosures and the statement of cash flows required by generally-accepted accounting principle, and that the inclusion of the information omitted by management could influence a report user's conclusions about partnership's financial condition. Willis v. Marshall (App. 8 Dist. 2013) 401 S.W.3d 689. Securities Regulation 302
Under the Texas Securities Act (TSA), both control persons and aiders are jointly and severally liable with the primary violator to the same extent as if they were the primary violator. Darocy v. Abildtrup (App. 5 Dist. 2011) 345 S.W.3d 129. Securities Regulation 302
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Frank test for determining whether a defendant was a control person for purposes of imposing control person liability under the Texas Security Act (TSA) was applicable to investors' claims against securities brokerage firm arising from agent's purportedly fraudulent conduct involving sale of church-related securities. Barnes v. SWS Financial Services, Inc. (App. 5 Dist. 2003) 97 S.W.3d 759. Securities Regulation 302
It is not necessary for a plaintiff to show culpable participation by a defendant in order to establish the defendant was a control person, for purposes of imposing control person liability under the Texas Securities Act (TSA), because lack of participation and good faith constitute an affirmative defense for a controlling person. Barnes v. SWS Financial Services, Inc. (App. 5 Dist. 2003) 97 S.W.3d 759. Securities Regulation 302
For purposes of establishing whether a defendant is a control person subject to control person liability under Texas Securities Act (TSA), separating the issue of control from the issue of good faith is crucial, as the burden of proof with respect to good faith is on the defendant while the burden of establishing control is on the plaintiff. Barnes v. SWS Financial Services, Inc. (App. 5 Dist. 2003) 97 S.W.3d 759. Securities Regulation 302; Securities Regulation 307
National Association of Securities Dealers (NASD) form which listed brokerage firm's president, vice-president, and secretary/ treasurer as control persons did not conclusively establish that these officers were “control persons” within meaning of Texas Securities Act. Texas Capital Securities Management, Inc. v. Sandefer (App. 6 Dist. 2002) 80 S.W.3d 260, petition stricken. Securities Regulation 302
Status alone does not automatically cause officers to be deemed “control persons” under Texas Securities Act, and evidence is also required that an officer had influence over at least the direction of the corporation. Texas Capital Securities Management, Inc. v. Sandefer (App. 6 Dist. 2002) 80 S.W.3d 260, petition stricken. Securities Regulation 302
Evidence that two owners of yogurt store franchisor knew of franchisee's development delays and late payment of franchise obligations, that one owner knew franchisee was raising money from investors, that owners knew two of franchisor's corporate officers were acting as references for franchisee, and that franchisee relied on owners' celebrity status when recruiting investors in franchisee's proposed stores, did not establish intent to deceive or reckless disregard for truth of representations that could conceivably be attributed to owners, as basis for aider and abettor liability under Texas Securities Act, relating to investors' allegations that franchisee, and the corporate officers as co-conspirators, absconded with investor funds instead of fully developing proposed stores. Crescendo Investments, Inc. v. Brice (App. 4 Dist. 2001) 61 S.W.3d 465, rehearing overruled, review denied. Securities Regulation 308
Underwriters could not be liable under Texas Securities Act (TSA) for directly or indirectly controlling corporation that allegedly sold securities in violation of TSA, absent competent proof that underwriters controlled internal affairs of corporation that solicited investors and sold securities at issue. Frank v. Bear, Stearns & Co. (App. 14 Dist. 2000) 11 S.W.3d 380, review denied. Securities Regulation 260
State Securities Act imposed joint and several liability on control persons of corporation issuing securities, allowing for suit against control persons of issuing corporation without joining corporation. Summers v. WellTech, Inc. (App. 1 Dist. 1996) 935 S.W.2d 228. Securities Regulation 302
Person who directly or indirectly controls seller or issuer of a security is liable jointly and severally under Texas Securities Act statute providing that offerer or seller of unregistered security may be liable to the buyer, together with the seller or issuer and to the same extent as the seller or issuer. Busse v. Pacific Cattle Feeding Fund No. 1, Ltd. (App. 6 Dist. 1995) 896 S.W.2d 807, rehearing overruled, writ denied. Securities Regulation 302
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Term “control person” in Texas Securities Act is used in same broad sense as in federal statute, and major shareholders and directors are control persons. Busse v. Pacific Cattle Feeding Fund No. 1, Ltd. (App. 6 Dist. 1995) 896 S.W.2d 807, rehearing overruled, writ denied. Securities Regulation 302
Defendant waived complaint to comment by plaintiff's counsel that court had already determined in deciding earlier motion that defendant was a control person for a company selling securities in violation of Texas Securities Act, where not until the next day did the defendants move for mistrial on grounds that statement improperly informed jury of court's prior ruling and implied that defendant was a wrongdoer, and failed to request curative instruction. Busse v. Pacific Cattle Feeding Fund No. 1, Ltd. (App. 6 Dist. 1995) 896 S.W.2d 807, rehearing overruled, writ denied. Trial 131(2)
Quitclaim deed
Assertions by buyer of interest in oil lease, that provision of Texas Securities Act (TSA) which rendered void any contractual provision requiring a buyer of securities to waive compliance with TSA rendered void warnings in auction documents that seller was making no representation or warranty, and that another provision of TSA impliedly prohibited seller from asserting, as defense to claim of untruth or omission, that neither party knew the representation was false but both might have discovered its falsity, were irrelevant, where conveyance from seller to buyer was by quitclaim deed, so that seller made no representation to buyer that lease was valid. Geodyne Energy Income Production Partnership I-E v. Newton Corp. (Sup. 2005) 161 S.W.3d 482. Securities Regulation 278
Sellers
Under the Texas Securities Act, (TSA) a statutory “seller” is person who sold security directly to purchaser, or who acted as vendor's agent and solicited the sale. In re Enron Corp. Securities, Derivative & Erisa Litigation, S.D.Tex.2010, 762 F.Supp.2d 942. Securities Regulation 302
A “seller” of securities for purposes of Texas Securities Act can include a person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner, such as a broker. Highland Capital Management, L.P. v. Ryder Scott Co. (App. 1 Dist. 2012) 402 S.W.3d 719. Securities Regulation 302
Waiver
Only way by which investment company could have waived rights it had under the 1933 Securities Act antifraud provision when it ratified original agreement would be if the ratification was found to operate as a settlement between it and those who allegedly fraudulently induced it to enter into the original agreement. Haralson v. E.F. Hutton Group, Inc., C.A.5 (Tex.)1990, 919 F.2d 1014, rehearing denied. Securities Regulation 35.24
Buyer of security regarding interest in oil well did not waive its right to seek rescission of transaction by not submitting issue to jury in action against seller under Texas Security Act (TSA) for alleged omission or misrepresentation of material fact regarding sale, since jury's finding on availability of rescission, which was an issue of law, would have been immaterial. Geodyne Energy Income Production Partnership I-E v. Newton Corp. (App. 5 Dist. 2003) 97 S.W.3d 779, review denied, rehearing of petition for review granted, withdrawn, reversed in part 161 S.W.3d 482. Securities Regulation 309
Inclusion of an “as is” or waiver clause in sale agreement for security does not release or waive any cause of action buyer may have for current violation of Texas Security Act (TSA) of which buyer has neither actual nor constructive knowledge. Geodyne Energy Income Production Partnership I-E v. Newton Corp. (App. 5 Dist. 2003) 97 S.W.3d 779, review denied, rehearing of petition for review granted, withdrawn, reversed in part 161 S.W.3d 482. Securities Regulation 278
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Brokerage firm waived its right to have the issue of exemption from registration under the Texas Securities Act submitted to the jury in an action under the Act's anti-fraud provision, where the issue had not been raised specifically in an affirmative written pleading. Texas Capital Securities, Inc. v. Sandefer (App. 1 Dist. 2001) 58 S.W.3d 760, review denied. Securities Regulation 306
Disclaimer
“As is” clause in agreement for sale of security involving interest in oil well did not preclude buyer from asserting claim against seller under Texas Security Act (TSA) for alleged omission or misrepresentation of material fact regarding sale, because TSA did not require proof that misrepresentation or omission either caused buyer to purchase security or caused buyer's loss. Geodyne Energy Income Production Partnership I-E v. Newton Corp. (App. 5 Dist. 2003) 97 S.W.3d 779, review denied, rehearing of petition for review granted, withdrawn, reversed in part 161 S.W.3d 482. Securities Regulation 278
Jurisdiction
Anti-waiver provisions of federal and state Securities Acts did not bar enforcement of international forum selection clause in shareholder agreement for purchase of company's stock, stating that parties agreed to exclusive jurisdiction of courts of Ontario, Canada to adjudicate any and all disputes arising under or relating to shareholder agreement and/or sale, purchase, or holding of company's common shares; public policy strongly favored enforcement of forum selection clauses, and securities laws were only affected in cases where parties exercised their rights to freely and voluntarily enter into a contract mandating that suits be brought in courts and under laws of another country. Young v. Valt.X Holdings, Inc. (App. 3 Dist. 2010) 336 S.W.3d 258, review dismissed. Contracts 127(4)
Exercise of personal jurisdiction over administrator of investor's individual retirement account did not offend traditional notions of fair play and substantial justice required to satisfy due process; administrator would not be substantially burdened, Texas had strong interest in protecting its residents who purchase securities, Texas was a convenient forum, a Texas court could efficiently resolve the controversy and promote the policies implicated by the Texas Securities Act, and Texas had an interest in providing an effective means of redress for its residents. Ira Resources, Inc. v. Griego (App. 13 Dist. 2005) 161 S.W.3d 248, rehearing overruled, review granted, reversed 221 S.W.3d 592, on remand 235 S.W.3d 263. Constitutional Law 3965(7); Securities Regulation 303.1
Petition, alleging that defendant foreign corporation was engaged in business in Texas and maintained office and principal place of business in Dallas, that corporation had misused solicited funds and made misrepresentations in prospectuses, and that solicited funds were to be paid into trust account at bank in Dallas, was sufficient to permit court to acquire personal jurisdiction by substituted service over corporation, which had made special appearance in action seeking an accounting for common-law fraud, statutory fraud, and violation of this article. Minexa Arizona, Inc. v. Staubauch (App. 5 Dist. 1984) 667 S.W.2d 563. Courts 32.5(2)
Out-of-state securities investors were subject to Texas jurisdiction in action brought by client who alleged that investors fraudulently cause her to invest money in foreign bank securities; investors directly controlled the receipt and disbursement of funds obtained from client in a scheme involving fraudulent investments in foreign securities, investors did not deny that they were the recipients of client's funds, evidence indicated that investors participated in a scheme that caused harm to Texas consumers, and investors were subject to jurisdiction based on their status as recipients of the funds at issue, or, put another way, as links in the chain in the money trail. Leben v. Treen (App. 13 Dist. 2003) 2003 WL 22479150, Unreported. Courts 13.5(12)
Parties
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Sellers of oil and gas leases and associated personal property had no standing under Texas Securities Act or Securities Act of 1933 to sue buyers, since sellers did not purchase any securities from buyers as part of transaction, notwithstanding claim that buyers' agreement to pay sellers 25% of net profits from production constituted a “security” and that sellers “purchased” it when they executed agreement, since, rather than buying net profits interest, sellers did no more than retain a portion of their rights as working interest owners. Ratner v. Sioux Natural Gas Corp., C.A.5 (Tex.)1985, 770 F.2d 512. Securities Regulation 25.60; Securities Regulation 300
Oil lessee's sale of his interests in certain oil and gas wells to a third party did not make investor, who had purchased a threeeighths interest in five operating wells, a forced seller such as would give him standing to assert claims under federal and Texas security laws. Jeanes v. Henderson, C.A.5 (Tex.)1983, 703 F.2d 855. Securities Regulation 60.37; Securities Regulation 300
Washington state investor had right of action under Texas Securities Act arising from alleged misconduct occurring in Texas, i.e. issuance of registration statement for sale of notes that made materially false statements about entities formed by employees of Texas issuer, even though damage from misconduct, i.e. investor's purchase of notes at artificially inflated prices, occurred outside Texas. In re Enron Corp. Securities, Derivative & ERISA Litigation, S.D.Tex.2002, 235 F.Supp.2d 549. Securities Regulation 300
A major shareholder or director can be a “control person” for purposes of secondary liability under the Texas Securities Act (TSA). Darocy v. Abildtrup (App. 5 Dist. 2011) 345 S.W.3d 129. Securities Regulation 302
Insured demonstrated he would vigorously prosecute class members' claims and defenses against insurer alleged to have sold securities as an unregistered dealer in violation of Securities Act, and thus, insured satisfied that element of adequacy of representation requirement for class certification, where insured showed personal integrity and intelligence to understand proceedings, and he demonstrated familiarity with proceedings and willingness to prosecute those claims. Citizens Ins. Co. of America v. Hakim Daccach (App. 3 Dist. 2003) 105 S.W.3d 712, review granted, reversed 217 S.W.3d 430. Parties 35.85
Laches and limitations
Under Texas law, three-year statute of limitations on plaintiffs' claims against corporation's officers and directors and several financial institutions for aiding and abetting under the Texas Securities Act began to run when plaintiffs had notice of the claims when corporation publicly announced that it had incurred a $683 million loss and was taking non-recurring charges of $1.01 billion after-tax in the third quarter of that year. Tex.Rev.Civ. Stat. Ann. art. Newby v. Enron Corp., C.A.5 (Tex.)2008, 542 F.3d 463. Limitation Of Actions 95(18)
The two-year limitations period applicable to general fraud statute in Texas Business and Commerce Code (V.T.C.A. Bus. & C. § 27.01) and not three-year statute of limitations for actions brought under this article applied to Rule 10b-5 action for which Texas was forum state. Wood v. Combustion Engineering, Inc., C.A.5 (Tex.)1981, 643 F.2d 339. Securities Regulation 134
Under allegations of complaint under SEC rule 106-5, 17 C.F.R. 240.10b-5, and Securities and Exchange Act of 1934, § 10b [15 U.S.C.A. § 78j(b) ] against use of deceptive or manipulative device or contrivance, plaintiffs either knew or should have known about alleged fraud at such a time that their action was barred by three-year Texas statute of limitations. Berry Petroleum Co. v. Adams and Peck, C.A.2 (N.Y.)1975, 518 F.2d 402. Limitation Of Actions 179(2)
Action under SEC rule 10b-5, 17 C.F.R. 240.10b-5, against use of any manipulative, deceptive or other fraudulent device or contrivance is more nearly approximated by cause of action for false or misleading statement under this article than cause of action under Texas fraud statute (V.T.C.A. Bus. & C. § 27.01), and Texas three-year statute of limitations (this article) should be applied to suits by buyers in Texas under the federal rule. Berry Petroleum Co. v. Adams and Peck, C.A.2 (N.Y.)1975, 518 F.2d 402. Securities Regulation 134
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Under the limitations period of Texas Security Act of three years from discovery but within five years of initial purchase, claims by investors under Act claims were barred for investments made more than five years before filing suit. Hanley v. First Investors Corp., E.D.Tex.1992, 793 F.Supp. 719. Securities Regulation 305
Two-year Texas statute of limitations under general fraud statute (V.T.C.A. Bus. & C. § 27.01) applied to action alleging securities fraud under the Securities Exchange Act [15 U.S.C.A. § 78j(b) ], rather than this article. Keys v. Wolfe, N.D.Tex.1982, 540 F.Supp. 1054, reversed 709 F.2d 413. Securities Regulation 134
Actions brought in Texas for violation of Securities Exchange Commission rule governing use of manipulative or deceptive devices or contrivances in connection with purchase or sale of securities are controlled by three-year limitation period of this article. Richardson v. Salinas, N.D.Tex.1972, 336 F.Supp. 997. Securities Regulation 134
Cause of action for registration violations under the Texas Securities Act from sale of viatical and life settlements accrued, and three-year limitations period began to run, at moment of sale, not when purchasers made further payment of additional premiums on the life insurance policies from which the settlements were produced. Arnold v. Life Partners, Inc. (App. 5 Dist. 2013) 416 S.W.3d 577, rehearing overruled, petition for review filed, review granted. Limitation of Actions 58(1)
The limitations period began to run on claim under the Texas Securities Act (TSA) on the date minority shareholder in natural gas exploration company discovered or, in the exercise of reasonable diligence, should have discovered majority shareholder's purported untruths or omissions in regards to redemption of shares. Allen v. Devon Energy Holdings, L.L.C. (App. 1 Dist. 2012) 367 S.W.3d 355, review granted, judgment set aside, and remanded by agreement, opinion after remand from supreme court 2013 WL 273026. Limitation of Actions 100(6)
Action under Securities Act alleging failure to secure permit or registration for issue was barred by three-year statute of limitations in subd. C of this article where, more than three years before action was filed, securities buyer signed promissory note for purchase price of securities and security agreement was executed giving seller security interest in shares to secure payment due on note. Stone v. Enstam (Civ.App. 1976) 541 S.W.2d 473. Limitation Of Actions 58(1)
Class actions
Definition of class, in action alleging insurer was unregistered dealer in securities by selling life insurance policies with stock purchase option, was not dependent on merits of case and did not permit class members to bring individual claims if class claims were rejected, and thus, class was determined by objective criteria and did not create impermissible “fail-safe” class, even though definition permitted members to retain policy and opt-out of rescission remedy; Securities Act prohibited members who chose to opt-out from bringing individual claims, and definition did not depend on ultimate legal conclusion of whether policies were “securities” sold in state. Citizens Ins. Co. of America v. Hakim Daccach (App. 3 Dist. 2003) 105 S.W.3d 712, review granted, reversed 217 S.W.3d 430. Parties 35.41; Parties 35.85
Class representative alleged “overall scheme” by insurer in sale of policies that were securities by unregistered dealer in violation of Securities Act, and thus, he was typical of class members, as essential element of class certification, even though insurer claimed statute of limitations defense, that he lacked reliance on claim that policy was investment, and that representative's policy did not contain arbitration clause found in other policies; statute of limitations claim did not destroy typicality, reliance was not element of cause of action, and arbitration clause did not destroy “nexus” between representative's injuries and those of other members. Citizens Ins. Co. of America v. Hakim Daccach (App. 3 Dist. 2003) 105 S.W.3d 712, review granted, reversed 217 S.W.3d 430. Parties 35.85
Class action alleging unregistered securities dealer's sale of insurance policies as investment vehicle violated Securities Act was both more fair and efficient than individual claims, and satisfied superiority requirement for class certification, where
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issues were limited to whether insurance policies were “securities” and whether those policies were sold from state by insurer, claimants would be required to relitigate same issues if individual claims were brought, and small monetary value of rescission precluded non-residents from bearing costs of travel to state to prosecute claims. Citizens Ins. Co. of America v. Hakim Daccach (App. 3 Dist. 2003) 105 S.W.3d 712, review granted, reversed 217 S.W.3d 430. Parties 35.85
Venue
There was no probative evidence that all or a substantial part of the events giving rise to fraud, negligent misrepresentation and Texas Securities Act action, brought against reservoir-evaluation consulting firm that had prepared reports on oil company's proven reserves by holders of company's unsecured subordinated notes, occurred in county in which holders initially brought action, and thus venue was not maintainable in such county under general permissive venue statute, where only event cited by holders that occurred in such county was that one of their portfolio managers received and reviewed in such county company's security forms that incorporated firm's reports, there was no allegation that holders met with representatives of firm or company in such county or that firm directed security forms to holders in such county, and all of the work that firm performed for company occurred in another county. Highland Capital Management, L.P. v. Ryder Scott Co. (App. 1 Dist. 2006) 212 S.W.3d 522, rehearing overruled, review denied, on remand 2009 WL 8620816. Venue 8.5(1); Venue 8.5(2); Venue 8.5(8)
Pleadings
District Court would not consider, on corporate borrower and its insiders' motion to dismiss lenders' claim alleging violation of the Texas Securities Act, borrower and insiders' claim that funds they set up to finance purchase of oil and gas drilling rigs were exempt from Act's registration requirements because there were fewer than 35 total sales for each contract, where borrower and insiders did not include the claim in their pleadings. Biliouris v. Sundance Resources, Inc., N.D.Tex.2008, 559 F.Supp.2d 733. Securities Regulation 306
Investors failed to state claims against issuer's bank for aiding and abetting fraud in violation of Texas Securities Act (TSA) and Texas Business and Commerce Code, common law fraud, and conspiracy to commit fraud since they did not adequately plead a primary violation by issuer under the TSA and Business and Commerce Code, common law fraud, and the underlying fraud for the conspiracy claim; investors failed to allege with particularity the requisite facts about issuer's alleged misrepresentations and omissions, when and where the statements were made, why the statements were fraudulent, what material facts were omitted and where, and why those omissions made the representations misleading, and investors failed to adequately plead reliance. In re Enron Corporation Securities, Derivative & "ERISA" Litigation, S.D.Tex.2007, 540 F.Supp.2d 759. Federal Civil Procedure 636
Investors alleging scheme to artificially inflate energy corporation's earnings and to conceal debt adequately pleaded facts demonstrating that auditor's officer had general awareness of his role in scheme, as required to state claim for aiding and abetting liability under Texas Securities Act (TSA); complaint averred that officer assisted corporation in “cooking its books,” and that officer acted with intention of deceiving investors or with reckless disregard about truth or applicable law. In re Enron Corp. Securities, Derivative & ""ERISA'' Litigation, S.D.Tex.2007, 490 F.Supp.2d 784. Securities Regulation 302
Investors who sued energy corporation and auditor, alleging scheme to artificially inflate corporation's earnings and to conceal debt, adequately pleaded facts demonstrating that auditor had general awareness of its role in scheme, as required to state claim for aiding and abetting liability under Texas Securities Act (TSA); complaint averred that auditor fired analyst and replaced him at corporation's behest, and that auditor gave substantial assistance in allowing corporation to deceptively report $60 million in income. In re Enron Corp. Securities, Derivative & ""ERISA'' Litigation, S.D.Tex.2007, 490 F.Supp.2d 784. Securities Regulation 302
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Investors who sued energy corporation and auditor, alleging scheme to artificially inflate corporation's earnings and to conceal debt, failed to allege corporation's primary violation of Texas Securities Act (TSA) with requisite specificity under federal rules; although investors pleaded specific figures for purported sham earnings, they failed to point to locations in corporation's financial documents where such amounts were misrepresented. In re Enron Corp. Securities, Derivative & ""ERISA'' Litigation, S.D.Tex.2007, 490 F.Supp.2d 784. Federal Civil Procedure 636
Allegations in complaint were insufficient to support inference that individual who gave positive reference to investors on behalf of hedge fund was recruited by fund to be an active seller of securities, as was required to state claims under Texas Securities Act, Arkansas Securities Act, and Tennessee Securities Act. Harding University v. Consulting Services Group, L.P., N.D. Ill.1998, 22 F.Supp.2d 824. Securities Regulation 278
Summary judgment
Genuine issue of material fact existed as to whether oil reserve estimates that reservoir-evaluation consulting firm made for oil and gas company, which were included in prospectus, were material misrepresentations, despite the fact that prospectus included cautionary language regarding reserve estimates, precluding summary judgment on claims by holders of unsecured bonds in bankrupt oil and gas company against consulting firm alleging that firm materially aided company in violating Texas Securities Act. Highland Capital Management, L.P. v. Ryder Scott Co. (App. 1 Dist. 2012) 402 S.W.3d 719. Judgment 181(31)
Genuine issue of material fact existed as to whether securities brokers who sold unsecured bonds in oil and gas company were motivated at least in part by a desire to serve their own financial interests or those of the securities owner so as to make them “sellers” under the Texas Securities Act, precluding summary judgment on bond holders' claims against reservoir-evaluation consulting firm that had prepared reports on company's proven reserves alleging that firm aided sellers in a primary violation of the Act. Highland Capital Management, L.P. v. Ryder Scott Co. (App. 1 Dist. 2012) 402 S.W.3d 719. Judgment 181(18); Judgment 181(31)
Defenses
Where a plaintiff proceeding under fraud provision of the Texas Securities Act (subd. B of this article) proves intentional, fraudulent conduct, the defendant, by the statute's terms, has no defense; where a plaintiff likewise proves reckless conduct, the due care defense is also of no avail, for conduct, which is an “extreme departure” from ordinary standards of care cannot simultaneously admit to a finding of reasonable care; but where plaintiff can prove only negligence, without intentional or reckless conduct, defendant can prevail if he can establish his own exercise of due care. American General Ins. Co. v. Equitable General Corp., 1980, 493 F.Supp. 721. Securities Regulation 297
Jury's finding that third-party trustee, sued as aider-abetter under state securities act, lacked knowledge of broker's untrue statement or omission defrauding investors in qualified securities through illegal Ponzi scheme, did not constitute a defense to trustee's secondary liability as an aider-abetter. Sterling Trust Co. v. Adderley (App. 2 Dist. 2003) 119 S.W.3d 312, rehearing overruled, review granted, reversed 168 S.W.3d 835, rehearing denied. Securities Regulation 278
Ratification is not a defense to securities fraud. Duperier v. Texas State Bank (App. 13 Dist. 2000) 28 S.W.3d 740, review dismissed by agreement. Securities Regulation 297
Comparative fault is not a defense to securities fraud. Duperier v. Texas State Bank (App. 13 Dist. 2000) 28 S.W.3d 740, review dismissed by agreement. Securities Regulation 297
Loss causation is not a defense to securities fraud. Duperier v. Texas State Bank (App. 13 Dist. 2000) 28 S.W.3d 740, review dismissed by agreement. Securities Regulation 297
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Common law defenses of estoppel and ratification are not available in Deceptive Trade Practices Act (DTPA) or Texas Securities Act (TSA) actions. Insurance Co. of North America v. Morris (App. 14 Dist. 1996) 928 S.W.2d 133, rehearing overruled, writ granted, affirmed in part, reversed in part 981 S.W.2d 667. Antitrust And Trade Regulation 294; Securities Regulation 301
A joint venture is a defense to any cause of action arising under the Texas Securities Act. Anderson v. Vinson Exploration, Inc. (App. 8 Dist. 1992) 832 S.W.2d 657, rehearing overruled, writ denied. Securities Regulation 291.1
Evidence was sufficient to create a jury question as to whether oil and gas lease joint operating agreement was a joint venture and thus not subject to the Texas Securities Act; joint operating agreement wholly excluded owners of working interest from participation in the drilling, operating and control of the wells in question, lease operator encouraged but did not contribute to initial investment of the project, and lease operators were to share in profits only to the extent of the overriding royalty. Anderson v. Vinson Exploration, Inc. (App. 8 Dist. 1992) 832 S.W.2d 657, rehearing overruled, writ denied. Securities Regulation 309
In suit to recover consideration paid for shares of stock allegedly sold in violation of Securities Act, laches was not available to defendant as a defense since plaintiff was seeking to enforce a statutory legal right, but court's error with respect to laches was harmless in view of holding that plaintiff was not entitled to judgment because of his failure to comply with the Act. Riggs v. Riggs (Civ.App. 1959) 322 S.W.2d 571. Appeal And Error 1029; Securities Regulation 305
Presumptions and burden of proof
To state a claim for aider and abettor liability under the Texas Securities Act (TSA), a plaintiff must show: (1) a primary violation of the securities laws, (2) that the aider and abettor has a general awareness of his role in the violation, (3) that he gave substantial assistance in the violation, and (4) that he intended to deceive the plaintiff or acted with reckless disregard for the truth of the primary violator's misrepresentations. Dorsey v. Portfolio Equities, Inc., C.A.5 (Tex.)2008, 540 F.3d 333. Securities Regulation 302
Under the Texas securities fraud statute, the buyer is not required to prove his own due diligence, nor that he relied on the alleged misrepresentations or omissions. In re Westcap Enterprises, C.A.5 (Tex.)2000, 230 F.3d 717, rehearing and rehearing en banc denied 239 F.3d 367. Securities Regulation 278
Focus of the Texas Securities Act is upon conduct of seller or issuer of securities, i.e., on whether they made a material misrepresentation, and not on conduct of individual buyers, and buyer, to recover under fraud provision of the TSA, need not prove that he would have acted differently but for omission or misrepresentation. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
To recover under fraud provision of the Texas Securities Act (TSA), investor must introduce evidence of material misrepresentation or omission that related to security and induced its purchase, and must also prove that material misrepresentation or omission occurred prior to time of purchase. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
To recover under fraud provision of the Texas Securities Act (TSA), investor must prove that security was sold by means of (1) untrue statement of material fact, or (2) failure to state material fact which was necessary to make any statement made not misleading. In re Perry, Bkrtcy.S.D.Tex.2009, 404 B.R. 196. Securities Regulation 278
The injured investor is not required to show that the defendant participated in the alleged violation in order to establish control person liability under the Texas Securities Act (TSA). Darocy v. Abildtrup (App. 5 Dist. 2011) 345 S.W.3d 129. Securities Regulation 302
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Art. 581-33. Civil Liability with Respect to Issuance or Sale..., TX CIV ST Art. 581-33
To prove aider-and-abettor liability under the Texas Securities Act (TSA), the plaintiff must demonstrate: (1) that a primary violation of the securities laws occurred; (2) that the alleged aider had general awareness of its role in this violation; (3) that the alleged aider rendered substantial assistance in this violation; and (4) that the alleged aider either (a) intended to deceive plaintiff or (b) acted with reckless disregard for the truth of the representations made by the primary violator. Darocy v. Abildtrup (App. 5 Dist. 2011) 345 S.W.3d 129. Securities Regulation 302
Admissibility of evidence
Investors could not use vacated convictions of issuer's employees for wire fraud and conspiracy to prove that broker was liable under Texas law for aiding and abetting securities fraud. In re Enron Corp. Securities, Derivative & ""ERISA'' Litigation, S.D.Tex.2007, 491 F.Supp.2d 690. Judgment 648; Judgment 664; Securities Regulation 302
A statement made after purchase of the securities could not induce purchase and is therefore not relevant to liability under the Texas Securities Act for selling a security by means of an untrue statement of a material fact or an omission of a material fact necessary to prevent statements made from being misleading. Crescendo Investments, Inc. v. Brice (App. 4 Dist. 2001) 61 S.W.3d 465, rehearing overruled, review denied. Securities Regulation 307
Stock broker's testimony that he did not know the identity of the issuer of a document titled “manual exemption” failed to meet the evidentiary requirement of making known to the court the substance of the evidence, and thus, brokerage firm was not entitled to have the document admitted to establish the “recognized securities manual” exemption from registration under the Texas Securities Act, in an action under the Act's anti-fraud provision. Texas Capital Securities, Inc. v. Sandefer (App. 1 Dist. 2001) 58 S.W.3d 760, review denied. Trial 45(1)
Sufficiency of evidence
Evidence established that defendant was a control person for corporate offeror of unregistered securities for participation in oil and gas joint ventures, as basis for defendant's secondary liability under Texas Securities Act (TSA) for offeror's primary violations in selling securities to venturers in violation of TSA and in making untrue statements of material fact or failing to state material facts necessary so that offeror's statements would not be misleading; defendant was board member, secretary, and treasurer of offeror, and he exercised control over offeror's general operations and had power to control the specific transaction or activity upon which primary violations were predicated. Darocy v. Abildtrup (App. 5 Dist. 2011) 345 S.W.3d 129. Securities Regulation 302
Legally and factually sufficient evidence existed to support jury's finding that seller omitted a material fact that was necessary to make seller's statement that it owned a ten-percent working interest in lease not misleading, in buyer's action asserting claim under Texas Security Act (TSA) for alleged omission or misrepresentation of material fact regarding sale of security involving oil-well lease; evidence indicated that lease had expired before time of sale. Geodyne Energy Income Production Partnership I-E v. Newton Corp. (App. 5 Dist. 2003) 97 S.W.3d 779, review denied, rehearing of petition for review granted, withdrawn, reversed in part 161 S.W.3d 482. Securities Regulation 308
Investors seeking to invoke collateral estoppel in suit to hold officers of brokerage firm and firm's management company liable for violations of Texas Securities Act were not required to introduce into evidence the pleadings from prior suit against brokerage firm, since investors had filed a copy of the judgment and jury charge from the prior action and they clearly stated what was determined in that case. Texas Capital Securities Management, Inc. v. Sandefer (App. 6 Dist. 2002) 80 S.W.3d 260, petition stricken. Judgment 956(.5)
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Art. 581-33. Civil Liability with Respect to Issuance or Sale..., TX CIV ST Art. 581-33
Instructions
Third-party trustee, sued under state securities act by qualified securities investors defrauded by broker in Ponzi scheme, was not entitled to general awareness jury instruction; state securities act did not require proof that an aider was generally aware of its role in the securities violation to be liable as an aider. Sterling Trust Co. v. Adderley (App. 2 Dist. 2003) 119 S.W.3d 312, rehearing overruled, review granted, reversed 168 S.W.3d 835, rehearing denied. Securities Regulation 309
Verdict
Jury's answer that securities seller did not violate the anti-fraud provision of the Texas Securities Act was not “immaterial,” though the jury also found that seller's control persons were liable for securities fraud conspiracy, and, thus, the trial court properly declined to disregard the answer; the liability of a control person could not be used to impute liability to the seller under the Act. Crescendo Investments, Inc. v. Brice (App. 4 Dist. 2001) 61 S.W.3d 465, rehearing overruled, review denied. Securities Regulation 302; Securities Regulation 309
Remedies
The purpose of the saving language in civil liability article of state securities act, stating that rights and remedies provided by act are in addition to any other rights, including exemplary or punitive damages, or remedies that may exist at law or in equity, is to confirm that other theories of recovery that provide relief for a transaction that gives rise to a cause of action under the act are not preempted by the act; it is not intended to permit a plaintiff to mix and match actual and punitive damage awards based on alternative theories of recovery. Sterling Trust Co. v. Adderley (App. 2 Dist. 2003) 119 S.W.3d 312, rehearing overruled, review granted, reversed 168 S.W.3d 835, rehearing denied. Securities Regulation 309
Under subd. M of this article providing that rights and remedies provided by Texas Securities Act (art. 581-1 et seq.) are in addition to any other rights or remedies that may exist at law or in equity, no such right exists with respect to matter committed to primary jurisdiction of administrative agency. Simmons v. Danco, Inc. (Civ.App. 1978) 563 S.W.2d 376, ref. n.r.e. Securities Regulation 275
Attorney fees
Issues presented to trial court for determination of equitable attorney fees if class members prevailed on claim that insurer was an unregistered dealer who sold “securities” from the state in violation of Securities Act were limited to whether life insurance policies were securities and whether policies were sold from within the state, and thus, common question predominated over issues of individual class members in determining equitable attorney fees, as essential element of class certification; entire claim was based solely on insurer's conduct and status of policies, and conduct and knowledge of policyholders were irrelevant to whether or not insurer violated Act. Citizens Ins. Co. of America v. Hakim Daccach (App. 3 Dist. 2003) 105 S.W.3d 712, review granted, reversed 217 S.W.3d 430. Parties 35.85
Interest
Simple interest of ten percent was the rate of prejudgment interest in a securities fraud suit. Duperier v. Texas State Bank (App. 13 Dist. 2000) 28 S.W.3d 740, review dismissed by agreement. Interest 31; Interest 60
Review
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Art. 581-33. Civil Liability with Respect to Issuance or Sale..., TX CIV ST Art. 581-33
Jury's finding that third-party trustee, sued under state securities act by qualified securities investors defrauded by broker in Ponzi scheme, did not know and could not have known of untruth or omission on which securities fraud claim against broker was based did not conflict with finding that trustee aided broker's securities fraud and, thus, there was no reversible error attributable to conflict in findings; former finding related to trustee's defense to investors' primary liability claim against it, while latter related to investors' secondary liability claim against it. Sterling Trust Co. v. Adderley (App. 2 Dist. 2003) 119 S.W.3d 312, rehearing overruled, review granted, reversed 168 S.W.3d 835, rehearing denied. Securities Regulation 309
Court of Appeals looks to federal cases interpreting section of Federal Securities Act of 1933 imposing liability on sellers of securities for untrue statement of material fact or omission of material fact as guide in interpreting section of Texas Security Act dealing with omissions and untrue statements of material fact, because state statute is virtually identical in all relevant aspects to federal statute. Geodyne Energy Income Production Partnership I-E v. Newton Corp. (App. 5 Dist. 2003) 97 S.W.3d 779, review denied, rehearing of petition for review granted, withdrawn, reversed in part 161 S.W.3d 482. Courts 97(5)
Footnotes 1 15 U.S.C.A. § 77f. Vernon's Ann. Texas Civ. St. Art. 581-33, TX CIV ST Art. 581-33 Current through Chapters effective immediately through Chapter 46 of the 2015 Regular Session of the 84th Legislature
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§ 17.042. Acts Constituting Business in This State, TX CIV PRAC & REM § 17.042
Vernon's Texas Statutes and Codes Annotated Civil Practice and Remedies Code (Refs & Annos)
Title 2. Trial, Judgment, and Appeal Subtitle B. Trial Matters Chapter 17. Parties; Citation; Long-Arm Jurisdiction (Refs & Annos)
Subchapter C. Long-Arm Jurisdiction in Suit on Business Transaction or Tort (Refs & Annos)
V.T.C.A., Civil Practice & Remedies Code § 17.042
§ 17.042. Acts Constituting Business in This State
Currentness
In addition to other acts that may constitute doing business, a nonresident does business in this state if the nonresident:
(1) contracts by mail or otherwise with a Texas resident and either party is to perform the contract in whole or in part in this state;
(2) commits a tort in whole or in part in this state; or
(3) recruits Texas residents, directly or through an intermediary located in this state, for employment inside or outside this state.
Credits Acts 1985, 69th Leg., ch. 959, § 1, eff. Sept. 1, 1985.
Notes of Decisions (1506)
V. T. C. A., Civil Practice & Remedies Code § 17.042, TX CIV PRAC & REM § 17.042 Current through Chapters effective immediately through Chapter 46 of the 2015 Regular Session of the 84th Legislature
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
§ 17.045. Notice to Nonresident, TX CIV PRAC & REM § 17.045
Vernon's Texas Statutes and Codes Annotated Civil Practice and Remedies Code (Refs & Annos)
Title 2. Trial, Judgment, and Appeal Subtitle B. Trial Matters Chapter 17. Parties; Citation; Long-Arm Jurisdiction (Refs & Annos)
Subchapter C. Long-Arm Jurisdiction in Suit on Business Transaction or Tort (Refs & Annos)
V.T.C.A., Civil Practice & Remedies Code § 17.045
§ 17.045. Notice to Nonresident
Effective: September 1, 2001 Currentness
(a) If the secretary of state is served with duplicate copies of process for a nonresident, the documents shall contain a statement of the name and address of the nonresident's home or home office and the secretary of state shall immediately mail a copy of the process to the nonresident at the address provided.
(b) If the secretary of state is served with process under Section 17.044(a)(3), he shall immediately mail a copy of the process to the nonresident (if an individual), to the person in charge of the nonresident's business, or to a corporate officer (if the nonresident is a corporation).
(c) If the person in charge of a nonresident's business is served with process under Section 17.043, a copy of the process and notice of the service must be immediately mailed to the nonresident or the nonresident's principal place of business.
(d) The process or notice must be sent by registered mail or by certified mail, return receipt requested.
(e) If the secretary of state is served with duplicate copies of process as an agent for a person who is a nonresident administrator, executor, heir, guardian, or personal representative of a nonresident, the secretary shall require a statement of the person's name and address and shall immediately mail a copy of the process to the person.
Credits Acts 1985, 69th Leg., ch. 959, § 1, eff. Sept. 1, 1985. Amended by Acts 1987, 70th Leg., ch. 158, § 2, eff. May 25, 1987; Acts 2001, 77th Leg., ch. 275, § 1, eff. Sept. 1, 2001.
Notes of Decisions (67)
V. T. C. A., Civil Practice & Remedies Code § 17.045, TX CIV PRAC & REM § 17.045 Current through Chapters effective immediately through Chapter 46 of the 2015 Regular Session of the 84th Legislature
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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