The Houston [14th] Court of Appeals has affirmed a Harris County district court’s denial of an out-of-state defendant’s special appearance in a multi-party fraud suit.
RDF Agent, LLC, Related Fund Management, LLC and Brian Sedrish v. Electric Red Ventures, LLC, Manfred Co. L.C., and Monzer Hourani (No. 14-23-00031-CV; filed September 21, 2023) arose from a failed venture to finance a multifamily real estate project in Arizona. Electric Red Ventures (ERV), a plaintiff in the fraud suit, is a subsidiary of Medistar, a Houston-based investment and financing company founded by plaintiff Monzer Hourani. ERV is organized under Arizona law and maintains its principal place of business there. In April 2021 a real estate broker approached defendant Sedrish, managing director of defendant Related Fund Management (RFM) and authorized signatory for defendant RDF Agent, about the possibility of loaning Medistar $230 million for the Arizona project. RFM is a real estate investment manager organized under Delaware law with its principal place of business in New York, as is RDF Agent, a loan servicer and term sheet negotiator. Sedrish traveled to Houston, toured Medistar facilities in Houston (including the Best Western hotel near the Texas Medical Center) and met with Hourani and other Medistar executives to discuss financing for the Arizona project. The parties eventually executed a Term Sheet in July 2021, under which plaintiffs paid RDF Agent a $350,000 due diligence deposit. Hourani signed the agreement as CEO of ERV and Manfred Co., which guaranteed the loan, and in his personal capacity as guarantor. Sedrish signed as managing director of RDF Agent. The Term Sheet also contained a right of first refusal on behalf of RDF Agent to provide financing for Medistar’s Best Western hotel in Houston.
In March 2022 RDF Agent’s attorney sent a demand letter to ERV and Hourani asserting that they had breached the Term Sheet by failing to secure equity for the project to close the loan and violating the exclusivity provision by pursuing other financing options. The letter demanded $2.3 million in liquidated damages and $350,000 for RDF Agent’s out-of-pocket costs. Shortly thereafter, ERV and Hourani sued RDF, asserting fraudulent misrepresentation, conspiracy to commit fraud, and declaratory judgment. RDF and the other defendants filed special appearances, which the trial court denied. RDF filed an interlocutory appeal.
The court of appeals affirmed. Plaintiffs alleged the following jurisdictional facts: (1) Sedrish traveled to Houston to meet with Medistar about the Arizona project in his capacity as an employee of RFM and agent and authorized signatory of RDF Agent; (2) at the meeting Sedrish fraudulently represented that RDF would help Medistar “locate equity partners”; and (3) the parties subsequently executed the Term Sheet and plaintiffs paid the due diligent deposit. Plaintiffs pleadings thus satisfied their initial burden to establish that defendants were doing business in Texas and committed alleged torts in Texas. The burden then shifted to defendants to negate jurisdiction. Conducting a due process analysis, the court of appeals first considered whether defendants “establishe[d] minimum contacts with” Texas by “purposefully avail[ing] itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protection of its laws” [citation omitted]. The court found that they had, citing Sedrish’s travel to Houston to discuss the deal, his alleged representations about securing equity partners, and the specific discussion and subsequent communications between the parties culminating in the execution of the Term Sheet. As the court concluded, “this evidence shows that the [defendants] made numerous purposeful contacts in the state of Texas for the purpose of obtaining future benefits or profits” (citations omitted).
The court found further that a substantial connection existed between the defendants’ Texas contacts and the “operative facts of the litigation,” primarily on the basis that the alleged misrepresentation and fraud that led to the Term Sheet occurred in Houston. The court rejected defendants’ argument that since the representations were made to a non-party, Medistar, they could not serve as the basis for personal jurisdiction. As the court pointed out, the relevant inquiry is the nature and extent of the defendants’ contacts with Texas, not the plaintiffs’. In any event, the court went on, the evidence supported the trial court’s implied finding that the representations were in fact made to ERV in the person of its CEO Hourani. As to whether exercising jurisdiction over defendants would offend notions of fair play and substantial justice, the court held that it would not. Not only did Texas have an interest in resolving a dispute involving its own citizens, a New York lawsuit filed by defendants a month after plaintiffs filed suit in Texas does not vitiate that interest or make it unreasonable to try the Texas case here.
Justice Jewell concurred, agreeing with the majority that specific jurisdiction exists under § 17.042, CPRC, because the alleged tort was committed in Texas. Justice Jewell, however, disagreed with the majority as to the significance of the negotiations around the Term Sheet, which he argued did not have a connection to the alleged tort. “In my view,” he wrote, “the term sheet and surrounding discussions fail [the purposeful availment] test because, by attempting to negotiate and arrive at a financing arrangement for a real estate investment in Arizona, the parties were not seeking to benefit or profit in Texas” (citations omitted).
