by George Christian
The Texas Supreme has affirmed a Dallas Court of Appeals decision that overturned a $30 million judgment in a fraud case against a commercial landlord.
Maya Walnut LLC f/k/a Maya Foods, Inc. v. Bryan Ly, Walnut Creek Center, Inc., Leng Chiv Ly, and Sao Minh Ly(No. 24-0171; June 26, 2026) arose from a dispute over negotiations for a commercial lease. Tenant Maya Walnut, owned and operated by Hamdy Shalabi, operated a grocery in Walnut Creek Center, owned by the Lys (Landlord). Tenant’s lease was scheduled to expire on September 30, 2019. In 2016 Landlord and Tenant, through Tenant’s broker, began negotiating a new lease. After back and forth over the amount of rent, Tenant submitted a draft lease agreement to Landlord, which lowered Tenant’s base rate, in December 2017. Landlord paused the negotiations, which didn’t resume until June 2018. Meanwhile, Tenant was scouting possible alternate locations for the grocery, identifying a location a block from its current location. In July 2018 Landlord leased the property to another tenant, Chihuahua Foods, without notifying Tenant of his negotiations for a new tenant. Even after the lease was signed, Landlord continued to string Tenant along until the following February, when he sent notice of non-renewal to Tenant. Tenant vacated bye premises and closed the store.
Shortly thereafter, Tenant filed suit, alleging fraud, negligent misrepresentation, conspiracy to commit fraud, promissory estoppel, and equitable estoppel, and sought actual and punitive damages. Landlord counterclaimed for unpaid rent and property damage. A six-person jury found that Landlord committed fraud and that tenant sustained $1,500,000 in damages for past lost profits, $3,000,000 for future lost profits, and $12,000,000 for lost business value. The jury also assessed punitive damages of $10,000,000. The jury also determined that Landlord was party of a conspiracy that damaged Tenant and made a negligent misrepresentation on which Tenant justifiably relief, awarding $1,500,000 for past economic loss and $3,000,000 for future economic loss. Landlord didn’t walk away empty-handed, though. The jury awarded $353,000 for unpaid rent and $100,000 for damage to the property. Tenant elected to recover lost business value on its fraud claim, awarding $10,855, 917 (net of Landlord’s recovery) and $10 million in punitive damages. Both parties appealed. In an opinion by Justice Pederson III, the court reversed the trial court’s judgment and rendered a take nothing judgment for Landlord. Tenant petitioned for review, which SCOTX granted.
In an opinion by Justice Busby, SCOTX affirmed. The crux of the issue was whether Tenant justifiably relied on Landlord’s alleged misrepresentations regarding the status of the lease renewal. Landlord argued that it didn’t make any misrepresentations promising Tenant a new lease or claiming that it wasn’t negotiating with any other potential lessee. The Court agreed, since “agreements to negotiate toward a future contract are not legally enforceable,” and Landlord never said it wasn’t looking elsewhere for a new tenant. Tenant asserted, however, that Landlord misrepresented that the property was still available for renewal despite the fact that Landlord had already signed a new lease with somebody else. The question then became whether Tenant justifiably relied on that misrepresentation.
Although the jury determined that Tenant did so, the Court went the other way as a matter of law. Justice Busby referred to the “red flag doctrine,” which holds that reliance is unjustifiable “if there are red flags indicating such reliance is unwarranted” (citation omitted). The first question was whether “sufficient” red flags existed under these facts. Looking at the entirety of the circumstances, the Court concluded that there were. As a sophisticated party, Tenant was expected to “‘recognize ‘red flags’ that the less experienced may overlook’ and ‘to exercise ordinary care for the protection of [its] own interests’ in light of any red flags” (citations omitted). Here Landlord’s new tenant, El Rancho, publicly promised a “big surprise,” which should have put Tenant on notice “that its competitor might be taking over the lease at the Walnut Creek property.” Consequently, Tenant “should have investigated when it became suspicious that El Rancho may have leased” the property. Blind reliance on Landlord’s representation to the contrary won’t cut it. And by failing to conduct a reasonable investigation of the true state of affairs, Tenant failed to “exercise reasonable diligence and ordinary care to protect its interests” (citations omitted). Here Tenant should have asked Landlord what was up with El Rancho. Because Tenant didn’t do that, it was “charged with knowledge it would have obtained” by asking. The Court thus affirmed that Tenant take nothing on its fraud claim.
Chief Justice Blacklock, joined by Justices Lehrmann and Sullivan, concurred. The Chief pointed to an even more fundamental problem with Tenant’s case. “No reasonable business owner, told by a commercial landlord that the property he wants is ‘available’ to lease, would bet the future of his business on actually obtaining that lease. Even if some risk-loving business owners would take that bet, no reasonable judicial system would make that landlord compensate them if it doesn’t work out.” Rather than conducting the “red flags” analysis, the Chief would have held that “the alleged misrepresentations, even if false, were not material to [Tenant’s] decision to forego pursuit of a backup lease because no reasonable person would have relied on the representations in making that decision.”
