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

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

1
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).

2
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

3
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

4
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
5
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.
6
 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

7
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-

8
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,

9
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).

10
 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

11
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
12
(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

13
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

14
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).
15
 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

16
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

17
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

18
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

19
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,
20
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).

21
 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,

22
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

23
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

24
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

25
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
26
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)

27
(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.

28
 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.

29
 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.

30
 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

31
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
32
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.

33
 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:

34
 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:

35
 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.

36
 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,

37
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.

38
 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.

39
 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

40
 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

41
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" 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
466
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. wrote:

CONFIDENTIAL ENR000214
414
 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

85Q.570.4793 (Direct Dial)
801 .938.7640 (Admlnlstratlve}
tenr!qht@whltew!nston.oom

CONFIDENTIAL ENR000215
415
 On Jun 13, 2014, at 10:57 AM, Moss, Ainy C.
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
416
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 trade-
saw 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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.).

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. 5
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (2002)
45 Tex. Sup. Ct. J. 930

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)).

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (2002)
45 Tex. Sup. Ct. J. 930

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (2002)
45 Tex. Sup. Ct. J. 930

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (2002)
45 Tex. Sup. Ct. J. 930

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 10
BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (2002)
45 Tex. Sup. Ct. J. 930

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (2002)
45 Tex. Sup. Ct. J. 930

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.

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. 12
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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”

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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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Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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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Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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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Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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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Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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 “out-
did 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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Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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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Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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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Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 15
Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
105 S.Ct. 2174, 85 L.Ed.2d 528, 53 USLW 4541

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 16
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.

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. 17
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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. World-
activities 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
Calder v. Jones, 465 U.S. 783 (1984)
104 S.Ct. 1482, 79 L.Ed.2d 804, 10 Media L. Rep. 1401

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. 6
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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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Camac v. Dontos, 390 S.W.3d 398 (2012)

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 v. Dontos, 390 S.W.3d 398 (2012)

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
Camac v. Dontos, 390 S.W.3d 398 (2012)

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
Camac v. Dontos, 390 S.W.3d 398 (2012)

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
Camac v. Dontos, 390 S.W.3d 398 (2012)

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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Camac v. Dontos, 390 S.W.3d 398 (2012)

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
Camac v. Dontos, 390 S.W.3d 398 (2012)

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 12
Camac v. Dontos, 390 S.W.3d 398 (2012)

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’

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 13
Camac v. Dontos, 390 S.W.3d 398 (2012)

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.

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. 14
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 merits-
fraudulent 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)

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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)

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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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)

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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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)

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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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)

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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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)

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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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)

[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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Citrin Holdings, LLC v. Minnis, 305 S.W.3d 269 (2009)

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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 17
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 18
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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 legal-
disregard 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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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 legal-
evidence 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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,

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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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City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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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City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

[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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City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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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City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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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City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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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City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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 cross-
sufficiency, 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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City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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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City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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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City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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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City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 20
City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 21
City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

—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,

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 22
City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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).

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 28
City of Keller v. Wilson, 168 S.W.3d 802 (2005)
48 Tex. Sup. Ct. J. 848

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).

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. 29
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
CSR Ltd. v. Link, 925 S.W.2d 591 (1996)
Prod.Liab.Rep. (CCH) P 14,666, 39 Tex. Sup. Ct. J. 767

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
CSR Ltd. v. Link, 925 S.W.2d 591 (1996)
Prod.Liab.Rep. (CCH) P 14,666, 39 Tex. Sup. Ct. J. 767

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
CSR Ltd. v. Link, 925 S.W.2d 591 (1996)
Prod.Liab.Rep. (CCH) P 14,666, 39 Tex. Sup. Ct. J. 767

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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Prod.Liab.Rep. (CCH) P 14,666, 39 Tex. Sup. Ct. J. 767

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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Prod.Liab.Rep. (CCH) P 14,666, 39 Tex. Sup. Ct. J. 767

(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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Prod.Liab.Rep. (CCH) P 14,666, 39 Tex. Sup. Ct. J. 767

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;

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 12
CSR Ltd. v. Link, 925 S.W.2d 591 (1996)
Prod.Liab.Rep. (CCH) P 14,666, 39 Tex. Sup. Ct. J. 767

(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)).

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. 13
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 10
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
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).

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. 12
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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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Ennis v. Loiseau, 164 S.W.3d 698 (2005)

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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Ennis v. Loiseau, 164 S.W.3d 698 (2005)

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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Ennis v. Loiseau, 164 S.W.3d 698 (2005)

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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Ennis v. Loiseau, 164 S.W.3d 698 (2005)

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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Ennis v. Loiseau, 164 S.W.3d 698 (2005)

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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Ennis v. Loiseau, 164 S.W.3d 698 (2005)

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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Ennis v. Loiseau, 164 S.W.3d 698 (2005)

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
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.

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. 12
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;

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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-on-
firm 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 forward-
amended, 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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 10
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
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-but-
scienter 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 12
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 13
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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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Fed. Sec. L. Rep. P 92,239

*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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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Fed. Sec. L. Rep. P 92,239

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 “forward-
that 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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

& 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 Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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 broker-
pleading 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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

*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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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 co-
did 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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Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
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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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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 mark-
funding 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 risk-
exposing 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 multi-
records 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 50
In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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-its-
its New Power stock and create an enormous phony profit
kind whereby consumers would be able to enjoy video-on-
of $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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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)
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¶ 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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
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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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
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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 multi-
according 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 Enron-
under § 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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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 Morgan-
controlled 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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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 Enron-
its ′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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

*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 would-
the 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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

Lynch participated in the decision to allow favored banks trigger points in its capitalization of a number of Enron-
or 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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
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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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
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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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
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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 Powers-
disclosure 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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Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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 re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
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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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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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Fed. Sec. L. Rep. P 92,239

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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
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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 related-
had 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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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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 quarter-
how, 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 co-
or 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-balance-
sheet 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
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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 lower-
level 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 arm-
twist 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 122
In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549 (2002)
Fed. Sec. L. Rep. P 92,239

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.

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. 123
In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

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-in-
law, 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

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,

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

[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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
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.,

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

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).

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. 9
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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 on-
power 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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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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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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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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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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Guardian Royal Exchange Assur., Ltd. v. English China..., 815 S.W.2d 223 (1991)
59 USLW 2547

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.

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. 11
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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Hodge v. Northern Trust Bank of Texas, N.A., 54 S.W.3d 518 (2001)

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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Hodge v. Northern Trust Bank of Texas, N.A., 54 S.W.3d 518 (2001)

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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Hodge v. Northern Trust Bank of Texas, N.A., 54 S.W.3d 518 (2001)

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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Hodge v. Northern Trust Bank of Texas, N.A., 54 S.W.3d 518 (2001)

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).

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. 8
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
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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Horowitz v. Berger, 377 S.W.3d 115 (2012)

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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Horowitz v. Berger, 377 S.W.3d 115 (2012)

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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Horowitz v. Berger, 377 S.W.3d 115 (2012)

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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Horowitz v. Berger, 377 S.W.3d 115 (2012)

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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Horowitz v. Berger, 377 S.W.3d 115 (2012)

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 personal-
disposition 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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Horowitz v. Berger, 377 S.W.3d 115 (2012)

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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Horowitz v. Berger, 377 S.W.3d 115 (2012)

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 ).

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. 15
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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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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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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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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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© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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 two-
received 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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© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005)
48 Tex. Sup. Ct. J. 789

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005)
48 Tex. Sup. Ct. J. 789

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 Indiana-
based 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
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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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005)
48 Tex. Sup. Ct. J. 789

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-of-
forum'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 state-
conduct” 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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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005)
48 Tex. Sup. Ct. J. 789

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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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005)
48 Tex. Sup. Ct. J. 789

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 forum-
who 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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 12
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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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005)
48 Tex. Sup. Ct. J. 789

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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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005)
48 Tex. Sup. Ct. J. 789

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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Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005)
48 Tex. Sup. Ct. J. 789

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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48 Tex. Sup. Ct. J. 789

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).

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 19
Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777 (2005)
48 Tex. Sup. Ct. J. 789

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.

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. 20
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569 (2007)
50 Tex. Sup. Ct. J. 498

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 doing-
at 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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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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50 Tex. Sup. Ct. J. 498

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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50 Tex. Sup. Ct. J. 498

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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50 Tex. Sup. Ct. J. 498

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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50 Tex. Sup. Ct. J. 498

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).

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. 19
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).

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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 long-
long-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 long-
requires the exercise of personal jurisdiction
arm statute to comport with due process in
over a non-resident defendant through the long-
action 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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Moncrief Oil Intern. Inc. v. OAO Gazprom, 414 S.W.3d 142 (2013)
56 Tex. Sup. Ct. J. 1023

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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Moncrief Oil Intern. Inc. v. OAO Gazprom, 414 S.W.3d 142 (2013)
56 Tex. Sup. Ct. J. 1023

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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Moncrief Oil Intern. Inc. v. OAO Gazprom, 414 S.W.3d 142 (2013)
56 Tex. Sup. Ct. J. 1023

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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56 Tex. Sup. Ct. J. 1023

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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56 Tex. Sup. Ct. J. 1023

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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56 Tex. Sup. Ct. J. 1023

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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56 Tex. Sup. Ct. J. 1023

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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56 Tex. Sup. Ct. J. 1023

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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56 Tex. Sup. Ct. J. 1023

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.

End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.

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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

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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Prudential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74 (2000)
43 Tex. Sup. Ct. J. 980

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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Prudential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74 (2000)
43 Tex. Sup. Ct. J. 980

[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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Prudential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74 (2000)
43 Tex. Sup. Ct. J. 980

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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Prudential Ins. Co. of America v. Financial Review Services, Inc., 29 S.W.3d 74 (2000)
43 Tex. Sup. Ct. J. 980

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 late-
those 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
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 double-
billed 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 10
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.

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. 11
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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,

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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,

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
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.

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. 7
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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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Rittenmeyer v. Grauer, 104 S.W.3d 725 (2003)

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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Rittenmeyer v. Grauer, 104 S.W.3d 725 (2003)

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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Rittenmeyer v. Grauer, 104 S.W.3d 725 (2003)

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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Rittenmeyer v. Grauer, 104 S.W.3d 725 (2003)

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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Rittenmeyer v. Grauer, 104 S.W.3d 725 (2003)

End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.

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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 non-
denied). 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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'

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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

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. 5
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).

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

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. 2
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
Spir Star AG v. Kimich, 310 S.W.3d 868 (2010)
Prod.Liab.Rep. (CCH) P 18,380, 53 Tex. Sup. Ct. J. 423

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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Spir Star AG v. Kimich, 310 S.W.3d 868 (2010)
Prod.Liab.Rep. (CCH) P 18,380, 53 Tex. Sup. Ct. J. 423

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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Spir Star AG v. Kimich, 310 S.W.3d 868 (2010)
Prod.Liab.Rep. (CCH) P 18,380, 53 Tex. Sup. Ct. J. 423

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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Spir Star AG v. Kimich, 310 S.W.3d 868 (2010)
Prod.Liab.Rep. (CCH) P 18,380, 53 Tex. Sup. Ct. J. 423

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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Spir Star AG v. Kimich, 310 S.W.3d 868 (2010)
Prod.Liab.Rep. (CCH) P 18,380, 53 Tex. Sup. Ct. J. 423

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 10
Spir Star AG v. Kimich, 310 S.W.3d 868 (2010)
Prod.Liab.Rep. (CCH) P 18,380, 53 Tex. Sup. Ct. J. 423

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.

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. 11
Sterling Trust Co. v. Adderley, 168 S.W.3d 835 (2005)
Blue Sky L. Rep. P 74,547, 48 Tex. Sup. Ct. J. 887

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
Sterling Trust Co. v. Adderley, 168 S.W.3d 835 (2005)
Blue Sky L. Rep. P 74,547, 48 Tex. Sup. Ct. J. 887

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,

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
Sterling Trust Co. v. Adderley, 168 S.W.3d 835 (2005)
Blue Sky L. Rep. P 74,547, 48 Tex. Sup. Ct. J. 887

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
Sterling Trust Co. v. Adderley, 168 S.W.3d 835 (2005)
Blue Sky L. Rep. P 74,547, 48 Tex. Sup. Ct. J. 887

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
Sterling Trust Co. v. Adderley, 168 S.W.3d 835 (2005)
Blue Sky L. Rep. P 74,547, 48 Tex. Sup. Ct. J. 887

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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Sterling Trust Co. v. Adderley, 168 S.W.3d 835 (2005)
Blue Sky L. Rep. P 74,547, 48 Tex. Sup. Ct. J. 887

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
Sterling Trust Co. v. Adderley, 168 S.W.3d 835 (2005)
Blue Sky L. Rep. P 74,547, 48 Tex. Sup. Ct. J. 887

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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Sterling Trust Co. v. Adderley, 168 S.W.3d 835 (2005)
Blue Sky L. Rep. P 74,547, 48 Tex. Sup. Ct. J. 887

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
Sterling Trust Co. v. Adderley, 168 S.W.3d 835 (2005)
Blue Sky L. Rep. P 74,547, 48 Tex. Sup. Ct. J. 887

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).

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9
Sterling Trust Co. v. Adderley, 168 S.W.3d 835 (2005)
Blue Sky L. Rep. P 74,547, 48 Tex. Sup. Ct. J. 887

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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 10
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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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Tabacinic v. Frazier, 372 S.W.3d 658 (2012)

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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Tabacinic v. Frazier, 372 S.W.3d 658 (2012)

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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Tabacinic v. Frazier, 372 S.W.3d 658 (2012)

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
Tabacinic v. Frazier, 372 S.W.3d 658 (2012)

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.

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. 12
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
TeleVentures, Inc. v. International Game Technology, 12 S.W.3d 900 (2000)

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
TeleVentures, Inc. v. International Game Technology, 12 S.W.3d 900 (2000)

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”;

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
TeleVentures, Inc. v. International Game Technology, 12 S.W.3d 900 (2000)

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
TeleVentures, Inc. v. International Game Technology, 12 S.W.3d 900 (2000)

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;

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
TeleVentures, Inc. v. International Game Technology, 12 S.W.3d 900 (2000)

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
TeleVentures, Inc. v. International Game Technology, 12 S.W.3d 900 (2000)

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”:

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
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.

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. 12
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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).

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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);

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
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.

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. 9
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 10
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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© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
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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TransFirst Holdings, Inc. v. Phillips, Not Reported in F.Supp.2d (2007)
2007 WL 631276

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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TransFirst Holdings, Inc. v. Phillips, Not Reported in F.Supp.2d (2007)
2007 WL 631276

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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TransFirst Holdings, Inc. v. Phillips, Not Reported in F.Supp.2d (2007)
2007 WL 631276

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
TransFirst Holdings, Inc. v. Phillips, Not Reported in F.Supp.2d (2007)
2007 WL 631276

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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TransFirst Holdings, Inc. v. Phillips, Not Reported in F.Supp.2d (2007)
2007 WL 631276

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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TransFirst Holdings, Inc. v. Phillips, Not Reported in F.Supp.2d (2007)
2007 WL 631276

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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TransFirst Holdings, Inc. v. Phillips, Not Reported in F.Supp.2d (2007)
2007 WL 631276

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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 11
TransFirst Holdings, Inc. v. Phillips, Not Reported in F.Supp.2d (2007)
2007 WL 631276

(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.

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. 12
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 non-
from 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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)

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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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)

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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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)

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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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)

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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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)

*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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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)

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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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)

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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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)

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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Wright v. Sage Engineering, Inc., 137 S.W.3d 238 (2004)

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.).

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. 15
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

End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.

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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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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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(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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(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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(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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(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

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

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
Art. 581-33. Civil Liability with Respect to Issuance or Sale..., TX CIV ST Art. 581-33

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.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
Art. 581-33. Civil Liability with Respect to Issuance or Sale..., TX CIV ST Art. 581-33

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' cash-
flow 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 three-
eighths 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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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

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. 35
§ 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