City and EDC established personal/specific jurisdiction over out-of-state financial institutions involved in failed EDC project

City of White Settlement, et al. v. Benjamin S. Emmons, and Source Capital, LLC, 02-17-00358-CV (Tex. App. – Fort Worth, September 27, 2018)

While involving a governmental entity, this case is more about personal jurisdiction over an out-of-state financial institution involved in an EDC project.  It will likely only be of interest to litigators and contract drafters.

In September 2013, the City and EDC entered into a transaction with Hawaiian Parks – White Settlement, LLC (HPARKS) where the City would ground lease land to HPARKS to construct a water and adventure park and would pay up to $12.5 million for the construction, to be financed by debt obligations issued by either the City or the EDC. The ground lease agreement allowed HPARKS to encumber the leasehold interest and capital improvements but only with the City’s consent.  The owners of HPARKS mortgaged the Park in order to finance the park construction.  HPARKS ran out of money and could not meet its past due obligations or complete construction. Capital One and the Source Capital Lenders issued notices of default. As part of a financial reorganization, the City and EDC agreed that HPARKS could execute documents granting a lien on all of its right, title, and interest under the ground lease and that Capital One could foreclose on that interest in an event of default of its loan to HPARKS. Despite receiving new loans and changing ownership, HPARKS failed to make good on its obligations to the City or Bank. The City sued the owners and lenders claiming the banking entities falsely represented that the City would be provided payment in exchange for allowing the encumbrances and not declaring a default. Further instead of making the October 2015 lease payment and ensuring that the Park had enough income, the Defendants diverted HPARKS’s income to operate the other parks in other cities. The Source Capital Defendants filed a special appearance noting a lack of personal jurisdiction. The trial court granted the special appearance without holding a live hearing. The City and EDC appealed.

A Texas court may assert personal jurisdiction over a nonresident defendant only if the requirements of the Texas long-arm statute and of due process under the Fourteenth Amendment are satisfied. A trial court may exercise specific jurisdiction over a defendant only if the suit arises out of or relates to the defendant’s forum contacts. This depends on the existence of activity or an occurrence that takes place in the forum state and is therefore subject to its regulation. The court went through a lengthy listing of evidence and testimony. The evidence showed the various defendants were physically present in the state and made allegedly fraudulent representations on which the City and EDC relied. The court held the Source Capital defendants purposefully availed themselves of the privilege of conducting business and investment activity in Texas sufficient to confer specific jurisdiction on the trial court for fraud and torts. However, personal jurisdiction over the individual agents of Source Capital does not extend to the breach of contract claim. Unlike in a tort context, a corporate agent who is not individually a party to a contract may not be held liable for breaching a contract to which only his principal is a party. As a result, the trial court’s order is affirmed-in-part and reversed-in-part.

If you would like to read this opinion click here. Panel consists of Justice Gabriel, Justice Kerr and Justice Birdwell.  Memorandum Opinion by Justice Birdwell.  The attorney listed for the City and EDC is Robert F. Maris.  The attorneys listed for the Plaintiffs are Spencer Hamilton, Glenn A. Ballard Jr. and Mukul S. Kelkar.

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