Peter Smith v. Kenda Capital, LLC ( 2014 )

Affirmed and Opinion filed October 21, 2014.
In The
Fourteenth Court of Appeals
NO. 14-13-00977-CV
PETER SMITH, Appellant
V.
KENDA CAPITAL, LLC, Appellee
On Appeal from the 55th District Court
Harris County, Texas
Trial Court Cause No. 2012-68381
OPINION
Peter Smith signed a contract with Kenda Capital B.V. (“Kenda Parent”)
governing Smith’s rights in connection with securities held by Smith and issued by
Kenda Parent. Smith signed a separate contract with a wholly owned subsidiary of
Kenda Parent called Kenda Capital, LLC (“Kenda Subsidiary”) to serve as Kenda
Subsidiary’s chief human resources officer. Smith’s rights concerning the
securities issued by Kenda Parent are linked to Smith’s employment status with
Kenda Subsidiary.
Smith sued Kenda Subsidiary in Harris County district court and alleged that
it fraudulently induced him to accept employment. Smith contends that Kenda
Subsidiary did so when its managing director and chief financial officer made
material, pre-employment misrepresentations to Smith and omitted material
information concerning the value of the securities held by Smith and issued by
Kenda Parent as part of Smith’s compensation for working at Kenda Subsidiary.
The trial court dismissed Smith’s suit against Kenda Subsidiary pursuant to a
forum selection clause contained in the contract between Smith and Kenda Parent.
Smith challenges the trial court’s dismissal order on appeal. We reject Smith’s
contentions and affirm the trial court’s order.
BACKGROUND
Smith signed an “Employment Agreement” with Kenda Subsidiary effective
as of October 26, 2009. Among other provisions, the Employment Agreement
specifies the base salary that Kenda Subsidiary will pay to Smith. Paragraph 17 of
the Employment Agreement states: “The venue for any dispute arising out of this
Agreement or employee’s employment with the Company shall be any state or
federal court of competent jurisdiction in Harris County, Texas.”
In conjunction with his employment at Kenda Subsidiary, Smith also signed
a separate contract with Kenda Parent on October 19, 2009, that the parties refer to
as the “Carry Agreement.” Smith’s rights under the Carry Agreement with Kenda
Parent were part of his compensation for serving as Kenda Subsidiary’s chief
human resources officer under the Employment Agreement.
The Carry Agreement with Kenda Parent governs Smith’s rights in
connection with closely held securities called “Profit Sharing Certificates –
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Depository Receipts.” This opinion will call them “Depository Receipts” for ease
of reference.
The Depository Receipts are based on a 1/10th fractional interest in profit
sharing certificates issued by a technology venture capital fund managed by Kenda
Parent. The profit sharing certificates issued by the fund are held by Kenda Parent;
in turn, Kenda Parent issues the Depository Receipts. If the underlying fund
reaches a certain level of profitability, then holders of the Depository Receipts
have the right to receive a portion of those profits.
The Carry Agreement identifies Kenda Parent as the “Issuer” and Smith as
the “Participant.” The Carry Agreement states: “The Participant is an employee of
[Kenda Subsidiary] . . . which is a subsidiary of the Issuer.” It continues: “The
Issuer has agreed to issue certain PSC Depository Receipts to the Participant and
subject to the terms of this Agreement.” A later provision in the Carry Agreement
specifies that Kenda Parent will issue 16 Depository Receipts to Smith. According
to Smith’s appellate brief, “The Carry Agreement is merely the vehicle used to
issue [Depository Receipts] . . . to [Smith] . . . as part of his employment
compensation package.”
The Carry Agreement between Smith and Kenda Parent contains a forum
selection clause. This clause in paragraph 13.2 states that “[t]he courts of
England” shall have “exclusive” jurisdiction “to settle any dispute between the
parties arising in connection with this Agreement and a dispute in connection with
any non-contractual obligation arising out of or in connection with this agreement .
. . .”1
1
Paragraph 13.2 allows an exception to the grant of exclusive jurisdiction under certain
circumstances as stated in paragraph 13.3. Smith does not contend that the circumstances
described in paragraph 13.3 are present in this case.
3
Smith asserts that, before he terminated his prior employment and accepted
the job with Kenda Subsidiary, he engaged in and relied upon discussions with
Kenda Subsidiary regarding the Depository Receipts. He says Kenda Subsidiary’s
officers made representations to him about the value of the Depository Receipts
and events that could affect this value; these alleged representations included the
possibility of a second fund being created from which Kenda Parent could
distribute additional profits via the Depository Receipts.
After he terminated his prior employment and signed the Employment
Agreement with Kenda Subsidiary in October 2009, Smith alleges that Kenda
Subsidiary “began disclosing information concerning the negotiations with the
investors which ultimately led to significant changes in terms that affected those
who held [Depository Receipts] . . . .” According to Smith, Kenda Subsidiary
belatedly disclosed to him that “performance levels and time criteria had to be met
before the investors would give their approval for a second fund to be raised.” He
asserts that in November 2009 he learned Kenda Subsidiary’s “statements and
representations were in fact misrepresentations that ultimately resulted in the
termination of his employment and a substantial loss in the compensation he was
previously told he would receive.” He further asserts that “[i]information critical
to his decision to accept employment with [Kenda Subsidiary] . . . was
misrepresented, causing him to rely on false information and accept employment
with [Kenda Subsidiary] . . . to his detriment.” Smith alleges as follows in his
petition: “The economic impact caused to Mr. Smith by the misrepresentations
made by Kenda [Subsidiary] is substantial, calculated to conservatively exceed
$900,000.00.”
Smith sued Kenda Subsidiary in Harris County district court on November
16, 2012, asserting claims for fraud and breach of contract. Kenda Subsidiary filed
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its “Plea in Abatement and Original Answer” on January 4, 2013, in which it (1)
asserted a general denial; and (2) sought “abatement of this suit and the dismissal
of Plaintiff’s claims for fraud and misrepresentation” pursuant to the Carry
Agreement’s forum selection clause. On July 15, 2013, Kenda Parent filed a
“Limited Petition in Intervention” for “the sole purpose of enforcing a mandatory
and exclusive forum selection clause that covers these proceedings . . . .” Kenda
Parent and Kenda Subsidiary also filed a joint motion to dismiss on that date
“based on a mandatory exclusive forum selection clause designating the courts of
England as the exclusive jurisdiction for resolving Plaintiff’s claims . . . .”
Smith filed a response to the motion to dismiss on August 8, 2013; he
simultaneously moved to strike Kenda Parent’s petition in intervention. The trial
court signed an order on August 19, 2012 in which it granted the motion to dismiss
and dismissed with prejudice “all claims the parties alleged or could have alleged
in this case . . . .” The trial court signed an order on October 14, 2013, overruling
Smith’s motion to reconsider the August 19, 2012 dismissal order. Smith timely
filed a notice of appeal on October 23, 2013.
ANALYSIS
Smith contends on appeal that the trial court erred in dismissing his fraud
claims against Kenda Subsidiary pursuant to the Carry Agreement’s forum
selection clause because (1) “the facts related to such claims are outside the scope
of” the Carry Agreement; and (2) “the surrounding circumstances relevant to
[Smith’s] . . . claim[s] . . . were separate and apart from the subject matter within
the Carry Agreement and its forum selection clause.”
Determining the propriety of dismissal turns on an analysis of the Carry
Agreement in light of Texas legal standards governing enforcement of forum
selection clauses.
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I. Standards Governing Enforcement of Forum Selection Clauses
A motion to dismiss is the proper procedural mechanism to enforce a forum
selection clause. See In re AIU Ins. Co., 148 S.W.3d 109, 111 (Tex. 2004) (orig.
proceeding); Deep Water Slender Wells, Ltd. v. Shell Int’l Exploration & Prod.,
Inc., 234 S.W.3d 679, 687 (Tex. App.—Houston [14th Dist.] 2007, pet. denied).
“We review the trial court’s granting of such a motion for an abuse of discretion.”
Deep Water Slender Wells, Ltd., 234 S.W.3d at 687 (citing Phoenix Network
Techs. (Europe) Ltd. v. Neon Sys., Inc., 177 S.W.3d 605, 610 (Tex. App.—
Houston [1st Dist.] 2005, no pet.)). “However, to the extent that our review
involves the construction or interpretation of an unambiguous contract, the
standard of review is de novo.” Id.
A trial court must presume that a mandatory forum selection clause is valid
and enforceable. See In re AIU Ins. Co., 148 S.W.3d at 111-12; In re Boehme, 256
S.W.3d 878, 881 (Tex. App.—Houston [14th Dist.] 2008, orig. proceeding); Deep
Water Slender Wells, Ltd., 234 S.W.3d at 692; see also M/S Bremen v. Zapata Off-
Shore Co., 407 U.S. 1, 10 (1972). The trial court gives full effect to a forum
selection clause “absent a strong showing by the resisting party that the court
should set aside the clause because (1) the clause is invalid based on reasons such
as fraud, undue influence, or overweening bargaining power; or (2) enforcement
would be unreasonable and unjust.” Deep Water Slender Wells, Ltd., 234 S.W.3d
at 692 (citations omitted).
Smith does not contend that the Carry Agreement’s forum selection clause is
invalid, or that the clause itself was the product of fraudulent inducement. Nor is
there any contention that enforcement of a clause mandating proceedings in
England is unreasonable and unjust as to Smith, an Irish citizen and Irish-trained
lawyer who maintains residences in Houston and England. Smith contends instead
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that the forum selection clause in the Carry Agreement between Smith and Kenda
Parent does not apply to his fraud claims against Kenda Subsidiary.
“In examining whether claims brought by the plaintiff were within the scope
of the clauses, this Court held that a reviewing court should engage in a ‘common-
sense examination of the claims and the forum-selection clause to determine if the
clause covers the claims.’” In re Lisa Laser USA, Inc., 310 S.W.3d 880, 884 (Tex.
2010) (orig. proceeding) (per curiam) (citing Ginter ex rel. Ballard v. Belcher,
Prendergast & Laporte, 536 F.3d 439, 444 (5th Cir. 2008), In re Laibe Corp., 307
S.W.3d 314, 316 (Tex. 2010) (orig. proceeding) (per curiam), and In re Int’l Profit
Assocs., Inc., 274 S.W.3d 672, 677 (Tex. 2009) (orig. proceeding) (per curiam)).
Reference to cases addressing the applicability of arbitration clauses is
appropriate when examining whether particular claims or parties fall within a
forum selection clause’s reach. See, e.g., In re Lisa Laser USA, Inc., 310 S.W.3d
at 884. Arbitration cases are germane because arbitration clauses are “another type
of forum-selection clause.” In re AIU Ins. Co., 148 S.W.3d at 115; see also id. at
115 n.28 (“‘An agreement to arbitrate before a specified tribunal is, in effect, a
specialized kind of forum-selection clause . . . .’”) (quoting Scherk v. Alberto-
Culver Co., 417 U.S. 506, 519 (1974)); Deep Water Slender Wells, Ltd., 234
S.W.3d at 694 (“We see no reason that . . . courts would not also apply arbitration
law’s equitable theories for enforcement by a nonsignatory to non-arbitration
forum-selection clauses.”).2
2
Plaintiff’s Original Petition states that Smith demands a jury trial “in this case . . . of
fraud, misrepresentation and breach of contract as to any and all issues triable to a jury.” The
petition makes no further reference to a breach of contract claim. Smith’s appellate briefing
references only fraud claims; his briefing does not mention a separate breach of contract claim or
describe any alleged breach. Smith’s reply brief asserts that his claims “are non-contractual by
nature” and that his “claims were for misrepresentation.” Accordingly, this opinion will analyze
the propriety of dismissal with respect to Smith’s contentions that Kenda Subsidiary made
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II. Application of Governing Standards
Smith argues that the Carry Agreement’s forum selection clause is
inapplicable here because he did not sue Kenda Parent, which issued the
Depository Receipts to him; Smith sued only Kenda Subsidiary, his immediate
employer and a nonsignatory to the Carry Agreement. Smith further argues that
his fraud claims arise from misrepresentations and omissions that are “outside the
four corners of the Carry Agreement.” Smith stresses that the Carry Agreement
between Smith and Kenda Parent identifies the number of Depository Receipts he
will receive but does not assign a specific dollar value to them. He contends that
the alleged fraud concerning the value of his Depository Receipts is “related to
[Smith’s] . . . employment relationship which was governed by his Employment
Agreement, as opposed to the Carry Agreement which merely issues [Depository
Receipts] . . . .”
We address Smith’s contentions in turn.
A. Enforcement by Non-Signatory Against a Signatory
Kenda Subsidiary’s status as a nonsignatory to the Carry Agreement does
not necessarily foreclose application of that agreement’s forum selection clause to
Smith’s claims against Kenda Subsidiary. As the Texas Supreme Court has
observed in the arbitration context, “[S]ometimes a person who is not a party to the
agreement can compel arbitration with someone who is . . . .” Meyer v. WMCO-
GP, LLC, 211 S.W.3d 302, 305 (Tex. 2006) (citing In re Vesta Ins. Grp., Inc., 192
S.W.3d 759, 761-62 (Tex. 2006) (orig. proceeding) (per curiam)); see also Deep
Water Slender Wells, Ltd., 234 S.W.3d at 693-94 (applying Meyer to determine
misrepresentations to him and omitted material facts concerning the Depository Receipts in
connection with his acceptance of employment with Kenda Subsidiary. See In re FirstMerit
Bank, N.A., 52 S.W.3d 749, 754 (Tex. 2001) (orig. proceeding) (“[W]e focus on the complaint’s
factual allegations rather than the legal causes of action asserted.”).
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that nonsignatories could enforce forum selection clause). A person who has
agreed to resolve disputes with one party in a particular forum may be required in
some circumstances to resolve related disputes with other parties in the same
forum. See In re Trammell, 246 S.W.3d 815, 820 (Tex. App.—Dallas 2008, orig.
proceeding) (citing Meyer, 211 S.W.3d at 304).
One circumstance allowing enforcement by a nonsignatory against a
signatory involves direct benefits estoppel. “A non-signatory may invoke the
direct benefits estoppel exception to enforce an arbitration clause contained in a
contract that contains other terms on which the signatory plaintiff must rely to
prosecute its claims.” VSR Fin. Servs., Inc. v. McLendon, 409 S.W.3d 817, 831
(Tex. App.—Dallas 2013, no pet.). This species of estoppel applies when a
signatory’s claim against a nonsignatory “references or presumes the existence of
the written agreement” containing the clause. See In re Trammell, 246 S.W.3d at
821 (citing Meyer, 211 S.W.3d at 306, and Grigson v. Creative Artists Agency,
L.L.C., 210 F.3d 524, 527 (5th Cir. 2000)); see also In re Cornerstone Healthcare
Holding Grp., Inc., 348 S.W.3d 538, 544-45 (Tex. App.—Dallas 2011, orig.
proceeding) (applying direct benefits estoppel to allow nonsignatory to enforce
forum selection clause against signatory).
The circumstances here meet the criteria for allowing nonsignatory Kenda
Subsidiary to enforce the Carry Agreement’s forum selection clause against
signatory Smith based upon direct benefits estoppel.3
3
Meyer also discussed a separate equitable estoppel theory based on allegations of
concerted misconduct among signatories and nonsignatories. See Meyer, 211 S.W.3d at 306-07.
The Texas Supreme Court subsequently adopted a narrow reading of Meyer and concluded
arbitration had been compelled in that case “because the plaintiff’s claims depended on the
underlying agreement, and thus were governed by principles of direct-benefits estoppel.” In re
Merrill Lynch Trust Co. FSB, 235 S.W.3d 185, 191 n.22 (Tex. 2007) (orig. proceeding) (citing
Meyer, 211 S.W.3d at 306-07). The court stated: “[W]e have never compelled arbitration based
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Smith asserts that he was fraudulently induced to sign the Employment
Contract with Kenda Subsidiary because he relied on Kenda Subsidiary’s
misrepresentations and omissions concerning Depository Receipts issued to him by
Kenda Parent under the Carry Agreement. Smith contends that these
misrepresentations and omissions harmed him because he accepted the job with
Kenda Subsidiary based upon an erroneous belief that the Depository Receipts he
would receive under the Carry Agreement as part of his compensation were more
valuable than they really were.
It follows that Smith’s fraudulent inducement claim necessarily references
and presumes the existence of the Carry Agreement. Smith’s fraud claim must
reference the Carry Agreement and presume its existence because a viable dispute
about the Depository Receipts’ true value can exist only if Smith had a right to
receive Depository Receipts – and, by extension, a portion of any underlying fund
profits from Kenda Parent distributed via the Depository Receipts. That right
exists only under the Carry Agreement containing the forum selection clause; the
Employment Agreement itself contains no reference to Depository Receipts or
their value. Direct benefits estoppel applies under these circumstances so that
nonsignatory Kenda Subsidiary can enforce the Carry Agreement’s forum selection
clause against signatory Smith. See In re Cornerstone Healthcare Holding Grp.,
Inc., 348 S.W.3d at 544 (“Here, the signatory is attempting to avoid its own
solely on substantially interdependent and concerted misconduct . . . .” In re Merrill Lynch Trust
Co. FSB, 235 S.W.3d at 191; see also Glassell Prod. Co. v. Jared Res., Ltd., 422 S.W.3d 68, 82
(Tex. App.—Texarkana 2014, no pet.) (“The application of the equitable estoppel doctrine to
arbitration clauses in Texas is limited to the direct benefit prong.”) (citing In re Merrill Lynch
Trust Co. FSB, 235 S.W.3d at 194-95). The analysis of Smith’s claims in this case does not
depend upon allegations of substantially interdependent and concerted misconduct; nor does it
depend upon the parent-subsidiary relationship between the two Kenda entities. The analysis in
this case of a nonsignatory’s enforcement ability against a signatory turns on direct benefits
estoppel.
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contract’s burden while enforcing the benefits it derived from the contract.”).
Smith cannot avoid this result by arguing that alleged misrepresentations and
omissions concerning the Depository Receipts’ value arose “outside the four
corners of the Carry Agreement,” were “separate and apart from the subject matter
within the Carry Agreement,” and were based on oral and email communications
from Kenda Subsidiary’s officers rather than specific contract language addressing
the value of Depository Receipts.
As a threshold matter, these arguments highlight that Smith’s fraud
allegations are more strongly connected to the Carry Agreement than to the
Employment Agreement; the latter contract makes no reference whatsoever to the
allegedly devalued Depository Receipts or to Smith’s rights in relation to the
Depository Receipts. If these arguments establish that there is only an indirect
connection between Smith’s allegations and the Carry Agreement, they likewise
demonstrate that the connection with the Employment Agreement is even more
attenuated.
In any event, these arguments miss the point because direct benefits estoppel
analysis focuses on whether a contract containing the clause at issue also includes
other terms on which the signatory plaintiff must rely to prosecute its claims. See
VSR Fin. Servs., Inc., 409 S.W.3d at 831; see also In re Trammell, 246 S.W.3d at
821 (citing Meyer, 211 S.W.3d at 306, and Grigson, 210 F.3d at 527); In re
Cornerstone Healthcare Holding Grp., Inc., 348 S.W.3d at 544-45. Here, the
Carry Agreement containing the forum selection clause does indeed include other
terms on which Smith must rely to pursue his claim because the Depository
Receipts’ value is irrelevant unless Smith had a right to receive them. That right
comes from the Carry Agreement, not the Employment Agreement.
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B. Scope of the Clause
The forum selection clause’s broad wording underscores its applicability to
Smith’s fraud claim.
The Carry Agreement’s forum selection clause applies to “any dispute
between the parties arising in connection with this Agreement” and to “a dispute in
connection with any non-contractual obligation arising out of or in connection with
this agreement . . . .” Smith contends on appeal that his claims “are non-
contractual by nature” because “[h]e sought damages and judicial relief for the
misrepresentations made to him . . . prior to his employment as to the valuation of
the [Depository Receipts] . . . and the existence of a Second Fund . . . .”
The clause’s “arising out of or in connection with” language indicates a
broad reach. Language of this nature “encompasses any dispute connected to the
agreement” containing the forum selection clause, including fraudulent inducement
claims that “relate to” the agreement. See My Cafe-CCC, Ltd. v. Lunchstop, Inc.,
107 S.W.3d 860, 866 (Tex. App.—Dallas 2003, no pet.) (fraudulent inducement
claim fell within scope of forum selection clause that applied to “‘[a]ny dispute
arising under or in connection with’” agreement and “‘any claim affecting its
validity, construction, effect, performance or termination’”).
This language in the Carry Agreement’s forum selection clause is broad
enough to reach Smith’s fraudulent inducement claim, which is nominally aimed at
the Employment Agreement but nonetheless relates to and bears a connection with
allegedly less valuable Depository Receipt rights granted to Smith under the Carry
Agreement. See id.; see also Courtland Bldg. Co. v. Jalal Family P’ship, Ltd., 403
S.W.3d 265, 273 (Tex. App.—Houston [14th Dist.] 2012, no pet.) (fraudulent
inducement claims were encompassed by arbitration clause that applied to “all
controversies, claims . . . or matters in question arising out of or relating to . . . this
12
Contract . . .”); In re Guggenheim Corp. Funding, LLC, 380 S.W.3d 879, 887 (Tex.
App.—Houston [14th Dist.] 2012, orig. proceeding) (“Courts interpret the phrases
‘relates to,’ ‘relating to,’ and ‘arising out of or relating to’ broadly in forum
selection clauses.”) (citations omitted); RSR Corp. v. Siegmund, 309 S.W.3d 686,
701 (Tex. App.—Dallas 2010, no pet.) (clause applying to “‘any action or
proceeding arising out of or relating to this Agreement’” encompassed “all claims
that have some possible relationship with the agreement”).4
Smith relies heavily on Steakley v. Round One Investments, L.P., No. 01-09-
00022-CV, 2012 WL 3628800 (Tex. App.—Houston [1st Dist.] Aug. 23, 2012, no
pet.) (mem. op.), which involved claims by a group of stock purchasers for
statutory fraud in a stock transaction and for violations of the Texas Securities Act.
The stock purchasers in Steakley signed subscription agreements for the purchase
of stock, which did not contain a forum selection clause. Id. at *1. They also
signed separate nondisclosure agreements containing a forum selection clause
applicable to “actions related to the subject matter” of the nondisclosure
agreement. Id. at *4. “Broadly stated, the subject matter of the nondisclosure
agreement is the protection and nondisclosure of information that the parties have
deemed to be proprietary, as well as remedies for a breach of the agreement.” Id.
“The nondisclosure agreement was concerned with the use of ‘Proprietary
Information,’ and that term was defined in the agreement to embrace ‘business or
technical information relating to [Round One Investment] . . .,’ including
information relating to ‘its investors’ and ‘its proposed transactions.’” Id.
The appellate court concluded that “no common-sense reading of the
4
In contrast to paragraph 13.2 of the Carry Agreement, the venue provision in paragraph
17 of the Employment Agreement is drafted more narrowly; it references “any dispute arising
out of this Agreement or Employee’s employment” but does not include additional “in
connection with” language.
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nondisclosure agreement permits a conclusion that the subject matter of the
agreement is the ‘investment relationship’ itself . . . .” Id. Therefore, the
nondisclosure agreement’s forum selection clause agreement did not apply “to
other disputes arising from the parties’ transactions, including the Buyers’ claims
for breaches of duties existing independently of the specific agreement about the
treatment of proprietary information.” Id. Smith analogizes to Steakley and argues
as follows: “No common sense reading of the Carry Agreement could permit a
conclusion that the subject matter of the agreement is the employment relationship
and the representations made in order to solidify/form that relationship.”
Smith misplaces his reliance on Steakley. In contrast to the nondisclosure
statement at issue in Steakley, the Carry Agreement containing the forum selection
clause addresses the same subject matter upon which Smith predicates his claims –
namely, the Depository Receipts whose allegedly diminished value is the source of
Smith’s alleged monetary harm from Kenda Subsidiary’s alleged representations
concerning the Depository Receipts.
CONCLUSION
We affirm the trial court’s order enforcing the forum selection clause and
granting the motion to dismiss.
/s/ William J. Boyce
Justice
Panel consists of Justices Boyce, Busby, and Wise.
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