Dan Kelly and Laura Hofstatter v. General Interior Construction, Inc. ( 2008 )

Affirmed in Part, and Reversed in Part, and Remanded, and Majority and Dissenting Opinions filed July 3, 2008

Affirmed in Part, and Reversed in Part, and Remanded, and Majority and Dissenting Opinions filed July 3, 2008.

In The

Fourteenth Court of Appeals

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NO. 14-07-00270-CV

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DAN KELLY AND LAURA HOFSTATTER, Appellants

V.

GENERAL INTERIOR CONSTRUCTION, INC., Appellee

On Appeal from the 125th District Court

Harris County, Texas

Trial Court Cause No. 2005-46388

M A J O R I T Y   O P I N I O N

In this accelerated appeal, appellants, Dan Kelly and Laura Hofstatter, challenge the denial of their special appearance, asserting that the trial court did not have personal jurisdiction over them with respect to appellee=s, General Interior Construction, Inc. (AGeneral@), breach of contract and fraud claims and alleged violations under chapter 162 of the Texas Property Code.  We affirm the trial court=s order denying the special appearance as to General=s chapter 162 and fraud claims, and reverse as to General=s breach of contract claim.

BACKGROUND

Appellants Dan Kelly and Laura Hofstatter (collectively the AOfficers@) are the sole shareholders and officers of DIVA Consulting, Inc. (ADIVA@), an Arizona-based company regularly acting as a general contractor on construction projects.    Hofstatter is the President of DIVA, while Kelly is the Vice-President.  Hofstatter and Kelly are both Arizona residents.

In 2004, DIVA entered into a construction contract for improvements to be performed on a hotel located in Texas (the AHilton project@).  DIVA then entered into numerous subcontract agreements with various Texas contractors, including General, a Texas company, to provide labor and materials on the Hilton project.  After executing these agreements, General and the other Texas subcontractors began work on the project.  During construction, Kelly made site trips to Texas to oversee the project.  DIVA sent change orders to and received invoices from General and other Texas subcontractors for materials and work performed.  The Officers frequently corresponded with General via email, facsimile, and telephone. Throughout the duration of the project, DIVA received funds from the property owner, Meristar Hospitality Corporation (AMeristar@), to pay for expenses related to the Hilton project.  Initially, the Officers, on behalf of DIVA, sent payments to General; payments stopped when DIVA disputed the amounts owed to General and alleged that General=s performance was substandard. 

Meristar initiated litigation against both DIVA and General for various contract and tort claims.  General counterclaimed against Meristar and filed a cross-claim against DIVA and third-party petition against the Officers for breach of contract, fraud, and violations under chapter 162 of the Texas Property Code (the ATexas Trust Fund Act@). The Officers filed a joint special appearance contesting the trial court=s personal jurisdiction over them as to General=s third-party claims.  The trial court denied the special appearance, and this appeal ensued. 

The Officers challenge the denial of their special appearance on three grounds. First, the Officers argue that they are not subject to personal jurisdiction as to General=s breach of contract claim because they were not parties to the contract and were acting in their corporate capacity.  In their second issue, the Officers contend that no jurisdiction exists as to General=s chapter 162 claim because they are nonresidents of Texas and were acting in their corporate capacity.  In their last issue, the Officers argue that no jurisdiction exists as to General=s fraud claim because there is no evidence that the Officers engaged in fraudulent conduct. 

STANDARD OF REVIEW

Whether a trial court has personal jurisdiction over a defendant is a question of law we review de novo.  Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569, 574 (Tex. 2007).  When the trial court does not issue findings of fact and conclusions of law with its special appearance ruling, as in this case, all facts necessary to support the judgment and supported by the evidence are implied.  BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789, 795 (Tex. 2002). 

The plaintiff bears the initial burden of pleading sufficient allegations to invoke jurisdiction under the Texas long-arm statute.  Am. Type Culture Collection, Inc. v. Coleman, 83 S.W.3d 801, 807 (Tex. 2002).  The nonresident defendant then assumes the burden of negating all bases of jurisdiction in those allegations.  BMC Software, 83 S.W.3d at 793.  In considering the denial of a special appearance, we determine only the issue of jurisdiction, not liability.  Barnhill v. Automated Shrimp Corp., 222 S.W.3d 756, 762 (Tex. App.CWaco 2007, no pet.).  A Texas court may exercise personal jurisdiction over a nonresident defendant if (1) the defendant has minimum contacts with Texas, and (2) the exercise of jurisdiction comports with traditional notions of fair play and substantial justice.  BMC Software, 83 S.W.3d at 795. Minimum contacts are sufficient for personal jurisdiction when the nonresident defendant purposefully avails himself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws. Moki Mac, 221 S.W.3d at 575.  There must be either minimum contacts sufficient to confer specific jurisdiction or continuous and systematic contacts sufficient to confer general jurisdiction. Coleman, 83 S.W.3d at 806-07.

When specific jurisdiction is asserted, as in this case, the following requirements must be met: (1) the defendant=s contacts must be purposeful; and (2) the cause of action must arise from or relate to those contacts.  Id. at 806.  In analyzing specific jurisdiction, we must focus on the relationship among the defendant, Texas, and the cause of action.  See Guardian Royal Exch. Assur., Ltd. v. English China Clays, P.L.C., 815 S.W.2d 223, 228 (Tex. 1991); Barnhill, 222 S.W.3d at 762.   Furthermore, foreseeability is an important consideration, although not determinative, in deciding whether the nonresident defendant has purposefully established Aminimum contacts@ with the forum.  BMC Software, 83 S.W.3d at 795; Huynh v. Nguyen, 180 S.W.3d 608, 616 (Tex. App.CHouston [14th Dist.] 2005, no pet.).

MINIMUM CONTACTS ANALYSIS

Breach of Contract Claim

In the Officers= first issue, they contend that they are not subject to personal jurisdiction as to General=s breach of contract claim because they were not parties to the contract and were acting in their corporate capacity. We agree.  A corporate officer who signs a contract on behalf of his corporation is not a party to the contract, but acting in his corporate capacity.  Such act does not constitute a contact for purposes of personal jurisdiction.  Wolf v. Summers-Wood, L.P., 214 S.W.3d 783, 792 (Tex. App.CDallas 2007, no pet.) (concluding that no specific jurisdiction existed where officer contracted in corporate capacity); Cerbone v. Farb, 225 S.W.3d 764, 771-72 (Tex. App.CHouston [14th Dist.] 2007, no pet.) (holding that the appellant did not make a purposeful contact with forum because he was not a party to the settlement agreement).  Because Hofstatter signed the contract in her corporate capacity, her act was not a contact or purposeful act to impose personal jurisdiction.  See Wolf, 214 S.W.3d at 792; Cerbone, 225 S.W.3d at 771-72.^[1] The trial court does not have jurisdiction over her with respect to General=s breach of contract claim.^[2] Likewise, Kelly is not subject to personal jurisdiction on the basis of the corporate contract.  See Wolf, 214 S.W.3d at 792; Cerbone, 225 S.W.3d at 771-72.  Accordingly, the trial court lacked personal jurisdiction over the Officers with respect to the breach of contract claim alleged by General.  We sustain appellants= first issue.^[3]

Chapter 162 Claim

In their second issue, the Officers challenge personal jurisdiction as to General=s chapter 162 claim under the Texas Trust Fund Act.  In assessing personal jurisdiction, we must focus on the relationship among the Officers, Texas, and the chapter 162 cause of action. See Guardian Royal, 815 S.W.2d at 228; Barnhill, 222 S.W.3d at 762. The Trust Fund Act imposes fiduciary responsibilities on contractors to ensure that Texas subcontractors, mechanics, and materialmen are paid for work completed.  Taylor Pipeline Constr., Inc. v. Directional Road Boring, Inc., 438 F. Supp. 2d 696, 714-15 (E.D. Tex. 2006).  Under chapter 162, construction payments are trust funds if the payments were made to a contractor or to an officer under a construction contract for improvement of specific real estate in Texas.  Tex. Prop. Code Ann. ' 162.001.  The contractor or officer who receives the trust funds is a trustee of the funds.  Id. ' 162.002.  The artisan, laborer, mechanic, contractor, subcontractor, or materialman who labors or furnishes labor or material for the construction or repair of an improvement on specific real property located in Texas is the beneficiary of any trust funds paid or received in connection with the improvement.  Id. ' 162.003.  A trustee who intentionally or knowingly or with the intent to defraud directly or indirectly retains, uses, disburses, or otherwise diverts the funds has misapplied the trust funds.  Id. ' 162.031.  Thus, a trustee who misapplies these trust funds is subject to personal civil liability if (1) the party breaches the duty imposed by chapter 162 with the requisite scienter, and (2) the claimants are within the class of people chapter 162 was designed to protect and have asserted the type of injury chapter 162 was intended to prohibit.  C & G, Inc. v. Jones, 165 S.W.3d 450, 453 (Tex. App.CDallas 2005, pet. denied).  Any officer or director who has control or direction over the funds is also a trustee of the funds and is personally liable.  Id. at 453-54.

Under Texas law, the construction payments from Meristar to DIVA were trust funds held for the benefit of General, a subcontractor and materialman on the Hilton project.  Any officer or director who had control or direction over such funds was also a trustee of the funds.  It is undisputed that the Officers had exclusive control and direction over these funds.  General pleads that the Officers were the sole owners and shareholders of DIVA and that they controlled and directed all funds received by Meristar for the Hilton project.  Thus, they are charged by the Texas Trust Fund Act with the fiduciary duties and responsibilities of a Texas trustee.  The dissent reasons that no personal jurisdiction exists because the Officers did not act in their individual capacities, but on behalf of DIVA.  This point is irrelevant in the instant case because the cause of action made the basis of personal jurisdiction imputes individual liability on the Officers for misappropriating Texas trust funds.  By controlling the trust funds, the Texas Trust Fund Act imposes a fiduciary duty that extends beyond DIVA and reaches the Officers individually. See Nuclear Corp. of Am. v. Hale, 355 F. Supp. 193, 197 (N.D. Tex. 1973) (stating that individual liability depends only on whether officers controlled or directed funds).^[4]  Looking at the chapter 162 claim, we must focus only on whether General has pleaded that the Officers, regardless on behalf of DIVA or in their individual capacities, controlled and directed funds received for the Hilton project.  Clearly, General has done so.^[5]   

General also relies on Herbert v. Greater Gulf Coast Enterprises, Inc. in support of its jurisdiction argument.  915 S.W.2d 866 (Tex. App.CHouston [1st Dist.] 1995, no writ). In Herbert, our sister court faced a similar issue in which a Texas company sought to sue the president of a foreign company in his individual capacity.  Id. at 869.  The Texas company alleged that chapter 162 imposed individual liability upon the defendant because he misdirected trust funds that were received by the foreign company under a construction contract. Id. at 870.  The First Court concluded that these allegations alone were sufficient to confer personal jurisdiction.  Id.  Accepting as true General=s allegations that the Officers misappropriated Texas trust funds, we hold that such allegations are sufficient to establish minimum contacts with respect to its chapter 162 claim.  See id.^[6]

Fraud Claim

In their third issue, the Officers argue that there is no personal jurisdiction as to General=s fraud claim, which alleges that the Officers continued to allow General to work on the Hilton project under the false pretense that General would be paid, knowing all along that the Officers had no intentions of paying General.  The Officers argue that the trial court did not have personal jurisdiction on the fraud claim because there is no evidence that any false statements were made to General.  This argument relates to the merits of whether the Officers actually committed the alleged fraud.  Ultimate tort liability is not a jurisdictional fact; the merits are not at issue in a special appearance.  See Cerbone, 225 S.W.3d at 770; Glattly v. CMS Viron Corp., 177 S.W.3d 438, 449 (Tex. App.CHouston [1st Dist.] 2005, no pet.).

The Officers may be individually liable for the alleged false statements because a corporate officer can be held individually liable for fraudulent statements or knowing misrepresentations even when they are made in the capacity of a corporate representative.  See Glattly, 177 S.W.3d at 448.  It is not necessary that the corporate veil be pierced in order to impose liability, as long as it is shown that the corporate officer knowingly participated in the wrongdoing.  Id. (quoting Wright v. Sage Engineering, Inc., 137 S.W.3d 238, 250 (Tex. App.CHouston [1st Dist.] 2004, pet. denied)).  The Officers= alleged fraud sufficiently Arelates to@ conduct purposefully directed toward Texas. We hold that General has made allegations of sufficient minimum contacts with respect to its fraud claim.

FAIR PLAY AND SUBSTANTIAL JUSTICE

Once it has been decided that a defendant purposefully established minimum contacts within the forum State, these contacts may be considered, in light of other factors, to determine whether the assertion of personal jurisdiction would comport with fair play and substantial justice.  Burger King Corp. v. Rudzewicz, 471 U.S. 462, 476, 105 S. Ct. 2174, 85 L. Ed. 2d 528 (1985).  The other relevant factors are: (1) the burden on the nonresident defendant; (2) the forum state=s interest 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 controversies; and (5) the shared interest of the several states in furthering substantive social policies.  World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 292, 100 S. Ct. 559, 62 L. Ed. 2d 490 (1980).   After reviewing these factors and the evidence, it is clear that jurisdiction would not offend traditional notions of fair play and substantial justice.  The Officers have not made a showing of undue burden.  The litigation below involves numerous parties, counterclaims, and crossclaims.  Because the Officers, on behalf of DIVA, are defending against certain claims in this Texas lawsuit, there will be no additional burden on them to defend against General=s chapter 162 and fraud claims.  It would be a waste of judicial resources to litigate all the claims, including the counterclaims and cross claims, in Texas, and litigate two related claims in another forum. Texas also has a legitimate interest in asserting jurisdiction: (1) the litigation involves misappropriated trust funds and fraudulent acts subject to Texas law; (2) General is a Texas resident; and (3) the litigation involves work performed on Texas real estate.  See D.H. Blair Inv. Banking Corp. v. Reardon, 97 S.W.3d 269, 278 (Tex. App.CHouston [14th Dist.] 2002, pet. dism=d w.o.j.). 

General also has a heightened interest in obtaining relief in this case. Subcontractors and materialmen are at the bottom of the construction chain, leaving chapter 162, in most cases, their only remedy to recover for work performed on construction projects.  In re HLW Enterprises of Tex., Inc., 157 B.R. 592, 597 (Bankr. W.D. Tex. 1993).   Because chapter 162 is a remedial statute, we must give it a broad construction to effectuate its protective purposes.  Jones, 165 S.W.3d at 454.  The dissent ignores the statute=s purpose.  The Texas Supreme Court has indicated that the Texas Trust Fund Act should be construed liberally in favor of laborers and materialmen.  RepublicBank Dallas, N.A. v. Interkal, Inc., 691 S.W.2d 605, 607 (Tex. 1985).  This provision was specifically enacted to serve as a special protection for subcontractors and materialmen in situations as the instant one, where contractors refuse to pay the subcontractor or materialman for labor and materials.  Taylor Pipeline Constr., 438 F.Supp.2d at 714-15; Herbert, 915 S.W.2d at 870-871.  Additionally, states and the intrastate judicial system both hold similar interests in resolving such conflicts efficiently in order to protect residents from economic loss resulting from torts.  See Guardian Royal, 815 S.W.2d at 228. 

The basic equities clearly weigh in favor of in personam jurisdiction.  We hold that jurisdiction over the Officers is not offensive to the ideals of fair play and substantial justice with respect to the chapter 162 and fraud claims.  We further hold that the trial court did not err by denying the Officers= special appearance as to the chapter 162 and fraud claims.  We overrule appellants= second and third issues. 

We affirm the trial court=s order denying the Officers= special appearance with respect to General=s chapter 162 and fraud claims, and reverse the trial court=s order denying the Officers= special appearance as to General=s breach of contract claim.  We remand to the trial court with instructions to dismiss General=s breach of contract claim against the Officers for want of personal jurisdiction.

/s/        Adele Hedges

Chief Justice

Judgment rendered and Majority and Dissenting Opinions July 3, 2008.

Panel consists of Chief Justice Hedges and Justices Anderson and Frost (Frost, J. dissenting).

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^[1]  The dissent alleges that our analysis conflicts with Cerbone.  Cerbone, however, supports our reasoning and conclusion that Hofstatter did not make a purposeful contact by contracting in her corporate capacity.  See Cerbone, 225 S.W.3d at 771 (no purposeful availment where individual signed agreement in corporate capacity).  We also note that our decision does not reach the merits of General=s claim.  There is a difference between the issue of liability and imputing one entity=s contacts to another for jurisdictional purposes. PHC-Minden, L.P. v. Kimberly-Clark Corp., 235 S.W.3d 163, 174 (Tex. 2007).  Our decision today addresses the jurisdictional issue as to whether DIVA=s act can be imputed onto Hofstatter, who was acting in her corporate capacity.  See id.

^[2]  The dissent contends that our analysis of and reliance on Wolf is in conflict with two Texas Supreme Court cases and two Fourteenth Court of Appeals cases.  See PHC-Minden, 235 S.W.3d 163; Michiana Easy Livin= Country, Inc. v. Holten, 168 S.W.3d 777 (Tex. 2005); Weldon-Francke v. Fisher, 237 S.W.3d 789 (Tex. App.CHouston [14th Dist.] 2007, no pet.); Cerbone, 225 S.W.3d 764.  PHC-Minden involved a tort claim and an assertion of only general jurisdiction.  Our case involves specific jurisdiction on a breach of contract claim.  Additionally, the Court in PHC-Minden reasoned that deciding whether a business contact can be imputed on a corporate official is a jurisdictional issue, not one of liability.  235 S.W.3d at 174.  Our conclusion and Wolf follow this reasoning.  Because Hofstatter was acting in her corporate capacity, DIVA=s act cannot be imputed to Hofstatter, depriving the trial court of jurisdiction.  See id.  PHC-Minden supports Wolf and our conclusion on personal jurisdiction. Our decision is not also in conflict with Michiana.  Michiana reasons, as do we, that jurisdiction turns on purposeful availment and contacts.  168 S.W.3d at 791-92.  Fisher is a tort case reasoning that liability is irrelevant in a jurisdictional analysis.  237 S.W.3d at 797-98.  Our decision today does not dispute this contention.  Moreover, our opinion in Cerbone supports our conclusion.  See supra note 1.

^[3]  The dissent believes that General failed to allege a breach of contract claim against the Officers.  General=s answer is divided into four parts: a general denial, a counterclaim against Meristar, a cross-claim against DIVA, and a third-party claim against the Officers.  The cross-claim states a breach of contract claim against DIVA, and the third-party petition states a breach of contract claim against the Officers.  General=s third-party petition alleges that the Officers, who exclusively owned and operated DIVA, are liable for breach of contract.  See Tex. Dept. of Transp. v. Ramirez, 74 S.W.3d 864, 867 (Tex. 2002) (holding that in considering jurisdictional motions, the reviewing court construes the pleadings in the plaintiff=s favor).  Accordingly, a breach of contract claim was alleged against the Officers in the third-party petition.

^[4]  The dissent relies on Commonwealth Gen. Corp. v. York to support its contention that we consider only the Officers= purposeful contacts with Texas and not the contacts of DIVA in assessing personal jurisdiction.  177 S.W.3d 923 (Tex. 2005). Unlike York, the instant case involves liability under chapter 162, which automatically imputes individual liability upon an officer or shareholder who controls and directs the trust funds, regardless of the capacity in which the individual is acting while handling the funds.  Chapter 162 essentially pierces the corporate veil for subcontractors.  Because the statute explicitly creates a fiduciary relationship and imposes individual liability regardless of one=s acting capacity, a piercing of the corporate veil analysis is inappropriate for General=s chapter 162 claims.  See Jones, 165 S.W.3d at 453-54 (a party who misapplies trust funds under chapter 162 is subject to civil liability); Perry & Perry Builders v. Galvan, No. 03-02-00091-CV, 2003 WL 21705248, at *4-5 (Tex. App.CAustin July 24, 2003, no pet.) (mem. op.) (jury charge and findings were sufficient in chapter 162 suit instructing the jury that individual liability exists where trustee diverts funds from beneficiary); Lively v. Carpet Servs., Inc., 904 S.W.2d 868, 873 (Tex. App.CHouston [1st Dist.] 1995, writ denied) (any officer or director who has control or direction over the funds is also a trustee, and is therefore personally liable).

^[5]  The dissent also contends that the Officers had no substantial connection with Texas.  The record reveals that performance under the construction contract was to be performed exclusively in Texas.  The Officers sent and directed payments to General in Texas.  Kelly made site visits to the Texas work site. The Officers received numerous invoices from Texas regarding the Hilton project.  See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 473, 105 S. Ct. 2174, 85 L. Ed. 2d 528 (1985) (when a party reaches out beyond one state and creates a continuing relationship and obligation with a citizen of another state, he is subject to regulation and sanctions in the other state for the consequences of his activities).

^[6]  The dissent rejects Herbert on erroneous grounds.  Herbert is directly on point.  The dissent cites to no authority overruling or disagreeing with Herbert and provides no authority involving a chapter 162 claim that supports is its contentions.