Keith Harrell v. Jared S. Smith, Individually and Derivatively on Behalf of Covenant Equity Partners, L.L.C ( 2022 )

Affirm and Opinion Filed November 30, 2022
In The
Court of Appeals
Fifth District of Texas at Dallas
No. 05-22-00242-CV
KEITH HARRELL, Appellant
V.
JARED S. SMITH, INDIVIDUALLY AND DERIVATIVELY ON BEHALF
OF COVENANT EQUITY PARTNERS, L.L.C, Appellee
On Appeal from the 219th Judicial District Court
Collin County, Texas
Trial Court Cause No. 219-06220-2021
MEMORANDUM OPINION
Before Justices Myers, Pedersen, III, and Garcia
Opinion by Justice Pedersen, III
Keith Harrell appeals the trial court’s denial of his motion to dismiss this
declaratory action filed by appellee—Jared S. Smith, individually and derivatively
on behalf of Covenant Equity Partners, LLC—pursuant to the Texas Citizens
Participation Act (TCPA). See TEX. CIV. PRAC. & REM. CODE ANN. §§ 27.003(a),
27.005(b)(1)(B). The basic issue is whether appellees’ suit “is based on” or “is in
response to” appellee’s exercise of his “right to petition.” Id. § 27.005(b)(1)(B). It is
not. Hence, we affirm the trial court’s order. Because all dispositive issues are settled
in law, we issue this memorandum opinion. See TEX. R. APP. P. 47.2(a), 47.4.
BACKGROUND
Smith and Harrell formed Covenant Equity Partners, LLC (Covenant) in
2011. In the Covenant company agreement Smith and Harrell agreed that each would
have fifty percent ownership of Covenant. Smith agreed to serve as Covenant’s
manager. Harrell and Smith signed Covenant’s restated company agreement on
December 15, 2011. Three of its provisions are relevant here. At the heart of this
dispute is section 6.12, which provides:
6.12 Broad Discretion and Authority of Managers. Each Member
acknowledges and understands that the Managers are granted broad
discretion and authority under this Agreement and that the Managers'
exercise of such broad discretion and authority may impair the value of
the Membership Interest of the Member. Such Member further
acknowledges and understands that the Managers would not cause the
Company to issue a Membership Interest to the Member if the
Managers did not have such broad discretion and authority, and such
Member agrees not to challenge the Manager's exercise of such
discretion and authority.
Moreover, section 15.04 provides for possible expulsion of a company member who
“has willfully violated any provision of this Agreement.” Section 15.04 also
provides that a willfully violating member “shall be considered a Defaulting
Member, and the Company or other Members may also exercise any one or more of
the remedies provided for in Article 15.01.” Section 15.01 provides numerous
remedies, including forfeiture of a defaulting member’s membership interest.
Prior to Smith’s filing this lawsuit, Harrell filed a lawsuit individually and
derivatively on behalf of Covenant, against Smith and against entities not party to
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this lawsuit. Harrell alleged claims for breach of fiduciary duty and joint tortfeasor
participation in breach of fiduciary (against all defendants); breach of contract
(against Smith); fraud (against Smith); money had and received (against all
defendants); and sought appointment of a receiver for Covenant pursuant to section
11.404(a)(1) of the Texas Business Organizations Code.
Smith’s counterclaim alleged twenty-three instances in which Harrell
challenged his authority to manage Covenant. Smith alleged Harrell challenged his
authority in the petition and in deposition testimony.
After unsuccessful efforts to obtain discovery information, Harrell non-suited
his claims and paid Smith his attorney’s fees pursuant to indemnity provisions of the
company agreement. Smith moved for leave to add a counterclaim for declaratory
relief. He sought to allege Harrell had willfully violated section 6.12 of the restated
agreement by challenging Smith’s broad and discretionary managerial authority.
Harrell moved to dismiss the case. The trial court denied Smith’s motion for leave to
amend and dismissed the matter as moot.
Subsequently, Smith filed the present lawsuit individually and derivatively on
behalf of Covenant against Harrell. Smith basically alleges in this lawsuit what he
unsuccessfully sought leave to allege via counterclaim in Harrell’s previous lawsuit.
Smith’s petition here alleges: “Pursuant to Chapter 37 of the Texas Civil Practice
and Remedies Code, Smith moves the Court for a declaration as a matter of law that
Harrell willfully breached the Restated Company Agreement of Covenant Equity
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Partners, L.L.C. under Section 15.03.”1 Smith also alleges twenty-three instances of
Harrell’s challenging Smith’s authority in the petition and in deposition testimony
of the previous lawsuit.
Harrell subsequently filed a TCPA motion to dismiss, asserting that Smith’s
filing a petition here violates Harrell’s right to petition that he allegedly exercised in
his previous lawsuit. Harrell urges that this lawsuit is “based on” or is brought “in
response to” his previous lawsuit. Harrell alleges he exercised his “right to petition”
via his petition and deposition testimony in the previous lawsuit.
The trial court, after a hearing, denied Harrell’s TCPA motion to dismiss. This
accelerated, interlocutory appeal followed.
THE TCPA AND STANDARD OF REVIEW
Whether the TCPA applies to a legal action is an issue of statutory
interpretation we review de novo.2 See Creative Oil & Gas, LLC v. Lona Hills
Ranch, LLC, 591 S.W.3d 127, 132 (Tex. 2019); Youngkin v. Hines, 546 S.W.3d 675,
680 (Tex. 2018); Dyer v. Medoc Health Servs., LLC, 573 S.W.3d 418, 424 (Tex.
App.—Dallas 2019, pet. denied).
1
We note that section 15.03 concerns “compromise or release.” Smith’s reference to section 15.03 appears
to be in error. Section 15.04 addresses willful violation of the restated agreement. The parties’ arguments
nonetheless focus on section 15.04 rather than on section 15.03.
2
The TCPA defines “[l]egal action” as “a lawsuit, cause of action, petition, complaint, cross-claim, or
counterclaim or any other judicial pleading or filing that requests legal, declaratory, or equitable relief” but
does not include certain matters not at issue here. TEX. CIV. PRAC. & REM. CODE ANN. § 27.001(6).
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As an anti-SLAPP statute,3 the TCPA “protects citizens who petition or speak
on matters of public concern from retaliatory lawsuits that seek to intimidate or
silence them.” In re Lipsky, 460 S.W.3d 579, 584 (Tex. 2015) (orig. proceeding).
In conducting our review, we must construe the TCPA “liberally to effectuate
its purpose and intent fully.” TEX. CIV. PRAC. & REM. CODE ANN. § 27.011(b); State
ex rel Best v. Harper, 562 S.W.3d 1, 11 (Tex. 2018). The TCPA’s stated purpose is
to protect both a defendant’s right to speech, petition, and association and a
claimant’s right to pursue valid legal claims for injuries. Montelongo v. Abrea, 622
S.W.3d 290, 299 (Tex. 2021); see also TEX. CIV. PRAC. & REM. CODE ANN. § 27.002.
Consistent with general rules of statutory construction, we ascertain and give
effect to the legislature’s intent as expressed in the statutory language considering
the specific language at issue and the TCPA as a whole, and we construe the statute’s
words according to their plain and common meaning, unless a contrary intention is
apparent from the context or unless such a construction leads to absurd results. See
Dyer, 573 S.W.3d at 424-25.
We consider, in the light most favorable to the non-movant, the pleadings,
evidence a court could consider under civil procedure rule 166a,4 and supporting and
opposing affidavits stating the facts on which the liability or defense is based. See
3
“SLAPP” is an acronym for “Strategic Lawsuits Against Public Participation.” Krasnicki v. Tactical
Entm’t, LLC, 583 S.W.3d 279, 282 (Tex. App.—Dallas 2019, pet. denied).
4
See TEX. R. CIV. P. 166a (“summary judgment”).
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TEX. CIV. PRAC. & REM. CODE ANN. § 27.006(a); Riggs & Ray v. State
Fair of Tex., No. 05-17-00973-CV, 2019 WL 4200009, at *4 (Tex. App.—Dallas
Sept. 5, 2019, pet. denied) (mem. op.); Reed v. Centurion Terminals, LLC, No. 05-
18-01171-CV, 2019 WL 2865281, at *3 (Tex. App.—Dallas July 3, 2019, pet.
denied) (mem. op.); Dyer, 573 S.W.3d at 424.
A claimant’s pleadings are usually “the best and all-sufficient evidence of the
nature of the action.” Hersh v. Tatum, 526 S.W.3d 462, 467 (Tex. 2017).
Under the TCPA, and subject to certain exemptions, ‘[i]f a legal action is
based on or is in response to a party’s exercise of the right of free speech, right to
petition, or right of association or arises from any act of that party in furtherance of
the party’s communication or conduct described by Section 27.010(b), that party
may file a motion to dismiss the legal action[,]” TEX. CIV. PRAC. & REM. CODE ANN.
§ 27.003(a), and a court “shall dismiss” it. Id. § 27.005(b). However, a court “may
not’ dismiss the legal action “if the party bringing [it] establishes by clear and
specific evidence a prima facie case for each essential element of the claim in
question.” Id. § 27.005(c). Notwithstanding section 27.005(c), however, “the court
shall dismiss a legal action against the moving party if the moving party establishes
an affirmative defense or other grounds on which the moving party is entitled to
judgment as a matter of law.” Id., § 27.005(d).
The TCPA provides a three-step process for the dismissal of a legal action to
which it applies. See Montelongo, 622 S.W.3d at 296; Creative Oil, 591 S.W.3d at
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132; Youngkin, 546 S.W.3d at 679-80. At step one, the party moving for dismissal
has the burden to demonstrate that the legal action is based on or is in response to
the party’s exercise of the right of association, right of free speech, or right to
petition. See TEX. CIV. PRAC. & REM. CODE ANN. § 27.005(b); Montelongo, 622
S.W.3d at 296 (discussing three steps).
If the movant does so, the analysis proceeds to step two, where the burden
shifts to the nonmovant to establish by clear and specific evidence a prima facia case
for each essential element of the claim. See TEX. CIV. PRAC. & REM. CODE ANN. §
27.005(c); Montelongo, 622 S.W.3d at 296.
If a nonmovant satisfies its burden at step two, the analysis proceeds to step
three, where the movant may still win dismissal by establishing an affirmative
defense or other grounds on which the moving party is entitled to judgment as a
matter of law. See TEX. CIV. PRAC. & REM. CODE ANN. § 27.005(d); Montelongo,
622 S.W.3d at 296.
“In order to trigger the TCPA’s protection, the ‘legal action’ must be factually
predicated on the alleged conduct that falls within the scope of [the] TCPA’s
definition of exercise of the ‘right of free speech,’ petition, or association.” Dyer,
573 S.W.3d at 428 (emphasis added) (citation and internal quotation marks omitted).
If this nexus is missing, then the statute does not apply. See Sloat v. Rathbun, 513
S.W.3d 500, 504 (Tex. App.—Austin 2015, pet. dism’d) (noting that any activities
by the movant “that are not a factual predicate for [the non-movant’s] claims are
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simply not pertinent to the inquiry”). We consider the pleadings and any supporting
and opposing affidavits in the light most favorable to the non-movant, Dyer, 573
S.W.3d at 424, favoring the conclusion that the non-movant’s claims are not
predicated on protected expression, Damonte v. Hallmark Fin. Servs., Inc., No. 05-
18-00874-CV, 2019 WL 3059884, at *5 (Tex. App.—Dallas July 12, 2019, no pet.)
(mem. op.); TEX. CIV. PRAC. & REM. CODE ANN. § 27.011(a) (stating that TCPA
“does not abrogate or lessen any other . . . remedy . . . available under the
constitutional, statutory, case, or common law or rule provisions”).
THE PARTIES’ CONTENTIONS
Harrell argues that Smith’s lawsuit should be dismissed because it is “based
on” or is “in response to” his right to petition, which he exercised by filing and
providing deposition testimony in the previous lawsuit. Harrell argues that Smith’s
petition explicitly states: “Harrell filed a lawsuit and offered a sworn deposition
making exactly these [described] challenges to Smith’s discretion and authority to
manage Covenant.” He argues that Smith’s petition contains no allegations of any
alleged wrongdoing other than filing the petition and testifying in the previous
lawsuit. “In short, Smith would not have filed this lawsuit but for Harrell’s petition
and testimony in the prior action,” he argues.5
5
In his step-one TCPA argument, Harrell argues that the previous lawsuit had alleged that Smith engaged
in self-dealing and that Smith judicially admitted in that lawsuit that section 6.12 cannot reasonably be
construed to permit Smith to engage in self-dealing. Hence, Harrell argues, he did not willfully challenge
Smith’s authority under section 6.12 because Smith had no authority to engage in the alleged self-dealing
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Smith counters that merely mentioning a previous judicial proceeding does
not necessarily establish that a movant has engaged in any communication
constituting an exercise of a right to petition under section 27.001(4) of the TCPA
or that the nonmovant’s claims are based on or in response to such communication.
Smith argues that his lawsuit here does not seek to prohibit Harrell from his right to
petition but instead seeks to obtain a declaration of the effect of the parties’ prior
restated agreement. He asserts that the previous lawsuit merely contains “evidence
of Harrell’s conduct that forms the basis of the dispute.”6
ANALYSIS
In his sole issue, Harrell contends the trial court erred in denying his TCPA
motion to dismiss because Smith’s petition for declaratory relief states on its face
that it is based solely on the petition that Harrell filed in the previous lawsuit and on
Harrell’s deposition testimony in that lawsuit. However, we cannot “blindly accept”
attempts by Harrell to characterize Smith’s claims as implicating protected
expression. See Sloat, 513 S.W.3d at 504.
that Harrell had complained of in the previous lawsuit. We conclude Harrell’s judicial-admission argument
would better be addressed in a later step of TCPA analysis addressing merits or defenses. Indeed, Harrell
repeats his judicial-admission argument in his TCPA step-three argument. Our disposition of this appeal
would be the same regardless of the effect of the judicial admission, if any.
6
Because we otherwise hold the TCPA is inapplicable here, we do not address Smith’s contention that the
TCPA is inapplicable because Harrell had challenged Smith’s authority prior to the filing of the previous
lawsuit.
Moreover, due to our conclusion that the TCPA is otherwise inapplicable here, we do not decide Smith’s
argument that Harrell waived his right to petition by agreeing not to challenge Smith’s actions as manager
of Covenant in paragraph 6.12 of the restated company agreement.
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Our resolution of the issue is guided by our opinion Riggs & Ray, P.C. v. State
Fair of Texas, a case involving the Uniform Declaratory Judgment Act and the
TCPA. See Riggs & Ray, P.C., 2019 WL 4200009. In Riggs & Ray, P.C., the State
Fair of Texas filed a declaratory action against Riggs & Ray to determine whether
the State Fair was a public entity and thus was required to disclose information to
Riggs & Ray. See id. at *1. Two months after the State Fair of Texas filed a notice
of non-suit in that action, Riggs & Ray filed a declaratory action against the State
Fair of Texas. Id. Riggs & Ray sought a declaration that the State Fair of Texas was
a governmental body and was required to disclose the information to Riggs & Ray—
the information at issue in the previous lawsuit filed and non-suited by the State Fair
of Texas. Id. The State Fair of Texas filed a motion to dismiss in the subsequent
lawsuit pursuant to the TCPA. Id. at *2. The State Fair of Texas alleged that Riggs
& Ray’s lawsuit, under a previous version of the TCPA, was “based on, relates to”
or was “in response to” the State Fair of Texas’s “right to petition.” Id. at *3. We
concluded Riggs & Ray’s legal action was not based on, related to, or in response to
the State Fair of Texas’s right to petition. See id. at *5. If this nexus is missing, the
statute does not apply. See id.; Sloat, 513 S.W.3d at 504.
Moreover, we find persuasive guidance in Choudhri v. Lee, No. 01-20-00098-
CV, 2020 WL 4689204 (Tex. App.—Houston [1st Dist.] Aug. 13, 2020, pet. denied)
(mem. op). In Choudhri, Lee sought a declaratory judgment to determine the effect
of a prior dispute-resolution agreement on subsequent litigation, and Choudhri
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sought to dismiss under the TCPA claiming the declaratory-judgment action violated
his right to petition because “[t]he entirety of [Lee’s] lawsuit is a catalogue of
complaints regarding what [Choudhri] allegedly did and did not communicate in
various judicial proceedings.” Id. at *2. The Choudhri court held that although Lee’s
pleadings referenced various legal actions, the TCPA did not apply because the
declaration Lee sought did not implicate a protected communication. Id. at *3.
Rather, it involved “the legal rights and obligations of the parties under the
Agreement” and did not “seek to prohibit Choudhri from petitioning the courts, but
instead to obtain a declaration of the effect of the parties’ prior Agreement on the
ongoing litigation.” Id. at *3 (“Taken in context, Lee’s declaratory judgment claim
is not based on or relating to Choudhri’s right to petition; rather, it seeks a
determination of the legal principles that the parties should apply in resolving their
various legal disputes.”).7
7
Smith characterizes his claim for declaratory relief as follows:
Here, the dispute before this court is whether the [sic] Harrell’s conduct, as alleged in the
[sic] Smith’s Petition and restated herein, is an intentional challenge to Smith’s discretion
and authority as manager, equating to a willful breach of a provision of the Company
Agreement. In other words, is Harrell’s status under the Company agreement a “Defaulting
Member,” and do Smith and Covenant have the right to pursue the remedies they are
awarded under Article 15.01(a)-(h).
We note the Declaratory Judgment Act provides in part that a person interested under a written contract or
other writings constituting a contract or whose rights, status, or other legal relations are affected by a
contract may have determined any question of construction or validity arising under the instrument or
contract and obtain a declaration of rights, status, or other legal relations thereunder. TEX. CIV. PRAC. &
REM. CODE ANN. § 37.004 (“subject matter of relief”).
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In light of the pleadings and evidence, we conclude Smith’s claims are not
factually predicated on communications made in the previous lawsuit or on Harrell’s
right to petition. See R & R, 2019 WL 4200009, at *4 (any activities by the movant
that are not a factual predicate for the non-movant’s claims are not pertinent to our
inquiry regarding whether the TCPA applies) (citing Sloat, 513 S.W.3d at 504)). In
doing so we follow our standard and consider the pleadings and evidence in the light
most favorable to the non-movant, see Dyer, 573 S.W.3d at 424, favoring the
conclusion that the non-movant’s claims are not predicated on protected expression,
see Damonte 2019 WL 3059884, at *5. We agree with Smith that “The
communications Harrell trumpets are merely evidence of Harrell’s conduct that
forms the basis of the dispute.” Simply alleging conduct that has a communication
embedded within it does not create the relationship between the claim and the
communication necessary to invoke the TCPA. See Riggs & Ray, P.C., 2019 WL
4200009, at *4 (quoting Kawcak v. Antero Res. Corp., 582 S.W.3d 566, 587 (Tex.
App.—Fort Worth 2019, pet denied)). Rather Smith’s claims are factually predicated
solely on Harrell’s alleged conduct of willfully violating the restated company
agreement. See Riggs & Ray, P.C., 2019 WL 4200009, at *4 (“Nothing in R & R’s
petition suggests that its claims are predicated on anything other than SFT’s
noncompliance with R & R’s records requests.”); Sloat, 513 S.W.3d at 504 (“Rather,
[non-movant’s] are garden-variety tort claims based on specific conduct that the
Scientology Defendants have failed to demonstrate, by a preponderance of the
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evidence, implicates the exercise of their rights of ‘free speech,’ ‘association,’ or ‘to
petition.’”); Dyer, 573 S.W.3d at 430 (plaintiffs’ claims were based on defendants’
alleged conspiracy to misappropriate plaintiffs’ proprietary software and
confidential information with intent to sell or use such property). Although Harrell
communicated his alleged willful violation of the restated agreement through his
previous lawsuit, the alleged willful violation itself, not the communication, is the
basis of Smith’s claims. See Riggs & Ray, P.C., 2019 WL 4200009, at *4. Hence,
we conclude that Smith’s claims are not “based on” or in “response to” Harrell’s
right to petition and that the TCPA does not apply.
CONCLUSION
We overrule Harrell’s issue. We affirm the trial court’s order
/Bill Pedersen, III/
BILL PEDERSEN, III
220242f.p05 JUSTICE
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Court of Appeals
Fifth District of Texas at Dallas
JUDGMENT
KEITH HARRELL, Appellant On Appeal from the 219th Judicial
District Court, Collin County, Texas
No. 05-22-00242-CV V. Trial Court Cause No. 219-06220-
2021.
JARED S. SMITH, Opinion delivered by Justice
INDIVIDUALLY AND Pedersen, III. Justices Myers and
DERIVATIVELY ON BEHALF OF Garcia participating.
COVENANT EQUITY PARTNERS,
L.L.C, Appellee
In accordance with this Court’s opinion of this date, the judgment of the trial
court is AFFIRMED.
It is ORDERED that appellee JARED S. SMITH, INDIVIDUALLY AND
DERIVATIVELY ON BEHALF OF COVENANT EQUITY PARTNERS, L.L.C
recover his costs of this appeal from appellant KEITH HARRELL.
Judgment entered this 30th day of November 2022.
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