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LP v. STK Rebel Austin, LLC

United States District Court, W.D. Texas, Austin Division

March 1, 2016

WC 3rd & TRINITY, LP
v.
STK REBEL AUSTIN, LLC, et al.
v.
WORLD CLASS CAPITAL GROUP, LLC, et al.

          HONORABLE LEE YEAKEL, UNITED STATES DISTRICT JUDGE

          REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE

          ANDREW W. AUSTIN, UNITED STATES MAGISTRATE JUDGE

         Before this Court are WC Group's Motion for Summary Judgment (Dkt. No. 39), STK's Response (Dkt. No. 47), and WC Group's Reply (Dkt. No. 48); and STK's Motion for Partial Summary Judgment (Dkt. No. 50), WC Group's Response (Dkt. No. 53), and STK's Reply (Dkt. No. 54). The District Court referred the above-motions to the undersigned Magistrate Judge for Report and Recommendation pursuant to 28 U.S.C. § 636(b)(1)(B), Federal Rule of Civil Procedure 72 and Rule 1(c) of Appendix C of the Local Rules.

         I. GENERAL BACKGROUND

         WC 3rd and Trinity, LP (WC Trinity) brought this suit against STK Rebel Austin, LLC (STK) and its parent corporation, The One Group Hospitality, Inc. for breach of a lease and guaranty. STK and The One Group then counterclaimed against WC 3rd and Trinity, and filed third-party claims against WC Trinity's parent corporation World Class Capital Group and owners Natin Paul and Sheena Paul (collectively WC Group). In its counter and third-party claims, STK asserts causes of action for fraudulent inducement, fraud by nondisclosure, and negligent misrepresentation, along with two claims for breach of contract and a claim for declaratory judgment. WC Trinity and WC Group now move for summary judgment in their favor on the affirmative breach of contract claim, and also seek a summary judgment rejecting all of the counterclaims and third-party claims. STK and The One Group have filed a cross-motion for summary judgment.

         This suit arises from a contract between WC Trinity and STK, in which STK entered into a lease for a property owned by WC Trinity. The lease was for an initial period of ten years, with the prospect of extending the lease for two additional five-year periods (the Lease). The subject of the Lease, the “Demised Premises, ” were defined as:

The building located at 305 E. 3rd St., Austin, Texas 78701, which, contains approximately 6, 690 square feet of rentable area on the ground floor, in addition to an approximately 4, 304 square foot rooftop area (“Rooftop Patio”) in an approximately 19, 244 gross square foot building containing approximately 15, 210 square feet of rentable area (“Building”) on a portion of the tract of land as more particularly described in Exhibit “A”.

(Dkt. No. 39, Exhibit 2-A). The One Group owns and operates a number of high end steak houses, and planned to open an “STK Rebel” restaurant in the leased premises. The parties signed the Lease on June 5, 2015, with a commencement date of July 1, 2015. The One Group Hospitality separately signed a guaranty agreement, in which it guaranteed payment and performance of STK's payment obligations under the Lease. The parties negotiated the lease over a number of months.

         Pursuant to the Lease, STK was to pay a “Minimum Guaranteed Rental” beginning on the “Rent Commencement Date.” The Rent Commencement Date was to begin “[t]he earlier of (i) the date upon which [STK] commences business operations at the Demised Premises and opens to the general public (the “Opening Date”), and (ii) March 1, 2016, subject to extension as provided for in Section 28.18.” Id. Section 28.18 allowed for an extension of the Rent Commencement Date in the case of: “(i) any Force Majeure Event or (ii) any Remediation Work, in any such case [that] causes, the Tenant's Work not to be completed or cause[s] Tenant to not open for business to the public on or before the Rent Commencement Date.” Id. Absent these circumstances, STK was to begin paying the Minimum Guaranteed Rental Payments in monthly installments by the first day of the calendar month following the Rent Commencement Date. The Minimum Guaranteed Rental for the first 36 months of the Lease was $27, 840.00 per month, with “an additional sum of $1, 546.66 per month during each of Month 1 through 36, ” and $2, 997.70 in a “Common Area Maintenance Charge” (CAM). Id. Further, STK was to pay a proportion of the taxes and insurance on the property.

         WC Trinity alleges in its Complaint that STK committed a breach of contract when, after paying rent for several months, it failed to deliver its rent payments as they became due, beginning in the Fall of 2016. WC Trinity also alleges that STK did not use commercially reasonable best efforts pursuant to the Lease to open the restaurant. STK, on the other hand, argues that there was no breach of contract because WC Trinity did not deliver the property-specifically the rooftop patio-up to code as was required by the Lease, and WC Trinity's breach excused STK's performance. Furthermore, STK-which views the rooftop patio as essential to its “STK concept” or branding-argues that before the Lease was signed, WC Group made several representations to STK about the rooftop patio which turned out to be false, and agreed to help resolve the issues related to the rooftop after the Lease was signed.

         Though STK began making its payments in March 2016-following the Rent Commencement Date- it failed to make its October 1, 2016 rent payment, and has not made any payments since that date. WC Group seeks $1, 088, 155.45 in unpaid rent and fees up to the date of June 6, 2018. It also seeks attorneys fees and costs.

         II. LEGAL STANDARD

         Summary judgment shall be rendered when the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine dispute as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 323-25 (1986); Washburn v. Harvey, 504 F.3d 505, 508 (5th Cir. 2007). A dispute regarding a material fact is “genuine” if the evidence is such that a reasonable jury could return a verdict in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). When ruling on a motion for summary judgment, the court is required to view all inferences drawn from the factual record in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Washburn, 504 F.3d at 508. Further, a court “may not make credibility determinations or weigh the evidence” in ruling on a motion for summary judgment. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000); Anderson, 477 U.S. at 254-55.

         Once the moving party has made an initial showing that there is no evidence to support the nonmoving party's case, the party opposing the motion must come forward with competent summary judgment evidence of the existence of a genuine fact issue. Matsushita, 475 U.S. at 586. Mere conclusory allegations are not competent summary judgment evidence, and thus are insufficient to defeat a motion for summary judgment. Turner v. Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir. 2007). Unsubstantiated assertions, improbable inferences, and unsupported speculation are not competent summary judgment evidence. Id. The party opposing summary judgment is required to identify specific evidence in the record and to articulate the precise manner in which that evidence supports his claim. Adams v. Travelers Indem. Co. of Conn., 465 F.3d 156, 164 (5th Cir. 2006). If the nonmoving party fails to make a showing sufficient to establish the existence of an element essential to its case and on which it will bear the burden of proof at trial, summary judgment must be granted. Celotex, 477 U.S. at 322-23.

         Determining whether a contract is ambiguous, and interpreting an unambiguous contract, are questions of law. Interstate Contracting Corp. v. City of Dall., Tex., 407 F.3d 708, 712 (5th Cir. 2005); Reilly v. Rangers Mgmt, Inc., 727 S.W.2d 527, 529 (Tex. 1987). The court's job in interpreting a written contract is to carry out the parties' stated intentions. Reilly, 727 S.W.2d at 529. Thus, in construing a contract, the court must give language its plain grammatical meaning unless it definitely appears that the intention of the parties would be defeated by doing so. Id. When a contract's meaning is disputed, the court's primary objective is to ascertain and give effect to the parties' intent as expressed by their language; objective manifestations of intent control, not what either party alleges they intended to say. URI, Inc. v. Kleberg Cnty, 543 S.W.3d 755, 763 (Tex. 2018). The Texas Supreme Court has stated that courts should “presume parties intend what the words of their contract say” and interpret contract language according to its “plain, ordinary, and generally accepted meaning” unless the instrument directs otherwise.

[W]ords must be construed in the context in which they are used. Context is not, however, confined to the two-dimensional contractual environs in which the words exist but may also encompass “the circumstances present when the contract was entered.” This is so because words are “the skin of a living thought, ” and our quest is to determine, objectively, what an ordinary person using those words under the circumstances in which they are used would understand them to mean.

Id. The Texas Supreme Court has also stated that if a court can give a clear and definite legal meaning to a contract, it is not ambiguous as a matter of law. Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118, 133 (Tex. 2010). Courts should not find ambiguity simply because the parties disagree over a contract's meaning. FPL Energy, LLC v. TXU Portfolio Mgmt. Co., L.P., 426 S.W.3d 59, 63 (Tex. 2014). The primary concern in contract interpretation is to ascertain the true intentions of the parties as expressed in the instrument; courts should consider the entire writing to harmonize and effectuate all provisions such that none are rendered meaningless. Id.

         III. ANALYSIS

         Each side has filed a summary judgment motion. The motion filed by the WC Group entities requests that the Court grant summary judgment on WC Trinity's breach of contract claim against STK and on its breach of the guaranty claim against The One Group Hospitality, Inc. It also asks that the Court grant summary judgment on all of the counterclaims against WC Trinity, as well as the third-party claims against World Class Capital Group and Natin and Sheena Paul. For its part, STK's motion seeks partial summary judgment on its fourth claim for relief (against WC Trinity for breach of contract), and against WC Trinity on its breach of contract and breach of guaranty claims against STK and The One Group, respectively.[1]

         A.WC Group's Motion for Summary Judgment

         As noted, WC Group asks that the Court dismiss all of STK's counterclaims and third-party claims, and also requests summary judgment in its own favor on its claims against STK and The One Group for breach of the Lease and the guaranty. The Court will start with the counter and third-party claims.

         1. STK's Fraud-based Counterclaims and Third-Party Claims

         Each of these claims-fraudulent inducement, fraudulent concealment, and negligent misrepresentation-contain an element of justifiable reliance.[2] Justifiable reliance “usually presents a question of fact, ” but as the Texas Supreme Court held last year, “the element can be negated as a matter of law when circumstances exist under which reliance cannot be justified.” JPMorgan Chase Bank, N.A. v. Orca Assets G.P., L.L.C., 546 S.W.3d 648, 654 (Tex. 2018). In JPMorgan Chase, a lessee under an oil and gas lease filed suit against a lessor and the lessor's representative for fraudulent inducement and negligent misrepresentation arising out of the execution of a lease when the lessor had already leased the property to a third party. The court held that the plaintiff could not maintain a claim of justifiable reliance within the context of numerous “red flags, ” the plaintiff's sophistication within the oil-and-gas industry, and the direct contradiction between the alleged representation and the letter of intent. The Court stated:

Orca, composed of experienced and knowledgeable businesspeople, negotiated an arm's-length transaction and then placed millions of dollars in jeopardy-all while operating under circumstances that similarly situated parties would have regarded as imminently risky. Orca needed to protect its own interests through the exercise of ordinary care and reasonable diligence rather than blindly relying upon another party's vague assurances. Its failure to do so precludes its claim of justifiable reliance as a matter of law.

JPMorgan Chase, 546 S.W.3d at 660. In a 2010 case, where investors claimed to have justifiably relied on representations when purchasing bonds, the Texas Court also held that the investors' reliance was not justified because before the acquisition, the investors' senior portfolio manager-who was “an experienced bond investor” with a finance degree and an MBA-learned the corporation was financially at risk. Grant Thornton, LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010).

         The Texas Supreme Court has also addressed the concept of “direct contradiction” in the context of justifiable reliance. The Court reiterated in JPMorgan Chase that, as Texas courts have “repeatedly held, a party to a written contract cannot justifiably rely on oral misrepresentations regarding the contract's unambiguous terms.” JPMorgan Chase, 546 S.W.3d at 658 (quoting Nat'l Prop. Holdings, L.P. v. Westergren. 453 S.W.3d 419, 424 (Tex. 2015)).

[A] party to an arm's length transaction must exercise ordinary care and reasonable diligence for the protection of his own interests. . . . Therefore, reliance upon an oral representation that is directly contradicted by the express, unambiguous terms of a written agreement between the parties is not justified as a matter of law. . . . If written contracts are to serve a purpose under the law, relative to oral agreements, it is to provide greater certainty regarding what the terms of the transaction are and that those terms will be binding, thereby lessening the potential for error, misfortune, and dispute. . . . [A] party who enters into a written contract while relying on a contrary oral agreement does so at its peril. . . .

Id. (quoting DRC Parts & Accessories, L.L.C. v. VM Motori, S.P.A., 112 S.W.3d 854, 858-59 (Tex. App.- Houston [14th Dist.] 2003)).

         The Fifth Circuit's cases applying Texas law have similarly rejected fraud claims where the reliance was not justified. In a recent case, the court stated that a company's own investigation of the facts may negate “any reasonable reliance upon the supposed misrepresentations.” N. Cypress Med. Ctr. Operating Co., Ltd. v. Aetna Life Ins. Co., 898 F.3d 461, 475 (5th Cir. 2018). The Circuit has held that “no reasonable jury could find that [plaintiff] justifiably relied on [the defendants'] alleged misrepresentation” when “its own investigation of the facts negated any reasonable reliance upon the supposed misrepresentations.” Highland Crusader Offfshore Partners LP v. LifeCare Holdings, Inc., 377 Fed.Appx 422, 428 (5th Cir. 2010). And in a 2003 case, the Fifth Circuit analyzed the justifiable-reliance element by stating:

Lewis, an individual with both a business background and familiarity with retirement accounts, should have viewed this series of events as a red flag warranting further investigation of the tax consequences of the loan transaction. Viewing the circumstances in their entirety, including Lewis's access to professional accountants, the amount of money involved in the transaction, and the ambiguous nature of [the defendant's] “assurance, ” Lewis' decision to ...

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