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Manchester Texas Financial Group, LLC v. Badame

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

September 5, 2019

MANCHESTER TEXAS FINANCIAL GROUP, LLC; MANCHESTER AUSTIN, LLC, AS ASSIGNEE OF MANCESTER TEXAS FINANCIAL GROUP, LLC; AND MANCHESTER FINANCIAL GROUP, LLC, Plaintiffs
v.
JAY BADAME AND TISHMAN CONSTRUCTION CORPORATION, Defendants

          REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE

          SUSAN HIGHTOWER, UNITED STATES MAGISTRATE JUDGE

         TO: THE HONORABLE LEE YEAKEL UNITED STATES DISTRICT JUDGE

         Before this Court are Defendant Tishman Construction Corporation's Motion to Dismiss filed on May 2, 2019 (Dkt. No. 45); Defendant Jay Badame's Motion to Dismiss filed on May 2, 2019 (Dkt. No. 46); Plaintiff's Motion for Leave to Conduct Jurisdictional Discovery filed on June 17, 2019 (Dkt. No. 51); Plaintiff's Motion for Leave to File Surreply filed on August 1, 2019 (Dkt. No. 62);[1] and all related filings. On July 18, 2019, the District Court referred the above motions and related filings to the undersigned Magistrate Judge for resolution and for report and recommendation pursuant to 28 U.S.C. § 636(b)(1), Federal Rule of Civil Procedure 72 and Rule 1 of Appendix C of the Local Rules of the United States District Court for the Western District of Texas (“Local Rules”).

         I. Background

         Manchester Financial Group, LP (“MFG”) is a California-based commercial real estate development firm that specializes in hotel development. Dkt. No. 39 at ¶ 10. On May 19, 2014, MFG's corporate affiliate Manchester Texas Financial Group, LLC (“MTFG”) entered into a construction contract[2] (“Contract”) with Hunt Construction Group, Inc. (“Hunt”) to build the Fairmont Austin Hotel, in Austin, Texas (the “Project”). Id. at ¶ 11. The Contract provided that Hunt would be the general contractor and construction manager of the Project in exchange for “Cost of the Work Plus a Fee with a Guaranteed Maximum Price.” Id. The Contract further designated Eric Schreiner as Hunt's corporate representative, and he was assigned as the Project Manager. Dkt. No. 45-1 at p. 1. The Contract also contained an Arbitration Clause requiring all parties to arbitrate any claims or disputes arising out of or related to the Contract. Id. at §§ 15.3.1, 15.4.1.

         On February 27, 2015, the Contract was amended to establish the “Guaranteed Maximum Price and the dates for Substantial Completion and Final Completion of the Hotel.” Dkt. No. 39 at ¶11. The guaranteed maximum price for the Project's construction was agreed to be $ 237, 734, 526, the Substantial Completion date was agreed to be May 25, 2017, and the Final Completion date was agreed to be June 3, 2017. Id. Plaintiffs further contend that the timely completion of the Project was agreed to “be of the essence” of the parties' agreement. Id.

         In October 2014, MTFG's rights and obligations under Contract were assigned to corporate affiliate Manchester Austin Hotel, LLC (“MAH”). MTFG, however, contends that it continued to act on behalf of MAH and MFG with respect to the Project. Dkt. No. 39 at ¶ 12.[3]

         Shortly after the parties executed the Contract, Hunt was acquired by AECOM, Inc., a large multinational infrastructure firm. Plaintiffs allege that AECOM became involved in the construction industry in 2010, when it acquired another construction firm, Tishman Construction Corporation (“Tishman”). Thus, with AECOM's acquisition of Hunt, Hunt and Tishman became corporate affiliates. Plaintiffs allege that after AECOM acquired Hunt, it did not give the Project “the same care and attention that Hunt . . . had in the past.” Id. at ¶ 27. In the Fall of 2016, AECOM transferred Project Manager Schreiner to a different construction project in California. Plaintiffs contend that AECOM failed to appoint a new Project Manager to oversee the Project. Id. at ¶ 30.

         After heavy rainfall in the Spring of 2015, Plaintiffs agreed to move the Substantial Completion Date of May 25, 2017 to August 9, 2017. Id. at ¶ 28. After Plaintiffs became aware of more construction delays, MFG President Richard Gibbons sent Hunt a “Notice of Claims” expressing his concern that the Project was significantly behind schedule. Id. at ¶ 35. In response, Hunt scheduled a meeting with Plaintiffs to discuss the Project. On March 31, 2107, Tishman's Chief Operating Officer and President, Jay Badame, and Hunt's Chief Operating Officer and President, Michael Frattiani, met with Plaintiffs in Austin. Id. at ¶ 37. Plaintiffs allege that Badame acknowledged at the meeting that the August 9, 2017 Substantial Completion Date could not be met, but assured Plaintiffs that Hunt would deliver the Project in a timely and efficient manner and that he would provide a new project schedule by April 15, 2017. Id. at ¶ 40.

         On April 15, 2017, Hunt's Executive Vice President Bill Morthland informed Plaintiffs that the new Substantial Completion Date would be September 20, 2017. Id. at ¶ 43. On April 19, 2017, Hunt representatives Jose Pienknagura and Michael Frattiani met with Plaintiffs again and allegedly gave Plaintiffs the ultimatum to either (1) pay $3.6 million and have the Project completed by September 20, 2017; (2) pay $2, 063, 000 and have the Project completed by October 15, 2017; or (3) make no payments to cover acceleration costs and the Project would not be done until the end of 2017. Id. at ¶ 46. Plaintiffs agreed to pay the $3.6 million to Hunt so that the Project would be completed by September 20, 2017. Id. at ¶ 51. Although Plaintiffs made the first two installment payments, totaling approximately $2.7 million, they did not make the third installment to Hunt. Id. at ¶ 55.

         Plaintiffs allege that Hunt did not meet the Substantial Completion Date of September 20, 2017. Id. at ¶ 56. On March 7, 2018, Plaintiffs decided to open the Hotel although the Project was not completed. Id. at ¶ 59. Plaintiffs allege that “40% of the rooms and many of its amenities were unavailable.” Id. Plaintiffs allege that a Certificate of Substantial Completion has not yet been issued, and that the Hotel is operating pursuant to a Temporary Certificate of Occupancy. Id.

         Plaintiffs further allege that: “DEFENDANTS strung PLAINTIFFS along month after month by lying about many things, concealing others, and always dangling the prospect of completion of the Hotel at a point in the future just close enough for Manchester to reasonably believe they could hit their target if they made the effort they promised, and not so far away that it would make sense for MANCHESTER to replace Hunt.” Id. at ¶ 60. Plaintiffs allege that Hunt and Tishman, through Badame, made numerous false representations that the Project would be complete by September 20, 2017. Id. at ¶¶ 57-59.

         Pursuant to the Arbitration Clause contained in the Contract, Plaintiffs have initiated arbitration proceedings against Hunt in this case and are seeking $100 million from Hunt. See Dkt. No. 45 p. 3. In addition to the arbitration proceeding, Plaintiffs filed the instant lawsuit in state court against AECOM, Inc., AECOM Tishman f/k/a Tishman Construction (“Tishman”), and Jay Badame, alleging fraud (intentional misrepresentation, non-disclosure, and no intent to perform) and negligent misrepresentation. See Manchester Texas Financial Group LLC v. AECOM, Inc., D-1-GN-18-007014 (419th Dist. Ct. Travis County, Tex. Nov. 21, 2018).

         On January 3, 2019, AECOM, Tishman and Badame removed this case to federal court on the basis of diversity jurisdiction pursuant to 28 U.S.C. § 1332. Dkt. No. 1. On April 11, 2019, the District Court granted Plaintiffs' Voluntary Notice of Dismissal of Defendant AECOM. Dkt. No. 37. On April 11, 2019, Plaintiffs filed their First Amended Complaint against Tishman and Badame, once again alleging fraud and negligent misrepresentation. Plaintiffs seek over $50 million in damages.

         Tishman and Badame have now filed Motions to Dismiss arguing that Plaintiff's lawsuit should be dismissed under Federal Rules of Civil Procedure 12(b)(1), 12(b)(2), 12(b)(6), and 12(b)(7). The Court will address the merits of both Motions below.

         II. Legal Standards

         A. Rule 12(b)(1)

         The Fifth Circuit has held that a district court lacks subject matter jurisdiction over a case and should dismiss it pursuant to Federal Rule of Civil Procedure 12(b)(1) when the parties' dispute is subject to binding arbitration. Gilbert v. Donahoe, 751 F.3d 303, 306-07 (5th Cir. 2014). The burden of proof for a 12(b)(1) motion to dismiss is on the party asserting jurisdiction. Id. at 307. In order to bear that burden, the party “must prove by a preponderance of the evidence that the court has jurisdiction based on the complaint and evidence.” Id. However, “a motion to dismiss for lack of subject matter jurisdiction should be granted only if it appears certain that the plaintiff cannot prove any set of facts in support of his claim that would entitle plaintiff to relief.” Id.

         B. Rule 12(b)(2)

         Federal Rule of Civil Procedure 12(b)(2) requires a court to dismiss a claim if the court does not have personal jurisdiction over the defendant. Fed.R.Civ.P. 12(b)(2). “If . . . the court rules on personal jurisdiction without conducting an evidentiary hearing, the plaintiff bears the burden of establishing only a prima facie case of personal jurisdiction.” Sangha v. Navig8 ShipManagement Private Ltd., 882 F.3d 96, 101 (5th Cir. 2018). “The district court is not obligated to consult only the assertions in the plaintiff's complaint in determining whether a prima facie case for jurisdiction has been made. Rather, the district court may consider the contents of the record at the time of the motion . . . .” Id. (internal quotations and citations omitted). “Although jurisdictional allegations must be accepted as true, such acceptance does not automatically mean that a prima facie case for [personal] jurisdiction has been presented.” Id. The plaintiff must prove that the court has jurisdiction over the defendant with regard to each claim. Seiferth v. Helicopteros Atuneros, Inc., 472 F.3d 266, 275 (5th Cir. 2006).

         C. Rule 12(b)(6)

         Federal Rule of Civil Procedure 12(b)(6) allows a party to move to dismiss an action for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). In deciding a Rule 12(b)(6) motion to dismiss for failure to state a claim, “[t]he court accepts all well-pleaded facts as true, viewing them in the light most favorable to the [nonmovant].” In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir. 2007) (internal quotation marks omitted) (2008). While a complaint attacked by a Rule 12(b)(6) motion does not need detailed factual allegations in order to avoid dismissal, the plaintiff's factual allegations “must be enough to raise a right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). The Supreme Court has explained that a court need not accept as true conclusory allegations or allegations stating a legal conclusion. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A complaint must contain sufficient factual matter “to state a claim to relief that is plausible on its face.” Id. (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility when the [nonmovant] pleads factual content that allows the court to draw the reasonable inference that the [movant] is liable for the misconduct alleged.” Id.

         III. Defendant Tishman's Motion to Dismiss

         Tishman argues that Plaintiffs' lawsuit should be dismissed because (1) the Contract's arbitration clause deprives the Court of subject matter jurisdiction, and (2) the economic loss rule prohibits Plaintiffs from repackaging their contract claims against Hunt as tort claims against Tishman. Alternatively, Tishman argues that Plaintiffs have failed to plead fraud and negligent misrepresentation with particularity, Hunt is an indispensable party that cannot be joined, and therefore dismissal is warranted under Rule 12(b)(7). The Court addresses the arbitration issue first.

         The Contract between MTFG and Hunt provides that “[c]laims, disputes, or other matters in controversy arising out of or related to the Contract . . . shall be subject to mediation as a condition precedent to binding dispute resolution.” Dkt. No. 45-1 at § 15.3.1 It also contains the following arbitration clause:

Any Claim subject to, but not resolved by, mediation shall be subject to arbitration which, unless the parties mutually agree otherwise, shall be administered by the American Arbitration Association in accordance with its Construction Industry Arbitration Rules in effect on the date of the Agreement.

Id. at § 15.4.1 (“Arbitration Clause”).

         Although Tishman was not a signatory to the Contract, Tishman argues that the Arbitration Clause applies to Plaintiffs' claims in this lawsuit because those claims all arise of out of the underlying provisions of the Contract. Plaintiffs argue that there is not a valid agreement to arbitrate between Plaintiffs and Tishman because Tishman was not a signatory to the Contract. In other words, Plaintiffs argue that the only valid arbitration agreement is between Plaintiffs and signatory Hunt, not Tishman.

         A. The Law ...


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