Madison Dev. Grp. LLC v. Mattress Firm, Inc.

• Decision Date: 06 August 2020
• Docket Number: NO. 01-18-00548-CV,01-18-00548-CV
• Citation: 608 S.W.3d 376
• Parties: MADISON DEVELOPMENT GROUP LLC, Quattro Development, LLC, and Michael Liyeos, Appellants v. MATTRESS FIRM, INC., Appellee
• Court: Texas Court of Appeals

608 S.W.3d 376

MADISON DEVELOPMENT GROUP LLC, Quattro Development, LLC, and Michael Liyeos, Appellants

v.MATTRESS FIRM, INC., Appellee

NO. 01-18-00548-CV

Court of Appeals of Texas, Houston (1st Dist.).

Opinion issued August 6, 2020

Varant Yegparian, Schiffer Hicks Johnson PLLC, 700 Louisiana, Ste. 2650, Houston, Texas 77002, Justin M. Waggoner, Razvan Ungureanu, Smyser Kaplan & Veselka, L.L.P., 700 Louisiana, Ste. 2300, Houston, Texas 77002, Chad Flores, Alistair Dawson, Alyssa McDaniel, Beck Redden LLP, 1221 McKinney, Ste. 4500, Houston, Texas 77010, Bradley S. Keller (Pro Hac Vice), Byrnes Keller Cromwell LLP, 1000 Second Avenue, 38^th Floor, Seattle, WA 98104, for Appellants.

J. Stephen Barrick, John B. Thomas, Paul L. Michell, Courtney E. Ervin, Hicks Thomas LLP, 700 Louisiana St., Ste. 2000, Houston, Texas 77002, for Appellee.

Panel consists of Justices Keyes, Goodman, and Countiss.

Evelyn V. Keyes, Justice In this case, appellee, Mattress Firm, Inc., sued multiple defendants, including appellants Madison Development Group LLC (Madison), Quattro Development, LLC (Quattro), and Michael Liyeos, arising out of an alleged multi-year fraudulent scheme involving bribes and kickbacks paid to Mattress Firm insiders by real estate brokers and property development companies in an effort to charge Mattress Firm artificially inflated rental rates on leases throughout the country. Mattress Firm brought claims for fraud, civil conspiracy, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and negligence. It also alleged that the defendants had been unjustly enriched, and it sought the imposition of a constructive trust. Most of the defendants generally appeared in the underlying lawsuit. Madison, Quattro, and Liyeos, however, are all nonresidents of Texas and they filed special appearances.

After a hearing, the trial court denied all three appellants' special appearances. On appeal, each of the appellants contends that the trial court erred in denying their respective special appearances because they lack minimum contacts with Texas such that maintenance of the suit against them in Texas fails to comport with due process. Madison also argues that exercising personal jurisdiction over it would offend traditional notions of fair play and substantial justice.

We affirm.

Background

Mattress Firm is a Delaware corporation with its principal place of business in Houston, Texas, and it sells mattresses and other bedding materials in retail stores nationwide. Generally, Mattress Firm does not own the real property on which it has retail stores. Instead, "independent real estate developers" own and develop the property, and Mattress Firm enters into a lease with the developer, or a "special purpose entity" owned by the developer, to operate a retail store on the property. Mattress Firm has a Real Estate Committee (the Committee) that regularly meets in Houston and determines which leases to approve.

In 2009, Mattress Firm embarked on a period of rapid expansion throughout the United States, and it made several internal hires to facilitate this expansion. It hired Bruce Levy as Vice President of Real Estate and Construction "to lead the national leasing efforts," and it hired Ryan Vinson as Director of New Market Development. Levy later became Executive Vice President of Real Estate, and Vinson later became Senior Vice President of Real Estate. On Levy's recommendation, Mattress Firm hired Alexander Deitch and the real estate brokerage firm that employed him, Colliers International—Atlanta, LLC (Colliers Atlanta), to serve as Mattress Firm's "Master Broker," primarily responsible for "identifying, evaluating, and brokering new site locations and advising and negotiating new leases and lease renewals on behalf of Mattress Firm." Levy, Vinson, Deitch, and Colliers Atlanta were responsible for evaluating potential locations for new retail stores and for recommending to senior management at Mattress Firm, including the Committee, which retail stores to open and where, lease terms for these stores, construction budgets, which leases to renew, and which stores to close. Levy, Vinson, Deitch, and Colliers Atlanta are all defendants in the underlying lawsuit but are not parties to this interlocutory appeal.

According to Mattress Firm, Levy, Vinson, Deitch, and Colliers Atlanta joined with real estate development companies and their principals—including appellants Madison Development, Quattro Development, and Michael Liyeos, one of Quattro's principals—to engage "in a nationwide bribery, kickback, and fraud scheme to financially enrich themselves at Mattress Firm's expense." To secure their position as "Master Broker," Deitch and Colliers Atlanta paid bribes and kickbacks to Levy and Vinson. Levy and Vinson also used "preferred developers"—real estate development companies that were also willing to pay bribes and kickbacks, often disguised as "brokerage fees" or "development fees," to Levy, Vinson, and Deitch—to develop properties nationwide, and these developers "were given the largest number of Mattress Firm leases with very favorable lease terms, including above-market rents and longer lease terms." The developer-friendly leases increased the value of the properties, allowing the developers (or entities controlled by the developers) to sell their properties at a substantial profit several months after entering into a lease with Mattress Firm.

As part of the alleged fraudulent scheme, Levy, Vinson, Deitch, and the development companies worked together to identify properties for new retail stores, negotiate long lease terms, and set inflated rental rates for new store locations that were beneficial to the development companies but detrimental to Mattress Firm. Levy, who "controlled the real estate transactions for the company," ensured that the Committee would approve the leases at the agreed-upon terms through misrepresentations and omissions about the nature of the transactions, including misrepresenting "[t]he need to pay at the high end of the market, or above, to secure a lease location," "the fact that there were no secret side deals to secure the lease location," "that there were no conflicts of interests that would require the transaction to be subject to closer scrutiny," and "that the lease rates were reasonable and the best deal possible under the circumstances."

In October 2017, Mattress Firm filed suit against seventeen defendants, including the three appellants here—Madison, Quattro, and Liyeos.¹ Madison is a Washington limited liability company with its principal place of business in Washington. Quattro is an Illinois limited liability company with its principal place of business in Illinois, and Liyeos is a member of Quattro and an Illinois resident.

Mattress Firm asserted a cause of action for common-law fraud against "all defendants" named in its petition. Mattress Firm alleged that Levy, Vinson, Deitch, and Colliers Atlanta knowingly made material misrepresentations and omissions to Mattress Firm, including failing to disclose kickbacks, using "a network of single purpose LLCs, partnerships, or other entities intended to conceal the unlawful activity," and providing inaccurate comparable lease information to Mattress Firm to induce it to "pay millions in brokerage commissions and above-market rents." It also asserted a cause of action for civil conspiracy against "all defendants," alleging that the real estate development companies—including Madison and Quattro—acted in concert to defraud Mattress Firm. Mattress Firm alleged that the development companies knew that Levy, Vinson, Deitch, and Colliers Atlanta were engaged in a scheme to defraud Mattress Firm "out of millions of dollars in excess rents and other expenses through materially false and inaccurate real estate reports and representations to [the Committee] and by hiding kickbacks and other costs that served to inflate Mattress Firm's lease expenses...."

Mattress Firm alleged that all of the defendants had been unjustly enriched as a result of their respective actions, and it sought the imposition of a constructive trust. With respect to the development companies, including Madison and Quattro, Mattress Firm alleged that it had conferred upon them "multiple non-gratuitous payments in the form of above-market rents that were provided in exchange for the kickbacks given to former Mattress Firm employees Levy and Vinson, which information was concealed and misrepresented to Mattress Firm," allowing the development companies "to ‘flip’ the properties for substantial profits, which they retained."

Mattress Firm asserted a claim for breach of fiduciary duty against its two former employees—Levy and Vinson—and alleged that the other defendants, including Madison and Quattro, were liable for aiding and abetting Levy's and Vinson's breach of their fiduciary duties. Specifically, Mattress Firm alleged that the development companies knew that Levy and Vinson "held positions of trust and confidence" at Mattress Firm, but they "illegally capitalized on the positions of authority held by Levy and Vinson for their own personal gain." Finally, Mattress Firm asserted a cause of action for negligence against Colliers Atlanta.

In its second amended petition—its live pleading—Mattress Firm alleged certain acts by Madison, Quattro, and Liyeos that connected each of these defendants to Texas. Mattress Firm alleged that, while the fraudulent scheme was ongoing, Quattro entered into at least twenty leases with Mattress Firm, including one for a retail store in Lubbock, Texas. In March 2013, Liyeos and Rob Walters² toured several cities in West Texas with Levy and Vinson, including a property in Lubbock that a Quattro-affiliated company later purchased. Through an email to Levy, Quattro solicited Mattress Firm's interest in this property. Levy and Vinson approved the deal "and then pushed it through the [Committee] approval process with Quattro's and Deitch's assistance."...