Supreme Court Dismisses Out-of-State Defendants

In a recent commercial case, a subcontractor in Texas sued out-of-state defendants when it was not paid for its work. The subcontractor, GIC, sued two individuals who were officers of the contractor which failed to pay him, asserting that they were liable under the Texas Trust Fund Act. In the case of Hofstatter v. General Interior Construction, Inc., decided last month, the Supreme Court said that the defendants could not be required to answer in Texas for their conduct, holding that there was no jurisdiction over them.

As the Supreme Court acknowledged, under the Texas Trust Fund Act, “Texas law provides that payments made to a contractor or its officers, agents, or directors are trust funds if made under a contract for the improvement of real property in this state. . . . The contractor or its officers, agents, or directors who receive or control the funds are trustees thereof. . . . The beneficiaries of the trust funds are persons who provide labor or materials for the project. . . . A trustee who acts, inter alia, with intent to defraud by using, disbursing, or otherwise diverting ‘trust funds without first fully paying all current or past due obligations incurred by the trustee to the beneficiaries’ misapplies the trust funds. . . . ‘Intent to defraud’ means, as relevant here, that the trustee so used trust funds obtained by means of an affidavit under Texas Property Code 53.085 containing false information relating to the trustee’s payment of the obligations.”

Texas law allows out-of-state residents who harm Texans to be sued in Texas. “Specific jurisdiction . . . arises when (1) the defendant purposefully avails itself of conducting activities in the forum state, and (2) the cause of action arises from or is related to those contacts or activities. In a specific jurisdiction analysis, we focus . . . on the relationship among the defendant, the forum[,] and the litigation.” Here, the “only relevant prong of the Texas long-arm statute extends jurisdiction over a nonresident who ‘commits a tort in whole or in part in this state.'”

In this case, the contractor hired the Texas-based subcontractor to provide services to renovate a hotel in Houston. One of the officers who was sued had “made several trips to Houston to oversee the project.” The contractor further sent to Texas various change-orders. When the contractor received money to pay for the project, it did not pay GIC. GIC claimed that, under the Trust Fund Act, the officers were liable for failing to pay GIC. But despite this, the Supreme Court ruled that the officers did not have enough personal contact with Texas for a court to assert jurisdiction over them.