Court Opinion

ID: 3214727
Source: CourtListenerOpinion
Date Created: 2016-06-20 10:13:19.065072+00
Date Added: 2024-06-11T07:39:37.019206
License: Public Domain

IN THE SUPREME COURT OF TEXAS
                              ══════════
                                No. 14-0538
                              ══════════

   CORNERSTONE HEALTHCARE GROUP HOLDING, INC., PETITIONER,

                                      v.

             NAUTIC MANAGEMENT VI, L.P., RESPONDENT
    ══════════════════════════════════════════
                 ON PETITION FOR REVIEW FROM THE
          COURT OF APPEALS FOR THE FIFTH DISTRICT OF TEXAS
    ══════════════════════════════════════════

                             ~ consolidated with ~

                              ══════════
                                No. 14-0539
                              ══════════

   CORNERSTONE HEALTHCARE GROUP HOLDING, INC., PETITIONER,

                                      v.

        NAUTIC PARTNERS VI, L.P., RELIANT SPLITTER, L.P., AND
          KENNEDY PLAZA PARTNERS VI, L.P., RESPONDENTS
    ══════════════════════════════════════════
                 ON PETITION FOR REVIEW FROM THE
          COURT OF APPEALS FOR THE FIFTH DISTRICT OF TEXAS
    ══════════════════════════════════════════

                          Argued January 12, 2016

JUSTICE LEHRMANN delivered the opinion of the Court.
       In these causes we consider whether Texas courts have specific personal jurisdiction over

three nonresident private-equity fund limited partnerships and their general partner. The funds

invested in a newly created Texas subsidiary that purchased a chain of Texas hospitals from a

Texas company. The plaintiff, another Texas company allegedly in the market to purchase the

hospitals, asserts that this conduct was tortious and subjects the defendants to Texas’s jurisdiction

with respect to claims arising out of that conduct. We agree and hold that Texas courts have

specific jurisdiction over the private-equity funds and their general partner.

                                          I. Background

       Plaintiff Cornerstone Healthcare Group Holding, Inc. owns and operates long-term acute-

care hospitals in Texas and other states. According to its pleadings, Cornerstone “sought to expand

into other sectors of the post-acute care continuum.” Several Cornerstone executives (Executives)

identified Reliant Hospital Partners, LLC (Old Reliant), which owned a chain of inpatient

rehabilitation facilities in Texas, as a possible takeover target. Cornerstone alleges that the

Executives “decided to take advantage of this opportunity for themselves” rather than present it to

Cornerstone’s board and that they approached several potential investment sources about the deal,

including Rhode Island-based private-equity firm Nautic Partners, LLC.

       Nautic Partners is a management advisor that identifies and conducts due diligence on

potential investments for several private-equity funds. The three funds at issue here—Nautic

Partners VI, L.P., Reliant Splitter, L.P., and Kennedy Plaza Partners VI, L.P. (collectively, the

Funds)—are Delaware limited partnerships with their principal places of business in Rhode Island.

Nautic Management VI, L.P., also a Delaware limited partnership, is the general partner of two of

                                                  2
the Funds and manager of the third. We will refer to Nautic Management VI as the General

Partner.1

         Based on its due diligence, Nautic Partners determines whether to present an investment

opportunity to the General Partner’s investment committee, which authorizes investment decisions

for the Funds.2 Scott Hilinski is Nautic Partners’ managing director and, along with two other

Nautic Partners employees, is also a member of the General Partner’s investment committee.

According to the General Partner’s corporate representative, Hilinski has a fiduciary duty to bring

to the committee any deal that would be an “appropriate” investment for the Funds.

         In November 2010, Cornerstone’s then-Chief Executive Officer Michael Brohm contacted

Nautic Partners to discuss a potential health-care investment opportunity. Shortly thereafter,

Brohm specifically proposed that the Funds acquire Old Reliant’s assets and hire Brohm and other

Cornerstone executives to run the company. Hilinski met with Brohm and another Cornerstone

executive at a “get-to-know-you dinner” in Texas. Hilinski subsequently called Old Reliant’s

owner in Texas expressing interest in the investment. On November 22, Nautic Partners and Old

Reliant signed a confidentiality agreement “in connection with [Nautic Partners’] evaluation of a

potential transaction with [Old Reliant],” and Nautic Partners began investigating the acquisition.

         Nautic Partners’ due diligence included site visits to Old Reliant’s hospitals in Texas by

Hilinski and Chris Corey, another Nautic Partners employee. Cornerstone alleges that Brohm

disclosed Cornerstone’s confidential information to Nautic Partners during the due-diligence

         1
          The General Partner’s corporate representative testified that, despite its designation as manager of one of
the Funds, the General Partner has the same authority to act on behalf of all three.

         2
           Neither the Funds nor the General Partner has employees, office space, office equipment, or “similar
tangible resources.”

                                                         3
period and that Nautic Partners used that information to evaluate the Reliant deal. On January 7,

2011, Nautic Partners and Old Reliant signed a letter of intent summarizing the “terms and

conditions under which an entity . . . to be formed by funds affiliated with Nautic Partners” would

purchase Old Reliant’s assets. The letter further stated that “Nautic’s deal team has discussed the

proposed transaction with the members of Nautic’s Investment Committee, and this Letter is

submitted with the endorsement and excitement of that group.”

        Hilinski presented the deal to the General Partner’s investment committee over three

meetings in Rhode Island in January and February 2011. On March 14, 2011, the committee

authorized the investment and issued a capital call to fund the deal. A chain of wholly owned

subsidiaries was established to facilitate the transaction, which closed March 23. On that date, the

Funds entered into a limited liability company agreement with Reliant Holding Company, 3 a new

Delaware LLC with its principal place of business in Texas, which the Funds describe as a “passive

investment vehicle.” In turn, Reliant Holding owned 100% of Reliant Pledgor, also a Delaware

LLC, which owned 100% of Reliant Opco Holding Corp., a Delaware corporation. Finally, Reliant

Pledgor and Reliant Opco owned, respectively, 99.9% and 0.1%4 of Reliant Acquisitions, LLC,

which would eventually change its name to Reliant Hospital Partners, LLC (New Reliant). 5 New

Reliant, a Delaware LLC with its principal place of business in Texas, entered into an asset-

purchase agreement with Old Reliant to acquire and operate its hospitals.

        3
          Hilinski signed the LLC agreement on behalf of Reliant Holding as its manager, and on behalf of all three
Funds as the General Partner’s managing director.

        4
         The record is inconsistent as to whether the respective ownership percentages were 99.9% and 0.1% or
99.99% and 0.01%.

        5
            The middle subsidiary layer, Reliant Pledgor, was created for tax purposes.

                                                           4
        The money New Reliant used to purchase the hospitals came from the Funds’ capital

contributions to Reliant Holding. The purchase price was “deemed” to pass from the Funds to

Reliant Holding, from Reliant Holding to Reliant Pledgor, from Reliant Pledgor to New Reliant,

and finally from New Reliant to Old Reliant. In actuality, the Funds transferred the money to the

law firm that served as New Reliant’s disbursement agent, and the law firm transferred the

purchase price directly to Old Reliant. New Reliant’s transaction expenses on the deal included a

$1 million “transaction fee” to the General Partner and $85,000 to Nautic Partners to

reimbursement its expenses.

        Immediately following the acquisition, Brohm and the other Executives resigned from

Cornerstone and joined New Reliant. Two weeks later, Cornerstone sued the Executives,6 New

Reliant, and Nautic Partners. Cornerstone later added as defendants, among others, Old Reliant,

the Funds, the General Partner, Hilinski, Corey, and one other Nautic Partners employee.

Cornerstone accuses the Executives of utilizing its proprietary and confidential information to

usurp a corporate opportunity for their own and New Reliant’s benefit, misappropriating

Cornerstone’s confidential information following their resignations, and breaching their fiduciary

duties. Cornerstone alleges the Nautic entities and employees conspired with and assisted the

executives in their tortious conduct. Cornerstone also asserts tortious interference claims against

these defendants.

        The Funds and the General Partner, to which we will refer collectively as the respondents,

filed special appearances contesting the trial court’s personal jurisdiction over them. Nautic

        6
         Specifically, Cornerstone named as defendants former Cornerstone executives Brohm, Patrick Ryan,
Kenneth McGee, Jerry Huggler, and Chad Deardorff.

                                                   5
Partners, New Reliant, Hilinski, and the other Nautic Partners employees entered general

appearances and did not contest jurisdiction. The trial court granted the Funds’ special appearance

but denied the General Partner’s. Cornerstone appealed the former order, and the General Partner

appealed the latter. In separate opinions issued by different panels, the court of appeals affirmed

as to the Funds and reversed as to the General Partner, holding that Texas lacks jurisdiction over

all four entities. ___ S.W.3d ___ (Tex. App.—Dallas 2014); ___ S.W.3d ___ (Tex. App.—Dallas

2014). We granted Cornerstone’s petitions for review and consolidated the cases for oral

argument.7

                                   II. Personal Jurisdiction Framework

         In several recent cases, we have reaffirmed the well-established framework for analyzing

personal jurisdiction, both generally and more specifically in the business-tort context. Courts

have personal jurisdiction over a nonresident defendant when the state’s long-arm statute

authorizes such jurisdiction and its exercise comports with due process. TV Azteca v. Ruiz, ___

S.W.3d ___, ___ (Tex. 2016). We have held that “the requirements of the Texas long-arm statute

are satisfied if an assertion of jurisdiction accords with federal due-process limitations,” and those

limitations therefore guide our analysis. Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569,

575 (Tex. 2007). A state’s exercise of jurisdiction comports with federal due process if the

         7
           We have jurisdiction over interlocutory appeals in which the court of appeals “holds differently from a prior
decision of” this Court, meaning that “there is inconsistency in the[] respective decisions that should be clarified to
remove unnecessary uncertainty in the law and unfairness to litigants.” TEX. GOV’T CODE § 22.225(c), (e).
Cornerstone argues that the court of appeals’ decisions conflict with this Court’s opinion in Spir Star AG v. Kimich,
in which we held that a nonresident manufacturer that “intentionally targets Texas as the marketplace for its products”
may not escape Texas’s jurisdiction with respect to product-liability claims “merely by forming a Texas affiliate” to
make the sales. 310 S.W.3d 868, 871, 875 (Tex. 2010). The court of appeals found Spir Star’s reasoning inapposite
outside the stream-of-commerce context applicable to product claims, revealing uncertainty to be clarified in this area.

                                                           6
nonresident defendant has “minimum contacts” with the state and the exercise of jurisdiction “does

not offend ‘traditional notions of fair play and substantial justice.’” Walden v. Fiore, 134 S. Ct.
1115, 1121 (2014) (quoting Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)).8

        The “touchstone” of a minimum-contacts analysis is purposeful availment. Michiana Easy

Livin’ Country, Inc. v. Holten, 168 S.W.3d 777, 784 (Tex. 2005). To that end, a “defendant

establishes minimum contacts with a forum when it ‘purposefully avails itself of the privilege of

conducting activities within the forum state, thus invoking the benefits and protections of its

laws.’” Moncrief Oil Int’l, Inc. v. OAO Gazprom, 414 S.W.3d 142, 150 (Tex. 2013) (quoting

Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333, 338 (Tex. 2009)). Three

primary considerations underlie the purposeful-availment analysis: (1) only the defendant’s

contacts with the forum are relevant, not the unilateral activity of another party or third person;

(2) the defendant’s acts must be “purposeful” and not “random, isolated, or fortuitous”; and (3) the

defendant “must seek some benefit, advantage, or profit by availing itself of the jurisdiction” such

that it impliedly consents to suit there. Michiana, 168 S.W.3d at 785 (citations and internal

quotation marks omitted). Although “physical presence in the forum” is “a relevant contact,” it

“is not a prerequisite to jurisdiction.” Walden, 134 S. Ct. at 1122.

        A defendant’s contacts with the forum may give rise to either general or specific

jurisdiction. General jurisdiction is established by a defendant’s “continuous and systematic”

contacts that render it “essentially at home in the forum State,” irrespective of whether the

        8
          The ultimate question of whether Texas courts have personal jurisdiction over a nonresident defendant is
one of law that we review de novo. Moncrief Oil Int’l, Inc. v. OAO Gazprom, 414 S.W.3d 142, 150 (Tex. 2013).
“When, as here, the trial court does not issue findings of fact and conclusions of law, we imply all relevant facts
necessary to support the judgment that are supported by evidence.” Id.

                                                        7
defendant’s alleged liability arises from those contacts. TV Azteca, ___ S.W.3d at ___ (quoting

Daimler AG v. Bauman, 134 S. Ct. 746, 754 (2014)) (internal quotation marks omitted); Moki Mac,
221 S.W.3d at 575. Specific jurisdiction arises when the plaintiff’s cause of action “arises from

or relates to the defendant’s contacts.” Spir Star AG v. Kimich, 310 S.W.3d 868, 873 (Tex. 2010).

Our inquiry in this case is confined to specific jurisdiction, which requires us to “focus on the

relationship among the defendant, the forum[,] and the litigation.” Moki Mac, 221 S.W.3d at 575–

76 (citations and internal quotation marks omitted).

                                                   III. Analysis

                                            A. Minimum Contacts

         Cornerstone argues that the Funds, via the General Partner,9 established minimum contacts

with Texas by purchasing Texas hospitals through wholly owned subsidiary New Reliant. No

disagreement should exist, Cornerstone contends, that these contacts were purposeful as opposed

to random or fortuitous, and that the respondents sought a benefit or profit from the Texas

investment. Cornerstone couches the dispute as whether the Texas contacts “count against” the

Funds and the General Partner even though New Reliant actually purchased the hospitals.

According to Cornerstone, they do. “[N]obody else made the decision to acquire these Texas

hospitals,” Cornerstone asserts, “because nobody else had the money.”

         By contrast, the respondents describe their role in the underlying events as “limited to

creating and funding a subsidiary that, in turn, indirectly invested in the Reliant hospital chain

         9
           It is undisputed that the General Partner acted on the Funds’ behalf in all matters related to the Reliant
transaction. See Lee Harris, A Critical Theory of Private Equity, 35 DEL. J. CORP. L. 259, 269 (2010) (noting that in
a limited partnership “the general partner raises the fund, manages and operates the fund, owes duties to the fund, and
acts as an agent of the fund vis-a-vis third parties”). For example, as noted, the General Partner approved the
investment and signed the LLC agreement on each of the Funds’ behalf.

                                                          8
through further subsidiaries.” They cite settled law that the contacts of distinct legal entities,

including parents and subsidiaries, must be assessed separately for jurisdictional purposes unless

the corporate veil is pierced. E.g., PHC-Minden, LP v. Kimberly-Clark Corp., 235 S.W.3d 163,

172–73 (Tex. 2007). They argue in turn that, because “the record shows that it was the Funds’

indirect subsidiary, New Reliant, not the Funds themselves that had direct contacts with Texas,”

and because Cornerstone has never argued or proved that New Reliant’s contacts may be attributed

to the respondents under a veil-piercing theory, jurisdiction over the respondents is lacking. The

court of appeals agreed, holding that the Funds “took no direct action in Texas” and merely

“invested in New Reliant through subsidiaries.” ___ S.W.3d at ___. Similarly, the court held that

“Cornerstone did not present evidence of [the General Partner’s] contacts with Texas related to the

Reliant hospital acquisition and did not rebut [the General Partner’s] evidence that it did not have

[such] contacts.” ___ S.W.3d at ___ (emphasis omitted).

       The respondents are correct that “so long as a parent and subsidiary maintain separate and

distinct corporate entities, the presence of one in a forum state may not be attributed to the other.”

PHC–Minden, 235 S.W.3d at 172 (quoting Hargrave v. Fibreboard Corp., 710 F.2d 1154, 1160

(5th Cir. 1983)); see also Cannon Mfg. Co. v. Cudahy Packing Co., 267 U.S. 333, 335 (1925).

They are also correct that Cornerstone has not argued that the Funds and their subsidiaries failed

to maintain their legal separateness or that the Texas contacts of any one of those entities could or

should be attributed to any other. Accordingly, New Reliant’s Texas contacts—specifically, its

ownership and operation of hospitals in Texas—could not in and of themselves subject New

Reliant’s limited-partner parent companies and their general partner to Texas’s jurisdiction. But

                                                  9
we disagree with the respondents that the Funds’ use of a subsidiary to purchase the hospitals

effectively ends the inquiry.

       The respondents frame the acquisition of Old Reliant’s assets as a succession of events: the

General Partner’s investment committee met in Rhode Island for presentations by Nautic Partners

and the prospective Reliant management team (i.e., the Cornerstone executives) about the

investment; the General Partner authorized the Funds to invest in Reliant Holding and issued a

capital call (actions that also took place in Rhode Island); the Funds created Reliant Holding

pursuant to that authorization; Reliant Holding formed Reliant Pledgor and Reliant Opco; Reliant

Pledgor and Reliant Opco formed New Reliant; and New Reliant acquired the hospitals. But in

reality, these events were all part of one overarching transaction that closed March 23, 2011.

       The LLC agreement between Reliant Holding and its members (the Funds), which had a

March 23 effective date, provided that the members’ capital contributions to Reliant Holding

would be used as “a contribution to capital to one or more Subsidiaries to effect the consummation

of the transactions contemplated by the Asset Purchase Agreement and payment of certain

transaction expenses related thereto on the Effective Date.” The referenced Asset Purchase

Agreement was the agreement between New Reliant and Old Reliant for the hospitals’ purchase.

Thus, the money the Funds invested in Reliant Holding—which, incidentally, listed its principal

place of business as Addison, Texas—was contractually required to be used for New Reliant’s

purchase of the Reliant hospitals. And as noted above, the purchase money was transferred by the

                                                10
Funds directly to the law firm serving as New Reliant’s disbursement agent, and from the agent to

Old Reliant.10

        Further, all of the Funds’ relevant subsidiaries, from Reliant Holding to New Reliant, were

newly created to complete the transaction that the respondents set in motion. Cornerstone is not

attempting to attribute the contacts established by New Reliant as a going concern to the Funds or

the General Partner. Rather, it is seeking to trace the purchase of Texas assets to the entities that

spearheaded and directed the transaction, and ultimately stood to profit from it. We agree with

Cornerstone that “[k]eeping legal entities distinct does not mean they can escape jurisdiction by

splitting an integrated transaction into little bits.” Although “only the defendant’s contacts with

the forum” count, not “the unilateral activity of another party or a third person,” the Reliant deal

did not stem from a third party’s unilateral activity; it was the result of a transaction stemming

from the activity of the respondents themselves. Michiana, 168 S.W.3d at 785.

        The General Partner argues that its state of mind when it acted in Rhode Island to direct

the investment is irrelevant to whether it had contacts with Texas. See id. at 791 (“Business

contacts are generally a matter of physical fact, while tort liability . . . turns on what the parties

thought, said, or intended.”). But whether the respondents’ conduct was ultimately tortious is not

before us and is not relevant to the minimum-contacts analysis. Id. at 790 (holding that purposeful

availment does not depend on “whether a tort was directed toward Texas” because, if it did, “a

nonresident may defeat jurisdiction by proving there was no tort”). Further, this is not a case in

        10
            The respondents maintain that the disbursement agent “credited and debited the money to each subsidiary”
and that “corporate formalities were observed.” That may be the case, but the document on which the respondents
rely expressly distinguishes between the “deemed” transaction sequence involving the chain of subsidiaries and the
“actual transfers” documented above.

                                                        11
which jurisdiction turns on the mere foreseeability of causing injury in Texas. Id. at 787. Instead,

the Funds, through the General Partner, targeted Texas assets in which to invest and sought to

profit from that investment.11

         By contrast, we hold today in Searcy v. Parex Resources, Inc. that Texas lacks jurisdiction

over a Canadian company that was sued for tortious interference with the plaintiff’s agreement to

purchase shares of a Bermuda corporation’s subsidiary, which owned Colombian oil-and-gas

operations. ___ S.W.3d ___, ___ (Tex. 2016). Although the seller of the shares had operations in

Texas and communicated with the Canadian company in Texas, we concluded that the seller’s

Texas presence was “coincidental” as far as the Canadian company was concerned because it “was

not specifically seeking out a Texas seller or Texas assets.”                     Id. at ___. Conversely, the

respondents here specifically sought both a Texas seller and Texas assets. Accordingly, we hold

that the respondents’ contacts with Texas were “purposeful” and that the respondents sought “some

benefit, advantage, or profit by availing [themselves] of the jurisdiction” such that they impliedly

consented to suit here.12 Michiana, 168 S.W.3d at 785.

         Because Cornerstone alleges the respondents’ minimum contacts give Texas specific,

rather than general, jurisdiction over the respondents, we must determine whether Cornerstone’s

         11
            The Funds’ corporate representative testified about the “lifespan” of a private-equity fund, explaining:
“Usually the lifespan is, you have five to six years to make your investments, and then the partnership itself has a 10-
year life cycle, with possible extensions.” He noted that, at the time of his deposition, one of the Funds was “towards
the end of its investment cycle” and therefore “somewhere between the earliest one-third or mid-life of its life cycle.”
The Funds thus appear to have been established in a manner consistent with the typical private-equity fund
arrangement. See Harris, 35 DEL. J. CORP. L. at 279 (noting that “parties to a private equity limited partnership
frequently agree that the limited partnership shall terminate after some finite period, usually ten years”).

         12
            The parties dispute whether the trial court’s denial of the General Partner’s plea to the jurisdiction is
supported by evidence that Hilinski acted on behalf of the General Partner, rather than (or in addition to) Nautic
Partners, when he conducted due diligence on the Reliant deal in Texas. Our analysis above renders it unnecessary to
address this dispute.

                                                          12
causes of action arise from or relate to the respondents’ purposeful contacts with Texas. Spir Star,
310 S.W.3d at 873. We have held that this standard requires “a substantial connection between

those contacts and the operative facts of the litigation.”                 Moki Mac, 221 S.W.3d at 585.

Cornerstone alleges that the respondents used Cornerstone’s confidential information to divert the

Reliant deal and that the transaction itself, which culminated in the Funds’ subsidiary’s purchase

of Old Reliant’s assets, constituted tortious interference as well as aiding and abetting the

Executives’ usurpation of the Reliant opportunity. Because the facts surrounding the Reliant

transaction—which is the crux of the respondents’ purposeful contact with Texas—will be the

focus of the claims against the respondents at trial,13 we hold that those claims arise out of the

respondents’ Texas contacts.

                                   B. Fair Play and Substantial Justice

        Having determined that the respondents have minimum contacts with Texas, we turn to

whether the exercise of personal jurisdiction comports with traditional notions of fair play and

substantial justice, as due process requires. Walden, 134 S. Ct. at 1121. Relevant factors in this

analysis include, where appropriate:

        (1) the burden on the defendant; (2) the interests of the forum in adjudicating the
        dispute; (3) the plaintiff’s interest in obtaining convenient and effective relief; (4)
        the international judicial system’s interest in obtaining the most efficient resolution
        of controversies; and (5) the shared interest of the several nations in furthering
        fundamental substantive social policies.

        13
           We noted in Moncrief that “a court need not assess contacts on a claim-by-claim basis if all claims arise
from the same forum contacts.” 414 S.W.3d at 150–51.

                                                        13
Moncrief, 414 S.W.3d at 155 (citing Spir Star, 310 S.W.3d at 878). As we have recognized, if “a

nonresident has minimum contacts with the forum, rarely will the exercise of jurisdiction over the

nonresident not comport with [such] notions.” Id. at 154–55 (emphasis added).

        This is not one of those rare occasions. Nautic Partners, Hilinski, and others associated

with the Nautic entities are already litigating in Texas and have not challenged jurisdiction. Any

added burden on the respondents is relatively minimal and does not outweigh Texas’s interest in

adjudicating a dispute involving the alleged usurpation of a corporate opportunity in Texas

involving Texas assets. Further, litigating the claims against the respondents together with the

claims against the other Nautic entities and individuals promotes judicial economy. See id. at 155.

Accordingly, we hold that exercising personal jurisdiction over the respondents comports with

traditional notions of fair play and substantial justice.

                                           IV. Conclusion

        The trial court has personal jurisdiction over the Funds and the General Partner. We reverse

the court of appeals’ judgments and remand to the trial court for further proceedings.

                                                            ________________________________
                                                            Debra H. Lehrmann
                                                            Justice

OPINION DELIVERED: June 17, 2016

                                                  14